FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
GOLD RESERVE CORPORATION
State Of Incorporation: Montana
Commission File Number: 1-8372
IRS Employer Identification No: 81-0266636
Address Of Principal Executive Offices: 601 West Riverside Avenue,
Suite 1940
Spokane, Washington 99201
Registrant's Telephone Number: (509) 623-1500
Securities registered pursuant to
Section 12(b) of the Act:
Title Of Each Class: Common Stock
Name Of Each Exchange on Which
Registered: NASDAQ SmallCap Market
The Toronto Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period as the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes[X]
The number of shares of common stock issued at April 30, 1998 was
22,974,143.
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(unaudited)
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,137,058 $ 12,524,125
Investments:
Held-to-maturity securities 4,003,319 4,054,494
Accrued interest on investments 155,146 240,757
Deposits, advances and other 632,782 411,725
Litigation settlement held in escrow -- 4,500,000
------------ ------------
Total current assets 19,928,305 21,731,101
Property, plant and equipment, net 39,138,841 38,446,169
Investments:
Available-for-sale securities 119,504 127,754
Held-to-maturity securities 7,592,865 11,521,973
Other 1,434,513 1,465,997
------------ ------------
Total assets $ 68,214,028 $ 73,292,994
============ ============
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 800,887 $ 646,203
Note payable - KSOP, current portion -- 188,470
Litigation settlement payable -- 4,500,000
------------ ------------
Total current liabilities 800,887 5,334,673
Note payable - KSOP, non-current portion 264,771 434,390
Minority interest in consolidated
subsidiaries 983,661 974,522
------------ ------------
Total liabilities 2,049,319 6,743,585
Commitments and contingencies
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED BALANCE SHEETS, CONTINUED
March 31, 1998 and December 31, 1997
(unaudited)
March 31, December 31,
1998 1997
------------ ------------
SHAREHOLDERS' EQUITY
Serial preferred stock, without par value
Authorized: 20,000,000 shares
Issued: none
Common stock, without par value
Authorized: 480,000,000 shares
Issued: 1998... 22,974,143;
1997... 22,918,143
Outstanding: 1998... 22,493,099;
1997... 22,437,099 $102,300,494 $102,269,494
Less, common stock held by affiliates (1,428,565) (1,428,565)
Accumulated other comprehensive income 2,750 11,000
Accumulated deficit (34,445,199) (33,679,660)
KSOP debt guarantee (264,771) (622,860)
------------ ------------
Total shareholders' equity 66,164,709 66,549,409
------------ ------------
Total liabilities and shareholders'
equity $ 68,214,028 $ 73,292,994
============ ============
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
For the Three Months Ended March 31, 1998 and 1997
(unaudited)
1998 1997
------------ ------------
Other Income:
Interest $ 359,257 $ 434,491
Foreign currency loss (25,874) (25,366)
------------ ------------
333,383 409,125
------------ ------------
Expenses:
General and administrative 483,946 518,419
Directors' and officers' compensation 495,500 449,854
Legal and accounting 87,864 78,172
Depreciation 11,244 11,574
Interest expense, net of amount
capitalized 11,229 4,543
Minority interest in net income (loss)
of consolidated subsidiaries 9,139 (1,717)
------------ ------------
1,098,922 1,060,845
------------ ------------
Net loss (765,539) (651,720)
Other comprehensive (loss) income (8,250) 4,750
------------ ------------
Comprehensive loss $ (773,789) $ (646,970)
============ ============
Net loss per share - basic and diluted $ (0.03) $ (0.03)
============ ============
Weighted average common shares
outstanding 22,441,829 22,263,673
============ ============
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
(unaudited)
1998 1997
----------- -----------
Cash Flows from Operating Activities:
Net loss $ (765,539) $ (651,720)
Adjustments to reconcile net loss to
net cash (used) provided by operating
activities:
Depreciation 11,244 11,574
Amortization of premium (discount)
on held-to-maturity securities 10,694 (53,363)
Foreign currency loss 25,874 25,366
Minority interest in net income
(loss) of consolidated
subsidiaries 9,139 (1,717)
Changes in current assets and
liabilities:
Net decrease (increase) in
current assets 4,364,554 (74,547)
Net (decrease) increase in
current liabilities (4,345,316) 779,401
----------- -----------
Net cash (used) provided by
operating activities (689,350) 34,994
----------- -----------
Cash Flows from Investing Activities:
Proceeds from maturities of held-
to-maturity securities 10,056,187 4,000,000
Purchase of held-to-maturity
securities (6,086,598) (12,999,375)
Purchase of property, plant and
equipment (729,790) (2,362,945)
Other 31,484 (215,403)
----------- -----------
Net cash provided (used)
by investing activities 3,271,283 (11,577,723)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common
shares 31,000 717,124
----------- -----------
Net cash provided by
financing activities 31,000 717,124
----------- -----------
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 1998 and 1997
(unaudited)
1998 1997
----------- -----------
Change in Cash and Cash Equivalents:
Net increase (decrease) in cash and
cash equivalents $ 2,612,933 $(10,825,605)
Cash and cash equivalents -
beginning of period 12,524,125 30,329,024
----------- -----------
Cash and cash equivalents -
end of period $15,137,058 $19,503,419
=========== ===========
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
March 31, 1998
The Company and Selected Notes to the Financial Statements
----------------------------------------------------------
The Company
-----------
Gold Reserve Corporation (the "Company") is a mining company
incorporated in the state of Montana in 1956 for the purpose of
acquiring, exploring and developing mining properties and placing them
into production. The Company's principal asset, the Brisas property,
is a late exploration-stage gold and copper mineralized deposit
located in the KM 88 mining district of the State of Bolivar in the
southeastern part of the country of Venezuela.
The Company and a number of independent consultants are preparing a
feasibility study for the Brisas property. The initial stage of the
study, a pre-feasibility report, was completed in February of 1998 and
included tradeoff studies for plant throughput rates, as well as an
analysis of the optimum processing facilities, site and ancillary
facilities and tailings impoundment. Management anticipates that the
final feasibility study will be completed in 1999.
A number of significant events must occur before commercial production
on the Brisas property can begin, including the establishment of
proven and probable reserves, obtaining financing for anticipated mine
development costs and the procurement of all necessary regulatory
permits and approvals. The Company has no revenue producing mining
operations at this time, and exploration and development of the Brisas
property is currently the Company's sole business. The Company's
strategy for growth is to develop mining and process operations at its
Brisas property through the successful development of mineable
reserves and make selective property or corporate acquisitions.
Financial Information
---------------------
The December 31, 1997 balance sheet has been derived from the
Company's 1997 audited consolidated financial statements. The notes
to the consolidated financial statements as of December 31, 1997 as
set forth in the Company's 1997 Form 10-K, substantially apply to
these interim financial statements at March 31, 1998 and are not
repeated here. The financial information given in the accompanying
unaudited financial statements reflects all normal, recurring
adjustments which, in the opinion of management, are necessary for a
fair presentation for the periods reported.
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
March 31, 1998
Consolidated Financial Statements
---------------------------------
The Company's operations in Venezuela are conducted through subsidiary
corporations. The consolidated financial statements include the
accounts of the Company, three Venezuelan subsidiaries, Gold Reserve
de Venezuela, C.A. (GLDRV), Compania Aurifera Brisas del Cuyuni,
C.A.(Brisas), Compania Minera Unicornio, C.A. (Unicorn), two domestic
majority-owned subsidiaries, Great Basin Energies, Inc. (Great Basin)
and MegaGold Corporation (MegaGold) and seven Aruban subsidiaries
which were formed to hold the Company's interest in its foreign
subsidiaries or for future transactions. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
Company's policy is to consolidate those subsidiaries where majority
control exists and is other than temporary.
Net Loss per Share
------------------
Net loss per share (basic and diluted) is based on the weighted
average number of common shares outstanding during each year which has
been reduced by the Company's proportionate ownership of common shares
owned by Great Basin, MegaGold and Stanco Investments, A.V.V.
(Stanco). As of March 31, 1998 and 1997, there were 3,552,075 and
2,377,565 shares available for issuance pursuant to the exercise of
previously granted stock options, respectively. These options were
not included in the computation of diluted loss per share as a loss
was incurred in each of the periods presented in the statement of
operations and other comprehensive loss and their inclusion would be
anti-dilutive.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Forward Looking Statements
--------------------------
The information presented in or incorporated by reference in this
Quarterly Report on Form 10-Q includes both historical information and
"forward-looking statements" (within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) relating to the future results of the Company (including
projections and business trends), which involve risks and
uncertainties. Prospective investors are cautioned not to put undue
reliance on forward-looking statements, and should not infer that
there has been no change in the affairs of the Company since the date
of this Quarterly Report on Form 10-Q that would warrant any
modification of any forward-looking statement made in this document or
other documents filed periodically with the SEC. All subsequent
written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in
their entirety by this notice. The Company disclaims any intent or
obligation to update publicly these forward-looking statements,
whether as a result of new information, future events or otherwise.
The Company cautions that numerous factors which are disclosed in the
Company's Annual Report on Form 10-K under the heading "Risk Factors"
and elsewhere in documents filed from time to time with the Securities
and Exchange Commission ("SEC"), including this Quarterly Report on
Form 10-Q, could cause actual results to differ materially from those
in the forward-looking statements, including without limitation the
risk that one or more of the following matters may negatively affect
the Company: the Company's Brisas feasibility study may conclude that
development of the Brisas property would be uneconomic or actual ore
reserves, costs, recovery rates, construction schedules and metals
production levels may vary considerably from those used in the
feasibility study. Likewise, continued low metals prices, production
volatility, concentration of operations and assets in Venezuela,
regulatory, environmental (including the Imataca Forest Reserve),
political and economic issues associated with investments in
Venezuela, anticipated or estimated future project development costs,
need for additional funding, dependence upon the abilities and
continued participation of certain key employees of the Company, and
the uncertainty normally incident to the operation and development of
mining properties may also cause adverse results for the Company.
Brisas Property
---------------
OWNERSHIP. The Brisas property consists of the Brisas alluvial
concession, the Brisas hardrock concession beneath the alluvial
concession, other applications for mineralization (primarily nominal
values of copper and silver) in the material contained in the alluvial
concession and other mineralization (primarily gold, copper and
molybdenum) on small land parcels contiguous to the existing alluvial
and hardrock concessions.
<PAGE>
In 1992, the Company acquired its Brisas subsidiary (which has held
the Brisas alluvial concession since 1988) and submitted an
application for the Brisas hardrock concession in February 1993. The
Brisas hardrock concession was published (officially granted) in the
Official Gazette of the Republic of Venezuela on March 3, 1998. The
Brisas alluvial concession is a production concession with an original
term of twenty (20) years, with two renewal periods of 10 years each,
at the discretion of the Ministry of Energy and Mines ("MEM"), and a
three percent (3%) tax on sales of gold production outside of
Venezuela. The Brisas hardrock concession is a production concession
with a term of twenty (20) years with two subsequent renewal periods
of 10 years each, at the discretion of the MEM. The hardrock
concession provides for a four percent (4%) tax on sales of gold
production outside of Venezuela and a seven percent (7%) mine-mouth
tax on copper production. Gold sold directly to the Central Bank of
Venezuela (the "Central Bank") is taxed at one percent (1%).
IMATACA FOREST RESERVE. The Brisas property is located within the
Imataca Forest Reserve (the "Imataca"), which is comprised of 3.6
million hectares in the State of Bolivar. In 1986, an area (in which
the Brisas property is located) in the southwestern part of the
Imataca was authorized, by presidential decree, for mining exploration
and exploitation activities. In 1997, legislation to identify
additional uses and activities within the Imataca was enacted by
presidential decree. Previously, mining activity outside of the area
authorized for mining in 1986 had been denied environmental
authorization by the government. Since the 1997 legislation expanding
the uses and activities within the Imataca was issued, several parties
have challenged its constitutionality and also moved to have all
previously issued regulations allowing mining activities within the
Imataca overturned. In response to this challenge, the Venezuelan
Supreme Court (the "Court") issued an order prohibiting the MEM from
granting new concessions pursuant to the 1997 legislation, however the
Court excluded from its order challenges to previous legislation
authorizing mining in certain regions of the Imataca. The Company has
been advised by its Venezuelan attorneys that it is unlikely that
future rulings by the Court related to this issue will impact the
Company's concessions, but there can be no assurance that an adverse
ruling that affects the Company will not occur.
DEVELOPMENT. The Company engaged JE MinCorp, a Division of Jacobs
Engineering Group Inc. and a number of other independent consultants
to prepare a feasibility study on the Brisas mineralized deposit, the
initial stage of which, a pre-feasibility report, was completed in
early 1998. The report included a "Base Case" analysis of the
proposed project assuming $375 per ounce gold and $1 per pound copper
as well as additional sensitivity analyses using $350 and $300 per
ounce gold and $.90 and $.80 per pound of copper, respectively. The
Brisas mineralized deposit does not yet qualify as a commercially
mineable ore body under standards promulgated by the SEC and may so
qualify only after a positive comprehensive economic, technical and
legal feasibility study has been completed.
<PAGE>
Assuming a gold price of $375 per ounce, copper price of $1.00 per
pound, an internal cutoff grade of 0.40 grams of gold per tonne and
open pit mining methods, the pre-feasibility report concluded that the
Brisas property contains mineralization consisting of approximately
249.2 million tonnes with an average grade of 0.70 grams of gold per
tonne and 0.14% copper. Total material expected to be moved is
estimated to be 668 million tonnes resulting in a strip ratio of
1.68:1 (waste to mineralization). Alternatively, assuming a gold
price of $350 and $300 per ounce and copper price of $0.90 and $0.80
per pound, the Brisas property is estimated to contain mineralization
(based on a preliminary Whittle pit design) of approximately 239.3 and
177.1 million tonnes with an average grade of 0.71 and 0.80 grams per
tonne gold and 0.14% and 0.12% copper, respectively. The pre-
feasibility report also estimates that the Company may achieve gold
recovery of 83 percent and copper recovery of 73 percent at the Brisas
property. The feasibility study is expected to be completed in mid
1999.
The pre-feasibility report conclusions are based on the assumption
that the Brisas property will be developed as a large-scale open pit
mining operation with conventional crushing and grinding with SAG and
ball mills followed by gravity separation resulting in the production
of gold-copper concentrate and gold dore. Planned mining facilities
are expected to be capable of processing approximately 55,000 tonnes
per day, yielding an estimated average annual production of as much as
335,000 ounces of gold and 38.3 million pounds of copper, over a mine
life of 14.2 years.
Construction of the currently planned facility is expected to take
approximately 18 months, with commissioning and achievement of
commercial production expected shortly thereafter. Under the
timetable presently contemplated by the Company, initial construction
would commence no earlier than mid 1999, with full production expected
to commence no earlier than January 2001. The ultimate design of the
plant is subject to the results of the final feasibility study.
Base case pre-feasibility report estimates of pre-tax operating cash
costs, including mining, processing, concentrate transportation,
smelting and refining expenses, total $222 per ounce of gold net of
copper revenues. Total pre-tax costs per ounce of gold produced
including life of mine capital are estimated at $295, excluding
previously incurred sunk costs of approximately $38 million or
approximately $8 per ounce of gold. Exploitation taxes and royalties
add approximately $9 per ounce of gold to the total cost per ounce.
The base case pre-tax net present value of the project (assuming $375
per ounce of gold and $1.00 per pound of copper) at zero percent is
$354.9 million with an internal rate of return of 11.8%.
OUTLOOK. The major focus of the Company in the upcoming twelve to
fifteen months will be permitting, securing additional sites required
for process facility infrastructure, the completion of the final
feasibility study and securing adequate funding to finance the
construction of the Brisas mining facility. A period of one year is
anticipated in the overall project schedule for permitting as well as
<PAGE>
completion of the final feasibility study. In addition, continuation
or completion of metallurgical testing, geotechnical and hydrological
investigations, electrical power supply and concentrate sales
agreements, and development and condemnation drilling will occur prior
to completion of the final feasibility study. It is estimated that an
additional $5 million will be spent for completion of the final
feasibility study.
Liquidity and Capital Resources
-------------------------------
INVESTING. During the three months ended March 31, 1998, the Company
expended approximately $.7 million for exploration and development of
the Brisas property. The cumulative amount of $61.6 million expended
on the Brisas property is comprised of acquisition costs, capitalized
exploration and development costs and equipment expenditures and
litigation settlement costs. Amounts recorded as property, plant and
equipment (capitalized exploration and development costs) include all
costs associated with the Brisas property, including personnel and
related administrative expenditures incurred in Venezuela, drilling
and related exploration costs, capitalized interest expenses and
general support costs related to the Brisas property.
The overall corporate budget for 1998, excluding any future
construction costs related to the mining facilities at the Brisas
property, amounts to $7 million. Approximately $5 million is
allocated to further exploration and future development drilling,
permitting, administration and the necessary work required to complete
the Brisas feasibility study, which is expected to be finalized during
mid 1999.
The recovery plant, as presently proposed in the Brisas pre-
feasibility report, is expected to consist of a conventional 55,000
tonne per day, gravity/flotation/cyanidation process plant and cost an
estimated $293 million. Ongoing life of mine capital requirements are
estimated at $53 million and working capital needs are estimated at
$15 million. The ultimate design of the plant is subject to the
results of the final feasibility study. Detailed engineering work
will commence after the receipt of the necessary operating and
environmental permits and as gold and copper prices warrant. Final
development of the Brisas property is dependent upon the then current
price and/or expectation of future prices of gold and copper,
completion of a bankable feasibility study including the establishment
of proven and probable reserves, obtaining adequate financing, and
obtaining the appropriate environmental and operating permits.
During the three months ended March 31, 1998, the Company decreased
its net investment in held-to-maturity securities, by approximately $4
million. The increase in cash and cash equivalents for the three
month period ended March 31, 1998 was primarily due to the maturity of
held-to-maturity securities partially offset by investments in
property, plant and equipment. In addition, pursuant to a 1994
<PAGE>
litigation settlement agreement related to an ownership dispute of the
Brisas property, the Company placed $4.5 million in escrow to be
released to one of the defendants at such time as the Company received
the mining title to the hardrock concession for the Brisas property on
or before January 1, 2000. In March 1998, the Brisas hardrock
concession was published in the Official Gazette of the Republic of
Venezuela and the funds in escrow were released to the defendant in
the litigation.
FINANCING. The Company has financed its general business and
exploration and development activities in Venezuela principally from
the sale of common stock and will require additional financing in
order to place the Brisas property into production which is currently
estimated to cost in excess of $300 million. Future construction
costs and development expenses, and the cost of placing the Brisas
property or additional future properties into production, if
warranted, are expected to be financed by a combination of the sale of
additional common stock, bank borrowings or other means. Whether and
to what extent additional or alternative financing options are pursued
by the Company depends on a number of important factors, including if
and when mine development activities are commenced on the Brisas
property, management's assessment of the financial markets, the price
of gold, the potential acquisition of additional properties or
projects and the overall capital requirements of the consolidated
corporate group.
As of April 30, 1998, the Company held approximately $26.5 million in
cash and current and long-term held-to-maturity securities. At this
time, management anticipates that its current cash and investment
positions are adequate to cover estimated operational and capital
expenditures (excluding estimated mine construction costs) associated
with the 1998 exploration and development program on the Brisas
property.
Results of Operations
---------------------
MARCH 31, 1998 COMPARED TO MARCH 31, 1997. Consolidated net loss for
the three months ended March 31, 1998 amounted to $765,539 or $0.03
per share compared to consolidated net loss of $651,720 or $0.03 per
share, for the same period in 1997 as a result of the following:
Other income for the current three month period decreased over the
comparable period in 1997 due to decreased interest income from lower
average levels of invested cash. Operating expenses during the three
months ended March 31, 1998 stayed substantially the same as the
comparable period in 1997.
<PAGE>
New Accounting Pronouncements
-----------------------------
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
for an Enterprise and Related Information" in 1998. The
implementation of these new standards did not have a material impact
on the presentation of the consolidated financial statements.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.
a) Exhibit 27 - Financial Data Schedule
b) There were no reports on Form 8-K for the quarter ended
March 31, 1998
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GOLD RESERVE CORPORATION
By: /s/ Robert A. McGuinness
------------------------
Vice President - Finance
Chief Financial Officer
May 11, 1998
<PAGE>
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