Inter Rock Minerals : Management’s Discussion & Analysis 2021

INTER-ROCK MINERALS INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

For the Year Ended December 31, 2021

April 21, 2022

INTER-ROCK MINERALS INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE YEAR ENDED DECEMBER 31, 2021

NOTES TO READER

References to "Inter-Rock" and the "Company" in this discussion refer to Inter-Rock Minerals Inc. and its subsidiaries taken as a whole.

The following management discussion and analysis ("MD&A") provides an analysis of the financial condition of Inter-Rock at December 31, 2021 and compares it to the financial condition of the Company on December 31, 2020. The MD&A also analyzes the Company's results of operations for the year ended December 31, 2021 and compares those results to the results for the year ended December 31, 2020.

This MD&A has been prepared in compliance with the requirements of National Instrument ("NI") 51-102 - Continuous Disclosure Obligations. This MD&A should be read in conjunction with Inter- Rock's annual audited consolidated financial statements and corresponding notes for the years ended December 31, 2021 and December 31, 2020. The Company's financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB").

All monetary amounts are expressed in United States dollars unless otherwise indicated.

This MD&A is prepared as of April 21, 2022.

DESCRIPTION OF THE BUSINESS

Inter-Rock is domiciled in Canada and is continued under the Business Corporations Act (Ontario). The Company's office is located at 2 Toronto Street, Suite 500 Toronto, Ontario, M5C 2B6, Canada. The Company's shares are traded on the TSX Venture Exchange under the symbol "IRO".

Inter-Rock owns two operating businesses: Papillon Agricultural Company Inc. ("Papillon") and MIN-AD Inc. ("MIN-AD"). Papillon is a US based marketer and distributor of toll manufactured premium dairy feed nutritional supplements, including MIN-AD's products. MIN-AD is engaged in the production and marketing of dolomite and clay products for the animal feed industry.

During the third quarter of 2021, Inter-Rock decided to sell its Mill Creek dolomite operation as part of its strategy to focus on its animal feed nutritional supplement businesses. Mill Creek was sold in February, 2022 (see "Subsequent Events"). In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, at December 31, 2021, all assets and liabilities related to Mill Creek have been classified as held for sale and are presented as current assets and current liabilities on the consolidated balance sheet. Additionally, results of operations for Mill Creek have been separated from the results of continuing operations and are presented as discontinued operations on the Company's consolidated statement of net and comprehensive income.

2021 HIGHLIGHTS

➢

Record consolidated revenue of $64.18 million.

• ➢ Operating cash flow before working capital changes of $2.42 million, (2020: $2.99 million).

• ➢ Working capital at year end increased to $4.17 million, including $2.27 million of cash.

• ➢ Papillon achieved record revenues of $60.56 million and gross profit of $7.02 million.

The U.S. dairy market experienced declining herd sizes and stable milk output per cow in the second half of 2021. This contributed to an increase in average milk prices in the fourth quarter of the year. A record year for U.S. dairy export sales also helped support domestic milk prices.

Overall, demand for U.S. dairy products is expected to remain robust in 2022, supported by the lifting of COVID-19 related capacity restrictions (in the U.S., a greater volume of dairy products are consumed in restaurants and the food service sector than are consumed at home) and continued strength in dairy product exports. Farmers, however, have been contending with significant inflation of farm input costs for the past two years. Prices for dairy feed, principally corn and soybeans, increased as a result of drought conditions in key growing regions and substantial imports by the Chinese to rebuild their hog industry. Wages have also increased as a result of a shortage of farm labourers, as farms and many other industries have struggled to find adequate labour during the COVID pandemic. Furthermore, energy costs are continuing to rise and, as a consequence, fertilizer prices are expected to increase further. Farm input costs are forecast to remain high during 2022 and into 2023, which will temper the benefit of higher milk prices for dairy producers and may impact the sale of some of Papillon's higher margin nutritional feed additive products.

Despite the uncertainty of the length and magnitude of the economic impact of COVID-19, Inter-Rock expects that its available cash and cash flow from operations will be sufficient to meet its operating requirements and financial commitments for the next twelve months.

COVID-19 PANDEMIC

COVID-19 negatively impacted the Company's results, particularly in the second quarter of 2020 at Mill Creek, and could have further negative impacts on the operations of the Company, its suppliers and its customers. Labour quarantines, railroad disruptions or other disturbances to the

Company's operations may impact our ability to provide products to our customers and, as a consequence, negatively impact our revenues and cash flow. Prolonged closures of meat processing facilities may also reduce the availability of a key ingredient in the Company's protein supplements. It is not possible to reliably estimate the length and severity of the economic consequences of the COVID-19 pandemic and the impact on the financial results of the Company.

OPERATIONS REVIEW

Papillon

Papillon develops and produces premium specialty nutritional products for dairy consultants, feed suppliers and dairy producers in the United States. Papillon has its own line of high quality proteins and rumen probiotic products that are produced under toll manufacturing agreements. In addition, Papillon distributes MIN-AD products and a clostridia control product.

Papillon recorded revenue of $60.56 million in 2021, an increase of 28% from $47.14 million in 2020. Total tons sold of all products combined in 2021 were approximately 7% higher than the prior year. In particular, a 12% increase in the volume of protein products sold in 2021 offset lower sales volumes of MIN-AD products (7% lower) and Dairyman's Edge probiotic and prebiotic products (3% lower). The improved sales performance in 2021 over 2020 reflects relatively high milk prices, a strong export market for dairy products and additional sales efforts by Papillon.

Gross profit (revenue less costs of goods sold) was $7.02 million in 2021, up from $6.35 million in 2020, a record level for the second consecutive year. (Papillon's revenue for its principal products reflects targeting a set gross profit per ton. As a consequence, if the cost of input ingredients fall, revenues will fall commensurately; however, margins may be maintained. Accordingly, gross profit can be more indicative of financial performance than revenue). The increase in gross profits was due to higher sales, notably a 12% increase in protein volumes and higher profit margins on the sale of MIN-AD products. The increase in protein product sales volume offset lower profit margins for these products, while the opposite was the case for Papillon's sales of MIN-AD's products, where lower sales volumes were more than offset by higher profit margins. Papillon's two other key product lines experienced flat or lower gross profits, in part due to lowering product margins to maintain sales. Papillon's overall gross profit margin was 11.6% in 2021, as compared with 13.5% in 2020. The decline in profit margins in 2021 was due largely to increased competition in protein products.

Cash flow from operating activities (before working capital changes) was $2.44 million in 2021, as compared with $2.33 million in 2020. The increase in cash flow is attributable to higher sales, which offset a decline in overall gross profit margins and higher SG&A expenses. SG&A expenses increased 14% in 2021 to $4.58 million, primarily due to increases in compensation, benefits, travel and insurance.

MIN-AD

MIN-AD quarries, processes, and markets dolomite and clay products for dairy and beef cattle feed. The specialty dolomite is used as a source of magnesium and calcium and as a rumen acid buffer and is available in three product lines: (i) Standard - a broad particle size distribution for dry supplements; (ii) Fines - a finely ground product sold to liquid feed manufacturers and (iii) Granular - a dust free coarse product for cattle on pasture. Approximately 96% of dolomite sales are in the United States, while the other 4% are in Alberta and British Columbia. MIN-AD's newly developed clay business produces products for use in anti-caking and toxin control applications. MIN-AD's operations are located in northern Nevada near the town of Winnemucca.

MIN-AD's sales and marketing activities are managed by Papillon. In the northeast, central Atlantic and upper mid-west regions of the U.S., Papillon acts as the exclusive distributor of MIN- AD's products. Under a distribution agreement, MIN-AD products are purchased by Papillon and then sold by Papillon to dairy feed manufacturers. This arrangement takes advantage of Papillon's marketing and sales expertise and geographic reach in the eastern United States. In 2021, 35% of MIN-AD's tons sold and 46% of sales revenue were attributed to inter-company sales to Papillon.

Papillion also acts as a sales agent for MIN-AD's products in regions of the U.S. not covered by the exclusive distribution agreement, primarily the mid-west and western states. Papillon is paid a commission by MIN-AD for tons sold under a sales agent agreement.

MIN-AD's sales volumes declined 14% in 2021 as compared with the prior year. The reduction in tons sold was attributable to increased competition and, to a lesser extent, truck and rail delivery disruptions. As a consequence, revenue and cash flow were also lower in 2021 as compared with 2020. Gross revenue (including freight and fuel costs passed on to customers) was $6.86 million in 2021 (excluding $150,000 of dividend income), as compared with $7.56 million in 2020. Operating cash flow (before working capital changes) of $376,000 was significantly lower than $999,000 recorded in 2020. The reduction in cash flow is attributable to lower sales. Despite lower volumes shipped, freight and warehousing costs in 2021 were near the same level as the year earlier and other operating and general and administrative costs in 2021 were comparable to 2020 levels.

Payments related to rail car leases (recorded as financing payments and thus not netted against operating cash flow) totalled $168,000 in 2021, as compared with $175,000 in 2020.

MIN-AD incurred $328,000 of capital expenditures in 2021, (2020: $166,000). Approximately $200,000 of the capital expenditures in 2021 were related to the development of the new clay deposit near MIN-AD's existing dolomite operation. Clay project capital items included a bagging machine, storage bins and some mobile equipment. The clay will be mined and processed by MIN-AD and will be sold as an anti-caking and toxin control agent for use in beef and dairy cow feed. MIN-AD forecasts a very modest level of clay sales in 2022, representing approximately 5% of MIN-AD's net revenues.

Mill Creek (Discontinued operations)

Mill Creek owns and operates a dolomite quarry and plant in Mill Creek, Oklahoma. Mill Creek sells into specialty markets for dolomite, principally glass, roofing materials and aglime. About 75% of Mill Creek's sales volume is to the glass industry, with the balance sold into the filler market, primarily for asphalt shingles and to the aglime market where Mill Creek's products provide a high purity source of calcium and magnesium to enhance soils and reduce acidity.

In 2021, total tons sold were 6% lower than in 2020, as a result of lower sales to the roofing market. Sales of higher value glass grade material in 2021 were largely unchanged from the prior year and represented 75% of overall sales volume. Sales volumes in 2021 reflect the return to normal purchasing levels by existing glass customers after some glass customers reduced inventory in 2020 due to COVID. The loss of a large glass customer in 2020 means that current volumes sold to glass customers are approximately 75% of the level reached in 2019 and 2018. Revenue of $3.97 million in 2021 was similar to the year earlier period ($3.93 million).

Operating cash flow in 2021 was $599,000, as compared with $339,000 in in 2020. The increase in cash flow is largely attributable to lower quarrying and milling costs which reflect continued cost savings stemming from operational changes instituted in the second half of 2020, including changing to one shift per day, reducing equipment usage and working in only one quarry.

In 2021, Mill Creek received equipment loan proceeds of $1.54 million to finance the purchase of mobile mine equipment. Payments for debt service and equipment leases (which are recorded as financing payments and thus not netted against operating cash flow) totalled $889,000 in 2021, (comprising $580,000 in debt service and $309,000 in lease payments) as compared with $947,000 in the prior year (comprising $528,000 in lease payments and $419,000 in debt service). Lease payments declined and debt service increased in 2021 as leased equipment was replaced with vendor financed purchased equipment.