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August 30, 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 August 5, 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, June 24, and
July 15, 2005. The July 15, 2005, response also enclosed an amended and
restated Form 20-F/A (the "Form 20-F/A"), marked to show proposed changes
responsive to the Staff's comments.
For ease of reference, the Staff's comments in response to the Company's
August 5, 2005 submission have been repeated below, with the Company's
response set forth underneath. In addition, attached hereto for your
consideration are additional marked pages for the Form 20-F/A the Company
proposes to file upon approval from the Staff.
_______________
Form 20-F for the year ended December 31, 2004
Note 11. Differences Between Canadian and U.S. GAAP, page 57
We have reviewed your response to prior comment number one and continue to be
unable to agree with your conclusions. Please explain, under your
interpretation of how to account under for mine project costs prior to the
determination of proven and probable reserves, as defined by Industry Guide
7, why these capitalized costs were not impaired under US GAAP during any of
the periods 1998 through the present. We note that during that time frame
gold commodity prices experienced sustained low prices and that it was not
until 2003 that gold prices remained above US$300 per ounce.
Please tell us whether or not events occurred which triggered the need for
you to evaluate these assets for impairment. If not, please explain why.
If you did evaluate your assets for impairment:
Please tell us what events triggered this requirement.
Please explain the method used to evaluate these assets for impairment and
the assumptions used.
We may have further comment.
_______________
Further to our previous discussions, the Tuesday, August 16, 2005 call with
the Company, its accountants and attorneys and the Staff, and written
responses, the Company reiterates that it believes it had a reasonable basis
for continuing to carry previously capitalized costs related to the Brisas
project on its balance sheet for U.S. GAAP purposes.
This belief is based on the results of its communications with the Staff in
1998, the advice of Behre Dolbear Inc. who in 2003 noted that they believed
the Company had an adequate basis under its pre-feasibility study for
supporting the estimated mineral reserves under Industry Guide 7, the annual
test of impairment (discussed with the Staff on the August 16, 2005 call)
whereby the Company concluded annually that the carrying value of the Brisas
project had not been impaired and the results of the 2005 Bankable
Feasibility Study.
However, notwithstanding the Company's belief that it has a reasonable basis
for continuing to carry previously capitalized costs related to the Brisas
project on its balance sheet for U.S. GAAP purposes, the Company has
concluded that, as a result of its discussions with the Staff and after
consultation with its independent accountants, it will amend its Form 20-F,
Note 11. Differences Between Canadian and U.S. GAAP and expense previously
capitalized costs (excluding acquisition costs) for U.S. GAAP purposes for
periods prior to January 1, 2005, which represents costs incurred prior to
the completion of the Bankable Feasibility Study. The Company's proposed
re-draft of Note 11 is shown below.
As a result of this write off, there is no reason to evaluate impairment for
U.S. GAAP purposes. For Canadian GAAP purposes the Company capitalizes costs
on properties where it has found mineralized material that does not meet all
the criteria required for classification as proven or probable reserves and
such costs have the characteristics of property, plant and equipment and it
has a reasonable basis for future recovery. On an annual basis the carrying
value of the Brisas project was evaluated for conditions that would give rise
for the need to write-off all or a portion of the amounts capitalized. Based
on Canadian GAAP no impairment has occurred and as a result, no adjustments
have been made to the carrying value of Brisas project.
11. Differences Between Canadian and U.S. GAAP:
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles (GAAP) in Canada. The effect of the
principal measurement differences between U.S. and Canadian GAAP are
summarized below.
Canadian GAAP Change U.S. GAAP
2004
Total assets $ 86,605,531 $ (37,990,343)A,C $ 48,615,188
Total shareholders' equity 84,176,058 (37,990,343)A,C 46,185,715
Net loss (5,482,629) (4,877,262)B,C (10,359,891)
Cash flow used by operations (3,958,098) (6,268,328)C (10,226,426)
Cash flow (used) provided
by investing activities (3,661,795) 6,268,328 C 2,606,533
2003
Total assets $ 67,030,482 $ (31,651,868)A,C $ 35,378,614
Total shareholders' equity 65,138,471 (31,651,868)A,C 33,486,603
Net loss (3,707,336) (7,704,726)B (11,412,062)
Cash flow used by operations (2,898,151) (2,898,151)
Cash flow provided
by investing activities 2,731,267 2,731,267
2002
Total assets $ 59,842,523 $ (34,724,809)A,C $ 25,117,714
Total shareholders' equity 58,412,021 (34,724,809)A,C 23,687,212
Net loss (3,008,122) (1,162,804)B (4,170,926)
Cash flow used by operations (2,244,724) (2,244,724)
Cash flow used
by investing activities (1,948,269) (1,948,269)
For U.S. GAAP purposes, the Company accounts for stock-based employee
compensation arrangements using the intrinsic value method. Had the fair
value method of accounting been used under U.S. GAAP, the net loss would have
been 4,690,986, 11,818,170 and 4,183,919 for the years ended December 31,
2004, 2003 and 2002, respectively.
A Under U.S. GAAP, marketable securities would be divided between
held-to-maturity securities and available-for-sale securities. Those
securities classified as available-for-sale would be recorded at market value
and the unrealized gain or loss would be recorded as a separate component of
shareholders' equity.
B For U.S. GAAP purposes, the Company accounts for stock-based employee
compensation arrangements using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No.25, "Accounting for Stock Issued
to Employees". Under U.S. GAAP, when the exercise price of certain stock
options is amended (the "Repricing "), these options are accounted for as
variable compensation from the date of the effective Repricing. Under this
method, following the repricing date, compensation expense is recognized when
the quoted market value of the Company's common shares exceeds the amended
exercise price. Should the quoted market value subsequently decrease, a
recovery of a portion, or all of the previously recognized compensation
expense will be recognized. For U.S. GAAP purposes, the Company will adopt
SFAS 123, "Accounting for Stock Based Compensation" effective January 1,
2005. SFAS 123 requires the use of the fair value method of accounting for
stock based compensation. This standard is consistent with the revised
provisions of CICA 3870, which was adopted by the Company for Canadian GAAP
effective January 1, 2004. For U.S. GAAP, the Company will apply the modified
retrospective method of adoption included in SFAS 148 and will adjust
shareholders' equity in 2005 as if the fair value based accounting method in
this statement had been used to account for all employees awards granted,
modified or settled in fiscal years beginning after December 14,1994. This
standard is consistent with the revised provisions of CICA 3870, adopted for
Canadian GAAP effective January 1, 2004.
C Under Canadian GAAP we capitalize mine development costs after proven and
probable reserves have been established. We also capitalize costs on
properties where we have found non-reserve material that does not meet all
the criteria required for classification as proven or probable reserves.
Under US GAAP, exploration and development expenditures incurred on
properties where mineralization has not been classified as a proven and
probable reserve under SEC rules are expensed as incurred. Accordingly,
certain expenditures are capitalized for Canadian GAAP purposes but expensed
under US GAAP.
_____________
Engineering Comments
General
Disclosure of two price levels may confuse investors, particularly in the
table on page 14, where it is unclear if the $400 price is related to
after-tax 9.1 percent rate-of-return and net present values. To clarify your
disclosure:
Please remove the disclosure about $400 gold prices and $1.00 copper prices
from page 13.
Please revise the disclosure in the table on page 14 to relate to the
rate-of-return to the gold price. If you wish to disclose a rate-of-return
for a $400 gold price, disclose the after-tax rate-of-return for the reserves
estimated using a $350 gold price.
_____________
As the Company has noted previously, mineral reserves contained in the
Company's 2004 Form 20-F are calculated using $350 gold and $.90 copper
which, by definition, also includes an economic analysis at $350 and $0.90,
as the economics of the project at $350 and $0.90 must be positive in order
to have proven and probable reserves. Thereafter, the published Bankable
Feasibility Study economic model was calculated using $400 gold and $1.00
copper, which is more representative of near term gold and copper prices. In
order to make the two items of disclosure more clear to the reader, the
Company has modified the table on page 14 of the Form 20-F/A as follows:
The following are the key assumptions contained in the 2005 Bankable
Feasibility Study:
Proven and probable reserves using $350 per ounce of gold and $0.90 per pound
of copper:
_____________________________________________________________
Proven Reserves 193.2 million tonnes;
0.71 g/t gold and 0.12% copper
Probable Reserves 221.3 million tonnes;
0.68 g/t gold and 0.13% copper
Strip ratio (waste: ore) 1.81:1
Mine Life 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 83.1%
copper 87.0%
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 metric tonnes
Economic Model Results using $400 per ounce of gold and $1.00 per pound
of copper:
_____________________________________________________________
Total cash operating cost
(on site and off site) $5.26 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
IRR, NPV and Payback using:
per ounce of gold and: $400 $350
per pound of copper $1.00 $0.90
___________________________________________________________________
Internal rate of return (After-Tax) 9.1% 5.2%
Project net present value (After-Tax)
@ 0% $711 million $384 million
@ 5% $207 million $12 million
Project payback 8 years 10.8 years
* Net of copper by product credit
________________
3. Based on our review of the supplemental information and a discussion with
your staff, we note that to mine your entire Brisas orebody, you must have an
agreement with the neighboring landowner(s) to mine waste from the neighbor's
lands, so that you can mine right up to the boundary. In an area associated
with your reserve estimate disclosure, please disclose that:
part of the reserve estimate is contingent to gaining a back-slope mining
agreement with the neighboring owner(s), and
the percentage reduction that would be made in the reserve estimate, if you
are unable to attain the back-slope agreement.
________________
As the Company noted in previous discussions with the Staff, the Company does
not currently have a formal set-back or high-wall agreement with the owners
(the Venezuelan government) of the adjacent property to the north. However,
based on discussions with the Ministry of Basic Industries and Mining
("MBIAM"), the Company expects to enter into a formal or informal agreement
in the future based on the following reasons:
The government of Venezuela through the MBIAM owns the Las Cristinas ("LC")
property that is located to the north and contiguous to the Brisas project.
The government of Venezuela transferred LC to Corporacion Venezolana de
Guayana ("CVG") a government-owned industrial corporation to facilitate the
exploitation of the LC mineralization. CVG subsequently contracted the mining
rights to Crystallex International Corporation ("KRY"), but not the mining
concession. The Company has been advised that KRY, as the mining contractor
and not a concession holder, cannot independently block or grant a set-back
agreement with its neighbors.
The Company understands that Venezuelan mining and environmental regulations
require the rational exploitation of mineralization and prohibits the
development of permanent structures over mineralization as well as prohibits
development efforts that hinder or negatively impact the rights of neighbors.
The Company's original mine plan has already been approved by the Venezuelan
government. This plan includes maps showing the encroachment on to LC in
order to allow the Company to rationally exploit the mineralization contained
within the Company's concession. Although the LC and Brisas mineralization is
contained within one ore body, all material including any mineralization
contained outside of the Brisas concession is considered to be waste for
purposes of the Brisas mine plan.
Approval of the Company's operating plan acknowledges that the Company, a
Venezuelan government entity 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 or their
contractors choice.
Unlike in North America, the Venezuelan government owns the mineralization on
a property until the concession holder extracts the minerals. As a result, the
Venezuelan government or in this case the MBIAM has a significant influence on
the extraction of the mineralization contained in this single continuous ore
body comprised of LC and Brisas and, as such, it is reasonable to assume that
a set-back agreement will be obtained and that the mineralization in question
will be mined during the life of the project.
For these reasons the Company believes that obtaining a formal set-back
agreement related to the LC property with the Venezuelan government and or
its subcontractor is not a significant risk.
In order to clarify the issue, the Company proposes to included the following
language in "VENEZUELAN MINING, ENVIRONMENT AND OTHER MATTERS", at the bottom
of page 19 of the Form 20-F/A:
"In addition to the issues described above, Venezuelan mining and
environmental regulations require the rational exploitation of all known
mineralization and prohibits the development of permanent structures over
mineralization and development efforts that hinder or negatively impact the
rights of neighbors. These regulations provide, among other things, the
environment in which neighboring title-holders can negotiate set-back
agreements in order to allow the mineralization contained within an adjoining
area to be rationally exploited by all parties. The Company's Brisas project
mine plan, which contains the assumption that a set-back agreement will be
obtained, has already been approved by the MBIAM and, although the Company
has not obtained a definitive set-back agreement with any adjacent property
title-holders, management has no reason to believe that such agreements will
not be obtained in the future. Further, approval of the Company's mine
operating plan acknowledges that either the Company, a Venezuelan government
entity and/or its subcontractor will mine the area between the pits with the
extracted ore delivered to the appropriate property owner. Consistent with
this assumption, the Company has already held 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 or their contractors choice. As a result of Venezuelan
mining laws and related regulations, the government (or in this case the
MBIAM) has significant influence over the extraction of mineralization
contained in this single continuous ore body comprised of LC and Brisas and,
as such, management believes that a set-back agreement will be obtained in
the future allowing the adjoining mineralization to 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. Thank you for your attention to this
matter.
Very truly yours,
Jonathan B. Newton
cc: Mr. Robert A. McGuinness
======== ======== ======== ======== ======== ======== ========
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
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 registrantis 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
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EXPLANATORY NOTE
Gold Reserve Inc ("Gold Reserve" or the "Company") is filing this Amendment
No.1 to its Annual Report on Form20-F for its fiscal year ended December 31,
2004, which was originally filed with the Securities and Exchange Commission
("SEC") on April 1, 2005, in response to comments the Company received from
the Staff of the U.S. Securities and Exchange Commission. The originally
filed 2004 20-F is amended as follows:
Note 11 to the Company's consolidated financial statements, "Differences
between Canadian and U.S. GAAP", included as part of Part III, Item17,
"Financial Statements, has been amended. This amendment reflects the
restatement of certain financial information under U.S. GAAP based upon a
revision in accounting treatment made by the Company under U.S. GAAP with
respect to the treatment of capitalized mine development costs prior to the
establishment of proven and probable reserves. Under Canadian GAAP we
capitalize mine development costs after proven and probable reserves have
been established. We also capitalize costs on properties where we have found
non-reserve material that does not meet all the criteria required for
classification as proven or probable reserves. Under US GAAP, exploration and
development expenditures incurred on properties where mineralization has not
been classified as a proven and probable reserve under SEC rules are expensed
as incurred. Accordingly, certain expenditures are capitalized for Canadian
GAAP purposes but expensed under US GAAP; In addition, the Company amended
the following sections in order to clarify its disclosure: Part 1n General
Information-Mineral Reserve Estimates; Part 1n General Information-Recent
Developments; Part 1, Item 3. Key Information-Risk Factors; Part, 1 Item 4.
Information on the Company-Properties-Brisas Project; and Part, 1, Item 4.
Information on the Company-Venezuelan Mining, Environment and Other Matters.
The revision in accounting treatment under U.S. GAAP has had no effect on the
Company's primary financial statements and related notes prepared in
accordance with Canadian GAAP since the Company's capitalization policy for
mine development costs are in accordance with Canadian GAAP.
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.
PAGE 4
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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.
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 43-101differ 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
- --------------------------------------------------------------------------------
(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 shareholdersi 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
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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 Projectis 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 2005 Bankable
Feasibility Study: Proven and probable reserves using $350 per ounce
of gold and $0.90 per pound of copper:
_____________________________________________________________
Proven Reserves 193.2 million tonnes;
0.71 g/t gold and 0.12% copper
Probable Reserves 221.3 million tonnes;
0.68 g/t gold and 0.13% copper
Strip ratio (waste: ore) 1.81:1
Mine Life 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 83.1%
copper 87.0%
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 metric tonnes
Economic Model Results using $400 per ounce of gold and $1.00 per pound
of copper:
_____________________________________________________________
Total cash operating cost
(on site and off site) $5.26 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
IRR, NPV and Payback using:
per ounce of gold and: $400 $350
per pound of copper $1.00 $0.90
___________________________________________________________________
Internal rate of return (After-Tax) 9.1% 5.2%
Project net present value (After-Tax)
@ 0% $711 million $384 million
@ 5% $207 million $12 million
Project payback 8 years 10.8 years
* Net of copper by product credit
PAGE 15
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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:
(kt=1,000 tonnes)
Measured Indicated Measured and Indicated
Au Eq --------------------- --------------------- ----------------------
Cut-off Au Cu Au Cu Au Cu
Grade kt (gpt) (%) kt (gpt) (%) kt (gpt) (%)
- ------------------------------------------------------------------------------
0.40 217,883 0.700 0.118 284,941 0.662 0.132 502,824 0.678 0.126
- ------------------------------------------------------------------------------
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 inferred mineral resource, based on an off-site smelter process (0.4 gram
per tonne gold equivalent cut-off), is estimated at 126.5 million tonnes
containing 0.65 grams gold per tonne and 0.13 percent copper. The mineral
resource and gold equivalent (AuEq) cut-off is based on $350 per gold ounce
and $0.90 per pound copper. The qualified persons involved in the property
evaluation and resource and reserve estimates were Raul Borrastero C.P.G.,
Susan Poos, P.E., Richard Addison, P.E., and Rick Lambert, P.E. of PAH, and
Brad Yonaka of Gold Reserve.
Mineral Reserve 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 proven and probable mineral reserve
of approximately 9.2 million ounces of gold and 1.2 billion pounds of copper.
PAGE 16
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The February 2005 estimated proven and probable mineral reserve utilizing
traditional flotation and off-site smelter processes is summarized in the
following table: