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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
THIS DOCUMENT IS A COPY OF THE FORM 10K FILED ON
MARCH 31, 1998 PURSUANT TO A RULE 202(d)
CONTINUING HARDSHIP EXEMPTION
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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.
(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA, CANADA N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
#540 - 355 BURRARD STREET
VANCOUVER, BRITISH COLUMBIA V6C 2G8
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (604) 687-0619
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
Common Shares, without par value
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 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant (based on the closing sale price of the
registrant's common shares on The Nasdaq Stock Market of $0.15625) as at
March 26, 1998, was approximately $6,041,178.
As of March 26, 1998, there were 38,663,540 common shares issued and
outstanding.
Documents incorporated by reference: NONE
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Page 1 of 86
Exhibit Index is on Page 71
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CORNUCOPIA RESOURCES LTD.
TABLE OF CONTENTS
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PART I GENERAL 3
ITEM 1 BUSINESS
- Business of the Company 3
- Business Development 3-4
- Significant Transactions of the Company
(1) Mineral Ridge Mine 4-6
(2) Ivanhoe Property and Ivanhoe Venture Agreement 6-7
(3) Carlin Resources Corp. 7
(4) First Dynasty Mines Ltd. Agreement Regarding New
Millennium Mining Ltd. 7
- Industry Overview and Factors Relating to the
Company's Properties 7-13
- Glossary of Mining Terms and Definitions 13-14
ITEM 2 DESCRIPTION OF PROPERTIES
- Mineral Ridge Mine 15-19
- Ivanhoe Property 19-23
- Other Property Interests 24
- Yakobi Island Property 24
- South Monitor Property 24
- Red Mountain Property 24
ITEM 3 LEGAL PROCEEDINGS 25
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 26-31
ITEM 6 SELECTED FINANCIAL DATA 32
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION 33-38
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38-54
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 38
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 55-57
ITEM 11 EXECUTIVE COMPENSATION 58-63
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 63
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 64
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 65-67
SIGNATURES 68-69
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2
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CORNUCOPIA RESOURCES LTD.
PART I
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GENERAL
Unless the context otherwise requires, the "Registrant" means Cornucopia
Resources Ltd. and the "Company" means the Registrant and its subsidiaries.
The Company's principal office is located at 540 - 355 Burrard Street,
Vancouver, British Columbia, V6C 2G8, telephone (604) 687-0619, facsimile
(604) 681-4170, or web site www.cornucopia-resources.com.
All references to number of common shares and per share amounts in this
Form 10-K reflect the subdivision of the Registrant's common shares ("Common
Shares") on a two-for-one basis on July 7, 1987.
The information set forth in this form is as of March 26, 1998, except where an
earlier or later date is indicated, and all information included in this
document should only be considered correct as of such date, except as otherwise
expressly stated.
Financial information is presented in accordance with Canadian Generally
Accepted Accounting Principles ("GAAP"). Differences between United States
GAAP and Canadian GAAP are explained in Note 8 of the Consolidated Financial
Statements of the Company dated December 31, 1997, and Item 8 of this
Form 10-K.
The Company uses the United States ("US dollar") dollar as its reporting
currency. As such, all references in this document to "dollars" or "$" are to
United States dollars, unless otherwise indicated.
ITEM 1: BUSINESS
BUSINESS OF THE COMPANY
The Company is engaged in the acquisition, exploration, development and mining
of precious mineral resource properties. Interests in these properties are
currently held directly, through leases and options and through working
interests.
The Company currently owns a 100% interest (subject to certain royalty
interests) in property (the "Mineral Ridge Mine") located near the town of
Silver Peak in Esmeralda County, Nevada, a 25% interest in property (the
"Ivanhoe Property") near Battle Mountain in Elko County, Nevada, and a 100%
interest in certain mineral claims located in southeast Alaska ("Yakobi Island
Property"). The Company also has direct or indirect interests in various other
mineral properties. See Item 2: "Description of Property" for a summary of
past and current activities on the Company's properties.
BUSINESS DEVELOPMENT
Cornucopia Resources Ltd. (the "Registrant") was organized on November 14,
1985, under the laws of the Province of British Columbia, Canada by the
statutory amalgamation of Cyrano Resources Inc. and Cornucopia Resources Ltd.,
two British Columbia companies which were incorporated in 1980 and 1982,
respectively. Subsequent to the amalgamation, the Registrant assumed Cyrano
Resources Inc.'s listing on the Vancouver Stock Exchange. On January 29, 1988,
Common Shares were listed on the Toronto Stock Exchange (symbol: CNP). The
Common Shares were also quoted in the United States on The Nasdaq Stock Market,
National Market System until January 17, 1992, and are currently quoted on The
Nasdaq SmallCap Market. At the Registrant's request, its Common Shares were
delisted from trading on the Vancouver Stock Exchange on February 4, 1993.
The Registrant conducts its business affairs in the United States through its
wholly-owned subsidiary, Cornucopia Resources Inc., a Nevada corporation, and
through the latter company's wholly-owned subsidiaries: Touchstone Resources
Company ("Touchstone"), a Nevada corporation; Red Mountain Resources, Inc.
("Red Mountain"), a Colorado corporation; and Mineral Ridge Resources Inc.
("Mineral Ridge"), a Nevada corporation. Mineral Ridge was incorporated on
July 23, 1993, to act as a holding company for the Registrant's newly acquired
property, the Mineral Ridge Mine. See Item 2: "Mineral Ridge Mine".
On December 3, 1992, the Registrant incorporated another wholly-owned
subsidiary, Cornucopia Resources Ghana Limited ("Cornucopia Ghana"), a company
incorporated under the laws of the Republic of Ghana, to act as a holding
company for its investments and operations in the Republic of Ghana.
3
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In October, 1994, the Registrant entered into agreements whereby it transferred
to Carlin Resources Corp. ("Carlin Resources"), a Vancouver Stock Exchange
listed company, all of the Registrant's interest in Cornucopia Ghana, in
consideration of a total of 1,635,639 common shares of Carlin Resources. The
Registrant currently holds approximately 14.6% of the outstanding shares of
Carlin Resources. See Item 1: "Significant Transactions of the Company"; (3)
"Carlin Resources Corp.").
The Registrant may incorporate additional subsidiary companies, if considered
advisable, to hold interests in other mineral properties it may acquire.
The following chart sets forth the organization of Cornucopia Resources Ltd.
and its direct and indirect subsidiaries as of December 31, 1997, and their
jurisdictions of incorporation, as well as relevant stock exchange listings.
[GRAPHIC]
(1)
CORNUCOPIA RESOURCES LTD.
TSE/NASDAQ
(British Columbia)
100%
CORNUCOPIA RESOURCES INC.
(Nevada)
100%
TOUCHSTONE RESOURCES COMPANY
(Nevada)
100%
RED MOUNTAIN RESOURCES, INC.
(Colorado)
100%
MINERAL RIDGE RESOURCES INC.
(Nevada)
(1) The Company also has a 14.6% interest in Carlin Resources Corp., a
Vancouver Stock Exchange listed company. See Item 1: "Carlin Resource
Corp."
SIGNIFICANT TRANSACTIONS OF THE COMPANY
(1) MINERAL RIDGE MINE
Mechanical completion of the project was achieved on May 29, 1997, and the
first gold was poured on June 20, 1997. Production was two months later than
expected due to weather related delays in completing the leach pad (see Item 2:
"Properties, Mineral Ridge"). Additions to resource assets at the Mineral Ridge
Mine site during the year ended December 31, 1997, totaled $13,818,341 which
was due primarily to: $17,087,066 in deferred construction costs, $2,662,300 in
ore stockpiled and $1,278,068 in debt financing costs offset by pre-commercial
net smelter revenue of $7,612,719 (including the gain from closing forward gold
sales contracts) and the write down of $16,000,000 in project costs. As
commercial production has not been achieved, net smelter revenue continues to
be recorded as an offset to capital expenditures and operating costs continue
to be recorded as capital expenditures.
The Mineral Ridge Mine was previously expected to reach commercial production
by October 1, 1997. However due to slower than anticipated leaching and a
depressed gold price, a temporary suspension of mining and crushing operations
was implemented. Testing and analysis of the leaching problem has determined
that the primary cause is an inadequate supply of water from the existing well.
Subject to financing, measures will be taken in 1998 to supplement the supply
of water from an alternative water source. The suspension of mining is
expected to last until mid-1998 during which time leach operations will
continue and gold continue to be recovered and sold. Once the problems with
the leach pad are resolved, production should progress to an estimated average
annual rate of 50,000 ounces of gold.
For the mine to reach commercial production consistent production over a
sustained period must be achieved. As at December 31, 1997, the Company has
recorded a write down of $16,000,000 against the Mineral Ridge Mine.
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MINE DEBT FINANCING FACILITY
On January 17, 1997, the Company entered into a loan agreement with a financial
institution 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 cost overruns and the initial debt
service reserve.
Outstanding principle bears interest at 2.5% (on pre-completion amounts) and
2.0% (on post completion amounts) above (i) LIBOR for US dollar drawings and
(ii) LIBOR minus GOFO for gold drawings. Repayments were scheduled to commence
September 30, 1997 (see below), in quarterly installments, to maturity on
December 31, 2001.
The bank was given warrants to purchase 1,500,000 Common Shares as part of the
consideration for providing the loan and warrants to purchase 250,000 shares in
consideration for establishing a letter of credit in the amount of $1.1 million
to facilitate construction of power lines and ancillary electrical distribution
equipment at the mine site. The warrants are exercisable at C $1.35 per share
at any time until December 31, 2000.
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, see Item 8(v), note 3 - "Investment". The facility also provides that
the Company's interest in the Ivanhoe property be pledged as security, see
Item 2: "Ivanhoe Property".
The Mineral Ridge Mine is required to meet certain financial covenants
pursuant to the loan agreement. As of December 31, 1997, the Mineral Ridge
Mine was not in compliance with certain of the covenants. Principal payments
of $1,500,000 due September 30, 1997 and December 31, 1997, have not yet
been made. In addition to the $4,436,599 in scheduled loan payments and
interest, the Company has classified the remaining $8,750,000 of the
borrowings to current liabilities as a result of the breaches of covenant.
Management are in discussions with the lender to renegotiate the covenants in
the loan agreement which, if completed as anticipated, will result in the
existing violations being waived. Discussions to date have resulted in the bank
deferring the principal payment of $1,500,000 which was originally scheduled on
September 30, 1997, deferring the principal payment which was due on December
31, 1997, deferring the quarterly interest payment which was due January 31,
1998, removing the restrictions on the use of $910,192 held in a reserve
account pursuant to the disposition of the Carlin Resources shares, and
agreeing to other concessions, including the revision of certain financial
ratios required to be maintained by the Company as stipulated in the agreement.
These amendments are subject to the approval of the bank's credit committee.
Until the covenants governing these financial ratios are formally amended, the
Company is not in compliance with the loan agreement. If these amendments are
completed as is currently being discussed, the violated covenant will be
revised and a waiver will be granted as to all pre-amendment violations. The
timing of this amendment, if any, is not known.
CONTRACTS
On August 20, 1996, the Company entered into a contract with Roberts &
Schaefer Company for the construction of certain facilities and plant at the
Mineral Ridge Mine. The total contract price was fixed at $12,399,672
payable in installments for the portion of the work completed each month over
the construction period. On December 8, 1997, Roberts & Schaefer recorded its
notice of lien on the Mineral Ridge property claiming for holdback, legal
fees and interest. Holdback of $599,512 has been recorded under accounts
payable and will be paid pending the resolution of a construction deficiency
at the mine facility, and as permitted by the cash flow of Mineral Ridge
Resources Inc.
On January 21, 1997, the Company entered into a contract with D. H. Blattner &
Sons, Inc. for open-pit mining over the life-of-mine estimated at 6 years. The
contract price is based on performance of work. The unit prices and hourly
rates remained constant through to December 31, 1997, and for ensuing years of
the contract shall be subject to an escalation provision which must be approved
by the Company. 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.
The Company entered into a refining agreement with Handy and Harman Refining
Group, Inc. on March 11, 1997, to further refine the Mineral Ridge Mine dore
bars in the form of unallocated 0.995 London Metal for gold, or better, and
unallocated 0.999 London Metal for silver, recognized as marketable on world
markets. Under the terms of this agreement, the dore is toll refined and the
refined gold and refined silver are returned to the Company's account for sale
to third parties.
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On July 11, 1997, Mineral Ridge Resources, Inc. entered into an agreement with
Sierra Pacific Power Company to provide electric power to the Mineral Ridge
Mine in Esmeralda County, Nevada, throughout the life of the project. The
agreement establishes certain long term prices for current and future capacity.
(2) IVANHOE PROPERTY AND IVANHOE VENTURE AGREEMENT
(a) SALE TO NEWMONT MINING CORPORATION
The Company's indirect wholly-owned subsidiary, Touchstone entered into a
letter agreement dated March 26, 1992, (the "Ivanhoe Venture") with Newmont
Mining Corporation and its subsidiaries (collectively "Newmont") for the sale
to Newmont of half of Touchstone's 50% interest in the assets of the Ivanhoe
property (the "Ivanhoe Property") in consideration for $6,700,000 payable in
cash on the closing date. At about the same time, Newmont also entered into an
agreement with Ivanhoe Gold Company, an indirect, wholly-owned subsidiary of
Galactic Resources Ltd., to acquire all of Ivanhoe Gold Company's 50% interest
in the assets of the Ivanhoe Property in consideration for $13,400,000, payable
in cash on the closing date. Each of Ivanhoe and Touchstone negotiated their
respective transactions at arm's length with Newmont and each other. The sales
transactions were completed on June 23, 1992, and accordingly Newmont acquired
a 75% interest in the Ivanhoe Property, with Touchstone holding the remaining
25% interest. Touchstone and Newmont then entered into a mining venture
agreement for further exploration and development of the Ivanhoe Property.
(b) TERMINATED OPTION WITH NEWMONT
On July 11, 1995, Newmont advised the Company of its decision to withdraw
from the Ivanhoe Venture. Upon notification by Newmont of their decision to
withdraw, the Company entered into an option agreement with Newmont on the
same date to acquire Newmont's interest in the Ivanhoe Property. The terms
of the agreement granted the Company the sole and exclusive option to
purchase all of Newmont's interest in the Ivanhoe Property for a total
purchase price of $1. Exercise of the option was contingent on the Company
identifying a mining industry partner acceptable to Newmont who would
contribute a further $1,000,000 to the reclamation fund established for the
Ivanhoe Property. Once the option was executed, the Company would be required
to pay an additional $25,000 to the reclamation fund, resulting in aggregate
payments by the Company of $500,000. The option agreement between the
Company and Newmont formally expired December 31, 1995, however, Newmont
informally agreed to extend the option to allow the Company additional time
to find a new partner. See Item (c): "Ivanhoe Venture Agreement with Great
Basin Gold Inc."
On June 1, 1996, Newmont commenced reclamation which consisted primarily of
rinsing the heaps, site monitoring and testwork, extensive construction of
diversion ditches, and re-shaping of waste rock piles. This reduced the
Company's share of the provision for site restoration from $500,000 on December
31, 1995, to nil as at December 31, 1996. Newmont submitted a formal
reclamation and closure plan in March 1997, to the State of Nevada and the
Bureau of Land Management and began a more extensive reclamation program.
Newmont revised its reclamation budget through to December, 2003, which is now
estimated to be approximately $6.0 million. The Company, Newmont and Great
Basin Gold Inc., an affiliate of Hunter Dickinson Inc., ratified an agreement
wherein Newmont would transfer its interest to the new venturer. Newmont
intends to complete the reclamation plan as submitted to the Bureau of Land
Management in March 1997.
The parties acknowledge that the Company has contributed $500,000 to the
reclamation fund and Newmont has contributed $3,000,000. Great Basin has
contributed $1,000,000. Once the $4,500,000 has been expended, the parties
will each contribute to the reclamation fund on an equal basis until a total of
$6,000,000 has been spent. Reclamation costs in excess of $6,000,000 will be
paid 75% by Newmont and 25% pro rata by the Company and the new venturer. See
Item 1 (m): "Reclamation Obligations."
(c) IVANHOE VENTURE AGREEMENT WITH GREAT BASIN GOLD INC.
On August 13, 1997, the Company through its 100% owned subsidiary Touchstone
Resources Company, entered into a Venture Agreement with Great Basin Gold Inc.
("Great Basin"). Pursuant to the terms of an agreement dated August 13, 1997,
Great Basin may earn up to a 75% interest in the Ivanhoe Property by paying US
$1 million to Newmont (paid), spending an additional US $2.8 million on
exploration and related costs over the next two years, and by purchasing
1,100,000 units in the capital stock of Cornucopia Resources Ltd. for C $1.00
each (completed). Each Cornucopia unit was comprised of one Common Share plus
one share purchase warrant exercisable at C $1.25. The share purchase warrants
expired on March 26, 1998. After Great Basin meets these requirements,
expenditures and ownership of the Ivanhoe Property will be on a 75% Great Basin
and 25% Cornucopia basis. See news releases filed under Exhibit 20.9.
6
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Newmont has agreed to manage and complete a mine closure plan of the 1.1 square
mile area former mining operations. already funded by US $4.5 million.
Overruns, if any, will be funded one third each by Newmont, Great Basin and the
Company up to US $1.5 million and thereafter 75% by Newmont with the balance
payable pro rata by Great Basin and the Company.
(3) CARLIN RESOURCES CORP.
On October 25, 1994, the Registrant entered into agreements whereby it acquired
an aggregate of 1,500,000 common shares of Carlin Resources Corp., a Vancouver
Stock Exchange listed company, which represented approximately 44% of the then
issued and outstanding shares of Carlin Resources. In conjunction with this
share acquisition, the Registrant transferred to Carlin Resources, with effect
from November 1, 1994, all of the Registrant's interest in Cornucopia Ghana, in
consideration of a total of 1,635,639 common shares of Carlin Resources.
The Registrant consolidated its investment in Carlin Resources up to September
20, 1996. At that date, the Registrant's interest in Carlin Resources
decreased to 38% due to subsequent equity offerings by Carlin Resources in
which the Registrant did not participate and as at December 31, 1996, the
Registrant's interest had decreased to 34%.
DISPOSITION OF CARLIN RESOURCES SHARES
As of March 31, 1997, the Registrant held 3,635,639 Carlin Resources shares,
being 34% of the then issued and outstanding shares.
Effective April 29, 1997, the Registrant sold 2,100,000 shares of Carlin
Resources through a broker for net proceeds of C $0.59 per share ("the Block
Trade"). The Registrant also appointed this broker to sell the balance of the
1,535,639 common shares of Carlin Resources held, for net proceeds of C $0.65
per share until October 31, 1997, and C $0.95 per share thereafter until April
30, 1998. As at December 31, 1997, the Registrant held 14.6% or 1,561,139
shares of Carlin Resources. After a writedown of $476,341 in 1997 the
carrying value of the investment in Carlin Resources has been reduced to nil.
In addition, under the terms of the agreement with the underwriter, the
Registrant advanced C $400,000 to Carlin Resources upon closing of the Block
Trade, which amount was subsequently repaid in July 1997. The remaining inter-
company advance of approximately $202,700 (C $290,000) is included in accounts
receivable on the balance sheet at its estimated realizable value as at
December 31, 1997. All advances made by the Registrant to Carlin Resources
bear interest at prime plus 2%.
In March 1998, the Registrant applied to the Supreme Court of British Columbia
for a mandatory injunction requiring Carlin Resources to execute security
documents relating to the C $290,000 account receivable. Further to the
injunction, the Registrant filed a charge order in the Supreme Court of British
Columbia against the funds held in escrow by the trust company of Carlin
Resources.
(4) FIRST DYNASTY MINES LTD. AGREEMENT REGARDING NEW MILLENNIUM MINING LTD.
On August 27, 1997, the Registrant and First Dynasty ("First Dynasty") jointly
announced that an agreement-in-principle had been reached whereby the
Registrant would acquire a 100% wholly-owned subsidiary, New Millennium Mining
Ltd. ("New Millennium"), from First Dynasty.
In the agreement, the Registrant was to have acquired New Millennium by issuing
45 million of its Common Shares valued at C $32.4 million (US $23.3 million).
The transaction would have seen First Dynasty assume control of the Company.
New Millennium's principal asset is the Dublin Gulch development project in the
Yukon, where a bankable feasibility study had been completed in April 1997,
which estimated a geological resource of three million ounces of gold.
On October 29, 1997, it was announced that after both companies had completed
their respective due diligence investigations, both parties concluded that the
transaction did not satisfy enough of their respective objectives and the
agreement was terminated on amicable terms.
INDUSTRY OVERVIEW AND FACTORS RELATING TO THE COMPANY'S PROPERTIES
(a) USES OF GOLD
Product fabrication and bullion investment are the two principal uses of gold.
Within the fabrication category there are a wide variety of end uses, the
largest of which is the manufacture of carat jewelry. Other fabrication
purposes include official coins, electronics, miscellaneous industrial and
decorative uses, dentistry, medals, and medallions. The Company believes that
7
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certain purchases of official coins and high-carat, low mark-up jewelry are
often motivated in part by investment, so that net private bullion purchases
alone do not represent the total investment activity in physical gold during
the course of any year.
(b) GOLD PRICE VOLATILITY
The Company's ability to generate profits from its operations has been directly
related to the market price of gold. There can be no assurance that the price
of gold will be such that the Company's properties can be mined at a profit.
In early January 1998, the price of gold dropped to a 19 year low of $278 an
ounce. The price of gold has typically experienced volatile and significant
price movements over short periods of time, and is affected by numerous factors
beyond the Company's control, including international economic and political
trends, expectations for inflation, currency exchange fluctuations
(specifically, the US dollar relative to other currencies), interest rates and
global or regional consumption patterns (such as the development of gold coin
programs), speculative activities and increased production due to improved
mining and production methods. The supply of and demand for gold are affected
by various factors, including political events, economic conditions and
production costs in major gold producing regions including South Africa and the
Soviet Union, and governmental policies with respect to gold holdings by a
nation or its citizens.
The volatility of gold prices is illustrated by the following table of the high
and low gold prices per ounce on the London Metals Exchange bullion market:
(Source of Data - Pratt's Metals Week.)
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<CAPTION>
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Year High Low Year High Low
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<S> <C> <C> <C> <C> <C>
1987 500 392 1993 405 326
1988 484 395 1994 396 369
1989 416 356 1995 396 372
1990 424 346 1996 416 367
1991 403 344 1997 367 283
1992 360 330 1998 (to March 26) 306 278
- ------------------------------- ---------------------------------------------
</TABLE>
On March 26, 1998, the afternoon fixing for gold on the London Gold Market was
$299.60 per ounce. Gold prices on the London Gold Market are regularly
published in most major financial publications.
(c) GOLD HEDGING
In order to manage its exposure to fluctuations in the price of gold, the
Company may enter into fixed forward contracts. Forward sales agreements
obligate the Company to sell gold at a specified price on a specified date.
In October 1997, the Company realized a portion of the equity in some of its
forward sales contracts for gold ounces scheduled for delivery in the years
2000 through to September 30, 2002. This resulted in a gain of $2.3 million.
Proceeds were used to reduce accounts payable.
As at December 31, 1997, the Company had outstanding forward contracts of
104,000 ounces (1996-120,000) of which 48,000 carry an average price of $397.50
per ounce. These contracts of 48,000 ounces mature on various dates between
March 31, 1998 and December 31, 1999. As at December 31, 1997, the remaining
contract of 56,000 ounces was carried at $326.85 per ounce for value March 6,
1998, (the Company subsequently rolled this contract forward at $328.98 for
value May 29, 1998).
Based upon current gold spot and forward sales prices, the remaining contracts
in place are worth approximately $6,000,000 (1996-$1,500,000).
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 one major financial
institution and the Company does not expect this counter-party to fail to meet
its obligations.
(d) INFLATION AND PRICE CHANGES
Inflation could affect both future costs and the price the Company will realize
from the sale of future gold production. Inflation is not expected to have any
other material impact on the Company beyond the general impact on all
businesses, such as higher costs of materials, services and wages.
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(e) RISKS AND UNCERTAINTIES
The mining industry is capital intensive and there can be no certainty that the
Company's cash balances or the proceeds from any future sales of its Common
Shares will provide sufficient funds for all of the Company's cash balances or
the proceeds from any future sales of its Common Shares will provide sufficient
funds for all of the Company's requirements. Should the need arise, the
Company may 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 favorable. The Company has no unused banking commitments or lines of
credit which could provide significant increases in its working capital. The
Company considers that current cash balances would not be sufficient to allow
the Company to meet its expected funding requirements on current projects and
anticipated administrative expenses for the next year.
(f) COMPETITION
Significant and increasing competition exists for the limited number of gold
acquisition opportunities available in Canada and the United States. As a
result of this competition, some of which is with large established mining
companies having substantial capabilities and greater financial and technical
resources than the Company, the Company may be unable to acquire future
potential gold mining properties on terms it considers acceptable. The Company
also competes with other mining companies in the recruitment and retention of
qualified employees.
(g) SALES AND REFINING
Gold can be readily sold on numerous markets throughout the world and it is not
difficult to ascertain its market price at any particular time. Dore bars
produced from the Company's mining operations are refined by a commercial
refinery. Gold and silver produced are subsequently purchased by the refinery
on the basis of the quoted selling price of gold on the applicable metals
exchange on the date of sale. Because of the large number of available gold
purchasers, the Company believes that it would not be dependent upon the sale
of gold to any customer, the loss of which would have a material adverse effect
on the business of the Company.
(h) EXPLORATION PROGRAMS
The Company is seeking to grow through exploration of its existing properties,
as well as through acquisitions of interests in new properties, preferably in
the late exploration stage or in companies which own such properties.
Substantial expenditures may be incurred in an attempt to establish the
economic feasibility of mining operations by identifying mineral deposits and
establishing ore reserves through drilling and other techniques, developing
metallurgical processes to extract metals from ore, designing facilities and
planning mining operations. The economic feasibility of a project depends on
numerous factors, including the cost of mining and production facilities
required to extract the desired minerals, the total mineral deposits that can
be mined using a given facility, the proximity of the mineral deposits to a
user of the minerals, and the market price of the minerals at the time of sale.
There is no assurance that the Company will have sufficient funds or that
future exploration programs or acquisitions will result in the identification
of deposits that can be mined profitably. During 1997, 1996 and 1995, the
Company spent $221,000, $743,000 and $3,600,000 respectively on exploration
activities.
(i) ROYALTIES AND OTHER COMMITMENTS
On April 16, 1993, the Company entered into a Letter Agreement with Mary Mining
Company, Inc., a Florida corporation ("MMC"), as trustee for the beneficiaries
of a land trust to acquire a 100% interest in certain mining properties located
in Esmeralda County, Nevada. Annually on July 15, the Company paid $235,000 for
the cost of the option which included an advance royalty payment of $25,000.
On May 15, 1996, the Company exercised its Purchase Right on the Mary Mining
Lease and Option agreement at a purchase price of $1.00. The Company will
make additional advance royalty payments of $30,000 initially and increasing by
$5,000 per annum to the sixth anniversary when, thereafter, the advance
royalties will be $60,000 per year. Any future production royalties payable
will be based on a percentage of the net smelter return ("NSR") from production
as follows: Price of gold per troy ounce less than or equal to $500, the
royalty will be 4.0% of the NSR, from the greater than $500 to less than or
equal to $800, the royalty will be at 5.0% of the NSR, and more than $800, the
royalty will be 6.0% of the NSR.
On August 31, 1995, the Company entered into an Agreement with Benguet Corp.
USA, Inc. ("BUSA") under which the Company was granted an option to purchase
mining properties situated contiguous to the Company's other claims at Mineral
Ridge and assume BUSA's obligations under the related property purchase
agreements. Under the terms of the Agreement, as at December 31, 1996, the
Company had paid BUSA the total purchase price of $1,200,000, plus accrued
interest of $7,715.
9
<PAGE>
BUSA has assigned to the Company its rights under two separate options to
purchase agreements pertaining to certain patented claims. Pursuant to these
agreements with the underlying landowners, the Company has paid a total of
$10,901 to purchase the claims subject to the following royalty payments:
<TABLE>
<CAPTION>
Price of Gold Net Smelter Royalty
<S> <C>
$300/oz 1.0%
GREATER THAN $300/oz - $400/oz 2.0%
GREATER THAN $400/oz - $500/oz 2.5%
GREATER THAN $500/oz 3.0%
</TABLE>
The Company has paid a total of $190,000 in advance royalties, of which the
remaining balance is $127,354 as at December 31, 1997.
(j) TITLE TO PROPERTIES
The Company owns or leases unpatented mining claims which constitute the
majority of the Company's property holdings in the United States. The
ownership and validity of unpatented mining claims are often uncertain and may
be contested.
To initiate the tenure of title created by an unpatented mining claim, the
locator must make a discovery of a valuable mineral, properly locate the claim
on ground open to location, file a location notice with the Bureau of Land
Management and record the notice with the county in which the claim is located.
Prior to October 1992, to maintain claims against subsequent locators and the
federal government, a locator or its successor in interest was to perform
annually a minimum of $100 of labour or improvements (assessment work) for each
claim. Assessment years began and ended at noon on September 1 of each year.
Annual recording of an assessment affidavit with the federal Bureau of Land
Management and with the appropriate county recorder was also a prerequisite to
maintaining title to unpatented mining claims.
In October 1992, a change was made in the United States mining law. The new
law required a two-year maintenance fee of $200 per claim to be paid by August
31, 1993, for the 1993 and 1994 assessment years; for the 1995 year until the
present time the annual maintenance fee has been set at $100 per claim for each
assessment year. Any assessment work done on a property is over and above this
claim maintenance fee. The claim maintenance fee can be paid in lieu of
assessment work.
An assessment affidavit for the Ivanhoe Property was required to be filed by
December 30, 1992, for those assessment years, and was so filed by the Company.
The total two year maintenance fee due on the Ivanhoe Property was $1,011,200,
of which the Company's portion was $252,800, which was paid on August 31, 1993.
The 1995 claim maintenance fee was approximately $442,000 of which the
Company's portion was approximately $110,000, and was paid in full on August
31, 1994. The 1996, 1997, and 1998 claim maintenance fees was approximately
$51,000 each year of which the Company's share was approximately $12,750 for
each year and were paid in full on August 31, 1995, 1996, and 1997.
At the Mineral Ridge Mine, the two year maintenance fees from 1992 to 1994,
paid in August 1993, amounted to $9,800 for 49 claims; the maintenance fees for
the 1994 - 1995 year totaled $6,800 for 68 claims; the maintenance fees for the
1995 - 1996 year totaled $6,900 for 69 claims; for the 1996 - 1997 year totaled
$11,800 for 118 claims; and as at March 26, 1998, for the 131 claims held, the
maintenance fees of $13,100 will payable in August, 1998.
The Company makes a search of mining records in accordance with mining industry
practices to confirm that it has acquired satisfactory title to its properties
but does not obtain title insurance with respect to such properties. The
possibility exists that title to one or more of its properties, particularly
title to undeveloped properties, might be defective because of errors or
omissions in the chain of title, including defects in conveyances and defects
in locating or maintaining such claims. Should any defect in title be
discovered by or disclosed to the Company, the Company would take all
reasonable steps to perfect title to the particular claims in question. The
Company is not aware of any material defect in the title to its properties.
The boundaries of some of the Company's mining properties have not been
surveyed and, therefore, the precise location and area of these mining
properties may be in doubt. The Company is not aware of challenges to the
location or area of its unpatented mining claims.
(k) LEGISLATIVE CHANGES AFFECTING UNITED STATES CLAIMS
There was little progress in 1997 toward implementing a proposed new Mining Law
reform bill. At this time a moratorium on mineral patents is in effect and the
annual $100 per claim maintenance fee. The 1998 fiscal has a proposal to
increase this maintenance fee to $125 per claim. In addition, the Hardrock
Mining Royalty Act of 1997 has been introduced to both houses
10
<PAGE>
of Congress. It would establish a 5% Net Smelter Royalty on hardrock minerals
mined on public lands and eliminate patenting mining claims.
(l) REGULATORY AND ENVIRONMENTAL MATTERS
The future operations of the Company will require permits from various foreign,
federal, state and local governmental authorities and will be governed by laws
and regulations governing prospecting, development, mining, production,
exports, taxes, labor standards, occupational health, waste disposal, toxic
substances, land use, environmental protection, mine safety and other matters.
Companies engaged in the development and operation of mines and related
facilities generally experience increased costs as a result of the need to
comply with applicable laws, regulations and permits. Permits and studies are
necessary prior to operation of the properties in which the Company has
interests and there can be no guarantee that the Company will be able to obtain
or maintain all necessary permits that may be required to commence construction
or operation of mining facilities at these properties on terms which enable
operations to be conducted at economically justifiable costs. The Company
believes it is in substantial compliance with all material current laws and
regulations which currently apply to its activities. There can be no
assurance, however, that all permits which the Company may require for its
future operations will be obtainable on reasonable terms or that such laws and
regulations would not have an adverse effect on any mining project which the
Company might undertake.
Failure to comply with applicable laws, regulations and permitting requirements
may result in enforcement actions thereunder including orders issued by
regulatory or judicial authorities causing operations to cease or be curtailed
and may include corrective measures requiring capital expenditures,
installation of additional equipment, or remedial actions. Violators may be
required to compensate those suffering loss or damage by reason of their mining
activities and may be fined if convicted of an offense under such legislation.
Amendments to current laws, regulations and permits governing operations and
activities of mining companies or more stringent implementation thereof could
require increases in capital expenditures, production costs, reduction in
levels of production of future mining operations, or require delays in
development or abandonment of new mining properties.
The Company's mining and processing operations are subject to extensive
federal, state and local laws and regulations governing the protection of the
environment, including laws and regulations relating to air and water quality,
mine reclamation, waste disposal, and the protection of endangered or
threatened species.
The Company's mining and processing activities generated solid waste, including
mining waste and other waste streams. Hazardous waste is one category of solid
waste that is subject to extensive regulations by the United States
Environmental Protection Agency ("EPA") and state authorities. The primary
federal statute governing the management of hazardous waste is the Resource
Conservation and Recovery Act ("RCRA"). Currently, under RCRA, solid waste
generated from the extraction, benefication and processing of ores and minerals
is excluded from regulation as a hazardous waste. The Company currently
manages and disposes of its mining waste onsite as non-hazardous. Once the
Company completes its mining operations, it will incur costs for closure and
cleanup and post-closure maintenance.
The Company's mining activities also are subject to federal, state and local
laws and regulations for protection of surface and ground water. Individual
states have established regulatory programs for controlling mining wastes under
their authority to regulate discharges to land that may affect water quality
and their delegated authority to manage the National Pollutant Discharge
Elimination System under the Federal Clean Water Act for discharges to
navigable waters.
The Company's operations may produce air emissions, including fugitive dust and
other air pollutants, from stationary equipment, storage facilities, and the
use of mobile sources such as trucks and heavy construction equipment which are
subject to review, monitoring and/or control requirements under the Federal
Clean Air Act and state air quality laws. Most requirements of state and
federal air quality laws are administered under rules adopted by local air
quality authorities. In November 1990, the United States Congress passed
amendments to the Clean Air Act that created an entirely new statutory scheme
for the regulation of air pollution. Since passage of the statutory
amendments, EPA has been promulgating new regulations to implement a
comprehensive nationwide air permit program, an air toxins regulatory program
and expanded enforcement authority. It will be several years before final EPA
and state programs for air toxins and permitting are fully in place and the
direction of enforcement under these programs is evident. At the present time,
the impact of these rule makings and of subsequent regulation of mining and
mineral processing under the Clean Air Act upon the Company cannot reasonably
be estimated. Potential impacts could include limitations on production or
additional capital expenditures to comply.
11
<PAGE>
The Comprehensive Environmental Response Compensation and Liability Act of
1980, as amended ("CERCLA"). along with analogous statutes in certain states
impose strict, joint and several liability on owners and operators of
facilities which release hazardous substances into the environment. CERCLA
imposes similar liability upon generators and transporters of hazardous
substances disposed of at an off-site facility from which a release has
occurred or its threatened. Such liability could include the cost of removal
or remediation of the release and damages for injury to the natural
resources. The Company has properties which are located in historic mining
districts which may include abandoned mining facilities including waste
piles, tailings, portals, and associated underground and surface workings.
Releases from such facilities or from any of the Company's properties due to
past or current activities could form the basis for liability under CERCLA
and its analogs. Under CERCLA's strict, joint and several liability
provisions, the Company could potentially be liable for all remedial costs
associated with the property it currently owns or operates regardless of
whether the Company's activities were the actual cause of the release of
hazardous substances. Similarly, the Company could potentially be liable for
remedial costs regarding property that it formerly owned or operated if
release of hazardous substances occurred during that past ownership or
operation. In addition, off-site disposal of hazardous substances, including
hazardous mining wastes, may subject the Company to CERCLA liability. None
of the Company's properties are currently listed or proposed for listing on
the National Priority List and the Company is not aware of pending or
threatened CERCLA litigation which names the Company as defendant or concerns
any of its properties or operations. The Company cannot predict the
potential for future CERCLA liability with respect to any of its properties
or off-site disposal sites (if any). Nor can it predict the potential impact
or future direction of CERCLA litigation in the area surrounding its
properties. Additionally, during the past decade, legislation has been
proposed in each session of Congress that would substantially alter federal
mining law, and could impose significant additional federal regulatory and
environmental requirements on mining operations. Such changes in the law and
potential liabilities are speculative and their potential financial impact on
existing Company operations cannot reasonably be predicted at this time.
If the Company undertakes new mining activities in states other than Nevada
or in foreign countries, or if it significantly expands its existing mining
operations, the Company may be required to obtain pre-construction
environmental and land use review and to comply with permitting, control and
mitigation requirements of the jurisdiction in which such operations are to
be located. Compliance with new requirements could impose costs on the
Company in the future, the materiality of which cannot reasonably be
predicted at this time.
(m) RECLAMATION OBLIGATIONS
Reclamation requirements vary depending on the location and the managing
agency, but they are similar in that they aim to minimize long term effects
of exploration and mining disturbance by requiring the operating company to
control possible deleterious effluents and to re-establish to some degree
pre-disturbance land forms and vegetation. The Company believes that it has
met or exceeded reclamation requirements to date.
Reclamation on the Ivanhoe Property is being carried out by Newmont. Newmont
submitted the original Ivanhoe Property reclamation plan to the State of
Nevada and the Bureau of Land Management in June 1993. In July 1995, Newmont
advised the Company that it did not plan to pursue the project and revised
its cost estimate of reclaiming the property. At that time, the revised
reclamation fund was established by mutual agreement to be $3,500,000. In
July 1997, Newmont quitclaimed its interest in the Ivanhoe Property to the
Company. The reclamation fund now consists of $4,500,000 of which $3,000,000
has been contributed by Newmont, $500,000 by the Company and $1,000,000 by
Great Basin.
On June 1, 1996, Newmont commenced reclamation which consisted primarily of
rinsing the heaps, site monitoring and testwork, extensive construction of
diversion ditches, and re-shaping of waste rock piles. This reduced the
Company's share of the provision for site restoration from $500,000 on
December 31, 1995 to NIL as at December 31, 1996. Newmont submitted a formal
reclamation and closure plan in March 1997 to the State of Nevada and the
Bureau of Land Management and began a more extensive reclamation program.
Newmont revised its reclamation budget through to December 2003, which is now
estimated to be approximately $6.0 million. Newmont intends to complete the
reclamation plan as submitted to the BLM in March 1997. Expenditures, if
any, over the reclamation fund of $4,500,000 will be funded one third each by
Newmont, Great Basin and the Company up to US $1.5 million and thereafter 75%
by Newmont with the balance payable pro rata by Great Basin and the Company.
As at December 31, 1997, the Company had capitalized $1,056,700 in
reclamation bonds and deposits for the Mineral Ridge Mine. Included in this
balance is half of a $1,640,086 reclamation bond which is required by the
State of Nevada, Bureau of Land Management ("BLM"). The Company funded 50%
of this bond and the balance was funded by a bonding company for a yearly fee
of 2% of the outstanding balance. The Company's $820,043 contribution earns
a market rate of interest compounded over time. The bond will remain in
place until all reclamation at the mine site is complete to the satisfaction
of the BLM, estimated to be approximately 10 years.
12
<PAGE>
During 1996, Company funded a $72,000 deposit for cultural bonding required
by the BLM and a $15,000 bond to cover exploration reclamation costs required
by the Nevada Department of Environmental Protection.
(n) LABOUR
During 1997, the Company had employed a maximum of 53 field and operations
employees at the Mineral Ridge Mine and as of December 31, 1997 there were 41
employees. Contractors were used to supplement the full-time employees as
necessary. The Company also employs individuals on a part-time basis from
time to time as required. The Company believes that its employee relations
are good and there are no collective agreements covering any group of
employees in effect at this time.
(o) FOREIGN OPERATIONS
Foreign properties, operations and investments may be adversely affected by
local political and economic developments, exchange controls, currency
fluctuations, taxation and laws or policies of particular countries, as well
as by laws and policies of Canada and the United States affecting foreign
trade, investment and taxation. The Company has not been adversely affected
by any risks inherent in foreign operations to date.
(p) CURRENCY AND CONVERSION
The Company's financial statements are denominated in United States dollars.
The Canadian/United States currency exchange rate at the end of each of the
past five calendar years and the average, the high and low rates of exchange
for each year are set forth below. These rates, which are expressed in
Canadian dollars, are noon rate of exchange for the conversion of United
States dollars into Canadian dollars calculated on the basis of rates of
exchange as reported by The Bank of Canada.
<TABLE>
<CAPTION>
Year Ended
December 31 Average Last Day High Low
---------------------------------------------------------
<S> <C> <C> <C> <C>
1997 1.3844 1.4305 1.4399 1.3345
1996 1.3630 1.3706 1.3865 1.3287
1995 1.3724 1.3640 1.4267 1.3275
1994 1.3659 1.4018 1.4090 1.3085
1993 1.2939 1.3255 1.3443 1.2428
</TABLE>
On March 26, 1998, the noon rate of exchange quoted by The Bank of Canada for
the conversion of the United States dollars into Canadian dollars was $1.4121
(Canadian $1.00 equals US $0.71).
GLOSSARY OF MINING TERMS AND DEFINITIONS
COLUMN LEACHING - a method of dissolving gold and/or silver from crushed or
ground ore contained in a cylindrical vessel by the continuous movement of
cyanide solution through the column.
CUT-OFF GRADE - the lowest grade of mineralized rock that qualifies as ore
grade in a given deposit, and is also used as the lowest grade below which
the mineralized rock currently cannot be profitably exploited. Cut-off
grades vary between deposits depending upon the amenability of ore to gold
extraction and upon costs of production.
GOFO - as contemplated in the Mineral Ridge Mine Debt Financing Facility,
means the rate per annum (rounded downwards if necessary to the nearest five
one-hundredths of one percent (0.05%)) equal to (a) the mean of the offered
rates as of 10:00 a.m. (London, England time) appearing on the display
designated as page "GOFO" on the Reuters Monitor Money Rates Service for a
term equivalent to the interest period, or (b) if fewer than two offered
rates appear on such display, the rate determined by the lender (which
determination shall be conclusive in the absence of manifest error) to be the
average of the Gold forward offered rates by such bullion traders for a term
equivalent to the interest period in the London interbank Gold market at
about 10:00 a.m. (London, England time).
HEAP-LEACHING/LEACHING - a process whereby gold is recovered from ore by
heaping broken ore on sloping impermeable pads, repeatedly spraying the heaps
with a cyanide solution which dissolves the gold content of the ore,
collecting the gold-laden solution and stripping the solution of gold. Such
gold is melted and recast as dore bullion and is then delivered to commercial
refiners.
13
<PAGE>
LIBOR - as contemplated in the Mineral Ridge Mine Debt Financing Facility,
means the rate per annum (rounded upwards if necessary to the nearest whole
one-sixteenth of one percent (1/16%) equal to (a) the average of the offered
rates as of 11:00 a.m. (London, England time) appearing on the display
designated as page "LIBO" on the Reuters Monitor Money Rates Service for
dollar deposits for the relevant period of time, or (b) if fewer than two
offered rates appear on such display, the rate determined by the lender
(which determination shall be conclusive in the absence of manifest error) to
be the average of the rates at which banks are offered dollar deposits for
the relevant period of time in the interbank Eurodollar market at about 11:00
a.m. (London, England time).
MA - million years.
MINERALIZED DEPOSIT - a mineralized body which has been physically delineated
by drilling, underground work, surface trenching and other workings or drill
holes and found to contain a sufficient amount of mineralized material with
an average grade sufficient to warrant further evaluation. Such deposit does
not qualify as a commercially mineable (or viable) ore body until technical,
economic and legal factors have been sufficiently satisfied to classify the
mineralized material as a reserve.
MINING CLAIM - that portion of public mineral lands which a party has staked
or marked out in accordance with provincial or state mining laws to acquire
the right to explore for and exploit the minerals under the surface.
NET SMELTER RETURN ("NSR") - a return based on the actual gold sale price
received less the cost of refining at an off-site refinery.
OPEN PIT MINING - the process of mining an ore body from the surface in
progressively deeper steps. Sufficient waste rock adjacent to the ore body
is removed to maintain mining access and to maintain the stability of the
resulting pit.
OPT - ounces per ton.
OUNCES - troy ounces; in this report production figures refer to gold having
a fineness of at least 995 parts per 1,000 parts; other references to ounces
in this report do not refer to a specific fineness.
PPB - parts per billion.
PPM - parts per million.
PROBABLE RESERVES - reserves for which quantity and grade and/or quality are
computed from information similar to that used for proven reserves, but the
sites for inspection, sampling and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although lower
than that for proven reserves, is high enough to assume continuity between
points of observation.
PROVEN RESERVES - reserves for which (a) quantity is computed from dimensions
revealed in outcrops, trenches, workings or drill holes; grade and/or quality
are computed from the results of detailed sampling; and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well established.
PROVEN/PROBABLE RESERVES - is used if the difference in degree of assurance
between proven and probable reserves cannot be reliably defined.
RESOURCE - the estimated quantity and grade of mineralization that is of
potential economic merit. A resource estimate does not require specific
mining, metallurgical, environmental, price, and cost data, but the nature
and continuity of mineralization must be understood. A resource
classification differs from "mineralization" as that term is used in National
Policy 2-A of the Canadian Securities Administrators in that the latter
refers to a natural aggregate of one or more metallic minerals, which may or
may not be of economic interest.
STRIPPING RATIO - the ratio of the number of tons of waste to the number of
tons of ore which will be extracted during the excavation of an open pit mine.
TONS - dry short tons (2,000 pounds).
14
<PAGE>
ITEM 2: DESCRIPTION OF PROPERTY
MINERAL RIDGE MINE
PROPERTY AND OWNERSHIP
The Mineral Ridge properties are located near the town of Silver Peak,
approximately 35 miles (56.35 kilometers) southwest of Tonopah, in Esmeralda
County, Nevada. The 3,130 acre (1,266 hectares) land package consists of a
total of 195 claims on four contiguous parcels of land in Esmeralda County
(collectively referred to as the "Mineral Ridge Mine"): the Mineral Ridge
mine site (the "Original Property"), the Blair town site, the Silver Peak
mill site adjacent to the town of Silver Peak and approximately 200 acres (80
hectares) of deeded land west of the mine site.
The Company acquired its interest in the Original Property in April 1993,
pursuant to an agreement with Mary Mining Company, Inc., a Florida
corporation ("MMC"), and in August 1995, acquired an option from BenguetCorp.
USA, Inc. ("BUSA") on other mining properties (the "Oromonte Claims")
situated contiguous to the Original Property. The Company's interest in the
Mineral Ridge Mine consists of 175 claims of which 54 are patented. The
Company's undivided 100% interest is subject to certain royalty obligations
outlined below.
LOCATION, CLIMATE AND INFRASTRUCTURE
The Mineral Ridge Mine is located about four miles (six kilometers) northwest
of the town of Silver Peak in the Silver Peak (Mineral Ridge) Mining District
in Esmeralda County, Nevada. The local topography is rugged with ephemeral
drainage. Access to the mine from Silver Peak is two miles (three
kilometers) north via paved SR265 to the Mineral Ridge East Access Road which
is then followed about four miles (six kilometers) west to the mine site.
The terrain throughout most of the mineralized area is hilly to steep.
Elevations range from 5,800 to 7,400 feet (1,740 - 2,220 meters) in the mine
area. Climate is typical of the Great Basin region with hot dry summers and
cool dry winters. Consequently, open-pit mining and heap-leaching will be
carried out year round.
Modest amenities including living quarters, an elementary school, library,
swimming pool and small store are found in Silver Peak and the town is
suitable for housing a small work force.
PROPERTY HISTORY
The Mineral Ridge area has been intermittently mined, mostly by underground
methods, since gold was first discovered there in the early 1860s. Between
1865 and 1870 a ten-stamp and later a thirty-stamp mill were operated. A
100-stamp mill was installed in the early 1900s, and this was followed by an
extensive period of mining and construction from 1906 to 1918. During that
time, the town of Blair was established and over 1.2 million tons of ore were
mined and 280,000 ounces of gold were produced.
Black Mammoth Consolidated Mining Company ("BMCMC") took over parts of the
Mary/Drinkwater mine in the late 1920s and built a 50-ton-per-day mill.
BMCMC was joined by E.L. Cord in 1935 who was instrumental in installing a
240-300 ton-per-day mill near the Mary portal in 1937. The mine was the top
Nevada gold producer in 1938 and continued until 1942 when the Second World
War (Gold Order L-208) ended production.
A modest amount of exploration, but no production, occurred between 1973 and
1989 when Zephyr Resources, Inc. and later Homestead Minerals Corp. initiated
production from an open-pit, hauling the ore 17 miles (27.3 kilometers) to
Sunshine Mining Company's 16-1 Mill. Production ceased in December 1992.
Overall historical production is estimated at 573,000 ounces of gold from
about 3 million tons of ore, with approximately 460,000 ounces produced prior
to 1942.
MINERAL RIDGE ACQUISITIONS
On April 16, 1993, the Company entered into a letter agreement with MMC as
trustee for and on behalf of certain beneficiaries under a land trust (the
"Mary Option"), under which the Company was granted the option to enter into
a lease for the Original Property located in Esmeralda County, Nevada. The
Mary Option granted to the Company the right to enter upon the Original
Property for the purposes of investigation, inspection, and examination of
the physical and environmental conditions of the property. On July 15, 1993,
the Company exercised the Mary Option and entered into a lease for a minimum
term of five years, which also granted the Company the right to purchase the
Original Property for a nominal sum, subject to certain royalty
15
<PAGE>
obligations outlined below. On May 15, 1996, the Company exercised such
right to purchase for $1.00. Under the terms of the letter agreement, the
Company paid $210,000 and is required to pay minimum advance royalties which
will be credited cumulatively against the production royalty payments payable
by the Company.
On each anniversary of the effective date of the lease, being July 15,
minimum advance royalty payments are required to be made (initially $30,000
and increasing by $5,000 annually) until the sixth anniversary. On each
anniversary thereafter, advance royalties will be $60,000 annually.
Any future production royalties payable will be based on a percentage of the
NSR from production. If the price of gold per troy ounce is less than or
equal to $500, the royalty will be 4.0% of the NSR; if the price of gold is
greater than $500 to less than or equal to $800 the royalty will be 5.0% of
the NSR; and if the price of gold is more than $800, the royalty will be 6.0%
of the NSR. The above royalty applies to approximately 88% of the mineable
reserves of the Mineral Ridge Mine.
Upon exercise of the Mary Option by the Company, it committed to pay the US
federal annual mining claim rental fee (currently $100 per unpatented claim)
on or before August 31, of each year.
On August 31, 1995, the Company entered into an agreement with BUSA under
which the Company was granted an option to purchase the Oromonte Claims and
assumed BUSA's obligations under the related property purchase agreements.
The Company paid BUSA $1.2 million.
BUSA assigned to the Company its rights under two separate option to purchase
agreements pertaining to the patented Oromonte Claims in the Oromonte area.
The Company owns the claims subject to the following royalty payments:
<TABLE>
<CAPTION>
-----------------------------------------------------------
Price of Gold Net Smelter Royalty
-----------------------------------------------------------
<S> <C>
LESS THAN $300/oz. 1.0%
GREATER THAN $300/oz. L $400/oz. 2.0%
GREATER THAN $400/oz. L $500/oz. 2.5%
GREATER THAN $500/oz. 3.0%
-----------------------------------------------------------
</TABLE>
The only portion of mineable reserve affected by the above royalty, which
reserve represents approximately 6% of the mineable reserves of the Mineral
Ridge Mine, is in the Gordon-Brodie Pit.
The remaining 6% of the mineable reserves do not have any royalty associated
with them.
GEOLOGY
The Mineral Ridge gold deposits are detachment-fault hosted mesothermal
quartz vein and replacement deposits localized on the crest and flanks of an
early Tertiary metamorphic core complex. Mineral Ridge is a northwest
tending, doubly plunging, antiformal uplift of intermediate to felsic
granitic rocks, varying from granodiorite to alaskite; capped by a
metamorphic carapace of Precambrian metasediments which host the gold
deposits. The core granite exhibits foliation and lineation parallel to the
contact with the overlying metasediments, with the deformation extending up
to one hundred feet into the upper portion of the intrusive. The Precambrian
metasediments are comprised of the Wyman Formation, a sequence of thin-bedded
mica schist, calc-silicate rocks and calcite marble after original
interlayered limestone and shale paleolith. The Wyman Formation is overlain
in low-angle fault contact by the Reed Dolomite, which is in turn covered by
Cambrian sediments. The core granite and sediments are cut by several ages
of dikes and sills ranging in composition from granite pegmatite to diabase,
with the mafic varieties often closely associated with the gold
mineralization.
Precious metal mineralization at Mineral Ridge is found in three types of
deposits, with the most important styles being lenticular quartz bodies and
manto replacements in the Wyman Formation limestone/marble beds. The quartz
veins occur within the sheared contact zone between the core granite and
Wyman Formation, usually in zones of dilation located on the eastern flank of
anticlinal folds and where more brittle beds or intrusive rocks have been
fractured and mineralized. The Mary Limestone, a blue-gray, finely
crystalline marble containing boudins and augen of quartz, calcite and
granitic to felsic intrusives within intensely folded groundmass, is the host
for silicic replacement ore formed adjacent to the veins. Up to 5%
disseminated pyrite and lesser galena and sphalerite occurs in the Mary
Limestone ore, with replacement of the limestone by silica, chlorite and
calcite. The ore bodies can occur as a single lens or as a stack of lenses
separated by mylonite and/or intrusive sills, with an aggregate thickness of
up to one hundred and forty feet of mineable ore.
16
<PAGE>
The ore zones on Mineral Ridge occur as north-south to north-west trending
lenses of mineralization which rake at a shallow angle to the dip of the
formations and structural contacts. The most favorable orientation for
forming an ore shoot includes the steeply dipping east flank of anticlinal
folds and the intersection of north-south strike faults of reverse
displacement. The ore zones are cut by east-west to north-east trending high
angle post-mineral faults of minor vertical displacement.
The principal gold-bearing mineralization at Mineral Ridge consists of milky
to sugary vein quartz and silicic breccias comprising multiple stages of
deposition and brecciation, containing variable amounts of sulfides and their
oxidation products. The sulfides include, in decreasing order of occurrence:
pyrite, galena, sphalerite and minor chalcopyrite and arsenopyrite. Gold
grades are highest in association with galena, although the gold occurs as
distinct grains within the quartz, not necessarily in contact with the
sulfides. Polished section studies have shown the gold to be mostly very
fine grained (5-100 microns) and often associated with iron oxides after
pyrite. Coarser gold of probable late stage deposition (supergene?) has been
found coating fractures and filling vugs in oxidized sulfides. The silver to
gold ratio for the deposits is about two to one. Dore production averages
about 65% Au and 35% Ag in the bullion.
FEASIBILITY STUDY
Behre Dolbear was retained by the Company during August 1995, to prepare a
final feasibility study on the Mineral Ridge Mine. As part of its assignment,
Behre Dolbear critically reviewed all technical work undertaken by consultant
firms contributing to the feasibility study. The technical and economic
parameters underlying the study were estimated by Behre Dolbear to have an
accuracy of plus/minus 15%, with the exception of the processing parameters
which were estimated to have an accuracy of plus/minus 10%.
The economic analysis prepared by Behre Dolbear assumed that the construction
of the Mineral Ridge Mine would be financed with funds raised entirely with
equity. Based upon the terms of the Mine Debt Financing Facility, the
Company estimates its debt service costs to be approximately $4.20 per ounce.
The feasibility study established ore reserves of the project contained in
four deposits and a low-grade ore stockpile. The proven and probable
mineable ore reserve is approximately 5.2 million tons averaging 0.068 ounces
gold per ton of ore at an average internal cut-off grade of 0.024 ounces gold
per ton of ore based on a gold price of $385 per ounce. Life-of-mine
waste-to-ore ratio is 4.3 to 1. The reserve is estimated to yield 284,668
saleable (recoverable) ounces of gold over a 5 1/2 year mining life and an
additional 1 1/2 year continued leaching period.
The following table sets out the mineable ore reserves of the Mineral Ridge
Mine as calculated by Behre Dolbear:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Mineable Ore Reserves
Mineral Ridge Mine
-----------------------------------------------------------------------------------------------
Ore Tons Ore Grade Waste Tons Stripping
Pit/Stockpile (000's) opt Ounces (000's) Ratio
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Low Grade Stockpile 570 0.0480 27,400 - -
Gold Wedge 345 0.0813 28,000 973 2.82/1
Gordon Brodie 191 0.0667 12,700 741 3.88/1
Drinkwater 2,983 0.0661 197,300 12,583 4.22/1
Mary 1,087 0.0799 86,800 8,088 7.44/1
-----------------------------------------------------------------------------------------------
MINERAL RIDGE MINE TOTAL 5,176 0.0680 352,200 22,385 4.32/1
-----------------------------------------------------------------------------------------------
</TABLE>
The life-of-mine direct cash operating costs (before taxes, royalties,
amortization, depreciation and debt service) were estimated in the Parrish
Report to be $235 per ounce and total operating costs (including debt service
costs) were estimated to be $355 per ounce.
The life-of-mine, cumulative project cash flow of $13.5 million is set out in
the Parrish Report. This cash flow was based on an economic analysis using
constant dollars, applying no leveraging, viewing the project on a
stand-alone basis. The estimates in the Parrish Report, assuming cash flows
are realized at year end, no change in current taxation structure and a gold
price averaging $407 per ounce for the 120,000 ounces hedged under the
Company's hedging line, and $385 per ounce for the balance of production,
indicated an internal rate-of-return of 12% after all applicable taxes.
Price, ore reserve grade, and gold recovery all have about the same and
greatest sensitivity on the projected cash flow.
17
<PAGE>
Since the date of the calculation of the internal rate of return, gold prices
have dropped significantly and, in response, the Company has revised its
mining plan which will impact the estimated cost of production. As a result,
the assumptions relating to the costs of gold production and to the revenue
generated by the sale of gold which underly the calculation of the internal
rate of return are no longer accurate. If gold prices remain at current
levels, the actual internal rate of return realized by the Company could be
significantly lower than 12% or even negative.
PERMITTING
Work on all significant permits was initiated in 1995. The Plan of
Operations and Reclamation Plan were key to acquiring these permits and both
were submitted to the United States Bureau of Land Management (the "BLM") in
January 1996. On July 26, 1996, the BLM issued a Finding of No Significant
Impact and Decision Record (the "Record of Decision") which allowed the
Company to commence construction of the Mineral Ridge Mine.
In early October 1996, the Mineral Ridge Mine received a Reclamation Permit
and posted an initial reclamation bond in the amount of $1.6 million clearing
the way to commence construction. Since that time, all additional permits
required from the State of Nevada in order to commence mining operations have
been obtained.
EXPLORATION AND DEVELOPMENT
Exploration at Mineral Ridge in 1997 consisted of a two phase program, with
the first stage designed to increase definition of the Mary, Brodie and Upper
Drinkwater deposits, while the second part tested the down-dip, underground
potential of the Mary and Custer Shaft targets. The 1997 program included
118 reverse circulation drill holes for a total of 22,140 feet of drilling.
An additional 19 rotary percussion holes were drilled using the IR DM45
blasthole drill. The mine reserves were updated in late 1997 using the new
data obtained in the drilling program, incorporated into a geologically
constrained mineralization model. Compilation of historic surface and
underground geology, structure and assay information is in progress to locate
additional reserves which may be developed by surface and underground mining
methods. An additional 22 lode claims were located to extend coverage of
the property to almost three line miles of strike on the mineralized contact.
CURRENT STATUS
Operations at the Mineral Ridge Mine consist of open-pit mining, four-stage
crushing, agglomeration, heaping onto a permanent leach pad, and leaching and
recovery by conventional cyanide and carbon adsorption methods. Mining is by
contractor. Crushing is to 100% minus 6 mesh [approximately 1/8 inches
(0.3 centimeters)]. The estimated gold recovery is 80.8% realized in
120 days after heaping in 20 feet (6.1 meters) lifts to a total height of
120 feet (36.6 meters).
In August 1996, a fixed price, turnkey contract was awarded to Roberts and
Schaefer Company of Salt Lake City, Utah, for Engineering, Procurement and
Construction Management (EPCM) of the Mineral Ridge Mine processing and other
facilities. Construction proceeded according to schedule and mechanical
completion was achieved on May 29, 1997. Final completion and testing of the
facility was achieved on August 7, 1997.
Subject to the availability of funding, additional construction will be
required in 1998 for leach pad expansion. This final expansion will more
than double the available area for leaching.
A 69 kV powerline has been installed to the mine site by Sierra Pacific Power
Company. Water for mining and processing is drawn from an 1,800 foot (540
meters) deep, well adjacent to the processing plant. Subject to the
availability of funding, measures will be taken in 1998 to supplement the
supply of water from an alternative water source.
The Company initiated mining operations at the Mineral Ridge Mine in the Gold
Wedge and Drinkwater pits in October 1996, and ore was stockpiled in advance
of process plant start-up. Mining in the Gold Wedge pits has been completed.
Current active pits are the Drinkwater and the Gordon-Brodie. Contract
mining of the Mineral Ridge Mine ore deposits was carried out by D.H.
Blattner & Sons Inc., of Avon, Minnesota; but due to low gold prices, mining
was temporarily suspended in November 1997.
A total of 4.6 million tons has been mined since mining began in October
1996. Of this total, 625,000 tons of ore has been mined at an average grade
of 0.074 opt and hauled to the stockpile and 4.0 million tons of waste rock
has been mined. Mining has taken place in the Drinkwater, Gold Wedge and
Gordon-Brodie pits. In addition, ore has been hauled from the Low Grade
stockpile.
18
<PAGE>
The crushing plant is designed for a maximum production rate of approximately
230 tons per hour. The ADR plant is designed for solution flows of 600
gallons per minute. As designed, these facilities will be capable of
handling the planned production rate of 2,700 tons per day, which, at the
planned mine head grades, would result in the average annual production of
50,000 ounces of gold.
As of December 31, 1997, in excess of 500,000 tons of ore has been crushed
and stacked on the leach pad at an average grade of 0.063 ounces per ton (2.1
grams per tonne). Initial gold production began in June 1997.
Because of declining gold prices, the reserves were reevaluated using a gold
price of US$325 per ounce. This was performed in house by Mineral Ridge
employees using MEDSYSTEM software. The following table summarizes the
reserves on December 31, 1997, after mining in 1996 and 1997.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Mineral Ridge Mine
Mineable Ore Reserves
----------------------------------------------------------------------------------------------------------
Water/Ore
st = dry short tons Ore st Opt Au Oz Au Waste st Ratio Total st
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOW GRADE STOCKPILE 563,000 0.048 27,024 563,000
GORDON BRODIE 120,712 0.059 7,127 319,525 2.65 440,237
DRINKWATER 1,732,232 0.072 124,679 5,981,907 3.45 7,714,139
MARY SOUTH 161,888 0.067 10,910 1,156,451 7.14 1,318,339
MARY NORTH 436,494 0.068 29,761 2,638,084 6.04 3,074,578
----------------------------------------------------------------------------------------------------------
TOTAL MINERAL RIDGE 3,014,326 0.066 199,501 10,095,967 3.35 13,110,293
----------------------------------------------------------------------------------------------------------
</TABLE>
IVANHOE PROPERTY
OWNERSHIP, LOCATION AND CLIMATE
The Company owns a 25% interest in the Ivanhoe Property through its
wholly-owned subsidiary, Touchstone Resources Company.
The Ivanhoe Property, which is approximately 50 miles northeast of Battle
Mountain, Nevada, is located at the northwestern end of the Carlin Trend in
an area between Little Antelope Creek on the south to the Midas Trough on the
north. The property currently consists of 510 unpatented mining claims and
covers approximately 9,231 acres. Access to the property is available either
via an eleven mile road from Midas, a county road from Battle Mountain, or a
road from the Dee Mine six miles southeast of the property.
The terrain is rolling to hilly with local areas of moderately rugged relief
and steeply incised drainage. Elevations range from 5,400 feet to 6,250 feet
in the project area. Temperatures are variable between winter lows of -30 F
to summer highs in excess of 105 F. Normal field seasons extend from April
through November and precipitation averages 8 to 10 inches annually with most
occurring as snow in the winter and rain during May and June.
Newmont Explorations Limited ("Newmont") decreased the number of unpatented
mining claims during 1995 after its decision to withdraw from the Ivanhoe
Venture. The Hollister deposit, which includes the area in the Phase I
development (the USX zone), represents an area of approximately one square
mile. The Ivanhoe joint venture's interest in the property is by way of
option agreements, mining leases, operating rights agreements and staked
mining claims.
Pursuant to an agreement dated August 13, 1997, Great Basin Gold Inc. is
earning up to a 75% interest in the property by incurring expenditures
totaling $5 million.
19
<PAGE>
PROPERTY HISTORY
Pursuant to an agreement dated January 19, 1987, the Company acquired from
USX Corporation ("USX") an option to purchase a 100% interest in part of the
Ivanhoe Property for a purchase price of $3,250,000. USX reserved a
non-participating royalty equal to the difference between 5% of the net
smelter returns from all minerals produced from the property and all
royalties paid pursuant to the underlying mining leases. This royalty was
assigned to Franco-Nevada Mining Corporation and Euro-Nevada Mining
Corporation in March 1992.
Following the acquisition of USX's interest, the Company proceeded to
increase its interest in the Ivanhoe Property through the staking of mining
claims and the acquisition of mining leases and operating rights agreements
with options to purchase the claims. The mining leases and operating rights
agreements then acquired provided for annual advance minimum royalties that
are fully creditable and recoverable against production royalties which range
from 2.5% to 3.5% of net smelter returns from all minerals (with limited
exceptions) produced from the mining claims.
On May 19, 1989, the Company and Galactic Resources Ltd. ("Galactic") signed
definitive agreements, effective April 4, 1987, which established the terms
and conditions of a joint venture for the exploration and development of the
Ivanhoe Property. Galactic acquired a 50% interest in the Ivanhoe Property
on March 1, 1990 in consideration of the issue of 750,000 Galactic shares
(which were assigned a value of $5,540,000), the expending of a minimum of
$4,000,000 for the completion of a feasibility program and report on the
Hollister deposit and providing or arranging all financing required to
develop and construct facilities to operate a mine on the Hollister deposit
as recommended by the feasibility report. Construction of the Hollister Mine
began in April 1990 and was completed in October 1990. Gold production
recovered from the Hollister Mine and attributed to the Company for the years
1990 to June 1996 totaled 50,457 ounces. Mining ceased in May 1992 and
production from residual leaching continued throughout the balance of 1992 to
June 1996.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Cornucopia's Share
Total Gold of Production
Period Production Quantity Percentage
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GALACTIC/CORNUCOPIA AGREEMENT
Oct. - Dec., 1990 5,974 oz 2,987 oz 50%
Jan. - Dec., 1991 59,978 oz 29,989 oz 50%
Jan. - May, 1992 20,174 oz 10,087 oz 50%
IVANHOE VENTURE
May - Dec., 1992 14,662 oz 3,666 oz 25%
Jan. - Dec., 1993 10,320 oz 2,580 oz 25%
Jan. - Dec., 1994 1,080 oz 270 oz 25%
Jan. - Dec., 1995 2,518 oz 630 oz 25%
Jan. - June, 1996 990 oz 248 oz 25%
----------------------------------------------------------------------------------------------
</TABLE>
The Galactic/Cornucopia joint venture terminated upon completion of the sale
of various interests in the Ivanhoe Property and assets to Newmont as
described below.
IVANHOE VENTURE
The Company's indirect wholly-owned subsidiary, Touchstone entered into a
letter agreement dated March 26, 1992, with Newmont for the sale to Newmont
of half of Touchstone's 50% interest in the assets of the Ivanhoe Property in
consideration for $6,700,000 payable in cash on the closing date. At about
the same time, Newmont also entered into an agreement with Ivanhoe Gold
Company ("Ivanhoe"), an indirect, wholly-owned subsidiary of Galactic, to
acquire all of Ivanhoe's 50% interest in the assets of the Ivanhoe Property
in consideration for $13,400,000, payable in cash on the closing date. Each
of Ivanhoe and Touchstone negotiated their respective transactions at arm's
length with Newmont and each other.
The sales transactions were completed on June 23, 1992, and accordingly
Newmont acquired a 75% interest in the Ivanhoe Property, with Touchstone
holding the remaining 25% interest. Touchstone and Newmont then entered into
a mining venture agreement (the "Ivanhoe Venture") for further exploration
and development of the Ivanhoe Property with Newmont being appointed as
manager.
20
<PAGE>
GEOLOGY
The Ivanhoe Property is located at the northwestern end of the Carlin Trend,
a major, linear structural zone containing at least 15 major gold deposits.
The gold mineralization in these deposits typically occurs as disseminations
in Lower Paleozoic clastic and carbonate rocks above and below the Roberts
Mountain Thrust. This regional structural "stacking" gives rise to the
concept of upper and lower plate hosted deposits. At Ivanhoe, gold deposits
occur in Tertiary volcanic rocks unconformably overlying the upper plate
clastic rocks.
Compilation of regional geological mapping data and regional gravimetric
surveys suggests the Ivanhoe Property straddles the axis of a
northwest-trending, northwesterly plunging, basement anticline in the
Paleozoic sequence known as the Tuscarora Mountains Anticline. The Hollister
deposit appears to lie on the crest of this open, asymmetric fold along which
many other Carlin Trend deposits occur.
Two episodes and styles of gold mineralization and alteration are recognized
in the Ivanhoe district. The most important event producing the majority of
gold and mercury mineralization is epithermal in character and occurs in the
Tertiary (Miocene) volcanic sequence. This event, dated at about 15Ma in
age, gave rise to the Hollister deposit and other volcanic-hosted prospects
on the property. An earlier gold mineralization system of mesothermal
character occurs in and around the zoned Hatter stock about 1.5 miles east of
Hollister and is thought to be related to an earlier Eocene intrusive event.
The dominant alteration and gold mineralization signature on the Ivanhoe
Property is the 15Ma Miocene event. The total Miocene fossil epithermal
field covers an area greater than 50 square miles. Within the Hollister
deposit area, gold mineralization occurs over an area 7,000 feet north-south
by 4,000 feet east-west. Outside of Hollister, most Miocene alterations and
mineralization occurs within the Silver Cloud - Quiver and Quiver - Gov/Fox
structural corridors.
At Hollister, gold mineralization is stratabound, disseminated,
oxide/sulfide, and hosted primarily in Miocene Lower Tuff and Andesite
(Basalt). As estimated by Pincock, Allen & Holt, Inc. in 1990, an
approximate 10 million ton proven and probable reserve grading 0.038 opt gold
occurs in portions of the Clementine, Velvet and Butte zones within the
Hollister deposit north of the USX pit. This reserve is treated as a
resource in light of current gold prices and the dated nature of the Pincock,
Allen and Holt, Inc. estimates. Higher grade mineralization occurs along the
Valmy-lower Tuff contact, within the basal 80 feet of the Andesite (Basalt)
and along fault structures and structural intersections. Sporadic, lower
grade mineralization (LESS THAN 0.02 opt gold) occurs in the Upper Tuff.
Significantly, subeconomic to economic gold mineralization also occurs in
narrow (+10 feet) structural zones and quartz-pyrite veined Valmy Formation
beneath the deposit.
Structure plays the dominant role in the localization and resulting geometry
of gold mineralization at Hollister. For example, the primary ore control in
the USX West Pit is a WNW trending fault which localized high grade
mineralization in the lower Tuff. Other high grade pods are localized where
this fault intersects N40 E trending faults. In the USX East Pit, higher
grade mineralization is localized where N30 W and N50 E faults intersect in
the center of the pit and where N30 E and N5 E faults intersect a major N65 E
structure in the northeast part of the pit.
Outside the Hollister resource area, only subeconomic, minor, discontinuous
disseminated mineralization has been found. Typical disseminated gold grades
range from 0.002 to 0.01 opt gold and rarely exceed 0.02 opt gold.
Structurally controlled mineralized zones outside Hollister contain higher
grades (0.01 to 0.03 opt gold) especially where quartz-kaolinite alteration
over-prints quartz-adularia alteration. To date, no potentially economic
mineralization has been found outside of the Hollister deposit area.
MINING OPERATIONS
The Hollister Mine was a surface mine with two coalescing open pits in the
USX zone with heap leach gold extraction and a carbon adsorption gold
recovery plant located approximately one half mile from the operating pits.
In addition, the mine site also included a waste dump, topsoil stockpiles,
haul roads, office, laboratory, and a warehouse/shop facility. The project
utilized conventional drilling and blasting techniques and material movement
methods. The USX zone of the Hollister deposit was mined out and shut down in
May 1992. Production from residual leaching continued from 1992 through to
June 1996.
EXPLORATION
Exploration in 1991 and early 1992 was primarily directed at the Hatter
intrusive complex with additional activity focused on the Quiver, GOV, Sheep
Corral and Little Antelope Creek areas. During this period, drilling was
completed in the Hollister, GOV and Hatter areas and various geochemical and
geophysical surveys were completed throughout the property.
21
<PAGE>
A total of 76 drill holes (34 "exploration" and 42 "development") amounting to
41,263 feet were completed in this 1991-1992 period including 8 holes
aggregating 14,400 feet that were completed by March 1992. In the Hollister
area, the drilling tested shallow oxide zones within the Tertiary volcanic
sediments and deeper sulfide potential in the Palaeozoic basement rocks.
Hollister drill holes which had significant impact included north A-45 holes
which had intercepts of 340 feet of 0.038 opt gold and 281 feet of 0.032 opt
gold and a Velvet hole which intercepted 142 feet of 0.067 opt gold. In the
GOV area the drilling intercepted a previously unknown gold zone (0.003 to
0.014 opt gold) in quartz-pyrite stockwork that was 400 feet thick. A Hatter
hole intersected 85 feet of fault breccia that graded 0.024 opt gold.
Other activities in 1991 and early 1992 included geological mapping and
completion of a number of geochemical surveys in the Hatter, Craig, Little
Antelope Creek, Quiver, SLB and GOV areas. Geophysical work included
reprocessing of airborne magnetics and completion of controlled source
audio-magnetotelluric (CSAMT), ground magnetic and IP surveys.
From the time exploration was resumed by the Ivanhoe Venture in mid-1992, the
entire Ivanhoe Property was geologically mapped in the folio style used by
Newmont elsewhere on the Carlin Trend and, during 1992 and 1993, a total of 12
core and 56 RVC holes, aggregating 15,294 feet and 37,660 feet, respectively,
have been drilled. In addition, a combined rock chip, soil and stream
geochemical survey and regional gravity airborne magnetic and airborne thematic
surveys were completed prior to the end of 1992. Anomalous gold mineralization
was encountered in the GOV and Sheep Corral and West Silver Cloud areas.
Regional mapping coupled with regional gravimetric surveys completed during the
1992/1993 exploration program strongly suggest the Hollister deposit lies along
the crest of a basement paleohigh - the Tuscarora Mountains Anticline - which
localizes numerous other Carlin Trend deposits to the southeast. This
revelation is particularly significant in that it strongly suggests the
Hollister deposit lies on the Carlin Trend. The 1992/1993 exploration program
also developed working genetic models of Eocene and Miocene gold
mineralization.
The 1994 exploration program was evenly split between the Hollister deposit
area and the remainder of the property. At Hollister, 20 reverse circulation
rotary holes (12,690 feet) and 7 core holes (4,318 feet + 500 feet rotary pre-
collars) were drilled to define the limits of the volcanic-hosted gold
mineralization and to explore for underlying, high-grade "feeder zones" in the
Valmy Formation. Exploration peripheral to the known resource did not locate
any new zones of mineralization or significantly expand the known zones. A
high-grade fault breccia/vein was drilled near the western margin of the
Clementine resource to offset an earlier 1994 rotary intercept of 15 feet
grading 1.5 opt gold in the Valmy Formation. This hole cut 2.4 feet that
graded 37.4 opt gold and terminated in the mineralized zone due to stuck drill
rods. Two additional attempts to offset this intercept 200 feet to the
northeast fell short of the target due to voids and resultant stuck rods. One
core hole was also completed in the southern Velvet area to twin an existing
rotary hole.
Flotation and bio-oxidation tests were performed on samples of sulfide
mineralization from the Rowena and USX zones. Encouraging results stemmed from
both sets of tests. Rougher concentrates recovered 70% of the contained gold
in a product assaying 0.545 opt gold. Cleaner concentrates assayed 1.05 opt
gold with 31% sulfide sulfur. Bio leach tests resulted in oxidation of 88% to
96% of the sulfide and extraction of 75% to 94% of the gold.
Seventeen individual target areas were selected for further work outside of the
Hollister deposit area in 1994. Many of these areas were chosen in light of
the Miocene gold mineralization model as reviewed above in concert with the
recently completed 1:24,000 scale property-wide compilation maps. Two core
holes (855 feet + 1,200 feet rotary pre-collars) and eleven rotary holes (7,725
feet) were drilled in five of these target areas. Of the remaining twelve
areas, recommendations were made to hold eleven and drop one.
At Hatter, two shallow angled core holes intersected the continuation of the
mineralized, north-south trending West Hatter Shear, but gold values were
restricted to narrow (5-10 foot) intervals of 0.010 to 0.024 opt gold within
broad zones (180 feet) grading 0.005 opt gold. No Phase 2 follow-up program
was recommended.
Phase I, reverse circulation drilling at Rimrock, SLM, Jackson and Silver Cloud
intersected only anomalous gold values. No follow-up drilling was undertaken.
CURRENT STATUS
In early 1995, Newmont completed an in-house pre-feasibility analysis of the
Hollister gold deposit and concluded that the Butte and Velvet deposits did not
meet Newmont's present size and investment criteria for near-term development.
22
<PAGE>
As a result of the above, on July 11, 1995, Newmont advised the Company of its
decision to withdraw from the Ivanhoe Venture. Upon notification by Newmont of
its decision to withdraw, the Company entered into an option agreement with
Newmont on the same date to acquire Newmont's interest in the Ivanhoe Property.
Thereafter, the Company entered into an agreement dated August 13, 1997 with
Great Basin Gold Inc. whereby Great Basin may earn up to a 75% interest in the
Ivanhoe Property by paying $1 million to Newmont (paid) as a contribution to
the reclamation fund, spending $2.8 million by August 12, 1999, on exploration
and related costs and by purchasing 1.1 million units in the capital stock of
Cornucopia Resources Ltd. for C $1.00 per unit (completed). The reclamation
fund consists of $4.5 million of which $3,000,000 has been contributed by
Newmont, $500,000 by the Company and $1,000,000 by Great Basin. Any eventual
reclamation costs incurred on the Ivanhoe Property greater than $4,500,000 will
be funded as to $500,000 each by Newmont, Great Basin and the Company. Further
overruns, if any, will be funded as to 75% by Newmont, 18.75% by Great Basin
and 6.25% by the Company. See Item 1 (m): "Reclamation Obligations".
In 1995, the joint venture's land claims were downsized to 510 claims which
include a substantial area around the Hollister deposit and the Hatter dome.
The property is in good standing and the leached out heaps continue to be
rinsed in the course of reclamation.
1997 ACTIVITIES
As operator of the Ivanhoe Joint Venture, Great Basin has identified two
primary exploration targets; the Hollister deposit and the Hatter intrusive
gold-bearing system. The 1997 exploration program commenced with an analysis
of all geological and geophysical data compiled by previous operators. This
has been used in conjunction with proven exploration techniques developed at
the nearby Rossi deposit of Meridian Gold Inc., where near-surface gold
mineralization was successfully traced to large bodies of high-grade
mineralization at depth.
Based on the model created by this analysis, an initial drill program was
commenced in October 1997, to test the Valmy Formation where Newmont had
encountered a high-grade intersection in 1994. The program consisted of six
core holes totaling 2,380 feet which were completed in February 1998. Assay
result highlights from 134.7 feet of selected whole core samples are tabulated
below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Gold Silver
Drill From To Intercept Intercept ---------------------------------------------------
Hole (feet) (feet) (feet) (metres) (oz./ton) (g/tonne) (oz./ton) (g/tonne)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IH-002 961.5 994.7 33.2 10.12 0.132 4.53 3.2 110
incl. 968.0 976.0 8.0 2.44 0.243 8.33 1.8 62
also 984.5 990.0 5.5 1.68 0.178 6.10 13.4 460
- ----------------------------------------------------------------------------------------------------------------------------------
IH-003 975.4 984.7 9.3 2.83 0.278 9.53 2.1 72
- ----------------------------------------------------------------------------------------------------------------------------------
IH-004 607.1 617.7 10.6 3.23 4.964 170.23 47.8 1639
incl. 613.1 617.7 4.6 1.40 11.130 381.69 103.4 3546
634.5 647.1 12.6 3.84 1.635 56.07 39.0 1337
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Careful core logging and detailed microscopic and microprobe analysis indicates
that the high grade gold-silver mineralization intersected in Valmy Formation
rocks in this initial drilling is similar to the recently discovered Ken Snyder
Mine located 15 miles northwest of Ivanhoe on the Midas Property, owned by
Franco-Nevada and Euro-Nevada Mining Corporations. The Valmy mineralization at
Ivanhoe and the Midas system are both characterized by coarse-gold as electrum
with locally abundant silver mineralization occurring as naumannite and
aguilarite within finely banded quartz veining.
Although significant near surface drill-indicated and inferred resources remain
in the Hollister area, current economic conditions, coupled with a change in
Company focus towards exploring for larger deep Carlin gold systems, caused
Newmont to initiate reclamation of the USX pit areas on June 1, 1996. Newmont
submitted a formal reclamation and closure plan in March 1997 to the State of
Nevada and the Bureau of Land Management. Newmont commenced more extensive
reclamation in the Spring of 1997. In view of the fact that reclamation has
begun, it is unlikely that the shallow gold resource at the Hollister deposit
will be mined.
23
<PAGE>
OTHER PROPERTY INTERESTS
The Company has interests in certain properties which are not considered to be
material to current operations. A brief summary of 1996 and 1997 activities on
each of these properties follows:
YAKOBI ISLAND PROPERTY
The Yakobi Island property is located approximately 70 miles west of Juneau in
the Sitka Recording District, at the northernmost end of the Alexander
Archipelago of Southeast Alaska. The property consisted of 39 unpatented
federal claims and 11 patented federal claims at Bohemia Basin. It also
includes a 1.95 acre Alaska Tidelands Lease which covers a 300-foot dock at the
Lower Camp access to Bohemia Basin. The Company held an undivided 100 percent
interest in certain patented and unpatented mineral claims on the Yakobi Island
property. In August 1997, all rental payments on the unpatented claims held by
the Company on this property were allowed to lapse. The Company intends to
hold its interest in the patented claims and maintain the tideland lease for
use of the dock at Bohemia Basin.
The property is without a known body of commercial ore and the Company's
activities on the property to date have been exploratory in nature.
SOUTH MONITOR PROPERTY
The South Monitor property, which consists of 147 unpatented mining claims, is
located in west-central Nevada between the Ellendale and Hannapah Mining
Districts at the southern end of the Monitor Range, Nye County. The property
is held by the Company, through its subsidiary Touchstone Resources Company,
and Gold Exploration General Partnership, whose general partner is Nassau Ltd.
Each partner holds a 50% interest in the property. The partners have elected
to farm the property out to larger exploration companies who have the resources
to fully explore the property's mineral potential.
The South Monitor property is without a known body of commercial ore and the
Company's activities on the property to date have been exploratory in nature.
RED MOUNTAIN PROPERTY
The Company acquired this property as a result of the amalgamation of
Cornucopia Resources Ltd. and Cyrano Resources Inc. in November 1985.
The Red Mountain property, situated approximately 13 miles from Silverton and
Ouray, Colorado, consisted of 48 patented mining claims and 51 unpatented lode
claims in Ouray and San Juan Counties in Southwestern Colorado. The Company
determined that it was not interested in retaining the property and executed a
quit-claim effective September 27, 1989, which reconveyed its interest in the
property to Frank W. Baumgartner and Sial Exploration Inc.
The Division of Minerals and Geology (previously the Colorado Mined Land
Reclamation Division) inspected the property in 1992 and 1993 and concluded
that a full release of funds in trust of $60,000 was dependent on further
evaluation of the revegetation on the property. In 1994, weather conditions
prohibited inspection by the authorities. Another inspection was performed
in 1995 when it was determined that further monitoring of vegetation was
required prior to full release of the reclamation bond. In 1996, the Company
received a release from Baumgartner for $50,000 of the funds held in trust.
No inspection was performed in 1997 and the $10,000 balance will be held in
trust by the Forestry Department until restoration of the land is considered
complete.
24
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
The Company is from time to time involved in various legal proceedings of a
character normally incidental to its business. The Company does not believe
adverse decisions in any pending or threatened proceeding, or any amounts which
it may be required to pay by reason thereof, will have a material adverse
effect on the financial condition of the Company.
Roberts & Schaefer, on December 8, 1997, recorded its notice of lien on the
Mineral Ridge property claiming for holdback, legal fees and interest.
Holdback of $599,512 remains outstanding and is recorded under accounts payable
and will be paid pending the resolution of a construction deficiency at the
mine facility, and as permitted by the cash flow of Mineral Ridge Resources
Inc.
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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
25
<PAGE>
CORNUCOPIA RESOURCES LTD.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Shares of the Registrant are listed and trade in Canada on the
Toronto Stock Exchange under the symbol "CNP" and are quoted in the United
States on The Nasdaq Stock Market's, SmallCap Market ("Nasdaq") under the
symbol "CNPGF". The high and low trade prices of the Registrant's Common
Shares as reported on the Toronto Stock Exchange for each quarter during the
past two years are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
High Low
Period (C $) (C $)
---------------------------------------------------------------------
<S> <C> <C> <C>
1996 First quarter 2.80 1.69
Second quarter 3.00 1.80
Third quarter 2.53 1.35
Fourth quarter 1.70 0.95
1997 First quarter 1.29 0.90
Second quarter 1.10 0.70
Third quarter 0.85 0.45
Fourth quarter 0.79 0.19
1998 First quarter (to March 26, 1998) 0.49 0.19
---------------------------------------------------------------------
</TABLE>
The following table sets forth, for the periods indicated, the high and low bid
prices of the Registrant's Common Shares as quoted on The Nasdaq SmallCap
Market:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
High Low
Period (US $) (US $)
---------------------------------------------------------------------
<S> <C> <C> <C>
1996 First quarter 2.09 1.15
Second quarter 2.16 1.25
Third quarter 1.81 1.00
Fourth quarter 1.28 0.66
1997 First quarter 0.94 0.62
Second quarter 0.81 0.50
Third quarter 0.59 0.31
Fourth quarter 0.56 0.16
1998 First quarter (to March 26, 1998) 0.38 0.13
---------------------------------------------------------------------
</TABLE>
The Nasdaq quotations above reflect inter-dealer prices, without retail mark-
up, mark-down or commission and may not represent actual transactions.
As at March 3, 1998, there were 2,113 registered shareholders of record holding
a total 38,663,540 Common Shares of the Company. To the best of the
Registrant's knowledge, as of March 3, 1998, there were 93 registered Canadian
shareholders, 6 international shareholders, and 2,014 shareholders resident in
the United States holding approximately 12,190,910, 74,124 and 26,398,506
shares respectively, which represented 31.53%, 0.19% and 68.28% respectively
of the Company's shares then outstanding.
There are no arrangements known to the Registrant which, at a date subsequent
to the date of this report, would result in a change of control of the
Registrant.
There are currently no limitations imposed by Canadian federal or provincial
laws on the rights of non-resident or foreign owners of Canadian securities to
hold or vote the securities held. There are no such limitations imposed by the
Registrant's Memorandum, Articles or contracts of which the management of the
Registrant is aware.
26
<PAGE>
There are no decrees or regulations in Canada or its several provinces that
restrict the import or export of capital, including, but not limited to foreign
exchange controls, or that affect the remittance of dividends or other payments
to holders of the Registrant's securities. Any such remittances to United
States residents, however, are subject to withholding tax.
TAX CONSIDERATIONS
The discussion under this heading summarizes the principal Canadian federal
income tax consequences of acquiring, holding and disposing of Common Shares of
the Registrant for a shareholder of the Registrant who is not resident in
Canada but is resident in the United States and who will acquire and hold
Common Shares of the Registrant and capital property for the purpose of the
Income Tax Act (Canada) (the "Tax Act"). This summary does not apply to a
shareholder who carries on business in Canada through a "permanent
establishment" situated in Canada or performs independent personal services in
Canada if the shareholder's holding in the Registrant is effectively connected
with such permanent establishment or fixed base. This summary is based on the
provisions of the Tax Act and the regulations thereunder and on counsel's
understanding of the administrative practices of Revenue Canada, and takes into
account all specific proposals to amend the Tax Act or regulations made by the
Minister of Finance of Canada to March 3, 1997. It has been assumed that there
will be no other relevant amendment of any governing law although no assurance
can be given in this respect. The existing tax treaty between the United
States and Canada essentially calls for taxation of shareholders by the
shareholder's country of residence. In those instances in which a tax may be
assessed by the other country, a corresponding credit against the tax owed in
the country of residence is generally available, subject to limitations. This
discussion is general only and is not a substitute for independent advice from
a shareholder's own Canadian and US tax advisor.
The provisions of the Tax Act are subject to income tax treaties to which
Canada is a party, including the Canada-United States Income Tax Convention
(1980) (the "Convention").
DIVIDENDS
The Registrant has not, since the date of its amalgamation, declared or paid
any dividends on its Common Shares and currently intends to utilize all of its
funds to finance its mineral exploration and development activities and for the
acquisition of capital assets relating to its business. It does not foresee
paying any dividends on its Common Shares in the near future.
Under the Tax Act, a nonresident of Canada is generally subject to Canadian
withholding tax at the rate of 25% on dividends paid or deemed to have been
paid to him by a corporation resident in Canada. The Convention limits the
rate to 15% if the shareholder is resident in the United States and the
dividends are beneficially owned by and paid to him, and to 6% for 1996 and to
5% for 1997 and thereafter if the shareholder is also a corporation that
beneficially owns at least 10% of the voting stock of the payor corporation.
The Convention generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to
an organization constituted and operated exclusively to administer a pension,
retirement or employee benefit fund or plan, if the organization is resident in
the United States and is exempt from income tax under the laws of the United
States.
SALES OF UNREGISTERED SECURITIES
(i) Pursuant to subscription agreements and an Agency Agreement dated
December 6, 1994, the Registrant issued and sold 4,000,000 Special
Warrants at a price of $1.25 per Special Warrant for gross proceeds of
$5,000,000. Each Special Warrant entitled the holder to receive one
Common Share and one share purchase warrant at no additional cost. The
Special Warrants were exercised in 1995 and the equivalent number of
Common Shares issued. At December 31, 1995, there were 4,050,000 share
purchase warrants outstanding. During the year ended December 31, 1996,
there were 1,595,700 Common Shares issued at $1.40 from the exercise of
3,393,400 share purchase warrants. The balance of the share purchase
warrants related to this issue expired on December 6, 1996.
(ii) On March 5, 1996, the Registrant issued 900,000 units by way of a
private placement at a price of C $2.00 per unit, for which the
Registrant paid an agents commission of 5%. Each unit consists of one
Common Share and one two year share purchase warrant exercisable at a
price of C $2.30 during the first twelve months after closing and
C $2.65 thereafter. At December 31, 1997, there were 900,000
share purchase warrants outstanding from this issue. These share
purchase warrants expired on March 4, 1998.
(iii) Pursuant to subscription agreements and an Agency Agreement dated May
15, 1996, the Registrant issued and sold 6,050,000 Special Warrants at a
price of C $2.00 per Special Warrant for gross proceeds of
C $12,100,000. Each Special Warrant entitled the holder to receive one
Common Share and one share purchase warrant at no additional cost.
27
<PAGE>
Two full share purchase warrants entitled the holder to purchase one
Common Share of the Registrant at a price of C $2.75 per Common Share at
any time prior to May 15, 1998.
In addition the underwriters were paid a fee of C $847,000 and issued an
aggregate 605,000 Broker's warrants. Each Broker's warrant is
exercisable at C $2.33 for two years into a unit comprised of one Common
Share and one-half of a share purchase warrant having the same terms as
the Special Warrants described above.
This issue of shares on exercises of share purchase warrants was subject
to shareholder approval which was granted at an extraordinary meeting of
the shareholders held on June 28, 1996.
The Special Warrants were exercised on September 16, 1996 with the
receipts being received for the final prospectus and the equivalent
number of Common Shares issued. As at December 31, 1997, there are
3,932,500 share purchase warrants, including 907,500 Broker's warrants,
outstanding from this financing.
(iv) On November 14, 1996, pursuant to the terms of a Special Warrant
Indenture made as of the same date, the Registrant issued 2,180,000
Special Warrants at a price of C $1.20 each for gross proceeds of
C $2,616,000.
Each Special Warrant is exchangeable for one unit comprised of 1.1
Common Share, in aggregate 2,398,000 Common Shares, and 0.55 of one
share purchase warrant. Each full share purchase warrant will entitle
the holder to purchase one additional Common Share at a price of C $1.50
to May 15, 1998.
As consideration for services rendered, the underwriters were paid a fee
of C $183,120 and issued an aggregate of 218,000 Broker's Warrants.
Each Brokers' Warrant is exercisable for one Compensation Option. Each
Compensation Option entitles the holder to acquire one Common Share of
the Registrant and one-half of one Common Share purchase warrant
("Underwriters' Warrant") at a price of C $1.30 to September 16, 1998.
Each Underwriters Warrant entitles the holder to acquire one Common
Share at a price of C $1.50 per share to May 15, 1998.
On March 5, 1997, the net proceeds of C $2,432,880, from the issue and
sale of the Special Warrants, were released from escrow with all
receipts being received for a final prospectus. As at December 31,
1997, there were 1,199,000 share purchase warrants outstanding from this
financing.
(v) On March 12, 1997, the Registrant announced a private placement of 1.1
million Special Warrants with one investor at a subscription price
of C $1.00 per Special Warrant, for a total of C $1.1 million. Each
Special Warrant will be exchangeable for one Unit, comprised of one
Common Share and one share purchase warrant. Each Special Warrant will
entitle the holder to purchase one additional Common Share at a price
of C $1.25 during the twelve months after closing, expiring on March
26, 1998.
The full amount of the subscription funds for this private placement
were released to the Registrant upon issue of the Special Warrants. The
Registrant obtained receipts from the regulatory authorities for the
final prospectus on July 24, 1997, and subsequently issued 1,100,000
Common Shares and share purchase warrants. As at December 31, 1997,
there were 1,100,000 share purchase warrants outstanding from this
financing.
(vi) On January 17, 1997, the Registrant entered into a loan agreement with a
financial institution 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.
The bank was given warrants to purchase 1,500,000 Common Shares as part
of the consideration for providing the loan and warrants to purchase
250,000 shares in consideration for establishing a letter of credit in
the amount of $1.1 million to facilitate construction of power lines and
ancillary electrical distribution equipment at the mine site. The
warrants are exercisable at C $1.35 per share at any time until December
31, 2000. As at December 31, 1997, no warrants have been exercised from
this issue.
UNITED STATES EXEMPTIONS
All of the distributions referred to above were made to either non-United
States residents outside the United States in reliance with Regulation S or to
qualified institutional investors in the United States in reliance to Rule 144.
28
<PAGE>
DISPOSITION OF COMMON SHARES
Under the Tax Act, a taxpayer's capital gain or capital loss from a disposition
of a Common Share of the Registrant is the amount, if any, by which his
proceeds of disposition exceed (or are exceeded by, respectively) the aggregate
of his adjusted cost base of the share and reasonable expenses of disposition.
Three-quarters of a capital gain (the "taxable capital gain") is included in
income, and three-quarters of a capital loss in a year (the "allowable capital
loss") is deductible from taxable capital gains realized in the same year. The
amount by which a shareholder's allowable capital loss exceeds the taxable
capital gain in a year may be deducted from a taxable capital gain realized by
the shareholder in the three previous or any subsequent year, subject to
certain restrictions in the case of a corporate shareholder and subject to
adjustment when the capital gains inclusion rate in the year of disposition
differs from the inclusion rate in the year the deduction is claimed.
If a Common Share of the Registrant is disposed of to the Registrant other than
in the open market in the manner in which shares would normally be purchased by
the public, the proceeds of disposition will, in general terms, be considered
as limited to the paid-up capital of the share and the balance of the price
paid will be deemed to be a dividend. In the case of a shareholder that is a
corporation, the amount of any capital loss otherwise determined may be
reduced, in certain circumstances, by the amount of dividends previously
received in respect of the shares disposed of, unless the corporation owned the
shares for at least 365 days prior to sustaining the loss and (together with
corporations, persons and other entities, with whom the corporation was not
dealing at arm's length) did not own more than 5% of the shares of any class of
the corporation from which the dividend was received. These loss limitation
rules may also apply where a corporation is a member of a partnership or a
beneficiary of a trust that owned the shares disposed of.
Under the Tax Act, a nonresident of Canada is subject to Canadian tax on
taxable capital gains and may deduct allowable capital losses, realized on a
disposition of "taxable Canadian property". Common Shares of the Registrant
will constitute taxable Canadian property of a shareholder at a particular time
if the shareholder used the shares in carrying on business in Canada, or if at
any time in the five years immediately preceding the disposition 25% or more of
the issued shares of any class or series in the capital stock of the Registrant
belonged to one or more persons with whom the shareholder did not deal at arm's
length and in certain other circumstances.
The Convention relieves United States residents from liability for Canadian tax
on capital gains derived on a disposition of shares unless:
a) The value of the shares is derived principally from "real property" in
Canada, including the right to explore for or exploit natural resources
and rights to amounts computed by reference to production,
b) The shareholder was resident in Canada for 120 months during the period of
20 consecutive years, preceding, and at any time during the 10 years
immediately preceding, the disposition and the shares were owned by him
when he ceased to be resident in Canada, or
c) The shares formed part of the business property of a "permanent
establishment" that the holder has or had in Canada within the 12 months
preceding the disposition.
UNITED STATES TAX CONSIDERATIONS
UNITED STATES SHAREHOLDERS ("US HOLDERS")
As used herein, a "US Holder" includes a holder of Common Shares who is a
citizen or resident of the United States, a corporation created or organized in
or under the laws of the United States or of any political subdivision thereof
and any other person or entity whose ownership of Common Shares is effectively
connected with the conduct of a trade or business in the United States. A US
Holder does not include persons subject to special provisions of federal income
tax law, such as tax-exempt organizations, qualified retirement plans,
financial institutions, insurance companies, real estate investment trusts,
regulated investment companies, broker-dealers, nonresident alien individuals
or foreign corporations whose ownership of Common Shares is not effectively
connected with the conduct of a trade or business in the United States and
shareholders who acquired their stock through the exercise of employee stock
options or otherwise as compensation.
29
<PAGE>
PASSIVE FOREIGN INVESTMENT COMPANY RULES
For United States federal income tax purposes, a foreign corporation will be
treated as a passive foreign investment company (a "PFIC") if 75% or more of
its gross income constitutes passive income or if 50% or more of its assets
produce passive income or are held for the production of passive income. A US
Holder will be deemed to hold shares of a PFIC if he holds shares in a foreign
corporation and at any time during the holding period of the shareholder the
foreign corporation constituted a PFIC under the above definition.
Generally, a US Holder of PFIC shares is subject to a special addition to tax
and interest charge with respect to certain dispositions of and "excess
distributions" with respect to shares of stock of a PCIF. (An excess
distribution is defined as the amount of distributions received by a
shareholder in a year with respect to stock in a PFIC which exceeds 125% of the
average amount of the distributions to such shareholder during the three years
prior to the year of the distribution.) This addition to tax is determined by
allocating the amount of the gain on disposition or excess distribution to each
day during the holding period of the shareholder of such stock. The amount of
the gain or excess distribution which is allocated to taxable years after 1986
and prior to the present year is deemed to generate an additional tax (computed
at the highest rate of federal income tax applicable to such shareholder in
such year) and an interest charge, calculated at the statutory rate applicable
to underpayments of federal income taxes.
Because the Company may have been a PFIC for its fiscal year ending December
31, 1993, and may have been a PFIC for some of its fiscal years ending before
that date, each US shareholder of the Company should consult a tax advisor with
respect to how the PFIC rules may affect such shareholder's tax situation. In
particular, a US shareholder should determine whether such shareholder should
elect to have the Company be treated as a Qualified Electing Fund in the event
the Company is a PFIC. This might avoid adverse US federal income tax
consequences that may otherwise result from the Company should it be treated as
a PFIC.
DISTRIBUTIONS ON COMMON SHARES
US Holders receiving dividend distributions (including constructive dividends)
with respect to the Registrant's Common Shares are required to include in gross
income for the United States federal income tax purposes the gross amount of
such distribution to the extent that the Registrant has current or accumulated
earnings and profits, without reduction for any Canadian income tax withheld
from such distributions. Such Canadian tax withheld (see above) may be
credited, subject to certain limitations, against the US Holder's United States
federal income tax liability or, alternatively, may be deducted in computing
the US Holder's United States federal income tax by those who itemize
deductions. (See more detailed discussion at "Foreign Tax Credit" Below). To
the extent that distributions by the Registrant exceed current or accumulated
earnings and profits of the Registrant, they will be treated first as a return
of capital up to the US Holder's adjusted basis in the Common Shares and
thereafter as gain from the sale or exchange of such shares. Preferential tax
rates for long-term capital gains are applicable to a US Holder which is an
individual, estate or trust. There are currently no preferential tax rates for
long-term capital gains for a US Holder which is a corporation.
Dividends paid on the Registrant's Common Shares will not generally be eligible
for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations. A US Holder which is a
corporation may, under certain circumstances, be entitled to a 70% deduction of
the United States source portion of dividends received from the Registrant if
such US Holder owns shares representing at least 10% of the voting power and
value of the Registrant. The availability of this deduction is subject to
several complex limitations which are beyond the scope of this discussion.
FOREIGN TAX CREDIT
A US Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of the Registrant's Common Share may be entitled,
at the option of the US Holder, to either a deduction or a tax credit for such
foreign tax paid of withheld. There are extremely complex rules and
limitations which apply to the credit and deduction. The availability of the
foreign tax credit or a deduction for foreign taxes and the application of the
limitations on the credit to a specific taxpayer will be determined based on
the specific circumstances of such shareholder. Accordingly, holders and
prospective holders of Common Shares should consult their own tax advisors
regarding their individual circumstances.
The foregoing discussion is based upon the sections of the Code, Treasury
Regulations, published Internal Revenue Service rulings, published
administrative positions of the Internal Revenue Service and court decisions
that are currently applicable, any or all of which could be materially
adversely changed, possibly on a retroactive basis, at any time. In addition,
this discussion does not consider the potential effects, both adverse and
beneficial, of proposed legislation which, if enacted, could be applied,
possibly on a retroactive basis, at any time. The foregoing discussion is for
general information only and is not intended to be, nor should it be construed
to be, legal or tax advise to any holder or prospective holder of the
Registrant's
30
<PAGE>
Common Shares, and no opinion or representation with respect to the United
States federal income tax consequences to any such prospective holders of the
Registrant's Common Shares should consult their own tax advisors about the
federal, state, local and foreign tax consequences of purchasing, owning and
disposing of Common Shares of the Registrant.
SHARE CAPITAL AND STOCK INCENTIVE PLAN
The Registrant's Common Shares authorized, issued and outstanding and the
Registrant's Stock Incentive Plan are described in the Notes to Financial
Statements under note 7.
ANTI-TAKE OVER PROVISIONS OF ARTICLES
The overall effect of the Registrant's Articles may be to render more difficult
or discourage the accomplishment of mergers, tender offers and forms of
business combinations, reorganizations and sales of assets, as well as to
discourage the assumption of control of the Registrant by a principal
shareholder.
In August 1992, and amended in July 1996, the Registrant adopted a Shareholder
Protection Rights Agreement (the "Plan") to protect the Company from unfair,
abusive or coercive takeover strategies. The Rights issued to shareholders
under the Plan will entitle the holder upon the occurrence of certain
triggering events (including the acquisition of 10% or more of the Common
Shares of the Registrant in a transaction not approved by the Registrant Board)
to acquire additional equity interest in the Registrant at a 50% discount to
the market. However, the Rights are not triggered by a "Permitted Bid" which
is a bid that is made to all shareholders for all of their Common Shares in
accordance with relevant securities legislation and other reasonable
conditions, provided that a majority of the Common Shares held by independent
shareholders are deposited in acceptance of such a bid.
The Plan is designed to prevent creeping takeovers and other coercive
acquisition tactics. The Plan's Permitted Bid provision allows bidders to take
bids directly to all of the shareholders without the cooperation of the
Registrant Board. The Plan thus preserves the shareholders' right to consider
such bids on a fully-informed basis. The Plan is not intended to deter fair
offers for the Common Shares of the Registrant. The Plan also does not impose
indebtedness or other burdens upon the Registrant's operations, and does not
impair the Registrant Board's continuing efforts to enhance shareholder value.
The Registrant was not aware of any pending or threatening takeover bids for
the Company on implementation of the Plan. A copy of the Shareholder
Protection Plan was filed as an exhibit to the Registrant's Form 6-K dated
June 30, 1992.
31
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial information has been derived from the
consolidated financial statements of the Company for the periods indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues -- $ 115,096 $ 315,144 $ 263,457 $ 918,904
Gross profit (loss) from operations 19,433 (78,269) (19,749) 40,724 163,079
Interest and other income 51,705 460,093 280,914 204,652 216,225
Abandonment & write down of
Resource Assets 16,000,000 1,026,325 701,006 164,158 534,328
Income (loss) (18,464,625) (2,610,635) (2,640,663) (1,924,518) (864,212)
Income (loss) per share (0.49) (0.09) (0.11) (0.09) (0.04)
Weighted average number of Common 37,514,204 30,287,082 24,847,263 21,400,555 20,685,637
Shares outstanding
BALANCE SHEET AND OTHER DATA
(AT PERIOD END)
Total assets 18,357,596 24,615,551 11,561,496 13,369,024 9,417,968
Working capital (13,970,445) (263,587) 1,015,931 6,349,434 5,867,622
Provision for site restoration 172,908 -- 500,000 475,000 475,000
Capital Lease Obligations 42,436 95,830 109,866 -- --
Shareholders' Equity 2,588,145 20,297,412 9,420,622 7,043,872 8,774,908
Increase (decrease) in cash (2,873,581) 2,609,716 (5,387,816) 1,514,894 (2,232,603)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
There have been no changes in accounting methods over the five year period.
The Company uses the United States dollar as its reporting currency.
Monetary assets and liabilities are translated at the exchange rate in effect
at the balance sheet date and non-monetary assets and liabilities at the rate
in effect on the dates of the related transactions. Revenue and expenses are
translated at rates approximating exchange rates in effect at the time of
transactions. See Item 1 - (p) "Currency and Conversion".
32
<PAGE>
ITEM 7: 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 years ended December 31, 1997, 1996, and 1995, 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 8 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.
Construction at the Mineral Ridge heap leach gold mine in Nevada began in
1996, and mechanical completion was reached May 31, 1997. The first ore was
fed into the crusher in early May 1997, and gold production began in June
1997. The mine has not met tests that qualify the project as being in full
commercial production. Net smelter revenues (including the gain from closing
forward gold sales contracts) continue to be recorded as an offset to capital
expenditures and operating costs continue to be recorded as capital
expenditures.
During the fourth quarter the Company conducted a review of the Mineral Ridge
operations which resulted in the suspension of mining and crushing operations
effective November 17, 1997, due the decline in spot gold prices and an
unforeseen reduction in water supply to the heaps. Leach and process plant
operations continue and gold continues to be recovered and sold at previously
hedged prices. The return towards full production is dependent upon a number
of factors, including those discussed under 'Liquidity and Capital Resources'.
As at December 31, 1997, the Registrant owned 14.6% of the outstanding common
shares of Carlin Resources Corp. ("Carlin Resources"), a Vancouver Stock
Exchange listed company, which has operations and mineral property interests
in the Republic of Ghana, Burkina Faso and Niger, West Africa. To September
20, 1996, through voting interests and common management, the Company had
been able to exercise effective control of Carlin Resources and, accordingly,
its accounts were consolidated in the Company's consolidated financial
statements. From September 20, 1996, to April 30, 1997, the accounts of
Carlin Resources were accounted for by the equity method. Subsequently the
cost method was used to account for the investment.
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 75% interest by spending $2.8
million 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 Registrant 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.
Due to the operating losses of the Company or the availability of loss carry
forwards, there were no provisions for income taxes recorded in the
consolidated financial statements for the years ended December 31, 1997,
1996, and 1995.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
REVENUES
Net smelter revenues totaling $7.6 million from the Mineral Ridge Mine, for
shipments beginning in June 1997, through December 1997, continue to be
recorded as an offset to capital expenditures until full commercial
production status is attained.
Revenues from sales of gold from residual heap leaching on the Ivanhoe
Venture with Newmont Exploration Ltd., the Company's former venture partner,
decreased to nil in 1997, from $0.1 million in 1996. Revenues from interest
and other income were $0.1 million in 1997 and $0.5 million in 1996. In
1997, excess cash balances were lower and the portion of interest income
relating to the Mineral Ridge project was capitalized against financing costs.
33
<PAGE>
EXPENSES
General and administrative expenses decreased to $2.0 million in 1997 from
$2.8 million in 1996. The decrease was principally due to lower costs
associated with shareholder and investor relations activities and the
elimination of general and administrative expenses associated with Carlin
Resources.
The completion of five financings by Carlin Resources in 1996, in which the
Registrant did not participate, reduced the Registrant's interest to 34% at
December 31, 1996. This resulted in a gain of $0.6 million on the partial
disposal of the investment. There were no such financings in 1997.
In 1997, the Company recorded a loss of $0.5 million from the write off of
its investment in Carlin Resources.
The Company has recorded a write down of $16.0 million against the Mineral
Ridge Mine. An undiscounted cash flow analysis of the Mineral Ridge Mine was
performed using spot gold price assumptions of $325.00 for the year 1998,
$350.00 for the year 1999 and $360.00 for years 2000 and beyond (see notes 5
& 8 to the consolidated financial statements). In 1996, the Company had
total abandonment and write down expenses of $1.0 million including $0.6
million for the Tenke-Fungurume Concession in Zaire and $0.3 million for the
Yakobi Island property in Alaska.
With the application of equity accounting to April 30, 1997, the Company's
share of the loss reported by Carlin Resources was $0.1 million for the year
ended December 31, 1997, and the same amount for the year ended December 31,
1996. In 1996, expenses were offset by a credit of $0.3 million relating to
the Company's non-controlling interest in Carlin Resources compared to nil in
1997.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
REVENUES
In the year ended December 31, 1996, revenues from operations were $0.1
million compared to $0.3 in 1995. The change was due to an expected decrease
in residual heap leaching on the Ivanhoe Property in which the Company had a
25% interest. Interest and other income increased by $0.2 million to $0.5
million, primarily due to higher average cash balances from two Special
Warrants issues.
EXPENSES
The decrease in production costs of the joint venture to rinse the leach
pads to $0.2 million in 1996 from $0.3 million in 1995 was due to a decision
to begin reclamation in June 1996. An increase in general and administrative
costs of $0.3 million related to head office expenses as a result of
increased activity in the Company, additional employees, as well as
negotiations and ongoing reviews related to acquisition of interests in
producing and exploration properties. The expenses were offset by a gain of
$0.6 million from the partial disposition of the Company's interest in Carlin
Resources from 51% at year end December 31, 1995 to 34% as at the period
ended December 31, 1996. In addition, the Company had total abandonment and
write down expenses of $1.0 million, an increase of $0.3 million over 1995.
The 1996 write downs include $0.6 million for the application for
Tenke-Fungurume Concession in Zaire and $0.3 million for the Yakobi Island
property in Alaska. The 1995 write down of $0.5 million relates to the
proposed acquisition of Addwest Minerals, Inc. which was terminated during
the quarter ended September 1995.
LOSS PER COMMON SHARE
The net loss for the year ended December 31, 1997, was $18.5 million of which
$16.0 million was attributable to the write down of Mineral Ridge Mine
assets. The net loss for the year 1996 of $2.6 million was the same as that
in 1995.
The weighted average number of Common Shares for the year ended December 31,
1997, was 37.5 million which translates to a loss of $0.49 per share. The
weighted average number of Common Shares for the year 1996 was 30.3 million
versus 24.8 million for the same period in 1995, and the loss per share was
$0.09 and $0.11 respectively.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
There was a working capital deficiency of $14.0 million at December 31, 1997,
compared to a working capital deficiency of $0.3 million as at December 31,
1996.
34
<PAGE>
Cash and cash equivalents decreased by a net amount of $2.9 million in the
year ended December 31, 1997. Principal uses of cash were to fund net
capital expenditures on resource assets at the Mineral Ridge property of
$13.8 million and for $4.0 million in cash used in operations, primarily
general and administrative expenses. These expenditures were financed by
proceeds from the Mine Debt Financing Facility of $13.2 million, net proceeds
from special warrants issued of $0.8 million and net proceeds from the
disposition of 2.1 million shares of Carlin Resources of $0.9 million.
The working capital deficiency has forced the Company to delay payment to its
mining contractor for invoices totaling $0.7 million for work performed.
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.
Holdback of $0.6 million remains outstanding and is recorded in accounts
payable and will be paid pending the resolution of a construction deficiency
at the mine facility and as permitted by the cash flow of Mineral Ridge
Resources Inc.
To improve liquidity, remove the above encumbrances and to enable necessary
expenditures of capital at Mineral Ridge property, discussions are underway
with third parties to obtain additional financing to strengthen the financial
position of the Company. No assurances can be given that the Company will be
successful in these endeavors.
MINERAL RIDGE MINE
Production began in late June 1997, which was two months later than expected
due to weather related delays in completing the leach pad. Preproduction
shipments of 13,951 ounces were made which together with hedge gains on
contracts for 16,000 ounces of gold accounted for revenue of $5.3 million.
The realization of a portion of the equity in future contracts of 56,000
ounces of gold accounted for a further $2.3 million of revenue.
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.
Mechanical completion of the project was achieved on May 29, 1997, and the
first gold poured in late June. Additions to resource assets at the Mineral
Ridge Mine site during the year ended December 31, 1997, totaled $13.8
million which was due primarily to: $17.1 million in deferred construction
costs, $2.7 million in ore stockpiled and $1.3 million in debt financing
costs offset by precommercial net smelter revenue of $7.6 million. This
brings the total cost to $30.8 million for the project to date compared to
the $25.4 million construction budget. The construction budget consisted of
$30.2 million in project development and construction offset by $4.8 million
in pre-commercial production gold revenue.
The Mineral Ridge Mine was previously expected to reach commercial production
by October 1, 1997. During the fourth quarter of 1997, the Company conducted
a review of the Mineral Ridge operations which resulted in the suspension of
mining operations due to the decline in spot gold prices and an unforeseen
reduction in water supply to the heaps. During the suspension, leach
operations will be ongoing and gold will continue to be recovered and sold.
The Company has recorded a write down of $16.0 million, as at December 31,
1997, against the Mineral Ridge Mine.
Crushing of the existing mine stockpile of approximately 100,000 tons was
initiated in early 1998. Lifting the suspension of mining operations and
making the capital expenditures to bring the mine into full commercial
production are critical to enable the mine to contribute positive cash flows
by the fourth quarter of 1998. Achieving full commercial production will
require the resolution of accounts owing to the two lien claimants, and the
cooperation of Dresdner Kleinwort Benson. Furthermore, in order to source
sufficient funds to make necessary capital expenditures, a business
combination with a suitable partner will have to be completed in the current
fiscal year. 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.
35
<PAGE>
Outstanding principle bears interest at 2.5% (on pre-completion amounts) and
2.0% (on post completion amounts) above (i) LIBOR for US dollar drawings and
(ii) LIBOR minus GOFO for gold drawings. Repayments were scheduled to
commence September 30, 1997, in quarterly installments, to maturity on
December 31, 2001.
The bank was given warrants to purchase 1,500,000 Common Shares as part of
the consideration for providing the loan and warrants to purchase 250,000
shares in consideration for establishing a letter of credit in the amount of
$1.1 million to facilitate construction of power lines and ancillary
electrical distribution equipment at the mine site. The warrants are
exercisable at C $1.35 per share at any time until December 31, 2000.
As of December 31, 1997, the Mineral Ridge Mine was not in compliance with
certain covenants. Discussions to date have resulted in the bank deferring
the principal payment of $1,500,000 which was originally scheduled on
September 30, 1997, deferring the principal payment of $1,500,000 which was
due on December 31, 1997 as well as other concessions.
In March 1998, the Company entered into discussions with the bank to provide
a standstill agreement designating a period of time whereby the bank would
not seek remedies provided in the Mine Debt Financing Facility triggered by
various events of default and whereby the bank would agree not to seek
enforcement of such remedies. As at March 26, 1998, the Company had not
received the completed agreement.
PRIVATE PLACEMENT - MARCH 5, 1996
In 1996, the Registrant issued 900,000 units at C $2.00 per unit by way of
private placement and paid an agent's commission of 5%. At December 31,
1997, 450,000 of the share purchase warrants from this issue remained
outstanding. The share purchase warrants from this issue expired on March 4,
1998.
PRIVATE PLACEMENT - MAY 15, 1996
Pursuant to subscription and agency agreements, in May 1996, the Registrant
issued 6.1 million special warrants at a price of C $2.00 per special warrant
for gross proceeds of C $12.1 million. In addition, the underwriters were
paid a fee of C $0.8 million and issued an aggregate of 605,000 broker's
warrants. As at December 31, 1997, there were 3,932,500 share purchase
warrants, including 907,500 broker's warrants, outstanding from this
financing which expire on May 15, 1998.
PRIVATE PLACEMENT - NOVEMBER 14, 1996
Pursuant to subscription and agency agreements, the Registrant issued
2,180,000 special warrants at a price of C $1.20 each for gross proceeds of
C $2.5 million. As consideration for services rendered, the underwriters
were paid a fee of C $0.2 million and issued an aggregate of 218,000 broker's
warrants. Each share purchase warrant entitles the holder to purchase one
additional Common Share at a price of C $1.50 to May 15, 1998. As at December
31, 1997, there were 1,199,000 share purchase warrants outstanding. On March
5, 1997, the net proceeds from this issue were released from escrow when all
receipts for the final prospectus were received from the exchanges.
PRIVATE PLACEMENT - MARCH 26, 1997
On March 26, 1997, a private placement of 1,100,000 special warrants at
C $1.00 was made with each special warrant exchangeable for one unit,
comprised of one Common Share and one Common Share purchase warrant. Each
special warrant will entitle the holder to purchase one additional Common
Share at C $1.25 for one year. On July 24, 1997, all receipts for the final
prospectus were received from the exchanges and the shares and purchase
warrants were issued. No additional proceeds were received from the issue of
the underlying shares and warrants. The share purchase warrants relating to
this issue expired on March 26, 1998.
DISPOSITION OF CARLIN RESOURCES SHARES
Effective April 29, 1997, the Registrant sold 2,100,000 shares of Carlin
Resources, for net proceeds of C $0.59 per share and appointed an agent to
sell the balance of the 1,535,639 common shares of Carlin Resources held by
the Registrant, for net proceeds to the Registrant of C $0.65 per share until
October 31, 1997, and C $0.95 per share until April 30, 1998. As at December
31, 1997 the Registrant held 1,561,139 shares of Carlin Resources and the
carrying value of the investment has been reduced to nil.
As a result of the above-noted transactions, as at December 31, 1997, the
Registrant held 14.6% of the outstanding common shares of Carlin Resources.
36
<PAGE>
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.
CONTRACTS
On August 20, 1996, the Company entered into a contract with Roberts &
Schaefer Company for the construction of certain facilities and plant at the
Mineral Ridge Mine. The total contract price is fixed at $12.4 million
payable in installments for the portion of the work completed each month over
the estimated six month construction period.
On January 21, 1997, the Company entered into a contract with D. H. Blattner
& Sons, Inc. for open-pit mining over the life-of-mine estimated at six
years. The contract price is based on performance of work. The unit prices
and hourly rates remain constant through to December 31, 1997, and for
ensuing years of the contract is subject to an escalation provision which
must be approved by the Company.
The Company entered into a refining agreement with Handy and Harman Refining
Group, Inc. on March 11, 1997, to further refine the Mineral Ridge Mine dore
bars in the form of unallocated 0.995 London Metal for gold, or better, and
unallocated 0.999 London Metal for silver, recognized as marketable on world
markets. Under the terms of this agreement, the dore is toll refined and the
refined gold and refined silver are returned to the Company's account for
sale to third parties.
On July 11, 1997, Mineral Ridge Resources, Inc. entered into an agreement
with Sierra Pacific Power Company to provide electric power to the Mineral
Ridge Mine in Esmeralda County, Nevada throughout the life of the project.
The agreement establishes certain long term prices for current and future
capacity.
On October 29, 1997, the Registrant and First Dynasty Mines Ltd. jointly
announced that the agreement previously reached, wherein the Registrant
would issue Common Shares to acquire First Dynasty's subsidiary, New
Millennium Mining Ltd., was terminated. Had this agreement closed, First
Dynasty would have acquired a 54% interest in the Registrant. The agreement
was canceled after both companies completed their due diligence
investigations and concluded that the transaction did not satisfy enough of
their respective objectives.
LEGAL
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 of $599,512 remains outstanding and is recorded under accounts
payable and will be paid pending the resolution of a construction deficiency
at the mine facility, and as permitted by the cash flow of Mineral Ridge
Resources Inc.
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.
RISKS AND UNCERTAINTIES
The Company is obliged to repay $4.4 million to the bank over the next year
pursuant to the terms of its financing facility. The Company's ability to
make these payments is contingent upon gold prices and the achievement of
commercial production after the leach pad problems are resolved. Additionally
$8.8 million of the financing facility has been classified as a current
liability as the Company is not in compliance with debt covenants.
The mining industry is capital intensive and there can be no certainty that
the Company's cash balances or the proceeds from any future sales of its
Common Shares will provide sufficient funds for all of the Company's
requirements. Should the need arise, the Company may 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 favorable.
The Company has no unused banking commitments or lines of credit which could
provide significant increases in its working capital.
37
<PAGE>
YEAR 2000 COMPUTER RISK
The Company uses current or near current versions of software by major
developers for office productivity, accounting, internet and database
applications. Published statements by these software developers have been
obtained assuring that these programs are year 2000 compliant and management
believes that the risk associated with these internal programs is low.
Operationally, the Company uses two software programs for crusher operation
and for mine modeling and planning. These programs are not date sensitive,
however, the vendors have been contacted directly for confirmation of year
2000 compliance.
INFLATION AND PRICE CHANGES
Inflation is not expected to have a material impact on the Company beyond the
general impact on all businesses, such as higher costs of materials, services
and wages.
Inflation could affect both future costs and the price the Company will
realize from the sale of future gold production.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company as at December 31, 1997,
and the report of independent Chartered Accountants are included in this
report as follows:
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(i) Report of Independent Chartered Accountants for the years ended
December 31, 1995, December 31, 1996, and December 31, 1997. 39
(ii) Consolidated Balance Sheets as at December 31, 1996, and
December 31, 1997. 40
(iii) Consolidated Statements of Loss and Deficit for the years
ended December 31, 1995, December 31, 1996, and
December 31, 1997. 41
(iv) Consolidated Statements of Changes in Financial Position for
the years ended December 31, 1995, December 31, 1996, and
December 31, 1997. 42
(v) Notes to the Consolidated Financial Statements for the years ended
December 31, 1995, December 31, 1996, and December 31, 1997. 43-54
</TABLE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's auditor is KPMG, Chartered Accountants of 777 Dunsmuir Street,
Vancouver, British Columbia, V7Y 1K3.
The Company has no disagreements on accounting or financial disclosure
matters with its accountants.
38
<PAGE>
AUDITORS' REPORT
TO THE SHAREHOLDERS
CORNUCOPIA RESOURCES LTD.
We have audited the consolidated balance sheets of Cornucopia Resources Ltd.
as at December 31, 1997, and 1996 and the consolidated statements of loss and
deficit and changes in financial position for each of the years in the three
year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December
31, 1997, and 1996 and the results of its operations and changes in its
financial position for each of the years in the three year period ended
December 31, 1997, in accordance with generally accepted accounting
principles in Canada. As required by the Company Act (British Columbia) we
report that, in our opinion, these principles have been applied on a
consistent basis.
Significant differences between Canadian and United States generally accepted
accounting principles are quantified and explained in note 8 to the financial
statements.
(SIGNED) "KPMG"
Chartered Accountants
Vancouver, Canada
February 27, 1998, except as to note 13(b) which is as of March 3, 1998, note
12(a) which is as of March 6, 1998 and note 13(c) which is as of March 12,
1998.
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
consolidated financial statements are affected by conditions and events that
cast substantial doubt on the company's ability to continue as a going
concern, such as those described in note 1 to the consolidated financial
statements. Our report to the shareholders dated February 27, 1998, except as
to note 13(b) which is as of March 3, 1998, note 12(a) which is as of March
6, 1998 and note 13(c) which is as of March 12, 1998, is expressed in
accordance with Canadian reporting standards which do not permit a reference
to such events and conditions in the auditors report when these are
adequately disclosed in the financial statements.
(SIGNED) "KPMG"
Chartered Accountants
Vancouver, Canada
February 27, 1998, except as to note 13(b) which is as of March 3, 1998, note
12(a) which is as of March 6, 1998 and note 13(c) which is as of March 12,
1998.
39
<PAGE>
CORNUCOPIA RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
(Stated in United States Dollars)
<TABLE>
<CAPTION>
December 31,
1997 1996
ASSETS
NOTE
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 2 996,732 2,088,619
Funds held in escrow -- 1,781,693
Accounts receivable 546,050 46,830
Product inventory -- 3,084
Prepaid expenses and deposits 40,880 38,496
- ------------------------------------------------------------------------------------------------
1,583,662 3,958,722
- ------------------------------------------------------------------------------------------------
Investments 3 -- 1,549,965
Note Receivable -- 111,837
Capital Assets 4 63,116 53,889
Resource Assets 5 16,710,818 18,941,138
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS 18,357,596 24,615,551
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 2,367,508 4,174,421
Due to mining joint venture -- 47,888
Debt 6 13,186,599 --
- ------------------------------------------------------------------------------------------------
15,554,107 4,222,309
- ------------------------------------------------------------------------------------------------
Capital Lease Obligations 42,436 95,830
Provision for Site Reclamation 5, 11 172,908 --
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 15,769,451 4,318,139
- ------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL 7 37,829,307 35,327,772
Issued and outstanding common shares
1997 - 38,556,040 (1996 - 35,058,040)
Special warrants, net of costs -- 1,746,177
Deficit (35,241,162) (16,776,537)
- ------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,588,145 20,297,412
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 18,357,596 24,615,551
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Operations 1
Commitments and Contingencies 5, 11
Subsequent events 11(e), 12(a) & 13
</TABLE>
Approved by the Board:
(signed)
- ---------------------------------------
Andrew F. B. Milligan, Director
(signed)
- ---------------------------------------
David S. Jennings, Director
See accompanying notes to consolidated financial statements.
40
<PAGE>
CORNUCOPIA RESOURCES LTD.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(Stated in United States Dollars)
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
REVENUES
Product sales -- 115,096 315,144
Production costs (19,433) 193,365 334,893
- -----------------------------------------------------------------------------------------
Operating profit (loss) 19,433 (78,269) (19,749)
Interest and other income 51,705 460,093 280,914
- -----------------------------------------------------------------------------------------
71,138 381,824 261,165
- -----------------------------------------------------------------------------------------
EXPENSES (OTHER INCOME)
General and administrative expenses 1,987,525 2,776,253 2,485,557
(Gain) on disposal of investments -- (631,970) (166,701)
Write down of investment 476,341 (37,929) --
Abandonment and write down of resource assets 16,000,000 1,026,325 701,006
Equity loss 71,897 112,264 --
- -----------------------------------------------------------------------------------------
18,535,763 3,244,943 3,019,862
- -----------------------------------------------------------------------------------------
LOSS BEFORE NON-CONTROLLING INTEREST 18,464,625 2,863,119 2,758,697
Non-controlling interest -- 252,484 118,034
- -----------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD 18,464,625 2,610,635 2,640,663
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Deficit, beginning of the period 16,776,537 14,165,902 11,525,239
Net Loss for the period 18,464,625 2,610,635 2,640,663
- -----------------------------------------------------------------------------------------
DEFICIT, END OF THE PERIOD 35,241,162 16,776,537 14,165,902
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
LOSS PER SHARE 0.49 0.09 0.11
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 37,514,204 30,287,082 24,847,263
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
CORNUCOPIA RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Stated in United States Dollars)
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATIONS
Net loss for the period (18,464,625) (2,610,635) (2,640,663)
Items not involving cash;
Amortization 103,536 101,692 69,306
Reclamation accrual 172,908 -- --
Gain on partial disposal of investment 476,341 (37,929) --
Write down of investment -- (631,970) (166,701)
Abandonment and write down of resource assets 16,000,000 1,026,325 160,931
Equity loss 71,897 -- --
Non - controlling interest -- (252,484) (118,034)
- ---------------------------------------------------------------------------------------------------------
(1,639,943) (2,405,001) (2,695,161)
Net change in non-cash working capital items;
Accounts receivable (413,720) 14,044 (17,483)
Product inventory 3,084 18,617 74,869
Prepaid expenses and deposits (2,384) 24,961 20,765
Loans and advances (85,500) -- --
Prepaid to mining venture net of liabilities -- (25,000) 25,000
Accounts payable and accrued liabilities (1,806,913) 4,003,572 (32,354)
Due to mining joint venture (47,888) (92,530) (117,802)
- ---------------------------------------------------------------------------------------------------------
(3,993,264) 1,538,663 (2,742,166)
- ---------------------------------------------------------------------------------------------------------
INVESTING
Investments 1,001,727 969,354 --
Proceeds on partial disposition of resource assets -- 99,980 --
Proceeds on disposal of investments -- 631,970 184,393
Note receivable 111,837 15,488 13,892
Capital assets (64,102) (83,384) (67,673)
Resource assets (13,818,341) (13,579,965) (3,852,587)
- ---------------------------------------------------------------------------------------------------------
(12,768,879) (11,946,557) (3,721,975)
- ---------------------------------------------------------------------------------------------------------
FINANCING
Debt 13,186,599 -- --
Capital lease obligations (53,394) (14,036) 109,866
Non - controlling interest -- (455,779) 661,666
Net proceeds from issue of common shares for cash 2,501,535 11,741,248 381,223
Issue of common shares for services -- -- 62,500
Net proceeds (expenses) from issue of special warrants (1,746,178) 1,746,177 (138,930)
- ---------------------------------------------------------------------------------------------------------
13,888,562 13,017,610 1,076,325
- ---------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (2,873,581) 2,609,716 (5,387,816)
Cash and Equivalents, beginning of the period 3,870,313 1,260,596 6,648,412
- ---------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF THE PERIOD 996,732 3,870,312 1,260,596
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(includes funds in escrow)
See accompanying notes to consolidated financial statements.
42
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
the quantity of economically recoverable reserves, on the outcome or timing of
legislative or regulatory developments relating to environmental protection,
and on future profitable operations or proceeds from the disposition thereof.
The viability of production on mineral properties held by the Company is highly
dependent on the price of gold.
At December 31, 1997, the Company had a working capital deficiency of
$13,970,445, which is, in part, due to the classification of indebtedness (see
below). In addition, the Company has suspended mining operations at its
Mineral Ridge Mine due, in part, to low gold prices. 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 (note 11(e)). 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 calculated as at
December 31, 1997 (note 6). The lender has been advised of the violation and
to date has neither given notice to the Company that an event of default has
occurred nor taken action to accelerate repayment of the loan or to otherwise
act on its security. Until the covenants governing these financial ratios are
formally amended, the Company is not in compliance with the loan agreement.
Therefore, the total obligation of $13,186,599 has been classified as a current
liability on the balance sheet. The Company is in ongoing discussions with the
lender to amend the terms of the loan agreement.
Notwithstanding the covenant violation, under the terms of the existing loan
agreement the Company is required to make loan payments of approximately
$4,436,599 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 be able to make the repayments from cash flow generated by
operations from Mineral Ridge over the life of the project. The amount of cash
flow generated is partially dependent upon future gold prices. However, if the
lender 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.
To improve liquidity and to enable necessary expenditures of capital at Mineral
Ridge, discussions are underway with third parties to obtain additional
financing.
2. SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION
The accompanying consolidated financial statements for the fiscal year ended
December 31, 1997, 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 8.
The consolidated financial statements include the accounts of Cornucopia
Resources Ltd., (the "Company") which is incorporated under the Company Act
(British Columbia), its subsidiaries, including Cornucopia Resources, Inc. a
wholly-owned subsidiary incorporated in the State of Nevada, and its
subsidiaries which are wholly-owned, except a partially-owned subsidiary,
Carlin Resources Corp. ("Carlin Resources") incorporated under the laws of
Canada and its wholly-owned subsidiaries to September 20, 1996.
The Company consolidated its investment in Carlin Resources up to September 20,
1996. At that date the Company's interest in Carlin Resources decreased to 38%
due to capital transactions of Carlin Resources and the application of the
consolidation method of accounting for Carlin Resources was no longer
considered to be appropriate. These financial statements reflect the
consolidation of Carlin Resources' operations to September 20, 1996, the
application of the equity method until April 30, 1997, and the application of
the cost method thereafter due to the disposition of Carlin Resources shares
(note 3(b)). The amount recorded on the consolidated balance sheet represents
the carrying value of the Company's investment in Carlin Resources at September
20, 1996, adjusted for subsequent transactions. As at December 31, 1997, and
December 31, 1996, the Company's interest in Carlin Resources was 14.6% and 34%
respectively.
The Company's 25% interest in the Ivanhoe joint venture (note 5(a)) has been
accounted for by the proportionate consolidation method. All significant
intercompany accounts and transactions have been eliminated upon consolidation.
43
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd)
The Company's operations are in the mining industry and are conducted primarily
in the United States of America.
b) CASH & CASH EQUIVALENTS
For the purpose of these consolidated financial statements, the Company
considers all investments in commercial paper and other highly liquid
investments which are readily convertible to cash, to be cash equivalents.
These cash equivalents are held through three separate financial institutions.
The Company follows a policy of diversifying its investments in different
corporate and industry sectors.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31, December 31,
1997 1996
CASH AND CASH EQUIVALENTS $ $
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash 996,732 2,088,619
Cash Equivalents (including escrow funds) - 1,781,693
- -------------------------------------------------------------------------------
$996,732 $3,870,312
- -------------------------------------------------------------------------------
</TABLE>
(c) INVENTORY AND REVENUE RECOGNITION
Product revenue is recognized at the time of delivery to customers and gold
inventory is recorded at estimated net realizable value. Gold ounces contained
and recoverable in the leach pad, the ore stockpile and in processing plant are
valued using the average cost method and carried at the lower of cost and net
realizable value.
(d) RESOURCE ASSETS
Property acquisition costs, which include financing costs related to the
development of the Mineral Ridge Mine, are deferred until the property to which
they relate is placed into commercial production, sold or abandoned. These
costs will be charged to future operations on a unit-of-production basis
following commencement of commercial production using estimated recoverable
reserves of the principal property as the base, or written down if the property
is sold, abandoned or there is an impairment in value.
Where the Company enters into agreements for the acquisitions of interest in
mining properties which provide for periodic payments, such amount unpaid are
not recorded as a liability since they are payable entirely at the Company's
discretion. Such payments, when made are recorded as a cost of the property to
which they relate. If unpaid, such non-payment will result in the write-off of
the related investment in mining properties.
Exploration costs incurred during the search for new ore bodies are deferred
and will be charged to future operations on a unit-of-production basis
following commencement of production. If the property is abandoned or sold or
there is an impairment in value, the exploration costs will be charged to
operations.
(e) RECLAMATION
Post closure reclamation and site restoration costs are estimated based upon
regulatory and environmental requirements and are accrued over the life of the
mine. Expenditures relating to environmental, reclamation and restoration
programs are expensed as determinable [see note 11(b)].
(f) FOREIGN CURRENCIES
The Company's functional and reporting currency is the United States dollar.
Monetary assets and liabilities are translated at the exchange rate in effect
at the balance sheet date and non-monetary assets and liabilities at the rate
in effect on the dates of the related transactions. Revenues and expenses are
translated at rates approximating exchange rates in effect at the time of the
transactions. Gains or losses arising on conversion of foreign currency
transactions are included in income in the period they occur, except for gains
or losses on fixed term monetary items, which are deferred and amortized over
the remaining term of the liability.
44
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(g) SHARE CAPITAL
Shares issued for other than cash consideration are valued at the quoted price
on the Toronto Stock Exchange on the date the agreement to issue the shares was
reached.
(h) EARNINGS (LOSS) PER SHARE
The earnings (loss) per share is computed on the basis of the weighted average
number of shares outstanding during the year. Fully diluted earnings or loss
per share is not presented as it is anti-dilutive.
(i) COMPARATIVE FIGURES
Where necessary, prior year figures have been reclassified to conform with the
current period's presentation.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
reported amounts of assets, such as the recoverability of resource assets (see
Notes 1, 2 and 5), and liabilities, including the determination of reclamation
obligations, and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(k) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses forward sales agreements for the purpose of managing its
anticipated gold sales. These financial instruments are accounted for as
hedges of anticipated transactions and are not recorded on the balance sheet of
the Company. Gains and losses from these contracts are recorded in income in
the same period as production is delivered to meet the commitments.
3. INVESTMENT
(a) CARLIN RESOURCES CORP. ("CARLIN RESOURCES")
The Company consolidated its investment in Carlin Resources up to September 20,
1996. At that date the Company's interest in Carlin Resources decreased to 38%
due to capital transactions of Carlin Resources and the application of the
consolidation method of accounting for Carlin Resources was no longer
considered to be appropriate. These financial statements reflect the
consolidation of Carlin Resources' operations to September 20, 1996, and the
application of the equity method until April 30, 1997, after which the cost
method became appropriate with the completion of the Block Trade discussed
below. As at December 31, 1997, the Company's interest in Carlin Resources was
14.6% and as at December 31, 1996, the Company's interest in Carlin Resources
was 34%.
(b) DISPOSITION OF CARLIN RESOURCES SHARES
As of December 31, 1996, the Company held 3,635,639 Carlin Resources shares,
being 34% of the then issued and outstanding shares.
Effective April 29, 1997, the Company sold 2,100,000 shares of Carlin Resources
through a broker for net proceeds of C $0.59 per share ("the Block Trade").
The Company also appointed this broker to sell 1,535,639 common shares of
Carlin Resources held, for net proceeds of C $0.65 per share until October 31,
1997, and C $0.95 per share thereafter until April 30, 1998. As at December
31, 1997, the Company held 14.6% or 1,561,139 shares of Carlin Resources.
After a write down of $476,341 in 1997, the carrying value of the investment
in Carlin Resources has been reduced to nil.
45
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
3. INVESTMENT (cont'd)
In addition, under the terms of the agreement with the underwriter, the Company
advanced C $400,000 to Carlin Resources upon closing of the Block Trade which
amount was subsequently repaid in July 1997. At December 31, 1997, the Company
has an amount due from Carlin Resources of $202,700 (C $290,000) which is
carried in accounts receivable at its estimated realizable amount.
All advances made by the Company to Carlin Resources bear interest at prime
plus 2%.
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
CAPITAL ASSETS $ $ $ $
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Buildings, leasehold improvements 12,088 5,810 6,278 2,853
Drilling, field equipment and vehicles - - - 451
Furniture, fixtures, and office equipment 212,163 155,325 56,838 50,585
- ---------------------------------------------------------------------------------------------------------------
$224,251 $161,135 $63,116 $53,889
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
5. RESOURCE ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Acquisition Deferred December 31, December 31,
costs Expenses 1997 1996
EXPLORATION PROPERTIES $ $ $ $
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ivanhoe Property (a) 1 1,874,891 1,874,892 1,874,892
Mineral Ridge Mine (b) 1,428,616 13,407,306 14,835,922 17,066,243
Other Properties 4 - 4 3
- ---------------------------------------------------------------------------------------------------------------
$1,428,621 $15,282,197 $16,710,818 $18,941,138
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) IVANHOE PROPERTY
The Company holds a 25% interest in the Ivanhoe Property in Nevada where mining
of the Hollister deposit ceased in May 1992, but residual leaching of the heap
continued to June 1996, and reclamation activities continued thereafter.
In June 1996, Newmont Exploration Limited ("Newmont") the former joint venture
partner, commenced reclamation, which consisted primarily of rinsing the heaps,
monitoring the site, constructing extensive diversion ditches and re-shaping
waste stock piles. Newmont submitted a formal reclamation and closure plan to
the State of Nevada Bureau of Land Management (the "BLM") in March 1997, and
began a more extensive program. The budget for the complete reclamation plan
through to December 2003, is estimated to be $6,000,000.
The Company, Newmont and Great Basin Gold Inc. ("Great Basin"), ratified a
purchase agreement on August 13, 1997, whereby their respective interests in
the Ivanhoe Property were transferred to a joint venture. Under the terms of
the agreement Newmont would transfer its 75% interest in the Ivanhoe Property
to Great Basin in consideration for a $1,000,000 contribution to a reclamation
fund. This contribution was made on August 14, 1997.
Immediately thereafter, the Company and Great Basin entered into a joint
venture agreement whereby Great Basin must spend $5.0 million in exploration
and related expenditures by August 12, 1999, otherwise Great Basin's
participating interest will be diluted 1% for each $166,667 of expenditure not
made.
The parties acknowledge that the Company has contributed $500,000 to the
reclamation fund and Newmont has contributed $3,000,000. Great Basin has
contributed $1,000,000 on behalf of the Company. Once the $4,500,000 has been
expended, the parties will each contribute funds to the reclamation fund on an
equal basis until a total of $6,000,000 has been spent. Reclamation costs in
excess of $6,000,000 will be paid 75% by Newmont and 25% pro rata by the
Company and the new venturer.
46
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
5. RESOURCE ASSETS (cont'd)
(b) MINERAL RIDGE MINE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
December 31, December 31,
1997 1996
RESOURCES ASSETS $ $
- ---------------------------------------------------------------------
<S> <C> <C>
Deposits/Bonds 1,056,700 1,001,764
Capital Assets, net 484,751 475,333
Land/Options 1,428,616 1,428,616
Deferred Royalties 127,354 130,000
Deferred Exploration 4,298,803 4,077,251
Deferred Construction Costs 12,271,104 9,642,146
Net Smelter Revenue (7,612,719) --
Deferred Financing Costs -- 263,824
Other Capital Costs 2,781,313 47,309
- ---------------------------------------------------------------------
$14,835,922 $17,066,243
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
On April 16, 1993, the Company entered into a Letter Agreement with Mary Mining
Company, Inc. ("MMC"), a Florida corporation, as trustee for the beneficiaries
of a land trust, to acquire a 100% interest in certain mining properties
located in Esmeralda County, Nevada. The Company paid $235,000 for the cost of
the option which included an advance royalty payment of $25,000. Annually on
July 15, the Company will make advance royalty payments of $30,000 initially
and increasing by $5,000 per annum until July 15, 1996, when, thereafter, the
advance royalties will be $60,000 per year.
On May 15, 1996, the Company exercised its Purchase Right on the Mary Mining
Lease and Option Agreement at a purchase price of $1.00.
On August 31, 1995, the Company entered into an Agreement with Benguet Corp.
USA, Inc. ("BUSA") under which the Company was granted an option to purchase
mining properties contiguous to the Company's other claims at Mineral Ridge and
assume BUSA's obligations under the related property purchase agreements. As at
December 1, 1996, the Company had paid BUSA the total purchase price of
$1,200,000 plus accrued interest of $7,715.
The BLM required the Company to provide a reclamation bond in the amount of
$1,640,086, half of which is included in the balance for reclamation bonds and
deposits. During 1996, the Company funded 50% of this bond and the balance was
funded by a bonding company for a yearly fee of 2% on the outstanding balance.
The Company's $820,043 contribution earns a market rate of interest compounded
over time. The bond will remain in place until all reclamation at the mine
site is completed to the satisfaction of the BLM estimated to be in
approximately 10 years.
Effective June 1997, after the first gold was poured the Company began to
calculate royalties which are payable on the MMC assets based on 4% of revenue
net of smelter expenses and proceeds taxes.
Additions to resource assets at the Mineral Ridge Mine site during the year
ended December 31, 1997, totaled $13,769,679 which was due primarily to:
$17,095,695 in deferred construction costs, $2,662,300 in product inventory and
$1,278,068 in debt financing costs offset by precommercial net smelter revenue
of $7,612,719 and the write down of $16,000,000 in project costs. 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
revenue continue to be recorded as an offset to capital expenditures and
operating costs continue to be recorded as capital expenditures.
Annually, the Company reviews the carrying values of its portfolio of mining
properties and exploration properties. From this process it was determined that
the following assets had suffered a permanent impairment in value and therefore
have been written down to their estimated net recoverable amounts.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
Resource Asset Write downs $ $ $
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mineral Ridge Mine 16,000,000 -- --
Tenke-Fungurume concession -- 684,598 --
Yakobi Island -- 341,727 --
Addwest Minerals Inc. -- -- 540,075
Other properties -- -- 160,931
- -------------------------------------------------------------------------------
$16,000,000 $1,026,325 $701,006
- -------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
5. RESOURCE ASSETS (cont'd)
During the fourth quarter the Company conducted a review of the Mineral Ridge
operations which resulted in the announcement that mining operations would be
suspended due to the decline in spot gold prices and an unforeseen reduction
in water supply to the heaps. Crushing of the existing mine stockpile of
approximately 100,000 tons was initiated in early 1998.
The Company has recorded a write down of $16,000,000 against the Mineral Ridge
Mine. A life-of-mine undiscounted cash flow analysis of the Mineral Ridge Mine
was performed using average spot gold price assumptions of $325.00 for the year
1998, $350.00 for the year 1999, and $360.00 for years 2000 and beyond and
assuming the recommencement of mining operations in July 1998. Management will
continue to reassess the underlying value of the Mineral Ridge Mine.
6. MINE DEBT FINANCING FACILITY
On January 17, 1997, the Company entered into a loan agreement with a financial
institution 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 facilities bear interest at 2.50% (on pre-completion amounts) and 2.0% (on
post-completion amounts) above (i) LIBOR for US dollar drawings and (ii) LIBOR
minus GOFO for gold drawings, and were originally to be repayable in quarterly
installments commencing September 30, 1997, to maturity on December 31, 2001.
The bank was given warrants to purchase 1,500,000 Common Shares, at C $1.35 at
any time until December 31, 2000, as part of the consideration for providing
the loan, as well as warrants to purchase 250,000 shares, on the same terms, in
consideration for establishing a letter of credit in the amount of $1,089,242
to facilitate construction of power lines and ancillary electrical distribution
equipment at the Mineral Ridge Mine.
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 (note 3). 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 December 31, 1997, the Mineral Ridge Mine was not
in compliance with certain of the covenants. A principal payment of $1,500,000
due December 31, 1997, has not yet been made. In addition to the $4,436,599 in
scheduled loan payments and interest the Company has classified the remaining
$8,750,000 of the borrowings to current portion of long term debt as a result
of the covenant violations.
Management are in discussions with the lender to renegotiate the covenants in
the loan agreement which, if completed as anticipated, will result in the
existing violations being waived. Discussions to date have resulted in the bank
deferring the principal payment of $1,500,000 which was originally scheduled on
September 30, 1997, deferring the principal payment of $1,500,000 which was due
on December 31, 1997, deferring quarterly interest payment which was due
January 31, 1998, removing the restrictions on the use of $910,192 held in a
reserve account pursuant to the disposition of the Carlin Resources shares, and
agreeing to other concessions, including the revision of certain financial
ratios required to be maintained by the Company as stipulated in the agreement.
These amendments are subject to the approval of the bank's credit committee.
Until the covenants governing these financial ratios are formally amended, the
Company is not in compliance with the loan agreement. If these amendments are
completed as is currently being discussed, the violated covenant will be
revised and a waiver will be granted as to all pre-amendment violations. The
timing of this amendment, if any, is not known.
48
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
7. 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>
- -------------------------------------------------------------------------------
Average Value
Price per of Share
Number of Share Capital
ISSUED AND OUTSTANDING: Shares $ $
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1995 21,535,340 0.744 18,569,111
-issued for cash 4,705,000 1.053 4,954,913
-issued for services 50,000 1.25 62,500
Balance, December 31, 1995 26,290,340 23,586,524
-issued for cash 8,767,700 1.339 11,741,248
Balance, December 31, 1996 35,058,040 $35,327,772
-issued for cash 3,498,000 0.715 2,501,535
- -------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 38,556,040 $37,829,307
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(b) STOCK INCENTIVE PLAN
The Company has a Stock Incentive Plan (the "Plan") which was adopted in June
1988. The Plan consists of a Share Purchase Plan, a Share Option Plan and a
Share Bonus Plan, the terms of which, as amended, are described below.
The aggregate maximum number of shares which the Company may at any time
reserve for issuance under the Plan was 4,750,000 as at March 31, 1997.
Under the Share Purchase Plan participants who are full-time employees and have
one year of continuous service, may contribute up to 10% of their annual basic
salary to the plan for the purpose of purchasing Common Shares of the Company.
The Company will contribute an amount equal to one-sixth of the participant's
contribution during the first year of participation and one-third in subsequent
years. At the end of each calendar quarter participants are issued Common
Shares based on the contributions made to date, with delivery of the shares to
the participants six months after issue.
Under the Share Option Plan participants who are employees of the Company or
who, in the opinion of the Board of Directors, are in a position to contribute
to the Company's success or are worthy of special recognition, may be granted
options ("discretionary options") to purchase Common Shares of the Company at a
price per share not less than the fair market value of the shares on the day
before the grant.
No discretionary option is exercisable until it has vested according to a
vesting schedule specified by the Board of Directors at the time of grant of
the option. A discretionary option is exercisable for any period specified by
the Board of Directors up to a maximum of five years after the date of grant.
Options to persons who would be deemed "insiders" under the United States
Securities Exchange Act of 1934, are allocated under a formula set out in the
Plan.
Under the Share Bonus Plan, the Board of Directors may issue Common Shares to
full-time employees in respect of meritorious service. The maximum number of
shares that may be issued under the plan in any calendar year may not exceed
107,676 being 0.5% of the total number of Common Shares of the Company that
were issued and outstanding on December 31, 1994.
(c) GRANT OF OPTIONS
As at December 31, 1997, there were an aggregate of 2,275,000 stock options
outstanding (December 31, 1996; 2,303,000) granted to directors, officers and
employees of the Company.
49
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
7. SHARE CAPITAL (cont'd)
The following table summarizes the options granted under the Plan to directors
and employees of the Company for the purchase of Common Shares at various
exercise prices. Stock options are granted at exercise prices based on the
closing market price of the Company's shares on the day before the grant.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Options Granted
- --------------------------------------------------------------------------------------------------
Original Revised*
Exercise Price Exercise Price Number of Options
Year Granted (C $) (C $) Expiry Date Outstanding
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 $1.75 $0.68 January 4, 2000 175,000
1.75 0.68 May 17, 2000 100,000
1.09 0.68 July 9, 2000 50,000
1.01 0.68 October 11, 2000 50,000
1.71 0.68 December 3, 2000 5,000
1996 $1.69 $0.68 January 4, 2001 873,000
2.60 0.68 April 10, 2001 50,000
2.26 0.68 July 8, 2001 30,000
2.26 0.68 July 21, 2001 15,000
1997 $1.08 $0.68 February 2, 2002 212,000
1.06 0.68 February 27, 2002 300,000
0.95 0.68 May 20, 2002 35,000
0.88 0.68 June 9, 2002 75,000
0.80 0.68 June 19, 2002 250,000
0.73 0.68 July 2, 2002 5,000
0.68 -- October 20, 2002 50,000
- --------------------------------------------------------------------------------------------------
2,275,000
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
* On October 21, 1997, the Board of Directors resolved that all stock options
be re-priced to reflect the current market price and that the exercise
price of the options be reduced to C $0.68 per share. The Company received
approval from the TSE on December 31, 1997, that all options held by
non-insiders were approved, but that the re-pricing of the remaining
options were not approved until such time that the Company received a
favorable disinterested vote of the shareholders at the Annual General
meeting scheduled for May 21, 1998.
A summary of the Company's outstanding stock option transactions as at December
31, is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 2,303,000 950,000 1,619,900
Granted 992,000 1,675,000 980,100
Exercised -- (222,000) (525,000)
Cancelled or expired (1,020,000) (100,000) (1,125,000)
- -------------------------------------------------------------------------------------------------
Outstanding at end of year 2,275,000 2,303,000 950,000
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
As at December 31, 1997, there were an aggregate of 2,275,000 stock options
outstanding, of which 1,175,000 were granted to the directors of the Company.
During the year ended December 31, 1997, there were no options exercised.
During the year ended December 31, 1996, there were a total of 222,000 options
exercised. During the year ended December 31, 1995, 525,000 options were
exercised at prices ranging between C $0.87 and C $1.09 per share.
(d) SHARE PURCHASE WARRANTS
(i) On March 5, 1996, the Company issued 900,000 units by way of a private
placement at a price of C $2.00 per unit, for which the Company paid an
agents commission of 5%. Each unit consists of one Common Share and one
two year Common Share purchase warrant exercisable at a price of C $2.30
during the first twelve months after closing and C $2.65 until March 4,
1998. At December 31, 1997, there were 450,000 share purchase warrants
outstanding from this issue, which expire on March 4, 1998.
(ii) Pursuant to subscription agreements and an Agency Agreement dated May 15,
1996, the Company issued and sold 6,050,000 Special Warrants at a price
of C $2.00 per Special Warrant for gross proceeds of C $12,100,000. Each
Special Warrant entitled the holder to receive one Common Share and one
share purchase warrant at no additional cost. Two full share purchase
warrants entitled the holder to purchase one Common Share of the Company
at a price of C $2.75 per Common Share at any time prior to May 15, 1998.
50
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
7. SHARE CAPITAL (cont'd)
In addition the underwriters were paid a fee of C $847,000 and issued an
aggregate 605,000 Broker's warrants. Each Broker's warrant is
exercisable at C $2.33 for two years into a unit comprised of one Common
Share and one-half of a share purchase warrant having the same terms as
the Special Warrants described above.
The Special Warrants were exercised on September 16, 1996, with the
receipts being received for the final prospectus and the equivalent
number of Common Shares issued. As at December 31, 1997, there were
3,932,500 share purchase warrants, including 907,500 Broker's warrants,
outstanding from this financing.
(iii) On November 14, 1996, pursuant to the terms of a Special Warrant
Indenture made as of the same date, the Company issued 2,180,000 Special
Warrants at a price of C $1.20 each for gross proceeds of C $2,616,000.
Each Special Warrant is exchangeable for one unit comprised of 1.1
Common Share, in aggregate 2,398,000 Common Shares, and 0.55 of one
share purchase warrant. Each full share purchase warrant entitles the
holder to purchase one additional Common Share at a price of C $1.50 to
May 15, 1998.
As consideration for services rendered, the underwriters were paid a fee
of C $183,120 and issued an aggregate of 218,000 Broker's Warrants.
Each Brokers' Warrant is exercisable for one Compensation Option. Each
Compensation Option entitles the holder to acquire one Common Share of
the Company and one-half of one Common Share purchase warrant
("Underwriters' Warrant") at a price of C $1.30 to September 16, 1998.
Each Underwriters Warrant entitles the holder to acquire one Common
Share at a price of C $1.50 per share to May 15, 1998.
On March 5, 1997, the net proceeds of C $2,432,880, from the issue and
sale of the Special Warrants, were released from escrow with all
receipts being received for a final prospectus. As at December 31,
1997, there were 1,199,000 share purchase warrants outstanding.
(iv) On March 12, 1997, the Company announced a private placement of
1,100,000 Special Warrants with one investor at a subscription price of
C $1.00 per Special Warrant, for a total of C $1,100,000. Each Special
Warrant will be exchangeable for one Unit, comprised of one Common Share
and one Common Share purchase warrant. Each purchase warrant will
entitle the holder to purchase one additional Common Share at a price of
C $1.25 to March 26, 1998.
The full amount of the subscription funds for the private placement were
released to the Company upon issue of the Special Warrants. The Company
obtained receipts from the regulatory authorities for a final prospectus
on July 24, 1997, and subsequently issued 1,100,000 Common Shares and
purchase warrants.
(v) On January 17, 1997, the Company entered into a loan agreement with a
financial institution 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. The bank
was given warrants to purchase 1,500,000 Common Shares as part of the
consideration for providing the loan and warrants to purchase 250,000
shares in consideration for establishing a letter of credit in the
amount of $1.1 million to facilitate construction of power lines and
ancillary electrical distribution equipment at the mine site. The
warrants are exercisable at C $1.35 per share at any time until December
31, 2000. As at December 31, 1997, none of the warrants had been
exercised.
(e) SHAREHOLDER PROTECTION PLAN
On August 18, 1992, and amended on July 16, 1996, the Company adopted a
Shareholder Protection Rights Plan (the "Plan") which will remain in effect for
ten years. Under the Plan, one right is issued in respect of each Common Share
outstanding and each Common Share issued thereafter. Each right entitles the
holder to purchase one Common Share at a 50% discount to the market. After a
person acquires 10% or more of the voting shares of the Company or announces an
intention to do so, the rights become exercisable. The rights are not
triggered by a bid which is made to all shareholders in accordance with
relevant securities legislation.
51
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
8. 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.
As indicated in Note 9, 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 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 (note 5(a)) 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.
9. INCOME TAXES
The Company's operations are primarily in the United States. Tax benefits
related to losses of prior years are not recognized in the statements of
operations and deficit in prior years due to the uncertainty of their
realization.
At December 31, 1997, the Company had net operating loss carry forwards for
United States income tax purposes of approximately $9,117,000 which, if not
utilized to reduce United States taxable income in future periods, expires
through 2012. Of this amount, approximately $945,000 can only be utilized
against future taxable income of a non-operating subsidiary and will begin to
expire in the year 2001.
At December 31, 1996, the Company had net operating losses for Canadian income
tax purposes carried forward of approximately C $10,464,000 which, if not
utilized to reduce Canadian taxable income in future periods, will expire
during the years 1998 to 2003.
10. RELATED PARTY TRANSACTIONS
Related party transactions not disclosed elsewhere are as follows:
(a) The Company paid $155,530 in 1997, (year ended: 1996 - $158,474; 1995 -
$157,389) to Glencoe Management Ltd., a company controlled by an officer
and director, in return for consulting services.
(b) The Company paid $nil in 1997, (year ended: 1996 - $11,005; 1995 -
$80,662) to 7557 Management Group Ltd., a company controlled by an
officer and director, in return for consulting services provided by two
officers.
(c) The Company paid $23,041 in 1997, (nil in prior years) to Anacortes
Management Inc., a company controlled by an officer, in return for
consulting services.
52
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
10. RELATED PARTY TRANSACTIONS (cont'd)
(d) The Company incurred legal fees of $155,758 in 1997, (year ended: 1996 -
$74,217; 1995 - $57,343) to DuMoulin Black, a firm in which a director of
the Company is a partner.
(e) The Company paid $2,341 in 1997, (year ended: 1996 - $954; 1995 -
$35,565) to David Williamson Associates Limited, a company controlled by a
director in return for consulting services.
11. COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The Company leases certain facilities and equipment under operating lease
arrangements. Minimum rental expense under such arrangements amounts to
approximately $111,000, $106,000, and $67,000 for fiscal 1997, 1996, and 1995
respectively. Future minimum lease commitments under such arrangements will
be approximately $61,000, $6,000 and $6,000 for fiscal 1998, 1999, and 2000
respectively.
(b) PROVISION FOR SITE RESTORATION
Newmont submitted a reclamation and closure plan for the Ivanhoe Venture to
the State of Nevada and the Bureau of Land Management in March 1997. The
budget for the complete reclamation plan through to December 2003, is
estimated to be $6,000,000 (note 5(a)).
(c) AGREEMENTS
The Company has entered into an agreement with Glencoe Management Ltd. a
company controlled by Andrew F. B. Milligan, the President and Chief
Executive Officer and a director of the Company. The agreement includes
provisions by which Mr. Milligan will be entitled to receive an amount equal
to three years management fees and benefits should the Company terminate the
agreement with or employment of him without cause. The estimated cost of
this arrangement to the Company based on 1997 compensation would be
approximately $492,000.
(d) CONTRACTS
On August 20, 1996, the Company entered into a contract with Roberts &
Schaefer Company for the construction of certain facilities and plant at the
Mineral Ridge Mine. The total contract price is fixed at $12,399,672 payable
in installments for the portion of the work completed each month over the
construction period.
On January 21, 1997, the Company entered into a contract with D. H. Blattner
& Sons, Inc. for open-pit mining over the life-of-mine estimated at 6 years.
The contract price is based on performance of work. The unit prices and
hourly rates remain constant through to December 31, 1997, and for ensuing
years of the contract shall be subject to an escalation provision which must
be approved by the Company.
On July 11, 1997, Mineral Ridge Resources, Inc. entered into an agreement
with Sierra Pacific Power Company to provide electric power to the Mineral
Ridge Mine in Esmeralda County, Nevada throughout the life of the project.
The agreement establishes certain long term prices for current and future
capacity. The agreement provides for a minimum monthly facilities charge of
$24,358 to be paid monthly until May 31, 2002, to reimburse Sierra Pacific
for the capital costs associated with the electrical installation. The
Company has guaranteed a letter of credit related to the construction of
electrical facilities (note 6).
(e) LEGAL
The Company is from time to time involved in various legal proceedings of a
character normally incidental to its business. The Company does not believe
adverse decisions in any pending or threatened proceedings, or any amounts
which it may be required to pay by reason thereof, will have a material
adverse effect on the financial condition of the Company.
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.
53
<PAGE>
CORNUCOPIA RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
11. COMMITMENTS AND CONTINGENCIES (cont'd)
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 of $599,512 remains outstanding and is recorded in accounts payable
and will be paid pending the resolution of a deficiency and as permitted by
the cash flow of Mineral Ridge Resources Inc.
12. FINANCIAL INSTRUMENTS
(a) GOLD HEDGING
In order to manage its exposure to fluctuations in the price of gold, the
Company may enter into fixed forward contracts. Forward sales agreements
obligate the Company to sell gold at a specified price on a specified date.
In October 1997, the Company realized a portion of the equity in some of its
forward sales contracts for gold ounces scheduled for delivery in the years
2000 through to September 30, 2002. This resulted in a gain of $2.3 million
which was offset to Resource Assets.
As at December 31, 1997, the Company had outstanding forward contracts of
104,000 ounces (1996-120,000) of which 48,000 carry an average price of
$397.50 per ounce. These contracts of 48,000 ounces mature on various dates
between March 31, 1998, and December 31, 1999. As at December 31, 1997, the
remaining contract of 56,000 ounces at $326.85 per ounce was to mature March
6, 1998 (this contract was subsequently amended to $328.98 per ounce
maturing May 29, 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
$6,000,000 (1996-$1,500,000) however, these contracts are with the lender of
the Mine Debt Financing Facility (note 6) 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 one major financial
institution 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.
13. SUBSEQUENT EVENTS
(a) Subsequent to year end, 107,500 Common Shares were issued by the Company
for services rendered and granted 50,000 stock options to a director
with an exercise price of C $0.26, expiring January 4, 2003.
(b) On March 3, 1998, 150,000 stock options with an exercise price of C $1.08
were cancelled.
(C) On March 12, 1998, 100,000 stock options with an exercise price of
C $1.75, expiring May 17, 2000, were cancelled due to the resignation of
a director.
54
<PAGE>
CORNUCOPIA RESOURCES LTD.
PART III
- ------------------------------------------------------------------------------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant's Board of Directors has a Compensation Committee and is
required to have an Audit Committee. Members of these committees are as set
out in the chart below. The names, ages, positions, offices with the
Registrant, business experience, and periods of service of all directors and
executive officers are also listed below:
<TABLE>
<CAPTION>
Name Age Position with Registrant
- ------------------------------------------------------------------------------
<S> <C> <C>
CURRENT DIRECTORS AND OFFICERS
Sargent H. Berner (1)(2) 57 Director since October, 1990; Corporate
Secretary from May, 1990 to June, 1992.
David S. Jennings 55 Director since June, 1986. Vice
President, Exploration from September,
1991 to February, 1996.
Andrew F. B. Milligan (1) 73 Director since November, 1986; Chairman
of the Board from April, 1987 to June,
1989; President and Chief Executive
Officer from November, 1986 to April,
1987 and since September, 1991.
Charles J. G. Russell (1)(2) 64 Director since July, 1991.
Stephen R. Sopher (2) 63 Director since March, 1990.
David R. Williamson 56 Director since October, 1989.
Glenn H. Friesen 41 Chief Financial Officer since February,
1998; Corporate Controller since May,
1997.
Karyn E. Bachert 46 Corporate Secretary since June, 1992;
Assistant Secretary from November, 1988
to June, 1992.
PAST DIRECTORS AND OFFICERS
Robert F. Dunlop 68 Resigned as a Director in February,
1998; Director since May, 1995
A. Terrance MacGibbon 51 Resigned as a Director in August, 1997;
Director since March, 1993.
James M. Carter 52 Resigned as a Director and officer
February, 1997. Executive Vice President
from January, 1995. Vice President
Finance and Corporate Development from
May, 1993.
James A. Currie 44 Resigned February 6, 1998; Executive
Vice President since May, 1997; and Vice
President of Mining from December 1995
to May 1997.
Bobbi-Jo (B. J.) Gordon 40 Resigned in February, 1998; Vice
President of Finance and Chief Financial
Officer since February, 1997.
Debbie Barfurth-Wood 42 Resigned in May, 1997; Treasurer since
June 1994; Controller from January, 1994
to June, 1994.
Nathan A. Tewalt 36 Resigned in May, 1997; Vice President of
Exploration from March 1996 to May, 1997.
</TABLE>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee
(see Item 11 - "Board Compensation Committee Report on Executive
Compensation").
55
<PAGE>
The Company's Board is elected at each Annual General Meeting and holds
office until the next meeting of shareholders or until their successors are
appointed. Executive officers are appointed by the Registrant's Board to
serve until terminated by the Registrant's Board or until their successors
are appointed. The Company's Annual General Meeting will be held on May 21,
1998.
BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS
CURRENT DIRECTORS
SARGENT H. BERNER has been partner of DuMoulin Black, a law firm in
Vancouver, British Columbia, since 1976. Mr. Berner is also a director of
Aurizon Mines Ltd., Emperor Gold Corporation, Cream Minerals Ltd., Valerie
Resources Ltd. and Sultan Minerals Inc. which are Vancouver-based companies
listed on the Vancouver Stock Exchange. Aurizon Mines Ltd. is also listed on
the Toronto and Montreal stock exchanges.
DAVID S. JENNINGS, a geologist and business executive, has been President of
Farallon Resources Ltd. since July, 1991 and President and Chief Executive
Officer of Quartz Mountain Gold Corp. since May, 1988; Dr. Jennings was
Vice-President, Exploration of the Company from September, 1991 to February
29, 1996. He was also Vice-President of Carlin Resources Corp. from November,
1994 to February 28, 1996. Dr. Jennings is also a director of Quartz Mountain
Gold Corp., which trades on the Canadian Unlisted Exchange, and Farallon
Resources Ltd., Zim-Gold Resources Ltd., B.A.S.M. Resources Ltd. and Advanced
Projects Limited, which are Vancouver-based companies with shares listed on
the Vancouver Stock Exchange.
ANDREW F. B. MILLIGAN, a business executive, has been President and Chief
Executive Officer of the Company since September 1991. Mr. Milligan was
Chairman of the Company from April 1987 to June 1989 and was President of the
Company from November 1986 to April 1987. Mr. Milligan also was Chairman of
Carlin Resources Corp. from November 1997, to June 1997 and was a director of
Carlin from November 1994 to January 1998. Mr. Milligan is a director of
Advanced Projects Limited and Lysander Gold Corporation, all of which are
Vancouver-based mining companies with shares listed on the Vancouver Stock
Exchange.
CHARLES J. G. RUSSELL retired in December 1995 after having served as Vice
President of Ivanhoe Capital Corp. since January 1993 and President of
Diamond Fields Resources Ltd. from September 1993 to February 1994. Mr.
Russell held the positions of Senior Vice President and director of Galactic
Resources Ltd. from June 1987 to September 1992. In January 1993, Galactic
filed an assignment in bankruptcy under Canadian law. Galactic's publicly
filed reports indicated that Galactic encountered financial difficulties
associated in part with environmental problems at the Summitville Mine, a
gold mine in Colorado operated by a wholly-owned subsidiary of Galactic. Mr.
Russell is also a director of Quartz Mountain Gold Corp. which is listed on
the Toronto Stock Exchange and Lysander Gold Corp., which is a
Vancouver-based mining company with shares listed on the Vancouver Stock
Exchange.
STEPHEN R. SOPHER is a professional geologist and a private investor. Mr.
Sopher was President and C.E.O. of Lysander Gold Corporation from May 1995,
to June 1997, and a director from January 1994, until September 1997. Mr.
Sopher was Executive Vice President and a director of TVX Gold Inc. from
January 1991 to September 1992. Prior to the merger of TVX Gold Inc. with
Inco Gold Ltd. in early 1991, Mr. Sopher was Vice President Exploration of
Inco Exploration and Technical Services, Inc. Mr. Sopher joined Inco Limited
in 1961 and in 1970 was transferred to Brazil to organize and manage Inco's
exploration program. In 1987 he became Managing Director, South America. Mr.
Sopher is a registered Professional Engineer of Ontario, member of the
American Institute of Mining, Metallurgical and Petroleum Engineers, Inc. and
also the founding member of the Brazil-Canada Chamber of Commerce. Mr.
Sopher is also a director of Consolidated Logan Mines, which is listed on the
Vancouver Stock Exchange.
DAVID R. WILLIAMSON, a mining engineer and business executive, is principal
of his own business, David Williamson Associates Limited, financial
consultants to the mining industry and publishers of International Mining
Review, based in London, England. In 1982 Mr. Williamson joined Shearson
Lehman Hutton and formed their metals and mining research team. From 1987 to
1989 he held the positions of Executive Director of Shearson Lehman Hutton
and director of Metals and Mining Research for Shearson Lehman Hutton
Commodities. He is also a former governor of the Camborne School of Mines in
England. Mr. Williamson is a director of Crown Resources Corporation, Asia
Pacific Resources Ltd. and South Crofty Holdings Ltd., publicly traded mining
companies listed on the Toronto Stock Exchange.
56
<PAGE>
PAST DIRECTORS
JAMES M. CARTER resigned as a director in February 1997. Mr. Carter is a
Chartered Accountant and has been President of Carter Financial Services
Corporation and Carter & Associates Consulting Inc., private companies which
previously provided financial consulting services to the industry since 1977.
Mr. Carter was Vice President, Finance and Corporate Development of the
Company from May 1993 to January 1995 and was Executive Vice President and
Chief Financial Officer of the Company from January 1995 to February 1997
when he resigned from the Company. Mr. Carter also has been the President
and Chief Executive Officer and a director of Carlin Resources Corp. November
1994. He is a director of Advanced Projects Limited which is a
Vancouver-based company with shares listed on the Vancouver Stock Exchange,
and Colony Energy Ltd. which is based in Calgary with shares listed on the
Alberta Stock Exchange.
ROBERT F. DUNLOP resigned as a director in February 1998. Mr. Dunlop was
formerly Deputy Chairman of Lonrho plc, the UK conglomerate which has
significant mining interests in Africa, including a 37% holding in Ashanti
Goldfields in Ghana and a 72% holding in Western Platinum in South Africa.
Currently he is also a director of Companhia do Pipeline Mocambique-Zimbabwe
Limitada.
A. TERRANCE MACGIBBON resigned as a director on August 29, 1997. Mr.
MacGibbon is a geologist and business executive, and was formerly employed by
Inco Limited. Mr. MacGibbon was Director, International Exploration of Inco
Exploration and Technical Services Inc., and President of American Copper &
Nickel Company, Inc., an Inco subsidiary company. Mr. MacGibbon joined Inco
Limited in 1968 and has been involved in mineral exploration since that time.
From 1987 to 1991 he was Director of Acquisitions and Property Management for
Inco Exploration and Technical Services, Inc.
CURRENT OFFICERS
GLENN H. FRIESEN is a Certified General Accountant and has been Chief
Financial Officer of the Company since February 1998 and Corporate Controller
from May 1997 to February 1998. Mr. Friesen was Chief Financial Officer of
Power Smart Inc. from 1991 to 1996 and controller of Skyline Gold Corp. from
1989 to 1991.
KARYN E. BACHERT has been Corporate Secretary of the Company since June 1992
and was Assistant Secretary of the Company from November 1988 to June 1992.
Ms. Bachert has been employed by the Company since January 1987. Ms. Bachert
was Corporate Secretary of Carlin Resources from November 1994 to June 1997.
PAST OFFICERS
JAMES A. CURRIE is a mining engineer with 18 years experience in the mining
industry, and principal of his own business, Anacortes Management Ltd.,
providing consulting to the mining industry. Mr. Currie resigned his
position in February 1998 and was Executive Vice President of the Company
from June 1997 to February 1998 and Vice President, Mining of the Company
from December 1994 to June 1997. Prior to this appointment he was employed
by Placer-Dome Inc., Fording Coal Ltd. and Noranda Mines Ltd. in various
capacities and more recently has been Vice President, Operations for
Queenstake Resources Ltd. (1989-1991) and Manager, Technical Services for
Galactic Resources Ltd. (1991-1993).
BOBBI-JO (B. J.) GORDON resigned her position with the Company in January
1998. Ms. Gordon is a Chartered Accountant and was appointed Vice President,
Finance and Chief Financial Officer of the Company on February 1, 1997. Ms.
Gordon previously provided consulting services to various resource companies.
In 1994, she was Chief Financial Officer of Ashton Mining Company of Canada
Inc. and in 1993, she was Vice President, Finance for CMP Resources Ltd.
Prior to this, Ms. Gordon was an officer and a director of companies in the
Homestake Canada group.
DEBBIE BARFURTH-WOOD, resigned her position with the Company on May 1997.
Ms. Barfurth-Wood is a Certified General Accountant and has been Treasurer of
the Company since June 1994, and from January 1994 to June 1994 she was the
Controller of the Company. Ms. Barfurth-Wood worked as an audit senior with
KPMG, Chartered Accountants, from April 1988 to November 1992. From November
1992 she worked on a contract/temporary basis with Norecol Dames & Moore
(previously Norecol Environmental Consultants Ltd.) as the Manager of
Accounting, Finance & Administration until July 1993 and with Trans Mountain
Pipeline Company Ltd. as a Financial Analyst in Regulatory Affairs until
joining the Company. Ms. Barfurth-Wood has also been the Treasurer and
Controller of Carlin Resources since November 1994.
NATHAN A. TEWALT is a geologist and held the position of Vice President,
Exploration of the Company from March 4, 1996, to May 1997. Mr. Tewalt is
Chief Executive Officer of Great Basin Gold Ltd. Prior to his appointment
with the Company, Mr. Tewalt was employed by Meridian Gold Ltd., formerly FMC
Gold Company ("FMC") from 1992 to February 1996 and held the position of
Project Manager of the Rossi Property, FMC's flagship property in the Carlin
Trend.
57
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The Company's executive and employee compensation program is administered by
the Compensation and/or Executive Committees. The Compensation Committee
establishes or recommends general compensation levels and policies for
executive officers and employees of the Company. The Stock Incentive Plan is
administered by the Executive Committee or, in the absence of this committee,
by executive officers of the Registrant on behalf of the Board of Directors.
The Registrant's Board designates the Members of each committee on an annual
basis.
SUMMARY OF EXECUTIVE COMPENSATION
During 1997, there were five executive officers of the Company: Andrew F. B.
Milligan, James M. Carter, James A. Currie, Bobbi-Jo Gordon and Nathan
Tewalt. The following table sets forth certain summary information concerning
the compensation awarded to, earned by, or paid to the Chief Executive
Officer and the two executive officers of the Company each of whose combined
salary and bonus for 1997 exceeded $100,000 for services in all capacities to
the Company during the year ended December 31, 1997, (collectively, the Named
Executive Officers). The aggregate value of other annual compensation paid
to the named Executive Officers during 1996 did not exceed 10% of the
aggregate cash compensation set forth in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Securities All other
Name and Principal Position Year Salary Bonus Under Options Compensation (1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Andrew F. B. Milligan (2) 1997 $155,530 -- -- --
President and Chief Executive Officer 1996 158,474 47,542 450,000 --
1995 157,389 31,478 50,000 --
James A. Currie (3) 1997 $112,448 -- 400,000 8,143
Executive Vice President and 1996 107,850 18,332 50,000 924
Chief Operating Officer 1995 88,041 -- 100,000 828
Bobbi-Jo (B. J.) Gordon (4) 1997 88,604 -- 150,000 4,991
Vice President, Finance and
Chief Financial Officer
James M. Carter (5) 1997 5,400 -- -- 365
Executive Vice President and 1996 132,062 39,168 240,000 1,109
Chief Financial Officer 1995 131,157 39,347 100,100 1,020
</TABLE>
(1) Represents life insurance premiums paid on behalf of the named executive
officers.
(2) The services of Mr. Milligan are provided under an Agreement dated
December 1, 1991, as amended on June 1, 1995, between the Company and
Glencoe Management Ltd., a company owned and controlled by Mr. Milligan.
(see Exhibit 20.4)
(3) The services of Mr. Currie were provided under an Agreement with the
Company dated November 17, 1997, (see Exhibit 20.7). Mr. Currie resigned
his position as Executive Vice President of the Company is February 1998,
but will remain as a director of the Company's subsidiary Touchstone
Resources Company.
(4) The services of Ms. Gordon were provided under an Agreement with the
Company dated February 1, 1997, (see Exhibit 20.6). Ms. Gordon resigned
her position as Vice President, Finance and Chief Financial Officer of the
Company in February 1998, and the stock option granted to her in 1997
expired in March 1998.
(5) The services of Mr. Carter were provided under an Agreement with the
Company dated June 1, 1993, as amended on June 1, 1995. Mr. Carter
resigned his position with the Company in February 1997. (see Item 11:
"Executive Compensation", "Management Agreements and Termination of
Employment and Change in Control Arrangements").
58
<PAGE>
STOCK INCENTIVE TRANSACTIONS DURING 1997
The following table sets onto the details of all stock option grants to the
Named Executive Officers during the most recent completed financial year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value
Number of Percent of Total at Assumed Annual Rates of
Securities Options Granted Stock Price Appreciation
Underlying to Employees in for Options Terms
Name Options Granted Fiscal Year Exercise Price Expiration Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James A. Currie 150,000 15% C $1.06 February 27, 2002 C $43,928 C $97,071
James A. Currie 250,000 25.1% C $0.80 June 19, 2002 C $55,256 C $122,102
Bobbi-Jo (B. J.) Gordon 150,000 15% C $1.08 February 2, 2002 C $44,757 C $98,903
Nathan A. Tewalt 150,000 15% C $1.06 February 27, 2002 C $43,929 C $97,071
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1997, a total of 992,000 options were granted under the Registrant's
Stock Incentive Plan. The Plan provides that all options to insiders are
issued at an exercise price equal to the closing price the Common Shares on
the Toronto Stock Exchange on the trading day immediately preceding the date
of grant.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTIONS EXERCISED, EXPIRED OR SURRENDERED IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Options (1)
Acquired Expired Number of Securities Value of Unexercised
on Exercise Surrendered Underlying Unexercised In-The Money Options at
(No. of (No. of Value Options at 12/31/97 12/31/97
Name Shares) Shares) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew F. B. Milligan -- -- -- 500,000 -- Nil --
James A. Currie -- 150,000 (2) -- 400,000 (2) -- Nil --
Bobbi-Jo (B. J.) Gordon -- 150,000 (3) -- 150,000 (3) -- Nil --
Nathan A. Tewalt -- 150,000 (2) -- 150,000 (2) -- Nil --
James M. Carter -- 400,000 (4) -- -- -- Nil --
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During 1997 a total of 1,020,000 options either expired or were
surrendered.
(2) On June 20, 1997, Messrs. Currie and Tewalt surrendered options after the
grant of new replacement options was approved by the shareholders. Mr.
Currie was granted an additional option of 250,000 after his appointment
as Executive Vice President of the Company.
(3) Option granted under the Plan in February 1997, and expired in March 1998,
due to resignation.
(4) Options expired in February 1997, due to resignation.
COMPENSATION OF DIRECTORS
The Company pays outside directors a fee of C $650 for each meeting attended,
in person or by telephone and an additional C $350 for outside directors who
chair committee or board meetings. In addition, the directors may be
reimbursed for actual expenses reasonably incurred by them in connection with
attending meetings of the board. Directors are also eligible to receive
bonus shares or options to purchase Common Shares of the Company.
59
<PAGE>
STOCK OPTION REPRICINGS
On October 21, 1997, the Board of Directors resolved that all stock options
of the Company be repriced to reflect the current market price and that the
exercise price of such options be reduced to C $0.68 per share. The Company
received approval from the Toronto Stock Exchange of the stock option
repricings on December 31, 1997, subject to approval of the shareholders for
all repriced stock options held by insiders. The details of the repriced
stock options held by all insiders that were repriced and the details of the
repricing are set out in the table below:
<TABLE>
<CAPTION>
Securities Market Price of Exercise Price Length of Original
Under Securities at Time at Time of Option Term
Options/SARs of Repricing or Repricing or New Exercise Remaining at Date
Date of Repriced or Amendment Amendment Price or Repricing or
Name Repricing Amended (#) (C $/Security) (C $/Security) (C $/Security) Amendment
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Andrew F. B. Milligan Oct 21-97 500,000 $0.68 $1.75/ $0.68 2 1/4 years/
$1.69 (1) 3 1/4 years (1)
James A. Currie Oct 21-97 400,000 $0.68 $1.06/ $0.68 4 1/2 years (2)
$0.80 (2)
Bobbi-Jo (B.J.) Gordon Oct 21-97 150,000 $0.68 $1.08 $0.68 4 1/4 years
Sargent H. Berner Oct 21-97 100,000 $0.68 $0.69 $0.68 3 1/4 years
David S. Jennings Oct 21-97 175,000 $0.68 $1.75/ $0.68 3 1/4 years
$1.69 (3)
Stephen R. Sopher Oct 21-97 100,000 $0.68 $1.69 $0.68 3 1/4 years
Charles J.G. Russell Oct 21-97 100,000 $0.68 $0.87/ $0.68 2 weeks/
$1.75 (4) 2 1/4 years (4)
David R. Williamson Oct 21-97 100,000 $0.68 $1.75/ $0.68 2 1/4 years/
$1.69 (5) 3 1/4 years (5)
Robert F. Dunlop Oct 21-97 175,000 $0.68 $1.75 $0.68 2 1/2 years
Karyn E. Bachert Oct 21-97 35,000 $0.68 $1.69/ $0.68 2 1/4 years/
$1.75/ 3 1/4 years/
$1.08 (6) 4 1/4 years (6)
Nathan A. Tewalt Oct 21-97 150,000 $0.68 $1.06 $0.68 4 1/4 years
Glenn H Friesen Oct 21-97 35,000 $0.68 $0.95 $0.68 4 1/2 years
</TABLE>
(1) Two stock options were repriced: one exerciseable for 50,000 shares at
C $1.75 per share expiring on January 4, 2000; and one exerciseable for
450,000 shares at C $1.69 per share expiring on January 4, 2001.
(2) Two stock options were repriced: one exerciseable for 150,000 shares at
C $1.06 per share expiring on February 27, 2002; and one exerciseable for
250,000 shares at C $0.80 per share expiring on June 19, 2002.
(3) Two stock options were repriced: one exerciseable for 35,000 shares at
C $1.75 per share expiring on January 4, 2000; and one exerciseable for
140,000 shares at C $1.69 per share expiring on January 4, 2001.
(4) Two stock options were repriced: one exerciseable for 50,000 shares at
C $0.87 per share expiring on November 5, 1997; and one exerciseable for
50,000 shares at C $1.75 per share expiring on January 4, 2000.
(5) Two stock options were repriced: one exerciseable for 30,000 shares at
C $1.75 per share expiring on January 4, 2000; and one exerciseable for
70,000 shares at C $1.69 per share expiring on January 4, 2001.
(6) Three stock options were repriced: one for 10,000 shares exerciseable at
C $1.75 per share expiring on January 4, 2000; one for 13,000 shares
exerciseable at C $1.69 per share expiring on January 4, 2001; and one for
12,000 shares exerciseable at C $1.08 per share expiring on February 2,
2002.
60
<PAGE>
A significant component of the compensation of the insiders of the Company
consists of stock options. The directors do not consider that the recent
performance of the Company's share price accurately reflects the performance
of its directors, officers or employees. The directors consider that the
most significant influences on the Company's share trading price has been the
drop in the price of gold and the current junior stock investment climate,
both of which are unrelated to performance of the directors, officers and
employees of the Company. As a result, the directors considered that it was
appropriate to reprice stock options of directors, officers and employees so
that they continue to provide incentive to such employees to act in the best
interests of the shareholders.
At the next Annual General Meeting, scheduled for May 21, 1998, the
shareholders will be asked to consider and, if thought fit, pass an ordinary
resolution approving the repricing of all the stock options held by insiders
so that they become exerciseable at C $0.68 per share.
MANAGEMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
(1) The services of Andrew F. B. Milligan, a director, President and Chief
Executive Officer of the Company, are provided to the Company pursuant to
a Consultant/Management Agreement with Glencoe Management Ltd. dated
December 1, 1991, and amended on December 19, 1992, June 29, 1994 and
June 1, 1995. Mr. Milligan is the principal shareholder of Glencoe
Management Ltd. This agreement includes provisions by which Mr. Milligan
will be entitled to receive an amount equal to three years' management
fees, and will also be entitled to participate in all employee insurance
and benefit plans in place for a period of up to three years if the
Company should terminate the agreement or the employment of the executive
officer without cause. In addition, the executive officer may elect to be
paid a sum equal to the difference between the market value and the
exercise price of any outstanding stock options held by him at the date
of his termination, upon surrender of such options; or may retain the
options for a period of up to 30 days following termination of his
employment. The estimated cost of the termination arrangements for Mr.
Milligan, based upon 1997 compensation, would be approximately $492,000.
The Company has no present intention to terminate this agreement.
(2) Until February 6, 1998, the services of James A. Currie, who was Executive
Vice President and Chief Operating Officer of the Company since June 1997,
and Vice President, Mining of the Company from December 1994 to June 1997,
were provided to the Company pursuant to a Consulting Agreement between
the Company and Anacortes Management Ltd. dated November 17, 1997. This
Agreement was terminated on February 6, 1998.
(3) Until February 1, 1998, the services of Bobbi-Jo (B. J.) Gordon, who was
Vice President, Finance and Chief Financial Officer of the Company since
February 1, 1997, were provided to the Company pursuant to an Employment
Agreement dated February 1, 1997. This agreement included provisions by
which Ms. Gordon was entitled to receive an amount equal to one year's
salary, and was also entitled to participate in all employee health,
insurance and benefit plan in place for a one year period should the
Company terminate the agreement or the employment of the executive officer
without cause, or should she resign based on the sole reason that there has
been a takeover of control of the Company she would be entitled to receive
an amount equal to three years' salary and employment benefits. In
addition, Ms. Gordon was entitled to retain any stock options held by her
at the date of termination for a period of up to 30 days following
termination of her employment. The Company and Ms. Gordon entered an
agreement on January 31, 1998, whereby the agreement provided for a
payment of C $90,508 (paid) ending her employment with the Company and
further amounts to be made under the agreement of $24,445, of which
$21,318 is payable at the option of the Company in cash or shares in the
capital of the Company. Ms. Gordon's stock options expired on March 3,
1998.
(4) Until February 1, 1997, the services of James M. Carter, who was until
that date a director and the Executive Vice-President and Chief Financial
Officer of the Company, were provided to the Company pursuant to a
Management Agreement dated June 1, 1993 and amended on June 29, 1994 and
June 1, 1995. This agreement included provisions by which Mr. Carter was
entitled to receive an amount equal to three years' salary, and also
entitled to participate in all employee insurance and benefit plans in
place for a period of up to three years if the Company should terminate
the agreement or employment of Mr. Carter without cause. In addition, Mr.
Carter was entitled to elect to be paid a sum equal to the difference
between the market value and exercise price of any outstanding stock
options held by him at the date of termination, upon surrender of such
options; or was entitled to retain the options for a period of up to 30
days following termination of his employment.
The Company, Mr. Carter and Carlin Resources had agreed that the
Management Agreement with Mr. Carter would be transferred to and assumed
by Carlin Resources effective February 1, 1997. Subsequently, the parties
agreed that the Company would be relieved of all obligations under the
Management Agreement in consideration of a payment of C $30,000. This sum
is not due until settlement of Carlin's indebtedness to the Company.
(5) David S. Jennings, a director of the Company, is the principal shareholder
of 7557 Management Group Ltd., a management company which received fees
for providing the services of Dr. Jennings.
61
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Andrew F. B. Milligan, a Director and Executive Officer of the
Registrant, served as a member of the Compensation Committee during 1996 and
part of 1997. As of June 1997, the Compensation Committee is made up of
non-executive directors of the Company.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's compensation program for its executive officers is administered
and reviewed by the Compensation Committee (the "Committee") of the Board of
Directors. In 1995, the Committee used information and a report prepared by
outside consultants to assist in determining appropriate executive
compensation practices for the most senior executive officers. The report
used two groups of Canadian mining companies, using annual revenues and
number of employees as measures. The report augmented information by
including recent salary surveys carried out for comparable mining companies,
and publicly available compensation information for Canadian mining companies.
The Committee reviewed the information and confirmed that the base salaries
and benefits provided to the two senior officers were comparable to those
provided by similar companies. However, it was determined that the Company
was deficient, in relation to comparable companies, in not providing
short-term incentives such as a bonus plan. Thus, the Committee recommended
and the Board of Directors approved additional potential annual compensation
through short term incentive awards (ie. bonus plan). The award of a bonus
is based on the performance of the Executive reaching strategic goals of the
company, such as achieving recognition in the market-place, development of
ore reserves, securing additional financing, accomplishing significant
acquisitions, etc. The objectives for the individual are intended to be
specific, measurable, achievable, relevant and timely.
In 1996, the Committee reviewed and concluded that the annual salary and
benefits for the chief executive officer and the executive vice-president
remained in line with salaries and benefits offered by comparable companies.
The Committee did not recommend any increase in base salaries or benefits for
those positions in 1996. The Committee reviewed the performance of the
president and chief executive officer and the executive vice president (in
the absence) and recommended a bonus based on job description and achievement
of objectives in 1995. The Board of Directors approved the recommendations
of the Committee. The Committee did not recommend any increase in base
salaries or benefits in 1997.
COMPARATIVE SHAREHOLDER RETURN PERFORMANCE GRAPH
The graph below compares the yearly percentage change in the cumulative total
shareholder return on the Company's Common Shares against the cumulative
total shareholder return on the TSE Gold & Precious Minerals Sub-Index and
TSE 300 Stock Index for the five fiscal years immediately prior to the
beginning of the present financial year, assuming a $100 initial investment
with all dividends reinvested to the cumulative returns.
COMPARISON OF FIVE-YEAR CUMULATIVE
TOTAL SHAREHOLDER RETURN ("CSR") ON COMMON SHARES
OF THE CORPORATION AND THE TSE 300 STOCK INDEX
[CHART]
62
<PAGE>
Yearly % Change in CSR = Total Dividends & (End Price - Opening Price)
----------------------------------------------
(for a given period) Opening Price
*Assumes that the initial value of investment on the Toronto Stock Exchange
in the Registrant's Common Shares and in each of the indices was $100 on
commencement of the 5 year period and that all dividends were reinvested.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
TSE 300 Gold & Mineral
Stock Price Stock Price
Year Index Values Index Value Cornucopia Closing Price
C $
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1992 3,350.44 5,250.06 1.60
- ------------------------------------------------------------------------------
1993 4,321.43 10,698.96 2.55
- ------------------------------------------------------------------------------
1994 4,213.61 9,586.36 1.55
- ------------------------------------------------------------------------------
1995 4,713.54 10,413.61 1.75
- ------------------------------------------------------------------------------
1996 5,927.03 11,302.64 0.97
- ------------------------------------------------------------------------------
1997 6,699.44 6,378.87 0.26
- ------------------------------------------------------------------------------
</TABLE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As at March 26, 1998, the number of Common Shares beneficially owned,
directly or indirectly, or over which control or direction is exercised, by
the directors and Named Executive Officers of the Registrant and, to the
knowledge of the directors and Named Executive Officers of the Registrant,
any person who beneficially owns, directly or indirectly, or exercises,
control or direction over shares carrying more than 5 % of the voting rights
attached to all shares of the Registrant follows. The total issued and
outstanding shares of the Registrant at December, 31, 1997, was 38,556,040.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Common Stock Beneficially Owned
Name Number of Shares (1) Percent of Class
----------------------------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS:
Andrew F. B. Milligan, Vancouver, BC, Canada 547,200 (2) 1.42%
Glenn H. Friesen, North Vancouver, BC, Canada 35,000 (3) LESS THAN 1%
OTHER DIRECTORS
Sargent H. Berner, Vancouver, BC, Canada 110,000 (4) LESS THAN 1%
David S. Jennings, Bowen Island, BC, Canada 175,000 (3) LESS THAN 1%
Charles J. G. Russell, Guernsey, UK 100,000 (3) LESS THAN 1%
Stephen R. Sopher, Oakville, ON, Canada 145,000 (4) LESS THAN 1%
David R. Williamson, London, England 100,000 (3) LESS THAN 1%
DIRECTORS OF US SUBSIDIARY COMPANIES
James A. Currie, Abbotsford, BC, Canada 400,000 (3) 1.04%
Nathan A. Tewalt, Blaine, WA, USA 150,000 (3) LESS THAN 1%
All directors and executive officers as group 1,762,200 (5) 4.57%
----------------------------------------------------------------------------------------
</TABLE>
(1) Based upon information furnished to the Registrant by individual
directors. Unless otherwise indicated, such shares are held directly.
(2) Includes 500,000 shares issuable upon exercise of a currently
exercisable incentive stock option.
(3) Represents shares issuable upon exercise of a currently exercisable
incentive stock option.
(4) Includes 100,000 shares issuable upon exercise of a currently
exercisable incentive stock option.
(5) Includes 1,660,000 shares issuable upon exercise of currently
exercisable incentive stock options.
The information as to shares beneficially owned, not being within the
knowledge of the Registrant, has been furnished by the respective individuals
or has been extracted from the register of shareholdings maintained by the
Registrant's transfer agent.
63
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The services of ANDREW F. B. MILLIGAN, a director, President and Chief
Executive Officer of the Registrant, are provided to the Company pursuant to
a Consultant/Management Agreement with Glencoe Management Ltd. dated December
1, 1991, as amended. Mr. Milligan is the principal shareholder of Glencoe
Management Ltd. which receives management fees from the Company. (See Item 11
- -"Executive Compensation", "Summary of Executive Compensation").
The services of BOBBI-JO (B. J.) GORDON, Vice President, Finance and Chief
Financial Officer of the Registrant was provided to the Company pursuant to
an Employment Agreement dated February 1, 1997, and terminated on January 31,
1998. (See Item 11: "Management Agreements and Termination of Employment and
Change-In-Control Agreements").
The services of JAMES M. CARTER, a director and Executive Vice President and
Chief Financial Officer of the Registrant until February 1997, was provided
to the Company pursuant to a Management Agreement dated June 1, 1993, and
amended on June 29, 1994, and June 1, 1995. (See Item 11: "Management
Agreements and Termination of Employment and Change-In-Control Arrangements").
SARGENT H. BERNER, a director of the Company, is a partner in the Vancouver
law firm of DuMoulin Black, which received fees for legal services provided
to the Company for the period ended December 31, 1997, ($74,217 - 1996 fiscal
year; $57,343 - 1995 fiscal year).
DAVID S. JENNINGS, a director and former Vice President of the Registrant, is
the principal shareholder of 7557 Management Group Ltd. ("7557"), a
management company which received fees for providing the services of Dr.
Jennings. During the period ended December 31, 1997, management fees of NIL
($11,005 - 1996; $80,662 - 1995 fiscal year) were paid to 7557 for such
services at a rate of C $600 per day. These fees vary monthly based on
services rendered during the month.
DAVID R. WILLIAMSON, a director of the Registrant, is the principle owner of
David Williamson Associates Limited ("DWA"), which received fees for services
of Mr. Williamson. During the period ended December 31, 1997, consulting
fees of $2,431 ($954 - 1996 fiscal year; $35,565 - 1995 fiscal year) were
paid to DWA for such services.
JAMES A. CURRIE, formerly Executive Vice President and Chief Operating
Officer of the Registrant until February 6, 1998, and currently a director of
Touchstone Resources Company, is the principal shareholder of Anacortes
Management Ltd., which received fees of $23,041 for providing consulting
services for the Company for the period November 17, 1997 to December 31,
1997, (nil in prior years).
64
<PAGE>
CORNUCOPIA RESOURCES LTD.
PART IV
- ------------------------------------------------------------------------------
ITEM 14: EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The consolidated Financial Statements of the Company are included in Part
II, Item 8 of this Form 10-K.
2. NOT APPLICABLE
3. A.) EXHIBITS PAGE(S)
* 3.1 Certificate of Amalgamation dated November 14, 1985 and
Amalgamation Agreement dated April 24, 1985 between Cyrano
Resources Inc. and Cornucopia Resources Ltd.
* 3.2 Memorandum of the Registrant, as amended June 24, 1986 and
June 25, 1987.
* 3.3 Articles of the Registrant, as amended June 24, 1986.
* 4.1 Article 25.1 of the Registrant.
* 4.2 Specimen Certificate for Common Shares without par value.
4.3 Stock Incentive Plan as amended and approved by the
Registrant shareholders on May 27, 1993 and further
amended by the directors on January 5, 1994, May 15,
1995, September 18, 1995 and January 4, 1996. Directors'
and Employees' Share Option Program. Incorporated
herein by reference to Exhibit 4.2 to the Registrant's
Form S-8 (Reg. No. 33-25974) and the most recent
amendment received approval from the Registrant
shareholders at the Company's Annual General Meeting on
June 20, 1996. Incorporated herein by reference to
Exhibit 4.3 of the Registrant's Form 10-K dated December
31, 1996.
10.1 Venture Agreement between Newmont Exploration Limited
and Touchstone Resources Company dated June 23, 1992.
Incorporated by reference to Exhibit 19.1 of the
Registrant's Form 6-K dated June 30, 1992 and amended on
July 6, 1996.
10.2 Property Agreement dated August 31, 1995 between Benguet
Corp., USA and Cornucopia Resources Ltd. Incorporated
by Reference to Exhibit 10.5 of the Registrant's Form
10-KSB dated December 31, 1995.
10.3 Construction Contract dated August 20, 1996, between the
Company's subsidiary Mineral Ridge Resources Inc. and
Roberts & Schaefer Company. Incorporated by reference
to Exhibit 10.7 of the Registrant's Form 10-K dated
December 31, 1996.
10.4 Open Pit Mining Contract dated August 20, 1996, between
the Company's subsidiary Mineral Ridge Resources Inc.
and D. H. Blattner & Sons, Inc. Incorporated by
reference to Exhibit 10.8 of the Registrant's Form 10-K
dated December 31, 1996.
10.5 Loan Agreement dated January 17, 1997, between the
Company's subsidiary Mineral Ridge Resources Inc. and
Dresdner Bank AG, New York and Grand Cayman Branches.
Incorporated herein by reference to Exhibit 10.9 of the
Registrant's Form 10-K dated December 31, 1996.
10.6 Agreement between Sierra Pacific Power Company and
Mineral Ridge Resource Inc. dated July 11, 1997.
Incorporated by reference to Exhibit 20.1 of the
Registrant's Form 10-Q dated September 30, 1997.
65
<PAGE>
PAGE(S)
10.7 Venture Agreement between Touchstone Resources Company
and Great Basin Gold Inc. dated August 13, 1997.
Incorporated by reference to Exhibit 20.2 of the
Registrant's Form 10-Q dated September 30, 1997.
11.1 Statement Regarding Computation of Per Share Earnings. 72
17.1 Letter of resignation from Robert F. Dunlop as a
director of the Registrant, dated February 12, 1998.
Incorporated by reference to Exhibit 17.1 of the
Registrant's Form 8-K dated February 26, 1998.
19.1 Shareholder Protection Plan Rights Agreement between
Cornucopia Resources Ltd. and The R-M Trust Company
dated August 18, 1992, and amended on July 16, 1996.
Incorporated herein by reference to Exhibit 19.5 of the
Registrant's Form 10-K dated December 31, 1996
20.1 Final Prospectus of Cornucopia Resources Ltd. dated
September 12, 1996 as filed with the Ontario Securities
Commission, British Columbia Securities Commission and
Quebec Securities Commission. Incorporated by reference
to Exhibit 20.2 of the Registrant's Form 10-K dated
December 31, 1996.
20.2 Final Prospectus of Cornucopia Resources Ltd. dated
March 3, 1997 as filed with the Ontario Securities
commission, British Columbia Securities Commission and
Quebec Securities Commission. Incorporated by reference
to Exhibit 20.3 of the Registrant's Form 10-K dated
December 31, 1996.
20.3 Final Prospectus of Cornucopia Resources Ltd. dated July
25, 1997, as filed with the Ontario Securities
commission, British Columbia Securities Commission and
Quebec Securities Commission. Incorporated by reference
to Exhibit 20.1 of the Registrant's Form 10-Q dated June
30, 1997.
20.4 Revised Management Agreement dated June 1, 1995 between
the Registrant and Glencoe Management Ltd. Incorporated
herein by reference to Exhibit 19.14 of the Registrant's
Form 10-KSB dated December 31, 1995.
20.5 Revised Management Agreement dated June 1, 1995 between
the Registrant and James Carter. Incorporated herein by
reference to Exhibit 19.13 of the Registrant's Form
10-KSB dated December 31, 1995.
20.6 Employment Agreement between the Registrant and B. J.
Gordon dated February 1, 1997. Incorporated by
reference to Exhibit 99 of the Registrant's Form 10-Q
dated March 31, 1997.
20.7 Consulting Agreement between the Registrant and 73-80
Anacortes Management Ltd. dated November 17, 1997.
20.8 New releases issued dated; February 3, February 4, March
6, March 12, April 8, April 9, April 30, and June 26,
1997, are incorporated herein by reference to Exhibit
28.1 of the Registrant's Form 10-Q dated June 30, 1997;
and news releases dated August 14, August 27, and
October 29, 1997, are incorporated by reference to
Exhibit 20.3 of the Registrant's Form 10-Q dated
September 30, 1997.
20.9 New releases issued dated February 10, 1998, and 81-84
February 25, 1998, regarding recent work on the Ivanhoe
Property, Nevada.
22.1 Subsidiaries of the Registrant. (The subsidiary
companies of the Registrant are described in Item 1 -
"Business" of this Form 10-K).
23.1 Consent of KPMG dated March 30, 1998. 85
99 Undertaking with respect to Form S-8 under the Securities 86
Act of 1993.
* Incorporated herein by reference to the corresponding exhibit filed with the
Registrant's original Form 10 dated April 29, 1988.
66
<PAGE>
B.) REPORTS ON FORM 8K
During 1997, and as of March 26, 1998, the Registrant has filed reports on
Form 8-K on the following dates:
May 8, 1997 - news release announcing Registrant selling 2,100,000
shares of Carlin Resources Corp.
September 10, 1997 - news release announcing Letter of Intent between
Registrant and First Dynasty Mines Ltd. regarding the
possible acquisition of New Millennium Mining Ltd.
September 30, 1997 - resignation of a director of the Registrant.
November 6, 1997 - news release announcing termination of First Dynasty
agreement-in-principle.
November 19, 1997 - news release announcing temporary shut down of mining
at the Mineral Ridge Mine.
February 12, 1998 - resignation of Executive Vice President and Vice
President, Finance and appointment of Chief Financial
Officer and shares granted under the Company's Share
Bonus Plan.
February 26, 1998 - news release announcing results in from Ivanhoe
Property, and resignation of a director of the
Registrant.
D.) During 1997, the Registrant filed three reports on Form 10-Q dated
March 31, 1997; June 30, 1997; and September 30, 1997.
67
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Date: March 30, 1998 /s/ Andrew F. B. Milligan
- --------------------- ---------------------------------
Andrew F. B. Milligan
President & Chief
Executive Officer
Director
Date: March 30, 1998 /s/ Glenn H. Friesen
- --------------------- ---------------------------------
Glenn H. Friesen
Corporate Controller and
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: March 30, 1998 /s/ David S. Jennings
- --------------------- ---------------------------------
David S. Jennings
Director
Date: March 30, 1998 /S/ Sargent H. Berner
- --------------------- ---------------------------------
Sargent H. Berner
Director
Date: March 20, 1998 /S/ Stephen R. Sopher
- --------------------- ---------------------------------
Stephen R. Sopher
Director
THE REGISTRANT'S 1997 ANNUAL REPORT COVERING THE COMPANY'S LAST FISCAL YEAR AND
RELATED PROXY MATERIAL WILL BE SENT TO SHAREHOLDERS IN APRIL, 1998.
68
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number
<S> <C> <C>
* 3.1 Certificate of Amalgamation dated November 14, 1985 and
Amalgamation Agreement dated April 24, 1985 between Cyrano
Resources Inc. and Cornucopia Resources Ltd.
* 3.2 Memorandum of the Registrant, as amended June 24, 1986 and
June 25, 1987.
* 3.3 Articles of the Registrant, as amended June 24, 1986.
* 4.1 Article 25.1 of the Registrant.
* 4.2 Specimen Certificate for Common Shares without par value.
4.3 Stock Incentive Plan as amended and approved by the
Registrant shareholders on May 27, 1993 and further
amended by the directors on January 5, 1994, May 15,
1995, September 18, 1995 and January 4, 1996. Directors'
and Employees' Share Option Program. Incorporated
herein by reference to Exhibit 4.2 to the Registrant's
Form S-8 (Reg. No. 33-25974) and the most recent
amendment received approval from the Registrant
shareholders at the Company's Annual General Meeting on
June 20, 1996. Incorporated herein by reference to
Exhibit 4.3 of the Registrant's Form 10-K dated December
31, 1996.
10.1 Venture Agreement between Newmont Exploration Limited
and Touchstone Resources Company dated June 23, 1992.
Incorporated by reference to Exhibit 19.1 of the
Registrant's Form 6-K dated June 30, 1992 and amended on
July 6, 1996.
10.2 Property Agreement dated August 31, 1995 between Benguet
Corp., USA and Cornucopia Resources Ltd. Incorporated
by Reference to Exhibit 10.5 of the Registrant's Form
10-KSB dated December 31, 1995.
10.3 Construction Contract dated August 20, 1996, between the
Company's subsidiary Mineral Ridge Resources Inc. and
Roberts & Schaefer Company. Incorporated by reference
to Exhibit 10.7 of the Registrant's Form 10-K dated
December 31, 1996.
10.4 Open Pit Mining Contract dated August 20, 1996, between
the Company's subsidiary Mineral Ridge Resources Inc.
and D. H. Blattner & Sons, Inc. Incorporated by
reference to Exhibit 10.8 of the Registrant's Form 10-K
dated December 31, 1996.
10.5 Loan Agreement dated January 17, 1997, between the
Company's subsidiary Mineral Ridge Resources Inc. and
Dresdner Bank AG, New York and Grand Cayman Branches.
Incorporated herein by reference to Exhibit 10.9 of the
Registrant's Form 10-K dated December 31, 1996.
10.6 Agreement between Sierra Pacific Power Company and
Mineral Ridge Resource Inc. dated July 11, 1997.
Incorporated by reference to Exhibit 20.1 of the
Registrant's Form 10-Q dated September 30, 1997.
<PAGE>
Page
10.7 Venture Agreement between Touchstone Resources Company
and Great Basin Gold Inc. dated August 13, 1997.
Incorporated by reference to Exhibit 20.2 of the
Registrant's Form 10-Q dated September 30, 1997.
11.1 Statement Regarding Computation of Per Share Earnings. 72
17.1 Letter of resignation from Robert F. Dunlop as a
director of the Registrant, dated February 12, 1998.
Incorporated by reference to Exhibit 17.1 of the
Registrant's Form 8-K dated February 26, 1998.
19.1 Shareholder Protection Plan Rights Agreement between
Cornucopia Resources Ltd. and The R-M Trust Company
dated August 18, 1992, and amended on July 16, 1996.
Incorporated herein by reference to Exhibit 19.5 of the
Registrant's Form 10-K dated December 31, 1996
20.1 Final Prospectus of Cornucopia Resources Ltd. dated
September 12, 1996 as filed with the Ontario Securities
Commission, British Columbia Securities Commission and
Quebec Securities Commission. Incorporated by reference
to Exhibit 20.2 of the Registrant's Form 10-K dated
December 31, 1996.
20.2 Final Prospectus of Cornucopia Resources Ltd. dated
March 3, 1997 as filed with the Ontario Securities
commission, British Columbia Securities Commission and
Quebec Securities Commission. Incorporated by reference
to Exhibit 20.3 of the Registrant's Form 10-K dated
December 31, 1996.
20.3 Final Prospectus of Cornucopia Resources Ltd. dated July
25, 1997, as filed with the Ontario Securities
commission, British Columbia Securities Commission and
Quebec Securities Commission. Incorporated by reference
to Exhibit 20.1 of the Registrant's Form 10-Q dated June
30, 1997.
20.4 Revised Management Agreement dated June 1, 1995 between
the Registrant and Glencoe Management Ltd. Incorporated
herein by reference to Exhibit 19.14 of the Registrant's
Form 10-KSB dated December 31, 1995.
20.5 Revised Management Agreement dated June 1, 1995 between
the Registrant and James Carter. Incorporated herein by
reference to Exhibit 19.13 of the Registrant's Form
10-KSB dated December 31, 1995.
20.6 Employment Agreement between the Registrant and B. J.
Gordon dated February 1, 1997. Incorporated by
reference to Exhibit 99 of the Registrant's Form 10-Q
dated March 31, 1997.
20.7 Consulting Agreement between the Registrant and 73-80
Anacortes Management Ltd. dated November 17, 1997.
20.8 New releases issued dated; February 3, February 4, March
6, March 12, April 8, April 9, April 30, and June 26,
1997, are incorporated herein by reference to Exhibit
28.1 of the Registrant's Form 10-Q dated June 30, 1997;
and news releases dated August 14, August 27, and
October 29, 1997, are incorporated by reference to
Exhibit 20.3 of the Registrant's Form 10-Q dated
September 30, 1997.
20.9 New releases issued dated February 10, 1998, and 81-84
February 25, 1998, regarding recent work on the Ivanhoe
Property, Nevada.
22.1 Subsidiaries of the Registrant. (The subsidiary
companies of the Registrant are described in Item 1 -
"Business" of this Form 10-K).
23.1 Consent of KPMG dated March 30, 1998. 85
99 Undertaking with respect to Form S-8 under the Securities 86
Act of 1993.
* Incorporated herein by reference to the corresponding exhibit filed with the
Registrant's original Form 10 dated April 29, 1988.
</TABLE>
<PAGE>
CORNUCOPIA RESOURCES LTD.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
BASIS LOSS PER SHARE
<TABLE>
<CAPTION>
1. Weighted average shares outstanding December 31,
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Number of shares outstanding, beginning of year 35,058,040 26,290,340 21,535,340
Number of shares issued during the year 3,498,000 8,767,700 4,755,000
Weighted average number of shares outstanding,
end of year 37,514,204 30,287,082 24,847,263
------------ ----------- -----------
2. Loss for the year 18,464,625 (2,610,635) (2,640,663)
------------ ----------- -----------
------------ ----------- -----------
Loss per share (0.49) (0.09) (0.11)
------------ ----------- -----------
------------ ----------- -----------
FULLY DILUTED LOSS PER SHARE
1. Shares outstanding
Weighted average number of shares outstanding
at end of year 37,514,204 30,287,082 24,847,263
Assumed exercise of options 2,275,000 2,303,000 2,240,000
Assumed exercise of warrants 8,431,500 8,306,500 2,090,000
Shares outstanding - fully diluted 48,220,707 40,896,582 29,177,263
------------ ----------- -----------
2. Loss for the year (18,464,625) (2,610,635) (2,640,663)
------------ ----------- -----------
------------ ----------- -----------
Fully diluted loss per share (0.38) (0.06) (0.09)
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
72
<PAGE>
CONSULTING AGREEMENT
THIS AGREEMENT made as of the 17th day of November, 1997.
BETWEEN:
CORNUCOPIA RESOURCES LTD., a company subsisting under the laws of the
Province of British Columbia, having an office at 540 - 355 Burrard
Street, Vancouver, B.C. V6C 2G8
(hereinafter called the "Company")
OF THE FIRST PART
AND:
ANACORTES MANAGEMENT LTD., a company subsisting under the laws of the
Province of British Columbia, having an office at 2077 Essex Drive,
Abbotsford, B.C. V2S 7R8
(hereinafter called the "Consultant")
OF THE SECOND PART
WHEREAS:
A. The Company is engaged in the acquisition, exploration, development
and operation of mineral properties;
B. The Consultant provides management and other services to companies,
including mining companies;
C. The Company desires to avail itself of the management services,
sources of information, advice, assistance and other facilities of the
Consultant and to have the Consultant undertake the duties and
responsibilities as hereinafter set out; and
D. The Consultant is willing to undertake such duties and
responsibilities to the Company according to the terms and conditions
hereinafter set out.
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of the mutual
covenants and agreements hereinafter set forth and for other good and
valuable consideration (the receipt and sufficiency of which is hereby
acknowledged by all parties hereto), the parties hereto covenant and agree as
follows:
1. APPOINTMENT AND DUTIES OF CONSULTANT
1.1 The Company agrees to engage the Consultant to perform certain
services, including management, supervision and the provision of technical
and operational advice to the Company, provided that at all times the powers
and duties of the Consultant hereunder, are to be
73
<PAGE>
- 2 -
such as may be determined by the President and the Board of Directors of the
Company. All services, duties and responsibilities to be performed by the
Consultant hereunder shall hereinafter be called the "Services"
1.2 The Consultant hereby accepts such appointment and agrees to perform
the Services in accordance with the terms and conditions herein, in a
diligent, competent and professional manner.
2. TERM
2.1 The Consultant shall provide the Services in accordance with the
provisions of this Agreement during an initial period commencing on November
17, 1997 and ending on November 16, 1998. This period is hereinafter called
the "Term". In each ensuing year, on the anniversary date of the Agreement,
the Term shall be automatically extended for an additional year unless the
parties hereto mutually agree otherwise in writing or unless this Agreement
is terminated under the provisions of section 7 hereof.
3. MANAGEMENT FEE AND EXPENSES
3.1 In consideration of the Services to be provided by the Consultant
hereunder, the Company shall pay to the Consultant, in full payment and
reimbursement for providing the Services the sum of C $16,000.00 per month.
3.2 The Consultant agrees to render monthly invoices to the Company, in
a form reasonably acceptable to the Company, detailing the Services performed
by the Consultant during the foregoing period.
3.3 The Company shall be responsible for all sales taxes (including
goods and services taxes) due in respect of the fees paid to the Consultant.
The fees paid to the Consultant under this Agreement shall be increased to
take into account any applicable goods and services taxes or other sales or
value-added taxes payable in respect of such fees, and all invoices submitted
by the Consultant shall include the GST registration number and any other
applicable sales or value-added tax registration numbers of the Consultant.
3.4 The employees of the Consultant shall not be entitled to receive
from the Company any benefits whatsoever, except as outlined in Section 3.5
hereof, including any Company sponsored benefits programs, and the Company
shall not be required to make contributions for Unemployment Insurance,
Canada Pension, Workers' Compensation or other similar levies in respect of
the commissions and fees for services to which the Consultant is entitled
under this Agreement.
The Consultant shall be responsible for the payment of all federal
and provincial income taxes and other expenses or taxes arising due to
payments made to the Consultant pursuant to this Agreement, and the
Consultant shall hold harmless and indemnify the Company, its officers,
directors, employees and agents, in respect of any and all loss, cost,
damage, liability, tax, charge, or penalty (including legal fees) arising or
allegedly arising due to any federal, provincial or
74
<PAGE>
- 3 -
municipal tax, charge, penalty, or interest in any manner related to payments
made to the Consultant hereunder.
3.5 The employees of the Consultant shall be entitled to participate in
certain of the Company's incentive programs, including share option plans,
share purchase plans and share bonus plans in accordance with and on the same
terms and conditions as at the date hereof are in place or as which may from
time to time be determined by the President and Directors in their sole
discretion. The Consultant acknowledges that participation in these plans or
programs will be to such extent and in such amounts as the President and the
Directors in their sole discretion, may decide from time to time.
Any amounts to which the employees of the Consultant may be entitled
under any such plan or program shall, for the purposes of this Agreement, be
treated as additional to, and not in substitution for, the payments provided
for in section 3.1 hereof.
The Consultant agrees that the company may substitute, reduce,
modify, or if necessary, eliminate such plans or programs for good and valid
reason. All such plans or programs shall be governed by the policies of the
various regulatory bodies which have jurisdiction over the affairs of the
Company.
3.6 The Consultant shall be reimbursed by the Company for all
out-of-pocket expenses actually and properly incurred in the discharge of his
duties for the Company. The Consultant agrees that such reimbursement shall
be due only after an itemized expense statement together with applicable
receipts has been submitted, providing the details of all monies actually
expended on behalf of the Company, and such other information as may be
reasonably required and requested by the Company.
4. INDEPENDENT CONTRACTOR
4.1 The parties agree that the Services to be provided by the Consultant
under this Agreement shall be and are those of an independent contractor and
it is not intended by the parties that this Agreement shall be construed to
create an employer/employee relationship, partnership, joint-venture, or
anything other than that of independent contractor and principal.
4.2 The parties hereby acknowledge that Mr. James A. Currie, P.Eng., is
a key employee of the Consultant and is integral to the successful
performance of the Services under this Agreement. As such, it is
acknowledged that the Consultant will cause Mr. James A. Currie, P.Eng., (the
"Employee") to perform the Services on its behalf and will not cause or
permit anyone other than the Employee to so act on its behalf without the
prior written consent of the Company. The Consultant further agrees that it
will arrange for the Employee to be available at all reasonable times to
provide the Services as and when reasonably required by the Company during
the Term of this Agreement
75
<PAGE>
- 4 -
4.3 The Employee and other employees of the Consultant will, throughout
the Term, be considered to be the employees of the Consultant and shall at no
time be considered to be employees of the Company.
4.4 Consultant, as an independent contractor, shall work according to
its own methods in providing the Services and is subject to the Company's
control only as to the results of the work, not as to the means or manner
whereby it is to be accomplished. The Company may, from time to time, give
such instructions to the Consultant as it considers necessary in connection
with the provision of the Services, but the Consultant will not be subject to
the control of the Company in respect of the manner in which such
instructions are carried out.
4.5 All activities of the Consultant not related to the activities of
the Company under this Agreement shall be considered to be "outside
business." Such outside businesses include the Consultant providing
consulting and other services to the Consultant's other clients and the
Consultant's participation in investments, business ventures, or other
business activity engaged in for-profit, political, charitable, trade,
professional and community organizations. Except as otherwise set forth
herein, nothing contained in this Agreement shall preclude the Employee from
engaging in such outside business activities of the Consultant, provided that
such outside business activities do not interfere with the performance of the
Employee's duties for, and responsibilities to the Company.
4.6 All outside business of the Consultant shall be done in the name of
the Consultant. Consultant shall not make any reference or representation
that directly or indirectly states, or from which in any way could be implied
or inferred, that the Company is engaged, participating, assisting,
supporting or encouraging any of the outside business of the Consultant. The
Company shall have no liability or obligation for any liabilities incurred in
such outside business.
4.7 Consultant shall indemnify, defend and hold harmless the Company,
its officers, directors, employees and agents from all loss, liability,
damages, costs and expenses including legal fees, resulting from all claims,
demands, actions and causes of action of any type or kind, known or unknown,
arising out of or related to any outside business of the Consultant or
arising out of or related to the activities of the Consultant pursuant to the
provisions of this Agreement and/or arising out of or related to any
negligent act or omission of the Consultant.
5. REPORTS
5.1 The Consultant will upon the request, from time to time, of the
Company:
(a) Fully inform the Company of the work done and to be done by the
Consultant in connection with the provision of the Services.
(b) Permit the Company at all reasonable times to inspect, examine,
review and copy any and all working papers, reports, documents
and material, whether complete or otherwise (collectively called
the "Material") that have been produced, received or acquired
by, or provided by the Company to, the Consultant as a result of
this Agreement.
76
<PAGE>
- 5 -
6. CONFIDENTIAL INFORMATION
6.1 The Consultant acknowledges that certain of the material and
information made available to the Consultant by the Company in the
performance of the Services (the "Confidential Information") will be of a
confidential nature. The Consultant recognizes that the Confidential
Information is the sole and exclusive property of the Company, and the
Consultant shall use its best efforts and exercise utmost diligence to
protect and maintain the confidentiality of the Confidential Information.
The Consultant shall not, directly or indirectly, use the Confidential
Information for its own benefit, or disclose to another any Confidential
Information, whether or not acquired, learned, obtained or developed by the
Consultant alone or in conjunction with others, except as such disclosure or
use may be required in connection with the performance of the Services or as
may be consented to in writing by the Company.
6.2 The Confidential Information is and shall remain the sole and
exclusive property of the Company regardless of whether such information was
generated by the Consultant or by others, and the Consultant agrees that upon
termination of this Agreement it shall deliver promptly to the Company all
such tangible parts of the Confidential Information including records, data,
notes reports, correspondence, materials, or other documents which are in the
possession or under the control of the Consultant without retaining copies
thereof.
6.3 Notwithstanding the foregoing provisions of this clause, the
Consultant shall not be liable for the disclosure or use of any of the
Confidential Information to the extent that:
(a) the Confidential Information is or becomes available to the
public from a source other than the Consultant and through no
fault of the Consultant; or
(b) the Confidential Information is lawfully obtained by the
Consultant from a third party or a source outside of this
Agreement.
6.4 The covenants and agreements contained in this clause shall survive
the termination of this Agreement.
7.0 TERMINATION
7.1 In the event that the Consultant breaches this Agreement, or
otherwise fails to perform the Services in accordance with the terms of this
Agreement, the Company may terminate this Agreement immediately and without
notice for cause. Either party may terminate this Agreement at any time,
without cause or reason, upon giving 30 days advance written notice to the
other.
7.2 Upon termination of this Agreement:
(a) the Company's obligations to the Consultant under this Agreement
shall terminate except for the Company's obligation to pay any
fees and expenses in accordance with the terms of this Agreement,
to the date of termination; and
77
<PAGE>
- 6 -
(b) the Consultant's obligations to the Company under this Agreement
shall terminate except those obligations which are specifically
expressed to survive the termination of this Agreement.
8. GOVERNING LAW
8.1 This Agreement shall be governed by and construed in accordance with
the laws of the Province of British Columbia which shall be deemed to be the
proper law hereof and each of the parties hereto by their execution of this
Agreement irrevocably attorneys to the jurisdiction of the courts of the said
Province.
9. SEVERABILITY
9.1 Should any part of this Agreement be declared or held invalid for
reason, such invalidity shall not affect the validity of the remainder which
shall continue in force and effect and be construed as if this Agreement had
been executed without the invalid portion and it is hereby declared that the
intention of the parties hereto, that this Agreement would have been executed
without reference to any portion which may, for any reason, be hereafter
declared or held invalid.
10. ASSIGNMENT AND SUB-CONTRACTING
10.1 This Agreement is personal in nature and may not be assigned by
either party hereto.
10.2 The Consultant shall not, without the prior written consent of the
Company, sub-contract any of its obligations under this Agreement and no
sub-contract entered into by the Consultant will relieve the Consultant from
any of its obligations under this Agreement or impose any obligation or
liability upon the Company to any such sub-contractor.
11. AMENDMENTS
11.1 Any amendment to this Agreement must be in writing and signed by
both parties hereto.
12. ENTIRE AGREEMENT
12.1 The provisions herein contained constitute the entire agreement
between the parties and supersede all previous communications,
representations and agreements, whether verbal or written, between the
parties with respect to the subject matter hereof.
13. REMEDIES CUMULATIVE
13.1 All rights and remedies of either party hereunder are cumulative and
are in addition to, and shall not be deemed to exclude, any other right or
remedy allowed by law. All rights and remedies may be exercised concurrently.
78
<PAGE>
- 7 -
14. NON-WAIVER
No condoning, excusing or waiver by any party hereto of any default,
breach or non-observance by any party hereto at any time or times in respect
of any covenant, provision or condition herein contained shall operate as a
waiver of that party's rights hereunder in respect of any continuing or
subsequent default, breach or non-observance, or so as to defeat or affect in
any way the rights of that party in respect of any such continuing or
subsequent default, breach or non-observance, and no waiver shall be inferred
from, or implied by anything done or omitted to be done by having those
rights.
15. NOTICES
15.1 All notices, demands and payments required or permitted to be given
hereunder shall be in writing and may be delivered personally or sent by
first-class, prepaid registered mail to the addresses set forth below. Any
notice delivered shall be deemed to have been given and received at the time
of delivery. Any notice mailed as aforesaid shall be deemed to have been
given and received on the expiration of 48 hours after it is posted,
addressed as follows:
If to the Company: Cornucopia Resources Ltd.
540 - 355 Burrard Street
Vancouver, B.C.
V6C 2G8
Attention: The Corporate Secretary
If to the Consultant: Anacortes Management Ltd.
2077 Essex Drive
Abbotsford, B.C.
V2S 7R8
Attention: The President
or at such other address or addresses as may from time to time be notified in
writing by the parties hereto, provided that if there shall be between the
time of mailing and the actual receipt of the notice a mail strike, slowdown
or other labour dispute which might affect the delivery of such notice by the
mails, then such notice shall only be effective if actually delivered.
16. FURTHER ASSURANCE
Each of the parties hereto hereby covenants and agrees to execute
such further and other documents and instruments and to do such further and
other things as may be necessary to implement and carry out the intent of
this Agreement.
17. TIME OF ESSENCE
Time shall be of the essence in this Agreement.
79
<PAGE>
- 8 -
18. ENUREMENT
This Agreement shall be binding upon and shall enure to the benefit
of each of the parties hereto and their respective employees and permitted
receivers, successors and assigns.
IN WITNESS WHEREOF the parties hereto have signed this Agreement as of the
day and year first above written.
The Common Seal of CORNUCOPIA RESOURCES LTD. )
was hereunto affixed in the presence of: )
)
)
/s/ Andrew F. B. Milligan )
- ---------------------------------------- )
Andrew F. B. Milligan, President and CEO )
)
The Common Seal of ANACORTES MANAGEMENT LTD. )
was hereunto affixed in the presence of and )
delivered by James A. Currie: )
)
)
)
/s/ [ILLEGIBLE] ) /s/ James A. Currie
- --------------------------------------- ) -------------------
Witness James A. Currie
80
<PAGE>
GREAT BASIN GOLD LTD. CORNUCOPIA RESOURCES LTD.
STE. 1020-800 WEST PENDER STREET STE. 540-355 BURRARD STREET
VANCOUVER, BC V6C 2V6 VANCOUVER, BC V6C 2G8
TEL 604-684-6365 (1-800-667-2114) TEL 604-687-0619 (1-800-436-4404)
FAX 604-684-8092 FAX 604-681-4170
February 10, 1998
DRILL CORE SAMPLING OF GOLD AND SILVER MINERALIZED
INTERSECTIONS UNDERWAY AT IVANHOE
Nathan A. Tewalt, Chief Executive Office of Great Basin Gold Ltd. (GBG: VSE;
GBGLF: NASDAQ) and Andrew F. B. Milligan, President and Chief Executive
Officer of Cornucopia Resources Ltd. (CNP: TSE; CNPGF: NASDAQ) announce that
initial core drilling at their Ivanhoe Property (75% GBG: 25% CNP) located on
the Carlin Trend, Nevada has intersected eptihermal, multi-stage quartz veins
hosting visible gold and silver mineralization within intervals ranging from
2 feet to over 20 feet in three of six vertical core holes drilled. The
northwest-trending structural system intersected is in upper plate Valmy
Formation rocks and likely represents a feeder system to the overlaying 3
million ounce mineral resource of the Hollister Deposit. For this initial
drilling, whole core intervals are being recommended to be sampled and
assayed to obtain the representative gold and silver values within these
intervals. The Boards of Directors wish to update shareholders on the
current status of the drill program at this point.
Great Basin Gold believes that the Valmy gold-silver system intersected is an
analogue to the precious metals-rich Ken Snyder (Midas) Deposit, located 15
miles to the northwest and therefore the Company plans to make this Valmy
system a primary target for extensive drilling in the coming months. The
gold and silver bearing structure intersected is believed to be but one of a
series of northwest and northeast trending, steeply dipping mineralized
conduits on the Ivanhoe Property.
Dr. Lawrence T. Larson, former professor and Department Head of the
Department of Geology (Mackay School of Mines), University of Nevada, Reno,
now in private practice, has been retained by Great Basin Gold to complete
preliminary petrographic and scanning electron microscopy/microprobe
examinations on samples of the drill core. Mineralization identified to date
includes gold-rich electrum and silver-bearing minerals such as naumannite,
aguilarite, stromeyerite, and tetrahedrite. Other characteristic minerals
include pyrite, marcasite, sphalerite, chalocopyrite, chalcocite, and
covellite. These minerals occur in varying concentrations and proportions in
banded to brecciated quartz vein structures and fissures filled dominantly
with quartz-kaolinite-adularia-sericite.
In light of the identification of gold and silver mineralization within the
current drill intercepts, the services of Chemex Labs Ltd. have been retained
to recommend a sampling and assay protocol for the drill core from the
initial six holes. After very detailed core logging, photographic
documentation, and petrography is completed by Great Basin Gold geologists,
Chemex has recommended that senior Chemex personnel complete sampling of
whole core over select intervals. Chemex will then prepare the samples by
crushing to -10 mesh and riffle splitting to 1 kilogram pulp aliquots for
screen metallics assay at +150 and -150 mesh. The total oversize fraction
(+150 mesh) will be analyzed by fire assay followed by a gravimetric
.../1
81
<PAGE>
finish for gold and silver, while the undersize fraction (-150 mesh) will be
subject to 3 one assay ton fire assays with a gravimetric finish for gold and
silver. The +150 mesh results will be added to the average of 3 assays for
the -150 mesh samples to calculate total gold and silver grades for each
sample. Cleaning rock sand will be run between each sample and this sand
material will be assayed to identify any potential cross contamination. As
well, all samples will undergo a 32 element ICP analysis. Assay results are
expected to be available for reporting in approximately two weeks.
Although nearly 900 historical holes have been drilled in the greater
Hollister area of the Ivanhoe Property, most of this drilling went into
delineation of shallow oxide gold resources in the near surface volcanics,
with very few of these historical holes penetrating the underlying Valmy
Formation. Despite little previous attention to the Valmy, 34 of these
historic drill holes (mainly reverse circulation) intercepted at least 5 feet
grading 0.20+ ounces gold/ton in Valmy rocks, across an area measuring 3600
feet by 2800 feet. The recognition by Great Basin Gold of the Valmy
intercepts as Ken Snyder-style mineralization combined with the likelihood of
these zones being the feeder systems to the 3 million ounce Hollister Deposit
mineral inventory located in the overlying volcanics, points to the high
potential for the delineation of an extensive high grade Valmy gold-silver
system on the Ivanhoe Property.
Great Basin Gold plans to aggressively pursue exploration of the Valmy
targets as the weather improves. In addition, an extensive drill hole
database in overlying volcanics will be combined with an emerging Valmy
geologic model to target even deeper gold zones in the lower plate carbonate
rocks which lie below classic carbonate hosted Carlin-type deposits found
along the Carlin Trend. In summary, the Ivanhoe Property is being explored
for Ken Snyder-type systems in upper plate Valmy rocks and also in two areas
for deeper Post-Betze-type analogues in lower plate carbonate rocks.
ON BEHALF OF THE BOARDS OF DIRECTORS
/s/ NATHAN A. TEWALT /s/ ANDREW F. B. MILLIGAN
Nathan A. Tewalt Andrew F. B. Milligan
Chief Executive Officer President & CEO
GREAT BASIN GOLD LTD. CORNUCOPIA RESOURCES LTD.
The Vancouver Stock Exchange has neither approved nor disapproved the
information contained in this news release.
82
.../2
<PAGE>
CORNUCOPIA RESOURCES LTD.
Suite 540 - 355 Burrard Street, Vancouver, BC Canada V6C 2G8
Telephone: (604) 687-0619 Facsimile: (604) 681-4170
NEWS RELEASE
INVESTOR RELATIONS: KARYN BACHERT NASDAQ TRADING SYMBOL: CNPGF
1.800.436.4404 TSE TRADING SYMBOL: CNP
WWW.CORNUCOPIA-RESOURCES.COM
FOR IMMEDIATE RELEASE FEBRUARY 25, 1998
BONANZA - GRADE GOLD INTERCEPT REPORTED FROM CORNUCOPIA'S IVANHOE PROPERTY
Vancouver, BC - Andrew F. B. Milligan, President and Chief Executive Officer
of Cornucopia Resources Ltd. (CNP: TSE; CNPGF: NASDAQ) is pleased to announce
highly encouraging assay results from select vein intercepts in three of six
core holes recently completed by its joint venture partner, Great Basin Gold
Ltd., operator of the Ivanhoe project located on the Carlin Trend, Nevada.
Great Basin is earning a 75% interest in the property by spending US $2.8
million on exploration.
The initial drill program consisted of a fence of six vertical holes drilled
on 25 foot spacings across an area of known, gold-bearing feeder structures.
This program was designed to test the feeder structures at moderate depths
before drilling down through Valmy Formation rocks towards potential
high-grade, lower plate, carbonate-hosted gold deposits at greater depth.
Great Basin utilized the latest drilling technology to obtain excellent core
recovery and successfully complete all holes in an area where historic
drilling produced either poor sample recovery or resulted in lost holes. To
prevent potential sample bias and maximize sample size, whole core was taken,
under the supervision of Chemex Labs Ltd., from select intervals in three of
the six core holes. Assay result highlights from 134.7 feet of the whole
core samples analyzed are listed below, while the balance of results from
2,246 feet of core utilizing half core for analysis are expected in March.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
GOLD SILVER
DRILL FROM TO INTERCEPT INTERCEPT -------------------- --------------------
HOLE (FEET) (FEET) (FEET) (METRES) (OZ./TON) (G/TONNE) (OZ./TON) (G/TONNE)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IH-002 961.5 994.7 33.2 10.12 0.132 4.53 3.2 110
incl. 968.0 976.0 8.0 2.44 0.243 8.33 1.8 62
also 984.5 990.0 5.5 1.68 0.178 6.10 13.4 460
- ---------------------------------------------------------------------------------------------
IH-003 975.4 984.7 9.3 2.83 0.278 9.53 2.1 72
- ---------------------------------------------------------------------------------------------
IH-004 607.1 617.7 10.6 3.23 4.964 170.23 47.8 1639
incl. 613.1 617.7 4.6 1.40 11.130 381.69 103.4 3546
634.5 647.1 12.6 3.84 1.635 56.07 39.0 1337
- ---------------------------------------------------------------------------------------------
</TABLE>
Further drilling of the gold-rich feeder structures is required before true
width calculations can be accurately completed.
83
<PAGE>
Careful core logging and detailed microscopic and microprobe analysis
indicates that the high grade gold-silver mineralization intersected in Valmy
Formation rocks in this initial drilling is very similar to the recently
discovered Ken Snyder Mine located 15 miles northwest of Ivanhoe on the Midas
Property owned by Franco-Nevada and Euro-Nevada Mining Corporations. Most
importantly, the Valmy mineralization at Ivanhoe and the Midas system are
both characterized by coarse-gold as electrum with locally abundant silver
mineralization occurring as naumannite and aguilarite within finely banded
quartz veining. A recently announced high grade intersection from the Midas
Property was 3 feet grading 12.91 oz gold per ton and 65.73 oz silver per
ton; a result similar to Great Basin's drill hole IH-004.
At Ivanhoe the potential for the Valmy Formation to host a mineralized system
similar to the underground Ken Snyder Mine is very significant. Although the
Ken Snyder deposit is contained within a narrow corridor of multiple veins
averaging only 3 to 5 feet thick, the current mineable reserves calculated at
US $300 per oz gold and US $6 per ounce silver, are 2.17 million tons,
grading 1.04 oz gold per ton and 11.65 oz silver per ton containing 2.25
million ounces of gold and 24.3 million ounces of silver. In today's
environment of depressed gold prices, the importance of having "quality
ounces" is obvious. At Midas, the US $84 million, 500 ton per day Ken Snyder
Mine is scheduled for commercial production in mid-1999 at a rate of 250,000
ounces of gold equivalent per year. Cash operating costs are forecast to be
under US $80 per ounce, which will make the Ken Snyder Mine one of the lowest
cost gold producers in the world.
At Ivanhoe, nearly 900 historic holes have delineated a near surface, 3
million ounce gold mineral inventory in the Hollister Resource area.
Although very few of these drill holes penetrated down to the underlying
Valmy Formation, 34 holes (mainly reverse circulation drilling) intercepted
at least 5 feet grading +0.20 ounces gold/ton in Valmy rocks across an area
measuring 3,600 feet by 2,800 feet. The recognition of these Valmy
intercepts as possible Ken Snyder-style mineralization points to the high
potential for the delineation of an extensive, high-grade Valmy gold-silver
system on the Ivanhoe Property. Now that the significance of the discovery
has been recognized, the joint venture partners plan to aggressively pursue
exploration of the Valmy system and make it a primary target for extensive
drilling.
In addition, extensive work to date on the property continues to show
excellent potential for discovery below the Valmy Formation of a classic,
carbonate-hosted Carlin-type deposit as found elsewhere along the Carlin
Trend. In the coming months, the Ivanhoe Property will be explored for both
Ken Snyder-style systems in upper plate Valmy rocks and for deeper
Post-Betze-style analogues in lower plate carbonate rocks.
The Company also announces that Robert F. Dunlop has resigned as a director.
Mr. Dunlop has retired from active business and has taken up residence in
Cyprus.
Cornucopia also owns and operates the Mineral Ridge Gold Mine in Esmeralda
County, Nevada where mining operations have been temporarily suspended but
residual leaching and the production of gold continues.
ON BEHALF OF THE BOARD OF DIRECTORS
/s/ ANDREW F. B. MILLIGAN
Andrew F. B. Milligan
President and CEO
CORNUCOPIA RESOURCES LTD.
84
<PAGE>
The Board of Directors
Cornucopia Resources Ltd.
We consent to the incorporation by reference in the registration statement
(No. 33-25974) on Form S-8 of Cornucopia Resources Ltd. of our report dated
February 27, 1998, except as to note 13(b) which is as of March 3, 1998, note
12(a) which is as of March 6, 1998 and note 13(c) which is as of March 12,
relating to the consolidated balance sheets of Cornucopia Resources Ltd. as
of December 31, 1997 and 1996, and the related consolidated statements of
loss and deficit and changes in financial position for each of the years in
the three-year period ended December 31, 1997, which report appears in the
December 31, 1997 annual report on Form 10-K of Cornucopia Resources Ltd.
(SIGNED) "KPMG"
Chartered Accountants
Vancouver, Canada
March 30, 1998
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 996,732
<SECURITIES> 0
<RECEIVABLES> 546,060
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,583,662
<PP&E> 16,935,069
<DEPRECIATION> (161,135)
<TOTAL-ASSETS> 18,357,596
<CURRENT-LIABILITIES> 15,554,107
<BONDS> 0
0
0
<COMMON> 37,829,307
<OTHER-SE> 35,241,162
<TOTAL-LIABILITY-AND-EQUITY> 18,357,596
<SALES> 0
<TOTAL-REVENUES> 71,138
<CGS> (19,433)
<TOTAL-COSTS> 1,987,525
<OTHER-EXPENSES> 16,548,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (18,464,625)
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<INCOME-CONTINUING> (18,464,625)
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<PAGE>
UNDERTAKING WITH RESPECT TO FORM S-8 UNDER THE SECURITIES ACT OF 1933
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned Registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into Registrant's Registration Statement on Form
S-8 No. 33-25974 (filed December 7, 1988):
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.