(A Development-Stage Company)
Condensed Interim Consolidated Financial Statements
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(in Canadian dollars)
(Unaudited)
Alderon Iron Ore Corp.
Condensed Interim Consolidated Statements of Financial Position (Unaudited)
(in Canadian dollars)
As of March 31, | As of December 31, | |||||||
| 2015 | 2014 | |||||||
| $ | $ | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | 17,608,035 | 21,442,903 | ||||||
| Restricted short-term investments (note 3) | 21,967,011 | 22,202,011 | ||||||
| Prepaid expenses and other current assets (note 4) | 2,505,395 | 2,246,607 | ||||||
| Receivables (note 5) | 1,295,817 | 1,314,506 | ||||||
| Total current assets | 43,376,258 | 47,206,027 | ||||||
| Non-current assets | ||||||||
| Mineral properties (note 6) | 176,655,019 | 176,574,918 | ||||||
Property, plant and equipment (note 7) | 28,640,996 | 27,250,606 | ||||||
| Long-term advance (note 8) | 20,465,016 | 20,465,016 | ||||||
| Total non-current assets | 225,761,031 | 224,290,540 | ||||||
| Total assets | 269,137,289 | 271,496,567 | ||||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Payables and accrued liabilities (note 9) | 9,072,128 | 8,922,367 | ||||||
| Due to related parties | 569,642 | 614,561 | ||||||
| Total current liabilities | 9,641,770 | 9,536,928 | ||||||
| Non-current liabilities | ||||||||
| Convertible debt (note 10) | 19,476,886 | 18,852,378 | ||||||
| Deferred share unit liability (note 12) | 232,942 | 131,500 | ||||||
| Total non-current liabilities | 19,709,828 | 18,983,878 | ||||||
| Total liabilities | 29,351,598 | 28,520,806 | ||||||
| EQUITY | ||||||||
Share capital, warrants and conversion option (notes 10 and 13) | 263,946,822 | 263,946,822 | ||||||
| Other capital (note 14) | 24,916,558 | 24,845,096 | ||||||
| Deficit | (101,056,201 | ) | (99,426,086 | ) | ||||
| Equity attributable to owners of the parent | 187,807,179 | 189,365,832 | ||||||
| Non-controlling interest | 51,978,512 | 53,609,929 | ||||||
| Total equity | 239,785,691 | 242,975,761 | ||||||
| Total liabilities and equity | 269,137,289 | 271,496,567 | ||||||
Basis of preparation, nature of operations and going concern (note 1) Commitments and contingencies (note 19) | ||||||||
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Approved by the Board of Directors
“Lenard Boggio” | “David Porter” | |||
Lenard Boggio Director | David Porter Director |
2
Alderon Iron Ore Corp.
Condensed Interim Consolidated Statements of Changes in Equity (Unaudited)
For the three-month periods ended March 31, 2015 and 2014
(in Canadian dollars, except share data)
| Attributable to owners of the parent | ||||||||||
| Common shares | Share capital, warrants and conversion option | Other capital | Deficit | Non-controlling interest | Total | |||||
| (number) | $ | $ | $ | $ | $ | |||||
| Balance – January 1, 2014 | 130,144,167 | 259,143,095 | 24,206,055 | (90,639,603) | 56,714,913 | 249,424,460 | ||||
Equity component of convertible debt, net of transaction costs (note 10)* | - | 3,403,753 | - | (850,938) | 850,938 | 3,403,753 | ||||
| Share-based compensation costs (note 14) | - | - | 202,032 | - | - | 202,032 | ||||
| Net loss and comprehensive loss | - | - | - | (1,234,062) | (724,252) | (1,958,314) | ||||
| Total contributions by and distributions to owners | - | 3,403,753 | 202,032 | (2,085,000) | 126,686 | 1,647,471 | ||||
| Balance – March 31, 2014 | 130,144,167 | 262,546,848 | 24,408,087 | (92,724,603) | 56,841,599 | 251,071,931 | ||||
| Attributable to owners of the parent | ||||||||||
| Common shares | Share capital, warrants and conversion option | Other capital | Deficit | Non-controlling interest | Total | |||||
| (number) | $ | $ | $ | $ | $ | |||||
| Balance – January 1, 2015 | 132,134,061 | 263,946,822 | 24,845,096 | (99,426,086) | 53,609,929 | 242,975,761 | ||||
| Share-based compensation costs (note 14) | - | - | 71,462 | - | - | 71,462 | ||||
| Net loss and comprehensive loss | - | - | - | (1,630,115) | (1,631,417) | (3,261,532) | ||||
| Total contributions by and distributions to owners | - | - | 71,462 | (1,630,115) | (1,631,417) | (3,190,070) | ||||
| Balance – March 31, 2015 | 132,134,061 | 263,946,822 | 24,916,558 | (101,056,201) | 51,978,512 | 239,785,691 | ||||
*An amount of $1,213,544 has been recorded as a reduction in the equity component of the Note (as defined in note 10), along with a corresponding increase in the liability component of the Note and a $303,386 decrease in the resulting allocation of non-controlling interest, reflecting an immaterial correction.
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
3
Alderon Iron Ore Corp.
Condensed Interim Consolidated Statements of Comprehensive Loss (Unaudited)
For the three-month periods ended March 31, 2015 and 2014
(in Canadian dollars, except share and per share data)
| Three months ended March 31, | ||
| 2015 | 2014 | |
| $ | $ | |
| Operating expenses | ||
| General and administrative expenses | 1,753,541 | 2,321,821 |
| Development expenses | 1,010,109 | - |
| Environmental, aboriginal, government and community expenses | 15,742 | - |
| 2,779,392 | 2,321,821 | |
| Loss from operations | (2,779,392) | (2,321,821) |
| Finance income | 154,184 | 363,507 |
| Finance costs (note 10) | (636,324) | - |
| Net finance (cost) income | (482,140) | 363,507 |
| Net loss and comprehensive loss | (3,261,532) | (1,958,314) |
| Attributable to: | ||
| Owners of the parent | (1,630,115) | (1,234,062) |
| Non-controlling interest | (1,631,417) | (724,252) |
| (3,261,532) | (1,958,314) | |
| Net loss per share (note 15) | ||
| Basic and diluted | (0.01) | (0.01) |
| Weighted average number of shares outstanding (note 15) | ||
| Basic and diluted | 132,134,061 | 130,144,167 |
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
4
Alderon Iron Ore Corp. Inc.
Condensed Interim Consolidated Statements of Cash Flows (Unaudited)
For the three-month periods ended March 31, 2015 and 2014
(in Canadian dollars)
| Three months ended March 31, | ||||||||
| 2015 | 2014 | |||||||
| $ | $ | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | (3,261,532) | (1,958,314) | ||||||
| Adjustments for: | ||||||||
| Share-based compensation costs (note 14) | 71,462 | 179,544 | ||||||
| Deferred share unit compensation costs (note 12) | 101,442 | - | ||||||
| Depreciation | 55,704 | 36,104 | ||||||
| Interest income | (154,184) | (363,507) | ||||||
| Finance costs | 636,324 | - | ||||||
| Changes in operating assets and liabilities (note 16) | (986,964) | (1,443,767) | ||||||
| Interest received | 475,161 | 322,141 | ||||||
| Interest paid | (11,816) | - | ||||||
| Net cash used in operating activities | (3,074,403) | (3,227,799) | ||||||
| Cash flows from investing activities | ||||||||
| Additions to mineral properties (note 6) | (1,024,794) | (12,249,947) | ||||||
| Decrease (increase) in restricted short-term investments (note 3) | 235,000 | (22,202,011) | ||||||
| Deposits on equipment (note 7) | - | (3,710,704) | ||||||
| Purchases of property, plant and equipment, net of disposals | 29,329 | (13,275) | ||||||
| Net cash used in investing activities | (760,465) | (38,175,937) | ||||||
| Cash flows from financing activities | ||||||||
Proceeds received on the issuance of convertible debt, net of cash transaction costs of $330,000 (note 10) | - | 21,670,000 | ||||||
| Net cash provided by financing activities | - | 21,670,000 | ||||||
| Net change in cash and cash equivalents | (3,834,868) | (19,733,736) | ||||||
| Cash and cash equivalents at the beginning of the period | 21,442,903 | 95,366,039 | ||||||
| Cash and cash equivalents at the end of the period | 17,608,035 | 75,632,303 | ||||||
| Cash and cash equivalents components: | ||||||||
| Cash | 17,608,035 | 67,843,712 | ||||||
| Cash equivalents | - | 7,788,591 | ||||||
| 17,608,035 | 75,632,303 | |||||||
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
5
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
1 Summary of business, reporting entity, basis of preparation, nature of operations and going concern
Summary of business
Alderon Iron Ore Corp. (“Alderon” or the “Company”) is a development-stage company conducting iron ore evaluation activities related entirely to its Canadian properties located in western Labrador in the province of Newfoundland & Labrador. Those properties are collectively referred to as the Kamistiatusset, or “Kami”, Property. All activities associated with the Kami Property are referred to as the Kami Project.
Reporting entity
The accompanying condensed interim consolidated financial statements include the accounts of Alderon Iron Ore Corp., an entity incorporated under the laws of the Province of British Columbia, and its subsidiaries: 0964896 BC Ltd. and Kami General Partner Limited (“Kami GP”), a corporation incorporated under the laws of the Province of Ontario. The condensed interim consolidated financial statements also include the accounts of an affiliate, The Kami Mine Limited Partnership (“The Kami LP”), established under the laws of the Province of Ontario. Kami GP and The Kami LP are each owned 75%, directly or indirectly, by the Company.
The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”), under the symbol “ADV” and on the NYSE MKT, under the symbol “AXX”.
Basis of preparation, nature of operations and going concern
Basis of presentation
These unaudited condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board, applicable to the preparation of interim financial statements, including International Accounting Standard (“IAS”) 34, Interim Financial Reporting (“IAS 34”), and should be read in conjunction with the Company’s consolidated financial statements as of December 31, 2014 and 2013 and for the three-year period ended December 31, 2014.
The preparation of financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates and the exercise of management’s judgment in applying the Company’s accounting policies. Areas involving a high degree of judgment or complexity and areas where assumptions and estimates are significant to the Company’s condensed interim consolidated financial statements are discussed in note 2.
The policies applied in these condensed interim consolidated financial statements are based on IFRS issued and outstanding as of March 31, 2015. These condensed interim consolidated financial statements were approved by the Company's Board of Directors on May 14, 2015.
Nature of operations and going concern
The accompanying condensed interim consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they become due.
The application of the going concern concept is dependent upon the Company’s ability to satisfy its liabilities as they become due and to obtain the necessary financing to complete the development of its mineral property interests, the attainment of profitable mining operations or the receipt of proceeds from the disposition of its mineral property interests. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but not limited to, twelve months from the end of the reporting period.
6
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
1 Summary of business, reporting entity, basis of preparation, nature of operations and going concern (continued)
The business of exploration, development and mining of minerals involves a high degree of risk and there can be no assurance that current exploration, development and mining plans will result in profitable mining operations. The recoverability of the carrying value of assets and the Company's continued existence is dependent upon the preservation of its interests in the underlying properties, the development of economically recoverable resources, the achievement of profitable operations and the ability of the Company to raise additional financing. Changes in future conditions could require material write-downs to the carrying values of the Company’s assets.
To date, the Company has not recorded any revenues from operations, has no source of operating cash flow and no assurance that additional funding will be available to it for further development of the Kami Project. The Company does not have financial resources sufficient to cover all of its commitments for the coming year, which includes net amounts payable, as at March 31, 2015, necessary general and administrative costs through 2015, contractual obligations as at March 31, 2015 (in relation to anticipated equipment payments, see also note 19) and the remaining security deposits which could be required to be advanced to Newfoundland and Labrador Hydro (“NLH”), a subsidiary of Nalcor Energy (see note 3), as of a date to be determined. As noted below (see note 19), Alderon has completed the engineering work required to commence construction at the Kami Project. The commencement of construction of the Kami Project is subject to the completion of the Company’s financing plan and project sanction by the Company’s Board of Directors. As the Kami Project’s required pre-construction engineering is substantially complete, Alderon has temporarily suspended any further work by its Engineering, Procurement and Construction Management (“EPCM”) contractor. The Company’s internal project team is continuing to advance the Kami Project in preparation for the start of construction once the Company’s financing plan is completed. The Company has plans in place and is seeking to arrange the necessary funds in order to cover these obligations. Specifically, the Company continues to advance all of the elements of its financing plan, including debt and equity. There can be no assurance that management’s financing plan will be successful. These conditions and events indicate material uncertainties that cast substantial doubt upon the Company's ability to continue as a going concern.
On December 9, 2014, the Company announced a cash preservation program designed to allow it to maintain sufficient liquidity during the advancement of its financing plan. This program includes an interest deferral agreement with Liberty Metals & Mining Holdings, LLC (“Liberty”), a subsidiary of Liberty Mutual Insurance and a significant shareholder of Alderon (see note 10), voluntary partial payment deferrals with equipment vendors for work completed to date, workforce reductions and the implementation of the DSU Plan (see note 12) for Directors in place of cash director fees.
The Company currently does not have sufficient financial resources to cover all of its originally planned commitments for the coming year and as a result, it has split its purchase orders for equipment into two phases, engineering and manufacturing. Advances for engineering have been paid in full while commitments for manufacturing and fabrication, estimated at $30.9 million, remain contingent upon the Company issuing to its suppliers a notice to proceed following successful completion of its financing plan (see note 19).
If management is unable to obtain new funding, the Company may be unable to continue its operations, and amounts realized for assets might be less than amounts reflected in these condensed interim consolidated financial statements. If the going concern assumption were not appropriate, adjustments to the carrying value of assets and liabilities, reported expenses and consolidated statement of financial position classifications would be necessary. Such adjustments could be material.
7
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
2 Significant accounting policies and critical accounting estimates and judgments
Significant accounting policies
The accounting policies described in the Company’s 2014 annual consolidated financial statements have been applied consistently to all periods presented in these condensed interim consolidated financial statements.
Critical accounting estimates and judgments
The preparation of the Company’s condensed interim consolidated financial statements in accordance with IFRS requires management to make estimates about and apply assumptions to future events and other matters that affect the reported amounts of the Company’s assets, liabilities, expenses and related disclosures. Assumptions and estimates are based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time at which the Company’s condensed interim consolidated financial statements are prepared. Management reviews, on a regular basis, the Company’s accounting policies, assumptions and estimates in order to ensure that the condensed interim consolidated financial statements are presented fairly and in accordance with IFRS.
Critical accounting estimates are those that have a significant risk of causing material adjustment and are often applied to matters or outcomes that are inherently uncertain and subject to change. As such, management cautions that future events often vary from forecasts and expectations and that estimates routinely require adjustment. The significant judgments made by the Company in applying accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Company’s 2014 annual consolidated financial statements.
3 Restricted short-term investments
Restricted short-term investments represent short-term investments deposited with the Company’s bank to guarantee letters of credit issued in the course of the Company’s development activities. Such short-term investments must remain on deposit as long as the letters of credit are outstanding.
On February 19, 2014, the Company entered into a Power Purchase Agreement (“PPA”) with NLH, pursuant to which NLH agrees to sell electrical power and energy to the Company. Power will be provided based on a rate schedule in line with the Labrador Industrial Rates Policy published in December 2012. Under the terms of the Security Agreement with NLH (the “Security Agreement”), the Company has agreed to provide a total of $65,000,000 in security deposits that will each take the form of a letter of credit that will be released to the Company once the Kami Project is interconnected to the electrical system as contemplated under the PPA, and has been commissioned and the Company has loaded saleable product produced from the Kami Project in two consecutive months.
The first security deposit in the amount of $21,000,000 (the “Security Deposit”) was paid upon on the signing of the Security Agreement. The remaining $44,000,000 in security deposits will be provided to NLH at such time as NLH can reasonably demonstrate that it has additional existing and pending commitments for such amount to construct the new transmission line. NLH is required to provide sufficient advance notice of the timing and amounts of additional security deposits. The letter of credit expires on April 7, 2016.
On March 14, 2014, the Company issued a letter of credit for $967,011 in favour of Fisheries and Oceans Canada (“DFO”) in relation to the DFO’s monitoring of the Kami Project. The letter of credit expires on March 13, 2016.
On March 17, 2014, the Company issued a letter of credit for $235,000 in favour of Hydro-Quebec (“HQ”) in relation to HQ’s energy study at the Company’s port facilities in Sept-Îles. The letter of credit was released in February 2015.
The Company expects that each of the letters of credit described above will be renewed at expiration.
8
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
4 Prepaid expenses and other current assets
As of March 31, 2015 | As of December 31, 2014 | |||||||
| $ | $ | |||||||
| Deferred transaction costs | 2,254,037 | 2,162,694 | ||||||
| Other | 251,358 | 83,913 | ||||||
| 2,505,395 | 2,246,607 | |||||||
During the three-month period ended March 31, 2015, the Company incurred professional fees of $91,343 ($695,314 in 2014) that are directly related to a probable future debt transaction. These costs will be reclassified to debt upon completion of the debt transaction.
5 Receivables
As of March 31, 2015 | As of December 31, 2014 | |||||||
| $ | $ | |||||||
| Sales tax credits receivable | 1,033,843 | 731,555 | ||||||
| Deposits receivable | 258,750 | 258,750 | ||||||
| Interest receivable | 3,224 | 324,201 | ||||||
| 1,295,817 | 1,314,506 | |||||||
6 Mineral properties
On January 15, 2013, the Company filed on SEDAR a Technical Report, entitled Feasibility Study of the Rose Deposit and Resource Estimate for the Mills Lake Deposit of the Kamistiatusset (Kami) Iron Ore Property, Labrador for Alderon Iron Ore Corp., (the “Feasibility Study”), dated effective December 17, 2012. As the technical feasibility and commercial viability of the extraction of the Kami Property’s mineral reserves have been demonstrated, the Company has started to capitalize directly attributable pre-production expenditures that give rise to future economic benefits as of February 1, 2013. Pre-production expenditures incurred prior to February 1, 2013 have been recorded in the consolidated statement of comprehensive loss as exploration and evaluation expenses or environmental, aboriginal, government and community expenses. In general the Company has stopped capitalizing development costs as of November 15, 2014, as the Company has implemented a cash preservation program designed to allow it to maintain sufficient liquidity during the advancement of its financing plan.
9
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
6 Mineral properties (continued)
Components of the Company’s mineral properties, as well as the activity associated therewith, are summarized below.
| Acquisition costs | Development costs | Share-based compensation costs capitalized | Interest capitalized | Depreciation capitalized | Total | |
| $ | $ | $ | $ | $ | $ | |
| Balance – January 1, 2014 | 88,668,710 | 49,576,480 | 386,958 | - | 13,674 | 138,645,822 |
| Additions during the period | - | 36,090,496 | 108,465 | 1,694,823 | 35,312 | 37,929,096 |
| Balance – December 31, 2014 | 88,668,710 | 85,666,976 | 495,423 | 1,694,823 | 48,986 | 176,574,918 |
| Additions during the period | - | 80,101 | - | - | - | 80,101 |
| Balance –March 31, 2015 | 88,668,710 | 85,747,077 | 495,423 | 1,694,823 | 48,986 | 176,655,019 |
Additions to mineral properties in the condensed interim consolidated statement of cash flows are presented on a cash basis. During the three-month period ended March 31, 2015, cash expenditures totaled $1,024,794 ($12,249,947 for the three-month period ended March 31, 2014), the decrease in accrued expenditures totaled $944,693 (increase of $3,864,687 for the three-month period ended March 31, 2014) and the increase in other non-cash items was nil ($31,242 for the three-month period ended March 31, 2014).
7 Property, plant and equipment
During the three-month period ended March 31, 2015, the Company did not make any advances to various suppliers in relation to the purchase of equipment ($3,710,704 for the three-month period ended March 31, 2014). As of March 31, 2015, advances paid on equipment totaled $23,360,170 ($23,360,170 as of December 31, 2014) (see note 9).
8 Long-term advance
On July 13, 2012, the Company entered into an agreement with the Sept-Îles Port Authority (the “Port”) to secure usage of a new multi-user deep water dock facility that the Port is constructing (the “Port Agreement”). The initial commitment paid by the Company was $20,465,016 (the “Buy-in Payment”), which constitutes an advance on Alderon’s future shipping fees. The Buy-in Payment will be reimbursed to the Company via a discount that will be applied to shipping fees to be billed by the Port once Alderon’s usage of the multi-user facility commences. The Company has a take or pay obligation based on a discounted rate applied on 50% of the 8,000,000 tons minimum annual shipping capacity and is payable even if Alderon does not use the facilities.
10
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
9 Payables and accrued liabilities
| As of March 31, | As of December 31, | ||
| 2015 | 2014 | ||
| $ | $ | ||
| Accrued payable on purchases of equipment (note 7) | 4,880,040 | 3,404,617 | |
| Accrued development costs | 3,411,396 | 3,830,541 | |
| Accrued salaries and benefits | 336,867 | 402,935 | |
| Accrued legal and professional expenses | 274,008 | 408,045 | |
| Sales tax credits payable | 95,321 | 319,886 | |
| Trade accounts payable | 28,829 | 336,265 | |
| Other accrued liabilities | 45,667 | 220,078 | |
| 9,072,128 | 8,922,367 | ||
10 Convertible debt
On February 24, 2014, Liberty provided a loan to The Kami LP (the “Note”) in the amount of $22,000,000. $21,000,000 of the gross proceeds of the Note was used to fund the Security Deposit. The remaining $1,000,000 was used for working capital purposes, including for the payment of the establishment fee and transaction costs. Commencing 12 months after the issuance of the Note, the principal amount of the Note and any accrued but unpaid interest, become convertible at Liberty’s option into the Company’s common shares at a conversion price equal to $2.376 per common share. The Note is secured with a mortgage over the Kami Project and bears interest at a rate of 8% per annum, payable on June 30th and December 31st of each year. A 1.5% establishment fee was paid to Liberty in connection with the Note. The Company has the option to prepay the entire balance of the Note, at a premium of a 20% internal rate of return to Liberty. The maturity date of the Note is December 31, 2018.
The issuance of the Note was recorded at inception as follows:
| $ | ||||
| Debt component | 18,266,247 | |||
| Equity component | 3,403,753 | |||
| Transaction costs | 330,000 | |||
| Gross proceeds | 22,000,000 | |||
The recording of the equity component of the Note as described in the table above increased the non-controlling interest in the Company by $850,938.
11
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
10 Convertible debt (continued)
On December 8, 2014, Alderon and Liberty amended the Note (the “Amended Note”). Liberty agreed to defer the payments of the interest due on December 31, 2014 and June 30, 2015. The deferred interest is added to the principal amount of the Note and is subject to interest in accordance with the terms of the Amended Note. In consideration of such deferral, Liberty is to be issued on each deferred interest payment date a number of warrants determined by dividing the interest payable by a dollar amount equal to a 10% premium to the volume weighted average trading price of the Company’s common shares on the TSX for the five trading days prior to the applicable interest payment date. The Company issued to Liberty 1,987,083 warrants with an exercise price of $0.4465 on December 31, 2014 and accounted for this as additional transaction costs of the Note which modifies the carrying amount of the Note. The effective interest rate of the Amended Note is 13.3%.
Transactions affecting the debt component are summarized below:
| $ | ||||
| Balance at January 1, 2014 | - | |||
| Issuances | 18,266,247 | |||
| Transaction costs (note 14) | (799,948) | |||
| Accretion | 1,386,079 | |||
| Balance at December 31, 2014 | 18,852,378 | |||
| Accretion | 624,508 | |||
| Balance at March 31, 2015 | 19,476,886 | |||
During the three-month period ended March 31, 2015, $624,508 in accretion expense has been recorded as finance costs in the consolidated statement of comprehensive loss. During the three-month period ended March 31, 2014, $268,946 in accretion expense has been recorded as development costs in the consolidated statement of financial position.
11 Related party disclosures
Related parties and related party transactions impacting the accompanying condensed interim consolidated financial statements are summarized below and include transactions with the following individuals or entities:
Key management personnel
Key management personnel include those persons having authority and responsibility for planning, directing and controlling the activities of the Company as a whole. The Company has determined that key management personnel consists of executive and non-executive members of the Company’s Board of Directors, corporate officers, including the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as well as any Vice Presidents reporting directly to a Corporate Executive Board member or officer, acting in that capacity.
12
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
11 Related party disclosures (continued)
Remuneration attributed to key management personnel can be summarized as follows:
| Three months ended March 31, | ||||||||
| 2015 | 2014 | |||||||
| $ | $ | |||||||
| Short-term benefits* | 573,674 | 893,335 | ||||||
| Share-based compensation | 154,666 | 165,586 | ||||||
| Incentive compensation other than share-based compensation | - | 407,934 | ||||||
| 728,340 | 1,466,855 | |||||||
| * | include base salaries, pursuant to contractual employment or consultancy arrangements, Directors’ fees, applicable payroll taxes and other non-post-retirement benefits. |
12 Deferred share units (“DSUs”)
The Company has in place a program (the “DSU Plan”) whereby Directors are issued DSUs, which vest immediately, are equivalent in value to a common share upon issuance of the Company and are settled in cash. Under the DSU Plan, Directors have the option to convert 25, 50, 75 or 100 percent of their annual director fees into DSUs. To support the Company’s cash preservation program the Directors have agreed to convert 100 percent of their annual director fees into DSUs as of September 30, 2014. The director fees are converted into DSUs on a quarterly basis by dividing the director fees by the closing value of Alderon’s share price at the end of each quarter. DSUs can only be redeemed following departure from the Company in accordance with the terms of the DSU Plan. A summary of the activity related to the Company’s DSUs is provided below.
| Number | |
| Balance, January 1, 2014 | - |
| Granted | 323,968 |
| Redeemed | - |
| Balance, December 31, 2014 | 323,968 |
| Granted | 403,976 |
| Redeemed | - |
| Balance, March 31, 2015 | 727,944 |
The Company recorded compensation costs of $101,442 for the three-month period ended March 31, 2015 (nil for the three-month period ended March 31, 2014) related to the outstanding DSUs in the consolidated statements of comprehensive loss.
13
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
13 Share Capital
On September 4, 2012, the Company completed a subscription transaction (the “Subscription Transaction”) with Hebei, pursuant to an agreement whereby Hebei purchased 25,858,889 of the Company’s common shares by way of a private placement in exchange for aggregate gross proceeds of $62,319,922, less cash transaction costs of $1,435,901.
On closing of the Subscription Transaction, Hebei and Alderon also entered into an arrangement pursuant to which Hebei would invest an additional $119,926,293 (the “Initial Investment”) in exchange for a 25% interest in the Kami Project. Per the definitive agreements entered into between the Company and Hebei, the latter’s 25% interest would be made into The Kami LP. The Kami LP was established in order to develop and operate the Kami Project, and it is this entity into which Alderon would transfer all assets associated with the Kami Project contemporaneously with the Initial Investment. Alderon and Hebei would be required to contribute to capital expenditures for the development of the Kami Project not covered by initial capital contributions and project debt financing, in accordance with their respective interests. However, Hebei’s further contributions to The Kami LP will depend upon the amount of aggregate proceeds received as project debt financing and will not exceed $220,000,000.
On March 15, 2013, Hebei contributed the Initial Investment, and Alderon contributed the Kami Property and its related assets to The Kami LP. In connection with Hebei’s contribution of the Initial Investment, the Company has provided confirmations to Hebei with respect to certain information rights related to the development of the Kami Project and to the use of the Initial Investment proceeds.
Alderon engaged a contractor under an agreement (the “Contractor Agreement”) pursuant to which the contractor was engaged to provide financial, management and business consulting services to the Company. On November 12, 2014, the Company and the contractor agreed to terminate the Contractor Agreement and settle all outstanding fees and expenses under the Contractor Agreement in exchange for the issuance of 1,990,049 common shares of Alderon.
14 Stock options
The following table summarizes the activity under the Company’s stock option plan.
Three months ended March 31, 2015 | Year ended December 31, 2014 | |||||||||||||||
| Number | Weighted average exercise price $ | Number | Weighted average exercise price $ | |||||||||||||
| Balance, beginning of period | 14,095,000 | 2.44 | 14,830,000 | 2.46 | ||||||||||||
Granted | 100,000 | 0.34 | 600,000 | 1.48 | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Expired | (765,000) | 1.50 | - | - | ||||||||||||
Forfeited | (2,245,000) | 2.58 | (1,335,000) | 2.27 | ||||||||||||
| Balance, end of period | 11,185,000 | 2.45 | 14,095,000 | 2.44 | ||||||||||||
Share-based compensation costs for the three-month period ended March 31, 2015 totaled $71,462 ($202,032 for the three-month period ended March 31, 2014): nil capitalized in mineral properties ($22,488 for the three-month period ended March 31, 2014); $11,026 in development expenses (nil for the three-month period ended March 31, 2014); and $60,436 in general and administrative expenses ($179,544 for the three-month period ended March 31, 2014).
14
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
14 Stock options (continued)
Fair value input assumptions
The table below shows the assumptions, or weighted average parameters, applied to the Black-Scholes option pricing model in order to determine share-based compensation costs over the life of the awards for options granted during each of the three-month periods ended March 31, 2015 and 2014.
| Three months ended March 31, | |||
| 2015 | 2014 | ||
| Expected dividend yield | 0.0% | 0.0% | |
| Estimated volatility | 69.1% | 63.7% | |
| Weighted average risk-free annual interest rate | 0.64% | 1.11% | |
| Weighted average expected life (years) | 3.5 | 2.5 | |
| Grant date fair value | $0.17 | $0.66 | |
15 Net loss per share
For the three-month periods ended March 31, 2015 and 2014, diluted net loss per share was calculated based on the net loss and comprehensive loss attributable to owners of the parent using the basic weighted average number of shares outstanding, since all outstanding warrants and stock options have been excluded from the calculation of diluted net loss per share because they were anti-dilutive. Accordingly, diluted net loss per share for each period was the same as the basic net loss per share.
16 Supplemental disclosure of cash flow information
| Three months ended March 31, | ||
| 2015 | 2014 | |
| $ | $ | |
| Changes in operating assets and liabilities | ||
| Receivables | (302,288) | 119,065 |
| Prepaid expenses and other current assets | (258,788) | (896,632) |
| Payables and accrued liabilities | (380,969) | (1,281,026) |
| Due to related parties | (44,919) | 614,826 |
| (986,964) | (1,443,767) | |
15
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
17 Capital disclosures
The Company’s objective in managing capital, consisting of equity, with cash being its primary component, is to ensure sufficient liquidity to fund: development and other Kami Project activities; general and administrative expenses; working capital; and capital expenditures.
Management regularly monitors the Company’s capital structure and makes adjustments thereto based on funds available to the Company for the acquisition, exploration and development of mineral properties. The Board of Directors has not established quantitative return on capital criteria for capital management, but rather relies upon the expertise of the management team to sustain the future development of the business.
The properties in which the Company currently has an interest are in the development stage, and the Company does not generate any revenue. Accordingly, the Company is dependent upon sources of external financing to fund both the Kami Project and its other costs. While the Company endeavours to minimize dilution to its shareholders, management has in the past engaged in dilutive financial transactions, such as private placements, and may engage in dilutive arrangements in the future.
The Company’s policy on dividends is to retain cash to keep funds available to finance the activities required to advance the Company’s Kami Project. Although the Company is not subject to any capital requirements imposed by any regulators or by any other external source, Alderon has provided confirmation to Hebei with respect to the use of the Initial Investment proceeds.
As at March 31, 2015, $11,547,312 of cash is held by The Kami LP which is the remaining amount of the Initial Investment. Under the terms of the agreements with Hebei, Alderon has agreed that the proceeds from the Initial Investment would be used solely for Kami Project related expenditures. As a result, Alderon is restricted from transferring this cash from The Kami LP to Alderon. Currently this restriction does not have an effect on Alderon’s ability to meet its short- to medium-term obligations as Alderon held $6,060,723 of cash as at March 31, 2015. However, Alderon will need to obtain additional financing at the parent company level in the future.
18 Financial instruments
Fair value
The carrying values of the Company’s cash, restricted short-term investments, receivables, payables and accrued liabilities and amounts due to related parties approximate their fair values due to their short-term maturities or to the prevailing interest rates of the related instruments, which are comparable to those of the market. The determination of fair value of the convertible debt as at March 31, 2015 and December 31, 2014 is based on a discounted cash flow model using the current market interest rate that the Company could have obtained for a similar secured loan without a conversion option.
16
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
18 Financial instruments (continued)
The fair values of the Company’s financial assets and liabilities, together with the carrying values included in the balance sheet, as of March 31, 2015 and December 31, 2014 are presented below.
| March 31, 2015 | Carrying value | Fair value |
| $ | $ | |
| Financial assets | ||
| Cash | 17,608,035 | 17,608,035 |
| Restricted short-term investments (note 3) | 21,967,011 | 21,967,011 |
| Receivables (note 5) | 261,974 | 261,974 |
| Financial liabilities | ||
| Payables and accrued liabilities (note 9) | (8,976,807) | (8,976,807) |
| Due to related parties | (569,642) | (569,642) |
| Convertible debt, including interest payable (note 10) | (19,476,886) | (17,645,612) |
| 10,813,685 | 12,644,959 |
| December 31, 2014 | Carrying value | Fair value |
| $ | $ | |
| Financial assets | ||
| Cash | 21,442,903 | 21,442,903 |
| Restricted short-term investments (note 3) | 22,202,011 | 22,202,011 |
| Receivables (note 5) | 582,951 | 582,951 |
| Financial liabilities | ||
| Payables and accrued liabilities (note 9) | (8,602,481) | (8,602,481) |
| Due to related parties | (614,561) | (614,561) |
| Convertible debt (note 10) | (18,852,378) | (16,955,000) |
| 16,158,445 | 18,055,523 |
In the preceding tables, receivables exclude sales tax credits, and payables and accrued liabilities exclude sales tax credits payable.
17
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
19 Commitments and contingencies
In connection with the 2010 purchase from Altius Resources Inc. (“Altius”) of the Kami Property, Alderon committed to paying Altius a 3% gross royalty on iron ore concentrate that is generated from the Kami Project.
In connection with the closing of the Subscription Transaction (see note 16), the Company had committed to pay a finder’s fee associated with the Initial Investment (the “Finder’s Fee”) and an off-take sales fee to the finder engaged to identify Hebei to the Company and to assist with the conclusion of the transaction with Hebei (the “Finder”). On March 15, 2013, the Company sent notice terminating the finder’s fee agreement, in accordance with its terms. On July 31, 2013, the Company and the Finder concluded a settlement agreement for the Finder’s Fee and the off-take sales fee. The total amount of the settlement is $1,798,500. All payments made also included an interest amount calculated at a rate of 1% per annum from April 30, 2013 until the date of payment. As part of the settlement, the Finder has released all claims to the off-take sales fee.
On March 1, 2012, the Company entered into the Charter Agreement with Image Air for a plane that Image Air leases from a limited partnership. The former Vice Chairman of the Company’s Board of Directors is the sole limited partner of this limited partnership. Per the Charter Agreement, the minimum cost to the Company is $44,400 per month, with additional charges incurred for each hour that the aircraft is flown. On April 9, 2013, the Company sent notice to Image Air terminating the Charter Agreement, in accordance with its terms. On November 28, 2014, the Company obtained a release of all outstanding claims under the Charter Agreement from Image Air.
The Company has negotiated contracts with suppliers in relation to the purchase of equipment. As at March 31, 2015, payments of $31,130,000 remain to be paid on the equipment for contracts entered into and approximately $30,860,000 of this amount is contingent on confirmation by the Company of future fabrication of this equipment.
On January 21, 2014, the Company entered into an agreement (the “Agreement”) with the Town of Labrador City (“Labrador City”) with respect to the development of the Kami Project. Under the terms of the Agreement, the Company will pay to Labrador City an annual grant based on the Kami Project mining operations that will be located in the Municipal Planning Area of Labrador City. The Company will not be required to pay municipal or other taxes except with respect to such assets and business of the Company, as may be located from time to time within the town boundaries of Labrador City.
On January 21, 2014, the Company and the Innu Nation entered into an Impact and Benefits Agreement ("IBA") with respect to carrying out the Kami Project. The IBA provides for participation in the Kami Project on the part of the Innu Nation in the form of training, jobs and contract opportunities, along with providing their community with financial and socio-economic benefits over the life of the mine. The IBA also contains provisions which recognize and support the culture, traditions and values of the Innu Nation.
On March 25, 2014, the Company signed a Grant-in-lieu of Municipal Taxes Agreement (the “Wabush Agreement”) with the Town of Wabush (“Wabush”) with respect to the development of the Kami Project. Under the terms of the Wabush Agreement, the Company will pay to Wabush an annual grant-in-lieu of municipal taxes on the Kami Project mining operations. Payments under the Wabush Agreement will commence after initial production occurs at the Kami Project. As long as the Company makes the payments required under the Wabush Agreement, Wabush will not seek to charge or assess the Company for any municipal taxes in relation to the Kami Project or the business carried on by the Company on the Kami Project.
18
Alderon Iron Ore Corp.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
As of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014
(amounts in Canadian dollars, except share/option data)
19 Commitments and contingencies (continued)
On May 27, 2014, Alderon signed a benefits agreement with the Province of Newfoundland and Labrador (the “Provincial Agreement”). The Provincial Agreement covers the life of the Kami Project and sets out employment, procurement and training benefits. Under the terms of the Provincial Agreement, Alderon has committed to provide full and fair opportunity and first consideration for provincial residents and suppliers. The Company has also agreed to establish an education and training fund commencing after the Kami Project achieves commercial production.
On June 30, 2014, the Company announced the completion of the required engineering work in order to commence construction at the Kami Project. The commencement of construction remains subject to the completion of the Company’s financing plan and project sanction by the Board of Directors of Alderon. As such, Alderon has temporarily suspended any further work by its EPCM contractor. It is likely that the temporary suspension of the EPCM contractor will result in certain demobilization costs to be incurred and charged to the Company in accordance with the terms of the EPCM contract. The actual amount to be incurred is a function of the duration of delay, actual costs incurred and commitments entered into by the EPCM contractor, and adjustments to the estimate will be recorded in future periods as necessary.
On July 29, 2014, the Company entered into an off-take agreement (the “Glencore Agreement”) with a subsidiary of Glencore plc (“Glencore”), with respect to an off-take transaction pursuant to which Glencore will acquire all of actual annual production from the Kami Project that has not been allocated to Hebei. Under the terms of the Glencore Agreement, Glencore will be obligated to purchase upon the commencement of commercial production, 40% of the actual annual production from the Kami Project up to a maximum of 3,200,000 tonnes of the first 8,000,000 tonnes of iron ore concentrate produced annually at the Kami Project. The term of the Glencore Agreement will continue until the Company has delivered 48,000,000 tonnes of iron ore concentrate to Glencore, which is expected to be 15 years after the commencement of commercial production. The market price paid by Glencore will be based on the monthly average price for iron ore sinter feed fines quoted by Platts Iron Ore Index for 62% iron content (plus additional quoted premium for iron content greater than 62%), less a discount equal to 2% of such quoted price.
19