TSX Trading Symbol: GBU
TORONTO, July 28 /CNW/ -
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Highlights
Financial performance
- Second quarter net loss was $3.4 million, or $0.02 per share.
Year-to-date net loss was $5.1 million, or $0.03 per share.
- Second quarter monthly expenditures averaged $3.1 million per month,
or $9.5 million in total during the second quarter and $18.1 million
for the first 6 months.
- A total of $7.7 million spent on our two development projects during
quarter, $14.4 million for the first 6 months.
Liquidity and capital resources
- Working capital at June 30, 2006 totaled $34.8 million.
- Our base budget for 2006 totals $30 million, excluding expenditures
included in our US$638 million project capital cost estimate.
- Project financing discussions are well underway with a goal of
completing a final term sheet for both the senior and subordinated
debt in the fourth quarter of 2006.
"With the submission of our Environmental Impact Assessment (EIA) and the
public consultation hearings well underway, we are making our way through the
approval process," said Alan R. Hill, President and Chief Executive Officer.
"With the first week of meetings in the local area complete, we are very
encouraged by the constructive nature of the meetings which will contribute to
Rosia Montana setting the standards for mining on a global scale".
Rosia Montana Project Development
Environmental Impact Assessment
- The EIA was completed by an independent team of specialists and
submitted to the Romanian Government in early May 2006.
- The Government announced in early June the Romanian public
consultation meetings schedule, with 14 meetings beginning
July 24th and ending August 25th.
- The Company will participate in at least one Hungarian public meeting
following the completion of the Romanian meetings in August, as
required under the Espoo Convention. The Hungarian meetings are
currently being finalized.
- The EIA and the public meeting schedule are available on our
web site.
- Questions and comments received during the public consultation
period, will be collected and reviewed by the Ministry of Environment
and Waters Management. The Ministry then refers to the Company all
questions and comments judged to require a response, which is
published as an Annex to the EIA. The Romanian Government makes the
final determination on EIA approval, which we expect in the fourth
quarter of 2006.
- The Alba Iulia Court of Appeal dismissed in early July the
application submitted by Alburnus Maior to suspend the assessment
process for the EIA for the Rosia Montana project.
Archaeological Discharge Certificate
- The Romanian Supreme Court (the "Supreme Court") has decided that the
series of lower court decisions that resulted in the annulment of
archaeological discharge certificate no. 4 ("Discharge Certificate")
were not conducted properly, and therefore have overturned the
previous annulment. The Supreme Court has referred the matter back to
a different lower court, the Brasov Court of Appeal, to be retried on
its merits. The retrial is scheduled for fall 2006.
- We already have the necessary discharge certificates for the area
required to begin construction in the spring of 2007.
Acquisition of Surface Rights
- Through July, a total of 55.5 percent of the homes in the affected
area are now either owned or under option for acquisition by the
Company.
- As of the date of this report, 96 percent of the property titles have
been clarified, the balance is expected to be completed by yearend.
Community Support
- On May 4th the local community held a march to demonstrate their
support for the project - over 500 residents joined in the 12km march.
- In early July ProRosia NGO held a fund raising barbeque attracting
over 600 people to raise funds to ensure the community voice is heard.
- In late July the Company held an open house and barbeque for the
residents of Rosia Montana to unveil the new town and home designs
attracting 2,000 people.
- Support for the community and project was also received from a group
of Romanian NGO's in early July. A total of 18 NGO's in favour of the
project issued a press release indicating: the project should proceed
if it complies with all laws; Neither Alburnus Maior nor Pro Rosia
Montana represent the interests of the local community; and that the
area of Rosia Montana is socially, economically and environmentally
disastrous and people do not have jobs and life is hard.
New Appointment
- On May 10, 2006 Yani Roditis was appointed to the position of
Chief Operating Officer. Mr. Roditis joined Gabriel as VP/Projects in
June 2005.
- Also on May 10, 2006 Alan R. Thomas joined our Board. Mr. Thomas
served as VP and CFO of ShawCor Ltd., an energy services firm until
his retirement earlier this year.
Updated Rosia Montana Project Timeline
- We maintain our target date to receive our construction permit in
winter 2006-2007. We remain on schedule for first gold pour in spring
of 2009.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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This Management Discussion and Analysis ("MD&A") provides a discussion
and analysis of the financial conditions 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-and-six-month periods ended
June 30, 2006 in comparison to the corresponding prior-year periods. The
MD&A is intended to supplement the Company's unaudited consolidated
financial statements and notes thereto ("Statements") for the
three-and-six-month periods ended June 30, 2006 which are included in
the quarterly report. You are encouraged to review the Statements in
conjunction with this document. This MD&A should be read in conjunction
with both the annual audited consolidated financial statements and the
related MD&A, which includes a detailed description of risks for the
two-year period ended December 31, 2005.
All amounts included in the MD&A are in Canadian dollars, unless
specified. Readers are encouraged to read our Forward-Looking Statement,
which is included at the end of this report in conjunction with the MD&A.
This report is dated as at July 28, 2006 and the Company's public
filings, including its most recent Annual Information Form dated
March 27, 2006 can be reviewed via the SEDAR website (www.sedar.com)
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.
Our vision is to create value for all of our stakeholders from
responsible mining. Our mission is to build Rosia Montana and, as a result, to
be a catalyst in Romania 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, open and
transparent communications, and operations and reclamation based on Best
Available Techniques -- all in the service of 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
The Environmental Impact Assessment ("EIA") was submitted, in both
Romanian and English to meet the requirements of the Romanian Government and
the international Espoo Convention, in early May 2006. In addition, while it
is not a legal requirement, the Company has elected to have the Non-Technical
Summary translated into Hungarian to assist affected parties in Hungary to
better participate in the public consultation process. The Government
announced in early June the Romanian public consultation meeting schedule,
with 14 meetings to be held from July 24, 2006 to August 25, 2006. Following
the meetings in Romania, the Company will participate in at least one meeting
in Hungary as required under the Espoo Convention. The Company is in the
process of finalizing the Hungarian meetings. The EIA and the public meeting
schedule are available on our web site.
On July 11, 2006 the Alba Iulia Court of Appeal dismissed the application
of the foreign funded Alburnus Maior to suspend the assessment process for the
EIA for the project. Alburnus Maior initiated its actions against the Romanian
Ministry of Environment and not Gabriel. With the Court's decision, the public
consultation process began as scheduled on July 24, 2006.
The questions and comments received during the public consultation
period, will be collected and reviewed by the Ministry of the Environment and
Waters Management. The Ministry then refers to the Company all questions or
comments judged to require a response, which is published as an Annex to the
EIA. The Romanian Government makes the final determination on EIA approval
which we expect in the fourth quarter 2006.
Surface Rights
During the second quarter, the focus of management was on the community.
Alan Hill, the Company's President and Chief Executive Officer met with about
half of the members of the local community to better understand their
individual situations. As of the date of this report, the Company owns
outright or has options to purchase 55.5% of the residential properties
located under the footprint of the project. In the past, one of the key steps
affecting surface rights acquisition has been property title clarification
within the footprint of the project. As of the date of this report, 96% of the
titles to properties have been clarified and the balance is expected to be
completed by yearend.
Through July, 129 residential property owners signed the options
agreement, a program which began in January 2006. This program introduces a
mechanism for the residents of the village of Rosia Montana to enter into
option agreements with respect to the acquisition of their properties, thereby
allowing us to continue the process of securing rights to the surface area
required to develop the Rosia Montana project with fair and equitable prices
ensured to property sellers, but without the significant cost outlay of an
outright purchase. This program was put together in accordance with World
Bank/IFC guidelines. The option program allows us to expedite the acquisition
of properties once we begin purchasing properties again.
There are a total of 433 homes, which the Company does not own or are not
covered by any form of agreement in the three separate zones of the project.
The three zones include the industrial zone, protected area and buffer zone of
the project. While the Company only needs 379 of the remaining homes, which
are located in the industrial zone needed to build the project, an offer to
purchase homes in the protected area and buffer zone was made to those
residents at their request. The focus of management's attention is to acquire
the homes in the industrial zone, particularly those homes required for
construction. As has happened in other areas, it is expected that some NGO's
will try to obstruct efforts to obtain surface rights. However, since not all
the homes in the industrial zone are necessary to start construction, this
issue will be managed in the context of the phases of mining.
In addition to the private properties required, the Company needs to
acquire about 35% of the project area owned by institutions including the
local administrations of Rosia Montana and Abrud, as well as certain churches
and local mining companies. The process to acquire the institutional
properties is well underway and we expect to have acquired or receive
concession rights to those properties before the end of the year.
Community Support
Support for the project in the Rosia Montana community is gaining
momentum. On May 4, 2006, over 500 residents of the village held a 12-km march
from Rosia Montana's village square to the town of Abrud. At the completion of
the march, the groups - including the ProRosia community NGO and the two major
mine unions - issued a statement calling on government encouragement for
private economic development, underlining the need for jobs and the region's
long history of mining. In early July ProRosia hosted a fund raising barbeque
which attracted over 600 people. In addition, the Company held an open house
and barbeque for the residents of Rosia Montana at the new town site on July
20, where 2,000 people gathered for the unveiling of the new town and home
designs.
Support for the community and the project was also received from a group
of Romanian NGO's in early July 2006. A total of 21 NGO's visited Rosia
Montana in early July 2006 and 18 NGO's issued a press release, two NGO's
being neutral on the project and one NGO being against the project. The main
conclusions of the 18 NGO's are that:
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1. If the Rosia Montana project complies with all applicable laws
then the project should proceed;
2. Neither Alburnus Maior nor ProRosia represent the interests of
the local community of Rosia Montana, but the interests of a
small group of people; and
3. The opinion shared by most participants was that the Rosia
Montana area is socially, economically and environmentally
disastrous and people do not have jobs and life is very hard.
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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. The area has been mined for at least two
thousand years and now provides many traces of the earlier activity. Over the
past five years we have been given several discharge permits to acknowledge
completion of the program. On July 11, we -- along with the Minister of
Culture and Religious Affairs -- won our appeal when the Romanian Supreme
Court (the "Court") decided that the series of lower court decisions that
resulted in the annulment of our archaeological discharge certificate no. 4
(the "Discharge Certificate") was not conducted properly, and as a result,
overturned the previous annulment. The Supreme Court has referred the matter
back to a different lower court, the Brasov Court of Appeal, to be retried on
its merits. We expect the retrial to be scheduled for the fall of this year.
The retrial should not delay the commencement of construction of the Rosia
Montana project as the Discharge Certificate relates to an area not required
for construction start up. We have all discharge certificates to begin
construction next spring.
Financing
At June 30, 2006, we have $34.8 million in working capital. Our rate of
expenditure was approximately $9.5 million for the quarter, or $3.2 million
per month, excluding working capital adjustments. This rate is higher than the
second quarter of 2005 when we spent $5.4 million for the quarter or an
average of $1.8 million per month, largely due to increased corporate activity
related to the progress of the project, higher communications costs and
completion of the project design and the EIA. The expenditure rate is expected
to decline to approximately $2.5 million per month over the next two quarters
with the submittal of the EIA but may rise as we acquire properties, begin
detailed engineering and ordering long-lead-time equipment and begin
construction of the new village at Piatra Alba.
Project financing discussions are well underway with the goal of
completing a final term sheet for both senior and subordinated debt in the
fourth quarter of 2006 to coincide with the expected timing of EIA approval.
It is not uncommon for financial institutions to require some form of hedging
in association with the provision of project debt finance.
The cost to construct the project is estimated at US$638 million based on
a definitive feasibility study updated in early 2006 and released concurrent
with our year end 2005 results. The estimated total cash cost to produce gold
over the first five years is expected to average US$181 per ounce and average
US$237 per ounce over the life of the project. The increase in both capital
and operating costs over the previous estimates from early 2003 reflects in
part significant cost pressures due to strengthening of currencies, higher raw
material costs, higher steel and fuel costs as well as higher wages. While the
updated cost estimate to build and operate the project contains contingencies,
if these trends continue, these contingencies may not be sufficient to absorb
the higher costs. Gabriel currently anticipates that it will need to raise
between US$700 and US$750 million to place the Rosia Montana project into
production. On the positive side, gold prices are at their highest level in 25
years, which overall have increased the return and the profitability of the
Rosia Montana project. The estimated internal rate of return of the project
based on US$500 gold is 18% and the estimated return increases to 26% at
US$600 gold. Also impacting the increase in capital was the fact that there
have been certain changes to the project to improve the design, to reduce
community impact and ensure compliance with changes in regulations. The
project has been designed to meet the highest environmental, social and
sustainable development standards.
New Appointment
On May 10, 2006 the Board of Directors appointed Yani Roditis,
VP/Projects, to the position of Chief Operating Officer. The appointment was
effective immediately and Mr. Roditis will continue to reside in Romania. Mr.
Roditis joined Gabriel in June 2005. Prior to joining the Company, he spent 11
years with a senior gold mining company, where he gained extensive
engineering, environmental permitting and mine development experience through
a number of positions at operating mines and development projects in the
United States, Peru, Chile and Argentina.
Also on May 10, 2006 Alan R. Thomas joined the Board of Directors of the
Company. Mr. Thomas served as Vice President and Chief Financial Officer of
ShawCor Ltd., an energy services firm headquartered in Toronto with
manufacturing and service operations around the world, until his retirement
earlier this year. Prior to serving with ShawCor, Mr. Thomas was CFO of
Noranda and brings extensive financing experience in mining and other capital
intensive industries. As a chartered accountant and graduate of the University
of Toronto, Mr. Thomas brings to the Company extensive experience in dealing
with controlled and Public Company Boards of Directors, both as a director and
as an officer.
Updated Project Timeline
The EIA was submitted in the second quarter of 2006, putting us on track
for approval in the fourth quarter of this year. The second key step is
archaeological clearance, we already have the necessary discharge certificates
for the area required to begin construction in the spring of 2007 but the
discharge for Cirnic open pit, one of the two open pits required for the first
eight years of operations is under suspension until retrial later this year.
We won our appeal in early July overturning a lower court decision to annul
the Cirnic discharge certificate and the retrial will begin this fall. We
would hope to have the discharge upheld before we begin construction next
spring but it is not mandatory. Once we acquire the balance of properties in
the village not already owned, we will have the surface rights, which is the
third key step in the permitting process. Our target date to receive our
construction permit is winter 2006-2007. We estimate that it will take
approximately two years to construct the mine, putting first pour of gold in
the spring of 2009.
Results of Operations
The results of operations expressed in Canadian dollars are summarized in
the following tables, which have been prepared in accordance with Canadian
Generally Accepted Accounting Principles:
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$ Canadian 2006 2006 2005 2005
2nd Quarter 1st Quarter 4th Quarter 3rd Quarter
Statement of loss
Loss 3,353,918 1,767,402 2,036,830 1,745,196
Loss per share 0.02 0.01 0.01 0.01
Balance Sheet
Working Capital 34,802,578 44,271,673 52,870,559 28,908,442
Total Assets 236,685,128 238,026,422 238,343,489 208,906,455
Statement of Cash
Flows
Investments in
exploration and
development
including working
capital changes 8,460,118 6,488,075 4,369,027 3,631,266
Cash flow from
financing
activities 1,190,195 360,570 30,539,400 575,684
$Cdn 2005 2005 2004 2004
2nd Quarter 1st Quarter 4th Quarter 3rd Quarter
Statement of loss
Loss 2,339,860 2,358,706 2,220,399 1,669,673
Loss per share 0.01 0.02 0.01 0.01
Balance Sheet
Working Capital 32,849,856 38,246,957 15,282,564 20,779,589
Total Assets 210,216,116 211,833,922 184,502,350 186,173,156
Statement of Cash
Flows
Investments in
exploration and
development
including working
capital changes 4,242,277 3,815,656 4,825,793 8,404,559
Cash flow from
financing
activities (247,499) 28,547,950 1,151,446 24,684,265
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Statement of Loss
Loss for the period
For the quarter ended June 30, 2006, we lost $3.4 million, or $0.02 per
share, compared to a loss of $2.3 million, or $0.01 per share, in the
year-earlier second quarter. For the six-month period ended June 30, 2006 we
lost $5.1 million, or $0.03 per share, compared to $4.7 million, or $0.03 per
share, in the year earlier period. Higher corporate, general and
administrative expenses and project financing costs partially offset lower
costs related to stock option compensation, severance costs and higher
interest income due to higher cash balances during 2006 compared to 2005. We
will continue to incur losses until commercial production commences and
revenues are generated.
Expenses
Corporate general and administrative
During the second quarter 2006, we incurred a total of $2.0 million for
corporate general and administrative expenses ("G&A"), compared to $1.1
million in the same quarter of 2005. Excluding the effect of the change in
value of the deferred share units ("DSU's"), costs increased by $876,592 due
primarily to higher communications, travel and public company costs. The year
earlier second quarter costs benefited from the reversal of an over accrual in
the amount of $318,000. For the six months ended June 30, 2006, G&A costs
increased to $3.7 million from $2.3 million in the same period of 2005.
Corporate general and administrative costs are anticipated to remain at
approximately the $1.5 million to $2.0 million level per quarter, excluding
the impact of DSU's.
DSU costs for the second quarter of 2006 increased G&A costs by $60,108,
while DSU costs decreased G&A costs by $24,207 in the year-earlier second
quarter. The DSU's are revalued each period end based on the closing share
price at period end, with the difference between the total value of the DSU's
at period end compared to the value at the end of the previous period charged
to the Statement of Loss. If the value is higher, as it was at the end of the
second quarter of 2006, the difference is charged to the Statement of Loss
increasing costs for the period. If the share price decreases as it did in
2005, the lower value of the DSU's is credited against costs during the period
decreasing costs. For the six-month period ended June 30, 2006, we expensed
$17,805 compared to $17,244 in the year earlier six-month period. Overall, for
2006 our share price increased (by $0.05) compared to last year, when our
share price increased from the close of the previous year end (by $0.02).
Stock option compensation
Stock option compensation for the second quarter 2006 decreased to
$725,366 compared to the second quarter of 2005 cost of $934,141, while stock
option compensation for the six-month period decreased to $1,099,381 compared
to $2,157,284 in the six-month period ended June 30, 2005. The lower expense
for the second quarter 2006 reflects the issuance of 925,000 options compared
to the year earlier second quarter when 1,985,000 options were issued.
Partially offsetting the reductions in option grants was the increased cost of
options due to the increase in share price and higher interest rates in 2006
as compared to the year earlier period.
For the six-month period the higher expense in 2005 relates to the
issuance of 3,460,000 options, of which 2,035,000 were replacement options in
the first half of last year compared to 1,125,000 options granted in the first
half of 2006, of which 600,000 were replacement options. The fair value of
stock options when granted is amortized to our Statement of Loss over the
period in which the options vest. For those options that vest on issuance, the
entire fair value of the options is expensed immediately.
Project financing costs
During the second quarter of 2006 we incurred $1.0 million in project
financing costs, including the accrual related to the termination fee related
to an agreement entered into in 2000 for advisory services. The Company is
negotiating with the financial institution to settle the agreement for less
than contractual termination fee. We did not incur any project financing costs
in 2005, as we had elected to put project financing activities on hold until
the project was further advanced. We restarted project financing activities in
January 2006, toward a goal of finalizing project financing term sheet in late
2006. Overall, we expect to incur $1.5 million for project financing
activities in 2006, including the termination fee, leading up to the
finalization of the term sheet. The activities include the completion of the
Risk Assessment Report for the banks, advisory services and term sheet
negotiation.
Interest income
Interest income for the second quarter of 2006 increased to $395,113,
compared to $217,637 in the same quarter of 2005, while interest income for
the six-month period increased to $822,770 compared to $284,052 in the year
earlier period. The higher interest income this year relates to the higher
cash balance due to an equity issue at the end of the first quarter of 2005
and the exercise of warrants in December 2005 and higher interest rates earned
on our cash balances. Quarterly interest income should decline as the year
progresses as our cash balance declines as we continue with permitting and
development activities.
Foreign exchange
For second quarter 2006, we reported a loss of $5,065, compared to a
$64,220 gain in second quarter 2005, while for the six-month period we
recorded a loss of $1,382 compared to a gain of $86,663 in the year earlier
period. We record foreign exchange gains or losses on US dollar cash balances
held. While a significant portion of our expenses are denominated in US
dollars and Romanian Ron, we only convert our Canadian dollar cash balance to
Ron at the time of payment. We would expect to continue to see foreign
currency gains and losses as we continue to hold US dollars.
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 to identify and define the size of the four ore bodies, for engineering
to design the size and scope of the project, for environmental assessment and
permitting, rescue archaeology as well as village surface rights acquisition.
Once we receive our construction permit, the nature and magnitude of the
expenditures will increase as we build roads, production facilities, pits,
tailings management facilities and associated infrastructure.
Mineral properties
We capitalize all costs incurred in Romania related to our two
development projects, Rosia Montana and Bucium, to mineral properties. We
invested $7.7 million on our two projects during second quarter 2006, compared
with $3.9 million during the same period in 2005. For the first six months of
2006 we invested $14.4 million compared to $8.0 million in the year earlier
period.
For the quarter ended June 30, 2006 expenditures increased in all the
major project areas. Community development activities increased to $1.4
million in 2006, compared to $0.7 million in second quarter 2005. The increase
reflects the implementation of the options program, which began in January
2006. During second quarter 2006, expenditures for permitting increased to
$2.2 million from $0.8 million in the year-earlier period, with the higher
expenditures due to the completion of the EIA and initiation of public
consultation. For second quarter 2006, expenditures on finance and
administration increased to $3.4 million from $1.5 million in the year-earlier
quarter, reflecting higher communications and legal costs. In addition, we
spent $0.5 million on engineering during 2006 with the completion of the
project design and cost update as compared to $0.4 million in 2005.
Exploration at Rosia Montana totaled $0.1 million for the second quarter of
2006, compared to $0.2 million in the year-earlier quarter. At Bucium, a
scoping study was completed during the first quarter to determine the
economics of developing the resource. The most economic option for Bucium is
to have the ore processed through the Rosia Montana facilities. Expenditures
at Bucium totaled $0.3 million during second quarter 2006 compared to $0.4
million in the year-earlier period. Mineral Properties also includes
capitalized depreciation in the amount of $0.2 million for second quarter 2006
compared to $0.2 million during the year-earlier second quarter, related to
capital assets used in Romania.
We would expect the mineral properties expenditure level for our
permitting activities to average between $2.0 and $2.5 million per month,
until expected approval of our EIA. Expenditures will rise as we acquire
properties, begin detailed engineering and ordering long-lead-time equipment
and begin construction of the new village at Piatra Alba.
Cash Flow Statement
Liquidity and Capital Resources
Our only sources of liquidity until we receive our environmental permits
for Rosia Montana, at which point we will be in a position to complete senior
and subordinate debt financing, are our cash balance, bridge financing,
exercise of warrants and stock options outstanding, and the equity markets.
With the exercise of warrants in fourth quarter 2005 adding $30 million to our
treasury, we are in a strong financial position through the permitting phase
of project development. We updated the cost to construct the project at year
end 2005. Capital costs increased from US$437 million to US$638 million,
reflecting design changes to accommodate stringent environmental laws and the
general increase in cost inflation witnessed by the entire mining industry.
To complete the development of the project, the Company will need additional
external financing. The ability to develop Rosia Montana hinges on our ability
to raise the necessary debt and equity financing for construction. If we were
unable to raise the required funds, we would seek strategic alternatives to
move the project toward development. We remain confident, however, that we
will be able to obtain the necessary financing to construct the mine on
reasonable commercial terms.
Short-term investments
The decrease in short-term investments in the quarter and six months
ended June 30, 2006 reflects the maturing of investments with tenors over 90
days. Some of the investments that matured were reinvested for periods less
than 90 days resulting in the reclassification to cash and cash equivalents.
Working capital
As at June 30, 2006 we had working capital of $34.8 million versus $44.3
million as at March 31, 2006 and $32.8 million as at June 30, 2005. The
decrease in working capital in the second quarter relates to the loss incurred
and the investment in capital assets and mineral properties during the second
quarter. In 2005, we issued 15 million units, each unit consisted of one
common share of Gabriel and one-half of one common share purchase warrant.
Each whole warrant entitles the holder to acquire one common share at a price
of Cdn$2.75 at any time on or before March 31, 2007. A total of 7.5 million
warrants were listed and posted for trading on the Toronto Stock Exchange
under the trading symbol GBU.WT, signifying the first time the Company has
listed warrants for trading.
Net change in non-cash working capital
The net change in operating non-cash working capital increased for the
quarter ended June 30, 2006, primarily reflecting the accrued advisory service
termination fee.
The net change in investing non-cash working capital decreased for the
quarter ended June 30, 2006, primarily as a result of payments made during the
quarter related to consultants for completion of the project design and cost
estimate and the completion of the EIA.
The decrease in financing non-cash working capital in second quarter 2005
results from the expensing of consulting costs incurred in 2003 related to a
future public financing, which was expensed as part of share issuance costs
accrued at the end of first quarter 2005.
Related Party Transactions
During the second quarter of 2006, the Company made an interest free loan
of $50,000 to an employee. The principal amount is repayable on June 15,
2010, but is forgivable in 2009 provided certain conditions are met. The
principle amount of the loan has been discounted for 3 years at the current
prime rate of 4.5%.
During second quarter 2006, our Romanian subsidiary RMGC paid $1,300
(2005 - $10,000) to a company owned by Minvest, a minority shareholder of
RMGC, for power costs related to RMGC's assay laboratory in Romania. For the
six months ended June 30, 2006 RMGC paid $8,500 (2005 - $23,000).
During second quarter 2006, we paid $7,958 (2005 - Nil) and $15,158 (2005
- Nil) for the six months ended June 30, 2006 (2005 - nil) to a director of
the Company for consulting services.
We subleased a portion of our leased premise to Alamos Gold Inc., on the
board of which our CEO, Alan R. Hill, serves as Chairman. The sublease
commenced March 1, 2004, before Mr. Hill joined the Company, and expired on
November 23, 2005. The amount of the sublease totaled $10,395 for second
quarter, and $20,790 for the six months ended June 30, 2005 and was included
as an offset to corporate general and administrative expenses.
In December 2004, the Company loaned a total of US$971,210 to the four
minority shareholders, 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.
Contractual Obligations
The Bucium exploration license obligates the Company to spend US$3.4
million over the term of its three year extension, which is expiring on May
19, 2007. As at June 30, 2006, the remaining expenditure commitment was
US$0.45 million (June 30, 2005 - US$1.4 million).
The Company has a number of agreements with arms-length third parties who
provide a wide range of services to it or RMGC. Typically, these 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. As at June 30,
2006, commitments under such agreements total $1.7 million (June 30, 2005 -
$8.0 million).
The Company has entered into a number of agreements for purchase and sale
relating to the acquisition of surface rights. The agreements bind the Company
to purchase properties. The total value of the properties committed to be
purchased as at June 30, 2006 is $358,000 (June 30, 2005 - $394,000). In
addition, during fourth quarter 2005 RMGC initiated a pre-sale agreement
program referred to as an options program for residents of the impacted area
whereby each resident could receive three percent of the value of their
properties in exchange for signing a pre-sale agreement. As at June 30, 2006,
the Company paid US$301,900, representing the 3 percent upfront payments which
represents US$10 million in commitments to purchase the properties. The
program is expected to cost approximately US$1.0 million during the first
three quarters of 2006, pursuant to the Promissory Agreements, committing the
Company to acquire approximately US$33 million in local properties in the
project area. The commitment is binding once the EIA is approved.
In addition to the above, the Company has other commitments in the normal
course of operations, which include annual licenses and building leases.
Subsequent to June 30, 2006, RMGC received an exploration license with respect
to the Baisoara property in Western Romania. The license is for a term of 5
years and expires in July 2011. The Company is obligated to spend US$3.3
million over the term of the license and has not conducted any exploration
activities on the property to date.
Romania Accession to European Union
In April 2005 Romania signed a Treaty of Accession with the European
Union ("EU") providing for Romania to join the EU on January 1, 2007 or
January 1, 2008. The final decision of the European Parliament to confirm the
entry date of Romania into the EU is scheduled following the release of the
September 2006 comprehensive monitoring report on the progress Romania has
made in its preparations for membership in the EU. The monitoring report
issued in May 2006 highlighted the progress made toward accession and
identified some technical issues that need to be addressed before the final
report is issued in September. None of the remaining technical issues relate
to mining activities.
<<
2006 Outlook
Our key objectives for 2006 are similar to those of 2005, which
include:
1. Finalizing and submitting our EIA to the Romanian Government,
which was completed in the second quarter;
2. Obtaining all archaeological discharges required to construct the
mine, in parallel with the approval of the EIA;
3. Signing up a majority of the residents of the village to the
pre-sale agreement before the approval of the EIA;
4. Continuously improving communications to all stakeholders; and
5. Finalizing project financing before approval of EIA.
>>
We made solid strides in meeting each of our five key objectives in the
first half of 2006; our goal is to build upon that success as the year
progresses to meet our construction and first pour schedule. The cost to
execute these five objectives should average $2.5 and $3.0 million per month
during the second half of this year, leaving us with between $20 and $25
million in working capital at the end of the year excluding any equity we may
raise to acquire surface rights, begin detailed engineering and order
long-lead-time equipment. The EIA has been submitted and the public
consultations schedule will take place from July 24th through August 25th in
Romania and at least one meeting will follow in Hungary. We have the
necessary archaeology discharges to begin construction in the spring of 2007,
so with the approval of our EIA, expected in the fourth quarter and the
completion of acquiring those properties required for commencement of
construction later this year we would be on track to receive our construction
permit in winter 2006/ 2007.
<<
Outstanding
Preferred shares Nil
Common shares 177,972,054
Common stock options 10,104,209
Common stock warrants 7,500,000
Deferred share units - common
shares 167,665
Fully diluted share capital 195,743,928
>>
Forward-Looking Statements
Certain statements included herein, including capital costs estimates,
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 Gabriel 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 Gabriel's requirements for substantial
additional funding.
Gabriel expressly disclaims any intention or obligation to update or
revise any forward-looking statements whether as a result of new information,
events or otherwise, except where required by law.
<<
Gabriel Resources Ltd.
Consolidated Balance Sheets
As at June 30, 2006 and December 31, 2005
(Unaudited and expressed in Canadian dollars)
-------------------------------------------------------------------------
2006 2005
$ $
Assets
Current assets
Cash and cash equivalents 30,336,905 25,306,083
Short-term investments 5,962,643 28,932,941
Accounts receivable (note 5(a)) 764,819 407,479
Prepaid expenses and supplies 1,135,749 826,586
---------------------------
38,200,116 55,473,089
Capital assets (note 2) 2,334,424 1,545,026
Mineral properties (note 3) 196,150,588 181,325,374
---------------------------
236,685,128 238,343,489
---------------------------
---------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 3,397,538 2,602,530
Other liabilities (note 4) 467,051 449,246
---------------------------
3,864,589 3,051,776
---------------------------
Shareholders' Equity
Capital stock (note 6) 287,161,701 284,986,949
Common share purchase
warrants (note 6(b) and 7) 1,950,000 1,950,000
Contributed surplus (note 9) 6,163,032 5,687,638
Deficit (62,454,194) (57,332,874)
---------------------------
232,820,539 235,291,713
---------------------------
236,685,128 238,343,489
---------------------------
---------------------------
Nature of operations and going concern (note 1)
Minority interest (note 5(e))
Commitments and contingencies (note 12)
Approved by the Board of Directors
"Michael Parrett" Director "Alan R. Hill" Director
The accompanying notes are an integral part of these
consolidated financial statements
Gabriel Resources Ltd.
Consolidated Statement of Loss and Deficit
For the three-and-six-month periods ended June 30, 2006 and 2005
(Unaudited and expressed in Canadian dollars)
-------------------------------------------------------------------------
3 months ended June 30, 6 months ended June 30,
2006 2005 2006 2005
$ $ $ $
Expenses
Corporate, general
and administrative 2,003,509 1,126,917 3,728,790 2,334,673
Stock option
compensation (note 8) 725,366 934,141 1,099,381 2,157,284
Project financing
costs 997,881 - 1,082,985 -
Reorganization
severance costs - 546,755 - 546,755
Amortization 17,210 13,904 31,552 30,569
----------------------------------------------------
3,743,966 2,621,717 5,942,708 5,069,281
----------------------------------------------------
Other income
(expense)
Interest 395,113 217,637 822,770 284,052
Foreign exchange (5,065) 64,220 (1,382) 86,663
----------------------------------------------------
390,048 281,857 821,388 370,715
----------------------------------------------------
Loss for the period 3,353,918 2,339,860 5,121,320 4,698,566
Deficit - Beginning
of period 59,100,276 51,210,988 57,332,874 48,852,282
----------------------------------------------------
Deficit - End of
period 62,454,194 53,550,848 62,454,194 53,550,848
----------------------------------------------------
----------------------------------------------------
Loss per share
(basic and diluted) 0.02 0.01 0.03 0.03
----------------------------------------------------
----------------------------------------------------
Weighted average
number of shares 177,719,221 161,412,866 177,454,113 154,037,175
----------------------------------------------------
----------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements
Gabriel Resources Ltd.
Consolidated Statements of Cash Flows
For the three-and-six-month periods ended June 30, 2006 and 2005
(Unaudited and expressed in Canadian dollars)
-------------------------------------------------------------------------
3 months ended June 30, 6 months ended June 30,
2006 2005 2006 2005
$ $ $ $
Cash flows used in
operating activities
Loss for the period (3,353,918) (2,339,860) (5,121,320) (4,698,566)
Items not affecting
cash
Amortization 17,210 13,904 31,552 30,569
Stock option
compensation 725,366 934,141 1,099,381 2,157,284
Deferred share
units 60,108 (24,207) 17,805 17,244
----------------------------------------------------
(2,551,234) (1,416,022) (3,972,582) (2,493,469)
Net changes in
non-cash working
capital (note 13) 1,288,994 346,859 642,015 201,777
----------------------------------------------------
(1,262,240) (1,069,163) (3,330,567) (2,291,692)
----------------------------------------------------
Cash flows used in
investing activities
Decrease/(increase)
in short-term
investments 20,964,907 (9,089,087) 22,970,298 (9,089,087)
Exploration and
development
expenditures (7,676,821) (3,901,694) (14,434,683) (7,965,376)
Purchase of
capital assets (431,235) (79,384) (1,211,481) (103,544)
Net changes in
non-cash working
capital (note 13) (826,540) (340,583) (513,510) (92,557)
----------------------------------------------------
12,030,311 (13,410,748) 6,810,624 (17,250,564)
----------------------------------------------------
Cash flows from
financing
activities
Proceeds from issuance
of capital stock,
net of issue costs 1,190,195 - 1,550,765 28,129,681
Net changes in
non-cash working
capital (note 13) - (247,499) - 170,770
----------------------------------------------------
1,190,195 (247,499) 1,550,765 28,300,451
----------------------------------------------------
Increase/(decrease)
in cash and cash
equivalents 11,958,266 (14,727,410) 5,030,822 8,758,195
Cash and cash
equivalents -
Beginning of
period 18,378,639 39,857,148 25,306,083 16,371,543
----------------------------------------------------
Cash and cash
equivalents -
End of period 30,336,905 25,129,738 30,336,905 25,129,738
----------------------------------------------------
----------------------------------------------------
Supplemental cash
flow information
(note 13)
The accompanying notes are an integral part of these
consolidated financial statements
Gabriel Resources Ltd.
Notes to Consolidated Financial Statements
For the three-and-six month periods ended June 30, 2006 and 2005
(Unaudited and expressed in Canadian dollars)
-------------------------------------------------------------------------
1. Nature of operations and going concern
Gabriel Resources Ltd. (the "Company") is a Canadian based resource
company committed to responsible mining and sustainable development
in the communities in which it operates. The Company 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"). The discovery was made in 1999, and since that time the
Company has raised approximately $285 million with most of the money
spent 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, rescue archaeology as well
as surface rights acquisitions. The Company is in the final stages of
permitting the project, which is expected in the fourth quarter of
2006. Once the Company receives the construction permit, the nature
and magnitude of expenditures will increase as it builds roads,
production facilities, pits, tailings management facilities and
associated infrastructure. At the Company's other licensed area,
Bucium, a scoping study was completed during the first quarter of
2006 to determine whether it contains economic reserves. It was
determined that one option for Bucium is to have the ore processed
through the Rosia Montana facilities.
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 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
stability, government regulations relating to mining which may delay
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. These may adversely affect the
investment and may result in the impairment or loss of all or part of
the Company's investment.
The Company 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 result
in project development delays. Management is of the opinion that
additional financing is available and may be sourced in time to allow
the Company to continue its planned activities in the normal course.
While it has been successful in the past, there can be no assurance
it will be able to raise sufficient funds in the future.
These consolidated financial statements have been prepared on the
basis of accounting principles 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. 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 would
be necessary in the carrying values of assets and liabilities, the
reported revenues and expenses, and the balance sheet classifications
used.
The accompanying interim consolidated financial statements are
prepared by management in accordance with Canadian generally accepted
accounting principles. Selected information and disclosures required
in notes to annual consolidated financial statements has been
condensed or omitted. 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, 2005. The interim consolidated financial statements have
been prepared following the same accounting policies and methods of
computation as the annual consolidated financial statements for the
year ended December 31, 2005.
2. Capital Assets
June 30, December 31,
2006 2005
$ $
--------------------------
Vehicles 1,275,597 1,355,364
Exploration and office equipment 3,117,672 1,933,519
Leasehold improvements 124,417 105,856
--------------------------
4,517,686 3,394,739
--------------------------
Less: Accumulated amortization
Vehicles 702,923 589,393
Exploration and office equipment 1,373,226 1,162,407
Leasehold improvements 107,113 97,913
--------------------------
2,183,262 1,849,713
--------------------------
Net book value
Vehicles 572,674 765,971
Exploration and office equipment 1,744,446 771,112
Leasehold improvements 17,304 7,943
--------------------------
2,334,424 1,545,026
--------------------------
--------------------------
3. Mineral properties
Rosia
Montana Bucium Total
$ $ $
---------------------------------------
Balance - December 31, 2004 157,626,166 6,830,973 164,457,139
Development costs 14,572,300 - 14,572,300
Exploration costs 790,069 1,505,866 2,295,935
---------------------------------------
Balance - December 31, 2005 172,988,535 8,336,839 181,325,374
Development costs 14,111,805 - 14,111,805
Exploration costs 340,530 372,879 713,409
---------------------------------------
Balance - June 30, 2006 187,440,870 8,709,718 196,150,588
---------------------------------------
---------------------------------------
The Company's principal asset is its 80% direct ownership interest in
a Romanian Company, Rosia Montana Gold Corporation ("RMGC"), which
holds two mineral licences in Romania being Rosia Montana and Bucium.
Minvest S.A. ("Minvest"), a Romanian state-owned mining company,
together with three other private Romanian companies, holds a 20%
interest in RMGC, and the Company holds the pre-emptive right to
acquire such 20% interest. The Company 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 at the Bucium property. The license
was extended in 2004 and expires May 19, 2007. The Company is obliged
to spend US$3.4 million over the term of the license extension
period. As at June 30, 2006, the remaining expenditure commitment was
approximately US$0.45 million (December 31, 2005 - US$0.8 million). A
scoping study was completed in the first quarter of 2006 to confirm
the economic potential of the resource. It was determined that one
option for Bucium is to have the ore processed through the Rosia
Montana facilities.
Subsequent to June 30, 2006, RMGC received an exploration license
with respect to the Baisoara property in Western Romania. The license
is for a term of 5 years and expires in July 2011. The Company is
obligated to spend US$3.3 million over the term of the license and
has not conducted any exploration activities on the property to date.
4. Other liabilities
As at June 30, 2006, 167,664.6 DSUs were valued as follows:
Price per
common
share Value
DSU $ $
----------- -----------
Outstanding - December 31, 2004 125,000.0 1.56 195,000
Granted 33,185.2 1.82 60,397
Change in value - - 193,849
----------- -----------
Outstanding - December 31, 2005 158,185.2 2.84 449,246
Granted 9,479.4 2.70 25,594
Settled for common shares
to be issued (125,000.0) 2.75 (343,750)
Change in value - - (7,789)
----------- -----------
Outstanding - June 30, 2006 42,664.6 2.89 123,301
DSU settled for common shares
to be issued 125,000.0 2.75 343,750
----------- -----------
Balance - June 30, 2006 167,664.6 467,051
----------- -----------
----------- -----------
The Company implemented a Deferred Share Unit Plan under which
qualifying participants may elect to receive certain compensation in
the form of deferred share units ("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. 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. During the second quarter, the Company settled 125,000 DSU
units for common shares of the Company at $2.75 per share to be
issued from treasury subsequent to quarter end..
The net period over period change in the value has been recorded in
corporate, general and administrative expense.
5. Related party transactions
The Company had related party transactions, with directors, officers
and employees of the Company or associated corporations, which were
in the normal course of operations and were measured at the exchange
amounts as follows:
(a) During the second quarter of 2006, the Company made an interest
free loan of $50,000 to an employee. The principal amount is
repayable on June 15, 2010, but is forgivable in 2009 if
certain conditions are met. The principle amount of the loan
has been discounted for 3 years at the current prime rate 4.5%.
(b) Power costs paid by RMGC to a company owned by a minority
shareholder of RMGC was $1,300 for the three months (2005 -
$10,000), and $8,500 for the six months ended June 30, 2006
(2005 - $23,000).
(c) The Company paid $7,958 (2005 - $nil) during the three months
and $15,158 for the six months ended June 30, 2006 (2005 -
$nil) to a director of the Company for consultation services
provided to the Company.
(d) During 2004 and 2005, the Company sublet a portion of its
office space to Alamos Gold Inc.. The sublease commenced
March 1, 2004 and ended November 23, 2005. Sublease revenue of
$10,395 was received in the three months and $20,790 was
received in the six months ended June 30, 2005 and was included
as an offset to corporate, general and administrative expenses.
Mr. Alan R. Hill, the President and Chief Executive Officer of
the Company as of May 10, 2005, is the Chairman of the Board of
Alamos Gold Inc.
(e) In December 2004, the Company loaned a total of US $971,210 to
the four minority shareholders, 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.
6. Capital stock
Authorized
Unlimited number of common shares without par value
Unlimited number of preferred shares, issuable in series, without
par value
Common shares issued and outstanding
Number of Amount
shares $
--------------------------
Balance - December 31, 2004 146,412,866 227,157,729
Shares issued from a public offering(b) 15,000,000 28,050,000
Less: Share issue costs - (1,870,319)
Shares issued on the exercise
of stock options 660,970 1,115,084
Stock-based compensation - exercise
of stock options - 534,455
Shares issued from the exercise of
share purchase warrants(a) 15,000,000 30,000,000
--------------------------
Balance - December 31, 2005 177,073,836 284,986,949
Shares issued on the exercise of
stock options (note 8) 780,418 1,550,765
Stock-based compensation - exercise
of stock options (note 9) - 623,987
--------------------------
Balance - June 30, 2006 177,854,254 287,161,701
--------------------------
--------------------------
(a) On December 6, 2005, Newmont Mining Corporation of Canada
Limited ("NMCCL"), a subsidiary of Newmont Mining Corporation,
exercised all 15 million common share purchase warrants for
proceeds of $30 million. NMCCL currently holds approximately
18.8% of the Company's issued and outstanding common shares.
(b) On March 31, 2005, the Company issued 15,000,000 units priced
at $2.00 per unit by way of a public offering for gross
proceeds of $30 million. Each unit consisted of one common
share and one half of one common share purchase warrant with an
exercise price of $2.75 and expiry date of March 31, 2007. Each
unit has been apportioned $1.87 to common share and $0.13 to
one half of one common share purchase warrant, resulting in an
assigned value of $28,050,000 to the 15,000,000 common shares
and an assigned value of $1,950,000 to the share purchase
warrants. The net proceeds of the offering were $28,129,681
after deducting a cash commission to the underwriters of
$1,350,000 plus various professional fees related to the
offering.
7. Share purchase warrants
(a) As at June 30, 2006, the following share purchase warrants were
issued and outstanding:
Number of Exercise
Warrants price Expiry date
---------------------------------------
Balance - December 31, December 31,
2004 15,000,000 2.00 2005
Warrants issued (note 6(b)) 7,500,000 2.75 March 31,
2007
Warrants exercised
(note 6(a)) (15,000,000)
-------------
Balance - June 30, 2006
and December 31, 2005 7,500,000
---------------------------------------
The 7,500,000 warrants expire March 31, 2007. If these warrants
are exercised in full, it will provide the Company with
$20.6 million.
The exercise of the outstanding share purchase warrants in the
loss per share calculation would be anti-dilutive.
(b) As part of the agreed upon compensation for undertaking a review
of the financeability of the Rosia Montana project, the Company
has agreed to issue, subject to certain conditions being met, a
number of share purchase warrants (the "Warrants") to a financial
institution in two tranches, A and B (respectively, the "Tranche
A Warrants" and the "Tranche B Warrants").
The Tranche A Warrants: (i) are issueable at a date to be agreed
upon by the Company and the financial institution; (ii) will be
in an amount equal to 0.8767% of the number of the Company's
outstanding common shares on the date of issuance; (iii) will
have an exercise price equal to the average closing price of the
Company's common shares on the Toronto Stock Exchange for the 10
days preceding the issuance; (iv) will be exerciseable as to 50%
upon issuance and as to 50% when the financial institution is
designated lead arranger for the financing of the Rosia Montana
project; and (v) will have a term of four years from the date of
issuance.
The Tranche B Warrants: (i) are issueable when the financial
institution is designated lead arranger for the financing of the
Rosia Montana project; (ii) will be in an amount equal to 0.4383%
of the number of the Company's outstanding common shares on the
date of issuance; (iii) will have an exercise price equal to the
average closing price of the Company's common shares on the
Toronto Stock Exchange for the 10 days preceding the issuance;
(iv) will be exerciseable upon issuance; and (v) will have a term
of four years from issuance.
The agreement with the financial institution can be terminated
prior to the issuance of the warrants and depending on the
circumstances of the termination, a termination fee of US$250,000
may be payable.
8. 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 Plan originally allowed for
the issuance of up to 19 million shares of which as at June 30, 2006,
2.9 million are available for issuance (December 31, 2005 -
3.6 million). The exercise price of the options equals the closing
price on the day 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.
As at June 30, 2006, common share stock options held by directors,
officers, employees and consultants are as follows:
Outstanding Exercisable
---------------------------------- ----------------------
Weighted
average
Weighted remaining Weighted
average contractual average
Range of Number of exercise life Number of exercise
exercise prices options price (Years) options price
--------------- ---------------------------------- ----------------------
$1.48 - $2.00 4,747,087 $1.58 3.71 3,015,736 $1.60
$2.01 - $3.00 3,534,862 $2.50 3.74 1,576,704 $2.51
$3.01 - $4.00 35,060 $3.05 0.47 35,060 $3.05
$4.01 - $5.00 1,050,000 $4.77 1.42 1,050,000 $4.77
$5.01 - $5.50 855,000 $5.50 .89 855,000 $5.50
---------------------------------- ----------------------
10,222,009 $2.56 3.24 6,532,500 $2.85
---------------------------------- ----------------------
---------------------------------- ----------------------
As at June 30, 2006 and December 31, 2005, stock options were
granted, exercised and cancelled as follows:
Number of Weighted average
options exercise price
----------------- -----------------
Balance - December 31, 2004 12,537,593 $3.27
Options granted 6,000,000 $1.77
Options expired (6,361,700) $3.22
Options cancelled (1,222,225) $2.81
Options exercised (660,970) $1.69
-----------------
Balance - December 31, 2005 10,292,698 $2.59
Options granted 1,125,000 $2.71
Options cancelled (415,271) $4.66
Options exercised (780,418) $1.99
----------------- -----------------
Balance - June 30, 2006 10,222,009 $2.56
----------------- -----------------
----------------- -----------------
The exercise of the outstanding stock options in the loss per share
calculation would be anti-dilutive.
The fair value of 1,125,000 options granted during the six-month
period ended June 30, 2006 (June 30, 2005 - 3,460,000) has been
estimated at the date of grant using a Black-Scholes option pricing
model. The current period's valuation was calculated with the
following assumptions: weighted average risk free interest rate of
4.06% (June 30, 2005 - 3.15%); volatility factor of the expected
market price of the Company's common stock of 69% (June 30, 2005 -
76%); and a weighted average expected life of the options of 2.6
years (June 30, 2005 - 2.6). The resulting weighted average cost per
option granted was $1.23 (June 30, 2005 - $0.77). The estimated fair
value of the options is expensed over the vesting period.
The fair value compensation recorded was $725,366 for the three
months ended June 30, 2006 (2005 - 934,141) and $1,099,381 for the
six months ended June 30, 2006 (2005 - $2,157,284).
The following is the Company's pro-forma loss applying fair value
method to all options issued prior to January 1, 2003:
3 months ended June 30, 6 months ended June 30,
2006 2005 2006 2005
Income Statement $ $ $ $
----------------------------------------------------
Loss for the period 3,353,918 2,339,860 5,121,320 4,698,566
Compensation expense
related to fair
value of stock
options - 330,583 - 855,396
----------------------------------------------------
Pro-forma loss for
the period 3,353,918 2,670,443 5,121,320 5,553,962
----------------------------------------------------
----------------------------------------------------
Pro-forma loss per
share 0.02 0.02 0.03 0.04
----------------------------------------------------
----------------------------------------------------
Balance Sheet June 30, December 31,
2006 2005
$ $
Mineral properties 196,150,588 181,325,374
Compensation expense related to fair value
of stock options 283,785 283,785
--------------------------
Pro-forma mineral properties 196,434,373 181,609,159
--------------------------
--------------------------
9. Contributed surplus
The following table identifies the changes in contributed surplus for
the period:
Corporate Stock based
Reorganization compensation Total
$ $ $
-----------------------------------------
Balance - December 31, 2005 1,012,655 4,674,983 5,687,638
Stock based compensation - 1,099,381 1,099,381
Exercise of stock options - (623,987) (623,987)
-----------------------------------------
Balance - June 30, 2006 1,012,655 5,150,377 6,163,032
-----------------------------------------
-----------------------------------------
10. 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:
June 30, December 31,
2006 2005
$ $
-------------------------
Romania 197,739,280 182,814,041
Canada 745,732 56,359
--------------------------
198,485,012 182,870,400
--------------------------
--------------------------
11. Financial instruments
The recorded amounts for cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued
liabilities approximate fair values based on the short-term nature of
those instruments.
The Company's operations expose it to significant fluctuations in
foreign exchange rates. The Company has monetary assets and
liabilities denominated in Romanian Ron and United States dollars and
are, therefore, subject to exchange variations against the functional
and reporting currency, the Canadian dollar.
12. 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.
2010
and
there-
Canadian $ thousand Total 2006 2007 2008 2009 after
Bucium mineral license
(note 3) 504 275 229 - - -
Property acquisition
agreements(a) 358 358 - - - -
Goods and services
agreements(b) 1,669 1,388 281 - - -
Rosia Montana
exploitation license(c) 307 24 24 24 24 211
Surface concession
rights(d) 1,004 22 22 22 22 916
Lease agreements(e) 1,279 124 398 217 221 319
-------------------------------------------
Total commitments 5,121 2,191 954 263 267 1,446
-------------------------------------------
-------------------------------------------
(a) RMGC signed sale-purchase contracts with certain owners of real
estate property required for the development of the Rosia Montana
mine. The signed contracts bind RMGC to purchase the properties.
The total value of the properties committed to being purchased by
RMGC is $358,000 (December 31, 2005 - $374,000) and are expected
to be paid within one year.
(b) The Company has a number of agreements with arms-length third
parties who provide a wide range of services to it or RMGC and
which total $1,669,000 at June 30, 2006 (December 31, 2005 -
$3,069,000). Typically, these 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.
(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,
converted from Romanian Ron to Canadian dollars at the current
period end rate, is $23,600. These fees are indexed annually by
the Romanian Government and the license has 13 years remaining.
(d) RMGC has approximately 45 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
US$20,000.
(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 following is a summary of contingencies of the Company.
(a) During the fourth quarter of 2005, RMGC initiated a program
whereby owners of property in the impacted area of the Project
could agree (the "Promissory Agreement") to either: (a) sell
their property for cash consideration or (b) exchange their
property for property owned by RMGC in Piatra Alba or Alba Iulia,
within 180 days of the issuance by the Romanian authorities of
the environmental integrated approval ("EIA") for the project.
The agreements expire June 30, 2007. RMGC agreed to pay owners
who sign a Promissory Agreement an immediate up front payment of
3% of the Property Value (as agreed in the Promissory Agreement).
As at June 30, 2006, the Company paid US $301,900 to property
owners, committing it to acquire approximately US$10 million in
local properties in the project area. The commitment is binding
once the EIA is approved. The option program is expected to cost
approximately US$1 million in the first nine months of 2006,
representing the purchase of approximately US$33 million in local
properties.
(b) As disclosed in note 7(b), the Company may be required to pay US
$250,000 on the termination of the agreement with the financial
institution.
(c) During the second quarter of 2006, one of the Company's suppliers
disputed the provisions of its agreement with the Company. The
Company has been notified of a claim in the amount of US$165,000,
for which an accrual of US$30,000 has been made. Management
believes that the claim is without merit; however the final cost
of settling this claim is not determinable at this time.
13. Supplemental cash flow information
(a) Net changes in non-cash working capital
3 months ended June 30, 6 months ended June 30,
2006 2005 2006 2005
$ $ $ $
----------------------------------------------------
Operating
activities:
Accounts
receivable,
prepaid
expenses and
supplies 209,802 (50,446) 1,852 (227,345)
Accounts payable
and accrued
liabilities 1,079,192 397,305 640,163 429,122
----------------------------------------------------
1,288,994 346,859 642,015 201,777
----------------------------------------------------
----------------------------------------------------
Investing
activities:
Accounts
receivable,
prepaid
expenses and
supplies 215,697 (2,897) (668,355) 228,442
Accounts payable
and accrued
liabilities (1,042,237) (337,686) 154,845 (320,999)
----------------------------------------------------
(826,540) (340,583) (513,510) (92,557)
----------------------------------------------------
----------------------------------------------------
Financing
activities:
Accounts
receivable,
prepaid
expenses and
supplies - - - 170,770
Accounts payable
and accrued
liabilities - (247,499) - -
----------------------------------------------------
- (247,499) - 170,770
----------------------------------------------------
(b) Exploration
and
development
expenditures (7,925,992) (4,055,474) (14,825,214) (8,277,189)
Non-cash
depreciation
and disposal
capitalized 249,171 153,780 390,531 311,813
----------------------------------------------------
(7,676,821) (3,901,694) (14,434,683) (7,965,376)
----------------------------------------------------
----------------------------------------------------
June 30, December 31,
2006 2005
$ $
--------------------------
(c) Cash and cash equivalents is
comprised of:
Cash 1,745,971 3,619,352
Short-term investments (less than
90 days) weighted average interest
of 4.4% (2005 - 3.4%) 28,590,934 21,686,731
--------------------------
30,336,905 25,306,083
--------------------------
--------------------------
The Company did not incur interest expense during the periods ended
June 30, 2006 and 2005.
14. Reclassification of comparative figures
Certain comparative figures have been reclassified to conform to the
current year's presentation.
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