MINCO SILVER CORPORATION
(An exploration stage enterprise)
Consolidated Financial Statements
(Expressed in Canadian dollars)
September 30, 2007
Index
Notice to Reader
Consolidated Balance Sheets
Consolidated Statements of Operations and Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
NOTICE TO READER
Under National Instrument 51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited interim financial statements of Minco Silver Corporation have been prepared by, and are the responsibility of, the Company’s management. The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in Canada, consistent with previous periods.
Minco Silver Corporation’s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity’s auditor.
- 2 -
| MINCO SILVER CORPORATION |
|
|
|
|
|
| ||||||
(An exploration stage enterprise) | |||||||||||||
Consolidated Balance Sheets | |||||||||||||
(Expressed in Canadian Dollars) | |||||||||||||
|
| September 30, 2007 |
| December 31 2006 | |||||||||
|
|
|
|
| |||||||||
ASSETS |
|
|
|
| |||||||||
|
|
|
|
| |||||||||
Current assets |
|
|
|
| |||||||||
Cash and cash equivalents | $ | 102,390 | $ | 85,764 | |||||||||
Short-term investments (Note 2) |
| 17,405,788 |
| 20,285,576 | |||||||||
Receivables |
| 109,762 |
| 158,402 | |||||||||
Prepaid expenses and deposits |
| 12,147 |
| 34,003 | |||||||||
|
|
|
|
| |||||||||
Total current assets |
| 17,630,087 |
| 20,563,745 | |||||||||
|
|
|
|
| |||||||||
Plant, property and equipment(Note 4) |
| 158,340 |
| 80,519 | |||||||||
|
|
|
|
| |||||||||
Total assets | $ | 17,788,427 | $ | 20,644,264 | |||||||||
|
|
|
|
| |||||||||
LIABILITIES |
|
|
|
| |||||||||
|
|
|
|
| |||||||||
Current liabilities |
|
|
|
| |||||||||
Accounts payable and accrued liabilities | $ | 341,699 | $ | 1,382,322 | |||||||||
Due to Minco Gold Corporation (Note 6(a)) |
| 1,259,219 |
| 442,404 | |||||||||
|
|
|
|
| |||||||||
Total liabilities |
| 1,600,918 |
| 1,824,726 | |||||||||
Commitments and contingencies (Notes 8 and 10) |
|
|
|
| |||||||||
|
|
|
|
| |||||||||
SHAREHOLDERS' EQUITY |
|
|
|
| |||||||||
Share capital(Note 5(a)) |
| 21,791,419 |
| 21,266,071 | |||||||||
|
|
|
|
| |||||||||
Contributed surplus(Note 5(c)) |
| 5,682,498 |
| 4,694,498 | |||||||||
|
|
|
|
| |||||||||
Deficit accumulated during the exploration stage |
| (11,286,408) |
| (7,141,031) | |||||||||
|
|
|
|
| |||||||||
Total shareholders’ equity |
| 16,187,509 |
| 18,819,538 | |||||||||
|
|
|
|
| |||||||||
Total liabilities and shareholders’ equity | $ | 17,788,427 | $ | 20,644,264 | |||||||||
See accompanying notes to consolidated financial statements |
|
| |||||||||||
|
|
| |||||||||||
|
|
| |||||||||||
On behalf of the Board: | “Chan-Seng Lee” |
| “William Meyer” | ||||||||||
| Chan-Seng Lee |
| William Meyer | ||||||||||
| |||||||||||||
Director Director | |||||||||||||
- 3 -
MINCO SILVER CORPORATION |
|
|
|
|
|
|
|
|
|
|
(An exploration stage enterprise) |
|
|
|
| ||||||
Consolidated Statements of Operations and Deficit |
|
|
| |||||||
(Unaudited-Prepared by Management) |
|
|
|
|
|
|
|
|
|
|
(Expressed in Canadian Dollars) |
|
|
|
|
|
|
|
|
|
|
|
| Three months Ended September 30, 2007 |
| Three months Ended September 30, 2006 |
| Nine months Ended September 30, 2007 |
| Nine months Ended September 30, 2006 |
|
Cumulative from August 20, 2004 (inception) to September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration permits | $ | - | $ | - | $ | - | $ | - | $ | 1,739,594 |
Other exploration costs(Note 3) |
| 682,067 |
| 492,300 |
| 2,505,830 |
| 897,272 |
| 4,569,289 |
Total exploration costs |
| 682,067 |
| 492,300 |
| 2,505,830 |
| 897,272 |
| 6,308,883 |
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses |
|
|
|
|
|
|
|
|
|
|
Accounting and audit |
| 8,774 |
| - |
| 33,698 |
| 69,182 |
| 237,096 |
Amortization |
| 6,524 |
| 3,478 |
| 14,209 |
| 7,111 |
| 32,000 |
Consulting |
| 10,967 |
| 15,730 |
| 51,175 |
| 52,663 |
| 186,989 |
Director’s fees (Note 6 (b)) |
| 7,250 |
| 12,000 |
| 39,583 |
| 28,500 |
| 80,833 |
Foreign exchange gain |
| (16,325) |
| (69,911) |
| (9,682) |
| (75,733) |
| (49,813) |
Investor relations |
| 52,835 |
| 142,540 |
| 393,969 |
| 303,383 |
| 1,034,547 |
Legal |
| 3,695 |
| 12,386 |
| 19,717 |
| 34,631 |
| 213,987 |
Regulatory and filing |
| 31,790 |
| 10,547 |
| 65,784 |
| 37,634 |
| 201,018 |
Rent and other office expenses |
| 62,023 |
| 58,128 |
| 200,886 |
| 179,749 |
| 637,144 |
Property investigation |
| 30,725 |
| 23,216 |
| 59,687 |
| 77,832 |
| 278,522 |
Salaries and benefits |
| 77,985 |
| 62,456 |
| 228,248 |
| 141,878 |
| 551,464 |
Stock based compensation (Note 5(d)) |
| 322,000 |
| 240,000 |
| 1,124,000 |
| 598,000 |
| 2,623,000 |
|
|
|
|
|
|
|
|
|
|
|
|
| 598,243 |
| 510,570 |
| 2,221,274 |
| 1,454,830 |
| 6,026,787 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
| (1,280,310) |
| (1,002,870) |
| (4,727,104) |
| (2,352,102) |
| (12,335,670) |
|
|
|
|
|
|
|
|
|
|
|
Interest and sundry income |
| 203,236 |
| 69,073 |
| 581,727 |
| 187,192 |
| 1,049,262 |
|
|
|
|
|
|
|
|
|
|
|
Loss for the period |
| (1,077,074) |
| (933,797) |
| (4,145,377) |
| (2,164,910) |
| (11,286,408) |
|
|
|
|
|
|
|
|
|
|
|
Deficit,beginning of period |
| (10,209,334) |
| (4,114,883) |
| (7,141,031) |
| (2,883,770) |
| - |
|
|
|
|
|
|
|
|
|
|
|
Deficit,end of period | $ | (11,286,408) | $ | (5,048,680) | $ | (11,286,408) | $ | (5,048,680) | $ | (11,286,408) |
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted | $ | (0.03) | $ | (0.04) | $ | (0.13) | $ | (0.09) | $ | (0.45) |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
- basic and diluted |
| 31,130,466 |
| 25,265,900 |
| 31,027,587 |
| 25,247,670 |
| 24,956,917 |
See accompanying notes to consolidated financial statements
- 4 -
MINCO SILVER CORPORATION |
|
|
|
|
|
|
|
|
|
|
(An exploration stage enterprise) |
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
(Unaudited-Prepared by Management) |
|
|
|
|
|
|
|
|
|
|
(Expressed in Canadian Dollars) |
|
|
|
|
|
|
|
|
|
|
|
| Three months Ended September 30, 2007 |
| Three months ended September 30, 2006 |
| Nine months Ended September 30, 2007 |
| Nine months Ended September 30, 2006 |
|
Cumulative from August 20, 2004 (inception) to September 30, 2007 |
Cash flows from (used in) operating activities |
|
|
|
|
|
|
|
|
| |
Net loss for the period | $ | (1,077,074) | $ | (933,797) | $ | (4,145,377) | $ | (2,164,910) | $ | (11,286,408) |
Adjustment for items not involving cash: |
|
|
|
|
|
|
|
|
|
|
- exploration permits |
| - |
| - |
| - |
| - |
| 484,000 |
- exploration costs |
| - |
| - |
| - |
| - |
| 63,331 |
- stock-based compensation (Note 5(d)) |
| 322,000 |
| 240,000 |
| 1,124,000 |
| 598,000 |
| 2,623,000 |
- amortization |
| 6,524 |
| 3,478 |
| 14,209 |
| 7,111 |
| 32,000 |
- foreign exchange gain |
| - |
| - |
| - |
| - |
| (24,000) |
Changes in non-cash working capital items: |
|
|
|
|
|
|
|
|
|
|
- decrease (increase) in receivables |
| 342,577 |
| (26,710) |
| 48,640 |
| (20,745) |
| (109,762) |
- decrease (increase) in prepaid expenses |
| 15,148 |
| 131,217 |
| 21,856 |
| (44,093) |
| (12,147) |
- increase (decrease) in accounts payable and accrued liabilities |
| (399,567) |
| 5,098 |
| (1,040,623) |
| 51,635 |
| (118,301) |
|
|
|
|
|
|
|
|
|
|
|
|
| (790,392) |
| (580,714) |
| (3,977,295) |
| (1,573,002) |
| (8,348,287) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) financing activities |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares and warrants (Note 5(a)) |
| - |
| - |
| 389,348 |
| 87,375 |
| 24,787,586 |
Advances from Minco Gold Corporation (Note 6(a)) |
| (2,129) |
| 293,600 |
| 816,815 |
| 553,946 |
| 1,259,219 |
|
|
|
|
|
|
|
|
|
|
|
|
| (2,129) |
| 293,600 |
| 1,206,163 |
| 641,321 |
| 26,046,805 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) investing activities |
|
|
|
|
|
|
|
|
|
|
Acquisition of equipment |
| (45,046) |
| (7,320) |
| (92,030) |
| (45,128) |
| (190,340) |
Acquisition of exploration permits |
| - |
| (436,000) |
| - |
| (436,000) |
| - |
Decrease (increase) in short-term investments |
| 818,993 |
| 560,461 |
| 2,879,788 |
| 1,441,226 |
| (17,405,788) |
|
|
|
|
|
|
|
|
|
|
|
|
| 773,947 |
| 117,141 |
| 2,787,758 |
| 960,098 |
| (17,596,128) |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
| (18,574) |
| (169,973) |
| 16,626 |
| 28,417 |
| 102,390 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
| 120,964 |
| 289,379 |
| 85,764 |
| 90,989 |
| - |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period | $ | 102,390 | $ | 119,406 | $ | 102,390 | $ | 119,406 | $ | 102,390 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
Interest paid in cash | $ | - | $ | - | $ | - | $ | - | $ | - |
Income taxes paid in cash | $ | - | $ | - | $ | - | $ | - | $ | - |
See accompanying notes to consolidated financial statements
- 5 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
1.
Nature of Business and Basis of Presentation
Minco Silver Corporation was incorporated on August 20, 2004 under the laws of British Columbia, Canada. Its principal business activities include the acquisition and exploration of silver mineral properties. At September 30, 2007, Minco Gold Corporation (formerly Minco Mining & Metals Corporation) (“Minco Gold”) owned 14,000,000 common shares representing a 45% equity interest in Minco Silver Corporation.
Minco Silver Corporation (the “Company”) is exploring and evaluating silver mineral properties and projects in the People’s Republic of China (“China”). The Company is considered to be an exploration stage enterprise as it has not yet generated any revenue from operations. The Company’s long term viability and the recoverability of amounts shown for long term assets in the Company’s balance sheet are dependent upon the existence of economically recoverable reserves, the ability of the Company to arrange appropriate financing to complete the exploration and development of its properties, the receipt of necessary permits and upon achieving future profitable production or receiving proceeds from the disposition of the properties. The timing of such events occurring, if at all, is not yet determinable.
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies and methods of application as those disclosed in Note 2 of the Company’s annual consolidated financial statements for the year ended December 31, 2006 and accordingly should be read in conjunction with the Company’s annual consolidated financial statements for the year ended December 31, 2006. In the opinion of management, all adjustments considered necessary for the fair presentation of results for the periods presented have been reflected in these unaudited interim consolidated financial statements. Those adjustments consist only of normal recurring adjustments. Operating results of these interim periods are not necessary indicative of result that may be expected for the full fiscal year ending December 31, 2007. These consolidated financial statements include the accounts of Minco Silver Corporation, its 100% owned subsidiary Minco Silver Ltd., and its interest in the Fuwan Property. All material inter-company accounts and transactions have been eliminated upon consolidation.
2.
Short-term Investments
As at September 30, 2007, short-term investments consist of cashable guaranteed investment certificates, commercial paper, provincial bonds, bankers’ acceptances and a corporate bond. The yields on these investments range from 3.75% to 6.75%.
As at December 31, 2006, short-term investments consisted of cashable guaranteed investment certificates and provincial bonds. The yields on these investments ranged from 3.80% to 4.35%.
- 6 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
3.
Mineral Interests
Guangdong Province, China
On April 16, 2004, Minco Gold entered into a preliminary joint venture agreement, superseded by a formal joint venture agreement dated September 28, 2004, with other third parties to explore and develop a mineral property known as the Changkeng Property in Guangdong Province, China. The target mineral in the Changkeng Property is gold but the property was known to also contain silver mineralization. The gold and silver zones on the Changkeng Property are geologically distinct and can be mined as separate entities without interference. The silver zone is hereafter referred to as the “Changkeng Silver Interest”.
On August 20, 2004, Minco Gold transferred the following mineral interests to the Company in exchange for 14,000,000 common shares:
(a)
The right to earn a 51% interest in the Changkeng Silver Interest;
(b)
A preliminary joint venture agreement in relation to the exploration and development of the Fuwan silver deposit ( the “Fuwan Silver Project”); and
(c)
New exploration permits acquired or to be acquired in respect of certain mineral properties adjoining the Fuwan and Changkeng properties and known as the Guanhuatang, Luoke-Jilinggang, Guyegang-Sanyatang and Dadinggang properties.
Minco Gold was the sole shareholder of the Company and the two companies had common management at the time of the transaction. As at the date of transfer, Minco Gold had expended $63,331 in preliminary exploration costs. The Company’s right to the Changkeng Silver Interest is derived from the Changkeng Exploration Permit. As the transfer occurred between a parent and wholly-owned subsidiary, these financial statements reflect the parent’s continuity of interest in the assets transferred. Accordingly, the mineral interests have been reflected retroactively in these financial statements at the parent company’s carrying value of $nil and the exploration costs incurred by the parent have also been reflected in these financial statements as an expense within exploration costs in the period from August 20, 2004 (inception) to December 31, 2004. The shares issued by the Company have b een recorded at $63,331.
On September 28, 2004, the Company signed a joint venture agreement with Guangdong Geological Exploration and Development Corporation (“GGEDC”) for the exploration and development of the Fuwan Property. The joint venture agreement provided for the Company and GGEDC to incorporate a Sino-Foreign joint venture company with equity interests of 70% and 30%, respectively. The joint venture company was never formed and the Company has been providing all of the funding to explore and develop the Fuwan Property. On January 10, 2006, the Company and GGEDC agreed that the joint venture will no longer be pursued and the Company should assume a 100% interest in the Fuwan Property. Consequently, the Company is now responsible for all of the exploration and development expenditures on the property. GGEDC will, however, continue to provide professional services and technical assistance to the Company in relation to the Company’s mining activities in Guangdong Province, China in return for a 10% net profit interest in the Fuwan Property.
- 7 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
3.
Mineral Interests(continued)
The cost of the exploration permit in respect of the Fuwan Silver Project (the “Fuwan Exploration Permit”) has been independently appraised at approximately $1.47 million (RMB10,330,000). On July 20, 2005, the Ministry of Land and Resources, China, approved the transfer of the Fuwan Exploration Permit to Minco Mining (China) Corporation (“Minco China”), a wholly-owned subsidiary of Minco Gold. As of September 30, 2007, the total amount of the exploration permit had been fully paid.
On April 7, 2005, the Company acquired three additional silver exploration permits in China, referred to as the Guanhuatang Property, the Luoke-Jilinggang Property and the Guyegang-Sanyatang Property, and paid $219,594 (RMB1,500,000) for the three permits in September 2005.
The permit application for Dadinggang Property was approved by the Ministry of Lands and Resources in China in December 2006. The Dadinggang area, which covers the northeast extension of the Fuwan silver project, has been added to the Luoke-Jilinggang exploration permit.
The following is a summary of other exploration costs incurred by the Company:
|
|
|
|
|
|
| Three months ended September 30, 2007 | Three months ended September 30, 2006 | Nine months ended September 30, 2007 | Nine months ended September 30, 2006 | Cumulative from August 20, 2004 (inception) to September 30, 2007 |
|
|
|
|
|
|
Consulting fees | $ 96,928 | $ 30,883 | $ 344,105 | $ 119,485 | $ 768,969 |
Drilling | 310,183 | 434,159 | 1,595,711 | 704,327 | 2,981,533 |
Labor costs | 55,120 | 13,065 | 128,034 | 33,914 | 214,588 |
Other exploration costs | 219,836 | 14,193 | 437,980 | 39,546 | 604,199 |
| $ 682,067 | $ 492,300 | $ 2,505,830 | $ 897,272 | $ 4,569,289 |
- 8 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
3.
Mineral Interests(continued)
The exploration permits owned by the Company are held through Minco China for and on behalf of the Company. Although the Company has taken steps to verify the title to mineral properties in which it has an interest in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company’s title. Property title may be subject to unregistered prior agreements or transfers and title may be affected by undetected defects. Further, the Company’s interest in the silver mineralization in the Changkeng Property is dependent upon Minco Gold maintaining its interests in the Changkeng Property in accordance with the terms of a joint venture agreement, to which the Company is not a party. In the event that Minco Gold loses or alienates any or all of its interest in the Changkeng Property, the Company’s interest in the silver mineralization underlying the Changkeng Property will be lost.
On February 8, 2007, Minco China signed a joint venture agreement with another three Chinese partners to form a joint venture company Guangzhou Mingzhong Mining Co., Ltd. (“Mingzhong”). Under the terms of the joint venture agreement, Minco Gold may earn up to a 51% interest in the joint venture provided that it invests approximately $425,000 (RMB 3.06 million) in the joint venture. In the event Minco Gold ceases to make its investment contributions, its interest in the joint venture will be subject to dilution. The Company is not responsible to Minco Gold for any of its current commitments as those are designated for the exploration of gold deposits in the Changkeng Property. The Company will only be responsible for 51% of any commitments made by the joint venture to explore the silver deposits in the Changkeng Property. As of September 30, 2007, Minco China has paid RMB 3 million (approximately $417,000). (See Note 10(a))
- 9 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
4.
Plant, Property and Equipment
| September 30, 2007 | ||
|
| Accumulated | Net Book |
| Cost | Amortization | Value |
|
|
|
|
Computer equipment | $ 77,224 | $ 21,462 | $ 55,762 |
Leasehold improvements | 25,445 | 3,845 | 21,600 |
Mining equipment | 1,814 | 461 | 1,353 |
Motor vehicles | 64,089 | 8,264 | 55,825 |
Office equipment and furniture | 27,340 | 3,540 | 23,800 |
| $ 195,912 | $ 37,572 | $ 158,340 |
| December 31, 2006 | ||
|
| Accumulated | Net Book |
| Cost | Amortization | Value |
|
|
|
|
Computer equipment | $ 51,484 | $ 11,392 | $ 40,092 |
Leasehold improvements | 8,966 | 1,621 | 7,345 |
Mining equipment | 1,262 | 293 | 969 |
Motor vehicles | 32,867 | 5,089 | 27,778 |
Office equipment and furniture | 5,782 | 1,447 | 4,335 |
| $ 100,361 | $ 19,842 | $ 80,519 |
Summary of amortization of plant, property and equipment is as follows:
Three Months Ended September 30 | Nine Months Ended September 30 | ||
2007 | 2006 | 2007 | 2006 |
$ 6,524 | $ 3,478 | $ 14,209 | $ 7,111 |
- 10 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
5.
Share Capital and Special Warrants
(a)
Common Shares
Authorized: Unlimited number of common shares without par value.
Issued:
| Shares | Amount |
Balance, December 31, 2005 | 25,196,000 | $ 9,059,258 |
Share purchase warrants exercised at $1.25 per share, including $40,000 contributed surplus recognized on the issuance of warrants | 111,700 | 179,625 |
Stock option exercised at $1.25 per share, including $11,000 contributed surplus recognized on the issuance of options | 16,667 | 31,834 |
Common shares issued pursuant to 2006 financing (net of share issuance costs of $1,488,606) | 5,528,200 | 14,990,354 |
Fair value of 2,500,000 prospectus warrants issued in connection with 2006 financing allocated to contributed surplus | - | (2,995,000) |
Balance, December 31, 2006 | 30,852,567 | 21,266,071 |
Stock option exercised at $1.25 per share, including $74,000 contributed surplus recognized on the issuance of options | 109,999 | 211,498 |
Share purchase warrants exercised at $1.50 per share, including $62,000 contributed surplus recognized on the issuance of warrants | 167,900 | 313,850 |
Balance, September 30, 2007 | 31,130,466 | $ 21,791,419 |
In October 2005, the Company, Computershare Trust Company of Canada (the “Escrow Agent”) and the principals of the Company (“Principals”) signed an escrow agreement. Pursuant to the escrow agreement, the Principals agreed to deposit an aggregate of 19,190,000 common shares in escrow (the “Escrowed Securities”) with the Escrow Agent. The escrow agreement provides that the Escrowed Securities will be released as follows: (i) 25% on the date of listing of the Company’s shares on a Canadian exchange (the “Listing Date”); (ii) 25% six months after the Listing Date; (iii) 25% twelve months after the Listing Date; and (iv) 25% eighteen months after the Listing Date. As at September 30, 2007, all common shares have been released from escrow.
- 11 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
5. Share Capital and Special Warrants (continued)
On November 17, 2006, the Company completed a public offering (the “Offering”) of 5,000,000 units at a price of $3.00 per unit for gross proceeds of $15,000,000. Each unit consisted of one common share and one-half of one common share purchase warrant. Each warrant is exercisable at $3.45 per share until May 17, 2008. The Offering was completed by way of a short form prospectus through a syndicate of underwriters (the “Underwriters”).
On December 1, 2006, the Company completed an additional 528,200 common shares at a price of $2.80 per common share and an additional 375,000 common share purchase warrants (the “Warrant”) at a price of $0.40 per Warrant for gross proceeds of $1,628,960 pursuant to the exercise of an over-allotment option (the “Over-Allotment Option”) by the Underwriters. Each Warrant is exercisable at $3.45 per share until May 17, 2008.
The estimated fair value of the 2,500,000 Warrants, being $2,995,000, has been recorded in contributed surplus for the year ended December 31, 2006. The fair value of the Warrant was calculated using the Black-Scholes option pricing model using a risk-free interest rate of 3.81%, dividend yield of 0% and volatility of 154%. The fair value of the additional 375,000 Warrants, being $150,000, has been recorded in contributed surplus for the year ended December 31, 2006.
The Company paid an underwriting fee of $997,738 or 6% of the proceeds from the sale of the Offering and the Over-Allotment Option, and legal and other costs in relation to the issue amounted to a total of $490,868.
(b) Share Purchase Warrants
A summary of the status of share purchase warrants and broker options granted by the Company is as follows:
| Number of | Weighted Average |
Warrants | Exercise Price | |
Outstanding at December 31, 2005 | 279,600 | $1.25 |
Issued | 2,875,000 | 3.45 |
Exercised | (111,700) | 1.25 |
Outstanding at December 31, 2006 | 3,042,900 | 3.34 |
Exercised | (167,900) | 1.50 |
Outstanding at September 30, 2007 | 2,875,000 | $3.45 |
The warrants outstanding as at September 30, 2007 are as follows:
Warrants | Exercise Price | Expiry Date |
|
|
|
2,875,000 | $3.45 | May 17, 2008 |
- 12 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
5. Share Capital and Special Warrants (continued)
(c)
Contributed Surplus
Summary of contributed surplus is as follows:
Balance at December 31, 2005 | $ 152,498 |
2006 stock-based compensation expense | 1,448,000 |
Transfer to share capital on exercise of share purchase warrants | (40,000) |
Transfer to share capital on exercise of stock options | (11,000) |
Fair value of 2,500,000 prospectus warrants issued in connection with 2006 financing | 2,995,000 |
Fair value of 375,000 warrants issued in connection with Over-Allotment Option of 2006 financing | 150,000 |
Balance at December 31, 2006 | 4,694,498 |
2007 stock-based compensation expense | 1,124,000 |
Transfer to share capital on exercise of stock options | (74,000) |
Transfer to share capital on exercise of share purchase warrants | (62,000) |
Balance at September 30, 2007 | $ 5,682,498 |
(d)
Stock Options
The Company may grant options to its directors, officers, employees and service providers under its stock option plan. The maximum number of common shares reserved for issuance is 15% of the issued and outstanding shares. The Company expenses stock options over their vesting period, with stock options typically vesting in various increments and having a maximum term of five years.
During the nine-month period ended September 30, 2007, the Company granted 1,344,000 stock options to its directors, employees and consultants at the price range from $2.10 to $3.25 per share. The Company recorded $1,124,000 of stock-based compensation expense in this period. The stock options granted vest in various increments and have a term of five years.
- 13 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
5. Share Capital and Special Warrants (continued)
A summary of the status of options granted by the Company is as follows:
|
| Weighted Average |
Number | Exercise Price | |
Options outstanding at December 31, 2005 | 2,740,000 | $ 1.25 |
Granted | 725,000 | 3.39 |
Exercised | (16,667) | 1.25 |
Forfeited | (335,000) | 1.59 |
Options outstanding at December 31, 2006 | 3,113,333 | 1.71 |
Granted | 1,344,000 | 2.22 |
Exercised | (109,999) | 1.25 |
Forfeited | (600,000) | 2.92 |
Options outstanding at September 30, 2007 | 3,747,334 | $ 1.80 |
The weighted average fair value of options granted during the period ended September 30, 2007 was $2.22. Each option entitles the holders to purchase one common share.
Options Outstanding |
| Options Exercisable | ||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (yr) | Weighted Average Exercise Price |
| Number Exercisable | Weighted Average Exercise Price |
$1.25 | 2,208,334 | 3.17 | $1.25 |
| 691,668 | $1.25 |
$2.10 - $3.67 | 1,539,000 | 4.46 | $2.59 |
| 218,333 | $2.87 |
| 3,747,334 | 3.70 | $1.80 |
| 910,001 | $1.64 |
- 14 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
6.
Related Party Transactions
a.
Due to Minco Gold at September 30, 2007 was $1,259,219 (December 31, 2006 – $442,404), used for expenditures on the Fuwan Property, new silver projects’ investigation, and shared office expenses. The amount due to Minco Gold is unsecured and non-interest bearing. The amount was repaid subsequent to the period end.
b.
In the nine-month period ended September 30, 2007, the Company paid consulting fees of $82,500 (September 30, 2006 – $59,875) to a director and President of the Company. These consulting fees are included in exploration costs, property investigation and management fees. The Company also paid director’s fees of $39,583 to other directors (September 30, 2006 - $28,500).
c.
In the nine-month period ended September 30, 2007, the Company paid or accrued $48,000 (September 30, 2006 – $34,436) in respect of rent, $165,948 (September 30, 2006 – $84,193) in respect of exploration costs, and $537,301 (September 30, 2006 – $507,385) in respect of shared office expenses to Minco Gold.
d.
As disclosed in Note 5, the Company entered into a strategic alliance with Silver Standard, a company which is a shareholder of the Company and which is related by one common director.
The above transactions are conducted in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the parties.
- 15 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
7.
Geographical Information
The Company’s business is considered as operating in one segment, mineral exploration and development. The geographical division of the Company’s assets and liabilities and net loss is as follows:
| September 30, | December 31, |
2007 | 2006 | |
Current Assets |
|
|
Canada | $ 17,519,372 | $ 20,505,205 |
China | 110,715 | 58,540 |
| $ 17,630,087 | $ 20,563,745 |
|
|
|
Long-term Assets |
|
|
Canada | $ 112,880 | $ 32,932 |
China | 45,460 | 47,587 |
| $ 158,340 | $ 80,519 |
|
|
|
Current Liabilities |
|
|
Canada | $ 874,892 | $ 1,038,394 |
China | 726,026 | 786,332 |
| $ 1,600,918 | $ 1,824,726 |
| Three months ended September 30, 2007 | Three months ended September 30, 2006 | Nine months ended September 30, 2007 | Nine months ended September 30, 2006 |
Net Loss |
|
|
|
|
Canada | $ (395,981) | $ (490,580) | $ (1,554,303) | $ (1,482,176) |
China | (681,093) | (443,217) | (2,591,074) | (682,734) |
| $ (1,077,074) | $ (933,797) | $ (4,145,377) | $ (2,164,910) |
- 16 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
8.
Commitments
(a)
The Company has commitments in respect of Guangdong branch office leases requiring minimum payments of $35,578, as follows:
|
|
2007 | $ 4,369 |
2008 | 17,750 |
2009 | 5,067 |
2010 | 4,750 |
2011 | 3,642 |
| 35,578 |
The Company shares office space with Minco Gold in Vancouver and China, and pays its proportionate share of rent to Minco Gold at cost.
(b)
The Company has committed $1,168,000 for drilling contracts on the Fuwan Property.
9.
Financial Instruments
Fair value – The fair values of cash, receivables, accounts payable and accrued liabilities and amount due to Minco China approximates their carrying values due to the short-term nature of these financial instruments. Short-term investments are carried at the lower of cost or market value.
Foreign exchange risk – The Company operates in China and many of its exploration expenditures are payable in either U.S. dollars or the Chinese currency RMB and are therefore subject to foreign currency risk arising from changes in exchange rates with the Canadian dollar.
Interest rate risk – The Company is exposed to interest rate risk on its short-term investments.
Credit risk – The Company generally places its short-term investment funds into government and Canadian bank debt securities and is therefore subject to minimal credit risk with regard to short-term investments.
- 17 -
MINCO SILVER CORPORATION
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
September 30, 2007
Unaudited- Prepared by Management
(Expressed in Canadian Dollars)
10.
Contingencies
(a)
The Company’s interest in the Changkeng Property relates to the assignment to it by Minco Gold of Minco Gold’s right to earn up to a 51% interest in the Changkeng Property’s silver mineralization pursuant to the Preliminary Changkeng Joint Venture (“JV”) Agreement dated April 16, 2004, superseded by the formal joint venture agreement dated September 28, 2004. On February 8, 2007, Minco China, Minco Gold’s wholly owned subsidiary, signed a joint venture agreement with three other Chinese partners to form a joint venture company called Guangzhou Mingzhong Mining Co. Ltd. (“Mingzhong”). Mingzhong received the business license on March 30, 2007. Under the terms of the joint venture agreement, Minco Gold may earn up to a 51% interest in the joint venture provided that it invests approximately $425,000 (RMB 3.06 million) in the joint v enture. As of September 30, 2007, Minco China has invested approximately $417,000 (RMB 3 million) in Mingzhong. The Changkeng Permit has yet to be acquired by Mingzhong. Therefore, the Company’s interest in the silver mineralization of the Changkeng Property is entirely dependent on whether Mingzhong can acquire the Changkeng Permit.
(b)
There is some risk to the Company’s ownership in all of its mineral interests in China as it does not hold its interests directly. The Company, Minco China and Minco Gold have confirmed pursuant to the Second Confirmation Agreement that Minco China holds the Fuwan Permits on behalf of and in trust for the Company on a temporary basis, until such time as the Company has established a new Chinese corporation, majority controlled by the Company. When the Chinese subsidiary has been established, the Company will direct the permits to be transferred, subject to government approval, from Minco China to the newly established subsidiary. The Company has the sole authority to direct Minco China in the future as to any transfer or other transaction relating to the Fuwan Permits. Minco Gold and Minco China agreed in the Second Confirmation Agreement not to transfer, sell, pl edge, grant security interests in, or otherwise encumber, in any manner whatsoever, the Fuwan Permits. In addition, Minco Gold agreed pursuant to the Second Confirmation Agreement not to transfer or sell any of its ownership or equity interest in Minco China or encumber its interest in any way if any of the foregoing, individually or in combination, would have the effect of Minco Gold holding at any point in time less than, on an actual or a fully-diluted calculation basis, a 75% unencumbered ownership interest in Minco China. Likewise, Minco China agreed pursuant to the Second Confirmation Agreement not to enter into any agreement or grant any option or right for the purchase, sale, transfer or issuance of any ownership or equity interests in Minco China if any of the foregoing, individually or in combination, would have the effect of Minco Gold holding at any point in time less than, on an actual or a fully-diluted calculation basis, a 75% unencumbered ownership interest in Minco China.
See Note 3 also.
- 18 -