TORONTO, ONTARIO (AMEX: MRB) is pleased to report its full year
2007 results and operational update. The Company's audited
consolidated financial statements and management's discussion and
analysis for the year will be available on SEDAR, EDGAR and
Metallica's website at www.metal-res.com by March 31, 2008.
"We are proud of the operational performances achieved in 2007
which resulted from strong execution at our Cerro San Pedro mine"
said Richard J. Hall, President and CEO. "We are confident that we
will achieve enhanced performance in 2008 driven by continuous
improvements at Cerro San Pedro, particularly in terms of cost
containment" continued Hall. "With the flexibility to sell the
mine's output into booming commodity markets we expect to
significantly expand our operating margin in 2008."
2007 Highlights and Early 2008 Update:
(Please refer to the press release dated January 9, 2008 for
complete 2008 guidance)
- Metallica began commercial production at its Cerro San Pedro
mine on May 1, 2007. In the first eight months, the mine turned
cash flow positive and generated $1.2 million despite high initial
stripping costs and start-up inefficiencies. As of March 13, 2008,
cumulative production totaled 39,098 ounces of gold and 567,891
ounces of silver.
- The Company is on track to achieve planned production levels
of 80,000 ounces of gold and 1.35 million ounces of silver for
2008. Metallica remains hedge free.
- Cash costs for 2007 were $5.27 per tonne of ore, only slightly
higher than planned. Cash costs for 2008 are expected to exceed
2007 costs, to roughly $5.40 per tonne of ore, due to expected
higher strip ratio. This equates to approximately $263 per ounce of
gold, net of silver at $14.80 per ounce.
- Ore production to the leach pad for the year was approximately
6.5 million tonnes, in line with expectations. As of early March
2008, approximately 8.0 million tonnes of ore had been placed on
the pad maintaining anticipated levels for the current year.
- The Cerro San Pedro Processing plant operated at design
capacity by the end of 2007 and continues to produce approximately
220 ounces of gold per day. Recoveries appear to be in line with
metallurgical test work, however, given the limited amount of leach
time, it is too early to draw any definitive conclusions.
- Capital costs for Cerro San Pedro for 2008 are estimated at
$6.7 million and will include the construction of Phase 2 of the
leach pad, which has been advanced to 2008 from 2009 as originally
scheduled due to increased mining rates.
- The focus of activity on the El Morro project during 2007 was
the completion of the final feasibility study by the joint venture
partner and project operator Xstrata Copper. In January 2008,
Metallica took delivery of the feasibility study per the agreed
deadline, however, both parties have agreed that additional
refinements to the study are needed in order to comply with third
party lending standards. Xstrata is currently amending the study so
that it meets these standards and Metallica anticipates a 43-101
Technical Report will be filed early in the second quarter.
- Metallica continues to advance its exploration projects at Rio
Figueroa in Chile and both Liberty Bell and the Southwest Peninsula
Projects in Alaska.
Metallica will host a conference call on Friday, March 14th at
10:00 a.m. MST (12:00 p.m. EST) to review full year 2007 results
and provide an outlook for 2008.
To access the call, please dial 866-542-4236 or 416-641-6127. A
live audio webcast of the conference call will be available on the
home page of our website at www.metal-res.com.
A replay of the conference call will be available until 11:59
p.m. MST, Friday, March 28th 2008. The replay may be accessed on
Metallica's website in the Investor Relations section, or by
dialing 800-408-3053 or 416-695-5800 followed by passcode
3251475.
FULL MD&A, FINANCIAL STATEMENTS & NOTES
Management's Discussion and Analysis
General
Management's discussion and analysis ("MD&A") has been
prepared based on information available to Metallica Resources Inc.
(the "Company") as of March 13, 2008. MD&A provides a detailed
analysis of the Company's business and compares its 2007 financial
results with those of the two previous years. In order to gain a
better understanding of MD&A, it should be read in conjunction
with the Company's consolidated financial statements. The
consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian
GAAP"). For a reconciliation of measurement differences to United
States generally accepted accounting principles ("U.S. GAAP"), see
Note 16 to the consolidated financial statements. All amounts are
in U.S. dollars unless otherwise indicated.
Overview
The Company became a gold and silver producer in 2007 with the
start-up of mining operations at its Cerro San Pedro mine in
Mexico. The processing plant facilities were tested, which included
three dore (partially refined gold and silver) pours totaling 365
ounces of gold and 9,221 ounces of silver, and determined to be
operational at the end of April 2007. The Company declared
commencement of commercial production on May 1, 2007. The Company's
results from operations for the current year differ from preceding
years as the Company is now generating revenue from operations.
The Company is also pursuing exploration and development of
various precious and base metal properties throughout the Americas.
The most advanced of these projects is the El Morro copper-gold
project in Chile, of which Xstrata Plc. ("Xstrata", formerly
Falconbridge Limited) owns 70% and the Company owns 30%.
As of March 13, 2008, approximately 8.0 million tonnes of ore
had been placed on the leach pad, containing estimated recoverable
gold and silver ounces of 52,055 and 1,110,688, respectively. The
ore tonnes placed on the leach pad to date are predominately
limestones, which are found at the top of the deposit and have the
lowest recovery rates of all the Cerro San Pedro ore types. The
recovery period is currently estimated to be five months for gold
and six months for silver.
Gold and silver production from commencement of commercial
production through March 13, 2008 totaled 39,098 ounces of gold and
567,891 ounces of silver. Production for the months of January and
February 2008 was 12,282 ounces of gold and 157,039 ounces of
silver, which compares to budgeted production of 12,076 ounces of
gold and 202,610 ounces of silver. The Company remains on track to
achieve planned production levels for gold and silver in 2008.
The Cerro San Pedro mine contains estimated mineral reserves(1)
of 85.8 million tonnes grading 0.55 grams per tonne gold and 22.5
grams per tonne silver at a waste-to-ore ratio of 1.26 to 1. This
equates to 1.5 million ounces of gold and 62.1 million ounces of
silver. The mineral reserves were estimated using a gold price of
$475 per ounce and a silver price of $8.00 per ounce, and were
prepared in February 2007 by William Rose of WLR Consulting Inc.,
the Qualified Person, in accordance with Canadian Securities
Administrators National Instrument 43-101, "Standards of Disclosure
for Mineral Projects". Remaining mineral reserves are estimated to
be 1.4 million ounces of gold and 56.1 million ounces of silver,
after deduction for production through December 31, 2007.
The El Morro project is currently subject to an exploration
agreement with Xstrata which allowed for Xstrata to earn a 70%
interest in the project by making, among other requirements, a $10
million payment to the Company by September 14, 2005. Xstrata was
also required to deliver a feasibility study for the project in
September 2007, the due date of which was extended until January
2008. The feasibility study was delivered in January 2008; however,
the Company's consultants concluded that additional work was needed
in order for the study to comply with third party lending
standards. Xstrata is currently amending the study in order for it
to comply with these standards.
(1) Mineral reserves have been calculated in accordance with
National Instrument 43-101, as required by Canadian Securities
regulatory authorities, and in accordance with U.S. Securities
Exchange Act of 1934 Industry Guide 7, as interpreted by the Staff
of the U.S. Securities and Exchange Commission.
In November 2006, the Company reported an updated mineral
resource(2) estimate for the La Fortuna deposit at the El Morro
project. Using a 0.3% copper cut-off grade, the La Fortuna deposit
is estimated to contain measured mineral resources(3) totaling
188.8 million tonnes grading 0.69% copper and 0.58 grams per tonne
gold, and indicated mineral resources(3) totaling 299.8 million
tonnes grading 0.53% copper and 0.49 grams per tonne gold. In
addition, the La Fortuna deposit is estimated to contain inferred
mineral resources(4) totaling 226.7 million tonnes grading 0.48%
copper and 0.41 grams per tonne gold. The mineral resource estimate
for the La Fortuna deposit is classified as a measured, indicated
and inferred mineral resource in compliance with the Canadian
Institute of Mining, Metallurgy, and Petroleum definitions. It was
calculated by Xstrata and incorporated the results from 147 core
holes totaling 57,900 meters. The Qualified Person, as defined by
Canadian Securities Administrators National Instrument 43-101,
responsible for the design and completion of the updated mineral
resource estimate is Ricardo Raul Roco, Member - Australasian
Institute of Mining and Metallurgy and Manager of Mines Geology for
Xstrata.
(2) Mineral resources do not have economic viability. Mineral
reserves are the economically viable part of measured or indicated
mineral resources.
(3) Cautionary note to U.S. investors concerning estimates of
measured and indicated mineral resources: We advise U.S investors
that while this term is recognized and required by Canadian
regulations, the U.S. Securities and Exchange Commission does not
recognize it. U.S. investors are cautioned not to assume that any
part or all of mineral deposits in this category will ever be
converted into mineral reserves.
(4) Cautionary note to U.S. investors concerning estimates of
inferred mineral resources: We advise U.S. investors that while
this term is recognized and required by National Instrument 43-101
under Canadian regulations, the U.S. Securities and Exchange
Commission does not recognize it. "Inferred mineral resources" have
a great amount of uncertainty as to their existence, and great
uncertainty as to their economic and legal feasibility. It cannot
be assumed that all or any part of an inferred mineral resource
will ever be upgraded to a higher category. Under Canadian rules,
estimates of inferred mineral resources may not form the basis of a
feasibility or other economic study. U.S. investors are cautioned
not to assume that any part or all of an inferred mineral resource
exists or is economically or legally mineable. Under Canadian
rules, an "inferred resource estimate" is that part of a mineral
resource for which the quantity and grade or quality can be
estimated on the basis of geological evidence and limited sampling
and reasonably assumed, but not verified, geological and grade
continuity. The estimate is based on limited information and
sampling gathered through appropriate techniques from locations
such as outcrops, trenches, pits, workings and drill holes.
Outstanding Share Data
As of March 13, 2008, the Company had issued one class of common
shares and a total of 93,162,076 shares outstanding. In addition,
the Company had the following warrants and stock options
outstanding as of March 13, 2008:
- 19,245,600 warrants, each of which is exercisable for one
common share at an exercise price of Cdn$3.10 through December 11,
2008.
- 3,835,250 warrants, each of which is exercisable for one
common share at an exercise price of Cdn$5.50 through December 20,
2009.
- 2,807,185 stock options, each of which is exercisable for one
common share at prices ranging from Cdn$1.42 to Cdn$5.66 per share
from March 2008 through January 2013.
Financial Results of Operations
The Cerro San Pedro mine generated cash flow from operations
totaling $1.2 million in its first eight months of operations
despite high initial stripping costs and start-up
inefficiencies.
Non-GAAP measure reconciliation of cash flow from mine
operations to Consolidated Statements of Operations:
Cash generated from mine operations is furnished to provide
additional information and is not a generally accepted Canadian
GAAP measure. This measure should not be considered in isolation as
a substitute for measures of performance prepared in accordance
with Canadian GAAP. The Company believes that certain investors use
this information to evaluate the Company's performance and ability
to generate cash flow from operations. The following table provides
a reconciliation of cash flow from mine operations to the operating
loss per the Consolidated Statements of Operations.
2007
(000's)
------------
Operating loss per Consolidated Statements of Operations $ (152)
Depreciation and amortization 1,311
------------
Cash flow from mine operations $ 1,159
------------
------------
The Company reported a net loss in 2007 principally from ramping
up of operations during 2007 due to commencement of commercial
production on May 1, 2007, and $5.4 million of income tax expense
that resulted from an increase in future tax liabilities, net of
future income tax assets, of $5.3 million arising as a result of
changes in Mexican tax law. The Company did not have any producing
properties in 2006 or 2005. Net loss in 2006 was principally the
result of general and administrative, and exploration expenses. Net
income in 2005 of $8.0 million was primarily due to $8.4 million of
income from property payments with respect to the El Morro project.
The following selected annual information has been prepared in
accordance with Canadian GAAP. For a reconciliation to U.S. GAAP,
see Note 16 to the consolidated financial statements.
Selected Annual Information (000's, except share data)
2007 2006 2005
--------------------------------------
Total revenues $ 22,863 $ - $ -
Net income (loss) $ (8,621) $ (3,130) $ 7,959
Basic net income (loss) per share $ (0.09) $ (0.04) $ 0.10
Diluted net income (loss) per share $ (0.09) $ (0.04) $ 0.10
Total assets $ 136,828 $ 132,953 $ 99,920
Long-term liabilities $ 12,666 $ 1,168 $ 403
Cash dividends per share $ - $ - $ -
Year to Date 2007 Compared to Year to Date 2006
The Company reported a net loss of $8.6 million ($0.09 per
share) for the year ended December 31, 2007 as compared to net loss
of $3.1 million ($0.04 per share) for the year ended December 31,
2006.
Gold and silver sales in the current year were generated by the
Cerro San Pedro mine and totaled $17.8 million and $5.0 million,
respectively. The Company sold a total of 24,278 ounces of gold and
371,333 ounces of silver from May through December 31, 2007 at an
average realized price per ounce of $734.89 and $13.52,
respectively. There were no metal sales during 2006.
The Company incurred an operating loss in 2007 of $0.2 million
principally due to the start-up nature of operations. Production
costs totaled $21.7 million and include mining, processing and mine
site administrative expenses. Depreciation and amortization totaled
$1.3 million due to amortization of Cerro San Pedro mine
development costs on the units-of-production method beginning May
1, 2007.
General and administrative expense increased by $1.7 million in
the current year to $5.4 million, and was principally due to higher
compensation costs, additional employees and other administrative
activities resulting from the Company's transition to an operating
company in 2007.
Foreign exchange gain in 2007 was $2.7 million as compared to a
gain of $0.7 million in 2006. The increase in foreign exchange gain
in the current year resulted from holding Canadian dollar cash
balances and a greater strengthening of the Canadian dollar
relative to the U.S. dollar in 2007 as compared to 2006. The
Cdn$:US$ exchange rate was 0.982:1 at December 31, 2007 as compared
to 1.166:1 at December 31, 2006.
Income tax expense increased from $0.1 million in 2006 to $5.4
million in 2007. The $5.3 million increase principally resulted
from an increase in future tax liabilities, net of future income
tax assets, of $5.3 million due to the expiration of a 1997 Mexican
tax loss carryforward in 2007, and a valuation allowance applied to
a portion of the remaining Mexican tax loss carryforwards as a
result of a change in Mexican tax law.
On October 1, 2007, Mexico enacted a new tax statute which
establishes a parallel tax regime to its regular tax regime called
IETU or "FLAT TAX", in which the taxpayer pays the greater of the
FLAT TAX or regular tax liability annually. The new statute is
effective for tax years beginning on January 1, 2008. Generally the
FLAT TAX is based on gross receipts less disbursements including
capital expenditures of the taxpayer at a tax rate of 17.5 percent.
A transition rule reduces the FLAT TAX rate to 16.5 percent and
17.0 percent for tax years 2008 and 2009, respectively.
The Company's most advanced stage exploration project is the El
Morro copper-gold project in Chile. The Company's carrying value of
the project at December 31, 2007 was only $0.3 million since
Xstrata, the owner of 70% of the project and the project operator,
was obligated to pay the cost of the feasibility study as required
under the terms of the exploration agreement. Xstrata is currently
revising the feasibility study in order for it to comply with third
party lending standards. Upon receipt of the updated feasibility
study, the Company will be obligated to pay its 30% share of all
ongoing development costs. The Company has an agreement with
Xstrata whereby Xstrata will finance, at the Company's election,
70% of the Company's 30% share of project development costs at
Xstrata's cost of financing plus 100 basis points. Xstrata will be
repaid through 80% of the Company's share of future project cash
flow. Xstrata has not yet submitted a proposed 2008 budget for the
project.
The Company has an option to earn a 100% interest in the Rio
Figueroa copper-gold project in Chile. The Company has $2.6 million
of remaining payments due to the project owner, of which $0.8
million is due in September 2008. The carrying value of the project
was $4.2 million at December 31, 2007 and includes $3.2 million of
exploration expenditures spent on the property. The Company intends
to pursue a joint venture partner for future exploration work on
the project in 2008.
The Liberty Bell gold project and the Alaska Peninsula copper
and gold project are located in Alaska. The Company has an option
to earn a 100% interest in the Liberty Bell project and up to an
80% interest in individual properties comprising the Alaska
Peninsula project. The carrying value of these projects was $1.8
million at December 31, 2007. The Company has budgeted a minimum of
3,000 meters of drilling on the Liberty Bell project at a total
cost of $1.4 million in 2008. The objective of these drilling
programs is to discover mineralization with potential for economic
mine development. Future exploration activities on these projects
will depend in part on the results from these drilling
programs.
2006 Compared with 2005
The Company reported a net loss of $3.1 million ($0.04 per
share) for the year ended December 31, 2006 as compared to net
income of $8.0 million ($0.10 per share) for the year ended
December 31, 2005.
The Company did not own any interests in producing mineral
properties or have any other revenue generating activities;
therefore, it did not generate any operating income or cash flow
from operations. The Company's only significant sources of income
were from property payments and interest earned on cash and cash
equivalents. Income from property payments decreased from $8.3
million in 2005 to none in 2006. The $8.3 million decrease was the
result of a $10.0 million earn-in payment received from Xstrata in
August 2005, which resulted in Xstrata earning a 70% interest in
the El Morro project.
General and administrative expense for the year ended December
31, 2006 totaled $3.6 million and was $1.6 million higher than 2005
expenditures of $2.0 million. The increase was primarily
attributable to a $0.8 million increase in stock compensation
expense resulting principally from an increase in stock option
grants from 880,000 in 2005 to 1,470,000 in 2006, payments to
consultants for Sarbanes Oxley compliance work totaling $0.4
million in 2006 versus none in the preceding year, and an increase
in salary costs of $0.3 million due principally to the hiring of
additional employees.
Restricted stock unit ("RSU") expense increased from $0.1
million in 2005 to $0.4 million in 2006. The increase was
attributable to an additional 250,000 RSUs granted in 2006 and an
increase in the Company's five-day average closing price on the
Toronto Stock Exchange from Cdn$2.18 at December 31, 2005 to
Cdn$4.57 at December 31, 2006. The Company had 370,000 RSUs
outstanding at December 31, 2006.
The write-down of mineral properties and deferred expenditures
of $0.4 million in 2006 related to the Company's Alaska Peninsula
project. In February 2007, the Company was notified that a native
village corporation, which controls the surface rights over one of
the Alaska Peninsula property areas, had decided not to allow
mineral exploration activities on its land. As a result, management
recorded an impairment write-down attributable to this property
area totaling $0.4 million in the year ended December 31, 2006.
Foreign exchange gains of $0.7 million in 2006 principally
resulted from converting Canadian dollar cash balances into U.S.
dollar cash balances earlier in 2006 when the Canadian dollar had
strengthened relative to the U.S. dollar. The foreign exchange gain
in 2005 was primarily attributable to the strengthening of the
Canadian dollar relative to the U.S. dollar at December 31, 2005 as
compared to December 31, 2004. The Cdn$:US$ exchange rate at
December 31, 2005 was 1.166:1 as compared to 1.205:1 on December
31, 2004.
Summary of Quarterly Results
(000's) 2007
-------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------------------------------------------
Total revenues $ 13,172 $ 7,160 $ 2,531 $ -
Net income (loss) $ (4,844) $ (2,519) $ (501) $ (757)
Basic net income (loss)
per share $ (0.04) $ (0.03) $ (0.01) $ (0.01)
Diluted net income (loss)
per share $ (0.04) $ (0.03) $ (0.01) $ (0.01)
2006
-------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------------------------------------------
Total revenues $ - $ - $ - $ -
Net income (loss) $ (2,167) $ (605) $ 9 $ (367)
Basic net income (loss)
per share $ (0.03) $ (0.01) $ 0.00 $ 0.00
Diluted net income (loss)
per share $ (0.03) $ (0.01) $ 0.00 $ 0.00
The Company commenced commercial production on May 1, 2007. The
increase in revenues arose from the ramp-up of production during
2007 which resulted in an increase in gold and silver sales.
The quarterly net loss volatility for 2007 was in part
attributable to holding cash balances in Canadian dollars and
significant fluctuations in the Canadian dollar/U.S. dollar
exchange rate. Net foreign exchange gains totaled $0.2 million,
$1.7 million, $0.7 million and $0.1 million for the first, second,
third and fourth quarters of 2007, respectively. The net loss for
the second and third quarters of 2007 also resulted from an
operating loss of $0.4 million and $1.9 million, respectively, due
to start-up of operations associated with commencement of
commercial production on May 1, 2007. The net loss for the fourth
quarter of 2007 was primarily due to operating profit at Cerro San
Pedro of $2.2 million, which was offset by $5.4 million of income
tax expense resulting from an increase in future tax liabilities,
net of future income tax assets, of $5.3 million due to the
expiration of a 1997 Mexican tax loss carryforward in 2007, and a
valuation allowance applied to a portion of the remaining Mexican
tax loss carryforwards arising as a result of a change in Mexican
tax law.
The quarterly net income (loss) volatility for 2006 was
primarily attributable to holding large cash balances in Canadian
dollars and significant fluctuations in the Canadian dollar/U.S.
dollar exchange rate. Net foreign exchange gains (losses) totaled
($0.1 million), $1.2 million, $0.2 million and ($0.6 million) for
the first, second, third and fourth quarters of 2006, respectively.
In addition, the fourth quarter of 2006 reflected a write-down of
mineral properties, plant and equipment totaling $0.4 million and
an additional $0.2 million for restricted stock unit expense due
principally to an increase in the Company's share price from C$3.40
at September 30, 2006 to C$4.60 at December 31, 2006.
Liquidity and Capital Resources
Mine cash flow from operations was $1.2 million, which was
offset by a build-up of inventory, principally ore on leach pad
inventory of $10.9 million, resulting in cash flows used for
operating activities in 2007 of $8.8 million.
Cash flows used for operating activities in 2006 totaled $2.4
million and resulted principally from a $1.1 million cash basis
loss from operations and an increase in Mexican value added taxes
of $2.0 million, which were partially offset by an increase in
accounts payable and accrued liabilities of $0.9 million.
Cash flows used for investing activities in 2007 of $20.3
million principally arose from $19.9 million of expenditures on
mineral properties, plant and equipment. This amount includes $17.5
million of expenditures on the Cerro San Pedro mine for
construction of the process plant and related facilities, and the
leach pads. The Company spent $0.4 million on exploration
activities at the Alaska Peninsula project, which included geologic
mapping, surface sampling and reconnaissance ground magnetics
surveys at various target areas on the property. The Company also
spent $1.5 million on the Rio Figueroa project in 2007, which
included a 3,268-meter drilling program to follow up on
mineralization intercepted during a 2006 drilling program.
Approximately $0.1 million was spent on the Company's El Morro
project in 2007. Substantially all exploration expenditures on the
El Morro project since 2000 have been made by Xstrata pursuant to
an exploration agreement with Xstrata. Expenditures on the Liberty
Bell project totaled $0.4 million and were for a property wide
reconnaissance evaluation to confirm previously identified
prospective geology and potential for economic gold mineralization,
and to update the exploration model for the area.
Cash flows used for investing activities in 2006 totaled $25.0
million and were all attributable to expenditures on mineral
properties, plant and equipment. This amount included $22.8 million
of expenditures on the Cerro San Pedro project for construction of
the process plant and related facilities, and other project related
costs. The Company spent $1.0 million on exploration activities at
the Alaska Peninsula project, which included an evaluation of
selected exploration targets and a 641-meter drilling program at
the Bee Creek target area. The Company also spent $0.8 million on
the Rio Figueroa project in 2006, which included a 1,339-meter
drilling program at the Cerro Matta target area. Approximately $0.1
million was spent on the Company's El Morro project and the El
Morro Border project in 2006. The remaining $0.2 million of
expenditures for 2006 included the purchase and installation of an
accounting software package for $0.1 million and office furniture
and computer equipment for $0.1 million.
Cash flows provided from financing activities in 2007 of $1.4
million resulted principally from the exercise of stock
options.
Cash flows provided from financing activities in 2006 totaled
$29.4 million and primarily arose from $28.1 million of proceeds
from a private placement.
The Company's cash and cash equivalents decreased by $27.6
million for the year ended December 31, 2007 as compared to an
increase in cash and cash equivalents of $2.1 million for the year
ended December 31, 2006. The $29.7 million increase in 2007 cash
outflows was primarily attributable to a private placement
financing in 2006 for net proceeds for $28.1 million, whereas there
were no financings in 2007. The Company does not hold any
asset-backed securities.
At December 31, 2007, the Company had $17.1 million of cash and
cash equivalents, and working capital of $30.4 million. The Company
believes that its existing cash balances, along with the expected
cash flow to be generated from the Cerro San Pedro mine will allow
it to satisfy its ongoing general and administrative, exploration
and project development expenditures, subject to a possible
decision by Xstrata to proceed with construction at the El Morro
project as discussed below.
In addition to cash flow generated by the Cerro San Pedro mine,
the Company currently also expects to receive $60 million from the
exercise of 19.2 million warrants exercisable at Cdn$3.10 (current
share price Cdn$5.24) which expire on December 11, 2008.
In the event that Xstrata elects to proceed with construction at
the El Morro project, the Company may need additional financing in
order to retain its 30% interest in the project. The Company has an
agreement with Xstrata whereby Xstrata will finance, at the
Company's election, 70% of the Company's 30% share of El Morro
project development costs at Xstrata's cost of financing plus 100
basis points. Xstrata will be repaid through 80% of the Company's
share of future project cash flow. Management believes that the
Company has the ability to obtain sufficient financing, if
required, in the event of a decision by Xstrata to proceed with
construction. The Company expects to generate positive cash flow
from the Cerro San Pedro mine and receive approximately $60 million
from the exercise of warrants in 2008. Furthermore, the Company has
no debt on its balance sheet.
Material Contractual Obligations and Contingencies
Most of the Company's exploration properties are subject to
option purchase agreements which require minimum exploration
expenditures and option payments in order for the Company to retain
its rights under the agreements. Budgeted capital expenditures for
the Company's projects in 2008 are as follows:
Cerro San Pedro mine $6.8 million
Rio Figueroa project $0.9 million
Alaska Peninsula project $0.5 million
Liberty Bell project $1.5 million
The Company has an option to acquire a 100% interest in the Rio
Figueroa copper-gold project in Chile. The agreement provides for
the Company to make annual option payments over a five-year period
beginning September 2004 totaling $3.5 million, and to incur annual
exploration expenditures over a three-year period beginning
September 2004 totaling $1.5 million. The Company met its
exploration commitment on the project in 2006 and has made $0.9
million of option payments to date.
The Company entered into an option agreement that allows it to
earn a 65% interest in several precious and base metal exploration
properties located along the Alaska Peninsula in Southwest Alaska.
The Company may increase its interest in individual properties to
70% by completing a pre-feasibility study, and it may further
increase its interest in individual properties to 80% by completing
a feasibility study. In February 2007, the Company was notified
that a native village corporation located within the Alaska
Peninsula project had decided not to allow mineral exploration
activities on its land. At December 31, 2006, costs attributable to
this land totaling $0.4 million were written off. Negotiations to
secure access to the contested land are ongoing. The Company's
exploration commitment for the project is $4.5 million, plus $0.3
million for option payments over a five-year period beginning
September 2005. As of December 31, 2007, the Company has incurred
qualifying exploration expenditures totaling $1.7 million and made
option payments totaling $0.2 million. The Company has an
expenditure commitment on the project for 2008 of approximately
$0.4 million.
On July 9, 2007 the Company entered into an exploration
agreement with the right to acquire the Liberty Bell gold project
in central Alaska. The agreement provides for the Company to make
aggregate advance royalty payments totaling $0.3 million beginning
in March 2008, incur exploration expenditures totaling $2.0
million, and deliver a feasibility study by December 31, 2011. If a
feasibility study is not delivered by that time, the agreement may
be extended up to four more years by incurring additional advance
royalty payments totaling $0.9 million and exploration expenditures
totaling $5.5 million from 2012 through 2015. Aggregate holding
fees of up to $2.5 million, which will be indexed for inflation,
are required to be paid from 2021 through 2026 until commencement
of commercial production. The owner retains a sliding scale net
smelter return royalty of 0.5% to 4.0% from future production,
based on the market price of gold. The Company has incurred
qualifying expenditures totaling $0.3 million as of December 31,
2007 and has an expenditure commitment on the project for 2008 of
$0.4 million.
On January 23, 2008, the Company entered into a 50-year Mining
Lease Agreement (the "Agreement") with the owners of certain
Alaskan mining concessions located within the Company's Liberty
Bell project area of interest. The Agreement provides for an
initial payment of $30,000, which was paid in January 2008, a
minimum work commitment of $25,000 per year through December 31,
2012, and minimum royalty payments as follows:
Payment
Amount Due Date
---------------------------------
$25,000 September 1, 2008
$50,000 January 1, 2009
$25,000 September 1, 2009
$50,000 September 1, 2010
$150,000 September 1, 2011
$200,000 September 1, 2012
$200,000 September 1, 2013
$250,000 September 1, 2014
$250,000 September 1, 2015
$300,000 September 1, 2016
$100,000 September 1, 2017 and
each year thereafter
through the end of the
lease term
The Company's estimated contractual obligations for future
payments are summarized as follows:
(000's) Payments Due by Period
--------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Contractual Obligations Total 1 year Years Years Years
--------------------------------------------------
Long-term debt $ - $ - $ - $ - $ -
Capital lease obligations - - - - -
Operating leases 27,118 8,611 17,294 317 896
Purchase obligations(1) 19,231 2,486 5,575 2,175 8,995
Other long-term
obligations(2) 5,276 919 1,437 1,454 1,466
--------------------------------------------------
Total contractual
obligations $ 51,625 $ 12,016 $ 24,306 $ 3,946 $ 11,357
--------------------------------------------------
--------------------------------------------------
(1) Purchase obligations also include option payments totaling
$2.6 million for the Rio Figueroa project, exploration commitments
and option payments totaling $2.9 million for the Alaska Peninsula
project and exploration commitments and minimum royalty payments
totaling $12.7 million for the Liberty Bell project. The Company is
also obligated to pay $0.1 million, representing its 30% share of
amounts owed to the former owners of certain mining concessions at
the El Morro project, within two years of commencement of mining
operations. In addition, purchase obligations include commitments
totaling $0.9 million to provide services and supplies with respect
to the Cerro San Pedro mine.
(2) Other long-term obligations include 583,700 restricted stock
units that will be paid in 2008, 2009 and 2010 and have an
estimated fair value at December 31, 2007 of $1.6 million, and $2.7
million representing the estimated future value of the Company's
reclamation estimate at its Cerro San Pedro mine. Other long-term
obligations also includes $1.0 million for the estimated future
value of obligations owed to various property owners at the Cerro
San Pedro mine.
Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have, or
are reasonably likely to have, any material effect on the
consolidated balance sheets, consolidated statements of operations
or consolidated statements of cash flows.
Related Party Transactions
The Company entered into a consulting agreement with a director
of the Company, Robert Martinez, to provide technical advisory
services with respect to the Cerro San Pedro mine at a rate of
$1,000 per day plus out-of-pocket expenses. Effective April 1,
2007, the director's consulting rate was increased to $1,250 per
day, which in the opinion of the management approximates an
arms-length rate for these services. The Company has incurred
technical advisory fees pursuant to this agreement totaling $0.2
million during the year ended December 31, 2007. Services are
provided under the agreement on an as-needed basis and may be
terminated by the director or the Company at any time.
The Company entered into a consulting agreement with a company,
Firex, S.A. de C.V., which is controlled by a director of the
Company, Jorge Mendizabal Acebo, to provide management services
with respect to the Cerro San Pedro mine. The agreement provided
for consulting fees of $6,250 per month. Effective April 1, 2007,
the director's consulting rate was increased to $7,188 per month,
which in the opinion of the management approximates an arms-length
rate for these services. The Company has incurred consulting fees
pursuant to this agreement totaling $0.1 million during the year
ended December 31, 2007. Services are provided under the agreement
on an as-needed basis and may be terminated by the director or the
Company at any time.
Critical Accounting Policies
The Company's accounting policies are described in Note 2 to the
consolidated financial statements. Management considers the
following policies to be the most critical in understanding the
judgments and estimates that are involved in the preparation of its
consolidated financial statements and the uncertainties which could
materially impact its results of operations, financial condition
and cash flows.
Use of Estimates
The preparation of the Company's financial statements, in
conformity with generally accepted accounting principles, requires
that management make assumptions and estimates that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of expenses during
the reporting period. Management continually evaluates its
assumptions and estimates; however, actual amounts could materially
differ from those based on assumptions and estimates.
Management has identified the following critical accounting
estimates that could have a material impact on the Company's
financial statements:
Inventory
The amount of gold and silver in ore on leach pad is measured by
estimating the number of tonnes delivered to the leach pad, the
number of contained ounces based on assay data and the estimated
recoverable ounces based on metallurgical data. Although the
quantities of recoverable gold and silver placed on the leach pad
are reconciled by comparing the grades of ore placed on the leach
pad to the quantities actually recovered, the nature of the
leaching process inherently limits the ability to precisely monitor
inventory levels. The ultimate recovery of gold and silver from the
leach pad will not be known until the leaching process has
concluded at the end of the mine life.
Mineral Properties and Deferred Costs:
Mineral reserve estimates are imprecise and depend partly on
statistical inferences drawn from drilling and other data, which
may prove to be unreliable. Future production could differ
dramatically from mineral reserve estimates due to differences in
actual mineralization and mineralization estimated by sampling,
variances in the grade of mineral reserves, increases in mining,
processing and reclamation costs, and changes in the market price
of gold and/or silver. The Company's mineral reserves are limited
to its Cerro San Pedro gold and silver mine in Mexico.
Management reviews and evaluates the carrying value of each
mineral property when events and circumstances indicate that there
may be a risk of impairment. This review requires significant
judgment in cases where the Company does not have proven and
probable reserves that would enable management to estimate future
cash flows that can be compared to the asset's carrying value. Many
factors are considered in the assessment of impairment which
include, but are not limited to, adverse legal, regulatory, title,
accessibility, environmental or political factors that could affect
the property's value. Management also considers commodity prices,
results from exploration activities, future exploration plans,
property development and holding costs, market price of the
property and other factors.
In the case of the Cerro San Pedro mine, which has mineral
reserves, the total estimated future cash flows on an undiscounted
basis are compared to the project's carrying value. If the
estimated future cash flows are less than the carrying value, an
impairment loss is recorded and the carrying value is written down
to fair value, which is typically the estimated future discounted
cash flows. Management estimates future cash flows for the Cerro
San Pedro mine using assumptions that reflect the long-term
operating plan for the project, which include assumptions of
operating costs and metal prices. The future cash flow estimates
are updated periodically to reflect market conditions. There are
significant risks and uncertainties in the assumptions used to
estimate future cash flows.
Accounting for Stock Options:
The fair value of stock options used to calculate compensation
expense has been estimated using the Black-Scholes Option Pricing
Model with the following assumptions:
2006 2006 2005
-----------------------------------------
Risk free interest rate (Canada) 3.7 to 4.7% 3.8 to 4.3% 3.2 to 3.7%
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility of the
Company's common shares 55 to 67% 60 to 71% 65 to 66%
Expected life of option 3.4 to 3.7 3.5 to 3.9 5 years
years years
Option pricing models require the input of highly subjective
assumptions, including the expected price volatility of the
Company's shares and the expected life of the option. Changes in
the subjective input assumptions can materially affect the fair
value estimate.
Asset Retirement Obligation:
The Company's reclamation obligation is calculated using
assumptions that include the Company's long-term credit-adjusted
risk-free interest rate, the long-term inflation rate, the year in
which the reclamation obligation is expected to begin and the
current estimate of the reclamation obligation. Any changes in
these assumptions could materially affect the Company's reclamation
obligation.
Adoption of New Accounting Standards
Effective January 1, 2007, the Company adopted two new
accounting standards and related amendments to other standards on
financial instruments issued by The Canadian Institute of Chartered
Accountants ("CICA").
Financial Instruments - Recognition and Measurement, CICA
Handbook Section 3855
This standard prescribes when a financial asset, financial
liability or non-financial derivative is to be recognized on the
balance sheet and whether fair value or cost-based methods are used
to measure the recorded amounts. It also specifies how financial
instrument gains and losses are to be presented.
Effective January 1, 2007, the Company's cash equivalents have
been classified as available-for-sale securities and are recorded
on the balance sheet at fair value, which is based on quoted market
prices. Changes in the fair value of these securities are reflected
in other comprehensive income and included in accumulated other
comprehensive income on the balance sheet. These unrealized gains
and losses are not reflected in net income until realized.
Comprehensive Income - CICA Handbook Section 1530
This standard requires the presentation of a statement of
comprehensive income and its components. Comprehensive income
includes both net earnings and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on
available-for-sale investments, gains and losses on certain
derivative instruments, and foreign currency gains and losses
related to self-sustaining operations, none of which are included
in the calculation of net earnings until realized.
The effect on the Company's balance sheet as of January 1, 2007
on adoption of these financial instrument standards resulted in a
$10,000 increase to accumulated other comprehensive income. As
prescribed by these standards, prior periods have not been
restated.
Recent Canadian Accounting Pronouncements
The CICA has issued three new standards which may affect the
financial disclosures and results of operations of the Company for
interim and annual periods beginning January 1, 2008. The Company
will adopt the requirements commencing in the quarter ended March
31, 2008 and is considering the impact that these standards will
have on the Company's financial statements.
Capital Disclosures - CICA Handbook Section 1535
This standard establishes standards for disclosing information
about an entity's capital and how it is managed. Under this
standard, the Company will be required to disclose quantitative and
qualitative information about its objectives, policies and
processes for managing capital.
Inventories - CICA Handbook Section 3031
This standard provides guidance on the determination of costs
and their subsequent recognition as an expense, including any
write-down to net realizable value. It also provides guidance on
the types of costs that should be included in inventory.
Financial Instruments, Disclosures - CICA Handbook Section
3862
This standard requires entities to disclose quantitative and
qualitative information that enable users to evaluate (a) the
significance of financial instruments for the Company's financial
performance, and (b) the nature and extent of risks arising from
financial instruments to which the Company is exposed during the
period and at the balance sheet date, and management's objectives,
policies and procedures for managing such risks. The Company will
be required to disclose the measurement basis used, and the
criteria used to determine classification of financial
instruments.
Financial Instruments
The Company's financial instruments consist of cash and cash
equivalents, value added tax receivable and other receivables,
inventory, deposits and prepaid expenses, and accounts payable and
accrued liabilities. It is management's opinion that the Company is
not exposed to significant interest or credit risk with these
financial instruments. However, the Company is exposed to currency
risk in that it holds cash balances in Canadian dollars (Cdn$12.3
at December 31, 2007) and incurs the majority of expenditures at
its Cerro San Pedro mine in Mexican pesos, whereas the Company's
revenues are in U.S. dollars, which is the functional currency.
Canadian dollars are invested in high grade commercial paper or
other high grade investments with maturities of less than 90 days.
The Company does not hold any asset-backed commercial paper. Any
decreases in the value of the Canadian dollar relative to the U.S.
dollar, or increase in the value of the Mexican peso relative to
the U.S. dollar could have a negative impact on the Company's cash
and cash equivalents, and the consolidated statement of
operations.
Evaluation of Disclosure Controls
Disclosure controls and procedures are designed to provide
reasonable assurance that material information is gathered and
reported to senior management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to permit
timely decisions regarding public disclosure.
Management carried out an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures (as defined in Canadian Securities Administrators
Multilateral Instrument 52-109, "Certification of Disclosure in
Issuer's Annual and Interim Filings") as of December 31, 2007.
Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls
and procedures are effective in recording, processing, summarizing
and reporting, on a timely basis, information required to be
disclosed by the Company to satisfy its continuous disclosure
obligations, and are effective in ensuring that information
required to be disclosed in the reports that the Company files is
accumulated and communicated to management as appropriate to allow
for timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial
Reporting
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting. Any
system of internal control over financial reporting, no matter how
well designed, has inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation. During the year the Company documented and assessed
its systems of internal controls over financial reporting as
contemplated pursuant to Rule 404 of the Sarbanes Oxley Act of
2002. Management has used the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) framework to evaluate the
effectiveness of the Company's internal control over financial
reporting. Based on this assessment, management has concluded that
as at December 31, 2007, the Company's internal control over
financial reporting was effective.
Changes in Internal Control over Financial Reporting
The commencement of commercial production at the Cerro San Pedro
mine on May 1, 2007 required the Company to supplement its internal
control processes by adding controls to address revenue and
receivables, production costs, amortization of mine development
costs and inventory.
Corporate Outlook
The Cerro San Pedro mine is currently mining at full mine plan
production rates of 63,000 tonnes per day. The processing plant is
operating at designed throughput levels of 1,000 cubic meters per
hour. With January and February production reaching 12,282 ounces
of gold and 157,039 ounces of silver, the Company remains on track
to achieve planned production levels for 2008 of 80,000 ounces of
gold and 1.35 million ounces of silver. The Company intends to
analyze the potential for crushing ore at the mine in order to
increase gold and silver recoveries. Capital expenditures in 2008
for expansion of the leach pad area are expected to total $6.8
million.
Xstrata is currently revising the feasibility study for the El
Morro project in order for it to comply with third party lending
standards. Upon receipt of the feasibility study amendments, the
Company will be obligated to pay its 30% share of all ongoing
project development costs. The Company has an agreement with
Xstrata whereby Xstrata will finance, at the Company's election,
70% of the Company's 30% share of project development costs at
Xstrata's cost of financing plus 100 basis points. Xstrata will be
repaid through 80% of the Company's share of future project cash
flow. Xstrata has not yet submitted a proposed 2008 budget for the
project.
In regards to the Company's other exploration properties, the
Company will consider joint venturing the property as an option for
the Rio Figueroa project in 2008. The Company has budgeted a
minimum of 3,000 meters of drilling at the Liberty Bell project at
total cost of $1.5 million in 2008.
Contingencies
In June 2007 the Company terminated its mining contract with
Washington Group Latin America Inc. ("WGLA"), for cause, at the
Cerro San Pedro mine. WGLA maintains that the contract was
terminated for convenience and that they were not paid for all
amounts owed under the agreement, including early contract
termination fees, and has filed an arbitration claim against the
Company for $16.6 million plus value added taxes. The Company has
filed a counterclaim against WGLA for $2.5 million. The arbitration
proceedings are scheduled to take place in Denver, Colorado in June
and July of 2008; however, the outcome of the arbitration
proceedings cannot be determined at the present time.
The Company has been notified of various lawsuits and legal
actions that have been filed against governmental agencies by a
group of mine opponents seeking nullification of various permits
and licenses that have been granted to the Company with respect to
its Cerro San Pedro mine. Various lawsuits and legal actions have
been filed by members of this group over the past four years. Those
lawsuits that have had final rulings have all been resolved in
favor of the various governmental agencies. In the event of an
adverse ruling from any of the unresolved lawsuits, the Company may
be forced to suspend or cease project construction or operating
activities.
Risk Factors
The discovery, development and acquisition of mineral properties
are in many instances unpredictable events and involve numerous
risks, including those described under the heading "Item 3. Key
Information - D) Risk Factors" in the Company's latest Annual
Report on Form 20-F. In addition, as a result of the Company's
transition from an exploration company to a gold and silver
producer, the Company is subject to additional risks including,
among others, risks associated with the operation of a mine, such
as uncertainty concerning the Company's ability to hire and retain
qualified personnel, risks of labor disruptions, power outages,
landslides, flooding, encountering unexpected geologic formations
or unanticipated variations in grade, uncertainty concerning the
Company's ability to obtain suitable machinery, equipment and
parts, metallurgical and other processing problems, mechanical
equipment performance problems, occurrence of accidents, force
majeure factors, unanticipated transportation costs, and weather
conditions, any of which can materially and adversely affect, among
other things, the development of properties, production quantities
and rates, costs and expenditures and production commencement
dates. The Company has prepared estimates, and relies on the
estimates of consultants and management, of future production,
schedules and cash and total costs in respect of its Cerro San
Pedro mine. There is no assurance that such estimates will be
achieved. Actual production from the Cerro San Pedro mine may vary
from such estimates for a variety of reasons such as the actual ore
mined varying from estimates of grade, tonnage, dilution and
metallurgical and other characteristics, as well as the foregoing
risks associated with the operation of a mine.
The Company's primary operations are located in Mexico where
most of its obligations and disbursements are denominated in
Mexican pesos. The Company has not entered into any hedging
activity for foreign currency risk with respect to the Mexican
peso.
Forward-Looking Statements
This document contains statements, which, to the extent that
they are not recitations of historical fact, constitute
"forward-looking statements" within the meaning of Section 27A of
the United States Securities Act of 1933 and Section 21E of the
United States Securities Exchange Act of 1934 and applicable
Canadian securities legislation, and are intended to be subject to
the safe harbor protection of those provisions. All statements,
other than statements of historical facts, included in this
document and in press releases and public statements by our
officers or representatives, that address activities, events or
developments that management of the Company expects or anticipates
will or may occur in the future, are forward-looking statements,
including, but are not limited to, those relating to the Company's
transition from an exploration company to a gold and silver
producer, projections of production and scheduling, cash and total
costs, start-up of any new project, results of exploration efforts,
status of required permits from governmental and regulatory
authorities, status of lawsuits filed against governmental agencies
including lawsuits filed by Project Opponents with respect to the
Company's Cerro San Pedro mine, and any other information about the
future business and prospects of the Company. In certain cases,
forward-looking statements can be identified by the use of words
such as "could", "expect", "believe", "estimate", "anticipate",
"project" and similar expressions and statements relating to
matters that are not historical facts. All forward-looking
statements in this document involve risks, uncertainties and other
factors, including those described above as well as those set forth
under the heading "Item 3. Key Information - D) Risk Factors" in
the Company's latest Annual Report on Form 20-F.
These may cause the actual results or performance of the Company
to be materially different from any future results or performance
expressed or implied by such forward-looking statements. These
factors include, among others, risks related to the Company's
recent transition from an exploration company to a gold and silver
producer including, among others, risks associated with the
operation of a mine and risks that could affect the Company's
ability to achieve estimated production, schedules and cash and
total costs with respect to its Cerro San Pedro mine, such as those
described under "Risk Factors" above; risks related to the
Company's properties being at the exploration or development stage;
uncertainty of obtaining additional funding; uncertainty of mineral
reserve and resource estimates; effects on the Company's operations
of current and prospective regulations governing, among others,
prospecting, development, environmental protection and labor
matters; permitting requirements; risks of liability for
environmental damage; risks relating to legal proceedings; and
risks associated with international business operations. Although
the Company has attempted to identify important factors that could
cause actual actions, events or results to differ materially from
those described in forward-looking statements, there may be other
factors that cause actions, results or events not to be as
anticipated, estimated or intended. There can be no assurance that
forward-looking statements will prove to be accurate, as actual
results and future events could differ materially from those
anticipated in such statements. Accordingly, readers should not
place undue reliance on forward-looking statements. The Company
undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise except as may be required under
applicable securities laws.
Metallica Resources Inc.
Consolidated Balance Sheets (Unaudited)
December 31, 2007 and 2006
U.S. dollars (000's, except share data)
----------------------------------------------------------------------------
2007 2006
Assets
Current assets:
Cash and cash equivalents $ 17,127 $ 44,762
Value-added tax and other receivables 3,777 2,787
Inventory (Note 4) 11,668 133
Deposits and prepaid expenses 1,418 204
Future income tax assets (Note 9) 4,194 -
------------------------
38,184 47,886
Mineral properties, plant and equipment (Note 5) 102,034 84,827
Other assets 804 240
------------------------
Total assets $ 141,022 $ 132,953
------------------------
------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 7,818 $ 5,789
Restricted stock units (Note 8(e)) 1,015 557
Asset retirement obligation (Note 6) 1,481 611
Other liabilities (Note 7) 700 -
Future income tax liabilities (Note 9) 9,470 -
------------------------
20,484 6,957
------------------------
Shareholders' equity:
Share capital (92,773,665 common shares,
2006: 92,001,263) (Note 8(b)) 135,832 133,572
Contributed surplus 1,485 1,485
Warrants (Note 8(d)) 10,360 10,364
Stock options (Note 8(c)) 3,405 2,474
Accumulated other comprehensive loss (24) -
Deficit (30,520) (21,899)
------------------------
120,538 125,996
------------------------
Total liabilities and shareholders' equity $ 141,022 $ 132,953
------------------------
------------------------
Contingencies (Note 12)
Subsequent event (Note 17)
The accompanying notes are an integral part of these consolidated financial
statements.
Metallica Resources Inc.
Consolidated Statements of Operations and Deficit (Unaudited)
For the years ended December 31, 2007, 2006 and 2005
U.S. dollars (000's, except share data)
----------------------------------------------------------------------------
2007 2006 2005
Revenues (Note 1):
Gold $ 17,842 $ - $ -
Silver 5,021 - -
-----------------------------------------
22,863 - -
Operating expenses (Note 1):
Production costs 21,704 - -
Depreciation and amortization 1,311 - -
-----------------------------------------
23,015 - -
-----------------------------------------
Operating loss (152) - -
Other expense (income):
General and administrative 5,365 3,641 2,030
Exploration and business
development 775 545 232
Restricted stock units 876 417 59
Write-down of mineral properties,
plant and equipment - 380 3
Foreign exchange gain (2,729) (695) (1,045)
Income from property payments
(Note 5) - - (8,349)
Interest income (1,202) (1,216) (1,037)
-----------------------------------------
3,085 3,072 (8,107)
-----------------------------------------
Income (loss) before income taxes (3,237) (3,072) 8,107
Income tax provision (Note 9) 5,384 58 148
-----------------------------------------
Net income (loss) (8,621) (3,130) 7,959
Deficit at beginning of period (21,899) (18,769) (26,728)
-----------------------------------------
Deficit at end of period $ (30,520) $ (21,899) $ (18,769)
-----------------------------------------
-----------------------------------------
Basic and diluted net income
(loss) per share $ (0.09) $ (0.04) $ 0.10
-----------------------------------------
-----------------------------------------
Weighted average number of common
shares outstanding 92,404,717 84,110,240 82,952,717
-----------------------------------------
-----------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Metallica Resources Inc.
Consolidated Statement of Comprehensive Loss (Unaudited)
For the year ended December 31, 2007
U.S. dollars (000's)
----------------------------------------------------------------------------
Net loss $ (8,621)
Net unrealized loss on available-for-sale securities (34)
------
Comprehensive loss $ (8,655)
------
------
Consolidated Statement of Accumulated Other Comprehensive Loss (Unaudited)
For the year ended December 31, 2007
U.S. dollars (000's)
----------------------------------------------------------------------------
Balance at December 31, 2006 $ -
Net unrealized gain on available-for-sale securities 10
------
Balance at January 1, 2007 on adoption of new accounting standard 10
Net unrealized loss on available-for-sale securities (34)
------
Accumulated other comprehensive loss $ (24)
------
------
Metallica Resources Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the years ended December 31, 2007, 2006 and 2005
U.S. dollars (000's)
----------------------------------------------------------------------------
2007 2006 2005
Cash flows provided from (used for)
operating activities
Net income (loss) $ (8,621) $ (3,130) $ 7,959
Non-cash items:
Depreciation and amortization 1,378 37 12
Stock-based compensation expense 1,505 1,177 341
Restricted stock unit expense 997 417 59
Future income tax expense 5,276 - -
Other non-cash items 173 15 43
Write-down of mineral properties,
plant and equipment - 380 3
Changes in non-cash working capital
and other assets (Note 14) (9,514) (1,262) (251)
---------------------------------------
(8,806) (2,366) 8,166
---------------------------------------
Cash flows used for investing
activities
Mineral properties, plant and
equipment (19,879) (24,975) (9,194)
Proceeds from property option
payment - - 1,651
Deposits for construction (368) - -
Other liabilities (24) - -
---------------------------------------
(20,271) (24,975) (7,543)
---------------------------------------
Cash flows provided from financing
activities
Common shares and warrants issued for
cash, net of issue costs - 28,123 -
Proceeds from exercise of warrants 35 252 -
Proceeds from exercise of stock
options 1,397 1,058 430
---------------------------------------
1,432 29,433 430
---------------------------------------
Increase (decrease) in cash and cash
equivalents (27,645) 2,092 1,053
Cash and cash equivalents, beginning
of period (Note 3) 44,772 42,670 41,617
---------------------------------------
Cash and cash equivalents, end of
period $ 17,127 $ 44,762 $ 42,670
---------------------------------------
---------------------------------------
Cash and cash equivalents consist
of:
Cash on hand $ 2,693 $ 961 $ 490
Short-term investments 14,434 43,801 42,180
---------------------------------------
$ 17,127 $ 44,762 $ 42,670
---------------------------------------
---------------------------------------
Non-cash investing activities:
Increase (decrease) in accounts
payable and other liabilities
related to mineral properties,
plant and equipment $ (2,797) $ 3,592 $ 501
Income tax payments $ 82 $ 47 $ 140
The accompanying notes are an integral part of these consolidated financial
statements.
(Unaudited)
1. Nature of Operations
Metallica Resources Inc. (the "Company") operates a gold and
silver mine in Mexico and is engaged in the acquisition,
exploration and development of precious and base metal mineral
deposits throughout the Americas.
The processing facilities for the Company's Cerro San Pedro gold
and silver mine were tested and determined to be operational on
April 30, 2007. Effective May 1, 2007, commercial production
commenced at the Cerro San Pedro mine. All revenues and operating
costs recorded after May 1, 2007 are reflected in the Company's
statement of operations.
The Company also has a 30% interest in an advanced stage
copper-gold exploration project in Chile and is pursuing various
other exploration projects in the Americas.
2. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements have been prepared by
management in accordance with generally accepted accounting
principles ("GAAP") in Canada. The significant measurement
differences between these principles and those that would be
applied to the Company under United States GAAP are described in
Note 16.
Consolidation
These consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries, after
elimination of intercompany balances and transactions.
- Datawave Sciences Inc. - Minera Metallica Resources Chile
Limitada
- De Re Holdings Inc. - Minera San Xavier, S.A. de C.V.
- Desarrollos Metallica C.A. - MMM Exploraciones, S.A. de C.V.
- Great Frontier Resources Inc. - Raleigh Mining International Limited
- Metallica (Barbados) Inc. - Servicios del Plata y Oro, S.A. de C.V.
- Metallica Management Inc. - Sociedad Contractual Minera El Morro
- Metallica Resources Alaska Inc.
Use of Estimates
The preparation of consolidated financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date
of the consolidated financial statements and the reported amount of
revenues and expenses during the reporting periods. Significant
estimates that involve highly subjective assumptions by management
include estimates of recoverable gold and silver in ore on leach
pad inventory, depletion and amortization calculations, estimates
of fair value to assess asset impairment, estimates of asset
retirement obligations, provisions for contingencies and
litigation, estimates for stock-based compensation and valuation
allowances for future income tax assets. Actual results could
therefore differ from those reported.
Foreign Currency Translation
The Company considers the United States dollar to be the
functional currency of all of its operations. Monetary assets and
liabilities in foreign currencies and integrated foreign
subsidiaries are translated into United States dollars at the
exchange rate on the balance sheet date. Nonmonetary assets and
liabilities are translated at historical exchange rates. Revenues
and expenses are translated at average exchange rates, except for
depreciation and amortization, and stock compensation expense,
which are translated at historical rates. All exchange gains and
losses are included in the statement of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term
investments that have original maturities of three months or less.
The Company does not hold any asset-backed securities.
Inventory
The Cerro San Pedro mine is a run-of-mine heap leaching
operation whereby gold and silver ore is mined and placed on leach
pads without screening or crushing. Ore on leach pad represents
mined ore that has been stacked on an impermeable pad and is being
leached with chemical solutions to dissolve precious metals. The
precious metals will be recovered in the processing plant in the
form of partially refined gold and silver, called dore, which is
sent to a third party refinery for processing into saleable
precious metals. Inventories consist primarily of ore on leach pad
and dore.
The amount of gold and silver in the ore on leach pad is
measured by estimating the number of tonnes delivered to the leach
pad, the number of contained ounces based on assay data and the
estimated recoverable ounces based on metallurgical data. Although
the quantities of recoverable gold and silver placed on the leach
pad are reconciled by comparing the grades of ore placed on the
leach pad to the quantities actually recovered, the nature of the
leaching process inherently limits the ability to precisely monitor
inventory levels. The ultimate recovery of gold and silver from the
leach pad is not known until the leaching process has concluded at
the end of the mine life.
Ore on leach pad is valued at the lower of average production
cost or net realizable value. Costs are added to ore on leach pad
based on actual mining costs and amortization and depreciation
incurred during the period, and are removed from the leach pad
based on the average cost per recoverable ounce.
Dore inventory is valued at the lower of average production cost
or net realizable value. Average production cost includes the
average cost of the ore on leach pad incurred prior to the dore
refining process, plus dore processing costs including applicable
depreciation on the process plant facilities. Royalties, outside
refinery charges and related transportation charges are allocated
directly to production costs.
Supplies and reagents inventory are valued at the lower of
average cost or replacement cost.
Mineral Properties, Plant and Equipment
The cost of acquiring mineral property interests, and related
exploration and development costs incurred thereafter, are
capitalized until commercial production is established, or the
property is disposed of through sale or otherwise, or the carrying
value has been impaired. Exploration expenditures incurred prior to
the acquisition of a mineral property interest are expensed as
incurred. Proceeds from the sale of an interest in a mineral
property are credited against its carrying value until the payments
received exceed the costs incurred, at which time they are recorded
as income. If a property is put into commercial production,
capitalized mineral property, exploration and development
expenditures for that property are amortized over the estimated
economic mine life using the units-of-production method based on
estimated recoverable mineral reserves. Equipment, vehicles,
buildings and furniture are amortized on the straight-line basis
over the estimated useful life of the asset, which currently ranges
from three to 20 years.
When events or changes in circumstances suggest impairment of
long-lived assets, estimated undiscounted future net cash flows are
calculated using estimated future metal prices, proven and probable
reserves, value beyond proven and probable reserves, and estimated
net proceeds from the disposition of assets on retirement less
operating and sustaining capital and reclamation costs. Although
management has made its best estimate of these factors, it is
possible that material changes could occur that would adversely
affect management's estimate of undiscounted future net cash flows
from its mineral properties. If projected undiscounted future cash
flows are less than the carrying value, the estimated fair value is
calculated using discounted future net cash flows and the asset is
written down to fair value with an impairment charge to operations.
When future net cash flows cannot be estimated and other events
suggest impairment, management assesses whether carrying values can
be recovered by considering alternative methods of determining fair
value. If management's estimate of the recoverable amount is less
than a long-lived asset's carrying value, the carrying value is
written down to the estimated fair value.
The costs deferred at any point in time do not necessarily
reflect present or future values. The ultimate recovery of such
amounts depends on the discovery of economically recoverable
reserves, successful commercial development of the related
properties, availability of financing, future profitable
production, or proceeds from the disposition of the properties.
Although the Company has taken steps to verify title to mineral
properties in which it has an interest, these procedures do not
guarantee the Company's title. Such properties may be subject to
prior undetected agreements or transfers and title may be affected
by such defects.
Asset Retirement Obligations
Asset retirement obligations ("AROs") are legal obligations
associated with the retirement of a long-lived asset that results
from the acquisition, construction, development or normal operation
of a long-lived asset.
The Company recognizes the fair value of AROs in the period in
which it incurs a legal obligation, if a reasonable estimate of
fair value can be made, based on the present value of the estimated
future cash settlement of the ARO. AROs are capitalized as part of
the carrying amount of the associated long-lived asset and a
liability is recorded. The capitalized asset retirement cost is
amortized over the life of the related asset upon commencement of
commercial production. The liability is accreted up to the date
that the liability is finally settled in cash, subject to annual
adjustments for changes in estimates. Accretion of the liability
prior to commencement of commercial production was capitalized,
whereas accretion of the liability after commencement of commercial
production is reflected in production costs in the statement of
operations.
Financial Instruments
At December 31, 2007, the carrying values of cash, value-added
tax and other receivables, deposits and other assets, and accounts
payable and accrued liabilities approximate their fair values due
to the relatively short period to maturity of the instruments.
Foreign exchange risk principally arises from foreign currency
fluctuations when cash is held in currencies other than U.S.
dollars, and operating expenses denominated in Mexican Pesos at the
Company's Cerro San Pedro mine. The Company does not use any
derivative instruments to reduce its exposure to fluctuations in
foreign currency exchange rates.
Production Costs
Production costs include ore and waste mining, ore processing,
mine administration, transportation and refining, and
royalties.
Revenue Recognition
Revenue is recorded when persuasive evidence of an arrangement
exists, the dore has been shipped, title has passed to the
purchaser, the price is fixed or determinable and the cash has been
received. Settlement adjustments, if any, are reflected in revenue
when the amounts are determinable.
Income Taxes
The Company uses the asset and liability method of accounting
for income taxes. Under this method, future income tax assets and
liabilities are recognized for future tax consequences attributable
to differences between the tax basis of an asset or liability and
the carrying amount on the balance sheet. Future tax assets and
liabilities are measured using substantively enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on future tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the
date of substantive enactment. Future income tax assets are
evaluated and if realization is not considered more likely than
not, a valuation allowance is provided.
Stock-based Compensation and Warrants
The Company recognizes stock-based compensation expense for all
forms of employee stock-based compensation, including stock
options. Stock-based compensation expense for stock options is
determined based on the estimated fair values of the options on the
date of grant using the Black-Scholes option pricing model. The
fair value is recognized as stock-based compensation expense, or
capitalized in the case of employees or consultants working
directly on mine development projects, over the vesting period of
the respective options. The fair value attributable to stock
options that expire unexercised is credited to contributed surplus.
The fair value attributable to unvested stock options that are
forfeited is recorded as a reduction to stock compensation expense,
or as a reduction to the related asset in the case of an employee
or consultant working directly on a mine development project, when
the forfeiture occurs.
Restricted stock units are settled in cash and are marked to
market based on the underlying stock price at period end. Changes
in the related liability are recorded in the statement of
operations, or capitalized if related to mine development projects,
based on service provided to that date.
Warrants are recorded at their estimated fair value on the date
of issue using the Black-Scholes option pricing model.
Employee Future Benefits
The Company is subject to Mexican statutory laws and regulations
governing employee termination benefits. Employee future benefits
include statutorily mandatory accrued benefits payable to employees
in the event of termination in certain circumstances. The accrual
of this benefit is estimated at the discounted value of the
expected future payments.
Per Share Amounts
Basic per share amounts are calculated using the weighted
average number of common shares outstanding during the year.
Diluted per share amounts are calculated based on the
treasury-stock method, which assumes that any proceeds from the
exercise of in-the-money options and warrants would be used to
purchase common shares at the average market price during the year.
The weighted average number of common shares outstanding is
adjusted for the net increase in the number of common shares issued
upon exercise of the options and warrants. Stock options and
warrants are included in the calculation of diluted per share
amounts only to the extent that the average market price of the
common shares during the year exceeds the exercise price of the
options or warrants. During years when the Company has generated a
loss, the potential shares to be issued from the assumed exercise
of options and warrants are not included in the computation of
diluted per share amounts since the result would be
anti-dilutive.
Reclassifications
Certain reclassifications of prior year balances have been made
to conform to the current year presentation.
Recent Canadian Accounting Pronouncements
The Canadian Institute of Chartered Accountants ("CICA") has
issued three new standards which may affect the financial
disclosures and results of operations of the Company for interim
and annual periods beginning January 1, 2008. The Company will
adopt the requirements commencing in the quarter ended March 31,
2008 and is considering the impact that these standards will have
on the Company's financial statements.
Capital Disclosures - CICA Handbook Section 1535
This section establishes standards for disclosing information
about an entity's capital and how it is managed. Under this
standard, the Company will be required to disclose quantitative and
qualitative information about its objectives, policies and
processes for managing capital.
Inventories - CICA Handbook Section 3031
This standard provides guidance on the determination of costs
and their subsequent recognition as an expense, including any
write-down to net realizable value. It also provides guidance on
the types of costs that should be included in inventory.
Financial Instruments, Disclosures - CICA Handbook Section
3862
This standard requires entities to disclose quantitative and
qualitative information that enable users to evaluate (a) the
significance of financial instruments for the Company's financial
performance, and (b) the nature and extent of risks arising from
financial instruments to which the Company is exposed during the
period and at the balance sheet date, and management's objectives,
policies and procedures for managing such risks. The Company will
be required to disclose the measurement basis used, and the
criteria used to determine classification of financial
instruments.
Effective January 1, 2009 the CICA has issued a new standard
which may affect the financial disclosures and results of
operations of the Company for interim and annual periods beginning
January 1, 2009. The Company will adopt the requirements commencing
in the quarter ended March 31, 2009 and is considering the impact
this will have on the Company's financial statements.
Goodwill and Intangible Assets - CICA Handbook
This section establishes revised standards for recognition,
measurement, presentation and disclosure of goodwill and intangible
assets. Concurrent with the introduction of this standard, the CICA
withdrew EIC 27, Revenues and Expenses During the Pre-operating
Period. As a result of the withdrawal of EIC 27, the Company will
not be able to defer costs and revenues incurred prior to
commercial production at new mine operations.
3. Adoption of New Accounting Standards
Effective January 1, 2007, the Company adopted two new
accounting standards and related amendments to other standards on
financial instruments issued by the CICA.
Financial Instruments - Recognition and Measurement, CICA
Handbook Section 3855
This standard prescribes when a financial asset, financial
liability or non-financial derivative is to be recognized on the
balance sheet and whether fair value or cost-based methods are used
to measure the recorded amounts. It also specifies how financial
instrument gains and losses are to be presented.
Effective January 1, 2007, the Company's cash equivalents have
been classified as available-for-sale securities and are recorded
on the balance sheet at fair value, which is based on quoted market
prices. Changes in the fair value of these securities are reflected
in other comprehensive income and included in accumulated other
comprehensive income on the balance sheet. These unrealized gains
and losses are not reflected in net income until realized.
Comprehensive Income - CICA Handbook Section 1530
This standard requires the presentation of a statement of
comprehensive income and its components. Comprehensive income
includes both net earnings and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on
available-for-sale investments, gains and losses on certain
derivative instruments, and foreign currency gains and losses
related to self-sustaining operations, none of which are included
in the calculation of net earnings until realized.
The effect on the Company's balance sheet as of January 1, 2007
on adoption of these financial instrument standards resulted in a
$10,000 increase to accumulated other comprehensive income. As
prescribed by these standards, prior periods have not been
restated.
4. Inventory
Inventory consists of the following:
(000's) December 31,
---------------------------------------------------
2007 2006
---------------------------------------------------
Ore on leach pad $ 10,255 $ 133
Gold and silver dore 1,281 -
Reagents and supplies 132 -
----------------------------
$ 11,668 $ 133
----------------------------
----------------------------
5. Mineral Properties, Plant and Equipment
Additions to mineral properties, plant and equipment for the
years ended December 31, 2007 and 2006 are summarized as
follows:
(000's) Plant Accumul-
Balance at Mineral Deferred Constr- and ated
December 31, Propert- Expend tion in Equip- Deprec-
2006 ies tures Progress ment Subtotal iation Net
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cerro San
Pedro,
Mexico $23,924 $20,840 $35,213 $1,128 $81,105 $383 $80,722
El Morro,
Chile - 113 - - 113 - 113
Rio
Figueroa,
Chile 562 2,115 - - 2,677 - 2,677
Other
Projects,
Chile 41 12 - - 53 - 53
Southwest
Alaska,
USA 225 886 - - 1,111 - 1,111
Other - - - 275 275 124 151
--------------------------------------------------------------
Balance at
December 31,
2006 24,752 23,966 35,213 1,403 85,334 507 84,827
--------------------------------------------------------------
2007
Additions
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cerro San
Pedro,
Mexico 573 1,692 13,990 563 16,818 1,969 14,849
Reclassifica-
tion of
Cerro
San Pedro
balances - (22,532) (49,203) 71,735 - - -
El Morro,
Chile - 144 - - 144 - 144
Rio
Figueroa,
Chile 436 1,037 - - 1,473 - 1,473
Other
Projects,
Chile 14 3 - - 17 - 17
Southwest
Alaska,
USA 120 243 - - 363 - 363
Liberty
Bell, USA 28 340 - - 368 - 368
Other - - - 60 60 67 (7)
--------------------------------------------------------------
2007
Additions 1,171 (19,073) (35,213) 72,358 19,243 2,036 17,207
--------------------------------------------------------------
Balance at
December 31,
2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cerro San
Pedro,
Mexico 24,497 - - 73,426 97,923 2,352 95,571
El Morro,
Chile - 257 - - 257 - 257
Rio
Figueroa,
Chile 998 3,152 - - 4,150 - 4,150
Other
Projects,
Chile 55 15 - - 70 - 70
Alaska
Peninsula,
USA 345 1,129 - - 1,474 - 1,474
Liberty
Bell, USA
28 340 - - 368 - 368
Other - - - 335 335 191 144
--------------------------------------------------------------
Balance at
December 31,
2007 $25,923 $4,893 - $73,761 $104,577 $2,543 $102,034
--------------------------------------------------------------
--------------------------------------------------------------
(000's) Plant Accumul-
Balance at Mineral Deferred Constr- and ated
December 31, Propert- Expend tion in Equip- Deprec-
2005 ies tures Progress ment Subtotal iation Net
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cerro San
Pedro,
Mexico $23,874 $20,060 $9,210 $735 $53,879 $246 $53,633
El Morro,
Chile - 20 - - 20 - 20
Rio Figueroa,
Chile 335 1,521 - - 1,856 - 1,856
Other
Projects,
Chile 26 2 - - 28 - 28
Alaska
Peninsula,
USA 310 172 - - 482 - 482
Other - - - 102 102 87 15
--------------------------------------------------------------
Balance at
December
31,2005 24,545 21,775 9,210 837 56,367 333 56,034
--------------------------------------------------------------
2006 Additions
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cerro San
Pedro,
Mexico 50 780 26,003 393 27,226 137 27,089
El Morro,
Chile - 93 - - 93 - 93
Rio Figueroa,
Chile 227 594 - - 821 - 821
Other
Projects,
Chile 15 10 - - 25 - 25
Southwest
Alaska, USA 51 958 - - 1,009 - 1,009
Other - - - 173 173 37 136
--------------------------------------------------------------
2006
Additions 343 2,435 26,003 566 29,347 174 29,173
--------------------------------------------------------------
2006 Impairment
write-down
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Southwest
Alaska, USA (136) (244) - - (380) - (380)
--------------------------------------------------------------
Balance at
December 31, 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cerro San
Pedro,
Mexico 23,924 20,840 35,213 1,128 81,105 383 80,722
El Morro,
Chile - 113 - - 113 - 113
Rio Figueroa,
Chile 562 2,115 - - 2,677 - 2,677
Other
Projects,
Chile 41 12 - - 53 - 53
Southwest
Alaska, USA 225 886 - - 1,111 - 1,111
Other - - - 275 275 124 151
--------------------------------------------------------------
Balance at
December 31,
2006 $24,752 $23,966 $35,213 $1,403 $85,334 $507 $84,827
--------------------------------------------------------------
--------------------------------------------------------------
The Company reclassified its capitalized exploration and mine
development costs relating to the Cerro San Pedro mine to plant and
equipment due to commencement of commercial production on May 1,
2007.
a) Mexico - Cerro San Pedro Mine
The Cerro San Pedro gold and silver mine is located in the State
of San Luis Potos, Mexico and is 100%-owned by the Company's wholly
owned subsidiary, Minera San Xavier, S.A. de C.V. ("MSX"). The mine
is an open-pit, heap-leach operation that produces gold and silver
dore from run-of-mine ore. Commercial production at the mine
commenced on May 1, 2007.
In December 2003, the Company entered into a contract with
Washington Group Latin America ("WGLA") to provide contract mining
and related construction services over the pre-production period
and estimated mine life of approximately ten years. The contract
was terminated in June 2007 (See Note 12).
The mine is subject to a 1.95% royalty on the gross value of
metals and minerals contained in production in all MSX mineral
concessions presently owned or optioned by the Company.
b) Chile - El Morro Project
The Company's activities in Chile are concentrated on precious
and base metal exploration targets. The El Morro copper-gold
project consists of the La Fortuna and El Morro areas. The
Company's interest in the El Morro area, which is approximately
four kilometers from the La Fortuna area, was acquired by staking
in 1998.
In September 1999, the Company entered into an exploration
agreement with Xstrata Plc (formerly, Falconbridge Limited) that
provided for Xstrata to earn a 70% interest in the El Morro
copper-gold project by making, among other requirements, minimum
exploration and property acquisition expenditures on the project of
$10 million and by making a $10 million payment to the Company by
September 14, 2005. On August 31, 2005, the Company received the
$10 million payment from Xstrata, which resulted in Xstrata earning
a 70% interest in the El Morro project and the Company recording
$8.3 million of income from property payments:
(000's)
Xstrata earn-in payment on El Morro project $ 10,000
Carrying value of El Morro project at August 31, 2005 1,651
----------
Income from property payment $ 8,349
----------
----------
------------------------------------------------------------------
The Company and Xstrata are required to make payments to the
former owners of certain mining concessions totaling $0.4 million,
in accordance with their respective ownership interests, within two
years of commencement of mining on these concessions.
Certain mining concessions at the La Fortuna area are subject to
a 2% NSR royalty.
c) Chile - Rio Figueroa Project
In September 2004, the Company entered into an option agreement
with Sociedad Contractual Minera Los Potrillos ("Potrillos") to
acquire a 100% interest in a copper-gold exploration project
referred to as the Rio Figueroa project. In order to exercise the
option, the Company must make annual option payments over a
five-year period beginning September 2004 totaling $3.5 million, of
which $1.0 million has been paid to date. The Company was also
required to spend a minimum of $1.5 million on qualifying
exploration expenditures, which has been met.
Certain mining concessions contained in the Rio Figueroa project
property package, which are held under a purchase option agreement
with Potrillos, are subject to a 1.5% NSR production royalty.
Certain other mining concessions, which are held under an amendment
to the option agreement with Potrillos, are subject to a 2% NSR
production royalty.
d) Chile - Other Projects
Other projects consist of copper-gold exploration concessions
that the Company acquired by staking and are contiguous to the El
Morro project. The Company has incurred property acquisition costs
and deferred expenditures on these concessions totaling $0.1
million at December 31, 2007.
e) USA - Alaska Peninsula
In September 2005, the Company acquired an option to earn up to
a 65% interest in the Alaska Peninsula gold and copper project by
making qualifying expenditures totaling $4.75 million over a
five-year period beginning September 2005. The Company may increase
its interest in individual properties to 70% by completing a
pre-feasibility study, and it may further increase its interest in
individual properties to 80% by completing a feasibility study. The
Company has incurred qualifying expenditures totaling approximately
$1.7 million as of December 31, 2007.
In February 2007, the Company was notified that a native village
corporation, which controls the surface rights over one of the
Alaska Peninsula property areas, had decided not to allow mineral
exploration activities on its land. As a result, an impairment
write-down attributable to this property area totaling $0.4 million
was recorded in 2006.
f) USA - Liberty Bell
On July 9, 2007 the Company entered into an exploration
agreement with the right to acquire the Liberty Bell gold project
in central Alaska. The agreement was entered into on July 9, 2007
and provides for the Company to make aggregate advance royalty
payments totaling $0.3 million beginning in March 2008, incur
exploration expenditures totaling $2.0 million, and deliver a
feasibility study by December 31, 2011. If a feasibility study is
not delivered by that time, the agreement may be extended up to
four more years by incurring additional advance royalty payments
totaling $0.9 million and exploration expenditures totaling $5.5
million from 2012 through 2015. Aggregate holding fees of up to
$2.5 million, which will be indexed for inflation, are required to
be paid from 2021 through 2026 until commencement of commercial
production. The owner retains a sliding scale net smelter return
royalty of 0.5% to 4.0% from future production, based on the market
price of gold. Exploration activities on the Liberty Bell project
include a property wide reconnaissance evaluation to confirm
previously identified prospective geology and potential for
economic gold mineralization, and to update the exploration model
for the area. The Company has incurred qualifying expenditures
totaling approximately $0.3 million as of December 31, 2007.
6. Asset Retirement Obligation
The Company's environmental permit for its Cerro San Pedro mine
requires that it reclaim certain land that it disturbs during mine
construction and mine operations. The Company has recorded an asset
retirement obligation for its Cerro San Pedro mine as follows:
(000's) December 31,
------------------------
2007 2006
Balance at beginning of year $ 611 $ 343
Additional reclamation provision 1,126 236
Accretion 61 32
Revision in estimated cash flows (119) -
------------------------
Balance at end of year 1,679 611
------------------------
Less current portion, included in accounts payable
and accrued liabilities (198) -
------------------------
Non-current portion $ 1,481 $ 611
------------------------
------------------------
The asset retirement obligation is calculated as the net present
value of the estimated future cash outflows, which total $2.7
million as of December 31, 2007. The present value of the estimated
future cash outflows assumes a long-term inflation rate of 2.5% to
3.0%, and has been discounted using credit-adjusted risk-free rates
of 6.5% to 9%. The asset retirement obligation at December 31, 2007
of $1.7 million has been capitalized as mineral properties, plant
and equipment, and is being amortized over the estimated economic
mine life using the units-of-production method based on estimated
recoverable mineral reserves. Accretion of the asset retirement
obligation is included in direct production costs in the statement
of operations.
The Company has agreed to make reclamation deposits totaling
approximately $4.3 million over the estimated mine life; however,
negotiations with the relevant governmental agency to determine the
periodic funding requirements have not been finalized.
7. Other Liabilities
Other liabilities include amounts owed under long-term
non-interest bearing payment obligations to property owners at the
Cerro San Pedro mine over a period of approximately ten years. The
Company has recorded the present value of the liability at fair
value, using a 7% discount rate. Accretion expense is included in
direct production costs in the statement of operations. The fair
value of the liability at December 31, 2007 was $0.7 million.
8. Share Capital
a) Authorized
Unlimited number of common and preferred shares without par
value.
b) Common Shares Issued and Outstanding
Year Ended
December
31, 2007 2006 2005
----------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
# (000's) # (000's) # (000's)
Outstanding
beginning
of year 92,001,263 $ 133,572 83,301,676 $ 108,158 82,687,043 $107,662
Shares
issued in
private
placement
(Note 8(d)) - - 7,670,500 23,621 - -
Exercise
of
warrants
for cash
(Note 8(d)) 11,900 35 92,500 252 - -
Fair value
of
warrants
exercised
(Note 8(d)) - 4 - 28 - -
Exercise
of stock
options
for cash
(Note 8(c)) 755,934 1,397 926,833 1,058 598,833 430
Fair value
of stock
options
exercised
(Note 8(c)) - 803 - 428 - 46
Shares
issued for
retirement
plan
(Note 10) 4,568 21 9,754 27 15,800 20
----------------------------------------------------------------
Outstanding
end of
year 92,773,665 $ 135,832 92,001,263 $ 133,572 83,301,676 $108,158
----------------------------------------------------------------
----------------------------------------------------------------
c) Options
The Company's stock-based compensation plan provides that the
exercise price per share is equal to the closing market price as
quoted on the Toronto Stock Exchange on the day preceding the date
of grant. Each stock option allows for the purchase of one share
and expires not later than five years from the date of grant. Stock
options generally vest over a period of up to two years from the
date of grant. In 2006, the shareholders approved an amendment to
the stock option plan which provides for a maximum of 7.5 million
common shares that may be issued after April 19, 2006. As of
December 31, 2007, a total of 1,361,767 common shares had been
issued subsequent to April 19, 2006.
The fair value of stock options used to calculate compensation
expense has been estimated using the Black-Scholes Option Pricing
Model with the following assumptions:
2007 2006 2005
Risk-free interest rate
(Canada) 3.7% to 4.7% 3.8% to 4.3% 3.2% to 3.7%
Expected dividend yield 0.0% 0.0% 0.0%
Expected price volatility
of the Company's common
shares 55% to 67% 60% to 71% 65% to 66%
Expected life of option 3.4 to 3.7 years 3.5 to 3.9 years 5 years
Option pricing models require the input of highly subjective
assumptions including the expected price volatility of the
Company's common shares. Changes in the subjective input
assumptions can materially affect the fair value estimate.
The following is a summary of options granted under the
Company's stock-based compensation plan:
Weighted Average
Exercise Price
(Canadian Dollars)
Year Ended December 31, Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2007 2006 2005
Outstanding,
beginning of
year 3,066,500 2,555,000 2,535,500 $ 2.41 $ 1.49 $ 1.36
Granted 846,285 1,470,000 880,000 4.98 3.32 1.62
Exercised (755,934) (926,833) (598,833) 2.05 1.30 0.86
Forfeited (90,000) (31,667) (186,667) 3.90 2.97 1.79
Expired - - (75,000) - - 2.87
------------------------------------------------------------
Outstanding,
end of year 3,066,851 3,066,500 2,555,000 $ 3.17 $ 2.41 $ 1.49
------------------------------------------------------------
------------------------------------------------------------
Exercisable,
end of year 2,070,995 1,867,582 1,858,333 1 $ 2.66 $ 2.00 $ 1.39
------------------------------------------------------------
------------------------------------------------------------
The following table summarizes selected information relating to stock
options outstanding at December 31, 2007:
Range of Weighted Average Weighted Average
Exercise Prices Number Remaining Exercise Price
(Canadian Dollars) Outstanding Contractual Life (Canadian Dollars)
-----------------------------------------------
$1.20 to $2.54 1,064,500 1.5 years $1.64
$3.04 841,733 3.4 years $3.04
$3.35 to $4.47 373,985 3.8 years $3.85
$4.95 to $5.10 786,633 4.5 years $5.04
-----------------------------------------------
$1.20 to $5.10 3,066,851 3.1 years $3.17
-----------------------------------------------
-----------------------------------------------
The following table summarizes the changes in fair value assigned
to stock options for the three years ended December 31, 2007:
(000's) Year Ended December 31,
-------------------------------------------
2007 2006 2005
Balance at beginning of year $ 2,474 $ 1,431 $ 1,043
Compensation cost recognized 1,777 1,472 573
Exercised (803) (428) (46)
Forfeited (43) (1) (139)
-------------------------------------------
Balance at end of year $ 3,405 $ 2,474 $ 1,431
-------------------------------------------
-------------------------------------------
d) Warrants
Year Ended December 31,
----------------------------------------------------------------
2007 2006 2005
----------------------------------------------------------------
Warrants Amount Warrants Amount Warrants Amount
# (000's) # (000's) # (000's)
Outstanding,
beginning
of year 23,092,750 $10,364 19,350,000 $ 5,889 24,399,000 $ 7,374
Warrants
issued
in
private
placement - - 3,835,250 4,503 - -
Exercise
of
warrants (11,900) (4) (92,500) (28) - -
Expira-
tion of
warrants - - - - (5,049,000) (1,485)
----------------------------------------------------------------
Outstanding,
end of
year 23,080,850 $ 10,360 23,092,750 $ 10,364 19,350,000 $ 5,889
----------------------------------------------------------------
----------------------------------------------------------------
On December 20, 2006, the Company issued 7.7 million units in a
private placement at a price of Cdn$4.50 per unit for gross
proceeds of Cdn$34.5 million (US$28.1 million, net of issue costs).
Each unit consisted of one common share and one-half of one common
share purchase warrant. Each whole common share purchase warrant
entitles the holder to purchase one common share at an exercise
price of Cdn$5.50 for a period of three years to December 20, 2009.
As of December 31, 2007, a total of 3,835,250 of these warrants
were outstanding.
On December 11, 2003, the Company issued 38.7 million units in a
public offering at a price of Cdn$2.20 per unit for gross proceeds
of Cdn$85.1 million (US$61.3 million, net of issue costs). Each
unit consisted of one common share and one-half of one common share
purchase warrant. Each whole common share purchase warrant entitles
the holder to purchase one common share at an exercise price of
Cdn$3.10 for a period of five years to December 11, 2008. Warrants
to purchase 11,900 and 92,500 shares were exercised in 2007 and
2006, respectively. As of December 31, 2007, a total of 19,245,600
of these warrants were outstanding.
e) Restricted Stock Units
In November 2005, the directors adopted a restricted stock unit
("RSU") plan with an effective date of March 1, 2005. The plan
provides for the Board of Directors (the "Directors") to grant RSUs
to employees subject to vesting and other conditions as determined
by the Directors; however, the vesting period may not exceed three
years from the award date, but may be accelerated at the discretion
of the Directors. The settlement of RSUs is required to be made in
cash and is calculated at the average closing price of the
Company's common shares on the Toronto Stock Exchange for the five
trading days preceding the date of settlement. RSU expense is
recorded over the three-year vesting period. The following table
summarizes RSUs outstanding as of December 31, 2007 and 2006:
2007 2006
Carrying Carrying
Date of Date of Number of Value Value
Grant Settlement RSU's (000's) (000's)
-------------------------------------------------------------------------
March 10, 2005 March 10, 2008 120,000 $ 604 $ 288
March 9, 2006 March 9, 2009 250,000 813 269
May 24, 2007 May 24, 2010 183,700 199 -
December 13, December 13, 30,000 3 -
2007 2010 ----------------------------
Balance at December 31, 1,619 557
Less current maturities, included in
accounts payable and accrued liabilities (604) -
----------------------------
Non-current portion $ 1,015 $ 557
----------------------------
----------------------------
9. Income Taxes
Income tax expense included in the consolidated statement of
operations consists of the following:
(000's) Year Ended December 31,
--------------------------------------
2007 2006 2005
Current $ 108 $ 65 $ 124
Future 5,276 (7) 24
--------------------------------------
Income tax expense $ 5,384 $ 58 $ 148
--------------------------------------
--------------------------------------
The difference between the amount of reported consolidated
income tax provision and the amount computed by multiplying income
(loss) before income taxes by the Company's combined applicable
Canadian federal and provincial tax rate of 36.12% for 2007, 2006
and 2005 is reconciled as follows:
(000's) Year Ended December 31,
--------------------------------------
2007 2006 2005
Income tax expense (benefit)
computed using the applicable
tax rate $ (1,168) $ (1,110) $ 2,928
Increase (decrease) in valuation
allowance 6,823 (570) (5,023)
Losses incurred in foreign operations
without tax benefit - 2,126 569
Share issuance costs - (625) -
Foreign earnings taxed at other than
statutory rate (1,277) (425) (139)
Foreign exchange gains not subject
to tax 760 - -
Non-deductible expenses 332 407 1,154
Other, net (86) 255 659
--------------------------------------
Income tax expense $ 5,384 $ 58 $ 148
--------------------------------------
--------------------------------------
The tax effects of temporary differences that give rise to
significant portions of the future income tax assets and
liabilities at December 31, 2007 and 2006 are as follows:
(000's) 2007 2006
Current income tax assets:
Canada:
Deferred share issuance costs $ 125 $ -
Mexico:
Tax loss carryforwards 6,466 -
-----------------------
Total current income tax assets 6,591 -
Less valuation allowance (2,299) -
-----------------------
Current income tax assets, net of
valuation allowance 4,292 -
Current income tax liabilities:
Mexico:
Other (50) -
Other countries:
Other (48) -
-----------------------
Total current income tax liabilities (98) -
-----------------------
Net current income tax assets $ 4,194 $ -
-----------------------
-----------------------
Future income tax assets:
Canada:
Tax loss carryforwards $ 2,979 $ 1,241
Deferred share issuance costs 250 866
Mexico:
Tax loss carryforwards 6,163 13,334
Other 675 183
Other countries:
Tax loss carryforwards 2,205 264
Stock-based compensation 826 705
Other - 137
-----------------------
Total future income tax assets 13,098 16,730
Less valuation allowance (8,315) (3,531)
-----------------------
Future income tax assets, net of valuation allowance 4,783 13,199
Future income tax liabilities:
Mexico:
Mineral properties, plant and equipment 14,253 13,199
-----------------------
Net future income tax liabilities $ (9,470) $ -
-----------------------
-----------------------
At December 31, 2007, the Company and its subsidiaries have
available tax loss carry forwards in various tax jurisdictions as
follows:
Tax Loss Carryforwards Expiry Dates
------------------------------------------------------------------
Canada $8.1 million 2024 through 2027
Chile $2.6 million Unlimited
Mexico $45.1 million 2008 through 2017
United States $3.5 million 2021 through 2027
On October 1, 2007, Mexico enacted a new tax statute which
establishes a parallel tax regime to its regular tax regime called
IETU or "FLAT TAX" in which the taxpayer pays the greater of the
FLAT TAX or regular tax liability annually. The new statute is
effective for tax years beginning on January 1, 2008. Generally the
FLAT TAX is based on gross receipts less disbursements including
capital assets of the taxpayer at a tax rate of 17.5 percent. A
transition rule reduces the FLAT TAX rate to 16.5 percent and 17.0
percent for tax years 2008 and 2009, respectively. As a result of
the FLAT TAX, the Company has determined that the future benefit of
its Mexican net operating loss carryovers as of December 31, 2007,
should be subject to a valuation allowance of $5.2 million.
Management believes that sufficient uncertainty exists regarding
the realization of certain future tax assets and that a valuation
allowance is required. The change in valuation allowance of $7.1
million in the above schedule includes a currency translation
adjustment of $0.3 million to future tax assets in existence as of
the beginning of the year. The valuation allowance reflects
management's assessment regarding the future realization of
Canadian and foreign future tax assets and estimates of future
earnings in these jurisdictions as of December 31, 2007.
10. Pension Plan
The Company has a qualified defined contribution savings plan
that covers all United States based employees. Subject to certain
employee eligibility requirements and statutory limitations on
employee elective deferrals, the Company matches 50% of the
employee's elective deferral up to a maximum matching contribution
of 5% of the employee's compensation, as defined under the plan.
The employee has the option of receiving the matching contribution
in common shares of the Company or in cash. Employees vest 100% in
the employer matching contribution after three years of service.
The Company's matching contributions were $46,724, $27,672 and
$22,053 for the years ended December 31, 2007, 2006 and 2005,
respectively.
The Company has an employment services subsidiary in Mexico
through which all its Mexico based employees are paid. Pension
benefits are provided under a defined benefit plan, These benefits
consist of a one-time payment equivalent to 12 days wages for each
year of service (at the employee's most recent salary, but not to
exceed twice the legal minimum wage), payable to all employees with
15 or more years of service, as well as to certain employees
terminated involuntarily prior to vesting of their seniority
premium benefit.
The Company is also required to provide mandated severance
benefits to its employees terminated under certain circumstances.
These payments consist of a one-time payment for three months wages
plus 20 days wages for each year of service payable upon
involuntary termination without just cause. The liability
associated with the seniority and termination benefits is
calculated as the present value of expected future payments. In
determining the expected future payments, assumptions regarding
employee turnover rates, inflation, wage increases and expected
salary levels are required and are subject to annual review and
change. The Company expensed $0.1 million in 2007 for service costs
relating to this obligation. As at December 31, 2007, the
obligation is $0.2 million.
11. Related Party Transactions
The Company entered into a consulting agreement with a director
of the Company to provide technical advisory services with respect
to the Cerro San Pedro mine at a rate of $1,000 per day plus
out-of-pocket expenses. Effective April 1, 2007, the director's
consulting rate was increased to $1,250 per day. The Company has
incurred technical advisory fees pursuant to this agreement
totaling $0.2 million during the year ended December 31, 2007.
The Company entered into a consulting agreement with a company
controlled by an individual, who is a director of the Company, to
provide management services with respect to the Cerro San Pedro
mine. The agreement provided for consulting fees of $6,250 per
month. Effective April 1, 2007, the director's consulting rate was
increased to $7,188 per month. The Company has incurred consulting
fees pursuant to this agreement totaling $0.1 million during the
year ended December 31, 2007.
12. Contingencies
In June, 2007, the Company terminated its mining contract with
WGLA at its Cerro San Pedro mine. WGLA maintains that it was not
paid for all amounts owed under the agreement, including early
contract termination fees, and has filed an arbitration claim
against the Company for $16.6 million plus value added taxes. The
Company has filed a counterclaim against WGLA for $2.5 million. The
arbitration proceedings are scheduled to take place in Denver,
Colorado in June and July of 2008; however, the outcome of the
arbitration proceedings cannot be determined at the present
time.
The Company has been notified of various lawsuits and legal
actions that have been filed by a group of project opponents
("Project Opponents") against governmental agencies. The Project
Opponents seek to nullify various permits and licenses that have
been granted to the Company with respect to its Cerro San Pedro
mine. Various lawsuits and legal actions have been filed by members
of this group over the past four years. Those lawsuits that have
had final rulings have all been resolved in favor of the various
governmental agencies. In the event of an adverse ruling from any
of the unresolved lawsuits, the Company's operations may be
negatively impacted.
13. Commitments
The Company leases certain land rights, facilities and equipment
under long-term operating lease agreements. As of December 31,
2007, lease commitments for the next five years and thereafter are
as follows:
(000's)
-------------------------------
2008 8,611
2009 8,643
2010 8,651
2011 183
2012 134
Thereafter 896
Lease commitments include a three-year mine equipment rental
contract at its Cerro San Pedro mine expiring on December 31, 2010.
The contract provides for minimum monthly payments of $0.7 million
with annual increases for inflation. If the contract is terminated
prior to December 31, 2010, the Company will be required to pay
early termination fees from $0.5 million to $2.0 million depending
on the date of termination.
The Company's Land Use License with the State of San Luis Potos
requires that it structurally stabilize a church in the village of
Cerro de San Pedro. The Company has deposited $0.2 million in a
bank trust account controlled by the Company which will be applied
to the cost of the church stabilization project. The Company is
awaiting approval for a stabilization plan from the regulatory
authorities.
14. Supplementary Cash Flow Information
Cash flows from changes in non-cash working capital and other
assets are summarized as follows:
(000's) 2007 2006 2005
Value added tax and other
receivables $ (991) $ (1,986) $ (337)
Inventory (10,907) (133) -
Deposits and prepaid expenses (1,213) (35) 7
Other assets (78) 13 (6)
Accounts payable and accrued
liabilities 3,675 879 85
--------------------------------------
$ (9,514) $ (1,262) $ (251)
--------------------------------------
--------------------------------------
15. Segment Information
The Company operates in one business segment being the
exploration, development and extraction of precious and base metals
in geographic segments principally in Mexico, Chile, and the United
States. The Mexico segment consists of the Cerro San Pedro mine,
which commenced commercial production on May 1, 2007. The Chile
segment includes exploration activities on the El Morro, Rio
Figueroa and other projects. The United States segment includes
exploration activities on the Alaska Peninsula and Liberty Bell
projects, and operations from the Company's corporate office.
Capital expenditures by industry segment are presented in Note 5. A
summary of capital assets and revenues by industry segment are as
follows:
(000's) 2007
--------------------------------------------------
Property, plant and United
equipment Mexico Chile States Total
Producing $ 95,571 $ - $ - $ 95,571
Non-producing - 4,477 1,986 6,463
--------------------------------------------------
$ 95,571 $ 4,477 $ 1,986 $ 102,034
--------------------------------------------------
--------------------------------------------------
Gold revenues $ 17,842 $ - $ - $ 17,842
Silver revenues 5,021 - - 5,021
--------------------------------------------------
Segment revenues $ 22,863 $ - $ - $ 22,863
--------------------------------------------------
--------------------------------------------------
Segment net loss $ (5,456) $ (408) $ (2,757) $ (8,621)
(000's) 2006
--------------------------------------------------
Property, plant and United
equipment Mexico Chile States Total
Producing $ - $ - $ - $ -
Non-producing 80,722 2,843 1,262 84,827
--------------------------------------------------
$ 80,722 $ 2,843 $ 1,262 $ 84,827
--------------------------------------------------
--------------------------------------------------
Segment revenues $ - $ - $ - $ -
Segment net loss $ (56) $ (307) $ (2,767) $ (3,130)
(000's) 2005
--------------------------------------------------
United
Mexico Chile States Total
Segment revenues $ - $ - $ - $ -
Segment net income (loss) $ (75) $ 8,316 $ (282) $ 7,959
16. Reconciliation to United States Generally Accepted
Accounting Principles
The consolidated financial statements have been prepared in
accordance with Canadian GAAP which differs in certain respects
from those principles that the Company would have followed had its
consolidated financial statements been prepared in accordance with
United States GAAP. Significant measurement differences that
materially affect these consolidated financial statements are as
follows:
- As described in Note 2, Canadian GAAP allows for the deferral
of exploration expenditures. Under United States GAAP, the Company
expenses, as incurred, costs relating to the exploration and
development of mineral properties. When proven and probable
reserves are determined for a property and a feasibility study has
been prepared, all subsequent exploration and development costs on
the property are capitalized. The Company's mineral reserves have
been prepared in accordance with Canadian Securities Administrators
National Instrument 43-101, "Standards of Disclosure for Mineral
Projects". The Company has determined that these reserves also meet
the definition for proven and probable reserves under the United
States Securities and Exchange Commission Industry Guide 7. The
only property for which the Company has proven and probable
reserves is its Cerro San Pedro mine. Mineral properties, plant and
equipment under United States GAAP at December 31, 2007 and 2006
include property acquisition, mine construction and other project
costs relating to the Cerro San Pedro property. Capitalized
expenditures for this property do not include any exploration or
development costs incurred prior to determination of proven and
probable reserves, and the feasibility study. The Company reviews
and evaluates the estimated cash flows from this property
periodically to assess whether carrying value has been impaired in
accordance with Statement of Financial Accounting Standard ("SFAS")
No. 144, "Accounting for the Impairment of Long-Lived Assets".
Although the Company has incurred delays with the construction
schedule and additional costs due to various permitting and project
access issues, the impact of the additional costs has been more
than offset by the anticipated additional revenues arising from
gold and silver price appreciation. At December 31, 2007, the
Company has concluded that the carrying value of this property is
not impaired.
- The Company's mine processing facilities were tested and
determined to be operational and ready for use on April 30, 2007.
Operations began on May 1, 2007 and all revenues and operating
costs incurred subsequent to that date have been recorded in the
statement of operations for both United States and Canadian
GAAP.
- On January 1, 2006, the Company adopted FAS No. 123R,
"Share-Based Payment" for all employee stock-based awards granted,
modified or settled after the effective date using the fair value
measurement method. Compensation cost is recognized over the period
during which an employee is required to provide service in order to
earn the award. Under Canadian GAAP, the Company accounts for
forfeitures only as they occur. FAS No. 123R was adopted using the
modified prospective method without restatement of prior periods.
As the Company had previously applied the fair value method of
accounting for stock-based compensation under Canadian GAAP since
January 1, 2004, the adoption of FAS 123R did not result in any
significant differences between Canadian and United States GAAP
with respect to stock-based compensation expense in 2006. Prior to
January 1, 2006, the Company accounted for stock-based compensation
arrangements under United States GAAP using the intrinsic value
method prescribed under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related
interpretations. This standard did not require the Company to
recognize compensation expense since stock option awards to
employees were granted at exercise prices equal to, or greater
than, the quoted market price on the date of grant. The Company is
required to estimate forfeitures at the date of grant under United
States GAAP, whereas Canadian GAAP requires that forfeitures are
accounted for when they occur. There were no material United States
and Canadian GAAP differences attributable to forfeitures.
- The Company has warrants to purchase common shares that are
denominated in Canadian dollars, which results in the Company
having warrants outstanding that are denominated outside its U.S.
dollar functional currency. The U.S. Securities and Exchange
Commission and Financial Accounting Standards Board
("FASB") have issued recent interpretations for U.S. GAAP that
suggest warrants with exercise prices denominated in a currency
other than the entity's functional currency cannot be classified as
equity. As a result, these instruments would be treated as
derivatives and recorded as liabilities which are carried at fair
value with changes in the fair value recorded in the statement of
operations. In August 2007, the Emerging Issues Task Force ("EITF")
issued EITF no. 07-5, Issue Summary No. 1 "Determining Whether an
Instrument (or an Embedded Feature) is Indexed to an Entity's Own
Stock." The Issue Summary discusses the merits of various
accounting treatments related to this issue but does not provide
any definitive guidance. The EITF considers Issue 07-5 an open
issue subject to discussion at future meetings.
Had the Company followed United States GAAP, certain items in
the statements of operations and deficit, balance sheets and
statements of cash flows would have been reported as follows:
Statements of Operations and Deficit Year Ended December 31,
-------------------------------------
(000's) 2007 2006 2005
Net income (loss) under
Canadian GAAP $ (8,621) $ (3,130) $ 7,959
Exploration expenditures expensed (2,362) (1,952) (1,900)
Depreciation and amortization 111 - -
Write-down of mineral properties,
plant and equipment - 380 2
Accretion of asset retirement
obligation (18) (32) (19)
Income from property payments - - 1,051
Stock-based compensation expense - - 341
-------------------------------------
Net income (loss) before income
taxes under U.S. GAAP (10,890) (4,734) 7,434
Income tax expense 2,347 - -
-------------------------------------
Net income (loss) under U.S. GAAP $ (8,543) $ (4,734) $ 7,434
-------------------------------------
-------------------------------------
Basic net income (loss) per share
under U.S. GAAP $ (0.09) $ (0.06) $ 0.09
-------------------------------------
-------------------------------------
Diluted net income (loss) per share
under U.S. GAAP $ (0.09) $ (0.06) $ 0.09
-------------------------------------
-------------------------------------
Balance Sheets December 31,
-------------------------------------------------
(000's) 2007 2006
-------------------------------------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
Inventory $ 11,668 $ 11,614 $ 133 $ 133
-------------------------------------------------
-------------------------------------------------
Mineral properties, plant
and Equipment $ 102,034 $ 87,659 $ 84,827 $ 72,666
-------------------------------------------------
-------------------------------------------------
Future tax liabilities $ 9,470 $ 7,123 $ - $ -
-------------------------------------------------
-------------------------------------------------
Shareholders' equity $ 120,538 $ 108,456 $ 125,996 $ 113,834
-------------------------------------------------
-------------------------------------------------
Statements of Cash Flows Year Ended December 31,
-------------------------------------
(000's) 2007 2006 2005
Cash flows provided from (used for)
operating activities, Canadian GAAP $ (8,806) $ (2,366) $ 8,166
Mineral properties, plant and
equipment (2,362) (1,952) (849)
-------------------------------------
Cash flows provided from (used for)
operating activities, U.S. GAAP $ (11,168) $ (4,318) $ 7,317
-------------------------------------
-------------------------------------
Cash flows used for investing
activities, Canadian GAAP $ (20,271) $ (24,975) $ (7,543)
Mineral properties, plant and
equipment 2,362 1,952 849
-------------------------------------
Cash flows used for investing
activities, U.S. GAAP $ (17,909) $ (23,023) $ (6,694)
-------------------------------------
-------------------------------------
Recent U.S. Accounting Pronouncements
In February 2007, the FASB issued Statement No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities" ("SFAS
159"). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value, with
the objective of improving financial reporting by mitigating
volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge
accounting provisions. The provisions of SFAS 159 are effective for
the Company's fiscal year ending December 31, 2008. The Company is
currently evaluating the impact that the adoption of this statement
will have on the Company's consolidated financial position, results
of operations and disclosures.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"), effective for fiscal periods beginning
after November 15, 2007. SFAS 157 defined fair value, established a
framework for measuring fair value in U.S. GAAP, and expanded
disclosures about fair value measurements. In December 2007, the
FASB issued SFAS No. 157-b, which provided for a one-year deferral
of the implementation of SFAS 157 for non-financial assets and
liabilities. However, SFAS 157 is still required to be adopted
effective January 1, 2008 for financial assets and liabilities that
are carried at fair value. The Company is currently evaluating the
impact of the adoption of this standard on its consolidated
financial position, results of operations and disclosures.
In June 2006, the FASB issued Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109" (FIN 48). FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to
be taken in a tax return. FIN 48 requires that the Company
recognize in its financial statements the impact of a tax position,
if that tax position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also
provides guidance on derecognition, classification of interest and
penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 were effective beginning January 1, 2007. The
adoption of FIN 48 did not have a material effect on the Company's
financial position, results of operations or cash flows.
17. Subsequent Event
On January 23, 2008, the Company entered into a 50-year Mining
Lease Agreement (the "Agreement") with the owners of certain
Alaskan mining concessions located within the Company's Liberty
Bell project area of interest. The Agreement provides for an
initial payment of $30,000, which was paid in January 2008, a
minimum work commitment of $25,000 per year through December 31,
2012, and minimum royalty payments as follows:
Payment
Amount Due Date
---------------------------------------
$25,000 September 1, 2008
$50,000 January 1, 2009
$25,000 September 1, 2009
$50,000 September 1, 2010
$150,000 September 1, 2011
$200,000 September 1, 2012
$200,000 September 1, 2013
$250,000 September 1, 2014
$250,000 September 1, 2015
$300,000 September 1, 2016
$100,000 September 1, 2017
and each year
thereafter
through the end
of the lease term
In the event that the Company delivers a feasibility study on
the property prior to September 1, 2017, the minimum annual royalty
payment for all subsequent periods through the end of the lease
term will be $100,000 per year.
The owners retained a sliding scale net smelter return ("NSR")
royalty from all minerals produced and sold from the claims that
ranges from 0.5% at gold prices of $300 or less, to 5.0% at gold
prices of $1,000 or more. Minimum royalty payments are applied to
reduce future amounts owed under the NSR royalty. The Company has
an option to convert the sliding scale NSR royalty to a fixed 4%
NSR royalty for a payment of $1.0 million within two years of
commencement of commercial production.
Metallica Resources is a Canadian gold and silver producer. It
currently has 93.1 million shares outstanding and no debt. For
further details on Metallica Resources, please visit the company's
website at www.metal-res.com.
INFORMATION IN THIS NEWS RELEASE THAT IS NOT CURRENT OR
HISTORICAL FACTUAL INFORMATION MAY CONSTITUTE FORWARD-LOOKING
INFORMATION OR STATEMENTS WITHIN THE MEANING OF THE UNITED STATES
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND APPLICABLE
CANADIAN SECURITIES LEGISLATION. IMPLICIT IN THIS INFORMATION,
PARTICULARLY IN RESPECT OF STATEMENTS AS TO FUTURE OPERATING
RESULTS AND ECONOMIC PERFORMANCE OF THE COMPANY, AND RESOURCES AND
RESERVES AT THE COMPANY'S MINERAL PROJECTS, ARE ASSUMPTIONS
REGARDING PROJECTED REVENUE AND EXPENSE, GOLD, SILVER AND COPPER
PRICES, AND MINING COSTS. THESE ASSUMPTIONS, ALTHOUGH CONSIDERED
REASONABLE BY THE COMPANY AT THE TIME OF PREPARATION, MAY PROVE TO
BE INCORRECT. READERS ARE CAUTIONED THAT ACTUAL RESULTS ARE SUBJECT
TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING RISKS RELATING TO
GENERAL ECONOMIC CONDITIONS AND MINING OPERATIONS, AND COULD DIFFER
MATERIALLY FROM WHAT IS CURRENTLY EXPECTED. THE COMPANY DISCLAIMS
ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS
OR OTHERWISE.
Contacts: Metallica Resources Inc. Rhonda Bennetto Director
Investor Relations (303) 640-3292 Website: www.metal-res.com
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