Management’s
Discussion and Analysis
For
the Three Month Period Ended March 31, 2009
(All
monetary figures are expressed in United States dollars, unless otherwise
specified)
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 as at
and for the three month period ended March 31, 2009. 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, 2008.
The
Company prepares its consolidated financial statements in United States (“U.S.”)
dollars and in accordance with Canadian Generally Accepted Accounting Principles
(“GAAP”). All monetary figures in this MD&A are expressed in U.S. dollars
unless otherwise specified.
This
MD&A was prepared on May 14, 2009 and the Company’s public filings,
including its most recent Financial Statements and Annual Information Form, can
be accessed through the System for Electronic Document Analysis and Retrieval
(“SEDAR”) website at
www.sedar.com
and the Company’s
website at
www.crystallex.com
.
Special
Note Regarding Forward Looking Statements
Certain
statements included or incorporated by reference in this MD&A, 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 MD&A. 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
MD&A 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.
Cautionary
Note to U.S. Investors
The
terms "proven mineral reserve" and "probable mineral reserve" used in this
report are Canadian mining terms as defined in accordance with National
Instrument 43-101 - Standards of Disclosure for Mineral Projects under the
guidelines set out in the Canadian Institute of Mining, Metallurgy and Petroleum
("CIM") Standards on Mineral Resources and Mineral Reserves, adopted by the CIM
Council on August 20, 2000 as may be amended from time to time by the CIM. These
definitions differ from the definitions in the SEC's Industry Guide 7. The
terms, "measured mineral resource", "indicated mineral resource" and "inferred
mineral resource" used in this report are Canadian mining terms as defined in
accordance with National Instrument 43-101. While the terms "measured mineral
resource", "indicated mineral resource", and "inferred mineral resource" are
recognized and required by Canadian regulations, they are not defined terms
under Industry Guide 7 and normally are not permitted to be used in reports and
registration statements filed with the SEC. As such, information contained in
this report concerning descriptions of resources under Canadian standards may
not be comparable to similar information made public by U.S. companies in SEC
filings. With respect to "indicated mineral resource" and "inferred mineral
resource" there is a great amount of uncertainty as to their existence and a
great uncertainty as to their economic and legal feasibility. It can not be
assumed that all or any part of an "indicated mineral resource" or "inferred
mineral resource" will ever be upgraded to a higher category. Investors are
cautioned not to assume that any part or all of mineral deposits in these
categories will ever be converted into reserves.
Overview
Crystallex
is a Canadian based mining company engaged in the development of gold properties
in Venezuela. Its common shares (symbol: KRY) are traded on both the Toronto
Stock Exchange and the NYSE Amex.
Las
Cristinas
|
·
|
The
Company’s principal asset is its interest in the Las Cristinas gold
project located in Bolivar State, Venezuela. The Company’s
interests in the Las Cristinas concessions are derived from a Mine
Operating Contract (the “MOC”) with the Corporacion Venezolana de Guayana
(the “CVG”) which grants Crystallex exclusive rights to develop and mine
the gold deposits on the Las Cristinas property.
|
|
·
|
The
Company has not received a response from the Minister of Environment and
Natural Resources (“MinAmb”) to its June 16, 2008 appeal of the Director
General of the Administrative Office of Permits at MinAmb denying its
request for the Permit for the Las Cristinas project.
|
|
·
|
On
March 2, 2009, the CVG confirmed that the Company was in compliance with
the MOC. This corroborates the Company’s position that is not in default
of the MOC and there is no change in control under the terms of the
MOC.
|
|
·
|
The
Company plans to remain compliant with the MOC in order to protect the
option of proceeding to arbitration, if
necessary.
|
Liquidity
and Capital Resources
|
§
|
Cash
and cash equivalents at March 31, 2009 were $21.6
million.
|
|
§
|
The
Company forecasts that it will have sufficient cash to fund its operations
through the end of 2009 (see “Liquidity and Capital Resources”
section).
|
Financial
Results
|
§
|
Losses
from continuing operations were $4.8 million ($(0.02) per share) and $13.4
million ($(0.05) per share) for the three month periods ended March 31,
2009 and 2008, respectively.
|
|
§
|
Losses
from operations were $5.2 million ($(0.02) per share) and $11.2 million
($(0.04) per share) for the three month periods ended March 31, 2009 and
2008, respectively.
|
Legal
Matters
|
§
|
On
May 4, 2009, the holders of the Company’s $100 million notes due December,
2011, agreed to have its derivative action dismissed with
prejudice. The Noteholders’ Application to the court also
included an oppression claim, which has been held in abeyance until the
end of July, 2009, at which time the Noteholders and the Company will
appear before the court to set a schedule for the continuation of the
Application.
|
|
§
|
The
Company and certain officers and/or directors have been named as
defendants in a proposed class action lawsuit commenced in the United
States.
|
|
|
This
action is in its preliminary stage, however, Crystallex believes that the
complaint is without merit and will vigorously defend itself against this
action.
|
Las
Cristinas Permit
On
September 17, 2002, Crystallex entered into a non-assignable Mine Operating
Contract with the CVG, acting under the authority of the Ministry of Energy and
Mines of Venezuela, under which Crystallex was granted the exclusive right to
explore, develop and exploit the Las Cristinas 4, 5, 6 and 7 concessions
including the processing of gold for its subsequent commercialization and
sale.
In May
2007, the 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 is
required to commence construction of the mine; however, the Permit was not
issued. In April, 2008, the Director General of the Administrative
Office of Permits at MinAmb issued a letter to the CVG denying its request for
the Permit for the Las Cristinas project. In May 2008, the Company filed a
challenge to this denial. This challenge was denied by the Director General on
May 30, 2008 and the Company was advised by the Director General to appeal
directly to the Minister of MinAmb.
On June
16, 2008 the Company filed an appeal (the “Appeal”) with the Minister of
MinAmb. The Company has not received a response to this Appeal. The
Minister of MinAmb is obligated to issue a decision on this Appeal; however, if
no decision is issued within 90 business days of submitting the Appeal (by
October 30, 2008), Venezuelan law allows the Company to elect to deem the Appeal
as being denied in order to avail itself of additional legal avenues in
Venezuela. Although the deadline for the Minister’s response has passed, the
Company has yet not invoked this right.
In
August, 2008, the Company, at the request of the Vice-Minister of MinAmb, filed
a report that dealt with modifications to the project, which were accepted by
the Vice-Minister. The Vice Minister of MinAmb issued an official letter which
indicated that the modifications complied with government guidelines on
environmental and social matters and were technically viable. The
letter further noted that the foregoing should be considered by the Minister of
MinAmb in rendering her decision on the Permit.
The
Company has received express and implicit confirmation of its rights and the
acceptability of its performance from Venezuelan officials with whom it
interacts. These confirmations have at times been contradicted by public
statements made by government officials suggesting that the Company will either
not obtain the Permit or will lose control of Las Cristinas. The Company has not
received any official notification from any government entity concerning changes
to the control of Las Cristinas or to the MOC. On March 2, 2009, the
CVG confirmed in writing that the Company was in compliance with the MOC, which
corroborates the Company’s status of being in continued control of the
project.
The
Company is taking the necessary steps to protect its shareholder and stakeholder
rights, including preserving its rights to pursue legal avenues both inside and
outside of Venezuela. In November 2008, the Company delivered a
letter to the Government of the Republic of Venezuela notifying it of the
existence of a dispute between the
Company
and the Bolivarian Republic of Venezuela under the Agreement between the
Government of Canada and the Government of Venezuela for the Promotion and
Protection of Investments (the “Treaty”). It is Crystallex's desire
to settle the dispute amicably within the six month negotiation period
established by the Treaty. If the dispute has not been settled amicably within
six months, Crystallex has the option of submitting the dispute to international
arbitration under the terms of the Treaty.
The
Company has been advised that the MOC remains in full force and
effect. Additionally, the Company has been advised that by remaining
in full compliance with the MOC while it continues to resolve the permitting
matter during the six month period initiated by the delivery of the dispute
letter to the Venezuelan government, the Company will preserve options for a
settlement of the dispute. Accordingly, the Company has determined
that it is in the best interest of all stakeholders to remain compliant with the
MOC and incur the consequent expenditures which is supported by ongoing
permitting discussions with government officials and protects the option of
international arbitration in the alternative. The Company
continuously assesses developments in the permitting process and will carefully
review its options in the absence of a positive outcome at the end of the six
month waiting period for the international arbitration option.
Noteholders’
Action
In
December 2008, the Company was served with a Notice of Application (the
“Application”) by the trustee for the holders (the “Noteholders”) of the
$100,000 senior unsecured notes. The trustee, on behalf of certain Noteholders,
is, among other things, seeking a declaration from the Court that there has been
a project change of control (a “Project Change of Control”) event as defined in
the First Supplemental Indenture made as of December 23, 2004 thereby requiring
Crystallex to accelerate payment and purchase all of the notes of each
Noteholder who has so requested at a price equal to 102% of the principal amount
of the notes, together with accrued and unpaid interest to the date of
purchase.
A
Project Change of Control is defined as “the occurrence of any transaction as a
result of which Crystallex ceases to beneficially own, directly or indirectly,
at least a majority interest in the Las Cristinas project asset”.
In the
alternative, the trustee sought permission from the Court to commence a
derivative action in the name of and on behalf of Crystallex against its entire
Board of Directors.
On May
4, 2009, the Noteholders agreed to have the derivative action dismissed with
prejudice. The claims for oppression relief under the Application, except for
the derivative action, will be held in abeyance until the end of July 2009, at
which time the parties will appear before the Court to set a schedule for the
continuation of the Application.
The
Company has strong defences to this action and will vigorously defend against
the Application. In particular, the Company believes that the Noteholders'
allegation that there has been a Project Change of Control has no merit. At this
stage in the process
the
Company cannot provide an assignment of losses, if any, it may suffer as a
result of this proceeding.
Proposed
Class Action
The
Company and certain officers and/or directors have been named as defendants in a
putative securities fraud class action commenced on December 8, 2008, in the
United States District Court for the Southern District of New
York. The plaintiffs in the lawsuit are described as investors who
acquired the Company’s common stock during the period of July 28, 2005 to April
30, 2008, inclusive (the “Proposed Class Period”). The complaint
alleges that the defendants made several statements during the Proposed Class
Period about Las Cristinas, and that the issuance of the Permit in connection
with that project was imminent and guaranteed to be issued to the
Company. The complaint asserts that the defendants “did not have,
during the Class Period, a reasonable expectation that the Company would receive
the required permit, ” and that on April 30, 2008, the Permit was, in fact,
denied. The proposed class action seeks compensatory damages plus
costs and fees, alleging violations of Section 10(b) of the Securities Exchange
Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder by each
of the defendants and violations of Section 20(a) of the Exchange Act by the
individual defendants.
In a
court order dated April 7, 2009, the lead plaintiffs were appointed and have
until May 29, 2009 to file an amended complaint. The defendants have
until July 31, 2009 to file a motion to dismiss. The lead plaintiffs
can file an opposition to the motion to dismiss by August 28, 2009 and the
defendants have until September 15, 2009 to file any reply thereto.
Crystallex
believes that the complaint is without merit and intends to defend vigorously
against the action. However, because the action is in preliminary
stages, the Company cannot provide assurances as to the outcome of the action,
nor can the range of losses, if any, be estimated. Accordingly, no losses have
been accrued.
Summary
of Quarterly Results (Unaudited)
|
$,000 except per
share
|
2009
|
2008
|
|
|
Q1
|
Q4
|
Q3
|
Q2
|
|
(Loss) income from continuing
operations
|
(4,
8
34)
|
3,457
|
(1,613)
|
(10,210)
|
|
(Loss) income from discontinued
operation
s
|
(374)
|
(407)
|
(5,960)
|
215
|
|
Net (loss)
income
|
(
5,2
08)
|
3,050
|
(7,573)
|
(9,995)
|
|
Unrealized (loss) gain on
translation of future income taxes included in loss from continuing
operations
|
2,209
|
4,212
|
6,504
|
(3,769)
|
|
Loss per share from continuing
opera
tions
–
Basic and
diluted
|
(0.02)
|
(
0.0
1)
|
(0.01)
|
(0.03)
|
|
Loss per share
–
Basic and
diluted
|
(0.02)
|
(
0.0
1)
|
(0.03)
|
(0.03)
|
|
$,000 except per
share
|
2008
|
2007
|
|
|
Q1
|
Q4
|
Q3
|
Q2
|
|
Loss
from continuing
operations
|
(13,441)
|
$(9,169)
|
$(4,957)
|
$(8,997)
|
|
(Loss) income from discontinued
operations
|
2,239
|
$382
|
(1,765)
|
(3,126)
|
|
Net loss
|
(11,202)
|
$(8,787)
|
$(6,722)
|
$(12,123)
|
|
Unrealized (loss) gain on
translation of future income taxes included in loss from continuing
operations
|
(6,139)
|
956
|
2,534
|
1,580
|
|
L
oss
per share from continuing
operations
–
Basic and
diluted
|
(0.05)
|
$(0.03)
|
$(0.02)
|
$(0.03)
|
|
Loss per share
–
Basic and
diluted
|
(0.04)
|
$(0.03)
|
$(0.03)
|
$(0.05)
|
|
·
|
The
El Callao mining activities ceased as at September 30, 2008. The Company
continues to incur expenditures for maintaining an office at El Callao to
conclude reclamation of the mines and to negotiate a transfer of the
mining concessions to the State of
Venezuela.
|
Results
of Operations
Continuing
operations
The
Company recorded losses from continuing operations for the first quarters of
2009 and 2008 of $4.8 million, (($0.02) per share) and $13.4 million (($0.5) per
share), respectively. The reduction in loss of $8.6 million in the
first quarter of 2009 is mainly due to a reduction in foreign exchange expense
of $9.0 million, reduction in corporate and administrative expenses of $1.1
million, offset by an increase in litigation costs of $1.2 and a reduction in
interest income of $0.2 million.
General
and administrative expenses
General
and administrative expenses decreased by $1.1 million or 33% from $3.4 million
in the first quarter of 2008 to $2.3 million in the first quarter of 2009. This
decrease is due to reduction in salaries, benefits, travel and other
administrative expenses as a result of cost cutting actions taken by the
Company.
Litigation
expenses
Litigation
costs of $1.2 million in the first quarter of 2009 (2008: $nil) is almost
entirely due to the Noteholders’ action which commenced in December 2008. To
date the Company has incurred approximately $2.4 million relating to the defence
against the Noteholders’ action. This action has most recently resulted in the
dismissal of the derivative action contained in the Application and an
adjournment until July 2009 for a hearing to schedule the rest of the
Application. Accordingly, the Company expects to incur additional legal costs
relating to its defence.
Interest
on debt
Interest
on debt was $3.3 million and $3.2 million for the three month periods ended
March 31, 2009 and 2008, respectively. These amounts represent $2.3 million
interest payable on the $100 million notes which bear interest at 9.375% per
annum and payable semi-annually in January and July. These amounts also include
amortization of deferred financing fees related to this debt and amounts for
interest accretion of approximately $0.9 for both quarters as the notes contain
debt and equity components.
Foreign
exchange gain
The
Company recorded foreign currency gain of $1.9 million in the quarter ended
March 31, 2009 compared to a foreign currency loss of $7.1 million in the
quarter ended March 31, 2008 for a net favourable change in the quarter ended
March 31, 2009 of $9.0 million.
Foreign
exchange gain includes an unrealized foreign currency translation gain of $2.2
million in the quarter ended March 31, 2009 compared to an unrealized loss of
$6.1 million in the quarter ended March 31, 2008 as a result of translation of
future income tax liabilities in the Venezuelan Branch. The components of the
Company’s future income tax balance include a future income tax estimate of 34%
of the carrying value of costs incurred for the Las Cristinas asset recorded in
the parent entity for accounting purposes which may not have deductibility for
income tax purposes in Venezuela. It may not be likely that the
parent entity will be able to utilize in Canada the benefits derived from any
foreign tax credits generated in Venezuela as a result of the possible reduced
Venezuelan tax base of the Las Cristinas asset. These foreign currency
translation gains result from the translation into U.S. dollars at the end of
the each reporting period of the Venezuelan-denominated future income tax
liabilities that are recognized in connection with expenditures on the Las
Cristinas asset. A strengthening of the BsF/USD at the parallel rate in one
period relative to the previous period results in an unrealized foreign currency
translation loss and vice versa.
In
addition, the foreign exchange results include an unrealized gain of $0.1
million in the quarter ended March 31, 2009 compared to an unrealized gain of
$0.8 million in the quarter ended March 31, 2008 which were derived from the
translation into U.S. dollars at the end of each respective period of certain
Venezuelan BsF and Canadian dollar denominated assets and
liabilities.
Interest
and other income
Interest
income declined from $0.2 million in the quarter ended March 31, 2008 to $0.04
million in the quarter ended March 31, 2009 as a result of significantly reduced
interest rates obtained on short term treasury bills.
Discontinued
operations – El Callao
At the
end of September 2008, the Company ceased mining operations at El Callao due to
the transfer of the Revemin mill to the State of Venezuela on October 1,
2008.
The
Company has maintained an estimated liability for asset retirement obligations
of $2.3 million relating to all areas affected by past mining.
Cash
used in these discontinued operations were $0.2 million in the quarter ended
March 31, 2009 compared to $2.8 million cash flow in the quarter ended March 31,
2008.
Cash
used for the quarter ended March 2008 was favourably impacted by the mining
operations, which saw the sale of 8,054 oz of gold at an average realized price
of $733 per oz.
Cash
and Cash Equivalents
On
March 31, 2009, the Company had cash and cash equivalents of $21.6 million
compared to $34.5 million on December 31, 2008.
The
change in the cash and cash equivalents balance during the quarter ended March
31, 2009 is reconciled as follows ($ millions):
|
Cash
and cash equivalents, December 31, 2008
|
|
$
|
34.5
|
|
|
|
|
|
|
|
Cash
used in operating activities
|
|
|
(9.0)
|
|
|
Capital
expenditures – Las Cristinas
|
|
|
(3.8)
|
|
|
Cash
used in discontinued operations
|
|
|
(0.2)
|
|
|
Effects
of exchange rate fluctuations on cash
|
|
|
0.1
|
|
|
|
|
|
(12.9)
|
|
|
|
|
|
|
|
Cash
and cash equivalents, March 31, 2009
|
|
$
|
21.6
|
|
Cash
used in Operating Activities
Cash
used in operating activities from continuing operations reduced by 18% in the
quarter ended March 31, 2009; from $11.0 million in the quarter ended March 31,
2008 compared to $9.0 million in the quarter ended March 31, 2009.
Cash
used in the quarter ended March 31, 2009 was largely attributable to $2.3
million of corporate general and administrative expenses, $1.2 million of
litigation expenses, cash interest payments of $4.7 million, and working capital
increase of $0.8 million.
Cash
used in the quarter ended March 31, 2008 from operations of $11.0 million was
largely attributable to general and administrative expenses of $3.4 million,
cash payments for interest of $4.7 million, and working capital increase of $2.9
million.
Investing
Activities
Cash
used for capital expenditures for the Las Cristinas project was $3.8 million in
the quarter ended March 31, 2009 compared to $5.5 million in the quarter ended
March 31, 2008
The
majority of the expenditures in the quarter ended March 31, 2009 represent
ongoing costs for administering, securing and maintaining the Las Cristinas
camp, storage costs for long lead time equipment stored outside of Venezuela,
and construction activities related to completion work on the medical facility
and sewage treatment plant as part of the Company’s obligations under the
MOC. Excluding the cost of medical equipment for the clinic, which
has not been ordered at this time, the estimated cost to complete both projects
is approximately $1.2 million which is an obligation under the terms of the
MOC.
The
Company has determined that it is in the best interest of all stakeholders to
continue to incur the expenditures necessary to remain compliant with the MOC
until at least the end of May 2009 which is the date of expiry of the six month
amicable settlement period. This period commenced with the filing of the
November 28, 2008 letter notifying the Government of Venezuela of the existence
of a dispute under the Treaty between the Government of Canada and the
Government of Venezuela. The Company has been advised that
non-compliance with the terms of the MOC may limit the Company’s options for a
settlement of the dispute. In addition, the Company intends to remain fully
compliant with the MOC as it continues to pursue a resolution for permitting Las
Cristinas.
The
Company has mining and milling equipment, with an original cost of approximately
$61 million, in storage in various countries. The majority of this
equipment is located in the United States. The equipment is regularly inspected
and maintained while in storage. In April 2008, the Company sold some equipment
but 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.
Liquidity
and Capital Resources
On
March 31, 2009, the Company had cash and cash equivalents of $21.6 million with
excess cash invested in U.S. and Canadian treasury bills.
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 planned full capacity of 20,000 tonnes per day.
If and
when 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 at 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 will consider various financing alternatives, including project
finance debt and other capital and equity markets opportunities. There can be no
assurances that such financing will be available, or if available, on acceptable
terms.
Commencing
in December 2007 the Company has undertaken a cost reduction program, which has
significantly reduced expenditures, although the reductions have been partially
offset by litigation costs incurred since the fourth quarter of 2008 and the
requirement to pay certain compensation costs in cash instead of stock
options. Effective June 25, 2008, the shareholders of the Company did
not confirm the stock option plan, with the result that the Company is not
permitted to grant additional stock options without shareholders’ approval.
Expenditures in Venezuela have been reduced to the minimum required to remain in
compliance with the MOC and to continue to pursue the Permit. Cost reduction
efforts include reducing personnel in Canada, the United States and Venezuela,
closing the Houston office, relocating to a smaller corporate office, ceasing
all EPCM and related activities, postponing all drilling programs at Las
Cristinas and negotiating reductions in security payments at Las Cristinas by
50% on an annualized basis, which was phased in at 25% in the second quarter of
2008 and a further 25% in the third quarter of 2008.
Management
estimates that the available funds will be sufficient to meet the Company's
obligations and budgeted expenditures until December 31, 2009, but will not be
sufficient to cover its obligations falling due in January 2010. The anticipated
funding shortfall may be met in a number of ways including but not limited to,
the following:
|
(a)
|
sale
of equity securities
|
|
(b)
|
further
expenditure reductions
|
|
(c)
|
introduction
of joint venture partners
|
|
(d)
|
negotiated
settlement with its note holders to reduce, defer, eliminate or
otherwise decrease its obligations, particularly interest
costs.
|
There
is, however, no assurance that these sources of funding or initiatives will be
available to the Company, or that they will be available on terms which are
acceptable to the Company.
Contractual
Obligations and Commitments
The
Company’s significant contractual obligations and commitments, as at March 31,
2009, are tabled below:
|
Millions
|
Less
than One Year
|
1
- 3
Years
|
4
- 5
Years
|
More
Than 5 Years
|
Total
|
|
Notes
payable
|
$ -
|
$100.0
|
$ -
|
$ -
|
$100.0
|
|
Interest
on notes payable
|
9.4
|
18.2
|
-
|
-
|
27.6
|
|
Asset
retirement obligations at El Callao
|
2.3
|
-
|
-
|
-
|
2.3
|
|
Social
commitments at Las Cristinas
|
1.2
|
-
|
-
|
-
|
1.2
|
|
Total
contractual obligations
|
$12.9
|
$118.2
|
$ -
|
$ -
|
$131.1
|
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 estimate from a 43-101 Technical Report, completed 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. These projected cost
estimates will be updated if and when the Company receives the
Permit.
The
Company’s $100 million notes mature in 2011. The Company is considering
alternatives relating to the settlement of this debt and has engaged a financial
advisor to assist in assessing options, and if appropriate to assist in
negotiating, structuring and executing a settlement with the bondholders. The
Company has agreed to grant to such advisor 3,000,000 warrants to acquire common
shares of the Company at C$0.30 per common share with an expiry date of April
23, 2012. In addition, the Company has agreed to pay the financial advisor a
success fee of C$1 million.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements with special purpose
entities.
Related
Party and Other Transactions
The
Company entered into the following transactions with related and other parties
during the three month period ended March 31, 2009:
|
|
a)
|
Paid
underwriting fees of $nil (2008: $2.8 million) to a company which
retains the Chairman of the Company as
an employee.
|
|
|
b)
|
Paid
head office rent of $0.03 million (2008: $nil) to a company which retains
the Chairman of the Company as a
director.
|
Critical
Accounting Estimates and Uncertainties
The preparation of financial statements
in conformity with accounting principles generally accepted in Canada requires
management to make estimates
and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial
statements. Significant estimates
and uncertainties
include those relating to the
reco
verability of property,
plant and equipment, tax provisions and future income tax balances, costs of
asset retirement obligations,
fair value of debt, outcomes of
litigations
and
assumptions on the
Company
’
s ability to continue as a going
concern
.
While
management believes these estimates and
assumptions are reasonable, actual results could vary significantly. The
carrying value of the Company
’
s principal asset, the Las Cristinas
project, could be subject to material adjustment in the event that the
Com
p
any is not successful in obtaining the
Permit and financing necessary for its development.
Changes
In Accounting Policies and Future Accounting Pronouncements
Changes
in accounting policies – Sections 3064 and EIC-173
The
CICA issued new accounting standards which are effective for interim and annual
consolidated financial statements for the Company beginning on January 1,
2009.
The
CICA has issued a new accounting standard, Handbook Section 3064 “Goodwill and
Intangible Assets” which 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”.
The
CICA has issued EIC-173 “Credit Risk and the Fair Value of Financial Assets and
Financial Liabilities” which concludes that in determining the fair value of
financial assets and financial liabilities an entity should take into account
the credit risk of the entity and the counterparty.
There
was no material impact to the Company’s consolidated financial statements on
adoption of these new accounting standards.
Future
accounting pronouncements
In
February 2008, the Canadian Accounting Standards Board confirmed that
International Financial Reporting Standards (“IFRS”) will replace current
Canadian GAAP for publicly accountable companies. The official change over date
is for interim and annual financial statements for fiscal years beginning on or
after January 1, 2011. IFRS will be required for the Company’s interim and
annual consolidated financial statements for the fiscal year beginning on
January 1, 2011. The Company is currently formulating and developing an
implementation plan to comply with the new standards and its future reporting
requirements.
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 fair value of the debt is
approximately $30.0 million using a discounted cash flow methodology as
described in the notes to the financial statements.
Outstanding
Share Data
A
summary of common shares, common share options and common share purchase
warrants at May 14, 2009 are tabled below:
|
Common
Shares Issued
|
294,817,719
|
|
Common
Share Options
|
10,340,522
|
|
Warrants
|
31,695,000
|
|
Fully
Diluted Common Shares
|
336,853,241
|
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 2008 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
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 only 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. Neither the outcome of Crystallex’s
appeal to the Minister of MinAmb nor when or if the Permit will be granted can
be ascertained with any certainty.
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 BsF/USD, has since been adjusted twice upwards and presently
stands fixed at 2.15 BsF/USD. It is likely that exchange controls will continue
and, if they do, they will 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 – Mine Operating Contract” in the AIF. The
Mine Operating Contract is an operating 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 Mine Operating
Contract.
The
interests of the Company in the Las Cristinas deposits are contingent upon the
Company continuing to satisfy its obligations under the Mine Operating
Contract. Failure to do so could result in the CVG having the right
to terminate the Mine Operating Contract. In addition, the CVG is
party to an agreement dated May 16, 2002 with the Ministry of
Mines (“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 Mine Operating Contract.
Furthermore, any failure by the CVG to assert its rights under its agreement
with MIBAM could have a material adverse effect on the Company’s rights under
the MOC. To date, no assertions of contractual breaches by the Company have been
received.
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 Mine Operating 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 Mine
Operating 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 Mine
Operating 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 is a risk as to whether the MIBAM will grant to the
CVG the additional right to negotiate the exploitation of the copper with third
parties or whether 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. It is not possible to predict when
or if a draft mining bill will be enacted into law or what the final provisions
of such law will be, if enacted. It is possible
that
the Government of Venezuela will 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. Any
changes to current Venezuelan mining law may adversely affect the Company’s
ability to develop and operate the Company’s Venezuelan properties.
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 2008 AIF, available electronically at www.sedar.com and
www.sec.gov.
On
November 28, 2008, Crystallex delivered a letter to the Government of Venezuela
notifying it of the existence of a dispute between Crystallex and the Bolivarian
Republic of Venezuela ("Venezuela") under the Agreement between the Government
of Canada and the Government of the Republic of Venezuela for the Promotion and
Protection of Investments (the "Treaty"). It is Crystallex's desire
to settle the dispute amicably within six months. If the dispute has not been
settled amicably within six months, Crystallex has the option of submitting the
dispute to international arbitration. The dispute has arisen out of various
measures of Venezuela including MinAmb's decision dated April 14, 2008 to deny
the Permit and Venezuela's subsequent media statements attributed to the
Minister of MIBAM on November 5, 2008 regarding the status of the Project and
the MOC.
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 to authorized mining operations. Although the Company, in conjunction
with the local authorities, employs strategies to control the presence of
unauthorized miners, the success of these strategies is not assured, and there
is a risk that the Company’s operations may 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
Current
Global Financial Condition
Current
financial conditions globally have been subject to increased volatility and
numerous financial institutions have either filed for bankruptcy or have been
rescued by governmental authorities. Access to financing has been negatively
impacted by both sub-prime mortgages and the liquidity crisis affecting the
asset-backed commercial paper market. These factors may impact the ability of
the Company to obtain loans, financing and other credit facilities in the future
and, if obtained, on terms favourable to the Company. If these increased levels
of volatility and market turmoil continue, the Company’s operations, financial
conditions, results of operations and share price could be adversely
impacted.
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.
Management understands
that this review was completed by the end of 2005; however, management is not
aware of any further steps undertaken to change the mining title regime as
described above. Any such
changes
could, if enacted, affect the Company’s interest in Las Cristinas. It
is also possible that the Government could 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 financial assurances
by posting a Compliance Guarantee Bond for Las Cristinas to cover the cost of
reclamation activities. However, it is possible that the Company may 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 Mine Operating 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 Mine
Operating Contract. In order to carry out the Las Cristinas project
and its other mining projects, the Company will need to raise substantial
additional financing.
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. In this context the Company notes that it 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.
The
fundamentals for gold are expected to remain positive in the current year and
despite the financial market turmoil and volatility, equity issues of gold
companies have been favourable under the right conditions. Some producers have
met resistance in the financing markets as credit is more restrictive and
expensive and some equity financings were completed at levels which have
resulted in significant dilution.
Despite
the financings that have been completed by the Company, the Company has limited
access to financial resources as a direct result of the Permit denial and there
is a risk that sufficient additional financing may not be available to the
Company on acceptable terms or at all as a consequence of the Government’s
conduct. 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 Mine Operating Contract.
Reserve
and Resource Estimates
The
Company’s reported mineral reserves and resources are estimates
only. Notwithstanding the rigor with which such estimates have been
prepared, there can be no assurance that they will be recovered at the rates
estimated. There are numerous uncertainties inherent in estimating
mineral reserves and resources, including many factors beyond the Company’s
control. Such estimation is a subjective process and the accuracy of any
estimate is a function of the quantity and quality of available data and of the
assumptions made and judgments used in engineering and geological
interpretation. 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.
Mineral
Exploration and Exploitation
Mineral
exploration and exploitation involves a high degree of risk. 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. 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.
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.
Dependence
on One Mining Property
Future
results for the Company depend largely on the Las Cristinas project, which if
the Permit is not granted 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 for Las
Cristinas. Once Las Cristinas is in production, failure to meet these
estimates could adversely affect the Company’s future profitability, cash flows
and financial position.
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.
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 is a risk that the Company will be not
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 1999 to 2008, the gold price fluctuated between an
annual average low of U.S. $279 per ounce and an annual average high of U.S.$872
per ounce. In the quarter ended March 31, 2009, the price of gold ranged from
$810 per ounce to $986 per ounce and averaged $908 per ounce for the
quarter.
The
market price of the common shares of the Company can be significantly affected
by changes in the gold price. In addition, the Company may be
required to restate its mineral reserves and resources and write down its
investment in Las Cristinas. Any of these developments could
negatively affect the Company’s financial position. Accordingly, even
if the Company produces gold at Las Cristinas, there is a risk that the gold
price will not be high enough to enable the Company to sell the gold produced by
it profitably.
Currency
Fluctuations
The
Company’s functional and reporting currency is the U.S. dollar. A significant
portion of the Company’s operating and capital expenditures are in Venezuelan
BsF and Canadian dollar. Fluctuations in exchange rate between the U.S. dollar
and both the BsF and Canadian dollar, either favourable or unfavourable, could
have a material impact on the results of operations and financial
position.
Credit
and Market Risks
The
Company may enter 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.
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 are dependant 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.
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;
|
|
·
|
the
current global economic crisis;
|
|
·
|
acquisitions,
strategic alliances or joint ventures involving the Company or its
competitors;
|
|
·
|
gold
price volatility; and
|
|
·
|
outcomes
of litigation.
|
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
May 14, 2009, the Company had outstanding options to purchase 10,340,522 common
shares of the Company and warrants to purchase 31,695,000 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 stock
options 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 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 named in the
2008 Annual Information Form are located outside the United States. Furthermore,
it may not be possible to enforce against the Company or its directors or
officers, 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, but this area of the law
is not free from doubt and there is a risk that such a judgment will not be
enforceable.
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, unless and until the Permit is granted and Las Cristinas mine
is operating at full capacity. 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. There can be no assurance that the
Company will become profitable in the near future.
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 pre-development stage for its principal
property, the Las Cristinas project, the Company intends to retain its earnings
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.
Litigation
The
Company is defending against several legal actions. The Company believes that
these actions are without merit and intends to defend vigorously against these
actions. The Company cannot provide assurances as to the outcome of
the actions, nor can the range of losses, if any, be estimated. Accordingly, no
losses have been accrued. A negative outcome from any of these actions, or
possible future actions, could result in a material loss to the
Company.
26