UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES
EXCHANGE ACT OF 1934.
OR
[X] ANNUAL REPORT PURSUANT TO SECTION "13" OR "15(d)" OF THE SECURITIES EXCHANGE
ACT OF 1934.For the fiscal year ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number: 0-12660
PINE VALLEY MINING CORPORATION
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of registrant's name into English)
British Columbia, Canada
(Jurisdiction of incorporation or organization)
Suite 501 - 535 Thurlow Street
Vancouver, British Columbia, V6E 3L2
(Address of principal executive offices)
Securities to be registered pursuant to Section 12(b) of the Act.
None.
Securities to be registered pursuant to Section 12(g) of the Act.
Common Shares, without par value.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None.
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
48,654,519 common shares (Fiscal year end March 31, 2004)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No: N/A
Indicate by checkmark which financial statement item the registrant has elected
to follow:
Item 17 X Item 18 _______
FORM 20-F
INDEX
CONVERSION TABLE 3
GLOSSARY OF NAMES AND TERMS 4
FORWARD-LOOKING STATEMENTS 5
PART 1 5
Item 1 - Identity Of Directors, Senior Management and Advisers 5
Item 2 - Offer Statistics and Expected Timetable 5
Item 3 - Key Information 6
A. Selected Financial Data 6
B. Capitalization and Indebtedness 7
C. Reasons for the Offer and Use of Proceeds 7
D. Risk Factors 7
Item 4 -Information on the Company 14
A. History and Development of the Company 14
B. Business Overview - Description of Properties 18
C. Organizational Structure 21
D. Property, Plants and Equipment 21
Item 5 - Operating and Financial Review and Prospects 24
A. Operating Results 24
B. Liquidity and Capital Resources 32
C. Research and Development, Patents and Licenses, Etc. 34
D. Trend Information 34
E. Off-Balance Sheet Arrangements 35
F. Tabular Disclosure of Contractual Obligations 35
G. Safe Harbor 36
ITEM 6 - Directors, Senior Management and Employees 37
A. Directors and Senior Management 37
B. Compensation 38
C. Board Practices 42
D. Employees 43
E. Share Ownership 43
ITEM 7 - Major Shareholders and Related Party Transactions 45
A. Major Shareholders 45
B. Related Party Transactions 46
C. Interests of Experts and Counsel 47
ITEM 8 - Financial Information 47
A. Consolidated Statements and Other Financial Information 47
B. Significant Changes 47
ITEM 9 - The Offer and Listing 47
A. Offer and Listing Details 47
B. Plan of Distribution 49
C. Markets 49
D. Selling Shareholders 49
E. Dilution 49
F. Expenses of the Issue 49
Item 10 - Additional Information 49
A. Share Capital 50
B. Memorandum and Articles 50
C. Material Contracts 51
D. Exchange Controls 53
E. Taxation 54
F. Dividends and Paying Agents 55
G. Statements by Experts 55
H. Documents on Display 55
I. Subsidiary Information 55
Item 11 - Quantitative and Qualitative Disclosures about Market Risk 56
Item 12 - Description of Securities Other than Equity Securities 56
PART II 56
Item 13 - Defaults, Dividends Arrearages and Delinquencies 56
Item 14 - Material Modifications to the Rights of Security Holders and Use
of Proceeds 56
Item 15 - Controls and Procedures 56
Item 16 - Reserved 57
Item 16A - Audit Committee Financial Expert 57
Item 16B - Code of Ethics 57
Item 16C - Principal Accountant Fess and Services 57
Item 16D - Exemptions from the Listing Standards for Audit Committees 58
Item 16E - Purchases of Equity Securities by the Issuer and Affiliated
Purchasers 58
PART III 58
Item 17 - Financial Statements 58
Item 18 - Financial Statements 59
Item 19 - Exhibits 59
Certifications 62
CONVERSION TABLE
For ease of reference, the following conversion factors are provided:
1 mile = 1.6093 kilometres
1 metric ton (tonne) = 2,205 pounds
1 foot - 0.305 metres
1 troy ounce = 31.103 grams
1 acre = 0.4047 hectare
1 imperial gallon = 4.546 litres
1 long ton = 2,240 pounds
1 imperial gallon = 1.2010 U.S. gallons
GLOSSARY OF NAMES AND TERMS
"BTU":
A British thermal unit, the amount of heat needed to raise the temperature
of 1 pound of water by 1 degree Fahrenheit.
"Calorific Value":
The calorific value of a sample of fuel is defined as the amount of heat
evolved when a unit weight of the fuel is completely burnt and the
products of combustion cooled to a standard temperature of 298 degree
Kelvin.
"Coal Rank":
The qualitative classification of coal from lignite to anthracite based on
calorific values and other qualitative characteristics.
"Coke":
A hard, dry carbon substance produced by heating coal to a very high
temperature in the absence of air, used primarily in the manufacture of
iron and steel.
"Coking Coal":
The various grades of coal suitable for carbonization used to make coke
for steel manufacture.
"Deposit":
A mineralized body which has been physically delineated by sufficient
drilling, trenching, and/or underground work, and found to contain a
sufficient average grade of a commodity, metal or metals to warrant
further exploration and/or development expenditures. Such a deposit does
not qualify as a commercially mineable ore body or as containing reserves
of ore, unless final legal, technical, and economic factors are resolved.
"Metallurgical Coal":
The various grades of coal suitable for making steel, such as coking coal,
which is used to make coke, and PCI coal, which is used in the steelmaking
process for its calorific value.
"Net Profits":
Profits resulting from metal production from the property, less deduction
of certain limited costs including smelting, refining, transportation and
insurance costs.
"Pulverized Coal Injection" or "PCI":
Refers to that step in the integrated steel mill process where coal is
pulverized and injected into a blast furnace. The grades of coal used in
the process are generally non-coking. In the integrated steel mill process
pulverized coal injection grade coal (also referred to as "PCI") is used
primarily as a heat source in partial replacement of high quality coking
coals which are typically more expensive.
"Reclamation":
Means the restoration of land and the surrounding environment of a mining
site after the coal or metal is extracted.
"Recoverable Coal Reserves":
Refers to that portion of the coal in mineable seams that can be recovered
with the mining techniques considered in the feasibility study of a
specific project. In a surface mining scenario recoverable coal would
exclude mining losses from the top and bottom of the seam and adjacent to
removable internal rock partings, as well as allowances for surface
facilities, spoil piles, etc., under which mining would be conducted.
"Royalty":
A phrase used to describe a royalty payment made by a producer of metals
based on a percentage of revenue from production, less deduction of the
costs of commercial production, including exploration and capital and
operating costs.
"Ore":
A natural aggregate of one or more minerals which, at a specified time and
place, may be mined and sold at a profit or from which some part may be
profitably separated.
"Seam":
Means a three dimensional zone consisting of one or more layers of coal,
which may be separated by one or more thin layers of rock.
"Thermal Coal":
Means coal used for its heating value by power plant and industrial steam
boilers to produce electricity or process steam.
"Ton":
Short ton (2,000 pounds). 1 Ton equals 0.907185 Metric Tons)
"Tonne (t)":
Metric ton (1,000 kilograms). 1 Tonne equals 1.10231 Tons
FORWARD-LOOKING STATEMENTS
Pine Valley Mining Corporation (the "Company") cautions you that certain
important factors (including without limitation those set forth in this Report)
may affect our actual results and could cause such results to differ materially
from any forward-looking statements that may be deemed to have been made in this
Report, or that are otherwise made by or on behalf of the Company. See Item 5G
of this Report for further discussion regarding such forward-looking statements.
PART 1
Item 1 - Identity Of Directors, Senior Management and Advisers
Not applicable.
Item 2 - Offer Statistics and Expected Timetable
Not applicable.
Item 3 - Key Information
A. Selected Financial Data
Financial Highlights
The following table sets forth our selected consolidated financial data for the
five years ended March 31, 2004 prepared in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP") in Canadian dollars. The table
also summarizes certain corresponding information prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP") in Canadian
dollars. This selected consolidated financial data includes the accounts of our
subsidiaries.
Years ended March 31
2004 2003 2002 2001 2000
$CDN $CDN $CDN $CDN $CDN
---- ---- ---- ---- ----
Revenues
Canadian GAAP - - - - -
US GAAP - - 2,348,587 - -
(Loss) from continuing
operations and net loss for the year
Canadian GAAP (1,112,932) (3,457,839) (2,340,558) (694,160) (430,539)
US GAAP (1,091,951) (851,000) (2,765,739) (5,586,139) (654,332)
(Loss) per share
Canadian GAAP (0.03) (0.12) (0.12) (0.04) (0.03)
US GAAP (0.03) (0.03) (0.14) (0.30) (0.04)
Total assets
Canadian GAAP 16,931,370 11,124,817 15,049,644 12,692,376 7,933,634
US GAAP 6,608,289 801,736 2,073,469 91,422 224,619
Net assets
Canadian GAAP 12,051,295 10,338,945 10,853,536 8,194,660 7,754,270
US GAAP 1,728,214 15,864 (2,122,639) (4,406,334) 45,255
Deficit
Canadian GAAP (19,017,458) (17,904,526) (14,446,687) (12,106,129) (11,411,969)
Long-term debt
Canadian GAAP 1,000,000 - - - -
Interest expense on convertible debt
Canadian GAAP - - - - 27,640
Mineral property exploration costs
Canadian GAAP 16,842,989 10,423,081 13,026,175 12,600,994 7,709,015
Capital stock
Canadian GAAP 29,674,146 26,423,896 23,207,462 19,268,028 18,913,478
Cash dividends declared
Canadian GAAP - - - - -
Number of common shares
outstanding 48,654,519 32,073,269 24,626,185 19,064,438 19,064,438
See Item 5, "Operating and Financial Review and Prospects - Operating Results-
Differences Between Canadian and United States Generally Accepted Accounting
Principles and Effects of Recent Accounting Pronouncements" for comments on
reconciliation of Canadian and United States Generally Accepted Accounting
Principles in this Report.
Exchange Rates
In this report, unless otherwise specified, all dollar amounts are expressed in
Canadian dollars ("CDN").
Since June 1, 1970, the Government of Canada has permitted a floating exchange
rate to determine the value of the Canadian dollar against the U.S. dollar. The
high and low exchange rates, the average rates (average of the exchange rates on
the last day of each month during the period) and the end of the period rates
for Canadian dollars, expressed in U.S. dollars, from April 1, 1999 to March 31,
2004 were as follows:
U.S. DOLLARS PER $1.00 (CDN.)
Years ended March 31
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
High .7879 .6823 .6559 .6983 .6917
Low .6791 .6252 .6219 .6525 .6391
Average .7399 .6457 .6330 .6786 .6683
End of Period .7631 .6806 .6275 .6534 .6801
The high and low exchange rates for Canadian dollars, expressed in U.S. dollars
for each month from March 1, 2004 to September 27, 2004 were as follows:
U.S. DOLLARS PER $1.00 (CDN.)
Monthly 2004
March April May June July August September
High .7646 .7638 .7365 .7460 .7646 .7714 .7851
Low .7468 .7296 .7296 .7307 .7492 .7581 .7652
B. Capitalization and Indebtedness
N/A
C. Reasons for the Offer and Use of Proceeds
N/A
D. Risk Factors
The following risks have been identified and should be recognized in regard to
the business of the Company and its subsidiaries:
History of Substantial Losses and No Assurance of Profitable Operations: The
Company has incurred losses since inception of $19,017,458 through March 31,
2004. The Company has only recently commenced commercial operations and there
can be no assurance that the Company will be able to operate profitably during
future periods.
Status of Willow Creek Mine: While the Company has begun production at the
Willow Creek Mine, substantial additional development work will be necessary in
order to enable the mine to produce at levels projected by the Company. The
capital expenditure program to effect the above is currently in progress. The
Company previously disclosed total estimated project development costs of
approximately $18 million for projects under construction or expected to be
constructed through 2005. Previous costs estimates were based on consultant's
reports available to the Company, including the August, 2003 report prepared for
the Willow Creek Coal Mine by Merit Consultants International, Inc. These
estimates were not supported by firm contractual commitments, and actual costs
are therefore likely to vary from these estimates. Based upon its experience to
date with the project, the Company believes that capital project costs will
exceed previous estimates and may exceed the previous estimates by up to
approximately $3 million. Greater certainty on development cost information will
arise only after the Company settles contracts and makes further mine
development progress. Factors such as general economic and market conditions,
competitive factors, and exchange rate fluctuations will impact the Company's
project costs.
Potential Need for Additional Financing: The Company had a working capital
deficiency at March 31, 2004 of $3,206,748 and $746,976 as of June 30, 2004. To
date, the Company has not realized any cash flow from commercial operations. It
has depended upon debt and equity financing in order to fund its exploration and
development programs and its working capital requirements. To the extent that
the Company's cash flow from operations is lower than expected, or if the cost
of its capital projects exceed the revised estimates, it will have to continue
to rely upon sales of its debt and equity securities to fund these activities
and meet its debt service requirements. In addition, the Company's ability to
make capital expenditures in connection with acquisitions, new mine development
and major mine expansions will depend upon its ability to raise debt financing
and/or issue new securities. The Company's ability to raise additional debt
financing is restricted as it has secured all of its assets under the provisions
of its current debt obligations with Marubeni and Mitsui Matsushima. There can
be no assurance that debt or equity financing will be available to the Company
in the amount required at any particular time or for any particular period or,
if available, that such financing can be obtained on terms satisfactory to the
Company. The Company's inability to obtain financing when needed could have a
material adverse effect on its results of operations and financial condition.
Restrictions Imposed under Debt Agreements and Debt Service Requirements: As of
March 31, 2004, the Company had total debt of $4,000,000, and the current
portion of that debt was $3,000,000. As of June 30, 2004, the Company's total
debt was $5,173,100, and the current portion of that debt was $4,000,000. The
Company's existing debt agreements impose substantial interest payment and
amortization requirements on it. The Company's ability to meet its debt service
obligations and to reduce its indebtedness will depend upon its future
performance, which will be subject to general economic conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. If the Company becomes unable to pay its
debt service charges or otherwise commits an event of default, the Company's
lenders may foreclose on or sell the assets of the Company. The agreements
governing the Company's existing indebtedness also contain covenants limiting
its ability to borrow additional funds, to dispose of assets and may affect the
Company's flexibility in planning for, and reacting to, changes in the business,
including possible acquisition activities.
Ability to Continue Operations as a Going Concern: Note 2 to the Company's
audited financial statements discloses that the financial statements have been
prepared on the basis of accounting principles applicable to a going concern
which assume that the Company will realize its assets and discharge its
liabilities in the normal course of business, and notes that the Company's
continued existence is dependent on the ability to obtain loan financing, the
raising of additional equity capital through sales of its common stock or other
means to fund its operations and the Company's ability to ultimately attain
profitable operations. Were the Company's financial statements required to
conform to the standards of the Public Company Accounting Oversight Board
(United States), the addition of an explanatory paragraph to the report of the
Company's Independent Registered Chartered Accountants concerning the Company's
ability to continue as a "going concern" would have been required. Canadian
reporting standards do not permit a reference to such conditions and events in
the auditors' report when these are adequately disclosed in the financial
statements.
Coal Price and Volume Volatility: The Company's ability to generate profits is
directly related to the volume and price of coal sold. Coal demand and price are
determined by numerous factors beyond the control of the Company including the
international demand for steel and steel products, the availability of
competitive coal supplies, international exchange rates and political and
economic conditions, and production costs in major coal producing regions. The
Company's dependence on foreign markets may result in instability due to
political and economic factors in those foreign jurisdictions, which is beyond
the control of the Company. The effect of any or all of these factors on coal
prices or volumes is impossible for the Company to predict. If realized coal
prices fall below the full cost of production and remain at such level for any
sustained period, then the Company will experience losses and may decide to
discontinue operations forcing the Company to incur closure and/or care and
maintenance costs, as the case may be.
Mining Risks: The Company's mining operations are subject to conditions beyond
its control which can affect the cost of mining. Such conditions include
environmental hazards, industrial accidents, explosions, unusual or unexpected
geological formations or pressures, pit wall slides, pit flooding and periodic
interruptions in both production and transportation due to inclement or
hazardous weather conditions. Because the Company's Willow Creek Mine has not
yet completed its first full year of operations and construction on certain
parts of the mine are still ongoing, such risk may be greater than those
associated with a more established coal mine. In any event, such risks could
result in damage to, or destruction of, mineral properties or producing
facilities, personal injury, environmental damage, delays in mining, monetary
losses and possible legal liability.
Insurance Coverage: Although the Company maintains insurance within ranges of
coverage consistent with industry practice, no assurance can be given that such
insurance will be available at economically feasible premiums or that it will be
sufficient to fully cover any claims brought forward. Insurance against
environmental risks (including potential liability for pollution or other
hazards as a result of disposal of waste products occurring from exploration and
production) is not generally available to the Company or to its competitors
within the mining industry. To the extent that the Company is subject to
environmental liabilities, the payment of such liabilities would reduce the
funds available to the Company. Should the Company be unable to fully fund the
cost of remedying an environmental problem, it may be required to suspend
operations or enter into interim compliance measures pending completion of the
required remedy.
Fluctuation in Operating Results: The Company's mining operations are inherently
subject to changing conditions that can affect levels of production and
production costs at particular mines for varying lengths of time and can result
in decreases in profitability. Weather conditions, equipment replacement or
repair, fuel prices, fires, variations in coal seam thickness, amounts of
overburden rock and other natural materials, and other geological conditions
have had, and can be expected in the future to have, a significant impact on
operating results. A prolonged disruption of production at the Willow Creek Mine
would significantly reduce our revenues and profitability. Other factors
affecting the production and sale of our coal that could result in decreases in
our profitability include: (i) expiration or termination of, or sales price
redeterminations or suspension of deliveries under, coal supply agreements; (ii)
disruption or increases in the cost of transportation services; (iii) changes in
laws or regulations, including permitting requirements; (iv) litigation; (v)
work stoppages or other labor difficulties; (vi) mine worker vacation schedules
and related maintenance activities; and (vii) changes in coal market and general
economic conditions.
Competition: The coal mining industry is highly competitive. Competition in the
industry is based on price, quality and long-term deliverability to end-user
markets. Large international mining companies that can supply multiple types of
coal from several countries are increasingly dominating markets. These larger
companies have substantially greater financial resources than the Company. In
addition, certain coal producers benefit from higher quality coal deposits than
those found on the Company's lands, and some producers benefit from more
favorable geographic locations, climatic conditions and lower operating and
regulatory compliance costs than the costs incurred by the Company. . There can
be no assurance that the Company will be able to compete effectively with these
companies or that the need to respond to competitive pricing pressures will not
have a material adverse effect on the Company's results of operation and
financial condition.
Dependence on the Steel Industry: Continued demand for the Company's coal is a
function of worldwide economic growth and steel production. The steel industry
is highly cyclical in nature and demand is affected by a number of factors
including international economic conditions and interest rates. The cyclical
nature of the steel industry can result in dramatic fluctuations in the demand
for metallurgical coal. For example, the 1997-1999 economic crisis in Asia
resulted in steel demand significantly weakening which, when combined with an
oversupply of coal in world markets, led to a decline in coal prices. Benchmark
Japanese export metallurgical coal prices declined by approximately 27% from
1996 to 2000. In addition, materials such as aluminum, composites and plastics
are substitutes for steel and an increase in their usage could
adversely affect the demand for steel, and consequently, the demand for
metallurgical coal.
Reliance on Terms of Long-Term Contracts: Approximately 30% of the Company's
annual coal production is expected to be sold pursuant to long-term contracts
providing for annual upward or downward revision to reflect changes in specified
price indices. The prices for coal shipped under these contracts may be below
the current market price for similar type coal at any given time. As a
consequence of the substantial volume of its sales, which are subject to these
long-term agreements, the Company may have less coal available with which to
capitalize on increases in coal prices if and when they arise. In addition,
because long-term contracts typically allow the customer to elect volume
flexibility, the Company's ability to realize the higher prices that may be
available in the spot market may be restricted when customers elect to purchase
higher volumes under such contracts, or its exposure to market-based pricing may
be increased should customers elect to purchase fewer tonnes. The loss of
certain of its long-term contracts could have a material adverse affect on the
Company's business.
Coal Transportation: The Company's sales are dependent on rail and ship
transportation. The Willow Creek Mine is serviced by a single rail carrier. Coal
is loaded into seagoing vessels at Neptune Terminals, in North Vancouver,
British Columbia. Service interruption by the rail carrier or port facility may
result in lost sales. Significant cost escalation for these services will serve
to reduce profitability, possibly increasing the full cost of production at the
Company's operations above realized coal prices. To the extent such increases
are sustained, the Company could experience losses and may decide to discontinue
operations forcing the Company to incur closure and/or care and maintenance
costs, as the case may be. The Company has sought to mitigate transportation
risks by entering into long-term contracts for rail and port services. See Item
4B--"Business Overview--Coal Transportation."
Achievement of Forecasted Production Levels is Contingent on Permitting:
Authorization from governmental authorities will be required before the Company
will be permitted to increase its production volume to a level greater than 0.9
million tonnes per year. Management intends to file a permit amendment
application with provincial government regulators by early 2005 requesting an
increase in the permitted production level from the current 0.9 million tonnes
per year to approximately 2.0 million tonnes per year, which increase will
accommodate the forecasted production increases. However, there can be no
assurance that the requested permit amendment will be granted in a timely manner
if at all. See Item 4B--`Business Overview--Permitting."
Reserves and Resources: The coal reserves and resources have been estimated by
the Company's technical personnel in consultation with the Company's outside
consultants. No assurance can be given that the indicated level of recovery of
the coal will be realized. See Item 4, "Information on the Company". The
location and definition of coal resources can only be done on the basis of
estimation. Coal quality and recovery parameters can vary from estimates. Market
price fluctuations for coal as well as increased production costs or reduced
recovery rates, may render a portion or all of the reserves uneconomic and may
ultimately result in a restatement of reserves. Short-term operating factors
relating to the coal reserves, such as the need for sequential development of
coal bodies, varying stripping ratios and the processing of new or different
coal qualities, may adversely affect the Company's profitability in any
particular accounting period.
Exchange Rates: The Company's coal sales contracts are denominated in United
States dollars. The fluctuation of the exchange rate value of the Canadian and
United States dollars directly impacts the revenue realized on these sales. The
relative exchange rate fluctuation between the Canadian dollar and the
currencies of the Company's international competitors impacts the ability of the
Company's coal products to compete in foreign markets The Company has entered
into forward foreign exchange contracts for Canadian dollars in order to
establish a partial hedge against exposure to currency fluctuations. See Item 5
"Liquidity and Capital resources." and Item 11 - Quantitative and Qualitative
Disclosures about Market Risk.
Development Opportunities: The Company's ability to grow in the future will be
dependent on the acquisition and development of presently undeveloped coal
properties and mine operations. The inability of the Company to make and develop
such acquisitions in the future, due to lack of capital resources, competition
from other coal companies, government restrictions or the lack of suitable
acquisition candidates could limit the Company's future growth.
Labour Relations: Many of the Company's service providers, including its mining
contractor, rail carrier and port facility are unionized. Strikes or lockouts
could restrict the Company's ability to produce and sell coal to its customers.
Changes in Legislation: There can be no assurance that income tax laws, royalty
regulations and governmental incentive programs relating to the mining industry
in Canada will not be changed in a manner which adversely affects the Company.
Likewise, there can be no assurance that income tax laws, royalty regulations
and government incentive programs relating to the mining industry in other coal
producing countries will not change to favor our competitors leading to reduced
international coal prices and coal demand from the Company.
Government Regulation and Taxation of the Mining Industry: The Company's lands
and activities are subject to extensive federal and provincial laws and
regulations controlling not only the mining of and exploration of mineral
properties, but also the possible affects of such activities upon the
environment. Future legislation and regulations could cause additional expense,
capital expenditures, reclamation obligations, restrictions and delays in the
development of the Company's properties, the extent of which cannot be
predicted. In the context of environmental permitting, including the approval of
reclamation plans, the Company must comply with legislated or regulated
standards and existing laws and regulations which may entail greater or lesser
costs and delays depending on the nature of the activity to be permitted and how
stringently the regulations are implemented by the permitting authority. The
Company has based its business planning, as it relates to income tax matters,
upon current income tax legislation. At this time it is not possible to predict
if, or when, changes may be made, but there is potential for effective income
tax rates to vary from those presently incurred.
Environmental Regulation: The Company may be required to make increased capital
and other expenditures as a result of the increasingly stringent environmental
protection legislation, which expenditures are in addition to currently
projected reclamation costs. Future legislation and administrative regulations
may result in the Company being more closely regulated. Such legislation and
regulations, as well as future interpretations of existing laws, may require
substantial increases in equipment and operating costs to the Company and
delays, interruptions or a termination of operations, the extent of which cannot
be predicted.
Dividend Policy: The Company has never paid dividends on its common stock and
does not anticipate paying any dividends on its common stock in the foreseeable
future. The declaration and payment of dividends is subject to the discretion of
the Company's board of directors. Any determination as to the payment of
dividends in the future will depend upon results of our operations, capital
requirements, and restrictions in loan agreements, and such other factors as the
board of directors may deem relevant.
Title Matters: While the Company has reviewed and is satisfied with the titles
for the properties in which it has a material interest and, to the best of its
knowledge, such titles are in good standing, the Company has not obtained
independent title reports or title insurance on its coal leases, coal licenses,
nor on any other properties in which it has an interest. Such property interests
may be subject to prior unregistered agreements or transfers and title may be
affected by undetected defects. There is no guarantee that title to such
property interests will not be challenged or impugned.
Aboriginal Land Claims: In December 1997, the Supreme Court of Canada affirmed
that aboriginal groups may continue to have aboriginal title to lands that their
ancestors exclusively occupied and controlled at the time of the assertion of
British sovereignty. First Nations and aboriginal bands have claimed aboriginal
title and rights over substantial areas of Canada, including areas where the
Company operates under coal tenures issued by the provincial government.
Depending on the facts of each case, these claims may give them a right to
possess and control land or resources, or a right to compensation from the
provincial government in relation to past or current infringement. The December
1997 decision of the Court created uncertainty with respect to third-party
interests, including coal tenures, in lands claimed by aboriginal groups. The
Court dealt generally with the nature of aboriginal title and what was needed in
order to prove aboriginal title. It did not recognize aboriginal title to any
particular lands, and did not address how aboriginal title is to be reconciled
with property and tenure rights previously granted by the provincial government.
The Court confirmed that aboriginal title is not absolute and may be infringed
by the provincial government for substantial legislative purposes. In British
Columbia, many First Nations are participating in treaty negotiations with the
federal and provincial governments in an effort to resolve uncertainty about
aboriginal rights and title and to identify new authorities and treaty lands to
be held by those First Nations. There can be no assurance that aboriginal land
claims will not affect the Company's existing coal tenures in the future, or its
ability to renew or secure other coal tenures in the future.
Risk of "Penny Stock": The Company's common stock may be deemed to be "penny
stock" as that term is defined in Reg. Section 240.3a51-1 of the Securities and
Exchange Commission. Penny stocks are stocks (i) with a price of less than five
dollars per share; (ii) that are not traded on a "recognized" national exchange;
(iii) whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stocks must still meet requirement (i) above); or (iv) in issuers
with net tangible assets less than US $2,000,000 (if the issuer has been in
continuous operation for at least three years) or US $5,000,000 (if in
continuous operation for less than three years), or with average revenues of
less than US $6,000,000 for the last three years.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Reg.
Section 240.15g(c) 2 of the Securities and Exchange Commission require broker
dealers dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor's account. Potential investors in the Company's common
stock are urged to obtain and read such disclosure carefully before purchasing
any shares that are deemed to be penny stock.
Moreover, Reg. Section 240.15g-9 of the Securities and Exchange Commission
requires broker dealers in penny stocks to approve the account of any investor
for transactions in such stocks before selling any penny stock to that investor.
This procedure requires the broker dealer to (i) obtain from the investor
information concerning his or her financial situation, investment experience and
investment objectives; (ii) reasonably determine, based on that information,
that transactions in penny stocks are suitable for the investor and that the
investor has sufficient knowledge and experience as to be reasonably capable of
evaluating the risks of penny stock transactions; (iii) provide the investor
with a written statement setting forth the basis on which the broker-dealer made
the determination in (ii) above; and (iv) receive a signed and dated copy of
such statement from the investor, confirming that it accurately reflects the
investor's financial situation, investment experience and investment objectives.
Compliance with these requirements may make it more difficult for investors in
the Company's common stock to resell their shares to third parties or to
otherwise dispose of them.
Item 4 -Information on the Company
A. History and Development of the Company
The Company is engaged in prospecting, acquiring, developing and mining mineral
resource properties, although it is not prohibited from engaging in any
business. The Company is a corporation under the British Columbia Business
Corporations Act. The Company was originally formed as "Globaltex Industries
Inc. on March 5, 1993 by the amalgamation of New Lintex Minerals Ltd., a public
British Columbia company (SEC File No. 0-12660) ("New Lintex"), and Willow Creek
Coal Ltd., ("Willow Creek"), a wholly owned subsidiary of A.L.M. Associates Corp
("A.L.M.")under certificate of amalgamation No. 442303. It changed its name to
"Pine Valley Mining Corporation" on May 13, 2003.
The Company's principal place of business is located at:
#501 - 535 Thurlow Street
Vancouver, British Columbia, Canada V6E 3L2
Telephone: 604.682.4678
Facsimile: 604.682.4698
E-mail: pinevalley@pinevalleycoal.com
The Company's registered office is located at:
3000 Royal Centre, P.O. Box 11130
1055 West Georgia Street
Vancouver, British Columbia, Canada V6E 3R3
The contact person is: Mark Fields, Executive Vice-President, Secretary &
Director
The Company has unlimited common shares without par value authorized. At March
31, 2004, the end of the Company's most recent fiscal year, there were
48,654,519 common shares issued and outstanding. At September 27, 2004, there
were 57,136,822 common shares issued and outstanding.
The Company's common shares trade on the TSX Venture Exchange ("TSX-V") in
Vancouver, British Columbia, Canada under the symbol "PVM" and on the OTC
Bulletin Board in the United States under the symbol "PVMCF". Canada is the
place of domicile for the Company.
The Company's fiscal year end is March 31st in each year.
The Company has interests in two mining properties located in Canada. These
properties consist of: (1) the Willow Creek Coal Mine; and (2) the Indin Lake
Gold property.
Willow Creek Coal Mine
In 1993 the Company acquired a 100% interest in the Willow Creek
licenses, covering the area that is now referred to as the "Willow Creek Coal
Mine", from the amalgamation with Willow Creek Coal Ltd. ("Willow Creek"), which
had acquired these licenses from a group including James W. McLeod (the "McLeod
Group") by way of an Assignment of Coal Licenses dated April 29, 1992.
Similarly, the Company acquired other assets from the McLeod Group, including
various mining reports, information and maps on the Willow Creek Coal Mine, a
feasibility study on the Willow Creek Coal Mine, an environmental and
socio-economic study, diamond drill logs, gamma ray neutron logs and assay
reports, as well as the Pine River Bridge spanning the Pine River.
The purchase price for the Willow Creek Coal Mine was $580,000 in cash and
negotiable securities. The McLeod Group, as a consequence of default and
termination of a previous option agreement, reacquired title to the Willow Creek
Coal Mine from a previous optionee on August 31, 1990. On or about August 31,
1990, the McLeod Group granted to Orval Gillespie, the President of New Lintex ,
and certain of his associates (the "Gillespie Group"), the right to arrange for
a purchaser for the Willow Creek Coal Mine. In this connection, the Gillespie
Group personally pledged certain cash and negotiable securities to pay off debt
in relation to the Willow Creek Coal Mine. In addition, the Gillespie Group
agreed to pay all ongoing expenses to keep the Willow Creek licenses in good
standing.
The Gillespie Group introduced the Willow Creek Coal Mine to A.L.M., and
assisted in its financing by personally guaranteeing some of the purchase price
of the Willow Creek Coal Mine. To effect the acquisition, A.L.M. formed Willow
Creek as a wholly owned British Columbia subsidiary. Subsequently, the directors
of New Lintex and Willow Creek approved the transaction. Willow Creek reimbursed
the Gillespie Group the sum of $112,414 for their direct costs in license fees
paid for the years 1989 to 1991, inclusive, to maintain the Willow Creek Coal
Licenses in good standing.
Falls Mountain Coal Inc. ("Falls Mountain"), a wholly owned subsidiary of the
Company , acquired a 100% interest in the Pine Pass Properties from IDI Resource
Technologies Inc. by way of a purchase agreement dated February 1994 for a
consideration of 80,000 shares of common stock from the Company's treasury for a
deemed value of $96,000.
The Company and Falls Mountain on February 16, 1996 entered into a Joint
Venture Agreement (the "Agreement") with respect to the Willow Creek Coal
Mine with Mitsui Matsushima Canada Ltd., a wholly owned subsidiary of
Mitsui Matsushima Co. Ltd. ("Mitsui Matsushima"), and BCR Ventures Inc., a
wholly-owned subsidiary of BC Rail Ltd. ("BCR"). The purpose of the joint
venture ("Joint Venture") was to develop a coal mine. A new company, Pine Valley
Coal Ltd., was set up as the operator and was directed by a Joint Venture
Management Committee. BC Rail, a crown corporation owned by the Province of
British Columbia, owned and operated the rail system serving northeast British
Columbia; its main line ran adjacent to the proposed Willow Creek operation.
Mitsui Matsushima is a major Japanese coal mining company. Mitsui Matsushima has
been doing coal business for over 80 years, and was actively proceeding with the
expansion of its overseas coal business outside Japan, including in Canada.
Under the Agreement, Falls Mountain contributed 25 coal licenses which it owned
together with other assets in connection with its exploration activities at
Willow Creek. The licenses and assets were transferred in trust to the Joint
Venture in return for a capital account of $2,500,000, wherein Mitsui Matsushima
and BC Rail earned a one-third interest each by making equity contributions
totaling $5 million to the Joint Venture and a best efforts to obtain project
financing.
On January 8, 2001, the Company purchased a one-third interest from BCR for $3.9
million, thus increasing its ownership to 66.67%.
On March 10, 2003, Falls Mountain, and Mitsui Matsushima entered into a binding
Sale and Purchase Agreement whereby the Company had the right to acquire Mitsui
Matsushima's 33 1/3% interest in the Willow Creek Joint Venture. The agreement
provided for a single cash payment of $6,000,000 prior to December 10, 2003.
Prior to December 10, 2003, Falls Mountain and Mitsui Matsushima revised the
purchase terms so that Falls Mountain was required to pay $2,000,000 to Mitsui
Matsushima by January 6, 2004, and make a further $4,000,000 of principal
repayments between June 30, 2004 and June 30, 2005. On January 6, 2004, the
Company consummated the transaction and paid $2,000,000 in cash and issued a
$4,000,000 note payable to Mitsui Matsushima. Consequently, Falls Mountain now
owns 100% of the Willow Creek Coal Mine. The Company financed the initial
$2,000,000 payment with proceeds from the exercise of outstanding warrants and a
private placement of 8,000,000 units of $0.20 per unit. Subsequent to the end of
the year, pursuant to the terms of the agreement, the Company made a principal
payment of $200,000 plus accrued interest in June 2004. The remaining $3,800,000
principal balance, plus interest at a rate of 7.0% per annum on the unpaid
balance is payable according to the following schedule:
September 30, 2004 $ 300,000
December 31, 2004 $1,500,000
March 31, 2005 $1,000,000
June 30, 2005 $1,000,000
TOTAL $3,800,000
In March 2003, Falls Mountain applied for further coal licenses adjacent to the
current Willow Creek Coal Mine area to acquire the coal rights to a further
2,930 hectares. The application was granted in April 2004. The Willow Creek Coal
Mine now includes one coal lease, comprising twenty-one of the original coal
licenses, and twenty two coal licenses, covering a total area of 12,595
hectares.
In May 2004 the Company signed an agreement with Marubeni Corporation
("Marubeni") for a US$7,600,000 (approximately CAD$10,000,000) debt facility to
be provided by Marubeni. Also in May, the Company issued 3,333,334 shares of
common stock to Sprott Asset Management, Inc. in connection with a non-brokered
private placement for $3,000,000 at a price of $0.90 per common share. The
proceeds of both these financings will be used for capital expenditures, general
and administrative expenses, and working capital to finance the development of
the Willow Creek Mine to achieve an estimated production to a rate of 95,000
tonnes per month by the end of 2004 (an annualized rate of 1.1 million tonnes).
The agreement with Marubeni includes a provision whereby Marubeni will purchase
600,000 tonnes of coal over the next two years. Marubeni was also appointed the
Company's exclusive agent for sales of Willow Creek coal to the Japanese, Korean
and Taiwanese markets. The debt facility is secured by an interest in the
Company's assets which ranks pari passu with the current security interest held
by Mitsui Matsushima. The Company has agreed to pay interest on the outstanding
principal balance of the loan at a rate of 4.0% over the London Interbank
Offered Rate. In addition, the agreement provides that the principal balance be
repaid with some of the proceeds from coal sales the Company makes to Marubeni
according to the following schedule:
Principal
Repayment Total Principal
per Tonne Reduction
--------- ---------
First 400,000 tonnes sold to Marubeni US$ 8.50 US$ 3,400,000
Subsequent 200,000 tonnes sold to Marubeni 21.00 4,200,000
--------------
Total debt to be repaid US$ 7,600,000
==============
According to the terms of the agreement, the Company must repay the debt in
full, if not already repaid according to the terms described above, by March 31,
2006. In addition, the Company has the right, at its option, to pay off the
Marubeni debt facility, in whole or in part at any time and from time to time,
without bonus or penalty. Any early repayment to Marubeni will not effect the
agreement by Marubeni to purchase 600,000 tonnes of coal.
During fiscal year 2004 and in recent months, the Company has focused on the
following issues to begin production of coal in July, 2004 and shipment of coal
in September, 2004:
Financing
Mine design
Mine development planning
Delineation of reserves
Development of production costs models and estimates
Customer relationship development and contract sales of coal
The capital expenditure program to effect the above is currently in progress.
The Company previously disclosed total estimated project development costs of
approximately $18 million for projects under construction or expected to be
constructed through 2005. Previous costs estimates were based on consultant's
reports available to the Company, including the August, 2003 report prepared for
the Willow Creek Coal Mine by Merit Consultants International, Inc. These
estimates were not supported by firm contractual commitments, and actual costs
are therefore likely to vary from these estimates. Based upon its experience to
date with the project, the Company believes that capital project costs will
exceed previous estimates and may exceed the previous estimates by up to
approximately $3 million. Greater certainty on development cost information will
arise only after the Company settles contracts and makes further mine
development progress. Factors such as general economic and market conditions,
competitive factors, and exchange rate fluctuations will impact the Company's
project costs. Management believes that the recently completed $3,000,000 equity
financing, the US$7,600,000 debt facility, and cash flow when revenues from coal
sales begin will be sufficient to finance the capital and operational costs of
the mining and Company operations
As at March 31, 2004 the Company had a carrying value of $16,842,989 (2003 -
$10,423,081; 2002 - $13,026,175) on exploration and acquisition on the two
properties in which it still retains an interest.
B. Business Overview
As of September 2004, the Company has interests in the Willow Creek Coal Mine
and the Indin Lake property. The Company's primary focus during the last three
financial years has been the development of the Willow Creek Coal Mine into an
operating mine. Commercial production from the mine began in July 2004.
Products
The Company's Willow Creek Mine produces pulverized coal injection, or PCI, and
coking coal products. PCI and coking coal products are an important component in
the steel manufacturing process. PCI coal is used for its heat value and is not
typically a coking coal, although it is also used in steel manufacturing.
Metallurgical coal is generally higher in carbon content and calorific value and
has a lower moisture content than the "thermal coal" that is used by electric
utilities and industrial users to produce electricity, steam and heat.
Metallurgical coal is typically sold at higher prices than thermal coal due to
its special characteristics. Thermal coal is found in many parts of the world.
Metallurgical coal is less abundant and is produced primarily in Australia,
Canada and the United States.
Customers and Markets
The Company anticipates that the primary markets for the coal produced at the
Willow Creek Mine will be steel-producing countries in the Pacific Rim, Europe
and South America that import metallurgical coal by means of seaborne vessels.
The Company has entered into agreements with steel manufacturers in Asia and
Europe providing for the sale of 435,000 tonnes of its PCI product for the
period September 2004 to March 31, 2005. The Company is presently completing the
formal documentation for these sales. Of the 435,000 tonnes, 300,000 tonnes is
being sold under agreements typical for the industry, with multi-year terms and
annual price negotiations. The Company is also continuing negotiations to
complete sales of approximately 225,000 additional tonnes, representing
production that it expects to have available for sale in the period from January
2005 through March 31, 2005.
Under the terms of the Company's arrangements with Marubeni, the Company has
entered into an agreement appointing Marubeni as its exclusive agent responsible
for the promotion, marketing and sale of Willow Creek Mine PCI and coking coal
to end-users in Japan, Korea and Taiwan. Marubeni will be entitled to receive
commissions on sales of coal to end users in those countries and to other
approved purchaser.
Marubeni has also committed to purchase 600,000 tonnes of the Company's
production during the next two years.
Competition
The coal mining industry is highly competitive. Competition in the industry is
based on price, quality and long-term deliverability to end-user markets. Large
international mining companies that can supply multiple types of coal from
several countries are increasingly dominating markets.
The Company expects to compete primarily with coal producers from Canada,
Australia and the United States. The supply of metallurgical coal in the global
markets and the demand for coal among world steel producers has historically
provided for a competitive market. Coal pricing is generally established in U.S.
dollars and the competitive positioning among producers can be significantly
affected by exchange rates. For example, a decline in the U.S. dollar value of
the Australian dollar compared to that of the Canadian dollar has in the past
and may in the future allow Australian producers a price advantage over Canadian
metallurgical coal producers. In addition, a number of steel producers deal with
multiple coal suppliers in order to ensure a security of supply and promote
further competitiveness in this market, although this dynamic has been off-set
somewhat by consolidation of producers.
Geological Setting of the Willow Creek Mine and Mineralization
The Willow Creek Coal Mine is in the Rocky Mountain Inner Foothills
physiographical region, and has relatively low, rounded, northwest-trending
ridges and valleys. It is dissected by the 1.5 km wide Pine River Valley.
Elevations range from 630 m to 1,300 m.
The coal measures of current interest on the Willow Creek Coal Mine belong to
the lower Cretaceous Gething Formation. Although the Gething is known to be coal
bearing the Willow Creek mine would be the first to exploit its coal on a major
scale. The Willow Creek geology is typical of other Western Canadian mountain
coal mines, characterized by folding and faulting in a moderately to steeply
dipping multi-seam deposit.
The mine plan considers eight seams for mining; five seams to be blended for a
metallurgical coking product, and three seams to be blended for a low-volatile
product for pulverized coal injection(PCI). The economic seams vary in true
thickness from the minimum mining thickness of 1m to in excess of 7m (combined
coal and parting, with in excess of 5m of coal), with an aggregate true
thickness of 20m over the total mining section. The majority of the tonnage is
the PCI product.
Mining and Processing
The Willow Creek Mine employs conventional open pit mining techniques using
truck and shovel methods. Overburden is drilled and blasted with explosives and
loaded onto large trucks by shovels and loaders and hauled to waste dumps
outside of the pit. Once the overburden is removed, the coal is loaded onto
trucks for transport.
The next step in coal processing is to transport the coal to a coal treatment
plant, which employs rotary breakers to break the coal into a predetermined size
and remove rock. The Company currently does not have a coal preparation plant.
It expects to have an operational plant by July 2005. The Company believes that
it can produce approximately 1.0 million tonnes of coal without such a facility.
Coal Transportation
Processed coal is conveyed to clean coal silos or other storage facilities for
storage and loadout to railcars. The loadout facilities are set up to load and
weigh unit trains (each train carrying up to 13,000 tonnes). A spray system
coats the top of each railcar with a dust inhibitor to minimize the escape of
coal dust during transportation.
The Willow Creek Mine is serviced by a single rail carrier. Coal is loaded into
seagoing vessels at Neptune Terminals, in North Vancouver, British Columbia.
Rail service is provided pursuant to an agreement expiring in June 2009 with
prices tied to tonnage levels. Neptune Terminals provides ship-loading services
for the Company.
Permitting Requirements
In order to develop or extend an existing coal property, it is necessary to
obtain a mine permit from the applicable provincial government. In certain
instances, such as when mine operations cross navigable waters or interfere with
a fishery, it may be necessary to obtain permits from the federal government.
The process to obtain these permits involves disclosure of the project to the
applicable authorities. If the proposed project development is of sufficient
size and impact, an Environmental Impact Assessment ("EIA") detailing the
proposed components are then published for public input and, with such input the
procedures and studies to be included in the EIA are finalized. The proponent
must then complete the EIA and document full details of the mine development and
operational plans to complete the application. The authorities review the
application again with public input, and following required amendments or
additions, the application is deemed complete. Dependent upon the magnitude of
the project, the level of public interest and the location of the project, the
regulators may then require a public hearing process. When this process is
complete the regulators will either approve the project, request modifications
to the project and approve it as modified or reject the project. Once approved
the required permits are issued.
The Company has the necessary mining permits to operate the Willow Creek Coal
Mine to an annual production level of 0.9 million tonnes. Management intends to
file a permit amendment application, rather than an EIA, following discussions
with provincial government regulators. The permit amendment application will be
filed with the provincial government regulators by early 2005 requesting an
increase in the permitted production level to approximately 2.0 million tonnes
per year, which increase will accommodate the forecasted production increases.
However, there is no guarantee that the permit will be granted, and, if
permission is delayed, the Company will be unable to increase production above
current permitted levels until the new permit is received.
The Company will produce pulverized coal injection ("PCI") and coking coal
products during the life of the mine. These products will be exported for use in
the steel manufacturing industry. The Company has entered into sales agreements
with steel manufacturers in Asia and Europe. Marubeni acts as the Company's
exclusive sales agent for sales from the Willow Creek Coal Mine into Japan,
Korea and Taiwan.
The Company has the necessary mining permits to operate the Willow Creek Coal
Mine to an annual production level of 0.9 million tonnes. Management intends to
file a permit amendment application with provincial government regulators by
early 2005 requesting an increase in the permitted production level to
approximately 2.0 million tonnes per year, which increase will accommodate the
forecasted production increases. However, there is no guarantee that the permit
will be granted, and, if permission is delayed, the Company will be unable to
increase production above current permitted levels until the new permit is
received.
C. Organizational Structure
The Company has the following material subsidiaries:
(a) Falls Mountain Coal Inc. ("Falls Mountain") was incorporated under the
laws of British Columbia, Canada on April 13, 1994 and is a wholly-owned
subsidiary of the Company; and
(b) Pine Valley Coal Pty Limited ("Pine Valley Coal") was incorporated under
the laws of Victoria, Australia on March 5, 2003 and was a wholly-owned
subsidiary of the Company. It is currently in a liquidation.
D. Property, Plants and Equipment
Willow Creek Coal Mine Description
The Willow Creek Coal Mine is 200 km northeast of Prince George and 45 km west
of Chetwynd, B.C. Access to the area is via the John Hart Highway (Highway 97),
which is an all weather paved highway connecting the Peace River District with
the city of Prince George. At the Willow Creek Coal Mine, the highway lies along
the north bank of the Pine River; secondary and tertiary roads provide access to
most parts of the Willow Creek Coal Mine project area. A bridge provides access
across the Pine River from the highway to the plant site currently under
construction, which is adjacent to the mining areas on the coal deposit. Access
roads within the Willow Creek Coal Mine mining area have been upgraded for use
as haulage roads.
Pine Pass is a transportation corridor within which lie the John Hart Highway
and the railway main line (from Prince George to the Peace River District),
which crosses the Willow Creek Coal Mine along the south side of the Pine River
adjacent to the plant site and clean coal storage areas. The railway provides
direct rail access to two ports in Vancouver, BC, and the Ridley Island coal
port at Prince Rupert, BC. The Peace River District is serviced by scheduled
airline flights to the cities of Dawson Creek, Fort St. John and Prince George,
which are 148 km, 203 km and 265 km respectively from the Willow Creek Coal
Mine. Power lines are currently being constructed from existing services to the
Willow Creek Coal Mine, a distance of approximately 22km.
The Willow Creek Coal Mine is in the Rocky Mountain Inner Foothills
physiographical region, and has relatively low, rounded, northwest-trending
ridges and valleys. It is dissected by the 1.5 km wide Pine River Valley.
Elevations range from 630 m to 1,300 m.
The forest consists of jackpine and minor spruce with little underbrush except
in wet areas adjacent to creeks and seepages. The climate is northern temperate
with temperatures ranging from a maximum of 32 degreesC to a minimum of
- -48 degreesC. The mean total annual precipitation in the region is 425 mm.
The Willow Creek Coal Mine currently consists of coal tenures encompassing
12,595 ha including a coal lease (#15, tenure number 389294 in map reference
93O) and twenty two coal licenses as listed below:
Coal Land Map
License No District Reference Block Units
327314 Peace River 93O/9 B 49,50,59,60
327316 Peace River 93O/9 C 63,64,73,74
327318 Peace River 93O/9 C 83,84,93,94
327320 Peace River 93O/9 C 41,42,51,52
327321 Peace River 93O/9 C 61,62,71,72
347215 Peace River 93O/9 B 29,30,39,40
347216 Peace River 93O/9 B 27,28,37,38
347217 Peace River 93O/9 B 7,8,17,18
347218 Peace River 93O/9 B 5,6,15,16
327312 Peace River 93O/9 F 27,28,37,38
327313 Peace River 93O/9 F 29,30,39,40
347214 Peace River 93O/9 L 1,2,11,12
409343 Peace River 930/9 F 7,8,17,18
409344 Peace River 930/9 F 9,10,19,20
409345 Peace River 930/9 F 25,26,35,36
409346 Peace River 930/9 F 47,48,57,58
409347 Peace River 930/9 F 49,50,59,60
409348 Peace River 930/9 F 67,68,77,78
409349 Peace River 930/9 F 69,70,79,80
409350 Peace River 930/9 F 85,86,95,96
409351 Peace River 930/9 F 87,88,97,98
409352 Peace River 930/9 F 5,6,15,16
In 1996, Norwest Corporation ("Norwest")was commissioned to prepare a bankable
feasibility study for an open pit mine. The study was completed in July, 1997
for the use of the joint venture participants. Subsequently, additional mine
design was done by Norwest which resulted in a further report in February 1998.
A detailed feasibility study was completed on January 14, 1999 by Norwest,
Cochrane PBK Engineering, Piteau Associates and Agra Earth & Environmental.
An update of the 1999 feasibility study focused on updating the costs and
revenues to 2002 was completed by Norwest in September, 2002. In 2001 and early
2002 a trial cargo shipment was completed by mining approximately 84,000 tonnes,
which was shipped and sold to a leading Japanese steel maker. The mining
occurred within the mine development area.
In 2003 the Company studied a series of initiatives designed to lower capital
and operating costs to improve the mine economics.
The coal measures of current interest on the Willow Creek Coal Mine belong to
the lower Cretaceous Gething Formation. Although the Gething is known to be coal
bearing the Willow Creek mine would be the first to exploit its coal on a major
scale. The Willow Creek geology is typical of other Western Canadian mountain
coal mines, characterized by folding and faulting in a moderately to steeply
dipping multi-seam deposit.
The mine plan considers eight seams for mining; five seams to be blended for a
metallurgical coking product, and three seams to be blended for a low-volatile
product for pulverized coal injection(PCI). The economic seams vary in true
thickness from the minimum mining thickness of 1m to in excess of 7m (combined
coal and parting, with in excess of 5m of coal), with an aggregate true
thickness of 20m over the total mining section. The majority of the tonnage is
the PCI product.
SUMMARY OF SURFACE RESERVES AND RESOURCES
Strip Ratio
Tonnes (BCM(1):tonne
Area Category (Millions) coal)
Willow Creek Measured and Indicated(2) 15.2 3.6:1
(North and Central only)
Pine Pass Measured and Indicated(2) 9.5 10.15:1
Crassier Creek Resource(3) 57.3 7.2:1
Fisher Creek Resource(3) 21.3 7.6:1
(1) Note: BCM is bank cubic metre of waste rock.
(2) The measured and indicated reserve were calculated by Norwest Corporation in
accordance with the requirements of Canadian National Instrument 43-101 and the
applicable criteria for the calculations of coal reserves in the Geological
Survey of Canada Paper 88-21.
(3)These historical resources calculations were prepared by Gulf Canada from
work in the 1980s and do not conform to Canadian National Instrument 43-101 and
are available through the British Columbia Ministry of Energy and Mines.
The Company is currently producing a PCI coal with the following characteristics
on a dry basis:
Ash 8.0%
Volatiles 16.0%
Sulphur 0.6%
Calorific Value 7,750 kcal/kg
The Company can produce approximately 1.0 million tonnes of PCI coal without
coal preparation facilities. Thereafter a coal preparation facility will be
installed to wash run-of-mine (ROM) coal and prepare the primary metallurgical
coking coal and PCI coal products. The coal preparation facility is planned to
be operational by July 2005.
Item 5 - Operating and Financial Review and Prospects
Overview
The following discussion should be read in conjunction with the audited
consolidated financial statements of the Company for the years ended March 31,
2004, 2003, and 2002, and related notes thereto, and with the selected data set
forth. The Company's consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles. Except as
described below under "Material Differences Between US and Canadian Generally
Accepted Accounting Principles," and in Note 16 to the audited consolidated
financial statements, there are no material differences, for the purposes of
these financial statements, between accounting principles generally accepted in
Canada and the US. Unless otherwise indicated, all currency is reported in
Canadian dollars.
The Company's activities are primarily directed toward the development and
production of coal from its Willow Creek Coal Mine. In addition, the Company is
interested in the location, exploration and development of mineral properties.
Activities over the last five years include general exploration in locating and
evaluating potential properties and exploration on properties that have been
acquired by the Company. Costs incurred for general exploration that did not
result in the acquisition of mineral properties with ongoing exploration or
development potential were charged to operations. Exploration costs relating to
the Company's properties with ongoing exploration or development potential were
capitalized as deferred exploration. Should the Company abandon a property, the
related deferred exploration costs are charged to operations. Administrative
costs are not deferred.
A. Operating Results
Year ended March 31, 2004 Compared to Year Ended March 31, 2003
The Company had a loss from operations of $1,112,932 (2003 - $3,457,839) during
the year ending March 31, 2004. The Company's loss per share was $0.03 per
share. The loss for the year ended March 31, 2004 was lower than the prior year
due to a large write down of the Indin Lake gold project during the year ended
March 31, 2003. Other costs generally increased in the current period due to an
increased level of activity directed to bringing the Willow Creek coal project
towards production.
The Company incurred Expenses and Other Items totaling $1,118,750 for the fiscal
year ended March 31, 2004 compared to $561,595 for the fiscal year ended March
31, 2003. The increased expenses and other items, excluding stock based
compensation, reflect the increased size of the Company's management team.
Below is a table comparing Expense items for the year ended March 31, 2004 and
2003 where significant changes occurred. A discussion of the changes follows the
table.
Year ended Year ended
March 31, 2004 March 31, 2003
Accounting & Audit $ 86,671 $ 39,150
Consulting and Management Fees 27,929 55,544
Fees and Assessment 97,256 24,422
Filing and Transfer agent fees 34,676 20,171
Interest and Financing 84,488 143,957
Office 47,552 22,948
Professional Fees 104,573 78,374
Promotion & Marketing 6,978 11,898
Salaries and stock-based compensation 591,211 139,618
Travel 35,024 20,833
Accounting and Audit fees increased due to costs associated with the continued
increased regulatory requirements and initiating the liquidation of the
Australian subsidiary.
Consulting fees were due to the engagement of an individual to assist the
Company with the overall financial direction of the Company and the
establishment of the Australian subsidiary and supporting functions. The
consulting services for the period ending March 31, 2003 were to aid the Company
in the preparation and dissemination of press releases and the introduction and
communication with the financial markets in the United States.
Filing and Transfer Agent costs were higher due to the TSX-Venture Exchange
costs associated with various share issuances.
Interest and Financing costs of $84,488 in the current period were due to the
accrual of $18,515 in provincial capital tax for the years 1997 through 2001 and
interest payments of $65,973 on the note payable to Mitsui Matsushima.
Management fees were nil during the current year, reflecting the Company's
change in structure engaging key management as employees.
Office costs, comprised of office supplies, telephone and communications, rent
and computer expenses, increased as a result of increased activity and as there
was no recovery from the Willow Creek Joint Venture for the rent as had occurred
in the previous year.
Professional Fees, consisting of legal fees, were increased from last year as a
result of the increased company activities. The professional services provided
each year were primarily by the Company's legal counsel and related to dealings
for the agreements to purchase Mitsui Matsushima's Willow Creek Joint Venture
interest, a variety of regulatory related and other legal matters.
Promotion and Marketing decreased primarily as last year's equivalent period
included the development of a new web site and the engagement of a firm to focus
on marketing for a limited period of time.
Salaries and Stock Based Compensation were reclassified from Office to conform
to the presentation adopted in the current period. The increased amounts
reflected the engagement of individuals as the Company's Executives in March
2003.
Year ended March 31, 2003 Compared to Year Ended March 31, 2002
The consolidated loss for March 31, 2003 was $3,457,839 or $0.12 per share
compared with a loss of $2,340,558 or $0.12 per share for March 31, 2002.
The Company incurred Expenses and Other Items totaling $561,595 for the fiscal
year ended March 31, 2003 compared to $2,118,345 for the fiscal year ended March
31, 2002. Expenses and Other Items were reduced through a focus on reducing
general and administrative expenses and decreased interest and financing charges
due to lower debt. This was offset by an increase in consulting costs as a
result of stock based compensation.
Below is a table comparing Expense items for the year-ended March 31 in 2003 and
2002 where significant changes occurred. A discussion of the changes follows the
table.
Year ended Year-ended
March 31, 2003 March 31, 2002
Accounting & Audit $39,150 $45,842
Consulting 22,794 Nil
Fees & Assessment 24,422 1,253
Interest and Financing 143,957 969,210
Management Fee 32,750 161,796
Office 162,566 741,464
Professional Fees 78,374 139,689
Travel 20,833 22,558
Promotion & Marketing 11,898 7,580
Consulting fees increased as a result primarily of adopting the fair value
method for stock based compensation for stock options which were issued to non-
employees or non-directors. The consulting services included aiding the Company
in the preparation and dissemination of press releases and the introduction and
communication with the financial markets in the United States.
Fees and Assessments increased due to payments for British Columbia capital
taxes.
The Company incurred lower Interest and Financing costs due to substantially
lower loans outstanding.
Management Fees, incurred for the services of one of the management team, were
lower, reflecting the Company's focus to reduce the administrative costs to
operate the Company. The management services in the current year included
overall Company management and administration as well as rail negotiations,
government liaison and commercial dealings with Mitsui Matsushima Canada Ltd. In
the previous year the management fees included the provision of the services of
two individuals filling the roles of the President, CEO and CFO who provided
overall Company management and administration, including managing the financial
affairs of the Company.
Office costs were comprised of salaries and salary related costs totaling
$146,683 as well as general office supplies and miscellaneous items. A portion
of the salaries and salary related costs was for the engagement of an individual
as President of the Company. The Office costs declined significantly over the
full year due to the provision during the year ended 2002 for a $600,000 payment
to the estate of a former Chairman of the Company as described in note 6 of the
current financial statements. Office costs did increase in the fourth quarter
compared to the previous three quarters as a result of increased salaries due to
the added management and establishing the Australian office in March 2003 to
support the increased management expertise, as announced in a press release on
March 10, 2003.
Professional Fees were lower in the current period as in the year ended March
31, 2002 the Company had incurred costs related to the investigation of an
opportunity to develop a coal fired electrical generation plant in Washington
State. The Company also reversed significant legal fees which had been accrued
in 2002 thus lowering the Professional Fees in 2003. The professional services
provided in 2003 were primarily by the Company's legal counsel and related to
dealings for the agreement to purchase Mitsui Matsushima Canada Ltd.'s Willow
Creek Joint Venture interest, a variety of regulatory related matters including
public company issues and debt settlements, the engagement contracts of the
added management as announced on March 10, 2003 and various other legal matters.
Promotion and Marketing increased primarily due to the initial start up costs as
the Company developed and launched a new web site during the second quarter and
engaged a firm to focus on marketing for a limited period of time.
The Company entered into related party transactions. A total of 4,185,722 shares
were issued to satisfy debt totaling $2,516,433. The debt had been incurred
principally to finance the trial cargo the Company participated in during 2001
and the acquisition of the BC Rail joint venture interest in the Willow Creek
project. The shares were issued to a director and trusts of which a director is
a trustee; the TSX Venture Exchange approved the terms and shareholders approved
the transaction at the Company's Annual General Meeting on September 30, 2002.
The Company paid and accrued interest expense totaling $76,960 to a director of
the Company beneficially owning more than 10% of the stock. This includes
$34,000 that was reclassified by the Company's auditor in the year-end accounts
for loan interest. Management fees of $32,750 due to a former officer and
director of the Company were accrued. The Company had agreed to pay compensation
of $500 per day for the professional services, including Company management,
rail negotiations government liaison, and commercial dealings with Mitsui
Matsushima Canada Ltd. for approximately ten days per month. Of the daily amount
50% was paid through the Willow Creek Joint Venture, and the balance was
deferred until such time as the Company has the financial resources to pay the
appropriate amount. The total deferred payment to the former officer and
director is $51,675 (2002 -$18,925). During the year 100,000 shares were issued
to a former officer and director to settle a $55,000 debt outstanding. The terms
of this settlement were approved by the TSX Venture Exchange. As well a total of
$16,800 was paid to an individual for consulting services prior to the
individual becoming an officer of the Company.
The Company incurred development costs of $311,506 in the period ending March
31, 2003 compared to $425,181 in the same period of the previous year. The
Company incurred costs of $307,761 with respect to the Willow Creek project.
These costs included the completion of feasibility and regional geological
studies and ongoing environmental and site maintenance work. The Company
concluded that the Indin Lake gold property should be written down in the March
31, 2003 financial statements to nil value due to the extended period of time
since any active exploration work has been undertaken, the difficulty advancing
the property at current gold prices and the limited likelihood that the Company
will realize any significant value from the property in the near future. A
write down of $2,914,600 on the Indin Lake property was charged to operations
for the year ended March 31, 2003.
Differences Between Canadian and United States Generally Accepted Accounting
Principles and Effects of Recent Accounting Pronouncements
Our financial statements are prepared in accordance with Canadian GAAP
(Generally Accepted Accounting Principles) and reconciled to US GAAP.
Differences are shown in note 16 of the audited consolidated financial
statements for the period March 31, 2004 which form a part of this Report.
(a) Mineral property costs
US GAAP requires that mineral property costs be expensed until there is
substantial evidence that a commercial body of ore has been located, whereas
Canadian GAAP allows mineral property costs to be deferred during the
exploration process. For US GAAP purposes, the Company has expensed property
costs incurred prior to March 31, 2003. Subsequent to that date the Company has
capitalized, for US GAAP purposes, acquisition and development costs as the coal
reserve estimates have been confirmed, a feasible mine plan has been developed
and financing from the development of the mine has been arranged.
(b) Revenue
Under Canadian GAAP, revenues received prior to the commercialization of mineral
properties reduce capitalized development and other capitalized pre-production
costs. Under US GAAP, such amounts are recorded as revenue when title and risk
of the ore pass to the buyer, the consideration is fixed or determinable and
collection is reasonably assured.
(c) Stock-based compensation
During the year ended March 31, 2004, the Company adopted the fair valued based
method of accounting under the Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, with prospective
application, effective April 1, 2003, as permissible under SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure. Fair value
accounting for stock-based compensation was also adopted by the Company under
Canadian GAAP effective April 1, 2003, which substantially harmonizes Canadian
GAAP with US GAAP for the year ended March 31, 2004.
The following pro forma financial information presents the net loss and loss per
share for the years ended March 31 under US GAAP for the effect of fair value
accounting for options issued to employees and directors.
2003 2002
---- ----
Net loss for the year under US GAAP $ (851,000) $(2,765,739)
Additional stock-based compensation costs (115,000) (510,000)
----------- -----------
Pro forma net loss under US GAAP $ (966,000) $(3,275,739)
=========== ===========
Pro forma basic and diluted loss per share
under US GAAP $ (0.03) $ (0.16)
=========== ===========
(d) Accounting for joint ventures
US GAAP requires investments in joint ventures to be accounted for using the
equity method, while under Canadian GAAP, the accounts of joint ventures are
proportionately consolidated. However, under rules promulgated by the Securities
and Exchange Commission, a foreign registrant may, subject to the provision of
additional information, continue to follow proportionate consolidation for
purposes of registration and other filings notwithstanding the departure from US
GAAP. Consequently, as at March 31, 2003, the balance sheets have not been
adjusted to restate the accounting under US GAAP and additional information
concerning the Company's interest in a joint venture is presented in Note 7.
During the year ended March 31, 2004, the Company acquired the remaining joint
venture interest and, as a result, consolidates 100% of the acquired company
(Note 5).
(e) Asset retirement obligation
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"), which addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of
long-lived assets, except for certain obligations of leases. SFAS 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, an entity capitalizes the cost by increasing the carrying
amount of the related long-lived assets. Over time, the liability is accreted to
its present value each period, and the capitalized cost is amortized over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
The adoption of SFAS 143 does not have a material impact on the Company's
financial position.
(f) Income taxes
Under Canadian GAAP, future income taxes are calculated based on enacted or
substantially enacted tax rates applicable to future years. Under US GAAP, only
enacted rates are used in the calculation of future income taxes. This
difference in GAAP did not result in a difference in the financial position,
results of operations or cash flows of the Company for the years ended March 31,
2004, 2003 and 2002.
(g) Accounting for impairments
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale. The
statement also supersedes certain provisions of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, and will require expected future operating
losses from discontinued operations to be displayed in discontinued operations
in the period(s) in which the losses are incurred rather than as of the
measurement date, as presently required. As required by SFAS No. 144, the
Company adopted this new statement on March 1, 2002. The adoption of SFAS No.
144 did not have a material impact on the Company's financial position, results
of operations or cash flows.
(h) Costs of exit for disposal of activities
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal of Activities. SFAS No. 146 requires that the liability for a
cost associated with an exit or disposal activity is recognized at its fair
value when the liability is incurred. Under previous guidance, a liability for
certain exit costs was recognized at the date that management committed to an
exit plan, which was generally before the actual liability had been incurred. As
SFAS No. 146 is effective only for exit or disposal activities initiated after
December 31, 2002, the adoption of this Statement did not have a material effect
on the Company's financial position, results of operations or cash flows.
(i) Newly released accounting standards
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation
of Variable Interest Entities, that addresses the consolidation of variable
interest entities. In December 2003, the FASB issued a revised Interpretation
"FIN 46R." Under the revised Interpretation, an entity deemed to be a business,
based on certain specified criteria, need not be evaluated to determine if it is
a Variable Interest Entity. The Company must apply the provisions to variable
interests in entities created before February 1, 2002. Adoption of FIN 46 and
FIN 46R did not have an impact on the Company's financial condition, results of
operations or cash flows.
In April 2003, the FASB issued Statement No. 149 ("SFAS 149"), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 is
intended to result in more consistent reporting of contracts as either
freestanding derivative instruments subject to Statement 133 in its entirety, or
as hybrid instruments with debt host contracts and embedded derivative features.
In addition, SFAS 149 clarifies the definition of a derivative by providing
guidance on the meaning of initial net investments related to derivatives. SFAS
149 is effective for contracts entered into or modified after June 30, 2003.
Adoption of SFAS 149 did not have a material effect on the Company's financial
position, results of operations or cash flows.
In May 2003, the FASB issued Statement No. 150 ("SFAS 150"), Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments including mandatory redeemable equity instruments and certain equity
derivatives. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003 and to other instruments as of September 1, 2003.
The adoption of SFAS 150 did not have a material impact on the Company's
financial position, results of operations or cash flows.
Accounting Policies
The Company's accounting policies are set out in Note 3 of the audited
consolidated financial statements. There are two policies, that due to the
nature of the mining business, may not be readily understood. These policies
relate to the capitalizing of mineral exploration expenditures and the use of
estimates.
The Company defers all costs relating to the acquisition and exploration of its
mineral properties. Any revenues received from such properties are credited
against the costs of the property. If commercial production commenced on any of
the Company's properties, costs would be amortized to operations by the
unit-of-production method. The Company's management periodically reviews the
results of its exploration programs. Any decisions to abandon or reduce
exploration efforts on any of its properties would result in a charge to
operations when such decision is made. There is not a predetermined hold period
for any property as geological economic circumstances render each property
unique.
The determination of mineral reserves is a complex task in which a number of
estimates and assumptions are made. These involve the use of geological sampling
and modeling as well as estimates of future costs. Knowledge derived from
ongoing exploration and development of the ore body may also affect reserve
estimates. In addition, the determination of economic reserves is dependent upon
a number of assumptions, including long-term coal prices and foreign exchange
rates.
The Company reviews and evaluates capital assets for impairment of value on an
ongoing basis. The expected undiscounted future cash flows from an asset used in
these evaluations are developed using assumptions that reflect our best estimate
of the long-term operating plans for the asset. Changes in market conditions,
reserve estimates and operating conditions are updated periodically as part of
the test for impairment of value.
Effective April 1, 2003 the Company changed its accounting policy on a
prospective basis with respect to the method of accounting for stock-based
compensation. The Company adopted CICA 3870, Stock-based Compensation and Other
Stock-based Payments, and has chosen to account for all grants of options to
employees, non-employees and directors after April 1, 2003 in accordance with
the fair value method for accounting for stock-based compensation as defined by
accounting principles generally accepted in Canada. Stock-based compensation
awards expense is calculated using the Black-Scholes option pricing model
("Black-Scholes"). Previously, the Company used the intrinsic value method for
valuing stock-based compensation awards granted to employees and directors where
compensation expense is recognized for the excess, if any, of the quoted market
price of the Company's common shares over the common share exercise price on the
day that options are granted. Using the fair value method for stock-based
compensation, the Company recorded a charge to operations of $26,454 for the
year ended March 31, 2004 for stock options granted to employees and directors.
This amount was determined using Black-Scholes assuming no dividends were paid,
a weighted average volatility of the Company's share price of 148%, a weighted
average annual risk free interest rate of 3.97% and an expected life of five
years.
B. Liquidity and Capital Resources
The Company's working capital deficiency at March 31, 2004 was $3,206,748,
primarily due to the $3,000,000 of scheduled payments due during the year ending
March 31, 2005 on the debt to Mitsui Matsushima.
On April 16, 2003 the Company completed a $1,100,000 private placement of
5,500,000 units, priced at $0.20 each, each unit consisting of one common share
and one warrant. Each warrant is exercisable at a price of $0.25 to purchase one
common share. The warrants expire two years after the issue date. The funds were
used for continuing work on the Willow Creek coal project and general corporate
purposes.
A financing related finder's fee of $131,250 was paid by the issuance of 656,250
common shares valued at a price of $0.20 per share.
In December 2003, the Company raised $1,600,000 in connection with a
non-brokered private placement of 8,000,000 units at a price of $0.20 per unit.
Each unit consists of one common share and a warrant. Each warrant is
exercisable at a price of $0.22 to purchase one common share for the first year
and at $0.25 to purchase one common share during the second year. The proceeds,
together with $500,000 in proceeds from an unrelated transaction, were used for
the initial $2,000,000 payment that was made January 6, 2004 pursuant to the
agreement between Falls Mountain and Mitsui Matsushima that allowed the Company
to acquire Mitsui Matsushima 's 33 1/3% interest in the Willow Creek Joint
Venture.
The carrying value of the Willow Creek resource property increased by
$6,400,000, reflecting the purchase of Mitsui Matsushima's one-third interest
and expenditures incurred on the project during the year.
In May 2004 the Company signed an agreement with Marubeni for a US$7,600,000
(CAD$10,000,000) debt facility. Also in May, the Company issued 3,333,334 shares
of common stock to Sprott Asset Management, Inc. in connection with a
non-brokered private placement for $3,000,000 at a price of $0.90 per common
share. The proceeds will be used for capital expenditures, general and
administrative expenses, and working capital to finance the development of the
Willow Creek mine to bring estimated production to a rate of 95,000 tonnes per
month by the fall of 2004 (an annualized rate of 1.1 million tonnes). The debt
payable to Marubeni is secured by an interest in the Company's assets which
ranks pari passu with the current security interest held by Mitsui Matsushima.
In August 2003, the Company received a report (the "Merit Report")from Merit
Consultants International Inc., an independent consulting firm, providing
estimated capital costs for projects under construction or expected to be
constructed in the early part of 2005. The estimates did not represent actual
contractual commitments entered into by the Company at the time, and actual
costs were therefore likely to vary from Merit's estimates. Those estimates are
presented in the table below. Mr. Jay Collins, an independent Qualified Person
as defined by National Instrument 43-101, supervised the preparation of the
technical information in the Merit Report.
Merit Report, August 2003
(incl. 10% contingency)
-------------------------
Mine Operations Facilities $ 684,000
Mine Operations Equipment $ 333,000
Pre-Development $ 660,000
Pre-Production and spares $ 1,631,000
Site work $ 991,000
Raw Coal Handling $ 1,474,000
Preparation Plant $ 5,153,000
Clean Coal Handling $ 2,279,000
Rail siding $ 2,033,000
EPCM and Additional Indirect Costs $ 818,000
Office/Workshop $ 1,912,000
-----------
Total $17,968,000
-----------
Notes:
- - Working capital, sustaining capital, first fills and inventory costs are not
included.
- - The Preparation Plant is based on a fully modularized processing plant.
As at September 15, 2004, the Company has spent approximately $2.9 million on
various aspects of the capital projects specified therein. Based upon its
experience to date with the project, the Company believes that capital project
costs will exceed previous estimates and may exceed the previous estimates by up
to approximately $3 million. Also, train loading facilities which were
originally scheduled to be installed in 2005 are now planned to be installed by
the end of 2004, which while not affecting the cost of the entire project, will
increase the project cost in the current year by approximately $2,000,000.
The Company will have additional capital requirements of approximately
$5,000,000 for construction of a coal processing plant and other facilities to
expand production in early 2005. Based upon its anticipated production levels
and assuming no significant deterioration in the current favorable pricing
environment, the Company expects that its $3,000,000 equity financing,
US$7,600,000 debt facility and cash flow from operations for periods subsequent
to the commencement of coal sales will be sufficient to finance its capital
expenditure and working capital requirements through 2005. To date, the Company
has not realized any cash flow from operations. It has depended upon debt and
equity financing in order to fund its exploration and development programs and
its working capital requirements. To the extent that the Company's cash flow
from operations is lower than expected, or if the cost of its capital projects
exceed the revised estimates, it will have to continue to rely upon sales of its
equity and debt securities to fund these activities and meet its debt service
requirements. There can be no assurance that financing, whether debt or equity,
will always be available to the Company in the amount required at any particular
time or for any particular period or, if available, that it can be obtained on
terms satisfactory to the Company. The Company's ability to raise additional
debt financing is restricted as it has secured all of its assets under the
provisions of its current debt obligations with Marubeni and Mitsui Matsushima.
The Indin Lake Project was written down to nil due to the extended period of
time since any active exploration work has been undertaken, the difficulty
advancing the property at current gold prices and the limited likelihood that
the Company will realize any significant value from the property in the near
future. The Company plans to have discussions with interested parties to option
or sell the Indin Lake gold project so that the Company can focus its efforts on
the Willow Creek Coal Mine.
The Company's historical capital needs have been met by the sale of equity
shares, by amalgamations with suitable companies and loans.
The Company had working capital deficiency of $3,206,748 as of March 31, 2004
and $746,976 as of June 30, 2004. The Company has entered into the following
additional commitments described below.
The Company has a $50,000 letter of credit outstanding at March 31, 2004 (2003 -
$50,000).
The Company has entered into an operating lease agreement for office space which
requires the Company to make the following lease payments:
Fiscal 2005 21,977
Subsequent to the end of its most recent fiscal year, the Company entered into
forward foreign exchange contracts for Canadian dollars in order to establish a
partial hedge against exposure to currency fluctuations. At September 28, 2004
the Company had outstanding forward contracts to sell US foreign currency and
purchase Canadian dollars having a total notional principal amount of
US$20,380,000. The contracts are structured to hedge 80% of currently scheduled
monthly sales from October 2004 to March 2005, as well as 100% of projected
advances from Marubeni net of expected US Dollar expenditures in connection with
its financing of the project.
Values ascribed to shares issued for consideration other than cash are
determined from the date of the agreement or transaction and the market value of
the Company's shares on that date. All treasury share issuances are subject to
application to regulators and receipt of regulatory approval. Although there is
fluctuation of the market price of the Company's shares from time to time, which
may not bear any relationship to a particular share transaction, it is a matter
of procedure by regulatory policy based on the date of the transaction and an
application of the share transaction to the regulators.
C. Research and Development, Patents and Licenses, Etc.
Not applicable
D. Trend Information
The price at which the Company sells its coal also affects the Company's
financial projections. Subsequent to the end of the period the Company announced
that it has concluded sales negotiations for the sale of 435,000 tonnes of its
pulverized coal injection ("PCI") product for the period September 2004 to March
31, 2005 with customers who represent a number of the premier
steel producers in Asia and Europe. The weighted average price for the PCI coal
to be sold under these contracts is US$52.11 per tonne, compared to US$32.25
used in the feasibility study by Norwest in September 2002. The Company is
presently completing the formal documentation for these sales. Of the 435,000
tonnes, 300,000 tonnes is being sold under agreements typical for the industry,
with multi-year terms and annual price negotiations. The Company is also
continuing negotiations to complete sales of approximately 225,000 additional
tonnes, representing production that it expects to have available for sale in
the period from January 2005 through March 31, 2005.
A portion of the sales were arranged in conjunction with the $10 million debt
financing with Marubeni announced in April, 2004. Since then, the Company has
worked with Marubeni to conclude sales initiated by Marubeni in its role as the
Company's sales agent in Japan, Korea and Taiwan. Coal prices have experienced
significant fluctuations in prior periods and the Company anticipates that
pricing will fluctuate significantly in the future as well (see Item 3D, Risk
Factors, Coal Price and Volatility).
From April 12, 2004 to September 9, 2004 warrants were exercised to issue
4,103,181 shares at prices ranging from $0.22 to $1.35 for total proceeds of
$1,333,609 to the Company.
As noted under the caption "Liquidity and Capital Resources" above, the Company
will have additional capital requirements of approximately $5,000,000 for
construction of a coal processing plant and other facilities to expand
production in early 2005.
The Company's mining operations are inherently subject to changing conditions
that can affect levels of production and production costs at particular mines
for varying lengths of time and can result in decreases in profitability.
Weather conditions, equipment replacement or repair, fuel prices, fires,
variations in coal seam thickness, amounts of overburden rock and other natural
materials, and other geological conditions have had, and can be expected in the
future to have, a significant impact on operating results. A prolonged
disruption of production at the Willow Creek Coal Mine would significantly
reduce the Company's revenues and profitability. Other factors affecting the
production and sale of the Company's coal that could result in decreases in our
profitability include: (i) expiration or termination of, or sales price
redeterminations or suspension of deliveries under, coal supply agreements; (ii)
disruption or increases in the cost of transportation services; (iii) changes in
laws or regulations, including permitting requirements; (iv) litigation; (v)
work stoppages or other labor difficulties; (vi) mine worker vacation schedules
and related maintenance activities; and (vii) changes in coal market and general
economic conditions.
E. Off-Balance Sheet Arrangements
Not applicable
F. Tabular Disclosure of Contractual Obligations
Payment due by period
Effective March 31, 2004
-------------------------------------------------------------
less than More than
Contractual Obligations Total (C$) 1 year 1-3 years 3-5 years 5 years
Long-Term Debt Obligations Mitsui Matsushima 4,000,000 3,000,000 1,000,000
Operating Lease Obligation Office Building Landlord 21,977 21,977
Other Long-Term Liabilities Estate of Gillespie 600,000 600,000
Total 4,621,977 3,021,977 1,600,000 Nil Nil
G. Safe Harbor
This Report and the attached exhibits contain "forward-looking statements" as
defined in the United States Private Securities Litigation Reform Act of 1995,
that involve a number of risks and uncertainties. Such statements are based on
the Company's current expectations, estimates and projections about the
industry, management's beliefs and certain assumptions made by it. Words such as
"anticipates", "expects", "intends", "plans", "believes" or similar expressions
are intended to identify forward-looking statements. These statements include,
but are not limited to, statements concerning projected revenues, expenses and
gross profit, mine development efforts, need for additional capital, market
acceptance of the Company's resource production, and the Company's production
capacity. Such statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, the Company's actual results could differ materially and
adversely from those expressed in any forward-looking statements as a result of
various factors.
Information relating to the magnitude or quality of mineral deposits is deemed
to be forward-looking information. The reliability of such information is
affected by, among other things, uncertainty involving geology of mineral
deposits; uncertainty of estimates of their size or composition; uncertainty of
projections relating to costs of production or estimates of market prices for
the mineral; the possibility of delays in mining activities; changes in plans
with respect to exploration, development projects or capital expenditures; and
various other risks including those relating to health, safety and environmental
matters.
The Company cautions that the list of factors set forth above is not exhaustive.
Some of the risks, uncertainties and other factors which negatively affect the
reliability of forward-looking information are discussed in the Company's public
filings with the Canadian securities regulatory authorities, including its most
recent annual report, quarterly reports, material change reports and press
releases, and with the United States Securities and Exchange Commission. In
particular, your attention is directed to the section in this Report entitled
"Risk Factors" and similar discussions in the Company's other SEC and Canadian
filings concerning some of the important risk factors that may affect its
business, results of operations and financial conditions. You should carefully
consider those risks, in addition to the other information in this Report and in
the Company's other filings, before making any business or investment decisions
involving the Company and its securities.
The Company undertakes no obligation to revise or update publicly any forward-
looking statements for any reason.
ITEM 6 - Directors, Senior Management and Employees
The shareholders determine, at each annual general meeting, the number of
directors that will make up the Company's board of. The Company's directors are
elected by the Company's shareholders pursuant to the terms of the Company's
Articles and the terms of its governing legislation, the British Columbia
Business Corporations Act. None of the Directors have entered into any service
agreements with the Company in their capacities as directors and, other that
incentive stock options disclosed in this Form 20-F, do not receive any
remuneration for their service as directors. The executive officers are
appointed by the board of directors and have employment or service agreements
with the Company.
The following sets out the directors and officers of the Company:
A. Directors and Senior Management as of August 31, 2004
Name Age Position with the Company
Jeffrey M Fehn 41 Chairman, Director
Graham Mackenzie 48 President, CEO, Director
Mark Fields 51 Executive Vice President, Corporate
Secretary, Director
Mark Smith 50 Director
Clay Gillespie 35 Director
Gordon Fretwell 51 Director
Jeffrey M. Fehn, Chairman and a director of the Company since August 2004,
currently serves as Chief Financial Officer of Oakwood Laboratories, LLC, a
developmental stage pharmaceutical company for which Mark T. Smith, the
Company's outgoing Chairman, serves as President and CEO. Mr. Fehn was formerly
Senior Vice President of Mergers & Acquisitions at KeyBanc Capital Markets,
Inc., where he was primarily responsible for the origination and execution of
M&A and restructuring transactions for corporate clients on a national basis.
Mr. Fehn held various positions over the past 16 years with KeyCorp, its
affiliates, and predecessors. Prior to his tenure in the Mergers & Acquisitions
Group, Mr. Fehn directed the firm's equity private placement activities as part
of the Growth Finance Group, where he provided financial advisory services
related to equity capital raising for both private and publicly-traded
companies.
Graham Mackenzie, B. Engineering (Civil), currently the President, Chief
Executive Officer and a director of the Company, was appointed Vice President in
charge of the Willow Creek coal mine in March 2003. Mr. Mackenzie has extensive
technical and operating experience within the coal industry, including being
Mine Manager of a 4.5 million tones per year capacity open pit coal mine.
Mark Fields, B.Sc., B.Comm., P.Geo., Executive Vice President and Corporate
Secretary, Director since September, 2001. Mr. Fields has over 18 years
experience as a professional geologist within the mineral exploration and
development industry, focusing on Canada and Alaska. Mr. Fields is a
member of the audit committee. He is a member of the Professional Engineers and
Geoscientists of British Columbia, and of the Canadian Institute of Mining,
Metallurgy and Petroleum.
Mark T. Smith, B.A. (Harvard), MBA (Stanford), a Director since March 2002. Mr.
Smith is President and COO of Oakwood Labs L.L.C., a pharmaceutical development
company located in Oakwood, Ohio, where significant advances in the treatment of
life-threatening diseases are commercially developed. Mr. Smith previously
served as Chairman of the Company and is one of the Company's largest
shareholders.
Clay Gillespie, B.B.A., CIM, CFP, Director since April 2002. Mr. Gillespie has
been an investment counselor and financial advisor for a prominent Vancouver
advisory firm for the past ten years. Mr. Gillespie is a member of the audit
committee. Mr. Gillespie holds a Bachelor of Business Administration with a
specialty in Finance and is a Certified Investment Manager and a Certified
Financial Planner.
Gordon Fretwell, L.L.B., Director since August, 2003. Mr. Fretwell is the
principal of his law corporation and acts as director on a number of other
public companies. Mr. Fretwell is a member of the audit committee.
B. Compensation
Summary Compensation Table
The following table sets forth all compensation paid in respect of the
individuals who were, at March 31, 2004, the current and the former Chief
Executive Officers, the former Chief Financial Officer and the current acting
Chief Financial Officer of the Company (the "Named Executive Officers"). There
were no other executive officers of the Company whose total salary and bonus
exceeded $150,000 during the financial year ended March 31, 2004.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------------ -----------------------------------------
Awards Payouts
------------------------- --------------
Securities Shares or
Under Units Subject Long Term
Name and Other Annual Options to Resale Incentive Plan All Other
Principal Salary Bonus Compensation Granted Restrictions Payouts Compensation
Position Year ($) ($) ($) (#) ($) ($) ($)
- ----------- ---- -------------- ----- ------------- ---------- ------------- -------------- -------------
Richard 2004 $ 92,589(2)(3) Nil $24,267(2) Nil Nil Nil Nil
Palmer
Former 2003 $ 6,516 Nil $ 8,329 1,500,000 Nil Nil
Chief
Executive
Officer(1)
Annual Compensation Long Term Compensation
------------------------------------ -----------------------------------------
Awards Payouts
------------------------- --------------
Securities Shares or
Under Units Subject Long Term
Name and Other Annual Options to Resale Incentive Plan All Other
Principal Salary Bonus Compensation Granted Restrictions Payouts Compensation
Position Year ($) ($) ($) (#) ($) ($) ($)
- ----------- ---- -------------- ----- ------------- ---------- ------------- -------------- -------------
Graham 2004 $120,472(2)(5) Nil $38,868(2) Nil Nil Nil Nil
Mackenzie
Current 2003 $ 1,882 Nil $ 494 700,000 Nil Nil
Chief
Executive
Officer(4)
Kevin 2004 $ 27,929 Nil Nil Nil Nil Nil Nil
Forbes
Former 2003 Nil Nil Nil Nil Nil Nil
Chief
Financial
Officer(6)
Mark Fields 2004 $ 90,000 Nil $ 3,000 Nil Nil Nil Nil
Executive
Vice- 2003 $ 90,000 Nil $ 3,000 Nil Nil Nil
President
2002 $ 45,000 Nil $ 1,500 300,000 Nil Nil
NOTES:
(1) Richard Palmer resigned as Chief Executive Officer of the Company on
December 11, 2003.
(2) Amounts were converted from Australian dollars to Canadian dollars at a rate
on March 31, 2004 of CDN$1.00 equals AUS$1.004.
(3) The Company issued Mr. Palmer 400,972 Common shares in the capital of the
Company at a deemed price of $0.25 per share to settle an additional
outstanding salary obligation in the amount of $100,243 owing to Mr. Palmer
on the termination of the Palmer Agreement.
(4) Mr. Mackenzie was appointed Chief Executive Officer of the Company on
December 11, 2003.
(5) The Company issued Mr. Mackenzie 295,116 Common shares in the capital of the
Company at a deemed price of $0.25 per share to settle an additional
outstanding salary obligation in the amount of $73,779 owing to Mr.
Mackenzie as at December 4, 2003.
(6) Mr. Forbes acted as Chief Financial Officer of the Company during the period
April 15, 2003 to December 11, 2003.
Compensation of Directors
During the financial year ended March 31, 2004, no compensation, cash or
otherwise, was paid or is payable by the Company to directors of the Company,
other than the Named Executive Officers (the "Other Directors") for services
rendered.
The Company has no pension plan or other arrangement for non-cash compensation
to the Other Directors, except stock options. On August 12, 2003, Mr. Fretwell,
a director of the Company, was granted a stock option to purchase 100,000 Common
shares in the capital of the Company exercisable for a term of five years
expiring on August 12, 2008 at a price of $0.29 per share. On July 12, 2004, Mr.
Fretwell partially exercised this option to purchase 20,000 Common shares.
Stock Options
No stock options were granted to the Named Executive Officers during the
financial year ended March 31, 2004.
The following table sets forth details of each exercise of stock options during
the financial year ended March 31, 2004 by the Named Executive Officers and the
financial year end value of unexercised options on an aggregate basis:
Aggregated Option Exercises During the Most Recently Completed Financial Year
and Financial Year-End Option Values
Value of
Unexercised
Unexercised in-the-Money
Options at FY- Options at FY-
Securities End End
Acquired on Aggregate (#) ($)
Exercise Value Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---------------- ----------- -------------- -------------- ---------------
Richard Palmer 250,000 $20,000(1) Nil N/A
Graham Nil N/A 700,000(2) $420,000
Mackenzie (Exercisable) (Exercisable)
Kevin Forbes Nil N/A Nil N/A
Mark Fields Nil N/A 300,000(3) Nil(4)
(Exercisable)
NOTES:
(1) This amount represents the aggregate dollar value of the difference between
the stock option exercise price and the market price of the Company's shares on
January 9, 2004, being the date the stock option was exercised.
(2) Stock option to purchase 700,000 shares at $0.20 per share exercisable until
March 10, 2008.
(3) Stock option to purchase 300,000 shares at $0.90 per share exercisable until
December 12, 2006.
(4) Based on the closing price of $0.80 per share for the shares of the Company
on March 31, 2004, the financial year end.
Pension Arrangements
The Company and its subsidiaries do not have any pension arrangements in place
for the Named Executive Officers.
Termination of Employment, Change in Responsibilities and Employment Contracts
Executive Employment Agreement with Richard Palmer
Pine Valley Coal Pty Limited ("Pine Valley Coal") entered into a three-year
Executive Employment Agreement dated effective March 10, 2003 with Richard
Palmer (the "Palmer Agreement"), subject to certain conditions, for his services
as Managing Director of Pine Valley Coal and other duties. In addition, Mr.
Palmer was appointed Chief Executive Officer and Secretary of the Company. The
Palmer Agreement terminated by its own terms on December 4, 2003. Mr. Palmer
resigned from his various offices with the Company and its affiliates on
December 11, 2003.
Pursuant to the terms of the Palmer Agreement, Pine Valley Coal:
(a) paid to Mr. Palmer an annual salary of AUS$124,000; and
(b) caused to be issued to Mr. Palmer 400,972 Common shares in the capital of
the Company at a deemed price of $0.25 per share to settle an outstanding salary
obligation in the amount of $100,243 owing to Mr. Palmer on the termination of
the Palmer Agreement.
Employment Agreement with Mark Fields
The Company entered into an Employment Agreement dated effective December 9,
2002 (the "Fields Agreement") with Mr. Fields for his continuing services as an
officer of the Company in consideration of an annual salary of $90,000. In
addition, up to $30,000 will be payable at the discretion of the Company's Board
of Directors as a bonus based on Mr. Fields' overall performance as set out in
the Fields Agreement. In the event that there is a change of control of the
Company or Mr. Fields is terminated, demoted, or otherwise constructively
dismissed, then an amount equal to $105,000 will be paid to Mr. Fields under the
Fields Agreement, together with interest.
Employment Agreement with Graham Mackenzie
Pine Valley Coal entered into a two-year Executive Employment Agreement dated
effective March 11, 2003 with Graham Mackenzie (the "Mackenzie Agreement"),
subject to certain conditions, for his services as Vice-President of the Willow
Creek project. The Mackenzie Agreement terminated by its own terms on December
4, 2003.
Pursuant to the terms of the Mackenzie Agreement, Pine Valley Coal:
(a) paid Mr. Mackenzie an annual salary of AUS$94,000; and
(b) caused to be issued to Mr. Mackenzie 295,116 Common shares in the capital of
the Company at a deemed price of $0.25 per share to settle an outstanding salary
obligation in the amount of $73,779 owing to Mr. Mackenzie as at December 4,
2003.
Since the termination of the Mackenzie Agreement, Mr. Mackenzie has been
employed by the Company on a month-to-month basis at an annual salary of
$200,000.
Compensation Agreement with Jeffrey M. Fehn
On September 24, 2004, the Company's compensation committee reached an agreement
in principal with the Company's newly appointed Chairman, Jeffrey M. Fehn,
pursuant to which Mr. Fehn will receive a an annual salary of $150,000. In
addition, and as set out below, the Company has granted to Mr. Fehn options to
purchase up to an aggregate of 950,000 Common shares in the capital of the
Company exercisable for a period of five years ending on September 24, 2009 at a
price of $1.75 per share. Of these options, 50% vested immediately upon being
granted. A further 25% will vest after 12 months, and the remaining 25% will
vest after 24 months. The other specific terms of Mr. Fehn's employment
agreement with the Company have yet to be finalized by the Company's
compensation committee.
Compensation of Former Chairman
The Company has agreed, subject to certain conditions being fulfilled, to enter
into discussions regarding payments totalling $600,000, or other consideration
of like value, to the former Chairman of the Company, Orval Gillespie, upon
terms and arrangements that are yet to be determined. Orval Gillespie died in
November 2000. Since his death, the administrators of his estate have advised
the Company that they intend to continue discussions with the Company to settle
this matter.
Share Option Plan
See "Share Ownership" for particulars of the Company's Share Option Plan.
Compensation of Directors
During the financial year ended March 31, 2004, no compensation, cash or
otherwise, was paid or is payable by the Company to directors of the Company,
other than the Named Executive Officers (the "Other Directors") for services
rendered.
The Company has no pension plan or other arrangement for non-cash compensation
to the Other Directors, except stock options. On August 12, 2003, Mr. Fretwell,
a director of the Company, was granted a stock option to purchase 100,000 Common
shares in the capital of the Company exercisable for a term of five years
expiring on August 12, 2008 at a price of $0.29 per share. On July 12, 2004, Mr.
Fretwell partially exercised this option to purchase 20,000 Common shares.
C. Board Practices
Terms of Office
The directors of the Company are elected annually and hold office until the next
annual general meeting of the shareholders of the Company or until their
successors in office are duly elected or appointed. All directors are elected
for a one-year term. All offices serve at the pleasure of the board of
directors. The Company held its 2004 Annual & Extraordinary General Meeting on
August 31, 2004. Refer to Item 6.A.
Directors' Service Contracts
See "Compensation - Termination of Employment, Change in Responsibilities and
Employment Contracts".
Board of Director Committees
The Company's Board of Directors has an audit committee. The members of the
audit committee are appointed or replaced annually at a directors' meeting held
immediately following the annual general meeting of shareholders of the Company.
The audit committee, the members of which are Mark Fields, Clay Gillespie and
Gordon Fretwell, is responsible for reviewing the Company's financial reporting
procedures, internal control and management information systems and liaising
with the external auditors. The audit committee also reviews the annual and
interim financial statements before those statements are approved by the Board.
The Company has a compensation committee, the members of which are Mark Smith,
Clay Gillespie and Gordon Fretwell. The members of the compensation committee
are appointed or replaced annually at a directors' meeting held immediately
following the annual general meeting of members of the Company. The compensation
committee is responsible for reviewing and approving compensation for the senior
management of the Company.
D. Employees
The average number of employees was as follows:
Years ended March 31
2004 2003 2002
4 4 3
E. Share Ownership
The following table lists, as of September 27, 2004, directors and senior
management who beneficially own the Company's voting securities, consisting
solely of common shares, and the amount of the Company's voting securities owned
by the directors and senior management as a group.
Name No. of Shares Percentage of Class(1)
Graham Mackenzie 1,175,116 2.06%
Mark Fields 53,500 0.09%
Mark T. Smith 31,273,011(2) 54.73%
Clay Gillespie 300,000 0.53%
Gordon Fretwell 0 0%
Jeffrey M. Fehn 0 0%
Total: 32,801,642 57.41%
NOTES:
(1) Based on 57,136,822 shares outstanding as of September 27, 2004.
(2) Shares reported as being beneficially owned by Mr. Smith include 13,306,617
shares owned by The Rockside Foundation of New Rochelle, New York, U.S.A.,
and additional 4,472,857 shares owned by the R. Templeton Smith Foundation,
Cleveland, Ohio, U.S.A, both of which are private charitable trusts for
which Mr. Smith serves a trustee. Mr. Smith does
not participate in the trusts' decisions concerning the voting or
disposition of the shares in question and disclaims beneficial ownership of
the shares held by the trusts.
As at September 28, 2004, the following stock options to purchase shares of the
Company's common stock are outstanding:
Name/Title No. of Shares Exercise Price Expiry Date
Mark Fields/Director 300,000 $0.90 December 12, 2006
Mark T. Smith/Director 150,000 $0.90 April 28, 2007
Clay Gillespie/Director 100,000 $0.90 April 28, 2007
Graham Mackenzie/Director 700,000 $0.20 March 10, 2008
Gordon Fretwell/ Director 80,000 $0.29 August 12, 2008
Raven Waschilowski/Consultant 10,300 $1.01 April 23, 2009
Lei Wang/Employee 35,000 $1.01 April 23, 2009
Gail MacLaren/Employee (1) 100,000 $1.56 July 8, 2009
Jeffrey M. Fehn/Director (2) 950,000 $1.75 September 24, 2009
NOTES:
(1) Gail MacLaren's option vested as to 25,000 shares on July 8, 2004 and will
vest as to 25,000 shares on July 8, 2005 and 50,000 shares on July 8, 2006
and should a change of control occur of the Company, then all remaining
shares shall vest upon the change of control.
(2) Jeff Fenn's option vested as to 475,000 shares on September 24, 2004 and
will vest as to 237,500 shares on each of September 24, 2005 and September
24, 2006.
As at the date hereof, officers and directors, as a group, own options entitling
them to purchase a total of 2,315,300 shares of the Company.
On July 14, 2004, the Company Share Option Plan (the "Plan") for the benefit of
directors, officers, employees and consultants of the Company and of its
subsidiaries in order to conform to the applicable rules and policies of the
TSX-V, which Plan was initially accepted by the TSX-V on July 25, 2003 and
approved by the shareholders of the Company on August 12, 2003.
The principal features of the Plan are as follows:
1. The maximum number of common shares issuable pursuant to the Plan
(including all options that were outstanding when the Plan was adopted)
shall not exceed 10% of the issued shares of the Company at the time of
the stock option grant.
2. The maximum number of shares under option to the benefit of one person
under the Plan may not exceed 5%, on an annual basis, of the total of the
issued and outstanding shares of the Company (on a non-diluted basis) at
the time of grant (in the case of a consultant, as defined by the
Exchange's policies, the annual maximum is 2%).
In the case where the holder of an option is engaged in investor relations
activities (as defined by the Exchange's policies) for the Company or one of its
subsidiaries, the total number of shares under option may not exceed 2% of the
total of the issued and outstanding shares of the Company (on a non-diluted
basis) at the time of grant.
3. The options granted will have a maximum term of 10 years from the date of
grant.
4. The option is non-assignable and non-transferable.
5. If an optionee ceases to be employed by the Company (other than as a
result of termination with cause)ceases to act as a director or officer of
the Company or a subsidiary of the Company, or ceases to provide investor
relations services to the Company, any option held by such optionee may be
exercised within 30 days after the date such optionee ceases to be
employed by the Company ceases to act as a director or officer, as the
case may be, or ceases to be employed to provide investor relations
activities.
6. In the event of the death of an optionee, the optionee's heirs or
administrators may exercise any portion of the outstanding option up to a
period of one year from the date of the optionee's death or the
termination date of the option, whichever is earlier.
7. Any common shares subject to an option which for any reason is cancelled
or terminated without having been exercised shall again be available for
grant under the Plan.
ITEM 7 - Major Shareholders and Related Party Transactions
A. Major Shareholders
To the best of the Company's knowledge, the Company is not owned or controlled,
directly or indirectly, by another corporation or by any foreign government.
The following persons or groups are known to the Company to each own more than
5% of the issued and outstanding common shares, which as of July 14, 2004 was:
Name No. of Shares (1) Percentage
Mark T. Smith 27,232,738 52.07%
CDS & Co.(2) 10,985,499 21.00%
NOTES:
(1) Shares reported as being beneficially owned by Mr. Smith include
9,518,617 shares owned by The Rockside Foundation of New Rochelle, New
York, U.S.A., representing 18.20% of the issued and outstanding shares,
and an additional 4,472,857 shares owned by the R. Templeton Smith
Foundation, Cleveland, Ohio, U.S.A, representing 8.55% of the issued and
outstanding shares, both of which are private charitable trusts for which
Mark Smith serves a trustee. Mr. Smith does not participate in the
trusts' decisions concerning the voting or disposition of the shares in
question and disclaims beneficial ownership of the shares held by the
trusts.
(2) The Company has no knowledge of the beneficial ownership of these shares
registered in the names of a clearing agency.
The Company's major shareholders do not have different voting rights.
As at July 14, 2004, according to the records maintained by the Company's
registrar and transfer agent, there were 72 shareholders of the Company of
record having addresses in the United States holding a total of 29,848,885
shares, representing approximately 57.06% of the outstanding common shares.
As at July 14, 2004, the total number of issued and outstanding common shares
beneficially owned by the directors and officers as a group, giving
consideration to note 1 in the above table, was 28,486,238 common shares.
To the best of the Company's knowledge, there are no arrangements, the operation
of which at a subsequent date will result in a change in control of our Company.
B. Related Party Transactions
Consulting Fees
The Company paid a total of Nil (2003 - $76,960) in interest expenses for a loan
provided to the Company by a director and $27,929 for consulting fees to an
officer of the Company. The Company owes $51,675 (2003 - $51,675) to a former
director for consulting fees. The Company has provided for the payment of
$600,000 to the estate of Orval Gillespie, the former Chairman of the Company.
On September 24, 2004, the Company's compensation committee reached an agreement
in principal with the Company's newly appointed Chairman, Jeffrey M Fehn,
pursuant to which Mr. Fehn will receive a an annual salary of $150,000. In
addition, and as set out above, the Company has granted to Mr. Fehn options to
purchase up to an aggregate of 950,000 Common shares in the capital of the
Company exercisable for a period of five years ending on September 24, 2009 at a
price of $1.75 per share. Of these options, 50% vested immediately upon being
granted. A further 25% will vest after 12 months, and the remaining 25% will
vest after 24 months. The other specific terms of Mr. Fehn's employment
agreement with the Company have yet to be finalized by the Company's
compensation committee.
Private Placements
In December 2003, the Company raised $1,600,000 in connection with a
non-brokered private placement of 8,000,000 units at a price of $0.20 per unit.
Each unit consists of one common share and a warrant. Each warrant is
exercisable at a price of $0.22 to purchase one common share for the first year
and at $0.25 to purchase one common share during the second year. The proceeds,
together with $500,000 in proceeds from an unrelated transaction, were used for
the initial $2,000,000 payment that was made January 6, 2004 pursuant to the
agreement between Falls Mountain and Mitsui Matsushima that allowed the Company
to acquire Mitsui Matsushima's 33 1/3% interest in the Willow Creek Joint
Venture. Related parties who were participants included Mark T. Smith as to
935,000 units, The Rockside Foundation as to 4,000,000 units, Clay Gillespie as
to 250,000 units and Mark Fields as to 50,000 units. In addition The R.
Templeton Smith Foundation participated for 2,330,000 units.
On April 16, 2003, the Company issued by way of private placement a total of
5,500,000 units at a price of $0.20 per unit, each unit consisting of one Common
share and one warrant. Each warrant entitles the holder to purchase one
additional Common share for a term of two years at a price of $0.25 per share.
Richard Palmer and Graham Mackenzie, both officers of the Company, participated
in this private placement as to 1,760,000 units and 880,000 units, respectively.
A financing related finder's fee of $131,250 was paid by the issuance of 656,250
common shares valued at a price of $0.20 per share.
On December 31, 2002, the Company issued to Mark Smith by way of private
placement 3,125,000 units at a price of $0.20 per unit, each unit consisting of
one Common share and one warrant. Each warrant entitles Mr. Smith to purchase
one additional Common share for a term of two years at a price of $0.23 per
share in the first year and $0.27 per share in the second year. On December 18,
2003, Mr. Smith Partially exercised the warrants to purchase 2,175,000 shares at
a price of $0.23 per share.
On December 18, 2003 warrants were exercised by Mark T. Smith to receive
2,175,000 shares at a price of $0.23 per share. From April 12, 2004 to September
9, 2004 warrants were exercised to receive 4,103,181 shares at prices ranging
from $0.22 to $1.35 for total proceeds of $1,333,609 to the Company.
Employment Agreements with Richard Palmer, Graham Mackenzie and Mark Fields
See "Compensation - Termination of Employment, Change in Responsibilities and
Employment Contracts" for details regarding the entering into with Richard
Palmer, Graham Mackenzie and Mark Fields of Executive Employment Agreements.
During the fiscal year ended March 31, 2004, no director or officer or any
associate of any director or officer was indebted to the Company, and there were
no transactions, except in respect of loans to the Company, between the Company
and any related party.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8 - Financial Information
A. Consolidated Statements and Other Financial Information
See Item 17 for the Company's Consolidated Financial Statements.
To the best of our knowledge, there are no legal or arbitration proceedings
against the Company or any of our subsidiaries.
To the best of the Management's knowledge, the Company has not since the date of
its incorporation, declared or paid any dividends, nor does it intend to declare
any dividend for the foreseeable future.
B. Significant Changes
None.
ITEM 9 - The Offer and Listing
A. Offer and Listing Details
Nature of Trading Market
The common shares trade on the TSX-V, the successor to the Canadian Venture
Exchange, which was the successor to the merger between the Alberta Stock
Exchange and the Vancouver Stock Exchange, under the symbol "PVM". The Company's
shares also trade on OTC BB in the United States under the symbol "PVMCF".
Trading on the TSX-V
The following table sets forth the high and low sale prices on the TSX-V for
the common shares for the last five fiscal years ended March 31, 2004.
High Low Volume
Year Ended $CDN $CDN
March 31, 2004 0.90 0.23 2,455,435
March 31, 2003 0.74 0.17 909,713
March 31, 2002 2.70 0.55 1,418,605
March 31, 2001 2.35 1.12 2,744,781
March 31, 2000 1.75 0.42 2,566,979
The following table sets forth the high and low sale prices on the TSX-V for the
common shares for each quarterly period in the two most recent fiscal years
ended March 31, 2004 and the subsequent quarter ended June 30, 2004.
High Low Volume
Quarter Ended $CDN $CDN
June 30, 2004 1.58 0.65 1,211,975
March 31, 2004 0.68 0.23 1,503,747
December 31, 2003 0.31 0.18 234,267
September 30, 2003 0.37 0.23 267,950
June 30, 2003 0.65 0.25 402,271
March 31, 2003 0.69 0.17 348,903
December 31, 2002 0.32 0.18 232,425
September 30, 2002 0.54 0.29 78,902
June 30, 2002 0.74 0.48 249,483
The following table sets forth the high and low sale prices on the TSX-V for our
common shares for each monthly period in the past six months.
High Low Volume
Month Ended $CDN $CDN
August 31, 2004 1.87 1.20 430,222
July 31, 2004 1.70 1.27 420,687
June 30, 2004 1.58 1.18 410,430
May 31, 2004 1.32 1.11 363,549
April 30, 2004 1.40 0.65 437,996
March 31, 2004 0.90 0.48 1,111,749
Trading on the OTC BB
The following table sets forth the high and low sale prices on the OTC BB for
the common shares for the last five fiscal years ended March 31, 2004.
High Low Volume
Year Ended $USD $USD
March 31, 2004 0.49 0.17 1,180,105
March 31, 2003 0.50 0.10 989,300
March 31, 2002 1.90 0.35 1,535,200
March 31, 2001 1.53 0.66 1,450,500
March 31, 2000 Nil
The following table sets forth the high and low sale prices on the OTC BB for
the common shares for each quarterly period in the two most recent fiscal years
ended March 31, 2004 and the subsequent quarter ended June 30, 2004.
High Low Volume
Quarter Ended $USD $USD
June 30, 2004 1.20 0.63 360,800
March 31, 2004 0.49 0.10 88,903
December 31, 2003 0.28 0.17 140,802
September 30, 2003 0.31 0.19 223,100
June 30, 2003 0.47 0.25 727,300
March 31, 2003 0.50 0.10 421,900
December 31, 2002 0.21 0.11 183,100
September 30, 2002 0.35 0.21 54,500
June 30, 2002 0.42 0.29 329,800
The following table sets forth the high and low sale prices on the OTC BB for
the common shares for each monthly period in the past six months.
High Low Volume
Month Ended $USD $USD
August 31, 2004 1.35 0.97 120,700
July 31, 2004 1.39 0.95 256,700
June 30, 2004 1.20 0.85 184,800
May 31, 2004 1.05 0.85 56,000
April 30, 2004 1.10 0.63 120,000
March 31, 2004 0.49 0.10 37,300
On the TSX-V the most recent trade of the stock was $2.55 on September 28, 2004
and on the OTC BB the most recent trade of the stock was $US2.05 on September
28, 2004.
B. Plan of Distribution
Not applicable.
C. Markets
The common shares of the Company trade on the TSX-V in Canada and the OTC BB in
the United States. Refer to Item 9A.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10 - Additional Information
A. Share Capital
Not applicable.
B. Notice of Articles and Articles of Association
The Company is a corporation under the British Columbia Business Corporations
Act. The Company was originally formed as "Globaltex Industries Inc." on March
5, 1993 by the amalgamation of New Lintex Minerals Ltd. and Willow Creek Coal
Ltd., under certificate of amalgamation No. 442303. It changed its name to "Pine
Valley Mining Corporation" on May 13, 2003.
The authorized capital of the Company consists of an unlimited number of common
shares without par value. The Company's Notice of Articles does not prescribe
any extraordinary limits on the businesses or purposes of the Company.
Therefore, generally, the Company has the power and capacity of a natural
person.
Directors: (a) Part 17 of the Company's Articles deals with the directors
involvement in transactions in which they have an interest. Article 17.2
provides that a director who holds a disclosable interest in a contract or
transaction into which the Company has entered or proposes to enter is not
entitled to vote on any directors' resolution to approve that contract or
transaction, unless all the directors have a disclosable interest in that
contract or transaction, in which case any or all of those directors may vote on
such resolution. (b) Pursuant to the Business Corporations Act, a director does
not have a disclosable interest in a contract or transaction merely because the
contract or transaction relates to the remuneration of the director in that
person's capacity as a director of the Company. (c) Part 8 of the Company's
Articles deals with borrowing powers. The Company, if authorized by the
directors, may: (i) borrow money in the manner and amount, on the security, from
the sources and on the terms and conditions that they consider appropriate; (ii)
issue bonds, debentures and other debt obligations either outright or as
security for any liability or obligation of the Company or any other person and
at such discounts or premiums and on such other terms as they consider
appropriate; (iii) guarantee the repayment of money by any other person or the
performance of any obligation of any other person; and (iv) mortgage, charge,
whether by way of specific or floating charge, grant a security interest in, or
give other security on, the whole or any part of the present and future assets
and undertaking of the Company. (d) The Articles do not specify a retirement age
for directors. (e) Directors are not required to own any shares of the Company.
3. Rights and Restrictions Attached to the Shares
As all of the Company's authorized and issued shares are of one class of common
stock, there are no special rights or restrictions of any nature or kind
attached to any of the shares. All authorized and issued shares rank equally in
respect to the declaration and receipt of dividends and rights to share in any
profits or surplus on liquidation, dissolution or winding-up of the Company.
Each share has attached to it one non-cumulative vote. Shareholders are not
liable to further capital calls by the Company.
Alteration of Share Rights: The rights of holders of issued shares of the
Company may be altered only with the approval of the holders of 2/3rds or more
of the shares of the Company voted at a meeting of the shareholders of the
Company called and held in accordance with applicable law.
Annual General Meetings: Annual General Meetings are called and scheduled upon
decision by the Board of Directors. Pursuant to the British Columbia Business
Corporations Act, the Company is required to hold an annual meeting in each
year, not more than 15 months after the date of the most recent annual meeting.
The directors may convene an extraordinary general meeting of the shareholders.
The holders of not less than 5% of the issued shares of the Company may
requisition an extraordinary meeting of the shareholders. All meetings of the
shareholders may be attended by registered shareholders or persons who hold
powers of attorney or proxies given to them by registered shareholders.
Foreign Ownership Limitations: The Company's Articles do not contain limitations
prohibiting non-residents, foreigners or any other group from holding or voting
shares.
Change of Control: There are no provisions in the Company's Articles or charter
documents that would have the effect of delaying, deferring or preventing a
change in the control of the Company, or that would operate with respect to any
proposed merger, acquisition or corporate restructuring involving the Company or
any of its subsidiaries.
Share Ownership Reporting Obligations: There are no provisions in the Company's
Articles requiring share ownership to be disclosed. Securities legislation in
Canada requires that shareholder ownership must be disclosed once a person owns
beneficially or has control or direction over greater than 10% of the issued
shares of the Company. This threshold is higher than the 5% threshold under U.S.
securities legislation at which shareholders must report their share ownership.
C. Material Contracts
Other than contracts entered into in the ordinary course of business and those
disclosed elsewhere in this Annual Report, the Company has not entered into any
material contracts within the past two years except as follows:
1. Director Stock Option Agreement dated April 29, 2002 between the Company
and Mark Smith as described in Item 6E.
2. Employee Stock Option Agreement dated May 8, 2002 between the Company and
Lei Wang as described in Item 6E.
3. Subscription Agreement dated May 17, 2002 between the Company and Mark
Smith.
4. Debt Settlement Agreement dated May 30, 2002 between the Company and Mark
Smith as described in Item 5.
5. Debt Settlement Amendment Agreement dated June 14, 2002 between the
Company and Mark Smith as described in Item 5.
6. Debt Settlement Agreement dated August 2, 2002 between the Company and
Walter Davidson.
7. Employment Agreement dated effective December 9, 2002 between the Company
and Mark Fields as described in Item 6B.
8. Subscription Agreement dated December 18, 2002 between the Company and
Mark Smith as described in Item 7B.
9. Amending Agreement dated January 31, 2003 between the Company, Thomas
O'Brien and LOGG Investment Research Inc.
10. Amending Agreement dated March 3, 2003 between the Company, Thomas O'Brien
and LOGG Investment Research Inc.
11. Subscription Agreement dated March 5, 2003 between the Company and Richard
Palmer as described in Item 5B.
12. Letter Agreement dated March 10, 2003 among the Company, Mitsui Matsushima
Co. Ltd., Falls Mountain and Pine Valley Coal Ltd.
13. Sale & Purchase of Joint Venture Interest Agreement dated for reference
March 10, 2003 among the Company, Mitsui Matsushima Canada Ltd. and Falls
Mountain as described in Item 4.
14. Share Pledge Agreement dated March 10, 2003 between the Company and Mitsui
Matsushima Canada Ltd as described in Item 4.
15. Executive Employment Agreement made effective March 10, 2003 between Pine
Valley Coal and Richard Palmer as described in Item 6B.
16. Executive Employment Agreement made effective March 11, 2003 between Pine
Valley Coal and Graham Mackenzie as described in Item 6B.
17. Senior Officer Stock Option Agreement dated March 31, 2003 between the
Company and Richard Palmer as described in Item 6B.
18. Amending Agreement dated April 7, 2003 between the Company and Richard
Palmer as described in Item 6B.
19. Consulting Agreement dated April 29, 2003 between the Company and Kevin
Forbes as described in Item 6B.
20. Share Option Plan dated for reference July 10, 2003.
21. Notice of Stock Option Commitment (Director) dated August 12, 2003 between
the Company and Gordon Fretwell as described in Item 6E.
22. Coal Purchase and Financing Agreement dated as of May 18, 2004 among the
Company, Falls Mountain Coal Inc., Pine Valley Coal Ltd. and Marubeni
Corporation as described in Item 4.
23. Transportation Agreement dated June 8, 2004 among Falls Mountain Coal Inc.
and BC Rail Partnership as described in Item 4.
24. Willow Creek Marketing and Agency Agreement dated May 21, 2004 among the
Company, Falls Mountain Coal Inc. and Marubeni Corporation.
25. Amendment to Agreement for Sale & Purchase of Joint Venture Interest dated
for reference December 3, 2003 among the Company, Mitsui Matsushima Canada
Ltd. and Falls Mountain Coal Inc. as described in Item 4.
26. Amendment to Agreement for Sale & Purchase of Joint Venture Interest dated
for reference December 5, 2003 among the Company, Mitsui Matsushima Canada
Ltd. and Falls Mountain Coal Inc. as described in Item 4.
27. Amendment to Agreement for Sale & Purchase of Joint Venture Interest dated
for reference December 12, 2003 among the Company, Mitsui Matsushima
Canada Ltd. and Falls Mountain Coal Inc. as described in Item 4.
28. Memorandum of Understanding dated for reference December 12, 2003 among
the Company, Mitsui Matsushima Canada Ltd. and Falls Mountain Coal Inc. as
described in Item 4.
29. Subscription Agreement dated December 2003 between the Company and ten
parties as described in Item 5B, Liquidity and Capital Resources.
30. Subscription Agreement dated May 4, 2004 between the Company and Sprott
Asset Management Inc. as described in Item 5B, Liquidity and Capital
Resources.
31. Amended and Restated Share Option Plan dated for reference July 14, 2004.
32. Employment Agreement dated effective January 1, 2004 between the Company
and Graham Mackenzie as described in Item 6B.
33. Notice of Stock Option Commitment (Employee) dated April 23, 2004 between
the Company and Lei Wang as described in Item 6E.
34. Notice of Stock Option Commitment (Consultant) dated April 23, 2004
between the Company and Ray Lagace as described in Item 6E.
35. Amended Notice of Stock Option Commitment (Consultant) dated July 7, 2004
between the Company and Raven Waschilowski (a.k.a. Ray Lagace) as
described in Item 6E.
36. Share Pledge Agreement dated May 21, 2004 between the Company and Marubeni
Corporation.
37. Notice of Option Commitment (Employee) dated July 8, 2004 between the
Company and Gail MacLaren as described in Item 6E.
38. Inter-Creditor Agreement dated May 21, 2004 between Mitsui Matsushima
Canada Ltd., Marubeni Corporation, Falls Mountain and Pine Valley Coal
Ltd. as described in Item 4.
D. Exchange Controls
There is no law or government decree of regulation in Canada that restricts the
export or import of capital, or that affects the remittance of dividends,
interest or other payments to a non-resident holder of common shares, other than
withholding tax requirements.
There is no limitation imposed by Canadian law or by the Articles or other
charter documents of a company on the right of a non-resident to hold or vote
common shares of a company, other than as provided in the Investment Canada Act,
as amended (the "Investment Act").
The Investment Act generally prohibits implementation of a reviewable investment
by an individual, government, corporation, partnership, trust or joint venture
that is non-Canadian unless the minister responsible for the Investment Act is
satisfied that the investment is likely to be of net benefit to Canada. If an
investment by a non-Canadian is not a reviewable investment, it requires the
filing of a short notice.
An investment in common shares of a company by a non-Canadian that is a "WTO
investor" would be reviewable if the value of the assets of the Company equaled
or exceeded $184 million, the threshold established for 1999. In subsequent
years, the threshold amount may be increased or decreased in accordance with the
provisions of the Investment Act. A WTO investor is a member of the World Trade
Organization, current members of which include the European Community, Germany,
Japan, Mexico, the United Kingdom and the United States, or a WTO
investor-controlled entity, as defined in the Investment Act.
An investment in common shares of a company by a non-Canadian, other than a WTO
investor, would be reviewable under the Investment Act if it were an investment
to acquire control of a company and the value of the assets were $5.0 million.
The Investment Act would not apply to certain transactions in relation to common
shares of the Company, including:
An acquisition of common shares of a company by any person made in the ordinary
course of that person's business as a trader or dealer in securities;
An acquisition of control of a company by an amalgamation, merger, consolidation
or corporate reorganization following which the control of the Company, remains
unchanged.
E. Taxation
This section is to make United States persons aware and caution them as to some
of the consequences of investing in the Company (a Canadian company).
A brief description of certain provisions of the tax treaty between Canada and
the United States is included below. The consequences of state and local taxes
are not considered. The following information is general and security holders
should seek the advice of their own tax advisors.
Taxation of Dividends
A holder of a common share who is not resident in Canada for purposes of the
Income Tax Act will be subject to Canadian withholding tax on dividends paid or
credited to the holder of the common share. The rate of withholding tax on
dividends is 25% of the amount of the dividend. This rate may be reduced under
the provisions of an international tax treaty to which Canada is a party. Under
the tax treaty that Canada has entered into with the United States, the rate of
Canadian withholding tax is generally reduced to 15%, or 5% in the case of a
corporate holder which owns 10% or more of the voting shares. A foreign tax
credit for the tax withheld may be available to a holder resident in the United
States against U.S. federal income taxes.
Disposition of Common Shares
A non-resident holder of a common share will not be subject to tax under the
Income Tax Act in respect of a capital gain realized on the disposition of a
common share unless the common share is a "taxable Canadian property" (as
defined in the Income Tax Act). Shares of a corporation that are listed on a
prescribed stock exchange are generally not considered to be taxable Canadian
property. Taxable Canadian property includes any common share held by a
non-resident if used in carrying on a business (other than an insurance
business) in Canada. A non-resident whose common shares constitute taxable
Canadian property will realize upon disposition, a capital gain (or a capital
loss).
One-half of any capital gain realized by a holder (a taxable capital gain) will
be included in computing the holder's income. Non-residents are advised to
consult their tax advisers with regard to the availability of a treaty exemption
and their own particular circumstances.
Passive Foreign Investment Company
A foreign corporation with one or more U.S. shareholders is a PFIC if 75% or
more of its income is passive income or if at least 50% of its assets would be
invested in instruments which produce interest, dividends and/or capital gains.
Unlike a controlled foreign corporation or a foreign personal holding company,
there is no minimum percentage ownership by U.S. shareholder to trigger
application of the PFIC rules. If a foreign corporation has a high enough
percentage of passive income or assets, it is a PFIC as regards any U.S.
shareholder no matter how small their ownership percentage of the foreign
corporation and regardless of whether the U.S. shareholders, individually or in
the aggregate, have the ability to control the business or investments of the
foreign corporation.
If you own shares in a PFIC and you sell them for a profit you generally must
pro-rate your profit over all the years you held the shares in the PFIC, pay
U.S. income tax on the profit allocated to each year at the highest U.S. rate in
effect for that year, and pay interest on all the prior year's tax, computed
from the tax return due date for the year to which the income is attributable.
The above rule may not apply if you elect to treat your investment as a
"Qualified Electing Fund" (QEF). This election is made by attaching Form 8621 to
the annual tax return. This will permit the annual inclusion of the QEF your
pro-rata share of ordinary income and long-term capital gains.
The Company does not believe it was a passive foreign investment company during
the fiscal year ended March 31, 2002 or any other year.
Future Developments
The foregoing discussion is based on existing provisions of the Code, existing
and proposed regulations thereafter, and current administrative rulings and
court decisions, all of which are subject to change. Any such changes could
affect the validity of this discussion. In addition, the implementation of
certain aspects of the PFIC rules requires the issuance of regulations which in
many such instances have not yet been promulgated and which may have retroactive
effect. Furthermore, legislation has been proposed which would replace the PFIC
provisions with a consolidated anti-deferral regime. While this legislation was
vetoed, it may be re-introduced in subsequent years.
ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE COMMON SHARES.
F. Dividends and Paying Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
You may review a copy of our filings with the SEC, including exhibits and
schedules filed with it, at the SEC's web site www.sec.gov and search for
company filings, or at public reference facilities in Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330 for further information on the public reference rooms.
In addition, any of the documents referred to above can be viewed at the
registered office of the Company at Suite 3000, 1055 West Georgia Street,
Vancouver, British Columbia, Canada, V6E 3R3. All of the documents referred to
above are in English.
I. Subsidiary Information
Not applicable.
Item 11 - Quantitative and Qualitative Disclosures about Market Risk
The Company does not presently believe it has material exposure to potential,
change in fair value of market sensitive instruments, near-term losses in future
earnings and/or cash flows from reasonably possible near-term changes in market
rates, long term debt and interest risk.
The Company did not have any foreign currency derivatives outstanding at March
31, 2004. Accordingly, no market risk existed for such instruments at this date.
Subsequent to the end of its most recent fiscal year, the Company entered into
forward foreign exchange contracts for Canadian dollars in order to establish a
partial hedge against exposure to currency fluctuations. At September 28, 2004
the Company had outstanding forward contracts to sell US foreign currency and
purchase Canadian dollars having a total notional principal amount of
US$20,380,000. The contracts are structured to hedge 80% of the currently
scheduled monthly sales from October 2004 to March 2005, as well as 100% of
projected advances from Marubeni net of expected US Dollar expenditures in
connection with its financing of the project.
Item 12 - Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13 - Defaults, Dividends Arrearages and Delinquencies
Not applicable.
Item 14 - Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not applicable.
Item 15 - Controls and Procedures
As of March 31, 2004, an evaluation was carried out under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer ("CEO") and the Acting Chief Financial Officer ("CFO"), of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
The Company's disclosure controls and procedures operate such that important
information flows to appropriate collection and disclosure points in a timely
manner and are effective to ensure that such information is accumulated and
communicated to the Company's management, and made known to the Company's CEO,
including during the period in which this Annual Report on Form 20-F was
prepared, as appropriate to allow timely decision making regarding the required
disclosure.
There have been no significant changes in the Company's internal controls or the
occurrence of events or other factors that could significantly affect these
controls, subsequent to the date of evaluation, nor have there been any
corrective actions with regard to significant deficiencies or material
weaknesses.
Item 16 - Reserved
Item 16A - Audit Committee Financial Expert
The Company does not have an audit committee financial expert serving on its
audit committee. The Company's Audit Committee consists of two unrelated
directors and the Executive Vice President and Acting Chief Financial Officer of
the Company, all of whom are financially literate and very knowledgeable about
the Company's affairs. Because the Company's structure and operations are
straightforward, the Company does not find it necessary to augment its Board
with a financial expert.
Item 16B - Code of Ethics
The Company adopted a new Code of Ethics on September 20, 2004 as attached in
Exhibit 19.
Item 16C - Principal Accountant Fees and Services
2004 2003
Audit Fees
Year end audit $ 27,800 $ 22,400
Canadian Public Accountability Board fee 1,000 -
--------- ---------
Total Audit Fees $ 28,800 $ 22,400
Audit Related Fees
None
Tax Fees
Tax planning, advice and compliance filings $ 3,000 $ 3,500
Assistance with respect to the audit by BCCT 1,100 -
--------- ---------
Total Tax Fees $ 4,100 $ 3,500
All Other Fees
Nil.
Item 16D - Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E - Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Not applicable.
PART III
Item 17 - Financial Statements
See Financial Statements and Exhibits listed in Item 19 hereof and filed as part
of this Annual Report.
Item 18 - Financial Statements
Not applicable.
Item 19 - Exhibits
1. Memorandum, Articles and Amendments Thereto:
1.1 Transition Application to which is attached the Notice of
Articles.
1.2 Notice of Alteration removing the pre-existing company
provisions (which is an amendment to the Notice of Articles).
1.3 Notice of Alteration increasing the authorized share structure
(which is a further amendment to the Notice of Articles.
1.4 New Articles.
1.5 Articles of Incorporation of the Company (incorporated herein
by reference to Exhibit 19 to Form 20-F dated July 9, 1984).
1.6 Code of Ethics.
2. Instruments defining the rights of debt holders and any other
instruments defining the rights of equity holders:
2.1 Inter-Creditor Agreement dated May 21, 2004 between Mitsui
Matsushima Canada Ltd. and Marubeni Corporation and Falls
Mountain Coal Inc. and Pine Valley Coal Ltd.
2.2 Amendment to General Security Agreement dated May 18, 2004
among Mitsui Matsushima Canada Ltd. and Falls Mountain Coal
Inc. and Pine Valley Coal Ltd.
2.3 Security Agreement dated May 13, 2004 among Marubeni
Corporation and Falls Mountain Coal Inc. and Pine Valley Coal
Ltd.
2.4 Share Pledge Agreement dated May 21, 2004 among Marubeni
Corporation and Pine valley Mining Corporation.
3. Voting trust agreements: None
4. Material Contracts:
4.1 Director Stock Option Agreement dated April 29, 2002 between
the Company and Mark Smith and Schedule, which was attached as
an Exhibit to the Company's Annual Report on Form 20-F for the
year ended March 31, 2003.
4.2 Employee Stock Option Agreement dated May 8, 2002 between the
Company and Lei Wang, which was attached as an Exhibit to the
Company's Annual Report on Form 20-F for the year ended March
31, 2003.
4.3 Subscription Agreement dated May 17, 2002 between the Company
and Mark Smith and Schedule, which was attached as an Exhibit
to the Company's Annual Report on Form 20-F for the year ended
March 31, 2003.
4.4 Debt Settlement Agreement dated May 30, 2002 between the
Company and Mark Smith, which was attached as an Exhibit to
the Company's Annual Report on Form 20-F for the year ended
March 31, 2003.
4.5 Debt Settlement Amendment Agreement dated June 14, 2002
between the Company and Mark Smith, which was attached as an
Exhibit to the Company's Annual Report on Form 20-F for the
year ended March 31, 2003.
4.6 Debt Settlement Agreement dated August 2, 2002 between the
Company and
Walter Davidson, which was attached as an Exhibit to the
Company's Annual Report on Form 20-F for the year ended March
31, 2003.
4.7 Employment Agreement dated effective December 9, 2002 between
the Company and Mark Fields, which was attached as an Exhibit
to the Company's Annual Report on Form 20-F for the year ended
March 31, 2003.
4.8 Subscription Agreement dated December 18, 2002 between the
Company and Mark Smith, which was attached as an Exhibit to
the Company's Annual Report on Form 20-F for the year ended
March 31, 2003.
4.9 Amending Agreement dated January 31, 2003 between the Company,
Thomas O'Brien and LOGG Investment Research Inc. which was
attached as an Exhibit to the Company's Annual Report on Form
20-F for the year ended March 31, 2003.
4.10 Amending Agreement dated March 3, 2003 between the Company,
Thomas O'Brien and LOGG Investment Research Inc. which was
attached as an Exhibit to the Company's Annual Report on Form
20-F for the year Ended March 31, 2003.
4.11 Subscription Agreement dated March 5, 2003 between the Company
and Richard Palmer and Schedule, which was attached as an
Exhibit to the Company's Annual Report on Form 20-F for the
year ended March 31, 2003.
4.12 Letter Agreement dated March 10, 2003 among the Company,
Mitsui Matsushima Co. Ltd., Falls Mountain and Pine Valley
Coal Ltd. which was attached as an Exhibit to the Company's
Annual Report on Form 20-F for the year ended March 31, 2003.
4.13 Sale & Purchase of Joint Venture Interest Agreement dated for
reference March 10, 2003 among the Company, Mitsui Matsushima
Canada Ltd. and Falls Mountain, which was attached as an
Exhibit to the Company's Annual Report on Form 20-F for the
year ended March 31, 2003.
4.14 Share Pledge Agreement dated March 10, 2003 between the
Company and Mitsui Matsushima Canada Ltd. which was attached
as an Exhibit to the Company's Annual Report on Form 20-F for
the year ended March 31, 2003.
4.15 Executive Employment Agreement made effective March 10, 2003
between Pine Valley Coal and Richard Palmer, which was
attached as an Exhibit to the Company's Annual Report on Form
20-F for the year ended March 31, 2003.
4.16 Executive Employment Agreement made effective March 11, 2003
between Pine Valley Coal and Graham Mackenzie, which was
attached as an Exhibit to the Company's Annual Report on Form
20-F for the year ended March 31,2003.
4.17 Senior Officer Stock Option Agreement dated March 31, 2003
between the Company and Richard Palmer and Schedule, which was
attached as an Exhibit to the Company's Annual Report on Form
20-F for the year ended March 31, 2003.
4.18 Amending Agreement dated April 7, 2003 between the Company and
Richard Palmer and Schedule, which was attached as an Exhibit
to the Company's Annual Report on Form 20-F for the year ended
March 31, 2003.
4.19 Consulting Agreement dated April 29, 2003 between the Company
and Kevin Forbes, which was attached as an Exhibit to the
Company's Annual Report on Form 20-F for the year ended March
31, 2003.
4.20 Share Option Plan dated for reference July 10, 2003, which was
attached as an Exhibit to the Company's Annual Report on Form
20-F for the year ended March 31, 2003.
4.21 Notice of Stock Option Commitment (Director) dated August 12,
2003
between the Company and Gordon Fretwell, which was attached as
an Exhibit to the Company's Annual Report on Form 20-F for the
year ended March 31, 2003.
4.22 Coal Purchase and Financing Agreement dated as of May 18, 2004
among the Company, Falls Mountain Coal Inc., Pine Valley Coal
Ltd. and Marubeni Corporation.*
4.23 Transportation Agreement dated June 8, 2004 among Falls
Mountain Coal Inc. and BC Rail Partnership.*
4.24 Willow Creek Marketing and Agency Agreement dated May 21, 2004
among the Company, Falls Mountain Coal Inc. and Marubeni
Corporation.*
4.25 Amendment to Agreement for Sale & Purchase of Joint Venture
Interest dated for reference December 3, 2003 among the
Company, Mitsui Matsushima Canada Ltd. and Falls Mountain Coal
Inc.
4.26 Amendment to Agreement for Sale & Purchase of Joint Venture
Interest dated for reference December 5, 2003 among the
Company, Mitsui Matsushima Canada Ltd. and Falls Mountain Coal
Inc.;
4.27 Amendment to Agreement for Sale & Purchase of Joint Venture
Interest dated for reference December 12, 2003 among the
Company, Mitsui Matsushima Canada Ltd. and Falls Mountain Coal
Inc.
4.28 Memorandum of Understanding dated for reference December 12,
2003 among the Company, Mitsui Matsushima Canada Ltd. and
Falls Mountain Coal Inc.
4.29 Subscription Agreement dated December 2003 between the Company
and Rockside Foundation and a schedule to attach listing
additional agreements which are substantially identical.
4.30 Subscription Agreement dated May 4, 2004 between the Company
and Sprott Asset Management Inc.
4.31 Amended and Restated Share Option Plan dated for reference
July 14, 2004.
4.32 Employment Agreement dated effective January 1, 2004 between
the Company and Graham Mackenzie.
* Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission
5. List of all subsidiaries, their jurisdiction of incorporation and
the names under which they do business.
The Company has the following subsidiaries:
(a) Falls Mountain Coal Inc. ("Falls Mountain") was incorporated under the
laws of British Columbia, Canada on April 13, 1994 and is a wholly-owned
subsidiary of the Company;
(b) Globaltex Gold Mining Corp. ("Globaltex Gold") was incorporated under the
laws of British Columbia, Canada on March 29, 1993 under the name
"Globaltex Coal Mining Corp." and subsequently changed its name effective
January 20, 1994 to "Globaltex Coal Corporation" and effective September
11, 1996 to "Globaltex Gold Mining Corp.". Globaltex Gold is a
wholly-owned subsidiary of the Company;
(c) Pine Valley Coal Pty Limited ("Pine Valley Coal") was incorporated under
the laws of Victoria, Australia on March 5, 2003 and was a wholly-owned
subsidiary of the Company. It is currently in a liquidation; and
(d) Pine Valley Coal Ltd. was set up as an operator of the Willow Creek Joint
Venture in February 14 1996. With the purchases of its joint partners'
interests in 2001 and 2004, it is a wholly-owned subsidiary of the
Company.
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
PINE VALLEY MINING CORPORATION
Dated: September 28, 2004 By:
"Graham Mackenzie", President & CEO
CERTIFICATION
I, Graham Mackenzie, certify that:
1. I have reviewed this annual report on Form 20-F of Pine Valley Mining
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) evaluated the effectiveness of the Company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
(d) disclosed in this annual report any change in the Company's internal
control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial
reporting; and
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the Company's auditors and the audit committee of the Company's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal control
over financial reporting.
Date: September 28, 2004
Graham Mackenzie, Chief Executive Officer
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Pine Valley Mining Corporation (the
"Company") on Form 20-F for the period ending March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Graham
Mackenzie, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date: September 28, 2004
Graham Mackenzie, Chief Executive Officer
Pine Valley Mining Corporation
CERTIFICATION
I, Mark Fields, certify that:
1. I have reviewed this annual report on Form 20-F of Pine Valley Mining
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d- 15(f)) for the Company and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) evaluated the effectiveness of the Company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
(d) disclosed in this annual report any change in the Company's internal
control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial
reporting; and
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the Company's auditors and the audit committee of the Company's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal control
over financial reporting.
Date: September 28, 2004
Mark Fields, Acting Chief Financial Officer
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Pine Valley Mining Corporation (the
"Company") on Form 20-F for the period ending March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Mark
Fields, Acting Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date: September 28, 2004
Mark Fields, Acting Chief Financial Officer
Pine Valley Mining Corporation
Report of Independent Registered Chartered Accountants and Consolidated
Financial Statements of
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
March 31, 2004
Deloitte & Touche LLP
P.O. Box 49279
Four Bentall Centre
2800 - 1055 Dunsmuir Street
Vancouver, British Columbia
V7x 1P4
Tel: (604) 669 4466
Fax: (604) 685 0395
www.deloitte.ca [DELOITTE & TOUCHE LOGO]
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Shareholders of
Pine Valley Mining Corporation
(an exploration stage company)
We have audited the consolidated balance sheets of Pine Valley Mining
Corporation (an exploration stage company) as at March 31, 2004 and 2003 and the
consolidated statements of operations and deficit, cash flows and capital stock
for each of the years in the three year period ended March 31, 2004 and
cumulative from inception to March 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 2004
and 2003 and the results of its operations and cash flows for each of the years
in the three year period ended March 31, 2004 and cumulative from inception to
March 31, 2004 in accordance with Canadian generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, British Columbia
June 25, 2004
COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS FOR U.S. READERS ON
CANADA - UNITED STATES REPORTING DIFFERENCE
To the Shareholders of Pine Valley Mining Corporation
(an exploration stage company)
The standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph (following the opinion
paragraph) for the following:
i) when the financial statements are affected by conditions and events that
cast substantial doubt on the Company's ability to continue as a going
concern, such as those described in Note 2 to the financial statements;
ii) when the financial statements reflect a change in accounting policy, such
as described in Note 4 for stock-based compensation and other stock-based
payments;
Although we conducted our audits in accordance with both Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), our report to the Shareholders dated June 25,
2004 is expressed in accordance with Canadian reporting standards which do not
permit a reference to such conditions and events in the auditors' report when
these are adequately disclosed in the financial statements.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, British Columbia
June 25, 2004
[DELOITTE TOUCHE TOHMATSU LOGO]
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(CANADIAN DOLLARS)
March 31, March 31,
2004 2003
------------ ------------
ASSETS
CURRENT
Cash and cash equivalents $ 54,720 $ 680,040
Amounts receivable 12,204 1,349
Prepaid expenses 6,403 5,497
- -----------------------------------------------------------------------------------------
73,327 686,886
EQUIPMENT (Note 6) 15,054 14,850
MINERAL PROPERTIES (Note 7) (Schedule 1) 16,842,989 10,423,081
- -----------------------------------------------------------------------------------------
$ 16,931,370 $ 11,124,817
=========================================================================================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 280,075 $ 185,872
Current portion of long-term debt (Note 9) 3,000,000 -
- -----------------------------------------------------------------------------------------
3,280,075 185,872
LONG-TERM DEBT (Note 9) 1,000,000 -
DUE TO RELATED PARTY (Note 8) 600,000 600,000
- -----------------------------------------------------------------------------------------
4,880,075 785,872
- -----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 10)
Authorized
100,000,000 common shares of no par value
Issued and fully paid
48,654,519 shares (2003 - 32,073,269 shares) 29,674,146 26,423,896
Commitment to issue shares (Note 10 (c)) 174,022 131,250
Share subscription (Note 10 (b)) 78,576 572,770
Contributed surplus and other capital 1,142,009 1,115,555
Deficit accumulated during exploration stage (19,017,458) (17,904,526)
- -----------------------------------------------------------------------------------------
12,051,295 10,338,945
- -----------------------------------------------------------------------------------------
$ 16,931,370 $ 11,124,817
=========================================================================================
CONTINUING OPERATIONS (Note 2)
CONTINGENT LIABILITIES AND COMMITMENTS (Note 17)
APPROVED BY THE BOARD OF DIRECTORS
"GRAHAM MACKENZIE"
- -------------------------------
Graham Mackenzie, Director
"MARK FIELDS"
- -------------------------------
Mark Fields, Director
See accompanying Notes to the Consolidated Financial Statements.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(CANADIAN DOLLARS)
Cumulative
from inception Years ended March 31,
to March 31, --------------------------------------------
2004 2004 2003 2002
-------------- ------------ ------------ ------------
REVENUE
Interest and other $ 224,075 $ 7,615 $ 1,472 $ 8,874
- -------------------------------------------------------------------------------------------------------------
EXPENSES
Accounting and audit 810,712 86,671 39,150 45,842
Amortization 103,049 2,392 4,680 5,704
Consulting 50,723 27,929 22,794 -
Fees and assessments 248,030 97,256 24,422 1,253
General exploration 83,821 - - -
Filing and transfer agent fees 269,824 34,676 20,171 23,249
Interest and financing 2,141,266 84,488 143,957 969,210
Management fees 1,128,847 - 32,750 161,796
Office 1,248,752 47,552 22,948 654,410
Professional fees 1,554,098 104,573 78,374 139,689
Promotion and marketing 369,652 6,978 11,898 7,580
Salaries and stock-based compensation 817,883 591,211 139,618 87,054
Travel 249,764 35,024 20,833 22,558
- -------------------------------------------------------------------------------------------------------------
9,076,421 1,118,750 561,595 2,118,345
- -------------------------------------------------------------------------------------------------------------
LOSS BEFORE UNDERNOTED ITEMS (8,852,346) (1,111,135) (560,123) (2,109,471)
- -------------------------------------------------------------------------------------------------------------
Amalgamation and settlement costs (840,720) - - -
Loss on disposal of equipment (120,732) (5,412) - -
Foreign exchange gain (loss) 5,290 30,233 16,884 (41,827)
Write-down of mineral
properties (Schedule 1) (9,014,053) (20,981) (2,914,600) -
Write-off of receivable (5,637) (5,637) - -
Write-down of investment in
US Electric Power Inc. (189,260) - - (189,260)
- -------------------------------------------------------------------------------------------------------------
(10,165,112) (1,797) (2,897,716) (231,087)
- -------------------------------------------------------------------------------------------------------------
NET LOSS (19,017,458) (1,112,932) (3,457,839) (2,340,558)
DEFICIT ACCUMULATED DURING
EXPLORATION STATE,
BEGINNING OF PERIOD - (17,904,526) (14,446,687) (12,106,129)
- -------------------------------------------------------------------------------------------------------------
DEFICIT ACCUMULATED DURING
EXPLORATION STATE,
END OF PERIOD $(19,017,458) $(19,017,458) $(17,904,526) $(14,446,687)
=============================================================================================================
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.12) $ (0.12)
=============================================================================================================
WEIGHTED AVERAGE NUMBER OF
SHARES 40,560,855 28,318,672 20,007,894
=============================================================================================================
See accompanying Notes to the Consolidated Financial Statements.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN DOLLARS)
Cumulative
from inception Years ended March 31,
to March 31, -----------------------------------------
2004 2004 2003 2002
-------------- ----------- ----------- -----------
OPERATING ACTIVITIES
Net loss $(19,017,458) $(1,112,932) $(3,457,839) $(2,340,558)
Adjustments
Amortization 103,049 2,392 4,680 5,704
Loss on disposal of capital assets 120,732 5,412 - -
Accretion of equity component of
convertible instrument 31,095 - - -
Non-cash consulting costs 22,794 - 22,794 -
Non-cash financing costs 1,055,450 - 25,973 792,477
Non-cash payroll costs 200,476 200,476 - -
Write-off of mineral properties
(Schedule 1) 9,014,053 20,981 2,914,600 -
Write-off of receivable 5,637 5,637 - -
Write-off of investment in US Electric
Power Inc. 189,260 - - 189,260
Office expenses (Note 8) 600,000 - - 600,000
Changes in non-cash working
capital items other than cash (Note 14) (230,694) 86,390 198,057 (657,996)
- ---------------------------------------------------------------------------------------------------------------------
(7,905,606) (791,644) (291,735) (1,411,113)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Capital stock issued 9,875,277 2,546,230 700,000 578,000
Note proceeds 9,617,471 - 94,734 1,176,328
Note payments (288,974) - (288,974) -
Share subscription (Note 10 (c)) 782,596 78,576 704,020 -
Proceeds on convertible debt 150,000 - - -
- ---------------------------------------------------------------------------------------------------------------------
20,136,370 2,624,806 1,209,780 1,754,328
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of equipment (165,605) (5,171) - (2,164)
Investment in US Electric Power Inc. (189,260) - - (182,021)
Deferred exploration and development (6,337,773) (461,268) (311,506) (116,912)
Acquisition of net assets of Willow Creek (5,483,406) (1,992,043) - -
- ---------------------------------------------------------------------------------------------------------------------
(12,176,044) (2,458,482) (311,506) (301,097)
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 54,720 (625,320) 606,539 42,118
CASH POSITION, BEGINNING OF PERIOD - 680,040 73,501 31,383
- ---------------------------------------------------------------------------------------------------------------------
CASH POSITION, END OF PERIOD $ 54,720 $ 54,720 $ 680,040 $ 73,501
=====================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 65,973 $ 76,960 $ 129,865
=====================================================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended March 31, 2004, the Company:
(i) acquired the remaining 33 1/3% interest in the Willow Creek Joint
Venture for $2,000,000 in cash and a $4,000,000 note payable (Notes
5, 7 and 9).
(ii) issued 656,250 common shares at $0.20 per share for a finders fee
totalling $131,250 (Note 10 (a) (i)).
See accompanying Notes to the Consolidated Financial Statements.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENT OF CAPITAL STOCK
(CANADIAN DOLLARS)
Capital Stock
Years Number of from inception to
Issued Shares March 31, 2004
------ ---------- -----------------
SHARES ISSUED FOR CASH 1970 45,117 $ 67,675
1971 12,895 30,948
1972 16,361 49,084
1973 1 1
1974 83,333 60,000
1976 100,000 90,000
1977 66,667 35,000
1978 100,000 52,173
1980 233,333 135,000
1981 433,333 1,496,546
1987 83,333 62,500
1988 358,334 321,751
1990 150,000 43,500
1991 50,000 14,000
1992 800,000 235,750
1994 236,500 302,030
1995 648,125 542,860
1996 100,000 120,000
1997 50,000 60,000
1998 355,000 230,787
1999 1,225,833 758,463
2000 1,816,157 958,000
2001 656,500 384,979
2002 866,667 578,000
2003 3,261,362 700,000
2004 16,581,250 3,250,250
- -----------------------------------------------------------------------------
28,330,101 10,579,297
- -----------------------------------------------------------------------------
SHARES ISSUED FOR PROPERTY 1970 108,333 162,500
(COMPANY AND PREDECESSOR 1973 25,000 7,500
CORPORATIONS) 1976 108,333 3,250
1976 1,667 1,000
1980 250,000 559,815
1981 8,333 56,250
1983 8,333 42,500
1985* (82,732) (185,261)
1988 100,000 88,000
1990 100,000 25,000
1991 100,000 25,000
1993 5,400,000 8,532,000
1995 80,000 96,000
- -----------------------------------------------------------------------------
6,207,267 9,413,554
- -----------------------------------------------------------------------------
SHARES ISSUED FOR DEBT 1985 993,368 745,026
SHARES ISSUED FOR EQUIPMENT 1985 333,333 400,000
1987 447,052 335,289
SHARES ISSUED FOR DEBT 1988 46,315 34,737
1990 568,953 194,003
1991 608,360 152,090
SHARES ISSUED FOR FINDERS' FEE 1996 756,581 543,049
SHARES ISSUED FOR DEBT 1996 1,038,390 1,013,631
1997 50,000 47,500
1998 130,840 157,008
2000 263,157 181,095
2002 4,695,080 3,361,434
2003 4,185,722 2,516,433
- -----------------------------------------------------------------------------
14,117,151 9,681,295
- -----------------------------------------------------------------------------
BALANCE OF SHARES ON MARCH 31, 2004 48,654,519 $29,674,146
=============================================================================
* Shares contributed to the Company and cancelled.
See accompanying Notes to the Consolidated Financial Statements.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
1. BUSINESS OF THE COMPANY
The Company is engaged in the exploration and development of a coal
project (Note 7 (a)) near Chetwynd, British Columbia, Canada.
2. CONTINUING OPERATIONS
These financial statements have been prepared on the basis of accounting
principles applicable to a going concern which assume that the Company
will realize its assets and discharge its liabilities in the normal course
of business. The Company has incurred losses since inception of
$19,017,458 and has a working capital deficiency at March 31, 2004 of
$3,206,748. The Company's continued existence is dependent on the ability
to obtain loan financing, the raising of additional equity capital through
sales of its common stock or other means to fund its operations and the
Company's ability to ultimately attain profitable operations.
If the going concern assumption were not applicable in the preparation of
these financial statements, adjustments would be necessary to the carrying
values of assets and liabilities, the reported net loss and the balance
sheet classifications used.
Subsequent to March 31, 2004, the Company obtained a US$7.6 million loan
to fund mine construction and operations (Note 18 (a)) and raised $3.0
million through the issuance of 3,333,333 units through a private
placement (Note 18 (d)).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP")
which in respect of these financial statements do not differ materially
from accounting principles generally accepted in the United States ("US
GAAP"), expect as disclosed in Note 16.
(a) Basis of presentation
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Pine Valley Coal Pty
Limited, Pine Valley Coal Ltd., Globaltex Gold Mining Corp. and
Falls Mountain Coal Inc. All intercompany transactions and balances
have been eliminated.
(b) Cash and cash equivalents
Cash and cash equivalents includes short-term money market
instruments with terms to maturity at the date of issue not
exceeding 90 days.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Mineral properties
The Company defers all acquisition costs and exploration costs, net
of pre-commercial revenues, that relate to specific properties when
the properties are initially examined and/or the property has
indicated mineral reserves until such time as the properties are
brought into production, are sold or abandoned. Costs pertaining to
properties developed to production will be amortized over the
estimated productive life of the property. Costs pertaining to
properties sold or abandoned will be written off.
The carrying costs of mineral properties and deferred exploration
costs are not intended to represent present or future values. The
ultimate realization of the carrying costs of mineral properties is
dependent upon the discovery of commercially exploitable ore bodies
or the proceeds from disposition. The Company reviews the carrying
value of its mineral properties on a regular basis, primarily by
reference to estimated future expected cash flows. When the carrying
value of these assets exceed their estimated net recoverable
amounts, an impairment provision is made for the other than
temporary decline in value.
(d) Capital assets
Capital assets are recorded at cost and the Company provides for
amortization using the declining balance method at rates ranging
from 20% to 30% per annum.
(e) Restoration, rehabilitation, and environmental expenditures
Restoration, rehabilitation and environmental expenditures are
charged to earnings as incurred during the exploration phase.
Significant restoration, rehabilitation and environmental
expenditures to be incurred subsequent to the cessation of
exploration are accrued when their extent can be reasonably
estimated.
(f) Income taxes
The Company accounts for income taxes using the future income tax
method whereby future income tax assets and liabilities are computed
based on differences between the carrying amount of assets and
liabilities on the balance sheet and their corresponding tax values
using the enacted income tax rates at each balance sheet date.
Future income tax assets also result from unused loss carryforwards
and other deductions. The value of future income tax assets is
reviewed annually and adjusted, if necessary, by use of a valuation
allowance to reflect the estimated realizable amount. Although the
Company has tax loss carryforwards, there is uncertainty as to
utilization prior to their expiry. Accordingly, the future tax asset
amounts have been fully offset by a valuation provision.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Earnings (loss) per common share
Earnings per share calculations are based on the weighted average
number of common and common equivalent shares issued and outstanding
during the year. Diluted earnings per share are calculated using the
treasury stock method. Common equivalent shares consist of the
incremental common shares exercisable upon the exercise of stock
options and are excluded from the computation if their effect is
anti-dilutive.
(h) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates.
(i) Fair value of financial instruments
The Company believes, based upon current information, that the
carrying value of the Company's cash and cash equivalents, accounts
receivable and accounts payable and accrued liabilities approximate
their fair value. The estimated fair values of debt, which is
estimated by discounting cash flows using current market rates
available for debt with similar terms and maturity, is disclosed in
Note 9. Due to the non-arms length nature of the amounts due to
related party, the fair value is not readily determinable.
(j) Financial risk
Financial risk is the risk arising from changes in interest rates
and foreign currency exchange rates. The Company does not use any
derivative instruments to reduce its exposure to fluctuations in
interest rates and foreign currency exchange rates.
(k) Joint venture
The Company accounted for its interest in the Willow Creek Joint
Venture ("Joint Venture") for the year ended March 31, 2003 on a
proportionate consolidation basis, which resulted in presentation
similar to that derived from the equity method.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Foreign currency translation
The Company uses the temporal method to translate transactions and
balances denominated in foreign currencies. Under this method,
monetary items are translated at the rate of exchange in effect at
the balance sheet date and non-monetary items are translated at
historical exchange rates. Revenue and expense items are translated
at exchange rates in effect at the date of the transaction except
for amortization, which is translated using the same rates as the
related assets. Gains and losses on translation are recorded in
operations.
(m) Stock-based compensation
The Company's stock-based compensation plan is described in Note 11
(a). The Company has adopted the fair value based method (Note 4) to
account for stock-based transactions with employees, non-employees
and directors. Accordingly, the fair value of the options at the
date of the grant is charged to operations, with an offsetting
credit to contributed surplus, on a straight-line basis over the
vesting period. Any consideration paid on exercise of stock options
together with and the related portion of contributed surplus is
credited to share capital.
4. CHANGES IN ACCOUNTING POLICY
Effective April 1, 2003 the Company changed its accounting policy on a
prospective basis with respect to the method of accounting for stock-based
compensation. The Company adopted CICA 3870, Stock-based Compensation and
Other Stock-based Payments, and has chosen to account for all grants of
options to employees, non-employees and directors after April 1, 2003 in
accordance with the fair value method for accounting for stock-based
compensation as defined by accounting principles generally accepted in
Canada. Stock-based compensation awards expense is calculated using the
Black-Scholes option pricing model ("Black-Scholes"). Previously, the
Company used the intrinsic value method for valuing stock-based
compensation awards granted to employees and directors where compensation
expense is recognized for the excess, if any, of the quoted market price
of the Company's common shares over the common share exercise price on the
day that options are granted.
Using the fair value method for stock-based compensation, the Company
recorded a charge to operations of $26,454 for the year ended March 31,
2004 for stock options granted to employees and directors. This amount was
determined using Black-Scholes assuming no dividends were paid, a weighted
average volatility of the Company's share price of 148%, a weighted
average annual risk free interest rate of 3.97% and an expected life of
five years.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
5. BUSINESS ACQUISITION
During the year ended March 31, 2004, the Company purchased the remaining
33 1/3% interest in the Willow Creek Joint Venture held in Pine Valley
Coal Ltd. ("PVC") (Note 7 (b)) from Mitsui Matsushima Canada Ltd. for
$6,000,000. The Company paid $2,000,000 in cash and issued a $4,000,000
note payable (Note 9).
Prior to the acquisition, the Company accounted for its 66 2/3% of the
joint venture under proportionate consolidation. The acquisition was
accounted for by the purchase method and the remaining 33 1/3% of the
accounts of PVC have been consolidated from January 6, 2004. The fair
value of assets and liabilities acquired and the consideration paid are
summarized as follows:
Current assets (including cash of $7,957) $ 32,290
Plant and equipment 2,838
Coal property 5,979,620
- -------------------------------------------------------
6,014,748
Less: Current liabilities (14,748)
- -------------------------------------------------------
Consideration $ 6,000,000
=======================================================
6. EQUIPMENT
2004 2003
--------------------------------- --------
Accumulated Net Book Net Book
Cost Amortization Value Value
------- ------------ -------- --------
Office equipment $60,928 $45,874 $15,054 $14,066
Field equipment - - - 784
- --------------------------------------------------------------
$60,928 $45,874 $15,054 $14,850
==============================================================
7. MINERAL PROPERTIES
(a) Willow Creek Coal Project
During the year ended March 31, 1996, the Company entered into the
Willow Creek Joint Venture Agreement with respect to the Willow
Creek Coal Project with Mitsui Matsushima Canada Ltd, ("Mitsui
Matsushima") and BCR Venture Inc. ("BCR"), a wholly owned subsidiary
of BC Railway Company ("BC Rail") to form the Willow Creek Joint
Venture ("Willow Creek Joint Venture"). The purpose of the Willow
Creek Joint Venture is to develop a low cost coal mine.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
7. MINERAL PROPERTIES (CONTINUED)
(a) Willow Creek Coal Project (continued)
Under the agreement, a feasibility study was completed and accepted
by the Willow Creek Joint Venture participants, and a decision made
to proceed to develop a coal mine in the Willow Creek coal licenses.
Pine Valley Coal Ltd. was set up as the operator and directed by a
Management Committee. Under the agreement, the Company's 100% owned
subsidiary, Falls Mountain Coal Inc. ("Falls Mountain"), contributed
25 coal licences which it owned together with other assets in
connection with its exploration activities at Willow Creek.
Under the agreement, the parties contracted with BC Rail to provide
haulage services under a haulage contract and had also contracted
with Mitsui Matsushima to market the coal worldwide during the life
of the project. The Willow Creek Joint Venture Agreement provided
that, in the event of acquisition of control of the Company (as
defined by the Securities Act of British Columbia) by a person in
the business of producing or transporting coal in, or selling coal
produced from Alberta or British Columbia, the Company would cease
to have any representation or right to vote on the management
committee of the Willow Creek Joint Venture.
During the year ended March 31, 2001, the Company acquired BCR's
interest in consideration of $3,902,543 cash, resulting in the
Company holding 66-2/3% of the joint venture.
On March 10, 2003 Falls Mountain and Mitsui Matsushima entered into
a binding Sale and Purchase Agreement whereby the Company had the
right to acquire Mitsui Matsushima's remaining one-third interest in
the Willow Creek Joint Venture for $6,000,000 prior to December 10,
2003. Falls Mountain and Mitsui Matsushima revised the terms prior
to December 10, 2003 so that Falls Mountain was required to pay $2.0
million to Mitsui Matsuhima by January 6, 2004, and make a further
$4.0 million of principal repayments between June 30, 2004 and June
30, 2005.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
7. MINERAL PROPERTIES (CONTINUED)
(a) Willow Creek Coal Project (continued)
The assets, liabilities and cash flows of the Willow Creek Joint
Venture at March 31, 2003 were as follows:
Current assets and deposits $ 32,194
Coal property interests and equipment 10,821,653
- ----------------------------------------------------
10,853,847
Current liabilities 23,847
- ----------------------------------------------------
Joint Venturers' Equity $ 10,830,000
====================================================
Cash flows generated (applied)
Investing activities $ 1,091,856
- ----------------------------------------------------
Financing activities $ (1,198,869)
====================================================
(b) Indin Lake
The Company has a 90% interest in certain leases located in the
Mackenzie Mining Division of the Northwest Territories. During the
year ended March 31, 2003, the Company concluded that the Indin Lake
gold property be written off due to the extended period of time
since any active exploration work has been undertaken, the
difficulty advancing the property at current gold prices and the
limited likelihood that the Company will realize any significant
value from the property in the near future.
8. DUE TO RELATED PARTY
The Company has provided for the payment of $600,000 to the estate of the
former Chairman of the Company (the "Estate"). The Estate is administered
on behalf of its beneficiaries by a director of the Company. The Company
has agreed, subject to certain conditions being fulfilled, to enter into
discussions that could result in a cash payment or shares of the Company
being issued in full consideration of an amount of $600,000 for the Estate
upon terms and arrangements that are not yet to be determined. There is no
immediate requirement or intention to finalize these discussions. Per a
letter from the Estate dated June 16, 2004, the Estate undertook that no
action will be taken to collect any or all of the amount until beyond June
30, 2005.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
9. LONG-TERM DEBT
2004 2003
---- ----
Current portion of long-term debt $3,000,000 $ -
Long-term portion, net of current portion 1,000,000 -
---------- -------
$4,000,000 $ -
========== =======
On January 6, 2004, the Company purchased Mitsui's 33.33% interest in the
Willow Creek Joint Venture for $6,000,000 (Note 5), of which $2,000,000
was paid in cash, and the Company has an outstanding debt obligation to
Mitsui of $4,000,000 with interest compounded daily at 7%. The Company is
required to make principal repayments as follows:
June 30, 2004 $ 200,000
September 30, 2004 300,000
December 31, 2004 1,500,000
March 31, 2005 1,000,000
June 30, 2005 1,000,000
The Company paid $65,973 accrued interest to Mitsui on March 31, 2004. The
debt obligation is secured by the Company's assets and may be prepaid at
any time without penalty.
10. SHAREHOLDERS' EQUITY
(a) Capital stock issuances
During the year ended March 31, 2004, the Company :
(i) Closed a private placement financing of 5,500,000 units for
proceeds of $1,100,000 on April 16, 2003. Each unit consisted
of one common share and one common share purchase warrant.
Each common share purchase warrant is exercisable for two
years at a price of $0.25 per share. A finder's fee totalling
$131,250 was paid by issuance of 656,250 common shares at a
price of $0.20 per share.
(ii) Issued 2,425,000 common shares for proceeds of $550,250 on the
exercise of warrants and stock options.
(iii) Closed a private placement financing of 8,000,000 units for
proceeds of $1,600,000 on January 6, 2004. Each unit consisted
of one common share and one common share purchase warrant.
Each common share purchase warrant is exercisable for two
years at a price of $0.22 per share for the first year and
$0.25 for the second year (Note 9).
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
10. SHAREHOLDERS' EQUITY (CONTINUED)
(a) Capital stock issuances (continued)
During the year ended March 31, 2003, the Company :
(i) Issued 1,428,571 common shares to settle notes payable in the
amount of $1,000,000.
(ii) Closed a private placement financing of 136,362 units for
proceeds of $75,000 on June 14, 2002. Each unit consisted of
one common share and one half common share purchase warrant of
the Company. Each common share purchase warrant is exercisable
for two years from the date of issue at an exercise price of
$0.60.
(iii) Issued 100,000 common shares to settle $55,000 debt due to a
former director. This debt was included in accounts payable
and accrued liabilities in the year.
(iv) Issued 2,657,151 common shares to settle notes payable in the
amount of $1,461,433.
(v) Closed a private placement financing of 3,125,000 units for
proceeds of $625,000 on December 31, 2002. Each unit consisted
of one common share and one common share purchase warrant.
Each common share purchase warrant is exercisable for two
years at a price of $0.23 per share in the first year and
$0.27 per share during the second year.
(b) Share subscription
In March 2004, the Company received total proceeds of $78,576 in
connection with the exercise of 274,727 warrants from two private
placements. The shares were issued subsequent to the year end March
31, 2004.
During the year ended March 31, 2003, the Company had received net
proceeds of $572,770 pursuant to a private placement of 5,500,000
units (Note 10 (a) (i)).
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
10. SHAREHOLDERS' EQUITY (CONTINUED)
(c) Commitment to issue shares
On January 7, 2004, the Company announced a debt settlement by the
issuance of 696,088 common shares in the aggregate amount of
$174,022. In March 2003, the Company entered into employment
agreements with its former President and current President for the
provision of management and technical services to the Company and
its Australian subsidiary. Pursuant to the agreements, the Company
has certain outstanding payment obligations to the executives either
by paying cash or delivering common shares in the capital of the
Company. The Board of Directors of the Company approved settling the
obligations by issuance of 696,088 common shares at price of $0.25
per share.
During the year ended March 31, 2003, the Company had a commitment
to issue 656,250 common shares at a value of $131,250 for a finders
fee pursuant to a private placement of 5,500,000 units (Notes 10 (a)
(i) and 10 (b)).
11. STOCK OPTIONS AND WARRANTS
(a) Stock options
The Company has established a stock option plan for directors and
employees. The Company is allowed to grant up to 10% of issued and
outstanding shares as stock options. Stock options are exercisable
from the date of grant. A summary of the Company's options at March
31, 2004, 2003, and 2002 and the changes for the years ending on
those dates is presented below:
Years ended March 31,
----------------------------------------------------------------------
2004 2003 2002
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ---------- -------- --------- --------
Outstanding at the
beginning of year 2,865,004 $ 0.37 2,193,500 $ 1.06 1,850,167 $ 1.20
Granted 100,000 0.29 2,815,000 0.35 1,050,000 0.90
Exercised (250,000) 0.20 - - (96,667) 1.20
Cancelled and
expired (1,350,004) 0.25 (2,143,496) 1.06 (610,000) 1.20
---------- -------- --------- -------- --------- --------
Outstanding at the
end of year 1,365,000 $ 0.50 2,865,004 $ 0.35 2,193,500 $ 1.06
========== ======== ========= ======== ========= ========
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
11. STOCK OPTIONS AND WARRANTS
(a) Stock options (continued)
As at March 31, 2004, outstanding stock options to directors,
officers and an employee were as follows:
Number Exercise
of Shares Price Expiry Date
- --------- ----- -----------
300,000 $ 0.90 December 12, 2006
250,000 0.90 April 28, 2007
15,000 0.90 May 7, 2007
700,000 0.20 March 10, 2008
100,000 0.29 August 12, 2008
- ---------
1,365,000
=========
(b) Stock-based compensation
During the year ended March 31, 2003, 200,000 stock options were
granted to non-employees and non-directors. Using the fair value
method for stock based compensation, consulting costs of $22,794
were recorded (2002 - $Nil). This amount was determined using an
option pricing model assuming no dividends are to be paid, vesting
occurring on the terms of the original grant, exercising on the last
day before expiry, a weighted average volatility of the Company's
share price of 69% and an average annual risk free interest rate of
4%. The option granted to the optionee was vested as to 16,674
shares at June 4, 2002 and was vested every month thereafter at a
rate of 16,666 shares per month up to November 1, 2002, the
termination date of the consulting service.
Pro forma compensation expense
If the Company had adopted the fair value method of accounting for
stock options as set out in CICA Handbook section 3870, Stock-Based
Compensation and Other Stock Based Payments, and included share
purchase options granted to employees in the calculation of
compensation expense, net loss would be as follows:
Years ended March 31,
---------------------
2003 2002
---- ----
Net loss as reported $(3,457,839) $(2,340,558)
Compensation expense of employees (115,000) (510,000)
----------- -----------
Pro forma net loss $(3,572,839) $(2,850,558)
=========== ===========
Pro forma basic and diluted loss per share $ (0.13) $ (0.14)
=========== ===========
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
(b) Stock-based compensation (continued)
Pro forma compensation expense (continued)
Compensation expense for the year ended March 31, 2003 is determined
using an option pricing model assuming no dividends are to be paid,
vesting on the date of grant, a weighted average volatility of the
Company's share price of 69% (2002 - 105%), an annual risk free
interest rate of 4% (2002 - 4.23%) and an expected life of five
years.
(c) Warrants
A summary of the Company's warrants at March 31, 2004, 2003, and
2002 and the changes for the years ending on those dates is
presented below:
Years ended March 31,
----------------------------------------------------------------------
2004 2003 2002
---------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- --------- -------- --------- --------
Outstanding at the
beginning of year 5,793,181 $ 0.84 2,600,000 $ 1.56 3,070,000 $ 1.50
Issued 13,500,000 0.23 3,193,181 0.26 300,000 1.25
Exercised (2,175,000) 0.23 - - (770,000) 1.20
Cancelled and
expired (2,300,000) 1.70 - - - -
---------- -------- --------- -------- --------- --------
Outstanding at the
end of year 14,818,181 $ 0.24 5,793,181 $ 0.84 2,600,000 $ 1.56
========== ======== ========= ======== ========= ========
As at March 31, 2004, outstanding share purchase warrants were as
follows:
Number Exercise
of Shares Price Expiry Date
- --------- ----- -----------
300,000 $ 1.35 September 18, 2004
68,181 0.60 June 3, 2004
950,000 0.27 December 31, 2004
5,500,000 0.25 April 16, 2005
8,000,000 0.22/0.25 January 6, 2005/2006
- ----------
14,818,181
==========
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
12. RELATED PARTY TRANSACTIONS
(a) The Company paid or accrued amounts payable to officers and
companies controlled by directors as follows:
Years ended March 31,
---------------------
2004 2003 2002
---- ---- ----
Management and consulting fees $27,929 $32,750 $161,796
Geological consulting - 16,800 26,040
Interest expense - 76,960 156,453
These transactions have been recorded at the exchange amount, which
is considered by management, to approximate terms and conditions
that are similar to those available from unrelated parties.
(b) As at March 31, 2004, accounts payable and accrued liabilities
include $51,675 (2003 - $51,675) due to former directors,
shareholders and companies controlled by directors.
(c) During the year ended March 31, 2003, 4,085,722 common shares and
100,000 common shares were issued to a director and a former
director of the Company with respect to the settlements of notes
payable and debt outstanding in the amounts of $2,461,433 and
$55,000, respectively. The terms of these settlements were approved
by the TSX Venture Exchange.
13. SEGMENTED INFORMATION
The Company operates in one industry and as at March 31, 2004 and 2003
substantially all of the Company's assets were located in Canada.
14. CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS
Years ended March 31,
---------------------
2004 2003 2002
---- ---- ----
Decrease (increase) in restricted cash $ - $ 296,803 $(296,803)
(Increase) decrease in amounts receivable 7,841 19,746 2,595
(Increase) decrease in prepaid expenses (906) (20) 523
Increase (decrease) in accounts payable
and accrued liabilities 79,455 (91,884) (390,899)
(Decrease) increase in interest payable - (26,588) 26,588
--------- --------- ---------
$ 86,390 $ 198,057 $(657,996)
========= ========= =========
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
15. FUTURE INCOME TAXES
The provision for income taxes reported differs from the amounts computed
by applying the cumulative Canadian federal and provincial income tax
rates to the loss before tax provision due to the following:
Years ended March 31,
---------------------
2004 2003 2002
---- ---- ----
Statutory tax rate 36% 38% 38%
Recovery of income taxes computed at
standard rates $ 400,656 $ 1,313,979 $ 1,029,846
Non-deductible non-cash financing costs - (19,335) (348,690)
Non-deductible expenses (9,523) - -
Tax losses not recognized in the period
that the benefit arose (391,133) (1,294,644) (681,156)
--------- ----------- -----------
$ - $ - $ -
========= =========== ===========
The approximate tax effect of each type of temporary difference that gives
rise to the Company's future tax assets is as follows:
2004 2003
---- ----
Mineral properties and equipment $ 1,465,560 $ 1,539,085
Operating loss carry-forward 1,654,394 1,324,074
----------- -----------
3,119,954 2,863,159
----------- -----------
Less: Valuation allowance (3,119,954) (2,863,159)
----------- -----------
Future income tax asset $ - $ -
=========== ===========
At March 31, 2004, the Company has approximately $5,115,000 of non-capital
losses for tax purposes available at various dates until 2012, to be
carried forward and applied against future income for tax purpose and
approximately $189,000 of capital tax losses for tax purposes available to
be carried forward indefinitely and applied against future capital gains
for tax purposes.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
16. RECONCILIATION OF CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with Canadian
GAAP which differ in some respects from US GAAP. The material differences
between Canadian and US GAAP, in respect of these financial statements,
are summarized as follows:
Years ended March 31,
---------------------
2004 2003 2002
---- ---- ----
CONSOLIDATED STATEMENTS OF LOSS
Net loss under Canadian GAAP $ (1,112,932) $ (3,457,839) $(2,340,558)
Mineral property acquisition and exploration
costs - (307,761) (2,773,768)
Writedown of mineral costs 20,981 2,914,600 -
Revenue from sale of ore - - 2,348,587
------------ ------------ -----------
Net loss under US GAAP $ (1,091,951) $ (851,000) $(2,765,739)
============ ============ ===========
Basic and diluted loss per share
under US GAAP $ (0.03) $ (0.03) $ (0.14)
============ ============ ===========
CONSOLIDATED BALANCE SHEETS 2004 2003
---- ----
Total Assets as per Canadian GAAP $ 16,931,370 $ 11,124,817
Decrease in mineral properties due to
expensing of mineral property costs (a) (10,323,081) (10,323,081)
------------ ------------
As per US GAAP $ 6,608,289 $ 801,736
============ ============
Total Liabilities
As per Canadian GAAP and US GAAP $ 4,880,075 $ 785,872
Total Shareholders' equity (capital deficiency)
As per Canadian GAAP 12,051,295 10,338,945
Decrease in mineral property costs (a) (10,323,081) (10,323,081)
------------ ------------
As per US GAAP $ 1,728,214 $ 15,864
============ ============
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
16. RECONCILIATION OF CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Years ended March 31,
---------------------
2004 2003 2002
---- ---- ----
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities
Operating activities under Canadian GAAP $ (791,644) $(291,735) (1,411,113)
Exploration (a) - (311,506) (116,912)
----------- --------- -----------
Operating activities under US GAAP $ (791,644) $(603,241) $(1,528,025)
=========== ========= ===========
Investing activities
Investing activities under Canadian GAAP $ 2,458,482 $(311,506) (301,097)
Exploration (a) - 311,506 116,912
----------- --------- -----------
Investing activities under US GAAP $ 2,458,482 $ - $ (184,185)
=========== ========= ===========
(a) Mineral property costs
US GAAP requires that mineral property costs be expensed until there
is substantial evidence that a commercial body of ore has been
located, whereas Canadian GAAP allows mineral property costs to be
deferred during the exploration process. For US GAAP purposes, the
Company has expensed property costs incurred prior to March 31,
2003. Subsequent to that date the Company has capitalized, for US
GAAP purposes, acquisition and development costs as the coal reserve
estimations have been confirmed, a feasible mine plan has been
developed and financing from the development of the mine has been
arranged.
(b) Revenue
Under Canadian GAAP, revenues received prior to the
commercialization of mineral properties reduce capitalized
development and other capitalized pre-production costs. Under US
GAAP, such amounts are recorded as revenue when title and risk of
the ore pass to the buyer, the consideration is fixed or
determinable and collection is reasonably assured.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
16. RECONCILIATION OF CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(c) Stock-based compensation
During the year ended March 31, 2004, the Company adopted the fair
valued based method of accounting under the Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, with prospective application, effective April 1, 2003,
as permissible under SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. Fair value accounting for
stock-based compensation was also adopted by the Company under
Canadian GAAP effective April 1, 2003, which substantially
harmonizes Canadian GAAP with US GAAP for the year ended March 31,
2004.
The following pro forma financial information presents the net loss
and loss per share for the years ended March 31 under US GAAP for
the effect of fair value accounting for options issued to employees
and directors.
2003 2002
---- ----
Net loss for the year under US GAAP $(851,000) $(2,765,739)
Additional stock-based compensation costs (115,000) (510,000)
--------- -----------
Pro forma net loss under US GAAP $(966,000) $(3,275,739)
========= ===========
Pro forma basic and diluted loss per share
under US GAAP $ (0.03) $ (0.16)
========= ===========
(d) Accounting for joint ventures
US GAAP requires investments in joint ventures to be accounted for
using the equity method, while under Canadian GAAP, the accounts of
joint ventures are proportionately consolidated. However, under
rules promulgated by the Securities and Exchange Commission, a
foreign registrant may, subject to the provision of additional
information, continue to follow proportionate consolidation for
purposes of registration and other filings notwithstanding the
departure from US GAAP. Consequently, as at March 31, 2003, the
balance sheets have not been adjusted to restate the accounting
under US GAAP and additional information concerning the Company's
interest in a joint venture is presented in Note 7. During the year
ended March 31, 2004, the Company acquired the remaining joint
venture interest and, as a result, consolidates 100% of the acquired
company (Note 5).
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
16. RECONCILIATION OF CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(e) Asset retirement obligation
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"), which addresses financial
accounting and reporting for obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of
long-lived assets, except for certain obligations of leases. SFAS
143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred.
When the liability is initially recorded, an entity capitalizes the
cost by increasing the carrying amount of the related long-lived
assets. Over time, the liability is accreted to its present value
each period, and the capitalized cost is amortized over the useful
life of the related asset. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June
15, 2002, with earlier application encouraged. The adoption of SFAS
143 does not have a material impact on the Company's financial
position.
(f) Income taxes
Under Canadian GAAP, future income taxes are calculated based on
enacted or substantially enacted tax rates applicable to future
years. Under US GAAP, only enacted rates are used in the calculation
of future income taxes. This differences in GAAP did not result in a
difference in the financial position, results of operations or cash
flows of the Company for the years ended March 31, 2004, 2003 and
2002.
(g) Accounting for impairments
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. Although
retaining many of the fundamental recognition and measurement
provisions of SFAS No. 121, the new rules significantly change the
criteria that would have to be met to classify an asset as
held-for-sale. The statement also supersedes certain provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, and will require expected future operating
losses from discontinued operations to be displayed in discontinued
operations in the period(s) in which the losses are incurred rather
than as of the measurement date, as presently required. As required
by SFAS No. 144, the Company adopted this new statement on March 1,
2002. The adoption of SFAS No. 144 did not have a material impact on
the Company's financial position, results of operations or cash
flows.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
16. RECONCILIATION OF CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(h) Costs of exit for disposal of activities
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal of Activities. SFAS No. 146
requires that the liability for a cost associated with an exit or
disposal activity is recognized at its fair value when the liability
is incurred. Under previous guidance, a liability for certain exit
costs was recognized at the date that management committed to an
exit plan, which was generally before the actual liability had been
incurred. As SFAS No. 146 is effective only for exit or disposal
activities initiated after December 31, 2002, the adoption of this
Statement did not have a material effect on the Company's financial
position, results of operations or cash flows.
(i) Newly released accounting standards
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, that addresses the
consolidation of variable interest entities. In December 2003, the
FASB issued a revised Interpretation "FIN 46R." Under the revised
Interpretation, an entity deemed to be a business, based on certain
specified criteria, need not be evaluated to determine if it is a
Variable Interest Entity. The Company must apply the provisions to
variable interests in entities created before February 1, 2002.
Adoption of FIN 46 and FIN 46R did not have an impact on the
Company's financial condition, results of operations or cash flows.
In April 2003, the FASB issued Statement No. 149 ("SFAS 149"),
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS 149 is intended to result in more consistent
reporting of contracts as either freestanding derivative instruments
subject to Statement 133 in its entirety, or as hybrid instruments
with debt host contracts and embedded derivative features. In
addition, SFAS 149 clarifies the definition of a derivative by
providing guidance on the meaning of initial net investments related
to derivatives. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. Adoption of SFAS 149 did not have a
material effect on the Company's financial position, results of
operations or cash flows.
In May 2003, the FASB issued Statement No. 150 ("SFAS 150"),
Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity. SFAS 150 establishes standards for
classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 represents
a significant change in practice in the accounting for a number of
financial instruments including mandatory redeemable equity
instruments and certain equity derivatives. SFAS 150 is effective
for all financial instruments created or modified after May 31, 2003
and to other instruments as of September 1, 2003. The adoption of
SFAS 150 did not have a material impact on the Company's financial
position, results of operations or cash flows.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
17. CONTINGENT LIABILITIES AND COMMITMENTS
The Company has a $50,000 letter of credit outstanding at March 31, 2004
(2003 - $50,000).
The Company has entered into an operating lease agreement for office space
which requires the Company to make the following lease payments:
2005 $ 21,977
18. SUBSEQUENT EVENTS
Subsequent to the year ended March 31, 2004, the Company:
(a) signed a Coal Purchase and Financing Agreement with Marubeni
Corporation ("Marubeni"). Under the terms of the agreement, Marubeni
will lend the Company US$7.6 million, to be drawn down on a
non-revolving basis, at an interest rate of LIBOR plus 4% on the
advanced principal. The interest is payable quarterly and the
principal is due to be repaid no later than March 31, 2006. The
funds are to provide capital requirements for mine-site construction
and required working capital. The agreement further stipulates that
the Company will sell and Marubeni will purchase 600,000 tons of
coal over a two year period and Marubeni has the option to purchase
an additional 100,000 tonnes of coal within that time frame.
The loan is backed by security over the Company's assets, ranked
pari passu with the security interest held by Mitsui (Note 9), and
assignment of 100% of the issued and outstanding common shares of
Falls Mountain, the Company's wholly-owned subsidiary, which will be
held by Marubeni until repayment of the loan principal and interest
and fulfillment of the Company's commitment to sell and deliver the
coal to Marubeni.
The agreement further stipulates that the Company is required to
raise an additional $2,950,000 in equity by July 31, 2004 (satisfied
as per Note 18 (d)) which will be dedicated to funding the Willow
Creek coal project.
Marubeni will also become the marketing agent in Japan, Taiwan and
Korea for the Company's coal production and will receive a standard
commercial sales commission based on total tonnage sold during the
year.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
(CANADIAN DOLLARS)
18. SUBSEQUENT EVENTS (CONTINUED)
(b) engaged Ray Lagace of Vancouver, British Columbia, to manage the
Company's investors relations functions.
(c) granted 85,000 stock options under the Company's option plan
exercisable at a price of $1.01 per share for a five-year period.
Among which, 50,000 options were granted to Mr. Ray Lagace and
another 35,000 options were granted to one employee of the Company.
(d) completed a 3,333,334 units of private placement at a price of $0.90
per share with Sprott Asset Management Inc. for gross proceeds of
$3.0 million.
PINE VALLEY MINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENT OF DEFERRED EXPLORATION AND
DEVELOPMENT COSTS
(CANADIAN DOLLARS) SCHEDULE 1
Cumulative
from inception Years ended March 31,
to March 31, --------------------------------------------
2004 2004 2003 2002
---- ---- ---- ----
DEFERRED EXPENDITURES
Willow Creek Coal Property
Acquisition $ 18,076,951 $ 5,979,620 $ - $ -
Bulk sample 115,754 - - -
Consulting 579,815 - 26,843 52,840
Deferred development 4,610,505 320,581 162,998 2,674,882
Environmental 34,451 - - -
Geological 2,061 - - -
Laboratory 45,749 - - -
Licences 388,630 119,707 117,920 -
Reclamation 4,803 - - -
Recovery from trial cargo (2,348,587) - - (2,348,587)
Supplies 15,896 - - -
Survey and mapping 29,104 - - -
Travel 62,147 - - 11,388
Costs written-down (4,774,290) - - -
------------ ------------ ------------ ------------
16,842,989 6,419,908 307,761 390,523
------------ ------------ ------------ ------------
Indin Lake
Acquisition 553,665 - - -
Consulting 512,895 - - 31,124
Geological program 355,218 - - -
Environment deposit 50,000 - - -
Equipment purchases 1,131,233 - - -
Insurance 56,974 - - -
Insurance proceeds (553,736) - - -
Remediation cost 15,636 15,636 - -
Supplies 318,556 - - -
Survey 43,331 - - -
Taxes and licences 79,329 4,084 3,745 3,534
Travel and camp 372,530 1,311 - -
Recovery from Indin Lake (50) (50) - -
Cost written-down (2,935,581) (20,981) (2,914,600) -
------------ ------------ ------------ ------------
- - (2,910,855) 34,658
------------ ------------ ------------ ------------
16,842,989 6,419,908 (2,603,094) 425,181
MINERAL PROPERTIES,
BEGINNING OF PERIOD - 10,423,081 13,026,175 12,600,994
------------ ------------ ------------ ------------
MINERAL PROPERTIES,
END OF PERIOD $ 16,842,989 $ 16,842,989 $ 10,423,081 $ 13,026,175
============ ============ ============ ============
See accompanying Notes to the Consolidated Financial Statements.