UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C.20549
FORM
10 - Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly report ended March 31, 2009
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from – to –
Commission
File Number: 000 - 51076
WESTERN
GOLDFIELDS INC.
(Name of
Registrant in its Charter)
|
Ontario, Canada
|
98 - 0544546
|
|
(State or Other Jurisdiction of
|
(I.R.S. Employer Identification No.)
|
|
Incorporation or Organization)
|
|
|
|
|
|
Royal Bank Plaza, South Tower, 200 Bay Street, Suite 3120, P.O. Box 167
|
|
|
Toronto, Canada
|
M5J 2J4
|
|
(Address of Principal Executive Office)
|
(
Postal Code)
|
Registrant’s
telephone number, including area code: (416) 324 - 6000
Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past ninety 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company (check
one): Large Accelerated Filer
o
Accelerated Filer
x
Non-Accelerated
Filer
o
Smaller reporting
company
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
As of
April 30, 2009 there were 136,331,286 shares of common stock of the issuer
issued and outstanding.
INDEX
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
Financial
Statements (unaudited)
|
3
|
|
|
Cautionary
Note Regarding Forward Looking Statements
|
3
|
|
|
Consolidated
Financial Statements (unaudited):
|
|
|
|
Consolidated
Balance Sheets
|
4
|
|
|
Consolidated
Statements of Operations
|
5
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
6
|
|
|
Consolidated
Statements of Cash Flows
|
7
|
|
|
Notes
to the Consolidated Financial Statements
|
8
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
34
|
|
Item
4.
|
Controls
and Procedures
|
35
|
|
PART II.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
36
|
|
Item
1A.
|
Risk
Factors
|
36
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
36
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
36
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
36
|
|
Item
5.
|
Other
Information
|
36
|
|
Item
6.
|
Exhibits
|
36
|
PART
1 – FINANCIAL INFORMATION
CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS
We have
included and from time to time may make in our public filings (including this
Form 10-Q), press releases or other public statements, forward-looking
statements, including, without limitation, in our “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Part I, Item 2. In
some cases these statements are identifiable through the use of words such as
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,”
“target,” “can,” “could,” “may,” “should,” “will,” “would” and similar
expressions. You are cautioned not to place undue reliance on these
forward-looking statements. In addition, our management may make
forward-looking statements to analysts, investors, representatives of the media
and others. These forward-looking statements are not historical facts
and represent only our beliefs regarding future events and, by their nature, are
inherently uncertain and beyond our control.
These
forward-looking statements are based on the best estimates of management at the
time such statements are made. Expected production, results and cost
of sales (including without limitation, statements made with respect to future
production and costs contemplated in our new mine plan) are based in part on
current and historical production and cost data factoring certain assumptions
with respect to future metal prices, costs, availability of supplies and labor
and other parameters.
The
nature of our business makes predicting the future trends of our revenues,
costs, production, expenses and net income difficult. The risks and
uncertainties involved in our businesses could affect the matters referred to in
such statements and it is possible that our actual results may differ materially
from the anticipated results indicated in these forward
looking-statements. Important factors that could cause actual results
to differ from those in the forward-looking statements include, without
limitation:
|
|
·
|
the
effect of political, economic and market conditions and geopolitical
events;
|
|
|
·
|
the
actions and initiatives of current and potential
competitors;
|
|
|
·
|
our
reputation;
|
|
|
·
|
investor
sentiment; and
|
|
|
·
|
other
risks and uncertainties detailed elsewhere throughout this
report.
|
Accordingly,
you are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date on which they are made. We undertake
no obligation to update publicly or revise any forward-looking statements to
reflect the impact of circumstances or events that arise after the dates they
are made, whether as a result of new information, future events or otherwise
except as required by applicable law. You should, however, consult
further disclosures we may make in future filings of our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, any
amendments thereto, available on the Securities and Exchange Commission website
at
www.sec.gov
, and in the corresponding documents filed in Canada.
PART
I – FINANCIAL INFORMATION
Item 1.
Financial
Statements
|
WESTERN
GOLDFIELDS INC.
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(In
thousands U.S. dollars)
|
|
(Unaudited)
|
|
|
|
March
31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
19,057
|
|
|
$
|
11,275
|
|
|
Restricted
cash (Note 4)
|
|
|
7,500
|
|
|
|
7,500
|
|
|
Receivables
|
|
|
634
|
|
|
|
2,550
|
|
|
Inventories
(Note 5)
|
|
|
34,964
|
|
|
|
35,098
|
|
|
Prepaid
expenses
|
|
|
1,517
|
|
|
|
1,747
|
|
|
Current
portion of deferred income tax asset (Note 10)
|
|
|
3,716
|
|
|
|
2,045
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
67,388
|
|
|
|
60,215
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant
and equipment, net of accumulated amortization (Note 6)
|
|
|
109,729
|
|
|
|
111,334
|
|
|
Investments
- reclamation and remediation (Note 7)
|
|
|
8,960
|
|
|
|
8,934
|
|
|
Long-term
deposits
|
|
|
371
|
|
|
|
367
|
|
|
Long-term
prepaid expenses (Note 8)
|
|
|
1,341
|
|
|
|
1,384
|
|
|
Deferred
debt issuance costs, net of accumulated amortization (Note
9)
|
|
|
2,593
|
|
|
|
2,766
|
|
|
Deferred
income tax asset (Note 10)
|
|
|
24,696
|
|
|
|
22,368
|
|
|
TOTAL
OTHER ASSETS
|
|
|
147,690
|
|
|
|
147,153
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
215,078
|
|
|
$
|
207,368
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
7,058
|
|
|
$
|
7,484
|
|
|
Current
portion of mark-to-market loss on gold hedging contracts (Notes
11)
|
|
|
8,071
|
|
|
|
5,606
|
|
|
Current
portion of mark-to-market loss on fuel hedging contracts (Note
12)
|
|
|
809
|
|
|
|
540
|
|
|
Current
portion of loan payable (Note 13)
|
|
|
11,656
|
|
|
|
11,656
|
|
|
Current
portion of reclamation and remediation liabilities (Note
14)
|
|
|
339
|
|
|
|
339
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
27,933
|
|
|
|
25,625
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Mark-to-market
loss on gold hedging contracts (Note 11)
|
|
|
49,406
|
|
|
|
39,580
|
|
|
Mark-to-market
loss on fuel hedging contracts (Note 12)
|
|
|
425
|
|
|
|
391
|
|
|
Loan
payable (Note 13)
|
|
|
56,984
|
|
|
|
56,984
|
|
|
Reclamation
and remediation liabilities (Note 14)
|
|
|
4,824
|
|
|
|
4,737
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
139,572
|
|
|
|
127,317
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 19)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Common
stock, of no par value, unlimited shares authorized; 135,581,286 and
134,801,286 shares issued and outstanding, respectively (Note
15)
|
|
|
134,043
|
|
|
|
133,383
|
|
|
Stock
options and warrants (Note 16)
|
|
|
8,378
|
|
|
|
8,291
|
|
|
Accumulated
deficit
|
|
|
(66,915
|
)
|
|
|
(61,623
|
)
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
75,506
|
|
|
|
80,051
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
215,078
|
|
|
$
|
207,368
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WESTERN
GOLDFIELDS INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands U.S. dollars)
(Unaudited)
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Revenues
from gold sales
|
|
$
|
28,369
|
|
|
$
|
9,256
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
|
|
|
|
|
|
|
Mine
operating costs
|
|
|
17,806
|
|
|
|
9,087
|
|
|
Royalties
|
|
|
644
|
|
|
|
265
|
|
|
Cost
of sales (excludes amortization and accretion)
|
|
|
18,450
|
|
|
|
9,352
|
|
|
Amortization
and accretion
|
|
|
2,776
|
|
|
|
2,094
|
|
|
|
|
|
21,226
|
|
|
|
11,446
|
|
|
GROSS
PROFIT (LOSS)
|
|
|
7,143
|
|
|
|
(2,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,370
|
|
|
|
1,481
|
|
|
Exploration
and business development
|
|
|
1,478
|
|
|
|
224
|
|
|
|
|
|
2,848
|
|
|
|
1,705
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
4,295
|
|
|
|
(3,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
44
|
|
|
|
384
|
|
|
Interest
expense and commitment fees
|
|
|
(486
|
)
|
|
|
(699
|
)
|
|
Amortization
of deferred debt issuance costs
|
|
|
(173
|
)
|
|
|
(115
|
)
|
|
Realized
and unrealized loss on mark-to-market of gold forward sales contracts
(Note 11)
|
|
|
(12,291
|
)
|
|
|
(24,111
|
)
|
|
Realized
and unrealized loss on mark-to-market of fuel forward contracts (Note
12)
|
|
|
(591
|
)
|
|
|
—
|
|
|
Loss
on foreign currency exchange
|
|
|
(99
|
)
|
|
|
(1,020
|
)
|
|
|
|
|
(13,596
|
)
|
|
|
(25,561
|
)
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(9,301
|
)
|
|
|
(29,456
|
)
|
|
INCOME
TAX RECOVERY
|
|
|
4,009
|
|
|
|
9,832
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(5,292
|
)
|
|
$
|
(19,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER SHARE
|
|
$
|
(0.04
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
135,189,376
|
|
|
|
135,659,101
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WESTERN
GOLDFIELDS INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(In
thousands U.S. dollars)
(Unaudited)
|
|
|
Common Stock
|
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
and
|
|
|
Accumulated
|
|
|
|
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
135,049,685
|
|
|
|
133,725
|
|
|
|
7,551
|
|
|
|
(75,987
|
)
|
|
|
65,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued on exercise of common stock warrants
|
|
|
750,000
|
|
|
|
338
|
|
|
|
—
|
|
|
|
—
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued on exercise of common stock options
|
|
|
1,281,234
|
|
|
|
980
|
|
|
|
—
|
|
|
|
—
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option grants
|
|
|
—
|
|
|
|
—
|
|
|
|
1,335
|
|
|
|
—
|
|
|
|
1,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
and expiration of warrants and options
|
|
|
—
|
|
|
|
595
|
|
|
|
(595
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
acquired under normal course issuer bid (Note 15)
|
|
|
(2,279,633
|
)
|
|
|
(2,255
|
)
|
|
|
—
|
|
|
|
(252
|
)
|
|
|
(2,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended December 31, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,616
|
|
|
|
14,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
134,801,286
|
|
|
$
|
133,383
|
|
|
$
|
8,291
|
|
|
$
|
(61,623
|
)
|
|
$
|
80,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued on exercise of common stock options
|
|
|
780,000
|
|
|
|
397
|
|
|
|
—
|
|
|
|
—
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option grants
|
|
|
—
|
|
|
|
—
|
|
|
|
350
|
|
|
|
—
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
and expiration of warrants and options
|
|
|
—
|
|
|
|
263
|
|
|
|
(263
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the three months ended March 31, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,292
|
)
|
|
|
(5,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2009
|
|
|
135,581,286
|
|
|
$
|
134,043
|
|
|
$
|
8,378
|
|
|
$
|
(66,915
|
)
|
|
$
|
75,506
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WESTERN
GOLDFIELDS INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands U.S. dollars)
(Unaudited)
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,292
|
)
|
|
$
|
(19,624
|
)
|
|
Adjustments
to reconcile net loss to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
|
Items
not affecting cash:
|
|
|
|
|
|
|
|
|
|
Amortization
of plant and equipment
|
|
|
2,531
|
|
|
|
2,013
|
|
|
Amortization
of deferred debt issuance costs
|
|
|
173
|
|
|
|
115
|
|
|
Accretion
expense (Note 14)
|
|
|
87
|
|
|
|
87
|
|
|
Deferred
income taxes
|
|
|
(3,999
|
)
|
|
|
(9,832
|
)
|
|
Interest
net of reimbursed costs - reclamation and remediation
|
|
|
(26
|
)
|
|
|
(63
|
)
|
|
Stock
based compensation
|
|
|
350
|
|
|
|
370
|
|
|
Mark-to-market
loss on gold hedging contracts
|
|
|
12,291
|
|
|
|
24,112
|
|
|
Mark-to-market
loss on fuel hedging contracts
|
|
|
303
|
|
|
|
—
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,689
|
|
|
|
78
|
|
|
Inventories
|
|
|
320
|
|
|
|
(6,041
|
)
|
|
Prepaid
expenses and deposits
|
|
|
269
|
|
|
|
83
|
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,463
|
|
|
|
(1,337
|
)
|
|
Payroll
and related taxes payable
|
|
|
—
|
|
|
|
(1,563
|
)
|
|
Accrued
liabilities
|
|
|
(1,204
|
)
|
|
|
1,051
|
|
|
Accrued
interest expense
|
|
|
(39
|
)
|
|
|
(171
|
)
|
|
Net
cash provided (used) by operating activities
|
|
|
8,916
|
|
|
|
(10,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment, including construction in process
|
|
|
(1,531
|
)
|
|
|
(8,749
|
)
|
|
Net
cash used by investing activities
|
|
|
(1,531
|
)
|
|
|
(8,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Advances
under loan facilities
|
|
|
—
|
|
|
|
7,860
|
|
|
Exercise
of options to purchase common stock
|
|
|
397
|
|
|
|
233
|
|
|
Exercise
of warrants to purchase common stock
|
|
|
—
|
|
|
|
337
|
|
|
Net
cash provided by financing activities
|
|
|
397
|
|
|
|
8,430
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
7,782
|
|
|
|
(11,041
|
)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
11,275
|
|
|
|
43,870
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
19,057
|
|
|
$
|
32,829
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
(526
|
)
|
|
$
|
(797
|
)
|
|
Interest
received
|
|
$
|
21
|
|
|
$
|
384
|
|
|
Taxes
paid
|
|
$
|
(44
|
)
|
|
$
|
—
|
|
|
NON-CASH
FINANCING AND INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Stock
options and warrants issued
|
|
$
|
350
|
|
|
$
|
370
|
|
|
Equipment
purchases included in accounts payable
|
|
$
|
132
|
|
|
$
|
513
|
|
|
Non-cash
component of inventories
|
|
$
|
186
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WESTERN
GOLDFIELDS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all
tabular data in thousands U.S. dollars unless otherwise stated)
1.
ORGANIZATION AND DESCRIPTION
OF
BUSINESS
Western
Goldfields Inc. (hereinafter “the Company” or “Western Goldfields”) and its
wholly owned subsidiaries are engaged in the exploration for, development and
extraction of precious metals, principally in North America. The
Company’s four wholly owned subsidiaries are: Western Goldfields USA
Inc. (a holding company), Western Goldfields (Canada) Inc. (a management
company), Western Mesquite Mines, Inc. (an operating company), and Calumet
Mining Company (an exploration company).
The
Company was in the exploration stage until late 2003. With the
acquisition of the Mesquite Mine in November 2003, the Company moved from the
exploration stage to become an operating mining company. Until June
2007, the Company’s operations were restricted to the production of gold from
material that was placed on heap leach pad by previous owners of the
mine. In June 2007, the Company commenced active mining operations
and in December 2007 commenced leaching new ore.
The
Company, through its wholly-owned subsidiary, Western Mesquite Mines, Inc.
(“WMMI”), entered into a term loan facility with a syndicate of banks,
originally dated March 30, 2007 and subsequently amended and restated (Note 13),
under which facility WMMI can borrow up to $105 million in connection with the
development of the Mesquite Mine. Of this amount, $87.3 million was
available until Completion of the project and $17.7 million is available until
12 months after Completion. The agreement, in conjunction with the
equity financings in 2007 completed the financing requirements for
Mesquite. On December 18, 2008 the term loan facility was further
amended which included an acceleration of the loan repayment
schedule. At December 31, 2008, the first repayment of $17.7 million
was made. Repayments under the facility cannot be subsequently
withdrawn upon. At March 31, 2009, $68.6 million remains outstanding
on the facility.
The
Company’s year-end for reporting purposes is December 31.
Proposed
Business Combination
Western
Goldfields and New Gold Inc. (“New Gold”) have entered into a definitive
business combination agreement dated as of March 3, 2009 (amended April 8, 2009)
for the purpose of combining the ownership of their respective
companies. Under the terms of the agreement, New Gold will acquire by
way of a plan of arrangement all of the outstanding common shares of Western
Goldfields on the basis of one New Gold common share and Cdn. $0.0001 in cash
for each common share of Western Goldfields (the "Transaction"). Upon
completion of the Transaction, New Gold will have approximately 348 million
shares outstanding (436 million fully-diluted).
The
Transaction is subject to regulatory approvals, court approval and obtaining a
minimum two-thirds approval of those shares voted at a special meeting of the
shareholders of Western Goldfields and majority approval at a special meeting of
the shareholders of New Gold. The Transaction has been structured as
a plan of arrangement under the
Business Corporations Act
(Ontario). The management information circulars, joint management
information circular supplement and other materials were mailed for the New Gold
and Western Goldfields meetings to be held on May 13, 2009 and May 14, 2009,
respectively. The Transaction is expected to close on June 1,
2009.
The
definitive business combination agreement entered into in connection with the
Transaction includes a commitment by each of New Gold and Western Goldfields not
to solicit alternative transactions to the proposed Transaction. In certain
circumstances, if a party terminates the definitive agreement to enter into an
agreement to effect an acquisition proposal that is different from the
Transaction, then such party is obligated to pay to the other party as a
termination payment an aggregate amount equal to Cdn. $8.8 million. Each party
has also been provided with certain other rights, representations and warranties
and covenants customary for a transaction of this nature, and each party has the
right to match competing offers made to the other party.
2.
BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
The
consolidated financial statements include the accounts of Western Goldfields
Inc. and its 100% owned subsidiaries: Western Goldfields USA Inc., Western
Goldfields (Canada) Inc., Western Mesquite Mines, Inc., and Calumet Mining
Company (collectively “Western Goldfields”). The consolidated
financial statements include the assets and liabilities of Western Goldfields as
at March 31, 2009 and December 31, 2008 and its results of operations and its
cash flows for each of the three month periods ended March 31, 2009 and
2008. All inter-company accounts and transactions have been
eliminated on consolidation.
The
classification of certain items in these financial statements differs from that
adopted in prior periods as a result of revised groupings or
allocations. Comparative figures have been reclassified in the
financial statements of the prior period to conform to the revised
basis.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”)
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant areas
requiring the use of management estimates relate to the determination of mineral
reserves, reclamation and remediation obligations, impairment of assets, useful
lives for amortization, measurement of heap leach, metal-in-process and finished
goods inventories, value of options and warrants, and valuation allowances for
future tax assets. Actual results could differ from these
estimates.
The
accounting policies followed in preparing these financial statements are those
used by Western Goldfields as set out in the audited financial statements for
the year ended December 31, 2008, except as referenced in Note 3
below. These interim statements should be read together with Western
Goldfields’ audited financial statements for the year ended December 31,
2008. In the opinion of management, all adjustments considered
necessary for fair and consistent presentation of interim financial statements
have been made. The financial statements and notes are
representations of the Company’s management which is responsible for their
integrity and objectivity. These accounting policies conform to
accounting principles generally accepted in the United States of America and
have been consistently applied in the preparation of the financial
statements.
3.
RECENT ACCOUNTING
PRONOUNCEMENTS
Newly
Adopted Pronouncements
This
section includes a discussion of significant accounting standards that were
effective January 1, 2009.
FAS 141(R), Business
Combinations (FAS 141(R))
Effective
January 1, 2009, we assessed the provisions of FAS 141(R), which replaced FAS
141, for business combinations consummated after the effective date of December
15, 2008. Under FAS 141(R), business acquisitions will be accounted
for under the “acquisition method”, compared to the “purchase method” mandated
by FAS 141. This standard did not impact our interim financial
statements.
FSP FAS 157-2 Fair Value
Measurements (FSP FAS 157-2)
Effective
January 1, 2009, we assessed the provisions of FSP FAS 157-2 which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements for
nonfinancial assets or liabilities. The new disclosure requirements
did not significantly impact these interim financial statements – see Note
17.
FAS 160, Non-controlling
Interests in Consolidated Financial Statements (FAS 160)
Effective January 1, 2009, we assessed
the provisions of FAS 160. Under FAS 160, non-controlling interests
are measured at 100% of the fair value of assets acquired and liabilities
assumed. As the Company does not currently have any non-controlling
interests, this standard has not had any impact on these interim financial
statements.
FAS 161, Disclosures about
Derivative Instruments and Hedging Activities (FAS 161)
Effective
January 1, 2009, we assessed the provisions of FAS 161. Under FAS 161
entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under FAS 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. The
Company’s enhanced disclosure requirements in respect of its gold forward sales
and fuel hedge contracts are provided in Notes 11 and 12.
Accounting
Pronouncements Issued but Not Yet Adopted
This
section includes a discussion of accounting pronouncements recently issued but
not yet adopted that may have an impact on our financial
statements.
SFAS No. 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly
In April
2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly ("FSP FAS No.
157-4"), which expands quarterly disclosure requirements in SFAS No. 157 about
how an entity determines fair value when the volume and level of activity for an
asset or liability have significantly decreased and transactions related to such
assets and liabilities are not orderly. This pronouncement is effective for our
reporting periods beginning with our June 30, 2009 interim financial statements.
We are currently assessing the impact of FSP FAS No. 157-4 on our consolidated
financial position, cash flows and results of operations.
SFAS No. 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
In April 2009, the FASB issued Staff
Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments, which amends FASB Statement No. 107, Disclosures about
Fair Value of Financial Instruments ("SFAS No. 107"), and Accounting Principles
Board Opinion No. 28, Interim Financial Reporting ("APB No. 28"). This
pronouncement is effective for our reporting periods beginning with our June 30,
2009 interim financial statements. The amendments expand the disclosure
requirements of SFAS No. 107 and APB No. 28 about how an entity reports on fair
value to be included in the summarized, interim financial statements. We are
currently assessing the impact of this FASB Staff Position on our consolidated
financial position, cash flows or results of
operations.
SFAS No. 115-2 and SFAS No.
124-2, Recognition and Presentation of Other-Than-Temporary
Impairments
In April
2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. FSP SFAS No. 115-2 and SFAS
No. 124-2 provides additional guidance designed to create greater clarity and
consistency in accounting and presenting impairment losses on securities. The
FSP is intended to bring greater consistency to the timing of impairment
recognition, and provide greater clarity to investors about the credit and
noncredit components of impaired debt securities that are not expected to be
sold. The measure of impairment in comprehensive income remains fair value. The
FSP also requires increased disclosures regarding expected cash flows, credit
losses, and an aging of securities with unrealized losses. This pronouncement is
effective for our reporting periods beginning with our June 30, 2009 interim
financial statements. We are currently evaluating the impact of the
implementation of FSP SFAS No. 115-2 and SFAS No. 124-2 on our consolidated
financial position, results of operations and cash flows.
4.
RESTRICTED CASH
The
Company, through its wholly-owned subsidiary, Western Mesquite Mines, Inc.
(“WMMI”), entered into a term loan facility with a syndicate of banks,
originally dated March 30, 2007 and subsequently amended and restated (Note
13). Under the terms of this facility the Company has set aside $7.5
million (December 31, 2008 - $7.5 million) in a cost overrun account until
Completion of the Mesquite Mine development project, which occurs on
satisfaction of physical and economic completion tests as set out in the credit
agreement. At Completion, unused funds will be applied to fund a debt
service reserve account, established to hold an amount equal to the debt service
amounts payable on the next repayment date as set out in the credit agreement,
and thereafter any surplus funds may be returned to the
Company. Interest earned on restricted cash is for the account of the
Company. Completion of the Mesquite Mine development project, as
defined in the credit agreement, has not yet been reached.
5.
INVENTORIES
Inventories
consist of the following:
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
Ore
on leach pads
|
|
$
|
30,325
|
|
|
$
|
31,847
|
|
|
Metal-in-process
|
|
|
2,097
|
|
|
|
1,409
|
|
|
Bullion
|
|
|
94
|
|
|
|
6
|
|
|
Supplies
|
|
|
2,448
|
|
|
|
1,836
|
|
|
Total
inventories
|
|
$
|
34,964
|
|
|
$
|
35,098
|
|
Inventories
are valued at the lower of cost or net realizable value (“NRV”).
Since
June 30, 2008, new ore placed on leach pad has been valued at cost, based on
current mining costs, including amortization and depletion, since this is lower
than NRV.
Since
June 30, 2008, metal-in-process inventory has been valued at cost, based on the
average cost of gold-in-solution fed into the process from the leach pad plus
further processing costs, including amortization relating to processing
facilities, since this is lower than NRV.
Bullion
represents gold held for our account a refiner pending sale. Since
June 30, 2008, bullion has been valued at cost, based on the average cost of the
in-process inventory plus refining costs, since this is lower than
NRV.
6.
PLANT AND
EQUIPMENT
The
following is a summary of buildings, equipment, property, and accumulated
amortization as at March 31, 2009 and December 31, 2008:
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
Buildings
|
|
$
|
9,902
|
|
|
$
|
9,886
|
|
|
Equipment
|
|
|
84,654
|
|
|
|
84,053
|
|
|
Leach
pad expansion and other processing equipment
|
|
|
30,088
|
|
|
|
29,824
|
|
|
Mine
development
|
|
|
3,864
|
|
|
|
3,864
|
|
|
|
|
|
128,508
|
|
|
|
127,627
|
|
|
Less
accumulated amortization
|
|
|
(18,779
|
)
|
|
|
(16,293
|
)
|
|
Net
Plant and Equipment
|
|
$
|
109,729
|
|
|
$
|
111,334
|
|
Capitalized
interest expense for the three month period ended March 31, 2009 was $nil (March
31, 2008 - $0.1 million), based on the interest attributable to borrowings
incurred to finance the construction of assets intended for the Company’s own
use. For the year ended December 31, 2008 capitalized interest was
$0.2 million. Capitalization of interest ceases when an asset is
ready for its intended use.
Plant and
equipment as at March 31, 2009 includes cost of $1.4 million (December 31, 2008
- $1.4 million) in respect of fauna relocation costs and $2.2 million (December
31, 2008 - $2.2 million) in respect of capitalized development drilling
costs.
Amortization
expense for the three month period ended March 31, 2009 was $2.7 million (March
31, 2008 - $2.0 million).
7.
INVESTMENTS - RECLAMATION AND REMEDIATION
The
Company has a bonding and insurance program, primarily with American
International Specialty Lines Insurance Company (“AIG Insurance”), in respect of
the operations and closure liabilities of the Mesquite Mine. Under
the program, the Company initially paid $6.0 million into a reimbursement
account with AIG, representing the net present value of expected reclamation
costs. As a result of increases in proven and probable reserves in
August 2006 and March 2007, which increased the reserve life of the mine by two
years, the Company agreed with AIG and the regulatory agencies to revisions in
its reclamation cost estimates. As a consequence, in May 2007 the
bonding program was increased from approximately $8.7 million to approximately
$11.3 million and the Company was required to place an additional $2.1 million
into the reimbursement account with AIG. In addition, changes were
made to the insurance program as described in Note 8.
The
following is a summary of cumulative activity in the reimbursement account as at
March 31, 2009 and December 31, 2008:
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
Original
deposit to reimbursement account
|
|
$
|
5,999
|
|
|
$
|
5,999
|
|
|
Additional
deposit to reimbursement account
|
|
|
2,091
|
|
|
|
2,091
|
|
|
Interest
earned from inception
|
|
|
1,219
|
|
|
|
1,193
|
|
|
|
|
|
9,309
|
|
|
|
9,283
|
|
|
Reclamation
costs reimbursed
|
|
|
(349
|
)
|
|
|
(349
|
)
|
|
Closing
balance
|
|
$
|
8,960
|
|
|
$
|
8,934
|
|
The
following bonds have been issued by AIG and approved by regulatory agencies
under the bonding component of the insurance program:
|
Bond
Number
|
|
Inception
Date
|
|
Value
|
|
Obligee(s)
|
|
ESD
7315360
|
|
11/7/2003
|
|
$
|
1,218
|
|
Imperial
County, California
|
|
|
|
|
|
|
|
|
California
Department of Conservation
|
|
|
|
|
|
|
|
|
U.S.
Bureau of Land Management
|
|
ESD
7315361
|
|
11/7/2003
|
|
$
|
1,468
|
|
Imperial
County, California
|
|
|
|
|
|
|
|
|
California
Department of Conservation
|
|
|
|
|
|
|
|
|
U.S.
Bureau of Land Management
|
|
ESD
7315362
|
|
11/7/2003
|
|
$
|
62
|
|
Imperial
County, California
|
|
|
|
|
|
|
|
|
California
Department of Conservation
|
|
|
|
|
|
|
|
|
U.S.
Bureau of Land Management
|
|
ESD
7315363
|
|
11/7/2003
|
|
$
|
550
|
|
California
Water Quality Control Board
|
|
ESD
7315358
|
|
11/7/2003
|
|
$
|
6,978
|
|
U.S.
Bureau of Land Management
|
|
ESD
7315359
|
|
11/7/2003
|
|
$
|
50
|
|
California
State Lands Commission
|
|
ESD
7315533
|
|
5/30/2007
|
|
$
|
977
|
|
Imperial
County, California
|
|
|
|
|
|
|
|
|
California
Department of Conservation
|
|
|
|
|
|
|
|
|
U.S.
Bureau of Land Management
|
|
|
|
|
|
|
|
|
California
State Lands
Commission
|
8.
LONG-TERM PREPAID
EXPENSES
The
Company has an insurance program which covers closure and reclamation risk in
excess of the amount on deposit in the Investments - Remediation and Reclamation
account which was $9.0 million at March 31, 2009 (December 31, 2008 - $8.9
million), to an aggregate limit of $17.5 million (December 31, 2008 - $17.5
million), and expires November 7, 2020.
The
program also covers pollution and remediation risk up to $10.0 million and
includes coverage for pre-existing conditions and new conditions. The
terms for pre-existing conditions and new conditions expire on November 7, 2013
and November 7, 2009, respectively.
The
Company has paid advance premiums in respect the insurance policies to cover
environmental risks at the Mesquite Mine. The premium cost is being
amortized over the terms of the policies and is summarized below.
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
Original
Policy Premiums
|
|
$
|
1,643
|
|
|
$
|
1,643
|
|
|
Additional
Policy Premium
|
|
|
724
|
|
|
|
724
|
|
|
Amortization
to date
|
|
|
(855
|
)
|
|
|
(812
|
)
|
|
Unamortized
Premium Cost
|
|
|
1,512
|
|
|
|
1,555
|
|
|
Current
Portion
|
|
|
(171
|
)
|
|
|
(171
|
)
|
|
Long-Term
Prepaid Expenses
|
|
$
|
1,341
|
|
|
$
|
1,384
|
|
9.
DEFERRED DEBT ISSUANCE
COSTS
Debt
issuance costs, primarily bank fees and professional fees and expenses
associated with the term loan facility (Note 13) incurred to March 31, 2009 were
$3.6 million (December 31, 2008 - $3.6 million). These costs are
being amortized over the term of the facility to December 31,
2012. Amortization for the three month period ended March 31, 2009
was $0.2 million (March 31, 2008 - $0.1 million).
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
Debt
issuance costs incurred
|
|
$
|
3,570
|
|
|
$
|
3,570
|
|
|
Cumulative
amortization
|
|
|
(977
|
)
|
|
|
(804
|
)
|
|
Closing
balance
|
|
$
|
2,593
|
|
|
$
|
2,766
|
|
10.
DEFERRED INCOME TAX
ASSETS
Income
Taxes Recoverable
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
Current
|
|
$
|
10
|
|
|
$
|
329
|
|
|
Deferred
|
|
|
3,999
|
|
|
|
12,720
|
|
|
Recovery
of income taxes
|
|
$
|
4,009
|
|
|
$
|
13,049
|
|
Deferred
Taxes
The
Company records future income tax assets and liabilities where temporary
differences exist between the carrying amounts of assets and liabilities in the
balance sheet and their tax bases.
The
significant components of the deferred tax asset at March 31, 2009 and December
31, 2008 are as follows:
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
Current
deferred tax assets
|
|
$
|
3,716
|
|
|
$
|
2,045
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
deferred tax assets
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on mark-to-market of gold forward sales contracts
|
|
|
19,444
|
|
|
|
15,577
|
|
|
Net
operating losses
|
|
|
30,390
|
|
|
|
25,451
|
|
|
Mining
property
|
|
|
1,265
|
|
|
|
1,265
|
|
|
Reclamation
cost
|
|
|
2,553
|
|
|
|
1,979
|
|
|
Exploration
cost
|
|
|
838
|
|
|
|
35
|
|
|
Stock-based
compensation
|
|
|
1,973
|
|
|
|
1,675
|
|
|
Minimum
tax
|
|
|
394
|
|
|
|
327
|
|
|
Other
|
|
|
662
|
|
|
|
637
|
|
|
Total
long-term deferred tax assets
|
|
|
57,519
|
|
|
|
46,946
|
|
|
Long-term
deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
(25,189
|
)
|
|
|
(16,944
|
)
|
|
Total
long-term deferred tax liabilities
|
|
|
(25,189
|
)
|
|
|
(16,944
|
)
|
|
Net
long-term deferred tax asset
|
|
|
36,046
|
|
|
|
32,047
|
|
|
Valuation
allowance
|
|
|
(7,634
|
)
|
|
|
(7,634
|
)
|
|
Net
deferred tax assets
|
|
$
|
28,412
|
|
|
$
|
24,413
|
|
At March
31, 2009 the Company had income tax loss carry-forwards of approximately $69.0
million. These losses expire from 2022 to 2029. The ability to utilize these
loss carry-forwards is dependent upon a number of factors, including the future
profitability of operations and other tax limitations. The future tax benefit of
$30.4 million less a valuation allowance of $6.0 million, resulting in a future
tax benefit of $24.4 million, has been recognized in the consolidated financial
statements with respect to these income tax loss
carry-forwards.
11.
MARK-TO-MARKET LOSS ON GOLD HEDGING
CONTRACTS
Under the
terms of the term loan facility originally dated March 30, 2007 and subsequently
amended and restated (Note 13), Western Mesquite Mines Inc. was required, as a
condition precedent to drawdown the loan, to enter into a gold hedging program
acceptable to the banking syndicate. On June 14, 2007 the Company
announced that all requirements needed to make the facility available for
drawdown had been met and that it had executed gold forward sales contracts for
429,000 ounces of gold at a price of $801 per ounce. The hedging
contracts represent a commitment of 5,500 ounces per month for 78 months
commencing July 2008 with the last commitment deliverable in December
2014. At March 31, 2009, 69 hedge contracts representing a total
commitment of 379,500 ounces remain outstanding.
The
Company’s gold forward sales contracts do not meet the criterion in SFAS No.133,
and therefore were not designated as cash flow hedges. Accordingly,
the period-end mark-to-market adjustment related to these contracts is
immediately reflected on the statement of operations of the Company as
unrealized gains or losses on gold forward sales contracts and the cumulative
effect is reflected as an asset or liability on the balance sheet.
Starting
in July 2008, the Company began settling these contracts, at the Company’s
option, by physical delivery of gold or on a net financial settlement
basis. During the first quarter of 2009, the Company settled the
contracts through physical delivery recognizing revenue from gold sales at the
contract price. The remaining contracts were marked-to-market as at
March 31, 2009 using a spot price of gold of $917 per ounce (December 31, 2008 -
$870 per ounce). The cumulative unrealized pre-tax loss of $57.5
million has been disclosed as a liability as at March 31, 2009 (December 31,
2008 - $45.2 million) and the Company has recorded an unrealized loss of $10.2
million for the three month period ended March 31, 2009 (March 31, 2008 - $24.1
million).
12.
MARK-TO-MARKET LOSS ON FUEL
CONTRACTS
Western
Goldfields entered into fuel hedge contracts with financial institutions in
December 2008 and January 2009. The hedging contracts represent a
total commitment of 2.9 million and 3.0 million gallons of diesel per year at
weighted average prices of $1.75 and $1.94 per gallon in 2009 and 2010,
respectively. The Company is financially settling 252,000 gallons of
diesel per month related to these contracts until December 31,
2010.
The
Company’s fuel hedge contracts do not meet the criterion in SFAS No.133, and
therefore were not designated as cash flow hedges. Accordingly, the
period-end mark-to-market adjustment related to these contracts is immediately
reflected on the statement of operations of the Company as unrealized gains or
losses on fuel hedging contracts and the cumulative effect is reflected as an
asset or liability on the balance sheet.
Realized
losses of $0.3 million were recognized for the three month period ended March
31, 2009 (March 31, 2008 - $nil). The remaining contracts were
marked-to-market as at March 31, 2009 using a spot price of fuel of $1.38 per
gallon (December 31, 2008 - $1.45 per gallon). The cumulative
unrealized pre-tax loss of $1.2 million has been disclosed as a liability as at
March 31, 2009 (December 31, 2008 - $0.9 million) and the Company has recorded
an unrealized loss of $0.3 million within other income (expense) for the three
month period ended March 31, 2009 (March 31, 2008 - $nil).
13.
LOAN PAYABLE
Term
Loan Facility
The
Company, through its wholly owned subsidiary WMMI, entered into a term loan
facility with a syndicate of banks, dated March 30, 2007 as amended and restated
on May 31, 2007 and as further amended on June 29, 2007, July 16, 2007, August
14, 2007, and August 14, 2008, under which WMMI can borrow up to $105 million in
connection with the development of the Mesquite Mine. The facility
was for a term of 7.75 years until December 31, 2014 and comprises a
multiple-draw term loan of which $87.3 million was available as required for the
development of the Mesquite Mine; the remainder will be available for up to 12
months after completion for corporate purposes. The facility is secured by
all of the assets of WMMI and a pledge of the shares of WMMI owned by the
Company. Repayments under the facility cannot be subsequently withdrawn
upon. In addition, until Completion, the facility is guaranteed by
the Company. The facility was amended on December 18, 2008 to
encompass the following: alterations to the original development plan
contemplated by the Company; acceleration of the loan repayment period with the
final payment now due on December 31, 2012; and, extension of the date by which
completion must be reached to June 30, 2009. On January 9, 2009, an
amendment was made to the facility include terms and conditions on the Company’s
fuel hedge contracts.
Interest
on the term loan is charged at U.S. dollar LIBOR plus 2.2% prior to completion
and U.S. dollar LIBOR plus 1.75% after completion. Completion occurs upon
the satisfaction of certain technical and financial criteria as defined in the
credit agreement. As at March 31, 2009, WMMI had outstanding $68.6 million
(December 31, 2008 - $68.6 million), under the facility and incurred interest at
an average rate of approximately 2.7% for the three month period ended March 31,
2009 (December 31, 2008 – 5.0%). Repayment of the project facility is
on a semi-annual basis, through December 31, 2012 according to an agreed
schedule of percentages of the loan outstanding on the final day of the
availability period. In addition to the scheduled repayments,
mandatory prepayments are required semi-annually based on excess cash flows from
the Mesquite Mine. At December 31, 2008 there were no excess cash
flows to trigger a prepayment on the repayment date.
The
schedule of repayments is as follows:
|
|
|
December 31,
2008
|
|
|
June
30, 2009
|
|
$
|
4,749
|
|
|
December
31, 2009
|
|
|
6,907
|
|
|
June
30, 2010
|
|
|
11,224
|
|
|
December
31, 2010
|
|
|
8,634
|
|
|
June
30, 2011
|
|
|
4,317
|
|
|
December
31, 2011
|
|
|
6,907
|
|
|
June
30, 2012
|
|
|
12,951
|
|
|
December
31, 2012
|
|
|
12,951
|
|
|
|
|
$
|
68,640
|
|
This
schedule excludes any mandatory prepayments which can only be determined at date
of scheduled repayment.
14.
RECLAMATION AND REMEDIATION
LIABILITIES
Federal,
state and local laws and regulations concerning environmental protection affect
the Company’s operations. Under current regulations, the Company is
required to meet performance standards to minimize environmental impact from
operations and to perform site reclamation and remediation
activities. The Company’s provision for reclamation and remediation
liabilities is based on known requirements. It is not possible to
estimate the impact on operating results, if any, of future legislative or
regulatory developments. The Company’s estimate of the net present
value of these obligations for the Mesquite Mine is based upon existing
reclamation standards at March 31, 2009 and is in conformity with SFAS No.
143. The increase in the net present value of the liability is
recognized for accounting purposes as accretion expense during the period under
review.
The
following table sets out the activity for the Company’s reclamation and
remediation liabilities for the three month period ended March 31, 2009 and the
year ended December 31, 2008:
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
Opening
Balance
|
|
$
|
5,076
|
|
|
$
|
5,061
|
|
|
Accretion
|
|
|
87
|
|
|
|
224
|
|
|
Reduction
in the present value of obligations
|
|
|
—
|
|
|
|
(209
|
)
|
|
Ending
Balance
|
|
|
5,163
|
|
|
|
5,076
|
|
|
Less:
current portion
|
|
|
339
|
|
|
|
339
|
|
|
|
|
$
|
4,824
|
|
|
$
|
4,737
|
|
Issuances
of Common Shares
During
the three month period ended March 31, 2009, 780,000 options (December 31, 2008
– 1,281,234 options) were exercised for cash consideration of $0.4 million
(December 31, 2008 - $1.0 million).
During
the year ended December 31, 2008, 750,000 shares of common stock were issued for
cash consideration of $0.3 million upon the exercise of 750,000 warrants to
purchase common shares. There were no warrant exercises in the three
month period ended March 31, 2009.
Normal
Course Issuer Bid
In
November 2008, the Company received approval from the Toronto Stock Exchange for
a normal course issuer bid (“NCIB”) program for the repurchase of its
outstanding common shares. The Company had approval to repurchase up
to a maximum of 12,838,011 common shares, or approximately 10% of the Company’s
public float from the period November 7, 2008 to November 6,
2009. During the year ended December 31, 2008, the Company
repurchased 2,279,633 common shares at a cost of $2.5 million. The
Company returned to treasury and cancelled these shares. The excess
of the purchase price over the carrying amount of the shares purchased was
recorded as a $0.3 million increase in retained accumulated
deficit. There were no further repurchases of the Company’s
outstanding common shares in the three month period ended March 31,
2009.
16.
STOCK OPTIONS AND
WARRANTS
The
Company has a stock incentive plan which is intended to provide an incentive to
officers, employees, directors and consultants of the Company. The
option price is determined by the Compensation Committee of the Board of
Directors at its sole discretion but shall not be less than the closing price of
the Company’s common stock on The Toronto Stock Exchange two trading days after
the date of the grant. The term of each option granted shall be for a
period of not exceeding ten years from the date of the grant. Except
as expressly provided for in the option holder’s employment, consulting or
termination contract, the option holder may exercise the option to the extent
exercisable on the date of such termination at any time within three months
after the date of termination.
The plan
is a non-qualifying stock option plan for U.S. income tax
purposes. For awards made before and after the reorganization of the
Company effective June 29, 2007, the price of options granted is expressed in
terms of U.S. and Canadian dollars, respectively. The aggregate
number of shares of the Company’s common stock for which option awards may be
granted under the plan shall not exceed 5,000,000. At March 31, 2009,
851,667 (December 31, 2008 – 976,667) option awards were available for issuance
under the plan.
Prior to
inception of the Western Goldfields’ stock option plan, of the awards issued,
8,975,118 option awards remain outstanding as at March, 31, 2009.
The
Company estimates the fair value of options and warrants using the Black-Scholes
option price calculation. Some options and warrants may be exercised
by means of a “cashless exercise” to receive a number of shares of common stock
equal in market value to the difference between the market value of the shares
of common stock issuable under the option or warrant and the total cash exercise
price of the option or warrant being exercised.
During
the three month period ended March 31, 2009, 780,000 options were exercised for
cash proceeds of $0.4 million; 25,000 options were forfeited; and, 100,000
options expired.
On January 26, 2009, the Company issued
150,000 options to an employee, with an exercise price of Cdn. $2.20 per
share. The options vest in three equal annual installments beginning
on January 27, 2010, and were fair valued at $0.2 million.
During
the year ended December 31, 2008, 1,281,234 options were exercised for cash
proceeds of $1.0 million; 36,666 options were forfeited; and, 100,000 options
expired.
During
the year ended December 31, 2008, the Company issued 1,785,000 options to
employees, officers, directors, and a consultant with a weighted average
exercise price of $1.48. These options vest in three equal annual
installments beginning on the grant date or one-year from the grant date and
were fair valued at $1.6 million.
The
value of each option award is estimated on the date of the grant using the
Black-Scholes option-pricing model. The model requires the input of
subjective assumptions, including the weighted-average risk-free rate of return,
expected term of the option award and stock price volatility. These
assumptions were adjusted to reflect prevailing interest rates, plan experience
and stock market performance of the Company’s shares,
respectively. These estimates involve inherent uncertainties and the
application of management judgment. In addition, we are required to
estimate the expected forfeiture rate and only recognize expense for options
expected to vest. As a result, if other assumptions had been used,
our recorded stock-based compensation expense could have been different from
that reported. The Black-Scholes option pricing model used the
following assumptions:
|
|
|
March
31,
2009
|
|
December
31,
2008
|
|
Weighted-average
risk-free rate of return (%)
|
|
|
1.9%
|
|
2.6%
|
|
Dividend yield
|
|
|
-%
|
|
-%
|
|
Expected life in years
|
|
|
5
|
|
4 and 5
|
|
Volatility
|
|
|
82%
|
|
75%
|
The
following is a summary of stock option activity for the three month period ended
March 31, 2009 and the year ended December 31, 2008:
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair Value
|
|
|
Aggregate
Intrinsic Value
|
|
|
Balance January
1, 2008
(1)
|
|
|
13,301,618
|
|
|
$
|
0.82
|
|
|
$
|
0.59
|
|
|
$
|
39,801
|
|
|
Granted
|
|
|
1,785,000
|
|
|
|
1.48
|
|
|
|
0.90
|
|
|
|
—
|
|
|
Exercised
|
|
|
(1,281,234
|
)
|
|
|
0.76
|
|
|
|
0.37
|
|
|
|
2,243
|
|
|
Forfeited
|
|
|
(36,666
|
)
|
|
|
1.96
|
|
|
|
1.64
|
|
|
|
11
|
|
|
Expired
|
|
|
(100,000
|
)
|
|
|
1.63
|
|
|
|
0.81
|
|
|
|
—
|
|
|
Outstanding
at December 31, 2008
|
|
|
13,668,718
|
|
|
|
0.86
|
|
|
|
0.64
|
|
|
|
10,990
|
|
|
Exercisable
at December 31, 2008
|
|
|
11,687,054
|
|
|
$
|
0.73
|
|
|
$
|
0.56
|
|
|
$
|
10,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2009
|
|
|
13,668,718
|
|
|
$
|
0.86
|
|
|
|
0.64
|
|
|
|
10,990
|
|
|
Granted
|
|
|
150,000
|
|
|
|
1.75
|
|
|
|
1.13
|
|
|
|
—
|
|
|
Exercised
|
|
|
(780,000
|
)
|
|
|
0.51
|
|
|
|
0.34
|
|
|
|
1,196
|
|
|
Forfeited
|
|
|
(25,000
|
)
|
|
|
1.96
|
|
|
|
1.64
|
|
|
|
—
|
|
|
Expired
|
|
|
(100,000
|
)
|
|
|
1.00
|
|
|
|
0.36
|
|
|
|
43
|
|
|
Outstanding
at March 31, 2009
(1)
|
|
|
12,913,718
|
|
|
|
0.74
|
|
|
|
0.66
|
|
|
|
13,650
|
|
|
Exercisable
at March 31, 2009
|
|
|
10,790,387
|
|
|
$
|
0.88
|
|
|
$
|
0.58
|
|
|
|
12,906
|
|
|
|
(1)
|
Includes
options granted under predecessor
plan.
|
The following table summarizes
information about the stock options outstanding at March 31, 2009:
|
Awards Outstanding by Range
|
|
Exercise Price
$
|
|
Awards Outstanding
|
|
Awards Exercisable
|
|
Low
|
|
High
|
|
Quantity
|
|
Weighted
Average
Outstanding
Contractual
Life
|
|
Weighted
Average
Exercise
Price
$
|
|
Quantity
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise Price
$
|
|
|
0.01
|
|
0.50
|
|
|
7,130,117
|
|
3.74
|
|
|
0.34
|
|
7,130,117
|
|
|
3.74
|
|
0.34
|
|
|
0.51
|
|
1.00
|
|
|
1,845,000
|
|
4.13
|
|
|
0.84
|
|
1,845,000
|
|
|
4.13
|
|
0.84
|
|
|
1.01
|
|
1.50
|
|
|
1,285,000
|
|
4.66
|
|
|
1.39
|
|
—
|
|
|
—
|
|
—
|
|
|
1.51
|
|
2.00
|
|
|
1,033,601
|
|
5.50
|
|
|
1.78
|
|
443,602
|
|
|
5.41
|
|
1.85
|
|
|
2.01
|
|
2.50
|
|
|
1,320,000
|
|
4.64
|
|
|
2.19
|
|
1,171,668
|
|
|
4.55
|
|
2.19
|
|
|
2.51
|
|
3.00
|
|
|
300,000
|
|
5.69
|
|
|
2.97
|
|
200,000
|
|
|
5.69
|
|
2.97
|
|
|
|
|
|
|
|
12,913,718
|
|
4.17
|
|
|
0.88
|
|
10,790,387
|
|
|
4.00
|
|
0.74
|
As of
March 31, 2009, there was $1.6 million (December 31, 2008 - $1.7 million) of
total unrecognized compensation cost related to non-vested stock-based
compensation arrangements granted under the plan. The cost is
expected to be recognized over a weighted-average period of 1.6 years (December
31, 2008 – 1.6 years). Stock based compensation expense for the three
month period ended March 31, 2009 was $0.4 million (March 31, 2008 - $0.4
million).
Warrants
The
following is a summary of warrant activity for the three months ended March 31,
2009 and the year ended December 31, 2008:
|
|
|
Three months
ended March 31,
2009
|
|
|
Year ended
December 31,
2008
|
|
|
Balance,
start of period
|
|
|
6,056,180
|
|
|
|
6,806,180
|
|
|
Exercised
|
|
|
—
|
|
|
|
(750,000
|
)
|
|
Balance,
end of period
|
|
|
6,056,180
|
|
|
|
6,056,180
|
|
Warrants
outstanding to acquire common shares of the Company at March 31, 2009 are as
follows:
|
Warrants Outstanding
|
|
Exercise
Price
|
|
Expiry Date
|
|
6,056,180
|
|
0.76
|
|
Note
(1)
|
|
|
(1)
|
Newmont
Mining Corporation (“Newmont”) received warrants as part of the purchase
price for Mesquite in November 2003. The warrants expire between June 9,
2011 and June 9, 2012
|
17.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
SFAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with U.S. GAAP, and expands disclosure about fair value
measurements. As discussed in Note 3, the Company has now adopted the
provisions SFAS 157 as it relates to nonfinancial assets and liabilities
measured at fair value on a non-recurring basis. The statement is
intended to enable the reader of the financial statements to assess the inputs
used to develop those measurements by establishing the hierarchy for ranking the
quality and reliability of the information used to determine fair
values. The statement requires that assets and liabilities carried at
fair value be classified and disclosed in a three-tier fair value
hierarchy. These tiers include: Level 1, defined as quoted market
prices in active markets for identical assets and liabilities; Level 2, defined
as inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; model-based valuation techniques for which all
significant assumptions are observable in the market; or inputs that are
observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities; and Level 3, defined as unobservable
inputs that are not corroborated by market data.
The
following table sets out the Company’s financial assets and liabilities at March
31, 2009 at fair value by level within the fair value hierarchy. As
required by FAS 157, liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value
measurement.
|
|
|
Fair Value at March
31, 2009
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents and restricted cash
|
|
$
|
26,557
|
|
|
$
|
26,557
|
|
|
$
|
—
|
|
|
Receivables
|
|
$
|
634
|
|
|
$
|
—
|
|
|
$
|
634
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
debt
|
|
$
|
68,640
|
|
|
$
|
68,640
|
|
|
$
|
—
|
|
|
Derivative instruments – forward gold sales
contracts
|
|
$
|
57,477
|
|
|
$
|
—
|
|
|
$
|
57,477
|
|
|
Derivative
instruments – forward fuel hedge contracts
|
|
$
|
1,234
|
|
|
$
|
—
|
|
|
$
|
1,234
|
|
The
Company’s cash and restricted cash are represented by account balances and
short-term deposits with major Canadian and U.S. banks. Canadian
account balances and deposits are converted to U.S. dollars at the closing
exchange rate on March 31, 2009 and accordingly are classified within Level 1 of
the fair value hierarchy.
The
Company’s bank debt represents the current and long-term portions of advances
under the Company’s term-loan facility. As the loan was re-negotiated
at the end of 2008, the book value is representative of fair value from a market
participant’s perspective. Accordingly it is classified within Level
1 of the fair value hierarchy.
The
Company’s gold forward sales and fuel hedge contracts are valued using pricing
models which require a variety of inputs, including contractual terms and yield
curves, and correlation of such inputs. The Company utilizes the
market approach to measurement of fair value for these derivative
instruments. This approach uses prices and other relevant information
generated by market transactions involving comparable
liabilities. Such derivative contracts trade in liquid markets and,
as such, model inputs can generally be verified and do not involve significant
management judgment. As the derivatives are in a net liability
position at March 31, 2009, the Company has determined that there is no
counterparty credit risk. Such instruments are typically classified
within Level 2 of the fair value hierarchy.
18. RELATED PARTY
TRANSACTIONS
In
November 2008, a new cost sharing agreement was reached between Silver Bear and
Western Goldfields with an effective date of January 1, 2009. The new
agreement amends previous cost sharing ratios between the two companies to
one-third recovery of shared costs from Silver Bear, which reflects the current
level of activities. Western Goldfields initially incurs the
costs.
During
the three month period ended March 31, 2009 overhead costs of $0.1 million were
charged by Western Goldfields to Silver Bear (March 31, 2008 - $0.1
million). There were no amounts outstanding at March 31,
2009.
19.
COMMITMENTS AND
CONTINGENCIES
Mining
Industry
Although
the mineral exploration and mining industries are inherently speculative and
subject to complex environmental regulations, the Company is unaware of any
pending litigation or of any specific past or prospective matters which could
impair the value of its mining claims.
Contract
with the County Sanitation District of Los Angeles
During
its ownership of the Mesquite Mine, Hanson Natural Resource Company, a prior
operator of the mine, entered into an agreement with the County Sanitation
District of Los Angeles County, which then developed and permitted a plan to
create a 100-year landfill at the Mesquite Mine.
Under the
agreement with the County Sanitation District of Los Angeles County, the Company
has the right to explore, mine, extract, process, market and sell ore, and
otherwise conduct mining and processing activities, anywhere on the property for
an initial period through 2024 with automatic extensions until
2078. Much of the infrastructure at the property is likely to be
retained by the landfill after mining operations are completed and the Company
has met certain reclamation standards.
Lease
Agreement
The
Company has entered into a lease for head office premises for the ten-year
period which commenced June 1, 2008. In the new cost sharing
agreement, effective January 1, 2009, Silver Bear shares one-third of total
occupancy costs (Note 18). The estimated contractual obligations, as
at March 31, 2009 are as follows:
|
|
|
Total
|
|
|
Less
than 1 Year
|
|
$
|
383
|
|
|
2 –
3 Years
|
|
|
766
|
|
|
4 –
5 Years
|
|
|
773
|
|
|
More
than 5 Years
|
|
|
1,607
|
|
|
Total
|
|
$
|
3,529
|
|
Litigation
and Claims
The
Company is involved in legal proceedings from time to time, arising in the
ordinary course of its business. Typically, the amount of ultimate
liability with respect to these actions will not, in the opinion of management,
materially affect Western Goldfields’ financial position, results of operations
or cash flows.
In
assessing loss contingencies related to legal proceedings that are pending
against us or unasserted claims that may result in such proceedings, the Company
and its legal counsel evaluate the perceived merits of any legal proceedings or
unasserted claims as well as the perceived merits of the amount of relief sought
or expected to be sought. If the assessment of a contingency suggests
that a loss is probable, and the amount can be reliably estimated, then a loss
is recorded. When a contingent loss is not probable but is reasonably
possible, or is probable but the amount of loss cannot be reliably estimated,
then details of the contingent loss are disclosed. Loss contingencies
considered remote are generally not disclosed unless they involve guarantees, in
which case we disclose the nature of the quantities. Legal fees
incurred in connection with pending legal proceedings are expensed as
incurred.
There
were no loss contingencies accrued in the three months ended March 31, 2009 or
the three months ended March 31, 2008.
Proposed
Business Combination
The
completion of the proposed business combination with New Gold, which is expected
to occur on June 1, 2009, will result in known severance payments of
approximately $0.8 million.
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The
following Management’s Discussion and Analysis (“MD&A”) provides information
that management believes is relevant to an assessment and understanding of the
consolidated financial condition and results of operations of Western Goldfields
Inc. and its subsidiaries (collectively “Western Goldfields” or the “Company”).
This MD&A should be read in conjunction with our unaudited consolidated
financial statements for the three month period ended March 31, 2009 and the
notes thereto. The information is presented as of April 30,
2009. All amounts in this discussion are expressed in U.S. dollars,
unless otherwise specified.
The
following discussion contains forward-looking statements that involve numerous
risks and uncertainties. Actual results of the Company could differ materially
from those discussed in such forward-looking statements as a result of these
risks and uncertainties, including those set forth in our Annual Report filed
with the SEC and Canadian securities regulators on March 11, 2009 under Item 1.
Description of Business - “Risk Factors”, as well as other risk factors
identified in our other filings made from time to time.
Overview
Western
Goldfields Inc. is a gold production and exploration company. The
Mesquite Mine (“Mesquite”) located in Imperial County, California is currently
our sole mining asset. We acquired Mesquite from Newmont Mining
Corporation (“Newmont”) in November 2003. Until late 2007, Mesquite
provided us with residual gold production from ore that was placed on the heap
leach pad by Newmont and previous owners of the property. We
completed a positive feasibility study in August 2006 and subsequent equity and
debt financings have enabled us to resume mining operations at
Mesquite. We started to place new ore on the heap leach pad during
the second half of 2007 and this started to be reflected in our gold production
and inventories by late 2007. We attained “steady state”
production from the new leach pad during the second quarter of
2008. We have obtained all necessary permits and have effectively
completed our capital expansion program.
Proposed
Business Combination
The
Company, Western Goldfields Inc. and New Gold Inc. (“New Gold”) have entered
into a definitive business combination agreement dated as of March 3, 2009
(amended April 8, 2009) for the purpose of combining the ownership of their
respective companies. Under the terms of the agreement, New Gold will
acquire by way of a plan of arrangement all of the outstanding common shares of
Western Goldfields in exchange for one New Gold common share and Cdn. $0.0001 in
cash for each common share of Western Goldfields (the
"Transaction"). Upon completion of the Transaction, New Gold will
have approximately 348 million shares outstanding (436 million
fully-diluted).
The
Transaction is subject to regulatory approvals, court approval and obtaining a
minimum two-thirds approval of those shares voted at a special meeting of the
shareholders of Western Goldfields and majority approval at a special meeting of
the shareholders of New Gold. The Transaction has been structured as
a plan of arrangement under the
Business Corporations Act
(Ontario). The management information circulars, joint management
information circular supplement and other materials were mailed for the New Gold
and Western Goldfields meetings to be held on May 13, 2009 and May 14, 2009,
respectively. The Transaction is expected to close on June 1,
2009.
The
definitive business combination agreement entered into in connection with the
Transaction includes a commitment by each of New Gold and Western Goldfields not
to solicit alternative transactions to the proposed Transaction. In certain
circumstances, if a party terminates the definitive agreement to enter into an
agreement to effect an acquisition proposal that is different from the
Transaction, then such party is obligated to pay to the other party as a
termination payment an aggregate amount equal to Cdn. $8.8 million. Each party
has also been provided with certain other rights, representations and warranties
and covenants customary for a transaction of this nature, and each party has the
right to match competing offers made to the other party.
See “Item
1A. Risk Factors – Risks Related to the Business Combination with New Gold and
Operations of the Combined New Gold and Western Goldfields” set forth in our
Annual Report filed with the SEC on March 11, 2009, and “Risk Factors” in the
joint management information circular supplement filed with the SEC on April 16,
2009, for a discussion of some of the risks associated with the
transaction.
Overall
Performance
During
the first quarter 2009, net loss was $5.3 million or $0.04 per share, compared
to net loss of $19.6 million, or $0.14 per share in the same prior year
period
.
The net loss in
2009 includes after tax mark-to-market losses on gold forward sales contracts of
$7.5 million, or $0.06 per share as compared to $14.7 million, or $0.11 per
share in the same prior year period. Gold production of 33,660 ounces
was considerably higher than 9,146 ounces in the same prior year period as we
were still escalating production until we attained steady-state production from
the new leach pad during the second quarter 2008. Although we
benefitted from selling 32,715 ounces during the first quarter 2009, we realized
an average gold price of $867 per ounce compared to $929 per ounce in the same
prior year period. Consistent with prior periods, we immediately sold
our gold inventory in the spot-market and were impacted by fluctuations in world
markets for gold. Per terms of our term-loan facility, at March 31,
2009, we still hold 69 monthly contracts totaling 379,500 ounces to be settled
at $801 per ounce. We also financially settled 630,000 gallons into
our fuel hedge contracts and realized losses of $0.3
million.
Selected Financial
Information
|
(In thousands U.S.
dollars
except ounces and per share amounts)
|
|
Three months ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Gold
ounces produced
|
|
|
33,660
|
|
|
|
9,146
|
|
|
Gold
ounces sold
|
|
|
32,715
|
|
|
|
9,960
|
|
|
Revenues
from gold sales
|
|
$
|
28,369
|
|
|
$
|
9,256
|
|
|
Cost
of sales (excludes amortization and accretion)
|
|
$
|
18,450
|
|
|
$
|
9,352
|
|
|
Cost
of goods sold
|
|
$
|
21,226
|
|
|
$
|
11,446
|
|
|
Gross
profit (loss)
|
|
$
|
7,143
|
|
|
$
|
(2,190
|
)
|
|
Operating
income (loss)
|
|
$
|
4,295
|
|
|
$
|
(3,895
|
)
|
|
Net
loss
|
|
$
|
(5,292
|
)
|
|
$
|
(19,624
|
)
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.14
|
)
|
|
Average
realized gold price ($/ounce)
|
|
$
|
867
|
|
|
$
|
929
|
|
|
Cost
of sales per ounce
1
($/ounce)
|
|
$
|
573
|
|
|
$
|
939
|
|
(1) Includes
realized losses from settlement of fuel hedge contracts. Cost of
sales per ounce is a non-GAAP financial performance measure with no standardized
meaning under US GAAP. For further information, please see page
36.
Economic
Trends
Although
there was continued volatility in gold prices during the first quarter of 2009,
with prices fluctuating between $810 to $989 per ounce, gold prices remained
strong. The average gold price for the period was $909 per ounce with
the price closing in March at $917 per ounce. Key factors influencing
the price of gold include currency rate fluctuations and the relative strength
of the U.S. dollar, the supply of and demand for gold, and macroeconomic factors
such as the level of interest rates and inflation expectations. Gold
prices have been subject to volatile price movements over short periods of time,
especially in 2008. The price of gold is a significant factor
affecting Western Goldfields’ profitability and operating cash
flows. As such, the current and future financial performance of the
Company will be closely correlated to the price of gold. In first
quarter 2009, we realized gold prices that were slightly lower than the average
market price as ounces necessary to satisfy gold hedge contracts at prices that
were lower than average market prices were delivered into, and recognized in
revenue. Of the 32,715 ounces sold during the quarter, 16,500 ounces
or 50% were hedged at $801 per ounce.
Throughout 2008, our operating costs
were negatively influenced by continuing high costs with respect to labor,
energy and consumables. Mining is generally an energy intensive
activity, especially in an open-pit operation such as Mesquite, where energy
prices had a significant impact on operations. Historically,
approximately 20% of Mesquite’s operating costs were attributable to diesel
consumption. We consume diesel fuel which is refined from crude oil
and is therefore subject to the same price volatility affecting crude oil
prices. With global demand decreasing towards the end of 2008 on
fears of a global economic slowdown, oil prices have decreased from a record
high of $147 per barrel in the third quarter of 2008 to close at $50 per barrel
at March 31, 2009. Relatively lower fuel prices during 2009 have
translated into lower costs for petroleum based expenditures including, diesel
fuel, lubricants, explosives, tires and transportation. With
declining fuel prices during late 2008, we took the opportunity to enter into
additional fuel hedge contracts for approximately 25% of the Mesquite Mine’s
fuel requirements over the next two years. An additional tranche of
contracts were entered into in early 2009 thereby hedging a combined 50% of our
Mine’s projected requirements in 2009 and 2010.
The
deterioration of the global economy in 2008 and into 2009 created a challenging
environment for all companies to operate in. For the more junior
mining companies, access to funds became a key determinant of future
viability. Companies found that debt and equity markets were
effectively closed in many jurisdictions resulting in the postponement of
capital raisings. Meanwhile, banks and other lenders were declining
terms or unable to refinance existing debt. We were in a position of
having previously secured a $105.0 million term loan facility, of which $86.3
million was drawn and the first repayment of $17.7 million was made on December
31, 2008. At March 31, 2009, $68.6 million was outstanding on the
facility. The Mesquite Mine’s capital project is effectively complete
and we do not anticipate drawing on the $17.7 million of available
credit. Our contractual obligation is to have fully paid off the
credit facility by December 31, 2012.
Given the
early warning signs of a volatile financial market, we implemented a
conservative investment strategy wherein funds in excess of operating
requirements were invested in short-term, highly liquid government of Canada or
U.S. treasury bills. While the interest earned on these investments
was nominal, we believe strongly in the safety and security of our funds above
all else. We held no other investments during 2009 and plan on
maintaining our current investment strategy into the foreseeable
future. In the three month period ended March 31, 2009, our cash
balances were held with CIBC and Bank of America. We continuously
monitor the performance of our banks and will actively seek alternative banking
solutions should the situation dictate. Although we cannot completely
eliminate the risks associated with managing a company in a volatile and
uncertain economic climate, we are continuously monitoring and assessing the
impacts to our Company and using a prudent and conservative investment
strategy.
We are
also cognizant of market effects on our suppliers. In the current
volatile environment, significant changes in an entity can occur very
quickly. We continue to monitor the performance of our current
suppliers and thoroughly assess the viability of new suppliers. We
have assessed business critical suppliers and ensured back-up measures and
alternatives are in place. We also closely monitor companies with
which we have our bonding and insurance programs and counterparties on gold
sales and fuel hedge contracts. At this time, we believe that our
counterparties are able to honor their commitments to us.
Completion
of Capital Program
By the
end of first quarter 2009, the remaining aspects of our capital program,
launched in late 2006, were effectively completed. During 2008, the
expanded leach pad became operational and the retrofit of the process plant was
completed. We also brought on-stream new carbon columns for the
processing circuit and completed construction of the new truck repair shop,
warehouse and mine administrative office.
Results
of Operations
Revenue
|
|
|
Three months ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Gold
sales revenue
|
|
|
28,369
|
|
|
|
9,256
|
|
|
Average
realized gold price
|
|
|
867
|
|
|
|
929
|
|
|
Increase
in revenues
|
|
|
19,113
|
|
|
|
8,023
|
|
|
Change
in revenues attributable to ounces sold
|
|
|
21,147
|
|
|
|
5,316
|
|
|
Change
in revenues attributable to average selling price
|
|
|
(2,034
|
)
|
|
|
2,707
|
|
Gold production
in the first quarter of 2009 was 33,660
ounces compared with 9,146 ounces in the comparative prior
period. Mining of new ore at Mesquite started in July 2007 and the
first pour of gold from new ore occurred in January 2008. Ore
production has been building up steadily since that time but did not reach a
steady state until the second quarter of 2008. As such, we produced
fewer ounces of gold in the first quarter of 2008 and recognized $9.3 million
from the 9,960 ounces sold, all of which were unhedged. Of the 32,715
ounces sold in the first quarter of 2009, 16,500 ounces were at a hedged price
of $801. This was lower than the average prevailing gold market price
of $909 per ounce, resulting in an average realized price of $867 per
ounce. In the first quarter of 2009, the lower average price realized
per ounce of gold sold negatively impacted revenues by $2.0 million, when
comparing to the same prior year period, but this was offset by the increase in
ounces sold resulting in gold sales revenue of $28.4
million.
Cost
of Goods Sold
|
|
|
Three months ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cost
of goods sold
|
|
|
21,226
|
|
|
|
11,446
|
|
|
Increase
(decrease)
|
|
|
9,780
|
|
|
|
8,817
|
|
|
Gross
profit (loss) %
|
|
|
25
|
%
|
|
|
(19
|
)%
|
|
Increase
(decrease)
|
|
|
44
|
%
|
|
|
34
|
%
|
Cost of goods sold in the first quarter
of 2009 increased by $9.8 million compared to the same prior year
period. In the first quarter of 2008, cost of goods sold exceeded
revenues reflecting the higher costs of previous quarters when the new leach pad
was in start-up mode and when a relatively high volume of waste material was
moved to access the ore body. Gross profit percentage in the first
quarter of 2009 was 25%, reflecting a full quarter of normal costs reflecting
ongoing operations. By the first quarter of 2009, we had already
experienced three previous quarters of full-production at the Mesquite
Mine.
Major
Components of Cost of Goods Sold
|
|
|
Three months ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Mine
operating costs
|
|
|
17,806
|
|
|
|
9,087
|
|
|
Royalties
|
|
|
644
|
|
|
|
265
|
|
|
Amortization
and accretion
|
|
|
2,776
|
|
|
|
2,094
|
|
|
Cost
of goods sold
|
|
|
21,226
|
|
|
|
11,446
|
|
Mine operating costs, including
inventory adjustments, were $17.8 million in the first quarter of 2009, compared
to $9.1 million in first quarter 2008. The most significant
components of mine operating costs included: labor, contracted
services, fuel and tire costs. Mine labor costs for 2009 were $4.8
million compared with $3.7 million in 2008, reflecting the increase in staff and
associated costs to support full mining operations. The costs of
maintaining our full mining fleet increased to $1.4 million in the first quarter
of 2009, compared to $0.5 million in the same prior year period.
In first quarter 2008, we
had just recommenced mining operations resulting in a significant portion of
ounces on the heap leach pad which created an inventory adjustment that
decreased mine operating costs. Whereas in first quarter 2009, we had
a decrease in ounces on the leach pad since the preceding period resulting in an
inventory adjustment that increased mine operating
costs.
Amortization and accretion expense in
the first quarter of 2009 was $2.8 million compared with $2.1 million in the
same prior year period, reflecting mining fleet additions, a new leach pad
addition, and increased ounces produced.
The foregoing factors resulted in a
gross profit of $
7.1
million for the first quarter of 2009
com
pared with a gross loss of $2.2 million
in the prior year period
.
Other
Operating Expenses
|
|
|
Three months ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
General
and administrative
|
|
|
1,370
|
|
|
|
1,481
|
|
|
Exploration
and business development
|
|
|
1,478
|
|
|
|
224
|
|
Other operating expenses
in the first quarter of 2009 were
$2.8
million compared with
$
1.7
million in
the same prior year period
. General an
d administrative expense of
$1.4
million, including
s
tock based compensation,
in 2009
decreased
marginally from the same
prior period expense of $1.5
million.
We are now incurring higher costs as a
result of moving into a new head-office facility in June of
2008.
Stock based compensation, included
within general and administrative expenses, represents the non-cash costs of
options, as calculated under the Black-Scholes option pricing model, and was
granted to directors, officers, employees and consultants. The
slightly lower cost of $0.3
million in 2009, compared to $0.4 million in 2008
, reflects the fact that options granted
to the new management team in 2006 were fully expensed
prior to the start of 2009
.
In November 2008, the Company changed
its stock option policy so that one-third of new grants commences vesting one
year from grant date, as opposed to one-third vesting immediately at grant
date. The impact of extending the vesting period is that expensing of
the fair value is also extended resulting in a lower expense being recorded in
each period.
There were
150,000 options granted in the first
quarter of 2009
and none were granted in the same prior
year period
.
In the first quarter of 2009, we
incurred $1.5 million on activities relating to our proposed business
combination with New Gold. These costs include legal, due-diligence
related and promotional fees necessary for the proposed
transaction. Since we anticipate closing this transaction on June 1,
2009, we expect further costs related to the proposed transaction. In
the comparative 2008 period, we did not have any business development costs, but
did incur $0.2 million on a drilling program to explore for oxide resources to
the south of the Brownie Hill area at Mesquite.
Other
Income (Expense)
|
|
|
Three months ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Interest
income
|
|
$
|
44
|
|
|
$
|
384
|
|
|
Interest
expense and commitment fees
|
|
|
(486
|
)
|
|
|
(699
|
)
|
|
Amortization
of deferred debt issuance costs
|
|
|
(173
|
)
|
|
|
(115
|
)
|
|
Realized
and unrealized loss on mark-to-market of gold forward sales
contracts
|
|
|
(12,291
|
)
|
|
|
(24,111
|
)
|
|
Realized
and unrealized loss on mark-to-market of fuel forward
contracts
|
|
|
(591
|
)
|
|
|
—
|
|
|
Loss
on foreign currency exchange
|
|
|
(99
|
)
|
|
|
(1,020
|
)
|
Other expense in the first quarter of
2009 was $13.6
million
com
pared to $25.6 million
in the same prior year period. The decrease in expense
primarily reflects
the 2008 charge of $24.1
million in respect of the unrealized
mark-to-market loss on gold forward sales contracts as a result of the
increasing spot price of gold during the period and the downward movement in
go
ld forward lease
rates. In the first quarter of 2009
,
m
ark-to-
market realized and unrealized losses of
$12.3
million w
ere
recognized
on our gold forward sales
contracts
.
We
entered into fuel hedge contracts with financial institutions in December 2008
and January 2009. The hedging contracts represent a total commitment
of 2.9 million and 3.0 million gallons of diesel per year at weighted average
prices of $1.75 and $1.94 per gallon in 2009 and 2010,
respectively. We are financially settling 252,000 gallons of diesel
per month related to these contracts until December 31, 2010. In the
first quarter of 2009, we realized losses of $0.3 million on the settlement of
our fuel hedge contracts. A
t March 31, 2009
, these hedge contracts were priced
higher t
han the prevailing
market price
, as
such, an unrealized loss of
$0.3
million was
recognized
in the
mark-to-market of the remaining contracts
.
Interest income in the first quarter of
2009 was $0.04 million compared with $0.4
million in the previous year as a
result of cash balances b
eing relatively high during
2008
and declining interest
rates throughout 2008
and
2009
. Interest
exp
ense and commitment fees
of $0.5 million in 2009
reflect
our outstanding
term loan facility of $68.6 million and an average interest rate of
approximately 2.7%
.
At March 31,
2008
,
$84.3 million had been
advanced
under the loan
facility
but at a higher
interest rate of 5.3% thereby resulting in interest expense and commitment fees
of $0.7 million for the period. In the first quarter of
2008
,
a foreign exchange loss of
$1.0
million was recognized
due to holding Canadian dollar bank deposits at a time when that currency was
weakening in relation to the U.S. dollar.
The loss was a smaller $0.1
million in 2009 as a result of us holding less Canadian dollar denominated
currency.
At March 31, 2009
,
we continued to meet the criteria that
it was more likely than not that we would realize the benefit of a substantial
amount of the accumulated deferred tax asset. As such, a tax recovery
of $4.0 million was recognized, principally arising from the recording of the
accounting loss in respect of the mark-to-market of gold forward sales and fuel
hedge contracts. At March 31, 2009, the net deferred tax asset was
$28.4 million.
The factors discussed above
resulted
in a net
loss
for the first quarter of 2009 of $5.3
million or $0.04 per
share,
c
ompared with a net loss of
$19.6 million or $0.14
per
share in the prior year
period
.
Liquidity
and Capital Resources
Operating
Activities
In first quarter 2009, operating
activities generated cash of $8.9 million compared to using $10.7 million in the
same prior year period
.
The net loss in first
quarter 2009 was $5.3 million, including the non-cash impact of $12.6 million in
net mark-to-market losses on gold forward sales and fuel hedge contracts, and
deferred income taxes of $4.0 million. Other non-cash expense items
included amortization of deferred debt issuance costs of $0.2 million and
stock-based compensation of $0.4 million. Amortization of plant and
equipment increased from $2.0 million in first quarter 2008 to $2.5 million in
the comparative period in 2009 as a result of capital additions that were part
of the Mesquite Mine expansion project and increased ounces of gold
produced. Changes in the composition of non-cash working capital
items during first quarter 2009 generated $2.5 million. Accounts
receivable has decreased by $1.7 million during first quarter 2009 due largely
to the receipt of payment for a shipment of gold valued at $2.1 million that was
sold in 2008 but payment was delayed until January 2, 2009 due to a bank
error. We also saw a net increase in accounts payables and accrued
liabilities of $0.3 million as a result of costs related to the proposed
business combination with New Gold.
Investing
Activities
Cash required for investing activities
in first quarter 2009 was $1.5 million compared with $8.7 million in the same
prior year period. The spending in 2008 was on several process
related projects forming part of the Mesquite Mine expansion project, most
notably being the new leach pad, new carbon columns and retrofit of the process
plant. By December 31, 2008, the expansion project was effectively
completed. In the first quarter of 2009, we spent $0.2 million on
general site instrumentation and electrical items, and $0.7 million on a
training simulator for truck operators to minimize accidents, pre-mature
mechanical failures and tire wear.
Financing
Activities
During the first quarter of 2009,
financing activities generated $0.4 million of cash inflows from the exercise of
stock options, compared to $0.6 million from the combined exercises of stock
options and warrants in the same prior year period. In first quarter
2008, we were also advanced a further $7.9 million under our term loan facility
which allowed us to fund the completion of the expansion project at Mesquite and
ramp-up gold production.
The foregoing factors resulted in an
increase in our cash and cash equivalent balances of $7.8 million in the first
quarter of 2009, compared to a decrease of $11.0 million in the same prior year
period.
Balance
Sheet
At March 31, 2009
,
we
de
creased our gold inventory in the leach
pad to
45,685
ounces from 52,146 ounces at December
31, 2008. In 2009, inventoried costs associated with respect to the
leach pad and metal-in-process build-up were $30.3 million and $2.1 million,
respectively, compared with $31.8 million and $1.4 million in
the same prior year period
,
respectively.
At March
31, 2009, we had available cash balances of $19.1 million, restricted cash of
$7.5 million, and working capital of $39.5 million. In addition, we
currently have unutilized credit facilities of $17.7 million. At
present it is not anticipated there will be further advances under the credit
facility. We have also effectively completed expenditures related to
the Mesquite Mine expansion project.
Related
Party Transactions
In
November 2008, a new cost sharing agreement was reached between Silver Bear and
Western Goldfields with an effective date of January 1, 2009. The new
agreement amends previous cost sharing ratios between the two companies to
one-third recovery of shared costs from Silver Bear, which reflects the current
level of activities. Western Goldfields initially incurs the
costs.
During
the three month period ended March 31, 2009 overhead costs of $0.1 million were
charged by Western Goldfields to Silver Bear (March 31, 2008 - $0.1
million). There were no amounts outstanding at March 31,
2009.
Critical
Accounting Policies
Listed
below are the accounting policies that we believe are critical to our financial
statements due to the degree of uncertainty regarding the estimates or
assumptions involved and the magnitude of the asset, liability, revenue or
expense being reported. For additional information on the market
risks that we face see Item 3 – “Quantitative and Qualitative Disclosure about
Market Risk” set forth in this report.
Derivative
Instruments
The
Company accounts for its gold forward sales and fuel hedges in conformity with
the following statements issued by the Financial Accounting Standards Board
(“FASB”): Statement of Financial Accounting Standards (“SFAS”) No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” as amended by
SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB No. 133,” SFAS No. 138, “Accounting for
Certain Derivative Instruments and Certain Hedging Activities,” and SFAS No.
149, “Amendment of Statement 133 on Derivative Instruments and Hedging
Activities”. These standards establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. They require
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value.
A
derivative may be specifically designated as a hedge of financial risk exposures
of anticipated transactions if, both at the inception of the hedge and
throughout the hedge period, the changes in fair value of the contract
substantially offset the effect of commodity price changes on the anticipated
transactions and if it is probable that the transactions will
occur. Pursuant to such a designation, the income effect of the
change in derivative values would be accounted for in other comprehensive income
based upon the Company's valuation of the associated financial gain or
loss. Any change arising from the determination of the derivative's
effectiveness would be accounted for as a charge to current
operations.
At March
31, 2009, the Company’s gold forward sales and fuel hedge contracts did not meet
the hedge accounting criterion in SFAS No.133, and therefore were not designated
as cash flow hedges. These derivative contracts have been entered
into in order to effectively establish prices for future production of metals
and to establish prices for future purchases of energy. Since the
hedge accounting rules of SFAS No.133 are not being applied, the period-end
mark-to-market of these contracts are immediately reflected on the statement of
operations of the Company and the cumulative effect is reflected as an asset or
liability on the balance sheet. Realized and unrealized gains or
losses associated with these derivative contracts are included in earnings in
the period in which the underlying hedged transaction is
recognized.
Amortization
Expenditures
for new facilities or equipment and expenditures that extend the useful lives of
existing facilities or equipment are capitalized and amortized using the
straight line method at rates sufficient to depreciate such costs over the
estimated useful lives of such facilities or equipment.
We have
expensed all mine development costs prior to our establishing proven and
probable reserves upon completion of the feasibility study in August 2006.
Subsequent costs incurred to access reserves, drilling and related costs
incurred that meet the definition of an asset were capitalized and amortized on
a units-of-production basis.
The costs
incurred in the construction of our leach pad expansion were capitalized and
being amortized on a units-of-production basis.
The
expected useful lives used in amortization calculations are based on applicable
facts and circumstances, as described above. Significant judgment is involved in
the determination of useful lives, and no assurance can be given that actual
useful lives will not differ significantly from the useful lives assumed for
purposes of amortization.
Carrying Value of Long-Lived
Assets
We review
and evaluate the carrying value of our long-lived assets for impairment when
events or changes in circumstances indicate the carrying values may not be
recoverable. Our long-lived assets comprise the fair values allocated to the
plant and equipment acquired upon completion of the Mesquite acquisition and
subsequent additions. Annually, we review the present value of future cash flows
to determine if the amounts carried under plant and equipment are
recoverable.
Material
changes to any of these factors or assumptions discussed above could result in
future impairment charges.
Inventories
Ore on Heap Leach
Pad
Prior to
July 2007, the Company placed no value on the mineralized material that had been
placed on the leach pad at the Mesquite Mine prior to the acquisition of the
property by the Company on November 7, 2003. The reserve estimates
reported by the Company in August 2006 and March 2007 support the recoverability
of inventoried production costs. Accordingly, since resumption of
mining operations in July 2007, new ore placed on the leach pad has been valued
at the lower of average cost or net realizable value. Any adjustment
to net realizable value is reflected in the statement of operations as a
component of mine operating costs. Costs are added to ore on leach
pad based on current mining costs, including applicable amortization and
depletion relating to mining operations. Costs are removed from ore
on leach pad as ounces are recovered based on the average cost per estimated
recoverable ounce of gold on the leach pad. The estimates of
recoverable gold on the leach pad are calculated from the quantities of ore
placed on the leach pad (based on measured tonnage), the grade of ore placed on
the leach pad (based on assay results), and a recovery percentage (based on ore
type).
Metal-in-Process
Inventories
Under the
heap leaching process, ore on leach pad is treated with a chemical solution
which dissolves the gold contained in the ore. The solution is
further processed in a plant where the gold is
recovered. Metal-in-process inventories represent metal in solution
or in subsequent stages of the refining process. In-process
inventories are measured based on assays of the solution and projected
recoveries from the refining circuit and are valued at average production cost
or net realizable value. Average production cost is based on the
average cost of material fed into the process from the leach pad plus the
in-process conversion costs, including applicable amortization relating to the
process facilities. Metal-in-process inventories are valued at the
lower of average cost or net realizable value and any adjustment to net
realizable value is reflected in the statement of operations as a component of
mine operating costs.
Although
the amount of recoverable gold ounces placed on the leach pad, based on tonnage
and grade of ore, is reconciled to the gold ounces actually recovered, the
nature of the leaching process inherently limits the ability to precisely
monitor inventory levels. As a result, the metallurgical balancing
process is constantly monitored and estimates are refined based on actual
results over time. The determination of both the ultimate recovery
percentage and the quantity of metal expected over time requires the use of
estimates, which are subject to revision since they are based upon metallurgical
test work. The Company expects to continue to process and recover
metal from the leach pad until no longer considered economically
feasible.
Bullion
Bullion
(metal refined to industry purity standards) inventory, which includes metal
held on our behalf by third parties, is valued at the lower of average
production cost or net realizable value.
Deferred
Taxes
The
Company accounts for income taxes using the liability method, recognizing
certain temporary differences between the financial reporting basis of the
Company’s assets and liabilities and the related income tax basis for such
assets and liabilities. This method generates either a net deferred
income tax asset or liability for the Company, as measured by the statutory tax
rates in effect. The Company derives its deferred income tax benefit
or charge by recording the change in either the net deferred income tax asset or
liability balance in the year.
The
Company’s deferred income tax assets include certain future income tax
benefits. A valuation allowance is recorded against deferred income
tax assets if management does not believe the Company has met the “more likely
than not” standard required by SFAS No. 109 to allow recognition of such an
asset.
Reclamation and Remediation
Liabilities
Our
mining and exploration activities are subject to various laws and regulations
governing the protection of the environment. In August 2001, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” which
established a uniform methodology for accounting for estimated reclamation and
remediation costs. The statement was adopted in July 2003 upon the acquisition
of Mesquite when we recorded the estimated present value of the reclamation and
remediation liabilities. Our estimates of reclamation and remediation
liabilities are reviewed and adjusted from time to time to reflect changes in
the estimated present value resulting from the passage of time and revisions to
the estimates of either timing or amount of reclamation and abandonment
costs.
Accounting
for reclamation and remediation liabilities requires management to make
estimates at the end of each period of the undiscounted costs expected to be
incurred. Such cost estimates include ongoing care, maintenance and monitoring
costs. Changes in estimates are reflected in earnings in the period an estimate
is revised.
Accounting
for reclamation and remediation liabilities requires management to make
estimates of the future costs we will incur to complete the reclamation and
remediation work required to comply with existing laws and regulations. Actual
costs incurred in future periods could differ from amounts estimated.
Additionally, future changes to environmental laws and regulations could
increase the amount of reclamation and remediation work required. Any such
increases in future costs could materially impact the amounts charged to
earnings for reclamation and remediation.
Stock Options and Warrants
Granted to Employees and Non-employees
The
Company accounts for grants of stock options and warrants in terms of SFAS No.
123 (R), “Share Based Payment”, which revises SFAS No.123, “Accounting for
Stock-Based Compensation”. Accordingly, the Company measures all employee
stock-based compensation awards and awards to non-employees in exchange for
goods and services, using a fair value method and records such expense in its
financial statements over the service period. In its application of the
Black-Scholes model for valuation of stock options and warrants, management is
required to make estimates based on several assumptions, including: risk-free
interest rate, volatility rate, and the expected life of the options and
warrants. Actual results could differ from these estimates.
Newly
Adopted Pronouncements
This
section includes a discussion of significant accounting standards that were
effective January 1, 2009.
FAS 141(R),
Business Combinations (FAS 141(R))
Effective January 1,
2009, we
assessed
the provisions of FAS 141(R), which
replaced FAS 141, for business combinations consummated after the effective date
of December 15, 2008. Under FAS 141(R), business acquisitions will be
accounted for under the “acquisition method”, compared to the “purchase method”
mandated by FAS 141.
This standard
did not impact our
interim
financial
statements.
FSP FAS
157-2 Fair Value Measurements (FSP FAS 157-2)
Effective
January 1, 2009, we assessed the provisions of FSP FAS 157-2 which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements for
nonfinancial assets or liabilities. The new disclosure requirements
did not significantly impact these interim financial statements – see Note
17.
FAS 160, Non-controlling
Interests in Consolidated Financial Statements (FAS 160)
Effective January 1, 2009, we assessed
the provisions of FAS 160. Under FAS 160, non-controlling interests
are measured at 100% of the fair value of assets acquired and liabilities
assumed. As the Company does not currently have any non-controlling
interests, this standard has not had any impact on these interim financial
statements.
FAS 161, Disclosures about
Derivative Instruments and Hedging Activities (FAS 161)
Effective
January 1, 2009, we assessed the provisions of FAS 161. Under FAS 161
entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under FAS 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. The
Company’s enhanced disclosure requirements in respect of its gold forward sales
and fuel hedge contracts are provided in Notes 11 and 12.
Accounting
Pronouncements Issued but Not Yet Adopted
This
section includes a discussion of accounting pronouncements recently issued but
not yet adopted that may have an impact on our financial
statements.
SFAS No. 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly
In April
2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly ("FSP FAS No.
157-4"), which expands quarterly disclosure requirements in SFAS No. 157 about
how an entity determines fair value when the volume and level of activity for an
asset or liability have significantly decreased and transactions related to such
assets and liabilities are not orderly. This pronouncement is effective for our
reporting periods beginning with our June 30, 2009 interim financial statements.
We are currently assessing the impact of FSP FAS No. 157-4 on our consolidated
financial position, cash flows and results of operations.
SFAS No. 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
In April 2009, the FASB issued Staff
Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments, which amends FASB Statement No. 107, Disclosures about
Fair Value of Financial Instruments ("SFAS No. 107"), and Accounting Principles
Board Opinion No. 28, Interim Financial Reporting ("APB No. 28"). This
pronouncement is effective for our reporting periods beginning with our June 30,
2009 interim financial statements. The amendments expand the disclosure
requirements of SFAS No. 107 and APB No. 28 about how an entity reports on fair
value to be included in the summarized, interim financial statements. We are
currently assessing the impact of this FASB Staff Position on our consolidated
financial position, cash flows or results of
operations.
SFAS No. 115-2 and SFAS No.
124-2, Recognition and Presentation of Other-Than-Temporary
Impairments
In April
2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. FSP SFAS No. 115-2 and SFAS
No. 124-2 provides additional guidance designed to create greater clarity and
consistency in accounting and presenting impairment losses on securities. The
FSP is intended to bring greater consistency to the timing of impairment
recognition, and provide greater clarity to investors about the credit and
noncredit components of impaired debt securities that are not expected to be
sold. The measure of impairment in comprehensive income remains fair value. The
FSP also requires increased disclosures regarding expected cash flows, credit
losses, and an aging of securities with unrealized losses. This pronouncement is
effective for our reporting periods beginning with our June 30, 2009 interim
financial statements. We are currently evaluating the impact of the
implementation of FSP SFAS No. 115-2 and SFAS No. 124-2 on our consolidated
financial position, results of operations and cash flows.
Contractual
Obligations
The
following table presents the contractual obligations outstanding as at March 31,
2009:
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
2- 3
Years
|
|
|
4- 5
Years
|
|
|
More than
5 Years
|
|
|
Loan
payable
1
|
|
$
|
68,640
|
|
|
$
|
11,656
|
|
|
$
|
31,082
|
|
|
$
|
25,902
|
|
|
$
|
—
|
|
|
Reclamation
and remediation obligations
2
|
|
|
10,097
|
|
|
|
362
|
|
|
|
1,356
|
|
|
|
1,123
|
|
|
|
7,256
|
|
|
Share
of office lease
|
|
|
3,529
|
|
|
|
383
|
|
|
|
766
|
|
|
|
773
|
|
|
|
1,607
|
|
|
Total
|
|
$
|
82,266
|
|
|
$
|
12,401
|
|
|
$
|
33,204
|
|
|
$
|
27,798
|
|
|
$
|
8,863
|
|
|
|
(1)
|
In
addition to the scheduled repayments, mandatory prepayments are required
semi-annually based on excess cash flow from the Mesquite
Mine. An estimate of the timing and amount of prepayments has
not been included in the chart above, as these payments are based on the
amount by which the Mesquite Mine’s cash balance, at date of repayment,
exceeds $4.0 million.
|
|
|
(2)
|
In
current dollars (undiscounted).
|
|
|
(3)
|
This
chart does not include obligations that can be settled by physical
delivery of gold.
|
The completion of the proposed business
combination with New Gold, which is expected to occur on June 1, 2009, will
result in known severance payments of approximately $0.8 million.
Outlook
Consistent with details of the new mine
plan for the Mesquite Mine announced in 2008, we have started focusing on mining
ore from the Rainbow pit in 2009. This compares with the previous
plan in which mining was split between the Rainbow and Big Chief
pits. We have begun to achieve increased efficiency by consolidating
mining equipment into one location, including reduced costs due to shorter
haulage distances, no wasted time moving between pits, as well as improved
operator efficiency. The estimated mine life remains unchanged at 14
years and we plan to mine our three pits sequentially through the duration of
the mine life to continue to maximize these efficiencies.
In 2009,
we expect to incur $68.0 to $72.0 million in operating costs to place
approximately 155,000 recoverable ounces of gold on the leach pad. At
March 31, 2009, Western Goldfields had approximately 45,685 recoverable ounces
of inventory on the heap leach pad which is estimated to increase to
approximately 65,000 ounces at the end of 2009. Due to the timing of
leach pad recoveries and the impact of inventory adjustments, we continue to
forecast production and sales to be between 140,000 and 150,000 ounces at cost
of sales per ounce
1
of $530
to $540. Operating cash flow is expected to be $40 - $45 million for
2009 assuming a gold price of $850 per ounce. We expect production
and sales to grow again in 2010 to approximately 175,000 ounces with total
operating costs remaining similar to 2009 at $68 to $72 million, thus reducing
the cost of sales per ounce in 2010 to approximately $400.
While
total operating costs are expected to remain consistent on a quarterly basis
from $16.5 to $18.5 million, higher stripping ratios and lower grades are
expected to result in lower ounces placed and lower production in the first
three quarters than the fourth quarter of 2009. Approximately 50% of
the recoverable ounces placed in 2009 are forecast to be placed in the fourth
quarter. Production in each of the second and third quarters is
expected to be 33,000 to 38,000 ounces before increasing to 38,000 to 43,000
ounces in the fourth quarter. The cost of sales per ounce
1
in the
second and third quarters of the year are forecast to be $595 to $605 and
include approximately $4 million per quarter of costs from the expected
reduction in the value of leach pad gold inventory quarter to
quarter. The fourth quarter cost of sales per ounce
1
is
expected to decline to $365 to $375 and include approximately a $1.0 million
reduction to cost of sales from the expected increase in the value of leach pad
gold inventory during the fourth quarter. The inventory related costs
do not impact the Company's cash flow in the respective quarters.
We repaid
$17.7 million of our outstanding debt at the end of 2008 leaving $68.6 million
outstanding under the credit facility. We also have sufficient cash
to make further scheduled payments of $11.7 million during 2009. At
March 31, 2009, Western Goldfields had cash of $19.1 million, excluding $7.5
million of restricted cash. As Mesquite’s expansion project is
effectively completed, we expect nominal sustaining capital requirements going
forward. We intend to continue using Mesquite’s cash flow to de-lever
the balance sheet.
The
proposed business combination with New Gold announced on March 4, 2009 continues
to move forward; materials were mailed for the New Gold and Western Goldfields
shareholder meetings on May 13, 2009 and May 14, 2009,
respectively. This Transaction will diversify Western Goldfields from
a single mine company to a multi-mine producer. This will also
deliver upon the Company’s strategic goal of growth through
consolidation.
|
|
(1) Includes
realized losses from settlement of fuel hedge contracts. Cost
of sales per ounce is a non-GAAP financial performance measure with no
standardized meaning under US GAAP. For further information,
please see below.
|
Off-Balance
Sheet Arrangements
We had no
off-balance sheet arrangements as at March 31, 2009 and December 31, 2008 or at
the date of this report.
Summary of Quarterly Results
($ in thousands, except ounces
and per share amounts)
|
|
|
Mar-09
|
|
Dec-08
|
|
Sept-08
|
|
Jun-08
|
|
Mar-08
|
|
Dec-07
|
|
Sept-07
|
|
Jun-07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
28,369
|
|
24,472
|
|
41,352
|
|
20,347
|
|
9,256
|
|
606
|
|
1,281
|
|
1,546
|
|
|
Realized
and unrealized gain (loss) on mark-to-market of gold hedging
contracts
|
|
|
(12,291
|
)
|
15,120
|
|
30,777
|
|
(8,708
|
)
|
(24,111
|
)
|
(30,570
|
)
|
(28,331
|
)
|
—
|
|
|
Income
tax recovery (expense)
|
|
|
4,009
|
|
(7,706
|
)
|
(17,204
|
)
|
2,029
|
|
9,832
|
|
37,133
|
|
—
|
|
—
|
|
|
Net
income (loss)
|
|
|
(5,292
|
)
|
7,781
|
|
30,518
|
|
(4,059
|
)
|
(19,624
|
)
|
(7,293
|
)
|
(36,375
|
)
|
(4,007
|
)
|
|
Net
income (loss) per share - basic
|
|
|
(0.04
|
)
|
0.06
|
|
0.22
|
|
(0.03
|
)
|
(0.14
|
)
|
(0.06
|
)
|
(0.31
|
)
|
(0.04
|
)
|
|
-
diluted
|
|
|
(0.04
|
)
|
0.05
|
|
0.21
|
|
(0.03
|
)
|
(0.14
|
)
|
(0.06
|
)
|
(0.31
|
)
|
(0.04
|
)
|
|
Cash
and cash equivalents
|
|
|
19,057
|
|
11,275
|
|
37,914
|
|
26,549
|
|
32,829
|
|
43,870
|
|
18,038
|
|
18,750
|
|
|
Total
assets
|
|
|
215,078
|
|
207,368
|
|
234,506
|
|
232,244
|
|
226,363
|
|
214,495
|
|
126,252
|
|
92,037
|
|
|
Total
long-term financial liabilities
|
|
|
111,639
|
|
101,692
|
|
131,186
|
|
159,218
|
|
158,592
|
|
131,479
|
|
83,590
|
|
4,826
|
|
Non-GAAP
Financial Measure
Cost
of Sales per Ounce
Cost of
sales per ounce is a non-GAAP financial measure which is calculated by dividing
cost of sales, as per the Company’s financial statements, including realized
losses from settlement of fuel hedge contracts by the number of gold ounces
sold. This is the first quarter where this adjustment has been made
as we only began settling our fuel hedges in fiscal 2009.
We record
the realized and unrealized gains/losses from our fuel hedge contracts in other
income. We believe that including the realized gains/losses from
settlement of fuel hedge contracts provides investors and analysts with a
measure of our costs related to production that is more comparable to measures
presented by other mining companies. Management also uses this
measure internally to monitor, evaluate, and manage those factors that impact
production costs on a monthly basis. This calculation is performed on
a consistent basis for the periods presented.
The cost
of sales per ounce statistic is intended to provide additional information, does
not have any standardized meaning prescribed by U.S. GAAP and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with U.S. GAAP. This non-GAAP measure may not be
comparable to similar measures presented by other issuers.
|
|
|
Three
months ended
March
31
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations (000’s)
|
|
|
|
|
|
|
|
Cost
of sales (excludes amortization and accretion)
|
|
$
|
18,450
|
|
|
$
|
9,352
|
|
|
Realized
losses from settlement of fuel forward contracts
|
|
|
288
|
|
|
|
—
|
|
|
Cost
base for calculation
|
|
$
|
18,738
|
|
|
$
|
9,352
|
|
|
Gold
ounces sold
|
|
|
32,715
|
|
|
|
9,960
|
|
|
Cost
of sales per ounce
|
|
$
|
573
|
|
|
$
|
939
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
In the
normal course of business, we are exposed to market risk, including changes in
interest rates and prices of certain commodities, notably gold and
fuel. A change in the market price of these commodities significantly
affects our profitability and cash flow.
Gold
prices can fluctuate widely due to numerous factors, such as: demand, forward
selling by producers, central bank activities, the strength of the U.S. dollar
and global mine production levels. We use gold forward sales
contracts to manage a portion of our exposure to risk arising through changes in
the price of gold. While we are exposed to credit risk in the event
of non-performance by counterparties to these agreements, in all cases the
counterparties are highly rated financial institutions and we do not anticipate
non-performance. We do not hold or issue derivative financial
instruments for trading purposes.
At March
31, 2009, our remaining gold forward sales contracts of 379,500 ounces,
consisted of a series of contracts to sell 5,500 ounces per month at a price of
$801 per ounce over a remaining 69-month period to December 2014. The
fair value of the liability on the remaining contracts as at March 31, 2009 was
$57.5 million. We monitor our hedge positions and perform sensitivity
analyses on our forward contracts to determine the mark-to-market gain/loss at
current gold prices. We estimate that a 10% change in the spot price
of gold from the level of $917 per ounce at March 31, 2009 translates into a
mark-to-market fluctuation of approximately $34.5 million.
Gold
sales covered by the forward sales contracts represent approximately 44% of our
forecast annual shipments for 2009. The balance of our shipments will
be sold in the spot market. We estimate that a 10% change in the
price of gold from the level of $917 per ounce at March 31, 2009 translates into
a $7.6 million increase/decrease in revenues from un-hedged production in
2009.
Western
Goldfields entered into fuel hedge contracts with financial institutions in
December 2008 and January 2009. The hedging contracts represent a
total commitment of 2.9 million and 3.0 million gallons of diesel per year at
weighted average prices of $1.75 and $1.94 per gallon in 2009 and 2010,
respectively. The Company is financially settling 252,000 gallons of
diesel per month related to these contracts until December 31,
2010. The fair value of the liability on the contracts as at March
31, 2009 was $1.2 million. We monitor our hedge positions and perform
sensitivity analyses on our forward contracts to determine the mark-to-market
gain/loss at current fuel prices. We estimate that a 10 cent change
in the spot price of fuel from the level of $1.38 per gallon at March 31, 2009
translates into a mark-to-market fluctuation of approximately $0.5
million.
Fuel
costs are a significant cost element at Mesquite. An approximate 20%
of Mesquite’s operating costs were attributable to diesel
consumption. The market price of diesel and gasoline is unpredictable
and can fluctuate significantly. As world oil prices have declined in
the past six months, the impact was being reflected in the price paid for
fuel. We estimate that a 10 cent change in the price of diesel fuel
from an average of approximately $1.55 per gallon experienced during the three
month period ended March 31, 2009 translates into a $0.2
million increase/decrease in mining costs.
At March
31, 2009 we had $68.6 million of bank debt outstanding of which $11.7 million is
current. This debt currently bears interest based on short-term U.S.
dollar LIBOR rates, generally for one-month periods, plus 2.2%. A 1%
fluctuation in U.S. dollar LIBOR rates at current levels of indebtedness would
translate into a $0.7 million change in reported pre-tax income.
We have a
bonding and insurance program, primarily with American International Specialty
Lines Insurance Company (“AIG Insurance”) in respect of the operations and
closure liabilities of the Mesquite Mine. At March 31, 2009, we had
$8.9 million in the account. On September 16, 2008, AIG Insurance’s
parent company, American International Group, Inc. (“AIG”), suffered a liquidity
crisis following the downgrade of its credit rating. The United
States Federal Reserve has since loaned money to AIG in order for the company to
meet its obligations to post additional collateral to trading
partners. As a result of Federal and State laws governing the
operation of AIG Insurance, we do not currently believe that our funds are at
risk.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures and Internal Controls Over Financial
Reporting
Under the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, an evaluation of the
disclosure controls and procedures was conducted, as such is defined under Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the Exchange Act). Based on this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective as at the end of such period covered by
this Form 10-Q to provide reasonable assurance that the information required to
be disclosed by the Company in the reports it files, and the transactions that
are recorded, processed, summarized and reported, within the appropriate time
periods and forms. It should be noted that a control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that it will detect or uncover failures within our company
to disclose material information otherwise required to be set forth in our
periodic reports.
Changes
in Internal Control Over Financial Reporting
During
the period covered by this report, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
|
Item 1.
|
Legal
Proceedings
|
The
Company is involved in legal proceedings from time to time, arising in the
ordinary course of its business. Typically, the amount of ultimate
liability with respect to these actions will not, in the opinion of management,
materially affect Western Goldfields’ financial position, results of operations
or cash flows.
In
assessing loss contingencies related to legal proceedings that are pending
against us or unasserted claims that may result in such proceedings, the Company
and its legal counsel evaluate the perceived merits of any legal proceedings or
unasserted claims as well as the perceived merits of the amount of relief sought
or expected to be sought. If the assessment of a contingency suggests
that a loss is probable, and the amount can be reliably estimated, then a loss
is recorded. When a contingent loss is not probable but is reasonably
possible, or is probable but the amount of loss cannot be reliably estimated,
then details of the contingent loss are disclosed. Loss contingencies
considered remote are generally not disclosed unless they involve guarantees, in
which case we disclose the nature of the quantities. Legal fees
incurred in connection with pending legal proceedings are expensed as
incurred.
There
were no loss contingencies accrued in the three month period March 31, 2009 or
year ended December 31, 2008.
There
have been no material changes to the risk factors disclosed in our 2008 Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
11, 2009 and joint management information circular supplement filed on April 16,
2009.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
|
Item 3.
|
Defaults Upon Senior
Securities
|
None.
|
Item 4.
|
Submission of Matters to a Vote
of Security Holders
|
None.
|
Item 5.
|
Other
Information
|
None.
31.1 Rule
13a - 14(a) Certification of Principal Executive Officer*
31.2 Rule
13a - 14(a) Certification of Principal Financial Officer*
32.1 Section
1350 Certification of Principal Executive Officer *
32.2 Section
1350 Certification of Principal Financial Officer *
* Filed herewith
SIGNATURES
Pursuant
to the requirement of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
WESTERN
GOLDFIELDS INC.
|
|
|
|
|
|
Dated:
April 30, 2009
|
By:
|
/s/
Raymond Threlkeld
|
|
|
|
Raymond Threlkeld, President and Chief Executive Officer
|
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