Gabriel Resources Ltd.: Second Quarter 2010 Report
TORONTO, ONTARIO -- (Marketwire) -- 08/05/10 -- Gabriel Resources Ltd. (TSX: GBU) -
Highlights
-- Romanian government official statements positive towards the restart of
EIA review process
-- New CEO joins the Company in June 2010
-- Dam safety permits issued
-- Acid mine drainage pilot plant work commenced
-- Restoration of historical town centre continues
'We are highly encouraged by the progress the Company has achieved to date in advancing towards the recommencement of the Technical Analysis Committee process of our flagship Rosia Montana gold project in Romania. The project has been designed for the benefit of not only our shareholders but the people of Rosia Montana, Romania and the European Union in terms of job creation, environmental rehabilitation and preservation of the rich cultural heritage,' stated Jonathan Henry, the Company's recently-appointed Chief Executive Officer.
For further information on this press release, please contact:
Jonathan Henry, President and Chief Executive Officer
+ 44 7798 801783
Tom Sipos, Investor Relations
(416) 682-6084
About Gabriel Resources/Rosia Montana Gold Corporation
Gabriel is a Canadian-based resource company engaged in the exploration and development of mineral properties in Romania and is presently in the permitting stage and preparing to develop its 80.46%-owned Rosia Montana gold project. Gabriel is committed to responsible mining and sustainable development in the communities in which it operates. For more information please visit the Company's website at www.gabrielresources.com.
Financial Performance
-- Second quarter net loss was $12.8 million, or $0.04 per share. Year-to-
date net loss was $28.2 million, or $0.08 per share.
-- A total of $7.8 million was spent on our development projects during the
second quarter, increasing the year-to-date amount to $17.1 million.
Liquidity and Capital Resources
-- Cash, cash equivalents and short term investments at June 30, 2010
totaled $119.9 million.
-- The base budget for 2010 on the Rosia Montana project ('the Project')
totals $46 million, of which $26.6 remains to be spent over the balance
of the year. This includes significant commitments to the Rosia Montana
community in order to reduce the high unemployment in the area. This
budget includes expenditures and commitments to maintain the value of
the Company's investment in mineral properties and to move the Project
through EIA approval.
-- Depending on the Project re-start, the Company may spend an additional
$33 million during 2010 on the acquisition of surface rights and various
activities to acquire permits and approvals required to apply for
construction permits.
-- Corporate overhead costs are expected to total a further $3 million for
the remaining part of the year.
Political Situation
-- On June 16, 2010, parliamentary opposition parties pressed a 'no
confidence' vote against the Romanian Government. The vote failed,
validating the current Government's programme and general agenda to
reignite Romania's economic development. As the Government's effort to
reduce Romania's budget deficit, largely through an increase in the VAT
and reduction in public sector salaries, was found to conform with the
requirements of its International Monetary Fund ('IMF') emergency loan,
the next tranche of emergency aid was released in early July 2010.
-- The re-assessment of the Project remains in Romania's governing
programme, indicating a new appreciation for the benefits that the
country's significant resources endowment can bring to Romania. At the
end of April 2010, the Minister of Environment and Forestry and Minister
of Culture, two key ministers for the Project, visited Rosia Montana. In
May 2010, the Minister of Environment and Forestry made a fact-finding
visit to a gold mine in Sweden to observe its operations, in particular
its use of cyanide in conformity with the strict European Union
directive on mining wastes.
-- In April 2010, opponents of cyanide-based mining seeking to ban the
practice in the European Union ('EU') pressed the European Parliament to
support a complete ban on the use of cyanide in mining before the end of
2011. In early May 2010, the European Parliament voted to adopt a motion
seeking legislation to ban the use of cyanide-based technologies in
mining in Europe, a non-binding exercise as only the European Commission
('EC') has the authority to initiate directives or regulations that, if
subsequently approved by the Parliament and EU Council, must then be
transposed into domestic law across EU member states. In June 2010, the
EC issued a letter over the signature of the Environment Commissioner
declining to institute a ban on cyanide, and endorsing the EU directives
regulating its use in mining. As the Project is designed to operate well
within the EU directive's limits, the Company sees the EC statement as a
positive endorsement for responsible mining.
-- Management continues to meet with stakeholders to understand their
issues and concerns and to explain the benefits and impacts of the
Project. Continued strong local and regional support is a direct result
of the Company's outreach. The Company's communication efforts are fact
based, focusing on the critically-needed economic benefits the Project
will bring to Romania. While political and NGO opposition remains,
broader understanding of these economic and development issues is a
factor in the positive reaction to the Project among Romania's governing
authorities.
Environmental/Permitting
-- Since the fall of 2007, review of the Project's EIA has been suspended
as a result of a decision taken by the former Minister of Environment
and Sustainable Development. Since that time, management has worked
diligently to advocate in favour of a restart of the EIA review process
and advance the permitting process for the Project. At the end of April
2010, local authorities issued RMGC a new urbanism certificate ('UC')
for the Project. The Company delivered the new UC to the Ministry of
Environment and Forestry ('MOE') in early May 2010, with the expectation
that receipt of this certificate would allow the MOE to direct the
Technical Analysis Committee ('TAC') to recommence its review of the EIA
for the Project. In the meantime, the MOE has confirmed that members of
the TAC have been provided with the documentation submitted by RMGC
originally to the MOE in 2004 and 2006 and once their period of review
is completed, the MOE will decide on the next steps regarding the EIA
review process.
-- The Company is moving forward with the amended industrial zonal
urbanistic plan ('Amended PUZ'), having completed the public
participation phase including ESPOO procedure (transboundary
consultations pursuant to Convention on Environmental Impact Assessment
in a Transboundary Context).
-- In addition, the Local Council has initiated the process for the zonal
urbanistic plan for the protected area ('PUZ - Protected Area'). The
forestry and agricultural land use change permits will proceed after the
EIA has been approved and surface rights obtained.
-- In June 2010 the dam safety permits for the Cetate and Corna dams for
the Project were issued by the MOE.
Rosia Montana Project Timeline
-- The new CEO is currently reviewing all aspects of the Project schedule
with a view to updating the market at the time of the Q3 results, if not
earlier, of any amendment to the timeline to first gold pour. At this
stage, management believes that once the EIA for the Project is approved
by the Romanian Government, in the absence of any other extraordinary
events, legal or otherwise, it would take at least 6 months to:
-- Complete the purchase of the outstanding properties;
-- Receive all other permits and approvals, including initial
construction permits; and
-- Complete the control estimate and complete all the financing.
-- Once construction of the mine begins, it is currently expected to take
at least 24 months to complete. Ultimately, the Romanian Government
determines the timing of issuance of the EIA approval and all other
permits and approvals required for the Rosia Montana Project, subject to
the Romanian courts dealing with litigation from NGOs in a timely
manner.
Other
-- The Company would also like to state that it has filed on SEDAR an
amended Management Discussion and Analysis ('MD&A') for the year ended
December 31, 2009. The amended MD&A includes disclosure as to the
management's conclusion regarding the effectiveness of the Company's
internal controls over financial reporting. This amended MD&A is being
re-filed at the request of the Ontario Securities Commission as a result
of a continuous disclosure review of the Company's filings.
Management's Discussion and Analysis
This Management's Discussion and Analysis ('MD&A') provides a discussion and analysis of the financial condition and results of operations to enable a reader to assess material changes in the financial condition and results of operations as at and for the three-and-six months ended June 30, 2010 and 2009. The MD&A should be read in conjunction with the unaudited consolidated financial statements and notes thereto ('Statements') of Gabriel Resources Ltd. ('Gabriel' or the 'Company') as at and for the three-and-six months ended June 30, 2010 and 2009, as well as the audited consolidated financial statements of the Company as at and for the year ended December 31, 2009 and notes thereto. The Company's consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ('Canadian GAAP').
All amounts included in the MD&A are in Canadian Dollars, unless otherwise specified. This report is dated as of August 4, 2010, and the Company's public filings, including its most recent Annual Information Form, can be reviewed on the SEDAR website (www.sedar.com).
Overview
Gabriel is a Canadian-based resource company engaged in the exploration and development of mineral properties in Romania and is presently in the permitting stage and preparing to develop its 80.46%-owned Rosia Montana gold project (the 'Project'). Minvest S.A. ('Minvest'), a Romanian state owned mining company, and one other private Romanian company, hold a 19.54% interest in Rosia Montana Gold Corporation ('RMGC'), beneficial owner of the Project, and Gabriel holds the pre-emptive right to acquire the 19.54% minority interest. Gabriel is committed to responsible mining and sustainable development in the communities in which it operates. RMGC will be required to pay 4% net smelter royalty on all production from the Project to the Romanian Government.
The Company's mission is to create value for all stakeholders from responsible mining. Gabriel's vision is to build the Project and to be a catalyst for sustainable economic, environmental, cultural and community development. As the Company develops the world-class Rosia Montana project, it will strive to set high standards through good governance, good engineering, open and transparent communications, and operations and reclamation based on best available techniques - all in the service of value creation and sustainable development. Whether the issue is corporate governance, community development, environmental responsibility or operational practices, the Company pledges to do it right.
Key Issues
Political Situation
On June 16, 2010, parliamentary opposition parties pressed a 'no confidence' vote against the Romanian Government. The vote failed, validating the current Government's programme and general agenda to reignite Romania's economic development. As the Government's effort to reduce Romania's budget deficit, largely through an increase in the VAT and reduction in public sector salaries, was found to conform with the requirements of its International Monetary Fund ('IMF') emergency loan, the next tranche of emergency aid was released in early July 2010.
Against the background of the Government's effort to sustain economic development, the Project continues to receive support from members of the local and regional political leadership. The focus of this support continues to be urging Romania's national government to restart the Environmental Impact Assessment ('EIA') review process for the Project as soon as possible.
The re-assessment of the Project remains in Romania's governing programme, indicating a new appreciation for the benefits that the country's significant resources endowment can bring to Romania. At the end of April 2010, the Minister of Environment and Forestry and Minister of Culture, two key ministers for the Project, visited Rosia Montana. In May 2010, the Minister of Environment and Forestry made a fact-finding visit to a gold mine in Sweden to observe its operations, in particular its use of cyanide in conformity with the strict European Union directive on mining wastes. The public comments of both ministers indicate their recognition of the need for significant investment in the Rosia Montana area.
In April 2010, opponents of cyanide-based mining seeking to ban the practice in the European Union ('EU') pressed the European Parliament to support a complete ban on the use of cyanide in mining before the end of 2011. Certain members of the European Parliament from Romania and other EU nations that are home to gold mining operations spoke out against the ban, indicating that the ban would effectively render it impossible to develop gold resources and pointing to the strict EU directive governing cyanide use as sufficient to ensure public health and safety. In early May 2010, the European Parliament voted to adopt a motion seeking legislation to ban the use of cyanide-based technologies in mining in Europe, a non-binding exercise as only the European Commission ('EC') has the authority to initiate directives or regulations that, if subsequently approved by the Parliament and EU Council, must then be transposed into domestic law across EU member states. In June 2010 the EC issued a letter over the signature of the Environment Commissioner declining to institute a ban on cyanide, and endorsing the EU directives regulating its use in mining. As the Project is designed to operate well within the EU directive's limits, the Company sees the EC statement as a positive endorsement for responsible mining.
Management continues to meet with stakeholders to understand their issues and concerns and to explain the benefits and impacts of the Project. Continued strong local and regional support is a direct result of the Company's outreach. The Company's communication efforts are fact based, focusing on the critically-needed economic benefits the Project will bring to Romania. While political and NGO opposition remains, broader understanding of these economic and development issues is a factor in the positive reaction to the Project among Romania's governing authorities.
Environmental/Permitting
Since the fall of 2007, review of the Project's EIA has been suspended as a result of a decision taken by the former Minister of Environment and Sustainable Development. Since that time, management has worked diligently to advocate in favor of a restart of the EIA review process and advance the permitting process for the Project.
Romania's current Minister of Environment and Forestry has indicated that he considers a valid urbanism certificate ('UC') necessary to restart the EIA review process. The Company maintains its position that a UC is not required to conduct the EIA review process under Romanian law or EU directives. At the end of April 2010, local authorities issued RMGC a new urbanism certificate for the Project; the Company delivered the new UC to the Ministry of Environment and Forestry (the 'MOE') in early May 2010 with the expectation that receipt of this certificate would allow the MOE to direct the Technical Analysis Committee ('TAC') to recommence its review of EIA for the Project. In the meantime, the MOE has confirmed that members of the TAC have been provided with the documentation submitted originally by RMGC to the MOE in 2004 and 2006 and once their period of review is completed, the MOE will decide on the next steps regarding the EIA review process.
While the EIA is by far the most important project approval, there are a number of other permits and approvals required to advance the Project to construction, such as dam safety permits, zonal urbanistic plans for the industrial and protected areas, forestry/agriculture land use change permits, archeological discharge certificates, as well as other permits and approvals that follow EIA approval. To that end, to the extent these permits and approvals are not dependent on EIA approval or the acquisition of surface rights, the processes for each of these will proceed in parallel with the EIA review process. The Company is moving forward with the amended industrial zonal urbanistic plan ('Amended PUZ'), having completed the public participation phase including ESPOO procedure (transboundary consultations pursuant to Convention on Environmental Impact Assessment in a Transboundary Context). In addition, the Local Council has initiated the process for the zonal urbanistic plan for the protected area ('PUZ - Protected Area'). The forestry and agricultural land use change permits will proceed after the EIA has been approved and surface rights obtained. In June 2010, the dam safety permits for the Cetate and Corna dams for the Project were issued by the MOE. Although there is no precedent or regulatory timeline, in the absence of any other extraordinary events, legal or otherwise, we expect the completion of permitting processes to take at least six months from the date the EIA is approved by the Romanian government.
Litigation
A number of foreign-funded and Romanian NGOs have initiated a multitude of legal challenges against a number of local, regional and national Romanian regulatory authorities that have the administrative authority to grant permits, authorizations and approvals for any aspect of the exploration and development of the Project. While some of the actions have been successful, most have been frivolous. These legal challenges include civil actions against both the regulatory authorities and individuals within such regulatory authorities; in general, they claim that such regulatory authorities are acting in violation of Romanian laws and ask for cancellation of the license, permit or approval. Gabriel, through RMGC, has intervened in all material cases in order to ensure that the Romanian courts considering these actions are presented with a legally correct, fair and balanced analysis as to why the various Romanian regulatory authorities' actions are in accordance with the relevant and applicable laws.
While the Company has designed the Project to follow all applicable laws to protect against permitting delays of the Project, multiple legal challenges brought forward by NGOs in Romania may continue to cause potential setbacks to the Project timeline.
During the second quarter there were three judgments rendered by Romanian courts on cases in which RMGC intervened as a defendant. As previously reported, on April 21, 2010, the High Court of Cassation and Justice admitted an RMGC appeal and cancelled irrevocably the fiscal audit assessment levied for the period 2003-2004 which totaled approximately $9.8 million. The timeframe for seeking recovery of this amount remains uncertain at this time. On June 1, 2010, a lower court ruling in Alba Iulia rejected an NGO claim seeking the suspension of urbanism certificate No. 68 ('UC 68') issued to RMGC by the Alba County Council in 2004. UC 68 expired in 2005. Finally, on June 2, 2010 the High Court of Cassation and Justice upheld a lower court ruling compelling the MOE to issue two dam safety permits previously approved by the National Commission on Dam Safety.
During the second quarter of 2010 RMGC also intervened in two new court challenges filed by NGOs opposed to the Project. The first matter involves a claim to suspend the latest urbanism certificate issued to RMGC by the Alba County Council ('UC 87'). UC 87 was issued to RMGC by the Alba County at the end of April 2010 and was provided to the Romanian Ministry of Environment and Forestry at its request. The second claim involves a challenge against the legality of two resolutions of the local council of Rosia Montana passed in 2002 regarding zoning bylaws for the area. The timeframe for the resolution of both of these cases is uncertain at this time. If the NGOs pursuing these claims are successful before the courts then delays in the permitting process could be expected, depending on the ruling issued by the court and the reaction to this ruling by the administrative authorities in Romania. Also during the second quarter, an appeal was filed against an earlier court decision which rejected an NGO claim seeking an order compelling the MOE to return the initial project presentation report submitted by RMGC in 2004. The next hearing on this matter is scheduled for September 8, 2010.
RMGC's action against the MOE seeking an order compelling it to re-commence the EIA review process remains before the High Court of Cassation and Justice, with the next hearing scheduled in the third quarter of 2010.
There were no other material developments involving litigation matters associated with the Project during the second quarter of 2010.
Surface Rights
As a result of the suspension of the EIA review process in September 2007, the home purchase program was suspended indefinitely in February 2008. The Company owns 77 percent of the homes in the industrial zone, protected area and the buffer zone.
In addition to the private properties required, the Company needs to acquire properties (about 30 percent of the surface area of the Project) which are owned by institutions, including the local administrations of Rosia Montana and Abrud, as well as certain churches and state-owned mining companies. The process to acquire the institutional properties is underway and expected to be completed after the approval of the EIA.
Ultimately, the Company's ability to obtain construction permits for the mine and plant is predicated on securing 100 percent of the surface rights within the footprint of the construction permits in the industrial zone, the timing of which is not entirely within the Company's control.
Resettlement Sites
Construction of the Alba Iulia resettlement site, known as Recea, began in summer 2007. The construction of all 125 homes in the Recea resettlement site in Alba Iulia has been completed, with 124 homes handed over to their respective owners. This project stands as visible testimony to the determination of the Company to deliver on its promises to the people of Rosia Montana.
The Company is currently reviewing the technical merits of Piatra Alba, the new resettlement village to be built in Rosia Montana, as well as the process of obtaining permits for this site.
Archaeology
An archaeological review of historic mining activity at Rosia Montana is a critical step in the granting of the construction permit to build the Project. A number of archaeological discharge certificates are required for various parts of the area under the footprint of the proposed mine.
An NGO commenced legal action in 2004 and ultimately obtained an annulment with respect to RMGC's archaeological discharge certificate No. 4 ('ADC 4') from the High Court of Cassation and Justice in December 2008. The Company has reviewed the Court's written reasons for this decision and will seek a new archeological discharge certificate through a revised application prepared by independent researchers that it believes will address all deficiencies identified by the Court.
The Company has concluded the restoration of a historical home located in the center of Rosia Montana to host a permanent exhibition of history and mining archeology, which will be part of the future Mining Museum (this being one of the public commitments made in the EIA).
During the past year, the Company continued emergency maintenance work on 160 houses located in the historical center of Rosia Montana, with the aim to stop their deterioration. While these houses are not designated as historic, their restoration will contribute to maintaining the character of Rosia Montana village. This emergency conservation work will continue through a multi-year program, which will run in parallel with the construction and the operations phase of the mining project.
CEO Search
On May 25, 2010 the Company announced the appointment of Jonathan Henry as President and Chief Executive Officer, effective June 7, 2010. Mr. Henry is a seasoned mining executive with a track record of success in building a strong precious metals mining and development franchise, most recently as Chief Executive Officer and Managing Director of Avocet Mining PLC, a UK based gold mining company with operations and advanced development and exploration projects in West Africa and South East Asia.
Liquidity and Capital Resources
Cash, cash equivalents and short term investments at June 30, 2010 totaled $119.9 million.
The base budget for 2010 on the Project totals $46 million, of which $26.6 remains to be spent over the balance of the year. This includes significant commitments to the Rosia Montana community in order to reduce the high unemployment in the area. This budget includes expenditures and commitments to maintain the value of the Company's investment in mineral properties and to move the Project through EIA approval. In addition to the base budget, and depending on the Project re-start, the Company may spend an additional $33 million during 2010 on the acquisition of surface rights and various activities to acquire permits and approvals required to apply for construction permits. Corporate overhead costs are expected to total a further $3 million for the remaining part of the year.
Financing Plan
The estimated capital cost to complete the development of the Rosia Montana Project - including interest, financing and corporate costs - is approximately US$1 billion. Under the guidance of the new CEO, management is in the process of re-examining financing alternatives with a view to presenting the various options open to the Company to the board of directors.
Project Timeline
-- The EIA was submitted in the second quarter of 2006.
-- In January 2007, the Company received the list of official questions
from the Romanian Government, raised during the public consultation
process.
-- The Company responded to the questions in the form of an Annex to the
EIA, in early May 2007.
-- Technical Analysis Committee and Espoo Convention meetings went well
during the third quarter of 2007, until TAC meetings were suspended in
September 2007.
-- In response to the repeated requests for a new urbanism certificate for
the Rosia Montana Project by the current Minister of Environment and
Forestry, RMGC obtained and delivered one to the MOE in May 2010.
-- In July 2010, the MOE confirmed that members of the TAC have been
provided with the documentation submitted originally by RMGC to the MOE
in 2004 and 2006 and once their period of review is completed, the MOE
will decide on the next steps regarding the EIA review process.
The new CEO is currently reviewing all aspects of the Project schedule with a view to updating the market at the time of the Q3 results, if not earlier, of any amendment to the timeline to first gold pour. At this stage management believes that once the EIA for the Project is approved by the Romanian Government, in the absence of any other extraordinary events, legal or otherwise, it would take at least 6 months to:
-- Complete the purchase of the outstanding properties;
-- Receive all other permits and approvals, including initial construction
permits; and
-- Complete the control estimate and complete all financing.
Once construction of the mine begins, it is currently expected to take at least 24 months to complete. Ultimately, the Romanian Government determines the timing of issuance of the EIA approval and all other permits and approvals required for the Rosia Montana Project, subject to the Romanian courts dealing with litigation from NGOs in a timely manner.
Outlook
Our key objectives include:
1. Continue to win Romanian public and Government support and backing for
the Project
2. Obtaining approval of our EIA and all other required permits;
3. Raising the required financing to build the Project;
4. Beginning Project construction; and
5. Continue to maximize shareholder value, while ensuring that the Project
benefits those in the community and the surrounding area to the optimum
possible extent.
Results of Operations
The results of operations are summarized in the following tables, which have been prepared in accordance with Canadian generally accepted accounting principles:
Results of Operations
in thousands of Canadian dollars,
except per share amounts 2010 Q2 2010 Q1 2009 Q4 2009 Q3
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Statement of Loss
Loss $ 12,789 $ 15,439 $ 10,729 $ 7,082
Loss per share - basic and diluted 0.04 0.04 0.03 0.02
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Balance Sheet
Working capital 110,278 124,604 148,715 95,838
Total assets 632,678 642,189 658,694 608,399
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Statement of Cash Flows
Investments in development and
exploration including working
capital changes 10,372 13,185 13,004 10,689
Cash flow from (used in) financing
activities 3,764 857 70,260 (435)
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in thousands of Canadian dollars,
except per shareamounts 2009 Q2 2009 Q1 2008 Q4 2008 Q3
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Statement of Loss (Income)
Loss (Income) $ 1,798 $ 6,969 $ (3,958) $ 2,782
Loss (Income) per share - basic
and diluted 0.01 0.03 (0.02) 0.01
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Balance Sheet
Working capital 109,518 7,401 29,172 50,324
Total assets 624,991 522,618 530,135 508,010
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Statement of Cash Flows
Investments in development and
exploration including working
capital changes 7,389 11,158 8,171 19,237
Cash flow provided by financing
activities 112,906 3 - 82
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Statement of Loss
3 months ended 6 months ended
in thousands of Canadian dollars, June 30, June 30,
except per share amounts 2010 2009 2010 2009
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Total operating expenses for the
period $ 5,664 $ 4,344 $ 8,079 $ 11,062
Loss for the period 12,789 1,798 28,228 8,767
Loss per share - basic and diluted 0.04 0.01 0.08 0.03
Total operating expenses for the three-month period ended June 30, 2010 increased from the corresponding period in 2009 primarily due to the vesting of 750 thousand stock options valued at $2.4 million upon achievement of certain milestones. The increase is partially offset by severance costs incurred in 2009 of $0.9 million. For the six-month period ended June 30, 2010, total operating expenses decreased from 2009 due to $4.9 million resulting from non-recurring retiring allowances and settlement payments, including the expensing of share-based compensation, for the former CEO and two employees who departed the Company during the first half of 2009. The decrease is partially offset by $2.4 million representing fair value of stock options which vested upon achievement of certain milestones.
Loss for the three-and-six-month periods ended June 30, 2010 increased from the same periods in 2009 mainly due to an increase in foreign exchange loss of $9.7 and $22.5 million, respectively, as well as due to an increase in stock based compensation expense.
The Company expects to incur operating losses until commercial production commences and revenues are generated.
Expenses
Corporate, General and Administrative
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Finance $ 217 $ 237 $ 450 $ 434
External communications 247 123 439 288
Information technology 77 124 151 200
Legal 147 192 306 376
Payroll 920 798 1,589 3,985
Other 638 573 1,035 927
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Corporate, general and administrative
expense $2,246 $2,047 $3,970 $6,210
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Corporate, general and administrative costs are those costs incurred by the corporate office in Toronto. Corporate, general and administrative costs for the three-month period ended June 30, 2010 were comparable to the same period in 2009. For the six-month period ended June 30, 2010, corporate, general and administrative costs are lower than in 2009 due to the non-recurring retiring allowance of $2.4 million paid to the Company's former CEO in the first quarter of 2009. Corporate, general and administrative costs are anticipated to rise (excluding the cost of non- recurring items) once the Project is permitted and the Company increases its staffing for construction and operations.
Stock Based Compensation
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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DSUs - expensed (recovered) $ 178 $ (432) $ 145 $ 521
Stock option compensation - expensed 2,837 1,462 3,391 2,851
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Stock based compensation - expensed $ 3,015 $ 1,030 $ 3,536 $ 3,372
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DSUs - capitalized (capital
reduction) $ - $ (48) $ - $ 47
Stock option compensation -
capitalized 296 263 593 526
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Stock based compensation -
capitalized $ 296 $ 215 $ 593 $ 573
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DSU Compensation
Number of DSUs issued 362,806 22,668 368,768 36,389
Average value ascribed to each DSU
issued $ 4.20 $ 1.93 $ 4.20 $ 2.13
DSU costs for the second quarter 2010 reflect the issuance of 5 thousand DSU's during the period and the increase in the DSU liability due to a higher share price at quarter end compared to the Company's share price at the beginning of the period.
During the three-month ended June 30, 2010 the Company issued 358 thousand DSU's to the newly appointed CEO. The expense will be recognized as 50 percent of the DSUs vest on the first anniversary and remaining 50 percent vest on the second anniversary of commencement of the employment.
For the six-month ended June 30, 2010, the DSU costs reflect the issuance of 11 thousand units and the increase in the Company's share price at the beginning of the period. The Company's closing share price at June 30, 2010 was $4.83 while at December 31, 2009 the closing share price was $4.37.
Initially valued at the five-day weighted average market price of the stock at date of issue, DSUs are revalued each period based on the closing share price at the period end, with the difference between the total value of the DSUs at period end compared to the value at the end of the previous period. The change in share price of the DSU's at the end of the period is charged to the Statement of Loss. Overall, for the three-and-six month periods ended June 30, 2010, the Company's share price increased by $0.62 compared to March 31, 2010 and $0.46 compared to December 31, 2009, while for the same period in 2009, the Company's share price increased by $0.45 from March 31, 2009 and $0.43 compared to December 31, 2008.
3 months ended 6 months ended
June 30, June 30,
2010 2009 2010 2009
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Stock option compensation
Number of stock options
granted 4,050,000 1,550,000 4,050,000 2,150,000
Average value ascribed to
each regular vesting option
granted $ 4.64 $ 1.08 $ 4.64 $ 1.12
Options granted to corporate
employees, consultants,
officers, and directors 2,925,000 1,350,000 2,925,000 1,350,000
Options granted to
development project
employees and consultants 1,125,000 200,000 1,125,000 800,000
The estimated fair value of stock options is amortized over the period in which the options vest which is normally three years. For those options which vest on single or multiple dates, either on issuance or on meeting milestones (the 'measurement date'), the entire fair value of the vesting options is recognized immediately on the measurement date.
The fair value of stock options granted to personnel working on development projects is capitalized over the vesting period.
Of the 4 million options issued in the second quarter of 2010, 2 million vest over a three-year period and the remainder vest based on achievement of certain milestones. The fair value of options that vest upon achievement of milestones will be recognized and capitalized as milestones are achieved and the value can be reasonably measured.
Project Financing Costs
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Project Financing Costs $ 353 $ 236 $ 465 $ 386
The project financing costs for the three-and-six month periods ended June 30, 2010 were comparable to those of the same period in 2009.
Project financing activities include advisory services.
Interest Income
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Interest Income $ 73 $ 67 $ 194 $ 131
Higher interest income in the three-and-six month periods ended June 30, 2010 compared to the same periods in 2009 is the result of higher average cash balances during the periods in 2010, partially offset by lower interest rates.
The Company is focused on minimizing credit risk and therefore is foregoing higher yields on its investments and is investing predominantly in government guaranteed instruments.
Approximately 90 percent of the Company's cash balances are invested in government guaranteed instruments with the balance invested in term deposits with major Canadian banks.
Foreign Exchange
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Foreign exchange gain (loss) -
realized $ (1,207) $ (759) $ (1,617) $ (868)
Foreign exchange gain (loss) -
unrealized (5,989) 3,240 (18,722) 3,034
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Total foreign exchange gain
(loss) $ (7,196) $ 2,481 $ (20,339) $ 2,166
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During 2009, the Company converted the majority of the cash raised from two private placements and public equity offering to foreign currencies to match anticipated foreign denominated expenditures. Since the purchase of foreign currencies, mainly EURO and US Dollar, the Canadian Dollar strengthened relative to the foreign currencies acquired, resulting in realized and unrealized foreign exchange losses for the three-and-six month periods ended June 30, 2010. As a result of higher average cash balance in the first half of 2010 and strengthening of Canadian Dollar to EURO and US Dollar, the realized and unrealized foreign exchange losses for the three- and-six month periods ended June 30, 2010 were higher by $9.7 million and $22.5 million, respectively, than in the same periods in 2009.
The Company maintains a Canadian dollar cash position to fund corporate, general and administrative activities, while the majority of its cash resources are in foreign currencies.
The Company expects to continue to report foreign currency gains and losses as it continues to hold foreign currencies.
Taxes
In April 2010, the Supreme Court in Romania admitted an RMGC appeal and cancelled irrevocably the fiscal assessment concerning the period 2003 and 2004 which totaled $9.8 million. The original assessment arose from the disallowance of the application of state aid incentives related to unrealized foreign exchange gains on inter-company debt.
The Company seeks to obtain a reimbursement for the taxes paid in previous years. The timeframe and process for seeking recovery of the full amount is uncertain at this time. As of June 30, 2010 no recovery amount was recorded in the financial statements.
Investing Activities
The most significant ongoing investing activities are for the Project in Romania. Most of the expenditures to date have been for identifying and defining the size of the four ore bodies, for engineering to design the size and scope of the Project, for environmental assessment and permitting, social support to local communities, as well as surface rights/property acquisition. Once the construction permit is received, the nature and magnitude of the expenditures will increase, as roads, production facilities, open pits, tailings management facilities and associated infrastructure is built.
Mineral Properties
All costs incurred in Romania related to development and exploration projects - Rosia Montana, Bucium and Baisoara - are capitalized to mineral properties.
Listed below is a summary of expenditures at Rosia Montana for the three-and-six months ended June 30, 2010 and 2009.
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Finance and administration $ 1,304 $ (1,436) $ 2,981 $ 1,173
External communications 1,678 3,875 4,179 5,087
Legal 2,030 1,205 3,243 2,396
Permitting 260 616 660 1,371
Community development 1,541 225 2,680 1,374
Project management and engineering 1,195 1,373 2,557 2,903
Exploration - Rosia Montana 136 178 300 350
Exploration - Bucium - - - -
Exploration - Baisoara 47 51 64 86
Capitalized depreciation and
disposals (851) (101) (963) (232)
Capitalized stock based compensation (296) (215) (593) (573)
Reclassification to mineral
properties - (3,564) - (3,564)
Decrease (increase) in resettlement
liabilities 335 8,631 556 7,778
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Total exploration and development
expenditures $ 7,379 $ 10,838 $ 15,664 $ 18,149
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During the three-and-six month periods ended June 30, 2010, the finance and administration costs increased compared to the corresponding 2009 periods primarily due to reduced foreign exchange gains related to lower trade payable and resettlement liability balances.
External communications costs decreased for the three-and-six-months ended June 30, 2010 compared to the same period last year mainly due to the reduction in media advertising. The professional service agreement between the Company and an international communications firm continues until February 29, 2012. The agreed fee consists of an annual fee and success fee payable at the end of three years agreement upon fulfillment of certain criteria.
The increased legal costs for the three-and-six-months ended June 30, 2010 compared to the same periods last year reflect the additional fees associated with the engagement of a new law firm in Romania.
Community development costs increased for the three-and-six-months ended June 30, 2010 compared to the same periods in 2009 mainly due to the acceleration of certain commitments to the Rosia Montana community which will reduce the high unemployment in the area.
No additional work is planned on the Bucium property until the exploration license is converted to an exploitation license and the Rosia Montana EIA is approved. The government has indicated that a decision on the conversion of the Bucium exploration to exploitation license will not be made until a decision on the Project is made.
Purchase of Capital Assets
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Resettlement site development costs $ - $ 2,620 $ 1 $ 4,738
Investment in long-lead-time equipment 403 5,081 1,328 11,889
Other 74 13 183 43
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Total investment in capital assets $ 477 $ 7,714 $ 1,512 $ 16,670
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Depreciation and disposal - expensed $ 50 $ 61 $ 108 $ 124
Depreciation and disposal -
capitalized to mineral properties $ 851 $ 101 $ 963 $ 232
The construction of all 125 homes at the Recea resettlement site in Alba Iulia has been completed with 124 homes handed over to their respective owners.
The final installments for the mills are expected to be made in 2010 ($2.0 million) and 2011 ($50 thousand) at which point the grinding area systems and crushing facilities will be fully paid for and in the possession of the Company. In order to minimize the transportation, storage expenditures and other costs, the Company evaluated various strategies for storing completed equipment and based on the final evaluation the equipment is currently stored at four main locations in accordance with manufacturer's specifications.
Cash Flow Statement
Liquidity and Capital Resources
Until receipt of the environmental permits for Project, the only source of liquidity is the Company's cash balance, bridge financing, exercise of stock options and warrants outstanding, and the equity markets. The cost to complete the Project was estimated at US$876 million based on a revised cost estimate in March 2009. To complete the development of the Project, the Company will need financing of approximately US$1 billion, to fund capital costs of US$876 million plus working capital, interest, financing and corporate costs of US$124 million. Under the guidance of the new CEO, management is in the process of re-examining financing alternatives with a view to presenting the various options open to the Company to the board of Directors. If the Company was unable to raise the required funds, it would seek strategic alternatives to move the Project towards development.
In 2009, the Company raised $180 million net of acquisition costs through two private placements and a public equity offering.
As at June 30, 2010, cash, cash equivalents, and short-term investments were $119.9 million compared to $142.8 million at June 30, 2009. Substantially all of these amounts are invested in government guaranteed investments.
The Company manages its foreign currency risks through matching its expected foreign denominated expenditures with foreign currency investments. The Company has not entered into any derivatives hedging activities. The Company maintains Canadian Dollar investments to fund corporate costs while most investments are denominated in Euros and some in US Dollars to match planned foreign currency expenditures. The Company incurs foreign currency gains and losses on those foreign denominated investments as the currencies move against each other. Accordingly, the Company will continue to experience foreign exchange gains and losses as long as it maintains foreign currency investments.
Based on management's knowledge and experience of the financial markets, the Company believes the following movements are 'reasonably possible' over a three month period:
-- Cash and cash equivalents include deposits which are at floating
interest rates. A plus or minus 1% change in earned interest rates would
affect net income from deposits by $0.2 million.
-- For short-term investments a plus or minus 1% change in earned interest
rates would affect net income by $70 thousand.
-- The Company holds significant balances in foreign currencies, and this
gives rise to exposure to foreign exchange risk. A plus or minus 1%
change in foreign exchange rates would affect net income by $1.0
million.
The Company's objective when managing capital is to safeguard its accumulated capital in order to fund development of its Project. The Company manages its capital structure and makes adjustments to it based on the level of funds on hand and anticipated future expenditures. While the Company expects that it will be able to obtain equity, long-term debt and/or project-based financing sufficient to build and operate the Project, there are no assurances that these initiatives will be successful. To safeguard capital and to mitigate currency risk, the Company invests its surplus capital in highly liquid, highly rated financial instruments that reflect the currency of the planned expenditure.
Working Capital
As at June 30, 2010, the Company had working capital, calculated as total current assets less total current liabilities, of $110.3 million versus $148.7 million as at December 31, 2009. The decrease in working capital in the second quarter of 2010 relates to the loss incurred during the period, investments in mineral properties and payments for capital assets.
As at June 30, 2010, the Company had current liabilities of $11.1 million of which $4.9 million relates to resettlement obligations stemming from the acquisition of homes in the Project area. The construction of all 125 homes at the Recea resettlement site in Alba Iulia has been completed with 124 homes handed over to their respective owners.
Net Change in Non-Cash Working Capital
Operating non-cash working capital decreased for the three-months ended June 30, 2010 compared to the same period in 2009 due to a decrease in payables and accrued liabilities since the previous period end.
The decrease in investing non-cash working capital for the three-and-six-months ended June 30, 2010 compared to the same period in 2009 is primarily due to a decrease in payables and accrued liabilities of the Romanian subsidiary as well as due to unrealized foreign exchange losses on short-term investments.
Related Party Transactions
In December 2004, the Company loaned a total of US$971 thousand to the four minority shareholders of RMGC, who held an aggregate of 20% of the shares of RMGC, to facilitate a statutory requirement to increase RMGC's total share capital. During 2009 the Company purchased shares held in RMGC by two of its minority shareholders. Upon completion of this transaction, the outstanding indebtedness of the two minority shareholders of $23 thousand was deemed to be paid in full.
During 2009, the Company received a formal offer to purchase the shares held in RMGC by two of its minority shareholders (the 'Minority Shareholders'), each of whom owned 23,967 common shares in RMGC representing each 0.23% of its share capital. The Company responded to the offer of the minority shareholders and has purchased 47,934 common shares of RMGC held by the Minority Shareholders for 222,708 shares of Gabriel and for US$0.8 million in cash. As a result of these transactions, the Company's ownership interest in RMGC increased from 80% to 80.46%.
In 2009, the Company loaned a further US$40 million to the remaining two minority shareholders of RMGC to facilitate another statutory share capital increase in RMGC.
The loans are non-interest bearing and are to be repaid as and when RMGC distributes dividends to its shareholders. The loans and related minority interest contribution have been offset on the balance sheet until such time as the loans are repaid. Once the loans are repaid the minority interest component will be reflected on the balance sheet.
Resettlement Liabilities
During the fourth quarter of 2006, the Company recommenced purchasing homes in the Project area. Residents were offered two choices. They could either choose to take the sale proceeds and move to a new location of their choosing or they could exchange their properties for a new property to be built by the Company at one of the two new resettlement sites. For those residents who choose the resettlement option, the Company increases its mineral properties on the balance sheet as well as resettlement liabilities for the anticipated construction costs of the resettlement houses. As the construction takes place, the costs of newly built houses are capitalized as construction in progress. After the transfer of legal title of the property is completed, the Company reduces the amounts capitalized as construction in progress and at the same time its resettlement liabilities. All resettlement associated costs will remain capitalized in mineral properties and amortized over the life of the mine once the Project moves into production.
At June 30, 2010, the Company had accrued resettlement liabilities totaling $4.9 million (December 31, 2009 - $5.4 million), which represents the cost of building the remaining new homes for the local residents and outstanding delay penalties.
The construction of all 125 homes at the Recea resettlement site in Alba Iulia has been completed with 124 homes handed over to their respective owners. The Company is currently reviewing the technical merits of Piatra Alba, the new resettlement village to be built in Rosia Montana, as well as the process of obtaining the permits for this site. All 24 property owners who chose the Piatra Alba resettlement site have signed a three year extension contract. As a result of the delay in delivery of homes, the Company paid or accrued a penalty of 9% (for Recea) and up to 20% (for Piatra Alba) of the agreed upon unpaid property value per year of delay as required by the agreement including all amendments.
As at June 30, 2010, the Company has accrued $0.5 million (December 31, 2009 - $0.4 million) representing its total estimated delay penalty. During the three-and-six-month period ended June 30, 2010, the Company paid $58 and $25 thousand respectively of delay penalties (2009 - $0.3 and $0.4 million respectively).
Contractual Obligations
The Company, through its wholly owned subsidiary Rom Aur SRL ('Rom Aur'), holds an exploration license with respect to the Baisoara property in Western Romania. The license is for an initial term of 5 years and expires in July 2011. Upon granting of the license, the Company committed to spend US$3.2 million over the term of the license. Due to the delay in the Rosia Montana permitting process, the Company has reduced the exploration expenditure for Baisoara to a level required to maintain the license and permit in good standing.
The Company and its subsidiaries have a number of agreements with arms-length third parties who provide a wide range of goods and services which totalled $10.3 million at June 30, 2010 (December 31, 2009 - $14.7 million). Typically, the service agreements are for a term of not more than one year and permit either party to terminate for convenience on notice periods ranging from 15 to 90 days. Upon termination, the Company has to pay for services rendered and costs incurred to the date of termination.
During 2007, the Company entered into purchase agreements for long-lead-time equipment, the cost of which is to be paid over several years beginning 2007. As at June 30, 2010 outstanding commitments under such agreements totaled $2.0 million (December 31, 2009 - $5.1 million). No further long-lead-time equipment orders are expected to be placed until the EIA is approved; however, the reported commitment expressed in Canadian Dollars will fluctuate as obligations are denominated in foreign currencies.
The following is a summary of contractual commitments of the Company
including payments due for each of the next five years and thereafter:
2014 and
Total 2010 2011 2012 2013 thereafter
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Baisoara exploration
license $ 2,773 $ 185 $ 2,588 $ - $ - $ -
Resettlement 4,681 - 4,681 - - -
Goods and services 10,349 8,045 796 1,233 275 -
Long lead time
equipment 2,047 1,988 59 - - -
Rosia Montana
exploitation license 1,412 177 177 176 176 706
Surface concession
rights 849 11 21 21 21 775
Lease agreements 524 261 263 - - -
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Total commitments $ 22,635 $ 10,667 $ 8,585 $ 1,430 $ 472 $ 1,481
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