UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of SEPTEMBER, 2007.
Commission File Number: 0-30390
ROCHESTER RESOURCES LTD
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
#1305 - 1090 West Georgia Street, Vancouver, British Columbia, V6E 3V7, Canada
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F: FORM 20-F [X] FORM 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): _______
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): _______
Indicate by check mark whether the registrant by furnishing the information
contained in this Form, is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
YES [ ] NO [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3- 2(b): 82-_____________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
ROCHESTER RESOURCES LTD
Date: September 30, 2007 /s/ Nick DeMare
----------------------------- -------------------------------------
Nick DeMare,
Chairman
ROCHESTER RESOURCES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
MAY 31, 2007 AND 2006
D & H Group LLC
Chartered Accountants
AUDITORS' REPORT
To the Shareholders of
Rochester Resources Ltd.
We have audited the consolidated balance sheets of Rochester Resources Ltd. as
at May 31, 2007 and 2006 and the consolidated statements of operations and
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. 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 May 31, 2007 and
2006 and the results of its operations and cash flows for the years then ended
in accordance with Canadian generally accepted accounting principles.
On September 17, 2007 we reported separately to the shareholders of Rochester
Resources Ltd. on consolidated financial statements as at May 31, 2007 and 2006
and for the years ended May 31, 2007, 2006 and 2005 audited in accordance with
Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States) which include a
reconciliation to United States generally accepted accounting principles.
/s/ D&H GROUP LLP
Vancouver, B.C.
September 17, 2007 CHARTERED ACCOUNTANTS
D+H Group LLP Chartered Accountants
10th Floor, 1333 West Broadway Telephone 604 731 5881 www.DHgroup.ca
Vancouver, British Columbia Facsimile 604 731 9923 A BC Limited Liaibility
Canada V6H 4C1 Email: info@dhgroup.ca Partnership of
Corporations
Member of BHD Association with affiliated offices across Canada and
internationally
ROCHESTER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
AS AT MAY 31
2007 2006
$ $
ASSETS
CURRENT ASSETS
Cash 1,680,753 3,657,676
Amounts receivable (Note 4) 269,997 80,022
Prepaid expenses and deposits 52,580 12,825
Inventories 116,706 -
------------ ------------
2,120,036 3,750,523
IVA TAX RECEIVABLE 1,045,413 -
MINERAL PROPERTY INTERESTS (Note 5) 26,240,492 1,128,652
PROPERTY, PLANT AND EQUIPMENT (Note 6) 1,364,623 55,341
OTHER ASSETS - 37,040
------------ ------------
30,770,564 4,971,556
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 388,386 214,447
Current portion of long-term debt (Note 7) 962,910 -
------------ ------------
1,351,296 214,447
LONG-TERM DEBT (Note 7) 615,193 -
ASSET RETIREMENT OBLIGATION (Note 16) 590,894 -
FUTURE INCOME TAX LIABILITIES (Notes 3 and 12) 4,300,000 -
------------ ------------
6,857,383 214,447
------------ ------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 8) 96,437,468 75,890,208
CONTRIBUTED SURPLUS (Note 10) 2,891,157 608,284
DEFICIT (75,415,444) (71,741,383)
------------ ------------
23,913,181 4,757,109
------------ ------------
30,770,564 4,971,556
============ ============
NATURE OF OPERATIONS (Note 1)
SUBSEQUENT EVENTS (Note 17)
APPROVED BY THE BOARD
/s/ ALFREDO PARRA , Director
- ------------------
/s/ NICK DEMARE , Director
- ------------------
The accompanying notes are an integral part of these
consolidated financial statements.
ROCHESTER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED MAY 31
2007 2006
$ $
EXPENSES
Accounting and administration 75,455 53,415
Accretion (Note 16) 20,212 -
Amortization 1,428 2,149
Audit 14,940 20,517
Corporate development 137,916 37,360
Corporate finance fee - 30,500
General exploration 91,837 24,588
Investor relations 69,508 6,497
Legal 14,079 19,573
Management fees 58,500 113,838
Office 28,270 12,098
Professional fees 108,515 91,167
Regulatory 15,859 12,836
Rent 10,500 4,165
Salaries and benefits 52,318 6,410
Shareholder costs 16,688 9,251
Stock-based compensation (Note 9) 2,542,500 256,159
Transfer agent 19,512 17,420
Travel 68,665 24,207
------------ ------------
3,346,702 742,150
------------ ------------
LOSS BEFORE OTHER ITEMS (3,346,702) (742,150)
------------ ------------
OTHER ITEMS
Interest expense (187,940) -
Interest and other income 46,622 36,566
Foreign exchange (186,041) (66,651)
Gain on sale of other assets - 40,980
Bad debts - (10,000)
------------ ------------
(327,359) 895
------------ ------------
NET LOSS FOR THE YEAR (3,674,061) (741,255)
DEFICIT - BEGINNING OF YEAR (71,741,383) (71,000,128)
------------ ------------
DEFICIT - END OF YEAR (75,415,444) (71,741,383)
============ ============
BASIC AND DILUTED LOSS PER SHARE $(0.19) $(0.17)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,859,117 4,388,853
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
ROCHESTER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31
2007 2006
$ $
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
Net loss for the year (3,674,061) (741,255)
Adjustment for items not involving cash
Accretion 20,212 -
Amortization 1,428 2,149
Interest expense 12,038 -
Corporate finance fee - 30,500
Gain on sale of other assets - (40,980)
Stock-based compensation 2,542,500 256,159
------------ ------------
(1,097,883) (493,427)
Increase in amounts receivable (189,552) (40,995)
Increase in prepaid expenses and deposits (39,755) (3,189)
Increase in inventories (116,706) -
Increase (decrease) in accounts payable
and accrued liabilities (161,903) 183,441
Increase in IVA tax receivable (1,045,413) -
------------ ------------
(2,651,212) (354,170)
------------ ------------
FINANCING ACTIVITIES
Issuance of common shares 10,066,170 4,966,050
Share issue costs (278,537) (348,155)
Repayment on long-term debt (619,285) -
Advances received 550,000 -
Repayment of advances (550,000) -
------------ ------------
9,168,348 4,617,895
------------ ------------
INVESTING ACTIVITIES
Additions to mineral property interests (7,254,078) (791,152)
Additions to property, plant and equipment (1,280,983) (52,726)
Other assets 37,040 (37,040)
Proceeds from sale of other assets - 47,280
Cash assumed on acquisition of ALB 3,962 -
------------ ------------
(8,494,059) (833,638)
------------ ------------
INCREASE (DECREASE) IN CASH FOR THE YEAR (1,976,923) 3,430,087
CASH - BEGINNING OF YEAR 3,657,676 227,589
------------ ------------
CASH - END OF YEAR 1,680,753 3,657,676
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION - Note 15
The accompanying notes are an integral part of these
consolidated financial statements.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
1. NATURE OF OPERATIONS
Rochester Resources Ltd. (the "Company") is engaged in the acquisition,
exploration and development of its mineral property interests in
Mexico. As at the end of December 2006 the Company has completed
construction of the cyanidation processing plant and related
infrastructure at the Mina Real Property located in Nayarit State,
Mexico. Commissioning of the mill commenced in January 2007. As at May
31, 2007 management of the Company has determined that commercial
production has not yet been achieved.
As at May 31, 2007 the Company had working capital of $768,740. The
Company anticipates that it may require additional funding to conduct a
planned increase in the capacity of the mill facility, to provide
adequate working capital for start-up operations and to retire its
long-term debt. The Company also plans to conduct a significant
exploration and development program.
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP") applicable to a going concern which assumes that the
Company will realize its assets and discharge its liabilities in the
normal course of business. The Company's ability to continue as a going
concern is dependent on the Company's ability to raise equity or other
financing as required and ultimately achieve profitable operations.
These financial statements do not include any adjustments to the amount
and classification of recorded assets and liabilities that night be
necessary should the Company be unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in
accordance with Canadian GAAP and include the accounts of the Company,
its wholly-owned subsidiaries ALB Holdings Ltd. ("ALB") and Mina Real
Mexico S.A. de C.V. ("Mina Real") and its 60% owned subsidiary,
Compania Minera Nayarit S.A. de C.V. Inter-company balances and
transactions are eliminated on consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian
GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements, and the
reported amounts of revenues and expenditures during the period. Actual
results may differ from those estimates. Significant areas requiring
the use of management estimates relate to the determination of asset
retirement obligations, stock-based compensation and amortization. The
financial statements have, in management's opinion, been properly
prepared using careful judgement within the framework of the
significant accounting policies summarized in this note.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of cash and money market instruments
with terms to maturity not exceeding 90 days at date of acquisition.
The Company is not exposed to significant credit or interest rate risk
although cash and cash equivalents are held in excess of federally
incurred limits with major financial institutions.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORIES
Materials and supplies are valued at the lower of cost or replacement
cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost less accumulated
depreciation. These assets are depreciated using the straight-line
method at the following rates:
Motor vehicles 25%
Office equipment, furniture and fixtures 10%
Plant and equipment 10%
Buildings 5%
Capital works in progress costs are not depreciated until the related
asset is complete, ready for use and utilized in commercial production.
MINERAL PROPERTY INTERESTS
Mineral property interests costs and exploration, development and field
support costs directly relating to mineral property interests are
deferred until the interests to which they relate is placed into
production, sold or abandoned. The deferred costs will be amortized
over the life of the orebody following commencement of commercial
production or written off if the mineral interest is sold or abandoned.
Administration costs and other exploration costs that do not relate to
any specific mineral interest are expensed as incurred.
On a periodic basis, management reviews the carrying values of deferred
mineral interest acquisition and exploration expenditures with a view
to assessing whether there has been any impairment in value. Management
takes into consideration various information including, but not limited
to, results of exploration activities conducted to date, estimated
future metal prices, and reports and opinions of outside geologists,
mine engineers and consultants. When it is determined that a project or
interest will be abandoned or its carrying value has been impaired, a
provision is made for any expected loss on the project or interest.
Although the Company has taken steps to verify title to the mineral
interests, according to the usual industry standards for the stage of
exploration of such mineral interests, these procedures do not
guarantee the Company's title. Such mineral interests may be subject to
prior agreements or transfers and title may be affected by undetected
defects.
From time to time, the Company acquires or disposes of mineral
interests pursuant to the terms of option agreements. Options are
exercisable entirely at the discretion of the optionee and,
accordingly, are recorded as mineral interest costs or recoveries when
the payments are made or received.
ASSET RETIREMENT OBLIGATIONS
Future obligations to retire an asset, including dismantling,
remediation and ongoing treatment and monitoring of the site, are
recognized and recorded as a liability at fair value as at the time in
which they are incurred or the event occurs giving rise to such an
obligation. The liability is increased (accreted) over time through
periodic charges to earnings. The corresponding asset retirement cost
is capitalized as part of the asset's carrying value, and is amortized
over the asset's estimated useful life. The amount of the liability
will be subject to re-measurement at each reporting period.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Where possible, the Company has estimated asset retirement obligations
based on current best practice. These estimates are subject to change
as a result of changes in regulations, the extent of environmental
remediation required, the means of reclamation, or cost estimates.
Changes in estimates are accounted for prospectively from the period
the estimate is revised.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are assessed for impairment when events and
circumstances warrant. The carrying value of a long-lived asset is
impaired when the carrying amount exceeds the estimated undiscounted
net cash flow from use and fair value. In that event, the amount by
which the carrying value of an impaired long-lived asset exceeds its
fair value is charged to earnings.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for at fair value as determined
by the Black-Scholes option pricing model using amounts that are
believed to approximate the volatility of the trading price of the
Company's stock, the expected lives of awards of stock-based
compensation, the fair value of the Company's stock and the risk-free
interest rate. The estimated fair value of awards of stock-based
compensation are charged to expense as awards vest, with offsetting
amounts recognized as contributed surplus. If and when the stock
options are exercised the applicable amounts of contributed surplus are
transferred to share capital.
TRANSLATION OF FOREIGN CURRENCIES
As the Company's foreign subsidiaries have been dependent on funding
from their parent, the operations are considered to be integrated. As a
result, the temporal method of translating the accounts of the foreign
subsidiaries have been adopted. Under this method, the Company
translates monetary items at the rate of exchange in effect at the
balance sheet date. Non-monetary items are translated at average rates
in effect during the period in which they were earned or incurred.
Revenues and expenses are translated at average rates in effect during
the period except for depreciation and amortization which are
translated at historical rates. Gains and losses resulting from the
fluctuation of foreign exchange rates have been included in the
determination of income.
INCOME TAXES
Income tax liabilities and assets are recognized for the estimated
income tax consequences attributable to differences between the amounts
reported in the consolidated financial statements and their respective
tax bases, using substantially enacted income tax rates. The effect of
a change in income tax rates on future income tax liabilities and
assets is recognized in income in the period that the change occurs.
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 only if it is more
likely than not that they can be realized.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
LOSS PER SHARE
The loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the year. The
diluted loss per share reflects the potential dilution of common share
equivalents, such as outstanding stock options and warrants, in the
weighted average number of common shares outstanding during the year,
if dilutive. For these purposes the treasury stock method is used for
the assumed proceeds upon the exercise of stock options and warrants
that are used to purchase common shares at the average market price
during the year. During fiscal 2007 and 2006 all of the outstanding
options and warrants were anti-dilutive.
3. ACQUISITION
On December 1, 2006 (the "Effective Date") the Company completed the
acquisition of 100% of the issued and outstanding capital of ALB in
exchange for the issuance of 10,500,000 common shares of the Company,
at a fair value of $10,500,000. ALB's sole asset is its 49% equity
interest in the Mina Real Property and the only liability of ALB is an
underlying obligation of US $1,925,000 (see Note 8) and a 1% net
smelter return royalty on the Mina Real Property. In addition, as a
result of differences in the book value and tax value of the mineral
property interest acquired, the Company has recorded a future income
tax liability of $4,300,000 with a corresponding amount capitalized to
mineral property interests.
The acquisition of ALB was accounted for by the purchase method as
summarized below and the results of operations were recorded from the
Effective Date. The assets and liabilities of ALB have been recorded at
their fair values, as follows:
$
Cash 3,962
Amounts receivable 423
Mineral property interests 16,963,276
Equipment 29,727
Long-term debt assumed (2,197,388)
Future income tax liabilities (4,300,000)
------------
Net assets acquired 10,500,000
============
4. AMOUNTS RECEIVABLE
2007 2006
$ $
Production receivable 190,812 -
Other receivables 79,185 80,022
------------ ------------
269,997 80,022
============ ============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
5. MINERAL PROPERTY INTERESTS
2007 2006
$ $
Exploration costs 459,819 101,108
Development and pre-production costs 7,287,980 540,960
Acquisition and other 18,492,693 486,584
------------ ------------
26,240,492 1,128,652
============ ============
(a) Mina Real Property
In January 2006 the Company entered into an option agreement
with ALB to acquire up to a 51% interest in the Mina Real
Property located in Tepic, Mexico. The Mina Real Property
comprises of four concessions covering approximately 3,377
hectares. Under the agreement the Company made an option
payment of US $110,000 and issued 250,000 common shares, at a
fair value of $337,500. The Company could earn its interests,
as follows:
i) an initial 20% interest on funding the initial US
$750,000;
ii) a further 20% interest on funding a further US
$750,000; and
iii)a further 11% interest on payment of US $900,000, at
the minimum rate of US $75,000 per month, commencing
July 1, 2006, with each payment vesting at 0.9166%
interest.
On October 20, 2006 the Company and ALB completed negotiations
and ALB agreed to waive the requirement for any further
payments and the Company was deemed to have fully earned its
51% interest in the Mina Real Property.
On December 1, 2006 the Company acquired the remaining 49%
interest in the Mina Real Property, as described in Note 3.
The Company has also staked an additional 3,981 hectares
adjacent to the Mina Real Property.
Commissioning of the mill began in January 2007. As at May 31,
2007 commercial production had not yet been achieved. During
fiscal 2007, the Company had recorded revenue totalling
$890,487 which has been credited against pre-production costs.
(b) Santa Fe Property
On March 12, 2007 the Company entered into an option agreement
to acquire a 70% interest in the Santa Fe Property located in
Tepic, Mexico. Under the terms of the agreement, the Company
has agreed to implement a program of exploration to determine
if the Santa Fe Property can be economically exploited. In
addition, if the exploration work is successful, the Company
has agreed to provide the necessary capital to construct a
processing plant capable of processing a minimum of 200 tonnes
per day. The Company will pay a monthly fee of US $10,000
while it is conducting exploration and development on the
Santa Fe Property.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
6. PROPERTY, PLANT AND EQUIPMENT
2007 2006
---------------------------------------------- ------------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
$ $ $ $
Motor vehicles 69,907 6,928 62,979 52,921
Office equipment 16,060 402 15,658 2,420
Mill and mine equipment 883,184 22,079 861,105 -
Buildings 118,495 2,962 115,533 -
Land 309,348 - 309,348 -
------------ ------------ ------------ ------------
1,396,994 32,371 1,364,623 55,341
============ ============ ============ ============
7. LONG-TERM DEBT
2007 2006
$ $
Amount due to Huajicari (US $1,475,000) 1,578,103 -
Less: current portion (US $900,000) (962,910) -
------------ ------------
615,193 -
============ ============
The amount due to Compania Minera Huajicari ("Huajicari") is unsecured
and as at May 31, 2007 carries interest at a rate of 10% per annum,
with repayment on a monthly basis of US $75,000 plus accrued interest.
Since the completion of the purchase of ALB, as described in Note 3,
the Company has repaid $619,285 (US $450,000) principal and interest of
$175,902 (US $153,542). As at May 31, 2007 interest of $12,038 remained
outstanding and has been included in accounts payable and accrued
liabilities.
The Company is obligated to make the following principal payments in
each of the next two fiscal years:
$
2008 962,910
2009 615,193
------------
1,578,103
============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
8. SHARE CAPITAL
Authorized: Unlimited common shares without par value
Issued: 2007 2006
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
$ $
Balance, beginning of year 11,237,735 75,890,208 2,230,735 70,970,313
------------ ------------ ------------ ------------
Issued during the year
For cash
Private placements 4,600,456 6,575,524 6,000,000 3,220,000
Exercise of warrants 2,864,247 3,188,286 2,557,000 1,671,050
Exercise of options 463,000 302,360 - -
Exercise of agent's option - - 150,000 75,000
Reallocation from contributed surplus
relating to the exercise of options - 226,662 - -
Reallocation from contributed surplus
relating to the exercise of agent's
option and related warrants - 32,965 - 112,500
For corporate finance fees - - 50,000 30,500
For mineral interests - - 250,000 337,500
For acquisition of ALB (Note 3) 10,500,000 10,500,000 - -
------------ ------------ ------------ ------------
18,427,703 20,825,797 9,007,000 5,446,550
Less: share issue costs - (278,537) - (526,655)
------------ ------------ ------------ ------------
18,427,703 20,547,260 9,007,000 4,919,895
------------ ------------ ------------ ------------
Balance, end of year 29,665,438 96,437,468 11,237,735 75,890,208
============ ============ ============ ============
(a) During fiscal 2007 the Company completed a number of private
placements, as follows:
(i) 2,000,000 units at a price of $0.90 per unit for
gross proceeds of $1,800,000. Each unit comprised one
common share and one share purchase warrant. Each
warrant entitles the holder to purchase one
additional common share at an exercise price of $1.15
per share on or before July 28, 2007 and $1.30 per
share on or before July 28, 2008, subject to
acceleration in certain circumstances. The Company
incurred $18,623 of share issue costs associated with
the private placement;
(ii) 700,456 units at a price of $1.15 per unit for gross
proceeds of $805,524. Each unit comprised one common
share and one share purchase warrant. Each warrant
entitles the holder to purchase one additional common
share at an exercise price of $1.40 per share on or
before December 11, 2008. After June 30, 2007 the
warrants are subject to a forced conversion provision
once the Company's common shares trade in excess of
$2.30 per share for 45 consecutive trading days. The
Company incurred $45,213 of of share issue costs
associated with the private placement;
(iii) 1,200,000 units at a price of $1.85 per unit for
gross proceeds of $2,220,000. Each unit comprised one
common share and one-half share purchase warrant.
Each full warrant entitles the holder to purchase an
additional common share at a price of $2.25 per share
for a period of one year. The Company paid a
commission of $155,400, administrative fee of $10,000
and share issue costs of $39,526; and
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
8. SHARE CAPITAL (continued)
(iv) 700,000 units at a price of $2.50 per unit for gross
proceeds of $1,750,000. Each unit comprised one
common share and one share purchase warrant. Each
warrant entitles the holder to purchase one
additional common share at an exercise price of $2.75
per share on or before November 17, 2008. The Company
incurred $9,775 of share issue costs associated with
the private placement.
(b) During fiscal 2006 the Company completed a number of private
placements, as follows:
i) 5,000,000 units at $0.50 per unit for gross proceeds
of $2,500,000. Each unit comprised one common share
and one half share purchase warrant. One full warrant
was exercisable into one common share at $0.65 per
common share on or before January 16, 2008, subject
to a forced conversion provision. The Company paid
$22,000 as finders' fees on the non-brokered portion
of the private placement. On the brokered portion of
the private placement, the Company paid a commission
of $150,000 and issued 25,000 common shares, at a
fair value of $12,500, for a corporate finance fee.
The Company also granted an option to the agent
entitling it to acquire 150,000 units at a price of
$0.50 per unit, for a period of two years. The
agent's option was exercised during the 2006 fiscal
year. The units issued to the agent had the same
terms as the units issued under the private
placements. In addition, the Company incurred $71,087
of costs relating to the private placement. Certain
directors and officers of the Company have purchased
270,000 units of the private placement.
The fair value of the agent's option and related
warrants have been estimated using the Black-Scholes
option pricing model. The assumptions used were:
dividend yield - 0%; expected volatility - 136%; a
risk-free interest rate of 3.71%; and an expected
life of twelve months. The value assigned to the
agent's option and related warrants was $112,500.
During fiscal 2006 the Company issued a total of
2,545,000 common shares for proceeds of $1,654,250,
as a result of the exercise of warrants under the
forced conversion provision. The remaining warrants
for 30,000 common shares expired without exercise.
ii) 1,000,000 units at $0.72 per unit for gross proceeds
of $720,000. Each unit comprised one common share and
one share purchase warrant. Each warrant is
exercisable into one common share at $0.80 per common
share on or before May 3, 2008. The Company paid a
commission of $72,000, issued 25,000 common shares,
at a fair value of $18,000, for a corporate finance
fee and granted 100,000 agent's warrants exercisable
on the same basis as the warrants issued under the
private placement. The Company also incurred $33,068
of share issue costs associated with the private
placement.
The fair value of the agent's warrants have been
estimated using the Black-Scholes option pricing
model. The assumptions used were: dividend yield -
0%; expected volatility - 137%; a risk-free interest
rate of 4.12%; and an expected life of twelve months.
The value assigned to the agent's warrants was
$66,000.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
8. SHARE CAPITAL (continued)
(c) A summary of the number of common shares reserved pursuant to
the Company's outstanding warrants at May 31, 2007 and 2006
and the changes for the years ending on those dates is as
follows:
2007 2006
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
$ $
Balance, beginning of period 1,282,000 0.90 688,500 1.78
Issued 4,000,455 1.64 3,675,000 0.69
Exercised (2,864,247) 1.11 (2,557,000) 0.65
Expired (54,750) 2.00 (524,500) 1.82
------------ ------------
Balance, end of period 2,363,458 1.90 1,282,000 0.90
============ ============
The following table summarizes information about the number of
common shares reserved pursuant to warrants outstanding at May
31, 2007:
EXERCISE
NUMBER PRICE EXPIRY DATE
$
410,359 0.80 May 3, 2008
63,100 1.15/1.30 July 28, 2007 / 2008
590,000 1.40 December 11, 2008
74,999 2.25 February 2, 2008
525,000 2.25 February 12, 2008
700,000 2.75 November 17, 2008
-----------
2,363,458
===========
9. STOCK OPTIONS AND STOCK-BASED COMPENSATION
The Company has established a rolling stock option plan (the "Plan"),
in which the maximum number of common shares which can be reserved for
issuance under the Plan is 10% of the issued and outstanding shares of
the Company. The exercise price of the options is set at the Company's
closing share price on the day before the grant date, less allowable
discounts in accordance with the policies of the TSX Venture Exchange.
The options have a maximum term of five years.
During fiscal 2007 the Company granted 2,425,000 (2006 - 720,000) stock
options to the Company's directors, employees and consultants and
recorded compensation expense of $2,542,500 (2006 - $256,159).
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
9. STOCK OPTIONS AND STOCK-BASED COMPENSATION (continued)
The fair value of stock options granted to directors, employees and
consultants is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for the grants
made during fiscal 2007 and 2006:
2007 2006
Risk-free interest rate 3.92% - 4.38% 3.63% - 3.86%
Estimated volatility 103% - 116% 125% - 136%
Expected life 3 years - 5 years 9 months - 18 months
Expected dividend yield 0% 0%
The weighted average fair value of stock options granted during fiscal
2007 to the Company's directors, employees and consultants was $1.05
(2006 - $0.36) per share .
Option-pricing models require the use of estimates and assumptions
including the expected volatility. Changes in the underlying
assumptions can materially affect the fair value estimates and,
therefore, existing models do not necessarily provide reliable measure
of the fair value of the Company's stock options.
A summary of the Company's outstanding stock options at May 31, 2007
and 2006 and the changes for the years ending on those dates is as
follows:
2007 2006
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE
$ $
Balance, beginning of year 720,000 0.62 217,500 1.30
Granted 2,425,000 1.64 720,000 0.62
Exercised (463,000) 0.65 - -
Cancelled / Expired (100,000) 0.80 (217,500) 1.30
------------ ------------
Balance, end of year 2,582,000 1.57 720,000 0.62
============ ============
The following table summarizes information about the stock options
outstanding and exercisable at May 31, 2007:
NUMBER NUMBER EXERCISE
OUTSTANDING EXERCISABLE PRICE EXPIRY DATE
$
27,500 27,500 0.50 November 10, 2008
234,500 234,500 0.62 January 17, 2009
150,000 75,000 1.40 November 24, 2009
395,000 395,000 0.90 September 5, 2011
1,625,000 1,625,000 1.85 January 8, 2010
150,000 - 2.15 February 14, 2010
------------ ------------
2,582,000 2,357,000
============ ============
See also Note 17.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
10. CONTRIBUTED SURPLUS
The Company's contributed surplus as May 31, 2007 and 2006 is comprised
of the following:
2007 2006
$ $
Balance, beginning of year 608,284 286,125
Stock-based compensation on stock
options (Note 9) 2,542,500 256,159
Stock options exercised (226,662) -
Stock-based compensation on agent's
option and warrants (Note 8(b)) - 178,500
Agent's option and warrants exercised (32,965) (112,500)
------------ ------------
Balance, end of year 2,891,157 608,284
============ ============
11. RELATED PARTY TRANSACTIONS
(a) During fiscal 2007 and 2006 the Company was charged for
various services provided by companies controlled by current
and former directors and officers of the Company, as follows:
2007 2006
$ $
Accounting and administration - 30,990
Management fees 58,500 78,887
Professional fees 78,466 60,917
------------ ------------
136,966 170,794
============ ============
These fees have been either expensed to operations or
capitalized to mineral property interest based on the nature
of the expenditures. As at May 31, 2007, accounts payable and
accrued liabilities include $26,037 (2006 - $17,210) due to
these related parties. These transactions were measured at the
exchanged amount which was the amount of consideration
established and agreed to by the related parties.
(b) Other related parties are disclosed elsewhere in these
consolidated financial statements.
12. INCOME TAXES
Future income tax assets and liabilities of the Company as at May 31,
2007 and 2006 are as follows:
2007 2006
$ $
Future income tax assets
Losses carried forward 2,401,600 2,492,600
Share issue costs 151,100 101,800
------------ ------------
2,552,700 2,594,400
Valuation allowance (2,552,700) (2,594,400)
------------ ------------
Net future income tax asset - -
============ ============
Future income tax liabilities
Mineral properties 4,300,000 -
============ ============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
12. INCOME TAXES (continued)
The recovery of income taxes shown in the consolidated statements of
operations and deficit differs from the amounts obtained by applying
statutory rates to the loss before provision for income taxes due to
the following:
2007 2006
$ $
Income tax rate reconciliation
Combined federal and provincial
income tax rate 34.12% 34.12%
============ ============
Expected income tax recovery (1,253,600) (252,700)
Non-deductible stock-based compensation 867,600 87,400
Foreign income tax rate differences (4,100) -
Other 17,700 (4,000)
Unrecognized benefit of income tax losses 372,400 169,300
------------ ------------
Actual income tax recovery - -
============ ============
As at May 31, 2007 the Company has accumulated non-capital losses for
income tax purposes of approximately $5.7 million for Canadian income
tax purposes to offset against future income, expiring from 2008 to
2027. The Company also has accumulated non-capital losses of
approximately 18.0 million pesos for Mexican tax purposes.
Future income tax benefits which may arise as a result of these losses
have not been recognized in these financial statements as their
realization is unlikely.
13. SEGMENTED INFORMATION
The Company operates in one industry segment, the acquisition,
exploration and development of mineral interests. The Company's mineral
operations are located in Mexico and its corporate assets are located
in Canada.
2007
----------------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES LOSS
$ $ $
Mineral operations
(Mexico) 29,217,261 - (113,548)
Corporate (Canada) 1,553,303 46,622 (3,560,513)
------------ ------------ ------------
30,770,564 46,622 (3,674,061)
============ ============ ============
2006
----------------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES LOSS
$ $ $
Mineral operations
(Mexico) 1,337,075 - (12,091)
Corporate (Canada) 3,634,481 36,566 (729,164)
------------ ------------ ------------
4,971,556 36,566 (741,255)
============ ============ ============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments at May 31, 2007 and 2006 were
estimated based on relevant market information and the nature and terms
of financial instruments. Management is not aware of any factors which
would significantly affect the estimated fair market amounts, however,
such amounts have not been comprehensively revalued for purposes of
these financial statements. Disclosure subsequent to the balance sheet
dates and estimates of fair value at dates subsequent to May 31, 2007
and 2006 may differ significantly from that presented.
Fair value approximates the amounts reflected in the financial
statements for cash, amounts receivable and accounts payable and
accrued liabilities due to their relative short periods to maturity. In
addition, the fair value of long-term debt is approximated by their
carrying amount as the debt bears a fair market rate of interest.
The Company may be subject to currency risk due to the fluctuations of
exchange rates between the Canadian dollar and other foreign
currencies. However, the Company is not subject to significant interest
and credit risks arising from these instruments.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash activities were conducted by the Company during fiscal 2007
and 2006 as follows:
2007 2006
$ $
Financing activities
Issuance of common shares for acquisition of ALB 10,500,000 -
Long-term debt 2,197,388 -
Issuance of common shares non-cash consideration 259,627 480,500
Contributed surplus (259,627) 66,000
Share issue costs - (178,500)
------------ ------------
12,697,388 368,000
============ ============
Investing activities
Additions to equipment (29,727) -
Additions to mineral property interests (17,862,147) (337,500)
------------ ------------
(17,891,874) (337,500)
============ ============
Operating activities
Increase in future tax liabilities 4,300,000 -
Increase in asset retirement obligations 570,682 -
Increase in accounts payable and accrued liabilities 323,804 -
Corporate finance fee - (30,500)
------------ ------------
5,194,486 (30,500)
============ ============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2007 AND 2006
15. SUPPLEMENTAL CASH FLOW INFORMATION (continued)
Other supplemental cash flow information:
2007 2006
$ $
Interest paid in cash 180,505 -
============ ============
Income taxes paid in cash - -
============ ============
16. ASSET RETIREMENT OBLIGATION
2007 2006
$ $
Balance, beginning of year - -
Initial estimated liability 570,682 -
Accretion 20,212 -
------------ ------------
Balance, end of year 590,894 -
============ ============
The total undiscounted amount of estimated cash flows required to
settle the Company's estimated obligation is $750,000 which has been
discounted using a credit adjusted risk free rate of 8.5% and inflation
rate of 4%. The reclamation obligation relates to the Mina Real
Property. The present value of the reclamation liability may be subject
to change based on management's current estimates, changes in
remediation technology or changes to the applicable laws and
regulations. Such changes will be recorded in the accounts of the
Company as they occur.
17. SUBSEQUENT EVENTS
Subsequent to May 31, 2007 the Company granted stock options to
directors and employees of the Company to purchase 100,000 common
shares at a price of $1.65 per share on or before June 8, 2010 and
424,000 common shares at a price of $1.65 per share on or before June
12, 2010.
SCHEDULE I
ROCHESTER RESOURCES LTD.
CONSOLIDATED SCHEDULE OF MINERAL PROPERTY INTERESTS
FOR THE YEARS ENDED MAY 31
2007 2006
---------------------------------------------- ------------
MINA REAL SANTA FE TOTAL TOTAL
$ $ $ $
BALANCE - BEGINNING OF YEAR 1,128,652 - 1,128,652 -
------------ ------------ ------------ ------------
COSTS INCURRED DURING THE YEAR
EXPLORATION COSTS
Accommodation 29,229 29,229 -
Assays 23,293 - 23,293 -
Amortization 29,515 - 29,515 -
Camp costs 26,492 - 26,492 27,642
Contractors 16,365 - 16,365 -
Equipment rental 16,143 - 16,143 7,416
Food 3,442 - 3,442 -
Fuel and lubricants 9,619 - 9,619 2,238
Geologists and related 79,892 - 79,892 -
Mine and mill camp 77,761 - 77,761 -
Miscellaneous 18,686 - 18,686 10,092
Surveying 7,328 - 7,328 -
Supplies 17,522 - 17,522 52,283
Travel 3,424 - 3,424 1,437
------------ ------------ ------------ ------------
358,711 - 358,711 101,108
------------ ------------ ------------ ------------
DEVELOPMENT AND PRE-
PRODUCTION COSTS
Mine development 2,043,913 - 2,043,913 -
Pre-production costs 5,593,594 - 5,593,594 540,960
------------ ------------ ------------ ------------
7,637,507 - 7,637,507 540,960
Less: net revenues received
prior to commercial production (890,487) - (890,487) -
------------ ------------ ------------ ------------
6,747,020 - 6,747,020 540,960
------------ ------------ ------------ ------------
ACQUISITION COSTS AND OTHER
Option payments and other 2,600,915 34,186 2,635,101 149,084
Issuance of common shares 10,500,000 - 10,500,000 337,500
Future income tax adjustment 4,300,000 - 4,300,000 -
Asset retirement obligation 571,008 - 571,008 -
------------ ------------ ------------ ------------
17,971,923 34,186 18,006,109 486,584
------------ ------------ ------------ ------------
25,077,654 34,186 25,111,840 1,128,652
------------ ------------ ------------ ------------
BALANCE - END OF YEAR 26,206,306 34,186 26,240,492 1,128,652
============ ============ ============ ============
ROCHESTER
RESOURCES LTD.
Management's Discussion and Analysis For the
Fiscal Year Ended May 31, 2007
www.rochesterresourcesltd.com
RCT (TSX Venture Exchange)
ROCHESTER RESOURCES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE FISCAL YEAR ENDED MAY 31, 2007
The following Management's Discussion and Analysis ("MD&A") of Rochester
Resources Ltd. ("Rochester" or the "Company") should be read in conjunction with
the Company's audited consolidated financial statements and accompanying notes
for the fiscal year ended May 31, 2007, which are available along with further
information on the Company including any news releases and historical reports
referred to in this MD&A on the SEDAR website at www.sedar.com. Those financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP"). Except as otherwise disclosed, all
dollar figures included therein and in the following management discussion and
analysis ("MD&A") are quoted in Canadian dollars. Additional information
relevant to the Company's activities, can be found on SEDAR at www.sedar.com .
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This MD&A contains certain forward looking statements that involve risks and
uncertainties such as statements of the Company's plans, objectives, strategies,
expectations, and intentions. The words "may", "would", "could", "will",
"intend", "plan", "believe", "estimate", "expect" and similar expressions, as
they relate to the Company, or its management, are intended to identify such
forward looking statements. Many factors could cause the Company's actual
results, performance or achievements to be materially different from any future
results, performance or achievements that may be expressed or implied by such
forward looking statements, including those factors discussed below and in
filings made with the Canadian securities regulatory authorities. Should one or
more of these risk factors or uncertainties materialize, or should assumptions
underlying the forward looking statements prove incorrect, actual results may
vary materially from those described herein as intended, planned, anticipated,
believed, estimated or expected. The Company does not intend, and does not
assume any obligation to update these forward looking statements.
COMPANY OVERVIEW
The Company is a junior gold/silver producer actively engaged in the exploration
and development of its Mina Real and Santa Fe Properties, comprising 11,181
hectares of gold/silver mineral concessions located in the State of Nayarit,
Mexico. Nayarit is located in the Sierra Madre Occidental range, the largest
epithermal precious metal region in the world, which hosts the majority of
Mexico's gold and silver deposits. The Company substantially completed the
construction of a cyanidation processing plant at the end of December 2006.
Initial milling operations commenced in January 2007 with the commissioning
process being completed by May 31, 2007.
The Company is a reporting issuer in British Columbia, Alberta and Saskatchewan.
The Company trades on the TSX Venture Exchange ("TSXV") under the symbol "RCT",
the Frankfurt Stock Exchange Open Market under the trading Symbol "R5I" and on
the Over the Counter Bulletin ("OTCBB") under the symbol "RCTFF". The Company is
also registered with the U.S. Securities and Exchange Commission ("SEC") as a
foreign private issuer under the Securities Act of 1934.
CHANGES TO THE BOARD OF DIRECTORS AND OFFICERS OF THE COMPANY
On January 9, 2007, Dr. Alfredo Parra was appointed as President and CEO of the
Company, replacing Mr. Douglas Good, who moved to Chairman of the Board. On
January 19, 2007, the Company also appointed Messrs. Joseph M. Keane, of Tucson
Arizona, and Lindsay R. Bottomer, of North Vancouver BC, to the board of
directors. They replaced Messrs. Carter and Lee who submitted their resignations
to take effect concurrent with these new appointments. On June 8, 2007, Mr. Nick
DeMare, was appointed to the Board and replaced Mr. Good as Chairman.
On August 10, 2007 the Company announced that Mr. Eduardo Luna, Chairman of
Silver Wheaton Corp. and recently retired President of Goldcorp Inc's Mexican
mining operations, joined the board of Rochester. Mr. Luna replaced Mr. Gil
Leathley who moved to the Mining Advisory Board.
- 1 -
PROPERTY UPDATE
OVERVIEW
Effective December 1, 2006, the balance of the 49% interest in the Mina Real
Property was acquired by the Company though the issuance of 10,500,000 common
shares in exchange for all of the outstanding shares of ALB. The sole asset of
ALB is its 49% equity interest in Mina Real Mexico SA de CV ("Mina Real Mexico")
and the only liability of ALB is an underlying obligation which, as of May 31,
2007, stands at US $1,475,000 to an ex-partner and a 1% net smelter royalty
obligation on its interest in the Mina Real Project. On January 30, 2007, the
Company added to its land position by staking an additional 3,981 hectares
adjacent to the Mina Real property. The Company now holds a 100% interest in the
Mina Real gold/silver property comprising 7,358 hectares of exploration and
mining concessions located east of the capital city of Tepic, in the state of
Nayarit, Mexico.
On March 12, 2007, the Company entered into an option agreement to acquire a 70%
interest in the Santa Fe gold-silver property located immediately east of its
Mina Real Property in the State of Nayarit, Mexico. The Santa Fe Property covers
approximately 3,823 hectares, and previous work has identified ten zones of
epithermal veining and mineralization on the property. This brings the Company's
total land package to 11,181 hectares.
MILL OPERATIONS
Commissioning of the Mina Real mill began in January 2007 and the first gold and
silver precipitate was delivered to the refinery in early February. During the
five month period ended May 31, 2007, 1,082 ounces of gold and 10,991 ounces of
silver were delivered to the refinery resulting in net proceeds of $890,487
being applied against the pre-production costs. Production was interrupted a
number of times during commissioning to implement processing and equipment
changes. During the commissioning process, ongoing monitoring revealed that the
rock beneath the lined tailings dam was more permeable than indicated by
pre-construction testing. As a result, milling operations were suspended in
March 2007 until a cyanide destruction circuit was installed to neutralize the
tailings prior to being deposited in the tailings dam. Tests indicated that this
destruction process was working effectively and the plant recommenced production
during the last week of May 2007.
Since May 31, 2007 the mill has been operating in a satisfactory manner with
some disruptions in production being experienced. June production was
particularly impacted due to down time associated with intermittent power
outages being experienced from our primary supplier of electricity. A second
back-up power generator has been put into operation which now provides the power
capacity to operate when there is disruption in service from the main grid.
Further improvements are being implemented to attain more accurate and
continuous reconciliation of the throughput tonnage, production, and deliveries
to the refinery.
Since May 2007 production has ramped up steadily from average production levels
of 150 tonnes/day to current average levels of about 200 tonnes/day. The current
recovery rate for gold is surpassing 90% and beginning to approach our initial
target of 94%. Recovery rates for silver are close to expected, averaging
between 40% and 60%, depending on the material. A priority capital project for
fiscal 2008 is to implement process plant changes in order to increase silver
recoveries.
MINING OPERATIONS
During the year the Company continued with development mining activities in
order to prepare the initial mining area at Florida for increased production.
During 2006 the Company completed about 2,000 metres of development mining which
produced a stockpile of about 18,000 tonnes of mineralized material at the mine
and mill site in preparation for commencement of milling operations in January
2007. As at May 31, 2007, the stockpile of mineralized material was estimated at
11,669 tonnes.
Mine development activities are continuing at the Florida triple vein structure
with current activities concentrating on ramping down to level 1090 and lower
levels to determine the base of the structure which is open to depth.
A comprehensive sampling of the ramp development from Level 1115 down to Level
1090 was undertaken during the last quarter and assays were received from SGS
Laboratories, an independent ISO 2000 certified laboratory. The independent
assays from 58 ramp channel samples taken over approximately 120 metres of
development within the vein system indicate an average vein width of 1.35 metres
with average grades of 17 grams/tonne of gold and 139 grams/tonne of silver. On
- 2 -
the upper ramp to Level 1115, grades on eleven contiguous channel samples taken
over approximately 20 metres of vein structure averaged 30.8 grams/tonne of gold
and 212 grams/tonne of silver and an average width of 1.33 metres. Six of these
samples ranged between 26.7 and 59.1 grams/tonne of gold. The lower ramp has so
far produced an average grade of 15.1 grams/tonne of gold and 116 grams/tonne of
silver from 19 channel samples taken over approximately 38 metres. Mill head
grades being processed have been lower than expected in part due to higher than
expected dilution in the mining process. During fiscal 2007, 80% of the
production came from development with 20% from stoping, where stoping dilution
control is more difficult. Management is implementing changes in its mining
practices which are expected to reduce the amount of mining dilution in the
future.
GEOLOGY OF PROPERTIES & EXPLORATION ACTIVITIES
Mina Real Property
In January 2007, the Company announced that it had staked an additional 3,981
hectares adjacent to the 3,377 hectares previously comprising the Mina Real
concessions in Nayarit, Mexico. In addition to protecting the continuity of five
vein structures - La Florida, El Puerto 1, El Puerto 2, Tajos Cuates 1 and Tajos
Cuates 2 - as well as three recently discovered veins on the property, there is
potential that this additional ground could add to the Company's resource base
and provide additional mill feed to the recently constructed conventional mill
on the property. The Company also announced that it had located several outcrops
on the properties that indicate the existence of additional veins that were
previously undiscovered. A drilling and exploration program is being developed
to define the potential of the vein structures uncovered to date on both the
existing and recently acquired ground.
The north end of the Florida Veins within the mine workings is defined by a late
dacite intrusive which truncates the veins. On surface further north, a number
of quartz veins oriented parallel to the Florida trend have been identified in
outcrops up to 1.5 kilometres further to the north. Initial exploration for the
projected northern continuation of the Florida Vein system was done by means of
an underground drive across the intrusive on the 1160 Level of the Florida Mine.
This work successfully crossed through 180 metres of the intrusive and emerged
into highly faulted and altered volcanic rocks to the northwest. The next phase
of exploration work will consist of more extensive surface trenching, sampling
and mapping of the Florida North system combined with a limited drilling program
to identify the exact location of the vein system in Florida North and continued
drift development in the form of a cross-cut approached from the northeast.
The Tajos Cuates vein system is located 1 kilometre southwest of the Florida
Mine site and is a primary target in the near term to outline additional
potential ore sources for the existing milling operation. This vein system is a
robust low sulphidation epithermal vein which has been traced on surface over
1.8 kilometres, and known workings and a historical drill intercept extend over
a vertical horizon of at least 200 metres. The mineralization is silver rich
compared to the Florida Vein system - a 1.70 metre wide sample collected by
Victor Jaramillo P.Geo. from the Chalata Adit assayed 2.7 g/t gold and 1300 g/t
silver. Three drill holes completed in 2006 provided confirmation that the
mineralized vein structure continues to depth and established a base of the
mineralized horizon at about the 900 metre level. Drill hole No. 800-7-04
intersected 2.42 metres (estimated true width 1.5 metres) of mineralization
which assayed 4.9 grams/tonne of gold and 310 grams/tonne of silver at the 915
metre elevation.
Recent work has extended road access to Tajos Cuates, and initial underground
rehabilitation work is underway to allow exploration and bulk sampling of the
vein system in more detail. In addition, surface work has identified two new
mineralized systems in the area, Tomas and El Crudo. Preliminary surface
sampling has returned 2.10 metres grading 3.7 g/t gold and 137 g/t silver from
Tomas, and 0.70 metres grading 4.9 g/t gold and 106 g/t silver from El Crudo.
The veins systems at Tajos Cuates are the primary target for expansion of our
mining operations. Drift development activities are already underway to
supplement more extensive trenching and surface sampling activities.
- 3 -
Santa Fe Property
Initial exploration activities on the recently acquired Santa Fe Property (70%
interest), which adjoins the Florida tenements to the east and northeast, has
concentrated on developing approximately 8 kilometres of new road access to the
central portion of the property, thereby allowing systematic sampling and
development of the multiple vein systems in that area.
The work to date has better defined the three main vein systems, all of which
trend northwesterly and are sub-parallel with some cross veining. From west to
east, these are the Jonas system, the Clavellino system, and the Tajitos system.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
OMITTED GRAPHIC MAY BE VIEWED AT THE COMPANY'S WEBSITE:
www.rochesterresourcesltd.com
[Graphic is a diagram of the Florida Mine showing the location of the Florida
Mine in relation to the Talitos Vein, Clavelino System and Jonas System.]
Of the three, initial indications are that the Clavellino system is the most
extensive, having been traced over a length of more than 3 kilometres. The width
of this structure varies from 1 metre to 40 metres. At the south end, multiple
quartz veins occur over a width of 30 to 40 metres, with some values in the
intervening wallrocks. At the north end (El Picacho), the vein structure is more
discrete, consisting of a 5.4 metre wide zone of silicification. The central 0.5
metres returned values of 3.36 g/t gold and 163 g/t silver .
Two samples taken from old surface workings in the Tepehuaje section of
Clavellino returned a grade of 2 grams/tonne of gold and 235 grams/tonne of
silver over a 1.6 metre average width. A centre section of 0.7 metres produced 5
grams/tonne of gold and 481 grams/tonne of silver.
Sampling along new exposures created by recent road building has exposed the
Jonas system in a number of places. Jonas is a silver-rich system, with one main
and several subsidiary northwest-trending quartz structures. Continuous sampling
by the Company has shown that silver values are not just confined to the main
veins however, and occur in some of the intervening altered volcanic wallrocks.
Many sample results have yet to be received, however sampling to date on the
main level has defined three parallel zones grading 0.27 g/t gold and 162 g/t
silver over 2.40 metres, 0.81 g/t gold and 378 g/t silver over 0.62 metres, and
0.23 g/t gold and 234 g/t silver over 0.83 metres. Individual sample results for
gold range from less than 0.03 g/t to 3.6 g/t and silver from less than 3 g/t to
796 g/t, which includes samples taken from the intervening rock.
The Tajitos system is relatively narrow (1-1.5 metres true width) exposed in a
series of old workings, but well mineralized over more than 300 metres of the
700 metre length identified to date. A sample from the north end of the system
produced 4.68 g/t gold and 1,380 g/t silver over 0.7 metres width.
- 4 -
A significant feature of these systems at the Santa Fe Property is the
identification of gold and silver mineralization over a vertical extent of
almost 700 metres (833 metres above sea level at the El Bagre vein and at the
1522 metre elevation at the north end of the Tajitos system), twice that found
on the Mina Real Property. It is also important to note that these types of
epithermal vein systems vary in width and grade over strike and depth. Grades
obtained from surface outcrops may or may not be depleted from exposure to the
elements with significantly higher grades potentially occurring at depth and
then tapering back to lower grades as the base of the system is approached.
However, the Santa Fe structures appear to be very similar to those encountered
at Mina Real where strong gold and silver grades have been experienced and
reported from mining activities between the 1090 to 1200 metre elevations.
The Santa Fe Property is within a short trucking distance of the Mina Real mill
and has the potential to provide additional mill feed to support a material
increase in capacity at the Mina Real mill or possibly support the development
of a second mill in the area.
SELECTED FINANCIAL DATA
The following selected financial information is derived from the audited annual
consolidated financial statements of the Company prepared in accordance with
Canadian GAAP.
--------------------------------------------
FISCAL YEARS ENDED MAY 31,
--------------------------------------------
2007 2006 2005
$ $ $
------------ ------------ ------------
OPERATIONS:
Revenues Nil Nil Nil
Expenses(1) (3,346,702) (742,150) (391,177)
Other items (327,359) 895 (717,810)
Income (loss) (3,674,061) (741,255) (1,108,987)
Basic and diluted income (loss)
per share (0.19) (0.17) (0.56)
Dividends per share Nil Nil Nil
BALANCE SHEET:
Working capital 768,740 3,536,076 245,246
Total assets 30,770,564 4,971,556 287,316
Total long-term liabilities 5,506,087 Nil Nil
------------ ------------ ------------
(1) Includes non-cash stock-based compensation of $2,542,000 (2006 - $256,259;
2005 - $138,725), the calculation of which is based on using the
Black-Scholes option pricing model using estimates and assumptions. Changes
in the underlying assumptions can materially affect the fair value
estimates and, therefore, existing models do not necessarily provide
reliable measure of the fair value of the Company's stock options.
The following selected financial information is derived from the unaudited
interim consolidated financial statements of the Company prepared in accordance
with Canadian GAAP.
------------------------------------------------- -------------------------------------------------
FISCAL 2007 FISCAL 2006
------------------------------------------------- -------------------------------------------------
THREE MONTH PERIODS ENDING MAY 31/07 FEB 28/07 NOV 30/06 AUG 31/06 MAY 31/06 FEB 28/06 NOV 30/05 AUG 31/05
$ $ $ $ $ $ $ $
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
OPERATIONS:
Revenues Nil Nil Nil Nil Nil Nil Nil Nil
Expenses (545,036) (2,039,218) (640,911) (121,537) (237,338) (343,844) (118,492) (42,476)
Other items (45,534) (263,722) (3,134) (14,969) (22,415) 230 (17,003) 40,083
Net loss (590,570) (2,302,940) (644,045) (136,506) (259,753) (343,614) (135,495) (2,393)
Basic and diluted loss per
share (0.04) (0.09) (0.05) (0.01) (0.06) (0.07) (0.06) (0.00)
Dividends per share Nil Nil Nil Nil Nil Nil Nil Nil
BALANCE SHEET:
Working capital 768,740 1,227,597 1,898,776 3,595,277 3,536,076 2,098,783 192,592 249,510
Total assets 30,770,564 23,019,599 7,765,911 6,531,028 4,971,556 2,338,844 214,439 274,800
Total long-term liabilities 5,506,087 936,000 Nil Nil Nil Nil Nil Nil
------------------------------------------------- -------------------------------------------------
- 5 -
RESULTS OF OPERATIONS
Three Months Ended May 31, 2007 Compared to Three Months Ended May 31, 2006
During the three months ended May 31, 2007 (the "2007 Quarter") the Company
reported a net loss of $590,570, compared to a net loss of $259,753 for the
three months ended May 31, 2006 (the "2006 Quarter"), an increase in loss of
$330,817. The primary factors for the increase were the recognition of non-cash
stock-based compensation of $234,761 and an increase in general exploration of
$74,888.
Year Ended May 31, 2007 Compared to Year Ended May 31, 2006
During fiscal 2007, the Company recorded a loss of $3,674,061 ($0.19 per share)
compared to a loss of $741,255 ($0.17 per share) for fiscal 2006, an increase in
loss of $2,932,806. The increase in loss in fiscal 2007 compared to fiscal 2006
is primarily attributed to non-cash stock-based compensation of $2,542,500 in
fiscal 2007 compared to $256,159 in fiscal 2006 and an overall increase in
general and administrative expenses.
The Company was in the pre-production stage throughout fiscal 2007. Accordingly
net revenues totalling $890,487 were credited against pre-production costs.
General and administrative expenses of $3,346,702 were reported in fiscal 2007,
an increase of $2,604,552, from $742,150 in fiscal 2006. Specific expenses of
note, incurred by the Company during fiscal 2007 as compared to fiscal 2006 are
as follows:
- accounting and administrative fees of $75,455 (2006 - $53,415);
- professional and management fees and salaries totalling $168,708
(2006 - $116,804) were paid to current and former senior
executives and officers and related family members;
- corporate development expenses of $137,916 (2006 - $37,360) for
ongoing market awareness and promotional campaign and
participation in investment conferences;
- $33,508 (2006 -$6,497) was paid to Accent Marketing Limited
("Accent") to provide a market awareness campaign and investor
relation activities in Europe;
- $36,000 (2006 - $nil) was paid to Empire Communications Inc.
("Empire") to provide investor relations services;
- $2,542,500 (2006 - $256,159) for non-cash stock-based compensation
on the granting and vesting of stock options; and
- travel expenses of $68,665 (2006 - $24,207) for ongoing mine site
visits to Mexico and participation in investment conferences in
Europe and Canada.
Interest income is generated from cash held with the Company's financial
institution. During fiscal 2007, the Company reported interest and other income
of $46,622 as compared to $36,506 during fiscal 2006. The increase is attributed
to higher levels of cash held during fiscal 2007.
During fiscal 2007 the Company recorded a total of $25,111,840 for mineral
property additions, of which $18,006,109 was attributed to acquisition costs,
$6,747,000 for development and pre-production, net of $890,487 revenues, and
$358,711 for exploration activities primarily on the Mina Real Project. A
detailed breakdown on the expenditures is itemized on Schedule 1 of the
Company's audited consolidated financial statements for the year ended May 31,
2007. Exploration, development and pre-production activities conducted in fiscal
2007 period are described in "Exploration Projects" in this MD&A.
- 6 -
FINANCIAL CONDITION / CAPITAL RESOURCES
The Company has financed all of its capital and exploration expenditures through
the issuance of equity capital. During fiscal 2007, the Company completed
private placements for 4,600,456 units for gross proceeds of $6,575,524 and
issued 3,327,247 common shares for proceeds of $3,490,646 on the exercise of
stock options and warrants. As at May 31, 2007, the Company had working capital
of $768,740 (2006 - $3,536,076). With production and revenue from its Mina Real
Project, the Company anticipates that it will have sufficient cash flow to meet
ongoing operating costs, corporate overheads and current levels of exploration
and development. Further exploration and development activities, however, may
change due to ongoing results and recommendations which may entail significant
funding. As a result, the Company may be required to obtain additional
financing. While it has been successful in the past, there can be no assurance
that the Company will be successful in raising future financing should the need
arise.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as of May
31, 2007.
PAYMENTS DUE BY PERIOD
-------------------------------------------------
LESS THAN 1 TO 2 GREATER THAN
1 YEAR YEARS 2 YEARS TOTAL
$ $ $ $
Contractual Obligations
Long-term debt 962,910 615,193 - 1,578,103
========== ========== ========== ==========
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
PROPOSED TRANSACTIONS
The Company has no proposed transactions.
CRITICAL ACCOUNTING ESTIMATES
A detailed summary of all the Company's significant accounting policies is
included in Note 2 to the May 31, 2007 audited consolidated financial
statements.
CHANGES IN ACCOUNTING POLICIES
The Company has no changes in accounting policies.
TRANSACTIONS WITH RELATED PARTIES
During fiscal 2007 and 2006 the Company was charged for various services
provided by companies controlled by current and former directors and officers of
the Company, as follows:
2007 2006
$ $
Accounting and administration - 30,990
Management fees 58,500 78,887
Professional fees 59,208 60,917
---------- ----------
117,708 170,794
========== ==========
These fees have been either expensed to operations or capitalized to mineral
property interest based on the nature of the expenditures. As at May 31, 2007,
accounts payable and accrued liabilities include $6,779 (2006 - $17,210) due to
these related parties. These transactions were measured at the exchanged amount
which was the amount of consideration established and agreed to by the related
parties.
- 7 -
RISKS AND UNCERTAINTIES
The Company competes with other mining companies, some of which have greater
financial resources and technical facilities, for the acquisition of mineral
concessions, claims and other interests, as well as for the recruitment and
retention of qualified employees.
The Company is in compliance in all material regulations applicable to its
exploration activities. Existing and possible future environmental legislation,
regulations and actions could cause additional expense, capital expenditures,
restrictions and delays in the activities of the Company, the extent of which
cannot be predicted. Before production can commence on any properties, the
Company must obtain regulatory and environmental approvals. There is no
assurance that such approvals can be obtained on a timely basis or at all. The
cost of compliance with changes in governmental regulations has the potential to
reduce the profitability of operations.
The Company's activities are conducted in Mexico. Consequently, the Company is
subject to certain risks, including currency fluctuations and possible political
or economic instability which may result in the impairment or loss of mining
title or other mineral rights, and mineral exploration and mining activities may
be affected in varying degrees by political stability and governmental
regulations relating to the mining industry.
INVESTOR RELATIONS ACTIVITIES
Effective February 28, 2006, the Company entered into an agreement with Accent
to provide market awareness and investor relation activities in Europe. During
fiscal 2007, the Company paid $33,508. The agreement was terminated on November
23, 2006.
Effective November 23, 2006, the Company entered into an agreement with Empire,
to provide investor relations services under which the Company has agreed to pay
a monthly fee of $6,000. In addition, the Company has granted 150,000 stock
options to Empire with an exercise price of $1.40 per share. The options vest on
a quarterly basis over a twelve month period. The agreement may be terminated
with written 30 days notice. During fiscal 2007, the Company paid $36,000 to
Empire.
OUTSTANDING SHARE DATA
The Company's authorized share capital is unlimited common shares without par
value. As at September 26, 2007, there were 29,802,738 issued and outstanding
common shares. In addition there were 2,836,000 stock options outstanding at
exercise prices ranging from $0.50 to $2.15 per share and 2,206,158 warrants
outstanding with exercise prices ranging from $0.80 to $2.75 per share.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance
that material information is gathered and reported to senior management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to permit timely decisions regarding public disclosure.
Management, including the Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer has concluded that the Company's
disclosure controls and procedures, as defined in Multilateral Instrument 52-109
- - Certification of Disclosure in Issuer's Annual and Interim Filings ("52-109"),
are effective to ensure that the information required to be disclosed in reports
that are filed or submitted under Canadian Securities legislation are recorded,
processed, summarized and reported within the time period specified in those
rules. In conducting the evaluation it has become apparent that management
relies upon certain informal procedures and communication, and upon "hands-on"
knowledge of senior management. Management intends to formalize certain of its
procedures. Due to the small staff, however, the Company will continue to rely
on an active Board and management with open lines of communication to maintain
the effectiveness of the Company's disclosure controls and procedures. Lapses in
the disclosure controls and procedures could occur and/or mistakes could happen.
Should such occur, the Company will take whatever steps necessary to minimize
the consequences thereof.
- 8 -
INTERNAL CONTROLS AND PROCEDURES OVER FINANCIAL REPORTING
Management is also responsible for the design of the Company's internal control
over financial reporting in order to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Canadian generally accepted accounting
principles. During the process of management's review and evaluation of the
design of the Company's internal control over financial reporting, it was
determined that certain weaknesses existed in internal controls over financial
reporting. As is indicative of many small companies, the lack of segregation of
duties and effective risk assessment were identified as areas where weaknesses
existed. The existence of these weaknesses is to be compensated for by senior
management monitoring which exists. The Company is taking steps to augment and
improve the design of procedure and controls impacting these areas of weakness
over internal control over financial reporting. It should be noted that a
control system, no matter how well conceived or operated, can only provide
reasonable assurance, not absolute assurance, that the objectives of the control
system are met.
- 9 -
FORM 52-109F1 CERTIFICATION OF ANNUAL FILINGS
I, Alfredo Parra, a President and Chief Executive Officer of Rochester Resources
Ltd., certify that:
1. I have reviewed the annual filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of Rochester Resources Ltd. (the issuer)
for the period ending May 31, 2007;
2. Based on my knowledge, the annual filings do not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated or that is necessary to make a statement not misleading in
light of the circumstances under which it was made, with respect to the
period covered by the annual filings;
3. Based on my knowledge, the annual financial statements together with
the other financial information included in the annual filings fairly
present in all material respects the financial condition, results of
operations and cash flows of the issuer, as of the date and for the
periods presented in the annual filings;
4. The issuer's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal control over financial reporting for the issuer, and we have:
(a) designed such disclosure controls and procedures, or caused
them to be designed under our supervision, to provide
reasonable assurance that material information relating to the
issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which the annual filings are being prepared;
(b) designed such internal control over financial reporting, or
caused it to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with the issuer's GAAP; and
(c) evaluated the effectiveness of the issuer's disclosure
controls and procedures as of the end of the period covered by
the annual filings and have caused the issuer to disclose in
the annual MD&A our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period
covered by the annual filings based on such evaluation; and
5. I have caused the issuer to disclose in the annual MD&A any change in
the issuer's internal control over financial reporting that occurred
during the issuer's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer's
internal control over financial reporting.
Date: September 28, 2007
/s/ Alfredo Parra
- ------------------------------
Alfredo Parra, President & CEO
FORM 52-109F1 CERTIFICATION OF ANNUAL FILINGS
I, Jose Manual Silva, the Chief Financial Officer of Rochester Resources Ltd.,
certify that:
1. I have reviewed the annual filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of Rochester Resources Ltd. (the issuer)
for the period ending May 31, 2007;
2. Based on my knowledge, the annual filings do not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated or that is necessary to make a statement not misleading in
light of the circumstances under which it was made, with respect to the
period covered by the annual filings;
3. Based on my knowledge, the annual financial statements together with
the other financial information included in the annual filings fairly
present in all material respects the financial condition, results of
operations and cash flows of the issuer, as of the date and for the
periods presented in the annual filings;
4. The issuer's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal control over financial reporting for the issuer, and we have:
(a) designed such disclosure controls and procedures, or caused
them to be designed under our supervision, to provide
reasonable assurance that material information relating to the
issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which the annual filings are being prepared;
(b) designed such internal control over financial reporting, or
caused it to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with the issuer's GAAP; and
(c) evaluated the effectiveness of the issuer's disclosure
controls and procedures as of the end of the period covered by
the annual filings and have caused the issuer to disclose in
the annual MD&A our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period
covered by the annual filings based on such evaluation; and
5. I have caused the issuer to disclose in the annual MD&A any change in
the issuer's internal control over financial reporting that occurred
during the issuer's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer's
internal control over financial reporting.
Date: September 28, 2007
/s/ Jose Manuel Silva
- -----------------------
Jose Manuel Silva,
Chief Financial Officer