|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 13. | LONG-TERM DEBT (continued) |
The Company has $2,400,000 in term deposits with an expiration date of longer than one year in order to secure this arrangement. The annual interest rates on these term deposits range from 4.88% to 5%.
The following table summarizes the loans outstanding as at May 31, 2011 and May 31, 2010:
| | | | | | | |
| | | | | | | |
| | | May 31, 2011 | | | May 31, 2010 | |
| | | | | | | |
| | Vehicle loan, repayable at $3,733 per month, including interest at 10%, due May 2013 | $ | 81,087 | | $ | 115,700 | |
| | | | | | | |
| Vehicle loan, repayable at $877 per month, including interest at 8.25%, due April 2014. | | 24,882 | | | - | |
| | | | | | | |
| Bank loan, repayable at $42,578 per month, including interest at 6%, due February and April 2016 | | 2,170,264 | | | - | |
| | | 2,276,233 | | | 115,700 | |
| | | | | | | |
| Less: current portion | | (435,733 | ) | | (35,465 | ) |
| | $ | 1,840,500 | | $ | 80,235 | |
| |
| 14. | DEFERRED SERVICES AND MATERIALS PROVIDED TO IMN RESOURCES INC. |
On September 30, 2007, Petaquilla Gold S.A. (“Gold”), a subsidiary of the Company entered into a Service Agreement with Minera Panama S.A. (“MPSA”) (formerly Petaquilla Copper S.A.) to provide electric generation, aggregate for construction and the rental of a drill machine (collectively, the “services”) for a 3-year period. In return for receiving certain benefits and assurances, payment for services was assumed and prepaid by IMN Resources Inc. (“IMN”) (formerly Petaquilla Copper Ltd.), a wholly owned subsidiary of Inmet Mining Corporation, in the amount of $4,404,000. Services provided to date include the rental of a drill and the generation of electricity.
During the year ended May 31, 2011, the Service Agreement between Gold and MPSA expired with no further obligations. As a result, the Company derecognized the liability and in doing so recognized a gain of $3,153,394 during the year ended May 31, 2011.
| |
| 15. | CAPITAL LEASE OBLIGATIONS |
The Company entered into four capital lease arrangements with Banco Bilbao Vizcaya Argentaria (Panama) S.A. (“BBVA”) for the purchase of equipment to advance the Molejon project into production during the thirteen months ended May 31, 2008. The equipment includes but is not limited to: ball mills, a Metso crushing plant, cranes and an aggregate crushing plant. As a condition of the leases, the equipment will serve as collateral throughout the amortization period and will be registered with the Public Registry of the Republic of Panama. Further, IMN has pledged a term deposit in the amount of $2,361,098 (May 31, 2010 -$2,361,098) as additional security.
During the year ended May 31, 2011 a Credit Line Facility with Global Bank from Panama, in amount of $10 million, has been approved for the Company. This facility for the acquisition of heavy equipment by Panama Desarrollo de Infraestructuras, S.A. is a lease that accrues interest at 6.25% per annum. As a condition of the leases, the equipment will serve as collateral throughout the amortization period and will be registered with the Public Registry of the Republic of Panama. As at May 31, 2011, leases with a total value of $4,848,492 had been established under this facility.
Page 20
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 15. | CAPITAL LEASE OBLIGATIONS (continued) |
Future minimum lease payments on the capital lease obligations are as follows:
| | | | | | | |
| | | | May 31, 2011 | | | May 31, 2010 | |
| | 2011 | $ | - | | $ | 4,376,667 | |
| | 2012 | | 1,754,547 | | | 447,080 | |
| | 2013 | | 1,134,360 | | | - | |
| | 2014 | | 1,134,360 | | | - | |
| | 2015 | | 1,134,360 | | | - | |
| | 2016 | | 945,004 | | | - | |
| | | | 6,102,631 | | | 4,823,747 | |
| | Less: imputed interest | | (783,595 | ) | | (247,486 | ) |
| | | | 5,319,036 | | | 4,576,261 | |
| | Less: Current obligation | | (1,468,561 | ) | | (4,136,032 | ) |
| | Long - term obligation | $ | 3,850,475 | | $ | 440,229 | |
| | | | | | | |
| | | | May 31, 2011 | | | May 31, 2010 | |
| | Senior secured notes due to related parties | $ | 3,124,437 | | $ | 20,672,235 | |
| | Senior secured notes due to third parties | | - | | | 5,974,396 | |
| | | | 3,124,437 | | | 26,646,631 | |
| | Less estimated current portion | | (217,984 | ) | | (26,646,631 | ) |
| | | $ | 2,906,453 | | $ | - | |
The Notes bear interest at an annual rate of 15%.
The Notes have a maturity date of five years from date of issuance with a 20% premium on principal to be paid at maturity. The Company has the right to redeem the Notes at any time at 120% of the principal amount plus any accrued or unpaid interest on the Notes.
The Company initially issued 60,000 Notes. Each Note was issued with 382 share purchase warrants. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. On April 17, 2009, the Company re-priced these warrants to entitle the holder to purchase one common share at CAD $0.65 for the remainder of the warrant period with the provision that, if the closing trading price of the Company’s common shares on the TSX is CAD$ 1.00 or more for a period of 30 consecutive trading days, the Company has the option to require the earlier exercise of the warrants. The effect of re-pricing the warrants was an increase in the value of the warrants of $1,781,500 and a decrease in contributed surplus for the same amount.
The Notes contain an embedded derivative as a result of the call and put options. The Company is unable to fair value the embedded derivative component separately and thus has classified the combined contract as a financial liability that is held for trading.
On September 30, 2008 the Company redeemed 36,032,376 Notes at 120% of their principal value for a total payment of $43,238,852, resulting in a loss of $10,983,735.
On October 1, 2008, the Company issued an additional 20,000 Notes under the $60 million senior secured notes indenture for net proceeds of $15,874,958. These Notes contain the same terms and conditions as the previous issue under the indenture with the exception of the 382 share purchase warrants. These Notes did not include any warrants.
Page 21
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 16. | SENIOR SECURED NOTES (continued) |
On March 25, 2009, the Company redeemed 17,500 Notes at 120% of their principal value for a total payment of $21,000,000, resulting in a loss of $2,147,247.
On September 15, 2009 the Company redeemed 5,000 Notes at 120% of their principal value plus interest for a total payment of $6,208,844. This payment was financed in part by a $5,129,600 prepayment on forward gold sales of 5,600 ounces at a net price of $916 per ounce.
There were two additional scheduled repayments of principal, premium and interest totalling $9,443,405 that were due in March 2010 and May 2010. Of the amounts due, the Company paid out $857,594. Under the terms of the Indenture an event of default occurred and the Notes became due on demand at the option of the Note holders or the Trustee.
On September 23, 2010, the Company paid $13,952,574 in principal, premium and interest on the Notes from the proceeds of a Forward Gold Purchase Agreement, entered with Deutsche Bank as is described in note 27. As part of the Forward Gold Purchase Agreement, the Note holders were required to enter into an inter-creditor agreement with the Company which prevents the Note holders from taking action as a result of the event of default that occurred, until the Company’s obligations under the Forward Gold Purchase Agreement have been satisfied. The impact of the Inter-Creditor Agreement on the Notes is as follows:
| | a) | The security for the Notes became subordinated to the security granted under the Forward Gold Purchase Agreement with Deutsche Bank; |
| | | |
| | b) | No interest or principal payments are required on the Notes until March 22, 2011. After March 22, 2011, the Company is only required to make scheduled interest payments on the Notes as they become due until the Notes mature five years and one day after closing of the Forward Gold Purchase Agreement with Deutsche Bank; |
| | | |
| | c) | Until the Company’s obligations under the Forward Gold Purchase Agreement with Deutsche Bank are satisfied, the holder of the Notes are not permitted to take any action as a result of an event of default that has occurred pursuant to the indenture; |
| | | |
| | d) | If the Company is able to negotiate new financing arrangements satisfying certain conditions, the proceeds of such financing will be used to prepay the outstanding balance of principal, premium and interest on the Notes. |
On February 8, 2011, the Company redeemed 12,008 Notes at 120% of their principal value plus interest for a total payment of $12,008,345. This payment was financed by the private placement that closed on January 31, 2011, as is explained in note 18.
At May 31, 2011 the Notes have been adjusted to their fair market value of $3,124,437 using a discount rate of 10.18%.
The Notes are guaranteed, on a joint and several basis, by all of the assets of the Company and of the Company’s subsidiaries. The security for the Notes is subordinated to the security granted under the Forward Gold Purchase Agreement with Deutsche Bank.
Page 22
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 17. | CONVERTIBLE SENIOR SECURED NOTES |
| | | | | | | |
| | | | May 31, 2011 | | | May 31, 2010 | |
| | Convertible notes due to related parties | $ | 3,970,094 | | $ | 44,397,509 | |
| | Convertible notes due to third parties | | - | | | 440,482 | |
| | | | 3,970,094 | | | 44,837,991 | |
| | Less estimated current portion | | (276,983 | ) | | (44,837,991 | ) |
| | | $ | 3,693,111 | | $ | - | |
On March 25, 2009 the Company closed $40,000,000 of a convertible senior secured note (“Convertible Notes”) financing. The Convertible Notes bear interest at an annual rate of 15%, of which the first year is prepaid. The Convertible Notes had an original maturity after two years from the date of issuance at 110% of the principal. The Company has the right to redeem the Convertible Notes at any time at 110% of the principal amount plus any accrued or unpaid interest. Each Convertible Note in the principal amount of $1,000 is convertible into common shares at CAD$ 2.25 per share.
The Convertible Notes contained an embedded derivate as a result of the call option. The Company is unable to fair value the embedded derivative component separately and thus has classified the combined contract as a financial liability that is held for trading.
Interest of $829,545 on the Convertible Notes was due on May 15, 2010. Of this amount the Company paid $342,406. Under the terms of the Indenture an event of default occurred and the Convertible Notes became due on demand at the option of the Convertible Note holders or the Trustee.
On September 23, 2010, the Company paid $25,997,426 in principal, premium and interest on the Convertible Notes from the proceeds of a Forward Gold Purchase Agreement entered with Deutsche Bank as is described in note 27. As part of the Forward Gold Purchase Agreement, the Convertible Note holders were required to enter into an inter-creditor agreement with the Company which prevents the Convertible Note holders from taking action as a result of the event of default that occurred, until the Company’s obligations under the Forward Gold Purchase Agreement have been satisfied. The Inter-Creditor Agreement on the Convertible Notes is as follows:
| | a) | The security for the Convertible Notes became subordinated to the security granted under the Forward Gold Purchase Agreement with Deutsche Bank; |
| | | |
| | b) | No interest or principal payments are required on the Convertible Notes until March 22, 2011. After March 22, 2011, the Company is only required to make scheduled interest payments on the Convertible Notes as they become due until the Convertible Notes mature five years and one day after closing of the Forward Gold Purchase Agreement with Deutsche Bank; |
| | | |
| | c) | Until the Company’s obligations under the Forward Gold Purchase Agreement with Deutsche Bank are satisfied, the holder of the Convertible Notes are not permitted to take any action as a result of an event of default that has occurred pursuant to the indenture; |
| | | |
| | d) | If the Company is able to negotiate new financing arrangements satisfying certain conditions, the proceeds of such financing will be used to prepay the outstanding balance of principal, premium and interest on the Convertible Notes. |
On February 8, 2011, the Company redeemed 18,347 Notes at 110% of their principal value plus interest for a total payment of $18,347,276. The total amount of interest paid was $1,212,746. This payment was financed by the private placement that closed on January 31, 2011, as is explained in note 18.
Page 23
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 17. | CONVERTIBLE SENIOR SECURED NOTES (continued) |
At May 31, 2011, the Convertible Notes were adjusted to their fair market value of $3,970,094 using a 10.18% discount rate.
The Convertible Notes are guaranteed, on a joint and several basis, by all of the assets of the Company and of the Company’s subsidiaries. The security for the Convertible Notes is subordinated to the security granted under the Forward Gold Purchase Agreement with Deutsche Bank.
| |
| 18. | SHARE CAPITAL, WARRANTS AND CONTRIBUTED SURPLUS |
At May 31, 2011, the Company had unlimited authorized common shares without par value and unlimited authorized preferred shares without par value. The Board of Directors will assign the rights and privileges to each series of preference shares upon issue.
In December 2009, the Company closed a non-brokered private placement of 24,000,000 common shares at a price of CAD $0.50 per share, raising gross proceeds of $11,328,236. In connection with the closing of the private placement, the Company has paid finders’ fees in the amount of $566,412.
In May 2010, the Company issued 4,000,080 units at a price of CAD$ 0.50 per unit, raising gross proceeds of $1,888,077. Each unit consisted of one common share and one-half of one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of the Company for a period of two years at an exercise price of CAD$ 0.85 per share. The Company paid finders’ fees of $103,844 plus 100,002 warrants exercisable for a period of two years at an exercise price of CAD$ 0.85 per share. The fair value of the finders’ warrants was $15,225.
On December 30, 2010, January 7, 2011, January 26, 2011 and January 31, 2011, the Company issued a total of 32,000,000 common shares at a price of CAD $1.00 per shares, raising gross proceeds of $32,000,000 Canadian. Each unit consisted of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of the Company for a period of three years at an exercise price of CAD $1.45 per share. The fair value of the warrants issued was $18,329,132. The Company paid finders’ fees of CAD $2,054,330. In addition, the Company granted to finders a total of 1,568,748 stock options according to the following breakdown:
| | | | |
| | Number of shares | Exercise Price | Expiry Date | |
| | | (CAD$) | | |
| | 1,169,970 | 1.00 | December 30, 2013 | |
| | 273,778 | 1.00 | January 7, 2014 | |
| | 125,000 | 1.00 | January 26, 2014 | |
| | 1,568,748 | | | |
| | | | | |
Each finder option is exercisable into one common share and one common share purchase warrant, which shall bear an exercise price of CAD$1.45. These warrants are callable by the Company if the volume weighted average trading price of the Company’s common share on the Toronto Stock Exchange, or any other stock exchange on which the Company’s common share are then listed, is at a price equal to or greater than CAD$2.00 for a period of 30 consecutive trading days. In such event, the Company is entitled to accelerate the expiry date of the warrants by providing written notice to the holders of the warrants that the warrants will expire on the date that is not less than 30 days from the date of such notice. The fair value of the options issued was $1,031,233.
Page 24
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
On November 18, 2008, the Company received approval for its stock option plan which authorizes the Board of Directors to grant incentive stock options to directors, officers and employees. The maximum number of shares reserved for issuance under the Company’s Plan was 10,700,000.
On October 18, 2010, the Company’s plan was amended. The Company received approval for its stock option plan which authorizes the Board of Directors to grant incentive stock options to directors, officers and employees. The maximum number of shares reserved for issuance under the Company’s Plan is 12,500,000.
The aggregate number of common shares reserved for issuance to any person may not exceed 5% of the number of outstanding common shares. The exercise price of the options will be determined by the five day volume weighted average price of the Company’s shares prior to the date of the grant. Options granted must be exercised no later than 10 years after the date of grant or such lesser period as may be determined by the Board. The Board may at its discretion in any granting of an option set a vesting period whereby the option may only be exercisable in pre-determined instalments.
Stock option transactions are summarized as follows:
| | | | | | | |
| | | | Number | | | Weighted Average | |
| | | | of Shares | | | Exercise Price (CAD$) | |
| | Balance at May 31, 2009 | | 8,435,853 | | | 1.64 | |
| | | | | | | | |
| | Granted | | 5,365,000 | | | 0.37 | |
| | Exercised | | (768,750 | ) | | 0.48 | |
| | Cancelled | | (3,245,080 | ) | | 2.08 | |
| | Forfeited | | (1,532,653 | ) | | 1.65 | |
| | Expired | | (30,000 | ) | | 0.26 | |
| | Balance at May 31, 2010 | | 8,224,370 | | | 0.75 | |
| | | | | | | | |
| | Granted | | 1,295,000 | | | 0.91 | |
| | Exercised | | (593,750 | ) | | 0.38 | |
| | Cancelled | | - | | | - | |
| | Forfeited | | (743,350 | ) | | 0.50 | |
| | Expired | | (786,000 | ) | | 0.54 | |
| | | | | | | |
| | Balance at May 31, 2011 | | 7,396,270 | | | 0.74 | |
| | | | | | | | |
| | Number of stock options exercisable | | 5,870,645 | | | 0.74 | |
As at May 31, 2011, the following stock options were outstanding as follows:
Page 25
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 19. | STOCK OPTIONS (continued) |
| | | |
| | Number of Shares | Exercise Price | |
| | Outstanding | (CAD$) | Expiry Date |
| | 118,800 | 0.26 | July 11, 2011 |
| | 762,262 | 1.05 | January 15, 2012 |
| | 755,208 | 2.01 | January 15, 2012 |
| | 100,000 | 2.25 | June 20, 2012 |
| | 50,000 | 2.49 | July 12, 2012 |
| | 300,000 | 0.52 | December 1, 2013 |
| | 2,750,000 | 0.23 | November 18, 2014 |
| | 425,000 | 0.87 | January 5, 2015 |
| | 425,000 | 0.57 | March 25, 2015 |
| | 350,000 | 0.53 | April 30, 2015 |
| | 65,000 | 0.48 | May 13, 2015 |
| | 685,000 | 0.75 | November 1, 2015 |
| | 75,000 | 1.00 | November 29, 2015 |
| | 510,000 | 1.11 | December 21, 2015 |
| | 25,000 | 0.93 | April 6, 2016 |
| | | | |
| | 7,396,270 | | |
During the year ended May 31, 2011, 762,262 options priced at $2.01 CAD and expiring on January 15, 2012 were repriced to $1.05. The increased stock based compensation expense associated with this change was $104,540.
The weighted average fair value of stock options granted is estimated to be CAD $0.53 for the year ended May 31, 2011 (year ended May 31, 2010 – CAD $0.35) by using the Black-Scholes options pricing model with the following weighted average assumptions:
| | | |
| | | Year ended May 31, 2011 | Year ended May 31, 2010 |
| | | | |
| | Risk-free interest rate | 1.52% | 1.88% |
| | Expected dividend yield | - | - |
| | Expected stock price volatility | 100% | 82% |
| | Expected option life in years | 2.0 | 3.00 |
| | | | |
| |
| 20. | SHARE PURCHASE WARRANTS |
Share purchase warrant transactions are summarized as follows:
Page 26
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 20. | SHARE PURCHASE WARRANTS (continued) |
| | | |
| | | | Weighted |
| | | | Average |
| | | Number | Exercise |
| | | of Shares | Price (CAD$) |
| | Balance at May 31, 2009 | 34,953,280 | 1.03 |
| | Issued | 2,100,042 | 0.85 |
| | Exercised | (473,000) | 0.65 |
| | Expired | (1,691,875) | 3.50 |
| | Balance at May 31, 2010 | 34,888,447 | 0.90 |
| | Issued | 32,000,000 | 1.45 |
| | Exercised | (18,553,800) | 0.65 |
| | Expired | - | - |
| | Balance at May 31, 2011 | 48,334,647 | 1.36 |
| | | | |
In December 2009, the Company closed a non-brokered private placement of 24,000,000 common shares at a price of CAD $0.50 per share, raising gross proceeds of $11,328,236. In connection with the closing of the private placement, the Company has paid finders’ fees in the amount of $566,412.
On May 21, 2010, the Company issued 4,000,080 units at a price of CAD$ 0.50 per unit, raising gross proceeds of $1,888,077. Each unit consisted of one common share and one-half of one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of the Company for a period of two years at an exercise price of CAD$ 0.85 per share. The Company paid finders’ fees of $103,844 plus 100,002 warrants exercisable for a period of two years at an exercise price of CAD$ 0.85 per share. The fair value of the finders’ warrants was $15,225.
On December 30, 2010, January 7, 2011, January 26, 2011 and January 31, 2011, the Company issued a total of 32,000,000 common shares at a price of CAD $1.00 per share, raising gross proceeds of $31,976,036. Each unit consisted of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of the Company for a period of three years at an exercise price of CAD $1.45 per share. The Company paid finders’ fees of CAD $1,763,236.
At May 31, 2011, the following warrants were outstanding as follows:
| | | |
| | Number of Warrants | Exercise | |
| | Outstanding | Price (CAD$) | Expiry Date |
| | 250,000 | 1.54 | October 4, 2011 |
| | 9,174,605 | 1.54 | October 17, 2011 |
| | 3,964,000 | 0.65 | May 21, 2013 |
| | 846,000 | 0.65 | June 4, 2013 |
| | 2,100,042 | 0.85 | May 21, 2012 |
| | 23,399,402 | 1.45 | December 30, 2013 |
| | 6,100,598 | 1.45 | January 7, 2014 |
| | 2,500,000 | 1.45 | January 26, 2014 |
| | 48,334,647 | | |
Page 27
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 21. | RELATED PARTY TRANSACTIONS |
Related party transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the transacting parties.
During the year ended May 31, 2011:
| | a) | The Company paid fees for compensation related matters of $929,000 to a company controlled by the Chairman (year ended May 31, 2010 – $489,908, year ended May 31, 2009 – $220,176). |
| | | |
| | b) | The Company paid for goods and services provided to the Molejon mine of $228,965 (year ended May 31, 2010- $166,134, year ended May 31, 2009 - $155,805) to companies controlled by the Chairman. |
| | | |
| | c) | The Company paid fees of $18,800 (year ended May 31, 2010 – nil, year ended May 31, 2009 - nil) to a company controlled by a Director. |
| | | |
| | d) | The Company paid wages of nil (year ended May 31, 2010 – nil, year ended May 31, 2009 - $32,158) to companies controlled by a former director. |
| | | |
| | e) | The Company paid legal fees of nil (year ended May 31, 2010 - $273,178, year ended May 31, 2009 - $269,526), and financing costs of nil (year ended May 31, 2010 – nil, year ended May 31, 2009 - $104,272) to a law firm controlled by a former officer and a law firm controlled by a former director. |
| | | |
| | f) | Note 10 provides a description of the Iberian Resources Corp (“Iberian”) transaction. As noted, Iberian is a related party to the Company by virtue of common management and directors. |
At May 31, 2011, excluding related party Notes and related party Convertible Notes (Notes 16 and 17), $126,858 was owed to related parties.
A reconciliation of income taxes at statutory rates with the reported taxes is as follows.
| | | | | | | | | | |
| | | | Year ended | | | Year ended | | | Year ended | |
| | | | May 31, 2011 | | | May 31, 2010 | | | May 31, 2009 | |
| | Statutory tax rate | | 27.67 | % | | 29.38 | % | | 30.38 | % |
| | (Loss) for the period | $ | (3,937,323 | ) | $ | (26,982,082 | ) | $ | (21,099,866 | ) |
| | Income tax recovery | | (1,089,457 | ) | | (7,925,987 | ) | | (6,409,084 | ) |
| | Permanent differences | | (770,813 | ) | | (199,709 | ) | | (4,746,965 | ) |
| | Share issue costs | | (586,739 | ) | | - | | | - | |
| | Income tax rate change and differential | | (1,847,117 | ) | | 2,608,282 | | | 5,551,802 | |
| | Foreign exchange | | 630,607 | | | 522,046 | | | (1,131,760 | ) |
| | Cost of previously unrecognized tax pools | | - | | | - | | | 1,480,781 | |
| | Change in functional currency foreign exchange impact | | - | | | - | | | 4,010,847 | |
| | Other | | 28,814 | | | (2,142,158 | ) | | - | |
| | Change in valuation allowance | | 3,634,705 | | | 7,137,526 | | | 1,244,379 | |
| | Income tax recovery | | - | | | - | | | - | |
Page 28
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 22. | INCOME TAXES (continued) |
The significant components of the Company’s future income tax assets (liabilities) are as follows:
| | | | | | | |
| | | | May 31, 2011 | | | May 31, 2010 | |
| | | | | | | | |
| | Future income tax assets (liabilities) | | | | | | |
| | Non-capital and other loss carry-forwards | $ | 14,200,672 | | $ | 9,684,260 | |
| | Equipment and exploration properties | | 63,530 | | | 51,814 | |
| | Deferred financing costs | | 2,243,377 | | | 1,951,713 | |
| | Foreign exchange gain on notes | | - | | | - | |
| | Senior secured notes | | 147,860 | | | 1,333,938 | |
| | Other | | 13,843 | | | 12,852 | |
| | Total future income tax assets | $ | 16,669,282 | | $ | 13,034,577 | |
| | Valuation allowance | | (16,669,282 | ) | | (13,034,577 | ) |
| | Net future income tax assets | | - | | | - | |
The Company has non-capital losses of $56,802,689 for deduction against future years’ taxable income in Canada. If unutilized, these losses will expire, beginning in 2014, as follows:
| | | | |
| | | | | |
| | 2014 | $ | 433,802 | |
| | 2015 | | 910,470 | |
| | 2026 | | 1,994,647 | |
| | 2027 | | 5,339,864 | |
| | 2028 | | 4,182,831 | |
| | 2029 | | 6,285,866 | |
| | 2030 | | 23,010,780 | |
| | 2031 | | 14,644,429 | |
| | | $ | 56,802,689 | |
The Company will not be subject to any income taxes in Panama until all of the debt incurred by all of the affiliated / subsidiary companies has been repaid in full, the timing of which cannot be estimated due to the uncertainty inherent in the future price of gold. At that time the Company will be able to claim accelerated write-offs for all Panamanian subsidiaries.
Page 29
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| | | | | | | | | | | | | | | | |
| | | | Less than 1 | | | | | | | | | | | | More than 5 | |
| | | | Year | | | 2 Years | | | 3 Years | | | 4-5 Years | | | Years | |
| | Office lease | $ | 73,900 | | $ | 28,000 | | | Nil | | | Nil | | | Nil | |
| | Equipment lease | $ | 1,754,547 | | $ | 1,134,360 | | $ | 1,134,360 | | $ | 2,079,364 | | | Nil | |
| | Senior secured notes | $ | 451,668 | | $ | 455,411 | | $ | 455,411 | | $ | 3,679,473 | | | Nil | |
| | Convertible senior secured notes | $ | 573,916 | | $ | 578,672 | | $ | 578,672 | | $ | 4,675,355 | | | Nil | |
| | Long term debt | $ | 435,733 | | $ | 465,109 | | $ | 448,377 | | $ | 927,011 | | | Nil | |
| | Fundacion Petaquilla | $ | 1,440,000 | | $ | 1,440,000 | | $ | 1,440,000 | | $ | 2,880,000 | | $ | 1,440,000 | |
| | Asset retirement obligation | | Nil | | | Nil | | | Nil | | | Nil | | $ | 10,218,124 | |
| | Total | $ | 4,729,764 | | $ | 4,101,552 | | $ | 4,056,820 | | $ | 14,241,203 | | $ | 11,658,124 | |
The Company has committed funding of $120,000 per month to Fundacion Petaquilla for the life of the Molejon mine. Fundacion Petaquilla promotes a sustainable development culture, administering social programs in the area around the Molejon property.
As it is described in note 27, the Company has an obligation to the Deutsche Bank, AG for a certain amount of ounces of gold in the future.
| |
| 24. | FINANCIAL INSTRUMENTS AND CAPITAL MANAGEMENT |
The Company thoroughly examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, currency risk, and interest rate risk. Where material, these risks are reviewed and monitored by the Board of Directors.
(a) Fair Values
The fair value of the Company’s current assets and liabilities including cash and cash equivalents, receivables, restricted cash and accounts payable and accrued liabilities approximates their carrying values due to the immediate or short-term maturity of these financial instruments. The carrying amounts of the Company’s long term debt and obligations under capital leases approximate fair value due to their interest rates being in line with market rates.
The Company’s Notes and Convertible Notes are measured on initial recognition using the residual method. Subsequent fair value measurement is based on a discounted cash flow model using a discount rate of 10.18% at May 31, 2011 (May 31, 2010 – 12.0%) and estimated principal, premium and interest date of September 15, 2011 and the assumption mentioned in Notes 16 and 17.
Page 30
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 24. | FINANCIAL INSTRUMENTS AND CAPITAL MANAGEMENT (continued) |
The amendments to Section 3862 introduce a fair value hierarchy that reflects the significance of inputs used in making fair value measurements as follows:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices of) or indirectly (i.e. derived from prices); and
Level 3 – inputs for the asset or liability that are not based on observable market data.
At May 31, 2011, the levels in the fair value hierarchy into which the Company’s financial assets and liabilities measured and recognized in the balance sheet at fair value are categorized as follows:
| | | | |
| | | Level 1 | Level 2 | Level 3 |
| | Senior secured notes | - | - | $3,124,437 |
| | Convertible senior secured notes | - | - | 3,970,094 |
An analysis of these notes including related gains and losses during the year is as follows:
| | | | | | | |
| | | | Year ended | | | Year ended | |
| | | | May 31, 2011 | | | May 31, 2010 | |
| | Balance at beginning of the year | | | | | | |
| | Senior secured notes | $ | 26,646,631 | | $ | 29,407,502 | |
| | Convertible senior secured notes | | 44,837,991 | | | 34,794,455 | |
| | | | 71,484,622 | | | 64,201,957 | |
| | Repayment of senior secured notes and convertible senior secured notes | | (70,413,280 | ) | | (8,806,743 | ) |
| | Mark-to-market losses (gain) included in net income (expense) | | 6,023,189 | | | 16,089,408 | |
| | Balance at end of the year | $ | 7,094,531 | | $ | 71,484,622 | |
(b) Financial Instrument Risk Exposure
Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. The Company has reduced its credit risk by investing its cash and cash equivalents and restricted cash in term deposits with financial institutions that operate globally. There is also minimal risk associated with accounts receivable as the payment for gold sales is received prior to the gold being credited to the customer’s account at the refinery.
Therefore, the Company is not exposed to significant credit risk and overall the Company’s credit risk has not changed significantly from the prior year.
Page 31
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 24. | FINANCIAL INSTRUMENTS AND CAPITAL MANAGEMENT (continued) |
Liquidity risk
Liquidity risk arises from the Company’s general and capital financing needs. The Company has in place a planning and budgeting process to help determine the funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives. The Company has historically relied on issuance of shares, senior secured debt, convertible senior secured debt and leasing arrangements to develop the Molejon gold project. The Company expects to fund operations and capital expenditures in fiscal 2012 via operations as the Molejon gold project has been in commercial production since January 2010.
Market risk
(i) Currency risk
Financial instruments that impact the Company’s net earnings or other comprehensive income due to currency fluctuations include: Canadian dollar denominated cash and cash equivalents, restricted cash, accounts receivable and accounts payable. As the Company conducts the vast majority of its activities in United States dollars, changes in the exchange rate between the Canadian dollar and the United States dollar have a minimal effect on the Company’s net earnings and other comprehensive income.
(ii) Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Cash and cash equivalents and restricted cash bear interest at fixed rates.
Other current financial assets and liabilities are not exposed to interest rate risk because they are non-interest bearing.
The operating credit line facility, capital leases, and long-term debt bear interest at a fixed rate and are also not exposed to interest rate risk.
(c) Capital Management
The Company’s objectives of capital management are intended to safeguard the entity's ability to support the Company’s normal operating requirements on an ongoing basis, continue the development and exploration of its mineral properties and support any expansionary plans.
The capital structure of the Company consists of long term debt (Note 13), leases (Note 15), Notes (Note 16), Convertible Notes (Note 17), advances from Deutsche Bank in connection with future production of gold (Note 27) and equity attributable to common shareholders, comprised of issued capital, contributed surplus and deficit. The Company manages the capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the Company’s assets.
To effectively manage the entity’s capital requirements, the Company has in place a planning and budgeting process to help determine the funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives. The Company has historically relied on issuance of shares, senior secured debt, convertible senior secured debt and leasing arrangements to develop the project and may require doing so again in the future.
The Company is monitoring market conditions to secure funding at the lowest cost of capital. The Company is exposed to various funding and market risks which could curtail its access to funds.
Page 32
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 25. | SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS |
| | | | | | | | | | |
| | | | Year ended | | | Year ended | | | Year ended | |
| | | | May 31, 2011 | | | May 31, 2010 | | | May 31, 2009 | |
| | Non-cash investing and financing activities | | | | | | | | | |
| | Finder’s fees | $ | 1,763,236 | | $ | 15,226 | | $ | - | |
| | Share issue costs | | (1,763,236 | ) | | (15,226 | ) | | - | |
| | Share capital warrants exercised | | 3,979,771 | | | 60,429 | | | - | |
| | Warrants exercised | | (3,979,771 | ) | | (60,429 | ) | | (112,686 | ) |
| | Share capital warrants issued in private placement | | (19,360,365 | ) | | (304,511 | ) | | - | |
| | Warrants granted in private placement | | 19,360,365 | | | 304,511 | | | - | |
| | Share capital broker warrants issued | | 1,715,805 | | | - | | | - | |
| | Broker warrants issued | | (1,715,805 | ) | | - | | | - | |
| | Mineral properties | | 629,138 | | | (291,357 | ) | | - | |
| | Asset retirement obligation | | (629,138 | ) | | 291,357 | | | - | |
| | Share capital options exercised | | 276,180 | | | 187,488 | | | - | |
| | Contributed surplus options exercised | | (276,180 | ) | | (187,488 | ) | | - | |
| | Senior secured note repayment through forward sales agreement | | - | | | (5,129,600 | ) | | - | |
| | Deposits on equipment transferred to capital assets | | - | | | 946,484 | | | - | |
| | Mineral properties financed through payables | | 7,000,000 | | | 5,242,659 | | | 5,147,462 | |
| | Property and equipment financed through payables | | 2,110,998 | | | - | | | 1,071,255 | |
| | Property and equipment acquired through credit line facility and capital leases | | 4,848,492 | | | 115,700 | | | 2,058,197 | |
| | Amortization capitalized to mineral properties | | - | | | 1,825,067 | | | - | |
| | Amortization allocated to ending inventory | | 173,226 | | | 146,696 | | | - | |
| | Depletion allocated to ending inventory | | 527,421 | | | 281,617 | | | - | |
| | Deferred services and materials financed by a reduction in amounts payable to IMN | | - | | | 90,000 | | | 156,597 | |
| | | | | | | | | | | |
| | Interest paid in cash | $ | 7,758,123 | | $ | 4,165,274 | | $ | 14,224,440 | |
| | Income taxes paid in cash | | - | | | - | | | - | |
| | | | | | | | | | |
| | | | May 31, 2011 | | | | | | May 31, 2010 | |
| Cash and cash equivalents consist of: | | | | | | | | | |
| Cash | $ | 5,712,792 | | | | | $ | 4,625,649 | |
| | | $ | 5,712,792 | | | | | $ | 4,625,649 | |
| |
| 26. | ASSET RETIREMENT OBLIGATION |
The Company’s asset retirement obligation relates to site restoration and cleanup costs for its Molejon gold project located in Panama.
A reconciliation of the provision for asset retirement obligation is as follows:
| | | | |
| | Balance at May 31, 2008 | $ | 4,333,216 | |
| | Accretion | | 331,504 | |
| | Balance at May 31, 2009 | | 4,664,720 | |
| | Accretion | | 325,287 | |
| | Adjustment for change in estimate of timing of cash flows | | (291,357 | ) |
| | Balance at May 31, 2010 | | 4,698,650 | |
| | Accretion | | 359,448 | |
| | Adjustment for change in estimate of liability | | 629,138 | |
| | Balance at May 31, 2011 | $ | 5,687,236 | |
Page 33
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 26. | ASSET RETIREMENT OBLIGATION (continued) |
The provision for asset retirement obligation is based upon the following assumptions:
| | a) | The total undiscounted cash flow required to settle the obligation is approximately $10,200,000; |
| | b) | Asset retirement obligation payments are expected to occur mainly between fiscal years 2017 and 2020; |
| | c) | A credit adjusted risk-free rate of 10.18% has been used to discount cash flows. |
| | | |
On September 22, 2010, the Company entered into a Forward Gold Purchase Agreement (“the Agreement”) with Deutsche Bank, AG (“Deutsche Bank”), in an amount of $45,000,000. Under the terms of the Agreement, the Company has sold to Deutsche Bank, a Contract Quantity of Gold being 66,650 ounces.
For any shortfall in the number of gold ounces the Company is required to deliver, the Company is required to pay the amount in US dollars equal to the shortfall in gold ounces required to be delivered multiplied by the gold price on the scheduled delivery date. Interest will be charged on the shortfall at the LIBOR rate plus 2% per annum (based on 360 days/year) and is due on demand. However, under the Agreement the Company may deliver the monthly shortfall in gold, plus interest, if it can do so within 30 days of the monthly delivery date. The Company is only allowed to exercise this right no more frequently than twice in total during the term of the Agreement and no more frequently than once during any six month period.
The following table summarizes the above noted delivery requirements on an annual basis:
| | | |
| | Delivery Obligation – 2011 to 2016 | Ounces per month | Total ounces |
| | November 2010 - May 2011 | 500 | 3,500 |
| | Total delivery requirements for fiscal year 2011 | | 3,500 |
| | June 2011 - April 2012 | 1,110 | 12,210 |
| | May 2012 | 1,485 | 1,485 |
| | Total delivery requirements for fiscal year 2012 | | 13,695 |
| | June 2012 - May 2013 | 1,485 | 17,820 |
| | Total delivery requirements for fiscal year 2013 | | 17,820 |
| | June 2013 - April 2014 | 1,485 | 16,335 |
| | May 2014 | 900 | 900 |
| | Total delivery requirements for fiscal year 2014 | | 17,235 |
| | June 2014 - May 2015 | 900 | 10,800 |
| | Total delivery requirements for fiscal year 2015 | | 10,800 |
| | June 2015 - September 2015 | 900 | 3,600 |
| | Total delivery requirements for fiscal year 2016 | | 3,600 |
| | Total Ounces to be Delivered | | 66,650 |
Page 34
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 27. | DEFERRED REVENUE (continued) |
As of May 31, 2011, the Company has delivered 3,500 ounces under the terms of the Agreement and has an obligation to deliver 63,150 ounces in future periods in accordance with the table above. The current portion of deferred revenue represents the revenue expected to be recognized in the following year in respect of gold to be delivered pursuant to this Agreement. As at May 31, 2011, $9.2 million and $33.4 million represent the current and long-term remaining ounces, respectively, to be delivered under the Agreement.
The Company incurred $3.9 million of fees to parties involved in the Agreement, of which $2.1 million was expensed as transaction costs and $1.8 million paid to the Deutsche Bank was deferred. As of May 31, 2011, the mentioned amount of the costs was deferred based on their direct relationship with the revenue expected to be recognized in future periods. This transaction fee is being amortized based on the ounces to be delivered under the Agreement. As of May 31, 2011 net book value of this deferred fee was $1,705,476.
In addition, should the gold price be in excess of $875 per ounce, the Company will receive from Deutsche Bank, an additional payment amount equal to the product of the monthly quantity of gold delivered in that month and the amount by which the gold price exceeds $875 per ounce, limited to $415 per ounce.
If on any business day on or after September 1, 2010 and on or prior to December 31, 2013, the gold price is less than $1,000 per ounce, then Deutsche Bank may, by notice to the Company, require that the Company enter into, on commercially reasonable terms, a fixed-for-floating swap or any combination of gold derivative instruments that would have the net effect of reducing the Company’s exposure to movements in the gold price. The mandatory hedging which the Deutsche Bank may require pursuant to this shall be restrictive to the period commencing on the Notice Date and ending on December 31, 2013.
| | 1) | On November 13, 2008 the Autoridad Nacional del Ambiente (“ANAM”), the environmental agency of the Government of the Republic of Panama, issued a Resolution purporting to fine the Company and its present and former affiliates $1,000,000 for alleged violations of environmental laws that took place on the main Petaquilla Copper Concession in 2005 and an additional $934,695 for damages. On November 26, 2008, ANAM, by Resolution, approved the Company’s Environmental Impact Study (“EIS”) Category III submitted in July 2007 for the Molejon Gold Project. The Resolution sets out a number of conditions to be satisfied before the Company can attain full commercial production. Based on the approval of the EIS, the Company filed for reconsideration by ANAM to have the fines reduced to nil. In January 2009, the Company was advised that ANAM had not accepted the Company’s request for reconsideration that the amount of the financial sanctions purportedly levied against the Company and its present and former affiliates be reduced to nil. On March 10, 2009, the Supreme Court of the Republic of Panama suspended the imposition of ANAM’s fine until the matter of the Company’s appeal is resolved. On February 14, 2011, the Supreme Court of the Republic of Panama declared that the fine imposed by ANAM on the Company rendered ineffective. The Company has accepted the Government of the Republic of Panama’s position, and therefore, no fine has been recorded. |
| | | |
| | 2) | On February 11, 2011, the Government of Panama made an amendment to the Mineral Resources Code of Panama. However, after this decision the Government of Panama formally requested to the National Assemble to revoke Law No. 8 of February 11, 2011, which amended the Mineral Resources Code of Panama in its entirety. The primary focus of the Law No. 8 amendments was to allow foreign sovereign funds to invest in Panamanian resources. In addition, an increase in royalties’ rate by 2% was included in such amendments. The effect of increasing royalties by 2% on the Company’s operations and financial position for the current year would have been an increase in cost of sales of $1,441,287 should the legislation be enacted and applied retroactively. |
Page 35
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 28. | CONTINGENCIES (continued) |
| | 3) | During the year ending May 31, 2008, the Company was served with a claim by a former officer in the amount of $250,000. This matter will be going to mediation in fiscal 2012. The Company believes that the claim is without merit and has not recorded a liability as the outcome is uncertain. |
| | | |
| | 4) | On October 6, 2010 Pro-Con Industries, Inc. filed a claim in the Los Angeles Superior Court against Petaquilla Minerals S.A. for breach of written contract, fraud, intentional interference with economic relationship and negligent interference with economic relationship. The claim seeks damages in excess of $600,000 in addition to punitive damages and attorney fees. The case was dismissed on January 10, 2011, as the plaintiff failed to effect service. |
| | | |
| | 5) | The Company is engaged in certain other legal actions in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material adverse effect on its operating results, liquidity or financial position. |
| | | |
Subsequent to May 31, 2011 the following events took place:
| | 1) | On July 19, 2011, the Company entered into a sublease for corporate office space. The term of the agreement is for thirty six months commencing on September 1, 2011, at a monthly rate of $3,052. |
| | | |
| | 2) | The Company has filed a notice with the Toronto Stock Exchange (“TSX”) for, and received its approval to make, a Normal Course Issuer Bid (“NCIB”) permitting the Company to purchase up to 17,000,000 common shares (“Shares”), representing approximately 9.9% of its public float. The average daily trading volume on the TSX for the six months preceding June 1, 2011, was 683,833 Shares. Subject to the Company’s ability to make “block” purchases under TSX rules, the daily purchase restriction during the course of the NCIB is 25% of the average daily trading volume, or 170,958 Shares. The Company may buy back Shares anytime during the 12-month period beginning on July 4, 2011, and ending on July 3, 2012, or on such earlier date as the Company may complete its purchases pursuant to the NCIB, or provide notice of termination. Any purchase under the NCIB will be made through the facilities of the TSX in compliance with the rules of the TSX. The Company will pay the market price, up to a maximum of CAD$1.00 per Share, at the time of acquisition of Shares purchased through the facilities of the TSX, subject to any restrictions under the rules of the TSX. The actual number of Shares which may be purchased, and the timing of any such purchases, will be determined by the Company, in accordance with the rules of the TSX. A total of 285,000 shares were repurchased by the Company, ranging share price from CAD$0.69 to CAD$0.80. |
| | | |
| | 3) | On July 20, 2011, an additional $1,508,524 was subscribed to from the long term financing with Global Bank of Panama at 6.25% per annum, in addition to the amount of $2,170,264 that was already subscribed to as at May 31, 2011, according to terms detailed in note 13. |
| | | |
| | 4) | On July 20, 2011, the Company announced that a special meeting (the “Meeting”) of the holders of common shares of Petaquilla (the “Shareholders”) will be held on August 31, 2011. At the Meeting, Shareholders will be asked to consider and, if thought fit, to approve with or without variation, an ordinary resolution authorizing the issuance by the Company of such number of common shares in the capital of the Company (the “Shares”) as is necessary to complete the proposed acquisition by the Company of all the outstanding securities of Iberian Resources Corp. (the “Acquisition”); and to transact such other business as may properly come before the Meeting or any adjournment thereof. The Acquisition is subject to receipt of all required regulatory approvals, if any, and to the approval of the Shareholders at the Meeting. Assuming all such approvals are obtained, the Acquisition is expected to be effected on or about September 1, 2011. |
Page 36
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 29. | SUBSEQUENT EVENTS (continued) |
| | 5) | On June 28, 2011 and June 29, 2011, a total of $1,292,925 was subscribed to by Petaquilla Gold S.A., a subsidiary of the Company from Caterpillar Financial, to supply heavy equipment. The terms of these agreements are an interest rate of 6% per annum, and repayment terms between 48 and 60 months. |
| | | |
| | 6) | On August 17, 2011, $175,000 of the $247,864 lien relating a bank account of Petaquilla Gold S.A., a subsidiary of the Company, was cancelled by the Federal Court of Justice of the Republic of Panama. |
| | | |
| | 7) | 50,000 stock options were exercised. |
| | | |
| |
| 30. | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES |
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). Material variations in the accounting principles, practices and methods used in preparing these financial statements from United States Generally Accepted Accounting Principles (“U.S. GAAP”) are described and quantified below.
| | | | | | | | | | |
| | | | | | | Year ended | | | | |
| | | | Year ended | | | May 31, 2010 | | | Year ended | |
| | Loss for the years | | May 31, 2011 | | | | | | May 31, 2009 | |
| | Loss for the year – Canadian GAAP | $ | (3,937,326 | ) | $ | (26,982,082 | ) | $ | (21,099,866 | ) |
| | Gain on dilution of equity investment (a) | | (453,775 | ) | | - | | | (2,238,492 | ) |
| | Mineral properties expensed under U.S. GAAP (b) | | (15,371,440 | ) | | (3,411,935 | ) | | (17,562,548 | ) |
| | Revenue recognized (i) | | - | | | 27,948,475 | | | 653,941 | |
| | Cost of goods sold (i) | | (231,896 | ) | | (24,275,977 | ) | | (1,260,127 | ) |
| | Amortization (i) | | - | | | (1,825,067 | ) | | (640,425 | ) |
| | Amortization of ball mills included in mineral properties | | (419,345 | ) | | (419,345 | ) | | - | |
| | under U.S. GAAP (i) | | | | | | | | | |
| | Depletion of mineral properties under Canadian GAAP (i) | | 7,489,645 | | | 3,338,116 | | | - | |
| | Loss of variable interest entity under US GAAP (k) | | - | | | 69,765 | | | - | |
| | Expensing of opening inventory reclassified in prior year | | - | | | (2,868,999 | ) | | - | |
| | Write down of inventory in finished goods and work in progress | | - | | | - | | | (2,404,695 | ) |
| | Foreign exchange on difference in mineral properties expensed under U.S. GAAP | | - | | | - | | | (9,639,262 | ) |
| | Foreign exchange on difference in senior secured notes under U.S. GAAP | | - | | | - | | | 3,180,313 | |
| | Additional loss relating to redemption and modification of senior secured note agreement under U.S. GAAP (f and g) | | 177,778 | | | - | | | (18,712,488 | ) |
| | Share issue costs relating to warrants expensed under U.S. GAAP | | (357,395 | ) | | - | | | - | |
| | Change in fair value of warrants denominated in Canadian dollars under U.S. GAAP (j) | | (8,420,089 | ) | | 1,692,320 | | | 22,871,582 | |
| | Change in fair value of share capital issued with warrants denominated in Canadian dollars under U.S. GAAP (j) | | - | | | 58,824 | | | - | |
| | Net gain (loss) – U.S. GAAP | $ | (21,523,843 | ) | $ | (26,675,905 | ) | $ | (46,852,067 | ) |
| | Other comprehensive (loss) gain | | | | | | | | | |
| | Unrealized loss on translating financial statements to US reporting currency | | - | | | - | | | (4,648,716 | ) |
| | Foreign exchange on difference in mineral properties expensed under U.S. GAAP | | - | | | - | | | 9,639,262 | |
| | Foreign exchange on difference in senior secured notes under U.S. GAAP | | - | | | - | | | (3,180,313 | ) |
| | Comprehensive gain (loss) for the year | $ | (20,414,977 | ) | $ | (26,675,905 | ) | $ | (45,041,834 | ) |
| | Basic and diluted gain (loss) per share – U.S. GAAP | $ | (0.15 | ) | $ | (0.25 | ) | $ | (0.49 | ) |
Page 37
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 30. | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) |
| | | | | | | |
| | Mineral Properties | | May 31, 2011 | | | May 31, 2010 | |
| | Mineral properties – Canadian GAAP | $ | 66,670,067 | | $ | 58,788,273 | |
| | Amortization (h) | | (2,465,492 | ) | | (2,465,492 | ) |
| | Revenue recognized under U.S. GAAP (i) | | 28,602,416 | | | 28,602,416 | |
| | Cost of goods sold (i) | | (25,536,104 | ) | | (25,536,104 | ) |
| | Depletion of mineral properties under Canadian GAAP (i) | | 11,622,891 | | | 3,619,733 | |
| | Amortization of ball mills included in mineral properties under U.S. GAAP (i) | | (838,690 | ) | | (419,345 | ) |
| | Mineral properties expensed under U.S. GAAP (b) | | (75,920,645 | ) | | (60,036,692 | ) |
| | Mineral properties – U.S. GAAP | $ | 2,134,443 | | $ | 2,552,789 | |
| | | | | | | | |
| | Balance Sheets | | May 31 2011 | | | May 31 2010 | |
| | Total assets – Canadian GAAP | $ | 115,519,276 | | $ | 80,262,195 | |
| | Depletion of mineral properties added to ending inventory (i) | | (513,513 | ) | | (281,617 | ) |
| | Mineral properties expensed or charged to cost of sales and revenue under U.S. GAAP (a)(i) | | (64,535,624 | ) | | (56,235,484 | ) |
| | Total assets – U.S. GAAP | $ | 50,470,139 | | $ | 23,745,094 | |
| | Liabilities – Canadian GAAP | $ | 95,199,170 | | $ | 101,615,310 | |
| | Derivative liability – warrants (j) | | 11,578,581 | | | 4,965,589 | |
| | Equity component of convertible debt treated as a liability under U.S. GAAP (g) | | - | | | 177,778 | |
| | Liabilities – U.S. GAAP | $ | 106,777,751 | | $ | 106,758,677 | |
| | Non-controlling interest – Canadian GAAP | $ | 2,507,156 | | $ | - | |
| | Equity adjustment (a) | | (2,507,156 | ) | | - | |
| | Non-controlling interest – U.S. GAAP | $ | - | | $ | - | |
| | Shareholders’ equity (deficit) - Canadian GAAP | $ | 17,812,950 | | $ | (21,353,115 | ) |
| | Mineral properties expensed or charged to cost of sales and revenue under U.S. GAAP (b)(i) | | (64,536,624 | ) | | (56,235,484 | ) |
| | Exercise of warrants denominated in Canadian dollars under U.S. GAAP (j) | | 13,478,944 | | | 272,000 | |
| | Depletion added to ending inventory | | (513,513 | ) | | (281,617 | ) |
| | (Decrease) increase in retained earnings due to translation of prior year mineral property expenses and senior secured notes | | (4,564,949 | ) | | (4,564,949 | ) |
| | Difference in accumulated other comprehensive income | | 4,564,949 | | | 4,564,949 | |
| | Increase in net income due to the change in fair value of warrants denominated in Canadian dollars under U.S. GAAP (j) | | 14,463,183 | | | 22,883,272 | |
| | Decrease in warrants due to fair value of warrants denominated in Canadian dollars under U.S. GAAP (j) | | (38,489,476 | ) | | (28,120,861 | ) |
| | Decrease in warrants due to the fair value of finders’ warrants (j) | | (1,031,232 | ) | | - | |
| | Additional loss relating to redemption and modification of senior secured note agreement under U.S. GAAP (f) | | (14,591,713 | ) | | (14,591,713 | ) |
| | Allocation of fair value of senior secured notes under U.S. GAAP (f) | | 14,591,713 | | | 14,591,713 | |
| | Equity adjustment of non-controlling interest (a) | | 2,507,156 | | | - | |
| | Equity component of convertible debenture treated as a liability under U.S. GAAP (g) | | - | | | (177,778 | ) |
| | Shareholders’ equity (deficit) – U.S. GAAP | $ | (56,308,612 | ) | $ | (83,013,583 | ) |
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| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 30. | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) |
| | | | | | | | | | |
| | Statement of Cash Flows | | Year ended | | | Year ended | | | Year ended | |
| | | | May 31, 2011 | | | May 31, 2010 | | | May 31, 2009 | |
| | Cash provided by (used in) operating activities – Canadian GAAP | $ | 44,127,970 | | $ | 500,846 | | $ | (16,010,085 | ) |
| | Revenues and expenses charged to mineral properties under Canadian GAAP | | - | | | 3,672,498 | | | - | |
| | Expenditures on mineral properties | | (13,514,509 | ) | | (3,411,935 | ) | | (27,201,810 | ) |
| | Cash provided by (used in) operating activities – U.S. GAAP | $ | 30,613,461 | | $ | 761,409 | | $ | (43,211,895 | ) |
| | Cash provided by (used in) financing activities – Canadian GAAP | $ | (22,770,446 | ) | $ | 6,354,018 | | | | |
| | Cash provided by (used in) financing activities – U.S. GAAP | $ | (22,770,446 | ) | $ | 6,354,018 | | | | |
| | Cash provided by (used in) investing activities – Canadian GAAP | $ | (20,270,899 | ) | $ | (5,804,679 | ) | $ | 8,164,377 | |
| | Revenues and expenses charged to mineral properties under Canadian GAAP | | - | | | (3,672,498 | ) | | - | |
| | Expenditures on mineral properties | | 13,514,509 | | | 3,411,935 | | | 27,201,810 | |
| | Cash provided by (used in) investing activities – U.S. GAAP | $ | (6,756,390 | ) | $ | (6,065,242 | ) | $ | 35,366,187 | |
| | Cash and cash equivalents, end of year – Canadian GAAP | $ | 5,712,792 | | $ | 4,625,649 | | $ | 3,575,168 | |
| | Cash and cash equivalents, end of year – U.S. GAAP | $ | 5,712,792 | | $ | 4,625,649 | | $ | 3,575,168 | |
Under U.S. GAAP, changes in the parent company’s proportionate share of equity resulting from the additional equity raised by an entity subject to significant influence in the development stage are accounted for as an equity transaction on consolidation. Under Canadian GAAP, these gains have been credited to income. In the current year, under Canadian GAAP, the Company recorded a dilution gain related to a variable interest entity. The non-controlling interest portion of this equity investment has been recorded as a U.S. GAAP adjustment of $2,507,156 in the current year.
| | b) | Mineral properties and deferred costs |
Mineral property costs and related exploration expenditures are accounted for in accordance with Canadian GAAP as disclosed in Note 2. For U.S. GAAP purposes, the Company expenses, as incurred, the exploration costs related to unproven mineral properties. When proven and probable reserves are determined for a property and a feasibility study is prepared, then subsequent exploration and development costs of the property would be capitalized. The capitalized costs of such properties are measured periodically for recoverability of carrying values.
| | c) | Development stage company |
Pursuant to U.S. GAAP, the Company would be subject to the disclosure requirements applicable to a development stage enterprise as the Company is devoting its efforts to establishing commercially viable mineral properties. However, the identification of the Company as such for accounting purposes does not impact the measurement principles applied to these consolidated financial statements.
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| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 30. | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) |
Under Canadian GAAP, future tax assets and liabilities are recorded at substantively enacted tax rates. Under U.S. GAAP, deferred tax assets and liabilities are recorded at enacted rates. There were no significant differences between enacted and substantively enacted rates for the periods presented.
| | e) | Accounting for uncertainty in income taxes |
U.S. GAAP provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return.
Effective May 1, 2007 the Company adopted the U.S. GAAP guidance in accounting for uncertainty in income taxes. The adoption did not result in any adjustment to opening retained earnings under U.S. GAAP. As a result of the implementation of this guidance, the Company did not recognize any liabilities for unrecognized tax benefits. In the event that the Company recognizes accrued interest related to unrecognized tax benefits, it will be recorded in interest expense. Any penalties will be recorded in general and administrative expenses.
The Company is subject to taxation in Canada and various other foreign jurisdictions. The Company is currently open to audit under the statute of limitations by the Canada Revenue Agency for years ended April 30, 2006 through May 31, 2011.
Under Canadian GAAP, compound financial instruments can be accounted for using the residual method when allocating between the liability and the equity component of the instrument. Under U.S. GAAP, compound financial instruments are accounted for using the fair value method when allocating between the liability and the equity component. On the modification of the senior secured note agreement on March 25, 2009, the senior secured notes were required to be marked- to-market and the Company recognized additional losses relating to redemption and inception losses in the amount of $14,903,816. This resulted in harmonizing both Canadian GAAP and U.S. GAAP with no differences going forward.
| | g) | Convertible senior secured notes |
Under U.S. GAAP, convertible debt instruments are classified as debt until converted to equity, whereas under Canadian GAAP, the proceeds of the convertible debt instrument are allocated to both debt and equity components, with the debt component being accreted over time to its face value and accretion charged to earnings. Under U.S. GAAP, a value is assigned to the conversion feature only if the effective conversion rate is less than the market price of the common stock at the commitment date. No value would be assigned under U.S. GAAP to the conversion feature and thus, the entire value of the convertible notes is classified as debt. This difference resulted in liabilities being increased by $177,778 and shareholders’ equity being decreased by $177,778.
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| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 30. | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) |
| | h) | Deferred financing costs |
U.S. GAAP requires that debt issuance costs be reported in the balance sheet as deferred charges and amortized over the term of the debt. Upon issuance, the Company reduced the carrying value of the senior secured notes by debt issuance costs. On modification of the senior secured note agreement as stated above in (f), an inception loss wrote off all deferred financing costs. No differences exist for the period ended May 31, 2011.
| | i) | Commencement of production |
Under Canadian GAAP, the Company uses specific criteria to assess the point at which an operation commences commercial production (Note 2). Under U.S. GAAP, commercial production is considered to have commenced when saleable minerals are extracted (produced) from an ore body, regardless of the level of production. However, commercial production does not commence with the removal of de minimum saleable mineral material that occurs in conjunction with the removal of overburden or waste material for the purpose of obtaining access to an ore body. For the year ended May 31, 2011, there were no Canadian/U.S. GAAP differences with respect to the determination of commercial production as the Company was in commercial production during the entire fiscal year.
Under Canadian GAAP, up until January 7, 2010, the Molejon gold mine was at a pre-commercial production phase whereas for U.S. GAAP purposes, commercial production commenced on the date on which revenue was earned from the sale of gold. For U.S. GAAP purposes, the impact of this difference was to increase revenues, cost of sales and amortization and decrease depletion for the year ended May 31, 2010 by $27,948,475, $24,275,977, $1,825,067 and $3,338,116 respectively, and increase mineral properties and net earnings for the year ended May 31, 2010 by $8,054,546, and $5,185,547, respectfully. For the year ended May 31, 2011, there were no Canadian/U.S. GAAP differences as the Company was in commercial production during the entire fiscal year.
Under Canadian GAAP share purchase warrants are accounted for as equity. Under US GAAP, as required by the Financial Accounting Standards Board (“FASB”) issued ASC Topic 815 (formerly, SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”), as amended, and EITF 07-5 “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”, share purchase warrants denominated in a currency that is not the functional currency of the Company are accounted for as a liability, with the change in fair value recorded in the statement of operations.
For the year ended May 31, 2011, under U.S. GAAP, other income was decreased by $8,420,089 arising from an increase in fair value of the warrants granted in which the exercise price denominated currency is different from the Company’s functional currency. As of May 31, 2011, the liability relating to warrants granted for which the exercise price denominated currency is different from the Company’s functional currency was $11,578,581 and the warrant account was reduced by $38,489,476 as a result of the reclassification of the warrants to liabilities pursuant to U.S. GAAP.
| | k) | Under Canadian GAAP, the financial position and results of operations of a variable interest entity are consolidated with those of the Company designated as the primary beneficiary of the entity even though the Company may not hold the controlling interest in the entity. Under ASC 810, non-controlling interests are classified as a separate component of shareholders’ equity. Under ASC 810, accumulated losses attributable to non-controlling interests are not limited to the original carrying amount, and therefore non-controlling interests could have a negative carrying amount. |
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| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (in United States Dollars) |
| Year ended May 31, 2011, May 31, 2010 and May 31, 2009 |
| |
| 30. | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) |
| | l) | Transition to International Financial Reporting Standards |
The Company will report consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) for Fiscal 2012. As such the Company will not be presenting reconciliation to US GAAP in future periods as allowed under SEC regulations.
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