Interim Consolidated Financial Statements
Cumberland Resources Ltd.
September 30, 2006
Cumberland Resources Ltd.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Canadian dollars)
September 30 2006 | December 31 2005 | |
$ | $ | |
ASSETS | ||
Current | ||
Cash and cash equivalents[note 3] | 21,485,822 | 16,493,481 |
Short term investments | — | 11,419,988 |
Accounts receivable | 469,015 | 450,897 |
Prepaid expenses and other | 395,426 | 411,005 |
Total current assets | 22,350,263 | 28,775,371 |
Mineral property interests | 8,305,966 | 8,289,214 |
Capital assets, net[note 4] | 17,920,990 | 5,777,706 |
Advance payment[note 5] | 750,000 | — |
Reclamation deposit[note 13[c]] | 630,000 | 630,000 |
Investment in public company[note 2] | 261,139 | — |
50,218,358 | 43,472,291 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
Current | ||
Accounts payable and accrued liabilities | 4,583,313 | 1,122,700 |
Derivative instrument liabilities[note 10] | 4,794,030 | — |
Current portion of capital leases[note 5] | 898,472 | 197,088 |
Total current liabilities | 10,275,815 | 1,319,788 |
Capital leases[note 5] | 3,060,358 | — |
Accrued site closure costs[note 6] | 1,754,990 | 475,603 |
Commitments and contingencies [note 13] | ||
Shareholders’ equity | ||
Share capital[note 8[a]] | 119,860,732 | 112,565,733 |
Contributed surplus[note 8[d]] | 5,940,278 | 4,535,091 |
Accumulated other comprehensive loss[note 8[e]] | (4,306,905) | — |
Deficit | (86,366,910) | (75,423,924) |
Total shareholders’ equity | 35,127,195 | 41,676,900 |
50,218,358 | 43,472,291 |
See accompanying notes to consolidated financial statements
Cumberland Resources Ltd.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(Unaudited)
(Canadian dollars)
Three months ended Septemer 30 | Nine months ended September 30 | |||||
2006 | 2005 | 2006 | 2005 | |||
$ | $ | $ | $ | |||
REVENUE | ||||||
Option receipts[note 11] | — | — | 1,500,000 | 500,000 | ||
Interest revenue | 276,497 | 208,155 | 801,944 | 647,217 | ||
Gain on investments in public companies[note 12] | — | 270,084 | — | 1,049,939 | ||
276,497 | 478,239 | 2,301,944 | 2,197,156 | |||
EXPENSES | ||||||
Exploration and development costs[note 7] | 3,447,756 | 2,191,953 | 8,425,113 | 5,867,960 | ||
Employee compensation | 207,527 | 148,369 | 612,737 | 489,148 | ||
Stock-based compensation[note 8[b]] | 40,456 | 52,804 | 1,984,405 | 1,084,609 | ||
Public and investor relations | 79,547 | 188,139 | 363,426 | 407,172 | ||
Office and miscellaneous | 116,768 | 110,003 | 373,594 | 331,147 | ||
Legal, audit and accounting | 54,695 | 45,642 | 235,498 | 165,180 | ||
Other fees and taxes | 6,121 | 6,905 | 148,971 | 99,821 | ||
Project financing[note 9] | 42,000 | 291,496 | 526,707 | 302,686 | ||
Insurance | 72,030 | 119,954 | 222,590 | 356,885 | ||
Unrealized derivative losses[note 10] | 225,986 | — | 225,986 | — | ||
Depreciation and amortization | 14,105 | 13,460 | 40,149 | 40,381 | ||
Accrued site closure costs – accretion expense | 10,687 | 9,987 | 31,387 | 29,333 | ||
Interest expense on capital leases | — | 10,373 | 7,907 | 38,707 | ||
4,317,678 | 3,189,085 | 13,198,470 | 9,213,029 | |||
Net loss for the period | 4,041,181 | 2,710,846 | 10,896,526 | 7,015,873 | ||
Deficit, beginning of period | 82,325,729 | 70,036,914 | 75,423,924 | 65,731,887 | ||
Share issue costs[note 8[a]] | — | — | 46,460 | — | ||
Deficit, end of period | 86,366,910 | 72,747,760 | 86,366,910 | 72,747,760 | ||
Basic and diluted loss per share | $0.07 | $0.05 | $0.19 | $0.13 | ||
Weighted average number of shares outstanding | 56,539,774 | 54,980,974 | 56,017,645 | 54,976,294 | ||
See accompanying notes to consolidated financial statements
Cumberland Resources Ltd.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(Canadian dollars)
Three months ended September 30, 2006 | Nine months ended September 30, 2006 | |||
$ | $ | |||
Net loss for the period | 4,041,181 | 10,896,528 | ||
Other comprehensive loss (income): | ||||
Effective portion of change in fair value of derivative instruments[note 10] | 4,568,044 | 4,568,044 | ||
Unrealized loss (gain) on available-for-sale investment[note 8[e]] | 41,783 | (31,336) | ||
Comprehensive loss for the period | 8,651,008 | 15,433,236 | ||
See accompanying notes to consolidated financial statements
Cumberland Resources Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Canadian dollars)
Three months ended September 30 | Nine months ended September 30 | |||||
2006 | 2005 | 2006 | 2005 | |||
$ | $ | $ | $ | |||
OPERATING ACTIVITES | ||||||
Net loss for the period | (4,041,181) | (2,710,846) | (10,896,526) | (7,015,873) | ||
Add (deduct) items not affecting cash: | ||||||
Depreciation and amortization | 14,105 | 13,461 | 40,149 | 40,381 | ||
Accrued site closure costs – accretion expense | 10,687 | 9,987 | 31,387 | 29,333 | ||
Exploration related amortization | 25,581 | 29,555 | 78,905 | 88,942 | ||
Gain on investments in public companies | — | (270,084) | — | (1,049,939) | ||
Stock-based compensation | 40,456 | 52,804 | 1,984,405 | 1,084,609 | ||
Unrealized derivative losses[note 10] | 225,986 | — | 225,986 | — | ||
Project financing costs[note 8[c]] | — | — | 271,343 | — | ||
Net changes in non-cash working capital items: | ||||||
Accounts receivable | (208,595) | (174,753) | (18,118) | (202,707) | ||
Prepaid expenses | 305,542 | 271,139 | 15,579 | (84,189) | ||
Accounts payable and accrued liabilities | (869,531) | 1,383,370 | 317,813 | 1,744,694 | ||
Cash used in operating activities | (4,496,950) | (1,395,367) | (7,949,077) | (5,364,749) | ||
FINANCING ACTIVITIES | ||||||
Issuance of common shares on exercise of stock options | 555,640 | 20,000 | 1,444,440 | 20,000 | ||
Private placement of flow-through common shares [note 8[a]] | — | — | 4,999,998 | — | ||
Share issue costs [note 8[a]] | — | — | (46,460) | — | ||
Advance payment[Note 5] | (750,000) | — | (750,000) | — | ||
Repayment of capital lease obligation | — | (90,870) | (197,088) | (265,106) | ||
Cash provided by (used in) financing activities | (194,360) | (70,870) | 5,450,890 | (245,106) | ||
INVESTING ACTIVITIES | ||||||
Purchase of capital assets | (3,389,364) | (853,194) | (3,912,708) | (1,287,090) | ||
Acquisition of mineral property interests | (316) | (933) | (16,752) | (40,578) | ||
Short term investments | — | 12,116,466 | 11,419,988 | 15,642,940 | ||
Proceeds on sale of investment in public companies | — | 296,485 | — | 1,139,144 | ||
Cash provided by (used in) investing activities | (3,389,680) | 11,558,824 | 7,490,528 | 15,454,416 | ||
Increase (decrease) in cash and cash equivalents during the period | (8,080,990) | 10,092,587 | 4,992,341 | 9,844,561 | ||
Cash and cash equivalents, beginning of period | 29,566,812 | 9,815,483 | 16,493,481 | 10,063,509 | ||
Cash and cash equivalents, end of period | 21,485,822 | 19,908,070 | 21,485,822 | 19,908,070 | ||
Supplemental information: | ||||||
Interest paid | — | 10,373 | 7,907 | 38,707 | ||
See accompanying notes to consolidated financial statements
Cumberland Resources Ltd.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Canadian dollars)
September 30, 2006
1. BASIS OF PRESENTATION
The accompanying interim consolidated 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. As described in Note 14, these principles differ in certain material respects from those that the Company would have followed had the interim consolidated financial statements been prepared in United States generally accepted accounting principles.
Except for the changes in accounting policies described in Note 2, these interim consolidated financial statements follow the same significant accounting policies and methods of application as the Company’s annual consolidated financial statements for the year ended December 31, 2005 (the “Annual Financial Statements”). The interim consolidated 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, 2006. The majority of exploration costs are incurred in the second and third quarters of the fiscal year due to the seasonal weather conditions in Nunavut Territory. Option receipts are received from the operator of the Meliadine West joint venture in the first quarter.
2. CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2006 the Company has adopted three new accounting standards related to financial instruments that were issued by the Canadian Institute of Chartered Accountants in 2005. These accounting policy changes were adopted on a prospective basis with no restatement of prior period financial statements. The new standards and accounting policy changes are as follows:
Financial Instruments – Recognition and Measurement (Section 3855)
In accordance with this new standard the Company now classifies all financial instruments as either held-to-maturity, available-for-sale, held for trading or loans and receivables. Financial assets held to maturity, loans and receivables and financial liabilities other than those held for trading, are measured at amortized cost. Available-for-sale instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income. Instruments classified as held for trading are measured at fair value with unrealized gains and losses recognized on the statement of loss.
The Company has classified its investment in a public company as available-for-sale and therefore carries it at fair market value, with the unrealized gain or loss recorded in shareholders’ equity as a component of other comprehensive income. These amounts will be reclassified from shareholders’ equity to net income when the investment is sold. Previously, investments in public companies were carried at cost, less provisions for other than temporary declines in value. This change in accounting policy resulted in a $229,803 increase in the carrying value of investments in public companies as at January 1, 2006, representing the cumulative unrealized gain at that time (see Note 8(e)).
Comprehensive Income (Section 1530)
Comprehensive income is the change in shareholders’ equity during a period from transactions and other events and circumstances from non-owner sources. In accordance with this new standard, the Company now reports a consolidated statement of comprehensive loss and a new category, accumulated other comprehensive income, has been added to the shareholders’ equity section of the consolidated balance sheet. The components of this new category will include unrealized gains and losses on financial assets classified as available-for-sale and the effective portion of cashflow hedges. The components of accumulated other comprehensive income for the nine month period ended September 30, 2006 are disclosed in Note 8(e).
Hedges (Section 3865)
This new standard specifies the criteria under which hedge accounting can be applied and how hedge accounting can be executed. In September 2006, the Company has designated a hedging relationship with respect to its Gold Loan Protection Program (Note 10).
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid Canadian dollar denominated investments in banker's acceptances, with terms to maturity of 90 days or less when acquired. The counter-parties are financial institutions. At September 30, 2006, these instruments were yielding a weighted average interest rate of 4.0% per annum (at December 31, 2005 – 3.0% per annum). The cash equivalents are classified as held-to-maturity investments and are carried at amortized cost. The fair market value of the cash equivalents approximates the carrying value at September 30, 2006.
4. CAPITAL ASSETS
Capital assets are comprised as follows:
Cost | Accumulated amortization | Net book value Sept 30, 2006 | Net book value Dec 31, 2005 | |
$ | $ | $ | $ | |
Exploration equipment | 1,408,823 | 1,062,208 | 346,615 | 425,519 |
Computer equipment | 272,106 | 228,431 | 43,675 | 68,611 |
Office equipment | 139,100 | 119,014 | 20,086 | 1,757 |
Construction in progress | 17,510,614 | — | 17,510,614 | 5,281,819 |
19,330,643 | 1,409,653 | 17,920,990 | 5,777,706 |
Construction in progress includes an amount of $3,958,829 related to equipment that was acquired under a capital lease during 2006 (see Note 5).
5. CAPITAL LEASE
In September 2006, the Company renegotiated an existing agreement with a third party provider of mobile equipment. The revised agreement requires the Company to incur minimum hourly usage charges for mobile equipment prior to the end of 2007, at a total cost of $4,405,484. The timing of the payments will be based on actual usage of the specified equipment.
This contractual arrangement represents a capital lease in accordance with the guidance in EIC-150 and CICA 3065. The lease obligation at September 30, 2006 is comprised as follows:
$ | |
Total future lease payments | 4,405,484 |
Less: interest (at 10% annual effective rate) | 446,655 |
3,958,829 | |
Less: current portion | 898,472 |
Long term portion of capital lease | 3,060,358 |
The Company currently does not expect that it will be able to meet the minimum hourly usage requirement until 2008. The Company has the option of extending the agreement to the end of 2008 in which case the Company’s total obligation would increase. In September 2006, the Company made a lump sum payment of $750,000 to the lessor as an advance payment towards hourly usage charges in 2008. Assuming the agreement is extended to the end of 2008, recovery of such advance would commence in 2008.
6. ACCRUED SITE CLOSURE COSTS
Accrued site closure costs relate to the Company’s legal obligation to remove exploration equipment and other assets from its 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 $1,754,990 at September 30, 2006 (December 31, 2005 - $475,603) based on the expected payments of $2,794,285 to be made primarily in 2017, discounted at interest rates of 8.5% or 10.0% per annum. The liability for accrued site closure costs is comprised as follows:
$ | |
Accrued site closure costs, December 31, 2005 | 475,603 |
Additional liabilities incurred during the period | 1,248,000 |
Accrued site closure costs – accretion expense | 31,387 |
Accrued site closure costs, September 30, 2006 | 1,754,990 |
7. EXPLORATION AND DEVELOPMENT COSTS
The following is a summary of exploration and development costs incurred by the Company related to its mineral property interests:
Three months ended Sept 30 | Nine months ended Sept 30 | ||||||
2006 | 2005 | 2006 | 2005 | ||||
$ | $ | $ | $ | ||||
Meadowbank (100% interest): | |||||||
Drilling | 560,960 | 315,956 | 1,396,119 | 1,187,618 | |||
Transportation and freight | 696,214 | 320,985 | 1,225,862 | 770,608 | |||
Contracts and personnel | 284,985 | 272,058 | 771,234 | 709,112 | |||
Supplies and equipment | 167,828 | 201,862 | 509,311 | 374,397 | |||
Other exploration costs | 76,815 | 20,921 | 242,164 | 227,768 | |||
Environmental and permitting costs | 926,218 | 811,700 | 2,393,127 | 1,636,549 | |||
Public relations – mine development | 23,713 | — | 322,836 | — | |||
Engineering | 526,219 | 225,396 | 1,183,305 | 770,265 | |||
| 3,262,952 | 2,115,845 | 8,043,958 | 5,676,317 | |||
Meliadine East (50% interest): | |||||||
Exploration costs, net of recoveries | 18,239 | 44,134 | 27,846 | 83,676 | |||
Other projects | 166,565 | 61,590 | 353,309 | 107,967 | |||
Total exploration and development costs | 3,447,756 | 2,191,953 | 8,425,113 | 5,867,960 | |||
8. SHARE CAPITAL
[a]
Common shares
As at September 30, 2006 and December 31, 2005, the Company has an unlimited number of authorized common shares with no par value. The following is a summary of the common shares issued in the nine month period ended September 30, 2006:
Number of shares | Value | |
# | $ | |
Balance, December 31, 2005 | 55,144,441 | 112,565,733 |
Shares issued upon exercise of options | 725,500 | 2,295,001 |
Issuance of common shares | 833,333 | 4,999,998 |
Balance, September 30, 2006 | 56,703,274 | 119,860,732 |
On April 12, 2006, the Company closed a non-brokered private placement of 833,333 flow-through common shares at a price of $6.00 per share for aggregate gross proceeds of $4,999,998. Share issue costs of $46,460 have been incurred for legal costs and filing fees related to this private placement. The Company is committed to spend the proceeds from this flow-through private placement on qualifying Canadian exploration activities prior to December 31, 2007. The Company will renounce the tax benefits arising from these exploration expenditures to the investors.
[b]
Stock options
At September 30, 2006 there are options outstanding to issue 4,337,250 shares of the Company [December 31, 2005 – 4,066,500]. The price of these options ranges from $1.40 to $4.90 and their expiry dates range from April 5, 2007 to May 13, 2013.
At the Company’s annual general meeting on June 22, 2006, the Company’s shareholders approved an amendment to the existing stock option plan to allow for the number of common shares reserved for issuance under the plan to be based on a rolling maximum of 10% of the Company’s outstanding common shares. Based on the number of common shares outstanding at September 30, 2006, 5,670,327 common shares were reserved for issuance under the incentive share option plan at September 30, 2006.
The following table summarizes information about the share options outstanding and exercisable at September 30, 2006:
Outstanding | Exercisable | |||||
Range $ | Total # of shares | Weighted average exercise price | Weighted average contract life remaining | Total # of shares | Weighted average exercise price | |
1.40 – 1.85 | 1,018,500 | 1.43 | 3.63 | 1,006,000 | 1.43 | |
2.00 – 2.65 | 1,970,000 | 2.19 | 2.42 | 1,960,000 | 2.19 | |
3.56 – 4.90 | 1,348,750 | 4.75 | 4.05 | 1,303,750 | 4.75 | |
4,337,250 | 2.79 | 3.21 | 4,269,750 | 2.79 | ||
Option activity for the nine month period ended September 30, 2006 is as follows:
Shares | Weighted average price | |
# | $ | |
Options outstanding, December 31, 2005 | 4,066,500 | 2.19 |
Exercised | (725,500) | 1.99 |
Granted | 996,250 | 4.74 |
Options outstanding, September 30, 2006 | 4,337,250 | 2.79 |
The stock options granted in the nine month period ended September 30, 2006 had a weighted average fair value of $1.99 each (nine months ended September 30, 2005 - $0.76 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 4.53%; no dividends; volatility factor of the expected market price of the Company’s common shares of 57%; and an expected life of the options of 3.0 years.
The Company recognized stock compensation expense of $1,984,405 for the nine month period ended September 30, 2006 (nine months ended September 30, 2005 - $1,084,609) and $40,456 for the three month period ended September 30, 2006 (three months ended September 30, 2005 - $52,804) in accordance with the fair value based method of accounting for stock compensation, with the offsetting credit recorded as an increase in contributed surplus.
[c] Warrants
In March 2006 the Company issued an additional 125,000 warrants as consideration for pre-arranging advisory services provided by SG Corporate & Investment Banking (“SG CIB”) in connection with the debt financing for the Meadowbank project (see Note 9). The warrants issued to SG CIB had a fair value of $271,343 at the date of grant and this amount has been expensed as project financing costs on the Company’s consolidated statement of loss and deficit. This fair value was estimated using a Black-Scholes Option Pricing Model with the following assumptions: risk-free interest rate of 4.12%; no dividends; volatility factor of the expected market price of the Company’s common shares of 59%; and an expected life of the warrants of 4 years
The following warrants are outstanding and exercisable at September 30, 2006:
Issue Date: | Common shares to be issued upon exercise of warrants | Exercise Price | Expiry Date | ||
December 22, 2005 | 125,000 | $2.48 | December 22, 2009 | ||
March 31, 2006 | 125,000 | $5.22 | April 3, 2010 |
[d] Contributed surplus
Contributed surplus is comprised as follows:
$ | |
Balance, December 31, 2005 | 4,535,091 |
Stock-based compensation expense(note 7(b)) | 1,984,405 |
Fair value of warrants issued(note 7(c)) | 271,343 |
Transfer to share capital for exercise of stock options | (850,561) |
Balance, September 30, 2006 | 5,940,278 |
[e] Accumulated other comprehensive income
Accumulated other comprehensive income is comprised as follows:
$ | |
Balance, December 31, 2005 | - |
Adjustment for cumulative unrealized gains on available-for-sale investment at January 1, 2006(see note 2) | 229,803 |
Unrealized gains on available-for-sale investment | 31,336 |
Effective portion of change in fair value of derivative instruments[note 10] | (4,568,044) |
Balance, September 30, 2006 | (4,306,905) |
9. GOLD LOAN FINANCING
In March 2006, a wholly-owned subsidiary of the Company secured a commitment from a group of banks to arrange and underwrite a seven-year limited recourse gold loan facility for up to 420,000 ounces. The bank commitment and the Company’s ability to draw down under the facility are subject to certain conditions, including, among other things, the Company securing all requisite regulatory permits and licences and the completion of final loan documentation. In September 2006, and as a condition of the gold loan, the Company completed a zero cost Gold Loan Protection Program in order to secure a minimum monetized value for the gold that it expects to receive under the gold loan facility in 2007 (see Note 10).
During the three and nine month periods ended September 30, 2006 the Company incurred project financing costs of $42,000 and $526,707 respectively, in connection with the debt financing for the Meadowbank project. These costs primarily relate to pre-arranging advisory services performed by SG Corporate & Investment Banking (“SG CIB”) and loan documentation costs. Project financing costs also include a non-cash expense of $271,343 for the fair value of warrants (see Note 8(c)) that were earned by SG CIB upon the receipt of the bank commitment described above.
10. DERIVATIVE INSTRUMENTS
In September 2006, the Company completed a Gold Loan Protection Program in order to secure a minimum monetized value for the gold that it expects to receive under the gold loan facility in 2007 (see Note 9). The following derivative contracts were acquired under this program and remain outstanding at September 30, 2006:
Average Strike Price | Ounces | Maturity Date | |
Call options sold | $Cdn 800 | 420,000 | September 20, 2007 |
Put options purchased | $Cdn 605 | 420,000 | September 20, 2007 |
These derivatives were acquired at zero cost and the Company will not be required to post any security deposit. The counter-parties are major European financial institutions.
The purchased put options ensure that the Company will receive total cash proceeds from the monetization of the gold loan of at least $Cdn 254 million. These derivative instruments provide a cashflow hedge for the anticipated monetization of the gold loan in 2007. The Company expects to to meet the conditions of the gold loan facility and be in a position to drawdown all of the ounces under the gold loan facility by the end of the second quarter of 2007.
The total fair value of the derivative contracts of ($4,794,030) is recorded on the balance sheet as a current liability at September 30, 2006. An unrealized derivative loss of $225,986 has been recorded on the consolidated statement of loss for the three and nine month periods ended September 30, 2006 to reflect the ineffective portion of the hedge. The remaining balance of $4,568,044 has been classified in accumulated other comprehensive income on the consolidated balance sheet, and will be reclassified to the consolidated statement of loss when the gold loan is monetized in 2007.
The fair value of these contracts at September 30, 2006 was estimated using a Black-Scholes option pricing model assuming volatility factors of 23% for the call options and 19% for the put options, a risk free interest rate of 4% and a spot gold price of $Cdn 670 per ounce.
11. OPTION RECEIPTS
In January 2006, the Company received the scheduled option payment of $1,500,000 (2005 - $500,000) from the operator of the Meliadine West joint venture. The Company has agreed to sell this joint venture interest in October 2006 (see Note 14).
12. GAIN ON SALE OF INVESTMENT IN PUBLIC COMPANY
During the three month period ended September 30, 2005 the Company sold 440,000 shares of Eurozinc Mining Corporation (“Eurozinc”) for net proceeds of $296,484, resulting in a gain of $270,084. In the nine months ended September 30, 2005 the Company sold 1,480,000 Eurozinc shares for net proceeds of $1,138,848 and a gain of $1,050,048.
13. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies not disclosed elsewhere in these financial statements include the following:
a)
The Company has committed to capital expenditures for construction activity at Meadowbank, primarily for the procurement and mobilization of contractor’s equipment and other supplies required for construction of the access road from Baker Lake to the Meadowbank site. The Company estimates that as at September 30, 2006 the committed capital expenditures, net of resale recoveries, are approximately $12 milllion.
b) In connection with the flow-through financing completed in April 2006 (see Note 8(a)), the Company is required to spend a further $1.2 million on qualifying Canadian exploration expenditures prior to December 31, 2007.
c)
The Company has a $630,000 deposit at a financial institution that is serving as collateral for letters of credit that have been pledged in favour of the Kivalliq Inuit Association. The deposit is bearing interest at market rates. The deposit will be returned when the Company has satisfied its legal obligations with respect to site reclamation at the Meadowbank mineral property in Nunavut (see Note 6).
d)
The Company has employment agreements in place with various key employees which establish compensatory terms, including annual salary, employee benefit entitlements and termination benefits. Five 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, 2006, the estimated contingent payment with respect to such bonuses is approximately $1.8 million, none of which has been accrued.
e)
As at September 30, 2006, the Company has a contingent loan balance of $19.7 million [December 31, 2005 - $17.2 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). In October 2006 the Company agreed to sell its interest in the Meliadine West property and as part of this agreement, the purchaser will assume the contingent loan (see Note 14).
f) The Company is committed to future minimum annual rent payments under operating lease agreements of $68,140 in the remainder of 2006 and $203,264 during 2007.
14. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”), which differ in certain material respects from those principles that the Company would have followed had its financial statements been prepared in accordance with United States generally accepted accounting principles (“US GAAP”). Had the Company followed US GAAP, certain items on the consolidated statements of loss and deficit, comprehensive loss and consolidated balance sheets would have been reported as follows:
Consolidated statements of loss and deficit - | Nine months ended September 30, 2006 $ | Nine months ended September 30, 2005 $ |
Revenue | 2,301,944 | 2,277,818 |
Exploration and development costs | (12,049,244) | (5,867,960) |
Other expenses | (4,773,357) | (3,345,069) |
Future income tax recovery | 916,666 | — |
Net loss, US GAAP | (13,603,991) | (6,935,211) |
Reconciliation: Net loss, Canadian GAAP Adjustments to: | (10,896,526) | (7,015,873) |
Meadowbank project development costs [b] | (3,624,131) | — |
Gain on investment in Eurozinc [c] | — | 80,662 |
Premium received on flow-through shares [d] | 916,666 | — |
Net loss, US GAAP | (13,603,991) | (6,935,211) |
Comprehensive loss [c], [f] | (18,130,253) | (7,990,928) |
Net loss per share (U.S. GAAP, basic and diluted) | $0.24 | $0.12 |
Consolidated statement of comprehensive loss - | Nine months ended September 30, 2006 $ |
Net loss, US GAAP | (13,603,991) |
Effective portion of change in fair value of derivative instruments | (4,568,044) |
Unrealized gain on available for sale investment | 41,782 |
Comprehensive loss, US GAAP | (18,130,253) |
Reconciliation: Comprehensive loss, Canadian GAAP Adjustments to: | (15,433,236) |
Meadowbank project development costs [b] | (3,624,131) |
Premium received on flow-through shares [d] | 916,666 |
Unrealized gain on available for sale investment [c] | 10,448 |
Comprehensive loss, US GAAP | (18,130,253) |
Prior to the adoption ofCICA 1530Comprehensive Income in 2006, the Company did not report a consolidated statement of comprehensive loss under Canadian GAAP. The Company’s US GAAP comprehensive loss for the nine month period ended September 30, 2005 is comprised as follows:
Nine months ended September 30, 2005 $ | |
Net loss, US GAAP | (6,935,211) |
Change in net unrealized gains on available-for-sale investments | (1,055,717) |
Comprehensive loss, US GAAP | (7,990,928) |
Consolidated balance sheets - | September 30, 2006 | December 31, 2005 | ||
Canadian basis $ | U.S. basis $ | Canadian basis $ | U.S. basis $ | |
Assets | ||||
Cash and cash equivalents | 21,485,822 | 20,366,477 | 16,493,481 | 16,493,481 |
Restricted cash [d] | — | 1,119,345 | — | — |
Short term investments | — | — | 11,419,988 | 11,419,988 |
Accounts receivable | 469,015 | 469,015 | 450,897 | 450,897 |
Prepaid expenses and other | 395,426 | 395,426 | 411,005 | 411,005 |
Mineral property interests [a] | 8,305,966 | 8,950,261 | 8,289,214 | 8,933,509 |
Capital assets, net [b] | 17,920,990 | 14,296,859 | 5,777,706 | 5,777,706 |
Advance payment | 750,000 | 750,000 | — | — |
Reclamation deposit | 630,000 | 630,000 | 630,000 | 630,000 |
Investments in public companies [c] | 261,139 | 348,186 | — | 306,404 |
50,218,358 | 47,325,569 | 43,472,291 | 44,422,990 | |
Liabilities and shareholders’ equity | ||||
Accounts payable & accrued liabilities | 4,583,313 | 4,583,313 | 1,122,700 | 1,122,700 |
Derivative instrument liabilities | 4,794,030 | 4,794,030 | — | — |
Current portion of capital leases | 898,472 | 898,472 | 197,088 | 197,088 |
Accrued site closure costs | 1,754,990 | 1,754,990 | 475,603 | 475,603 |
Capital leases | 3,060,358 | 3,060,358 | — | — |
Shareholders’ equity | ||||
Share capital [a], [d], [e] | 119,860,732 | 113,785,084 | 112,565,733 | 107,453,211 |
Contributed surplus | 5,940,278 | 5,940,278 | 4,535,091 | 4,535,091 |
Accumulated other comprehensive | ||||
loss [c] | (4,306,905) | (4,219,858) | — | 306,404 |
Deficit [e] | (86,366,910) | (83,271,098) | (75,423,924) | (69,667,107) |
Total shareholders’ equity | 35,127,195 | 32,234,406 | 41,676,900 | 42,627,599 |
50,218,358 | 47,325,569 | 43,472,291 | 44,422,990 | |
a)
Mineral property interests
Under Canadian GAAP, the warrants attached to the shares issued as consideration for the acquisition of the Meadowbank mineral property were not separately valued in 1997. Under US GAAP, the fair market value of the warrants in the amount of $644,295 was recorded as a cost of the mineral property interest, in accordance with FASB Statement No. 123(R).
b)
Capital assets
Capital assets under Canadian GAAP at September 30, 2006 includes an amount of $3,624,131 (December 31, 2005 - $Nil) for construction in progress that does not meet the US GAAP criteria for capitalization under SEC Industry Guide 7. This amount has been expensed for US GAAP purposes in the nine month period ended September 30, 2006.
c)
Investments in public companies
The cost base of the Company’s investment in Lithic Resources Ltd. at December 31, 2005 was $Nil under both Canadian GAAP and US GAAP. However under US GAAP, this investment is classified as an available-for-sale investment under FASB Statement No. 115Accounting for Certain Investments in Debt and Equity Securities. As a result, under US GAAP this investment is recorded on the balance sheet at its fair value of $306,404 at December 31, 2005, with the offsetting credit recorded as a separate component of shareholders’ equity (accumulated other comprehensive income).
As the result of the adoption ofCICA 3855 Financial Instruments – Recognition and Measurement andCICA 1530Comprehensive Income, effective January 1, 2006, the investment in Lithic Resources is now also classified as an available for sale investment under Canadian GAAP with the offsetting credit recorded as a separate component of shareholders’ equity. However, under US GAAP the Company has not recognized a fair value discount to reflect the illiquid nature of this investment. As a result, the fair value of this investment under US GAAP is $87,047 higher than under Canadian GAAP at September 30, 2006 and the increase in the fair value during the nine month period ended September 30, 2006 is $10,448 higher under US GAAP.
The US GAAP cost base of the investment in Eurozinc Mining at December 31, 2004 was lower than the Canadian GAAP carrying value of this investment. As a result, the gain on sale of Eurozinc shares during the nine month period ended September 30, 2005 is higher under US GAAP than under Canadian GAAP.
d) Flow-through shares
Under Canadian income tax legislation, the Company is permitted to issue shares whereby the Company agrees to incur Canadian Exploration Expenditures (as defined in the Canadian Income Tax Act) and renounce the related income tax deductions to the investors. Under Canadian GAAP, the full amount of funds received from flow-through share issuances are recorded as share capital. Under US GAAP, the premium paid for the flow-through shares in excess of the market value is credited to liabilities and included in income when the related tax benefits are renounced by the Company. A tax recovery of $916,666 has been recorded under US GAAP in the nine month period ended September 30, 2006 as a result of the premium paid for the flow-through shares issued by the Company in April 2006.
Furthermore, under US GAAP, and notwithstanding that there is not a specific requirement to segregate funds pursuant to the flow-through share agreements, the flow-through funds which are unexpended at the balance sheet date are separately classified as restricted cash. Such amount unexpended at September 30, 2006 was $1,119,345 (December 31, 2005 - $Nil).
e)
Share issue costs
Under Canadian GAAP, share issue costs have been charged directly against the deficit but under the US GAAP they must be charged against share capital.
15. SUBSEQUENT EVENTS
In October 2006, the Company agreed to sell its 22% interest in the Meliadine West Project and its 50% interest in the Meliadine East Project for cash consideration of $23 million. As part of the transaction, the purchaser has assumed the Company’s contingent loan balance of approximately $19.7 million (see Note 13(e)). The purchaser has also agreed to a potential future cash payment of up to a maximum of $2 million depending on the results of an independent resource estimate to be completed on the Meliadine West property. The Company recorded a related accounting gain of approximately $22.8 million in the fourth quarter of 2006.
On November 2, 2006 the Company entered into an agreement under which a syndicate of underwriters agreed to buy 16,100,000 common shares of the Company at a price of $5.40 per share for gross proceeds of $86,940,000. The underwriters also exercised an option to purchase an additional 2,415,000 common shares (representing 15% of the offering) resulting in the Company raising additional gross proceeds of $13,041,000, for a total of $100 million. This transaction closed in the fourth quarter of 2006.
On February 14, 2007 the Company announced that it had signed an agreement with Agnico Eagle Mines Ltd. (“Agnico”) under which Agnico has agreed to make an all share exchange offer for all of the Company’s outstanding and fully diluted common shares. The transaction is subject to certain conditions, including approval of the Company’s shareholders.
