Silver Standard Resources Inc.
(a development stage company)
Consolidated Balance Sheets
As at September 30, 2008
(expressed in thousands of Canadian dollars – unaudited)
September 30 | December 31 | |||
Note | 2008 | 2007 | ||
$ | $ | |||
Assets | (Restated) | |||
Current assets | ||||
Cash and cash equivalents | 144,987 | 80,629 | ||
Silver bullion | 3 | - | 15,787 | |
Marketable securities | 4a | 16,064 | 33,209 | |
Accounts receivable | 2,923 | 2,903 | ||
Prepaid expenses and deposits | 7,093 | 453 | ||
171,067 | 132,981 | |||
Restricted cash | 1,868 | 1,809 | ||
Other investments | 5 | 26,700 | 45,102 | |
Convertible debenture | 4c | 7,557 | - | |
Valued added tax recoverable | 20,190 | 9,527 | ||
Mineral property costs and property, plant, and equipment | 6 | 443,907 | 302,588 | |
Mineral property held-for-sale | - | 6,837 | ||
671,289 | 498,844 | |||
Liabilities and Shareholders' Equity | ||||
Current liabilities | ||||
Accounts payable | 15,140 | 9,640 | ||
Accrued liabilities | 14,607 | 3,632 | ||
Accrued interest on convertible notes | 7 | 549 | - | |
Current portion of taxes payable | 10,000 | - | ||
Current portion of asset retirement obligations | 527 | 1,029 | ||
Foreign exchange derivatives | 4b | - | 1,412 | |
40,823 | 15,713 | |||
Asset retirement obligations | 2,937 | 2,827 | ||
Taxes payable | 3,370 | - | ||
Future income tax liability | 27,032 | 25,253 | ||
Long-term convertible notes | 7 | 108,670 | - | |
182,832 | 43,793 | |||
Non-controlling interest | 608 | 608 | ||
183,440 | 44,401 | |||
Shareholders' Equity | ||||
Share capital | 8a | 462,212 | 459,888 | |
Value assigned to stock options | 8b | 38,769 | 31,810 | |
Value assigned to convertible notes | 7 | 36,553 | - | |
Contributed surplus | 649 | 649 | ||
Accumulated other comprehensive income | 34 | 19,377 | ||
Deficit | (50,368) | (57,281) | ||
487,849 | 454,443 | |||
671,289 | 498,844 |
Commitments (note 13)
Approved on behalf of the Board of Directors
“John R. Brodie” “Peter W. Tomsett”
John R. Brodie, FCA Peter W. Tomsett
(Director) (Director)
The accompanying notes are an integral part of the consolidated financial statements.
1
Silver Standard Resources Inc.
(a development stage company)
Consolidated Statements of Earnings (Loss) and Comprehensive Loss
(expressed in thousands of Canadian dollars, except per share amounts – unaudited)
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||
Note | 2008 | 2007 | 2008 | 2007 | |||||
$ | $ | $ | $ | ||||||
(Restated) | (Restated) | ||||||||
Exploration and mineral property costs | |||||||||
Property examination and exploration | 75 | 3 | 242 | 61 | |||||
Reclamation and accretion | 53 | 121 | 175 | 286 | |||||
(128) | (124) | (417) | (347) | ||||||
Expenses | |||||||||
Salaries and employee benefits | 807 | 596 | 2,021 | 1,651 | |||||
Depreciation | 81 | 100 | 229 | 228 | |||||
Professional fees | 271 | 143 | 699 | 454 | |||||
General and administration | 975 | 988 | 3,465 | 3,722 | |||||
Stock-based compensation | 8b | 2,707 | 4,531 | 7,577 | 10,747 | ||||
Foreign exchange loss (gain) | (1,656) | 1,998 | (3,366) | 2,383 | |||||
(3,185) | (8,356) | (10,625) | (19,185) | ||||||
Other income (expenses) | |||||||||
Investment income | 1,018 | 1,212 | 2,616 | 5,763 | |||||
Financing fees | 7 | - | - | (3,690) | - | ||||
Interest expense on convertible debt | 7 | (709) | - | (2,769) | - | ||||
Gain on sale of silver bullion | 3 | - | - | 23,457 | - | ||||
Gain on sale of marketable securities | 4a | - | - | 2,105 | - | ||||
Unrealized gain (loss) on | |||||||||
financial instruments held-for-trading | 4a,b | (924) | (1,860) | 461 | (2,176) | ||||
Future income tax expense | 2 | (3,016) | (457) | (3,979) | (1,617) | ||||
Write-down of other investments | 5 | - | (4,000) | (18,402) | (4,000) | ||||
Gain on sale of mineral property | 6c | 31,526 | 229 | 31,526 | 509 | ||||
Income tax expense | 6c | (13,370) | - | (13,370) | - | ||||
14,525 | (4,876) | 17,955 | (1,521) | ||||||
Earnings (Loss) for the period | 11,212 | (13,356) | 6,913 | (21,053) | |||||
Weighted average shares outstanding (thousands) | |||||||||
Basic | 62,699 | 62,518 | 62,687 | 62,061 | |||||
Diluted | 63,070 | 62,518 | 63,149 | 62,061 | |||||
Earnings (Loss) per common share | |||||||||
Basic earnings (loss) per share | 0.18 | (0.21) | 0.11 | (0.34) | |||||
Diluted earnings (loss) per share | 0.18 | (0.21) | 0.11 | (0.34) | |||||
Comprehensive income | |||||||||
Earnings (Loss) for the period | 11,212 | (13,356) | 6,913 | (21,053) | |||||
Other comprehensive loss | |||||||||
Unrealized loss on marketable securities, net of tax | 4a | (14,659) | (2,223) | (17,597) | (7,863) | ||||
Reclassification of realized gain on | |||||||||
sale of marketable securities, net of tax | 4a | - | - | (1,746) | - | ||||
Other comprehensive loss for the period | (14,659) | (2,223) | (19,343) | (7,863) | |||||
Comprehensive loss for the period | (3,447) | (15,579) | (12,430) | (28,916) |
The accompanying notes are an integral part of the consolidated financial statements.
2
Silver Standard Resources Inc.
(a development stage company)
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian dollars - unaudited)
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||
Note | 2008 | 2007 | 2008 | 2007 | |||||
$ | $ | $ | $ | ||||||
(Restated) | (Restated) | ||||||||
Operating activities | |||||||||
Earnings (Loss) for the period | 11,212 | (13,356) | 6,913 | (21,053) | |||||
Items not affecting cash | |||||||||
Depreciation | 81 | 100 | 229 | 228 | |||||
Stock-based compensation | 8b | 2,707 | 4,531 | 7,577 | 10,747 | ||||
Asset retirement obligations | 39 | 54 | 118 | 161 | |||||
Gain on sale of marketable securities | 4a | - | - | (2,105) | - | ||||
Gain on sale of silver bullion | 3 | - | - | (23,457) | - | ||||
Gain on sale of mineral property | (31,526) | (229) | (31,526) | (509) | |||||
Unrealized loss (gain) on held-for-trading | |||||||||
financial instruments | 4a,b | 924 | 1,860 | (461) | 2,176 | ||||
Accretion expense on convertible notes | 7 | 345 | - | 1,305 | - | ||||
Interest income on convertible debenture | 4c | (169) | - | (169) | - | ||||
Write-down of other investments | 5 | - | 4,000 | 18,402 | 4,000 | ||||
Future income tax expense | 2 | 3,016 | 457 | 3,979 | 1,617 | ||||
Increase in non-current taxes payable | 3,370 | - | 3,370 | - | |||||
Foreign exchange loss (gain) | 4,189 | 108 | 8,189 | 268 | |||||
Donation of shares | - | 325 | - | 639 | |||||
Increase (decrease) in non-cash working capital items | 9 | 1,996 | 499 | 4,008 | (648) | ||||
Cash used in operating activities | (3,816) | (1,651) | (3,628) | (2,374) | |||||
Financing activities | |||||||||
Proceeds from issuance of convertible notes | 7 | - | - | 134,936 | - | ||||
Financing costs related to equity portion of | |||||||||
convertible notes financing | 7 | - | - | (1,440) | - | ||||
Shares issued for cash | 227 | 1,008 | 1,676 | 7,324 | |||||
Cash generated by financing activities | 227 | 1,008 | 135,172 | 7,324 | |||||
Investing activities | |||||||||
Mineral property costs | (16,893) | (14,099) | (32,506) | (29,679) | |||||
Property, plant and equipment | (37,010) | (6,316) | (88,541) | (30,907) | |||||
Increase in value added tax recoverable (net) | (5,249) | (3,266) | (10,663) | (4,686) | |||||
Net proceeds from sale of mineral property | 6c | 22,480 | - | 22,480 | - | ||||
Proceeds from sale of silver bullion | 3 | - | - | 39,244 | - | ||||
Proceeds from sale of marketable securities | 4a | - | - | 2,800 | - | ||||
Reliant, net of cash | - | - | - | 193 | |||||
Purchase of marketable securities | - | - | - | (3,648) | |||||
Other investments | 5 | - | (57,102) | - | (57,102) | ||||
Cash used in investing activities | (36,672) | (80,783) | (67,186) | (125,829) | |||||
Increase (decrease) in cash and cash equivalents | (40,261) | (81,426) | 64,358 | (120,879) | |||||
Cash and cash equivalents - Beginning of period | 185,248 | 190,163 | 80,629 | 229,616 | |||||
Cash and cash equivalents - End of period | 144,987 | 108,737 | 144,987 | 108,737 | |||||
Supplementary cash flow information (note 9) |
The accompanying notes are an integral part of the consolidated financial statements.
3
Silver Standard Resources Inc.
(a development stage company)
Statements of Shareholders’ Equity
For the nine months ended September 30, 2008
(expressed in thousands of Canadian dollars - unaudited)
Common Shares | Values | Values | Accumulated | |||||
assigned | assigned to | other | Retained | Total | ||||
Number of | to stock | convertible | Contributed | comprehensive | earnings | shareholders' | ||
shares | Amount | options | notes | Surplus | income | (deficit) | equity | |
(thousands) | $ | $ | $ | $ | $ | $ | $ | |
(Restated) | (Restated) | (Restated) | ||||||
Balance, December 31, 2006 | 61,646 | 442,265 | 20,798 | - | 649 | - | (27,142) | 436,570 |
Transition adjustment to opening | - | - | - | - | - | 24,716 | 5,084 | 29,800 |
balance (note 2) | ||||||||
Issued for cash: | ||||||||
Exercise of options | 887 | 11,794 | - | - | - | - | - | 11,794 |
Exercise of warrants | - | |||||||
For mineral property | 9 | 358 | - | - | - | - | - | 358 |
Value assigned to options granted | - | - | 15,523 | - | - | - | - | 15,523 |
Value of options exercised | - | 4,511 | (4,511) | - | - | - | - | - |
Value of warrants exercised | - | |||||||
Donations | 27 | 960 | - | - | - | - | - | 960 |
Other comprehensive loss | - | - | - | - | - | (5,339) | - | (5,339) |
Loss for the year | - | - | - | - | - | - | (35,223) | (35,223) |
Balance, December 31, 2007 | 62,569 | 459,888 | 31,810 | - | 649 | 19,377 | (57,281) | 454,443 |
Issued for cash: | ||||||||
Exercise of options | 123 | 1,449 | - | - | - | - | - | 1,449 |
Value assigned to options granted | - | - | 2,381 | - | - | - | - | 2,381 |
Value of options exercised | - | 566 | (566) | - | - | - | - | - |
Value assigned to convertible notes | - | - | - | 36,553 | - | - | - | 36,553 |
Other comprehensive loss | - | - | - | - | - | (2,349) | - | (2,349) |
Earnings for the period | - | - | - | - | - | - | 1,673 | 1,673 |
Balance, March 31, 2008 | 62,692 | 461,903 | 33,625 | 36,553 | 649 | 17,028 | (55,608) | 494,150 |
Value assigned to options granted | - | - | 2,477 | - | - | - | - | 2,477 |
Other comprehensive loss | - | - | - | - | - | (2,335) | - | (2,335) |
Loss for the period | - | - | - | - | - | - | (5,972) | (5,972) |
Balance, June 30, 2008 | 62,692 | 461,903 | 36,102 | 36,553 | 649 | 14,693 | (61,580) | 488,320 |
Issued for cash: | ||||||||
Exercise of options | 13 | 227 | - | - | - | - | - | 227 |
Value assigned to options granted | - | - | 2,749 | - | - | - | - | 2,749 |
Value of options exercised | - | 82 | (82) | - | - | - | - | - |
Other comprehensive loss | - | - | - | - | - | (14,659) | - | (14,659) |
Earnings for the period | - | - | - | - | - | - | 11,212 | 11,212 |
Balance, September 30, 2008 | 62,705 | 462,212 | 38,769 | 36,553 | 649 | 34 | (50,368) | 487,849 |
The accompanying notes are an integral part of the consolidated financial statements.
4
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
1. | NATURE OF OPERATIONS |
We are a development stage company with a portfolio of silver-dominant projects located in seven countries in the Americas and Australia. We are currently developing our Pirquitas property that is located in the province of Jujuy in northwest Argentina.
Management has estimated that we will have adequate funds from existing working capital to meet our corporate, development, administrative and property obligations for the coming year, including the construction of the Pirquitas property. We will periodically need to obtain additional financing and while we have been successful in the past, there can be no assurance that we will be able to do so in the future.
The recoverability of the amounts shown for mineral properties and related deferred costs is dependent upon the existence of economically recoverable reserves, our ability to obtain necessary financing to complete the development, and upon future profitable production. The amounts shown as deferred expenditures and property acquisition costs represent net costs to date, less amounts amortized and/or written-off, and do not necessarily represent present or future values.
Although we have taken steps to verify title to mineral properties in which we have an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee our title. Property title may be subject to unregistered prior agreements or transfers and may be affected by undetected defects.
2. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
These unaudited interim consolidated financial statements follow the same accounting policies as our most recent audited annual consolidated financial statements except changes relating to capital disclosure and presentation and disclosure of financial instruments (see “Changes in Accounting Policies” below). These changes became effective January 1, 2008. These statements do not contain all the information required for annual financial statements and should be read in conjunction with our annual consolidated financial statements. In the opinion of management, all of the adjustments necessary to fairly present the consolidated financial statements set forth herein have been made. We have reclassified certain comparative figures to reflect the presentation used in our most recent annual consolidated financial statements.
Changes in Accounting Policies
Capital Disclosure
Effective January 1, 2008, we adopted CICA Handbook Section 1535, “Capital Disclosures”, which requires the disclosure of information on our objectives, policies, and processes for managing capital. This information is disclosed in note 11.
5
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
2. | SIGNIFICANT ACCOUNTING POLICIES (Cont’d) |
Financial Instruments – Disclosures
Effective January 1, 2008, we adopted CICA Handbook Section 3862, “Financial Instruments – Disclosures” and CICA Handbook Section 3863, “Financial Instruments – Presentation”. Section 3862 requires the disclosure of quantitative and qualitative information in our financial statements to evaluate (a) the significance of financial instruments for our financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which we are exposed during the period and at the balance sheet date. Management’s objectives, policies and procedures for managing such risks are disclosed in note 4(c). Section 3863 replaces the existing requirements on presentation of financial instruments.
As at September 30, 2008, our financial instruments are comprised of cash and cash equivalents, marketable securities, accounts receivable, restricted cash, convertible debenture receivable, other investments, accounts payable, accrued liabilities, and convertible notes. The fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying value due to their short-term maturity or capacity of prompt liquidation. Cash equivalents and restricted cash are designated as available-for-sale as they are not acquired for purpose of trading and have short-term maturity. Marketable securities are reported at their fair market value based on quoted market prices. Non-derivative based marketable securities are designated as available-for-sale financial instruments, as they were not acquired for purpose of trading. Derivative based marketable securities are designated as held-for-trading financial instruments as their default category. Convertible debenture receivable consists of a note receivable component and a conversion feature component. The note receivable component is designated as loans and receivable and the conversion feature is designated as a derivative or held-for-trading financial instruments as their default category. Convertible notes are designated as other liabilities as their default category and related transaction costs are expensed as incurred. Interest expense related to expenditures incurred on development projects are capitalized to the project.
Going Concern
Effective January 1, 2008, we adopted an amendment to CICA Handbook Section 1400, “General Standards of Financial Statement Presentation” in relation to going concern. The amendment requires management to assess an entity’s ability to continue as a going concern. When management is aware of material uncertainties related to events or conditions that may cast doubt on an entity’s ability to continue as a going concern, those uncertainties must be disclosed. In assessing the appropriateness of the going concern assumption, the standard requires management to consider all available information about the future, which is at least, but not limited to, twelve months from the balance sheet date. The adoption did not have a material impact on the consolidated financial statements for any of the periods presented.
6
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
2. | SIGNIFICANT ACCOUNTING POLICIES (Cont’d) |
Inventories
Effective January 1, 2008, we adopted CICA Handbook Section 3031, “Inventories”, which prescribes the accounting treatment for inventories and provides guidance on the determination of costs and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. As at September 30, 2008, we have no inventories and this standard has no effect on our financial statements.
Income Statement Presentation of Tax Loss Carryforward
Effective September 30, 2008, we adopted EIC-172, “Income Statement Presentation of a Tax Loss Carryforward Recognized Following an Unrealized Gain in Other Comprehensive Income”.�� This abstract provides guidance on whether the tax benefit from the recognition of previously unrecognized tax loss carryforwards consequent to the recording of unrealized gains in other comprehensive income, such as unrealized gains on available-for-sale financial assets, should be recognized in net income or in other comprehensive income. The abstract should be applied retrospectively, with restatement of prior periods from January 1, 2007, the date of adoption of CICA Handbook Section 3855, “Financial Instruments – Recognition and Measurement”.
The adoption of EIC-172 resulted in a reclassification of $5,084,000 of income tax recovery from opening accumulated other comprehensive income to opening accumulated deficit in 2007, $1,098,000 of income tax expense from other comprehensive loss to net loss in 2007 and $3,979,000 of income tax expense from other comprehensive loss to net loss in the current period.
Recent Accounting Pronouncements
Recent accounting pronouncements issued which may impact us in the future are as follows:
Goodwill and Intangible Assets
CICA Handbook Section 3064, Goodwill and Intangible Assets, establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets. Concurrent with the introduction of this standard, the CICA withdrew EIC 27, Revenues and Expenses during the pre-operating period. As a result of the withdrawal of EIC 27, companies will no longer be able to defer operating costs and revenues incurred prior to commercial production at new mine operations. The changes are effective for interim and annual financial statements beginning January 1, 2009. We have not yet determined the impact of the adoption of this change on the disclosure in our financial statements.
7
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
2. | SIGNIFICANT ACCOUNTING POLICIES (Cont’d) |
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board (“AcSB”) confirmed that publicly listed companies will be required to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Early adoption may be permitted, however, exemptive relief requires approval of the Canadian Securities Administrators.
We are currently in the process of developing an IFRS conversion plan and evaluating the impact of the transition to IFRS. We will continue to invest in training and resources throughout the transition period to facilitate a timely conversion.
3. | SILVER BULLION |
In March 2008, we sold our silver bullion for cash proceeds of $39,244,000 (US$39,648,000). As at December 31, 2007, the silver bullion was recorded on our balance sheet at a cost of $15,787,000. The sale results in a gain of $23,457,000. No tax expense was recorded as we have sufficient tax pools to offset the taxable gain on the sale.
4. | FINANCIAL INSTRUMENTS |
(a) Marketable Securities
At September 30, 2008 and December 31, 2007, we held shares or share purchase warrants as follows:
September 30, 2008 | December 31, 2007 | ||||||
Accumulated | Accumulated | ||||||
Unrealized | Unrealized | ||||||
Fair Value | Cost | Gains (losses) | Fair Value | Cost | Gains (losses) | ||
Available-For-Sale Shares | ($) | ($) | ($) | ($) | ($) | ($) | |
Esperanza Silver Corporation | 4,651 | 4,823 | (172) | 10,012 | 4,823 | 5,189 | |
Aurcana Corporation | 3,900 | 6,900 | (3,000) | - | - | - | |
Minco Silver Corporation | 3,342 | 2,270 | 1,072 | 13,694 | 2,966 | 10,728 | |
Silvermex Resources Ltd. | 825 | 300 | 525 | 3,250 | 300 | 2,950 | |
Canplats Resources Corporation | 850 | 50 | 800 | 1,760 | 50 | 1,710 | |
Geologix Explorations Inc. | 930 | 900 | 30 | 2,220 | 900 | 1,320 | |
Other investments | 1,566 | 780 | 786 | 2,246 | 780 | 1,466 | |
16,064 | 16,023 | 41 | 33,182 | 9,819 | 23,363 | ||
Held-For-Trading Warrants | |||||||
Esperanza Silver Corporation | - | 416 | (416) | 27 | 416 | (389) | |
Total Marketable Securities | 16,064 | 16,439 | (375) | 33,209 | 10,235 | 22,974 |
8
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
4. | FINANCIAL INSTRUMENTS (Cont’d) |
During the nine months ended September 30, 2008, we recognized an unrealized loss of $21,217,000 (2007 – $9,480,000) on marketable securities designated as available-for-sale in other comprehensive income and an unrealized loss of $27,000 (2007 - $247,000) on financial instruments classified as held-for-trading in our earnings for the period.
In July 2008, as part of considerations received for sale of the Shafter Silver Project (See note 6(c)), we received 15 million common shares of Aurcana Corporation (“Aurcana”). As at the date of the transaction, the Aurcana common shares had a fair value of $6,900,000.
During the period, we sold some investments for proceeds of $2,800,000, generating a gain of $2,105,000. As a result of the transaction, $2,105,000 of unrealized gain previously recorded in accumulated other comprehensive income has been included in net income for the period.
(b) Foreign Exchange Derivatives
At December 31, 2007, we held various USD foreign exchange option agreements with a negative fair value of $1,412,000. All of these foreign exchange contracts have been closed during the first quarter and we have no outstanding foreign exchange option agreements at September 30, 2008.
(c) Convertible Debenture
As part of considerations received for sale of the Shafter Silver Project (See note 6(c)), we received a $10 million convertible debenture (“Debenture”) from Aurcana. The Debenture has a three-year term, a coupon rate of 3% and is convertible into 6,600,000 Aurcana common shares at $1.515 per share.
The note receivable component of the Debenture is designated as loans and receivable financial instrument. At initial recognition, the fair value of the note receivable component was estimated at $6,868,000 using the discounted cash flow model method at market rate. The note receivable component is accreted over an expected life of 3 years using the effective interest method. As at September 30, 2008, the book value of the note receivable component of the Debenture was $7,039,000. For the nine month period ended September 30, 2008, interest and accretion income of $234,000 was recorded to earnings in relation to the Debenture.
The conversion feature of the Aurcana Debenture is classified as a held-for-trading financial instrument by default. The fair value of conversion feature was estimated, at initial recognition, to be $1,442,000 and is re-valued at each period end based on the Black-Scholes valuation model. As at September 30, 2008, the fair value of the conversion feature was $518,000. As a result, an unrealized loss of $924,000 on financial instruments held-for-trading was recorded to net earnings during the period.
9
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
4. | FINANCIAL INSTRUMENTS (Cont’d) |
(d) Financial Risk Management
Our activities expose us to a variety of financial risks, including foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk. From time to time, we may use foreign exchange contracts, commodity price contracts and interest rate swaps to manage exposure to fluctuations in foreign exchange, metal prices and interest rates. We do not have a practice of trading derivatives. In the past, our use of derivatives was limited to specific programs to manage fluctuations in foreign exchange risk, which are subject to the oversight of the Board of Directors.
Foreign Exchange Risk
We operate projects in seven different countries and therefore, foreign exchange risk exposures arise from transactions denominated in foreign currencies. Our foreign exchange risk arises primarily with respect to the US dollar, as the majority of our debt and capital expenses are denominated in US dollars.
Our exposure of US dollar on financial instruments is as follows:
September 30 | December 31 | ||
2008 | 2007 | ||
US$ | US$ | ||
Cash and cash equivalents | 103,010 | 10,769 | |
Restricted cash | 1,637 | 1,637 | |
Accounts payable and accrued liabilities | (8,194) | (3,028) | |
Convertible notes | (103,047) | - | |
(6,594) | 9,378 |
As at September 30, 2008, with other variables unchanged, a $0.01 strengthening (weakening) of the US dollar against the Canadian dollar would decrease (increase) our net earnings by $66,000. There would be no significant effect on other comprehensive income.
Interest Rate Risk
Our interest rate risk mainly arises from the interest rate impact on our cash and cash equivalents. Cash and cash equivalents receive interest based on market interest rates. Our long-term note receivable and long-term debt have fixed interest rates and are not exposed to interest rate risk.
As at September 30, 2008, with other variables unchanged, a 1% increase (decrease) in the interest rate would increase (decrease) our net earnings by $1,058,000. There would be no significant effect on other comprehensive income.
10
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
4. | FINANCIAL INSTRUMENTS (Cont’d) |
Commodity Price Risk
Our profitability and long-term viability will depend, in large part, on the market price of silver, gold, tin, zinc, lead and copper. The market prices for these metals are volatile and are affected by numerous factors beyond our control, including: global or regional consumption patterns; the supply of, and demand for, these metals; speculative activities; the availability and costs of metal substitutes; expectations for inflation; and political and economic conditions, including interest rates and currency values. We cannot predict the effect of these factors on metal prices. A decrease in the market price of silver and other metals would affect the profitability of the Pirquitas Project and could affect our ability to finance the exploration and development of any of our other mineral properties. The market price of silver and other metals may be subject to significant fluctuation.
Credit Risk
Credit risk arises from the non-performance by counterparties of contractual financial obligations. Our credit risk arises primarily with respect to our money market investments, convertible debenture receivable and investment in asset-backed commercial papers.
We manage our credit risk by investing only in obligations of any Province of Canada, Canada or the United States of America or their respective agencies, obligations of enterprises sponsored by any of the above governments; banker’s acceptances purchased in the secondary market and having received the highest credit rating from a recognized rating agency in Canada or the United States, with a term of less than 180 days; and bank term deposits and bearer deposit notes, with a term of less than 180 days.
Our maximum exposure to credit risk at the reporting date is the carrying value of cash and cash equivalents, other receivables, convertible debenture receivable (see note 4c) and other investments (see note 5).
Liquidity Risk
We manage liquidity risk by maintaining adequate cash and cash equivalent balances. If necessary, we may raise funds through the issuance of debt, equity, or monetization of non core assets. For example, in February 2008, we completed a US$138 million, 4.5% convertible debenture due in 2028. In July 2008, we closed the sale of our Shafter Silver Project for total considerations of $38.2 million. In 2006, we also issued 7.2 million common shares for net proceeds of $171 million. We ensure that there is sufficient capital to meet our obligations by continuously monitoring and reviewing actual and forecasted cash flows, and match the maturity profile of financial assets to development, capital and operating needs.
See “Note 13 – Commitments” for contractual undiscounted cash flow requirements for financial liabilities as at September 30, 2008.
11
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
5. | OTHER INVESTMENTS |
As at September 30, 2008, we had a total of $57,102,000 invested in Canadian asset-backed commercial paper (“ABCP”). At the dates at which we acquired the investments, the non-bank sponsored ABCP was rated R-1 high by DBRS Limited (“DBRS”), the highest credit rating for commercial paper. In August 2007, the ABCP market experienced liquidity problems and was subsequently frozen.
In September 2007, a Pan Canadian Committee (the “Committee”) consisting of a panel of major ABCP investors was formed to restructure the affected ABCP trusts. A press release issued by the Committee on December 23, 2007 outlined a proposal to restructure ABCP for new notes that have maturities based on the maturities of the assets underlying the ABCP.
At December 31, 2007, based on the limited data available, we estimated the fair values of our ABCP investments to be $45,102,000 using a valuation technique which incorporates a probability weighted approach applied to discounted future cash flows and an impairment of $12,000,000 was recorded in 2007.
On March 20, 2008, the Committee issued an information statement which provided details of the restructuring plan. The proposed restructuring plan (the “Restructuring Plan”) was submitted under the Companies Creditors Arrangement Act and approved by a majority of noteholders on April 25, 2008. The Restructuring Plan was sanctioned by the Ontario Superior Court on June 5, 2008. On September 19, 2008, the Supreme Court of Canada denied an appeal by a group of investors seeking relief including dismissal of the Restructuring Plan. On October 22, 2008, the Committee indicated the closing of the Restructuring Plan is expected to be completed by the end of November 2008.
We have updated our valuation model to reflect new information outlined in the information statement. The restructuring plan contemplates:
· | The creation of three master assets vehicles (MAV). Participation in each of the MAV is dependant on the noteholder’s ability and willingness to self insure against margin calls. |
· | Within each MAV, the issuance of 5 different series of notes: |
o | Class A-1 Notes will be the senior notes, with the other series of Notes subordinated to them. Class A-1 Notes are expected to receive AA ratings, have maturities ranging from 6 to 8 years and a coupon rate of Bankers Acceptance (“BA”) Rate less 0.5%. |
o | Class A-2 Notes will be senior to the Class B and C Notes and IA Tracking Notes. Class A-2 Notes are expected to receive AA ratings, have a maturity of 8 years and a coupon rate of BA Rate less 0.5%. |
o | Class B Notes will be senior to the Class C Notes and IA Tracking Notes. Class B Notes will not be rated and are expected to have a maturity of 8 years and a coupon rate of BA Rate less 0.5%. |
o | Class C Notes will be senior to the IA Tracking Notes. Class C Notes will not be rated and are expected to have a maturity of 8 years and a coupon rate of 20%. |
o | IA Tracking Notes will not be rated. IA Tracking Notes are expected to have a maturity of 8 years and a coupon rate equivalent to the net rate of return generated by the specific underlying assets. |
12
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
5. | OTHER INVESTMENTS (Cont’d) |
· | The allocation of existing ABCP notes to proposed new notes was based on a report issued by J.P. Morgan, financial advisor to the Committee. The new notes will be issued based on the relative contribution from the assets underlying the existing trusts based on this report. |
· | There is no market data on these notes and no formal ratings have yet been issued by DBRS. |
Based on the Restructuring Plan:
· | $48,774,000 of our investments will be replaced with Class A-1 and Class A-2 Notes. |
· | $3,681,000 of our investments will be replaced with Class B Notes. |
· | $1,622,000 of our investments will be replaced with Class C Notes. |
· | $3,025,000 of our investments will be replaced with IA Tracking Notes. |
We have assessed the estimated fair value of our ABCP investments and based on the available information regarding current market conditions, the underlying assets of our existing trusts and the indicative values contained in the report issued by J.P. Morgan, we recorded an impairment of $18,402,000 in the first quarter of 2008. This resulted in an estimated fair value of $26,700,000 which approximates those values contained in the J.P. Morgan report. No impairment was recorded in the current quarter. There is currently no certainty regarding the outcome of the ABCP investments and therefore the fair value reported may change materially in subsequent periods. In July 2008, we initiated legal action against HSBC and DBRS by filing a writ and statement of claim in the Supreme Court of British Columbia to recover any losses that may occur with respect to the ultimate recovery of our ABCP.
6. | MINERAL PROPERTY COSTS AND PROPERTY, PLANT AND EQUIPMENT |
September 30, 2008 | December 31, 2007 | ||||||
Accum. | Net Book | Accum. | Net Book | ||||
Cost | Amort. | Value | Cost | Amort. | Value | ||
$ | $ | $ | $ | $ | $ | ||
Mineral property costs | 283,277 | - | 283,277 | 244,681 | - | 244,681 | |
Construction in progress | 136,560 | - | 136,560 | 33,625 | - | 33,625 | |
Mining equipment and machinery | 22,941 | (951) | 21,990 | 22,870 | (413) | 22,457 | |
Other | 3,285 | (1,205) | 2,080 | 2,743 | (918) | 1,825 | |
446,063 | (2,156) | 443,907 | 303,919 | (1,331) | 302,588 |
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Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
6. | MINERAL PROPERTY COSTS AND PROPERTY, PLANT AND EQUIPMENT |
a) Mineral Property Costs |
Exploration | ||||||
and | Total | Total | ||||
Acquisition | development | Future tax | September 30 | December 31 | ||
costs | costs | effects | 2008 | 2007 | ||
$ | $ | $ | $ | $ | ||
Argentina | ||||||
Diablillos | 5,530 | 10,275 | - | 15,805 | 12,085 | |
Pirquitas | 56,308 | 24,231 | 13,060 | 93,599 | 85,879 | |
Other | 23 | 194 | - | 217 | 205 | |
Australia | ||||||
Bowdens | 10,900 | 8,793 | 3,260 | 22,953 | 22,851 | |
Other | 2 | 253 | - | 255 | 246 | |
Canada | ||||||
Silvertip | 1,818 | 273 | - | 2,091 | 2,089 | |
Snowfield | 125 | 9,231 | - | 9,356 | 4,489 | |
Sulphurets | 2,393 | 1,255 | - | 3,648 | 3,648 | |
Sunrise Lake | 1,234 | 71 | - | 1,305 | 1,301 | |
Chile | ||||||
Challacollo | 2,953 | 5,230 | 360 | 8,543 | 8,357 | |
Other | 50 | 255 | - | 305 | �� 282 | |
Mexico | ||||||
Pitarrilla | 13,445 | 49,982 | 2,781 | 66,208 | 51,128 | |
San Marcial | 1,250 | 794 | - | 2,044 | 2,019 | |
Veta Colorada | 4,517 | 932 | 44 | 5,493 | 4,911 | |
Other | 973 | 1,794 | - | 2,767 | 2,464 | |
Peru | ||||||
Berenguela | 12,936 | 3,327 | 6,200 | 22,463 | 21,947 | |
San Luis | 417 | 15,012 | 1,023 | 16,452 | 11,453 | |
Other | - | 103 | - | 103 | - | |
United States | ||||||
Candelaria | 2,981 | 3,650 | 265 | 6,896 | 6,634 | |
Maverick Springs | 692 | 2,043 | 39 | 2,774 | 2,693 | |
118,547 | 137,698 | 27,032 | 283,277 | 244,681 |
14
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
6. MINERAL PROPERTY COSTS AND PROPERTY, PLANT AND EQUIPMENT (Cont’d)
b) Property, Plant and Equipment |
During the nine months ended September 30, 2008, we recorded $825,000 of depreciation on property, plant, and equipment, of which $229,000 was charged to the Consolidated Statements of Earnings (Loss) and Comprehensive Loss and $596,000 was deferred as mineral property costs.
c) Sale of Shafter Silver Project |
On July 17, 2008, we closed the sale of the Shafter Silver Project in Presidio County, Texas, to Aurcana Corporation (“Aurcana”). Under the terms of the agreement, Aurcana paid us total consideration of $38,210,000 consisting of $23,000,000 in cash, 15 million Aurcana common shares with a fair value of $6,900,000 and a $10,000,000 convertible debenture with a fair value of $8,310,000 (see note 4(c)). After deducting transaction costs of $520,000, sale of the Shafter Silver Project resulted in a gain on sale of mineral property of $31,526,000 (after-tax gain of $18,156,000).
7. | CONVERTIBLE NOTES |
In February 2008, we sold US$138,000,000 ($134,936,000) in senior convertible notes (“Notes”) for net proceeds of $129,806,000 after payment of commissions and expenses related to the offering. The unsecured Notes mature on March 1, 2028 and bear an interest rate of 4.5% per annum, payable semi-annually. The Notes will be convertible into our common shares at a fixed conversion rate, subject to certain anti-dilution adjustments, only in the following events:
a. | during specified consecutive trading periods, the market price of our common shares exceeds 130% of the conversion price of the Notes, |
b. | the trading price of the Notes falls to 97% or less of the amount equal to the then prevailing price of our common shares, multiplied by the applicable conversion rate, |
c. | the Notes are called for redemption, |
d. | upon the occurrence of specified corporate transactions, or |
e. | during specified periods in early 2013 and 2028. |
On conversion, holders of the Notes will receive cash and, if applicable, common shares (or, at our election, in lieu of such common shares, cash or any combination of cash and common shares). In addition, if certain fundamental changes occur to us, holders of the Notes may be entitled to an increased conversion rate. The Notes will be convertible into our common shares at an initial conversion rate of 23.0792 common shares per US$1,000 principal amount of Notes converted, representing an initial conversion price of approximately US$43.33 per common share.
15
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
7. | CONVERTIBLE NOTES (Cont’d) |
Holders of the Notes will have the right to require us to repurchase all or part of their Notes on March 1 of each of 2013, 2018 and 2023, and upon certain fundamental corporate changes. The repurchase price will be equal to 100% of the principal amount of the Notes being converted, plus accrued and unpaid interest to, but excluding, the repurchase date. Subject to specified conditions, we shall pay the purchase price in cash. On and after March 5, 2013, we may redeem all or part of the Notes for cash at a redemption price equal to 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. All principal and interest payments will be denominated in US Dollars.
The face value of the Notes has been allocated as follows for accounting purposes:
Allocation of gross proceeds | USD$ | CAD$ |
Gross proceeds | 138,000 | 134,936 |
Fair value of debt component | (99,144) | (96,943) |
Fair value of equity component | 38,856 | 37,993 |
Convertible notes | USD$ | CAD$ |
Opening balance | 99,144 | 96,943 |
Accretion expense | 3,385 | 3,483 |
Interest accrued | 3,675 | 3,779 |
Interest paid | (3,157) | (3,323) |
Foreign exchange loss on revaluation | - | 8,337 |
Ending balance | 103,047 | 109,219 |
Accrued interest on convertible notes | 518 | 549 |
Long-term convertible notes | 102,529 | 108,670 |
Total convertible notes | 103,047 | 109,219 |
The fair value of the debt portion of the Notes at initial recognition was estimated using a discounted cash flow model method. The fair value of the equity component was estimated using the residual value method. The debt component of the Notes is accreted over an expected life of 5 years using the effective interest method. Total financing fees associated with the transaction were $5,130,000, of which $3,690,000 was charged to net income for the period and $1,440,000 was charged to equity.
For the nine months ended September 30, 2008, interest expense and accretion expense related to the convertible notes was $3,779,000 and $3,483,000 respectively; $2,315,000 of interest expense and $2,178,000 of accretion expense were capitalized to construction in progress during the period resulting in $1,464,000 of interest and $1,305,000 of accretion expensed in the period.
16
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
8. | OUTSTANDING SHARES AND RELATED INFORMATION |
(a) Authorized Share Capital |
Our authorized share capital consists of an unlimited number of common shares without par value.
(b) Options |
At September 30, 2008, the total number of options outstanding was 4,436,250 with exercise prices ranging from $12.85 to $40.62 with weighted average remaining lives of 3.21 years. This represents 7.1% of issued and outstanding capital.
During the nine months ended September 30, 2008, 180,000 options were granted to employees and consultants at a strike price between $29.02 and $32.08 and average fair value of $9.86 per option based on the Black-Scholes option pricing model. We amortize the fair value of stock options on a graded basis over the respective vesting period of the stock options. The allocation of fair value of options during the period was as follows:
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
2008 | 2007 | 2008 | 2007 | |||||
$ | $ | $ | $ | |||||
Consolidated Balance Sheets | ||||||||
Mineral property costs | 43 | 211 | 31 | 494 | ||||
Consolidated Statements of Earnings (Loss), | ||||||||
and Comprehensive Loss | ||||||||
Stock based compensation - Employee salaries and benefits | 1,983 | 4,021 | 6,081 | 8,937 | ||||
Stock based compensation - General and administration | 724 | 510 | 1,496 | 1,810 | ||||
2,707 | 4,531 | 7,577 | 10,747 | |||||
Total stock based compensation | 2,750 | 4,742 | 7,608 | 11,241 |
(c) Convertible Senior Notes due 2028 |
In February 2008, we sold US$138 million in senior convertible notes (“Notes”). The Notes will be convertible into Silver Standard common shares at a fixed conversion rate of US$43.33 per common share upon specified events. On conversion, holders of the Convertible Notes will receive cash and, if applicable, common shares (or, at our election, in lieu of such common shares, cash or any combination of cash and common shares). The convertible notes mature on March 1, 2028.
(d) Diluted Earnings (Loss) Per Share |
The shares issuable pursuant to the terms of the convertible debenture have not been included in the calculation of diluted earnings (loss) per share as the impact would be anti-dilutive.
17
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
9. | SUPPLEMENTARY CASH FLOW INFORMATION |
Non-cash working capital activities were: | ||||||||
Three Months Ended | Nine Months Ended | |||||||
September 30 | September 30 | |||||||
2008 | 2007 | 2008 | 2007 | |||||
$ | $ | $ | $ | |||||
Accounts receivable | (1,336) | 712 | (20) | 778 | ||||
Prepaid expenses and deposits | (5,016) | (24) | (6,640) | (92) | ||||
Accounts payable and current portion of ARO | (264) | (449) | (223) | (1,276) | ||||
Accrued liabilities | 212 | 260 | 342 | (58) | ||||
Accrued interest on convertible debt | (1,600) | - | 549 | - | ||||
Current portion of taxes payable | 10,000 | - | 10,000 | - | ||||
1,996 | 499 | 4,008 | (648) | |||||
Non-cash investing activities were: | ||||||||
Three Months Ended | Nine Months Ended | |||||||
September 30 | September 30 | |||||||
2008 | 2007 | 2008 | 2007 | |||||
$ | $ | $ | $ | |||||
Non-cash investing activities | ||||||||
Accretion expense capitalized to construction | ||||||||
in progress | (1,250) | - | (2,178) | - | ||||
Shares acquired for sale of mineral property | - | 650 | - | 900 | ||||
Shares issued for mineral properties | - | - | - | (358) |
10. | RELATED PARTY TRANSACTIONS |
During the nine months ended September 30, 2008, we recorded administrative, technical services and expense reimbursements of $1,118,000 (2007 - $275,000) from companies related by common directors or officers. At September 30, 2008, accounts receivable includes $89,000 (2007 - $44,000) from these related parties. Amounts due from related parties are non-interest bearing and without specific terms of repayment. Transactions for expense reimbursement with related parties are at normal business terms.
11. | CAPITAL RISK MANAGEMENT |
Our objectives when managing capital are:
· | to safeguard our ability to continue as a going concern in order to pursue the development of our mineral properties |
· | to provide an adequate return to shareholders |
· | to maintain a flexible capital structure which optimizes the cost of capital |
· | to meet our long term debt obligations |
In order to facilitate the management of our capital requirements, we prepare annual expenditure budgets and continuously monitor and review actual and forecasted cash flow. The annual and updated budgets are approved by the Board of Directors.
18
Silver Standard Resources Inc.
(a development stage company)
Notes to Consolidated Financial Statements
For the nine months ended September 30, 2008
(tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated - unaudited)
11. | CAPITAL RISK MANAGEMENT (Cont’d) |
To maintain the capital structure, we may, from time to time, attempt to issue new shares, issue new debt or dispose of non-core assets. We expect our current capital resources will be sufficient to carry our exploration and development plans and operations through the current operating period.
12. | SEGMENTED FINANCIAL INFORMATION |
We have one operating segment, which is the exploration and development of mineral properties. Mineral property expenditures by property are detailed in note 6. Substantially all of our gains and losses were incurred in Canada. Segment assets by geographic location are as follows:
September 30, 2008 | ||||||||
Argentina | Australia | Canada | Chile | Mexico | Peru | United States | Total | |
$ | $ | $ | $ | $ | $ | $ | $ | |
Mineral property | ||||||||
costs and property, | ||||||||
plant and equipment | 268,172 | 23,210 | 17,732 | 8,849 | 76,708 | 39,567 | 9,669 | 443,907 |
Total assets | 298,248 | 23,334 | 209,831 | 8,853 | 80,230 | 41,095 | 9,698 | 671,289 |
December 31, 2007 | ||||||||
Argentina | Australia | Canada | Chile | Mexico | Peru | United States | Total | |
$ | $ | $ | $ | $ | $ | $ | $ | |
Mineral property | ||||||||
costs and property, | ||||||||
plant and equipment | 154,254 | 23,097 | 12,867 | 8,639 | 60,661 | 33,744 | 9,326 | 302,588 |
Total assets | 170,565 | 23,240 | 181,707 | 8,763 | 64,157 | 34,208 | 16,204 | 498,844 |
13. | COMMITMENTS |
As at September 30, 2008, we have committed to payments under contractual obligations as follows:
Less than 1 year | 1-3 years | 4-5 years | Total | ||
$ | $ | $ | $ | ||
Lease obligations | 79 | 907 | 412 | 1,398 | |
Asset retirement obligations | 527 | 2,148 | 430 | 3,105 | |
Long-term convertible notes* | 3,163 | 12,651 | 150,651 | 166,465 | |
3,769 | 15,706 | 151,493 | 170,968 | ||
* Convertible notes are due in 2028 but expected to be repaid in 2013. The notes are convertible into common shares at a fixed conversion rate upon specified events |
19