SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 20-F
|_| Registration Statement Pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 2000.
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-22617
MINCO MINING & METALS CORPORATION
(Exact name of registrant as specified in its charter)
Province of British Columbia (Canada)
(Jurisdiction of incorporation or organization)
543 Granville Street, Suite 1200
Vancouver, British Columbia, Canada V6C 1X8
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
N/A N/A
----- -----
Title of each class Name of each exchange
on which registered
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Shares without par value
(Title of Class)
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
16,380,123.
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
Indicate by check mark which financial statement item the registrant has elected
to follow: Item 17 X Item 18
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No Not Applicable
2
TABLE OF CONTENTS
Page
Introduction And Use of Certain Terms......................................3
Forward-Looking Statements.................................................3
Glossary of Mining Terms...................................................3
Item 1. Identity of Directors, Senior Management and Advisers.............6
Item 2. Offer Statistics and Expected Timetable...........................6
Item 3. Key Information...................................................6
Item 4. Information on the Company.......................................11
Item 5. Operating and Financial Review and Prospects.....................28
Item 6. Directors, Senior Management and Employees.......................32
Item 7. Major Shareholders and Related Party Transactions................36
Item 8. Financial Statements.............................................39
Item 9. The Offering and Listing.........................................39
Item 10. Additional Information..........................................40
Item 11. Quantitative and Qualitative Disclosures About Market Risk......52
Item 12. Description of Securities Other than Equity Securities..........53
Item 13. Defaults, Dividend Arrearages and Delinquencies.................53
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds.............................................53
Item 15. [Reserved].......................................................53
Item 16 [Reserved].......................................................53
Item 17. Financial Statements............................................53
Item 18. Financial Statements............................................53
Item 19. Exhibits........................................................53
3
Introduction And Use of Certain Terms
Minco Mining & Metals Corporation is a corporation incorporated under the
laws of the province of British Columbia, Canada. As used herein, except as the
context otherwise requires, the term "Minco" or the "Company" refers to Minco
Mining & Metals Corporation and its consolidated subsidiaries. The Company's
consolidated financial statements are prepared in accordance with Canadian
generally accepted auditing standards and are presented in Canadian dollars.
Unless otherwise indicated, reference to dollar amounts in this Annual Report
shall refer to Canadian dollars.
Minco Mining & Metals Corporation files reports and other information with
the Securities and Exchange Commission located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain copies of Minco's filings
with the SEC by accessing their website located at www.sec.gov. Further, Minco
also files reports on Sedar. You may access Minco's reports filed on Sedar by
accessing their website at www.sedar.com.
The principal executive office of the Company is located at Suite 1200 -
543 Granville Street, Vancouver, British Columbia, Canada V6C 1X8, and its
telephone number is 604-688-8002.
Forward-Looking Statements
The following discussion contains forward-looking statements regarding
events and financial trends which may affect the Company's future operating
results and financial position. Such statements are subject to risks and
uncertainties that could cause the Company's actual results and financial
position to differ materially from those anticipated in forward looking
statements. These factors include, but are not limited to, the fact that the
Company is in the exploration stage, will need additional financing to develop
its properties and will be subject to certain risks since its prospects are
located in China, all of which factors are set forth in more detail in the
section entitled "Risk Factors" in Item 3.D. and "Operating and Financial Review
and Prospects" at Item 5.
Glossary of Mining Terms
Alteration changes in the chemical or mineralogical composition of a
rock, generally produced by weathering or hydro-thermal
solutions.
Anomalous inconsistent with or deviating from what is usual, normal or
expected.
Anomaly the geographical area corresponding to anomalous geochemical
or geophysical values.
Assay a chemical test performed on a sample of ores or minerals to
determine the amount of valuable metals contained.
Back-in rights providing financing assistance in exchange for the
right to regain an interest at a later time under
predetermined terms.
Carried interest an interest which does not require funding.
Chalcopyrite copper sulphide mineral.
4
Drift an underground passage, approximately horizontal, often
along a mineralized zone.
Drilling - a drilling procedure using diamond-tipped bits which result
diamond drilling in recovery of a drill core cylindrical section of rock from
beneath the earth's surface.
Fault a fracture in a rock across which there has been
displacement.
Felsic intrusions an intrusion of granite into surrounding rocks.
Geochemical trace element analysis of residual soils which may be
sampling interpreted to predict the composition of the underlying
bedrock.
Geology a science that deals with the history of the earth and its
life especially a recorded in rocks.
Geophysical survey means an exploration method that measures magnetic,
electrical or other physical characteristics of the earth,
the results of which can be interpreted and used to predict
the possibility of economic mineral concentrations beneath
the surface of the earth.
Grade the concentration of an ore metal in a rock sample, given
either as weight percent for base metals or in grams per
tonne (g/t) or ounces per short ton (oz/t) for precious
metals. The grade of an ore deposit is calculated, often
using sophisticated statistical procedures, as an average of
the grades of a very large number of samples collected from
throughout the deposit.
Ground magnetometer a geophysical survey carried out from the ground.
survey
Heap leach a process whereby valuable metals are leached from a heap or
pad of crushed ore by leaching solutions percolating down
through the heap and collected from a sloping, impermeable
liner below the pad.
Highly anomalous an anomaly, which is 50 to 100 times average background.
Horizon layer (as in massive sulphide horizon).
Intrusive mineralization within a rock type that was once molten and
has "intruded" into other rocks in that state, after which
it cools.
Mineralization minerals of value occurring in rocks.
Net smelter royalty a share of the net revenues received from a
smelter generated by the sale of metal produced by a mine.
5
Ore a natural aggregate of one or more minerals which may be
mined and sold at a profit, or from which some part may be
profitably separated.
Ore lenses a lenticular concentration of valuable material.
Sedimentary a type of deposit consisting of layers of massive sulphide
exhalative (a rock composed of at least 60% sulphide minerals)
(or SedEx) interbedded with layers of sedimentary rock.
type deposit
Skarn type of altered rock which in some areas
contains commercially-recoverable amounts of metals.
Smelter the treatment of sulphide concentrates to produce metal.
Sulphide a compound of sulphur and some other elements.
Surficial oxide the top portion of a deposit which has been oxidized by
zone surface weathering.
Trenching trenches excavated to bedrock which may be made by hand or
by machine.
6
Part I
Item 1. Identity of Directors, Senior Management and Advisers
The following table sets forth as of May 31, 2001, the names, business
addresses and functions of Minco's directors and senior management.
Name Business Address Position
- -------------------------- ------------------------------------- -------------------------------
Ken Cai Suite 1200 - 543 Granville Street, President, Chief Executive
Vancouver, British Columbia, Canada Officer and Director
V6C 1X8
William Meyer Suite 1200 - 543 Granville Street, Chairman and Director
Vancouver, British Columbia, Canada
V6C 1X8
Robert M. Callander 43 Delhi Avenue Director
North York, Ontario, Canada
M5M 3B8
Hans Wick Rebhaldenstrasse 7 Director
Zurich, Switzerland CH002
Minco's auditors are Ellis Foster, Chartered Accountants. Their address is
1650 West 1st Avenue, Vancouver, British Columbia Canada V6J 1G1. Ellis Foster
has been Minco's auditors for at least the past three years.
Item 2. Offer Statistics and Expected Timetable
Not Applicable
Item 3. Key Information
A. Selected Financial Data
The following selected financial information for the fiscal years ended
December 31, 1996, 1997, 1998, 1999, and 2000 are derived from the financial
statements of Minco which is reported in Canadian dollars and should be read in
conjunction with the financial statements and the notes thereto attached to this
Annual Report. Minco's financial statements are prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"). There are
significant differences between Canadian GAAP and U.S. GAAP including the
recording of exploration costs, recognition of compensation expense upon release
of the escrow shares and issuance of stock options and the recording of
marketable securities. For a discussion between Canadian GAAP and United States
GAAP, see note 12 to the Company's financial statements.
7
Canadian GAAP At December 31
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
Operations
Interest and Sundry Income $ 119,190 $ 265,388 $ 197,068 $ 144,042 $ 116,205
Exploration Expense -- 191,170 1,065,408 579,088 --
Operating Loss (1,117,105) (1,476,887) (1,996,584) (1,389,759) (624,679)
Loss for Period (1,117,105) (1,476,342) (1,996,584) (1,506,108) (624,679)
Income (loss) from Continuing
Operations per Common Share (0.11) (0.10) (0.13) (0.09) (0.04)
Common Shares used in calculations 9,828,126 15,331,855 15,549,918 16,154,986 16,335,178
Consolidated Balance Sheet Data
Total Assets 8,326,356 6,465,465 5,180,841 4,382,428 3,912,973
Mineral Interests 786,476 1,812,908 1,654,593 1,835,376 2,281,470
Total Liabilities 763,008 167,959 139,554 284,749 328,873
Share Capital $ 8,662,468 $ 4,097,679 $ 5,041,287 $ 6,297,506 $ 3,912,973
U.S. GAAP At December 31
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
Operations
Interest and Sundry Income $ 119,190 $ 265,388 $ 197,068 $ 144,042 $ 116,205
Exploration Expense (784,476) (1,026,432) 158,315 (180,783)
Loss for Year (3,742,015) (3,315,242) (2,544,584) (1,070,773)
Income (loss) from Continuing
Operations per Common Share (0.38) (0.31) (0.21) (0.08)
Common shares used in calculations 5,582,498 9,869,355 10,749,411 12,189,894 12,828,232
Consolidated Balance Sheet Data
Total Assets $ 7,539,880 $ 4,652,597 $ 3,534,948 $ 2,547,092 $ 1,648,933
Mineral Interests -- -- -- -- --
Total Liabilities 763,008 167,959 139,554 284,749 328,873
Share Capital $ 8,680,268 $ 10,545,934 $ 12,763,272 $ 14,299,814 $ 14,410,914
8
Exchange Rates
The following table sets forth information as to the period end, average,
the high and the low exchange rate for Canadian Dollars and U.S. Dollars for the
periods indicated based on the noon buying rate in New York City for cable
transfers in Canadian Dollars as certified for customs purposes by the Federal
Reserve Bank of New York (Canadian dollar =U.S. $1).
Year Ended:
December 31 Average Period End High Low
----------- ------- ---------- ---- ---
1995 1.3460 1.3655 1.2789 1.4132
1996 1.3636 1.3696 1.3865 1.3287
1997 1.3844 1.4305 1.4399 1.3345
1998 1.4831 1.5305 1.5765 1.4096
1999 1.4346 1.4440 1.5268 1.4512
2000 l.4916 1.4995 1.5592 1.4379
The following table sets forth the high and low exchange rate for the
past six months. As of May 31, 2001, the exchange rate was 1.5461.
Month High Low
----- ---- ---
December 2000 1.5458 1.4995
January 2001 1.5162 1.4944
February 2001 1.5399 1.4933
March 2001 1.5784 1.5388
April 2001 1.5790 1.5360
May 2001 1.5541 1.5310
B. Capitalization and indebtedness.
The Company's capitalization as of December 31, 2000 is as follows:
Consolidated Balance Sheet Data December 31, 2000
-----------------
Long-Term Debt $ 0
Shareholder's Equity $3,584,100
----------
Total Capitalization $3,584,100
==========
C. Reasons for the offer and use of proceeds.
Not Applicable.
9
D. Risk Factors
In addition to the other information presented in this Annual Report, the
following should be considered carefully in evaluating the Company and its
business. This Annual Report contains forward- looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed below
and elsewhere in this Annual Report.
1. The Company Has Incurred Losses. Since its reorganization in 1996, the
Company has incurred net losses and will continue to incur losses until it can
derive sufficient revenues from its projects.
2. The Company Is In Exploration Stage And Has No Proven Reserves. The
Company is in the exploration stage. None of the properties in which it has
interests are in commercial production, or contain reserves. In order to obtain
more reliable information on which to base decisions about possible development
of a property, it is necessary to expend significant time and money, and many
such properties will turn out not to be worth further expense. The Company may
thus expend significant amounts of financing and effort on any or all of its
properties without finding reserves or reaching a stage of commercial
production.
3. The Company Must Obtain Additional Financing to Conduct Exploration on
Its Properties. Because the Company is in the exploration stage, it does not
have sufficient financial resources available to undertake extensive exploration
or, if warranted, development programs. Further exploration or commercial
development, if warranted, would require additional financing. There can be no
assurance that needed future financing will be available in a timely or
economically advantageous manner, or at all.
4. The Company's Interests in Their Joint Ventures Will Be Subject to
Dilution. Under the terms of their joint venture agreements, the Company may
earn a specified percentage in the joint venture provided that the Company
spends a required amount on project expenditures for the joint venture. In the
event the Company ceases to make its project expenditures, its interest in the
joint venture will be subject to dilution.
5. The Company's Interest In Projects Will Be Diluted Pursuant to the
Teck-Cominco Agreements. The Teck-Cominco Agreements grant those companies the
right to become the operators of an aggregate of two future properties of the
Company as well as rights of first refusal to acquire interests in other future
projects for a period of three years. See "The Teck-Cominco Agreements" on page
15. The exercise of those earn-in-rights by either Teck or Cominco will dilute
the Company's interest in those projects.
6. The Mining Industry Is Highly Speculative. The Company is engaged in the
exploration for minerals which involves a high degree of geological, technical
and economic uncertainty, because of the inability to predict future mineral
prices, as well as the difficulty of determining the extent of a mineral deposit
and the feasibility of extracting it without the expenditure of considerable
money. There is a high level of risk involved.
7. It May Be Difficult to Enforce Civil Liabilities Against the Company.
Because all of the assets of the Company and its subsidiary, as well as the
Company's jurisdiction of incorporation and the residences of its officers and
10
directors, are located outside of the United States, it may be difficult or
impossible to enforce judgments granted by a court in the United States against
the assets of the Company and its subsidiaries or the directors and officers of
the Company who reside outside the United States.
8. Penny Stock Rules May Make It More Difficult to Trade the Company's
Common Shares. The Securities and Exchange Commission has adopted regulations
which generally define a "penny stock" to be any equity security that has a
market price, as defined, less than U.S.$5.00 per share or an exercise price of
less than U.S.$5.00 per share, subject to certain exceptions. Our securities may
be covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established
customers and accredited investors such as, institutions with assets in excess
of U.S.$5,000,000 or an individual with net worth in excess of U.S.$1,000,000 or
annual income exceeding U.S.$200,000 or U.S.$300,000 jointly with his or her
spouse. For transactions covered by this rule, the broker-dealers must make a
special suitability determination for the purchase and receive the purchaser's
written agreement of the transaction prior to the sale. Consequently, the rule
may affect the ability of broker-dealers to sell our securities and also affect
the ability of our investors to sell their shares in the secondary market.
9. Minco is a Passive Foreign Investment Company for United State Federal
Income Tax Purpose. Minco believes that it is a passive foreign investment
company ("PFIC") for United States Federal income tax purposes because it earns
75% or more of its gross income from passive sources. As a result, United States
holders of Minco's common shares may make a certain election to have Minco's
distributions or ordinary earnings and net capital gain treated differently for
United States income tax purposes. See Item 10.E. "Taxation - United States Tax
Consequences - Passive Foreign Investment Companies."
10. Risks Related to Doing Business in China. Various matters which are
specific to doing business in China may create additional risks or increase the
degree of such risks associated with the Registrant's activities. These risks
are discussed below.
a. The Company Must Seek Governmental Approval to Develop Mines. The
establishment, operation and terms of the joint ventures through which any
particular mineral property is to be explored or operated are all subject to
obtaining Chinese governmental approvals at various levels and for particular
matters, including mining rights, importation of equipment, hiring of labor, and
environmental regulations. Currently, the joint ventures formed to explore and,
if warranted, develop the White Silver Mountain and Gobi Gold projects have
obtained a license to conduct mineral exploration activities, but will be
required to obtain a mining license to, if warranted, develop and conduct
operations at the property. Depending on the scope of the operation, its
location and the particular issues involved, the level of government from which
approvals must be sought and the process involved may vary potentially
restricting the joint venture's operation.
b. Environmental Regulations May Adversely Affect the Company's Projects.
The Company's operations are subject to environmental regulations promulgated by
various Chinese government agencies from time to time. Violation of existing or
future Chinese environmental rules may result in various fines and penalties. As
China's economy modernizes and expands, it is expected that regulations covering
environmental protection and the reclamation and remediation of industrial sites
would be strengthened which could increase the operation costs in China.
11
It is industry practice for North American mining companies like Teck and
Cominco to apply the more stringent standards of their home countries to foreign
operations regardless of local practices. Should Teck or Cominco choose to
initiate production of a property in joint venture with the Company, its
operations would be carried out using North American environmental standards. It
is common practice for the estimates costs of reclamation and remediation of
mine sites to be included in the capital cost of a project. A project would have
to be able to provide an adequate return on all capital, including estimated
reclamation costs, to be considered viable. The Company's current projects all
surround active mining operations, which add additional considerations that
would be dealt with on a case-by-case basis. See the "Environmental
Considerations" section under the individual property description in Item 4.D.
for more details.
c. Politics of China May Adversely Affect the Company's Investments. The
Company's investments may be adversely affected by political, economic and
social uncertainties in China. Changes in leadership, social or political
disruption or unforseen circumstances affecting China's political, economic and
social structure could adversely affect the Company's joint venture interest or
restrict its operations.
d. Lack Of A Legal System May Produce Inconsistent Results. Enforcement,
operation and interpretation of existing laws may be uncertain, sporadic or
inconsistent. China's judiciary is relatively inexperienced in enforcing laws
that do exist, leading to a higher than usual degree of uncertainty as to the
outcome of any litigation. Even where adequate law exists in China, it may be
impossible to obtain swift and equitable enforcement of such law, or to obtain
enforcement of the judgment by a court of another jurisdiction. As a result, if
the Company is adversely effected, the Company may be unable to seek legal
address in China.
e. Property Information May Be Uncertain. Much of the information on which
the Company and its consultants have based their decisions regarding the
Company's mineral prospects is based on information provided by Chinese
governmental officials, geologists and mining engineers and cannot be
independently confirmed. Accordingly, the reliability of geological and mineral
information regarding the properties, the costs of labor, operation and
construction may be uncertain since it has not been independently verified by
the Company.
Item 4. Information on the Company
Introduction
Minco Mining & Metals Corporation is a British Columbia corporation whose
common shares trade on the Toronto Stock Exchange ("TSE") under the trading
symbol MMM. The principal executive office of the Company is located at Suite
1200 - 543 Granville Street, Vancouver, British Columbia, Canada V6C 1X8, and
its telephone number is 604-688-8002. Through joint ventures with Chinese
governmental entities, and others, the Company is engaged in the exploration and
acquisition of base and precious metal mineral projects in the People's Republic
of China. Minco has no affiliation with 3M corporation. Minco's wholly-owned
subsidiary, Triple Eight Mineral Corporation ("Temco"), is a British Virgin
Islands corporation also engaged in the exploration and acquisition of mineral
projects in China.
At present, Minco is an exploration-stage company. None of Minco's
properties has a known body of commercial ore, nor are any such properties at
the commercial development or production stage.
12
No assurance can be given that commercially-viable mineral deposits exist on any
of Minco's properties. Minco's properties are in the exploration stage, and
further exploration will be required before a final evaluation as to the
economic and legal feasibility can be determined. Further, Minco's interest in
joint ventures which own properties will be subject to dilution if Minco fails
to expend further funds on the project. Minco has not generated cash flows from
operations. These facts increase the uncertainty and risks faced by investors in
Minco. See Item 3. for Risk Factors.
Background
Minco was incorporated under the laws of the Province of British Columbia
on November 5, 1982, under the name "Caprock Energy Ltd." On February 19, 1996,
current management acquired its interests in Minco pursuant to the following
agreements: the "PCR Agreement," and the "Teck-Cominco Agreements," described
below. (See Item 4 - "The PCR Agreement" and "The Teck-Cominco Agreements.") The
purpose of the PCR Agreement was to transfer PCR's assets to Minco which allowed
Minco to explore and evaluate for potential acquisition and, if warranted,
development mineral properties in China.
Business
Since the signing of its first co-operation agreement on the Chapuzi
project in China in 1995, Minco has been active in mineral exploration and
property evaluations in China. Minco intends to build a portfolio of base metals
and precious metals properties in China. As discussed below, a strategic
alliance was formed with Teck Corporation and its 50.1% subsidiary, Cominco
Ltd., for mineral exploration and acquisition in China. Minco has conducted
exploration work on properties located in Sichuan, Xinjiang, Hebei, Inner
Mongolia, and Gansu provinces of China. Currently, Minco has interests in two
Sino-Foreign co-operative joint ventures and intends to establish a third
Sino-Foreign co- operation joint venture with Chinese mining organizations to
hold mineral rights in China.
At present Minco has no income from its operations and none of its
properties have reserves or are in production. Minco's ability to finance the
exploration and development, if warranted, of its mineral properties, to make
concession payments and to fund general and administrative expenses is therefore
dependent upon Minco's ability to secure financing. The equity markets for
junior mineral exploration companies are unpredictable. Alternatively, Minco may
enter into cost sharing arrangements through joint venture agreements. While
management believes that the quality of the concessions now held by Minco will
attract joint venture partners in the short-term and medium-term, there is no
guarantee that the terms would be as favorable as management would like.
While Minco believes that it has sufficient working capital to fund the
exploration work commitments on currently held properties for fiscal year ended
2001, it cannot be determined what the funding requirements will be necessarily
beyond that time and whether Minco will require additional financing to meet
such requirements. Minco does not believe that there are particular
environmental regulations that will materially impact its current or proposed
operations.
As discussed below, for the year ended 2001, Minco is focusing on the White
Silver Mountain and Gobi Gold projects. Teck is funding expenditures at White
Silver Mountain at its sole discretion and may discontinue its funding at any
time. However, Minco believes that results so far have been favorable and it is
expected that exploration will continue until such time as Teck will make a
13
decision concerning possible production. The Gobi Gold project is being funded
by Minco at this time. Major increases in the exploration efforts outlined below
would require additional capital.
A summary of Minco's plan of operations for the fiscal year 2001 for the
White Silver Mountain project and Gobi Gold project is as follows.
White Silver Mountain. The year 2000 program consisted of 230 meters of
underground excavation to establish drill stations from which 2,730 meters of
diamond drilling in five holes was carried out with the objective of outlining
the downward extensions of the known massive sulphide horizons. The drilling
further outlined the extensions of the western lobe of massive sulphide
mineralization. The eastern lobe remains open and will require additional
drilling to define its extent.
In addition to the underground program, an extensive surface program was
carried out in the area of geology perspective for the occurrence of massive
sulphide mineralization. Approximately 207 line- kilometers of geophysical
surveys (comprising magnetic and electromagnetic surveys) was completed. A
number of anomalies were outlined, of which three occur in highly perspective
geology and require testing by drilling. These three areas will be tested in the
year 2001 field season by six surface diamond drill holes aggregating 2,700
meters at an estimated cost of $400,000. Additional drilling will be contingent
in part on the results of the proposed six-hole program.
Additional underground drilling will be required and may be scheduled for
later in 2001.
Gobi Gold Project. The 2000 Gobi Gold project field program included
regional scale geological and geochemical sampling programs followed by detailed
ground magnetometer surveys and geological mapping in a 20 square kilometer
area. Detailed rock geochemical sampling focused on a seven square kilometer
area within this broader area. Rock samples were assayed for gold and seven
other elements common to gold-skarn systems.
The combination of geology, intrusive centers interpreted from magnetic
data and geochemistry indicates a typical gold skarn system in a belt 1,500
meters long and 300 meters wide where rock geochemical samples grade two grams
per ton gold or better.
A new discovery was made during the year 2000 in an area in thin sand
covering 500 meters to the east of the main gold zone near another interpreted
intrusive center. A six meter wide zone was exposed in a trench which returned
an average grade of six grams per ton gold. Minco believes that geochemical
values of two grams of gold per tonne are considered highly anomalous and could
be an indication of economic concentrations of gold in the sub-surface. Values
of six grams per tonne are potentially economic if found in large enough volumes
to be economically extracted. No assurance can be given that the Gobi Gold
project will be able to find a sufficient amount of gold to be economically
mined.
The year 2001 program will consist of expanded sampling programs by a
drilling and/or trenching program prior to designing an extensive diamond
drilling program.
14
The PCR Agreement
On February 19, 1996, Minco entered into an agreement with Pacific Canada
Resources, Inc. ("PCR"). PCR was a private company controlled by Ken Cai and
Donald Hicks, both of whom became directors of Minco upon completion of the
transaction. Prior to that time, PCR, Ken Cai and Donald Hicks were not
affiliated with Minco. Mr. Hicks is no longer a director of the Company.
Pursuant to the PCR Agreement, Minco acquired rights to PCR's entire portfolio
of base and precious metal property agreements and acquisition rights in China,
some of which were held directly and some of which were held by PCR's
subsidiary, Temco. At that time, Temco was a joint venture, of which Minco held
a 60% equity interest and China Clipper Gold Mines, Ltd. ("China Clipper"), a
publicly traded Ontario corporation, held the remaining 40% equity interest. On
February 27, 1997, Minco purchased China Clipper's 40% equity interest in Temco
for $175,000, which was believed to be the fair market value at the time. PCR is
currently largest and the controlling shareholder of Minco, and has no other
operations other than its ownership in Minco.
The Teck-Cominco Agreements
Simultaneously, and in connection with the PCR agreement, Minco and PCR
entered into separate, but related agreements respectively dated February 19 and
February 20, 1996 (collectively the "Teck-Cominco Agreements") with Teck
Corporation ("Teck") and its 50.1% owned subsidiary, Cominco Ltd. ("Cominco"),
which are both public Canadian mining companies traded on the Toronto Stock
Exchange. Pursuant to these agreements, Teck and Cominco each invested $500,000
in Minco, and received 625,000 units, each unit consisting of one common share
of Minco and one half of a non- transferable common share purchase warrant, each
whole share purchase warrant entitling the holder to acquire one additional
common share at a price of $1.20 on or before February 20, 1997, or $1.38 on or
before February 20, 1998. The shares purchased by Teck and Cominco were
"restricted shares" under the rules of the British Columbia Securities
Commission until February 20, 1997. Teck exercised its warrants to purchase
125,000 common shares at $1.20 per share prior to February 20, 1997. The
warrants issued to Cominco expired under their terms.
As partial consideration for the investments by Teck and Cominco, they
received "earn-in rights" as to the Non-Chinese Interest ("NCI") in any two
mineral property rights acquired by Minco in China after the date of the
Teck-Cominco Agreements until March 1, 2004. The Non-Chinese Interest with
respect to a property represents the direct or indirect interest in a property
that is available for a non- Chinese entity or a foreigner to acquire under
Chinese Law.
The earn-in rights provide that upon Minco procuring a base or precious
metal project, and after preliminary work by Minco, Teck and Cominco, in their
sole discretion, shall first determine whether such project is to be governed by
the Teck-Cominco Agreements. If they determine that the project is subject to
the agreement, Teck and Cominco shall hold earn-in rights with respect to such
project. If Teck and Cominco determine that the project is not to be governed by
the Teck-Cominco Agreements, Minco shall thereafter have the right to elect
whether or not to have the project assigned to it at cost.
If Teck and Cominco determine that a base or precious metal project will be
governed by the Teck-Cominco Agreements, their earn-in rights shall be
exercisable in one of two ways, depending on whether the project is determined
by Teck and Cominco, in their sole discretion, to be a "development property" or
"exploration property." If determined to be a development property, Teck and
Cominco shall have the right to acquire 70% of the Non-Chinese interest in such
15
property and to become the operator of the project by completing, at their sole
cost, any further project work and the final feasibility report on the project.
Teck and Cominco must then arrange for 70% of the costs required to be provided
by the non-Chinese parties to place the property into commercial production.
Upon completion of all of the foregoing, Teck and Cominco shall be deemed to
have exercised their earn-in rights in respect to the development project. Minco
must contribute 30% of the costs required after the completion of the
feasibility study.
If a project is determined to be an exploration property by Teck and
Cominco, Teck and Cominco shall have the right, upon completion of a preliminary
feasibility study by Minco, to acquire 51% of the non-Chinese interest in such
exploration property and to become the operator of programs on the property. To
earn this 51% interest, Teck and Cominco must fund the final feasibility study
on the project and arrange for all financing required to be provided by the
non-Chinese parties to place the property into commercial production, as
determined in the feasibility study. Upon completion of all of the foregoing,
Teck and Cominco shall be deemed to have exercised their earn-in rights in
respect to the exploration project.
Each property for which Teck or Cominco have exercised an earn-in right
shall be governed by its own separate joint venture agreement which will include
a provision that if Minco's interest is diluted to 10% or less, such interest
will be converted to a 1% net smelter return royalty. The agreements further
provide that Cominco (in the case of a base metal property) or Teck (in the case
of a precious metal property) shall be the designated operator of the property
on behalf of the joint venture which shall be formed to exploit any such
property.
The Teck-Cominco Agreements contain provisions under which Teck and Cominco
agree, subject to certain limitations, not to increase their collective share
holdings in Minco beyond 20% of the common shares, nor to reduce them beyond 50%
of their initial ownership, which limitations expire upon certain changes in
control of Minco. As of March 31, 2001, Teck owned 1,125,000 common shares
representing 6.87% of the outstanding shares and Cominco owned 625,000 common
shares representing 3.82% of the outstanding shares. Teck and Cominco have a
right of first refusal to purchase common shares of Minco in any future
offerings, so as to maintain their percentage ownership in Minco.
After Teck and Cominco have exercised their earn-in rights in an aggregate
of two projects procured by Minco, Teck and Cominco shall have further
preferential rights of first refusal with respect to further properties
identified by Minco for a period of three years after the exercise of their
earn-in rights. These preferential rights of purchase will apply only in
circumstances where Minco, if Minco has elected to acquire a project identified
by PCR, intends to offer an interest to third parties or has received an offer
to purchase, earn or acquire an interest in such properties from third parties.
Minco is required to notify Teck and Cominco of its intent to sell an interest
in such project to a third party, and provide Teck and Cominco all information
which Minco possesses with respect to the project as well as the terms of the
proposed sale, and Teck and Cominco may, within thirty days, purchase such
interest on the terms which Minco had proposed to accept from a third party.
The White Silver Mountain Teck Agreement
On June 15, 1998, Teck exercised its option with respect to the White
Silver Mountain Project (see Item 4 - Description of Property) under which it
has the right to acquire up to 70% of Minco's interest in, or a net 56% in, the
White Silver Mountain Project by purchasing 375,000 common shares of Minco at a
price of $2.00 per share, which occurred on July 10, 1998, and by exercising
16
warrants to purchase 125,000 common shares of Minco at a price of $3.00 per
share, within one year, and funding all of Minco's obligations on the White
Silver Mountain project up to the point of production. These warrants were not
exercised. As a part of the transaction, warrants were issued to Teck allowing
it to buy an additional 125,000 shares at a price of $2.00 per share, for one
year, and warrants to buy a further 125,000 shares at a price of $3.45 per share
for two years. Cominco has "back-in rights" with respect to this project to earn
up to a 20% working interest in the Non-Chinese Interest in the property up to
the pre-feasibility stage by repaying Teck and Minco one and one-half times the
total project expenditures up to the date of exercise of its rights and
thereafter funding its pro-rata share of feasibility and development costs. If
Cominco exercises these back in rights, Minco's interest would be reduced to a
19% carried interest.
The White Silver Mountain agreements with Teck and Cominco are separate
from the Earn-In Rights that are detailed in the section above. The White Silver
Mountain Agreement does not constitute an exercise of either Teck's or Cominco's
first right of refusal, which remain intact.
People's Republic of China - Background Information
The following is a general description of China's foreign investment in
China and the history of gold mining therein.
Foreign Investment
China is in the process of developing a comprehensive system of laws for
the development of a market-oriented economy. Since 1979, a significant number
of laws and regulations dealing with foreign investment and matters related to
foreign investment have been promulgated.
The Constitution authorizes and encourages foreign investment and protects
the "lawful rights and interests" of foreign investors in China. The Civil
Procedure Law of China (the "Civil Procedure Law"), effective April 9, 1991,
provides that if there is a conflict between the provisions of international
treaties to which China is a signatory, and domestic Chinese law, the treaty
provisions will prevail. In addition, the Foreign Economic Contract Law of China
(the "FECL"), effective July 1, 1985, provides that matters not covered by
Chinese law will be dealt with by reference to international practices.
Direct foreign investment in China usually takes the form of equity joint
ventures ("EJVs"), co-operative joint ventures ("CJVs") and wholly-foreign-owned
enterprises. These investment vehicles are collectively referred to as foreign
investment enterprises ("FIEs").
An EJV is a Chinese legal person and consists of at least one foreign party
and at least one Chinese party. The EJV generally takes the form of a limited
liability company. It is required to have a registered capital to which each
party to the EJV subscribes. Each party to the EJV is liable to the EJV up to
the amount of the registered capital subscribed by it. The profits, losses and
risks of the EJV are shared by the parties in proportion to their respective
contributions to the registered capital. There are also rules and regulations
governing specific aspects of EJVs or FIEs, including capital contribution
requirements, debt-equity ratio, foreign exchange control, labor management,
land use and taxation.
Unlike an EJV, a CJV may be, but need not be, incorporated as a separate
legal entity. The relationship between the parties is contractual in nature. The
rights, liabilities and obligations of the parties are governed by the CJV
17
contract, as is each party's share of the goods produced or profits generated. A
CJV is considered a legal person with limited liability.
The establishment of FIEs requires the approval of various Chinese
government authorities. Generally, the approval authority is determined on the
basis of the total amount of investment involved and the location of the project
in question. The State Council must approve any foreign investment projects
having an investment of U.S.$30 to U.S.$100 million or more. The State
Development Planning Commission and the Ministry of Foreign Trade and Economic
Go-operation are authorized by the State Council to approve foreign investment
projects of between U.S.$30 million and U.S.$100 million. Provincial authorities
are authorized to approve projects less than U.S.$30 million.
Gold Mining in China
Gold has been produced in China for over 4,000 years. In 1994, China was
the world's sixth largest producer of gold at a reported 130 tonnes, immediately
following Canada which was then the fifth largest producer of gold. It is
presumed that early Chinese production was from placer deposits, and placer
reserves still account for over 15% of China's total gold production. Gold
mining is currently active in all of China's provinces, with over 460 official
operations.
The Chinese mining industry has traditionally been closed to foreign
participation. However, a change in the Mineral Resources Law has been
implemented by China's Central Government which permits foreign participation.
The regulation of mining, including gold mining, in China is in a state of
evolution from a totally planned, state-controlled condition to free market
conditions as experienced in developed and most developing countries.
The Ministry of Geology and Mineral Resources ("MGMR"), which formerly
administered geological exploration and also carried out exploration through its
own personnel, has been replaced by the new Ministry of Lands and Mineral
Resources.
Chinese-Foreign Co-Operative Joint Ventures
Minco has entered into two joint ventures to explore, and if warranted, to
develop the White Silver Mountain project and Gobi Gold project. Minco believes
that each of the joint ventures has complied with the required statutory
regulations.
The following is a general description of the legal framework for
Sino-foreign co-operation joint ventures pursuant to which the Company's
business is carried on in China or will be regulated.
Legal Framework. Each of the various joint venture entities through which
the Company will carry on business in China has been or will be formed under the
laws of China as a Chinese-foreign co-operative joint venture enterprise and is
or will be a "legal person" with limited liability. All joint ventures entered
into, or to be entered into, by the Registrant must be approved by both the
Ministry of Foreign Trade and Economic Go-operation ("MOFTEC") and the State
Planning Commission ("SPC") in Beijing or their provincial bureaus.
The establishment and activities of each of the Company's joint venture
entities are governed by the Law of the People's Republic of China on
Chinese-foreign co-operative Joint Ventures and the regulations promulgated
thereunder (the "China Joint Venture Law"). As with all Chinese-foreign
18
co-operative joint venture enterprises, the Company's joint venture enterprises
will be subject to an extensive and reasonably well-developed body of statutory
law relating to matters such as establishment and formation, distribution of
revenues, taxation, accounting, foreign exchange and labor management.
On January 1, 1997, an amendment to the Mineral Resources Law of China
became effective. Among other things, the amended law deals with foreign
ownership of Chinese mines and mineral rights, and allows, under some
circumstances, the transfer of exploration rights and mining rights. Pursuant to
this law, new regulations were made effective on February 12, 1998. These new
regulations have effectively removed the limitations formerly imposed on foreign
investment in gold mining.
Restructuring within central government bureaucracies dealing with
resources has resulted in the formation of one new ministry, the Ministry of
Land and Resources, which replaces the old Ministry of Geology and Mineral
Resources, State Bureau of Land Administration, State Bureau of Oceanic
Administration and the State Bureau of Survey. This new ministry administers a
new computerized central mineral title registry established in Beijing. This
change has streamlined the application for exploration and mining permits so
that a maximum 40-day response time is now guaranteed.
Under existing laws, in order to form a mining joint venture, foreign
companies must complete three levels of agreements. In general, the first level
of agreement is a Letter of Intent or a Memorandum of Understanding, which sets
forth broad areas of "mutual co-operation." The second level of agreement is a
more detailed Co-operation Agreement which outlines the essential terms of the
joint venture which will ultimately be formed. The third level of agreement is a
Joint Venture Contract which sets out the entire agreement among the parties and
contemplates the establishment of a "Chinese Legal Person," a separate legal
entity.
Before a joint venture can be created, an assessment or feasibility study
of the proposed joint venture must be prepared and approved by the State
Development Planning Commission (the "SDPC") or its provincial bureau.
Therefore, upon completing a Cooperation Agreement, the parties prepare a
feasibility study of the proposed joint venture and submit this feasibility
study along with the Cooperation Agreement to the SDPC for what may be described
as an approval in principle, the granting of which depends upon whether the
proposed project broadly conforms to the economic policy issued by the
government and any prescribed regulations.
Upon receiving this approval in principle, the parties then negotiate and
prepare a Joint Venture Contract and submit it to the Ministry of Foreign Trade
and Economic Cooperation ("MOFTEC"), or its provincial bureaus, which approves
the specific terms of all Joint Venture Contracts between Chinese and foreign
parties. Within one month after the receipt of a certificate of approval from
MOFTEC, a joint venture must register with the State Administration of Industry
and Commerce (the "SAEC"). Upon registration of the joint venture, a business
license is issued to the joint venture. The joint venture is officially
established on the date on which its business license is issued. Following the
receipt of its business license, the joint venture applies to the MLR to approve
and grant to the joint venture its exploration permits and/or mining licenses.
Governance and Operations. Governance and operations of a Sino-foreign
cooperative joint venture enterprise are governed by the Chinese Joint Venture
Law and by the parties' joint venture agreement and the Articles of Association
of each joint venture entity. Pursuant to relevant Chinese laws, certain major
actions of the joint venture entity require unanimous approval by all of the
directors present at the meeting called to decide upon actions such as:
19
amendments to the joint venture agreement and the Articles of Association;
increase in, or assignment of, the registered capital of the joint venture; a
merger of the joint venture with another entity; or the termination and
dissolution of the joint venture enterprise.
Term. Under the joint venture agreement, the parties will agree to a term
of the joint venture enterprise from the date a business license is granted.
However, the term may be extended with the unanimous approval of the board of
directors of the joint venture entity and the approval of the relevant Chinese
governmental entities.
Employee Matters. Each joint venture entity is subject to the
Chinese-Foreign Cooperative Joint Venture Enterprise Labor Management
Regulations. In compliance with these regulations, the management of the joint
venture enterprise may hire and discharge employees and make other
determinations with respect to wages, welfare, insurance and discipline of its
employees.
Generally, in the joint venture agreement, the standard of salary, social
welfare insurance and traveling expenses of senior management will be determined
by the board of directors of the joint venture entity. In addition, the joint
venture will establish a special fund for enterprise development, employee
welfare and incentive fund, and a general reserve. The amount of after-tax
profits allocated to the special funds is determined at the discretion of the
board of directors on an annual basis.
Distributions. After provision for a reserve fund, enterprise development
fund and employee welfare and incentive fund, and after provision for taxation,
the profits of a joint venture enterprise will be available for distribution to
the Registrant and the relevant Chinese governmental entity, such distribution
to be authorized by the board of directors of the joint venture entity.
Assignment of Interest. Under joint venture agreements and the Chinese
Joint Venture Law, any assignment of an interest in a joint venture entity must
be approved by the relevant governmental authorities. The China Joint Venture
Law also provides for pre-emptive rights and consent of the other party for
proposed assignments by one party to a third party.
Liquidation. Under the Chinese Joint Venture Law and joint venture
agreements, the joint venture entity may be liquidated in certain limited
circumstances including the expiry of its term or any term of extension,
inability to continue operations due to severe losses, failure of a party to
honor its obligations under the joint venture agreement and Articles of
Association in such a manner as to impair the operations of Chinese governmental
entitles and force majeure.
Resolution of Disputes. In the event of a dispute between the parties,
attempts will be made to resolve the dispute through friendly consultation. This
is the practice in China and the Company believes that its relationship with
Chinese governmental entities is such that it will be able to maintain a good
working relationship with respect to the operations of its joint venture
enterprises. In the absence of a friendly resolution of any dispute, the parties
have agreed or will agree that the matter will first be referred to the Foreign
Economics and Trade Arbitration Commission of China Council ("FETAL") for the
Promotion of International Trade for Arbitration. Awards of FETAL are
enforceable in accordance with the laws of China before Chinese courts. Resort
to Chinese courts to enforce a joint venture contract or to resolve disputes
between the parties over the terms of the contract is permissible. However, the
parties' may jointly select another internationally recognized arbitration
institution to resolve disputes. All of the Company's joint venture agreements
stipulate that disagreements between the parties will be arbitrated by an
arbitration institution in Singapore.
20
Expropriation. The Chinese Joint Venture Law also provides that China
generally will not nationalize and requisition enterprises with foreign
investment. However, in special circumstances where demanded by social public
interest, enterprises with foreign investment may be requisitioned by legal
procedures, but appropriate compensation will be paid.
Division of Revenues. Revenues derived from operating joint ventures, once
all necessary agreements, permits and licenses are obtained, will be divided
between the Company and the Chinese governmental entity or entities which are
parties to the joint venture according to the terms of each individual joint
venture, which terms will vary from project to project. The Company will be
subject to various taxes on its revenues.
C. Organizational Structure
Minco has one wholly-owned subsidiary, Temco, a corporation organized on
September 1, 1995, under the laws of the British Virgin Islands and having a
statutory office at Arawak Chambers, P.O. Box 173, Road Town, Tortola, British
Virgin Islands.
The following chart sets forth Minco's corporate structure, including its
subsidiary, their jurisdiction of incorporation, and the various mineral
properties held by each of them:
[ORGANIZATIONAL STRUCTURE TABLE]
MINCO MINING AND METALS CORPORATION
(a British Columbia corporation)
A) Triple Eight Mineral Corporation (a British Virgin Islands company) (100%)
owned by Minco).
B) Gansu Keyin Mining Co. Ltd. (1), a Chinese joint venture with Minco's right
to earn up to an 80% interest and who owns rights to the White Silver
Mountain project.
C) Inner Mongolia Damo Mining Co., Ltd. (2), a Chinese joint venture with
Minco's right to earn up to a 75% interest and who owns rights to the Gobi
Gold project.
D) Changba-Lijiajou project (3). Minco has the option to earn up to a 75%
interest.
(1) Formed by Minco and Baiyin Non-Ferrous Metals Corporation ("BNMC"), a
Chinese state-owned company. Teck Corporation has the right to earn 70% of
Minco's interest for a net 56% interest. As of March 31, 2001, Minco has
not yet earned its 80% interest.
(2) Formed by Minco and the Exploration Institute of Land and Resources of
Inner Mongolia ("EILR"), a department of the Chinese government. As of
March 31, 2001, Minco has not yet earned its 75% interest.
(3) Owned by BNMC. Minco has the right to earn up to a 75% interest in joint
venture. As of March 31, 2001, Minco has not yet earned its 75% interest.
21
D. Property, Plant and Equipment
For the year 2000, Minco actively pursued exploration at the White Silver
Mountain and Gobi Gold projects.
At White Silver Mountain, a 250-meter horizontal tunnel was completed under
the direction of Minco and Teck Corporation personnel. The purpose of the tunnel
was to allow a drill to be put in the optimal location for testing the
extensions of the Xiaotieshan deposit. Upon completion of the tunnel, Teck
drilled approximately 2,000 meters in several holes to test the zone. Based on
the results of this drill program, a follow-up program will be planned for the
year 2001.
Concurrent with the on-going underground program, Teck will undertake a
program of surface work on broader areas of the property away from the known
deposits. These areas have seen little previous exploration. The initial mapping
program completed by Minco in the year 1999 discovered several areas of
favorable geology that require follow-up. The year 2000 surface program included
a broader and more comprehensive mapping project, 200 line kilometers of
geophysical surveys and, where applicable, soil and rock sampling. The results
of the surface program will be followed up with approximately 3,000 meters of
surface drilling in the year 2001 at an estimated cost of $400,000, which is
being funded by Teck.
In addition to the White Silver Mountain program, Minco carried out work on
its own account on the Gobi Gold project. The initial exploration phase
consisted of geological mapping, soil and rock geochemical sampling and surface
magnetometer surveys designed to aid in mapping the major structures on the
project and assist in locating buried intrusive bodies. This program also
included follow-up prospecting of the anomalies generated by earlier work by the
Chinese joint venture partner. The Gobi Gold project surrounds a small mining
permit retained by the vendor. The Phase I program is on schedule, will be
completed at an estimated cost of $400,000 and will be funded from Minco's
existing working capital. Further exploration work, if warranted, will be
contingent on an evaluation and interpretation of the geological and geophysical
data resulting form the Phase I program.
At this time, Minco plans no further work programs on any of it other
properties including the Changba-Lijiagou project. Minco may entertain offers
from third parties that wish to option or joint venture the Changba-Lijiagou
project. At the present time, Minco is not negotiating any agreement on the
property and there is no assurance that an offer will be obtained that will
enhance shareholder value.
White Silver Mountain
Minco acquired its rights to the White Silver Mountain project located in
Gansu Province, China, pursuant to the "Co-operation Agreement for Mineral
Exploration and Development" between the Company and Baiyin Non-Ferrous Metals
Corporation ("BNMC") signed on November 17, 1997. A fully licensed Sino-Foreign
joint venture company, Gansu Keyin Mining Co. Ltd. ("Gansu Keyin") has been
formed to hold the mineral interests. In order to earn up to an 80% interest in
Gansu Keyin which owns the rights to the White Silver Mountain project, Minco
must spend a minimum of US$4.8 million (40 million RMB) on the White Silver
Mountain property over a six year period. If Minco fails to spend the minimum
amount, Minco's interest in Gansu Keyin will be capped by a predetermined
formula as set out in the Joint Venture Agreement. BNMC contributed the
exploration permit held by it and the geological data and research results,
including drill core samples and maps, for its 20% interest in Gansu Keyin.
Following the completion of the above expenditures, each party shall make
22
contributions to Gansu Keyin in proportion to their respective beneficial
interests. Pursuant to an option agreement dated December 22, 1999, with
effective date of June 10, 1998, the date a letter agreement was entered into,
Minco granted Teck an option to earn 70% of Minco's 80% interest, for a 56% net
interest in Gansu Keyin, by assuming all of Minco's funding requirements until
commercial production has been attained. Since inception, Teck has spent
approximately $1,674,858, and Minco has spent $1,376,303, respectively on the
White Silver Mountain project.
Location and Description
The 111 square kilometer White Silver Mountain project includes exploration
ground in or around a number of past and presently producing properties in the
Baiyin Ore Field located close to the city of Baiyin, Gansu Province, China.
Baiyin is located 1,000 kilometers west of Beijing. The area is fully serviced
by road and rail and has the entire required infrastructure to support an active
mining operation. The White Silver Mountain project is located near the
Xiaotieshan deposit which is currently being mined and operated by BNMC. Gansu
Keyin, the joint venture in which Minco has the right to earn an 80% interest,
has concluded an agreement to explore the extensions of the mineralized zones
being mined at Xiaotieshan as well as any new discoveries in the region.
Drilling and underground exploration undertaken by Gansu Keyin has focused on
the area immediately below the Xiaotieshan underground mine testing the downward
extensions of the ore lenses being mined by BNMC. The agreement includes the
areas immediately surrounding past and present mine workings but excludes the
workings themselves and the BNMC milling and/or smelting operations. Recent
surface exploration and geological mapping has uncovered other prospective areas
outside of the project boundary. In response to these finds, Gansu Keyin has
applied for an additional 70 square kilometers of mineral rights, which was
granted in March 2000.
History, Deposit Type and Exploration Potential
The White Silver Mountain deposits are of the Volcanogenic Massive Sulphide
(VMS) type. VMS deposits are formed in undersea settings by the precipitation of
metal rich fluids expelled by volcanic vents. VMS deposits display a
characteristic "zoning" with more copper-rich deposits found near the location
of the original volcanic vents and more zinc-rich deposits found at a distance
to them, though the pattern is often obscured by later faulting and folding of
the rocks that contain them. VMS deposits are "syngenetic," meaning they form at
the same time as the rocks that enclose them and they usually occur in clusters
over a 20 to 40 km radius. Deposits are found where the volcanic rock has
changed to a distinctive quartz rich rock units known as "exhalitives." These
are indicators of VMS deposit forming activity; exploration for new deposits in
known VMS camps therefore often focuses on finding the exhalative horizons then
exploring within them for economic concentrations of metals. Geological mapping
undertaken as part of the 1999 exploration program has located five separate
exhalitive horizons, including the one that hosts the mined deposits. To the
best of Minco's knowledge, there had been virtually no past exploration of the
property away from the mines.
Environmental Considerations
The Gansu Keyin joint venture agreement specifically excludes any areas of
past or present mining activity. Minco foresees no direct or indirect
liabilities arising from the activities of BNMC on its own mine sites. In the
White Silver Mountain underground exploration area, Teck has hired BNMC as a
contractor to undertake all underground excavation. BNMC is responsible for the
disposal of all mining waste (mainly barren rock) in an environmentally sound
23
manner. Similarly, it is expected that BNMC would be retained as the mining
contractor if the joint venture makes a positive production decision. BNMC would
have operational management of the project and would be responsible for
adherence to sound environmental practice. If smelting is done by BNMC, it would
be governed by standard commercial contract under which the handling and safe
disposal of any attendant waste products would be BNMC's sole responsibility.
Gansu Keyin Mining Co. Ltd.
Gansu Keyin Mining Co. Ltd was formed and operates pursuant to a
Sino-Foreign Joint Venture contract between Baiyin Non-Ferrous Metals
Corporation of the People's Republic of China and Minco. Under the terms of the
joint venture contract, Gansu Keyin's board of directors consists of seven
directors of which Minco has the right to select four directors, including the
chairman. Minco has selected Messrs. Ken Cai, William Meyer, Hans Wick and Fred
Daley as its representatives. Baiyin has the right to select the remaining three
directors.
Because of Minco's majority ownership and majority representatives on the
Gansu Keyin's board, Minco controls Gansu Keyin's operations in the ordinary
course of business. However, the following transactions by Gansu Keyin requires
the unanimous approval by its board: (1) terminating or dissolving Gansu Keyin;
(2) selling or mortgaging assets that have a value of 10% of Gansu Keyin's
assets; (3) increasing or decreasing Gansu Keyin's registered capital; (4)
borrowing by Gansu Keyin; (5) merging Gansu Keyin; (6) guaranteeing on behalf of
Gansu Keyin; and (7) establishing organization under the board.
2000 Exploration Program and Planned Activities for 2001
The White Silver Mountain project program for 2000 consisted of 250 meters
of underground excavation establish drill stations, approximately 2,000 meters
of underground drilling and a surface program which included geological mapping
and approximately 200 line kilometers of electromagnetic surveying. The mapping
and electromagnetic surveys generated new targets for a surface drilling
campaign to be undertaken in 2001 after the Keyin has received and interpreted
the results of the surface work and the current underground drill program. The
cost of this program is estimated at $400,000 and will be completely funded by
Teck. Similarly, the underground program is expected to continue as long as
favorable results are being received and the potential size of the mineralized
zone is being increased.
In April 2001, Teck commenced a surface diamond drilling program comprising
of an estimated 2,700 meters in priority zones based on a combination of
electromagnetic conductors with coincident surface alteration zones and
mineralization in geological setting prospective for volcanogenic massive
sulphide minerals. Results are expected during the third quarter of 2001.
Minco's costs related to the White Silver Mountain project was $73,023 for
the December 31, 2000, year end and will be approximately $50,000 for the year
ended December 31, 2001, consisting of $20,000 in geological fees, $15,000 in
management fees and $15,000 related to travel and lodging related to the
project. These amounts are in addition to the amounts being expended by Teck.
Gobi Gold Project
A regional exploration and property evaluation was carried out on the Inner
Mongolia (Gobi Gold project) during 1998 culminating in the joint venture
24
agreement in 1999 between Minco and the Exploration Institute of Land and
Resources of Inner Mongolia ("EILR"). In 1999, Minco and EILR created Damo
Mining Co. Ltd., a fully-licensed Sino-Foreign joint venture company, to explore
for metallic mineral deposits within the Inner Mongolia Autonomous Region.
Initially, Damo Mining will focus on exploring its existing license holding that
covers 550 km2. The Damo Mining joint venture agreement allows Minco to earn up
to a 75% interest in joint venture by spending US$2.5 million on exploration on
the Gobi Gold project over four years. In the event Minco does not spend the
specified amounts, its interest in the joint venture agreement may be subject to
being capped by a predetermined formula as set out in the Joint Venture
Agreement.
Inner Mongolia Damo Mining Co., Ltd.
Inner Mongolia Damo Mining Co., Ltd. ("Damo Mining") was formed and
operates pursuant to a Sino-Foreign Joint Venture contract between EILR and
Minco. Under the terms of the joint venture contract, Damo Mining's board of
directors consists of seven directors of which Minco has the right to select
four directors, including the chairman. Minco has selected Messrs. Ken Cai,
William Meyer, Robert Callander and Ruijin Jiang as its representatives. EILR
has the right to select the remaining three directors.
Because of Minco's majority ownership and majority representatives on Damo
Mining's board, Minco controls Damo Mining's operations in the ordinary course
of business. However, the following transactions by Damo Mining requires the
unanimous approval by its board: (1) terminating or dissolving Damo Mining; (2)
selling or mortgaging assets that have a value of 10% of Damo Mining's assets;
(3) increasing or decreasing Damo Mining's registered capital; (4) borrowing by
Damo Mining; (5) merging Damo Mining; (6) guaranteeing on behalf of Damo Mining;
and (7) establishing organizations under the board.
Location, History, Geology and Exploration Potential
The Gobi Gold project is the culmination of a series of regional
exploration programs undertaken by EILR. EILR carried out a broad program of
stream and drainage sampling. This program highlighted several areas with gold
concentrations some of which were followed up by mapping, prospecting and more
closely spaced geochemical sampling. Minco believes that the potential for
discovering more extensive, near surface skarn mineralization is good, given the
limited exploration that has taken place beyond the surficial oxide zones. An
initial program of detailed ground magnetic surveys combined with geological
mapping was completed to give better resolution of features controlling
mineralization.
25
Other prospects identified in the license blocks from regional geochemical
surveys have had limited to no follow-up work. Known mineralization is developed
in calcareous sedimentary units and proximal to small felsic intrusions. Field
examination of two prospects visited in 1999 showed features indicative of skarn
style mineralization. The exploration program for 2000 involved ground magnetic
surveys and geological mapping over the two identified skarn prospects to
establish drill targets. Field- checking remaining geochemical anomalies is also
planned. Total expenditures from inception to December 31, 2000, funded by Minco
on the Gobi Gold project were $379,987.
Upon completion of results from this program, the next phase of work, if
warranted, will likely involve more detailed work on the most favorable targets,
culminating in drilling. Expenditures for the year ended December 31, 2000, were
$335,255 consisting of approximately $221,325 in advances to Damo Mining,
$10,456 for acquisition costs, $76,347 in consulting fees and $27,127 in
administration fees, travel, transportation and lodging. For the year ended
December 31, 2001, expenditures will be approximately $250,000 consisting of
$125,000 in advances to Damo Mining, $37,500 for administrative fees, $50,000 in
consulting fees and $37,500 in travel, transportation and lodging.
Environmental Considerations
The exploration activities proposed for the Gobi gold project, including
potential drill testing of new anomalies, will result in little surface
disturbance, and standard reclamation procedures will be used for areas such as
trenches or drill pads. Minco does not believe that there will be any potential
environmental liability arising from these activities.
Changba-Lijiagou Property
Minco acquired its rights to the Changba-Lijiagou Lead Zinc project located
in Ganzu Province, China, through the "Cooperation Agreement Regarding the
Development of the Changba Lijiagou Lead Zinc Deposit" between Minco and BNMC
signed on November 17, 1997. Under this agreement, which has no expiration date,
Minco and BNMC will form a Chinese joint venture company to explore, and, if
warranted, develop and exploit the lead and zinc deposits of Changba and
Lijiagou and the joint area between them by taking the project through
development, to production at a rate of 3,500 tonnes of ore per day. If a joint
venture agreement is entered into, Minco will contribute capital and advance
equipment to develop a 3,500 tonne per day underground mine for a 75% interest
in the joint venture. BNMC operated the Changba-Lijiagou project as a 3,500
tonne per day open pit mine until the collapse of underground workings forced
the downsizing of the operation to 750 tonnes per day. BNMC will contribute the
mining rights relating to Changba and Lijiagou and net values of total assets at
the Changba milling system for a 25% interest in the joint venture.
Since entering into the agreement, Minco has concentrated its efforts on
the Lijiagou mineralization. The work undertaken to date is of a preliminary
nature only. Further third party work and a complete feasibility study would be
required prior to any production decision. No exploration activities are planned
for the Changba-Lijiagou project the remaining of this year 2001 and no joint
venture has yet been entered into. Because of its focus on the White Silver
Mountain and Gobi gold projects, Minco may entertain offers from third parties
who wish to earn a portion of Minco's interest in the project by further funding
it.
26
History, Geologic Model and Exploration Potential
BNMC originally moved into the Changba area in the 1940's after the
discovery of copper in the region. BNMC started up operations at two copper
mines soon afterwards, which are now virtually depleted. The search for new
copper reserves in the area lead to the discovery of the Changba, then Lijiagou
zinc/lead mineralization.
The Changba-Lijiagou project is located in Ganzu province in northwestern
China. The project took its name from the town of Changba, a small regional
agricultural/government center before the arrival of the miners. Changba is 350
kilometers east of the provincial capitol of Ganzu and 400 kilometers by road
and rail to Baiyin, the headquarters town of BNMC and location of the smelting
complex.
Changba and Lijiagou are Sedimentary Exhalative (or SedEx) type deposits.
SedEx deposits are characteristically zoned in a pattern with zinc rich material
in the center. The Changba-Lijiagou deposits are zinc rich. They are open and
substantially untested to depth, as well as laterally along trend. Though
exploratory drilling is needed to confirm this, the zinc rich nature of the ore
and the long trend length indicate potential for further discoveries in the
area. BNMC has completed close to 250 surface drill holes to test Changba to
depth and to outline the Lijiagou mineralization and to test the intervening
area at depth.
Environmental Considerations
All areas of past and present mining activities are specifically excluded
from the joint venture. Should Minco and/or its partners decide to put all or
part of the project into production, there would be an operating agreement
negotiated with BNMC. In negotiating the joint venture agreement, Minco will
request that a provision be included that will absolve the partners from any
environmental hazards arising from BNMC's mining activities prior to the date of
the joint venture contract to be negotiated and finalized. The structure of the
agreement with BNMC allows Minco to earn a direct interest in the mill site and
other infrastructure. Should Minco make a positive production decision, it would
need to negotiate an agreement that defines its responsibilities concerning the
ultimate rehabilitation of the mill site and include those costs in its decision
making.
Other Mineral Interests
(a) Minco has entered into a cooperative joint venture agreement with the
Sichuan Bureau of the Ministry of Geology and Mineral Resources on the Chapuzi
property which is located in Sichuan Province, China.
Pursuant to the agreement, Minco has the right to earn a 51% interest by
spending $5 million on exploration and development in the Chapuzi gold deposit.
A total of $153,416 has been spent on exploration and metallurgical testing as
of December 31, 1996. Minco may earn a 75% interest by placing the Chapuzi gold
deposit project into production. Minco discontinued exploration work on the
property in 1999.
(b) Minco has an exclusive right to negotiate and enter into a joint
venture contract with the Xinjiang Bureau of the Ministry of Geology and Mineral
Resources and to invest in certain mineral properties located in Xinjiang Uygur
27
Autonomous Region in China. At this time, Minco has no plans to invest in any of
the properties.
(c) Minco had an interest in Savoyardinskii gold/antimony property located
in the Savoyardinskii area in Karakuldzinskii Region, Osh Oblast, Kyrgyz
Republic. Minco abandoned the project in 1998.
(d) Pursuant to a joint venture agreement, Minco can earn a 55% interest in
the Emperor's Delight and Lengkou properties, which are located in Hebei
Province, China, by spending US$4.4 million over a five-year period beginning in
1996. Minco discontinued exploration work on the Emperor's Delight property in
1999 and on the Lengkou property in 1998.
(e) The Crystal Valley and Stone Lake properties are located in Hebei
Province, China. These projects are subject to the approval of the appropriate
Chinese government authorities.
All Minco's properties are located in China and fall into two general
groups: the Chapuzi, West Tian Shan, Xinjiang, White Silver Mountain and Gobi
Gold properties were acquired by direct negotiations and agreements between
Minco and the Chinese authorities and the Changba-Lijiagou, Emperor's Delight,
Lengkou, Crystal Valley and Stone Lake properties were acquired in connection
with the PCR Agreement.
In setting up a joint venture to operate a mining venture in China, the
general procedure involves three levels of agreements. The first level of
agreement is a Letter of Intent or a Memorandum of Understanding, which sets
forth broad areas of "mutual co-operation." The second level of agreement is a
more detailed Co-operation Agreement which outlines the essential terms of the
joint venture which will ultimately be formed. The third level of agreement is a
Joint Venture Contract which sets out the entire agreement among the parties and
contemplates the establishment of a "Chinese Legal Person," a separate legal
entity.
To date, Minco has not entered into a final agreement on a producing
property. Consequently, Minco has not generated a cash flow from operations. In
management's opinion, given that the nature of Minco's business consists of
mineral exploration, development and the evaluation of resource properties,
meaningful financial information consists primarily of Minco's liquidity and
solvency. The results of operations of an exploration company are almost
entirely measured by the extent and quality of the mineralization discovered
compared with the related costs of such discoveries.
Expenditures on Properties of Minco for 1998, 1999, and 2000.
The following table sets forth Minco's expenditures on it properties for
the years ended December 31, 1998, 1999 and 2000.
28
December 31,
---------------------------------------
1998 1999 2000
- --------------------------------------------------------------------------------
Changba Lijiagou Lead-Zinc Deposit $ 52,107 $ $
Chapuzi 1,456
Emperor's Delight 25,051
Heavenly Mountains 33,412
Inner Mongolia (Gobi) 40,456 49,922 358,645
Lengkou 44,561
Savoyardinskii 82,216
West Kunlun
White-Silver Mountain 619,381 684,898 87,449
Xifanping Gold Deposits 33,504
- --------------------------------------------------------------------------------
Total $ 907,093 $ 759,871 $ 446,094
================================================================================
Item 5. Operating and Financial Review and Prospects
This discussion and analysis of the operating results and the financial
position of Minco for the three years ended December 31, 2000, 1999, and 1998,
and should be read in conjunction with the Consolidated Financial Statements and
the related Notes thereto.
A. Operating results.
General
Since the signing of its first co-operation agreement on the Chapuzi
project in China in 1995, Minco has been very active for mineral exploration,
property evaluation and acquisition in China. Minco intends on building a
portfolio of base metals and precious metals properties in China. A strategic
alliance was formed with Teck Corporation and Cominco Ltd. for mineral
exploration and development in China. Minco has conducted exploration work on
properties located in Sichuan, Xinjiang, Hebei, Inner Mongolia, and Gansu
provinces of China, and investigated or evaluated about 300 Chinese mineral
properties. Minco has rights to earn interests in three Sino-Foreign
co-operative joint ventures that have been established with Chinese mining.
Results of Operations
Year ended December 31, 2000, compared to year ended December 31, 1999
The Company is in the exploration stage and had no revenue during 2000 and
1999. During the year ended December 31, 2000, Minco had no mineral interests
written off compared to mineral interests written off of $579,088 during the
year ended December 31, 1999. Mineral interests written off during the year
ended December 31, 1999, consisted of the Emperor's Delight, Changba Lijiajou
Lead-Zinc Depot and Chapuzi interests.
Total administrative expenses were $740,884 for fiscal year 2000 compared
to $954,713 for fiscal year 1999. During fiscal year 2000, the Company continued
its ongoing effort to reduce expenses. Expenses decreased in almost all
administrative categories including advertising by $17,557, consulting fees
29
by $19,984, promotion and government relations by $55,834, and rent by $30,502.
These decreases were offset, in part, by the increase in legal fees by $23,000
related to the Company's Annual Report registering its common shares with the
SEC.
During 2000, mineral property expenditures were $446,094 of which $87,449
was spent on White-Silver Mountain and $358,645 was spent on Inner Mongolia
(Gobi Gold).
Net loss from operations for 2000 was $624,679 or $0.04 per share compared
to $1,506,108 or $0.09 per share in 1999.
US GAAP Reconciliation
For the year ended December 31, 2000, the Company had a loss of $1,070,773
or $0.08 per share calculated under US GAAP compared to a net loss of $624,679
or $0.04 per share calculated under Canadian GAAP. The difference in calculation
of loss is primarily attributed to the write-off of deferred exploration costs
of $446,094 under US GAAP.
Year ended December 31, 1999, compared to year ended December 31, 1998
The Company is in the exploration stage and had no revenues during 1999 and
1998. Mineral interests written off of $579,088 during 1999 consisted of the
Emperor's Delight, Changba Lijiagou Lead-Zinc Deposit and Chapuzi interests.
This is a reduction of mineral interests written off during 1998 consisting of
the Lengkou, Heavenly Mountains and Savoyardinskii mineral interests. The
mineral interests write-offs relate to Minco's decision to discontinue
exploration at Emperor's Delight and Chapuzi properties, and to the write down
of the Changba- Lijiagou property to a nominal carrying value. Mineral property
expenditures for 1999 amounted to $760,000, of which $700,000 went to White
Silver Mountain project, and $60,000 was spent on the Gobi Gold project in Inner
Mongolia.
Total administrative expenses were $954,713 for 1999 compared to $1,128,244
for 1998. On- going cost reductions were mainly in overhead items such as rent,
telephone and travel costs as well as a reduction in listing fees due to the
need to only maintain the Toronto Stock Exchange listing. This cost reduction
included decreasing management fees and property investigation activities.
Minco's efforts on cost control in the past three years have lead to a decrease
of approximately $400,000 in administrative and overhead costs. A large portion
of the decrease is attributed to a reduction in property investigation costs of
$77,583 due to a decrease in the number of properties being investigated.
During 1999, mineral property expenditures were $759,871, primarily spent
on the White-Silver Mountain project. Mineral property expenditures for 1998
were $910,000 with the bulk of such mineral property expenditures of $620,000
was spent on White Silver Mountain project, and the remainder spread across
several other properties.
Net loss from operations for 1999 was $1,506,108 or $0.09 per share
compared to $1.99 million or $0.13 per share in 1998.
US GAAP Reconciliation
For the year ended December 31, 1999, the Company had a loss of $2,544,584
or $0.21per share calculated under US GAAP compared to a net loss of $1,506,188
30
or $0.09 per share calculated under Canadian GAAP. The difference in calculation
of loss is primarily attributed to (1) the release of escrow shares of $974,042
which is recorded as compensation expense under US GAAP; (2) the write-off of
$180,788 of deferred exploration costs under US GAAP; and (3) the recognition of
$116,347 under US GAAP of securities written off under Canadian GAAP.
Exchange Rates
Minco maintains its accounting records in functional currency: Canadian
dollar. Minco translates foreign currency transactions into functional currency
in the following manner: At the transaction date, each asset, liability, revenue
and expense is translated into Canadian dollars at the exchange rate in effect
on that date. At each period end, all monetary assets and liabilities are
translated into the functional currency by using the exchange rate in effect at
that date. The resulting foreign exchange gains and losses are included in the
consolidated Statement of Operation.
Minco pays for its expenses related to its Chinese joint ventures in
Canadian dollars which are then converted into Chinese dollars. Based on prior
years' experience, Minco does not believe that foreign currency fluctuations
have had a material impact on its financial condition. However, no assurance can
be given that material foreign currency fluctuations will not occur in the
future. The Company does not engage in foreign currency hedging transaction.
Inflation
Based on prior history for at least the two fiscal years, Minco does not
believe that inflation will have a material adverse effect on its financial
condition. However, no assurance can be given that Minco will not experience a
substantial increase in inflation.
B. Liquidity and Capital Resources
Currently, none of the Company's projects are producing revenues and no
revenues are anticipated to be generated in the near future. To provide working
capital for its operations and project development, Minco needs to raise new
funds within twelve to eighteen months. Traditionally, the Company has raised
capital through the issuance of common shares. It is contemplated that it will
continue to raise capital primarily private through investors consisting of
resource investment groups, senior mining companies, and public financing
through the facilities of the Toronto Stock Exchange. No assurance, however, can
be given that Minco's future capital requirements can be obtained. Minco's
access to capital is always dependent upon future financial market conditions,
especially those pertaining to venture capital situations such as mining
exploration companies. There can be no guarantee that Minco will be successful
in obtaining future financing, when necessary, on economically acceptable terms.
For the year ended December 31, 2001, the Company believes that it will
need approximately $900,000, of which $600,000 is administrative costs and
$300,000 is for ongoing programs consisting of $250,000 and $50,000 related to
the Gobi Gold and White Silver Mountain projects, respectively. No assurance can
be given that the Company will make the anticipated exploration expenditures on
the Gobi Gold and White Silver Mountain projects which will depend, in part, on
actual results of exploration.
The Company anticipates that it will pay for its administrative and
exploration costs for 2001 from its current working capital. Based upon the
completion of its prior private placement, the Company believes that it has
31
sufficient working capital to complete its anticipated expenditures during the
remaining portion of 2001.
At March 31, 2001, and December 31, 2000, Minco had working capital of
$1,039,903 and $1,167,966, respectively. During the period of 1999 to 2000,
capital additions totaled $111,100 through the exercise of warrants.
The particulars of all capital raising transactions since 1997 are detailed
as follows:
In June 1996, Minco completed a private placement of 3.2 million special
warrants at a price of $2.55 per special warrant for gross proceeds of
$8,160,000. Each unit consisted of one common share and one half of a
non-transferable common share purchase warrant. Each whole share purchase
warrant entitled the holder to acquire one additional common share at a price of
$2.55 per share until one year after the date of issuance of the warrant upon
exercise of the special warrant. The expiration date of such warrants was
subsequently extended until 4:30P.M. on June 30, 2000, and the exercise price of
the warrants was reduced to $2.00. These warrants expired under their terms.
Common shares issued for cash in 1997 totaled $158,000. $150,000 from the
exercise of share purchase warrants and $8,000 from the exercise of employee
options. 133,000 shares were issued in regards to these transactions.
On July 10, 1998, Minco completed a private placement of 375,000 common
shares to Teck Corporation at a price of $2.00 per share. Proceeds of this
placement were expended entirely on the White Silver Mountain Project. The
placement also included warrants to purchase 125,000 common shares at a price of
$2.00 per share for one year and a further 125,000 common shares at a price of
$3.45 per share for two years.
Financing in 1999 included the exercise by Teck of 125,000 warrants to
purchase shares at $1.60 as part of its exercise of its option to become a joint
venture partner and operator of the White Silver Mountain project. Teck had the
right but not the obligation to acquire an additional 125,000 shares at $3.45
until July 9, 2000, and did not acquire the additional common shares.
Additionally, the Company undertook private placements of 250,000 common shares
at $0.85 per share and 150,000 common shares at $1.00 per share.
During fiscal year 2000, Arbora Portfolio Management exercised warrants to
acquire 110,000 common shares at $1.01 per share representing gross proceeds of
$111,100.
Proceeds of the financing listed above are being used for exploration and
for development expenditures (only when and if warranted) in connection with
Minco's mineral projects located in China, for working capital and for
acquisition of additional projects. The one exception to this was the 1997
placement of 375,000 shares at $2.00 to Teck Corp. The proceeds of this
placement were entirely expended on the White Silver Mountain project.
32
Item 6. Directors, Senior Management and Employees
A. Directors and senior management.
The following table sets forth all current directors and executive officers
of Minco as of May 31, 2000, with each position and office held by them in
Minco, their terms of office and the period of service as such. Each director's
term of office expires at the next annual general meeting of shareholders to be
held on June 28, 2001. At such meeting, each current director is seeking
re-election.
Number of Shares Principal Occupation
Beneficially Owned, and if Not at Present
Directly or Indirectly, an Elected Director,
or Over Which Occupation During
Name and Present Control Or Direction the Past Five (5)
Office Held Director Since is Exercised Years
- ------------------------ ----------------------- ----------------------- ------------------------
Ken Cai February 1996 6,288,500(1) Geologist
President, Chief
Executive Officer and
Director
William Meyer July 13, 1999 250,000(2) Professional Engineer
Chairman and Director
Robert M. Callander August 1996 197,550(3) Vice President,
Director Caldwell Securities
Ltd.
Hans Wick March 1997 262,300(3) Financial Advisor
Director
(1) Includes 5,917,500 common shares held by Pacific Canada Resources, a
private company, of which Dr. Ken Cai has more than a 10% interest. Also
includes 371,000 common shares subject to options.
(2) Represents 250,000 common shares subject to options.
(3) Includes 97,300 common shares subject to options.
Positions held by Minco's directors and officers other than with Minco:
Name Positions Held
- -------------------------------------------------------------------------------
Ken Cai Director, Chineseworldnet.com
Director, Dragon Pharmaceutical Inc.
Director, Aquasol Environtech Ltd.
President & Director, Kaisun Investment &
Development
President & Director, Pacific Canada Resources Inc.
33
Name Positions Held
- -------------------------------------------------------------------------------
William Meyer Director, Silver Standard Resources Inc.
Director, Gerle Gold Ltd.
Director, Lysander Minerals Corporation
Director, Cantech Ventures Inc.
Director, Standard Mining Inc.
Director, Trans American Industries Inc.
Robert Callander Director, Urbana Corporation
Director, Pacific Canada Resources Inc.
Director, Environwaste Technologies Inc.
Director, Member Savings Credit Union
Director, Intraconnect Inc.
The business background and principal occupations of Minco's officers and
directors for the preceding five years are as follows:
Ken Z. Cai. Dr. Cai has served as president, chief executive officer and a
director of Minco since February 29, 1996. Dr. Cai devotes approximately 90% to
100% of his time to Minco's business. Dr. Cai holds a Ph.D. in mineral economics
from Queens University in Kingston, Ontario, Canada. Dr. Cai, a Chinese national
now living in Canada, has 15 years of experience in mineral exploration, project
evaluation, corporate financing and company management. Dr. Cai has been
responsible for negotiating the property agreements in China through his
contacts in the Chinese mining communities. This has allowed Minco to access
data on a large number of projects throughout China. Dr. Cai has served as a
director of several publicly-traded and private Canadian and Chinese companies.
In addition, Dr. Cai is a director of Dragon Pharmaceutical, Inc., a company
whose shares of common stock are registered under the Securities Exchange Act of
1934.
William Meyer. Mr. Meyer has served as Chairman and director since 1999.
Mr. Meyer devotes approximately 80% of his time to Minco's business. He was
formerly Vice-President, Exploration for Teck Corporation and President of Teck
Exploration Ltd. He graduated from the University of British Columbia with a
B.Sc. in geology in 1962. After graduation, he was employed as an exploration
geologist with Phelps Dodge Corporation of Canada and later as senior geologist
with Gibraltar Mines Ltd. In 1967 he joined the consulting firm of Western
Geological Services as a partner, and in 1975 formed his own consulting firm, W.
Meyer and Associates. Mr. Meyer joined Teck Exploration Ltd. in 1979 as
Exploration Manager for Western Canada and the United States. In 1991, he was
appointed Vice-President, Exploration, for Teck Corporation responsible for the
direction of exploration activities for Teck and its associated companies
worldwide. He is a director and officer of a number of public and privately
owned Canadian companies.
Robert Callander. Mr. Callander has been a director since August 1996. He
holds an MBA from York University, Toronto, Ontario, Canada, as well as a CFA
from the Institute for Investment Management, Charlotte, Virginia. Mr. Callander
has worked for Caldwell Securities Ltd. since 1992 and currently serves as a
Vice-President with that firm. Prior to his engagement with Caldwell Securities
Ltd., Mr. Callander served as a corporate finance analyst with Nesbitt Burns. He
has worked in the investment industry for 25 years.
34
Hans J. Wick. Mr. Wick has been a director since March 1997. He is a
resident of Zurich, Switzerland. For the past five years, Mr. Wick has been an
independent portfolio manager.
B. Compensation
The aggregate direct or indirect remuneration paid to the directors and
officers of Minco, as a group during the fiscal year ended December 31, 2000,
for service to Minco in all capacities, was $110,300. Certain information about
payments to Minco's executive officers is set out in the following table:
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------------------------------ ---------------
All Other
Name and Principal Shares Under Compensation
Position Year Salary Bonus Other Options ($)
- -------------------------- ---------------------- ---------------------------- - --------------- ----------------
Ken Cai 2000 Nil Nil $110,300(1) 371,000 Nil
President, Chief Executive 1999 Nil Nil $111,500(1) 371,000 Nil
Officer and Director 1998 Nil Nil $121,276(1) 371,000 Nil
(1) Consulting fees paid and amounts paid as a travel allowance.
C. Board practices
The current directors of the board were elected to their position at the
annual meeting of shareholders held on June 29, 2000. Each director will
continue to serve as such until the next meeting of the shareholders to be held
on June 28, 2001. The officers of the Company are elected by the board and serve
at the board's pleasure. Directors are elected annually at the Annual General
Meeting of shareholders, whereas officers' appointments are approved by the
Board of Directors and terminate upon resignation or termination by the Board.
The Company has no contract with any of its officers or directors that
provide for payments upon termination.
The Company has an Audit committee consisting of Messrs. Meyer and
Callander. The roles and responsibilities of the Audit committee have been
specifically defined and include responsibility for overseeing management
reporting on internal control. The Audit committee has direct communication
channels with the external auditors.
D. Employees
The Company has ten full-time employees and one part-time employee. Most of
the Company's employees are located in Vancouver, British Columbia with three
employees located in China.
35
E. Share ownership
There were no options granted during the year ended December 31, 2000.
During the fiscal year of Minco ended December 31, 2000, no amounts were
set aside or accrued by Minco or its subsidiaries during such year to provide
pension, retirement or similar benefits for directors and officers of Minco,
pursuant to any existing plan provided or contributed to by Minco or its
subsidiaries.
The following table sets forth, as of May 31, 2001, common stock held by
Minco's officers and directors and all outstanding options and warrants to
purchase common shares of Minco; there are no options to purchase shares of any
other class of security:
Common Shares Owned by Officers and Directors
Name Number of Common Shares Owned
---- -----------------------------
Ken Cai 5,917,500*
William Meyer -0-
Robert M. Callander 100,250
Hans Wick 165,000
* Represents shares owned by Pacific Canada Resources Inc., a private
company, in which Ken Cai beneficially owns more than 10%.
Outstanding Options
Exercise
Name Options Price From To
Ken Cai 321,500 $1.41(1) March 5, 1996 March 5, 2006
49,500 $1.41(1) June 20, 1997 June 20, 2007
Wayne Spilsbury 185,000 $1.41(1) March 5, 1996 March 5, 2006
Robert Callander 97,300 $1.41(1) October 8, 1996 October 8, 2006
Hans Wick 97,300 $1.41(1) March 6, 1997 March 6, 2007
William Meyer 150,000 $1.65(1) July 16, 1999 July 16, 2006
100,000 $1.12(1) December 2, 1999 December 1, 2006
Ruijin Jiang 100,000 $0.55 January 2, 2001 January 2, 2006
Anna Liu 75,000 $0.55 January 2, 2001 January 2, 2006
Susan Parker 50,000 $0.55 January 2, 2001 January 2, 2006
36
Exercise
Name Options Price From To
Wilma Gao 20,000 $0.55 January 2, 2001 January 2, 2006
Lynette Rudichuk 15,000 $0.55 January 2, 2001 January 2, 2006
Total 1,260,600
(1) Subject to shareholder approval at Minco's annual general meeting to be
held on June 28, 2001, Minco is seeking to reprice the exercise price of
the options to $.55 per share.
Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders
As of May 31, 2001, Minco believes that approximately 589,214 of the issued
and outstanding common shares were held by 20 shareholders with addresses in the
United States.
As far as known to Minco, and except as disclosed herein, Minco is not
directly or indirectly owned or controlled by another corporation(s) or by any
foreign government. As disclosed below, Pacific Canada Resources Inc., a private
company controlled by a director and a former director of Minco, as at May 31,
2001, owned approximately 36% of the issued and outstanding shares of Minco's
common stock.
The following table sets forth, as of May 31, 2001, information with
respect to (i) any person who is known to Minco to be the owner of more than 10%
of any class of Minco's outstanding voting securities and (ii) the total amount
of any class of Minco's voting securities owned by the officers and directors as
a group.
Title of Class Identity of Holder Amount Owned Percent of Class
- -------------- ------------------ ------------ ----------------
Common Shares Teck Corporation(1) 1,875,000(2) 11.45%
Common Shares Pacific Canada 5,917,500(3) 36.0%
Resources Inc.
Common Shares Dr. Ken Cai 6,288,500(4) 37.54%
Common Shares All officers and 6,998,300 40.70%
directors as a group
(four persons)(5)
(1) Teck Corporation has a right of first refusal to purchase common shares of
Minco in any future offerings so as to maintain its ownership.
(2) Also includes 625,000 common shares owned by Cominco Ltd. which is
controlled by Teck Corporation.
(3) Dr. Ken Cai beneficially owns more than 10% of Pacific Canada Resources,
Inc. See also note (4) below.
37
(4) Dr. Ken Cai, a director and officer of Minco, beneficially owns more than
10% of Pacific Canada Resources Inc., a private company. Also includes
options to purchase 371,000 common shares.
(5) Includes Dr. Ken Cai's beneficial interest in shares owned by Pacific
Canada Resources, Inc.
Performance Shares or Escrow Securities
As at May 31, 2001, there were a total of 2,991,322 common shares of
Minco held at Montreal Trust Company of Canada, 510 Burrard Street, Vancouver,
British Columbia, subject to escrow share restrictions under a Performance
Escrow Agreement dated August 17, 1995 (the "1995 Escrow Agreement") and an
Escrow Agreement dated February 19, 1996 (the "1996 Escrow Agreement"). As of
March 31, 2001, the escrow shares represent approximately 18.0% of the total
issued and outstanding shares of Minco.
Table Of Escrow Shares
Pacific Canada Peter P. Hans Fotios Petros S. Colin
Resources Inc. Tsaparas Wick Kandianis E. Tsaparas McAleenan Total
Balance December 31, 1996 4,880,000 262,500 90,000 60,000 60,000 90,000 5,442,500
Released at $1.20 per share, June 1998 949,561 131,250 45,000 30,000 30,000 45,000 1,230,811
Released at $1.50 per share, August 1999 508,736 65,625 22,500 15,000 15,000 22,500 649,361
Released at $0.97 per share, March 2001 430,381 65,625 22,500 15,000 15,000 22,500 571,006
Balance May 31, 2001 2,991,322 -0- -0- -0- -0- -0- 2,991,322
The escrow shares may be released upon the following conditions.
1. One escrow share for each $0.97 in the value of the interests in the
mineral properties acquired by the Company from PCR pursuant to the PCR
Agreement (the "PCR Properties"), based on a valuation report to be
prepared by a qualified independent consultant, less any expenditures
required to be made by the Company, pursuant to the PCR Agreement or
otherwise, in order to earn its interests in the PCR Properties (provided
that all required Chinese governmental approvals in order to perfect the
interests to be acquired by the Company hereunder have been obtained for
each of the PCR Properties that are the subject of the valuation report);
2. One escrow share for each $0.97 in the value of the interest in any new
mineral properties acquired by the Company pursuant to the PCR Agreement or
the TCIP Agreements ("New Projects"), such value to be determined on the
same basis and subject to the same provisions as described in note 1 above.
3. One escrow share for every $1.81 expended by the Company, PCR, Teck,
Cominco, Temco or any other third party expending monies on exploration and
development of the PCR Properties or of any New Projects, exclusive of
general and administrative expenses, determined in accordance with the
provisions applicable to natural resources issuers under Local Policy
Statement #3-07 of the British Columbia Securities Commission; and
38
4. One escrow share for every $0.97 in cumulative cash flow from the
operations of the Company on the PCR Properties and any New Projects and as
determined in accordance with generally accepted accounting principles,
provided that each PCR Property and each New Project will be considered
separately without taking into account any negative cash flow that may
exist in any other PCR Property or New Project.
Generally, requests for escrow release are made as a matter of course once
per year accompanied by the audited financial statements for the previous year
showing verifiable expenditures on mineral properties or cash flow from those
properties. Upon review and approval of the statements, the Regulatory
Authorities approve the release of the escrow shares in a quantity that matches
the actual spending or cash flow divided by the "exploration spending per share"
or "cash flow per share." If all the escrow shares are not released to PCR
within ten years of issuance, all unreleased escrow shares shall be forfeited by
PCR and canceled. The foregoing escrow shares are held subject to the direction
and determination of the Regulatory Authorities.
B. Related party transaction
As a result of the PCR acquisition, Minco entered into a consulting
agreement dated June 25, 1996, with a Kaisun Investment, a private company
controlled by Ken Cai, Minco's current President and Chief Executive Officer,
under the terms of which such company receives $8,333 per month in exchange for
Mr. Cai serving as president and chief executive officer and providing
consulting, management and supervision services in connection with the
development of overall corporate strategy. In addition, Kaisun Investment
receives expenses of $100 a day while Mr. Cai is in China. The consulting
agreement has a three-year term and was renewed for an additional three years
effective June 25, 1999.
During the years ended December 31, 2000, 1999 and 1998, the Company paid
Kaisun Investment, a total of $117,817, $117,831, and $117,715, respectively,
for management services, property investigation, geological consulting and rent
in China. Kaisun Investment is a company controlled by Dr. Ken Cai, president
and director of the Company. The amounts paid to Kaisun Investment include a
management fee of $8,333 per month discussed in the preceding paragraph.
None of the directors or senior officers of the Company and no associates
or affiliates of any of them, is or has been indebted to the Company or its
subsidiaries at any time during the year ended December 31, 2000. However, the
Company has entered into a Loan Agreement with its president, Mr. Ken Cai, dated
as of October 8, 1997 (the "Loan Agreement"). Pursuant to the Loan Agreement,
the Company has agreed to advance to Mr. Cai up to $225,000 as a loan in order
to assist Mr. Cai in moving from Toronto to Vancouver and purchasing a residence
in either Vancouver or Beijing. The loan will be fully secured and repaid by Mr.
Cai upon the occurrence of certain stated events as described in the Loan
Agreement. The Loan Agreement remains in full force and effect; however, Mr. Cai
has not yet exercised his right under the terms of the Loan Agreement.
Minco believes that the consulting agreement with Kaisun Investment and
Loan Agreement with Mr. Cai are on terms as favorable as could be obtained from
an unaffiliated third party. Other than the previously disclosed agreements with
Teck and Cominco, Minco has not entered into any other transactions with Teck or
Cominco.
39
Item 8. Financial Statements
A. Consolidated Statements and Other Financial Information
The following financial statements of Minco are attached to this Annual
Report:
Auditors' Report.
Consolidated Balance Sheet at December 31, 2000 and 1999.
Consolidated Statement of Operations and Deficit for the years ended
December 31, 2000, 1999 and 1998.
Consolidated Statement of Cash Flows for the years ended December 31,
2000, 1999 and 1998.
Notes to Consolidated Financial Statements
Dividend policy.
The Company has never paid any dividends and does not intend to pay any
dividends in the near future.
Item 9. The Offering and Listing
Since February 24, 1998, Minco's common shares have been listed on the
Toronto Stock Exchange. Previously, Minco's common shares were dual listed on
the CDNX (formerly the Vancouver Stock Exchange) and Toronto Stock Exchange. On
January 29, 1999, voluntary delisted its common shares from the CDNX. The Board
of Directors of Minco deemed a continued listing on a Canadian junior exchange,
such as the CDNX to be an unnecessary requirement both from a financial and
management perspective.
Minco's common shares are not currently trading on any U.S. stock exchange
or in the over-the- counter market, and accordingly, there is currently no
public market for the common shares of Minco in the United States. Minco intends
to have its common shares quoted on the OTC Bulletin Board. However, no
assurance can be given that Minco's common shares will qualify to be quoted on
the OTC Bulletin Board, nor that a market will develop if Minco's common shares
are quoted on the OTC Bulletin Board.
The following tables set forth the reported high and low prices for (a) the
five most recent fiscal years; (b) each quarterly period for the past two fiscal
years and for the first quarter of 2001; and (c) each month for the past six
months. Beginning in December 1998, Minco's common stock began trading on the
Toronto Stock Exchange. Prior to that time, Minco's common shares were trading
on the CDNX.
40
High and low price for the five most recent fiscal years.
Years Ended High Low
- ----------- ---- ---
December 31, 1996 $4.20 $0.95
December 31, 1997 $3.15 $1.00
December 31, 1998 $2.00 $2.40
December 31, 1999 $2.50 $0.95
December 31, 2000 $1.88 $0.30
High and low prices for each quarterly period for the past two fiscal years
ended December 31, 1999 and 2000.
Year and Quarter High Low
- ---------------- ---- ---
March 31, 1999 $2.25 $0.95
June 30, 1999 $2.50 $1.50
September 30, 1999 $1.80 $1.40
December 31, 1999 $1.50 $1.10
March 31, 2000 $1.88 $1.35
June 30, 2000 $1.35 $0.70
September 30, 2000 $0.80 $0.40
December 31, 2000 $0.70 $0.30
March 31, 2001 $0.65 $0.31
High and low prices for each month for the past six months.
Month Ended High Low
- ----------- ---- ---
October 2000 $0.70 $0.40
November 2000 $0.55 $0.41
December 2000 $0.59 $0.30
January 2001 $0.65 $0.35
February 2001 $0.45 $0.32
March 2001 $0.55 $0.31
Item 10. Additional Information
A. Share capital
Minco has 100,000,000 common shares authorized, without par value, of which
16,380,123 shares were issued and outstanding as of May 31, 2001.
Each of the common shares has equal dividend, liquidation and voting
rights. Voters of the common shares are entitled to one vote per share on all
matters that may be brought before them.
41
Holders of the common shares are entitled to receive dividends when declared by
the Board of Directors from funds legally available therefor. The common shares
are not redeemable, have no conversion rights and carry no pre-emptive or other
rights to subscribe for additional shares. The outstanding common shares are
fully paid and non-assessable.
Of Minco's common shares outstanding, 2,991,322 are held in escrow, subject
to release or cancellation upon certain conditions. See Item 7 "Performance
Shares or Escrow Securities."
The transfer agent and registrar for the common shares is Montreal Trust
Company of Canada, 510 Burrard Street, Vancouver, British Columbia, Canada V6B
5A1.
The following table sets forth a history of the share capital for the
Company for the last three years, and through March 31, 2001.
Issuance Common Share
-------- ------------
Balance, December 31, 1997 15,370,123
Private placement of common shares to Teck 375,000
Corporation
Balance, December 31, 1998 15,745,123
Private placement of common shares 250,000
Private placement of common shares 150,000
Exercise of warrants 125,000
Balance, December 31, 1999 16,270,123
Exercise of warrants 110,000
Balance, December 31, 2000 16,380,123
Balance, March 31, 2001 16,380,123
B. Memorandum and articles of association
On July 8, 1996, Minco adopted a revised Articles of Minco Mining & Metals
Corporation under the Province of British Columbia Company Act.
Common Shares
All issued and outstanding common shares are fully paid and non-assessable.
Each holder of record of common shares is entitled to one vote for each common
share so held on all matters requiring a vote of shareholders, including the
election of directors. The holders of common shares will be entitled to
dividends on a pro-rata basis, if and when as declared by the board of
directors. There are no preferences, conversion rights, preemptive rights,
subscription rights, or restrictions or transfers attached to the common shares.
In the event of liquidation, dissolution, or winding up of the Company, the
42
holders of common shares are entitled to participate in the assets of the
Company available for distribution after satisfaction of the claims of
creditors.
Powers and Duties of Directors
The directors shall manage or supervise the management of the affairs and
business of Minco and shall have authority to exercise all such powers of Minco
as are not, by the Company Act or by the Memorandum or the Article, required to
be exercised by Minco in a general meeting.
Directors will serve as such until the next annual meeting. In general, a
director who is, in any way, directly or indirectly interested in an existing or
proposed contract or transaction with the Company whereby a duty or interest
might be created to conflict with his duty or interest director, shall declare
the nature and extent of his interest in such contract or transaction or the
conflict or potential conflict with his duty and interest as a director. Such
director shall not vote in respect of any such contract or transaction with the
Company in which he is interested and if he shall do so, his vote shall note be
counted, but he shall be counted in the quorum present at the meeting at which
such vote is taken. However, notwithstanding the foregoing, directors shall have
the right to vote on determining the remuneration of the directors.
The directors may from time to time on behalf of Minco; (a) borrow money in
such manner and amount from such sources and upon such terms and conditions as
they think fit; (b) issue bonds, debentures and other debt obligations; or (c)
mortgage, charge or give other security on the whole or any part of the property
and assets of Minco.
The majority of the directors of Minco must be persons ordinarily resident
in Canada and one director of Minco must be ordinarily resident in British
Columbia. There is no age limitation, or minimum share ownership, for Minco's
directors.
Shareholders
An annual general meeting shall be held once in every calendar year at such
time and place as may be determined by the directors. A quorum at an annual
general meeting and special meeting shall be two shareholders or one or more
proxy holder representing two shareholders, or one shareholder and a proxy
holder representing another shareholder. There is no limitation imposed by the
laws of Canada or by the charter or other constituent documents of Minco on the
right of a non-resident to hold or vote the common shares, other than as
provided in the Investment Canada Act, (the "Investment Act") discussed below
under "Item 10. Additional Information, D. Exchange Controls."
In accordance with British Columbia law, directors shall be elected by an
"ordinary resolution" which means (a) a resolution passed by the shareholders of
Minco in general meeting by a simple majority of the votes cast in person or by
proxy, or (b) a resolution that has been submitted to the shareholders of Minco
who would have been entitled to vote on it in person or by proxy at a general
meeting of Minco and that has been consented to in writing by such shareholders
of Minco holding shares carrying not less than 3/4 of the votes entitled to be
cast on it.
Under British Columbia law certain items such as an amendment to Minco's
articles or entering into a merger, requires approval by a special resolution
which shall mean (a) a resolution passed by a majority of not less than 3/4 of
the votes cast by the shareholders of Minco who, being entitled to do so, vote
43
in person or by proxy at a general meeting of the company (b) a resolution
consented to in writing by every shareholder of Minco who would have been
entitled to vote in person or by proxy at a general meeting of Minco, and a
resolution so consented to is deemed to be a special resolution passed at a
general meeting of Minco.
C. Material Contracts
1. Assignment of Contracts and Share Purchase Agreement between Minco and
PCR dated February 19, 1996, assigning all of PCR's direct and indirect
exploration and development rights to properties located in China to Minco
in exchange for 7,280,000 common shares of Minco and the assumption of
PCR's liabilities to third parties.
2. Investment and Participation Agreement among PCR, Teck Corporation and
Cominco dated February 19, 1996. Under the agreement, PCR granted Teck and
Cominco a right to participate in direct and indirect interests in mineral
properties acquired by PCR in consideration of an investment in PCR.
Investment and Participation Agreement dated February 20, 1996, among
Minco, Teck Corporation and Cominco Ltd. granting Teck Corporation and
Cominco Ltd. an investment in Minco Mining & Metal and certain rights to
properties that may be developed by Minco. The February 19, 1996 and
February 20, 1996, are collectively referred to the "Teck- Cominco
Agreements."
Pursuant to the terms of the Teck-Cominco Agreements, Teck and Cominco
received "earn-in rights" as to the Non-Chinese Interest in any two mineral
property rights acquired by Minco in China after the date of the
Teck-Cominco Agreements until March 1, 2004. The Non-Chinese Interest with
respect to a property represents the direct or indirect interest in a
property that is available for a non-Chinese entity or a foreigner to
acquire under Chinese Law.
The earn-in rights provide that upon Minco procuring a base or precious
metal project, and after preliminary work by Minco, Teck and Cominco shall
first determine whether such project is to be governed by the Teck-Cominco
Agreements. If they determine that it is to be so governed, Teck and
Cominco shall hold earn-in rights in respect to such project. If Teck and
Cominco determine that the project is not to be governed by the
Teck-Cominco Agreements, Minco shall thereafter have the right to elect
whether or not to have the project assigned to it at cost.
If Teck and Cominco determine that a base or precious metal project is to
be governed by the Teck-Cominco Agreements, their earn-in rights shall be
exercisable in one of two ways, depending on whether the project is
determined to be a "development property" or an "exploration property",
which determination is made solely by Teck and Cominco. If determined to be
a development property, Teck and Cominco shall have the right to acquire
70% of the Non- Chinese Interest in such property and to become the
operator of the project by completing, at their sole cost, any further
project work and the final feasibility report on the project. Teck and
Cominco must then arrange for 70% of the costs required to be provided by
the non-Chinese parties to place the property into commercial production.
Upon completion of all of the foregoing, Teck and Cominco shall be deemed
to have exercised their earn-in rights in respect to the development
project. Minco must contribute 30% of the costs required after the
completion of the feasibility study.
44
If the project is determined to be an exploration property, Teck and
Cominco shall have the right, upon completion of a preliminary feasibility
study by Minco, to acquire 51% of the Non-Chinese Interest in such
exploration property and to become the operator of programs on the
property. To earn this 51% interest, Teck and Cominco must fund the final
feasibility study on the project and arrange for all financing required to
be provided by the non-Chinese parties to place the property into
commercial production, as determined in the feasibility study. Upon
completion of all of the foregoing, Teck and Cominco shall be deemed to
have exercised their earn-in rights in respect to the exploration project.
Each property for which Teck or Cominco have exercised an earn-in right
shall be governed by its own separate joint venture agreement which will
include a provision that if Minco's interest is diluted to 10% or less,
such interest will be converted to a 1% net smelter return royalty. The
agreements further provide that Cominco (in the case of a base metal
property) or Teck (in the case of a precious metal property) shall be the
designated operator of the property on behalf of the joint venture which
shall be formed to exploit any such property.
The Teck-Cominco Agreements contain provisions under which Teck and Cominco
agree, subject to certain limitations, not to increase their collective
share holdings in Minco beyond 20% of the common shares, nor to reduce them
beyond 50% of their initial ownership, which limitations expire upon
certain changes in control of Minco. Teck and Cominco have a right of first
refusal to purchase common shares of Minco in any future offerings, so as
to maintain their percentage ownership in Minco.
After Teck and Cominco have exercised their earn-in rights in an aggregate
of two projects procured by Minco, Teck and Cominco shall have further
preferential rights of first refusal in respect to further properties
identified by Minco for a period of three years after the exercise of their
earn-in rights. These preferential rights of purchase will apply only in
circumstances where Minco, if Minco has elected to acquire a project
identified by PCR, intend to offer an interest to their parties or have
received an offer to purchase, earn or acquire an interest in such
properties from third parties. Minco is required to notify Teck and Cominco
of its intent to sell an interest in such a project to a third party, and
provide Teck and Cominco all information which Minco possesses with respect
to the project as well as the terms of the proposed sale, and Teck and
Cominco may, within thirty days, purchase such interest on the terms which
Minco had proposed to accept from a third party.
The rights of Teck and Cominco under the Teck-Cominco Agreements shall only
apply to projects secured by Minco on or before March 1, 2004.
3. Performance Shares Escrow Agreement dated August 17, 1995, between
Minco, Montreal Trust Company of Canada and certain shareholders of Minco
describing the condition under which certain outstanding Minco common
shares may be released. The escrow shares may be released upon the
following conditions.
a. One escrow share for each $0.97 in the value of the interests in the
mineral properties acquired by the Company from PCR pursuant to the
PCR Agreement (the "PCR Properties"), based on a valuation report to
be prepared by a qualified independent consultant, less any
expenditures required to be made by the Company, pursuant to the PCR
Agreement or otherwise, in order to earn its interests in the PCR
45
Properties (provided that all required Chinese governmental approvals
in order to perfect the interests to be acquired by the Company
hereunder have been obtained for each of the PCR Properties that are
the subject of the valuation report);
b. One escrow share for each $0.97 in the value of the interest in any
new mineral properties acquired by the Company pursuant to the PCR
Agreement or the TCIP Agreements ("New Projects"), such value to be
determined on the same basis and subject to the same provisions as
described in note 1 above.
c. One escrow share for every $1.81 expended by the Company, PCR, Teck,
Cominco, Temco or any other third party expending monies on
exploration and development of the PCR Properties or of any New
Projects, exclusive of general and administrative expenses, determined
in accordance with the provisions applicable to natural resources
issuers under Local Policy Statement #3-07 of the British Columbia
Securities Commission; and
d. One escrow share for every $0.97 in cumulative cash flow from the
operations of the Company on the PCR Properties and any New Projects
and as determined in accordance with generally accepted accounting
principles, provided that each PCR Property and each New Project will
be considered separately without taking into account any negative cash
flow that may exist in any other PCR Property or New Project.
4. Consulting Agreement dated June 25, 1996, between Minco and Kaisun Group
Canada, Inc. engaging Kaisun to act as president and chief executive
officer and to provide Minco with such other consulting services as Minco
and Kaisun agree upon. The term of the consulting agreement is for a period
commencing March 1, 1996, and ending June 25, 1999, for a fee of $500 per
day to a maximum of $100,000 per year.
5. Cominco, Teck and Minco letter agreement regarding White Silver Mountain
dated June 15, 1998. Under the letter agreement, Cominco has the right to
elect to acquire an interest in the White Silver Mountain property up to
20%, provided that Cominco incurs expenditures on the White Silver Mountain
property of 1.5 times the expenditures made by Teck and pays Minco
$1,125,000 upon the closing of a project financing.
6. Sino-Foreign Joint Venture Agreement forming Gansu Keyin Mining Co. Ltd.
to explore and develop the White Silver Mountain project. A fully licensed
Sino-Foreign joint venture company, Gansu Keyin Mining Co. Ltd. ("Gansu
Keyin") has been formed to hold the mineral interests. In order to earn up
to an 80% interest in Gansu Keyin which owns the rights to the White Silver
Mountain project, Minco must spend a minimum of US$4.8 million (40 million
RMB) on the White Silver Mountain property over a six year period. If Minco
fails to spend the minimum amount, Minco's interest in Gansu Keyin will be
capped by a predetermined formula as set out in the Joint Venture
Agreement.
Under the terms of the joint venture contract, Gansu Keyin's board of
directors consists of seven directors of which Minco has the right to
select four directors, including the chairman. Minco has selected Messrs.
Ken Cai, William Meyer, Hans Wick and Fred Daley as its representatives.
Baiyin has the right to select the remaining three directors.
46
Because of Minco's majority ownership and majority representatives on the
Gansu Keyin's board, Minco controls Gansu Keyin's operations in the
ordinary course of business. However, the following transactions by Gansu
Keyin requires the unanimous approval by its board: (1) terminating or
dissolving Gansu Keyin; (2) selling or mortgaging assets that have a value
of 10% of Gansu Keyin's assets; (3) increasing or decreasing Gansu Keyin's
registered capital; (4) borrowing by Gansu Keyin; (5) merging Gansu Keyin;
(6) guaranteeing on behalf of Gansu Keyin; and (7) establishing
organization under the board.
7. Sino-Foreign Joint Venture Agreement forming Damo Mining Co. Ltd to
explore and develop the Gobi Gold project. Inner Mongolia Damo Mining Co.,
Ltd. ("Damo Mining") was formed and operates pursuant to a Sino-Foreign
Joint Venture contract between EILR and Minco. Under the terms of the joint
venture contract, Damo Mining's board of directors consists of seven
directors of which Minco has the right to select four directors, including
the chairman. Minco has selected Messrs. Ken Cai, William Meyer, Robert
Callander and Ruijin Jiang as its representatives. EILR has the right to
select the remaining three directors.
Because of Minco's majority ownership and majority representatives on Damo
Mining's board, Minco controls Damo Mining's operations in the ordinary
course of business. However, the following transactions by Damo Mining
requires the unanimous approval by its board: (1) terminating or dissolving
Damo Mining; (2) selling or mortgaging assets that have a value of 10% of
Damo Mining's assets; (3) increasing or decreasing Damo Mining's registered
capital; (4) borrowing by Damo Mining; (5) merging Damo Mining; (6)
guaranteeing on behalf of Damo Mining; and (7) establishing organizations
under the board.
8. Co-operation Agreement regarding the Development of the Changa Lijiagou
Land Zinc Deposit dated November 17, 1997, between Minco and Baiyin
Non-Ferrous Metals company, a corporation incorporated under the law of the
People's Republic of China ("BNMC"). Under this agreement, Minco and BNMC
will prepare and file an application with the Chinese governmental
authorities to form a joint venture company to explore, and, if warranted,
develop and exploit the lead and zinc deposits of Changba and Lijiagou and
the joint area between them. If a joint venture company is approved and
formed, Minco will contribute capital and advance equipment to develop a
3,500 tonne per day underground mine for a 75% interest in the joint
venture and BNMC will contribute its mining right to the Changba and
Lijiagou area for its 25% joint venture interest.
D. Exchange Controls
There is no law, governmental decree or regulation in Canada that restricts
the export or import of capital or affects the remittance of dividends, interest
or other payments to a non-resident holder of common shares other than
withholding tax requirements. Any such remittances to United States residents
are subject to withholding tax. See "Taxation."
There is no limitation imposed by the laws of Canada or by the charter or
other constituent documents of Minco on the right of a non-resident to hold or
vote the common shares, other than as provided in the Investment Act. The
following discussion summarizes the principal features of the Investment Act for
a non-resident who proposes to acquire the common shares.
47
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture (each an "entity") that is not a "Canadian"
as defined in the Investment Act (a "non-Canadian"), unless after review, the
Director of Investments appointed by the minister responsible for the Investment
Act is satisfied that the investment is likely to be of net benefit to Canada.
An investment in the common shares by a non-Canadian other than a "WTO Investor"
(as that term is defined by the Investment Act, and which term includes entities
which are nationals of or are controlled by nationals of member states of the
World Trade Organization) when Minco was not controlled by a WTO Investor, would
be reviewable under the Investment Act if it was an investment to acquire
control of Minco and the value of the assets of Minco, as determined in
accordance with the regulations promulgated under the Investment Act, was
$5,000,000 or more, or if an order for review was made by the federal cabinet on
the grounds that the investment related to Canada's cultural heritage or
national identity, regardless of the value of the assets of Minco. An investment
in the common shares by a WTO Investor, or by a non-Canadian when Minco was
controlled by a WTO Investor, would be reviewable under the Investment Act if it
was an investment to acquire control of Minco and the value of the assets of
Minco, as determined in accordance with the regulations promulgated under the
Investment Act was not less than a specified amount, which for 1996 was any
amount in excess of $168 million. A non-Canadian would acquire control of Minco
for the purposes of the Investment Act if the non-Canadian acquired a majority
of the common shares. The acquisition of one third or more, but less than a
majority of the common shares would be presumed to be an acquisition of control
of Minco unless it could be established that, on the acquisition, Minco was not
controlled in fact by the acquirer through the ownership of the common shares.
Certain transactions relating to the common shares would be exempt from the
Investment Act, including: (a) an acquisition of the common shares by a person
in the ordinary course of that person's business as a trader or dealer in
securities; (b) an acquisition of control of Minco in connection with the
realization of security granted for a loan or other financial assistance and not
for a purpose related to the provisions of the Investment Act; and (c) an
acquisition of control of Minco by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate direct or
indirect control in fact of Minco, through the ownership of the common shares,
remained unchanged.
Chinese Currency
The Chinese currency is the Renminbi yuan ("RMB"). It is not freely
convertible although the Chinese government has emphasized that full
convertibility is the long-term goal. Full convertibility, probably after some
transitional period, will be a condition precedent to membership in the World
Trade Organization, for which China has applied. The People's Bank of China,
China's central banking authority, publishes the Renminbi exchange rate against
the U.S. dollar every day based on the trading price between the two currencies
of the previous day on the Inter-Bank Foreign Exchange Market established in
Shanghai in 1994. In addition, the People's Bank of China publishes the Renminbi
exchange rates against other major foreign currencies. Designated banks
participate on the Inter-Bank Foreign Exchange Market through a computer network
connected with major cities in China.
Foreign exchange is administered by the State Administration Bureau of
Exchange Control (SAEC), and its local branch offices, all of which are subject
to the supervision of the People's Bank of China. The SAEC has established
regulations relating to outward remittance by foreign investors of their share
of net profits or dividends and final repatriation of their investments, in
foreign currency. Subject to payment of applicable taxes, foreign investors may
remit out of China, in foreign exchange, profits or dividends derived from a
source within China. The Swap Centers were established to assist foreign
48
investment enterprises to balance their foreign currency income and
expenses by converting surplus local currency earnings into foreign
exchange and vice versa without their having to wait for central
allocation. The central foreign exchange adjustment center is in Beijing
and other centers have been established in the coastal cities, Special
Economic Zones and other major cities, municipalities and autonomous
regions. Remittance by foreign investors of any other amounts (including,
for instance, principal and interest on debt and proceeds of sale arising
from a disposal by a foreign investor of any of its or his investments in
China) out of China is subject to the approval of the SAEC.
Minco finances its Chinese operations by transferring Canadian dollars,
which are then converted into Chinese dollars, or RMB. Based on prior history,
the Company does not believe that the Canadian dollar and RMB conversion to be
currency risk. No assurance, however, can be given that a currency risk will not
occur in the future.
E. Taxation
Canadian Federal Income Tax Consequences
The following summarizes the principal Canadian federal income tax
consequences applicable to the holding and disposition of common shares in the
capital of Minco by a United States resident, and who holds common shares solely
as capital property (a "U.S. Holder"). This summary is based on the current
provisions of the Income Tax Act (Canada) (the "Tax Act"), the regulations
thereunder, all amendments thereto publicly proposed by the government of
Canada, the published administrative practices of Revenue Canada, Customs,
Excise and Taxation, and on the current provisions of the Canada-United States
Income Tax Convention, 1980, as amended (the "Treaty"). Except as otherwise
expressly provided, this summary does not take into account any provincial,
territorial or foreign (including without limitation, any U.S.) tax law or
treaty. It has been assumed that all currently proposed amendments will be
enacted substantially as proposed and that there is no other relevant change in
any governing law or practice, although no assurance can be given in these
respects.
Each U.S. Holder is advised to obtain tax and legal advice applicable to
such U.S. Holder's particular circumstances.
Every U.S. Holder is liable to pay a Canadian withholding tax on every
dividend that is or is deemed to be paid or credited to the U.S. Holder on the
U.S. Holder's common shares. The statutory rate of withholding tax is 25% of the
gross amount of the dividend paid. The Treaty reduces the statutory rate with
respect to dividends paid to a U.S. Holder for the purposes of the Treaty. Where
applicable, the general rate of withholding tax under the Treaty is 15% of the
gross amount of the dividend, but if the U.S. Holder is a company that owns at
least 10% of the voting stock of Minco and beneficially owns the dividend, the
rate of withholding tax is 5% for dividends paid or credited after 1996 to such
corporate U.S. Holder. Minco is required to withhold the applicable tax from the
dividend payable to the U.S. Holder, and to remit the tax to the Receiver
General of Canada for the account of the U. S. Holder.
Pursuant to the Tax Act, a U.S. Holder will not be subject to Canadian
capital gains tax on any capital gain realized on an actual or deemed
disposition of a common share, including a deemed disposition on death, provided
that the U.S. Holder did not hold the common share as capital property used in
carrying on a business in Canada, and that neither the U. S. Holder nor persons
with whom the U.S. Holder did not deal a arms length (alone or together) owned
49
or had the right or an option to acquire 25% or more of the issued shares of any
class of Minco at any time in the five years immediately preceding the
disposition.
United States Tax Consequences
Passive Foreign Investment Companies
The Treaty essentially calls for taxation of shareholders by the
shareholder's country of residence. In those instances in which a tax may be
assessed by the other country, a corresponding credit against the tax owed in
the country of residence is generally available, subject to limitations.
Under ss.1296, of the Internal Revenue Code of the United States, a foreign
investment corporation is treated as a passive foreign investment company (a
"PFIC") if it earns 75% or more of its gross income from passive sources or if
50% or more of the value of its assets produce passive income. The Company
believes that it is a passive foreign investment company ("PFIC") for United
States federal income tax purposes with respect to a United States Investor.
Because the Company is a PFIC, unless a United States Investor who owns
shares in the Company elects (a section 1295 election) to have the Company
treated as a "qualified electing fund" (a "QEF") as described below, the
following rules apply:
1. Distributions made by the Company during a taxable year to a United
States Investor who owns shares in the Company that are an "excess distribution"
(defined generally as the excess of the amount received with respect to the
shares in any taxable year over 125% of the average received in the shorter of
either the three previous years or such United States Investor's holding period
before the taxable year) must be allocated ratably to each day of such
shareholder's holding period. The amount allocated to the current taxable year
and to years when the corporation was not a PFIC must be included as ordinary
income in the shareholder's gross income for the year of distribution. The
remainder is not included in gross income but the shareholder must pay a
deferred tax on that portion. The deferred tax amount, in general, is the amount
of tax that would have been owed if the allocated amount had been included in
income in the earlier year, plus interest. The interest charge is at the rate
applicable to deficiencies in income taxes.
2. The entire amount of any gain realized upon the sale or other
disposition of the share will be treated as an excess distribution made in the
year of sale or other disposition and as a consequence will be treated as
ordinary income and, to the extent allocated to years prior to the year of sale
or disposition, will be subject to the interest charge described above.
A shareholder that makes a section 1295 election will be currently taxable
on his or her pro rata share of the Company's ordinary earnings and net capital
gain (at ordinary income and capital gains rates, respectively) for each taxable
year of the Company, regardless of whether or not distributions were received.
The shareholder's basis in his or her shares will be increased to reflect taxed
but undistributed income. Distributions of income that had previously been taxed
will result in a corresponding reduction of basis in the shares and will not be
taxed against as a distribution to the shareholder.
A shareholder may make a section 1295 election with respect to a PFIC for
any taxable year of the shareholder (shareholder's election year). A section
1295 election is effective for the shareholder's election year and all
subsequent taxable years of the shareholder. (In temporary regulations, Treasury
50
provides procedures for both retroactive and protective elections). Once a
section 1295 election is made it remains in effect, although not applicable,
during those years that the Company is not a PFIC. Therefore, if the Company
requalifies as a PFIC, the section 1295 election previously made is still valid
and the shareholder is required to satisfy the requirements of that election.
Once a shareholder makes a section 1295 election, the shareholder may revoke the
election only with the consent of the Secretary.
If the shareholder makes the section 1295 election for the first tax year
of the Company as a PFIC that is included in the shareholder's holding period,
the result will be that the PFIC will qualify as a "pedigreed QEF" with respect
to the shareholder. If a QEF is an unpedigreed QEF with respect to the
shareholder, the shareholder is subject to both the non-QEF and QEF treatment.
Certain elections are available which enable shareholders to convert an
unpedigreed QEF into a pedigreed QEF thereby avoiding such dual application.
A shareholder making the section 1295 election must make the election on or
before the due date, as extended, for filing the shareholder's income tax return
for the first taxable year to which the election will apply. A shareholder must
make a section 1295 election by completing Form 8621; attaching said Form to its
federal income tax return; and reflecting in the Form the information provided
in the PFIC Annual Information Statement or if the shareholder calculated the
financial information, a statement to that effect; and filing a copy of the Form
with the Philadelphia Service Center. As provided in IRS Notice 88-125, the PFIC
Annual Information Statement must include the shareholder's pro rata shares of
the ordinary earnings and net capital gain of the PFIC for the PFIC's taxable
year or information that will enable the shareholder to calculate its pro rata
shares. In addition, the PFIC Annual Information Statement must contain
information about distributions to shareholders and a statement that the PFIC
will permit the shareholder to inspect and copy its permanent books of account,
records, and other documents of the PFIC necessary to determine that the
ordinary earnings and net capital gain of the PFIC have been calculated
according to federal income tax accounting principles. Temporary regulations
have recently clarified that a shareholder may obtain the books, records and
other documents of the foreign corporation necessary for the shareholder to
determine the correct earnings and profits and net capital gain of the PFIC
according to federal income tax principles and calculate the shareholder's pro
rata shares of the PFIC's ordinary earnings and net capital gain. In that case,
the PFIC must include a statement in its PFIC Annual Information Statement that
it has permitted the shareholder to examine the PFIC's books of account,
records, and other documents necessary for the shareholder to calculate the
amounts of ordinary earnings and net capital gain.
Because the Company's stock is "marketable" under section 1296(e), a U.S.
Investor may elect to mark the stock to market each year. In general, a PFIC
shareholder who elects under section 1296 to mark the marketable stock of a PFIC
includes in income each year an amount equal to the excess, if any, on the fair
market value of the PFIC stock as of the close of the taxable year over the
shareholder's adjusted basis in such stock. A shareholder is also generally
allowed a deduction for the excess, if any, of the adjusted basis of the PFIC
stock over the fair market value as of the close of the taxable year. Deductions
under this rule, however, are allowable only to the extent of any net mark to
market gains with respect to the stock included by the shareholder for prior
taxable years. While the interest charge regime under the PFIC rules generally
does not apply to distributions from and dispositions of stock of a PFIC where
the U.S. Investor has marked to market, coordination rules for limited
application will apply in the case of a U.S. Investor that marks to market PFIC
stock later than the beginning of the shareholder's holding period for the PFIC
stock.
51
Special rules apply with respect to the calculation of the amount of the
foreign tax credit with respect to excess distributions by a PFIC or inclusions
under a QEF.
Each U.S. Holder should consult a tax advisor with respect to how the PFIC
rules may affect such shareholder's tax situation. In particular, a U.S. Holder
should determine whether such shareholder should elect to have Minco be treated
as a Qualified Electing Fund.
Other Consequences
To the extent a shareholder is not subject to the tax regimes outlined
above with respect to foreign corporations that are PFICs, the following
discussion describes the United States federal income tax consequences arising
from the holding and disposition of Minco's Common Shares.
U.S. Holders
As used herein, a "U.S. Holder," includes a holder of Common Shares who is
a citizen or resident of the United States, a corporation created or organized
in or under the laws of the United States or of any political subdivision
thereof and any other person or entity whose ownership of Common Shares is
effectively connected with the conduct of a trade or business in the United
States. A U.S. Holder does not include persons subject to special provisions of
federal income tax laws, such as tax exempt organizations, qualified retirement
plans, financial institutions, insurance companies, real estate investment
trusts, regulated investment companies, broker-dealers, non-resident alien
individuals or foreign corporations whose ownership of common shares is not
effectively connected with the conduct of a trade or business in the United
States and shareholders who acquired their stock through the exercise of
employee stock options or otherwise as compensation.
Distribution of Common Shares
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to Minco's common shares are required to include in
gross income for United States federal income tax purposes the gross amount of
such distribution to the extent that Minco has current or accumulated earnings
or profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the U.S. Holder's United States federal income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
United States federal income tax by those who itemize deductions. (See more
detailed discussions at "Foreign Tax Credit" below). To the extent that
distributions exceed current or accumulated earnings and profits of Minco, they
will be treated first as a return of capital up to the U.S. Holder's adjusted
basis in the common shares and thereafter as gain from the sale or exchange of
such shares. Preferential tax rates for the long-term capital gains are
applicable to a U.S. Holder which is an individual, estate or trust. There are
currently no preferential tax rates for long-term capital gains for a U.S.
Holder which is a corporation.
Dividends paid on Minco's common shares will not generally be eligible for
the dividends received deduction provided to corporations receiving dividends
from certain United States corporations. A U.S. Holder which is a corporation
may, under certain circumstances, be entitled to a 70% deduction of the United
States source portion of dividends received from Minco if such U.S. Holder owns
shares representing at least 10% of the voting power and value of Minco.
52
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distribution) Canadian income
tax with respect to the ownership of Minco's common shares may be entitled, at
the option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
tax credit, because a credit reduces United States federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and generally
applies to all foreign income taxes paid by (or withheld from) the U.S. Holder
during that year. There are significant and complex limitations which apply to
the credit, among which is the general limitation that the credit cannot exceed
the proportionate share of the U.S. Holder's United States income tax liability
that the U.S. Holder's foreign source income bears to his or its worldwide
taxable income. In the determination of the application of this limitation, the
various items of income and deduction must be classified into foreign and
domestic sources. Complex rules govern this classification process. There are
further limitations on the foreign tax credit for certain types of income, such
as "passive income," "high withholding tax interest," "financial services
income," "shipping income," and certain other classifications of income. The
availability of foreign tax credit and the application of the limitations on the
credit are fact specific and holders and prospective holders of common shares
should consult their own tax advisors regarding their individual circumstances.
Disposition of Common Shares
A U.S. Holder will recognize gain and loss upon the sale of the common
shares equal to the difference, if any, between (i) the amount of cash plus the
fair market value of any property received and (ii) the shareholder's tax basis
in the common shares. The gain or loss will be capital gain or loss if the
shares are a capital asset in the hands of the U.S. Holder, and will be a
short-term or long-term capital gain or loss depending on each U.S. Holder's
holding period. Gains and losses are netted and combined according to special
rules in arriving at the overall capital gain or loss for a particular tax year.
Deductions for net capital losses are subject to significant limitations. For
U.S. Holders who are individuals, any unused portion of such net capital loss
may be carried over to be used in later tax years until such net capital loss is
thereby exhausted. For U.S. Holders which are corporations (other than
corporations subject to Subchapter S of the Code), an unused capital loss may be
carried back three years from the loss year and carried forward five years from
the loss year to be offset against capital gains until such net capital loss is
thereby exhausted.
The foregoing discussion is based upon the sections of the Code, Treasury
Regulations, published Internal Revenue Service rulings, published
administrative positions of the Internal Revenue Service and court decisions
that are currently applicable, any or all of which could be materially adversely
changed, possibly on a retroactive basis, at any time. In addition, this
discussion does not consider the potential effects, both adverse and beneficial,
of recently proposed legislation which, if enacted could be applied, possibly on
a retroactive basis, at any time. A holder or prospective holder of Minco's
common shares should consult his or her own tax advisors about federal, state
local and foreign tax consequences of purchasing, owning and disposing of the
common shares of Minco.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Minco is exposed to market risk, primarily related to foreign exchange.
Minco uses the Canadian dollar as its reporting currency and is therefore
exposed to foreign exchange movements in China where Minco is conducting
exploration activities.
53
The following table sets forth the percentage of Minco's administrative
expense by currency for the years ended December 31, 1999 and 2000.
By Currency
1999 2000
---- ----
Canadian Dollar 86% 84%
Renminbi yuan ("RMB") 14% 16%
--- ---
Total 100% 100%
Such administrative expense by currency may change from time to time.
Further, Minco incurred exploration costs of $740,150 and $443,512 for the years
ended December 31, 1999 and 2000, respectively, all of which we paid in RMB.
The Company has not entered into any material foreign exchange contracts to
minimize or mitigate the effects of foreign exchange fluctuations on the
Company's operations. The Company exchanges Canadian dollars to fund its Chinese
operations. Based on prior years, the Company does not believe that it is
subject to material foreign exchange fluctuations. However, no assurance can be
given that this will not occur in the future.
The Company has no long-term debt, therefore, the Company does not believe
that the interest rate market risk to be material.
Item 12. Description of Securities Other than Equity Securities
Not Applicable
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not Applicable
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not Applicable
Item 15. [Reserved]
Item 16. [Reserved]
Item 17. Financial Statements
Attached hereto
Item 18. Financial Statements
54
Item 19. Exhibits
Index
3.(i) Articles of Incorporation and all amendments(1)
3.(ii) Bylaws(1)
10.1 Investment and Participation Agreement dated February 20, 1996,
Among the Registrant, Teck Corporation and Cominco Ltd.(1)
10.2 Consulting Agreement dated June 25, 1996, between Registrant and
Kaisun Group Canada, Inc.(1)
10.3 Stock Escrow Agreement dated December 24, 1992, between Montreal
Trust Company of Canada, Consolidated Caprock Resources, Ltd. and
certain shareholders of Consolidated Caprock Resources, Ltd.(1)
10.4 Performance Shares Escrow Agreement dated August 17, 1995,between
Registrant, Montreal Trust Company of Canada and certain
shareholders of Registrant(1)
10.5 Assignment of Contracts and Share Purchase Agreement between Minco
Mining & Metals and Pacific Canada Resources dated February 19,
1996 (3)
10.6 Investment and Participation Agreement among Pacific Canada
Resources, Teck Corporation and Cominco dated February 19, 1996(2)
10.7 Teck and Cominco agreement regarding White Silver Mountain dated
June 15, 1998(2)
10.8 Sino-Foreign Joint Venture Agreement forming Gansu Keyin Mining
Co. Ltd.(3)
10.9 Sino-Foreign Joint Venture Agreement forming Damo Mining Co. Ltd.
(Gobi Gold)(3)
10.10 Cooperation Agreement regarding the Development of the Changba
Lijiagou Lead Zinc Deposit dated November 17, 1997 (2)
(1) Incorporated by reference to the Company's Form 20-F/R-A, amendment number
1 filed on October 18, 2000.
(2) Incorporated by reference to the Company's Form 20-F/R-A, amendment number
2 filed on May 4, 2001.
(3) Incorporated by reference to the Company's Form 20-F/R-A, amendment number
3 filed July 6, 2001.
55
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing this Annual Report on Form 20-F and that it has duly caused the
undersigned to sign this Annual Report on its behalf.
Minco Mining & Metals Corporation
Dated: July 3, 2001 /s/ Dr. Ken Z. Cai
----------------------------------
Dr. Ken Z. Cai
F-1
ELLIS FOSTER
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: generaldelivery@ellisfoster.bc.ca
- -------------------------------------------------------------------------------
AUDITORS' REPORT
To the Shareholders of
MINCO MINING & METALS CORPORATION
(An exploration stage enterprise)
We have audited the consolidated balance sheets of Minco Mining & Metals
Corporation as at December 31, 2000 and 1999 and the consolidated statements of
operations and deficit and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2000
and 1999 and the results of its operations and cash flows for each of the years
in the three-year period ended December 31, 2000 in accordance with Canadian
generally accepted accounting principles. As required by the Company Act of
British Columbia, we report that, in our opinion, these principles have been
applied on a basis consistent with that of preceding year.
Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in United States.
Application of accounting principles generally accepted in United States would
have affected the company's financial position and its shareholders' equity as
at December 31, 2000 and 1999 and its results of operations for each of the
years in the three-year period ended December 31, 2000, to the extent summarized
in Note 12 to the consolidated financial statements.
Vancouver, Canada "ELLIS FOSTER"
March 7, 2001 Chartered Accountants
- -------------------------------------------------------------------------------
EFA partnership of incorporated professionals
An independently owned and operated member of Moore Stephens North America Inc.,
a member of Moore Stephens International Limited
- members in principal cities throughout the world
F-2
MINCO MINING & METALS CORPORATION
(An exploration stage enterprise)
Consolidated Balance Sheets
December 31, 2000 and 1999
(Expressed in Canadian Dollars)
2000 1999
------------ ------------
ASSETS
Current
Cash and cash equivalents $ 219,333 $ 268,224
Marketable securities 1,142,829 1,931,633
Sundry receivable 78,076 92,883
Prepaid expenses and deposits 56,601 64,475
------------ ------------
1,496,839 2,357,215
Mineral interests (Note 3) 2,281,470 1,835,376
Capital assets (Note 4) 134,664 189,837
------------ ------------
$ 3,912,973 $ 4,382,428
============ ============
LIABILITIES
Current
Accounts payable and accrued liabilities $ 328,873 $ 284,749
------------ ------------
SHAREHOLDERS' EQUITY
Share capital (Note 5) 10,286,933 10,175,833
Deficit (6,702,833) (6,078,154)
------------ ------------
3,584,100 4,097,679
------------ ------------
$ 3,912,973 $ 4,382,428
============ ============
Commitments (Note 8)
F-3
MINCO MINING & METALS CORPORATION
(An exploration stage enterprise)
Consolidated Statements of Operations and Deficit
Years Ended December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Interest and sundry income $ 116,205 $ 144,042 $ 197,068
- ------------------------------------------------------------------------------------------------------
Mineral interests written off - 579,088 1,065,408
- ------------------------------------------------------------------------------------------------------
Administrative expenses
Accounting and audit 69,171 75,231 82,540
Advertising 18,665 36,222 20,826
Amortization of capital assets 35,187 51,788 60,132
Capital taxes 5,765 11,581 15,015
Conference 2,377 16,364 5,409
Consulting fees 137,651 157,635 90,097
Donation - - 3,800
Legal 48,255 25,250 40,820
Listing, filing and transfer agents 16,460 32,094 51,841
Management fees 48,474 40,758 97,559
Office and miscellaneous 58,909 51,683 50,295
Promotion and government relations 115,599 171,433 137,987
Property investigation - 52,229 129,812
Rent 72,723 103,225 138,486
Salaries and benefits 65,837 67,832 97,217
Telephone 14,289 20,868 55,851
Travel and transportation 28,892 35,492 52,811
Foreign exchange loss (gain) 2,630 5,028 (2,254)
- ------------------------------------------------------------------------------------------------------
740,884 954,713 1,128,244
- ------------------------------------------------------------------------------------------------------
Operating loss (624,679) (1,389,759) (1,996,584)
Write down of marketable securities - (116,349) -
- ------------------------------------------------------------------------------------------------------
Loss for the year (624,679) (1,506,108) (1,996,584)
Deficit, beginning of year (6,078,154) (4,572,046) (2,575,462)
- ------------------------------------------------------------------------------------------------------
Deficit, end of year $ (6,702,833) $ (6,078,154) $ (4,572,046)
======================================================================================================
Loss per share $ (0.04) $ (0.09) $ (0.13)
======================================================================================================
Weighted average number of
Common shares outstanding 16,335,178 16,154,986 15,549,918
======================================================================================================
F-4
MINCO MINING & METALS CORPORATION
(An exploration stage enterprise)
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
2000 1999 1998
- -------------------------------------------------------------------------------------------------------
Cash flows from (used in)
Operating activities
Loss for the year $ (624,679) $ (1,506,108) $ (1,996,584)
Adjustment for items not involving cash:
- amortization 35,187 51,788 60,132
- non-controlling interest's shares of loss - - -
- writeoff of mineral interests - 579,088 1,065,408
- write down of marketable securities - 116,349 -
- gain on sale of marketable securities (42,325)
Change in working capital items:
- funds restricted for mineral explorations - 213,598 (148,269)
- sundry receivable 14,807 (75,253) 33,135
- prepaid expenses and deposits 7,874 (458) (25,754)
- accounts payable and accrued liabilities 44,124 145,195 (28,405)
- -------------------------------------------------------------------------------------------------------
(565,012) (475,801) (1,040,337)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Shares issued for cash 111,100 562,500 740,365
- -------------------------------------------------------------------------------------------------------
Cash flows from (used in)
investing activities
Acquisition of capital assets (1,725) (8,303) (130,800)
Deferred exploration costs (424,383) (729,148) (889,141)
Proceeds from sales of
marketable securities 2,298,889 531,848 1,514,379
Purchase of marketable securities (1,467,760) - -
- -------------------------------------------------------------------------------------------------------
405,021 (205,603) 494,438
- -------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and
cash equivalents (48,891) (118,904) 194,466
Cash and cash equivalents,
beginning of year 268,224 387,128 192,662
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 219,333 $ 268,224 $ 387,128
=======================================================================================================
F-5
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
1. Nature of Operations
The Company was incorporated under the laws of British Columbia, Canada and
is in the business of mining exploration.
These consolidated financial statements have been prepared on a
going-concern basis which assumes that the Company will be able to realize
assets and discharge liabilities in the normal course of business. The
continued operations of the Company and the recoverability of amounts shown
for mineral interests are dependent upon the discovery of economically
recoverable reserves, the ability of the Company to obtain financing to
complete the development of the projects, and on future profitable
production or proceeds from the disposition thereof.
2. Significant Accounting Policies
(a) Consolidation
These consolidated financial statements include the accounts of the
Company and its wholly-owned British Virgin Island subsidiary, Triple
Eight Mineral Corporation ("Temco"). All material inter-company
balances have been eliminated.
(b) 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 amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the period. Actual results may differ from those
estimates.
(c) Capital Assets
Amortization is provided as follows:
Motor vehicles 30% per annum, declining-balance basis
Mining equipment 30% per annum, declining-balance basis
Computer equipment 30% per annum, declining-balance basis
Office equipment and furniture 20% per annum, declining-balance basis
Leasehold improvements Term of the lease (5 years), straight-
line basis
Amortization is provided at half the annual rate in the year of
acquisition except for leasehold improvements.
F-6
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
2. Significant Accounting Policies (continued)
(d) Cash Equivalents
Cash equivalents usually consist of highly liquid investments which
are readily convertible into cash with maturities of three months or
less when purchased. As at December 31, 2000 and 1999, cash
equivalents consist of bank redeemable term investment certificates.
(e) Marketable Securities
Marketable securities are stated at the lower of cost and market
value. As at December 31, 2000, marketable securities consist of bonds
issued by the provincial government of Ontario. The market value is
$1,160,259 (1999 - $1,931,633).
(f) Earnings (Loss) Per Share
Earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Fully-diluted
earnings (loss) per share has not been disclosed as the effect of
common shares issuable upon the exercise of warrants and options would
be anti-dilutive.
(g) Foreign Currency Transactions
The Company maintains its accounting records in its functional
currency (i.e., Canadian dollars). It translates foreign currency
transactions into its functional currency in the following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, monetary assets and
liabilities are translated into the functional currency by using the
exchange rate in effect at that date. The resulting foreign exchange
gains and losses are included in operations.
(h) Mineral Interests
The Company follows the method of accounting for its mineral interests
whereby all costs related to acquisition, exploration and development
are capitalized on a property-by-property basis. These costs will be
amortized against revenue from future production or written off if the
mineral interest is abandoned or sold.
F-7
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
2. Significant Accounting Policies (continued)
(h) Mineral Interests (continued)
The carrying values of mineral interests, on a property-by-property
basis, are reviewed by management at least annually to determine if
they have become impaired. If impairment is deemed to exist, the
mineral property will be written down to its net recoverable value.
The ultimate recoverability of the amounts capitalized for the mineral
properties is dependent upon the delineation of economically
recoverable ore reserves, the Company's ability to obtain the
necessary financing to complete their development and realize
profitable production or proceeds from the disposition thereof.
Management's estimates of recoverability of the Company's investment
in various projects have been based on current conditions. However, it
is reasonably possible that changes could occur in the near term which
could adversely affect management's estimates and may result in future
write-downs of capitalized property carrying values.
(i) Income Taxes
Income taxes are accounted for using the asset and liability method
pursuant to Section 3465, Income Taxes, of The Handbook of the
Canadian Institute of Chartered Accountants. Future taxes are
recognized for the tax consequences of "temporary differences" by
applying enacted or substantively enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and tax basis of existing assets and
liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the date of enactment
or substantive enactment. In addition, Section 3465 requires the
recognition of future tax benefits to the extent that realization of
such benefits is more likely than not.
In 1999, the Company changed its policy for accounting for income
taxes by adopting the provision of CICA Handbook Section 3465, Income
Taxes. Under this standard, current income taxes are recognized for
the estimated income taxes payable for the current period. Future
income tax assets and liabilities are recognized for temporary
differences between the tax and accounting basis of assets and
liabilities as well as for the benefit of losses available to be
carried forward to future years for tax purposes that are likely to be
realized.
The adoption of Section 3465 did not impact amounts reported in the
prior period.
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
3. Mineral Interests
------------------------------------------------------------------------------------------
Deferred Deferred
Costs 2000 Costs
Dec. 31 Exploration Amount Dec. 31
1999 Costs Written Off 2000
------------------------------------------------------------------------------------------
Emperor's Delight $ 100 $ - $ - $ 100
Crystal Valley 100 - - 100
Stone Lake 100 - - 100
Changba Lijiagou
Lead-Zinc Deposit 100 - - 100
White-Silver Mountain 1,307,979 87,449 - 1,395,428
Chapuzi 100 - - 100
Heavenly Mountains 436,519 - - 436,519
Inner Mongolia (Gobi Gold) 90,378 358,645 - 449,023
------------------------------------------------------------------------------------------
$1,835,376 $446,094 $ - $2,281,470
==========================================================================================
------------------------------------------------------------------------------------------
Deferred Deferred
Costs 1999 Costs
Dec. 31 Exploration Amount Dec. 31
1998 Costs Written Off 1999
------------------------------------------------------------------------------------------
Emperor's Delight $89,316 $ 25,051 $(114,267) $ 100
Crystal Valley 100 - - 100
Stone Lake 100 - - 100
Changba Lijiagou
Lead-Zinc Deposit 134,803 - (134,703) 100
White-Silver Mountain 623,081 684,898 - 1,307,979
Chapuzi 330,218 - (330,118) 100
Heavenly Mountains 436,519 - - 436,519
Inner Mongolia (Gobi Gold) 40,456 49,922 - 90,378
------------------------------------------------------------------------------------------
$1,654,593 $759,871 $(579,088) $1,835,376
==========================================================================================
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
3. Mineral Interests (continued)
(a) Expenditures on the Emperor's Delight, Crystal Valley, Stone Lake and
Chapuzi have been discontinued due to negative results and no further
work is planned. However, the Company retains rights to the projects.
(b) The Company acquired its rights to the Changba-Lijiagou Lead Zinc
Project located in Ganzu Province, China through the "Cooperation
Agreement Regarding the Development of the Changba Lijiagou Lead Zinc
Deposit" between the Company and Baiyin Non-Ferrous Metals Corporation
("Baiyin") signed on November 17, 1997. The Company discontinued
further work on this project in 1999 and will seek a joint venture
partner to develop it.
(c) The Company acquired its rights to the White Silver Mountain project
located in Gansu Province, China, pursuant to a Joint Venture
Agreement signed on August 28, 1998. A joint venture company, Gansu
Keyin Mining Co. Ltd. ("Keyin"), was formed to hold the above mineral
interests. In order to earn an 80% interest in Keyin, the Company must
expend 40 million RMB (approximately US$4.8 million) on the
properties. Baiyin will contribute the exploration permit held by it
and the geological data and research results, including drill core
samples and maps, for its 20% interest in Keyin. Following the
completion of the above expenditures, each party shall contribute to
Keyin in proportion to their respective beneficial interests.
Pursuant to an option agreement dated December 22, 1999, with effect
from June 10, 1998, the Company granted Teck Corporation of Vancouver,
B.C., Canada, an option to earn a 56% interest in Keyin by assuming
all of the Company's funding requirements until commercial production
has been attained. Pursuant to the term of the same option agreement,
Cominco Ltd. ("Cominco") of Vancouver, B.C., Canada, has "back-in
rights" with respect to this project to earn up to a 20% interest in
Keyin up to the pre-feasibility stage by repaying Teck one and
one-half times the total project expenditures up to the date of
exercise of its rights and making a cash payment to the Company, and
thereafter funding its pro-rata share of feasibility and development
costs.
The White Silver Mountain agreements with Teck and Cominco are
separate from the Earn-in Rights that are detailed in Note 8(c). The
White Silver Mountain Agreement does not constitute an exercise of
either Teck's or Cominco's first right of refusal, which remain
intact.
(d) The Heavenly Mountains properties are located in Xinjiang Province,
China. The Company has an exclusive right to negotiate and enter into
a joint venture contract with the Xinjiang Bureau of the Ministry of
Geology and Mineral Resources and to invest in certain mineral
properties located in Xinjiang Uygur Autonomous Region in China. The
Company discontinued further work and suspended the project in 1999.
F-10
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
3. Mineral Interests (continued)
(e) The Inner Mongolia property (Gobi Gold Project) is located in Inner
Mongolia Autonomous Region, China. Pursuant to a Cooperative Joint
Venture Agreement, the Company can earn a 75% interest in the property
by spending US$2.5 million over a four-year period. A joint venture
company called Inner Mongolia Damo Mining Co. Ltd. was formed to hold
the above noted mineral interests.
4. Capital Assets
2000
-------------- ----------------- --------------
Accumulated Net book
Cost Amortization value
---------------------------------------- -------------- ----------------- --------------
Computer equipment $ 62,948 $ 46,684 $16,264
Office equipment and furniture 81,436 50,924 30,512
Leasehold improvements 25,648 25,048 -
Motor vehicles 59,309 42,018 17,291
Mining equipment 191,292 120,695 70,597
---------------------------------------- -------------- ----------------- --------------
$420,633 $285,369 $134,664
======================================== ============== ================= ==============
1999
-------------- ----------------- --------------
Accumulated Net book
Cost Amortization value
---------------------------------------- -------------- ----------------- --------------
Computer equipment $ 59,801 $ 40,388 $ 19,413
Office equipment and furniture 82,858 43,119 39,739
Leasehold improvements 25,648 20,518 5,130
Motor vehicles 59,309 34,607 24,702
Mining equipment 191,292 90,439 100,853
---------------------------------------- -------------- ----------------- --------------
$418,908 $229,071 $189,837
======================================== ============== ================= ==============
F-11
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
5. Share Capital
(a) Authorized: 100,000,000 common shares without par value
(b) Issued:
Shares Amount
---------------------------------------------------- ------------- -------------
Balance, December 31, 1998 15,745,123 $9,613,333
Private placement at $0.85 per share 250,000 212,500
Private placement at $1.00 per share 150,000 150,000
Share purchase warrants exercised at $1.60 per
share 125,000 200,000
---------------------------------------------------- ------------- -------------
Balance, December 31, 1999 16,270,123 10,175,833
Share purchase warrants exercised at $1.01 per
share 110,000 111,100
---------------------------------------------------- ------------- -------------
Balance, December 31, 2000 16,380,123 $10,286,933
==================================================== ============= =============
(c) As at December 31, 2000, 3,562,328 of the shares issued are held in
escrow, the release of which is subject to the direction of the
regulatory authorities. Subsequent to the year-end, 571,006 shares
were released from escrow.
(d) Stock options outstanding at December 31, 2000 are as follows:
Number of Options Exercise Price Expiry Date
----------------- -------------- -----------
506,500 $1.41 March 5, 2006
150,000 $1.65 July 16, 2006
97,300 $1.41 October 8, 2006
100,000 $1.12 December 1, 2006
97,300 $1.41 March 6, 2007
49,500 $1.41 June 20, 2007
-----------
1,000,600
Each stock option entitles the holder to acquire one common share of
the Company. Subsequent to the year-end, the exercise price of the
above stock options were amended to $0.55 per share.
F-12
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
6. Income Taxes
The components of the future income tax assets are as follows:
2000 1999
------------------------------------------------------- -------------- ----------------
Future income tax assets:
Non-capital loss carryforwards $ 6,166,149 $ 5,501,892
Unused foreign exploration and
development expenses 2,765,383 2,299,934
Unused cumulative Canadian exploration
expenses 2,591 2,591
Unused cumulative Canadian development
expenses 148,461 148,461
Undepreciated capital cost of capital assets
over their net book value 284,820 227,922
------------------------------------------------------- -------------- ----------------
Less: Valuation allowance (9,367,404) (8,180,800)
------------------------------------------------------- -------------- ----------------
Net future income tax assets $ - $ -
======================================================= ============== ================
The valuation allowance reflects the Company's estimate that the tax
assets, more likely than not, will not be realized.
The non-capital losses are carried forward for tax purposes and are
available to reduce taxable income of future years. These losses expire
commencing in 2001 through 2007. The exploration and development expenses
can be carried forward indefinitely.
7. Related Party Transactions
(a) The Company incurred the following expenses to a corporation
controlled by a director and an individual related to a director:
2000 1999 1998
---------------------------------------------------------------
Management fees $ 86,263 $ 89,392 $ 90,059
Deferred exploration costs 59,577 77,073 83,383
Property investigation - - 13,825
Rent - - 12,667
---------------------------------------------------------------
$145,840 $166,465 $199,934
===============================================================
(b) Included in accounts payable and accrued liabilities is a total of
$63,117 (1999 - $62,689) due to two corporations controlled by a
director of the Company.
F-13
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
8. Commitments
(a) The Company has commitments in respect of office leases requiring
minimum payments of $159,373 within the next two years, as follows:
2001 $150,177
2002 9,196
----------------------------------
$159,373
==================================
(b) The Company entered into a Loan Agreement (the "Agreement") with a
director of the Company in October, 1997. Pursuant to the terms of the
Agreement, the Company agreed to advance a sum up to $225,000 to
assist the director in moving from Toronto to Vancouver, Canada, and
purchasing a residence in either Vancouver or Beijing, China. The loan
will be fully secured and repaid by the director upon the occurrence
of certain stated events as described in the Agreement. The director
has not yet exercised his rights under the terms of the Agreement.
(c) The Teck-Cominco Agreements
The Company has entered into agreements with Teck Corporation ("Teck")
and Cominco Ltd. ("Cominco"), both of Vancouver, B.C., Canada on
February 19, 1996 and February 20, 1996, respectively (collectively
the "Teck-Cominco Agreements").
Pursuant to the terms of the Teck-Cominco Agreements, Teck and Cominco
received "earn-in rights" as to the Non-Chinese Interest in any two
mineral property rights acquired by the Company in China after the
date of the Teck-Cominco Agreements until March 1, 2004.
Teck and Cominco have the right to "earn-in" to 51% of Minco's
interest in a property deemed to be an exploration property or 70% of
Minco's interest in a property deemed to be a development property.
After Teck and Cominco have exercised their earn-in rights in an
aggregate of two projects procured by the Company, Teck and Cominco
shall have further preferential rights of first refusal in respect to
further properties identified by the Company for a period of three
years after the exercise of their earn-in rights.
F-14
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
9. Financial Instruments
The carrying value of cash and cash equivalents, sundry receivable and
accounts payable and accrued liabilities approximates the fair value due to
the short-term nature of these financial instruments. The fair value of
marketable securities is equivalent to the market value. The Company
operates in China and some of its material exploration expenditures are
payable in either U.S. dollars and the Chinese currency RMB and is,
therefore, subject to foreign currency risk arising from changes in
exchange rates among Canadian dollars, U.S. dollars and RMB. The Company is
not exposed to significant interest risk. The Company places its marketable
securities with government debt securities and is subject to minimal credit
risk. The Company also considers itself not subject to high concentration
of credit risk to its debtors and does not require collateral to support
these financial instruments.
10. Comparative Figures
Certain 1998 and 1999 comparative figures have been reclassified to conform
with the financial statement presentation adopted for 2000.
11. Subsequent Event
Subsequent to year-end, the Company granted 320,000 stock options to its
directors and employees at $0.55 per share expiring on January 2, 2006.
12. Reconciliation of Canadian and United States Generally Accepted Accounting
Principles
(a) The Consolidated Statement of Shareholders' Equity, prepared in
accordance with the U.S. GAAP as required, is now presented as an
additional schedule.
(b) Reconciliation of Consolidated Balance Sheet items:
2000 1999
---------------------------------------------------------------------------------
Mineral interests (Canadian GAAP) $ 2,281,470 $ 1,835,376
Capitalized deferred exploration costs
written-off (2,281,470) (1,835,376)
---------------------------------------------------------------------------------
Mineral interests (US GAAP) - -
---------------------------------------------------------------------------------
Securities available for sale (Canadian GAAP) 1,142,829 1,931,633
Unrealized gain 17,430 -
---------------------------------------------------------------------------------
Securities available for resale (US GAAP) 1,931,633
---------------------------------------------------------------------------------
Total assets (US GAAP) 1,648,933 2,547,052
---------------------------------------------------------------------------------
Total liabilities (US GAAP) 328,873 284,749
---------------------------------------------------------------------------------
F-15
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
12. Reconciliation of Canadian and United States Generally Accepted Accounting
Principles (continued)
(c) Reconciliation of Consolidated Statement of Operations Items:
2000 1999 1998
-----------------------------------------------------------------------------------------
Loss for the year (Canadian GAAP) $ (624,679) $(1,506,108) $(1,996,584)
Capitalized deferred exploration costs
written-off (446,094) (180,783) 158,315
Write down of marketable securities added back - 116,349 -
Release of escrow shares as compensation - (974,042) (1,476,973)
-----------------------------------------------------------------------------------------
Loss for the year (US GAAP) (1,070,773) (2,544,584) (3,315,242)
-----------------------------------------------------------------------------------------
Loss per share - basic and diluted (US GAAP) (0.08) (0.21) (0.31)
-----------------------------------------------------------------------------------------
Weighted average number of common shares
Outstanding - basic and diluted (US GAAP) 12,828,232 12,189,874 10,749,411
-----------------------------------------------------------------------------------------
(d) Marketable Securities
All of the Company's marketable securities are classified as
available-for-sale securities under US GAAP. Available-for-sale
securities are recorded at market value. Unrealized holding gains and
losses on available-for-sale securities are excluded from income and
charged to accumulated other comprehensive income as a separate
component of shareholders' equity until realized. A summary of
available-for-sale securities by major security type are as follows:
Gross
unrealized
holding Market
Cost gains (losses) value
----------------------------------- -------------- ---------------- ------------
2000:
Bonds issued by provincial
government in Canada $1,142,829 $17,430 $1,160,259
=================================== ============== ================ ============
1999:
Bonds issued by provincial
government in Canada $2,047,982 $(116,349) $1,931,633
=================================== ============== ================ ============
(e) Mineral Interests
U.S. GAAP requires that exploration cost of mineral interests not be
deferred and capitalized until there is evidence of economically
recoverable resources. The Company only incurred exploration costs for
mineral interests. These costs will not be capitalized for U.S. GAAP
purposes as the Company is at present exploring its properties for
economically recoverable ore reserves. The effect of these capitalized
costs write-off is presented in Notes 12(b) and 12(c).
F-16
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
12. Reconciliation of Canadian and United States Generally Accepted Accounting
Principles (continued)
(f) Escrow Shares
562,500 escrow shares may be released, upon application, on the basis
of 15% of the original number of escrow shares for every $100,000
expended on exploration and development of a resource property
provided that no more than 50% of the original number of escrow shares
may be released in any twelve-month period. In addition, where
administrative expenses exceed 33% of total expenditures during the
period of application, then the release factor of 15% will be reduced
to 7.5% and the percentage of the original number of escrow shares
available for release in any twelve-month period will be reduced to
25%. 281,250 shares and 140,625 shares were released in 1998 and 1999,
respectively. As at December 31, 1999 and 2000, there were 140,625
such escrow shares outstanding.
Pursuant to another escrow share agreement, 4,880,000 escrow shares
may be released, upon application, on the basis of one escrow share
for every $1.81 expended on exploration and development of a resource
property, including expenditures on mining equipment, but excluding
expenditures on Chapuzi and Savoyardinskii properties. 949,561 shares
and 508,736 shares were released in 1998 and 1999, respectively. As at
December 31, 1999 and 2000, there were 3,421,703 such escrow shares
outstanding.
U.S. GAAP requires that the fair value of the shares at the time they
are released from escrow should be recognized as a charge to income as
a compensation expense. A summary of the escrow shares released is
presented as follows:
------------------------------------------------- -------------- ---------------
Compensation
Shares expense
------------------------------------------------- -------------- ---------------
Balance, December 31, 1997 5,442,500
Released from escrow at $1.20 per share (1,230,811) $1,476,973
==========
------------------------------------------------- --------------
Balance, December 31, 1998
Released from escrow at $1.50 per share (649,361) $974,042
========
------------------------------------------------- --------------
Balance, December 31, 1999 and 2000 3,562,328
================================================= ==============
As escrow shares are contingently cancellable, they are excluded from
the calculation of weighted average number of shares for purposes of
loss per share under U.S. GAAP. The effect of accounting treatment on
escrow shares on the Company's consolidated financial statements under
US GAAP are presented in Note 12(c) and the Consolidated Statement of
Shareholders' Equity.
F-17
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
12. Reconciliation of Canadian and United States Generally Accepted Accounting
Principles (continued)
(g) Stock Options Compensation
The Company has been granting stock options to directors, officers and
employees from 1995 onwards. All options granted were vested
immediately and will be exercised from the date of grant for a period
from one year to ten years.
In 1999, the Company adopted another Stock Option Plan ("the 1999
Plan") for the grant of options to certain employees. Options granted
under the 1999 Plan will be exercisable from the date of grant for a
period from one year to seven years and would vest upon when the
Company's share price reached certain level. These options granted
were subsequently cancelled in 2000.
There were no stock options granted in 2000. A summary of the options
granted is as follows:
Weighted
average
Number exercise
of shares price
----------------------------------------------------- -------------
Outstanding, December 31, 1997 $1.42
Granted 75,000 1.50
Cancelled (300,800) 1.48
--------------------------------------------------
Outstanding, December 31, 1998 1,311,200 1.41
Granted 670,000 1.45
Cancelled (75,000) 1.50
--------------------------------------------------
Outstanding, December 31, 1999 1,906,200 1.42
Cancelled (905,600) 1.42
--------------------------------------------------
Outstanding, December 31, 2000 1,000,600 1.42
--------------------------------------------------
----------------------------------------------------- ------------------------
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------
Weight
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Year) Price Exercisable Price
--------------- ------------- ------------ ---------- ------------ -----------
$1.01 - $2.00 1,000,600 5.5 $1.42 1,000,600 $1.42
--------------- ------------- ------------ ---------- ------------ -----------
F-18
MINCO MINING & METALS CORPORATION
(A exploration stage enterprise)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Expressed in Canadian Dollars)
12. Reconciliation of Canadian and United States Generally Accepted Accounting
Principles (continued)
(g) Stock Options Compensation (continued)
The Company applies Accounting Principles Board ("APB") No. 25
"Accounting for Stock Issued to Employees" and related interpretations
in accounting for stock options. Under APB 25, no compensation is
recognized in connection with options granted to employees except if
options are granted at a strike price below fair value of the
underlying stock. The adoption of APB 25 has nil effect on the
Company's consolidated financial statements.
Pro-forma information regarding Loss for the period and Loss per Share
is required under SFAS 123, and has been determined if the Company has
accounted for its stock options under the fair value method of SFAS
123. If compensation cost for the stock option plan had been
determined based on the fair value at the grant dates for awards under
the plan, consistent with the alternative method set forth under SFAS
123, the Company's loss for the year, basic and diluted loss per share
would have been increased on a pro-forma basis as indicated below:
---------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------
Loss for the year:
-as reported $(1,070,773) $(2,544,584) $(3,315,242)
---------------------------------------------------------------------------------
- pro-forma $(1,070,773) $(3,388,184) $(3,455,492)
---------------------------------------------------------------------------------
Basic and diluted loss per share:
- as reported $(0.08) $(0.21) $(0.31)
---------------------------------------------------------------------------------
- pro-forma $(0.08) $(0.28) $(0.32)
---------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants rewarded in 1998 to
1999, respectively:
---------------------------------------------------------------------------------
Weighted
Number of Risk-free Expected average
Year options Dividend Expected interest lives in fair value
granted granted yields volatility rate years of options
---------------------------------------------------------------------------------
1998 75,000 0% 57% 6.50% 5.0 $1.87
1999 670,000 0% 76% 5.00% 4.4 $1.26
---------------------------------------------------------------------------------
MINCO MINING & METALS CORPORATION
(An exploration stage enterprise)
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2000 and 1999
(Expressed in Canadian Dollars)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Additional hensive compre- Share-
Common shares paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income (loss) equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 15,745,123 - $ 12,763,272 $ - $ (9,376,578) $ 8,300 $ 3,394,994
Shares issued on February 4, 1999,
pursuant to a private placement
at $0.85 per share 250,000 - 212,500 - - - 212,500
Shares issued on March 8, 1999,
pursuant to a private placement
at $1.00 per share 150,000 - 150,000 - - - 150,000
Shares issued on July 9, 1999
for exercise of warrants at
$1.60 per share 125,000 - 200,000 - - - 200,000
Release of escrow share as
compensation - - 974,042 - - - 974,042
Other comprehensive income
- unrealized gain (loss) on
available-for-sale securities - - - (124,649) - (124,649) (124,649)
Comprehensive income
- net (loss) for the year - - - (2,544,584) (2,544,584) - (2,544,584)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (2,669,233)
============
Balance, December 31, 1999 16,270,123 - 14,299,814 (11,921,162) (116,349) 2,262,303
Shares issued on April 11, 2000
for exercise of warrants at
$1.01 per share 30,000 - 30,300 - - - 30,300
Shares issued for cash on
April 23, 2000 for exercise of
warrants at $1.01 per share 15,000 - 15,150 - - - 15,150
Shares issued for cash on
June 27, 2000 for exercise of
warrants at $1.01 per share 65,000 - 65,650 - - - 65,650
Other comprehensive income
- unrealized gain (loss) on
available-for-sale securities - - - 17,430 - 17,430 17,430
Comprehensive income
- net (loss) for the year - - - (1,070,773) (1,070,773) - (1,070,773)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (1,053,343)
============
Balance, December 31, 2000 16,380,123 - $ 14,410,914 $ (12,991,935) $ (98,919) $ 1,320,060
====================================================================== ==========================================