The accompanying notes are an integral part of these condensed consolidated interim financial statements
Page 5
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
On October 1, 2008, the Company issued an additional 20,000 Notes under the 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 share purchase warrants attached. These Notes did not include any warrants.
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 holders of the Notes can give six months notice to cause the Company to purchase all of the Notes then outstanding at a price equal to the sum of (a) 120% of the principal amount of such Notes to be purchased and (b) accrued and unpaid interest on the principal amount of the Notes.
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 fair-value-through-profit and loss.
Under the terms of the Indenture, because the Company was not able to make certain scheduled repayments in 2010, an event of default occurred and the Notes became due on demand at the option of the Notes holders or the Trustee. During the year ended May 31, 2011, the Company entered into a Forward Gold Purchase Agreement with Deutsche Bank as is described in Note 11. As part of the Forward Gold Purchase Agreement, the Notes holders were required to enter into an inter-creditor agreement with the Company which prevents the Notes 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.
At August 31, 2011, the Notes have been adjusted to their fair value of $3,143,099 using a discount rate of 10.18% (at May 31, 2011, the Notes were adjusted to their fair 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.
Convertible secured notes
On March 25, 2009, the Company issued $40 million of convertible secured notes (“Convertible Notes”). The Convertible Notes bear interest at an annual rate of 15%, of which the first year is prepaid. The Convertible Notes mature 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 $1,000 is convertible into one common share at CAD$ 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 fair-value-through-profit and loss.
Under the terms of the Indenture, because the Company was not able to make certain scheduled repayments in 2010, an event of default occurred and the Convertible Notes became due on demand at the option of the Convertible Notes holders or the Trustee. During the year ended May 31, 2011, the Company entered into a Forward Gold Purchase Agreement with Deutsche Bank as is described in Note 11. As part of the Forward Gold Purchase Agreement, the Convertible Notes holders were required to enter into an inter-creditor agreement with the Company which prevents the Convertible Notes 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.
At August 31, 2011, the Convertible Notes have been adjusted to their fair value of $3,993,806 using a discount rate of 10.18% (at May 31, 2011, the Convertible Notes were adjusted to their fair value of $3,970,105 using a discount rate of 10.18%).
The Convertible Notes are guaranteed, on a joint and several basis, by all of the assets of the Company and of the Company’s subsidiaries. The security for the Convertible Notes is subordinated to the security granted under the Forward Gold Purchase Agreement with Deutsche Bank.
Page 17
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
| | | | | | | | | | |
| | | | August 31, 2011 | | | May 31, 2011 | | | June 1, 2010 | |
| | | | ($) | | | ($) | | | ($) | |
| | Community support obligation | | 7,983,131 | | | 8,128,089 | | | 7,635,659 | |
| | Deferred services and materials | | - | | | - | | | 4,002,438 | |
| | | | 7,983,131 | | | 8,128,089 | | | 11,638,097 | |
| | Less: current portion | | | | | | | | | |
| | Community support obligation | | (1,347,176 | ) | | (1,424,290 | ) | | (1,182,378 | ) |
| | Deferred services and materials | | - | | | - | | | (4,002,438 | ) |
| | | | (1,347,176 | ) | | (1,424,290 | ) | | (5,184,816 | ) |
| | | | | | | | | | | |
| | | | 6,635,955 | | | 6,703,799 | | | 6,453,281 | |
Community support obligation
Upon adoption of IFRS at June 1, 2010, the Company has determined it has a constructive obligation with respect to future community support payments. The Company has recognized a liability for the present value of the estimated future payments and will recognize accretion expense due to a passage of time.
In September 2010, the Company entered into a Forward Gold Purchase Agreement (“the Agreement”) with Deutsche Bank, AG (“Deutsche Bank”), in an amount of $45 million. Under the terms of the Agreement, the Company is required to deliver 66,650 ounces of gold commencing November 2010 and ending September 2015. Deutsche Bank is considered a major customer.
For any shortfall in the number of gold ounces the Company is required to deliver, the Company is required to pay the amount in US dollars equal to the shortfall in gold ounces required to be delivered multiplied by the gold price on the scheduled delivery date. Interest will be charged on the shortfall at the LIBOR rate plus 2% per annum (based on 360 days/year) and is due on demand. However, under the Agreement the Company may deliver the monthly shortfall in gold, plus interest, if it can do so within 30 days of the monthly delivery date. The Company is only allowed to exercise this right no more frequently than twice in total during the term of the Agreement and no more frequently than once during any six month period.
The following table summarizes the above noted delivery requirements on an annual basis:
| | | | | | | |
| | | | | | | | |
| | Delivery obligations for fiscal years 2012 to 2016 | | Total ounces of gold | | | Total value of gold | |
| | | | | | | ($) | |
| | | | | | | | |
| | Total delivery requirements remaining for fiscal year 2012 | | 10,365 | | | 6,998,220 | |
| | Total delivery requirements for fiscal year 2013 | | 17,820 | | | 12,031,683 | |
| | Total delivery requirements for fiscal year 2014 | | 17,235 | | | 11,636,693 | |
| | Total delivery requirements for fiscal year 2015 | | 10,800 | | | 7,291,922 | |
| | Total delivery requirements for fiscal year 2016 | | 3,600 | | | 2,430,641 | |
| | | | 59,820 | | | 40,389,159 | |
| | Less: current portion | | (14,820 | ) | | (10,006,002 | ) |
| | | | | | | | |
| | | | 45,000 | | | 30,383,157 | |
Should the gold price be in excess of $875 per ounce, the Company will receive from Deutsche Bank, an additional gold 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.
Page 18
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
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.
As of August 31, 2011, the Company had delivered 6,830 ounces under the terms of the Agreement and had an obligation to deliver 59,820 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 August 31, 2011, $10,006,002 and $30,383,157 represent the fair value of the current and long-term remaining ounces, respectively, to be delivered under the Agreement.
During the three months ended August 31, 2011, the Company recognized $2,247,750 of the deferred income in the consolidated statement of operations and comprehensive gain.
| |
| 12. | PROVISION FOR CLOSURE AND RECLAMATION |
The Company’s provision for closure and reclamation relates to site restoration and clean-up costs for its operating Molejon mine located in Panama. The present value of the obligations relating to the operating mine is currently estimated at $10,276,332 at August 31, 2011, which reflects payments that are expected to be made during fiscal 2016 and 2017 (the present value at May 31, 2011 was $9,630,851, June 1, 2010 - $4,816,121).
The undiscounted value of this liability, the cash flow required to settle this obligation, is approximately $10,218,214 at August 31, 2011 (May 31, 2011 - $10,218,214; June 1, 2010 - $7,312,356). An inflation rate assumption of 1.91% has been used to estimate future costs (2010 – 1.69 %). A discount rate of 2.74% (2010 – 2.71%) was used in determining the initial present value. A discount rate of 1.90% was used in determining the present value at August 31, 2011. Accretion expense of $65,396 has been charged to the consolidated statement of operations and comprehensive income for the three months ended August 31, 2011 (three months ended August 31, 2010 - $33,066) to reflect an increase in the carrying amount of the obligations.
A reconciliation of the provision for closure and reclamation is as follows:
| | | | |
| | | | ($) | |
| | Balance at June 1, 2010 | | 4,816,121 | |
| | Accretion expense included in finance costs | | 133,632 | |
| | Revision in estimates and liabilities incurred | | 4,681,098 | |
| | | | | |
| | Balance at May 31, 2011 | | 9,630,851 | |
| | Accretion expense included in finance costs | | 65,396 | |
| | Revision in estimates and liabilities incurred | | 580,085 | |
| | | | | |
| | Balance at August 31, 2011 | | 10,276,332 | |
| |
| 13. | COMMON SHARES, SHARE OPTIONS AND SHARE PURCHASE WARRANTS |
Common Shares
At August 31, 2011, the Company had unlimited authorized common shares without par value and unlimited authorized preferred shares without par value. The Company’s Board of Directors assign the rights and privileges to each series of preference shares upon issue. At August 31, 2011, there were 176,479,501 common shares issued and outstanding (May 31, 2011 – 176,429,501, June 1, 2010 – 125,281,951). There are no preferred shares issued and outstanding. Refer to the consolidated statements of changes in equity for movement in share capital.
Page 19
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
Share Options
The Company has one incentive share option plan which allows for up to 12,500,000 share options with a maximum exercise period of 10 years, to be granted to employees, officers, directors and non-employee consultants. The aggregate number of common shares reserved for issuance to any person may not exceed 5% of the number of outstanding common shares.
The Company granted no share options during the three months ended August 31, 2011.
A summary of share option transactions is as follows:
| | | |
| | | | Weighted |
| | | | Average |
| | | | Exercise |
| | | Number | Price |
| | | of Shares | (CAD$/option) |
| | Outstanding at June 1, 2010 | 8,224,370 | 0.75 |
| | Granted | 1,295,000 | 0.91 |
| | Exercised | (593,750) | 0.38 |
| | Expired | (786,000) | 0.54 |
| | Forfeited | (743,350) | 0.50 |
| | Outstanding at May 31, 2011 | 7,396,270 | 0.74 |
| | Exercised | (50,000) | 0.23 |
| | Expired | (118,800) | 0.26 |
| | | | |
| | Outstanding at August 31, 2011 | 7,227,470 | 0.75 |
| | Exercisable at May 31, 2011 | 5,870,645 | 0.74 |
| | Exercisable at August 31, 2011 | 6,240,595 | 0.74 |
The following table summarizes information about share options outstanding at August 31, 2011:
| | | |
| | Number of Share | Exercise Price | |
| | Options Outstanding | (CAD$) | Expiry Date |
| | | | |
| | 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 |
| | 2,700,000 | 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 |
| | | | |
| | 7,227,470 | | |
Page 20
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
The exercise price of share options is equal to the five day volume weighted average price prior to the date of grant of the Company’s publicly traded shares on the TSX. The expected volatility assumption is based on the historical volatility of Petaquilla’s Canadian dollar share price over a period equal to the options’ expected life. The expected dividend yield assumption is based on historical and future expectations of dividends declared. The risk-free interest rate assumption is based on the yield curve on Canadian government zero-coupon bonds with a remaining term equal to the options’ expected life.
The fair value of the options is expensed over the vesting period. Options granted with a graded vesting schedule are accounted as separate grants with different vesting periods and fair values. Share-based payments of $130,310 were recognized during the three months ended August 31, 2011 with a corresponding increase to share-based payments reserve (three months ended August 31, 2010 - $171,698).
Share purchase warrants
Upon adoption of IFRS at June 1, 2010, the Company recorded an adjustment as a result of accounting for share purchase warrants issued using the principles of IAS 39,Financial Instruments: Recognition and Measurement(Note 24(f)). As the exercise price of the share purchase warrants is fixed in Canadian dollars and the functional currency of the Company is the US dollar, the warrants are considered a derivative, as a variable amount of cash in the Company’s functional currency will be received on exercise. At August 31, 2011 the fair value of share purchase warrants issued and outstanding with Canadian dollar exercise prices was $11,559,655 (May 31, 2011 - $11,064,020, June 1, 2010 $5,030,904). The share purchase warrants are re-measured at fair value at each statement of financial position date with the change in fair value recorded in earnings during the period of change. The change in fair value for the three months ended August 31, 2011 was a loss of $495,635 (year ended May 31, 2011 - loss of $107,353; period from initial recognition to the transition date of June 1, 2010 – gain of $6,789). The fair value of share purchase warrants is reclassified to shareholders’ equity upon exercise.
Brokers’ warrants and Finders’ warrants are considered share-based payment transactions and as such they are accounted for under IFRS 2,Share-based Payments, which considers them to be equity and as such they are initially fair valued at the date of issuance and are not re-measured at each reporting period. The original fair value assigned to the warrants is transferred to common shares on exercise.
There were no issuances of warrants during the three months ended August 31, 2011 or 2010.
As at August 31, 2011, share purchase warrant transactions are summarized as follows:
| | | |
| | | | Weighted |
| | | | Average |
| | | Number | Exercise |
| | | of Shares | Price (CAD$) |
| | Balance at June 1, 2010 | 34,888,447 | 0.90 |
| | Issued | 32,000,000 | 1.45 |
| | Exercised | (18,553,800) | 0.65 |
| | Balance at May 31, 2011 | 48,334,647 | 1.36 |
| | | | |
| | Balance at August 31, 2011 | 48,334,647 | 1.36 |
Page 21
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
At August 31, 2011, share purchase warrants were outstanding and exercisable as follows:
| | | |
| | Number of Warrants | Exercise | |
| | Outstanding | Price (CAD$) | Expiry Date |
| | 250,000 | 1.54 | October 4, 2011 |
| | 9,174,605 | 1.54 | October 17, 2011 |
| | 2,100,042 | 0.85 | May 21, 2012 |
| | 3,964,000 | 0.65 | May 21, 2013 |
| | 846,000 | 0.65 | June 4, 2013 |
| | 23,399,402 | 1.45 | December 30, 2013 |
| | 6,100,598 | 1.45 | January 7, 2014 |
| | 2,500,000 | 1.45 | January 26, 2014 |
| | | | |
| | 48,334,647 | | |
Finder’s stock options
As at August 31, 2011, the finder’s stock option transactions are summarized as follows:
| | | |
| | | Number | Exercise |
| | | of Shares | Price (CAD$) |
| | Balance at June 1, 2010 | - | - |
| | Issued | 1,568,748 | 1.00 |
| | Balance at May 31, 2011 | 1,568,748 | 1.00 |
| | | | |
| | Balance at August 31, 2011 | 1,568,748 | 1.00 |
At August 31, 2011, finder’s stock options were outstanding as follows:
| | | |
| | Number of Finders Stock Options | Exercise | |
| | Outstanding | Price (CAD$) | Expiry Date |
| | 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’s stock 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 shares on the Toronto Stock Exchange, or any other stock exchange on which the Company’s common shares 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 finder’s stock options issued was $1,029,331. The amount was determined using the Black-Scholes option pricing model with weighted average assumptions of: share price of CAD$1.08, expected life of 3 years, volatility of 93%, a risk-free interest rate of 1.92% and zero dividends.
Page 22
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
| | | | | | | |
| | | | Three months | | | Three months | |
| | | | ended | | | ended | |
| | | | August 31, | | | August 31, | |
| | | | 2011 | | | 2010 | |
| | | | ($) | | | ($) | |
| | | | | | | | |
| | Interest income | | 43,756 | | | 5,329 | |
| | Foreign exchange loss | | (18,860 | ) | | (26,637 | ) |
| | Accretion of closure and reclamation provision | | (65,396 | ) | | (33,066 | ) |
| | Accretion of community support obligation | | (40,711 | ) | | (51,738 | ) |
| Interest on long-term debt and finance lease obligations | | (79,707 | ) | | (75,666 | ) |
| | | | | | | | |
| | | | (160,918 | ) | | (181,778 | ) |
| |
| 15. | NON-OPERATING EXPENSES |
| | | | | | | |
| | | | Three months | | | Three months | |
| | | | ended | | | ended | |
| | | | August 31, | | | August 31, | |
| | | | 2011 | | | 2010 | |
| | | | ($) | | | ($) | |
| | | | | | | | |
| | Mark-to-market loss on share purchase warrants (Note 13) | | (495,635 | ) | | 6,789 | |
| | Loss from equity investment (Note 7) | | (431,130 | ) | | 104,937 | |
| Mark-to-market gain (loss) on secured notes and convertible secured notes | | 34,209 | | | (2,918,360 | ) |
| | | | | | | | |
| | | | (892,556 | ) | | (2,806,634 | ) |
Page 23
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
Earnings (loss) per share, calculated on a basic and diluted basis, is as follows:
| | | | |
| | August 31, | August 31, | |
| | 2011 | 2010 | |
| | ($) | ($) | |
| Earnings (loss) per share | | | |
| Basic | 0.03 | (0.05 | ) |
| Diluted | 0.03 | (0.05 | ) |
| | | | | |
| Net income (loss) | 4,969,398 | (5,737,909 | ) |
| Net income (loss) available (attributable) to common shareholders – basic | 5,189,276 | (5,737,909 | ) |
| Net income (loss) available (attributable) to common shareholders - diluted | 5,189,276 | (5,737,909 | ) |
| | | | |
| Weighted average number of shares outstanding | | | |
| Weighted average number of shares outstanding - basic | 176,437,110 | 125,294,994 | |
| Dilutive securities: | | | |
| Share options | 2,030,436 | - | |
| Warrants | 217,313 | - | |
| Weighted average number of shares outstanding - diluted | 178,684,859 | 125,294,994 | |
For the three months ended August 31, 2010, exercisable common equivalent shares totaling 58,628,442 (consisting of share issuable on the exercise of stock options, share purchase warrants, finder’s stock options, and shares issuable on the conversion of convertible secured notes) have been excluded from the calculation of diluted loss per share because the effect is anti-dilutive.
| |
| 17. | RELATED PARTY TRANSACTIONS |
Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated upon consolidation and are not disclosed in this note.
The Company incurred the following fees and expenses in the normal course of operations in connection with companies controlled by key management, directors or officers during the three months ended August 31, 2011 and 2010. Related party transactions have been measured at the exchange amount which is the amount of consideration established and agreed to by the transacting parties.
The Company paid fees of $280,975 to a company controlled by the Chairman (three months ended August 31, 2010 $140,991) for compensation related matters.
The Company paid for goods and services provided to the Molejon mine of $92,881 (three months ended August 31, 2010 $50,196) to companies controlled by the Chairman.
The Company paid fees of $8,000 for services (three months ended August 31, 2010 $Nil) to a company controlled by a Director.
The Company paid fees of $Nil for services (three months ended August 31, 2010 $915,486) to a company related to an officer.
At August 31, 2011, excluding related party Notes and related party Convertible Notes (Note 9), $104,050 was owed to related parties (May 31, 2011 $126,858).
Note 7 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.
Page 24
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
(a) Fair values of financial instruments
The fair value of the Company’s current assets and liabilities including cash and cash equivalents, restricted cash, receivables 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 obligations under finance 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 August 31, 2011 (May 31, 2011 – 10.18%, June 1, 2010 – 12.0%) and estimated interest payment date of September 15, 2011.
The categories of fair value hierarchy that reflect the significance of inputs used in making fair value measurements are 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 August 31, 2011, the levels in the fair value hierarchy into which the Company’s financial assets and liabilities measured and recognized on the statement of financial position at fair value are categorized as follows:
| | | | |
| | | | |
| | Level 1 | Level 2 | Level 3 |
| | ($) | ($) | ($) |
| Secured notes | - | - | 3,143,099 |
| | Convertible secured notes | - | - | 3,993,806 |
| Share purchase warrants | - | 11,559,655 | - |
(b) Embedded derivatives
The Secured Notes and the Convertible Secured Notes included embedded derivatives for call and put options which cannot be separately valued and as such the entire agreements are considered to be classified as at fair value through profit and loss and adjusted to their fair value at the end of each reporting period.
(c) Financial instrument risk exposure
The Company’s financial instruments are exposed to certain financial risks, including credit risk, liquidity risk, currency risk, interest rate risk and price risk. The Company thoroughly examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. Where material, these risks are reviewed and monitored by the Board of Directors. The Company does not acquire or issue derivative financial instruments for trading or speculative purposes.
The following describes the types of risks that the Company is exposed to and its objectives and policies for managing those risk exposures:
Page 25
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
Credit risk
Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. Credit risk is primarily associated with accounts receivable; however, it also arises on cash and cash equivalents and restricted cash. 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. Sales during the period were to two customers but there is not an economic dependence risk as the metals produced by the Company can be sold to other potential customers. 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. The Company does not have a significant concentration of credit risk and overall the Company’s credit risk has not changed significantly from the prior year.
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, secured debt, convertible 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.
In the past, the Company has been unable to meet all of its obligations with respect to scheduled repayments of principal, premium and interest on its Notes and interest on its Convertible Notes. Total payments of $10,272,950 were due in March and May 2010. Of this total, the Company paid $1,200,000. Under the terms of the Indenture an event of default occurred and the Notes and Convertible Notes became due on demand at the option of the Note holders and Convertible Note holders or the Trustee.
During the quarter ended November 30, 2010, the Company paid $39,950,000 in principal, premium and interest on the Notes and Convertible Notes from the proceeds of a gold forward purchase agreement. As part of the gold forward purchase agreement, the Note holders and Convertible Note holders were required to enter into an inter-creditor agreement with the Company which prevents the Note holders and 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 (See Note 11). The summary of all of the Company’s future commitments is disclosed in Note 20.
At August 31, 2011, Petaquilla held cash and cash equivalents of $3,277,873 (May 31, 2011 $5,712,792, June 1, 2010 - $4,625,649) and had a working capital deficit of $27,136,271 (May 31, 2011 - $24,218,777, June 1, 2010 -$89,616,869).
Market risk
(i) Currency risk
Currency risk is the risk that the fair values or future cash flows of the Company’s financial instruments will fluctuate because of changes in foreign exchange rates. 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.
During the three months ended August 31, 2011, the Company recognized a loss of $18,860 on foreign exchange (three months ended August 31, 2010 loss of $26,637).
(ii) Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of the Company will fluctuate because of to changes in market interest rates. The Company is exposed to interest rate risk on its outstanding borrowings and cash and cash equivalents and restricted cash. Other current financial assets and liabilities are not exposed to interest rate risk because they are non-interest bearing. The operating credit line facility, bank loan financing for the payment of advances to suppliers, capital leases, and long-term debt bear interest at a fixed rate and are also not exposed to interest rate risk.
Page 26
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
(iii) Price risk
Price risk is the risk that the fair value or future cash flows of the Company’s financial instruments will fluctuate because of changes in market prices. The largest risk relates to metal prices for gold and silver. Gold and silver prices are affected by numerous factors such as the global and regional supply and demand, interest rates, exchange rates, inflation or deflation, fluctuations in the value of the US dollar and foreign currencies, and the political and economic conditions of major producers throughout the world.
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 9), leases (Note 9), Secured Notes (Note 9), Convertible Secured Notes (Note 9), advances from Deutsche Bank in connection with future production of gold (Note 11) and equity attributable to common shareholders, comprised of issued capital, share-based payments reserve 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, secured debt, convertible secured debt and leasing arrangements to bring its mine into commercial production and to continue to explore other projects develop the project and may require additional funding 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.
In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The following table summarizes the remaining contractual maturities of the Company’s financial liabilities and operating and capital commitments:
| | | | | | |
| | Less than 1 | | | | More than 5 |
| | year | 2 years | 3 years | 4-5 years | years |
| | ($) | ($) | ($) | ($) | ($) |
| Office lease | 95,500 | 48,700 | 32,700 | - | - |
| Obligation under financing lease | 1,434,336 | 1,710,413 | 1,710,413 | 2,893,493 | - |
| Secured notes | 451,668 | 455,411 | 455,411 | 3,679,473 | - |
| | Convertible secured notes | 573,916 | 578,672 | 578,672 | 4,675,355 | - |
| Long-term debt | 442,890 | 461,413 | 452,861 | 812,912 | - |
| Fundacion Petaquilla(1) | 1,440,000 | 1,440,000 | 1,440,000 | 1,080,000 | - |
| Community support obligation(1) | - | - | - | 360,000 | 2,520,000 |
| Forward gold purchase agreement(2) | 10,006,002 | 12,031,508 | 10,451,613 | 7,900,036 | - |
| Closure and reclamation obligation | - | - | - | - | 10,276,332 |
| | | | | | |
| | 14,444,312 | 16,726,117 | 15,121,670 | 21,401,269 | 12,796,332 |
| | (1) | The Company has committed funding of $120,000 per month to Fundacion Petaquilla, an organization which promotes a sustainable development culture and administers social programs in the area around the Molejon property, for a contractual term ending in fiscal 2016. Thereafter, the Company has committed to funding a similar amount for the life of the Molejon mine. |
| (2) | As described in Note 11, the Company has an obligation to the Deutsche Bank, AG for a certain amount of ounces of gold in the future. |
Page 27
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
| |
| 21. | SUPPLEMENTAL CASH FLOW INFORMATION |
| | | | | |
| | Three months | | Three months | |
| | ended | | ended | |
| | August 31, | | August 31, | |
| | 2011 | | 2010 | |
| | ($) | | ($) | |
| Non-cash investing and financing activities: | | | | |
| | Share-based payments reserve - options exercised | 16,116 | | 57,884 | |
| Asset retirement obligation | (580,085 | ) | - | |
| Mineral property, plant and equipment financed through payables | 3,457,027 | | - | |
| Mineral property, plant and equipment acquired through credit line facility and capital leases | 2,648,749 | | - | |
| Depreciation allocated to ending inventory | 81,366 | | 57,330 | |
| Depletion allocated to ending inventory | 278,360 | | 178,613 | |
| | | | | |
| | | | | |
| | Three months | | Three months | |
| | ended | | ended | |
| | August 31, | | August 31, | |
| | 2011 | | 2010 | |
| | ($) | | ($) | |
| Change in non-cash working capital items: | | | | |
| | Increase in receivables, prepaids and other | (979,259 | ) | (978,991 | ) |
| (Increase) Decrease in inventory | (3,190,440 | ) | 65,127 | |
| Increase in accounts payable and accrued liabilities | 5,457,378 | | 3,123,213 | |
| Decrease in deferred revenue | (2,247,750 | ) | - | |
| Decrease in other liabilities | (360,000 | ) | (300,000 | ) |
| | | | | |
| Net change in non-cash working capital | (1,320,071 | ) | 1,909,349 | |
Cash and cash equivalents of $3,277,873 at August 31, 2011 ($5,712,792 at May 31, 2011, and $4,625,649 at June 1, 2010) represent only cash.
| | a) | 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 period would have been an increase in cost of sales of $542,354 should the legislation be enacted and applied retroactively. |
| | | |
| b) | 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 trial in fiscal 2013. The Company believes that the claim is without merit and has not recorded a liability as the outcome is uncertain. |
| | | |
| c) | 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. |
Page 28
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
| | a) | On September 1, 2011 in connection with the acquisition of Iberian Resources Corp., the Company issued 44,635,225 common shares of the Company, 1,511,248 warrants to purchase 1,640,419 common shares at prices ranging from US$0.14 to US$0.60 and options to purchase 3,357,313 common shares at prices ranging from CAD$0.10 to US$0.60. |
| | | |
| b) | On September 1, 2011 Banco Bilbao Vizcaya Argentaria (Panama) S.A. ("BBVA") approved a Credit Line Facility in the amount of $6.9 million. This facility will be used for the acquisition of heavy equipment by Petaquilla Gold S.A. in connection with the expansion of the production capacity at its Molejon Gold Mine. This credit facility will accrue interest at LIBOR rate plus spread of 3.75%. The mentioned equipment will serve as collateral throughout the amortization period (four years) and will be registered with the Public Registry of the Republic of Panama. |
| | | |
| c) | During October 2011, Panama Desarrollo de Infraestructuras, S.A ("PDI") entered effectively into two capital lease arrangements with Caterpillar Credito, S.A. de C.V. Sucursal Panama ("Caterpillar Financial") for the purchase of certain mining equipment in order to expand its production capacity at Molejon Gold Mine. These two capital leases amount to a total of $2.6 million and will accrue interest at 6% per annum during the period of five years to maturity. |
| | | |
| d) | After August 31, 2011 Petaquilla Gold S.A. entered into a working capital credit facility with Lafise Bank of Panama in the amount up to $2 million. This credit facility will accrue 7.75% per annum and the term of each loan within the credit facility will be 180 days. |
| | | |
| e) | Subsequent to the end of the period, 50,000 stock options were exercised for total proceeds of CAD$5,000. |
| | | |
| f) | Subsequent to the end of the period, 272,976 warrants were exercised for total proceeds of $65,050. |
| | | |
| g) | Subsequent to the end of the period, 9,424,605 warrants expired unexercised. |
| | | |
| h) | Subsequent to the end of the period, a total of 220,000 common shares were repurchased by the Company, at share prices ranging from CAD$0.76 to CAD$0.90. |
| |
| 24. | TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS |
Transition to International Financial Reporting Standards
As stated in Note 2, these are the Company’s first consolidated interim financial statements prepared in accordance with IAS 34. The accounting policies described in Note 2 have been applied in preparing the condensed consolidated interim financial statements for the three months ended August 31, 2011, the comparative information presented in these interim financial statements for the three months ended August 31, 2010 and in the preparation of consolidated statements of financial position as at June 1, 2010 and May 31, 2011. June 1, 2010 was the Company’s date of transition to IFRS (the “date of transition”).
In preparing its consolidated statements of financial position in accordance with IFRS, the Company has adjusted amounts previously reported in financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from previous Canadian GAAP to IFRS has affected the Company’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.
Transition date exemptions
IFRS 1 sets forth guidance for the initial adoption of IFRS. Under IFRS 1, the standards are applied retrospectively at the transition date with all adjustments to assets and liabilities recognized in deficit, unless certain exemptions are applied.
Page 29
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
The Company has applied the following exemptions to its opening statement of financial position as at June 1, 2010:
| | 1. | Borrowing costs –IAS 23,Borrowing Costs(“IAS 23”) requires the capitalization of borrowing costs directly attributable to the acquisition, construction or production of qualifying assets. For example, certain items of plant and equipment that take a substantial time to complete would represent a qualifying asset. IFRS 1 provides an exemption whereby the Company may apply requirements of IAS 23 prospectively from the transition date. The Company has taken this exemption and elected to commence capitalization of borrowing costs for qualifying assets on June 1, 2010. Borrowing costs expensed prior to June 1, 2010 under Canadian GAAP were not capitalized. |
| | | |
| 2. | Share-based payment transactions –This exemption permits the first-time adopter to not apply IFRS 2, Share-based Payments (“IFRS 2”) to equity instruments that vested before the date of transition or any unvested equity instruments that were granted prior to November 7, 2002. The Company has elected not to apply IFRS 2 to awards that vested prior to June 1, 2010. The adjustment to equity arising from the application of IFRS 2 to awards not vested as at the date of transition is described in Note 24 (g) below. |
| | | |
| 3. | Leases –IFRS provides the option to apply the transitional provisions in IFRIC 4 ‘Determining whether an Arrangement contains a Lease’. The Company may determine whether an arrangement existing at the Transition Date contains a lease on the basis of facts and circumstances existing at that date. The Company has applied this exemption when retrospectively applying IAS 17‘Leases’. |
| | 4. | Decommissioning liabilities included in the cost of mineral properties –Under IFRIC 1,Changes in Existing Decommissioning, Restoration and Similar Liabilities(“IFRIC 1”), certain changes in a decommissioning, restoration or similar liability are added to or deducted from the cost of the asset to which the liability relates. This exemption provides the option to not apply these requirements to changes in such liabilities that occurred before the date of transition and instead re-measure them in accordance with IAS 37,Provisions, Contingent Liabilities and Contingent Assets, and adjust the historical cost and accumulated depreciation of the related assets to reflect the adoption of IFRIC 1 at the date of transition. The Company has elected to apply this exemption. The adjustment to assets and liabilities arising from the application of this exemption as at the date of transition are described in Note 24 (b) and (c) below. |
| | 5. | Cumulative Translation Adjustment –IAS 21,The Effects of Changes in Foreign Exchange Rates(“IAS 21”) requires an entity to recognise some translation differences in other comprehensive income and accumulate these in a separate component of equity. However, the Company can elect under IFRS 1 to deem the cumulative translation differences for all foreign operations to be zero at the date of transition to IFRS. The Company has elected to apply the exemption and has deemed all cumulative translation differences to be zero at Transition Date. |
IFRS 1 also outlines specific guidelines that a first-time adopter must adhere to under certain circumstances. In accordance with IFRS 1, an entity’s estimates under IFRS at the date of transition must be consistent with the estimates made for the same date under previous GAAP, unless there is new objective evidence that the estimates were in error. The Company’s IFRS estimates as of June 1, 2010, August 31, 2010 and May 31, 2011 are consistent with its Canadian GAAP estimates for the same dates.
Reconciliation of equity and comprehensive income as previously reported under Canadian GAAP to IFRS
IFRS 1 requires an entity to provide a reconciliation of equity, income (loss) and comprehensive income (loss) for comparative periods reported under previous GAAP. The following tables and notes provide such reconciliation and provide details on the impact of adoption of IFRS on amounts previously reported by the Company under Canadian GAAP.
Page 30
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated statements of financial position | | | | | | Effect of | | | | | | | | | Effect of | | | | | | | | | Effect of | | | | |
| | | | Canadian | | | Transition to | | | | | | Canadian | | | Transition to | | | | | | Canadian | | | Transition to | | | | |
| | | | GAAP | | | IFRS | | | IFRS | | | GAAP | | | IFRS | | | IFRS | | | GAAP | | | IFRS | | | IFRS | |
| | Note | | | | | June 1, 2010 | | | | | | | | | August 31, 2010 | | | | | | | | | May 31, 2011 | | | | |
| Current Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | 4,625,649 | | | - | | | 4,625,649 | | | 1,806,708 | | | - | | | 1,806,708 | | | 5,712,792 | | | - | | | 5,712,792 | |
| Short-term investments | | | - | | | - | | | - | | | - | | | - | | | - | | | 200,000 | | | - | | | 200,000 | |
| Receivables, prepaids, other | | | 806,478 | | | - | | | 806,478 | | | 1,785,469 | | | - | | | 1,785,469 | | | 1,599,301 | | | - | | | 1,599,301 | |
| Inventories | (a) | | 3,634,715 | | | - | | | 3,634,715 | | | 2,664,179 | | | 18,866 | | | 2,683,045 | | | 11,613,321 | | | 44,355 | | | 11,657,676 | |
| Total Current Assets | | | 9,066,842 | | | - | | | 9,066,842 | | | 6,256,356 | | | 18,866 | | | 6,275,222 | | | 19,125,414 | | | 44,355 | | | 19,169,769 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments | | | - | | | - | | | - | | | - | | | - | | | - | | | 2,400,000 | | | - | | | 2,400,000 | |
| Stockpile inventory | | | 1,107,316 | | | - | | | 1,107,316 | | | 1,801,489 | | | - | | | 1,801,489 | | | 2,228,405 | | | - | | | 2,228,405 | |
| Other assets | | | 1,383,169 | | | - | | | 1,383,169 | | | 2,262,964 | | | - | | | 2,262,964 | | | 10,381,872 | | | - | | | 10,381,872 | |
| Mineral property, plant and equipment | (a),(b),(h), (i) | | 68,704,868 | | | 9,996,007 | | | 78,700,875 | | | 69,572,565 | | | 9,737,039 | | | 79,309,604 | | | 81,383,585 | | | 13,169,784 | | | 94,553,369 | |
| Total Assets | | | 80,262,195 | | | 9,996,007 | | | 90,258,202 | | | 79,893,374 | | | 9,755,905 | | | 89,649,279 | | | 115,519,276 | | | 13,214,139 | | | 128,733,415 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts payable and accrued liabilities | | | 17,586,683 | | | - | | | 17,586,683 | | | 20,709,895 | | | - | | | 20,709,895 | | | 30,318,558 | | | - | | | 30,318,558 | |
| Current portion of long-term debt | | | 75,656,119 | | | 256,093 | | | 75,912,212 | | | 9,557,878 | | | - | | | 9,557,878 | | | 2,399,261 | | | - | | | 2,399,261 | |
| Current portion of other liabilities | (a), (d) | | 3,153,394 | | | 2,031,422 | | | 5,184,816 | | | 3,153,394 | | | 2,038,311 | | | 5,191,705 | | | - | | | 1,424,290 | | | 1,424,290 | |
| Current portion of deferred revenue | | | - | | | - | | | - | | | - | | | - | | | - | | | 9,246,437 | | | - | | | 9,246,437 | |
| Total Current Liabilities | | | 96,396,196 | | | 2,287,515 | | | 98,683,711 | | | 33,421,167 | | | 2,038,311 | | | 35,459,478 | | | 41,964,256 | | | 1,424,290 | | | 43,388,546 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-Current Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long term debt | (e) | | 520,464 | | | - | | | 520,464 | | | 68,904,949 | | | 3,980 | | | 68,908,929 | | | 12,290,539 | | | 11 | | | 12,290,550 | |
| Accounts payable | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,866,667 | | | - | | | 1,866,667 | |
| Other liabilities | (d) | | - | | | 6,453,281 | | | 6,453,281 | | | - | | | 6,198,131 | | | 6,198,131 | | | - | | | 6,703,799 | | | 6,703,799 | |
| Share purchase warrants | (f) | | - | | | 5,030,904 | | | 5,030,904 | | | - | | | 5,024,114 | | | 5,024,114 | | | - | | | 11,064,020 | | | 11,064,020 | |
| Deferred revenue | | | - | | | - | | | - | | | - | | | - | | | - | | | 33,390,472 | | | - | | | 33,390,472 | |
| Provision for closure and reclamation | (b), (c) | | 4,698,650 | | | 117,471 | | | 4,816,121 | | | 4,788,512 | | | 60,675 | | | 4,849,187 | | | 5,687,236 | | | 3,943,615 | | | 9,630,851 | |
| Total Liabilities | | | 101,615,310 | | | 13,889,171 | | | 115,504,481 | | | 107,114,628 | | | 13,325,211 | | | 120,439,839 | | | 95,199,170 | | | 23,135,735 | | | 118,334,905 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-controlling interests | (j) | | - | | | - | | | - | | | 104,937 | | | (104,937 | ) | | - | | | 2,507,156 | | | (2,507,156 | ) | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders' Equity (Deficiency) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity attributed to shareholders of the Company | (k) | | (21,353,115 | ) | | (3,893,164 | ) | | (25,246,279 | ) | | (27,326,191 | ) | | (3,464,369 | ) | | (30,790,560 | ) | | 17,812,950 | | | (9,921,596 | ) | | 7,891,354 | |
| Equity attributed to non-controlling interests | (k) | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 2,507,156 | | | 2,507,156 | |
| | | | (21,353,115 | ) | | (3,893,164 | ) | | (25,246,279 | ) | | (27,326,191 | ) | | (3,464,369 | ) | | (30,790,560 | ) | | 17,812,950 | | | (7,414,440 | ) | | 10,398,510 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Liabilities and Shareholders' Equity | | | 80,262,195 | | | 9,996,007 | | | 90,258,202 | | | 79,893,374 | | | 9,755,905 | | | 89,649,279 | | | 115,519,276 | | | 13,214,139 | | | 128,733,415 | |
Page 31
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
| | | | | | | | | | | | | | | | | | | |
| Consolidated statements of operations and | | | | | | Effect of | | | | | | | | | Effect of | | | | |
| comprehensive loss | | | Canadian | | | Transition to | | | | | | Canadian | | | Transition to | | | | |
| | | | GAAP | | | IFRS | | | IFRS | | | GAAP | | | IFRS | | | IFRS | |
| | | | | | | Three months ended | | | | | | | | | Year ended | | | | |
| | Note | | | | | August 31, 2010 | | | | | | | | | May 31, 2011 | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Revenues | | | 14,728,011 | | | - | | | 14,728,011 | | | 71,708,685 | | | - | | | 71,708,685 | |
| Cost of operations | | | | | | | | | | | | | | | | | | | |
Production costs | | | (10,076,688 | ) | | - | | | (10,076,688 | ) | | (39,157,086 | ) | | - | | | (39,157,086 | ) |
Depreciation and depletion | (a), (c) | | (2,553,404 | ) | | (262,454 | ) | | (2,815,858 | ) | | (11,335,717 | ) | | (1,174,629 | ) | | (12,510,346 | ) |
| | | | 2,097,919 | | | (262,454 | ) | | 1,835,465 | | | 21,215,882 | | | (1,174,629 | ) | | 20,041,253 | |
| Expenses | | | | | | | | | | | | | | | | | | | |
| General and administrative | (c) | | 2,067,186 | | | (85,584 | ) | | 1,981,602 | | | 10,430,659 | | | (342,476 | ) | | 10,088,183 | |
| Donations and community relations | (d) | | 330,392 | | | (300,000 | ) | | 30,392 | | | 1,411,440 | | | 295,750 | | | 1,707,190 | |
| Exploration costs | | | 2,324,971 | | | - | | | 2,324,971 | | | 9,269,306 | | | - | | | 9,269,306 | |
| Share-based payments | (g) | | 183,557 | | | (11,859 | ) | | 171,698 | | | 971,208 | | | (51,352 | ) | | 919,856 | |
| Other operating expenses | (f) | | 76,299 | | | - | | | 76,299 | | | 2,473,358 | | | 1,912,458 | | | 4,385,816 | |
| Total expenses | | | (4,982,405 | ) | | 397,443 | | | (4,584,962 | ) | | (24,555,971 | ) | | (1,814,380 | ) | | (26,370,351 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Earnings (loss) from operations | | | (2,884,486 | ) | | 134,989 | | | (2,749,497 | ) | | (3,340,089 | ) | | (2,989,009 | ) | | (6,329,098 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Finance expense, net | (c), (h) | | (97,773 | ) | | (84,005 | ) | | (181,778 | ) | | (259,096 | ) | | (274,792 | ) | | (533,888 | ) |
| Non-operating income (expenses) | (e), (f), (j) | | (3,196,304 | ) | | 389,670 | | | (2,806,634 | ) | | (338,141 | ) | | 3,357,611 | | | 3,019,470 | |
| Total other income (expense) | | | (3,294,077 | ) | | 305,665 | | | (2,988,412 | ) | | (597,237 | ) | | 3,082,819 | | | 2,485,582 | |
| | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | (6,178,563 | ) | | 440,654 | | | (5,737,909 | ) | | (3,937,326 | ) | | 93,810 | | | (3,843,516 | ) |
| Net income (loss) attributed to: | | | | | | | | | | | | | | | | | | | |
Shareholders of the Company | | | (6,178,563 | ) | | 440,654 | | | (5,737,909 | ) | | (1,430,170 | ) | | 93,810 | | | (1,336,360 | ) |
Non-controlling interests | | | - | | | - | | | - | | | (2,507,156 | ) | | - | | | (2,507,156 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Comprehensive gain (loss) | | | | | | | | | | | | | | | | | | | |
| Comprehensive gain (loss) attributed to: | | | | | | | | | | | | | | | | | | | |
Shareholders of the Company | (j) | | (6,178,563 | ) | | 440,654 | | | (5,737,909 | ) | | (1,430,170 | ) | | 543,382 | | | (886,788 | ) |
Non-controlling interests | (j) | | - | | | - | | | - | | | (2,507,156 | ) | | - | | | (2,507,156 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Deficit, beginning of period | | | (146,757,018 | ) | | 1,587,565 | | | (145,169,453 | ) | | (146,757,018 | ) | | 1,587,565 | | | (145,169,453 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Deficit, end of period | | | (152,935,581 | ) | | 2,028,219 | | | (150,907,362 | ) | | (150,694,344 | ) | | 2,130,947 | | | (148,563,397 | ) |
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|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
Cash Flows
The adoption of IFRS has had no impact on the net cash flows of the Company. The presentation of the cash flow statement in accordance with IFRS differs from the presentation of cash flow statement in accordance with Canadian GAAP. The changes made to the consolidated statements of financial position and consolidated statements of comprehensive loss have resulted in the reclassification of amounts on the consolidated statements of cash flows. IAS 7,Statement of Cash Flows, requires that cash flows relating to finance costs/interest and income tax to be separately presented within the relevant cash flow categories. Under Canadian GAAP these amounts were previously excluded from the reconciliation of changes in net cash flows and instead disclosed as part of the notes to the consolidated financial statements. These amounts have been included in the reconciliation of ‘cash flows from operating activities’ within the consolidated statement of cash flows under IFRS.
Notes to the reconciliation as previously reported under Canadian GAAP to IFRS
| | | | | | | | | | | |
| | Change in mineral property, plant and equipment | | | June 1, 2010 | | | August 31, 2010 | | | May 31, 2011 | |
| | Change in functional currency of subsidiaries | (a) | | 10,037,910 | | | 9,780,885 | | | 8,924,517 | |
| | Recognition and amortization of closure and reclamation asset | (b) | | 587,596 | | | 559,023 | | | 465,032 | |
| | Change in estimate of provision for closure and reclamation | (b) | | - | | | - | | | 4,051,960 | |
| | Capitalization of borrowing costs | (h) | | - | | | 26,630 | | | 357,774 | |
| | Impact of componentization | (i) | | (629,499 | ) | | (629,499 | ) | | (629,499 | ) |
| | | | | 9,996,007 | | | 9,737,039 | | | 13,169,784 | |
| | | | | | | | | | | | |
| | Change in provision for closure and reclamation | | | | | | | | | | |
| | Recognition and accretion of closure and reclamation asset | (b) | | 117,471 | | | 60,675 | | | (108,345 | ) |
| | Change in estimate of provision for closure and reclamation | (b) | | - | | | - | | | 4,051,960 | |
| | | | | 117,471 | | | 60,675 | | | 3,943,615 | |
(a) Change in Functional Currency of subsidiaries
Under IAS 21, the functional currency of several of the Company’s subsidiaries was determined to be U.S. dollars from inception of these subsidiaries. Under Canadian GAAP, prior to March 1, 2009, the Canadian dollar was determined to be the measurement currency of the Company’s operations and these operations were translated to the Canadian dollar for presentation purposes until February 28, 2009. As of March 1, 2009, the functional currency of the Company was determined to be U.S. dollar and under Canadian GAAP the value of property, plant and equipment, mineral properties, and certain other balances was re-measured and the resulting impact was charged to OCI. Under IAS 21, the entries to OCI were reversed to bring the impacted balances back to the original U.S. dollar values and any associated expense such as depreciation or depletion was recalculated from March 1, 2009 on these original dollar values taking into consideration actual activity in the period.
(b) Provision for closure and reclamation
Under IAS 37,Provisions, Contingent Liabilities and Contingent Assets(“IAS 37”), a change in the current market based discount rate will result in a change in the measurement of this provision, whereas under Canadian GAAP, discount rates are not changed unless there is an increase in the estimated future cash flows in which case the incremental cash flows are discounted at current market based rates. In addition, under Canadian GAAP, a credit adjusted risk free discount rate is used whereas under IFRS, the discount rate reflects the current market assessments of the time value of money and the risks specific to the liability. As a result, the provision for reclamation and closure has been re-measured as at the date of transition which increased the reclamation asset and the reclamation obligation. At May 31, 2011, the Company determined a new estimate of provision for closure and reclamation under Canadian GAAP. An increase to the provision and related asset is required under IFRS related to the different discount rate applicable under IFRS.
Page 33
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
(c) Change in depletion, depreciation and accretion
The re-measurement of the provision for closure and reclamation under IAS 37 resulted in an increase in the related reclamation asset, which resulted in an increase in the amount of depletion recognized against the asset under IFRS. Under IFRS, accretion is considered to be a finance charge and not an operating expense. Accretion has been reduced to zero and the recalculated amount of finance cost to be recognized due to a passage of time has been was been recorded. In addition, as a result of the foreign currency treatment described in note (a) above, depreciation, amortization and depletion on property, plant and equipment and mineral properties have increased as they are based on revised amounts.
| | | | | | | | |
| | Effect on the statement of operations and comprehensive loss | | | Three months | | | Year ended | |
| | | | | ended August 31, | | | May 31, 2011 | |
| | | | | 2010 | | | | |
| | Additional expense resulting from change in functional currency of subsidiaries | (a) | | (233,881 | ) | | (1,052,065 | ) |
| | Additional depletion on re-measurement of closure and reclamation asset | (b) | | (28,573 | ) | | (122,564 | ) |
| Change in depreciation and depletion | | | (262,454 | ) | | (1,174,629 | ) |
| | Additional depreciation resulting from change in functional currency | (a) | | (4,278 | ) | | (16,972 | ) |
| | Reversal of accretion on original reclamation obligation | (b) | | 89,862 | | | 359,448 | |
| Change in general and administrative expenses | | | 85,584 | | | 342,476 | |
| | Accretion of provision for closure and reclamation | (b) | | (33,066 | ) | | (133,632 | ) |
| | Accretion of community support obligation | (d) | | (51,738 | ) | | (196,680 | ) |
| | Capitalization of borrowing costs | (h) | | 799 | | | 55,520 | |
| Change in finance costs | | | (84,005 | ) | | (274,792 | ) |
| | Net additional expense | | | (260,875 | ) | | (1,106,945 | ) |
(d) Community Support Obligation
Under IAS 37, the Company has determined it has a constructive obligation with respect to future community support payments. The Company must measure the fair value of this liability at each reporting date at its present value. This present value is accreted as finance cost and is recognized due to a passage of time.
(e) Convertible Senior Secured Notes Conversion Feature
Under IAS 32,Financial Instruments – Presentation, (“IAS 32”), a contract that will or may be settled in the Company’s own equity instruments which is not at a fixed number of the Company’s own equity instruments is classified as a financial liability. Under IAS 32, the conversion option is considered a derivative as the Company will be required to provide a variable number of shares in its own equity should a holder decide to exercise the conversion option. Accordingly, the conversion feature is recorded as a financial liability and stated at fair value at the end of each period. Under Canadian GAAP, these instruments were considered equity instruments and changes in fair value subsequent to initial recognition were not recognized.
(f) Share Purchase Warrants
At June 1, 2010, the Company had 33.7 million non-brokers share purchase warrants outstanding with C$ exercise prices included in equity. Under IAS 39,Financial Instruments - Recognition and Measurement, share purchase warrants issued with exercise prices denominated in a currency other than the functional currency of the entity are classified and presented as derivative liabilities and measured at fair value. Accordingly the carrying amount of all non-broker share purchase warrants were reclassified from equity to non-current liabilities and re-measured at fair value with the difference between the fair value and amount removed from equity being recognized as an adjustment to opening retained earnings. The share purchase warrant liability has been re-measured each period end with the difference to mark-to-market gain (loss) on share purchase warrants.
Transaction costs related to warrants classified as derivatives are expensed under IFRS as opposed to an offset to the warrants equity balance under Canadian GAAP. Transaction costs associated with share purchase warrants of $1,912,458 were expensed during the third quarter of fiscal 2011.
Page 34
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
(g) Re-measurement of share-based compensation expense
As allowed by Canadian GAAP, the Company made a single fair value estimate for all tranches included in a given grant of share purchase options, recognized share-based payments on a graded vesting schedule and recognized the impact of actual forfeitures as they occurred. Under IFRS 2, individual tranches of an equity issuance are to be treated as separate grants, measured at their respective fair value and recognized in expense over their respective vesting pattern. Furthermore, forfeitures have to be estimated and incorporated in measurement of stock-based compensation. This has resulted in differences in the amount of share-based payment expense that recognized under IFRS with corresponding adjustments to share-based payment reserve (contributed surplus under Canadian GAAP).
(h) Borrowing costs
Under IAS 23, the Company capitalizes interest on qualifying assets. Borrowing costs are capitalized at the rate of interest applicable to the specific borrowings financing the assets under construction, or, where financed through general borrowings, at a capitalization rate representing the average interest rate on such borrowings. Borrowing costs are capitalized to Mineral property, plant and equipment.
(i) Componentization of mineral property, plant and equipment
Under Canadian GAAP, the Company followed a practice of depreciating plant and equipment at the individual asset level over their estimated useful lives. IAS 16,Property, Plant and Equipment, (“IAS 16”) requires that significant components of each asset are separately identified and depreciated based on their respective estimated useful lives. The company reviewed componentization of its mineral property, plant and equipment, and identified certain additional components. Retroactive application of IAS 16 resulted in a decrease in the carrying amounts of mineral property, plant and equipment and an increase in accumulated deficit.
(j) Non-controlling interests and dilution gains
Under Canadian GAAP, non-controlling interests were presented as a separate item between liabilities and shareholders’ equity in the statement of financial position and the non-controlling interests’ share of income (loss) were deducted in calculating net income (loss) and comprehensive income of the entity. Under IFRS, the non-controlling interests’ share of the net assets is included in equity and their share of the comprehensive income is allocated directly to equity. Under Canadian GAAP dilution gains are recorded within the statement of operations. Under IFRS dilution gains which do not lead to a loss of control are recorded as an equity transaction. For the year ended May 31, 2011 this resulted in an increase to net loss of $449,572 and a corresponding increase to equity in relation to dilution gains recorded under Canadian GAAP.
(k) Shareholders’ Equity and Deficit adjustments
The following details the changes in total shareholder’s equity and the increase (decrease) of the accumulated deficit of the Company:
| | | | | | | | | | | |
| | Change in shareholders' equity balances | | | June 1, 2010 | | | August 31, 2010 | | | May 31, 2011 | |
| | | | | | | | | | | | |
| | Reclassification of share purchase warrants from equity to liabilities | (f) | | (11,890,265 | ) | | (11,890,265 | ) | | (24,523,822 | ) |
| | Re-measurement of unvested stock options | (g) | | (28,883 | ) | | (40,742 | ) | | (532,539 | ) |
| | Reclassification to share capital on exercise of share purchase warrants | (f) | | 200,298 | | | 200,298 | | | 8,820,549 | |
| | Reclassification of conversion feature from equity to liability | (e) | | (495,121 | ) | | (495,121 | ) | | (42,817 | ) |
| | Eliminate cumulative translation adjustment to deficit | | | 6,733,242 | | | 6,733,242 | | | 6,733,242 | |
| | Adjustments to deficit (table following) | | | 1,587,565 | | | 2,028,219 | | | 2,130,947 | |
| | Net adjustments to equity | | | (3,893,164 | ) | | (3,464,369 | ) | | (7,414,440 | ) |
Page 35
|
| PETAQUILLA MINERALS LTD. |
| NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
| FOR THE THREE MONTHS ENDED AUGUST 31, 2011 and 2010 |
| (Expressed in United States dollars, unless otherwise noted - unaudited) |
| | | | | | | | | | | |
| | Adjustments impacting deficit | | | June 1, 2010 | | | August 31, 2010 | | | May 31, 2011 | |
| | | | | | | | | | | | |
| | Eliminate cumulative translation adjustment to deficit | | | 6,733,242 | | | 6,733,242 | | | 6,733,242 | |
| | Impact of change in functional currency of subsidiaries | (a) | | (4,277,618 | ) | | (4,515,777 | ) | | (4,497,612 | ) |
| | Impact of unwinding the discount of provision for closure and reclamation due to passage of time, net of amortization of related asset | (b) | | 470,125 | | | 498,348 | | | 573,377 | |
| | Re-measurement of unvested stock options | (g) | | 28,883 | | | 40,742 | | | 80,236 | |
| | Re-measurement of share purchase warrants at fair value | (f) | | 6,659,063 | | | 6,665,853 | | | 6,551,710 | |
| | Transaction costs associated with share purchase warrants expensed | (f) | | - | | | - | | | (1,912,458 | ) |
| | Re-measurement of conversion liability at fair value | (e) | | 239,028 | | | 491,141 | | | 495,110 | |
| | Recognition of and change in community support obligation | (d) | | (7,635,659 | ) | | (7,387,398 | ) | | (8,128,089 | ) |
| | Capitalization of borrowing costs | (h) | | - | | | 26,630 | | | 357,774 | |
| | Impact of componentization of mineral property, plant and equipment | (i) | | (629,499 | ) | | (629,499 | ) | | (629,499 | ) |
| | Difference in treatment of non-controlling interests | (j) | | - | | | 104,937 | | | 2,507,156 | |
| | Net adjustments to deficit | | | 1,587,565 | | | 2,028,219 | | | 2,130,947 | |
Page 36
