Fortune Minerals : Q4 December 31, 2020 MD&A (PDF 246 KB)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS

AND RESULTS OF OPERATIONS

Year ended December 31, 2020

This Management's Discussion and Analysis of Financial Conditions and Results of Operations ("MD&A") of Fortune Minerals Limited ("Fortune" or the "Company") is dated March 29, 2021 and should be read in conjunction with the Company's Annual Audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2020, prepared in accordance with International Financial Reporting Standards ("IFRS"). This discussion contains certain forward-looking information and is expressly qualified by the cautionary statement at the end of this MD&A. All dollar amounts are presented in Canadian dollars unless indicated otherwise. Unless the context otherwise requires, the terms "Fortune" and "the Company" where used herein refer to Fortune Minerals Limited and its subsidiaries on a consolidated basis.

SELECTED ANNUAL INFORMATION

	2020	2019	2018
Net income (loss) from continuing operations	(1,715,659)	(2,693,994)	8,548,687
Basic income (loss) per common share	-	(0.01)	0.03
Fully diluted income (loss) per common share	-	(0.01)	0.02
Total assets	76,340,541	76,813,666	78,326,060
Debt - non-current	10,008,154	8,627,189	7,442,171

SUMMARY OF QUARTERLY RESULTS

The following table provides selected consolidated financial information that is derived from the unaudited interim condensed consolidated financial statements and audited consolidated financial statements of the Company. The amounts represent the three-month periods ended:

		2020			2019
	Dec-31	Sep-30	Jun-30	Mar-31	Dec-31	Sep-30	Jun-30	Mar-31
Revenue and Other	5,461	49,104	22,207	26,589	12,600	8,533	8,416	12,604
Income
Net income (loss)	(436,621)	(181,619)	(1,057,014)	(40,405)	1,196,754	164,075	(1,067,619)	(2,987,204)
Basic and fully diluted	-	-	-	-	-	-	-	(0.01)
income (loss) per common
share(1)

Notes:

1. The sum of quarterly income (loss) per common share for any given period may not equal the year-to-date amount due to rounding.

OVERVIEW

Fortune's vision is to be a recognized developer, miner, processer and refiner of specialty energy and eco-metals, together with gold and other by-products that contribute to new technologies and the growing green economy. Supporting the vision is Fortune's mission to profitably produce specialty and precious metals to meet the needs of our customers and partners, and to attract and develop an exceptional team of people motivated to acquire, explore, develop, mine and reclaim resource properties in a safe and responsible manner.

The Company's most significant asset is its wholly owned NICO cobalt-gold-bismuth-copper deposit and proposed mine ("NICO") in the Northwest Territories ("NWT") and a related hydrometallurgical refinery ("Refinery") proposed to be constructed in southern Canada among several greenfield and brownfield site options currently being investigated by the Company (collectively, the "NICO Project").

Fortune Minerals Limited

Management's Discussion and Analysis of Financial Conditions and Results of Operations Year Ended December 31, 2020

Fortune has experienced personnel focused on advancing the NICO Project towards commercial production, while also minimizing the risks associated with its development. Fortune is committed to developing its project in a socially and environmentally responsible manner.

NICO Project

Fortune continues to advance its wholly-owned NICO Project and the Company's business activities have been focused on certain priority critical path activities required to advance permitting and financing for the planned development. The NICO Project comprises a proposed open pit and underground mine and a mill and concentrator in the NWT, with a related hydrometallurgical process refinery to be located in southern Canada. This refinery was previously planned to be constructed at a site in the Rural Municipality of Corman Park in Saskatchewan, ("Saskatchewan Metals Processing Plant" or "SMPP"), but alternative locations are now being evaluated, including brownfield sites with existing facilities to materially reduce capital costs for the planned development. The NICO Project was engineered in the Front-End Engineering and Design study and a Technical Report entitled "Technical Report and Updated Mineral Reserve Estimate and Front-EndEngineering & Design ("FEED") Study on the NICO Gold-Cobalt-BismuthDeposit, Mazenod Lake Area, Northwest Territories, Canada" dated July 2, 2012 (the "2012 FEED Study") is filed on SEDAR at www.sedar.com by the Company pursuant to National Instrument 43-101.

In 2014, a feasibility study (the "2014 Feasibility Study") was prepared for the NICO Project based primarily on the 2012 FEED study as well as some improvements to the project since its completion, and produce a report to support project financing based on the proposed transaction. The 2014 Feasibility Study was summarized in a Technical Report reflecting the planned development, dated May 5, 2014, prepared by Micon International Limited ("Micon") and entitled "Technical Report on the Feasibility Study for the NICO Gold-Cobalt-Bismuth-CopperProject, Northwest Territories, Canada" (the "Technical Report") was also filed on SEDAR.

In 2018, Fortune engaged Hatch Ltd. ("Hatch"), Micon and P&E Engineering Consultants Inc. ("P&E") to produce an updated study of the economics for the NICO Project to support its discussions with potential strategic partners. The study contemplated an approximately 30% expanded mill throughput rate of 6,000 tonnes of ore per day ("tpd"), up from the 4,650 tpd rate used in the earlier study. There were also process improvements that had been identified by Hatch that needed to be included. This updated study was also assessing a potential start-up option of producing metal concentrates and gold doré for direct sale to third party refiners from the Company's proposed mine and concentrator in the NWT. This would eliminate or defer the need to construct a vertically integrated Refinery. The base case for both the earlier 2014 study and the 30% expanded project contemplated a mine and concentrator in the NWT and a related Refinery in southern Canada producing cobalt sulphate used in lithium-ion rechargeable batteries, gold doré, bismuth ingot and copper cement. After assessing the indicative economics of the expanded 6,000 tpd mill throughput rate, the Company concluded that the additional capital required to construct a larger project would not deliver a commensurate increase in cash flows to justify the expansion at prevailing cobalt and bismuth prices. Consequently, work on the expanded, 6,000 tpd mill throughput rate study was terminated.

Fortune has prepared a number of high level financial and operating models assessing the NICO Project indicative economics using different pit sizes and various production rate sensitivities. The engineering and revised cost quotes from the 6,000 tpd case contemplated in 2019 were used as the basis for the factored capital and operating costs used in these different production rate scenarios. The Company concluded from these financial model sensitivities that the 4,650 tpd rate used in the 2014 Feasibility Study was likely optimal to produce the best balance between economies of scale and capital costs, while focusing on a smaller open pit with higher cobalt and gold grades. The analyses also determined that a combined open pit and underground approach to the mine plan in the early years of the mine life, which was contemplated in the 2014 study, would also produce a more attractive indicative rate of return for the development by enabling earlier access to deeper gold-rich ores in the deposit.

Before completing an updated Technical Report for the NICO Project Fortune is assessing a number of other optimizations it has recognized that include:

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Fortune Minerals Limited

Management's Discussion and Analysis of Financial Conditions and Results of Operations Year Ended December 31, 2020

• A new Mineral Resource block model has been prepared with a more constrained approach to the interpolation boundary wireframes to reduce internal and external dilution and differentiate higher grade resource blocks for early processing;
• The block model also identified some high grades that had been missed in previous estimates as well as mineralized material at the volcanic sedimentary rock interface that was not used in previous estimates;
• The grade interpolation wireframe boundaries were also extended to surface where the deposit is known to outcrop and to depth where the gold zone had been too abruptly terminated;
• A new mine plan and schedule has been completed based on the new Mineral Resource model with a re- optimized open pit shell and selective underground mining of gold-rich ores located close to the existing decline ramp during early years of the mine life; and
• The open pit mine fleet was optimized with smaller equipment to reduce dilution with waste rock and match the lower mining rate.

In addition to the above optimizations, the Company has also undertaken the following activities during the year ended December 31, 2020 in support of permitting and financing initiatives:

• The Company continues to have dialogue with third party processors interested in purchasing cobalt and bismuth concentrates directly from the mine site to defer the capital associated with building a Refinery in southern Canada;
• The Company is also assessing a number of brownfield sites to build the Refinery in southern Canada, with existing facilities that could materially reduce capital costs for the development.

The Tlicho all-season road (the "Tlicho Road") construction is ahead of schedule and will enable the Company to align the construction schedule for the mine with the availability of the all-season road and eliminate construction from winter ice roads in order to reduce capital costs and construction risks.

Fortune applied to the Government of the Northwest Territories ("GNWT") Mining Incentive Program ("MIP") and received a matching grant of $144,000 to support geophysical surveys to better delineate some known anomalies east of the known deposit. As at December 31, 2020, The Company had received 85% of the grant and the remainder is expected to be received once the Company has filed its final report, which is due in April 2021. In August and September 2020, the Company completed the geophysical exploration program and commissioned a more comprehensive interpretive report to determine the best targets for follow-up work and drill-testing of potential underlying iron oxide copper gold ("IOCG") style deposits.

In light of the foregoing, the Company believes that the development schedule for the NICO Project can be aligned with the deficit in cobalt supply expected to start in 2022-2023 when demand for batteries in electric vehicles is anticipated to outstrip production from existing mines and development projects. In addition, the Canadian and United States ("U.S.") governments have signed a Joint Action Plan on Critical Mineral Collaboration to enable more North American production of certain minerals identified by the U.S. Government as critical to economic and national security. Minerals considered critical for this purpose have essential use in important industrial and defense applications, cannot be easily substituted by other minerals, and their supply chain is threatened by geographic concentration of production and/or geopolitical risks. Cobalt and bismuth are both identified as Critical Minerals on the U.S. and European Union Critical Minerals Lists. Fortune has been in discussions with the Canadian and U.S. governments about potential financial support for the NICO Project development, including submission of a White Paper proposal to the U.S. Department of Defense. On March 12, 2021, Natural Resources Canada released the Canadian Critical Minerals List which includes cobalt, bismuth and copper.

Fortune also continues to work with a number of private sector companies and potential strategic partners interested in the Critical Minerals and/or the gold contained in the NICO Project. If and when the NICO Project is developed, Fortune will be an important new producer of battery grade cobalt products to the rapidly expanding lithium-ion rechargeable battery industry, and support their demand in portable electronic devices, electric vehicles, and stationary storage cells to make electricity use more efficient and allow greater use of renewable energy such as solar and wind. Fortune will also produce environmentally friendly bismuth metals and oxide used in the

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Fortune Minerals Limited

Management's Discussion and Analysis of Financial Conditions and Results of Operations Year Ended December 31, 2020

automotive and pharmaceutical industries and the growing demand as a non-toxic and environmentally safe replacement for lead. The NICO Project will also be a significant producer of gold and copper as a minor by- product. Fortune will be able to demonstrate supply chain transparency and custody control of metals from ores through to the production of value added products and mitigate risks from geographic concentration of supply from the Democratic Republic of the Congo and China.

On May 1, 2015 the Company's wholly-owned subsidiary, Fortune Coal Limited ("FCL") and POSCO Klappan Coal Ltd., FCL's joint venture partner in the Arctos Anthracite Joint Venture ("AAJV"), sold their interests in the coal licenses comprising the Arctos anthracite coal project in northwest British Columbia to British Columbia Railway Company for $18,308,000. The AAJV partners maintain the exclusive right to purchase back the coal licenses at the same price for a 10-year option period, which expires on May 1, 2025. On March 31, 2017, the Government of British Columbia imposed a 20-year moratorium on major industrial development within parts of the Klappan area. During the 10-year option period currently in effect, the coal licenses are excluded from this moratorium on industrial development within the Klappan area.

RESULTS OF OPERATIONS

Summary

The Company's net loss for the year ended December 31, 2020 was $1,715,659 or $Nil per common share compared to a net loss of $2,693,994 or $0.01 per common share for the prior year. The significant change year over year is primarily due to the change in fair value related to derivative liability and impairment charge recognized in the prior year as discussed in "Expenses" below.

Revenue and Other Income

Revenue and other income increased in 2020 to $103,361 for the year ended December 31, 2020 compared to $42,153 for the prior year. The increase is primarily the result of recognition of flow-through share premium income during the year.

Expenses

Expenses, excluding change in fair value related to derivative liability and impairment charge, decreased in 2020 to $2,350,286 for the year ended December 31, 2020 compared to $2,720,128 for the prior year.

The decrease year over year is primarily attributable to: (i) a decrease in general and administrative expenditures, primarily as a result of a decrease in stock based compensation expense and receipt of government grants obtained relating to supporting payroll through the COVID-19 pandemic; and (ii) a decrease in corporate development expenditures. This year over year decrease was partially offset by an increase in interest expenses related to interest accrued on the Company's long-term debts, which is compounded semi-annually.

The change in fair value related to derivative liability recognized a gain of $531,266 for the year ended December 31, 2020 compared to a gain of $1,454,917 for 2019.

In the prior year, the Company recorded an impairment charge of $1,470,936 against surface facilities under construction in mining properties as a result of the Company's decision to sell its land after a negative rezoning decision. The Company completed an impairment assessment of the SMPP capitalized costs and determined that assets with a net book value of $2,550,936 were directly attributable to the site sold and recorded them at their recoverable amount of $1,080,000, which was equal to the proceeds received on the sale of the land.

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Fortune Minerals Limited

Management's Discussion and Analysis of Financial Conditions and Results of Operations Year Ended December 31, 2020

Deferred Taxes

The Company has not recognized a net deferred income tax recovery or provision for the years ended December 31, 2020 and 2019. During the year ended December 31, 2020, recognition of (i) $455,000 from the estimated tax loss;

1. $174,000 for tax rate difference; (iii) $141,000 for non-deductible change in fair value of derivative; and (iv) $23,000 for non-taxableflow-through share premium resulted in a tax recovery which was offset by: (i) a tax provision of $589,000 for a loss carryforward not recognized; and (ii) $204,000 for non-deductiblestock-based compensation and other expenses.

During the same period in 2019, recognition of (i) $714,000 from the estimated tax loss; (ii) $385,500 for non- deductible change in fair value of derivative; and (iii) $171,000 for tax rate difference resulted in a tax recovery which was offset by: (i) a tax provision of $1,073,500 for a loss carryforward not recognized; and (ii) $197,000 for non-deductiblestock-based compensation and other expenses.

A valuation allowance of $17,312,000 has been recognized related to the uncertainty of realizing the benefit of deferred income tax assets in future years.

Cash Flow

Cash used in operating activities during the year ended December 31, 2020 was $568,219 compared to $1,922,590 for 2019. The decrease in use of cash in operating activities year over year is mainly attributed to a decrease in accounts receivable, general and administrative expenditures and corporate development.

Cash used in investing activities was $646,799 compared to $1,065,548 for the year ended December 31, 2020 and 2019, respectively. This decrease is related primarily to a decrease in expenditures of capital assets included in mining properties and exploration and evaluation expenditures due to a decrease in activity on the NICO Project and is offset by proceeds received on the sale of capital assets held in mining properties in the prior year.

The NICO Project, and the Company's other exploration projects, are classified as exploration and evaluation stage projects for accounting purposes. Exploration and evaluation cash expenditures incurred by Fortune on its properties during the three months and year ended December 31, 2020 were $95,831 and $600,484 respectively, and were spent on the projects as follows:

	Three months ended	Year ended
	December 31, 2020	December 31, 2020
NICO	$ 95,062	$ 595,164
All Other Projects	769	5,320
Total cash exploration and evaluation expenditures	$ 95,831	$ 600,484

As of December 31, 2020, $122,400 of the MIP grant had been received and was used to support geophysical surveys conducted at the NICO Project site in August and September 2020. The Company has elected to present this government grant as a reduction to exploration expenditures and is included in the line "mining properties" on the consolidated statements of financial position.

For comparison, exploration and evaluation expenditures incurred by Fortune on its properties during the three months and year ended December 31, 2019 were $205,426 and $1,486,191, respectively, and were spent on the projects as follows:

	Three months ended	Year ended
	December 31, 2019	December 31, 2019
NICO	$ 205,426	$ 1,483,388
All Other Projects	-	2,803
Total cash exploration and evaluation expenditures	$ 205,426	$ 1,486,191

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