Gabriel Resources Ltd: Third Quarter 2009 Report
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TORONTO, ONTARIO -- (MARKET WIRE) -- 11/04/09 -- Gabriel Resources Ltd. (TSX: GBU) -
Highlights
"During the third quarter, we continued to make our case that the Rosia Montana Project is a world-class project - socially, environmentally and culturally - taking that message not only to key Romanian public officials, but to the Romanian public at large through our ongoing media campaign," said Keith Hulley, Gabriel President & Chief Executive Officer. "Given Romania's urgent need for investment, job creation and government revenue, we remain confident that the Rosia Montana Project will be recognized as a project delivering significant economic opportunity, while conforming to the highest standards on environment, patrimony and social issues," Mr. Hulley added.
Financial performance
- Third quarter net loss was $7.1 million, or $0.02 per share. Year-to-date loss was $15.8 million, or $0.06 per share.
- A total of $13.5 million, including $4.8 million of long-lead-time equipment purchases, was spent on our development projects during the third quarter increasing the year-to-date amount to $48.4 million.
Liquidity and capital resources
- Cash, cash equivalents and short term investments at September 30, 2009 totaled $117.9 million.
- The remaining budget for the Rosia Montana Project for 2009 is estimated at $18 million, primarily for long-lead equipment payments, Romanian project costs, final costs related to the completion of the Recea resettlement site and initial road construction for the new resettlement site in Piatra Alba.
- With EIA approval, the activity level will increase, including the acquisition of remaining surface rights, completion of a control estimate, payment of land use taxes and other payments required to obtain construction permits and mobilization for construction.
- These additional activities are expected to cost at least US$70 million over and above the equity raised in the second quarter. These activities can only commence once additional financing is raised.
Financing Plan
- Management began the process of executing on its financing plan during the first quarter 2009. Based on the initial feedback, management believes that the financing plan is achievable. However, management can not advance financing discussions any further until the permitting process recommences.
- The estimated cost to complete the development of the Rosia Montana Project (updated in March 2009) - including interest, financing and corporate costs - is US$1 billion, consisting of capital costs of US$876 million and interest, financing and corporate costs of US$124 million. The estimate excludes a provision for a cost overrun facility, reclamation bond, hedging and initial working capital, which could add US$200 million to the financing plan.
- Once completed, the Project is expected to produce approximately 626,000 ounces of gold annually at an average total cash cost of approximately $272/ounce over first five years.
Rosia Montana Project Development
Political Situation
- On October 1, 2009 Romania's governing coalition of the Democrat-Liberal Party ("PDL") and Social Democrat Party ("PSD") collapsed after the withdrawal of the PSD members from the coalition government and all of its cabinet members from their respective Ministries.
- The Prime Minister established an Interim Government on October 9, 2009 however on October 13, 2009, the Interim Government fell after passage of a no-confidence motion introduced in parliament by the National Liberal Party ("PNL"), the Democratic Union of Hungarians ("UDMR") and the PSD.
- It is unlikely a new government will achieve the confidence of parliament until the Presidential election results are known on December 6, 2009, and the successful candidate names a new Prime Minister. In the interim, those Ministers that did not resign, remain in office as caretakers.
- The government anti-crisis measures - specifically Romania's ability to comply with IMF guidelines - remains a visible policy issue. The Company continues to draw public and political attention to the significant economic opportunity its project represents, while conforming to the highest standards on environment, patrimony and social matters.
- In mid July there were two separate, official government visits made to Rosia Montana, one by the President of Romania and the other by the Minister of Culture. Both went on their own agendas, but with a common theme of gathering information. Though no formal public statements were made, we are encouraged by their interest in and comments on the Project.
- Throughout 2009 management has focused on meeting with stakeholders to understand their issues and concerns and explain the benefits and impacts of the Project. The strong local and regional support among politicians is a direct result of our outreach. To further strengthen our communications efforts, the Company retained an internationally recognized public relations firm to assist with our ongoing communications program. Our communication efforts have been fact based, focusing on the critically-needed economic benefits the Project will bring to Romania at a time when the country faces the impact of the global financial crisis. Through these initiatives, the Company is receiving more favourable media coverage.
- Since the beginning of the year the Project has received strong support from members of the local and regional political leadership of both parties in the former coalition government. This support has been manifested through, among other things, a series of open letters to various government ministries. These open letters have all requested that the government restart the EIA review process immediately.
Environmental/Permitting
- Since the fall of 2007, review of the Project's Environmental Impact Assessment (the "EIA") has been suspended as a result of a decision taken by the former Minister of Environment. Since that time, management has worked diligently to advocate in favour of a restart of the EIA review process and advance the permitting process for the Project.
- The Company is moving forward with the amended industrial zonal urbanistic plan ("Amended PUZ"), having completed four public participation meetings and prepared responses to the questions received from these public consultations including questions received from Hungary pursuant to the Espoo Convention.
- The Regional Environmental Protection Agency from Sibiu is currently analyzing the SEA (Strategic Environmental Assessment) environmental report provided by Gabriel, in order to take the final decision on this part of the permitting process related to the Amended PUZ.
- In addition, the Local Council has initiated the process for the zonal urbanistic plan for the protected area.
Rosia Montana Project Timeline
- Once the EIA for the Project is approved by the Romanian Government, in the absence of any other extraordinary events, legal or otherwise, management and its advisory team anticipates that it would take at least 6 months to:
-- Complete the purchase of the outstanding properties;
-- Receive all other permits and approvals, including initial construction permits; and
-- Complete the control estimate and complete the financing.
- Throughout 2009 management has been focused on initiating and maintaining dialogue with the various ministries in the new government with respect to the EIA review process, but can not predict when the process will restart.
- The estimated time line could be extended due to the global financial crisis, as the Company may pursue certain activities sequentially that had previously been planned to run in parallel.
- Once construction of the mine begins, it is expected to take approximately 24 months to complete. Ultimately, the Romanian Government determines the timing of issuance of the EIA approval and all other permits and approvals required for the Rosia Montana Project, subject to the Romanian courts dealing with litigation from NGOs in a timely manner.
Surface Rights
- As a result of the suspension of the EIA review process in September 2007, the home purchase program was suspended indefinitely in February 2008.
- The Company owns 77 percent of the homes in the industrial zone, protected area and the buffer zone.
- Once we complete the agreements for institutional properties, our ownership will rise to approximately 85 percent of the industrial zone of the Project, further demonstrating strong local support for the Project.
Resettlement Sites
- Construction of the Alba Iulia resettlement site, known as Recea, began in summer 2007.
- To date, all of the 125 homes have been completed with 115 homes handed over to their respective owners. The rectification and repair work from the extreme heavy rainfall in the middle of the year is expected to be completed by year end.
- The Company is also working to obtain permits for the construction of Piatra Alba. In the second quarter, the Company was hoping to begin construction towards the end of 2009. Delays in the permitting process have changed the expected time to obtaining the construction permit to the second quarter of 2010.
Archaeology
- The Supreme Court annulled archaeological discharge certificate number 4 ("ADC 4") in December 2008.
- The Company has reviewed the Court's written reasons for this decision and intends to apply for a new ADC 4 through a revised application that it believes will address all deficiencies identified by the Court. The Company anticipates applying for a new ADC 4 once the Company sees some positive momentum in the permitting process.
- An initial NGO claim seeking the suspension of archaeological discharge certificate number 5 ("ADC 5") has been irrevocably rejected by the Romanian Courts, however an annulment claim remains outstanding.
- The Company commissioned two independent audits (from highly regarded UK based firms), one on archaeology and the other on architecture in the third quarter of 2008. The overall conclusions of the reports were positive and at the same time returned some constructive comments which are currently being acted on and incorporated into the Company's ongoing program.
CEO Search
- On March 23, 2009 Alan R. Hill retired as President & CEO of Gabriel. The Board appointed Keith Hulley, who has served on the Board and as Chairman of the Technical Committee for the past three years, as interim CEO until a permanent replacement is found. The Company has formed a selection committee and an executive search firm has been engaged to assist the Company in identifying a CEO.
About Gabriel
Gabriel is a Canadian-based resource company committed to responsible mining and sustainable development in the communities in which it operates. Gabriel is currently engaged in the exploration and development of mineral properties in Romania and is presently engaged in the development of its 80% owned Rosia Montana gold project. For more information please visit the Company's website at www.gabrielresources.com.
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A") provides a discussion and analysis of the financial condition and results of operations to enable a reader to assess material changes in the financial condition and results of operations as at and for the three-and-nine-months ended September 30, 2009 and 2008. The MD&A should be read in conjunction with the unaudited consolidated financial statements and notes thereto ("Statements") of Gabriel Resources Ltd. ("Gabriel" or the "Company") as at and for the three-and-nine-months ended September 30, 2009 and 2008, as well as the audited Consolidated Financial Statements of the Company as at and for the year ended December 31, 2008 including notes thereto. The Company's Consolidated Financial Statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP").
All amounts included in the MD&A are in Canadian dollars, unless otherwise specified. This report is dated as of November 3, 2009. Readers are encouraged to read the Company's Annual Information Form dated March 6, 2009 and the Company's other public filings, which can be viewed on the SEDAR website (www.sedar.com).
Overview
Gabriel is a Canadian-based resource company committed to responsible mining and sustainable development in the communities in which it operates. Gabriel is engaged in the exploration and development of mineral properties in Romania and is presently developing its 80%-owned Rosia Montana gold project (the "Project"). Minvest S.A. ("Minvest"), a Romanian state-owned mining company, together with three other private Romanian companies, hold a 20% interest in RMGC, and Gabriel holds the pre-emptive right to acquire the 20% minority interest. RMGC will be required to pay a 4% royalty on all production from the Rosia Montana Project.
Our mission is to create value for all of our stakeholders from responsible mining. Our vision is to build the Project and to be a catalyst for sustainable economic, environmental, cultural and community development. As we develop the world-class Rosia Montana Project, we will strive to set high standards through good governance, good engineering, open and transparent communications, and operations and reclamation based on Best Available Techniques -- all in the service of value creation and sustainable development. Whether the issue is corporate governance, community development, environmental responsibility or operational practices, we pledge to do it right.
Key Issues
Environmental/Permitting
Since the fall of 2007, review of the Project's Environmental Impact Assessment (the "EIA") has been suspended as a result of a decision taken by the former Romanian Minister of Environment (the "MOE"). Since that time, Management has worked diligently to advocate in favour of a restart of the EIA review process and advance the permitting process for the Project. Throughout 2009 management has been focused on initiating and maintaining dialogue with the various ministries in the Romanian government with respect to the EIA review process, but can not predict when the process will restart.
While the EIA is by far the most important project approval, there are a number of other permits and approvals required to advance the Project to construction, such as dam safety permits, zonal urbanistic plans for the industrial and protected areas, forestry/agriculture land use change permits as well as other permits and approvals that follow EIA approval. To that end, to the extent these permits and approvals are not dependent on EIA approval or the acquisition of surface rights, the processes for each of these will proceed in parallel with the EIA review process. The Company is moving forward with the amended industrial zonal urbanistic plan ("Amended PUZ"), having completed four public participation meetings and prepared responses to the questions received from these public consultations including questions received from Hungary pursuant to the Espoo Convention. The Regional Environmental Protection Agency from Sibiu is currently analyzing the SEA (Strategic Environmental Assessment) environmental report provided by Gabriel, in order to take the final decision on this part of the permitting process related to the Amended PUZ. In addition, the Local Council has initiated the process for the zonal urbanistic plan for the protected area. The forestry and agricultural land use change permits will proceed after the EIA has been approved and surface rights obtained. The dam safety permits for the Rosia Montana project which were validated by the Bucharest Court of Appeal earlier this year remain subject to a final appeal to the Supreme Court by the MOE. In the absence of any other extraordinary events, legal or otherwise, we expect these permitting processes to take at least six months from the date the EIA is approved by the Romanian government.
Political Situation
Romania held national parliamentary elections on November 30, 2008 and a coalition government was formed on December 22, 2008 comprising the Democrat-Liberal Party ("PDL") and the Social Democrat Party ("PSD"). The government focused on an anti-crisis program to mitigate the impact of the financial and economic crisis, completing the 2009 budget for the country and negotiating the terms of an aid package worth approximately EUR20 billion from the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development (the "Financial Aid Package").
On October 1, 2009 Romania's governing coalition of PDL and PSD collapsed after the withdrawal of the PSD members from the coalition government and all of its cabinet members from their respective Ministries. On October 9, 2009 the Prime Minister established an Interim Government, allotting to each PDL cabinet member an additional Ministry portfolio from those relinquished by the PSD. On October 13, 2009 the Interim Government fell, after passage of a no-confidence motion introduced in parliament by the National Liberal Party ("PNL"), the Democratic Union of Hungarians ("UDMR") and the PSD. It is unlikely a new government will achieve the confidence of parliament until the Presidential election results are known on December 6, 2009, and the successful candidate names a new Prime Minister. In the interim, those Ministers that did not resign, remain in the office as caretakers.
Notwithstanding the fall of the governing coalition or the accelerating presidential campaign, government anti-crisis measures - and specifically the Romanian's ability to comply with IMF guidelines - remain Romania's paramount policy issue. The Company continues to draw public and political attention to the significant economic opportunity its project represents, while conforming to the highest standards on environment, patrimony and social matters.
Since the beginning of the year the Project has received strong support from members of the local and regional political leadership of both parties in the former coalition government. This support has been manifested through, among other things, a series of open letters to various government ministries. These open letters have all requested that the government restart the EIA review process immediately.
In mid July there were two separate, official government visits made to Rosia Montana, one by the President of Romania and the other by the Minister of Culture. Both went on their own agendas, but with a common theme of gathering information. Though no formal public statements were made, we are encouraged by their interest in and comments on the Project.
As reported earlier, under the previous government, three "private member bills" were introduced for consideration by the Romanian Parliament. Each bill was intended to block the Project, either by banning the use of cyanide in mining operations, or by creating a protected status for the area designated for mining. One of the bills related to the creation of protected areas was voted down and the other two remain in the Parliamentary Committee process. The sponsors of the bills are no longer members of Parliament. With a new Parliament in place, it is not possible to determine when or if any of these bills will be tabled for consideration and a vote taken in the Chamber of Deputies. In the ordinary course of any Parliamentary session many legislative bills are introduced for debate some of which, when passed in their final form, could have an adverse impact on the Project from an economic, permitting or operations perspective. At this time the Company cannot predict what these potential outcomes may be given the inherent unpredictability of the parliamentary review process, however the two private members bills mentioned above are the only ones currently before Parliament which have been expressly proposed to stop the Project.
Throughout 2009 management has focused on meeting with stakeholders to understand their issues and concerns and explain the benefits and impacts of the Project. The strong local and regional support among politicians is a direct result of our outreach. To further strengthen our communications efforts, the Company retained an internationally recognized public relations firm to assist with our ongoing communications program. Through a multi-tiered and proactive public communications program that includes both TV and print media amongst other advocacy initiatives, we have been able to improve public understanding of the pros and cons of this Project. Our communication efforts have been fact based, focusing on the critically-needed economic benefits the Project will bring to Romania at a time when the country faces the impact of the global financial crisis. In addition, we attempt to demonstrate how modern mining methods and strict standards can help Romania revitalize its resource sector creating an economic engine for growth and sustainable development. Through these initiatives, the Company is receiving more favourable media coverage.
Litigation
A number of foreign-funded and Romanian NGOs have initiated a multitude of legal challenges against virtually every local, regional and national Romanian regulatory authority that has the administrative authority to grant permits, authorizations and approvals for any aspect of the exploration and development of the Project. While few of the actions have been successful and most have been frivolous, they include civil actions against both the regulatory authorities and individuals within such regulatory authorities; in general, they claim that such regulatory authorities are acting in violation of Romanian laws and ask for cancellation of the license, permit or approval and archeological discharged certificates. Gabriel, through RMGC, has intervened in all cases in order to ensure that the Romanian courts considering these actions are presented with a legally correct, fair and balanced analysis as to why the various Romanian regulatory authorities' actions are in accordance with the relevant and applicable laws.
While we have designed the Project to follow all applicable laws to protect against permitting delays of the Project, multiple legal challenges brought forward by NGOs in Romania may continue to cause potential setbacks to the Project timeline.
During the third quarter, the Bucharest Court of Appeal issued a decision on the EIA suspension case initiated by RMGC in November 2007. This decision dismissed RMGC's claim without addressing the merits of RMGC's lawsuit. The reasons for this decision have not been released by the court. The decision is appealable, and once the Company analyzes the rationale for the decision it will decide its further actions. Also in July, RMGC was made aware that the MOE filed a final appeal to the Supreme Court of Justice in the case concerning our dam safety permits and the first hearing is scheduled for December, 2009. Litigation concerning two urbanism certificates ("UC") (UC No. 68 granted in 2004, and UC No. 105 granted in 2007), Archaeological Discharge Certificate No.5, the technical presentation report filed by the Company in 2004, and RMGC challenges to decisions related to two assessments issued in 2008 continue through the Romanian courts. No other definitive decisions related to outstanding litigation were issued during the quarter.
Surface Rights
As a result of the suspension of the EIA review process in September 2007, the home purchase program was suspended indefinitely in February 2008. The Company owns 77 percent of the homes in the industrial zone, protected area and the buffer zone.
In addition to the private properties required, the Company needs to acquire properties (about 35 percent of the surface area of the Project), which are owned by institutions, including the local administrations of Rosia Montana and Abrud, as well as certain churches and state-owned mining companies. The process to acquire the institutional properties is underway and expected to be completed after the approval of the EIA.
Once we complete the agreements for institutional properties, our ownership will rise to approximately 85 percent of the industrial zone of the Project, further demonstrating strong local support for the Project. Ultimately, the Company's ability to obtain construction permits for the mine and plant is predicated on securing 100 percent of the surface rights in the industrial zone, the timing of which is not entirely within the Company's control.
Resettlement Sites
Construction of the Alba Iulia resettlement site, known as Recea, began in summer 2007. Infrastructure was completed during the third quarter 2008. To date, all of the 125 homes have been completed with 115 homes handed over to their respective owners. The rectification and repair work from the extreme heavy rainfall in the middle of the year is expected to be completed by the end of the year.
The Company is also working to obtain permits for the construction of Piatra Alba, the new resettlement village to be built in Rosia Montana. In the second quarter, the Company was hoping to begin construction towards the end of 2009. Delays in permitting process have changed the expected time to obtaining the construction permit to the second quarter of 2010. Planning is advancing in order to allow mobilization on granting of the construction permits.
Archaeology
An archaeological review of historic mining activity at Rosia Montana is a critical step in the granting of the construction permit to build the Project. An archaeological discharge is required for all of the area under the footprint of the proposed mine.
An NGO commenced legal action in 2004 and ultimately obtained an annulment with respect to RMGC's archaeological discharge Certificate No. 4 ("ADC 4") from the Supreme Court of Romania in December 2008. The Company has reviewed the Court's written reasons for this decision and intends to apply for a new ADC 4 through a revised application that it believes will address all deficiencies identified by the Court.
Archaeological discharge Certificate No. 5 ("ADC 5") has also been challenged. An initial NGO claim seeking the suspension of ADC 5 has been irrevocably rejected by the Romanian Courts, however an annulment claim remains outstanding. ADC 5 is a compilation of the four previously issued discharge certificates and was obtained for administrative convenience only. The Company has been advised by its Romanian legal counsel that the annulment of ADC 5 does not automatically result in the annulment of the underlying discharge certificates.
The Company commissioned two independent audits (from highly regarded UK based firms), one on archaeology and the other on architecture. The archaeological audit report concluded that the "National Research Programme, set up in response to proposals for the Rosia Montana gold mine project, represents one of the largest cultural heritage projects ever undertaken in Romania. The large body of data created will be invaluable in further understanding of Roman Dacia, and as a basis for future studies." In addition, the report concluded that the Project was compliant with the applicable regulatory framework and best practice. The architectural expert audit, though positive, returned some constructive comments. The report commented that there was inadequate attention being paid to the preservation of some peripheral buildings in the protected area, the majority of which are owned by the Company, and in some instances inappropriate materials and techniques were being used in the conservation work. A preservation program is now underway. A plan for next stage restoration is in final preparatory stage for review by such experts and repairs, appropriate materials and techniques for restoration of the buildings (including training of craftsmen in the necessary skills) are being organized.
CEO Search
On March 23, 2009 Alan R. Hill retired as President and CEO of Gabriel. The Board appointed Keith Hulley, who has served on the Board and as a Chairman of the Technical Committee for the past three years, as interim CEO until a permanent replacement is found. The Company has formed a selection committee and an executive search firm has been engaged to assist the Company in identifying a CEO.
Liquidity and Capital Resources
Cash, cash equivalents and short term investments at September 30, 2009 totaled $117.9 million. The remaining budget for 2009 is estimated at $18 million, primarily for long-lead equipment payments, Corporate and Romanian overhead costs, final costs related to completion of the Recea resettlement site and initial road construction for the new resettlement site in Piatra Alba.
On June 11, 2009 the Company closed a private placement and public offering financing through the issuance of 51.8 million common shares at $2.25 for aggregate gross proceeds of approximately Cdn$117 million (Cdn$112 million after deducting fees). Pursuant to the private placement, each of Electrum Strategic Holding LLC and Paulson & Co. Inc increased their percentage ownerships to 19.99% of the issued and outstanding common shares of the Company.
The Company intends to put the net proceeds of the equity raise towards costs associated with developing the Rosia Montana gold project and for general corporate purposes. Approximately half of the proceeds raised are earmarked for surface rights acquisition, which at this time will only advance on EIA approval. This financing is expected to advance the Project toward the receipt of construction permits.
With EIA approval, our activity level will increase, including the acquisition of remaining surface rights, completion of a project cost control estimate, payment of land use taxes and other payments required to obtain construction permits and mobilization for construction. These additional activities are expected to cost at least US$70 million, over and above the equity raised in the second quarter. These activities can only commence once additional financing is raised.
Financing Plan
Project finance planning was restarted during third quarter of 2008 in preparation for financing the Project in 2009. The global financial crisis has negatively impacted most of the international banking system, restricting credit and increasing the cost of credit. As a result, the conventional bank debt market and the high-yield bond market are both currently restricted; however, there are now signs of modest improvement. The updated financing plan assumes that neither the conventional bank debt market nor the bond market will be available in time to meet the Company's financing needs. Management has been advised by its financial advisors that while financing the Project will be challenging due to the financial crisis, financing from government agencies and non traditional lenders should be available even in the current environment because of the economic and other benefits resulting from the Project. Management began the process of executing on its financing plan during the first half of 2009. Based on the initial feedback, management believes that the financing plan is achievable. However, management can not advance financing discussions any further until the permitting process recommences.
- The estimated cost to complete the development of the Rosia Montana Project (updated in March 2009) - including interest, financing and corporate costs is US$1 billion, consisting of capital costs of US$876 million and interest, financing and corporate costs of US$124 million.
- The Company anticipates financing these costs with approximately 25 percent equity - US$250 million of which, the Company raised US$80 million (Cdn$112 million) in the second quarter 2009, leaving approximately US$170 million left to be raised.
- The Company anticipates financing the balance with approximately 75 percent debt - US$750 million, including senior debt, subordinate debt, by-product off-take agreements, vendor loans and possibly EU grants.
- The estimated capital cost to complete does not include a provision for (i) a cost overrun facility, (ii) a financial guarantee (reclamation deposit), (iii) hedging program if required by the banks and agencies and (iv) initial working capital. These additional items could add US$200 million to the financing plan.
Project Timeline
- The EIA was submitted in the second quarter of 2006.
- In January 2007, the Company received the list of official questions from the Romanian Government, raised during the public consultation process.
- The Company responded to the questions in the form of an Annex to the EIA, in early May 2007.
- Technical Analysis Committee ("TAC") and Espoo Convention meetings went well during the third quarter of 2007, until TAC meetings were suspended in September 2007.
Once the EIA for the Project is approved by the Romanian Government, in the absence of any other extraordinary events, legal or otherwise, management and its advisory team anticipates that it would take at least 6 months to:
- Complete the purchase of the outstanding properties;
- Receive all other permits and approvals, including initial construction permits; and
- Complete the control estimate and complete the financing.
Throughout 2009 management has been focused on initiating and maintaining dialogue with the various ministries in the new government with respect to the EIA review process, but can not predict when the process will restart. The estimated time line could be extended due to the global financial crisis, as the Company may pursue certain activities sequentially that had previously been planned to run in parallel.
Once construction of the mine begins, it is expected to take approximately 24 months to complete. Ultimately, the Romanian Government determines the timing of issuance of the EIA approval and all other permits and approvals required for the Rosia Montana Project, subject to the Romanian courts dealing with litigation from NGOs in a timely manner.
Outlook
Our key objectives include:
1. Obtaining approval of our EIA and all other required permits, which require acquisition of all surface rights:
2. Beginning construction of the new resettlement village at Piatra Alba;
3. Raising the required debt and equity to build the Project;
4. Beginning Project construction; and
5. Maximizing shareholder value, as the markets recognize project advancement, while ensuring that the Project benefits those in the community and the surrounding area to the optimum possible extent.
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:
in thousands of Canadian dollars,
except per share amounts 2009 Q3 2009 Q2 2009 Q1 2008 Q4
----------------------------------------------------------------------------
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Statement of Loss (Income)
Loss (Income) $ 7,082 $ 1,798 $ 6,969 $ (3,958)
Loss (Income) per share - basic
and diluted 0.02 0.01 0.03 (0.02)
----------------------------------------------------------------------------
Balance Sheet
Working capital 95,838 109,518 7,401 29,172
Total assets 608,399 624,991 522,618 530,135
----------------------------------------------------------------------------
Statement of Cash Flows
Investments in development and
exploration including working
capital changes 10,689 11,194 11,159 8,171
Cash flow provided by financing
activities (435) 112,908 3 -
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in thousands of Canadian dollars,
except per share amount 2008 Q3 2008 Q2 2008 Q1 2007 Q4
----------------------------------------------------------------------------
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Statement of Loss (Income)
Loss (Income) $ 2,782 $ 16,241 $ (10,970) $ 7,821
Loss (Income) per share - basic
and diluted 0.01 0.06 (0.04) 0.03
----------------------------------------------------------------------------
Balance Sheet
Working capital 50,324 80,513 110,021 118,299
Total assets 508,010 513,965 521,269 507,955
----------------------------------------------------------------------------
Statement of Cash Flows
Investments in development and
exploration including working
capital changes 19,237 4,375 17,211 24,708
Cash flow provided by financing
activities 82 1,015 - -
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Statement of Loss
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars, except
per share amounts 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total operating expenses for the period $ 3,139 $ 1,983 $ 14,201 $ 8,616
Loss for the period 7,082 2,782 15,849 8,053
Loss per share - basic and diluted 0.02 0.01 0.06 0.03
Total operating costs increased by $1.2 million for the three months ended September 30, 2009 primarily due to the costs associated with the settlement payment to a senior employee and higher stock based compensation costs during the quarter. Total operating expenses for the nine month period ended September 30, 2009 increased from the corresponding periods in 2008 primarily due to a $5.7 million charge resulting from non-recurring retiring allowances and settlement payments, including the expensing of share-based compensation, for the former CEO and three senior employees who departed the Company during 2009. Excluding the impact of one time charges to departed employees, the higher project financing costs were more than offset by the cost savings in most departments from cost-cutting initiatives for the nine month period ended September 30, 2009.
Loss for the third quarter 2009 increased from the same period in 2008 mainly due to increase in operating costs of $1.2 million, a swing of $1.6 million in foreign currency movement, lower interest income of $0.6 million and an income tax recovery of $0.9 million. Excluding one time charges, costs decreased by $0.6 million due to cost savings initiatives. For the nine-months ended September 30, 2009, the Company reported a higher loss compared to 2008 due to higher operating expenses of $5.6 million, lower interest income of $2.8 million, and foreign exchange swing of $9.1 million, partially offset by lower income taxes of $9.8 million.
We expect to incur operating losses until commercial production commences and revenues are generated.
Expenses
Corporate, General and Administrative
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Finance $ 40 $ 315 $ 473 $ 1,015
External communications 91 117 379 614
Information technology 82 109 281 380
Legal 160 63 536 766
Payroll 681 734 4,664 2,159
Other 505 324 1,436 1,070
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Corporate, general and administrative
expense $ 1,559 $ 1,662 $ 7,769 $ 6,004
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate, general and administrative costs are those costs incurred by the corporate office in Toronto. Third quarter 2009 costs were slightly lower than the same period in 2008 due to cost savings initiatives. For the nine-month period ended September 30, 2009, a $2.4 million charge for the non-recurring retiring allowance to the former CEO increased corporate costs overall compared to the same period in 2008. Excluding the one time charge, costs decreased by $0.6 million due to costs savings initiative. Corporate, general and administrative costs are anticipated to rise once the Rosia Montana Project is permitted and the Company increases it's staffing for construction and operations.
Stock Based Compensation
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
DSUs - expensed (recovered) $ 239 $ (322)$ 760 $ 124
Stock option compensation - expensed 707 550 3,558 1,540
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Stock based compensation - expensed $ 946 $ 228 $ 4,318 $ 1,664
----------------------------------------------------------------------------
----------------------------------------------------------------------------
DSUs - capitalized (capital reduction) $ 22 $ (40)$ 69 $ 4
Stock option compensation - capitalized 252 317 778 865
----------------------------------------------------------------------------
Stock based compensation - capitalized $ 274 $ 277 $ 847 $ 869
----------------------------------------------------------------------------
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DSU Compensation
Number of DSUs issued - 16,148 36,389 42,319
Average value ascribed to each DSU
issued $ - $ 2.09 $ 2.14 $ 2.12
DSU costs for the third quarter 2009 reflect the increase in the Company's share price since the beginning of the period. For the nine-months ended September 30, 2009, DSU costs increased in comparison to the same period 2008. The increase in DSU costs reflects the issuance of 36 thousand units and the increase in the Company's share price since the beginning of the period. The Company's closing share price at the end of the third quarter 2009 was $2.16 per share while at June 30, 2009 and December 31, 2008 the closing share price was $1.95 and $1.52 respectively.
Initially valued at the market price of the stock at date of issue, DSUs are revalued each period based on the closing share price at the period end, with the difference between the total value of the DSUs at period end compared to the value at the end of the previous period. If the share price declines, the lower value of the DSUs is credited against costs during the period. If the value is higher, the difference is charged to the Statement of Loss, increasing costs for the period. Overall, for the three-and-nine-month periods ended September 30, 2009, our share price increased by $0.21 compared to June 30, 2009 and $0.64 compared to December 31, 2008, while for the same period in 2008, our share price decreased by $0.71 from June 30, 2008 and increased by $0.08 compared to December 31, 2007.
9 months ended
September 30,
2009 2008
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Stock option compensation
Number of stock options granted 2,150,000 5,935,000
Average value ascribed to each regular
vesting option granted $ 1.12 $ 1.05
Options granted to corporate employees,
consultants, officers, and directors 1,350,000 2,100,000
Options granted to development project
employees and consultants 800,000 3,835,000
No stock options were granted in the third quarter of 2009 and 2008.
The estimated fair value of stock options is amortized over the period in which the options vest which is normally three years. For those options which vest on a single or multiple dates, either on issuance or on meeting milestones (the "measurement date"), the entire fair value of the vesting options is recognized immediately on the measurement date.
The fair value of stock options granted to personnel working on development projects is capitalized over the vesting period.
Of the 2.2 million options issued during the nine-months ended September 30, 2009, 0.7 million vest over a three-year period and the remainder vest based on achievement of certain milestones. The fair value of options that vest upon achievement of milestones will be recognized and capitalized as milestones are achieved and the value can be reasonably measured. As of September 30, 2009, the amount recognized was $0.4 million.
Project Financing Costs
3 months ended 9 months ended
September 30, September 30,
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in thousands of Canadian dollars 2009 2008 2009 2008
Project Financing Costs $ 37 $ 16 $ 423 $ 50
Project financing activities were placed on hold in the fall of 2007 after the suspension of the permitting process but resumed in September 2008 in anticipation of the restart of permitting activities and the requirement to complete the financing. The higher costs in the three-and-nine-month periods ended September 30, 2009 reflect the higher activity levels compared to the same periods in 2008.
Project financing activities include advisory services for the various facilities under our financing plan.
Severance and Termination Costs
Severance costs for the three-and-nine-month periods ended September 30, 2009 represent the settlement costs paid to departed employees.
On December 4, 2007, in light of the suspension of the EIA review process, the Company announced and enacted plans to scale back activities.
The Company paid $1.3 million in termination benefits in 2008 related to scaling back of activities in Romania in 2008. The remaining balance of $0.8 million was paid in full during the first half of 2009. The amount paid in 2009 was fully expensed in 2008.
Interest Income
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2009 2008 2009 2008
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Interest Income $ 172 $ 788 $ 303 $ 3,122
For the three-month period ended September 30, 2009 lower interest income is a result of substantially lower interest rates than in the same period of 2008. Lower interest income in the nine-month period ended September 30, 2009 compared to the same periods in 2008 is the result of lower average cash balances and substantially lower interest rates. During 2008 and first five months of 2009 the Company's cash balances declined, before proceeds were received in June 2009 from a concurrent public and private placement equity offering, due to ongoing resettlement site development costs, installment payments made under our long-lead-time equipment orders and corporate and Romanian overhead costs. Over the course of 2008, the global financial crisis led to a dramatic decline in interest rates for government securities in each currency the Company holds.
As of September 30, 2009, the average yield to maturity on the Company's cash, cash equivalents, and short-term investments was 0.5% versus 3.3% as of September 30, 2008.
With the global financial crisis, the Company is focused on capital preservation and therefore is foregoing higher yields on its investments and is investing predominantly in government guaranteed instruments. Approximately 87 percent of the Company's cash balances are invested in government guaranteed instruments with the balance invested in term deposits with major Canadian banks.
Foreign Exchange
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2009 2008 2009 2008
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Foreign exchange gain (loss) -
realized $ (417) $ 1,000 $ (1,285) $ 5,168
Foreign exchange gain (loss) -
unrealized (3,696) (3,516) (662) 2,064
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Total foreign exchange gain
(loss) $ (4,113) $ (2,516) $ (1,947) $ 7,232
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During the first half of 2009, we converted the majority of the cash raised from a private and a public offering to foreign currencies to match anticipated foreign denominated expenditures. Since the purchase of foreign currencies, the Canadian dollar strengthened relative to the foreign currencies acquired, resulting in unrealized foreign exchange losses for the three-and-nine-month periods ended September 30, 2009.
The Company maintains a Canadian dollar cash position to fund corporate, general and administrative activities, while the majority of its cash resources are in foreign currencies.
We would expect to continue to report foreign currency gains and losses as we continue to hold foreign currencies.
Taxes
During the first quarter of 2008, the Company received a tax assessment for $4.8 million related to a Romanian tax audit completed during the first quarter of 2008. The Company, having accrued in 2006 its then estimated tax liability, accrued an additional $3.7 million in respect of the assessment, which arose from the disallowance of the application of state tax incentives related to unrealized foreign exchange gains on inter-company debt.
On June 24, 2008, the Company received a tax assessment for $9.8 million related to another tax audit, for the years 2003 and 2004, initiated and completed during the second quarter of 2008. This assessment also arose from the disallowance of the application of state tax incentives related to unrealized foreign exchange gains on inter-company debt.
All tax assessments have been paid and provided for in the 2007 and 2008 financial statements. Based on the advice of its professional tax advisors, the Company believes that the tax authorities have misapplied the legislation and we are vigorously contesting the State's position through the courts.
Investing Activities
The most significant ongoing investing activities are for our Rosia Montana development project in Romania. Most of the expenditures to date have been for identifying and defining the size of the four ore bodies, for engineering to design the size and scope of the Project, for environmental assessment and permitting, social support to local communities, as well as surface rights/property acquisition. Once we receive our construction permit, the nature and magnitude of the expenditures will increase as we build roads, production facilities, open pits, tailings management facilities and associated infrastructure.
Mineral Properties
We capitalize all costs incurred in Romania related to our development and exploration projects - Rosia Montana, Bucium and Baisoara - to mineral properties.
Listed below is a summary of expenditures at Rosia Montana for the three-and-nine months ended September 30, 2009 and 2008.
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2009 2008 2009 2008
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Finance and administration $ (313)$ 3,121 $ 860 $ 9,808
External communications 2,945 2,216 8,032 4,618
Legal 903 1,021 3,299 2,908
Permitting 420 621 1,791 1,871
Community development 1,239 7,154 2,613 19,391
Project management and
engineering 1,133 1,312 4,036 5,967
Exploration - Rosia Montana 343 199 693 413
Exploration - Bucium - - - 82
Exploration - Baisoara 19 64 105 156
Capitalized depreciation net
of disposals (100) (121) (332) (382)
Capitalized stock based
compensation (274) (277) (847) (869)
Reclassification to mineral
properties (3,853) - (7,417) (25)
Decrease (increase) in
resettlement liabilities 6,285 (5,149) 14,063 (9,469)
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Total exploration and
development expenditures $ 8,747 $ 10,161 $ 26,896 $ 34,469
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During the three-and-nine-months ended September 30, 2009, finance and administration costs decreased compared to the corresponding 2008 periods primarily due to foreign exchange gains on trade payables and resettlement obligations. During the three-and-nine months ended September 30, 2009, both the US dollar and the Euro weakened against the Canadian dollar resulting in foreign exchange gains capitalized by the Romanian subsidiary. As at September 30, 2009 and 2008, the Company's Romanian subsidiary had outstanding foreign denominated liabilities for long-lead equipment and resettlement obligations.
External communications costs increased for the three-and-nine-months ended September 30, 2009 compared to the same periods last year mainly due to the media campaign initiated in the first half of 2009. The Company entered into a professional service agreement with an international communications firm, which term is 3 years from the commencement date of March 1, 2009 until February 29, 2012. The agreed fee comprises of annual fee and success fee payable at the end of 3 years agreement upon fulfillment of certain criteria.
Community development costs decreased for the three-and-nine-months ended September 30, 2009 compared to the same periods in 2008 due to the hand-over of houses to property owners. When the legal title of the resettlement properties are transferred to property owners, the Company reduces its resettlement liabilities and corresponding assets (resettlement houses) recorded as mineral properties. The reduction in community development costs is also due to suspension of the surface rights acquisition program in February 2008.
The base budget for 2009, approved by the Company's board of directors for Rosia Montana, included only those expenditures and commitments to maintain the value of our investment in mineral properties and capital assets and to move the Project through EIA approval. As at September 30, 2009 the Company spent $54 million within the budget. The remaining budget for 2009 is estimated at $18 million, primarily for long-lead equipment payments, Romanian overhead costs, final costs related to completion of the Recea resettlement site and initial road construction for the new resettlement site in Piatra Alba.
No additional work is planned on the Bucium property until the exploration license is converted to an exploitation license and the Rosia Montana EIA is approved. The government has indicated that a decision on the conversion of the Bucium exploration to exploitation license will not be made until a decision on the Rosia Montana Project is made.
Purchase of Capital Assets
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2009 2008 2009 2008
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Resettlement site development costs $ 854 $ 2,858 $ 5,592 $ 6,539
Investment in long-lead-time
equipment 3,904 9,538 15,793 11,440
Other 35 55 78 118
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Total investment in capital assets $ 4,793 $ 12,451 $ 21,463 $ 18,097
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Depreciation and disposal - expensed $ 51 $ 77 $ 175 $ 230
Depreciation and disposal -
capitalized to mineral properties $ 100 $ 121 $ 332 $ 382
To date, all of the 125 houses in the Recea resettlement site in Alba Iulia have been completed with 115 homes handed over to the property owners.
(1) Total cash cost is a non-GAAP financial measure. Total cash costs represent all costs absorbed into inventory, plus royalties and production taxes, less by-product revenues and exclude amortization and accretion.
We continue to make the installment payments for long-lead-time mill equipment orders which are proceeding, subject to satisfying our quality assurance criteria. The Company expects to make $4.3 million in long-lead-time equipment payments in the fourth quarter of 2009 and $1.7 million in 2010 at which point we would own the mill equipment outright. The Company evaluated various strategies for storing completed equipment including storage at origin, EU free ports and EU bonded storage areas. Based on the final evaluation and in order to minimize the transportation, storage expenditures and immediate tax obligations three main storage locations were selected in Belgium, Germany and Turkey.
Cash Flow Statement
Liquidity and Capital Resources
Our only sources of liquidity until we receive our environmental permits for Rosia Montana are our cash balance, bridge financing, exercise of stock options outstanding, and the equity markets. We updated the estimated cost to completion for construction of the Project in first quarter 2009 to US$876 million, excluding working capital and sunk costs of approximately US$90 million for surface rights, $13 million for engineering and project management and US$44 million for long-lead-time mill equipment. Our updated cost estimate also reflects higher operating costs but these are more than offset by expected higher gold prices which result in improved cash margins and therefore project returns and faster payback. The estimated total cash cost(1) to produce gold over the first five years is estimated at US$272 per ounce and is expected to average US$335 per ounce over the life of the Project.
To complete the development of the Project, the Company will need additional external financing of approximately US$1 billion, to fund capital costs of US$876 million and interest, financing and corporate costs of US$124 million, comprised of an estimated debt (approximately 75%) and equity (approximately 25%) financing. The estimated capital cost to complete does not include a provision for (i) a cost overrun facility, (ii) a financial guarantee (reclamation deposit), (iii) hedging program if required by the banks and agencies and (iv) initial working capital. These additional items could add US$200 million to the financing plan. The ability to develop Rosia Montana hinges on our ability to raise the necessary financing for construction. If we were unable to raise the required funds, we would seek strategic alternatives to move the Project toward development.
Having restarted project financing planning during the third quarter 2008, management has developed a financing plan that assumes neither the conventional bank debt market nor the bond market will be available in time to meet the Company's financing needs. Management has been advised by its financial advisors that while financing the Project will be challenging due to the financial crisis, financing from government agencies and non traditional lenders should be available even in the current environment because of the economic and other benefits resulting from the Project.
On June 11, 2009 the Company closed a private placement and a public offering financing through the issuance of 51.8 million common shares for aggregate gross proceeds of approximately $117 million.
As at September 30, 2009, we had cash, cash equivalents, and short-term investments of $117.9 million compared to $72.2 million at December 31, 2008. Substantially all of these amounts are invested in government guaranteed investments.
For mineral properties and capital assets, the 2009 updated budgeted expenditure totals $72 million and includes expenditures and commitments to maintain the value of our investment in mineral properties and capital assets, and to move the Project through EIA approval. As at September 30, 2009 the Company spent $54 million within the budget with remaining $18 million to be spent in the fourth quarter of 2009. Budgeted corporate expenditures for 2009 are expected to total $13 million resulting in a total spend of $85 million for 2009.
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