gdrzfform40f042817.htm - Generated by SEC Publisher for SEC Filing  

 United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 40-F

¨   REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x   ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2016                                             Commission File Number:  001-31819

GOLD RESERVE INC.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Alberta, Canada

(Province or other jurisdiction of incorporation or organization)

1040

(Primary Standard Industrial Classification Code Number)

N/A

(I.R.S. Employer Identification Number)

926 West Sprague Avenue, Suite 200, Spokane, Washington 99201   (509) 623-1500

(Address and telephone number of Registrant’s principal executive offices)

Rockne J. Timm,

926 West Sprague Avenue, Suite 200, Spokane, Washington, 99201   (509) 623-1500

(Name, address (including zip code) and telephone number (including area code)

of agent for service in the United States)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Class A common shares, no par value per share

Rights to Purchase Class A common shares

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 (Title of Class)

For annual reports, indicate by check mark the information filed with this Form:

x  Annual Information Form                    x  Audited Annual Financial Statements

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:  Class A common shares, no par value per share: 89,710,604

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   x  Yes     ¨  No

Form 40-F – Page 1

 


 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). x  Yes     ¨  No

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act. ¨ Emerging Growth Company. If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Explanatory note

Gold Reserve Inc. ("Gold Reserve", the "Company", "we", "us", or "our") is a Canadian issuer eligible to file its annual report pursuant to Section 13 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"), on Form 40-F.  We are a "foreign private issuer" as defined in Rule 3b-4 under the Exchange Act and in Rule 405 under the U.S. Securities Act of 1933, as amended (the "Securities Act").  Our equity securities are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the Exchange Act pursuant to Rule 3a12-3.

 

CAUTIONARY NOTE REGARDING differences in united states and
canadian reporting practices

 

We are permitted, under a multi-jurisdictional disclosure system adopted by the United States and Canada, to prepare this Annual Report in accordance with Canadian disclosure requirements, which are different from those of the United States.  

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
AND INFORMATION

 

The information presented or incorporated by reference in this report contains both historical information and "forward-looking statements" (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) or "forward looking information" (within the meaning of applicable Canadian securities laws) (collectively referred to herein as "forward looking statements") that may state our intentions, hopes, beliefs, expectations or predictions for the future.

Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies that may cause our actual financial results, performance or achievements to be materially different from those expressed or implied herein and many of which are outside our control.

Forward-looking statements involve risks and uncertainties, as well as assumptions, including those set out herein, that may never materialize, prove incorrect or materialize other than as currently contemplated which could cause our results to differ materially from those expressed or implied by such forward-looking statements.  The words "believe," "anticipate," "expect," "intend," "estimate," "plan," "may," "could" and other similar expressions that are predictions of or indicate future events and future trends, which do not relate to historical matters, identify forward-looking statements.  Any such forward-looking statements are not intended to provide any assurances as to future results.

Numerous factors could cause actual results to differ materially from those described in the forward-looking statements, including, without limitation:

·         delay or failure by Venezuela to make payments or otherwise honor its commitments under the Settlement Agreement, including with respect to the sale of the Mining Data;

Form 40-F – Page 2

 


 

·         the ability of the Company and Venezuela to (i) successfully overcome any legal, regulatory or technical obstacles to operate the Mixed Company and develop the Brisas Cristinas Project (as herein defined), (ii) obtain any remaining governmental approvals and (iii) obtain financing to fund the capital costs of the Brisas Cristinas Project;

·         risks associated with exploration, delineation of adequate resources and reserves, regulatory and permitting obstacles and other risks normally incident to the exploration, development and operation of mining properties including our ability to achieve revenue producing operations in the future;

·         local risks associated with the concentration of our future operations and assets in Venezuela, including operational, security, regulatory, political and economic risks;

·         our ability to resume our efforts to enforce and collect the Award, including the associated costs of such enforcement and collection effort and the timing and success of that effort, if Venezuela fails to make payments under the Settlement Agreement, it is terminated and further efforts to consummate the Settlement Agreement are abandoned;

·         pending the receipt of payments under the Settlement Agreement or otherwise, our continued ability to service or restructure our outstanding notes or other obligations as they come due and access future additional funding, when required, for ongoing liquidity and capital resources;

·         shareholder dilution resulting from future restructuring, refinancing and/or conversion of our outstanding notes or from the sale of additional equity, if required;

·         value realized from the disposition of the remaining Brisas Project related assets, if any;

·         our prospects in general for the identification, exploration and development of additional mining projects;

·         risks associated with the abilities and continued participation of key employees; and

·         Changes in U.S. and/or Canadian tax laws to which we are subject.

This list is not exhaustive of the factors that may affect any of our forward-looking statements.  See "Risk Factors" in Management's Discussion and Analysis for the fiscal year ended December 31, 2016 included herein as Exhibit 99.3.

Investors are cautioned not to put undue reliance on forward-looking statements, and investors should not infer that there has been no change in our affairs since the date of this report that would warrant any modification of any forward-looking statement made in this document, other documents periodically filed with the U.S. Securities and Exchange Commission (the “SEC”) or other securities regulators or presented on the Company’s website.  Forward-looking statements speak only as of the date made.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this notice.  We disclaim any intent or obligation to update publicly or otherwise revise any forward-looking statements or the foregoing list of assumptions or factors, whether as a result of new information, future events or otherwise, subject to our disclosure obligations under applicable U.S. and Canadian securities regulations.  Investors are urged to read the Company’s filings with U.S. and Canadian securities regulatory agencies, which can be viewed online at www.sec.gov and www.sedar.com, respectively.

CURRENCY

 

Unless otherwise indicated, all references to "$", “U.S. $” or "U.S. dollars" in this Annual Report refer to U.S. dollars and references to "Cdn$" or "Canadian dollars" refer to Canadian dollars.  The 12 month average rate of exchange for one Canadian dollar, expressed in U.S. dollars, for each of the last two calendar years equaled 0.7544 and 0.7820, respectively, and the exchange rate at the end of each such period equaled 0.7448 and 0.7226, respectively.

Form 40-F – Page 3

 


 

PrincipAl Canadian Documents

Annual Information Form. Our Annual Information Form for the fiscal year ended December 31, 2016 is included herein as Exhibit 99.1.

Audited Annual Financial Statements. Our audited consolidated financial statements as at December 31, 2016 and 2015 and for the fiscal years ended December 31, 2016 and 2015, including the report of the independent auditors with respect thereto, are included herein as part of Exhibit 99.2.

Management’s Discussion and Analysis. Management’s discussion and analysis for the fiscal year ended December 31, 2016 is included herein as Exhibit 99.3.

DISCLOSURE CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report.  Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC rules and forms.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management's Annual Report on Internal Control over Financial Reporting for the fiscal year ended December 31, 2016 is included herein as part of Exhibit 99.2.

Attestation Report of The Registered Public Accounting Firm

The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, independent auditors (“PwC”), as stated in their report included herein as part of Exhibit 99.2.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

During the fiscal year ended December 31, 2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15d-15(f) under the Exchange Act).

AUDIT COMMITTEE

 

Our Board of Directors (the "Board") has a separately-designated standing Audit Committee for the purpose of overseeing our accounting and financial reporting processes and audits of our annual financial statements. As at the date of the Annual Report, the following individuals comprise the entire membership of our Audit Committee, which has been established in accordance with Section 3(a)(58)(A) of the Exchange Act:

Patrick McChesney (Chair)               Jean Charles Potvin                            James P Geyer

 

                Our Audit Committee’s Charter can be found on our website at www.goldreserveinc.com in the Investor Relations section under "Governance."

Form 40-F – Page 4

 


 

Independence. The Board has made the affirmative determination that all members of the Audit Committee are "independent" pursuant to the criteria outlined by the Canadian National Instrument 52-110 - Audit Committees, Rule 10A-3 of the Exchange Act and the policies of the TSX Venture Exchange.

 

Audit Committee Financial Expert. Mr. McChesney, now a business consultant, was most recently a financial executive for an automotive sales group and has served in similar positions for a number of other companies.  Mr. Potvin is a director and President of Murchison Minerals Ltd. (formerly Flemish Gold Corp.), has a MBA-Finance degree and was an investment analyst at Burns Fry Ltd for 13 years. Mr. Geyer has a Bachelor of Science in Mining Engineering from the Colorado School of Mines, has substantial experience in underground and open pit mining and has held engineering and operations positions with a number of companies including AMAX and ASARCO and has had previous audit committee experience with another public company.

 

The Board has determined that Mr. McChesney is an "audit committee financial expert" as such term is defined under Item 8(b) of General Instruction B to Form 40-F.  The SEC has indicated that the designation of Mr. McChesney as an audit committee financial expert does not make Mr. McChesney an "expert" for any purpose, impose any duties, obligations or liabilities on Mr. McChesney that are greater than those imposed on other members of the Audit Committee and Board who do not carry this designation or affect the duties, obligations or liability of any other member of the Audit Committee and Board. 

CODE OF ETHICS

We have adopted a Code of Conduct and Ethics (the "Code") that is applicable to all our directors, officers and employees.  The Code contains general guidelines for conducting our business. The Code was amended and approved by the Board effective March 24, 2006.  No waivers to the provisions of the Code have been granted since its inception.  We intend to disclose future amendments to, or waivers from, certain provisions of the Code on our website within five business days following the date of such amendment or waiver.  A copy of the Code can be found on our website at www.goldreserveinc.com in the Investor Relations section under "Governance."  We believe that the Code constitutes a "code of ethics" as such term is defined by Item 9(b) of General Instruction B to Form 40-F.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by our independent auditors, PwC, for the integrated audit of our annual financial statements for 2016 and 2015 were $88,775 and $100,661, respectively.

Audit-Related Fees. The aggregate fees billed in each of the last two fiscal years by PwC related to our quarterly reports and services provided in respect of other regulatory-required auditor attest functions associated with government audit reports, registration statements, prospectuses, periodic reports and other documents filed with securities regulatory authorities or other documents issued in connection with securities offerings not otherwise reported under "Audit Fees" above for 2016 and 2015 were $51,355 and $39,069, respectively.

Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by PwC for tax compliance, consulting and return preparation services for 2016 and 2015 were $116,620 and $8,829, respectively.

All Other Fees.  None.

Audit Committee Services Pre-Approval Policy

The Audit Committee is responsible for the oversight of our independent auditor’s work and pre-approves all services provided by PwC.  Audit Services and Audit-Related Services rendered in connection with the annual financial statements and quarterly reports are presented to and approved by the Audit Committee typically at the beginning of each year. Audit-Related Services other than those rendered in connection with the quarterly reports and Tax services provided by PwC are typically approved individually during the Committee’s periodic meetings or on an as-needed basis. The Audit Committee’s Chair is authorized to approve such services in advance on behalf of the Committee with such approval reported to the full Audit Committee at its next meeting.  The Audit Committee sets forth its pre-approval and/or confirmation of services authorized by the Audit Committee Chair in the minutes of its meetings.

Form 40-F – Page 5

 


 
 

OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial performance, financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

CONTRACTUAL OBLIGATIONS

 

The following table sets forth information on our material contractual obligation payments for the periods indicated as of December 31, 2016. For further details see "Management's Discussion and Analysis" and Note 11 to the audited consolidated financial statements.

                                             Payments due by Period

                                                                                              Less than                                                                         More Than

Contractual Obligations                      Total                      1 Year                  1-3 Years            4-5 Years               5 Years

Convertible Notes 1                           $ 50,852,345                   $          -            $ 49,814,345               $            -             $ 1,038,000

Interest Notes 1                                                      19,763,220                               -               19,763,220                             -                               -

Interest                                                      313,995                     57,090                    114,180                  114,180                      28,545 

Total                                                 $ 70,929,560                   $ 57,090            $ 69,691,745               $ 114,180              $ 1,066,545

1         Includes $49,814,345 principal amount of remaining 11% Senior Secured Convertible Notes due 2018 (the “2018 Convertible Notes”) and 11% Senior Secured Interest Notes due 2018 (the “Interest Notes” and, together with the 2018 Convertible Notes, the “2018 Notes”) from previous financings and restructurings and $1,038,000 principal amount of 5.50% Convertible Notes due June 15, 2022 (the “2022 Convertible Notes” and, together with the 2018 Notes, the " Notes"). The amounts shown above include the principal payments due unless the Notes are converted into our Class A common shares (other than the Interest Notes), redeemed or repurchased prior to their due date pursuant to the terms of the indenture governing the Notes (See Note 11 to the consolidated financial statements).

The amount recorded as convertible notes and interest notes in the consolidated balance sheet as of December 31, 2016 is comprised of approximately $36.8 million carrying value of 2018 Convertible Notes issued pursuant to the 2015 restructuring, approximately $1.0 million of previously issued 2022 Convertible Notes and post 2015 restructuring Interest Notes of approximately $6.2 million. The carrying value of convertible notes will be accreted to face value using the effective interest rate method over the expected life of the notes with the resulting charge recorded as interest expense.

During 2015 we extended the maturity date of approximately $43.7 million of convertible notes and interest notes from December 31, 2015 to December 31, 2018 and issued approximately $13.4 million of additional 2018 Convertible Notes also maturing December 31, 2018.

 

UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

 

We undertake to make available, in person or by telephone, representatives to respond to inquiries made by the SEC staff, and to furnish promptly, when requested to do so by the SEC staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

We previously filed an Appointment of Agent for Service of Process and Undertaking on Form F-X signed by us and our agent for service of process on May 7, 2007 with respect to the class of securities in relation to which the obligation to file this Annual Report on Form 40-F arises.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.

Form 40-F – Page 6

 


 

GOLD RESERVE INC.

 

By: /s/ Robert A. McGuinness                                                                         

        Robert A. McGuinness, its Vice President of Finance,

        Chief Financial Officer and its Principal Financial and Accounting Officer

        April 28, 2017

 

Form 40-F – Page 7

 


 

EXHIBIT INDEX

 

Exhibit                                                                                                                                                                                             

Number         Exhibit                                                                                                                                                                     

99.1                Annual Information Form for the fiscal year ended December 31, 2016

 

99.2                Audited Consolidated Financial Statements as at December 31, 2016 and 2015 and for the fiscal years ended December 31, 2016 and 2015

 

99.3                Management’s Discussion and Analysis for the fiscal year ended December 31, 2016

 

99.4                Certification of Gold Reserve Inc. Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                        

 

99.5                Certification of Gold Reserve Inc. Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                        

 

99.6                Certification of Gold Reserve Inc. Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

99.7                Certification of Gold Reserve Inc. Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                        

         

99.8                Consent of PricewaterhouseCoopers LLP, Independent Auditors

                       

 

 

 

 

 

Form 40-F – Page 8

 

gdrzfform40fexhibit991042817.htm - Generated by SEC Publisher for SEC Filing

Exhibit 99.1 – Annual Information Form

 

 

 

 

 

 

 

 

 

 

 

 

 

GOLD RESERVE INC.

 

ANNUAL INFORMATION FORM

 

 

For The Year Ended December 31, 2016

As filed on April 28, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 99.1   Annual Information Form - Page 1

 


 
 

TABLE OF CONTENTS

 

Introductory Notes...3.

Cautionary Statement Regarding Forward-Looking Statements and Information...7.

Corporate Structure...7.

General Development and Description of the Business...8.

Properties...13.

Dividends and Distributions...20.

Description of Capital Structure...21.

Market for Securities...22.

Prior Sales...22.

Escrowed Securities and Securities Subject to Contractual Restriction on Transfer...22

Directors and Officers...22.

Audit Committee Information...26.

Conflicts of Interest...27

Legal Proceedings and Regulatory Actions...28.

Interest of Managament and Others in Material Transactions...28.

Transfer Agents and Registrars...28.

Material Contracts...28.

Interests of Experts...33.

 

 

Exhibit 99.1   Annual Information Form - Page 2

 


 

Introductory Notes

The Company

In this Annual Information Form, the terms "Gold Reserve", the "Company" "we," "us," or "our," refer to Gold Reserve Inc. and its consolidated subsidiaries and affiliates, unless the context requires otherwise. When appropriate, capitalized terms are defined herein.

Gold Reserve, an exploration stage company, is engaged in the business of acquiring, exploring and developing mining projects. We were incorporated in 1998 under the laws of the Yukon Territory, Canada and continued to Alberta, Canada in September 2014. We are the successor issuer to Gold Reserve Corporation which was incorporated in 1956. We have only one operating segment, the exploration and development of mineral properties.

In February 1999, each Gold Reserve Corporation shareholder exchanged their shares for an equal number of Gold Reserve Inc. Class A common shares except in the case of certain U.S. holders who for tax reasons elected to receive equity units (each an "Equity Unit") in lieu of Gold Reserve Inc. Class A common shares. Each Equity Unit comprises one Gold Reserve Inc. Class B common share and one Gold Reserve Corporation Class B common share and is substantially equivalent to a Class A common share. At December 31, 2015, all Equity Units had been converted to Class A common shares.

Our recent activities, as more fully described herein, have included:

SETTLEMENT AGREEMENT

§  The signing of a Memorandum of Understanding (the "MOU") in February 2016, with the Bolivarian Republic of Venezuela ("Venezuela") represented by the Office of the Attorney General and the Ministry of Popular Power of Oil and Mining that contemplated settlement, including payment and resolution, of the International Centre for the Settlement of Investment Disputes ("ICSID") arbitral award (the "Award") granted in our favor by ICSID in respect of the Brisas Project and the transfer of our technical mining data related to the Brisas Project (the "Mining Data"). Efforts to come to an agreement with Venezuela commenced in October 2015 and in the spirit of that effort, the parties subsequently agreed to extend the MOU to allow for further efforts to agree on a formal settlement agreement;

§  The execution of a Settlement Agreement (as defined herein) in July 2016 with Venezuela which provided for payment of the Award (including accrued interest) in the amount of approximately $770 million in respect of the Brisas project and the acquisition by Venezuela of the Mining Data for $240 million. The Company agreed to temporarily suspend the legal enforcement of the Award until final payment is made by Venezuela, at which time we would permanently cease all legal activities related to the collection of the Award;

§  The execution of addendums to the Settlement Agreement in early November and again in early December 2016 whereby the parties agreed to revise the payment schedule. The payments for the Award and Mining Data continue to be contingent upon Venezuela obtaining the necessary financing, which has not occurred and, as a result, as of the date of this report no payments have been made by Venezuela. At the passing of the last agreed upon payment date, the board of directors chose to not formally terminate the Settlement Agreement as a result of the delay in the initial agreed upon payment(s), but instead instructed management to continue all efforts to work with Venezuela to complete the terms of the Settlement Agreement. Management has recently proposed and Venezuela is currently considering a third addendum to the Settlement Agreement, whereby the parties would agree, among other things, to revise the previously proposed payment schedule.

MIXED COMPANY AGREEMENT

·         The parties agreed, during the first half of 2016, following extensive negotiations over a number of months with Venezuelan authorities, to significant terms, including economic conditions and various decrees and resolutions impacting the entity envisioned to develop the Brisas and the adjacent Cristinas gold-copper project (the "Brisas Cristinas Project"). Concurrent with those activities, we developed a business plan (the "Business Plan") for the Brisas Cristinas Project with broad input from our engineering consultants. Thereafter, we met with and reviewed the Business Plan with representatives of Venezuela. These discussions were key to our joint agreement to revise royalty and income tax rates related to the Brisas Cristinas Project resulting in the parties concluding initial formation negotiations, moving on to the negotiation of the various terms of the articles of incorporation and by-laws of the Mixed Company;

·         The Company and Venezuela entered into an agreement ("Mixed Company Agreement") on August 7, 2016 for the formation of a jointly owned company ("Mixed Company") to develop the Brisas Cristinas Project;

Exhibit 99.1   Annual Information Form - Page 3

 


 

·         In anticipation of the Mixed Company Agreement, GR Mining (Barbados) Inc. ("GR Mining") a wholly-owned subsidiary of Gold Reserve Inc. and GR Engineering (Barbados) Inc. ("GR Engineering"), a wholly-owned subsidiary of GR Mining were formed in early 2016. GR Mining was formed to hold our interest in Empresa Mixta Ecosocialista Siembra Minera, S.A. ("Siembra Minera"), the Venezuelan company formed to act as the Mixed Company and provide for the management of the development and operation of the Brisas Cristinas Project and GR Engineering was formed to provide technical services to Siembra Minera;

·         Venezuela has granted the following decrees which have been published in the Official Gazette:  The formation, in October 2016, of Siembra Minera, the entity that will develop the Brisas Cristinas Project, Delimitation of the Area, Transferring the Gold Rights, Transferring the Strategic Mineral Rights (including copper and silver).  Venezuela has also committed to issuing the following decrees, resolutions and exchange agreement on or prior to the effective date of the new addendum of the Settlement Agreement: the BCV (Central Bank of Venezuela) Resolution to export doré and concentrate and sell product to other than the BCV and keep funds offshore; the Incentives Regime; the Special Tax Regime Decree; the Ministry Resolution in accordance with Article 16 of the Organic Gold Law; and the Exchange Agreement;

·         The significant negotiated terms related to the formation of Siembra Minera and its development and operation of the Brisas Cristinas Project include:

·         Siembra Minera is beneficially owned 55% by Corporacion Venezolano Minera (a Venezuelan government corporation) and 45% by GR Mining; 

·         Siembra Minera holds the rights to the gold, copper, silver and other strategic minerals contained within a 18,950 hectare area located in southeast Bolivar State which includes the Brisas Cristinas Project;

·         GR Engineering, under a Technical Services Agreement, will provide engineering, procurement and construction services to Siembra Minera for a fee of 5% over all costs of construction and development and, thereafter, for a fee of 5% over operating costs during operations;  

·         Presidential Decrees, within the legal framework of the "Orinoco Mining Arc", have been, or will be issued to provide for tax and fiscal incentives for mixed companies operating in that area that include exemption from value added tax, stamp tax, municipal taxes and any taxes arising from the contribution of tangible or intangible assets, if any, to the mixed companies by the parties and the same cost of electricity, diesel and gasoline as that incurred by the government or related entities;

·         Gold price participation, in accordance with an agreed upon formula resulting in specified respective percentages based on the sales price of gold per ounce.  For sales up to $1600 per ounce, net profits will be allocated 55% to Venezuela and 45% to us. For sales greater than $1600 per ounce, the incremental amount will be allocated 70% to Venezuela and 30% to us. For example, with sales at $1600 and $3500 per ounce, net profits will be allocated 55.0%  ̶  45.0% and 60.5%  ̶  39.5%, respectively;

·         Net smelter return royalty (“NSR”) to Venezuela on the sale of gold, copper, silver and any other strategic minerals of 5% for the first ten years of commercial production, 6% for the next ten years;

·         Income tax rate of 14% for years one to five, 19% for years 6 to 10, 24% for years 11 to 15,  29% for years 16 to 20 and 34% thereafter;

·         The Parties agreed to work together to complete financing(s) to jointly fund the contemplated $2.1 billion anticipated capital costs of the Brisas Cristinas project on behalf of Siembra Minera, which is expected to be comprised of a combination of project financing, development agencies, equipment manufacturer, offtake and smelter financings. In order to facilitate the early startup of the pre-operation and construction activities, Venezuela agreed to advance $110.2 million to Siembra Minera, which will be repaid from the financing proceeds;

·         Maintenance of funds associated with future capital cost financings in offshore US dollar accounts;

Exhibit 99.1   Annual Information Form - Page 4

 


 

·         Authorization to export and sell concentrate and doré containing gold, copper, silver and other strategic minerals outside of Venezuela and maintain proceeds from such sales in a US dollar account. In addition, dividends and profit distributions, if any, will be directly paid to the shareholders;

·         Funds to pay, as required, Venezuela income taxes and local annual operating and capital costs denominated in Bolivars for the Brisas Cristinas Project will be converted into local currency at the most favorable exchange rate offered by Venezuela to other entities;

·         Venezuela agrees to use its best efforts to grant to Siembra Minera similar terms that would apply to the Brisas Cristinas Project in the event Venezuela enters into an agreement with a third party for the incorporation of a mixed company to perform similar activities with terms and conditions that are more favorable than the above tax and fiscal incentives;

·         Venezuela will indemnify us and our affiliates against any future legal actions associated with the Brisas Cristinas Project; and

·         The board of directors will be comprised of seven individuals, of which four will be appointed by Venezuela and three by us.

The primary activities of Siembra Minera since its formation has included:

§  Establishment of bank accounts in both offshore US$ accounts and Venezuelan Bolivars. Identification of external auditors which will be formally designated during upcoming board meetings. Engagement of certain key employees with additional initial interviews has been completed or is in process. Potential office locations in Caracas and Puerto Ordaz have been identified;

§  Initiated discussions whereby the parties are working on a draft Engineering Procurement Construction Management (“EPCM”) contract between GR Engineering and Siembra Minera;

§  Conducted preliminary meetings with CAMIMPEG, a Venezuelan Army construction company, to provide project information regarding the early works plan which includes man-camp and certain access roads;

§  Provided CVG-Tecmin, a state corporation that provides technical services and information with regard to the development of mineral resources, with the project description and related technical information to produce and file the Environmental Questionnaire leading to the granting of the Authorization to Occupy the Territory (AOT); 

§  Sponsored several meetings with Mission Piar to initiate surveys and follow up on the activities of small miners groups currently working in certain parts of the 18,950 hectare property. Mission Piar is a Government instituted Mission under the authority of the Ministry of Mines in charge of providing assistance and coordination of small mining activities;

§  Held fact finding meetings with the Ministry of Mines and members of the Guayana REDI to provide inputs and assist in the establishment of a General Plan of Security for the Project Area. The security of the project area falls under the responsibility of the Region of Integral Defense Guayana (REDI) lead by General Carlos Augusto Leal Tellería;

§  Initiated efforts to define the Relocation Plan with the help of Venezuelan officials and REDI and supported by a census that is underway by Mission Piar.  Several meetings have taken place between the Ministry of Mines and small miners as part of the relocation plan; 

§  Initiated development of a Small Miner Project with input from entities such as Ministry of Mines, REDI, Mission Piar and others to provide alternatives to some of the small miners that currently operate in the project area. This project is intimately linked to the Relocation Plan and includes an Early Production Plan, training of miners in environmental protection and remediation, and in other disciplines so many of them can be incorporated in the project construction and operation; and

Exhibit 99.1   Annual Information Form - Page 5

 


 

§  Requested a High Definition Multispectral Satellite image of the Brisas Cristinas Project land position and its adjacent area at the end of 2016, which will be used to document existing conditions and as an aid for documenting and census of existing small miner activity. Completion will take several months due to multiple satellite passes to meet cloud cover requirement.

PRIVATE PLACEMENT

§  Completed a non-brokered private placement in May 2016 for the issuance of 8,562,500 Class A common shares at $4.00 per share for gross proceeds of $34.3 million.

AWARD ENFORCEMENT

§  Due to the rejection on February 7, 2017 by the Paris Court of Appeal of Venezuela’s annulment arguments and the issuance of a judgment dismissing the applications filed by Venezuela pending before the French courts in relation to the Award, we initiated service to accelerate Venezuela’s appeal before the French Cour de cassation, which is the court of final resort in the French judicial system. Regardless of whether Venezuela files an appeal to the Cour de cassation, the exequatur previously achieved by us remains in full force and effect; and

§  Continued legal efforts in the United States and Luxembourg to posture the Company for potential future legal activities related to enforcement of the Award in the event payment under Settlement Agreement is not received.

OTHER

§  Continued to pursue the sale of Brisas Project equipment; and

§  Pursued activities related to the LMS property in Alaska.

We have no commercial production and, as a result, we continue to experience losses from operations, a trend we expect to continue unless we collect, in part or whole, the Award and/or acquire and develop a mineral project which results in positive results from operations.

Historically we have financed our operations through the issuance of common stock, other equity securities and debt. Funds necessary for on-going corporate activities to pursue the collection of the Award, future investments and/or transactions if any, cannot be precisely determined at this time and are subject to available cash, proceeds related to the sale of remaining Brisas Project equipment, future financings and cash received from the collection of the Award, if any.  

We currently employ eight individuals. Our Class A common shares are listed for trading on the TSX Venture Exchange (the "TSXV") and the OTC under the symbol "GRZ.V" and "GDRZF", respectively.

Our registered office is located at the office of Norton Rose Fulbright Canada LLP, 400 3rd Avenue SW, Suite 3700, Calgary, Alberta T2P 4H2, Canada. Telephone and fax numbers for our registered agent are 403.267.8222 and 403.264.5973, respectively. Our administrative office is located at 926 West Sprague Avenue, Suite 200, Spokane, WA  99201, U.S.A. and our telephone and fax numbers are 509.623.1500 and 509.623.1634, respectively.

Financial Reporting

We maintain our accounts in U.S. dollars and prepare our financial statements in accordance with accounting principles generally accepted in the United States. Our audited consolidated financial statements as at December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015 are available for review under our profiles at www.sedar.com and www.sec.gov. All information in this Annual Information Form is as of April 28, 2017, unless otherwise noted.

Exhibit 99.1   Annual Information Form - Page 6

 


 

Currency

Unless otherwise indicated, all references to "$", “U.S. $” or "U.S. dollars" in this Annual Information Form refer to U.S. dollars and references to "Cdn$" or "Canadian dollars" refer to Canadian dollars.  The 12 month average rate of exchange for one Canadian dollar, expressed in U.S. dollars, for each of the last two calendar years equaled 0.7544 and 0.7820, respectively, and the exchange rate at the end of each such period equaled 0.7448 and 0.7226, respectively.

Cautionary Statement Regarding Forward-Looking Statements and Information

The information presented or incorporated by reference in this report contains both historical information and "forward-looking statements" (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) or "forward looking information" (within the meaning of applicable Canadian securities laws) (collectively referred to herein as "forward looking statements") that may state our intentions, hopes, beliefs, expectations or predictions for the future.

Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies that may cause our actual financial results, performance or achievements to be materially different from those expressed or implied herein and many of which are outside our control.

Forward-looking statements involve risks and uncertainties, as well as assumptions, including those set out herein, that may never materialize, prove incorrect or materialize other than as currently contemplated which could cause our results to differ materially from those expressed or implied by such forward-looking statements.  The words "believe," "anticipate," "expect," "intend," "estimate," "plan," "may," "could" and other similar expressions that are predictions of or indicate future events and future trends, which do not relate to historical matters, identify forward-looking statements.  Any such forward-looking statements are not intended to provide any assurances as to future results.

Numerous factors could cause actual results to differ materially from those described in the forward-looking statements, including, without limitation:

·         delay or failure by Venezuela to make payments or otherwise honor its commitments under the Settlement Agreement, including with respect to the sale of the Mining Data;

·         the ability of the Company and Venezuela to (i) successfully overcome any legal, regulatory or technical obstacles to operate the Mixed Company and develop the Brisas Cristinas Project (as herein defined), (ii) obtain any remaining governmental approvals and (iii) obtain financing to fund the capital costs of the Brisas Cristinas Project;

·         risks associated with exploration, delineation of adequate resources and reserves, regulatory and permitting obstacles and other risks normally incident to the exploration, development and operation of mining properties including our ability to achieve revenue producing operations in the future;

·         local risks associated with the concentration of our future operations and assets in Venezuela, including operational, security, regulatory, political and economic risks;

·         our ability to resume our efforts to enforce and collect the Award, including the associated costs of such enforcement and collection effort and the timing and success of that effort, if Venezuela fails to make payments under the Settlement Agreement, it is terminated and further efforts to consummate the Settlement Agreement are abandoned;

·         pending the receipt of payments under the Settlement Agreement or otherwise, our continued ability to service or restructure our outstanding notes or other obligations as they come due and access future additional funding, when required, for ongoing liquidity and capital resources;

·         shareholder dilution resulting from future restructuring, refinancing and/or conversion of our outstanding notes or from the sale of additional equity, if required;

·         value realized from the disposition of the remaining Brisas Project related assets, if any;

·         our prospects in general for the identification, exploration and development of additional mining projects;

·         risks associated with the abilities and continued participation of key employees; and

Exhibit 99.1   Annual Information Form - Page 7

 


 

·         Changes in U.S. and/or Canadian tax laws to which we are subject.

This list is not exhaustive of the factors that may affect any of our forward-looking statements.  See the section entitled "Risk Factors" in our Management's Discussion and Analysis ("MD&A") for the fiscal year ended December 31, 2016 which is incorporated by reference herein. The MD&A has been filed on SEDAR and can be viewed at www.sedar.com.

Investors are cautioned not to put undue reliance on forward-looking statements, and investors should not infer that there has been no change in our affairs since the date of this report that would warrant any modification of any forward-looking statement made in this document, other documents periodically filed with the SEC or other securities regulators or presented on the Company’s website.  Forward-looking statements speak only as of the date made.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this notice.  We disclaim any intent or obligation to update publicly or otherwise revise any forward-looking statements or the foregoing list of assumptions or factors, whether as a result of new information, future events or otherwise, subject to our disclosure obligations under applicable U.S. and Canadian securities regulations.  Investors are urged to read the Company’s filings with U.S. and Canadian securities regulatory agencies, which can be viewed online at www.sec.gov and www.sedar.com, respectively.

Corporate Structure

We are domiciled in Alberta, Canada and conduct our business primarily through our wholly-owned subsidiaries.  The following table lists the names of our significant subsidiaries, our ownership in each subsidiary and each subsidiary's jurisdiction of incorporation or organization.

Subsidiary

Ownership

Domicile

Gold Reserve Corporation

100%

Montana USA

GR Mining (Barbados) Inc.

100%

Barbados

GR Engineering (Barbados) Inc.

100%

Barbados

In September 2016, together with Venezuela, we established Siembra Minera of which we own 45%, to develop the Brisas Cristinas Project. We also have several dormant subsidiaries domiciled in Venezuela, Barbados and Canada which were previously formed to hold our interest in our foreign subsidiaries or for future transactions.

 

GENERAL Development and description of the BUSINESS

Brisas Award

SETTLEMENT AGREEMENT

In February 2016, we signed the MOU with Venezuela represented by the Office of the Attorney General and the Ministry of Popular Power of Oil and Mining that contemplated settlement, including payment and resolution, of the Award granted in our favor by ICSID in respect of the Brisas Project and the transfer of the Mining Data. In April 2016, in the spirit of providing continuity to the discussions begun in February, the parties agreed to extend the MOU to allow for further efforts to agree on a settlement.

At the urging of the board of directors, management had made numerous multi-weeks trips to Venezuela since late 2015 to meet face to face with the President of Venezuela, Minister of Mines, Attorney General, Central Bank President, and many other key administration officials and their staff to ensure that a settlement agreement with Venezuela was obtained.

In July 2016, we executed the Settlement Agreement with Venezuela which contemplated payment of the Award including accrued interest in the amount of approximately $770 million in respect of the Brisas Project, acquisition of our Mining Data by Venezuela for $240 million and, included, among other terms:

·         Payment of the Award in respect of the Brisas Project of approximately $770 million, including accrued interest up to February 24, 2016, in two installments, $600 million due on or before October 31, 2016 and the remaining approximately $170 million on or before December 31, 2016. The Company agreed to temporarily suspend the legal enforcement of the Award until final payment is made by Venezuela, at which time we will permanently cease all legal activities related to the collection of the Award.

·         The acquisition of our Mining Data by Venezuela for $240 million, payable in four quarterly installments of $50 million beginning October 31, 2016, with a fifth and final installment of $40 million due on or before October 31, 2017. After the final payment, the Mining Data will be transferred to the Venezuelan National Mining Database.

Exhibit 99.1   Annual Information Form - Page 8

 


 

·         Venezuela agreed to use the proceeds from any financing it closes after the execution of the Settlement agreement to pay us the amounts owed under the Settlement Agreement in preference to any other creditor.

·         Termination of the Settlement Agreement by written notice by us, without requiring any decision from any judicial authority if the two installments with respect to the payment of the Award are not received within the periods provided in the Settlement Agreement.

In early November 2016, and again in early December 2016, the parties executed addendums to the Settlement Agreement whereby the parties agreed to revise the payment schedule under which Venezuela would make payments related to the Award and Mining Data as follows: $300 million on or before December 15, 2016; $469.7 million on or before January 3, 2017; $50 million on or before January 31, 2017; $100 million on or before February 28, 2017 and $90 million on or before June 30, 2017. The payments for the Award and Mining Data continue to be contingent upon Venezuela obtaining the necessary financing, which has not occurred and, as a result, as of the date of this report no payments have been made by Venezuela. At the passing of the last agreed upon payment date, the board of directors chose to not formally terminate the Settlement Agreement as a result of the delay in the initial agreed upon payment(s), but instead instructed management to continue all efforts to work with Venezuela to complete the terms of the Settlement Agreement. Management has recently proposed and Venezuela is currently considering a third addendum to the Settlement Agreement, whereby the parties would agree, among other things, to revise the previously proposed payment schedule.

ENFORCEMENT AND COLLECTION EFFORTS

In October 2009, we initiated a claim (the "Brisas Arbitration") under the Additional Facility Rules of the ICSID of the World Bank to obtain compensation for the losses caused by the actions of Venezuela that terminated the Brisas Project in violation of the terms of the Treaty between the Government of Canada and the Government of Venezuela for the Promotion and Protection of Investments (the "Canada-Venezuela BIT"). (Gold Reserve Inc. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/09/1)).

In September 2014, the ICSID Tribunal unanimously awarded us the Award totaling (i) $713 million in damages, plus (ii) pre-award interest from April 2008 through the date of the Award based on the U.S. Government Treasury Bill Rate, compounded annually totaling, as of the date of the Award, approximately $22.3 million and (iii) $5 million for legal costs and expenses, for a total, as of September 22, 2014, of $740.3 million. The Award (less legal costs and expenses) accrues post-award interest at a rate of LIBOR plus 2%, compounded annually for a total estimated Award as of the date of the Settlement Agreement of $770 million.

Subsequent to the issuance of the Award, both parties filed requests for the ICSID Tribunal to correct what each party identified as "clerical, arithmetical or similar errors" in the Award as is permitted by the rules of ICSID’s Additional Facility. In December 2014, the Tribunal denied both parties’ requests for correction and reaffirmed the Award originally rendered in our favor on September 22, 2014. This proceeding marked the end of the Tribunal’s jurisdiction with respect to the Award.

Although the process of getting the Award recognized and enforced is different in each jurisdiction, the process in general is-we file a petition or application to confirm the Award with the competent court; Venezuela has the right to oppose such petition for confirmation or recognition; thereafter there are a number of filings made by both parties and in some cases hearings before the court.  If the court subsequently confirms the enforcement of the Award then the court will issue a judgment against Venezuela. Thereafter we will begin the process of executing the judgment by identifying and attaching specific property owned by Venezuela that is not protected by sovereign immunity.

Legal Activities in France

The Award was issued by a Tribunal constituted pursuant to the arbitration rules of ICSID’s Additional Facility and, by agreement of the parties the seat of the Tribunal was in Paris.  As a consequence, the Award is subject to review by the French courts.

In October 2014, we filed an application before the Paris Court of Appeal (the "Paris Court") to obtain an Order of exequatur for the recognition of the Award in France. Venezuela opposed our application and requested a stay of execution pending the determination of its application for annulment of the Award, discussed below. On January 29, 2015, the Paris Court granted our application for exequatur and dismissed Venezuela’s request to stay the execution of the Award pending the outcome of its application to annul the Award. Since Venezuela was denied its motion to stay the execution of the Award, the exequatur or recognition of our Award granted on January 29, 2015 remains in full force and effect.

Exhibit 99.1   Annual Information Form - Page 9

 


 

In late October 2014 and in May 2015, Venezuela filed applications before the Paris Court, declaring its intent to have the Award and the December 15th decision (described above) annulled or set aside. At that time, we expected a ruling on Venezuela’s applications sometime in May 2016. As a result of the subsequent temporary suspension of the legal enforcement of the Award pursuant to the Settlement Agreement, the Paris Court did not make a ruling until February 2017.

On February 7, 2017, the Paris Court rejected all of Venezuela’s annulment arguments and issued a judgment dismissing the applications filed by Venezuela pending before the French courts in relation to the Award. In addition to the Award remaining enforceable in France, the Paris Court ordered Venezuela to pay an amount of €150,000 for our legal fees and costs. Venezuela can consider appealing the judgment before the French Cour de cassation, which is the court of final resort in the French judicial system. Regardless of whether Venezuela files an appeal, the exequatur remains in full force and effect.

Legal Activities in the District of Columbia – US District Court and US Court of Appeals

In November 2014, we filed in the U.S. District Court for the District of Columbia (the "district court") a petition to confirm the Award. In June 2015, Venezuela filed a motion to dismiss and in the alternative, Venezuela asked for a stay of enforcement of the Award pending the annulment determinations by the Paris Court. In November 2015, the district court entered an Order denying Venezuela’s motions, confirming the Award, and entering judgment for us against Venezuela for the Award, pre-award interest and legal fees totaling $740,331,576, plus post-award interest on the total amount awarded, exclusive of legal fees, at a rate of LIBOR plus 2%, compounded annually, from September 22, 2014, until payment in full (collectively, the "Judgment"). 

In December 2015, we filed a motion for an Order by the district court under 28 U.S.C. § 1610(c) determining that a "reasonable period of time" had elapsed since entry of the Judgment and in January 2016, the district court granted the motion, thus allowing us to pursue further efforts to enforce and collect on the Judgment. Venezuela filed a notice of appeal of the Judgment to the United States Court of Appeals for the District of Columbia Circuit. Filing of the appeal did not automatically stay enforcement of the Judgment.

Thereafter, in January 2016, we filed a motion for an Order by the district court permitting registration of the Judgment in federal district courts outside the District of Columbia and Venezuela filed a motion for a stay of execution of the Judgment pending appeal without an appeal bond, which was later denied by the district court.  In same month, we served Venezuela with requests for written discovery (interrogatories and requests for production of documents) in aid of enforcement of the Judgment.  The original date for Venezuela to respond to the discovery requests was in February 2016.

In February 2016, the parties filed a stipulation with the district court stating that Venezuela consented to the relief requested in our motion for an Order permitting registration of the Judgment outside the District of Columbia, that we would not so register the Judgment prior to March 2016, and that Venezuela’s due date to respond to our January 2016 discovery requests would be extended to March 2016.  Shortly thereafter, the district court entered an Order enforcing the terms of this stipulation.

In March 2016, the parties agreed that Venezuela’s due date to respond to our January 2016 discovery requests would be further extended to April 2016, and that we would not register the Judgment in other federal district courts prior to April 2016. 

In May 2016, the appellate court denied Venezuela's motion for a stay of execution pending appeal, the parties agreed to extend the above-referenced April 2016 deadlines to May 22, 2016, and the appellate court issued a schedule for the appeal.  Thereafter, as a result of the Settlement Agreement, the parties have entered into a series of agreed or unopposed extensions of the appeal briefing schedule, which have been approved by the appellate court.  Most recently, in March 2017, the court approved an extension that schedules the briefing to occur between May 2017 and July 2017.

Exhibit 99.1   Annual Information Form - Page 10

 


 

Legal Activities in Luxembourg

In October 2014, we were granted an exequatur for the recognition and execution of the Award by the Tribunal d’arrondissement de et à Luxembourg allowing us to proceed with conservatory or attachment actions against Venezuela’s assets in the Grand Duchy of Luxembourg. In January 2015, Venezuela filed a notice of appeal of this decision in the Cour d’appel de Luxembourg (the "Luxembourg Court of Appeal") asking for a stay of execution pending the determination of its application to annul the Award before the Paris Court of Appeal. In June 2015, the Luxembourg Court of Appeal stayed Venezuela's appeal of the October 28, 2014 order granting the exequatur (recognition and execution) of the Award in Luxembourg, on the basis that the Paris Court of Appeal was scheduled to hear Venezuela’s application to annul within a few months. The exequatur remains in full effect allowing us to proceed with seizure filings if and when we deem it appropriate. In light of the February 2017 ruling by the Paris Court, Venezuela must inform the Luxembourg Court of Appeal whether it wants to maintain the suspension of its appeal.  The exequatur continues to allow for seizures in the form of conservatory actions to be taken while the appeal is pending.

Legal Activities in England

In May 2015, we filed in the High Court (Queen Bench’s Division - Commercial Court) an application for leave to enforce the Award pursuant to s. 101(2) of the Arbitration Act. In the English courts, such application is made by way of an Arbitration Claim Form (the "Claim"). In that same month, the Court granted leave to enforce the Award as a judgment or Order of the court, and entered judgment in the amount of the Award (the "Order and Judgment").  In September 2015 (prior to formal service), Venezuela made an application to the Court for declarations that the Court had no jurisdiction over the Claim, and for Orders that (i) the Claim be set aside, (ii) service of the Claim (if any) be dismissed and (iii) the Order and Judgment be set aside (the "Jurisdiction Application"). 

The hearing for the Jurisdiction Application took place in London in January 2016 and judgment was handed down the first of February 2016.  The Court dismissed the Jurisdiction Application and ordered that, among other things, Venezuela did not have sovereign immunity and we followed the correct procedure in relation to the Claim. On February 23, 2016, Venezuela filed an Appeal with the Court of Appeal.  Venezuela originally requested permission to appeal on an additional ground, which was denied by the Jurisdiction Application judge and the Court of Appeal at first instance, however the Court of Appeal has granted Venezuela an oral hearing in respect of this request.  The permission to appeal hearing is listed for October 11, 2017.  The Appeal itself is listed for October 16 to 18, 2017, with October 19, 2017 held in reserve depending on the outcome of Venezuela’s permission request (referred to above).

The parties have agreed by consent to extend the time for Venezuela to make any further application to set aside the Order and Judgment until 14 days following resolution of the Appeal of the Jurisdiction Application by Venezuela.  We intend to continue to take all available steps to ensure that Appeal of the Jurisdiction Application is resolved as quickly as possible, and that any further application that Venezuela may make will be dealt with expeditiously, so that enforcement can proceed without further delay.  Enforcement cannot proceed while the Appeal is pending.

Obligations Due Upon Collection of the Award and Sale of Brisas Technical Mining Data

We have outstanding Contingent Value Rights ("CVRs"), which are obligations arising from the disposition of a portion of the rights to future proceeds of the Award against Venezuela and/or the sale of the Brisas Project technical mining data (the "Mining Data").

The CVRs entitle each holder that participated in the note restructuring completed in 2012 to receive, net of certain deductions (including income tax calculation and the payment of our then current obligations), a pro rata portion of a maximum aggregate amount of 5.468% of the proceeds actually received by us with respect to the Award or disposition of the Mining Data. The proceeds associated with the Award or sale of the Mining Data, if any, could be cash, commodities, bonds, shares and/or any other consideration we receive and if such proceeds are other than cash, the fair market value of such non-cash proceeds, net of any required deductions (e.g., for taxes) will be subject to the CVRs and will become our obligation only as the Award is collected and/or the Mining Data is sold.

The Board of Directors (the "Board") approved a Bonus Pool Plan (the "Bonus Plan") in May 2012, which is intended to compensate the participants, including executive officers, employees, directors and consultants, for their past and future contributions including their past efforts related to the development of the Brisas Project, execution of the Brisas Arbitration and the collection of an award and/or sale of the Mining Data. The bonus pool under the Bonus Plan is comprised of the gross proceeds collected or the fair value of any consideration realized (calculated  on substantially the same terms as the CVR) related to such transactions less applicable taxes multiplied by 1% of the first $200 million and 5% thereafter. The Bonus Plan is administered by a committee of independent directors who selected the individual participants in the Bonus Plan and fixed the relative percentage of the total pool to be distributed to each participant. Participation in the Bonus Plan by existing participants is fully vested, subject to voluntary termination of employment or termination for cause.

Exhibit 99.1   Annual Information Form - Page 11

 


 
 

We also maintain the Gold Reserve Director and Employee Retention Plan (the "Retention Plan") (See Note 10 to the audited consolidated financial statements).  Each Unit (the "Retention Units") granted entitles such participant to receive a cash payment equal to the fair market value of one Class A: Share (a) on the date the Unit was granted or (b) on the date any such participant becomes entitled to payment, whichever is greater. Units previously granted under the plan become fully vested upon: (1) collection of proceeds from the Award and/or sale of the Mining Data totaling at least $200 million and we agree to distribute a substantial majority of the proceeds to our shareholders or, (2) the event of a change of control. A “Change of Control”, as it relates to the Retention Plan, means one or more of the following: the acquisition by any individual, entity or group, of beneficial ownership of the Company of 25 percent of the voting power of the outstanding Common Shares; a change in the composition of the Board that causes less than a majority of the current directors of the Board to be members of the incoming board; solicitation of proxies or consents by or on behalf of a person other than the board; reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company; liquidation or dissolution of the Company; or any other event the Board reasonably determines constitutes a Change of Control.

As of December 31, 2016 an aggregate of 1,457,500 unvested units have been granted to directors and executive officers of the Company and 315,000 units have been granted to other employees. We currently do not accrue a liability for the Bonus Plan or Retention Plan as events required for payment under the Plans have not yet occurred. The minimum value of these units, based on the grant date value of the Class A common shares, was approximately $7.8 million. An estimated $1.8 million of contingent legal fees will also become due upon the collection of the Award.

Upon payment of the Award or receipt of proceeds from the disposition of the Mining Data, subject to certain limitations, we are obligated to make an offer to existing holders to redeem the 2018 Notes (as defined herein) at a price equal to 120% of the principal amount of 2018 Notes then outstanding. See "Description of Capital Structure".

Our Intent to Distribute Collection of the Award or Sale of Mining Data to Shareholders

Subject to applicable regulatory requirements regarding capital and reserves for operating expenses, accounts payable and income taxes, and any obligations arising as a result of the collection of the Award or sale of the Mining Data including payments pursuant to the terms of the 2018 Convertible Notes (as defined herein) (if not otherwise converted), Interest Notes (as defined herein), CVRs, Bonus Plan and Retention Plan or undertakings made to a court of law, our current plans are to distribute to our shareholders, in the most cost efficient manner, a substantial majority of any net proceeds.

Convertible Notes Restructuring:

During the fourth quarter of 2015, we issued approximately $13.4 million of new 2018 Convertible Notes  (the “New Notes”) and modified, amended and extended the maturity date of approximately $43.7 million of our previously outstanding convertible notes and interest notes from previous financings and restructurings in 2007, 2012 and 2014 (the “Modified Notes”). The newly issued 2018 Convertible Notes comprised of approximately $12.3 million aggregate principal amount of 2018 Convertible Notes, issued with an original issue discount of 2.5% of the aggregate principal amount, and approximately $1.1 million aggregate principal amount of additional 2018 Convertible Notes, representing 2.5% of the extended principal and interest amount due to the note holders as a restructuring fee.  

Exhibit 99.1   Annual Information Form - Page 12

 


 

Properties

Brisas Cristinas Project

Empresa Mixta Ecosocialista Siembra Minera, S.A.

In August 2016, we executed an agreement with Venezuela for the formation of a jointly owned Mixed Company to develop and operate the Brisas Cristinas Project. On September 29, 2016 a Presidential Decree was issued authorizing the formation of Siembra Minera.

In anticipation of the Mixed Company Agreement, GR Mining and GR Engineering were formed in early 2016. GR Mining was formed to hold our interest in Siembra Minera and provide for the management of the development and operation of the Brisas Cristinas Project and GR Engineering was formed to provide technical services to Siembra Minera. Siembra Minera is owned 55% by Venezuela through Corporacion Venezolana De Mineria, S.A. (a Venezuelan government corporation) and 45% by GR Mining.

The completion of the Mixed Company Agreement was based upon extensive long-term negotiations with Venezuelan authorities, related to significant business terms, including economic conditions and various decrees and resolutions impacting the entity envisioned to develop the Brisas Cristinas Project. Concurrent with those activities, we developed the Business Plan for the Brisas Cristinas Project with broad input from our engineering consultant. Thereafter we met with and reviewed the Business Plan with PDVSA Development. These discussions were central to our joint agreement to revise royalty and income tax rates related to the Project resulting in parties concluding negotiations and coming to an agreement. Thereafter, from April to July 2016, we negotiated the various terms of the articles of incorporation and by-laws of Siembra Minera. On October 4th, Siembra Minera was duly incorporated before the Register Office in Puerto Ordaz, Bolivar state and published its incorporation in Official Gazzete No. 41.002 of that same date.

On October 31, 2016, the Ministry of Mines issued Resolution 000030 which was published in the Official Gazzette No. 41.022 on November 2, 2016, assigning the area (approximately 18,950 hectares) including the Brisas Cristinas area to Siembra Minera. On March 27, 2017, Presidential Decrees were issued transferring all of the gold and strategic minerals (including copper and silver) rights to Siembra Minera. 

These Decrees also authorized a term of twenty years plus extensions, a NSR royalty of five percent for the first 10 years of production and six percent for the following 10 years, a special advantage to Venezuela of three percent of gross sales and authorization to export and sell concentrate and doré containing gold, copper, silver and other strategic minerals outside of Venezuela and maintain foreign currency balances associated with sales proceeds.

The significant negotiated terms related to the formation of Siembra Minera and its development and operation of the Brisas Cristinas Project include:

§  Siembra Minera is beneficially owned 55% by Corporacion Venezolana de Mineria, S.A. and 45% by GR Mining;

§  Siembra Minera holds the rights to the gold, copper, silver and other strategic minerals contained within a 18,950 hectare area located in the Km 88 gold mining district of southeast Bolivar State which includes the Brisas Cristinas Project;

§  GR Engineering, under a Technical Services Agreement, will provide engineering, procurement and construction services to Siembra Minera for a fee of 5% over all costs of construction and development and, thereafter, for a fee of 5% over operating costs during operations;

§  Presidential Decrees, within the legal framework of the "Orinoco Mining Arc" (created on February 24, 2016 under Presidential Decree No. 2.248 as an area for national strategic development Official Gazzette No. 40.855), will or have been issued to provide for tax and fiscal incentives for mixed companies operating in that area that include exemption from value added tax, stamp tax, municipal taxes and any taxes arising from the contribution of tangible or intangible assets, if any, to the mixed companies by the parties and the same cost of electricity, diesel and gasoline as that incurred by the government or related entities;

§  Gold price participation, in accordance with an agreed upon formula resulting in specified respective percentages based on the sales price of gold per ounce. For sales up to $1,600 per ounce, net profits will be allocated 55% to Venezuela and 45% to us. For sales greater than $1,600 per ounce, the incremental amount will be allocated 70% to Venezuela and 30% to us. For example, with sales at $1,600 and $3,500 per ounce, net profits will be allocated 55.0%  ̶ 45.0% and 60.5%  ̶ 39.5%, respectively;

Exhibit 99.1   Annual Information Form - Page 13

 


 

§  Net smelter return royalty (“NSR”) to Venezuela on the sale of gold, copper, silver and any other strategic minerals of 5% for the first ten years of commercial production, 6% for the next ten years;

§  Income tax rate of 14% for years one to five, 19% for years 6 to 10, 24% for years 11 to 15, 29% for years 16 to 20 and 34% thereafter;

§  The parties agreed to work together to complete financing(s) to jointly fund the contemplated $2.1 billion anticipated capital costs of the Brisas Cristinas project on behalf of Siembra Minera, which is expected to be comprised of a combination of project financing , development agencies, equipment manufacturer, offtake and smelter financings. In order to facilitate the early startup of the pre-operation and construction activities, Venezuela agreed to advance $110.2 million to Siembra Minera, which will be repaid from the financing proceeds;

§  Funds associated with future capital cost financings will be held in offshore US dollar accounts and dividends and profit distributions, if any, will be directly paid to the shareholders;

§  All funds will be converted into local currency at the most favorable exchange rate offered by Venezuela to other entities to pay, as required, Venezuela income taxes and annual operating and capital costs denominated in Bolivars for the Brisas Cristinas Project. Venezuela agrees to use its best efforts to grant to Siembra Minera similar terms that would apply to the Brisas Cristinas Project in the event Venezuela enters into an agreement with a third party for the incorporation of a mixed company to perform similar activities with terms and conditions that are more favorable than the above tax and fiscal incentives;

§  Venezuela will indemnify us and our affiliates against any future legal actions associated with the Brisas Cristinas Project; and

§  The board of directors is comprised of seven individuals, of which four are appointed by Venezuela and three by us.

Exhibit 99.1   Annual Information Form - Page 14

 


 

Brisas Cristinas Location

The Brisas Cristinas Project is located in the Guyana region, in the Kilometer (Km) 88 gold mining district of Bolivar State in southeast Venezuela. The name Kilometer 88 for the district came from the area being located near kilometer 88 marker of the road linking El Dorado (Km 0) with the Brazilian border (Pan American Highway or Highway 10). Las Claritas is the closest town to the property. The closest nearby large city is Puerto Ordaz situated on the Orinoco River near its confluence with the Caroní River. Puerto Ordaz is home to most of the major industrial facilities like the aluminum smelters and port facilities accessible to ocean-going vessels from the Atlantic Ocean via the Orinoco River, a distance of about 200 kilometers.

Exhibit 99.1   Annual Information Form - Page 15

 


 

 

Exhibit 99.1   Annual Information Form - Page 16

 


 

Brisas Cristinas History

Gold was first discovered in the Brisas Cristinas region in 1920. Gold mining at the site was initiated in the 1930's and continued sporadically on a minor scale until the early 1980’s when a gold rush occurred. During this period it has been reported that several thousand small miners worked alluvial and saprolite-hosted gold deposits using hydraulic mining techniques. This material was processed in sluices and small hammer mills. Since the early 1960’s the mining ministry granted gold mining concessions in the Guayana region, including the 1964 Las Cristinas and the 1988 Brisas concessions with small scale mining activities continuing under a legal framework.

Also, in the late 1980’s the mining ministry assigned to CVG, a state owned development corporation for the Guayana Region, the rights to grant gold mining operating contracts in the whole Guayana region, excluding the areas already under concession. Since Las Cristinas concessions had by then elapsed, CVG cleared the area of small miners and in 1991 established a joint venture with Placer Dome Inc. ("Placer") named Minera Las Cristinas (MINCA), for the development of the property. At approximately the same time, in 1992 we acquired the Brisas concession initiating the exploration and development of the Brisas property. The amount of gold recovered over the years is unknown and much of the Brisas Cristinas Project area now held by Siembra Minera is now void of any substantial vegetation and covered with tailings.

Las Cristinas

Based on publicly available information, Placer conducted essentially all of the modern exploration on Cristinas during their tenure on the property from 1991 to 2001. Placer completed line cutting, mapping, rock and soil sampling, geophysics, and drilling of 1,174 drill holes for a total of 158,738 meters of drilling, resulting in a significant presence of gold and copper in the deposit. Placer’s drilling was conducted in essentially three phases – shallow drilling to test saprolite, bedrock drilling and infill drilling in saprolite, and finally infill drilling of the pit area. Placer completed a comprehensive feasibility study on the project in 1996 that was updated in 1998.

After extensive exploration, Placer announced commencement of construction of the project in August 1997. However, in January 1998, Placer announced it had decided to suspend construction. Construction resumed once again in May 1999 but was again suspended in July 1999 due to uncertainties with respect to gold prices and legal security of title. Up until that time, Placer had reportedly spent US$168 million on the project.

CVG took possession of the property in 2001 and in 2002 signed a mine operating agreement with Crystallex International ("Crystallex") to explore, mine, and produce gold at Las Cristinas. Crystallex reportedly drilled 90 holes for a total of 28,427 meters from 2003 through early 2007. Crystallex’s 2003 drilling program twinned selected Placer holes to independently evaluate Placer’s drill-hole data and assay base. Crystallex’s subsequent drilling, conducted from 2004 through 2007, focused on infill drilling, drilling down-dip extensions of the stratiform mineralized zone, and exploring strike extensions of the deposit.

Brisas

The Brisas concession was acquired by us in August 1992 with the acquisition of Compañia Aurifera Brisas del Cuyuni C.A. Prior to 1992, no known drill holes existed on the Brisas site. Initial work included surface mapping, regional geophysical surveys, and geochemical sampling. Several anomalies were identified on the property and drilling and assaying began in 1993. The presence of a large strata bound gold-copper mineralization was discovered in both alluvial and hard rock material early in the drilling program. Additional work followed with petrology, mineral studies, density tests, metallurgical sample collection, and laboratory test work.

We commenced initial exploration drilling in 1993 utilizing both auger and core drilling methods. A majority of the exploration and development drilling took place in 1996 and 1997. From 1996 on, all exploration drilling was completed utilizing diamond drill core rigs. Additional exploration drilling was completed in 1999, 2003, 2004, and 2005. As of 2005, 802 exploration holes had been drilled of which 731 were diamond core holes.  This represented 186,094 meters of exploration core drilling, and 189,985 total meters of exploration drilling, core and auger. Subsequent to 2005, 76 additional holes were drilled on the Brisas property for geotechnical and other studies.

We completed and filed in August 2005 a Venezuelan Environmental and Social Impact Assessment (V-ESIA) for the Ministry of Environment and Natural Resources ("MARN"), with the assistance of a number of independent consultants. At the time the V-EISA satisfied Venezuelan requirements to obtain an “Administrative Authorization to Affect Natural Resources for Construction of Infrastructure and Exploitation of Alluvial and Vein Deposits of Gold and Copper,” which was granted by MARN. In addition, an International Environmental and Social Impact Assessment (I-ESIA) meeting World Bank Standards, the Equator Principles and any requirements desired by financing institutions was completed in draft form during the subsequent months.

Exhibit 99.1   Annual Information Form - Page 17

 


 

Detailed engineering, including construction drawings, site layout, manpower requirements, construction planning, and many other functions required in a project of this magnitude were substantially advanced through 2008 by SNC Lavalin and was approximately 85% complete by mid-2008. This was the final step in the engineering process for mine development work and is expected to be an important resource for the development of the Brisas Cristinas project.

Brisas Cristinas Combined

Brisas and Cristinas properties are immediately adjacent to each other. Historical studies for both projects show their respective pit designs coming within a few hundred meters of each other and mineralization continuing in-line along strike over a distance of 5 to 6 kilometers covering both areas. The void between the projects, the Potaso area, had never been significantly drilled due to a large man-made lake that was a result of historical small miner activity. However, based on historical small miner activities in the immediate area and the alignment of strike and dip of mineralization being almost identical on both properties, we believed that it was highly likely that the mineralization continued between the pits.

The concept of combining the Brisas and Cristinas properties was first evaluated in the year 2000 and as part of that effort we studied additional economic aspects of developing and exploiting the mineralization on the properties. It was determined that not only did the adjoining properties share one large, continuous mineral deposit, but developing and exploiting this mineralization in a combined project would have less impact on the environment than two separate projects, and as a result would create efficiencies and economies of scale that would enhance the combined project economics. The concept was developed utilizing Brisas information combined with available Cristinas data from public records and permit documents.

In 2001 INGEOMIN, the Venezuelan government's Geological & Mining Institute prepared a comprehensive report evaluating the environmental, social and economic impacts of the combined project being proposed by us and strongly recommended its implementation. However, Venezuela decided to move forward, on a standalone basis, with the Las Cristinas project with Crystallex while we continued our work on the combined project in parallel with our efforts to develop the Brisas Project.

Multiple mineral resource estimates and feasibility studies, that are no longer current, have been completed on each individual property in the past and Siembra Minera plans to complete a new resource estimate on the combined properties in the future  with a view to preparing a Preliminary Economic Assessment ("PEA") in accordance with National Instrument 43-101- Standards of Disclosure for Mineral Projects ("NI 43-101").

We believe that based on previous studies the Brisas Cristinas Project has the potential to be a large open pit mining project. Our base plan is to combine the Brisas and Cristinas properties into one project and utilize the 2008 Brisas design and layout as an initial blue print. This concept eliminates the duplication of infrastructure facilities and staff from the previously independent project plans. It reduces the project footprint or disturbed ground by 30 to 40% of the area from what was anticipated for the independently developed projects. As a result, it allows the down-dip expansion of the pit area for increased recovery of addition potential ore resources while reducing related environmental impacts significantly. The Brisas site would be the starting point for the project due to its advanced stage of design, environmental permitting and readiness for construction activity.

Brisas Cristinas Project Completed Activities

Siembra Minera held its first meeting of shareholders and its board of directors in October 2016 where the appointment of the directors was confirmed and key strategic issues associated with the startup of the initial activities of Siembra Minera were discussed. A second board meeting was held in early 2017, in the office of the Ministry of Mines, with the presence of the Directors, Legal Consultant, and Secretary of Siembra Minera, and again the discussions covered key strategic issues.

Subsequent to the October board meeting, we traveled to Germany with Venezuelan representatives to meet with a German smelter company resulting in a signed letter of intent through which the smelter expressed its interest in a future service agreement including possible financing conditions and offering the plant's available capacity to process 60 to 100% of the copper concentrate for 10 to 15 years.

The primary activities of Siembra Minera since its formation has included:

·         Established bank accounts in both offshore US$ accounts and Venezuelan Bolivars. External auditors have been identified and formal designation will occur during upcoming board meetings. Certain key employees have been engaged and additional initial interviews completed. Potential office locations in Caracas and Puerto Ordaz have been identified;

·         Initiated discussions whereby the parties are working on a draft EPCM contract between GR Engineering and Siembra Minera;

Exhibit 99.1   Annual Information Form - Page 18

 


 

·         Conducted preliminary meetings with CAMIMPEG, a Venezuelan Army construction company, to provide project information regarding the early works plan which include man-camp and certain access roads;

·         Provided CVG-Tecmin, a state corporation that provides technical services and information with regard to the development of mineral resources, with the project description and related technical information to produce and file the Environmental Questionnaire leading to the granting of the Authorization to Occupy the Territory (AOT);

·         Sponsored several meetings with Mission Piar to initiate surveys and follow up on the activities of small miners groups currently working in certain parts of the 18,950 hectare property. Mission Piar is a Government instituted Mission under the Ministry of Mines in charge of providing assistance and coordination of small mining activities;

·         Held fact finding meetings with the Ministry of Mines and members of the Guayana REDI to provide inputs and assist in the establishment of a General Plan of Security for the Project Area. The security of the project area falls under the responsibility of the Region of Integral Defense Guayana (REDI) lead by General Carlos Augusto Leal Tellería;

·         Initiated efforts to define the Relocation Plan with the help of Venezuelan officials and REDI and supported by a census that is underway by Mission Piar. Several meetings have taken place between the Ministry of Mines and small miners as part of the relocation plan;

·         Initiated development of a Small Miner Project with input from entities such as Ministry of Mines, REDI, Mission Piar and others to provide alternatives to some of the small miners that currently operate in the project area. This project is intimately linked to the Relocation Plan and includes an Early Production Plan, training of miners in environmental protection and remediation, and in other disciplines so many of them can be incorporated in the project construction and operation; and

·         Requested a High Definition Multispectral Satellite image of the Project land position and its adjacent area at the end of 2016 which will be used to document existing conditions and as an aid for documenting and census of existing small miner activity. Completion will take several months due to multiple satellite passes to meet cloud cover requirement.

Brisas Cristinas Initial Scope of work

Siembra Minera will focus its initial staffing efforts towards providing the future management group the required organization structure, policies and facilities to support its workforce and expects to employ a project director and a general manager as soon as is possible. Thereafter, additional key staff positions are expected to be filled and the following tasks will be implemented:

·         Identify and lease secure office facilities with reliable access to utilities such as electrical power, telephone and secure high speed internet and source office furniture and IT hardware.

·         Engage professional consultants with very proven success in technical matters, engineering, design, operations experience and international environmental & social standards required to conduct data research, studies, resource estimates, pit design, mine plans, complete engineering & design work, prepare drawings, specifications, procurement documents and other documents for permits and reports.

·         Engage consultants to assist in acquiring Venezuela visas, provide for incoming/outgoing transportation, day to day office work and transportation, living accommodations or housing assistance.

·         Prepare and implement security policies, transportation and housing policies, hire and train security staff, acquire vehicles and equipment. It will be necessary to determine number of security people including those required for rotating shift assignments and number and type of vehicles.

·         Complete initial contractual agreement between GR Engineering and Siembra Minera for EPCM services which will allow for the engagement of consultants and early-works contractors. A more extensive contract document will be completed as significant detail engineering, procurement and construction takes place.

Exhibit 99.1   Annual Information Form - Page 19

 


 

·         Prepare and submit updated permit applications for approval of early-works construction which will include timber clearing, road building and sediment control structures in areas of the access roads, overland conveyor corridor, powerline corridor, process plant, man camp area, rock quarry and tailings dam area. In conjunction with the permit application; we expect to prepare and submit a draft scope of work, design specifications and drawings for construction.

·         Assemble a temporary work facility and temporary housing or man camp for Company employees and consultants associated with the early-works and field data collection required for the International ESIA.

·         Prepare and implement long-term small miner consultation, relocation and education program.

·         Implement public consultation regarding the plans for construction, operations, reclamation, project size & magnitude providing for mitigation of the impact upon the general public and communities surrounding the project area.

·         Prepare a preliminary ESIA document using existing information from the Brisas Project, which would exclude updated field data and the result of the small miner and public consultation, but would allow for the initiation of discussions with institutions for project financing and for preparation of Venezuela environmental permits. A more substantial final ESIA would be completed when the Cristinas field data is collected, combined project engineering and design is substantially complete and the small miner and public consultations with mitigation plans are complete.

·         Initiate the preparation of a Preliminary Economic Assessment NI 43-101 document by an independent engineering company allowing for the public disclosure of resource tonnages, metal grade, annual production and any economic projections and providing support for obtaining international bank or financial institution project financing.

·         Engage an international engineering contractor and initiate detail engineering work which will provide information regarding engineering, design and cost estimates for completion of a feasibility study. This effort will also provide design specification and pricing information that is needed for ordering long lead time equipment. The work would also support public consultations activities, permitting efforts, and completion of an updated NI 43-101 document. The new NI 43-101 will include the feasibility study results and provide a proven and probable reserve estimate for public disclosure and financing.

 

LMS Gold Project

On March 1, 2016, we completed the acquisition of certain wholly-owned mining claims known as the LMS Gold Project (the "Property"), together with certain personal property for $350,000, pursuant to a Purchase and Sale Agreement  with Raven Gold Alaska Inc. ("Raven"), a wholly-owned subsidiary of Corvus Gold Inc. 

Raven retains a royalty interest with respect to (i) "Precious Metals" produced and recovered from the Property equal to 3% of "Net Smelter Returns" on such metals (the "Precious Metals Royalty") and (ii)  "Base Metals" produced and recovered from the Property equal to 1% of  Net Smelter Returns on such metals, provided that we have the option, for a period of 20 years from the date of closing of the acquisition, to buy back a one-third interest (i.e. 1 %) in the Precious Metals Royalty at a price of $4 million. The Property consists of 36 contiguous State of Alaska mining claims covering 61 km² in the Goodpaster Mining District situated approximately 25 km north of Delta Junction and 125 km southeast of Fairbanks, Alaska. 

The Property remains at an early stage of exploration and is the subject of a National Instrument 43-101 Technical Report entitled "Technical Report on the LMS Gold Project, Goodpaster Mining District, Alaska" dated February 19, 2016 prepared for us by Ed Hunter, BSc., P. Geo and Gary H. Giroux, M.A. Sc., P. Eng.

Dividends AND DISTRIBUTIONS

We have not declared or paid any dividends on our Class A common shares since 1984.  We may declare cash dividends or make distributions in the future only if our earnings and capital are sufficient to justify the payment of such dividends or distributions. Regarding the collection of the Award and/or payment for the Mining Data, subject to applicable regulatory requirements regarding capital and reserves for operating expenses, accounts payable and taxes, we expect to distribute, in the most cost efficient manner, a substantial majority of any net proceeds received after fulfillment of our corporate obligations.  

Exhibit 99.1   Annual Information Form - Page 20

 


 

Description of Capital Structure

Class A common shares

We are authorized to issue an unlimited number of Class A common shares without par value of which 89,848,104 Class A common shares were issued and outstanding as at the date hereof. Shareholders are entitled to receive notice of and attend all meetings of shareholders with each Class A common share held entitling the holder to one vote on any resolution to be passed at such shareholder meetings. Shareholders are entitled to dividends if, as and when declared by the Board. Shareholders are entitled upon liquidation, dissolution or winding up of the Company to receive the remaining assets available for distribution to shareholders.

Equity Units

Equity Units were issued in February 1999, when Gold Reserve Corporation became our subsidiary, and we became the successor issuer. Generally, each shareholder of Gold Reserve Corporation received one of our Class A common shares for each common share owned in Gold Reserve Corporation. For tax reasons, certain U.S. holders elected to receive Equity Units in lieu of Class A common shares. An Equity Unit comprised one Class B common share of Gold Reserve Inc. and one Gold Reserve Corporation Class B common share, which were substantially equivalent to a Gold Reserve Inc. Class A common share and was generally immediately convertible into Class A common shares. As of December 31, 2016 and 2015 all Equity Units had been converted to Class A common shares.

Preferred shares

We are authorized, subject to the limitations prescribed by law and our articles of incorporation, from time to time, to issue an unlimited number of serial preferred shares and to determine variations, if any, between any series so established as to all matters, including, but not limited to: the rate of dividend and whether dividends shall be cumulative or non­-cumulative; the voting power of holders of such series; the rights of such series in the event of our dissolution or upon any distribution of our assets; whether the shares of such series shall be convertible; and such other designations, rights, privileges, and relative participating, optional or other special rights, and such restrictions and conditions thereon as are permitted by law. There are no preferred shares issued or outstanding as of the date hereof.

Share Purchase Warrants

We issued 1,750,000 share purchase warrants in 2013 to acquire for a two-year period one-half of one Class A common share (875,000 whole warrants) at a price of $4.00 per share. The share purchase warrants expired on September 20, 2015.

Share Purchase Options

We maintain the 2012 Equity Incentive Plan (the "2012 Plan") which provides for the grant of stock options of up to 8,750,000 of our Class A common shares. As of December 31, 2016, there were 3,357,000 options outstanding and 5,393,000 remaining options available for grant. Grants are made for terms of up to ten years with vesting periods as required by the TSXV and as may be determined by a committee established pursuant to the 2012 Plan, or in certain cases, by the Board.

Convertible Notes and Interest Notes

At December 31, 2016, we had $50.9 million aggregate principal amount of convertible notes outstanding, which are comprised of (i) approximately $49.9 million aggregate principal amount of 11% Senior Secured Convertible Notes due December 31, 2018 (the “2018 Convertible Notes”) and approximately $1.0 million aggregate principal amount of 5.50% Senior Subordinated Convertible Notes due June 15, 2022 (the “2022 Convertible Notes”).  Interest on the 2018 Convertible Notes accrues and is capitalized quarterly and is payable in a new series of 11% Senior Secured Interest Notes due December 31, 2018 (the “Interest Notes” and together with the 2018 Convertible Notes, the “2018 Notes”).  Interest on the Interest Notes is also payable in additional Interest Notes. We had $6.2 million aggregate principal amount of Interest Notes outstanding at December 31, 2016. The 2018 Notes mature on December 31, 2018. (See Note 11 to the audited consolidated financial statements). 

Holders of the 2018 Convertible Notes may convert them into 333.3333 Class A common shares per $1,000 principal amount (which is equivalent to a conversion price of $3.00 per common share), subject to adjustment upon the occurrence of certain events. The Interest Notes are not convertible into Class A common shares or any other security. We paid, in the case of the New Notes, a fee of 2.5% of the principal in the form of an original issue discount, and in the case of the Modified Notes, an extension fee of 2.5% of the extended principal and interest notes in the form of additional 2018 Convertible Notes.  For a more detailed description of the terms of the 2018 Notes, see "Material Contracts". The 2022 Convertible Notes subject to certain conditions can be redeemed, repurchased or converted into our Class A common shares at a conversion price of $7.54 per common share.

Exhibit 99.1   Annual Information Form - Page 21

 


 

Market for Securities

Our Class A common shares are traded in Canada on the TSXV under the symbol "GRZ.V". Our Class A common shares are also traded in the United States on the OTC under the symbol "GDRZF". The Notes are not listed for trading on any exchange. The following table sets forth for the periods indicated the high and low sales prices of our Class A common shares as reported on the TSXV and the OTC during 2016.

 

Cdn $

U.S. $

 

High

Low

Volume

High

Low

Volume

January

3.76

3.06

72,100

2.60

2.19

896,700

February 

6.23

3.35

1,012,500

4.54

2.35

3,238,000

March

8.00

4.95

1,214,000

5.90

3.45

2,252,700

April

6.50

5.52

306,100

5.20

4.24

1,234,400

May

6.49

3.28

599,800

5.05

2.48

3,047,600

June

6.10

4.12

617,400

4.72

3.15

2,511,900

July

5.96

4.94

242,100

4.64

3.60

566,500

August

7.34

5.74

1,989,800

5.54

4.20

2,305,700

September

6.58

5.02

485,800

5.05

3.48

941,600

October

5.99

4.97

298,500

4.58

3.75

253,900

November

6.68

4.50

312,700

4.79

3.40

163,700

December

6.75

4.41

548,600

5.16

3.17

428,100

 

On April 27, 2017, the closing price for our Class A common shares was Cdn $3.66 per share on the TSXV and U.S. $2.69 per share on the OTC. As of the date hereof, there were a total of 89,848,104 Class A common shares issued and outstanding.

PRIOR SALES

On May 17, 2016, we closed a non-brokered private placement with certain arm’s length investors for gross proceeds of $34.3 million (the "Private Placement"). Pursuant to the Private Placement, we issued 8,562,500 Class A common shares at a price of $4.00 per share. No commission or finder’s fee was paid in connection with the Private Placement. The shares were offered pursuant to exemptions from the prospectus requirements of applicable securities legislation and were subject to a hold period in Canada of four months and a day from their date of issuance.

ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER

As of the date hereof, none of our securities were subject to escrow or contractual restrictions on transfer.

Directors and Officers

Our articles provide that the Board shall consist of a minimum of three and a maximum of fifteen directors, with the actual number of directors to be determined from time to time by the Board.  The Board presently consists of six members. Our by-laws provide that each director shall be appointed and/or elected to hold office, until our next annual meeting of shareholders, or until their qualified successors are elected.  All of the current directors’ terms expire on the date of the next annual meeting.

The following table and notes thereto states the names of each of our directors and executive officers, the province or state and country of residence, their age, all offices now held by such individual, their principal occupation, the period of time such individual has acted as a director or executive officer and the number of Class A common shares beneficially owned, or controlled or directed, directly or indirectly, by each such director or executive officer. 

Exhibit 99.1   Annual Information Form - Page 22

 


 

Name, Residence and Position

Age

Principal Occupation

during the last five years

Director
and/or Officer Since

Number
of Common Shares Beneficially Owned as of March 31, 2017 (1)

Percent
of
Class

Rockne J. Timm (2) (3)

Spokane, Washington, USA

Chief Executive Officer
and Director

71

Mr. Timm’s principal occupation is chief executive officer of the Company, a position he has held since 1988.  Mr. Timm has also served as president and chairman of the Board from 1988 until January 2004 and currently is chairman of the Company’s executive committee.

Mr. Timm is a director of Siembra Minera, chief executive officer of GR Mining and GR Engineering since 2016 and is president and director of Great Basin Energies, Inc. since 1981 and MGC Ventures, Inc. since 1989.

 

 

 

 

March 1984

 

 

 

 

2,080,040

 

 

 

 

2.3%

A. Douglas Belanger (2) (3)

Spokane, Washington, USA

President and Director

63

Mr. Belanger’s principal occupation is president of the Company, a position he has held since January 2004.  Mr. Belanger has also served as executive vice president from 1988 through January 2004 and currently serves on the Company’s executive committee.

Mr. Belanger is a director of Siembra Minera, director and president of GR Mining and GR Engineering since 2016 and is executive vice president and director of Great Basin Energies Inc. since 1984 and MGC Ventures, Inc. since 1997. 

 

 

 

 

August 1988

 

 

 

 

2,000,940

 

 

 

 

2.2%

James P. Geyer

Spokane, Washington, USA

Independent Director

64

Mr. Geyer is retired and serves on the Company’s audit committee.  Mr. Geyer is a former director of Thompson Creek Metals Company Inc. Mr. Geyer held the position of senior vice president of the Company from January 1997 to August of 2010. 

 

 

 

 

June 1997

 

 

 

 

559,140

 

 

 

 

*

 

James H. Coleman, Q.C. (2) (3)

Alberta, Canada

Non-Executive Chairman
and Independent Director

66

Mr. Coleman’s principal occupation is senior partner with the law firm of Norton Rose Fulbright Canada LLP.

Mr. Coleman has been chairman of the Company since 2004 and serves on the executive and nominating committees. He is also a director of Siembra Minera since 2016, Great Basin Energies Inc. since 1996 and MGC Ventures, Inc. since 1997 as well as Energold Drilling Corp. since 1994, Sterling Resources Ltd. since 2013, and Petrowest Corporation since 2012. 

 

 

 

 

February 1994

 

 

 

 

1,330,588

 

 

 

 

1.5%

Patrick D. McChesney (2) (3)

Las Vegas, Nevada, USA

Independent Director

67

Mr. McChesney recently retired from his position as chief financial officer and chief technology officer of Foothills Auto Group, an automobile dealership group based in Spokane, Washington, a position he held since 2005.

Mr. McChesney is a director of Great

 

 

 

 

August 1988

 

 

 

 

345,777

 

 

 

 

*

Exhibit 99.1   Annual Information Form - Page 23

 


 

 

 

 

Basin Energies, Inc. since 2002 and MGC Ventures, Inc. since 1989. 
Mr. McChesney serves on the Company’s compensation and nominating committees and is the chair of the audit committee.

 

 

 

Jean Charles Potvin

Ontario, Canada

Independent Director

63

Mr. Potvin currently serves on the Company’s audit and nominating committees and is chairman of the compensation committee. 

Mr. Potvin’s principal occupation is as a director, chairman, and member of the audit committee of Murchison Minerals Ltd. (formerly Flemish Gold Corp.), a minerals exploration company. Mr. Potvin was President of Murchison Minerals Ltd. until November 2015, a position he held since 2007.  He is also a director of Exploration Azimut Inc. where he is chair of the audit committee. Mr. Potvin is also a director and member of the audit committee of Canadian Zinc.

 

 

 

 

November 1993

 

 

 

 

493,339

 

 

 

 

*

Mary E. Smith (2) (3)

Spokane, Washington, USA

Vice President Administration and Secretary

64

Ms. Smith’s principal occupation with the Company is as Vice President of Administration since January 1997 and Secretary since June 1997. 

She also serves as Vice President of Administration for GR Mining and GR Engineering as well as Vice President of Administration and Secretary of Great Basin Energies Inc. and MGC Ventures, Inc.

 

 

 

 

February 1997

 

 

 

 

349,855

 

 

 

 

*

Robert A. McGuinness (2) (3)

Spokane, Washington, USA

Vice President Finance and CFO

61

Mr. McGuinness’ principal occupation with the Company is as Vice President of Finance since March 1993 and Chief Financial Officer since June 1993. 

He also serves as Vice President of Finance for GR Mining and GR Engineering as well as Vice President of Finance, Chief Financial Officer and Treasurer of Great Basin Energies, Inc. and MGC Ventures, Inc.

 

 

 

 

March 1993

 

 

 

 

358,004

 

 

 

 

*

 

 

 

 

 

 

Directors and officers as a group

 

 

 

7,517,683

8.1%

 

*Indicates less than 1%

(1)   Includes Class A Shares issuable pursuant to options exercisable as of the date of this Annual Information Form or exercisable within 60 days of the date of this Annual Information Form as follows: Mr. Timm 850,000; Mr. Belanger 600,000; Mr. Geyer 151,667; Mr. Coleman 950,000; Mr. McChesney 160,000; Mr. Potvin 176,667; Ms. Smith 160,000; and Mr. McGuinness 175,000.  The number includes direct ownership of common shares as follows:  Mr. Timm 1,230,040 shares; Mr. Belanger 1,400,940 shares; Mr. Geyer 407,473 shares; Mr. Coleman 380,588 shares; Mr. McChesney 185,777 shares; Mr. Potvin 316,672 shares; Ms. Smith 189,855 shares; and Mr. McGuinness 183,004 shares.

Exhibit 99.1   Annual Information Form - Page 24

 


 

(2)   Messrs. Timm, Belanger, Coleman, McChesney, McGuinness, and Ms. Smith are directors and/or officers of Great Basin Energies, Inc. (OTC: GBEI), which owns 491,192 Class A Shares, or 0.6% of the outstanding Class A Shares. The foregoing individuals beneficially own 17.6%, 11.2%, 4.2%, 2.7%, 1.3%, and 1.2%, respectively, of the outstanding common shares of Great Basin Energies, Inc. and may be deemed indirectly to have an interest in the Company through their respective management positions and/or ownership interests in Great Basin Energies, Inc. Each of the foregoing individuals disclaims any beneficial ownership of the Class A Shares owned by Great Basin Energies, Inc. and such Class A Shares are not included in this total.

(3)   Messrs. Timm, Belanger, Coleman, McChesney, McGuinness, and Ms. Smith are directors and/or officers of MGC Ventures, Inc. (OTC: MGCV), which owns 258,083 Class A Shares, or 0.3% of the outstanding Class A Shares. The foregoing individuals beneficially own 18.4%, 18.6%, 7.5%, 5.6%, 1.9%, and 1.5%, respectively, of the outstanding common shares of MGC Ventures, Inc. and may be deemed indirectly to have an interest in the Company through their respective management positions and/or ownership interests in MGC Ventures, Inc. Each of the foregoing individuals disclaims any beneficial ownership of the Class A Shares owned by MGC Ventures, Inc. and such Class A Shares are not included in this total.  

At the date of this Annual Information Form, our directors and executive officers, as a group, beneficially owned, or controlled or directed, directly or indirectly, 4,294,349 of our Class A common shares, representing approximately 4.8% of our issued and outstanding Class A common shares.  In addition, our directors and executive officers held 3,223,334 options to acquire an additional 3,223,334 of our Class A common shares. Information concerning  Class A common shares beneficially owned, or controlled or directed, directly or indirectly, is based on information provided to us by our directors and executive officers.

Corporate Cease Trade Orders

At the date of this Annual Information Form, none of our directors or executive officers is, or has been within ten years prior to the date of this Annual Information Form, a director, chief executive officer or chief financial officer of any company (including us) that:

(i)            was subject to a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days, that was issued while the director or officer was acting in the capacity as director, chief executive officer or chief financial officer of the relevant company; or

(ii)           was subject to a cease trade order, an order or similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days, that was issued after the director or officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.

Penalties or Sanctions

At the date of this Annual Information Form, none of our directors or executive officers or any shareholder holding a significant number of our securities to materially affect control of us, is or has been subject to:

(i)            any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or

(ii)           any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor making an investment decision.

Bankruptcies

None of our directors or executive officers, or a shareholder holding a sufficient number of our securities to materially affect control of us:

(i)            is, at the date of this Annual Information Form, or has been within ten years prior to the date of this Annual Information Form, a director or officer of any company (including us) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager, or trustee appointed to hold its assets; or

Exhibit 99.1   Annual Information Form - Page 25

 


 

(ii)           has, within ten years prior to the date of the Annual Information Form become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, officer or shareholder.

Audit Committee Information

Audit Committee Charter

The Board has a separately-designated standing Audit Committee for the purpose of overseeing our accounting and financial reporting processes and audits of our annual financial statements. Mr. Chris Mikkelsen previously served as the Chairman and audit committee financial expert. Mr. Mikkelsen resigned from the Board and the Audit Committee effective March 17, 2015 and was replaced by Mr. Geyer. The Audit Committee of the Board operates within a written mandate (the "Audit Committee Charter"), as approved by the Board, which describes the Committee’s objectives and responsibilities.  The full text of the Audit Committee Charter is attached as Exhibit A to our proxy circular for our 2016 annual meeting of shareholders (the "2016 Proxy Circular") which is available for review under our profile at www.sedar.com and www.sec.gov or is available at www.goldreserveinc.com under the Investor Relations page.

Composition of the Audit Committee

The Audit Committee is composed of the following three directors:

Patrick McChesney (Chair)               Jean Charles Potvin            James P. Geyer

The Board has determined each member of the Audit Committee to be "independent" and "financially literate" as such terms are defined under Canadian securities laws.  In addition, the Chair of the Committee, Mr. McChesney, is considered by the Board to qualify as an "audit committee financial expert" as defined by the SEC. The Board has made these determinations based on the education and experience of each member of the Committee, as outlined below. 

Relevant Education and Experience

The following is a description of the education and experience of each member of the Audit Committee that is relevant to the performance of his responsibilities as a member of the Audit Committee:

Mr. McChesney is currently a business consultant and previously was Chief Financial Officer of Foothills Auto Group, an operator of franchised auto dealerships, where he was responsible for the financial statements.  Mr. McChesney graduated from the University of Portland, with a Bachelor degree in Accounting. During his 30 plus year working career, he has prepared and analyzed financial statements in the mining, public accounting, retail, electronics and construction industries. Mr. McChesney has been a member of the Audit Committee since August 1998 and Chair since March 17, 2015.

Mr. Potvin is Director and President of Murchison Minerals Ltd. (formerly Flemish Gold Corp.) and Director and Chairman of the audit committee of Azimut Exploration Ltd. a publicly listed mineral exploration company. Mr. Potvin holds a Bachelor of Science degree in Geology from Carleton University and an MBA from the University of Ottawa. He spent nearly 14 years as a mining investment analyst for a large Canadian investment brokerage firm (Burns Fry Ltd., now BMO Nesbitt Burns Inc.).  Mr. Potvin has been a member of the Audit Committee since August 2003.

Mr. Geyer has a Bachelor of Science in Mining Engineering from the Colorado School of Mines, has 41 years of experience in underground and open pit mining and has held engineering and operations positions with a number of companies including AMAX and ASARCO. Mr. Geyer is a former Director of Thompson Creek Metals Inc. where he was previously a member of the audit committee. Mr. Geyer has been a member of the Audit Committee since March 19, 2015.

 

External Auditor Service Fees

Fees paid or payable to our independent external auditor, PricewaterhouseCoopers LLP, are detailed in the following table:

 

Exhibit 99.1   Annual Information Form - Page 26

 


 

Fee category

(U.S.$)
Year Ended 2016

(U.S.$)
Year Ended 2015

Audit

$ 88,775

$   100,661

Audit related

51,355

39,069

Tax

116,620

8,829

All other fees

-

-

Total

$ 256,750

$ 148,559

The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories indicated in the table is described below.

Audit Fees

Audit fees were for professional services rendered by PricewaterhouseCoopers LLP for the audit of our annual financial statements.

Audit-related Fees 

Audit-related fees were for the review of our quarterly financial statements and services provided in respect of other regulatory-required auditor attest functions associated with government audit reports, registration statements, prospectuses, periodic reports and other documents filed with securities regulatory authorities or other documents issued in connection with securities offerings.

Tax Fees

Tax fees were for services outside of the audit scope and represented tax return preparation, consultations for tax compliance and advisory services relating to common forms of domestic and international taxation.

All Other Fees

All Other Fees represent costs not included above.

Pre-approval Policies and Procedures

Our Audit Committee has adopted policies and procedures for the pre-approval of services performed by our external auditors, with the objective of maintaining the independence of the external auditors. Our policy requires that the Audit Committee pre-approve all audit, audit-related, tax and other permissible non-audit services to be performed by the external auditors, including all engagements of the external auditors with respect to our subsidiaries. Prior approval of engagements for services other than the annual audit may, as required, be approved by the Chair of the Audit Committee with the provision that such approvals be brought before the full Audit Committee at its next regular meeting. Our policy sets out the details of the permissible non-audit services consistent with the independence requirements of the United States Sarbanes-Oxley Act of 2002 and the Canadian independence standards for auditors. The Chief Financial Officer presents the details of any proposed assignments of the external auditor for consideration by the Audit Committee. The procedures do not include delegation of the Audit Committee’s responsibilities to our management.

Conflicts of Interest

Our directors and officers may serve as directors or officers of other companies or have significant shareholdings in other resource companies and, to the extent that such other companies may participate in ventures in which we may participate, such individuals may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. In the event that such a conflict of interest arises the individual is required to abstain from participating in the deliberation or approval of such participation or such terms. In accordance with the laws of Alberta, Canada, the directors and officers are required to act honestly, in good faith and in our best interests.

Our directors and officers are aware of the existence of laws governing the accountability of directors and officers for corporate opportunity and requiring disclosures of conflicts of interest. All such conflicts will be disclosed by such directors and/or officers in accordance with the Business Corporations Act (Alberta) and they will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law. Our directors and officers are not aware of any such conflicts of interests.

Exhibit 99.1   Annual Information Form - Page 27

 


 

Legal Proceedings AND REGULATORY ACTIONS

See “General Development and Description of the Business-Brisas Award” for a discussion of legal proceedings related to the Award. Except for the proceedings related to the Award, there were no legal proceedings, to which we are aware of or of which any of our property was the subject, since the beginning of the most recently completed financial year, nor were there any proceedings known by us to be contemplated, that involve a claim for damages exceeding 10% of our current assets. In addition, to the best of our knowledge, there were no:

(i)            penalties or sanctions imposed against us by a court relating to securities legislation or by a securities regulatory authority during the year ended December 31, 2016;

(ii)           penalties or sanctions imposed by a court or regulatory body against us that would likely be considered important to a reasonable investor in making an investment decision; or

(iii)          settlement agreements entered into by us before a court relating to securities legislation or with a securities regulatory authority during the year ended December 31, 2016.

Interest of MANAGEMENT AND OTHERS in Material Transactions

During the fourth quarter of 2015 (as more fully described herein), we issued $13.4 million of New Notes and modified, amended and extended the maturity date of $43.7 million of Modified Notes. Pursuant to the transaction $19.0 million and $11.7 million of the Modified Notes were held by a fund managed by Steelhead and funds managed by Greywolf, respectively, and $10.7 million of the New Notes were issued to funds managed by Greywolf. Both Steelhead and Greywolf exercised control or direction over more than 10% of our Class A common shares prior to the transaction. In addition we paid, in the case of the New Notes, a fee of 2.5% of the principal in the form of an original issue discount and in the case of the Modified Notes, a fee of 2.5% of the principal in the form of additional 2018 Convertible Notes (or an aggregate principal amount of $0.5 million and $0.3 million, respectively) to the Steelhead and the Greywolf funds, respectively.  

Other than as disclosed herein, we are not aware of any material interest, direct or indirect, of any director, executive officer, or shareholder that beneficially owns, or controls or directs, directly or indirectly more than 10% of our voting securities, or any associate or affiliate of such persons, in any transaction within the three most recently completed financial years or during the current financial year, that has materially affected us, or is reasonably expected to materially affect us.

Transfer Agents and Registrars

Our registrar and transfer agent is Computershare Trust Company, Inc. ("Computershare"). Computershare maintains the Company’s register for our Class A common shares in Highlands Ranch, CO.

8742 Lucent Blvd, Suite 225                                                            8th Flr, 100 University Avenue

Highlands Ranch, CO  80129                                                           Toronto, Ontario Canada M5J 2Y1

 

Material Contracts

Except as set forth below, the Company did not enter into any contract during the most recently completed financial year, and has not entered into any contract since January 1, 2002 that is still in effect, that may be considered material to the Company, other than material contracts entered into in the ordinary course of business not required to be filed under National Instrument 51-102-Continuous Disclosure Obligations.

Settlement Agreement

In July 2016, we executed the Settlement Agreement (as amended) with Venezuela which contemplated payment of the Award (including accrued interest) in the amount of approximately $770 million in respect of the Brisas project and the acquisition of our Mining Data by Venezuela for $240 million. The terms of the Settlement Agreement have subsequently been amended. See "General Development and Description of the Business – Settlement Agreement."

Mixed Company Agreement

In August 2016, we executed the Mixed Company Agreement with Venezuela for the formation of a the Mixed Company and, in October 2016, we, together with Venezuela, established Siembra Minera, the Mixed Company. See "Introductory Notes―Mixed Company Agreement".

Convertible Notes

At December 31, 2016, we had $50.9 million aggregate principal amount of convertible notes outstanding, which are comprised of (i) approximately $49.9 million aggregate principal amount of 2018 Convertible Notes and approximately $1.0 million aggregate principal amount of 2022 Convertible Notes.  Interest on the 2018 Convertible Notes accrues and is capitalized quarterly and is payable in Interest Notes.  Interest on the Interest Notes is also payable in additional Interest Notes. We had $6.2 million aggregate principal amount of Interest Notes outstanding at December 31, 2016. The 2018 Notes mature on December 31, 2018.

Exhibit 99.1   Annual Information Form - Page 28

 


 

The 2018 Notes have been, or will be (with respect to Interest Notes issued in the future), issued under the fourth supplemental indenture, dated as of November 30, 2015 (the “Fourth Supplemental Indenture”), among us, as issuer, U.S. Bank National Association, as trustee (the “Trustee”), and Computershare Trust Company of Canada, as Co-Trustee (the “Co-Trustee”).  The Fourth Supplemental Indenture amends the indenture, dated as of May 18, 2007 (the “Original Indenture”), among us, the Trustee, as successor trustee to The Bank of New York Mellon (f/k/a The Bank of New York), and the Co-Trustee, as successor Co-Trustee to BNY Trust Company of Canada, as previously amended and supplemented by the first supplemental indenture, dated as of December 4, 2012 (the “First Supplemental Indenture”), the second supplemental indenture, dated as of June 18, 2014 (the “Second Supplemental Indenture”), and the third supplemental indenture, dated as of September 24, 2014 (the “Third Supplemental Indenture” and, the Original Indenture as amended and supplemented by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and the Fourth Supplemental Indenture, the “Indenture”), each among us, the Trustee and the Co-Trustee.  Certain additional terms of the 2018 Notes are also set forth in the Note Restructuring and Note Purchase Agreement, dated as of November 30, 2015 (the “2015 Restructuring Agreement”), among the Company, the Existing Holders and the New Note Purchasers (each as defined in the 2015 Restructuring Agreement) and the Security and Pledge Agreement, dated as of November 30, 2015 (the “Security and Pledge Agreement”), among the Company (and any Additional Grantors (as defined in the Security and Pledge Agreement), if any), the Trustee and U.S. Bank National Association, as collateral agent (the “Collateral Agent”). The 2022 Convertible Notes were issued under the Original Indenture. 

The following description is a summary of the material provisions of the 2018 Notes and does not purport to be complete and is qualified in its entirety by the Indenture, the 2015 Restructuring Agreement and the Security and Pledge Agreement, copies of which have been filed on, and can be obtained from, SEDAR at www.sedar.com and the U.S. Securities and Exchange Commission’s Internet website at www.sec.gov.

General

The 2018 Notes are our secured indebtedness and rank (i) equal in right of payment with our other secured indebtedness that is permitted to be secured on a pari passu basis, including the CVRs, (ii) equal in right of payment to the 2022 Convertible Notes, (iii) effectively senior in right of payment to our existing and future unsecured indebtedness to the extent of the value of the Collateral (as defined herein) securing the 2018 Notes and (iv) senior in right of payment to all of our future subordinated debt; provided, that any future incurrence of additional indebtedness by us or the provision of any security interest with respect to any indebtedness by us or the provision of any security interest with respect to any indebtedness in the future must be incurred or provided, as applicable, in compliance with the terms of the Indenture, the 2015 Restructuring Agreement and the Security and Pledge Agreement underlying the 2018 Notes.

The 2018 Convertible Notes are convertible into our Class A common shares, as described more fully under “Conversion rights” below. The Interest Notes are not convertible into our Class A common shares or any other security. The 2018 Notes are currently evidenced by physical certificates and are not eligible for deposit with the Depository Trust Company.  

Security

The 2018 Notes, together with the CVRs, are secured by a first lien on substantially all of our assets (excluding a security interest over our rights with respect to the ongoing Brisas arbitration and only limited rights over the stock of our subsidiaries) whether now owned or existing or hereafter acquired or arising and regardless of where located, as collateral for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Company’s obligations under the 2018 Notes and the CVRs whether now existing or hereafter incurred or arising, including, but not limited to all cash and cash accounts, receivables, contracts, inventory, equipment, intellectual property, chattel paper, supporting obligations, general intangibles, pledged interests in our subsidiaries, proceeds of the Award and Mining Data (collectively referred to herein, as the “Collateral”).  Pursuant to the Security and Pledge Agreement, the Collateral also provides collateral for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of our obligations under the other Finance Documents (as defined herein), including the CVRs on a pari passu basis with the 2018 Notes as described above.  Under the Security and Pledge Agreement, the “Finance Documents” means (i) the Indenture, (ii) the certificates evidencing the CVRs, (iii) the Security and Pledge Agreement, (iv) the 2015 Restructuring Agreement and (v) all other documents to be executed and delivered by the us, or any other grantor, if any, to the secured parties related to the transactions contemplated by the Security and Pledge Agreement.

Exhibit 99.1   Annual Information Form - Page 29

 


 

Pursuant to the Security and Pledge Agreement we have agreed that we will maintain good title to all of the Collateral, free and clear of all liens, except for the security interest created by the Security and Pledge Agreement and any ordinary course Permitted Liens (as defined in the Security and Pledge Agreement), and that we will not grant or allow any liens other than Permitted Liens to exist. We have also agreed that, except as expressly permitted under the Finance Documents, we will not (i) sell, assign (by operation of law or otherwise), transfer, exchange, lease or otherwise dispose of, or grant any option with respect to, any of the Collateral other than cash and cash equivalents used by us in the ordinary course of business, including, but not limited to, paying our expenses and other obligations in the ordinary course as they become due and payable, or (ii) create or permit to exist any lien upon or with respect to any of the Collateral, except for Permitted Liens; provided, however, that upon certification by us that we have reached agreement to sell any equipment related to the Brisas Project for a price that a majority of our board of directors deems reasonable, the Collateral Agent shall release its lien on such equipment upon such sale and the proceeds of such sale shall no longer be subject to the lien granted under the Security and Pledge Agreement and will not constitute part of the Collateral; provided, further, that upon certification by us that we reached agreement to sell the Mining Data for a price that a majority of our board of directors deems reasonable, and the Majority Holders (as defined herein) have consented to such sale upon the terms contained in such written certification (provided that such consent may not be unreasonably withheld, denied or delayed), the Collateral Agent shall release its lien on the Mining Data in conjunction with such sale and the proceeds of such sale shall no longer be subject to the lien granted under the Security and Pledge Agreement and will not constitute part of the Collateral and may be distributed to our owners to the extent permitted by the Finance Documents. As used herein, “Majority Holders” means holders of 2018 Notes comprising at least a majority in the aggregate principal amount of outstanding 2018 Notes, voting together as a single class, including, if applicable, (i) funds and accounts advised by Steelhead Partners, LLC; provided that at the relevant time they collectively hold at least 25% in aggregate principal amount of outstanding 2018 Notes and (ii) funds and accounts advised by Greywolf Capital Management LP; provided that at the relevant time they collectively hold at least 25% in aggregate principal amount of outstanding 2018 Notes.

Pursuant to the 2015 Restructuring Agreement and the Security and Pledge Agreement, we have agreed that any Award Proceeds (as defined in the 2015 Restructuring Agreement) constituting cash and cash equivalents (“Cash Proceeds”) in an amount equal to the sum of (i) an amount equal to 120% of the outstanding principal amount of the 2018 Notes then outstanding plus accrued and unpaid interest, if any, to, but excluding, the date on which all 2018 Notes will be repaid in accordance with their terms and (ii) any amounts due to holders of the CVRs under the terms of the CVRs as a result of the receipt of such Cash Proceeds, shall be deposited into a separate deposit account with the Collateral Agent that we have established with Bank of America, N.A. (the “Proceeds Account”). The Collateral Agent shall have exclusive control of the Proceeds Account at any time that an event of default has occurred and is continuing under the Indenture, after giving effect to applicable notice and cure periods, or an event of default under the CVRs has occurred and is continuing; provided, that, with respect to any event of default under the CVRs, we shall have 10 business days to cure any such default following receipt of notice thereof from a holder of CVRs.

Subject to the following paragraph, (i) all Cash Proceeds shall be deposited in the Proceeds Account until it holds all amounts provided for in the preceding paragraph (and, subject to the exception set forth below, shall remain in such account until the 2018 Notes and CVRs have been paid in full) and (ii) if, and only if, other Company funds are unavailable, funds from the Proceeds Account shall be disbursed to ensure that we are paying our obligations as they come due and, in any event, to ensure payment of our current obligations.

We have the option to effect a defeasance of the 2018 Notes and CVRs upon five business days’ notice to the Collateral Agent and holders of 2018 Notes and CVRs on the following terms and conditions: (i) we have complied with our other obligations to date in connection with the Proceeds Account described above and have sufficient funds in the Proceeds Account; (ii) we have complied with our obligation to offer to redeem the 2018 Notes in accordance with the provision described under “Mandatory redemption” (the “Awards Redemption”); and (iii) holders of a majority in the aggregate principal amount of the then outstanding 2018 Notes have notified us that they elect not to have some or all of the 2018 Notes held by them so redeemed, such that a majority in the aggregate principal amount of the 2018 Notes remain outstanding following completion of the transactions contemplated by the Awards Redemption. 

Following a defeasance of the 2018 Notes and the CVRs, (i) we shall no longer be able to utilize the funds in the Proceeds Account for payment of obligations, other than payment obligations in respect of the 2018 Notes and the CVRs in accordance with their terms, (ii) following conversion of any 2018 Notes in accordance with the terms of the Indenture and such 2018 Notes, the portion of Cash Proceeds held for repayment of principal and interest on such 2018 Notes in accordance with their terms shall be released from the Proceeds Account and (iii) the collateral securing repayment of the 2018 Notes and the CVRs shall be released, and the 2018 Notes and the CVRs shall no longer be secured, and the holders of the 2018 Notes have agreed to take such action as reasonably required in connection with such release, subject to certain exceptions.

Exhibit 99.1   Annual Information Form - Page 30

 


 

Conversion rights

Holders of the 2018 Convertible Notes may convert their 2018 Convertible Notes, in whole or in part, initially at a conversion rate of 333.3333 Class A common shares per $1,000 principal amount of 2018 Convertible Notes (equivalent to a conversion price of $3.00 per share), at their option upon not less than three days’ notice to us and at any time prior to the close of business on the business day immediately preceding the final maturity date of the 2018 Convertible Notes, subject to prior repurchase of the 2018 Convertible Notes. The Interest Notes are not convertible into our Class A common shares or any other security.

Upon conversion of a 2018 Convertible Note, we will have the option to deliver Class A common shares, cash or a combination of cash and Class A common shares for the 2018 Convertible Notes surrendered for conversion. The Trustee will initially act as conversion agent. The conversion rate and the applicable conversion price in effect at any given time are referred to as the “applicable conversion rate” and the “applicable conversion price,” respectively, and will be subject to adjustment in certain circumstances. A holder may convert fewer than all of such holder’s 2018 Convertible Notes so long as the 2018 Convertible Notes converted have a principal amount of $1,000 or an integral multiple of $1.00 in excess thereof.

We will have the option to deliver cash in lieu of some or all of the Class A common shares to be delivered upon conversion of the 2018 Convertible Notes. We will give notice of our election to deliver part or all of the conversion consideration in cash to the holder converting the 2018 Convertible Notes within two business days of our receipt of the holder’s notice of conversion. The amount of cash to be delivered per 2018 Convertible Note will be equal to the number of Class A common shares in respect of which the cash payment is being made multiplied by the average of the per share volume-weighted average price of the Class A common shares for the 10 trading days commencing one day after (a) the date of our notice of election to deliver all or part of the conversion consideration in cash if we have not given notice of redemption or (b) the conversion date, in the case of conversion following notice of redemption specifying our intention to deliver cash upon conversion.

We may not deliver cash in lieu of any Class A common shares issuable upon a conversion date (other than in lieu of fractional shares) if there has occurred and is continuing an event of default under the Indenture, other than an event of default that is cured by the payment of the conversion consideration.

Optional redemption

No sinking fund will be provided for the 2018 Notes, which means that the Indenture will not require us to redeem a portion of the 2018 Notes periodically. We may redeem, at our option, all or part of the 2018 Convertible Notes upon 20 days’ notice to the holders, for Class A common shares equal to the principal amount of such security divided by the applicable conversion price plus cash for any accrued and unpaid interest if the closing sale price of our Class A common shares is equal to or greater than 200% of the conversion price for at least 20 trading days in the period of 30 consecutive trading days; provided that we provide such notice within five days of the end of such 30 trading day period.

We also have the option to redeem all but not part of the 2018 Notes if we have or would become obligated to pay to the holder of any 2018 Note “additional amounts” (which are more than a de minimis amount) as a result of certain changes in Canadian tax law.

Mandatory redemption

We have a mandatory obligation to redeem the 2018 Notes then outstanding, in whole or in part, for an amount of cash equal to 120% of the outstanding principal amount of the 2018 Notes, plus accrued and unpaid interest, upon (a) the issuance of a final Arbitration Award (as defined in the Indenture), with respect to which enforcement has not been stayed and no annulment proceeding is pending, or (b) our receipt of Proceeds (as defined in the Indenture) from a Mining Data Sale (as defined in the Indenture) (the occurrence of an event described in (a) or (b) may be referred to as a “Redemption Trigger”); provided, however, that following the issuance of a final Arbitration Award, we shall not be obligated to effect any such redemption unless we receive cash proceeds in excess of $20,000,000, net of (i) taxes and (ii) $13,500,000 to fund professional fees and expenses and accrued and unpaid prospective operating expenses (such net amount, collectively the “Net Cash Proceeds”). In the case of a Redemption Trigger described in clause (a) above, at any time following receipt of notice from us and prior to the receipt by a holder of the applicable redemption amount, such holder may notify the Company that it elects to not have its 2018 Notes (or any portion thereof) so redeemed, in which case the applicable securities of such holder shall not be redeemed and the amounts that would have otherwise been payable to such holder shall be available for distribution to the holders of the securities which are being redeemed in accordance herewith if such holders would not otherwise receive payment of the entire redemption price.

Offer to purchase upon a fundamental change

Exhibit 99.1   Annual Information Form - Page 31

 


 

In the event of a fundamental change (as defined in the Indenture) with respect to the Company at any time prior to December 31, 2018, subject to the terms and conditions of the Indenture, we shall be required to offer to purchase all of the 2018 Notes then outstanding (a “purchase offer”), on the date (the “purchase date”) that is 30 business days after the date of such offer, at a purchase price equal to (i) the principal amount of the 2018 Notes to be purchased, plus (ii) accrued but unpaid interest, including additional amounts, if any, up to, but excluding, the purchase date plus (iii) if a Redemption Trigger has occurred prior to the date of the applicable fundamental change, but we have not yet made payments to the holders as provided under “―Mandatory redemption,” an additional 20% of the principal amount of the 2018 Notes; provided, that the amounts set forth in clause (iii) shall not be payable to any holder of the 2018 Notes with respect to any fundamental change arising out of or in connection with any actions of such holder or in which such holder is an active participant (excluding, for the avoidance of doubt, voting in favor of any fundamental change that does not principally arise out of, or is not caused by, the actions of such holder).

Subject to satisfaction of certain conditions, we may elect to satisfy our obligation to pay the purchase price, in whole or in part, by delivering Class A common shares as further described under “Delivery of shares.”

Delivery of shares

We may, at our option, elect to pay the amount payable in connection with a repurchase of the 2018 Notes at the option of the holder in cash or Class A common shares or any combination of cash and Class A common shares.  We may also, at our option, elect to pay the fundamental change purchase price in cash or Class A common shares or any combination of cash and Class A common shares.  Our right to issue Class A common shares to pay the repurchase price or the fundamental change purchase price is subject to our satisfying various conditions, including: (i) no event of default shall have occurred and be continuing under the Indenture; (ii) listing of the Class A common shares on the principal United States and Canadian securities exchanges on which our Class A common shares are then listed, or if not so listed, the listing of the Class A common shares on a U.S. national securities exchange; (iii) the registration of the Class A common shares under the Securities Act and the Exchange Act and applicable Canadian securities laws, if required; and (iv) any necessary qualification or registration under applicable state securities laws or the availability of an exemption from qualification and registration.

Negative covenants

In addition to customary negative covenants for convertible notes of this type and amount, the Indenture contains the following additional negative covenants with respect to the 2018 Notes:

·         except as provided in the Indenture and the Security Documents (as defined in the Indenture), we shall not pledge, hypothecate, transfer or otherwise dispose of or encumber the Mining Data or any Arbitration Award (each as defined in the Indenture) (or permit any subsidiary to take any of the foregoing actions) without the consent of holders of not less than 75% in aggregate principal amount of the then outstanding 2018 Notes, voting together as a single class;

·         subject to certain exceptions, we shall not incur any additional indebtedness (or permit any subsidiary to incur any indebtedness) without the consent of holders of not less than 75% in aggregate principal amount of the outstanding 2018 Notes, voting together as a single class, which consent shall not be unreasonably withheld, denied or delayed;

·         subject to certain exceptions, we shall not incur, create or suffer to exist any liens securing indebtedness that are pari passu or senior in priority to the liens securing the 2018 Notes without the consent of holders of not less than 75% in aggregate principal amount of the outstanding 2018 Notes;

·         we and our subsidiaries’ capital expenditures (including for exploration and related activities) shall not exceed an aggregate of $500,000 in any 12 month period without the consent of holders of not less than a majority in aggregate principal amount of the outstanding 2018 Notes, voting together as a single class; and

·         we shall not agree to any amendment to the Indenture or modification of our rights and obligations and the rights of holders of any security issued under the Indenture, provide any fees or other compensation whether in cash or in-kind to any holder of any security or engage in the repurchase, redemption or other defeasance of any security without offering such terms, compensation or defeasance to all holders of the 2018 Notes on an equitable and pro rata basis.

Affirmative Covenants

In addition to customary affirmative covenants for convertible notes of this type and amount, the 2015 Restructuring Agreement contains additional affirmative covenants with respect to the 2018 Notes which require:

Exhibit 99.1   Annual Information Form - Page 32

 


 

·         that holders of the 2018 Notes that were a party to the 2015 Restructuring Agreement (and not any transferees thereof, other than affiliates of any of such parties) shall have a right of first refusal with respect to any future equity (or equity linked) or debt financing of the Company on a pro rata basis based on the amount of Class A common shares such parties hold, including Class A common shares issuable upon conversion of convertible securities;

·         that we shall distribute to our shareholders, subject to applicable regulatory requirements regarding capital and reserves for operating expenses and taxes, a substantial majority of the Award Proceeds constituting cash and cash equivalents received in connection with the Arbitration Proceedings and/or the sale of any related Mining Data promptly following each receipt (if more than one) thereof; provided, that we are not required to distribute funds that are required to pay or satisfy certain contractual obligations, tax obligations or current payment obligations, including, obligations with respect to the 2018 Notes, the CVRs and any compensatory or change of control arrangements;

·         that we shall use our commercially reasonable best efforts to reduce certain expenses; and

·         that the Company shall not sell, transfer, pledge, encumber or otherwise dispose of, directly or indirectly, including to any subsidiary, prior to repayment in full of the 2018 Notes and all obligations in respect thereof (i) the Award (as defined in the Security and Pledge Agreement) or any Award Proceeds (as defined in the 2015 Restructuring Agreement) or (ii) any Mining Data, in each case, without the consent of the Majority Holders (which consent may not be unreasonably withheld, denied or delayed).

Events of Default

The Indenture contains customary events of default for convertible notes of this type and amount. The Indenture also contains additional events of default for (i) a material breach occurring and continuing under the 2015 Restructuring Agreement that, if curable, has not been cured by us within 20 business days following the Company’s receipt of notice of such breach and (ii) the Security and Pledge Agreement for any reason ceasing to create a valid and (to the extent required thereunder) perfected first priority lien on and security interest in the Collateral (subject to certain exceptions), which has not been cured by the Company within 20 business days following the receipt by the Company of notice of such cessation.    

Interests of Experts

There is no person or company who is named as having prepared or certified a report, valuation, statement or opinion described or included in a filing, or referred to in a filing, made under Canadian National Instrument 51-102 Continuous Disclosure Obligations, by us during, or related to, our most recently completed financial year and whose profession or business gives authority to the report, valuation, statement or opinion made by the person or company, other than PricewaterhouseCoopers LLP and Ed Hunter, BSc., P. Geo and Gary H. Giroux, M.A. Sc., P. Eng.

PricewaterhouseCoopers LLP, our independent auditor, has advised us that they are independent with respect to us within the meaning of the Code of Professional Conduct of the Chartered Professional Accountants of British Columbia, the meaning of the Securities Acts administered by the SEC and relevant legislation and the requirements of the Public Company Accounting Oversight Board (PCAOB).

In February 2016, a NI 43-101 technical report on the Property entitled "Technical Report on the LMS Gold Project, Goodpaster Mining District, Alaska," was updated by Ed Hunter, BSc., P. Geo and Gary H. Giroux, M.A. Sc., P. Eng. To the best of our knowledge as of the date hereof, the aforementioned persons own, directly or indirectly, less than 1% of our securities. In addition, neither of the aforementioned persons is or is expected to be elected, appointed or employed as a director, officer or employee of the Company or of any associate or affiliate of the Company.

Additional information relating to the Company may be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. Additional financial information is provided in our audited consolidated financial statements for the year ended December 31, 2016, together with the auditor’s report thereon, and managements’ discussion and analysis for the most recently completed financial year, both of which are also available separately, on the aforementioned websites. Information, including information relating to directors' and officers' remuneration and indebtedness, principal holders of our securities, securities authorized for issuance under equity compensation plans and interests of insiders in material transactions, where applicable, is contained in the proxy circular for our 2016 annual general meeting.

 

 

Exhibit 99.1   Annual Information Form - Page 33

 

gdrzfform40fexhibit992042817.htm - Generated by SEC Publisher for SEC Filing

Exhibit 99.2 – Audited Consolidated Financial Statements

 

Management’s Annual Report on Internal Control over Financial Reporting

The accompanying audited consolidated financial statements of Gold Reserve Inc. were prepared by management in accordance with accounting principles generally accepted in the United States, consistently applied and within the framework of the summary of significant accounting policies contained therein. Management is responsible for all information in the accompanying audited consolidated financial statements.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the U.S.  Internal control over financial reporting includes:

·         maintaining records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

·         providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles;

·         providing reasonable assurance that receipts and expenditures are made in accordance with authorizations of our executive officers; and

·         providing reasonable assurance that unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. 

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

Management, including the CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 

Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2016.

The effectiveness of internal control over financial reporting as of December 31, 2016 has been audited by our independent auditors, PricewaterhouseCoopers LLP ("PwC"), as stated in their audit report, which is dated April 28, 2017 and included below.

/s/ Rockne J. Timm                                                                                             /s/ Robert A. McGuinness

     Chief Executive Officer                                                                                      Vice President–Finance and CFO

     April 28, 2017                                                                                                       April 28, 2017

 

Exhibit 99.2    Audited Consolidated Financial Statements - Page 1

 


 

April 28, 2017

 

 

Independent Auditor’s Report

 

 

To the Shareholders of Gold Reserve Inc.

 

We have completed integrated audits of Gold Reserve Inc.’s December 31, 2016 and December 31, 2015 consolidated financial statements and its internal control over financial reporting as at December 31, 2016. Our opinions, based on our audits are presented below.

 

Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements of Gold Reserve Inc. (the "Company"), which comprise the consolidated balance sheets as at December 31, 2016 and 2015 and the consolidated statements of operations, comprehensive loss, changes in shareholders’ equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

 

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards also require that we comply with ethical requirements.

 

An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion on the consolidated financial statements.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Gold Reserve Inc. as at December 31, 2016 and 2015 and results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Report on internal control over financial reporting

We have also audited Gold Reserve Inc.’s internal control over financial reporting as at December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

 

Exhibit 99.2    Audited Consolidated Financial Statements - Page 2

 


 

Management’s responsibility for internal control over financial reporting

Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Controls over Financial Reporting.

 

Auditor’s responsibility

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances.

 

We believe that our audit provides a reasonable basis for our audit opinion on the Company’s internal control over financial reporting.

 

Definition of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Inherent limitations

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

Opinion

In our opinion, Gold Reserve Inc. maintained, in all material respects, effective internal control over financial reporting as at December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

 

s/PricewaterhouseCoopers LLP

 

Chartered Professional Accountants

Vancouver, British Columbia

Exhibit 99.2    Audited Consolidated Financial Statements - Page 3

 


 

GOLD RESERVE INC.

CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. dollars)

 

 

 

December 31, 2016

 

 

December 31, 2015

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents (Note 4)

$

35,747,049

 

$

9,350,892

Marketable securities (Notes 5 and 6)

 

541,216

 

 

180,986

Deposits, advances and other

 

153,916

 

 

590,250

Total current assets

 

36,442,181

 

 

10,122,128

Property, plant and equipment, net (Note 7)

 

12,046,496

 

 

12,258,599

Total assets

$

48,488,677

 

$

22,380,727

LIABILITIES

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses (Note 3)

$

691,409

 

$

1,549,905

Accrued interest

 

2,379

 

 

2,388

Total current liabilities

 

693,788

 

 

1,552,293

 

 

 

 

 

 

Convertible notes and interest notes (Note 11)

 

43,968,020

 

 

39,671,870

Other (Note 11)

 

1,012,491

 

 

1,012,491

Total liabilities

 

45,674,299

 

 

42,236,654

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

Serial preferred stock, without par value

 

 

 

 

 

 Authorized:

Unlimited

 

 

 

 

 

 

 Issued:

None

 

 

 

 

 

 

Common shares (Note 12)

 

342,190,645

 

 

290,467,418

 Class A common shares, without par value

 

 

 

 

 

  Authorized:

Unlimited

 

 

 

 

 

 

  Issued and outstanding:

2016…89,710,604

2015…76,447,147

 

 

 

 

 

Contributed Surplus (Note 11)

 

25,723,900

 

 

30,435,625

Stock options (Note 10)

 

17,353,725

 

 

20,523,325

Accumulated deficit

 

(382,897,065)

 

 

(361,351,373)

Accumulated other comprehensive income

 

443,173

 

 

69,078

Total shareholders' equity (deficit)

 

2,814,378

 

 

(19,855,927)

Total liabilities and shareholders' equity

$

48,488,677

 

$

22,380,727

 

Contingencies (Note 3)

The accompanying notes are an integral part of the audited consolidated financial statements.

Approved by the Board of Directors:

            /s/ Patrick D. McChesney                                                           /s/ James P. Geyer

Exhibit 99.2    Audited Consolidated Financial Statements - Page 4

 


 

GOLD RESERVE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 (Expressed in U.S. dollars)

 

For the Years Ended

 

December 31,

        

 

2016

 

2015

OTHER INCOME (LOSS)

 

 

 

 

Interest income

$

47,691

$

651

Gain on disposition of marketable securities

 

48,360

 

Loss on settlement of debt (Note 11)

 

(70,221)

 

(495,101)

Write-down of property, plant and equipment (Note 7)

 

(556,558)

 

Loss on sale of equipment

 

 

(9,432)

Loss on impairment of marketable securities (Note 5)

 

(13,769)

 

(46,629)

Foreign currency gain

 

51,142

 

12,710

 

 

(493,355)

 

(537,801)

EXPENSES

 

 

 

 

Corporate general and administrative

 

4,111,563

 

3,143,259

Mixed Company (Note 8)

 

1,648,043

 

Debt restructuring (Note 11)

 

 

1,399,148

Exploration

 

320,611

 

249,619

Legal and accounting

 

867,965

 

270,138

Arbitration and settlement (Note 3)

 

2,785,817

 

2,153,123

Equipment holding costs

 

796,680

 

752,288

Interest expense (Note 11)

 

10,521,658

 

9,630,521

 

 

21,052,337

 

17,598,096

 

 

 

 

 

Net loss for the year

$

(21,545,692)

$

(18,135,897)

 

 

 

 

 

Net loss per share, basic and diluted

$

(0.26)

$

(0.24)

Weighted average common shares outstanding, basic and diluted

 

84,456,074

 

76,118,236

 

 

GOLD RESERVE INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 (Expressed in U.S. dollars)

 

For the Years Ended

 

December 31,

 

 

2016

 

2015

 

 

 

 

 

Net loss for the year

$

(21,545,692)

$

(18,135,897)

Other comprehensive income, net of tax:

 

 

 

 

Items that may be reclassified subsequently to the

 consolidated statement of operations:

 

 

 

 

   Unrealized gain on marketable securities, net of tax of nil

 

360,386

 

5,445

Realized gain on marketable securities, net of tax of nil

 

(60)

 

Impairment loss on marketable securities, net of tax of nil

 

13,769

 

46,629

Other comprehensive income

 

374,095

 

52,074

Comprehensive loss for the year

$

(21,171,597)

$

(18,083,823)

 

The accompanying notes are an integral part of the audited consolidated financial statements.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 5

 


 
 

GOLD RESERVE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2016 and 2015

(Expressed in U.S. dollars)

 

 

 

 

 

 

 

 

 

 

Common Shares and Equity Units

Contributed Surplus

Warrants

Stock Options

Accumulated Deficit

Accumulated Other

Comprehensive income

 

 

Common Shares

Equity Units

Amount

Balance, December 31, 2014

76,077,547

100

$ 289,326,172

 $ 11,682,644

 $ 543,915        

$ 20,669,308

$(343,215,476)

 $ 17,004

Net loss

 

 

 

 

 

 

(18,135,897)

 

Other comprehensive income

 

 

 

 

 

 

 

52,074

Stock option compensation

 

 

 

 

 

315,273

 

 

Fair value of options exercised

 

 

461,256

 

 

(461,256)

 

 

Equity Units converted to shares

100

(100)

 

 

 

 

 

 

Warrant expiration

 

 

 

543,915

(543,915)

 

 

 

Equity component – convertible notes

 

 

 

18,209,066

 

 

 

 

Common shares issued for:

 

 

 

 

 

 

 

 

 Option exercises

369,500

 

679,990

 

 

 

 

 

Balance, December 31, 2015

76,447,147

        -

 290,467,418

 30,435,625

        -

 20,523,325

(361,351,373)

 69,078

Net loss

 

 

 

 

 

 

(21,545,692)

 

Other comprehensive income

 

 

 

 

 

 

 

374,095

Stock option compensation

 

 

 

 

 

14,907

 

 

Fair value of options exercised

 

 

3,184,507

 

 

(3,184,507)

 

 

Common shares issued for:

 

 

 

 

 

 

 

 

 Private placement, net of costs

8,562,500

 

34,108,113

 

 

 

 

 

 Option exercises

2,286,500

 

4,175,875

 

 

 

 

 

 Note conversions (Note 11)

2,414,457

 

10,254,732

(4,711,725)

 

 

 

 

Balance, December 31, 2016

89,710,604

        -

$ 342,190,645

$ 25,723,900

     $   -

$ 17,353,725

$(382,897,065)

$ 443,173

                     

 

The accompanying notes are an integral part of the audited consolidated financial statements.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 6

 


 

GOLD RESERVE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in U.S. dollars)

 

 

 

For the Years Ended

 

 

December 31,

 

 

2016

 

2015

Cash Flows from Operating Activities:

 

 

 

 

Net loss for the year

$

(21,545,692)

$

(18,135,897)

Adjustments to reconcile net loss to net cash

 used in operating activities:

 

 

 

 

Stock option compensation

 

14,907

 

315,273

Depreciation

 

5,545

 

7,623

Loss on settlement of debt

 

70,221

 

495,101

Loss on sale of equipment

 

 

9,432

Write-down of property, plant and equipment

 

556,558

 

Accretion of convertible notes

 

10,463,666

 

9,573,212

Non cash restructure expense

 

 

1,399,148

Gain on disposition of marketable securities

 

(48,360)

 

    Impairment loss on marketable securities

 

13,769

 

46,629

Changes in non-cash working capital:

 

 

 

 

Net (increase) decrease in deposits and advances

 

436,334

 

(236,508)

Net decrease in accounts payable and accrued expenses

 

(858,505)

 

(2,378,703)

Net cash used in operating activities

 

(10,891,557)

 

(8,904,690)

Cash Flows from Investing Activities:

 

 

 

 

Proceeds from disposition of marketable securities

 

48,456

 

Purchase of property, plant and equipment

 

(350,000)

 

Proceeds from sales of equipment

 

 

165,000

Net cash provided by (used in) investing activities

 

(301,544)

 

165,000

Cash Flows from Financing Activities:

 

 

 

 

Proceeds from the issuance of debt

 

 

11,989,575

Proceeds from the issuance of common shares

 

38,425,875

 

679,990

Financing fees

 

(141,887)

 

(1,018,130)

Settlement of debt

 

(694,730)

 

Net cash provided by financing activities

 

37,589,258

 

11,651,435

Change in Cash and Cash Equivalents:

 

 

 

 

Net increase in cash and cash equivalents

 

26,396,157

 

2,911,745

Cash and cash equivalents - beginning of year

 

9,350,892

 

6,439,147

Cash and cash equivalents - end of year

$

35,747,049

$

9,350,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

$

749,311

$

57,310

 

                                                                                                                                                     

The accompanying notes are an integral part of the audited consolidated financial statements.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 7

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

Note 1.      The Company and Significant Accounting Policies:

Gold Reserve Inc. ("Gold Reserve", the "Company", "we", "us", or "our") is engaged in the business of acquiring, exploring and developing mining projects. We are an exploration stage company incorporated in 1998 under the laws of the Yukon Territory, Canada and continued to Alberta, Canada in September 2014.

Gold Reserve Inc. is the successor issuer to Gold Reserve Corporation which was incorporated in 1956. A significant portion of our activities relate to enforcement and collection efforts associated with the September 2014 Award in connection with Venezuela's seizure of our mining project known as the Brisas Project, the execution of the August 2016 Settlement Agreement and more recently the November 4, 2016 amended Settlement Agreement (the "Settlement Agreement") with Venezuela in regards to the payment of the Award and the acquisition of our Mining Data (See Note 3, Arbitral Award Settlement and Associated Mining Data Sale).

In February 1999 each Gold Reserve Corporation shareholder exchanged their shares for an equal number of Gold Reserve Inc. Class A common shares except in the case of certain U.S. holders who for tax reasons elected to receive equity units which were comprised of one Gold Reserve Inc. Class B common share and one Gold Reserve Corporation Class B common share and substantially equivalent to one Class A common share of Gold Reserve Inc. As of December 31, 2015, all equity units had been converted to Class A common shares.

Basis of Presentation and Principles of Consolidation. These audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The statements include the accounts of the Company, Gold Reserve Corporation, two Barbadian subsidiaries formed to hold our interest in and operate the Mixed Company as defined herein and several dormant subsidiaries domiciled in Venezuela, Canada and Barbados which were previously formed to hold our interest in our foreign subsidiaries or for future transactions. The Mixed Company is beneficially owned 55% by Venezuela and 45% by Gold Reserve. All subsidiaries are wholly owned. All intercompany accounts and transactions have been eliminated on consolidation. Our policy is to consolidate those subsidiaries where control exists. We have only one operating segment, the exploration and development of mineral properties.

Cash and Cash Equivalents. We consider short-term, highly liquid investments purchased with an original maturity of three months or less to be cash equivalents for purposes of reporting cash equivalents and cash flows. The cost of these investments approximates fair value.  We manage the exposure of our cash and cash equivalents to credit risk by diversifying our holdings into major Canadian and U.S. financial institutions.

Exploration and Development Costs. Exploration costs incurred in locating areas of potential mineralization or evaluating properties or working interests with specific areas of potential mineralization are expensed as incurred. Development costs of proven mining properties not yet producing are capitalized at cost and classified as capitalized exploration costs under property, plant and equipment. Mineral property holding costs are charged to operations during the period if no significant exploration or development activities are being conducted on the related properties. Upon commencement of production, capitalized exploration and development costs would be amortized based on the estimated proven and probable reserves benefited. Mineral properties determined to be impaired or that are abandoned are written-down to the estimated fair value. Carrying values do not necessarily reflect present or future values.

Property, Plant and Equipment. Included in property, plant and equipment is certain equipment, the carrying value of which has been adjusted, as a result of impairment tests, to its estimated fair value of $11.7 million and it is not being depreciated as it is not yet available for its intended use. The ultimate recoverable value of this equipment may be different than management’s current estimate. We have additional property, plant and equipment which are recorded at cost less impairment charges and accumulated depreciation. Replacement costs and major improvements are capitalized. Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets retired or sold are removed from the accounts and any resulting gain or loss is reflected in operations. Furniture and office equipment is depreciated using the straight-line method over 5 to 10 years. The remaining property, plant and equipment are fully depreciated.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 8

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

Impairment of Long Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the expected future net cash flows to be generated from the use or eventual disposition of a long-lived asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on a determination of the asset’s fair value. Fair value is generally determined by discounting estimated cash flows based on market participant expectations of those future cash flows, or applying a market approach that uses market prices and other relevant information generated by market transactions involving comparable assets.

Foreign Currency. The U.S. dollar is our (and our foreign subsidiaries’) functional currency. Monetary assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Non-monetary assets and liabilities are translated at historical rates and revenue and expense items are translated at average exchange rates during the reporting period, except for depreciation which is translated at historical rates. Translation gains and losses are included in the statement of operations.

Stock Based Compensation. We maintain the 2012 Equity Incentive Plan (the "2012 Plan") which provides for the grant of stock options to purchase our Class A common shares. We use the fair value method of accounting for stock options. The fair value of options granted to employees is computed using the Black-Scholes method as described in Note 10 and is expensed over the vesting period of the option. For non-employees, the fair value of stock based compensation is recorded as an expense over the vesting period or upon completion of performance. Consideration paid for shares on exercise of share options, in addition to the fair value attributable to stock options granted, is credited to capital stock. We also maintain the Gold Reserve Director and Employee Retention Plan (the "Retention Plan"). Each Unit (each, a "Retention Unit") granted under the Retention Plan to a participant entitles such person to receive a cash payment equal to the fair market value of one Class A common Share (1) on the date the Retention Unit was granted or (2) on the date any such participant becomes entitled to payment, whichever is greater. We will not accrue a liability for these Retention Units until and unless events required for vesting of the units occur.  Stock options and Retention Units granted under the respective plans become fully vested and exercisable upon a change of control.

Income Taxes. We use the liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on the differences between the tax basis of assets and liabilities and those amounts reported in the financial statements. The deferred tax assets or liabilities are calculated using the enacted tax rates expected to apply in the periods in which the differences are expected to be settled. Deferred tax assets are recognized to the extent that they are considered more likely than not to be realized.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Net Loss Per Share. Net loss per share is computed by dividing net loss by the combined weighted average number of Class A common shares and equity units outstanding during each year. In periods in which a loss is incurred, the effect of potential issuances of shares under options and convertible notes would be anti-dilutive, and therefore basic and diluted losses per share are the same.

Convertible Notes. Convertible notes are initially recorded at estimated fair value and subsequently measured at amortized cost. The fair value is allocated between the equity and debt component parts based on their respective fair values at the time of issuance and recorded net of transaction costs. The equity portion of the convertible notes is estimated using the residual value method. The fair value of the debt component is accreted to the face value of the convertible notes using the effective interest rate method over the contractual life of the convertible notes, with the resulting charge recorded as interest expense.

Financial Instruments. Marketable equity securities are classified as available for sale with any unrealized gain or loss recorded in other comprehensive income. If a decline in fair value of a security is determined to be other than temporary, an impairment loss is recognized. Cash and cash equivalents, deposits and advances are accounted for at cost which approximates fair value. Accounts payable, convertible notes and interest notes are recorded at amortized cost. Amortized cost of accounts payable approximates fair value.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 9

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

Contingent Value Rights. Contingent value rights ("CVRs") are obligations arising from the disposition of a portion of the rights to future proceeds of the Award against Venezuela and/or the sale of the Brisas Project technical mining data (the "Mining Data") that we compiled.

Warrants. Common share purchase warrants ("Warrants") issued by us entitle the holder to acquire our Class A common shares at a specific price within a certain time period. The fair value of warrants issued is calculated using the Black-Scholes method.

 

Note 2.      New Accounting Policies:

Adopted in the year

In April 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-03, Interest – Imputation of interest. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this update were effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this ASU did not have an impact on our financial statements.

In August 2014, the FASB issued ASU 2014-15, which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This update was effective for us commencing with the annual period ending after December 15, 2016 and did not have an impact on our financial statements.

Recently issued accounting pronouncements

In January 2017, the FASB issued ASU 2017-01, Business Combinations. This update clarifies the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective for us commencing with the annual period beginning after December 15, 2017 and interim periods within that annual period. We are still in the process of evaluating the impact of this standard.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows – Restricted Cash. This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This update is effective for us commencing with the annual period beginning after December 15, 2017 and interim periods within that annual period. We are still in the process of evaluating the impact of this standard.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments. This update is intended to reduce the existing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update is effective for us commencing with the annual period beginning after December 15, 2017 and interim periods within that annual period. We are still in the process of evaluating the impact of this standard.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation. The objective of this update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update is effective for us commencing with the annual period beginning after December 15, 2016. We do not expect the adoption of this standard will have a significant impact on our financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. This update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for us commencing with the annual period beginning after December 15, 2018, including interim periods within that year. We are still in the process of evaluating the impact of this standard.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This update is effective for us commencing with the annual period beginning after December 15, 2017. We do not expect the adoption of this standard will have a significant impact on our financial statements.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 10

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from contracts with customers. This standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.  This update is effective for us commencing with the annual period beginning after December 15, 2017. As we currently do not generate revenue from operations we do not expect the adoption of this standard will have a significant impact on our financial statements.

 

Note 3.      Arbitral Award Settlement and Associated Mining Data Sale:

In October 2009, we initiated a claim (the "Brisas Arbitration") under the additional facility rules of the International Centre for the Settlement of Investment Disputes ("ICSID") of the World Bank to obtain compensation for the losses caused by the actions of Venezuela that terminated the Brisas Project in violation of the terms of the Treaty between the Government of Canada and the Government of Venezuela for the Promotion and Protection of Investments (the "Canada-Venezuela BIT"). (Gold Reserve Inc. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/09/1)).

In September 2014, the ICSID Tribunal unanimously awarded us an Arbitral Award (the "Award") totaling (i) $713 million in damages, plus (ii) pre-award interest from April 2008 through the date of the Award based on the U.S. Government Treasury Bill Rate, compounded annually totaling, as of the date of the Award, approximately $22.3 million and (iii) $5 million for legal costs and expenses, for a total of $740.3 million. The Award (less legal costs and expenses) accrues post-award interest at a rate of LIBOR plus 2%, compounded annually, which at the date of the original Settlement Agreement approximated $29.4 million. Since the Award was issued, we have pursued enforcement and collection of the Award in France, England, Luxembourg and the United States.

On July 17, 2016, we signed a settlement agreement with Venezuela (the "Settlement Agreement") which contemplated payment of the Award (including accrued interest) of approximately $770 million in respect of the Brisas project and the acquisition of our Mining Data by Venezuela for $240 million, the first payment being due on or before October 31, 2016. Pursuant to the terms of the Settlement Agreement, we temporarily suspended the legal enforcement of the Award preserving our ability to resume enforcement and collection of Award via the courts, in the event we ultimately do not receive the agreed upon payments contemplated in the Settlement Agreement, as amended.

In early November 2016, and again in early December 2016, the parties executed addendums to the Settlement Agreement whereby the parties agreed to revise the payment schedule under which Venezuela would make payments related to the Award and Mining Data as follows: $300 million on or before December 15, 2016; $469.7 million on or before January 3, 2017; $50 million on or before January 31, 2017; $100 million on or before February 28, 2017 and $90 million on or before June 30, 2017. The payments for the Award and Mining Data continue to be contingent upon Venezuela obtaining the necessary financing, which has not occurred and, as a result, as of the date of this report no payments have been made by Venezuela. At the passing of the last agreed upon payment date, the Board of Directors chose to not formally terminate the Settlement Agreement as a result of the delay in the initial agreed upon payment(s), but instead instructed management to continue all efforts to work with Venezuela to complete the terms of the Settlement Agreement. Management has recently proposed a third addendum to the Settlement Agreement, whereby the parties would agree, among other things, to revise the previously proposed payment schedule.

 

 

Exhibit 99.2    Audited Consolidated Financial Statements - Page 11

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

In October 2014 and January 2015, respectively, Venezuela filed annulment applications before the Paris Court of Appeal (the "Court") regarding the Award and the December 15, 2014 arbitral decision dismissing its request for rectification. During the same period, the Company applied to the Court for exequatur of the Award, which entails recognition and enforcement of the Award in France. The Court issued the exequatur on January 29, 2015 declaring the Award to be recognized and enforceable in France. On February 7, 2017, the Court rejected all of Venezuela’s previous annulment arguments and issued a judgment dismissing the applications filed by Venezuela pending before the French courts in relation to the Award. In addition to the Award remaining enforceable in France, the Court ordered Venezuela to pay an amount of €150,000 for our legal fees and costs. Venezuela can consider appealing the judgment before the French Cour de cassation, which is the court of final resort in the French judicial system.

Obligations related to the collection of the Award

We have outstanding CVRs which entitle each holder that participated in the note restructuring completed in 2012 to receive, net of certain deductions (including income tax calculation and the payment of our then current obligations), a pro rata portion of a maximum aggregate amount of 5.468% calculated on the proceeds actually received by us with respect to the Award and/or the disposition of the Mining Data related to the development of the Brisas Project.

The Board of Directors (the "Board") approved a Bonus Pool Plan (the "Bonus Plan") in May 2012, which is intended to compensate the participants, including executive officers, employees, directors and consultants, for their past and future contributions including their past efforts related to the development of the Brisas Project, execution of the Brisas Arbitration and the collection of an award and/or sale of the Mining Data. The bonus pool under the Bonus Plan is comprised of the gross proceeds collected or the fair value of any consideration realized (calculated  on substantially the same terms as the CVR) related to such transactions less applicable taxes multiplied by 1% of the first $200 million and 5% thereafter. The Bonus Plan is administered by a committee of independent directors who selected the individual participants in the Bonus Plan and fixed the relative percentage of the total pool to be distributed to each participant. Participation in the Bonus Plan by existing participants is fully vested, subject to voluntary termination of employment or termination for cause.

The Company maintains the Gold Reserve Director and Employee Retention Plan (See Note 10). Each unit (the "Retention Units") granted to a participant entitles such person to receive a cash payment equal to the fair market value of one Gold Reserve Class A common share: (1) on the date the unit was granted or (2) on the date any such participant becomes entitled to payment, whichever is greater. Units previously granted under the plan become fully vested upon: (1) collection of Award proceeds from the ICSID arbitration process and/or sale of mining data totaling at least $200 million and we agree to distribute a substantial majority of the proceeds to our shareholders or, (2) the event of a change of control. We currently do not accrue a liability for the Bonus or Retention Plan as events required for payment under the Plans have not yet occurred.

Upon payment of the Award or receipt of proceeds from the disposition of the Mining Data, subject to certain limitations, we are obligated to make an offer to existing holders to redeem the 2018 Notes at a price equal to 120% of the principal amount of 2018 Notes then outstanding. See "Description of Capital Structure".

Our current plan is to distribute to our shareholders, in the most cost efficient manner, a substantial majority of any net proceeds, subject to applicable regulatory requirements regarding capital and reserves for operating expenses, accounts payable and income taxes, and any obligations arising as a result of the collection of the Award and/or sale of the Mining Data. Such obligations include payments pursuant to the terms of the Convertible Notes (if not otherwise converted), Interest Notes, CVRs, Bonus Plan and Retention Plan (all as defined herein), contingent legal fees of approximately $1.8 million which will become payable upon the collection of the Award or undertakings made to a court of law.

 

Exhibit 99.2    Audited Consolidated Financial Statements - Page 12

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

Note 4.      Cash and Cash Equivalents:

 

 

 

 

 

 

December 31,

 

December 31,

 

 

 

 

 

 

2016

 

2015

Bank deposits

 

 

 

 

$

1,122,542

$

9,278,730

Money market funds

 

 

 

 

 

34,624,507

 

72,162

Total

 

 

 

 

$

35,747,049

$

9,350,892

Note 5.      Marketable Securities:                                          

           

 

 

 

 

 

December 31,

 

December 31,

 

 

 

 

 

 

2016

 

2015

Fair value at beginning of year

 

 

 

 

$

180,986

$

175,541

Dispositions, at cost

 

 

 

 

 

(96)

 

Realized gain

 

 

 

 

 

(60)

 

Impairment loss

 

 

 

 

 

(13,769)

 

(46,629)

Increase in market value

 

 

 

 

 

374,155

 

52,074

Fair value at balance sheet date

 

 

 

 

$

541,216

$

180,986

 

The Company’s marketable securities are classified as available-for-sale and are recorded at quoted market value with gains and losses recorded within other comprehensive income until realized or impaired. Realized gains and losses are based on the average cost of the shares held at the date of disposition. As of December 31, 2016 and 2015, marketable securities had a cost basis of $98,043 and $111,908, respectively.

Note 6.      Fair Value Measurements:

Accounting Standards Codification ("ASC") 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1 inputs are quoted prices in active markets for identical assets or liabilities, Level 2 inputs are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability and Level 3 inputs are unobservable inputs for the asset or liability that reflect the entity’s own assumptions. The most observable level 2 inputs used for the convertible notes include the volume weighted average trading price of our common stock and the most recent observable trading history of the 2022 Notes (as defined in Note 11).

 

 

 

Fair value

December 31, 2016

 

Level 1

 

Level 2

Marketable securities

$

541,216

$

541,216

$

Convertible notes and interest notes

$

77,164,724

$

$

77,164,724

 

 

 

 

 

 

 

 

 

Fair value

December 31, 2015

 

Level 1

 

Level 2

Marketable securities

$

180,986

$

180,986

$

Convertible notes and interest notes

$

50,268,471

$

$

50,268,471

 

  

 

                                                                                                                                                                               

 

 

Exhibit 99.2    Audited Consolidated Financial Statements - Page 13

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

Note 7.      Property, Plant and Equipment:

               

 

 

 

Accumulated

 

 

 

 

Cost

 

Depreciation

 

Net

December 31, 2016

 

 

 

 

 

 

Machinery and equipment

$

11,677,534

$

$

11,677,534

Furniture and office equipment

 

519,832

 

(500,870)

 

18,962

Leasehold improvements

 

41,190

 

(41,190)

 

Mineral property

 

350,000

 

 

350,000

 

$

12,588,556

$

(542,060)

$

12,046,496

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

Cost

 

Depreciation

 

Net

December 31, 2015

 

 

 

 

 

 

Machinery and equipment

$

12,234,092

$

$

12,234,092

Furniture and office equipment

 

519,832

 

(495,325)

 

24,507

Leasehold improvements

 

41,190

 

(41,190)

 

 

$

12,795,114

$

(536,515)

$

12,258,599

 

On March 1, 2016, we completed the acquisition of certain wholly-owned mining claims known as the LMS Gold Project (the "Property"), together with certain personal property for $350,000, pursuant to a Purchase and Sale Agreement with Raven Gold Alaska Inc. ("Raven"), a wholly-owned subsidiary of Corvus Gold Inc. which was recorded as mineral property. 

Raven retains a royalty interest with respect to (i) precious metals produced and recovered from the Property equal to 3% of net smelter returns on such metals (the "Precious Metals Royalty") and (ii)  base metals produced and recovered from the Property equal to 1% of  net smelter returns on such metals, provided that we have the option, for a period of 20 years from the date of closing of the acquisition, to buy back a one-third interest
(i.e. 1%) in the Precious Metals Royalty at a price of $4 million.

Machinery and equipment consists of infrastructure and milling equipment intended for use on the Brisas Project. We continually evaluate our equipment to determine whether events or changes in circumstances have occurred that may indicate impairment has occurred. We review comparable market data for evidence that fair value less cost to sell is in excess of the carrying amount.  In 2016, based on market valuations for mining equipment which included the review of transactions involving comparable assets, we recorded a write-down of $0.6 million to an estimated fair value. During the second quarter of 2015, equipment with a carrying value of $174,432 was sold and we recorded a loss on sale of $9,432.

Note 8.      Mixed Company:

On August 7, 2016, we executed an agreement ("Mixed Company Agreement") with Venezuela for the formation of a jointly owned company ("Mixed Company") and in October 2016, together with Venezuela, we established Empresa Mixta Ecosocialista Siembra Minera, S.A. ("Siembra Minera"), the entity that will develop the Brisas Cristinas Project.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 14

 


 
 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

Siembra Minera is beneficially owned 55% by Corporacion Venezolana De Mineria, S.A., a Venezuelan government corporation, and 45% by Gold Reserve and the parties will retain their respective interest in the Siembra Minera in the event the agreed upon payments, pursuant to the Settlement Agreement, are not made by Venezuela. Siembra Minera will, among other things, hold the gold, copper, silver and other strategic mineral rights within Bolivar State, including the Brisas Cristinas Project, (each having a 40 year term comprised of 20 years with two 10 year extensions), be authorized, via Presidential Decrees and Ministerial and Central Bank resolutions, to carry-on it's business, pay a net smelter return royalty to Venezuela on the sale of gold, copper, silver and any other strategic minerals over the life of the project and provide net profits participation based on the sales price of gold per ounce. We incurred costs of $1.6 million during 2016 associated with the legal negotiation related to the Mixed Company Agreement and our efforts to facilitate the establishment of Siembra Minera.

Note 9.            KSOP Plan:

The KSOP Plan, adopted in 1990 for retirement benefits of employees, is comprised of two parts, (1) a salary reduction component, and a 401(k) which includes provisions for discretionary contributions by us, and (2) an employee share ownership component, or ESOP. Allocation of Class A common shares or cash to participants’ accounts, subject to certain limitations, is at the discretion of the Board. There have been no Class A common shares allocated to the KSOP Plan since 2011. Cash contributions for the KSOP Plan years 2016 and 2015 were approximately $163,000 and $150,000, respectively.

 

Note 10.    Stock Based Compensation Plans:

Equity Incentive Plans

On June 27, 2012, the shareholders approved the 2012 Equity Incentive Plan (the "2012 Plan") to replace our previous equity incentive plans. In 2014, the Board amended and restated the 2012 Plan changing the maximum number of Class A common shares issuable under options granted under the 2012 Plan from a "rolling" 10% of the outstanding Class A common shares to a fixed number of 7,550,000 Class A common shares. On September 19, 2016, the Board approved an amendment and restatement of the 2012 Plan to increase the maximum number of shares issuable thereunder to 8,750,000, representing less than 10% of the issued and outstanding Class A Common Shares of the Company at such date. Such amendment was approved by the TSX Venture Exchange ("TSXV") on October 6, 2016.

As of December 31, 2016, there were 5,393,000 options available for grant. Grants are made for terms of up to ten years with vesting periods as required by the TSXV and as may be determined by a committee of the Board established pursuant to the 2012 Plan.

 

Share option transactions for the years ended December 31, 2016 and 2015 are as follows:

 

2016

 

2015

 

Shares

Weighted Average Exercise Price

 

Shares

Weighted Average Exercise Price

Options outstanding - beginning of year

5,643,500

$ 2.43

 

5,698,000

$ 2.31

Options exercised

(2,286,500)

1.83

 

(369,500)

1.84

Options granted

-

-

 

315,000

3.90

Options outstanding - end of year

3,357,000

$ 2.84

 

5,643,500

$ 2.43

 

 

 

 

 

 

Options exercisable - end of year

3,357,000

$ 2.84

 

5,593,500

$ 2.42

 

 

 

 

 

 

 

Exhibit 99.2    Audited Consolidated Financial Statements - Page 15

 


 
 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

The following table relates to stock options at December 31, 2016:

 

 

Outstanding Options

 

Exercisable Options

Exercise Price

Number

Weighted Average Exercise Price

Aggregate Intrinsic Value

Weighted Average Remaining Contractual Term (Years)

 

Number

Weighted Average Exercise Price

Aggregate Intrinsic Value

Weighted Average Remaining Contractual Term (Years)

$1.92

875,000

$1.92

$1,968,750

4.44

 

875,000

$1.92

$1,968,750

4.44

$2.89

1,607,000

$2.89

2,056,960

0.08

 

1,607,000

$2.89

2,056,960

0.08

$3.00

250,000

$3.00

292,500

1.44

 

250,000

$3.00

292,500

1.44

$3.89

100,000

$3.89

28,000

3.21

 

100,000

$3.89

28,000

3.21

$3.91

215,000

$3.91

55,900

8.49

 

215,000

$3.91

55,900

8.49

$4.02

310,000

$4.02

46,500

7.56

 

310,000

$4.02

46,500

7.56

$1.92 - $4.02

3,357,000

$2.84

$4,448,610

2.64

 

3,357,000

$2.84

$4,448,610

2.64

During the years ended December 31, 2016 and 2015, the Company granted nil and 0.32 million options, respectively. In 2016 and 2015, approximately 2.3 million and 0.4 million outstanding options were exercised, respectively for net proceeds to the Company of approximately $4.2 million and $0.7 million, respectively. The Company recorded non-cash compensation expense during 2016 and 2015 of $0.02 million and $0.3 million, respectively, for stock options granted in 2015 and prior periods.

The weighted average fair value of the options granted in 2015 was calculated as $0.85. The fair value of options granted was determined using the Black-Scholes model based on the following weighted average assumptions:

 

 

 

2015

Risk free interest rate

 

 

0.66%

Expected term

 

 

2.0 years

Expected volatility

 

 

38%

Dividend yield

 

 

nil

The risk free interest rate is based on the US Treasury rate on the date of grant for a period equal to the expected term of the option. The expected term is based on historical exercise experience and projected post-vesting behavior. The expected volatility is based on historical volatility of our common stock over a period equal to the expected term of the option.

Retention Plan and Change of Control Agreements

The Company maintains the Gold Reserve Director and Employee Retention Plan.  Each unit (the "Retention Units") granted to a participant entitles such person to receive a cash payment equal to the fair market value of one Gold Reserve Class A common share: (1) on the date the unit was granted or (2) on the date any such participant becomes entitled to payment, whichever is greater. Units previously granted under the plan become fully vested upon: (1) collection of Award proceeds from the ICSID arbitration process and/or sale of mining data totaling at least $200 million and we agree to distribute a substantial majority of the proceeds to its shareholders or, (2) the event of a change of control.  A “Change of Control”, as it relates to the Retention Plan, means one or more of the following: the acquisition by any individual, entity or group, of beneficial ownership of the Company of 25 percent of the voting power of the outstanding Common Shares; a change in the composition of the Board that causes less than a majority of the current directors of the Board to be members of the incoming board; solicitation of proxies or consents by or on behalf of a person other than the board; reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company; liquidation or dissolution of the Company; or any other event the Board reasonably determines constitutes a Change of Control. As of December 31, 2016 an aggregate of 1,457,500 unvested units have been granted to directors and executive officers of the Company and 315,000 units have been granted to other employees.  The Company currently does not accrue a liability for these units as events required for vesting of the units have not yet occurred. The minimum value of these units, based on the grant date value of the Class A common shares, was approximately $7.8 million. The Company also maintains change of control agreements with certain officers and employees. As of December 31, 2016, the amount payable under these agreements in the event of a change of control, including unvested retention units, was approximately $16.0 million.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 16

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

 

Note 11.    Convertible Notes and Interest Notes:

During the fourth quarter of 2015, we issued approximately $13.4 million aggregate principal amount of new 11% Senior Secured Convertible Notes due December 31, 2018 (the "New Notes") and modified, amended and extended the maturity date of approximately $43.7 million aggregate principal amount of previously outstanding convertible notes, interest notes and accrued interest from December 31, 2015 to December 31, 2018 (the “Modified Notes and,  together with the New Notes, the "2018 Convertible Notes"). The New Notes are comprised of approximately $12.3 million aggregate principal amount of 2018 Convertible Notes, issued with an original issue discount of 2.5% of the principal amount, and approximately $1.1 million of additional 2018 Convertible Notes representing 2.5% of the extended principal and interest amount due to the note holders as a restructuring fee.

The total cost of the new issuance and restructuring of the 2018 Convertible Notes was approximately $2.4 million, which includes approximately $1.4 million of extension and issuance fees that were expensed and approximately $1.0 million associated with legal and associated transactional fees that were capitalized.

Approximately $30.7 million aggregate principal amount of the Modified Notes and $10.7 million aggregate principal amount, respectively, of the New Notes were issued to related parties which exercised control or direction over more than 10% of our Class A common shares prior to the transactions and as a result, those portions of the transactions were considered to be related party transactions.

The Modified Notes include convertible notes and interest notes from previous financings and restructurings in 2007, 2012 and 2014. Pursuant to a 2012 restructuring, we issued CVRs that entitle the holders to an aggregate of 5.468% of any future proceeds, net of certain deductions (including income tax calculation and the payment of our then current obligations), actually received by us with respect to the Brisas Arbitration proceedings and/or disposition of the Mining Data.

The 2018 Convertible Notes bear interest at a rate of 11% per year which is accrued quarterly and is payable in the form of a new 11% Senior Secured Interest Notes due December 31, 2018 (the "Interest Notes" and, together with the 2018 Convertible Notes, the “2018 Notes”) and payable in cash at maturity.  Interest on the Interest Notes is also payable in additional Interest Notes. The 2018 Convertible Notes are convertible, at the option of the holder, into 333.3333 Class A common shares per $1,000 principal amount (equivalent to a conversion price of $3.00 per common share) at any time upon prior written notice to us. The Interest Notes are not convertible into our Class A common shares or any other security. We also have outstanding $1.0 million aggregate principal amount of 5.50% Senior Subordinated Convertible Notes due June 15, 2022 (the “2022 Convertible Notes” and, together with the 2018 Convertible Notes, the “Convertible Notes”) issued in May 2007 with a maturity date of June 15, 2022. The 2022 Convertible Notes bear interest at a rate of 5.50% per year, payable semiannually in arrears on June 15 and December 15 and, subject to certain conditions we may redeem, repurchase or convert the 2022 Convertible Notes into our Class A common shares at a conversion price of $7.54 per common share.

The amount recorded as Convertible Notes and Interest Notes in the consolidated balance sheet as of December 31, 2016 is comprised of approximately $36.8 million carrying value of 2018 Notes, approximately $1.0 million of 2022 Convertible Notes and Interest Notes of approximately $6.2 million. The carrying value of the 2018 Convertible Notes is being accreted to face value using the effective interest rate method over the expected life of the 2018 Convertible Notes with the resulting charge recorded as interest expense.

The 2018 Notes are secured by substantially all of our assets and are subject to certain terms including: (1) the Award and the Mining Data, or any payments made thereon,  may not be pledged without consent of holders comprising at least 75% in aggregate principal amount of outstanding 2018 Notes; (2) subject to certain exceptions, we may not incur any additional indebtedness without consent of holders comprising at least 75% in aggregate principal amount of the outstanding 2018 Notes; (3) the Company may not engage in any future financings  whether by private placement or otherwise, without the consent of the Majority Holders which expires upon the earliest of (i) a substantial majority of the Awards proceeds being distributed to the shareholders and (ii) December 31, 2016. Thereafter, to the extent the 2018 Notes remain outstanding, each holder of the Secured Notes will have the right to participate, on a pro-rata basis based on the amount of equity it holds, including Class A common shares issuable upon conversion of convertible securities, in any future equity (or equity-linked) or debt financing; (4) the 2018 Notes shall be redeemable on a pro-rata basis, by us at the note holders’ option, for an amount of cash equal to 120% of the outstanding principal balance upon (a) the issuance of a final Arbitration Award, with respect to which enforcement has not been stayed and no annulment proceeding is pending, or (b) our receipt of proceeds from the sale of the Mining Data; provided we shall only be obligated to make a redemption to the extent net cash proceeds received are in excess of $20,000,000, net of taxes and $13,500,000 to fund professional fees and expenses and accrued and unpaid prospective operating expenses; (5) capital expenditures (including exploration and related activities) shall not exceed an aggregate of $500,000 in any 12-month period without the prior consent of holders of a majority in the aggregate principal amount of the outstanding 2018 Notes; (6) subject to certain exceptions, we shall not incur, create or suffer to exist any liens securing indebtedness without consent of holders comprising at least 75% in aggregate principal amount of the outstanding 2018 Notes; and (7) we shall not agree with any holder of the 2018 Notes to any amendment or modification to any terms of any security issued under the indenture governing the 2018 Notes, provide any fees or other compensation whether in cash or in-kind to any holder of such securities, or engage in the repurchase, redemption or other defeasance of any such security without offering such terms, compensation or defeasance to all holders of the 2018 Notes on an equitable and pro-rata basis.

Exhibit 99.2    Audited Consolidated Financial Statements - Page 17

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

In accordance with accounting standards, we allocated the 2018 Convertible Notes between their equity and liability component parts based on their respective fair values at the time of issuance. The liability component was computed by discounting the stream of future payments of interest and principal at an effective interest rate of 27% which was the estimated market rate for a similar liability that does not have an associated equity component. The equity portion of the 2018 Convertible Notes was estimated using the residual value method at approximately $18.2 million net of issuance costs which were allocated pro rata between the equity and liability components. The fair value of the liability component is accreted to the face value of the 2018 Notes using the effective interest rate method over the expected life of the 2018 Convertible Notes, with the resulting charge recorded as interest expense. Extinguishment accounting was used for the Modified Notes resulting in a loss of $0.5 million in the fourth quarter of 2015 due to the unamortized discount remaining on the Modified Notes prior to the restructuring.

In 2016, $7.2 million face value of 2018 Convertible Notes were converted at a price of $3.00 per share resulting in the issuance of 2.4 million Class A common shares. As of December 31, 2016, the Company had $50.9 million face value of Convertible Notes and $6.2 million face value of Interest Notes outstanding.

Note 12.    Common Shares:

 

On May 17, 2016, we closed a non-brokered private placement with certain arm’s length investors for gross proceeds of $34.3 million (the "Private Placement"). Pursuant to the Private Placement, we issued 8,562,500 Class A common shares at a price of $4.00 per share. No commission or finder’s fee was paid in connection with the Private Placement. The shares were offered pursuant to exemptions from the prospectus requirements of applicable securities legislation and are subject to a hold period in Canada of four months and a day from their date of issuance.

During 2016 and 2015, certain directors, officers, employees and consultants exercised approximately 2.3 million and 0.4 million outstanding options, respectively for net proceeds to the Company of approximately $4.2 million and $0.7 million, respectively.

Note 13.    Income Tax:

 

Income tax expense differs from the amount that would result from applying Canadian tax rates to net loss before taxes. These differences result from the items noted below:

 

 

2016

 

2015

Income tax benefit based on Canadian tax rates

$

5,386,423

$

4,533,974

Increase (decrease) due to:

 

 

 

 

 Different tax rates on foreign subsidiaries

 

248,385

 

222,999

 Non-deductible expenses

 

(1,040,629)

 

(1,712,121)

 Change in valuation allowance and other

 

(4,594,179)

 

(3,044,852)

 

$

– 

$

                                                                                                                               

Exhibit 99.2    Audited Consolidated Financial Statements - Page 18

 


 

GOLD RESERVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars)

 

No current income tax has been recorded by us for each of the two years ended December 31, 2016. We have recorded a valuation allowance to reflect the estimated amount of the future tax assets which may not be realized, principally due to the uncertainty of utilization of net operating losses and other carry forwards prior to expiration. The valuation allowance for future tax assets may be reduced in the near term if our estimate of future taxable income changes. The components of the Canadian and U.S. future income tax assets as of December 31, 2016 and 2015 were as follows:

 

 

Future Tax Asset

 

 

2016

 

2015

Net operating loss carry forwards

 

46,962,497

 

40,779,302

Property, Plant and Equipment

 

3,227,610

 

3,087,432

Capital loss carry forwards

 

15,411

 

1,116,595

Other

 

330,882

 

325,467

 

 

50,536,400

 

45,308,796

Valuation allowance

 

(50,536,400)

 

(45,308,796)

Net deferred tax asset

$

                  –

$

 

 

At December 31, 2016, we had the following U.S. and Canadian tax loss carry forwards:

 

 

 

U.S.

 

Canadian

Expires

 

$

1,386,674

$

2018

 

 

1,621,230

 

2019

 

 

665,664

 

2020

 

 

896,833

 

2021

 

 

1,435,774

 

2022

 

 

1,806,275

 

2023

 

 

2,386,407

 

2024

 

 

3,680,288

 

2025

 

 

4,622,825

 

1,946,470

2026

 

 

6,033,603

 

3,612,395

2027

 

 

4,360,823

 

13,768,805

2028

 

 

1,769,963

 

13,048,798

2029

 

 

2,159,079

 

16,121,064

2030

 

 

3,216,024

 

18,051,860

2031

 

 

3,041,866

 

5,237,048

2032

 

 

5,532,290

 

6,734,675

2033

 

 

1,933,918

 

9,702,739

2034

 

 

2,099,507

 

12,593,389

2035

 

 

3,770,594

 

15,742,039

2036

 

$

52,419,637

$

116,559,282

 

 

 

 

 

 

Exhibit 99.2    Audited Consolidated Financial Statements - Page 19

 

gdrzfform40fexhibit993042817.htm - Generated by SEC Publisher for SEC Filing

Exhibit 99.3          Management’s Discussion and Analysis

The following Management’s Discussion and Analysis ("MD&A") of Gold Reserve Inc. ("Gold Reserve", the "Company", "we", "us", or "our") should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2016 and 2015, the related notes contained therein as well as the 2015 MD&A. This MD&A has been approved by our Board of Directors (the "Board") and is dated April 28, 2017

 

CURRENCY

 

Unless otherwise indicated, all references to "$", "U.S. $" or "U.S. dollars" in this MD&A refer to U.S. dollars and references to "Cdn$" or "Canadian dollars" refer to Canadian dollars. The 12 month average rate of exchange for one Canadian dollar, expressed in U.S. dollars, for each of the last two calendar years equaled 0.7544 and 0.7820, respectively, and the exchange rate at the end of each such period equaled 0.7448 and 0.7226, respectively.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

 

The information presented or incorporated by reference in this MD&A contains both historical information and "forward-looking statements" (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) or "forward looking information" (within the meaning of applicable Canadian securities laws) (collectively referred to herein as "forward looking statements") that may state our intentions, hopes, beliefs, expectations or predictions for the future.

Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies that may cause our actual financial results, performance or achievements to be materially different from those expressed or implied herein and many of which are outside our control. 

Forward-looking statements involve risks and uncertainties, as well as assumptions, including those set out herein, that may never materialize, prove incorrect or materialize other than as currently contemplated which could cause our results to differ materially from those expressed or implied by such forward-looking statements.  The words "believe," "anticipate," "expect," "intend," "estimate," "plan," "may," "could" and other similar expressions that are predictions of or indicate future events and future trends, which do not relate to historical matters, identify forward-looking statements.  Any such forward-looking statements are not intended to provide any assurances as to future results.

Numerous factors could cause actual results to differ materially from those described in the forward-looking statements, including without limitation:

·         delay or failure by the Bolivarian Republic of Venezuela ("Venezuela") to make payments or otherwise honor its commitments under the settlement agreement (as amended, the "Settlement Agreement"), including with respect to the sale of our technical mining data related to the Brisas Project (the "Mining Data");

·         the ability of the Company and Venezuela to (i) successfully overcome any legal or regulatory obstacles to operate the Mixed Company for the purposes of developing the Brisas Cristinas Project (as herein defined), (ii) the completion of any additional definitive documentation and finalization of any remaining governmental approvals and (iii) obtain financing to fund the capital costs of the Brisas Cristinas Project;

·         risks associated with exploration, delineation of adequate reserves, regulatory and permitting obstacles and other risks associated with the development of the Brisas Cristinas Project;

·         local risks associated with the concentration of our future operations and assets in Venezuela, including operational, security, regulatory, political and economic risks;

Exhibit 99.3    Management’s Discussion & Analysis - Page 1

 

 

 


 

·         our ability to resume our efforts to enforce and collect the International Centre for the Settlement of Investment Disputes ("ICSID") arbitral award (the "Award"), including the associated costs of such enforcement and collection effort and the timing and success of that effort, if Venezuela fails to make payments under the Settlement Agreement, it is terminated and further efforts to consummate the Settlement Agreement are abandoned;

·         pending the receipt of payments under the Settlement Agreement or otherwise, our continued ability to service or restructure our outstanding notes or other obligations as they come due and access future additional funding, when required, for ongoing liquidity and capital resources;

·         shareholder dilution resulting from future restructuring, refinancing and/or conversion of our outstanding notes or from the sale of additional equity, if required;

·         value realized from the disposition of the remaining Brisas Project related assets, if any;

·         our prospects in general for the identification, exploration and development of mining projects and other risks normally incident to the exploration, development and operation of mining properties, including our ability to achieve revenue producing operations in the future;

·         abilities and continued participation by certain employees; and

·         U.S. and/or Canadian tax laws to which we are subject.

This list is not exhaustive of the factors that may affect any of our forward-looking statements. 
See "
Risk Factors."

Investors are cautioned not to put undue reliance on forward-looking statements, whether in this document, other documents periodically furnished or filed with the U.S. Securities and Exchange Commission (the "SEC") or other securities regulators or presented on our website.  Forward-looking statements speak only as of the date made.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this notice.  We disclaim any intent or obligation to update publicly or otherwise revise any forward-looking statements or the foregoing list of assumptions or factors, whether as a result of new information, future events or otherwise, subject to our disclosure obligations under applicable rules promulgated by the SEC and the Ontario Securities Commission (the "OSC"). Investors are urged to read our filings with U.S. and Canadian securities regulatory authorities, which can be viewed online at www.sec.gov and www.sedar.com, respectively.

Gold Reserve, an exploration stage mining company, is engaged in the business of acquiring, exploring and developing mining projects. Management’s recent activities, as more fully discussed below have focused on:

SETTLEMENT AGREEMENT

§  The signing of a Memorandum of Understanding (the "MOU") in February 2016 with the Bolivarian Republic of Venezuela ("Venezuela") that contemplated settlement, including payment and resolution, of the Award granted in our favor by ICSID in respect of the Brisas Project and the transfer of the Mining Data;

§  The execution of a Settlement Agreement in July 2016 with Venezuela which provided for payment of the Award (including accrued interest) in the amount of approximately $770 million in respect of the Brisas project and the acquisition by Venezuela of the Mining Data for $240 million;

§  The execution of addendums to the Settlement Agreement in early November and again in early December 2016 whereby the parties agreed to revise the payment schedule. Any payments pursuant to the Settlement Agreement continue to be contingent upon Venezuela obtaining the necessary financing, which has not occurred and, as a result, as of the date of this report no payments have been made by Venezuela; and

Exhibit 99.3    Management’s Discussion & Analysis - Page 2

 

 

 


 

§  At the passing of the last agreed upon payment date, the board of directors chose to not formally terminate the Settlement Agreement as a result of the delay in the initial agreed upon payment(s), but instead instructed management to continue all efforts to work with Venezuela to complete the terms of the Settlement Agreement. Management has recently proposed and Venezuela is currently considering a third addendum to the Settlement Agreement, whereby the parties would agree, among other things, to revise the previously proposed payment schedule.

MIXED COMPANY AGREEMENT

·         The parties signed an agreement ("Mixed Company Agreement") on August 7, 2016, for the formation of a jointly owned company ("Mixed Company") to develop the Brisas and the adjacent Cristinas gold-copper project (the "Brisas Cristinas Project");

·         Formed GR Mining (Barbados) Inc. ("GR Mining") and GR Engineering (Barbados) Inc. (“GR Engineering”) in early 2016. GR Mining was formed to hold our interest in Siembra Minera and provide for the management of the development and operation of the Brisas Cristinas Project and GR Engineering was formed to provide technical services to Siembra Minera; and

·         Established Empresa Mixta Ecosocialista Siembra Minera, S.A. ("Siembra Minera"), the Mixed Company that will develop the Brisas Cristinas Project, in October 2016.

PRIVATE PLACEMENT

·         Completed a non-brokered private placement in May 2016 for the issuance of 8,562,500 Class A common shares at $4.00 per share for gross proceeds of $34.3 million.

AWARD ENFORCEMENT

·         Due to the rejection on February 7, 2017 by the Paris Court of Appeal of Venezuela’s annulment arguments and the issuance of a judgment dismissing the applications filed by Venezuela pending before the French courts in relation to the Award we initiated service to accelerate Venezuela’s appeal  before the French Cour de cassation, which is the court of final resort in the French judicial system. Regardless of whether Venezuela files an appeal to the Cour de cassation, the exequatur previously achieved by us remains in full force and effect; and

·         Continued legal efforts in the United States and Luxembourg to posture the Company for future legal activities related to enforcement of the Award.

OTHER

·         Continued to pursue the sale of the Brisas Project equipment; and

·         Pursued activities related to the LMS property in Alaska.

Exhibit 99.3    Management’s Discussion & Analysis - Page 3

 

 

 


 

EXPLORATION PROSPECTS

Brisas Cristinas Project

Empresa Mixta Ecosocialista Siembra Minera, S.A.

In August 2016, we executed an agreement with Venezuela for the formation of a jointly owned Mixed Company to develop and operate the Brisas Cristinas Project. On September 29, 2016 a Presidential Decree was issued authorizing the formation of Siembra Minera.

In anticipation of the Mixed Company Agreement, GR Mining and GR Engineering were formed in early 2016. GR Mining was formed to hold our interest in Siembra Minera and provide for the management of the development and operation of the Brisas Cristinas Project and GR Engineering was formed to provide technical services to Siembra Minera. Siembra Minera is owned 55% by Venezuela through Corporacion Venezolana De Mineria, S.A. (a Venezuelan government corporation) and 45% by GR Mining.

The completion of the Mixed Company Agreement was based upon extensive long-term negotiations with Venezuelan authorities, related to significant business terms, including economic conditions and various decrees and resolutions impacting the entity envisioned to develop the Brisas Cristinas Project. Concurrent with those activities, we developed the Business Plan for the Brisas Cristinas Project with broad input from our engineering consultant. Thereafter we met with and reviewed the Business Plan with PDVSA Development. These discussions were central to our joint agreement to revise royalty and income tax rates related to the Project resulting in parties concluding negotiations and coming to an agreement. Thereafter, from April to July 2016, we negotiated the various terms of the articles of incorporation and by-laws of Siembra Minera. On October 4th, Siembra Minera was duly incorporated before the Register Office in Puerto Ordaz, Bolivar state and published its incorporation in Official Gazzete No. 41.002 of that same date.

On October 31, 2016, the Ministry of Mines issued Resolution 000030 which was published in the Official Gazzette No. 41.022 on November 2, 2016, assigning the area (approximately 18,950 hectares) including the Brisas Cristinas area to Siembra Minera. On March 27, 2017, Presidential Decrees were issued transferring all of the gold and strategic minerals (including copper and silver) rights to Siembra Minera. 

These Decrees also authorized a term of twenty years plus extensions, a NSR royalty of five percent for the first 10 years of production and six percent for the following 10 years, a special advantage to Venezuela of three percent of gross sales and authorization to export and sell concentrate and doré containing gold, copper, silver and other strategic minerals outside of Venezuela and maintain foreign currency balances associated with sales proceeds.

The significant negotiated terms related to the formation of Siembra Minera and its development and operation of the Brisas Cristinas Project include:

§  Siembra Minera holds the rights to the gold, copper, silver and other strategic minerals contained within a 18,950 hectare area located in the Km 88 gold mining district of southeast Bolivar State which includes the Brisas Cristinas Project;

§  GR Engineering, under a Technical Services Agreement, will provide engineering, procurement and construction services to Siembra Minera for a fee of 5% over all costs of construction and development and, thereafter, for a fee of 5% over operating costs during operations;

§  Presidential Decrees, within the legal framework of the "Orinoco Mining Arc" (created on February 24, 2016 under Presidential Decree No. 2.248 as an area for national strategic development Official Gazzette No. 40.855), will or have been issued to provide for tax and fiscal incentives for mixed companies operating in that area that include exemption from value added tax, stamp tax, municipal taxes and any taxes arising from the contribution of tangible or intangible assets, if any, to the mixed companies by the parties and the same cost of electricity, diesel and gasoline as that incurred by the government or related entities;

§  Gold price participation, in accordance with an agreed upon formula resulting in specified respective percentages based on the sales price of gold per ounce. For sales up to $1,600 per ounce, net profits will be allocated 55% to Venezuela and 45% to us. For sales greater than $1,600 per ounce, the incremental amount will be allocated 70% to Venezuela and 30% to us. For example, with sales at $1,600 and $3,500 per ounce, net profits will be allocated 55.0%  ̶ 45.0% and 60.5%  ̶ 39.5%, respectively;

Exhibit 99.3    Management’s Discussion & Analysis - Page 4

 

 

 


 

§  Net smelter return royalty (“NSR”) to Venezuela on the sale of gold, copper, silver and any other strategic minerals of 5% for the first ten years of commercial production, 6% for the next ten years;

§  Income tax rate of 14% for years one to five, 19% for years 6 to 10, 24% for years 11 to 15, 29% for years 16 to 20 and 34% thereafter;

§  The Parties agreed to work together to complete financing(s) to jointly fund the contemplated $2.1 billion anticipated capital costs of the Brisas Cristinas project on behalf of Siembra Minera, which is expected to be comprised of a combination of project financing , development agencies, equipment manufacturer, offtake and smelter financings. In order to facilitate the early startup of the pre-operation and construction activities, Venezuela agreed to advance $110.2 million to Siembra Minera, which will be repaid from the financing proceeds;

§  Funds associated with future capital cost financings will be held in offshore US dollar accounts and dividends and profit distributions, if any, will be directly paid to the shareholders;

§  All funds will be converted into local currency at the most favorable exchange rate offered by Venezuela to other entities to pay, as required, Venezuela income taxes and annual operating and capital costs denominated in Bolivars for the Brisas Cristinas Project. Venezuela agrees to use its best efforts to grant to Siembra Minera similar terms that would apply to the Brisas Cristinas Project in the event Venezuela enters into an agreement with a third party for the incorporation of a mixed company to perform similar activities with terms and conditions that are more favorable than the above tax and fiscal incentives;

§  Venezuela will indemnify us and our affiliates against any future legal actions associated with the Brisas Cristinas Project; and

§  The board of directors is comprised of seven individuals, of which four are appointed by Venezuela and three by us.

Exhibit 99.3    Management’s Discussion & Analysis - Page 5

 

 

 


 

Brisas Cristinas Location

The Brisas Cristinas Project is located in the Guyana region, in the Kilometer (Km) 88 gold mining district of Bolivar State in southeast Venezuela. The name Kilometer 88 for the district came from the area being located near kilometer 88 marker of the road linking El Dorado (Km 0) with the Brazilian border (Pan American Highway or Highway 10). Las Claritas is the closest town to the property. The closest nearby large city is Puerto Ordaz situated on the Orinoco River near its confluence with the Caroní River. Puerto Ordaz is home to most of the major industrial facilities like the aluminum smelters and port facilities accessible to ocean-going vessels from the Atlantic Ocean via the Orinoco River, a distance of about 200 kilometers.

Exhibit 99.3    Management’s Discussion & Analysis - Page 6

 

 

 


 

 

Exhibit 99.3    Management’s Discussion & Analysis - Page 7

 

 

 


 

Brisas Cristinas History

Gold was first discovered in the Brisas Cristinas region in 1920. Gold mining at the site was initiated in the 1930's and continued sporadically on a minor scale until the early 1980’s when a gold rush occurred. During this period it has been reported that several thousand small miners worked alluvial and saprolite-hosted gold deposits using hydraulic mining techniques. This material was processed in sluices and small hammer mills. Since the early 1960’s the mining ministry granted gold mining concessions in the Guayana region, including the 1964 Las Cristinas and the 1988 Brisas concessions with small scale mining activities continuing under a legal framework.

Also, in the late 1980’s the mining ministry assigned to CVG, a state owned development corporation for the Guayana Region, the rights to grant gold mining operating contracts in the whole Guayana region, excluding the areas already under concession. Since Las Cristinas concessions had by then elapsed, CVG cleared the area of small miners and in 1991 established a joint venture with Placer Dome Inc. ("Placer") named Minera Las Cristinas (MINCA), for the development of the property. At approximately the same time, in 1992 we acquired the Brisas concession initiating the exploration and development of the Brisas property. The amount of gold recovered over the years is unknown and much of the Brisas Cristinas project area now held by Siembra Minera is now void of any substantial vegetation and covered with tailings.

Las Cristinas

Based on publicly available information, Placer conducted essentially all of the modern exploration on Cristinas during their tenure on the property from 1991 to 2001. Placer completed line cutting, mapping, rock and soil sampling, geophysics, and drilling of 1,174 drill holes for a total of 158,738 meters of drilling, resulting in a significant presence of gold and copper in the deposit. Placer’s drilling was conducted in essentially three phases – shallow drilling to test saprolite, bedrock drilling and infill drilling in saprolite, and finally infill drilling of the pit area. Placer completed a comprehensive feasibility study on the project in 1996 that was updated in 1998.

After extensive exploration, Placer announced commencement of construction of the project in August 1997. However, in January 1998, Placer announced it had decided to suspend construction. Construction resumed once again in May 1999 but was again suspended in July 1999 due to uncertainties with respect to gold prices and legal security of title. Up until that time, Placer had reportedly spent US$168 million on the project.

 CVG took possession of the property in 2001 and in 2002 signed a mine operating agreement with Crystallex International ("Crystallex") to explore, mine, and produce gold at Las Cristinas. Crystallex reportedly drilled 90 holes for a total of 28,427 meters from 2003 through early 2007. Crystallex’s 2003 drilling program twinned selected Placer holes to independently evaluate Placer’s drill-hole data and assay base. Crystallex’s subsequent drilling, conducted from 2004 through 2007, focused on infill drilling, drilling down-dip extensions of the stratiform mineralized zone, and exploring strike extensions of the deposit.

Brisas

The Brisas concession was acquired by us in August 1992 with the acquisition of Compañia Aurifera Brisas del Cuyuni C.A. Prior to 1992, no known drill holes existed on the Brisas site. Initial work included surface mapping, regional geophysical surveys, and geochemical sampling. Several anomalies were identified on the property and drilling and assaying began in 1993. The presence of a large strata bound gold-copper mineralization was discovered in both alluvial and hard rock material early in the drilling program. Additional work followed with petrology, mineral studies, density tests, metallurgical sample collection, and laboratory test work.

We commenced initial exploration drilling in 1993 utilizing both auger and core drilling methods. A majority of the exploration and development drilling took place in 1996 and 1997. From 1996 on, all exploration drilling was completed utilizing diamond drill core rigs. Additional exploration drilling was completed in 1999, 2003, 2004, and 2005. As of 2005, 802 exploration holes had been drilled of which 731 were diamond core holes.  This represented 186,094 meters of exploration core drilling, and 189,985 total meters of exploration drilling, core and auger. Subsequent to 2005, 76 additional holes were drilled on the Brisas property for geotechnical and other studies.

We completed and filed in August 2005 a Venezuelan Environmental and Social Impact Assessment (V-ESIA) for the Ministry of Environment and Natural Resources ("MARN"), with the assistance of a number of independent consultants. At the time the V-EISA satisfied Venezuelan requirements to obtain an “Administrative Authorization to Affect Natural Resources for Construction of Infrastructure and Exploitation of Alluvial and Vein Deposits of Gold and Copper,” which was granted by MARN. In addition, an International Environmental and Social Impact Assessment (I-ESIA) meeting World Bank Standards, the Equator Principles and any requirements desired by financing institutions was completed in draft form during the subsequent months.

Exhibit 99.3    Management’s Discussion & Analysis - Page 8

 

 

 


 

Detailed engineering, including construction drawings, site layout, manpower requirements, construction planning, and many other functions required in a project of this magnitude were substantially advanced through 2008 by SNC Lavalin and was approximately 85% complete by mid-2008. This was the final step in the engineering process for mine development work and is expected to be an important resource for the development of the Brisas Cristinas project.

Brisas Cristinas Combined

Brisas and Cristinas properties are immediately adjacent to each other. Historical studies for both projects show their respective pit designs coming within a few hundred meters of each other and mineralization continuing in-line along strike over a distance of 5 to 6 kilometers covering both areas. The void between the projects, the Potaso area, had never been significantly drilled due to a large man-made lake that was a result of historical small miner activity. However, based on historical small miner activities in the immediate area and the alignment of strike and dip of mineralization being almost identical on both properties, we believed that it was highly likely that the mineralization continued between the pits.

The concept of combining the Brisas and Cristinas properties was first evaluated in the year 2000 and as part of that effort we studied additional economic aspects of developing and exploiting the mineralization on the properties. It was determined that not only did the adjoining properties share one large, continuous mineral deposit, but developing and exploiting this mineralization in a combined project would have less impact on the environment than two separate projects, and as a result would create efficiencies and economies of scale that would enhance the combined project economics. The concept was developed utilizing Brisas information combined with available Cristinas data from public records and permit documents.

In 2001 INGEOMIN, the Venezuelan government's Geological & Mining Institute prepared a comprehensive report evaluating the environmental, social and economic impacts of the combined project being proposed by us and strongly recommended its implementation. However, Venezuela decided to move forward, on a standalone basis, with the Las Cristinas project with Crystallex while we continued our work on the combined project in parallel with our efforts to develop the Brisas Project.

Multiple mineral resource estimates and feasibility studies, that are no longer current, have been completed on each individual property in the past and Siembra Minera plans to complete a new resource estimate on the combined properties in the future  with a view to preparing a Preliminary Economic Assessment ("PEA") in accordance with National Instrument 43-101- Standards of Disclosure for Mineral Projects ("NI 43-101").

We believe that based on previous studies the Brisas Cristinas Project has the potential to be a large open pit mining project. Our base plan is to combine the Brisas and Cristinas properties into one project and utilize the 2008 Brisas design and layout as an initial blue print. This concept eliminates the duplication of infrastructure facilities and staff from the previously independent project plans. It reduces the project footprint or disturbed ground by 30 to 40% of the area from what was anticipated for the independently developed projects. As a result, it allows the down-dip expansion of the pit area for increased recovery of addition potential ore resources while reducing related environmental impacts significantly. The Brisas site would be the starting point for the project due to its advanced stage of design, environmental permitting and readiness for construction activity.

Brisas Cristinas Project Completed Activities

Siembra Minera held its first meeting of shareholders and its board of directors in October 2016 where the appointment of the directors was confirmed and key strategic issues associated with the startup of the initial activities of Siembra Minera were discussed. A second board meeting was held in early 2017, in the office of the Ministry of Mines, with the presence of the Directors, Legal Consultant, and Secretary of Siembra Minera, again the discussions covered key strategic issues.

Subsequent to the October board meeting, we traveled to Germany with Venezuelan representatives to meet with a German smelter company resulting in a signed letter of intent through which the smelter expressed its interest in a future service agreement including possible financing conditions and offering the plant's available capacity to process 60 to 100% of the copper concentrate for 10 to 15 years.

The primary activities of Siembra Minera since its formation has included:

·         Established bank accounts in both offshore US$ accounts and Venezuelan Bolivars. External auditors have been identified and formal designation will occur during upcoming board meetings. Certain key employees have been engaged and additional initial interviews completed. Potential office locations in Caracas and Puerto Ordaz have been identified;

Exhibit 99.3    Management’s Discussion & Analysis - Page 9

 

 

 


 

·         Initiated discussions whereby the parties are working on a draft EPCM contract between GR Engineering and Siembra Minera;

·         Conducted preliminary meetings with CAMIMPEG, a Venezuelan Army construction company, to provide project information regarding the early works plan which include man-camp and certain access roads;

·         Provided CVG-Tecmin, a state corporation that provides technical services and information with regard to the development of mineral resources, with the project description and related technical information to produce and file the Environmental Questionnaire leading to the granting of the Authorization to Occupy the Territory (AOT);

·         Sponsored several meetings with Mission Piar to initiate surveys and follow up on the activities of small miners groups currently working in certain parts of the 18,950 hectare property. Mission Piar is a Government instituted Mission under the Ministry of Mines in charge of providing assistance and coordination of small mining activities;

·         Held fact finding meetings with the Ministry of Mines and members of the Guayana REDI to provide inputs and assist in the establishment of a General Plan of Security for the Project Area. The security of the project area falls under the responsibility of the Region of Integral Defense Guayana (REDI) lead by General Carlos Augusto Leal Tellería;

·         Initiated efforts to define the Relocation Plan with the help of Venezuelan officials and REDI and supported by a census that is underway by Mission Piar. Several meetings have taken place between the Ministry of Mines and small miners as part of the relocation plan;

·         Initiated development of a Small Miner Project with input from entities such as Ministry of Mines, REDI, Mission Piar and others to provide alternatives to some of the small miners that currently operate in the project area. This project is intimately linked to the Relocation Plan and includes an Early Production Plan, training of miners in environmental protection and remediation, and in other disciplines so many of them can be incorporated in the project construction and operation; and

·         Requested a High Definition Multispectral Satellite image of the Project land position and its adjacent area at the end of 2016 which will be used to document existing conditions and as an aid for documenting and census of existing small miner activity. Completion will take several months due to multiple satellite passes to meet cloud cover requirement.

Brisas Cristinas Initial Scope of work

Siembra Minera will focus its initial staffing efforts towards providing the future management group the required organization structure, policies and facilities to support its workforce and expects to employ a project director and a general manager as soon as is possible. Thereafter, additional key staff positions are expected to be filled and the following tasks will be implemented:

·         Identify and lease secure office facilities with reliable access to utilities such as electrical power, telephone and secure high speed internet and source office furniture and IT hardware.

·         Engage professional consultants with very proven success in technical matters, engineering, design, operations experience and international environmental & social standards required to conduct data research, studies, resource estimates, pit design, mine plans, complete engineering & design work, prepare drawings, specifications, procurement documents and other documents for permits and reports.

·         Engage consultants to assist in acquiring Venezuela visas, provide for incoming/outgoing transportation, day to day office work and transportation, living accommodations or housing assistance.

·         Prepare and implement security policies, transportation and housing policies, hire and train security staff, acquire vehicles and equipment. It will be necessary to determine number of security people including those required for rotating shift assignments and number and type of vehicles.

Exhibit 99.3    Management’s Discussion & Analysis - Page 10

 

 

 


 

·         Complete initial contractual agreement between GR Engineering and Siembra Minera for EPCM services which will allow for the engagement of consultants and early-works contractors. A more extensive contract document will be completed as significant detail engineering, procurement and construction takes place.

·         Prepare and submit updated permit applications for approval of early-works construction which will include timber clearing, road building and sediment control structures in areas of the access roads, overland conveyor corridor, powerline corridor, process plant, man camp area, rock quarry and tailings dam area. In conjunction with the permit application we expect to prepare and submit a draft scope of work, design specifications and drawings for construction.

·         Assemble a temporary work facility and temporary housing or man camp for Company employees and consultants associated with the early-works and field data collection required for the International ESIA.

·         Prepare and implement long-term small miner consultation, relocation and education program.

·         Implement public consultation regarding the plans for construction, operations, reclamation, project size & magnitude providing for mitigation of the impact upon the general public and communities surrounding the project area.

·         Prepare a preliminary ESIA document using existing information from the Brisas Project, which would exclude updated field data and the result of the small miner and public consultation, but would allow for the initiation of discussions with institutions for project financing and for preparation of Venezuela environmental permits. A more substantial final ESIA would be completed when the Cristinas field data is collected, combined project engineering and design is substantially complete and the small miner and public consultations with mitigation plans are complete.

·         Initiate the preparation of a Preliminary Economic Assessment NI 43-101 document by an independent engineering company allowing for the public disclosure of resource tonnages, metal grade, annual production and any economic projections and providing support for obtaining international bank or financial institution project financing.

·         Engage an international engineering contractor and initiate detail engineering work which will provide information regarding engineering, design and cost estimates for completion of a feasibility study. This effort will also provide design specification and pricing information that is needed for ordering long lead time equipment. The work would also support public consultations activities, permitting efforts, and completion of an updated NI 43-101 document. The new NI 43-101 will include the feasibility study results and provide a proven and probable reserve estimate for public disclosure and financing.

 

LMS Gold Project

On March 1, 2016, we completed the acquisition of certain wholly-owned mining claims known as the LMS Gold Project (the "Property"), together with certain personal property for $350,000, pursuant to a Purchase and Sale Agreement  with Raven Gold Alaska Inc. ("Raven"), a wholly-owned subsidiary of Corvus Gold Inc. 

Raven retains a royalty interest with respect to (i) "Precious Metals" produced and recovered from the Property equal to 3% of "Net Smelter Returns" on such metals (the "Precious Metals Royalty") and (ii)  "Base Metals" produced and recovered from the Property equal to 1% of  Net Smelter Returns on such metals, provided that we have the option, for a period of 20 years from the date of closing of the acquisition, to buy back a one-third interest (i.e. 1 %) in the Precious Metals Royalty at a price of $4 million. The Property consists of 36 contiguous State of Alaska mining claims covering 61 km² in the Goodpaster Mining District situated approximately 25 km north of Delta Junction and 125 km southeast of Fairbanks, Alaska. 

The Property remains at an early stage of exploration and is the subject of a National Instrument 43-101 Technical Report entitled "Technical Report on the LMS Gold Project, Goodpaster Mining District, Alaska" dated February 19, 2016 prepared for us by Ed Hunter, BSc., P. Geo and Gary H. Giroux, M.A. Sc., P. Eng.

Exhibit 99.3    Management’s Discussion & Analysis - Page 11

 

 

 


 

We continue to evaluate other prospects with a focus on, among other things, location, the mineralized potential, economic factors, the level and quality of previous work completed on the prospect.  We are focused on prospects that are located in a politically friendly jurisdiction, which has clear and well-established mining, tax and environmental laws with an experienced mining authority.

BRISAS ARBITRAL AWARD

SETTLEMENT AGREEMENT

In February 2016, we signed the Memorandum of Understanding (the "MOU") with the Bolivarian Republic of Venezuela ("Venezuela") represented by the Office of the Attorney General and the Ministry of Popular Power of Oil and Mining that contemplated settlement, including payment and resolution, of the Award granted in our favor by ICSID in respect of the Brisas Project and the transfer of the Mining Data. In April 2016, in the spirit of providing continuity to the discussions begun in February, the parties agreed to extend the MOU to allow for further efforts to agree on a settlement.

At the urging of the board of directors, management had made numerous multi-weeks trips to Venezuela since late 2015 to meet face to face with the President of Venezuela, Minister of Mines, Attorney General, Central Bank President, and many other key administration officials and their staff to ensure that a settlement agreement with Venezuela was obtained.

In July 2016, we executed a Settlement Agreement with Venezuela which contemplated payment of the Award, including interest, of approximately $770 million in respect of the Brisas project, acquisition of our Mining Data by Venezuela for $240 million and, included, among other terms:

·         Payment of the Award in respect of the Brisas project of approximately $770 million, including accrued interest up to February 24, 2016, in two installments, $600 million due on or before October 31, 2016 and the remaining approximately $170 million on or before December 31, 2016. The Company agreed to temporarily suspend the legal enforcement of the Award until final payment is made by Venezuela, at which time we will permanently cease all legal activities related to the collection of the Award.

·         The acquisition of our Mining Data by Venezuela for $240 million, payable in four quarterly installments of $50 million beginning October 31, 2016, with a fifth and final installment of $40 million due on or before October 31, 2017. After the final payment, the Mining Data will be transferred to the Venezuelan National Mining Database.

·         Venezuela agreed to use the proceeds from any financing it closes after the execution of this agreement to pay us the amounts owed under the agreement in preference to any other creditor.

·         Termination of the agreement by written notice by us, without requiring any decision from any judicial authority if the two installments with respect to the payment of the Award are not received within the periods provided in the Settlement Agreement.

·         In early November 2016, and again in early December 2016, the parties executed addendums to the Settlement Agreement whereby the parties agreed to revise the payment schedule under which Venezuela would make payments related to the Award and Mining Data as follows: $300 million on or before December 15, 2016; $469.7 million on or before January 3, 2017; $50 million on or before January 31, 2017; $100 million on or before February 28, 2017 and $90 million on or before June 30, 2017. The payments for the Award and Mining Data continue to be contingent upon Venezuela obtaining the necessary financing, which has not occurred and, as a result, as of the date of this report no payments have been made by Venezuela. At the passing of the last agreed upon payment date, the Board of Directors chose to not formally terminate the Settlement Agreement as a result of the delay in the initial agreed upon payment(s), but instead instructed management to continue all efforts to work with Venezuela to complete the terms of the Settlement Agreement. Management has recently proposed and Venezuela is currently considering a third addendum to the Settlement Agreement, whereby the parties would agree, among other things, to revise the previously proposed payment schedule.

Exhibit 99.3    Management’s Discussion & Analysis - Page 12

 

 

 


 

ENFORCEMENT AND COLLECTION EFFORTS

In October 2009, we initiated a claim (the "Brisas Arbitration") under the Additional Facility Rules of ICSID of the World Bank to obtain compensation for