Unaudited Interim Financial Statements
Cumberland Resources Ltd.
June 30, 2004
BALANCE SHEETS
(Unaudited)
(Canadian dollars)
42,101,805
47,112,577
Mineral property interests
8,246,083
8,246,083
Capital assets, net[note 3]
4,430,247
3,679,703
Investments in public companies[note 8]
114,405
264,405
54,892,540
59,302,768
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current
Accounts payable and accrued liabilities
1,222,341
1,001,510
Current portion of capital leases
343,264
329,109
Total current liabilities
1,565,605
1,330,619
Accrued site closure costs[note 4]
400,083
340,000
Capital leases
374,450
549,696
Commitments and contingencies [note 7]
Shareholders’ equity
Share capital[note 6]
111,389,521
110,806,463
Contributed surplus[note 6[d]]
1,911,147
1,481,612
Deficit
(60,748,266)
(55,205,622)
Total shareholders’ equity
52,552,402
57,082,453
54,892,540
59,302,768
See accompanying notes to financial statements
STATEMENTS OF LOSS AND DEFICIT
(Unaudited)
(Canadian dollars)
Three months ended June 30 | Six months ended June 30 | ||||||
2004 | 2003 | 2004 | 2003 | ||||
$ | $ | $ | $ | ||||
[as restated – see note 1[b]] | [as restated – see note 1[b]] | ||||||
REVENUE | |||||||
Options receipts | - | - | 500,000 | 500,000 | |||
Interest and other revenue | 237,799 | 151,357 | 534,186 | 313,526 | |||
Gain on sale of investments in public companies[note 8] | 495,060 | - | 1,306,627 | - | |||
732,859
151,357
2,340,813
813,526
EXPENSES
Exploration and development costs[note 5]
3,937,040
4,845,004
5,976,087
6,728,953
Employee compensation
163,871
95,140
344,004
174,848
Stock-based compensation[note 6[d]]
204,845
211,850
429,535
545,450
Public and investor relations
150,700
151,913
207,115
212,205
Office and miscellaneous
117,530
96,102
248,862
157,751
Legal, audit and accounting
104,500
38,040
188,550
63,523
Other fees and taxes
56,751
78,963
178,255
98,293
Insurance
117,609
16,525
219,761
33,050
Depreciation and amortization
21,345
5,399
34,716
11,754
Accrued site closure costs – accretion expense
8,077
1,819
15,083
3,638
Interest expense on capital leases
19,945
3,123
41,489
6,494
4,902,213
5,543,878
7,883,457
8,035,959
Net loss for the period
4,169,354
5,392,521
5,542,644
7,222,433
Deficit, beginning of period
56,578,912
41,666,208
55,205,622
39,836,296
Deficit, end of period
60,748,266
47,058,729
60,748,266
47,058,729
Loss per share
$0.08
$0.14
$0.10
$0.18
Weighted average number of share outstanding
54,413,941
39,626,005
54,382,891
39,564,844
See accompanying notes to financial statements
STATEMENTS OF CASH FLOWS
(Unaudited)
(Canadian dollars)
Three months ended June 30 | Six months ended June 30 | |||||||
2004 | 2003 | 2004 | 2003 | |||||
$ | $ | $ | $ | |||||
| ||||||||
[as restated –see note 1[b]]
[as restated–see note 1[b]]
OPERATING ACTIVITES
Net loss for the period
(4,169,354)
(5,392,521)
(5,542,644)
(7,222,433)
Add (deduct) items not affecting cash:
Depreciation and amortization
21,345
5,399
34,716
11,754
Accrued site closure costs – accretion expense
8,077
1,819
15,083
3,638
Exploration related amortization
45,459
59,191
92,386
104,167
Gain on sale of investment in public companies
(495,060)
-
(1,306,627)
-
Stock-based compensation
204,845
211,850
429,535
545,450
Net changes in non-cash working capital items:
Accrued interest receivable
242,537
(106,193)
275,973
(194,704)
Accounts receivable
(296,603)
(170,740)
(256,655)
(159,097)
Due from joint venturer
(2,015)
(289,726)
3,979
(184,229)
Prepaids
(214,943)
16,525
(620,659)
14,329
Accounts payable and accrued liabilities
(247,402)
1,038,218
220,831
1,672,238
Cash used in operating activities
(4,903,114)
(4,626,178)
(6,654,082)
(5,408,887)
FINANCING ACTIVITIES
Issuance of common shares
-
5,079,582
583,058
5,951,750
Repayment of capital lease obligation
(81,393)
(16,658)
(161,091)
(33,050)
Cash provided by (used in) financing activities
(81,393)
(5,062,924)
421,967
5,918,700
INVESTING ACTIVITIES
Purchase of capital assets
(389,410)
(5,002)
(832,646)
(61,424)
Short term investments
(12,173,589)
(1,830,603)
(9,033,699)
3,404,210
Proceeds on sale of investment in public companies
549,060
-
1,456,627
-
Cash provided by (used in) investing activities
(12,013,939)
(1,853,605)
(8,409,718)
3,342,786
Increase (decrease) in cash and cash equivalents during the period
(16,998,446)
(1,398,859)
(14,641,833)
3,852,599
Cash and cash equivalents, beginning of period
26,626,630
6,398,102
24,270,017
1,146,644
Cash and cash equivalents, end of period
9,628,184
4,999,243
9,628,184
4,999,243
Supplemental information:
Interest paid
19,945
3,123
41,489
6,494
Taxes paid
20,946
47,642
20,946
47,642
See accompanying notes to financial statements
-1-
1. SIGNIFICANT ACCOUNTING POLICIES
a)
Basis of presentation
The accompanying interim financial statements of Cumberland Resources Ltd. (the “Company”) have been prepared in accordance with Canadian generally accepted accounting principles for interim financial statements and accordingly do not include all disclosures required for annual financial statements.
These interim financial statements follow the same significant accounting policies and methods of application as the Company’s annual financial statements for the year ended December 31, 2003 (the “Annual Financial Statements”). The interim financial statements should be read in conjunction with the Annual Financial Statements.
In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for these interim periods are not necessarily indicative of the result that may be expected for the full fiscal year ending December 31, 2004. Certain prior year amounts have been reclassified to conform with the current year’s presentation.
b)
Changes in accounting policies
As described in Note 3(b) in its 2003 annual financial statements, the Company had previously adopted the fair value based method of accounting for stock-based compensation to employees and directors in accordance with CICA 3870 Stock-based Compensation and Other Stock-based payments. This change was adopted in the fourth quarter of 2003 and was applied on a prospective basis from January 1, 2003. In addition, as described in Note 3(a) in its 2003 annual financial statements, the Company has previously adopted CICA 3110 Asset Retirement Obligations and changed its accounting policy for recording obligations related to site closure costs. This change was adopted on a retroactive basis in the fourth quarter of 2003.
As a result of these changes in accounting policies, the Company’s previously reported net losses for the three and six month periods ended June 30, 2003 have been restated as follows:
Three month period ended June 30,2003 | Six month period ended June 30,2003 | ||
$ | $ | ||
Net loss, as previously reported | (5,165,230) | (6,659,130) | |
Stock-based compensation expense | (211,850) | (545,450) | |
Impact of adoption of CICA 3110 | (15,441) | (17,853) | |
Net loss, as restated | |||
(5,392,521)
(7,222,433)
-2-
2. CASH AND CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
Cash and cash equivalents include cash and highly liquid Canadian dollar denominated investments in investment grade debt and banker's acceptances, with terms to maturity of 90 days or less when acquired. The counter-parties include corporations and financial institutions. At June 30, 2004, these instruments were yielding a weighted average interest rate of 1.9% per annum.
Short-term investments comprise highly liquid Canadian dollar denominated investments in investment grade debt and banker's acceptances with maturities to December 7, 2004. The counter-parties include corporations, financial institutions and the Canadian government. At June 30, 2004, these instruments were yielding a weighted average interest rate of 2.1% per annum.
The fair market value of the cash equivalents and short-term investments approximates their carrying values at June 30, 2004.
3. CAPITAL ASSETS
Capital assets at June 30, 2004 are comprised as follows:
Cost | Accumulated amortization | Net book value June 30, 2004 | Net book value Dec 31, 2003 | |
$ | $ | $ | $ | |
Exploration equipment | 1,232,400 | 595,348 | 637,052 | 729,439 |
Computer equipment | 253,469 | 107,616 | 145,553 | 36,324 |
Office equipment | 120,790 | 103,294 | 17,496 | 23,778 |
Construction in progress | 3,629,846 | - |
3,629,846
2,890,162
5,236,505
-3-
4. ACCRUED SITE CLOSURE COSTS
Accrued site closure costs relate to the Company’s legal obligation to remove exploration equipment and other assets from it’s mineral property sites in Nunavut and to perform other site reclamation work. Although the ultimate amount of future site restoration costs to be incurred for existing exploration interests is uncertain, the Company has estimated the fair value of this liability to be $400,083 at June 30, 2004 based on the expected payments of approximately $1.2 million to be made in 2018, discounted at an interest rate of 8.5% per annum. The liability for accrued site closure costs is comprised as follows:
$ | |
Accrued site closure costs, December 31, 2003 | 340,000 |
Additional liabilities incurred during the period | 45,000 |
Accrued site closure costs – accretion expense | 15,083 |
Accrued site closure costs, June 30, 2004 |
400,083
5. EXPLORATION AND DEVELOPMENT COSTS
The following is a summary of exploration and development costs incurred by the Company related to it’s mineral property interests in Meadowbank and Meliadine East, for the following three and six month periods:
Three months ended June 30 | Six months ended June 30 | |||||
2004 | 2003 | 2004 | 2003 | |||
$ | $ | $ | $ | |||
Meadowbank (100% interest): | ||||||
Drilling | 1,151,043 | 1,304,005 | 1,207,212 | 1,319,230 | ||
Transportation and freight | 968,237 | 853,829 | 1,185,594 | 1,296,080 | ||
Contracts and personnel | 720,109 | 769,725 | 967,986 | 1,089,155 | ||
Supplies and equipment | 245,733 | 555,597 | 437,465 | 947,795 | ||
Other exploration costs | 146,293 | 251,914 | 269,889 | 356,492 | ||
Environmental and permitting costs | 440,807 | 436,227 | 1,101,131 | 806,644 | ||
Feasibility and permitting costs | 262,802 | 423,209 | 800,882 | 658,278 | ||
| 3,935,024 | 4,594,506 | 5,970,159 | 6,473,674 | ||
Meliadine East (50% interest): | ||||||
Exploration costs | 4,032 | 556,738 | 11,856 | 561,519 | ||
Recoveries from joint venture partner | (2,016) | (306,240) | (5,928) | (306,240) | ||
2,016
250,498
5,928
255,279
3,937,040
4,845,004
5,976,087
6,728,953
-4-
6. SHARE CAPITAL
[a]
Common shares
As at June 30, 2004, the Company has an unlimited number of authorized common shares with no par value (December 31, 2003 – 100,000,000 authorized common shares with no par value). Common shares have been issued for the following consideration:
Number of shares | Value | |
# | $ | |
Balance, December 31, 2003 | 54,222,744 | 110,806,463 |
Shares issued upon exercise of warrants | 152,825 | 519,964 |
Shares issued upon exercise of options | 38,372 | 63,094 |
Balance, June 30, 2004 |
54,413,941
111,389,521
[b]
Flow-through shares
The flow-through shares issued effectively pass on tax credits associated with Canadian Exploration Expenditures (as defined in the Canadian Income Tax Act) funded by the proceeds of the shares. The entire amount of the tax benefits from flow-through share issuances has been renounced to the subscribers. As of December 31, 2003 the Company was committed to spend the unused proceeds from flow-through share issuances of $2,368,522 on qualifying Canadian exploration activities. During the six month period ended June 30, 2004, the Company has spent this entire amount on qualifying Canadian exploration activities.
[c]
Warrants
At June 30, 2004 there are 5,366,350 [December 31, 2003 - 5,519,175] warrants outstanding to purchase 5,366,350 [December 31, 2003 - 5,519,175] common shares of the Company at a weighted average exercise price of $3.72 per share until July 29, 2004. On July 29, 2004, these warrants expired unexercised.
-5-
[d]
Stock options
At June 30, 2004 there are options outstanding under the Company’s Incentive Share Option Plan of 1995 (as amended) to issue 2,856,128 shares of the Company. The price of these options ranges from $0.80 to $4.85 and their expiry dates range from December 17, 2004 to May 13, 2013. At June 30, 2004, 5,441,394 common shares were reserved for issuance pursuant to the incentive share option plan.
The following table summarizes information about the share options outstanding and exercisable at June 30, 2004:
Outstanding | Exercisable | |||||
Range $ | Total # of shares | Weighted average exercise price | Weighted average contract life remaining | Total # of shares | Weighted average exercise price | |
0.80-1.61 | 657,500 | 1.42 | 0.70 | 657,500 | 1.42 | |
2.00-4.20 | 1,596,628 | 2.31 | 3.85 | 1,379,128 | 2.27 | |
4.85 | 602,000 | 4.85 | 4.41 | 301,000 | 4.85 | |
2,856,128 | 2.64 | 3.24 | ||||
2,337,628
2.36
Option activity for the six month period ended June 30, 2004 is as follows:
Shares | Weighted average price | |
# | $ | |
Options outstanding, December 31, 2003 | 2,804,500 | 2.62 |
Granted | 105,000 | 3.02 |
Exercised | (38,372) | 1.64 |
Cancelled | (15,000) | 4.20 |
Options outstanding, June 30, 2004 |
2,856,128
2.64
The stock options granted in the six month period ended June 30, 2004 had a weighted average fair value of $1.64 each. The fair value of these stock options was estimated at the date of grant using a Black-Scholes Option Pricing Model with the following weighted average assumptions: risk-free interest rate 3.75%; no dividends; volatility factor of the expected market price of the Company’s common shares of 64%; and an expected life of the options of 4.5 years.
-6-
The Company recognized stock compensation expense of $429,535 for the six month period ended June 30, 2004 (six months ended June 30, 2003 - $545,450) and $204,845 for the three month period ended June 30, 2004 (three months ended June 30, 2003 - $211,850) in accordance with the fair value based method of accounting for stock compensation, with the offsetting credit to contributed surplus.
7. COMMITMENTS AND CONTINGENCIES
[a]
The Company has a non-recourse contingent loan balance of approximately $14.2 million at June 30, 2004 [December 31, 2003 - $13.7 million]. This loan will be repaid only if commercial production at Meliadine West is achieved and will be paid only out of production cash flow (as defined in the joint venture agreement).
[b]
The Company is legally obligated to remove exploration equipment and other assets from its mineral property sites in Nunavut and to perform other site reclamation work for which an amount of $400,083 has been accrued as at June 30, 2004 (December 31, 2003 - $340,000). Short term investments include an amount of $35,000 in respect of a government bond arising from the land use agreement entered into with Kivalliq Inuit Association for protection against environmental accidents.
[c]
The Company has employment agreements in place with various key employees which establish compensatory terms, including annual salary, employee benefit entitlements and termination benefits. Three of these agreements also provide for the payment of specific bonus amounts should certain financial and operating milestones with respect to the Meadowbank Project be attained in the future. As of June 30, 2004, the estimated contingent payment with respect to such bonuses is approximately $1.2 million, none of which has been accrued.
[d]
The Company is committed to future minimum annual rent payments under operating lease agreements over the next four years as follows:
$ | |
2004 | 116,862 |
2005 | 217,292 |
2006 | 190,000 |
2007 | 159,000 |
-7-
8. INVESTMENTS IN PUBLIC COMPANIES
During the three month period ended June 30, 2004 the Company sold 900,000 shares (six month period ended June 30, 2004 – 2,700,000 shares) of Eurozinc Mining Corporation (“Eurozinc”) for net proceeds of $549,060 (six month period ended June 30, 2004 - $1,456,627), resulting in a gain of $495,060 (six month period ended June 30, 2004 - $1,306,627).
The market value of the Company’s Eurozinc shares based on the quoted share trading price at June 30, 2004 is $1,330,000 (1,900,000 shares at $0.70 per share). This amount may not be reflective of what the Company would realize on liquidation of its investment.
As a result of private placements completed by Lithic Resources Ltd. (“Lithic”) in 2004, the Company’s interest in Lithic has been diluted to 9.0% as at June 30, 2004 (December 31, 2003 – 11.5%). The quoted market value of these shares at June 30, 2004 is $417,823 (1,392,744 shares at $0.30 per share). This amount may not be reflective of what the Company would realize on liquidation of its investment.
9. SUBSEQUENT EVENTS
On July 30, 2004 the Company granted 1,050,000 stock options with an exercise price of $2.02 per share. The majority of these options vest immediately and expire on July 30, 2009. Also effective July 30, 2004 the Company repriced 277,000 options previously granted to non-insider employees with a weighted average exercise price of $4.73. These options now have an exercise price of $2.02, with no change to the vesting terms or expiry dates. An additional $1.1 million of stock-based compensation expense will be recognized during the remainder of 2004 with respect to this option grant and repricing.
