Unaudited Interim Financial Statements
Cumberland Resources Ltd.
September 30, 2004
BALANCE SHEETS
(Unaudited)
(Canadian dollars)
See accompanying notes to financial statements
STATEMENTS OF LOSS AND DEFICIT
(Unaudited)
(Canadian dollars)
Three months ended September 30 | Nine months ended September 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 | 197,176 | 371,106 | 731,362 | 684,632 | |||
Gain on sale of investments in public companies[note 8] | 106,336 | 30,918 | 1,412,963 | 30,918 | |||
303,512 | 402,024 | 2,644,325 | 1,215,550 | ||||
EXPENSES | |||||||
Exploration and development costs[note 5] | 2,125,327 | 3,319,283 | 8,101,414 | 10,048,236 | |||
Employee compensation | 131,905 | 123,016 | 475,909 | 297,864 | |||
Stock-based compensation[note 6[d]] | 1,276,206 | 125,600 | 1,705,741 | 671,050 | |||
Public and investor relations | 58,366 | 179,266 | 265,481 | 391,471 | |||
Office and miscellaneous | 95,884 | 199,537 | 344,746 | 357,288 | |||
Legal, audit and accounting | 69,317 | 98,949 | 257,867 | 162,472 | |||
Other fees and taxes | 10,903 | 8,601 | 189,158 | 106,894 | |||
Insurance | 133,864 | 16,525 | 353,625 | 49,575 | |||
Depreciation and amortization | 23,625 | 6,286 | 58,341 | 18,040 | |||
Accrued site closure costs – accretion expense | 8,263 | 2,819 | 23,346 | 6,457 | |||
Interest expense on capital leases | 22,704 | 17,360 | 64,193 | 23,854 | |||
3,956,364 | 4,097,242 | 11,839,821 | 12,133,201 | ||||
Net loss for the period | 3,652,852 | 3,695,218 | 9,195,496 | 10,917,651 | |||
Deficit, beginning of period | 60,748,266 | 47,058,729 | 55,205,622 | 39,836,296 | |||
Share issue costs | (5,278) | 1,937,146 | (5,278) | 1,937,146 | |||
Deficit, end of period | 64,395,840 | 52,691,093 | 64,395,840 | 52,691,093 | |||
Basic and Diluted loss per share | $0.07 | $0.08 | $0.17 | $0.26 | |||
Weighted average number of share outstanding | 54,489,106 | 48,888,840 | 54,418,173 | 42,672,843 | |||
See accompanying notes to financial statements
STATEMENTS OF CASH FLOWS
(Unaudited)
(Canadian dollars)
Three months ended September 30 | Nine months ended September 30 | |||||
2004 | 2003 | 2004 | 2003 | |||
$ | $ | $ | $ | |||
[as restated – see note 1[b] ] | [as restated – see note 1[b]] | |||||
OPERATING ACTIVITES | ||||||
Net loss for the period | (3,652,852) | (3,695,218) | (9,195,496) | (10,917,651) | ||
Add (deduct) items not affecting cash: | ||||||
Depreciation and amortization | 23,625 | 6,286 | 58,341 | 18,040 | ||
Accrued site closure costs – accretion expense | 8,263 | 2,819 | 23,346 | 6,457 | ||
Exploration related amortization | 41,287 | 99,013 | 133,673 | 203,180 | ||
Gain on sale of investment in public companies | (106,336) | (30,918) | (1,412,963) | (30,918) | ||
Stock-based compensation | 1,276,206 | 125,600 | 1,705,741 | 671,050 | ||
Net changes in non-cash working capital items: | ||||||
Accrued interest receivable | 3,313 | 53,485 | 279,286 | (141,219) | ||
Accounts receivable | 265,206 | (119,328) | 8,551 | (278,425) | ||
Due from joint venturer | (9,482) | (4,200) | (5,503) | (188,429) | ||
Prepaids | 241,300 | 16,525 | (379,359) | 30,854 | ||
Accounts payable and accrued liabilities | (663,479) | (1,125,813) | (442,648) | 544,366 | ||
Cash used in operating activities | (2,572,949) | (4,671,749) | (9,227,031) | (10,082,695) | ||
FINANCING ACTIVITIES | ||||||
Issuance of common shares | 652,050 | 36,708,356 | 1,235,108 | 42,660,106 | ||
Share issue costs | 5,278 | (1,937,146) | 5,278 | (1,937,146) | ||
Repayment of capital lease obligation | (78,539) | (206,444) | (239,630) | (237,435) | ||
Cash provided by financing activities | 578,789 | 34,564,766 | 1,000,756 | 40,485,525 | ||
INVESTING ACTIVITIES | ||||||
Purchase of capital assets | (179,324) | (1,674,166) | (1,011,970) | (1,735,590) | ||
Reclamation deposit | (500,000) | - | (500,000) | - | ||
Short term investments | (835,909) | (7,889,141) | (9,869,608) | (4,484,931) | ||
Proceeds on sale of investment in public companies | 118,336 | 43,318 | 1,574,963 | 43,318 | ||
Purchase of investment | - | (405) | - | (405) | ||
Cash used in investing activities | (1,396,897) | (9,520,394) | (9,806,615) | (6,177,608) | ||
Increase (decrease) in cash and cash equivalents during the period | (3,391,057) | 20,372,623 | (18,032,890) | 24,225,222 | ||
Cash and cash equivalents, beginning of period | 9,628,184 | 4,999,243 | 24,270,017 | 1,146,644 | ||
Cash and cash equivalents, end of period | 6,237,127 | 25,371,866 | 6,237,127 | 25,371,866 | ||
Supplemental information: | ||||||
Interest paid | 22,704 | 17,360 | 64,193 | 23,854 | ||
Taxes paid | 14,722 | - | 35,668 | 47,642 | ||
See accompanying notes to financial statements
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
(Canadian dollars)
September 30, 2004
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 3870Stock-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 3110Asset 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 nine month periods ended September 30, 2003 have been restated as follows:
Three months ended September 30, 2003 | Nine months ended September 30, 2003 | ||
$ | $ | ||
Net loss, as previously reported | (3,512,762) | (10,171,892) | |
Stock-based compensation expense | (125,600) | (671,050) | |
Impact of adoption of CICA 3110 | (56,856) | (74,709) | |
Net loss, as restated | (3,695,218) | (10,917,651) | |
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 are financial institutions. At September 30, 2004, these instruments were yielding a weighted average interest rate of 2.0% per annum.
Short-term investments comprise highly liquid Canadian dollar denominated investments in investment grade debt and banker's acceptances with maturities to March 7, 2005. The counter-parties include corporations and financial institutions. At September 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 September 30, 2004.
3. CAPITAL ASSETS
Capital assets at September 30, 2004 are comprised as follows:
Cost | Accumulated amortization | Net book value Sept 30, 2004 | Net book value Dec 31, 2003 | |
$ | $ | $ | $ | |
Exploration equipment | 1,232,400 | 636,634 | 595,766 | 729,439 |
Computer equipment | 258,839 | 125,114 | 133,725 | 36,324 |
Office equipment | 120,790 | 109,421 | 11,369 | 23,778 |
Construction in progress | 3,803,799 | - | 3,803,799 | 2,890,162 |
5,415,828 | 871,169 | 4,544,659 | 3,679,703 |
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 $408,346 at September 30, 2004 based on the expected payments of approximately $1.1 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 | 23,346 |
Accrued site closure costs, September 30, 2004 | 408,346 |
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 nine month periods:
Three months ended Sept 30 | Nine months ended Sept 30 | ||||||
2004 | 2003 | 2004 | 2003 | ||||
$ | $ | $ | $ | ||||
Meadowbank (100% interest): | |||||||
Drilling | 601,485 | 530,572 | 1,808,697 | 1,849,802 | |||
Transportation and freight | 605,639 | 910,386 | 1,791,233 | 2,206,466 | |||
Contracts and personnel | 164,966 | 471,859 | 1,132,952 | 1,561,014 | |||
Supplies and equipment | 201,862 | 324,746 | 639,327 | 1,272,541 | |||
Other exploration costs | 20,921 | 46,812 | 290,810 | 403,304 | |||
Environmental and permitting costs | 343,991 | 368,626 | 1,445,122 | 1,175,270 | |||
Feasibility and engineering | 176,981 | 644,975 | 977,863 | 1,303,253 | |||
| 2,115,845 | 3,297,976 | 8,086,004 | 9,771,650 | |||
Meliadine East (50% interest): | |||||||
Exploration costs | 18,964 | 23,723 | 30,820 | 585,242 | |||
Recoveries from joint venture partner | (9,482) | (2,416) | (15,410) | (308,656) | |||
9,482 | 21,307 | 15,410 | 276,586 | ||||
Total exploration and development costs | 2,125,327 | 3,319,283 | 8,101,414 | 10,048,236 | |||
6. SHARE CAPITAL
[a]
Common shares
As at September 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 | 443,372 | 715,144 |
Balance, September 30, 2004 | 54,818,941 | 112,041,571 |
In addition, the Company has options outstanding to issue 3,501,128 common shares of the Company as at September 30, 2004 (see Note 6[d]). If all dilutive instruments outstanding at September 30, 2004 were exercised, the Company would have a total of 58,320,069 common shares outstanding.
[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 nine month period ended September 30, 2004, the Company has spent this entire amount on qualifying Canadian exploration activities.
[c]
Warrants
At December 31, 2003 there were 5,519,175 warrants outstanding to purchase 5,519,175 common shares of the Company at a weighted average exercise price of $3.71 per share until July 29, 2004. 152,825 of these warrants were exercised during 2004 and the remainder expired unexercised on July 29, 2004.
[d]
Stock options
At September 30, 2004 there are options outstanding under the Company’s Incentive Share Option Plan of 1995 (as amended) to issue 3,501,128 common shares of the Company. The exercise 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 September 30, 2004, 5,036,394 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 September 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 - 1.85 | 362,500 | 1.34 | 1.61 | 325,000 | 1.28 | |
2.00 - 2.65 | 2,753,628 | 2.15 | 4.12 | 2,295,128 | 2.16 | |
3.56 - 4.85 | 385,000 | 4.78 | 4.14 | 202,500 | 4.72 | |
3,501,128 | 2.36 | 3.86 | 2,822,628 | 2.24 | ||
Option activity for the nine month period ended September 30, 2004 is as follows:
Shares | Weighted average exercise price | |
# | $ | |
Options outstanding, December 31, 2003 | 2,804,500 | 2.62 |
Granted | 1,155,000 | 2.11 |
Exercised | (443,372) | 1.61 |
Cancelled | (15,000) | 4.20 |
Options outstanding, September 30, 2004 | 3,501,128 | 2.36 |
The stock options granted in the nine month period ended September 30, 2004 had a weighted average fair value of $1.17 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 3.98%; no dividends; volatility factor of the expected market price of the Company’s common shares of 66%; and an expected life of the options of 4.5 years.
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. As a result of this repricing, these options now have an exercise price of $2.02, with no change to the vesting terms or expiry dates. An additional $81,734 of stock-based compensation expense was recognized in the three month period ended September 30, 2004 with respect to this repricing.
The Company recognized total stock compensation expense of $1,705,741 for the nine month period ended September 30, 2004 (nine months ended September 30, 2003 - $671,050) and $1,276,206 for the three month period ended September 30, 2004 (three months ended September 30, 2003 - $125,600) 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 $14.9 million at September 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 has a $500,000 deposit at a financial institution that is serving as collateral for a letter of credit pledged in favour of the Kivalliq Inuit Association in connection with land use agreements in Nunavut. The deposit is bearing interest at market rates and will be returned when the Company has satisfied its legal obligations with respect to site reclamation at mineral property sites in Nunavut (see Note 4).
[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 September 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 (remaining) | 58,002 |
2005 | 221,556 |
2006 | 190,000 |
2007 | 159,000 |
8. INVESTMENTS IN PUBLIC COMPANIES
During the three month period ended September 30, 2004 the Company sold 200,000 shares (nine months ended September 30, 2004 – 2,700,000 shares) of Eurozinc Mining Corporation (“Eurozinc”) for net proceeds of $118,336 (nine months ended September 30, 2004 - $1,574,963), resulting in a gain of $106,336 (nine months ended September 30, 2004 - $1,412,963).
The market value of the Company’s Eurozinc shares based on the quoted share trading price at September 30, 2004 is $1,309,000 (1,700,000 shares at $0.77 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 8.5% as at September 30, 2004 (December 31, 2003 – 11.5%). The quoted market value of these shares at September 30, 2004 is $278,549 (1,392,744 shares at $0.20 per share). This amount may not be reflective of what the Company would realize on liquidation of its investment.
