 PDF of Press Release
VANCOUVER, May 1 /CNW/ - (All figures in US dollars except where noted) - Northgate Minerals Corporation (TSX: NGX; AMEX: NXG) today reported adjusted net earnings of $29,393,000 or $0.12 per diluted common share and cash flow from operations of $15,450,000 or $0.06 per diluted common share for the first quarter of 2008. Northgate's net earnings of $20,427,000 or $0.08 per diluted common share include a one-time, non-cash mark-to-market gain of $9,836,000 arising from the settlement of the gold forward contracts of Perseverance Corporation Ltd. ("Perseverance"), and the negative non-cash change of $29,332,000 in the fair value of copper forward sales contracts related to future production in late 2009 and 2010. A reconciliation of net earnings to adjusted net earnings is provided under the section entitled Non-GAAP Measures.
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First Quarter 2008 Highlights
- Closed the Perseverance transaction for A$230,552,000(US$210,516,000)
and added two additional operating mines to Northgate's asset portfolio.
- Total calendar quarterly gold production of approximately
90,000 ounces at Northgate's three operating mines at an average net
cash cost of production of $320 per ounce of gold.
- Kemess South produced 14.4 million pounds of copper in concentrate.
- A new three-year collective agreement was ratified on April 8, 2008
by the International Union of Operating Engineers Local 115,
representing the 300 production and maintenance employees at Kemess
South.
- Indicated resources underground at Young-Davidson increased by 137%.
- A Memorandum of Understanding ("MOU") for the development of the
Young-Davidson mine was signed with the Matachewan First Nation.
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Ken Stowe, President and CEO, stated: "The closing of the Perseverance transaction in February has opened a new and exciting chapter in the history of Northgate. At our two new Australian mines, we are implementing aggressive plans to address the key strategic issues that we identified during our due diligence. We are very pleased that from a management perspective the integration of the new operations has gone very smoothly and we are excited to welcome over 450 dedicated employees to the Northgate family. Northgate is committed to make significant investments in operational improvements and near mine exploration at Stawell and Fosterville to increase their reserve lives and reduce their operating costs. In particular, we expect to see dramatic improvements at Fosterville during 2008 once the conversion to owner mining is completed and as a comprehensive metallurgical enhancement program identifies specific methods of significantly improving gold recoveries. Back in Canada, the Young-Davidson project continues to make excellent progress on all fronts with a preliminary assessment report due out in the second quarter of 2008 and a feasibility study scheduled for completion at the end of the year. The continued robust price environment for gold and copper bodes well for the future as we look to add more projects and mines to our company from existing platforms in Canada and Australia."
Executive Overview
Financial Performance
Northgate recorded consolidated net earnings of $20,427,000 or $0.08 per diluted common share in the first quarter of 2008 compared with earnings of $9,406,000 or $0.04 per share during the corresponding quarter of 2007. On February 18, 2008, Northgate completed the acquisition of Perseverance; the first quarter consolidated results include the activities of Perseverance from February 19 onwards. Per share data is based on 255,338,997 weighted average diluted number of shares outstanding in the first quarter of 2008 and 255,541,281 in the corresponding period of 2007. As of May 1, 2008, the Corporation had 255,258,185 issued and outstanding common shares.
The net earnings of the Corporation include a one-time, non-cash mark-to-market gain of $9,836,000 arising from the settlement of the gold forward contracts of Perseverance. The contracts were settled directly by Perseverance after the completion of the acquisition. The net earnings also include the negative change in the fair value of the Corporation's copper hedge contracts of $29,332,000. Excluding these items, adjusted net earnings per diluted common share increase to $0.12.
Health, Safety and Environment
Kemess South recorded two lost time injuries during the first quarter.
In Australia, the Stawell mine operated without any lost time incidents in the first quarter of 2008 and overall safety performance improved compared to the same period in 2007. The Fosterville mine also operated without any lost time incidents during the quarter, but there were two significant "near miss" underground incidents that were cause for concern. In order to promote a strong safety culture within the workforce at Fosterville, Northgate suspended underground mining operations for eight days shortly after assuming control of the mine. During this period, a review of safety and training procedures was completed to ensure that all members of the underground workforce had adequate safety training. In the second quarter of the year, Northgate will be conducting safety and environmental audits at both of its recently acquired Australian mines.
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Summarized Consolidated Results
(100% of production basis; thousands
of US dollars, except where noted) Q1 2008(1) Q1 2007
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Operating Data
Gold production (ounces) 89,601 68,110
Gold sales (ounces) 61,539 66,480
Average spot gold price - London Bullion
Market ($ per ounce) 927 650
Copper production (thousands pounds) 14,380 17,702
Copper sales (thousands pounds) 13,375 17,270
Average spot copper price - London Metal
Exchange Cash ($ per pound) 3.54 2.69
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Financial Data
Revenue 86,093 74,313
Net earnings 20,427 9,406
Earnings per share
Basic 0.08 0.04
Diluted 0.08 0.04
Cash flow from operations 15,450 19,241
Cash and cash equivalents 52,688 278,810
Total assets 715,625 530,119
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(1) Financial data and gold sales (ounces) include the results of
Perseverance from February 19 to March 31, 2008. Other figures are
for the three month period ending March 31, 2008.
KEMESS SOUTH MINE
(100% of production basis; thousands
of US dollars, except where noted) Q1 2008 Q1 2007
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Operating Data
Ore plus waste mined (tonnes) 8,536,638 12,082,857
Ore mined (tonnes) 4,766,372 5,561,033
Stripping ratio (waste/ore) 0.791 1.17
Ore milled (tonnes) 4,243,891 4,341,422
Ore milled per day (tonnes) 46,636 48,238
Gold
Grade (g/t) 0.522 0.677
Recovery (%) 70 72
Production (ounces) 49,583 68,110
Sales (ounces) 44,724 66,480
Copper
Grade (%) 0.182 0.214
Recovery (%) 85 86
Production (thousands pounds) 14,380 17,702
Sales (thousands pounds) 13,375 17,270
Net cash cost ($/ounce) 105 28
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Financial Data
Revenue 104,016 93,245
Cost of sales 49,164 46,986
Earnings from operations 47,039 32,391
Cash flow from operations 27,316 1,586
Capital expenditures 1,789 2,743
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Operational Performance
The Kemess South mine posted gold and copper production of 49,583 ounces and 14.4 million pounds, respectively, in the first quarter of 2008. Metal production was adversely affected by a number of factors, including several unscheduled power outages by BC Hydro, which disrupted scheduled production for a total of five days in the quarter, and lower than expected gold grades.
During the first quarter of 2008, approximately 8.5 million tonnes of ore and waste were removed from the open pit compared to 12.1 million tonnes during the corresponding quarter of 2007. Unit mining costs were Cdn$2.01 per tonne compared with Cdn$1.47 per tonne in the first quarter of 2007. The unit mining costs in the most recent quarter were significantly higher than they were in the same period last year due to the significantly lower volume of material moved, higher prices for diesel fuel and higher maintenance costs.
Mill availability and mill throughput during the first quarter of 2008 were 89% and 46,636 tonnes per day (tpd), respectively, compared with 91% availability and throughput of 48,238 tpd in the first quarter of 2007. The ore milled in the first quarter of 2008 had a grade of 0.522 grams per metric tonne (g/t) for gold and 0.182% for copper. Gold grades of the ore milled were 9% lower than predicted by the Kemess South reserve model, which in combination with lower than expected mill availability due to several power outages, were responsible for gold production that was 13% lower than plan and copper production that was 4% lower than plan.
Gold and copper recoveries averaged 70% and 85%, respectively, compared with 72% and 86% in the first quarter of 2007. While gold recoveries were slightly lower than one year ago, metallurgical performance in the first quarter of 2008 was actually better than plan on the much lower grade ore that was milled.
Metal concentrate inventory increased by 1,000 wet metric tonnes (wmt) in the first quarter of 2008 to approximately 7,000 wmt, as a result of poor railcar availability due to extreme winter conditions experienced throughout Canada in February and March.
The average unit cost of production at Kemess per tonne milled during the first quarter of 2008 was Cdn$13.58, including Cdn$3.18 for concentrate marketing costs, which was comprised of treatment and refining costs and transportation fees. The unit cost in the same quarter in 2007 was Cdn$13.86, which included Cdn$4.21 for marketing costs. Overall units costs have fallen due to a decline in 2008 Benchmark settlement terms throughout the world for treatment and refining costs. However, this was offset by an increase in site operating costs, which were Cdn$44.2 million in the first quarter of 2008, approximately 5% higher than the Cdn$41.9 million figure recorded in the first quarter of 2007. The increase in costs is extremely broad based with costs for energy, consumables and labour all rising. The net cash cost of production at Kemess in the first quarter was $105 per ounce of gold compared to the $28 per ounce cash cost reported in the first quarter of 2007. The net cash cost was higher than the figure in the corresponding period last year due to the combined effects of lower gold and copper production, the stronger Canadian dollar and higher Canadian dollar denominated site costs, which were only partially offset by stronger copper prices and reductions in marketing costs.
Financial Performance
Revenue from the Kemess South mine in the first quarter of 2008 was $104,016,000 compared with $93,245,000 in the corresponding period of 2007 excluding the effects of mark-to-market adjustments on Northgate's hedge books. Metal sales in the first quarter of 2008 consisted of 44,724 ounces of gold and 13.4 million pounds of copper, compared with 66,480 ounces of gold and 17.3 million pounds of copper in the first quarter of 2007. During the first quarter of 2008, the price of gold on the London Bullion Market averaged $927 per ounce and the price of copper on the London Metal Exchange (LME) averaged $3.54. The net realized metal prices received on sales in the first quarter of 2008 were approximately $960 per ounce of gold and $3.68 per pound of copper, compared with $579 per ounce and $3.03 per pound in the first quarter of 2007.
The cost of sales in the first quarter of 2008 was $49,164,000, which was higher than the corresponding period last year when the cost of sales was $46,986,000. The increase in the most recent quarter reflects the higher costs of production as well as the impact of the strengthening Canadian dollar.
Depreciation and depletion expenses in the first quarter were $7,745,000 compared to $13,348,000 during the corresponding period of 2007. The lower depreciation and depletion expense for the most recent quarter reflects the 29% reduction in tonnes mined and is slightly offset by an increase in the amortization rate for 2008 as a result of capital expenditures in the prior year.
Capital expenditures during the first quarter of 2008 totalled $1,789,000 compared to $2,743,000 in the corresponding period of 2007. Capital expenditures in the most recent quarter were primarily devoted to ongoing construction of the tailings dam and the purchase of new mining equipment including dewatering equipment and an excavator for the Kemess South mine.
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STAWELL GOLD MINE
(100% of production basis; thousands
of US dollars, except where noted) Q1 2008 Q1 2007
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Operating Data
Ore mined (tonnes) 150,217 164,837
Ore milled (tonnes) 166,835 188,860
Ore milled per day (tonnes) 1,833 2,098
Gold
Grade (g/t) 5.96 6.10
Recovery (%) 89 90
Production (ounces) 28,363 33,443
Sales (ounces)(1) 12,247 32,762
Net cash cost ($/ounce)(1) 536 n/a
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Financial Data(1)
Revenue 11,739 n/a
Cost of sales 7,245 n/a
Earnings from operations 683 n/a
Cash flow from operations 6,592 n/a
Capital expenditures 2,622 n/a
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(1) Financial data and gold sales (ounces) include the results of
Perseverance from February 19 to March 31, 2008. Other figures are
for the three month period ending March 31, 2008.
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The Stawell mine produced a total of 28,363 ounces of gold during the three months ended March 31, 2008. Gold production attributable to Northgate from the date of acquisition was 11,508 ounces at a net cash cost of $536 per ounce. During the quarter, gold production was 1,600 ounces higher than forecast, primarily due to significantly higher than predicted ore grades in the underground mine. Approximately 167,000 tonnes of ore at a grade of 5.96 g/t were milled in the first quarter of 2008. Gold recoveries in the mill were in line with expectation at 89%. Total operating costs from the date of acquisition were A$6,170,000 equating to an overall unit operating cost of A$89/mt of ore milled. Mining costs were A$57/mt of ore mined and milling costs were A$29/mt of ore milled.
Underground mine development continued in the Golden Gift (GG) production zones, GG1, GG3 and GG5L, during the quarter and the development advance totalled 1,201 metres (capital and operating). Progress was made upgrading underground ventilation systems, improving secondary egress routes to certain areas of the mine and on the conversion to emulsion explosives.
Financial Performance
Stawell's revenue from the date of acquisition to March 31, 2008 was $11,739,000 based on gold sales of 12,247 ounces. The cost of sales for this period was $7,245,000 and earnings from operations were $683,000. The mine generated $6,592,000 in cash from operations from February 19, 2008 to the end of the quarter.
Cash expenditures for Stawell include capital expenditures of $2,622,000 and exploration of $412,000. Depreciation for the period from February 19 was $3,387,000.
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FOSTERVILLE GOLD MINE
(100% of production basis; thousands
of US dollars, except where noted) Q1 2008 Q1 2007
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Operating Data
Ore mined (tonnes) 110,904 149,648
Ore milled (tonnes) 139,492 240,465
Ore milled per day (tonnes) 1,533 2,672
Gold
Grade (g/t) 4.3 2.9
Recovery (%) 54 81
Production (ounces) 11,655 17,951
Sales (ounces)(1) 4,568 19,691
Net cash cost ($/ounce)(1) 1,190 n/a
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Financial Data(1)
Revenue 4,398 n/a
Cost of sales 6,346 n/a
Earnings (loss) from operations (3,781) n/a
Cash flow from operations (1,908) n/a
Capital expenditures 2,596 n/a
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(1) Financial data and gold sales (ounces) include the results of
Perseverance from February 19 to March 31, 2008. Other figures are
for the three month period ending March 31, 2008.
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The Fosterville mine produced 11,655 ounces of gold during the three months ended March 31, 2008. Gold production attributable to Northgate from the date of acquisition was 4,782 ounces at a net cash cost of $1,190 per ounce. Gold production at Fosterville during the quarter was negatively affected by two mining shutdown events. The first was a 10 day suspension of underground mining that began just before Christmas while the mine was still controlled by its previous owner. During this suspension, ore from surface stockpiles was milled to maintain gold production, which reduced the amount and quality of ore available for processing in January. Upon assuming control of the mine on February 19, 2008, Northgate temporarily suspended underground mining activities for a period of eight days from February 21-28, 2008 in order to facilitate a thorough review of operating procedures in the underground mine and provide additional safety training to its mining personnel. In addition to taking these steps, a number of key initiatives were put in motion to ensure the long-term success of the mine, including conversion to owner mining from contractor mining and implementation of a gold recovery enhancement program to improve overall efficiency and lower costs. The transition to owner mining, which includes the purchase of new mining equipment, is well advanced and is expected to be completed by June 2008.
Approximately 139,492 tonnes of ore at a grade of 4.3 g/t were milled in the first quarter of 2008. Gold recoveries in the milling circuit were well below historic levels due to the treatment of a very high proportion (60%) of stockpiled inherently lower recovery carbonaceous ores during the month of January due to the extended shutdown of underground activities in late December. This ore type is primarily associated with the Fosterville fault and typically makes up about 8%-10% of the ore delivered to the mill. Current and future ore sources have significantly less carbon content and recoveries had returned to normal levels by March 2008.
Total operating costs from the date of acquisition were A$5,688,000, equating to an overall unit operating cost of $161/mt of ore milled. Mining costs were A$74/ mt of ore mined and milling costs were A$53/mt of ore milled.
A comprehensive recovery improvement project has been initiated in order to significantly increase the 75%-80% average gold recovery levels achieved in the past. The project team includes both Northgate staff and world-renowned experts in the field. A pilot plant is expected to arrive on site in early May, which will expedite the testing of a number of process improvements that have already been identified as having a high probability of success.
Underground mine development at the Fosterville mine totalled 1,420 metres during the first quarter of 2008 in spite of the eight day operating shutdown. Northgate plans to spend approximately A$19,000,000 on underground mine development during 2008 in order to increase the number of working faces underground and allow the ramp-up of the processing plant to design capacity.
Financial Performance
Fosterville's revenue from the date of acquisition to March 31, 2008 was $4,398,000 based on gold sales of 4,568 ounces. The cost of sales for this period was $6,346,000 and the loss from operations was $3,781,000. The mine utilized $1,908,000 in cash from operations from February 19, 2008 to the end of the quarter.
Cash expenditures for Fosterville include capital expenditures of $2,596,000 and exploration of $175,000. Depreciation for the quarter from February 19 was $1,667,000.
Exploration Update
YOUNG-DAVIDSON
Significant progress on all fronts was made at Young-Davidson during the first quarter. On February 6, 2008, a revised resource estimate was announced in which total indicated underground resources increased by 137% to 1.42 million ounces. Total resources on the property include 1,418,000 ounces of indicated and 440,000 ounces of inferred resources underground and a further 464,000 ounces of measured and indicated resources in the proposed open pit.
Exploration drilling continued from surface and underground during the quarter. To date, a total of 10,353 metres of diamond drilling have been completed as part of the $5 million 2008 drilling program, which is designed to increase resources between the two main zones of mineralization at depth and move additional inferred resources into the indicated category in the Upper Boundary zone.
The underground ramp development continued with an additional 674 metres during the quarter. A cross cut drift was completed through the Upper Boundary zone where a 40-tonne bulk sample was extracted for grinding circuit pilot plant testing.
On March 26, 2008, Northgate signed an MOU with the Matachewan First Nation. The MOU outlines the framework for the negotiation of an Impact and Benefit Agreement, which will establish the long-term working relationship between Northgate and the Matachewan First Nation during the development and operation of the mine.
Northgate is also working on a NI 43-101 compliant Preliminary Assessment Report, which is nearing completion and is expected to be released by the end of the second quarter of 2008.
Figure 1: Young-Davidson Property
(Vertical, North Looking, Longitudinal Section with Metric Grid)
www.northgateminerals.com/Theme/Northgate/files/Releases/2008/YD_Feb08.gif
STAWELL GOLD MINE
During 2008, Northgate has allocated $7 million towards an aggressive exploration plan at Stawell in order to identify new underground resources and to convert resources to reserves through underground diamond drilling and surface exploration. Northgate recently announced very positive drill results from the Golden Gift 6 (GG6) zone at the Stawell Gold mine in a press release dated April 15, 2008 and will be completing a resource estimation for this zone in June. In addition to the drill results at GG6, Northgate is also targeting the North Magdala zone as a high priority target given its close proximity to existing mine workings (Figure 2) and the highly prospective nature of the target. The North Magdala campaign will be conducted from both surface and underground. Five to six holes will be wedged off an existing surface hole (SD622), which had an intercept of 9.4m at 8.35 g/t gold. Coupled with the recent results in GG6, the North Magdala program is expected to add significant resources and extend the present mine life at Stawell.
Figure 2: Stawell - North Magdala Target
(Vertical, West Looking, Longitudinal Section with Metric Grid)
www.northgateminerals.com/Theme/Northgate/files/Releases/2008/SGM_NMag.gif
FOSTERVILLE GOLD MINE
Northgate has allocated $3 million during 2008 towards definition drilling of the Wirrawilla Zone (Figure 3), which lies about 1.5 kilometres south of the Fosterville processing facility and 800 metres south of and 500 metres above the known southern extents of the Phoenix resource. Mineralization at Wirrawilla plunges south, averaging true widths of 3m - 5m. The drill spacing in this zone is presently 100m north-south by 50m down plunge. Significant Wirrawilla downhole drill intercepts include:
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SPD261: 10.7m at 11.2 g/t gold
SPD382A 6.5m at 7.9 g/t gold
SPD379: 4.9m at 6.5 g/t gold
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The Wirrawilla area has an inferred resource of 4.6 million tonnes @ 3.3 g/t gold for 500,000 contained ounces using a 2.0 g/t gold lower cut-off. At a higher 3.0 g/t gold cut-off, which approximates the present underground mining cut-off grade, there is 2.7 million tonnes @ 4.1 g/t gold for 350,000 contained ounces.
The resource definition drilling program will begin in early May and entail 5,000m of reverse circulation and 12,000m of diamond drilling to increase the drill hole density to 50m north-south and 50m down-dip. Geotechnical and metallurgical studies will be undertaken as drilling progresses.
On a regional basis, Northgate has begun a program to evaluate the extensive land package around the Fosterville mining lease. Within the land package, the first priority is a reconnaissance drill program at Myrtle Creek south of Fosterville, where there are extensive historic workings that have not been subject to modern exploration and diamond drill testing.
Figure 3: Fosterville Wirrawilla Area
www.northgateminerals.com/Theme/Northgate/files/Releases/2008/Wirrawilla.gif
Corporate Overview
At March 31, 2008, Northgate had no forward gold contracts outstanding. At March 31, 2008, forward contracts for 3,025 mt of copper related to the December 2007 production remained outstanding at an average price of $3.30 per pound. 16,200 mt of copper forward contracts, representing approximately 100% of Kemess South's remaining copper production for the 12 month period ended June 2010, remained outstanding at an average price of $2.52 per pound.
Corporate administration costs in the first quarter of 2008 were $3,161,000 compared to $2,128,000 in the prior year quarter. The increase is due primarily to administrative expenditures in Australia of $668,000. Canadian corporate expenditures of $2,493,000 include corporate development costs as well as ongoing compliance costs.
Exploration costs in the first quarter of 2008 were $6,161,000 compared to $3,593,000 in the prior year quarter as a result of the increased activity in Canada in which $5,574,000 was incurred primarily at the Young-Davidson property where the advanced underground exploration program continues. A total of $587,000 was expended in Australia since February 19 to the end of the first quarter.
Other income includes a one-time, non-cash mark-to-market gain of $9,836,000 related to the settlement of Perseverance's gold forward contracts. In connection with the acquisition of Perseverance, Northgate had entered into an agreement to acquire Perseverance's portfolio of gold forward contracts based on the value of the underlying forward contracts at October 30, 2007. A derivative gain was recorded to recognize the difference in the fair value of the portfolio and the settlement amount.
Liquidity and Capital Resources
Working Capital: At March 31, 2008, Northgate had working capital of $35,850,000 compared with working capital of $235,739,000 at December 31, 2007. The decrease in working capital was driven primarily by the acquisition of Perseverance, which was achieved through the purchase of all ordinary shares, warrants, options and convertible securities for cash consideration. Cash and cash equivalents at March 31, 2008 amounted to $52,688,000 compared with $266,045,000 at December 31, 2007. All cash and cash equivalents are invested in R1/P1/A1 rated investments including money market funds, direct obligation commercial paper, bankers' acceptances and other highly rated short- term investment instruments.
Investments: The Corporation continues to maintain a portion of its investments in auction rate securities ("ARS"), which are floating rate securities that are marketed by financial institutions with auction reset dates at 7, 28, or 35 day intervals to provide short-term liquidity. All ARS were rated AAA when purchased, pursuant to the Corporation's investment policy. Beginning in August 2007, a number of auctions began to fail and the Corporation is currently holding ARS with a par value of $72,600,000, which currently lack liquidity. The Corporation's ARS investments were originally structured and marketed by a major US investment bank.
The estimated fair value of the Corporation's ARS holdings at March 31, 2008 was $64,397,000, which reflects a $5,000,000 adjustment to the December 31, 2007 estimated fair value of $69,397,000. This adjustment was recorded into other comprehensive income as the Corporation believes this decline in value to be temporary. All of the ARS investments have continued to make regular interest payments. Further, approximately 57% of the ARS investments are insured by bond insurer institutions (monoline insurers).
In estimating the fair value of ARS, the Corporation considered various variables, including trading levels of comparable securities markets, the Corporation's rank within the capital structure of the individual ARS issuers, the credit circumstances of financial guarantors, and the investments and reserves held by the issuers.
Rating agencies such as S&P, Moody's and Fitch continue to monitor the credit rating of monoline insurers. During the quarter, a number of bond insurers were downgraded by certain rating agencies, which in some cases resulted in a downgrade of the AAA securities insured by those institutions. All of the Corporation's uninsured ARS continue to be rated AAA and Aaa, as applicable.
The Corporation has no investments in asset backed commercial paper, mortgage backed securities or collateralized debt obligations.
The balance of Northgate's long-term investments comprises of equity investments in publicly-listed junior mining companies. These investments are carried on the balance sheet at fair value based on quoted bid prices.
If uncertainties in the credit and capital markets persist or Northgate experiences further downgrades on its ARS holdings, the Corporation may incur additional impairments, which may be judged to be other than temporary. Northgate believes that based on its cash and cash equivalents balance of $52,688,000 at March 31, 2008 and expected operating cash flows, the current liquidity issues concerning its ARS investments will not have a material impact on Northgate's ability to carry on its business.
Acquisition of Perseverance: On February 18, 2008, Northgate completed its acquisition of Perseverance and a total of A$230,552,000(US$210,516,000) was paid to Perseverance securityholders. The results of Perseverance have been included in the interim consolidated financial statements from February 19, 2008.
In connection with the acquisition of Perseverance, the Corporation was required to pledge a cash amount of A$109,400,000 in a stand-by letter of credit ("SBLC"). A portion of the SBLC was released upon payment of the consideration for the debt instruments noted above. The funds remaining in the SBLC at December 31, 2007 were used to settle Perseverance's gold forward contracts for A$49,317,000(US$45,550,000) and to pledge certain performance guarantees in Australia for A$8,020,000(US$7,434,000). At March 31, 2008, A$100,000 remains in the SBLC to cover various administrative costs related to the acquisition.
Short-Term Loan: In December 2007, the Corporation secured a loan from the same US investment bank, which structured and marketed Northgate's ARS investments. The proceeds of the loan have been invested in highly liquid investments, which can be accessed if needed for working capital requirements. The loan bears interest at LIBOR plus 100 basis points and matures on June 6, 2008. At March 31, 2008, the balance of the loan including accrued interest was $45,038,000.
Adoption of New Accounting Standards
On January 1, 2008, the Corporation adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Sections 1535, Capital Disclosures; Section 3031, Inventories; Section 3862, Financial Instruments - Disclosures; Section 3863, Financial Instruments - Presentation; and Section 1400, Financial Statement Presentation. In accordance with the transitional provisions, prior periods have not been restated. The principal changes resulting from these new standards are described below:
Capital Disclosures
Section 1535 establishes standards for disclosing information about the Corporation's capital and how it is managed. The required disclosures with respects to capital management have been included in the notes to the interim financial statements.
Inventories
Section 3031 establishes standards for the determination of inventory cost and its subsequent recognition as an expense, including any write-down to net realizable value. In addition, in certain circumstances, write-downs of inventory previously recognized may be reversed. This section also provides guidance concerning the presentation of supplies inventory, capital spares and insurance spares on the balance sheet. This section has been applied retroactively without restatement of prior year comparative amounts. Upon adoption of this standard, an adjustment to supplies inventory of $1,032,000 was recognized to reclassify significant long-term capital and insurance spares to property, plant and equipment. A related adjustment to opening retained earnings of $381,000 was recognized to adjust for additional depreciation on the spares
Further upon adoption of this standard, the Corporation changed its valuation of supplies inventory from the lower of cost and replacement cost to the lower of cost and net realizable value. This change in valuation had no impact on the Corporation's financial statements.
Financial Instruments - Presentation and Disclosure
Section 3862, Financial Instruments - Disclosures expands on the types and nature of disclosures required with respects to an entity's use and exposure from financial instruments. Adoption of this standard resulted in more detailed disclosures in the notes to financial statements. These disclosures are included in the notes to the interim financial statements.
Section 3863, Financial Instruments - Presentation establishes the standards for the classification of financial instruments as liabilities or equity and the classification of related gains, income, and/or losses in the statement of operations. The adoption of these standards did not result in any changes to the Corporation's financial statements.
As a result of the acquisition of Perseverance, the Corporation has also adopted a series of accounting policies associated with the related operations acquired. The related significant accounting policies are disclosed in the notes to the interim financial statements.
Financial Statement Presentation
Section 1400, General Standards of Financial Statement Presentation, was amended to include requirements to assess and disclose an entity's ability to continue as a going concern. Currently, the amended requirements have no impact on the Corporation's financial statements.
New Accounting Pronouncements
Goodwill and Intangible Assets
In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets which replaces Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. The new section establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets and harmonizes this standard with International Financial Reporting Standard IAS 38, Intangible Assets. The new requirements are effective for fiscal years beginning on or after October 1, 2008. The Corporation is in the process of assessing the effect this new standard will have on its results of operations of financial position.
Conversion to International Financial Reporting Standards
On February 13, 2008, the Accounting Standards Board announced that publicly accountable entities will be required to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) for interim and annual financial statements for fiscal years beginning on or after January 1, 2011. The Corporation is currently assessing the impact of the conversion on the consolidated financial statements and disclosures and will develop a conversion implementation plan.
Non-GAAP Measures
Adjusted Net Earnings
The Corporation has prepared a calculation of adjusted net earnings which has removed certain non-cash adjustments from its Canadian generally accepted accounting principles (Canadian GAAP) calculation of net earnings as it believes this may be a useful indicator to investors. Adjusted net earnings may not be comparable to other similarly titled measures of other companies.
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(Expressed in thousands of US$, except share amounts)
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Net earnings $ 20,427
Adjustments
Unrealized gain on derivatives related to the acquisition
of Perseverance hedge book (9,836)
Fair value adjustment on copper forward contracts, net of
tax $10,530 18,802
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Adjusted net earnings 29,393
-------------------------------------------------------------------------
Diluted common shares outstanding 255,338,997
-------------------------------------------------------------------------
Adjusted net earnings per diluted common share $ 0.12
-------------------------------------------------------------------------
>>
Cash Cost
The Corporation has included net cash costs of production per ounce of gold in the discussion of its results from operations, because it believes that these figures are a useful indicator to investors and management of a mine's performance as they provide: (i) a measure of the mine's cash margin per ounce, by comparison of the cash operating costs per ounce to the price of gold; (ii) the trend in costs as the mine matures; and, (iii) an internal benchmark of performance to allow for comparison against other mines. However, cash costs of production should not be considered as an alternative to net earnings or as an alternative to other Canadian GAAP measures and may not be comparable to other similarly titled measures of other companies.
A reconciliation of net cash costs per ounce of production to amounts reported in the statement of operations is shown in the following table.
<<
Q1 2008
(Expressed in thousands
of US$, except per ounce
amounts) Kemess Stawell(1) Fosterville(1) Combined
-------------------------------------------------------------------------
Gold production
(ounces) 49,583 11,508 4,782 65,873
-------------------------------------------------------------------------
Cost of sales $ 49,164 $ 7,245 $ 6,346 $ 62,755
-------------------------------------------------------------------------
Change in inventories
and other 8,301 (1,075) (658) 6,568
Gross copper and silver
revenue (52,280) - - (52,280)
-------------------------------------------------------------------------
Total cash cost 5,185 6,170 5,688 17,040
-------------------------------------------------------------------------
Cash cost ($/ounce) $ 105 $ 536 $ 1,190 $ 259
-------------------------------------------------------------------------
Q1 2007
(Expressed in thousands
of US$, except per ounce
amounts) Kemess Stawell Fosterville Combined
-------------------------------------------------------------------------
Gold production
(ounces) 68,110 n/a n/a 68,110
-------------------------------------------------------------------------
Cost of sales $ 46,986 n/a n/a $ 46,986
Change in inventories
and other 4,361 n/a n/a 4,361
Gross copper and silver
revenue (49,406) n/a n/a (49,406)
-------------------------------------------------------------------------
Total cash cost 1,941 n/a n/a 1,941
-------------------------------------------------------------------------
Cash cost ($/ounce) $ 28 n/a n/a $ 28
-------------------------------------------------------------------------
(1) Quarterly data for the Stawell and Fosterville gold mines only
include results from February 19, 2008 to March 31, 2008.
Selected Quarterly Financial Data
(Thousands of
US dollars,
except per share,
per ounce
and per pound 2008 2007 Quarter Ended
amounts) Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
-------------------------------------------------------------------------
Revenue $ 86,093 $ 95,999 $ 86,756 $ 80,878 $ 74,313
Earnings (loss) for
the period 20,427 33,309 (11,937) 8,647 9,406
Earnings (loss) per
share
Basic $ 0.08 $ 0.13 $ (0.05) $ 0.03 $ 0.04
Diluted $ 0.08 $ 0.13 $ (0.05) $ 0.03 $ 0.04
Metal production
Gold (ounces) 65,873 41,467 70,055 65,999 68,110
Copper
(thousands pounds) 14,380 16,766 18,822 14,839 17,702
Metal Prices
Gold (London
Bullion Market -
$ per ounce) 927 788 681 667 650
Copper (LME Cash -
$ per pound) 3.54 3.26 3.50 3.47 2.69
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Thousands of
US dollars,
except per share,
per ounce
and per pound 2006 Quarter Ended
amounts) Dec 31 Sep 30 Jun 30
---------------------------------------------------
Revenue $118,239 $102,667 $105,348
Earnings (loss) for
the period 19,790 14,902 50,315
Earnings (loss) per
share
Basic $ 0.09 $ 0.07 $ 0.23
Diluted $ 0.09 $ 0.07 $ 0.22
Metal production
Gold (ounces) 81,746 74,789 76,127
Copper
(thousands pounds) 21,254 19,602 18,071
Metal Prices
Gold (London
Bullion Market -
$ per ounce) 614 622 627
Copper (LME Cash -
$ per pound) 3.21 3.48 3.27
---------------------------------------------------
---------------------------------------------------
* * * * * *
>>
Notification of Annual General Meeting
May 2, 2008, 10:00 AM Toronto time
TSX Broadcast Centre,
Exchange Tower, 130 King Street West,
Toronto, Canada
This event will also include an overview of Northgate's 2008 first quarter financial results, which are scheduled for release after market close on May 1, 2008.
Webcast and Conference Call
For those unable to attend in person, a live audio webcast and presentation package will be available on Northgate's homepage at www.northgateminerals.com. Alternatively, you may listen to this event by calling 416-644-3416 or toll free in North America at 1-800-732-9307.
A replay of this event will be available beginning on May 2 at 12:30 pm ET until May 16 at 11:59 pm ET.
<<
Replay Access No. 416-640-1917 Passcode: 212 685 85 followed by the
number sign
Replay Access No. 877-289-8525 Passcode: 212 685 85 followed by the
number sign
* * * * * *
>>
Northgate Minerals Corporation is a mid-tier gold and copper producer with mining operations, development projects and exploration properties in Canada and Australia. The company is forecasting over 400,000 ounces of unhedged gold production in 2008 and is targeting growth through further acquisitions in stable mining jurisdictions around the world. Northgate is listed on the Toronto Stock Exchange under the symbol NGX and on the American Stock Exchange under the symbol NXG.
<<
* * * * * *
>>
Forward-Looking Statements:
This news release contains certain "forward-looking statements" and "forward-looking information" as defined under applicable Canadian and U.S. securities laws. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," or "continue" or the negative thereof or variations thereon or similar terminology. Forward-looking statements are necessarily based on a number of estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies. Certain of the statements made herein by Northgate Minerals Corporation ("Northgate") including those related to future financial and operating performance and those related to Northgate's future exploration and development activities, are forward-looking and subject to important risk factors and uncertainties, many of which are beyond the Corporation's ability to control or predict. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. Such factors include, among others: gold price volatility; fluctuations in foreign exchange rates and interest rates; impact of any hedging activities; discrepancies between actual and estimated production, between actual and estimated reserves and resources and between actual and estimated metallurgical recoveries; costs of production, capital expenditures, costs and timing of construction and the development of new deposits; and, success of exploration activities and permitting time lines. In addition, the factors described or referred to in the section entitled "Risk Factors" of Northgate's Annual Information Form (AIF) for the year ended December 31, 2007 or under the heading "Risks and Uncertainties" of Northgate's 2007 Annual Report, both of which are available on SEDAR at www.sedar.com, should be reviewed in conjunction with this document. Accordingly, readers should not place undue reliance on forward-looking statements. The Corporation does not undertake any obligation to update publicly or release any revisions to forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except in each case as required by law.
<<
Interim Consolidated Balance Sheets
March 31 December 31
Thousands of US dollars 2008 2007
-------------------------------------------------------------------------
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 52,688 $ 266,045
Concentrate settlements and other receivables 37,933 17,101
Inventories (note 5) 52,719 35,234
Future income tax asset 1,147 1,194
-------------------------------------------------------------------------
144,487 319,574
Other assets 47,407 80,181
Long-term receivables - 25,117
Deferred acquisition costs - 1,799
Future income tax asset 16,438 16,507
Mineral property, plant and equipment 370,960 121,337
Investments (note 6) 65,550 70,074
Goodwill 70,783 -
-------------------------------------------------------------------------
$ 715,625 $ 634,589
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 58,658 $ 35,861
Short-term loan 45,038 44,835
Current portion of capital lease obligations 3,854 2,267
Future income tax liability 1,087 872
-------------------------------------------------------------------------
108,637 83,835
Capital lease obligations 675 282
Other long-term liabilities 31,787 12,089
Provision for site closure and reclamation
obligations 56,802 49,120
Future income tax liability 13,265 2,487
-------------------------------------------------------------------------
211,166 147,813
Shareholders' equity
Common shares 311,182 309,455
Contributed surplus 4,354 3,940
Accumulated other comprehensive loss (7,786) (3,282)
Retained earnings 196,709 176,663
-------------------------------------------------------------------------
504,459 486,776
-------------------------------------------------------------------------
$ 715,625 $ 634,589
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated
financial statements.
Interim Consolidated Statements of Operations and Comprehensive Income
Thousands of US dollars, except share Three Months Ended March 31
and per share amounts, unaudited 2008 2007
-------------------------------------------------------------------------
Revenue $ 86,093 $ 74,313
-------------------------------------------------------------------------
Cost of sales 62,755 46,986
Administrative and general 3,161 2,128
Depreciation and depletion 12,851 11,026
Net interest income (3,612) (3,236)
Exploration 6,161 3,593
Currency translation gain (7,874) (1,192)
Accretion of site closure and reclamation costs 741 438
Other income (9,836) -
-------------------------------------------------------------------------
64,347 59,743
-------------------------------------------------------------------------
Earnings before income taxes 21,746 14,570
Income tax recovery (expense)
Current (1,586) (3,313)
Future 267 (1,851)
-------------------------------------------------------------------------
(1,319) (5,164)
-------------------------------------------------------------------------
Net earnings for the period $ 20,427 $ 9,406
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other comprehensive income (loss)
Reclassification of net realized gains on
available for sale securities to net earnings - (315)
Unrealized gain (loss) on available for
sale securities (4,498) 134
Unrealized gain on translation of
self-sustaining operations (6) -
Reclassification of deferred losses on gold
forward contracts to net earnings, net of tax - 4,306
-------------------------------------------------------------------------
(4,504) 4,125
-------------------------------------------------------------------------
Comprehensive income $ 15,923 $ 13,531
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per share
Basic $ 0.08 $ 0.04
Diluted $ 0.08 $ 0.04
Weighted average shares outstanding
Basic 254,677,588 253,962,949
Diluted 255,338,997 255,541,281
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated
financial statements.
Interim Consolidated Statement of Changes in Shareholders' Equity
Number of Common
Thousands of US dollars, except Common Shares Contributed
common shares, unaudited Shares Amount Surplus
-------------------------------------------------------------------------
Balance at December 31, 2007 254,452,862 $ 309,455 $ 3,940
Transitional adjustment on
adoption of inventory
standard (note 4) - - -
Shares issued under employee
share purchase plan 50,440 104 -
Shares issued on exercise
of options 736,300 1,571 (439)
Stock-based compensation - 52 853
Net income - - -
Other comprehensive income - - -
-------------------------------------------------------------------------
Balance at March 31, 2008 255,239,602 $ 311,182 $ 4,354
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
Other
Thousands of US dollars, except Retained Comprehensive
common shares, unaudited Earnings Income Total
-------------------------------------------------------------------------
Balance at December 31, 2007 $ 176,663 $ (3,282) $ 486,776
Transitional adjustment on
adoption of inventory
standard (note 4) (381) - (381)
Shares issued under employee
share purchase plan - - 104
Shares issued on exercise
of options - - 1,132
Stock-based compensation - - 905
Net income 20,427 - 20,427
Other comprehensive income - (4,504) (4,504)
-------------------------------------------------------------------------
Balance at March 31, 2008 $ 196,709 $ (7,786) $ 504,459
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of Common
Thousands of US dollars, except Common Shares Contributed
common shares, unaudited Shares Amount Surplus
-------------------------------------------------------------------------
Balance at December 31, 2006 253,700,033 $ 307,914 $ 2,596
Transitional adjustment on
adoption of financial
instruments - - -
Shares issued under employee
share purchase plan 32,807 79 -
Shares issued on exercise of
share purchase warrants - - -
Shares issued on exercise
of options 413,420 519 (153)
Stock-based compensation - 39 759
Net income - - -
Other comprehensive income - - -
-------------------------------------------------------------------------
Balance at March 31, 2007 254,146,260 $ 308,551 $ 3,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
Other
Thousands of US dollars, except Retained Comprehensive
common shares, unaudited Earnings Income Total
-------------------------------------------------------------------------
Balance at December 31, 2006 $ 137,238 $ - $ 447,748
Transitional adjustment on
adoption of financial
instruments - (18,676) (18,676)
Shares issued under employee
share purchase plan - - 79
Shares issued on exercise of
share purchase warrants - - -
Shares issued on exercise
of options - - 366
Stock-based compensation - - 798
Net income 9,406 - 9,406
Other comprehensive income - 4,125 4,125
-------------------------------------------------------------------------
Balance at March 31, 2007 $ 146,644 $ (14,551) $ 443,846
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated
financial statements.
Interim Consolidated Statements of Cash Flows
Three Months Ended March 31
Thousands of US dollars, unaudited 2008 2007
-------------------------------------------------------------------------
Operating activities:
Net earnings for the period $ 20,427 $ 9,406
Non-cash items:
Depreciation and depletion 12,851 11,026
Unrealized currency translation gain (7,369) (35)
Unrealized gain on derivatives (9,836) -
Accretion of site closure and reclamation
costs 741 438
Amortization of hedging losses - 6,537
Amortization of deferred charges 54 72
Stock-based compensation 905 798
Future income tax expense (recovery) (267) 1,851
Change in fair value of forward contracts 30,920 20,099
Gain on sale of investments (1) (315)
Changes in operating working capital and other:
Concentrate settlements and other receivables (17,626) (17,199)
Inventories (5,758) (6,202)
Accounts payable and accrued liabilities (7,876) 2,091
Settlement of forward contracts (1,588) (9,326)
Reclamation costs paid (127) -
-------------------------------------------------------------------------
15,450 19,241
-------------------------------------------------------------------------
Investing activities:
Release of restricted cash 53,064 -
Increase in restricted cash (30,549) -
Purchase of mineral property, plant
and equipment (7,097) (2,761)
Transaction costs paid (1,925) -
Acquisition of Perseverance, net of
cash acquired (196,590) -
Repayment of Perseverance hedge portfolio (45,550) -
Proceeds from sale of investments 1 315
-------------------------------------------------------------------------
(228,646) (2,446)
-------------------------------------------------------------------------
Financing activities:
Repayment of capital lease obligation (1,077) (629)
Financing from credit facility 7,948 -
Repayment of credit facility (7,746) -
Repayment of other long-term liabilities (304) -
Issuance of common shares 1,236 445
-------------------------------------------------------------------------
57 (184)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (218) -
-------------------------------------------------------------------------
Increase/(decrease) in cash and cash
equivalents (213,357) 16,611
Cash and cash equivalents, beginning of period 266,045 262,199
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 52,688 $ 278,810
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information
Cash paid during the period for:
Interest $ 988 $ 71
Income taxes 334 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
Three months ended March 31, 2008 and 2007
(All dollar amounts are stated in United States dollars unless otherwise
indicated. Tables are expressed in thousands of United States dollars,
except share and per share amounts. Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited interim consolidated financial statements for
Northgate Minerals Corporation ("Northgate" or the "Corporation") have
been prepared in accordance with generally accepted accounting principles
in Canada ("Canadian GAAP"). They do not include all the disclosures
required by Canadian GAAP for annual financial statements and should be
read in conjunction with the Corporation's consolidated financial
statements and the notes thereto included in the Corporation's Annual
Report for the year ended December 31, 2007. In the opinion of
management, all adjustments considered necessary for fair presentation
have been included in these financial statements.
Except as disclosed in Notes 3 and 4 below, these financial statements
are prepared using the same accounting policies and methods of
application as those disclosed in Note 2 to the Corporation's
consolidated financial statements for the year ended December 31, 2007.
Note 2 Acquisition of Perseverance
On February 18, 2008, the Corporation completed its acquisition of
Perseverance Corporation Limited ("Perseverance"), an Australian gold
producer with two fully permitted gold mines in the state of Victoria.
Perseverance's major assets were the Stawell Gold Mine, approximately
250 km west of Melbourne, and the Fosterville Gold Mine, located
20 km east of Bendigo in central Victoria.
The acquisition was accounted for as a business combination using the
purchase method. The results of Perseverance have been included in the
consolidated financial statements of the Corporation from
February 19, 2008 inclusive. As part of the acquisition, the Corporation
acquired for cash consideration all the issued and outstanding ordinary
shares and warrants, convertible subordinated notes, executive options,
bank debt and gold forward contracts of Perseverance. The purchase price
of the acquisition was calculated as follows:
-------------------------------------------------------------------------
Cash consideration to acquire:
Ordinary shares and warrants $ 175,527
Convertible subordinated notes 34,267
Executive options 722
Bank debt 29,486
Transaction costs 3,673
-------------------------------------------------------------------------
$ 243,675
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table sets forth a preliminary allocation of the purchase
price to the assets and liabilities acquired, based on preliminary
estimates of fair value. The final valuations of major items such as
mineral property, plant and equipment, intangible assets, mineral and
exploration rights, asset retirement obligations and deferred income tax
assets and liabilities are not yet complete due to the inherent
complexity associated with the valuations. This is a preliminary purchase
price allocation and therefore subject to adjustment on completion of the
valuation process and analysis of the resulting tax effects.
-------------------------------------------------------------------------
Cash and cash equivalents $ 14,306
Accounts receivable 10,142
Inventories 10,120
Mineral property, plant and equipment 245,155
Mineral and exploration rights 10,592
-------------------------------------------------------------------------
$ 290,315
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable and accrued liabilities 30,254
Other long-term liabilities 1,686
Site closure and reclamation costs 8,982
Gold forward contracts 65,111
Future income tax liability 11,390
Goodwill 70,783
-------------------------------------------------------------------------
$ 243,675
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 3 Significant Accounting Policies
As a result of the acquisition of Perseverance, the Corporation has
adopted the following accounting policies associated with the related
operations acquired:
A. Inventories
Inventories of unshipped gold doré are recorded at the lower of
production costs on a first-in, first-out basis, and net realizable
value. Work-in-process inventories (gold in circuit) are valued at the
lower of average production costs or net realizable value. Production
costs include costs related to mining, crushing, mill processing, as well
as depreciation on production assets and certain allocations of mine-site
overhead expenses attributable to the production process, as applicable.
B. Mineral Property, Plant and Equipment
Certain underground development costs, which are incurred to enable
physical access to ore underground, may be capitalized. Capitalized
development costs must be linked to specific ore blocks or mine areas for
which they provide physical access. Amortization is recorded using the
units of production method based on proven and probable reserves within
the specific ore block or area. Infrastructure and underground
development costs that provide a benefit over the entire mine life are
amortized using the units of production method, based on accessible
proven and probable mineral reserves at the mine.
For underground mining, any development not directly related to stope
production intended for use over a period exceeding two years is
considered deferred development, which is capitalized. Such activities
generally include development of shafts, access ramps, main crosscuts,
main level drifts, ore and waste passes and ventilation raises.
Similarly, exploration drifts and drill holes used to establish probable
reserves and resources that will not be mined before two years are also
considered deferred development. Definition drilling used to establish
mining reserves that will be mined in less than two years are considered
an operating cost.
Deferred development costs include all costs directly related to
development, as well as a proportion of the costs related to direct
supervision, supervision of mechanical and electrical services,
engineering and geology, and the cost of power used by the equipment.
C. Revenue Recognition
The Corporation recognizes revenue from the sale of its gold doré upon
delivery, which is when the doré is picked up by the customer's agent at
the mine site. At this point, the risks and rewards of ownership have
passed to the buyer and the price is reasonably determinable.
D. Foreign Currency Translation
The Corporation's primary currency of measurement and display is the
United States dollar (US$). The measurement currency of Perseverance is
the Australian dollar (A$).
The financial statements of Perseverance are translated into United
States dollars using the current rate method. Under this method, all
assets and liabilities are translated at the exchange rate in effect at
the balance sheet date. Revenues and expenses are translated at rates of
exchange in effect during the period. Gains and losses on translation are
included in equity as a separate component of other comprehensive income.
In the period ending March 31, 2008, the Corporation recognized a gain of
$6,000 in other comprehensive income from the translation of the
financial statements of self-sustaining operations.
E. Goodwill
When accounting for business combinations under the purchase method, the
excess of the purchase price over the fair value of assets acquired and
liabilities assumed at the date of acquisition is recorded as goodwill.
Goodwill is assigned to the reporting units and is not amortized.
The Corporation evaluates, on at least an annual basis, the carrying
amount of goodwill to determine whether events and circumstances indicate
that such carrying amount is impaired. To accomplish this, the
Corporation compares the fair value of the reporting units to which
goodwill was allocated to their carrying value. If the carrying amount of
a reporting unit exceeds its fair value, the Corporation would recognize
an impairment in results from operations equal to the difference between
the implied fair value of the reporting unit's goodwill and its carrying
amount.
Note 4 Adoption of New Accounting Standards
On January 1, 2008, the Corporation adopted the Canadian Institute of
Chartered Accountants ("CICA") Handbook Sections 1535, Capital
Disclosures; Section 3031, Inventories; Section 3862, Financial
Instruments - Disclosures; Section 3863, Financial Instruments -
Presentation; and Section 1400, Financial Statement Presentation. In
accordance with the transitional provisions, prior periods have not been
restated. The principal changes resulting from these new standards are
described below:
Capital Disclosures
Section 1535 establishes standards for disclosing information about the
Corporation's capital and how it is managed. The required disclosures
with respects to capital management have been included in Note 7 to these
interim financial statements.
Inventories
Section 3031 establishes standards for the determination of inventory
cost and its subsequent recognition as an expense, including any
write-down to net realizable value. In addition, in certain
circumstances, write-downs of inventory previously recognized may be
reversed. This section has been applied retroactively without restatement
of prior year comparative amounts. Upon adoption of this standard, an
adjustment to supplies inventory of $1,032,000 was recognized to
reclassify items not meeting the definition of inventory, including
significant long-term capital and insurance spares, to property, plant
and equipment. A related decrease to opening retained earnings of
$381,000 was recognized to adjust for accumulated depreciation on the
spares.
Further upon adoption of this standard, the Corporation changed its
valuation of supplies inventory from the lower of cost and replacement
cost to the lower of cost and net realizable value. This change in
valuation had no impact on the Corporation's financial statements.
Financial Instruments - Disclosures and Presentation
Section 3862, Financial Instruments - Disclosures expands on the types
and nature of disclosures required with respects to an entity's use and
exposure from financial instruments. Adoption of this standard resulted
in more detailed disclosures in the notes to financial statements. These
disclosures are included in Note 9.
Section 3863, Financial Instruments - Presentation establishes the
standards for the classification of financial instruments as liabilities
or equity and the classification of related gains, income, and/or losses
in the statement of operations. The adoption of these standards did not
result in any changes to the Corporation's financial statements.
Financial Statement Presentation
Section 1400, General Standards of Financial Statement Presentation was
amended to include requirements to asses and disclose an entity's ability
to continue as a going concern. Currently, the amended requirements have
no impact on the Corporation's financial statements.
Note 5 Inventories and Cost of Sales
March 31 December 31
2008 2007
-------------------------------------------------------------------------
Concentrate and unshipped gold doré $ 17,880 $ 10,501
Gold in circuit 1,461 -
Stockpiled ore 15,243 11,871
Supplies 18,135 12,862
-------------------------------------------------------------------------
$ 52,719 $ 35,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of sales balance on the statement of operations is comprised of
the following items:
Q1 2008 Q1 2007
-------------------------------------------------------------------------
Change in inventory $ (6,569) $ (4,368)
Mining and milling costs 47,898 30,039
Marketing and other costs 21,426 21,315
-------------------------------------------------------------------------
$ 62,755 $ 46,986
-------------------------------------------------------------------------
The change in inventory balance does not include depreciation and
depletion of $1,441,000 (2007 - $2,422,000), which was included in
inventory. Depreciation and depletion is included in depreciation expense
in the statement of operations when the related inventory is sold.
Note 6 Investments
The Corporation maintains a portion of its investments in auction rate
securities ("ARS"), which are floating rate securities that are marketed
by financial institutions with auction reset dates at 7, 28, or 35 day
intervals to provide short-term liquidity. All ARS were rated AAA when
purchased, pursuant to the Corporation's investment policy. Beginning in
August 2007, a number of auctions began to fail and the Corporation is
holding ARS with a par value of $72,600,000, which currently lack
liquidity. The Corporation's ARS investments were originally structured
and marketed by a major US investment bank.
The estimated fair value of the Corporation's ARS holdings at March 31,
2008 was $64,397,000, which reflects a $5,000,000 adjustment to the
December 31, 2007 estimated fair value of $69,397,000. This adjustment
was recorded into other comprehensive income as the Corporation believes
this decline in value to be temporary. All of the ARS investments have
continued to make regular interest payments. Further, approximately 57%
of the ARS investments are insured by bond insurer institutions (monoline
insurers).
In estimating the fair value of ARS, the Corporation considered various
variables, including trading levels of comparable securities markets, the
Corporation's rank within the capital structure of the individual ARS
issuers, the credit circumstances of financial guarantors, and the
investments and reserves held by the issuers.
Rating agencies such as S&P, Moody's and Fitch continue to monitor the
credit rating of monoline insurers. During the quarter, a number of bond
insurers were downgraded by certain rating agencies, which in some cases
resulted in a downgrade of the AAA securities insured by those
institutions. All of the Corporation's uninsured ARS continue to be rated
AAA and Aaa, as applicable.
The Corporation has no investments in asset backed commercial paper,
mortgage backed securities or collateralized debt obligations.
If uncertainties in the credit and capital markets persist or the credit
ratings of its ARS holdings are downgraded further, the Corporation may
incur impairments, which may be judged to be other than temporary and
result in the recognition of an impairment loss in net earnings.
Note 7 Capital Management
The Corporation's objective when managing capital is to maintain a strong
capital base so as to maintain investor, creditor and market confidence
and to sustain future development and growth.
The Corporation sets the amount of capital in proportion to risk by
managing the capital structure and making adjustments to it in light of
changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure,
the Corporation may issue new shares or seek debt financing.
Other long-term liabilities include mark-to-market losses on copper
forward contracts. The Corporation is required to maintain a margin
account which may require further deposits based on copper prices. The
Corporation's short-term loan is from the same US investment bank which
structured and marketed the Corporation's ARS investments. The loan is
secured by the ARS investments. The Corporation's closure plans require
the company to post closure bonds and deposits from time to time. Costs
of reclamation are accrued for as an asset retirement obligation and
deposits are recorded in other assets.
Neither the Corporation nor any of its subsidiaries are subject to any
other externally imposed capital requirements such as loan covenants or
capital ratios. There were no changes to the Corporation's approach to
capital management during the three months ended March 31, 2008.
Note 8 Stock Based Compensation
During the three months ended March 31, 2008, the Corporation granted a
total of 1,480,000 (2007 - 1,425,000) options to employees, with a term
of seven years. 1,460,000 of these options are exercisable at
Cdn$2.97 per share and 20,000 are exercisable at Cdn$3.19 per share. Of
the options granted, 274,800 vested immediately, 1,099,200 vest in equal
amounts on the anniversary date of the grant over the next four years and
106,000 vest over five years. The fair value of the options granted for
the three months ended March 31, 2008 was $2,087,000 (2007 - $2,500,000).
During the three months ended March 31, 2008, $853,000 (2007 - $759,000)
of stock-based compensation was recognized related to outstanding stock
options.
During the three months ended March 31, 2008, a total of 27,000 options
were cancelled and 736,300 options were exercised.
At March 31, 2008, there were 5,913,300 options outstanding, of which
3,164,400 were exercisable.
The fair value of the share options granted during the three months ended
March 31, 2008 and 2007 was estimated using the Black-Scholes pricing
model with the following assumptions:
For Options For Options
Granted in Granted in
Q1 2008 Q1 2007
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Risk-free interest rate 3.74% 3.94%
Annual dividends - -
Expected stock price volatility 49.5% 53.4%
Expected option life 5.0 years 5.0 years
Per share fair value of options granted
(Cdn$) $1.42 $2.05
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Note 9 Financial Instruments
Financial Risk Management
The Corporation has exposure to credit risk, liquidity risk and market
risk from its use of financial instruments.
Credit Risk
Credit risk is the risk of potential loss to the Corporation if a
customer or counterparty to a financial instrument fails to meet its
contractual obligations. It arises principally from the Corporation's
receivables and investment securities. It may also arise on the
Corporation's copper forward contracts.
In general, t |