Crystallex International
Corporation
Consolidated
Financial Statements
June
30, 2008
(Unaudited)
Crystallex International
Corporation
Consolidated
Balance Sheets - Unaudited
(In
thousands of United States dollars)
|
June
30
|
|
|
December
31
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
Cash
and cash equivalents (
Note
9
)
|
$
|
61,490
|
|
|
$
|
16,065
|
|
Accounts
receivable
|
|
518
|
|
|
|
1,170
|
|
|
|
2,604
|
|
|
|
2,142
|
|
Prepaid
expenses and other
|
|
3,915
|
|
|
|
1,979
|
|
|
|
68,527
|
|
|
|
21,356
|
|
|
|
|
|
|
|
|
|
|
|
327,770
|
|
|
|
317,179
|
|
Other
|
|
1,667
|
|
|
|
705
|
|
|
$
|
397,964
|
|
|
$
|
339,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
11,703
|
|
|
$
|
10,868
|
|
Current
portion of asset retirement obligations (Note 6)
|
|
868
|
|
|
|
567
|
|
|
|
12,571
|
|
|
|
11,435
|
|
|
|
|
|
|
|
|
|
|
|
84,968
|
|
|
|
83,291
|
|
Asset
retirement obligations (
Note
6
)
|
|
1,745
|
|
|
|
1,864
|
|
Future
income taxes
|
|
26,483
|
|
|
|
14,243
|
|
|
|
125,767
|
|
|
|
110,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561,588
|
|
|
|
503,489
|
|
Contributed
surplus
|
|
34,012
|
|
|
|
27,124
|
|
Accumulated
other comprehensive income
|
|
11,959
|
|
|
|
11,959
|
|
Deficit
|
|
(335,362
|
)
|
|
|
(314,165
|
)
|
|
|
272,197
|
|
|
|
228,407
|
|
|
$
|
397,964
|
|
|
$
|
339,240
|
|
Nature
of operations and continuation of business –
Note
1
Approved
on behalf of the Board of Directors
(Signed)
“Robert A. Fung”, Director
|
(Signed)
“Johan van’t Hof", Director
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Crystallex International
Corporation
Consolidated
Statements of Operations and Comprehensive Operations - Unaudited
(In
thousands of United States dollars except for share and per share
amounts)
|
Three
months ended June 30
|
|
|
Six
months ended June 30
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Restated
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
revenue
|
$
|
5,233
|
|
|
$
|
2,848
|
|
|
$
|
11,134
|
|
|
$
|
6,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
7,390
|
|
|
|
5,121
|
|
|
|
13,793
|
|
|
|
9,833
|
|
Accretion
of asset retirement obligations
|
|
91
|
|
|
|
51
|
|
|
|
182
|
|
|
|
101
|
|
|
|
7,481
|
|
|
|
5,172
|
|
|
|
13,975
|
|
|
|
9,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
(2,248
|
)
|
|
|
(2,324
|
)
|
|
|
(2,841
|
)
|
|
|
(3,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
3,847
|
|
|
|
7,114
|
|
|
|
7,132
|
|
|
|
12,426
|
|
Interest
on debt
|
|
3,182
|
|
|
|
3,525
|
|
|
|
6,364
|
|
|
|
6,741
|
|
Foreign
exchange loss (gain)
|
|
2,534
|
|
|
|
(511
|
)
|
|
|
6,709
|
|
|
|
(7,152
|
)
|
Amortization
of property, plant and equipment
|
|
20
|
|
|
|
21
|
|
|
|
42
|
|
|
|
43
|
|
Gain
on sale of equipment
|
|
(1,636
|
)
|
|
|
-
|
|
|
|
(1,636
|
)
|
|
|
-
|
|
Interest
and other income
|
|
(200
|
)
|
|
|
(430
|
)
|
|
|
(414
|
)
|
|
|
(624
|
)
|
|
|
7,747
|
|
|
|
9,719
|
|
|
|
18,197
|
|
|
|
11,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income tax expense
|
|
(9,995
|
)
|
|
|
(12,043
|
)
|
|
|
(21,038
|
)
|
|
|
(14,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
-
|
|
|
|
(80
|
)
|
|
|
(159
|
)
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss and comprehensive loss for the period
|
|
(9,995
|
)
|
|
|
(12,123
|
)
|
|
|
(21,197
|
)
|
|
|
(14,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit,
beginning of period
|
|
(325,367
|
)
|
|
|
(286,533
|
)
|
|
|
(314,165
|
)
|
|
|
(283,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit,
end of period
|
$
|
(335,362
|
)
|
|
$
|
(298,656
|
)
|
|
$
|
(335,362
|
)
|
|
$
|
(298,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
Basic and diluted
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,670,869
|
|
|
|
257,242,695
|
|
|
|
287,076,377
|
|
|
|
251,639,775
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Crystallex International
Corporation
Consolidated Statements of Cash Flows -
Unaudited
(In
thousands of United States dollars)
|
Three
months ended June 30
|
|
|
Six
months ended June 30
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Restated
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
$
|
(9,995
|
)
|
|
$
|
(12,123
|
)
|
|
$
|
(21,197
|
)
|
|
$
|
(14,942
|
)
|
Items
not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
20
|
|
|
|
21
|
|
|
|
42
|
|
|
|
43
|
|
Interest
accretion on debt
|
|
837
|
|
|
|
1,176
|
|
|
|
1,676
|
|
|
|
1,986
|
|
Stock-based
compensation
|
|
164
|
|
|
|
1,012
|
|
|
|
537
|
|
|
|
1,724
|
|
Accretion
of asset retirement obligations
|
|
91
|
|
|
|
51
|
|
|
|
182
|
|
|
|
101
|
|
Directors’
fees paid in shares
|
|
-
|
|
|
|
72
|
|
|
|
112
|
|
|
|
132
|
|
Unrealized
loss (gain) on translation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
future
income taxes
|
|
3,769
|
|
|
|
(1,580
|
)
|
|
|
9,908
|
|
|
|
(10,832
|
)
|
Unrealized
foreign exchange (gain) loss
|
|
(452
|
)
|
|
|
249
|
|
|
|
(1,223
|
)
|
|
|
2,241
|
|
Gain
on sale of equipment
|
|
(1,636
|
)
|
|
|
-
|
|
|
|
(1,636
|
)
|
|
|
-
|
|
Changes
in other operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
13
|
|
|
|
(2,185
|
)
|
|
|
861
|
|
|
|
(2,084
|
)
|
Decrease
(increase) in inventories
|
|
(488
|
)
|
|
|
122
|
|
|
|
(462
|
)
|
|
|
1,031
|
|
Decrease
(increase) in prepaid expenses and other
|
|
(709
|
)
|
|
|
(1,461
|
)
|
|
|
(1,936
|
)
|
|
|
(2,943
|
)
|
Increase
in accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
accrued liabilities
|
|
3,747
|
|
|
|
3,526
|
|
|
|
324
|
|
|
|
181
|
|
|
|
(4,639
|
)
|
|
|
(11,120
|
)
|
|
|
(12,812
|
)
|
|
|
(23,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in property, plant and equipment
|
|
(7,260
|
)
|
|
|
(7,608
|
)
|
|
|
(12,731
|
)
|
|
|
(15,835
|
)
|
Proceeds
from sale of equipment
|
|
5,902
|
|
|
|
-
|
|
|
|
5,902
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,358
|
)
|
|
|
(7,608
|
)
|
|
|
(6,829
|
)
|
|
|
(15,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from (used in) financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares
|
|
-
|
|
|
|
51,645
|
|
|
|
64,306
|
|
|
|
52,489
|
|
Debt
repayments
|
|
-
|
|
|
|
(3,190
|
)
|
|
|
-
|
|
|
|
(3,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
48,455
|
|
|
|
64,306
|
|
|
|
48,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
(5,997
|
)
|
|
|
29,727
|
|
|
|
44,665
|
|
|
|
9,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of exchange rate fluctuations on cash
|
|
282
|
|
|
|
5
|
|
|
|
760
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
67,205
|
|
|
|
8,916
|
|
|
|
16,065
|
|
|
|
28,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
$
|
61,490
|
|
|
$
|
38,648
|
|
|
$
|
61,490
|
|
|
$
|
38,648
|
|
Supplemental
disclosures with respect to cash flows (
Note
9
)
Page 3
of 16
The
accompanying notes are an integral part of the consolidated financial
statements.
Crystallex International
Corporation
Consolidated
Statements of Shareholders’ Equity - Unaudited
(In
thousands of United States dollars)
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
Equity
component
of exchangeable
bank loan
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Deficit
|
|
|
Total
|
|
|
(thousands)
|
|
|
|
|
|
(thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
208,036
|
|
|
$
|
336,492
|
|
|
|
8,998
|
|
|
$
|
32,489
|
|
|
$
|
2,564
|
|
|
$
|
11,959
|
|
|
$
|
(248,030
|
)
|
|
$
|
135,474
|
|
Shares
issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit
offerings
|
|
20,924
|
|
|
|
51,209
|
|
|
|
17,313
|
|
|
|
5,972
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,181
|
|
Exercise
of options
|
|
1,642
|
|
|
|
5,490
|
|
|
|
-
|
|
|
|
(1,839
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,651
|
|
Issuance
of shares under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
draw down facility
|
|
1,661
|
|
|
|
4,318
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,318
|
|
Settlement
of promissory note
|
|
611
|
|
|
|
1,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,800
|
|
Settlement
of bank loan
|
|
3,766
|
|
|
|
7,641
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,564
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
5,077
|
|
Exercise
of warrants
|
|
8,765
|
|
|
|
41,090
|
|
|
|
(8,765
|
)
|
|
|
(17,317
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,773
|
|
Directors’
fees
|
|
19
|
|
|
|
60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
Share
exchange – El Callao
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Stock-based compensation
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,464
|
|
Warrants
issued for professional fees
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
|
|
1,366
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,366
|
|
Warrants
issued in exchange for early
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of warrants
|
|
-
|
|
|
|
-
|
|
|
|
875
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
expired
|
|
-
|
|
|
|
-
|
|
|
|
(233
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
for the year
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(35,684
|
)
|
|
|
(35,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
245,424
|
|
|
$
|
448,101
|
|
|
|
18,688
|
|
|
$
|
23,135
|
|
|
$
|
-
|
|
|
$
|
11,959
|
|
|
$
|
(283,714
|
)
|
|
$
|
199,481
|
|
Shares
issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
offering
|
|
14,375
|
|
|
|
50,701
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,701
|
|
Exercise
of options
|
|
859
|
|
|
|
1,622
|
|
|
|
-
|
|
|
|
(412
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,210
|
|
Settlement
of promissory note
|
|
461
|
|
|
|
1,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,800
|
|
Exercise
of warrants
|
|
502
|
|
|
|
1,117
|
|
|
|
(502
|
)
|
|
|
(236
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
881
|
|
Directors’
fees
|
|
38
|
|
|
|
148
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
148
|
|
Stock-based
compensation
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,637
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,637
|
|
Loss
for the year
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,451
|
)
|
|
|
(30,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
261,659
|
|
|
$
|
503,489
|
|
|
|
18,186
|
|
|
$
|
27,124
|
|
|
$
|
-
|
|
|
$
|
11,959
|
|
|
$
|
(314,165
|
)
|
|
$
|
228,407
|
|
Shares
issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
offering
|
|
32,890
|
|
|
|
57,730
|
|
|
|
16,445
|
|
|
|
6,414
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,144
|
|
Exercise
of options
|
|
76
|
|
|
|
257
|
|
|
|
-
|
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
Directors’
fees
|
|
46
|
|
|
|
112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112
|
|
Warrants
expired
|
|
-
|
|
|
|
-
|
|
|
|
(5,061
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based
compensation
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
569
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
569
|
|
Loss
for the period
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,197
|
)
|
|
|
(21,197
|
)
|
Balance
at June 30, 2008
|
|
294,671
|
|
|
$
|
561,588
|
|
|
|
29,570
|
|
|
$
|
34,012
|
|
|
$
|
-
|
|
|
$
|
11,959
|
|
|
$
|
(335,362
|
)
(1)
|
|
$
|
272,197
|
|
(1)
Includes total comprehensive deficit for the six months ended June 30, 2008 of
$323,403 (2007 - $286,697)
The
accompanying notes are an integral part of the consolidated financial
statements.
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
1. Nature
of operations and continuation of business
Crystallex
International Corporation (“Crystallex” or the “Company”) is engaged in the
production of gold and related activities including exploration, development,
mining and processing in Venezuela.
The
Company’s principal asset is the Las Cristinas project, currently under
pre-development in Venezuela. On September 17, 2002, the Company
entered into a mining operating contract (the “Mine Operating Contract”) with
the Corporación Venezolana de Guayana (the “CVG”), a Venezuelan state-owned
enterprise which owns the Las Cristinas concessions. The CVG
authorized the Company and the Company agreed to make all investments and carry
out all activities necessary to explore, develop, exploit, commercialize and
sell the gold mineral contained in the Las Cristinas deposits for the
CVG.
The
Company received official notice in March 2006 from the Venezuelan Ministry of
Basic Industries and Mining (“MIBAM”) advising that MIBAM had formally approved
the technical, economic and financial Feasibility Study for the Las Cristinas
project.
The
Company further received written notice in June 2007 from the CVG, that all of
the requirements of the Ministry of the Environment and Natural Resources
(“MinAmb”) for the issuance of the Authorization to Affect Natural Resources
(the “Permit”) to commence construction at Las Cristinas had been
fulfilled. The CVG notice was based on MinAmb approval of the Las
Cristinas Environmental Impact Study (the “EIS”), the posting of a Construction
Compliance Guarantee Bond (the “Bond”) and payment of the Environment Tax (the
“Tax”). Both the posting of the Bond and payment of the Tax were
satisfied in 2007 and Crystallex obtained receipt of acceptance.
In
April 2008, a Director General in the Administrative Office of Permits at MinAmb
issued a communication to the CVG which indicated that the Office of Permits at
MinAmb had denied the request of the CVG for the Permit. The Company
believed that the communication from this Director General contradicted the Las
Cristinas EIS approval, and the Bond and Tax requests issued by
MinAmb. This communication appeared to be in opposition to all
mineral mining in the Las Cristinas region and left a number of current and
historic projects standing contrary to the communication. In
addition, the Company believed that the content of the letter contradicted
Presidential Decrees, National Assembly Resolutions, MinAmb Resolutions, MIBAM
Resolutions and current and historic mining projects in Venezuela. Accordingly,
in May 2008, the Company filed a legal rebuttal to the position taken by the
Director General of Permits at MinAmb. The Director General subsequently denied
the legal rebuttal filed by the Company and advised the Company of its rights
under Venezuelan law to appeal directly to the Minister of MinAmb. On
June 16, 2008, the Company filed an appeal with the Minister of MinAmb. The
Minister has, under statute, 90 business days in which to issue a decision on
the appeal. If no decision is issued within the 90 business days, the appeal is
deemed to be denied. On June 18, 2008 the Company was instructed by MinAmb to
prepare modifications to the Las Cristinas project to diminish the environmental
impacts of the project and thus enable the Permit to be issued. In early August,
2008, the Company filed with MinAmb a report which dealt with the MinAmb
requests for (i) further improvements to the social projects in the area, (ii)
mitigating the impact of open vein deposit mining in the currently affected
areas of the Imataca Forest Reserve, and (iii) improving the remediation plans
at the end of the mine life as well as repairing existing environmental damage
caused by illegal mining.
The
continued development and ultimate commencement of commercial production at Las
Cristinas are dependent upon receipt of the Permit which will allow management
to proceed to put in place financing to fund construction. In
addition, the Las Cristinas project may be subject to sovereign risk, including
political and economic instability, changes in existing government regulations,
government regulations relating to mining which may withhold the receipt of
required permits, as well as currency fluctuations and local
inflation. The April 2008 communication from the Director General of
Permits at MinAmb and subsequent denial of the Company’s rebuttal, demonstrate
the significant risks that the Las Cristinas project faces. These
risks may adversely affect the investment and may result in the impairment or
loss of all or part of the Company’s investment.
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
1. Nature
of operations and continuation of business (continued)
These
financial statements have been prepared on a going concern basis which assumes
that the Company will be successful in obtaining the Permit and will be able to
obtain the necessary financing to complete the Las Cristinas project through
project debt, other forms of public market debt, or equity financing; thereby
fulfilling its commitment under its Mine Operating Contract. The
Company continues to believe that it will be successful in obtaining the Permit
and any other government approvals that are necessary to complete the mine
development and commence commercial production.
2. Significant
accounting policies – basis of presentation
These
unaudited interim consolidated financial statements of the Company have been
prepared in accordance with Canadian generally accepted accounting
principles. These unaudited interim consolidated financial statements
do not contain all of the disclosures required by Canadian generally accepted
accounting principles and therefore should be read together with the most recent
audited annual consolidated financial statements and the accompanying notes
thereto.
The
preparation of these consolidated financial statements is based on the
accounting policies and practices consistent with those used in the preparation
of the Company’s annual consolidated financial statements as at December 31,
2007 and for the year then ended except for certain new accounting
pronouncements which have been adopted effective January 1, 2008 as described in
Note
3
.
Certain
comparative amounts have been reclassified to conform to the current period’s
presentation.
3.
Changes in accounting policies and future accounting pronouncements
Changes
in accounting policies – Sections 1400 and 3031
The
CICA issued new accounting standards which are effective for interim and annual
consolidated financial statements for the Company beginning on January 1,
2008.
Handbook
Section 1400, “General Standards of Financial Statement Presentation”, was
amended so as to include the criteria for determining and presenting the
Company’s ability to continue as a going concern. Handbook Section
3031, “Inventories”, establishes standards for the measurement of inventories,
allocations of overhead accounting for write-down and disclosures.
There
is no material impact to the Company’s consolidated financial statements on
adoption of these new accounting standards.
Future
accounting pronouncements – Section 3064
The
CICA has issued a new standard which may affect the financial disclosures and
results of operations of the Company for interim and annual periods beginning
January 1, 2009.
Section
3064, “Goodwill and Intangible Assets”, establishes revised standards for
recognition, measurement, presentation and disclosure of goodwill and intangible
assets. Concurrent with the introduction of this standard, the CICA
withdrew EIC 27, “Revenues and Expenses during the Pre-Operating
Period”. As a result of the withdrawal of EIC 27, the Company will no
longer be able to defer costs and revenues incurred prior to commercial
production at new mine operations.
The
Company has not yet assessed the impact of Section 3064 on its consolidated
financial statements.
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
4 Inventories
|
|
June
30
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Consumables
and spare parts
|
$
|
1,558
|
|
|
$
|
1,415
|
|
|
Gold
in process
|
|
753
|
|
|
|
296
|
|
|
Stockpiled
ore
|
|
293
|
|
|
|
33
|
|
|
Gold
in doré
|
|
-
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,604
|
|
|
$
|
2,142
|
|
5. Property,
plant and equipment
|
|
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
amortization
|
|
|
Net
book
|
|
|
|
Cost
|
|
|
and
depletion
|
|
|
value
|
|
|
Plant
and equipment
|
$
|
119,215
|
|
|
$
|
9,108
|
|
|
$
|
110,107
|
|
|
Mineral
properties
|
|
225,915
|
|
|
|
8,252
|
|
|
|
217,663
|
|
|
|
$
|
345,130
|
|
|
$
|
17,360
|
|
|
$
|
327,770
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
amortization
|
|
|
Net
book
|
|
|
|
Cost
|
|
|
and
depletion
|
|
|
value
|
|
|
Plant
and equipment
|
$
|
121,890
|
|
|
$
|
9,066
|
|
|
$
|
112,824
|
|
|
Mineral
properties
|
|
212,262
|
|
|
|
7,907
|
|
|
|
204,355
|
|
|
|
$
|
334,152
|
|
|
$
|
16,973
|
|
|
$
|
317,179
|
|
Plant
and equipment include $110,037 (2007 - $112,724) and $70 (2007 - $100)
associated with Las Cristinas and Canada, respectively.
Las
Cristinas
On
September 17, 2002, the Company entered into a non-assignable Mine Operating
Contract with the Corporación Venezolana de Guayana (“CVG”), acting under the
authority of the Ministry of Energy and Mines of Venezuela (“MEM”), pursuant to
Venezuelan mining law, under which the Company was granted the exclusive right
to explore, develop and exploit the Las Cristinas 4, 5, 6 and 7 properties
including the processing of gold for its subsequent commercialization and
sale.
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
5. Property,
plant and equipment (continued)
The
aggregate costs incurred by the Company to June 30, 2008 are summarized as
follows:
|
|
Cash
|
|
|
Non-cash
|
|
|
Total
|
|
|
Plant
and equipment
|
$
|
110,037
|
|
|
$
|
-
|
|
|
$
|
110,037
|
|
|
Exploration,
development and related expenses
|
|
139,869
|
|
|
|
5,732
|
|
|
|
145,601
|
|
|
Property
payment and finders’ fees
|
|
24,978
|
|
|
|
11,192
|
|
|
|
36,170
|
|
|
Future
income taxes
|
|
-
|
|
|
|
34,335
|
|
|
|
34,335
|
|
|
Stock-based
compensation
|
|
-
|
|
|
|
1,557
|
|
|
|
1,557
|
|
|
|
$
|
274,884
|
|
|
$
|
52,816
|
|
|
$
|
327,700
|
|
6. Asset
retirement obligations
|
|
June
30
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
Asset
retirement obligations, beginning of period
|
$
|
2,431
|
|
|
$
|
1,211
|
|
|
Accretion
expense
|
|
182
|
|
|
|
211
|
|
|
Revisions
in estimated cash flows
|
|
-
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligations, end of period
|
|
2,613
|
|
|
|
2,431
|
|
|
Less:
current portion
|
|
868
|
|
|
|
567
|
|
|
|
$
|
1,745
|
|
|
$
|
1,864
|
|
The key
assumptions on which the fair value of the asset retirement obligations (“ARO”)
are based include the estimated future cash flows, the timing of those cash
flows, and the credit-adjusted risk-free rate or rates at which the estimated
cash flows have been discounted. The Company used a discount rate of
15%. As at June 30, 2008, undiscounted cash outflows approximating
$3,400 are expected to occur over a five year period.
7. Notes
payable
In
conjunction with a Unit offering on December 23, 2004, the Company issued
$100,000 principal amount senior unsecured notes (the “Notes”) with a coupon
rate of 9.375%, due on December 23, 2011 for net proceeds of $75,015 after
expenses and equity allocation. Interest is payable semi-annually on
January 15 and July 15 of each year, beginning July 15, 2005. The
Company may redeem the Notes, in whole or in part, at any time after December
31, 2008 at a redemption price of between 100% and 102% of the principal amounts
of the Notes, depending on the redemption date, plus accrued and unpaid interest
and additional interest, if any, to the date of the redemption. In
addition, the Company may be required to redeem the Notes for cash under certain
circumstances, such as a change in control in the Company or where the Company
ceases to beneficially own, directly or indirectly, at least a majority interest
in the Las Cristinas Project; or the Company may redeem the Notes, in whole but
not in part, for cash at its option under certain circumstances, such as a
change in the applicable Canadian withholding tax legislation.
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
7. Notes
payable (continued)
The
initial carrying value of the Notes was derived from a financial offering that
contained both a liability and equity component. As a result, the
equity component was allocated based on the fair value of the shares issued with
the Unit offering, calculated at $21,450 with $78,550 being the discounted fair
value of the Notes. The discounted fair value of the Notes, net of
expenses of $3,535, is accreted up to the face value of the Notes using the
effective interest rate method over its seven year term, with the resulting
charge recorded to interest expense.
Interest
accretion
Interest
accretion of $1,676 on the Notes was expensed during the six month period ended
June 30, 2008 (2007 - $1,986) as a component of interest expense.
Fair
value of debt
The
fair value of the debt is approximately $70,000 (2007 - $82,000), calculated
using a discounted cash flow methodology. The methodology uses the
risk-free interest rate and the Company's credit spread as inputs. The
Company's credit spread is an unobservable input as there is limited trading of
the Company's debt in the market. The Company has estimated its credit
spread by taking into account several factors including general credit
conditions, company specific news, the movement of the Company's stock, and the
limited trading activities of the Company's debt.
8. Share
capital
|
|
June
30
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
Authorized
|
|
|
|
|
|
|
|
|
Unlimited
common shares, without par value
|
|
|
|
|
|
|
|
|
Unlimited
Class “A” preference shares, no par value
|
|
|
|
|
|
|
|
|
Unlimited
Class “B” preference shares, no par value
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
294,671,000
(2007 - 261,659,072) common shares
|
$
|
561,588
|
|
|
$
|
503,489
|
|
Warrants
As at
June 30, 2008 common share purchase warrants were outstanding enabling the
holders to acquire common shares as follows:
|
|
|
Weighted
average
|
|
|
Number
of
|
remaining
|
|
Exercise
Price
|
warrants
|
contractual
life
|
|
|
(thousands)
|
(years)
|
|
$2.95
(CDN $3.00)
|
$16,445¹
|
-
|
|
$4.25
|
12,250²
|
-
|
|
$4.00
|
875
3
|
0.04
|
|
|
29,570
|
|
|
1.
|
These
warrants expire on the later of: (i) August 11, 2009; and (ii) six months
following the date which is 45 days following the receipt of the Permit
for the Company’s Las Cristinas
project.
|
|
2.
|
These
warrants become exercisable for an eighteen month period commencing on the
date which is 45 days following the receipt of the Permit for the
Company’s Las Cristinas project.
|
|
3.
|
These
warrants expired on July 14, 2008.
|
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
8.
Share capital (continued)
A
summary of common share purchase warrants outstanding as at June 30 and changes
during each of the six month periods then ended is as follows:
|
|
Six
months ended
|
|
|
Six
months ended
|
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
of
|
|
|
average
|
|
|
Number
of
|
|
|
average
|
|
|
|
warrants
|
|
|
exercise
price
|
|
|
warrants
|
|
|
exercise
price
|
|
|
|
(thousands)
|
|
|
($)
|
|
|
(thousands)
|
|
|
($)
|
|
|
Balance
– beginning of period
|
|
18,186
|
|
|
|
4.25
|
|
|
|
18,688
|
|
|
|
4.01
|
|
|
Granted
|
|
16,445
|
|
|
|
2.91
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
-
|
|
|
|
-
|
|
|
|
(502
|
)
|
|
|
1.76
|
|
|
Expired
|
|
(5,061
|
)
|
|
|
4.20
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance
– end of period
|
|
29,570
|
|
|
|
3.50
|
|
|
|
18,186
|
|
|
|
4.17
|
|
Stock
options
The
Company has an Incentive Share Option Plan (the “Plan”) that provides for the
granting of options to executive officers, directors, employees and service
providers of the Company. Under the Plan, the exercise price of each option
cannot be less than the closing price of the Company’s common shares on the
Toronto Stock Exchange, on the trading day immediately preceding the date of the
grant. Stock options granted to service providers and employees,
executive officers, and directors have a life of two, five and ten years,
respectively. Stock options may vest immediately, or over periods
ranging from one year to three years. In June 2007 the shareholders
of the Company approved amendments to the Plan whereby the Board of Directors
may permit an optionee to elect to receive without payment by the optionee of
any additional consideration, common shares equal to the value of options
surrendered. Effective June 25, 2008, the Company is not permitted to grant
additional stock options under the Plan without shareholders’
approval.
The
Company determines the fair value of the employee stock options using the
Black-Scholes option pricing model. The estimated fair value of the
options is expensed over their respective vesting periods. The fair
value of stock options granted was determined using the following weighted
average assumptions for options granted during the six month period ended June
30, 2007. No options were granted during the six month period ended June 30,
2008 (June 30, 2007 – 1,462,004).
|
|
Six
months ended June 30
|
|
|
2008
|
2007
|
|
Risk
free interest rate
|
-
|
4.0%
|
|
Expected
life (years)
|
-
|
3.0
|
|
Expected
volatility over expected life
|
-
|
110%
|
|
Expected
dividend rate
|
-
|
0%
|
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
8. Share
capital (continued)
The
fair value compensation recorded for options that have vested for the six month
period ended June 30, 2008 was $569 (2007 - $3,125) of which $537 (2007 -
$1,724) was expensed and $32 (2007 – $1,401) was capitalized to mineral
properties.
|
|
Six
months ended June 30
|
|
|
|
2008
|
|
|
2007
|
|
|
Weighted
average fair value of
|
|
|
|
|
|
|
options
granted during the period
|
$
|
-
|
|
|
$
|
2.61
|
|
As at
June 30, 2008 stock options were outstanding enabling the holders to acquire
common shares as follows:
|
|
|
|
|
Outstanding
options
|
|
|
Exercisable
options
|
|
|
|
|
|
|
Weighted
average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
remaining
|
|
|
average
|
|
|
|
|
|
average
|
|
|
Range
of
|
Number
|
|
|
contractual
|
|
|
exercise
|
|
|
Number
|
|
|
exercise
|
|
|
exercise
price
|
of
options
|
|
|
life
|
|
|
price
|
|
|
exercisable
|
|
|
price
|
|
|
(CDN$)
|
(thousands)
|
|
|
(years)
|
|
|
(CDN$)
|
|
|
(thousands)
|
|
|
(CDN$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.00
to $1.50
|
|
798
|
|
|
|
0.14
|
|
|
$
|
1.46
|
|
|
|
798
|
|
|
$
|
1.46
|
|
|
$1.75
to $2.60
|
|
3,944
|
|
|
|
3.12
|
|
|
|
2.22
|
|
|
|
3,871
|
|
|
|
2.23
|
|
|
$2.65
to $3.60
|
|
3,969
|
|
|
|
4.07
|
|
|
|
3.10
|
|
|
|
3,940
|
|
|
|
3.10
|
|
|
$4.00
to $4.65
|
|
3,238
|
|
|
|
4.66
|
|
|
|
4.33
|
|
|
|
2,853
|
|
|
|
4.29
|
|
|
|
|
11,949
|
|
|
|
3.65
|
|
|
$
|
3.03
|
|
|
|
11,462
|
|
|
$
|
2.99
|
|
A
summary of the status of the Plan as at June 30 and changes during each of the
six month periods then ended is as follows:
|
|
Six months
ended
|
|
|
|
June 30,
2008
|
|
|
June 30, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
Number
|
|
|
exercise
|
|
|
Number
|
|
|
exercise
|
|
|
|
of
options
|
|
|
price
|
|
|
of
options
|
|
|
price
|
|
|
|
(thousands)
|
|
|
(CDN$)
|
|
|
(thousands)
|
|
|
(CDN$)
|
|
|
Balance
– beginning of period
|
|
12,527
|
|
|
$
|
3.04
|
|
|
|
11,394
|
|
|
$
|
2.80
|
|
|
Granted
|
|
-
|
|
|
|
-
|
|
|
|
1,462
|
|
|
|
4.25
|
|
|
Exercised
|
|
(76
|
)
|
|
|
2.14
|
|
|
|
(746
|
)
|
|
|
1.42
|
|
|
Expired
or forfeited
|
|
(502
|
)
|
|
|
3.20
|
|
|
|
(62
|
)
|
|
|
3.99
|
|
|
Balance
- end of period
|
|
11,949
|
|
|
$
|
3.03
|
|
|
|
12,048
|
|
|
$
|
3.07
|
|
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
8. Share
capital (continued)
Financing
Transactions
Fiscal
2008 Activity
On
February 11, 2008, the Company completed a public offering of 32.89 million
units at CDN$2.10 per unit for gross proceeds of CDN$69.1 million.
Each
unit consisted of one common share of the Company and one-half of one common
share purchase warrant. Each whole warrant entitles the holder to purchase a
further common share of the Company at an exercise price of CDN$3.00 for a
period expiring on the later of: (i) August 11, 2009; and (ii) six months
following the Permit date, where the Permit date is the 45
th
day
following the receipt by the Company of the Permit.
The net
proceeds received by the Company, after considering issuance costs of $4.6
million, was $64.1 million. The issuance costs were allocated proportionately to
the amounts recorded as share capital of $57.7 million and contributed surplus
of $6.4 million.
9. Supplemental
disclosures with respect to cash flows
|
|
June
30
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
and cash equivalents consist of:
|
|
|
|
|
|
|
Cash
|
$
|
4,223
|
|
|
$
|
2,157
|
|
|
US
Treasury Bills with interest rate of 1.42%
|
|
57,267
|
|
|
|
-
|
|
|
Canadian
Treasury Bills with interest rate of 2.05%
|
|
-
|
|
|
|
13,908
|
|
|
|
$
|
61,490
|
|
|
$
|
16,065
|
|
Cash
paid during the six month periods ended June 30
|
|
2008
|
|
|
2007
|
|
|
For
interest
|
$
|
4,688
|
|
|
$
|
4,771
|
|
|
For
income taxes
|
$
|
178
|
|
|
$
|
286
|
|
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
9. Supplemental
disclosures with respect to cash flows (continued)
Investment
in property, plant and equipment for the six month periods ended June
30
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
Net
book value of property, plant and equipment
|
|
|
|
|
|
|
January
1
|
$
|
317,179
|
|
|
$
|
283,407
|
|
|
Net
book value of property, plant and equipment
|
|
|
|
|
|
|
|
|
June
30
|
|
327,770
|
|
|
|
301,456
|
|
|
Net
additions to property, plant and equipment
|
|
|
|
|
|
|
|
|
(after
amortization and depletion) during the
|
|
|
|
|
|
|
|
|
period
ended June 30
|
|
(10,591
|
)
|
|
|
(18,049
|
)
|
|
Capitalization
of stock compensation
|
|
32
|
|
|
|
1,401
|
|
|
Future
income taxes
|
|
2,332
|
|
|
|
2,267
|
|
|
Amortization
and depletion expenses
|
|
(42
|
)
|
|
|
(43
|
)
|
|
Net
book value of equipment sold
|
|
(4,266
|
)
|
|
|
-
|
|
|
Net
additions to property, plant and equipment
|
|
|
|
|
|
|
|
|
during
the period ended June 30
|
|
(12,535
|
)
|
|
|
(14,424
|
)
|
|
Changes
in working capital related to
|
|
|
|
|
|
|
|
|
property,
plant and equipment acquisitions
|
|
(196
|
)
|
|
|
(1,411
|
)
|
|
|
$
|
(12,731
|
)
|
|
$
|
(15,835
|
)
|
Issuance
of common shares for cash for the six month periods ended June 30
|
|
2008
|
|
|
2007
|
|
|
Cash
received from:
|
|
|
|
|
|
|
Public
offering
|
$
|
64,144
|
|
|
$
|
50,701
|
|
|
Exercise
of options
|
|
162
|
|
|
|
907
|
|
|
Exercise
of warrants
|
|
-
|
|
|
|
881
|
|
|
|
$
|
64,306
|
|
|
$
|
52,489
|
|
Significant
non-cash transactions for the six month periods ended June 30
|
|
2008
|
|
|
2007
|
|
|
Issuance
of common shares for:
|
|
|
|
|
|
|
Settlement
of promissory note, 245,710 common shares
|
$
|
-
|
|
|
$
|
900
|
|
|
Directors’
fees, 45,770 (2007: 33,720) common shares
|
$
|
112
|
|
|
$
|
132
|
|
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
10. Segmented
information
Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. All of the Company’s
operations are within the mining sector. Due to geographic and
political diversity, the Company’s mining operations are decentralized, whereby
mine general managers are responsible for business results and regional
corporate offices provide support to the mines in addressing local and regional
issues. The Company’s operations are therefore segmented on a
district basis. The Company’s only product is gold, produced from
mines located in Venezuela.
The
segments’ accounting policies are the same as those described in the summary of
significant accounting policies except that other expense items are not
allocated to the individual operating segments when determining profit or loss,
but rather are attributed to the corporate office.
Geographic
information:
Substantially
all revenues generated and property, plant and equipment held by the Company are
in Venezuela, except for long-lead time capital assets required for the
development of Las Cristinas, of which significant amounts are located
temporarily in Houston, U.S.A., Antwerp, Belgium and Cape Town, South
Africa.
|
|
|
|
|
Venezuelan
|
|
|
Las
Cristinas
|
|
|
|
|
|
|
Canada
|
|
|
Operations
|
|
|
Development
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
revenue
|
$
|
-
|
|
|
$
|
5,233
|
|
|
$
|
-
|
|
|
$
|
5,233
|
|
|
Mining
operations
|
$
|
-
|
|
|
$
|
(7,390
|
)
|
|
$
|
-
|
|
|
$
|
(7,390
|
)
|
|
Amortization
and accretion of ARO
|
$
|
(20
|
)
|
|
$
|
(91
|
)
|
|
$
|
-
|
|
|
$
|
(111
|
)
|
|
Interest
and other income
|
$
|
200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
200
|
|
|
Interest
expense
|
$
|
(3,182
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(3,182
|
)
|
|
Gain
on equipment sale
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,636
|
|
|
$
|
1,636
|
|
|
Segment
income (loss)
|
$
|
(6,793
|
)
|
|
$
|
215
|
|
|
$
|
(3,417
|
)
|
|
$
|
(9,995
|
)
|
|
Segment
assets
|
$
|
58,393
|
|
|
$
|
8,685
|
|
|
$
|
330,886
|
|
|
$
|
397,964
|
|
|
Capital
expenditures
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(7,260
|
)
|
|
$
|
(7,260
|
)
|
|
Three
months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
revenue
|
$
|
-
|
|
|
$
|
2,848
|
|
|
$
|
-
|
|
|
$
|
2,848
|
|
|
Mining
operations
|
$
|
-
|
|
|
$
|
(5,121
|
)
|
|
$
|
-
|
|
|
$
|
(5,121
|
)
|
|
Amortization
and accretion of ARO
|
$
|
(21
|
)
|
|
$
|
(51
|
)
|
|
$
|
-
|
|
|
$
|
(72
|
)
|
|
Interest
and other income
|
$
|
430
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
430
|
|
|
Gain
on equipment sale
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Interest
expense
|
$
|
(3,171
|
)
|
|
$
|
(354
|
)
|
|
$
|
-
|
|
|
$
|
(3,525
|
)
|
|
Segment
income (loss) - Restated
|
$
|
(9,865
|
)
|
|
$
|
(3,371
|
)
|
|
$
|
1,113
|
|
|
$
|
(12,123
|
)
|
|
Segment
assets - Restated
|
$
|
40,071
|
|
|
$
|
11,333
|
|
|
$
|
298,188
|
|
|
$
|
349,592
|
|
|
Capital
expenditures
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(7,608
|
)
|
|
$
|
(7,608
|
)
|
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
10. Segmented
information (continued)
|
|
|
|
|
Venezuelan
|
|
|
Las
Cristinas
|
|
|
|
|
|
|
Canada
|
|
|
Operations
|
|
|
Development
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
revenue
|
$
|
-
|
|
|
$
|
11,134
|
|
|
$
|
-
|
|
|
$
|
11,134
|
|
|
Mining
operations
|
$
|
-
|
|
|
$
|
(13,793
|
)
|
|
$
|
-
|
|
|
$
|
(13,793
|
)
|
|
Amortization
and accretion
|
$
|
(42
|
)
|
|
$
|
(182
|
)
|
|
$
|
-
|
|
|
$
|
(224
|
)
|
|
Interest
and other income
|
$
|
414
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
414
|
|
|
Interest
expense
|
$
|
(6,364
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(6,364
|
)
|
|
Gain
on equipment sale
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,636
|
|
|
$
|
1,636
|
|
|
Segment
income (loss)
|
$
|
(13,113
|
)
|
|
$
|
2,454
|
|
|
$
|
(10,538
|
)
|
|
$
|
(21,197
|
)
|
|
Segment
assets
|
$
|
58,393
|
|
|
$
|
8,685
|
|
|
$
|
330,886
|
|
|
$
|
397,964
|
|
|
Capital
expenditures
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(12,731
|
)
|
|
$
|
(12,731
|
)
|
|
Six
months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
revenue
|
$
|
-
|
|
|
$
|
6,569
|
|
|
$
|
-
|
|
|
$
|
6,569
|
|
|
Mining
operations
|
$
|
-
|
|
|
$
|
(9,833
|
)
|
|
$
|
-
|
|
|
$
|
(9,833
|
)
|
|
Amortization
and accretion
|
$
|
(43
|
)
|
|
$
|
(101
|
)
|
|
$
|
-
|
|
|
$
|
(144
|
)
|
|
Interest
and other income
|
$
|
624
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
624
|
|
|
Interest
expense
|
$
|
(6,326
|
)
|
|
$
|
(415
|
)
|
|
$
|
-
|
|
|
$
|
(6,741
|
)
|
|
Segment
income (loss) - Restated
|
$
|
(17,503
|
)
|
|
$
|
(7,367
|
)
|
|
$
|
9,928
|
|
|
$
|
(14,942
|
)
|
|
Segment
assets - Restated
|
$
|
40,071
|
|
|
$
|
11,333
|
|
|
$
|
298,188
|
|
|
$
|
349,592
|
|
|
Capital
expenditures
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(15,835
|
)
|
|
$
|
(15,835
|
)
|
11. Related
party and other transactions
During
the six month period ended June 30, 2008, the Company paid underwriting fees of
$2,779 (2007: $3,371) to a company which retains the Chairman of the Company as
an employee.
The
amounts charged to the Company for the services provided have been determined by
negotiation among the parties. These transactions were in the normal
course of operations and were measured at the exchange value which represented
the amount of consideration established and agreed to by the related
parties.
12. Restatement
of prior period due to future income taxes
In
2007, the Company reviewed its accounting practices in respect of certain
expenditures made in connection with its Venezuela Branch but funded by its
Canadian parent entity with respect to Las Cristinas. The Company
determined that such expenditures, previously treated as deductible for tax
purposes, that have been capitalized in the Canadian parent entity are unlikely
to be deductible either in Venezuela or in Canada thereby creating a difference
between their accounting and tax values. The resulting future tax
liability is subject to foreign exchange translation gains and losses at each
reporting period when it is re-valued into US dollars.
Crystallex International
Corporation
Notes
to the Consolidated Financial Statements - Unaudited
June
30, 2008
(In
thousands of United States dollars)
12.
Restatement
of prior period due to future income taxes
(continued)
The
following table summarizes information relating to the restatement of the six
month period ended June 30, 2007 as a result of this review:
|
Cumulative
non-deductible expenditures
|
$
|
56,719
|
|
|
Related
future income tax liability
|
$
|
29,218
|
|
|
Capitalized
to mineral properties during the period
|
$
|
2,267
|
|
|
Unrealized
foreign currency translation gains – three months ended June 30,
2007
|
$
|
1,580
|
|
|
–
six months ended June 30, 2007
|
$
|
10,832
|
|
|
|
|
|
|
|
Unrealized
foreign currency translation gains
|
|
|
|
|
Fiscal
2005
|
$
|
1,442
|
|
|
Fiscal
2004
|
|
1,996
|
|
|
Cumulative
effect on opening deficit
|
$
|
3,438
|
|
|
|
As at June 30, 2007
|
|
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
Property,
plant and equipment
|
$
|
263,536
|
|
|
$
|
29,218
|
|
|
$
|
292,754
|
|
|
Future
income taxes
|
$
|
-
|
|
|
$
|
14,948
|
|
|
$
|
14,948
|
|
|
Opening
deficit
|
$
|
(287,152
|
)
|
|
$
|
3,438
|
|
|
$
|
(283,714
|
)
|
|
Net
loss for the period
|
|
(25,774
|
)
|
|
|
10,832
|
|
|
|
(14,942
|
)
|
|
Deficit,
end of period
|
$
|
(312,926
|
)
|
|
$
|
14,270
|
|
|
$
|
(298,656
|
)
|
The
estimated future income taxes represent a net accounting entry derived from the
current lack of deductibility in the Venezuela Branch of certain expenditures
related to Las Cristinas which were funded by the parent Company in
Canada. These costs will be amortized for accounting purposes but may
not be for income tax purposes. Accordingly, the future income taxes
represent an undiscounted estimate of the tax effect of this difference, and
therefore are not payable at the present.
CRYSTALLEX
INTERNATIONAL CORPORATION
Management’s
Discussion and Analysis
For
the Six Month Period Ended June 30, 2008
(All
dollar amounts in US dollars, unless otherwise stated)
This
Management Discussion and Analysis (“MD&A”) of the financial condition and
results of the operations of Crystallex International Corporation (“Crystallex”
or the “Company”) is intended to supplement and complement the Company’s
unaudited interim consolidated financial statements and the related notes
covering the six month period ended June 30, 2008. This MD&A
should be read in conjunction with those unaudited interim consolidated
financial statements as well as the annual audited consolidated financial
statements of the Company and the related annual MD&A for the year ended
December 31, 2007.
The
Company prepares its consolidated financial statements in U.S. dollars and in
accordance with Canadian Generally Accepted Accounting Principles. All dollar
amounts in this MD&A are in U.S. dollars unless otherwise
specified.
This
MD&A was prepared on August 13, 2008 and the Company’s public filings,
including its 2007 Annual Information Form, are available on
SEDAR at
www.sedar.com
Special
Note Regarding Forward Looking Statements
Certain
statements included or incorporated by reference in this Management Discussion
and Analysis, including information as to the future financial or operating
performance of the Company, its subsidiaries and its projects, constitute
forward-looking statements. The words “believe,” “expect,” “anticipate,”
“contemplate,” “target,” “plan,” “intends,” “continue,” “budget,” “estimate,”
“may,” “schedule” and similar expressions identify forward-looking
statements. Forward-looking statements include, among other things,
statements regarding targets, estimates and assumptions in respect of gold
production and prices, operating costs, results and capital expenditures,
mineral reserves and mineral resources and anticipated grades and recovery
rates. Forward-looking statements are necessarily based upon a number
of estimates and assumptions that, while considered reasonable by the Company,
are inherently subject to significant business, economic, competitive, political
and social uncertainties and contingencies. Many factors could cause
the Company’s actual results to differ materially from those expressed or
implied in any forward-looking statements made by, or on behalf of, the
Company. Such factors include, among others, risks relating to
additional funding requirements, reserve and resource estimates, gold prices,
exploration, development and operating risks, illegal miners, political and
foreign risk, uninsurable risks, competition, limited mining operations,
production risks, environmental regulation and liability, government regulation,
currency fluctuations, recent losses and write-downs and dependence on key
employees. See “Risk Factors” section of this Management Discussion
and Analysis. Due to risks and uncertainties, including the risks and
uncertainties identified above, actual events may differ materially from current
expectations. Investors are cautioned that forward-looking statements are not
guarantees of future performance and, accordingly, investors are cautioned not
to put undue reliance on forward-looking statements due to the inherent
uncertainty therein. Forward-looking statements are made as of the
date of this Management Discussion and Analysis and the Company disclaims any
intent or obligation to update publicly such forward-looking statements, whether
as a result of new information, future events or results or
otherwise.
Overview
The
Company is engaged in the production of gold and related activities including
exploration, development, mining and processing in Venezuela. The Company’s
principal asset is its interest in the Las Cristinas gold project located in
Sifontes, Bolivar State, Venezuela. The Company’s other assets include the Tomi
operations, the Lo Incréible properties (which include the La Victoria deposit),
and the Revemin mill, all of which are located in Bolivar State, Venezuela (the
“El Callao operations”).
Highlights
Las
Cristinas Permitting to Impact the Environment
To
date, the Company has not been granted the Permit required to begin mine
construction at the Las Cristinas site. Below is a chronology of the recent
steps that have been taken to secure the Permit:
|
|
During
2007, the Corporacion Venezolana de Guayana (“CVG”) was formally notified
by the Ministry of Environment and Natural Resources (“MinAmb”) that all
requirements had been fulfilled for the issuance of the Authorization to
Affect Natural Resources (the “Permit”) which will enable construction of
the mine to begin. MinAmb approved the EIS for the Las Cristinas gold
project, and requested the CVG post a construction compliance guarantee
bond and pay certain environmental taxes. Crystallex posted the requested
bond and paid the requested taxes. No impediments were raised in
discussions with Government officials at that time; they subsequently
confirmed that the Company was in good standing for the issuance of the
Permit.
|
|
|
In
early 2008, Mr. Rodolfo Sanz was appointed Minister of the Ministry of
Basic Industries and Mining (“MIBAM”) and President of the CVG, both
titles giving him direct responsibility for the Las Cristinas project.
Crystallex officials have met with the Minister on an ongoing
basis.
|
|
§
|
On
April 30, 2008, the Company reported that the Director General of the
Administrative Office of Permits at MinAmb had issued a letter to the
CVG denying its
request for the Permit for the Las Cristinas
project.
|
|
§
|
On
May 12, 2008, the Company filed a legal rebuttal to the position taken by
the Director General of Permits at
MinAmb.
|
|
§
|
Crystallex
argues that the position taken by the Director General, which led to the
existing appeal against the Minister of MinAmb, is in conflict with the
Las Cristinas EIS approval, the Construction Compliance Guarantee Bond
request and Environmental Tax request already issued by MinAmb. Both the
posting of the Bond and payment of the requested Tax were satisfied in
2007 and Crystallex obtained receipt of acceptance. In addition, the
Company has said that the Ministry’s position appears to contradict normal
mineral mining practices in the Imataca Forest Region and does not conform
to the treatment of either current and/or historic projects. In addition,
Crystallex believes that the position of this official and statements made
by the Minister of MinAmb contradict Presidential Decrees, National
Assembly Resolutions, MinAmb Resolutions, and MIBAM
Resolutions.
|
|
§
|
On
May 30, 2008, the Company reported that the Director General denied the
legal rebuttal and advised the Company of its rights under Venezuelan law
to appeal directly to the Minister of
MinAmb.
|
|
§
|
On
June 4, 2008, the Company appeared by invitation at a public hearing of
the Economic Development Committee of the Venezuelan National Assembly. At
the hearing, Crystallex gave a presentation addressing plans for mining at
Las Cristinas. The presentation included the Company’s plan for
remediation and dealing with the environmental issues at the project and
its planned social projects for the local communities such as employment
and training projects. Senior representatives of MIBAM who appeared before
the Committee hearings supported the position presented by
Crystallex.
|
|
§
|
The
resolution issued by the Committee states that the Las Cristinas project
has been in development for a significant period of time with the support
of several different branches of the Government. The resolution further
notes that there was a lack of coordination between the various Government
branches, and calls for a positive solution which should take into
consideration the macroeconomic policies and goals of Venezuela, as well
as the social needs of the people and the pre-existing environmental
damage at Las Cristinas.
|
|
§
|
On
June 16, 2008, the Company filed an appeal with the Minister of MinAmb.
The Minister has 90 business days in which to issue a decision on the
appeal. If no decision is issued within the 90 business days, the appeal
is deemed to be denied.
|
|
§
|
On
June 18, 2008, the Company was invited by the Vice-Minister of MinAmb to a
meeting where Crystallex was informed that MinAmb was instructed by the
Government of Venezuela to reconsider issuance of the Permit by discussing
with Crystallex possible modifications of the Las Cristinas project to
diminish the environmental impacts of the project and thus enable the
Permit to be issued.
|
|
§
|
In
early August, 2008, the Company filed with MinAmb a report which dealt
with the MinAmb requests for (i) further improvements to the social
projects in the area, (ii) mitigating the impact of open vein deposit
mining in the currently affected areas of the Imataca Forest Reserve, and
(iii) improving the remediation plans at the end of the mine life as well
as repairing existing environmental damage caused by illegal
mining.
|
|
§
|
On
August 8, 2008, as part of the ongoing process towards issuance of the
Permit, a team from MinAmb led by the Vice-Minister of MinAmb concluded a
two-day site visit of the Las Cristinas
project.
|
Liquidity
and Capital Resources
|
§
|
Cash
and cash equivalents at June 30, 2008 were $61.5
million.
|
|
§
|
Assuming
expenditures at approximately the reduced rate following cost reductions
in the first half of 2008, the Company forecasts that it will have cash to
fund its operations until the third quarter of 2009 (see “Liquidity and
Capital Resources”).
|
Financial
Performance
|
§
|
Six
months loss of $21.2 million, or $0.07 per share; second quarter loss of
$10.0 million, or $0.03 per share.
|
|
§
|
Loss
of $2.8 million and $2.2 million for six months and three months ended
June 30, 2008, respectively, from operations at El Callao (the loss is
inclusive of exploration expenditures of approximately $1.6 million and
$0.8 million, respectively).
|
|
§
|
Expenditures
of $12.7 million and $7.3 million on Las Cristinas for the six months and
three months ended June 30, 2008,
respectively.
|
Summary
of Quarterly Results (Unaudited)
$,000
except per share
|
2008
|
2007
|
|
Q2
|
Q1
|
Q4
|
Q3
(Amended)
|
Revenue
|
$5,233
|
$5,901
|
$4,809
|
$2,188
|
Net
loss previously reported
|
-
|
-
|
-
|
($9,256)
|
Adjustment
to unrealized gain
|
-
|
-
|
|
2,534
|
Net
loss as amended
|
$(9,995)
|
$(11,202)
|
$(8,787)
|
$(6,722)
|
Per
share – Basic and diluted
|
$(0.03)
|
$(0.04)
|
$(0.03)
|
$(0.03)
|
$,000
except per share
|
2007
|
2006
|
|
Q2
((Amended))
|
Q1
(Amended)
|
Q4
|
Q3
|
Revenue
|
$2,848
|
$3,720
|
$5,720
|
$9,769
|
Net
loss previously reported
|
($13,703)
|
($12,071)
|
($11,617)
|
($8,815)
|
Adjustment
to unrealized gain
|
1,580
|
9,252
|
-
|
-
|
Net
loss as amended
|
$(12,123)
|
$(2,819)
|
($11,617)
|
($8,815)
|
Per
share – Basic and diluted
|
$(0.05)
|
$(0.01)
|
$(0.04)
|
$(0.04)
|
Financial
Results Overview
The
Company recorded a net loss for the first six months and second quarter of 2008
of $21.2 million, (($0.07) per share) and $10.0 million, (($0.03) per share)
respectively, as compared with net losses of $14.9 million, (($0.06) per share)
and $12.1 million (($0.05) per share) for the comparable periods in 2007. The
losses in the first six months and second quarter of 2008 are principally
attributable to the aggregate of corporate general and administrative costs,
interest expense, foreign exchange losses and losses at the El Callao mining
operations.
The
increase in the net loss for the first six months of 2008 compared to the first
six months in 2007 is due primarily to recording a foreign currency loss of $6.7
million in 2008 compared to a foreign currency gain of $7.2 million in 2007.
These amounts include an unrealized foreign currency translation loss of $9.9
million in 2008 compared to an unrealized gain of $10.8 million in 2007 as a
result of translation of future income tax liabilities in the Venezuelan Branch.
The increased exchange loss was offset in part by a $5.3 million reduction in
general and administrative expenses (2008: $7.1 million vs 2007: $12.4 million)
and a 2008 gain on sale of equipment of $1.6 million. The decrease in the net
loss in Q2 2008 compared to Q2 2007 is due primarily to a reduction in general
and administrative expenses, and offset by an increase in the unrealized foreign
exchange loss.
Mining
revenue at the El Callao operations was $11.1 million for the first six months
of 2008 compared to $6.6 million for the first six months of 2007. The Company
recorded an operating loss of $2.8 million at the El Callao operations for the
first six months of 2008 compared to an operating loss of $3.4 million for the
first six months in 2007. The loss was reduced despite higher spending on
exploration as revenue from gold sales increased in the first half of 2008
compared to the comparable period in 2007 due to higher average gold
prices. This higher realized price more than offset the reduction in
ounces sold and higher operating and exploration costs.
Cash
flow used in operating activities was a deficit of $12.8 million for the first
six months of 2008 compared to a deficit of $23.4 million for the comparable
period in 2007. The cash flow deficit incurred in the first six
months of 2008 was largely attributable to $7.1 million of corporate general and
administrative expenses, cash interest payments of $4.7 million and cash used to
fund exploration at the El Callao operations. Cash flow from
operations for Q2 2008 was a deficit of $4.6 million and similarly, principally
reflects cash payments for general and administrative expenses and funding
exploration at El Callao.
The
Company’s cash position at June 30, 2008 decreased to $61.5 million from $67.2
million at March 31, 2008. Capital expenditures for Las Cristinas were $7.3
million in Q2 2008 compared to $5.5 million in Q1 2008.
El
Callao Operations Review
Key
Mine Operating Statistics (USD)
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
Operating
Statistics
|
|
|
|
|
Gold
Production (ounces)
|
6,838
|
7,814
|
14,099
|
18,055
|
Gold
Sold (ounces)
|
6,830
|
7,416
|
14,885
|
17,182
|
Per
Ounce Data:
|
|
|
|
|
Total
Cash Cost
1,2
|
$960
|
$628
|
$822
|
$526
|
Total
Cost
1,2
|
$973
|
$635
|
$833
|
$532
|
Average
Realized Gold Price
2
|
$766
|
$384
|
$748
|
$382
|
Average
Spot Gold Price
|
$896
|
$668
|
$911
|
$659
|
|
|
|
|
|
Key
Mine Operating Statistics (Bolivars)
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
Operating
Statistics
|
|
|
|
|
Gold
Production (ounces)
|
6,838
|
7,814
|
14,099
|
18,055
|
Per
Ounce Data: (Bolivars)
|
|
|
|
|
Average
Realized Gold Price
|
2,597
|
1,427
|
3,074
|
1,411
|
Total
Cash Cost
1,2
|
3,254
|
2,334
|
3,372
|
1,943
|
Financial
Results (Bolivars, 000’s)
|
|
|
|
|
Mining
Revenues
|
17,740
|
10,580
|
45,761
|
24,240
|
Total
Cash Operating Cost
1
|
22,221
|
17,312
|
50,191
|
33,380
|
Average
Foreign Exchange Rate
|
3.39
|
3.72
|
4.11
|
3.69
|
|
|
|
|
|
1.
Total
Cost represents the total cost of gold production, including amortization,
depletion, accretion and revisions to asset retirement
obligations. For an explanation, refer to the section on
Non-GAAP measures at the end of this MD&A. The calculation
is based on ounces of gold sold. Since the second quarter of
2005, all costs at the El Callao operations are expensed due to the
short life of these mines.
|
2
Based on the average parallel (market) exchange rate in effect during the
period.
|
Production
Summary
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
Gold
Production (ounces)
|
|
|
|
|
Tomi
Open Pits
|
2,388
|
1,366
|
4,197
|
4,710
|
Tomi
Underground
|
1,589
|
3,375
|
3,845
|
7,634
|
La
Victoria
|
2,148
|
1,812
|
5,300
|
3,955
|
Purchased
Material
|
713
|
1,261
|
765
|
1,756
|
Total
Gold Production (ounces)
|
6,838
|
7,814
|
14,099
|
18,055
|
Total
Ore Processed
1
(tonnes)
|
75,650
|
72,808
|
153,489
|
159,489
|
Head
Grade of Ore Processed (g/t)
|
3.15
|
3.88
|
3.22
|
4.07
|
Total
Recovery Rate (%)
|
89%
|
86%
|
89%
|
86%
|
Total
Gold Recovered (ounces)
|
6,838
|
7,814
|
14,099
|
18,055
|
Total
Cash Cost Per Ounce Sold
|
$960
|
$628
|
$822
|
$526
|
Mine
Operating Cash Flow ($,000)
2
|
($1,322)
|
($1,812)
|
($1,078)
|
($2,477)
|
Capital
Expenditures ($000)
3
|
----
|
---
|
---
|
---
|
Net
Mine Cash Flow ($000)
|
(1,322)
|
($1,812)
|
($1,078)
|
($2,477)
|
1
|
Ore
from Tomi, La Victoria and purchased material is processed at the
Company’s Revemin mill.
|
2
|
Mining
Revenues less Operating Expenses adjusted for non-cash items and excludes
exploration costs of $0.84 million in the three months ended June 30, 2008
(2007: $0.46 million) and $1.6 million in the six months ended
June 30 2008 (2007: $0.79 million).
|
3
|
Capital
expenditures at the El Callao operating mines, excludes Las
Cristinas. Since the second quarter of 2005, all costs at the
El Callao operations have been expensed due to the short reserve life of
these mines.
|
Tomi
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
Tomi
Open Pits
|
|
|
|
|
Tonnes
Ore Mined
|
35,545
|
15,746
|
41,823
|
52,030
|
Tonnes
Waste Mined
|
51,741
|
326,185
|
122,437
|
737,728
|
Strip
Ratio (Waste:Ore)
|
1.5:1.0
|
20.7:1.0
|
2.9:1.0
|
14.2:1.0
|
Tonnes
Ore Processed
|
32,686
|
18,144
|
55,017
|
51,596
|
Average
Grade of Ore Processed (g/t)
|
2.5
|
2.60
|
2.6
|
3.18
|
Recovery
Rate (%)
|
91%
|
90%
|
91%
|
89%
|
Production
(ounces)
|
2,388
|
1,366
|
4,197
|
4,710
|
Tomi
Underground
|
|
|
|
|
Tonnes
Ore Mined
|
9,211
|
15,807
|
16,505
|
33,729
|
Tonnes
Ore Processed
|
9,275
|
17,122
|
21,107
|
35,469
|
Average
Grade of Ore Processed (g/t)
|
5.8
|
6.67
|
6.1
|
7.28
|
Recovery
Rate (%)
|
92%
|
92%
|
93%
|
92%
|
Production
(ounces)
|
1,589
|
3,375
|
3,845
|
7,634
|
La
Victoria
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
Tonnes
Ore Mined
|
29,876
|
33,926
|
74,938
|
73,213
|
Tonnes
Waste Mined
|
181,928
|
107,742
|
284,052
|
267,887
|
Strip
Ratio (Waste:Ore)
|
6.1:1.0
|
3.2:1.0
|
3.8:1.0
|
3.7:1.0
|
Tonnes
Ore Processed
|
30,122
|
29,701
|
73,594
|
58,568
|
Average
Grade of Ore Processed (g/t)
|
2.64
|
2.62
|
2.67
|
2.81
|
Recovery
Rate (%)
|
84%
|
72%
|
84%
|
75%
|
Production
(ounces)
|
2,148
|
1,812
|
5,300
|
3,955
|
Gold
production for the second quarter of 2008 was 6,838 ounces; a decrease of 12%
from 7,814 ounces produced in the second quarter of 2007. For the six months of
2008 production was 14,099 ounces, a decrease of 22% from 18,055 ounces produced
in the six months of 2007.
Lower
production for the second quarter and first half of 2008 is due to declining ore
grades. On the Tomi concession, the Fosforito pit was depleted during the first
quarter of 2008 and the Mackenzie pit is expected to be depleted in
September. Mining has finished on Level 9, the lowest level currently
developed at the underground mine. During the fourth quarter of 2008,
there is not expected to be any mining activity on the Tomi concession, with ore
for the Revemin mill coming from the La Victoria mine and purchased
material.
Mining
may continue at the La Victoria mine until the first quarter of 2009; however,
gold production is expected to decline in the fourth quarter, as the mine
approaches the point of requiring a river diversion to continue expanding the
open pit. With a preliminary capital estimate of approximately $9
million for diverting the river and for other related items, the Company will
defer a decision on advancing with the La Victoria expansion project until at
least the time of receiving the Permit to allow construction at Las
Cristinas.
An
underground drilling program to test the mineralization below the current mining
level at the Tomi underground mine was completed and Crystallex estimated an
Indicated Resource of approximately 494,000 tonnes grading 9.7 g/t, containing
approximately 150,000 ounces using a 4.0 g/t cutoff grade. A mine
design study is required to determine what portion of the resource would be
minable.
The El
Callao operations incurred a deficit in mine operating cash flow in the second
quarter and first six months of 2008 $1.3 million and $1.1 million respectively,
as compared with an operating deficit of $1.8 million and $2.5 million for the
comparable periods in 2007. Mine operating cash flow is calculated as
Mining Revenue less Operations Expenses, net of Exploration costs of $0.84
million and $1.6 million for the second quarter and six month period
respectively. The increase in mine operating cash flow for the six
months of 2008 is a result of realizing higher gold prices, (see “Revenue”
below) which offset higher costs and fewer ounces sold.
Cash
operating costs increased to $960 per ounce in the second quarter of 2008, from
$628 per ounce in the second quarter of 2007. (Unit costs are based
on the average USD/Bs exchange rate for the period). For the first
six months of 2008, cash operating costs were $822 per ounce as compared with
$526 per ounce for the comparable period in 2007. The increase in
unit costs was attributable to a general increase in the cost of operating
supplies, and lower productivity as the pits near depletion. High
operating costs also reflect the effect of expensing all costs at the El Callao
operation. Plant replacement parts that would typically be
capitalized are expensed due to the short life of the operation.
Venezuelan
Exchange Controls
In
accordance with the Exchange Control regulations in Venezuela, the Central Bank
of Venezuela, (“CBV”) centralizes the purchase and sale of foreign currency in
Venezuela which has been fixed since 2003. The current rate of
exchange is fixed at 2.15 Bolivars (“Bs”) (2,150 prior to January 1, 2008) per
USD. The Venezuelan government enacted the Criminal Exchange Law that imposes
strict sanctions for the exchange of Venezuelan currency with other foreign
currencies through other than designated methods. The exchange regulations do
not apply to certain securities which are traded within Venezuela and on
recognized exchanges outside Venezuela. Therefore, the purchase in
one market and sale in the other market of these dual listed securities provides
an effective parallel market for the Venezuelan currency. The
majority of the securities that are so traded are issued by the Venezuelan
government.
The
parallel or market rate in 2007 and 2008 has been volatile, but the parallel
rate has been consistently higher than the official rate. As a result of this
spread, transactions recorded and settled in Bs have been converted to USD at
the average parallel exchange rate commencing in fiscal 2007 instead of the
official rate as used in prior periods. Monetary items reported in Bs have
been converted using the parallel rate at period end. During the
third quarter of 2007 the Company reviewed the accounting for foreign currency
transactions in Venezuela due to the increasing spread between the official rate
and the parallel or
market
rate in Venezuela. It was determined that, as a consequence of the rapid decline
in the valuation of the Venezuelan Bolivar, as reflected in the parallel market
for foreign currencies in Venezuela, translating from Bs to USD using the
official rate was no longer appropriate.
Exchange
Controls Impact on Revenue and Operating Costs
The
Company sold its gold production to the CBV for the first nine months of
2007. Sales to the CBV are based on the USD spot gold price at the
time of delivery; however, payment is received in Bs, with the USD revenues
converted to Bs by the CBV at the then official rate of Bs 2,150. In 2006, for
USD reporting purposes, the Company converted the Bs back to USD at the same
rate of 2,150 and, as a result, the reported realized price per ounce was
comparable to the actual average spot gold price for the
period. However, with the parallel rate in 2007 materially above the
official rate and since the Company is not registered to purchase USD in
Venezuela at the official rate, it was determined that for 2007 USD reporting
purposes, the Company convert the Bs revenue back to USD using the higher
parallel rate. (In practice, the Company does not convert the Bs
revenue to USD, rather the Bs are used to fund ongoing
operations). As a consequence of receiving Bs at the official rate on
gold sales, then converting back to USD at the parallel rate for reporting
purposes, the Company’s quarterly 2008 and 2007 reported USD revenue reflects a
realized price that is significantly below the average spot price for these
periods and below the actual price realized for the respective
period.
Similarly,
USD reported operating costs in the 2008 and 2007 quarters have been reduced as
a result of converting a portion of the costs to USD at the higher parallel rate
in 2008 and 2007 compared to the official rate used in 2006.
Income
Statement
Revenue
The
Company sold its gold production to the CBV for the first nine months of
2007. Sales are based on the USD spot gold price at the time of
delivery; however, payment is received in Bs, with the USD revenues converted to
Bs at the official rate of 2.15 Bs. For USD reporting purposes, the
Bs are converted back to USD; however, the re-conversion uses the higher
parallel (market) rate, as the Company is not registered to apply to purchase
USD at the official rate of 2,150. In practice, the Company is not
buying USD, rather the Bs received from gold sales are used to fund the El
Callao operations. For reporting purposes, the conversion back
to USD results in reportable revenue and realized prices per ounce that are well
below the average USD spot gold rates for the reporting periods.
In
order to maximize the Bs received from gold sales, the Company informed
Venezuelan authorities of its decision to sell its gold production to registered
local purchasers, as they buy the gold at a significant premium to the official
rate. After giving notice to the appropriate government authorities, in October
2007, the Company commenced selling gold production at El Callao to registered
businesses at prices based on the USD spot price of gold, with settlement in Bs
at the parallel rate instead of selling to the CBV at the official
rate.
Mining
revenue was $11.1 million and $5.2 million for the first six months and second
quarter of 2008 respectively, compared to $6.6 million and $2.8 million for the
corresponding periods in 2007. Gold sales were 14,885 ounces and 6,830 for the
first six months and second quarter of 2008 respectively, compared to 17,182
ounces and 7,416 ounces for the corresponding periods in 2007.
Although
the Company sold fewer ounces of gold in the first half of 2008, as compared
with the first half of 2007, revenue was significantly higher in the first half
of 2008 due to higher spot gold prices and receiving Bs from gold sales at a
rate materially higher than the official rate (for the first half of 2007 gold
sales to the CBV were paid in Bs at the official rate). For the first
six months of 2008, the spot price of gold averaged $911 per ounces as compared
with $659 per ounce for the same period in 2007.
Operating
Expenses
Operations’
expenses were $13.8 million and $7.4 million for the first six months and second
quarter of 2008 respectively, compared to $9.8 million and $5.1 million for the
corresponding periods in 2007. Exploration expenditures of $1.6
million and $0.84 million for the first six months and second quarter of 2008
respectively are included in the mine operating expense figures. The
Company is not planning any further exploration programs at the El Callao
operations.
The
total cash cost per ounce sold was $822 and $960 for the first six months and
second quarter of 2008 respectively, compared to $526 and $628 million for the
corresponding periods in 2007. The increase was attributable to a general
increase in the cost of operating supplies and lower productivity as the pits
near depletion.
Corporate
General and Administrative Expenses
Corporate
General and Administrative expenses were $7.1 million and $3.8 million for the
first six months and second quarter of 2008 respectively, compared to $12.4
million and $7.1 million for the corresponding periods in 2007. Higher
expenditures in 2007 reflect increased legal and advisory costs as the Company
came close to obtaining the Permit and then experienced delays from MinAmb
resulting in more legal expenses. General and administrative expenses include
stock-based compensation charges of $0.5 million and $0.1 million for the first
six months and second quarter of 2008 respectively, compared to $1.7 million and
$1.0 million for the corresponding periods in 2007; the reduction was
attributable to no stock option grants in 2008 (the first half of 2007 includes
option grants to three new members of senior management), and limitations in the
stock option plan as at the date of the Annual General Meeting held on June 25,
2008.
Interest
Expense
Interest
on debt was $6.4 million and $3.2 million for the first six months and second
quarter of 2008 respectively, compared to $6.7 million and $3.5 million for the
corresponding periods in 2007. The six month figures include cash interest
payments of $4.7 million on the $100 million notes which bear interest at 9.375%
per annum, payable semi-annually in January and July and amounts for interest
accretion as the notes contain debt and equity components.
Foreign
Exchange Loss/Gain
The
foreign exchange results include an unrealized non-cash loss of $6.7 million and
$2.5 million for the first six months and second quarter of 2008 respectively,
compared to an unrealized non-cash gain of $7.2 million and $0.5 million for the
corresponding periods in 2007.
These
amounts were derived from the translation into U.S. dollars at the end of each
respective period of certain Venezuelan denominated assets and
liabilities.
Liquidity
and Capital Resources
Crystallex’s
principal sources of liquidity have been equity and debt financings. The Company
does not expect to generate positive cash flow after operating and corporate
general and administrative expenses until the Las Cristinas project is operating
at full capacity.
Once
the Company is in a position to commence development activities at Las
Cristinas, it will determine its overall funding requirements to cover the
period through to commercial production of Las Cristinas. The funding
requirement will include the balance of capital required to complete the
development of Las Cristinas, and funds to meet the Company’s general and
administrative expenses, debt service and financing fees. The Company intends to
fund its overall requirement with existing cash and is considering various
financing alternatives to supplement these funds including public market
debt, limited recourse project debt and equity.
The
Company believes that it will be successful in securing the Permit to launch
development of Las Cristinas. Nevertheless, the Company will take all prudent
steps to protect its shareholder and stakeholder rights and value, including the
preservation of rights to pursue further legal avenues both inside and outside
of Venezuela. The Company has received legal advice relating to its
rights and obligations under the terms of the Mine Operating Contract (the
“MOC”) with the CVG concerning the Las Cristinas project. Accordingly, the
Company is, at the present, continuing to comply with the MOC in order to pursue
the issuance of the Permit and to preserve legal avenues in the event that the
Permit is ultimately denied. This requires maintaining a certain level of Las
Cristinas activities and related expenditures.
In
parallel, the Company is reducing costs significantly. Since the beginning of
the year, the Company has reduced the number of its personnel in Canada and the
United States by 42%. Personnel have also been reduced in the
Company’s Caracas office, and at the El Callao and Las Cristinas
operations. The Company has also reduced the use of consultants,
eliminated most EPCM activities, eliminated future exploration programs at El
Callao and Las Cristinas and is negotiating with security and catering
contractors providing services at Las Cristinas to reduce costs. The
Company will be closing its Houston office when the current lease expires in
September.
With
the exception of related legal and advisory fees, the Company is obligated under
the MOC to continue substantially all of the current Las Cristinas capital
expenditures. For example, the MOC requires the Company to employ a
certain number of personnel at site, which, in turn, necessitates that the site
be properly secured and requires a caterer to provide meals and
housekeeping. Other indirect costs related to employment
include the cost of transporting employees to and from site, communications, and
various other general and administrative costs. Additionally, the MOC requires
expenditures for the two principal remaining community projects, the medical
clinic and sewage treatment plant and the costs of providing medicines and
doctors to the existing medical facility.
In the
event of a negative outcome of its Permit appeal to the Minister of MinAmb, the
Company will further re-assess its planned expenditures.
Cash
and Cash Equivalents
On June
30, 2008, the Company had cash and cash equivalents of $61.5 million compared to
$16.1 million at December 31, 2007.
The
change in the cash balance during the six months ended June 30, 2008 is
reconciled as
follows
($ millions):
|
Cash
and cash equivalents, December 31, 2007
|
|
$
|
16.1
|
|
|
|
|
|
|
|
|
Cash
used in operating activities
|
|
|
(12.8
|
)
|
|
Capital
expenditures – Las Cristinas
|
|
|
(12.7
|
)
|
|
Proceeds
from sale of equipment
|
|
|
5.9
|
|
|
Total
uses of cash and cash equivalents
|
|
|
(19.6
|
)
|
|
|
|
|
|
|
|
Cash
from issuance of common shares
|
|
|
64.3
|
|
|
Effect
of exchange rate fluctuations on cash and cash equivalents
|
|
|
0.7
|
|
|
Cash
and cash equivalents, June 30, 2008
|
|
$
|
61.5
|
|
|
|
|
|
|
|
At June
30, 2008, the Company’s debt consisted of face value $100 million, 9.375% senior
unsecured notes (the “Notes”) due December 2011. The Company may redeem the
Notes, in whole or in part, at any time after December 31, 2008 at a redemption
price of between 100% and 102% of the principal amounts of the Notes, depending
on the redemption date, plus accrued and unpaid interest and additional
interest, if any, to the date of the redemption.
Cash
Flow used in Operating Activities
Cash
flow from operations was a deficit of $12.8 million and $4.6 million for the
first six months and second quarter of 2008 respectively, compared to a deficit
of $23.4 million and $11.1 million for the corresponding periods in 2007. The
cash flow deficits are principally attributable to interest payments on the
Company’s $100 million of 9.375% Notes, corporate general and administrative
expenses, El Callao operations (including exploration) and changes in working
capital.
Cash
interest payments in the first half of 2008 were $4.7 million, general and
administrative expenditures (net of non-cash stock-based compensation expense
and directors’ fees) were $6.6 million and $3.7 million for the first six months
and second quarter of 2008 respectively, compared to $10.7 million and $6.1
million for the corresponding periods in 2007. This reduction reflects lower
legal and personnel costs in 2008.
Working
capital changes amounted to an outflow of $1.2 million for the first six months
of 2008 (2007: $3.8 million) compared to an inflow of $2.6 million in the second
quarter of 2008 (2007: $2 million).
Investing
Activities
Cash
used for capital expenditures for the Las Cristinas project was $12.7 million
and $7.3 million for the first six months and second quarter of 2008
respectively, compared to $15.8 million and $7.6 million for the corresponding
periods in 2007.
Capital
spending at Las Cristinas has declined since peaking in
2005. Spending was reduced in 2008 due to the protracted delay in the
issuance of the Permit. The majority of the expenditures in the first half of
2008 represent ongoing costs for administering, securing and maintaining the Las
Cristinas camp and for off-site equipment storage. In addition, the
Company is continuing to build a medical facility and sewage treatment plant as
part of its obligations under the MOC.
Construction
activities at the sewage treatment plant have been halted due to contractual
disagreements with the contractor. As a consequence of this delay,
the plant will not be operational by the end of 2008 as previously
reported. The medical facility is approximately 65 percent complete
and building construction is scheduled to be completed by year
end. Medical equipment has not been ordered at this
time. An estimated $3.7 million in expenditures are forecast for the
completion of both projects, including an estimate for medical equipment and
additional paving repair work on the main road in town. The cost of these
projects has increased due to inflation, design changes and additional road
paving and repair work.
Equipment
with an original cost of approximately $63 million is located principally in
Houston (USA), Antwerp (Belgium) and Cape Town (South Africa). The equipment is
secured, and regularly inspected and maintained while in storage. In April 2008
and prior to the Company becoming aware of the issue of denying the issuance of
the permit, the Company sold equipment for $5.9 million cash to two unrelated
purchasers and recorded a gain of $1.6 million on the sales. The value of this
equipment is not included in the $63 million total. As reported
previously, concurrent with these sales, the Company provided purchase orders
with an equipment manufacturer to supply new equipment for $5.9 million;
however, the Company subsequently decided to cancel the purchase orders for the
replacement equipment. The Company does not currently have plans for
additional equipment sales, nor does the Company have any outstanding purchase
orders for additional equipment. All of the equipment worldwide is
insured under a marine insurance policy. The Company plans to ship
equipment to Venezuela as needed after the Permit is received and assurances are
in place with respect to security and ownership in Venezuela.
Financing
Activities
On
February 11, 2008, the Company completed a public offering of 32.89 million
units at CDN$2.10 per unit for gross proceeds of CDN$69.1 million including 4.29
million units issuable upon the exercise of the over-allotment option by the
syndicate of underwriters.
Each
unit consists of one common share of the Company and one-half of one common
share purchase warrant. Each whole warrant entitles the holder to purchase a
further common share of the Company at an exercise price of CDN$3.00 for a
period expiring on the later of: (i) August 11, 2009; and (ii) six months
following the Permit date, where the Permit date is the 45th day following the
receipt by the Company of the Permit.
The net
proceeds received by the Company, after considering issuance costs of $4.6
million, was $64.3 million.
Contractual
Obligations and Commitments
The
Company’s significant contractual obligations and commitments on an undiscounted
basis, as at June 30, 2008, are tabled below:
Millions
|
Less
than
One
Year
|
|
|
1
- 3
Years
|
|
|
4
- 5
Years
|
|
|
More
Than
5
Years
|
|
|
Total
|
|
Long
term debt repayment
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100.0
|
|
|
$
|
-
|
|
|
$
|
100.0
|
|
Asset
retirement obligations
|
|
1.0
|
|
|
|
2.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.4
|
|
Social
commitments
|
|
3.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.7
|
|
Total
contractual obligations
|
$
|
4.7
|
|
|
$
|
2.4
|
|
|
$
|
100.0
|
|
|
$
|
-
|
|
|
$
|
107.1
|
|
Under
the terms of the MOC, the Company has undertaken to make all investments
necessary to develop and exploit the Las Cristinas deposits. Based on
a revised capital estimate in November 2007, a further $254 million (exclusive
of VAT) would have to be spent on Las Cristinas to meet this obligation after
the receipt of the Permit.
The
Company’s gold production from the Tomi and La Victoria concessions are subject
to a 1.75% royalty and a further 3% exploitation tax on gold
revenue.
The
Company has excluded its normal course purchase arrangements due to their
discretionary nature and/or short notice period for termination of
contracts.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements with special purpose
entities.
Related
Party and Other Transactions
During
the six month period ended June 30, 2008 the Company paid underwriting fees of
$2.8 million (2007: $3.3) to Macquarie Capital (Canada) Ltd. which retains the
Chairman of the Company as an employee.
The
amounts charged to the Company for the services provided have been determined by
negotiation among the parties. These transactions were in the normal
course of operations and were measured at the exchange value which represented
the amount of consideration established and agreed to by the related
parties.
Restatement
of 2007 Quarters
In the
process of preparing the annual 2007 consolidated financial statements, the
Company reviewed its accounting practices in respect of certain expenditures
made in connection with its Venezuela Branch but funded by its Canadian
operations with respect to Las Cristinas. The Company determined that such
expenditures, previously treated as deductible for tax purposes, that have been
capitalized in the Canadian operations, may not be deductible in Venezuela
thereby creating a difference between their accounting and tax values in
Venezuela. For Canadian GAAP purposes, the amounts determined to be potentially
non-deductible as at June 30, 2007 totalled $56.7 million of which $52.3 million
related to 2006 and prior years. The Company recorded future tax liabilities of
$14.9 million as at June 30, 2007 and $23.5 million as at December 31, 2006. Due
to the decline in the parallel rate of the Venezuelan Bolivars to the USD from
December 31, 2006 to June 30, 2007, there is a resultant unrealized foreign
exchange gain on the opening future income tax liabilities upon revaluation into
US dollars.
The
2007 results were significantly impacted due to the change in Bs rate to the USD
from 2,150 at December 31, 2006 to 3,650, 4,100, 5,010 and 5,500 at the end of
Q1, Q2, Q3, and Q4 2007, respectively. Accordingly, unrealized foreign currency
translation gains of $9.3 million, $1.6 million, $2.5 million and $1.0 million
were recorded at the end of Q1, Q2, Q3 and Q4 2007, respectively.
The
estimated future income taxes represent a net accounting entry derived from the
current lack of deductibility in the Venezuela Branch of certain expenditures
related to Las Cristinas which were funded by the parent entity in Canada. These
costs will be amortized for accounting purposes but may not be for income tax
purposes. Accordingly, the future income taxes represent an undiscounted
estimate of the tax effect of this difference, and therefore are not payable at
the present.
Critical
Accounting Estimates
Critical
accounting estimates are those estimates that have a high degree of uncertainty
and for which changes in those estimates could materially impact the Company’s
results. Significant estimates used include those relating to the timing and
receipt of the Las Cristinas Permit to construct, gold prices, recoverable
proven and probable reserves, available resources, available operating capital,
fair value of stock options and warrants, income taxes and required asset
retirement obligations. These estimates each affect management’s
evaluation of asset impairment and the recorded balances of inventories, site
closure and asset retirement obligations.
Adoption
of New Accounting Policies
Changes
in accounting policies – Sections 1400 and 3031
The
CICA issued new accounting standards which are effective for interim and annual
consolidated financial statements for the Company beginning on January 1,
2008.
Handbook
Section 1400, “General Standards of Financial Statement Presentation”, was
amended so as to include the criteria for determining and presenting the
Company’s ability to continue as a going concern. Handbook Section 3031,
“Inventories”, establishes standards for the measurement of inventories,
allocations of overhead accounting for write-down and disclosures.
There
is no material impact to the Company’s consolidated financial statements on
adoption of these new accounting standards.
Future
accounting pronouncements – Section 3064
The
CICA has issued a new standard which may affect the financial disclosures and
results of operations of the Company for interim and annual periods beginning
January 1, 2009.
Section
3064, “Goodwill and Intangible Assets”, establishes revised standards for
recognition, measurement, presentation and disclosure of goodwill and intangible
assets. Concurrent with the introduction of this standard, the CICA withdrew EIC
27, “Revenues and Expenses during the Pre-Operating Period”. As a result of the
withdrawal of EIC 27, the Company will no longer be able to defer costs and
revenues incurred prior to commercial production at new mine
operations.
The
Company has not yet assessed the impact of Section 3064 on its consolidated
financial statements.
Financial
Instruments
The
balance sheet carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value due
to their short-term nature. The estimated fair value of debt is
$70,000,000 June 30, 2008 ( December 31, 2007: $82,000,000) and is determined by
discounting the contractual cash flows using the risk-free interest rate and the
Company's credit spread as inputs. The Company's credit spread is an
unobservable input as there is limited trading of the Company's debt in the
market. The Company has estimated its credit spread by taking into account
several factors including general credit conditions, company specific news, the
movement of the Company's stock, and the limited trading activities of the
Company's debt.
Outstanding
Share Data
A
summary of common shares, common share options and common share purchase
warrants at August 13, 2008 are tabled below:
|
Common
Shares Issued
|
294,862,317
|
|
Common
Share Options
|
11,546,422
|
|
Warrants
|
29,570,000
|
|
Fully
Diluted Common Shares
|
335,978,739
|
Controls
and Procedures
The
Company maintains disclosure controls and procedures which are designed to
provide reasonable assurance that information required to be disclosed by the
Company is recorded, processed, summarized and reported within the time periods
specified by regulations. The Company performed an evaluation, under the
supervision and participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of its disclosure controls and procedures as of the end of the period
covered by this report. Based on this evaluation, with the exception of those
weaknesses identified in the December 31, 2007 annual MD&A, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of the end of the period
covered by this report. Management of the Company is in the process of
addressing the areas of weakness identified as at December 31,
2007.
Risk
Factors
The
business and operations of the Company and its affiliates are subject to risks.
In addition to considering the other information in the Company’s 2007 Annual
Information Form, which is available on SEDAR at
www.sedar.com
, an
investor should carefully consider the following factors. Any of the following
risks could have a material adverse effect on the Company, its business and
future prospects.
Risks
Associated with Operating in Developing Countries
The
Company’s mineral exploration and mining operations are located in Venezuela and
may be adversely affected by political instability and legal and economic
uncertainty that might exist in such country. The risks associated with the
Company’s foreign operations may include political unrest, labour disputes,
invalidation of governmental orders, permits, agreements or property rights,
risk of corruption including violations under U.S. and Canadian foreign corrupt
practices statutes, military repression, war, civil disturbances, criminal and
terrorist actions, arbitrary changes in laws, regulations and policies,
taxation, price controls, exchange controls, delays in obtaining or the
inability to obtain necessary permits, opposition to mining from environmental
or other non-governmental organizations, limitations on foreign ownership,
limitations on the repatriation of earnings, limitations on mineral exports,
high rates of inflation and increased financing costs. These risks may limit or
disrupt the Company’s projects or operations, restrict the movement of funds or
result in the deprivation of contractual rights or the taking of property by
nationalization, expropriation or other means without fair
compensation.
Risks Specific to Operations
in
Venezuela
Political
and Economic Instability
The
Company’s mineral properties are located in Venezuela and as such the Company
may be affected by political or economic instabilities there. The risks
associated with carrying on business in Venezuela, in addition to those
highlighted above, include, but are not limited to violent crime, which is
prevalent throughout the country and includes kidnapping, smuggling and drug
trafficking especially in remote areas. Changes in resource development or
investment policies or shifts in political attitudes in Venezuela may adversely
affect the Company’s business. Operations may be affected in varying degrees by
government regulations with respect to restrictions in production, price
controls, export controls, exchange controls, income taxes, expropriation of
property, maintenance of claims, environmental legislation, land use,
unauthorized mining activities, land claims of local people, water use and mine
safety. The effect of these factors cannot be accurately predicted.
Environmental
Permit Still Required
MIBAM
completed its overall approval process of Las Cristinas on March 26, 2006. On
June 14, 2007 the Company announced that it received written notice from the CVG
that all the requirements for the issuance of the Las Cristinas Permit from
MinAmb had been fulfilled. The CVG confirmed that MinAmb’s approval
of the Las Cristinas Environmental Impact Study, together with Crystallex’s
payment of certain taxes and posting of a Compliance Guarantee Bond, as
requested by MinAmb, represented the final steps in the process for the issue of
the Permit. CVG’s notice to the Company was based on a formal notice
the CVG received from MinAmb, which stated that the Permit would be issued
following the payment of the taxes and the posting of the bond.
In
April 2008, the CVG received a letter from the Director General of the
Administrative Office of Permits in the MinAmb denying the request for the Las
Cristinas Permit. The Director General cited sensitivities
surrounding indigenous peoples, the small miners and the environment in the area
generally known as the Imataca Forest Reserve.
On May
12, 2008 the Company filed a legal rebuttal to the position taken by the
Director General of Permits at MinAmb. The Director General subsequently denied
the legal rebuttal filed by the Company and advised the Company of its rights
under Venezuelan law to appeal directly to the Minister of MinAmb.
On June
16, 2008, the Company filed an appeal with the Minister of MinAmb. The Minister
has, under statute, 90 business days in which to issue a decision on the appeal.
If no decision is issued within the 90
business
days, the appeal is deemed to be denied. The Minister of MinAmb in an interview
made comments that she is personally against open-pit mining in the Imataca
Forest Reserve.
On June
18, 2008, the Company was invited by the Vice-Minister of MinAmb to a meeting
where Crystallex was informed that MinAmb was instructed by the Government to
reconsider issuance of the Permit by discussing with Crystallex possible
modifications of the Las Cristinas project, which would enable the Permit to be
issued. In early August, 2008, the Company filed with MinAmb a report which
dealt with the MinAmb requests for (i) further improvements to the social
projects in the area, (ii) mitigating the impact of open vein deposit mining in
the currently affected areas of the Imataca Forest, and (iii) improving the
remediation plans at the end of the mine life as well as repairing existing
environmental damage caused by illegal mining. On August 8, 2008, as part of the
ongoing process towards issuance of the Permit, a team from MinAmb led by the
Vice-Minister of MinAmb concluded a two-day site visit of the Las Cristinas
project.
Development
of Las Cristinas and the ultimate commencement of commercial production are
dependent upon receipt of the Permit, which will allow the Company to proceed to
put in place financing to fund construction. As the Las Cristinas project is the
Company’s primary project, the continued delay in receipt of the Permit could
have a material adverse effect on the future of the Company’s business, and may
result in the need for additional financing. There can be no
assurance that the Company will be successful in its appeal to the Minister of
MinAmb or as to when or if the Permit will be granted.
Exchange
Controls
Venezuela
currently has exchange controls that affect the ability of companies doing
business in Venezuela to convert Venezuelan source income into foreign currency.
The Central Bank of Venezuela enacted such exchange control measures in 2003 in
order to protect international reserves. The exchange rate, originally fixed at
approximately 1.6 Bs/USD, has since been adjusted twice upwards and presently
stands fixed at 2.15 Bs/USD. There can be no assurance that exchange controls
will not continue and, if they do, that they will not adversely affect the
Company’s operations, including its ability to satisfy its foreign currency
obligations or to receive fair value in U.S. dollars.
Lack
of Ownership Rights
Under
the Venezuelan Mining Law of 1999 (“
VML
”), all mineral resources
belong to the Republic of Venezuela. In accordance with the VML, the
Government of Venezuela has reserved for itself the right to directly explore
and exploit the Las Cristinas deposits and has elected to do so through the
CVG. See “Las Cristinas Project – Mining Operation Contract” in the
AIF. The Mining Operation Contract is an operation agreement and does
not transfer any property ownership rights or title rights to the gold produced
to the Company. Rather, the Company has been authorized to exploit
the Las Cristinas deposits for the CVG in accordance with the Mining Operation
Contract.
The
interests of the Company in the Las Cristinas deposits are contingent upon the
Company continuing to satisfy its obligations under the Mining Operation
Contract. Failure to do so could result in the CVG having the right
to terminate the Mining Operation Contract. In addition, the CVG is
party to an agreement dated May 16, 2002 with MIBAM. As the CVG’s
rights thereunder are contingent upon the CVG continuing to satisfy its
obligations, while the Company has no reason to believe the CVG is not
performing its obligations thereunder, any failure to do so could result in
MIBAM having the right to terminate such agreement, thereby effectively
terminating the Mining Operation Contract.
Lack
of Copper Rights
In
addition to gold, the Las Cristinas deposits also contain very low levels of
copper, 0.11% on average. Under the Mining Operation Contract, the
Company is only entitled to exploit the gold contained in the Las Cristinas
deposits. Based on the feasibility studies carried out by the Company
and following discussions with the CVG, the Company has determined that
exploiting the copper contained in the Las Cristinas deposits would detract from
the economics of the Las Cristinas project. Furthermore, it may not
be technically viable to produce a marketable copper concentrate from the main
Las Cristinas deposit as the copper is too low grade. The Company
does not need the right to exploit the copper contained in the
Las
Cristinas deposits in order to exploit the gold and does not currently intend to
negotiate with the CVG for the right to exploit the copper contained in the Las
Cristinas deposits.
Although
the Company does not believe that the MIBAM would do so, the MIBAM retains the
right to grant exploitation and other rights with respect to the copper
contained in the Las Cristinas deposits to the CVG or a third
party. The Company has been advised by its Venezuelan counsel
that:
(a)
|
if
the MIBAM grants the right to exploit the copper contained in the Las
Cristinas deposits to the CVG, subject to fulfilling all necessary
requirements of Venezuelan law (including the additional grant by the
MIBAM to the CVG of the right to negotiate the exploitation of the copper
with third parties), the CVG has agreed under the terms of the Mining
Operation Contract to negotiate the exploitation of the copper with the
Company; and
|
(b)
|
if
the MIBAM grants the right to exploit the copper contained in the Las
Cristinas deposits to a third party, the Company’s right under the Mining
Operation Contract to exploit the gold contained in the Las Cristinas
deposits would, as a matter of Venezuelan law, take precedence over the
third party’s right to exploit the
copper.
|
If the
MIBAM grants the right to exploit the copper contained in the Las Cristinas
deposits to the CVG, there can be no assurance that the MIBAM will grant to the
CVG the additional right to negotiate the exploitation of the copper with third
parties or that the Company will be able to negotiate an agreement with respect
to the exploitation of the copper with the CVG. Also, if the MIBAM
grants the right to exploit the copper contained in the Las Cristinas deposits
to a third party, or if the MIBAM grants the right to exploit the copper
contained in the Las Cristinas deposits to the CVG and the CVG grants the right
to exploit the copper to a third party, there can be no assurance that the
Company will be successful under Venezuelan law in asserting that its right to
exploit the gold contained in the Las Cristinas deposits takes precedence over
the third party’s right to exploit the copper.
Proposed
Amendments to Mining Laws
The
Company’s business may be affected by amendments or changes to mining laws,
regulations and requirements in Venezuela. At any time, a number of
draft mining laws may be proposed. There is no assurance when or if a
draft mining bill will be enacted into law or what the final provisions of such
law will be, if enacted. Any changes to current Venezuelan mining law
may adversely affect the Company’s ability to develop and operate the Company’s
Venezuelan properties.
On
February 1, 2007 the National Assembly of the Republic of Venezuela issued the
“Law which Authorizes the President of the Republic to Issue Decrees with Rank
and Force of Law in those Matters Delegated” (the “
Decree Law
”), which empowers
the President of Venezuela to approve changes to certain laws without consulting
Congress for a period of 18 months. The Decree Law does not include any direct
mention of, or references to, mining matters and, accordingly, such matters
remain within the exclusive competence of the National Assembly. In
order for amendments to the mining law to be enacted into law, they must be
accepted in the Venezuelan National Assembly and undergo a review by the
Permanent Commission of Energy and Mines. The detailed provisions of
the Draft Mining Bill are then debated in the National Assembly, and finally the
Draft Mining Bill must be approved by the President of Venezuela. There is no
assurance that the Government of Venezuela will not issue further decrees or
otherwise attempt to modify existing mining rights or other laws affecting the
Company, its Venezuelan properties and its ability to operate in
Venezuela.
Arbitration
Proceedings
The
Company is a party that is interested in, but is not a party to, an ongoing
arbitration. See “Legal Proceedings — Withdrawal of MINCA Litigation — Vanessa
Arbitration” in the 2007 AIF, available electronically at
www.sedar.com
and
www.sec.gov.
Sale
of Gold
For the
past several years, the Company sold all of its Venezuelan gold production to
the Central Bank of Venezuela. In June 2006, the Central Bank of Venezuela
informed the Company it was suspending
purchase
of gold from the Company. During June and July, the Company sold gold to
accredited third parties within Venezuela and in August 2006 the Central Bank
resumed purchasing gold from the Company and continued to purchase all of the
Company’s gold production through the end of the third quarter of
2007.
In
October 2007, the Company began selling all of its gold production to accredited
third parties in Venezuela. The Company is updating the registration of its
export licence which will also allow it to export and sell gold outside of
Venezuela. Pending the update of the Company’s export licence, should the
Company be unable to sell gold within Venezuela, it could have an adverse effect
on the Company’s revenues, cash flow and profitability in the
short-term.
Unauthorized
Miners
The
Company’s operations may also be affected by the presence of unauthorized miners
which is not uncommon in the gold mining areas of the Guyana Shield area of
northern South America, including Venezuela. The methods used by unauthorized
miners to extract gold are typically harmful to the environment and may be
disruptive of authorized mining operations. Although the Company, in conjunction
with the local authorities, employs strategies to control the presence of
unauthorized miners, there can be no assurance that these strategies will be
successful or that the Company’s operations will not be adversely affected by
the presence of unauthorized miners.
Imataca
Forest Reserve
In
addition to the general risks associated with environmental regulation and
liability, the Las Cristinas deposits are located within the Imataca Forest
Reserve (the “
Forest
Reserve
”). On September 22, 2004, Presidential Decree 3110, which
establishes an ordinance plan and regulations for the use of the Forest Reserve,
permits various activities (including mining) in up to 13% of the Forest Reserve
and establishes the legal framework for such activities, was issued.
Presidential Decree 3110 was issued in response to previous Presidential Decree
1850, the latter was issued in May 1997.
Decree
1850 reserved an even larger part of the Forest Reserve for various activities
and became subject to a legal challenge before the Venezuelan Supreme Court. The
Venezuelan Supreme Court issued a prohibition order on November 11, 1997
prohibiting the relevant government authorities from granting concessions,
authorization and any other acts relating to various mining activities in the
Forest Reserve under Decree 1850 until the Venezuelan courts ruled on the merits
of the nullity action. It is possible that Presidential Decree 3110 could be
similarly challenged and that such challenge, if ultimately successful, could
prevent the Company from exploiting or fully exploiting the Las Cristinas
deposits.
Venezuelan
Decree No. 1257 establishes the environmental assessment requirements for mining
projects. The Company was advised that the Las Cristinas project is not a new
project and, accordingly, Article 40 of Decree 1257 does not apply since no
significant increase in environmental impact is predicted.
General
Risk Factors
Title
to Mineral Properties
Acquisition
of title to mineral properties is a very detailed and time-consuming
process. Title to, and the area of, mineral properties may be
disputed or impugned. Although the Company has investigated its title
to the mineral properties for which it holds concessions or mineral leases or
licenses, there can be no assurance that the Company has valid title to such
mineral properties or that its title thereto will not be challenged or
impugned. For example, mineral properties sometimes contain claims or
transfer histories that examiners cannot verify; and transfers under foreign law
often are complex. The Company does not carry title insurance with
respect to its mineral properties. A successful claim that the
Company does not have title to a mineral property could cause the Company to
lose its rights to mine that property, perhaps without compensation for its
prior expenditures relating to the property. Furthermore, the MOC
does not transfer any property ownership rights to the Company.
In 2005
the Government of Venezuela announced that it would be changing the mining title
regime from a system where title was granted in the form of joint ventures or
either concessions or operating contracts
to a
system where all new economic interests would be granted in the form of
operating contracts. In order to effect this change, the Government advised that
it would need to create a national mining company which would be the nation’s
contracting party covering the entire country of Venezuela. The Government also
indicated that, given this change in title regime, it would also be appropriate
to review all existing mining companies in a single comprehensive exercise to
ensure that only companies found to be in compliance with their existing title
terms and conditions would qualify for the new title.
This review was
completed as of December 31, 2005. MIBAM completed its approval
process for the Las Cristinas project at the end of March 2006. The
Ministry of the Environment and Natural Resources (“MinAmb”) approved the Las
Cristinas EIS in June 2007; and, based on this approval, the Company posted a
Compliance Guarantee Bond and paid certain surface taxes. On April 30, 2008, the
Company reported that it became aware that the Director General of the
Administrative Office of Permits at MinAmb had issued a letter to the
CVG denying its request
for the Permit for the Las Cristinas project. The Company believes that this
communication contradicts the Environmental Impact Study approval process,
conflicts with various Government Decrees and Resolutions; appears to be in
opposition to all mineral mining in the Imataca Forest Region and is contrary to
current and historic mining projects in Venezuela.
On May
12, 2008, the Company filed a legal rebuttal to the position taken by the
Director General of Permits at MinAmb. The Director General subsequently denied
the legal rebuttal filed by the Company and advised the Company of its rights
under Venezuelan law to appeal directly to the Minister of MinAmb. On June 16,
2008, the Company filed an appeal with the Minister of MinAmb. The Minister has,
under statute, 90 business days in which to issue a decision on the appeal. If
no decision is issued within the 90 business days, the appeal is deemed to be
denied. On June 18, 2008, the Company was invited by the
Vice-Minister of MinAmb to a meeting where Crystallex was informed that MinAmb
was instructed by the Government to reconsider issuance of the Permit by
discussing with Crystallex possible modifications of the Las Cristinas project,
which would enable the Permit to be issued. In early August, 2008, the Company
filed with MinAmb a report which dealt with the MinAmb requests for (i) further
improvements to the social projects in the area, (ii) mitigating the impact of
open vein deposit mining in the currently affected areas of the Imataca Forest,
and (iii) improving the remediation plans at the end of the mine life as well as
repairing existing environmental damage caused by illegal mining. On August 8,
2008, as part of the ongoing process towards issuance of the Permit, a team from
MinAmb led by the Vice-Minister of MinAmb concluded a two-day site visit of the
Las Cristinas project.
There
is no assurance of the success of the Company’s appeal, and that the Government
will not issue further decrees or otherwise attempt to modify existing mining
rights.
Environmental
Regulation and Liability
The
Company’s activities are subject to laws and regulations controlling not only
mineral exploration and exploitation activities themselves but also the possible
effects of such activities upon the environment. Environmental legislation may
change and make the mining and processing of ore uneconomic or result in
significant environmental or reclamation costs. Environmental legislation
provides for restrictions and prohibitions on spills, releases or emissions of
various substances produced in association with certain mineral exploitation
activities, such as seepage from tailings disposal areas that could result in
environmental pollution. A breach of environmental legislation may result in the
imposition of fines and penalties or the suspension or closure of
operations.
In
addition, certain types of operations require the submission of environmental
impact statements and approval by government authorities. Environmental
legislation is evolving towards stricter standards,, increased fines and
penalties for non-compliance, more stringent environmental assessments of
proposed projects and a heightened degree of responsibility for companies and
their directors, officers and employees. Permits from a variety of regulatory
authorities are required for many aspects of mineral exploitation activities,
including closure and reclamation. Future environmental legislation could cause
additional expense, capital expenditures, restrictions, liabilities and delays
in the development of the Company’s properties, the extent of which cannot be
predicted.
In the
context of environmental permits, in particular the approval of closure and
reclamation plans, the Company must comply with standards and laws and
regulations which may entail costs and delays
depending
on the nature of the activity and how stringently the regulations are
implemented by the permitting authority.
In
accordance with applicable laws, the Company has provided various forms of
financial assurances to cover the cost of reclamation activities. However, there
can be no assurance that the Company will not incur reclamation costs that are
in excess of such financial assurances. While the Company plans to establish a
reserve for reclamation activities, there can be no assurance that the
combination of the reserve and financial assurances will be sufficient to meet
future reclamation standards, if such standards are materially more stringent
than existing standards. The Company does not maintain environmental liability
insurance. The Company has adopted high standards of environmental compliance;
however, failure with or unanticipated changes in Venezuela’s laws and
regulations pertaining to the protection of the environment could adversely
affect the Company.
Additional
Funding Requirements
Under
the terms of the Mining Operation Contract, the Company is required, among other
things, to make all necessary investments and complete all works necessary to
reactivate the Las Cristinas deposits, to design, construct and operate a
processing plant to process gold for its subsequent commercialization and sale
and to return the mine, its installations and equipment to the CVG upon
termination of the Mining Operation Contract. In order to carry out
the Las Cristinas project and its other mining projects, the Company will need
to raise substantial additional financing. In establishing its funding
requirements, the Company has assumed that costs incurred during the
construction phase of Las Cristinas will receive an exoneration from the 9%
Value Added Tax (“VAT”). Venezuelan Law allows for but does not guarantee the
granting of exoneration of VAT on goods and services, including expenses in
Venezuela, related to the construction and development of mining
projects. Crystallex will apply for an exoneration of VAT during the
construction phase of Las Cristinas. If the Company does not receive
the construction period VAT exoneration, sufficient additional funds would need
to be raised to cover the development phase. The construction period VAT can
then be recovered by the Company during the production phase of the Las
Cristinas project.
The
Company may decide to meet its additional funding requirements through one or
more of non-recourse project debt and other forms of public markets debt and
equity. If the Company elects to raise commercial bank limited recourse project
debt, the Company will need to demonstrate to potential lenders compliance with
the Equator Principles, which are a set of guidelines adopted by a number of
international financing institutions to address the environmental and social
issues associated with project financing transactions. The Equator Principles
are largely based on policies and guidelines established by the International
Finance Company. Although the Company has completed an Environmental Impact
Study to international standards, which was approved by the Venezuelan Ministry
of the Environment and includes plans to comply with the Equator Principles,
there can be no assurances that potential lenders will conclude that the project
is in compliance with the Equator Principles. In this case, some
institutions may decide not to lend to the project, or the financing timeline
may be extended while the Company addresses the concerns of the
banks.
Despite
the financings that have been completed by the Company, the Company has limited
access to financial resources and there can be no assurance that sufficient
additional financing will be available to the Company on acceptable terms or at
all. Failure to obtain such additional financing could result in a delay or the
indefinite postponement of the Las Cristinas project and other mining projects
of the Company and could also result in the Company defaulting in the
performance of its obligations under the Mining Operation Contract.
Reserve
and Resource Estimates
The
Company’s reported mineral reserves and resources are estimates
only. As a result, there can be no assurance that they will be
recovered at the rates estimated or at all. Mineral reserve and
resource estimates are based on limited sampling and are uncertain because the
samples may not be representative. Mineral reserve and resource
estimates may require revision (either up or down) based on actual production
experience. Market fluctuations in the price of metals, increased
production costs or reduced recovery rates may render estimated mineral reserves
and resources uneconomic and may ultimately result in a restatement of mineral
reserves and resources. In addition, short-term operating factors,
such as the need for sequential development of mineral deposits and the
processing of new or
different
ore grades, may adversely affect the Company’s profitability in any particular
accounting period. If its mineral reserve and resource estimates are
incorrect, the Company will not correctly allocate its financial resources,
causing it either to spend too much on what could be a less than economic
deposit or to fail to mine what could be a significant deposit.
Mineral
Exploration and Exploitation
Mineral
exploration and exploitation involves a high degree of risk. Few
properties that are explored are ultimately developed into producing
mines. Unusual or unexpected formations, formation pressures, fires,
power outages, labour disruptions, flooding, explosions, tailings impoundment
failures, cave-ins, landslides and the inability to obtain adequate machinery,
equipment or labour are some of the risks involved in mineral exploration and
exploitation activities. The Company has relied on and may continue
to rely on consultants and others for mineral exploration and exploitation
expertise. Substantial expenditures are required to establish mineral
reserves and resources through drilling, to develop metallurgical processes to
extract the metal from the material processed and, in the case of new
properties, to develop the mining and processing facilities and infrastructure
at any site chosen for mining. There can be no assurance that the
Company will discover mineral reserves and resources in sufficient quantities to
justify exploitation or that the funds required to exploit any mineral reserves
and resources discovered by the Company will be obtained on a timely basis or at
all. The economics of exploiting mineral reserves and resources
discovered by the Company are affected by many factors, many outside the control
of the Company, including the cost of operations, variations in the grade of
material mined and metals recovered, price fluctuations in the metal markets,
costs of mining and processing equipment, continuing access to smelter
facilities on acceptable terms and other factors such as government regulations,
including regulations relating to foreign exchange, royalties, allowable
production, tax deductibility of expenditures, importing and exporting of
minerals and environmental protection. There can be no assurance that
the Company’s mineral exploration and exploitation activities will be
successful.
Uninsurable
Risks
Mineral
exploration and exploitation activities involve numerous risks, including
unexpected or unusual geological operating conditions, rock bursts, cave-ins,
fires, floods, earthquakes and other environmental occurrences and political and
social instability. It is not always possible to obtain insurance
against all such risks and the Company may decide not to insure against certain
risks as a result of high premiums or other reasons. Should such
liabilities arise, they could negatively affect the Company’s profitability and
financial position and the value of the common shares of the
Company. The Company does not maintain insurance against
environmental risks.
Competition
The
competition to discover and acquire mineral properties considered to have
commercial potential is intense. The Company competes with other
mining companies, many of which have greater financial resources than the
Company, with respect to the discovery and acquisition of interests in mineral
properties and the recruitment and retention of qualified employees and other
personnel to carry on its mineral exploration and exploitation
activities. There can be no assurance that the Company will be able
to successfully compete against such companies.
Dependence
on Limited Mining Operations and Properties
The
Company’s Tomi and La Victoria operations and Revemin mill currently account for
all of the Company’s mineral production and revenues. Any adverse development
affecting these operations could adversely affect the Company’s financial
performance and results of operations. Furthermore, future results for the
Company depend largely on the Las Cristinas project, which may never be
developed into a commercially viable mining operation. Any event, or combination
thereof, which adversely affects the Las Cristinas project (whether the property
itself or the Company’s ability to finance and/or construct and operate a
commercially viable mine on the property), would adversely impact the Company’s
future performance.
Production
Risks
The
Company prepares estimates of future production at its
operations. Failure to meet these estimates could adversely affect
the Company’s profitability, cash flows and financial position. There
can be no assurance that the Company will achieve its production
estimates.
The
Company’s actual production may vary from its estimates for a variety of
reasons, including actual ore mined varying from estimates of grade, tonnage,
dilution and metallurgical and other characteristics; short-term operating
factors such as the need for sequential development of ore bodies and the
processing of new or different ore grades from those planned; mine failures,
slope failures or equipment failures; industrial accidents; natural phenomena
such as inclement weather conditions, floods, droughts, rock slides and
earthquakes; encountering unusual or unexpected geological conditions; changes
in power costs and potential power shortages; shortages of principal supplies
needed for operation, including explosives, fuels, chemical reagents, water,
equipment parts and lubricants; labour shortages or strikes; civil disobedience
and protests; and restrictions or regulations imposed by governmental or
regulatory authorities or other changes in the regulatory
environments. Such occurrences could result in damage to mineral
properties, interruptions in production, injury or death to persons, damage to
property of the Company or others, monetary losses and legal
liabilities. These factors may cause a mineral deposit that has been
mined profitably in the past to become unprofitable forcing the Company to cease
production. These factors also apply to the Company’s future
operations. For example, it is not unusual for new mining and
processing operations to experience unexpected problems during the start-up
phase.
In
addition to the general production risks outlined above, one of the most
significant physical production issues the Company faces in the Las Cristinas
project is the heavy amount of rainfall the area receives (an average of 3.3
m/year). MDA has accounted for anticipated time lost due to rainfall in
scheduling production and determining equipment
requirements. Crystallex believes that the allowances made are
consistent with the range of practice employed by the iron ore and bauxite
mining industry in the same high rainfall regions in Venezuela as well as
comparable mining operations in similar or greater rainfall regions of Guyana,
Suriname and Brazil. Regardless, actual mining experience with the combination
of wet saprolite and high rainfall rates may require adjustment of these
estimates.
Regulations
and Permits
The
Company’s activities are subject to wide variety of laws and regulations
governing health and worker safety, employment standards, waste disposal,
protection of the environment, protection of historic and archaeological sites,
mine development and protection of endangered and protected species and other
matters. The Company is required to have a wide variety of permits
from governmental and regulatory authorities to carry out its
activities. These permits relate to virtually every aspect of the
Company’s exploration and exploitation activities. Changes in these
laws and regulations or changes in their enforcement or interpretation could
result in changes in legal requirements or in the terms of the Company’s permits
that could have a significant adverse impact on the Company’s existing or future
operations or projects. Obtaining permits can be a complex,
time-consuming process. There can be no assurance that the Company
will be able to obtain the necessary permits including any renewals thereof on
acceptable terms, in a timely manner or at all. The costs and delays
associated with obtaining permits and complying with these permits and
applicable laws and regulations could stop or materially delay or restrict the
Company from continuing or proceeding with existing or future operations or
projects. Any failure to comply with permits and applicable laws and
regulations, even if inadvertent, could result in the interruption or closure of
operations or material fines, penalties or other liabilities.
Gold
Price Volatility
The
gold price can fluctuate widely and is affected by numerous factors beyond the
Company’s control, including industrial and jewellery demand, inflation and
expectations with respect to the rate of inflation, the strength of the U.S.
dollar and other currencies, interest rates, gold sales by central banks,
forward sales by producers, global or regional political or financial events,
and production and cost levels in major gold-producing regions. The
gold price is also subject to rapid short-term changes due to speculative
activities. During the period 1998 to 2007, the gold price fluctuated between a
low of U.S.$253 per ounce and a high of U.S.$841 per ounce. To date in 2008 the
price of gold has reached a high of U.S.$1,011 per ounce and has averaged $911
per ounce during the first half.
The
Company’s revenues, cash flow, profitability and the market price of the common
shares of the Company are significantly affected by changes in the gold
price. If the gold price is below the cost of production at any of
the Company’s operations for a significant period, the Company may be required
to suspend or terminate production at the affected operation. In
addition, the Company may be required to restate its mineral reserves and
resources, write down its investment and increase or accelerate reclamation and
closure charges at the affected operation. Any of these developments
could negatively affect the Company’s profitability, cash flows and financial
position. Accordingly, even if the Company discovers and produces
gold, there can be no assurance that the gold price will be high enough to
enable the Company to sell the gold produced by it profitably.
Currency
Fluctuations
Currency
fluctuations may affect costs at the Company’s operations. Gold is
sold throughout the world based principally on a U.S. dollar price, but a
portion of the Company’s operating expenses is in non-U.S. dollar
currencies. Any appreciation of these non-U.S. dollar currencies
against the U.S. dollar could negatively affect the Company’s profitability,
cash flows and financial position.
Credit
and Market Risks
The
Company enters into financial agreements (financial instruments) with major
international banks, other international financial institutions and other
accredited third parties in order to manage underlying revenue and future cash
flow exposures arising from commodity prices. Financial instruments,
which subject the Company to market risk and concentrations of credit risk,
consist primarily of cash and accounts receivable.
Market
risk is the risk that the value of a financial instrument might be adversely
affected by a change in interest rates or currency exchange rates. The Company
manages the market risk associated with commodity prices by establishing and
monitoring parameters that limit the types and degree of market risk that may be
undertaken.
Credit
risk is the risk that counterparty might fail to fulfil its performance
obligations under the terms of a contract. The Company limits the amount of
credit exposure in cash and cash equivalents by placing these in high quality
securities issued by government agencies and financial institutions. The
Company’s cash equivalents consist of Government of Canada Treasury Bills,
denominated in U.S. dollars. The Company also has concentrations of credit risk
with respect to accounts receivable as the accounts receivable are due from the
Venezuelan Tax Department and occasionally from the Venezuelan Central
Bank.
The
Company can be exposed to credit risk in the event of non-performance by
counterparties in connection with metal forward and option contracts. The
Company does not obtain any security to support financial instruments subject to
credit risk but mitigates this risk by dealing only with a diverse group of
financially sound counterparties and, accordingly, does not anticipate loss for
non-performance. Further, the Company minimizes its credit risk in derivative
instruments by entering into transactions with high-quality counterparties whose
credit ratings are high and by monitoring the financial condition of its
counterparties. The Company continually monitors the market risk of its
activities. The Company currently does not have metal forward and option
contracts.
Dependence
on Key Employees
The
Company’s business and operations are dependent on retaining the services of a
small number of key management personnel. The success of the Company
is, and will continue to be, to a significant extent, dependent on the expertise
and experience of the directors and senior management. Since late
2005, the Company has experienced the loss of a number of senior management
employees due to delays in receiving the Las Cristinas Permit. The
loss of one or more key employees could have a materially adverse effect on the
Company. The MinAmb letter denying the Las Cristinas Permit may make
it more difficult for the Company to retain key employees. The Company does not
have a senior management retention program.
Compliance
with Sarbanes-Oxley Act of 2002
Passed
by the U.S. Congress on July 30, 2002, the Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley”) requires companies to, among other things, have management
provide a report on the Company’s internal controls with respect to financial
reporting. The Company has complied with this particular aspect of
Sarbanes-Oxley for its fiscal year ended December 31,
2007. Management’s evaluation of, and report on, the Company’s
internal controls over financial reporting is set out in the 2007 Annual
Management Discussion and Analysis under the section Controls and Procedures –
Internal Control over Financial Reporting. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were not effective as at December 31, 2007
and the Company has described the plans to remediate the material weaknesses
described therein.
There
can be no assurance that the Company will be able to adequately remediate its
currently known weaknesses or that the Company’s internal controls over
financial reporting will be free of material weaknesses in future periods, which
could cause the market price of the Company’s common shares to decline and could
lead to shareholder litigation. In addition, the discovery of
additional material weaknesses will likely result in the Company having to incur
costs to fix the internal controls for financial reporting as well as costs to
remediate any financial inaccuracies. Management is in the process of
remediating the material weaknesses discovered in fiscal 2007. The aggregate
final costs of addressing such weaknesses, however, cannot be assured. Any
remediation costs for the discovery of additional material weaknesses in future
periods are unknown.
Common
Share Price Volatility
The
market price of the common shares of the Company could fluctuate significantly
based on a number of factors in addition to those listed in this document,
including:
|
·
|
the
Company’s operating performance and the performance of competitors and
other similar companies;
|
|
·
|
the
public’s reaction to the Company’s press releases, other public
announcements and the Company’s filings with the various securities
regulatory authorities;
|
|
·
|
changes
in earnings estimates or recommendations by research analysts who track
the common shares or the shares of other companies in the resource
sector;
|
|
·
|
changes
in general economic conditions;
|
|
·
|
the
arrival or departure of key
personnel;
|
|
·
|
acquisitions,
strategic alliances or joint ventures involving the Company or its
competitors; and
|
In
addition, the market price of the common shares of the Company are affected by
many variables not directly related to the Company’s success and are, therefore,
not within the Company’s control, including other developments that affect the
market for all resource sector shares, the breadth of the public market for the
common shares and the attractiveness of alternative investments. The
effect of these and other factors on the market price of common shares on the
exchanges on which the Company trades has historically made the Company’s share
price volatile and suggests that the Company’s share price will continue to be
volatile in the future.
Potential
Dilution
As at
August 13, 2008, the Company has outstanding options to purchase 11,546,422
common shares of the Company (including 487,500 options outstanding that were
not fully vested) and warrants to purchase 29,570,000 common shares of the
Company (including 12,250,000 warrants that do not become effective until after
the receipt of the Permit). The issue of common shares of the Company upon the
exercise of the options and warrants will dilute the ownership interest of the
Company’s current shareholders. The
Company
may also issue additional option and warrants or additional common shares from
time to time in the future. If it does so, the ownership interest of
the Company’s then current shareholders could also be diluted.
Enforcement
by Investors of Civil Liabilities
The
enforcement by investors of civil liabilities under United States federal
securities laws may be adversely affected by the fact that the Company is
organized under the laws of Canada, that most of its officers and directors and
most of the experts named in this Annual Information Form are residents of
Canada, and that a substantial portion of the Company’s assets and the assets of
a majority of the Company’s directors and officers and the experts named in this
Annual Information Form are located outside the United States. Furthermore, it
may not be possible to enforce against the Company or its directors, officers or
experts, judgments contained in U.S. courts. The Company believes that a
monetary judgment of a Canadian court predicated solely on the Canadian civil
liability regime would likely be enforceable in the U.S. if the Canadian court
in which the judgment was obtained had a basis for jurisdiction in the matter
that was recognized by a U.S. court for such purposes. However, the Company can
provide no assurances to this effect.
Operating
Losses are Expected to Continue in the Near Future
The
Company expects that it will continue to incur losses, and possibly incur
increased losses, until the Las Cristinas mine is operating at full capacity.
The Company’s profitability depends, among other things, on the gold price, gold
production and cash operating costs at its operations, interest expense and
general and administrative expenses. Substantially all of these
factors are beyond the control of the Company. There can be no
assurance that the Company will become profitable in the near
future. The Company expects that this trend will reverse if and when
gold is produced from the future Las Cristinas mine in commercial quantities at
prices equal to or in excess of the prices assumed in the 20,000 TPD Feasibility
Study.
Future
Hedging Activities
The
Company has not entered into forward contracts or other derivative instruments
to sell gold that it might produce in the future. Although the Company has no
near term plans to enter such transactions, it may do so in the future if
required for project financing. Forward contracts obligate the holder to sell
hedged production at a price set when the holder enters into the contract,
regardless of what the price is when the product is actually mined. Accordingly,
there is a risk that the price of the product is higher at the time it is mined
than when the Company entered into the contracts, so that the product must be
sold at a price lower than could have been received if the contract was not
entered. There is also the risk that the Company may have insufficient gold
production to deliver into forward sales positions. The Company may enter into
option contracts for gold to mitigate the effects of such hedging.
No
Payment of Cash Dividends in the Near Future
Given
that the Company is currently in the development stage for its principal
property, the Las Cristinas project, the Company intends to retain its earning
to finance the growth and development of the business rather than pay dividends
to shareholders. The Company does not intend to declare or pay cash dividends in
the near future, nor has it done so since its inception. In the event that the
Company decides to declare and pay cash dividends in the future, such a decision
will made entirely in the discretion of the board of directors and shall be
dependent on factors such as the existing earnings, capital requirements, future
business opportunities, financing agreements and market conditions for the
Company’s shares and the underlying commodities markets.
Non
GAAP Measures – Total Cash Costs
Total
cash costs per ounce are calculated in accordance with the Gold Institute
Production Cost Standard, (the “Standard”). The total cash cost per
ounce data are presented to provide additional information and are not prepared
in accordance with Canadian or U.S. GAAP. The data should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP. The measures are not necessarily indicative
of operating profit or costs of operations as determined under Canadian or U.S.
GAAP. The total cash cost per ounce calculation is derived from
amounts included in the Operating Expense line on the Statement of
Operations. As this line item is unchanged under US GAAP, the total
cash cost per ounce figure is similarly unchanged using US GAAP results of
operations.
Data
used in the calculation of total cash costs per ounce may not conform to other
similarly titled measures provided by other precious metals
companies. Management uses the cash cost per ounce data to access
profitability and cash flow from Crystallex’s operations and to compare it with
other precious metals producers. Total cash costs per ounce are
derived from amounts included in the Statement of Operations and include mine
site operating costs such as mining, processing, administration, royalties and
production taxes but exclude amortization, reclamation, capital expenditures and
exploration costs.
Total
costs and total cash costs per ounce may be reconciled to the Operations Expense
as follows:
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
$000
(except per ounce data)
|
|
|
|
|
Operations
Expense per Financial Statements
|
7,390
|
5,121
|
13,793
|
9,833
|
Less
Exploration Expenditures
|
835
|
461
|
1,581
|
787
|
Total
Cash Operating Costs
|
6,555
|
4,660
|
12,212
|
9,046
|
Accretion
of Asset Retirement Obligations
|
91
|
51
|
182
|
101
|
Total
Operating Costs
|
6,646
|
4,711
|
12,394
|
9,147
|
|
|
|
|
|
Gold
Ounces Sold
|
6,830
|
7,416
|
14,885
|
17,182
|
Total
Cash Cost Per Ounce US$
|
$960
|
$628
|
$822
|
$526
|
Total
Cost Per Ounce US$
|
$973
|
$635
|
$834
|
$532
|
|
Three
months ended June 30,
|
Six
months ended June 30,
|
Bolivars
000’s (except per ounce data)
|
2008
|
2007
|
2008
|
2007
|
$000
(except per ounce data)
|
|
|
|
|
Operations
Costs
|
25,052
|
19,025
|
56,689
|
36,284
|
Less
Exploration Expenditures
|
(2,831)
|
(1,713)
|
(6,498)
|
(2,904)
|
Total
Cash Operating Costs
|
22,221
|
17,312
|
50,191
|
33,380
|
Accretion
of Asset Retirement Obligations
|
308
|
189
|
748
|
373
|
Total
Operating Costs
|
22,530
|
17,501
|
50,939
|
33,752
|
|
|
|
|
|
Gold
Ounces Sold
|
6,830
|
7,416
|
14,885
|
17,182
|
Total
Cash Cost Per Ounce in Bolivars
|
3,254
|
2,334
|
3,372
|
1,943
|
Total
Cost Per Ounce in Bolivars
|
3,299
|
2,360
|
3,422
|
1,964
|
26