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, 2008.
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 29, 2008 /s/ Nick DeMare
----------------------------- -------------------------------------
Nick DeMare,
Chairman
ROCHESTER RESOURCES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
MAY 31, 2008 AND 2007
D & H Group LLP
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, 2008 and 2007 and the consolidated statements of loss and
comprehensive loss, 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, 2008 and
2007 and the results of its operations and cash flows for the years then ended
in accordance with Canadian generally accepted accounting principles.
On September 15, 2008 we reported separately to the shareholders of Rochester
Resources Ltd. on consolidated financial statements as at May 31, 2008 and 2007
and for the years ended May 31, 2008, 2007 and 2006 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 15, 2008, except as to Note 18,
which is as of September 24, 2008 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
2008 2007
$ $
ASSETS
CURRENT ASSETS
Cash 948,093 1,680,753
Amounts receivable (Note 4) 1,905,596 269,997
Prepaid expenses and deposits 198,352 52,580
Inventories (Note 5) 873,902 116,706
------------ ------------
3,925,943 2,120,036
IVA TAX RECEIVABLE 579,774 1,045,413
MINERAL PROPERTY INTERESTS (Note 6) 26,204,499 26,240,492
PROPERTY, PLANT AND EQUIPMENT (Note 7) 5,018,199 1,364,623
------------ ------------
35,728,415 30,770,564
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 2,200,022 388,386
Current portion of long-term debt (Note 8) 1,115,457 962,910
------------ ------------
3,315,479 1,351,296
LONG-TERM DEBT (NOTE 8) 693,429 615,193
ASSET RETIREMENT OBLIGATION (NOTE 17) 640,006 590,894
FUTURE INCOME TAX LIABILITIES (NOTE 13) 4,098,760 4,300,000
------------ ------------
8,747,674 6,857,383
------------ ------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9) 30,281,745 96,437,468
CONTRIBUTED SURPLUS (Note 11) 4,207,560 2,891,157
DEFICIT (7,508,564) (75,415,444)
------------ ------------
26,980,741 23,913,181
------------ ------------
35,728,415 30,770,564
============ ============
NATURE OF OPERATIONS AND GOING CONCERN (NOTE 1)
SUBSEQUENT EVENTS (NOTE 18)
APPROVED BY THE BOARD
/s/ ALFREDO PARRA , Director
- ------------------
/s/ JOSE SILVA , Director
- ------------------
The accompanying notes are an integral part of
these consolidated financial statements.
ROCHESTER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED MAY 31
2008 2007
$ $
REVENUE 9,353,785 -
COST OF OPERATIONS 7,963,615 -
DEPLETION AND AMORTIZATION 1,370,051 -
------------ ------------
OPERATING INCOME 20,119 -
------------ ------------
EXPENSES
General and administration 1,838,900 804,202
Accretion of reclamation obligation (Note 17) 49,112 -
Interest expense on long-term debt 112,356 187,940
Stock-based compensation (Note 10) 1,426,615 2,542,500
------------ ------------
3,426,983 3,534,642
------------ ------------
LOSS BEFORE OTHER ITEMS (3,406,864) (3,534,642)
------------ ------------
OTHER ITEMS
Interest and other income 38,329 46,622
Foreign exchange gain (loss) 74,047 (186,041)
------------ ------------
112,376 (139,419)
------------ ------------
LOSS BEFORE INCOME TAXES (3,294,488) (3,674,061)
FUTURE INCOME TAX RECOVERY (Note 13) 201,240 -
------------ ------------
NET LOSS AND COMPREHENSIVE LOSS FOR THE YEAR (3,093,248) (3,674,061)
============ ============
BASIC AND DILUTED LOSS PER SHARE $(0.10) $(0.19)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 31,462,351 19,859,117
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
ROCHESTER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE YEARS ENDED MAY 31
2008 2007
$ $
DEFICIT - BEGINNING OF YEAR (75,415,444) (71,741,383)
ELIMINATION OF DEFICIT (Note 9(a)) 71,000,128 -
------------ ------------
(4,415,316) (71,741,383)
NET LOSS AND COMPREHENSIVE LOSS FOR THE YEAR (3,093,248) (3,674,061)
------------ ------------
DEFICIT - END OF YEAR (7,508,564) (75,415,444)
============ ============
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
2008 2007
$ $
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
Net loss for the year (3,093,248) (3,674,061)
Adjustment for items not involving cash
Accretion 49,112 20,212
Depletion and amortization 1,370,051 1,428
Stock-based compensation 1,426,615 2,542,500
Interest expense 4,153 12,038
Foreign exchange 1,617 -
Future income tax recovery (201,240) -
------------ ------------
(442,940) (1,097,883)
Increase in amounts receivable (695,364) (189,552)
Increase in prepaid expenses and deposits (145,772) (39,755)
Increase in inventories (757,196) (116,706)
Increase in IVA tax receivable (474,596) (1,045,413)
Increase (decrease) in accounts payable
and accrued liabilities 1,936,827 (161,903)
------------ ------------
(579,041) (2,651,212)
------------ ------------
FINANCING ACTIVITIES
Issuance of common shares 4,855,414 10,066,170
Share issue costs (121,221) (278,537)
Payment of long-term debt (1,007,816) (619,285)
Advances received - 550,000
Repayment of advances - (550,000)
------------ ------------
3,726,377 9,168,348
------------ ------------
INVESTING ACTIVITIES
Additions to mineral property interests (1,312,617) (7,254,078)
Additions to property, plant and equipment (2,567,379) (1,280,983)
Other assets - 37,040
Cash assumed on acquisition of ALB - 3,962
------------ ------------
(3,879,996) (8,494,059)
------------ ------------
DECREASE IN CASH FOR THE YEAR (732,660) (1,976,923)
CASH - BEGINNING OF YEAR 1,680,753 3,657,676
------------ ------------
CASH - END OF YEAR 948,093 1,680,753
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION - Note 16
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, 2008 AND 2007
1. NATURE OF OPERATIONS AND GOING CONCERN
Rochester Resources Ltd. (the "Company") is engaged in gold and silver
mining and the exploration and development of its mineral property
interests in Mexico. Construction of the cyanidation processing plant
and related infrastructure at the Mina Real Property was completed at
the end of December 2006 and commissioning of the mill commenced in
January 2007. Effective June 1, 2007 the Mina Real Property was
determined by management to have achieved commercial production.
The amounts shown as mineral property interests represent net costs to
date, less amounts amortized and do not necessarily represent present
or future values. The recoverability of these amounts and any
additional amounts required to place these properties into commercial
production are dependent upon certain factors. These factors include
the existence of ore deposits sufficient for commercial production and
the Company's ability to obtain the required additional financing
necessary to develop its mineral property interests.
During fiscal 2008 the Company incurred a net loss of $3,093,248 and as
at May 31, 2008 the Company had working capital of $610,464. The
Company is continuing in its efforts to generate sufficient cash from
its operations or raise funds to meet its ongoing liabilities as they
fall due. There can be no assurance that the Company will be successful
in its efforts, in which case the Company may be unable to meet its
obligations. Should the Company be unable to realize on its assets and
discharge its liabilities in the normal course of business, the net
realizable value of its assets may be materially less than the amounts
recorded on the balance sheet. These consolidated 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 meet its obligations or continue operations.
Subsequent to May 31, 2008 the Company completed an equity financing of
$1,000,350 and received US $910,000 on account of a US $940,000
convertible debenture financing. See Note 18.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP") and include the accounts of the Company, its
wholly-owned subsidiaries ALB Holdings Ltd. ("ALB"), Mina Real Mexico
S.A. de C.V. ("Mina Real") and Compania Minera Santa Fe S.A. de C.V.
("Compania Minera"). 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 depletion 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.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
INVENTORIES
Finished product and ore in process is valued at the lower of cost and
net realizable value. Cost is determined as the average production cost
of saleable gold and silver. Materials and supplies are valued at the
lower of cost and 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.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of gold and silver at the
time the concentrate is delivered to the independent refiner. Final
sales proceeds are received when the concentrate is smelted and the
precise content of recovered gold and silver is known. The final
settlement amount is included in revenues and in amounts receivable.
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.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
FUTURE INCOME TAXES
Future income tax assets and liabilities 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.
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 2008 and 2007 all of the outstanding
options and warrants were anti-dilutive.
FINANCIAL INSTRUMENTS
Effective June 1, 2007 the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive
Income, Section 3251, Equity, Section 3855, Financial Instruments -
Recognition and Measurement and Section 3861, Financial Instruments -
Disclosure and Presentation and Section 3865, Hedges. These sections
apply to fiscal years beginning on or after October 1, 2006 and provide
standards for recognition, measurement, disclosure and presentation of
financial assets, financial liabilities and non-financial derivatives,
and describe when and how hedge accounting may be applied. Section 1530
provides standards for the reporting and presentation of comprehensive
income, which is defined as the change in equity, from transactions and
other events and circumstances from non-owner sources. Other
comprehensive income refers to items recognized in comprehensive income
but that are excluded from net income calculated in accordance with
generally accepted accounting principles. A statement of comprehensive
income has not been presented as no components of comprehensive income
have been identified and therefore have not affected the current or
comparative period balances on the financial statements. Under these
new standards, all financial instruments are classified into one of the
following five categories: held for trading, held-to-maturity
investments, loans and receivables, available for sale assets or other
financial liabilities. All financial instruments, including
derivatives, are included on the balance sheet and are measured at fair
market value upon inception with the exception of certain related party
transactions. Subsequent measurement and recognition of change in the
fair value of financial instruments depends on their initial
classification. Held-for-trading financial investments are measured at
fair value and all gains and losses are included in operations in the
period in which they arise. Available-for-sale financial instruments
are measured at fair value with revaluation gains and losses included
in other comprehensive income until the asset is removed from the
balance sheet. Loans and receivables, investments held to maturity and
other financial liabilities are measured at amortized cost using the
effective interest method. Gains and losses upon inception,
derecognition, impairment write downs and foreign exchange translation
adjustments are recognized immediately. Transaction costs related to
financings will be expensed in the period incurred.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Upon adoption of this new standard the Company has designated its cash
as held-for-trading, which are measured at fair value. Amounts
receivable are classified as loans and receivables, which are measured
at amortized cost. Accounts payable and accrued liabilities are
classified as other financial liabilities, which are measured at
amortized cost.
COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
with the presentation as at and for the year ended May 31, 2008.
NEW ACCOUNTING PRONOUNCEMENTS
ASSESSING GOING CONCERN
The Accounting Standards Board ("AcSB") amended CICA Handbook Section
1400, to include requirements for management to assess and disclose an
entity's ability to continue as a going concern. This section applies
to interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2008.
FINANCIAL INSTRUMENTS
The AcSB issued CICA Handbook Section 3862, Financial Instruments -
Disclosures, which requires entities to provide disclosures in their
financial statements that enable users to evaluate (a) the significance
of financial instruments for the entity's financial position and
performance; and (b) the nature and extent of risks arising from
financial instruments to which the entity is exposed during the period
and at the balance sheet date, and how the entity manages those risks.
The principles in this section complement the principles for
recognizing, measuring and presenting financial assets and financial
liabilities in Section 3855, Financial Instruments - Recognition and
Measurement, Section 3863, Financial Instruments - Presentation, and
Section 3865, Hedges. This section applies to interim and annual
financial statements relating to fiscal years beginning on or after
October 1, 2007.
The AcSB issued CICA Handbook Section 3863, Financial Instruments -
Presentation, which is to enhance financial statement users'
understanding of the significance of financial instruments to an
entity's financial position, performance and cash flows. This section
establishes standards for presentation of financial instruments and
nonfinancial derivatives. It deals with the classification of financial
instruments, from the perspective of the issuer, between liabilities
and equity, the classification of related interest, dividends, losses
and gains, and the circumstances in which financial assets and
financial liabilities are offset. This section applies to interim and
annual financial statements relating to fiscal years beginning on or
after October 1, 2007.
CAPITAL DISCLOSURES
The AcSB issued CICA Handbook Section 1535, which establishes standards
for disclosing information about an entity's capital and how it is
managed. This section applies to interim and annual financial
statements relating to fiscal years beginning on or after October 1,
2007.
GOODWILL
In February 2008, the AcSB issued CICA Handbook Section 3064, Goodwill
and Intangible Assets, which replaces Section 3062, Goodwill and Other
Intangible Assets and Section 3450, Research and Development Costs.
Section 3064 establishes standards for the recognition, measurement,
presentation and disclosure of
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
goodwill subsequent to its initial recognition and the recognition,
measurement and presentation of intangible assets. Standards concerning
goodwill are unchanged from the standards included in the previous
Section 3062. This section is effective for the Company on June 1,
2009.
The Company is currently assessing the impact of the above new
accounting standards on the Company's financial position and results of
operations.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
In 2006, the AcSB published a new strategic plan that will
significantly affect financial reporting requirements for Canadian
companies. The AcSB strategic plan outlines the convergence of Canadian
GAAP with IFRS over an expected five year transitional period. In
February 2008, the AcSB announced that 2011 is the changeover date for
publicly-listed companies to use IFRS, replacing Canada's own GAAP. The
date is for interim and annual financial statements relating to fiscal
years beginning on or after January 1, 2011. The transition date of
January 1, 2011, will require the restatement for comparative purposes
of amounts reported by the Company for the year ended May 31, 2010.
While the Company has begun assessing the adoption of IFRS for 2011,
the financial reporting impact of the transition to IFRS cannot be
reasonably estimated at this time.
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
============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
4. AMOUNTS RECEIVABLE
2008 2007
$ $
Production receivable 785,227 190,812
IVA tax receivable 940,235 -
Other receivables 180,134 79,185
------------ ------------
1,905,596 269,997
============ ============
5. INVENTORIES
2008 2007
$ $
Ore in process 344,714 -
Mine stores, supplies and other 529,188 116,706
------------ ------------
873,902 116,706
============ ============
6. MINERAL PROPERTY INTERESTS
2008 2007
$ $
PRODUCING
MINA REAL PROPERTY
Acquisition and other 18,458,507 18,458,507
Deferred exploration and development costs 7,747,799 7,747,799
Accumulated depletion (1,571,159) -
------------ ------------
24,635,147 26,206,306
------------ ------------
NON-PRODUCING
MINA REAL PROPERTY
Deferred exploration and development costs 1,089,452 -
SANTA FE PROPERTY
Acquisition and other 223,229 34,186
Deferred exploration 256,671 -
------------ ------------
1,569,352 34,186
------------ ------------
26,204,499 26,240,492
============ ============
(a) Mina Real Property
In January 2006 the Company entered into an option agreement
with ALB Holdings Ltd. ("ALB") to acquire up to a 51% interest
in the Mina Real Property located in Tepic, Mexico. The Mina
Real Property comprises of six concessions covering
approximately 7,358 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
then 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
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
6. MINERAL PROPERTY INTERESTS (continued)
(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 through the acquisition of ALB through the
issuance of 10,500,000 common shares of the Company, as
described in Note 3.
(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 near the Mina Real Property. The agreement
comprises one concession covering approximately 3,823
hectares. 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.
The Company has also staked an additional two concessions
covering approximately 13,164 hectares adjacent to the Santa
Fe Property.
7. PROPERTY, PLANT AND EQUIPMENT
--------------------------------------------
2008
--------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
Motor vehicles 246,272 33,797 212,475
Office equipment 39,175 3,747 35,428
Mill and mine equipment 1,985,038 121,881 1,863,157
Buildings 791,023 17,537 773,486
Land 2,133,653 - 2,133,653
------------ ------------ ------------
5,195,161 176,962 5,018,199
============ ============ ============
--------------------------------------------
2007
---------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
Motor vehicles 69,907 6,928 62,979
Office equipment 16,060 402 15,658
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
============ ============ ============
See also Note 8.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
8. LONG-TERM DEBT
2008 2007
$ $
Amount due to Huajicari -
US $575,000 (2007 - US $1,475,000) (a) 571,665 1,578,103
Amounts due on land and surface rights
purchases (b) 1,237,221 -
------------ ------------
1,808,886 1,578,103
Less: Current portion (1,115,457) (962,910)
------------ ------------
693,429 615,193
============ ============
Estimated principal payments for the remaining years are as follows:
YEAR $
2009 1,115,457
2010 543,792
2011 149,637
------------
1,808,886
============
(a) The amount due to Compania Minera Huajicari ("Huajicari") is
unsecured and carries interest at a rate of 10% per annum,
with repayment on a monthly basis of US $75,000 plus accrued
interest.
As at May 31, 2008 accrued interest of $4,153 was recorded
and has been included in accounts payable and accrued
liabilities.
(b) The Company has acquired land and surface rights to enable
access to the development of the Mina Real Property. The
Company has agreed to make monthly principal payments of
$45,316 plus interest, calculated at a simple rate of 7.2% per
annum.
During fiscal 2008, the Company capitalized interest totalling
$13,314.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
9. SHARE CAPITAL
Authorized: Unlimited common shares without par value
Issued: 2008 2007
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
$ $
Balance, beginning of year 29,665,438 96,437,468 11,237,735 75,890,208
Reduction of capital - (71,000,128) - -
------------ ------------ ------------ ------------
29,665,438 25,437,340 11,237,735 75,890,208
------------ ------------ ------------ ------------
Issued during the year
For cash
Private placements 2,000,000 4,000,000 4,600,456 6,575,524
Exercise of warrants 532,510 509,374 2,864,247 3,188,286
Exercise of options 383,000 346,040 463,000 302,360
For corporate finance fee 125,000 250,000 - -
For commission 126,113 252,226 - -
Reallocation from contributed surplus
relating to the exercise of options - 256,322 - 226,662
Reallocation from contributed surplus
relating to the exercise of agent's
option and warrants - 33,035 - 32,965
For acquisition of ALB (Note 3) - - 10,500,000 10,500,000
------------ ------------ ------------ ------------
3,166,623 5,646,997 18,427,703 20,825,797
Less: share issue costs - (802,592) - (278,537)
------------ ------------ ------------ ------------
3,166,623 4,844,405 18,427,703 20,547,260
------------ ------------ ------------ ------------
Balance, end of year 32,832,061 30,281,745 29,665,438 96,437,468
============ ============ ============ ============
(a) On November 20, 2007 the shareholders of the Company passed a
special resolution to reduce the Company's capital by
$71,000,128, being an amount equal to the deficit of the
Company at May 31, 2005. This deficit arose as a result of
prior unsuccessful business activities previously carried out
by the Company under the direction of its former management
and board. The reduction of capital resulted in a
corresponding elimination of $71,000,128 of the deficit.
(b) During fiscal 2008 the Company completed a private placement
of 2,000,000 units at $2.00 per unit for gross proceeds of
$4,000,000. Each unit comprises one common share and one-half
share purchase warrant. One full warrant entitles the holder
to purchase an additional common share at an exercise price of
$2.25 per share for a period of 18 months. The Company paid
Canaccord Capital Corp. (the "Agent") a cash commission of
$40,274 and issued 126,113 units (the "Agent's Units"), at a
fair value of $252,226. Each Agent's Unit comprises one common
share and one-half share purchase warrant, with the same
exercise terms as the purchase warrants. The Company also paid
Canaccord an administration fee of $15,000 and issued 125,000
common shares, for a $250,000 corporate finance fee, and
146,250 warrants (the "Agent's Warrants"). Each Agent's
Warrant is exercisable into a common share at an exercise
price of $2.00 per share for a period of 18 months.
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 - 78%; a
risk-free interest rate of 4.08%; and an expected life of 18
months. The value assigned to the Agent's Warrants was
$179,145. The Company also incurred additional share issue
costs of $65,947 on this private placement.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
9. SHARE CAPITAL (continued)
(c) 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
(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.
(d) A summary of the number of common shares reserved pursuant to
the Company's outstanding warrants at May 31, 2008 and 2007
and the changes for the years ending on those dates is as
follows:
2008 2007
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
$ $
Balance, beginning of year 2,363,458 1.90 1,282,000 0.90
Issued 1,209,306 2.21 4,000,455 1.64
Exercised (532,510) 0.98 (2,864,247) 1.11
Expired (36,000) 0.80 (54,750) 2.00
------------ ------------
Balance, end of year 3,004,254 2.21 2,363,458 1.90
============ ============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
9. SHARE CAPITAL (continued)
The following table summarizes information about the number of
common shares reserved pursuant to warrants outstanding at May
31, 2008:
EXERCISE
NUMBER PRICE EXPIRY DATE
$
700,000 2.75 November 17, 2008
499,949 1.40 December 11, 2008
74,999 2.25 February 2, 2009
520,000 2.25 February 12, 2009
1,000,000 2.25 April 25, 2009
209,306 2.00 April 25, 2009
------------
3,004,254
============
(e) See also Note 18.
10. 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 2008 the Company granted 1,254,000 (2007 - 2,425,000)
stock options to the Company's directors, employees and consultants and
recorded compensation expense of $1,255,910 (2007 - $2,425,000) on
these stock options and $170,705 (2007 - $117,500) on stock options
which vested.
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 2008 and 2007:
2008 2007
Risk-free interest rate 2.71% - 4.71% 3.92% - 4.38%
Estimated volatility 78% - 99% 103% - 116%
Expected life 2 years - 3 years 3 years - 5 years
Expected dividend yield 0% 0%
The weighted average fair value of stock options granted during fiscal
2008 to the Company's directors, employees and consultants was $1.00
(2007 - $1.05) 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.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
10. STOCK OPTIONS AND STOCK-BASED COMPENSATION (continued)
A summary of the Company's outstanding stock options at May 31, 2008
and 2007 and the changes for the years ending on those dates is as
follows:
2008 2007
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE
$ $
Balance, beginning of year 2,582,000 1.57 720,000 0.62
Granted 1,254,000 1.94 2,425,000 1.64
Exercised (383,000) 0.91 (463,000) 0.65
Cancelled / expired (500,000) 1.88 (100,000) 0.80
------------ ------------
Balance, end of year 2,953,000 1.69 2,582,000 1.57
============ ============
The following table summarizes information about the stock options
outstanding and exercisable at May 31, 2008:
NUMBER NUMBER EXERCISE
OUTSTANDING EXERCISABLE PRICE EXPIRY DATE
$
22,500 22,500 0.62 January 17, 2009
150,000 150,000 1.40 November 24, 2009
1,479,000 1,479,000 1.85 January 8, 2010
50,000 33,333 2.15 February 14, 2010
100,000 - 1.65 June 8, 2010
274,000 274,000 1.65 June 12, 2010
500,000 332,500 2.12 October 26, 2010
80,000 80,000 2.30 November 16, 2010
297,500 297,500 0.90 September 5, 2011
------------ ------------
2,953,000 2,668,833
============ ============
11. CONTRIBUTED SURPLUS
The Company's contributed surplus as May 31, 2008 and 2007 is comprised
of the following:
2008 2007
$ $
Balance, beginning of year 2,891,157 608,284
Stock-based compensation on stock
options (Note 10) 1,426,615 2,542,500
Stock options exercised (256,322) (226,662)
Stock-based compensation on agent's
option and warrants 179,145 -
Agent's option and warrants exercised (33,035) (32,965)
------------ ------------
Balance, end of year 4,207,560 2,891,157
============ ============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
12. RELATED PARTY TRANSACTIONS
(a) During fiscal 2008 and 2007 the Company was charged for
various services provided by companies controlled by current
and former directors and officers of the Company, as follows:
2008 2007
$ $
Accounting and administration 85,130 -
Management fees 54,683 58,500
Professional fees 61,565 78,466
------------ ------------
201,378 136,966
============ ============
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, 2008, accounts payable and
accrued liabilities include $11,374 (2007 - $26,037) 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.
13. INCOME TAXES
Future income tax assets and liabilities of the Company as at May 31,
2008 and 2007 are as follows:
2008 2007
$ $
Future income tax assets
Losses carried forward 2,835,100 2,401,600
Share issue costs 134,000 151,100
------------ ------------
2,969,100 2,552,700
Valuation allowance (2,969,100) (2,552,700)
------------ ------------
Net future income tax asset - -
============ ============
Future income tax liabilities
Mineral properties 4,098,760 4,300,000
============ ============
The recovery of income taxes shown in the consolidated statements of
loss and comprehensive loss differs from the amounts obtained by
applying statutory rates to the loss before provision for income taxes
due to the following:
2008 2007
$ $
Income tax rate reconciliation
Combined federal and provincial
income tax rate 33.03% 34.12%
============ ============
Expected income tax recovery 1,088,240 1,253,600
Non-deductible stock-based compensation (471,200) (867,600)
Other 74,700 (13,600)
Unrecognized benefit of income tax losses (490,500) (372,400)
------------ ------------
Future income tax recovery 201,240 -
============ ============
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
13. INCOME TAXES (continued)
As at May 31, 2008 the Company has accumulated non-capital losses for
income tax purposes of approximately $6.7 million for Canadian income
tax purposes to offset against future income, expiring from 2009
through 2028. The Company also has accumulated non-capital losses of
approximately $2.45 million (23.3 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.
14. 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.
--------------------------------------------
2008
--------------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES INCOME (LOSS)
$ $ $
Mineral operations (Mexico) 34,760,993 9,353,785 (389,827)
Corporate (Canada) 967,422 38,329 (2,703,421)
------------ ------------ ------------
35,728,415 9,392,114 (3,093,248)
============ ============ ============
--------------------------------------------
2007
--------------------------------------------
IDENTIFIABLE
ASSETS REVENUES NET 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)
============ ============ ============
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments at May 31, 2008 and 2007 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, 2008
and 2007 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.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
16. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash activities were conducted by the Company during fiscal 2008
and 2007 as follows:
2008 2007
$ $
Financing activities
Issuance of common shares for acquisition of ALB - 10,500,000
Long-term debt 1,332,257 2,197,388
Issuance of common shares non-cash consideration 770,068 259,627
Contributed surplus (88,697) (259,627)
Share issue costs (681,371) -
------------ ------------
1,332,257 12,697,388
============ ============
Investing activities
Additions to property, plant and equipment (1,332,257) (29,727)
Additions to mineral property interests (194,460) (17,862,147)
------------ ------------
(1,526,717) (17,891,874)
============ ============
Operating activities
Increase in future tax liabilities - 4,300,000
Increase in asset retirement obligations - 570,682
Increase in accounts payable and accrued liabilities 194,460 323,804
------------ ------------
194,460 5,194,486
============ ============
Other supplemental cash flow information:
2008 2007
$ $
Interest paid in cash 121,519 180,505
============ ============
Income taxes paid in cash - -
============ ============
17. ASSET RETIREMENT OBLIGATION
2008 2007
$ $
Balance, beginning of year 590,894 -
Initial estimated liability - 570,682
Accretion 49,112 20,212
------------ ------------
Balance, end of year 640,006 590,894
============ ============
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.
ROCHESTER RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2008 AND 2007
18. SUBSEQUENT EVENTS
Subsequent to May 31, 2008 the Company completed a brokered private
placement of 2,223,000 units, at a purchase price of $0.45 per unit,
for gross proceeds to the Company of $1,000,350. Each unit comprises
one common share of the Company and one-half of one common share
purchase warrant. Each whole warrant entitles the holder to purchase
one additional common share of the Company at an exercise price of
$0.75 per share for a period of two years. The Company also paid the
agent a commission of $80,028 and 177,840 agent's warrants (the Agent's
Warrants"). Each Agent's Warrant is exercisable at an exercise price of
$0.45 per share for a period of two years.
The Company has also agreed to conduct a US$940,000 unsecured
convertible debenture offering (the "Convertible Debentures") with the
directors of the Company. To date the Company has received US $910,000.
The Convertible Debentures will bear interest at a rate of 1% per month
and will mature on December 31, 2010. The Convertible Debentures will
be convertible at the election of the holders' into units, at a
conversion price of $0.75 per unit, with each unit being comprised of
one common share of the Company and one-half of one common share
purchase warrant. Each whole warrant will entitle the holder to
purchase one additional common share of the Company at an exercise
price of $0.75 per share until December 31, 2010.
ROCHESTER RESOURCES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED MAY 31, 2008
The following Management's Discussion and Analysis ("MD&A") of Rochester
Resources Ltd. ("Rochester" or the "Company") is prepared as at September 26,
2008 and should be read in conjunction with the Company's audited annual
consolidated financial statements and accompanying notes for the years ended May
31, 2008 and 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.
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 engaged in the production and the
continued exploration and development of its Mina Real and Santa Fe Properties
located in the State of Nayarit, Mexico. Nayarit is located in the Sierra Madre
Occidental range, the most productive 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 has, in a very compressed time frame, acquired, developed and brought
into production a gold property in Mexico. The Company now has an operating mill
which is generating cash flow from operations. The Company is also implementing
an exploration and development program utilizing funds raised in the capital
markets and cash flow from operations to define resources to support future
mining and and production.
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.
PROPERTY UPDATE
OVERVIEW
The Company holds a 100% interest in the Mina Real Property, a gold silver
property comprising 7,358 hectares located in the state of Nayarit, Mexico, east
of the capital city of Tepic. The Mina Real Property is held through the
Company's wholly-owned subsidiary, Mina Real Mexico SA de CV ("Mina Real
Mexico").
- 1 -
The Company also has an option agreement to acquire a 70% interest in the Santa
Fe gold/silver property located immediately east of the Mina Real Property. The
Santa Fe Property comprises one concession covering approximately 3,823
hectares. Compania Minera Santa Fe SA de CV was established to hold the Santa Fe
concession and the Company holds a 70% interest in this entity. In addition the
Company added to its land position by staking an additional 13,164 hectares
adjacent to the Santa Fe concession.
OPERATIONS SUMMARY
The first year of operations for the Company have been a challenge. In regards
to production, the Company has demonstrated the capacity to produce at 200
tonnes per day on an ongoing basis. Tonnage processed was 65,377 tonnes, only 1%
below the target throughput of 66,000 tonnes.
The reason for not achieving our overall gold and silver production targets was
due to the milling of lower grade material then budgeted. The Company has
explained in each quarter the difficulties and problems experienced during the
year. Overall the gold grade was 24% less than plan and the silver grade was 34%
less than plan. This is also the year where we experienced delays in the
negotiations to secure the surface rights to additional areas which we had
planned to bring into production.
The Company tried to access the projected continuation of the Florida III vein
system to the northwest of a small intrusive stock by drifting across the
intrusive. This program was not successful in locating the continuation of the
Florida 3 vein system and resulted in significant lost time and substantial
costs. When the Company attempted to negotiate surface rights to allow access to
the northern extensions from surface, the negotiations were protracted and
difficult and as a result the Company could not access these new work areas
within the planned timeframe. Ultimately the Company was able to negotiate and
conclude agreements to acquire the land and is now able to implement a new work
program.
The current program's objective is to make up some of the lost time and to
restore production to the planned levels with more working faces allowing us to
maintain mill feed and to control grades of gold and silver.
For the month of November, the Company plans to have three areas of exploration,
development and preparation - Florida IV/Veta Nueva, Tajos Cuates and Macedo/El
Gringo.
Florida IV and Veta Nueva will produce from the development of the veins and
will have at least two stopes in production during the month of November.
Tajos Cuates: we will also obtain mineral from the development of the veins and
will have two stopes in production for the month of December.
Macedo and El Gringo: This area will only produce from developments.
Florida III will continue to produce on a limited basis from the three existing
stopes.
The objective of this program is to have a stable production from November and
control the 200 tonnes per day with 7.5 grams per tonne gold and 250 grams per
tonne silver and, beginning in December, to increase the tonnage and grade
through the mill. The success of this program is dependent on Company's ability
to implement the above noted items.
In October, the Company will commence a structural geological study and in
November the Company will commence a regional study to refine the property-wide
geological model.
The cyanidation plant operated well through out the year, operating at better
than planned levels. The cyanide neutralization system has worked very well.
Work is ongoing on the planned plant expansion to 300 tonnes per day. In early
October the Falcon gravimetric concentrator will come on production and this is
expected to substantially increase silver recoveries.
The new tailings dam is expected to be operational for the month of November.
- 2 -
The start-up of the new 10x10 ball mill is dependent on increasing production
from the mine. At this time the work is substantially complete and there is
little left to do before this new ball mill can be brought on line.
We have continued with our studies to combine different methods of recovery from
the mill and we have obtained interesting results by combining gravity
concentration and flotation. In approximately one month, the Company will have
sufficient information to make a decision on what action to take.
Although the plant met all planned production parameters, the overall production
of gold and silver was below plan due to lower grade material being produced
from the mine.
For the year average gold recovery was 91.39% and silver recovery was 43.9%,
these recovery rates from the plant were higher than what the Company had
budgeted. The production of gold was 10,173 compared to the Company's target of
13,889 ounces. There were 107,149 of silver produced compared to the Company's
target of 154,320 ounces.
There were a total of 12,109 ounces of gold equivalent produced compared to the
Company's target of 16,975 ounces equivalent, a variation of 29% from what the
Company had anticipated.
Had the Company been able to keep within the planned parameters of production,
the cost of gold equivalent per ounce produced would have only been US $370 per
ounce. The actual cost increased to US $784.81 per ounce equivalent, 53% more of
what the Company had anticipated. The main reason was due to the low level of
production of the mine. The actual cost per tonne was US $119.35 compared to
planned cost of US $90.00 per tonne a negative variation of 24%.
A summary of operating statistics for the fourth quarter ended May 31, 2008 and
the year ended May 31, 2008 are below:
- --------------------------------------------------------------------------------
FOURTH QUARTER ENDED YEAR ENDED
RESULTS MAY 31, 2008 MAY 31, 2008
- --------------------------------------------------------------------------------
Ore Processed 15,456 tonnes 65,377 tonnes
- --------------------------------------------------------------------------------
Gold 5.12 grams/tonne 6.08 grams/tonne
- --------------------------------------------------------------------------------
Silver 103.39 grams/tonne 131.10 grams/tonne
- --------------------------------------------------------------------------------
Recovery Gold (%) 92.65% 91.39%
- --------------------------------------------------------------------------------
Recovery Silver (%) 39.22% 43.94%
- --------------------------------------------------------------------------------
Gold Produced 2,010 ounces 10,108 ounces
- --------------------------------------------------------------------------------
Silver Produced 20,656 ounces 107,149 ounces
- --------------------------------------------------------------------------------
Gold Equivalent 2,416 ounces 12,109 ounces
- --------------------------------------------------------------------------------
Developed Metres 846 metres 2,871 metres
- --------------------------------------------------------------------------------
Samples Taken 4,730 15,481
- --------------------------------------------------------------------------------
Diamond Drilling Metres 1,891 metres 2,384 metres
- --------------------------------------------------------------------------------
Access Road kilometres 4 kilometres 10 kilometres
- --------------------------------------------------------------------------------
Cost of Production US $149.38/ton US $119.35/ton
- --------------------------------------------------------------------------------
Cost of Ounce Equivalent US $922.26/ounce US $784.81/ ounce
- --------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2008
- --------------------------------------------------------------------------------
DIFFER-
RESULTS ACTUAL TARGET ENCE
%
- --------------------------------------------------------------------------------
Tonnes Processed 65,377 tonnes 66,000 tonnes -1%
- --------------------------------------------------------------------------------
Gold (grams/tonne) 6.08 g/t 8.0 g/t -24%
- --------------------------------------------------------------------------------
Silver (grams/tonne) 131.10 g/t 200 g/t -34%
- --------------------------------------------------------------------------------
Gold Recovery (%) 91.39% 90% +1.39%
- --------------------------------------------------------------------------------
Silver Recovery (%) 43.94% 40% +3.94%
- --------------------------------------------------------------------------------
Gold Produced 10,173 ounces 13,889 ounces -26.8%
- --------------------------------------------------------------------------------
Silver Produced 107,149 ounces 154,320 ounces -31%
- --------------------------------------------------------------------------------
- 3 -
- --------------------------------------------------------------------------------
DIFFER-
RESULTS ACTUAL TARGET ENCE
%
- --------------------------------------------------------------------------------
Equivalent Ounces Gold 12,109 ounces 16,975 ounces -29%
- --------------------------------------------------------------------------------
Development (m) 2,871 metres 5,000 metres -43%
- --------------------------------------------------------------------------------
Samples Taken 15,481 20,000 -25%
- --------------------------------------------------------------------------------
Diamond Drilling (m) 2,384 metres 6,000 metres -61%
- --------------------------------------------------------------------------------
Road Access (km) 10 kilometres 5 kilometres +50%
- --------------------------------------------------------------------------------
Cost of Production Per Tonne US $119.35/ton US $90/ton -24%
- --------------------------------------------------------------------------------
Cost of Ounce Equivalent US $784.81 US $370.00 -53%
- --------------------------------------------------------------------------------
Sales Millions US $9.728 US $12.750 -24%
- --------------------------------------------------------------------------------
SUMMARY OF MINING OPERATIONS
The production during the fourth quarter was 15,456 tonnes with an average grade
of 5.12 grams of gold per tonne and 103.39 grams of silver per tonne. The
production during the fourth quarter decreased from the previous quarter in
tonnage and grade. There were 4% less tonnes and gold grade was 12% less and
silver grade 33% less.
The principal reason for this low production was due to the decrease in the
number of areas of working faces in the mine, a problem that has been seen
throughout the year. When considering that all production is coming from a vein
system, one must, to maintain production levels, have an ongoing program of 550
metres drift development per month. However this past year has seen developed
only an average of 718 metres per quarter.
In the initial work plan for this fiscal year the Company considered a program
to develop the Florida I, II and III veins in the north west zone which would
have provided the Company with enough producing areas to maintain the ongoing
requirements of development and preparation of mineral blocks that would sustain
the continuation of production and assist in maintaining better control of gold
and silver grades and dilution.
The Company encountered significant difficulties with the acquisition of the
surface rights to the areas of interest which continued for well over a year and
delayed the implementation of the aforementioned work program. The delay in
accessing these areas resulted in fewer working areas giving rise to the poor
operating results. The acquisition of the surface rights was finally completed
towards year end but the delay had a significant impact on the Company's
operating results.
The new development programs are now underway and the Company believes that the
changes made will be reflected during the last quarter of calendar 2008, with
improvements in the development parameters, and an increase in tonnage produced,
with better gold and silver grades.
The diamond drill program which had been developed by the Company could not be
completed as originally planned. The Company retained two drill contractors to
drill from surface, both contractors encountered serious operational
difficulties with the ground conditions in which we required drilling. The
Company drilled 1,891 metres during the fourth quarter which represents an
increase of 76% from the previous quarter (470 metres). The Company has started
negotiations with contractors with more experience in our type of terrain and it
is possible that the Company will start a new program during the third quarter
of calendar 2008.
To compensate for the inability to complete the diamond drill program the
Company implemented a program of mapping and sampling of the different outcrops
of the Florida 1, 2 and 3 veins that are located to the NW and at the area
parallel to the SW. Following the completion of the access roads (4 km), the
Company commenced surface mapping and sampling programs with very encouraging
results having discovered 13 new veins. The results from this program have been
used by the Company in its model to define the potential of the area.
A total of 4,730 samples were taken from different areas including the known and
new veins as well as within the areas of the underground workings.
The pace of both the development and of the exploration program is very
important to maintain adequate workings to continue to provide the mill with
material. This has also led the Company to implement an aggressive maintenance
program especially for the scoop trams. The Company is also analyzing different
methods to implement a development program of 1,000 metres per month. This would
allow the Company to increase
- 4 -
production with the development and commencement of work in new areas. This
program scheduled for the last quarter of calendar 2008.
At the cyanidation plant, 15,456 tonnes were processed with a grade of 5.2
grams/tonne gold and 103.39 grams/tonne silver. All material produced from the
mine was processed and there was no inventory left to process at the plant.
The gold recovery was 92.65%, increasing from the previous quarter by 0.4%. The
silver recovery was 39.22%, decreasing by 21 % from the previous quarter. In the
previous quarter the silver grade was 152.3 grams / tonne. The significant
variance in grades is caused in part by the production problems at the mine. The
plant has been operating very efficiently and there are no issues or concerns
with increasing through put to the mill once the improvements in the mine plan
are able to be realized.
During the quarter, production was 2,010 ounces of gold and 20,656 ounces of
silver, being a total of 2,416 ounces of gold equivalent. As production
decreased the cost per equivalent has increased during this quarter. The cost
was US $922.26/oz being the highest cost during the year. The work programs now
in place have the objective of reducing the costs to what management had
budgeted being US $390.00 per equivalent ounce of gold.
Work is ongoing at the plant with the installation of the necessary equipment
for the production increase to 300 tonnes per day. Increase in plant capacity
will require additional capacity in the power line. A new transformer is on site
and work is ongoing on the new electrical substation. The new 10 x 10 ball mill
has been installed. The only components which have not been received are the new
filters and this is expected by early October.
The Falcon gravimetric concentrator is expected to be in operation in early
October. This is expected to have a significant impact on silver recoveries.
UPDATE ON MINERAL PROPERTIES
At this time the Company is producing from the Florida I, II and III veins.
Within the area of Florida I, II and III veins the Company has identified 13
veins, which are parallel to the Florida vein. During the first quarter of
fiscal 2009, the Company will develop access to the Tajos Cuates vein an area
which has been prepared for production and which will be a source of mill feed.
The development program for these veins was deferred until the Company had
installed a Falcon concentrator that will allow the Company to increase the
recovery from this higher grade mineralized material. The Company believes
recovery of silver can be increased to between 70% and 80%.
In addition to this parallel system of veins, the Company has identified a
perpendicular system of veins which have a different mineralogical composition.
The area has been sampled and the results have varied from 1 gram of gold per
tonne to as high as 200 grams of gold per tonne. The work completed to date
indicates that there are areas which have the potential for free gold. To test
the area further the Company is undertaking gravity concentration studies and
plans to test the area by taking much larger bulk samples and processing through
a pilot plant to determine the gold content.
The Company has identified an area of geological interest in the SE area of
Florida, on the other side of the valley, that has been sampled and the values
and characteristics of the mineral indicate that this zone is the continuation
of the Florida system and area of parallel veins. Within this area, the Company
has identified two areas of interest with sufficient information to undertake
exploration and development of this zone. These areas are known as the Macedo
vein and the El Gringo vein. The Company plans to build road access during
October 2008.
UPDATE ON PROPERTY EXPLORATION
The Company operates in Mexico through two subsidiaries, Mina Real Mexico, which
holds the Mina Real Property and Compania Minera Santa Fe, which holds the Santa
Fe property.
Mina Real Mexico has four areas of exploration:
- 5 -
FLORIDA AREA: The Company has identified 16 veins, three known (Florida I, II
and III), two currently under exploration and development (Florida IV and Veta
Nueva). The Company is developing drifts and adits at three different levels at
Florida IV and Veta Nueva. The Company is focussing its efforts in these areas
as the work completed to date including trenching undertaken at the different
surface areas indicate this is a prospective area which warrants development.
The Company is continuing with the development of the Florida IV and Veta Nueva
veins for a distance of 800 metres in length to reach the center of the zone of
interest. From that point, the Company will develop cross cuts, one of 700
metres and the other 600 metres in length, with the first intersection being
located to the NW which will provide the Company with access to 13 veins that
are located between Veta Nueva and Florida III NW. The second cross cut's
objective is to intersect within the same level 5 parallel veins between Veta
Nueva and Tajos Cuates.
MACEDO AREA: This zone is located to the SE of Florida and from the work done to
date this area is thought to be the continuation of the vein system of the
Florida area.
The Company has completed a trenching program with favourable sampling results
that have identified two areas of interest. Macedo is a vein that has been
identified from surface work and it continues for 1 kilometre. Within this area
the Company has identified areas where the vein is 20 metres in width carrying
gold and silver values and other areas where the width of the vein decreases to
1.5 to 2 metres width carrying gold and silver values. This information,
according to our model, helps us to clearly determine the objections of our
exploration and development programs. This will be one of the items to be
studied in further detail by our consulting structural geologist, whom has been
retained and who will be visiting the property in October.
The Gringo is another vein located in this zone where the Company has undertaken
trenching and sampling of the old workings. The results showed that the area
also has potential. The Company has identified other structures that are also
interesting and which warrant further exploration.
TAJOS CUATES AREA: The Tajos Cuates area is extensive and comprises additional
veins to the two veins that are currently under exploration. The Company staked
further ground to the NE to protect the zone.
OTHER AREAS: The three areas previously mentioned above are where the Company is
focussing its current activities. These areas cover approximately 40% of the
Company's total land holdings. The Company has yet to undertake any work on the
remaining 60% of the property, which has a similar geological setting.
SANTA FE: The Company is earning a 70 % interest in the Santa Fe property. The
Company has focussed its work on three veins the Clavellinos, the Jonas and the
Tajitos.
There are 15 known structures in the area, some of which have old workings and
in general all have geological potential. This is another area that requires a
structural geological study in order to define the elevation of the zone of
interest and understand the movements of the blocks to determine the prospective
areas. The Company is not currently doing any work in this area.
MINA REAL PRESENT AND FUTURE
In a very short period of time and with keeping the capital invested to a
minimum the Company has made the transition from an exploration company to a
development and production company. At May 31 2008 we completed one year of
operations, going through some start up issues along the way. After one year of
operations, we have gained better knowledge of the Company, its staff and
everything that comes with managing the Company, working with various levels of
government, the land, town and the geological environment where we have
identified numerous veins and mineralized zones. Our operating team continues to
make progress and we are confidant that we have the capacity to proceed forward
and handle any technical, social and legal obstacles which may arise.
Our work to date has shown us the Mina Real property is a property of
substantial merit and has the potential for long term production. The principal
challenge for the Company is to find out how quickly we can convert this
potential to resources and reserves that would allow us to grow.
- 6 -
The Cyanidation plant and the knowledge gained from processing material from the
different mineralized zones has provided us with knowledge to consider different
alternatives as to production processes which could be implemented with a
minimum investment that could substantially increase the level of gold and
silver production.
We have identified 37 veins in the area and all have geological potential
however to date we have only developed 10 or 12 of these veins If we take into
consideration the potential identified already within the area subjected to
exploration that represents only 40% of the total land owned by the Company, it
is reasonable to assume that considerable undiscovered potential remains for
additional gold and silver deposits given that the area yet to be explored has a
geological environment very similar to the one we are currently exploring and
developing.
While the outlook remains positive, the delays encountered have put a strain on
current operations and cash flow. We require improvements to the maintenance
program for the mine production equipment to increase availability. We are also
looking to more quickly develop access to new production areas and finish
building the new tailings dam and filtration system.
Management has developed a plan to deal with these issues and quickly return to
a positive cash flow. In order to guarantee the success of this plan the Company
requires additional capital funding and improved cash flow from production. At
this time the two sources of financing, the capital markets and operations are
experiencing complications. It is very difficult given the current capital
markets to complete financings and secondly, it will take the Company time to
stabilize its operations which have been delayed even more with the upcoming
rainy season and the damage it may cause to the roads.
Subsequent to year end in a very difficult market the company was able to secure
some additional financing through a private placement and is working to complete
further financings to secure additional funding of US $2 million. Delays in
raising the money will delay the Company's ability to implement its development
plans. The Company will be working to complete additional capital funding during
the month of October to be able to implement these programs.
SANTA FE PROPERTY
The Company is earning a 70% interest in this property by agreeing to fund a
development program. The Santa Fe Property covers 3,823 hectares and is located
near the Mina Real Mine. At Santa Fe there exists a type of geological
environment very similar to the one currently being developed in the Mina Real
area.
During the year, the Company constructed approximately 8 kilometres of access
roads with the purpose of reaching the various outcrops at different elevations
which are considered to be of high priority for the exploration and development
objectives. With the roads in place, the Company was able to cross cut the
Clavellinos vein at various elevations.
In addition to the access roads, the Company completed a surface trenching
program along 4 kilometres. The information obtained was sufficient to determine
the exploration objectives with diamond drilling.
The Company drilled the first drill hole to cross cut the outcrop of the
Clavellinos vein at 60 metres depth. The results were positive indicating that
the width of the vein narrows but with higher values of gold and silver. The
Company could not find the continuation of the vein on the second drill hole
towards depth due to the system of fualts that exists in the area. The drill
program was suspended due to poor ground conditions which did not allow the
contractor to complete with the drill program.
Taking into consideration the information from the drill holes as well from the
surface trenching and the road cross cuts, the Company has decided to undertake
a structural geological study. This study will commence in October 2008. The
Company is confidant that this will assist us in determining the areas with
higher potential and develop a more focussed exploration program.
All of the work programs at Santa Fe were suspended at the end of the third
quarter.
The Santa Fe property is seen as having significant geological opportunities. To
date more than 17 veins have been located with only 50% of the area mapped to
determine the mineralization of the area.
- 7 -
The Santa Fe area is seen as a future production property. At this time
management's objective is to defer the exploration and development at Santa Fe
until development and cash flow from Mina Real provides internal cash flow to
fund costs.
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.
--------------------------------------------
YEARS ENDED MAY 31,
--------------------------------------------
2008 2007 2006
$ $ $
------------ ------------ ------------
OPERATIONS:
Revenues 9,353,785 Nil Nil
Cost of operations (7,963,615) Nil Nil
Depletion and amortization (1,370,051) Nil Nil
Expenses(1) (3,426,983) (3,534,642) (742,150)
Other items 112,376 (139,419) 895
Future income tax recovery 201,240 Nil Nil
Net loss (3,093,248) (3,674,061) (741,255)
Basic and diluted income
(loss) per share (0.10) (0.19) (0.17)
Dividends per share Nil Nil Nil
BALANCE SHEET:
Working capital 610,464 768,740 3,536,076
Total assets 35,728,415 30,770,564 4,971,556
Total long-term liabilities 693,429 615,193 Nil
Asset retirement obligation 640,006 590,894 Nil
Future income tax liabilities 4,098,760 4,300,000 4,300,000
--------------------------------------------
(1) Includes non-cash stock-based compensation of $1,426,615 (2007 -
$2,542,000; 2006 - $256,259), 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 2008 FISCAL 2007
------------------------------------------------- -------------------------------------------------
MAY 31/08 FEB 29/08 NOV 30/08 AUG 31/07 MAY 31/07 FEB 28/07 NOV 30/06 AUG 31/06
$ $ $ $ $ $ $ $
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
OPERATIONS:
Revenues 2,091,771 2,507,487 2,987,744 1,766,783 Nil Nil Nil Nil
Cost of operations (2,642,333) (2,084,709) (1,920,735) (1,315,838) Nil Nil Nil Nil
Depletion and amortization (622,410) (248,301) (261,933) (237,407) Nil Nil Nil Nil
Expenses (616,150) (533,379) (1,329,371) (948,083) (732,976) (2,039,218) (640,911) (121,537)
Other items (4,437) 93,210 50,585 (26,982) 142,406 (263,722) (3,134) (14,969)
Future income tax recovery 201,240 Nil Nil Nil Nil Nil Nil Nil
Net loss (1,592,319) (265,692) (473,710) (761,527) (590,570) (2,302,940) (644,045) (136,506)
Basic and diluted loss
per share (0.05) (0.01) (0.02) (0.03) (0.04) (0.09) (0.05) (0.01)
Dividends per share Nil Nil Nil Nil Nil Nil Nil Nil
BALANCE SHEET:
Working capital 610,464 2,215,461 4,558,148 684,866 768,740 1,227,597 1,898,776 3,595,277
Total assets 35,728,415 35,555,850 34,657,344 30,539,200 30,770,564 23,019,599 7,765,911 6,531,028
Total long-term liabilities 693,429 Nil 125,100 368,740 615,193 936,000 Nil Nil
Asset retirement obligation 640,006 627,387 615,217 603,447 590,894 Nil Nil Nil
Future income tax
liabilities 4,098,760 4,300,000 4,300,000 4,300,000 4,300,000 Nil Nil Nil
------------------------------------------------- -------------------------------------------------
- 8 -
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2008 COMPARED TO THREE MONTHS ENDED MAY 31, 2007
During the three months ended May 31, 2008 (the "2008 Quarter") the Company
reported a net loss of $1,592,319, compared to a net loss of $590,570 for the
three months ended May 31, 2007 (the "2007 Quarter"), an increase in loss of
$1,001,749. The quarters are not comparable as the Company was not in commercial
production prior to June 1, 2007 and had no production in the 2007 Quarter.
YEAR ENDED MAY 31, 2008 COMPARED TO YEAR ENDED MAY 31, 2007
During fiscal 2008, the Company recorded a loss of $3,093,248 ($0.10 per share)
compared to a loss of $3,674,061 ($0.19 per share) for fiscal 2007, a decrease
in loss of $580,813. The fiscal years are not comparable as the Company was not
in commercial production prior to June 1, 2007 and had no production in fiscal
2007. As a result, no depletion on mineral property interests or amortization on
property, plant and equipment was taken until fiscal 2008.
The Company recognized net revenue during fiscal 2008 of $9,353,785 generated on
the sale of 12,109 ounces of gold equivalent, for an average of $772.47 net
revenue per ounce (net of royalty and treatment charges).
----------------------- ----------------------- ----------------------- -----------------------
THREE MONTH PERIOD ENDING: MAY 31, 2008 FEBRUARY 29, 2008 NOVEMBER 30, 2007 AUGUST 31, 2007
----------------------- ----------------------- ----------------------- -----------------------
Ounces of gold equivalent 2,416 oz 3,293 oz 3,744 oz 2,656 oz
----------------------- ----------------------- ----------------------- -----------------------
TOTAL PER OUNCE TOTAL PER OUNCE TOTAL PER OUNCE TOTAL PER OUNCE
$ $ $ $ $ $ $ $
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net revenue 2,091,771 865.80 2,507,487 761.46 2,987,744 798.01 1,766,783 665.20
Cost of operations 2,642,333 1,093.68 2,084,709 633.07 1,920,735 513.02 1,315,838 495.42
Depletion and amortization 622,410 257.62 248,301 75.40 261,933 69.96 237,407 89.39
----------------------- ----------------------- ----------------------- -----------------------
Operating profit (loss) (1,172,972) (485.50) 174,477 52.99 805,076 215.03 213,538 80.39
----------------------- ----------------------- ----------------------- -----------------------
All production from the mill is shipped and sold to MetMex Penoles SA de CV
("Penoles"), a major Mexican mining and processing company, at their smelter in
Torreon, located approximately 1,000 kilometres from the mill. Pursuant to the
Company's sales contract with Penoles, the Company is paid for 98.5% of the gold
shipped and 97% of the silver shipped. The price paid by Penoles is based on the
average of the closing London final for the month production is shipped. The
Company initiated negotiations with an alternate buyer in order to obtain more
favourable terms. An alternate buyer has been identified and terms have been
settled but in order to implement the Company must finalize a transition
arrangement with Penoles.
The cost of operations for fiscal 2008 comprise the following:
$
Mine costs 3,444,216
Mill costs 3,054,235
Service department costs 1,465,164
----------
7,963,615
==========
The service department costs include activities which provide services to both
mine and mill departments.
General and administrative expenses for fiscal 2008 and 2007 are as follows:
2008 2007
$ $
Accounting and administrative 85,130 75,455
Audit 59,885 14,940
Consulting 208,819 108,515
Corporate development 182,877 137,916
General exploration 135,305 113,477
- 9 -
2008 2007
$ $
Insurance 29,938 -
Investor relations 100,000 69,508
Legal 28,929 14,080
Management fees - 58,500
Office 244,817 38,270
Regulatory fees 16,932 15,859
Rent 14,968 10,500
Salaries and benefits 543,190 52,318
Shareholder costs 25,025 16,688
Transfer agent fees 15,885 19,511
Travel 147,200 68,665
---------- ----------
1,838,900 804,202
========== ==========
General and administrative expenses of $1,838,900 were reported in fiscal 2008,
an increase of $1,034,698, from $804,202 in fiscal 2007. Specific expenses of
note during fiscal 2008 as compared to fiscal 2007 are as follows:
- accounting and administrative fees of $85,130 (2007 - $75,455) charged
by Chase Management Ltd. ("Chase") a private corporation owned by Mr.
Nick DeMare, a director of the Company;
- consulting fees totalling $208,819 (2007 - $108,515) were paid, of
which $61,565 (2007 - $78,466) were paid mainly to current and former
directors and officers;
- corporate development expenses of $182,877 (2007 - $137,916) for
ongoing market awareness and promotional campaign and participation in
several international investment conferences;
- $100,000 (2007 - $36,000) was paid to Empire Communications inc.
("Empire") to provide investor relations services. During fiscal 2007,
$33,508 was paid to Accent Marketing Limited ("Accent") to provide a
market awareness campaign and investor relation activities in Europe.
The agreement was terminated on November 23, 2007;
- travel expenses of $147,200 (2007 - $68,665) for ongoing mine site
visits to Mexico and participation in several international investment
conferences;
- incurred $29,938 (2007 - $nil) for director and officers' liability
insurance for fiscal 2008;
- audit fees of $59,885 (2007 - $14,940) were recorded. The increase is
attributed to the change in the basis of recording audit fees;
- during fiscal 2008, $54,683 was paid to the current President of the
Company. During fiscal 2007 management fees totalling $58,500 were paid
to the former President of the Company;
- office expenses of $244,817 (2007 - $28,270) were incurred, of which
$222,015 (2007 - $nil) was for costs associated with the mining office
in Mexico; and
- during fiscal 2008 salaries and benefits expense of $543,190 (2007 -
$52,318) was paid, of which $494,589 (2007 - $nil) was mainly for the
administrative staff in Mexico.
Interest income is generated from cash held with the Company's financial
institution. During fiscal 2008, the Company reported interest and other income
of $38,329 as compared to $46,622 during fiscal 2007. The decrease is attributed
to higher levels of cash held during fiscal 2007.
During fiscal 2008 the Company recorded a total of $1,535,166 for additions to
mineral property interests, of which $445,714 was attributed to acquisition and
deferred exploration activities on the Santa Fe Property and $1,089,452 for
deferred exploration and development activities on the Mina Real Project.
Exploration, development and pre-production activities conducted in fiscal 2008
are described in "Exploration Projects" in this MD&A.
During fiscal 2008, the Company recorded a total of $3,798,167 for additions to
property, plant and equipment of which $1,824,305 was for the purchase of land
and $1,973,862 was for the purchase of plant and equipment, primarily mill and
mining equipment for the expansion .
FINANCIAL CONDITION / CAPITAL RESOURCES
During fiscal 2008 the Company completed a 2,000,000 unit brokered private
placement for gross proceeds of $4,000,000. In addition the company issued
915,510 common shares on the exercise of stock options and warrants for gross
- 10 -
proceeds of $855,414. As at May 31, 2008, the Company had working capital of
$610,464 compared to $768,740 as of May 31, 2007. The Company is continuing in
its efforts to generate sufficient cash from its operations or raise funds to
meet its ongoing liabilities as they fall due. There can be no assurance that
the Company will be successful in its efforts, in which case the Company may be
unable to meet its obligations. Should the Company be unable to realize on its
assets and discharge its liabilities in the normal course of business, the net
realizable value of its assets may be materially less than the amounts recorded
on the balance sheet. In the event that the occasion arises, the Company may be
required to obtain additional financing. The Company has relied solely on equity
financing to raise the requisite financial resources. 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.
Subsequent to May 31, 2008 the Company completed a brokered private placement of
2,223,000 units, at a purchase price of $0.45 per unit, for gross proceeds to
the Company of $1,000,350. Each unit comprises one common share of the Company
and one-half of one common share purchase warrant. Each whole warrant entitles
the holder to purchase one additional common share of the Company at an exercise
price of $0.75 per share for a period of two years. The Company also paid the
agent a commission of $80,028 and 177,840 agent's warrants (the Agent's
Warrants"). Each Agent's Warrant is exercisable at an exercise price of $0.45
per share for a period of two years.
The Company has also agreed to conduct a US$940,000 unsecured convertible
debenture offering (the "Convertible Debentures") with the directors of the
Company. To date the Company has received US $910,000. The Convertible
Debentures will bear interest at a rate of 1% per month and will mature on
December 31, 2010. The Convertible Debentures will be convertible at the
election of the holders' into units, at a conversion price of $0.75 per unit,
with each unit being comprised of one common share of the Company and one-half
of one common share purchase warrant. Each whole warrant will entitle the holder
to purchase one additional common share of the Company at an exercise price of
$0.75 per share until December 31, 2010.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as of May
31, 2008
PAYMENTS DUE BY PERIOD
-------------------------------------------------
LESS THAN 1 TO GREATER THAN
1 YEAR 2 YEARS 2 YEARS TOTAL
$ $ $ $
---------- ---------- ---------- ----------
Contractual Obligations
Long-term debt 1,115,457 543,792 149,637 1,808,886
========== ========== ========== ==========
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, 2008 audited consolidated financial
statements.
CHANGES IN ACCOUNTING POLICIES
FINANCIAL INSTRUMENTS
Effective June 1, 2007 the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 1530, Comprehensive Income, Section 3251,
Equity, Section 3855, Financial Instruments - Recognition and Measurement and
Section 3861, Financial Instruments - Disclosure and Presentation and Section
3865, Hedges. These sections apply to fiscal years beginning on or after October
1, 2006 and provide standards for recognition, measurement, disclosure and
- 11 -
presentation of financial assets, financial liabilities and non-financial
derivatives, and describe when and how hedge accounting may be applied. Section
1530 provides standards for the reporting and presentation of comprehensive
income, which is defined as the change in equity, from transactions and other
events and circumstances from non-owner sources. Other comprehensive income
refers to items recognized in comprehensive income but that are excluded from
net income calculated in accordance with generally accepted accounting
principles. A statement of comprehensive income has not been presented as no
components of comprehensive income have been identified and therefore have
notaffected the current or comparative period balances on the financial
statements. Under these new standards, all financial instruments are classified
into one of the following five categories: held for trading, held-to-maturity
investments, loans and receivables, available for sale assets or other financial
liabilities. All financial instruments, including derivatives, are included on
the balance sheet and are measured at fair market value upon inception with the
exception of certain related party transactions. Subsequent measurement and
recognition of change in the fair value of financial instruments depends on
their initial classification. Held-for-trading financial investments are
measured at fair value and all gains and losses are included in operations in
the period in which they arise. Available-for-sale financial instruments are
measured at fair value with revaluation gains and losses included in other
comprehensive income until the asset is removed from the balance sheet. Loans
and receivables, investments held to maturity and other financial liabilities
are measured at amortized cost using the effective interest method. Gains and
losses upon inception, derecognition, impairment write downs and foreign
exchange translation adjustments are recognized immediately. Transaction costs
related to financings will be expensed in the period incurred.
Upon adoption of this new standard the Company has designated its cash as
held-for-trading, which are measured at fair value. Amounts receivable are
classified as loans and receivables, which are measured at amortized cost.
Accounts payable and accrued liabilities are classified as other financial
liabilities, which are measured at amortized cost.
NEW ACCOUNTING PRONOUNCEMENTS
ASSESSING GOING CONCERN
The Accounting Standards Board ("AcSB") amended CICA Handbook Section 1400, to
include requirements for management to assess and disclose an entity's ability
to continue as a going concern. This section applies to interim and annual
financial statements relating to fiscal years beginning on or after January 1,
2008.
FINANCIAL INSTRUMENTS
The AcSB issued CICA Handbook Section 3862, Financial Instruments - Disclosures,
which requires entities to provide disclosures in their financial statements
that enable users to evaluate (a) the significance of financial instruments for
the entity's financial position and performance; and (b) the nature and extent
of risks arising from financial instruments to which the entity is exposed
during the period and at the balance sheet date, and how the entity manages
those risks. The principles in this section complement the principles for
recognizing, measuring and presenting financial assets and financial liabilities
in Section 3855, Financial Instruments - Recognition and Measurement, Section
3863, Financial Instruments - Presentation, and Section 3865, Hedges. This
section applies to interim and annual financial statements relating to fiscal
years beginning on or after October 1, 2007.
The AcSB issued CICA Handbook Section 3863, Financial Instruments -
Presentation, which is to enhance financial statement users' understanding of
the significance of financial instruments to an entity's financial position,
performance and cash flows. This section establishes standards for presentation
of financial instruments and nonfinancial derivatives. It deals with the
classification of financial instruments, from the perspective of the issuer,
between liabilities and equity, the classification of related interest,
dividends, losses and gains, and the circumstances in which financial assets and
financial liabilities are offset. This section applies to interim and annual
financial statements relating to fiscal years beginning on or after October 1,
2007.
CAPITAL DISCLOSURES
The AcSB issued CICA Handbook Section 1535, which establishes standards for
disclosing information about an entity's capital and how it is managed. This
section applies to interim and annual financial statements relating to fiscal
years beginning on or after October 1, 2007.
- 12 -
GOODWILL
In February 2008, the AcSB issued CICA Handbook Section 3064, Goodwill and
Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible
Assets and Section 3450, Research and Development Costs. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and the
recognition, measurement and presentation of intangible assets. Standards
concerning goodwill are unchanged from the standards included in the previous
Section 3062. This section is effective for the Company on June 1, 2009.
The Company is currently assessing the impact of the above new accounting
standards on the Company's financial position and results of operations.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
In 2006 the AcSB published a new strategic plan that will significantly affect
financial reporting requirements for Canadian companies. The AcSB strategic plan
outlines the convergence of Canadian GAAP with IFRS over an expected five year
transitional period. In February 2008 the AcSB announced that 2011 is the
changeover date for publicly-listed companies to use IFRS, replacing Canada's
own GAAP. The date is for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2011. The transition date of
January 1, 2011 will require the restatement for comparative purposes of amounts
reported by the Company for the year ended May 31, 2010. While the Company has
begun assessing the adoption of IFRS for 2011 the financial reporting impact of
the transition to IFRS cannot be reasonably estimated at this time.
TRANSACTIONS WITH RELATED PARTIES
During fiscal 2008 and 2007 the Company was charged for various services
provided by companies controlled by current and former directors and officers of
the Company, as follows:
2008 2007
$ $
Accounting and administration 85,130 -
Management fees 54,683 58,500
Professional fees 61,565 78,466
---------- ----------
201,378 136,966
========== ==========
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, 2008,
accounts payable and accrued liabilities include $11,374 (2007 - $26,037) 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.
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.
- 13 -
INVESTOR RELATIONS ACTIVITIES
The Company has an arrangement with Empire to provide investor relations
services under which the Company is currently paying a monthly fee of $10,000.
During fiscal 2008, the Company paid a total of $100,000 to Empire. On October
26, 2007, the Company granted Empire a further 35,000 options with an exercise
price of $2.12 per share, subject to vesting provisions.
OUTSTANDING SHARE DATA
The Company's authorized share capital is unlimited common shares without par
value. As at September 26, 2008, there were 35,055,061 issued and outstanding
common shares. In addition there were 3,003,000 stock options outstanding at
exercise prices ranging from $0.62 to $2.30 per share and 4,293,594 warrants
outstanding, with exercise prices ranging from $0.80 to $2.75 per share.
- 14 -
CERTIFICATION OF ANNUAL FILINGS
VENTURE ISSUER BASIC CERTIFICATE
I, ALFREDO PARRA, CHIEF EXECUTIVE OFFICER OF ROCHESTER RESOURCES LTD., certify
the following:
1. REVIEW: I have reviewed the AIF, if any, annual financial statements
and annual MD&A, including for greater certainty all documents and
information that are incorporated by reference in the AIF (together the
annual filings) of Rochester Resources Ltd. (the issuer) for the
financial year ended May 31, 2008.
2. NO MISREPRESENTATIONS: Based on my knowledge, having exercised
reasonable diligence, 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, for the period
covered by the annual filings.
3. FAIR PRESENTATION: Based on my knowledge, having exercised reasonable
diligence, 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 of and for the periods
presented in the annual filings.
Date: September 29, 2008
/s/ ALFREDO PARRA
- -----------------------
Alfredo Parra
Chief Executive Officer
- --------------------------------------------------------------------------------
NOTE TO READER
In contrast to the certificate required under Multilateral Instrument 52-109
Certification of Disclosure in Issuers' Annual and Interim Filings (MI 52-109),
this Venture Issuer Basic Certificate does not include representations relating
to the establishment and maintenance of disclosure controls and procedures
(DC&P) and internal control over financial reporting (ICFR), as defined in MI
52-109. In particular, the certifying officers filing this certificate are not
making any representations relating to the establishment and maintenance of:
i) controls and other procedures designed to provide reasonable assurance
that information required to be disclosed by the issuer in its annual
filings, interim filings or other reports filed or submitted under
securities legislation is recorded, processed, summarized and reported
within the time periods specified in securities legislation; and
ii) a process 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.
The issuer's certifying officers are responsible for ensuring that processes are
in place to provide them with sufficient knowledge to support the
representations they are making in this certificate.
Investors should be aware that inherent limitations on the ability of certifying
officers of a venture issuer to design and implement on a cost effective basis
DC&P and ICFR as defined in MI 52-109 may result in additional risks to the
quality, reliability, transparency and timeliness of interim and annual filings
and other reports provided under securities legislation.
- --------------------------------------------------------------------------------
CERTIFICATION OF ANNUAL FILINGS
VENTURE ISSUER BASIC CERTIFICATE
I, JOSE MANUAL SILVA, CHIEF FINANCIAL OFFICER OF ROCHESTER RESOURCES LTD.,
certify the following:
1. REVIEW: I have reviewed the AIF, if any, annual financial statements
and annual MD&A, including for greater certainty all documents and
information that are incorporated by reference in the AIF (together the
annual filings) of Rochester Resources Ltd. (the issuer) for the
financial year ended May 31, 2008.
2. NO MISREPRESENTATIONS: Based on my knowledge, having exercised
reasonable diligence, 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, for the period
covered by the annual filings.
3. FAIR PRESENTATION: Based on my knowledge, having exercised reasonable
diligence, 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 of and for the periods
presented in the annual filings.
Date: September 29, 2008
/s/ JOSE MANUAL SILVA
- -----------------------
Jose Manual Silva
Chief Financial Officer
- --------------------------------------------------------------------------------
NOTE TO READER
In contrast to the certificate required under Multilateral Instrument 52-109
Certification of Disclosure in Issuers' Annual and Interim Filings (MI 52-109),
this Venture Issuer Basic Certificate does not include representations relating
to the establishment and maintenance of disclosure controls and procedures
(DC&P) and internal control over financial reporting (ICFR), as defined in MI
52-109. In particular, the certifying officers filing this certificate are not
making any representations relating to the establishment and maintenance of:
i) controls and other procedures designed to provide reasonable assurance
that information required to be disclosed by the issuer in its annual
filings, interim filings or other reports filed or submitted under
securities legislation is recorded, processed, summarized and reported
within the time periods specified in securities legislation; and
ii) a process 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.
The issuer's certifying officers are responsible for ensuring that processes are
in place to provide them with sufficient knowledge to support the
representations they are making in this certificate.
Investors should be aware that inherent limitations on the ability of certifying
officers of a venture issuer to design and implement on a cost effective basis
DC&P and ICFR as defined in MI 52-109 may result in additional risks to the
quality, reliability, transparency and timeliness of interim and annual filings
and other reports provided under securities legislation.
- --------------------------------------------------------------------------------