TSX Trading Symbol: GBU
TORONTO, March 6 /CNW/ -
Highlights
Financial performance
- Fourth quarter net loss was $5.1 million, or $0.03 per share. Full
year loss was $12.6 million, or $0.07 per share.
- Fourth quarter expenditures totaled $38.5 million on our two
development projects and $60.0 million for the full year.
Liquidity and capital resources
- Working capital at December 31, 2006 totaled $79.9 million.
- An additional $20.6 million of cash is expected to be added to
working capital with the expiry of 7.5 million warrants, which are
currently in the money, at the end of first quarter 2007.
- The Company expects to spend US$190 million of the US$638 million
definitive feasibility study budget estimate in 2007 - based on fall
2007 construction permit receipt.
- Project financing discussions are well underway, with a goal of
completing final term sheets for both senior and subordinated debt in
parallel with our EIA approval expected in summer 2007.
Expected Financing Plan
- The estimated capital cost to complete the development of Rosia
Montana project - including interest, financing and corporate costs
is approximately US$750 million.
- The Company anticipates financing these costs with approximately
20 percent equity - US$150 million, of which US$80 million was raised
in the third quarter of 2006 - and 80 percent debt, which could
include senior and mezzanine or high yield debt.
- The estimated capital cost to complete does not include a provision
for (i) a cost overrun facility, (ii) a financial guarantee
(reclamation deposit), or (iii) hedging program if required. These
additional items could add $100 million to the financing plan.
Rosia Montana Project Development
Environmental Impact Assessment
- On January 31, 2007, the Company received the official list of
questions gathered during the public consultation process and judged
by the Romanian Government to require a response.
- In total, approximately 5,600 questions and 95 statements were
included in the official list of questions.
- In preparation, the Company, the project design team and the EIA team
have drafted answers for 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.
- These preparatory efforts, together with an in depth expert
examination of all new issues raised, should allow the Annex to the
EIA to be submitted with robust responses during spring 2007.
- The delay in receipt of the questions, which had been expected before
the end of 2006, has extended the permitting process into summer
2007. While we expect EIA approval in summer 2007, the Romanian
Government ultimately determines the timing of the decision.
"With the questions in hand, we are well underway to completing the
annex this spring," said Alan R. Hill, President and Chief Executive Officer.
"Looking longer term, we made solid strides in 2006 and our aim in 2007 is to
obtain all permits and approvals, as well as financing to begin construction
in the fall."
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 the
archaeological discharge certificate no. 4 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 fall 2007.
Acquisition of Surface Rights
- On October 9, 2006 the Company recommenced acquiring residential
properties.
- In total $25.3 million was spent during the fourth quarter acquiring
residential properties.
- At December 31, 2006, the Company acquired or has options to acquire
134 of the 379 remaining homes within the industrial zone 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.
- The pace of acquisitions has decreased during first quarter 2007 as
the Company and the community find a solution to a surge in the
construction of illegal wood structures referred to as "cabins", for
which sellers expect compensation.
- The Company is confident that a solution will soon be reached and
that the pace of acquisitions will pick up to levels consistent with
those in fall 2006.
Updated Rosia Montana Project Timeline
- The delay in receipt of the questions has extended the permitting
process into summer 2007.
- We are targeting receipt of our construction permit in fall 2007,
following receipt of EIA approval and other permits and approvals
required for the construction permit and the necessary surface
rights.
- We estimate that it will take approximately two years to construct
the mine, putting the first pour of gold target date in fall 2009.
The first pour date has been extended by one quarter, due to the
longer than anticipated lead time for critical equipment and the
delay in receipt of the questions. Lead time for some equipment has
nearly doubled from the estimated time in the definitive feasibility
study.
Romania's Accession to European Union
- Romania's accession to the European Union took place as planned on
January 1, 2007.
- With EU Accession, robust economic growth continues but the coalition
government has become less cohesive during the past several weeks.
- No allowance has been made in our schedule for any delay that may
result from the current political environment.
New Appointments
- On March 1, 2007, Mr. Ronald Simkus, with more than 30 years
experience in the international mining industry, was appointed to the
Board of Directors.
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
This Management's Discussion and Analysis ("MD&A") provides a discussion and analysis of the financial condition and results of operations to enable a reader to assess material changes in the financial condition and results of operations as at and for the years ended December 31, 2006 and 2005. The MD&A is intended to supplement the audited consolidated financial statements and notes thereto ("Statements") of Gabriel Resources Ltd. ("Gabriel" or the "Company") as at and for the years ended December 31, 2006 and 2005. You are encouraged to review the Statements in conjunction with this document.
All amounts included in the MD&A are in Canadian dollars, unless otherwise specified. This report is dated as at March 5, 2007, and the Company's public filings, including its most recent Annual Information Form, can be reviewed on the SEDAR website (www.sedar.com).
Overview
Gabriel is a Canadian based resource company committed to responsible mining and sustainable development in the communities in which it operates. Gabriel is 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 its EU era 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 to the Romanian Government in May 2006. A translation of the study in English was also submitted to meet the requirements for the international Espoo Convention for communications to adjacent States. While it is not a legal requirement, the Company elected to have the Non-Technical Summary of the EIA translated into Hungarian to further assist interested parties in Hungary to better participate in the public consultation process due to the concerns of Hungarians toward the Project. 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. On January 31, 2007, the Company received the official list of questions gathered during the public consultation process and judged by the Romanian Government to require a response. In total approximately 5,600 questions and 95 statements were included in the official list of questions. In preparation, Gabriel, the project design team and the EIA team have drafted answers for 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. These preparatory efforts, together with an in depth expert examination of all new issues raised should allow the Annex to the EIA to be submitted with robust responses promptly during the spring 2007. The delay in receipt of the questions, which had been expected before the end of 2006, has extended the permitting process into summer 2007. While we expect EIA approval in summer 2007, the Romanian Government ultimately determines the timing of the decision.
While the EIA is by far the most important project permit, the Urbanistic Certificate lays out approximately 80 other permits and approvals required, 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 within 60 days of EIA approval. As Gabriel, through Rosia Montana Gold Corporation, 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 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 NGO 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.
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 and most have been frivolous, they include both civil actions and criminal complaints against both the regulatory authorities and individuals within such regulatory authorities; in general, they claim that such regulatory authorities are acting in violation of Romanian laws and ask as sanctions cancellation of the permit or authorization. Gabriel, through Rosia Montana Gold Corporation (RMGC), has intervened in the majority of these cases in order to ensure that the Romanian courts considering these actions are presented with a legally correct, fair and balanced analysis as to why the various Romanian regulatory authorities' actions are in accordance with the relevant and applicable laws. While 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 against and prevent, as much as possible, potential future legal challenges.
Surface Rights
During third quarter 2006, 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 increase in costs is not expected to effect the overall project budget as the definitive feasibility study budget contained a contingency and covered more properties then required to construct the mine. The new prices were announced to the community and public meetings were held in September 2006, as required under World Bank Guidelines.
On October 9, 2006, the Company recommenced 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 134 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.
The pace of acquisitions has decreased during the first quarter 2007 as the Company and the community find a solution to a surge in the construction of illegal wood structures referred to as "cabins," for which sellers expect compensation. The Company is confident that a solution will soon be reached and that the pace of acquisitions will pick up to levels consistent with those in fall 2006.
In addition to the private properties required, the Company needs to acquire about 35% of the project area which is 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 obtain access rights to those properties required for construction and the first five years of operations by the time the EIA is approved.
Community Support
Support for the project in the Rosia Montana community continued to gain momentum in 2006. Following up on the 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 in July 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 across Romania to show community support for the project.
Support for the community and the project was also received from a group of Romanian NGO's in 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:
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. After the visit, some Parliamentarians vocally expressed their disapproval of the project. Pro or con, the Parliamentarians have no role in the permitting process, which takes place in the Executive/Ministerial branch of the Romanian Government.
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 damage done by 20th Century mining, continues to provide traces of the earlier activity. We have spent approximately US$10 million sponsoring a program of rescue archaeology to recover and document the remaining evidence. Over the past five years we have been granted several discharge permits to acknowledge completion of the program.
Here as on other issues, project opponents have used the courts to obstruct the discharge process. 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 2006, 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 in 2007 have been secured.
Financing
At December 31, 2006, we have $79.9 million in working capital. Our rate of expenditure was approximately $3.8 million per month during 2006, excluding working capital adjustments and the commencement of home acquisitions in fourth quarter 2006, which cost an additional $25.3 million. This rate is higher than 2005 when we spent 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 EIA. The expenditure rate is expected to rise in 2007 as we continue to acquire properties, complete detailed engineering, order long-lead-time equipment and begin construction of the new village at Piatra Alba and Alba Iulia. Once the Company receives the construction permit, which is expected in fall 2007, the nature and rate of expenditure changes significantly as site construction begins. Based on fall 2007 construction permit receipt, we expect to spend approximately $200 million in 2007 for corporate activities (US$10 million) and project related activities (US$190 million) leading up to construction and commencement of construction in the fall of 2007. The strong demand for mining and process equipment has forced the Company to accelerate the ordering of long-lead-time equipment and has resulted in larger deposits than was historically the case. Long-lead-time equipment and permitting are the critical path items in meeting our schedule for first pour of gold in fall 2009.
Project financing discussions with traditional lenders are well underway with the goal of completing a final term sheet for both senior and subordinated debt during summer 2007 to coincide with the expected timing of EIA approval. An independent Risk Assessment Report ("Report") was completed by the banks' technical consultants during third quarter 2006. The Report confirms that the Project is Equator Principle compliant, which is a necessary pre-condition for project debt 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.
Expected Financing Plan
- The estimated capital cost to complete the development of Rosia
Montana project - including interest, financing and corporate costs
is approximately US$750 million.
- The Company anticipates financing these costs with approximately
20 percent equity - US$150 million, of which US$80 million was raised
in the third quarter of 2006 - and 80 percent debt, which could
include senior and mezzanine or high yield debt.
- The estimated capital cost to complete does not include a provision
for (i) a cost overrun facility, (ii) a financial guarantee
(reclamation deposit), or (iii) hedging program if required. These
additional items could add $100 million to the financing plan.
The cost to construct the project is estimated at US$638 million based on a definitive feasibility study updated in early 2006. 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. Some of the increase in both capital and operating costs over the previous estimates from early 2003 reflects 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 approximately US$750 million, of which US$88 million was raised during 2006, to place the Rosia Montana project into production. These amounts are a combination of debt and equity and include working capital. A cost overrun facility, which is required by lenders in a financing of this type, is being negotiated over and above the amounts targeted above. If a cost overrun facility can not be successfully negotiated, or there becomes a need for a cash deposit as part of a financial guarantee or if we decide to purchase puts to meet our hedging commitments, the Company would have to increase the equity offering above the current target in the overall financing plan by up to $100 million. The lenders requirement for gold price guarantee could be accomplished through a variety of instruments, most of which would be at no cost to the Company, however, those instruments may limit our participation in rising gold prices. Puts are the only gold price guarantee that would not limit the Company's participation in higher gold prices but come with a cash cost. 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.
Capital and Operating Cost Summary
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Capital
Mine $ 45
Process 142
Infrastructure 82
Tailings Management Facility 43
Total Directs 311
Total Indirects 156
Owners' costs 116
Contingencies 55
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Total $ 638
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Operating cost per tonne
Mine $2.41
Process 6.09
Administration 0.96
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Subtotal $9.46
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Silver credit (1.13)
Royalties and taxes 0.39
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Net cost per tonne $8.72
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(1) For details on proven and probable mineral reserves, please see
page 26 of this report.
Annual Summary
Year Year Year
ended ended ended
December December December
31, 2006 31, 2005 31, 2004
In thousands of Canadian dollars
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Loss $ 12,613 $ 8,481 $ 8,587
Loss per share - basic and diluted $ 0.07 $ 0.05 $ 0.06
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Total assets $338,056 $238,343 $184,502
Long-term liabilities $ 1,387 $ 449 $ 221
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Investments in exploration and
development including working capital
changes $ 53,058 $ 15,992 $ 35,049
Cash flows from financing activities $ 98,145 $ 59,416 $ 26,947
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Loss
- The higher loss in 2006 reflects higher corporate, general and
administrative expenses, project financing costs and provision for
income taxes partially offset by lower costs related to stock option
compensation, severance costs and higher interest income due to
higher cash balances during 2006 compared to 2005.
- Overall, the 2004 and 2005 losses were similar. Lower project finance
costs in 2005 were offset by reorganization severance costs,
settlement of a lawsuit and an increase in non-cash charges related
to stock option compensation.
- The Company will continue to incur losses until Rosia Montana begins
commercial production.
Total Assets
- The increase in total assets from the year ended 2004 to 2006 relates
to two equity issues and the exercise of stock options and warrants,
which raised a total of $157.4 million, to finance the advancement of
the Company's two key projects, Rosia Montana and Bucium.
- Total assets will increase once the EIA is approved and the Company
begins raising the necessary funds to develop Rosia Montana.
Other Liabilities
- The only long-term liability on the Company's balance sheet is
Deferred Stock Units (DSUs) due to Directors and officers of the
Company and the fidelity bonus, a retention bonus for Romanian
employees. The DSUs are revalued at each balance sheet date; the
increase in 2005 and 2006 reflects the increase in our share price
and the issuance of additional DSU's.
Investment in Exploration and Development
- The reduction in expenditures in 2005 compared to 2004, relates to
the shift to only those activities related to the permitting process.
As a result, detailed engineering and acquisition of properties had
been put on hold. The increase in 2006 expenditures reflects the
restart of the acquisition of properties, higher permitting and
communications costs.
- Expenditures are expected to rise significantly in 2007 with the
approval of the EIA and commencement of site construction.
Cash Flow from Financing Activities
- The Company's primary source of liquidity has been the equity
markets. The Company raised $183.2 million over the past three years
through four financings, as well as the exercise of warrants and the
exercise of stock options by employees.
- The Company will need to raise at least an additional US$670 million
to finance the development of Rosia Montana.
Project Timeline
The EIA was submitted in second quarter 2006. In January 2007, the Company received the 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, which we anticipate will be completed during spring 2007. We expect EIA approval during summer 2007. If we are able to purchase the necessary properties in the village to begin initial construction during the first two quarters of 2007 and obtain the other permits and approvals required for the project in parallel or shortly after EIA approval, we would expect receipt of the construction permit enabling us to begin construction in fall 2007. This timetable has slipped from our previous guidance during 2006, which targeted receipt of EIA and construction permit during the fall/winter 2006-2007 and construction start up in spring 2007. The longer than anticipating lead time for critical path equipment and the delay in receipt of the official questions have caused the delay. We had expected receipt of the official questions from the Romanian Government from the public consultation process by the end of third quarter 2006; however, due to the volume of questions received by the Romanian Government, we did not receive the questions until January 2007, a delay of four months. The schedule has also been adjusted to reflect, based on past experience, the workings of the permitting process and construction schedule. Overall, we expect first pour in fall 2009.
Romania's Accession to European Union
Romania became a full member of the European Union on January 1, 2007. The robust economic growth that characterized the five years proceeding accession is projected to continue at levels exceeding five percent. The inflow of foreign direct investment, although reduced from the record levels of 2006, is also expected to continue at higher than average levels into the post accession period.
This relatively bright economic picture is not matched however, in the political arena. Since accession, cohesiveness in the ruling coalition has deteriorated with the departure of one of the smaller partners while open disputes between the bigger members dominate the political agenda. The Opposition has exploited this situation by launching an impeachment process against the President who according to the polls is the most popular president Romania has ever had. While these events are not expected to bring about his removal from office, they do tend to impede attention to urgent government business and the implementation of needed reforms that would improve Romania's ranking as a place to do business.
We have adjusted our permitting and construction schedule to reflect, based on our current best estimate, past experience, the workings of the permitting and construction schedule but no allowance has been made in our schedule for any delay that may result from the current political environment.
2007 Outlook
Our key objectives for next year are similar to those of 2006, and include:
1. Continuously improving communications with all stakeholders;
2. Gaining approval of the EIA by the Romanian Government;
3. Gaining reinstatement of the archaeological discharge currently
before courts;
4. Acquiring the surface rights necessary to begin initial construction;
5. Obtaining the project construction permit; and
6. Obtaining funding to begin project construction.
We made solid strides in meeting each one of our key objectives in 2006 and our aim in 2007 is to obtain all permits and approvals, as well as financing, to begin project construction.
Results of Operations
The results of operations are summarized in the following tables, which have been prepared in accordance with Canadian Generally Accepted Accounting Principles:
Cdn $ thousands 2006 Q4 2006 Q3 2006 Q2 2006 Q1 ------------------------------------------------------------------------- Statement of Loss Loss $ 5,103 $ 2,156 $ 3,587 $ 1,767 Loss per share 0.03 0.01 0.02 0.01 ------------------------------------------------------------------------- Balance Sheet Working capital 79,903 120,360 34,803 44,272 Total assets 338,056 330,489 236,685 238,026 ------------------------------------------------------------------------- Statement of Cash Flows Investments in exploration and development including working capital changes 31,447 6,663 8,460 6,488 Cash flow from financing activities 1,954 94,640 1,190 361 ------------------------------------------------------------------------- Cdn $ thousands 2005 Q4 2005 Q3 2005 Q2 2005 Q1 ------------------------------------------------------------------------- Statement of Loss Loss $ 2,037 $ 1,745 $ 2,340 $ 2,359 Loss per share 0.01 0.01 0.01 0.02 ------------------------------------------------------------------------- Balance Sheet Working capital 52,870 28,908 32,850 38,247 Total assets 238,343 208,906 210,216 211,834 ------------------------------------------------------------------------- Statement of Cash Flows Investments in exploration and development including working capital changes 4,369 3,631 4,242 3,816 Cash flow from financing activities 30,539 576 (247) 28,548 -------------------------------------------------------------------------
Fourth Quarter 2006 Analysis
For the quarter ended December 31, 2006, we incurred a loss of $5.1 million, or 3 cent per share, compared to a loss of $2.0 million, or 1 cent per share, in the year-earlier quarter. The increased loss is due to higher corporate, general and administrative expenses, project financing costs and provision for income taxes partially offset by higher interest income. In addition, we invested $38.5 million during the fourth quarter in our Rosia Montana and Bucium properties, compared to $4.9 million in the year earlier period. The increased expenditures related to the commencement in the fourth quarter of property acquisitions. Cash flow from financing activities in fourth quarter 2006 totaled $2.2 million due to the exercise of stock options, compared to $30.5 million in fourth quarter 2005, reflecting the exercise of warrants and stock options.
Statement of Loss
Loss for the Period
For the year ended December 31, 2006, we lost $12.6 million, or $0.07 per share, compared to a loss of $8.5 million, or $0.05 per share, for 2005. The higher loss in 2006 reflects 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 2006, we incurred a total of $9.3 million for corporate general and administrative expenses ("G&A"), compared to $5.5 million in 2005. Excluding the effect of the change in value of the deferred share units ("DSUs"), costs increased by $3.0 million due primarily to higher communications, travel and legal costs. Corporate general and administrative costs are anticipated to remain at current levels, excluding the impact of DSUs, for the foreseeable future.
DSU costs for 2006 increased corporate general and administrative costs by $1 million, compared to an increase of $228 thousand in 2005. The DSUs are revalued each year based on the closing share price at year end, with the difference between the total value of the DSUs at year end compared to the value at the end of the previous year. If the value is higher, as it was at the end of 2006 and 2005, the difference is charged to the Statement of Loss, increasing costs for the year. If the share price declines, the lower value of the DSUs is credited against costs during the year. Overall, for 2006 our share price increased by $2.22, compared to last year when our share price increased from the close of the previous year end by $1.28.
Stock Option Compensation
Stock option compensation expensed for 2006 was $1.8 million, compared to $2.8 million for 2005. The lower expense for 2006 reflects the issuance of fewer options in 2006 (2.5 million) compared to 2005 (6.0 million), partially offset by the higher value ascribed to the options under the Black-Scholes option pricing model in 2006 ($1.68) compared to 2005 ($0.85). The higher value of the options in 2006 is due to the higher share price, interest rates and volatility. Of the options granted in 2006, 750 thousand were granted to personnel working on development projects for which the cost of those options -- which totaled $385 thousand -- was capitalized to mineral properties.
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.
Severance and Settlement Costs
In 2005, we closed our existing office in Alba Iulia, eliminating a number of staff positions not immediately relevant to our permitting and other development efforts, and relocated all remaining staff to either Bucharest or the project site in Rosia Montana. The total cost to sever the 9 employees was $547 thousand, which amount was accrued at the end of the second quarter. Two-thirds of the severance accrued was paid during 2005, with the balance being paid over the course of the first six months of 2006.
In January 2006, the Company settled for US$250,000 a lawsuit with a former employee who claimed unspecified damages for breach of contract, negligence and breach of fiduciary duty arising out of an employment contract. The trial was set to begin in February 2006. The amount was recorded in the 2005 Statement of Loss, even though the settlement occurred after year end since the contingency was known prior to year end and could be reasonably estimated.
Project Financing Costs
We incurred $2.1 million in project financing costs in 2006, related to completion of the Risk Assessment Report for the banks and advisory services, as well as payments to former advisors to terminate contracts. 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 summer 2007. Overall, we expect to incur costs of $1.0 million for project financing activities in 2007, leading up to the finalization of the term sheets. The activities include advisory services and completion of term sheet negotiations for the various facilities under our financing plan.
Interest Income
Interest income for 2006 increased to $2.7 million, compared to $0.7 million in 2005. The higher interest income in 2006 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. Interest income should decrease in 2007 as our cash balance declines while we continue permitting and development activities at our Rosia Montana project.
Foreign Exchange
For 2006, we reported a gain of $33 thousand compared to a $63 thousand gain in 2005. 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, EU Euros and Romanian Lei, we only convert our Canadian dollar cash balance to Euros and Lei 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 for identifying and defining the size of the four ore bodies, for engineering to design the size and scope of the project, for environmental assessment and permitting, as well as surface rights/property acquisition. Once we receive our construction permit, the nature and magnitude of the expenditures will increase as we build roads, production facilities, 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 $59.9 million in our two projects during 2006, compared with $16.0 million in 2005.
For the year ended December 31, 2006, expenditures increased in all the major project areas as permitting and development activities moved ahead. Community development activities totaled $30.1 million in 2006, compared to $2.4 million in 2005. The increase was due largely to the recommencement of surface rights acquisitions in the fourth quarter totaling $25.3 million. In addition, we spent $3.1 million on engineering during 2006, as compared to $0.9 million in 2005, for detailed engineering to order long-lead-time equipment. During 2006, expenditures for permitting increased to $8.0 million from $5.0 million in the year-earlier period, as the EIA was completed, we participated in 16 public meetings and began preparatory work to respond to the expected questions from the Romanian Government. For 2006, expenditures on finance and administration increased to $16.3 million from $6.4 million in the year-earlier period, reflecting higher communications, legal and consulting costs. Exploration at Rosia Montana totaled $0.9 million in 2006 compared to $0.7 million in 2005, with the focus of activity in both years on geologic mapping and metallurgical sampling. At Bucium, a scoping study was completed in 2006 to determine the economics of developing the resource. The scoping study cost $1.1 million during 2006, compared to $1.5 million in 2005. Note 4, Mineral Properties, of our Consolidated Financial Statements also includes capitalized depreciation in the amount of $0.5 million for 2006 and $0.8 million for 2005, related to capital assets used in Romania.
Expenditures for project construction are expected to total US$190 million in 2007, as we acquire properties, continue detailed engineering, order long-lead-time equipment, begin construction of the new village at Piatra Alba and subdivision in Alba Iulia and begin site construction, which is scheduled for fall 2007.
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. We updated the cost to construct the project in first quarter 2006. 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.
Working Capital
As at December 31, 2006, we had working capital of $79.9 million versus $52.9 million as at December 31, 2005. The increase in working capital in 2006 relates to an equity issue and exercise of stock options totaling $98 million, partially offset by the loss incurred and the investment in capital assets and mineral properties during the year. 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 approximately $20.6 million of working capital for the Company.
Net Change in Non-Cash Working Capital
The net change in operating non-cash working capital increased for the year ended December 31, 2006, reflecting an increase in accounts payable.
The net change in investing non-cash working capital increased for the year ended December 31, 2006, primarily as a result of a significantly higher accruals related to a higher level of activity related to the Rosia Montana project and the addition of resettlement liabilities related to those residents of Rosia Montana who have sold their homes in exchange for a new home in one of the two development sites the Company is building.
The increase in financing non-cash working capital in the year ended December 31, 2005 represents consulting costs incurred in 2003 related to a future public financing, which was expensed as part of share issuance costs at the end of first quarter 2005.
Related Party Transactions
During second quarter 2006, the Company provided an interest free loan of $50 thousand to an employee. The principal amount is repayable on June 15, 2010, but is forgivable in 2009 provided certain conditions are met. The principal amount of the loan has been discounted for 3 years at the Bank of Canada's key interest rate of 4.5%.
During 2006, our Romanian subsidiary RMGC paid $14 thousand (2005 - $39 thousand) to a company owned by Minvest, a minority shareholder of RMGC, for power costs related to RMGC's assay laboratory in Romania. As the laboratory was sold to a third party during third quarter 2006, future payments to Minvest are not anticipated.
During 2006, we paid $27 thousand (2005 - $19 thousand) to a director of the Company for consulting services.
We subleased a portion of our 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 $38 thousand for 2005 and was included as an offset to corporate general and administrative expenses. There were no transactions in 2006.
In December 2004, we loaned a total of US $971 thousand 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.
Resettlement Liabilities
During the fourth quarter of 2006, the Company recommenced purchasing homes in the project area. Residents have two choices. They can either choose to take the sales proceeds and move to a new location of their choosing or they can exchange their properties for a new property to be built by the Company at one of the two new resettlement sites. At December 31, 2006, the Company had entered into resettlement contracts totaling $4.4 million, obligating the Company to deliver a new property under those contracts by September 30, 2007. A penalty of 0.5% per month of delay past September 30 will have to be paid.
Contractual Obligations
During third quarter 2006, the Company received the Baisoara exploration license which obligates the Company to spend US$3.2 million over its five-year term, which expires July 2011. As at December 31, 2006, the remaining expenditure commitment was US$3.2 million (December 31, 2005 - Nil).
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 December 31, 2006, commitments under such agreements totaled $6.0 million (December 31, 2005 - $3.1 million).
During fourth quarter 2005, RMGC initiated its pre-sale agreement program - referred to as the options program - for residents of the impacted area, whereby each resident receives three percent of the value of their properties in exchange for signing a pre-sale agreement. The program cost approximately US$0.7 million during the first three quarters of 2006, representing the 3% up-front payment to the pre-sale agreement, committing the Company to acquire approximately US$24 million in local properties in the project area. The commitment becomes binding once the EIA is approved. During the fourth quarter the Company began purchasing homes, acquiring US$22.2 million of these properties, leaving US$1.8 million remaining at year end to purchase homes and properties of residents who signed the pre-sale agreement.
Critical Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses and other income during the year. Significant estimates and assumptions include those related to the recoverability of mineral properties and benefits of future income tax assets, estimated useful lives of capital assets, stock compensation valuation assumptions and determinations as to whether costs are expensed or deferred. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly. A summary of the critical accounting estimates is listed below:
Recoverability of mineral properties
We have determined that the area covered by the Rosia Montana exploitation license contains economically recoverable reserves. The ultimate recoverability of the $234.5 million carrying value at December 31, 2006 plus related capital assets is dependent upon our ability to obtain the necessary permits and financing to complete the development and commence profitable production - or alternatively, upon our ability to dispose of our interest on an advantageous basis.
A scoping study was completed to determine the economic potential of the Bucium license area. Once again, the recoverability of the $9.4 million carrying value at December 31, 2006 plus related capital assets of this exploration property is dependent upon the ultimate discovery of economically recoverable reserves, our ability to obtain necessary permits, financing to complete the development and future profitable production - or alternatively, upon our ability to dispose of our interest in the license on an advantageous basis.
Changes in future conditions could require material write-downs of the Rosia Montana project and/or the Bucium carrying value.
Stock-based compensation
Stock-based compensation relating to stock options are estimated based on fair value at the grant date, and charged to the Statement of Loss or capitalized to Mineral Properties on the Balance Sheet over the vesting period. The Company has elected to disclose pro-forma net loss and loss per share amounts related to options granted prior to January 1, 2003.
Stock-based compensation relating to deferred share units is calculated based on the quoted market value of the common share, and charged to the Statement of Loss or capitalized to Mineral Properties on the Balance Sheet. The compensation cost and liability is adjusted each reporting period for change in the underlying share price.
Income taxes
Income taxes are calculated using the asset and liability method of tax accounting. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recognized to the extent the recoverability of future income tax assets are not considered more likely than not to be realized.
Risks and Uncertainties
The Company's business is subject to a number of risks related to both its exploration and development programs for its Rosia Montana, Bucium and Baisoara projects as well as risks related to the mining industry generally.
Political & Economic Risks of Doing Business in Romania
As all of our property interests are located in Romania, we are subject to certain risks, including possible political or economic instability, which may result in the impairment or loss of mineral concessions or other mineral rights. Mineral exploration and mining activities may be affected in varying degrees by political stability and government regulations relating to the mining industry, which could include cancellation or renegotiation of contracts, changes in Romanian domestic laws or regulations, changes in tax laws, royalty and tax increases, restrictions on production, price controls, expropriation of property, fluctuations in foreign currency, foreign exchange controls, import and export regulations, restrictions on the export of gold, restrictions on the ability to repatriate earnings and pay dividends offshore, restrictions on the ability to hold foreign currencies in offshore bank accounts, environmental legislation, employment practices and mine safety. There can be no assurance that such restrictions and controls will not be imposed in the future and such restrictions, controls or fluctuations may materially affect our financial position as well as our ability to develop our mineral properties. In the event of a dispute regarding any of these matters, we may be subject to the jurisdiction of courts outside of Canada, which could have adverse implications for the outcome. Any changes in laws, regulations or shifts in political attitudes regarding foreign direct investment in the Romanian mining industry are beyond our control and may adversely affect our business.
Romania became a full member of the European Union on January 1, 2007. The country has been governed by a coalition of centre and centre right parties that came together after the national parliamentary elections of 2004 to unseat the social democrats. This coalition held together while the pursuit of full membership in the EU created a sense of common purpose. Since accession, the cohesiveness of the coalition has eroded as the diverse elements jockey for position in the EU parliament and in garnering advantage prior to the next round of national elections. These are currently scheduled for November, 2008 but may well come earlier if the coalition is defeated through a non confidence motion.
New elections will undoubtedly return different proportions of senators and deputies from the various political parties and while a coalition will have to form, it may not be the same as the incumbent. While the prospect of abrupt change in any future Romanian government's approach to the market economy or foreign direct investment is not likely since the core of these policies are part of the articles of Romania's accession to the European Union and are therefore subject to oversight by the European Commission, the current preoccupation of the political class with issues related to the sharing of power diverts attention from the business of government.
The Company has adjusted permitting and construction schedule to reflect, on its best estimate the possible effect of political turbulence on our project, but no allowances have been made to provide for delays that might be caused by such a situation.
The incidents at the Baia Mare and Baia Borsa tailings management facilities in Romania, in neither of which the Company had any interest or involvement, have dramatically increased public awareness of the environmental and safety hazards of the mining industry. In response to these incidents, both the United Nations and the European Union (the "EU") convened missions or task forces to investigate these incidents and to formulate conclusions and recommendations. The EU recommendations included developing a new EU directive relating specifically to the mining industry, as well as the preparation of an inventory of similar sites in Europe that pose the threat of similar incidents. The International Commission for the Protection of the Danube River (the "ICPDR") has assembled an inventory of high-risk tailings facilities in countries surrounding the Danube River, including Hungary, Romania, Slovenia and the Ukraine. The Salistei tailings dam - operated by Minvest in the village of Rosia Montana but outside of our project boundaries - is included in the ICPDR's inventory.
An incident at any one of the facilities included in the ICPDR's inventory, or that occurs elsewhere in Europe is beyond our control and may adversely affect political attitudes in Romania regarding the mining industry. In particular, a shift in such attitudes away from support for the mining industry may adversely affect our ability to develop or may prevent us from developing a new mine at Rosia Montana.
Project Approval Risks
EIA
We must obtain a large number of permits, approvals and authorizations from the local, county and federal levels of the Romanian Government in order to proceed with the development, construction and operation of the Rosia Montana project. The laws relating to the permitting of a large-scale project like Rosia Montana are being applied for the first time in this case, under the newly-harmonized EU directives. The environmental approval is one of the more important approvals the Company must obtain. In addition to complying with all Romanian laws and regulations, the EIA for the project must comply with all EU guidelines and directives. Due to the potential transboundary effects of the project, a number of countries neighbouring Romania have the opportunity to participate in the public consultation process, pursuant to the provisions of the Espoo Convention. There are significant risks that the governmental review and approval process could be delayed due to circumstances beyond the Company's control, and any such delays could negatively impact the Company's development plans or result in additional expenses on our part.
Surface Rights
In order to construct and operate a new mine at Rosia Montana, all land required for the open pits, waste dumps, processing plant, tailings management facility and associated facilities and infrastructure must be zoned and/or reclassified for industrial uses. To date, the majority of the proposed project site has been zoned and classified for industrial use, and application is presently being made to have the balance of the project site re-zoned and/or reclassified to permit industrial uses such as mining. There are significant risks that the rezoning process could be delayed due to circumstances beyond our control, and any such delays could negatively impact our development plans or result in additional expenses on our part.
Archaeological Discharge
The validity of one of the archaeological discharge certificates previously issued to RMGC has become the subject of a court challenge initiated by a NGO opposed to the development of the Rosia Montana project. The court challenge was commenced against the Ministry of Culture and Religious Affairs, the governmental authority issuing the discharge certificate, and not against RMGC. The Alba Court granted a temporary injunction suspending the operation of the discharge certificate pending a final hearing on the matter. The Company along with the Ministry of Culture and Religious Affairs appealed the Alba Court ruling to Romania's Supreme Court and won the 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. As a result, the Supreme Court overturned the previous annulment, and 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. There can be no assurance that the validity of the discharge certificate will be upheld the Brasov Court of Appeal and there can be no assurance that other previously obtained discharge certificates will not be challenged. Any successful challenges could negatively impact the Company's development plans, require additional work and re-application for discharge certificates, or result in additional delays and expenses on our part.
Project Development Risks
We plan to commence construction of the new mine at Rosia Montana in fall 2007. However, there are significant risks that the commencement of construction of the new mine at that time could be significantly delayed due to circumstances beyond our control. Such risks include delays in acquiring all necessary surface rights, including the acquisition of the properties in the impact area in Rosia Montana, delays in completing the acquisition, permitting and construction of the new Piatra Alba and Alba Iulia town-sites as part of the community development program, delays in obtaining all zoning, environmental, construction and other required permits, approvals and authorizations required to construct and operate the new mine, delays in finalizing detailed engineering and a definitive construction contract, construction cost overruns, availability of all necessary process plant and mining equipment, as well as unforeseen difficulties encountered during the construction and commissioning process. In addition, continued opposition to the Rosia Montana project by certain Romanian and international NGOs and their allies could contribute to such delays.
Project Financing Risks
While we have sufficient financial resources to fund permitting and initial construction activities based on our current permitting and construction schedule, we do not have the financial resources to construct the mine at Rosia Montana. We will require additional financing from external sources to meet our capital requirements. Although we have been successful in the past in obtaining financing through the sale of equity securities, there can be no assurance that we will obtain adequate financing in the future or that the terms of such financing will be favourable. Failure to obtain such additional financing could result in delay or indefinite postponement of further development of our project, with the possible loss of such properties.
In the past few years, gold prices have risen from the low US$300-per-ounce level to over US$650 per ounce, resulting in higher share prices for gold equities. During 2006, our share price increased from $2.84 to close 2006 at $5.06, due in part to the advancement of permitting activities but also due to rising gold prices. There can be no assurance that gold prices and therefore gold equities will remain high, especially during the time we will need to raise debt and equity financing for construction of Rosia Montana.
Risk Associated With Mineral Tenure Rights
The acquisition of title to mineral concessions in Romania is a detailed and time-consuming process. Title to the area of mining concessions may be disputed. We have diligently investigated title to all mineral concessions and obtained title opinions with respect thereto and, based upon such opinions, we believe that title to all properties covering the mineral resources and reserves at the Rosia Montana project is in good standing; however, the foregoing should not be construed as a guarantee of title to those properties. Title to those properties may be affected by undisclosed and undetected defects.
Risks Associated With the Existing State-Run Mining Operations
RMGC is the titleholder of the mining License for the Rosia Montana project and Minvest has been designated as the affiliated company under the mining License for the sole purpose of running its now-closed state-subsidized mining operation at Rosia Montana. While Minvest ceased operations during the second quarter 2006, there can be no assurance that Minvest's operating activities will not attract liability to RMGC and therefore the Company, as the titleholder to the License, under the laws, rules and regulations applicable to mining activities in Romania. Likewise, there can be no assurance that the assumption by Minvest of all liabilities associated with its mining operations and the indemnification of RMGC and therefore Gabriel from such liabilities will be enforceable against Minvest.
Risk Associated with Acquisition of Surface Rights and Resettlement and
Relocation
In order to develop the Rosia Montana project, we must acquire all necessary surface rights for the construction of the new mine, including initial open pits, waste dumps, plant site and associated infrastructure, as well as for the tailings management facility. This process involves the acquisition of properties owned by residents in the Rosia Montana and Corna valleys and the construction of the new village of Piatra Alba to house such former residents of Rosia who wish to live there, as well as the acquisition and replacement of all public buildings, social facilities and other structures. While we updated the Company's property acquisition program in third quarter 2006 to reflect changing circumstances within the affected communities, there is no certainty that the acquisition of all surface rights will be carried out within the timeframe and within the range of costs we have currently estimated.
Uninsured Risks
We maintain insurance to protect against certain risks related to our current operations in amounts that we believe are reasonable, depending upon the circumstances surrounding each identified risk. We may elect, however, not to insure against certain risks due to high premiums or for various other reasons. In the course of exploration, development and production of mineral properties, certain risks, and in particular, unexpected or unusual geological operating conditions, including rock bursts, cave-ins, fire, flooding and earthquakes may occur. It is not always possible to fully insure against such risks as a result of high premiums or other reasons. Should such liabilities arise, any future profitability could be reduced or eliminated and result in increasing costs and a decline in the value of our securities.
Management
We currently have a small executive management group, which is sufficient for the Company's present stage of development. Given that our development to date has depended, and in the future will continue to depend, in large part on the efforts of the current executive management group, the loss of a significant number of the members of this group could have a material adverse effect on the Company, its business and its ability to develop the project.
Enforcement of Civil Liabilities
As substantially all of the assets of the Company and its subsidiaries are located outside of Canada, and certain of its directors and officers are resident outside of Canada, it may be difficult or impossible to enforce judgments granted by a court in Canada against the assets of the Company or its subsidiaries or its directors and officers residing outside of Canada.
Dividends
All of our available funds will be invested to finance the growth of our business and, therefore, investors cannot expect to receive a dividend on our common shares in the foreseeable future.
Risks Related to the Gold Mining Industry Generally
The following risks apply to the gold mining industry generally:
Exploration and Mining Risks
The business of exploring for minerals and mining involves a high degree of risk. Few properties that are explored are ultimately developed into producing mines. At present, none of our properties, other than Rosia Montana, have proven and probable reserves. Fires, power outages, labour disruptions, flooding, explosions, cave-ins, land slides and the inability to obtain suitable or adequate machinery, equipment or labour are other risks involved in the construction and operation of mines and the conduct of exploration programs. Substantial expenditures are required to establish reserves through drilling, to develop metallurgical processes, and to develop the mining and processing facilities and infrastructure at any site chosen for mining. Although substantial benefits may be derived from the discovery of a major mineralised deposit, no assurance can be given that minerals will be discovered in sufficient quantities to justify commercial operations or that funds required for development can be obtained on a timely basis. The economics of developing gold and other mineral properties is affected by many factors, including the cost of operations, variations of the grade of ore mined, fluctuations in the price of gold or other minerals produced, fluctuations in exchange rates, costs of development, infrastructure and processing equipment and such other factors as government regulations, including regulations relating to royalties, allowable production, importing and exporting of minerals and environmental protection. In addition, the grade of mineralization ultimately mined may differ from that indicated by drilling results and such differences could be material. Depending on the price of gold or other minerals produced, we may determine that it is impractical to commence or continue commercial production.
Estimates of Mineral Reserves and Resources and Production Risks
The mineral reserves and resources are estimates only, and no assurance can be given that any particular level of recovery of minerals will in fact be realized - or that an identified reserve or resource will ever qualify as a commercially mineable (or viable) deposit which can be legally and economically exploited. In addition, the grade of mineralization ultimately mined may differ from that indicated by drilling results and such differences could be material. Production can be affected by such factors as permitting regulations and requirements, weather, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations, inaccurate or incorrect geologic, metallurgical or engineering work, and work interruptions, among other things. Short-term factors, such as the need for orderly development of deposits or the processing of new or different grades, may have an adverse effect on mining operations and on the results of operations. There can be no assurance that minerals recovered in small-scale laboratory tests will be duplicated in large-scale tests under on-site conditions or in production-scale operations. Material changes in reserves or resources, grades, stripping ratios or recovery rates may affect the economic viability of projects. The estimated reserves described herein should not be interpreted as assurances of mine life or of the profitability of future operations.
We have engaged expert independent technical consultants to advise us on mineral reserves and resources and basic and detailed engineering, among other things. We believe that those experts are competent and that they have carried out their work in accordance with internationally recognized industry standards. However, if the work conducted by those experts is ultimately found to be incorrect or inadequate in any material respect, we may experience delays and increased costs in developing the Rosia Montana project.
Mineral Prices
The mineral exploration and development industry in general is intensely competitive and there is no assurance that, even if commercial quantities of proven and probable reserves are discovered, a profitable market may exist for the sale of same. Factors beyond our control may affect the marketability of any substances discovered. Mineral prices have fluctuated widely, particularly in recent years. The marketability of minerals is also affected by numerous other factors beyond our control, including government regulations relating to price, royalties, allowable production and importing and exporting of minerals, the effect of which cannot accurately be predicted. Depending on the price of gold or other minerals produced, we may determine that it is impractical to commence or continue commercial production.
The financing plan being contemplated by the Company requires some form of price guarantee (hedging) as the price required to support the total senior and subordinate debt facilities is above the banks' long-term gold price assumption. The amount and cost of the price guarantee is a function of gold prices at the time the program is executed. If gold prices were to fall between now and the execution of the hedging program, it could have a significant impact on the quantum of program and cost of the guarantee.
Environmental and other Regulatory Requirements
Our activities are subject to environmental regulations promulgated by government agencies from time to time. Environmental legislation generally provides for restrictions and prohibitions on spills, releases or emissions of various substances produced in association with certain mining industry operations, such as seepage from tailings disposal areas, which would result in environmental pollution. A breach of such legislation may result in the imposition of fines and penalties. In addition, certain types of operations require the submission and approval of environmental impact assessments. Environmental legislation is evolving in a manner which means stricter standards, and enforcement, fines and penalties for non-compliance are more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers and employees. The cost of compliance with changes in governmental regulations has the potential to reduce the profitability of operations.
Our current development activities and commencement of production on our properties require permits from various governmental authorities and such operations are and will be governed by laws and regulations governing prospecting, development, mining, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. Companies engaged in exploration activities and in the development and operation of mines and related facilities generally experience increased costs, and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. There can be no assurance that all permits which may be required for exploration, construction of mining facilities and conduct of mining operations will be obtainable on reasonable terms or on a timely basis, or that such laws and regulations would not have an adverse effect on any mining project that we may undertake. We believe that we are in substantial compliance with all material laws and regulations which currently apply to our activities.
Failure to comply with applicable laws, regulations, and permitting requirements may result in enforcement actions, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations and, in particular, environmental laws.
Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation thereof, could have a material adverse impact on us and cause increases in capital expenditures or production costs or reduction in levels of production at producing properties, or require abandonment or delays in development of new mining properties.
CEO/CFO Certification
Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded at December 31, 2006 that these controls and procedures are operating effectively. In addition, our Chief Executive Officer and Chief Financial Officer have concluded at December 31, 2006 that management has designed such internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting as required by the new Ontario Securities Commission Internal Control certification requirements for year end, December 31, 2006.
Outstanding Share Data
The Company's issued shares outstanding as at the report date was:
Outstanding ------------------------------------------------------------------------- Preferred shares Nil Common shares 211,048,182 Common stock options 10,160,831 Common stock warrants 10,086,000 Deferred share units - common shares 232,742 ------------------------------------------------------------------------- Fully diluted share capital 231,527,755 ------------------------------------------------------------------------- -------------------------------------------------------------------------
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 the Company to be materially different from its estimated future results, performance or achievements expressed or implied by those forward-looking statements and its forward-looking statements are not guarantees of future performance. These risks, uncertainties and other factors include, but are not limited to: changes in the worldwide price of precious metals; fluctuations in exchange rates; legislative, political or economic developments including changes to mining and other relevant legislation in Romania; operating or technical difficulties in connection with exploration, development or mining; environmental risks; the speculative nature of gold exploration and development, including the risks of diminishing quantities or grades of reserves; and the Company's requirements for substantial additional funding.
Gabriel Resources Ltd. expressly disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, events or otherwise.
Proven and Probable Mineral Reserves
At year end 2005 (no change in 2006), we updated proven and probable reserves for the project: Proven and probable reserves decreased from 10.6 million ounces to 10.1 million ounces. The decrease in reserves reflects the reduction of 200,000 ounces due to a more conservative method of measuring reserves to include internal dilution, as well as the fact that 700,000 ounces were removed from reserves primarily as a result of expanding the buffer zone around the protected area, reducing the size of three of the four pits. Partially offsetting those reductions was the conversion of internal waste to ore within the existing pit cones as a result of increasing the gold price used to calculate reserves from US$300 to US$400 per ounce, partially offset by the increase in estimated operating costs.
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Grade Contained
(g/t) Ounces
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Reserve
Category Tonnes Gold Silver Gold Silver
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Proven 113,768,000 1.62 9.0 5,900,000 32,800,000
Probable 101,137,000 1.28 4.6 4,200,000 14,800,000
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Total 214,905,000 1.46 6.9 10,100,000 47,600,000
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John Marek, P.Eng., is the qualified person responsible for calculating
the reserve estimate set forth in the table above.
Management's Responsibility for Financial Reporting
The accompanying consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in Canada, and contain estimates based on management's judgment. Management maintains an appropriate system of internal controls to provide reasonable assurance that transactions are authorized, assets safeguarded, and proper records maintained.
The Audit Committee of the Board of Directors has met with the Company's independent auditors to review the scope and results of the annual audit and to review the consolidated financial statements and related financial reporting matters prior to submitting the consolidated financial statements to the Board for approval.
The Company's independent auditors are PricewaterhouseCoopers LLP, have conducted an audit in accordance with generally accepted auditing standards in Canada, and their report follows.
Alan R. Hill Richard Young President and CEO Vice President and CFO
March 5, 2007
Auditors' Report
To the Shareholders of
Gabriel Resources Ltd.
We have audited the consolidated balance sheet of Gabriel Resources Ltd. as at December 31, 2006 and the consolidated statements of loss and deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.
The consolidated financial statements as at December 31, 2005 and for the year then ended was audited by other auditors who expressed an opinion without reservation on those consolidated financial statements in their report dated February 10, 2006.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
March 5, 2007
Consolidated Balance Sheets
As at December 31
(In thousands of Canadian dollars)
2006 2005
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 12,598 $ 25,306
Short-term investments (note 3) 77,717 29,156
Accounts receivable 2,326 407
Prepaid expenses and supplies 583 604
-------------------------------------------------------------------------
93,224 55,473
Capital assets (note 4) 3,491 1,545
Mineral properties (note 5) 241,341 181,325
-------------------------------------------------------------------------
$ 338,056 $ 238,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current Liabilities
Accounts payable and accrued liabilities $ 8,928 $ 2,603
Resettlement liabilities (note 6) 4,393 -
-------------------------------------------------------------------------
13,321 2,603
Other Liabilities (note 7) 1,387 449
-------------------------------------------------------------------------
14,708 3,052
-------------------------------------------------------------------------
Shareholders' Equity
Capital Stock (note 9) 385,444 284,987
Common Share Purchase Warrants (note 10) 1,946 1,950
Contributed Surplus (note 12) 5,904 5,687
Deficit (69,946) (57,333)
-------------------------------------------------------------------------
323,348 235,291
-------------------------------------------------------------------------
$ 338,056 $ 238,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nature of operations and going concern (note 1)
Minority interest (note 8(e))
Commitments and contingencies (note 16)
Approved by the Board of Directors
Michael Parrett Alan Thomas
Director Director
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Loss and Deficit
For the years ended December 31
(In thousands of Canadian dollars, except per share data)
2006 2005
-------------------------------------------------------------------------
Expenses
Corporate, general and administrative $ 9,310 $ 5,530
Stock option compensation (note 11) 1,801 2,846
Project financing costs 2,119 -
Severance and settlement costs - 838
Amortization 138 59
-------------------------------------------------------------------------
13,368 9,273
-------------------------------------------------------------------------
Other income
Interest and foreign exchange 2,755 792
-------------------------------------------------------------------------
Loss before income taxes $ 10,613 $ 8,481
Provision for income taxes 2,000 -
-------------------------------------------------------------------------
Loss for the year 12,613 8,481
Deficit - beginning of year 57,333 48,852
-------------------------------------------------------------------------
Deficit - end of year $ 69,946 $ 57,333
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loss per share (basic and diluted) $ 0.07 $ 0.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of shares 189,823 158,971
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31
(In thousands of Canadian dollars)
2006 2005
-------------------------------------------------------------------------
Cash flows from operating activities
Loss for the year $ (12,613) $ (8,481)
Items not affecting cash
Amortization 138 59
Stock option compensation 1,801 2,846
Deferred share units 1,002 229
-------------------------------------------------------------------------
(9,672) (5,347)
Net changes in non-cash working capital (note 17) 2,122 130
-------------------------------------------------------------------------
(7,550) (5,217)
-------------------------------------------------------------------------
Cash flows from (used) in investing activities
Increase in short-term investments (48,561) (28,884)
Exploration and development expenditures (59,940) (16,036)
Purchase of capital assets (1,684) (273)
Net changes in non-cash working capital (note 17) 6,882 44
-------------------------------------------------------------------------
(103,303) (45,149)
-------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issuance of capital stock,
net of issue costs 98,145 59,245
Net changes in non-cash working capital (note 17) - 171
-------------------------------------------------------------------------
98,145 59,416
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (12,708) 9,050
Cash and cash equivalents - beginning of year 25,306 16,256
-------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 12,598 $ 25,306
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow information (note 17)
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006 and 2005
(Tabular amounts in thousands of Canadian dollars, unless otherwise
shown. References to US$ are to United States 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"). Since acquiring the exploitation license, the
Company has been focused on identifying and defining the size of the four
ore bodies, engineering to design the size and scope of the Project,
environmental assessment and permitting, rescue archaeology and surface
rights acquisitions.
The underlying value of the Company's mineral properties is dependent
upon the existence and economic recovery of such reserves in the future
and the ability of the Company to 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 withhold the receipt
of required permits or impede the Company's ability to acquire the
necessary surface rights, as well as currency fluctuations and local
inflation. 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 expects that additional financing will be
available and may be sourced in time to allow the Company to continue its
planned activities in the normal course. While the Company 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 Canadian generally accepted accounting principles ("Canadian GAAP")
applicable to a "going concern", which assume that the Company will
continue in operation for the foreseeable future and will be able to
realize its assets and discharge its liabilities in the normal course of
operations. However, there can be no assurances that the Company's
activities will be successful and as a result there may be substantial
doubt regarding the "going concern" assumption. These consolidated
financial statements do not reflect adjustments that would be necessary
if the "going concern" assumption were not appropriate. If the "going
concern" assumption were not appropriate for these consolidated financial
statements, then adjustments to the carrying values of the assets and
liabilities, the reported expenses and the balance sheet classifications,
which could be material, may be necessary.
The accompanying consolidated financial statements are prepared by
management in accordance with Canadian GAAP, and in the opinion of
management, include all adjustments considered necessary for fair and
consistent presentation of financial statements.
2. Significant accounting policies
Sources of GAAP
These consolidated financial statements have been prepared in accordance
with Canadian GAAP, and reflect the following significant accounting
policies:
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and the following subsidiaries:
Gabriel Resources (Barbados) Ltd. 100%-owned
Gabriel Resources (Jersey) Ltd. 100%-owned
Gabriel Resources (Netherlands) B.V. 100%-owned
Rosia Montana Gold Corporation S.A. ("RMGC") 80%-owned
Rom AUR SRL 100%-owned
Gabriel Finance SA 99.7%-owned
Estimates, risks and uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of expenses and other income
during the year. Significant estimates and assumptions include those
related to the recoverability of mineral properties and benefits of
future income tax assets, estimated useful lives of capital assets, stock
compensation valuation assumptions and determinations as to whether costs
are expensed or deferred. While management believes that these estimates
and assumptions are reasonable, actual results could vary significantly.
Capital assets
Capital assets are recorded at cost less accumulated amortization.
Amortization of capital assets used for exploration and development is
capitalized to mineral properties.
Amortization is recorded using the straight-line method based on a useful
life of five years for vehicles and varying rates between three and five
years for office equipment. Leasehold improvements are amortized on a
straight-line basis over the term of the respective lease.
Mineral properties
Acquisition costs of mineral properties, together with direct exploration
and development expenses incurred thereon, are capitalized. Upon reaching
commercial production, these capitalized costs will be transferred from
exploration properties to producing properties on the consolidated
balance sheet and will be amortized using the unit-of-production method
over the estimated ore reserves.
The carrying value of mineral properties is subject to periodic review.
When a property is sold, abandoned or deemed not economic, all related
costs are written off. In the case of producing properties, where the
carrying amounts exceed the related undiscounted cash flows from future
operations, an appropriate reduction is made with a corresponding charge
to operations.
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are
translated at the exchange rate in effect at the balance sheet date.
Non-monetary assets and liabilities, expenses and other income arising
from foreign currency transactions are translated at the exchange rate in
effect at the date of the transaction. Exchange gains or losses arising
from the translation are included in the determination of losses in the
current period.
Integrated foreign subsidiaries are accounted for under the temporal
method. Under this method, monetary assets and liabilities are translated
at the exchange rate in effect at the balance sheet date. Non-monetary
assets and liabilities are translated at historical rates. Expenses and
other income are translated at the rate in effect on date of transaction.
Exchange gains or losses related to expenditures on project activities
arising from the translation are included in mineral properties which are
capitalized.
Loss per share (LPS)
LPS is calculated based on the weighted average number of common shares
issued and outstanding during the year. Diluted per share amounts are
calculated using the treasury stock method whereby proceeds deemed to be
received on the exercise of options and warrants in the per share
calculation are applied to reacquire common shares. The effect of
potential issuances of shares under options and warrants would be
anti-dilutive, and accordingly basic and diluted LPS are the same.
Income taxes
Income taxes are calculated using the asset and liability method of tax
accounting. Under this method, current income taxes are recognized for
the estimated income taxes payable for the current period. Future income
tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities, and are
measured using the substantively enacted tax rates and laws that will be
in effect when the differences are expected to reverse. A valuation
allowance is recognized to the extent the recoverability of future income
tax assets are not considered more likely than not to be realized.
Cash and cash equivalents
Cash and cash equivalents comprise of cash at banks, on hand and other
highly liquid short-term investments, having an original maturity date of
three months or less.
Short-term investments
Short-term investments represent investments in bankers' acceptances and
guaranteed investment certificates with maturity dates of more than a
period of 90 days. Short-term investments are carried at cost which
approximates fair value.
Stock-based compensation
Stock-based compensation relating to stock options are estimated based on
fair value at the grant date, and charged to the Statement of Loss or
capitalized to Mineral Properties on the Balance Sheet over the vesting
period. The Company has elected to disclose pro-forma net loss and loss
per share amounts related to options granted prior to January 1, 2003.
Stock-based compensation relating to deferred share units is calculated
based on the quoted market value of the common share, and charged to the
Statement of Loss or capitalized to Mineral Properties on the Balance
Sheet. The compensation cost and liability is adjusted each reporting
period for change in the underlying share price.
Asset retirement obligation
The fair value of the liability for an asset retirement obligation is
recorded when it is incurred and the corresponding increase to the asset
is depreciated over the life of the asset. The liability is increased
over time to reflect an accretion element considered in the initial
measurement at fair value. At December 31, 2006, the Company has not
incurred or committed to any asset retirement obligations related to the
development of its mineral properties in Romania.
Impairment of long-lived assets
Long-lived assets to be held and used by the Company are reviewed for
possible impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. When
management determines that an impairment exists, the impairment loss will
be determined by comparing the asset's carrying amount to its fair value,
which is determined using a discounted cash flow model. Management
believes that there has been no impairment of the Company's long-lived
assets as at December 31, 2006.
Recent Canadian accounting pronouncements
In April 2005, the Canadian Institute of Chartered Accountants (CICA)
issued three new standards relating to financial instruments. These
standards are applicable for fiscal years beginning on or after
October 1, 2006. The Company is currently reviewing the impact of these
new standards. These standards are as follows:
(i) Financial Instruments - Recognition and Measurement, Section 3855
This standard prescribes when a financial asset, financial liability or
non-financial derivative is to be recognized on the balance sheet and
whether fair value or cost-based measures are used. It also specifies how
financial instrument gains and losses are to be presented.
(ii) Hedges, Section 3865
This standard is applicable when a company chooses to designate a hedging
relationship for accounting purposes. It builds on the existing
Accounting Guideline 13 (AcG-13) "Hedging Relationships" and Section 1650
"Foreign Currency Translation", by specifying how hedge accounting is
applied and what disclosures are necessary when it is applied.
(iii) Comprehensive Income, Section 1530
This standard introduces new rules for the reporting and display of
comprehensive income. Comprehensive income represents a change in
shareholders' equity (net assets) of an enterprise during a reporting
period from transactions and other events and circumstances from non-
owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
These items include holding gains and losses on certain investments,
gains and losses on certain derivative instruments, and foreign currency
gains and losses related to self-sustaining foreign operations.
3. Short-term investments
2006 2005
-------------------------------------------------------------------------
Money market investments with maturities
from the date of acquisition of
4 - 6 months $ 68,446 $ 14,838
7 - 12 months 8,763 13,895
Restricted cash 508 423
-------------------------------------------------------------------------
$ 77,717 $ 29,156
-------------------------------------------------------------------------
Money market investments yield average interest of 4.3% (2005 - 3.1%).
4. Capital Assets
2006 2005
-------------------------------------------------------------------------
Office equipment $ 3,508 $ 1,729
Buildings 1,015 205
Vehicles 1,269 1,355
Leasehold improvements 131 106
-------------------------------------------------------------------------
5,923 3,395
-------------------------------------------------------------------------
Less: Accumulated amortization
Office equipment 1,552 1,133
Buildings 35 30
Vehicles 736 589
Leasehold improvements 109 98
-------------------------------------------------------------------------
2,432 1,850
-------------------------------------------------------------------------
Net book value
Office equipment 1,956 596
Buildings 980 175
Vehicles 533 766
Leasehold improvements 22 8
-------------------------------------------------------------------------
$ 3,491 $ 1,545
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In 2006, $960 thousand related to historical monument buildings and a
concession license have been reclassified from Mineral Properties to
Capital Assets.
5. Mineral Properties
Rosia Montana Bucium Baisoara Total
-------------------------------------------------------------------------
Balance - December 31, 2004 $ 157,626 $ 6,831 $ - $ 164,457
Development costs 14,572 - - 14,572
Exploration costs 790 1,506 - 2,296
-------------------------------------------------------------------------
Balance - December 31, 2005 172,988 8,337 - 181,325
Development costs 58,024 - - 58,024
Exploration costs 898 1,053 41 1,992
-------------------------------------------------------------------------
Balance - December 31, 2006 $ 231,910 $ 9,390 $ 41 $ 241,341
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
which was extended in 2004, expires May 19, 2007. The Company was obliged
to spend US$3.4 million over the term of the license extension period.
During 2006, the Company met its expenditure commitment. The expiring
exploration license can be converted into an exploitation license upon
submission and approval of a feasibility study which is currently being
compiled.
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. Field work commenced in the fourth quarter
of 2006.
6. Resettlement liabilities
The Company entered into resettlement agreements with certain property
owners in the project area. Under the agreements, property owners have
sold their properties to the Company in exchange for a new property to be
constructed by the Company. The Company is obligated to deliver the new
property by September 30, 2007. If the Company fails to deliver these new
properties, the Company will incur a penalty of 0.5% of the agreed upon
property value per month of delay, to a maximum of 12 months. If the
Company fails to fulfill its obligation by the end of the 12-month
penalty period, the Company shall pay the owners the agreed upon property
value, plus the related penalties, and the owners retain the property
possession for an undetermined period of time.
As at December 31, 2006, the total value of resettlement contracts
entered into amounted to $4.4 million (2005 - Nil).
7. Other liabilities
As at December 31, 2006, other liabilities included the following:
Price per
Common
share
Deferred Share Units ("DSUs")(a) DSUs (dollars) Value
-------------------------------------------------------------------------
Outstanding - December 31, 2004 125 $ 1.56 $ 195
Granted 33 1.82 60
Change in value - - 194
-------------------------------------------------------------------------
Outstanding - December 31, 2005 158 2.84 449
Granted 205 4.07 833
Settled (125) 2.75 (344)
Change in value - - 265
-------------------------------------------------------------------------
Balance - December 31, 2006 238 $ 5.06 1,203
-------------------------------------------------------------------------
Fidelity Bonus(b) 184
-------------------------------------------------------------------------
Other liabilities $ 1,387
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) DSUs
The Company implemented a DSU Plan under which qualifying participants
receive certain compensation in the form of DSUs in lieu of cash. On
retirement, participants may redeem their DSUs for common shares of the
Company, cash, or a combination of common shares and cash. 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
2006, the Company settled 125 thousand DSUs by issuing common shares of
the Company valued at $2.75 per share, the price at which retirement
occurred.
The annual change in the fair market value of the DSUs 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 December 31, 2006, $1 million (2005 - $228) was
expensed and $96 thousand (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
December 31, 2006, $184 thousand has been accrued.
8. 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 provided an employee
with an interest free loan of $50 thousand. 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 Bank of Canada's key interest 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
$14 thousand for the year (2005 - $39 thousand). The laboratory was
sold to a third party during the third quarter 2006, and no other
costs will be paid to Minvest.
(c) The Company paid $27 thousand (2005 - $19 thousand) during the year
to a director of the Company for consultation services provided to
the Company.
(d) In 2005, the Company sublet a portion of its office space to
Alamos Gold Inc. The sublease ended November 23, 2005. Sublease
revenue of $38 thousand was received in 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 thousand 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.
9. 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 shares Amount
-------------------------------------------------------------------------
Balance - December 31, 2004 146,413 $ 227,158
Shares issued from a public offering (b) 15,000 28,050
Less: Share issue costs - (1,870)
Shares issued on the exercise of stock
options (note 11) 661 1,115
Stock-based compensation - exercise of
stock options (note 12) - 534
Shares issued from the exercise of share
purchase warrants (c) 15,000 30,000
-------------------------------------------------------------------------
Balance - December 31, 2005 177,074 284,987
Shares issued from a public offering (a) 31,050 97,808
Less: Share issue costs - (4,780)
Shares issued on the exercise of stock options
(note 11) 2,628 5,079
Stock-based compensation - exercise of stock
options (note 12) - 1,963
Stock-based compensation - settlement of DSUs
(note 7(a)) 125 344
Shares issued from the exercise of share purchase
warrants (note 10(a)) 14 43
-------------------------------------------------------------------------
Balance - December 31, 2006 210,891 $ 385,444
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) During the third quarter 2006, the Company issued 31.05 million
common shares at $3.15 per share to a syndicate of underwriters for
aggregate net proceeds of $93 million, after deducting underwriting
fee of $4.3 million plus various professional fees related to the
offering of $0.5 million. 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% (6.21 million common shares)
of the total offering. As of the closing of the offering, NCL held
39.7 million common shares or 19% of the issued and outstanding
common shares.
(b) On March 31, 2005, the Company issued 15 million 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 $28.05 million to
the 15 million common shares and an assigned value of $1.95 million
to the share purchase warrants. The net proceeds of the offering were
$28.1 million after deducting a cash commission to the underwriters
of $1.4 million plus various professional fees related to the
offering of $0.5 million.
(c) On December 6, 2005, NCL exercised all 15 million common share
purchase warrants for proceeds of $30 million.
(d) The Board of Directors has adopted a Shareholder Rights Plan (the
"Rights Plan") designed to protect the shareholders of the Company
from unfair, abusive or coercive take-over strategies. The Rights
Plan contains a permitted bid feature that allows a take-over bid to
proceed in the face of the Rights Plan, provided that it meets
certain minimum standards of fairness and disclosure. To qualify as a
permitted bid, at least 50% of the common shares not beneficially
owned by the person making the bid and certain related third parties
must be tendered within a period of 60 days, in which case the bid
must be extended for an additional 10 business days on the same
terms. The Rights Plan will encourage an offer to proceed by way of a
permitted bid or to approach the Board of Directors with a view to
negotiation as the Rights Plan creates the potential for substantial
dilution of the offeror's interest in the Company. As required by its
terms, the Rights Plan was reconfirmed at the Annual and Special
Meeting and will expire on February 10, 2010.
10. Share Purchase Warrants
(a) During the years ended December 31, 2006 and 2005, share purchase
warrants were issued and exercised as follows:
Number Exercise
of price
warrants (dollars) Expiry date
-------------------------------------------------------------------------
Balance - December 31, 2004 15,000 $ 2.00 December 31, 2005
Warrants issued and outstanding
(note 9(b)) 7,500 2.75 March 31, 2007
Warrants exercised (15,000) 2.00 December 31, 2005
-------------------------------------------------------------------------
Balance - December 31, 2005 7,500 2.75 March 31, 2007
Warrants exercised (14) 2.75 March 31, 2007
-------------------------------------------------------------------------
Balance - December 31, 2006 7,486 $ 2.75 March 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) The Company entered into mandate letters with two international
financial institutions to arrange project debt financing for the
development of the Rosia Montana project (the "Project") during
fourth quarter 2006. As part of the proposed compensation of the
financial institutions, the Company is prepared to issue up to a
total of 2.625 million common share purchase warrants (the
"Warrants"). The Warrants have an exercise price of $4.88 per
warrant, 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 the
2005 annual financial statements.
11. Stock Options
The Incentive Stock Option Plan (the "Plan") authorizes the Directors to
grant options to purchase shares of the Company to directors, officers,
employees and consultants. The Plan originally allowed for the issuance
of up to 19 million shares of which 1.7 million are available for
issuance as at December 31, 2006, (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 day after
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 December 31, 2006, common share stock options held by directors,
employees and consultants are as follows:
Outstanding Exercisable
------------------------------------ ---------------------
Weighted Weighted Weighted
Range of average average average
exercise exercise remaining exercise
prices Number of price contractual Number of price
(dollars) options (dollars) life (Years) options (dollars)
------------- ------------------------------------ ---------------------
$1.48 - $2.00 3,418 $1.56 3.3 2,142 $1.57
2.01 - 3.00 2,935 2.49 3.6 1,422 2.47
3.01 - 4.00 - - - - -
4.01 - 5.00 2,375 4.65 3.1 1,097 4.75
5.01 - 5.50 855 5.50 0.4 855 5.50
------------------------------------ ---------------------
9,583 $2.96 3.1 5,516 $3.05
------------------------------------ ---------------------
During the years ended December 31, 2006 and 2005, director, employee and
consultants stock options were granted, exercised and cancelled as
follows:
Weighted
average
exercise
Number of price
options (dollars)
-------------------------------------------------------------------------
Balance - December 31, 2004 12,538 $ 3.27
Options granted 6,000 1.77
Options expired (6,362) 3.22
Options cancelled (1,222) 2.81
Options exercised (661) 1.69
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Balance - December 31, 2005 10,293 2.59
Options granted 2,450 3.71
Options expired (50) 2.65
Options cancelled (482) 4.34
Options exercised (2,628) 1.93
-------------------------------------------------------------------------
Balance - December 31, 2006 9,583 $ 2.96
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The exercise of the outstanding stock options would be anti-dilutive in
the loss per share calculation.
The fair value of 2.5 million options granted in 2006 (2005 - 6 million)
has been estimated at the date of grant using a Black-Scholes option
pricing model. The current year's valuation was calculated with the
following assumptions: weighted average risk-free interest rate of 4.0%
(2005 - 3.3%); volatility factor of the market price of the Company's
common stock of 69% (2005 - 75%); and a weighted average expected life of
the options of 2.6 years (2005 - 2.6 years). The resulting weighted
average cost per option granted was $1.68 (2005 - $0.85). The estimated
fair value of the options is amortized over the vesting period and
expensed to the Statement of Loss or capitalized to Mineral Properties on
the Balance Sheet.
For awards granted subsequent to December 31, 2002, the fair value
compensation recorded for the year ended December 31, 2006 was
$2.2 million (2005 - $2.8 million), of which $1.8 million was expensed in
2006 and $0.4 million was capitalized to mineral properties in respect of
personnel working on projects in Romania.
The following is the Company's pro-forma loss applying the fair value
method to all options granted prior to January 1, 2003 and vested to
date:
Income Statement (year ended December 31) 2006 2005
-------------------------------------------------------------------------
Loss for the year $ 12,613 $ 8,481
Compensation expense related to fair value of
stock options - 1,079
-------------------------------------------------------------------------
Pro-forma loss for the year $ 12,613 $ 9,560
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro-forma loss per share (dollars) $ 0.07 $ 0.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance Sheet (as at December 31) 2006 2005
-------------------------------------------------------------------------
Mineral properties $ 241,341 $ 181,325
Compensation expense related to fair value
of stock options - 284
-------------------------------------------------------------------------
Pro-forma mineral properties $ 241,341 $ 181,609
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Contributed Surplus
The following table identifies the changes in contributed surplus for the
year:
Corporate Stock-based
reorganization compensation Total
-------------------------------------------------------------------------
Balance - December 31, 2004 $ 1,013 $ 2,363 $ 3,376
Stock-based compensation - 2,845 2,845
Exercise of stock options - (534) (534)
-------------------------------------------------------------------------
Balance - December 31, 2005 1,013 4,674 5,687
Stock-based compensation - 2,180 2,180
Exercise of stock options - (1,963) (1,963)
-------------------------------------------------------------------------
Balance - December 31, 2006 $ 1,013 $ 4,891 $ 5,904
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Income Taxes
The following table reconciles the expected income tax expense (recovery)
at the Canadian statutory income tax rate to the amounts recognized in
the consolidated statements of loss.
2006 2005
-------------------------------------------------------------------------
Income tax rate 36% 36%
Income tax at statutory rates $(3,821) $(3,053)
Adjustment for foreign subsidiaries 2,018 219
Stock option compensation 648 1,025
Deferred share units 360 82
Other 46 61
Valuation allowance 2,749 1,666
-------------------------------------------------------------------------
Provision for income taxes $ 2,000 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table reflects future income tax assets at December 31,
2006 and 2005:
2006 2005
-------------------------------------------------------------------------
Loss carry forwards $ 14,612 $ 15,471
Share issue costs 1,739 1,010
Capital assets 156 130
Cumulative eligible capital expenditures 3,060 2,744
Valuation allowance (19,567) (19,355)
-------------------------------------------------------------------------
Future income tax assets recognized $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has available tax losses for Canadian income tax purposes
which may be carried forward to reduce taxable income derived in future
years. A summary of these losses is provided below:
Non-capital losses expiring in: 2006 2005
-------------------------------------------------------------------------
2006 $ - $ 2,321
2007 3,578 3,578
2008 5,741 6,620
2009 6,324 6,324
2010 11,421 11,421
2014 6,309 6,309
2015 6,397 6,401
2026 7,364 -
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14. Segmented Information
The Company has one operating segment: the acquisition, exploration and
development of precious metal projects located in Romania.
Geographic segmentation of capital assets and mineral properties is as
follows:
2006 2005
-------------------------------------------------------------------------
Romania $ 243,899 $ 182,814
Canada 933 56
-------------------------------------------------------------------------
$ 244,832 $ 182,870
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-------------------------------------------------------------------------
15. 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, United States dollars and European Union
Euros, and are, therefore, subject to exchange variations against the
functional and reporting currency, the Canadian dollar.
16. 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.
2011 and
there-
Total 2007 2008 2009 2010 after
-------------------------------------------------------------------------
Baisoara
exploration
license (note 5) $ 3,730 $ 223 $ 287 $ 744 $ 1,526 $ 950
Goods and services
agreements (a) 5,972 5,504 43 9 9 407
Rosia Montana
exploitation
license (b) 326 27 27 27 27 218
Surface
concession
rights (c) 1,020 23 23 23 23 928
Lease
agreements (d) 1,096 338 217 221 225 95
-------------------------------------------------------------------------
Total
commitments $12,144 $ 6,115 $ 597 $ 1,024 $ 1,810 $ 2,598
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) The Company and its subsidiaries have a number of agreements with
arms-length third parties who provide a wide range of services which
totaled $6 million at December 31, 2006 (2005 - $3.1 million).
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.
(b) Under the terms of the Company's exploitation mineral license for the
Rosia Montana project, an annual fee is required to be paid to
maintain the license in good standing. The current annual fee, is
approximately $27 thousand. These fees are indexed annually by the
Romanian Government and the license has 12 years remaining.
(c) 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 thousand.
(d) 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 December 31, 2006, the Company has
committed to purchasing approximately US$1.8 million of local
properties in the project area which it has not acquired as of year
end. The commitment is binding once the EIA is approved.
(b) The Company has an agreement with a consulting firm to provide
financial advisory services in relation to defining and implementing
the financing plan for development of the Rosia Montana gold project.
A success fee of up to US$4 million will be payable on execution of
definitive credit agreements and/or financing documents for the
senior, mezzanine and cost overrun debt facilities for the Project.
17. Supplemental Cash Flow Information
(a) Net changes in non-cash working capital
2006 2005
-------------------------------------------------------------------------
Operating activities:
Accounts receivable, prepaid expenses
and supplies $ (1,003) $ (244)
Accounts payable and accrued liabilities 3,125 374
-------------------------------------------------------------------------
2,122 130
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investing activities:
Accounts receivable, prepaid expenses and
supplies (895) 416
Accounts payable and accrued liabilities 3,384 (372)
Resettlement liabilities 4,393 -
-------------------------------------------------------------------------
6,882 44
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing activities:
Accounts receivable, prepaid expenses and
supplies - 171
-------------------------------------------------------------------------
$ - $ 171
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Exploration and development expenditures $ (60,016) $ (16,868)
Non-cash depreciation and disposal
capitalized 560 581
Reclassification from Mineral Properties (960) -
Stock based compensation capitalized 476 251
-------------------------------------------------------------------------
$ (59,940) $ (16,036)
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Cash and cash equivalents is comprised of:
Cash $ 8,611 $ 3,619
Short-term investments (less than 90 days)
- weighted
average interest of 4.3% (2005 - 3.4%) 3,987 21,687
-------------------------------------------------------------------------
$ 12,598 $ 25,306
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company did not incur interest expense during 2006 and 2005.
18. Reclassification of Comparative Figures
Certain comparative figures have been reclassified to conform to the
current year's presentation.