The three schedules required to complete this Report are attached and the disclosure contained therein has been approved by the Board of Directors. A copy of this Report will be provided to any shareholder that requests it. Please note this form is incorporated as part of both the required filing of Schedule A and Schedules B and C.
See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
KNIGHT RESOURCES LTD. (An exploration stage company) Notes to the Financial Statements June 30, 2004 (Unaudited) (Canadian Dollars)
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1.Nature of Operations and Basis of Presentation
The Company is a public company incorporated under the Company Act, British Columbia. Its shares are listed on the TSX Venture Exchange and the Frankfurt Stock Exchange. The principal business of the Company is exploration of mineral and oil and gas properties. As of the date of this report, the Company has not determined whether its properties contain reserves that are economically recoverable. The recoverability of amounts shown for mineral and oil and gas properties is dependent upon the discovery of economically recoverable reserves, the ability of the Company to obtain necessary financing to complete the exploration of the properties and future profitable production from the properties or proceeds from disposition.
These interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and notes to the financial statements required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the nine month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended September 30, 2004. The balance sheet at September 30, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles fo r complete financial statements.
2. Significant Accounting Policies
These interim financial statements have been prepared by management in accordance with the accounting policies described in the Company’s annual financial statements for the year ended September 30, 2003 except that the Company has adopted the new recommendations of the Canadian Institute of Chartered Accountants Handbook section 3870,Stock-based Compensation and Other Stock-based Payments, effective October 1, 2003.
This new section requires that a fair value based method of accounting must be used for all stock-based payments to employees, directors and non-employees. The old section only required a fair value based method of accounting for direct awards of stock, stock appreciation rights, and awards that call for settlement in cash or other assets. Also, only stock options granted to non-employees had to be accounted for using a fair value based method.
Accordingly, starting October 1, 2003, compensation expense is determined when stock options are granted and is recognized over the vesting period of the options. The compensation expense is determined as the fair value of the option at the date of grant using an option pricing model.
The Company has chosen early adoption of this new policy and therefore will be accounting for the fair value of stock-based payments on a prospective basis with no restatement of prior periods.
For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report to Shareholders for the year ended September 30, 2003.
3. Oil and Gas Property
Maycroft Property
In November 2001, the Company entered into a farmout agreement with Polaris Resources Ltd. (‘Polaris’) to participate and earn a 25% before payout (20% after payout) working interest, subject to a 9% overriding royalty in a gas prospect in the Foothills region of Alberta, Canada. The Company has a director in common with Polaris. Upon signing the agreement, the Company advanced Polaris $125,000 for seismic costs and has advanced an additional $402,500 for preparatory work to obtain a well licence. On December 16, 2003, the Alberta Energy & Utilities Board denied the well licence application. The Company and Polaris are reviewing the decision and are pursuing various means to recover the costs incurred on the project. The Company is of the opinion that as of June 30, 2004 and the date of this quarterly report, there has been no impairment of carrying value.
3. Oil and Gas Property (cont’d)
Lagarde Property
During the three months ended December 31, 2003, the Company completed the abandonment of the initial Lagarde Property test well. The abandonment was completed at a cost that was less than previously estimated which resulted in a recovery of $4,168. The Company sold the used wellhead and used tubing for net proceeds of $8,250.
Refund of Abandonment Deposit
During the three months ended June 30, 2004, the Company received $129,370 from Tri-Valley Oil & Gas Co. (“Tri-Valley”). The funds represent the Company’s share of abandonment funds advanced to Tri-Valley in 1999 for the drilling of the Ekho No. 1 test well. The Company’s share of abandonment funds were returned because Tri-Valley decided to re-enter the well and consequently took over the responsibility for the abandonment of the well. During fiscal 2000, the Company determined that further expenditures on the test well were not warranted and as a result, the Company wrote-off all of its deferred exploration costs as at September 30, 2000.
4. Mineral Property
West Raglan Property
| | June 30, | | September 30, |
Cumulative expenditures | 2004 | | 2003 |
|
| |
|
| | | | |
| Claim renewal fees | $ 138,599 | | $ - |
| | | | |
| Exploration expenditures | $ 4,190,469 | | $ 1,982,685 |
| Refundable tax credits and mining duties | (1,548,316) | | (858,000) |
|
|
|
|
| | | | |
| | $ 2,642,153 | | $ 1,124,685 |
| | | | |
On March 26, 2003, the Company entered into a formal option and joint venture agreement with Anglo American Exploration (Canada) Limited (‘Anglo American’), whereby the Company can earn a 49% participating joint venture interest in the 720 km2West Raglan Project (‘the Project’) located in northern Quebec, Canada.
To exercise the option, the Company must incur a total of $11.8 million of expenditures on exploration and related work on or before December 31, 2006, as follows:
| | December 31, | | | |
|
|
|
|
|
| | 2003 | 2004 | 2005 | 2006 |
|
|
|
|
|
| | | | | |
| Minimum work expenditure commitment | $ 1,700,000 | $ 2,300,000 | $ 3,400,000 | $ 4,400,000 |
The Company has agreed to spend $4.5 million in calendar 2004. As at June 30, 2004, the Company has incurred approximately $4,330,000 since exploration commenced on the property in April 2003.
On April 21, 2004 Novawest Resources Inc. of Vancouver, BC, commenced litigation in the Supreme Court of British Columbia against Anglo American. The lawsuit, Action No. SO42230, relates primarily to the question of ownership of the claims that form the West Raglan Property. On June 24, 2004 Anglo American filed a Statement of Defence in the Supreme Court of British Columbia. In the Statement of Defense, Anglo American provides a detailed account of the events that led to Anglo American’s staking of the West Raglan Property, and more specifically challenges the basis for all claims made by Novawest Resources Inc.
The Company is relying on representations in its Option and Joint Venture Agreement with Anglo American that Anglo American is the valid owner of all of the claims that form the West Raglan Project.
5. Share Capital
| | | | Number | Value |
| | |
|
|
| | | | | |
| Balance at September 30, 2003 | | | 36,215,437 | $ 10,431,488 |
| Exercise of options | | | 1,575,000 | 564,850 |
| Exercise of warrants | | | 3,419,500 | 895,975 |
| Private placement | | | 6,730,769 | 3,500,000 |
|
|
|
|
|
| | | | | |
| Balance at June 30, 2004 | | | 47,940,706 | $ 15,392,313 |
| | | | | |
On December 11, 2003, the Company closed a non-brokered private placement in the amount of $3,500,000. The Company issued 6,730,769 units at a price of $0.52 per unit. Each unit is comprised of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at a price of $0.65 expiring June 10, 2005. Of the 6,730,769 common shares and warrants issued, 1,507,500 are flow-through common shares and 1,007,500 are flow-through warrants. For income tax purposes, the subscription funds of $783,900 relating to the flow-through common shares will be applied towards carrying out exploration activities and the expenditures will be renounced in favour of the subscriber. Accordingly, the Company will not have available deductions from taxable income in respect of such expenditures.
6. Stock-based Compensation
The Company uses the fair value based method of accounting for all stock-based awards. During the nine months ended June 30, 2004, the Company granted 3,025,000 stock options with a compensation cost of $1,187,750. The Company calculated the compensation cost by using the Black-Scholes option pricing model assuming a weighted average risk-free interest rate of 3%, a dividend yield of nil, an expected volatility of 75% and expected lives of the stock options of two years. The Company did not grant any stock options during the three months ended June 30, 2004.
7. Contractual Obligations
Effective June 1, 2004, the Company entered into a one year lease with ViewNorth Properties Ltd., whereby the Company pays $2,000 per month for rent and $500 per month for operating costs for its executive offices. David Patterson, CEO and director of the Company is also a director of ViewNorth Properties Ltd.
8. Related Party Transactions
Related parties are directors, officers and other companies with common directors and/or officers of the Company. Amounts due to related parties are non-interest bearing and without specific terms of repayment.
Related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
The following is a summary of the related party transactions that occurred throughout the period:
| | 2004 | | 2003 |
|
| |
|
| | | | |
| Management fees | $ 192,967 | | $ 18,667 |
| Rent | $ 2,500 | | $ - |
| Interest expense | $ - | | $ 19,071 |
| Property, plant and equipment | $ 4,068 | | $ - |
KNIGHT RESOURCES LTD. | | | | | | | |
(An exploration stage company) | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Exploration Expenditures | | | | | | | Schedule 1 |
(Unaudited) | | | | | | | |
(Canadian Dollars) | | | | | | | |
|
|
|
|
|
|
|
|
| | | | | | | | |
| | | | Three months ended June 30, | | | | Nine months ended June 30, |
| | 2004 | | 2003 | | 2004 | | 2003 |
|
| |
| |
| |
|
| | | | | | | | |
Lagarde | | | | | | | |
| Recovery of abandonment costs | $ - | | $ - | | $ (4,168) | | $ - |
| Net proceeds on sale of wellhead and tubing | - | | - | | (8,250) | | - |
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|
|
|
|
|
|
|
| | | | | | | | |
| | - | | - | | (12,418) | | - |
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|
|
|
|
|
|
|
| | | | | | | | |
West Raglan Property | | | | | | | |
| Drilling | 148,195 | | 40,096 | | 648,626 | | 40,096 |
| Geochemistry | 28,836 | | 7,887 | | 70,344 | | 7,887 |
| Geology | 309,413 | | 157,387 | | 855,822 | | 157,387 |
| Geophysics | 45,355 | | 18,730 | | 319,211 | | 18,730 |
| Other | 120,583 | | 28,314 | | 313,781 | | 28,314 |
| Refundable tax credits | (164,709) | | - | | (558,709) | | - |
| Mining duties refund | (39,607) | | - | | (131,607) | | - |
|
|
|
|
|
|
|
|
| | | | | | | | |
| | 448,066 | | 252,414 | | 1,517,468 | | 252,414 |
|
|
|
|
|
|
|
|
| | | | | | | | |
| | $ 448,066 | | $ 252,414 | | $ 1,505,050 | | $ 252,414 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
General and Administrative Expenses | | | | | | | Schedule 2 |
(Unaudited) | | | | | | | |
(Canadian Dollars) | | | | | | | |
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|
|
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|
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| | | | | | | | |
| | | | Three months ended June 30, | | | | Nine months ended June 30, |
| | 2004 | | 2003 | | 2004 | | 2003 |
|
| |
| |
| |
|
| | | | | | | | |
| Accounting and audit | $ 6,250 | | $ 350 | | $ 36,579 | | $ 2,100 |
| Administrative fees | 26,000 | | 24,000 | | 78,500 | | 48,000 |
| Amortization | 1,265 | | 214 | | 3,058 | | 626 |
| Compensation expense (notes 2 & 6) | - | | - | | 1,187,750 | | - |
| Consulting fees | - | | - | | 48,000 | | - |
| Filing fees | 2,945 | | 32,822 | | 33,739 | | 43,167 |
| Legal fees | 6,356 | | 75,553 | | 24,786 | | 82,398 |
| Management fees | 65,367 | | 18,667 | | 192,967 | | 18,667 |
| Office and miscellaneous | 6,638 | | 1,395 | | 33,888 | | 12,108 |
| Rent | 10,500 | | 6,000 | | 28,500 | | 12,000 |
| Telephone and communications | 4,457 | | 1,530 | | 15,074 | | 3,701 |
| Transfer agent | 2,103 | | 2,365 | | 11,747 | | 5,324 |
| Less: interest income | (23,721) | | (5,956) | | (59,575) | | (6,026) |
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|
|
|
|
|
|
|
| | | | | | | | |
| | $ 108,160 | | $ 156,940 | | $ 1,635,013 | | $ 222,065 |
| | | | | | | | |
See accompanying notes to the financial statements.
KNIGHT RESOURCES LTD.Schedule B Supplementary Information For the Nine Months Ended June 30, 2004
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1. Analysis of expenses and deferred costs
Please see the financial statements for the following:
§Schedule of Exploration Expenditures and Schedule of General and Administrative Expenses
2. Related party transactions
§See the financial statements for a summary of related party transactions.
3. a) Securities issued during the period
| Date of | | Type of | | | | Type of | Commission |
| Issue | Type of Security | Issue | Number | Price | Proceeds | Consideration | Paid |
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| | | | | | | | |
| 01-Oct-03 | Common shares | Warrants | 475,000 | $0.25 | $118,750 | Cash | $0 |
| 02-Oct-03 | Common shares | Warrants | 140,000 | $0.25 | $35,000 | Cash | $0 |
| 06-Oct-03 | Common shares | Warrants | 125,000 | $0.25 | $31,250 | Cash | $0 |
| 07-Oct-03 | Common shares | Warrants | 25,000 | $0.25 | $6,250 | Cash | $0 |
| 09-Oct-03 | Common shares | Warrants | 5,000 | $0.25 | $1,250 | Cash | $0 |
| 16-Oct-03 | Common shares | Warrants | 8,000 | $0.25 | $2,000 | Cash | $0 |
| 21-Oct-03 | Common shares | Warrants | 25,000 | $0.22 | $5,500 | Cash | $0 |
| 21-Oct-03 | Common shares | Options | 250,000 | $0.30 | $75,000 | Cash | $0 |
| 22-Oct-03 | Common shares | Warrants | 10,000 | $0.25 | $2,500 | Cash | $0 |
| 24-Oct-03 | Common shares | Options | 535,000 | $0.51 | $272,850 | Cash | $0 |
| 24-Oct-03 | Common shares | Options | 500,000 | $0.30 | $150,000 | Cash | $0 |
| 24-Oct-03 | Common shares | Warrants | 127,000 | $0.25 | $31,750 | Cash | $0 |
| 30-Oct-03 | Common shares | Warrants | 12,500 | $0.25 | $3,125 | Cash | $0 |
| 31-Oct-03 | Common shares | Warrants | 130,000 | $0.25 | $32,500 | Cash | $0 |
| 7-Nov-03 | Common shares | Warrants | 66,000 | $0.25 | $16,500 | Cash | $0 |
| 14-Nov-03 | Common shares | Options | 72,000 | $0.20 | $14,400 | Cash | $0 |
| 21-Nov-03 | Common shares | Warrants | 112,000 | $0.25 | $28,000 | Cash | $0 |
| 26-Nov-03 | Common shares | Warrants | 50,000 | $0.25 | $12,500 | Cash | $0 |
| 27-Nov-03 | Common shares | Warrants | 50,000 | $0.25 | $12,500 | Cash | $0 |
| 2-Dec-03 | Common shares | Warrants | 5,000 | $0.25 | $1,250 | Cash | $0 |
| 4-Dec-03 | Common shares | Warrants | 249,000 | $0.25 | $62,250 | Cash | $0 |
| 8-Dec-03 | Common shares | Warrants | 10,000 | $0.25 | $2,500 | Cash | $0 |
| 10-Dec-03 | Common shares | Options | 78,000 | $0.20 | $15,600 | Cash | $0 |
| 10-Dec-03 | Common shares | Warrants | 78,000 | $0.25 | $19,500 | Cash | $0 |
| 11-Dec-03 | Common shares | Warrants | 10,000 | $0.25 | $2,500 | Cash | $0 |
| 11-Dec-03 | Common shares | Units | 6,730,769 | $0.52 | $3,500,000 | Cash | $0 |
| 19-Dec-03 | Common shares | Warrants | 256,000 | $0.25 | $64,000 | Cash | $0 |
| 22-Dec-03 | Common shares | Options | 15,000 | $0.30 | $4,500 | Cash | $0 |
| Date of | | Type of | | | | Type of | Commission |
| Issue | Type of Security | Issue | Number | Price | Proceeds | Consideration | Paid |
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| | | | | | | | |
| 09-Jan-04 | Common shares | Warrants | 15,000 | $0.25 | $3,750 | Cash | $0 |
| 13-Jan-04 | Common shares | Warrants | 13,000 | $0.25 | $3,250 | Cash | $0 |
| 22-Jan-04 | Common shares | Options | 15,000 | $0.30 | $4,500 | Cash | $0 |
| 26-Jan-04 | Common shares | Warrants | 19,500 | $0.25 | $4,875 | Cash | $0 |
| 30-Jan-04 | Common shares | Options | 50,000 | $0.20 | $10,000 | Cash | $0 |
| 10-Feb-04 | Common shares | Options | 50,000 | $0.30 | $15,000 | Cash | $0 |
| 13-Feb-04 | Common shares | Warrants | 50,000 | $0.25 | $12,500 | Cash | $0 |
| 17-Feb-04 | Common shares | Warrants | 47,500 | $0.25 | $11,875 | Cash | $0 |
| 19-Feb-04 | Common shares | Warrants | 250,000 | $0.25 | $62,500 | Cash | $0 |
| 23-Feb-04 | Common shares | Warrants | 62,500 | $0.25 | $15,625 | Cash | $0 |
| 24-Feb-04 | Common shares | Warrants | 20,000 | $0.25 | $5,000 | Cash | $0 |
| 4-Mar-04 | Common shares | Options | 10,000 | $0.30 | $3,000 | Cash | $0 |
| 05-Mar-04 | Common shares | Warrants | 365,000 | $0.22 | $80,300 | Cash | $0 |
| 5-Mar-04 | Common shares | Warrants | 10,000 | $0.25 | $2,500 | Cash | $0 |
| 11-Mar-04 | Common shares | Warrants | 33,000 | $0.25 | $8,250 | Cash | $0 |
| 12-Mar-04 | Common shares | Warrants | 82,000 | $0.25 | $20,500 | Cash | $0 |
| 17-Mar-04 | Common shares | Warrants | 16,000 | $0.25 | $4,000 | Cash | $0 |
| 22-Mar-04 | Common shares | Warrants | 50,000 | $0.22 | $11,000 | Cash | $0 |
| 23-Mar-04 | Common shares | Warrants | 10,000 | $0.22 | $2,200 | Cash | $0 |
| 25-Mar-04 | Common shares | Warrants | 100,000 | $0.22 | $22,000 | Cash | $0 |
| 25-Mar-04 | Common shares | Warrants | 2,000 | $0.25 | $500 | Cash | $0 |
| 7-Apr-04 | Common shares | Warrants | 119,000 | $0.25 | $29,750 | Cash | $0 |
| 22-Apr-04 | Common shares | Warrants | 11,000 | $0.25 | $2,750 | Cash | $0 |
| 23-Apr-04 | Common shares | Warrants | 144,000 | $0.65 | $93,600 | Cash | $0 |
| 30-Apr-04 | Common shares | Warrants | 10,000 | $0.25 | $2,500 | Cash | $0 |
| 21-May-04 | Common shares | Warrants | 7,000 | $0.25 | $1,750 | Cash | $0 |
| 8-Jun-04 | Common shares | Warrants | 1,000 | $0.25 | $250 | Cash | $0 |
| 10-Jun-04 | Common shares | Warrants | 13,500 | $0.25 | $3,375 | Cash | $0 |
b) Options granted during the period
| Date of | | | Exercise | Expiry |
| Grant | Number | Name | Price | Date |
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| | | | | |
| 14-Nov-03 | 200,000 | Investor relations | $0.83 | 13-Nov-05 |
| 23-Dec-03 | 900,000 | Harvey Keats | $0.93 | 22-Dec-05 |
| 23-Dec-03 | 900,000 | David Patterson | $0.93 | 22-Dec-05 |
| 23-Dec-03 | 200,000 | Kerry Sparkes | $0.93 | 22-Dec-05 |
| 23-Dec-03 | 25,000 | John Maher | $0.93 | 22-Dec-05 |
| 23-Dec-03 | 100,000 | Erin Walmesley | $0.93 | 22-Dec-05 |
| 23-Dec-03 | 350,000 | Employees | $0.93 | 22-Dec-05 |
| 23-Dec-03 | 150,000 | Investor relations | $0.93 | 22-Dec-05 |
| 12-Feb-04 | 100,000 | Employees | $1.15 | 11-Feb-06 |
| 26-Mar-04 | 100,000 | Employees | $1.12 | 25-Mar-06 |
4. a) Authorized share capital
100,000,000 common shares with no par value
b) Issued and outstanding share capital
47,940,706 common shares at a recorded value of $15,392,313
c) Options, warrants and convertible securities
| | | Exercise/ | |
| | | Conversion | |
| Type of Security | Number | Price | Expiry Date |
|
|
|
|
| | | | |
| Agent's options | 1,300,000 | $0.20 | May 12, 2005 |
| Options | 237,500 | $0.25 | August 23, 2006 |
| Options | 50,000 | $0.25 | January 17, 2007 |
| Options | 1,082,500 | $0.30 | June 18, 2005 |
| Options | 340,000 | $0.51 | July 28, 2005 |
| Options | 200,000 | $0.83 | November 13, 2005 |
| Options | 2,625,000 | $0.93 | December 22, 2005 |
| Options | 100,000 | $1.15 | February 11, 2006 |
| Options | 100,000 | $1.12 | March 25, 2006 |
| Warrants | 8,000,000 | $0.15 | March 25, 2005 |
| Warrants | 6,417,500 | $0.25 | May 12, 2005 |
| Warrants | 6,730,769 | $0.65 | June 10, 2005 |
d) Number of shares subject to escrow or pooling agreements
None
5. Directors and officers of the Company
Harvey Keats Director, President
David Patterson Director, CEO
Kerry Sparkes Director
John Maher Director
Laurie Sadler Director
Erin Walmesley Secretary
Knight Resources Ltd. is a natural resource exploration company. The Company’s primary project is the West Raglan nickel project located in northern Quebec. The Company also has an interest in a gas well near Fort St. John, British Columbia (the Fort St. John Project) and an interest in an oil and gas prospect in the Foothills Region of Alberta (the Maycroft Project).
West Raglan, Quebec
On March 26, 2003, the Company entered into a formal Option and Joint Venture Agreement with Anglo American Exploration (Canada) Ltd. ('Anglo American') whereby the Company can earn a 49% participating joint venture interest in the 720 square kilometre West Raglan Project located in the Cape Smith Belt in northern Quebec. To exercise the option, the Company must incur a total of $11.8 million of expenditures on exploration and related work on the property on or before December 31, 2006.
Anglo American has the right to increase its interest in the Project from 51% to 70% by completing, at its own cost, a bankable feasibility study. At the Company’s election, Anglo American can further increase its interest in the West Raglan Project to 75% by arranging production financing for both parties.
Anglo American Exploration (Canada) Ltd. is a wholly owned subsidiary of Anglo American plc, of London, England.
Falconbridge's Raglan nickel mine is located 90 kilometres east of the eastern margin of the West Raglan Project. Resources, reserves and mined ore to date at Raglan total 28 million tonnes averaging 2.8% nickel and 0.8% copper with significant platinum group elements and cobalt. Proximity of the Company’s West Raglan Project to Falconbridge’s Raglan mine provides no assurance that economic mineralization exists on the West Raglan Project.
The known nickel deposits in the Cape Smith Belt occur in two different settings: the Raglan Formation at the base of the Chukotat Group, and the Delta Horizon in the Povungnituk Group. All of Falconbridge’s resources and reserves are hosted by the Raglan Formation and occur in nine separate deposits over a 55 kilometre strike length.
In 2002 AAEC confirmed the existence of 65 kilometres of strike length of the Raglan Formation and 65 kilometres of strike length of the Delta Horizon on the West Raglan Project.
The 2003 program began when AAEC flew the entire property with their deep penetrating SPECTREM electromagnetic and magnetic airborne system.
In July 2003, surface sampling discovered high grade locally derived boulders on the West Raglan Project. The best grab sample taken assayed 3.41% nickel, 2.91% copper, 0.09% cobalt, 3.3 grams/tonne palladium and 0.84 grams/tonne platinum. (See news release dated July 16, 2003 on the West Raglan Project).
In 2003, a total of 18 holes were drilled, eight of which intersected significant nickel, copper, cobalt, platinum and palladium mineralization in the Frontier area. The Frontier area, which extends over 3 kilometres east-west by 1 kilometre north-south, has been divided into four zones: Frontier East, Frontier Central, Frontier West and Frontier South. The mineralization occurs in ultramafic rocks of the Raglan Formation.
The discovery hole, WR-08 intersected 14.75 metres of 3.04% nickel in 50% net textured sulphides. The best hole, WR-16, intersected 5.12 metres of 4.16% nickel averaging 35% sulphides, including a 0.67 metre intersection of 11.83% nickel in massive sulphides. (See news releases dated September 8, September 23, October 1, and October 14, 2003.)
Subsequent to March 31, 2004, the Company became aware that Novawest Resources Inc. of Vancouver, BC, commenced litigation in the Supreme Court of British Columbia against Anglo American. The lawsuit, Action No. SO42230, relates primarily to the question of ownership of the claims that form the West Raglan Project. In late June, Anglo American filed, in the Supreme Court of British Columbia, a Statement of Defence responding to allegations made by Novawest Resources Inc. over the question of ownership of the mineral claims that form the West Raglan Project. In the Statement of Defense, Anglo American provides a detailed account of the events that led to Anglo American’s staking of the West Raglan Property, and more specifically challenges the basis for all claims made by Novawest.
The Company is relying on representations in its Option and Joint Venture Agreement with Anglo American that Anglo American is the valid owner of all of the claims that form the West Raglan Project.
The Company has been advised by Anglo American that they will be defending their ownership of the West Raglan Project claims.
2004 Program
Exploration on the West Raglan Project resumed in late June 2004. A minimum of 5,000 metres of drilling is planned for 2004. Initial drilling will focus on the Frontier area and will include testing of borehole electromagnetic targets around known mineralization, testing electromagnetic anomalies on strike with known mineralization and testing other electromagnetic anomalies associated with ultramafics. Additional drilling will be carried out on targets on the 65 kilometre strike length of the Raglan Formation and the 65 kilometre strike length of the Delta Horizon.
A detailed AEROTEM helicopter borne electromagnetic and magnetic geophysical survey was flown in July. The 3,000 line kilometre AEROTEM survey was flown at 100 metre line spacing, with the exception of 50 metre line spacing over the Frontier area and other selected targets areas. The survey has been designed to follow up the airborne SPECTREM survey flown at 200 metre line spacing in 2003.
Limited electromagnetic and magnetic surface surveys will be carried out over selected targets before drilling. Down-hole electromagnetic surveys will be carried out on a routine basis.
Maycroft, Alberta
In November 2001, Knight entered into a farmout agreement with Polaris Resources Ltd. (“Polaris”) to participate and earn a 25% before payout (20% after payout) working interest, subject to a 9% overriding royalty in a large sour gas prospect near Maycroft in the Foothills region of Alberta, Canada.
The Foothills region of southwest Alberta is one of the most prolific natural gas producing regions of the Western Canadian Sedimentary Basin. Production to date from the well known Mississippian and Devonian gas fields ranges from 234 BCF at Coleman to 3.9 TCF at Waterton. Many of the wells in this region produce in excess of 25 million cubic feet per day and have high deliverability with relatively low decline rates, and consequently a long life. Proximity of the Company’s Maycroft Project to known producing regions of the Western Canadian Sedimentary Basin provides no assurance that economic quantities of oil and gas exist on the Maycroft Project.
The Whaleback Structure is one of the largest known undrilled prospects in the Mississippian and Devonian formations of Southern Alberta, with an undiscovered potential for over 2 TCF of natural gas. A major international oil and gas company proposed drilling of the Whaleback Structure in the early nineties. That proposal involved the drilling of up to 25 wells in a pristine wilderness area. After much consultation, the Provincial Government created the Bob Creek Wildland Provincial Park and the Black Creek Heritage Rangeland. Consequently, development of the subsurface structures under the Parkland cannot occur.
Following the creation of the Provincial Park and the Heritage Rangeland in 1999, Polaris acquired mineral rights near the southern boundary of the protected areas. The 640 acres of petroleum and natural gas rights that Polaris acquired lie one mile outside the Bob Creek Provincial Park. Seismic data acquired by Polaris indicates that a large subsurface geological structure is also present under the lands outside of the Park. Polaris has proposed the drilling of up to four wells from one surface location, thus causing minimal disturbance in this area near the Park.
Polaris, the operator, applied for a well license for the drilling of an initial test well and up to three additional wells from the same site. The Alberta Energy & Utilities Board ('AEUB') conducted a public hearing on the proposed drilling of the initial test well in Maycroft, Alberta in September 2003. On December 16, 2003, the AEUB denied the well license application for the Maycroft Project, submitted by Polaris. The Company and Polaris are reviewing the decision.
The proposed drilling would target the large geophysically and geologically mapped structure that potentially traps natural gas, especially in Mississippian and Devonian Formations. Secondary targets exist in the overlying Cretaceous Formations. It is estimated that the cost of an initial 5,000 metre test well would be $9 million (Knight’s portion would be approximately $2.25 million).
As at June 30, 2004, the Company has spent $530,000 ($70,000 during fiscal 2004) on the Maycroft property and most of the costs incurred have been for preparatory work to obtain a well license. As the Company was denied the well license on the property, the Company is pursuing various means to recover its costs.
Fort St. John, B.C.
The Company has a 15% working interest in a gas well in Fort St. John, B.C. The well has produced approximately 518 million cubic feet of gas since it was tied in on August 2, 2000. Production was limited during 2002 and therefore the Company provided for 100% depletion of the well during the 2002 fiscal year. The well produced approximately 17 million cubic feet of gas during the nine months ended June 30, 2004.
Operations and Liquidity
The Company reported a loss of $3,394,134 (2003 - $497,136) and a loss per share of $0.08 (2003 - $0.03) for the nine months ended June 30, 2004. The Company’s 2004 loss has increased significantly compared to 2003 due to the Company’s involvement in the West Raglan Project and a change in accounting for stock-based awards. Management anticipates increasing expenditures for fiscal 2004 in order to manage the Company’s involvement in the West Raglan Project and to raise funds for future exploration. In particular, the Company expects to incur greater legal fees, travel and promotion costs, filing fees, transfer agent fees, administrative fees and management fees.
Effective October 1, 2003, the Company has adopted the new recommendations of the Canadian Institute of Chartered Accountants Handbook section 3870,Stock-based Compensation and Other Stock-based Payments.
The new rules require that a fair value based method of accounting must be used for all stock-based payments to employees, directors and non-employees. The old rules only required a fair value based method of accounting for direct awards of stock, stock appreciation rights, and awards that call for settlement in cash or other assets. Also, only stock options granted to non-employees had to be accounted for using a fair value based method. Accordingly, starting October 1, 2003, compensation expense is determined when stock options are granted and is recognized over the vesting period of the options. The compensation expense is determined as the fair value of the option at the date of grant using an option pricing model. The Company has chosen early adoption of this new policy and therefore will be accounting for the fair value of stock-based payments on a prospecti ve basis with no restatement of prior periods.
During the nine months ended June 30, 2004, the Company incurred $1,187,750 (2003 - $nil) in compensation expense in accordance with the new accounting rules. The compensation expense is a non-cash item and accordingly did not impact the Company’s working capital position.
The Company expended $2,207,784 (2003 - $252,414) on mineral property exploration and $138,599 (2003 - $nil) on claim renewal fees on the Company’s West Raglan Project. The Company has accrued $690,316 in tax credits recoverable for the nine months ended June 30, 2004. These tax credits recoverable relate to the Government of Quebec’s exploration subsidy programs. As a result of these credits, the Company’s net exploration expenditures on the West Raglan Project for the nine months ended June 30, 2004 were $1,517,468.
During the three months ended June 30, 2004, the Company received $129,370 from Tri-Valley Oil & Gas Co. (“Tri-Valley”). The funds represent the Company’s share of abandonment funds advanced to Tri-Valley in 1999 for the drilling of the Ekho No. 1 test well. The Company’s share of abandonment funds were returned because Tri-Valley decided to re-enter the well and consequently took over the responsibility for the abandonment of the well.
The Fort St. John well did not produce any gas during the three months ended June 30, 2004 because the well was shut in during this time. The Company does not anticipate significant production from the well in the future. As of the date of this report, there are no plans to abandon the well in the short term. The Company is not expecting any material future profits or losses from the well.
During the three months ended December 31, 2003, the Company completed the abandonment of the Lagarde initial test well. The abandonment was completed at a cost that was less than previously estimated which resulted in a recovery of $4,168. The Company sold the used wellhead and used tubing for net proceeds of $8,250.
Most of the line items on the consolidated schedule of general and administrative expenses have increased in 2004 compared to 2003. The increase is in large part due to the Company’s involvement in the West Raglan Project which resulted in a significant increase in corporate activity and caused the Company to incur more costs in all areas.
The Company pays its officers management fees as compensation for the time incurred in managing the Company. Management devotes a portion of their time to the Company and a portion of their time to other companies where they are directors and/or officers. Accordingly, management invoices the Company based on the percentage of time each of the individuals devote to the Company.The Company’s business required more management time during the nine months ended June 30, 2004 compared to the same period for 2003. The Company paid the CEO $108,000 (2003 - $nil), the president $62,467 (2003 - $10,667) and the exploration manager $22,500 (2003 - $8,000) for the nine months ended June 30, 2004.
The Company paid an arms-length private company $78,500 (2003 - $48,000) for administrative and accounting services and paid the same company $26,000 (2003 - $12,000) for rent of office space. The administrative fees have increased because of the Company’s increased business activity and rent has increased because the Company is using more office space. Effective June 1, 2004, the Company entered into a one year lease with ViewNorth Properties Ltd., whereby the Company pays $2,000 per month for rent and $500 per month for operating costs for its executive offices. David Patterson, CEO and director of the Company is also a director of ViewNorth Properties Ltd.
Promotion and travel costs have also increased significantly during the first nine months of fiscal 2004. Management has traveled across North America and Europe promoting the Company in order to raise money for future exploration expenditures. The Company is also paying two investor relations firms in order to raise awareness of the Company’s activities in North America and Europe (see below for details).
As at June 30, 2004, the Company’s working capital is $4,967,712.
The Company currently does not have any revenue producing assets and therefore will be dependent on additional equity financing in order to continue operations and to finance exploration commitments for the West Raglan Project.
Subsequent to June 30, 2004, the Company advanced $3,237,674 to Anglo American for exploration of the West Raglan Project. Taking into account this subsequent advance of funds, the Company has advanced $4,320,360 to Anglo American during the 2004 calendar year.
Financings
On December 11, 2003, the Company closed a non-brokered private placement in the amount of $3,500,000. The Company issued 6,730,769 units at a price of $0.52 per unit. Each unit is comprised of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at a price of $0.65 expiring June 10, 2005. Of the 6,730,769 common shares and warrants issued, 1,507,500 are flow-through common shares and 1,007,500 are flow-through warrants. For income tax purposes, the subscription funds of $783,900 relating to the flow-through common shares will be applied towards carrying out exploration activities and the expenditures will be renounced in favour of the subscriber. Accordingly, the Company will not have available deductions from taxable income in respect of such expenditures.
During the nine months ended June 30, 2004, the Company issued 1,575,000 common shares pursuant to the exercise of stock options for proceeds of $564,850 and 3,419,500 common shares pursuant to the exercise of warrants for proceeds of $895,975.
The Company will be using the funds raised in the above equity offerings for exploration on the West Raglan Project and for general working capital purposes.
Investor Relations
Effective August 1, 2003 the Company engaged Institutional Market Communications Inc. (formerly Rock Marketing Inc.) of Vancouver, British Columbia to provide public relations for an initial term of 12 months. Institutional Market Communications is focused on servicing the Company's European shareholders and introducing and presenting the Company to interested investors. The Company pays Institutional Market Communications $5,000 per month, plus expenses.
Effective October 1, 2003 the Company engaged Vanguard Shareholder Solutions Inc. of Vancouver, British Columbia to provide public relations for an initial term of 12 months. The Company pays Vanguard $8,000 per month, plus expenses.
During the nine months ended June 30, 2004, the Company participated in investment and mineral resource conferences held in Calgary, Quebec City, Vancouver, Toronto, New York and Europe.
