MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2007, 2006, and 2005
Index
Auditors’ Report
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss and Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
1
![[financials002.gif]](https://capedge.com/proxy/6-K/0001137171-08-000320/financials002.gif)
Management's Responsibility for Financial Reporting
The financial statements and the information contained in the annual report are the responsibility of the Board of Directors and management. The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles.
The Audit Committee of the Board of Directors is composed of three Directors and meets periodically with management and the independent auditors to review the scope and results of the annual audit and to review the financial statements and related financial reporting matters prior to submitting the financial statements to the Board for approval.
The financial statements have been audited by Ernst & Young LLP, Chartered Accountants, who were appointed by the shareholders. The auditors’ report outlines the scope of their examination and their opinion on the financial statements.
Ken Cai
Garnet Clark
President and CEO
Chief Financial Officer
Vancouver, Canada
March 31, 2008
2
![[financials003.jpg]](https://capedge.com/proxy/6-K/0001137171-08-000320/financials003.jpg)
3
4
Note: The results of Minco Silver Corporation are consolidated in the above statement to November 16, 2006. Thereafter, the results of Minco Silver Corporation are accounted for on an equity basis (see Note 6).
5
Note: The results of Minco Silver Corporation are consolidated in the above statement to November 16, 2006. Thereafter, the results of Minco Silver Corporation are accounted for on an equity basis (see Note 6).
6
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
1.
Nature of Operations
Minco Gold Corporation (“Minco Gold”) (formerly Minco Mining & Metals Corporation) was incorporated on November 5, 1982 under the laws of British Columbia, Canada. Its principal business activities include the acquisition and exploration of mineral resource properties.
Minco Gold Corporation and its subsidiaries and joint ventures (collectively the “Company”) are in the process of exploring and evaluating its mineral properties and projects in the Peoples’ Republic of China (“China”) and have not yet determined whether these properties contain ore reserves that are economically recoverable. The ability of the Company to meet its commitments as they become payable, the exploration and development of mineral properties and projects, and the underlying value of the mineral properties are entirely 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 pr oceeds from the disposition of the properties. The timing of such events occurring, if at all, is not yet determinable. The Company is considered to be an exploration stage enterprise as it has not yet generated any revenue from operations.
2.
Significant Accounting Policies
(a)
Basis of Presentation
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles.
The consolidated financial statements include the accounts of Minco Gold Corporation (formerly Minco Mining & Metals Corporation) (“Minco Gold”), its wholly-owned China subsidiaries Minco Mining (China) Corporation (“Minco China”), Yuanling Minco Mining Ltd. (“Yuanling Minco”) and Huaihua Tiancheng Mining Ltd. (“Huaihua Tiancheng”), its wholly-owned British Virgin Island subsidiary Triple Eight Mineral Corporation (“Temco”), its right to earn up to a 75% interest in the joint venture company Inner Mongolia Damo Mining Co. Ltd. (“Damo”), its right to earn up to a 75% interest in the joint venture company Inner Mongolia Huayu-Minco Mining Co., Ltd. (“HYMK”), its right to earn up to a 70% interest in the joint venture company Henan Zhongjia Minco Mining Co., Ltd. (“Zhongjia Minco”), and its ri ght to earn up to a 51% interest in the joint venture company Guangzhou Mingzhong Mining Co., Ltd. (“Mingzhong”).
7
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
2.
Significant Accounting Policies (continued)
As at December 31, 2007, Minco Gold beneficially owns 13,000,000 shares of Minco Silver Corporation (“Minco Silver”), which represents approximately 41.75% of Minco Silver’s share capital. The Company uses the equity method to account for the investment in Minco Silver and Minco Silver’s interest in Fuwan Property (See note 6).
The Company has not recorded non-controlling interests in the other joint venture companies, except for Zhongjia Minco and Mingzhong, as their ownership percentages represent only the profit sharing and working interests and the minority partners are not responsible for any of the associated costs. As at December 31, 2007, the joint ventures are still in the exploration stage and have not generated any revenue.
All inter-company accounts and transactions have been eliminated.
(b)
Use of Estimates
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant. Actual results could differ from those estimates.
(c)
Cash and Cash Equivalents
Cash and cash equivalents consist of short-term money market instruments which are highly-liquid investments and readily convertible into cash with a remaining term to maturity of 90 days or less when acquired. As of December 31, 2007 and 2006, cash and cash equivalents consisted of cash only.
(d)
Short-term Investments
Short-term investments comprise marketable securities, highly liquid investment grade bonds, and guaranteed investment certificates with remaining terms to maturity of greater than 90 days when acquired. Short-term investments are classified as held-for-trading financial instruments in accordance with the new requirements of Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3855 “Financial Instruments”, adopted by the Company on January 1, 2007. These investments are recorded at fair value. A transition amount was recorded effective January 1, 2007 as an adjustment to retained earnings to reflect the adoption of the policy.
8
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
2.
Significant Accounting Policies (continued)
Prior to 2007, short-term investments were carried at the lower of original cost or market.
(e)
Plant, Property and Equipment
Plant, property and equipment are recorded at cost and amortization is provided as follows:
Computer equipment | 30% per year, declining-balance basis |
Leasehold improvements | 5 year, straight-line basis |
Mining equipment | 30% per year, declining-balance basis |
Motor vehicles | 30% per year, declining-balance basis |
Office equipment and furniture | 20% per year, declining-balance basis |
Amortization is provided at half the annual rate in the year of acquisition.
(f)
Revenue Recognition
Interest income on cash and cash equivalents and short-term investments is recognized as it is earned.
(g)
Loss Per Share
Basic loss per share is computed using the weighted average number of common shares outstanding during the year. Diluted loss per share amounts are calculated giving effect to the potential dilution that would occur if securities or other contracts to issue common shares were exercised or converted to common shares using the treasury stock method. The treasury stock method assumes that proceeds received from the exercise of stock options and warrants are used to repurchase common shares at the prevailing market rate. Shares held in escrow that are returnable to the Company if the conditions for their release are not met (Note 9) are excluded in the computation of loss per share until the conditions for their release are satisfied. As the Company incurred net losses in fiscal 2007, 2006 and 2005, the stock options and share purchase warrants as disclosed in Note 9 were not included in the computation of loss per share as their inclusion would be anti-dilutive.
(h)
Translation of Foreign Currencies
The Company’s functional currency is the Canadian dollar. The Company follows the temporal method of accounting for the translation of its integrated foreign operations and for foreign currency transactions. Under this method, transactions denominated in foreign currencies are translated into Canadian dollars at the exchange rates prevailing at the transaction dates. At year-end, monetary assets and liabilities are re-measured at the year-end exchange rates, and non-
9
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
2.
Significant Accounting Policies (continued)
monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at their historical exchange rates. The exchange gains and losses on translation are charged to operations.
(i)
Equity investments
Investments in which the Company has a significant influence are accounted for by the equity method, whereby the Company records its proportionate share of the investee’s income or loss.
(j)
Acquisition, Exploration and Development of Mineral Interests
Mineral property and mineral rights acquisition costs are capitalized until the viability of the mineral interest is determined. If a mineral ore body is discovered, capitalized costs will be amortized over their estimated useful lives following the commencement of production. Otherwise, capitalized acquisition costs are expensed when it is determined that the mineral property has no future economic value. Capitalized amounts (including capitalized development costs) are written down if future cash flows, including potential sales proceeds, related to the mineral property are estimated to be less than the property’s total carrying value. Management of the Company reviews the carrying value of each mineral property periodically, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Reductions in the carrying value of a property would be recorded to the extent that the total carrying value of the mineral property exceeds its estimated fair value.
Exploration permits and other exploration costs are expensed as incurred. When it is determined that a mining deposit can be economically and legally extracted or produced based on established proven and probable reserves, further exploration costs and development costs incurred after such determination will be capitalized. The establishment of proven and probable reserves is based on results of final feasibility studies which indicate whether a property is economically feasible. Upon commencement of commercial production, capitalized costs will be transferred to the appropriate asset categories and amortized over their estimated useful lives. Capitalized costs, net of salvage values, relating to a deposit which is abandoned or considered uneconomic for the foreseeable future will be written off.
10
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
2.
Significant Accounting Policies (continued)
(k)
Asset Retirement Obligations
The Company recognizes the fair value of liabilities for asset retirement obligations in the period in which they are incurred and in which a reasonable estimate of such costs can be made. The asset retirement obligation is recorded as a liability with a corresponding increase to the carrying amount of the related asset and depreciated over the life of the asset. Over time, the liability is increased to reflect an interest element (accretion expenses) considered in its initial measurement at fair value. The amount of liability will be subject to re-measurement at each reporting period. It is possible that the Company’s estimates of its ultimate reclamation and closure liabilities could change as a result of changes in regulations, the extent of environmental remediation required, and the means of reclamation or cost estimates. Changes in estimates are accounted for prospectively from the period the estimate is revised.
As at December 31, 2007 and 2006, the Company did not have any asset retirement obligations.
(l)
Income Taxes
The Company follows the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, measured using substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.
(m)
Stock Based Compensation
The Company follows the fair value method, as determined using the Black-Scholes option valuation model, of accounting for stock-based compensation as recommended by the Canadian Institute of Chartered Accountants Handbook section 3870, Stock-based compensation and other stock-based payments.
Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting period.
As permitted by this Handbook section, the Company applied this change retroactively, without restatement, for options granted after January 1, 2002. As a result, the opening deficit as at January 1, 2004 was adjusted to reflect a compensation expense of $154,300 relating to options granted in 2002 and 2003.
(n)
Comprehensive Income and Equity
Effective January 1, 2007, the Company adopted the new recommendations of the CICA Handbook Section 1530, “Comprehensive Income” and Section
11
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
2.
Significant Accounting Policies(continued)
3251, “Equity”. These new accounting standards apply to fiscal years beginning on or after October 1, 2006.
·
Section 1530 provides standards for reporting and display of comprehensive income, which is the change in equity, from transactions and other events and circumstances from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with Canadian GAAP.
·
Section 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. The requirements in Section 3251 are in addition to Section 1530.
The adoption of these new Handbook sections had minimal impact on the consolidated financial statements for the year ended December 31, 2007.
(o)
Financial Instruments
Effective January 1, 2007, the Company also adopted the new recommendations of the CICA Handbook Section 3855, “Financial Instruments – Recognition and Measurement” and Section 3861, “Financial Instruments – Disclosure and Presentation”. These new accounting standards, which apply to fiscal years beginning on or after October 1, 2006, provide comprehensive requirements for the recognition, measurement, disclosure and presentation of financial assets, financial liabilities and non-financial derivatives. Under the new standards, policies followed for periods prior to the effective date are not reversed and therefore, the comparative figures have not been restated.
·
Section 3855 requires financial instruments be classified into one of five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets, or other financial liabilities. All financial instruments , including derivatives, are measured on the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification. Held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income. Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net income. Tra nsaction costs are included in the initial carrying amount of financial instruments except for held-for-trading items in which case they are expensed as incurred. Section 3855 also requires that embedded derivatives be identified and separated from the related host contract and be measured at
12
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
2.
Significant Accounting Policies(continued)
fair value. Subsequent changes in fair value of embedded derivatives are recognized in the statement of operations in the period the change occurs.
·
Section 3861 establishes the requirements for presentation and disclosure of financial instruments and non-financial derivatives.
Upon adoption of these new standards, the Company has classified cash and cash equivalents and short-term investments as held-for-trading, receivables as loans and receivables, accounts payable and accrued liabilities as other financial liabilities. There was a transition adjustment of $144,480 that was credited to the opening retained earnings upon adoption of Section 3855.
(p)
Accounting Changes
In July 2006, the CICA revised Section 1506, “Accounting Changes”, which now requires that: (i) a voluntary change in accounting principles can be made if, and only if, it is required by primary source of GAAP or the changes result in more reliable and relevant information, (ii) changes in accounting policies are accompanied with disclosures of prior period amounts and justification for the change, and (iii) for changes in estimates, the nature and amount of the change should be disclosed. The revised section is effective for the Company’s financial year beginning January 1, 2007 for the year ended December 31, 2007. The adoption of this section does not have an impact on the Company’s consolidated financial statements for the year ended December 31, 2007.
(q)
Comparative Figures
Certain comparative figures have been reclassified to conform with the presentation as at and for the year ended December 31, 2007.
(r)
Future Accounting Standards
During the fourth quarter of 2006, the CICA issued three new accounting standards: CICA Handbook Section 1535 “Capital Disclosures”, CICA Handbook Section 3863 “Financial Instruments – Presentation” and CICA Handbook Section 3862 “Financial Instruments – Disclosure”. These standards are effective for interim and annual financial statements for the Company’s reporting periods beginning on January 1, 2008.
Capital Disclosures section describes the standards for disclosing information about a company’s objectives, policies and processes for managing capital,
13
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
2.
Significant Accounting Policies(continued)
quantitative data about what a company regards as capital and whether a company has complied with any capital requirements and, if not, the consequences of such non-compliance. Financial Instruments – Presentation carries forward the guidance under Section 3861 with little change and Financial Instruments – Disclosures requires disclosure on the face of the balance sheet of each of the financial instrument categories as well as additional disclosure regarding credit, market and liquidity risk faced by the Company.
The Company is currently assessing the impact of these new accounting standards on its financial statements.
3.
Short-term Investments
As at December 31, 2007, short-term investments consisted of cashable guaranteed investment certificates, commercial notes, and 420,000 common shares of New Cantech Venture Inc. (“New Cantech”, see Note 11(d)). The market value of the shares was $88,200 as of December 31, 2007.
At December 31, 2007, the yields on the short-term investments were between 4.00% and 4.30% per year (December 31, 2006 – 1.08% to 4.35%)
As at December 31, 2006, short-term investments consisted of: short term fixed deposits, cashable guaranteed investment certificates; two provincial bonds and a Canadian government bond (maturing from September 15, 2008 to April 1, 2015); a Canadian government treasury bill (maturing on April 5, 2007), and 420,000 common shares of New Cantech Venture Inc. (“New Cantech”, see Note 11(d)). The market value of the shares was $277,000 on December 31, 2006.
4.
Mineral Interests
a.
Gold Projects:
i.
Guangdong - Changkeng
On September 28, 2004, Minco Gold signed a 30-year joint venture contract with four companies in Guangdong for the exploration and development of the Changkeng gold deposit in Gaoyao City of Guangdong Province, China. Pursuant to the contract, Minco Gold and its four partners will form Guangdong Minco-Jinli Mining Co. Ltd. (the “Jinli JV”), a Sino-Foreign Joint Venture company, whereby a total of a RMB 100 million (approximately $14.9 million) would be invested by Minco Gold and its four partners to explore and develop the Changkeng gold deposit.
The 50% initial payment of the total investment, RMB 50 million (approximately $7.5 million), shall be paid in three instalments and the balance of 50% shall be paid in
14
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
three instalments within one and a half years after the initial payment is fully contributed. To earn a 51% equity interest in the Jinli JV, Minco Gold is to contribute RMB 51 million (approximately $7.6 million) of the RMB100 million (approximately $14.9 million). The Company has spent $703,083 as of December 31, 2007 on exploration costs. None of the above mentioned instalments had been made as at December 31, 2007.
The Jinli JV intends on acquiring the Changkeng exploration permit from the No. 757 Exploration Team of Guangdong Geological Exploration Bureau (“No. 757 Exploration Team”). The value of the exploration permit was appraised at RMB 33 million (approximately $4.9 million) by an independent valuator, which was confirmed by the Ministry of Land and Resources of China. The Jinli JV is to pay the RMB 33 million for the exploration permit in three instalments within 360 days of the exploration permit title transfer. The remaining RMB 67 million (approximately $10 million) will be used for project exploration and feasibility studies on the mine property.
In November 2006, the JV partners of Changkeng reached an agreement to change the JV name from Guangdong Minco-Jinli Mining Co. Ltd to Guangdong Mingzhong Mining Corporation (“Mingzhong”). All the terms will remain the same as the original JV agreement.
On February 8, 2007, Minco China, Minco Gold’s wholly owned subsidiary, signed a joint venture agreement with the JV partners to form Mingzhong. Mingzhong received its business license on March 30, 2007.
The original Changkeng exploration permit, which expired in September 2006, has been renewed until September 10, 2008, and is presently held by the No. 757 Exploration Team. Mingzhong has signed an exploration permit transfer agreement with No.757 Exploration Team. The value of the exploration permit has been currently appraised at 48.363 million RMB (approximately $6.5 million) by an independent valuator, which was confirmed by the Ministry of Land and Resources of China. Subsequent to the end of the year Mingzhong received the exploration permit.
The Company currently has a 51% interest in Mingzhong and therefore records a 49% non-controlling interest to reflect the minority owners’ interests in Mingzhong.
ii.
Gansu - Yangshan (Anba)
The Keyin joint venture company was formed pursuant to an agreement dated August 28, 1998 and amended August 28, 2003.
15
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
On October 29, 2003, Keyin signed agreements with the Gansu provincial government and two other companies in Gansu for the exploration and development of the Anba gold deposit in the Yangshan gold field. The agreement was amended on January 8, 2004. Pursuant to the terms of the agreements, Keyin has the right to acquire a 40% equity interest in Yangshan Gold Mining Co., Ltd. (“YGM”), a joint venture company to be established for the exploration and development of the Anba gold deposit. YGM will acquire a 100% interest in the Anba gold deposit for RMB 60 million (approximately $8.9 million); including an initial payment of RMB 24 million (approximately $3.6 million) and the balance of RMB 36 million (approximately $5.4 million) will be paid over five years. Keyin’s share of the capital contribution is 40%, which is RMB 24 million (approximately $3.6 million). T he Company has spent $490,022 on exploration to the end of December 31, 2007.
In April 2004, YGM’s board of directors agreed to pay RMB 3 million (approximately $447,000) to a company engaged to prepare the transfer of the exploration permit to YGM. The Company advanced RMB 2.0 million (approximately $298,000) but that company was unable to fulfill all the required duties. The Company has demanded that the RMB 2.0 million be returned but the ability to collect this amount is uncertain and so the Company has recorded a provision for doubtful collectability in 2005. Should these funds be collected in the future, this amount will be recorded as exploration cost recovery.
The Company does not consider the Anba gold property to be a material property and does not intend to undertake any further exploration expenditures on the property at the current time. This project was terminated in 2007.
iii.
Gansu – Minco-Qinqi (formerly West Extension of Yangshan)
On October 28, 2004, Minco Gold signed a joint venture contract with Gansu Qinqi Mining Co. Ltd. for the exploration and development of mineral resources for gold in three areas in China’s south Gansu province, for which the joint venture partner holds exploration permits. Pursuant to the contract, Minco Gold will participate in a Sino-Foreign Joint Venture, Gansu Minco Mining Co., Ltd.(the “Gansu JV”), the total investment of RMB 10 million (approximately $1.49 million) is required to be paid by March 1, 2008. To earn a 75% equity interests in the three areas, Minco Gold must contribute RMB 7.5 million (approximately $1.12 million) on this project over three years. The Company has spent $278,576, net of recoveries from partners, to December 31, 2007 on exploration costs.
The joint venture contract was terminated on October 30, 2007 and the Chinese partner reimbursed the Company RMB 1.3 million (approximately $165,000).
iv.
Gansu – Longnan
16
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
Minco China presently holds thirteen exploration permits in the Longnan region of south Gansu province in China. The Longnan region is within the southwest Qinling gold field. The Longnan project has been divided into three sub-projects according to their geographic distribution, type and potential of mineralization:
(1)
Yangshan: including six exploration permits located in the northeast extension of the Yangshan gold belt and its adjacent area; potential for gold.
(2)
Yejiaba: including four exploration permits adjacent to Guojiagou exploration permit; potential for gold and antimony.
(3)
Xicheng East: including three exploration permits to the east extension of the famous Xicheng Pb-Zn mineralization belt; potential for gold, silver, lead and zinc.
The Company has spent $1,383,760 to December 31, 2007 on exploration costs.
v.
Inner Mongolia - Gobi Gold
The project is located in Inner Mongolia Autonomous Region, China. Pursuant to a co-operative joint venture agreement signed on March 12, 2004, Minco Gold can earn a 75% interest in the project by spending RMB 18 million (approximately $2.7 million) over a four-year period by March 12, 2008. The Damo joint venture company was formed to hold the above noted mineral interests. At December 31, 2007, the Company has spent approximately $1.7 million and earned a 63% project interest.
vi.
Inner Mongolia - BYC
In 2002, Minco Gold reached an agreement with the Inner Mongolian Bureau of Non-ferrous Metals and Exploration to acquire a majority interest in a joint venture company, which holds the BYC gold project located in central Inner Mongolia. The joint venture contract was signed on July 18, 2003. On December 3, 2003, the HYMK joint venture company was formed to hold the above noted mineral interest. Minco Gold can earn a 75% interest in HYMK by spending RMB 12 million (approximately $1.8 million) over four years by December 3, 2007. In 2003, Minco Gold entered into a letter agreement with New Cantech. Pursuant to the agreement, New Cantech acquired the right to earn a 51% interest, reducing Minco Gold’s interest to 24%, in the BYC project by spending RMB 12 million (approximately $1.8 million) in exploration by March 22, 2007. New Cantech can earn another 9% by funding all further exploration and development expenditures leading to the completion of a preliminary feasibility study that recommends completion of a final feasibility study.
17
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
Pursuant to the terms of the agreement on the BYC project, Minco Gold received, from New Cantech, 100,000 common shares at $0.21 per share for $21,000 in May 2005 and 50,000 common shares at $0.30 per share for $15,000 in September 2005. In 2004, the Company received 250,000 common shares at $0.34 per share for a total of $85,000 and 100,000 common shares at $0.37 per share for a total of $37,000. The aggregate value of these shares at the date of issue of $158,000 has been recorded as an exploration cost recovery in prior years.
On September 28, 2006, New Cantech notified Minco Gold that it did not want to proceed with the BYC Option, and the two parties signed a termination agreement on October 3, 2006. Pursuant to the BYC Option Agreement, New Cantech reconveyed to Minco Gold all of its rights and interest in and to the BYC project.
As of September 28, 2006, New Cantech has spent $781,588 on geophysical and geochemical surveys, geology and drill holes. In the nine-month period ended September 28, 2006, the direct costs and management fees incurred on the BYC project totalled $95,331 (2005: 286,918, 2004: $358,362), which were repaid by New Cantech.
The above transactions were 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.
vii.
Hunan – Gold Bull Mountain
In July 2006, Minco China’s wholly owned subsidiary Yuanling Minco entered into a Gold Bull Mountain Mining License Transfer Agreement with Yuanling County Government. On August 10, 2006, the Gold Bull Mountain Mining License was transferred to Yuanling Minco. As of December 31, 2006, the Company has paid a total of RMB 2,546,652 (approximately $358,400), which includes a mining licence transfer fee of RMB 1,000,000 (approximately $143,000), an environmental protection fee of RMB 740,000 (approximately $104,000) and other related costs. The acquisition was recently completed.
On August 5 2006, the Company entered into a Shareholding and Enterprise Assets Transfer Agreement to acquire Huaihua Tiancheng in order to obtain exploration permits for the areas around the Gold Bull Mountain mining licensed area. The acquisition price was RMB 6,000,000 (approximately $852,000), which was paid as of December 31, 2006.
viii.
Xiaoshan - Zhongjia
The Xiaoshan project consists of two exploration permits, the 17.1km2 Huluyu permit and the 12km2 Dafangshan permit and both permits are held by the Henan Nonferrous Exploration and Mining Company (“HNEM”), a subsidiary of the Nonferrous Geological Exploration Bureau of Henan Province.
18
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
On April 30, 2007, a JV contract was signed between Minco China and HNEM to jointly explore and develop the precious and nonferrous resources in the Xiaoshan project area. On June 11, 2007, a business license was issued to the JV, Henan Zhongjia Minco Mining Co. Ltd. (“Zhongjia”). The Company has spent $1,131,000 to December 31, 2007 on exploration costs, including $842,788 (RMB 6,000,000) to acquire the exploration permits.
The Company currently has a 70% interest in Zhongjia and therefore records a 30% non-controlling interest to reflect the minority owners’ interests in Zhongjia.
b.
Base Metals Project
Gansu - White Silver Mountain
White Silver Mountain is operated through Keyin. Further to an amendment to the joint venture contract signed on August 28, 2003, Minco Gold has earned a 61% total project interest. Both parties to Keyin may proceed in accordance with the original joint venture contract which provided Minco Gold the right to earn an 80% interest by spending another RMB 20 million (approximately $2.9 million). There is no time limit for the expenditure.
The White Silver Mountain project is fully licensed. The Company has spent approximately $1,489,651 to December 31, 2006 on exploration costs.
On January 31, 2007, the Company announced it is proceeding with a reorganization and spin-off of its White Silver Mountain Project to Minco Base Metals with the intention to build a strong base metals company in China. On November 15, 2007 the re-organization and spin-off took effect. It is anticipated that Minco Base Metals will seek a stock exchange listing and complete equity offerings to further develop the White Silver Mountain property and acquire additional base metals properties. Effective November 15, 2007 the Company no longer has an interest in White Silver Mountain and therefore the expenditures have been treated as discontinued operations.
19
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
The following is a summary of exploration costs incurred by the Company:
|
| Cumulative Costs |
| Costs |
| Cumulative |
Currently active properties: |
|
|
|
|
|
|
Gansu |
|
|
|
|
|
|
- Minco-Qinqi (formerly West Extension of Yangshan) |
| $ 441,584 |
| $ (163,008) |
| $ 278,576 |
- Yangshan (Anba) |
| 477,481 |
| 12,941 |
| 490,422 |
- Longnan |
| 497,384 |
| 886,375 |
| 1,383,760 |
Inner Mongolia |
|
|
|
|
|
|
- Gobi Gold |
| 1,498,691 |
| 214,319 |
| 1,713,010 |
- BYC |
| 835,437 |
| 34,098 |
| 869,535 |
Guangdong |
|
|
|
|
|
|
- Changkeng |
| 526,718 |
| 176,365 |
| 703,083 |
Hunan |
|
|
|
|
|
|
- Gold Bull Mountain |
| 1,402,734 |
| 655,858 |
| 2,058,592 |
Henan |
|
|
|
|
|
|
- Xiaoshan |
| - |
| 1,131,000 |
| 1,131,000 |
Total |
| 5,680,029 |
| 2,947,948 |
| 8,627,977 |
Exploration cost recoveries |
| (956,903) |
| - |
| (956,903) |
Expensed exploration permits |
| (2,591,594) |
| (842,788) |
| (2,591,594) |
Expensed exploration costs |
| (1,773,032) |
| (2,105,160) |
| (4,720,980) |
Capitalized mining permit costs | $ | 358,500 | $ | - | $ | 358,500 |
20
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
|
2007 |
| 2006 |
| 2005 |
Gansu – Minco-Qinqi (formerly West Extension of Yangshan) |
|
|
|
|
|
|
|
|
|
|
|
Consulting fees | $ 8,725 |
| $ 16,444 |
| $ 59,014 |
Drilling and geology | (162,911) |
| - |
| 106,732 |
Labor costs | (1,572) |
| 2,610 |
| 9,572 |
Other exploration costs | (7,250) |
| 1,034 |
| 32,381 |
Total | $ (163,008) |
| $ 20,088 |
| $ 207,699 |
|
2007 |
|
2006 |
| 2005 |
Gansu – Yangshan (Anba) |
|
|
|
|
|
|
|
|
|
|
|
Consulting fees | $ 8,906 |
| $ - |
| $ 11,292 |
Legal and license fees | - |
| - |
| - |
Labor costs | 2,834 |
| 4,209 |
| 3,767 |
Other exploration costs | 1,201 |
| - |
| 304,167 |
Total | $ 12,941 |
| $ 4,209 |
| $ 319,226 |
|
2007 |
| 2006 |
| 2005 |
Gansu – Longnan |
|
|
|
|
|
|
|
|
|
|
|
Consulting fees | $ 121,977 |
| $ 130,472 |
| $ - |
Geology and geochemistry | 446,908 |
| 162,456 |
| 47,652 |
Labor costs | 139,960 |
| 56,849 |
| 8,602 |
Other exploration costs | 177,530 |
| 66,438 |
| 24,915 |
Exploration costs recoveries |
|
|
|
| (14,757) |
Total | $ 886,375 |
| $ 416,215 |
| $ 66,412 |
21
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
|
2007 |
| 2006 |
| 2005 |
Inner Mongolia – Gobi Gold |
|
|
|
|
|
|
|
|
|
|
|
Consulting fees | $ 44,750 |
| $ 625 |
| $ 5,276 |
Geology and drilling | 66,208 |
| 5,099 |
| 3,856 |
Labor costs | 32,657 |
| 597 |
| 2,333 |
Other exploration costs | 70,704 |
| 4,830 |
| 3,917 |
Total | $ 214,319 |
| $ 11,151 |
| $ 15,382 |
|
|
|
|
|
|
|
2007 |
| 2006 |
| 2005 |
Inner Mongolia – BYC |
|
|
|
|
|
|
|
|
|
|
|
Consulting fees | $ 6,050 |
| $ 1,420 |
| $ - |
Geology and drilling | 3,101 |
| 42,735 |
| - |
Other exploration costs | 24,947 |
| 91,219 |
| 286,918 |
Exploration costs recoveries | - |
| (95,331) |
| (322,918) |
Total | $ 34,098 |
| $ 40,043 |
| $ (36,000) |
|
|
|
|
|
|
|
2007 |
| 2006 |
| 2005 |
Guangdong – Changkeng |
|
|
|
|
|
|
|
|
|
|
|
Consulting fees | $ 31,099 |
| $ 14,952 |
| $ 41,877 |
Drilling and geology | 113,100 |
| 20,229 |
| 18,568 |
Labor costs | 623 |
| 2,289 |
| - |
Other exploration costs | 31,543 |
| 18,564 |
| 29,439 |
Total | $ 176,365 |
| $ 56,034 |
| $ 89,884 |
|
|
|
|
|
|
|
2007 |
| 2006 |
| 2005 |
Henan – Xiaoshan |
|
|
|
|
|
|
|
|
|
|
|
Consulting fees | $ 30,338 |
| $ - |
| $ - |
Drilling | 195,911 |
| - |
| - |
Labor costs | 37,459 |
| - |
| - |
Other exploration costs | 204,504 |
| - |
| - |
Subtotal – Exploration costs | 468,212 |
| - |
| - |
Exploration permits | 842,788 |
| - |
| - |
Total | $ 1,311,000 |
| $ - |
| $ - |
22
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
4.
Mineral Interests (continued)
|
2007 |
| 2006 |
| 2005 |
Gold Bull Mountain |
|
|
|
|
|
(1) Exploration costs |
|
|
|
|
|
Consulting fees | $ 63,246 |
| $ 37,687 |
| $ - |
Drilling and geology | 575,094 |
| 154,089 |
| - |
Other exploration costs | 17,518 |
| 558 |
| - |
Subtotal – Exploration costs | 655,858 |
| 192,334 |
| - |
(2) Exploration permits | - |
| 852,000 |
| - |
(3) Mining license | - |
| 358,400 |
| - |
Total | $ 655,858 |
| $ 1,402,734 |
| $ - |
5.
Property, Plant and Equipment
| December 31, 2007 | |||||||
|
| Accumulated | Net Book | |||||
| Cost | Amortization | Value | |||||
|
|
|
| |||||
Computer equipment | $201,139 | $123,702 | $77,437 | |||||
Leasehold improvements | 63,980 | 38,683 | 25,296 | |||||
Mining equipment | 306,142 | 197,697 | 108,445 | |||||
Motor vehicles | 368,874 | 109,766 | 259,107 | |||||
Office equipment and furniture | 132,055 | 98,170 | 33,886 | |||||
| $1,072,190 | $568,018 | $504,171 | |||||
|
|
|
|
| ||||
|
| December 31, 2006 | ||||||
|
|
| Accumulated | Net Book | ||||
|
| Cost | Amortization | Value | ||||
|
|
|
|
| ||||
| Computer equipment | $190,164 | $99,250 | $90,914 | ||||
| Leasehold improvements | 43,726 | 33,042 | 10,684 | ||||
| Mining equipment | 255,913 | 186,415 | 69,498 | ||||
| Motor vehicles | 202,954 | 88,345 | 114,609 | ||||
| Office equipment and furniture | 118,291 | 89,759 | 28,532 | ||||
|
| 811,048 | 496,811 | 314,237 | ||||
| Discontinued operations | 46,544 | 26,694 | 19,850 | ||||
|
| $857,592 | $523,505 | $334,087 | ||||
23
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
6.
Equity Investment in Minco Silver Corporation
As at December 31, 2007 the Company owns 13,000,000 common shares of Minco Silver (December 31, 2006 – 14,000,000 common shares) that were acquired in 2004 in exchange for the transfer of the Fuwan property and the silver interest in the Changkeng property from Minco Gold to Minco Silver.
On December 1, 2005, Minco Silver received approval of its application to list its common shares on the Toronto Stock Exchange (“TSX”). Minco Silver’s common shares began trading on the TSX on December 2, 2005 with the trading symbol “MSV”. On the same date, Minco Silver issued and converted 10,276,000 special warrants to common shares. Minco Silver also completed its initial public offering of 920,000 common shares at a price of $1.25 per common share for gross proceeds of $1,150,000. The Company did not participate in the public offerings and as a result its ownership interest decreased from approximately 100% to 56% in 2005.
On November 17, 2006, Minco Silver completed a public offering, by way of a short form prospectus, of 5,000,000 units at a price of $3.00 per common share 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. On December 1, 2006, Minco Silver completed an additional issuance of 528,200 common shares at a price of $2.80 per common share and an additional 375,000 common share purchase warrants at a price of $0.40 per warrant for gross proceeds of $1,628,960 pursuant to the exercise of an over-allotment option by the underwriters. Each warrant is exercisable at $3.45 per share until May 17, 2008.
The Company did not participate in the public offering and as a result its ownership interest decreased from approximately 55.6% to 45.5% on November 17, 2006 and reduced further to 45.3% as at December 31, 2006. As at December 31, 2007 the Company’s ownership had decreased to 41.75% primarily due to the sale of 1,000,000 shares of Minco Silver by the Company. Prior to November 17, 2006, the Company consolidated the accounts of Minco Silver. Effective November 17, 2006, the Company commenced accounting for its investment in Minco Silver on an equity basis and as a result the following assets and liabilities were deconsolidated at that date: cash of $6,539; short term investment of $5,578,000; current assets of $5,786,000; property and equipment of $80,000; current liabilities of $1,175,000 and non-controlling interest of $2,985,000.
During December 2007, the Company sold 1,000,000 shares of Minco Silver at a gross price of $3.25 per share. This transaction resulted in a gain of $2,978,034.
Following the dilution of Minco Gold’s shareholding interest in Minco Silver, Minco Gold recognized a dilution gain and equity loss on investment in Minco Silver since November 17, 2006 as follows:
24
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
6.
Equity Investment in Minco Silver Corporation(continued)
|
| 2007 |
| 2006 |
| 2005 |
Dilution gain on issuance of shares by Minco Silver | $ |
191,000 | $ |
5, 213,000 | $ | 2,953,000 |
Equity loss of Minco Silver Corporation |
| (3,239,898) |
| (521,095) |
| - |
Income from investment in Minco Silver | $ |
(3,048,898) | $ |
4, 691,905 | $ |
2,953,000 |
The carrying value and market value of the Minco Silver shares held by the Company and accounted for using the equity basis, are as follow:
|
| December 31, 2007 |
| December 31, 2006 |
Investment in Minco Silver Corporation on an equity basis |
|
$ 3,079,412 |
|
$ 6,398,692 |
|
|
|
|
|
Market value of Minco Silver shares |
| $38,740,000 |
| $39,200,000 |
As of December 31, 2007, Minco Silver had current assets of $17,083,000, property and equipment of $244,000, current liabilities of $3,678,000 and shareholders equity of $13,649,000. Minco Silver incurred exploration costs of $4,790,000, administration costs of $3,255,000 and a loss of $7,275,000 during the year ended December 31, 2007.
7.
Non-Controlling Interest
The non-controlling interest represents the interest of minority shareholders in Zhongjia JV, which holds the Xiaoshan project, and the interest of the minority shareholders in Mingzhong, based on the amount of their investment adjusted for income or losses from operations since the date of their investment. The non-controlling interest in the Zhongjia JV was 30% and the non-controlling interest in Mingzhong was 49% as at December 31, 2007.
8.
Discontinued Operations
On November 15, 2007, the Company effected the reorganization and spin-off of Minco Base Metals Corp. The Company effectively transferred the wholly-owned subsidiary called Minco Base Metals Corporation (“Minco Base Metals”) to Minco Base Metals Corp., including its interest in Gansu Keyin Mining Co. Ltd. and the White Silver Mountain project. The Company issued 1 common share in Minco Base Metals Corp. for every 5 common shares of the Company. As at November 15, 2007, the assets disposed of consisted primarily of cash, receivables and payables. The 2007 loss of Minco Base Metals prior to disposition was $39,596. The net liabilities of $112,674 of Minco
25
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
8.
Discontinued Operations(continued)
Base Metals as of November 14, 2007 was credited to contributed surplus of the Company.
Pursuant to CICA Handbook Section 3475 “Disposal of Long-Lived Assets and Discontinued Operations”, the consolidated financial statements of the Company have
been reclassified to reflect discontinued operations of Minco Base Metals. Accordingly, exploration costs and administrative expenses, assets and liabilities and cash flows of discontinued operations have been segregated in the Consolidated Statements of Operations and Comprehensive Loss and Deficit and Consolidated Balance Sheets.
Below is the summarized financial information for the Company’s discontinued operations:
Minco Base Metals Corporation
Balance Sheet
(Expressed in Canadian Dollars) |
|
|
| ||
|
|
| November 14, 2007 |
| December 31, 2006
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash |
|
| 5,082 |
| 1,502 |
Receivables |
|
| 4,504 |
| 1,783 |
Current assets of discontinued operations |
|
| 9,586 |
| 3,285 |
|
|
|
|
|
|
Plant, property and equipment |
|
| 16,534 |
| 19,850 |
Total assets of discontinued operations |
|
| 26,120 |
| 23,135 |
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
| 138,794 |
| 100,718 |
Total liabilities of discontinued operations |
|
| 138,794 |
| 100,718 |
|
|
|
|
|
|
Net assets of Minco Base Metals disposed |
|
| (112,674) |
| (77,583) |
26
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
8.
Discontinued Operations(continued)
Minco Base Metals Corporation
Statement of Operations and Comprehensive Loss and Deficit
(Expressed in Canadian Dollars) |
|
|
| ||
|
|
| Period from January 1, 2007 to November 14, 2007 |
| Year Ended December 31, 2006
|
|
|
|
|
|
|
Exploration costs |
|
| 9,172 |
| 27,851 |
Administration expenses |
|
| 30,424 |
| 32,313 |
|
|
|
|
|
|
Net loss from discontinued operations |
|
| (39,596) |
| (60,164) |
Minco Base Metals Corporation
Statement of Cash Flows
(Expressed in Canadian Dollars) |
|
|
| ||
|
|
| Period from January 1, 2007 to November 14, 2007 |
| Year Ended December 31, 2006
|
|
|
|
|
|
|
Cash used by operating activities of discontinued operations |
|
| (4,240) |
| (241,914) |
Cash used in investing activities of discontinued operations |
|
| - |
| (8,629) |
Cash provided by (used in) financing activities of discontinued operations |
|
| 7.820 |
| 30,694 |
|
|
|
|
|
|
Increase (decrease) in cash |
|
| 3,580 |
| (219,849) |
Cash, beginning of year |
|
| 1,502 |
| 221,351 |
|
|
|
|
|
|
Cash, end of period |
|
| 5,082 |
| 1,502 |
27
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
9.
Share Capital
(a)
Common Stock
Authorized:
100,000,000 common shares without par value
Issued:
| Shares | Amount |
Balance, December 31, 2005 | 38,633,992 | 28,187,245 |
Stock options exercised ranging from $0.20 to $1.80 per share, including $658,700 contributed surplus attributed to stock-based compensation recognized | 1,535,799 | 1,438,330 |
Broker options exercised at $1.40 per share, including $111,000 allocated to contributed surplus in a private placement in 2004 | 250,000 | 461,000 |
Share purchase warrants exercised ranging from $1.50 to $1.70 per share | 2,445,428 | 3,723,328 |
Balance, December 31, 2006 | 42,865,219 | $ 33,809,903 |
Stock options exercised ranging from $0.55 to $1.35 per share, including $63,750 contributed surplus attributed to stock-based compensation recognized | 111,166 | 169,558 |
Purchased and cancelled pursuant to normal course issuer bid | (48,000) | (37,951) |
Balance, December 31, 2007 | 42,928,385 | $ 33,941,510 |
Under the original escrow agreement, 4,880,000 escrow shares were to be released based on the Company’s expenditures on exploration and development of a particular resource property. In July 2005, the Company released 1,473,264 escrow shares based on exploration expenditures. In June 2005, the Company’s shareholders approved a new escrow agreement that will result in the remaining 1,518,058 escrow shares being released over a period of 18 months on a time release basis: (a) 379,514 escrow shares on December 31, 2005 (the release was effected in January 2006); (b) 379,514 escrow shares on July 1, 2006; (c) 379,514 escrow shares on December 31, 2006 (the release was effected in January 2007); and (d) 379,516 escrow shares on July 1, 2007. As at December 31, 2007, all shares are released from escrow (December 31, 2006 – 759,030).
The Toronto Stock Exchange accepted a Notice of Intention by the Company to make a Normal Course Issuer Bid. Under the terms of the Normal Course Issuer Bid, the Company may acquire up to 2,107,210 common shares of the Company between November 22, 2006 and November 21, 2007. Prior to the expiry of the bid, the Company acquired and cancelled 48,000 common shares at a cost $44,450. The cost to purchase the shares exceeded their carrying value by $6,499. This excess has been debited to retained earnings.
28
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
9.
Share Capital(continued)
(b)
Sharepurchase warrants and broker options
There was no share purchase warrants outstanding as at September 30, 2007.
A summary of the status of share purchase warrants and broker options granted by the Company is as follows:
| Number of Warrants | Weighted Average | Number of Broker | Weighted Average |
| Exercise | Options | Exercise | |
| Price |
| Price | |
Outstanding at December 31, 2005 | 4,398,214 | $ 1.57 | 250,000 | $ 1.40 |
Exercised | (2,445,428) | 1.52 | (250,000) | 1.40 |
Expired | (1,372,286) | 1.70 | - | - |
Outstanding at December 31, 2006 | 580,500 | 1.50 | - | - |
Expired | (580,500) | 1.50 | - | - |
Outstanding atDecember 31, 2007 | - | $ - | - | $ - |
(c)
Contributed Surplus
Summary of contributed surplus is as follows:
Balance at December 31, 2005 | 987,043 |
2006 stock-based compensation | 1,432,000 |
Transfer to share capital on exercise of stock options | (769,700) |
Balance at December 31, 2006 | $ 1,649,343 |
2007 stock-based compensation | 2,022,850 |
Transfer to share capital on exercise of stock options | (63,750) |
Transfer of net liabilities to Minco Base Metals | 112,674 |
Balance at December 31, 2007 | $ 3,721,117 |
29
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
9.
Share Capital(continued)
(d)
Minco Gold Stock Options
Minco Gold may grant options to its directors, officers, employees and consultants under its stock option plan. The maximum number of stock options reserved for issuance is 5,979,226 common shares.
In 2007, Minco Gold granted 3,865,000 stock options to its directors, officers, employees and consultants at the price range from $0.79 to $1.95 per share. The stock options granted vest in various increments and have a maximum term of five years.
Minco Gold recorded $2,022,850 in stock based compensation expense in 2007 (2006 - $2,820,000).
A summary of the status of options granted by Minco Gold is as follows:
|
| Weighted Average |
Number | Exercise Price | |
Options outstanding at December 31, 2005 | 2,954,500 | 0.98 |
Granted | 2,197,000 | 1.67 |
Exercised | (1,535,799) | 0.51 |
Forfeited | (470,367) | 1.34 |
Expired | (200,000) | 2.00 |
Options outstanding at December 31, 2006 | 2,945,334 | $ 1.61 |
Granted | 3,865,000 | 1.07 |
Exercised | (111,166) | 0.95 |
Forfeited | (1,197,501) | 1.71 |
Expired | (265,000) | 1.50 |
Options outstanding at December 31, 2007 | 5,236,667 | $ 1.21 |
30
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
9.
Share Capital(continued)
The weighted average fair value of options granted by Minco Gold during the period ended December 31, 2007 was $0.71. Each option entitles the holder 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 |
$0.00 - $1.06 | 2,485,000 | 4.67 | $0.82 |
| 91,666 | $0.79 |
$1.07 - $1.63 | 1,221,667 | 3.93 | $1.30 |
| 380,001 | $1.41 |
$1.64 - $2.54 | 1,430,000 | 2.82 | $1.70 |
| 1,396,666 | $1.69 |
$2.55 - $3.00 | 100,000 | 3.33 | $2.55 |
| 100,000 | $2.55 |
| 5,236,667 | 3.96 | $1.21 |
| 1,968,333 | $1.64 |
The Company used the Black-Scholes option pricing model to determine the fair value of the options with the following assumptions:
| 2007 | 2006 | 2005 |
Risk-free interest rate | 3.95% - 4.59% | 3.83% - 4.5% | 3.47% |
Dividend yield | 0% | 0% | 0% |
Volatility | 86% - 104% | 114% - 134% | 58% - 64% |
Approximate expected lives | 5 years | 5 years | 3 years |
|
|
|
|
Option pricing models require the use of highly subjective estimates and assumptions including the expected stock price volatility. Changes in the underlying assumptions can materially affect the fair value estimates and therefore, in management’s opinion, existing models do not necessarily provide a reliable measure of the fair value of the Company’s stock options.
31
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
10.
Income Taxes
On March 16, 2007, the National People’s Congress (NPC) of China approved the new Corporate Income Tax Law, which will become effective on January 1, 2008. The new law establishes a unified 25% tax rate for both domestic enterprises and foreign invested enterprises (FIEs). This change of the Chinese tax law will have impact to the extent of the Company’s business operation in China when the Company becomes profitable in China.
(a)
Income tax expense differs from the amount that would result from applying the Canadian federal and provincial income tax rates to earnings before income taxes. These differences result from the following items:
| 2007 | 2006 | 2005 |
Loss before non-controlling interest | $(7,970,077) | $(2,910,887) | $(2,120,975) |
| 34.12% | 34.12% | 34.87% |
|
|
|
|
Income tax recovery at statutory rates | $ (2,719,390) | $ (1,013,723) | $ (765,523) |
Non-taxable capital gain | (553,530) | - | - |
Non-taxable dilution gain | 520,313 | (1,778,676) | (1,029,711) |
Non-taxable foreign exchange gain | - | (122,393) | - |
Non-deductible expenses | 734,677 | 1,220,990 | 144,906 |
Difference in foreign tax rates | 145,999 | 9,946 | 18,485 |
Impact of federal tax rate change | 637,268 | 636,021 | 202,228 |
Expiry of non-capital loss carryforward | 356,895 | 389,542 | 401,466 |
Change in valuation allowance | 877,768 | 658,293 | 1,028,149 |
| $ - | $ - | $ - |
Future income taxes arise from temporary differences in the recognition of income and expenses for financial reporting and tax purposes. The significant components of future income tax assets and liabilities at December 31 are as follows:
32
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
10.
Income Taxes (continued)
| 2007 | 2006 |
| 27.00% | 31.00% |
Future income tax assets: |
|
|
Net capital losses | $ - | $ 245,012 |
Non-capital losses | 2,576,597 | 2,547,986 |
Unclaimed resource expenditures | 1,744,282 | 1,580,169 |
Capital assets | 142,273 | 129,053 |
Share issue costs | 53,514 | 144,695 |
| 4,516,666 | 4,646,915 |
Less: valuation allowance | (4,516,666) | (4,646,915) |
Net future income tax assets | $ - | $ - |
(b) No future income tax asset has been recognized as realization is not considered more likely than not, due to the uncertainty of future taxable income.
The Company has Canadian non-capital loss carryforwards of approximately $6,538,000 that may be available for tax purposes. The expiry for Canadian non-capital loss carryforwards is as follows:
| Non-Capital Losses Canada |
|
|
2008 | 757,000 |
2009 | 774,000 |
2010 | 857,000 |
2014 | 1,161,000 |
2015 | 1,215,000 |
2016 | 1,459,000 |
2017 | 1,361,000 |
| $7,584,000 |
The Company also has $4,430,000 (2006 - $4,098,000) of cumulative foreign resource expenses for Canadian income tax purposes which can be carried forward indefinitely and used to reduce future taxable income in Canada.
33
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
10.
Income Taxes (continued)
Such cumulative foreign resource expenses are related to the Company’s exploration activities in China. Consequently, these resource expenses may also be currently deductible for Chinese tax purposes (subject to Chinese tax law deductibility limitations) which would result in tax losses in China.
The Company has approximately $2,115,000 of operating losses and approximately $4,214,000 of unclaimed exploration expenses for Chinese income tax purposes. Operating losses incurred in a year can be carried forward for five years, while unclaimed exploration expenses will be amortized to match with future sales.
11.
Related Party Transactions
a.
The Company incurred the following fees to its directors or corporations controlled by its directors:
b.
Receivables of $239,260 (December 31, 2006 - $86,238) are due from five (2006: five) companies related by two common directors. $13,903 has been received subsequent to December 31, 2007.
At December 31, 2007, the Company also has $1,929,893 (December 31, 2006 - $363,889 due from) due to Minco Silver. The amount is unsecured, non-interest bearing and repayable on demand.
At December 31, 2007, Minco China also has a due from balance of $4,639,788 (December 31, 2006 – $442,404) from Minco Silver in relation to expenditures on the Fuwan Property, new silver projects’ investigation, and shared office expenses paid by Minco China on behalf of Minco Silver. The amount due from Minco Silver is unsecured, non-interest bearing and repayable on demand.
c.
The Company and Minco Silver (“Minco Group”) have entered into a strategic alliance with Silver Standard Resources Ltd. (“Silver Standard”), a company that is a shareholder of Minco Silver and which is related by one common director. The agreement provides that all silver-dominant properties of the Minco Group located in China will be held by Minco Silver and that Silver Standard will not
34
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
11.
Related Party Transactions (continued)
actively explore for or seek out silver-dominant properties located in China. In addition, both the Minco Group and Silver Standard have agreed to offer to the other a first right of refusal on any silver-dominant properties in China brought to their attention which they do not intend to pursue.
d.
In 2003, the Company entered into a letter agreement with New Cantech, which is related by one common director.
Pursuant to the terms of the agreement on the BYC project in Inner Mongolia, the Company received, from New Cantech, 100,000 common shares at $0.21 per share for $21,000 and 50,000 common shares at $0.30 per share for $15,000 in 2005. In 2004, the Company received 250,000 common shares at $0.34 per share for a total of $85,000 and 100,000 common shares at $0.37 per share for a total of $37,000. The aggregate value of these shares at the date of issue ($158,000) has been recorded as an exploration cost recovery in prior years.
On September 28, 2006, New Cantech notified the Company that it did not want to proceed with the BYC Option, and the two parties signed a termination agreement on October 3, 2006. Pursuant to the BYC Option Agreement, New Cantech reconveyed to the Company all of its rights and interest in and to the BYC Property.
The above transactions were 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.
12.
Commitments and Contingencies
(a)
The Company has commitments in respect of office leases requiring minimum payments of $2,325,180, as follows:
|
|
2008 | $ 353,625 |
2009 | 291,462 |
2010 | 296,258 |
2011 | 311,850 |
2012 | 317,048 |
2013 | 332,640 |
2014 | 337,838 |
2015 | 84,459 |
| $ 2,325,180 |
35
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
12.
Commitments and Contingencies (continued)
The Company has entered into sub-lease agreements for a portion of its leased premises.
(b)
Minco Gold is also conditionally committed to payments of up to $9,567,311 in respect of joint venture investments and mineral property development.
Notes:
(1)
Costs of exploration permits and investment commitments in accordance with the Mingzhong JV Contract dated February 8, 2007;
(2)
Costs of exploration permits and investment commitments in accordance with the Zhongjia Contract dated April 30, 2007 as well as a commitment of RMB 1,144,000 (approximately $154,000) to be paid on a Zhongjia exploration program;
(3)
A commitment of RMB 1,186,000 (approximately $ 159,000) to be paid on a Gobi Gold exploration program.
13.
Geographic Information
The Company’s business is considered as operating in one segment, mineral exploration and development. The geographical division of the Company’s total assets, liabilities and operating loss is as follows:
36
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
13.
Geographic Information (continued)
| December 31 | December 31 |
2007 | 2006 | |
Current Assets |
|
|
Canada | $ 7,844,446 | $ 8,658,009 |
China | 4,909,303 | 3,783,963 |
| $ 12,753,749 | $ 12,441,972 |
|
|
|
| December 31 | December 31 |
2007 | 2006 | |
Long-term Assets |
|
|
Canada | $ 3,207,479 | $ 6,513,058 |
China | 785,881 | 629,498 |
| $ 3,993,360 | $ 7,253,556 |
|
|
|
| December 31 | December 31 |
2007 | 2006 | |
Current Liabilities |
|
|
Canada | $ 2,344,007 | $ 384,481 |
China | 475,886 | 116,647 |
| $ 2,819,893 | $ 501,128 |
| 2007 | 2006 | 2005 |
|
|
|
|
Loss for the year |
|
|
|
Canada | $ (3,959,788) | $ 167,378 | $ 2,735 |
China | (3,620,443) | (1,756,702) | (1,016,276) |
| $ (7,580,231) | $ (1,589,324) | $ (1,013,541) |
14.
Financial Instruments
Fair value - The fair values receivables, accounts payable and accrued liabilities approximates their carrying values due to the short-term nature of these financial instruments.
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
37
MINCO GOLD CORPORATION
(Formerly Minco Mining & Metals Corporation)
(An exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
14.
Financial Instruments (continued)
therefore subject to foreign currency risk arising from changes in exchange rates with the Canadian dollar.
Interest rate risk - The Company has no interest-bearing debt and so is not exposed to interest rate risk.
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.
15.
Subsequent Event
Subsequent to the end of the year, Mingzhong received the Changkeng exploration permit from the No. 757 Exploration Team.
38