MANAGEMENT'S REPORT
Management is responsible for the preparation of the accompanying
consolidated financial statements of Breakwater Resources Ltd. (the "Company")
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.
GARTH A. C. MACRAE RICHARD R. GODFREY
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
- --------------------------------------------------------------------------------
AUDITORS' REPORT
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, 2004 and 2003 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, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United States). 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 in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2004 and 2003 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly we express no such
opinion.
DELOITTE + TOUCHE LLP
Chartered Accountants
Toronto, Canada
February 24, 2005
COMMENTS BY AUDITOR ON CANADA-UNITED STATES OF AMERICA REPORTING
DIFFERENCE
The standards of the Public Company Accounting Oversight Board (United
States) require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Company's financial statements, such as the
changes described in Note 1 to the consolidated financial statements. Our report
to the Shareholders, dated February 24, 2005, is expressed in accordance with
Canadian reporting standards which do not require a reference to such changes in
accounting principles in the auditors' report when such changes are properly
accounted for and adequately disclosed in the financial statements.
DELOITTE + TOUCHE LLP
Chartered Accountants
Toronto, Canada
February 24, 2005
BREAKWATER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
As at December 31, 2004 and 2003
(Expressed in thousands of Canadian dollars)
- ----------------------------------------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------------------------------------
ASSETS (Restated - note 1)
CURRENT ASSETS
Cash and cash equivalents $ 12,667 $ 6,033
Restricted cash (note 3) 3,391 355
Short-term investments (quoted market value -2004: $3,886; 2003: $59) 2,633 50
Accounts receivable - concentrate 9,637 7,450
Other receivables 6,488 5,650
Concentrate inventory 56,215 21,828
Materials and supplies inventory 23,863 23,783
Prepaid expenses and other current assets 2,007 1,855
Future tax assets (note 13) - 1,190
- ----------------------------------------------------------------------------------------------------------------
116,901 68,194
RECLAMATION DEPOSITS 100 100
MINERAL PROPERTIES AND FIXED ASSETS (note 5) 153,073 111,299
LONG-TERM INVESTMENT (note 6) 5,615 -
PROMISSORY NOTE (note 9) 11,785 -
- ----------------------------------------------------------------------------------------------------------------
$ 287,474 $ 179,593
================================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 35,558 $ 18,629
Provisional payments for concentrate inventory shipped and not priced 22,962 2,010
Short-term debt including current portion of long-term debt (note 7) 256 10,329
Income and mining taxes payable 441 252
Current portion of reclamation, closure cost accruals and other
environmental obligations (note 10) 21,081 132
- ----------------------------------------------------------------------------------------------------------------
80,298 31,352
DEFERRED INCOME 1,848 1,340
ROYALTY OBLIGATION (note 9) 11,696 -
LONG-TERM DEBT (note 8) 1,424 15,517
RECLAMATION, CLOSURE COST ACCRUALS AND OTHER ENVIRONMENTAL
OBLIGATIONS (note 10) 42,673 34,253
EMPLOYEE FUTURE BENEFITS (note 11) 6,446 -
FUTURE TAX LIABILITIES (note 13) 1,681 962
- ----------------------------------------------------------------------------------------------------------------
146,066 83,424
- ----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (notes 2 and 12) 326,403 287,790
Warrants (notes 2 and 12) 8,561 -
Contributed surplus (note 12(j)) 3,120 1,991
Deficit (187,667) (190,291)
Cumulative translation adjustments (9,009) (3,321)
- ----------------------------------------------------------------------------------------------------------------
141,408 96,169
- ----------------------------------------------------------------------------------------------------------------
$ 287,474 $ 179,593
================================================================================================================
The accompanying notes form an integral part of these consolidated financial
statements.
Approved by the Board
Donald K. Charter Grant A. Edey
DIRECTOR DIRECTOR
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended December 31, 2004, 2003 and 2002
(Expressed in thousands of Canadian dollars except share and per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
(Restated - note l) (Restated - note l)
Gross sales revenue $ 240,299 $ 207,591 $ 305,354
Treatment and marketing costs 81,856 83,581 136,738
- ----------------------------------------------------------------------------------------------------------------------------
Net revenue 158,443 124,010 168,616
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS
Direct operating costs 101,922 103,239 147,653
Depreciation and depletion 25,896 25,964 29,987
Reclamation and closure costs 4,896 3,619 4,166
- ----------------------------------------------------------------------------------------------------------------------------
132,714 132,822 181,806
- ----------------------------------------------------------------------------------------------------------------------------
CONTRIBUTION (LOSS) FROM MINING ACTIVITIES 25,729 (8,812) (13,190)
- ----------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME)
General and administrative 9,559 5,087 6,198
Stock-based compensation 1,253 274 184
Interest and financing 509 3,321 5,122
Investment and other income (843) (405) (1,273)
Foreign exchange loss (gain) on US dollar denominated debt 431 (11,578) (669)
Other foreign exchange loss (gain) 1,809 (206) 361
- ----------------------------------------------------------------------------------------------------------------------------
12,718 (3,507) 9,923
- ----------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE THE FOLLOWING: 13,011 (5,305) (23,113)
- ----------------------------------------------------------------------------------------------------------------------------
Write-down of mineral properties and fixed assets (note 5) 1,178 279 -
Other non-producing property costs (income) 8,638 (5,394) 3,847
Income and mining taxes (recovery) (note 13) 571 (841) (224)
- ----------------------------------------------------------------------------------------------------------------------------
10,387 (5,956) 3,623
- ----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 2,624 651 (26,736)
DEFICIT - BEGINNING OF YEAR (190,291) (190,942) (164,206)
- ----------------------------------------------------------------------------------------------------------------------------
DEFICIT - END OF YEAR $ (187,667) $ (190,291) $ (190,942)
- ----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE (note 22) $ 0.01 $ 0.00 $ (0.16)
- ----------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (note 22) $ 0.01 $ 0.00 $ (0.16)
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING AFTER BONUS ELEMENT (note 22) 353,508,000 211,411,000 169,074,000
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial
statements.
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
(Expressed in thousands of Canadian dollars)
- ----------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED FROM (Restated - note l) (Restated - note l)
OPERATING ACTIVITIES
Net earnings (loss) $ 2,624 $ 651 $ (26,736)
Non-cash items:
Depreciation and depletion 25,896 25,964 29,987
Gain on sale of property (note 5(i)) - (10,336) -
Write-down of mineral properties and fixed assets (note 5) 1,178 279 -
Foreign exchange gain on US dollar denominated loans - (3,712) (608)
Other non-cash items (133) (761) 2,984
Stock-based compensation (note 12(j)) 1,253 274 184
Deferred income - 1,340 -
Future income taxes (note 13) 1,909 (1,050) 822
Reclamation closure cost accruals and other
environmental obligations 4,896 3,619 4,166
Employee future benefits (note 11) 553 - -
- ----------------------------------------------------------------------------------------------------------------------------
38,176 16,268 10,799
Payment of reclamation, closure cost accruals and other
environmental obligations (7,879) (728) (945)
Payment of employee future benefits (note 11) (968) - -
Changes in non-cash working capital items (note 21) (5,177) 2,347 (12,406)
- ----------------------------------------------------------------------------------------------------------------------------
24,152 17,887 (2,552)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term restricted cash (note 3) (3,036) (355) -
Proceeds from sale of royalty (note 9) 12,204 - -
Issue of common shares for cash (note 12) 30,407 29,316 17,907
Issue of warrants for cash (note 12) 7,211 - -
Decrease in short-term debt (10,059) (18,711) (3,495)
(Decrease) increase in long-term debt (14,095) (29,821) 2,390
- ----------------------------------------------------------------------------------------------------------------------------
22,632 (19,571) 16,802
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Funds advanced on promissory note (note 9) (11,785) - -
Reclamation deposits - 1,287 (150)
Acquisition of Boliden Westmin (Canada) Limited, net of cash
acquired (note 2) (886) - -
Mineral properties and fixed assets (27,689) (10,621) (10,970)
Proceeds from sale of mineral properties 210 10,616 -
- ----------------------------------------------------------------------------------------------------------------------------
(40,150) 1,282 (11,120)
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 6,634 (402) 3,130
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 6,033 6,435 3,305
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 12,667 $ 6,033 $ 6,435
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 436 $ 2,681 $ 3,539
Income and mining taxes $ 358 $ 339 $ 588
The accompanying notes form an integral part of these consolidated financial
statements.
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. All inter-company accounts and transactions
have been eliminated on consolidation.
REVENUE RECOGNITION AND RECEIVABLES
Revenue is recognized following the transfer of title and risk of metal
concentrate and the determination of the final settlement price in accordance
with the contractual arrangements with customers. Title is transferred on
payment by the customer of provisional invoices or in some instances on receipt
of the metal concentrate. Risk is transferred either when the metal concentrate
is delivered to the discharge port or to the load port depending on the terms of
the contract. Under a delivered ex ship ("DES") term, risk passes when the
concentrate is delivered to the discharge (destination) port. Under a cost,
insurance and freight ("C.I.F.") term, risk passes when the concentrate is
delivered to the load (departure) port. 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".
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.
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.
LONG-TERM INVESTMENTS
Long-term investment is valued at cost, net of any impairment in value.
EMPLOYEE FUTURE BENEFITS
The actuarial determination of the accrued benefit obligations for
pensions and other retirement benefits uses the projected benefit method
prorated on service (which incorporates management's best estimate of the
expected future return of plan assets, cost escalations, retirement ages of
employees and other actuarial factors).
For the purpose of calculating the expected return on plan assets, those
assets are valued at fair value.
Actuarial gains (losses) arise from the difference between actual
long-term rate of return on plan assets for a period and the expected long-term
rate of return on plan assets for that period or from changes in actuarial
assumptions used to determine the accrued benefit obligation. The excess of the
net accumulated actuarial gain (loss) over 10 percent of the greater of the
benefit obligation and the fair value of plan assets is amortized over the
lesser of the average remaining service period of active employees or to the
date that Myra Falls Mine operations are assumed to cease, December 31, 2011.
The average remaining service period of the active employees covered by all
plans is 10 years.
Past service costs arising from plan amendments are deferred and
amortized on a straight-line basis over the lesser of the average remaining
service period of employees active at the date of amendment or to the date that
mine operations are assumed to cease, December 31, 2011.
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, 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 5(f) and 5(g)) and
related deferred expenditures, are reviewed regularly to determine if there is
any impairment in the carrying value. An impairment loss would be recognized
when the carrying amount of a long-lived asset is not recoverable and exceeds
its fair value. Estimated future net cash 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.
ASSET RETIREMENT OBLIGATIONS AND ASSET RETIREMENT COSTS
The Company provides for the fair value of liabilities for asset
retirement obligations in the period in which they are incurred. 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. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or records a gain
or loss upon settlement.
Asset retirement obligations are provided for obligations that are
required to be settled as a result of an existing law, regulation or contract
related to asset retirements.
Collateral on deposit with third parties to fund reclamation costs is
shown separately on the balance sheet as Reclamation Deposits.
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 of 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 into 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.
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, materials and supplies 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. When the Company chooses to apply hedge accounting, 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 are deferred
on the designation date and are recognized in income when the original hedged
transaction affects income. Subsequent changes in fair value are recorded in
current period income. Gains or losses (realized or unrealized) for derivative
contracts which relate to a hedged transaction that is no longer expected to
occur are recorded immediately in income. Contracts for which hedge accounting,
has not been applied, are marked-to-market, and gains and losses are recognized
in the relevant period and included in "Gross sales revenue" on the consolidated
statements of operations and deficit.
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 12. The Company use the fair value method of accounting for,
and to recognize as compensation expense, its stock-based compensation for
employees. 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.
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, 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, subject to an appropriate valuation allowance.
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 PRONOUNCEMENTS
On January 1, 2004, the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") Handbook Section 3110 - "Asset Retirement
Obligations" ("CICA 3110") which requires that the fair value of liabilities for
asset retirement obligations be recognized in the period in which they are
incurred. 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. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement.
CICA 3110 is applicable to obligations that are required to be settled
as a result of an existing law, regulation or contract related to asset
retirements.
Previously, the Company provided 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.
The adoption of CICA 3110 has been applied retroactively and the effects
on the consolidated financial statements are as follows:
Increase (decrease) in Statement of Operations and Deficit amounts:
Year ended December 31, Year ended December 31,
($000's) 2003 2002
-------------------------------------------------------------------------------------------------------------------
Depreciation and depletion 1,849 2,422
Reclamation and closure costs 4,344 4,243
-------------------------------------------------------------------------------------------------------------------
Net loss 6,193 6,665
Deficit - beginning of period 11,903 5,238
-------------------------------------------------------------------------------------------------------------------
Deficit - end of period 18,096 11,903
Earnings per share ($0.03) ($0.04)
Increase (decrease) in Balance Sheet amounts:
($000's) December 31, 2003
-----------------------------------------------------------------------------------------------------
Assets
Mineral properties and fixed assets 3,958
Liabilities
Current portion of reclamation, closure costs accruals and other environmental (695)
obligations
Reclamation and closure cost accruals 22,183
Shareholders' Equity
Deficit 18,096
Cumulative translation adjustments (568)
On January 1, 2004, the Company adopted the CICA Handbook Section 3870 -
"Stock-based Compensation and Other Stock-based payments" ("CICA 3870") which
requires that the Company use the fair value method of accounting for, and to
recognize as compensation expense, its stock-based compensation for employees.
The adoption of CICA 3870 has been applied retroactively and the effects
on the consolidated financial statements are as follows:
Increase (decrease) in Statement of Operations and Deficit amounts:
Year ended December 31, Year ended December 31,
($000's) 2003 2002
-------------------------------------------------------------------------------------------------------------------
Stock-based compensation 274 184
-------------------------------------------------------------------------------------------------------------------
Net (loss) earnings (274) 184
Deficit - beginning of period 184 -
-------------------------------------------------------------------------------------------------------------------
Deficit - end of period 458 184
-------------------------------------------------------------------------------------------------------------------
Earnings per share $Nil $Nil
Increase in Balance Sheet amounts:
($000's) December 31, 2003
----------------------------------------------------------------------------------------
Shareholders' Equity
Capital stock 47
Contributed surplus 409
Deficit 458
2003 AND 2002 FIGURES
Certain of the 2003 and 2002 figures have been reclassified to conform
to the 2004 presentation.
2. ACQUISITION OF BOLIDEN WESTMIN (CANADA) LIMITED
On July 23, 2004, the Company acquired, through NVI Holdings Ltd., a
wholly-owned subsidiary of the Company, 100% of the outstanding common shares of
Boliden Westmin (Canada) Limited ("BWCL") which operates the Myra Falls mine, a
zinc, copper and gold mine located on Vancouver Island, British Columbia.
Subsequently, the name of BWCL was changed to NVI Mining Ltd. The purchase price
comprised:
i) Cash of $4,194,000, including out-of-pocket expenses of $569,000
incurred by the Company to effect the acquisition;
ii) 18,000,000 common shares ("Common Shares") of the Company at an
ascribed value of $0.45 per share, for a total of $8,081,000,
net of share issue expenses of $19,000. The value of the Common
Shares issued was determined based on the weighted-average
market price of the Company's Common Shares over the two-day
period before and after July 8, 2004, which was the date the
terms of the acquisition were agreed to and announced; and
iii) 5,000,000 warrants exercisable at $1.00 per Common Share with an
expiry date of January 28, 2009. The value ascribed of $0.27 per
warrant, for a total of $1,350,000 is included in the amount for
warrants on the balance sheet. The value of the warrants issued
was determined based on the weighted-average market price of the
Company's warrants over the two-day period before and after the
date the terms of the acquisition were agreed to and announced.
The acquisition has been accounted for using the purchase method of
accounting and the results of NVI Mining Ltd. and NVI Holdings Ltd. have been
consolidated into the Company's financial statements from July 23, 2004. The
Company's interest in the net assets acquired was allocated as follows:
($000's)
- --------------------------------------------------------------------------
Cash 3,308
Non-cash current assets 15,234
Long-term investment 5,615
Mineral properties and fixed assets 46,146
Current liabilities (16,471)
Reclamation and other environmental obligations (33,155)
Employee future benefits (7,052)
- --------------------------------------------------------------------------
Total 13,625
- --------------------------------------------------------------------------
Total consideration comprised of:
Cash and out-of-pocket expenses 4,194
Common shares, net of share issue expenses 8,081
Warrants 1,350
- --------------------------------------------------------------------------
Total 13,625
- --------------------------------------------------------------------------
3. RESTRICTED CASH
The restricted cash balance at December 31, 2004 of $3,391,000 includes
$2,625,000 placed on deposit for letters of credit to cover reclamation security
bonds (see note 4), deposit for letters of credit of $90,000 and $250,000 to
guarantee reclamation costs and an operating lease, respectively and a security
deposit of $426,000 to guarantee reclamation costs. The restricted cash balance
at December 31, 2003 of $355,000 was held in escrow as a condition to the
restructuring of the Company's banking agreement. The cash was released in March
2004.
4. RECLAMATION DEPOSITS
Cash collateral on deposit at December 31, 2004 of $100,000 (2003 -
$100,000) with third parties to fund reclamation costs is shown separately on
the balance sheet as Reclamation Deposits. The Reclamation Deposits at December
31, 2004 and 2003 are in respect of reclamation costs at the Caribou mine. In
addition, at December 31, 2004, the Company was obligated under reclamation
security bonds totalling $8,257,000 (2003 - $8,181,000), of which $2,625,000 is
secured by letters of credit. The Company has also issued letters of credit
aggregating $90,000 and a security deposit of $426,000 to guarantee reclamation
costs (see notes 3, 16 and 18).
5. MINERAL PROPERTIES AND FIXED ASSETS
($000's) 2004 2003 (restated - note 1)
--------------------------------------------------------------------------------------------------------------------------
Accumulated Accumulated
Depreciation Net Book Depreciation Net Book
Cost and Depletion Value Cost and Depletion Value
--------------------------------------------------------------------------------------------------------------------------
Equipment 145,453 (104,170) 41,283 146,562 (104,365) 42,197
Mineral properties,
buildings and
improvements 123,437 (69,245) 54,192 95,477 (64,732) 30,745
Development 85,315 (41,409) 43,906 54,866 (34,503) 20,363
Exploration 14,756 (2,939) 11,817 14,845 (525) 14,320
Asset retirement cost 10,590 (8,715) 1,875 10,847 (7,173) 3,674
--------------------------------------------------------------------------------------------------------------------------
379,551 (226,478) 153,073 322,597 (211,298) 111,299
Mineral properties and fixed assets of the Company comprise the
following:
a) El Mochito Mine $16,078,000 (2003 - $14,322,000)
The El Mochito mine is a zinc, lead and silver mine located in the Republic of
Honduras. Deferred exploration costs were written down in 2004 by $Nil (2003 -
$279,000 and 2002- $Nil).
b) Bougrine Mine $4,687,000 (2003 - $13,021,000)
The Bougrine mine is a zinc and lead mine located 160 kilometres west of Tunis,
Tunisia.
c) El Toqui Mine $27,728,000 (2003 - $22,823,000)
The El Toqui mine is a zinc and gold mine located 1,350 kilometres south of
Santiago, Chile.
d) Bouchard-Hebert Mine $5,155,000 (2003 - $11,578,000)
The Bouchard-Hebert mine is a zinc, copper, gold and silver mine located 30
kilometres northeast of Rouyn-Noranda, Quebec, Canada.
e) Myra Falls Mine $46,853,000 (2003 - $Nil)
The Myra Falls mine is a zinc, copper and gold mine located on Vancouver Island,
British Columbia. The mine was acquired on the purchase of BWCL (see note 2).
f) Langlois Mine $44,436,000 (2003 - $40,729,000)
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. Development costs totaled $698,000 in 2004 (2003 -
$1,659,000). In 2004, the Company incurred $3,009,000 (2003 - $778,000) of
pre-production costs and fixed assets, which have been capitalized in
anticipation of the mine reopening.
g) Caribou Mine $Nil (2003 - $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. Care and maintenance costs incurred in 2004 of $1,641,000 (2003 -
$1,521,000) are included in"Other non-producing property costs (income)" on the
consolidated statement of operations and deficit.
h) Nanisivik Mine $2,342,000 (2003 - $2,542,000)
The Nanisivik mine was a zinc and silver mine located on Strathcona Sound,
Baffin Island, Nunavut, Canada. The fixed asset carrying value of $2,342,000
(2003 - $2,542,000) as at December 31, 2004, 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. The Nanisivik mine ceased
operations on September 30, 2002. Holding costs incurred in 2004 of $4,734,000
(2003 - $3,386,000) and a obsolescence provision of $2,100,000 (2003 - $Nil) for
materials and supplies inventory are included in "Other non-producing property
costs (income)" on the consolidated statement of operations and deficit.
i) Other Properties $5,794,000 (2003 - $6,284,000)
Other Properties comprise exploration properties held directly and other capital
assets. Management reviews the carrying values of these properties annually and
in 2004 recorded a write-down of $1,178,000 (2003 - $Nil, 2002- $Nil), which is
included in "Write-down of mineral properties and fixed assets" on the
consolidated statement of operations and deficit.
On June 16, 2003, the Company sold the Lapa exploration properties
consisting of the Tonawanda and Zulapa properties, 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 included in "Deferred Income"
on the balance sheet. 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 in 2003 was included in "Other non-producing property costs
(income)" on the consolidated statement of operations and deficit.
6. LONG-TERM INVESTMENT
Long-term investment is valued at cost, net of any impairment in value.
($000's) December 31, 2004 December 31, 2003
-------------------------------------------------- ----------------------- ----------------------
Taseko Mines Limited convertible debenture 5,615 -
The Company's long-term investment was acquired on the purchase of BWCL
(note 2).
The convertible debenture from Taseko Mines Limited ("Taseko") was
issued on July 21, 1999, for an amount of $17,000,000 and matures on July 21,
2009. The principal sum does not bear interest and is not secured by any charge
or mortgage on any assets of Taseko.
The debenture is convertible into common shares of Taseko over a
ten-year period from the date of issuance commencing at a price of $3.14 per
share escalating by $0.25 per year thereafter. From the fifth anniversary from
the date of issue until the tenth anniversary, the outstanding principal may, at
the election of Taseko, be converted into common shares of Taseko at the then
prevailing market price. The fair value of the debenture as at December 31,
2004, was $8,055,000 and was calculated using the quoted market price of
Taseko's shares.
7. SHORT-TERM DEBT
($000's) 2004 2003
------------------------------------------------------------------------------------------------------------
Syndicated Credit Facility
- Revolver - 6,462
- Non-Revolving Facility, current portion (note 8) - 1,266
- Supplemental Term Facility, current portion (note 8) - 467
Customer prepayments for zinc concentrates (note 8) - 646
Other (2004 - interest at floating rates; 2003 - the major portion of debt was
non-interest bearing) 256 1,488
------------------------------------------------------------------------------------------------------------
256 10,329
On January 30, 2004, the Revolver was fully repaid. On December 21,
2004, the Revolver was cancelled. Interest expense on short-term debt during
2004 amounted to $34,000 (2003 - $797,000; 2002 - $1,979,000).
8. LONG-TERM DEBT
($000's) 2004 2003
------------------------------------------------------------------------------------------------------------
Non-Revolving Facility - 11,393
Supplemental Term Facility - 4,201
Reimbursable government assistance, unsecured 1,424 1,412
Customer prepayments for zinc concentrates - 646
Other - 1,277
------------------------------------------------------------------------------------------------------------
Total 1,424 18,929
Less current portion - 3,412
------------------------------------------------------------------------------------------------------------
1,424 15,517
$925,000 of the reimbursable government assistance is the estimated
amount expected to be repaid in 2006 and no interest is currently being accrued.
The remaining reimbursable government assistance of $499,000 is contingently
repayable based on the future profits generated by zone 97 of the Langlois mine
and is not accruing interest. Accordingly the fair value of this amount cannot
be reasonably determined.
On January 30, 2004, the Non-Revolving Credit Facility and the
Supplemental Term Credit Facility were fully repaid and cannot be redrawn. The
Company's various credit facilities were repaid using a portion of the proceeds
of the sale of units to a syndicate of underwriters (see note 12(a)). On
December 21, 2004, the Non-Revolving Credit Facility and the Supplemental Term
Credit Facility were cancelled.
Other long-term debt at December 31, 2003, included fees of $1,033,000
payable to Dundee Securities Corporation ("DSC"), a subsidiary of Dundee Bancorp
("Dundee"), with respect to acquisitions in prior years (see note 15). This
amount was repaid in 2004.
Interest expense on long-term debt during 2004 amounted to $38,000 (2003
- - $1,432,000, 2002 - $1,913,000).
9. ROYALTY OBLIGATION
In December 2004, the Company entered into a Royalty Agreement
("Agreement") with Red Mile Resources No. 5 Limited Partnership ("Red Mile")
whereby the Company sold a "Basic Royalty" on a portion of the payable zinc
production, over the life of the Myra Falls mine. The Company received cash of
$13,540,000, which included royalty income of $11,979,000 and indemnity fees and
interest of $1,561,000.
Under the terms of the Agreement, the Company is required to make Basic
Royalty payments at fixed amounts per pound of payable zinc produced, which
escalates from $0.003 per pound to $0.016 per pound over the first 12 years of
the Agreement. In addition, the Company granted Red Mile a Net Smelter Return of
0.4%, 0.5% or 0.7% in years 2010 through 2014 if the price of zinc in a given
calendar year averages US$2,250, US$2,500 or US$2,750 per tonne respectively.
$11,785,000 of the cash received was placed with a financial institution, for
which the Company took back a promissory note. Interest earned from the
promissory note will be used to fund the expected Basic Royalty payments during
the first five years of the Agreement. Over the remaining years of the
Agreement, interest and principal from the promissory note will be used to fund
the Basic Royalty payments.
The balance of the funds received of $1,755,000 will be used for working
capital and capital requirements at the Myra Falls mine.
Under certain circumstances the Company has the right, by way of a call
option to acquire the partnership units of Red Mile for the lower of market
value or for the outstanding amount of the promissory note.
On the balance sheet, the long-term portion of the royalties received
from Red Mile of $11,696,000 is shown as "Royalty Obligation" and the current
portion of $283,000 is included in "Accounts payable and accrued liabilities".
Of the indemnity fees received, $508,000 was deferred and is included in
"Deferred Income" on the balance sheet. The deferred indemnity fees will be
recognized in income as earned over the life of the Agreement.
10. RECLAMATION, CLOSURE COST ACCRUALS AND OTHER ENVIRONMENTAL OBLIGATIONS
The Reclamation, Closure Cost Accruals and Other Environmental
Obligations shown on the balance sheet comprise:
December 31, December 31, 2003
($000's) 2004 (restated - note 1)
-------------------------------------------------------------------------------------------------
Asset retirement obligations (see note 1 "New pronouncements") 47,221 30,237
Closure cost accruals 4,978 4,148
Other environmental obligations (see note below) 11,555 -
-------------------------------------------------------------------------------------------------
63,754 34,385
Less current portion 21,081 132
-------------------------------------------------------------------------------------------------
42,673 34,253
Other environmental obligations represent expenditures required to
complete modifications to the tailings facility at the Myra Falls mine. The
Company expects to complete the work required by 2007. The full amount of the
estimated obligation was recorded and is being reduced by actual expenditures
incurred. The actual expenditures since acquisition were $3,310,000. The current
portion of $7,694,000 is included in "Current portion of reclamation, closure
cost accruals and other environmental obligations" on the balance sheet.
Asset Retirement Obligations - ($000's)
-----------------------------------------------------------------------------------------------
As at December 31, 2003 30,237
Addition on acquisition of Myra Falls mine 18,291
Accretion (included in reclamation and closure costs) 2,781
Expenditures (3,624)
Impact of foreign exchange (464)
-----------------------------------------------------------------------------------------------
As at December 31, 2004 47,221
Less: current portion included in Current portion of reclamation,
closure cost accruals and other environmental obligations 9,826
-----------------------------------------------------------------------------------------------
37,395
The estimated amount of undiscounted cash flows required to satisfy the
asset retirement obligations as at December 31, 2004, was $119,649,000 (December
31, 2003 - $37,088,000). The expected timing of payments of the cash flows
ranges from 2004 to 2117, and the credit-adjusted risk-free rates at which the
estimated cash flows have been discounted to arrive at the accounting obligation
range from 7.17% to 7.89%. The estimated amount of undiscounted cash flows for
December 31, 2004 includes an amount of $66,329,000, which is for treatment of
water at the Myra Falls mine, in perpetuity. At the end of the mine life, the
Company has two options to fund the water treatment costs. The first would be to
put on deposit $17,500,000, which amount is expected to generate sufficient cash
flow to fully fund the water treatment costs. The second, subject to the
necessary approvals from the government of British Columbia, would be to connect
the hydroelectric generating facilities located at the Myra Falls mine to the BC
Hydro electrical grid and sell electrical power to the market. The expected
revenue would be more than sufficient to fund the water treatment costs.
11. EMPLOYEE FUTURE BENEFITS
The Company's unionized hourly employees at the Myra Falls mine have a
defined benefit pension plan. The hourly employees' benefits under this plan are
specified by a collective agreement. Actuarial reports valuing this hourly plan
are prepared every three years, with January 1, 2003, being the most recent
valuation. The Company also provides extended health and dental benefits for
certain employees of the Myra Falls mine.
The details of the Company's benefit plans as at December 31, 2004, are
as follows:
Post-retirement
Pension benefits other
benefits than pension Total
---------------- ---------------------- -----------------
Expected long-term rate of return on plan assets 7.75% 7.75% N/A
Discount rate on accrued pension obligations (July 23, 6.00% 6.00% N/A
2004 - 6.25%)
Rate of compensation increase N/A N/A N/A
12% for the first 10
Extended health care rate of expense increase N/A years, 5% thereafter N/A
Dental care rate of expense increase N/A 4.00% N/A
($000's)
-------------------------------------------------------------------------------------------------------------------
Pension expenses:
Current service cost 494 9 503
Interest cost of projected benefit obligation 884 21 905
Expected return on pension fund assets (855) - (855)
Net amortization, deferrals and other - - -
-------------------------------------------------------------------------------------------------------------------
523 30 553
===================================================================================================================
Plan assets:
Fair value of plan assets, as at July 23, 2004 21,661 - 21,661
Return on plan assets 1,306 - 1,306
Employer contributions 941 27 968
Benefits paid (575) (27) (602)
-------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, at December 31, 2004 23,333 - 23,333
===================================================================================================================
Accrued benefit obligation:
Accrued benefit obligation, as at July 23, 2004 28,033 680 28,713
Current service cost 494 9 503
Interest cost 884 21 905
Benefits paid (575) (27) (602)
Actuarial loss (gain) 771 (5) 766
Plan improvement 1,512 426 1,938
-------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation, at December 31, 2004 31,119 1,104 32,223
===================================================================================================================
Plan assets 23,333 - 23,333
Accrued benefit obligation 31,119 1,104 32,223
-------------------------------------------------------------------------------------------------------------------
Funding deficit (7,786) (1,104) (8,890)
Unamortized actuarial loss (gain) 510 (4) 506
Unamortized past service costs 1,512 426 1,938
-------------------------------------------------------------------------------------------------------------------
Pension liability (5,764) (682) (6,446)
===================================================================================================================
The assumed health care cost trend rates can affect the amounts reported
for the health care plan:
-------------------------------------------------------------------------------------------------------------------
$000's 1 Percentage-Point 1 Percentage-Point
increase decrease
-------------------------------------------------------------------------------------------------------------------
Effect on service cost 0.20 (0.1)
-------------------------------------------------------------------------------------------------------------------
Effect on interest cost 0.4 (0.4)
-------------------------------------------------------------------------------------------------------------------
Effect on year-end accrued benefit obligation 34 (33)
-------------------------------------------------------------------------------------------------------------------
PLAN ASSETS
The allocation of plan assets is set forth in the Investment Policy
Statement. The Investment Policy Statement delegates authority to the Employee
Benefits Committee to maintain and establish investment policies relating to the
defined benefit plans. These policies and any changes to these policies are
approved by the Board of Directors of the Company. The Company has adopted the
following standards for the Employee Benefits Committee to follow when deciding
how to invest the plan assets.
ASSETS SHALL BE INVESTED:
(a) in the sole interest of the plan participants and beneficiaries;
(b) with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and of like aims in
compliance with Section 404(A) of ERISA, and other applicable
provisions of ERISA; and
(c) by diversifying the investments so as to minimize the risk of
large losses as well as provide a reasonable rate of return on
the assets.
The following table summarizes the defined benefit plan asset
weighted-average asset allocation percentages by asset category:
---------------------------------------------------------------------------
Asset Category 2004
---------------------------------------------------------------------------
Short-term / Money market 5.0%
---------------------------------------------------------------------------
Fixed income 38.0%
---------------------------------------------------------------------------
Canadian equity 36.5%
---------------------------------------------------------------------------
U.S. equity 12.5%
---------------------------------------------------------------------------
Non-U.S. Foreign equity 8.0%
---------------------------------------------------------------------------
The benefit plan assets are managed by a major insurance company and the Company
has chosen to invest in their diversified fund which has a target investment
allocation of 15% - 20% in foreign equity, 20% - 40% in Canadian equity and 40%
- - 60% in fixed income. The diversified fund invests in several of its segregated
funds, which include Canadian and foreign stocks, Canadian bonds and mortgages
to achieve diversification. The performance objective of the diversified fund is
to exceed the median rate of return of a representative sample of comparable
funds over rolling five-year periods. The assumption for the expected long-term
rate of return on plan assets is based on the relative weighting of plan assets,
the historical experience of the portfolio and the review of projected returns
by asset class on broad, publicly traded equity and fixed-income indices.
CONTRIBUTIONS
The Company expects to contribute $2,333,000 to its defined benefit
pension plan and $128,000 to its post-retirement benefit plans in 2005.
ESTIMATED FUTURE BENEFIT PAYMENTS
------------------------------------------------------------------- ----------------------- -----------------------
$000's Defined benefit
Pension plan Other Benefits
------------------------------------------------------------------- ----------------------- -----------------------
2005 1,358 128
------------------------------------------------------------------- ----------------------- -----------------------
2006 1,526 144
------------------------------------------------------------------- ----------------------- -----------------------
2007 1,698 159
------------------------------------------------------------------- ----------------------- -----------------------
2008 1,845 170
------------------------------------------------------------------- ----------------------- -----------------------
2009 1,893 191
------------------------------------------------------------------- ----------------------- -----------------------
Aggregate of 5 years thereafter 40,833 415
------------------------------------------------------------------- ----------------------- -----------------------
Benefit payments are expected to cease after December 31, 2011, for the
retirement supplement plan and the non-pension post-retirement plan, as these
plans are assumed to close once the Myra Falls mine ceases operation. The
expected payments for the registered pension plan in 2012 reflect the
termination of the plan on December 31, 2011, and represent the pay out of all
plan obligations.
12. CAPITAL STOCK
Authorized - Unlimited Common Shares
200,000,000 preferred shares
Issued:
Common shares
(000's) Number of shares Amount
--------------------------------------------------------------------------------------------------------
As at December 31, 2002 193,281 $257,759
Private placement (b) 1,014 742
Shares issued for subscription receipts, net of expenses (c) 85,800 28,002
Shares issued as supplementary payment to employee (d) 2,565 618
Shares issued on exercise of warrants 500 105
Shares issued on exercise of options (h) 1,333 263
Employee share bonus plan (g) 200 50
Employee share purchase plan (e) 1,097 204
--------------------------------------------------------------------------------------------------------
As at December 31, 2003 - as originally reported 285,790 287,743
Adjustment relating to options exercised under
stock-based compensation (see note 1) - 47
--------------------------------------------------------------------------------------------------------
As at December 31, 2003 - Restated 285,790 287,790
Common Shares issued for cash (a) 57,143 29,816
Common Shares issued on acquisition of BWCL (see note 2) 18,000 8,081
Exercise of warrants 1,250 242
Adjustment to flow-through share costs 3
Value ascribed to options exercised under stock-based compensation - 125
Employee share purchase plan (e) 480 253
Employee share option plan - proceeds of options exercised 493 93
--------------------------------------------------------------------------------------------------------
As at December 31, 2004 363,156 $326,403
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 $37,027,000, net of costs of issue of approximately $2,973,000. 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 27, 2009. The fair value of the
warrants, issued on completion of the sale in the amount of $7,211,000, net of
costs of issue, is shown on a combined basis with the warrants issued on the
BWCL acquisition, ($1,350,000; see note 2) within shareholders' equity on the
balance sheet as "Warrants".
b) 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.
c) 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").
d) 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. The supplementary amount paid in the form
of Common Shares for an amount of $618,000 was included in general and
administrative expenses in 2002.
e) Under the share purchase plan employees of the Company who fall under a
certain classification can contribute up to 10% of their annual basic salary to
purchase Common Shares. All other employees who qualify under the share purchase
plan can contribute up to 5% 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 480,000 Common Shares pursuant to the Share Purchase
Plan during 2004 (2003 - 1,097,000). The number of shares authorized for issue
under the share purchase plan as at December 31, 2004, was 7,500,000.
f) Pursuant to the share option plan, the Board of 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 issued in 2004 must be exercised no later than five years after the date
of the grant, and options issued prior to 2004 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. There were no terminations of
options by optionees in 2004 or 2003.
As at December 31, 2004, the outstanding share options which total
14,670,000 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, 2004, was 23,000,000.
g) The Company has a Share Bonus Plan that 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, 2004, the Company has issued to date 1,200,000 (2003 - 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, 2004, was
4,000,000.
h) Share option transactions were as follows:
Weighted-
Options Average
(000's) Exercise
Price
-------------------------------------------------------------------------------------------------
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
Granted 6,335 0.64
Exercised (494) 0.19
Forfeited (1,000) 0.67
Cancelled (56) 0.72
-------------------------------------------------------------------------------------------------
As at December 31, 2004 13,670 $1.06
The following table summarizes information about the share options
outstanding at December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------ ------------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
as at Remaining Average as at Average
Range of Dec. 31, 2004 Contractual Exercise Dec. 31, 2004 Exercise
Exercise Prices (000's) Life Price (000's) Price
------------------------------------------------------------------------------------ ------------------------------------
$0.18 - $0.49 5,995 7 years 4 days $0.27 3,378 $0.26
$0.50 - $1.49 4,767 4 years 116 days $0.76 1,907 $1.20
$1.50 - $2.99 1,091 2 years 7 days $2.09 1,083 $2.09
$3.00 - $8.20 1,817 3 years 171 days $3.79 1,817 $3.79
----------------- -----------------
13,670 8,185
i) On June 1, 2004, the shareholders of the Company approved an amendment
to the share incentive plan (the "Plan") which is described in note 1, to
increase the maximum number of Common Shares that may be issued under the Plan
to 34,500,000 Common Shares, of which 7,500,000 will be the maximum number that
may be issued under the share purchase plan, 23,000,000 will be the maximum
number that may be issued under the share option plan, and 4,000,000 will be the
maximum number that may be issued under the share bonus plan.
j) The Company's share option plan is described in note 12(f). Compensation
expense for the stock-based compensation plan for employees has been determined
based upon the fair value of awards granted on or after January 1, 2002.
Stock-based compensation of $1,253,000 (2003 - $274,000) less the proceeds of
options exercised of $124,000 (2003 - $47,000) for a net compensation expense of
$1,129,000 (2003 - $227,000), was credited to "Contributed Surplus" within
shareholders' equity on the balance sheet. The proceeds of options exercised of
$124,000 (2003 - $47,000), was credited to "Capital stock" within shareholders'
equity on the balance sheet.
The fair value of each option grant has been estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2004 2003
------------------------------------------------------------------------------------------------------------
Weighted-average exercise price per Common Share $0.64 $0.27
Weighted quoted market price per Common Share at date of grant $0.64 $0.27
Weighted-average grant-date fair value price per Common Share $0.39 $0.17
Expected life (years) 3 - 5 3 - 10
Risk free interest rate 4.49% 4.62%
Expected volatility 70% 46%
Dividend yield 0% 0%
The exercise price of all options granted during 2004 and 2003 equaled
the quoted market price at the date of grant.
k) In consideration for restructuring the Non-Revolving Facility in 2001
and 2002, the Company granted to the syndicate ("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, 2004, 250,000 (2003 - 500,000) of the warrants issued to
the Lenders were exercised and Nil (2003 - 50,000) were cancelled. At December
31, 2004, 200,000 warrants remain outstanding.
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. At December 31, 2004, all the warrants remain outstanding.
l) Under an agreement reached on December 23, 2002, with the Lenders and
Dundee Corporation ("Dundee"), 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. In 2004,
1,000,000 of these warrants were exercised by the Lenders. At December 31, 2004,
2,000,000 of these warrants remain outstanding.
13. 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, 2004, of 37%
(2003 - 38%, 2002 - 39%) to the net earnings (loss), excluding income and mining
taxes. The differences are summarized as follows:
($000's) 2004 2003 2002
-------------------------------------------------------------------------------------------------------------------------
Tax provision (recovery) at statutory rate 1,180 2,364 (7,762)
Federal resource allowance (1,035) 119 (289)
Unrecognized tax benefit relating to losses 4,366 916 5,781
Different effective tax rates on earnings (losses) in foreign subsidiaries (163) 1,630 2,725
Benefit of previously unrecognized losses available for carry forward (5,107) (5,984) (246)
Other 108 124 (88)
Mining taxes (recovery) 1,222 (10) (345)
-------------------------------------------------------------------------------------------------------------------------
571 (841) (224)
As at December 31, 2004, the significant components of the Company's
future tax assets (liabilities) were as follows:
($000's) 2004 2003
-------------------------------------------------------------------------- ------------------ --------------
Future tax assets
Loss carry forwards 72,415 19,043
Mineral properties and fixed assets 137,833 56,062
Reclamation and closure cost accruals 21,258 5,354
-------------------------------------------------------------------------- ------------------ --------------
Future tax assets before valuation allowance 231,506 80,459
Valuation allowance 231,506 79,269
-------------------------------------------------------------------------- ------------------ --------------
Future tax assets - 1,190
Future tax liabilities
Mineral properties - mining tax (1,681) (962)
-------------------------------------------------------------------------- ------------------ --------------
Net future tax (liabilities) assets (1,681) 228
a) At December 31, 2004, the Company has net operating loss carry forwards
in Canada of approximately $186,000,000, which expire at various dates through
2011. In addition, the Company has approximately $273,700,000 of resource
expenditures that are limited in their deduction to income from specific
properties.
b) At December 31, 2004, the Company has net operating loss carry forwards
in Chile of approximately $31,000,000, which do not expire.
c) At December 31, 2004, the Company has net operating loss carry forwards
in Honduras of approximately $5,200,000, which will expire four years after the
Company in Honduras generates its first taxable profit.
14. 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, restricted cash, accounts receivable, 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 8.
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 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 5(h)). Accordingly, foreign exchange contracts
totalling US$25,000,000, originally designated as hedges of anticipated
operating costs at the Nanisivik mine, were no longer considered as effective
hedges. Consequently these contracts were marked-to-market, resulting in a gain
of $608,000 included in gross sales revenue in the year ended December 31, 2002.
These contracts were closed out in 2003 with a nominal income impact recognized
by the Company.
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
when they are designated as hedges are reported as a component of the related
transactions.
The Company had no foreign exchange contracts outstanding at December
31, 2004 and 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 as hedge accounting has not been applied,
and gains and losses are recognized in the relevant period. The Company also
periodically enters into written call options which are marked-to-market through
income as hedge accounting is not applied. No call options have been entered
into in either 2004 or 2003, other than those described below. In 2004 and 2003,
the Company choose not to apply hedge accounting.
As at December 31, 2004, there were no outstanding contracts. The
Company had the following contracts, which were 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 had various operating lines of credit that tie interest
payments to the bank prime or LIBOR lending rates. Therefore, the Company was
exposed to interest rate risk through fluctuations in these interest rates.
15. RELATED PARTY TRANSACTIONS
All related party transactions are disclosed elsewhere in these
consolidated financial statements (see notes 8 and 12) except for the following:
a) The Company and Dundee Securities Corporation ("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 was deferred through
2004, and was included in short-term debt as at December 31, 2003 (see note 8).
This amount was repaid in 2004.
b) The Company incurred management fees in 2004, of $Nil (2003 - $250,000,
2002 - $250,000) for services provided by Dundee. As at December 31, 2004, the
total management fees of $500,000 is still outstanding and is included in
accounts payable and accrued liabilities on the balance sheet.
c) At December 31, 2004, the Company has an amount of $Nil (2003- $544,000)
on deposit with DSC.
d) The Company provides to Glencairn Gold Corporation ("Glencairn"),
formerly Black Hawk Mining Inc. ("BHK"), a company that is related through
common directorship, logistic and procurement services which enables both
companies to reduce costs and negotiate favourable terms for the purchase of
materials and supplies.
Transactions for the year ended December 31, 2004, for sale of supplies
and charges for administrative services to Glencairn totalled $652,000 (2003 -
$574,000, 2002 - $1,827,000). These transactions have been reflected in the
statements of operations as cost recoveries and accordingly, are reflected as
reductions in either direct operating costs or general and administrative
expenses. In addition, the Company did not sell any equipment to Glencairn in
2004 (2003 proceeds from surplus equipment - $106,000, 2002 - $146,000).
Other accounts receivable at December 31, 2004 and 2003 included the
following amounts due from Glencairn:
($000's) 2004 2003
---------------------------------------------------------------
For:
Supplies 315 203
Services 18 112
---------------------------------------------------------------
333 315
Interest was charged on overdue amounts receivable from BHK at
commercial rates.
16. GUARANTEES
a) As at December 31, 2004, the Company has outstanding letters of credit
totalling $2,965,000 (2003 - $3,811,000), which are renewable annually.
$2,715,000 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 5(h)).
b) In consideration for the receipt of an indemnity fee of $564,334 from
Wilshire Financial Services Inc. ("Wilshire") related to the Agreement (note 9),
the Company has indemnified and holds harmless Wilshire from and against any and
all losses based upon, arising out of, or otherwise in connection with or as a
result of any claims relating to a breach or default by the Company under the
Agreement. As at December 31, 2004, the maximum liability was $11,785,000.
17. 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.
Material 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
Mineral Accounts
Properties Payable
and and
(Expressed in thousands of Fixed Short-term Long-term Restricted Intangible Accrued
Canadian dollars) Assets Investments Investment Cash Assets Liabilities
- -------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2004
As shown in the consolidated
financial statements under
Cdn. GAAP $153,073 $2,633 $5,615 $3,391 $ - $35,558
Shares issued to promoters or
shareholders in exchange (1,028)
Adjustment relating to
stock-based compensation
Adjustment relating to
stock-based compensation
to non-employee
Adjustment relating to
stock-based compensation
to senior officer
Adjustment relating to
write-down of El Toqui
mine (b) (1,862)
Adjustment relating to
exploration expenditures
(c) (7,595)
Adjustment relating to
unrealized gains on
short-term investments (e) 1,253
Adjustment relating to
fair value on long-term
investments (f) 2,440
Adjustment relating to
flow-through shares (742) 742 142
Recognition of minimum
pension liability (j) 1,512
Adjustment to reclassify
Cumulative Translation
Adjustment
- -------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $142,588 $3,144 $8,055 $4,133 $1,512 $35,700
=============================================================================================================
(CONT'D)
Employee Other Cumulative
(Expressed in thousands of Future Comprehensive Contribute Translation Capital
Canadian dollars) Benefits Income Deficit Surplus Adjustment Stock
- --------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2004
As shown in the consolidated
financial statements under
Cdn. GAAP $6,446 ($187,667) $3,120 ($9,009) $326,403
Shares issued to promoters or
shareholders in exchange 13,178 (14,206)
Adjustment relating to
stock-based compensation 458 (410) (48)
Adjustment relating to
stock-based compensation
to non-employee (48) 48
Adjustment relating to
stock-based compensation
to senior officer (156) 156
Adjustment relating to
write-down of El Toqui
mine (b) (1,862)
Adjustment relating to
exploration expenditures
(c) (7,595)
Adjustment relating to
unrealized gains on
short-term investments (e) 1,253
Adjustment relating to
fair value on long-term
investments (f) 2,440
Adjustment relating to
flow-through shares (142)
Recognition of minimum
pension liability (j) 2,022 (510)
Adjustment to reclassify
Cumulative Translation
Adjustment (9,009) 9,009
- --------------------------------------------------------------------------------------------------
According to U.S. GAAP $8,468 ($8,266) ($181,252) $2,914 $ - $312,007
==================================================================================================
Mineral Accounts Cumulated
Properties Payable and Other Contri- Trans-
(Expressed in thousands of and Short-term Restricted Accrued Comprehensive buted lation Capital
Canadian dollars) Fixed Assets Investments Cash Liabilities Income Deficit Surplus Adjustment Stock
- ------------------------------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2003
(RESTATED) NOTE 1
As shown in the consolidated
financial statements under
Cdn. GAAP $111,299 $50 $355 $18,629 $ - ($190,291) $1,991 ($3,321) $287,790
Shares issued to promoters
or shareholders in exchange
for non-monetary assets (1,289) 12,917 (14,206)
Adjustment relating to
stock-based compensation 458 (410) (48)
Adjustment relating to
stock-based compensation
to non-employee (48) 48
Adjustment relating to
stock-based compensation to
senior officer (156) 156
Adjustment relating to
write-down of El Toqui
mine (b) (2,130) (2,130)
Adjustment relating to
exploration expenditures (c) (7,808) (7,808)
Adjustment relating to
unrealized gains on
short-term investments (e) 18 18
Adjustment relating to
flow-through shares (j) (742) 742 142 (142)
Adjustment to reclassify
Cumulative Translation
Adjustment (i) (3,321) 3,321
- ------------------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $100,072 ($674) $1,097 $18,771 ($3,303) ($187,058) $1,785 $ - $273,394
====================================================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of Canadian dollars, except for per share
information) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) as shown in the consolidated financial
statements under Cdn. GAAP $2,624 $651 ($26,736)
Additional (expense) income:
Adjustment to reverse ARO restatement under Cdn. GAAP (n) - - 6,665
Cumulative effect of change in accounting principle for ARO (n) - (11,903) -
Adjustment to depletion in connection with shares
issued to promoters or shareholders (a) 261 279 347
Adjustment relating to write-down of the El Toqui mine (b) - - (2,287)
Adjustment relating to depreciation and depletion (b) 268 158 73
Adjustment relating to write-off of exploration expenditures (c) (807) (837) (2,150)
Adjustment stock-based compensation (m) - 274 184
Adjustment to mark-to-market embedded option in long-term 2,348 - -
investment
Adjustment for interest on long-term investment 92 -
Adjustment for deferred losses on foreign exchange hedging - - 2,003
contracts
Adjustment to reverse write-off of exploration properties under
Cdn. GAAP as these properties were already expensed under
U.S. GAAP (c) 1,178 - -
==========================================================================================================
Net earnings (Loss) under U.S. GAAP $5,964 ($11,378) ($21,901)
==========================================================================================================
Basic earnings (loss) per share under U.S. GAAP $0.02 ($0.05) ($0.13)
Diluted earnings (loss) per share under U.S. GAAP $0.02 ($0.05) ($0.13)
Effect of U.S. GAAP adjustments on basic loss per share $0.01 ($0.05) ($0.03)
CONSOLIDATED STATEMENTS OF OPERATIONS PRESENTATION:
Under U.S. GAAP, the measure "Contribution (Loss) from Mining
Activities" is not a recognized term and would therefore not be presented.
"Contribution (Loss) from Mining Activities" when adjusted for the items in the
table below is comparable to the terminology "Contribution (Loss) from
operations" under U.S. GAAP.
The following table reconciles "Contribution (Loss) from Mining
Activities under Cdn. GAAP" to "Contribution (Loss) from operations under U.S.
GAAP"
(Expressed in thousands of Canadian dollars) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Contribution (Loss) from Mining Activities under Cdn. GAAP $ 25,729 $ (8,812) $ (13,190)
General and administrative (9,559) (5,087) (6,198)
Stock-based compensation (1,253) (274) (184)
Write-down of mineral properties and fixed assets (1,178) (279) -
Other non-producing property (costs) income (8,638) (5,394) 3,847
Aggregate adjustments for U.S. GAAP 3,340 (126) (1,830)
- -----------------------------------------------------------------------------------------------------------------
Contribution (Loss) from operations under U.S. GAAP $ 8,441 $ (19,972) $ (17,555)
=================================================================================================================
For U.S. GAAP purposes, the components of non-operating income (loss) are as follows:
(Expressed in thousands of Canadian dollars) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Interest and financing $ (509) $ (3,321) $ (5,122)
Investment and other income 843 405 1,273
Other foreign exchange (loss) gain (1,809) 206 (361)
Foreign exchange (loss) gain on US dollar denominated debt (431) 11,578 669
- -----------------------------------------------------------------------------------------------------------------
Non-operating (loss) income for U.S. GAAP $ (1,906) $ 8,868 $ (3,541)
=================================================================================================================
The following table reconciles "Net earnings (loss) under U.S. GAAP" to
"Comprehensive income (loss) under U.S. GAAP".
(Expressed in thousands of Canadian dollars) 2004 2003 2002
-----------------------------------------------------------------------------------------------
Net Earnings (Loss) under U.S. GAAP $5,964 ($11,378) ($21,901)
Change in cumulative translation adjustment account (i) (5,688) (17,727) 2,332
Adjustment to recognise minimum pension liability (510) - -
Adjustment relating to unrealized gains on short-term 1,253 18 142
investments (e)
-----------------------------------------------------------------------------------------------
Comprehensive loss under U.S. GAAP $1,019 ($29,087) ($19,427)
===============================================================================================
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 earnings (loss) 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 $39,118,000,
$16,268,000 and $10,799,000 for 2004, 2003, and 2002, respectively for U.S. GAAP
purposes.
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 of the Company 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 of the
Company be recorded at the transferor's historical cost.
b) 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 2004 consolidated
financial statements, the Company determined that no write-down was required in
2004 (2003 - $Nil, 2002 - $2,287,000) as a result of applying SFAS 144,
"Accounting for the impairment or disposal of long-lived assets". In 2002,
differences in the amount of write-down arose, reflecting the requirement under
U.S. GAAP to discount future cash flows from impaired properties. Under Cdn.
GAAP at the time, future cash flows from properties were not discounted in
determining the magnitude of any impairment. As a consequence of the difference
in impairment write-downs, under U.S. GAAP, depreciation and depletion would be
reduced in 2004 by $268,000 ($158,000 in 2003, and $73,000 in 2002).
c) 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,
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. Under U.S. GAAP, the Company
expenses exploration costs of non-producing properties as incurred.
d) 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 in capital.
e) Short-term Investments
Under Cdn. GAAP, short-term investments are recorded at the lower of
cost and quoted market value. Under U.S. GAAP, unrealized gains (losses) on
short-term investments classified as available for sale securities are recorded
in other comprehensive income, until realized.
f) Long-term Investment
Long-term investment consists of a non-interest bearing convertible
debenture from Taseko Mines Limited, which under Cdn. GAAP, is recorded at cost,
net of any impairment in value. Under Cdn. GAAP the Company has not recorded any
interest income or unrealized gains (losses) on this investment. Under U.S.
GAAP, the conversion option was bifurcated from the debenture. At acquisition,
under U.S. GAAP, the value allocated to the conversion option was $1,165,000
with the remainder of $4,450,000 to the debenture. The subsequent mark to market
gain on the conversion option of $2,348,000 and accretion income on the
debenture of $92,000 has been recognized in earnings for U.S. GAAP purposes.
There has been no change in fair value of the debenture since acquisition other
than the accretion, which needs to be recognized in other comprehensive income,
as the debenture is classified as an available for sale security.
g) Derivative Instruments and Hedging Activities
The Company applies 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 values or
cash flows. SFAS 138 amended certain provisions of SFAS 133 to clarify four
areas of implementation.
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 has 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$25,000,000, 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 14 to the Company's
consolidated financial statements as at December 31, 2004). 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 Adjustment 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 other comprehensive income.
j) Flow-through Shares
Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and provide
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 expenditures were incurred in 2003 or 2004. For U.S.
GAAP, the premium paid in excess of the market value of $142,000 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 equivalent to
the total proceeds of $742,000, was unexpended at December 31, 2004, and is
considered to be restricted and is not considered to be cash or cash equivalents
under U.S. GAAP.
k) 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) 2004 2003
---------------------------------------------------------------------------------
Accounts payable $24,946 $11,147
Payroll and severance accrual 4,931 2,921
Utilities cost accrual 873 854
Management fees accrual - 500
Mark-to-market of metal forward sale and call options - 708
Capital lease - current portion 375 -
Capital tax accrual 130 65
Premium paid on flow-through shares 142 142
Other accruals 4,303 2,434
---------------------------------------------------------------------------------
$35,700 $18,771
l) Minimum Pension Liability
Under U.S. GAAP, if the accumulated pension plan benefit obligation
which is the same as the accrued benefit obligation exceeds the market value of
plan assets, a minimum pension liability for the excess is recognized to the
extent that the liability recorded in the balance sheet is less than the minimum
liability. Any portion of this additional liability that relates to unrecognized
prior service cost is recognized as an intangible asset while the remainder is
charged to Other Comprehensive Income. Cdn. GAAP does not require the Company to
record a minimum pension liability and does not have the concept of Other
Comprehensive Income. In 2004, the Company recorded a minimum pension liability
of $2,022,000, an unrecognized prior service cost of $1,512,000, classified as
"Intangible Asset" on the U.S. GAAP balance sheet, and a loss charged to Other
Comprehensive Income of $510,000.
m) Stock Based Compensation
Under both Cdn. GAAP and U.S. GAAP, effective January 1, 2004, the
Company recorded an expense for employee stock-based compensation using the fair
value based method in accordance with the transitional provisions of Section
3870 and SFAS 123 as amended by SFAS 148. As a result of applying the modified
prospective method for U.S. GAAP the stock-based compensation recognized under
Cdn. GAAP for 2003 and 2002 has been reversed against contributed surplus and
capital stock.
The fair value at grant date of stock options is estimated using the
Black-Scholes option-pricing model. Compensation expense is recognized over the
stock option vesting period.
n) Asset Retirement Obligations
Effective January 1, 2004, under Cdn. GAAP the Company adopted Section
3110, "Accounting for Asset Retirement Obligations" which requires that the fair
value of liabilities for asset retirement obligations associated with tangible
long-lived assets be recognized in the period in which they are incurred. This
Section harmonizes Cdn. GAAP with U.S. GAAP (SFAS 143) for the accounting for
asset retirement obligations. There are no GAAP differences between Cdn. GAAP
and U.S. GAAP related to the accounting for asset retirement obligations on a
prospective basis. Under Section 3110, the transition provisions required the
prior year comparatives to be restated. However, U.S. GAAP required a cumulative
effect of accounting change to be recorded in the period of adoption for SFAS
143, which was recorded by the Company for the year ended December 31, 2003. The
restatements under Cdn. GAAP have been reversed in 2002 and a cumulative
adjustment has been recorded in 2003 under U.S. GAAP. In addition, as a result
of adopting Section 3110 under Cdn. GAAP as at January 1, 2004, there were
further enhancements to the Asset Retirement Obligation and related balances
relative to the amounts recognized in accordance with SFAS 143.
o) Variable Interest Entities
In December 2003, the FASB issued FIN 46R, which provides guidance on
the identification and reporting for entities over which control is achieved
through means other than voting rights. FIN 46R defines such entities as
variable interest entities ("VIEs"). Application of this revised interpretation
was required in financial statements for companies that have interests in VIEs
or potential VIEs for periods ending after December 15, 2003. Application for
all other types of entities is required in financial statements for periods
ending after March 15, 2004. The adoption of this accounting standard did not
have a material impact on the financial statements of the Company.
p) Recent Accounting Pronouncements
U.S. STANDARDS
The Emerging Issues Task Force ("EITF") formed a committee ("Committee")
to evaluate certain mining industry accounting issues, including issues arising
from the application of SFAS No. 141, "Business Combinations" ("SFAS No. 141")
to business combinations within the mining industry and the capitalization of
costs after the commencement of production, including deferred stripping.
In March 2004, the EITF reached a consensus, based upon the Committee's
deliberations and ratified by the FASB, that mineral interests conveyed by
leases should be considered tangible assets. On April 30, 2004, the FASB issued
a FASB Staff Position ("FSP") amending SFAS No. 141 and SFAS No. 142 to provide
that certain mineral use rights are considered tangible assets and that mineral
use rights should be accounted for based on their substance. The FSP is
effective for the first reporting period beginning after April 29, 2004, with
early adoption permitted. The Company does not expect the standard will have any
impact on its financial statements.
The Financial Accounting Standards Board (FASB) has issued FASB
Statement No. 151, Inventory Costs, a amendment of ARB No. 43, Chapter 4. The
amendments made by Statement 151 will improve financial reporting by clarifying
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges and
by requiring the allocation of fixed production overheads to inventory based on
the normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. The provisions of Statement 151 should
be applied prospectively. The Company does not expect the standard will have any
impact on its financial statements.
CANADIAN STANDARDS
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. 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.
18. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
a) The Company and Trans-Oceanic Trading Company ("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 license renewal 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 was $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
form.
The indemnity bonds amounting to $5,000,000 expired in July 2003 and
were replaced in 2004 by an unsecured promissory note in the amount of
$5,000,000.
The Company and DIAND are still in the process of discussing the matter
of financial security, but to date those discussions have not resulted in
additional securities being provided, as the matter of the form of the security
has not yet been resolved.
As at December 31, 2004, the balance of the accrual for current and
long-term reclamation, site restoration and closure costs with respect to the
Nanisivik Mine is $7,248,000. 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 notes 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.
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 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 was mediated on March 23, 2004, but the parties did not reach a
definitive resolution. The Company anticipates completing a preliminary motion
by April of 2005 and discoveries by June of 2005.
d) Taseko Mines Limited ("Taseko"), the parent of Gibraltar Mines
Ltd. ("Gibraltar"), has notified Boliden Westmin (Canada) Limited ("BWCL") (now
NVI Mining, ("NVI"), a wholly owned subsidiary of the Company) in 2001 about
indemnification claims made by Gibraltar pursuant to the purchase agreement
entered into in 1999, whereby Gibraltar acquired certain assets from BWCL on
July 21, 1999. The claims are (a) latent tax liability relating to the
environmental reclamation deposit that was transferred to Gibraltar as a result
of the purchase agreement. The estimated tax liabilities claimed are $3,750,000;
(b) potential tax liabilities with respect to an employee severance trust, which
is in excess of $500,000. If this claim is successful, it exposes NVI to further
direct liabilities which have not been quantified; and (c) claim for tax loss
deductions in the amount of $54,000,000 as a result of delays in signing mineral
exploration cumulative expenditure account. The Company believes, based on
correspondence between Taseko and BWCL, that this claim may no longer be
outstanding. No legal proceedings have been commenced with respect to any of
these claims.
NVI is involved in certain other legal actions. It is the opinion of the
Company that these legal matters will be resolved without a material effect on
the Company's financial position or results of operations.
e) The Alberta Energy Utilities Board has notified Boliden Westmin
(Canada) Limited, now NVI Mining Ltd., a wholly owned subsidiary of the Company
that it is required to post $280,000 as security for reclamation of a number of
closed gas wells in Alberta. The notice is pursuant to the Licensee Liability
Rating Program of the Alberta Energy and Utilities Board. NVI Mining Ltd. must
also address non-compliance issues such as removal of vegetation. The Company
believes that this estimated figure might be higher than required because some
prior remediation work was carried out in 2000 by the predecessor company. No
legal proceedings have been commenced with respect to this matter.
f) Tusk Energy Inc, Acanthus Resources Ltd., Bounty Developments
Ltd., Cabre Exploration Ltd., Sunoma Energy Corp. and Trans World Oil & Gas Ltd.
have filed a claim against multiple defendants including, Nanisivik Mines Ltd.
("Nanisivik"), a subsidiary of CanZinco, AEC West Ltd., Gulf Canada Resources
Limited, et al. The claim arises from ownership or ownership interest of the
Plaintiffs and Defendants in oil and gas producing properties in the Meekwap
area of Alberta. It is alleged that Gulf Canada was responsible for measurement
and processing of the plaintiffs' gas and natural gas liquids and failed to
accurately measure and account for the plaintiffs' contributions from January
1990 to June, 1996, thereby resulting in allocations to all other defendants,
including Nanisivik, in excess of their proper share and therefore have been
unjustly enriched. The total claim against all defendants is approximately
$6,000,000. It is not possible at this time to assess what portion, if any, of
the misallocations, were actually received by Nanisivik. The action is subject
to a standstill agreement, which expires on March 31, 2005. The plaintiffs are
determining if they intend to pursue the action further.
g) The Company is also involved in other 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.
h) 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.
i) 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. The Company's
current insurers have indicated that they will not be renewing the current
bonding on expiry. 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.
19. LEASE COMMITMENTS
The Company is committed to operating leases for business premises and
equipment as follows:
($000's)
2005 1,454
2006 988
2007 504
2008 395
2009 354
2010 and thereafter 383
20. SEGMENT INFORMATION
The Company operates 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).
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, 2004
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Consoli-
Geographic location Latin America Canada Tunisia and Other dated
- ------------------------------------------------------------------------------------------------------------------------------------
El El Bouchard- Myra
Mochito Toqui Nanisivik Caribou Hebert Langlois Falls Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 40,457 23,207 63,664 - - 62,175 - 11,750 73,925 20,803 51 158,443
Depreciation and depletion (3,599) (3,161) (6,760) - - (7,255) - (3,290)(10,545) (7,716) (875) (25,896)
Reclamation and closure costs (605) (294) (899) (715) (365) (1,625) (86) (542) (3,333) (664) - (4,896)
Contribution (loss) from
mining activities 10,569 6,163 16,372 (715) (365) 21,260 (86) (5,089) 15,005 (5,186) (822) 25,729
General and administrative - - - - - - - - - - (9,559) (9,559)
Stock-based compensation - - - - - - - - - - (1,253) (1,253)
Interest and financing - - - - - - - - - - (509) (509)
Investment and other income - - - - - - - - - - 843 843
Foreign exchange loss on US
dollar denominated debt - - - - - - - - - - (431) (431)
Other foreign exchange loss - - - - - - - - - - (1,809) (1,809)
Write-down of mineral
properties and fixed assets - - - - - - - - - - (1,178) (1,178)
Other non-producing
property costs - - - (6,834) (1,641) - (108) - (8,583) - (55) (8,638)
Income and mining (taxes)
recovery (91) - (91) - - (1,234) 11 (1,223) - 743 (571)
Net earnings (loss) 10,478 6,163 16,641 (7,549) (2,006) 20,026 (183) (5,089) 5,199) (5,186) (14,030) 2,624
Capital expenditures 6,762 10,981 17,743 (200) - 1,219 4,008 3,997 9,024 428 494 27,689
Identifiable assets 38,165 43,756 81,921 6,954 1,210 14,351 46,189 97,825 166,529 16,320 22,704 287,474
INFORMATION ABOUT MAJOR
CUSTOMERS
Of the Company's total consolidated net revenue in 2004, revenue from one
customer of $53,966,000 was generated from the Bouchard-Hebert mine and revenue
from a another customer of $23,307,000 consisted of $13,290,000 that was
generated from the El Mochito mine, $5,099,000 that was generated from the El
Toqui mine, $3,099,000 that was generated from the Myra Falls mine and
$1,819,000 that was generated from the Bougrine mine.
SEGMENT INFORMATION
For the Year Ended December 31, 2003
($000's)
(Restated - note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Con-
Geographic location Latin America Canada Tunisia and Other solidated
- ------------------------------------------------------------------------------------------------------------------------------------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine
Operating Segment 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) (2,220) (6,245) - - (10,725) - (10,725) (8,595) (399) (25,964)
Reclamation and closure costs (680) (293) (973) (667) (338) (1,251) - (2,256) (390) - (3,619)
(Loss) contribution from
mining activities 3,932 (1,713) 2,219 (867) (338) (1,608) - (2,813) (6,699) (1,519) (8,812)
General and administrative - - - - - - - - - (5,087) (5,087)
Stock-based compensation - - - - - - - - - (274) (274)
Interest and financing - - - - - - - - - (3,321) (3,321)
Investment and other income - - - - - - - - - 405 405
Foreign exchange gain on US
dollar denominated debt - - - - - - - - - 11,578 11,578
Other foreign exchange gain - - - - - - - - - 206 206
Write-down of mineral
properties and fixed assets (279) - (279) - - - - - - - (279)
Other non-producing property
income (costs) - - - (3,386) (1,521) - (83) (4,990) - 10,384 5,394
Income and mining taxes
(recovery) (83) - (83) - - (141) 5 (136) 145 915 841
Net earnings (loss) 3,570 (1,713) 1,857 (4,253) (1,859) (1,749) (78) (7,939) (6,554) 13,287 651
Capital expenditures 2,586 5,748 8,334 (36) - 27 1,659 1,650 606 31 10,621
Identifiable assets 35,332 35,111 70,443 7,266 1,499 22,117 42,268 73,150 24,974 11,026 179,593
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 Bougrine mine and $7,407,000 that originated from the El Toqui mine.
SEGMENT INFORMATION
For the Year Ended December 31, 2002
($000's)
(Restated - note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Con-
Geographic location Latin America Canada Tunisia and Other solidated
- ------------------------------------------------------------------------------------------------------------------------------------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine
Operating Segment 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) (2,606) (8,636) (3,435) - (10,493) - (13,928) (7,358) (65) (29,987)
Reclamation and closure costs (813) (305) (1,118) (941) (314) (914) - (2,169) (879) - (4,166)
(Loss) contribution from
mining activities (2,905) 213 (2,692) (2,832) (314) 1,354 - (1,792) (8,641) (65) (13,190)
General and administrative - - - - - - - - - (6,198) (6,198)
Stock-based compensation - - - - - - - - - (184) (184)
Interest and financing - - - - - - - - - (5,122) (5,122)
Investment and other income - - - - - - - - - 1,273 1,273
Foreign exchange gain on US
dollar - - - - - - - - - 669 669
Other foreign exchange loss - - - - - - - - - (361) (361)
Other non-producing property
income (costs) - - - (2,971) (1,678) - (107) (4,756) - 909 (3,847)
Income and mining taxes
(recovery) (95) - (95) 602 - (99) 6 509 (165) (25) 224
Net (loss) earnings (3,000) 213 (2,787) (5,201) (1,992) 1,255 (101) (6,039) (8,806) (9,104) (26,736)
Capital expenditures 2,348 2,859 5,207 16 - 1,676 867 2,559 1,967 1,237 10,970
Identifiable assets 47,901 35,288 83,189 17,141 3,587 31,464 39,792 91,984 37,308 16,995 229,476
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.
21. ANALYSIS OF CHANGES IN NON-CASH WORKING CAPITAL ITEMS
($000's)
---------------------------------
2004 2003 2002
---------------------------------
(Restated - (Restated -
note 1) note 1)
Accounts receivable - concentrate 583 8,376 (13,976)
Other receivables (282) 1,271 (654)
Concentrate inventory (31,784) 708 16,295
Materials and supplies inventory 2,251 1,833 8,905
Short-term investments 30 20 (19)
Prepaid expenses and other current assets 752 (165) 201
Provisional payments for concentrate inventory
shipped and not priced 21,779 (6,105) (17,879)
Accounts payable and accrued liabilities 1,437 (2,630) (2,964)
Income and mining taxes payable 189 (129) (880)
Current portion of reclamation, closure cost
accruals and other environmental obligations (132) (832) (1,435)
---------------------------------
(5,177) 2,347 (12,406)
---------------------------------
22. 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 2003 and 2002, 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 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 2004 was $0.53 (2003 -
$0.32, 2002 - $0.20).
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 the
weighted-average number of Common Shares outstanding in those years have been
adjusted retroactively as follows:
2003 2002
2004 (restated) (restated)
- -----------------------------------------------------------------------------------------
Earnings (loss) per share - before bonus element $0.01 $0.00 ($0.16)
Earnings (loss) per share - after bonus element $0.01 $0.00 ($0.16)
Diluted earnings per share - before bonus element $0.01 N/A N/A
Diluted earnings per share - after bonus element $0.01 N/A N/A
Weighted-average number of shares outstanding (000's) 353,508 211,411 159,684
Additional shares due to bonus element (000's) - - 9,390
- -----------------------------------------------------------------------------------------
Weighted-average number of Common Shares
outstanding after bonus element (000's) 353,508 211,411 169,074
Incremental shares on assumed exercise of
options and warrants (000's) 23,292 10,259 601
- -----------------------------------------------------------------------------------------
Weighted-average number of Common Shares used
for diluted earnings per share (000's) 376,800 221,670 169,675
- -----------------------------------------------------------------------------------------