Gabriel Resources Ltd.: Third Quarter 2010 Report
TORONTO, ONTARIO -- (Marketwire) -- 11/03/10 -- Gabriel Resources Ltd. ('Gabriel' or the 'Company') (TSX: GBU) -
Highlights
-- Technical Analysis Committee ('TAC') recommenced its review of the Rosia
Montana Environmental Impact Assessment ('EIA')
-- First formal TAC meeting was held on September 22, 2010
-- Romanian lower courts rejected legal challenges to Urbanism Certificates
issued for the Rosia Montana project in 2004 and 2010
-- Restoration of historical town centre continues
Jonathan Henry, Gabriel's President and Chief Executive Officer stated:
'We were very encouraged by the recommencement of the TAC review process in September. Our team is in the process of addressing all the questions posed by the Romanian authorities and looking forward to fully demonstrating that the Rosia Montana project has been designed in a technologically sound, safe and environmentally responsible fashion'.
'The continuation of the EIA process is an important step in the development of Rosia Montana, which should deliver much-needed economic development and employment to the region as well as to Romania. The Rosia Montana project will also remediate ongoing environmental degradation within the footprint of the project caused by prior un-remediated mining activities' Jonathan Henry added.
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 (the 'Project'). Gabriel is committed to responsible mining and sustainable development in the communities in which it operates. Rosia Montana is expected to bring US$19 billion to Romania as direct and indirect investment according to recent estimates from British- based Oxford Policy Management. The project will generate thousands of jobs while observing all Romanian and European environmental laws and also helping preserve important historic buildings as well as local cultural heritage. For more information please visit the Company's websites at www.gabrielresources.com and www.rmgc.ro.
Financial Performance
-- Third quarter net income was $14.6 million, or $0.04 per share,
primarily reflecting foreign exchange gains of $10.2 million and $6.9
million Romanian income tax recovery. Year-to-date net loss was $13.6
million, or $0.04 per share.
-- A total of $9.1 million was spent on development projects during the
third quarter, increasing the year-to-date amount to $26.3 million.
Liquidity and Capital Resources
-- Cash, cash equivalents and short-term investments at September 30, 2010
totaled $131.3 million.
-- The budget for the fourth quarter of 2010 is estimated at $20 million
including expenditures and commitments to maintain the value of the
Company's investment in the Project.
-- The capital cost to complete the development of the Project - including
interest, financing and corporate costs - is estimated at approximately
US$1 billion. Once the EIA approval is granted, the Company will re-
examine its alternatives to finance the development of the Project in
the most optimal fashion.
Political Environment
-- Throughout the third quarter of 2010, the Romanian Government continued
to deal with the challenges of the global economic slowdown, focusing on
implementing austerity measures intended to reduce Romania's budget
deficit and comply with the requirements of the International Monetary
Fund emergency aid programme.
-- The Company is continuing to reach out to various stakeholders of the
Project. These efforts are designed to address comprehensively the
issues and concerns related to the development of the Project. Continued
strong local and regional support for Rosia Montana is believed to be
the direct result of these efforts. The Company's communication program
is fact-based and focused on explaining the Project's economic and
environmental benefits.
Environmental/Permitting
-- In July 2010, the members of the TAC were provided with the
documentation submitted originally to the Ministry of the Environment in
2004 and 2006; the first formal TAC meeting was held on September 22,
2010. The process is on-going.
-- The Company is moving forward with the amended Industrial Zone
Urbanization Plan, having completed the public participation phase of
the process.
Management's Discussion and Analysis
This Management's Discussion and Analysis ('MD&A') provides a discussion and analysis of the financial condition and results of operations to enable a reader to assess material changes in the financial condition and results of operations as at and for the three-and-nine months ended September 30, 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-nine months ended September 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 November 2, 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'), the 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, responsible 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
Throughout the third quarter of 2010, the Romanian Government continued to grapple with the challenges of the global economic downturn, focusing on implementing austerity measures intended to reduce Romania's budget deficit and comply with the requirements of the International Monetary Fund ('IMF') emergency aid programme. In late October, opposition parties in the Romanian Parliament tabled a non-confidence motion against the Government in response to public-sector wage cuts and an increase in the country's value-added tax - steps the Government considered to be in keeping with the IMF recovery programme. The vote failed, leaving the coalition government in place.
Against the background of the Government's effort to encourage economic development, the Project continues to receive support from members of the local and regional political leadership. On September 17, 2010, the Ministry of Environment and Forestry ('MOE') recommenced the Technical Analysis Committee ('TAC') review of the Rosia Montana Environmental Impact Assessment ('EIA'), which had been suspended since the fall of 2007, and the project is now receiving the objective analysis the Company has long sought.
While the second quarter saw efforts by Project opponents to press the European Parliament to support a complete ban on cyanide use in mining, no additional initiatives were advanced in the third quarter. The last action relating to the Project occurred in June 2010, when the European Commission ('EC') issued a letter over the signature of the Environment Commissioner declining to institute a ban on cyanide, and endorsing existing European Union ('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 as well as the environmental benefits to an area that has significant environmental damage from historical unregulated mining activities. 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
On September 17, 2010 the Romanian MOE recommenced resumption of the TAC review for the Project's EIA. The TAC review had been suspended since September 2007 based on a decision taken by the former Minister of Environment and Sustainable Development.
In July 2010, the members of the TAC were provided with the documentation originally submitted by RMGC to the MOE in 2004 and 2006. The first formal TAC meeting involving RMGC was held on September 22, 2010. At this time it is not known how many TAC meetings will be required to review and make an assessment of the Project's EIA or how long this process may take. Ultimately, the EIA must be approved by a Cabinet decision of the Romanian Government. The Company's management expects that this can be achieved by the end of the second quarter of 2011.
While the EIA is the most important project approval, there is a number of other permits and approvals required to advance the Project to construction, such as 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 the Convention on Environmental Impact Assessment in a Transboundary Context) and obtained the Romanian Waters Authority Endorsement. In addition, the Local Council has initiated the process for the zonal urbanistic plan for the protected area ('PUZ - Protected Area'). During the third quarter, the Company obtained for the PUZ - Protected Area the Romanian Waters Authority Endorsement and the Environmental Endorsement issued by the Environmental Protection Agency of Alba. 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 permitting processes to obtain initial construction permits for the Project to take approximately one year from the date the EIA for the Project and the new archeological discharge certificate for the Carnic deposit are approved by the Romanian government.
Litigation
Over the years 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 these actions have been successful, most have been frivolous. These legal challenges include civil actions against the regulatory authorities and, in certain cases, against 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 a particular 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 - those currently ongoing and those that may be introduced in the future - may continue to cause potential setbacks to the Project timeline.
During the third quarter of 2010, RMGC was involved as a defendant and/or intervener in the following cases: (i) defendant in a claim seeking the suspension, and ultimately the cancellation of urbanism certificate No. 87 ('UC 87'); (ii) defendant in the final appeal of a claim seeking the cancellation of urbanism certificate No. 68 ('UC 68'); and iii) intervener in a claim challenging the legality of a Rosia Montana local council resolution re-confirming zoning bylaws for the local commune.
In June of 2010 a lower court ruling rejected an NGO claim seeking the cancellation of UC 68. Prior to the end of the third quarter the appeal of this ruling was filed and a preliminary hearing on the appeal is currently scheduled for November 9, 2010. On September 29, 2010 a lower court also ruled against an NGO claim seeking the suspension of UC 87. This decision remains appealable.
During the third quarter, Gabriel and the County Council of Alba Iulia withdrew their final appeal against an earlier court ruling cancelling UC 105. UC 105 was granted to RMGC in 2007 and expired in 2008.
RMGC also intervened in a claim challenging the legality of a resolution of the local council of Rosia Montana passed in 2009 re-confirming zoning bylaws initially approved in 2002 for the area. This claim remains before the courts with a hearing scheduled for November 16, 2010.
On September 21, 2010 RMGC and the Romanian MOE definitively won a ruling case regarding an NGO claim seeking an order compelling the MOE to return to RMGC for further completion the initial project presentation report submitted by RMGC in 2004. RMGC and the MOE obtained favourable judgments at both the lower and appellate courts in this matter.
RMGC's action against the MOE challenging its grounds for suspending the EIA (TAC) review process in 2007 and seeking an order compelling it to re-commence the process remains before the High Court of Cassation and Justice. The next hearing on this matter is currently scheduled for January 18, 2011.
A lower or appellate court ruling against RMGC's interest with respect to UC 68, UC 87 or the challenge to the local council resolution re-confirming local zoning bylaws may have a material impact on the permitting process for the Project. The implications of a negative court ruling will only be known once such a decision is issued and the position of the Romanian Government is assessed. In all circumstances RMGC will vigorously maintain its legal rights and will continue to work with local, county and federal authorities to ensure the Project receives a fair and timely evaluation in accordance with all Romanian and EU laws.
There were no other material developments involving litigation matters associated with the Company during the third 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 in February 2008. The acquisition process for private properties is currently on hold-pending progress in the permitting process. 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 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 for a further resettlement village to be built, as well as the process of obtaining permits for its construction.
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 within 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 submitted documents for obtaining a new archeological discharge certificate through a revised application prepared by independent researchers that it believes will address all deficiencies identified by the Court, which annulled the prior ADC 4.
The Company has completed 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.
Liquidity and Capital Resources
Cash, cash equivalents and short term investments at September 30, 2010 totaled $131.3 million. The budget for the fourth quarter of 2010 is estimated at $20 million including expenditures and commitments to maintain the value of the Company's investment in mineral properties.
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. Once EIA approval has been granted, the Company will re-examine 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.
-- A new urbanism certificate for the Rosia Montana Project was delivered
to the MOE in May 2010.
-- On September 17, 2010 the MOE recommenced resumption of the Technical
Analysis Committee ('TAC') review of the Project's EIA, which had been
suspended since the fall of 2007.
At this stage management believes that once the EIA for the Project and the
new archeological discharge certificate for the Carnic area are approved by
the Romanian Government, in the absence of any other extraordinary events,
legal or otherwise, it would take approximately one year to:
-- Receive the majority of other permits and approvals, including initial
construction permits; and
-- Complete the control estimate and complete initial documentation on any
third party project financing.
Once construction of the mine begins, it is expected to take an estimated 30 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 Project, subject to the Romanian courts dealing with litigation from NGOs in a timely manner. In the absence of further unforeseen delays the Project is expected to pour first gold by the end of 2014.
Outlook
The Company's key objectives in the short term include:
1. Continue to win Romanian public and Government support and backing for
the Project
2. Obtain approval of the EIA and all other required permits that allow
construction activities to commence;
3. 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 GAAP:
Results of Operations
in thousands of Canadian dollars,
except per share amounts 2010 Q3 2010 Q2 2010 Q1 2009 Q4
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Statement of Loss (Income)
Loss (Income) $(14,581) $ 12,789 $ 15,439 $ 10,729
Loss (Income) per share - basic (0.04) 0.04 0.04 0.03
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Loss (Income) per share - diluted (0.04) - - -
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Balance Sheet
Working capital 122,874 110,278 124,604 148,715
Total assets 654,261 632,678 642,189 658,694
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Statement of Cash Flows
Investments in development and
exploration including working capital
changes 4,473 10,372 13,185 13,004
Cash flow from financing activities 6,321 3,764 857 70,260
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in thousands of Canadian dollars,
except per share amounts 2009 Q3 2009 Q2 2009 Q1 2008 Q4
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Statement of Loss (Income)
Loss (Income) $ 7,082 $ 1,798 $ 6,969 $ (3,958)
Loss (Income) per share - basic and
diluted 0.02 0.01 0.03 (0.02)
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Balance Sheet
Working capital 95,838 109,518 7,401 29,172
Total assets 608,399 624,991 522,618 530,135
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Statement of Cash Flows
Investments in development and
exploration including working capital
changes 10,689 7,389 11,158 8,171
Cash flow from (used in) financing
activities (435) 112,906 3 -
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Statement of Loss (Income)
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars,
except per share amounts 2010 2009 2010 2009
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Total operating expenses for the
period $ 2,657 $ 3,139 $ 10,736 $ 14,201
Loss (Income) for the period (14,581) 7,082 13,647 15,849
Loss (Income) per share - basic (0.04) 0.02 0.04 0.06
Loss (Income) per share - diluted (0.04) - - -
Total operating expenses for the three-month period ended September 30, 2010 decreased from the corresponding period in 2009 primarily due to the costs associated with the settlement payment to a senior employee in the third quarter of 2009. For the nine-month period ended September 30, 2010, total operating expenses decreased from 2009 due to $5.7 million resulting from non-recurring retiring allowances and settlement payments in 2009, including the expensing of share-based compensation, for the former CEO and three senior employees who departed the Company during 2009. The decrease is partially offset by $2.4 million representing fair value of stock options which vested upon achievement of certain milestones.
Income for the three-month period ended September 30, 2010 increased from the same period in 2009 due to a positive swing of $14.3 million in foreign currency movement and a $6.9 million income tax recovery from the fiscal authorities in Romania resulting from the cancellation of a 2003-2004 fiscal assessment.
Loss for the nine-month period ended September 30, 2010 decreased from the same period in 2009 mainly due to a decrease in operating costs of $3.5 million and the income tax recovery of $6.9 million, partially offset by an increase in foreign exchange losses of $8.1 million.
The Company expects to incur operating losses until commercial production commences and revenues are generated.
Expenses
Corporate, General and Administrative
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Finance $ 222 $ 40 $ 672 $ 473
External communications 142 91 581 379
Information technology 80 82 231 281
Legal 158 160 465 536
Payroll 592 681 2,181 4,664
Other 295 505 1,329 1,436
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Corporate, general and administrative
expense $ 1,489 $ 1,559 $ 5,459 $ 7,769
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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 September 30, 2010 were comparable to the same period in 2009. For the nine-month period ended September 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 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 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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DSUs - expensed $ 336 $ 239 $ 481 $ 760
Stock option compensation - expensed 749 707 4,140 3,558
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Stock based compensation - expensed $ 1,085 $ 946 $ 4,621 $ 4,318
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DSUs - capitalized $ - $ 22 $ - $ 69
Stock option compensation - capitalized 396 252 989 778
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Stock based compensation - capitalized $ 396 $ 274 $ 989 $ 847
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DSU Compensation
Number of DSUs issued 1,639 - 370,407 36,389
Average value ascribed to each DSU
issued $ 6.10 $ - $ 4.21 $ 2.14
DSU costs for the third quarter 2010 reflect mainly the issuance of 2 thousand DSU's during the period and the amortization of 358 thousand DSUs issued to the Company's recently appointed CEO which are being expensed over a two-year period.
For the nine-months ended September 30, 2010, the DSU costs reflect the issuance of 12 thousand units and the increase in the Company's share price from the beginning of the period. The Company's closing share price at September 30, 2010 was $5.96 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-nine month periods ended September 30, 2010, the Company's share price increased by $1.13 compared to June 30, 2010 and $1.59 compared to December 31, 2009, while for the same period in 2009, the Company's share price increased by $0.21 from June 30, 2009 and $0.64 compared to December 31, 2008.
3 months ended 9 months ended
September 30, September 30,
2010 2009 2010 2009
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Stock option compensation
Number of stock options granted 200,000 - 4,250,000 2,150,000
Average value ascribed to each regular
vesting option granted $ 4.89 $ - $ 4.65 $ 1.12
Options granted to corporate
employees, consultants, officers, and
directors - - 2,925,000 1,350,000
Options granted to development project
employees and consultants 200,000 - 1,325,000 800,000
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.
During the nine-month period ended September 30, 2010, the Company granted 4.2 million options. Of the 4.2 million options issued, 2.2 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 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Project Financing Costs $ 34 $ 37 $ 499 $ 423
The project financing costs for the three-and-nine month periods ended September 30, 2010 were comparable to those of the same period in 2009.
Project financing activities include advisory services.
Interest Income
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Interest Income $ 100 $ 172 $ 294 $ 303
Lower interest income in the three-and-nine month periods ended September 30, 2010 compared to the same periods in 2009 is the result of lower average cash balances during the 2010 periods.
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 88 percent of the Company's cash balances are invested in government guaranteed instruments with the balance invested in term deposits with major Canadian banks.
Foreign Exchange
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Foreign exchange gain (loss) -
realized $ 682 $ (417) $ (935) $ (1,285)
Foreign exchange gain (loss) -
unrealized 9,540 (3,696) (9,182) (662)
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Total foreign exchange gain (loss) $ 10,222 $ (4,113) $(10,117) $ (1,947)
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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 its future anticipated foreign denominated expenditures. Since the purchase of foreign currencies, mainly the EURO and the US Dollar, the Canadian Dollar exchange rate versus the Euro and US Dollar has experienced significant fluctuations. During the three-month period ended September 30, 2010 the Euro regained some strength against Canadian dollar thereby offsetting prior period foreign exchange losses.
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 a fiscal assessment concerning the period 2003 and 2004. The original assessment arose from the disallowance of the application of state tax incentives related to unrealized foreign exchange gains on inter-company debt.
On September 2, 2010 the Company received the equivalent of $6.9 million from the fiscal authorities in Romania as a result of the cancelled fiscal assessment. The full recovered amount has been recognized in the Statements of (Income) Loss.
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, archeological and rehabilitation work to buildings, 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 are 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-nine months ended September 30, 2010 and 2009.
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Finance and administration $2,559 $ (313) $ 5,541 $ 860
External communications 2,157 2,945 6,337 8,032
Legal 1,272 903 4,515 3,299
Permitting 471 420 1,130 1,791
Community development 1,194 1,239 3,874 2,613
Project management and engineering 1,509 1,133 4,066 4,036
Exploration - Rosia Montana 136 343 435 693
Exploration - Bucium - - - -
Exploration - Baisoara 32 19 96 105
Capitalized depreciation and disposals (192) (100) (1,155) (332)
Capitalized stock based compensation (395) (274) (988) (847)
Reclassification to mineral properties - (3,853) - (7,417)
Decrease (increase) in resettlement
liabilities 139 6,285 695 14,063
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Total exploration and development
expenditures $8,882 $ 8,747 $24,546 $26,896
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During the three-and-nine month periods ended September 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 payables and resettlement liability balances and a $0.6 million bonus achieved during the third quarter.
External communications costs decreased for the three-and-nine-months ended September 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 the three-year agreement upon fulfillment of certain criteria.
The increased legal costs for the three-and-nine-months ended September 30, 2010 compared to the same periods last year reflect the additional fees associated with the engagement of a new legal firm in Romania.
Community development costs increased for the nine-months ended September 30, 2010 compared to the same period in 2009 due to the accelerated start of programs to support the local community.
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.
Capital Assets
3 months ended 9 months ended
September 30, September 30,
in thousands of Canadian dollars 2010 2009 2010 2009
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Resettlement site development costs $ - $ 854 $ - $ 5,592
Investment in long-lead-time equipment 187 3,904 1,515 15,793
Other 122 35 307 78
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Total investment in capital assets $ 309 $ 4,793 $ 1,822 $ 21,463
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Depreciation and disposal - expensed $ 49 $ 51 $ 157 $ 175
Depreciation and disposal -
capitalized to mineral properties $ (192) $ 100 $ (1,155) $ 332
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 processing mills are expected to be made in 2010 ($1.7 million) and 2011 ($60,000) 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 the 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. Once EIA approval has been granted, the Company will re-examine 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 September 30, 2010, cash, cash equivalents, and short-term investments were $131.3 million compared to $117.9 million at September 30, 2009. Substantially all of these amounts are invested in government issued 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 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:
-- For cash and cash equivalents a plus or minus 1% change in earned
interest rates would affect net income from deposits by $0.1 million.
-- For short-term investments a plus or minus 1% change in earned interest
rates would affect net income by $0.2 million.
-- As of September 30, 2010 a plus or minus 1% change in foreign exchange
rates of the Company's significant balances in foreign currencies
would affect net income by $0.3 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 September 30, 2010, the Company had working capital, calculated as total current assets less total current liabilities, of $122.9 million versus $148.7 million as at December 31, 2009. The decrease in working capital during the nine -month period ended September 30, 2010 relates to the loss incurred during the year, investments in mineral properties and payments for capital assets.
As at September 30, 2010, the Company had current liabilities of $10.7 million of which $4.7 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 September 30, 2010 compared to the same period in 2009 due to a decrease in payables and accrued liabilities since the previous period end.
The increase in investing non-cash working capital for the three months ended September 30, 2010 compared to the same period in 2009 is primarily due to the unrealized foreign exchange gain on short-term investments.
Related Party Transactions
In December 2004, the Company loaned a total of US$971,000 to the four non-controlling 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 non-controlling shareholders. Upon completion of this transaction, the outstanding indebtedness of the two non-controlling shareholders of $23,000 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 non-controlling shareholders (the 'Non-Controlling 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 non-controlling shareholders and has purchased 47,934 common shares of RMGC held by the Non-Controlling 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 non-controlling 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 non-controlling interest contribution have been offset on the balance sheet until such time as the loans are repaid. Once the loans are repaid the non- controlling interest component will be reflected on the balance sheet.
Resettlement Liabilities
For a number of years, the Company has had a program for purchasing homes in the Project area, which was suspended in February 2008 due to the suspension of the EIA review process in September 2007. Under the resettlement program 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 two 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 cost of newly built houses is 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 September 30, 2010, the Company had accrued resettlement liabilities totaling $4.7 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 for a further resettlement village to be built, as well as the process of obtaining permits for this resettlement site. All 24 property owners who chose to resettle within Rosia Montana 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 new site) of the agreed upon unpaid property value per year of delay as required by the agreement including all amendments.
As at September 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-nine-months period ended September 30, 2010, the Company paid $71,000 and $122,000 respectively, of delay penalties (2009 - $0.1 and $0.5 million, respectively).
The acquisition process for private properties is currently on hold pending progress in the permitting process.
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 $9.6 million at September 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 September 30, 2010 outstanding commitments under such agreements totaled $1.7 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 2,690 $ 182 $2,508 $ - $ - $ -
Resettlement 4,628 - 4,628 - - -
Goods and services 9,585 6,735 1,210 1,332 7 301
Long lead time equipment 1,766 1,702 64 - - -
Rosia Montana exploitation
license 1,584 198 198 198 198 792
Surface concession rights 832 5 21 21 21 764
Lease agreements 397 125 272 - - -
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Total commitments $21,482 $8,947 $8,901 $1,551 $ 226 $ 1,857
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The following is a summary of the long-lead-time equipment orders and the
payment status:
September 30, December 31,
2010 2009
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Total purchase agreements:
Grinding area systems $ 42,032 $ 41,731
Crusher facilities 3,961 3,961
Foreign exchange movement 1,647 3,023
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47,640 48,715
Amount paid to date:
Grinding area systems (40,425) (37,011)
Crusher facilities (3,881) (3,881)
Foreign exchange movement (1,568) (2,676)
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Outstanding payment obligation $ 1,766 $ 5,147
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New Accounting Pronouncements
Business Combinations, Consolidated Financial Statements and Non-Controlling Interests
The CICA issued three new accounting standards in January 2009: Section 1582, 'Business Combinations', Section 1601, 'Consolidated Financial Statements' and Section 1602, 'Non- Controlling interests'. These new standards will be effective for fiscal years beginning on or after January 1, 2011.
Section 1582, 'Business Combinations' replaces section 1581, 'Business Combinations', and establishes standards for the accounting for a business combination. It provides the Canadian equivalent to IFRS 3 - Business Combinations. The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Sections 1601, 'Consolidated Financial Statements', and 1602, 'Non-Controlling interests', together replace section 1600, 'Consolidated Financial Statements'. Section 1601 establishes standards for the preparation of consolidated financial statements and applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Section 1602 establishes standards for accounting for non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Company opted to early adopt these standards as at December 31, 2009 and applied Section 1602, 'Non-Controlling Interests', in accounting for the purchase of non-controlling interest shares in RMGC. Consequently, the difference between the carrying amount of the non-controlling interest shares and the fair value of the consideration paid was recognized directly in shareholders' equity. The early adoption of Section 1582, 'Business Combinations' and Section 1601, 'Consolidated Financial Statements', did not have an impact on the Company's consolidated financial statements.
IFRS Changeover Plan Disclosure
The Canadian Accounting Standards Board (AcSB) has announced its decision to replace Canadian generally accepted accounting principles ('GAAP') with International Financial Reporting Standards (IFRS) for all Canadian Publicly Accountable Enterprises (PAEs).
The effective changeover date is January 1, 2011, at which time Canadian GAAP will be replaced by IFRS. Following this timeline, the Company will issue its first set of interim financial statements prepared under IFRS in the first quarter of 2011 including comparative IFRS financial results and an opening balance sheet as at January 1, 2010. The first annual IFRS consolidated financial statements will be prepared for the year ended December 31, 2011 with restated comparatives for the year ended December 31, 2010.
Management has developed a project plan for the conversion to IFRS based on the current nature of operations. The conversion plan is comprised of three phases: IFRS diagnostic assessment, implementation and education, and completion of all integration system and process changes.
Management has completed phase one, IFRS diagnostic assessment, and phase two, implementation and education, and is now advancing through phase three, completion of all integration system and process changes. Management has finalized component evaluation of its existing financial statement line items, comparing Canadian GAAP to the corresponding IFRS guidelines, and identified a number of differences. Many of the differences identified don't have a material impact on the reported results and financial position.
Based on management's evaluation, most of the adjustments required on transition to IFRS will be made retrospectively against opening retained earnings as of the date of the first comparative balance sheet presented based on standards applicable at that time.
IFRS 1, 'First-Time Adoption of International Financial Reporting Standards', provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions in certain areas to the general requirement for full retrospective application of IFRS. During the third quarter of 2009, management held an IFRS educational session for the Audit Committee and the Board of Directors which focused on the key issues and transitional choices under IFRS 1.
Set out below are the most significant areas, management has identified to date, where changes in accounting policies are expected to impact the Company's consolidated financial statements based on the accounting policy choices approved by the Audit Committee and Board of Directors. In the period leading up to the changeover in 2011, the AcSB has ongoing projects and intends to issue new accounting standards during the conversion period. As a result, the final impact of IFRS on the Company's consolidated financial statements can only be measured once all the IFRS accounting standards at the conversion date are known.