TORONTO, March 7 /CNW/ -
Highlights
----------
- 2005 net loss was $8.5 million, or 5 cents per share, compared to
a net loss of $8.6 million, or 6 cents per share in 2004
- Monthly expenditures averaged $1.8 million, or $5.4 million in
total spending per quarter, with a total of $16.9 million invested
in our two development projects during 2005
- Working capital at December 31, 2005 totaled $52.9 million -
including $30 million from the exercise of warrants during the
fourth quarter
- Forecast spending through third quarter 2006 to average $2.5
million per month
- Updated feasibility study for Rosia Montana:
- Estimated capital cost to construct project of US$638
million
- Annual production of approximately 635,000 ounces of gold at
total cash costs of US$181 per ounce over the first five
years of production
- Annual production of approximately 500,000 ounces of gold at
total cash costs of US$237 per ounce for life of mine
- At US$500 per ounce gold - 3.8 year payback and 18% internal
rate of return
- EIA on track for completion at end of First Quarter 2006
- On track to receive construction permit in second half 2006, with
first gold pour expected in spring 2009
Loss for the period
For the year ended December 31, 2005, we incurred a loss of $8.5 million,
or 5 cents per share, compared to a loss of $8.6 million, or 6 cents per share
in 2004. The marginally lower loss in 2005 reflects an increase in interest
income due to higher cash balances during 2005, while lower project financing
costs were more than offset by reorganization severance costs, settlement of a
lawsuit and an increase in non-cash charges related to stock option
compensation.
"We are on track," said Alan R. Hill, President and Chief Executive
Officer. "We've made significant strides to improve our communications program
- meeting with key stakeholders in the village of Rosia Montana and the
surrounding area, as well as Bucharest, combined with a nationwide media
campaign. In just a few weeks, we will complete our EIA, giving all
stakeholders a comprehensive view of how we will develop Rosia Montana and the
specific benefits - economic, environmental, cultural and social - that the
Project will bring Romania."
Development activities
We invested $16.9 million in our two development projects during 2005,
compared to $33.7 million in 2004. For 2005, expenditures declined in all
major project areas as we focused primarily on permitting and communications
activities. Once we receive our archaeological discharge and approved EIA,
both of which are expected in third quarter 2006, expenditures would rise as
we complete property purchase options, order long-lead-time equipment and
prepare for the commencement of construction later this year or early 2007.
Liquidity and capital resources
The Company remains well financed to complete permitting. We had
$52.9 million in working capital as at December 31, 2005, including $30
million added through the exercise of warrants in the fourth quarter. We
averaged monthly total expenditures for the Company of $1.8 million per month,
or $5.4 million per quarter. This rate is lower than 2004 when we invested on
average $3.5 million per month or $10.6 million per quarter, reflecting
reduced engineering, property acquisition and permitting costs during 2005.
The expenditure rate is expected to rise to approximately $2.5 million per
month during the first three quarters of 2006, peaking at $3.5 million per
month in the first quarter, as we finalize and submit our EIA and prepare for
mine construction.
Rosia Montana Project Development
Capital and Operating Cost Update
Project economics for Rosia Montana remain robust. A revised feasibility
study of the capital and operating costs for Rosia Montana has been recently
completed, indicating capital cost for construction of the project to be
US$638 million at total cash costs of US$237 per ounce over the life of the
project. During the first five years, gold production is expected to average
635,000 ounces per annum at total cash costs of US$181 per ounce, which will
enable a payback of 3.8 years on the construction costs, generating an 18%
internal rate of return at gold prices of US$500 per ounce.
"We believe that the revised feasibility study is conservative and that
additional value will be realized as the project moves forward through a
continued focus on optimizing the capital and operating costs," added Mr.
Hill.
The increase in both capital and operating costs reflects significant
cost pressures due to strengthening currencies, rising raw material costs
including steel and fuel, as well as higher wages. In addition, increased
costs reflect an enhanced design to further strengthen management's commitment
to meet the highest environmental, social and sustainable development
standards.
Mineral Reserve Estimate Update
Reserves are expected to decline by approximately 5%, primarily as a
result of expanding the buffer zone around the protected area reducing the
size of three of the four pits, as well as a more conservative estimating
method. We are currently waiting for Romanian regulatory approval prior to
releasing details of updated reserves.
Acquisition of Surface Rights
During the fourth quarter we published the new Property Purchase Program
(the "PPP"), which reflects both changes in World Bank/IFC guidelines, as well
as a number of changes in local conditions and circumstances, and held a
series of information meetings in both Rosia Montana and Corna Valley for the
residents to explain the new elements of the program. The updated PPP
introduces a mechanism for the residents of the village of Rosia Montana to
enter into option agreements with respect to the acquisition of their
properties, thereby allowing us to continue the process of securing rights to
the surface area required to develop the Rosia Montana project, with fair and
equitable prices ensured to property sellers, but without the immediate cost
outlay of an outright purchase. The option program will allow us to expedite
the acquisition of properties once we receive the approval of our EIA. The new
option program should cost approximately US$1 million over the course of the
first nine months of 2006.
Archaeological Discharge Certificate
We received a copy of the Alba Court's written reasons for its decision
to annul archaeological discharge certificate no. 4 in late September 2005.
Joining with the Romanian Minister of Culture and Religious Affairs, we have
appealed the decision to the Romanian Supreme Court in Bucharest, based on
advice of Romanian counsel that the Alba Court incorrectly applied the laws
governing archaeological discharges and based its decision on a number of
matters irrelevant to the granting of archaeological discharges. The appeal is
scheduled to be heard in April 2006. The ruling of the Alba Court does not
prevent us from continuing our archaeological discharge program and we retain
the right to reapply for a new archaeological discharge certificate at any
time, either before or after the Supreme Court hears our appeal.
The court challenge to our discharge certificate is one example of a
series of legal challenges initiated over the past year by one non-government
organization in particular, seizing any pretense to question 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 Rosia Montana project. While Gabriel is typically not the
primary target of this strategy of legal obstruction, we have intervened in
the majority of these cases in order to ensure that the Romanian courts
considering these actions are presented with a legally correct, fair and
balanced analysis as to why the various Romanian regulatory authorities'
actions are in accordance with the relevant and applicable Romanian laws.
Environmental Impact Assessment
The last step in the EIA process prior to submittal - turning the EIA
over to the independent team of specialists - was completed during fourth
quarter 2005. As we enter 2006, the independent team of specialists is
finalizing the EIA, which will be submitted in both Romanian and English to
meet the requirements of the Romanian Government and the Espoo Convention. We
are on track to complete the EIA by the end of first quarter 2006.
Broad Communications Program
During the second half of 2005 and continuing through the first quarter
of 2006, our communications program emphasized face-to-face meetings and a
national media campaign. We met with Romanian Government officials, senior
European Union officials, hosted press conferences with the Romanian media,
organized site tours for Romanian journalists, as well as sessions with
Romanian business leaders to introduce the new corporate and Romanian
management teams and highlight project benefits.
As a complement to our coordinated communications campaign, we began a
national media campaign during fourth quarter 2005, including television,
print and billboards, to creating a more positive climate of opinion on the
many benefits of building the Rosia Montana mine. Viewers of both the
television commercial and print ads are encouraged to visit www.truestory.ro -
a website custom-built to provide additional information on the positive
impacts of the Rosia Montana project.
"We are making real progress on communicating the many benefits to the
stakeholders of this project in Romania. The feedback has been very positive,
creating an improved climate for the submittal of our EIA and the public
consultation phase of the project," added Mr. Hill.
Rosia Montana Project Timeline Update
As indicated in our Second Quarter Report 2005 Report to Shareholders, we
expect to complete our EIA by the end of first quarter 2006. If we are able to
complete our archaeology discharges in parallel with the approval of our EIA,
we would expect to begin purchasing properties in the village in the third
quarter, putting us on track to receive our construction permit in the second
half of 2006. The project should take approximately two years to construct,
putting our projected first gold pour in spring 2009.
Schedule 1
----------
Gabriel Resources Ltd.
Rosia Montana Project
Update Feasibility Study - Summary Information
(United States Dollars)
1. Resources
Measured and Indicated Resources
Tonnes 350,300,000
Grade (0.6g/t gold cut-off grade)
- Grams per tonne gold 1.3
- Grams per tonne silver 6
Contained Ounces
- Gold 14,600,000
- Silver 64,900,000
Inferred Resources
Tonnes 30,300,000
Grade (0.6g/t gold cut-off grade)
- Grams per tonne gold 1.2
- Grams per tonne silver 3
Contained Ounces
- Gold 1,200,000
- Silver 3,000,000
2. Mining and Processing
Plant Throughput (tonnes)
Annual Average 13,432,000
Hourly Design 1,625
Ore Mined (tonnes) (x) including low
grade stockpile
Total 214,905,000
Waste Mined (tonnes)
Total 256,926,000
Waste to Ore Stripping Ratio 1.2:1
Mine Life (Years) 15.6
Mining Conventional Open Pit
Processing Conventional Mill / CIL
Cyanide Destruct Circuit S02 / Air
Metallurgical Recovery
- Gold 79%
- Silver 61%
Initial 60 Months Life of Mine
Gold Production (ounces)
- Total 3,176,000 7,943,000
- Average Annual 635,000 509,000
Silver Production (ounces)
- Total 13,907,000 28,891,000
- Average Annual 2,680,000 1,806,000
3. Capital Costs
Dollars
Initial Capital (Millions)
- Mining 45
- Process Plant & Infrastructure 142
- Tailings Management Facility 43
- Infrastucture and Utilities 82
Sub-Total: 311
- EPCM 65
- Other Indirects 90
Sub-Total: 156
- Community Development
(All Stages) 61
- Owners' Costs 55
Sub-Total: 116
- Contingency 55
Total: 638
Sustaining Capital (Millions)
- Mining 76
- Process Plant & Infrastructure 2
- Tailings Management Facility 116
- Administration 14
- Mine Closure & Reclamation 70
Total: 278
4. Operating Costs
Initial 60 Months Life of Mine
Onsite Operating Costs Dollars
- Per Tonne of Ore
- Mining 2.76 2.41
- Processing 6.31 6.09
- General, Administrative
and other 1.05 0.96
Total: 10.12 9.46
Cash Operating Costs
- Per ounce of gold
- Mining 56 65
- Processing 128 165
- Administrative 18 23
- Refining, Treatment and Transport 4 3
- Silver By-Product Credit -36 -31
Cash Operating Cost 170 225
- Royalty and Environmental tax 11 12
Total Cash cost 181 237
5. Financial Analysis
Gold Price
US$450 US$500 US$550
Pay Back Period (Years) 4.6 3.8 3.2
Internal Rate of Return
(100% Equity Basis) 12.8% 17.6% 21.8%
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, 2005 and 2004. The MD&A
is intended to supplement the audited consolidated financial statements and
notes thereto ("Statements") of Gabriel Resources Ltd. (the "Company") as at
and for the years ended December 31, 2005 and 2004. 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 7, 2006, and the
Company's public filings, including its most recent Annual Information Form,
can be reviewed on the SEDAR website (www.sedar.com).
Overview
The change in management at the Company during second quarter 2005 has
provided the opportunity to reaffirm our goals and objectives as a company.
Our vision is to create value for all of our stakeholders from responsible
mining. Our mission is to build Rosia Montana and, as a result, to be a
catalyst in Romania for sustainable economic, environmental, cultural and
community development. As we develop the world-class Rosia Montana project, we
will strive to set high standards through good governance, open and
transparent communications, and operations and reclamation based on Best
Available Techniques - all in the service of sustainable development. Whether
the issue is corporate governance, community development, environmental safety
or operational practices, we pledge to do it right.
Key Issues
Environmental/Permitting
When developed, Rosia Montana will be the largest gold mine in Europe and
one of the largest gold mines in the world. This is also the first mine
Romania will permit under its new environmental laws, which were harmonized
with those of the European Union in 2003. The size, scope and location of the
proposed operation dictate a comprehensive permitting process for both the
Company and the Government. As we enter 2006, three of the four steps required
of the Company before submitting the Environmental Impact Assessment ("EIA")
to the Romanian Government have been completed. The first was the submission
of the Project Presentation Report ("PPR"), filed in December of 2004, which
provided an overview of the project. The second step was the response from the
Romanian Government based on the PPR, which was received in late May 2005 and
is referred to as the Terms of Reference ("TOR"). The TOR outlines the matters
that need to be considered and addressed in the EIA. During third quarter
2005, we completed the third step which involved incorporating the issues
outlined in the TOR into our EIA.
The last step in the EIA process, turning the EIA over to the independent
team of specialists, was completed during fourth quarter 2005. As we enter
2006, the independent team of specialists is finalizing the EIA, which will be
submitted in both Romanian and English to meet the requirements of the
Romanian Government and the Espoo Convention. We are on track to complete the
EIA by the end of first quarter 2006.
Surface Rights
Obtaining surface rights is a critical path item for the project. We have
already acquired 400 homes to date. We need to acquire a further 560 homes, as
well as a number of government and community buildings to complete the
acquisition of all surface rights in the project area. During third quarter
2005, we completed the update of our Property Purchase Program (the "PPP") to
reflect both changes in World Bank/IFC guidelines, as well as a number of
changes in local conditions and circumstances. The updated program introduces
a mechanism for the residents of the village of Rosia Montana to enter into
option agreements with respect to the acquisition of their properties. This
will allow us to continue the process of securing rights to the surface area
required to develop the Rosia Montana project, with fair and equitable prices
ensured to property sellers, but without the immediate cost outlay of an
outright purchase. The option program will allow us to expedite the
acquisition of properties once we receive the approval of our EIA.
The new option program began in early December, following the publication
of the PPP and the communication of the new program to the residents of Rosia
Montana. The new option program should cost approximately US$1 million over
the course of the first nine months of 2006, committing the Company to acquire
approximately US$33 million in local properties in the project area. The
commitment becomes binding once the EIA is approved.
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 extensive mine work in the 20th century, still
provides many traces of the earlier activity. We have spent approximately
US$9 million sponsoring a program of rescue archaeology to recover and
document the remaining evidence. While over the past four years we have
received several discharge permits to acknowledge completion of the program,
one of the discharges - for a part of the Cirnic Massif - was annulled by the
Alba Iulia Court of Appeal (the "Alba Court") in June 2005. We received a copy
of the Court's written reasons for its decision to annul archaeological
discharge certificate no. 4 in late September 2005 and along with the Romanian
Minister of Culture and Religious Affairs, we have appealed the decision to
the Supreme Court in Bucharest, based on counsel that the Alba Court
incorrectly applied the laws governing archaeological discharges and based its
decision on a number of matters we consider irrelevant to the granting of
archaeological discharges. The appeal is scheduled to be heard in April 2006.
The ruling of the Alba Court does not prevent us from continuing our
archaeological discharge program and we retain the right to reapply for a new
archaeological discharge certificate at any time, either before or after the
Supreme Court hears our appeal.
Financing
At the end of December 2005, we had $52.9 million in working capital. Our
rate of expenditure was approximately $5.4 million per quarter, or
$1.8 million per month during 2005, excluding working capital adjustments.
This rate is lower than 2004 when we spent on average $10.6 million per
quarter or $3.5 million per month, reflecting lower engineering, property
acquisition and permitting costs in 2005. The expenditure rate is expected to
rise to approximately $2.5 million per month during the first three quarters
of 2006, peaking at $3.5 million per month in the first quarter, as we
finalize and submit our EIA and prepare for mine construction.
Concurrent with our year end results, we updated the cost to construct
and operate the project. The cost to construct the mine increased from
US$437 million, based on a definitive feasibility study completed in early
2003, to US$638 million, while the total cash cost to produce gold increased
from an average of US$152 per ounce to US$237 per ounce. Despite higher
capital and cash costs, the internal rate of return at US$500 per ounce gold
remains robust at 18%, resulting in a 3.8 year payback on the US$638 million
in capital. The increase in costs reflects in part significant cost pressures
due to the strengthening of currencies, higher raw material costs, higher
steel and fuel costs, as well as higher wages. In addition, there have been
certain changes to the project to improve the design and to ensure compliance
with changes in regulations. The project has been designed to meet the highest
environmental, social and sustainable development standards. The higher
capital and operating costs are not expected to hinder our ability to finance
the project, as gold prices have increased from the low US$300-per-ounce level
when the original estimate was calculated to over US$550 per ounce today,
which more than offsets the higher costs, resulting in the continuation of
strong returns. Reserves are expected to decline by approximately 5%,
primarily a result of expanding the buffer zone around the protected area
reducing the size of 3 of the 4 pits as well as a more conservative estimating
method. We are currently waiting for Romanian regulatory approval.
Capital and Operating Cost Summary
Change
2006 2003 $ %
-------------------------------------------------------------------------
Capital
Mine $ 45 $ 55 -$ 11 -19%
Process 142 86 56 65%
Infrastructure 82 53 28 53%
Tailings Management Facility 43 37 5 14%
Total Directs $ 311 $ 232 $ 79 34%
Total Indirects $ 156 $ 59 $ 96 163%
Owners Costs $ 116 $ 103 $ 14 13%
Contingencies 55 44 12 27%
--------- --------- --------- ---------
Total $ 638 $ 437 $ 200 46%
Operating cost per tonne milled
Mine $ 2.41 $ 1.58 $ 0.83 53%
Process 6.09 4.45 1.64 37%
Administration and other 0.96 0.45 0.51 113%
--------- --------- --------- ---------
Subtotal $ 9.46 $ 6.48 $ 2.98 46%
Silver Credit (1.13) -0.69 -0.44 64%
Royalties and taxes 0.39 0.29 0.10 34%
--------- --------- --------- ---------
Net Cost per tonne milled $ 8.72 $ 6.08 $ 2.64 43%
Annual Summary
Year ended Year ended Year ended
December 31, December 31, December 31,
$ Cdn 2005 2004 2003
-------------------------------------------------------------------------
Loss $ 8,480,592 $ 8,587,435 $ 16,718,917
Loss per share - basic and
diluted $ 0.05 $ 0.06 $ 0.14
-------------------------------------------------------------------------
Total assets $238,343,489 $184,502,350 $168,157,947
Long-term liabilities $ 449,246 $ 220,823 $ 367,500
-------------------------------------------------------------------------
Investments in exploration
and development including
working capital changes $ 16,058,226 $ 35,049,283 $ 53,748,069
Cash flows from financing
activities $ 59,415,535 $ 26,947,328 $ 45,733,157
-------------------------------------------------------------------------
Loss
- 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 higher loss in 2003 as compared to 2004 and 2005, relates to
higher project finance costs, write-off of exploration costs, as well
as the cost of an internal investigation and severance costs.
- The Company will continue to incur losses until Rosia Montana begins
commercial production.
Total Assets
- The increase in total assets from the year ended 2003 to 2005 relates
to three equity issues, which raised a total of $82.8 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 of the Company. The DSUs
are revalued at each balance sheet date; the decrease in 2004 reflects
the decrease in the Company's share price at year end 2004, as the
increase in 2005 reflects that year's increase in share price.
Investment in Exploration and Development
- The reduction in expenditures over the past three years relates to the
shift to only those activities related to the permitting process. As a
result, detailed engineering and acquisition of properties have been
put on hold until such time as the Company receives the approval of
its EIA for Rosia Montana.
- Expenditures are expected to remain modest until the EIA is approved,
which is expected in third quarter 2006.
Cash Flow from Financing Activities
- The Company's only source of liquidity until the project is permitted
are the equity markets. The Company raised $130.8 million over the
past three years through four financings, as well as the exercise of
stock options by employees.
- Once the EIA is approved, the Company will need to raise at least
$700 million to finance the development of Rosia Montana.
Mineral Resources
Mineral Resources
During the third quarter of 2005, we updated our mineral resource
estimate for the Rosia Montana project to include all exploration drilling and
sampling results generated since the last resource estimate was completed in
2003. This updated mineral resource estimate totals 14.6 million ounces of
gold, unchanged from the 2003 estimate. The updated resource estimate for the
Rosia Montana project, using a 0.6g/t gold cutoff, a 10 x 10 x 10 metre block
size and ordinary kriging, is set forth in the following table and is
essentially unchanged from the previous estimate completed in 2003:
Grade Contained
(g/t) Ounces
------------- --------------------
Resource Category Tonnes Gold Silver Gold Silver
-------------------------------------------------------------------------
Measured (M) 139,827,000 1.5 8 6,800,000 38,100,000
Indicated (I) 210,521,000 1.2 4 7,800,000 26,800,000
-------------------------------------------------------------------------
Total M + I 350,348,000 1.3 6 14,600,000 64,900,000
-------------------------------------------------------------------------
Inferred 30,285,000 1.2 3 1,200,000 3,000,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Brett Gossage, MAusIMM, is the qualified person responsible for
calculating the resource estimate set forth in the table above.
Project Timeline
The Company's previous guidance, dating back to 2004, anticipated that
construction would commence no earlier than second quarter 2006. That guidance
was further modified in the First Quarter 2005 Management's Discussion &
Analysis to suggest that it may not be possible to start construction
activities in 2006. With the changes in management during second quarter 2005
and our subsequent review, we issued new guidance in the Second Quarter 2005
Report that we expect to receive our construction permit in second half 2006.
Our plan is to begin construction in 2006, providing that we receive the
construction permit early enough in the fall to lay the foundation to work
through the winter, which in the Rosia Montana region can be severe. If we
cannot complete the level of construction work necessary to work through
winter, we will use the additional time to order the long-lead-time equipment
and be ready to break ground as soon as possible in spring 2007. The project
should take approximately two years to construct, projecting first gold pour
for early 2009. As of the date of this report, we are on target to meet that
schedule.
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 2005 Q4 2005 Q3 2005 Q2 2005 Q1
-------------------------------------------------------------------------
Statement of Loss
Loss $ 2,036,830 $ 1,745,196 $ 2,339,860 $ 2,358,706
Loss per share 0.01 0.01 0.01 0.02
-------------------------------------------------------------------------
Balance Sheet
Working capital 52,870,559 28,908,442 32,849,856 38,246,957
Total assets 238,343,489 208,906,455 210,216,116 211,833,922
-------------------------------------------------------------------------
Statement of
Cash Flows
Investments in
exploration and
development
including
working capital
changes 4,369,027 3,631,266 4,242,277 3,815,656
Cash flow from
financing
activities 30,539,400 575,684 (247,499) 28,547,950
-------------------------------------------------------------------------
$ Cdn 2004 Q4 2004 Q3 2004 Q2 2004 Q1
-------------------------------------------------------------------------
Statement of Loss
Loss $ 2,220,399 $ 1,669,673 $ 2,290,824 $ 2,406,539
Loss per share 0.01 0.01 0.02 0.02
-------------------------------------------------------------------------
Balance Sheet
Working capital 15,282,564 20,779,589 3,503,844 20,142,199
Total assets 184,502,350 186,173,156 165,364,837 165,875,236
-------------------------------------------------------------------------
Statement of
Cash Flows
Investments in
exploration and
development
including
working capital
changes 4,825,793 8,404,559 11,623,339 10,195,592
Cash flow from
financing
activities 1,151,446 24,684,265 - 1,111,617
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Fourth Quarter 2005 Analysis
For the quarter ended December 31, 2005 we incurred a loss of
$2.0 million, or 1 cent per share compare to a loss of $2.2 million, or 1 cent
per share in the year earlier quarter. In addition, we invested $4.4 million
during the fourth quarter in our Rosia Montana and Bucium properties, compared
to $4.8 million in the year earlier period. Cash flow from financing
activities in the fourth quarter 2005 increased to $30.5 million, reflecting
the fourth quarter exercise of warrants and stock options compared to $1.2
million in the year earlier fourth quarter on the exercise of stock options.
Statement of Loss
Loss for the Period
For the year ended December 31, 2005, we lost $8.5 million, or $0.05 per
share, compared to a loss of $8.6 million, or $0.06 per share, for 2004. The
marginally lower loss in 2005 reflects an increase in interest income due to
higher cash balances during 2005, while lower project financing costs were
offset by reorganization severance costs, settlement of a lawsuit and an
increase in non-cash charges related to stock option compensation. We will
continue to incur losses until commercial production commences and revenues
are generated.
Expenses
Corporate General and Administrative
During 2005, we incurred a total of $5.5 million for corporate general
and administrative expenses ("G&A"), compared to $5.0 million in 2004.
Excluding the effect of the change in value of the deferred share units
("DSUs"), costs increased by $163,017 due primarily to higher communications
and travel costs, partially offset by the reversal of an over-accrual of
consulting fees from a prior period. Corporate general and administrative
costs are anticipated to remain at approximately the $1.5 million per-quarter
level or $6.0 million per-year level, excluding the impact of DSUs, for the
foreseeable future, as our current staff level is sufficient to support the
increase in activity as the project moves forward.
DSU costs for 2005 increased corporate general and administrative costs
by $228,423, while in 2004 DSU costs decreased corporate general and
administrative costs by $146,677. 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 2005, the difference is
charged to the Statement of Loss, increasing costs for the year. If the share
price declines as it did in 2004, the lower value of the DSUs is credited
against costs during the year. Overall, for 2005 our share price increased by
$1.28 compared to last year when our share price declined from the close of
the previous year end by $3.34.
Stock Option Compensation
Stock option compensation for 2005 increased to $2,846,160, compared to
$1,733,315 during 2004. The higher expense for 2005 reflects the issuance of
6,000,000 options granted during the year, 2,035,000 of which were replacement
options, which vest immediately, compared to 1,495,000 options granted during
2004, all of which were new options amortized over the vesting period. The
significant increase in option grants reflects the issuance of options to the
new corporate and Romanian management teams, as well as a modification to our
compensation program that seeks to ensure that the existing senior and middle
management teams' goals and objectives are aligned with shareholders. The fair
values of stock options when granted are amortized to our Statement of Loss
over the period in which the options vest. For those replacement options that
vest on issuance, the entire fair value of the options is expensed
immediately. Stock option compensation is expected to decline in 2006, as we
are not scheduled to issue any replacement options.
Severance and Settlement Costs
During second quarter 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 $546,755, 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 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 for US$250,000. 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, as the
contingency was known prior to year end, but the amount was not quantifiable
until the settlement was reached.
Project Financing Costs
We did not incur any project financing costs in 2005, as we elected to
put project financing activities on hold until the project is further
advanced. During 2004, we incurred $2.1 million in project financing costs. As
our permitting and development activities progressed, we restarted project
financing activities in January 2006 toward the goal of finalizing project
financing in late 2006. Overall, we expect to incur $0.5 million for project
financing activities until we receive EIA approval, which we expect in third
quarter 2006, at which time costs would increase as we finalize the legal
documentation related to the project finance loan.
Interest Income
Interest income for 2005 increased to $729,688, compared to $374,966 in
2004. The higher interest income this year relates to the higher cash balance
due to the public offering completed March 31, 2005, which raised
$28.1 million, and the exercise of warrants in December 2005, which added a
further $30 million to our treasury. Interest income should increase in 2006
as our cash balance is higher than last year, and our rate of expenditure
remains modest pending approval of our EIA.
Foreign Exchange
For 2005, we reported a gain of $63,106, compared to a $48,033 loss in
2004. We record foreign exchange gains or losses on US dollar cash balances
held. While a significant portion of our expenses are denominated in US
dollars and Romanian Lei, we only convert our Canadian dollar cash balance to
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 $16.0 million in our two projects during 2005, compared with
$33.2 million in 2004.
For the year ended December 31, 2005, expenditures declined in all the
major project areas as we focused primarily on permitting and communications
activities. Community development activities totaled $2.4 million in 2005,
compared to $6.0 million in 2004. The decrease was due largely to the decision
in mid-2004 to pause property acquisitions until such time as we receive
approval of our EIA, which is expected in third quarter 2006. In addition, we
spent $0.9 million on engineering during 2005, as compared to $10.9 million in
2004, when detailed engineering was underway. During 2005, expenditures for
permitting declined to $5.0 million from $6.8 million in the year-earlier
period, when the Project Presentation Report was being prepared. For 2005,
expenditures on finance and administration declined to $5.6 million from
$6.8 million in the year-earlier period, reflecting lower consulting and legal
costs this year, partially offset by higher communications costs. Exploration
at Rosia Montana totaled $0.7 million in 2005 compared to $0.7 million in
2004, with the focus of activity in both years on geologic mapping and
metallurgical sampling. At Bucium, a scoping study is underway to determine
the economics of developing the resource. The scoping study cost $1.5 million
during 2005, compared to $2.0 million in 2004. Note 4 Mineral Properties of
our Consolidated Financial Statements also includes capitalized depreciation
in the amount of $0.8 million for 2005 and $0.5 million for 2004, related to
capital assets used in Romania.
We would expect the mineral properties expenditure level to average
$2.0 million per month for the first nine months of 2006, peaking at
$3.0 million in the first quarter, until approval of our EIA, which we expect
in the third quarter. We expect increased activity in 2006 in our
environmental department as our independent specialist team works to finalize
and submit our EIA documents, followed by the public consultation period with
all of our stakeholders. Engineering costs are also expected to rise as we
finalize the project design in conjunction with the EIA. Property acquisition
expenditures are expected to rise in 2006 with the implementation of the
option program, while finance and administration costs are expected to rise as
we continue a nationwide communications program covering television, print and
billboards and incur higher legal costs associated with the permitting
process. Once we receive our archaeological discharge and approved EIA, both
of which are expected in third quarter 2006, expenditures would rise as we
execute property purchase options, order the long-lead-time equipment and
prepare for construction of the project either in late 2006 or early 2007.
Cash Flow Statement
Liquidity and Capital Resources
Our only sources of liquidity until we receive our environmental permits
for Rosia Montana are our cash balance, bridge financing, exercise of warrants
and stock options outstanding, and the equity markets. With the exercise of
warrants in fourth quarter 2005 adding $30 million to our treasury, we are in
a strong financial position through the permitting phase of project
development. We updated the cost of constructing the project at year end.
Capital costs increased from US$437 million to the US$638 million, reflecting
design changes to accommodate stringent environmental laws and the general
increase in cost inflation experienced by the entire mining industry. To
complete the development of the project, the Company will pursue 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. The project economics remain strong, as the higher capital
and operating costs are more than offset by the increase in gold price, which
has risen from the low US$300-per-ounce level at the time of the original cost
estimate to over US$550 per ounce in first quarter 2006.
Working Capital
As at December 31, 2005, we had working capital of $52.9 million versus
$15.3 million as at December 31, 2004. The increase in working capital is the
direct result of the proceeds received on March 31, 2005 from a public
offering of units for aggregate gross proceeds of $30 million (net proceeds
$28.1 million). Each unit consisted of one common share of Gabriel and one
half of one common share purchase warrant. Each whole warrant entitles the
holder to acquire one common share at a price of Cdn$2.75 at any time on or
before March 31, 2007. A total of 7.5 million warrants were listed and posted
for trading under the trading symbol GBU.WT, signifying the first time the
Company has listed warrants for trading. In addition, warrants to purchase 15
million shares at $2.00 per share, which were to expire at year end, were
exercised in full, adding a further $30 million to our treasury.
Net Change in Non-Cash Working Capital
The net change in operating non-cash working capital increased for the
year ended December 31, 2005, reflecting unpaid severance accrued and the
accrual of the settlement costs of US$250,000 related to a lawsuit.
The net change in investing non-cash working capital decreased for the
year ended December 31, 2005, primarily as a result of a significantly lower
level of engineering work and permitting costs compared to 2004.
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
We sublease a portion of our leased premise to Alamos Gold Inc., on the
board of which Alan R. Hill, our Chief Executive Officer, 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 totalled $38,115 for
2005 (2004 - $34,650).
The Company paid $19,200 during 2005 (2004 - nil) to a director for
consulting services provided to the Company.
During, 2005, our Romanian subsidiary RMGC paid $39,600 (2004 - $87,157)
to a company owned by Minvest, a minority shareholder of RMGC, for power costs
related to RMGC's assay laboratory in Romania.
During the third quarter of 2004, we drew down $1.5 million under a short-
term standby credit facility provided by Quest Capital Corp., of which the
Managing Director and shareholder is also a director and shareholder of the
Company. The loan was repaid on September 30, 2004 at which time the facility
was terminated. We incurred interest of $18,284 and issued 197,917 common
shares valued at $237,500 for payment of fees in conjunction with the
facility.
In December 2004, we loaned a total of US $971,210 to the four minority
shareholders, who hold an aggregate of 20% of the shares of RMGC, to
facilitate a statutory requirement to increase RMGC's total share capital. The
loans are non-interest-bearing and are to be repaid as and when RMGC
distributes dividends to its shareholders.
The loans and related minority interest contribution have been offset on
the balance sheet until such time as the loans are repaid. Once the loans are
repaid the minority interest component will be reflected on the balance sheet.
Contractual Obligations
The Bucium exploration license obligates the Company to spend
US$3.4 million over the term of its three-year extension, which expires on May
19, 2007. As at December 31, 2005, the remaining expenditure commitment was
US$0.8 million (December 31, 2004 - US$2.0 million).
The Company has a number of agreements with arms-length third parties who
provide a wide range of services to it or RMGC. Typically, these agreements
are for a term of not more than one year and permit either party to terminate
for convenience on notice periods ranging from 15 to 90 days. As at December
31, 2005, commitments under such agreements totaled $3.1 million (December 31,
2004 - $8.5 million).
The Company has entered into a number of agreements for purchase and sale
relating to the acquisition of surface rights. The agreements bind the Company
to purchase properties. The total value of the properties committed to be
purchased as at December 31, 2005 is $374,000 (December 31, 2004 -
$1.2 million). In addition, 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 is expected to cost approximately US$1.0 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$33 million in
local properties in the project area. The commitment becomes binding once the
EIA is approved.
Romania Signs Accession Treaty with European Union
On April 25, 2005, in Brussels, Romania signed the Treaty of Accession
(the "Treaty") with the European Union, providing for Romania to join the
European Union on January 1, 2007. Romania also entered into the Accession
Protocol and its Annexes, which form an integral part of the Treaty and which
contain most of the detailed conditions and arrangements for accession to the
European Union. The signing of the Treaty followed the European Parliament's
vote on April 13, 2005 approving the entry of Romania into the European Union
in 2007.
On October 25, 2005, the European Union (the "EU") released its 2005
comprehensive monitoring report (the "Report") on progress Romania has made in
its preparations for membership in the EU. The Report covers the political and
economic requirements for membership, the reforms undertaken by Romania to
meet those requirements, as well as the progress in aligning its legislation
with the EU legal order. While the Report highlights the significant progress
Romania has made so far, it also highlights a number of areas of concern which
will require immediate and significant action from Romania. The next Report is
scheduled to be released on May 17, 2006.
Critical Accounting Estimates
We have determined that the area covered by the Rosia Montana
exploitation license contains economically recoverable reserves. The ultimate
recoverability of the $173.0 million carrying value at December 31, 2005 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.
We have not yet determined whether the area covered by the Bucium
exploration license contains economically recoverable reserves. A scoping
study is underway to determine the economic potential of the license area. The
recoverability of the $8.3 million carrying value at December 31, 2005 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.
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 and Bucium
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.
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 in a constant state of change, as Romania continues to
harmonize its legislation with that of the EU as part of its accession
process. 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 will have the opportunity to
participate in the public consultation process, pursuant to the provisions of
the Espoo Convention. There are significant risks that the public consultation
process and 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 non-governmental organization ("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 has granted a temporary injunction suspending the operation of the
discharge certificate pending a final hearing on the matter. While the Company
has appealed the Alba Court ruling to Romania's Supreme Court, there can be no
assurance that the validity of the discharge certificate will be upheld and,
if its validity is successfully challenged, 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 the
second half of 2006 or spring 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 the closure of the current state-owned mining operations
at Rosia Montana, which is now set for the fall of 2006, 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, academics and other
special interest groups, could contribute to such delays.
Project Financing Risks
While we have sufficient financial resources to fund permitting
activities based on our current permitting 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$550 per ounce, resulting in higher share
prices for gold equities. During 2005, our share price increased from $1.56 to
close 2005 at $2.84, 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 continuing its state-subsidized mining
operations at Rosia Montana until such time as we are ready to begin
construction of a new mine at Rosia Montana. Until Minvest's ongoing
activities permanently cease, there can be no assurance that such 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.
In December 2004, Minvest's environmental authorization to conduct its
mining operations expired and Gabriel understands that Minvest has made
application for a new environmental authorization. RMGC has formally requested
that Minvest take all necessary action to ensure that Minvest conducts all of
its mining operations at Rosia Montana in accordance with all laws,
regulations and rules and to ensure that it holds all necessary permits,
approvals and authorizations, in order to prevent RMGC, as titleholder of the
License, from attracting any liabilities as a result of Minvest's action.
There are significant risks that any mining activities conducted by Minvest
without all necessary permits, approvals and authorizations may attract
liability to RMGC, as titleholder to the License, and may provide grounds for
the License to be terminated.
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 at Rosia
Montana, 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 fourth quarter 2005 to reflect changes to World Bank/IFC guidelines, as
well as to 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 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
judgements 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.
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.
Disclosure Controls and Procedures
Based on the evaluation of our disclosure controls and procedures, our
Chief Executive Officer and Chief Financial Officer have concluded at December
31, 2005 that these controls and procedures are operating effectively.
Internal Controls
We are in the process of implementing the Oracle software system at our
corporate office, as well as at our Romanian operations. Oracle is an ERP
system, which will better enhance our ability to meet the new Ontario
Securities Commission Internal Control certification requirements for year
end, December 31, 2006.
2006 Outlook
Our key objectives for next year are similar to those of 2005, and
include:
1. Finalizing and submitting our EIA to the Romanian Government;
2. Obtaining all archaeological discharges required to construct the
mine, in parallel with the approval of the EIA;
3. Signing up a majority of the residents of the village to the pre-sale
agreement before the approval of the EIA, and acquiring all surface
rights as quickly as possible after the approval of the EIA;
4. Continuously improving communications with all stakeholders; and
5. Finalizing project financing term-sheet before approval of the EIA.
We made solid strides in meeting each one of our first four key
objectives in 2005 and our goal is to build upon that success in 2006. With
the success in meeting the first four, we have moved forward on finalizing
project financing term-sheet. The cost to execute these five objectives should
average $2.5 million per month during the first three-quarters of the year,
peaking at $3.5 million in the first quarter, leaving us with between $25 and
$30 million in working capital at the end of the third quarter, when we expect
to receive approval for our EIA. We expect to complete our EIA at the end of
first quarter 2006. If we are able to complete our archaeology discharges in
parallel with the approval of our EIA, we would expect to begin purchasing
properties in the village in the third quarter, putting us on track to receive
our construction permits in the second half of 2006. This timetable, announced
in our Second Quarter 2005 Report to Shareholders, firmed up previous guidance
issued by the Company. We remain on track to meet this new timetable.
Outstanding Share Data
The Company's issued shares outstanding as at the report date was:
Outstanding
-------------------------------------------------------------------------
Preferred shares Nil
Common shares 177,200,268
Common stock options 10,357,933
Common stock warrants 7,500,000
Deferred share units - common shares 158,185
-------------------------------------------------------------------------
Fully diluted share capital 195,216,386
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 forwardlooking
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.
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 judgement.
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, Grant Thornton LLP, are appointed by
the shareholders to conduct an audit in accordance with generally accepted
auditing standards in Canada, and their report follows.
(signed) (signed)
Richard Young Alan R. Hill
Vice President & CFO President & CEO
March 7, 2006
Auditors' Report
To the Shareholders of
Gabriel Resources Ltd.
We have audited the consolidated balance sheets of Gabriel Resources Ltd.
as at December 31, 2005 and 2004 and the consolidated statements of loss and
deficit and cash flows for the years 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 audits.
We conducted our audits 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, 2005 and 2004 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.
(signed)
Chartered Accountants
Toronto, Canada
Feb. 10, 2006
Consolidated Balance Sheets
As at December 31
(Canadian dollars)
2005 2004
$ $
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 25,306,083 16,256,543
Short-term investments 28,932,941 115,000
Accounts receivable 407,479 294,160
Prepaid expenses and supplies 826,586 1,217,008
-------------------------------------------------------------------------
55,473,089 17,882,711
Capital assets (note 3) 1,545,026 2,162,500
Mineral properties (note 4) 181,325,374 164,457,139
-------------------------------------------------------------------------
238,343,489 184,502,350
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 2,602,530 2,600,147
Other liabilities (note 5) 449,246 220,823
-------------------------------------------------------------------------
3,051,776 2,820,970
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock (note 7) 284,986,949 227,157,729
Common share purchase warrants
(notes 7(b) and 8) 1,950,000 -
Contributed surplus (note 10) 5,687,638 3,375,933
Deficit (57,332,874) (48,852,282)
-------------------------------------------------------------------------
235,291,713 181,681,380
-------------------------------------------------------------------------
238,343,489 184,502,350
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nature of operations and going concern (note 1)
Minority interest (note 6(e))
Commitments and contingencies (note 14)
Approved by the Board of Directors
(signed) (signed)
Michael Parrett Alan R. Hill
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
(Canadian dollars)
2005 2004
$ $
-------------------------------------------------------------------------
Expenses
Corporate, general and administrative 5,530,378 4,992,261
Project financing costs - 2,122,518
Severance and settlement costs 838,230 -
Stock option compensation (note 9) 2,846,160 1,733,315
Amortization 58,618 66,274
-------------------------------------------------------------------------
9,273,386 8,914,368
-------------------------------------------------------------------------
Other income (expenses)
Interest 729,688 374,966
Foreign exchange 63,106 (48,033)
-------------------------------------------------------------------------
792,794 326,933
-------------------------------------------------------------------------
Loss for the year 8,480,592 8,587,435
Deficit - Beginning of year 48,852,282 40,264,847
-------------------------------------------------------------------------
Deficit - End of year 57,332,874 48,852,282
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loss per share (basic and diluted) 0.05 0.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of shares 158,970,863 135,991,665
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31
(Canadian dollars)
2005 2004
$ $
-------------------------------------------------------------------------
Cash flows from operating activities
Loss for the year (8,480,592) (8,587,435)
Items not affecting cash
Amortization 58,618 66,274
Stock option compensation 2,846,160 1,733,315
Deferred share units 228,423 (146,677)
Bridge loan fees paid with shares (note 6(d)) - 237,500
-------------------------------------------------------------------------
(5,347,391) (6,697,023)
Net changes in non-cash working capital
(note 15) 130,589 (345,999)
-------------------------------------------------------------------------
(5,216,802) (7,043,022)
-------------------------------------------------------------------------
Cash flows used in investing activities
(Increase)/Decrease in short-term investment (28,817,941) 65,442
Exploration and development expenditures (16,036,353) (33,227,640)
Issue of loans receivable (note 6(e)) - (1,165,449)
Purchase of capital assets (273,026) (1,184,099)
Net changes in non-cash working capital
(note 15) (21,873) (1,821,643)
-------------------------------------------------------------------------
(45,149,193) (37,333,389)
-------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from short-term bridge loan
(note 6(d)) - 1,500,000
Repayment of short-term bridge loan
(note 6(d)) - (1,500,000)
Minority interest contributions (note 6(e)) - 1,165,449
Proceeds from issuance of capital stock,
net of issue costs 59,244,765 25,781,879
Net changes in non-cash working capital 170,770 -
-------------------------------------------------------------------------
59,415,535 26,947,328
-------------------------------------------------------------------------
Increase (Decrease) in cash and cash
equivalents 9,049,540 (17,429,083)
Cash and cash equivalents -
Beginning of year 16,256,543 33,685,626
-------------------------------------------------------------------------
Cash and cash equivalents -
End of year 25,306,083 16,256,543
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash .ow information (note 15)
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
For the years ended December 31, 2005 and 2004
(Canadian dollars)
1. Nature of operations and going concern
Gabriel Resources Ltd. (the "Company") is a Canadian-based resource
company committed to responsible mining and sustainable development in
the communities in which it operates. The Company is engaged in the
exploration and development of mineral properties in Romania and is
presently developing its 80%-owned Rosia Montana gold project (the
"project"). The discovery was made in 1999, and since that time the
Company has raised approximately $285 million with most of the money
spent for identifying and defining the size of the four ore bodies, for
engineering to design the size and scope of the project, for
environmental assessment and permitting as well as surface rights
acquisitions. The Company is in the final stages of permitting the
project, which is expected in the second half of 2006. Once the Company
receives the construction permit, the nature and magnitude of
expenditures will increase as it builds roads, production facilities,
pits, tailings management facilities and associated infrastructure. In
addition, the Company's other license area, Bucium, is undergoing a
scoping study to determine whether it contains economic reserves.
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 longterm financing to complete
the development of the properties. In addition, the project may be
subject to sovereign risk, including political and economic stability,
government regulations relating to mining which may delay the receipt of
required permits or impede the Company's ability to acquire the necessary
surface rights, as well as currency fluctuations and local inflation.
These may adversely affect the investment and may result in the
impairment or loss of all or part of the Company's investment.
The Company does not have sufficient cash to fund the development of the
Project and therefore will require additional funding which if not raised
would result in the curtailment of activities and result in project
development delays. Management is of the opinion that additional
financing is available and may be sourced in time to allow the Company to
continue its planned activities in the normal course. While it has been
successful in the past, there can be no assurance it will be able to
raise sufficient funds in the future.
These consolidated financial statements have been prepared on the basis
of accounting principles applicable to a "going concern", which assume
that the Company will continue in operation for the foreseeable future
and will be able to realize its assets and discharge its liabilities in
the normal course of operations. These consolidated financial statements
do not reflect adjustments that would be necessary if the going concern
assumption were not appropriate. If the "going concern" assumption were
not appropriate for these consolidated financial statements, then
adjustments would be necessary in the carrying values of assets and
liabilities, the reported revenues and expenses, and the balance sheet
classifications used.
2. Significant accounting policies
Sources of GAAP
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada, 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 Analize SRL 80% owned
Rom AUR SRL 100% 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, determinations as to whether costs are expensed or deferred and
stock compensation valuation assumptions. 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 three years for office equipment, six years for vehicles and
varying rates between three and five years for exploration equipment.
Leasehold improvements are amortized on a straightline 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 to operations using the
unit-of-production method over the estimated useful life of the estimated
related 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.
The amounts capitalized represent costs to be charged to operations in
the future and do not necessarily reflect the present or future values of
the particular properties.
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 average rates for the period. Exchange
gains or losses 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 is not considered more likely than not.
Cash and cash equivalents
Cash and cash equivalents comprise cash at banks and on hand and other
highly liquid short-term investments, which may be settled on demand or
within a maximum 90-day period.
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
The grants of stock, stock options and other equity instruments to
officers, directors and consultants are recognized as compensation
expense based on the estimated fair value at the grant date. The Company
has elected to disclose pro-forma net loss and loss per share amounts
related to options granted prior to January 1, 2003.
Asset retirement obligation
In fiscal 2004, the Company adopted the CICA Handbook Section 3110,
"Asset Retirement Obligations", which established standards for asset
retirement obligations and the associated retirement costs related to
site reclamation and abandonment. 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, 2005, the Company has not incurred or committed any asset retirement
obligations related to the development of its mineral properties in
Romania.
Impairment of long-lived assets
In fiscal 2004, the Company adopted the CICA Handbook Section 3063
"Impairment of Long-lived Assets" on a prospective basis. Section 3063
requires that long-lived assets and intangibles to be held and used by
the Company be reviewed for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If changes in circumstances indicate that the
carrying amount of an asset that an entity expects to hold and use may
not be recoverable, future cash flows expected to result from the use of
the asset and its disposition must be estimated. If the undiscounted
value of the future cash flows is less than the carrying amount of the
asset, impairment is recognized. Management believes that there has been
no impairment of the Company's long-lived assets as at December 31, 2005.
3. Capital assets
2005 2004
$ $
-------------------------------------------------------------------------
Vehicles 1,355,364 1,357,135
Exploration and office equipment 1,933,519 2,019,059
Leasehold improvements 105,856 105,856
-------------------------------------------------------------------------
3,394,739 3,482,050
-------------------------------------------------------------------------
Less: Accumulated amortization
Vehicles 589,393 391,376
Exploration and office equipment 1,162,407 868,764
Leasehold improvements 97,913 59,410
-------------------------------------------------------------------------
1,849,713 1,319,550
-------------------------------------------------------------------------
Net book value
Vehicles 765,971 965,759
Exploration and office equipment 771,112 1,150,295
Leasehold improvements 7,943 46,446
-------------------------------------------------------------------------
1,545,026 2,162,500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Mineral properties
Rosia Montana Bucium Total
$ $ $
-------------------------------------------------------------------------
Balance - December 31, 2003 125,919,287 4,855,098 130,774,385
Development costs 30,984,995 - 30,984,995
Exploration costs 721,884 1,975,875 2,697,759
-------------------------------------------------------------------------
Balance - December 31, 2004 157,626,166 6,830,973 164,457,139
Development costs 14,572,300 - 14,572,300
Exploration costs 790,069 1,505,866 2,295,935
-------------------------------------------------------------------------
Balance - December 31, 2005 172,988,535 8,336,839 181,325,374
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's principal asset is its 80% direct ownership interest in a
Romanian Company, Rosia Montana Gold Corporation ("RMGC"), which holds
two mineral licences in Romania, being Rosia Montana and Bucium. Minvest
S.A. ("Minvest"), a Romanian state-owned mining company, together with
three other private Romanian companies, holds a 20% interest in RMGC, and
the Company holds the pre-emptive right to acquire such 20% interest. The
Company is required to fund 100% of all expenditures related to the
exploration and development of these properties and holds a preferential
right to recover all funding plus interest from future cash flows prior
to the shareholders receiving dividends.
An exploitation license is held by RMGC as the titleholder in respect of
the Rosia Montana property. RMGC has the exclusive right to conduct
mining operations at the Rosia Montana property for an initial term of 20
years commencing in 1998, and thereafter with successive five-year
renewal periods.
RMGC holds an exploration license at the Bucium property. The license was
extended in 2004 and expires May 19, 2007. The Company is obliged to
spend US$3.4 million over the term of the license extension period. As at
December 31, 2005, the remaining expenditure commitment was approximately
US$0.8 million (2004 - US$2.0 million). A scoping study is currently
underway to confirm the economic potential of the resource. Once the
resource's economic potential is confirmed, a feasibility study is needed
in order to obtain an exploitation license.
5. Other liabilities
The Company has implemented a Deferred Share Unit Plan under which
qualifying participants may elect to receive certain compensation in the
form of deferred share units ("DSUs"), in lieu of cash. On retirement,
participants may redeem their DSUs for common shares of the Company to be
purchased on the open market, cash, or a combination of common shares and
cash. The Company, at its sole discretion, can elect to pay the amount in
common shares issued from treasury. At December 31, 2005, 158,185 (2004 -
141,553) outstanding DSUs were valued at the Company's December 31, 2005
share price of $2.84 (2004 - $1.56) per share, resulting in $449,246
(2004 - $220,823) recorded as other liabilities. Accordingly the net
year-over-year change in the value has been recorded in corporate general
and administrative expense.
6. Related party transactions
The Company had related party transactions, with directors and/ or
officers of the Company or associated corporations, which were in the
normal course of operations and were measured at the exchange amounts as
follows:
(a) The Company receives rental revenue of $3,465 per month under a
sublease to Alamos Gold Inc., which commenced March 1, 2004, and
ended november 23, 2005. Sublease revenue of $38,115 for 2005 (2004 -
$41,580) is included as an offset to corporate general and
administrative expense. 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.
(b) During the year ended December 31, 2005, RMGC paid a total of $39,600
(2004 - $87,157) to a company owned by a minority shareholder of RMGC
for power costs related to the Rosia Montana project.
(c) During the year ended December 31, 2005, the Company paid $19,200
(2004 - $nil) to a director of the Company for consultation services
provided to the Company.
(d) During the third quarter of 2004, the Company drew down $1.5 million
under a short-term standby credit facility provided by Quest Capital
Corp., of which the Managing Director and shareholder is also a
director and shareholder of the Company. The loan was repaid on
September 30, 2004 at which time the facility was terminated. The
Company incurred interest of $18,284 and issued 197,917 common shares
valued at $237,500 for payment of fees in conjunction with the
facility.
(e) In December 2004, the Company loaned a total of US $971,210 to the
four minority shareholders, who hold an aggregate of 20% of the
shares of RMGC, to facilitate a statutory requirement to increase
RMGC's total share capital. The loans are non-interest bearing and
are to be repaid as and when RMGC distributes dividends to its
shareholders.
The loans and related minority interest contribution have been offset
on the balance sheet until such time as the loans are repaid. Once
the loans are repaid the minority interest component will be
reflected on the balance sheet.
7. Capital stock
Authorized
Unlimited number of common shares without par value
Unlimited number of preferred shares, issuable in series, without par
value
Common shares issued and outstanding
Number of Amount
shares $
-------------------------------------------------------------------------
Balance - December 31, 2003 130,792,305 201,099,150
Shares issued on the exercise of
stock options (note 9) 422,644 1,111,617
Stock-based compensation -
exercise of stock options (note 10) - 39,200
Shares issued on the bridge loan (note 6(d)) 197,917 237,500
Shares issued under the private placement(a) 15,000,000 24,750,000
Less: Share issue costs - (79,738)
-------------------------------------------------------------------------
Balance - December 31, 2004 146,412,866 227,157,729
Shares issued from a public offering (b) 15,000,000 28,050,000
Less: Share issue costs - (1,870,319)
Shares issued on the exercise of
stock options (note 9) 660,970 1,115,084
Stock-based compensation -
exercise of stock options (note 10) - 534,455
Shares issued from the exercise of
share purchase warrants (c) 15,000,000 30,000,000
-------------------------------------------------------------------------
Balance - December 31, 2005 177,073,836 284,986,949
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) On September 8, 2004, the Company issued 15,000,000 units priced at
$1.65 per unit by way of a private placement for gross proceeds of
$24.75 million. Each unit consisted of one common share and one
common share purchase warrant with an exercise price of $2.00 and
expiry date of December 31, 2005.
(b) On March 31, 2005, the Company issued 15,000,000 units priced at
$2.00 per unit by way of a public offering for gross proceeds of
$30 million. Each unit consisted of one common share and one half of
one common share purchase warrant with an exercise price of $2.75 and
expiry date of March 31, 2007. Each unit has been apportioned $1.87
to common share and $0.13 to one-half of one common share purchase
warrant, resulting in an assigned value of $28,050,000 to the
15,000,000 common shares and an assigned value of $1,950,000 to the
share purchase warrants. The net proceeds of the offering were
$28,129,681 after deducting a cash commission to the underwriters of
$1,350,000 plus various professional fees related to the offering.
(c) On December 6, 2005, newmont Mining Corporation of Canada Limited
("NMCCL"), a subsidiary of Newmont Mining Corporation, exercised all
15 million common share purchase warrants for proceeds of
$30 million. NMCCL currently holds approximately 18.9% of the
Company's issued and outstanding common shares.
(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 for an additional three-year
term by the shareholders of the Company at the Annual and Special
Meeting held on June 17, 2003.
8. Share purchase warrants
During the years ended December 31, 2005 and 2004, share purchase
warrants were issued and exercised as follows:
Number of Exercise
warrants price Expiry date
-------------------------------------------------------------------------
Balance - December 31, 2003 Nil
Warrants issued and
outstanding (note 7(a)) 15,000,000 2.00 December 31, 2005
------------------------------------------
Balance - December 31, 2004 15,000,000
Warrants issued and
outstanding (note 7(b)) 7,500,000 2.75 March 31, 2007
Warrants exercised
(note 7(c)) (15,000,000)
------------------------------------------
Balance - December 31, 2005 7,500,000
------------------------------------------
------------------------------------------
(a) As part of the agreed upon compensation for undertaking a review of
the financeability of the Rosia Montana project, the Company has
agreed to issue, subject to certain conditions being met, a number of
share purchase warrants (the "Warrants") to a financial institution
in two tranches, A and B (respectively, the "Tranche A Warrants" and
the "Tranche B Warrants").
The Tranche A Warrants: (i) are issueable at a date to be agreed upon
by the Company and the financial institution; (ii) will be in an
amount equal to 0.8767% of the number of the Company's outstanding
common shares on the date of issuance; (iii) will have an exercise
price equal to the average closing price of the Company's common
shares on the Toronto Stock Exchange for the 10 days preceding the
issuance; (iv) will be exerciseable as to 50% upon issuance and as to
50% when the financial institution is designated lead arranger for
the financing of the Rosia Montana project; and (v) will have a term
of four years from the date of issuance.
The Tranche B Warrants: (i) are issueable when the financial
institution is designated lead arranger for the financing of the
Rosia Montana project; (ii) will be in an amount equal to 0.4383% of
the number of the Company's outstanding common shares on the date of
issuance; (iii) will have an exercise price equal to the average
closing price of the Company's common shares on the Toronto Stock
Exchange for the 10 days preceding the issuance; (iv) will be
exerciseable upon issuance; and (v) will have a term of four years
from issuance.
The agreement with the financial institution can be terminated prior
to the issuance of the warrants and depending on the circumstances of
the termination, a termination fee of US$250,000 may be payable.
9. Stock options
The Incentive Stock Option Plan (the "Plan") authorizes the Directors to
grant options to purchase shares of the Company to directors, officers,
employees and consultants. The Plan originally allowed for the issuance
of up to 19 million shares of which as at December 31, 2005, 3.3 million
are available for issuance (2004 - 1.9 million). The exercise price of
the options equals the closing price on the day prior to the option
allotment. The majority of options granted vest over three years and are
exercisable over five years from the date of issuance.
As at December 31, 2005, common share stock options held by directors,
employees and consultants are as follows:
Weighted
average
Number of contractual
options life (years)
-------------------------------------------------------------------------
Option strike price
$1.48 - $2.00 5,275,415 4.3
$2.01 - $3.00 2,677,223 3.6
$3.01 - $4.00 85,060 1.0
$4.01 - $5.00 1,175,000 1.9
$5.01 - $5.50 1,080,000 1.4
-----------------------------------------------------------
10,292,698 3.5
-----------------------------------------------------------
-----------------------------------------------------------
As at December 31, 2005, 6,536,754 stock options are vested.
During the years ended December 31, 2004 and 2005, director, consultant
and employee stock options were granted, exercised and cancelled as
follows:
Weighted
average
Number of exercise price
options $
-------------------------------------------------------------------------
Balance - December 31, 2003 13,344,403 3.48
Options granted 1,495,000 1.62
Options expired (300,000) 1.91
Options cancelled (1,579,166) 3.91
Options exercised (422,644) 2.63
--------------------------------------------------------
Balance - December 31, 2004 12,537,593 3.27
Options granted 6,000,000 1.77
Options expired (6,361,700) 3.22
Options cancelled (1,222,225) 2.81
Options exercised (660,970) 1.69
Balance - December 31, 2005 10,292,698 2.59
--------------------------------------------------------
--------------------------------------------------------
The exercise of the outstanding stock options in the loss per share
calculation would be anti-dilutive.
The fair value of 6,000,000 options granted in fiscal 2005 (2004 -
1,495,000) 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
3.3% (2004 - 3.00%); volatility factor of the expected market price of
the Company's common stock of 75% (2004 - 76%); and a weighted average
expected life of the options of 2.6 years (2004 - 2.5 years). The
resulting weighted average cost per option granted was $0.85 (2004 -
$0.77). The estimated fair value of the options is expensed over the
three-year vesting period.
The fair value compensation recorded for the year ended December 31, 2005
in respect of awards granted subsequent to December 31, 2002 was
$2,846,160 (2004 - $1,733,315).
The following is the Company's pro-forma loss applying fair value method
to all options granted prior to January 1, 2003 and vested to date:
2005 2004
$ $
-------------------------------------------------------------------------
Loss for the year 8,480,592 8,587,435
Compensation expense related to fair
value of stock options 1,078,626 1,981,605
-------------------------------------------------------------------------
Pro-forma loss for the year 9,559,218 10,569,040
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro-forma loss per share 0.06 0.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2005 2004
Balance Sheet $ $
-------------------------------------------------------------------------
Mineral properties 181,325,374 164,457,139
Compensation expense related to fair
value of stock options 283,785 283,785
-------------------------------------------------------------------------
Pro-forma mineral properties 181,609,159 164,740,924
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Contributed surplus
The following table identifies the changes in contributed surplus for the
year:
Corporate Stock-based Total
reorganization compensation $
-------------------------------------------------------------------------
Balance - December 31, 2003 1,012,655 669,163 1,681,818
Stock-based compensation - 1,733,315 1,733,315
Exercise of stock options - (39,200) (39,200)
-------------------------------------------------------------------------
Balance - December 31, 2004 1,012,655 2,363,278 3,375,933
Stock-based compensation - 2,846,160 2,846,160
Exercise of stock options - (534,455) (534,455)
-------------------------------------------------------------------------
Balance - December 31, 2005 1,012,655 4,674,983 5,687,638
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. 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.
2005 2004
-------------------------------------------------------------------------
Income tax rate 36% 36%
$ $
Income tax at statutory rates (3,053,000) (3,102,000)
Adjustment for foreign subsidiaries 219,000 13,000
Stock option compensation 1,025,000 626,000
Deferred share units 82,000 (53,000)
Other 61,000 -
Valuation allowance 1,666,000 2,516,000
-------------------------------------------------------------------------
Income tax recovery recognized - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table reflects future income tax assets at December 31,
2005 and 2004:
2005 2004
$ $
-------------------------------------------------------------------------
Loss carryforwards 15,471,000 13,880,000
Share issue costs 1,010,000 946,000
Capital assets 130,000 110,000
Cumulative eligible capital expenditures 2,744,000 2,753,000
Valuation allowance (19,355,000) (17,689,000)
-------------------------------------------------------------------------
Future income tax 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 2,321,000
2007 3,578,000
2008 6,620,000
2009 6,324,000
2010 11,421,000
2014 6,309,000
2015 6,401,000
-----------------------------------------------------------
12. 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:
2005 2004
$ $
-------------------------------------------------------------------------
Romania 182,814,041 166,559,373
Canada 56,359 60,266
-------------------------------------------------------------------------
182,870,400 166,619,639
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. 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 Lei and United States dollars and are, therefore,
subject to exchange variations against the functional and reporting
currency, the Canadian dollar.
14. Commitments and contingencies
The following is a summary of contractual commitments of the Company
including payments due for each of the next five years and thereafter.
2010 and
Canadian $ thousand Total 2006 2007 2008 2009 thereafter
-------------------------------------------------------------------------
Bucium mineral license
(note 4) 911 643 268 - - -
Property acquisition
agreements (a) 374 374 - - - -
Goods and services
agreements (b) 3,069 3,069 - - - -
Rosia Montana
exploitation
license (c) 290 22 22 22 22 202
Surface concession
rights (d) 1,049 23 23 23 23 957
Lease agreements (e) 1,630 485 387 217 221 320
-------------------------------------------------------------------------
Total commitments 7,323 4,616 700 262 266 1,479
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) RMGC signed sale-purchase contracts with certain owners of real
estate property required for the development of the Rosia Montana
mine. The signed contracts bind RMGC to purchase the properties. The
total value of the properties committed to being purchased by RMGC is
$374,000 (2004 - $1,225,000) and is expected to be paid within one
year.
(b) The Company has a number of agreements with armslength third
parties who provide a wide range of services to it or RMGC and which
totaled $3,069,000 at December 31, 2005 (2004 - $8,491,000).
Typically, these agreements are for a term of not more than one year
and permit either party to terminate for convenience on notice
periods ranging from 15 to 90 days. Upon termination, the Company has
to pay for services rendered and costs incurred to the date of
termination.
(c) Under the terms of the Company's exploitation mineral license for the
Rosia Montana project, an annual fee is required to be paid to
maintain the license in good standing. The current annual fee,
converted from Romanian Lei to Canadian dollars at the year end rate,
is $22,300. These fees are indexed annually by the Romanian
Government and the license has 13 years remaining.
(d) RMGC has approximately 45 years remaining on a concession agreement
with the Local Council of Rosia Montana Commune by which it is
granted exploitation rights in property located on and around the
proposed Cirnic pit for an annual payment of US$20,000.
(e) The Company has entered into agreements to lease premises for various
periods until May 31, 2011. The annual rent of premises consists of
minimum rent plus realty taxes, maintenance and utilities.
The following is a summary of contingencies of the Company.
(a) During the fourth quarter of 2005, RMGC initiated a program whereby
owners of property in the impacted area of the project could agree
(the "Promissory Agreement") to either: (a) sell their property for
cash consideration, or (b) exchange their property for property owned
by RMGC in Piatra Alba or Alba Iulia within 180 days of the issuance
by the Romanian authorities of the environmental integrated approval
("EIA") for the project. The agreement expires 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).The program is expected to cost approximately
US$1 million in the first nine months of 2006, representing the 3%
up-front payment pursuant to the Promissory Agreements, committing
the Company to acquire approximately US$33 million in local
properties in the project area. The commitment is binding once the
EIA is approved.
(b) As disclosed in note 8, the Company may be required to pay US$250,000
on the termination of the agreement with the financial institution.
15. Supplemental cash flow information
Net changes in non-cash working capital
2005 2004
$ $
-------------------------------------------------------------------------
Operating activities:
Accounts receivable, prepaid expenses and
supplies (244,256) 104,101
Accounts payable and accrued liabilities 374,845 (450,100)
-------------------------------------------------------------------------
130,589 (345,999)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investing activities:
Accounts receivable, prepaid expenses and
supplies 350,589 402,438
Accounts payable and accrued liabilities (372,462) (2,224,081)
-------------------------------------------------------------------------
(21,873) (1,821,643)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2005 2004
$ $
-------------------------------------------------------------------------
Cash and cash equivalents is comprised of:
Cash 3,619,352 2,575,223
Short-term investments - weighted average
interest of 3.4% (2004 - 2.3%) 21,686,731 13,681,320
-------------------------------------------------------------------------
25,306,083 16,256,543
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the year ended December 31, 2005, the Company paid interest of
$nil (2004 - $18,284).
16. Reclassification of comparative figures
Certain comparative figures have been reclassified to conform to the
current year's presentation.
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