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TORONTO,
ONTARIO--(Marketwire - May 7, 2009) - Gabriel Resources Ltd. (TSX:GBU)
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Highlights
"The Rosia Montana Project has been designed to the highest
international standards and the economic benefits that it will bring to
Romania are significant" said Keith Hulley, CEO. "We remain
encouraged by the increasing support the Project has received over the
past several months from members of the local and regional political
leadership of both coalition parties."
Financial performance
- First quarter net loss was $7.0 million, or $0.03 per share
- A total of $16.3 million was spent on our development projects during
the quarter the first quarter 2009.
Liquidity and capital resources
- Cash and cash equivalents at March 31, 2009 totaled $50.1 million.
- The base budget for 2009 to operate the corporate office, complete
EIA permitting activities, complete construction of Recea (resettlement
site) and pay final installment payments for long-lead-time equipment
has increased to $85 million from $70 million of which $60 million
remains to be spent over the balance of the year. This increase is
primarily due to additional engineering activities and higher
corporate, legal and communications costs. Therefore the Company will
require additional capital in 2009.
- Once the EIA is approved, the activity level will increase, including
the acquisition of remaining surface rights, completion of a control
estimate, payment of land use taxes and other payments required to
obtain construction permits.
- These additional activities are expected to cost approximately US$150
million of which approximately US$82 million would be required to
advance the Project to the point of receipt of construction permits
(subject only to payment of various land taxes). These activities can
only commence once additional financing is raised.
- Management has been advised by its financial advisors that while
financing the Project will be challenging due to the financial crisis,
financing from government agencies and non traditional lenders should
be available even in the current environment because of the economic
and other benefits resulting from the Project.
Financing Plan
- Management began the process of executing on its financing plan
during the first quarter 2009. Based on the initial feedback,
management believes that the financing plan is achievable.
- The estimated cost to complete the development of the Rosia Montana
Project - including interest, financing and corporate costs is US$1
billion, consisting of capital costs of US$876 million and interest,
financing and corporate costs of US$124 million. (For details see page
5 of MD&A.)
- Once completed, the Project is expected to produce approximately
626,000 ounces of gold annually at an average total cash cost of
approximately $335/ounce over first five years.
Rosia Montana Project Development
Political Situation
- A new coalition government was formed on December 22nd 2008,
comprising the Democrat-Liberal Party ("PDL") and the Social
Democrat Party ("PSD"), the two largest parties in the
country. Together the two parties received over 70 percent of the
electoral seats in the new Parliament.
- Over the past several months, members of the local and regional
political leadership of both coalition parties have, among other
things, issued a series of open letters to various Ministers of the
government (including the current MOE directly). These open letters
have all requested that the government restart the EIA review process
immediately.
Environmental/Permitting
- Since the fall of 2007, review of the Project's Environmental Impact
Assessment (the "EIA") has been suspended as a result of a
decision taken by the former Minister of Environment (MOE). Since that
time, management has worked diligently to advocate in favour of a
restart of the EIA review process and advance the permitting process
for the Project.
- Throughout the quarter management has had more open dialogue with the
new government with respect to the EIA review process, but can not
predict when the process will restart.
- The Company is moving forward with the industrial zonal urbanistic
plan having just completed four public participation meetings. In
addition, the Local Council has initiated the process for the zonal
urbanistic plan for the protected area.
Rosia Montana Project Timeline
- Once the EIA for the Project is approved by the Romanian Government,
in the absence of any other extraordinary events, legal or otherwise,
Gabriel anticipates that it would take at least 6 months to:
-- Complete the purchase of the outstanding properties;
-- Receive all other permits and approvals, including initial construction
permits; and
-- Complete the control estimate and complete the financing.
- With the delay in the restart of the EIA review, management feels it
is prudent to be conservative due to the possible impact the upcoming
elections (EU elections scheduled for June and Presidential elections
scheduled for the fall) might have on the timeliness of the permitting
process. This is a change from previous guidance when management stated
that it would take at least six months from the time the permitting
process restarted to complete the above mentioned items.
- This estimated time line could be extended due to the global
financial crisis, as the Company may pursue certain activities
sequentially that had previously been planned to run in parallel.
- Once construction of the mine begins, it is expected to take
approximately 24 months to complete. Ultimately, the Romanian
Government determines the timing of issuance of the EIA approval and
all other permits and approvals required for the Rosia Montana Project.
This process is also subject to the Romanian courts dealing with
litigation from NGOs in a timely manner.
Surface Rights
- As a result of the suspension of the EIA review process in September
2007, the home purchase program was suspended indefinitely in February
2008.
- The Company owns 77 percent of the homes in the industrial zone,
protected area and the buffer zone.
- Once we complete the agreements for institutional properties, our
ownership will rise to approximately 85 percent of the three zones of
the Project, further demonstrating strong local support for the
Project.
Resettlement Sites
- Construction of the Alba Iulia resettlement site, known as Recea,
began in summer 2007. Infrastructure was completed during the third
quarter 2008 and all of the 125 homes are expected to be completed
during the second quarter of 2009.
- The process of title and utility transfer to the new owners has begun
and is expected to be completed in the third quarter.
- The Company is also working with local officials to obtain permits
for the construction of Piatra Alba and hopes to begin construction
during the fall of 2009.
Archaeology
- The Supreme Court annulled archaeological discharge certificate
number 4 ("ADC 4") in December 2008.
- As the Company prepares its application for a new ADC 4, it will
address all deficiencies identified by the Supreme Court. The Company
anticipates applying for a new ADC 4 in the near term.
- The Company commissioned two independent audits (from highly regarded
UK based firms), one on archaeology and the other on architecture in
the third quarter of 2008. The overall conclusions of the reports were
positive and at the same time returned some constructive comments which
are currently being acted on and incorporated into the Company's ongoing
program.
Management Change
- The Board of Directors announced on March 23 that Alan R. Hill
retired as President and CEO effective immediately. The Board appointed
Keith Hulley as CEO on an interim basis. Mr. Hulley provides strong
continuity during this transaction period having served on the Board
and as a Chairman of the Technical Committee for the past three years. Mr.
Hulley managed and oversaw the evaluation, engineering, construction
and recent start-up of an open-pit silver mine in Bolivia which is
similar in size and scope to the Rosia Montana Project. Mr. Hulley is
able to spend the necessary time in Romania to oversee the completion
of the permitting process and at the same time provide the time
required to conduct an orderly and thorough search for a new CEO.
- Mr. Hill remains a Director and will continue to provide consulting
services to the Company through the permitting, financing and
construction periods.
- The Company has formed a selection committee and an executive search
firm has been engaged.
About Gabriel
Gabriel is a Canadian-based resource company committed to responsible
mining and sustainable development in the communities in which it
operates. Gabriel is currently engaged in the exploration and
development of mineral properties in Romania and is presently engaged
in the development of its 80% owned Rosia Montana gold project. For
more information please visit the Company's website at www.gabrielresources.com.
The Company will be hosting its First Quarter 2009 Conference Call and
Webcast on May 7, 2009 at 10:00 am EST. North American callers dial
1-866-804-6927 and International callers dial 1-857-350-1673 -
Participant Passcode: 65356032.
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A")
provides a discussion and analysis of the financial condition and
results of operations to enable a reader to assess material changes in
the financial condition and results of operations as at and for the
three-months ended March 31, 2009 and 2008. The MD&A should be read
in conjunction with the unaudited consolidated financial statements and
notes thereto ("Statements") of Gabriel Resources Ltd. ("Gabriel"
or the "Company") as at and for the three-months ended March
31, 2009 and 2008, as well as the audited Consolidated Financial
Statements of the Company as at and for the year ended December 31,
2008 including notes thereto. The Company's Consolidated Financial
Statements have been prepared in accordance with Canadian Generally
Accepted Accounting Principles ("Canadian GAAP").
All amounts included in the MD&A are in Canadian dollars, unless
otherwise specified. This report is dated as of May 7, 2009. Readers
are encouraged to read the Company's Annual Information Form dated
March 6, 2009 and the Company's other public filings, which can be
viewed on the SEDAR website (www.sedar.com).
Overview
Gabriel is a Canadian-based resource company committed to responsible
mining and sustainable development in the communities in which it
operates. Gabriel is engaged in the exploration and development of
mineral properties in Romania and is presently developing its 80%-owned
Rosia Montana gold project (the "Project").
Our mission is to create value for all of our stakeholders from
responsible mining. Our vision is to build the Project and, to be a
catalyst for sustainable economic, environmental, cultural and
community development. As we develop the world-class Rosia Montana
Project, we will strive to set high standards through good governance,
good engineering, open and transparent communications, and operations
and reclamation based on Best Available Techniques - all in the service
of value creation and sustainable development. Whether the issue is
corporate governance, community development, environmental
responsibility or operational practices, we pledge to do it right.
Key Issues
Environmental/Permitting
Since the fall of 2007, review of the Project's Environmental Impact
Assessment (the "EIA") has been suspended as a result of a
decision taken by the former Minister of Environment (MOE). Since that
time, management has worked diligently to advocate in favour of a
restart of the EIA review process and advance the permitting process
for the Project. National elections were held in Romania in November of
2008 and a new coalition government was formed shortly thereafter. Throughout
the quarter management has had more open dialogue with the new government
with respect to the EIA review process, but can not predict when the
process will restart.
While the EIA is by far the most important project approval, there are
a number of other permits and approvals required to advance the Project
to construction, such as dam safety permits, zonal urbanistic plans for
the industrial and protected areas, forestry and land use change
permits as well as other permits and approvals that follow EIA
approval. To that end, to the extent these permits and approvals are
not dependent on EIA approval or the acquisition of surface rights the
processes for each of these will proceed in parallel with the EIA
review process. During the first quarter, the Company received a
positive court ruling compelling the MOE to issue our dam safety
permits. This decision is appealable by the MOE once the rationale for
the decision has been received. The Company is moving forward with the
industrial zonal urbanistic plan, having just completed four public
participation meetings. In addition, the Local Council has initiated
the process for the zonal urbanistic plan for the protected area. The
forestry and agricultural land use change permits will proceed after
the EIA has been approved and surface rights obtained. In the absence
of any other extraordinary events, legal or otherwise, we expect these
permitting processes to take at least six months from the date the EIA
is approved by the Romanian government.
Political Situation
Romania held national elections on November 30(th), 2008. A new coalition
government was formed on December 22(nd), 2008 comprising the
Democrat-Liberal Party ("PDL") and the Social Democrat Party
("PSD"). The process of appointing state secretaries and
other senior government officials was completed in early February 2009.
The new government spent its first three months focused on an
anti-crisis program to mitigate the impact of the financial and
economic crisis, completing the 2009 budget for the country and
negotiating the terms of an aid package worth approximately EUR 20
billion from the International Monetary Fund, the World Bank and the
European Bank for Reconstruction and Development (the "Financial
Aid Package"). On April 11, 2009, the Romanian government revised
its 2009 budget in order to meet the demands of the Financial Aid
Package.
The new coalition government is comprised of the two largest parties in
the country. Together the two parties received over 70 percent of the
electoral seats in the new Parliament. The ministerial portfolios of
the government have been almost evenly divided between the PDL and the
PSD.
Over the past several months the Project has received strong support
from members of the local and regional political leadership of both
coalition parties. This support has been manifested through, among
other things, a series of open letters to various Ministers of the
government (including the current MOE directly). These open letters
have all requested that the government restart the EIA review process
immediately.
The change in government may affect several of our opposition's efforts
to delay the Project. As reported previously, under the previous
government, three "private member bills" were introduced for
consideration by the Romanian Parliament. Each bill was intended to
block the Project, either by banning the use of cyanide in mining
operations, or by creating a protected status for the area designated
for mining. One of these bills was voted down and the other two remain
in the Parliamentary Committee process. The sponsors of the bills are
no longer members of Parliament. With a new Parliament in place, it is
not possible to determine when or if any of these bills will be tabled
for consideration and a vote taken in the Chamber of Deputies.
Management spent 2008 focused on meeting with stakeholders to
understand their issues and concerns and explain the benefits and
impacts of the Project. The strong local and regional support among
politicians is a direct result of our outreach. In addition, media
coverage of the Project has improved over the past several months. To
further strengthen our communications efforts, the Company retained an
internationally recognized public relations firm to assist with our
ongoing communications program.
Litigation
A number of foreign-funded and Romanian NGOs, including the
Hungarian-registered Alburnus Maior, the Soros Foundation Romania
(formerly Open Society Institute/Romania), the Independent Centre for
the Development of Environmental Resources (a "new" NGO
formed in 2007 by the members of Alburnus Maior), Terra Mileniul III
Foundation and the Center for Legal Resources (working in conjunction
with Alburnus Maior), have initiated a multitude of legal challenges
against virtually every local, regional and national Romanian
regulatory authority that has the administrative authority to grant
permits, authorizations and approvals for any aspect of the exploration
and development of the Project. While few of the actions have been
successful and most have been frivolous, they include both civil
actions and criminal complaints against both the regulatory authorities
and individuals within such regulatory authorities; in general, they
claim that such regulatory authorities are acting in violation of
Romanian laws and ask for cancellation of the license, permit or approval.
Gabriel, through RMGC, has intervened in the majority of these cases in
order to ensure that the Romanian courts considering these actions are
presented with a legally correct, fair and balanced analysis as to why
the various Romanian regulatory authorities' actions are in accordance
with the relevant and applicable laws.
While we have
designed the Project to follow all applicable laws to protect against
permitting delays of the Project, multiple legal challenges brought
forward by NGOs in Romania may continue to cause potential setbacks to
the Project timeline.
Surface Rights
As a result of the suspension of the EIA review process in September
2007, the home purchase program was suspended indefinitely in February
2008. The Company owns 77 percent of the homes in the industrial zone,
protected area and the buffer zone.
In addition to the private properties required, the Company needs to
acquire properties (about 35 percent of the surface area of the
Project), which are owned by institutions, including the local
administrations of Rosia Montana and Abrud, as well as certain churches
and state-owned mining companies. The process to acquire the
institutional properties is well underway and expected to be completed
after the approval of the EIA.
Once we complete the agreements for institutional properties, our
ownership will rise to approximately 85 percent of the three zones of
the Project, further demonstrating strong local support for the
Project. Ultimately, the Company's ability to obtain construction permits
for the mine and plant is predicated on securing 100 percent of the
surface rights in the industrial zone, the timing of which is not
entirely within the Company's control.
Resettlement Sites
Construction of the Alba Iulia resettlement site, known as Recea, began
in summer 2007. Infrastructure was completed during the third quarter
2008 and all of the 125 homes are expected to be completed during the
second quarter of 2009. The process of title and utility transfer to
the new owners has begun and is expected to be completed in the third
quarter. The Company is also working with local officials to obtain
permits for the construction of Piatra Alba and hopes to begin
construction during the fall of 2009.
Archaeology
An archaeological review of historic mining activity at Rosia Montana
is a critical step in the granting of the construction permit to build
the Project. An archaeological discharge is required for all of the
area under the footprint of the proposed mine.
An NGO commenced legal action in 2004 and ultimately obtained an
annulment with respect to RMGC's archaeological discharge Certificate
No. 4 ("ADC 4") from the Supreme Court of Romania in December
2008. The Company recently received the Court's written reasons for
this decision. As the Company prepares its application for a new ADC 4,
it will address all deficiencies identified by the Court. The Company
anticipates applying for a new ADC 4 in the near term.
Archaeological discharge Certificate No. 5 ("ADC 5") has also
been challenged on grounds similar to the challenge of ADC 4, and this
matter is currently before the Romanian courts. ADC 5 is a compilation
of the four previously issued discharge certificates and was obtained
for administrative convenience only. The Company has been advised by
its Romanian legal counsel that the annulment of ADC 5 does not
automatically result in the annulment of the underlying discharge
certificates.
The Company commissioned two independent audits (from highly regarded
UK based firms), one on archaeology and the other on architecture in
the third quarter of 2008. The archaeological audit report concluded
that the: "National Research Programme, set up in response to
proposals for the Rosia Montana gold mine project, represents one of
the largest cultural heritage projects ever undertaken in Romania. The
large body of data created will be invaluable in further understanding
of Roman Dacia, and as a basis for future studies." In addition,
the report concluded that the Project was compliant with the applicable
regulatory framework. The architectural expert audit, though positive,
returned some constructive comments. The report commented that there
was inadequate attention being paid to the preservation of some
peripheral buildings in the protected area, the majority of which are
owned by the Company, and in some instances inappropriate materials and
techniques were being used in the conservation work. A preservation
program is now underway; a plan for next stage restoration is in final
preparatory stage for review by such experts and repairs, appropriate
materials and techniques for restoration of the buildings (including
training of craftsmen in the necessary skills) are being organized.
Management Changes
The Board of Directors announced on March 23 that Alan R. Hill retired
as President and CEO effective immediately. The Board appointed Keith
Hulley as CEO on an interim basis. Mr. Hulley provides strong
continuity during this transaction period having served on the Board
and as a Chairman of the Technical Committee for the past three years.
Mr. Hulley managed and oversaw the evaluation, engineering,
construction and recent start-up of an open-pit silver mine in Bolivia
which is similar in size and scope to the Rosia Montana Project. Mr.
Hulley is able to spend the necessary time in Romania to oversee the
completion of the permitting process and at the same time provide the
time required to conduct an orderly and thorough search for a new CEO.
Mr. Hill will remain a Director and continue to provide consulting services
to the Company through the permitting, financing and construction
periods. Mr. Hill's retirement happened as the Company transitions from
engineering and permitting to financing and construction of the Rosia
Montana Project in Romania (subject to EIA approval). This new phase
requires a commitment of at least three years. Key decisions made
through this period should be made by the CEO that will see these
decisions through. The Company has formed a selection committee and an
executive search firm has been engaged.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2009 totaled $50.1 million. The
base budget for 2009 to operate the corporate office, complete EIA
permitting activities, complete construction of Recea and pay final installment
payments for long-lead-time equipment has increased to $85 million from
$70 million. This increase is primarily due to additional engineering
activities and higher corporate, legal and communications costs. The
budget for the remaining 9 months is $60 million. Therefore the Company
will require additional capital in 2009.
Financing Plan
Project finance planning was restarted during third quarter of 2008 in
preparation for financing the Project in 2009. The global financial
crisis has negatively impacted most of the international banking
system, restricting credit and increasing the cost of credit. As a
result, the conventional bank debt market and the high-yield bond
market are both currently restricted, however there are now signs of
modest improvement. The updated financing plan assumes that neither the
conventional bank debt market nor the bond market will be available in
time to meet the Company's financing needs. Management has been advised
by its financial advisors that while financing the Project will be
challenging due to the financial crisis, financing from government
agencies and non traditional lenders should be available even in the
current environment because of the economic and other benefits
resulting from the Project. Management began the process of executing
on its financing plan during the first quarter 2009. Based on the
initial feedback, management believes that the financing plan is
achievable.
- The estimated cost to complete the development of the Rosia Montana
Project - including interest, financing and corporate costs is US$1
billion, consisting of capital costs of US$876 million and interest,
financing and corporate costs of US$124 million.
- The Company anticipates financing these costs with approximately 25
percent equity - US$250 million.
- The Company anticipates financing the balance with approximately 75
percent debt - US$750 million, including senior debt, subordinate debt,
by-product off-take agreements, vendor loans and possibly EU grants.
- The estimated capital cost to complete does not include a provision
for (i) a cost overrun facility, (ii) a financial guarantee
(reclamation deposit), (iii) hedging program if required by the banks
and agencies and (iv) initial working capital. These additional items
could add US$200 million to the financing plan.
Project Timeline
- The EIA was submitted in the second quarter of 2006.
- In January 2007, the Company received the list of official questions
from the Romanian Government, raised during the public consultation process.
- The Company responded to the questions in the form of an Annex to the
EIA, in early May 2007.
- TAC and Espoo Convention meetings went well during the third quarter
of 2007, until TAC meetings were suspended in September 2007.
Once the EIA for the Project is approved by the Romanian Government, in
the absence of any other extraordinary events, legal or otherwise,
management and its advisory team anticipates that it would take at
least 6 months to:
- Complete the purchase of the outstanding properties;
- Receive all other permits and approvals, including initial
construction permits; and
- Complete the control estimate and complete the financing.
With the delay in the restart of the EIA review, management feels it is
prudent to be conservative due to the possible impact the upcoming
elections (EU elections scheduled for June and Presidential elections
scheduled for the fall) might have on the timeliness of the permitting
process. This is a change from previous guidance when management stated
that it would take at least six months from the time the permitting
process restarted to complete the above mentioned items. This estimated
time line could be extended due to the global financial crisis, as the
Company may pursue certain activities sequentially that had previously
been planned to run in parallel.
Once construction of the mine begins, it is expected to take
approximately 24 months to complete. Ultimately, the Romanian
Government determines the timing of issuance of the EIA approval and
all other permits and approvals required for the Rosia Montana Project,
subject to the Romanian courts dealing with litigation from NGOs in a
timely manner.
Outlook
Our key objectives include:
1. Maximizing shareholder value, while ensuring that the Project benefits
those in the community and the surrounding area to the optimum possible
extent;
2. Obtaining approval of our EIA and all other required permits;
3. Obtaining a new archaeological discharge certificate number 4;
4. Beginning construction of the new resettlement village at Piatra
Alba;
5. Completing the acquisition of all surface rights (private and
institutional);
6. Completing the control estimate for the cost to complete the
Project;
7. Raising the required debt and equity to build the Project;
8. Beginning Project construction; and
9. Continuing to strengthening dialogue and communications with all
stakeholders.
Results of Operations
The results of operations are summarized in the following tables, which
have been prepared in accordance with Canadian generally accepted
accounting principles:
Results of Operations in thousands of Canadian dollars, except per share amounts 2009 Q1 2008 Q4 2008 Q3 2008 Q2 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Statement of Loss (Income) Loss (Income) $ 6,969 $ (3,958) $ 2,782 $ 16,241 Loss (Income) per share - basic and diluted 0.03 (0.02) 0.01 0.06 --------------------------------------------------------------------------- Balance Sheet Working capital 7,401 29,172 50,324 80,513 Total assets 522,618 530,135 508,010 513,965 --------------------------------------------------------------------------- Statement of Cash Flows Investments in development and exploration including working capital changes 11,159 8,171 19,237 4,375 Cash flow provided by financing activities 3 - 82 1,015 --------------------------------------------------------------------------- in thousands of Canadian dollars 2008 Q1 2007 Q4 2007 Q3 2007 Q2 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Statement of Loss (Income) Loss (Income) $ (10,970) $ 7,821 $ 6,785 $ 5,966 Loss (Income) per share - basic and diluted (0.04) 0.03 0.03 0.02 --------------------------------------------------------------------------- Balance Sheet Working capital 110,021 118,299 147,157 199,073 Total assets 521,269 507,955 513,490 503,381 --------------------------------------------------------------------------- Statement of Cash Flows Investments in development and exploration including working capital changes 17,211 24,708 15,448 24,107 Cash flow (used in) provided by financing activities - - (31) 18,389 --------------------------------------------------------------------------- Statement of Loss (Income) 3 months ended March 31, in thousands of Canadian dollars, except per share amounts 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total operating expenses for the period $ 6,718 $ 2,484 Loss (Income) for the period 6,969 (10,970) Loss (Income) per share - basic and diluted 0.03 (0.04)
Total operating expenses for the
three-month period ending March 31, 2009 increased from the
corresponding 2008 period primarily due to $3.2 million resulting from
a non-recurring retiring allowance including the expensing of
share-based compensation for the Company's former Chief Executive
Officer, additionally an increase in the Company's share price resulted
in an increase of its liability related to outstanding deferred share
units of $1 million during the period.
For the first quarter 2009, foreign exchange fluctuations on foreign
currency cash balances generated a net loss of $0.3 million while for
the same period in 2008, the Company had a foreign exchange gain of
$12.1 million. Overall, the Company reported a higher loss for first
quarter 2009 compared to 2008 due to a swing of $12.4 million in
foreign currency values, combined with higher operating expenses of
$4.2 million and lower interest income of $1.3 million.
We expect to incur operating losses until commercial production
commences and revenues are generated.
Expenses Corporate, General and Administrative 3 months ended March 31, in thousands of Canadian dollars 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Finance $ 197 $ 347 External communications 165 287 Information technology 76 129 Legal 184 117 Payroll 3,187 740 Other 354 369 ---------------------------------------------------------------------------- Corporate, general and administrative expense $ 4,163 $ 1,989 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Corporate, general and administrative costs
are those costs incurred by the corporate office in Toronto. Excluding
a $2.4 million expense for a non-recurring retiring allowance payable
to the Company's former Chief Executive Officer, corporate costs
overall for the three-month period ending March 31, 2009 compared to
the same period in 2008 are lower due to cost saving initiatives.
Corporate, general and administrative costs are anticipated to rise
once the Rosia Montana Project is permitted and the Company increases
its staffing for construction and operations.
Stock Based Compensation 3 months ended March 31, in thousands of Canadian dollars 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- DSUs - expensed (recovered) $ 953 $ (124) Stock option compensation - expensed 1,389 520 ---------------------------------------------------------------------------- Stock based compensation - expensed $ 2,342 $ 396 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- DSUs - capitalized (capital reduction) $ 95 (16) Stock option compensation - capitalized 263 266 ---------------------------------------------------------------------------- Stock based compensation - capitalized $ 358 $ 250 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- DSU Compensation Number of DSUs issued 13,721 14,793 Average value ascribed to each DSU issued $ 2.46 $ 1.69
DSU costs for the first quarter 2009
reflect the issuance of 13 thousand units during the period and an
increase in the DSU liability due to a higher share price at quarter
end compared to the Company's share price at the beginning of the
period. The Company's closing share price for the first quarter 2009
was $2.40 per share while at December 31, 2008 the closing share price
was $1.52.
Initially valued at the market price of the stock at date of issue,
DSUs are revalued each period based on the closing share price at the
period end, with the difference between the total value of the DSUs at
period end compared to the value at the end of the previous period. If
the share price declines, the lower value of the DSUs is credited
against costs during the period. If the value is higher, the difference
is charged to the Statement of Loss, increasing costs for the period.
Overall, for the three-month period ended March 31, 2009, our share
price increased by $0.88 compared to December 31, 2008, while for the
same period in 2008, our share price decreased by $0.28 from December
31, 2007.
3 months ended March 31, 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Stock option compensation Number of stock options granted 600,000 - Average value ascribed to each option granted $ 1.56 $ - Options granted to corporate employees, consultants, officers, and directors - - Options granted to development project employees and consultants 600,000 -
The estimated fair value of stock options
is amortized over the period in which the options vest which is
normally three years. For those options which vest on a single or
multiple dates, either on issuance or on meeting milestones (the
"measurement date"), the entire fair value of the vesting
options is recognized immediately on the measurement date.
The fair value of stock options granted to personnel working on
development projects is capitalized over the vesting period.
Of the 0.6 million options issued in first quarter 2009, 0.1 million
will vest over a three-year period while the remaining 0.5 million
options will vest upon completion of certain milestones. The fair value
of options that vest upon achievement of milestones will be recognized
and capitalized as milestones are achieved and the value can be
reasonably measured. As of March 31, 2009, the amount capitalized was
$Nil.
Project Financing Costs 3 months ended March 31, in thousands of Canadian dollars 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Project Financing Costs $ 150 $ 22
Project financing activities were placed on
hold in the fall of 2007 after the suspension of the permitting process
but resumed in September 2008 in anticipation of the restart of
permitting activities and the requirement to complete the financing.
The higher costs in first quarter 2009 reflect the higher activity
levels compared to the same period in 2008.
Project financing activities include advisory services for the various
facilities under our financing plan.
Severance and Termination Costs
On December 4, 2007, in light of the suspension of the EIA review
process, the Company announced and enacted plans to scale back
activities. The Company accrued $2.1 million of costs related to the
retrenchment of 170 employees.
As at March 31, 2009 the Company paid $1.3 million in termination
benefits and anticipates paying the remaining balance of $0.9 million
during the second quarter 2009.
Interest Income 3 months ended March 31, in thousands of Canadian dollars 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest Income $ 64 $ 1,343
Lower interest income in first quarter 2009
compared to the first quarter 2008 is the result of lower average cash
balances and substantially lower interest rates During 2008 and 2009
the Company's cash balances have declined due to ongoing resettlement
site development costs, installment payments made under our
long-lead-time equipment orders and corporate and Romanian overhead
costs. Over the course of 2008, the global financial crisis led to a
dramatic decline in interest rates for government securities in each
currency the Company holds.
As of March 31, 2009, the average yield to maturity on the Company's
cash and cash equivalents was 0.44% versus 3.5% as of March 31, 2008.
With the current global financial crisis, the Company is focused on
capital preservation and therefore is foregoing higher yields on its
investments and is investing predominantly in government guaranteed
instruments. Approximately 81 percent of the Company's cash balances
are invested in government guaranteed instruments with the balance
invested in term deposits with major Canadian banks.
Foreign Exchange 3 months ended March 31, in thousands of Canadian dollars 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Foreign exchange gain (loss) - realized $ (108) $ 417 Foreign exchange gain (loss) - unrealized (207) 11,694 --------------------------------------------------------------------------- Total foreign exchange gain (loss) $ (315) $ 12,111 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The Company maintains foreign currency
investments to match anticipated foreign denominated expenditures. In
the three-month period ended March 31, 2009, the Euro weakened against
the Canadian dollar, resulting in a foreign exchange loss which was
partially offset by a foreign exchange gain on the Company's US dollar
cash balance. For the same period in 2008, both the US dollar and the
Euro strengthened against the Canadian dollar, resulting in foreign
exchange gains and with larger average cash balances and more
significant exchange movements, our first quarter 2008 foreign exchange
movement was larger than the movement in the first quarter 2009. The
Company maintains a Canadian dollar cash position to fund corporate,
general and administrative activities, while the balance of its cash
resources are in foreign currencies.
We would expect to continue to report foreign currency gains and losses
as we continue to hold foreign currencies.
Taxes
During the first quarter of 2008, the Company received a tax assessment
for $4.8 million related to a Romanian tax audit completed during the
first quarter of 2008. The Company, having accrued in 2006 its then
estimated tax liability, accrued an additional $3.7 million in respect
of the assessment, which arose from the disallowance of the application
of state tax incentives related to unrealized foreign exchange gains on
inter-company debt.
On April 10, 2008, the Company was advised by the Romanian tax
authorities that they were reopening and auditing fiscal years 2003 and
2004 which had been previously audited.
On June 24, 2008, the Company received a tax assessment for $9.8
million related to another tax audit, for the years 2003 and 2004,
initiated and completed during the second quarter of 2008. This
assessment also arose from the disallowance of the application of state
tax incentives related to unrealized foreign exchange gains on
inter-company debt.
All tax assessments have been paid and provided for in the 2007 and
2008 financial statements. Based on the advice of its professional tax
advisors, the Company believes that the tax authorities have misapplied
the legislation and we are vigorously contesting the State's position
through the courts.
Investing Activities
The most significant ongoing investing activities are for our Rosia
Montana development project in Romania. Most of the expenditures to
date have been for identifying and defining the size of the four ore
bodies, for engineering to design the size and scope of the Project,
for environmental assessment and permitting, as well as surface
rights/property acquisition. Once we receive our construction permit,
the nature and magnitude of the expenditures will increase as we build
roads, production facilities, open pits, tailings management facilities
and associated infrastructure.
Mineral Properties
We capitalize all costs incurred in Romania related to our development
and exploration projects - Rosia Montana, Bucium and Baisoara - to
mineral properties.
Listed below is a summary of expenditures at Rosia Montana for the
three months ended March 31, 2009 and 2008.
3 months ended March 31, in thousands of Canadian dollars 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Finance and administration $ 2,609 $ 3,681 External communications 1,212 1,042 Legal 1,191 648 Permitting 755 655 Community development 1,149 9,079 Project management and engineering 1,531 2,526 Exploration - Rosia Montana 172 103 Exploration - Bucium 0 41 Exploration - Baisoara 35 41 Capitalized depreciation net of disposals (131) (130) Capitalized stock based compensation (358) (250) Reclassification to mineral properties - (25) Increase in resettlement liabilities (853) (3,570) ---------------------------------------------------------------------------- Total exploration and development expenditures $ 7,311 $ 13,841 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
During the three-months ended March 31,
2009, finance and administration costs decreased compared to the
corresponding 2008 period primarily due to lower foreign exchange
losses on trade payables and resettlement obligations. During the
three-months ended March 31, 2009, the foreign exchange movement of the
US dollar and Euro against the Canadian dollar was less compared to
same period in 2008, resulting in lower foreign exchange losses being
capitalized by the Romanian subsidiary. As at March 31, 2009 and 2008,
the Company's Romanian subsidiary had outstanding foreign denominated
liabilities for long-lead equipment and resettlement obligations.
Finance and administration costs also decreased due to less staffing
and less information technology expenditures as a result of the EIA
process suspension.
Community development costs decreased for the three-months ended March
31, 2009 compared to the three-months ended March 31, 2008 due to the
suspension of the surface rights acquisition program in February 2008. Additionally,
first quarter 2008 expenditures were high compared to the first quarter
2009 due to the recognition of anticipated additional costs for
construction of resettlement homes having occurred during the first
quarter 2008.
Legal costs increased for the three-months ended March 31, 2009 due to
the decision made by management during 2008 to add a second law firm on
all legal cases. Management believes that the addition of a second firm
and second opinion is helpful to ensuring that the best legal strategies
are followed.
The base budget for 2009, approved by the Company's board of directors
in December 2008, included only those expenditures and commitments to
maintain the value of our investment in mineral properties and capital
assets and to move the Project through EIA approval. Our original
budgeted expenditures for 2009 for mineral properties and capital
assets totaled $60 million, consisting of $31 million for the final
installment payments for long-lead equipment, transportation and
storage costs, $10 million to complete Recea resettlement site and
begin construction of Piatra Alba, with the balance of $19 million for
engineering and Romanian overhead costs (which includes the cost to
maintain the Company's mining license).
As at March 31, 2009, the Company has $50.1 million in cash and cash
equivalents. Remaining expenditures for the Project total $60 million
through the balance of the year, including corporate overheads.
Therefore the Company will require additional capital in 2009.
No additional work is planned on the Bucium property until the
exploration license is converted to an exploitation license and the
Rosia Montana EIA is approved. The government has indicated that a
decision on the conversion of the Bucium exploration to exploitation
license will not be made until a decision on the Rosia Montana Project
is made.
Purchase of Capital Assets 3 months ended March 31, in thousands of Canadian dollars 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Resettlement site development costs $ 2,120 $ 1,313 Investment in long-lead-time equipment 6,806 861 Other 30 20 --------------------------------------------------------------------------- Total investment in capital assets $ 8,956 $ 2,194 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Depreciation and disposal - expensed $ 63 $ 77 Depreciation and disposal - capitalized to mineral properties $ 131 $ 130
As at March 31, 2009, all houses in the
Recea resettlement site in Alba Iulia were under construction out of
which 55 houses were in the process of being handed over to the
property owners. Infrastructure was completed in the third quarter of
2008, and the Company donated site infrastructure to the Alba County
Council.
We continue to make the installment payments for long-lead-time mill
equipment orders which are proceeding, subject to satisfying our
quality assurance criteria. The Company expects to make $15.9 million
in long-lead-time equipment payments in the remainder of 2009 at which
point we would have made all payments for the long-lead equipment and
own the mill equipment outright. The plan is to transport and store
completed equipment at a central location, which should cost an
additional $3.6 million.
Cash Flow Statement
Liquidity and Capital Resources
Our only sources of liquidity until we receive our environmental
permits for Rosia Montana are our cash balance, bridge financing,
exercise of stock options outstanding, and the equity markets. We
updated the estimated cost to completion for construction of the
Project in first quarter 2009 to US$876 million, excluding working
capital and excluding sunk costs of approximately US$90 million for
surface rights, $13 million for engineering and project management and
US$44 million for long-lead-time mill equipment. Our updated cost
esstimate also reflects higher operating costs but these are more than
offset by expected higher gold prices which result in improved cash
margins and therefore project returns and faster payback. The estimated
total cash cost(1) to produce gold over the first five years is
estimated at US$272 per ounce and is expected to average US$335 per
ounce over the life of the Project.
To complete the development of the Project, the Company will need
additional external financing of approximately US$1 billion, to fund
capital costs of US$876 million and interest, financing and corporate
costs of US$124 million, comprised of an estimated debt (approximately
75%) and equity (approximately 25%) financing. The ability to develop
Rosia Montana hinges on our ability to raise the necessary financing
for construction. If we were unable to raise the required funds, we
would seek strategic alternatives to move the Project toward
development.
Having restarted project financing planning during the third quarter
2008, management has developed a financing plan that assumes neither
the conventional bank debt market nor the bond market will be available
in time to meet the Company's financing needs. Management has been
advised by its financial advisors that while financing the Project will
be challenging due to the financial crisis, financing from government
agencies and non traditional lenders should be available even in the
current environment because of the economic and other benefits
resulting from the Project.
As at March 31, 2009, we had cash and cash equivalents of $50.1 million
compared to $72.2 million at December 31, 2008. Substantially all of
these amounts are invested in government guaranteed investments. The
Company's 2009 updated budgeted expenditures totals $85 million of
which $60 million remains to be spent over the balance of the year;
therefore the Company will require additional capital in 2009.
For mineral properties and capital assets, the 2009 updated budgeted
expenditure totals $72 million and includes expenditures and
commitments to maintain the value of our investment in mineral
properties and capital assets, to move the Project through EIA
approval, and additional expenditures for engineering, legal and
communications costs approved during the first quarter. Budgeted
corporate expenditures are $13 million.
Once the EIA is approved, the activity level will increase, including
completing the acquisition of remaining surface rights, development of
a control estimate, payment of land use taxes and other payments
required to obtain construction permits. These additional activities
are expected to cost approximately US$150 million of which
approximately US$82 million would be required to advance the Project to
the point of receipt of construction permits (subject only to the
payment of various land taxes). These activities can only commence once
additional financing is raised.
A special shareholder meeting was held in March 2009 to amend the
Company's Shareholder Rights Plan to provide greater flexibility and
certainty that future equity offerings are successful during this
period of global financial and economic crisis.
The Company manages its foreign currency risks through matching its
expected foreign denominated expenditures with foreign currency
investments. The Company has not entered into any derivatives hedging
activities. The Company maintains Canadian dollar investments to fund
corporate costs while most investments are denominated in either US
dollars or Euros to match planned foreign currency expenditures. The
Company incurs foreign currency gains and losses on those foreign
denominated investments as the currencies move against each other.
Accordingly, the Company will continue to experience foreign exchange
gains and losses as long as it maintains foreign currency investments.
(1) Total cash cost is a non-GAAP financial measure. Total cash costs
represent all costs absorbed into inventory, plus royalties and
production taxes, less by-product revenues and exclude amortization and
accretion.
Based on management's knowledge and experience of the financial
markets, the Company believes the following movements are
"reasonably possible" over a "typical" three month
period. The current global financial crisis has resulted in dramatic
interest rate, commodity and currency volatility. The Company does not
view these market conditions as "typical" and therefore the
effect of interest rate changes and currency valuation changes on net
income may be more dramatic than deemed "reasonably
possible". Nonetheless, the Company has taken steps to reduce its
risks as discussed above.
- Cash and cash equivalents include deposits which are at floating
interest rates. Sensitivity of cash and cash equivalents to a plus or
minus 1% change in earned interest rates would affect net income by
$0.1 million.
- The Company holds significant balances in foreign currencies, and
this gives rise to exposure to foreign exchange risk. Sensitivity to a
plus or minus 1% change in foreign exchange rates would affect net
income by $0.3 million.
The Company's objective when managing capital is to safeguard its
accumulated capital in order to fund development of its Rosia Montana
Project. The Company manages its capital structure and makes
adjustments to it based on the level of funds on hand and anticipated
future expenditures. While the Company expects that it will be able to
obtain equity, long-term debt and/or project-based financing sufficient
to build and operate the Rosia Montana Project, there are no assurances
that these initiatives will be successful. To safeguard capital and to
mitigate currency risk, the Company invests its surplus capital in
highly liquid, highly rated financial instruments that reflect the
currency of the planned expenditure.
Working Capital
As at March 31, 2009, we had working capital of $7.4 million versus
$29.2 million as at December 31, 2008. The decrease in working capital
in first quarter 2009 relates to the loss incurred during the period,
installment payments on capital assets and investments in mineral
properties. As at March 31, 2009, we had current liabilities of $45.9
million of which $31.1 million relates to our resettlement obligations
stemming from the acquisition of homes in the Project area. With the
majority of resettlement homes for the Recea resettlement site
scheduled for handover during the second and third quarter 2009, our
current obligation will decrease to $5.3 million by September 30, 2009,
as the handover process unfolds, thereby increasing our working capital
balance.
Net Change in Non-Cash Working Capital
The net change in operating non-cash working capital increased for the
three-months ended March 31, 2009 compared to the same period in 2008
due to an increase in payables and accrued liabilities.
The net change in investing non-cash working capital for the
three-months ended March 31, 2009 is consistent with that of the same
period in 2008. However, during the period, the Company collected $3
million of VAT receivable from the Romanian government, which was more
than offset by the decrease in accrued liabilities of $6.6 million for
long-lead-time equipment installment payments.
Related Party Transactions
The Company paid $Nil (2008 - $6 thousand) during the first quarter to
a director of the Company for consulting services provided to the
Company.
In December 2004, the Company loaned a total of US$971 thousand to the
four minority shareholders, who hold an aggregate of 20 percent of the
shares of RMGC, to facilitate a statutory requirement to increase
RMGC's total share capital. The loans are non-interest bearing and are
to be repaid as and when RMGC distributes dividends to its shareholders.
The loans and related minority interest contribution have been offset
on the balance sheet until such time as the loans are repaid. Once the
loans are repaid the minority interest component will be reflected on
the balance sheet.
Resettlement Liabilities
During the fourth quarter of 2006, the Company recommenced purchasing
homes in the Project area. Residents had two choices. They could either
choose to take the sale proceeds and move to a new location of their
choosing or they could exchange their properties for a new property to
be built by the Company at one of the two new resettlement sites. At
March 31, 2009, the Company had accrued resettlement liabilities
totaling $31.1 million (December 31, 2008 - $30.2 million), which
represents the cost of building the new homes for the local residents
and delay penalties.
Under the original contracts, the Company was required to deliver homes
by August 1, 2008, a date which was not met. As a result, the Company
either signed extension agreements or will deliver the new homes within
the penalty period for the 125 residents who chose the Recea
resettlement site option in Alba Iulia. All 24 property owners who
chose the Piatra Alba resettlement site have signed a three year
extension contract. As a result of the delay in delivery of homes, the
Company is accruing a penalty of 9% (for Recea) and up to 20% (for
Piatra Alba) of the agreed upon unpaid property value per year of delay
as required by the agreement including all amendments.
As at March 31, 2009, the Company has accrued $1.1 million (December
31, 2008 - $1.2 million) representing its total estimated delay
penalty. During the three-month period ended March 31, 2009, the
Company paid $0.1 million of delay penalties (2008 - $Nil).
Contractual Obligations
The Company, through its wholly owned subsidiary Rom Aur SRL ("Rom
Aur"), holds an exploration license with respect to the Baisoara
property in Western Romania. The license is for an initial term of 5
years and expires in July 2011. The Company is obligated to spend
US$3.2 million over the term of the license. Field work commenced in
the fourth quarter of 2006, and a total of $422 thousand has been spent
through March 31, 2009. In 2008, due to the delay in the Rosia Montana
permitting process, the Company reduced the exploration expenditure for
Baisoara to a level required to maintain the license and permit in good
standing.
The Company and its subsidiaries have a number of agreements with
arm's-length third parties who provide a wide range of goods and
services which totaled $5.1 million at March 31, 2009 (December 31,
2008 - $6.6 million). Typically, the service agreements are for a term
of not more than one year and permit either party to terminate for
convenience on notice periods ranging from 15 to 90 days. Upon
termination, the Company is required to pay for services rendered and
costs incurred to the date of termination.
During 2007, the Company entered into purchase agreements for
long-lead-time equipment, the cost of which is to be paid over three
years beginning 2007. As at March 31, 2009 outstanding commitments
under such agreements totaled $15.9 million (December 31, 2008 - $27.7
million). No further long-lead-time equipment orders are expected to be
placed until the EIA is approved; however, the reported commitment
expressed in Canadian dollars will fluctuate as currencies fluctuate on
the foreign denominated obligations.
The following is a summary of contractual commitments of the Company
including payments due for each of the next five years and thereafter:
2013 and Total 2009 2010 2011 2012 thereafter --------------------------------------------------------------------------- --------------------------------------------------------------------------- Baisoara exploration license $ 3,590 $ 128 $ 800 $ 1,641 $ 1,022 $ - Resettlement 31,061 31,061 - - - - Goods and services 5,131 4,639 107 9 9 367 Long lead time equipment 15,943 15,913 30 - - - Rosia Montana exploitation license 2,360 236 236 236 236 1,416 Surface concession rights 1,046 19 25 25 25 952 Lease agreements 1,262 421 549 292 - - --------------------------------------------------------------------------- Total commitments $ 60,393 $ 52,417 $ 1,747 $ 2,203 $ 1,292 $ 2,735 --------------------------------------------------------------------------- --------------------------------------------------------------------------- The following is a summary of the long-lead-time equipment orders and the payment status: March 31, December 31, 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total purchase agreements: Grinding area systems $ 41,237 $ 41,237 Crusher facilities 3,923 3,923 Foreign exchange movement 10,288 9,681 ---------------------------------------------------------------------------- 55,448 54,841 Amount paid to date: Grinding area systems (29,686) (20,436) Crusher facilities (2,558) (1,896) Foreign exchange movement (7,261) (4,769) ---------------------------------------------------------------------------- Outstanding payment obligation $ 15,943 $ 27,740 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
New Accounting Pronouncements
Goodwill and Intangible Assets
The Canadian Institute of Chartered Accountants ("CICA")
issued accounting standard Section 3064 - Goodwill and Intangible
Assets which replaces Section 3062 - Goodwill and Other Intangible
Assets, Section 3450 - Research and Development and EIC27 - Revenues
and Expenditures during the Pre-operating Period. The new standard
provides guidance on the recognition, measurement, presentation and
disclosure of goodwill and intangible assets. This standard is
effective for interim and annual financial statements for fiscal years
beginning on or after October 1, 2008. The adoption of this standard
has no impact on the Company's financial statements.
Mining Exploration Costs
On March 27, 2009, the Emerging Issues Committee of the CICA approved
an abstract EIC-174, "Mining Exploration Costs", which
provides guidance on capitalization of exploration costs related to
mining properties in particular, and on impairment of long-lived assets
in general. The Company has applied this new abstract for the year
ended December 31, 2008 and there was no impact on its financial
statements as a result of applying this abstract.
Business Combinations, Consolidated Financial Statements and
Non-Controlling Interests
The CICA issued three new accounting standards in January 2009: Section
1582, "Business Combinations", Section 1601,
"Consolidated Financial Statements" and Section 1602,
"Non-Controlling interests". These new standards will be
effective for fiscal years beginning on or after January 1, 2011. The
Company is in the process of evaluating the requirements of the new
standards.
Section 1582, "Business Combinations" replaces section 1581,
"Business Combinations", and establishes standards for the
accounting for a business combination. It provides the Canadian
equivalent to IFRS 3 - Business Combinations. The section applies
prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period
beginning on or after January 1, 2011. Sections 1601,
"Consolidated Financial Statements", and 1602,
"Non-Controlling interests", together replace section 1600,
"Consolidated Financial Statements". Section 1601 establishes
standards for the preparation of consolidated financial statements and
applies to interim and annual consolidated financial statements
relating to fiscal years beginning on or after January 1, 2011. Section
1602 establishes standards for accounting for non-controlling interest
in a subsidiary in consolidated financial statements subsequent to a
business combination. It is equivalent to the corresponding provisions
of IFRS International Accounting Standard 27 - Consolidated and
Separate Financial Statements and applies to interim and annual
consolidated financial statements relating to fiscal years beginning on
or after January 1, 2011.
IFRS Changeover Plan Disclosure
The Canadian Accounting Standards Board (AcSB) has announced its
decision to replace Canadian generally accepted accounting principles
("GAAP") with International Financial Reporting Standards
(IFRS) for all Canadian Publicly Accountable Enterprises (PAEs).
The effective changeover date is January 1, 2011, at which time Canadian
GAAP will cease to apply for Gabriel Resources Ltd. and will be
replaced by IFRS. Following this timeline, the Company will issue its
first set of interim financial statements prepared under IFRS in the
first quarter of 2011, with one period of comparative information also
compiled under IFRS.
Management has developed a project plan for the conversion to IFRS
based on our current nature of operations. The conversion plan is
comprised of three phases: IFRS diagnostic assessment, implementation
and education, and completion of all integration system and process
changes. The Project is progressing as planned. Management is in the
process of finalizing phase one, IFRS diagnostic assessment, which
includes preliminary Canadian GAAP and IFRS comparison on key accounting
issues applicable to the Company and we have entered the early
education phase of our plan.
Due to anticipated changes in International Accounting Standards prior
to our transition to IFRS, we are not in a position to determine the
impact on our financial results. The most significant impact identified
to date is the expanded presentation and disclosures required.
Disclosure requirements under IFRS generally contain more breadth and
depth than those required under Canadian GAAP and therefore, will
result in more extensive note references.
CEO/CFO Certification
The Company's Chief Executive Officer and Chief Financial Officer are
responsible for establishing and maintaining disclosure controls and
procedures (DC&P) and internal control over financial reporting
(ICFR), as those terms are defined in National Instrument 52-109
Certification of Disclosure in Issuers' Annual and Interim Filings, for
the Company.
Our CEO and CFO certify that, as at March 31, 2009, the Company's
DC&P have been designed effectively to provide reasonable assurance
that material information relating to the Company is made known to them
by others, particularly during the period in which the interim filings
are being prepared; and information required to be disclosed by the Company
in its annual filings, interim filings or other reports filed or
submitted by it under securities legislation is recorded, processed,
summarized and reported within the time periods specified in securities
legislation. They also certify that the Company's ICFR have been
designed effectively to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the Canadian GAAP.
The control framework the Company's CEO and CFO used to design the
Company's ICFR is COSO.
There is no limitation on scope of design as described in paragraph 5.3
of NI 52-109. There has been no change in the Company's ICFR that
occurred during first quarter 2009 which has materially affected, or is
reasonably likely to materially affect, the Company's ICFR.
Outstanding Share Data
The Company's fully diluted share capital as at the report date was:
Outstanding Share Data Outstanding --------------------------------------------------------------------------- --------------------------------------------------------------------------- Preferred shares Nil Common shares 255,451,084 Common stock options 23,825,945 Common stock warrants 1,125,000 Deferred share units - common shares 1,167,794 --------------------------------------------------------------------------- Fully diluted share capital 281,569,823 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
Proven and Probable Mineral Reserves
The Company maintains an 80 percent economic interest in the Rosia
Montana Project which at year end 2008, has aggregate proven and
probable reserves as follows, calculated using a gold price of $735 per
ounce:
------------------------------------------- Grade (g/t) In Situ (Ounces) --------------------------------------------------------------------------- Reserve Category Tonnes Gold Silver Gold Silver --------------------------------------------------------------------------- --------------------------------------------------------------------------- Proven 112,455,000 1.63 9.0 5,893,000 32,540,000 Probable 102,476,000 1.27 4.6 4,184,000 15,156,000 --------------------------------------------------------------------------- Total 214,931,000 1.46 6.9 10,077,000 47,696,000 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
John Marek, P.Eng., is the qualified person
responsible for calculating the reserve estimate set forth in the table
above.
Forward-Looking Statements
Certain statements included herein, including capital costs estimates,
sustaining capital and reclamation estimates, estimated production and
total cash costs of production, future ability to finance the Project
and other statements that express management's expectations or
estimates regarding the timing of completion of various aspects of the
Projects' development or of our future performance, constitute
"forward-looking statements" within the meaning of the United
States Private Securities Litigation Reform Act of 1995 and Canadian
securities legislation. The words "believe", "expect",
"anticipate", "contemplate", "target",
"plan", "intends", "continue",
"budget", "estimate", "may",
"will", "schedule", and similar expressions
identify forward-looking statements. Forward-looking statements are
necessarily based upon a number of estimates and assumptions that,
while considered reasonable by management, are inherently subject to
significant business, economic and competitive uncertainties and
contingencies. In particular, the Management's Discussion and Analysis
includes many such forward-looking statements and such forward-looking
statements involve known and unknown risks, uncertainties and other
factors that may cause the actual financial results, performance or
achievements of the Company to be materially different from its
estimated future results, performance or achievements expressed or
implied by those forward-looking statements and its forward-looking
statements are not guarantees of future performance. These risks,
uncertainties and other factors include, but are not limited to:
changes in the worldwide price of precious metals; fluctuations in
exchange rates; legislative, political or economic developments
including changes to mining and other relevant legislation in Romania;
operating or technical difficulties in connection with exploration,
development or mining; environmental risks; the speculative nature of
gold exploration and development, including the risks of diminishing
quantities or grades of reserves; and the Company's requirements for
substantial additional funding.
While Gabriel may elect to, Gabriel is under no obligation to and does
not undertake to update this information at any particular time, except
as required by law.
Gabriel Resources Ltd. Interim Consolidated Financial Statements (Unaudited) For the period ended March 31, 2009 Consolidated Balance Sheets As at March 31, 2009 and December 31, 2008 (Unaudited and expressed in thousands of Canadian dollars) 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 50,093 $ 72,233 Accounts receivable 2,167 5,221 Prepaid expenses and supplies 1,046 769 ---------------------------------------------------------------------------- 53,306 78,223 Restricted cash (note 3) 138 153 Capital assets (note 4) 53,437 44,675 Mineral properties (note 5) 415,737 407,084 ---------------------------------------------------------------------------- $ 522,618 $ 530,135 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities Current Liabilities Accounts payable and accrued liabilities $ 14,844 $ 18,843 Resettlement liabilities (note 6) 31,061 30,208 ---------------------------------------------------------------------------- 45,905 49,051 Other Liabilities (note 7) 4,008 3,065 ---------------------------------------------------------------------------- 49,913 52,116 ---------------------------------------------------------------------------- Shareholders' Equity Capital stock (note 9) 560,056 560,052 Contributed surplus (note 12) 16,702 15,051 Deficit (104,053) (97,084) ---------------------------------------------------------------------------- 472,705 478,019 ---------------------------------------------------------------------------- $ 522,618 $ 530,135 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Nature of operations and going concern (note 1) Minority interest (note 8(b)) Commitments and contingencies (note 17) The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Loss and Deficit For the three-month periods ended March 31, 2009 and 2008 (Unaudited and expressed in thousands of Canadian dollars, except per share data) 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Expenses Corporate, general and administrative $ 4,163 $ 1,989 Stock based compensation (note 7 & 11) 2,342 396 Project financing costs 150 22 Amortization 63 77 ---------------------------------------------------------------------------- 6,718 2,484 ---------------------------------------------------------------------------- Other expense (income) Interest (64) (1,343) Foreign exchange loss (gain) 315 (12,111) ---------------------------------------------------------------------------- Loss (income) for the period 6,969 (10,970) Deficit - beginning of period 97,084 92,989 ---------------------------------------------------------------------------- Deficit - end of period $ 104,053 $ 82,019 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Loss (earnings) per share Basic and diluted $ 0.03 $ (0.04) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted average number of shares Basic 255,450 254,898 Diluted 255,450 256,410 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Consolidated Statements of Comprehensive Loss For the three-month periods ended March 31, 2009 and 2008 (Unaudited and expressed in thousands of Canadian dollars) ---------------------------------------------------------------------------- Comprehensive loss (income) $ 6,969 $ (10,970) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash Flows For the three-month periods ended March 31, 2009 and 2008 (Unaudited and expressed in thousands of Canadian dollars) 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash flows from (used in) operating activities Income (loss) for the period $ (6,969) $ 10,970 Items not affecting cash Amortization 63 77 Stock-based compensation 2,342 396 Unrealized foreign exchange loss (gain) on cash and cash equivalents 129 (11,312) ---------------------------------------------------------------------------- (4,435) 131 DSU cash settlement - (52) Net changes in non-cash working capital (note 18) 2,598 (592) ---------------------------------------------------------------------------- (1,837) (513) ---------------------------------------------------------------------------- Cash flows provided by (used in) investing activities Decrease (increase) in short-term investments and restricted cash 15 (10,180) Development and exploration expenditures (7,311) (13,841) Purchase of capital assets (8,956) (2,194) Net changes in non-cash working capital (note 18) (3,848) (3,370) ---------------------------------------------------------------------------- (20,100) (29,585) ---------------------------------------------------------------------------- Cash flows from (used in) financing activities Proceeds from the exercise of stock options 3 - ---------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (21,934) (30,098) Effect of foreign exchange on cash, cash equivalents, and non-cash working capital (206) 11,694 Cash and cash equivalents - beginning of period 72,233 147,244 ---------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 50,093 $ 128,840 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Supplemental cash flow information (note 18) The accompanying notes are an integral part of these consolidated financial statements
1. Nature of operations and going concern
Gabriel Resources Ltd. (the "Company") is a Canadian-based
resource company engaged in the exploration and development of mineral
properties in Romania and is presently developing its 80%-owned Rosia
Montana gold project (the "Project"). Since acquiring the
exploitation license, the Company has been focused on identifying and
defining the size of the four ore bodies, engineering to design the
size and scope of the Project, environmental assessment and permitting,
rescue archaeology and surface rights acquisitions.
The underlying value of the Company's mineral properties is dependent
upon the existence and economic recovery of such reserves in the future
and the ability of the Company to obtain all necessary permits and
raise long-term financing to complete the development of the
properties. In addition, the Project may be subject to sovereign risk,
including political and economic instability, changes in existing
government regulations, for example, a ban on the use of cyanide in
mining, re-designation of the Project area as a archeological site of
national importance, government regulations relating to mining which
may withhold the receipt of required permits or impede the Company's
ability to acquire the necessary surface rights, as well as currency
fluctuations and local inflation. The suspension of the EIA process by
the former Minister of Environment and Sustainable Development in
September 2007 demonstrates the significant risks that this Project
faces. These risks may adversely affect the investment and may result
in the impairment or loss of all or part of the Company's investment.
These consolidated financial statements have been prepared on the basis
of Canadian generally accepted accounting principles ("Canadian
GAAP") applicable to a 'going concern', which assume that the
Company will continue in operation for the foreseeable future and will
be able to realize its assets and discharge its liabilities in the
normal course of operations. As at March 31, 2009 the Company had no
sources of operating cash flows and does not have sufficient cash to
fund the development of the Project and therefore will require
additional funding which, if not raised, would result in the
curtailment of activities and project delays. As at March 31, 2009, the
Company has $50.1 million in cash and cash equivalents and will require
additional capital in 2009.
Management has prepared a financing plan that assumes neither the
conventional debt market nor the bond market will be available in time
to meet the Company's financing needs. The current global financial
crisis may cause the time line from the restart of the permitting
process until receipt of construction permits to be extended as the
Company may pursue certain activities sequentially that had previously
been planned to run in parallel or, alternatively, construction may not
begin immediately after receipt of construction permits if financing is
not complete.
There can be no assurances that the Company's activities will be
successful or sufficient and as a result there is significant doubt
regarding the "going concern" assumption and, accordingly,
the use of accounting principles applicable to a going concern. These
consolidated financial statements do not reflect adjustments that would
be necessary if the "going concern" assumption were not
appropriate. If the "going concern" assumption were not
appropriate for these consolidated financial statements, then
adjustments to the carrying values of the assets and liabilities, the
reported expenses and the balance sheet classifications, which could be
material, would be necessary.
2. Basis of presentation and new accounting policies
The accompanying interim consolidated financial statements have been
prepared in accordance with Canadian GAAP for the preparation of
interim financial information. Accordingly, they do not include all of
the information and disclosures required by Canadian GAAP for annual
consolidated financial statements. The accounting policies and methods
of computation used in the preparation of these unaudited interim
consolidated financial statements are the same as those described in
our audited consolidated financial statements and notes thereto for the
year ended December 31, 2008. To ensure comparability of financial
information, certain prior period amounts have been reclassified to
conform to the current year presentation.
In the opinion of management, the accompanying interim financial
statements include all adjustments considered necessary for fair and
consistent presentation of financial statements. These interim
consolidated financial statements should be read in conjunction with
the Company's audited annual consolidated financial statements and
notes for the year ended December 31, 2008.
Goodwill and Intangible Assets
The Canadian Institute of Chartered Accountants ("CICA")
issued accounting standard Section 3064 - Goodwill and Intangible
Assets which replaces Section 3062 - Goodwill and Other Intangible
Assets, Section 3450 - Research and Development and EIC27 - Revenues
and Expenditures during the Pre-operating Period. The new standard
provides guidance on the recognition, measurement, presentation and
disclosure of goodwill and intangible assets. This standard is
effective for interim and annual financial statements for fiscal years
beginning on or after October 1, 2008. The adoption of this standard
has no impact on the Company's financial statements.
Mining Exploration Costs
On March 27, 2009, the Emerging Issues Committee of the CICA approved
an abstract EIC-174, "Mining Exploration Costs", which
provides guidance on capitalization of exploration costs related to
mining properties in particular, and on impairment of long-lived assets
in general. The Company has applied this new abstract for the year
ended December 31, 2008 and there was no impact on its financial
statements as a result of applying this abstract.
Business Combinations, Consolidated Financial Statements and
Non-Controlling Interests
The CICA issued three new accounting standards in January 2009: Section
1582, "Business Combinations", Section 1601,
"Consolidated Financial Statements" and Section 1602,
"Non-Controlling interests". These new standards will be
effective for fiscal years beginning on or after January 1, 2011. The
Company is in the process of evaluating the requirements of the new
standards.
Section 1582, "Business Combinations" replaces section 1581,
"Business Combinations", and establishes standards for the
accounting for a business combination. It provides the Canadian
equivalent to IFRS 3 - Business Combinations. The section applies
prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period
beginning on or after January 1, 2011. Sections 1601,
"Consolidated Financial Statements", and 1602, "Non-Controlling
interests", together replace section 1600, "Consolidated
Financial Statements". Section 1601 establishes standards for the
preparation of consolidated financial statements and applies to interim
and annual consolidated financial statements relating to fiscal years
beginning on or after January 1, 2011. Section 1602 establishes
standards for accounting for non-controlling interest in a subsidiary
in consolidated financial statements subsequent to a business
combination. It is equivalent to the corresponding provisions of IFRS
International Accounting Standard 27 - Consolidated and Separate
Financial Statements and applies to interim and annual consolidated
financial statements relating to fiscal years beginning on or after
January 1, 2011.
New Accounting Pronouncements not yet adopted
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board (AcSB) has announced its
decision to replace Canadian generally accepted accounting principles
("GAAP") with IFRS for all Canadian Publicly Accountable
Enterprises (PAEs). The effective changeover date is January 1, 2011,
at which time Canadian GAAP will cease to apply for Gabriel Resources
Ltd. and will be replaced by IFRS. Following this timeline, the Company
will issue its first set of interim financial statements prepared under
IFRS in the first quarter of 2011. The Company is currently assessing
the impact of transition to IFRS on its consolidated financial
statements.
3. Restricted cash March 31, December 31, 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Restricted cash(1) $ 138 $ 153 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Restricted cash represents environmental guarantees for future clean up costs. 4. Capital Assets March 31, December 31, 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cost Office equipment $ 4,078 $ 4,069 Building 1,082 1,082 Vehicles 1,282 1,282 Leasehold improvements 215 215 Construction in progress(1) 50,882 41,956 ---------------------------------------------------------------------------- 57,539 48,604 ---------------------------------------------------------------------------- Less: Accumulated amortization Office equipment 2,706 2,566 Building 56 53 Vehicles 1,180 1,156 Leasehold improvements 160 154 Construction in progress(1) - - ---------------------------------------------------------------------------- 4,102 3,929 ---------------------------------------------------------------------------- Net book value Office equipment 1,372 1,503 Building 1,026 1,029 Vehicles 102 126 Leasehold improvements 55 61 Construction in progress(1) 50,882 41,956 ---------------------------------------------------------------------------- $ 53,437 $ 44,675 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Amounts included in construction in progress are not subject to amortization. Construction in progress includes the following amounts: March 31, December 31, 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Resettlement site development costs $ 11,951 $ 9,831 Long-lead-time equipment 38,931 32,125 ---------------------------------------------------------------------------- $ 50,882 $ 41,956 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 5. Mineral Properties Rosia Montana Bucium Baisoara Total ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance - December 31, 2007 $ 328,804 $ 10,375 $ 182 $ 339,361 Development costs 66,760 - - 66,760 Exploration costs 675 83 205 963 ---------------------------------------------------------------------------- Balance - December 31, 2008 396,239 10,458 387 407,084 Development costs(1) 8,446 - - 8,446 Exploration costs(1) 172 - 35 207 ---------------------------------------------------------------------------- Balance - March 31, 2009 $ 404,857 $ 10,458 $ 422 $ 415,737 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Mineral property additions of $8.7 million includes $1.4 million of non-cash items principally related to resettlement liabilities, stock based compensation, and amortization, therefore the net cash investment during the three-month period ended March 31, 2009 was $7.3 million.
The Company's principal asset is its 80%
direct ownership interest in a Romanian company, Rosia Montana Gold
Corporation ("RMGC"), which holds two mineral licenses in
Romania, being Rosia Montana and Bucium. Minvest S.A.
("Minvest"), a Romanian state-owned mining company, together
with three other private Romanian companies, hold a 20% interest in
RMGC, and RMGC holds the pre-emptive right to acquire the 20% minority
interest. RMGC is required to fund 100% of all expenditures related to
the exploration and development of these properties and holds a
preferential right to recover all funding plus interest from future
cash flows prior to the shareholders receiving dividends.
An exploitation license is held by RMGC as the titleholder in respect
of the Rosia Montana property. RMGC has the exclusive right to conduct
mining operations at the Rosia Montana property for an initial term of
20 years commencing in 1998, and thereafter with successive five-year
renewal periods.
RMGC holds an exploration license over the Bucium property. The license
was extended in 2004 and expired on May 19, 2007. The Company spent
US$3.4 million over the term of the license extension period. The
expiring exploration license can be converted into an exploitation
license upon submission and approval of a feasibility study. During
2007, the Company filed the necessary documentation to convert the
exploration license into an exploitation license and the Company is
awaiting response from the authorities on this item. No additional work
on Bucium's project economics is planned until the license is converted
from an exploration to an exploitation license and until the Rosia
Montana EIA is approved.
The Company, through its wholly owned subsidiary Rom Aur SRL ("Rom
Aur"), holds an exploration license with respect to the Baisoara
property in Western Romania. The license is for an initial term of 5
years and expires in July 2011. The Company is obligated to spend
US$3.2 million over the term of the license. Due to the delay in the
Rosia Montana permitting process, the Company has reduced the
exploration expenditure for Baisoara to a level required to maintain
the license and permit in good standing.
6. Resettlement liabilities
During the fourth quarter of 2006, the Company recommenced purchasing homes
in the Project area. Residents had two choices. They could either
choose to take the sale proceeds and move to a new location of their
choosing or they could exchange their properties for a new property to
be built by the Company at one of the two new resettlement sites. At
March 31, 2009, the Company had accrued resettlement liabilities
totaling $31.1 million (December 31, 2008 - $30.2 million), which
represents the cost of building the new homes for the local residents
and delay penalties.
Under the original contracts, the Company was required to deliver homes
by August 1, 2008, which was not met. As a result, the Company either
signed extension agreements or will deliver the new homes within the
penalty period for the 125 residents who chose the Recea resettlement
site option in Alba Iulia. All 24 property owners who chose the Piatra
Alba resettlement site have signed a three year extension contract. As
a result of the delay in delivery of homes, the Company is accruing a
penalty of 9% (for Recea) and up to 20% (for Piatra Alba) of the agreed
upon unpaid property value per year of delay as required by the
agreement including all amendments.
As at March 31, 2009, the Company has accrued $1.1 million (December
31, 2008 - $1.2 million) representing its total estimated delay
penalty. During the three-month period ended March 31, 2009, the
Company paid $0.1 million of delay penalties (2008 - $Nil).
7. Other liabilities Price per DSU's Common Share Deferred Share Units ("DSU") (a) (000's) (dollars) Value---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Outstanding - December 31, 2007 603 $ 1.97 $ 1,188 Granted 580 1.26 728 Settled (28) 1.82 (52) Change in fair value - - (109) ---------------------------------------------------------------------------- Outstanding - December 31, 2008 1,155 1.52 1,755 Granted 13 2.46 33 Change in fair value - - 1,015 ---------------------------------------------------------------------------- Balance - March 31, 2009 1,168 $ 2.40 $ 2,803 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Fidelity bonus and other benefits (b) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance accrued - December 31, 2007 $ 849 Additions 461 ---------------------------------------------------------------------------- Balance accrued - December 31, 2008 1,310 Foreign exchange movement (105) ---------------------------------------------------------------------------- Balance accrued -March 31, 2009 $ 1,205 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total Other Liabilities $ 4,008 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
(a) DSUs
The Company implemented a DSU Plan under which qualifying participants
receive certain compensation in the form of DSUs in lieu of cash. On
retirement, participants may redeem their DSUs for common shares of the
Company, cash, or a combination of common shares and cash. It is at the
holder's discretion as to whether he/she elects to settle the DSU in
cash or shares of Gabriel. If the holder elects to settle the DSU in
shares of Gabriel, the Company, at its sole discretion, can elect to
pay the amount in common shares either purchased from the open market,
or issued from treasury.
The change in the fair market value of the DSU liability has been
recorded in stock based compensation expense except for costs relating
to personnel working on projects in Romania, which are capitalized.
Three months ended March 31, Deferred Share Units ("DSUs") 2009 2008---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Expensed (recovered) $ 953 $ (124) Capitalized (capital reduction) $ 95 $ (16) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
(b) Fidelity Bonus
Under the Collective Bargaining Agreement between RMGC and its
employees, under certain conditions, employees of RMGC are entitled to
a bonus equal to one month of average gross salary when celebrating 3,
5, 10, 15, 20, and 25 years of uninterrupted service as well as other
benefits related to death benefits and termination of employment. As of
March 31, 2009, $1.2 million (December 31, 2008 - $1.3 million) has
been accrued for these benefits.
(c) Severance and Termination Costs
On December 4, 2007, in light of the suspension of the EIA review
process, the Company announced and enacted plans to scale back
activities. The Company accrued $2.1 million in costs related to the
retrenchment of 170 employees.
As at March 31, 2009 the Company paid $1.3 million in termination
benefits and anticipates paying the remaining balance of $0.9 million
during the second quarter 2009.
8. Related Party Transactions
The Company had related party transactions, with directors of the
Company or associated corporations, which were in the normal course of
operations and were measured at the exchange amounts as follows:
(a) The Company paid $Nil (2008 - $6 thousand) during the first quarter
to a director of the Company for consultation services provided to the
Company.
(b) In December 2004, the Company loaned a total of US$971 thousand to
the four minority shareholders of RMGC, who hold an aggregate of 20% of
the shares of RMGC, to facilitate a statutory requirement to increase
RMGC's total share capital. The loans are non-interest bearing and are
to be repaid as and when RMGC distributes dividends to its
shareholders.
The loans and related minority interest contribution have been offset
on the balance sheet until such time as the loans are repaid. Once the
loans are repaid the minority interest component will be reflected on
the balance sheet.
9. Capital Stock Authorized Unlimited number of common shares without par value Unlimited number of preferred shares, issuable in series, without par value Number of Common shares issued and outstanding shares (000's) Amount ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance - December 31, 2007 254,898 $ 558,277 Shares issued on the exercise of stock options (note 11) 551 1,209 Stock-based compensation - exercise of stock options (note 12) - 566 ---------------------------------------------------------------------------- Balance - December 31, 2008 255,449 $ 560,052 Shares issued on the exercise of stock options (note 11) 2 3 Transfer from contributed surplus - exercise of stock options (note 12) - 1 ---------------------------------------------------------------------------- Balance - March 31, 2009 255,451 $ 560,056 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The following is a reconciliation of the
numerator and denominator of loss (earnings) per share computations:
March 31, March 31, Loss (earnings) per share 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net loss (income) for the period $ 6,969 $ (10,970) Adjustment for diluted earnings - - ---------------------------------------------------------------------------- Net loss (income) for diluted earnings per share $ 6,969 $ (10,970) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted average number of common shares outstanding 255,450 254,898 Effect of dilutive securities - 1,512 ---------------------------------------------------------------------------- Diluted weighted average number of shares outstanding 255,450 256,410 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Loss (earnings) per share Basic $ 0.03 $ (0.04) Diluted $ 0.03 $ (0.04) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
For March 2009, the exercise of outstanding
options would be anti-dilutive in the loss per share calculation and
were therefore excluded. For March 2008, options to purchase 5.3
million common shares were excluded from the diluted earnings per share
computation because the options' exercise prices were greater than the
average market price of the common shares.
10. Share Purchase Warrants
As at March 31, 2009, the following share purchase warrants were issued
and outstanding:
Exercise Number of price warrants (dollars) Expiry date ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Warrants issued 1,125 $ 4.88 November 28, 2010 ---------------------------------------------------------------------------- Balance - March 31, 2009 1,125 $ 4.88 November 28, 2010 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
During the fourth quarter of 2006, the
Company entered into mandate letters with two international financial
institutions to arrange project debt financing for the development of
the Rosia Montana Project. The two institutions were to provide a
committed underwriting in an amount up to US$350 million. As a result
of the suspension of the EIA review process, the mandate letters
terminated during 2008 and 1.125 million warrants vested while 1.5
million warrants were cancelled. Each warrant has a four year term and
has an exercise price of $4.88. The Company continues to work with the
international financial institutions to secure a new agreement whereby the
institutions would arrange but not underwrite a bank facility.
The fair value of the warrants vested, being US$1.5 million, represents
their cash settlement value. The Company has accrued this amount in
accounts payable and accrued liabilities. It is at the holders'
discretion as to whether they elect to settle the warrants in cash or
shares of the Company.
11. Stock Options
The Incentive Stock Option Plan (the "Plan") authorizes the
Directors to grant options to purchase shares of the Company to directors,
officers, employees and consultants. The exercise price of the options
equals the five-day weighted average closing price prior to the option
allotment. The majority of options granted vest over three years and
are exercisable over five years from the date of issuance.
The Plan was amended on May 8, 2007 to allow for the maximum number of
common shares issuable under the Plan to equal 10% of the issued and
outstanding common shares of the Company at any point in time, and that
options once exercised would be re-endorsed into the pool of un-granted
options.
As at March 31, 2009, 2.8 million options are available for issuance
under the Plan (December 31, 2008 - 3.0 million).
As at March 31, 2009, common share stock options held by directors,
officers, employees and consultants are as follows:
Outstanding Exercisable ----------------------------------- ----------------------- Weighted Weighted average Weighted Range of average remaining average exercise Number of exercise contractual Number of exercise prices options price life options price (dollars) (thousands) (dollars) (Years) (thousands) (dollars) -------------- ----------------------------------- ----------------------- $ 1.18 - 2.00 15,437 $ 1.69 3.4 9,239 $ 1.63 2.01 - 3.00 5,254 2.51 3.3 2,791 2.53 3.01 - 5.00 2,085 4.47 2.8 1,508 4.49 ----------------------------------- ----------------------- 22,776 $ 2.13 3.3 13,538 $ 2.13 ----------------------------------- ----------------------- ----------------------------------- -----------------------
During the year ended 2008 and the
three-month period ended March 31, 2009, director, officer, employee
and consultants stock options were granted, exercised and cancelled as
follows:
Weighted average Number of exercise price options (dollars) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance - December 31, 2007 12,926 $ 2.44 Options granted 11,240 1.95 Options expired (279) 4.51 Options forfeited / cancelled (822) 2.99 Options exercised (551) 2.19 ---------------------------------------------------------------------------- Balance - December 31, 2008 22,514 2.16 Options granted 600 2.44 Options forfeited / cancelled (336) 4.31 Options exercised (2) 1.56 ---------------------------------------------------------------------------- Balance - March 31, 2009 22,776 $ 2.13 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The estimated fair value of stock options
is amortized over the period in which the options vest which is
normally three years. For those options which vest on a single date,
either on issuance or on meeting milestones (the "measurement
date"), the entire fair value of the vesting options is recognized
immediately on the measurement date.
The fair value of stock options granted to personnel working on
development projects is capitalized over the vesting period.
During 2008, the Company granted 3 million options with a fair value of
$2.6 million ($0.87 per share option) that vested and were charged to
Mineral Properties during the fourth quarter of 2008.
During the fourth quarter 2008, the Company granted 5 million options
one-third of which vested upon issuance with the remainder vesting upon
completion of certain milestones or under certain conditions of
termination. The estimated fair value of the unvested options will be
recognized and capitalized at the measurement date as the milestones
are achieved and the value can be reasonably measured. As of March 31,
2009, the amount capitalized was $1.0 million ($0.60 per share option).
The valuation was calculated with the following assumptions: risk-free
interest rate of 1.51%, expected annual volatility of 84.58%, and
expected life of options of 4 years. The remaining fair value of
outstanding unvested options to be capitalized cannot be reasonably
measured as of March 31, 2009.
During the first quarter 2009, the Company granted 0.5 million options
which vest upon completion of certain milestones. The estimated fair
value of the unvested options will be recognized and capitalized at the
measurement date as the milestones are achieved and the value can be
reasonably measured. As of March 31, 2009, the amount capitalized was
$Nil.
Of the 0.6 million options issued in first quarter 2009, 0.1 million
will vest over a three-year period and the current period's valuation
was calculated with the following assumptions:
2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted average risk-free interest rate 1.32% Volatility of the expected market price of share 99% Weighted average expected life of options 2.7 years Weighted average cost per option $ 1.36 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
As of March 31, 2009, the remaining fair
value of outstanding measurable unvested options to be expensed is $3.4
million, to be capitalized is $1.5 million. For the three-month periods
ended March 31, 2009 and 2008, the fair value of stock options expensed
and capitalized is as follows:
2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Expensed $ 1,389 $ 520 Capitalized $ 263 $ 266 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
12. Contributed Surplus
The following table identifies the changes in contributed surplus for
the periods indicated:
Total ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance - December 31, 2007 $ 8,807 Stock-based compensation 6,810 Exercise of stock options (566) ---------------------------------------------------------------------------- Balance - December 31, 2008 15,051 Stock-based compensation 1,652 Exercise of stock options (1) ---------------------------------------------------------------------------- Balance - March 31, 2009 $ 16,702 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
13. Income Taxes
During the first quarter of 2008, the Company received a tax assessment
for $4.8 million related to a Romanian tax audit completed during the
first quarter of 2008. The Company, having accrued in 2006 its then
estimated tax liability, accrued an additional $3.7 million in respect
of the assessment, which arose from the disallowance of the application
of state tax incentives related to unrealized foreign exchange gains on
inter-company debt.
On April 10, 2008, the Company was advised by the Romanian tax
authorities that they were re-opening and auditing fiscal years 2003
and 2004 which had been previously audited.
On June 24, 2008, the Company received a tax assessment for $9.8
million related to another tax audit, for the years 2003 and 2004,
initiated and completed during the second quarter of 2008. This
assessment also arose from the disallowance of the application of state
tax incentives related to unrealized foreign exchange gains on
inter-company debt.
Based on the advice of its professional tax advisors, the Company
believes that the tax authorities have misapplied the legislation and
we are vigorously contesting the State's position through the courts.
14. Segmented Information
The Company has one operating segment: the acquisition, exploration and
development of precious metal projects located in Romania.
Geographic segmentation of capital assets and mineral properties is as
follows:
March 31, December 31, 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Romania $ 468,758 $ 451,280 Canada 416 479 ---------------------------------------------------------------------------- Total $ 469,174 $ 451,759 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
15. Financial Instruments
The recorded amounts for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair
values based on the short-term nature of those instruments.
The Company's risk exposures and the impact on the Company's financial
instruments are summarized below:
Credit risk
The Company's credit risk is primarily attributable to cash and cash
equivalents that are held in investment accounts with major Canadian
banks. As a consequence of the global financial crisis that began
impacting the financial markets in the summer 2007, the Company adopted
a strategy to minimize its credit risk by substantially investing in
sovereign debt issued by Canadian Agencies, Provinces and the Federal
Governments of Canada, the United States and France, with the balance
of cash being invested in short-term Term Deposits issued by major
Canadian banks.
The Company strives to maintain at least 85-90% of its cash and cash
equivalent investments in sovereign debt. With the ongoing global
financial crisis it is becoming increasingly difficult to source
short-term sovereign debt that meets the Company's credit risk criteria
and maturities schedule.
The Company is exposed to the credit risk of Romanian banks that hold
and disburse cash on behalf of its Romanian subsidiaries. The Company
manages its Romania bank credit risk by centralizing custody, control
and management of its surplus cash resources in Canada at the corporate
office and only transferring money to its Romanian subsidiary based on
immediate cash requirements, thereby mitigating exposure to Romania
banks.
The Company's credit risk is also attributable to value-added taxes
receivable. Value-added taxes receivable are collectable from the
Romanian government.
Liquidity risk
The Company has sufficient funds as at March 31, 2009 to settle current
and long-term liabilities.
Market risk
(a) Interest rate risk
The Company has significant cash balances and no interest-bearing debt.
As discussed above in the section entitled 'Credit Risk', the Company's
policy is to primarily invest excess cash in sovereign guaranteed
investments.
With the Company maintaining a short-term investment horizon, typically
less than 90 days, for its cash and cash equivalent balances, it is
highly susceptible to interest rate volatility as investments mature
and are rolled over.
With a short-term investment horizon and the intent to hold all
investments until maturity, the Company is only marginally exposed to
capital erosion should interest rates rise and cause its fixed yield
investments to devalue.
The Company's primary objective, with respect to cash and cash
equivalents, is to mitigate credit risk. The Company has elected to
forego yield in favour of capital preservation.
(b) Foreign currency risk
The Company's functional currency is the Canadian dollar and its
operations expose it to significant fluctuations in foreign exchange
rates. The Company has monetary assets and liabilities denominated in
Romanian Ron, United States dollars and European Union Euros, and is
therefore, subject to exchange variations against the functional and
reporting currency, the Canadian dollar.
The global financial crisis has led to dramatic volatility in the
foreign currency markets. The Company maintains cash and cash
equivalents in the currency of planned expenditures and is therefore
highly susceptible to market volatility as foreign cash balances are
revalued to the functional currency of the Company. Therefore, the
Company may report significant foreign exchange gains or losses as
significant market volatility continues.
Sensitivity analysis
The Company has designated its cash and cash equivalents as
held-for-trading, which are measured at fair value. As of March 31,
2009, the carrying amount of the financial instruments equals fair
market value. Based on management's knowledge and experience of the
financial markets, the Company believes the following movements are
"reasonably possible" over a "typical" three month
period. The current global financial crisis has resulted in dramatic
interest rate, commodity and currency volatility. The Company does not
view these market conditions as "typical" and therefore the
effect of interest rate changes and currency valuation changes on net
income may be more dramatic than deemed "reasonably
possible". Nonetheless, the Company has taken steps to reduce its
risks as discussed above.
- Cash and cash equivalents include deposits which are at floating
interest rates. Sensitivity of cash and cash equivalents to a plus or
minus 1% change in earned interest rates would affect net income by
$0.1 million.
- The Company holds significant balances in foreign currencies, and
this gives rise to exposure to foreign exchange risk. Sensitivity of
the foreign currency balance as of March 31, 2009 to a plus or minus 1%
change in foreign exchange rates would affect net income by $0.3
million.
16. Capital Management
The Company's objective when managing capital is to safeguard its
accumulated capital (cash on hand) in order to fund development of its
Rosia Montana Project. The Company manages its capital structure and
makes adjustments to it based on the level of funds on hand and
anticipated future expenditures.
Management has prepared a new financing plan that assumes neither the
conventional bank debt market nor the bond market will be available in
time to meet our financing needs. There are no assurances that this
initiative will be successful. To safeguard capital and to mitigate
currency risk, the Company strives to maintain at least 85-90% of its cash
and cash equivalent investments in sovereign debt that reflect the
currency of the planned expenditure.
17. Commitments and Contingencies
The following is a summary of contractual commitments of the Company
including payments due for each of the next five years and thereafter.
2013 and Total 2009 2010 2011 2012 thereafter ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Baisoara exploration license (note 5) $ 3,590 $ 128 $ 800 $ 1,641 $ 1,022 $ - Resettlement (note 6) 31,061 31,061 - - - - Goods and services(a) 5,131 4,639 107 9 9 367 Long lead time equipment(b) 15,943 15,913 30 - - - Rosia Montana exploitation license(c) 2,360 236 236 236 236 1,416 Surface concession rights(d) 1,046 19 25 25 25 952 Lease agreements(e) 1,262 421 549 292 - - ---------------------------------------------------------------------------- Total commitments $ 60,393 $ 52,417 $ 1,747 $ 2,203 $ 1,292 $ 2,735 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (a) The Company and its subsidiaries have a number of agreements with arms- length third parties who provide a wide range of goods and services which totalled $5.1 million at March 31, 2009 (December 31, 2008 - $6.6 million). Typically, the service agreements are for a term of not more than one year and permit either party to terminate for convenience on notice periods ranging from 15 to 90 days. Upon termination, the Company has to pay for services rendered and costs incurred to the date of termination. (b) During 2007, the Company entered into purchase agreements for long-lead- time equipment, the cost of which is to be paid over three years beginning 2007. The following is a summary of the long-lead-time equipment orders and the payment status: March 31, December 31, 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total purchase agreements: Grinding area systems $ 41,237 $ 41,237 Crusher facilities 3,923 3,923 Foreign exchange movement 10,288 9,681 ---------------------------------------------------------------------------- 55,448 54,841 Amount paid to date: Grinding area systems (29,686) (20,436) Crusher facilities (2,558) (1,896) Foreign exchange movement (7,261) (4,769) ---------------------------------------------------------------------------- Outstanding payment obligation $ 15,943 $ 27,740 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (c) Under the terms of the Company's exploitation mineral license for the Rosia Montana Project, an annual fee is required to be paid to maintain the license in good standing. The current annual fee is approximately $0.2 million. These fees are indexed annually by the Romanian Government and the license has 10 years remaining. (d) RMGC has approximately 42 years remaining on a concession agreement with the Local Council of Rosia Montana Commune by which it is granted exploitation rights in property located on and around the proposed Cirnic pit for an annual payment of $25 thousand. (e) The Company has entered into agreements to lease premises for various periods until May 31, 2011. The annual rent of premises consists of minimum rent plus realty taxes, maintenance and utilities.
The Company has an agreement with a
consulting firm to provide financial advisory services in relation to
defining and implementing the financing plan for development of the
Rosia Montana gold project. A success fee of up to US$4 million will be
payable on execution of definitive credit agreements and/or financing
documents for the senior, mezzanine and cost overrun debt facilities
for the Project. No amount has been accrued for these services.
18. Supplemental Cash Flow Information March 31, March 31, (a) Net changes in non-cash working capital 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating activities: Accounts receivable, prepaid expenses and supplies $ (146) $ (318) Accounts payable and accrued liabilities 2,666 (304) Unrealized foreign exchange loss on working capital 78 30 ---------------------------------------------------------------------------- $ 2,598 $ (592) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Investing activities: Accounts receivable, prepaid expenses and supplies $ 2,923 $ (1,443) Accounts payable and accrued liabilities (6,771) (1,517) Unrealized foreign exchange loss in non-cash working capital - (410) ---------------------------------------------------------------------------- $(3,848) $ (3,370) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (b) Exploration and development expenditures Balance sheet change in mineral properties $(8,653) $ (17,816) Reclassification of mineral properties from prepaid expenses - 25 Increase in resettlement liabilities 853 3,570 Non-cash depreciation and disposal capitalized 131 130 Stock based compensation capitalized 358 250 ---------------------------------------------------------------------------- Exploration and development expenditures per cash flow statement $(7,311) $ (13,841) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (c) Cash and cash equivalents is comprised of: Cash $11,128 $ 602 Short-term investments (less than 90 days) - weighted average interest of 0.44% (2008 - 3.5%) 38,965 128,238 ---------------------------------------------------------------------------- $50,093 $ 128,840 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
19.
Reclassification of Comparative Figures
Certain comparative figures have been reclassified to conform to the
current year's presentation.
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