TSX Trading Symbol: GBU
TORONTO, Nov. 14 /CNW/ -
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Highlights
Financial performance
- Third quarter net loss was $2.2 million, or $0.01 per share. Year-to-
date net loss was $7.5 million, or $0.04 per share.
- Third quarter monthly expenditures averaged $3.0 million per month, or
$9.0 million in total during the third quarter and $28.6 million for
the first 9 months; including
- A total of $7.0 million was spent on our two development projects
during quarter, $21.4 million for the first 9 months.
Liquidity and capital resources
- Working capital at September 30, 2006 totaled $120.4 million.
- Gabriel Resources Ltd. ("Gabriel" or the "Company") raised a total of
$94.4 million during the third quarter through an equity issue and the
exercise of stock options.
- Fourth quarter expenditures are expected to total about $9.0 million
for permitting and corporate costs.
- In addition, the Company expects to spend US$35 million under our
US$638 million definitive feasibility study budget estimate.
- Project financing discussions are well underway with a goal of
completing final term sheets for both the senior and subordinated debt
in parallel with our EIA approval expected in the first quarter 2007.
"Consistent progress continues to be made on all fronts toward the
development of our 80% owned Rosia Montana Project," said Alan R. Hill,
President and Chief Executive Officer. "We have worked very diligently to make
sure the Project complies with all relevant Romanian and European laws, as
well as international best practices for mining development, and I am very
proud that this will serve as a model mine development not only for Romania
but for Europe at large."
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 Company participated in 16 public consultation meetings in Romania
and Hungary between July 24 and August 30, 2006.
- The Company anticipates receipt during November 2006 of an official
list of questions, gathered during the public consultation process and
judged by the Romanian Government to require a response.
- In preparation, our EIA team has prepared answers for all expected
questions from the 16 meetings, the questions provided by the
Hungarian Ministry of Environment, as well as other third party
questions and comments in the media.
- We expect our preparatory efforts will allow us to submit our
responses promptly in the form of an Annex to the EIA in December
2006.
- The delay in receipt of the questions has extended the permitting
process into the first quarter 2007, an extension of one quarter over
our previous guidance.
- The Alba Iulia Court of Appeal dismissed in early July 2006 the
application submitted by the NGO Alburnus Maior to suspend the
assessment process for the EIA for the Rosia Montana project. Alburnus
Maior has appealed the decision.
Updated Rosia Montana Project Timeline
- The delay in receipt of the questions from the Romanian Government has
extended the permitting process into first quarter 2007, an extension
of one quarter over our previous guidance. While we expect EIA
approval in first quarter 2007, the Romanian Government ultimately
determines the timing of approval.
- We are targeting receipt of our construction permit in spring of 2007,
following receipt of EIA approval, other permits and approvals
required for the construction permit and the necessary surface rights.
- We estimate that it will take over two years to construct the mine,
putting first pour of gold target date in the summer of 2009. The
first pour date has been extended by one quarter due to the later than
expected delivery of certain long lead-time equipment. While estimates
during the preparation of the feasibility study earlier this year
indicated 60 weeks for the critical mill components, tenders received
during fourth quarter 2006 forecast up to 100 weeks, resulting in the
one quarter extension to the construction schedule.
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 has 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 began in October 2006.
- Notwithstanding the pace of the retrial, we already have the necessary
discharge certificates for the area required to begin construction in
the spring of 2007.
Acquisition of Surface Rights
- As of September 30, 2006, the Company owned outright or had options to
purchase 60 percent of the residential properties located within the
project area, which comprises the industrial zone, protected area and
buffer zone. On October 9, 2006 the Company began acquiring
residential properties.
- The estimated cost to acquire 100 percent of the homes in the project
area increased from US$48 million to US$68 million, reflecting the
general increase in real estate prices in Romania and our efforts to
address issues raised by the community regarding the compensation
program.
- In preparing the definitive feasibility study budget for the Project,
we anticipated higher compensation costs and as a result, the current
budget covers the higher costs.
- Overall, the Company has acquired or has options for 111 of the 379
remaining homes within the industrial area needed to build and operate
the project over its 16 year life. More importantly, the Company now
has over half of the homes required for construction and the first
five years of operations.
Community Support
- In early July 2006, the NGO ProRosia held a fund raising barbeque in
support of the project, attracting over 600 people to raise funds to
ensure the community voice is heard.
- In late July 2006 the Company held an open house and barbeque for the
residents of Rosia Montana to unveil plans and home designs for the
new town at Piatra Alba attracting 2,000 people.
- Support for the community and project was also received from a group
of Romanian NGO's in early July 2006. 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 Appointments
- On September 29, 2006, Mr. Simon Prior-Palmer, with more than 30 years
experience in the international financial markets, was appointed to
the Board of Directors effective as of October 1, 2006.
- On September 29, 2006 the Company announced the resignation of
Mr. James McClements from the Board of Directors, effective as of
October, 1, 2006 and extended its appreciation for his 8 years of
service.
- On October 18, 2006 the Company announced the appointment of David
Christensen as Vice President, Corporate Development. Mr. Christensen
has spent more than 15 years as a senior metals and mining analyst.
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.
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-nine-month periods ended September 30,
2006 in comparison to the corresponding prior-year periods. The MD&A is
intended to supplement Gabriel Resources Ltd's ("Gabriel" or the "Company")
unaudited consolidated financial statements and notes thereto ("Statements")
for the three and nine-month periods ended September 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 the Company's Annual Information
Form dated March 27, 2006, which can be viewed 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 as Romania enters the EU 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") for the Rosia Montana project
was submitted, in both Romanian and English to meet the requirements of the
Romanian Government and the international Espoo Convention, in early May 2006.
While it is not a legal requirement, the Company elected to have the
Non-Technical Summary of the EIA translated into Hungarian to assist
interested parties in Hungary to better participate in the public consultation
process. During the third quarter, the Company participated in 14 public
consultation meetings in Romania, held from July 24, 2006 to August 25, 2006.
Following the meetings in Romania, the Company participated in two meetings in
Hungary during the final week of August, 2006 to meet Espoo Convention
commitments. The Company anticipates receipt during November 2006 of an
official list of questions, gathered during the public consultation process
and judged by the Romanian Government to require a response by the Company. In
preparation, our EIA team has prepared answers for all of the anticipated
questions from the 16 public meetings, the questions provided by the Hungarian
Ministry of Environment as well as other third party questions and comments
made in the media. Once the official list of questions is received, we expect
our preparatory efforts to allow us to submit our responses promptly in the
form of an Annex to the EIA during December 2006. The delay in receipt of the
questions has extended the permitting process into first quarter 2007, an
extension of one quarter over our previous guidance. While we expect EIA
approval first quarter of 2007, the Romanian Government ultimately determines
the timing of the approval.
While the EIA is by far the most important project permit, other permits
are required according to the Urbanistic Certificate, such as the zonal
urbanistic plans for the industrial and protected areas, the forestry permit,
the land use change permit, as well as other permits and approvals that result
from the EIA approval, to obtain the construction permit. The process for each
of these permits and approvals is underway to run parallel with or follow EIA
approval. As Gabriel is the first company to permit a project under the new
European legislation, it is pioneering with the Government of Romania the
permitting process. As a result, we along with the government are working our
way through new legislation that has never been applied.
On July 11, 2006 the Alba Iulia Court of Appeal dismissed the application
of the foreign-funded non-government organization Alburnus Maior to suspend
the assessment process for our EIA. While Alburnus Maior initiated its actions
against the Romanian Ministry of Environment and not Gabriel, the Company
intervened in the case to present its arguments together with the Ministry of
Environment. With the Court's decision, the public consultation process began
as scheduled on July 24, 2006. Alburnus Maior has appealed the decision of the
Court of Appeal and that appeal is currently pending.
Over the past several years, Alburnus Maior has 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 Rosia Montana project. While few of the actions have been successful,
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 as sanctions cancellation of the permit or
authorization. We, through Rosia Montana Gold Corporation (RMGC), have
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. Our
permitting and construction schedule does not make any allowance for legal
challenges that may arise. We have been very successful in the past in these
legal challenges and have designed the project and attempted to follow all
applicable laws to protect and prevent, as much as possible, potential future
legal challenges.
Surface Rights
During the third quarter, the Company raised $93 million in an equity
offering, the majority of which was allocated to fund the purchase of the
homes and properties in the project area. During August, 2006 the Company
updated the real estate survey in the region to determine appropriate prices
for homes and properties. The estimated cost to acquire 100 percent of the
homes in the project area increased from US$48 million to US$68 million,
reflecting the general increase in real estate prices in Romania and our
efforts to address issues raised by the community regarding the compensation
program. The definitive feasibility study budget covers the higher costs. The
new prices were announced to the community and public meetings were held in
September, as required under World Bank Guidelines. As of September 30, 2006,
the Company owned outright or had options to purchase 60 percent (42 percent
owned and 18 percent optioned) of the residential properties located within
the project area.
On October 9, 2006 the Company began purchasing homes in the project
area, which is comprised of the industrial zone, the protected area and the
buffer zone. While the Company only needs homes which are located in the
industrial zone to build the project, as a consideration to community opinion,
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 that are not already owned by the Company. 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. Overall, the
Company has acquired or has options on 111 of the 379 remaining homes within
the industrial area needed to build and operate the project over its 16 year
life. More importantly, the Company now has over half of the homes required
for construction and the first five years of operation.
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 state-owned mining companies. The process to acquire the institutional
properties is well underway and we expect to start to obtain access rights to
those properties by the end of the year.
Community Support
Support for the project in the Rosia Montana community continues to gain
momentum. Following up on the pro-project march during second quarter 2006 in
which over 500 residents marched in favour of the project, in early July 2006
ProRosia, a local pro-project NGO, 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 at Piatra
Alba on July 20, 2006 where 2,000 people gathered for the unveiling of the new
town and home designs. Support continued through the public consultation
hearings, with many residents attending all 14 of the public meetings in
Romania to show support for the project.
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 and 18 NGO's issued a press release supportive of the project, with
two NGO's asserting their neutrality and one NGO being against the project.
The main conclusions of the 18 NGO's were:
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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 -- that
people do not have jobs and life is very hard.
>>
During October 2006 a committee of 28 members of the Romanian Parliament
visited the site. The mayors of the villages of Rosia Montana, Abrud and
Bucium openly made public comments in support of the project during the course
of the visit.
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, in spite of the damages done by 20th Century mining,
continues to provide traces of the earlier activity. Over the past five years
we have been granted several discharge permits to acknowledge completion of
the program. On July 11, 2006 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. The retrial, which began in October, 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. All discharge
certificates required to begin construction next spring have been secured.
Financing
At September 30, 2006, we have $120.4 million in working capital. Our
rate of expenditure was approximately $9.0 million for the quarter, or
$3 million per month, excluding working capital adjustments. This rate is
higher than third quarter 2005 when we spent $4.5 million for the quarter, or
an average of $1.5 million per month, largely due to increased corporate
activity related to the progress of the project, higher communications costs
and completion of the public meetings for the EIA. The expenditure rate is
expected to rise in the fourth quarter as we begin to acquire properties,
begin detailed engineering, 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 during
first quarter 2007 to coincide with the expected timing of EIA approval. The
Risk Assessment Report ("Report") was completed by the banks technical
consultants during the third quarter. The Report confirms that the Project is
Equator Principle compliant, which is a necessary pre-condition for project
financing. Based on discussions with financial institutions and our target
debt financing requirements, some form of price guarantee (hedging) will be
required. The level and type of price guarantee has not been discussed. The
final amount will be a function of negotiations with lenders and spot gold
prices at the time.
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 2005 year end 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, of which US$88 million was raised in the
third quarter, to place the Rosia Montana project into production. These
amounts are a combination debt and equity and included working capital. A cost
overrun facility, which is required by lenders in financings of this type, is
being negotiated over and above the amounts targeted above. 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 is the fact that the Company has made 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 September 29, 2006 Mr. Simon Prior-Palmer was appointed to the Board
of Directors effective as of October 1, 2006. Mr. Prior-Palmer has more than
30 years experience in the international financial markets, twenty of which he
spent at Credit Suisse First Boston in various capacities, including Managing
Director of UK Investment Banking. With his extensive European business
experience as well as financial expertise, Mr. Prior-Palmer will be a great
asset in assisting the Company in advancing the development of the Rosia
Montana project.
On September 29, 2006 the Company announced the resignation of Mr. James
McClements from the Board of Directors, after 8 years of service.
Mr. McClements resigned due to his expanding commitments at Resource Capital
Fund, where he is the Senior Partner.
On October 18, 2006 the Company announced the appointment of David
Christensen as Vice President, Corporate Development. Mr. Christensen has
spent more than 15 years as a senior metals and mining analyst; his
responsibilities in his new role will be to establish a Corporate Development
program including the completion of the Rosia Montana project financing, to
maintain and improve the corporate cash flow model, evaluate potential merger
and acquisition proposals, and to assist finance and investor relations -
commencing immediately.
Updated Project Timeline
With the EIA submitted in second quarter 2006, the Company is awaiting a
list of official questions from the Romanian Government, raised during the
public consultation process. The Company will respond to these questions in
the form of an Annex to the EIA. These questions, and the Company's responses,
are anticipated to be completed and submitted in December 2006. The Romanian
Government makes the final determination on EIA approval, which we are
targeting in first quarter of 2007. The second key step is archaeological
clearance; necessary discharge certificates for the area required to begin
construction in the spring of 2007 are in place, while 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. We won our appeal in early
July overturning a lower court decision to annul the Cirnic discharge
certificate and the retrial began in October 2006. While we hope to have the
discharge upheld before we begin construction next spring, it is not
mandatory. Once we acquire the balance of properties in the industrial zone,
we will have the surface rights, which is the third key step in the
construction permitting process. Our target date to receive our construction
permit is spring of 2007. We estimate that it will take over two years to
construct the mine, putting first pour of gold target date in the summer of
2009. The first pour date has been extended by one quarter due to the later
than expected delivery of certain long lead time equipment. Estimates during
the preparation of the feasibility study, earlier this year, indicated 60
weeks for the critical mill components but the tenders received during the
forth quarter forecast up to 100 weeks, resulting in the one quarter extension
to the construction schedule.
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 2006 2005
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter
Statement of loss
Loss 2,155,693 3,587,146 1,767,402 2,036,830
Loss per share 0.01 0.02 0.01 0.01
Balance Sheet
Working Capital 120,360,124 34,802,578 44,271,673 52,870,559
Total Assets 330,489,147 236,685,128 238,026,422 238,343,489
Statement of Cash
Flows
Investments in
exploration and
development
including working
capital changes 6,662,682 8,460,118 6,488,075 4,369,027
Cash flow from
financing activities 94,640,567 1,190,195 360,570 30,539,400
$Cdn 2005 2005 2005 2004
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter
Statement of loss
Loss 1,745,196 2,339,860 2,358,706 2,220,399
Loss per share 0.01 0.01 0.02 0.01
Balance Sheet
Working Capital 28,908,442 32,849,856 38,246,957 15,282,564
Total Assets 208,906,455 210,216,116 211,833,922 184,502,350
Statement of
Cash Flows
Investments in
exploration and
development
including working
capital changes 3,631,266 4,242,277 3,815,656 4,825,793
Cash flow from
financing activities 575,684 (247,499) 28,547,950 1,151,446
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Statement of Loss
Loss for the period
For the quarter ended September 30, 2006, the Company incurred a loss of
$2.2 million, or $0.01 per share, compared to a loss of $1.7 million, or $0.01
per share, in the year-earlier third quarter. For the nine-month period ended
September 30, 2006 we lost $7.5 million, or $0.04 per share, compared to
$6.4 million, or $0.04 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 after commercial
production commences and revenues are generated.
Expenses
Corporate general and administrative
During third quarter 2006 we incurred a total of $2.0 million for
corporate general and administrative expenses ("G&A"), compared to
$1.6 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 $393,304
due primarily to higher communications, travel and public company costs. For
the nine months ended September 30, 2006, G&A costs increased to $6.0 million
from $3.9 million in the same period of 2005. The year earlier nine-month
costs benefited from the reversal of an over-accrual in the amount of
$318,000. 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 third quarter 2006 increased G&A costs by $163,115 while
DSU costs increased G&A costs by $120,715 in the year-earlier third quarter.
The increase in DSU costs relates primarily to the increase in our share
price. The DSU's are revalued each period end based on the closing share
price, 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 third
quarter 2006 and 2005, the difference is charged to the Statement of Loss
increasing costs for the period. If the share price decreases, the lower value
of the DSU's is credited against costs during the period decreasing costs. For
the nine-month period ended September 30, 2006 we expensed $414,148 compared
to $137,959 in the year earlier nine-month period. Overall, for 2006 our share
price increased (by $1.73) compared to last year, when our share price
increased from the close of the previous year end (by $0.76). In the third
quarter, we settled 125,000 units of DSU for common shares of the Company at
$2.75 per share, for a total of $343,750. The value of the settlement was
credited to common share capital.
Stock option compensation
Stock option compensation for third quarter 2006 was $352,375 compared to
a third quarter 2005 cost of $327,528, while stock option compensation for the
nine-month period decreased to $1,451,756, compared to $2,484,812 in the
nine-month period ended September 30, 2005. The higher expense for third
quarter 2006 reflects the increased cost of options issued in 2006 due to the
increase in share price and higher interest rates as compared to the year
earlier period.
For the nine-month period, the higher expense in 2005 relates to the
issuance of 5 million options, of which 635,000 were vested on issuance,
compared to 1,125,000 options granted in the first nine months of 2006, of
which 250,000 were vested on issuance. The fair value of stock options when
granted is amortized over the period in which the options vest. For those
options that vest on issuance, the entire fair value of the options is
recognized immediately. Fair value of stock options granted to personnel
working on development projects is capitalized over the vesting period.
Project financing costs
During third quarter 2006 we incurred $0.5 million in project financing
costs related to completion of the Risk Assessment Report for the banks and
advisory services. 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 sheets in parallel with EIA
approval, which is now expected in the first quarter of 2007. Overall, we
expect to incur costs of $2.0 million for project financing activities in
2006, leading up to the finalization of the term sheets. The activities
include the completion of the Risk Assessment Report for the banks, advisory
services and term sheet negotiation.
Interest income
Interest income for third quarter 2006 increased to $822,162 compared to
$211,285 in the same quarter of 2005, while interest income for the nine-month
period increased to $1,644,932 compared to $495,337 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 first quarter 2005, the exercise
of warrants in December 2005, an equity issue during third quarter 2006 and
higher interest rates earned on our cash balances. Quarterly interest income
should increase in the fourth quarter, as a result of the equity issue during
the third quarter, but decline next year as our cash balance declines as we
continue with permitting and development activities.
Foreign exchange
For third quarter 2006, we reported a gain of $6,010, compared to a
$19,172 loss in third quarter 2005, while for the nine-month period we
recorded a gain of $4,628 compared to a gain of $67,491 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 $7.0 million on our two projects during third quarter 2006, compared
with $3.2 million during the same period in 2005. For the first nine months of
2006 we invested $21.4 million compared to $11.1 million in the year earlier
period.
For the quarter ended September 30, 2006 expenditures increased in most
of the major project areas. Community development activities were $0.5 million
in third quarter 2006 and 2005. During third quarter 2006, expenditures for
permitting increased to $1.7 million from $1.1 million in the year-earlier
period, with the higher expenditures due to the completion of the EIA and
initiation of public consultation. For third quarter 2006, expenditures on
finance and administration increased to $3.2 million, from $0.9 million in the
year-earlier quarter, reflecting higher communications and legal costs. In
addition, we spent $0.7 million on engineering during third quarter 2006
compared to $0.1 million in 2005. Exploration at Rosia Montana totaled
$0.4 million for third quarter 2006, compared to $0.3 million in the
year-earlier quarter. At Bucium, a scoping study was completed during the
first quarter to determine whether it contained economic reserves. It was
determined that one option for Bucium is to have the ore processed through the
Rosia Montana facilities. Expenditures at Bucium were $0.5 million during
third quarter 2006 compared to $0.5 million in the year-earlier period.
Mineral Properties also includes capitalized depreciation in the amount of
$0.01 million for third quarter 2006 compared to $0.2 million during the
year-earlier third quarter, related to capital assets used in Romania. Asset
retirements reduced third quarter 2006 amortization.
We would expect the mineral properties expenditure level for our
permitting activities to average $2.5 million per month during the fourth
quarter, until expected approval of our EIA. Expenditures for project
construction are expected to total US$35 million during fourth quarter 2006 as
we acquire properties, begin detailed engineering, order long-lead-time
equipment and we prepare for construction of the new village at Piatra Alba
and subdivision in Alba Iulia. Expenditures will rise further in 2007 with EIA
approval and receipt of construction permits as we mobilize and begin site
construction.
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 and the third quarter 2006 equity issue and
exercise of stock options of $96 million, we are in a strong financial
position through the permitting and initial construction phases of project
development. We updated the cost to construct the project at year end 2005.
Capital costs increased 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 increase in short-term investments in the quarter and nine months
ended September 30, 2006 reflects the investment of cash with terms greater
than 90 days. The cash invested arose from the December 2005 exercise of
warrants and the third quarter 2006 equity issue.
Working capital
As at September 30, 2006 we had working capital of $120.4 million versus
$34.8 million as at June 30, 2006 and $28.9 million as at September 30, 2005.
The increase in working capital in the third quarter relates to an equity
issue and exercise of stock options of $96 million from the issuance of
30.05 million shares and the exercise of stock options, partially offset by
the loss incurred and the investment in capital assets and mineral properties
during the third quarter. In 2005, we issued 15 million units, with each unit
consisting 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. If exercised, these warrants would
raise an additional $20.625 million of working capital for the Company.
Net change in non-cash working capital
The net change in operating non-cash working capital decreased for the
quarter ended September 30, 2006, primarily reflecting higher accrued interest
income.
The net change in investing non-cash working capital increased for the
quarter ended September 30, 2006, primarily as a result of costs incurred
during the EIA public consultation period and higher communications costs.
The increase in financing non-cash working capital in third quarter 2006
reflects accrued share issue costs related to the recent equity issue.
Related Party Transactions
During third quarter 2006, our Romanian subsidiary RMGC paid $5,400 (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 nine months
ended September 30, 2006 RMGC paid $19,900 (2005 - $33,000). As the laboratory
was sold to a third party during third quarter 2006, future payments to
Minvest are not anticipated.
During third quarter 2006, we paid $7,500 (2005 - Nil) and $22,658 (2005
- Nil) for the nine months ended September 30, 2006 (2005 - nil) to a director
of the Company for consulting services.
During second quarter 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%.
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 third
quarter, and $31,185 for the nine months ended September 30, 2005 and was
included as an offset to corporate general and administrative expenses. There
were no transactions in 2006.
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
During third quarter 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$3.2 million over the term of the license and has not conducted any
exploration activities on the property to date.
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 September 30, 2006, the Company has met its commitment
(September 30, 2005 - US$1.0 million remaining).
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
September 30, 2006, commitments under such agreements total $1.0 million
(September 30, 2005 - $7.6 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 September 30, 2006 is $358,000 (September 30, 2005 -
$376,000). 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
September 30, 2006, the Company paid US$393,800, representing the 3 percent
upfront payments, which represents US$13.1 million in commitments to purchase
the properties. 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.
Romania Accession to European Union
On September 26, 2006 the European Commission confirmed that Romania
would join the European Union on January 1, 2007. In its final report, the
European Commission praised Romania for the progress it had made to prepare
itself for membership in the European Union, but also outlined some areas
where Romania needed to continue reform until accession and beyond. The
European Commission has established a mechanism for monitoring and verifying
progress in the area of judicial reform in order to ensure Romania continues
its reforms after accession. Romania must meet a number of benchmarks
established by the European Commission or risk the imposition of safeguard
measures set forth in the accession treaty with the European Union.
<<
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 in parallel with EIA approval.
We made progress in meeting each of our five key objectives over the
course of the first nine months of 2006, putting us in position to meet our
construction permit target timetable for the project during spring of 2007. We
have all necessary archaeological discharges to begin construction in the
spring and we expect to have all discharges required for the first eight years
of operation by next spring. The changes made to the property purchase
program, along with the sustainable development initiatives, have created
positive momentum in the community. Public opinion of the project has improved
significantly in Romania through the course of the year as a result of our
communications and permitting efforts. Our target date for receipt of our
construction permit is the spring 2007 and following a two year construction
period, our projected first gold pour target date is for the summer of 2009.
Outstanding
Preferred shares Nil
Common shares 210,812,011
Common stock options 9,227,002
Common stock warrants 7,496,000
Deferred share units - common shares 127,742
Fully diluted share capital 227,662,755
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 Financial Statements
September 30, 2006 and 2005
Gabriel Resources Ltd.
Consolidated Balance Sheets
As at September 30, 2006 and December 31, 2005
(Unaudited and expressed in Canadian dollars)
-------------------------------------------------------------------------
2006 2005
$ $
Assets
Current assets
Cash and cash equivalents 44,560,604 25,306,083
Short-term investments 77,593,245 28,932,941
Accounts receivable (note 5(a)) 1,594,522 407,479
Prepaid expenses and supplies 684,301 826,586
---------------------------
124,432,672 55,473,089
Capital assets (note 2) 2,670,274 1,545,026
Mineral properties (note 3) 203,386,201 181,325,374
---------------------------
330,489,147 238,343,489
---------------------------
---------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 4,072,548 2,602,530
Other liabilities (note 4) 720,131 449,246
---------------------------
4,792,679 3,051,776
---------------------------
Shareholders' equity
Capital stock (note 6) 382,315,494 284,986,949
Common share purchase warrants (notes 6 and 7) 1,948,960 1,950,000
Contributed surplus (note 9) 6,275,129 5,687,638
Deficit (64,843,115) (57,332,874)
---------------------------
325,696,468 235,291,713
---------------------------
330,489,147 238,343,489
---------------------------
---------------------------
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 nine month periods ended September 30, 2006 and 2005
(Unaudited and expressed in Canadian dollars)
-------------------------------------------------------------------------
3 months ended 9 months ended
September 30, September 30,
2006 2005 2006 2005
$ $ $ $
Expenses
Corporate general
and administrative 2,032,084 1,596,380 5,994,102 3,931,053
Stock option
compensation (note 8) 352,375 327,528 1,451,756 2,484,812
Project financing costs 547,507 - 1,630,492 -
Reorganization
severance costs - - - 546,755
Amortization 51,899 13,401 83,451 43,970
---------------------------------------------------
2,983,865 1,937,309 9,159,801 7,006,590
---------------------------------------------------
Other income (expense)
Interest 822,162 211,285 1,644,932 495,337
Foreign exchange 6,010 (19,172) 4,628 67,491
---------------------------------------------------
828,172 192,113 1,649,560 562,828
---------------------------------------------------
Loss for the period 2,155,693 1,745,196 7,510,241 6,443,762
Deficit - Beginning
of period 62,687,422 53,550,848 57,332,874 48,852,282
---------------------------------------------------
Deficit - End of
period 64,843,115 55,296,044 64,843,115 55,296,044
---------------------------------------------------
---------------------------------------------------
Loss per share
(basic and diluted) 0.01 0.01 0.04 0.04
---------------------------------------------------
---------------------------------------------------
Weighted average
number of shares 193,252,037 161,479,221 182,688,616 156,545,118
---------------------------------------------------
---------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
Gabriel Resources Ltd.
Consolidated Statements of Cash Flows
For the three and nine month periods ended September 30, 2006 and 2005
(Unaudited and expressed in Canadian dollars)
-------------------------------------------------------------------------
3 months ended 9 months ended
September 30, September 30,
2006 2005 2006 2005
$ $ $ $
Cash flows used in
operating activities
Loss for the period (2,155,693) (1,745,196) (7,510,241) (6,443,762)
Items not affecting
cash
Amortization 51,899 13,401 83,451 43,970
Stock option
compensation 352,375 327,528 1,451,756 2,484,812
Deferred share
units 163,115 120,715 414,148 137,959
---------------------------------------------------
(1,588,304) (1,283,552) (5,560,886) (3,777,021)
Net changes in non-
cash working capital
(note 13) (133,668) (95,742) 508,347 106,035
---------------------------------------------------
(1,721,972) (1,379,294) (5,052,539) (3,670,986)
---------------------------------------------------
Cash flows provided
by (used in)
investing activities
Increase in short
term investments (71,630,602) (11,982,484) (48,660,304) (21,071,571)
Exploration and
development
expenditures
(note 13 (b)) (7,001,275) (3,174,666) (21,435,958) (11,140,042)
Purchase of capital
assets (401,612) (58,880) (1,613,093) (162,424)
Net changes in non-
cash working capital
(note 13) 338,593 (456,600) (174,917) (549,157)
---------------------------------------------------
(78,694,896) (15,672,630) (71,884,272) (32,923,194)
---------------------------------------------------
Cash flows from
financing activities
Proceeds from
issuance of capital
stock, net of issue
costs (note 6) 94,412,390 575,684 95,963,155 28,705,365
Net changes in non-
cash working capital
(note 13) 228,177 - 228,177 170,770
---------------------------------------------------
94,640,567 575,684 96,191,332 28,876,135
---------------------------------------------------
Increase (decrease)
in cash and cash
equivalents 14,223,699 (16,476,240) 19,254,521 (7,718,045)
Cash and cash
equivalents -
beginning
of period 30,336,905 25,129,738 25,306,083 16,371,543
---------------------------------------------------
Cash and cash
equivalents -
end of period 44,560,604 8,653,498 44,560,604 8,653,498
---------------------------------------------------
---------------------------------------------------
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 nine month periods ended September 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 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 of the Rosia
Montana Gold deposit was made in 1999 and since that time the efforts
of the Company have been devoted to 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 as well as surface rights acquisitions. The Company is in
the final stages of the permitting process for the Project, which is
expected to be completed in the first quarter of 2007. 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 one of the Company's other licensed areas, 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. In the opinion of management, all adjustments
considered necessary for fair and consistent presentation of interim
financial statements have been included. 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, however,
selected information and disclosures required in notes to annual
consolidated financial statements have 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.
2. Capital Assets
September 30, December 31,
2006 2005
$ $
-------------------------------
Vehicles 1,275,334 1,355,364
Exploration and office equipment 3,453,902 1,933,519
Leasehold improvements 126,197 105,856
-------------------------------
4,855,433 3,394,739
-------------------------------
Less: Accumulated amortization
Vehicles 806,675 589,393
Exploration and office equipment 1,270,384 1,162,407
Leasehold improvements 108,100 97,913
-------------------------------
2,185,159 1,849,713
-------------------------------
Net book value
Vehicles 468,659 765,971
Exploration and office equipment 2,183,518 771,112
Leasehold improvements 18,097 7,943
-------------------------------
2,670,274 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 20,403,194 - 20,403,194
Exploration costs 731,809 925,824 1,657,633
-----------------------------------------
Balance - September 30,
2006 194,123,538 9,262,663 203,386,201
-----------------------------------------
-----------------------------------------
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, hold a 20%
interest in RMGC, and the Company holds the pre-emptive right to
acquire the 20% minority 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 over 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 September 30, 2006, the Company has met its
expenditure commitment. (December 31, 2005 - US$0.8 million remaining
commitment). 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. The expiring exploration
license can be converted into an exploitation license upon submission
and approval of a feasibility study.
The Company, through its wholly owned subsidiary Rom Aur SRL ("Rom
Aur"), received 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. There was no field work
done as at September 30, 2006.
4. Other liabilities
As at September 30, 2006, other liabilities included the following:
Price per
Deferred Share Units ("DSUs") common
DSUs share $ Value $
----------- -----------
Outstanding - December 31,
2004 125,000.0 1.56 195,000
Granted and issued 33,185.2 1.82 60,397
Change in value - - 193,849
----------- -----------
Outstanding - December 31,
2005 158,185.2 2.84 449,246
Granted and issued 94,557.6 2.91 275,163
Settled (125,000.0) 2.75 (343,750)
Change in value - - 203,125
----------- -----------
Balance - September 30,
2006 127,742.8 4.57 583,784
-----------
-----------
Fidelity Bonus 136,347
-----------
720,131
-----------
-----------
(a) DSUs
The Company implemented a Deferred Share Unit Plan under which
qualifying participants may elect to 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. 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 third quarter, the Company settled 125,000 DSUs for common
shares of the Company at $2.75 per share, the price at which
retirement occurred. The net period over period change in the
value has been recorded in corporate, general and administrative
expense except for costs relating to personnel working on
projects in Romania, which is capitalized. As at September 30,
2006, $414,148 (2005 - $137,959) was expensed and $64,140 (2005 -
$Nil) was capitalized.
(b) Fidelity Bonus
Under the Collective Bargaining Agreement between RMGC and its
employees, under certain conditions, employees of RMGC are
entitled to a bonus when celebrating 3, 5, 10, 15, 20, and 25
years of uninterrupted service. These bonuses are equal to one
month of average gross salary. As of September 30, 2006, $136,347
has been accrued.
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 of 4.5%.
(b) Power costs for an assay laboratory in Romania paid by RMGC to
Minvest, a company owned by a minority shareholder of RMGC, was
$5,400 for the three months (2005 - $10,000), and $13,900 for the
nine months ended September 30, 2006 (2005 - $33,000). The
laboratory was sold to a third party during the third quarter
2006, and no other cost will be paid to Minvest.
(c) The Company paid $7,500 (2005 - $nil) during the three months and
$22,658 for the nine months ended September 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 $31,185 was received in the nine
months ended September 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.
There were no transactions during 2006.
(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 (c) 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 (b) 15,000,000 30,000,000
---------------------------
Balance - December 31, 2005 177,073,836 284,986,949
Shares issued from a public
offering (a) 31,050,000 97,807,500
Less: Share issue costs - (4,781,204)
Shares issued on the exercise
of stock options (note 8) 1,442,647 2,925,859
Stock-based compensation -
exercise of stock options (note 9) - 1,020,600
Shares issued on the settlement of
DSU (note 4) 125,000 343,750
Shares issued from the exercise of
share purchase warrants (note 7(a)) 4,000 12,040
---------------------------
Balance - September 30, 2006 209,695,483 382,315,494
---------------------------
---------------------------
(a) During the third quarter 2006, the Company issued 31,050,000
common shares at $3.15 per share to a syndicate of underwriters
for aggregate net proceeds of $93,026,296, after deducting
underwriting fee of $4,303,530 plus various professional fees
related to the offering of $477,674. The Company intends to use
the net proceeds of the offering to advance the development of
the Rosia Montana gold deposit in Romania, completing surface
rights acquisition, advancing detailed engineering, ordering long
lead-time equipment and commencing construction of the new
village of Piatra Alba.
Newmont Canada Limited ("NCL"), a subsidiary of Newmont Mining
Corporation, participated to acquire 20% (6,210,000 common
shares) of the total offering. As of the closing of the offering,
NCL held 39,658,900 common shares or 19% of the issued and
outstanding common shares.
(b) On December 6, 2005, NCL exercised all 15 million common share
purchase warrants for proceeds of $30 million.
(c) 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 of $520,319.
During the third quarter 2006, a total of 4,000 warrants were
exercised.
7. Share purchase warrants
a) As at September 30, 2006, the following share purchase warrants
were issued and outstanding:
Number of Exercise
Warrants price Expiry date
-----------------------------------------
Balance - December 31,
2004 15,000,000 2.00 December 31, 2005
Warrants issued
(note 6(c)) 7,500,000 2.75 March 31, 2007
Warrants exercised
(note 6(b)) (15,000,000)
-------------
Balance - December 31,
2005 7,500,000 2.75 March 31, 2007
Warrants exercised (4,000)
-------------
Balance - September 30,
2006 7,496,000 2.75 March 31, 2007
-------------
The exercise of the outstanding share purchase warrants in the
loss per share calculation would be anti-dilutive.
b) The Company intends to enter into mandate letters with two
international financial institutions to arrange project debt
financing for the development of the Rosia Montana project (the
"Project") prior to the end of 2006. As part of the proposed
compensation of the financial institutions, the Company is
prepared to issue up to a total of 2.25 million common share
purchase warrants (the Warrants"). The Warrants will have an
exercise price established at the time of grant, a four year term
and will vest upon achievement of project financing milestones,
including public announcement of a committed underwriting by such
financial institutions of a syndicated bank credit facility in an
amount up to US$350 million (the "Facility"), execution of
definitive credit documentation for the Facility, and first draw-
down under the Facility. This warrant compensation replaces the
previous Tranche A and B warrants referred to in earlier
quarterly and annual financial statements. In addition to the
warrants referred to above, the Company may be required to issue
additional warrants to complete the Project financing.
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 2.9 million are
available for issuance as at September 30, 2006 (December 31, 2005 -
3.6 million). The exercise price of the options equals the closing
price on the day prior to the option allotment. For options granted
during a blackout period, the exercise price of the options equals
the closing price on the date prior to the date the blackout is
cleared. The majority of options granted vest over three years and
are exercisable over five years from the date of issuance.
As at September 30, 2006, 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 (Years) options price
------------- ----------------------------------- ----------------------
$1.48 - $2.00 4,362,303 $1.58 3.51 2,858,459 $1.59
$2.01 - $3.00 3,262,417 $2.49 3.72 1,496,772 $2.48
$3.01 - $4.00 30,060 $3.05 0.22 30,060 $3.05
$4.01 - $5.00 1,050,000 $4.77 1.17 1,050,000 $4.77
$5.01 - $5.50 855,000 $5.50 0.64 855,000 $5.50
----------------------------------- ----------------------
9,559,780 $2.59 3.06 6,290,291 $2.87
----------------------------------- ----------------------
----------------------------------- ----------------------
As at September 30, 2006 and December 31, 2005, stock options were
granted, exercised and cancelled as follows:
Weighted
average
Number of exercise
options 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 (1,442,647) $2.03
------------- -------------
Balance - September 30, 2006 9,559,780 $2.59
------------- -------------
------------- -------------
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 nine-month
period ended September 30, 2006 (September 30, 2005 - 5,000,000) 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% (September 30, 2005 - 3.1%); volatility factor of the expected
market price of the Company's common stock of 69% (September 30, 2005
- 75%); and a weighted average expected life of the options of 2.6
years (September 30, 2005 - 2.6). The resulting weighted average cost
per option granted was $1.23 (September 30, 2005 - $0.79). The
estimated fair value of the options is amortized over the vesting
period to either the Statement of Loss or Mineral Properties.
The fair value compensation recorded was $508,710 for the three
months ended September 30, 2006 (2005 - $327,528) and $1,608,091 for
the nine months ended September 30, 2006 (2005 - $2,484,812). During
the third quarter ended September 30, 2006, $352,375 (2005 -
$327,528) was expensed and $156,335 was capitalized (2005 - $Nil).
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 9 months ended
September 30, September 30,
Income Statement 2006 2005 2006 2005
$ $ $ $
--------------------------------------------------
Loss for the
period 2,155,693 1,745,196 7,510,241 6,443,762
Compensation
expense related
to fair value of
stock options - 133,938 - 989,334
--------------------------------------------------
Pro-forma loss
for the period 2,155,693 1,879,134 7,510,241 7,433,096
--------------------------------------------------
--------------------------------------------------
Pro-forma loss
per share 0.01 0.01 0.04 0.05
--------------------------------------------------
--------------------------------------------------
Balance Sheet September 30, December 31,
2006 2005
$ $
Mineral properties 203,386,201 181,325,374
Compensation expense related
to fair value of stock options 283,785 283,785
----------------------------
Pro-forma mineral properties 203,669,986 181,609,159
----------------------------
----------------------------
9. Contributed surplus
The following table identifies the changes in contributed surplus
for the period:
Corporate Stock based
Reorganization compensation Total
$ $ $
-------------------------------------------
Balance - December 31,
2004 1,012,655 2,363,278 3,375,933
Stock based compensation - 2,846,160 2,846,160
Exercise of stock options - (534,455) (534,455)
-------------------------------------------
Balance - December 31,
2005 1,012,655 4,674,983 5,687,638
Stock based compensation - 1,608,091 1,608,091
Exercise of stock options - (1,020,600) (1,020,600)
-------------------------------------------
Balance - September 30,
2006 1,012,655 5,262,474 6,275,129
-------------------------------------------
-------------------------------------------
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:
September 30, December 31,
2006 2005
$ $
---------------------------
Romania 205,267,102 182,814,041
Canada 789,373 56,359
---------------------------
206,056,475 182,870,400
---------------------------
---------------------------
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
Baisoara exploration
license (note 3) 3,578 46 168 275 714 2,375
Property acquisition
agreements (a) 358 358 - - - -
Goods and services
agreements (b) 1,048 874 174 - - -
Rosia Montana
exploitation
license (c) 310 24 24 24 24 214
Surface concession
rights (d) 1,006 22 22 22 22 918
Lease agreements (e) 1,253 95 400 217 221 320
-----------------------------------------------
Total commitments 7,553 1,419 788 538 981 3,827
-----------------------------------------------
-----------------------------------------------
(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 be 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 $1,048,000 at September 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 $24,000. These fees are indexed annually by
the Romanian Government and the license has 12 years remaining.
(d) RMGC has approximately 44 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, converted to Canadian dollars at the current period
end rate, is $22,000.
(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 impact assessment ("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 September 30, 2006, the Company paid US$393,800 to property
owners, committing it to acquire approximately US$13.1 million in
local properties in the project area. The commitment is binding
once the EIA is approved.
(b) 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.
Management believes that the claim is without merit; however the
final cost of settling this claim is not determinable at this
time.
(c) 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 US$2.0 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.
13. Supplemental cash flow information
(a) Net changes in non-cash working capital
3 months ended 9 months ended
September 30, September 30,
2006 2005 2006 2005
$ $ $ $
-------------------------------------------------
Operating activities:
Accounts
receivable,
prepaid expenses
and supplies (412,196) 97,995 (410,344) (129,350)
Accounts payable
and accrued
liabilities 278,528 (193,737) 918,691 235,385
-------------------------------------------------
(133,668) (95,742) 508,347 106,035
-------------------------------------------------
-------------------------------------------------
Investing activities:
Accounts
receivable,
prepaid expenses
and supplies 33,941 (61,945) (634,414) 166,497
Accounts payable
and accrued
liabilities 304,652 (394,655) 459,497 (715,654)
-------------------------------------------------
338,593 (456,600) (174,917) (549,157)
-------------------------------------------------
-------------------------------------------------
Financing activities:
Accounts
receivable,
prepaid expenses
and supplies - - - 170,770
Accounts payable
and accrued
liabilities 228,177 - 228,177 -
-------------------------------------------------
228,177 - 228,177 170,770
-------------------------------------------------
-------------------------------------------------
b) Exploration and
development
expenditures (7,235,613) (3,410,768) (22,060,827) (11,687,957)
Non-cash
depreciation
and disposal
capitalized 13,863 236,102 404,394 547,915
Stock-based
compensation
capitalized 220,475 - 220,475 -
-------------------------------------------------
(7,001,275) (3,174,666) (21,435,958) (11,140,042)
-------------------------------------------------
-------------------------------------------------
September 30, December 31,
2006 2005
$ $
--------------------------
c) Cash and cash equivalents is
comprised of:
Cash 3,600,989 3,619,352
Short-term investments
(less than 90 days) weighted average
interest of 4.2% (2005 - 2.8%) 40,959,614 21,686,731
--------------------------
44,560,604 25,306,083
--------------------------
--------------------------
The Company did not incur interest expense during the periods ended
September 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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