PERTH, Western Australia, Sept. 28, 2012 /CNW/ - Management's Discussion and Analysis
The Management's Discussion and Analysis ("MD&A") provides an analysis to enable readers to assess material changes in financial condition and results of operations for the 12 month period ended June 30, 2012. This MD&A, prepared as of September 28, 2012 is intended to complement and supplement our Annual Financial Statements. It should be read in conjunction with the MD&A for the period ended March 31, 2012, our audited consolidated Annual Financial Statements for the year ended June 30, 2012 and our Annual Information Form ("AIF") for 30 June 2012, copies of which are available on SEDAR. Our financial statements and this MD&A are intended to provide investors with a reasonable basis for assessing our results of operation and our financial performance.
Our Consolidated Financial Statements are prepared in accordance with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards ("IFRS"). All dollar amounts contained in this MD&A are expressed in US dollars, unless otherwise specified.
Where we say "we", "us", "our", the "Company" "Group" or "CGA", we mean CGA Mining Limited and/or one or more of all of its subsidiaries, as it may apply.
Fourth Quarter Highlights
| Project Operating
| Consolidated Operating
| % Variance
| % Variance
|Gold production (oz)||50,817||3%||50,817||3%|
|Net profit after tax 1||$15.568M||(13%)||($1.142M)||(107%)|
|Exploration expenditure 2||$4.355M||35%||N/A||N/A|
|Capital expenditure 3||$11.219M||30%||$4.161M||63%|
|Excise tax 4||$1.399M||50%||-||-|
|Cash flow from operating activities 5||$28.758M||(4%)||$20.907M||29%|
|Operating cash flow per share 5 (cents per share)||8.51||(4%)||6.19||29%|
|Cash operating cost /oz5||$784||4%||$784||4%|
Year to Date Highlights
| Project Operating
| Consolidated Operating
| June Year
| % Variance
| June Year
| % Variance
|Gold production (oz)||142,771||(25%)||142,771||(25%)|
|Net profit after tax 1||$31.557M||(59%)||$5.988M||(91%)|
|Exploration expenditure 2||$13.472M||131%||N/A||N/A|
|Capital expenditure 3||$36.230M||56%||$11.260M||7%|
|Excise tax 4||$4.519M||(8%)||-||-|
|Cash flow from operating activities 5||$69.799M||(38%)||$29.983M||(65%)|
|Operating cash flow per share 5 (cents per share)||20.66||(44%)||8.88||(68%)|
|Cash operating cost /oz5||$831||$640||$831||30%|
¹ Net Profit after tax reflects a notional consolidation of the operating results of PGPRC and FRC and as such, do not necessarily match with the Group's consolidated financial statements, as FRC is classified as an associate of the Group for accounting purposes and therefore does not form part of the consolidated results of the Group.
2 Exploration activities are undertaken by FRC, and as FRC is classified as an associate of the Group for accounting purposes, the exploration expenditure is not included in the Group's consolidated financial statements.
3 Capital expenditure for the Project reflects the capital expenditure of PGPRC & FRC, while the consolidated capital expenditure reflects the consolidated CGA group expenditure, but does not include FRC, as outlined above.
4 Excise tax reflects tax paid rather than tax accrued for as there are quarterly payments that cross over accounting periods. Excise tax is not reflected in the consolidated results as it is incurred by FRC, which is not part of the consolidated group. Excise tax is on-charged from FRC to PGPRC as part of the cost of ore, and is included in the consolidated results as part of ore purchases in Cost of Sales.
5 Masbate Project cashflow from operating activities and adjusted cash operating cost per ounce reflects a notional consolidation of the operating results of PGPRC and FRC and excludes changes in working capital items, and adjusts for gold inventory and stockpile movements, capital expenditure, all taxes, royalties and corporate costs. Consolidated cashflows from operating activities reflects the consolidated CGA group results and accordingly includes a consolidation of PGPRC but does not include the results of FRC.
Mining Operations Results
(In thousands of dollars, except amounts per ounce, per tonne and per share)
|Masbate Gold Project||Three-month period ended||Year to date|
|June 2012||Mar 2012||Variance||June 2012|
|Ore mined (tonnes)||1.60M||1.61M||(0.01M)||4.93M|
|Ore processed (tonnes)||1.73M||1.59M||0.14M||4.75M|
|Head grade (g/t) (processed)||1.05||1.12||(0.07)||1.08|
|Gold ounces produced||50,817||49,202||1,615||142,771|
|Gold ounces sold||47,087||43,868||3,219||137,741|
|Financial Data (in thousands of dollars)|
|Revenues - Gold and silver sales||65,915||63,188||2,727||184,977|
|Masbate Project cash operating costs||36,908||33,025||3,883||114,484|
|Depreciation and amortisation||7,989||7,040||949||21,267|
|Corporate / Makati administration||1,009||576||433||2,801|
|Masbate Project gross profit/(loss)||17,619||20,503||(2,884)||38,949|
|Masbate Project net profit/(loss)||15,568||17,891||(2,323)||32,557|
|Masbate Project cashflow from operating activities³||28,758||29,896||(1,138)||69,799|
|Mining fleet capital payments||1,710||1,656||54||5,476|
|Total capital expenditure||11,219||8,648||2,571||36,230|
|Deferred mining expenditure||-||-||-||-|
|Tax related payments 4||2,803||3,646||(843)||8,776|
|Average realized price (per ounce)||1,377||1,418||(41)||1,319|
|Cash operating cost (per ounce sold) 2||784||753||31||831|
|Adjusted cash operating cost (per tonne processed) 2||23||23||-||25|
¹ Excise tax reflects tax paid rather than tax accrued for as there are quarterly payments that cross over accounting periods.
² Interest expense includes interest payments in relation to the BNP finance facility and the finance lease held by PGPRC for the Masbate project mine equipment.
³ Masbate Project cashflow from operating activities and adjusted cash operating cost per ounce reflects a combination of the operating results of PGPRC and FRC and excludes changes in working capital items, and adjusts for gold inventory and stockpile movements, capital expenditure, all taxes, royalties and corporate costs.
4 Taxes includes the VAT payments which are in part recoverable, and accordingly capitalised and not recognised in the net income figures, and other local taxes but excludes excise tax.
The financial and operating results set out above for the Masbate Gold Project are based on a notional consolidation of the results of Filminera Resource Corporations ("FRC") and Phil. Gold Processing and Refining Corp ("PGPRC") and as such, do not necessarily match with the Group's consolidated financial statements, as FRC is classified as an associate of the Group for accounting purposes and therefore does not form part of the consolidated results of the Group. The specific purpose analysis set out above is to illustrate the operating results of the Masbate Gold Project.
The results for the year were adversely impacted by the failure in July 2011 of the SAG Mill at the Company's operation at the Masbate Gold Project. All expenses in relation to the repair of the SAG Mill have been fully expensed in the twelve month period.
Furthermore any insurance claims arising therefrom, including a loss of profits insurance claim, have not been reflected in the current year results. Any insurance proceeds received subsequently will be disclosed as income in the period received.
Once the SAG Mill was brought back on line, record production of 100,019 ounces was achieved, in the six months to 30 June 2012, with a corresponding net profit after tax of US$28,109,938 (6 months to 30 June 2011: US$26,063,123), before allowing for the non-recurring expenses on the SAG Mill of US$6,213,085 and impairment arising from the mark to market of investments of US$6,869, 837.
During the 6 month period July 2011 to December 2011, throughput was 1,433,078 tonnes, with 42,752oz produced in the 6 month period. Adjusted cash costs per tonne milled were$30/t for the 6 month period to December 2011, with cash operating costs $951/oz. 48,786oz of gold was sold, with revenue from metal sales during this period of $55.874M at an average gold sales price of $1,166/oz.
Repairs to the SAG mill were completed on 25 December 2011 with recommissioning occurring over the ensuing days. Following the successful recommissioning of the SAG mill, throughput for the 6 month period January to June 2012 was 3,315,301 tonnes, a 131% increase from the 6 month period ended December 2011. 90,955oz of gold was sold, with revenue from metal sales during the 6 months to June 2012 of $129.103M at an average gold sales price of $1,397/oz.
Total throughput for the 12 months to June 2012 was 4,748,378 tonnes, with 142,771oz of gold produced. Revenue from metal sales for the 12 month period was $184.977M, with 137,741oz of gold sold at an average gold sales price of $1,319/oz. Adjusted cash costs per tonne milled was $25/t for the 12 month period ended June 2012, with cash operating costs $831/oz.
During the 2012 fiscal year $14.4M was spent on exploration, reserve definition and sterilisation programs. 31,572m of diamond core drilling and 44,035m of reverse circulation drilling was completed. Regional mapping and sampling was conducted over an area of 47km2, with over 2,000 stream samples and 1,254 rock chip samples taken. A geophysical IP survey was also conducted in the Baleno district over a 3km2 area.
Production for the June quarter was 1,615oz higher than in the March quarter, with production continuing at a steady state following re-commencement of full production in January 2012. As a result, revenue from metal sales for the June quarter increased by $2.727M or 4% from the previous quarter to $65.915M, with gold production being 3% higher in the June quarter as compared to the March quarter. The average gold price achieved for the June quarter was $1,377/oz as compared to $1,418/oz for the March quarter, with the increased proportion of sales at spot offset by the lower average spot price of $1,602/oz achieved in the June quarter compared to $1,692/oz achieved in the March quarter. Mill throughput for the quarter was 1,728,751 tonnes (March quarter: 1,586,549 tonnes) for total production of a 50,817 ounces (March quarter: 49,202 ounces) of gold.
Adjusted cash costs per tonne milled were steady at $23/t for both the June and March quarters, adjusted for waste deferral and ore stockpile valuation changes. Cash operating costs per ounce increased by 4% to US$783/oz (US$753/oz in the March quarter) due to slightly lower grade in the June quarter.
The Lycopodium Optimisation Study to consider a number of alternative development options, which will better utilise the existing infrastructure (and accordingly may provide significant capital expenditure reductions compared to the alternative which makes the current front end redundant) is continuing to progress well. Results of the study will be released in the December quarter of 2012.
Exploration activities planned for the 2012 - 2013 year include resource definition drilling within the mine site area, exploration drilling within EP-10 and MPSA 219 (Vicar), geophysical surveys (EP-10), and follow up geochemical sampling and detail mapping (EP-10 and MPSA 219).
Planned drilling within the mining area includes continuation of current resource infill and extension drill programs at Colorado, Libra West, Main Vein North Split, Panique and 34,000m of drilling classified as "resource conversion". The resource conversion drilling programs are designed to convert Inferred Resources that lie mostly outside of the new pit designs to Indicated category. Areas targeted include -
- Main Vein North Split
- Star Vein
- Colorado Vein 5
Planned exploration within EP-10 includes drilling known prospects at Young Lady, Water West, Luy-A, Bart-Ag, Pinanaan, and a continuation of drilling commenced in the current year at the Baleno Copper prospect.
The exploration team will carry out detailed mapping, soil sampling and drilling targets generated initially from the intensive drainage sampling program carried out in FY 2011-2012.
In addition to the drilling and geochemical exploration programs 40 km of IP survey work will also be conducted on targets in EP-10.
The exploration program for the Vicar property includes drilling at Pajo Hill, Jessie, and Montana NW.
Consolidated Balance Sheet Extracts
(In thousands of dollars)
|For the period ended|
| June 30,
| March 31,
|Cash and cash equivalents1||79,671||75,551||4,120|
|Cash and liquid assets2||151,394||154,048||(2,655)|
|Property, plant and equipment||191,842||188,535||3,307|
|Mining fleet finance lease||23,854||23,088||766|
|Investments and other assets||86,413||89,408||(2,995)|
|BNP project finance facility||27,206||31,408||(4,202)|
|Mining fleet finance lease||24,427||21,786||2,641|
1 Cash and cash equivalents at 30 June 2012 include an amount of $9,000,000 (31 March 2012: $9,000,000) held with BNP Paribas in line with the requirements of project financing facility agreement which requires two quarters of principal and interest payments due on the facility to be held on deposit.
2 Cash and liquid assets includes cash and cash equivalents, held by the consolidated group, cash held by the consolidated group's associate, FRC, investments in listed securities valued as at the balance date, and gold on hand, valued at market as at the balance date.
Total assets of the Company decreased during the quarter, mainly attributable to the decrease in market value of the investment in St Augustine Gold & Copper Limited ("SAU"), resulting in a decrease in cash and liquid assets by $2.655M and a decrease in total assets of $4.214M. The decrease in total assets is predominantly due to a decrease in investment in associates of $2.995M, resulting from the impairment of the investment in St Augustine Gold & Copper Limited of $6.870M, offset against funding provided to FRC for its increased exploration and mining activities. Cash on hand increased by $4.120M and inventory, including gold on hand of $5.374M and total liabilities for the group also reduced by $20.160M, including principal repayments of $4.202M on the BNP finance facility during the current quarter, bringing the outstanding principal balance to $27.206M at 30 June 2012.
The VAT receivable reflects the payments made for VAT as at the balance date and represents an estimate of proceeds to be refunded or offset against other future tax payments.
Consolidated Profit and Loss
(In thousands of dollars)
|For the 12 months ended|
|June 2012||June 2011||Variation|
|Revenue from continuing operations||187,695||238,481||(50,786)|
|Cost of sales||(147,855)||(158,113)||10,258|
|Gain on deconsolidation||-||2,929||(2,929)|
|Movement in fair value of derivative financial instruments||(864)||493||(1,357)|
|Impairment of Investments||(6,870)||-||(6,870)|
|Share of loss of associate||(3,883)||(3,192)||(691)|
|SAG Mill expenses||(6,213)||-||(6,213)|
| (Loss)/profit from continuing operations
before income tax expense
|Income tax benefit/(expense)||189||(354)||543|
| Net (Loss)/profit for the period
from continuing operations for the period
For the twelve month period ended June 30, 2012, the Company earned $187.695M in revenue as compared with $238.481M in the twelve month period ended June 30, 2011, a decrease of $50.786M or 21%. Revenue in the current twelve month period was impacted by the SAG Mill incident, which resulted in decreased gold production during the first half of the year. Full production resumed in January 2012, with the Project producing a record 100,013oz in the 6 months to June 2012.
Cost of sales for the twelve month period ended June 30, 2012 was $147.855M as compared to $158.113M for the twelve month period ended June 30, 2012, a decrease of $10.258M or 6.5%. The decrease in cost of sales is due to the reduced operations as a result of the breakdown of the SAG Mill.
Gross Profit for the twelve months to June 30, 2012 was $39.840M as compared to $80.368M for the prior year period, a decrease of $40.528M. As discussed above, gold production for the first half of the year was impacted by the breakdown of the SAG Mill.
A notional gain on deconsolidation of $2.929M was recognised in the twelve month period ended June 30 2011 relating to the deconsolidation of Ratel Gold ("Ratel"), which involved the spin-off of its existing African assets, being the Segilola Gold Project and the Mkushi Copper Project to Ratel Gold.
A loss of $0.864M on the movement in fair value of financial derivatives was recognised during the twelve months period ended June 30 2012 as compared to a gain of $0.493M in the twelve months period ended June 30 2011. The 2011 gain related largely to the movement in the fair value of the Company's fuel hedges, which expired in April 2012.
An impairment of investments of $6.870M was recognised in the twelve month period ended June 30 2012 arising from the mark to market of the investment in St Augustine Gold & Copper Limited. This is a non-cash, non-recurring expense.
SAG Mill expenses of $6.213M, being non-recurring legal, consulting and other costs in relation to the repair of the SAG Mill were incurred and fully expensed in the twelve month period ended June 30, 2012. An insurance claim has been lodged to compensate for costs incurred to repair the SAG Mill, however it is not at a point of virtual certainty and therefore the costs have been expensed Any insurance proceeds received subsequently will be disclosed as income in the period received.
Other expenses of $8.192M were incurred during the twelve month period ended June 30 2012 as compared to $4.946M incurred during the twelve month period ended June 30 2011, an increase of $3.247M or 66%. The increase is due largely to the recognition during the twelve months to June 30, 2012 of $1.030M of probable losses for taxes on loan agreements, the loss on disposal of leased assets of $0.382M, and $0.657M of losses on non-recoverable input taxes included in other expense in the twelve month period to June 30, 2012, which was recognised as part of cost of sales in the twelve month period ended June 30, 2011. The variance is also due to a gain of $1.000M from the repayment of loans previously written off being recognised in the twelve months period ended June 30 2011, thus reducing the prior year expense.
The Company recorded a net profit of $5.988M for the twelve month period ended June 30 2012 as compared to a net profit of $65.360M in the June 30 2011 period, a decrease of $59.372M, which is mainly attributable to the reduced mining operations resulting from the breakdown of the SAG Mill, resulting in a decrease in gross profit of $40.528M, the impairment of investments of $6.870M recognised in the current year together with the recognition of SAG Mill expenses of $6.213M. The gain on deconsolidation of $2.929M recognised in the June 30, 2011 period also contributed to the increased net profit for the prior year. The results for the period were adversely impacted by the failure in July 2011 of the SAG Mill at the Company's operation at the Masbate Gold Project. All expenses in relation to the repair of the SAG Mill have been fully expensed in the twelve month period. Furthermore, any insurance claims arising therefrom, including a loss of profits insurance claim, have not been reflected in the current year results. Any insurance proceeds subsequently received will be disclosed as income in the period received.
Once the SAG Mill was brought back on line, record production of 100,013oz was achieved, in the six months to 30 June 2012, with a corresponding net profit after tax of $28.110M (6 months to 30 June 2011; $26.063M), before allowing for the non-recurring expenses on the SAG Mill of $6.213M and impairment arising from the mark to market of investments of $6.870M.
Reconciliation of Masbate cashflows from operations to Consolidated cashflows from operations
(In thousands of dollars)
|Three month period ended||Year to date|
|June 2012||March 2012||June 2012||June 2011|
|Masbate Project revenue||65,666||62,985||184,284||234,396|
|Less: Masbate Project cash costs||(36,908)||(33,089)||(114,484)||(121,001)|
|Masbate Project operating cashflow||28,758||29,896||69,799||113,395|
|Less: Masbate non-cash costs:|
|Depreciation, amortisation. taxes, accruals||(10,103)||(8,609)||(28,937)||(32,352)|
|Ore sales margin||(1,475)||(1,809)||(4,434)||(4,761)|
|Masbate Project non cash costs||(11,578)||(10,417)||(33,371)||(37,113)|
|Gross profit from Masbate Project operations||17,179||19,479||36,428||76,282|
|Add: revenue from other operations||858||858||3,411||4,086|
|Gross profit from operations||18,037||20,337||39,839||80,368|
|Less: Other expenses|
|Impairment of investments||(6,870)||-||(6,870)||-|
|Movement in fair value of derivatives||45||(286)||(864)||493|
|Gain on deconsolidation||-||-||-||2,929|
|Share of loss of associates||(1,570)||(158)||(3,883)||(3,192)|
|SAG Mill expenses||(6,213)||-||(6,213)||-|
|Total other expenses||(16,953)||(4,200)||(34,040)||(14,655)|
|Net Profit/(Loss) from continuing operations||(1,280)||16,138||5,800||65,714|
|Net Profit/(Loss) after income tax||(1,142)||16,138||5,988||65,360|
|(Loss) from discontinued operations||-||-||-||(278)|
|Net Profit for the period||(1,142)||16,138||5,988||65,082|
|Adjustments for non-cash items:|
|Depreciation and amortisation||6,180||4,947||17,090||16,364|
|Proceeds from sale of asset||385||-||385||-|
|Foreign exchange loss||195||390||640||352|
|Share based payments||-||-||460||921|
|Impairment of investments||6,870||-||6,870||-|
|Share of loss of associates||1,570||158||3,833||3,192|
|Interest Income on receivable from associate||(728)||(728)||(2,911)||(2,606)|
|Movement in fair value of derivatives||(45)||286||864||(494)|
|Movement in working capital||6,417||(6,042)||(7,368)||(2,333)|
|Net cashflow from consolidated operating activities||20,907||16,259||29,984||85,519|
|Masbate cash costs||(36,908)||(33,089)||(114,484)||(121,001)|
|Masbate non-cash costs||(11,578)||(10,417)||(33,371)||(37,112)|
|Cost of Sales||(48,486)||(43,506)||(147,855)||(158,113)|
Liquidity and Capital Resources
As at 30 June 2012, the Company had cash and cash equivalents of $79.671M as compared to $75.551M at 31 March 2012, and $107.336M at 30 June 2011. Cash and liquid assets of the Company were $151.394M at 30 June 2012 (31 March, 2012: $154.048M). The decrease from the prior quarter is primarily due to the decrease in value of listed investments by $13.923M, offset by an increase in cash by $5.785M and the value of bullion on hand by $4.9M.
During the 30 June 2012 quarter, 0.050M outstanding options due to expire on 30 June 2012 were exercised for total gross proceeds of A$0.0325M.
During the current quarter, the Company has repaid $4.2M in principal and $0.4M in interest on the financing facility with BNP Paribas, reducing the balance owing at 30 June 2012 to $27.2M.
During the 2010 financial year the Company completed a private placement, issuing 39.1M ordinary shares at C$2.20 per share in February 2010, raising a total of C$111.020M. The net proceeds from this issue were used, amongst other things, to repay the $25M promissory notes and $10M loan facility from Meridian and Casten and were used to increase exploration activity at the Masbate Gold Project. The resumption of full production at the Masbate Gold Project is expected to strengthen the Company's cash and liquid assets position and provide funding towards its planned exploration programme and the plant expansion.
The Company manages liquidity risk through cash reserves, credit facilities and equity capital raising to meet the operating requirements of the business, investing excess funds in highly liquid short term cash deposits. The Company's liquidity needs can likely be met through cash on hand and short and long-term borrowings, subject to current forecast operating parameters being met. Future cashflow forecasts are subject to a number of risks including commodity price movements and inflationary risks surrounding mining and processing costs. These risks have been accounted for in the forecasts, by adopting a conservative commodity price, as well as allowing for estimated inflationary effects in its cashflow forecasts.
The Company currently has in place an active program of financial forecasting and budgeting both at a corporate and project level to manage both the application of funds and planning for future financial needs to ensure that any shortfall in revenue funds is adequately covered by cash reserves or planned new sources being either debt or equity based on the then most cost effective weighted average cost of capital.
Credit Risk represents the loss that would be recognised if counterparties failed to perform as contracted. The Group's maximum exposures to credit risk at the reporting date in relation to each class of financial asset is the carrying amounts of those assets as indicated in the Balance Sheet.
Subsequent to year end, 40,000 A$1.15 and 50,000 A$0.90 options were exercised for total proceeds of A$91,000.
On September 4, 2012, the Company entered into a loan facility agreement with Ratel Group Limited ("Borrower") to provide a funding facility of up to $2.5M to Ratel Group Limited. The term is for 24 months at an interest rate of 9% per annum.
On September 19, 2012, the Company announced it had entered into a definitive Merger Implementation Agreement ("Merger Agreement") to merge B2Gold Corp. (TSX: BTO, NSX: B2G, OTCQX: BGLPF) ("B2Gold") and CGA at an agreed exchange ratio of 0.74 B2Gold common shares for each CGA share held, which represents a purchase price of approximately C$3.18 per CGA share (based on the closing share prices on 17 September 2012). The transaction is valued at approximately C$1.1 billion. The transaction is subject to amongst other things, shareholder approvals for both companies and necessary consents and is subject to normal terms and conditions including termination rights for various events including any material adverse change to either party.
The merger will be implemented by way of a Scheme of Arrangement under the Australian Corporations Act 2001 ("Scheme"). Upon completion of the Scheme, existing B2Gold shareholders and CGA shareholders will own approximately 62% and 38%, respectively, of the issued common shares of the combined company. A copy of the Merger Agreement is available on sedar.com and further details are set out in the announcement on the Toronto Stock Exchange and Australian Securities Exchange dated 19 September 2012.
Information on Outstanding Shares
As at September 28, 2012 the Company had 337,865,726 common shares outstanding and 6,056,250 unlisted options on issue. Each option is exercisable into one common share in the capital of the Company.
Annual and Quarterly Information
Selected Annual Information
($US in thousands, except for per share information)
|Annual Total||Annual Total||Annual Total|
|Net profit/(loss) from continuing operations||5,988||65,360||18,948|
|Net profit/(loss) from discontinued operations||-||(278)||(2,956)|
|Net profit/(loss) for the period||5,988||65,082||15,992|
| Earnings per share for profit/
(loss) from continuing operations
|undiluted cents per share||1.79||19.64||6.35|
|diluted cents per share||1.78||19.31||6.28|
|Earnings per share for profit/ (loss)|
|undiluted cents per share||1.79||19.56||5.36|
|diluted cents per share||1.78||19.23||5.30|
|Total long-term financial liabilities||50,771||103,464||118,530|
Fluctuations in the annual financial position over the three year period ended June 30, 2012 are predominantly due to the following factors:
- The finalisation of the development of the Masbate Gold Project in the 2009 financial year and the commencement of commercial production at the project on 1 July 2009. The Company recorded a maiden gross profit of $47.367M in its first year of operations and a gross profit of $80.368M in the 2011 year.
- hedge accounting for the gold forward contracts, interest rate swap and fuel swaps done for the Masbate Gold Project and depreciation of gold put options.
- exploration activities in Zambia and Nigeria for the periods up to 30 June 2010 and notional gain on the deconsolidation of the entities holding these project in quarter 1 of the 2011 financial year.
- fluctuations in the theoretical fair value on the warrants in the 2009 and 2010 which were required to be recognised in the profit and loss statement each period. These amounts do not represent either a current or future cash flow or loss to the Company. The Warrants expired in February 2010 hence there is no impact in the subsequent financial periods.
- the breakdown of the SAG Mill in July 2011, which resulted in significantly decreased production for the first six months of the 2012 financial year. Full production re-commenced in January 2012, however the net profit for the 2012 financial year was impacted by the lower production in the first half of the financial year.
- costs totalling $6.213M incurred in relation to the repair of the SAG Mill were expensed in the 2012 financial year. An insurance claim has been lodged to compensate for costs incurred to repair the SAG Mill, however it is not at a point of virtual certainty, and therefore the costs incurred to date have been expensed. Any insurance proceeds subsequently received will be recognised as income in the period received; and
- The impairment of investment in St Augustine of $6.870M to its current market value recognised in the 2012 financial year.
Selected Quarterly Information
($US in thousands, except for per share information)
(unaudited, in accordance with IFRS)
Sep - 11
Jun - 11
|Gold and silver sales||184,285||65,666||62,985||39,347||16,287||235,314||72,942||43,483||68,539||50,350|
| Per share
(undiluted US$ cents per share)
| Per share
(diluted US$ cents per share)
Fluctuations in the quarterly net loss or profit amounts over the two year period ended 30 June 2012 are predominantly due to the following factors:
- the recognition of fair value mark to mark movements of the Company's derivative instruments which do not qualify for hedge account, or the ineffective portion of those that do;
- a notional gain on the deconsolidation of Ratel Gold in quarter 1 of the 2011 financial year;
- the decreased gold production during the first half of the 2012 financial year, resulting from the breakdown of the SAG Mill in July 2011, which has resulted in lower gold sales and higher costs per ounce in the due to the fixed cost component of operations. Repairs to the SAG Mill were completed during the December 2011 quarter with full production re-commencing in January 2012;
- the recognition of impairment of investments of $6.9M in quarter 4 of the 2012 financial year to reflect the market value of the investment in St Augustine Gold & Copper Limited;
- the recognition of SAG Mill expenses of $6.2M in quarter 4 of the 2012 financial year. An insurance claim has been lodged to compensate for costs incurred to repair the SAG Mill, however it is not at a point of virtual certainty and therefore the costs incurred were fully expensed. Any insurance proceeds subsequently received will be disclosed as income in the period received.
Three Months Ended June 30, 2012 Compared to the Three Months Ended March 31, 2012 and the Three Months Ended June 30, 2011
The Company's result for the three months ended June 30, 2012 was a net loss of $1.142M or (0.34) cents per share (undiluted) as compared to a net profit of $16.138M or 4.83 cents per share (undiluted) for the March 2012 quarter and a net profit of $18.800M or 5.65 cents per share (undiluted) for the June 2011 quarter. The results for the quarter were adversely impacted by the failure in July 2011 of the SAG Mill at the Masbate Gold Project operations, together with the impairment arising from mark to market of investments. All expenses in relation to the repair of the SAG Mill were fully expensed during the financial year, with $5.713M being expensed in the June quarter (March 2012 quarter: nil). An impairment of investments arising from the mark to market of the investment in St Augustine Gold & Copper Limited of $6.870M was also recognised in the June 2012 quarter (March 2012 quarter: nil). Before allowing for the non-recurring SAG Mill expenses and impairment of investments, the net profit for the June 2012 quarter was $11.441M or 3.39 cents per share.
The result for the most recent quarter (before allowing for the non-recurring SAG Mill expenses and impairment of investment) reflects the recommencement of full production during January 2012 which continued through to June 2012, hence the comparable sales revenue in the current quarter of $65.666M compared to the March 2012 quarter sales revenue of $62.985M, an increase of $2.681M or 4% and compared to the June 2011 quarter sales revenue of $72.942M, a decrease of $7.276M or 10%. The increase in revenue from the March 2012 quarter is due to the marginal increased gold production (50,817oz for June 2012 compared to 49,199oz for March 2012) and increased gold sales of 3,219oz from the prior quarter, however the June 2012 quarter sales were also impacted by the decrease in average realised gold sales price from $1,418/oz in March 2012 to $1,377/oz in June 2012, a decrease of $41/oz. Gold sales of 47,087oz for the June 2012 quarter was lower than the prior year comparative quarter gold sales of 53,714oz, due to the higher than normal gold inventory on hand at the end of the March 2011 quarter (17,247oz), which was sold in the June 2011 quarter, resulting in higher than normal sales for the quarter. The average realised gold sales price of $1,377/oz for the June 2012 quarter was slightly higher than the June 2011 quarter average realised gold sales price of $1,332/oz. Cost of sales for the current quarter was $48.486M as compared to $43.506M in the previous quarter (including depreciation, amortisation and tax expenses), an increase of $4.980M or 11%, and an increase of $0.299M or 1% as compared to $48.187M in the June 2011 quarter. The increase in cost of sales from the previous quarter was predominantly due to increased depreciation of amortisation of $1.229M or 25% resulting from additional acquisitions to the leased asset fleet, an increase in ore purchases of $2.387M or 15% and an increase in consumables & supplies of $1.374M or 10%. The increase in consumables & supplies expenditure is attributable to the 9% increase in mill throughput in the June 2012 quarter compared to the previous quarter, as well as general price increases, coupled with a 40% increase in the costs of cyanide, which has contributed to an increase of approximately $0.243M/month for cyanide expenditure. The cost of sales for the June 2012 quarter is comparable to the June 2011 quarter. The cost of sales includes a mark-up charged to PGPRC by FRC on the ore sales of $1.475M for the June 2012 quarter, a decrease of 18% compared to $1.809M for the March 2012 quarter, and an increase of 17% from $1.262M for the June 2011 quarter, as FRC is an associate of the group and is therefore not consolidated for accounting purposes. The mark-up is determined on a sliding scale basis depending upon the head grade processed. During the current quarter, the head grade processed was comparable to the prior quarter however there was a decrease in the volume of ore purchased by PGPRC from the previous quarter which has resulted in the decrease in the ore sales mark up in the June 2012 quarter from the March 2012 quarter.
As previously mentioned, the Mkushi Copper Project and Segilola Projects that were previously operated by the Company were spun out and the interests are now held by the Ratel Group, a 19.1% associate of the Company. The market value of the investment in Ratel Group Limited ("Ratel Group") at 30 June 2012 was $2.24M ($5.47M March 2012). The Company has taken up its proportional share of their loss for the period, along with its other associates being SAU, Masminero Resources ("Masminero"), Aroroy Resources ("Aroroy") and FRC. The total loss from associates taken up by the Company during the current period is $1.570M ($0.158M: March 2012 quarter and $1.018M: June 2011 quarter).
The Company earned $66.524M in revenue for the June 2012 quarter as compared to $63.843M in revenue for the prior quarter and $73.625M in revenue for the June 2011 quarter. The increase in revenues by $2.681M or 4% from the prior quarter is a result of an increase in gold ounces sold of 3,219oz or 7% for the June 2012 quarter, however the increase in revenue resulting from higher gold sales was impacted by a decrease in the average gold sales price of $1,377/oz for the June 2012 quarter compared with $1,418/oz for the March 2012 quarter, a decrease of $41/oz or 3%. The average gold sales price for the June 2011 quarter was $1,332/oz. The higher gold production in the June 2012 quarter resulted in increased levels of gold sales at spot prices. In the June 2012 quarter 32,630oz gold was sold at an average unhedged gold sales price of $1,602/oz compared to 29,411oz of gold sold at an average unhedged sales price of $1,692/oz in the March 2012 quarter and 39,389oz of gold sold at an average unhedged sales price of $1,514/oz in the June 2011 quarter. Gold production for the quarter was marginally higher than the previous quarter as production has been running at a consistent steady state subsequent to completion of repairs to the SAG Mill and commencement of full production at the beginning of the previous quarter. Gold production of 50,817oz for the June 2012 quarter was 10% higher than the gold production of 46,261oz for the June 2011 quarter as a result in the increased throughput capacity resulting from the commissioning of the supplementary crusher in September 2011, together with the 6.5Mtpa plant upgrade completed in December 2011.
In addition, as a result of the acquisition of the Masbate Gold Project in late March 2007, the Company has recognised a receivable from its associate, FRC. The acquisition accounting for the business combination through which the Project was acquired requires the accretion of the interest on the discounted receivable to be recognised as revenue during each period. As FRC is an associate, it is required to be equity accounted by the group, with the Company recognizing its ownership portion of the FRC loss in the Company's accounts. As the notional interest accretion gain is recognised as income in the consolidated group and recognised as an expense in Filminera's accounts, the amounts are largely offset. The notional interest accretion recognised for the 3 months ended June 30, 2012 was $0.728M (June 2012: $0.728M and June 2011 $0.652M).
Cost of Sales
Cost of sales for the June 2012 quarter was $48.486M as compared to $43.506M for the March 2012 quarter and $48.187M for the June 2011 quarter. Cost of sales increased from the March 2012 quarter predominantly as a result of a $1.229M increase in depreciation due to recent upgrades to the mining fleet commissioned during the quarter, an increase of $2.388M in ore purchases from FRC, and an increase of $1.344M in expenditure on consumables & supplies, as a result of the 9% increased mill throughput in the June 2012 quarter compared to the prior quarter and general prices increases coupled with a 40% increase in the cost of cyanide, an increase of $0.729M per quarter. The commissioning of a fourth mining fleet during June 2011 and the completion of the mining plant upgrade to 6.5Mtpa in December 2011 has resulted in increased mining operations in the current year period, hence the overall increase to the cost of sales from the prior year corresponding quarter. Total ore purchases were $18.122M in the June 2012 quarter compared to $22.994M in the June 2011 quarter, a decrease of $4.872M or 21%, largely due to the higher gold sales in the June 2011 quarter.
Cash operating costs for the project (based on a combination of the results of FRC and PGPRC before depreciation, amortisation and taxes) were $784/oz as compared to $753/oz in the March 2012 quarter, with the increase mainly attributable to the reduced feed grade to the mill. Total project cash operating costs for the current quarter increased by $3.883M or 12% as compared to the March 2012 quarter, largely due to the increase in ore processed from the prior quarter (1.729M tonnes in June 2012 compared to 1.586M tonnes processed in the March 2012 quarter). Consumables and supplies expense was $14.741M for the June 2012 quarter as compared to $13.367M for the March 2012 quarter, an increase of $1.374M or 10%. This is due to the increase in tonnes milled during the June quarter which has resulted in the increased processing costs for the current quarter, together with general price increases including a 40% increase in the cost of cyanide.
Production costs disclosed in the annual financial statements also include costs which are not included in the cash cost calculation, such as depreciation, amortisation, refining and treatment charges and tax expenses, along with the cost mark up on purchases of ore from its associate, FRC, of $1.475M for June 2012 quarter ($1.809M March 2012 quarter and $1.261M June 2011 quarter).
Net other expenses (after cost of sales) for the June 2012 quarter were $16.953M as compared to $4.199M for the March 2012 quarter and $6.236M in the prior year comparative quarter, an increase of $10.717M or 172%. The variance of $12.754M or 304% from the March 2012 quarter relates largely to additional SAG Mill repairs & maintenance costs of $3.351M and $6.870M impairment of investments that were expensed In the June 2012 quarter, together with an increase in share of loss of associates of $1.411M incurred in the June 2012 quarter.
Specific Items Contributing to Changes
Impairment of investments
An impairment of investments of $6.870M was recognised in the June 2012 quarter (March 2012 quarter: nil) for the mark to market of the investment in St Augustine Gold & Copper Limited. This is a non-cash non-recurring expense.
Movement in fair value of derivative financial instruments
A gain of $0.045M was recognised in the profit and loss statement in June 2012 for the movement in the fair value of the Company's hedges, being a gain of $0.119M on interest rate swap contracts and a gain related to the movement in the value of ineffective gold forward hedges at 30 June 2012 of $0.343M, offset by losses on its HFO & diesel fuel swap contracts of $0.417M. The HFO & diesel fuel swap contracts expired in April 2012. A loss of $0.286M was recognised for the March 31, 2012 quarter. In the June 2011 quarter a gain of $0.535M was recognised. The movements relate to the fair value of the Company's hedged instruments, and as such are determined by the prevailing market values at each balance date.
The Company incurred finance costs of $1.137M during the period compared to the $1.056M incurred during the March 2012 quarter, and increase of $0.081M or 8% and $1.818M in the June 2011 quarter, a decrease of $0.681M or 37%. These comprise predominantly interest expense of $0.946M for June 2012 ($0.913M for March 2012 and $0.932M for June 2011) on borrowings on the $80.3M project finance facility with BNP Paribas and finance lease obligations, together with $0.155M for amortisation of capitalised borrowing costs for June 2012 ($0.142M for March 2012, $0.881M for June 2011). Amortisation has increased by $0.013M or 9% in the current period as a result of the marginal increase in production during the current quarter compared the previous quarter. Interest on the finance lease obligations has also increased from the prior quarter due to the increased use of leased assets resulting from the increased production in the current quarter.
Share of loss of associates
In the June 2012 quarter, the Company has recognised a loss of $1.569M in relation to its interests in the results of its associates FRC, Ratel Group, SAU, Aroroy Resources, Inc. and Masminero Resources Corporation, an increase of $1.411M or 893% from the previous quarter loss of $0.158M. In the June 2011 quarter, the Company recognised a loss of $1.017M, which related to FRC, Ratel Gold (now SAU), Ratel Group, Aroroy and Masminero. The variance from the March 2012 quarter is mainly due to the increased share of loss from FRC.
SAG Mill expenses
All expenses in relation to the SAG Mill repair have been fully expensed in the current year, with $5.713M expensed in the June 2012 quarter (March 2012 quarter: nil). Additionally, other operating income that was recognised in the December 2011 quarter for insurance compensation of $2.363M relating to the insurance claim lodged for repairs to the SAG Mill was reclassified as part of the SAG Mill expenses in the June 2012 quarter.
Administration and other costs
In the current quarter the Company incurred costs of $1.208M as compared to $2.699M for the previous quarter, a decrease of $1.491M or 55% and $2.865M in June 2011, a decrease of $1.657M or 58%. The variance from the previous quarter is partially due to repairs & maintenance costs of $2.863M relating to the repair of the SAG Mill incurred during the December 2011 quarter being reclassified to a separate line item in the June 2012 quarter, therefore reducing administration & other costs in the June 2012 quarter. The variance is also attributable to the recognition of documentary stamp taxes of $1.027M in the June 2012 quarter.
Year to Date Results
Twelve Months Ended June 30, 2012 Compared to the Twelve Months Ended June 30, 2011
The Company made a net profit of $5.988M for the twelve months ended June 30, 2012 or 1.79 cents per share as compared to a net profit of $65.082M or 19.56 cents per share for the same period the preceding year. The result for the current year reflects revenue from gold and silver sales at the Masbate Gold Project of $184.285M, offset against a cost of sales of $147.855M (including depreciation, amortisation and tax expenses). The results for the twelve month period ended June 30, 2012 were adversely impacted by the failure in July 2011 of the SAG Mill at the Masbate Gold Project. All expenses in relation to the repair of the SAG Mill have been fully expensed in the twelve month period. Furthermore any insurance claims arising therefrom, including a loss of profits insurance claim, have not been reflected in the current year results. Any insurance proceeds received subsequently will be disclosed in the period received. Once the SAG Mill was brought back on line, record production of 100,013 ounces was achieved, in the six months to 30 June 2012, with a corresponding net profit after tax of $28.110M (6 months to 30 June 2011: $26.063M), before allowing for the non-recurring expenses on the SAG Mill of $6.213M and impairment arising from the mark to market of investments of $6.870M.
Revenues and Cost of Sales
For the twelve month period ended June 30, 2012, the Company earned $187.695M in revenue as compared with $238.481M in the comparable prior year period, a decrease of $50.786M or 21%. Revenue for the first 6 months of the current year period was negatively impacted by the breakdown of the SAG Mill, which resulted in decreased gold production, with full production only re-commencing at the end of January 2012. The revenue in the current year is almost entirely from proceeds from gold and silver sales, along with a non-cash notional interest accretion on the receivable from the associate of $2.911M. The total gold sales for the current period were 137,741 ounces, at an average price of US$1,319 per ounce, as compared to 188,949oz at a price of $1,222/oz for the prior year. With the repairs to the SAG Mill now complete, the Group's production has returned to normal and is expected to continue in the 2012-13 year.
Expenses for the twelve months to June 2012 (after cost of sales) were $34.040M as compared with $14.655M for the twelve months ending 30 June 2011, an increase of $19.385M or 132%. The increase from the prior year is largely due to repairs & maintenance costs of $6.213M relating to the repair of the SAG Mill, non-cash impairment of investment expense of $6.870M, and the $0.691M increase in the share of losses of associates from the June 2011. The current period includes a loss on the fair value of derivatives of $0.864M (losses on HFO and diesel fuel swap contracts of $1.760M offset by a gain of $0.553M on the interest rate swap and the movement in value of ineffective gold forward contacts at 30 June 2012 of $0.343M), compared to a gain of $0.494M in the 30 June 2011 year (gains on HFO and diesel fuel swaps of $0.378M due to the stronger oil price during period and a gain of $0.115M on the interest rate swap). The variance from June 2011 is also due to the balance of fuel swap contracts expiring in April 2012, resulting in derivative assets related to the fuel hedges being written off at June 2012. A notional gain on deconsolidation of $2.929M relating to the deconsolidation of Ratel Group was recorded during the June 2011 year, which was netted against other expenses. A $0.382M loss on the disposal of leased assets was also recognised in June 2012, together with a provision for taxes of $1.027M.
Specific Items Contributing to Changes
Impairment of Investments
An impairment of investments of $6.870M was recognised in June 2012 (June 2011: nil) to write down the carrying value of the investment in St Augustine Gold & Copper Limited to its market value at 30 June 2012.
SAG Mill expenses
Legal, consulting & other costs incurred in relation to the repair of the SAG Mill, totalling $6.213M, have been fully expensed in the current year (June 2011: nil). An insurance claim has been lodged to compensate for costs incurred to repair the SAG Mill, however it is not a point of virtual certainty and therefore the costs incurred have been expensed. Any insurance proceeds subsequently received will be disclosed as income in the period received.
Movement in fair value of derivative financial instruments
The Company recognised a loss of $0.864M in the current year as compared to a gain of $0.493M in the prior year, a movement of $1.357M or 275%, relating to the movement in fair value of the Company's derivative financial instruments which include commodity hedges and interest rate swaps. The current period loss was primarily due to a loss of $1.760M on the fair value of the HFO & diesel hedges (gain of $0.378M for June 2011 as a result of the strong oil price during the period), offset against a gain of $0.553M for the interest rate swap ($0.115M for June 2011) and $0.343M gain related to the movement in the value of ineffective gold forwards contracts at 30 June 2012 (nil for June 2011).
The Company incurred borrowing costs of $3.782M during the year as compared to $5.042M for the twelve months ending June 2011, a decrease of $1.260M or 25%. These comprise predominantly a $3.282M interest expense on borrowings on the $80.30M project finance facility with BNP Paribas and finance lease obligations ($4.118M for June 2011). In the current year the Company has continued to pay down its debt facility with BNP, resulting in the lower year to date interest expense. $0.427M of amortised capitalised borrowing costs were also incurred in the current year ($0.881M for June 2011).
Gain on deconsolidation
A one off gain of $2.929M was recognised in the twelve month period ended 30 June 2011 on the deconsolidation of Ratel Gold (now SAU).
Administration and other costs
The Company incurred administration and other costs of $12.429M during the year as compared to $9.843M for the twelve month period ended 30 June 2011, an increase of $2.586M or 26%. The variance is largely due to a gain of $1.100M from the repayment of loans previously written off being recognised & netted off against expenses in the twelve month period ended June 30 2011, a provision for taxes of $1.027M recognised in June 2012 and the recognition of $0.382M loss on disposal of leased assets during June 2012.
Derivative Financial Instruments
A hedging program of puts covering 46,079 ounces (which expired during the 2010 financial year) and forward sales covering 214,337 ounces was successfully executed during the September 2008 quarter. The effective portion of changes in the fair value of these derivatives that have been designated and qualify as cash flow hedges are recognised in equity in the cash flow hedge reserve. The gain or loss relating to the ineffective portion or portion that does not qualify for hedge accounting is immediately recognised in the income statement. If the forecast transaction is no longer expected to occur, amounts recognised in equity are transferred to the income statement. In March 2009, the Company subsequently executed further hedging comprising fuel hedges and interest rate swaps. The fuel hedges do not qualify for hedge accounting and all changes to the fair value of the fuel derivatives are recognised in the profit and loss. The gain or loss relating to the ineffective portion or portion that does not qualify for hedge accounting is immediately recognised in the income statement. If the forecast transaction is no longer expected to occur, amounts recognised in equity are transferred to the income statement. The amount reflected in the group consolidated profit and loss for hedge related expenses is a loss of $0.864M for the year to date, which is the result of losses on its HFO and diesel fuel swap contracts of $1.760M, offset against a gain of $0.553M on its interest rate swap which do not qualify for hedge accounting and the movement in value of ineffective gold forward contracts of $0.343M at 30 June 2012. The HFO and diesel fuel swaps expired at 30 April 2012. The remaining balance of gold forward sales contracts as at 1 July 2012 is 79,457 ounces at an average price of $903/oz.
Summary of gold forward sales contracts
|Expiry Date||Settlement Date||Total Ounces|| Average Price
|27 Jul 2012 - 31 Dec 2012||31 Jul 2012 - 31 Dec 2012||29,232||884.77|
|29 Jan 2013 - 27 Dec 2013||31 Jan 2013 - 31 Dec 2013||50,225||912.67|
Summary of interest rate swap contract
|Start Date||End Date|| Total Loan Amount
|Fixed interest rate|
|30 Jun 2012||30 Sep 2012||13,600,000||2.41%|
|30 Sep 2012||31 Dec 2012||5,710,000||2.41%|
|31 Dec 2012||31 Mar 2013||4,600,000||2.41%|
|31 Mar 2013||30 Jun 2013||3,500,000||2.41%|
|30 Jun 2013||30 Sep 2013||2,350,000||2.41%|
|30 Sep 2013||31 Dec 2013||1,200,000||2.41%|
Summary of HFO fuel and diesel swap contracts
HFO fuel and diesel swap contracts expired 30 April, 2012
Commitments and Contingencies
|June 2012||Mar 2012|
|Operating lease commitments - Group as lessee|
|Due within one year||381,498||389,977|
|After one year but no more than five years||540,456||649,962|
|Aggregate lease expenditure contracted for at balance date||921,954||1,039,939|
|Finance lease commitments - Group as lessee|
|Due within one year||8,813,833||5,869,866|
|After one year but no more than five years||20,235,822||20,988,796|
|Aggregate lease expenditure contracted for at balance date||29,049,656||26,858,662|
|(a) Mining services commitments||3,658,000||3,658,000|
|(b) Power services contract commitments||428,483||428,483|
|(c) Laboratory services commitments||205,431||205,431|
|(d) Other capital commitments||5,081,482||2,992,064|
The Company is party to a mining services contract between Leighton Contractors (Philippines) Limited and Filminera Resources Corporation which has been determined to contain a finance lease. The contract for mining services previously had a 6 month termination period (3 months at 31 December 2011), however the term of the contract ended at 31 March 2012, and the mining services contract is now on a month by month term and can be terminated at any time without the requirement to pay an extended termination notice period. Under the Ore Purchase Agreement, PGPRC is contracted to purchasing ore from Filminera at cost plus a profit margin. The Company is also party to a contract for the operation of the power station at the Masbate Gold Project. The contract has a 3 month termination notice period. Laboratory services agreements relate to a 3 month termination notice period on the laboratory services contract.
|BNP project finance debt facility||30 June 2012||31 Mar 2012|
|Due within one year||17,748,210||12,883,830|
|After one year but no more than five years||9,457,680||18,523,800|
|Insurance Premium Funding facility||30 June 2012||31 Mar 2012|
|Due within one year||2,431,697||4,820,196|
|After one year but no more than five years||-||-|
|Payments due by period|
|Contractual Obligations||Total|| Less than 1
|1 - 3 years||4 - 5 years|| After
|Finance Lease Obligations||29,049,655||8,813,833||14,780,056||5,455,766||-|
|Total Contractual Obligations||39,345,005||18,568,727||15,320,512||5,455,766||-|
Background and Review of Operations
CGA is incorporated and domiciled in Australia. The Company has been listed on the Australian Stock Exchange ("ASX") since April 1991 and on the Toronto Stock Exchange ("TSX") since February 2005.
During the 2007 year, the Company entered into agreements to acquire interests in the Masbate Gold Project in the Philippines, the Mkushi Copper Project in Zambia, and the Segilola Gold Project in Nigeria.
The Company executed a joint venture agreement on May 30, 2007 between Seringa Mining Limited ("SML"), a then wholly owned subsidiary of the Company, African Eagle Resources plc ("AFE") and Katanga Resources Limited ("Katanga"), a wholly owned subsidiary of AFE whereby CGA acquired a 51% interest in the Mkushi Copper Project in Zambia, with AFE retaining a 49% interest.
On May 27, 2007, the Company through its then wholly owned subsidiary, Segilola Gold Limited ("SGL"), entered into a joint venture agreement ("the JV Agreement") with Tropical Mines Limited ("TML"), to earn a 51% interest in the Segilola Gold Project in Nigeria, considered to be the most advanced gold exploration project in the country. TML is a Nigerian company owned in joint venture by local investors and the Government.
On January 31, 2007, the Company entered into a Sale and Purchase Agreement ("SPA") for the acquisition of 100% of Thistle Mining Inc's interest in the Masbate Gold Project located in the Republic of the Philippines. The agreed purchase consideration was $51M, and the transaction was completed on March 19, 2007 through an issue of 40,985,538 shares and cash payments of $25M.
The Company completed a private placement, which closed on February 9, 2009, of 20M ordinary shares in the capital of the Company at C$1.25 per share for a total capital raising of C$25M. On June 12, 2009, the Company closed an additional private placement of 14,815,000 ordinary shares in the capital of the Company. The shares were sold at C$1.35 per share, raising C$20,000,250. The proceeds, in combination with existing cash reserves, were utilised to supplement working capital during the initial months of production at the Masbate Gold Mine.
During the 2009 year, the Company's focus was the development and commissioning of the Masbate Gold Project with the construction of the processing plant completed in the 2009 March quarter and the power plant in the 2009 June quarter. The Masbate Gold Project achieved its first gold pour on 12 May 2009. Prior to commencement of commercial production, most costs were capitalised as development costs.
On October 30, 2009 the Company completed a private placement of 14,705,000 ordinary shares in the capital of the Company at C$1.70 per share for a total capital raising of C$24,998,500. The net proceeds, after costs of the issue, in combination with existing cash reserves, were utilised to fund further enhancements in the plant and exploration activities at the Masbate Gold Mine.
A further private placement was completed on February 5, 2010 on a bought deal basis, of 39.1M ordinary shares in the capital of the Company at C$2.20 per share for total gross proceeds of C$86M. The net proceeds from the sale of the shares were used to repay indebtedness, including the early repayment of the loan facility with Meridian and Casten, the $25M Senior Promissory Notes, to increase exploration activity at the Masbate Gold Project and for general corporate purposes.
In 2010, the Company entered into a strategic alliance with Sierra Mining Limited ("Sierra"), which holds prospective gold exploration interests in the Philippines. Projects include the property immediately adjacent to Medusa Mining Limited's (TSX:MLL) rich Co-0 gold mine (December 2010 quarter - average grade 13.09g/t and cash costs of $185/oz) and other properties to the south of the King-king gold and copper deposit. This will leverage CGA's exploration expenditure and further capitalise on the success to date in the Philippines. In November 2010, the Company purchased a further 4M shares in Sierra, increasing its holding to 19.7M shares or approximately 8.5%.
In 2010, the Company incorporated a new entity, Ratel Gold Limited now called St Augustine Gold and Copper Limited which acquired the Company's African assets. During the 2010 year, the Company announced a proposed spin-off of Ratel from the Company, with Ratel undertaking an initial public offering of common shares (the "Offering") in Ratel. The Offering closed successfully on 6 August 2010, with Ratel issuing 70M common shares at a price of C$0.20 per common share, for aggregate gross proceeds of C$14M. The Offering, along with a subsequent issue of 2.5M shares by Ratel, diluted the Company's holding in Ratel to 19.4%. Accordingly the African assets, being the Segilola Gold Project and the Mkushi Copper Project, are no longer controlled by the Company or consolidated into its financial statements.
In October 2010 the Company entered into a strategic alliance with Ratel (now called SAU) in connection with Ratel's agreement to acquire the interests held by Russell Mining & Minerals, Inc. and their subsidiaries (the "RMMI Group"), in the 20.7M equivalent gold ounce King-king Copper-Gold Project in the Philippines ('the King-king Interests"). As part of the acquisition, the Company agreed to provide a loan facility to the RMMI Group to fund the initial settlement payments to Benguet Corporation ("Benguet") and debt holders of Benguet, together with working capital, which was fully secured against the King-king Interests. The total amount loaned was $14,489,202, which was fully repaid to the Company on 7 January 2011, along with interest of $336,705. The acquisition was conditional on the successful completion of a C$25M capital raising at C$0.30 ('the Ratel Placement") per share and securing all necessary shareholder and TSX approval for the acquisition, share issue to the RMMI Group and the Ratel Placement. The Company subscribed for a total of 50M additional shares in the Ratel Placement, increasing its interest in Ratel Gold Limited (now called SAU) to its current interest of 20.7%. The Ratel Placement along with the acquisition of the King-king interests was successfully closed on 7 January 2011.
With the closure of the Ratel Placement, Ratel (now called SAU) completed a spin-off of its existing African assets, by way of an entitlement issue back to shareholders of shares in Ratel Group Limited, a TSX-listed company trading under the symbol "RTG". Under the terms of the reorganization, the Company was issued a further 9,722,222 Ratel Group shares. The Company also participated in a capital raising of Ratel Group, taking up 19M shares at C$0.10 each. As a result the Company now holds a 19.1% interest in Ratel Group.
In June 2011, the Company successfully achieved Project Completion for the project finance facility for the Masbate Gold Project. Having now satisfied Project Completion, the following additional benefits apply to the facility:
- the margin has reduced from LIBOR plus 3.65% to LIBOR plus 3.15%;
- any guarantees from CGA have been released and the project is non-recourse to CGA;
- the Project is able to flow all excess funds (above and beyond the Debt Service Reserve Account) to any other entity within the CGA group, with any payment out of the security structure to be applied as to 25% to a further prepayment of the principal outstanding under the facility, subject to the satisfaction of normal financial ratios.
Operations at the Masbate Gold Project progressed well through the 2010-11 year. Mill throughput continued to improve with a ninth consecutive quarterly record set in the June 2011 quarter along with the commissioning of a fourth mining fleet to support further throughput improvements including the 6.5Mtpa plant upgrade which was completed during the December 2011 quarter.
On 10 July 2011, cracks were detected in the SAG mill at the Masbate Gold Project. The SAG mill was shut down to be repaired, although interim production was re-established on 21 July 2011 with a reconfiguration of the grinding circuit and ore being fed directly into the ball mills. Repairs to the SAG mill were completed on 25 December 2011 with recommissioning occurring over the ensuing days. Initially production was set at 300-350tph to bed the mill in and make final mechanical checks. Production rates were subsequently lifted to 700tph with all mechanical checks showing that the circuit had settled in and was running smoothly and back at full operating capacity. Following the repairs to the SAG mill, throughput was 1,728,751 tonnes for the June 2012 quarter, compared to 866,140 tonnes for the December 2011 quarter - a 100% increase in throughput from the December quarter when the repairs were completed. The milling circuit is performing consistently at levels at or above 6.5Mtpa. All repairs were conducted under the supervision of mill specialists, Metso Minerals, who have repaired similar issues on this type of mill on a number of previous occasions. All repair work was subjected to extensive Non Destructive Testing which showed that 100% of the weld was within specification. Further engineering work in the form of the addition of gussets which "knit" the rotating element to the mill heads were also implemented to ensure improved structural integrity to the mill shell. The purchase of a new rotating element is also in the process giving extra security against any chance of another prolonged shutdown.
Following the successful recommissioning of the SAG mill in December 2011, production has remained strong and in line with forecast. 100,019 ounces were produced in the 6 month period January to June 2012. This production has resulted from throughputs in excess of 6.5Mtpa annualised whilst keeping availabilities and recoveries in line with guidance.
The Lycopodium Optimisation Study to determine the options for upgrading plant capacity via stepped increases in capital expenditure is currently being finalised, with capital and operating estimates under final consultant review.
During the 2012 fiscal year $14.4M was spent on exploration, reserve definition and sterilisation programs. 31,572m of diamond core drilling and 44,035m of reverse circulation drilling was completed. Regional mapping and sampling was conducted over an area of 47km2, with over 2,000 stream samples and 1,254 rock chip samples taken. A geophysical IP survey was also conducted in the Baleno district over a 3km2 area.
Results from recent drilling at "near mine" targets have resulted in some excellent intercepts. Programs targeting immediately north and south of the Main Vein Pit have intercepted broad widths of high grade mineralisation.
During the current year to date, 50,000 A$1.70 options issued in April 2009 were exercised, together with 4.30M A$0.65 options issued in March 2007, raising a total of A$2.880M.
On 7 May 2012, the Company announced an updated resource and reserve statement for the Masbate Gold Project. The full details of the announcement can be found on sedar.com.
On September 18, 2012, CGA entered into a Merger Implementation Agreement with B2Gold Corp. ("B2Gold") to combine the two companies at an agreed exchange ratio of 0.74 B2Gold common shares for each CGA share held by a CGA shareholder (a copy of the agreement is available on sedar.com). B2Gold also proposes to acquire all outstanding CGA options and issue B2Gold shares as consideration for the cancellation of the options based on the in the money amount of such CGA options on September 17, 2012. The merger will be implemented by way of a Scheme of Arrangement under the Australian Corporations Act 2001 ("Scheme"). The merger is subject to regulatory, Australian Court, shareholder, and third party approvals, together with other customary conditions. Regulatory approvals include approval by the Australian Foreign Investment Review Board, and ASX and TSX approvals. A Scheme Booklet setting out the terms of the Scheme and an Independent Expert's Report will be circulated to all CGA shareholders in connection with a meeting of CGA shareholders expected to take place later in the year. The Scheme requires approval by 75% of the number of votes cast, and 50% of the number of CGA shareholders present and voting, at the meeting of CGA shareholders. If the Scheme is implemented, CGA will become a subsidiary of B2Gold and cease to be a reporting issuer in Canada and will de-list from the ASX and TSX.
The business of the Company and its shares should be considered speculative given the volatility in world stock markets (particularly with respect to mining and exploration companies) and the uncertain nature of mining and exploration activities generally. Amongst other things, some of the key risk factors faced by CGA include:
- foreign exchange movements;
- movements in commodity prices (in particular the gold price and costs of production);
- access to new capital (both debt and equity) and meeting liquidity requirements;
- meeting forecast operating parameters, including grade, operating costs, throughput and reliability of mechanical components;
- the uncertain nature of exploration and development activities;
- commissioning risks in new development projects including the use of second hand equipment;
- satisfying banking requirements and covenants;
- increases in capital expenditures necessary to advance the Company's projects;
- the ability to profitably exploit new development projects;
- political, security and sovereign risks of the Philippines;
- permitting, local community and small scale miners support;
- environmental obligations; and
- weather conditions.
For further information on these and other risks inherent in the Company's business, we direct readers to Appendix A of this MD&A and the Company's Annual Information Form for the most recently completed financial year lodged on SEDAR at sedar.com.
Disclosure Controls and Procedures
In accordance with Multilateral Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings, an evaluation of the effectiveness of the Company's disclosure controls and procedures (DC&P) and its internal control over financial reporting ("ICFR") was conducted. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that DC&P and ICFR were effective as of the three-month period ended June 30, 2012, and that, as a result, ICFR design provides reasonable assurance that material information relating to the Company, is made known to them by others within those entities, particularly during the period in which the annual filings are being prepared, and the information that the Company must present in its annual documents, its interim documents or in other documents it files or submits under securities regulations is recorded, processed, condensed and presented within the times frames prescribed by this legislation. Furthermore, ICFR design provides reasonable assurance that the Company's financial information is reliable and that its financial statements have been prepared, for the purpose of publishing financial information, in accordance with the Company's GAAP. Lastly, no changes to the ICFR that have had or are likely to have a significant effect on this control mechanism were identified by management during the accounting period commencing on April 1, 2012 and ending on June 30, 2012.
Critical Accounting Estimates
The significant accounting policies including the critical accounting estimates and assumptions used by CGA are disclosed in Note 2 to the annual financial statements for the year ended June 30, 2012. Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management reviews its estimates on a regular basis. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates. The critical accounting estimates and assumptions used in the preparation of the 30 June 2012 annual financial statements have been applied consistently from the previous financial year. The critical accounting estimates and assumptions used are as follows:
(i) Significant accounting judgments
- Mineral reserve estimates
(ii) Significant accounting estimates and assumptions
- Share based payment transactions
- Impairment of intangibles
- Carrying value of exploration and evaluation
- Deferred tax assets and liabilities
- Impairment of plant and equipment
- Estimating costs of environment rehabilitation
- Loan to associate
- Finance leases
- Derivative financial instruments
Further details regarding the critical accounting estimates and assumptions can be found in the 30 June 2012 annual financial statements.
Transactions between the group and its related parties
During the quarter ended June 30, 2012, the Company entered into transactions with related parties in the wholly-owned group:
- loans were advanced and repayments received on short term inter-company accounts; and
- loans were received from controlled entities on short term inter-company accounts.
During the quarter ended June 30, 2012 the Company entered into loan advances totalling $4.384M on short term intercompany accounts with its 40% associate, Filminera.
These transactions were undertaken on commercial terms and conditions except that:
- there is no fixed repayment of loans between the related parties; and
- no interest is payable on the loans at present.
During the financial year, the Company entered into the following transactions with related parties:
- Office accommodation and administrative support were provided at commercial rates to Ratel Group, in which the Company holds 19.1% of the outstanding share capital. In the current quarter Ratel Group was charged $102,357 (excluding GST) in relation to the provision of these services (YTD; $409,563).
- Ore was purchased from its 40% associate Filminera, pursuant to an Ore Sales and Purchases Agreement, which requires the Company to purchase ore mined from the associate's facility on a cost plus basis. In the current quarter, $21,017,447 of ore was purchased from Filminera (YTD; $61,243,712).
Additional Information and Continuous Disclosure
This MD&A has been prepared as of September 28, 2012. Additional information on the Company is available through regular filings of press releases, financial statements and its Annual Information Form on SEDAR (sedar.com). You may also find these documents and other information about CGA on our website at www.cgamining.com.
This MD&A contains forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding expectations of the Company as to the market price of gold, strategic plans, future commercial production, production targets, timetables, mining operating expenses, capital expenditures, and mineral reserve and resource estimates. Forward-looking statements involve known and unknown risks and uncertainties and accordingly, actual results and future events could differ materially from those anticipated in such statements. Factors that could cause future results or events to differ materially from current expectations expressed or implied by the forward-looking statements include, but are not limited to, fluctuations in the market price of precious metals, mining industry risks, uncertainty as to calculation of mineral reserves and resources, risks related to hedging strategies, risks of delays in construction, requirements of additional financing, increase in tax or royalty rates or adoption of new interpretations related thereto and other risks described in this MD&A and in the Company's other documents filed from time to time with Canadian securities regulatory authorities. Although the Company is of the opinion that these forward-looking statements are based on reasonable assumptions, those assumptions may prove to be incorrect. Accordingly, readers should not place undue reliance on forward-looking statements. Readers can find further information with respect to risks in the Annual Information Form of the Company and other filings of the Company with Canadian securities regulatory authorities available at sedar.com. The Company disclaims any obligation to update or revise these forward-looking statements, except as required by applicable law.
RISKS AND UNCERTAINTIES
As a mining company, the Company faces the financial, operational, political and environmental risks inherent to the nature of its activities. These risks may affect the Company's profitability and level of operating cash flow. The Company also faces risks stemming from other factors, such as fluctuations in gold prices, oil prices, interest rates, exchange rates, tax or royalty rates or the adoption of new interpretation relating thereto and financial market conditions in general. As a result, the securities of the Company must be considered speculative, and in evaluating the securities of the Company, the following factors, amongst other things, should be considered.
Fluctuation in Gold Prices
The profitability of CGA's operations will be significantly affected by changes in the market price of gold. Gold production from mining operations and the willingness of third parties, such as central banks, to sell or lease gold affects the gold supply. Demand for gold can be influenced by economic conditions, gold's attractiveness as an investment vehicle and the strength of the US dollar and local investment currencies. Other factors include the level of interest rates, exchange rates, inflation and political stability. The aggregate effect of these factors is impossible to predict with accuracy. Gold prices are also affected by worldwide production levels. In addition, the price of gold has on occasion been subject to very rapid short-term changes because of speculative activities. Fluctuations in gold prices may adversely affect CGA's financial performance and results of operations.
Uncertainty of Reserve and Resource Estimates
The figures for reserves and resources presented are estimates based on limited information acquired through drilling and other sampling methods. No assurance can be given that the anticipated tonnages and grades will be achieved or that the indicated level of recovery will be realized. The ore grade actually recovered may differ from the estimated grades of the reserves and resources. Such figures have been determined based upon assumed gold prices and operating costs. Future production could differ dramatically from reserve estimates for, among others, the following reasons:
- mineralization or formations could be different from those predicted by drilling, sampling and similar examinations;
- increases in operating mining costs and processing costs could adversely affect reserves;
- the grade of the reserves may vary significantly from time to time and there is no assurance that any particular level of gold may be recovered from the reserves; and
- declines in the market price of gold may render the mining of some or all of the reserves uneconomic.
Any of these factors may require CGA to reduce its reserves estimates or increase its costs. Short-term factors, such as the need for the additional development of a deposit or the processing of new different grades, may impair CGA's profitability. Should the market price of gold fall, CGA could be required to materially write down its investment in mining properties or delay or discontinue production or the development of any new projects.
No assurance can be given that the intended or expected production schedules or the estimated direct operating cash costs will be achieved in respect of the operating gold mine in which CGA has an interest. Many factors may cause delays or cost increases, including, without limitation, labour issues, disruptions in power, transportation or supplies, and mechanical failure. The revenues of CGA from the operating gold mine will depend on the extent to which expected operating costs in respect thereof are achieved. In addition, short-term operating factors, such as the need for the orderly development of ore bodies or the processing of new or different ore grades, may cause a mining operation to be unprofitable in any particular period.
Depletion of the Company's Mineral Reserves
CGA must continually replace mining reserves depleted by production to maintain production levels over the long term. This is done by expanding known mineral reserves or by locating or acquiring new mineral deposits. There is, however, a risk that depletion of reserves will not be offset by future discoveries of mineral reserves. Exploration for minerals is highly speculative in nature and involves many risks. Many projects are unsuccessful and there are no assurances that current or future exploration programs will be successful. Further, significant costs are incurred to establish mineral reserves, open new pits and construct mining and processing facilities. Development projects have no operating history upon which to base estimates of future cash flow and are subject to the successful completion of feasibility studies, obtaining necessary government permits, obtaining title or other land rights and the availability of financing. In addition, assuming discovery of an economic mine or pit, depending on the type of mining operation involved, many years may elapse before commercial operations commence. Accordingly, there can be no assurances that CGA's current programs will result in any new commercial mining operations or yield new reserves to replace and/or expand current reserves.
Uncertainty Relating to Inferred Mineral Resources
Inferred mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty which may attach to inferred mineral resources, there is no assurance that Inferred mineral resources will be upgraded to mineral resources with sufficient geological continuity to constitute proven and probable mineral reserves as a result of continued exploration.
Fluctuation in Oil Prices
Because CGA uses diesel and heavy fuel oil to power its mining equipment and power stations to supply its mining operations, CGA's operating results and financial results may be adversely affected by rising petroleum prices. A portion of the costs until April 2012 were the subject of fuel hedges.
Exchange Rate Fluctuations
The operations of CGA in the Philippines are subject to currency fluctuations and such fluctuations may materially affect the financial position and results of CGA. Gold is currently sold in US dollars and although the majority of the costs of CGA are also in US dollars, certain costs are incurred in other currencies. The appreciation of non-US dollar currencies against the US dollar can increase the cost of exploration and production in US dollar terms, which could materially and adversely affect CGA's profitability, results of operations and financial condition.
Access to Capital Markets
To fund its growth, CGA is often dependent on securing the necessary capital through loans or permanent capital. The availability of this capital is subject to general economic conditions and lender and investor interest in CGA's projects.
Nature of Mineral Exploration and Mining
CGA's profitability is significantly affected by CGA's exploration and development programs. The exploration and development of mineral deposits involves significant financial risks over a significant period of time, which even a combination of careful evaluation, experience and knowledge may not eliminate. While the discovery of a gold-bearing structure may result in substantial rewards, few properties explored are ultimately developed into mines. Major expenses may be required to establish and replace reserves by drilling, and to construct mining and processing facilities at a site. It is impossible to ensure that the current or proposed exploration programs on CGA's exploration properties will result in profitable commercial mining operations.
CGA's operations are, and will continue to be, subject to all of the hazards and risks normally associated with the exploration, development and production of gold, any of which could result in damage to life or property, environmental damage and possible legal liability for any or all damage. CGA's activities may be subject to prolonged disruptions due to weather conditions depending on the location of operations in which CGA has interests. Hazards, such as unusual or unexpected formations, rock bursts, pressures, cave-ins, flooding or other conditions may be encountered in the drilling and removal of material. While CGA may obtain insurance against certain risks in such amounts as it considers adequate, the nature of these risks are such that liabilities could exceed policy limits or could be excluded from coverage. There are also risks against which CGA cannot insure or against which it may elect not to insure. The potential costs which may be associated with any liabilities not covered by insurance or in excess of insurance coverage or compliance with applicable laws and regulations may cause substantial delays and require significant capital outlays, adversely affecting CGA's earnings and competitive position in the future and, potentially, its financial position and results of operations.
Whether a gold deposit will be commercially viable depends on a number of factors, some of which are the particular attributes of the deposit, such as its size and grade, proximity to infrastructure, financing costs and governmental regulations, including regulations relating to prices, taxes, royalties, infrastructure, land use, importing and exporting of gold, revenue repatriation and environmental protection. The effects of these factors cannot be accurately predicted, but the combination of these factors may result in CGA not receiving an adequate return on invested capital.
Licences and Permits
CGA requires licences and permits from various governmental authorities. CGA believes that it holds all necessary licences and permits under applicable laws and regulations in respect of its properties and that it is presently complying in all material respects with the terms of such licences and permits. Such licences and permits, however, are subject to change in various circumstances and regularly expire and need to be renewed. There can be no guarantee that CGA will be able to obtain or maintain all necessary licences and permits that may be required to explore and develop its properties, commence construction or operation of mining facilities and properties under exploration or development or to maintain continued operations that economically justify the cost.
The mineral exploration and mining business is competitive in all of its phases. CGA competes with numerous other companies and individuals, including competitors with greater financial, technical and other resources than CGA, in the search for and the acquisition of attractive mineral properties and, increasingly, human resources. There is no assurance that CGA will continue to be able to compete successfully with its competitors in acquiring properties or prospects and in attracting and retaining human resources.
Cash Cost of Gold Production
CGA's cash operating cost to produce an ounce of gold is dependent on a number of factors, including the grade of reserves, recovery and plant throughput. In the future, the actual performance of CGA may differ from the estimated performance. As these factors are beyond CGA's control, there can be no assurance that CGA's cash operating cost will continue at historical levels or perform as forecast.
While CGA has no reason to believe that the existence and extent of any mining property in which it has a participating interest is in doubt, title to mining properties is subject to potential claims by third parties. The failure to comply with all applicable laws and regulations, including failure to pay taxes and carry out and file assessment work, may invalidate title to portions of the properties where the mineral rights are held by CGA.
Outside Contractor Risk
The mining and exploration activities are conducted by outside contractors. As a result, CGA's operations at these sites will be subject to a number of risks, some of which will be outside CGA's control, including:
- negotiating agreements with contractors on acceptable terms;
- the inability to replace a contractor and its operating equipment in the event that either party terminates the agreement;
- reduced control over such aspects of operations that are the responsibility of the contractor;
- failure of a contractor to perform under its agreement with CGA;
- interruption of operations in the event that a contractor ceases its business due to insolvency or other unforeseen events;
- failure of a contractor to comply with applicable legal and regulatory requirements, to the extent that it is responsible for such compliance; and
- problems of a contractor with managing its workforce, labour unrest or other employment issues.
In addition, CGA may incur liability to third parties as a result of the actions of a contractor. The occurrence of one or more of these risks could have a material adverse effect on CGA's business, results of operations and financial condition.
Safety and Other Hazards
The mining industry is characterised by significant safety risks. To minimize these risks, the Company has established an Occupational Health Safety & Environment Management Plan ("OHS&E"). The Company provides OHS&E training and awareness programs to its employees and contractors to continuously improve work practices and the work environment. However there are no guarantees that this will prevent safety issues, accidents or other hazards.
CGA currently holds interests in gold projects in the Philippines, which may be considered to have high political and sovereign risk. The Company also has its head office operations located in Australia. Any material adverse changes in government policies or legislation of Australia, Nigeria, the Republic of Zambia (given the investment in Ratel Group) or the Philippines or any other country that the Company has economic interests in that affect mineral exploration activities, may affect the viability and profitability of the Company.
While the government in the Philippines has historically supported the development of its natural resources by foreign companies, there is no assurance that the government will not in the future adopt different policies or interpretations respecting foreign ownership of mineral resources, royalties rates, taxation, rates of exchange, environmental protection, labour relations, repatriation of income or return of capital or the obligations of CGA under its respective mining codes. The possibility that the government may adopt substantially different policies or interpretations, which might extend to the expropriation of assets, may have a material adverse effect on CGA. Political risk also includes the possibility of civil disturbances and political instability.
Environmental Risks and Hazards
All phases of CGA's operations are subject to environmental regulation. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors and employees. Environmental hazards which are unknown to CGA at present and which have been caused by previous or existing owners or operations of the properties may exist on CGA's properties. Failure to comply with applicable environmental laws and regulations may result in enforcement actions thereunder and may include corrective measures that require capital expenditures or remedial actions. There is no assurance that future changes in environmental laws and regulations and permits governing operations and activities of mining companies, if any, will not materially adversely affect CGA's operations or result in substantial costs and liabilities to CGA in the future.
Production at CGA's mine involves the use of sodium cyanide which is a toxic material. Should sodium cyanide leak or otherwise be discharged from the containment system, CGA may become subject to liability for clean up work that may not be insured. While all steps have been taken to prevent discharges of pollutants into ground water and the environment, CGA may become subject to liability for hazards that it may not be insured against.
The Company is exposed to movements in the gold price, other commodities and interest rates. As part of the risk management policy of the Company and in compliance with the conditions required by the Company's financiers, a variety of financial instruments (such as gold forward sales contracts and gold put options) are used from time to time to reduce exposure to unpredictable fluctuations in the project life revenue streams. Within this context, the hedging programs undertaken are structured with the objective of retaining as much upside to the gold price as possible, but in any event, by limiting hedging commitments to no more than 50% of the group gold reserves. The Company has also entered into a number of other derivative instruments including interest rate swaps and fuel hedging contracts. In the event that the Company cannot deliver into these contracts due to insufficient gold production at the Masbate Gold Project, an early repayment of the loans, the Company could be exposed to material mark to market adjustments which could cause material liquidity requirements which may not be able to be funded from the cashflow from operations.
Small Scale Miners
Small scale miners have been operating in Aroroy, Masbate since the time Atlas Consolidated Mining and Development Corporation ("Atlas") operated in the area. While their processing operations are not on FRC's property, there has been evidence of contamination from tailing and effluent discharges within the Company's boundary. Although FRC is not liable for their contamination, the Company has been diligent in attempting to limit the activities of these miners and informing the public about the risk of contamination. In line with attempts to limit and control their activities the Company, in coordination with local and National government, is endeavouring to enter into agreements with small scale miners. The agreements will form local cooperatives to legally work on some areas of the Company's mineral tenements outside of its operations that are not suitable for large scale mining. There is also a natural conflict in objectives between small scale miners and the Company and FRC, as the small scale miners have no legal rights to mine and are keen to access as much ore as possible. In contrast, the Company and FRC have a stated position of allowing some level of activity; however, they require it to be contained to nominated areas only. Accordingly, there are risks that conflict can arise which could materially adversely affect the operations of CGA and/or FRC.
Dependence on Key Management Personnel and Executives
The Company will be dependent upon the continued support and involvement of a number of key management personnel. The loss of the services of one or more of such personnel could have a material adverse effect on the Company. The Company's ability to manage its exploration and development activities and, hence, its success, will depend in large part on the efforts of these individuals. The Company faces intense competition for qualified personnel and there can be no assurances that the Company will be able to attract and retain personnel.
In general, FRC has valid title to or preferential rights to use and possess the parcels of land needed for its mining operations at the Masbate Gold Project. The following are outstanding issues:
|(i)||titles to three parcels of land are being judicially confirmed by applying for registration under the Land Registration Act; and|
|(ii)||three claimants have filed an action contesting the title of FRC to three parcels of land.|
While FRC anticipates that these land issues will be resolved, no assurance can be given that the matters will be resolved in FRC's favour in a timely manner, or at all.
At the Masbate Gold Project, community support is critical to the continued successful operation of the project, including equitable and sensible co-operation with local small scale mining activities. The Philippines operates on a relatively decentralised system and accordingly, all constituents potentially have an impact on the operations of the project and may have interests that conflict with those of the project, which may have a material adverse effect on the project and the Company.
Construction of the Masbate Gold Project has in part been financed by project finance from commercial banks which have representations, financial commitments, banking ratios and other covenants which must be satisfied at all times. Given the risks to operating cashflow as described above, the Company is exposed to potential events of default which could make all amounts due and payable immediately or expose CGA to working capital needs which may not be able to be funded by proceeds from operations. Such exposures can also cause cross-defaults on other debt facilities, making those also due and payable immediately, and which may not be able to be funded from cash reserves.
Concentration of Share Ownership
Majority or significant shareholders may be able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, and such parties may not act in the best interests of the Company.
Thistle, PGO Loan and Inter-Company Loans
Some of the Philippine Gold Limited ("PGO") (which was acquired from Thistle) loans and inter-company loans have been in place for a number of years. In 2005 and 2006, PGO, FRC and PGPRC undertook a restructuring of the inter-company loans on the advice of tax consultants. Some inter-company loans were converted into interest-bearing loans, and a portion of the inter-company loans were converted into "additional paid-in capital".
There is a risk that the past and current structure of the inter-company loans may have adverse tax consequences.
Regulations in the Philippines
The Philippines Constitution provides that all natural resources are owned by the State which may enter into a co-production, joint venture or production sharing agreement with citizens of the Philippines or corporations or associations whose capital is at least 60% owned by Philippine citizens.
Commonwealth Act No. 108, as amended (the "Anti-Dummy Act"), provides penalties for, amongst others: (a) Filipinos who permit aliens to use them as nominees or dummies so that the aliens could enjoy privileges otherwise reserved for Filipinos or Filipino corporations, and (b) aliens or foreigners who profit from the adoption of these dummy relationships. It also penalises the act of falsely simulating the existence of minimum stock or capital as owned by citizens of the Philippines or any other country in cases in which a constitutional or legal provision requires that, before a corporation or association may exercise or enjoy a right, franchise or privilege, not less than a certain percentage of its capital must be owned by such citizens.
The Anti-Dummy Act likewise prohibits aliens from intervening in the management, operation, administration or control of nationalised business or enterprises, whether as officers, employees or labourers, with or without remuneration, except that aliens may take part in technical aspects only, provided (a) no Filipino can do such technical work, and (b) it is with express authority from the Secretary of Justice. The Anti-Dummy Act also allows the election of aliens as members of the boards of directors or governing bodies of corporations or associations engaged in partially nationalised activities in proportion to their allowable participation or share in the capital of such entities. Although CGA believes its structure complies with all Philippine regulations, there is a risk that, given the limited precedents to date in the country, it could be changed or challenged.
SOURCE: CGA Mining Limited
For further information:
CGA Mining Limited
Level 5, BGC Centre
28 The Esplanade
Perth Western Australia 6000
Tel: +61 8 9263 4000
Fax: +61 8 9263 4020
Email: [email protected]