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.
GEORGE E. PIRIE RICHARD R. GODFREY
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
1
- --------------------------------------------------------------------------------
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, 2005 and 2004 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, 2005. 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,
2005 and 2004 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2005 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.
Chartered Accountants
Toronto, Canada
March 2, 2006
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 March 2, 2006, 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.
Chartered Accountants
Toronto, Canada
March 2, 2006
2
BREAKWATER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
As at December 31, 2005 and December 31, 2004
(Expressed in thousands of Canadian dollars)
- -----------------------------------------------------------------------------------------------------------
2005 2004
===========================================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18,749 $ 12,667
Restricted cash (note 3) 3,929 3,391
Short-term investments (note 4) 2,523 2,633
Accounts receivable - concentrate 3,027 6,622
Other receivables 9,369 6,488
Concentrate inventory 47,501 56,215
Materials and supplies inventory 21,388 23,863
Prepaid expenses and other current assets 3,934 5,022
Future income tax assets (note 14) 6,517 -
- -----------------------------------------------------------------------------------------------------------
116,937 116,901
DEFERRED FINANCING FEES (notes 8 and 9) 344 -
RECLAMATION DEPOSITS (note 5) 6,808 100
MINERAL PROPERTIES AND FIXED ASSETS (note 6) 165,168 153,073
LONG-TERM INVESTMENT (note 7) 5,615 5,615
RESTRICTED PROMISSORY NOTE (note 10) 62,285 11,785
- -----------------------------------------------------------------------------------------------------------
$ 357,157 $ 287,474
===========================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 32,797 $ 35,558
Provisional payments for concentrate inventory shipped and not priced 14,807 22,962
Short-term debt including current portion of long-term debt (note 8) 14,585 256
Income and mining taxes payable 164 441
Current portion of reclamation, closure cost accruals and other
environmental obligations (note 11) 10,165 21,081
- -----------------------------------------------------------------------------------------------------------
72,518 80,298
DEFERRED INCOME (note 10) 6,888 1,848
LONG-TERM LEASE OBLIGATIONS (notes 6 and 20) 984 -
ROYALTY OBLIGATION (note 10) 62,479 11,696
LONG-TERM DEBT (note 9) 4,143 1,424
RECLAMATION, CLOSURE COST ACCRUALS AND OTHER ENVIRONMENTAL
OBLIGATIONS (note 11) 40,099 42,673
EMPLOYEE FUTURE BENEFITS (note 12) 5,379 6,446
FUTURE INCOMETAX LIABILITIES (note 14) 1,921 1,681
- -----------------------------------------------------------------------------------------------------------
194,411 146,066
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (notes 2 and 13) 335,512 326,403
Warrants (notes 2 and 13) 8,561 8,561
Contributed surplus (note 13(j)) 3,300 3,120
Deficit (172,928) (187,667)
Cumulative translation adjustments (11,699) (9,009)
- -----------------------------------------------------------------------------------------------------------
162,746 141,408
- -----------------------------------------------------------------------------------------------------------
$ 357,157 $ 287,474
===========================================================================================================
The accompanying notes form an integral part of these consolidated financial statements.
Approved by the Board of Directors
/s/ Garth A.C. MacRae
DIRECTOR DIRECTOR
3
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended December 31, 2005, 2004 and 2003
(Expressed in thousands of Canadian dollars except share and per share amounts)
- ------------------------------------------------------------------------------------------------------------
2005 2004 2003
============================================================================================================
Gross sales revenue $ 312,965 $ 240,299 $ 207,591
Treatment and marketing costs 105,391 81,856 83,581
- ------------------------------------------------------------------------------------------------------------
Net revenue 207,574 158,443 124,010
- ------------------------------------------------------------------------------------------------------------
OPERATING COSTS
Direct operating costs 144,297 101,922 103,239
Depreciation and depletion 23,229 25,896 25,964
Reclamation and closure costs 12,093 4,896 3,619
- ------------------------------------------------------------------------------------------------------------
179,619 132,714 132,822
- ------------------------------------------------------------------------------------------------------------
CONTRIBUTION (LOSS) FROM MINING ACTIVITIES 27,955 25,729 (8,812)
- ------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME)
General and administrative 8,666 9,559 5,087
Stock-based compensation 809 1,253 274
Interest and financing 1,284 509 3,321
Investment and other income (2,595) (843) (405)
Loss on gold loan (note 8) 1,787 - -
Foreign exchange (gain) loss on US dollar denominated debt (492) 431 (11,578)
Other foreign exchange loss (gain) 294 1,809 (206)
- ------------------------------------------------------------------------------------------------------------
9,753 12,718 (3,507)
- ------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE THE FOLLOWING: 18,202 13,011 (5,305)
- ------------------------------------------------------------------------------------------------------------
Exploration costs 535 - -
Write-down of mineral properties and fixed assets (note 6) 879 1,178 279
Other non-producing property costs (income) (note 6) 9,035 8,638 (5,394)
Income and mining (recovery) tax provision (note 14) (6,986) 571 (841)
- ------------------------------------------------------------------------------------------------------------
3,463 10,387 (5,956)
- ------------------------------------------------------------------------------------------------------------
NET EARNINGS 14,739 2,624 651
DEFICIT - BEGINNING OF YEAR (187,667) (190,291) (190,942)
============================================================================================================
DEFICIT - END OF YEAR $ (172,928) $ (187,667) $ (190,291)
- ------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE (note 23) $ 0.04 $ 0.01 $ 0.00
============================================================================================================
DILUTED EARNINGS PER COMMON SHARE (note 23) $ 0.04 $ 0.01 $ 0.00
============================================================================================================
BASIC WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (note 23) 369,190,000 353,508,000 211,411,000
============================================================================================================
The accompanying notes form an integral part of these consolidated financial statements.
4
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(Expressed in thousands of Canadian dollars)
=================================================================================================================================
2005 2004 2003
=================================================================================================================================
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings $ 14,739 $ 2,624 $ 651
- ---------------------------------------------------------------------------------------------------------------------------------
Non-cash items:
Depreciation and depletion 23,229 25,896 25,964
Gain on sale of investment (851) - -
Gain on sale of property (note 6(i)) - - (10,336)
Write-down of mineral properties and fixed assets (note 6) 879 1,178 279
Unrealized loss on gold loan 1,656 - -
Foreign exchange gain on US dollar denominated loans (447) - (3,712)
Other non-cash items (9) (133) (761)
Stock-based compensation (note 13(j)) 809 1,253 274
Deferred income (56) - 1,340
Future income taxes (note 14) (6,277) 1,909 (1,050)
Reclamation closure cost accruals and other environmental obligations 12,093 4,764 2,787
Employee future benefits (note 12) 1,773 553 -
- ---------------------------------------------------------------------------------------------------------------------------------
32,799 35,420 14,785
- ---------------------------------------------------------------------------------------------------------------------------------
Payment of reclamation, closure cost accruals and other environmental obligations (25,162) (7,879) (728)
Payment of employee future benefits (note 12) (2,840) (968) -
Changes in non-cash working capital items (note 22) 2,486 (5,045) 3,179
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,022 24,152 17,887
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in restricted cash (note 3) (538) (3,036) (355)
Proceeds from sale of royalty interest (note 10) 50,500 12,204 -
Issue of common shares for cash (note 13) 8,480 30,407 29,316
Issue of warrants for cash (note 13) - 7,211 -
Deferred Financing fees (344) - -
Deferred income 5,096 - -
Increase (decrease) in short-term debt 11,874 (10,059) (18,711)
Increase (decrease) in long-term debt 3,964 (14,095) (29,821)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 79,032 22,632 (19,571)
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Funds advanced on promissory note (note 10) (50,500) (11,785) -
Reclamation deposits (6,708) - 1,287
Acquisition of Boliden Westmin (Canada) Limited, net of cash acquired (note 2) - (886) -
Mineral properties and fixed assets (37,978) (27,689) (10,621)
Proceeds from sale of mineral properties 214 210 10,616
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (94,972) (40,150) 1,282
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 6,082 6,634 (402)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR $ 12,667 $ 6,033 $ 6,435
=================================================================================================================================
CASH AND CASH EQUIVALENTS - END OF YEAR $ 18,749 $ 12,667 $ 6,033
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 437 $ 436 $ 2,681
Income and mining taxes $ 634 $ 358 $ 339
The accompanying notes form an integral part of these consolidated financial statements.
5
(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 of which are controlled through the ownership of
majority voting interests. 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 term, risk passes when the concentrate
is delivered to the discharge (destination) port. Under a cost, insurance and
freight 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 determination of
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".
By-products such as gold and silver are often contained within concentrate ships
to customers and revenue from these by-products is recognized when all of the
above revenue criteria are meant and when the corresponding major metal is
recognized in revenue.
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, depreciation and depletion.
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 INVESTMENT
Long-term investment is valued at cost, net of any other than temporary
impairment in value.
EMPLOYEE FUTURE BENEFITS
The employee future benefits plan relates only to the employees at the Myra
Falls mine.
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.
6
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 6(b), 6(d), 6(f), 6(g) and
6(h)) 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 which would be determined based on the present value of
expected future cash flows. Estimated future net cash flows, on an undiscounted
basis, are calculated for each property using: estimated recoverable reserves;
estimated future metal 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. The company reviews these
investments, in accordance with the requirements of EIC 126 - "Accounting by
mining enterprises for exploration costs".
Fixed assets are stated at cost. Fixed assets are depreciated 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.
In accordance with EIC 152 - "Mining Assets - Impairment and Business
Combinations" the Company includes value beyond proven and probable reserves in
its estimate of future cash flows when testing for impairment and determining
fair value.
ASSET RETIREMENT OBLIGATIONS AND ASSET RETIREMENT COSTS
The Company provides for the fair value of liabilities for asset retirement
obligations in the year 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 year, and the capitalized cost is amortized over the
useful life of the related asset.
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
included in Reclamation Deposits and Restricted Cash on the balance sheet.
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 income statement amounts are translated at the historical
rates. Monetary assets and liabilities are translated at actual exchange rates
in effect at the balance sheet date, while 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.
7
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, reclamation, closure cost accruals and other environmental
obligations, future income tax assets and future income tax liabilities.
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 recognized. The premiums received at the
inception of written call options are recorded as a liability and 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 while
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 13. The Company uses the fair value method of accounting to
recognize compensation expense for its stock-based compensation to employees.
Shares issued under the Plan are recorded at the issue 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 statement,
carrying amounts and the tax basis 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 combinations, where differences between assigned values and tax basis
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, 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, 2005, the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Accounting Guideline No. 15 - "Consolidation of Variable
Interest Entities" ("AcG-15") which requires that the Company consolidate a
variable interest entity when the Company has a variable interest, or
combination of variable interests, that will absorb the majority of the entity's
expected losses, receive the majority of the entity's expected residual returns,
or both. As at December 31, 2005, the Company had no entities which would
qualify as a variable interest entity under AcG-15.
8
2004 AND 2003 FIGURES
Certain of the 2004 and 2003 figures have been reclassified to conform to
the 2005 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 was included in the amount for
warrants on the balance sheet for December 31, 2004. 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 was accounted for using the purchase method of accounting
and the results of NVI Mining Ltd. and NVI Holdings Ltd. were consolidated into
the Company's financial statements from July 23, 2004 onwards. 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, 2005, of $3,929,000, includes
$2,390,000 placed on deposit to cover certain reclamation costs (see note 5),
$250,000 to guarantee an operating lease and $1,289,000 as collateral for the
gold loan (see note 8). The restricted cash balance at December 31, 2004 of
$3,391,000 included $2,625,000 placed on deposit for letters of credit to cover
reclamation security bonds (see note 5), deposits for letters of credit of
$90,000 and $250,000 to guarantee reclamation undertakings and an operating
lease, respectively and a security deposit of $426,000 to guarantee reclamation
undertakings.
4. SHORT-TERM INVESTMENTS
($000's) 2005 2004
---------------------------------------------------------------------------------------------------
Marketable securities (quoted market value - 2005: $421, 2004: $3,886) 218 2,633
Gold bullion, at cost (quoted market value - 2005: $2,313) 2,305 -
---------------------------------------------------------------------------------------------------
2,523 2,633
9
As at December 31, 2005, the Company held 3,867 ounces of gold bullion to
facilitate an instalment payment for the Gold Loan. The payment was made on
January 3, 2006 (see note 8).
5. RECLAMATION DEPOSITS
Cash collateral on deposit at December 31, 2005 of $6,808,000 (2004 -
$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, 2005 are in respect of reclamation costs at the Caribou mine, the
Bouchard-Hebert mine, the Langlois mine and the Myra Falls mine. The Reclamation
Deposit at December 31, 2004 was for reclamation costs at the Caribou mine.
6. MINERAL PROPERTIES AND FIXED ASSETS
($000's) 2005 2004
---------------------------------------------------------------------- ---------------------------------------------
Accumulated Accumulated
Depreciation Net Book Depreciation Net Book
Cost and Depletion Value Cost and Depletion Value
---------------------------------------------------------------------- ---------------------------------------------
Equipment 150,860 (103,465) 47,395 145,453 (104,170) 41,283
Mineral properties,
buildings and
improvements 128,474 (77,112) 51,362 123,437 (69,245) 54,192
Development 101,081 (47,269) 53,812 85,315 (41,409) 43,906
Exploration 15,298 (4,170) 11,128 14,756 (2,939) 11,817
Asset retirement cost 10,481 (9,010) 1,471 10,590 (8,715) 1,875
---------------------------------------------------------------------- ---------------------------------------------
406,194 (241,026) 165,168 379,551 (226,478) 153,073
Development costs are amortized using the unit-of-production method. The
amortization expense for 2005 was $5,860 (2004 - $6,906; 2003 - $4,405)
The following is an analysis of equipment under capital leases:
($000's) Dec.31, 2005 Dec. 31, 2004
------------------------------------------------------------------------------------
Equipment cost 2,416 774
Less: Accumulated amortization (464) (145)
------------------------------------------------------------------------------------
1,952 629
Equipment under capital lease is amortized on a straight-line basis over
its economic life of 5 years.
The amount of amortization charged to expense in 2005 is $319,000 (2004 -
$111,000).
Mineral properties and fixed assets of the Company, net of accumulated
depreciation and depletion, comprise the following:
a) El Mochito Mine $17,424,000 (2004 - $16,078,000)
The El Mochito mine is a zinc, lead and silver mine located in the Republic of
Honduras. Deferred development costs were written down in 2005 by $187,000 (2004
- - $Nil and 2003- $279,000 in respect of deferred exploration costs).
b) Bougrine Mine $2,530,000 (2004 - $4,687,000)
The Bougrine mine is zinc and lead mine located 160 kilometres west of Tunis,
Tunisia. The Bougrine mine ceased operations on September 10, 2005, due to the
exhaustion of the known mineral reserves and is on care and maintenance. Care
and maintenance costs incurred in 2005 of $778,000 are included in "Other
non-producing property costs (income)" on the consolidated statement of
operations and deficit.
c) El Toqui Mine $28,816,000 (2004 - $27,728,000)
The El Toqui mine is a zinc and gold mine located 1,350 kilometres south of
Santiago, Chile.
d) Bouchard-Hebert Mine $3,504,000 (2004 - $5,155,000)
The Bouchard-Hebert mine is a zinc, copper, gold and silver mine located 30
kilometres northeast of Rouyn-Noranda, Quebec, Canada. The Bouchard-Hebert mine
ceased on February 20, 2005, due to the exhaustion of the known mineral reserves
and is on care and maintenance. Care and maintenance costs incurred in 2005 of
$3,468,000 are included in "Other non-producing property costs (income)" on the
consolidated statement of operations and deficit.
10
e) Myra Falls Mine $55,920,000 (2004 - $46,853,000)
The Myra Falls mine is a zinc, copper and gold mine located on Vancouver Island,
British Columbia.
f) Langlois Mine $49,784,000 (2004 - $44,436,000)
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. On November 8, 2005, the Company announced that it
will develop the Langlois mine and it is expected that the mine will be in full
commercial production by mid-2007. Development costs totaled $1,039,000 in 2005
(2004 - $698,000). In addition, pre-production costs and fixed assets, net of
disposals, of $4,309,000 (2004 - $3,009,000) 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 2005 of $1,813,000 (2004 -
$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 $1,620,000 (2004 - $2,342,000)
The Nanisivik mine was a zinc and silver mine located on Strathcona Sound,
Baffin Island, Nunavut, Canada. The fixed asset carrying value of $1,620,000
(2004 - $2,342,000) as at December 31, 2005, represents the net book value of
plant and equipment located at the Nanisivik mine, which management plans to
transfer to the Company's other mines or sell on the open market. The fixed
assets were written down in 2005 by $692,000 (2004 - $Nil, 2003 - $Nil). The
Nanisivik mine ceased operations on September 30, 2002. Care and maintenance
costs incurred in 2005 of $2,526,000 (2004 - $4,734,000, 2003 - $3,386,000) and,
in 2004, an obsolescence provision of $2,100,000 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 $5,570,000 (2004 - $5,794,000)
Other Properties comprise exploration properties and other capital assets.
Management reviews the carrying values of these properties annually and in 2005
recorded a write-down of $Nil (2004 - $1,178,000, 2003 - $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 was deferred and will be included 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.
7. LONG-TERM INVESTMENT
Long-term investment is valued at cost, net of any other than temporary
impairment in value.
($000's) December 31, 2005 December 31, 2004
----------------------------------------------------------------------------------------
Taseko Mines Limited convertible debenture 5,615 5,615
A convertible debenture, with a face value of $17,000,000, from Taseko
Mines Limited ("Taseko") was issued on July 21, 1999, 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,
2005, was $5,203,000 (2004 - $8,055,000) and was calculated using the quoted
market price of Taseko's shares. This decline in the value is considered to be
temporary. Therefore, no impairment charge was recorded in 2005.
11
8. SHORT-TERM DEBT
($000's) 2005 2004
-------------------------------------------------------------------------------------
Gold loan (see note 4) 11,563 -
Prepayment Facility, current portion (note 9) 1,458 -
Reimbursable government assistance, unsecured current portion 1,541 -
(note 9)
Other - interest at floating rates 23 256
-------------------------------------------------------------------------------------
14,585 256
On August 26, 2005, NVI Mining Ltd. ("NVI"), a wholly-owned subsidiary of
the Company, signed a Gold Loan agreement ("Gold Loan") with Natexis Banques
Populaires of France ("Natexis"). Under the terms of the agreement, NVI was
provided with 23,200 ounces of gold bullion valued at $11,889,000
(US$10,000,000). The Gold Loan bears interest at 2.9% payable monthly. The
principal will be repaid in six equal instalments, in the form of gold bullion,
over thirteen months with the first payment made on October 31, 2005. The Gold
Loan will be used to support reclamation, working capital requirements at NVI's
Myra Falls mine and for general corporate purposes. Myra Falls mine's copper,
zinc and gold concentrate inventories and related accounts receivable, a cash
collateral account and unsecured guarantees of the Company and NVI Holdings Ltd.
have been provided as security for the Gold Loan.
The Company has chosen not to apply hedge accounting to this arrangement
and accordingly, the obligation will be remeasured at each balance sheet date
and any gains or losses will be recognized in income. As at December 31, 2005,
19,333 ounces of gold bullion remained outstanding and were marked to market,
which resulted in an unrealized loss on remeasurement of $1,656,000.
As at December 31, 2005, financing fees amounting to $242,000 had been
deferred and are being amortized on a straight-line basis over the life of the
Gold Loan.
Interest expense on short-term debt during 2005 amounted to $74,000 (2004
- -$34,000; 2003 - $797,000).
9. LONG-TERM DEBT
($000's) 2005 2004
-------------------------------------------------------------------------------------
Prepayment Facility 5,101 -
Reimbursable government assistance, unsecured, non-interest
bearing 2,041 1,424
-------------------------------------------------------------------------------------
Total 7,142 1,424
Less current portion 2,999 -
-------------------------------------------------------------------------------------
4,143 1,424
On May 17, 2005, NVI entered into a contract (the "Prepayment Facility")
with a customer whereby the customer made a prepayment of US$5,000,000 against
future deliveries of zinc concentrate for the years 2005 through 2009. The
Prepayment Facility has been assigned to a third party by the customer. Under
the terms of the Prepayment Facility interest is payable at six month LIBOR at
the beginning of the period plus 3.5%. The Company has issued to the third party
as security, eight promissory notes, each for US$625,000, plus interest, payable
on demand if NVI fails to comply with its obligations to deliver the required
amount of zinc concentrate in six-month consecutive periods which began on June
16, 2005. As at December 31, 2005, financing fees amounting to $102,000 had been
deferred and are being amortized on a straight-line basis over the life of the
Prepayment Facility.
The current portion of the reimbursable government assistance of $1,541,000
is due in April 2006. The long term portion of $500,000 is payable when the Zone
97 at the Langlois mine is profitable.
Interest expense on long-term debt during 2005 amounted to $270,000 (2004 -
$38,000, 2003 - $1,432,000).
10. ROYALTY OBLIGATION
a) In December 2005, the Company entered into a Royalty Agreement ("the
Second Agreement") with Red Mile Resources No. 4 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 $56,500,000 which included royalty income of $50,500,000, indemnity fees of
$1,141,000, interest of $4,469,000 and prepaid interest income of $390,000.
Under the terms of the Second Agreement, the Company is required to make
Basic Royalty payments at fixed amounts per pound of payable zinc produced,
which escalates from $0.0016 per pound to $0.1373 per pound over the first 12
years of the agreement. In addition, the Company granted Red Mile a Net Smelter
Return of 1.50%, 2.25% or 3.00% in years 2011 through 2015 if the price of zinc
in a given calendar year averages US$2,600, US$2,800 or US$3,000 per tonne,
respectively. $50,500,000 of the cash received was placed with a financial
institution, for which the Company took back a restricted promissory note. The
restricted promissory note earns interest at 6%, payable annually, and matures
on February 15, 2015. The Company received and has deferred $390,000 of prepaid
interest on the note in December 2005. Interest earned from the restricted
promissory note and a portion of the principal must be used to fund the expected
Basic Royalty payments
12
during the first ten years of the Second Agreement. Over the remaining years of
the Second Agreement, interest and principal from the restricted promissory note
will be used to fund the Basic Royalty payments.
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 restricted promissory note at the end
of the tenth year of the Second Agreement.
The balance of the funds of $6,000,000 will be used for working capital and
capital requirements at the Myra Falls mine.
On the balance sheet, the royalty received from Red Mile is included in
"Royalty Obligation". These amounts are treated as debt and attract interest at
a rate of 6% annum which is included in interest expense. The indemnity fee
received of $1,141,000 was deferred and is included in "Deferred Income" on the
balance sheet and is being recognized in income as earned over the life of the
Second Agreement.
b) In December 2004, the Company entered into a Royalty Agreement
("Agreement") with Red Mile Resources No. 5 Limited Partnership ("Red Mile
No.5") 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, indemnity fees of
$564,000, interest of $520,000 and prepaid interest of $477,000.
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 No.5 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 restricted promissory note. The
restricted promissory note earns interest at 6%, payable annually, and matures
on December 15, 2014. The Company received and has deferred $477,000 of prepaid
interest on this note in December 2004. Interest earned from the restricted
promissory note must 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 restricted promissory note will be
used to fund the Basic Royalty payments.
The balance of the funds of $1,755,000 was 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 No.5 for the lower of market
value or for the outstanding amount of the restricted promissory note.
On the balance sheet, the long-term portion of the royalties received from
Red Mile No.5 of $11,696,000 was shown as "Royalty Obligation" and the current
portion of $283,000 was included in "Accounts payable and accrued liabilities".
These amounts are treated as debt and attract interest at a rate of 6.11% per
annum which is included in interest expense. Of the indemnity fees received,
$508,000 was deferred and as at December 31, 2005, $451,000 is still outstanding
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. Interest expense for the year ended December 31, 2005 was $719,000
(2004 - $Nil).
c) In accordance with AcG 15 - "Consolidation of Variable Interest
Entities" and EIC 157 - "Implicit Variable Interests under AcG 15" the Company
has determined that Red Mile and Red Mile No.5 are variable interest entities
for which the Company holds variable interests. However, as the Company is not
the primary beneficiary under these arrangements it is not required to
consolidate these entities.
11. RECLAMATION, CLOSURE COST ACCRUALS AND OTHER ENVIRONMENTAL OBLIGATIONS
The Reclamation, Closure Cost Accruals and Other Environmental Obligations
shown on the balance sheet comprise:
($000's) December 31, 2005 December 31, 2004
--------------------------------------------------------------------------------------------
Asset retirement obligations 41,542 47,221
Closure cost accruals 2,150 4,978
Other environmental obligations (see note below) 6,572 11,555
--------------------------------------------------------------------------------------------
50,264 63,754
Less current portion 10,165 21,081
--------------------------------------------------------------------------------------------
40,099 42,673
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 2008. The estimated obligation was
recorded and is being reduced by actual expenditures incurred. The actual
expenditures since acquisition have been $8,292,000. The current portion of
$2,001,000 is included in "Current portion of reclamation, closure cost accruals
and other environmental obligations" on the balance sheet.
13
Asset Retirement Obligations - ($000's)
-------------------------------------------------------------------------------------------
As at December 31, 2004 47,221
Change in cash flow estimate (included in reclamation and closure costs) 7,735
Accretion (included in reclamation and closure costs) 3,483
Expenditures (16,703)
Impact of foreign exchange (194)
-------------------------------------------------------------------------------------------
As at December 31, 2005 41,542
Less: current portion included in Current portion of reclamation,
closure cost accruals and other environmental obligations 7,284
-------------------------------------------------------------------------------------------
34,258
The estimated amount of undiscounted cash flows required to satisfy the
asset retirement obligations as at December 31, 2005, was $114,429,000 (2004 -
$119,649,000). The expected timing of payments of the cash flows ranges from
2006 to 2117, and the credit-adjusted risk-free rates at which the estimated
cash flows have been discounted to arrive at the obligation range from 7.17% to
7.89%. The estimated amount of undiscounted cash flows for December 31, 2005,
includes an amount of $66,329,000 (2004 - $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. 12.
14
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. The pension plan is a flat benefit plan and
there are no indexation features. Actuarial reports valuing this hourly plan are
prepared every three years, with December 31, 2004 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, 2005, are as
follows:
Post-retirement
Pension benefits other
benefits than pension Total
-------------------------------------------------------
Expected long-term rate of return on plan assets 7.00% N/A N/A
Discount rate on accrued pension obligations (December
31, 2004 - 6.00%) 5.00% 5.00% N/A
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 1,200 17 1,217
Interest cost of accrued benefit obligation 1,910 66 1,976
Expected return on pension fund assets (1,697) - (1,697)
Net amortization, deferrals and other 216 61 277
-------------------------------------------------------------------------------------------------------------------
1,629 144 1,773
===================================================================================================================
Plan assets:
Fair value of plan assets, as at December 31, 2004 23,333 - 23,333
Return on plan assets 2,633 - 2,633
Employer contributions 2,776 64 2,840
Benefits paid (969) (64) (1,033)
-------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, at December 31, 2005 27,773 - 27,773
===================================================================================================================
Accrued benefit obligation:
Accrued benefit obligation, as at December 31, 2004 31,119 1,104 32,333
Current service cost 1,200 17 1,217
Interest cost 1,910 65 1,975
Benefits paid (969) (63) (1,032)
Actuarial loss (gain) 6,244 (328) 5,916
-------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation, at December 31, 2005 39,504 795 40,299
===================================================================================================================
Plan assets 27,773 - 27,773
Accrued benefit obligation 39,504 795 40,299
-------------------------------------------------------------------------------------------------------------------
Funding deficit (11,731) (795) (12,526)
Unamortized actuarial gain (loss) 5,818 (332) 5,486
Unamortized past service costs 1,296 365 1,661
-------------------------------------------------------------------------------------------------------------------
Pension liability (4,617) (762) (5,379)
===================================================================================================================
15
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 0.5 (0.1)
-------------------------------------------------------- -------------------------- -------------------------
Effect on interest cost 1.3 (1.3)
-------------------------------------------------------- -------------------------- -------------------------
Effect on year-end accrued benefit obligation 17.2 (16.0)
-------------------------------------------------------- -------------------------- -------------------------
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 pension plan's weighted-average asset
allocation percentages by asset category:
------------------------------------------------- -------------------------
Asset Category 2005
------------------------------------------------- -------------------------
Short-term / Money market 7.0%
------------------------------------------------- -------------------------
Fixed income 38.5%
------------------------------------------------- -------------------------
Canadian equity 33.0%
------------------------------------------------- -------------------------
U.S. equity 11.5%
------------------------------------------------- -------------------------
Non-U.S. Foreign equity 10.0%
------------------------------------------------- -------------------------
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 $2,952,000 to its defined benefit
pension plan and $152,000 for its post-retirement benefit plans in 2006.
ESTIMATED FUTURE BENEFIT PAYMENTS
------------------------------------------------------- ------------------- ------------------
$000's Defined benefit
Pension plan Other Benefits
------------------------------------------------------- ------------------- ------------------
2006 1,300 152
------------------------------------------------------- ------------------- ------------------
2007 1,448 171
------------------------------------------------------- ------------------- ------------------
2008 1,591 184
------------------------------------------------------- ------------------- ------------------
2009 1,779 218
------------------------------------------------------- ------------------- ------------------
2010 2,091 265
------------------------------------------------------- ------------------- ------------------
Aggregate of 5 years thereafter 41,675 252
------------------------------------------------------- ------------------- ------------------
Benefit payments are expected to cease after December 31, 2011, for
the retirement supplement plan and the non-pension post-retirement plan, as
the obligation related to these plans will cease once the Myra Falls mine
ceases
16
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.
13. CAPITAL STOCK
The Company is authorized to issue 200,000,000 preferred shares. No
preferred shares were issued or outstanding on December 31, 2005 (2004 -
Nil).
The Company is authorized to issue an unlimited number of Common Shares.
Common shares issued:
Common shares
(000's) Number of shares Amount
-------------------------------------------------------------------------------------------------
As at December 31, 2003 285,790 $287,790
Common Shares issued for cash (c) 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
Employee share option plan - proceeds of options exercised 493 93
(g)
Value ascribed to options exercised under stock-based
compensation - 125
Employee share purchase plan (d) 480 253
-------------------------------------------------------------------------------------------------
As at December 31, 2004 363,156 326,403
Private placement (a) and (b) 13,000 7,081
Exercise of warrants 1,500 295
Employee share option plan - proceeds of options exercised 2,841 899
(g)
Value ascribed to options exercised under stock-based
compensation - 629
Employee share purchase plan (d) 420 205
-------------------------------------------------------------------------------------------------
As at December 31, 2005 380,917 $335,512
a) In August 2005, the Company issued an aggregate of 3,000,000
flow-through Common Shares by way of private placement at a price of $0.46
per Common Share exclusive of share issuance costs of $4,000 to CMP 2005
Resource Limited Partnership ("CMP") and Canada Dominion Resources 2005
Limited Partnership ("CDR"). The flow-through Common Shares have a four
month hold period. The proceeds are being used to finance exploration
activities in Quebec. CMP and CDR are managed by an affiliate of Dundee
Corporation ("Dundee") which is a significant shareholder of the Company.
b) In December 2005, the Company issued 10,000,000 flow-through Common
Shares by way of private placement at a price of $0.60 per Common Share
exclusive of share issuance costs of $295,000. The flow-through Common
Shares have a four month hold period. The proceeds are being used to
finance exploration activities in Quebec. A director of the Company
purchased 145,586 of the flow-through Common Shares issued pursuant to the
private placement.
c) 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 28,
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, was 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".
d) 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% of their annual basic salary to
purchase Common Shares. The Company matches each participant's
contribution. The purchase price per Common Share is the weighted-average
of the trading prices of the Common Shares on The Toronto Stock Exchange
(the "TSX") for the calendar quarter in respect of which the Common Shares
are issued. Common Shares acquired with the Company's contribution are held
in trust and delivered to employees 12 months following their date of
issue. The Company issued 420,000 Common Shares pursuant to the Share
Purchase Plan during 2005 (2004 - 480,000). The number of shares authorized
for issue and available for issue under the share purchase plan as at
December 31, 2005 was 7,500,000 (2004 - 7,500,000) and 2,431,206 (2004 -
2,851,554) respectively.
17
e) 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 after 2003 must be exercised no later than five years after
the date of the grant, and options issued prior to 2003 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.
As at December 31, 2005, the outstanding share options which total
10,085,000 expire at various dates between August 19, 2006 and November 19,
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, 2005, was 23,000,000.
f) 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. As
at December 31, 2005, 2004 and 2003, the Company had issued 1,200,000
Common Shares under the Share Bonus Plan. The number of shares authorized
for issue under the share bonus plan as at December 31, 2005, was
4,000,000.
g) Share option transactions were as follows:
Weighted-
Options Average
(000's) Exercise Price
-----------------------------------------------------------------------------------
As at December 31, 2003 8,885 1.25
Granted 6,335 0.64
Exercised (494) 0.19
Forfeited (1,000) 0.67
Expired (56) 0.72
-----------------------------------------------------------------------------------
As at December 31, 2004 13,670 $1.06
Granted 2,250 0.45
Exercised (2,841) 0.32
Forfeited (934) 0.62
Expired (2,060) 2.33
-----------------------------------------------------------------------------------
As at December 31, 2005 10,085 $1.02
The following table summarizes information about the share options
outstanding at December 31, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- ------------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
as at Remaining Average as at Average
Range of Dec. 31, 2005 Contractual Exercise Dec. 31, 2005 Exercise
Exercise Prices (000's) Life Price (000's) Price
--------------------------------------------------------------------------- ------------------------------------
$0.18 - $0.50 5,160 5 years 144 days $0.32 3,598 $0.28
$0.51 - $1.49 3,617 3 years 199 days $0.75 2,458 $0.77
$1.50 - $2.99 481 2 years 171 days $2.36 481 $2.36
$3.00 - $8.20 827 2 years 254 days $4.05 828 $4.05
----------------- -----------------
10,085 7,365
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 13(e).
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 $809,000 (2004 - $1,253,000)
less the proceeds of options exercised of $629,000 (2004 - $124,000) for a
net amount of $180,000 (2004 - $1,129,000), was credited to "Contributed
Surplus" within
18
shareholders' equity on the balance sheet. The proceeds of options
exercised of $629,000 (2004 - $124,000), 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:
2005 2004
----------------------------------------------------------------------------------------------
Weighted-average exercise price per Common Share $0.45 $0.64
Weighted quoted market price per Common Share at date of grant $0.46 $0.64
Weighted-average grant-date fair value price per Common Share $0.27 $0.39
Expected life (years) 5 3 - 5
Risk free interest rate 3.44% 4.49%
Expected volatility 69% 70%
Dividend yield 0% 0%
k) In consideration for restructuring a debt 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 were
exercisable until May 8, 2005. No value was ascribed to these warrants on
the date of issue. During the year ended December 31, 2005, 500,000 (2004 -
250,000, 2003 - 250,000) of the warrants issued to the Lenders were
exercised and Nil (2004 - Nil) were cancelled. At December 31, 2005, none
of these warrants remained outstanding.
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. At
December 31, 2005, the 30,801,410 warrants were outstanding.
l) Under an agreement reached on December 23, 2002, with certain lenders
and Dundee, the Company, in consideration for restructuring its existing
credit facilities, granted to these 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 2005, 1,000,000 (2004 - 1,000,000) of these warrants were
exercised by these lenders. At December 31, 2005, 1,000,000 of these
warrants remain outstanding.
14. 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, 2005,
of 36% (2004 - 37%, 2003 - 38%) to the net earnings (loss), excluding
income and mining taxes. The differences are summarized as follows:
($000's) 2005 2004 2003
----------------------------------------------------------------------------------------------------------
Tax provision (recovery) at statutory rate 2,812 1,180 2,364
Federal resource allowance 608 (1,035) 119
Unrecognized tax benefit relating to losses 7,806 4,366 916
Different effective tax rates on earnings (losses) in foreign
subsidiaries (5,291) (163) 1,630
Benefit of previously unrecognized losses available for
carry forward (13,231) (5,107) (5,984)
Other 161 108 124
Mining taxes (recovery) 149 1,222 (10)
----------------------------------------------------------------------------------------------------------
(6,986) 571 (841)
19
As at December 31, 2005, the significant components of the Company's
future tax assets (liabilities) were as follows:
($000's) 2005 2004
-------------------------------------------------------------------------------------------------------
Future tax assets
Loss carry forwards 60,420 72,415
Mineral properties and fixed assets 227,435 137,833
Reclamation and closure cost accruals 17,658 21,258
Deferred income 2,518 -
-------------------------------------------------------------------------------------------------------
Future tax assets before valuation allowance 308,031 231,506
Valuation allowance 301,514 231,506
-------------------------------------------------------------------------------------------------------
Future tax assets 6,517 -
Future tax liabilities
Mineral properties - mining tax (1,921) (1,681)
-------------------------------------------------------------------------------------------------------
Net future tax (liabilities) assets 4,596 (1,681)
($000's) 2005 2004 2003
-------------------------------------------------------------------------------------------------------
Income and mining (recovery) tax provision
Current income and mining (recovery) tax provision (709) (148) 208
Future income and mining (recovery) tax provision (6,277) 719 (1,049)
-------------------------------------------------------------------------------------------------------
(6,986) 571 (841)
a) At December 31, 2005, the Company has net operating loss carry
forwards in Canada of approximately $160,200,000, which expire at various
dates through 2015. In addition, the Company has approximately $229,000,000
of resource expenditures that are limited in their deduction to income from
specific properties.
b) At December 31, 2005, the Company has recognized net operating loss
carry forwards in Chile of approximately $22,500,000, which do not expire.
c) At December 31, 2005, the Company has the following loss carry
forwards in Honduras of approximately $1,849,000 relating to operating
losses and $16,530,000 relating to exchange rate losses. These losses will
expire four years from 2005.
15. 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 excluding the Gold Loan are
carried at cost which, due to their short-term nature, approximates their
fair value. The Gold Loan is carried at fair value as described in note 8.
The fair value of the long-term debt also approximates its carrying value
as set out in note 9.
Such fair value estimates are management's best estimates not
necessarily indicative of the amounts the Company might pay or receive in
actual market transactions, though the amounts realized in an actual
transaction may differ from these estimates. 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
counterparties that have strong credit ratings. The Company does not
consider the credit risk associated with these financial instruments to be
significant.
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
20
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, 2005 and 2004.
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. In 2005
and 2004, the Company chose not to apply hedge accounting.
The Company had the following contracts, which were outstanding as at
December 31, 2005:
December 31, 2005 Quantity Average Price (US) Maturity
-------------------------------------------------------------------------------------------------------------
Silver call options 1,050,000 ounces $7.50 per ounce January - June 2006
Gold call options 25,000 ounces $455 per ounce December 2006
As at December 31, 2004 there were no outstanding contracts.
In addition to the commodity risk related to revenues, the Company is
exposed to commodity risk related to its Gold Loan. This risk is mitigated
by the gold produced by the Company as well as ounces of gold purchased by
the Company in advance of loan repayments as described in note 8.
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. In addition, the Gold Loan carries a fixed rate of interest of 2.9%,
thus, the Company is also exposed to interest rate price risk. The Company
does not enter into financial instruments to manage its interest rate risk.
16. 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 incurred management fees in 2005 of $Nil (2004 - $Nil,
2003 - $250,000) for services provided by Dundee. As at December 31, 2005,
management fees totaling $500,000, relating to 2003 of $250,000 and 2002 of
$250,000, are outstanding and are included in accounts payable and accrued
liabilities on the balance sheet.
b) For the years ended December 31, 2004 and 2003 the Company provided to
Glencairn Gold Corporation ("Glencairn"), formerly Black Hawk Mining Inc.
("BHK"), a company that is related through common directorship, logistic
and procurement services which enable both companies to reduce costs and
negotiate favourable terms for the purchase of materials and supplies.
For the year ended December 31, 2005, Glencairn was not considered to
be a related party due to the change in the composition of the board of
directors of Glencairn.
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). 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 - $106,000).
Other accounts receivable at December 31, 2004 included the following
amounts due from Glencairn:
21
($000's) 2004
---------------------------------------------------------------
For:
Supplies 315
Services 18
---------------------------------------------------------------
333
These amounts were collected in full in 2005.
Interest was charged on overdue amounts receivable from BHK at
commercial rates during 2004 and 2003.
17. GUARANTEES
a) As at December 31, 2005, the Company has an outstanding letter of
credit in the amount of $250,000 which is renewable annually and relates to
the operating lease at the Nanisivik mine (see note 6(h)). As at December
31, 2004, the Company had outstanding letters of credit totaling
$2,965,000, of which, $2,715,000 was for security deposits for
rehabilitation and restoration expenses and $250,000 was for the operating
lease at the Nanisivik mine.
b) In consideration for the receipt of an indemnity fee of $1,141,000
from Wilshire Financial Services Inc. ("Wilshire") related to the Second
Agreement (note 10(a)), 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,
2005, the maximum liability was $50,500,000. The indemnity fee of
$1,141,000 was deferred and amortized on a straight-line basis over the
term of the agreement.
c) In consideration for the receipt of an indemnity fee of $564,000 from
Wilshire related to the Agreement (note 10(b)), 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, 2005, the maximum liability was $11,785,000. The
indemnity fee of $564,000 was deferred and amortized on a straight-line
basis over the term of the agreement.
22
18. RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been
prepared in accordance with Canadian generally accepted accounting
principles ("Cdn. GAAP") which are different in some respects from those
applicable in the United States of America ("U.S. GAAP") and from practices
prescribed by the United States Securities and Exchange Commission.
Variations between balance sheet items and statements of operations
items as shown in the consolidated financial statements under Cdn. GAAP and
the amounts determined using U.S. GAAP are as follows:
CONSOLIDATED BALANCE SHEETS
Mineral Accounts
Properties Payable and
(Expressed in thousands and Cash and Cash Short-term Long-term Restricted Intagible Accrued
of Canadian dollars) Fixed Assets Equivalents Investments Investments Cash Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2005
As shown in the consolidated
financial statements under
Cdn. GAAP $165,168 $18,749 $2,523 $5,615 $ 3,929 $ - $32,797
Shares issued to promoters
or shareholders in
exchange (a) (735)
Adjustment relating to
stock-based compensation (l)
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) (1,458)
Adjustment relating to
exploration expenditures
(c) (7,602)
Adjustment relating to
unrealized gains on
short-term investments (e) 203
Adjustment relating to
fair value on long-term
investments (f) (412)
Adjustment relating to
flow-through shares (i) (7,406) 7,406 940
Recognition of minimum
pension liability (k) 1,296
Adjustment to reclassify
Cumulative Translation
Adjustment (h)
- ---------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $155,373 $11,343 $2,726 $5,203 $11,335 $1,296 $33,737
===========================================================================================================================
(Continued)
Accumulated
Employee Other Cumulative
(Expressed in thousands Future Comprehensive Contributed Translation Capital
of Canadian dollars) Benefits Income Deficit Surplus Adjustment Stock
- -----------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2005
As shown in the consolidated
financial statements under
Cdn. GAAP $5,379 $ - ($172,928) $3,300 ($11,699) $335,512
Shares issued to promoters
or shareholders in
exchange (a) 13,471 (14,206)
Adjustment relating to
stock-based compensation (l) 458 (28) (430)
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) (1,458)
Adjustment relating to
exploration expenditures
(c) (7,602)
Adjustment relating to
unrealized gains on
short-term investments (e) 203
Adjustment relating to
fair value on long-term
investments (f) (412)
Adjustment relating to
flow-through shares (i) 142 (1,082)
Recognition of minimum
pension liability (k) 7,114 (5,818)
Adjustment to reclassify
Cumulative Translation
Adjustment (h) (11,699) 11,699
- -----------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $12,493 ($17,314) ($168,533) $3,476 $ - $319,794
=================================================================================================================
23
Mineral Accounts
Properties Payable and
(Expressed in thousands and Cash and Cash Short-term Long-term Restricted Intagible Accrued
of Canadian dollars) Fixed Assets Equivalents Investments Investments Cash Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2004
As shown in the consolidated
financial statements
under Cdn. GAAP $153,073 $12,667 $2,633 $5,615 $3,391 $ - $35,558
Shares issued to promoters
or shareholders in
exchange (a) (1,028)
Adjustment relating to
stock-based
compensation (l)
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 (i) (742) 742 142
Recognition of minimum
pension liability (k) 1,512
Adjustment to reclassify
Cumulative Translation
Adjustment (h)
- ---------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $142,588 $11,925 $3,886 $8,055 $4,133 $1,512 $35,700
===========================================================================================================================
(Continued)
Accumulated
Employee Other Cumulative
(Expressed in thousands Future Comprehensive Contributed Translation Capital
of 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 (a) 13,178 (14,206)
Adjustment relating to
stock-based
compensation (l) 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 (i) (142)
Recognition of minimum
pension liability (k) 2,022 (510)
Adjustment to reclassify
Cumulative Translation
Adjustment (h) (9,009) 9,009
- -----------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $8,468 ($8,266) ($181,252) $2,914 $ - $312,007
=================================================================================================================
24
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of Canadian dollars, except for per share 2005 2004 2003
information)
- ----------------------------------------------------------------------------------------------------------
Earnings as shown in the consolidated financial
statements under Cdn. GAAP $14,739 $2,624 $651
Additional (expense) income:
Cumulative effect of change in accounting principle for ARO (m) - - (11,903)
Adjustment to depletion in connection with shares
issued to promoters or shareholders (a) 293 261 279
Adjustment relating to depreciation and depletion (b) 404 268 158
Adjustment relating to write-off of exploration expenditures (c) (7) (807) (837)
Adjustment stock-based compensation (l) - - 274
Adjustment to mark-to-market long-term investment (f) (2,852) - -
Adjustment to mark-to-market embedded option in long-term - 2,348 -
investment (f)
Adjustment for interest on long-term investment - 92 -
Adjustment to reverse write-off of exploration properties under
Cdn. GAAP as these properties were already expensed under
U.S. GAAP (c) - 1,178 -
Adjustment relating to flow-through shares (i) 142 - -
==========================================================================================================
Net earnings (loss) under U.S. GAAP $12,719 $5,964 ($11,378)
==========================================================================================================
Basic earnings (loss) per share under U.S. GAAP $0.03 $0.02 ($0.05)
Diluted earnings (loss) per share under U.S. GAAP $0.03 $0.02 ($0.05)
Effect of U.S. GAAP adjustments on basic earnings (loss) per share ($0.01) $0.01 ($0.05)
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 "Earnings (Loss) from operations" under U.S. GAAP.
The following table reconciles "Contribution (Loss) from Mining Activities
under Cdn. GAAP" to "Earnings (Loss) from operations under U.S. GAAP"
(Expressed in thousands of Canadian dollars) 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------
Contribution (Loss) from Mining Activities under Cdn. GAAP $ 27,955 $ 25,729 $ (8,812)
General and administrative (8,666) (9,559) (5,087)
Stock-based compensation (809) (1,253) (274)
Exploration expense (535) - -
Write-down of mineral properties and fixed assets (879) (1,178) (279)
Other non-producing property costs (9,035) (8,638) (5,394)
Aggregate adjustments for U.S. GAAP (2,162) 3,340 (12,029)
- ------------------------------------------------------------------------------------------------------------
Earnings (Loss) from operations under U.S. GAAP $ 5,869 $ 8,441 $ (31,875)
============================================================================================================
For U.S. GAAP purposes, the components of non-operating income (loss) are as follows:
(Expressed in thousands of Canadian dollars) 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------
Interest and financing $ (1,284) $ (509) $ (3,321)
Investment and other income 2,595 843 405
Loss on gold loan (1,787) - -
Foreign exchange gain (loss) on US dollar denominated debt 492 (431) 11,578
Other foreign exchange (loss) gain (294) (1,809) 206
Adjustment relating to flow-through shares 142 - -
- ------------------------------------------------------------------------------------------------------------
Non-operating income (loss) for U.S. GAAP $ (136) $ (1,906) $ 8,868
============================================================================================================
25
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) 2005 2004 2003
------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) under U.S. GAAP $12,719 $5,964 ($11,378)
Change in cumulative translation adjustment account (h) (2,690) (5,688) (17,727)
Adjustment to recognise minimum pension liability (k) (5,818) (510) -
Adjustment relating to unrealized gains on short-term
investments (e) 203 1,253 18
------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) under U.S. GAAP $4,414 $1,019 ($29,087)
============================================================================================================
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 provided
from (Used for) operating activities" under "Operating Activities" is not
permitted; therefore the reader should disregard the sub-total of $32,799,000,
$35,420,000 and $13,445,000 for 2005, 2004, and 2003, respectively for U.S. GAAP
purposes. As well, changes in restricted cash would be shown as an investing
activity rather than a financing activity.
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 2005 consolidated
financial statements, the Company determined that no write-down was required in
2005, 2004 and 2003 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 to measure impairment. 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 2005 by $404,000 ($268,000 in 2004, and $158,000 in 2003).
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
has 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.
26
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, unrealized holding gains and losses on trading securities are recognized
in earnings, in accordance with SFAS 115 "Accounting for Certain Investments in
Debt and Equity Securities." In the current year, the Company has recorded a
mark-to-market loss on the investment of $2,852,000.
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, 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) 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.
i) 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. When the company renounces its rights to the related tax deductions,
the resulting future income tax liability ("FITL") is debited to share capital,
and any related decrease of the valuation allowance against future income tax
assets would be credited to income. Prior to 2004, Canadian GAAP did not require
the FITL to be charged to share capital. For U.S. GAAP, the premium paid in
excess of the market value of $940,000 (2004 - $Nil, 2003 - $142,000) is
credited to accounts payable and accrued liabilities and will be included in
income when the company renounces the deductions and the related FITL is charged
to income. Qualifying expenditures were incurred in 2005 of $417,000 (2004 -
$742,000, 2003 - $Nil) relating to the 2003 flow-through shares and the premium
of $142,000 was brought into income in 2005. The flow-through fund, which is
equivalent to the total unexpended proceeds of $7,406,000 (2004 - $742,000, 2003
- - $742,000), and is considered to be restricted and is not considered to be cash
or cash equivalents under U.S. GAAP.
27
j) 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) 2005 2004
- --------------------------------------------------------------------------------
Accounts payable $16,266 $24,946
Payroll and severance accrual 8,129 4,931
Utilities cost accrual 632 873
Management fees accrual 500 500
Mark-to-market of metal forward sale and call options 3,552 315
Capital lease - current portion 657 375
Capital tax accrual 144 130
Premium paid on flow-through shares 940 142
Other accruals 2,917 3,488
- --------------------------------------------------------------------------------
$33,737 $35,700
k) 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 2005, the Company recorded a minimum pension liability
of $7,114,000 (2004 - $2,022,000), an unrecognized prior service cost of
$1,296,000 (2004 - $1,512,000), classified as "Intangible Asset" on the U.S.
GAAP balance sheet, and a loss charged to Other Comprehensive Income of
$5,818,000 (2004 - $510,000).
l) 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 as, under US GAAP, recognition is not required for options granted
before January 1, 2004.
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.
Under U.S. GAAP, options granted to non-employees would be fair valued and
accounted as compensation expense. Under present Cdn. GAAP, effective January 1,
2002, options can be valued under either the intrinsic value method or the fair
value method. In accordance with Cdn. GAAP in effect prior to January 1, 2002,
the Company did not recognize compensation expense for options granted to
non-employees. For purposes of determining compensation expense under U.S. GAAP,
the fair value of each option grant has been estimated on the balance sheet date
using Black-Scholes option-pricing model with assumptions of a 1.58 year
expected life, risk free interest rate of 5.25%, an expected volatility of 136%
and a dividend yield of 0%.
During 2001 as part of an employment agreement with a former senior
personnel, the Company had granted stock options to this individual, which fully
vested on the date of the grant.
Under Cdn. GAAP, the Company has accounted for the options in accordance
with the Company's Accounting Policy for stock options. Under U.S. GAAP the
direct award of stock would be accounted for at the fair value of the stock on
the date of the award. The fair value of each option grant is estimated on the
balance sheet date using Black-Scholes option-pricing model with assumptions of
a 3-year expected life, risk free interest rate of 5.25%, an expected volatility
of 136% and a dividend yield of 0%.
m) 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
28
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.
n) 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
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets - an Amendment of APB Opinion No. 29". The guidance in APB Opinion No.
29, "Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be based on the fair value of the assets
exchanged. The guidance in that Opinion, however, included certain exceptions to
that principle. SFAS 153 amends Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 are effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. Early
adoption is permitted and companies must apply the standard prospectively. The
adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"),
which requires an entity to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's fair
value can be reasonably estimated. FIN 47 was adopted by the Company during the
year. The adoption of this standard did not have a material effect on the
Company's results of operations, financial position or cash flows.
The Financial Accounting Standards Board (FASB) has issued FASB Statement
No. 151, Inventory Costs, an 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.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payments" ("SFAS 123R"), which requires all share-based payments to employees,
including grants of employee stock options, to be recognized as compensation
expense in the consolidated financial statements based on their fair values.
SFAS 123R also modifies certain measurement and expense recognition provisions
of SFAS 123, that will impact the Company, including the requirement to estimate
employee forfeitures each period when recognizing compensation expense, and
requiring that the initial and subsequent measurement of the cost of
liability-based awards each period be based on the fair value (instead of the
intrinsic value) of the award. This statement is effective for the Company as of
January 1, 2006. SAB 107, "Share Based Payment" ("SAB 107") was issued by the
SEC in March 2005, and provides supplemental SFAS 123R application guidance
based on the views of the SEC. As described in "Accounting Changes" above, the
Company is expensing stock-based compensation using the fair value method
prospectively for all awards granted or modified on or after January 1, 2002 for
Canadian GAAP, which is similar to SFAS 123R. This change is not expected to
have a material impact on the calculated compensation expense and as a result,
the adoption of SFAS No. 123R is not expected to have an impact on the Company's
results of operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which relates to the accounting for and reporting of
a change in accounting principles and applies to all voluntary changes in
29
accounting principles. The reporting of corrections of an error by restating
previously issued financial statements is also addressed by this statement. SFAS
154 applies to pronouncements in the event they do not include specific
transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. SFAS 154 requires retroactive
application to prior periods' financial statements of changes in accounting
principle, unless the period specific effects or cumulative effects of an
accounting change are impracticable to determine, in which case the new
accounting principle is required to be applied to the assets and liabilities as
of the earliest period practicable, with a corresponding adjustment made to
opening retained earnings. Prior to SFAS 154, most accounting changes were
recorded effective at the beginning of the year of change, with the cumulative
effect at the beginning of the year of change recorded as a charge or credit to
earnings in the period a change was adopted. SFAS 154 will be effective on
accounting changes and corrections of errors beginning in 2006. SFAS does not
change the transition provisions of any existing accounting pronouncements,
including those that are in the transition phase as of the effective date of
SFAS 154.
CANADIAN STANDARDS
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.
19. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
a) On October 10, 2002, the Nunavut Water Board ("NWB") issued to
CanZinco Ltd. ("Canzinco"), 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 water license
renewal was a requirement that the Company guarantee the financial security
required by the license. The NWB established that the amount of security
required by the license was $17,600,000. Of that amount $5,000,000 had been
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.
In February 2003, the Company delivered to the Department of Indian
Affairs and Northern Development ("DIAND"), the federal government agency
responsible for the administration of financial security matters related to
any water license issued by the NWB, an unsecured promissory note in the
amount of $1,000,000 in order to satisfy the full requirement for financial
security set out in the expired water license. On July 31, 2003, the
indemnity bond in place in the amount of $5,000,000 to satisfy the previous
water license expired, and it too was replace by an unsecured promissory
note issued by the Company. These two unsecured promissory notes, taken in
concert, satisfied the full requirement for financial security set out in
the previous water license.
Following the issuance of the new water license in October 2002,
protracted discussions were held with DIAND regarding the form of security
to be adopted to satisfy the financial security requirements of the new
water license. Those discussions culminated in March 2005, when another
unsecured promissory note was issued by the Company in the amount of
$11,600,000 to satisfy the balance of the financial security requirement.
With that transaction, the full amount of the financial security required,
being $17,600,000, has been satisfied using unsecured promissory notes.
b) In 2003, Kalwea Financial Corp., BVI ("Kalwea") commenced an action
against the Company and CanZinco, 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. While the Company has preserved its legal rights, it
continues to negotiate the terms of settlement with the plaintiff.
c) 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 liabilities
estimated to be $3,750,000 relating to the environmental reclamation
deposit that was transferred to Gibraltar as a result of the purchase
agreement; (b) potential tax liabilities with respect to an employee
severance trust, which is in excess of $500,000. If this claim is
30
successful, it exposes NVI to further direct liabilities which have not
been quantified; and (c) a claim for tax loss deductions in the amount of
$54,000,000 as a result of delays in signing a 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.
The Alberta Energy Utilities Board has notified BWCL, now NVI, 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
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.
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) 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 expired on March 31, 2005. The plaintiffs
are determining if they intend to pursue the action further.
f) 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.
g) 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.
20. LEASE COMMITMENTS
The Company is committed to operating leases for business premises and
equipment as follows:
($000's)
----------------------------------------------------
2006 979
2007 698
2008 590
2009 399
2010 354
2011 and thereafter 29
The following is a schedule of future minimum lease payments under the
capital lease expiring September 27, 2010 together with the balance of the
obligation under capital lease.
($000's)
-----------------------------------------------------------------------
2006 725
2007 542
2008 303
2009 146
2010 109
-----------------------------------------------------------------------
Total minimum lease payments 1,825
Less: amount representing interest at
rates ranging from 5.9% -9.0% (183)
-----------------------------------------------------------------------
Balance of the obligation 1,642
31
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, 2005
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Consoli-
Geographic location Latin America Canada Tunisia and Other dated
- ------------------------------------------------------------------------------------------------------------------------------------
El El Myra Bouchard
Mochito Toqui Nanisivik Caribou Falls -Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Gross sales revenue 85,418 49,634 135,052 - - 113,725 25,129 - 138,854 41,976 (2,917) 312,965
Treatment and
marketing costs (29,439) (18,989) (48,428) - - (34,674) (6,853) - (41,527) (15,436) - (105,391)
--------------------------------------------------------------------------------------------------------------
Net revenue 55,979 30,645 86,624 - - 79,051 18,276 - 97,327 26,436 (2,917) 207,574
Direct operating
costs (29,814) (22,197) (52,011) - - (67,125) (10,334) - (77,459) (14,827) - (144,297)
Depreciation and
depletion (5,711) (4,308) (10,109) - - (8,135) (1,000) - (9,135) (3,895) (180) (23,229)
Reclamation and
closure costs (648) (295) (943) (8,578) (394) (1,371) (283) (92) (10,718) (432) - (12,093)
--------------------------------------------------------------------------------------------------------------
Contribution (loss)
from mining
activities 19,806 3,845 23,651 (8,578) (394) 2,420 6,659 (92) 15 7,386 (3,097) 27,955
General and
administrative - - - - - - - - - - (8,666) (8,666)
Stock-based
compensation - - - - - - - - - - (809) (809)
Interest and
financing - - - - - - - - - - (1,284) (1,284)
Investment and other
income - - - - - - - - - - 2,595 2,595
Loss on remeasurement
of gold loan - - - - - (1,787) - - (1,787) - - (1,787)
Foreign exchange
gain on US dollar
denominated debt - - - - - - - - - - 492 492
Other foreign
exchange loss - - - - - - - - - - (294) (294)
Exploration costs - - - - - - (535) - (535) - - (535)
Write-down of mineral
properties and
fixed assets (187) - (187) (692) - - - - (692) - - (879)
Other non-producing
property costs - - - (2,526) (1,813) - (3,468) (466) (8,273) (778) 16 (9,035)
Income and mining
(taxes) recovery 5,453 1,003 6,456 72 - (105) (248) 27 (254) - 784 6,986
--------------------------------------------------------------------------------------------------------------
Net earnings (loss) 25,072 4,848 29,920 (11,724) (2,207) 528 2,408 (531) (11,526) 6,608 (10,263) 14,739
--------------------------------------------------------------------------------------------------------------
Capital expenditures 8,202 7,095 15,297 (30) - 17,795 571 5,216 23,552 68 45 38,962
Identifiable assets 37,711 44,684 82,395 3,622 1,227 168,138 4,373 51,990 229,350 6,294 39,118 357,157
Capital expenditures for Myra Falls mine include fixed assets purchased through
capital leases of $984,000.
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue for the year ended December 31,
2005, revenue from one customer of $37,959,000 originated from the Myra Falls
mine, revenue from a second customer of $28,312,000 consisted of $15,162,000
that originated from the El Toqui mine, $6,443,000 that originated from the
Bougrine mine and $6,707,000 that originated from the El Mochito mine, revenue
from a third customer of $27,591,000 consisted of $18,088,000 that originated
from the El Mochito mine, $3,312,000 that originated from the Bougrine mine,
$3,239,000 that originated from the El Toqui mine and $2,952,000 that originated
from the Myra Falls mine, and revenue from a fourth customer of $24,390,000
consisted of $19,604,000 that originated from the El Mochito mine and $4,786,000
that originated from the Myra Falls mine.
32
SEGMENT INFORMATION
For the Year Ended December 31, 2004
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Consoli-
Geographic location Latin America Canada Tunisia and Other dated
- ------------------------------------------------------------------------------------------------------------------------------------
El El Myra Bouchard
Mochito Toqui Nanisivik Caribou Falls -Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Gross sales revenue 62,005 38,670 100,675 - - 18,012 88,112 - 106,124 33,449 51 240,299
Treatment and
marketing costs (21,547) (15,463) (37,010) - - (6,262) (25,937) - (32,199) (12,647) - (81,856)
--------------------------------------------------------------------------------------------------------------
Net revenue 40,458 23,207 63,665 - - 11,750 62,175 - 73,925 20,802 51 158,443
Direct operating
costs (25,684) (13,589) (39,273) - - (13,007) (32,034) - (45,041) (17,608) - (101,922)
Depreciation and
depletion (3,599) (3,161) (6,760) - - (3,290) (7,255) - (10,545) (7,716) (875) (25,896)
Reclamation and
closure costs (605) (294) (899) (715) (365) (542) (1,625) (86) (3,333) (664) - (4,896)
--------------------------------------------------------------------------------------------------------------
Contribution (loss)
from mining
activities 10,570 6,163 16,733 (715) (365) (5,089) 21,261 (86) 15,006 (5,186) (824) 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) 10,479 6,163 16,642 (7,549) (2,006) (5,089) 20,027 (183) 5,200 (5,186)(14,030) 2,624
--------------------------------------------------------------------------------------------------------------
Capital expenditures 6,762 10,981 17,743 (200) - 3,997 1,219 4,008 9,024 428 494 27,689
Identifiable assets 38,165 43,756 81,921 6,954 1,210 97,825 14,351 46,189 166,529 16,320 22,704 287,474
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue for the year ended December 31,
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.
33
SEGMENT INFORMATION
For the Year Ended December 31, 2003
($000's)
(Restated - note 1)
- -----------------------------------------------------------------------------------------------------------------------------
Corporate Consoli-
Geographic location Latin America Canada Tunisia and Other dated
- -----------------------------------------------------------------------------------------------------------------------------
El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine
- -----------------------------------------------------------------------------------------------------------------------------
Gross revenue 53,940 34,290 88,230 11,454 - 75,677 - 87,131 33,350 (1,120) 207,591
Treatment and
marketing costs (21,352) (16,896) (38,248) (5,794) - (26,391) - (32,185) (13,148) (83,581)
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Net revenue 32,588 17,394 49,982 5,660 - 49,286 - 54,946 20,202 (1,120) 124,010
Direct operating
costs (23,951) (16,594) (40,545) (5,860) - (38,918) - (44,778) (17,916) - (103,239)
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)
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(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 for the year ended December 31,
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.
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22. ANALYSIS OF CHANGES IN NON-CASH WORKING CAPITAL ITEMS
($000's)
-------------------------------------------
2005 2004 2003
-------------------------------------------
Accounts receivable - concentrate 3,161 583 8,376
Other receivables (2,881) (282) 1,271
Concentrate inventory 8,590 (31,784) 708
Materials and supplies inventory 2,049 2,251 1,833
Short-term investments 961 30 20
Prepaid expenses and other current assets 1,308 752 (165)
Provisional payments for concentrate inventory
shipped and not priced (8,220) 21,779 (6,105)
Accounts payable and accrued liabilities (2,205) 1,437 (2,630)
Income and mining taxes payable (277) 189 (129)
-------------------------------------------
2,486 ($5,045) 3,179
-------------------------------------------
23. EARNINGS PER SHARE
Basic Earnings 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, as the
exercise of options would not have been dilutive in the year.
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
2005 was $0.48 (2004 - $0.53, 2003 - $0.32).
2005 2004 2003
----------------------------------------------------------------------------------------------------------
Earnings per share $0.04 $0.01 $0.00
Diluted earnings per share $0.04 $0.01 N/A
Basic weighted-average number of shares outstanding (000's) 369,190 353,508 211,411
Incremental shares on assumed exercise of options and
warrants (000's) 20,300 23,292 10,259
----------------------------------------------------------------------------------------------------------
Weighted-average number of Common Shares used for diluted
earnings per share (000's) 389,490 376,800 221,670
----------------------------------------------------------------------------------------------------------
24. SUBSEQUENT EVENT
On January 31, 2006, the Company completed negotiations for a loan
facility of US$12,000,000 (the "Facility") from Standard Bank PLC, an
English and Welsh bank. The Facility bears an interest rate of LIBOR plus
2.0% per annum and has been secured by, and will be repaid from, deliveries
of concentrate to a customer between January 31, 2006 and July 31, 2007.
The funds were used to satisfy certain obligations to the government
of British Columbia in connection with environmental security requirements
for the Myra Falls mine.
35