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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to_________________
Commission file number 0-16778
CORNUCOPIA RESOURCES LTD.
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Exact name of registrant as specified in its charter
BRITISH COLUMBIA, CANADA N/A
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State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
SUITE 540 - THE MARINE BUILDING, 355 BURRARD STREET, VANCOUVER, BC V6C 2G8
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Address of principle executive offices
Registrants telephone number, including area code: (604) 687-0619
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last report
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 proceedings 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
Applicable only to Corporate Issuers:
As of August 12, 1998, there were 38,814,057 common shares outstanding.
<PAGE>
CORNUCOPIA RESOURCES LTD.
TABLE OF CONTENTS
<TABLE>
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PART I FINANCIAL INFORMATION Page
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Item 1 Financial Statements
- Consolidated Balance Sheets as at June 30, 1998,
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . .3
- Consolidated Quarterly Statements of Loss and Deficit for
the three months and six months ended June 30, 1998, and
June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
- Consolidated Quarterly Statements of Changes in Financial
Position for the three months and six months ended June 30,
1998, and June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . . .5
- Notes to Consolidated Financial Statements . . . . . . . . . . . . . .6 - 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . .10 - 13
PART II OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2 Changes In Securities and Use of Proceeds. . . . . . . . . . . . . . . . 14
Item 3 Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . 14
Item 4 Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 14
Item 5 Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6 Exhibits And Reports On Form 8-K . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
(the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements express or
implied by such forward-looking statements. Such factors include, among
others, results of merger or sale of assets, precious metals exploration and
development costs and results, reclamation obligations, fluctuation of gold
prices, competition, uninsured risks, recovery of reserves, capitalization
and commercial viability and requirements for obtaining bonds, permits and
licenses.
2
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CORNUCOPIA RESOURCES LTD.
CONSOLIDATED QUARTERLY BALANCE SHEETS
(Prepared by management without audit)
(Stated in United States Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 170,263 996,732
Funds held in escrow - -
Accounts receivable 357,828 460,550
Prepaid expenses and deposits 13,837 40,880
Loans and advances - 85,500
- ----------------------------------------------------------------------------------------
541,928 1,583,662
- ----------------------------------------------------------------------------------------
Capital Assets 28,957 63,116
Resource Assets 17,045,372 16,710,818
- ----------------------------------------------------------------------------------------
TOTAL ASSETS 17,616,257 18,357,596
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 2,008,772 2,367,508
Current portion of long term debt 13,456,221 13,186,599
- ----------------------------------------------------------------------------------------
15,464,993 15,554,107
- ----------------------------------------------------------------------------------------
Capital Lease Obligations 14,131 42,436
Provision for Site Reclamation 172,908 172,908
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TOTAL LIABILITIES 15,652,032 15,769,451
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SHAREHOLDERS' EQUITY
SHARE CAPITAL
Common shares
(issued and outstanding June 30, 1998 - 38,814,057;
December 31, 1997 - 38,556,040) 37,857,830 37,829,307
- ----------------------------------------------------------------------------------------
37,857,830 37,829,307
Deficit (35,893,605) (35,241,162)
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TOTAL SHAREHOLDERS' EQUITY 1,964,225 2,588,145
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 17,616,257 18,357,596
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
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CORNUCOPIA RESOURCES LTD.
CONSOLIDATED QUARTERLY STATEMENTS OF LOSS AND DEFICIT
(Prepared by management without audit)
(Stated in United States Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Product sales - (6,764) - -
Production costs - (104,570) - (22,888)
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Operating profit (loss) - 97,806 - 22,888
Interest and other income 1,547 32,227 3,856 74,169
- ---------------------------------------------------------------------------------------------------------------
1,547 130,033 3,856 97,057
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EXPENSES
General and administrative expenses 200,874 635,818 656,299 1,135,170
Write down of investment - - - 132,096
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200,874 635,818 656,299 1,267,266
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LOSS BEFORE NON-CONTROLLING INTEREST (199,327) (505,785) (652,443) (1,170,209)
Equity loss - (19,952) - (71,897)
- ---------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (199,327) (525,737) (652,443) (1,242,106)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Deficit, beginning of the period 35,694,278 17,492,906 35,241,162 16,776,537
Net Loss for the period 199,327 525,737 652,443 1,242,106
- ---------------------------------------------------------------------------------------------------------------
DEFICIT, END OF THE PERIOD 35,893,605 18,018,643 35,893,605 18,018,643
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
LOSS PER SHARE (0.01) (0.02) (0.02) (0.01)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 38,814,057 37,456,040 38,761,313 36,594,880
</TABLE>
See accompanying notes to financial statements.
4
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CORNUCOPIA RESOURCES LTD.
CONSOLIDATED QUARTERLY STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Prepared by management without audit)
(Stated in United States Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATIONS
Net loss for the period (199,328) (525,737) (652,443) (1,242,106)
Items not involving cash; - - - -
Amortization 41,587 24,571 79,460 48,306
Loss (gain) on partial disposal of investment - - - 132,096
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(157,741) (501,166) (572,983) (1,061,704)
Net change in non-cash working capital items; 4,559,672 8,828,604 126,152 12,341,410
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301,931 8,327,438 (446,831) 11,279,706
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INVESTING
Investments - 1,062,282 - 1,073,275
Note receivable - 6,000 - 10,043
Capital assets - (10,209) - (56,333)
Resource assets (302,324) (6,705,407) (379,856) (13,715,275)
- -------------------------------------------------------------------------------------------------------------------------
(302,324) (5,647,334) (379,856) (12,688,290)
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FINANCING
Capital lease obligations (14,148) 2,143 (28,305) (8,521)
Long term debt (13,518) (845,956) - -
Net proceeds from issue of common shares for cash - - - 1,735,687
Issue of common shares for debt 28,523 - 28,523 -
Net proceeds (expenses) from issue of special warrants - (34,311) - (980,330)
- -------------------------------------------------------------------------------------------------------------------------
- - - -
857 (878,124) 218 746,836
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INCREASE (DECREASE) IN CASH 464 1,801,980 (826,469) (661,748)
Cash and Equivalents, beginning of the period 169,799 1,406,585 996,732 3,870,313
- -------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF THE PERIOD 170,263 3,208,565 170,263 3,208,565
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(includes funds in escrow)
</TABLE>
See accompanying notes to financial statements.
5
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CORNUCOPIA RESOURCES LTD.
Notes to Consolidated Financial Statements
(Prepared by management without audit)
(stated in United States Dollars)
1. OPERATIONS
These financial statements are prepared in accordance with accounting
principles applicable to a going concern. The recoverability of the amounts
shown for interests in mining properties and deferred costs is dependent upon
future profitable operations or proceeds from the disposition thereof, the
quantity of economically recoverable reserves, and on the outcome or timing
of legislative or regulatory developments relating to environmental
protection. The viability of production on mineral properties held by the
Company is highly dependent on the price of gold.
At June 30, 1998, Cornucopia Resources Ltd. (the "Company") had a working
capital deficiency of $14,923,065, which is largely due to the classification
of indebtedness. In addition, the Company's mining operations at its Mineral
Ridge Mine have been suspended since November 1997, due, in part, to low gold
prices and the lack of capital to construct a leach pad expansion and
supplemental water supply. The timing of recommencement of mining operations
at Mineral Ridge cannot be determined with certainty. The Company has had
certain liens placed against the Mineral Ridge property by creditors. Due to
these factors, the ability of the Company to meet its obligations as they
become due is uncertain.
The Company is not in compliance with certain debt covenants. Dresdner
Kleinwort Benson ("Dresdner" or "the bank") has given notice to the Company
that an event of default has occurred and has taken action to accelerate
repayment of the loan or to otherwise act on its security. A letter has been
received from the bank declaring that the bank may foreclose on Mineral Ridge
Resources Inc. and enforce the guarantee of Cornucopia Resources Ltd. Due to
the covenant violations and the failure to make scheduled principal
repayments, the total obligation of $13,456,221 has been classified as a
current liability on the balance sheet.
The Company is in arrears on $3,106,211 of principal and interest payments
and the Company is required by its current financing facility to make further
principal payments of approximately $3,000,000 in the next twelve months.
Although the Company does not currently have sufficient funds to satisfy this
repayment obligation, it is management's intention to remedy the situation by
seeking new equity capital for the Mineral Ridge Mine operations or by
arranging for the sale of the Mineral Ridge Mine. The amount of future cash
flow generated is partially dependent upon future gold prices. However, if
the bank were to act on the covenant violation or the Company were unable to
meet these repayment requirements, the future operations of the Company could
be materially and adversely affected.
The Company has been generating cash from the crushing and leaching of ore
from the run of mine stockpile which was left over when mining operations
were suspended in November. 13,951 ounces of gold were shipped in 1997, and
in the first six months of 1998 6,920 ounces of gold were shipped. Crushing
of the run of mine stockpile was completed in June 1998 and as a result,
shipments of gold will begin to decline in quantity unless full operation
resumes. Discussions are ongoing with third parties to complete a corporate
merger or sale of the Mineral Ridge Mine.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim consolidated
balance sheet and interim consolidated statements of earnings and changes in
financial position contain all adjustments, consisting only those of a normal
recurring nature, necessary to present fairly the financial position of
Cornucopia Resources Ltd. as of June 30, 1998, and the results of its
operations and changes in its financial position for the three months and six
months ended June 30, 1998, and 1997. The results of operations for the
three months and six months ended June 30, 1998, are not necessarily
indicative of the results to be expected for the entire fiscal year.
The accompanying consolidated financial statements for the three months and
six months ended June 30, 1998, are prepared on the basis of accounting
principles generally accepted in Canada. Significant differences to
accounting principles generally accepted in the United States of America are
explained in note 6.
The consolidated financial statements include the accounts of Cornucopia
Resources Ltd., (the "Company") which is incorporated under the Company Act
(British Columbia), its subsidiary, including Cornucopia Resources, Inc., a
wholly-owned subsidiary incorporated in the State of Nevada, and its United
States subsidiaries which are wholly-owned.
6
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CORNUCOPIA RESOURCES LTD.
Notes to Consolidated Financial Statements
(Prepared by management without audit)
(stated in United States Dollars)
2. BASIS OF PRESENTATION (cont'd)
The Company's 25% interest in the Ivanhoe joint venture has been accounted
for by the proportionate consolidation method. All significant intercompany
accounts and transactions have been eliminated upon consolidation.
The Company's operations are focused on exploration, development and mining
of precious metal deposits, and are conducted primarily in the United States
of America.
3. INVESTMENT
(a) CARLIN RESOURCES CORP. ("CARLIN RESOURCES")
The treatment of the investment in Carlin Resources in these financial
statements reflect the application of the equity method until April 30, 1997,
upon which the cost method became appropriate with the completion of a Block
Trade of 2.1 million shares. As at June 30, 1998, the Company's interest in
Carlin Resources was 14.1% including the shares received in the June 26, 1998
debt settlement.
(b) DISPOSITION OF INVESTMENT IN CARLIN RESOURCES SHARES
Under the terms of the agreement with an underwriter to sell Carlin Resources
shares, the Company advanced C $400,000 to Carlin Resources upon closing of
the Block Trade which amount was subsequently repaid in July 1997.
The Company entered into an agreement with Carlin Resources in conjunction
with the settlement of all debts of Carlin Resources to accept 1.0 million
shares of Carlin Resources and C$150,000 of the C$290,000 owing. In the same
debt settlement the Company agreed to pay C$30,000 to James M. Carter in
conjunction with his January 31, 1997 termination of employment. On June
26, 1998, the Company received the C$150,000 and the 1.0 million shares of
Carlin Resources as full settlement of the remaining receivable.
4. MINE DEBT FINANCING FACILITY
On January 17, 1997, the Company entered into a loan agreement with Dresdner
for senior secured loan facilities to be used for the construction,
development, and mining of ore from the Mineral Ridge Mine. The agreement
provided for $13,000,000 for construction and development purposes and
initial working capital and a $2,000,000 contingency facility to be available
to fund cost overruns and the initial debt service reserve.
The Mine Debt Financing Facility contemplates that the Company's share
holdings in Carlin Resources would be pledged as security for the Company's
indebtedness, but could thereafter be disposed of in accordance with the
terms of such pledge. The facility also provides that the Company's interest
in the Ivanhoe Property be pledged as security.
The Mineral Ridge Mine is required to meet certain financial covenants
pursuant to the loan agreement. As of June 30, 1998, the Mineral Ridge Mine
was not in compliance with certain of the covenants. The Company was in
arrears on interest and principal payments totaling $3,106,211 at December
31, 1997 ($1,500,000), March 31, 1998 ($500,000) and at June 30, 1998
($1,106,211). In addition to the scheduled loan payments and interest, the
Company has classified all of the remaining borrowings to current portion of
long term debt as a result of the non-payment of principal payments and the
covenant violations.
Continued forbearance by the bank is largely due to the discussions between
the Company, the bank and other interested parties, the objective of which is
to complete a merger between the Company and a suitable partner or the sale
of the Mineral Ridge Mine. The discussions with interested parties, if
completed, would result in the restructuring of the Mine Debt Financing
Facility and would be subject to the approval of the bank's credit committee.
In the event of failure of the current discussions to merge the Company, or
to sell the Mineral Ridge Mine, the bank has informed the Company in writing
that the next step would be to declare default on the loan and commence
enforcement of the bank's rights including but not limited to foreclosure of
Mineral Ridge assets and enforcement of the guarantee granted by the Company.
7
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CORNUCOPIA RESOURCES LTD.
Notes to Consolidated Financial Statements
(Prepared by management without audit)
(stated in United States Dollars)
5. SHARE CAPITAL
(a) SHARES AUTHORIZED, ISSUED AND OUTSTANDING
Authorized:
100,000,000 preferred shares without par value, with rights to be determined
upon issue.
200,000,000 common shares authorized, without par value.
<TABLE>
<CAPTION>
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Number of Average Price per Share Value of Share Capital
ISSUED AND OUTSTANDING: Shares $ $
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<S> <C> <C> <C>
Balance, December 31, 1997 38,556,040 $37,829,307
- issued for share bonus February 6, 1998 107,500 --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 38,663,540 $37,829,307
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
- - issued as part of a settlement agreement on May 4, 1998 150,517 28,523
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 38,814,057 0.98 $37,857,830
- -------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(b) OPTIONS
As at June 30, 1998, there were an aggregate of 2,025,000 stock options
outstanding (December 31, 1997; 2,275,000) granted to directors, officers and
employees of the Company.
The following changes have occurred in the stock options outstanding since
December 31, 1997:
1. On January 5, 1998, the Board of Directors approved the grant of an
option to a director of the Company to purchase 50,000 common shares at
an exercise price of C$0.26 per share. This option is exercisable over
a five year period expiring January 4, 2003. This option grant was
granted pursuant to the provisions of the Company's Share Option Plan
and approval of this grant was received by the Toronto Stock Exchange.
2. On February 28, 1998, an option granted to an employee, totaling 50,000
common shares, at an exercise prices of C$1.01, expired due to the
optionee no longer being employed by the Company.
3. On March 3, 1998, an option granted to an officer of the Company,
totaling 150,000 common shares, at an exercise price of C$1.08, expired
due to the optionee no longer being employed by the Company.
4. On March 12, 1998, an option granted to a director of the Company
totaling 100,000 common shares, at an exercise price of C$1.75, expired
due to his resignation as a director of the Company on February 12, 1998.
5. At the Annual General Meeting of the Company, held on May 21, 1998, the
shareholders approved the repricing of all stock options granted to
directors and employees of the Company to C$0.68 per share.
8
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CORNUCOPIA RESOURCES LTD.
Notes to Consolidated Financial Statements
(Prepared by management without audit)
(stated in United States Dollars)
6. DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA
AND THE UNITED STATES
(a) For purposes of United States generally accepted accounting principles,
in 1993 the Company would have been required to adopt Financial
Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes". Statement 109 changed the method companies use to account for
income taxes from the deferred method to an asset and liability method.
The Company has significant unrecognized loss carry forwards for income
tax purposes. As there is no certainty as to the utilization of the
loss carry forwards, the benefit attributable thereto would be fully
offset by the valuation allowance. Accordingly, the adoption of
Statement No. 109 does not result in a material difference for
accounting purposes.
(b) Under United States accounting principles the value attributable to the
Common Shares issued for services and non-cash transactions related to
the deconsolidation of Carlin Resources in 1996 would be excluded from
financing activities in the consolidated statement of changes in
financial position and reported separately.
(c) Under United States accounting principles the $16,000,000 write down of
resource assets at December 31, 1997, would have been calculated using
discounted cash flow methods. Under such calculation methods using a
discount rate of 4% an additional provision of $900,000 ($0.02 per
share) would have been recorded.
(d) Under United States accounting principles, the Company's interest in the
Ivanhoe joint venture would be accounted for by the equity method. If
applied, this difference would not impact the reported earnings or
shareholders' equity.
(e) Under United States accounting principles, Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation",
requires that stock-based compensation be accounted for based on a fair
value methodology. As permitted by the statement, the Company has
elected to continue measuring compensation costs using the intrinsic
value based method of accounting.
Under this method, compensation is the excess, if any, of the quoted
market value of the stock at the measurement date of the grant over the
amount an optionee must pay to acquire the stock. As the exercise price
of the options approximate market value at date of grant, the Company
has determined that there is no material difference to United States
accounting principles.
7. FINANCIAL INSTRUMENTS
(a) GOLD HEDGING
Forward sales agreements allow the Company to sell gold at a specified price
on a specified future date.
As at June 30, 1998, the Company had outstanding forward contracts of 100,000
ounces (1996-120,000) of which 36,000 carry an average price of $400.21 per
ounce. These contracts of 36,000 ounces mature on various dates between
September 30, 1998, and December 31, 1999. The remaining contract of 64,000
ounces at $340.70 per ounce matures September 30, 1998.
Based upon current gold spot and forward sales prices and other market
conditions prevailing at the end of the respective fiscal years, the fair
value of the outstanding forward contracts is estimated to be approximately
$6,500,000 (1997 - $6,700,000) however, these contracts are with Dresdner
under the Mine Debt Financing Facility (note 4) on which the Company is not
in compliance.
The Company's ability to realize on the above contracts is dependent upon the
ability of the counter-parties to perform in accordance with the terms of the
agreements. The forward contract derivatives are with Dresdner and the
Company does not expect this counter-party to fail to meet its obligations.
(b) INVESTMENTS AND OTHER
The fair value of other financial instruments are not materially different
from their carrying value.
9
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial position of the Company and results
of operations for the three months and six months ended June 30, 1998, and
June 30, 1997, should be read in conjunction with the Consolidated Financial
Statements and the related notes.
These statements were prepared using accounting principles generally accepted
in Canada, which agree in all material respects with accounting principles
generally accepted in the United States, except as explained in note 6 to the
Company's Consolidated Financial Statements.
OVERVIEW
The Company's primary focus is exploration, development and mining of
precious metal deposits in the United States.
Gold production began in June 1997, at the Mineral Ridge Mine in Nevada
however, the mine has not yet met tests that qualify the project as being in
full commercial production. Net smelter revenues continue to be recorded as
an offset to capital expenditures and operating costs continue to be recorded
as capital expenditures.
Mining and crushing operations were suspended at Mineral Ridge in November
1997, due to the decline in spot gold prices and an unforeseen reduction in
water supply to the heaps. Leach and process plant operations continue and
gold has continued to be recovered and sold. The return towards full
production is dependent upon a number of factors, including those discussed
below.
The Company has a 25% interest in the Ivanhoe Property in Nevada, an early
stage exploration project. The Venture Agreement with Great Basin Gold Inc.
provides that Great Basin can earn up to a 75% interest by spending $2.8
million on exploration by August 12, 1999, and by payment to Newmont $1.0
million (paid) as contribution to the reclamation fund and by purchasing 1.1
million units in the capital stock of the Company at C $1.00 per unit
(completed). Great Basin is currently undertaking a drilling program on the
property. The Company and Great Basin will be responsible for any
reclamation costs over certain limits discussed below. (See also Ivanhoe
Joint Venture.)
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Net smelter revenues totaling $10.1 million from the Mineral Ridge Mine, for
shipments beginning in June 1997, through June 30, 1998, continue to be
recorded as an offset to capital expenditures until full commercial
production status is attained. As a result, no revenues from the sale of
gold and silver from the Mineral Ridge Mine have been included on the
consolidated statement of loss and deficit.
Revenues from interest and other income were $3,856 in the first six months
of 1998 compared to $74,169 in 1997, the reduction due to lower balances of
cash and short term investments.
EXPENSES
General and administrative expenses decreased to $656,299 in the first six
months of 1998, from $1,135,170 in the first half of 1997. The decrease was
due to lower employment costs resulting from reduction of staff from nine
down to four persons in the Vancouver, British Columbia office. Further
reductions in all other areas, such as insurance, investor relations, travel,
and rent have been made in the Vancouver office. Cost reductions have also
been made in the operations and administrative areas at the Mineral Ridge
Mine. These reduced costs continue to be capitalized as discussed above.
In the first half of 1997, the Company recorded a loss of $132,096 from the
write down of its investment in Carlin Resources. No corresponding loss
occurred in the first half of 1998.
10
<PAGE>
With the application of equity accounting to April 30, 1997, the Company's
share of the loss reported by Carlin Resources was $71,897 for the first six
months 1998. No corresponding loss occurred in the first half of 1998.
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Reversal of $6,764, Ivanhoe Venture revenues and $104,570 of operating costs
of were made in the three months ended June 30, 1997 due to the terms of the
transfer of the 75% interest in the Ivanhoe to Great Basin Gold Inc. from
Newmont Explorations Ltd. No corresponding revenues and expenses were
incurred in the three months ended June 1998.
General and administrative expenses were $200,874 this quarter, compared to
$635,818 in the comparable period in 1997. The decrease for the quarter is
attributable to staff and cost reductions in the Vancouver, British Columbia
office.
LOSS PER COMMON SHARE
The Company's net loss for the six months ended June 30, 1998, was $652,443
compared to a net loss of $1,242,106 in the same periods last year.
The net loss for the quarter ended June 30, 1998, was $199,327 compared to
net loss of $525,737 for the first quarter ended June 30, 1997.
The weighted average number of Common Shares for the six month ended June 30,
1998, was 38.8 million which results in a loss of $0.02 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company faces serious liquidity problems. Operational problems
experienced at the Mineral Ridge Mine and failure of the Company to secure
additional equity financing have resulted in a balance of $2,008,772 in
accounts payable while cash, accounts receivable and prepaids total only
$541,928. The working capital deficiency of $14,923,065 results from the
reclassification of long term debt to current as a result of the inability of
the Company to make scheduled principal payments.
To improve liquidity, remove encumbrances and to enable necessary
expenditures of capital to be made at Mineral Ridge property, discussions are
underway with third parties to strengthen the financial position of the
Company by way of corporate merger or sale of the Mineral Ridge Mine. No
assurances can be given that the Company will be successful in these
endeavors. If the Company is unsuccessful in completing a merger or sale of
the Mineral Ridge Mine the continuing liquidity problems may force the
Company into receivership.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Cash and cash equivalents decreased by a net amount of $826,469 in the six
months ended June 30, 1998. Principal uses of cash were to fund net capital
expenditures on resource assets at the Mineral Ridge property, reduction of
accounts payable and for operations, primarily general and administrative
expenses and staff reduction costs. These expenditures were financed by a
reduction in accounts and notes receivable and by drawing down cash balances.
The working capital deficiency forced the Company to delay payment to its
mining contractor and construction contractor for 1997 invoices and holdback
totaling $1.3 million. Notice of lien was filed by the mining contractor on
February 10, 1998, against the Mineral Ridge property. On December 8, 1997,
the construction contractor recorded its notice of lien on the Mineral Ridge
property claiming for holdback, legal fees and interest. On April 2, 1998,
the construction contractor filed suit to obtain judgment to collect amounts
owing of $619,486.
On April 24, 1998, 10 days notice was received from the bonding company to
increase the collateral by $719,700 which would bring the total collateral to
100% of the budget of $1,604,086 for reclamation at the Mineral Ridge Mine.
The Company did not have the financial resources to meet this payment by the
requested date of May 4, 1998, but is continuing to providing additional
information. If the request for additional collateral is not complied with
or if the additional information does not satisfy the bonding company, the
bond may be cancelled resulting in a negative impact on the operations of the
Company. The Company has drawn the attention of the bonding company to the
fact that reclamation costs for the limited disturbance caused to date are
likely to be considerably less than the $1,604,086 estimated on a full
life-of-mine basis.
11
<PAGE>
MINERAL RIDGE MINE
Preproduction shipments of 6,920 ounces in the first half of 1998 have been
made bringing preproduction shipments over the life of the project to 20,871
ounces of gold. First half 1998 preproduction revenues of $2,465,884 were
recorded.
For the mine to reach commercial production it is required to produce at a
consistent level over a sustained period of time. As this test has not been
met, net smelter revenues continue to be recorded as an offset to capital
expenditures and operating costs continue to be recorded as capital
expenditures.
Crushing of the existing mine stockpile of approximately 100,000 tons was
recommenced in February 1998, and was completed in June 1998. Lifting the
suspension of mining operations and making the capital expenditures to bring
the mine into full commercial production will require the resolution of
accounts owing to the two lien claimants, the cooperation of the bonding
company, Van American, and the bank, Dresdner Kleinwort Benson. Furthermore,
in order to source sufficient funds to make necessary capital expenditures,
it will be necessary to enter into a business combination with a suitable
partner or arrange the sale of Mineral Ridge to a qualified purchaser. No
assurances can be given that the Company will be successful in these
endeavors.
MINE DEBT FINANCING FACILITY
On January 17, 1997, the Company entered into a loan agreement with Dresdner
Kleinwort Benson for senior secured loan facilities of $13.0 million for
construction and development purposes and working capital; and a $2.0 million
contingency facility to be available to fund potential cost overruns and the
initial debt service reserve.
As of December 31, 1997, the Mineral Ridge Mine was in default on $3,106,221
of scheduled payments and in noncompliance with certain covenants.
Discussions to date have resulted in the bank deferring the principal
payments as well as other concessions.
In April 1998, the Company received written notice from the bank whereby the
bank did not intend to extend its forbearance of the various events of
default beyond April 30, 1998. The written notice also contained the bank's
intention to declare Mineral Ridge Resources Inc. in formal default and to
thereafter commence enforcement of its rights to foreclose on the assets of
Mineral Ridge, sell the Ivanhoe Property under a pledge agreement and enforce
the guarantee of the loan by the Company.
As at August 13, 1998, the formal default notice has not been received and
the extended forbearance by the bank is largely due to the continued
discussions between the Company, the bank and other interested parties, the
objective of which is to complete a merger between the Company and a suitable
partner or the sale of the Mineral Ridge Mine. The discussions with
interested parties, if completed, would result in the restructuring of the
Mine Debt Financing Facility and would be subject to the approval of the
bank's credit committee.
IVANHOE JOINT VENTURE
Under the terms of the Venture Agreement with Great Basin Gold Inc.,
exploration and related expenditures of $2.8 million are required to be made
by Great Basin by August 12, 1999, otherwise Great Basin's participating
interest will be diluted 1% for each $166,667 not made. After Great Basin
has made the required exploration expenditures, the Company will be required
to fund future exploration programs to the extent of its participating
interest.
A 2,380 feet drilling program conducted on the Hollister sector of the
Ivanhoe Property from November 1997, through February 1998, yielded results
were reported under Item 2 of the Company's Form 10-K filed on March 31, 1998.
RISKS AND UNCERTAINTIES
Under the terms of its current financing facility, the Company is in arrears
on $3,106,211 of principal and interest payments. The Company's ability to
make these payments is contingent upon gold prices and the achievement of
commercial production after the water supply problems are resolved.
Additionally all of the remaining borrowing under the financing facility has
been classified as a current liability due to the unpaid principal and
interest payments and non-compliance with debt covenants.
12
<PAGE>
There can be no certainty the Company could successfully pursue other
financing options or rely on joint venture partners to supply some of the
funds required to explore and develop its properties. There can be no
assurance that the Company will be successful in obtaining the funds it may
require for its programs or that the terms of any financing obtained will be
favourable. The Company has no unused banking commitments or lines of credit
which could provide significant increases in its working capital.
There can be no certainty the Company will successfully complete a corporate
merger or sale of the Mineral Ridge Mine and settle the liens recorded by the
construction contractor and the mining contractor. Such sale or merger would
also be subject to the approval of the bonding company and the bank and no
measure of certainty can be given as to those outcomes. If the Company is
unsuccessful in completing a merger or sale of the Mineral Ridge Mine the
continuing liquidity problems may force the Company into receivership.
Currently the Company does not meet the Nasdaq SmallCap eligibility
requirements as the share bid price is below $1.00. The Company may be
delisted pending the outcome of an appeal. If the Company were to be
unsuccessful in the appeal the shares would revert to trading on the OTC
Bulletin Board.
13
<PAGE>
CORNUCOPIA RESOURCES LTD.
PART II OTHER INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 1: LEGAL PROCEEDINGS
Roberts & Schaefer Company, on December 8, 1997, recorded its
notice of lien on the Mineral Ridge property claiming for holdback,
legal fees and interest. Holdback remains outstanding and is
recorded under accounts payable.
Roberts & Schaefer, on April 2, 1998, filed a complaint in the
United States District Court, Nevada, to foreclose on the mechanics
lien in the amount of $619,486 for holdback and other charges. The
Company has filed a defense of the foreclosure, claiming a
construction deficiency. The action is now in the initial
discovery phase. D.H. Blattner & Sons have intervened in the
action on the basis of their lien.
D. H. Blattner & Sons, on February 10, 1998, recorded its notice of
lien on the Mineral Ridge property for payment of invoices for
contract mining. Invoices totaling $699,000 are recorded in
accounts payable and will be paid as permitted by the cash flow of
Mineral Ridge Resources Inc.
A hearing will be held in "le Tribunal de Grande Instance de
Paris", France on a claim for commission of $60,000 alleged to be
payable in connection with the Company's unsuccessful attempt in
1996 to acquire a copper-colbalt property in Zaire. The Company's
legal advisors consider the claim to be totally without merit.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
For detailed information see Part 1, Item 2 - "Management's
Discussion and Analysis" under the headings Liquidity and Capital
Resources, Mine Debt Facility Financing and Risks and Uncertainties.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual General Meeting was held on May 21, 1998, in
Vancouver, British Columbia. A copy of the Notice of Meeting,
Information Circular (Proxy Statement) and Proxy Form was filed
electronically with SEDAR and EDGAR in April, 1998. The Company's
Annual Report to the Shareholders was filed with the Securities and
Exchange Commission on April 18, 1998 and are available on request
to the Company, Investor Relations Department.
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Regulation S-K
None
(b) Reports on Form 8K:
The following reports Form 8-K have been made year-to-date:
February 12, 1998, February 26, 1998, April 15, 1998, and
April 21, 1998.
14
<PAGE>
SIGNATURES
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.
CORNUCOPIA RESOURCES LTD.
(Registrant)
Date: August 12, 1998 /s/ Glenn H. Friesen
-------------------------------
Glenn H. Friesen
Corporate Controller
Date: August 12, 1998 /s/ Andrew F. B. Milligan
-------------------------------
Andrew F. B. Milligan
President & CEO
15
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