UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A
(Mark One)
( ) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2003
-------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 782875
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BREAKWATER RESOURCES LTD.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Canada
(Jurisdiction of incorporation or organization)
Suite 950
95 Wellington Street West
Toronto, Ontario
M5J 2N7
Canada
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
Not Applicable Not Applicable
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
COMMON SHARES
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(Title of Class)
NOT APPLICABLE
--------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
COMMON SHARES
--------------------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
285,789,527
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
INDICATE BY CHECK MARK WHICH FINANCIAL STATEMENT ITEM THE REGISTRANT HAS ELECTED
TO FOLLOW.
Item 17 (X) Item 18 ( )
EXPLANATORY NOTES
A) INTRODUCTION
This amendment on Form 20-F/A ("Form 20-F/A") to the Annual Report on Form 20-F
("Original Form 20-F") for the year ended December 31, 2003, as filed on May 21,
2004 with the U.S. Securities and Exchange Commission ("SEC") consists of a
cover page, these explanatory notes, the signature page, Item 17, and the
required certifications of the Chief Executive Officer and Chief Financial
Officer. This Form 20-F/A amends and restates Item 17 of the Original Form 20-F
to give effect to the amendment and restatement in Note 15 entitled
"Reconciliation with United States Generally Accepted Accounting Principles" of
2002 U.S. GAAP Consolidated Statement of Operations ("2002 U.S. GAAP
Consolidated Statement of Operations"). Accordingly, except for (a) the table of
attachments immediately preceding the Management's Report, (b) the Restatement
of the 2002 U.S. GAAP Consolidated Statement of Operations in Note 15 in this
Form 20-F/A, (c) the independent registered chartered accountants' report
relating to Note 15, and (d) the comments by auditors for U.S. readers on
Canada-U.S. reporting differences relating to Note 15, all information presented
in the Original Form 20-F and Form 20-F/A including forward looking statements
is as at the date of Original Form 20-F and the information has not been updated
for events subsequent to that date of the filing of the Original 20-F.
This Form 20-F/A amends and restates in its entirety Items 17 of the Original
Form 20-F, and no other information included in the Original Form 20-F for
fiscal year ended December 31, 2003 is amended hereby. This Amendment does not
amend the registrants' Annual Reports on Form 20-F filed with the SEC for the
year ended December 31, 2002 or any prior period. In addition, the Company has
not amended any financial information furnished to the SEC under cover of Form
6-K for any period to reflect the Restatement of 2002 U.S. GAAP Consolidated
Statement of Operations. The Restatement of 2002 U.S. GAAP Consolidated
Statements of Operations in such documents has been superseded by the
Restatement of 2002 U.S. GAAP Consolidated Statements of Operations in this Form
20-F/A.
B) Restatement of the Company's 2002 U.S. GAAP Consolidated Statements of
Operations
The Company's 2002 net income prepared in accordance with U.S. GAAP has been
revised to reflect the reversal of the deferred losses on foreign exchange
hedging contracts of $2,003,000 which was deferred under Cdn. GAAP until 2002
when the related costs were recognized in income (see note 15 (h) in the
consolidated financial statements). Under U.S.GAAP, these losses were not
deferred and, therefore, were previously recognized in 2001 in accordance with
SFAS 133. This adjustment resulted in decreasing the U.S. GAAP net loss by
$2,003,000 to a net loss of $21,901,000 and reducing the basic and diluted loss
per share by $0.01 for a revised basic loss per share of $0.13. Specifically,
the following amendments relating to the comparative financial information for
2002 were made:
- ---------------------------------- -------------------------- --------------------------
Description (under U.S. GAAP) Original Amounts ($`000) Restated Amounts ($'000)
- ---------------------------------- -------------------------- --------------------------
Net Loss 23,904 21,901
- ---------------------------------- -------------------------- --------------------------
Basic and Diluted Loss Per Share 0.14 0.13
- ---------------------------------- -------------------------- --------------------------
Effect of U.S. GAAP Adjustment 0.02 0.01
on Basic Loss Per Share
- ---------------------------------- -------------------------- --------------------------
Aggregate Adjustment (4,017) (2,014)
- ---------------------------------- -------------------------- --------------------------
Loss from Operation (20,587) (18,584)
- ---------------------------------- -------------------------- --------------------------
Comprehensive Loss (26,115) (24,112)
- ---------------------------------- -------------------------- --------------------------
ITEM 17. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the report thereon by
its independent registered chartered accountants listed below, are attached
hereto as follows:
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1. Independent Registered Chartered Accountants' Report of the Company dated as of February 27, 2004, except
as to Note 15 which is as of April 8, 2004, and the restatement note within Note 15 which is as of
February 24, 2005
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2. Consolidated Balance Sheets of the Company as at December 31, 2003 and December 31, 2002.
- -------- -------------------------------------------------------------------------------------------------------------
3. Consolidated Statements of Operations and Deficit of the Company for the years ended December 31, 2003,
2002 and 2001.
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4. Consolidated Statements of Cash Flows of the Company for the years ended December 31, 2003, 2002 and 2001.
- -------- -------------------------------------------------------------------------------------------------------------
5. Notes to the Consolidated Financial Statements of the Company.
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MANAGEMENT'S REPORT
Management is responsible for the preparation of the accompanying consolidated
financial statements of Breakwater Resources Ltd. and all of the information
contained in the Annual Report. The consolidated financial statements have been
prepared in conformity with Canadian generally accepted accounting principles
and management believes that they present fairly the Company's consolidated
financial position, results of operations and cash flows. The integrity of the
information presented in the financial statements, including estimates and
judgments relating to matters not concluded by fiscal year end, is the
responsibility of management. To fulfill this responsibility, the Company
maintains a system of internal accounting controls designed to provide
reasonable assurance that the Company's assets are protected and that events and
transactions are properly recorded as they occur. This system of internal
control includes organizational arrangement with clearly defined lines of
responsibility. Deloitte & Touche LLP, the independent auditors appointed by the
shareholders to audit the consolidated financial statements, have full and
unrestricted access to the Audit Committee to discuss their audit and their
related findings as to the integrity of the financial reporting process. During
the course of their audit, Deloitte & Touche LLP reviewed the Company's system
of internal control to the extent necessary to render their opinion on the
consolidated financial statements.
The board of directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control. The board is
assisted in exercising its responsibilities through the Audit Committee, which
is composed of three unrelated directors.
The Audit Committee meets periodically with management and the independent
auditors to satisfy itself that management's responsibilities are properly
discharged, to review the consolidated financial statements and to recommend
approval of the consolidated financial statements to the board.
"COLIN K. BENNER (SIGNED) "RICHARD R. GODFREY" (SIGNED)
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer acting)
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Shareholders of Breakwater Resources Ltd.
We have audited the consolidated balance sheets of Breakwater Resources Ltd. as
at December 31, 2003 and 2002 and the consolidated statements of operations and
deficit and of cash flows for each of the years in the three-year period ended
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). These 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 the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows each of the years
in the three-year period ended December 31, 2003 in accordance with Canadian
generally accepted accounting principles.
Our previous report dated February 27, 2004, except Note 15 which was as of
April 8, 2004 has been withdrawn and the financial information in accordance
with United States Generally Accepted Accounting Principles in Note 15 has been
revised as described in Note 15 under the heading Restatement of the Company's
2002 U.S. GAAP Consolidated Statement of Operation.
"Deloitte & Touche LLP" (signed)
Chartered Accountants
Toronto, Ontario
February 27, 2004, except as to Note 15 which is as of April 8, 2004, and the
restatement note within Note 15 which is as of February 24, 2005
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) to either identify
circumstances in which accounting changes affect consistency such as the matters
described in Note 1 and 15(d) to the consolidated financial statements. Our
report to the shareholders dated February 27, 2004, except as to Note 15 which
is as of April 8, 2004, and the restatement note within Note 15 which is as of
February 24, 2005, is expressed in accordance with Canadian reporting standards
which do not require a reference to such circumstances in the auditors' report
when the items are properly accounted for and disclosed in the consolidated
financial statements.
"Deloitte & Touche LLP" (signed)
Chartered Accountants
Toronto, Ontario
February 27, 2004, except as to Note 15 which is as of April 8, 2004, and the
restatement note within Note 15 which is as of February 24, 2005
BREAKWATER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
As at December 31, 2003 and 2002
(Expressed in thousands of Canadian dollars)
- -------------------------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 1) $ 6,388 $ 6,435
Accounts receivable - concentrate 7,450 17,061
Other receivables 5,650 6,921
Concentrate inventory 21,828 25,340
Materials and supplies inventory 23,783 28,967
Prepaid expenses and other current assets 1,905 2,387
Future tax assets (note 7) 1,190 -
- -------------------------------------------------------------------------------------------------------------
68,194 87,111
RECLAMATION DEPOSITS (note 2) 100 1,387
MINERAL PROPERTIES AND FIXED ASSETS (note 3) 107,341 134,882
- -------------------------------------------------------------------------------------------------------------
$ 175,635 $ 223,380
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LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 19,456 $ 25,577
Provisional payments for concentrate inventory shipped and not priced 2,010 8,642
Short-term debt including current portion of long-term debt (note 4) 10,329 30,227
Income and mining taxes payable 252 381
- -------------------------------------------------------------------------------------------------------------
32,047 64,827
DEFERRED ROYALTY (note 3(h)) 1,340 -
LONG-TERM DEBT (note 5) 15,517 48,438
RECLAMATION AND CLOSURE COST ACCRUALS (note 2) 12,070 13,697
FUTURE TAX LIABILITIES (note 7) 962 822
- -------------------------------------------------------------------------------------------------------------
61,936 127,784
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CONTINGENCIES AND COMMITMENTS (notes 1 and 10)
SHAREHOLDERS' EQUITY
Capital stock (note 6) 287,743 257,759
Common shares to be issued (note 6(c)) - 618
Contributed surplus (note 6(m)) 1,582 1,582
Deficit (171,737) (178,855)
Cumulative translation adjustments (3,889) 14,492
- -------------------------------------------------------------------------------------------------------------
113,699 95,596
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$ 175,635 $ 223,380
- -------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated
financial statements.
Approved by the Board
"GARTH A. C. MACRAE" (SIGNED) "COLIN K. BENNER" (SIGNED)
DIRECTOR DIRECTOR
135
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended December 31, 2003, 2002 and 2001
(Expressed in thousands of Canadian dollars except share and per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Gross sales revenue $ 207,591 $ 305,354 $ 304,037
Treatment and marketing costs 83,581 136,738 142,236
- -------------------------------------------------------------------------------------------------------------------------
Net revenue 124,010 168,616 161,801
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OPERATING COSTS
Direct operating costs 103,239 147,653 153,187
Depreciation and depletion 24,115 27,565 27,980
Reclamation and closure costs (note 2) 2,277 2,894 4,126
- -------------------------------------------------------------------------------------------------------------------------
129,631 178,112 185,293
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LOSS FROM MINING ACTIVITIES (5,621) (9,496) (23,492)
- -------------------------------------------------------------------------------------------------------------------------
OTHER (INCOME) EXPENSES
General and administrative (note 6(c)) 5,087 6,198 7,481
Interest and financing (note 6(l)) 3,321 4,761 8,015
Investment and other income (611) (551) (9,293)
Foreign exchange (gain) loss on US dollar denominated debt (11,578) (669) 4,720
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(3,781) 9,739 10,923
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LOSS BEFORE THE FOLLOWING: (1,840) (19,235) (34,415)
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Write-down of mineral properties and fixed assets (note 3) 279 - 70,281
Other non-producing property (income) costs (note 3(h)) (8,396) 876 3,176
Foreign exchange hedging loss (note 8) - - 3,162
Income and mining taxes (recovery) (note 7) (841) (224) 24
- -------------------------------------------------------------------------------------------------------------------------
(8,958) 652 76,643
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 7,118 (19,887) (111,058)
DEFICIT - BEGINNING OF YEAR (178,855) (158,968) (47,910)
- -------------------------------------------------------------------------------------------------------------------------
DEFICIT - END OF YEAR $ (171,737) $ (178,855) $ (158,968)
- -------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE (note 13) $ 0.03 $ (0.12) $ (0.92)
- -------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (note 13) $ 0.03 $ N/A $ N/A
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING AFTER BONUS ELEMENT (note 13) 211,411,000 169,074,000 120,166,000
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial statements.
136
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
(Expressed in thousands of Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES
Net earnings (loss) $ 7,118 $ (19,887) $ (111,058)
Non-cash items:
Depreciation and depletion 24,115 27,565 27,980
Gain on sale of property (note 3(h)) (10,336) - -
Write-down of mineral properties and fixed assets (note 3) 279 - 70,281
Other non-cash items (3,133) 2,379 3,309
Future income taxes (note 7) (1,050) 822 -
Reclamation and closure cost accruals 2,277 2,894 4,126
- -------------------------------------------------------------------------------------------------------------------------
19,270 13,773 (5,362)
Payment of reclamation and closure costs (4,562) (5,126) (1,996)
Deferred losses on foreign exchange hedging contracts - - (2,003)
Changes in non-cash working capital items (note 12) 3,179 (11,198) 42,460
- -------------------------------------------------------------------------------------------------------------------------
17,887 (2,551) 33,099
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issue of common shares for cash (note 6) 29,316 17,907 902
Decrease in short-term debt (18,711) (3,495) (27,962)
(Decrease) increase in long-term debt (29,821) 2,390 13,266
- -------------------------------------------------------------------------------------------------------------------------
(19,216) 16,802 (13,794)
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Reclamation deposits 1,287 (150) 962
Mineral properties and fixed assets (10,621) (10,971) (21,662)
Proceeds from sale of mineral properties 10,616 - -
- -------------------------------------------------------------------------------------------------------------------------
1,282 (11,121) (20,700)
- -------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH (47) 3,130 (1,395)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 6,435 3,305 4,700
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,388 $ 6,435 $ 3,305
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 2,681 $ 3,539 $ 5,681
Income and mining taxes $ 339 $ 588 $ 699
The accompanying notes form an integral part of these consolidated financial statements.
137
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Interests in joint ventures are consolidated on a
proportionate basis. All inter-company accounts and transactions have been
eliminated on consolidation.
REVENUE RECOGNITION AND RECEIVABLES
Revenue is recognized following the transfer of title of metal concentrate
and the determination of the final settlement price in accordance with the
contractual arrangements with customers. Generally, the final settlement price
is computed with reference to the average quoted metal prices for a specified
period of time, normally one to three months subsequent to shipment to the
customer. Concentrate sales and receivables are subject to adjustment on final
settlement to reflect changes in weights and assays. Provisional payments made
by customers upon receipt of shipments of metal concentrate are classified as
current liabilities captioned as "Provisional payments for concentrate inventory
shipped and not priced".
Substantially all of the Company's sales are made under long-term
contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less. The Company invests cash in term
deposits maintained in high credit quality institutions. Included in cash and
cash equivalents for 2003 was an amount of $355,000 that was held in escrow as a
condition to the restructuring of the Company's banking agreement. The cash is
expected to be released in March 2004.
CONCENTRATE INVENTORY
Concentrate inventory is valued at the lower of cost and net realizable
value. Cost represents the average cost and includes direct labour and material
costs, mine site overhead and depreciation and amortization.
MATERIALS AND SUPPLIES INVENTORY
Materials and supplies inventory is valued at the lower of average cost and
replacement cost.
SHORT-TERM INVESTMENTS
Short-term investments are carried at the lower of cost and quoted market
value.
MINERAL PROPERTIES AND FIXED ASSETS
The Company records its interest in mineral properties at cost and defers
exploration and development expenditures. When the properties are brought into
commercial production, the deferred costs are amortized on a unit-of-production
basis using current reserve estimates. Costs associated with exploration
properties are deferred, on a project basis, until the economic viability of the
project is determined.
If the properties are abandoned or sold, the cost of the mineral property
and any related deferred expenditures are expensed as a write-down of mineral
properties and fixed assets at that time. Administrative costs are expensed as
incurred.
The carrying values of producing mineral properties, including properties
placed on a care and maintenance basis (see notes 3(e) and 3(f)) and related
deferred expenditures, are reviewed regularly and, where necessary, are written
down to the estimated net recoverable amounts. Estimated future net cash
138
flows, on an undiscounted basis, are calculated for each property using:
estimated recoverable reserves; estimated future zinc price realization
(considering historical and current prices, price trends and related factors);
and, operating, capital and other cash flows. Estimates of future cash flows are
subject to risks and uncertainties. It is possible that changes could occur
which may affect the recoverability of the carrying value of mineral properties.
The carrying values of non-producing mineral properties and related
deferred expenditures represent unamortized net costs incurred to date and do
not necessarily reflect present or future values. The recoverability of these
amounts is dependent upon the existence of economically recoverable reserves,
upon the Company's ability to obtain the necessary financing to complete
development and upon future profitable production.
Fixed assets are stated at cost. Depreciation is provided to reduce the
original cost of fixed assets to estimated residual values over their useful
lives. In calculating depreciation, the Company employs the straight-line method
and the unit-of-production method. Principally, the rates of depreciation being
applied using the straight-line method are intended to fully depreciate the
related fixed assets over periods from 2 to 12 years.
RECLAMATION AND SITE RESTORATION COSTS
The Company provides for estimated reclamation and site restoration costs,
where reasonably determinable, net of salvage value, on a unit-of-production
basis over the estimated economic life of the related mine. Costs are based on
engineering estimates of the anticipated method and extent of site restoration.
Collateral on deposit with third parties to fund reclamation costs is shown
separately on the balance sheet as Reclamation Deposits. Estimates of the
ultimate site restoration costs are based on current laws and regulations and
expected costs to be incurred, all of which are subject to possible changes
thereby impacting current determinations.
TRANSLATION OF FOREIGN CURRENCIES
DOMESTIC AND FOREIGN OPERATIONS
The Company reports its financial statements in Canadian dollars, while the
currency of measurement for the Company's operations varies depending upon
location.
The currency of measurement for the Company's operations domiciled in
Canada is the Canadian dollar, while the currency of measurement for the
Company's foreign operations is the US dollar, since all the Company's revenue,
and a substantial portion of its expenses relating to the foreign operations,
are in US dollars. US dollar amounts for the Company's foreign operations are
translated to Canadian dollars for reporting purposes using the current rate
method. Under the current rate method, assets and liabilities are translated at
the exchange rates in effect at the balance sheet date, revenues and expenses
are translated at average rates for the year, and the resulting gains and losses
are accumulated in a separate component of shareholders' equity, described in
the consolidated balance sheet as cumulative translation adjustments.
As indicated above, the currency of measurement for the Company's foreign
operations, including those in Honduras, Chile and Tunisia, is the US dollar. In
each of these operations, the temporal method is used to translate local
currency amounts into US dollars. Under the temporal method, all non-monetary
items and the related depreciation are translated at the historical rates.
Monetary assets and liabilities are translated at actual exchange rates in
effect at the balance sheet date, revenues and expenses other than depreciation
and depletion of capital assets are translated at the average rate of exchange
for the year, and gains and losses on translation are reflected in income for
the year.
Monetary assets and liabilities of the Company's domestic operations in
Canada, denominated in US dollars, are translated at the rates of exchange
prevailing at the balance sheet date. Non-monetary assets and liabilities are
translated at historical rates. Revenues and expenses are translated at the
average rate of exchange for the year. Exchange gains and losses are included in
income for the year.
139
USE OF ESTIMATES
The preparation of financial statements, in accordance with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Management's estimates are made in accordance with mining industry practice.
Actual results could differ significantly from those estimates. The assets and
liabilities which require management to make significant estimates and
assumptions in determining carrying values include accounts receivable,
concentrate inventory, mineral properties and fixed assets, and reclamation and
closure cost accruals.
FINANCIAL INSTRUMENTS
The Company enters into derivative financial instrument contracts to manage
certain market risks which result from the underlying nature of its business.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. The Company uses forward
contracts to hedge exposure to commodity price risk for metals production, and
foreign exchange forward contracts to hedge exposure to fluctuations in foreign
currencies, relating primarily to the US dollar. The Company has written call
options to minimize exposure to commodity price risk. Non-option derivative
financial instruments are accounted for using the accrual method as management
views the contracts as effective hedges and has designated the contracts as
hedges of specific exposures. Hedge effectiveness is assessed based on the
degree to which the cash flows on the derivative contracts are expected to
offset the cash flows of the underlying position or transaction being hedged.
The Company also formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions
are, and continue to be, effective. Realized and unrealized gains or losses on
derivative contracts that qualify for hedge accounting are deferred and recorded
in income when the underlying hedge transaction is completed. The premiums
received at the inception of written call options are recorded as a liability
until maturity. Changes in the fair value of the liability are recognized
currently in income. Gains or losses (realized or unrealized) for derivative
contracts which no longer qualify as hedges for accounting purposes or which
relate to a hedged transaction that is no longer expected to occur are recorded
in income.
SHARE INCENTIVE PLAN
The Company has a share incentive plan (the "Plan"), which consists of a
share purchase plan, a share option plan and a share bonus plan which is
administered by the directors of the Company. The Plan provides that eligible
persons thereunder include any director, employee (full-time or part-time),
officer or consultant of the Company or any subsidiary thereof. The Plan is
described in note 6. No compensation expense is recognized for the Plan when
share options are issued to employees (see note 6(j)). Shares issued under the
Plan are recorded at the issue price. An optionee may elect under the Plan to
terminate an option, in which case the optionee may receive consideration either
in cash or shares of the Company, at the discretion of the Company, equal to the
difference between the fair market value of the shares, as defined, and the
exercise price. The consideration paid to the optionee in the event of such an
election is charged to deficit.
INCOME AND MINING TAXES
The provisions for income and mining taxes are based on the liability
method. Future income taxes arise from the recognition of the tax consequences
of temporary differences by applying substantively enacted statutory tax rates
applicable to future years to differences between the financial statements
carrying amounts and the tax bases of certain assets and liabilities. The
Company records a valuation allowance against any portion of those future income
tax assets that it believes will, more likely than not,
140
fail to be realized. On business acquisitions, where differences between
assigned values and tax bases of assets acquired and liabilities assumed exist,
the Company recognizes the future income tax assets and liabilities for the tax
effects of such differences.
Future withholding taxes are provided on the unremitted net earnings of
foreign subsidiaries and associates to the extent that dividends or other
repatriations are anticipated in the future and will be subject to such taxes.
NEW PRONOUNCEMENT
In February 2003, the Canadian Institute of Chartered Accountants ("CICA")
issued Accounting Guideline 14, Disclosure of Guarantees ("AcG-14"). AcG-14
requires disclosure for certain contracts or obligations that meet the
definition of a guarantee. As at December 31, 2003, the Company has outstanding
letters of credit totalling $3,811,000, which are renewable annually. $3,141,000
of these letters of credit are for security deposits for rehabilitation and
restoration expenses, $250,000 relates to the operating lease at the Nanisivik
Mine (see note 3(g)) and $420,000 (US$325,000) to guarantee a purchase contract.
2002 AND 2001 FIGURES
Certain of the 2002 and 2001 figures have been reclassified to conform to
the 2003 presentation.
2. RECLAMATION DEPOSITS AND RECLAMATION AND CLOSURE COST ACCRUALS
Reclamation and closure costs accruals by mine are as follows:
($000's) 2003 2002
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Nanisivik Mine 3,391 7,224
Bouchard-Hebert Mine 3,785 3,076
Bougrine Mine 2,489 2,339
El Mochito Mine 1,613 1,794
Caribou Mine 1,000 1,000
El Toqui Mine 620 425
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Total
Less current portion included in accounts
payable and accrued liabilities 828 2,161
---------------------------------------------------------------------------
Cash collateral on deposit at December 31, 2003 of $100,000 (2002 -
$1,387,000) with third parties to fund reclamation costs is shown separately on
the balance sheet as Reclamation Deposits. During 2003, $1,287,000 of the
collateral on deposit was converted to letters of credit (see note 1 - New
Pronouncement). The Reclamation Deposits at December 31, 2003 and 2002 are for
funding of reclamation costs at the Caribou Mine. In addition, at December 31,
2003, the Company has posted reclamation security bonds totalling $8,181,000
(2002 - $13,000,000) of which $3,141,000 is covered by letters of credit (see
note 1 - New Pronouncement).
141
3. MINERAL PROPERTIES AND FIXED ASSETS
($000's) 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Accumulated Accumulated
Depreciation Net Book Depreciation Net Book
Cost and Depletion Value Cost and Depletion Value
--------------------------------------------------------------------------------------------------------------------------
Equipment 146,562 (104,365) 42,197 158,305 (108,237) 50,068
Mineral properties,
buildings and
improvements 95,193 (64,732) 30,461 104,736 (63,089) 41,647
Development 54,866 (34,503) 20,363 60,489 (34,795) 25,694
Exploration 14,845 (525) 14,320 17,475 (2) 17,473
--------------------------------------------------------------------------------------------------------------------------
311,466 (204,125) 107,341 341,005 (206,123) 134,882
A summary of the write-downs of mineral properties and fixed assets is as
follows:
($000's) 2003 2002 2001
---------------------------------------------------------------------------
Caribou Mine - - 53,450
Nanisivik Mine - - 11,252
El Mochito Mine 279 - 2,505
Other Properties - - 3,074
---------------------------------------------------------------------------
279 70,281
Mineral properties and fixed assets of the Company comprise the following:
a) El Mochito Mine $14,322,000 (2002 - $19,447,000)
The El Mochito Mine is a zinc, lead and silver mine located in the Republic
of Honduras. Deferred exploration costs were written down in 2003 by
$279,000 (2002 - $Nil and 2001- $2,505,000)
b) Bougrine Mine $12,762,000 (2002 - $24,458,000)
The Bougrine Mine is a zinc and lead mine located 160 kilometres west of
Tunis, Tunisia.
c) El Toqui Mine $21,677,000 (2002 - $23,596,000)
The El Toqui Mine is a zinc and gold mine located 1,350 kilometres south of
Santiago, Chile.
d) Bouchard-Hebert Mine $10,111,000 (2002 - $18,452,000)
The Bouchard-Hebert Mine is a zinc, copper, gold and silver mine located 30
kilometres northeast of Rouyn-Noranda, Quebec, Canada.
e) Langlois Mine $39,643,000 (2002 - $37,166,000)
The Langlois Mine is a zinc, copper, gold and silver mine located 213
kilometres north of Val d'Or, Quebec, Canada. Mining activities at the Langlois
Mine were suspended in November 2000, pending the completion of a feasibility
study, which was completed in August 2001. Costs totalling $1,659,000 in 2003,
($1,575,000 in 2002), incurred primarily to upgrade resources to reserves and
$778,000 (2002 - $Nil) in pre-production costs in anticipation of reopening,
have been capitalized.
142
f) Caribou Mine $Nil (2002 - $Nil)
The Caribou Mine, a zinc, lead and silver mine, is located in the Province
of New Brunswick, Canada.
The Caribou Mine was placed on care and maintenance in 1998. In 2001, as a
result of depressed metal prices, the Company reassessed the carrying value of
its properties and the property was written down by $53,450,000 to $Nil. The
revised carrying value was determined on the basis set out in note 1.
g) Nanisivik Mine $2,542,000 (2002 - $2,899,000)
The Nanisivik Mine was a zinc and silver mine located on Strathcona Sound,
Baffin Island, Nunavut, Canada. The fixed asset carrying value of $2,542,000 as
at December 31, 2003, represents the net book value of plant and equipment
located at the Nanisivik Mine which management believes will be realized on the
ultimate disposition of mine equipment and property as part of the mine closure
and site restoration activities. In 2001, as a result of depressed metal prices,
the Company reassessed the carrying value of its properties on the basis set out
in note 1, resulting in a write-down of this property in the amount of
$11,252,000. The Nanisivik mine ceased operations on September 30, 2002.
h) Other Properties $6,284,000 (2002 - $8,864,000)
Other Properties comprise exploration properties held directly or through
joint ventures. Management reviews the carrying values of these properties
annually and in 2003 recorded a write-down of $Nil (2002 - $Nil, 2001 -
$3,074,000).
On June 16, 2003, the Company sold the Lapa exploration properties
consisting of the Tonawanda and Zulapa properties, respectively, for
US$7,925,000. The Company retains a 1.0 percent net smelter royalty from the
Tonawanda property and a 0.5 percent net smelter royalty from the Zulapa
property. The Company also received a non-refundable advance royalty of
US$1,000,000 against the above net smelter royalty of the Lapa properties and
will receive a further non-refundable advance royalty of US$1,000,000 when the
total published inferred resource reaches 2,000,000 ounces of gold.
The non-refundable advance royalty of $1,340,000 (US$1,000,000) received
has been deferred and is shown on the balance sheet as "Deferred Royalty". The
deferred royalty will be brought into income when earned.
The Lapa properties were non-producing properties and the gain on sale of
$10,336,000 is included in "Other non-producing property (income) costs" of
$8,396,000 in the consolidated statement of operations and deficit in 2003.
4. SHORT-TERM DEBT
($000's) 2003 2002
---------------------------------------------------------------------------
Syndicated Credit Facility
- Revolver 6,462 25,195
- Non-Revolving Facility, current portion (note 5) 1,266 -
- Supplemental Term Facility, current portion (note 5) 467 -
Customer prepayments for zinc concentrates (note 5) 646 3,159
Other (note 5) 1,488 1,873
---------------------------------------------------------------------------
10,329 30,227
On November 15, 2001, the Company completed a refinancing agreement whereby the
balance of the Non-Revolving Facility of US$22,631,000 was increased by
US$6,500,000 (the "Supplemental Term Facility"). Dundee Bancorp Inc. ("Dundee"),
a significant shareholder of the Company, guaranteed the Supplemental Term
Facility. Under the agreement, the Revolver was extended to January 2, 2003. In
addition, compliance with the existing financial covenants was waived until
January 2, 2003.
143
The syndicated credit facility (the "Syndicated Credit Facility") is
secured by a pledge of the shares in the Company's operating subsidiaries,
through guarantees by such subsidiaries, and through first charges on the
Company's concentrate inventory and receivables and on the majority of the
Company's mining assets.
In December 2002, the Syndicated Credit Facility that was due on January 2,
2003, was extended to January 2, 2004, and the interest rate on the
Non-Revolving Facility was increased to LIBOR plus 2.75%. The amount of the
Revolver was reduced from a cap of US$45,000,000 to US$30,000,000. In return for
amending the Syndicated Credit Facility, the banking syndicate was granted share
purchase warrants to purchase 2,000,000 common shares of the Company at an
exercise price of $0.19 per Common Share with an expiry date of March 27, 2006.
In addition, as consideration for extending its support of the Supplemental Term
Facility, Dundee was granted warrants to purchase 1,000,000 common shares of the
Company on the same basis as the banking syndicate (see note 6(m)).
On November 27, 2003, the Company completed a restructuring of the
Syndicated Credit Facility, which included:
i) A pay down of 50% of US$17,600,000 and US$6,500,000 of the
Non-Revolving Facility and the Supplemental Term Facility,
respectively, on a pari passu basis;
ii) An extension of the Non-Revolving Facility and the Supplemental
Term Facility, both due January 2, 2004, for a period of five
years to January 2, 2009;
iii) An agreement that principal under the Non-Revolving Facility and
the Supplemental Term Facility will be repaid in fifty-four equal
monthly payments beginning in July, 2004; and
iv) Maintaining the existing Revolver until January 2, 2005 with a
reduction of the cap from US$30,000,000 to US$25,000,000.
Interest expense on short-term debt during 2003 amounted to $797,000 (2002
- - $1,979,000, 2001 - $3,018,000).
5. LONG-TERM DEBT
($000's) 2003 2002
---------------------------------------------------------------------------
Non-Revolving Facility (note 4) 11,393 35,748
Supplemental Term Facility (note 4) 4,201 10,267
Reimbursable government assistance, discounted at
a rate of 8% 1,412 1,390
Customer prepayments for zinc concentrates 646 3,159
Other 1,277 1,033
---------------------------------------------------------------------------
Total 18,929 51,597
Less current portion 3,412 3,159
---------------------------------------------------------------------------
15,517 48,438
The Non-Revolving Facility and the Supplemental Term Facility (see note 4),
which bear interest at LIBOR plus 2.75%, are repayable through January 2, 2009,
with principal repayments in fifty-four equal monthly amounts beginning in July,
2004.
On January 30, 2004, the Non-Revolving Facility and the Supplemental Term
Facility were repaid and cannot be redrawn, using a portion of the proceeds from
the sale of units to a syndicate of underwriters (see note 14(a)).
Other long-term debt at December 31, 2003 and 2002 includes fees of
$1,033,000 payable to Dundee Securities Corporation ("DSC"), a subsidiary of
Dundee, with respect to acquisitions in prior years (see note 9), payment of
which has been deferred to 2004 and for 2003 is included in Other short-term
debt.
The fair value of the Company's long-term debt approximates its carrying
value at December 31, 2003 and 2002. Interest expense on long-term debt during
2003 amounted to $1,432,000 (2002 - $1,913,000, 2001 - $2,506,000).
144
6. CAPITAL STOCK
Authorized - Unlimited Common Shares
200,000,000 preferred shares
Issued:
Common shares
(000's) Number of shares Amount
-------------------------------------------------------------------------------------------------
As at December 31, 2001 93,848 $239,214
Rights offering, net of expenses (e) 94,455 17,643
Shares issued on reacquisition of assets (d) 3,603 638
Employee share purchase plan (f) 1,375 264
-------------------------------------------------------------------------------------------------
As at December 31, 2002 193,281 257,759
Private placement (a) 1,014 742
Shares issued for subscription receipts, net of expenses (b) 85,800 28,002
Shares issued as supplementary payment to employee (c) 2,565 618
Shares issued on exercise of warrants (k) 500 105
Shares issued on exercise of options (g) 1,333 263
Employee share bonus plan (h) 200 50
Employee share purchase plan (f) 1,097 204
-------------------------------------------------------------------------------------------------
As at December 31, 2003 285,790 $287,743
(a) In December 2003, the Company issued 1,013,514 flow-through common shares
at a price of $0.74, exclusive of share issue costs to finance exploration
activities in the vicinity of the Bouchard-Hebert Mine.
(b) On October 7, 2003, the Company issued 85,800,000 subscription receipts, at
a price of $0.35 per subscription receipt resulting in proceeds of
$28,002,000, net of costs of issue of approximately $2,028,000. The
proceeds from the issue were escrowed subject to the satisfaction of
certain conditions (the "Escrow Conditions") which included the Company
reaching agreement with its lenders on the restructuring and pay down of
the Syndicated Credit Facility. The Escrow Conditions were satisfied on
November 27, 2003, the proceeds were released to the Company and the
subscription receipts were exchanged for 85,800,000 common shares of the
Company ("Common Shares").
(c) In February 2003, 2,564,887 Common Shares were issued for $618,000, as
required under an agreement dated November 30, 2001, relating to the
resignation of an executive. The Company had agreed to pay the executive a
supplementary amount of up to $700,000, either in cash or Common Shares.
The amount to be paid was based on a formula using the weighted-average
trading price for the Common Shares for the month of January 2003. As at
December 31, 2002, the amount of $618,000 was shown on the balance sheet as
"Common shares to be issued" in Shareholders' Equity. The supplementary
amount paid in the form of Common Shares was included in general and
administrative expenses in 2002.
(d) Under an agreement dated June 7, 2001, relating to the sale of certain
assets acquired through the acquisition of Jascan in November 2000, the
Company granted to the purchaser who acquired such assets, the right under
certain circumstances to cause the Company to reacquire such assets in
consideration for the issuance of Common Shares. In 2002, the purchaser
exercised its rights and the Company issued 3,603,000 shares to reacquire
certain assets. The number of Common Shares issued was determined based
upon the ten-day weighted-average trading price of the Common Shares
immediately preceding the third party's notice of intent to acquire such
Common Shares, less a ten per cent discount. A director of the Company has
a significant ownership interest in the purchaser that acquired the shares.
145
(e) On May 1, 2002, the Company completed a rights offering resulting in the
issuance of 94,454,795 Common Shares at a price of $0.20 per share
resulting in proceeds of $17,600,000, net of costs of issue of
approximately $1,300,000.
(f) The share purchase plan entitles certain employees of the Company to
contribute up to 5% or up to 10% of their annual basic salary, to purchase
Common Shares. The Company matches each participant's contribution. The
purchase price per Common Share is the weighted-average of the trading
prices of the Common Shares on The Toronto Stock Exchange (the "TSX") for
the calendar quarter in respect of which the Common Shares are issued.
Common Shares acquired with the Company's contribution are held in
safekeeping and delivered to employees 12 months following their date of
issue. The Company issued 1,097,000 Common Shares pursuant to the Share
Purchase Plan during 2003 (2002 - 1,375,000). The number of shares
authorized for issue under the share purchase plan as at December 31, 2003
was 6,500,000.
(g) Pursuant to the share option plan, the directors have the authority to
grant options and to establish the exercise price of the option at the time
each option is granted, at a price not less than the closing price of the
Common Shares on the TSX on the trading day immediately preceding the date
of the grant of such option.
Options must be exercised no later than ten years after the date of the
grant and are subject to vesting provisions unless the directors of the
Company determine otherwise. One third of the options granted become
exercisable from the date of granting such options, and on a cumulative
basis, one third at any time after the first anniversary date and the
balance at any time after the second anniversary date.
Optionees may elect to terminate options and receive the difference between
the fair value of a Common Share and the exercise price of the option so
terminated multiplied by the number of options being terminated in Common
Shares or, with the consent of the Company, cash. The consideration paid
upon such terminations is charged to deficit. There were no terminations of
options by optionees in 2003 or 2002.
As at December 31, 2003, the outstanding share options which total
8,885,000 expire at various dates between April 30, 2005 and November 9,
2013 and are exercisable at prices ranging from $0.18 to $8.20 per Common
Share. The number of shares authorized for grants of options under the
share option plan as at December 31, 2003 was 12,500,000.
(h) On June 19, 2001, the Plan was amended to add a share bonus plan (the
"Share Bonus Plan") to the Plan. The Share Bonus Plan permits Common Shares
to be issued as a discretionary bonus to any director, employee (full-time
or part-time), officer or consultant of the Company or any subsidiary
thereof who is designated under the Share Bonus Plan from time to time. For
the year ended December 31, 2003, the Company has issued 1,200,000 (2002 -
1,000,000) Common Shares under the Share Bonus Plan. The number of shares
authorized for issue under the share bonus plan as at December 31, 2003 was
3,000,000.
146
(i) Share option transactions were as follows:
Options Weighted- Average
(000's) Exercise Price
- ----------------------------------------------------------------------------------------
As at December 31, 2001 5,259 $2.21
Granted 3,895 0.19
Cancelled (358) 2.39
- ----------------------------------------------------------------------------------------
As at December 31, 2002 8,796 1.31
Granted 1,740 0.27
Exercised (1,333) 0.20
Cancelled (318) 1.95
- ----------------------------------------------------------------------------------------
As at December 31, 2003 8,885 $1.25
The following table summarizes information about the share options
outstanding at December 31, 2003.
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
as at Remaining Average as at Average
Range of Dec. 31, 2003 Contractual Exercise Dec. 31, 2003 Exercise
Exercise Prices (000's) Life Price (000's) Price
- -----------------------------------------------------------------------------------------------------------------------
$0.18 - $0.20 3,555 8 years 190 days $0.19 2,282 $0.19
$0.24 - $2.00 2,921 7 years 58 days $0.74 2,554 $0.79
$2.05 - $3.35 1,501 3 years 142 days $2.92 1,501 $2.92
$3.75 - $8.20 908 5 years 183 days $4.33 908 $4.33
(j) The Company's share option plan is described in note 6(g). The Company has
elected not to use the fair value method of accounting and does not
recognize compensation expense for its stock-based compensation for
employees. Had compensation expense for the stock-based compensation plan
for employees been determined based upon the fair value of awards granted
on or after January 1, 2002, the Company's net earnings for the year ended
December 31, 2003 would have decreased by $274,000 and the net loss for
2002 would have increased by $183,000. However, the earnings and loss per
share for the years ended December 31, 2003 and 2002, respectively would
have been unchanged.
The fair value of each option grant is estimated on the balance sheet
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2003 2002
--------------------------------------------------------------------------------------------
Weighted-average exercise price per Common Share $0.27 $0.19
Weighted quoted market price per Common Share at date of grant $0.27 $0.19
Weighted-average grant-date fair value price per Common Share $0.17 $0.15
Expected life (years) 1 - 10 1 - 10
Risk free interest rate 4.62% 5.21%
Expected volatility 46% 62%
Dividend yield 0% 0%
The exercise price of all options granted during 2003 and 2002 equals
the quoted market price at the date of grant.
(k) In consideration for restructuring the Syndicated Credit Facility in May
2001, the Company granted to the members of the syndicate ("the Lenders")
warrants to purchase 300,000 Common
147
Shares at $1.57 per share. The warrants were exercisable until November 29,
2002 (see note 6(l)). No value was ascribed to these warrants on the date
of issue.
(l) In consideration for restructuring the Non-Revolving Facility on November
15, 2001 (see note 4), in March 2002 and May 2002, the Company granted to
the Lenders warrants to purchase an aggregate of 1,000,000 Common Shares at
$0.21 per share. The warrants are exercisable until May 8, 2005. No value
was ascribed to these warrants on the date of issue. Dundee also received
warrants to purchase an aggregate of 30,801,410 Common Shares at $0.20 per
share. One-half of these warrants are exercisable until March 2, 2007 and
the remainder are exercisable until May 2, 2007; no value was ascribed to
these warrants on the date of issue. During the year ended December 31,
2003, 500,000 of the warrants issued to the Lenders were exercised and
50,000 cancelled. As at December 31, 2002, none of these warrants had been
exercised or cancelled.
In addition, as part of the restructuring of the Syndicated Credit
Facility in 2001, the Company agreed to amend the terms of the outstanding
warrants issued to the Lenders to purchase an aggregate of 300,000 Common
Shares at a price of $1.57 per share until November 29, 2002, to change the
exercise price of such warrants to $0.21 per share and the expiry date of
the warrants to the earlier of May 8, 2005 and thirty days following the
date the ten-day weighted-average trading price of the Common Shares on the
TSX exceeds $0.28 per share. The exercise price was based on the five-day
weighted-average trading price of the Common Shares on the TSX following
the completion of the Rights Offering.
(m) Under an agreement reached on December 23, 2002 with the Lenders and Dundee
(see note 4), the Company, in consideration for restructuring its existing
credit facilities, granted to the Lenders and Dundee the right to purchase
2,000,000 and 1,000,000 Common Shares respectively, at an exercise price of
$0.19 per Common Share with an expiry date of March 27, 2006. The value
ascribed to the warrants issued of $97,000 was included in the financial
statements at December 31, 2002 as contributed surplus.
The fair value of each of the above option grants, had been estimated
on December 31, 2002 using Black-Scholes option-pricing model with the
following weighted-average assumptions:
Estimated exercise price per Common Share $0.25
Quoted market price per Common Share at date of grant $0.16
Expected life (years) 3
Risk free interest rate 3.23%
Expected volatility 46%
Dividend yield 0%
The quoted market value of the Company's Common Shares as at December
31, 2003 was $0.64.
(n) In 2001, the Company negotiated the deferral of payments of treatment
charges with several of its customers. As consideration for the deferral of
payments, the Company issued warrants to purchase 90,893 Common Shares at
$0.50 per share. The warrants expired on June 30, 2003. No value was
ascribed to these warrants on the date of issue.
148
7. INCOME AND MINING TAXES
Income and mining taxes differ from the amount computed by applying the
statutory federal income tax rate for the year ended December 31, 2003 of 38%
(2002 - 39%, 2001 - 39%) to the net earnings (loss), excluding income and mining
taxes. The differences are summarized as follows:
($000's) 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------
Tax provision (recovery) at statutory rate 2,364 (7,762) (43,303)
Federal resource allowance 119 (289) 470
Unrecognized tax benefit relating to losses 916 5,781 42,312
Different effective tax rates on earnings (losses) in foreign 1,630 2,725 712
subsidiaries
Benefit of previously unrecognized losses available for carry forward (5,984) (246) -
Other 124 (88) 483
Mining taxes (recovery) (10) (345) (650)
-----------------------------------------------------------------------------------------------------------------
(841) (224) 24
As at December 31, 2003, the significant components of the Company's future
tax assets (liabilities) were as follows:
($000's) 2003 2002
-------------------------------------------------------------------------------------------------------
Future tax assets
Loss carry forwards 19,043 30,562
Mineral properties and fixed assets 56,062 64,709
Reclamation and closure cost accruals 5,354 5,005
-------------------------------------------------------------------------------------------------------
Future tax assets before valuation allowance 80,459 100,276
Valuation allowance 79,269 100,276
-------------------------------------------------------------------------------------------------------
Future tax assets 1,190 -
Future tax liabilities
Mineral properties - mining tax (962) (822)
-------------------------------------------------------------------------------------------------------
Net future tax assets (liabilities) 228 (822)
a) At December 31, 2003, the Company has net operating loss carry
forwards in Canada of approximately $29,000,000, which expire at
various dates through 2010. In addition, the Company has approximately
$46,700,000 of resource expenditures that are limited in their
deduction to income from specific properties.
b) At December 31, 2003, the Company has net operating loss carry
forwards in Chile of approximately $42,700,000, which do not expire.
c) At December 31, 2003, the Company has net operating loss carry
forwards in Honduras of approximately $8,900,000, which will expire
four years after the Company in Honduras generates its first taxable
profit.
8. FINANCIAL INSTRUMENTS
The Company manages its exposure to fluctuations in commodity prices,
foreign exchange rates and interest rates by entering into derivative financial
contracts in accordance with the formal risk management policy approved by the
Company's Board of Directors and managed by the Company's Hedge Committee. The
Company does not hold or issue derivative contracts for speculation or trading
purposes.
The Company's short-term financial instruments, made up of cash and cash
equivalents, accounts receivable, bank indebtedness, accounts payable and
accrued liabilities, and short-term debt are carried at cost which, due to their
short-term nature, approximates their fair value. The fair value of the
long-term debt also approximates its carrying value as set out in note 5.
149
Such fair value estimates are not necessarily indicative of the amounts the
Company might pay or receive in actual market transactions. Potential taxes and
other transaction costs have not been considered in estimating fair value.
CREDIT RISK
The Company is subject to credit risk through trade receivables. The
Company manages this risk through evaluation and monitoring processes and
carries credit insurance when necessary. Although the Company has a number of
significant customers, they are all established and creditworthy customers.
Credit risk is further mitigated through the use of provisional payment
arrangements and the use of letters of credit and credit insurance where
appropriate. Credit risk also relates to derivative contracts arising from the
possibility that a counterparty to an instrument in which the Company has an
unrealized gain fails to perform. The Company transacts only with highly-rated
counterparties. The Company does not consider the credit risk associated with
these financial instruments to be significant.
FOREIGN EXCHANGE HEDGING
In 2001, the Company announced its intention to close the Nanisivik Mine in
September 2002 (see note 3(g)). Accordingly, foreign exchange contracts
totalling US$25,000,000, originally designated as hedges of anticipated 2003
operating costs at the Nanisivik Mine, were no longer considered as effective
hedges. Consequently these contracts were being marked to market, resulting in a
gain of $608,000 included in gross sales revenue in the year ended December 31,
2002 (2001 - a loss of $3,162,000).
FOREIGN EXCHANGE RISK
The Company operates using principally the Canadian dollar and the US
dollar, and as such may be negatively affected by fluctuations in foreign
exchange rates. The Company manages this risk by minimizing the number of
transactions that result in the settlement currency differing from the currency
of the initial transaction. In addition, the Company's sales are denominated
primarily in US dollars, while a significant percentage of its expenses are
denominated in non-US dollars. This exposes the Company to increased volatility
in earnings due to fluctuations in foreign exchange rates. The Company
periodically uses forward foreign exchange contracts to hedge the exchange rates
on identifiable foreign currency exposures. Gains and losses on these contracts
are reported as a component of the related transactions.
The Company had no foreign exchange contracts outstanding at December 31,
2003, and the following at December 31, 2002:
US ($000's) Exchange Rate Maturity
--------------------------------------------------------------------------------------------------
US dollar forward
sales against Canadian dollar 5,000 Cdn$1.5540 2003
COMMODITY PRICE RISK
The profitability of the Company is directly related to the market price of
metals produced. The Company reduces price risk by hedging against the price of
metals for a portion of its production.
The main tools available to protect against price risk are forward
contracts and options. Various strategies are available using these tools
including spot deferred and synthetic puts.
The Company periodically enters into forward sales to effectively provide a
minimum price for a portion of inventories and future production. These
contracts are marked to market, and gains and losses are recognized in the
relevant period. The Company also periodically enters into written call options.
No call options have been entered into in either 2003 or 2002 other than those
described below.
150
The Company had no contracts outstanding as at December 31, 2002. The
following contracts were entered into in 2003 and outstanding as at December 31,
2003:
December 31, 2003 Quantity Average Price (US) Maturity
--------------------------------------------------------------------------------------------------------
Zinc forward sale 4,600 tonnes $969 per tonne January 2004
Silver call options 250,000 ounces $5.42 per ounce January - February 2004
Gold call options 2,500 ounces $395 per ounce January - February 2004
INTEREST RATE RISK
The Company currently has various operating lines of credit and long-term
debt that tie interest payments to the bank prime or LIBOR lending rates.
Therefore, the Company is exposed to interest rate risk through fluctuations in
these interest rates.
9. RELATED PARTY TRANSACTIONS
All related party transactions are disclosed elsewhere in these
consolidated financial statements (see notes 4, 5 and 6) except for the
following:
a) The Company and DSC entered into an agreement in late 1998 for DSC to act
as the exclusive financial advisor to the Company. The agreement was for an
initial term of one year and thereafter year to year until cancelled, and
provided the Company with the right to cancel the agreement. The agreement
was terminated by the Company effective December 31, 2000. The unpaid
balance of $1,033,000 for the above fees has been deferred to 2004, and is
included in short-term debt as at December 31, 2003 and was included in
long-term debt as at December 31, 2002 (see note 5).
b) The Company incurred management fees in each of 2003 and 2002 of $250,000
(2001 - $Nil) for services provided by Dundee.
c) At December 31, 2003, the Company has an amount of $544,000 (2002- $Nil) on
deposit with DSC.
d) The Company and Black Hawk Mining Inc. ("BHK"), a company under common
significant influence by Dundee, entered into an agreement on April 1,
2002, whereby the Company was to manage BHK's mining operation for a fee of
US$100,000 (approximately Cdn$157,000) per annum plus a bonus to be
calculated based on a formula. This agreement was terminated in 2003. The
Company also provides logistic and procurement services to BHK which
enables both companies to reduce costs and negotiate favourable terms for
the purchase of materials and supplies. The companies shared office space
until 2003 and the Company charged BHK for certain administrative services.
Transactions for the year ended December 31, 2003 for sale of
supplies and charges for rent and administrative services to BHK totalled
$574,000 (2002 - $1,827,000, 2001 - $913,000). These transactions have been
reflected in the statements of operations as cost recoveries and
accordingly, as reductions in either direct operating costs or general and
administrative expenses. In addition, the Company sold surplus equipment to
BHK in 2003 for proceeds of $106,000 (2002 - $146,000, 2001-$Nil).
151
Other accounts receivable at December 31, 2003 and 2002 included the
following amounts due from BHK:
($000's) 2003 2002
--------------------------------------------------------------------------
For:
Supplies 203 773
Services 112 341
--------------------------------------------------------------------------
315 1,114
Interest was charged on overdue amounts receivable from BHK at commercial
rates.
10. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
a) The Company and TOTC, a former subsidiary of the Company, are defendants in
an action commenced in the Ontario Court (General Division) on June 18,
1996 by John W. Sheiles, formerly president of TOTC, claiming arrears of
base salary, salary in lieu of vacation pay, expenses and commissions
aggregating approximately US$185,000 and damages of US$500,000 for wrongful
termination of his employment contract. The Company has filed a statement
of defense and is of the opinion that the claim is without merit.
b) On October 10, 2002, the Nunavut Water Board ("NWB") issued to CanZinco
Ltd. (a wholly-owned subsidiary of the Company) a renewal of its water
license, for a period of 5.5 years commencing on October 1, 2002. One of
the conditions contained in the renewal license was a requirement that the
Company guarantee the financial security required by the license. NWB has
established that the amount of security required by the license is
$17,600,000. Of that amount, $5,000,000 was previously posted in the form
of indemnity bonds pursuant to the expired water license. The issue of the
outstanding balance of $12,600,000 was to have been addressed by the
Company within 30 days of the issuance of the water license.
By way of letter dated November 8, 2002, the Company committed to
the Department of Indian Affairs and Northern Development ("DIAND"), the
federal government agency that deals with the form of financial security
pursuant to a water license issued by NWB, that it would provide to DIAND a
guarantee in the form of an unsecured promissory note in the amount of
$11,600,000, later changed to $12,600,000. On February 20, 2003, CanZinco
delivered a promissory note in the amount of $1,000,000, with the balance
of $11,600,000 under discussion as to amount and form.
As at December 31, 2003, the balance of the accrual for current and
long-term reclamation, site restoration and closure costs with respect to
the Nanisivik Mine is $3,391,000, net of estimated salvage value of
$6,400,000. This accrual includes all obligations that the Company
estimates will arise from the requirements of the water license. Any excess
in the amount of the unsecured promissory note provided to DIAND over the
actual reclamation and closure costs incurred will not result in the
recognition of an incremental liability since any such excess would give
rise to a financial asset in the form of a receivable from DIAND. This
receivable would offset the excess and would be reported net on the balance
sheet.
The indemnity bonds amounting to $5,000,000 expired in July 2003.
The Company and DIAND are in the process of replacing these bonds with an
additional promissory note for $5,000,000.
c) In 2003, Kalwea Financial Corp., BVI ("Kalwea") commenced an action against
the Company and CanZinco Ltd. ("CanZinco"), a subsidiary of the Company for
damages in the amount of $560,000 plus additional annual minimum royalty
payments of $70,000 each quarter
152
on October 1, January 1, April 1, and July 1, sequentially. Kalwea also
claims a transfer of certain mining claims in Restigouche County, New
Brunswick. The Company and CanZinco have filed a statement of defense and
have counterclaimed for damages in the amount of $840,000 for overpayment
of royalties. Kalwea alleges that it is a secured creditor of Marshall
Minerals Corp. ("Marshall"), a company with which CanZinco has a royalty
agreement arising from the purchase of mining claims in 1995. The Company
and CanZinco are of the opinion that Kalwea's claims are without merit.
This action has been scheduled for mandatory mediation on March 23, 2004.
d) In accordance with the standard industry practice, the Company seeks to
obtain bonding and other insurance in respect of its liability for costs
associated with the reclamation of mine, mill and other sites used in its
operations and against other environmental liabilities imposed by statute.
Due to developments which have affected the insurance and bonding markets
worldwide, such bonding and/or insurance may be difficult or impossible to
obtain in the future, or may only be available at significant additional
cost. In the event that such bonding and/or insurance cannot be obtained by
the Company or is obtainable only at significant additional cost, the
Company may become subject to financial liabilities, which may affect its
financial resources.
e) The Company is also involved in legal proceedings and claims, which arise
in the ordinary course of its business. The Company believes these claims
are without merit and is vigorously defending them. In the opinion of the
management, the amount of ultimate liability with respect to these actions
will not materially affect the financial position, results of operations or
cash flows of the Company.
f) The Company's mining and exploration activities are subject to various
federal, provincial and state laws and regulations governing the protection
of the environment. These laws and regulations are continually changing and
generally becoming more restrictive. The Company conducts its operations so
as to protect public health and the environment and believes its operations
are materially in compliance with all applicable laws and regulations. The
Company has made, and expects to make in the future, expenditures to comply
with such laws and regulations.
LEASE COMMITMENTS
The Company is committed to operating leases for business premises
and equipment as follows:
($000's)
---------------------------------------------------------------
2004 839
2005 495
2006 307
2007 285
2008 274
11. SEGMENT INFORMATION
The Company operates primarily in the mining industry. Operations in the
Americas and Tunisia include the production and sale of zinc, lead and copper
concentrates which also contain silver and gold. The accounting policies adopted
by these segments are the same as those described in the Summary of Significant
Accounting Policies (see note 1).
153
As the products and services in each of the reportable segments, except for
corporate activities, are essentially the same, the reportable segments have
been determined at the level where decisions are made on the allocation of
resources and capital, and where internal financial statements are available.
SEGMENT INFORMATION
For the Year Ended December 31, 2003
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert Langlois Bougrine
Mine Mine Total Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 32,588 17,394 49,982 5,660 - 49,286 - 54,946 20,202 (1,120) 124,010
Depreciation and
depletion (4,025) (2,025) (6,050) - - (9,315) - (9,315) (8,351) (399) (24,115)
Reclamation and
closure costs (680) (295) (975) - - (809) - (809) (493) - (2,277)
(Loss) contribution from
mining activities 3,932 (1,520) 2,412 (200) - 245 - 45 (6,559) (1,519) (5,621)
General and administrative - - - - - - - - - (5,087) (5,087)
Interest and financing - - - - - - - - - (3,321) (3,321)
Investment and other
income - - - - - - - - - 611 611
Foreign exchange gain
on US dollar denominated
debt - - - - - - - - - 11,578 11,578
Write-down of mineral
properties and fixed
assets (279) - (279) - - - - - - - (279)
Other non-producing
property income (costs) - - - (384) (1,521) - (83) (1,988) - 10,384 8,396
Income and mining taxes
(recovery) (83) - (83) - - (141) 5 (136) 145 915 841
Net earnings (loss) 3,570 (1,520) 2,050 (584) (1,521) 104 (78) (2,079) (6,414) 13,561 7,118
Capital expenditures 2,586 5,748 8,334 (36) - 27 1,659 1,650 606 31 10,621
Identifiable assets 35,332 33,965 69,297 7,266 1,499 20,650 41,182 70,597 24,715 11,026 175,635
Information about major customers
Of the Company's total consolidated net revenue in 2003, revenue from one
customer of $48,795,000 originated from the Bouchard-Hebert Mine, and revenue
from another customer of $15,126,000 consisted of $7,719,000 that originated
from the Bourgrine Mine and $7,407,000 that originated from the El Toqui Mine.
SEGMENT INFORMATION
For the Year Ended December 31, 2002
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert Langlois Bougrine
Mine Mine Total Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 38,143 22,309 60,452 36,021 - 49,702 - 85,723 22,441 - 168,616
Depreciation and
depletion (6,030) (2,395) (8,425) (2,873) - (9,125) - (11,998) (7,077) (65) (27,565)
Reclamation and
closure costs (813) (135) (948) (319) - (562) - (881) (1,065) - (2,894)
(Loss) contribution from
mining activities (2,905) 594 (2,311) (1,647) - 3,075 - 1,428 (8,548) (65) (9,496)
General and administrative - - - - - - - - - (6,198) (6,198)
Interest and financing - - - - - - - - - (4,761) (4,761)
Investment and other
income - - - - - - - - - 551 551
Foreign exchange gain
on US dollar denominated
debt - - - - - - - - - 669 669
Other non-producing
property income (costs) - - - - (1,678) - (107) (1,785) - 909 (876)
Income and mining taxes
(recovery) (95) - (95) 602 - (99) 6 509 (165) (25) 224
Net (loss) earnings (3,000) 594 (2,406) (1,045) (1,678) 2,976 (101) 152 (8,713) (8,920) (19,887)
Capital expenditures 2,347 2,859 5,206 17 - 1,676 867 2,560 1,966 1,239 10,971
Identifiable assets 47,901 33,667 81,568 17,141 3,587 28,586 38,786 88,100 36,716 16,996 223,380
Information about major customers
Of the Company's total consolidated net revenue in 2002, revenue from one
customer of $35,331,000 consisted of $33,686,000 that originated from the
Bouchard-Hebert Mine, and $1,645,000 that originated from the El Mochito Mine.
154
For the Year Ended December 31, 2001
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert Langlois Bougrine
Mine Mine Total Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 33,643 22,400 56,043 27,519 - 51,360 - 78,879 26,879 - 161,801
Depreciation and
depletion (5,902) (3,053) (8,955) (4,075) - (6,326) - (10,401) (8,529) (95) (27,980)
Reclamation and
closure costs (818) (65) (883) (255) (81) (1,924) - (2,260) (983) - (4,126)
(Loss) contribution from
mining activities (6,564) (733) (7,297) (20,276) (81) 7,737 - (12,620) (3,480) (95) (23,492)
General and
administrative - - - - - - - - - (7,481) (7,481)
Interest and financing - - - - - - - - - (8,015) (8,015)
Investment and other
income - - - - - - - - - 9,293 9,293
Foreign exchange loss on
US dollar denominated
debt - - - - - - - - - (4,720) (4,720)
Write-down of mineral
properties and fixed
assets (2,505) - (2,505) (11,252)(53,450) - - (64,702) - (3,074) (70,281)
Other non-producing
property costs (115) - (115) - (2,147) - (462) (2,609) - (452) (3,176)
Foreign exchange hedging
loss - - - (3,162) - - - (3,162) - - (3,162)
Income and mining taxes (27) - (27) 155 - 467 28 650 2 (649) (24)
Net (loss) earnings (9,211) (733) (9,944) (34,535)(55,678) 8,204 (434) (82,443) (3,478) (15,193) (111,058)
Capital expenditures 2,442 5,471 7,913 3,932 (544) 1,701 4,141 9,230 3,015 1,504 21,662
Identifiable assets 48,698 34,161 82,859 35,645 3,826 33,242 39,632 112,345 43,569 12,796 251,569
Information about major customers
Of the Company's total consolidated net revenue in 2001, revenue from one
customer of $29,090,000 consisted of $23,745,000 that originated from the
Bouchard-Hebert Mine, $2,842,000 that originated from the El Mochito Mine and
$2,503,000 that originated from the El Toqui Mine. Revenue from another customer
of $16,401,000 consisted of $5,719,000 that originated from the El Mochito Mine,
$2,807,000 that originated from the Bougrine Mine, $4,074,000 that originated
from the Bouchard-Hebert Mine and $3,801,000 that originated from the Nanisivik
Mine.
12. ANALYSIS OF CHANGES IN NON-CASH WORKING CAPITAL ITEMS
($000's)
---------------------------------------
2003 2002 2001
---------------------------------------
Accounts receivable - concentrate 8,376 (13,976) 8,496
Other receivables 1,271 (654) 8,631
Concentrate and materials and supplies inventory 2,541 25,200 17,390
Short-term investments - - 4,158
Prepaid expenses and other current assets (145) 183 1,058
Provisional payments for concentrate inventory
shipped and not priced (6,105) (18,108) (7,519)
Accounts payable and accrued liabilities (2,630) (2,963) 10,772
Income and mining taxes payable (129) (880) (526)
---------------------------------------
3,179 (11,198) 42,460
---------------------------------------
13. EARNINGS (LOSS) PER SHARE
Basic Earnings (Loss) per Share ("EPS") has been calculated using the
weighted-average number of shares outstanding during the year. The diluted EPS
gives effect to the exercise of all outstanding options and warrants. Diluted
earnings per common share data is not presented in 2002 and 2001, as the
exercise of options would not have been dilutive in those years.
The calculation of diluted earnings per share has been computed using the
treasury stock method which assumes that options and warrants with an exercise
price lower than the average quoted market price were exercised at the later of
the beginning of the period, or time of issue. In applying the treasury stock
method, options and warrants with an exercise price greater than the average
quoted market price of
155
the Common Shares are not included in the calculation of diluted earnings per
share as the effect is anti-dilutive. The average quoted market price of the
Common Shares during 2003 was $0.32 (2002 - $0.20, 2001 - $0.86).
On May 1, 2002, the Company completed a rights issue with an exercise price
of $0.20 per share. The market value of the Common Shares on April 2, 2002, the
day prior to trading ex-rights was $0.37 per share. As a result of the bonus
element in the rights issue, the basic loss per share in 2002 and 2001 and the
weighted-average number of Common Shares outstanding in those years have been
adjusted retroactively as follows:
2003 2002 2001
------------------------------------------------------------------------------------------------
Earnings (loss) per share - before bonus element $0.03 ($0.12) ($1.20)
Earnings (loss) per share - after bonus element $0.03 ($0.12) ($0.92)
Diluted earnings per share - before bonus element $0.03 N/A N/A
Diluted earnings per share - after bonus element $0.03 N/A N/A
(000's)
------------------------------------------------------------------------------------------------
Weighted-average number of shares outstanding 211,411 159,684 92,560
Additional shares due to bonus element - 9,390 27,606
------------------------------------------------------------------------------------------------
Weighted average number of Common Shares
Outstanding after bonus element 211,411 169,074 120,166
------------------------------------------------------------------------------------------------
Incremental shares on assumed exercise of options and
warrants 10,259 601 20
------------------------------------------------------------------------------------------------
Weighted average number of Common Shares used for
diluted earnings per sahre 221,670 169,675 120,186
------------------------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS
a) On January 28, 2004, the Company completed the sale of 57,142,858
units to a syndicate of underwriters at a purchase price of $0.70 per unit,
for net proceeds of $37,326,000, net of costs of issue of approximately
$2,674,000. Each unit consisted of one Common Share and one-half of one
Common Share purchase warrant. Each whole warrant entitles the holder to
acquire one Common Share at a price of $1.00 at any time until January 28,
2009. The Company plans to use the net proceeds for the development of the
Langlois Mine, debt repayment, working capital and general corporate
purposes.
b) On February 16, 2004, the Company signed a letter of intent with
Boliden AB ("Boliden") to purchase all the outstanding shares of Boliden
Westmin (Canada) Limited ("BWCL"). BWCL is the owner of the Myra Falls
Mine, a zinc, copper and gold mine in British Columbia. The acquisition of
BWCL will be exclusive of the Premier Gold property and certain other
assets and liabilities of BWCL. The general terms of the proposed
acquisition include the Company issuing 18,000,000 Common Shares and
5,000,000 warrants, exercisable at $1.00 per Common Share until January 28,
2009.
156
15. RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles ("Cdn. GAAP")
which are different in some respects from those applicable in the United States
of America ("U.S. GAAP") and from practices prescribed by the United States
Securities and Exchange Commission.
Variations between balance sheet items and statements of operations items as
shown in the consolidated financial statements under Cdn. GAAP and the amounts
determined using U.S. GAAP are as follows:
CONSOLIDATED BALANCE SHEETS
Short-term Accounts
Mineral Investments Reclamation Payable
Properties (included in and Closure and
and Fixed Cash and Cash Restricted Costs Accrued
(Expressed in thousands of Canadian dollars) Assets Equivalents) Cash Accruals Liabilities
As at December 31, 2003
As shown in the consolidated financial statements
under Cdn. GAAP $107,341 $ 49 $ - $ 12,070 $ 19,456
Shares issued to promoters or shareholders in exchange
for non-monetary assets (a) (1,289)
Adjustment relating to stock-based compensation to non
-employees (b(i))
Adjustment relating to stock-based compensation to
senior officer (b(ii))
Adjustment relating to write-down of El Toqui Mine (c) (2,130)
Adjustment relating to exploration expenditures (d) (7,808)
Adjustment relating to unrealized gains on short-term
investments (f) 18
Adjustment relating to asset retirement obligations (j) 3,674 22,183 (695)
Adjustment relating to flow-through shares (k) (742) 742 142
Adjustment to reclassify cumulative translation
adjustment (i)
- -----------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $ 99,788 ($ 675) $ 742 $ 34,253 $ 18,903
=======================================================================================================================
As at December 31, 2002
As shown in the consolidated financial statements under
Cdn. GAAP $134,882 $ 30 $ - $ - $ 25,577
Shares issued to promoters or shareholders in exchange
for non-monetary assets (a) (1,568)
Adjustment relating to stock-based compensation to non-
employees (b(i))
Adjustment relating to stock-based compensation to
senior officer (b(ii))
Adjustment relating to write-down of El Toqui Mine (c) (2,287)
Adjustment relating to exploration expenditures (d) (7,129)
Adjustment relating to unrealized gains on short-term
investments (f) 142
Adjustment to reclassify cumulative translation
adjustment (i)
- -----------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $123,898 $172 $ - $ - $ 25,577
=======================================================================================================================
(continued)
Other Cumulative
Comprehensive Contributed Translation Capital
Income (Loss) Deficit Surplus Adjustment Stock
(Expressed in thousands of Canadian dollars)
As at December 31, 2003
As shown in the consolidated financial statements
under Cdn. GAAP $ - ($171,737) $1,582 ($3,889) $287,743
Shares issued to promoters or shareholders in exchange
for non-monetary assets (a) 12,917 (14,206)
Adjustment relating to stock-based compensation to non
-employees (b(i)) (48) 48
Adjustment relating to stock-based compensation to
senior officer (b(ii)) (156) 156
Adjustment relating to write-down of El Toqui Mine (c) (2,130)
Adjustment relating to exploration expenditures (d) (7,808)
Adjustment relating to unrealized gains on short-term
investments (f) 18
Adjustment relating to asset retirement obligations (j) 567 (18,381)
Adjustment relating to flow-through shares (k) (142)
Adjustment to reclassify cumulative translation
adjustment (i) (3,889) 3,889
- --------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP ($3,304) ($187,343) $1,786 $ 0 $273,395
==========================================================================================================================
As at December 31, 2002
As shown in the consolidated financial statements under
Cdn. GAAP $ - ($178,855) $1,582 $14,492 $257,759
Shares issued to promoters or shareholders in exchange
for non-monetary assets (a) 12,638 (14,206)
Adjustment relating to stock-based compensation to non-
employees (b(i)) (48) 48
Adjustment relating to stock-based compensation to
senior officer (b(ii)) (156) 156
Adjustment relating to write-down of El Toqui Mine (c) (2,287)
Adjustment relating to exploration expenditures (d) (7,129)
Adjustment relating to unrealized gains on short-term
investments (f) 142
Adjustment to reclassify cumulative translation
adjustment (i) 14,492 (14,492)
- --------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $ 14,634 ($175,837) $1,786 $ 0 $243,553
==========================================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of Canadian dollars, except for per share 2003 2002 2001
information)
- ---------------------------------------------------------------------------------------------------------
Earnings (loss) as shown in the consolidated financial
statements under Cdn. GAAP $7,118 ($19,887) ($111,058)
Additional (expense) income:
Adjustment to depletion in connection with shares
issued to promoters or shareholders (a) 279 347 472
Adjustment to recognize stock-based compensation to non-
employees (b(i)) - - (48)
Adjustment to recognize stock-based compensation to senior
officer (b(ii)) - - (156)
Adjustment relating to write-down of the El Toqui Mine, (2001 -
Nanisivik Mine) (c) - (2,287) (305)
Adjustment relating to depreciation and depletion (c) 158 73 69
Adjustment relating to write-off of exploration expenditures (d) (837) (2,150) (3,772)
Adjustment relating to ARO - depreciation and depletion (j) (1,849) - -
Adjustment relating to ARO - net adjustment to reclamation
expenses (j) (2,305) - -
Adjustment relating to ARO - accretion (j) (2,118) - -
Cumulative effect of change in accounting principle (j) (12,109) - -
Adjustment for mark-to-market of Hedge Contract Liability (h) - - 1,431
Adjustment to write-off deferred losses on foreign exchange
hedging contracts (h) (Restated) - 2,003 (2,003)
- ---------------------------------------------------------------------------------------------------------
Net Loss under U.S. GAAP (Restated for 2002 - see note (h)) ($11,663) ($21,901) ($115,370)
=========================================================================================================
Basic loss per share under U.S. GAAP (Restated for 2002 - see
note (h)) ($0.06) ($0.13) ($0.96)
Diluted earnings per share under U.S. GAAP (Restated for 2002 - $N/A $N/A $N/A
see note (h))
Effect of U.S. GAAP adjustments on basic loss per share (Restated
for 2002 - see note (h)) ($0.09) ($0.01) ($0.04)
CONSOLIDATED STATEMENTS OF OPERATIONS PRESENTATION:
Under U.S. GAAP, the measure "Loss from Mining Activities" is not a recognized
term and would therefore not be presented. "Loss from Mining Activities" when
adjusted for the items in the table below is comparable to the terminology "Loss
from operations" under U.S. GAAP.
The following table reconciles "Loss from Mining Activities under Cdn. GAAP" to
"Loss from operations under U.S. GAAP"
(Expressed in thousands of Canadian dollars) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Loss from Mining Activities under Cdn. GAAP $ (5,621) $ (9,496) $ (23,492)
General and administrative (5,087) (6,198) (7,481)
Write-down of mineral properties and fixed assets (279) - (70,281)
Other non-producing property income (costs) 8,396 (876) (3,176)
Aggregate adjustments for U.S. GAAP (see Statements
of Operations above) (Restated for 2002 - see note (h)) (18,781) (2,014) (4,312)
=============================================================================================================================
Loss from operations under U.S. GAAP $ (21,372) $ (18,584) $ (108,742)
(Restated for 2002 - see note (h))
=============================================================================================================================
For U.S. GAAP purposes, the components of non-operating income (loss) are as follows:
(Expressed in thousands of Canadian dollars) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Interest and financing $ (3,321) $ (4,761) $ (8,015)
Investment and other income 611 551 9,293
Foreign exchange gain (loss) on US dollar
Denominated debt 11,578 669 (4,720)
Foreign exchange hedging loss - - (3,162)
- -----------------------------------------------------------------------------------------------------------------------------
Non-operating income (loss) for U.S. GAAP $ 8,868 $ (3,541) $ (6,604)
=============================================================================================================================
The following table reconciles "Net loss under U.S. GAAP" to "Comprehensive loss under U.S. GAAP"
(Expressed in thousands of Canadian dollars) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $ (11,663) $ (21,901) $ (115,370)
(Restated for 2002 - see note (h))
Change in cumulative translation adjustments account (17,814) (2,353) 6,873
Adjustment relating to unrealized gains on short-term
investments (124) 142 430
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive loss under U.S. GAAP $ (29,601) $ (24,112) $ (108,067)
(Restated for 2002 - see note (h))
=============================================================================================================================
There are no differences in cash flows provided from operating
activities, financing activities and investing activities as presented
in the statements of cash flows under Cdn. and U.S. GAAP except that,
under U.S. GAAP the determination of cash provided from operating
activities would reflect the net (loss) earnings under U.S. GAAP (as
opposed to Cdn. GAAP) with appropriate adjustments to non-cash items and
non-cash working capital items with respect to adjustments disclosed in
the balance sheet and statement of operations schedules above to arrive
at the same cash flow from operating activities amount under both Cdn.
and U.S. GAAP.
Also, the sub-total within the caption "Cash (Used for) provided from operating
activities" under "Operating Activities" is not permitted; therefore the reader
should disregard the sub-total of $19,270,000, $13,773,000 and ($5,362,000) for
2003, 2002 and 2001, respectively for U.S. GAAP purposes.
RESTATEMENT OF THE COMPANY'S 2002 U.S. GAAP CONSOLIDATED STATEMENTS OF
OPERATIONS
The Company's 2002 net income prepared in accordance with U.S. GAAP has been
revised to reflect the reversal of the deferred losses on foreign exchange
hedging contracts of $2,003,000 which was deferred under Cdn. GAAP until 2002
when the related costs were recognized in income (see note 15 (h) below). Under
U.S.GAAP, these losses were not deferred and, therefore, were previously
recognized in 2001 in accordance with SFAS 133. This adjustment resulted in
decreasing the U.S.GAAP net loss by $2,003,000 to a net loss of $21,901,000 and
reducing the basic loss per share by $0.01 for a revised basic loss per share of
$0.13.
DIFFERENCES BETWEEN CDN. GAAP AND U.S. GAAP
a. TRANSFER OF NON-MONETARY ASSETS FROM PROMOTERS OR SHAREHOLDERS IN EXCHANGE
FOR SHARES
Under Cdn. GAAP, non-monetary assets acquired in exchange for Common Shares
should be valued at the fair value of the consideration given, unless the fair
value of the consideration given is not clearly evident, in which case the
acquisition should be accounted for at the fair value of the net assets
acquired.
The Securities and Exchange Commission's interpretative response to U.S.
Accounting Principles Board Opinion No. 29 requires that non-monetary assets
transferred from promoters or shareholders in exchange for Common Shares be
recorded at the transferor's historical cost.
b. ACCOUNTING FOR STOCK-BASED COMPENSATION
i) Under U.S. GAAP, options granted to non-employees would be fair valued
and accounted as compensation expense. Under current Cdn. GAAP,
effective January 1, 2002, options granted to non-employees are also
valued under the fair value method. However, in accordance with Cdn.
GAAP in effect prior to January 1, 2002, the Company did not recognize
compensation expense for options granted to non-employees. For
purposes of determining compensation expense to non-employees under
U.S. GAAP for 2001, the fair value of each option grant has been
estimated at the balance sheet date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
------------------------------------------- ----------------------
Expected life (years) 1.58
------------------------------------------- ----------------------
Risk free interest rate 5.25%
------------------------------------------- ----------------------
Expected volatility 136%
------------------------------------------- ----------------------
Dividend yield 0%
------------------------------------------- ----------------------
ii) During 2001, as part of an employment agreement with a former senior
officer, the Company had granted stock options to this individual,
which fully vested on the date of the grant. Under Cdn. GAAP, the
Company accounted for the options in accordance with the Company's
accounting policy for stock options. Under U.S. GAAP, the direct award
of stock would be accounted for at the fair value of the stock on the
date of the award. The fair value of each option grant has been
estimated at the balance sheet date using the Black-Scholes
option-pricing model with assumptions of a 1.58-year expected life,
risk free interest rate of 5.25 percent, an expected volatility of 136
percent and an dividend yield of 0 percent.
iii) The Company does not recognize compensation expense for its
stock-based compensation plans under either U.S. or Cdn. GAAP. Had
compensation cost for the stock option plans been determined based
upon fair value at the grant date for awards under these plans
consistent with the methodology prescribed under SFAS No. 123 -
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting
for Stock-Based Compensation-Transition and Disclosure, an amendment
to SFAS 123", the Company's pro forma net loss and loss per share
would have been as follows:
------------------------------------------------------------------ --------------- ---------------- ---------------
(Expressed in thousands of Canadian dollars, except per 2003 2002 2001
share amounts)
------------------------------------------------------------------ --------------- ---------------- ---------------
Net loss applicable to common shares per U.S. GAAP
As reported ($11,663) ($23,904) ($115,370)
Add: Stock compensation costs (274) (183) (543)
------------------------------------------------------------------ --------------- ---------------- ---------------
Pro forma ($11,937) ($24,087) ($115,913)
------------------------------------------------------------------ --------------- ---------------- ---------------
Loss per share, basic and diluted
As reported ($0.06) ($0.14) ($0.96)
Pro forma ($0.06) ($0.15) ($1.25)
------------------------------------------------------------------ --------------- ---------------- ---------------
160
The fair value of each option grant is estimated at the balance sheet
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
----------------------------------- -----------------------------------------------------------
Years ended December 31,
----------------------------------- -----------------------------------------------------------
2003 2002 2001
----------------------------------- ------------------ -------------------- -------------------
Expected life (years) 10 10 10
----------------------------------- ------------------ -------------------- -------------------
Risk free interest rate 4.62% 5.21% 5.25%
----------------------------------- ------------------ -------------------- -------------------
Expected volatility 46% 62% 136%
----------------------------------- ------------------ -------------------- -------------------
Dividend yield 0% 0% 0%
----------------------------------- ------------------ -------------------- --------\-----------
Effective January 1, 2004, for Cdn. GAAP purposes, the Company will
recognize all employee stock-based compensation as an expense in accordance
with the CICA handbook section 3870 - "Stock-based compensation and other
stock-based payments".
c) WRITE-DOWN OF MINERAL PROPERTIES AND FIXED ASSETS
Following an evaluation of the Company's mineral properties and fixed
assets on the basis set out in Note 1 of the Company's 2003 consolidated
financial statements, the Company determined that no write-down was required in
2003 (2002 - $2,287,000, 2001 - $305,000) as a result of applying SFAS 144,
"Accounting for the impairment or disposal of long-lived assets". In 2002 and
2001, differences in the amount of write-down arose from the requirement under
U.S. GAAP to discount future cash flows from impaired properties. Under Cdn.
GAAP, future cash flows from impaired properties are not discounted. As a
consequence of the difference in impairment write-downs, under U.S. GAAP,
depreciation and depletion would be reduced in 2003 by $158,000 ($73,000 in
2002, and $69,000 in 2001).
d) EXPLORATION EXPENDITURES
Under Cdn. GAAP, the Company defers certain exploration expenditures. When
the properties are brought into commercial production, the deferred costs are
amortized on the unit-of-production basis. If the properties are abandoned or
sold, the deferred expenditures are expensed at that time. The Securities and
Exchange Commission published interpretations with respect to the extractive
industry and have stated that under U.S. GAAP exploration expenditures during
the exploration stage prior to determination of the existence of commercially
mineable ore bodies are required to be expensed as incurred. Prior to 2000, for
U.S. GAAP purposes the Company deferred such costs. Under U.S. GAAP, the Company
expenses exploration costs of non-producing properties as incurred.
e. COMPREHENSIVE INCOME (LOSS)
Under SFAS No. 130, "Reporting Comprehensive Income", all components of
comprehensive income (loss) are to be reported in the period in which they are
recognized. It requires that an entity classify items of other comprehensive
income by their nature in a financial statement and disclose the accumulated
balance of other comprehensive income separately from retained earnings
(deficit) and additional paid up capital.
f. SHORT-TERM INVESTMENTS
Under Cdn. GAAP, unrealized gains (losses) on short-term investments are
not recorded. Under U.S. GAAP, unrealized gains (losses) on short-term
investments are recorded in other comprehensive income.
161
g. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted the Financial Accounting Standards
Board ("FASB") Statement No.133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), and the corresponding amendments under FASB
Statement No.138 ("SFAS 138"). SFAS 133 requires that all derivative financial
instruments be recognized in the financial statements and measured at fair value
regardless of the purpose or intent for holding them. Changes in the fair value
of derivative financial instruments are either recognized periodically in income
or in shareholders' equity (as a component of other comprehensive income),
depending on whether the derivative is being used to hedge changes in the fair
value or cash flows. SFAS 138 amends certain provisions of SFAS 133 to clarify
four areas of implementation.
The cumulative effect of adopting SFAS 133, as amended by SFAS 138, did not
have a material impact on the Company's consolidated results of operations,
financial position, or cash flows.
Under both Cdn. and U.S. GAAP, except for the hedge contract liability and
deferred losses on foreign exchange hedge contracts as described below, the
Company marked to market its derivative instruments and the resulting unrealized
gains (losses) have been charged to income in the relevant year.
h. DEFERRED LOSSES ON FOREIGN EXCHANGE HEDGING CONTRACTS
Foreign exchange hedges totalling US$26,000,000 designated as hedges of
2002 operating costs at the Nanisivik mine, matured in 2001 resulting in the
realization of losses of $2,003,000, which amounts were deferred under Cdn. GAAP
until the related costs were recognized in 2002 (see Note 8 to the Company's
consolidated financial statements as at December 31, 2003). Under U.S. GAAP,
these losses did not qualify for hedge accounting and, accordingly, were charged
to income in the year incurred.
i. CUMULATIVE TRANSLATION ADJUSTMENTS ACCOUNT
Under Cdn. GAAP, the unrealized translation gains and losses on the
Company's net investment in self-sustaining operations translated using the
current rate method accumulate in a separate component of shareholders' equity
described as "Cumulative translation adjustment" on the consolidated balance
sheet. Under U.S. GAAP, such unrealized foreign exchange gains and losses would
not accumulate in a separate component of shareholders' equity but rather as an
adjustment to accumulated other comprehensive income.
j. ASSET RETIREMENT OBLIGATIONS
Under Cdn. GAAP, the Company provides for estimated reclamation and site
restoration costs, where reasonably determinable, net of salvage value, on a
unit-of-production basis over the estimated economic life of the related mine.
Costs are based on engineering estimates of the anticipated method and extent of
site restoration. In 2003, the CICA issued Handbook Section 3110 - "Asset
Retirement Obligations" ("CICA 3110"), which is consistent with SFAS 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). The standard
provides for the recognition, measurement and disclosure of liabilities for
asset retirement obligations and the associated asset retirement costs. It
addresses obligations required to be settled as a result of an existing law,
regulation or contract related to asset retirements. The new CICA standard is
applicable for fiscal years beginning January 1, 2004. Upon adoption, CICA 3110
will require retroactive restatement of all comparative periods.
On January 1, 2003, for U.S. GAAP, the Company adopted SFAS 143, which
requires that the fair value of liabilities for asset retirement obligations be
recognized in the period in which they are incurred. For the purposes of
applying SFAS 143, asset retirement obligations are based principally on legal
and regulatory requirements associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the normal
162
operation of a long-lived asset. When the liability is initially recorded, a
corresponding increase in the carrying amount of the related asset is generally
recorded and then depreciated over the life of the asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is amortized over the useful life of the related asset. Under SFAS 143,
accretion is charged against earnings during the life of the mine and afterwards
until all obligations have been settled. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. The cumulative effect of adopting SFAS 143 was to increase
mineral properties and fixed assets by $3,674,000, increase reclamation and
closure costs accruals by $22,183,000, decrease accounts payable and accrued
liabilities by $695,000, increase other comprehensive income by $567,000 and to
record a one-time charge of $12,109,000 ($0.06 per share) to earnings in the
year ended December 31, 2003. Following the adoption of SFAS 143, the total
amount of recognized liabilities for asset retirement obligations was
$34,253,000. If the change had occurred on January 1, 2002, the cumulative
effect would have resulted in an increase in mineral properties and fixed assets
of $6,096,000, an increase of $19,283,000 in reclamation and closure costs
accruals, a decrease in accounts payable and accrued liabilities of $1,197,000
and a one-time charge of $8,609,000 ($0.05 per share) to earnings in the year
ended December 31, 2002.
k. FLOW-THROUGH SHARES
Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and renounce
the related income tax deductions to the investors. The Company has accounted
for the issue of flow-through shares using the deferral method in accordance
with Cdn. GAAP. At the time of issue, the funds received are recorded as share
capital. No qualifying expenditure was incurred in 2003. For U.S. GAAP, the
premium paid in excess of the market value of $750,000 is credited to accounts
payable and accrued liabilities and will be included in income as the qualifying
expenditures are made. The flow-through fund, which is unexpended at December
31, 2003, is considered to be restricted and is not considered to be cash or
cash equivalents under U.S. GAAP.
l. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Included in accounts payable and accrued liabilities are amounts for
accounts payable and accrued expenses, respectively, as follows:
($000's) 2003 2002
------------------------------------------------------------------------------
Accounts payable $11,147 $13,070
Payroll and severance accrual 2,921 5,183
Utilities cost accrual 854 2,589
Management fees accrual 500 -
Mark-to-market of metal forward sale and call options 708 -
Deferred foreign exchange hedge accrual - 170
Reclamation and closure cost accruals - current portion 133 2,161
Financing cost accrual - 17
Capital taxes accrual 65 168
Other accruals 2,575 2,219
------------------------------------------------------------------------------
$18,903 $25,577
163
m. RECENT ACCOUNTING PRONOUNCEMENTS
U.S. STANDARDS
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
issues relating to the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities. SFAS 146 is effective for exit and disposals activities initiated
after December 31, 2002 and requires that these costs be recognized when the
liability is incurred and not at project initiation. The Company has determined
that this standard has no impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 - Consolidated Financial Statements to those
entities defined as "Variable Interest Entities" (more commonly referred to as
special purpose entities) in which equity investors do not have the
characteristics of a "controlling financial interest" or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
all Variable Interest Entities created after January 31, 2003, and by the
beginning of the first interim or annual reporting period commencing after June
15, 2003 for Variable Interest Entities created prior to February 1, 2003. In
December 2003, the FASB issued FIN 46(R), amending the guidance in FIN 46 as
well as the related transition guidance. FIN 46(R) is effective for the first
reporting period that ends after March 15, 2004. The Company does not conduct
any transactions through special purpose entities and does not expect the
amended standard will have any impact on its financial statements.
CANADIAN STANDARDS
In 2002, the Canadian Institute of Chartered Accountants' ("CICA") Handbook
Section 3063 "Impairment of Long Lived Assets" was amended to harmonize with
SFAS 144. The standard requires that an impairment loss be recognized when the
carrying amount of an asset held for use exceeds the sum of the future
anticipated undiscounted cash flows. The impairment loss would be measured as
the amount by which the carrying amount exceeds the fair value of the asset.
Section 3063 is effective for fiscal years beginning on or after April 1, 2003.
The Company does not expect the standard will have any impact on its financial
statements.
In 2002, the Accounting Standards Board of the CICA issued Accounting
Guideline No. 13 "Hedging Relationships" that increases the documentation,
designation and effectiveness criteria to achieve hedge accounting. The
guideline requires the discontinuance of hedge accounting for hedging
relationships established that do not meet the conditions at the date it is
first applied. It does not change the method of accounting for derivatives in
hedging relationships, but requires fair value accounting for derivatives that
do not qualify for hedge accounting. The new guideline is applicable for fiscal
years commencing July 1, 2003. The Company is of the opinion that this standard
does not have any impact on its results of operations and financial position.
In June 2003, the CICA issued Accounting Guideline No. 15 "Consolidation of
Variable Interest Entities" ("AcG 15") which is similar to FIN 46(R). AcG 15 is
effective for reporting periods beginning on or after November 1, 2004. The
Company does not expect the standard will have any impact on its financial
statements.
In July 2003, the CICA issued Handbook Section 1100 "Generally Accepted
Accounting Principles" ("CICA 1100") and Handbook Section 1400 "General
Standards of Financial Statement Presentation" ("CICA 1400"). CICA 1100
describes what constitutes Cdn. GAAP and its sources. CICA 1400 clarifies
164
what constitutes fair presentation in accordance with generally accepted
accounting principles. Both sections are effective for fiscal years beginning on
or after October 1, 2003. The Company is currently evaluating the potential
impact these standards may have on its results of operations, financial position
and note disclosures.
In December 2003, the Emerging Issues Committee of the CICA issued EIC-141
"Revenue Recognition" and EIC-142, "Revenue arrangements with multiple
deliverables". EIC-141 harmonizes with SAB 101 in the United States. EIC-142
will harmonize with recently issued EITF 00-21 on multiple-element arrangements.
EITF 00-21 supercedes the multiple-element guidance under SAB 101. EIC-141 and
EIC-142 are effective for interim or annual fiscal periods beginning subsequent
to December 17, 2003. The Company is of the opinion that this standard does not
have any impact on its results of operations and financial position.
The terms "proven and probable reserves", "development", and "production"
have the same meaning under both U.S. and Cdn. GAAP. In addition, mining related
costs are only capitalized after proven and probable reserves have been
designated under both U.S. and Cdn. GAAP.
165
SIGNATURES
As to the undersigned registrant, this amendment on Form 20-F/A amends and
restates in its entirety Item 17 entitled "Financial Statements" of the annual
report for year ended December 31, 2003 on Form 20-F filed with the Securities
and Exchange Commission and consists of amendment to (a) the independent
auditors report relating to Note 15, (b) Comments by auditors for U.S. readers
on Canada-U.S. reporting differences relating to Note 15, and (c) the
Restatement of 2002 U.S. GAAP Consolidated Statement of Operation in Note 15 of
the annual report filed on Form 20-F with the Securities and Exchange
Commission.
The registrant certifies that it meets all of the requirements for filing on
Form 20-F and has duly caused this amendment and restatement on form 20-F/A to
be signed on its behalf by the undersigned.
Breakwater Resources Ltd.
SIGNED: "GARTH A.C. MACRAE"
Garth A.C. MacRae
President and Chief Executive Officer
Date: March 31, 2005