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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
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 registrants 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.
TABLE OF CONTENTS
PART I 3
GENERAL INFORMATION 3
Forward-Looking Statements 3
Mineral Reserve Estimates 3
Recent Developments 4
Currency 4
Item 1. Identity of Directors, Senior Management
and Advisors Not Applicable 5
Item 2. Offer Statistics and Expected Timetable 5
Item 3. Key Information 5
Selected Financial Data 5
Dividends 5
Risk Factors 5
Item 4. Information on the Company 10
History and Development of the Company 10
Properties 11
Venezuelan Mining, Environment and Other Matters 19
Item 5. Operating and Financial Review and Prospects 21
Overview 21
Critical Accounting Policies and Estimates 22
Results of Operations 22
Liquidity and Capital Resources 23
Item 6. Directors, Senior Management and Employees 25
Compensation of Directors and Officers 26
Item 7. Major Shareholders and Related Party Transactions 33
Control of Registrant 33
Related Party Transactions 33
Interest of Insiders in Material Transactions 33
Item 8. Financial Information 34
Legal Proceedings 34
Significant Changes 34
Item 9. The Offer and Listing 34
Offer and Listing details 34
Item 10. Additional Information 35
Memorandum and Articles of Association 35
Material contracts 35
Exchange Controls and Other Limitations Affecting Security Holders 35
Taxation 36
Item 11. Quantitative and Qualitative Disclosures about Market Risk 41
Item 12. Description of Securities Other Than Equity Securities
- Not applicable 41
PART II 41
Item 13. Defaults, Dividends Arrearages and Delinquencies - None 41
Item 14. Material Modifications to Rights of Security Holders
and Use of Proceeds None 41
Item 15. Controls and Procedures 41
Item 16. Reserved 41
Item 16A. Audit Committee Financial Expert 42
Item 16B. Code of Ethics 42
Item 16C. Principal Accountant Fees and Services 42
Item 16D. Exemptions From the Listing Standards for Audit Committees 42
Item 16E. Purchases of Equity Securities by the Issuer
and Affiliated Purchasers 42
PART III 43
Item 17. Financial Statements 43
Managements Report 43
Report of Independent Accountants 44
Item 18. Financial Statements Not Applicable 59
Item 19. Financial Statements and Exhibits 59
Signatures 60
Exhibit 12.1 Chief Executive Officers Section 302 Certification 61
Exhibit 12.2 Chief Financial Officers Section 302 Certification 62
Exhibit 13.1 Chief Executive Officers Section 906 Certification 63
Exhibit 13.2 Chief Financial Officers Section 906 Certification 64
Exhibit 99.1 Consent of Independent Accountants 65
Exhibit 99.2 Consent of Pincock, Allen & Holt 66
Exhibit 99.3 Consent of Aker Kvaerner Metals, Inc 67
Exhibit 99.4 Consent of Vector Colorado LLC 68
Exhibit 99.5 Consent of AATA International, Inc. 69
Exhibit 99.6 Consent of Neil S. Seldon & Associates Ltd. 70
Exhibit 99.7 SGS Lakefield Research 71
Glossary of Significant Terms 72
EXPLANATORY NOTE
Gold Reserve Inc. ("Gold Reserve" or the "Company") is filing this Amendment
No. 2 to its Annual Report on Form 20-F/A for its fiscal year ended December 31,
2004 (which Annual Report 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, Item 17,
"Financial Statements, has been amended. This amendment reflects the
restatement of results of operations, financial position and cashflows 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 1- General Information-Mineral Reserve Estimates; Part 1-
General Information-Recent Developments; Part 1, Item 3. Key Information-
Selected Financial Data; Part 1, Item 3. Risk Factors; Part, 1 Item 4.
Information on the Company-Properties-Brisas Project-Bankable Feasibility
Study; Part, 1 Item 4. Information on the Company-Properties-Brisas
Project-Mineral Resource and Reserve Estimates; 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 prepared in accordance with Canadian
GAAP since the Company's capitalization policy for mine development costs is
in accordance with Canadian GAAP. This Amendment does not reflect any events
occurring after our original filing of the Annual Report on Form 20-F and
does not modify or update the disclosure therein in any way other than to
provide 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/A, 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 Companyis 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 Companyis 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 43-101 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.
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 Companyis
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 $48,615, $35,379, $25,118, $27,947, and $29,970, respectively (as
restated). See "Explanatory Note" and Note 11 to the Company's consolidated
financial statements, "Differences between Canadian and U.S. GAAP."
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 $46,186, $33,487, $23,687, $26,563, and $28,598,
respectively (as restated). See "Explanatory Note" and Note 11 to the
Company's consolidated financial statements, "Differences between Canadian
and U.S. GAAP."
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.
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
Our mining assets are concentrated in Venezuela and our operations could be
disrupted.
At December 31, 2004 and as of the date of this report, nearly all of our
non-cash assets, including our primary mining asset, the Brisas Project, were
located in Venezuela.
Political and Economic Environment
Venezuela has experienced high levels of inflation during the last several
years as well as political instability, civil unrest, currency and exchange
controls, changes in legal, tax and regulatory regimes and a decline in
industrial output and foreign investment. In August 2004, Venezuela held a
mid-term presidential recall referendum (as provided in the Constitution of
Venezuela), the result of which was President Chavez was re-elected President
of Venezuela. Since the referendum, the political climate in Venezuela appears
to have improved. Despite past political and economic turmoil, we have not
experienced any significant adverse impact to date on our operations in
Venezuela nor have we curtailed our investment activities in the country.
However, our operations and investments in Venezuela could be adversely
affected by unforeseen political events and changes in legal, tax and
regulatory regimes in the future.
Currency and Exchange Controls
In February 2003, the Central Bank of Venezuela enacted exchange control
regulations as a measure to protect international reserves. The exchange rate
was fixed at approximately 1,600 Bolivars per one U.S. Dollar until February
2004 when it was adjusted to 1,920 Bolivars per one U.S. Dollar. In March
2005, the exchange rate was increased to approximately 2,150 Bolivars per one
U.S. Dollar. In February 2005, the Venezuelan government announced new
regulations concerning exports from Venezuela, which will require, effective
April 1, 2005, all goods and services to be invoiced in the currency of the
country of destination or in U.S. Dollars. We are currently evaluating the
impact of these new regulations, which we believe could result in an increase
in our costs. Past and recent conditions have not adversely affected our
operations as the Company primarily transfers funds into Venezuela for its
operations. However, this will change in the future to the extent that the
Company begins production and sales from Venezuela and we will assess
currency issues at that time. Future fluctuations of the Venezuelan Bolivar
against the U.S. Dollar and exchange controls could negatively impact the
Company's financial condition.
Small Miners
A significant number of unauthorized small miners have invaded various
properties near the Brisas Project however, there are no unauthorized small
miners located on the Brisas Project. The methods used by the small miners to
extract the gold from the surface material are typically environmentally
unsound and in general their presence can be disruptive to the rational
development of a project such as Brisas. The Brisas Project has not
experienced unauthorized small miners. The Company maintains security guards
and has implemented other procedures to mitigate the risk that the small
miners might try to occupy the Brisas Project, although management can give
no assurances that such activities will not occur in the future.
Imataca Forest Reserve
The Brisas Project is located within the boundaries of the Imataca Forest
Reserve (the "Imataca") in an area presently approved for mining activities.
During October 2004, a new Presidential Decree was published identifying
approximately 13% of the Imataca in the State of Bolivar to be used for
various activities, including mining. This recent Decree was published in
response to earlier challenges of a prior Decree which opened an even larger
part of the Imataca to activities such as mining, and a subsequent Venezuelan
Supreme Court prohibition against issuing new mining concessions in the
Imataca. Published after public consultation, the new Decree reduces the size
of the area available for activities, such as mining, which was larger in
earlier Decrees. The Ministry of Basic Industries and Mines (the "MIBM")
(previously referred to as the Ministry of Energy and Mines ("MEM") (See-
"Venezuelan Mining, Environment and Other Matters- Formation of the Ministry
of Basic Industries and Mines") and the Ministry of the Environment and
Natural Resources (the "MARN") have indicated that this Decree resolves
disputed issues as to the permissibility of mining in the Imataca. We have
been advised by Venezuelan counsel that it is unlikely that future
regulations related to this issue will materially impact our properties but
management provides no assurances that further challenges to the Imataca
issue, including by third parties, will not occur. Any such challenge could
have a material adverse effect on the Company
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 based on
Canadian regulations 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. 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.
Notwithstanding the conclusions of management and its qualified consultants,
mineral reserve estimation is an interpretive process based on drilling
results and experience as well as estimates of mineralization characteristics
and mining dilution, metal prices, costs of mining and processing, capital
expenditures and many other factors. Grades of mineralization processed at
any time also may vary from mineral reserve estimates due to geologic
variations within areas mined. Actual quality and characteristics of deposits
cannot be fully assessed until mineralization is actually mined and as a
result, mineral reserves change over time to reflect actual experience.
Operating losses are expected to continue until we construct or acquire an
operating mine.
We have experienced losses from operations for each of the last five years
and expect this trend to continue for the next several years as the result
of, among other factors, expenditures associated with the corporate
management activities on the Brisas Project, as well as other unrelated
non-property expenses, which are recorded in the consolidated statement of
operations. Such losses may increase in the short-term if we obtain
additional financing and subsequently begin construction of the Brisas
Project. This trend is expected to reverse if and when gold and copper are
produced at the Brisas Project in commercial quantities.
The market price of our common shares may experience volatility.
Our Class A common shares and the November 4, 2004 Class A common share
purchase warrants are listed on the Toronto Stock Exchange (TSX). Our Class A
common shares are listed on the American Stock Exchange (AMEX). Our securities
and securities of similar companies have experienced substantial volatility in
the past, often based on factors unrelated to the financial performance or
prospects of the companies involved. These factors include economic and
political developments in North America, Venezuela and generally worldwide
and overall market perceptions of the attractiveness of particular
industries. Our share price is also likely to be affected by short-term
changes in gold and copper prices or in our financial condition or results of
operations as reflected in our publicly filed reports. Other factors unrelated
to our performance that may have an effect on the price of our Class A common
shares and warrants include the extent, if any, of analytical coverage of our
business by investment banks' research departments, limited trading volume and
general market interest or limited public float in our securities, as well as
new regulatory rules. As a result of any of these factors, we believe the
market price of our Class A common shares and warrants at any given point in
time may not accurately reflect our long-term value.
Risks inherent in the mining industry could have a significant impact on the
Company's future operations.
Gold and copper projects are subject to all of the risks inherent in the
mining industry, including environmental hazards, industrial accidents,
fires, labor disputes, legal regulations or restrictions, unusual or
unexpected geologic formations, cave-ins, flooding, and periodic
interruptions due to inclement weather. These risks could result in damage
to, or destruction of, mineral properties and production facilities, personal
injury, environmental damage, delays, monetary losses and legal liability.
Insurance covering such catastrophic liabilities is not maintained and will
only be maintained in the future if available on a cost-effective basis.
The Company may incur costs in connection with future reclamation activities
that may have a material adverse effect on the Company's earnings and
financial condition.
The Company is required to obtain government approval of its plan to reclaim
the Brisas Project after the minerals have been mined from the site.
Reclaiming the Brisas Project will take place during and after the active
life of the mine. In accordance with applicable laws, bonds or other forms of
financial assurances have been and will be provided by the Company for the
reclamation of the mine. The Company may incur costs in connection with these
reclamation activities in excess of such bonds or other financial assurances,
which costs may have a material adverse effect on the Company's earnings and
financial condition. The Company expects to established a reserve for future
site closure and mine reclamation costs based on the estimated costs to
comply with existing reclamation standards. There can be no assurance that
the Company's reclamation and closure accruals will be sufficient or that the
Company will have sufficient financial resources to fund such reclamation and
closure costs in the future.
Future hedging activities could negatively impact future operating results.
The Company has not entered into forward contracts to sell gold or copper
that it might produce in the future. Although the Company has no near term
plans to enter such transactions, it may do so in the future if required for
project financing. Forward contracts obligate the holder to sell hedged
production at a price set when the holder enters into the contract,
regardless of what the price is when the product is actually mined.
Accordingly, there is a risk that the price of the product is higher at the
time it is mined than when the Company entered into the contracts, so that
the product must be sold at a price lower than could have been received if
the contract was not entered. The Company may enter into option contracts for
gold and copper to mitigate the effects of such hedging.
Acquiring and retaining key personnel in the future could have a significant
impact on future operating results.
We are and will be dependent upon the abilities and continued participation
of key management personnel, as well as the significant number of new
personnel that will be necessary to manage any construction and operations of
the Brisas Project. If the services of our key employees were lost or we are
unable to obtain the new personnel necessary to construct, manage and operate
the Brisas Project, it could have a material adverse effect on future
operations.
Item 4. Information on the Company
History and Development of the Company
History
Gold Reserve Inc. (the "Company") is a mining company incorporated in 1998
under the laws of the Yukon Territory, Canada; and is the successor issuer to
Gold Reserve Corporation, a Montana corporation formed in 1956. Gold Reserve
Inc's. registered agent is Austring, Fendrick, Fairman & Parkkari, The Drury
Building, 3801 Third Avenue, Whitehorse, Yukon, Y1A 4Z7. Telephone and fax
numbers for the Company's registered office are 867.668.4405 and
867.668.3710, respectively. Its primary place of business is 926 West Sprague
Avenue, Suite 200, Spokane, WA 99201, U.S.A. Telephone and fax numbers for
the Company's primary place of business are 509.623.1500 and 509.623.1634,
respectively.
Organizational Structure
References to the "Company" throughout this report refer primarily to Gold
Reserve Inc., Gold Reserve Corporation, Gold Reserve de Aruba AVV (domiciled
in Canada, the U.S. and Aruba, respectively), Gold Reserve deVenezuela, C.A.
("GLDRV"), Compania Aurifera Brisas del Cuyuni, C.A. ("BRISAS") (both
domiciled in Venezuela), and Great Basin Energies, Inc. ("Great Basin") and
MGC Ventures Inc. ("MGC Ventures") (both domiciled in the U.S.), which have
no current business activities. All subsidiaries are wholly owned except for
Great Basin and MGC Ventures, which are approximately 47% owned. The Company
believes it exercises majority control over Great Basin and MGC Ventures.
Corporate Reorganization
In February 1999, Gold Reserve Corporation became a subsidiary of Gold
Reserve Inc., the successor issuer (the "Reorganization"). Generally, each
shareholder of Gold Reserve Corporation received one Gold Reserve Inc. Class
A common share for each common share owned in Gold Reserve Corporation.
Certain U.S. holders elected, for tax reasons, to receive equity units in
lieu of Class A common shares. An equity unit, comprised of one Gold Reserve
Inc. Class B common share and one Gold Reserve Corporation Class B common
share, is substantially equivalent to a Class A common share and is generally
immediately convertible into Class A common shares. Equity units are not
listed for trading on any stock exchange, but subject to compliance with
applicable federal, provincial and state securities laws, may be transferred.
Unless otherwise noted, general references to common shares of the Company
include Class A common shares and Class B common shares as a combined group.
After the Reorganization, a shareholder continued to own an interest in the
business that in aggregate was essentially the same as before the
Reorganization.
Primary Mining Asset
Brisas Project
Our primary mining asset, the Brisas Project, is a gold/copper deposit
located in the Km 88 mining district of the State of Bolivar in southeastern
Venezuela. Over $80 million has been expended on the Brisas Project since its
acquisition in 1992. In early 2005, Aker Kvaerner Metals, Inc., with the
assistance of a number of other consultants, completed a bankable feasibility
study with respect to the Brisas Project. Based on the positive conclusions
contained in the bankable feasibility study, the Board of Directors approved
proceeding with the financing and construction of the mine.
See-"PROPERTIES-Brisas Project" for a detailed discussion of the Brisas
Project.
Choco 5 Property
The Choco 5 property, a grass-roots gold exploration target, is located in
the El Callao mining district in the State of Bolivar, southeastern
Venezuela. Since acquiring the property in 2000, the Company has invested
approximately $200,000 on acquisition and exploration costs and after
obtaining the required permits expects to expend up to $500,000 on further
exploration in 2005. See-"PROPERTIES-Choco 5 Property" for a detailed
discussion of the Choco 5 project.
Financial Position
As of March 28, 2005, the Company held approximately $32 million in cash and
investments. We will be seeking additional funding in the next twelve months
in order to finance the construction of the Brisas Project. In October 2004,
management engaged Endeavour Financial Corporation ("Endeavour") to provide
general corporate financial advice with respect to its corporate development
and expected financing of the Brisas Project. Endeavour has one of the
largest investment banking teams dedicated exclusively to the mining industry
and has significant experience in raising capital for mining projects on a
global basis. With Endeavor's assistance, we have already evaluated a number
of financing options and expect to evaluate additional options in the coming
months. At this time, although we have received indications of interest, we
have no proposals or firm commitments to proceed with financing the Brisas
Project.
Properties
Brisas Project
Location
The term Brisas property is used interchangeably with Brisas Project. The
Brisas Project is located in the Km 88 mining district in the State of
Bolivar in southeastern Venezuela approximately 373 kilometers (229miles), by
paved highway, southeast of Puerto Ordaz. The project, accessible by an
all-weather road, is 5 kilometers west of the Km 88 marker on Highway 10,
occupies an area of approximately 11,000 hectares.
Ownership
The Brisas Project consists of the Brisas alluvial concession, the Brisas
hardrock concession beneath the alluvial concession, applications for other
mineralization contained in these concessions, and contracts, land use
permits and concessions for mineralization (primarily gold, copper and
molybdenum) on land parcels contiguous to the existing concessions.
The Brisas alluvial concession was acquired through the acquisition of
BRISAS. The Brisas hardrock concession was granted to BRISAS in March 1998.
Both concessions were granted by the Ministry of Energy and Mines (the
predecessor to the MIBM) pursuant to the 1945 mining law. The Brisas alluvial
concession is an exploitation concession with a term of 20 years and two
renewal periods of 10 years each, at the discretion of the MIBM, and a 3% tax
on gold sales. The Brisas hardrock concession is an exploitation concession
with a term of 20 years and two renewal periods of 10 years each, at the
discretion of the MIBM. The hardrock concession provides for up to a 4% tax
on gold sales and up to a 7% mine mouth tax on copper production. (See
"Venezuelan Mining Environment and Other Matters").
The Brisas alluvial concession, which is approximately five percent (5%) of
the combined Brisas property mineralization, provides the MIBM or its
designate, the right ("special advantage" to the Republic of Venezuela) to
acquire twenty percent (20%) of the company organized by the alluvial
concession holder to perform extraction activities within the concession.
Venezuelan counsel has advised us that to the best of their knowledge the
MIBM has never enforced such provisions contained in similar concessions. For
this reason, it is unclear how the value of the twenty percent (20%) of the
alluvial concession would be determined, in the event the MIBM chose to
exercise such right pursuant to the concession.
Regional Infrastructure
The Brisas Project site is located in the State of Bolivar, in southeastern
Venezuela. The nearest major city is Puerto Ordaz, with approximately 700,000
inhabitants. Puerto Ordaz is the center of major industrial developments in
the area, including iron and steel mills, aluminum smelters, iron and bauxite
mining and forestry. Major hydroelectric generating plants on the Caroni
River, providing more than 20,000 MW of electricity, support these
industries. Puerto Ordaz has major port facilities, accessible to ocean-going
vessels from the Atlantic Ocean, via the Orinoco river. There are also port
facilities 428 km northwest of Puerto Ordaz on the Caribbean coast near
Barcelona, which would likely be the port of entry for most construction,
mining and milling equipment.
Puerto Ordaz is a modern urban center with good road and air connections to
the rest of Venezuela. There are regularly scheduled flights to Caracas and
other major cities several times daily. The highway system within Venezuela
is generally good, with paved roads in good condition providing access to
within 5 km of the Brisas Project. A four-lane highway runs from Puerto
Ordaz, northwest to both Barcelona and Guanta, and for 55 km south to Upata
where it becomes a two-lane highway to Km 88 and on into Brazil. A 400 kV
power line runs through the community of Las Claritas, nearby the Brisas
Project, with a transformer station located 3 km from the property.
Geology
The Brisas Project is within the Proterozoic granite-greenstone terrain of
the Guyana shield. The shield covers eastern Colombia, southeastern
Venezuela, Guyana, Suriname, French Guiana and northeastern Brazil. The
terrain is a thick section of andesite to dacite volcanics intruded by
numerous granite stocks and batholiths. Several periods of deformation,
metamorphism, and mineralization can be documented within this terrain.
The rock units on the Brisas property are divided into weathered and
unweathered. Weathered rock or saprolite is further defined by the degree of
oxidation into oxide saprolite and sulfide saprolite. Both contain clays and
quartz with the oxide saprolite having iron oxides such as hematite and
goethite while in the sulfide saprolite the iron is present as pyrite. The
unweathered rocks consist of andesite or dacite tuffs that are further
subdivided based on the presence or absence of mineral crystals and lithic or
lapilli fragments. Unweathered intrusive rocks include a tonalite stock and
basalt dikes and sills. The tuffs strike northerly and dip 30 to 35 degrees
to the west. No faulting can be recognized within the deposit.
The mineralization is stratabound and strataform within a 200-meter thick
series of tuffs marked by rapid horizontal and vertical facies changes. The
gold/copper mineralization is over 1,900 meters long and 500 to 900 meters
wide. Mineralization continues for an unknown distance down-dip to the west,
north and south, as well as, below the current deposit. Three styles of
mineralization are seen: 1) massive sulfide-quartz-tourmaline breccia with
pyrite, chalcopyrite and gold in an outcrop referred to as the Blue Whale, 2)
stratabound, disseminated pyrite-gold/copper mineralization and 3)
quartz-calcite high angle veins marked by erratic but high gold values. The
disseminated mineralization is characterized by a
calcite-quartz-epidote-sulfide alteration and constitutes the bulk of the
economic mineralization. There appears to be no relationship between the
disseminated mineralization and the high angle veins. The mineralization to
the north is generally pyrite-chalcopyrite-gold with the copper content
decreasing to the south until in the southern portion of the deposit the
copper is a minor constituent of the mineralization. Mineralization is open
down dip to the west and to the north.
Bankable Feasibility Study
Our primary mining asset, the Brisas Project, is a gold/copper deposit
located in the Km 88 mining district of the State of Bolivar in southeastern
Venezuela. A pre-feasibility study was completed in 1998 and updated in 2000
by JE MinCorp. In late 2003, the Company selected Aker Kvaerner and a number
of other consultants to complete a bankable feasibility study in respect to
the construction and operation of the Brisas Project. The study was completed
and delivered to the Company in January 2005. Based on the results of the
study, the Company plans to produce gold dorE on-site and ship gold/copper
concentrate to an off-site smelter.
The Company previously disclosed resource and mineral reserve estimates using
both a traditional off-site smelter process and the Cominco Engineering
Services Limited on-site copper process. While the Company will continue to
evaluate process alternatives, the Brisas bankable feasibility study assumes
a conventional flotation process. Based on the current process focus of the
bankable feasibility study, mineral resource and reserve estimates are no
longer disclosed using on-site copper processing technology.
Our previously disclosed preliminary feasibility study was based on an
estimated 50,000 tonnes per day, a 14 year mine life and estimated initial
mine construction and development costs of approximately $353 million. In
early 2004, based on the recommendations of Aker Kvaerner, the Company
selected a 70,000 tonne per day conventional flotation plant as the basis for
completion of the Brisas bankable feasibility study.
The bankable feasibility study, which was prepared by Aker Kvaerner, includes
work performed by other independent consultants under the coordination of Aker
Kvaerner. The geology, mineral resources, proven and probable reserves, mining
sections and the financial analysis for the study were performed by PAH. SGS
Lakefield Research conducted metallurgical pilot plant test work with
guidance from Aker Kvaerner. Aker Kvaerner designed the metallurgical process
flowsheet and the tailings facility design, hydrology study, geotechnical
analysis and geochemical analysis were performed by Vector. AATA
International, Inc. ("AATA") of Fort Collins, Colorado, assisted by
Ingenieria Caura, SA of Venezuela, are conducting the environmental fieldwork
in Venezuela and are in the final stages of preparing the Venezuelan
Environmental and Social Impact Study (V-ESIA) and the International
Environmental and Social Impact Assessment (I-ESIA) for the financial
institutions.
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.
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
* Net of copper by product credit
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 such mineral reserves based on Canadian regulations 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.
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.
The February 2005 estimated proven and probable mineral reserve utilizing
traditional flotation and off-site smelter processes is summarized in the
following table:
Reserve Au Cu Au Cu Waste Total
tonnes Grade Grade ounces pounds tonnes tonnes Strip
Class (thousands) (gpt) (%) (thousands) (millions) (thousands) (thousands) Ratio
- ------------------------------------------------------------------------------------------------
Proven 193,248 0.71 0.123 4,399 525
Probable 221,315 0.68 0.133 4,808 654
- ------------------------------------------------------------------------------------------------
Total 414,563 0.69 0.129 9,207 1,179 748,333 1,162,895 1.81
================================================================================================
The reserves disclosed above which are designated as commercially viable are
a part of the mineral resources estimate shown in the previous section. Note
that the mineral resources estimate does not represent material that exists
in addition to the mineral reserve.
The mineral reserve (within a pit design) has been estimated in accordance
with CSA National Instrument 43 - 101, which we believe is substantially the
same as SEC Industry Guide 7. The mineral reserve was estimated using average
recovery rates for gold and copper of 83% and 87% respectively, metal prices
of U.S. $350 per ounce gold and U.S. $0.90 per pound copper with an internal
revenue cut-off of $2.76 per tonne. 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.
Brisas Project Work To Date
Over $80 million has been expended on the Brisas Project since
inception.These costs include property and mineral rights, acquisition costs,
equipment expenditures, litigation settlement costs and exploration costs.
Considerable work has taken place to establish the mineral resource and
proven and probable reserves.
Previous activities on the property include:
Extensive geology, geophysics and geochemistry
811 exploration drill holes
Approximately 181,000 meters of drilling
Independent audits of exploration drilling, sampling, assaying procedures and
ore reserves methodology
Environmental baseline work/socioeconomic studies
Hydrology studies
Geotechnical studies
Mine planning
Advanced stage grinding and metallurgical testwork
Tailings dam designs
Milling process flow sheet designs
Preliminary feasibility study completed in 1998 and updated in 2000
Submittal and approval of initial operating plan based on the preliminary
feasibility study for the Brisas Project by the MIBM
Extraction of a 700 tonne bulk sample from an underground shaft for large
scale metallurgical testing
In addition to the completion of the Brisas bankable feasibility study in
early 2005, the following events occurred in 2004:
The Company received a Special Award for Excellence in Social Management from
the Latin-America Mining Organization ("OLAMI"). OLAMI is an industry
association that represents and promotes mining in 16 Latin American
countries. The Company received this award for its past and current work in
social management and responsibility at its Brisas Project.
Neil S. Seldon & Associates Ltd. (NSA) of Vancouver, BC, Canada was engaged
to market the copper and precious metals concentrate related to the Brisas
Project. NSA also assisted the Company in the development of sales and
marketing strategies and with smelter negotiations for the concentrate sales
contracts. Management and NSA contacted representatives of smelters in Japan,
Germany and Spain. Management expects to complete indicative marketing
agreements with one or more smelters in 2005.
AATA was engaged to complete the Brisas Project Environmental and Social
Impact Assessment Study (ESIA), meeting World Bank Standards, the new Equator
Principles as well as any requirements desired by financing institutions. AATA
has teamed up with Ingenieria Caura, S.A. of Caracas, Venezuela who is also
working on the Venezuela Environmental Impact Study (VEIS) to support the
Brisas permitting process. AATA is recognized as one of the world's leading
experts in assessing the environmental and social impact of projects for bank
financing and has completed similar assessments for the Overseas Private
Investment Corporation (OPIC), the European Bank for Reconstruction and
Development (EBRD), International Finance Corporation (IFC) and others. The
Company expects to submit the Venezuelan EIS mid-2005 and anticipates the
approval process will take approximately 90 to 180 days.
Endeavour was engaged to provide general corporate financial advice with
respect to the Company's corporate development and assist with expected
financing of the Brisas Project. Endeavour has significant experience in
advising companies on raising capital for mining projects on a global basis.
2005 Brisas Work Plan
With the completion of the bankable feasibility study, the Company expects to
commence preparations for detailed engineering, hiring additional qualified
managers, finalizing permitting to construct and complete financing of the
project. In addition, orders for equipment that require long lead times for
manufacturing and delivery will be prepared in anticipation of financing.
Likewise, negotiations will be concluded for electrical power, concentrate
smelting agreements and final port arrangements.
Management has developed a critical-path plan for obtaining the required
permits (most notable is the permits for construction and operation),
obtaining funding and commencing construction. This plan includes the
development and implementation of project related contracts such as
engineering, procurement and construction management, port facilities,
concentrate sales contracts, electricity and fuel supply contracts, final
permit approvals and a number of other agreements related to the construction
and operation of the Brisas Project. Concurrent with these activities,
management will also devote substantial time and effort on obtaining
financing for the Brisas Project.
Proposals have been solicited from major Engineering, Procurement and
Construction Management firms (EPCM) with International experience for the
detail design and construction management and geotechnical consultants
required for the final tailings dam design. Management anticipates completion
of this activity in the second quarter of 2005. Detailed engineering for
earthwork activities, the construction camp and other early construction
facilities would commence immediately thereafter and run concurrently,
depending upon our obtaining permits and sufficient financing.
An Environmental and Social Impact Assessment (ESIA) is in process, which is
expected to meet IFC and World Bank standards for financing international
projects. Baseline data for the ESIA was collected in 2004 as well as
consolidating data from previous studies in the area. The environmental
analysis and assessment is scheduled for completion in the second quarter of
2005. Also, an Environmental Impact and Impact Study is being completed to
satisfy Venezuelan requirements to obtain an "Authorization to Affect Natural
Resources (AANR)" (AutorizaciUn de AfectaciUn de Recursos Naturales), which is
granted by the MARN. In addition, final assessments of air emissions, water
quality, geochemistry of tailings and waste rock and other environmental
impacts and mitigation are ongoing.
Community assistance and development programs are expected to be continued
and expanded to include programs to develop and initiate basic skills
training for construction in the km 88 area.
Choco 5 Property
The Company is presently focused primarily on its Brisas Project, which is
the Company's primary mining asset. To a lesser extent, the Company is
conducting exploration of its Choco 5 property. This property is a grass
roots gold exploration target also located in Venezuela.
Location
The Choco 5 property is located in the State of Bolivar, Guayana region. The
property is located 24 kilometers west of the mining community of El Callao
(population approximately 25,000) located in the El Callao mining district
and 200 kilometers south ofPuerto Ordaz, the nearest major city.
Hydroelectric power from generating plants on the Caroni river, near Puerto
Ordaz, is connected to El Callao with a 400 kV power line running through the
Choco 5 property. The El Callao mining district is an area with considerable
mining activity by other companies such as Minerven (a wholly owned
subsidiary of CVG), Bolivar Gold Corp. (on the adjacent Choco 4 and 10
properties), Gold Fields Ltd. on properties adjacent to Choco 5 (in a joint
venture with Bolivar Gold), Crystallex International Corporation, Hecla
Mining Company and the Shandong Gold Group.
Ownership
The underlying mining title or concession for the area known as the Choco 5
property was issued by the MIBM to CVG on May 11, 1993. The concession was
subsequently leased by CVG to Minerven (a wholly-owned subsidiary of CVG)
pursuant to an agreement dated December 22, 1998 (the Choco 5 Lease). On June
28, 2000, Minerven subleased the Choco 5 Concession to the Company (the Choco
5 Sublease). The mining title, the lease and sub-lease have all been duly
registered at the appropriate Municipal Registrar Office.
The Choco 5 Concession is a vein and alluvial concession for the exploration
and subsequent exploitation of primarily gold and copper as well as other
minerals, with a term of 20 years, starting with the publication of its
exploitation certificate, subject to two possible 10 year extensions up to a
maximum term of 40 years. The Company's most significant obligations pursuant
to the Choco 5 Sublease (which incorporates the terms of the Choco 5 Lease and
Choco 5 Concession) included the payment of $150,000 upon signing, variable
royalties staged over the life of the project on the value of gross
production of gold and other minerals and on the value of proven reserves
ranging from 0.35 to 2.3 percent, quarterly payments of approximately $5,000
until commercial production and the obligation to keep the property in good
standing during the term of the agreement.
Regional Infrastructure
The Choco 5 property has the same regional infrastructure as the Brisas
Project. For a description of the Choco 5 regional infrastructure see
"Properties-Brisas Project-Regional Infrastructure" in Item 4.
Geology
The Choco 5 property is within the Proterozoic granite-greenstone terrain of
the Guyana shield. The shield covers eastern Colombia, southeastern
Venezuela, Guyana, Suriname, French Guiana and northeastern Brazil. The
terrain is a thick section of andesitic to dacitic volcanics intruded by
numerous granite stocks and batholiths. Several periods of deformation,
metamorphism, and mineralization can be documented within this terrain.
The rock units on the Choco 5 property consist of basaltic to rhyolitic
volcanic flows and tuffs, felsic sedimentary rocks related to volcanism, and
intrusives of gabbroic composition. Apart from a number of surface outcrops,
depth to unweathered rock is unknown due to lack of exploratory drilling.
Units on the eastern side of the property display foliation in a NE-SW
orientation, while on the western side a large scale folding yields
orientations of NW-SE. A number of large faults provide offsets of unknown
magnitude.
Gold mineralization, as seen exclusively from surficial soil and rock sample
anomalies, follows foliation orientations on both eastern and western sides
of the property. In most cases the presence of gold anomalies is accompanied
by dark red alteration of weathered material, suggesting high sulfide
content. There is also a clear association between mineralization and
presence of quartz veining.
Choco 5 Project Work To Date
Since acquiring the property, the Company has invested approximately $200,000
on the exploration of the Choco 5 property, which has included acquisition
costs, geological mapping, airborne geophysics, stream sediment and soil
geochemistry in selected areas, mapping of access roads and clearing of
property boundaries and geomorphological study.
2005 Choco 5 Work Plan
During 2005 we expect to commence a variety of exploration activities on the
Choco 5 property upon obtaining the required permits. These activities, which
are expected to cost up to $500,000, will include the following:
Environmental permitting
Additional geologic mapping and reconnaissance
Comprehensive grid of soil geochemical sampling
Exploration drilling
Geophysical testing of established gold anomalies in the eastern sector of
the property
Trenching and selective diamond drilling of gold anomalies Construction of
access roads to facilitate the above activities
Venezuelan Mining, Environment and Other Matters
Venezuelan mining operations are subject to laws that differ from those of
Canada and the United States, while at the same time are subject to various
mining and environmental rules and regulations that are similar in purpose to
those in Canada and the United States, but often more bureaucratically
complex. The following is a summary of the more significant Venezuelan mining
and environmental laws and other laws and regulations that may affect the
Company's operations on the Brisas and Choco 5 properties, but does not
purport to be a comprehensive review of all laws or a complete analysis of
all potential regulatory considerations related to the properties.
Formation of the Ministry of Basic Industries and Mines
In January 2005, Presidential Decree # 3,416 (dated January 11, 2005)
reorganized the previous Ministry of Energy and Mines and transferred certain
activities, including mining, to the newly created Ministry of Basic
Industries and Mining (the "MIBM"). The Decree has also assigned to the new
Ministry the oversight and authority over the state-owned CorporaciUn
Venezolana de Guayana ("CVG"), holder of the iron ore, bauxite and aluminum,
gold, metallurgical and other mining and industrial state-owned assets. In
conjunction with the reorganization, Mr. Victor Alvarez (previous President
of the Banco de Comercio Exterior ("Bancoex"), was appointed Minister of the
MIBM and President of CVG. The reorganization has elevated the regulation of
the mining industry to a cabinet level position and has the potential to,
among other things, streamline reporting and improve the communication
process with the new Ministry.
1999 Mining Law
A new Venezuelan Mining Law was approved and subsequently published in the
Official Gazette on September 28, 1999 (the "Mining Law"). It establishes
five basic ways to structure mining activities with the primary one being
concessions for exploration and subsequent exploitation.
Scope and Term of Concessions
The Mining Law sets out the basic requirements for a concession application
to the MIBM, including: Identification of the mineral(s) to be explored for
and exploited Evidence of technical, economic and financial capability
Special advantages to be granted to the Republic of Venezuela in different
areas (e.g., technology, infrastructure, social facilities, training
obligations, etc.)
Before initiating exploitation, the concession holder must provide to the
MARN an environmental bond to guarantee the rehabilitation of the environment
at the completion of exploitation.
The concession holder will have the right to exploit the granted minerals
regardless of whether they occur in the vein (veta) or alluvial and the
concession will extend only to minerals specifically covered by the
concession. A concession holder that finds a deposit of another mineral must
inform the MIBM and make separate application for such mineral, subject to
the 1999 Mining Law.
The term of a concession is twenty years (from the date the certificate of
exploitation is granted) with two subsequent ten-year renewals, provided the
concession holder has received such renewal within three months before the
expiration of the term of the concession. Concession exploration periods are
three years with a possible extension for one year. The concession holder
must obtain an exploitation certificate by application to the MIBM. A
feasibility study covering the technical, financial and environmental aspects
of the project must accompany the application. The concession holder has seven
years from the date of the exploitation certificate to commence exploitation.
Concession holders are subject to several royalties or taxes. A nominal
surface tax is to be paid quarterly commencing on the fourth anniversary of
the grant of the concession. In addition, minimum royalties or exploitation
taxes are assessed as follows:
Gold, silver, platinum and associated metals, 3% of their commercial value as
determined in the city of Caracas,
Diamonds and other precious stones, 4% of their commercial value as
determined in the city of Caracas,
In other cases, including copper, 3% of their commercial value at the mine
mouth. The MIBM can reduce this tax from 3% to 1% (and subsequently increase
it back to 3%) if economic conditions warrant it.
Also, the government is entitled to exempt, either totally or partially,
concession holders from taxes on importation of tools and equipment not
produced in the country and needed to develop mining activities.
In addition to the issues described above, current Venezuelan mining and
environmental regulations require the rational exploitation of all known
mineralization and prohibit 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, an
environment in which neighboring title-holders can negotiate set-back
agreements or similar agreements in order to allow the mineralization
contained within an adjoining area to be rationally exploited by all parties.
Under current Venezuelan mining laws and related regulations, the government
(or in this case the MIBM) has significant influence over the extraction of
mineralization contained in this single continuous ore body comprised of Las
Cristinas and Brisas. The Company's Brisas project mine plan, which has
already been approved by the MIBM, and its pending application for the Brisas
Project Permit to Affect for Construction and Exploitation both include the
assumption that a set-back agreement related to the Brisas project northern
boundary will be obtained, and, although the Company has not yet obtained a
definitive set-back agreement or something similar with the adjacent property
title-holder to the north, management has not received any communication that
such agreement (either formal or informal) will not be obtained in the
future. Less than fifteen percent of the Company's current proven and
probable reserves noted in Item 4. Information on the
Company-Properties-Brisas Project is effected by the area subject to the
set-back agreement. Further, previous 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. Management has
already held discussions with the MIBM where it offered to mine the area and
either process the ore, deliver the equivalent value in cash or metals or
deliver the mineralized material to a stockpile of their or their
contractor's choice. Recent statements by Venezuelan President Chavez have
created uncertainty as to the future form and application of Venezuelan
mining laws and regulations and as such no assurances can be given with
respect to the matters noted above.
1945 Mining Law Transition Provisions
All concessions acquired by BRISAS under the 1945 Mining Law are governed by
the 1999 Mining Law subject to the following provisions: 1) the right to
conduct exploitation activities will be limited to the minerals and deposits
indicated in the corresponding mining titles and 2) the term of the
concession is the one indicated in the corresponding mining titles, which
commences from publication thereof in the Official Gazette.
Conversion of CVG Work Contracts into Mining Concessions
The Transitory Provisions included in Title XI of the 1999 Mining Law
contemplate the conversion of CVG Work Contracts into mining concessions. In
September 2003 a Presidential Decree was enacted that eliminated the
authority of CVG to grant new mining contracts for the exploration,
development and exploitation of gold and diamonds in the Guayana region. The
Decree is a continuation of the policy of the MIBM to centralize the
management of mining rights in the Guayana region. The Company has acquired
several properties located near the Brisas property pursuant to CVG Work
Contracts and has applied to the MIBM in a timely manner for conversion
thereof into mining concessions. The MIBM has indicated it expects to act on
these conversion applications now that the Imataca issue has been resolved.
Environmental Laws and Regulations
Venezuela's environmental laws and regulations are administered through the
MARN. The MARN proscribes certain mining recovery methods deemed harmful to
the environment and monitors concessionaires' activities to ensure
compliance. Construction and production activities require four different
permits or approvals from the MIBM and MARN: 1) Permit to Occupy the
Territory ("Occupation Permit") from the MARN, 2) Permit to Affect for
Exploration from the MARN, 3) Approval of the prescribed operating plan
(Feasibility study) by the MIBM and 4) Permit to Affect for Construction and
Exploitation from the MARN. Although not consistently applied in the past,
regulations state that the MIBM will apply for and obtain the Occupation
Permit on behalf of those persons or entities applying for concessions before
granting the mining title. Applicants submit an environmental questionnaire to
the MIBM, which they in turn submit to the MARN. The production permitting
process is initiated by filing the proposed terms of reference which, when
approved, serves as the basis for an EIS. The format for the EIS is
stipulated in a 1996 law (Decree #1257) and conforms to an international
standard.
Other Taxes
Venezuelan tax law provides for a maximum corporate income tax rate on mining
companies of 34%. This rate applies to net income over approximately
U.S.$30,000 depending on exchange rates. Other Venezuelan taxes that apply or
may eventually apply to the Company's subsidiaries include a 15% value added
tax on goods and services, a 5% to 20% import duty on mining equipment and a
0.05% tax on certain bank transactions. Upon application, Venezuela offers
certain exemptions or exonerations from value added tax and import duties to
mining companies. Management is in the process of applying for such
exemptions or exoneration, where available.
Political and Economic Situation
See- "Risk Factors-Our mining assets are concentrated in Venezuela and our
operations could be disrupted-Political and Economic Environment"
Exchange Control Regulations
See- "Risk Factors-Our mining assets are concentrated in Venezuela and our
operations could be disrupted -Currency and Exhange Controls"
Gold Sales
The Central Bank of Venezuela (BCV) allows gold mining companies to sell up
to 85% of their production on the international market. The remaining 15% may
be required by the government to be sold domestically at the current market
price, which is paid in Venezuelan currency. Gold sold domestically to BCV is
assessed a maximum tax of 1% of the value of gold as compared to the amount
stated in the mining law.
Investment Protection Treaty with Canada
Pursuant to the Investment Protection Treaty with Canada, which was ratified
by Venezuela on January 20, 1998 (the "Canada-Venezuela Treaty"),
Canadian-based investors such as the Company may be afforded greater
protection in Venezuela than certain other foreign investors and may be
exempt from complying with certain restrictions imposed by the Exchange
Control Regulations. The Treaty provides protection for investments, property
and credit rights, including ownership of real estate, concessions, moveable
assets and security interests thereof, including other items. Investors are
protected against expropriation, nationalization or similar governmental
action, unless such action stems from legal procedures based on public
benefit, effected without discrimination and with a prompt, effective and
adequate compensation. Any dispute will be settled through diplomatic efforts
or international arbitration. The provisions of the Canada-Venezuela Treaty
prevail over the provisions of other Venezuelan laws and regulations,
including those of the Exchange Control Regulations.
Labor
Venezuela, typical of most countries, has extensive labor laws and
regulations including obligations to favor Venezuelan nationals for
employment whenever possible. It is anticipated that, in the initial stages
of the Company's mining projects, approximately 95% of the workforce will be
Venezuelan. In order to maintain or exceed this level, the Company will
implement an extensive training program over the life of the project.
Management plans to draw on Venezuela's large industrial base to staff many
of its positions, but the experience base for large-scale mining and milling
operations in Venezuela is limited. The Company will draw on the Puerto Ordaz
area to fill a significant portion of the required management, engineering and
administration staff with the remaining positions to be filled from the local
(Las Claritas) area.
Item 5. Operating and Financial Review and Prospects
Overview
We prepare our consolidated financial statements in U.S. Dollars in
accordance with accounting principles generally accepted in Canada. A
reconciliation of the principal measurement differences between accounting
principles generally accepted in Canada and the U.S. is presented in Note 11
of the consolidated financial statements. The information contained below is
as of March 28, 2005 and should be read in conjunction with the Company's
consolidated financial statements, included herein. The Company has no
material contracts outside the ordinary course of business at this time.
The Company is engaged in the business of exploration and development of
mining projects and is presently focused primarily on its most significant
asset, the Brisas Project, and to a lesser extent the exploration of its
Choco 5 property, both located in Bolivar State, Venezuela. The Company has
no commercial production at this time. As a result, the Company has not
recorded revenue or cashflow from its mining operations and has experienced
losses from operations for each of the last five years, a trend we expect to
continue until the Brisas Project is fully developed and put into production.
The Company has historically financed its operations through the sale of
common stock and other equity securities. Management expects the Brisas
Project to be similarly financed along with project debt financing.
Venezuela has experienced high levels of inflation during the last several
years as well as political and civil unrest. During this period Venezuela has
a experienced decline in industrial output and foreign investment. Despite
this political and economic turmoil, we have not experienced any significant
adverse impact to date on our operations in Venezuela nor have we curtailed
our investment activities in the country. However, our operations and
investments in Venezuela could be adversely affected in the future.
In late 2003, the Company selected Aker Kvaerner and a number of other
consultants, including PAH and Vector, to complete a bankable feasibility
study with respect to the construction and operation of the Brisas Project.
The feasibility study was delivered to the Company in January 2005. Based on
the results of the study, 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. 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. Initial costs to construct and
place the Brisas Project into production are currently estimated to be $552
million. Construction of the planned facility, the start of which is
primarily dependant upon receiving the required permits and obtaining
sufficient financing, is expected to take 24-26 months, with commissioning
and achievement of commercial production shortly thereafter. Over 2,000
personnel will be needed for the construction of the project and employment
will peak at over 900 operating personnel.
Our previously disclosed preliminary feasibility study was based on an
estimated 50,000 tonnes per day, a 14 year mine life and estimated initial
mine construction and development costs of approximately $353 million. In
early 2004, based on the recommendations of Aker Kvaerner, the Company
selected the above-mentioned 70,000 tonne per day conventional flotation
plant as the basis for completion of the Brisas bankable feasibility study.
References in this report to total cash costs per ounce (a non-GAAP measure
of performance) we believe enables certain investors to better understand the
Brisas Project's potential profitability and ability to generate operating
cash flow. Non-GAAP measures do not have any standardized meaning prescribed
by U.S. GAAP, and therefore they may not be comparable to similar measures
prescribed by other companies. The data are intended to provide additional
information and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with GAAP, such as the nearest
comparable GAAP measure-total cost per ounce. Such measures are not
necessarily indicative of operating profit or cash flow from operations as
determined under GAAP.
Critical Accounting Policies and Estimates
Critical Accounting Estimates.
Critical accounting estimates represent estimates that are highly uncertain
and for which changes in those estimates could materially impact our
financial statements. The significant accounting estimates contained in the
financial statements include: carrying value of the Brisas Project; mineral
reserve and resource estimates and contingencies. Management has discussed
the development and selection of our critical accounting estimates with the
Audit Committee.
Significant Accounting Policies.
The Company's accounting policies are described in Note 1 of the consolidated
financial statements. The more significant accounting policies are as follows:
Marketable Securities. Equity securities are carried at the lower of cost and
net realizable value. Corporate debt securities and U.S. treasuries and agency
obligations are carried at amortized cost.
Exploration and Development Costs. 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. Development costs of proven mining properties
not yet producing are capitalized at cost and classified as property, plant
and equipment. Property holding costs are charged to operations during the
period if no significant exploration or development activities are being
conducted on the related properties. Upon commencement of production,
capitalized exploration and development costs will be amortized based on the
estimated proven and probable reserves benefited. Properties determined to be
impaired or that are abandoned are written-down to the estimated recoverable
amount. Carrying values do not necessarily reflect present or future values.
Shares Issued
As of March 28, 2005, the Company had the following Class A common shares,
equity units and share purchase options issued:
Class A common shares 34,599,819
Equity Units* 1,157,397
----------
Total Issued 35,757,216
Class A common share purchase warrants 2,680,500
Class A common share purchase options 3,080,085
----------
Fully diluted 41,517,801
==========
* An equity unit consists of one Class B common share of Gold Reserve Inc.
and one Class B common share of Gold Reserve Corporation. Equity units are
convertible into Class A common shares of Gold Reserve Inc. on a one-to-one
basis.
Results of Operations
The Company has no commercial production at this time and, as a result, the
Company's results of operations are a product of operating expenses,
primarily related to the development of the Brisas Project, net of investment
income. The Company is in the process of soliciting requests for EPCM
contracts from qualified engineering firms, but currently has no material
long-term contracts or obligations. 2004 Compared To 2003. The consolidated
net loss for the year ended December 31, 2004 was $5,482,629 or $0.19 per
share, an increase of approximately $1,755,000 from the prior year. Other
income for 2004 amounted to $899,881, which is an increase of approximately
$130,000 from the previous year. Other income increased as a result of
increased gains on sales of marketable securities. Operating expenses for the
year amounted to $6,382,510, which is an increase from the prior year of
approximately $1,910,000. This change is due to the non-cash impact of
implementing new rules related to accounting for stock-based compensation,
overall increases in expenditures as a result of the increased corporate
management activity associated with the development of the Brisas Project and
financing activities, coupled with compensation adjustments for existing
officers, directors and employees, costs associated with new hires and
increased costs associated with investor relations.
2003 Compared To 2002. The consolidated net loss for the year ended December
31, 2003 was $3,707,336 or $0.15 per share, an increase of approximately
$699,000 from the prior year. Other income for 2003 amounted to $770,381,
which is a increase of approximately $67,000 from the previous year. Other
income increased as a result of increased gains on sales of marketable
securities offset by lower interest yields on invested cash. Operating
expenses for the year amounted to $4,472,984, which is an increase from the
prior year of approximately $762,000. This change is primarily due to the
increased activities on the Brisas Project and expenses associated with the
Choco 5 property.
Selected Quarterly Financial Data
Quarter ended 12/31/04 9/30/04 6/30/04 3/31/04 12/31/03 9/30/03 6/30/03 3/31/03
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other Income 372,064 193,340 205,652 128,825 291,218 145,664 140,899 192,600
Net loss
before tax (1,970,437) (1,420,077) (880,107) 1,212,008) (1,603,873) (809,276) (715,181) (549,688)
Per share (0.07) (0.05) (0.03) (0.04) (0.07) (0.03) (0.03) (0.02)
Fully diluted (0.07) (0.05) (0.03) (0.04) (0.07) (0.03) (0.03) (0.02)
Net loss (1,970,437) (1,420,077) (880,107) (1,212,008) (1,608,606) (809,276) (715,181) (549,688)
Per share (0.07) (0.05) (0.03) (0.04) (0.07) (0.03) (0.03) (0.02)
Fully diluted (0.07) (0.05) (0.03) (0.04) (0.07) (0.03) (0.03) (0.02)
The increase in net loss during the last two quarters of 2004 is primarily
due to the non-cash impact of implementing new rules related to accounting
for stock-based compensation, overall increases in expenditures as a result
of the increased activity associated with the development of the Brisas
Project and financing activities, coupled with compensation adjustments for
existing officers, directors and employees, costs associated with new hires
and increased costs associated with investor relations. The significant
variation from the third quarter 2003 to the fourth quarter 2003 is
attributable to the startup of activities related to the bankable feasibility
study, the commencement of additional drilling on the Brisas Project and the
extraction and transportation of a bulk sample intended to be used for tests
related to the possible deployment of an on-site pressure oxidation and
leaching process.
Liquidity and Capital Resources
Investing.
Since acquiring the Brisas Project in 1992, the Company has expended over $80
million on the property. These costs include property and mineral rights,
capitalized exploration costs, equipment expenditures, on-going property
management and litigation settlement costs that were expensed in 1994.
Amounts recorded as property, plant and equipment (capitalized exploration
costs) include costs associated with the Brisas Project, including personnel
and related administrative expenditures incurred in Venezuela, drilling,
preliminary and bankable feasibility and related costs, capitalized interest
expense and support costs related to the Brisas Project.
Significant investing activities in 2004 consisted of capitalized costs
related to the continued development of the Brisas Project, which totaled
approximately $6.3 million and the purchase and sale of marketable
securities, which on a net basis, was a total reduction of approximately $3.2
million.
With the completion of the bankable feasibility in early 2005, our efforts
are focused primarily on raising the required capital to construct the Brisas
Project, signing a EPCM contract, completing detailed engineering and the
environmental and social impact assessment study (ESIA), concluding smelter
and power contracts, as well as final project permitting. Initial capital
expenditures required to put the Brisas Project into production as presently
proposed in the Brisas bankable feasibility study, is estimated to be
approximately $552 million over a 24-26 month construction period.
Commencement of the construction of the Brisas Project is primarily dependant
upon obtaining the required permits and obtaining sufficient financing.
Financing.
On November 4, 2004 the Company completed an offering of 5,361,000 Units of
the Company representing aggregate gross proceeds to the Company of Cdn
$30,021,600 or approximately $25,000,000. The Units were sold at a price of
Cdn $5.60 or approximately $4.65 per Unit. Each Unit is comprised of one
Class A common share and one-half of a Class A common share purchase warrant
of Gold Reserve. Each whole Class A common share purchase warrant entitles
the holder thereof to acquire one Class A common share of Gold Reserve at a
price of Cdn $6.50 or approximately $5.40 per Class A common share for a
period of 24 months following the closing date of the Offering. The net
proceeds from the offering are being used for the development of the Brisas
property. In addition to the 5,361,000 private placement shares, 373,954
shares were issued upon exercise of employee stock options, 75,000 shares
were issued to the Company's KSOP plan and 54,000 shares were issued to
employees as compensation and 21,100 shares were issued upon the exercise of
42,200 warrants from the September 2003 offering.
As of March 28, 2005 the Company had the following unexercised
warrants outstanding:
Date Number of Number of Exercise Estimated Expiration
Issued Units/Warrants shares issuable Price Proceeds Date
11/04/04 5,361,000 2,680,500 $5.40 $14,474,700 11/05/06
In addition to the Class A common shares issuable pursuant to share purchase
warrants from the November 2004 financing, at December 31, 2004 the Company
also had 2,303,050 Class A common shares issuable pursuant to share purchase
warrants and certain underwriters' compensation options previously issued in
connection with the September 2003 financing. The share purchase warrants and
compensation options were exercisable at between $3.02 and $4.36 per share.
Subsequent to year-end share purchase warrants and compensation options were
exercised for 533,735 Class A common shares for gross proceeds of
approximately $2.1 million. The remaining share purchase warrants from the
September 2003 financing expired on March 28, 2005. See footnote 12 to the
consolidated financial statements.
The Company engaged Endeavour to provide general corporate financial advice
with respect to its corporate development and proposed financing of the
Brisas Project. Endeavour has significant experience in advising companies on
raising capital for mining projects on a global basis. Endeavour has reviewed
the Brisas Project and is assisting with evaluating the most efficient
financing plan for Brisas. In conjunction with Endeavor, we expect to
evaluate a number of financing options in the coming months. The Company
currently has no definitive proposals or firm commitments for such financing.
As of March 28, 2005, the Company held approximately $32 million in cash and
investments. As noted elsewhere in this document, we are seeking to raise
significant additional funding in the coming months in order to fund the
construction of the Brisas Project.
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.
The timing and extent of additional funding or project financing, if any,
depends on a number of important factors, including, but not limited to the
actual timetable of our 2005-2006 work plan, our assessment of the financial
markets, the political and economic conditions in Venezuela, our share price
and the price of gold and copper. Management provides no assurances that it
will be able to obtain the substantial additional financing that will be
needed to construct the Brisas Project. Failure to raise the required funds
will mean the Company is unable to construct and operate the Brisas Project.
Operations.
Cashflow used by operations for 2004 was approximately $4.0 million, which
was an increase over 2003 of approximately $1.1 million. The increase from
2003 was primarily due to overall increases in expenditures as a result of
the increased activity associated with the development of the Brisas Project
and financing activities, coupled with compensation adjustments for existing
officers, directors and employees, costs associated with new hires, and
increased costs associated with investor relations.
Item 6. Directors, Senior Management and Employees
The following sets forth certain information regarding the Company's Board of
Directors and Named Executive Officers. The time periods referred to below
reflect the cumulative period of time the individual has been a Director or
officer of the Company of Gold Reserve Corporation, the predecessor issuer.
Directors serve until the next annual meeting.
Rockne J. Timm
Age: 59
Chief Executive Officer, Director Chief Executive Officer of the Company.
Director and President of MGC Ventures, Inc. and Great Basin Energies, Inc.
Resides: Spokane, Washington.
Director Since March 1984
A. Douglas Belanger
Age: 51
President, Director President of the Company.
Director and Executive Vice President of MGC Ventures, Inc. and
Great Basin Energies, Inc.
Resides: Spokane, Washington.
Director Since August 1988
James P. Geyer
Age: 52
Director Senior Vice President of the Company.
Resides: Spokane, Washington.
Director Since June 1997
James H. Coleman
Age: 54
Non-Executive Chairman, Director Senior Partner of Macleod Dixon LLP
of Calgary, Alberta and Director of various
public companies.
Resides: Calgary, Alberta.
Director Since February 1994
Patrick D. McChesney
Age 55
Director Controller of Remtech, Inc. and a Director of Remediation
Technologies Nigeria, Ltd. He is also a Director of MGC Ventures, Inc.
and Great Basin Energies, Inc.
Resides: Spokane, Washington.
Director Since August 1988
Chris D. Mikkelsen
Age: 53
Director Principal in McDirmid, Mikkelsen & Secrest, P.S.
(a certified public accounting firm).
Director of MGC Ventures, Inc. and Great Basin Energies, Inc.
Resides: Spokane, Washington.
Director Since June 1997
Jean Charles Potvin
Age: 51
Director President and Chief Executive Officer
of Tiomin Resources Inc.
Resides: Toronto, Ontario
Director Since November 1993
Douglas E. Stewart-Vice President
Age: 53
Vice President-Project Development of the Company
Resides: Lone Tree, Colorado
Officer Since April 1997
Robert A. McGuinness
Age: 49
Vice President-Finance and Chief Financial Officer of the Company.
Vice President-Finance and Chief Financial Officer of MGC Ventures, Inc.
and Great Basin Energies, Inc.
Resides: Spokane, Washington.
Officer Since March 1993
Compensation of Directors and Officers
Executive Compensation
The following table sets forth the compensation paid by the Company to
the Named Executive Officers who served during the year ended
December 31, 2004.
(1)Securities
Under
U.S. Dollars Options/ (2) All
SARs Other
Name and Granted Compensation
Principal Position Year Salary $ Bonus (#) ($)
- -----------------------------------------------------------------------------
Rockne J. Timm
Chief Executive Officer 2004 217,917 95,000 649,950 39,000
2003 195,000 696,700 42,000
2002 195,000 696,700 31,144
A. Douglas Belanger
President 2004 201,250 65,000 568,955 41,000
2003 175,000 573,955 39,040
2002 175,000 573,955 29,000
James P. Geyer
Senior Vice President 2004 185,417 57,500 289,209 41,000
2003 175,000 284,209 39,040
2002 175,000 284,209 29,000
Robert A. McGuinness
Vice President-Finance and
Chief Financial Officer 2004 128,333 50,000 271,122 35,667
2003 120,000 301,122 26,770
2002 120,000 306,622 19,849
Douglas E. Stewart
Vice President -
Project Development 2004 114,333 40,000 83,000 30,867
2003 101,000 83,000 22,531
2002 96,000 79,367 15,839
Officers as a group (6)
2004 919,750 335,500 1,977,236 207,634
2003 831,000 2,053,986 183,654
2002 826,000 2,047,220 135,529
Consists of the number of Class A common shares issuable to Named Executive
Officers pursuant to options held at the end of each reported period.
Consists of the Dollar value of shares purchased under the Company's KSOP
Plan and allocated to the account of each Named Executive Officer during
2004, 2003, and 2002 respectively as follows: Mr. Timm: 18,785 shares, 39,463
shares, and 49,387 shares; Mr. Belanger: 19,749 shares, 36,681 shares, and
45,988 shares; Mr. Geyer: 19,749 shares, 36,681 shares, and 45,988 shares;
Mr. McGuinness: 17,180 shares, 25,153 shares, and 31,476 shares; and Mr.
Stewart: 14,868 shares, 21,170 shares, and 25,117 shares. See- "KSOP Plan"
below.
Options granted for shares of the Company during the year ended December 31,
2004 The following stock options to purchase Class A common shares were
granted during 2004 to Named Executive Officers.
Number
Date of
Name of options Exercise Expiration
grant granted Price Date
- -------------------------------------------------------------
Rockne J. Timm 07/26/04 45,000 $ 3.39 07/26/09
A. Douglas Belanger 07/26/04 30,000 $ 3.39 07/26/09
James P. Geyer 07/26/04 25,000 $ 3.39 07/26/09
Robert A. McGuinness 07/26/04 20,000 $ 3.39 07/26/09
Douglas E. Stewart 07/26/04 20,000 $ 3.39 07/26/09
Aggregated option exercises during the year ended and option values as of
December 31, 2004
The following table sets forth option exercises and the financial year-end
values for options outstanding to the Named Executive Officers and Directors
of the Company.
Number of Dollar
Number of unexercised value of unexercised
securities options at in-the-money options
acquired on Aggregate fiscal year-end at fiscal year-end
exercise Value exercisable/ exercisable/
Name Realized (1) unexercisable unexercisable (2)
- ---------------------------------------------------------------------------------------
Rockne J. Timm 91,750 230,847 649,950/- $ 2,284,099/-
A. Douglas Belanger 35,000 88,986 568,955/- 2,014,939/-
James P. Geyer 20,000 50,736 289,209/- 999,658/-
Robert A. McGuinness 50,000 136,748 271,122/- 912,160/-
Douglas E. Stewart 20,000 56,336 83,000/- 207,938/-
James H. Coleman 74,166/37,500 511,136/17,461
Patrick D. McChesney 5,000 12,684 127,385/- 469,739/-
Chris D. Mikkelsen 10,000 40,000 112,278/- 373,230/-
Jean Charles Potvin 20,000 52,600 100,612/- 362,771/-
The "Aggregate Value Realized," if applicable, would have been calculated by
determining the difference between the market value of the securities
acquired on the date of exercise based on the U.S. Dollar equivalent of the
closing price on the TSX on the date of exercise, less the exercise price of
the options exercised.
The "Value of Unexercised In-The-Money Options at FY-End" was calculated by
determining the difference between the market value of the securities
underlying the option at the end of the financial year and the exercise price
of such options. At December 31, 2004, the closing price of the shares of
common stock on the American Stock Exchange was $4.47. Options range in price
of between $0.72 and $4.14 and generally expire between 2005 and 2009.
Director Compensation
Consistent with the Board's intent to have both Directors and management hold
shares of the Company, non-employee Directors, Messrs. Coleman, McChesney,
Mikkelsen and Potvin, were each granted 10,000 Class A Shares in January 2005
for services during the fiscal year ended December 31, 2004. The value of each
share was U.S. $3.92524. Mr. Coleman was paid approximately $136,000, related
to his position as director of the Company, during the fiscal year ended
December 31, 2004. Directors of the Company received no additional
compensation for serving on Board committees or for attendance at the Board
or committee meetings.
Equity Incentive Plan
The Company presently has one active stock option plan, the 1997 Equity
Incentive Plan (the "Plan", as amended in 2004). The Plan provides for the
issuance of up to 2,850,000 Class A common shares, through the grant of both
"incentive stock options" and "non-statutory options" to purchase Class A
common shares, stock appreciation rights ("SARs"), and up to 650,000 shares
of restricted stock. In addition, options previously issued under inactive
predecessor plans that as a result of forfeiture to the Company become
subject to re-issuance shall be re-issued and administered pursuant to the
Plan. Key employees of the Company and its subsidiaries are eligible to
receive grants under the Plan. The Board or the Compensation committee of the
Board is responsible for the administration of the Plan.
As of March 28, 2005, options for the purchase of 3,080,085 Class A common
shares remained outstanding and 126,937 Class A common shares remained
available for grant under the Plan. To date, 438,000 shares of restricted
stock have been granted from the Plan. No SARs have been granted to date. An
incentive option may be exercised during the lifetime of the optionee only by
the optionee. At such optionee's death an option or any part thereof may only
be transferable by such optionee's will or by the laws of descent and
distribution.
Options, SARs and restricted stock granted under the Plan are generally
granted at the United States Dollar equivalent of the closing sales price of
the Class A common shares on the day immediately preceding the grant date, as
reported on the Toronto Stock Exchange.
Options to Purchase Securities From the Registrant or Subsidiaries
Gold Reserve Inc.
The following table sets forth the number of Class A common shares of Gold
Reserve Inc. subject to options, which were held by the Named Executives
Officers and Directors of the Company at December 31, 2004. As a group,
officers and Directors of the Company (10 persons) held 2,529,177 options to
purchase Class A common shares of the Company.
No. of Class A
common shares Exercise Expiry
Name subject to option Price Date
- ------------------------------------------------------------
Rockne J. Timm 486,867 $ 0.72 June 2006
118,083 1.00 June 2005
45,000 3.39 July 2009
A. Douglas Belanger 401,303 $ 0.72 June 2006
137,652 1.00 June 2005
30,000 3.39 July 2009
James P. Geyer 199,473 $ 0.72 June 2006
64,736 1.00 June 2005
25,000 3.39 July 2009
James H. Coleman 69,444 $ 0.72 June 2006
67,222 1.00 June 2005
75,000 4.00 January 2009
Patrick D. McChesney 98,974 $ 0.72 June 2006
28,411 1.00 June 2005
Chris D. Mikkelsen 41,519 $ 0.72 June 2006
20,759 1.00 June 2005
50,000 1.56 May 2008
Jean Charles Potvin 48,741 $ 0.72 June 2006
51,871 1.00 June 2005
Robert A. McGuinness 197,415 $ 0.72 June 2006
42,207 1.00 June 2005
11,500 4.14 October 2008
20,000 3.39 July 2009
Douglas E. Stewart 37,367 $ 0.72 June 2006
14,633 1.56 May 2008
11,000 4.14 October 2008
20,000 3.39 July 2009
Subsidiaries
Great Basin Energies, Inc. and MGC Ventures, Inc., both 47% owned
subsidiaries of the Company, have a total of 1,410,000 and 1,370,000
outstanding options to purchase their common shares, respectively. As a
group, officers and Directors of the Company (10 persons) held 1,240,000 and
1,210,000 options to purchase common shares of Great Basin Energies, Inc. and
MGC Ventures, Inc., respectively. These options are exercisable at between
$0.03 and $0.04 per share and expire between 2005 and 2008. No warrants to
purchase such common shares were outstanding.
Previous Re-pricing of Certain Options Granted to Directors and Officers of
the Company The following table sets forth certain re-pricing information
with respect to options held by Named Executive Officers and Directors of the
Company. During the last ten years the shareholders approved two re-pricings
of certain options held by the Named Executive Officers. In June 2000,
options with exercise prices of $3.75 were re-priced at $1.00, a 25% premium
to the market price of the Company's shares at the date of approval. In June
2001, options with exercise prices in excess of $0.72 were re-priced at
$0.72, a 50% premium to the market price of the Company's shares at the date
of approval and fifty-percent of all vested options, or immediately
exercisable options, were unvested for the following twelve month time
period. All repriced options have five-year lives from the date of approval
by shareholders. The following table details the re-pricing information:
Length of
Exercise Original
Securities Price Option
Under at Time of Term
Date Options/SARs Re-pricing Remaining
Approved Repriced Or at Date of
by or Amendement Re-pricing or
Name shareholders Amended ($/Security) Amendment
- -------------------------------------------------------------------------------
Rockne J. Timm June 2000 209,833 $3.75 2.8 years
June 2001 27,200 1.13 1.7 years
June 2001 40,000 1.50 3.1 years
June 2001 50,000 2.59 2.2 years
June 2001 125,000 3.25 2.3 years
June 2001 244,667 3.75 2.2 years
A. Douglas Belanger June 2000 172,652 3.75 2.8 years
June 2001 26,000 1.13 1.7 years
June 2001 30,000 1.50 3.1 years
June 2001 65,000 2.59 2.2 years
June 2001 50,000 3.25 2.3 years
June 2001 230,303 3.75 2.2 years
James P. Geyer June 2000 84,736 3.75 2.8 years
June 2001 30,000 1.50 3.1 years
June 2001 64,209 2.59 2.2 years
June 2001 5,000 2.88 7.0 years
June 2001 100,264 3.75 2.2 years
Robert A. McGuinness June 2000 92,207 3.75 2.8 years
June 2001 30,000 1.50 3.1 years
June 2001 68,417 2.59 2.2 years
June 2001 115,998 3.75 2.2 years
James H. Coleman June 2000 67,222 3.75 2.8 years
June 2001 15,000 1.28 3.1 years
June 2001 134,444 3.75 2.2 years
Patrick D. McChesney June 2000 33,411 3.75 2.8 years
June 2001 27,152 1.13 1.7 years
June 2001 15,000 1.28 3.1 years
June 2001 17,278 2.59 2.2 years
June 2001 49,544 3.75 2.2 years
Chris D. Mikkelsen June 2000 30,579 3.75 2.8 years
June 2001 15,000 1.28 3.1 years
June 2001 17,278 2.59 2.2 years
June 2001 44,241 3.75 2.2 years
Jean Charles Potvin June 2000 51,871 3.75 2.8 years
June 2001 15,000 1.28 3.1 years
June 2001 17,278 2.59 2.2 years
June 2001 89,463 3.75 2.2 years
Douglas E. Stewart June 2001 79,367 1.50 3.1 years
KSOP Plan
The Company also maintains a retirement plan, the KSOP Plan, for the benefit
of eligible employees of the Company. The KSOP Plan consists of two
components- a salary reduction component (401(k)) and stock ownership
component (ESOP) and is available to all eligible employees of the Company.
Eligible employees are those who have been employed for a period in excess of
one year and who have worked at least 1,000 hours during the year in which any
allocation is to be made.
Employee contributions to the 401(k) component of the KSOP Plan are limited
in each year to the total amount of salary reduction the employee elects to
defer during the year, which is limited in 2005 to $14,000 ($18,000 limit for
participants who are 50 or more years of age, or who turn 50 during 2005).
Employer contributions, stated as a percentage of eligible compensation, are
determined each year by the Board of Directors and allocations are made in
the form of Class A common shares. The number of Class A commons shares
released for allocation is determined by multiplying the total eligible
compensation by the contribution percentage approved by the Board of
Directors and dividing that number by the average price of the shares
remaining in the KSOP Plan for distribution. For KSOP Plan year 2005 the
Company has adopted a "Safe Harbor" contribution of 3% of eligible
compensation. As of December 31, 2004, 50,321 shares remained in the KSOP
Plan to be allocated to KSOP Plan participants.
Total employer and employee annual contributions to an employee participating
in both the 401(k) and ESOP components of the KSOP Plan are limited (in 2005)
to a maximum of $42,000 ($46,000 limit for participants who are 50 or more
years of age or who turn 50 during 2005). The annual Dollar limit is an
aggregate limit, which applies to all contributions made under this plan or
any other cash or deferral arrangements.
Distributions from the KSOP Plan are not permitted before the participating
employee reaches the age of 59, except in the case of death, disability,
termination of employment by the Company or financial hardship. The employee
stock ownership component of the KSOP Plan is qualified under Sections 421
and 423 of the U.S. Internal Revenue Code of 1986, as amended.
The Company allocated contributions to eligible KSOP Plan participants for
plan years 2004, 2003 and 2002 were $254,779 (122,722 shares), $216,432
(203,357 shares), and $153,003 (242,632 shares), respectively. See footnote 2
of "-Executive Compensation."
Termination of Employment, Change in Responsibilities and Employment Contracts
At this time, there are no written contracts of employment between the
Company and the Named Executive Officers. The Company has entered into
agreements with each of the Named Executive Officers in order to induce them
to remain employed by the Company in the event of a change of control (as
defined in the agreements). The Board decided to implement such Change of
Control Agreements given, among other things, the Named Executive Officers'
familiarity and long-standing involvement with the Brisas Project and the
importance of each of their continued involvement in the on-going development
of the Brisas Project.
In the event of a change in control, the Company has agreed with each of such
Named Executive Officers to, among other things, continue their employment
and, if their employment is terminated within seven months following the
change in control (other than for cause, disability, retirement or death) or
if the Named Executive Officer terminates his employment for good reason (as
defined in the agreements) at any time within seven months following the
change of control, such individual will be entitled to receive (lump-sum),
among other things, two or three times his annual salary and KSOP
contributions, an amount equal to all bonuses received during the twelve
months prior to the change of control, maintenance of health and insurance
benefits for a period of 36 months and the buy-out of the cash value of any
unexercised stock options (if so elected by the employee).
Board Practices
Based upon the recommendations of a report dated December 1994 (the "Report")
by the TSX Committee on Corporate Governance in Canada, the TSX adopted a
by-law requiring corporations listed on the TSX to disclose their approach to
corporate governance. The Board believes that the Company's general approach,
as summarized below, is substantially consistent with objectives reflected in
the Report.
Mandate and Duties of the Board. The Board has ultimate responsibility for
supervising the conduct of the Company's affairs and the management of its
business. The principal objective of the Board is to protect and enhance
shareholder value over the long term. Although the Board has delegated to
management responsibility for the day-to-day operations of the Company, the
Board has ultimate responsibility for the stewardship of the Company.
The Board's duties include overseeing strategic planning, reviewing and
assessing principal risks to the Company's business and approving risk
management strategies, supervising and evaluating management, authorizing
significant expenditures, ensuring timely and effective communication with
shareholders, and overseeing the Company's internal controls and information
systems.
The Board's duties also include planning and monitoring activities of senior
management. In considering and making appointments of senior management, the
Board considers it appropriate, where relevant, to address succession and
planning issues. In appointing senior management, the Board considers as a
necessary requirement of such appointments that such personnel be qualified
to carry out the duties and responsibilities relating to the appointed
positions and thus, apart from monitoring, assessing and providing feedback
to senior management, the Board does not consider it necessary to engage in
specifically training senior management.
The Board met ten times during 2004 at which attendance, in person or by
telephone, averaged 89%. Various matters were considered and approved by
written resolution during the year.
Board Composition. The Report's Guidelines recommend that a majority of the
Directors of the Company be "unrelated" Directors. An "unrelated" Director is
a Director who is independent of management and is free from any interest and
any business or other relationship, which could, or could reasonably be
perceived, to materially interfere with a Director's ability to act with a
view to the best interests of the corporation, other than the interests and
relationships arising from shareholding. The Company's Board presently
consists of seven members. The Board considers that four members are
"unrelated" Directors as defined in the Report's Guidelines. The remaining
three members are currently executive officers of the Company. For the
purposes of this discussion, a "related" Director is a Director who is not an
unrelated Director. All Directors presently serve until the next annual
meeting of the Company's shareholders or until their successors are elected
and have qualified.
The Board currently believes that seven Directors and the current composition
of the Board represent an appropriate board size for the Company, having
regard to the size and activities of the Company. The current composition of
the Board provides, in the Board's view, an appropriate representation of
senior management and outside Directors.
Board Compensation. The Board reviews from time to time the compensation paid
to the Directors in order to ensure that Directors are being adequately
compensated for the duties performed and the obligations assumed by the
Directors.
Board Committees. The Board has delegated some of its authority to three
committees of the Board. These are the Executive Committee, the Compensation
Committee and the Audit Committee. The Board does not maintain a nominating
committee or an orientation and education program for new Directors as
suggested by the Report or a committee to deal with corporate governance
matters generally. Decisions regarding recruitment of new Directors,
assessment of current Directors, succession planning and other corporate
governance matters are made by the full Board. The Board is of the view that,
given the size of the Company and the fact that a majority of the Board
members are independent of management, these matters can be appropriately
dealt with by the full Board. During 2004, all of the Directors attended, in
person or by phone, 92% of the meetings of the Board and Committees on which
they served.
The Executive Committee, which is comprised of Rockne J. Timm (Chair), A.
Douglas Belanger and James H. Coleman, meets in person or by phone on a
regular basis. The Executive Committee supervises the business affairs of the
Company between Board meetings, except for those matters assigned to the
Compensation and Audit Committees. The Executive Committee is composed of one
unrelated Director (Mr. Coleman) and two related Directors (Messrs. Timm and
Belanger).
The Compensation Committee, which met nine times during 2004, in person and
by phone, consists of Chris D. Mikkelsen (Chair) and JC Potvin, both of who
are unrelated Directors. The Compensation Committee has responsibility with
respect to approving and advising the full Board on compensation matters
involving officers of the Company as well as approving allocations to the
KSOP Plan.
The Audit Committee, which met four times during 2004, in person and by
phone, consists of Chris D. Mikkelsen (Chair), Patrick D. McChesney and JC
Potvin, all of who are unrelated Directors. The Audit Committee is directly
responsible for the appointment, compensation, retention and oversight of our
independent public accountants and monitors the independence and performance
of our auditors. The Audit Committee monitors the integrity of our financial
reporting process and systems of internal controls regarding finance,
accounting and legal compliance. It reviews and reports to the Board the
scope and results of audits by our outside auditor and reviews the audit and
other professional services rendered by the outside auditor. The Audit
Committee also reviews transactions between the Company and our directors and
officers, our policies regarding those transactions and compliance with our
business ethics and conflict of interest policies. The Board has delegated
review of the quarterly financial statements to the Audit Committee prior to
filing with regulatory agencies. The Audit Committee reports to the Board on
its activities and findings.
Independence From Management. It is the Board's view that the Board operates
and functions independently of management as required. Mr. Coleman, an
independent and un-related director serves as non-executive Chairman of the
Board. In addition, the fact that four out of the seven Board members are
unrelated and not employees of the Company further reinforces the Board's
independence from management.
Shareholder Communication. The Company communicates regularly with its
shareholders through annual and quarterly reports, as well as news releases,
regulatory filings and the Company's website. In addition, the executive
officers of the Company are responsible for addressing day-to-day shareholder
inquiries and other shareholder communication issues.
Expectations of Management. The Board has delegated to the Chief Executive
Officer responsibility for day-to-day management of the business and affairs
of the Company, subject to compliance with directives and objectives
established by the Board from time to time. The Board relies on management to
provide the Board on a timely basis with information required by the Board to
perform its duties.
Outside Advisors. The Company's Audit Committee hires, fires, compensates,
oversees and monitors the independence and performance of our independent
auditors. Each of the Board and the Audit Committee are empowered to hire
outside advisors independent of management, as it determines necessary to
carry out its duties.
Share Ownership by Directors and Management
The following table sets forth the share ownership in the Company by
Directors and Named Executive Officers as of March 28, 2005 at which time the
number of Class A common shares and Equity Units outstanding were 34,599,819
and 1,157,397, respectively.
Number of
Common Shares
Beneficially Percent
Name Owned (1) Ownership
- -------------------------------------------------------
Rockne J. Timm(2)(3)(4) 1,442,169 4.0
A. Douglas Belanger(2)(3) 1,433,192 4.0
James P. Geyer 465,865 1.3
Robert A. McGuinness(2)(3) 445,423 1.2
Douglas E. Stewart 196,365 0.6
James H. Coleman(2)(3) 234,000 0.7
Patrick D. McChesney(2)(3) 132,758 0.4
Chris D. Mikkelsen(2)(3)(4) 294,500 0.8
Jean Charles Potvin 104,168 0.3
(1) Includes for each individual shares issuable pursuant to presently
exercisable options for common shares as of March 28, 2005 or options
exercisable within 60 days of March 28, 2005 as follows: Mr. Timm, 594,617;
Mr. Belanger, 504,452; Mr. Geyer, 258,874; Mr. McGuinness 251,344; Mr.
Stewart 83,000; Mr. Coleman, 161,416; Mr. McChesney, 114,072; Mr. Mikkelsen,
91,519; Mr. Potvin, 76,305.
(2) Messrs. Timm, Belanger, McGuinness, Coleman, McChesney, and Mikkelsen
are Officers or Directors of Great Basin Energies, Inc., which owns 516,720
common shares, or 1.5% of the outstanding common shares. The foregoing
individuals beneficially own 9.4%, 6.1%, 0.9, 2.4%, 1.6%, and 1.3%,
respectively, of the outstanding common shares of Great Basin Energies, Inc.
and may be deemed indirectly to have an interest in the Company through their
respective management positions and/or ownership interests in Great Basin
Energies, Inc. Each of the foregoing individuals disclaims any beneficial
ownership of the common shares owned by Great Basin Energies, Inc.
(3) Messrs. Timm, Belanger, McGuinness, Coleman, McChesney, and Mr.
Mikkelsen are Officers or Directors of MGC Ventures, Inc., which owns 276,642
common shares, or 0.8% of the outstanding common shares of the Company. The
foregoing individuals beneficially own 10.6%, 10.5%, 1.5, 4.3%, 3.3%, and
2.3% respectively, of the outstanding common shares of MGC Ventures, Inc. and
may be deemed indirectly to have an interest in the Company through their
respective management positions and/or ownership interests in MGC Ventures,
Inc. Each of the foregoing individuals disclaims any beneficial ownership of
the common shares owned by MGC Ventures, Inc.
Number of Employees
As of March 28, 2005, the Company employed ten full time personnel from its
Spokane, Washington, office and approximately 55 people in Venezuela, of
which approximately 33 are located at the Brisas Project. The Company
maintains a corporate office in Caracas and manages day-to-day activities of
Venezuelan operations from its Puerto Ordaz office.
Item 7. Major Shareholders and Related Party Transactions
Control of Registrant
We are not directly or indirectly owned or controlled by another corporation
or by any foreign government. No company or government beneficially owns,
directly or indirectly, or exercises control or direction over, shares
carrying more than 5% of the voting rights attached to the Company's issued
Class A common shares as of the date of this report. Directors and the Named
Executives Officers as a group own 4,784,440 shares (including 2,135,599
shares subject to options exercisable within 60 days), or 12.3% of the total
shares issued. To the best of our knowledge, there are no individual
shareholders beneficially owning 5% or more of the Company's common shares.
See "-Directors, Senior Management and Employees- Share ownership by
Directors and Management." We have no knowledge of any arrangements that may,
at a subsequent date, result in a change in our control.
Related Party Transactions
The Directors, officers and principal shareholders of the Company and
associates, affiliates and close family members of the foregoing have had no
material interest, direct or indirect, in any transaction in which the
Company has participated during the last three fiscal years other than as
noted below. The following table sets forth maximum indebtedness to the
Company of each Director and Named Executive Officer during the last fiscal
year and the amount outstanding at March 28, 2005:
(1)Largest Amount
Name and Involvement amount outstanding
Principal Position of issuer or outstanding at
subsidiary during 2004 March 28, 2005
- -------------------------------------------------------------------------
Rockne J. Timm
Chief Executive Officer
and Director Lender $23,500 $0
James P. Geyer
Senior Vice President
and Director Lender 18,200 0
Robert A. McGuinness
Vice President-Finance and
Chief Financial Officer Lender (2)62,500 0
Douglas E. Stewart
Vice President-
Project Development Lender 4,900 0
Except for item 2 below, the indebtedness represents amounts loaned in 1998
to these individuals by the Company to pay income taxes related to restricted
stock grant transactions. The Company held promissory notes for each amount
loaned at an interest rate of 4.57%, originally due in 2005 and paid in full
in 2004.
Includes an outstanding 1996 loan of $50,000, bearing interest at 5.2%,
secured by a residential second mortgage, which was due in 2005 and paid in
full in 2004.
Interest of Insiders in Material Transactions
None of the Directors, officers of the Company, nor any person or corporation
owning more than 10% of any class of voting securities of the Company, nor any
associates or affiliate of any of them, had or has any material interest in
any transaction since the commencement of the Company's last financial year
or in any proposed transaction which has materially affected or would
materially affect the Company or any of its subsidiaries.
Item 8. Financial Information
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada. For a discussion of the
principal differences between accounting principles generally accepted in
Canada and the United States, please refer to note 11 to the consolidated
financial statements, included elsewhere in this annual report. A
consolidated balance sheet is presented for fiscal years 2004 and 2003 along
with consolidated statements of operations, cashflow and changes in
shareholders' equity, which are presented for fiscal 2004, 2003 and 2002.
Reference is made to Item 3 for the Company's policy on dividends and Item 17
for detailed financial information.
Legal Proceedings
We are unaware of any legal proceedings, either threatened or pending, to
which the Company is or is likely to be a party, or of which any of its
properties or assets is or is likely to be the subject, that may have a
significant effect on the Company's financial position or profitability.
Significant Changes
No significant changes have occurred since the date of the annual financial
statements.
Item 9. The Offer and Listing
Offer and Listing details
The Class A common shares of Gold Reserve Inc. are traded on The Toronto
Stock Exchange ("TSX") and on the American Stock Exchange ("AMEX") under the
symbol "GRZ." The Company's November 4, 2004 warrants are traded on the TSX
under the symbol "GRZ.T." Neither the Company's equity units and the related
underlying securities nor the other outstanding stock purchase warrants are
listed for trading on any exchange.
Previous to October 3, 2003, the Company's common stock was traded in the
United States on the Over-the-Counter Market ("OTC") under the symbol "GLDR"
and was traded on the TSX under the symbol "GLR.A."
Last Six Months TSX AMEX (1)
High Low High Low
Canadian Dollars U.S. Dollars
- ------------------------------------------------------------------------
March
(through 03/28/05) $ 5.69 $ 4.44 $ 4.72 $ 3.64
February 5.74 4.64 4.70 3.72
January 5.23 4.71 4.48 3.80
December 6.63 5.32 5.62 4.40
November 6.70 5.35 5.66 4.35
October 6.10 5.40 4.91 4.30
Last Nine Quarters
TSX AMEX(1)
2005 2005
High Low High Low
- -----------------------------------------------------------------------------
First Quarter $ 5.74 $ 4.44 $ 4.72 $ 3.64
2004 2003 2004 2003
High Low High Low High Low High Low
Canadian Dollars U.S. Dollars
- ------------------------------------------------------------------------------
Fourth Quarter $6.70 $ 5.32 $7.58 $4.32 $ 5.66 $4.30 $5.86 $3.25
Third Quarter 5.87 4.07 4.25 2.10 4.67 3.15 3.16 1.56
Second Quarter 5.70 3.70 2.55 2.10 4.31 2.74 1.91 1.41
First Quarter 6.89 4.39 2.94 1.77 5.33 3.35 2.00 1.16
Last Five Years TSX AMEX(1)
High Low High Low
Canadian Dollars U.S. Dollars
- ------------------------------------------------------------------------------
2004 $ 6.89 $ 3.70 $ 5.66 $ 2.74
2003 7.58 1.77 5.86 1.16
2002 3.31 1.06 2.24 0.71
2001 1.85 0.68 1.22 0.44
2000 1.46 0.67 1.25 0.41
(1) Previous to October 3, 2003, quotes are from the OTC market.
On March 28, 2005, the closing price for a Class A common share of the
Company was Cdn $4.44 per share on the TSX and U.S. $3.64 per share on the
AMEX. As of March 28, 2005, there were a total of 34,599,819 Class A common
shares issued and 1,157,397 Class B common shares issued.
The number of holders of Class A and Class B common shares of record on March
28, 2005 was approximately 1,200. Based on recent mailings to shareholders,
the Company believes its common shares are owned beneficially by
approximately 8,000 shareholders. An estimated 75% of the Company's
shareholders are Canadian residents who own approximately 60% of the
Company's outstanding shares, with the remaining outstanding shares owned
primarily by U.S. residents.
Item 10. Additional Information
Memorandum and Articles of Association
Information under this heading is included as a part of the Company's
Registration Statement on Form S-4 (Registration No. 333-68061) filed with
the U.S. Securities and Exchange Commission on November 27, 1998 and
incorporated by reference herein. All referenced documents concerning the
Company referenced in this annual report may be examined at the Company's
executive offices located at 926 West Sprague Avenue, Suite 200, Spokane, WA
99201, USA or through the U.S. Securities and Exchange Commission's website
at http://www.sec.gov".
Material contracts
During the past two years, the Company has had no material contracts, other
than through the ordinary course of business.
Exchange Controls and Other Limitations Affecting Security Holders
There are no Canadian laws that restrict the export or import of capital,
including foreign exchange controls, or that affect the payment of dividends
to non-resident holders, except as described below under the heading
"Taxation".
Presently, the Company does not carry on any mining business in Canada. If,
however, in the future the Company carries on a Canadian business, as defined
in the Investment Canada Act, a direct or indirect acquisition of control of
such a Canadian business by non-Canadians may be subject to either
notification or review under the Investment Canada Act. Under the Investment
Canada Act, subject to certain specified exceptions, acquisitions of control
by non-Canadians of Canadian businesses which exceed specified financial
thresholds are reviewable (i.e., require the prior approval of the federal
Minister of Industry and/or the federal Minister of Canadian Heritage based
on a "net benefit to Canada" test). Any acquisition of control of a Canadian
business by a non-Canadian that does not exceed the applicable review
threshold is merely subject to notification to Investment Canada, a
government agency within Industry Canada.
The term "non-Canadian" is defined in the Investment Canada Act to include:
(1) an individual who is neither a citizen nor a permanent resident of
Canada, (2) a foreign government or (3) any other entity, including a
corporation, that is not Canadian-controlled.
Under the Investment Canada Act, an acquisition of control of a Canadian
business may occur through the acquisition of the voting interests of an
entity, including a corporation, which directly or indirectly carries on the
Canadian business. Generally, the Investment Canada Act deems that the
acquisition of a majority of the voting shares of a corporation by a
non-Canadian constitutes acquisition of control of such corporation. The
acquisition of one-third or more (but less than a majority) of the voting
shares of a corporation by a non-Canadian is presumed to be an acquisition of
control of the corporation unless it can be established that the acquirer does
not in fact control the corporation through the ownership of voting shares.
The acquisition of less than one-third of the voting shares of a corporation
is deemed not to be an acquisition of control of the corporation.
In addition, an acquisition of control is also considered to occur for
purposes of the Investment Canada Act when all or substantially all of the
assets used in carrying on a Canadian business are acquired.
If an acquisition of control of a Canadian business is made in contravention
of the Investment Canada Act, a court of competent jurisdiction may make any
order it deems fit, including requiring the acquirer to divest such Canadian
business.
Except as described above, statutes in Canada and the Yukon Territory and the
charter documents of the Company do not restrict the right of non-resident or
foreign owners to hold or vote common shares of the Company.
The Company maintains a Shareholder Rights Plan, which is intended to give
adequate time for shareholders of the Company to properly assess the merits
of a take-over bid without pressure and to allow competing bids to emerge.
The Plan is designed to give the board of directors time to consider
alternatives to allow shareholders to receive full and fair value for their
common shares. One right is issued in respect of each outstanding share. The
rights become exercisable only when a person, including any party related to
it or acting jointly with it, acquires or announces its intention to acquire
20% or more of the Company's outstanding shares without complying with the
"permitted bid" provisions of the Shareholder Rights Plan. Each right would,
on exercise, entitle the holder, other than the acquiring person and related
persons, to purchase common shares of the Company at a 50% discount to the
market price at the time. In 2003, the shareholders approved an amendment to
continue the Shareholder Rights Plan until June 30, 2006.
Taxation
Canadian Federal Income Tax Considerations
The following is a general summary of the principal Canadian federal income
tax considerations under the Income Tax Act (Canada) (the eeCanadian Act'')
generally applicable to the holding and disposition of Class A and Class B
common shares (together, the "common shares") by a holder who, at all
relevant times for purposes of the Canadian Act, is not resident or deemed to
be resident in Canada, deals at arm's length with the Company, holds the
common shares as capital property and does not use or hold, and is not deemed
to use or hold the common shares in the course of carrying on, or otherwise in
connection with, a business in Canada and who, for purposes of the
Canada-United States Income Tax Convention (the eeTreaty''), is a resident of
the United States. Generally, common shares will be considered to be capital
property to a holder thereof provided that the holder does not use the common
shares in the course of carrying on a business and such holder has not
acquired them in one or more transactions considered to be an adventure or
concern in the nature of trade. This summary does not deal with special
situations, such as particular circumstances of traders or dealers in
securities, limited liability companies, tax-exempt entities, insurers, and
financial institutions. For purposes of the Canadian Act, all amounts
relevant in computing a holder's liability under the Canadian Act must be
computed in Canadian Dollars. Amounts denominated in U.S. Dollars including
adjusted cost base and proceeds of disposition must be converted into
Canadian Dollars based on the prevailing exchange rate at the relevant time.
Dividends
Dividends on common shares paid or credited to a U.S. Holder (as defined
below) by the Company are subject to Canadian withholding tax. Under the
Treaty, the rate of withholding tax on dividends paid or credited to a U.S.
Holder is generally limited to 15% of the gross amount of the dividend (or 5%
in the case of a U.S. Holder that is a corporation beneficially owning at
least 10% of the Company's voting shares). Under the Treaty, dividends paid
by the Company to certain religious, scientific, charitable, certain other
tax-exempt organizations and certain pension organizations that are resident
in, and exempt from tax in, the United States are exempt from Canadian
withholding tax.
Dispositions
A U.S. Holder will generally not be subject to tax under the Canadian Act in
respect of a capital gain realized on the disposition of a common share,
unless the common share constitutes eetaxable Canadian property'' as defined
in the Canadian Act at the time of disposition. The Class B common shares are
currently not listed on any stock exchange and are taxable Canadian property.
A Class A common share will generally not be taxable Canadian property to a
U.S. Holder at the time of disposition provided the Class A common shares are
listed on a prescribed stock exchange (which includes the Toronto Stock
Exchange and American Stock Exchange) at that time and, during the 60 month
period ending at the time of disposition of the Class A common share, the
U.S. Holder, persons with whom the U.S. Holder did not deal at arm's length,
or the U.S. Holder together with such persons, did not own 25% or more of the
Company's issued shares of any class or series of capital stock. A Class A
common share that was received on a conversion of a Class B common share may
constitute taxable Canadian property.
Even if a common share constitutes taxable Canadian property to a U.S.
Holder, by reason of the Treaty, no tax will generally be payable under the
Canadian Act on a capital gain realized by the U.S. Holder on the disposition
of such shares provided the value of such shares at the time of disposition is
not derived principally from real property situated in Canada. The Company
believes that, at the date of this filing, the value of each class of common
shares is not derived principally from real property situated in Canada
within the meaning of the Treaty.
Provided that the Class A common shares are not taxable Canadian property to
a U.S. Holder, there are no clearance certificate requirements imposed by the
Canadian Act on that U.S. Holder in respect of a disposition of Class A common
shares. As long as the Class B common shares are taxable Canadian property, a
U.S. Holder will be required to apply to the federal Canadian tax authorities
for a clearance certificate upon a disposition of a Class B common share,
including in the case of a conversion of a Class B common share into a Class
A common share.
U.S. Federal Income Tax Consequences
The following is a summary of certain material U.S. federal income tax
consequences of ownership and disposition generally applicable to U.S.
Holders (as defined below) of the Company's common shares. The discussion is
based on the Internal Revenue Code of 1986, as amended to the date hereof
(the "Code"), final and temporary Treasury regulations, rulings and judicial
decisions now in effect, all of which are subject to change or differing
interpretations possibly with retroactive effect. In such event, the U.S.
federal income tax consequences applicable to a U.S. Holder of the Company's
common shares could differ from those described in this discussion.
This summary does not address the effect of the U.S. federal estate, gift, or
excise tax laws or the tax laws of any applicable foreign, state, local or
other jurisdiction. This summary does not address tax consequences applicable
to a U.S. Holder's particular circumstances, including U.S. Holders who may be
subject to special tax rules, including, without limitation: (1) banks or
other financial institutions, U.S. Holders subject to alternative minimum
tax, partnerships or other legal entities classified as a partnership for
U.S. federal income tax purposes and persons holding through such entities,
regulated investment companies, insurance companies, dealers in securities,
traders in securities that elect to use the mark-to-market method of
accounting, certain retirement plans, dealers in commodities or currencies,
tax exempt organizations or holders of the Company's common shares as part of
a "straddle," "hedge" or "conversion transaction" with other investments and
taxpayers whose functional currency is not the United States Dollar or (2)
shareholders owning directly, indirectly or by attribution, 10% or more of
the Company's common shares.
For purposes of this discussion regarding U.S. federal income tax
consequence, a "U.S. Holder" is any beneficial owner of the Company's common
shares that is, for U.S. federal income tax purposes, a citizen or resident
of the United States (including certain former citizens and former long-term
residents), a corporation (or other entity taxable as a corporation for U.S.
federal income tax purposes) created or organized in or under the laws of the
United States or any political subdivision thereof, an estate the income of
which is subject to U.S. federal income taxation regardless of its source, or
a trust if (a) the administration of the trust is subject to the primary
supervision of a U.S. court and the trust has one or more U.S. persons with
authority to control all substantial decisions or (b) the trust has a valid
election in effect under applicable Treasury Regulations to be treated as
U.S. person. A "Non-U.S. Holder" is any shareholder other than a U.S. Holder.
The discussion below assumes that the Company's common shares are held as a
capital asset within the meaning of Section 1221 of the Code.
Distributions
For U.S. federal income tax purposes, the amount of distributions made on the
Company's common shares generally will equal the amount of cash and the fair
market value of any property distributed and also will include the amount of
any Canadian taxes withheld as described above. An amount of the distribution
will be treated as a dividend, taxable to a U.S. Holder as ordinary income, to
the extent of the Company's current or accumulated earnings and profits
allocable to such U.S. Holder. To the extent that an amount received by a
U.S. Holder exceeds the allocable share of the Company's current and
accumulated earnings and profits, such excess will be treated as a return of
capital to the extent of the U.S. Holder's tax basis in its common shares and
then, to the extent in excess of such U.S. Holder's tax basis, as capital
gain. The amount treated as a dividend will not be eligible for the dividends
received deduction generally allowed to U.S. corporate shareholders on
dividends from U.S. domestic corporations.
Under recently enacted U.S. federal income tax legislation, in the case of
non-corporate U.S. Holders, the federal income tax rate applicable to
dividends received in years beginning prior to 2009 may be lower than the
rate applicable to other categories of ordinary income if certain conditions
are met. Dividends will not qualify for the reduced rate, however, if the
corporation is treated, for the tax year in which the dividends are paid or
the preceding tax year, as a "passive foreign investment company" for U.S.
federal income tax purposes. As discussed below, for the year ended December
31, 2004, the Company was considered a "passive foreign investment company."
The amount of any distribution paid in foreign currency will be included in a
U.S. Holder's gross income in an amount equal to the U.S. Dollar value of the
foreign currency calculated by reference to the spot rate in effect on the
date of receipt by the U.S. Holder, regardless of whether the foreign
currency is converted into U.S. Dollars. If the foreign currency is converted
into U.S. Dollars on the date of receipt, a U.S. Holder generally should not
be required to recognize foreign currency gain or loss in respect of the
distribution. If the foreign currency received in the distribution is not
converted into U.S. Dollars on the date of receipt, a U.S. Holder will have a
tax basis in the foreign currency equal to its U.S. Dollar value on the date
of receipt. Any gain or loss recognized upon a subsequent conversion or other
disposition of the foreign currency will be treated as U.S. source ordinary
income or loss.
A Non-U.S. Holder generally will not be subject to U.S. federal income tax or
withholding tax on distributions with respect to the Company's common shares
that are treated as a dividend for U.S. federal income tax purposes unless
such dividends are effectively connected with the conduct of a trade or
business within the U.S. by the Non-U.S. Holder, (and are attributable to a
permanent establishment maintained in the U.S. by such Non-U.S. Holder if an
applicable income tax treaty so requires as a condition for such Non-U.S.
Holder to be subject to U.S. taxation on a net income basis in respect of
income from the Company's common shares), in which case the Non-U.S. Holder
generally will be subject to tax in respect of such dividends in the same
manner as a U.S. Holder. Any such effectively connected dividends received by
a corporate Non-U.S. Holder also may, under certain circumstances, be subject
to an additional "branch profits tax" at a 30% rate or such lower rate as may
be specified by an applicable income tax treaty. A Non-U.S. Holder generally
will not be subject to U.S. federal income tax or withholding tax on
distributions that are treated as capital gain for U.S. federal income tax
purposes unless such Non-U.S. Holder would be subject to U.S. federal income
tax on gain realized on the sale or other disposition of the Company's common
shares, as discussed below.
Subject to certain limitations, a U.S. Holder may elect to claim a credit
against its U.S. federal income tax liability for the Canadian tax withheld
from any dividends paid on the Company's common shares. A U.S. Holder who
does not make such an election instead may deduct the Canadian tax withheld,
but only for a year in which such U.S. Holder elects to do so with respect to
all creditable foreign taxes paid by such U.S. Holder. For U.S. foreign tax
credit purposes, for taxable years beginning before January 1, 2007,
dividends on the shares will generally constitute foreign source "passive
income" or, in the case of certain U.S. Holders, "financial services
income." However, pursuant to recently enacted legislation, for taxable
years beginning after December 31, 2006, dividends paid on the common shares
generally will be treated as "passive income" (or possibly "general income").
If, and for so long as, the Company is a United States-owned foreign
corporation, dividends paid by the Company on the common shares may, subject
to certain exceptions and elections, instead be treated for United States
foreign tax credit purposes as partly foreign source "passive income" (or
possibly "financial services income") for taxable years beginning before
January 1, 2007 or "passive income" (or possibly "general income") for
taxable years beginning after December 31, 2006, and partly United
States-source income, in proportion to the earnings and profits of the
Company in the year of such distribution allocable to foreign and United
States sources, respectively. The Company will be treated as a United
States-owned foreign corporation if stock representing 50% or more of the
voting power or value of the stock of the Company is held, directly or
indirectly, by U.S. holders. No assurance can be given as to whether the
Company is or will become a United-States-owned foreign corporation.
The rules relating to the U.S. foreign tax credit are complex, and U.S.
Holders should consult their own tax advisors to determine whether and to
what extent they would be entitled to a foreign tax credit.
Dispositions
Subject to the discussion below pertaining to passive foreign investment
companies, a U.S. Holder's sale, exchange or other disposition of the
Company's common shares generally will result in the recognition by the U.S.
Holder of U.S. source taxable capital gain or loss in an amount equal to the
difference between the U.S. Dollar value of the amount of cash and fair
market value of any property received upon the sale, exchange or other
disposition and such U.S. Holder's adjusted tax basis in the Company's common
shares. Such capital gain or loss will be long-term if the U.S. Holder's
holding period in the common shares is more than one year at the time of the
sale, exchange or other disposition. Long-term capital gain recognized by
certain non-corporate U.S. Holders generally will be subject to tax rates
lower than the rates applicable to ordinary income. The deductibility of
capital losses is subject to limitations. U.S. Holders should consult their
tax advisors regarding the treatment of capital gains and losses.
A Non-U.S. Holder will not be subject to U.S. federal income tax or
withholding tax on gain realized on the sale or other disposition of the
Company's common shares unless (i) the gain is effectively connected with the
conduct of a trade or business by the Non-U.S. Holder in the U.S. (and is
attributable to a permanent establishment maintained in the U.S. by such
Non-U.S. Holder if an applicable income tax treaty so requires as a condition
for such Non-U.S. Holder to be subject to U.S. taxation on a net income basis
in respect of income from the Company's common shares), or (ii) such Non-U.S.
Holder is an individual who is present in the U.S. for 183 days or more in the
taxable year of the sale, and certain other conditions are met. Effectively
connected gains realized by a corporate Non-U.S. Holder may also, under
certain circumstances, be subject to an additional "branch profits tax" at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Controlled Foreign Corporation Status
Under Section 951(a) of the Code, each "United States shareholder" of a
"controlled foreign corporation" ("CFC") must include in its gross income for
U.S. federal income tax purposes its pro rata share of the CFC's "subpart F
income," even if the subpart F income is not actually distributed to the
"United States Shareholder". In addition, gain on the sale of stock in a CFC
realized by a "United States shareholder" is treated as ordinary income,
eligible for the reduced tax rate applicable to certain dividends, to the
extent of such shareholder's proportionate share of the CFC's undistributed
earnings and profits accumulated during such shareholder's holding period for
the stock. Section 951(b) of the Code defines a United States shareholder
("U.S. Shareholder") as any U.S. corporation, citizen, resident or other U.S.
person who owns (directly or through certain deemed ownership rules) 10% or
more of the total combined voting power of all classes of stock of a foreign
corporation. In general, a foreign corporation is treated as a CFC only if
such U.S. Shareholders collectively own more than 50% of the total combined
voting power or total value of the foreign corporation's stock. Under these
rules the Company does not expect to be a CFC. If the Company is treated as a
CFC, the Company's status as a CFC should have no adverse effect on any
shareholder of the Company that is not a "United States Shareholder."
Foreign Personal Holding Company Status
If (1)more than 50% of the voting power or value of the Company's common
shares were owned, actually or constructively, by five or fewer individuals
who are citizens or residents of the United States and (2)60% or more (50% or
more in subsequent years) of the Company's income consisted of certain
interest, dividend or other enumerated types of income, then the Company
would be treated as a foreign personal holding company ("FPHC"). If the
Company were a FPHC, then each U.S. Holder, regardless of the amount of the
Company's common shares owned by such U.S. Holder, would be required to
include in its gross income, as a constructive dividend, its pro rata share
of the Company's undistributed taxable income, as specifically advised under
the FPHC rules.
The Company believes that it has not been, and does not expect to become, a
FPHC for United States federal income tax purposes. However, no assurances
can be given in this regard. Prospective investors should consult their own
tax advisors concerning the United States federal income tax consequences of
holding the common shares if the Company is treated as a FPHC.
The FPHC rules described above have been repealed with respect to taxable
years of the Company beginning after December 31, 2004 and to taxable years of
U.S. Holders of the Company's common shares with or within which such taxable
year of the Company ends. Prospective investors should consult their own tax
advisors regarding the tax consequences of such repeal on an investment in
the Offered Shares.
Foreign Investment Company Status.
If (a) 50% of more of the total voting power of the total value of the
Company's outstanding shares is owned directly or indirectly, by citizens or
residents of the U.S., U.S. partnerships or corporations, or U.S. estates or
trusts (as defined by the Code Section 7701(a)(30)), and (b) the Registrant
is found to be engaged primarily in the business of investing, reinvesting,
or trading in securities, commodities, or any interest therein, the
Registrant may be treated as a "Foreign Investment Company" ("FIC") as
defined in Section 1246 of the Code, causing all or part of any gain realized
by a U.S. Holder selling or exchanging the Company's common shares to be
treated as ordinary income rather than capital gain.
The corporation does not believe that it currently qualifies as a FIC.
However, there can be no assurance that it will not be considered a FIC for
the current or any future taxable year.
The FIC rules described above have been repealed with respect to taxable
years of the Company beginning after December31, 2004 and to taxable years of
U.S. Holders of common shares with or within which such taxable year of the
Company ends.
Passive Foreign Investment Company Status
Sections 1291 through 1298 of the Code contain special rules applicable with
respect to foreign corporations that are "passive foreign investment
companies" ("PFICs"). A company will be considered a PFIC if 75% or more of
its gross income (including a pro rata share of the gross income of any
company (United States or foreign) in which the company is considered to own
25% or more of the shares by value) in a taxable year is passive income (the
"Income Test"). Alternatively, a company will be considered to be a PFIC if
at least 50% of the assets (averaged over the four quarter ends for the year)
of the company (including a pro rata share of the assets of any company of
which the company is considered to own 25% or more of the shares by value) in
a taxable year are held for the production of, or produce, passive income (the
"Asset Test").
For the year ended December 31, 2004, the Company was a PFIC because it met
the Income Test. As a consequence, each shareholder who is a U.S. Holder, in
the absence of an election by such holder to treat the Company as a
"qualified electing fund" (a "QEF" election), as discussed below, will, upon
certain distributions by the Company or upon disposition of the Company's
common shares at a gain, be liable to pay tax at the highest tax rate on
ordinary income in effect for each period to which the income is allocated
plus interest on the tax, as if the distribution or gain had been recognized
ratably over the U.S. Holder's holding period for the Company's common shares
while the Company was a PFIC. Additionally, a U.S. Holder who acquires the
Company's common shares from a decedent who failed to make a QEF election
will generally be denied the normally available step-up of the income tax
basis for such shares to fair market value at the date of death and, instead,
would have a tax basis equal to the decedent's tax basis, if lower, in the
shares.
A U.S. Holder who owns the Company's common shares during a period when the
Company is a PFIC will be subject to the foregoing PFIC rules, even if the
Company ceases to be a PFIC, unless such U.S. Holder makes a QEF election in
the first year in which the U.S. Holder owned the Company's common shares and
the Company was considered a PFIC. A U.S. Holder who makes such a QEF election
will be entitled to treat any future gain on the sale of the Company's common
shares as capital gain and will not be denied the tax basis step-up at death
described above. Additionally, a U.S. Holder who makes a QEF election will,
for each taxable year the Company is a PFIC, include in income a pro rata
share of the ordinary earnings of the Company as ordinary income and a pro
rata share of any net capital gain of the Company as long-term capital gain,
subject to a separate election to defer payment of taxes, which deferral is
subject to an interest charge. The Company, at the request of a U.S. Holder
electing to have the Company treated as a QEF, will comply with the
applicable information reporting requirements.
A U.S. Holder who makes a QEF election for the year in which the Company
first becomes a PFIC (and complies with certain U.S. federal income tax
reporting requirements) should not have any material adverse U.S. federal
income tax consequences because the Company had no ordinary earnings or net
capital gains during the year ended December 31, 2004. In addition, the
Company believes that it will not have any ordinary earnings or net capital
gains in future years in which it may be a PFIC. However, no assurance can be
given as to this expectation. U.S. Holders are urged to consult their tax
advisors concerning the application of the U.S. federal income tax rules
governing PFICs in their particular circumstances.
As an alternative to the QEF election, a U.S. Holder of certain publicly
traded PFIC stock can elect to mark the stock to market, recognizing as
ordinary income or loss each year an amount equal to the difference as of the
close of the taxable year between the U.S. Holder's fair market value of the
PFIC stock and the adjusted basis in the PFIC stock. Losses would be allowed
only to the extent of net mark-to-market gain previously included in income
by the U.S. Holder under the election for prior taxable years. If a
mark-to-market election is in effect on the date of a U.S. Holder's death,
the otherwise available step-up in tax basis to fair market value will not be
available. Instead, the tax basis of the Company's common shares in the hands
of a U.S. Holder who acquires such shares from the decedent will be the
lesser of the decedent's tax basis or the fair market value of the shares.
As a PFIC, each U.S. Holder would be required annually to file an IRS Form
8621 (Return by a shareholder of a Passive Foreign Investment Company or
Qualified Electing Fund) with such U.S. Holder's timely filed income tax
return (or directly with the IRS if the U.S. Holder is not required to file
an income tax return). A U.S. Holder choosing to make a QEF election also
must include with its income tax return a shareholder election statement and
the PFIC annual information statement that the Company will provide. If the
Company determines that it was a PFIC during the year, within two months
after the end of each such year the Company intends to supply the PFIC annual
information statement necessary to make the QEF election for such year.
Due to the complexity of the PFIC rules, a U.S. Holder should consult it own
tax advisor regarding the Company's status as a PFIC for tax year ending
December 31, 2004 or a subsequent year, and the eligibility, manner and
advisability of making a QEF election or a mark-to-market election.
Backup Withholding and Information Reporting
In general, dividend payments or other taxable distributions on the Company's
common shares or proceeds from the disposition thereof paid by a U.S. paying
agent or other U.S. intermediary to a non-corporate U.S. Holder may be
subject to information reporting to the IRS and possible U.S. backup
withholding at a current rate of 28%. Backup withholding generally would not
apply to a U.S. Holder that furnishes a correct taxpayer identification
number and makes any other required certifications or if the U.S. Holder is
otherwise exempt from backup withholding. U.S. Holders that are required to
establish their exempt status generally must provide such certification on
IRS Form W-9 (Request for Taxpayer Identification Number and Certification).
Certain Non-U.S. Holders receiving payments in the U.S or through certain
U.S. financial intermediaries may be required to establish their exemption
from information reporting or backup withholding by providing certification
of non-U.S. status on IRS Form W-8, as applicable. Amounts withheld as backup
withholding may be credited against the U.S. Holder or Non-U.S Holder's U.S.
federal income tax liability. Additionally, a U.S. Holder or Non-U.S. Holder
may obtain a refund of any excess amounts withheld under the backup
withholding regime by filing the appropriate claim for refund with the IRS
and furnishing any required information. Copies of any information returns
filed with the IRS may be made available by the IRS, under the provisions of
a specific treaty or agreement, to the taxing authorities of the country in
which the Non-U.S. Holder resides or is organized.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
The Company currently does not enter into any hedging transactions or hold
any derivative instruments. The carrying amounts for cash and cash
equivalents, marketable securities, deposits, advances and other, accrued
interest and accounts payable and accrued expenses on the balance sheet
approximate fair value because of the immediate or short-term maturity of
these instruments. Fair value estimates are made at the balance sheet date
based on relevant market information but involve uncertainties and therefore
cannot be determined with precision. In order to limit its market risk, the
Company diversifies its cash and investment holdings into U.S. treasury and
agency obligations and major financial institutions and corporations. The
fair value of investments in marketable securities is disclosed in Note 2 to
the Consolidated Financial Statements. See "Risk Factors-Future hedging
activities could negatively impact future operating results."
Item 12. Description of Securities Other Than Equity Securities - Not
applicable
PART II
Item 13. Defaults, Dividends Arrearages and Delinquencies - None
Item 14. Material Modifications to Rights of Security Holders and Use of
Proceeds - None
Item 15. Controls and Procedures
a) An evaluation was performed under the supervision and with the
participation of the Company's management, including the chief executive
officer and chief financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15 of the U.S. Securities Exchange Act of 1934, as amended) as of
the end of the period covered by this Annual Report on Form 20-F/A. Based on
that evaluation, the Company's management, including the chief executive
officer and chief financial officer, concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this Annual Report on 20-F/A to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or
submits under the U.S. Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time period specified
in the U.S. Securities and Exchange Commission rules and forms.
b) Not applicable for annual reports for fiscal years ending prior to July
15, 2006.
c) Not applicable for annual reports for fiscal years ending prior to July
15, 2006.
d) In connection with the evaluation described above, the Company's
management, including the chief executive officer and chief financial
officer, identified no change in the Company's internal control over
financial reporting that occurred during the Company's fiscal year ended
December 31, 2004, and that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Our Audit Committee is comprised of three members: Mr. Chris Mikkelsen, Mr.
Patrick McChesney and Mr. Jean Charles Potvin. The Board has made the
affirmative determination that all members of the Audit Committee are
"independent" pursuant to the criteria outlined by AMEX and Rule 10A-3 of the
U.S. Securities and Exchange Act of 1934, as amended. Mr. Mikkelsen is a CPA
and shareholder in McDirmid, Mikkelsen, Secrest PS, a large local CPA
practice. Mr. McChesney is a CPA and a past and present financial executive
for a number of companies. Mr. Potvin is President and CEO of Tiomin
Resources, Inc. a resources company based in Toronto, Canada, has an
MBA-Finance and was an investment analyst at Burns Fry Ltd for 13 years. Mr.
Mikkelsen serves as the "audit committee financial expert" (as defined in
Item 16A to Form 20-F/A), although the Board believes that all members of the
Audit Committee have sufficient knowledge and experience to satisfy the
"financial sophistication" requirement of the AMEX and to serve as the
Committee's "audit committee financial expert."
Item 16B. Code of Ethics
The company has adopted a Code of Ethics and Conduct that is applicable to
all its directors, officers and employees. The Code of Ethics contains
general guidelines for conducting the business of the company. There have
been no amendments or waivers to this Code since its inception. We intend to
disclose future amendments to, or waivers from, certain provisions of the
Code on our website within five business days following the date of such
amendment or waiver. A copy of the Code of Ethics and Conduct is posted on
the Company's website ( HYPERLINK "http://www.goldreserveinc.com"
www.goldreserveinc.com). We believe that our Code of Ethics and Conduct
constitutes a "code of ethics" as defined by the U.S. Securities and Exchange
Commission and a "code of ethics and conduct" pursuant to the criteria
outlined by AMEX.
Item 16C. Principal Accountant Fees and Services
Audit Fees
The aggregate Audit Fees billed for professional services rendered by
PricewaterhouseCoppers LLP ("PwC") for the audit of our annual financial
statements or services that are normally provided by PwC in connection
therewith for 2004 and 2003 were $48,791 and $44,309, respectively,
Audit-Related Fees
The aggregate Audit-Related Fees for professional services rendered by PwC
for services connected with our quarterly reports and securities filing
documents for 2004 and 2003 were $18,827 and $4,931, respectively.
Tax Fees
The aggregate Tax Fees for professional services rendered by PwC for tax
compliance and return preparation services for 2004 and 2003 were $3,668 and
nil, respectively.
All Other Fees
None
Audit Committee Services Approval Policy
Our Audit Committee is responsible for the oversight of our independent
auditor's work and pre-approves all services provided by PwC. The Audit
Committee sets forth its pre-approval in the minutes of its meetings.
Audit-Related and Tax services provided by PwC are typically approved
individually during the Committee's periodic meetings or, on an as-needed
basis, the Audit Committee's Chair is authorized to approve such services in
advance on behalf of the Committee with such approval reported to the full
Audit Committee at its next meeting.
Item 16D. Exemptions From the Listing Standards for Audit Committees Not
Applicable
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers Not Applicable
PART III
Item 17. Financial Statements
Management's Report To the Shareholders of Gold Reserve Inc.
The accompanying consolidated financial statements of the Company were
prepared by management in accordance with accounting principles generally
accepted in Canada, consistently applied and within the framework of the
summary of significant accounting policies in these consolidated financial
statements. Management is responsible for all information in the annual
report. All financial and operating data in the annual report is consistent,
where appropriate, with that contained in the consolidated financial
statements.
Management is responsible for establishing and maintaining an adequate
internal control structure and procedures for financial reporting. Management
has established and maintains a system of internal accounting control designed
to provide reasonable assurance that assets are safeguarded from loss or
unauthorized use, financial information is reliable and accurate and
transactions are properly recorded and executed in accordance with
management's authorization. This system includes established policies and
procedures, the selection and training of qualified personnel and an
organization providing for appropriate delegation of authority and
segregation of responsibilities.
The Board of Directors fulfills its responsibilities for the consolidated
financial statements primarily through the activities of its Audit Committee,
which is composed of three directors, none of whom are members of management.
This Committee monitors the independence and performance of our independent
auditors and meets with the auditors to discuss the results of their audit
and their audit report prior to submitting the consolidated financial
statements to the Board of Directors for approval. This Committee reviews and
discusses with management the consolidated financial statements, related
accounting principles and practices and (when required of management under
securities commissions or the applicable listing standards) management's
assessment of internal control over financial reporting. This Committee also
monitors the integrity of our financial reporting process and systems of
internal controls regarding finance, accounting and legal compliance.
The consolidated financial statements have been audited on behalf of the
shareholders by the Company's independent auditors, PricewaterhouseCoopers
LLP. The auditors' report outlines the scope of their examination and their
opinion on the consolidated financial statements. The auditors have full and
free access to the Audit Committee.
s/ Rockne J. Timm s/ Robert A. McGuinness
Chief Executive Officer Vice President-Finance and CFO
November 10, 2005 November 10, 2005
Report of the Independent Accountants
To the Shareholders of Gold Reserve Inc
We have audited the consolidated balance sheets of Gold Reserve Inc. as at
December 31, 2004 and 2003 and the consolidated statements of operations,
cash flows and changes in shareholders' equity for each of the years in the
three year period ended December 31, 2004. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at December
31, 2004 and 2003 and the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 2004 in
accordance with Canadian generally accepted accounting principles.
Our previous report dated February 18, 2005 has been withdrawn and the
financial statements have been restated as described in note 11.
s/PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, British Columbia, Canada
February 18, 2005, except as to Note 11(c), which is as of October 21, 2005
Comments by Auditors for United States Readers on Canada-United States
Reporting Differences
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when there are
changes in accounting principles that have a material effect on the
comparability of the company's financial statements, such as the changes
described in note 2 to the financial statements. Our report to the
shareholders dated February 18, 2005 is expressed in accordance with Canadian
reporting standards which do not require a reference to such a change in
accounting principles in the auditors' report when the change is properly
accounted for and adequately disclosed in the financial statements.
s/PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, British Columbia, Canada
February 18, 2005, except as to Note 11(c), which is as of October 21, 2005
GOLD RESERVE INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
2004 2003
____________________________________
ASSETS
Cash and cash equivalents $ 27,178,705 $ 11,331,503
Marketable securities 5,528,776 8,450,478
Deposits, advances and other 336,128 310,820
Accrued interest 13,444 68,651
____________________________________
Total current assets 33,057,053 20,161,452
Property, plant and
equipment, net 52,535,018 46,126,317
Other 1,013,460 742,713
____________________________________
Total assets $ 86,605,531 $ 67,030,482
====================================
LIABILITIES
Accounts payable and
accrued expenses $ 1,307,635 $ 765,860
Minority interest in
consolidated subsidiaries 1,121,838 1,126,151
____________________________________
Total liabilities 2,429,473 1,892,011
Commitments
SHAREHOLDERS' EQUITY
Serial preferred stock, without par value
Authorized: Unlimited
Issued: None
Common shares
and Equity Units: 136,907,516 112,971,425
Class A common shares, without par value
Authorized: Unlimited
Issued: 2004...33,715,795 2003... 27,750,258
Outstanding: 2004...33,421,708 2003... 27,456,171
Equity Units
Issued: 2004...1,157,397 2003... 1,237,880
Outstanding: 2004... 658,122 2003... 738,605
Less, common shares and
equity units held by affiliates (674,598) (674,598)
Stock options 1,004,197
Accumulated deficit (52,955,734) (47,054,004)
KSOP debt (105,323) (104,352)
____________________________________
Total shareholders' equity 84,176,058 65,138,471
____________________________________
Total liabilities and
shareholders' equity $ 86,605,531 $ 67,030,482
====================================
The accompanying notes are an integral part of the consolidated financial
statements.
Expressed in U.S. Dollars
Approved by the Board of Directors:
s/ Chris D. Mikkelsen s/ Patrick D. McChesney
GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
_______________________________________
Other Income:
Interest income $ 529,838 $ 594,006 $ 676,550
Gain on sale of
marketable securities 370,043 176,375 26,450
_________________________________________
899,881 770,381 703,000
_________________________________________
Expenses:
General and administrative 3,079,597 1,860,312 1,329,920
Technical services 2,391,194 2,027,391 1,478,756
Corporate communications 674,786 419,394 279,093
Legal and accounting 236,924 276,291 173,472
Foreign currency (gain) loss 4,322 (156,314) 418,258
Minority interest in net income
(loss) of consolidated subsidiaries (4,313) 45,910 31,623
_________________________________________
6,382,510 4,472,984 3,711,122
_________________________________________
Net loss before tax (5,482,629) (3,702,603) (3,008,122)
Income tax 4,733
_________________________________________
Net loss $ (5,482,629) $ (3,707,336) $ (3,008,122)
==========================================
Net loss per share
basic and diluted $ (0.19) $ (0.15) $ (0.13)
===========================================
Weighted average common
shares outstanding 29,215,727 24,636,083 23,316,423
===========================================
The accompanying notes are an integral part of the consolidated financial
statements.
Expressed in U.S. Dollars
GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2004, 2003 and 2002
Common Shares and
Common Shares and Equity Units Issued Accumulated Equity Units
Common Shares Equity Units Amount Deficit Held by Affiliates
_________________________________________________________________________________________________________
Balance, December 31, 2001 22,655,122 1,313,016 102,265,911 40,338,546) (674,598)
Equity units exchanged for
common shares 23,036 (23,036)
Net loss (3,008,122)
Common shares issued 318,000 232,160
_________________________________________________________________________________________________________
Balance, December 31, 2002 22,996,158 1,289,980 102,498,071 (43,346,668) (674,598)
Equity units exchanged for
common shares 52,100 (52,100)
Net loss (3,707,336)
Common shares issued 4,702,000 10,473,354
_________________________________________________________________________________________________________
Balance, December 31, 2003 27,750,258 1,237,880 112,971,425 (47,054,004) (674,598)
Equity units exchanged for
common shares 80,483 (80,483)
Net loss (5,482,629)
Stock option compensation
from 2002 and 2003 (419,101)
Common shares issued 5,885,054 23,936,091
_________________________________________________________________________________________________________
Balance, December 31, 2004 33,715,795 1,157,397 $ 136,907,516 $ (52,955,734) $ (674,598)
=========================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Expressed in U.S. Dollars
GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
_________________________________________
Cash Flow from Operating Activities:
Net loss $(5,482,629) $(3,707,336) $(3,008,122)
Adjustments to reconcile
net loss to net cash used
by operating activities:
Stock option compensation 599,423
Depreciation 58,179 44,630 58,527
Amortization of premium
on corporate
debt securities 102,481 106,583 107,930
Foreign currency (gain) loss 4,332 (158,314) 418,258
Minority interest in net
income (loss) of
consolidated subsidiaries (4,313) 45,910 31,623
Net gain on disposition of
marketable securities (370,043) (176,375) (26,450)
Shares issued for
compensation and KSOP 453,698 520,032 238,203
Changes in non-cash working capital:
(Increase) decrease in
deposits, advances and
accrued interest 138,999 9,120 (94,172)
Increase (decrease)
in accounts payable and
accrued expenses 541,775 415,599 29,479
_________________________________________
Net cash used by
operating activities (3,958,098) (2,898,151) (2,244,724)
=========================================
Cash Flow from Investing Activities:
Purchase of marketable
securities (3,796,779) (7,375,099) (11,461,632)
Purchase of property,
plant and equipment (6,466,880) (26,551) (5,489)
Proceeds from the sale
and maturity of
marketable securities 6,986,043 9,940,182 9,443,246
Other (384,179) 192,735 75,606
________________________________________
Net cash provided (used)
by investing activities (3,661,795) 2,731,267 (1,948,269)
========================================
Cash Flow from Financing Activities:
Proceeds from issuance
of common shares 23,467,095 9,913,755 12,960
________________________________________
Net cash provided by
financing activities 23,467,095 9,913,755 12,960
========================================
Change in Cash and Cash Equivalents:
Net increase (decrease)
in cash and
cash equivalents 15,847,202 9,746,871 (4,180,033)
Cash and cash equivalents -
beginning of year 11,331,503 1,584,632 5,764,665
________________________________________
Cash and cash equivalents -
end of year $27,178,705 $11,331,503 $1,584,632
========================================
Supplemental Cash Flow Information
Non-cash investing and financing activities:
Issuance of common
shares as compensation $ 198,919 $ 303,600 $ 85,200
Issuance of common
shares to KSOP Plan $ 255,750 $ 256,000 $ 134,000
The accompanying notes are an integral part of the consolidated
financial statements.Expressed in U.S. Dollars
1. The Company and Significant Accounting Policies:
The Company. Gold Reserve Inc. (the "Company") is a mining company
incorporated in 1998 under the laws of the Yukon Territory, Canada, and is
the successor issuer to Gold Reserve Corporation. The Company's primary
mining asset, the Brisas Project, is a gold/copper deposit located in the Km
88 mining district of the State of Bolivar in southeastern Venezuela. The
Company has no revenue producing mining operations at this time. All amounts
shown herein are expressed in U.S. Dollars unless otherwise noted.
In February 1999, the shareholders of Gold Reserve Corporation approved a
plan of reorganization whereby Gold Reserve Corporation became a subsidiary
of Gold Reserve Inc., the successor issuer (the "Reorganization"). Generally,
each shareholder of Gold Reserve Corporation received one Gold Reserve Inc.
Class A common share for each common share owned of Gold Reserve Corporation.
After the Reorganization, a shareholder of Gold Reserve Inc. continued to own
an interest in the business, through subsidiary companies, that in aggregate
was essentially the same as before the Reorganization.
Certain U.S. holders of Gold Reserve Corporation elected, for tax reasons, to
receive equity units in lieu of Gold Reserve Inc. Class A common shares. An
equity unit is comprised of one Gold Reserve Inc. Class B common share and
one Gold Reserve Corporation Class B common share. The equity units are
substantially equivalent to a Class A common share and are immediately
convertible into Gold Reserve Inc. Class A common shares upon compliance with
certain procedures. Equity units are not listed for trading on any stock
exchange, but, subject to compliance with applicable federal, provincial and
state securities laws, may be transferred. Unless otherwise noted, general
references to common shares of the Company include Class A common shares and
Class B common shares as a combined group.
Presentation of Financial Statements and Consolidation. The consolidated
financial statements contained herein have been prepared in accordance with
accounting principles generally accepted in Canada, which as described in
Note 11, differ in certain respects from accounting principles generally
accepted in the United States of America.
These consolidated financial statements include the accounts of the Company,
Gold Reserve Corporation, two domestic subsidiaries, Great Basin Energies,
Inc. ("Great Basin") and MGC Ventures Inc. ("MGC Ventures"), seven Venezuelan
subsidiaries, and seven Aruba subsidiaries which were formed to hold the
Company's interest in its foreign subsidiaries or for future transactions.
All significant intercompany accounts and transactions have been eliminated
in consolidation. The Company's policy is to consolidate those subsidiaries
where majority control exists. The Company believes it exercises majority
control of Great Basin and MGC Ventures.
Cash and Cash Equivalents. The Company considers short-term, highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents for purposes of reporting cash equivalents and cash flows. At
December 31, 2004 and 2003, the Company had approximately $130,000 and
$64,000, respectively, in Venezuelan and banks outside Canada and the United
States.
Marketable Securities. Equity securities are carried at the lower of cost and
net realizable value. Corporate debt securities and U.S. treasuries and agency
obligations are carried at amortized cost.
Financial Instruments. The carrying amounts for cash and cash equivalents,
advances and accounts payable and accrued expenses on the balance sheet
approximate fair value because of the immediate or short-term maturity of
these instruments. Fair value estimates are made at the balance sheet date
based on relevant market information but involve uncertainties and therefore
cannot be determined with precision. In order to limit its exposure, the
Company diversifies its cash and investment holdings into Canadian and U.S.
treasury and agency obligations, major financial institutions and
corporations. The fair values of investments in marketable securities are
disclosed in Note 2.
Exploration and Development Costs. 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. Development costs of proven mining properties
not yet producing are capitalized at cost and classified as property, plant
and equipment. Property holding costs are charged to operations during the
period if no significant exploration or development activities are being
conducted on the related properties. Upon commencement of production,
capitalized exploration and development costs will be amortized based on the
estimated proven and probable reserves benefited. Properties determined to be
impaired or that are abandoned are written-down to the estimated fair value.
Carrying values do not necessarily reflect present or future values.
Property, Plant and Equipment. Property, plant and equipment are recorded at
the lower of cost less accumulated depreciation. Replacements and major
improvements are capitalized. Maintenance and repairs are charged to expense
as incurred. The cost and accumulated depreciation of assets retired or sold
are removed from the accounts and any resulting gain or loss is reflected in
operations. Depreciation is provided using straight-line and accelerated
methods over the lesser of the useful life or lease term of the related
asset. During the exploration and development phase, depreciation of mining
assets is capitalized. Interest costs incurred during the construction and
development of qualifying assets are capitalized.
Impairment Test. The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. If the sum of the expected future net
cash flows to be generated from the use or disposition of a long-lived asset
(undiscounted and without interest charges) is less than the carrying amount
of the asset, an impairment loss is recognized and the asset is written down
to fair value. Fair value is generally determined by discounting estimated
cash flows.
Foreign Currency. The U.S. Dollar is the Company's functional currency.
Foreign currency amounts are translated into U.S. Dollars using the temporal
method. Accordingly, non-monetary assets and liabilities are translated at
historical rates, monetary assets and liabilities are translated at current
rates and revenue and expense items are translated at average exchange rates
for the month in which they occur, except for depreciation which is
translated at historical rates. Translation gains and losses are included in
operating expenses.
Stock Based Compensation. Effective January 1, 2004, the Company adopted the
new requirements of the Canadian Institute of Chartered Accountants standard
3870 under which the fair value method of accounting for stock options
granted to employees and directors is followed. This new standards was
adopted retroactively without restatement of prior periods. Accordingly,
compensation expense was recorded on a retroactive basis to retained earnings
to show the effect of compensation expense associated with stock option grants
to employees and directors from January 1, 2002 to December 31, 2003, which
amounted to $419,101. Grants of stock options to non-employees and direct
awards of stock to employees and non-employees must be accounted for using
the fair value method of accounting. Consideration paid for shares on
exercise of share options in addition to the fair value attributable to stock
options granted is credited to capital stock.
Income Taxes. The Company uses the liability method of accounting for income
taxes. Future tax assets and liabilities are determined based on the
differences between the tax basis of assets and liabilities and those
reported in the financial statements. The future tax assets or liabilities
are calculated using the substantively enacted tax rates expected to apply in
the periods in which the differences are expected to be settled. Future tax
assets are recognized to the extent that they are considered more likely than
not to be realized.
Measurement Uncertainty. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Substantially all of the Company's investment in property, plant and
equipment represents amounts invested in the Brisas Project located in
Venezuela. Venezuela has experienced high levels of inflation during the last
several years as well as political instability, civil unrest, currency and
exchange controls, and a decline in industrial output and foreign investment.
In August 2004, Venezuela held a mid-term presidential recall referendum (as
provided in the Constitution), the result of which was President Chavez was
re-elected President of Venezuela. Since the referendum, the political
climate in Venezuela has improved. In view of past political and economic
turmoil, we have not experienced any significant adverse impact to date on
our operations in Venezuela nor have we curtailed our investment activities
in the country. However, our operations and investments in Venezuela could be
adversely affected by unforeseen political events and changes in legal, tax
and regulatory regimes in the future.
Management's capitalization of exploration and development costs and
assumptions regarding the future recoverability of such costs is subject to
among other things the Company's current mineral reserves which are based on
engineering and geological estimates, gold and copper prices, estimated plant
construction and operating costs and the procurement of all necessary
regulatory permits and approvals. These estimates could change in the future
and this could affect the carrying value and the ultimate recoverability of
the amounts recorded as property and mineral rights and capitalized
exploration and development costs.
The Company operates and files tax returns in a number of jurisdictions. The
preparation of such tax filings requires considerable judgment and the use of
assumptions. Accordingly, the amounts reported could vary in the future.
Net Loss Per Share. Net loss per share is computed by dividing net loss by
the combined weighted average number of Class A and B common shares
outstanding during each year, which has been reduced by the common shares
owned by Great Basin and MGC Ventures. As of December 31, 2004, 2003 and
2002, there were 3,316,374, 3,204,124 and 3,368,549 shares, respectively,
available for issuance pursuant to the exercise of previously granted share
options. In addition, at December 31, 2004 and 2003 there were 4,680,400 and
2,021,000 shares, respectively, available for issuance upon exercise of
common share purchase warrants. The effect of potential issuances of shares
under options and warrants would be anti-dilutive, and therefore basic and
diluted losses per share are the same.
Asset Retirement Obligations. On January 1, 2004, the Company adopted the new
accounting standard for asset retirement obligations, Canadian Institute of
Chartered Accountants ("CICA") 3110. The standard requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The adoption of this standard did
not have any impact on the Company's financial position or results of
operations of the Company.
2. Marketable Securities:
Amortized Cost/ Quoted
Carrying Value Market Value
2004
Temporary:
Corporate debt securities $ 503,226 $ 502,425
Equity securities 5,025,550 8,069,528
___________________________
Total $ 5,528,776 $ 8,571,953
===========================
2003
Temporary:
Corporate debt securities $ 4,074,928 $ 4,092,900
Equity securities 4,375,550 7,489,675
___________________________
Total $ 8,450,478 $11,582,575
===========================
Debt securities at December 31, 2004 and 2003 yield between 2% and 7%.
3. Property, Plant and Equipment:
Accumulated
Cost Depreciation Net
_________________________________________
2004
United States
Furniture and
office equipment $ 303,530 $ (236,887) $ 66,643
Leasehold improvements 35,633 (35,403) 230
_________________________________________
$ 339,163 $ (272,290) $ 66,873
=========================================
Foreign
Property and mineral rights $ 11,252,335 11,252,335
Capitalized exploration costs 41,034,321 41,034,321
Buildings 288,222 $ (253,121) 35,101
Furniture and office equipment 448,355 (408,127) 40,228
Transportation equipment 378,784 (277,942) 100,842
Machinery and equipment 316,552 (311,234) 5,318
_________________________________________
53,718,569 (1,250,424) 52,468,145
_________________________________________
Total $ 54,057,732 $(1,522,714) $ 52,535,018
=========================================
2003
United States
Furniture and
office equipment $ 271,444 $ (216,758) $ 54,686
Leasehold improvements 35,633 (34,809) 824
_________________________________________
$ 307,077 $ (251,567) $ 55,510
=========================================
Foreign
Property and mineral rights $ 11,252,335 $ 11,252,335
Capitalized exploration costs 34,765,993 34,765,993
Buildings 266,141 $ (238,351) 27,790
Furniture and office equipment 421,328 (399,566) 21,762
Transportation equipment 264,790 (264,790) -
Machinery and equipment 313,188 (310,261) 2,927
_________________________________________
47,283,775 (1,212,968) 46,070,807
_________________________________________
Total $ 47,590,852 $ (1,464,535) $ 46,126,317
=========================================
4. KSOP Plan:
The KSOP Plan, adopted in 1990 for the benefit of employees, is comprised of
two parts, (1) a salary reduction component, or 401(k), and (2) an employee
share ownership component, or ESOP. Unallocated shares are recorded as a
reduction to shareholders' equity. Allocation of common shares to
participants' accounts is at the discretion of the Company's board of
directors, subject to certain limitations. The value of the shares allocated
is recorded in the statement of operations with a reduction of the KSOP debt
account. The Company allocated contributions to eligible participants for the
Plan years 2004, 2003 and 2002 of $254,779, $216,432 and $153,003,
respectively. As of December 31, 2004, 50,321 common shares remain
unallocated to plan participants.
5. Share Option Plan:
The Company's Equity Incentive Plan (the "Plan") as amended in 2004, allows
for the issuance of up to 2,850,000 Class A common share purchase options, in
addition to any options issued pursuant to predecessor plans, to officers,
directors and key individuals for terms of up to ten years. The vesting
period of options ranges from immediately to up to three years. Share option
transactions for the last three years are as follows:
2004 2003 2002
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
____________________________________________________________________________
Options outstanding at
beginning of year 3,204,124 $0.95 3,368,549 $0.80 3,421,950 $0.81
Options exercised (373,954) 0.99 (400,000) 0.74 (18,000) 0.72
Options canceled (19,296) 1.13 (50,901) 1.21
Options granted 505,500 3.88 235,575 2.74 15,500 1.10
____________________________________________________________________________
Options outstanding at
end of year 3,316,374 $1.39 3,204,124 $0.95 3,368,549 $0.80
____________________________________________________________________________
Options exercisable
at end of year 2,975,374 $1.13 3,087,588 $0.94 3,335,217 $0.80
============================================================================
Price Price Price
Range Range Range
Exercise price at end of year $0.57-$4.90 $0.55-$4.14 $0.50-$1.50
Exercise price for exercisable shares $0.57-$4.14 $0.55-$4.14 $0.50-$1.50
As of December 31, 2004, the weighted average remaining contractual life of
total options outstanding was 1.86 years. The weighted average exercise price
of total options outstanding and those options, which were exercisable at
December 31, 2004 was $1.39 and $1.13, respectively.
Effective January 1, 2004, the Company adopted the new requirements of the
Canadian Institute of Chartered Accountants standard 3870 under which the
fair value method of accounting for stock options granted to employees and
directors is followed. Accordingly, compensation expense was recorded on a
retroactive basis, without restatement of prior years, to retained earnings
to show the effect of compensation expense associated with stock option
grants to employees and directors from January 1, 2002 to December 31, 2003,
which amounted to $419,101.
The Company recorded additional compensation expense of $599,423 for stock
options granted during 2004. The fair value of the options granted in 2004
was calculated using the Black-Scholes model assuming a risk free interest
rate of 3.25%, expected life of five years, expected volatility of 65% and a
dividend yield of nil.
Had the fair value method of accounting been followed in prior years, the
Company would have recorded additional compensation expense of $406,108 and
$12,993 in 2003 and 2002, respectively. The fair value of the options granted
in 2003 and 2002 was calculated using the Black-Scholes model. In 2003 the
model assumed a weighted average risk free interest rate of 3.7%, expected
life of five years, weighted average expected volatility of 84% and a
dividend yield of nil. In 2002 the model assumed a risk free interest rate of
4.0%, expected life of five years, weighted average expected volatility of
100% and a dividend yield of nil. These adjustments would have resulted in
proforma basic and diluted net loss per share of $0.17 and $0.13 in 2003 and
2002, respectively.
6. Related Party Transactions:
MGC Ventures. The Chief Executive Officer, President, Vice President-Finance
and Vice President-Administration of the Company are also officers and/or
directors and shareholders of MGC Ventures. At December 31, 2004 and 2003,
the Company owned 12,062,953 common shares of MGC Ventures which represented
47% of its outstanding shares. MGC Ventures owned 276,642 common shares of
the Company at December 31, 2004 and 2003. In addition, MGC Ventures owned
280,000 common shares of Great Basin at December 31, 2004 and 2003. During
the last three years, the Company sublet a portion of its office space to MGC
Ventures for $6,000 per year.
Great Basin. The Chief Executive Officer, President, Vice President-Finance
and Vice President-Administration of the Company are also officers and/or
directors and shareholders of Great Basin. At December 31, 2004 and 2003, the
Company owned 15,661,595 common shares of Great Basin which represented 47% of
its outstanding shares. Great Basin owned 516,720 common shares of the Company
at December 31, 2004 and 2003. Great Basin also owned 170,800 common shares of
MGC Ventures at December 31, 2004 and 2003. During the last three years, the
Company sublet a portion of its office space to Great Basin for $6,000 per
year.
Fees Paid to Director. During 2004, 2003 and 2002, the Company incurred fees
of approximately $136,000, $63,000 and $59,000, respectively, primarily for
director related services performed by Mr. Coleman.
Notes Receivable from Officers. As of December 31, 2003, the Company had
$109,100 in notes receivable from officers bearing interest of between 4.6%
and 5.2% and payable on or before December 31, 2005. The notes were paid in
full in 2004.
7. Income Tax:
No income tax benefit has been recorded for the three years ended December
31, 2004. The Company's Venezuelan subsidiaries are subject to Venezuelan
income tax but have not paid or accrued any income tax during the three years
ended December 31, 2004. Income tax accrued by the Company's domestic
subsidiaries during 2004, 2003 and 2002 amounted to $0, $4,733 and $0,
respectively. The Company has recorded a valuation allowance to reflect the
estimated amount of the future tax asset which may not be realized,
principally due to the uncertainty of utilization of net operating losses and
other carryforwards prior to expiration. The valuation allowance for future
tax assets may be reduced in the near term if the Company's estimate of
future taxable income changes. The components of the future income tax assets
and liabilities (excluding Venezuela) as of December 31, 2004 and 2003 were as
follows:
Future Tax Asset (Liability)
2004 2003
Accounts payable and accrued expenses $ 140,028 $ 7,470
Investment income (4,570) (26,769)
Property, plant and equipment 8,509,277 8,507,672
_______________________________
Total temporary differences 8,644,735 8,488,373
Net operating loss carryforward 7,067,835 5,531,788
Alternative minimum tax credit 19,871 19,871
_______________________________
Total temporary differences, operating
losses and tax credit carryforwards 15,732,441 14,040,032
Valuation allowance (15,732,441) (14,040,032)
_______________________________
Net deferred tax asset $ - $ -
===============================
7. Income Tax, continued:
At December 31, 2004, the Company had the following U.S.
and Canadian tax basis loss carryforwards and tax credits:
U.S. Canadian Expires
Regular tax net
operating loss: $ 272,248 $ 325,429 2006
1,650,395 217,789 2007
1,244,312 318,901 2008
688,808 419,763 2009
341,750 977,566 2010
645,622 2011
1,424,144 2012
- 1,688,052 2014
1,386,674 2018
1,621,230 2019
665,664 2020
896,833 2021
1,435,774 2022
1,806,275 2023
2,760,522 2024
_____________________________________
$ 16,840,251 $ 3,947,500
=====================================
Alternative minimum tax net operating loss:
$ 289,523 2006
1,624,454 2007
1,218,023 2008
660,271 2009
304,472 2010
618,845 2011
1,399,529 2012
_____________________________________
$ 6,115,117
=====================================
Alternative minimum tax credit:
$ 19,871
8. Geographic Segments:
North America South America Consolidated
2004
Other income $ 899,881 $ 899,881
Depreciation 20,723 $ 37,456 58,179
Net loss 3,620,963 1,861,666 5,482,629
=============================================================================
Identifiable assets
Property, plant and
equipment, net $ 66,873 $ 52,468,145 $ 52,535,018
General corporate assets 32,962,146 1,108,367 34,070,513
______________________________________________________________________________
Total identifiable assets $33,029,019 $ 53,576,512 $ 86,605,531
==============================================================================
2003
Other income $ 770,381 $ 770,381
Depreciation 25,645 $ 18,985 44,630
Net loss 2,146,525 $ 1,560,811 3,707,336
==============================================================================
Identifiable assets
Property, plant and
equipment, net $ 55,510 $ 46,070,807 $ 46,126,317
General corporate assets 20,095,630 808,535 20,904,165
______________________________________________________________________________
Total identifiable assets $ 20,151,140 $ 46,879,342 $ 67,030,482
==============================================================================
2002
Other income $ 703,000 $ 703,000
Depreciation 29,847 $ 29,680 58,527
Net loss 1,589,446 $ 1,418,676 3,008,122
==============================================================================
Identifiable assets
Property, plant and
equipment, net $ 75,767 $ 46,068,629 $ 46,144,396
General corporate assets 2,901,078 797,049 13,698,127
______________________________________________________________________________
Total identifiable assets $ 12,976,845 $ 46,865,678 $ 59,842,523
==============================+==============================================
Revenues and identifiable assets of each segment are those that are
directly identified with those operations.
9. Commitments:
The Company leases office space under a non-cancelable operating lease. In
January 2004, the lease was renewed for an additional five years commencing
March 1, 2004. Rent expense under the lease during 2004, 2003 and 2002 was
$112,352, 110,442 and 108,477, respectively. Future minimum annual rent
payable under the lease is $115,180 in 2005, $115,680 for each of the years
2006 through 2008 and $19,280 in 2009.
10. Shareholder Rights Plan:
At the 1997 annual meeting of shareholders, a "Shareholder Rights Plan"
approved by the shareholders of Gold Reserve Corporation. As part of the
Reorganization described in Note 1, the Shareholder Rights Plan was assumed
by the successor issuer Gold Reserve Inc. The Rights Plan is intended to give
adequate time for shareholders of the Company to properly assess the merits of
a take-over bid without pressure and to allow competing bids to emerge. The
Rights Plan is designed to give the board of director's time to consider
alternatives to allow shareholders to receive full and fair value for their
common shares. One right is issued in respect of each outstanding share. The
rights become exercisable only when a person, including any party related to
it or acting jointly with it, acquires or announces its intention to acquire
20% or more of the Company's outstanding shares without complying with the
"permitted bid" provisions of the Rights Plan. Each right would, on exercise,
entitle the holder, other than the acquiring person and related persons, to
purchase common shares of the Company at a 50% discount to the market price
at the time. In 2003, the shareholders approved an amendment to continue the
Shareholder Rights Plan until June 30, 2006.
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.
The Company restated its 2002 opening retained earnings and
2004 property, plant and equipment and net loss for U.S. GAAP purposes due to
a revision in its accounting treatment for exploration and development
expenditures incurred on properties where mineralization has not been
classified as a proven and probable reserve under SEC rules. We have
concluded that such capitalized costs for U.S. GAAP purposes should be
included in the determination of current profit and loss. The effect of the
restatement for U.S. GAAP purposes was to increase 2002 beginning retained
deficit by $34,765,993 and decrease December 31, 2004 property, plant and
equipment and shareholders' equity by $6,268,328. For purposes of the
Canadian to U.S. GAAP reconciliation shown below total assets and
shareholders' equity for the year ended December 31, 2004, 2003 and 2002 were
reduced by $41,034,321, $34,765,993, and $34,765,993 respectively and the net
loss for the year ended December 31, 2004 was increased by $6,268,328 as
compared to the amounts previously reported. The effect of the restatement
for the year ended December 31, 2004 was to increase loss per common share by
approximately $0.21 per share.
The revision in accounting treatment under U.S.
GAAP had no effect on the Company's primary financial statements and related
notes prepared in accordance with Canadian GAAP (other than this note 11)
since the Company's capitalization policy for mine development costs are in
accordance with Canadian GAAP.
Canadian GAAP Change U.S. GAAP
2004 RESTATED
- -------------------------------------------------------------------------------
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)
Loss per common share(1) (0.19) (0.16) (0.35)
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)
Loss per common share(1) (0.15) (0.31) (0.46)
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)
Loss per common share(1) (0.13) (0.05) (0.18)
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 $10,959,314, $11,818,170 and $4,183,919 for the years ended December 31,
2004, 2003 and 2002, respectively.
1. Basic and diluted
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. The increase in total assets and total shareholders'
equity between Canadian and U.S. GAAP for the years ended December 31, 2004,
2003, and 2002 was $3,043,978, $3,114,125 and $41,184, respectively.
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. The change in net loss between
Canadian and U.S. GAAP for the years ended December 31, 2004, 2003, and 2002
was $1,391,066, ($7,704,726) and ($1,162,804), respectively.
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 reserves under SEC rules are expensed as incurred. Accordingly,
certain expenditures are capitalized for Canadian GAAP purposes but expensed
under US GAAP.
12. Common Shares
On November 4, 2004 the Company completed an offering of 5,361,000 Units at
Canadian $5.60 per Unit. Each Unit consists of one Class A common share and
one half Class A common share purchase warrant. Each whole Class A common
share purchase warrant entitles its holder to acquire one Class A common
share at a price of Canadian $6.50 for a period of 24 months following the
closing date of the Offering. The net proceeds from the offering will be used
for the development of the Brisas property. The net proceeds of the offering
amounted to approximately Canadian $30 million (U.S.$ 25 million). In
addition to the 5,361,000 shares from the financing, 373,954 shares were
issued upon exercise of employee stock options, 75,000 shares were issued to
the KSOP plan, 54,000 shares were issued as compensation and 21,100 shares
were issued upon exercise of some the September 2003 warrants.
On September 26, 2003, the company completed an offering 4,042,000 Units at
Canadian $3.50 per Unit. Each Unit consists of one Class common share and one
half Class A common share purchase warrant. Each whole Class A common share
purchase warrant entitles its holder to acquire one Class A common share at
a price of Canadian $5.25 for a period of 18 months following the closing of
the offering. The net proceeds of the offering amounted to approximately
Canadian $13 million (U.S.$ 9.6 million).
In addition to the 4,042,000 private placement shares, 400,000 shares were
issued upon exercise of employee stock
options, 200,000 shares were issued to the KSOP plan and 60,000 shares were
issued primarily for independent director compensation.
As of December 31, 2004, the Company had the following units and warrants
outstanding:
Date Number of Number of Exercise Estimated Expiration
Issued units/Warrants shares issuable Price Proceeds Date
09/26/03 3,999,800 1,999,900 $4.36 $ 8,720,000 03/28/05
09/26/03** 202,100 303,150 $3.02-$4.36 1,051,000 03/28/05
11/04/04 5,361,000 2,680,500 $5.40 $14,475,000 11/05/06
** In connection with the September 2003 private placement, the Company
agreed to issue to the Underwriter's 202,100 non-assignable options as
partial consideration for the services provided to the Company. Each option
is exercisable for one unit at an exercise price of Cdn. $3.64. Each unit
consists of one Class A common share and one half Class A common share
purchase warrant. Each whole Class A common share purchase warrant entitles
its holder to acquire one Class A common share at a price of Cdn $5.25 per
share.
13. New standards
In January 2003, the Financial Accounting Standards Board or "FASB" issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46
establishes accounting guidance for consolidation of variable interest
entities by the primary beneficiary. FIN 46 applies to any business
enterprise, public or private, that has a controlling interest, contractual
relationship or other business relationship with a variable interest entity.
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46 R") which
supersedes FIN 46 and is effective for all Variable Interest Entities
("VIEs") created after February 1, 2003 at the end of the first interim or
annual reporting period ending after December 15, 2003. FIN 46R is applicable
to all VIEs created prior to February 1, 2003 by public entities at the end of
the first interim or annual reporting period ending after March 15, 2004. The
Company has determined that it has no VIEs.
In December 2004, the FASB issued SFAS 153 Exchanges of Non-Monetary
Assets an amendment of APB 29.This statement amends APB 29, which is based
on the principle that exchanges of non-monetary assets should be measured at
the fair value of the assets exchanged with certain exceptions. SFAS 153
eliminates the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of non-monetary
assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This statement is effective
for non-monetary asset exchanges occurring in fiscal periods beginning on or
after June 15, 2005.
In December 2004, the FASB issued SFAS 123R Accounting for Stock-based
Compensation. This statement supersedes APB 25 and eliminates the option to
use the intrinsic value method for valuing stock-based compensation. The
Company will adopt SFAS 123R, "Accounting for Stock Based Compensation"
effective January 1, 2005. SFAS 123R 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 (Note 5). For United
States 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.
The Emerging Issues Task Force ("EITF") formed a committee ("Committee") to
evaluate certain mining industry accounting issues, including issues arising
from the application of SFAS No. 141, "Business Combinations" ("SFAS No. 141
") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.142")
to business combinations within the mining industry, accounting for goodwill
and other intangibles and the capitalization of costs after the commencement
of production, including deferred stripping. The issues discussed also
included whether mineral interests conveyed by leases represent tangible or
intangible assets and the amortization of such assets.
The EITF reached a consensus, subject to ratification by the Financial
Accounting Standards Board ("FASB"), that mineral interests conveyed by
leases should be considered tangible assets. The EITF also reached a
consensus, subject to ratification by the FASB, on other mining related
issues involving impairment and business combinations.
The FASB ratified the consensus of the EITF on other mining related issues
involving impairment and business combinations. The FASB also ratified the
consensus of the EITF that mineral interests conveyed by leases should be
considered tangible assets subject to the finalization of a FASB Staff
Position ("FSP") in this regard. These issues did not have an impact on the
Company's financial statements since it did not change its accounting. The
FASB also issued a FASB Staff Position ("FSP") amending SFAS No. 141 and SFAS
No. 142 to provide that certain mineral use rights are considered tangible
assets and that mineral use rights should be accounted for based on their
substance. The FSP is effective for the first reporting period beginning
after April 29, 2004, with early adoption permitted. This FSP did not have an
impact on the Company's financial statements.
The Canadian Institute of Chartered Accountants (CICA) issued Accounting
Guideline AcG-15, "Consolidation of Variable Interest Entities", to provide
guidance for applying the principles in Handbook Section 1590,
"Subsidiaries", to certain entities. It is expected to be effective for the
Company's 2005 fiscal year. As noted above, the Company has determined that
it has no VIEs.
Item 18. Financial Statements - Not Applicable
Item 19. Financial Statements and Exhibits
Index to Consolidated Financial Statements
Management's Report 43
Report of Independent Accountants 44
Consolidated Balance Sheets
December 31, 2004 and 2003 45
Consolidated Statements of Operations
for the years ended December 31, 2004, 2003 and 2002 46
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2004, 2003 and 2002 47
Consolidated Statements of Cash Flows
for the years ended December 31, 2004, 2003 and 2002 48
Notes to Consolidated Financial Statements 49
Exhibits. The following exhibits are filed as part of this report.
Exhibit Page Number
Number Exhibit in this report
12.1 Certificate of Gold Reserve Inc. Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 61
12.2 Certificate of Gold Reserve Inc. Vice President-Finance
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 62
13.1 Certificate of Gold Reserve Inc. Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 63
13.2 Certificate of Gold Reserve Inc. Vice President-Finance
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 64
99.1 Consent of PricewaterhouseCoopers LLP 65
99.2 Consent of Pincock Allen & Holt 66
99.3 Consent of Aker Kvaerner Metals, Inc. 67
99.4 Consent of Vector Colorado LLC 68
99.5 Consent of AATA International, Inc. 69
99.6 Consent of Neil S. Seldon & Associates Ltd. 70
99.7 Consent of SGS Lakefield Research 71
The following exhibits previously filed are incorporated by reference.
Exhibit
Number Exhibit
1.0 Restated Articles of Incorporation of the Company. Filed as Exhibit3.1 to
the Proxy Statement/Joint Prospectus included as a part of the Company's
Registration Statement on Form S-4 (Registration No. 333-68061) filed with
the Commission on November 27, 1998 and incorporated by reference herein.
1.1 Bylaws of the Company. Filed as Exhibit3.2 to the Proxy Statement/Joint
Prospectus included as a part of the Company's Registration Statement on Form
S-4 (Registration No. 333-68061) filed with the Commission on November 27,
1998 and incorporated by reference herein.
2.0 Agreement and Plan of Merger, dated as of October 5, 1998, by and among
Gold Reserve Corporation (predecessor issuer), Gold Reserve Inc. (successor
issuer) and GRMerger Corp. Filed as Annex I to the Proxy Statement/Joint
Prospectus included as a part of the Company's Registration Statement on Form
S-4 (Registration No. 333-68061) filed with the Commission on November 27,
1998 and incorporated by reference herein.
2.1 Exchange Agreement by and among Gold Reserve Corporation, the
Company, TranSecurities International, Inc. and Holders of Unit Shares, dated
November 17, 1998. Filed as Exhibit4.1 to the Proxy Statement/Joint Prospectus
included as a part of the Company's Registration Statement on Form S-4
(Registration No. 333-68061) filed with the Commission on November 27, 1998
and incorporated by reference herein.
2.2 Shareholder Rights Plan Agreement (as Amended) of the Company (including
form of Rights Certificate). Filed as Exhibit No. 3 to the Company's
Registration Statement on Form 8-A (File No. 001-31819) filed with the
Securities and Exchange Commission on October 2, 2003 and incorporated by
reference herein.
2.3 Form of Certificate for the Company's Class A common shares. Filed as
Exhibit 4.4 to the Proxy Statement/Joint Prospectus included as a part of the
Company's Registration Statement on Form S-4 (Registration No. 333-68061)
filed with the Commission on November 27, 1998 and incorporated by
reference herein.
2.4 Form of Certificate for the Unit Share. Filed as Exhibit 4.5 to the Proxy
Statement/Joint Prospectus included as a part of the Company's Registration
Statement on Form S-4 (Registration No. 333-68061) filed with the
Commission on November 27, 1998 and incorporated by reference herein.
4.0 Form of Change in Control Agreement. Filed as Exhibit 4.0 to the
Company's Annual Report on Form 20-F (File No. 000-30102) filed with
the Commission on May 9, 2003 and incorporated by reference herein.
8.0 Subsidiaries of Registrant. Filed as Exhibit 21 to the Proxy Statement/
Joint Prospectus included as a part of the Company's Registration Statement
on Form S-4 (Registration No. 333-68061) filed with the Commission on
November 27, 1998 and incorporated by reference herein.
9.0 Executive SummaryBrisas Project Feasibility Study, dated January 2005.
Filed on Form 6-K (File No. 001-31819) with the Commission on February
14, 2005 and incorporated by reference herein.
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for
filing on Amendment No. 2 to Form 20-F/A and has duly caused and authorized
this annual report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GOLD RESERVE INC.
By: s/Rockne J. Timm By: s/Robert A. McGuinness
-------------- ----------------------
Rockne J. Timm, its Robert A. McGuinness, its
Chief Executive Officer Vice President of Finance,
November 10, 2005 Chief Financial Officer, and
its Principal Financial
and Accounting Officer
November 10, 2005
Exhibit 12.1 - Chief Executive Officer's Section 302 Certification
I, Rockne J. Timm, certify that:
1. I have reviewed this Amendment No. 2 to Annual Report on Form
20-F/A of Gold Reserve Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the company
as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the company's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting;
and
5. The company's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the company's auditors and the audit committee of the company's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the company's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the company's internal control over
financial reporting.
Date: November 10, 2005
s/ Rockne J Timm
-------------
Rockne J. Timm,
Chief Executive Officer
Exhibit 12.2 - Chief Financial Officer's Section 302 Certification
I, Robert A. McGuinness, certify that:
1. I have reviewed this Amendment No. 2 to Annual Report on Form
20-F/A of Gold Reserve Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the company
as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the company's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting;
and
5. The company's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the company's auditors and the audit committee of the company's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the company's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the company's internal control over
financial reporting.
Date: November 10, 2005
s/ Robert A. McGuinness
--------------------
Robert A. McGuinness,
Vice President-Finance & CFO
Exhibit 13.1 - Chief Executive Officer's Section 906 Certification
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 2 to Annual Report of Gold Reserve Inc.
on Form 20-F/A for the year ending December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof, I, Rockne J. Timm,
Chief Executive Officer of Gold Reserve Inc., certify to my knowledge,
pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Annual Report on 20-F/A fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Annual Report on Form 20-F/A fairly
presents, in all material respects, the financial condition and result of
operations of Gold Reserve Inc.
s/ Rockne J. Timm
--------------
Rockne J. Timm
Chief Executive Officer
November 10, 2005
Exhibit 13.2 - Chief Financial Officer's Section 906 Certification
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 2 to Annual Report of Gold Reserve Inc.
on Form 20-F/A for the year ending December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof, I, Robert A.
McGuinness, Vice President-Finance & CFO of Gold Reserve Inc., certify to my
knowledge, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Annual Report on 20-F/A fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Annual Report on Form 20-F/A fairly
presents, in all material respects, the financial condition and result of
operations of Gold Reserve Inc.
s/ Robert A. McGuinness
--------------------
Robert A. McGuinness
Vice President-Finance & CFO
November 10, 2005
Exhibit 99.1 - Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No 333-110938 and No 333-110937) Gold Reserve
Inc. of our report dated February 18, 2005, except as to note 11 (c ) which
is as of October 21, 2005 relating to the consolidated financial statements
of Gold Reserve Inc. which appears in Gold Reserve Inc.'s Annual Report on
Form 20F/A for the year ended December 31, 2004.
s/ PRICEWATERHOUSECOOPERS
----------------------
Chartered Accountants
Vancouver, BC, Canada
November 10, 2005
Exhibit 99.2 - Consent of Pincock, Allen & Holt
Pincock, Allen & Holt does hereby consent to the reference to this firm in
the Annual Report on Form 20-F/A of Gold Reserve, Inc. filed with the
Securities and Exchange Commission on or about October 21, 2005. We also
consent to the incorporation by reference in the Registration Statements on
Forms S-8 (File No. 333-110938 and File No. 333-110937) of Gold Reserve Inc.,
the reference to this firm, which appears in this Form 20-F/A. In giving this
consent, we do not thereby admit that we are an "expert" within the meaning
of the Securities Act of 1933, as amended.
s/ PINCOCK, ALLEN & HOLT
---------------------
October 19, 2005
Exhibit 99.3 - Consent of Aker Kvaerner Metals, Inc
Aker Kvaerner Metals, Inc. ("Aker Kvaerner") does hereby consent to the
reference to this firm in the Annual Report on Form 20-F/A of Gold Reserve,
Inc. (the "Company") filed with the Securities and Exchange Commission on or
about October 21, 2005, subject in connection with any references to a
certain feasibility study prepared by Aker Kvaerner for the Company to, among
others, the following qualifications: (a) Aker Kvaerner's preparation of such
feasibility study did not require Aker Kvaerner, and Aker Kvaerner did not so
undertake, to confirm the accuracy of information and data supplied by the
Company or third parties; (b) Aker Kvaerner did not in such feasibility study
attest to or assume responsibility for (i) the accuracy of information and
data supplied by the Company or third parties or (ii) the accuracy of any
recommendations or opinion contained in the feasibility study that are based
in whole or part on information and data supplied by the Company or third
parties; and (c) Aker Kvaerner's recommendations and opinions contained in
the feasibility study assume that unknown, unforeseeable, or unavoidable
events, which may adversely affect the cost, progress, scheduling or ultimate
success of the Brisas Project, will not occur. We also consent, again subject
to the foregoing qualifications, to the incorporation by reference in the
Registration Statements on Forms S-8 (File No. 333-110938 and File No.
333-110937) of Gold Reserve Inc., the reference to this firm, which appears
in this Form 20-F/A. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
s/ AKER KVAERNER METALS, INC.
--------------------------
October 19, 2005
Exhibit 99.4 - Consent of Vector Colorado LLC
Vector Colorado LLC does hereby consent to the reference to this firm in the
Annual Report on Form 20-F/A of Gold Reserve, Inc. filed with the Securities
and Exchange Commission on or about October 21, 2005. We also consent to the
incorporation by reference in the Registration Statements on Forms S-8 (File
No. 333-110938 and File No. 333-110937) of Gold Reserve Inc., the reference
to this firm, which appears in this Form 20-F/A. In giving this consent, we
do not thereby admit that we are an "expert" within the meaning of the
Securities Act of 1933, as amended.
s/ Vector Colorado LLC
-------------------
October 19, 2005
Exhibit 99.5 - Consent of AATA International, Inc.
AATA International, Inc. does hereby consent to the reference to this firm in
the Annual Report on Form 20-F/A of Gold Reserve, Inc. filed with the
Securities and Exchange Commission on or about October 21, 2005. We also
consent to the incorporation by reference in the Registration Statements on
Forms S-8 (File No. 333-110938 and File No. 333-110937) of Gold Reserve Inc.,
the reference to this firm, which appears in this Form 20-F/A. In giving this
consent, we do not thereby admit that we are an "expert" within the meaning
of the Securities Act of 1933, as amended.
s/ AATA International, Inc.
------------------------
October 19, 2005
Exhibit 99.6 - Consent of Neil S. Seldon & Associates Ltd.
Neil S. Seldon & Associates Ltd. does hereby consent to the reference to this
firm in the Annual Report on Form 20-F/A of Gold Reserve, Inc. filed with the
Securities and Exchange Commission on or about October 21, 2005. We also
consent to the incorporation by reference in the Registration Statements on
Forms S-8 (File No. 333-110938 and File No. 333-110937) of Gold Reserve Inc.,
the reference to this firm, which appears in this Form 20-F/A. In giving this
consent, we do not thereby admit that we are an "expert" within the meaning
of the Securities Act of 1933, as amended.
s/ Neil S. Seldon & Associates Ltd.
--------------------------------
October 19, 2005
Exhibit 99.7 - SGS Lakefield Research
SGS Lakefield Research does hereby consent to the reference to this firm in
the Annual Report on Form 20-F/A of Gold Reserve, Inc. filed with the
Securities and Exchange Commission on or about October 21, 2005. We also
consent to the incorporation by reference in the Registration Statements on
Forms S-8 (File No. 333-110938 and File No. 333-110937) of Gold Reserve Inc.,
the reference to this firm, which appears in this Form 20-F/A. In giving this
consent, we do not thereby admit that we are an "expert" within the meaning
of the Securities Act of 1933, as amended.
s/ SGS Lakefield Research
----------------------
October 19, 2005
Glossary of Significant Terms
Certain terms used throughout this report are defined below.
alluvial... 1) Used to identify unconsolidated or clay-like materials
deposited over time by moving water. 2) Used to describe a strata of material
that constitutes a concession, i.e. relating to the Brisas alluvial concession.
andesite... A volcanic rock of intermediate composition. It is
fine-grained and contains 55% to 60% silica.
assay... An analysis performed on a rock sample to determine its metal
content.
ball mill... A steel cylinder partially filled with steel balls into
which crushed ore is fed. The ball mill is rotated, causing the balls to
cascade and grind the ore.
batholith... A mass of igneous rock with a surface area greater than 100
square kilometers.
Bolivar... The basic monetary unit of the Republic of Venezuela. As of
March 2005, 2,150 Bolivars equaled one U.S. Dollar.
breccia... A clastic rock in which angular fragments are surrounded by a
fine-grained matrix or minerals cement.
BRISAS... Compania Aurifera Brisas del Cuyuni, C.A., a Venezuelan
corporation and the subsidiary of the Company that owns the Brisas property.
Brisas alluvial concession... The mining title granted to BRISAS by the
Ministry of Energy and Mines (predecessor to the Ministry of Basic Industries
and Mines) to explore and commercially develop and exploit gold contained in
alluvial material on the Brisas property.
Brisas hardrock concession... The mining title granted to BRISAS by the
Ministry of Energy and Mines (predecessor to the Ministry of Basic Industries
and Mines) to commercially develop and mine gold, copper and molybdenum
contained in the veta or vein material on the Brisas property.
Brisas property... The Brisas property or project consists of the Brisas
alluvial concession, the Brisas hardrock concession beneath the alluvial
concession, applications for other mineralization (primarily nominal values
of copper and silver) contained in these concessions, and contracts and
concessions for mineralization (primarily gold, copper and molybdenum) and
infrastructure use on land parcels contiguous to the existing concessions.
CESL Process Cominco Engineering Services Limited (CESL) on-site copper
processing technology. The CESL Process is based on the oxidation of reground
sulfide concentrates in an autoclave, followed by liquid-solid separation and
sulfuric acid washing of the oxidized leach residue. The autoclave leach
solution and the acid wash solution are subjected to solvent extraction and
electrowinning to produce copper cathodes. The rinsed leach residues are
subsequently cyanided to recover the contained gold.
Choco 5 Property Grass-roots exploration target leased from Minerven, a
subsidiary of CVG.
concentrate... A finely ground product of the milling process,
containing a high percentage of valuable metal, which is typically sent to a
smelter for further processing.
concession... A privilege, license or mining title granted by the MIBM
to explore and, if warranted, produce minerals from a specified property.
Corporacin Venezolana de
Guayana (CVG)... A Venezuelan government-owned entity formed to foster
industrial development and to explore and develop mineral resources in the
Guayana region of Venezuela, including the State of Bolivar.
cyanidation... A method of extracting gold or silver from a crushed or
ground ore by dissolving it in a weak cyanide solution.
dilution... Waste rock that is, by necessity, removed along with the ore
in the mining process, subsequently lowering the average grade of the ore
processed.
dip... The angle at which a vein, structure or rock bed is inclined from
the horizontal as measured at right angles to the strike.
environmental impact
statement (EIS)... A report, compiled prior to a production decision
that examines the effects of proposed mining activities on the natural
surroundings.
feasibility study... A comprehensive study of a deposit in which all
geological, engineering, operating, economic and other relevant factors are
considered in sufficient detail that it could reasonably serve as the basis
for a final decision by a financial institution to finance the development of
the deposit for mineral production.
flotation... A process for concentrating minerals based on the selective
adhesion of certain minerals to air bubbles in a mixture of water and ground
up ore. When the right chemicals are added to a frothy water bath of ore that
has been ground to the consistency of talcum powder, the minerals will float
to the surface. The metal rich flotation concentrate is then skimmed off the
surface.
gold equivalent... Gross value of copper at a stated value per pound
divided by the gross price of gold at a stated value per ounce.
Gold Reserve de Venezuela
C.A. (GLDRV)... A Venezuelan corporation and a foreign subsidiary of the
Company. GLDRV was organized in September 1992 to manage the exploration and
future development activities on the Brisas property.
grade... The relative quantity or the percentage of ore-mineral content
in a mineralized body, i.e. grams of gold per tonne or percent of copper per
tonne.
gravity separation... Recovery of gold from crushed rock or gravel using
gold's high specific gravity to separate it from the lighter material.
hardrock... Solid rock underlying an alluvial deposit. Also referred to
as bedrock.
hectare... A metric measurement of area equivalent to 10,000 square
meters or 2.47 acres.
igneous... Rocks formed by the cooling and solidifying of magma.
Imataca Forest Reserve... A 3.6 million hectare area of tropical forest
located in the State of Bolivar in southeastern Venezuela that was set aside
as a region for forest exploitation by the Venezuelan government in the
1960s. The Company's Brisas Project is located in an area within the reserve,
which was previously designated for mining activities.
indicated mineral resource That part of a mineral resource for which
quantity, grade or quality, densities, shape and physical characteristics,
can be estimated with a level of confidence sufficient to allow the
appropriate application of technical and economic parameters, to support mine
planning and evaluation of the economic viability of the deposit. The estimate
is based on detailed and reliable exploration and testing information gathered
through appropriate techniques from locations such as outcrops, trenches,
pits, workings and drill holes that are spaced closely enough for geological
and grade continuity to be reasonably assumed.
inferred mineral resource That part of a mineral resource for which
quantity and grade or quality can be estimated on the basis of geological
evidence and limited sampling and reasonably assumed, but not verified,
geological and grade continuity. The estimate is based on limited information
and sampling gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings and drill holes.
intrusive Rock which while molten penetrated into or between other rocks,
but solidified before reaching the surface.
Kilometer 88 mining district
(Km 88)... An area in the State of Bolivar in southeastern Venezuela
containing significant alluvial and hardrock deposits. The Company's Brisas
Project is located in this district.
measured mineral resource That part of a mineral resource for which
quantity, grade or quality, densities, shape, physical characteristics are so
well established that they can be estimated with confidence sufficient to
allow the appropriate application of technical and economic parameters, to
support production planning and evaluation of the economic viability of the
deposit. The estimate is based on detailed and reliable exploration, sampling
and testing information gathered through appropriate techniques from locations
such as outcrops, trenches, pits, workings and drill holes that are spaced
closely enough to confirm both geological and grade continuity.
metamorphism... Rock of sedimentary or igneous origin that has been
altered by high temperature and/or pressure.
mill... A processing plant where ore is crushed and ground, usually to
fine powder, and the metals are extracted by physical and/or chemical means.
Output from a mill usually requires further processing in a smelter or
refinery to produce pure metal.
mineral... A naturally occurring homogeneous substance having fixed
physical properties and chemical composition.
mineral resource A concentration or occurrence of natural, solid,
inorganic or fossilized organic material in or on the Earth's crust in such
form and quantity and of such grade or quality that it has reasonable
prospects for economic extraction. The location, quantity, grade, geological
characteristics and continuity of a Mineral Resource are known, estimated or
interpreted from specific geologic evidence and knowledge.
mineral reserve The economically mineable part of a Measured or Indicated
Mineral Resource demonstrated by at least a preliminary feasibility study.
This study must include adequate information on mining, processing,
metallurgical, economic and other relevant factors that demonstrate, at the
time of reporting, that economic extraction can be justified. A Mineral
Reserve includes diluting materials and allowances for losses that may occur
when material is mined.
mineralization... The presence of minerals in a specific area or
geological formation.
Ministry of the Environment
and Natural Resources
(MARN) Venezuelan governmental entity, which exercises supervisory
jurisdiction over the environment.
Ministry of Basic Industries
and Mines (MIBM)... Venezuelan governmental entity, which until early
2005 was previously referred to as the Ministry of Energy and Mines (MEM),
which exercises supervisory jurisdiction over the Brisas Project and the
Company's activities thereon.
Minerven A mining company wholly-owned by CVG.
molybdenum... An element (Mo), usually in the form of molybdenite,
primarily used in alloys and lubricants.
open pit... A mine that is entirely on surface. Also referred to as an
open-cut or open-cast mine.
Precambrian... All geologic time before 570 million years ago.
preliminary feasibility study... A comprehensive study of the viability
of a mineral project that has advanced to a stage where the mining method, in
the case of underground mining, or the pit configuration, in the case of an
open pit, has been established, and which, if an effective method of mineral
processing has been determined, includes a financial analysis based on
reasonable assumptions of technical, engineering, operating, economic factors
and the evaluation of other relevant factors which are sufficient for a
qualified person, acting reasonably, to determine if all or part of the
mineral resource may be classified as a mineral reserve.
probable mineral reserve...
Probable (Indicated) Reserves.
OSC N.I. 43-101
The economically mineable part of an indicated mineral resource, and in some
circumstances, a measured mineral resource demonstrated by at least a
preliminary feasibility study. This study must include adequate information
on mining, processing, metallurgical, economic, and other relevant factors
that demonstrate, at the time of reporting, that economic extraction can be
justified.
SEC Industry Guide 7
Reserves for which quantity and grade and/or quality are computed from
information similar to that used for proven (measured) reserves, but the
sites for inspection, sampling, and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although lower
than that for proven (measured) reserves, is high enough to assume continuity
between points of observation.
Proterozoic... That part of the Precambrian time represented by rocks in
which traces of life appear or the younger part of Precambrian time.
Proven (Measured) Reserves.
OSC N.I. 43-101
The economically mineable part of a measured mineral resource demonstrated by
at least a preliminary feasibility study. This study must include adequate
information on mining, processing, metallurgical, economic, and other
relevant factors that demonstrate, at the time of reporting, that economic
extraction is justified.
SEC Industry Guide 7
Reserves for which: (a) quantity is computed from dimensions revealed in
outcrops, trenches, workings or drill holes; grade and/or quality are
computed from the results of detailed sampling; and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well-established.
reclamation... The restoration of a site after mining or exploration
activity is completed.
recovery... The percentage of valuable metal in the ore that is
recovered by metallurgical treatment.
stock... An igneous body smaller than a batholith with a subcircular
section.
stratabound... Used to describe mineral deposits that are restricted to
a single stratagraphic unit.
strataform Mineral deposits whose geometry is similar to that of its
host rock.
strike... The direction, or bearing from true north, of a vein or rock
formation measured along a horizontal line on the surface of the vein or rock.
strip ratio... The tonnage of non-mineralized waste material removed to
allow the mining of one tonne of ore in an open pit. Also referred to as
waste-to-ore ratio.
tailings... The material removed from the milling circuit after
separation of the valuable metals.
troy ounce... Unit of weight measurement used for all precious metals.
The familiar 16 ounce avoirdupois pound equals 14.583 troy ounces.
vein... A sheet-like or tabular discordant mineralized body formed by
complete or partial infilling of a fracture or fault within a rock.
veta... 1) Used to describe veins of mineralization and/or deeper,
hardrock mineralization, 2) used to describe a strata of material that
constitutes a concession, i.e. relating to the Brisas hardrock concession.
CONVERSION FACTORS:
1 Troy ounce = 31.1034 Grams
1 Tonne = 1.1023 Short tons or 2204.6 Pounds
1 Hectare = 2.4711 Acres
1 Kilometer = 0.6214 Miles
1 Meter = 3.28084 Feet
SYMBOLS:
Au = Gold
Cu = Copper
gpt = Grams per tonne
kt = Thousand tonnes
Au Eq = Gold equivalent