PINE VALLEY MINING CORPORATION
Consolidated Financial Statements
for the Six Months Ended September 30, 2006
(Unaudited)
PINE VALLEY MINING CORPORATION
Consolidated Balance Sheets
(Unaudited)
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| September 30, |
| March 31, |
(in thousands of Canadian dollars) |
| 2006 |
| 2006 | |||
ASSETS |
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CURRENT |
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Cash |
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| $ 1,422 |
| $ 817 |
Accounts receivable, net of nil allowance |
| 46 |
| 3,719 | |||
Goods and Services Tax (GST) and other receivable |
| 1,539 |
| 1,356 | |||
Deferred financing charges |
| - |
| 279 | |||
Prepaid expenses |
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| 299 |
| 643 | |
Coal Inventory |
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| 10,301 |
| 9,528 | |
Future income taxes (Note 13) |
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| - |
| 302 | ||
Total Current Assets |
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| 13,607 |
| 16,644 | ||
Restricted cash |
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| 417 |
| 458 | |
Other non-current assets |
| 569 |
| 1,550 | |||
Mineral property, plant and equipment (Note 3) |
| 55,957 |
| 57,560 | |||
Non-producing mineral properties (Note 4) | 3,111 |
| 2,877 | ||||
Future income taxes (Note 13) |
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| - |
| 3,040 | ||
Total Assets |
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| $ 73,661 |
| $ 82,129 | |
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LIABILITIES |
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CURRENT |
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Operating line (Note 5) |
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| $ 5,681 |
| $ 5,675 | ||
Accounts payable |
| 11,322 |
| 9,214 | |||
Accrued liabilities |
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| 3,089 |
| 2,616 | |
Current portion of term debt (Note 6) |
| 9,892 |
| 10,337 | |||
Current portion of capital lease obligation | 18 |
| 41 | ||||
Due to related party (Note 7) |
| 600 |
| 600 | |||
Total Current Liabilities |
|
| 30,602 |
| 28,483 | ||
Asset retirement obligation (Note 8) |
| 2,461 |
| 2,307 | |||
Capital lease obligation |
| 122 |
| 124 | |||
Future income taxes (Note 13) |
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| - |
| 3,208 | ||
Total Liabilities |
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| 33,185 |
| 34,122 | |
SHAREHOLDERS' EQUITY |
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Share capital (Note 9) |
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| 61,161 |
| 61,161 | ||
Contributed surplus and other capital |
| 6,421 |
| 5,708 | |||
Deficit |
| (27,106) |
| (18,862) | |||
Total Shareholders' Equity |
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| 40,476 |
| 48,007 | ||
Total Liabilities and Shareholders' Equity |
| $ 73,661 |
| $ 82,129 | |||
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Commitments and contingencies (Note 14) |
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Subsequent events (Note 15) |
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Creditor protection and restructuring (Note 1) |
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Approved by the Board of Directors |
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"Jeffrey Fehn" |
| Director |
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"Robert Bell" |
| Director |
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See accompanying Notes to the Consolidated Financial Statements
PINE VALLEY MINING CORPORATION
Consolidated Statements of Operations
(Unaudited)
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| Three months ended |
| Six months ended | ||||
(in thousands of Canadian dollars |
| September 30, |
| September 30, | |||||||
except share and per share amounts) |
| 2006 |
| 2005 |
| 2006 |
| 2005 | |||
REVENUE |
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Coal Sales |
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| $ 11,871 |
| $ 19,957 |
| $ 32,526 |
| $ 33,431 | |
Cost of Operations: |
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Mining and transportation |
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| 14,563 |
| 12,905 |
| 31,393 |
| 24,569 | ||
Administrative and other |
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| 2,078 |
| 1,181 |
| 2,903 |
| 1,789 | ||
Depreciation and depletion |
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| 1,432 |
| 821 |
| 2,968 |
| 1,573 | ||
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| 18,073 |
| 14,907 |
| 37,264 |
| 27,931 |
(LOSS) INCOME BEFORE UNDERNOTED ITEMS | (6,202) |
| 5,050 |
| (4,738) |
| 5,500 | ||||
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EXPENSES |
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Office and general |
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| 233 |
| 236 |
| 475 |
| 420 | |
Professional fees |
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| 158 |
| 147 |
| 233 |
| 352 | |
Promotion and marketing |
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| 94 |
| 19 |
| 150 |
| 66 | ||
Salaries and stock-based compensation | 649 |
| 888 |
| 1,343 |
| 1,799 | ||||
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| 1,134 |
| 1,290 |
| 2,201 |
| 2,637 |
(LOSS) INCOME BEFORE OTHER INCOME |
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(EXPENSES) AND INCOME TAXES | (7,336) |
| 3,760 |
| (6,939) |
| 2,863 | ||||
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OTHER INCOME (EXPENSES) |
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Interest and other income |
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| 36 |
| 24 |
| 71 |
| 36 | ||
Interest and financing |
|
| (980) |
| (447) |
| (1,381) |
| (1,031) | ||
Foreign exchange gain |
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| 18 |
| 2,141 |
| 147 |
| 1,344 | ||
Other |
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| - |
| (93) |
| (8) |
| (34) | ||
|
|
|
|
| (926) |
| 1,625 |
| (1,171) |
| 315 |
(LOSS) INCOME BEFORE INCOME TAXES | (8,262) |
| 5,385 |
| (8,110) |
| 3,178 | ||||
Mining taxes recovery (expense) |
| 23 |
| (89) |
| - |
| (135) | |||
Future income taxes expense (Note 13) | (88) |
| (1,621) |
| (134) |
| (1,182) | ||||
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| (65) |
| (1,710) |
| (134) |
| (1,317) |
NET (LOSS) INCOME |
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| $ (8,327) |
| $ 3,675 |
| $ (8,244) |
| $ 1,861 | ||
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Basic and diluted (loss) income per share | $ (0.11) |
| $ 0.05 |
| $ (0.11) |
| $ 0.03 | ||||
Weighted average number of common shares - basic | 75,732,878 |
| 71,419,778 |
| 75,732,878 |
| 70,662,206 | ||||
Weighted average number of common shares - diluted | 75,732,878 |
| 72,124,077 |
| 75,732,878 |
| 71,359,515 |
See accompanying Notes to the Consolidated Financial Statements
PINE VALLEY MINING CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
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| Three months ended September 30, |
| Six months ended September 30, | ||||
(in thousands of Canadian dollars) |
| 2006 |
| 2005 |
| 2006 |
| 2005 | ||
OPERATING ACTIVITIES |
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Net (loss) income for the period |
| $ (8,327) |
| $ 3,675 |
| $ (8,244) |
| $ 1,861 | ||
Items not involving cash: |
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Deferred financing charges |
|
| (225) |
| 168 |
| (251) |
| 287 | |
Depreciation and depletion |
| 1,432 |
| 821 |
| 2,968 |
| 1,573 | ||
Non-cash financing costs |
| 528 |
| 256 |
| 575 |
| 642 | ||
Financing obligations |
|
| 474 |
| (88) |
| 728 |
| 210 | |
Stock-based compensation costs |
| 342 |
| 731 |
| 713 |
| 1,451 | ||
Unrealized foreign exchange and derivatives (gain) loss | (22) |
| (1,588) |
| 24 |
| (904) | |||
Future income taxes |
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| 88 |
| 1,621 |
| 134 |
| 1,182 | |
Changes in working capital items |
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other than cash (Note 12) |
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| 8,273 |
| 2,531 |
| 7,293 |
| 2,806 | |
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| 2,563 |
| 8,127 |
| 3,940 |
| 9,108 |
FINANCING ACTIVITIES |
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Capital stock issued |
| - |
| 4,994 |
| - |
| 5,542 | ||
Loan proceeds |
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| - |
| 8,785 |
| - |
| 10,023 | |
Loan payments |
| 14 |
| (9,751) |
| (445) |
| (11,147) | ||
Operating line proceeds (net) |
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| (4,776) |
| - |
| 6 |
| - | |
Financing fees |
|
| (45) |
| (143) |
| (45) |
| (409) | |
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| (4,807) |
| 3,885 |
| (484) |
| 4,009 |
INVESTING ACTIVITIES |
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Acquisition of property and equipment, net of |
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accounts payable |
|
| (583) |
| (4,482) |
| (1,470) |
| (12,956) | |
Goods and services tax and other receivable | (282) |
| (503) |
| (183) |
| 1,256 | |||
Property, plant and equipment obligations |
| (572) |
| (1,143) |
| (1,215) |
| 3,815 | ||
Restricted cash |
|
| 12 |
| - |
| 41 |
| - | |
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| (1,425) |
| (6,128) |
| (2,827) |
| (7,885) |
(DECREASE) INCREASE IN CASH |
| (3,669) |
| 5,884 |
| 629 |
| 5,232 | ||
Affect of foreign exchange rate |
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on cash |
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| 22 |
| (2) |
| (24) |
| (70) |
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CASH POSITION, BEGINNING OF PERIOD |
| 5,069 |
| 1,480 |
| 817 |
| 2,200 | ||
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CASH POSITION, END OF PERIOD |
| $ 1,422 |
| $ 7,362 |
| $ 1,422 |
| $ 7,362 | ||
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Non-cash financing and investing activities |
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Property and equipment acquired under capital lease | $ - |
| $ - |
| $ - |
| $ 88 | |||
Supplemental information |
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Interest paid |
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| $ 113 |
| $ 277 |
| $ 192 |
| $ 312 | |
Income taxes paid |
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| $ 30 |
| $ 26 |
| $ 130 |
| $ 26 |
See accompanying Notes to the Consolidated Financial Statements
PINE VALLEY MINING CORPORATION
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(in thousands of Canadian dollars, |
| Common shares | Commitment to | Share | Contributed |
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| |
except for share amounts) |
| Shares | Amount | issue shares | Subscription | Surplus | Deficit | Total |
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Balance, March 31, 2005 |
| 68,886,858 | $ 45,353 | $ 184 | $ - | $ 2,210 | $ (19,470) | $ 28,277 |
Issued for cash | 5,305,000 | 15,138 | - | - | - | - | 15,138 | |
Shares issued for financing charge |
| 101,020 | 614 | (184) | - | - | - | 430 |
Exercise of warrants and options | 1,440,000 | 578 | - | - | - | - | 578 | |
Fair value of warrants and options exercised | - | 28 | - | - | (28) | - | - | |
Share issue costs, net of future income taxes |
| - | (550) | - | - | - | - | (550) |
Stock-based compensation | - | - | - | - | 3,526 | - | 3,526 | |
Net income for the year | - | - | - | - | - | 608 | 608 | |
Balance, March 31, 2006 |
| 75,732,878 | 61,161 | - | - | 5,708 | (18,862) | 48,007 |
Stock-based compensation | - | - | - | - | 371 | - | 371 | |
Net income for the period | - | - | - | - | - | 83 | 83 | |
Balance, June 30, 2006 |
| 75,732,878 | $ 61,161 | $ - | $ - | $ 6,079 | $ (18,779) | $ 48,461 |
Stock-based compensation | - | - | - | - | 342 | - | 342 | |
Net loss for the period | - | - | - | - | - | (8,327) | (8,327) | |
Balance, September 30, 2006 |
| 75,732,878 | $ 61,161 | $ - | $ - | $ 6,421 | $ (27,106) | $ 40,476 |
See accompanying Notes to the Consolidated Financial Statements
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
1.
CREDITOR PROTECTION AND RESTRUCTURING
On October 20, 2006 (the “Filing Date”), Pine Valley Mining Corporation and its subsidiaries, Falls Mountain Coal Inc., Pine Valley Coal Ltd. and Globaltex Gold Mining Corporation, (together the “Company”) obtained an order (the “Initial Order”) from the Supreme Court of British Columbia (the “Court”) granting creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”). The Initial Order granted will be reviewed at a petition hearing on November 15, 2006 and remains in place to November 17, 2006. The Initial Order may be amended throughout the CCAA proceedings on motions from the Company, its creditors and other interested stakeholders. During the stay period, the Company is authorized to continue operations as required. Ernst & Young Inc. (the “Monitor”) has been appointed by the Court as Monitor and will be reporting to the Court from time to time on the Company’s cash flow and other developments during the proceedings.
The purpose of the Initial Order and stay of proceedings is to provide the Company with relief designed to stabilize operations and business relationships with customers, suppliers, employees and creditors while maintaining the core value of the business. The Company is in the process of developing its revised business plan which will serve as the basis for discussions with stakeholders. In that regard, an independent advisor has been appointed to assist the Company in evaluating its strategic alternatives in order to maximize the return to stakeholders as part of the restructuring plan. As part of the restructuring plan a formal CCAA plan of arrangement (the “Plan”) will be prepared and submitted to affected creditors, who will vote on the Plan, and to the Court for approval.
It is anticipated that the Company will request an extension to the stay period at the hearing on November 15, 2006. Should the stay period and subsequent extension not be sufficient to develop and present a Plan or should the Plan not be accepted by the affected creditors, the Company will lose the protection of the stay of proceedings at which time substantially all debt obligations will then be immediately due and payable. Such an event would in all likelihood lead to the liquidation of the Company’s assets.
The CCAA proceedings have triggered defaults under all debt obligations of the Company (see Notes 5 and 6). The Order generally stays actions against the Company including steps to collect indebtedness incurred by the Company prior to filing the petition. The Order grants the Company the authority to pay outstanding and future wages, salaries and benefits, and other obligations to employees; the cost of goods and services, both operating and capital, provided or supplied after the date of the Initial Order and rent payments under existing arrangements payable after the date of filing.
An Administration Charge was created as a first priority lien to the extent of $400,000 and a Director’s Charge as a second priority lien of $100,000. The Administration Charge is intended to secure the payment of the fees and disbursements of the Monitor, legal counsel to the Monitor and legal counsel to the Company. The Director’s Charge is security for the directors and officers of the Company for an indemnity relating to possible charges as a result of the Company’s failure to make certain payments.
Contributing Factors
The Company has incurred significant operating and cash losses during the quarter ended September 30, 2006 and was unable to raise suitable additional financing, as discussed below:
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
The Company’s clean coal production costs have increased dramatically primarily as a result of fine coal recoveries in its washplant, especially with regard to its coking coal product. The washplant continued to produce clean coal to raw coal feed yields below those noted in the Feasibility Study for the Willow Creek mine, especially on coking coal (often in the range of 50-60% yield compared to expected results in the 75% range). The impact of these low yields was a material increase in costs of production.
These cost increases in recent times can also be attributed to equipment failures at the Willow Creek mine during the early part of the current fiscal year whereby the Company was faced with the risk of missing certain planned shipments. As these shipments were important to the Company’s cash flows, management sought ways to increase the production of coal to meet customer shipments for the three month period ended June 30, 2006. As a result, the Company mined coal ahead of the timing scheduled by the mine plan by removing the coal in a trench below mining bench grade. Despite this, two customer shipments were delayed to a later period in the year. Following the decision to mine coal below grade in the three months ended June 30, 2006, the Company incurred additional mining costs beginning approximately July 1, 2006 as waste mining was being “caught up.” Waste rock w as mined during the period but little coal was realized as it had already been mined in the quarter ended June 30, 2006. The impact of this was an increase in raw coal ratios and accordingly, an increase in costs.
During the period through to the CCAA filing, the Company was seeking to raise additional debt financing to enable it to, among other working capital items, make certain improvements to the washplant to improve the clean coal recoveries. However, during the due diligence period, and for the reasons noted above, the Company’s financial condition worsened to the extent that the financing could not be obtained on terms suitable to the Company.
Basis of presentation and going concern issues
These financial statements have been prepared using the same basis of accounting principles as applied by the Company prior to the filing for CCAA. While the Company has filed for and been granted creditor protection, these financial statements continue to be prepared using the going concern concept, which assumes that the Company will realize its assets and discharge its liabilities in the normal course of business. The creditor protection proceedings provide the Company with a period of time to stabilize its operations and financial condition and develop a plan of arrangement. During the period, Debtor-In-Possession (DIP) financing, as described below, has been approved by the Court and is available if required, subject to borrowing conditions. Management believes that these actions make the going concern basis appropriate. However, it is not possible to predict the outcome of these proceedi ngs and accordingly substantial doubt exists as to whether the Corporation will be able to continue as a going concern. Further, it is not possible to predict whether the actions taken in any restructuring will result in improvements to the financial condition of the Company sufficient to allow it to continue as a going concern. If the going concern basis is not appropriate, adjustments may be necessary to the carrying amounts and/or classification of assets and liabilities and expenses in these financial statements. These financial statements do not reflect any adjustments related to subsequent events related to conditions that arose subsequent to September 30, 2006.
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
In accordance with generally accepted accounting principles appropriate for a going concern, property, plant and equipment is carried at the lower of cost less accumulated amortization and net recoverable amount. This carrying amount is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Net recoverable amount is the sum of the undiscounted cash flows from operations and cash flow from disposal of the property, plant and equipment. The Company’s filing for creditor protection under CCAA triggered an impairment review as at September 30, 2006.
In estimating future cash flows from operations of the Company’s property, plant and equipment, the Company made certain assumptions about the reductions in operating costs and its liabilities that could be achieved through the restructuring Plan. These assumptions included, and were based upon but not limited to, the following factors: (a) estimated future coal sales prices as reported by analysts in the sector, (b) required capital expenditures being incurred to implement improvements to the yield recovery in the washplant and to acquire an owner-operated fleet of mining equipment, and (c) costs associated with operating the coal preparation plant facilities, the equipment fleet and mine-site general and administrative expenses. The Company believes that these assumptions are consistent with use of the going concern assumption in these financial statements. Should there be a change to t he underlying estimates and assumptions, an asset impairment may occur that would require a write-down in the value of the Company’s property, plant and equipment.
In connection with the CCAA proceedings, any future Plan will require the approval of affected creditors and there can be no assurance that such agreement will be reached and that future cash flows will be sufficient to recover the carrying amount of property, plant and equipment. Without the benefit of an approved restructuring plan management estimates that future cash flows will likely be negative for the foreseeable future. This situation would result in the write-down of the Company’s property, plant and equipment to liquidation value. The Company believes that this situation is equivalent to the liquidation basis of accounting which is not consistent with the going concern basis of accounting.
While the Company is under creditor protection it will make adjustments to the financial statements to isolate assets, liabilities, revenues and expenses related to the reorganization and restructuring activities so as to distinguish these events and transactions from those associated with the operations of the business. Further, allowed claims under the CCAA proceedings may be recorded as liabilities and presented separately on the balance sheet. If a restructuring occurs and there is substantial realignment of the equity and non-equity interests in the Company, the Company will be required, under Canadian GAAP, to adopt “fresh start” reporting. Under fresh start reporting the Company will undertake a comprehensive revaluation of its assets and liabilities based on the reorganization value and as established and confirmed in the Plan. The financial statements do not present any adju stments that may be required during the period that the Company remains under creditor protection, or that may be required under fresh start reporting.
Financing during CCAA proceedings – Debtor-In-Possession (DIP) financing
The Company has finalized the negotiation of a Debtor-In-Possession (DIP) Credit Agreement secured financing dated November 6, 2006. This financing is with the Royal Bank of Canada for an initial amount of $1.1 million with the option to draw an additional $0.5 million. Interest will be charged at RBC prime plus 2.5% with a fee of $25,000 on the initial draw and $10,000 on the subsequent draw (if utilized). The term of the financing will expire on January 5, 2007. The Company anticipates repayment of this financing to occur concurrent with the receipt of funds for the sale of a vessel of coking coal made on November 7, 2006.
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These unaudited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) for interim financial information and follow the same accounting policies and methods of application as the audited consolidated financial statements of the Company for the year ended March 31, 2006. These unaudited interim consolidated financial statements do not include all the information and note disclosures required by Canadian GAAP for annual financial statements and therefore should be read in conjunction with the most recent annual audited consolidated financial statements of the Company and the notes thereto. In the opinion of management, all adjustments considered necessary for fair presentation have been included in these financial statements. Interim results are not necessarily indicative of the results expected for th e fiscal year.
3.
MINERAL PROPERTY, PLANT AND EQUIPMENT
Mineral property, plant and equipment consist of:
| September 30, 2006 |
| March 31, 2006 | ||||
|
| Accumulated | Net Book |
|
| Accumulated | Net Book |
| Cost | Amortization | Value |
| Cost | Amortization | Value |
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Assets acquired under capital lease | $ 256 | $ 105 | $ 151 |
| $ 256 | $ 80 | $ 176 |
Buildings | 651 | 45 | 606 |
| 426 | 30 | 396 |
Land | 214 | - | 214 |
| 140 | - | 140 |
Office equipment | 878 | 242 | 636 |
| 595 | 186 | 409 |
Plant and equipment | 25,634 | 3,044 | 22,590 |
| 25,513 | 1,752 | 23,761 |
Property and development | 35,288 | 3,528 | 31,760 |
| 34,722 | 2,044 | 32,678 |
| $ 62,921 | $ 6,964 | $55,957 |
| $61,652 | $ 4,092 | $57,560 |
Included in property, plant and equipment is $1.3 million (March 31, 2006 - $1.3 million) relating to interest capitalized during construction and development.
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
4.
NON-PRODUCING MINERAL PROPERTIES
|
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| Six months ended |
| Year ended |
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| September 30, 2006 |
| March 31, 2006 |
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Pine Pass |
|
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Consulting |
|
| $ 211 |
| $ 785 |
Drilling |
|
| - |
| 2,716 |
Environmental |
| 18 |
| 17 | |
Permits |
|
| 5 |
| 16 |
B.C. Mining Exploration Tax Credit | - |
| (717) | ||
|
|
| 234 |
| 2,817 |
|
|
|
|
|
|
Beginning of period |
| 2,877 |
| 60 | |
|
|
|
|
|
|
End of period |
|
| $ 3,111 |
| $ 2,877 |
The Company has an interest in the Pine Pass property, located adjacent to the Willow Creek mine site and has completed a drill program to further develop reserves at this coal deposit. The purpose of the drill program was to further define Pine Pass reserves for mining and reporting purposes to National Instrument 43-101 standard, provide geological data to develop a mine plan and initiate environmental testing necessary for mine permits.
5.
OPERATING LINE
The Company entered into a working capital credit facility of up to $20 million with Royal Bank Asset Based Finance, a division of Royal Bank of Canada (“Royal Bank” or the “Bank”) on September 16, 2005. The Bank’s facility is secured by all the assets of the Company with first position on inventory and receivables. The facility bears interest at the rate of Royal Bank’s prime plus 1% per annum, calculated monthly. At September 30, 2006, the Company was in breach of certain covenants associated with the Bank’s operating line due to the Company’s worsening financial situation as described in Note 1.
6.
TERM DEBT
|
| September 30, |
| March 31, |
|
| 2006 |
| 2006 |
|
|
|
|
|
Rockside Foundation loan (US$8,850) |
| $ 9,892 |
| $ 10,337 |
|
| 9,892 |
| 10,337 |
Less portion due within one year |
| 9,892 |
| 10,337 |
|
| $ - |
| $ - |
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
The Company entered into a Credit Facility Agreement (the "Agreement") with The Rockside Foundation ("Rockside"), a shareholder of the Company, for an aggregate amount up to US$ 7.0 million, with interest at an annual rate of 10%, further amended on December 30, 2004, to increase the loan to US$8.85 million. Under the terms of the Agreement, the Company issued 104,736 common shares for the loan of the initial US$3.75 million principal amount. A further 101,020 shares had been issued to Rockside as at March 31, 2006, representing the 10% bonus due by the Company upon receipt of the subsequent US$5.1 million.
A second amendment to the Agreement was completed on September 16, 2005. Under the terms of the second amendment the due date for repayment of the loan was extended for 10 weeks from November 29, 2005 to February 6, 2006. For the period from November 29, 2005 to February 6, 2006 interest was payable at the rate of 12% per annum with no bonus shares being issued.
A third amendment to the Agreement was completed on November 23, 2005 whereby the terms of repayment of the loan were further extended from February 6, 2006 to June 30, 2006.
A fourth amendment to the Agreement was completed on June 15, 2006, whereby the terms of repayment of the loan were extended from June 30, 2006 to September 30, 2006. All other terms remain unchanged.
A fifth amendment to the Agreement was completed on September 28, 2006, whereby the terms of repayment of the loan were extended from September 30, 2006 to October 31, 2006. All other terms remain unchanged.
Rockside’s loan is secured by the Company’s assets subject to an inter-creditor agreement with Royal Bank which grants the Bank certain priority rights with regard to inventory and receivables. In addition, a subordination and postponement agreement has been entered into between the Bank and Rockside whereby Rockside has postponed their loans in favour of Royal Bank (see Note 5).
7.
DUE TO RELATED PARTY
The Company has provided for the payment of $0.6 million to the estate of the former Chairman of the Company (the “Estate”). The Estate is administered on behalf of its beneficiaries by a director of the Company. The Company has agreed, subject to certain conditions being fulfilled, to enter into discussions that could result in a cash payment or shares of the Company being issued in full consideration of an amount of $0.6 million for the Estate upon terms and arrangements that are not yet to be determined. There is no immediate requirement or intention to finalize these discussions.
8.
ASSET RETIREMENT OBLIGATION
Although the ultimate amount of the asset retirement obligation and reclamation is uncertain, the fair value of these obligations is based on information currently available, including closure plans and applicable regulations.
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
The total undiscounted amount of the estimated cash flows required to settle the Company’s asset retirement obligation is $3.4 million (March 31, 2006 - $3.2 million) which has been discounted using a discount rate of 7.5% to total $2.5 million (March 31, 2006 - $2.3 million). Reclamation obligations at the Willow Creek Mine are expected to be paid annually up to 2013. These obligations will be funded from operating cash flows, reclamation deposits and cash on hand. Future changes to these estimates, due to changes in closure plans or applicable regulations, will be made prospectively with a corresponding charge to the asset’s carrying value.
9.
SHARE CAPITAL
(a)
Authorized
Unlimited common shares of no par value.
(b)
Issued and outstanding
No shares were issued during the three and six months ended September 30, 2006.
10.
STOCK OPTIONS AND WARRANTS
(a)
Stock options
The Company has established a stock option plan for directors, officers, consultants and employees. At September 30, 2006, the Company was allowed to grant up to 10% of the issued share capital of as stock options. Stock options are exercisable once they have vested under the terms of the grant. A summary of the Company's options at September 30, 2006 and the changes for the three and six months periods then ended is presented below:
| Three months ended September 30, | ||||||
| 2006 |
| 2005 | ||||
|
|
| Weighted |
|
|
| Weighted |
|
|
| Average |
|
|
| Average |
| Number |
| Exercise |
| Number |
| Exercise |
| of Options |
| Price |
| of Options |
| Price |
|
|
|
|
|
|
|
|
Outstanding, beginning of period | 3,100,000 |
| $ 2.36 |
| 2,760,000 |
| $ 3.76 |
Granted | 110,000 |
| 0.89 |
| 10,000 |
| 4.22 |
Expired | (300,000) |
| 2.93 |
| - |
| - |
Outstanding, end of period | 2,910,000 |
| $ 2.24 |
| 2,770,000 |
| $ 3.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended September 30, | ||||||
| 2006 |
| 2005 | ||||
|
|
| Weighted |
|
|
| Weighted |
|
|
| Average |
|
|
| Average |
| Number |
| Exercise |
| Number |
| Exercise |
| of Options |
| Price |
| of Options |
| Price |
|
|
|
|
|
|
|
|
Outstanding, beginning of period | 3,100,000 |
| $ 2.36 |
| 3,070,000 |
| $ 3.47 |
Granted | 110,000 |
| 0.89 |
| 10,000 |
| 4.22 |
Exercised | - |
| - |
| (310,000) |
| 0.88 |
Expired | (300,000) |
| 2.93 |
| - |
| - |
Outstanding, end of period | 2,910,000 |
| $ 2.24 |
| 2,770,000 |
| $ 3.76 |
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
As at September 30, 2006, the Company has outstanding stock options to purchase an aggregate 2,910,000 common shares as follows:
Options Outstanding |
| Options Exercisable | |||||
|
|
| Weighted |
|
|
| Weighted |
|
|
| Average |
|
|
| Average |
|
|
| Exercise |
|
|
| Exercise |
Number | Expiry Date |
| Price |
| Number |
| Price |
250,000 | April 28, 2007 |
| $ 0.90 |
| 250,000 |
| $ 0.90 |
5,000 | April 23, 2009 |
| 1.01 |
| 5,000 |
| 1.01 |
75,000 | July 8, 2009 |
| 1.56 |
| 75,000 |
| 1.56 |
500,000 | March 9, 2010 |
| 5.30 |
| 375,000 |
| 5.30 |
1,970,000 | March 21, 2011 |
| 1.74 |
| 1,177,000 |
| 1.74 |
110,000 | August 21, 2011 |
| 0.89 |
| - |
| - |
2,910,000 |
|
| $ 2.24 |
| 1,882,000 |
| $ 2.33 |
Using the fair value method for stock-based compensation, the Company recorded a charge to operations of $342,000 during the three month period ended September 30, 2006 (three months to September 30, 2005 - $731,000) and $713,000 for the six months to September 30, 2006 (six months to September 30, 2005 - $1,451,000). These amounts were determined using the Black-Scholes option pricing model, based upon the following terms and assumptions:
| Six months ended |
| Year ended |
| September 30, |
| March 31, |
| 2006 |
| 2006 |
|
|
|
|
Dividend yield | 0% |
| 0% |
Risk free interest rate | 4.07% |
| 3.2 - 3.99% |
Expected life | 3 years |
| 3 years |
Expected volatility | 72% |
| 75% |
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
(b)
Warrants
A summary of the Company's warrants at September 30, 2006 and the changes for the three and six month periods then ended is presented below:
| Three months ended September 30, | ||||||
| 2006 |
| 2005 | ||||
|
|
| Weighted |
|
|
| Weighted |
|
|
| Average |
|
|
| Average |
| Number |
| Exercise |
| Number |
| Exercise |
| of Warrants |
| Price |
| of Warrants |
| Price |
|
|
|
|
|
|
|
|
Outstanding, beginning of period | 2,777,500 |
| $ 4.24 |
| 750,000 |
| $ 6.25 |
Expired | (750,000) |
| 6.25 |
| - |
| - |
Outstanding, end of period | 2,027,500 |
| $ 3.50 |
| 750,000 |
| $ 6.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended September 30, | ||||||
| 2006 |
| 2005 | ||||
|
|
| Weighted |
|
|
| Weighted |
|
|
| Average |
|
|
| Average |
| Number |
| Exercise |
| Number |
| Exercise |
| of Warrants |
| Price |
| of Warrants |
| Price |
|
|
|
|
|
|
|
|
Outstanding, beginning of period | 2,777,500 |
| $ 4.24 |
| 1,850,000 |
| $ 2.68 |
Exercised | - |
| - |
| (1,100,000) |
| 0.25 |
Expired | (750,000) |
| 6.25 |
| - |
| - |
Outstanding, end of period | 2,027,500 |
| $ 3.50 |
| 750,000 |
| $ 6.25 |
As at September 30, 2006, the Company has outstanding share purchase warrants to purchase an aggregate 2,027,500 common shares as follows:
Warrants Outstanding | |||
|
|
| Weighted |
|
|
| Average |
|
|
| Exercise |
Number | Expiry Date |
| Price |
2,027,500 | June 12, 2007 |
| 3.50 |
2,027,500 |
|
| $ 3.50 |
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
11.
SEGMENTED INFORMATION AND ECONOMIC DEPENDENCE
The Company operates in one industry and as at September 30, 2006 substantially all of the Company's assets were located in Canada.
Revenues from customers can be attributed to the following countries:
| Three months ended September 30, |
| Six months ended September 30, | ||||||||
| 2006 |
| 2005 |
| 2006 |
| 2005 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Asia | $ 11,871 | 100% |
| $ 19,957 | 100% |
| $ 26,692 | 82% |
| $ 28,154 | 84% |
Europe | - | 0% |
| - | 0% |
| 5,834 | 18% |
| 5,277 | 16% |
| $ 11,871 | 100% |
| $ 19,957 | 100% |
| $ 32,526 | 100% |
| $ 33,431 | 100% |
For the six months ended September 30, 2006, 100% of sales are to six customers (September 30, 2005 – 100% of sales to four customers) and there are no accounts receivable due from sale of coal (September 30, 2005 - 100% of accounts receivable from two customers).
12.
CHANGES IN OPERATING ASSETS AND LIABILITIES OTHER THAN CASH
| Three months ended September 30 |
| Six months ended September 30 | ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable | $ 7,980 |
| $ 1,183 |
| $ 3,674 |
| $ (1,026) |
Decrease (increase) in prepaid expenses | 1,303 |
| (346) |
| 1,325 |
| (789) |
Increase in inventory | (1,806) |
| (412) |
| (773) |
| (1,628) |
Increase in accounts payable |
|
|
|
|
|
|
|
and accrued liabilities | 988 |
| 2,018 |
| 3,075 |
| 6,160 |
Affect of foreign exchange on non-cash items | (192) |
| 88 |
| (8) |
| 89 |
| $ 8,273 |
| $ 2,531 |
| $ 7,293 |
| $ 2,806 |
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
13.
INCOME TAXES
The Company incurred significant losses during the three months ending September 30, 2006, such losses which would, in the normal course of events, give rise to a future income tax asset. However, the effect of these losses has not been recognized by the Company in light of the filing for creditor protection as described in Note 1. In addition, the Company has determined that it is appropriate to carry a valuation allowance against future income tax balances in light of the current CCAA proceedings.
14.
COMMITMENTS AND CONTINGENCIES
(a)
The Company has letters of credit of $50,000 and $373,000 outstanding at September 30, 2006 (March 31, 2006 - $508,000).
(b)
Provincial government regulators have indicated that they are likely to seek an additional bond, pertaining to the Company’s mining activities at a rate of 900,000 tonnes per annum, of approximately $1.5 million. This bond is required to bring the total value of bonds held by the government closer into line with the current status of land disturbance at the Willow Creek mine.
(c)
The Company has entered into operating lease agreements for coal loading services, office space and equipment and vehicles at the mine site. These agreements require the Company to make the following lease payments:
|
|
|
| Office | Office |
|
| Coal |
|
|
|
|
| equipment | lease/trailer | Vehicles | Equipment | loading | Total |
Six months ending March 31, 2007 | $ 5 | $ 37 | $ 42 | $ 19 | $ 479 | $ 582 | |||
Year ending March 31, 2008 |
| 9 | 85 | 65 | 37 | 980 | 1,176 | ||
Year ending March 31, 2009 |
| 7 | 70 | 11 | 12 | 919 | 1,019 | ||
Year ending March 31, 2010 |
| - | 65 | - | - | - | 65 | ||
Year ending March 31, 2011 |
| - | 65 | - | - | - | 65 | ||
Year ending March 31, 2012 |
| - | 65 | - | - | - | 65 | ||
Year ending March 31, 2013 |
| - | 54 | - | - | - | 54 | ||
|
|
|
| $ 21 | $ 441 | $ 118 | $ 68 | $ 2,378 | $ 3,026 |
PINE VALLEY MINING CORPORATION
Notes to the Consolidated Financial Statements
For the Six Months ended September 30, 2006
(Unaudited)
(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)
15.
SUBSEQUENT EVENTS
Following the Company’s decision to file for creditor protection under CCAA as described in Note 1, the following events have occurred:
(a)
The Company’s second interim agreement for the provision of mining services, entered into on September 1, 2006, was terminated on November 2, 2006 with immediate effect. Under the terms of the second interim agreement, this gives rise to an additional liability to the Company’s mining contractor in the amount of $4.5 million.
(b)
The Toronto Stock Exchange (the “Exchange”) suspended trading in the Company’s shares as of 2.01 p.m. (Vancouver time) on October 20, 2006. The Exchange has further advised the Company that its shares will be delisted from the Exchange effective November 17, 2006 unless, before that deadline, the Company remedies all of the conditions which resulted in suspension (primarily relating to financial condition) and demonstrates to the Exchange’s satisfaction that the Company meets all of the Exchange’s requirements for an original listing. Notwithstanding the Exchange’s decision, the effective time of the delisting will likely remain suspended if the effective period on the initial order relating to creditor protection is extended beyond November 17, 2006.
(c)
On October 22, 2006 the Company’s Willow Creek mine and related plant operations were put on a care and maintenance basis. In connection with the shutdown of mining activities, the Company terminated 38 employees. Under the terms of its CCAA protection, the Company was not obligated to pay severance, vacation pay, and other items not related to wages and salaries at the time of the termination and these amounts remain unpaid. The exact amount of severance to be paid will be determined at a later date and will form part of the overall creditor pool of claims.