American Bonanza Gold Corp.
Management’s Discussion and Analysis
(For the three months ended March 31, 2011, as of June 13, 2011)
General
The following discussion of performance, financial condition and analysis should be read in conjunction with American Bonanza Gold Corp’s. (“the Corporation”) annual audited consolidated financial statements for the year ended December 31, 2010 and the unaudited consolidated financial statements of the Corporation for the three months ended March 31, 2011 and 2010. All amounts are expressed in Canadian Dollars unless otherwise indicated.
Forward-Looking Statements
Certain statements contained in the following Management’s Discussion and Analysis (“MD&A”) constitute forward-looking information within the meaning provided by Canadian securities laws. All statements other than statements of historical facts, are forward looking information. The following information provided in this Management’s Discussion and Analysis include statements regarding: the timing of the delivery of mill components to the mine site and assembling of plant and crusher; the estimated production, production and capital cost estimates; and the timing of application for permitting, commencement of mining at Copperstone, and sufficiency of capital set out under the heading “Outlook”. Although the Corporation believes the expectations expressed in such forward-looking information are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Forward looking information in this MD&A is based on various assumptions including, but not limited to, the expectations and beliefs of management, the assumed long term price of gold, that the Corporation will complete and receive required permits and licenses as required to develop the Copperstone Mine, the assumptions in the financial analysis prepared in connection with the feasibility report on the Copperstone Mine, that the Corporation will be able to access financing, the Corporation will be able to access appropriate equipment and sufficient labour, and the Corporation’s capital and operating costs will not increase significantly. These assumptions should be considered carefully by investors. Investors are cautioned not to place undue reliance on forward-looking information or the assumptions on which the Corporation’s forward looking information is based. Factors that could cause actual results to differ materially from those in forward-looking statements include unsuccessful exploration results, changes in metals prices, changes in the availability of funding for mineral exploration, changes in the availability of labour, equipment and personnel, unanticipated changes in laws governing mining projects and operations, unanticipated changes in key management personnel and general economic conditions. Mining is an inherently risky business. Investors should carefully review and consider the risk factors identified in this MD&A and in the Corporation’s Annual Report on Form 20-F for the year ended December 31, 2010. Accordingly the actual events may differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made, and readers are also advised to consider such forward-looking statements while considering the risks set forth below. The Corporation does not undertake to update any forward-looking information, except as, and to the extent, required by applicable securities laws.
Description of Business
The Corporation is a development stage company engaged in the acquisition, exploration and development of high-grade gold properties located in the United States. The Corporation is re-activating mining at its construction stage 100% owned Copperstone gold mine in Arizona and maintains ownership of other projects including Gold Bar in Nevada.
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Overview of Performance
The Corporation’s working capital as at March 31, 2011 was $20,795,870 compared with a working capital position of $7,979,474 as at December 31, 2010. The increase in working capital was the result of the successful financing of $16,095,697 net proceeds by issuance of common shares. Use of fund for operating activities in the period totalling $272,245 (December 31, 2010 – $399,397) and use of funding in the exploration expenditures at Copperstone and other properties totalling $893,655 (2009 – $424,475). An additional $1,104,484 (2010 - $nil) was used to purchase a processing plant and development for the Copperstone mine. Cash outlays were further reduced by the posting of an environmental bond with the BLM totaling $1,582,435 (2010 – $nil). The loss for the three months ended March 31, 2011 was $2,286,925 or ($0.01) per share compared with a net loss of $488,233 or $0.00 per share for the three months ended March 31, 2010. A significant component of the current period’s loss was related to stock-based compensation of $1,684,892 (2010 – $nil).
Between 2001 and 2006, the Corporation completed substantial drilling campaigns (over 400 holes totalling over 150,000 feet) that defined the measured, indicated and inferred resources at Copperstone. Over the past years the Corporation has been studying the best way to put Copperstone into production while completing further exploration drilling to increase the size of the resource.
The Corporation completed and released the positive results of its NI43-101 compliant Feasibility Study (the “Study”) in February, 2010 (updated January, 2011). The Study was prepared to present the results of a comprehensive evaluation of the Copperstone deposit and provide an economic evaluation of future underground mining operations at the past producing Copperstone mine. The Study indicates Copperstone will be a profitable gold mine with positive economics from the re-activation of mining, pursuing the gold mineralization from the past open pit to the future high grade underground mining. Re-activation of mining at Copperstone remains the Corporation’s primary objective.
In August 2010, the Corporation completed the purchase of a 700 ton per day milling and flotation circuit at Copperstone for a cash payment of US$400,000 and the issuance of 1,250,000 common shares. The purchase price of the mill was valued at US$612,500. This purchase represents a significant cost savings and is expected to reduce the capital cost of the Copperstone project by approximately $400,000. The mill has operated for less than 2 years and is in good condition. The Corporation has acquired a full set of engineering drawings, which will help accelerate construction timelines and reduce costs. The mill includes a rod mill, ball mill, fume scrubber, flotation cells, cleaner cells, concentrate filter drum, tank thickeners, water storage tank, concentrate ore samplers, cyclones, duplex gravity concentrating jigs, the mill building, control panel and conveyor. The mill does not include a crusher and crusher building, which Bonanza has purchased separately.
The milling and flotation/gravity plant and building were shipped to a facility in Globe, Arizona for refurbishing and some major components of the milling and flotation circuit were delivered to Bonanza’s Arizona based construction contractor’s yard in preparation for construction. Work is progressing on updating the engineering plans for the mill and mill foundation. Upon completing the modernization and design work, RAM will transport and reassemble the mill at Copperstone commencing in early April.
Work has also started on the rehabilitation of the existing buildings and other infrastructure at the Copperstone mine site including updating the electrical supply systems. Bonanza has drilled geotechnical holes to obtain information required for designing the foundation for the crushing plant in anticipation of the full construction phase.
In addition to the milling facilities, the Corporation also purchased a jaw crusher and a cone crusher. The jaw crusher is a Nordberg P1008VF Portable Jaw Plant with ST1008 Jaw Crusher (32" x 40"), a 16 foot x 44" Vibrating Grizzly feeder, a Kent Model KHB-86 Rock Breaker with 16' Boom and an associated control tower. The crusher has a capacity of up to 200 tons per hour and will crush all of the coarse run-of-mine mill feed for the planned mining operations. Delivery for the equipment is expected in 2-3 weeks. The equipment was purchased from Earthworks Machinery Company of Roseville, California. The cone crusher is a Nordberg 4 foot cone crusher and includes a 16 foot x 6 foot screen and associated conveyors and motors. Delivery for the equipment is expected during May 2011. The equipment was purchased from J.W. Jones Company of Paragon, Indiana.
In October, 2010 the United States Department of the Interior’s Bureau of Land Management (“BLM”) issued the federal permits for mining at the Copperstone gold mine. The BLM’s Decision Record is supported by the Proposed Reopening of the Copperstone Mine Environmental Assessment DOI-BLM-AZ-C020-2010-0015-EA (the “EA”), and the Finding of No Significant Impact (the “FONSI”).
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The FONSI determines that the Proposed Action (construction of the Copperstone gold mine) does not constitute a major Federal Action affecting the quality of the human environment and that an Environmental Impact Statement is unnecessary. The FONSI determines that the proposed action under the EA will assure that no significant adverse impact will occur to the human environment in terms of air quality, global warming, cultural resources, hazardous material, human health and public safety, lands and realty management, mineral resource management, native American religious concerns, non-native invasive species, recreation, surface protection, visual resources, water quality – drinking and ground, wildlife, wild horse and burro management.
In February, 2011 the Corporation posted an approximately $1.6 million cash reclamation bond with BLM for Copperstone. The bond was posted to guarantee that the Corporation is positioned to complete all required reclamation at the end of the mine life at Copperstone based on the current mine plan of operations. The Corporation will perform partial reclamation work at the Copperstone site concurrent with mining operations, as described in the mine plan of operations.
On April 20, 2011 the Corporation received the final aquifer protection permit (the "APP") required for gold mining and processing. The permit was issued by the Water Quality Division of the Arizona Department of Environmental Quality (the "ADEQ") as aquifer protection permit number P-106172.
In November 2010, the Corporation reported the selection of Mining and Environmental Services LLC ("MES"), of Idaho Springs, Colorado, to conduct contract mining at the wholly owned Copperstone gold mine in Arizona, and entered into a formal agreement with MES in March, 2011. MES will mobilize upon receipt of the final state permits to start pre-development mining activities, including rehabilitation of the existing decline and the development of the initial high grade stopes.
In November, 2010 the Corporation closed the sale of it’s eastern Canadian exploration properties with Balmoral Resources Ltd. (“Balmoral”). In consideration for the properties, Balmoral made a one-time cash payment to the Corporation of Cdn $3.7 million dollars and issuance of 4.5 million common shares of Balmoral to Bonanza, and assumed all ongoing liabilities in respect of the properties acquired. The Balmoral shares were valued at $1.15 per share giving total share value of $5,175,000.
In January, 2011 the Corporation closed a public offering of units by Wellington West Capital Markets Inc (the “Agent”) for a total of 50 million units at a price of $0.35 per unit for gross proceeds of $17.5 million. Each unit consisted of one common share and one half of one warrant, with each whole warrant entitling the holder to purchase a further common share at a price of $0.45 per common share at any time until July 21, 2012. The Corporation paid the Agent a cash commission equal to 6% of the gross proceeds of the Offering, and issued to the Agent warrants to purchase 2,963,700 common shares at a price of $0.38 per common share, exercisable until July 21, 2012.
Highlights of the Feasibility Study
The Copperstone Gold Mine is estimated to produce on average 45,891 ounces of gold annually for the first 3 years, and have a capital investment payback period of only 13 months. The Study details a total capital cost of US$17.74 million, including working capital, G&A startup, reclamation bonding, and contingencies. The Study estimates the cash production cost to be US$415 per ounce of gold produced.
The After Tax Net Present Value (“AT-NPV”) of the mine is US$51,291,204 and the Internal Rate of Return (“IRR”) is 96.3% in the base case using a future gold price estimate of US$962 per ounce and a 5% discount rate. Using the spot gold price of US$1,104 per ounce, (www.kitco.com on December 28, 2009) the AT-NPV rises to US$68,089,302 and the IRR increases to 120.5% .
Selected Information
The following table sets forth selected consolidated annual financial information of the Corporation for as of the end of each of the last three fiscal years. The selected consolidated financial information should be read in conjunction with the Consolidated Financial Statements of the Corporation.
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| | | Three months ended | | | Year Ended December 31, | |
| | | March 31, | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2010 | | | 2009 | | | 2008 | |
| | | $ | | | $ | | | $ | | | $ | | | $ | |
| Net loss | | (2,286,926 | ) | | (488,233 | ) | | (6,609,474 | ) | | (11,041,089 | ) | | (3,883,826 | ) |
| Net loss per share | | (0.01 | ) | | (0.00 | ) | | (0.05 | ) | | (0.09 | ) | | (0.03 | ) |
| Total cash and cash equivalents | | 15,347,528 | | | 516,704 | | | 3,104,650 | | | 957,923 | | | 2,650,636 | |
| Working capital | | 20,795,870 | | | 1,307,444 | | | 7,979,474 | | | 2,638,431 | | | 5,726,261 | |
| Total liabilities | | 1,230,082 | | | 731,446 | | | 1,079,376 | | | 724,292 | | | 1,739,187 | |
| Total assets | | 53,867,545 | | | 40,734,166 | | | 37,954,623 | | | 45,335,078 | | | 57,167,469 | |
| Shareholders’ equity | | 52,637,463 | | | 40,002,720 | | | 36,875,247 | | | 44,610,786 | | | 55,428,282 | |
Results of Operations
For the three months ended March 31, 2011, the Corporation had a net loss of $2,286,926 or $0.01 per share compared to a net loss of $488,233 or $0.00 per share with the corresponding period in 2010. A significant component of the current period’s loss was related to stock-based compensation expense of $1,684,892 (2010 –$nil). General and administrative costs increased slightly to $296,479 from $216,871 in 2010. Some significant components of the general and administration costs include management fees, consultant fees and salaries of $163,713 (2010 – $79,519) and public company expenses $103,995 (2010 - $105,127). The reason for the increase in public company expense was due to the increase in business activities related to the start up of the Copperstone project.
Exploration office expenses increased to $70,740 in the period from $39,688 in 2010. Activities relating to property evaluations and investigations are ongoing. Exploration expenses in the period also include all costs associated with maintaining the Corporation’s exploration offices in Reno, Nevada.
During 2006 the Corporation continued its surface and underground drilling program at the Copperstone project. This program phase was completed and the result of the preliminary assessment prepared by AMEC was filed on SEDAR on March 28, 2006. In August, 2006, the Corporation began a large drilling campaign designed to expand the gold resources at the 100% owned Copperstone gold project in Arizona. The drilling was completed ahead of schedule, consisting of 27 drill holes with a combined length of 7,695 meters (25,247 feet). In April of 2007, the Corporation began Phase II drilling. In September, 2007 Phase II drilling was completed consisting of 17 drill holes and a combined length of 5,482 meters (17,980 feet). This drilling phase was designed to test the continuity, geometry, and overall significance of the gold intercepted in several targets during Phase I drilling. Re-interpretation of previous geophysical data and a new ground magnetic survey also contributed to the targeting for the Phase II drilling.
During 2008, the Corporation commenced its Phase III exploration drilling campaign which targeted the South Pit and the Southwest gold zones with 15 drill holes of combined length of 4,313 meters (14,147 feet) completed. The South Pit zone as currently understood is at least 300 meters long and is open to expansion along strike and up and down dip. During 2007 and 2008, exploration follow-up drilling in the South Pit zone totaled 11 drill holes, all of which encountered the targeted fault zones and gold mineralization. The South Pit zone and the Southwest zone have the potential to extend the mine life at Copperstone beyond the current resources, and further drilling at both zones is planned.
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Summary of Quarterly Results
Selected consolidated financial information for each of the most recently completed quarters of fiscal 2011, 2010 and 2009 are as follows:
| (In thousand of dollars | | 2011 | | | 2010 | | | 2009 | |
| except amounts per share) | | Mar | | | Dec | | | Sept | | | Jun | | | Mar | | | Dec | | | Sep. | | | Jun. | |
| | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
| Cash and cash equivalents | | 15,348 | | | 3,104 | | | 626 | | | 507 | | | 517 | | | 958 | | | 1,606 | | | 1,897 | |
| Working Capital | | 20,796 | | | 7,979 | | | 649 | | | 647 | | | 1,307 | | | 2,638 | | | 4,131 | | | 4,002 | |
| Total assets | | 53,868 | | | 37,955 | | | 38,174 | | | 41,750 | | | 41,180 | | | 45,335 | | | 56,694 | | | 56,212 | |
| Shareholder’s equity | | 52,637 | | | 36,875 | | | 37,562 | | | 41,047 | | | 40,448 | | | 44,610 | | | 55,021 | | | 54,398 | |
| Net loss | | 2,287 | | | 507 | | | 4,912 | | | 702 | | | 488 | | | 9,906 | | | 184 | | | 274 | |
| Net loss per share | | (0.01 | ) | | (0.00 | ) | | (0.04 | ) | | (0.01 | ) | | (0.00 | ) | | (0.08 | ) | | (0.00 | ) | | (0.00 | ) |
Liquidity and Capital Resources
The Corporation’s working capital as at March 31, 2011 was $20,795,870 compared with a working capital position of $7,979,474 as at December 31, 2010. The increase in working capital was the result of the successful financing of $16,095,697 net proceeds by issuance of common shares. Use of fund for operating activities in the period totalling $272,245 (December 31, 2010 – $399,397) and use of funding in the exploration expenditures at Copperstone and other properties totalling $893,655 (2010 – $424,475). An additional $1,104,484 (2010 - $nil) was used to purchase a processing plant and development for the Copperstone mine. Cash outlays were further reduced by the posting of an environmental bond with the BLM totaling $1,582,435 (2010 – $nil).
On June 22, 2007 the Corporation entered into an option agreement with Cusac for Cusac to acquire the Taurus Project from the Corporation for total cash consideration of up to $11,000,000 plus up to 3,000,000 common shares of Cusac. On December 19, 2007 Cusac and Hawthorne Gold Corp. (“Hawthorne”) entered into a definitive merger agreement entitling holders of Cusac common shares to receive one common share of Hawthorne in exchange for each 19 common shares of Cusac. The Corporation, Cusac and Hawthorne also entered into an option assignment and amending agreement (the “Agreement”) whereby Cusac assigned to Hawthorne all its rights to the option to acquire the 46 mineral claims of the Taurus Project from the Corporation. The assignment agreement amended the terms of the original option agreement and required Hawthorne to pay $6 million over two years, consisting of $1 million by December 22, 2007 (paid), $2 million by June 22, 2008 (paid), $1.5 million by June 22, 2009 and $1.5 million by December 22, 2009. On June 22, 2007, the Corporation received its first instalment of 1,500,000 common shares of Cusac and on December 22, 2007 and June 22, 2008 the Corporation received the $1,000,000 and $2,000,000 option payments respectively.
In December 2008, the agreement was further amended to delete the 2009 payments and all subsequent royalty payments in favour of issuance of 6,750,000 Hawthorne common shares to the Corporation. The Corporation received the Hawthorne shares in full on December 30, 2008, which were valued at $2,362,500 based on the quoted market price and the Corporation recognised a loss on property disposal of $977,782. During 2009, the Corporation sold 1,300,000 of these securities and realised a gain of $68,712. During the three months ended March 31, 2011, the Corporation sold an additional 5,528,947 Hawthorne shares at an average price of $0.177 per share for gross proceeds of $976,535 and incurred commission of $16,344.
On June 16, 2010 the Corporation completed a non-brokered private placement of 1,594,500 flow-through shares, at a price of $0.16 per share for gross proceeds of $255,120. No commission was paid on the financing.
On August 10, 2010 the Corporation completed a non-brokered private placement of 3,333,717 units (the “Units”) at a price of $0.15 per Unit for gross proceeds of approximately $500,000. Each Unit consists of one common share, and one half of one common share purchase warrant with each full warrant entitling the holder to acquire one common share at a price of $0.23 until August 11, 2012. A 5% finder’s fee was paid on the financing.
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On August 16, 2010 the Corporation closed the purchase of a milling and flotation for a purchase price of US$400,000 and the issuance of 1,250,000 common shares. The common shares issued were valued at $0.17 per share for $212,500.
On August 24, 2010 the Corporation completed a non-brokered private placement of 4,675,166 units (the “Units”) at a price of $0.15 per Unit for gross proceeds of approximately $700,000. Each Unit consists of one common share (a “Common Share”), and one half of one common share purchase warrant (a “Warrant”), with each full Warrant entitling the holder to acquire one common share at a price of $0.23 until August 24, 2012.
In January, 2011 the Corporation closed the public offering of Units by Wellington West Capital Markets Inc (the “Agent”) for a total of 50 million Units at a price of $0.35 per unit for gross proceeds of $17.5 million. Each Unit consisted of one common share and one half of one warrant, with each whole warrant entitling the holder to purchase a further common share at a price of $0.45 per common share at any time until July 21, 2012. The Corporation paid the Agent a cash commission equal to 6% of the gross proceeds of the Offering, and issued to the Agent warrants to purchase 2,963,700 common shares at a price of $0.38 per common share, exercisable until July 21, 2012.
In February, 2011 the Corporation posted an approximately $1.6 million cash reclamation bond with BLM for Copperstone. The bond was posted to guarantee that Bonanza is positioned to complete all required reclamation at the end of the mine life at Copperstone based on the current mine plan of operations.
The recoverability of amounts capitalized is dependent upon the discovery of economically recoverable reserves, securing and maintaining title on the properties and obtaining the necessary financing to complete the exploration and development of these projects and upon the attainment of future profitable production. Based on funding requirements as indicated by the Feasibility Study of $17 million and a current working capital in excess of $20 million, the Corporation has sufficient funding to meet its operating and capital expenditure requirements through to production without raising additional capital.
The Corporation raised the following funds during the period from January 1, 2010 to March 31, 2011 as summarized below:
| | | CDN$ (Million) | |
| Cash | | | | | | |
| Cash available January 1, 2010: | | | | | 0.9 | |
| Financing: net of share issue costs | | | | | 17.4 | |
| Total Funds raised and available: | | | | | 18.3 | |
| Feasibility and Mine Development: | | | | | | |
| Mineral property | | (0.5 | ) | | | |
| Exploration | | (0.7 | ) | | | |
| Engineering | | (0.9 | ) | | | |
| Permit/Environment | | (0.3 | ) | | | |
| Plant, equipment | | (2.6 | ) | | | |
| Environmental Bond | | (1.6 | ) | | | |
| Change in working capital | | 0.9 | | | (5.7 | ) |
| Fund Remained from Financing: | | | | | 12.6 | |
| | | | | | | |
| Source of fund from property disposal | | | | | 4.5 | |
| General Corporate expenses: | | | | | (1.8 | ) |
| Funds available, March 31, 2011 | | | | | 15.3 | |
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Funds available as of March 31, 2011 will be utilized to complete the construction of the Copperstone Mine by late 2011. We have adequate funding to achieve our current business objectives and milestones.
Related Party Transactions
The Corporation’s related parties consist of companies which have certain directors in common as follows:
| Related Party | Nature of Transactions |
| Nevada Copper Corp. | General administration and management fees |
| Mesa Exploration Corp. | General and administration |
The Corporation recovered under cost-sharing arrangements the following expenditures from companies which have certain directors in common:
| Three months ended March 31, | | 2011 | | | 2010 | |
| | | $ | | | $ | |
| | | | | | | |
| Management and consulting fees | | 39,450 | | | 27,375 | |
| General and administration expenses | | 16,050 | | | 18,125 | |
| | | | | | | |
| | | 55,500 | | | 45,500 | |
Off-Balance Sheet Arrangements
The Corporation has no off-balance sheet arrangement.
Disclosure Controls and Internal Controls over Financial Reporting
The Chief Executive Officer (the “CEO”), and the Chief Financial Officer (the “CFO”) of the Corporation are responsible for establishing and maintaining the Corporation’s disclosure controls and procedures including adherence to the Disclosure Policy adopted by the Corporation. The Disclosure Policy requires all staff to keep senior management fully apprised of all material information affecting the Corporation so that they may evaluate and discuss this information and determine the appropriateness and timing for public release.
The CEO and the CFO are also responsible for the design of internal controls over financial reporting (“ICFR”). The fundamental issue is ensuring all transactions are properly authorized and identified and entered into a well designed, robust and clearly understood accounting system on a timely basis to minimize risk of inaccuracy, failure to fairly reflect transactions, failure to fairly record transactions necessary to present financial statements in accordance with IFRS, unauthorized receipts and expenditures, or the inability to provide assurance that unauthorized acquisitions or dispositions of assets can be detected.
The CEO and CFO have evaluated there was no change to the ICFR during the quarter ended March 31, 2011.
Critical Accounting Estimates
Critical accounting estimates used in the preparation of the financial statements include estimates used in the Corporation’s evaluation of recoverability of the carrying value of these mineral properties. The business of mineral exploration and extraction involves a high degree of risk since very few properties that are explored and developed ultimately achieve commercial production. At present, none of the Corporation’s properties have a known body of commercial ore reserve except the Copperstone property which was determined by a 43-101 compliant feasibility study issued in February, 2010 (updated January 2011).
The Corporation’s impairment determination and resulting estimated net recoverable value on its mineral projects represents management's best estimate of the value that will be recovered based on a net present value approach.
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Key assumptions in the estimate include future gold prices, recoverable ounces of gold and the discount rate applied, as well as the availability of necessary financing. Actual outcomes could differ materially from this estimate.
The Corporation is in an industry that is exposed to a number of risks and uncertainties, including exploration, development, commodity, operating, ownership, political, funding, currency and environmental risk. While factoring these risks the Corporation has relied on very preliminary resource estimates on its properties, however, these estimates include assumptions that are potentially subject to significant changes that are not yet determinable. Accordingly, there is always the potential for a material change to the presentation in the financial statements relating to the carrying value of the Corporation’s mineral properties.
Other significant areas requiring the use of management estimates and assumptions relate to the valuation of amounts receivable, future income tax assets and liabilities and assumptions used in valuing options and warrants in stock-based compensation calculations. Actual results could differ from those estimates.
Risk Factors
General
Precious metals exploration is a speculative business, characterized by a number of significant risks including, among other things, unprofitable efforts resulting not only from the failure to discover mineral deposits but from finding mineral deposits which, though present, are insufficient in quantity and quality to return a profit from production. The marketability of minerals acquired or discovered by the Corporation may be affected by numerous factors which are beyond the control of the Corporation and which cannot be accurately predicted, such as market fluctuations, the proximity and capacity of mining facilities, mineral markets and processing equipment, and such other factors as government regulations, including regulations relating to royalties, allowable production, importing and exporting of minerals, and environmental protection, any of which could result in the Corporation not receiving an adequate return on invested capital.
Uncertainties and risks relating to the start-up of operations at the Copperstone Mine
There are inherent construction and permitting-related risks to the development of all new mining projects. These risks include:
availability and delivery of critical equipment;
hiring of key personnel for construction and commissioning;
delays associated with contractors;
budget overruns due to changes in the cost of fuel, power, materials, supplies and currency fluctuations; and
potential opposition from non-governmental organizations, First Nations, environmental groups or local groups.
While the Corporation has undertaken systematic work programs at the Copperstone Mine to mitigate these risks, it is common in new mining operations to experience such unexpected costs, problems and delays during construction, development and mine start-up, often due to circumstances beyond the Corporation’s control. In addition, delays in the commencement of mineral production often occur. Accordingly, the Corporation cannot provide assurance that its activities will result in profitable mining operations at the Copperstone Mine. The Corporation will be required to rely upon outside consultants, engineers and others for construction expertise in respect of building the Copperstone Mine. The Corporation will also rely on an outside contractor for mining services, and will be dependent on such contractor’s expertise. While the Corporation has taken or will take steps to ensure such consultants have industry experience, there is no guarantee that such consultants and contractors will prove to have the required skills. The Corporation’s operations, earnings and ultimate financial success could be materially adversely affected.
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Mineral Prices
The mining industry in general is intensely competitive and there is no assurance that, even if commercial quantities of mineral resources are discovered, a profitable market will exist for the sale of same. Factors beyond the control of the Corporation may affect the marketability of any mineral occurrences discovered. The price of gold has experienced volatile and significant price movements over short periods of time, and is affected by numerous factors beyond the control of the Corporation, including international economic and political trends, expectations of inflation, currency exchange fluctuations (specifically, the United States dollar relative to the Canadian dollar and other currencies), interest rates and global or regional consumption patterns (such as the development of gold coin programs), speculative activities and increased production due to improved mining and production methods.
Currency Exposure
Currency fluctuations may affect the costs the Corporation incurs at its operations and may affect the Corporation’s operating results and cash flows. The principal source of funds for the Corporation has traditionally been through the sale of its common shares, which are sold in Canadian dollars, while a significant portion of the Corporation’s expenditures are incurred in United States dollars. Additionally, gold is sold throughout the world principally based upon the United States dollar price. Fluctuations in the exchange rate of the Canadian dollar to the United States dollar could have a material effect on the Corporation’s results of operations, may impact the development of its mineral projects, and the availability of fund for further mineral exploration.
Operating History
The Corporation and its predecessor companies have no history of earnings. The Corporation has paid no dividends on its shares since incorporation and does not anticipate doing so in the foreseeable future. The only present source of funds available to the Corporation is through the sale of its equity shares or by way of debt facilities. While the Corporation may generate additional working capital through the operation, development, sale or possible syndication of its properties, there is no assurance that any such funds will be generated.
Environmental Regulation
All phases of the Corporation’s operations are subject to environmental regulation in the various jurisdictions in which it operates. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Corporation’s operations, or its ability to develop its properties economically. Before production may commence on any property, the Corporation must obtain regulatory and environmental approvals and permits. There is no assurance such approvals and permits will be obtained on a timely basis, if at all. Compliance with environmental and other regulations may reduce profitability, or preclude economic development of a property entirely.
Competition
The resource industry is intensely competitive in all of its phases, and the Corporation competes with many companies possessing greater financial resources and technical facilities than it. Competition could adversely affect the Corporation’s ability to acquire suitable producing properties or prospects for exploration in the future.
Joint Venture Interests
The Corporation may enter into joint ventures with one or more mining companies in respect of its other mineral properties. The Corporation may require additional funding to meet obligations under any joint venture agreement, and there is no guarantee such funding will be available. The inability of the Corporation to meet its funding commitments under any joint venture agreement could result in the dilution of the Corporations interest in the property subject to the joint venture agreement. In addition, should any of the Corporation’s joint venture partners determine not to fund their commitments under such joint venture agreement, the development of that project may be materially delayed or stopped, and the operations or financial results of the Corporation materially affected.
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Title Matters
In those jurisdictions where the Corporation has property interests, the Corporation makes a search of mining records in accordance with mining industry practices to confirm satisfactory title to properties in which it holds or intends to acquire an interest, but does not obtain title insurance with respect to such properties. The possibility exists that title to one or more of its properties, particularly title to undeveloped properties, might be defective because of errors or omissions in the chain of title, including defects in conveyances and defects in locating or maintaining such claims, or concessions. The ownership and validity of mining claims and concessions are often uncertain and may be contested. In particular, in Canada mineral title is increasingly subject to challenges and claims of aboriginal title to land subject to mining claims. The Corporation is not aware of any challenges to the location or area of its mineral claims. There is, however, no guarantee that title to the Corporation’s properties and concessions will not be challenged or impugned in the future. The properties may be subject to prior unregistered agreements or transfers, and title may be affected by undetected defects.
Dependence on Key Personnel
The success of the Corporation and its ability to continue to carry on operations is dependent upon its ability to retain the services of certain key personnel. The loss of their services to the Corporation may have a material adverse effect on the Corporation. The Corporation does not presently have “key person” life insurance for any of its officers.
Conflicts of Interest
Certain of the directors of the Corporation are directors of other mineral resource companies and, to the extent that such other companies may be interested in a project also of interest to the Corporation, or may in the future participate in one or more ventures in which the Corporation participates, such directors may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. In the event that such a conflict of interest arises, at a meeting of the directors of the Corporation, a director who has such a conflict will abstain from voting for or against the approval of such acquisition or participation. In the appropriate cases, the Corporation will establish a special committee of independent directors to review a matter in which several directors, or management, may have a conflict. From time to time several companies may participate in the acquisition, exploration and development of natural resource properties thereby allowing for their participating in larger programs, permitting involvement in a greater number of programs and reducing financial exposure in respect of any one program.
Legal Proceedings Against Foreign Directors
The Corporation is incorporated under the laws of British Columbia, Canada, and some of the Corporation’s directors and officers are residents of Canada. Consequently, it may be difficult for United States investors to effect service of process within the United States upon the Corporation or upon its directors or officers, or to realize in the United States upon judgments of United States courts predicated upon civil liabilities under the United States Securities Exchange Act of 1934, as amended. Furthermore, it may be difficult for investors to enforce judgments of U.S. courts based on civil liability provisions of the U.S. federal securities laws in a foreign court against the Corporation or any of the Corporation’s non-U.S. resident officers or directors.
Additional Funding Requirements
The business of mineral exploration and extraction involves a high degree of risk with very few properties that are explored ultimately achieving commercial production. At present, none the Corporation’s properties have a known body of commercial ore. As a mining company in the exploration stage, the future ability of the Corporation to conduct exploration and development will be affected principally by its ability to raise adequate amounts of capital through equity financings, debt financings, joint venturing of projects and other means. In turn, the Corporation’s ability to raise such funding depends in part upon the market’s perception of its management and properties, but to a great degree upon the price of gold and the marketability of securities of speculative exploration and development mining companies.
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The development of any ore deposits found on the Corporation’s exploration properties depends upon the Corporation’s ability to obtain financing through any or all of equity financing, debt financing, the joint venturing of projects, or other means. There is no assurance that the Corporation will be successful in obtaining the required financing.
Audit Committee Information
The following is a supplement to audit committee information contained in the Corporation’s Form 20-F under the heading Item 16 – Audit Committee, which is filed onwww.sedar.com. The Corporation’s audit committee is governed by a written charter that sets out its mandate and responsibilities. A copy of the audit committee charter is set out in the Corporation’s Information Circular prepared for the Corporation’s June 8, 2007 annual general meeting and filed on SEDAR on May 14, 2007.
Composition of the Audit Committee
The independent members of the audit committee are Robert McKnight, Ronald Netolitzky and James Bagwell. All members are considered to be financially literate and independent.
Reliance on Certain Exemptions
At no time since the commencement of the Corporation's most recently completed financial year has the Corporation relied on the exemptions in section 2.4 (De Minimis Non-audit Services), section 3.2 (Initial Public Offerings), section 3.4 (Events Outside Control of Member), section 3.5 (Death, Disability or Resignation of Audit Committee Member) or Part 8 (Exemptions) of NI 52-110.
Reliance on the Exemption in Subsection 3.3(2) or Section 3.6
At no time since the commencement of the Corporation's most recently completed financial year has the Corporation relied on the exemption in subsection 3.3(2) (Controlled Companies) or section 3.6 (Temporary Exemption for Limited and Exceptional Circumstances) of NI 52-110.
Reliance on Section 3.8
At no time since the commencement of the Corporation's most recently completed financial year has the Corporation relied on section 3.8 (Acquisition of Financial Literacy) of NI 52-110.
Audit Committee Oversight
The audit committee has not made any recommendations to the board of directors to nominate or compensate any external auditor.
Pre-Approval Policies and Procedures
It is within the mandate of the Corporation’s Audit Committee to approve all audit and non-audit related fees. The Audit Committee has pre-approved specifically identified non-audit related services, including tax compliance and review of tax returns as submitted to the Audit Committee from time to time. The auditors also present the estimate for the annual audit related services to the Audit Committee for approval prior to undertaking the annual audit of the financial statements.
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International Financial Reporting Standards (IFRS)
Effective January 1, 2011 Canadian publicly listed entities were required to prepare their financial statements in accordance with IFRS. Due to the requirement to present comparative financial information, the effective transition date is January 1, 2010. The three months ended March 31, 2011 is our first reporting period under IFRS.
Our IFRS conversion team identified four phases to our conversion: scoping and planning, detailed assessment, implementation and post-implementation. We have now completed our IFRS conversion project through implementation. Post-implementation will continue in future periods, as outlined below.
The following outlines our transition project, IFRS transitional impacts and the on-going impact of IFRS on our financial results.
Notes to the consolidated interim financial statements provides more detail on our key Canadian GAAP to IFRS differences, our accounting policy decisions and IFRS 1, First-Time Adoption of International Financial Reporting Standards, optional exemptions for significant or potentially significant areas that have had an impact on our financial statements on transition to IFRS or may have an impact in future periods.
Transitional Financial Impact
As a result of the policy choices we have selected and the changes we were required to make under IFRS, we have recorded a reduction in our equity of approximately $2.6 million as at January 1, 2010. The tables below outline adjustments to our balance sheet on adoption of IFRS on January 1, 2010, and at March 31, 2010 and December 31, 2010 for comparative purposes.
The January 1, 2010 Canadian GAAP equity balances have been reconciled to IFRS as follows:
| | | Canadian GAAP | | | Adjustments | | | IFRS | |
| | | Jan 1 2010 | | | | | | Jan 1 2010 | |
| | | $ | | | $ | | | $ | |
| SHAREHOLDERS' EQUITY | | | | | | | | | |
| | | | | | | | | | |
| Share capital | | 59,977,063 | | | 673,556 | | | 60,650,619 | |
| Other equity reserve | | 6,396,978 | | | - | | | 6,396,978 | |
| Accumulated Other Comprehensive | | | | | | | | | |
| Loss | | (242,322 | ) | | (43,031 | ) | | (285,353 | ) |
| | | | | | | | | | |
| Deficit | | (21,520,933 | ) | | (3,729,082 | ) | | (25,250,015 | ) |
| | | | | | | | | | |
| | | 44,610,786 | | | (3,098,557 | ) | | 41,512,229 | |
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The March 31, 2010 Canadian GAAP equity balances have been reconciled to IFRS as follows:
| | | Canadian GAAP | | | Adjustments | | | IFRS | |
| | | Mar 31 2010 | | | | | | Mar 31 2010 | |
| | | $ | | | $ | | | $ | |
| SHAREHOLDERS' EQUITY | | | | | | | | | |
| | | | | | | | | | |
| Share capital | | 59,913,213 | | | 737,406 | | | 60,650,619 | |
| Other equity reserve | | 6,396,978 | | | - | | | 6,396,978 | |
| Accumulated Other Comprehensive | | | | | | | | | |
| Loss | | (727,215 | ) | | (579,414 | ) | | (1,306,629 | ) |
| Deficit | | (21,945,316 | ) | | (3,792,932 | ) | | (25,738,248 | ) |
| | | | | | | | | | |
| | | 43,637,660 | | | (3,634,940 | ) | | 40,002,720 | |
The December 31, 2010 Canadian GAAP equity balances have been reconciled to IFRS as follows:
| | | Canadian GAAP | | | Adjustments | | | IFRS | |
| | | Dec 31 2010 | | | | | | Dec 31 2010 | |
| | | $ | | | $ | | | $ | |
| SHAREHOLDERS' EQUITY | | | | | | | | | |
| | | | | | | | | | |
| Share capital | | 61,711,669 | | | 737,406 | | | 62,449,075 | |
| Other equity reserve | | 6,319,728 | | | - | | | 6,319,728 | |
| Accumulated Other Comprehensive | | | | | | | | | |
| Loss | | 583,571 | | | (1,063,084 | ) | | (479,513 | ) |
| | | | | | | | | | |
| Deficit | | (28,111,019 | ) | | (3,303,024 | ) | | (31,414,043 | ) |
| | | | | | | | | | |
| | | 40,503,949 | | | (3,628,702 | ) | | 36,875,247 | |
Comprehensive Income Impact
As a result of the policy choices we have selected and the changes we were required to make under IFRS, we have recorded a reduction in our comprehensive income of approximately $536,383 and $1,037,052 for the three months ended March, 31, 2010 and the year ended December 31, 2010, respectively.
Cash Flow Impact
None of the IFRS transition adjustments noted above had an impact on our cash balances during 2010.
Control Activities
For all changes to policies and procedures that have been identified, the effectiveness of internal controls over financial reporting and disclosure controls and procedures has been assessed and any changes have been implemented. In addition, controls over the IFRS changeover process have been implemented, as necessary. We have identified and implemented the required accounting process changes that resulted from the application of IFRS accounting policies and these changes were not significant. We applied our existing control framework to the IFRS changeover process. All accounting policy changes and transitional financial position impacts were subject to review by senior management and the Audit Committee of the Board of Directors.
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Information Technology and Systems
The IFRS transition project did not have a significant impact on our information systems for the convergence periods. We also do not expect significant changes in the post-convergence periods.
Post-Implementation
The post-implementation phase will involve continuous monitoring of changes in IFRS in future periods. We will ensure that potential changes are monitored and evaluated. The impact of any new IFRSs and IFRIC Interpretations will be evaluated as they are drafted and published.
Financial Instruments and Other Instruments
The Corporation’s financial instruments consist of cash and cash equivalents, marketable securities, amounts receivable and accounts payable. It is management’s opinion that we are not exposed to significant interest, currency or credit risks arising from our cash and cash equivalents, accounts receivable and accounts payable.
The Corporation is exposed to currency risk on the acquisition and exploration expenditures on its properties since it has to settle expenditures either in local currency or U.S. dollars. The Corporation’s expenditures are negatively impacted by increases in value of either the U.S. dollar or local currencies versus the Canadian dollar.
Use of Financial and Other Instruments
The Corporation has not entered into any specialized financial agreements to minimize its investment, currency or commodity risk. There are no off-balance sheet arrangements. The principal financial instruments affecting the Corporation’s financial condition and results of operations is currently its cash and cash equivalents.
Outlook
The Corporation’s current objective is to re-activate the Copperstone project towards gold production. Mining will commence at Copperstone upon the commissioning of the plant equipment.
In management’s opinion the Corporation’s current working capital position will be sufficient for purposes of completing its planned development at Copperstone. The Corporation plans to begin production at its Copperstone property during 2011.
Share Data
Capital Structure as of June 13, 2011:
Common shares issued and outstanding: 180,220,772
Total stock options outstanding: 17,655,000
| Number of | | | | |
| Options | | Exercise Price | | Expiry Date |
| 1,900,000 | | $ 0.220 | | November 6, 2012 |
| 1,910,000 | | $ 0.070 | | August 6, 2013 |
| 2,530,000 | | $ 0.060 | | January 26, 2014 |
| 3,720,000 | | $ 0.085 | | March 18, 2014 |
| 500,000 | | $ 0.090 | | July 28, 2014 |
| 100,000 | | $ 0.190 | | March 25, 2015 |
| 100,000 | | $ 0.385 | | May 4, 2016 |
| 6,895,000 | | $ 0.390 | | March 2, 2016 |
| | | | | |
| 17,655,000 | | | | |
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Total share purchase warrants outstanding: 31,946,641
| Number of | | | | |
| Warrants | | Exercise Price | | Expiry Date |
| 1,666,858 | | $0.23 | | August 11, 2012 |
| 2,316,083 | | $0.23 | | August 24, 2012 |
| 25,000,000 | | $0.45 | | July 21, 2012 |
| 2,963,700 | | $0.38 | | July 21, 2012 |
| | | | | |
| 31,946,641 | | | | |
Subsequent Events
Subsequent to March 31, 2011, 11,500 share purchase warrant were exercised at $0.23 and an additional 100,000 stock options were granted to an employee with exercise price of $0.385 expiring May 5, 2016.
In April, 2011the Corporation and Golden Band Resources Inc. announced that they have signed an agreement with Barrick Gold Inc. to acquire their interest in the Iskut Joint Venture. In June, 2011 the Corporation and its joint venture partner Golden Band Resources Inc. announced the sale of their Iskut JV Property to Skyline Gold Corporation.
The terms of the Skyline agreement with the Corporation (47.5%) and Golden Band (52.5%) are for 5,000,000 shares of Skyline. Additional consideration is a half warrant exercisable as 2,500,000 full warrants at a price of $0.50 per Skyline share for a period of five years. All transactions are subject to approval by the TSX Venture Exchange.
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