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Baker & McKenzie Letterhead
July 15, 2005
VIA EDGAR TRANSMISSION
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attention: Ms. Jill S. Davis
RE: Gold Reserve Inc.
Form 20-F, Filed April 1, 2005
File No. 001-31819
Ladies and Gentlemen:
On behalf of our client, Gold Reserve Inc. (the "Company"), set forth below
is the further response of the Company to the comments contained in the
Staff's letter to Mr. Robert A. McGuinness, Vice President - Finance & Chief
Financial Officer, dated June 14, 2005, regarding the Company's Form 20-F
filed April 1, 2005. The Company's previous responses to these and related
comments were set forth in letters filed with the Securities and Exchange
Commission (the "Commission") on April 20, April 27, June 20, and June 24,
2005. For ease of reference, the comments have been repeated below, with the
response set forth underneath. In addition, attached hereto for your
consideration is an amended and restated Form 20-F/A (the "Form 20-F/A"),
marked to show proposed changes, which Form 20-F/A the Company proposes to
file upon approval from the Staff. Various of the responses to comments below
reference such changes in the Form 20-F/A.
Form 20-F for the year ended December 31, 2004
Note 11. Differences Between Canadian and U.S. GAAP, page 57
1. We have reviewed your responses to prior comment 1. Based on the
information provided in your response we are unable to agree with your
conclusions. We note that:
no amounts were expensed for exploration activities through the periods ended
December 31, 2004;
under your accounting policy for Canadian GAAP, as noted on page 49,
"exploration costs incurred in locating areas of potential mineralization are
expensed as incurred. Exploration costs of properties or working interests
with specific areas of potential mineralization are capitalized at cost
pending the determination of a property's economic viability";
you do not identify any differences in your accounting for exploration costs
between Canadian and US GAAP in your reconciliation footnote beginning on
page 57; and,
as of the year ended December 31, 2004 it is unclear that you had designated
proven and probable reserves for US GAAP, as defined by the Commission's
Industry Guide 7, which can be found on our website at:
http://www.sec.gov/divisions/corpfin/forms/industry.htm#secguide7.
Accordingly, it appears that you were in the exploration stage through the
periods ended December 31, 2004 and all costs incurred related to acquired
and potential properties represent exploration costs and under US GAAP, are
expensed as incurred. Please revise your US GAAP reconciliation to account
for exploration costs as an expense as incurred.
Further to our previous discussions and written responses, the Company notes
the following:
As to the specific issue of capitalizing costs of acquiring unproven mining
properties, pursuant to the guidance contained in EITF 04-3 Mining Assets:
Impairment and Business Combinations, the Company believes that the
approximately $11 million related to acquisition costs of the Brisas project
are properly capitalized and the continued classification as an asset on the
Company's Balance Sheet is supported by the considerable work performed on
the Brisas project.
As to the issue of capitalizing costs related to the exploration and
development of the Brisas project, the Company believes that it has a
reasonable basis for the continued capitalization of costs related to the
Brisas project. Prior to the early 1990s it was generally accepted practice
to capitalize the costs in question. Thereafter, the Commission revised
certain aspects of its position regarding capitalization of exploration
costs, but allowed companies such as Gold Reserve, which had historically
capitalized pre-proven and probable expenditures to continue to do so.
Sometime thereafter it appears the Commission revised its position on the
"grandfathering" provisions and advised issuers they could no longer carry
these costs on the balance sheet.
In 1998 as part of the Staff's review of a proposed reorganization plan, the
Company had extensive discussions with the Staff regarding reserves as well
as related issues regarding the expensing or capitalization of the Company's
exploration costs. As to issues raised by the Staff at the time of the
Reorganization, including with respect to the capitalization of acquisition
and exploration costs, the Company understood these issues had been resolved
in 1998 as part of its move to Canada at the time final comments were cleared
and the Registration Statement on Form S-4 was permitted to go effective.
It is the Company's position that the Commission concurred with its request
in the second to last paragraph in the attached November 17, 1998 letter that
"no changes be made to existing accounting policy and its US GAAP financial
statements." The Company takes this view, in part, since following
discussions with the Company and review of related correspondence, the Staff
did not request that the Company take the alternative accounting position
noted in the last paragraph of the letter.
Based in part on the facts described above, the results of its preliminary
feasibility study in 1998 and especially the results of the final feasibility
study in January 2005, the Company believes it has proven and probable
reserves for purposes of the Commission's Industry Guide 7 and a reasonable
basis for continuing to carry the costs associated with the development of
the Brisas project on it balance sheet,
Finally, as requested by Ms. Davis, attached is a summary of annual
exploration and development costs since inception.
Engineering Comments
General
2. We note that in several locations in this document you disclose that
reserves are calculated in accordance with N.I. 43-101. Please disclose your
reserves according to Industry Guide 7. If you chose to disclose your
reserves the meet the requirements of N.I. 43-101, please do so and reconcile
the two estimates. Please remove any references to the SME standards.
The Company believes that its reserves as set forth in its originally filed
Form 20-F conform to the reserve disclosure requirements under Industry Guide
7, subject only to the clarification in the Form 20-F/A as to definitions
which differ in certain respects between N.I. 43-101 and Industry Guide 7.
References to SME have been deleted as reflected in the draft Form 20-F/A.
3. Please revise your disclosure in your use of the term "development" to
reflect the fact that under Industry Guide 7, the term "development" applies
only after you have designated reserves based on bankable feasibility.
Eliminate other uses of the term "development."
The Company considers itself to be in the development stage pursuant to N.I.
43-101 and, as a result of the fact that the Company received a final
feasibility study in early 2005, also considers itself to be in the
development stage pursuant to Industry Guide 7. However, to the extent the
word "development" is used to describe the status or stage of the project,
the requested change has been made as reflected in the draft Form 20-F/A
attached hereto.
4. Please minimize duplication of disclosure throughout document.
We have streamlined disclosure where possible without having to make
wholesale, non-substantive changes to the originally filed Form 20-F, as
reflected in the draft Form 20-F/A attached hereto.
Recent Developments, page 4
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5. In your discussion of certain Venezuelan taxes and import duties, please
expand your discussion as to why these taxes and duties are not included in
your cost estimate. Wherever, this disclosure in made in the document, revise
accordingly.
Costs of certain Venezuelan value added taxes and import duties are not
currently included in the initial cost of the project because Venezuelan law
provides for exoneration of or an exemption from paying such taxes. The
requested clarifying changes have been made to the draft Form 20-F/A attached
hereto.
6. Please provide a risk factor that addresses the uncertainty of your
obtaining financing for your project, particularly in light of political
events in Venezuela.
The Company believes such a risk factor already appears under the heading:
"RISK FACTORS - Obtaining funding for project planning, construction and
development and related operating activities is essential to the Company's
future plans." Related issues are addressed under "RISK FACTORS - Our mining
assets are concentrated in Venezuela and our operations could be disrupted."
Information on the Company, page 10
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Properties, page 11
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7. Proven and probable reserves are disclosed in your documents. Please
forward to our engineer as supplemental information and not as part of the
registration statement, information that establishes the legal, technical and
economic feasibility of the materials designated as reserves, as required by
Section C of SECis Industry Guide 7. Also please forward to us the basis for
your estimates of resources.
This includes:
Property and geologic maps,
Description of your sampling and assaying procedures,
Drill-hole maps showing drill intercepts,
Representative geologic cross-sections and drill logs,
Description and examples of your cut-off calculation procedures,
Cutoffs used for each category of reserve and resource,
Justifications for the drill hole spacings used at various classification
levels,
A detailed description of your procedures for estimating "reserves" and
"resources,"
All reserve and/or resource audit reports that were produced for your
property in the last three years,
Copies of pertinent engineering and geological reports, and feasibility
studies or mine plans (including cash flow analyses) concerning your property
that are needed to establish the existence of reserves as defined in Industry
Guide 7.
A detailed permitting and government approval schedule and explanation for
the project, particularly identifying the primary construction approval(s)
and your current location on that schedule.
Please provide the name and phone number for a technical person our engineer
may call, if he has technical questions about your reserves. If there are any
questions concerning the above request, please phone the Mining Engineer noted
below. If possible, provide supplemental information in electronic form using
..pdf files.
The Company provided the requested information on June 20, 2005 in its letter
to Mr. Roger Baer and discussed them in various conversations with Mr. Baer
most recently on July 6, 2005.
8. Please disclose your reserves in a table, noting metallurgical recovery,
metal prices and currency conversion factors in footnotes.
The Company's mineral reserve table (Properties-Mineral Reserve Estimate,
page 16 of originally filed 20F) has been revised to include metallurgical
recovery rates. Metal prices were provided as previously filed. Currency
conversion rates are not included as all amounts are in U.S. Dollars.
9. You disclose that your reserve estimates are based on prices of $400 per
ounce and $1.00 per pound, as well as $350 and 90 cents respectively. Please
clarify this disclosure. Preferably remove the disclosure about the $400/$1
prices.
The draft Form 20-F/A attached hereto clarifies that the $400 per ounce and
$1.00 per pound amounts relate only to the economic model case in the final
feasibility study. Mineral reserves are calculated at $350 per ounce gold and
$0.90 per pound copper.
10. The term "world class" is a subjective term. Please provide us with
objective third party support for your statement or delete it.
We have deleted this term, per your request, as reflected in the draft Form
20-F/A attached hereto.
11. Please provide disclosure as to the after tax rate of return for the
project, or provide a detailed assessment as to why you are not disclosing
your rate of return and project net present value on an after-tax basis.
The after tax rate of return and net present value have been included in the
draft Form 20-F/A.
12. Concerning your disclosure in your "Mineral Resource Estimate" section,
your disclosure using non-Commission "resource" estimates is allowed for
Canadian incorporated companies under the exception in Instruction 3 to
Paragraph (b)(5) of Industry Guide 7. Please always disclose your measured
and indicated resources separately from your inferred resources, using
separate tables and narratives. Resources should only be reported as "in
place" tonnage and grade, and should not be disclosed as units of product,
such as ounces of gold or pounds of copper. The relative quality, reliability
and risk associated with each group of estimates must be clearly distinguished
and conveyed to the average non-technical reader.
The measured and indicated resources are disclosed separately in a table. The
inferred resource is disclosed in a paragraph below the table. The resource
disclosure was revised to only include in-place tonnage and grade. A
reference to the glossary of terms contained in the appendix has been
included to help the reader understand the terminology used therein.
Before the Measured and Indicated Resource table, please insert the following
including the indenting and bolding:
Cautionary Note to U.S. Investors concerning estimates of Measured and
Indicated Resources
This section uses the terms "measured" and "indicated resources." We advise
U.S. investors that while those terms are recognized and required by Canadian
regulations, the U.S. Securities and Exchange Commission does not recognize
them. U.S. investors are cautioned not to assume that any part or all of
mineral deposits in these categories will ever be converted into reserves.
The legend above has been inserted in the draft Form 20-F/A attached hereto.
Before the Inferred Resource table, please insert the following including the
indenting and bolding:
Cautionary Note to U.S. Investors concerning estimates of Inferred Resources
This section uses the term "inferred resources." We advise U.S. investors
that while this term is recognized and required by Canadian regulations, the
U.S. Securities and Exchange Commission does not recognize it. "Inferred
resources" have a great amount of uncertainty as to their existence, and
great uncertainty as to their economic and legal feasibility. It cannot be
assumed that all or any part of an Inferred Mineral Resource will ever be
upgraded to a higher category. Under Canadian rules, estimates of Inferred
Mineral Resources may not form the basis of feasibility or prefeasibility
studies, except in rare cases. U.S. investors are cautioned not to assume
that part or all of an inferred resource exists, or is economically or
legally minable.
The legend above has been inserted in the draft Form 20-F/A attached hereto.
13. Please remove the metric mineral resources table, and provide disclosure
that the disclosed reserves are the part of the mineral resources that are
designated as commercially viable. Note that the mineral resources estimate
does not represent material that exists in addition to the reserve materials.
The requested changes have been made to the draft Form 20-F/A attached hereto.
Concerning your mineral reserve table, please disclose the metallurgical
recoveries expected.
14. The requested changes have been made to the draft Form 20-F/A attached
hereto.
Directors, Senior Management and Employees, page 25
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15. Please disclose:
Relevant professional training or technical credentials in the exploration,
development and operations of metal mines of all officers and directors, and
the names of companies they have worked for, as well as their positions at
those companies.
The approximate percent of their time that the officers worked on affairs of
your company this last year.
Other significant responsibilities that they currently have with other
companies.
If directors or management lack professional or technical credentials related
to mineral exploration, mine development or mining, disclose this information.
The Company believes its current disclosure complies with Item 401 of
Regulation S-K. As to the various bullets, the Company comments as follows:
Each of senior management has more than 25 years of professional experience
in the their respective field. The CEO, President, Senior Vice President,
Vice President-Administration and Vice President-Project Development have
extensive experience in the mining industry. A number of the directors has
either worked in the mining industry or advised mining clients over the years.
The officers devote their day-to-day time to the business and affairs of the
Company.
The officers do not spend a material amount of time on the positions for MGC
Ventures, Inc. and Great Basin Energies, Inc. referenced in the Form 20-F or
any other company.
The Company believes that its management team and directors as a whole have
appropriate mineral exploration, mine development or mining expertise.
Additional Comment
Roger Baer requested pursuant to a telephone call on July 6, 2005 with
management that the Company address the status of any set-back or high-wall
agreement with the owners of the adjacent property to the north. The
Company's response is provided below.
The Company does not currently have a formal set-back or high-wall agreement
with the owners of the adjacent property to the north. The Company expects to
enter into a formal or informal agreement in the future, however the lack of a
formal agreement at this time does not in the Companyis opinion preclude the
Company from including the mineralization affected by the joint boundaries in
proven and probable reserves.
The mineralization on the Brisas and the Las Cristinas property to the north
is contained in a single continuous ore body. The Ministry of Basic
Industries and Mining ("MBIAM") has approved the Company's operating plan,
which includes extracting the mineralization on the northern boundary of the
Brisas property. Approval of the Company's operating plan acknowledges that
Gold Reserve, the Venezuela Government or its subcontractor will mine the
area between the pits with the extracted ore delivered to the appropriate
property owner. The Company has had discussions with the MBIAM where it
offered to mine the area and either process the ore and deliver the
equivalent value in cash or metals or deliver the mineralized material to a
stockpile of their choice.
Unlike in North America, the government owns the mineralization on a property
until the concession holder extracts the minerals. Mining laws in Venezuela
prohibit permanent structures to be built on known mineralization, prohibits
actions by property holders which could negatively impact an adjacent
property and requires that all mineralization be rationally exploited.
Venezuelan mining laws assume that the mineralization in question will be
mined during the life of the project
* * * * *
I would appreciate it if you would please call me at (713) 427-5018 after
your review of the above responses. If you are not able to reach me, please
ask for Will Davis. Thank you for your attention to this matter.
Very truly yours,
s/ Jonathan Newton
cc: Mr. Robert A. McGuinness
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REVISED SECTIONS OF 20F/A
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File Number 001-31819
GOLD RESERVE INC.
(Exact name of registrant as specified in its charter)
Yukon Territory, Canada
(Jurisdiction of incorporation)
926 West Sprague Avenue, Suite 200
Spokane, Washington 99201
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Class A common shares, no par value per share
Preferred Share Purchase Rights
(Title of each class)
The Toronto Stock Exchange ("TSX")
American Stock Exchange ("AMEX")
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
The total number of the registrant's shares outstanding as of December 31,
2004:
Class A common shares, no par value per share: 33,421,708
Equity Units, no par value per share: 658,122
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]
Registrant elected to follow financial statement Item 17.
PAGE 3....
EXPLANATORY NOTE
THIS AMENDMENT NO. 1 TO FORM 20-F FOR THE YEAR ENDED DECEMBER 31, 2004, HAS
BEEN FILED TO AMEND AND RESTATE PORTIONS OF OUR ANNUAL REPORT ON FORM 20-F
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 (ORIGINALLY FILED ON APRIL 1,
2004) IN RESPONSE TO COMMENTS WE RECEIVED FROM THE STAFF OF THE SECURITIES
AND EXCHANGE COMMISSION. CHANGES FROM OUR ORIGINAL FILING ONLY APPEAR IN THE
FOLLOWING SECTIONS: PART 1- GENERAL INFORMATION-MINERAL RESERVE ESTIMATES;
PART 1- GENERAL INFORMATION-RECENT DEVELOPMENTS;ITEM 3. KEY INFORMATION-RISK
FACTORS; ANDITEM 4. INFORMATION ON THE COMPANY-PROPERTIES-BRISAS PROJECT.
THIS AMENDMENT DOES NOT REFLECT EVENTS OCCURRING AFTER OUR ORIGINAL FILING OF
THE FORM 20-F AND DOES NOT MODIFY OR UPDATE THE DISCLOSURE THEREIN IN ANY WAY
OTHER THAN AS NECESSARY TO REFLECT THE AMENDMENTS DISCUSSED ABOVE.
PART I
GENERAL INFORMATION
Forward-Looking Statements
The information presented or incorporated by reference in this Annual Report
on Form 20-F, including Operating and Financial Review and Prospects in Item
5, contains both historical information and forward-looking statements
(within the meaning of Section 27A of the United States Securities Act of
1933, as amended (the Securities Act), and Section 21E of the United States
Securities Exchange Act of 1934, as amended (the Exchange Act)). These
forward-looking statements involve risks and uncertainties, as well as
assumptions that, if they never materialize, prove incorrect or materialize
other than as currently contemplated, could cause the results of the Company
and its consolidated subsidiaries to differ materially from those expressed
or implied by such forward-looking statements.
Numerous factors could cause actual results to differ materially from those
in the forwardlooking statements, including without limitation, our ability
to obtain additional funding for the development of the Brisas Project, in
the event any key findings or assumptions previously determined by our
experts in the final feasibility study significantly differ or change as a
result of actual results in our expected construction and production at the
Brisas Project, the risk that actual mineral reserves may vary considerably
from estimates presently made, the impact of currency, metal prices and metal
production volatility, concentration of operations and assets in Venezuela,
the regulatory, political and economic risks associated with Venezuelan
operations, changes in proposed development plans (including technology
used), our dependence upon the abilities and continued participation of
certain key employees, and the risks normally incident to the operation and
development of mining properties.
The words "believe," "anticipate," "expect," "intend," "estimate," "plan,"
"assume," "positioned," "may," "will," "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 give any assurances as to
future results.
Investors are cautioned not to put undue reliance on forward-looking
statements, and should not infer that there has been no change in the affairs
of the Company since the date of this report that would warrant any
modification of any forward-looking statement made in this document, other
documents filed periodically with securities regulators or documents
presented on our Company website. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by this notice. The
Company disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise.
Investors are urged to read the Company's filings with U.S. and Canadian
securities regulatory agencies, which can be viewed on-line at www.sec.gov,
www.sedar.com or at the Company's website, www.goldreserveinc.com.
Additionally, you can request a copy directly from the Company.
PAGE 4....
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Mineral Reserve Estimates
With the completion of the bankable feasibility study in early 2005 described
below, the Brisas project is an advanced development-stage project. The
mineral reserves contained herein have been calculated in accordance with
National Instrument 43-101, as required by Canadian Securities regulatory
authorities. We believe that the calculation of such mineral reserves is
substantially the same as those under the U.S. Securities and Exchange
Commission Industry Guide 7. However,we advise U.S. investors that
definitions contained in National Instrument 43-101 differ in certain respects
from those set forth in the U.S. Securities and Exchange Commission Industry
Guide 7.
Recent Developments
In early 2005, Aker Kvaerner Metals, Inc., a subsidiary of the international
engineering and construction services group, Aker Kvaerner ("Aker Kvaerner"),
and a number of other consultants including Pincock Allen & Holt ("PAH") and
Vector Colorado LLC ("Vector"), completed a bankable feasibility study with
respect to the construction and operation of the Brisas Project, our primary
mining asset. The feasibility study operating plan assumes a large open pit
mine and anticipates utilizing conventional truck and shovel mining methods
with the processing of ore at full production of 70,000 tonnes per day,
yielding an average annual production of 486,000 ounces of gold and 63
million pounds of copper over an estimated mine life of approximately 16
years. The operating plan further assumes proven and probable reserves of
approximately 9.2 million ounces of gold and 1.2 billion pounds of copper in
414 million tonnes of ore grading 0.69 grams of gold per tonne and 0.13%
copper, at a revenue cutoff grade of $2.76 per tonne using a gold price of
$350 per ounce and a copper price of $0.90 per pound.
Initial costs to put the Brisas Project into production (construction and
related development costs) are estimated to be approximately $552 million.
The feasibility study economic model assumed an economic base case utilizing
$400 per ounce gold and $1.00 per pound copper. At such prices, total cash
operating costs (net of copper credits) are estimated at $154 per ounce of
gold and total costs per ounce, including operating costs and initial and
sustaining capital would be $263 per ounce of gold. Costs of certain
Venezuelan valued added taxes and import duties are not currently included in
the initial cost of the project because Venezuelan law provides for
exoneration of or an exemption from paying such taxes. We are currently
exploring financing options for the Brisas Project and have retained a
financial advisor to assist in our efforts. Following completion of
environmental studies, receipt of necessary permits and obtaining sufficient
funding, construction of the planned facility is expected to take 24-26
months, with commissioning and achievement of commercial production shortly
thereafter. Based on the results of the feasibility study, the Company plans
to produce gold dorE on-site and ship gold/copper concentrate to an off-site
smelter. See Item 4. Information on the Company-Properties.
Currency
All currency is in U.S. Dollars unless otherwise noted.
Glossary
Certain technical terms used herein are defined in the glossary at the end of
this Annual Report.
PAGE 5....
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Item 1. Identity of Directors, Senior Management and Advisors - Not Applicable
Item 2. Offer Statistics and Expected Timetable - Not Applicable
Item 3. Key Information
Selected Financial Data
The selected financial data set forth below are derived from the Company's
audited financial statements and should be read in conjunction with the
Company's consolidated financial statements and notes thereto appearing in
Item 17 and Operating and Financial Review and Prospects in Item 5. The
following selected financial data have been prepared in U.S. Dollars on the
basis of accounting principles generally accepted in Canada.
2004 2003 2002 2001 2000
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(in thousands of U.S. Dollars, except share and per share amounts)
Other income $900 $770 $703 $1,200 $884
Net loss (5,483) (3,707) (3,008) (851) (1,311)
Loss per
common share(1) (0.19) (0.15) (0.13) (0.04) (0.06)
Total assets(2) 86,606 67,030 59,843 62,553 63,231
Net Assets -
Shareholders'
equity (3) 84,176 65,138 58,412 61,169 61,859
Capital stock 136,908 112,971 102,498 102,266 102,106
Common shares:(4)
Issued 33,715,795 27,750,258 22,996,158 22,655,122 22,196,242
Outstanding 33,421,708 27,456,171 22,702,071 21,361,035 21,902,155
Equity Units:(4)
Issued 1,157,397 1,237,880 1,289,980 1,313,016 1,446,396
Outstanding 658,122 738,605 790,705 813,741 947,121
1. Basic and diluted.
2. Total assets prepared in accordance with accounting principles generally
accepted in the U.S. at December 31, 2004, 2003, 2002, 2001, and 2000 were
$89,650, $70,145, $59,884, $62,713, and $63,329, respectively.
3. Total shareholders' equity prepared in accordance with accounting
principles generally accepted in the U.S. at December 31, 2004, 2003, 2002,
2001, and 2000 was $87,220, $68,253, $58,453, $61,329, and $61,957,
respectively.
4. Great Basin Energies Inc. and MGC Ventures Inc., each consolidated
subsidiaries of the Company, own shares of the Company. As a result, the
Company has an indirect investment in itself. The shares and equity units
held by these entities represent the difference between issued and
outstanding shares.
Dividends
We have not declared cash or share dividends since 1984 and have no present
plans to pay any cash or share dividends. We may declare cash or share
dividends in the future only if earnings and capital of the Company are
sufficient to justify the payment of such dividends.
Risk Factors
Obtaining funding for project planning, construction and development and
related operating activities is essential to the Company's future plans.
The Board of Directors recently approved the financing and construction of
the Brisas Project based on the results of the bankable feasibility study
completed in early 2005. The feasibility study contemplates an initial
capital investment to put the Brisas Project into production of approximately
$552 million. The timing and extent of funding such investment depends on a
number of important factors, including the actual timetable of our 2005-2006
development plan, completion of environmental studies, receipt of appropriate
permits, the price of gold and copper, results of our efforts to obtain
financing, the political and economic conditions in Venezuela, and our share
price.
PAGE 6....
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In the near-term, management believes that cash and investment balances are
sufficient to enable the Company to fund its pre-construction activities
through 2006 (excluding substantial Brisas Project construction activities).
These activities are expected to consist of detailed project engineering,
development and implementation of project related contracts such as
engineering, procurement and construction management, port facilities,
concentrate sales contracts, electricity and fuel supply contracts, and a
number of other agreements related to the construction and operation of the
Brisas Project, completion of the Brisas Project Environmental and Social
Impact Assessment Study, obtaining the required permits (primarily the
permits to construct and operate) and identifying suitable funding sources.
Management provides no assurances that it will be able to obtain the
substantial additional financing that will be needed to construct the Brisas
Project, and the Company currently has no definitive proposals or firm
commitments to proceed with such financing. Failure to raise the required
funds will mean the Company is unable to construct and operate the Brisas
Project, which would have a material adverse effect on the Company.
As of March 28, 2005, the Company had approximately $32 million in cash and
investments. We currently do not generate revenue from operations and have
historically financed operating activities primarily from the sale of common
shares or other equity securities.
Risks arising from the bankable feasibility study and construction of the
Brisas Project.
The bankable feasibility study was completed to determine the economic
viability of the Brisas mineralized deposit. Many factors are involved in the
determination of the economic viability of mining a deposit, including the
achievement of satisfactory mineral reserve estimates, the level of estimated
metallurgical recoveries, capital and operating cost estimates, construction,
operation, permit and environmental requirements, and the estimate of future
gold prices. Capital and operating cost estimates are based upon many
factors, including anticipated tonnage and grades of ore to be mined and
processed, the configuration of the ore body, ground and mining conditions
and the ore and anticipated environmental and regulatory compliance costs.
While the Company is satisfied with the feasibility study, each of these
factors involves uncertainties and the making of assumptions and, as a
result, the Company cannot give any assurance that the overall feasibility
study will prove accurate in preparation, construction and development of the
Brisas Project or that any key finding or underlying assumption will not prove
to be inaccurate. It is not unusual in new mining operations to experience
unexpected problems during development. Costs could increase depending upon a
number of factors within and beyond our control. The actual cost and time of
placing the Brisas Project into production could differ significantly from
estimates contained in the bankable feasibility study. Likewise, if and after
the Brisas Project is developed, actual operating results may differ from
those anticipated in the feasibility study.
The volatility of the price of gold and copper could have a negative impact
upon our current and future operations.
The price of gold and copper has a significant influence on the market price
of our common shares and our business activities. Fluctuation in gold and
copper prices directly affects, among other things, the overall economic
viability of the project, our ability to obtain sufficient financing required
to construct the Brisas Project, including the terms of any such financing,
and the calculation of reserve estimates. The price of gold is affected by
numerous factors beyond our control, such as the level of inflation,
fluctuation of the United States Dollar and foreign currencies, global and
regional demand, sale of gold by central banks and the political and economic
conditions of major gold producing countries throughout the world. Copper
prices also fluctuate and are generally affected by global and regional
demand and existing inventories. As of March 28, 2005, the closing price for
gold and copper was: Gold: $426 per ounce, copper: $1.52 per pound. The
following table sets forth the average of the daily closing price for gold
and copper for the periods indicated as reported by the London Metal Exchange:
YEAR ENDED DECEMBER 31,
5 Yr. Avg. 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------
Gold ($ per ounce) $ 327 $ 410 $ 363 $ 310 $ 271 $ 279
Copper ($ per pound) $ 0.88 $ 1.37 $ 0.81 $ 0.71 $ 0.73 $ 0.80
PAGE 8....
Venezuelan environmental laws and regulations
Venezuela maintains environmental laws and regulations for the mining
industry that impose significant obligations on companies doing business in
the country. The MARN, which administers Venezuelan environmental laws and
regulations, proscribes certain mining recovery methods deemed harmful to the
environment and monitors mining activities to ensure compliance. Venezuela's
environmental legislation provides for the submission and approval of
environmental impact statements for certain operations and provides for
restrictions and prohibitions on spills, releases, or emissions of various
substances produced in association with certain mining industry operations,
such as seepage from tailings disposal areas which could result in
environmental pollution. Insurance covering losses or obligations related to
environmental liabilities is not maintained and will only be maintained in
the future if available on a cost-effective basis.
Challenges to mineral property titles or contract rights
Acquisition of title or contract rights to mineral properties is a very
detailed and time-consuming process under Venezuelan law. Mining properties
sometimes contain claims or transfer histories that examiners cannot verify,
and transfers can often be complex. The Company believes it has clear title
and/or rights to all of the properties for which it holds concessions or
other contracts and leases. However, the Company does not know whether
someone will challenge or impugn title or contract rights to such properties
in the future or whether such challenges will be by an individual or a
government agency. From 1992 to late 1994 the Company was involved in a
lawsuit relating to ownership of the Brisas Project. The Company successfully
defended its ownership rights in the Venezuelan courts and subsequently
settled the lawsuit for a substantial sum. A claim that the Company does not
have title or contract rights to a property could have an adverse impact on
the Company's business in the short-term and a successful claim could
negatively impact the future results of the Company.
Compliance with other laws and regulations
In addition to protection of the environment, the Company's activities are
subject to extensive laws and regulations governing health and worker safety,
employment standards, waste disposal, protection of historic and
archaeological sites, mine development and protection of endangered and
protected species and other matters. Obtaining the necessary permits is
critical to our business. Obtaining and maintaining such permits can be a
complex, time consuming process and as a result the Company cannot assess
whether necessary permits will be obtained or maintained on acceptable terms,
in a timely manner or at all. Any failure to comply with applicable laws and
regulations or failure to obtain or maintain permits, even if inadvertent,
could result in the interruption of our operations or material fines,
penalties or other liabilities.
Future results depend on the Brisas Project.
The Company has invested over $80 million on the Brisas Project. Any adverse
event affecting this property would likely significantly impact the future
results of the Company.
Our mineral resource and reserve estimates may vary from estimates in the
future.
The mineral resource and reserve estimates have been calculated in accordance
with National Instrument 43-101, as required by Canadian Securities regulatory
authorities.
This report uses the terms "measured," "indicated and "inferred" resources.
We advise U.S. investors that while those terms are recognized and required
by Canadian regulations, the U.S. Securities and Exchange Commission does not
recognize them. We believe that the calculation of mineral reserves is
substantially the same as those under the U.S. Securities and Exchange
Commission Industry Guide 7. However,we advise U.S. investors that
definitions contained in National Instrument 43-101differ in certain respects
from those set forth in the U.S. Securities and Exchange Commission Industry
Guide 7.U.S. investors are cautioned not to assume that mineralization
("mineral resource") not already categorized as mineral reserves will ever be
converted into reserves in the future.
As part of the completion of the bankable feasibility study, PAH reviewed the
methods and procedures utilized by the Company at the Brisas Project to gather
geological, geotechnical, and assaying information and found them reasonable
and meeting generally accepted industry standards for a bankable feasibility
level of study. PAH believes that the Brisas Project has conducted
exploration and development sampling and analysis programs using standard
practices, providing generally reasonable results and believes that the
resulting data can effectively be used in the estimation of mineral resource
and reserves.
PAGE 13....
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Based on the results set forth in the study, the operating plan assumes a
large open pit mine containing proven and probable reserves of approximately
9.2 million ounces of gold and 1.2 billion pounds of copper in 414 million
tonnes of ore grading 0.69 grams of gold per tonne and 0.13% copper, at a
revenue cutoff grade of $2.76 per tonne. The final pit was based on a shape
produced by an industry standard pit optimization software using a gold price
of $350 per ounce and a copper price of $0.90 per pound. Utilizing
conventional truck and shovel mining methods with the processing of ore at
full production of 70,000 tonnes per day, the study anticipates the Brisas
Project will yield an average annual production of 486,000 ounces of gold and
63 million pounds of copper over an estimated mine life of approximately 16
years.
The bankable feasibility study assumed an economic model base case utilizing
$400 per ounce gold and $1.00 per pound copper. At such prices, cash
operating costs (net of copper credits) are estimated at $154 per ounce of
gold and total costs per ounce, including operating costs and initial and
sustaining capital, would be $263 per ounce of gold. Initial capital costs to
construct and place the Brisas Project into production are currently estimated
to be approximately $552 million. Tax exonerations or tax payment holidays are
available for various taxes including value added taxes ("VAT") and import
duty tax on the initial capital costs. Management is in the process of
applying for all available exonerations and expects to obtain such
exonerations prior to the construction of the project. As a result, the cost
of such taxes and import duties are not included in the initial costs of the
project. However, there can be no assurances that such exonerations will be
obtained.
Construction of the Brisas Project, the start of which is primarily dependant
upon obtaining the necessary permits and sufficient funding, is expected to
take 24-26 months, with commissioning and achievement of commercial
production shortly thereafter. Operating supplies are expected to be
purchased primarily in Venezuela and from other South American countries.
Power is available from a transmission line that passes within a few
kilometers of the project site. The power company has constructed a
substation at the Km 88 location for connection to the project. Abundant
water is available in the area, with the Brisas Project's fresh water
requirements being met by water pumped from the pit dewatering system, and by
rainfall recovered in the tailings pond. On-site accommodations will be
provided for employees, who will be drawn both from the local area, and from
the industrialized area around Puerto Ordaz. Over 2,000 personnel will be
needed for the construction of the project and employment will peak at over
900 operating personnel. The mining and processing methods are all based on
conventional technology and, at present, no new or unproven technology is
expected to be employed.
The following key findings were determined by Aker Kvaerner in its
preparation of the feasibility study:
Using a pit shape based on $350/oz gold price and $0.90/lb copper price, PAH
has estimated that the Brisas Project deposit contains a proven and probable
reserve of 414.6 million tonnes of ore grading 0.69 grams per tonne gold and
0.13 percent copper. The pit design contains waste rock material of 748.3
million tonnes resulting in a 1.8:1 (waste to ore) strip ratio. Total metal
contained in the ore is 9.2 million ounces of gold and 1.2 billion pounds of
copper,
Brisas is a gold and copper deposit with favorable leverage to gold and
copper prices,
The ore-body is very large, predictable and open for further expansion,
The ore-body is relatively simple to mine, although requires special
attention to mine dewatering in order to insure mining efficiencies and pit
slope stability,
Metallurgy is straightforward with a gravity circuit, flotation to generate a
gold-copper concentrate and cyanidation of cleaner tailings,
SGS Lakefield Research confirmed the Brisas Project's gold and copper
metallurgical recovery profiles,
Existing infrastructure (including transportation and power transmission)
near the Brisas Project minimizes capital and operating costs.
PAGE 14....
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The following are the key assumptions contained in the feasibility study:
Proven 193.2 million tonnes; 0.71 g/t gold and 0.12% copper
Probable 221.3 million tonnes; 0.68 g/t gold and 0.13% copper
Strip ratio (waste: ore) 1.81:1
Mine Life (minimum) 16 years
Mill throughput 70,000 tonnes per day "Hardrock" ore
6,000 tonnes per day "Sulfide" saprolite
6,000 tonnes per day "Oxide" saprolite
Plant Metal recoveries gold 83% copper 87%
Net payable Metals gold 82.4% copper 83.0%
Life of Mine Production (payable metals) gold 7.59 million ounces
copper 979 million pounds
Average annual gold production 486,000 ounces
Average annual copper production 63 million pounds
Average annual copper concentrate production 124,000 mt
Preliminary Economic Model Results (Pre-Tax)
Gold price $400 per ounce
Copper price $1.00 per pound
Total cash operating cost
(on site and off site) $5.28 per tonne ore
Initial capital cost $552.4 million
Working capital $39.3 million
Ongoing capital $132.3 million
Cash Operating cost * $154 per ounce of gold
Production Taxes $13 per ounce of gold
Total Cash costs * $167 per ounce of gold
Capital Cost Amortization $ 96 per ounce of gold
Total Cost $263 per ounce of gold
Internal rate of return
After-Tax 9.1 %
Project net present value
After-Tax @ 0% $711 million
@ 5% $207 million
Project payback 8 years
* Net of copper by product credit
PAGE 15....
Mineral Resource and Reserve Estimates
PAH reviewed the methods and procedures utilized by the Company at the Brisas
Project to gather geological, geotechnical, and assaying information and found
them reasonable and meeting generally accepted industry standards for a
bankable feasibility level of study. PAH believes that the Brisas Project has
conducted sampling and analysis programs using standard practices, providing
generally reasonable results and believes that the resulting data can
effectively be used in the estimation of resources and reserves.
PAH calculated the mineral resource and reserve estimates contained herein,
most recently in February 2005 in accordance with National Instrument 43-101,
as required by Canadian Securities regulatory authorities. We believe that the
calculation of mineral reserves is substantially the same as those under the
U.S. Securities and Exchange Commission Industry Guide 7. However,we advise
U.S. investors that definitions contained in National Instrument 43-101differ
in certain respects from those set forth in the U.S. Securities and Exchange
Commission Industry Guide 7.
Mineral Resource Estimate
Based on work completed by PAH for the Brisas bankable feasibility study,
using an off-site smelter process for treating copper concentrates, the
Brisas Project is estimated to contain a measured and indicated mineral
resource of 10.97 million ounces of gold and approximately 1.4 billion pounds
of copper (based on 0.4 gram per tonne gold equivalent cut-off). A glossary of
terms used herein is contained in the appendix.
Cautionary Note to U.S. Investors concerning estimates of Measured and
Indicated Resources. This section uses the terms "measured" and "indicated
resources." We advise U.S. investors that while those terms are recognized
and required by Canadian regulations, the U.S. Securities and Exchange
Commission does not recognize them. U.S. investors are cautioned not to
assume that the mineralization not already categorized as mineral reserves
will ever be converted into reserves.
The February 2005 estimated measured and indicated mineral resource utilizing
an off-site smelter process is summarized in the following table and includes
the mineral reserve estimate shown in the following section: