SEABRIDGE GOLD INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 2012
Management’s Responsibility for Financial Statements
The accompanying consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Financial statements include certain amounts based on estimates and judgments. When an alternative method exists under IFRS, management has chosen that which it deems most appropriate in the circumstances in order to ensure that the consolidated financial statements are presented fairly, in all material respects, in accordance with IFRS.
The Company maintains adequate systems of internal accounting and administrative controls. Such systems are designed to provide reasonable assurance that transactions are properly authorized and recorded, the Company’s assets are appropriately accounted for and adequately safeguarded and that the financial information is relevant and reliable.
The Board of Directors of the Company is responsible for ensuring that management fulfills its responsibilities for financial reporting, and is ultimately responsible for reviewing and approving the consolidated financial statements and the accompanying management’s discussion and analysis. The Board of Directors carries out this responsibility principally through its Audit Committee.
The Audit Committee is appointed by the Board of Directors and all of its members are non-management directors. The Audit Committee meets periodically with management and the external auditors to discuss internal controls, auditing matters and financial reporting issues, and to satisfy itself that each party is properly discharging its responsibilities. The Audit Committee also reviews the consolidated financial statements, management’s discussion and analysis, the external auditors’ report, examines the fees and expenses for audit services, and considers the engagement or reappointment of the external auditors. The Audit Committee reports its findings to the Board of Directors for its consideration when approving the consolidated financial statements for issuance to the shareholders. KPMG LLP, the external auditors, have full and free access to the Audit Committee.
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Rudi P. Fronk Chairman & CEO March 22, 2013 | Christopher J. Reynolds Vice President, Finance and Chief Financial Officer March 22, 2013 |
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| | KPMG LLP Chartered Accountants Bay Adelaide Centre 333 Bay Street Suite 4600 Toronto ON M5H 2S5 | Telephone Fax | (416) 777-8500 (416) 777-8818 www.kpmg.ca |
INDEPENDENT AUDITORS’ REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Seabridge Gold Inc.
We have audited the accompanying consolidated financial statements of Seabridge Gold Inc., which comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011, the consolidated statements of operations and comprehensive (loss) income, changes in shareholders’ equity and cash flows for the years ended December 31, 2012 and December 31, 2011, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Seabridge Gold Inc. as at December 31, 2012 and December 31, 2011, and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2012 and December 31, 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Other Matter
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Seabridge Gold Inc.’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 22, 2013 expressed an unqualified (unmodified) opinion on the effectiveness of Seabridge Gold Inc.’s internal control over financial reporting.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
March 22, 2013
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| | KPMG LLP Chartered Accountants Bay Adelaide Centre 333 Bay Street Suite 4600 Toronto ON M5H 2S5 | Telephone Fax | (416) 777-8500 (416) 777-8818 www.kpmg.ca |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors of Seabridge Gold Inc.
We have audited Seabridge Gold Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Seabridge Gold Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting under the heading Internal Control over Financial Reporting included in Management’s Discussion and Analysis for the year ended December 31, 2012. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Seabridge Gold Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Seabridge Gold Inc. as of December 31, 2012 and December 31, 2011, and the related statements of operations and comprehensive (loss) income, changes in shareholders’ equity and cash flows for each of the years ended December 31, 2012 and December 31, 2011, and our report dated March 22, 2013 expressed an unqualified (unmodified) opinion on those consolidated financial statements.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
March 22, 2013
| SEABRIDGE GOLD INC. | |
| Consolidated Statements of Financial Position |
| (Expressed in thousands of Canadian dollars) |
| | | Note | | | December 31, 2012 | | | December 31, 2011 | |
| Assets | | | | | | | | | |
| Current assets | | | | | | | | | |
| Cash and cash equivalents | | | 4 | | | | 2,284 | | | | 7,063 | |
| Short-term deposits | | | 4 | | | | 41,099 | | | | 47,241 | |
| Amounts receivable and prepaid expenses | | | | | | | 1,911 | | | | 1,232 | |
| Marketable securities | | | 5 | | | | 8,658 | | | | 4,372 | |
| | | | | | | | 53,952 | | | | 59,908 | |
| Non-current assets | | | | | | | | | | | | |
| Mineral interests | | | 6 | | | | 208,091 | | | | 167,211 | |
| Reclamation deposits | | | 7 | | | | 1,553 | | | | 1,588 | |
| Property and equipment | | | | | | | 7 | | | | 12 | |
| Total non-current assets | | | | | | | 209,651 | | | | 168,811 | |
| Total assets | | | | | | | 263,603 | | | | 228,719 | |
| | | | | | | | | | | | | |
| Liabilities and shareholders’ equity | | | | | | | | | | | | |
| Current liabilities | | | | | | | | | | | | |
| Accounts payable and accrued liabilities | | | 8 | | | | 4,210 | | | | 2,934 | |
| Taxes payable | | | | | | | 97 | | | | 78 | |
| Flow-through share premium | | | 10 | | | | 6,256 | | | | 5,260 | |
| | | | | | | | 10,563 | | | | 8,272 | |
| Non-current liabilities | | | | | | | | | | | | |
| Deferred income tax liabilities | | | 14 | | | | 2,451 | | | | 1,122 | |
| Provision for reclamation liabilities | | | 9 | | | | 2,059 | | | | 1,963 | |
| Total non-current liabilities | | | | | | | 4,510 | | | | 3,085 | |
| Total liabilities | | | | | | | 15,073 | | | | 11,357 | |
| | | | | | | | | | | | | |
| Shareholders’ equity | | | 10 | | | | 248,530 | | | | 217,362 | |
| Total liabilities and shareholders’ equity | | | | | | | 263,603 | | | | 228,719 | |
Subsequent events (Notes 6 and 10)
Contingencies and Commitments (Notes 6 and 15)
The accompanying notes form an integral part of these consolidated financial statements.
These financial statements were approved by the Board of Directors and authorized for issue on March 22, 2013 and were signed on its behalf:
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Rudi P. Fronk Director | James S. Anthony Director |
| SEABRIDGE GOLD INC. |
| Consolidated Statements of Operations and Comprehensive (Loss) Income |
| (Expressed in thousands of Canadian dollars except common share and per common share amounts) |
| | | Note | | | 2012 | | | 2011 | |
| Corporate and administrative expenses | | | 11 | | | | (15,832 | ) | | | (19,840 | ) |
| Impairment of marketable securities | | | 5 | | | | (1,216 | ) | | | - | |
| Gain on disposition of mineral property | | | 6 | | | | 1,076 | | | | - | |
| Gain on sale of marketable securities | | | | | | | - | | | | 154 | |
| Loss on convertible debenture | | | | | | | - | | | | (758 | ) |
| Interest income | | | | | | | 412 | | | | 653 | |
| Finance expense | | | | | | | (41 | ) | | | (25 | ) |
| Other income - flow-through shares | | | 10 | | | | 5,739 | | | | 195 | |
| Foreign exchange (loss) gain | | | | | | | (23 | ) | | | 21 | |
| Loss before income taxes | | | | | | | (9,885 | ) | | | (19,600 | ) |
| Current income tax expenses | | | 14 | | | | (46 | ) | | | - | |
| Deferred Income tax expenses | | | 14 | | | | (2,578 | ) | | | (498 | ) |
| Loss for the year | | | | | | | (12,509 | ) | | | (20,098 | ) |
| | | | | | | | | | | | | |
| Other comprehensive loss, net of income taxes: | | | | | | | | | | | | |
| Unrecognized gain (loss) on financial assets | | | | | | | 260 | | | | (937 | ) |
| Comprehensive loss for the year | | | | | | | (12,249 | ) | | | (21,035 | ) |
| | | | | | | | | | | | | |
| Basic and diluted net loss per Common Share | | | | | | | (0.29 | ) | | | (0.48 | ) |
| Basic weighted-average number of common shares outstanding | | | | | | | 43,620,685 | | | | 41,950,424 | |
The accompanying notes form an integral part of these consolidated financial statements.
| SEABRIDGE GOLD INC. |
| Consolidated Statements of Changes in Shareholders’ Equity |
| (Expressed in thousands of Canadian dollars) |
| | | Share Capital | | | Stock Options | | | Contributed Surplus | | | Deficit | | | Accumulated Other Comprehensive Income | | | Total Equity | |
| As at January 1, 2012 | | | 239,662 | | | | 18,291 | | | | 327 | | | | (40,828 | ) | | | (90 | ) | | | 217,362 | |
| Shares - exercise of options | | | 411 | | | | (148 | ) | | | - | | | | - | | | | - | | | | 263 | |
| Stock-based compensation | | | - | | | | 10,691 | | | | - | | | | - | | | | - | | | | 10,691 | |
| Cancelled options | | | - | | | | (3,033 | ) | | | 3,033 | | | | - | | | | - | | | | - | |
| Expired options | | | - | | | | (2,450 | ) | | | 2,450 | | | | - | | | | - | | | | - | |
| Issuance of shares | | | 32,883 | | | | - | | | | - | | | | - | | | | - | | | | 32,883 | |
| Share issuance costs | | | (1,668 | ) | | | - | | | | - | | | | - | | | | - | | | | (1,668 | ) |
| Deferred tax | | | 1,248 | | | | - | | | | - | | | | - | | | | - | | | | 1,248 | |
| Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | 260 | | | | 260 | |
| Net loss | | | - | | | | - | | | | - | | | | (12,509 | ) | | | - | | | | (12,509 | ) |
| As at December 31, 2012 | | | 272,536 | | | | 23,351 | | | | 5,810 | | | | (53,337 | ) | | | 170 | | | | 248,530 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As at January 1, 2011 | | | 188,385 | | | | 5,028 | | | | 283 | | | | (20,730 | ) | | | 847 | | | | 173,813 | |
| Shares - exercise of options | | | 5,429 | | | | (1,610 | ) | | | - | | | | - | | | | - | | | | 3,819 | |
| Expired options | | | - | | | | (44 | ) | | | 44 | | | | - | | | | - | | | | - | |
| Private placement | | | 45,848 | | | | - | | | | - | | | | - | | | | - | | | | 45,848 | |
| Stock-based compensation | | | - | | | | 14,917 | | | | - | | | | - | | | | - | | | | 14,917 | |
| Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (937 | ) | | | (937 | ) |
| Net loss | | | - | | | | - | | | | - | | | | (20,098 | ) | | | - | | | | (20,098 | ) |
| As at December 31, 2011 | | | 239,662 | | | | 18,291 | | | | 327 | | | | (40,828 | ) | | | (90 | ) | | | 217,362 | |
The accompanying notes form an integral part of these consolidated financial statements.
| SEABRIDGE GOLD INC. |
| Consolidated Statements of Cash Flows |
| (Expressed in thousands of Canadian dollars) |
| | | 2012 | | | 2011 | |
| Operating Activities | | | | | | |
| Net loss | | | (12,509 | ) | | | (20,098 | ) |
| Items not affecting cash: | | | | | | | | |
| Impairment of marketable securities | | | 1,216 | | | | - | |
| Gain on disposition of mineral property | | | (1,076 | ) | | | - | |
| Stock-based compensation | | | 10,691 | | | | 14,917 | |
| Other income - flow-though shares | | | (5,739 | ) | | | (195 | ) |
| Deferred income taxes | | | 2,578 | | | | 498 | |
| Finance expense | | | 28 | | | | 25 | |
| Depreciation | | | 13 | | | | 31 | |
| Gain on sale of marketable securities | | | - | | | | (154 | ) |
| Loss on convertible debenture | | | - | | | | 758 | |
| Accreton of convertible debenture | | | - | | | | (74 | ) |
| Changes in non-cash working capital items | | | | | | | | |
| Amounts receivable and prepaid expenses | | | (679 | ) | | | 1,899 | |
| Accounts payable and accrued liabilities | | | 1,273 | | | | (791 | ) |
| Taxes payable | | | 19 | | | | (44 | ) |
| Net cash used in operating activities | | | (4,185 | ) | | | (3,228 | ) |
| | | | | | | | | |
| Investing Activities | | | | | | | | |
| Mineral interests | | | (48,716 | ) | | | (41,305 | ) |
| Redemption of short-term deposits | | | 6,142 | | | | (17,567 | ) |
| Cash proceeds from property recoveries | | | 1,320 | | | | - | |
| Redemption of reclamation deposit | | | 35 | | | | - | |
| Investing in marketable securities | | | - | | | | (2,750 | ) |
| Long-term guaranteed investment | | | - | | | | 11,000 | |
| Purchase of fixed assets | | | (8 | ) | | | - | |
| Proceeds from disposal of marketable securities | | | - | | | | 830 | |
| Proceeds from disposal of property and equipment | | | - | | | | 3 | |
| Net cash used in investing activities | | | (41,227 | ) | | | (49,789 | ) |
| | | | | | | | | |
| Financing Activities | | | | | | | | |
| Issue of share capital | | | 40,633 | | | | 59,036 | |
| Net increase (decrease) in cash during the year | | | (4,779 | ) | | | 6,019 | |
| | | | | | | | | |
| Cash and cash equivalents, beginning of the year | | | 7,063 | | | | 1,044 | |
| Cash and cash equivalents end of the year | | | 2,284 | | | | 7,063 | |
The accompanying notes form an integral part of these consolidated financial statements.
SEABRIDGE GOLD INC.
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 2012 and December 31, 2011
Seabridge Gold Inc. is comprised of Seabridge Gold Inc. (the “Company”) and its subsidiaries and is a development stage company engaged in the acquisition and exploration of gold properties located in North America. The Company was incorporated under the laws of British Columbia, Canada on September 4, 1979 and continued under the laws of Canada on October 31, 2002. Its common shares are listed on the Toronto Stock Exchange trading under the symbol “SEA” and on the NYSE AMEX Equities exchange under the symbol “SA”. The Company is domiciled in Canada, the address of its registered office is 10th Floor, 595 Howe Street, Vancouver, British Columbia, Canada V6C 2T5 and the address of its corporate office is 106 Front Street East, 4th Floor, Toronto, Ontario, Canada M5A 1E1.
| 2. | Statement of compliance and basis of presentation |
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). These financial statements were authorized for issuance by the Board of Directors of the Company on March 22, 2013.
| 3. | Significant accounting policies |
The significant accounting policies used in the preparation of these consolidated financial statements are described below.
The consolidated financial statements have been prepared on the historical cost basis, except for the revaluation of available for sale financial assets, classified as fair value through profit and loss which are measured at fair value.
| (b) | Basis of consolidation |
Subsidiaries
Subsidiaries are entities over which the Company has the power, directly or indirectly, to govern the financial and operating policies of the entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are presently exercisable or convertible, are taken into account in the assessment of whether control exists. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date on which control ceases.
Business acquisitions are accounted for using the acquisition method whereby acquired assets and liabilities are recorded at fair value as of the date of acquisition with the excess of the purchase consideration over such fair value being recorded as goodwill and allocated to cash generating units. Non-controlling interest in an acquisition may be measured at either fair value or at the non-controlling interest’s proportionate share of the fair value of the acquiree’s net identifiable assets.
If the fair value of the net assets acquired exceeds the purchase consideration, the difference is recognized immediately as a gain in the consolidated statement of operations.
Where a business combination is achieved in stages, previously held equity interests in the acquiree are re-measured at acquisition-date fair value and any resulting gain or loss is recognized in the consolidated statement of operations. Acquisition related costs are expensed during the period in which they are incurred, except for the cost of debt or equity instruments issued in relation to the acquisition which is included in the carrying amount of the related instrument. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will not exceed one year from the acquisition date.
| (c) | Translation of foreign currencies |
These consolidated financial statements are presented in Canadian dollars, which is the Company’s, and each of its subsidiary’s, functional currency.
Foreign currency transactions are translated into Canadian dollars using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of operations.
Monetary assets and liabilities of the Company denominated in a foreign currency are translated into Canadian dollars at the rate of exchange at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average exchange rates prevailing during the period. Exchange gains and losses are included in the determination of profit or loss for the year.
| (d) | Critical accounting judgments and estimation uncertainty |
In applying the Company’s accounting policies in conformity with IFRS, management is required to make judgments, estimates and assumptions about the carrying amounts of certain assets and liabilities. These estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
| (i) | Critical accounting judgments |
The following are the critical judgments, that the Company has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements (refer to appropriate accounting policies for details).
| (a) | Mineral reserves and resources |
To calculate reserves and resources, the Company uses assumptions and evaluates technical, economic and geological conditions for each ore body. Measured grade of the ore and its metallurgy can have a significant effect on the carrying value of mineral properties and therefore the recoverability costs. Future market prices for gold and copper are also factored into valuation models. Changes to these factors can affect the recoverability of mineral properties and impairment thereto.
When there has been a decline in the fair value of an investment in marketable securities that the Company has judged to be other than a temporary decline, the investment is written down to fair value and the loss is recognized in the statement of operations. For mineral properties, should the Company decide to proceed with development in respect of a particular area of interest, the relevant exploration and evaluation asset is tested for impairment at that time.
| (ii) | Key sources of estimation uncertainty |
The recoverability of the carrying value of mineral properties and associated deferred exploration expenses is based on market conditions for minerals, underlying mineral resources associated with the properties and future costs that may be required for ultimate realization through mining operations or by sale. The Company is in an industry that is dependent on a number of factors including environmental, legal and political risks, the existence of economically recoverable reserves, the ability of the Company and its subsidiaries to obtain necessary financing to complete the development, and future profitable production or the proceeds of disposition thereof.
| (b) | Asset retirement obligations |
The provision for asset retirement obligations is the best estimate of the present value of the future costs of reclaiming the environment that has been subject to disturbance through exploration activities or historical mining activities. The Company uses assumptions and evaluates technical conditions for each project that have inherent uncertainties, including changes to laws and practices and to changes in the status of the site from time-to-time. The timing and cost of the rehabilitation is also subject to uncertainty. These changes, if any, are recorded on the statement of financial position as incurred.
The factors affecting stock-based compensation include estimates of when stock options and compensation warrants might be exercised and the stock price volatility. The timing for exercise of options is out of the Company’s control and will depend upon a variety of factors, including the market value of the Company’s shares and financial objectives of the stock-based instrument holders. The Company used historical data to determine volatility in accordance with the Black-Scholes model. However, the future volatility is uncertain and the model has its limitations.
| (d) | Deferred Income taxes |
The Company has net assets in Canada and the United States and files corporate tax returns in each. Deferred tax liabilities are estimated for tax that may become payable in the future. Future payments could be materially different from our estimated deferred tax liabilities. We have deferred tax assets related to non-capital losses and other deductible temporary differences. Deferred tax assets are only recognized to the degree that it shelters tax liabilities or when it is probable that we will have enough taxable income in the future to recover them.
| (e) | Cash and cash equivalents and short-term deposits |
Cash and cash equivalents and short-term deposits consist of balances with banks and investments in money market instruments. These instruments are carried at fair value through profit or loss. Cash and cash equivalents consist of investments with maturities of up to 90 days at the date of purchase. Short-term deposits consist of investments with maturities from 91 days to one year at the date of purchase.
| (f) | Marketable securities |
Investments in marketable securities accounted for as available for sale securities are recorded at fair value. The fair values of the investments are determined based on the closing prices reported on recognized securities exchanges and over-the-counter markets. Such individual market values do not necessarily represent the realizable value of the total holding of any security, which may be more or less than that indicated by market quotations. Increases or decreases in the market value of investments are recorded in other comprehensive income net of related income taxes. When there has been a loss in the value of an investment in marketable securities that is determined to be other than a temporary decline, the investment is written down and the loss is recorded in the statement of operations.
Mineral resource properties are carried at cost. The Company considers exploration and development costs and expenditures to have the characteristics of property, plant and equipment and, as such, the Company capitalizes all exploration costs, which include license acquisition costs, advance royalties, holding costs, field exploration and field supervisory costs and all costs associated with exploration and evaluation activities relating to specific properties as incurred, until those properties are determined to be economically viable for mineral production. General and administrative costs are only included in the measurement of exploration and evaluation costs where they are related directly to activities in a particular area of interest.
Once a project has been established as commercially viable and technically feasible, related development expenditure are capitalized. This includes costs incurred in preparing the site for mining operations. Capitalization ceases when the mine is capable of commercial operations.
The actual recovery value of capitalized expenditures for mineral properties and deferred exploration costs will be contingent upon the discovery of economically viable reserves and the Company’s financial ability at that time to fully exploit these properties or determine a suitable plan of disposition.
When a decision is made to proceed with development in respect of a particular area of interest, the relevant exploration and evaluation asset is tested for impairment, reclassified to development properties, and then amortized over the life of the reserves associated with the area of interest once mining operations have commenced.
| (h) | Property and equipment |
Property and equipment are stated at cost, less accumulated amortization and accumulated impairment losses. The cost of property and equipment comprises its purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the estimated close down and restoration costs associated with the asset. Depreciation is provided using the straight-line method at an annual rate of 20% from the date of acquisition. Residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Changes to the estimated residual values or useful lives are accounted for prospectively.
| (i) | Impairment of non-financial assets |
The carrying value of the Company's mineral interests is assessed for impairment when indicators of such impairment exist. Property and equipment is assessed for impairment at the end of each reporting period. If any indication of impairment exists, an estimate of the asset's recoverable amount is calculated to determine the extent of the impairment loss, if any. The recoverable amount is determined as the higher of the fair value less costs to sell for the asset and the asset's value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
Impairment is determined on an asset by asset basis, whenever possible. If it is not possible to determine impairment on an individual asset basis, then impairment is considered on the basis of a cash generating unit (“CGU”). CGUs represent the lowest level for which there are separately identifiable cash inflows that are largely independent of the cash flows from other assets or other group of assets.
If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged immediately to the statement of comprehensive loss so as to reduce the carrying amount to its recoverable amount. Impairment losses related to continuing operations are recognized in the statement of comprehensive loss.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company makes an estimate of the recoverable amount.
A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of comprehensive loss.
| (j) | Reclamation liabilities |
Provisions for environmental restoration are recognized when: (i) the Company has a present legal or constructive obligation as a result of past exploration, development or production events; (ii) it is probable that an outflow of resources will be required to settle the obligation; (iii) and the amount has been reliably estimated. Provisions do not include any additional obligations which are expected to arise from future disturbance.
Costs are estimated on the basis of a formal report and are subject to regular review.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. When estimates of obligations are revised, the present value of the changes in obligations is recorded in the period by a change in the obligation amount and a corresponding adjustment to the mineral interest asset.
The amortization or ‘unwinding’ of the discount applied in establishing the net present value of provisions due to the passage of time is charged to the statement of operations in each accounting period.
The ultimate cost of environmental remediation is uncertain and cost estimates can vary in response to many factors including changes to the relevant legal requirements, the emergence of new restoration techniques or experience at other mine sites. The expected timing of expenditure can also change, for example in response to changes in ore reserves or production rates. As a result there could be significant adjustments to the provisions for restoration and environmental cleanup, which would affect future financial results.
Funds on deposit with third parties to provide for reclamation costs are included in reclamation deposits on the balance sheet.
Income tax expense comprises current and deferred tax. Current and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination or items recognized directly in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is measured at the rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantially enacted by the reporting date. Deferred tax is not recognized for the following temporary differences; the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill which is not deductible for tax purposes.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
The Company has certain non-monetary assets and liabilities for which the tax reporting currency is different from its functional currency. Any translation gains or losses on the remeasurement of these items at current exchange rates versus historic exchange rates that give rise to a temporary difference is recorded as a deferred tax asset or liability.
| (l) | Stock-based compensation |
The Company applies the fair value method for stock-based compensation and other stock-based payments. The fair value of these options are valued using the Black Scholes option-pricing model and other models for the two-tiered options as may be appropriate. The grant date fair value of stock-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date (Note 10). The Company reviews estimated forfeitures of options on an ongoing basis.
The Company finances a portion of its exploration activities through the issuance of flow-through common shares. The tax deductibility of qualifying expenditures is transferred to the investor purchasing the shares. Consideration for the transferred deductibility of the qualifying expenditures is often paid through a premium price over the market price of the Company’s shares. The Company reports this premium as a liability on the statement of financial position and the balance is reported as share capital. At each reporting period, and as qualifying expenditures have been incurred, the liability is reduced on a proportionate basis and income is recognized in the statement of operations.
| (n) | Net profit (loss) per common share |
Basic profit (loss) per common share is computed based on the weighted average number of common shares outstanding during the year. The Company uses the treasury stock method for calculating diluted earnings per share which assumes that stock options with an exercise price lower than the average quoted market price were exercised at the later of the beginning of the year, or time of issue. Stock options with an exercise price greater than the average quoted market price of the common shares are not included in the calculation of diluted profit per share as the effect is anti-dilutive.
| (o) | Financial assets and liabilities |
Financial assets within the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. When financial assets are recognized initially, they are measured at fair value, plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs. The Company determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year end.
The Company’s financial instruments are comprised of the following:
| Financial assets: | Classification: |
| Cash and cash equivalents | Fair value through profit or loss |
| Short-term deposits | Fair value through profit or loss |
| Amounts receivable | Loans and receivables |
| Marketable securities | Available for sale |
| Convertible debenture – debt component | Loans and receivables |
| Convertible debenture – option component | Fair value through profit or loss |
| Reclamation deposits | Fair value through profit or loss |
| | |
| Financial liabilities: | Classification: |
| Accounts payable and other liabilities | Other financial liabilities |
| (i) | Financial assets at fair value through profit or loss: |
Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss.
| (ii) | Loans and receivables: |
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit or loss or available for sale. After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest method less any allowance for impairment. Amortized cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognized in the consolidated statement of operations when the loans and receivables are derecognized or impaired, as well as through the amortization process.
| (iii) | Available for sale investments |
Financial assets classified as available for sale are measured at fair value, with changes in fair values recognized in other comprehensive income, except when there is objective evidence that the asset is impaired, at which point the cumulative loss that had been previously recognized in other comprehensive income is recognized within the consolidated statement of operations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value.
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves used to value currency and commodity contracts, volatility measurements used to value option contracts and observable credit default swap spreads to adjust for credit risk where appropriate), or inputs that are derived principally from or corroborated by observable market data or other means.
Level 3: Inputs are unobservable (supported by little or no market activity).
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
The Company’s financial assets measured at fair value, as at December 31, 2012 and December 31, 2011, which include cash and cash equivalents, short-term deposits and marketable securities are classified as a Level 1 measurement.
| (v) | Impairment of financial assets: |
Financial assets are assessed for indicators of impairment at each financial reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the instrument have been impacted. Evidence of impairment could include:
| · | significant financial difficulty of the issuer or counterparty; or |
| · | default or delinquency in interest or principal payments; or |
| · | it becoming probable that the borrower will enter bankruptcy or financial re-organization. |
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of amounts receivable, where the carrying amount is reduced through the use of an allowance account. When an amount receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment reversed does not exceed what the amortized cost would have been had the impairment not been recognized. In the case of an impairment loss reversal being recorded for available for sale marketable securities, the reversal is recorded in other comprehensive income.
| (p) | Accounting standards issued but not yet applied |
IFRS 9, Financial Instruments (“IFRS 9”) was issued in November 2009 and contained requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and
measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments, and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. This standard is required to be applied for accounting periods beginning on or after January 1, 2015, with earlier adoption permitted. The Company is currently evaluating the impact of IFRS 9 on the financial statements.
IFRS 10, Consolidated Financial Statements (“IFRS 10”) provides a single model to be applied in the control analysis for all investees, including entities that currently are special purpose entities in the scope of SIC 12. In addition, the consolidation procedures are carried forward substantially unmodified from IAS 27 Consolidated and Separate Financial Statements. The Company will adopt IFRS 10 in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect the impact of IFRS 10 on its financial statements to be significant.
IFRS 11, Joint Arrangements (“IFRS 11”) replaces the guidance in IAS 31 Interests in Joint Ventures and SIC 13 Jointly Controlled Entities – Non-monetary Contributions by Venturers. IFRS 11 requires classification of interests in joint arrangements as either joint operations or joint ventures. For a joint operation, assets, liabilities, revenues and expenses are recognized and for a joint venture, the equity method is applied. In addition, under IFRS 11 joint ventures are stripped of the free choice of equity accounting or proportionate consolidation; these entities must now use the equity method.
Upon application of IFRS 11, entities which had previously accounted for joint ventures using proportionate consolidation shall collapse the proportionately consolidated net asset value, including any allocation of goodwill, into a single investment balance at the beginning of the earliest period presented. The investment’s opening balance is tested for impairment in accordance with IAS 28 Investments in Associates and IAS 36 Impairment of Assets. Any impairment losses are recognized as an adjustment to opening retained earnings at the beginning of the earliest period presented. The Company intends to adopt IFRS 11 in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect the impact of IFRS 11 on its financial statements to be significant.
IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”) was issued by the IASB in May 2011. IFRS 12 requires enhanced disclosure of information about involvement with consolidated and unconsolidated entities, including structured entities commonly referred to as special purpose vehicles or variable interest entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013. The Company does not expect the impact of this standard on its financial statements to be significant.
IFRS 13, Fair Value Measurement was issued by the IASB on May 12, 2011. The new standard provides a single source of guidance of how to measure fair value and the related fair value disclosures. The new standard creates a single source of guidance for fair value measurements, where fair value is required or permitted under IFRS, by not changing how fair value is used but how it is measured. The focus will be on an exit price. IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company does not expect the impact of IFRS 13 on its financial statements to be significant.
IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine was issued by the IASB on October 20, 2011. The new standard addresses accounting issues regarding waste removal costs incurred in surface mining activities during the production phase of a mine. The new interpretation addresses the classification and measurement of production stripping costs as either inventory or as a tangible or intangible non-current stripping activity asset. The standard also provides guidance for the amortization and impairment of such assets. The standard is effective for annual periods beginning on or after January 1, 2013, although earlier application is permitted. Given the development stage of the Company’s projects, the impact of IFRIC 20 on its consolidated financial statements will not be significant.
| 4. | Cash and cash equivalents and short-term deposits |
| ($000’s) | | December 31, 2012 | | | December 31, 2011 | |
| Cash and cash equivalents | | | 2,284 | | | | 7,063 | |
| Short-term deposits | | | 41,099 | | | | 47,241 | |
| | | | 43,383 | | | | 54,304 | |
Short-term deposits consist of Canadian Schedule I bank guaranteed notes with terms from 91 days up to one year but are cashable in whole or in part with interest at any time to maturity. All of the cash is held in a Canadian Schedule I bank.
The Company holds common shares of several mining companies that were received as consideration for optioned mineral properties, among other investments. These available for sale financial assets are recorded at fair value on the statements of financial position. In 2012, the Company determined that several of the investments were impaired and a $1.2 million (2011 – nil) charge to the statement of operations was recorded.
Mineral interest expenditures on projects are considered as exploration and evaluation. All of the projects have been evaluated for impairment and their related costs consist of the following:
| ($000’s) | | Balance, | | | Expenditures | | | Recoveries | | | Balance, | |
| | | January 1, 2012 | | | 2012 | | | 2012 | | | December 31, 2012 | |
| KSM | | | 110,458 | | | | 33,117 | | | | (2,722 | ) | | | 140,853 | |
| Courageous Lake | | | 45,255 | | | | 15,575 | | | | - | | | | 60,830 | |
| Nevada Projects | | | 5,116 | | | | - | | | | (2,234 | ) | | | 2,882 | |
| Grassy Mountain | | | 3,359 | | | | 23 | | | | - | | | | 3,382 | |
| Red Mountain | | | 2,654 | | | | 69 | | | | (2,723 | ) | | | - | |
| Quartz Mountain | | | 369 | | | | - | | | | (225 | ) | | | 144 | �� |
| | | | 167,211 | | | | 48,784 | | | | (7,904 | ) | | | 208,091 | |
| | | | | | | | | | | | | | | | | |
| ($000’s) | | Balance, | | | Expenditures | | | Recoveries | | | Balance, | |
| | | January 1, 2011 | | | | 2011 | | | | 2011 | | | December 31, 2011 | |
| KSM | | | 86,782 | | | | 27,589 | | | | (3,913 | ) | | | 110,458 | |
| Courageous Lake | | | 32,028 | | | | 13,227 | | | | - | | | | 45,255 | |
| Nevada Projects | | | 5,000 | | | | 163 | | | | (47 | ) | | | 5,116 | |
| Grassy Mountain | | | 4,029 | | | | 70 | | | | (740 | ) | | | 3,359 | |
| Red Mountain | | | 2,411 | | | | 243 | | | | - | | | | 2,654 | |
| Quartz Mountain | | | 480 | | | | 13 | | | | (124 | ) | | | 369 | |
| | | | 130,730 | | | | 41,305 | | | | (4,824 | ) | | | 167,211 | |
Continued exploration of the Company’s mineral properties is subject to certain lease payments, project holding costs, rental fees and filing fees.
a) KSM (Kerr-Sulphurets-Mitchell)
In 2001, the Company purchased a 100% interest in contiguous claim blocks in the Skeena Mining Division, British Columbia. The vendor maintains a 1% net smelter royalty interest on the project, subject to maximum aggregate royalty payments of $4.5 million. The Company is obligated to purchase the net smelter royalty interest for the price of $4.5 million in the event that a positive feasibility study demonstrates a 10% or higher internal rate of return after tax and financing costs.
In 2002, the Company optioned the property to Noranda Inc. (which subsequently became Falconbridge Limited and then Xstrata plc.) which could earn up to a 65% interest by incurring exploration expenditures and funding the cost of a feasibility study.
In April 2006, the Company reacquired the exploration rights to the KSM property in British Columbia, Canada from Falconbridge Limited. On closing of the formal agreement in August 2006, the Company issued Falconbridge 200,000 common shares of the Company with a deemed value of $3,140,000 excluding share issue costs. The Company also issued 2 million warrants to purchase common shares of the Company with an exercise price of $13.50 each. The 2,000,000 warrants were exercised in 2007 and proceeds of $27,000,000 were received by the Company.
In July 2009, the Company agreed to acquire various mineral claims immediately adjacent to the KSM property for further exploration and possible mine infrastructure use. The terms of the agreement required the Company to pay $1 million in cash, issue 75,000 shares and pay advance royalties of $100,000 per year for 10 years commencing on closing of the agreement. The property is subject to a 4.5% net smelter royalty from which the advance royalties are deductible. The purchase agreement closed in September 2009, with the payment of $1 million in cash, the issuance of 75,000 shares valued at $2,442,750 and the payment of the first year’s $100,000 advance royalty.
In February 2011, the Company acquired a 100% interest in adjacent mineral claims mainly for mine infrastructure purposes for a cash payment of $675,000, subject to a 2% net smelter returns royalty.
On June 16, 2011, the Company completed an agreement granting a third party an option to acquire a 1.25% net smelter royalty on all gold and silver production sales from KSM for a payment equal to the lesser of $100 million or US$125 million. The option is exercisable for a period of 60 days following the announcement of receipt of all material approvals and permits, full project financing and certain other conditions for the KSM project. The option was conditional on the optionee subscribing for $30 million of the Company’s shares at a premium to market of 15%. The financing was completed on June 29, 2011. The 15% premium derived from the option agreement for the NSR, was determined to be $3.9 million ($3.84 per share for 1,019,000 shares) which was recorded as a credit to mineral properties on the statement of financial position in 2011. The optionee also held an option to purchase an additional $18 million of the Company’s shares, and exercised that option in December 2012, at a 15% premium to the market price of the shares at that time. The premium derived from the option agreement for the NSR on this transaction was determined to be $2.4 million ($2.41 per share for 1,004,491 shares) which was recorded as a credit to mineral properties on the statement of financial position in 2012.
Per the original agreement, the Company entered into an agreement to grant an additional 0.75% net smelter royalty on all gold and silver production sales from KSM for a payment equal to the lesser of $60 million or US$75 million.
In 2012, the Company incurred $33.1 million in exploration costs at KSM while completing an updated preliminary feasibility study and substantially completing an application for environmental assessment. The final application for environmental assessment was made subsequent to the year-end.
b) Courageous Lake
In 2002, the Company purchased a 100% interest in the Courageous Lake gold project from Newmont Canada Limited and Total Resources (Canada) Limited (“the Vendors”) for US$2.5 million. The Courageous Lake gold project consists of mining leases located in Northwest Territories of Canada.
In 2004, an additional property was optioned in the area. Under the terms of the agreement, the Company paid $50,000 on closing and was required to make option payments of $50,000 on each of the first two anniversary dates and subsequently $100,000 per year. In addition, the property may be purchased at any time for $1,250,000 with all option payments being credited against the purchase price.
In 2012, the Company incurred $15.6 million in exploration costs and completed an updated mineral resource at the project.
In June 2011, the Company entered into a letter of intent with Golden Predator Corp. pursuant to which the Company and Golden Predator Corp., would contribute a portfolio of mineral properties into a new private company called Wolfpack Gold Corp. (“Wolfpack”). The letter of intent was superseded by definitive agreements executed in June 2012. The transaction was closed on June 26, 2012 and certain properties were transferred to Wolfpack, from the Company, while others were optioned. In total, 5,506,500 shares of Wolfpack were received as consideration for the optioned and transferred properties. Under the agreement, Seabridge granted to Wolfpack an option to purchase 100% of its lease interest in the Castle Black Rock property located in Esmerelda County, Nevada. To exercise this option, Wolfpack will issue to Seabridge ad aggregate of 7,000,000 common shares of Wolfpack over a three year period, of which 840,000 shares were received on closing in June 2012. If Wolfpack exercises the option, Seabridge will retain a 1% net profits royalty in the Castle Black Rock Property.
Also under the agreement, Seabridge granted to Wolfpack and option to purchase 100% of its interest in the Four Mile Basin Property located in Nye Country, Nevada. To exercise this option, Wolfpack will issue to Seabridge an aggregate minimum of 3,000,000 Wolfpack shares over a three year period, of which, 360,000 shares were received on closing in June 2012. If Wolfpack exercises the option, Seabridge will retain a 2% net smelter returns royalty on precious metals and a 1% net smelter returns royalty in respect of all other mineral derived from the Four Mile Basin Property. Seabridge has an obligation to pay 10% of the proceeds received under this option to a third party. Therefore, Seabridge will retain a minimum of 2,700,000 Wolfpack shares and a 1.8% net smelter returns royalty on precious metals and a 0.9% net smelter returns royalty in respect of all other minerals after complying with this obligation.
In addition, under the executed agreement, Seabridge granted to Wolfpack an option to purchase 100% of its interest in the Liberty Springs Property located in Nye County, Nevada. To exercise this option, Wolfpack will issue to Seabridge an aggregate minimum of 2,500,000 Wolfpack Shares over a three year period, of which 300,000 Wolfpack shares were received on closing in June 2012. The actual number of Wolfpack shares to be issued to Seabridge following closing is subject to upward adjustment, based on future value protection formulae, and hence, these share amounts should be viewed as the minimum number of Wolfpack shares to be issued to maintain and fulfill the option. If Wolfpack exercises the option, Seabridge will retain a 2% net smelter returns royalty on precious metals and a 1% net smelter returns royalty in respect of all other minerals derived from the Property. Seabridge has an obligation to pay 10% of the proceeds received under this option to a third party. Therefore, Seabridge will retain a minimum of 2,250,000 Wolfpack shares and a 1.8% net smelter returns royalty on precious metals and a 0.9% net smelter returns royalty in respect of all other minerals after complying with this obligation.
Under the agreement, Seabridge sold to Wolfpack its interests in the several other properties located in Nevada for 4,500,000 Wolfpack shares. Seabridge will retain a 2% net smelter returns royalty on precious metals and a 1% net smelter returns royalty in respect of all other minerals derived from these properties, except that in the case of properties already subject to an underlying royalty, Seabridge will only retain a 1% net profits royalty. Seabridge had an obligation to pay 10% of the proceeds received under the acquisition of most of these properties to a third party. Accordingly, Seabridge retained 4,072,500 Wolfpack shares and either a 1.8% net smelter returns royalty on precious metals and a 0.9% net smelter returns royalty in respect of all other minerals or a 0.9% net profits royalty after complying with this obligation.
The fair value of the 5,560,500 shares received on closing has been recorded as a recovery of the carrying value of the Nevada projects. As Wolfpack and the Company currently have common members of the Board of Directors and senior management personnel, the two companies are deemed related parties.
d) Grassy Mountain
In 2000, the Company acquired an option on a 100% interest in mineral claims located in Malheur County, Oregon, USA. During 2002, the Company paid US$50,000 in option payments. On December 23, 2002, the agreement was amended and the Company made a further option payment of US$300,000 and in March 2003 acquired the property for a payment of US$600,000.
In April 2011, the Company announced that an agreement had been reached to option the Grassy Mountain project to Calico Resources Corp. (“Calico”) that has been amended subsequent to the year-end. In the original agreement, in order to exercise the option, Calico was to issue to the Company (i) two million of its common shares following TSX Venture Exchange approval; (ii) four million of its common shares at the first anniversary, and (iii) eight million of its shares when the project has received the principal mining and environmental permits necessary for the construction and operation of a mine. The Company received the first two million common shares of Calico and a value of $740,000 was recorded as a credit to the carrying value of the mineral properties. In February 2013, subsequent to the year-end, the agreement was amended to allow for an accelerated exercise of the option and Calico issued 6,433,000 common shares and 4,567,000 special warrants of Calico and acquired a 100% interest in the Grassy Mountain. Each special warrant is exercisable to acquire one additional common share of Calico for no additional consideration. The special warrants can only be exercised to the extent that, after exercise, the Company holds less than 20% of the outstanding shares of Calico. In addition, after the delivery of a National Instrument 43-101 compliant feasibility study on the project, Calico must either grant the Company a 10% net profits interest or pay the Company $10 million in cash, at the sole election of the Company. The fair value of the shares and special warrants will be recorded as a credit to the carrying value of the mineral properties in the first quarter of 2013.
In 2001, the Company purchased a 100% interest in an array of assets associated with mineral claims in the Skeena Mining Division, British Columbia, together with related project data and drill core, an owned office building and a leased warehouse, various mining equipment on the project site, and a mineral exploration permit which is associated with a cash reclamation deposit of $1 million.
The Company assumed all liabilities associated with the assets acquired, including all environmental liabilities, all ongoing licensing obligations and ongoing leasehold obligations including net smelter royalty obligations on certain mineral claims ranging from 2.0% to 6.5% as well as an annual minimum royalty payment of $50,000.
In the second quarter of 2012, the Company entered into an agreement with Banks Island Gold Ltd. to option its 100% interest in the Red Mountain Project. Under the terms of the option agreement, in order to acquire the property, Banks Island Gold must: (i) pay the Company $100,000 on the execution of the letter of intent (ii) pay $450,000 in cash and issue 4,000,000 of its common shares upon execution of the definitive option agreement; (iii) pay the Company a further $450,000 in cash on or before December 15, 2012; (iv) pay the Company a further $1,500,000 in cash on or before August 3, 2013; and (v) pay the Company a final $9,500,000 in cash on or before February 3, 2015. In 2012, the Company received $1 million and 4 million shares of Banks Island Gold valued at $2.8 million. The value of cash and shares was recorded first as a recovery against the carrying value of the mineral properties, of $2.7 million, and the excess, of $1.1 million was recorded as a gain on disposition of mineral properties in 2012.
f) Quartz Mountain
In 2001, the Company purchased a 100% interest in mineral claims in Lake County, Oregon. The vendor retained a 1% net smelter royalty interest on unpatented claims acquired and a 0.5% net smelter royalty interest was granted to an unrelated party as a finder’s fee.
In May 2009, the Company completed an option agreement on a peripheral claim portion of the Quartz Mountain property. To earn a 50% interest in that portion of the project, the optionee completed $500,000 in exploration expenditures by December 31, 2010 and issued 200,000 shares to the Company (50,000 shares were received in 2010 and the remaining 150,000 shares were received in February 2011). The amounts received are shown as recoveries against the carrying value of the mineral interest. The optionee has the right to increase its percentage holdings to 70% by funding and completing a feasibility study within three years.
In 2011, subject to an agreement between the Company and Orsa Ventures Corp. (“Orsa”) the Company has granted Orsa the exclusive option to earn a 100% interest in the main Quartz Mountain gold property and all of Seabridge's undivided 50% beneficial joint venture interest in the adjacent peripheral property mentioned above. The agreement stipulated that Orsa would pay the Company $0.5 million on or before the fifth day following regulatory approval of the option agreement and will make staged payments of $5 million in cash or common shares of Orsa, at the discretion of the Company. In addition, upon the delivery of a feasibility study, Orsa must pay the Company $15 million or provide a 2% net smelter return on production at Quartz Mountain. In 2012, the agreement was amended allowing Orsa to pay the Company 1.5 million common shares of Orsa instead of the $0.5 million, then due. All other terms of the original agreement remain the same. The Company received the 1.5 million common shares of Orsa and $225,000 has been recorded as a recovery of the carrying value of the property. The next payment of $2 million in cash or equivalent common shares is due to be received in the fourth fiscal quarter of 2013.
Reclamation deposits at December 31, 2012 consist of bank guaranteed deposits or cash deposited with banks or with government agencies of $1,553,000 (December 31, 2011 - $1,588,000) and are related to the obligation to fund future reclamation costs (See note 9).
| 8. | Accounts payable and accrued liabilities |
| ($000’s) | | December 31, 2012 | | | December 31, 2011 | |
| Trade and other payables due to related parties | | | 39 | | | | - | |
| Other trade payables | | | 3,889 | | | | 2,842 | |
| Non-trade payables and accrued expenses | | | 282 | | | | 92 | |
| | | | 4,210 | | | | 2,934 | |
| 9. | Provision for reclamation liabilities |
| ($000’s) | | December 31, 2012 | | | December 31, 2011 | |
| Beginning of the year | | | 1,963 | | | | 1,938 | |
| Accretion | | | 28 | | | | 25 | |
| Current year adjustment | | | 68 | | | | - | |
| End of the year | | | 2,059 | | | | 1,963 | |
The Company’s policy on providing for reclamation obligations is described in Note 3. Although the ultimate costs to be incurred are uncertain, the Company’s estimates are based on independent studies or agreements with the related government body for each project using current restoration standards and techniques. The fair value of the asset retirement obligations, as at December 31, 2012, was calculated using the total estimated undiscounted cash flows, of $2.5 million, required to settle estimated obligations and expected timing of cash flow payments required to settle the obligations in 2022. The total estimated undiscounted cash flows as at December 31, 2011 was also $2.5 million. The discount rate used to present value the reclamation obligations was 0.38% at December 31, 2012 (0.47% - December 31, 2011).
| | | | | | | |
| ($000’s) | | December 31, 2012 | | | December 31, 2011 | |
| Share capital | | | 272,536 | | | | 239,662 | |
| Stock options | | | 23,351 | | | | 18,291 | |
| Contributed surplus | | | 5,810 | | | | 327 | |
| Deficit | | | (53,337 | ) | | | (40,828 | ) |
| Accumulated other comprehensive income | | | 170 | | | | (90 | ) |
| | | | 248,530 | | | | 217,362 | |
| | | | | | | | | |
| Share capital | | Shares | | | Amount ($000’s) | |
| As at January 1, 2012 | | | 43,426,885 | | | | 239,662 | |
| Exercise of stock options | | | 25,000 | | | | 411 | |
| Cost of raising capital | | | - | | | | (1,668 | ) |
| Issuance of shares | | | 2,104,491 | | | | 32,883 | |
| As at December 31, 2012 | | | 45,556,376 | | | | 271,288 | |
| | | | | | | | | |
| As at January 1, 2011 | | | 41,055,185 | | | | 188,385 | |
| Exercise of stock options | | | 352,700 | | | | 5,429 | |
| Private placement | | | 2,019,000 | | | | 45,848 | |
| As at December 31, 2011 | | | 43,426,885 | | | | 239,662 | |
The Company is authorized to issue an unlimited number of preferred shares and common shares with no par value. No preferred shares have been issued or were outstanding at December 31, 2012 and December 31, 2011.
The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support the acquisition, exploration and development of mineral properties. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business.
The properties in which the Company currently has an interest are in the exploration stage; as such the Company is dependent on external financing to fund its activities. In order to carry out the planned exploration and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. The Company will continue to assess new properties and seek to acquire an interest in additional properties that would be accretive and meaningful to the Company. The Company is not subject to externally imposed capital requirements.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes in the Company's approach to capital management during the year ended December 31, 2012. The Company considers its capital to be share capital, stock options, contributed surplus and deficit.
Common share transactions were as follows:
The Company closed a private placement on December 13, 2012 and issued 1,004,491 common shares at $17.92 per share raising gross proceeds of $18 million. This financing was the exercise of an option to the same purchaser obtained through the private placement completed in June 2011, described below. The purchase price for the shares was equal to a 15% premium over the market price of the Company’s shares and provided the subscriber an option to acquire a 0.75% net smelter royalty (“NSR”) on all gold and silver production sales from the KSM property for the lesser of $60 million or US$75 million. The option on the NSR is exercisable for a period of 60 days following the announcement of receipt of all material approvals and permits, full project financing and certain other conditions for the KSM project. As the 15% premium was derived from the option agreement for the NSR, $2.4 million ($2.41 per share for 1,004,491 shares) has been recorded as a recovery of mineral properties on the statement of financial position. Common shares has been credited with $15.6 million ($15.51 per share for 1,004,491 shares), on the statement of financial position.
On November 21, 2012 the Company closed two private placement financings and, in total, issued 1,100,000 flow-through common shares, at an average price per share of $21.85, raising gross proceeds of $24.0 million. The purchase price for 635,800 shares subscribed to, by residents of British Columbia, who are eligible to take advantage of provincial tax credits, was $22.68 and represented a 44.2% premium over the market price of the Company’s shares on November 21, 2012. The purchase price for 464,200 shares subscribed to, by residents outside of British Columbia, was $20.72 and represented a 31.7% premium over the market price of the Company’s shares on the same day. The Company has renounced its ability to deduct qualifying exploration expenditures for the equivalent value of the gross proceeds of the financings and has transferred the deductibility to the purchasers of the flow-through shares. A combined premium of $6.7 million was recognized as a liability on the statement of financial position and the balance was recorded as share capital. At each reporting period, and as qualifying expenditures are incurred, the liability is reduced on a proportionate basis and income is recognized on the statement of operations. From the date of closing to December 31, 2012, the Company incurred $1.7 million of qualifying exploration expenditures and $479,000 of the premium was recognized as other income on the statement of operations in the current year. Share issuance costs of $1.7 million were incurred in relation to the offering and have been included in equity.
The Company has committed to spend the remaining $22.3 million on qualifying expenditures over a twelve month period beginning on January 1, 2013. At each reporting period, as qualifying expenditures have been incurred, the liability will be reduced on a proportionate basis and income will be recognized in the statement of operations.
On December 6, 2011 the Company closed two private placement financings of 500,000 flow-through common shares each, at an average price per share of $27.35, raising gross proceeds of $27.4 million. For tax purposes, the Company has renounced its ability to deduct qualifying exploration expenditures for the equivalent value of the gross proceeds of the financings and has transferred the deductibility to the purchasers of the flow-through shares. A combined premium of $5.5 million was recognized as a liability on the statement of financial position and the balance was recorded as share capital. As qualifying expenditures were incurred, in 2012, the liability was reduced on a proportionate basis and income was recognized in the statement of operations. From the date of closing to December 31, 2011, the Company incurred $976,000 of qualifying exploration expenditures and $195,000 of the premium was recognized as other income on the statement of operations in that year. The Company has spent the remaining $26.4 million on qualifying expenditures in 2012. The full liability related to this financing has been reduced and charged to the statement of operations in 2012. Share issuance costs of $1.5 million were incurred in relation to the offering and have been included in equity.
On June 29, 2011, the Company closed a private placement financing of 1,019,000 common shares at $29.44 per share raising gross proceeds of $30 million. The purchase price for the shares was equal to a 15% premium over the market price of the Company’s shares and provided the subscriber an option to acquire a 1.25% net smelter royalty on all gold and silver production sales from the KSM property for the lesser of $100 million or US$125 million. The option is exercisable for a period of 60 days following the announcement of receipt of all material approvals and permits, full project financing and certain other conditions for the KSM project. As the 15% premium was derived from the option agreement for the NSR, $3.9 million ($3.84 per share for 1,019,000 shares) has been recorded as a recovery of mineral properties on the statement of financial position. Common shares has been credited with $26.1 million, excluding costs ($25.60 per share for 1,019,000 shares), on the statement of financial position. The subscriber also obtained an option to subscribe for an additional $18 million of shares of the Company at a price equal to a 15% premium over the then market price of the shares, and in doing so, would hold an additional option to purchase an additional 0.75% NSR on the gold and silver sales of KSM. The option to subscribe for the additional shares was exercised in December 2012 (see Note 10(a)). Share issuance costs of $0.6 million were incurred in relation to the offering and have been included in equity.
The Company provides compensation to directors and employees in the form of stock options. Pursuant to the Share Option Plan, the Board of Directors has the authority to grant options, and to establish the exercise price and life of the option at the time each option is granted, at a price not less than the closing price of the Common Shares on the Toronto Stock Exchange on the date of the grant of such option and for a period not exceeding five years. All exercised options are settled in equity.
Stock option transactions were as follows:
| | | Options | | | Weighted Average Exercise Price | | | Value of options ($000’s) | |
| Outstanding January 1, 2012 | | | 2,763,300 | | | | 24.19 | | | | 18,291 | |
| Granted | | | 470,000 | | | | 17.06 | | | | 952 | |
| Exercised | | | (25,000 | ) | | | 10.54 | | | | (148 | ) |
| Cancelled | | | (300,000 | ) | | | 29.75 | | | | (3,033 | ) |
| Expired | | | (260,000 | ) | | | 29.60 | | | | (2,450 | ) |
| Value of 2010 and 2011 options vested | | | - | | | | - | | | | 9,739 | |
| Outstanding December 31, 2012 | | | 2,648,300 | | | | 21.90 | | | | 23,351 | |
| | | | | | | | | | | | | |
| Exercisable at December 31, 2012 | | | 1,332,467 | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Options | | | Weighted-average exercise price | | | Value of options ($000’s) | |
| Outstanding January 1, 2011 | | | 2,171,000 | | | | 21.67 | | | | 5,028 | |
| Granted | | | 950,000 | | | | 25.03 | | | | 3,178 | |
| Exercised | | | (352,700 | ) | | | 10.83 | | | | (1,610 | ) |
| Expired | | | (5,000 | ) | | | 29.75 | | | | (44 | ) |
| Value of options granted in prior years | | | - | | | | - | | | | 11,739 | |
| Outstanding December 31, 2011 | | | 2,763,300 | | | | 24.19 | | | | 18,291 | |
The outstanding share options at December 31, 2012 expire at various dates between March 2013 and December 2017.
For options exercised, the weighted average share price of the Company’s shares on exercise date was $18.74 for December 31, 2012 (2011 - $28.03).
A summary of options outstanding, their remaining life and exercise prices as at December 31, 2012 is as follows:
| | | Options Outstanding | | Options Exercisable | |
| Exercise price | | | | Remainingcontractual life | | Number exercisable | | | Exercise price | |
| $26.64 | | | 30,000 | | 2 months | | | 30,000 | | | $ | 26.64 | |
| $10.54 | | | 523,300 | | 9 months | | | 523,300 | | | $ | 10.54 | |
| $21.88 | | | 25,000 | | 1 years 2 months | | | 25,000 | | | $ | 21.88 | |
| $29.75 | | | 650,000 | | 3 years | | | 400,000 | | | $ | 29.75 | |
| $28.80 | | | 200,000 | | 3 years 2 months | | | 50,000 | | | $ | 28.80 | |
| $30.42 | | | 150,000 | | 3 years 3 months | | | 50,000 | | | $ | 30.42 | |
| $27.39 | | | 50,000 | | 3 years 6 months | | | - | | | $ | 27.39 | |
| $21.98 | | | 550,000 | | 4 years | | | 254,167 | | | $ | 21.98 | |
| $21.54 | | | 25,000 | | 4 years 3 months | | | - | | | $ | 21.54 | |
| $14.70 | | | 100,000 | | 4 year 6 months | | | - | | | $ | 14.70 | |
| $17.32 | | | 180,000 | | 4 years 9 months | | | - | | | $ | 17.32 | |
| $17.52 | | | 165,000 | | 5 years | | | - | | | $ | 17.52 | |
| | | | 2,648,300 | | | | | 1,332,467 | | | | | |
In 2012, 470,000 options were granted to members of senior management that fully vest over a two year period from the date of the grant as follows:
| | | Exercise | | | Number of | | | Fair Value | | | Fair Value of | | | Expensed in | | | Balance | |
| | | Price | | | Options | | | Per option | | | grant ($000's) | | | 2012 ($000's) | | | ($000's) | |
| March 7, 2012 | | | 21.54 | | | | 25,000 | | | | 12.20 | | | | 305 | | | | 251 | | | | 54 | |
| June 27, 2012 | | | 14.70 | | | | 100,000 | | | | 8.39 | | | | 839 | | | | 288 | | | | 551 | |
| September 11, 2012 | | | 17.32 | | | | 180,000 | | | | 9.72 | | | | 1,749 | | | | 358 | | | | 1,391 | |
| December 12, 2012 | | | 17.52 | | | | 165,000 | | | | 9.58 | | | | 1,581 | | | | 55 | | | | 1,526 | |
| | | | | | | | 470,000 | | | | | | | | 4,474 | | | | 952 | | | | 3,522 | |
The weighted average grant date fair value for the 470,000 options was $9.52. The fair value of these options will be amortized over the estimated service term, of two years from the date of the grant. In 2012, $1.0 million of the total fair value of $4.5 million for these options was charged to the statement of operations. The remaining $3.5 million will be recognized in 2013 and 2014.
Also in 2012, 260,000 options expired unexercised. The full fair value of these options had been fully expensed in prior years.
In 2011, 900,000 options were granted to members of senior management that fully vest over a two year period from the date of the grant as follows:
| | | Exercise | | | Number of | | | Fair Value | | | Fair Value of | | | Expensed in | | | Expensed in | | | Balance | |
| | | Price | | | Options | | | Per option | | | grant ($000's) | | | 2011 ($000's) | | | 2012 ($000's) | | | ($000's) | |
| March 1, 2011 | | | 28.80 | | | | 200,000 | | | | 16.37 | | | | 3,274 | | | | 1,705 | | | | 1,364 | | | | 205 | |
| March 29, 2011 | | | 30.42 | | | | 150,000 | | | | 17.01 | | | | 2,552 | | | | 1,134 | | | | 1,134 | | | | 284 | |
| December 12, 2011 | | | 21.98 | | | | 550,000 | | | | 11.73 | | | | 6,454 | | | | 245 | | | | 4,490 | | | | 1,719 | |
| | | | | | | | 900,000 | | | | | | | | 12,280 | | | | 3,084 | | | | 6,988 | | | | 2,208 | |
The weighted average grant date fair value for the 900,000 options was $13.64. Of the total fair value of $12.3 million for these options, $3.1 million was charged to the statement of operations in 2011 and $7 million was charged to the statement of operations in 2012. The remaining $2.2 million will be charged to the statement of operations in 2013.
The fair value of the options granted that vest over time is estimated on the dates of grant using a Black Scholes option-pricing model with the following assumptions:
| | | 2012 | | | 2011 | |
| Dividend yield | | Nil | | | Nil | |
| Expected volatility | | | 67 | % | | | 63%-66 | % |
| Risk free rate of return | | | 1.34 | % | | | 1.3%-2.6 | % |
| Expected life of options | | 5 years | | | 5 years | |
No other features of the option grant were incorporated into the measurement of fair value.
In 2008, 515,000 option grants to senior management and directors which were subject to performance vesting conditions that did not transpire until 2011. The full fair value of $3.0 million was charged to the statement of operations in 2011.
In 2010, a grant of options to directors was made but had remained subject to approval by the Company’s shareholders at that time. These options vest upon either the completion of an agreement to joint venture or sell one of the Company’s two major projects (KSM or Courageous Lake) or a transaction resulting in a change of control of the Company or the Company’s shares closing on the Toronto Stock Exchange at $40 or higher for ten consecutive days. In 2011, $2.1 million was charged to the statement of operations related to these options. In 2012, 300,000 of the 550,000 options were voluntarily relinquished by two directors of the Company and the amortization of the remaining fair value of those options of $1.5 million was accelerated and fully charged to the statement of operations. Combined with the amortization of the remaining options, $2.6 million was charged to the statement of operations in 2012. The remaining $0.9 million will be charged to the statement of operation in 2013 and 2014.
An additional 50,000 options were granted on June 29, 2011 with the same vesting terms as the 550,000 options granted to directors above and had a fair value of $0.6 million. In 2011, $0.1 million was charged to the statement of operations and in 2012 $0.2 million was similarly charged. The remaining balance of $0.3 million will be expensed in 2013 and 2014.
Should any of the options from these two grants vest earlier than the duration of the estimated service term, the remaining balance will be charged to the statement of operations. A Monte Carlo simulation method was used to fair value the options. Three simulations were prepared and the average results were used to fair value the options and estimated time to vest. Where volatility has been used in valuing the Company’s stock options, the historical volatility of the Company’s shares is used. Assumptions relating to the forecasted stock prices were as follows:
| | | 2011 | | | 2010 | |
| Dividend yield | | Nil | | | Nil | |
| Expected volatility | | | 45.24 | % | | | 45.00 | % |
| Risk free rate of return | | | 2.47 | % | | | 2.35 | % |
Subsequent to December 31, 2012, 665,000 five year options were granted to the directors of the Company at a price of $12.60. This grant is subject to shareholder approval and vesting is subject to the earlier of a major transaction on one of the Company’s two core assets or receipt of environmental assessment and environmental impact statement certificates for the KSM project. An additional 40,000 five-year options were granted to an employee of the Company at $12.60. These options vest over a two year period. The fair value of these options will be estimated in 2013 and amortized over the expected service life of the options.
| 11. | Corporate and administrative expenses |
| ($000’s) | | | | | | |
| | | 2012 | | | 2011 | |
| Employee expenses | | | 3,296 | | | | 2,586 | |
| Stock-based compensation | | | 10,691 | | | | 14,917 | |
| Professional fees | | | 540 | | | | 575 | |
| General and administrative | | | 1,305 | | | | 1,762 | |
| | | | 15,832 | | | | 19,840 | |
| 12. | Related party disclosures |
Compensation to directors and officers of the Company:
| ($000’s) | | | | | | |
| | | 2012 | | | 2011 | |
| Compensation of directors: | | | | | | |
| Directors fees | | | 260 | | | | 231 | |
| Consulting fees | | | 87 | | | | 36 | |
| Stock-based compensation | | | 840 | | | | 1,766 | |
| | | | 1,187 | | | | 2,033 | |
| | | | | | | | | |
| Compensation of key management personnel: | |
| Salaries and consulting fees | | | 2,681 | | | | 2,578 | |
| Stock-based compensation | | | 6,097 | | | | 10,098 | |
| | | | 8,778 | | | | 12,676 | |
| Total remuneration of directors and key management personnel | | | 9,965 | | | | 14,709 | |
As at December 31, 2012, $39,000 in liabilities to related parties remained outstanding. (December 31, 2011 - Nil).
During the year ended December 31, 2012, a private company controlled by a director of the Company was paid $87,000 (2011 - $35,600) for technical services provided by his company related to mineral properties; a private company controlled by a second director was paid $343,750 (2011 - $337,500) for corporate consulting fees for services rendered; and a third director was paid $27,200 (2011 - $15,800) for geological consulting. These transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
| 13. | Financial Instruments |
The Company's financial risk exposures and the impact on the Company's financial instruments are summarized below:
Credit Risk
The Company's credit risk is primarily attributable to short-term deposits, and receivables included in amounts receivable and prepaid expenses. The Company has no significant concentration of credit risk arising from operations. Short-term deposits consist of Canadian Schedule I bank guaranteed notes, with terms up to one year but are cashable in whole or in part with interest at any time to maturity, for which management believes the risk of loss to be remote. Financial instruments included in amounts receivable and prepaid expenses consist of harmonized sales tax due from the Federal Government of Canada. Management believes that the risk of loss with respect to financial instruments included in amounts receivable and prepaid expenses to be remote.
Liquidity Risk
The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As at December 31, 2012, the Company had cash and cash equivalents and short term deposits balances of $43.3 million (December 31, 2011 - $54.3 million) for settling current liabilities of $4.2 million (December 31, 2011 - $2.9 million). The short-term deposits are in various guaranteed investment securities with maturities to December 10, 2013 but are cashable in whole or in part with interest at any time to maturity. All of the Company's current financial liabilities have contractual maturities of 30 days and are subject to normal trade terms.
Market Risk
(a) Interest Rate Risk
The Company has cash balances and no interest-bearing debt. The Company's current policy is to invest excess cash in Canadian bank guaranteed notes (short-term deposits). The Company periodically monitors the investments it makes and is satisfied with the credit ratings of its banks. The short-term deposits can be cashed in at any time and can be reinvested if interest rates rise.
(b) Foreign Currency Risk
The Company's functional currency is the Canadian dollar and major purchases are transacted in Canadian and US dollars. The Company funds certain operations, exploration and administrative expenses in the United States on a cash call basis using US dollar currency converted from its Canadian dollar bank accounts held in Canada. In 2010, the Company sold its remaining interest in the Mexican property Noche Buena at a profit, which attracted income taxes payable in Mexican pesos. The income taxes were paid in December 2010 and there is no further exposure to the Mexican peso currency. Management believes the foreign exchange risk derived from currency conversions is not significant to its operations and therefore does not hedge its foreign exchange risk.
(c) Marketable Securities Risk
The Company has investments in other publicly listed exploration companies which are included in marketable securities. These shares were received as part of option payments on certain exploration properties the Company owns as well as $2.5 million in gold exchange traded receipts. The risk on these investments is significant due to the nature of the investment but the amounts are not significant to the Company.
Sensitivity Analysis
The Company has designated its cash and cash equivalents and short term deposits as fair value through profit or loss and these instruments are measured at fair value. Financial instruments included in amounts receivable and prepaid expenses are classified as loans and receivables, which are measured at amortized cost. Accounts payable and accrued liabilities are classified as other financial liabilities, which are measured at amortized cost.
As at December 31, 2012 and December 31, 2011, the fair value of the Company's financial instruments approximates their carrying values.
Based on management's knowledge and experience of the financial markets, the Company believes the following movements are "reasonably possible" over a year:
(i) Short term deposits have terms from 30 days to one year. The investments held at December 31, 2012 are held in GICs and savings accounts cashable at any time in whole or in part with interest. Sensitivity to a plus or minus 0.25% change in rates would affect income by approximately $103,000 on an annualized basis.
(ii) At December 31, 2012, the Company had net current assets in US dollars of approximately $46,000 (December 31, 2011 – net assets of $240,000), for which a 10% appreciation in US exchange rates, would affect net loss by approximately $5,000.
(iii) Price risk is remote since the Company is not a producing entity.
Components of Tax Expense
The following table shows the components of current and deferred tax:
| ($000's) | | December 31, 2012 | | | December 31, 2011 | |
| Current tax expense | | | 46 | | | | - | |
| Deferred tax expense | | | 2,578 | | | | 498 | |
| | | | 2,624 | | | | 498 | |
Tax recovery recognized directly in equity
| $000's) | | December 31, 2012 | | | December 31, 2011 | |
| Financing costs | | | 1,248 | | | | - | |
Rate Reconciliation
The provision for income tax differs from the amount that would have resulted by applying the combined Canadian Federal and Ontario statutory income tax rates of 26.5% (2011 - 28.25%) as a result of the following:
| ($000's) | | December 31, 2012 | | | December 31, 2011 | |
| (Loss) income before income taxes | | | (9,885 | ) | | | (19,600 | ) |
| | | | 26.50 | % | | | 28.25 | % |
| Tax recovery calculated | | | | | | | | |
| using statutory rates | | | (2,620 | ) | | | (5,537 | ) |
| Non-deductible items | | | 2,834 | | | | 4,428 | |
| Non-taxable items | | | (1,521 | ) | | | (195 | ) |
| Difference in foreign tax rates | | | 68 | | | | 92 | |
| Renouncement of flow through expenditures | | | 7,746 | | | | - | |
| Movement in tax benefits not recognized | | | 512 | | | | 1,710 | |
| Recognition of deferred tax assets | | | (4,395 | ) | | | - | |
| | | | | | | | | |
| Income tax expense | | | 2,624 | | | | 498 | |
The statutory rate has decreased 1.75% due to a decrease in the federal tax rate.
| Deferred Income Tax | | |
| The following table summarizes the components of deferred income tax: |
| ($000's) | | December 31, 2012 | | | December 31, 2011 | |
| Deferred tax assets | | | | | | |
| Marketable securities | | | - | | | | 197 | |
| Property and equipment | | | 60 | | | | 56 | |
| Provision for reclamation liabilities | | | 584 | | | | 690 | |
| Financing costs | | | 1,249 | | | | - | |
| Non-capital loss carryforwards | | | 8,029 | | | | 1,765 | |
| | | | | | | | | |
| Deferred tax liabilities | | | | | | | | |
| Mineral interests | | | (12,373 | ) | | | (3,830 | ) |
| | | | (2,451 | ) | | | (1,122 | ) |
| Unrecognized Deferred Tax Assets | | | | |
| Deferred income tax assets have not been recognized in respect of the following deductible temporary differences: |
| ($000's) | | December 31, 2012 | | | December 31, 2011 | |
| Investment in subsidiaries | | | 5,031 | | | | 4,402 | |
| Marketable securities | | | 892 | | | | - | |
| Loss carry forwards | | | 2,270 | | | | 17,409 | |
| Other deductible temporary differences | | | 497 | | | | 1,821 | |
The tax losses not recognized expire as per the amount and years noted below. The other deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit would be available against which the Company can utilize the benefits therefrom.
| Income Tax Attributes | | |
| As at December 31, 2012, the Company had the following income tax attributes to carry forward: |
| | | Amount ($000's) | | | Expiry date | |
| Canadian non-capital losses | | | 28,265 | | | | 2032 | |
| Canadian tax basis of mineral interest | | | 161,757 | | | Indefinite | |
| | | | | | | | | |
| US non-capital losses | | | 1,538 | | | | 2032 | |
| US tax basis of mineral interest | | | 1,196 | | | | |
| 15. | Contingencies and Commitments |
| ($000’s) | | | | | Payments due by period | | | | |
| | | Total | | | 2013 | | | | 2014-15 | | | | 2016-17 | | | After 2017 | |
| Mineral interests | | | 3,177 | | | | 403 | | | | 1,146 | | | | 1,063 | | | | 565 | |
| Flow-through expenditures | | | 22,337 | | | | 22,337 | | | | - | | | | - | | | | - | |
| Business premises operating lease | | | 561 | | | | 132 | | | | 264 | | | | 165 | | | | - | |
| | | | 26,075 | | | | 22,872 | | | | 1,410 | | | | 1,228 | | | | 565 | |
In fulfillment of agreements with subscribers of 1.1 million flow-through shares of the Company, the Company has committed to spend $24 million on qualifying exploration expenditures over a twelve month period beginning on November 21, 2012. The Company has spent $1.7 million to December 31, 2012 and will spend the remaining $22.3 million in 2013.
