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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File Number 001-31819
GOLD RESERVE INC.
(Exact name of registrant as specified in its charter)
Yukon Territory, Canada
(Jurisdiction of incorporation)
926 West Sprague Avenue, Suite 200
Spokane, Washington 99201
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Class A common shares, no par value per share
Preferred Share Purchase Rights
(Title of each class)
The Toronto Stock Exchange ("TSX")
American Stock Exchange ("AMEX")
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None
The total number of the registrant's shares outstanding as of December 31, 2003:
Class A common shares, no par value per share: 27,456,171
Equity Units, no par value per share: 738,605
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
GENERAL INFORMATION
Forward-Looking Statements
Mineral Reserve Estimates
Currency
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
Dividends
Risk Factors
Item 4. Information on the Company
History and Development of the Company
Properties
Venezuelan Mining, Environment and
Other Matters
Item 5. Operating and Financial
Review and Prospects
Overview
Significant Accounting Policies
Results of Operations
Liquidity and Capital Resources
Item 6. Directors, Senior Management
and Employees
Compensation of Directors and
Officers
Board Practices
Item 7. Major Shareholders and
Related Party Transactions
Control of Registrant
Related Party Transactions
Interest of Insiders in Material Transactions
Item 8. Financial Information
Legal Proceedings
Significant Changes
Item 9. The Offer and Listing
Offer and Listing details
Item 10. Additional Information
Memorandum and Articles of Association
Material contracts
Exchange Controls and Other Limitations
Affecting Security Holders
Taxation
Item 11. Quantitative and Qualitative
Disclosures about Market Risk
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
Item 16. Reserved
Item 16A. Audit Committee
Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant
Fees and Services
Item 16D. Exemptions From the Listing
Standards for Audit Committees
Item 16E. Purchases of Equity Securities
by the Issuer and Affiliated Purchasers
PART III
Item 17. Financial Statements
Management's Report
Report of Independent Accountants
ITEM 18. Financial Statements -
Not Applicable
ITEM 19. Financial Statements
and Exhibits
Signatures
Exhibit 12.1 - Chief Executive Officer's
Section 302 Certification
Exhibit 12.2 - Chief Financial Officer's
Section 302 Certification
Exhibit 13.1 - Chief Executive Officer's
Section 906 Certification
Exhibit 13.2 -President's Section
906 Certification
Chief Financial Officer's Section
906 Certification
Exhibit 99.1 - Consent of Independent
Accountants
Exhibit 99.2 - Consent of Behre
Dolbear & Company, Inc.
Glossary of Significant Terms
PART I
GENERAL INFORMATION
FORWARD-LOOKING STATEMENTS
The information presented or incorporated by reference in this Annual Report
on Form 20-F, including Operating and Financial Review and Prospects in Item
5, contains both historical information and forward-looking statements
(within the meaning of Section 27A of the United States Securities Act of
1933, as amended (the Securities Act), and Section 21E of the United States
Securities Exchange Act of 1934, as amended (the Exchange Act)). These
forward-looking statements involve risks and uncertainties, as well as
assumptions that, if they never materialize, prove incorrect or materialize
other than as currently contemplated, could cause the results of the Company
and its consolidated subsidiaries to differ materially from those expressed
or implied by such forward-looking statements.
Numerous factors could cause actual results to differ materially from those
in the forward-looking statements, including without limitation 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 ability to
obtain additional funding for future development of the Brisas project, our
dependence upon the abilities and continued participation of certain key
employees, and the risks normally incident to the operation and development
of mining properties.
The words "believe," "anticipate," "expect," "intend," "estimate," "plan,"
"assume," "positioned," "may," "will," "could" and other similar expressions
that are predictions of or indicate future events and future trends which do
not relate to historical matters, identify forward-looking statements. Any
such forward-looking statements are not intended to give any assurances as
to future results.
Investors are cautioned not to put undue reliance on forward-looking
statements, and should not infer that there has been no change in the
affairs of the Company since the date of this report that would warrant any
modification of any forward-looking statement made in this document, other
documents filed periodically with securities regulators or documents
presented on our Company website. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by this notice. The
Company disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise.
Investors are urged to read the Company's filings with U.S. and Canadian
securities regulatory agencies, which can be viewed on-line at www.sec.gov,
www.sedar.com or at the Company's website, www.goldreserveinc.com.
Additionally, you can request a copy directly from the Company.
MINERAL RESERVE ESTIMATES
The Brisas project is an advanced development-stage project. The mineral
reserve estimates set forth in this document have been prepared in
accordance with applicable Canadian and U.S. requirements. The definitions
related to reserves, used herein, are pursuant to and follow Canadian
National Instrument 43-101, Standards of Disclosure for Mineral Projects,
which we believe are substantially the same as those definitions used in
U.S. Securities and Exchange Commission Industry Guide 7.
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 Company's
audited financial statements and should be read in conjunction with the
Company's consolidated financial statements and notes thereto appearing in
Item 17 and Operating and Financial Review and Prospects in Item 5. The
following selected financial data have been prepared in U.S. Dollars on the
basis of accounting principles generally accepted in Canada.
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(in thousands of U.S. Dollars, except share and per share amounts)
Other income $ 770 $ 703 $ 1,200 $ 884 $ 965
Net loss (3,707) (3,008) (851) (1,311) (2,047)
Loss per common share (1) (0.15) (0.13) (0.04) (0.06) (0.09)
Total assets(2) 67,030 59,843 62,553 63,231 64,800
Net Assets -
Shareholders' equity (3) 65,138 58,412 61,169 61,859 63,303
Capital stock 112,971 102,498 102,266 102,106 102,067
Common shares: (4)
Issued 27,750,258 22,996,158 22,655,122 22,196,242 21,987,672
Outstanding 27,456,171 22,702,071 21,361,035 21,902,155 21,810,383
Equity Units: (4)
Issued 1,237,880 1,289,980 1,313,016 1,446,396 1,584,966
Outstanding 738,605 790,705 813,741 947,121 1,290,817
1. Basic and diluted.
2. Total assets prepared in accordance with accounting principles generally
accepted in the U.S. at December 31, 2003, 2002, 2001, 2000, and 1999 were
$70,145, $59,884, $62,713, $63,329, and $64,460, respectively.
3. Total shareholders' equity prepared in accordance with accounting
principles generally accepted in the U.S. at December 31, 2003, 2002, 2001,
2000, and 1999 was $68,253, $58,453, $61,329, $61,957, and $62,963,
respectively.
4. Great Basin and MGC Ventures, each consolidated subsidiaries of the
Company, own shares of the Company. As a result, the Company has an indirect
investment in itself. The shares 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 additional funding for future project development and other
operating activities is a critical factor in the future success of the
Company.
As of March 31, 2004, the Company had approximately $17.6 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. The timing and extent of
additional funding, if any, depends on a number of important factors,
including the actual timetable of our 2004-2005 work plan, the price of gold
and copper, our assessment of the financial markets, 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
allow the Company to fund its activities through 2005. Our plans for
significant additional funding (approximately $353 million) is dependent
upon the successful completion of the bankable feasibility study, if and
when mine development activities on the Brisas project are commenced, the
acquisition of additional properties and the overall capital requirements of
the consolidated group. Management can provide no assurances that it will be
able to acquire the additional financing that will be needed, if and when
construction on the Brisas project commences, and the Company currently has
no proposals or firm commitments to proceed with such financing. Failure to
raise the required funds will impede the Company's ability to construct and
operate the Brisas project and would, in the long-term, have a material
adverse effect on the Company.
The volatility of the price of gold and copper could have a negative impact
upon our future operations.
The price of gold and copper has a significant influence on the market price
of our common shares and our business activities. Fluctuations in gold and
copper prices directly affect, among other things, our ability to obtain
additional financing, the viability of current development plans and 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 31, 2004, the closing price for gold and copper
was: Gold: $424 per ounce, copper: $1.39 per pound. The following table sets
forth the average of the daily closing price for gold and copper for the
periods indicated as reported by the London Metal Exchange:
YEAR ENDED DECEMBER 31,
5 Yr. Avg. 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------
Gold ($ per ounce) $ 300 $ 363 $ 310 $ 271 $ 279 $ 279
Copper ($ per pound) $ 0.75 $ 0.81 $ 0.71 $ 0.73 $ 0.80 $ 0.71
Our mining assets are concentrated in Venezuela and our operations could be
disrupted.
Political and Economic Environment
At December 31, 2003, approximately 70% of our identifiable assets,
including our primary mining asset, the Brisas project, were located in
Venezuela.
Venezuela has experienced on-going public protests of the President's
policies and agendas in the last several years. These protests have resulted
in national work stoppages and a number of civil disturbances, and have lead
to fuel shortages, high levels of inflation, currency and exchange controls,
and a decline in industrial output and foreign investment. The opposition to
the President have demanded a change in the policies of the current
government, including calling for the removal of the President by recall
referendum.
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 future
operations and investments in Venezuela could be adversely affected by
continued political instability and civil unrest. Insurance covering
business disruptions or losses related to political instability or civil
unrest is not maintained and will only be maintained in the future if
available on a cost-effective basis.
Currency Controls
In February 2003, the Central Bank of Venezuela enacted exchange control
regulations as a temporary measure to protect international reserves. The
exchange rate was fixed at approximately 1,600 Bolivars to the US dollar. In
February 2004, the exchange rate was increased to approximately 1,920
Bolivars to the US dollar.
Past and recent conditions have not adversely affected our operations as the
Company primarily transfers funds into Venezuela for its operations. However,
this could change in the future to the extent that the Company begins
production and sales from Venezuela. Future fluctuations of the Venezuelan
Bolivar against the U.S. dollar 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. 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. Although the Brisas project has not
experienced a similar invasion and 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, management can give no assurances
that such activities will not occur in the future.
Imataca Forest Reserve
The Brisas project is located within the Imataca Forest Reserve (the
"Imataca") in the State of Bolivar. In 1986, an area within the Imataca,
which includes the Brisas project, was authorized by Presidential Decree
1046 for mining activities. In May 1997, Presidential Decree 1850 further
opened the region to various activities, including mining, but was later
challenged by several parties. The Venezuelan Supreme Court subsequently
issued an order to MEM prohibiting new concessions in the Imataca.
Subsequent to the Supreme Court order, the Company submitted to MEM and MARN
(Ministry of Environment) several additional concession and permit
applications related to the Brisas project.
In July 2003, the Venezuelan Government published for public consultation
draft amending regulations that further clarify mining activities in the
Imataca. According to the draft amending regulations, the Brisas project
continues to be in an area authorized for mining activities. Although MEM
and MARN have indicated that the Imataca issue is expected to be resolved in
the near term, it is unclear when the final regulations will be issued. We
have been advised by Venezuelan counsel that it is unlikely that future
regulations related to this issue will impact our properties, but management
can make no assurances that the final regulations will include Brisas in the
area approved for mining or the impact of further challenges to the Imataca
issue by third parties.
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. Mining properties sometimes contain
claims or transfer histories that examiners cannot verify, and transfers
under foreign law often are 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 mid 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. A claim that the Company does not have
title or contract rights to a property could have an adverse impact 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 $70 million on the Brisas project. Any adverse
event affecting this property could significantly impact the future results
of the Company.
Our mineral reserve estimates may vary from estimates in the future.
The mineral reserve and resource estimates set forth in this document have
been prepared in accordance with the disclosure requirements of applicable
Canadian and U.S. securities commissions. The definitions related to
reserves, used herein, are pursuant to Canadian National Instrument 43-101,
Standards of Disclosure for Mineral Projects, which we believe are
substantially the same as those definitions used in the U.S. Securities and
Exchange Commission Industry Guide 7.
Behre Dolbear & Company, Inc. (Behre Dolbear) audited the Company's data
collection procedures and modeling and mineral reserve methodology for the
preliminary feasibility study. Behre Dolbear concluded in their reports
that: technical data collection procedures met or exceeded accepted industry
standards; assay laboratories provided reliable and acceptable results; and
the compiled database was of a quality appropriate for utilization in a
mineral reserve study suitable for obtaining financing.
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 fifteen
years and expect this trend to continue for the next several years as the
result of, among other factors, expenditures associated with the activities
on the Brisas project, as well as other unrelated non-property expenses.
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 are listed on the Toronto Stock Exchange (TSX) and
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 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 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.
Risks associated with the construction of a mining project.
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 of placing the Brisas project
in to production could differ significantly from estimates contained in the
preliminary feasibility study.
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 CESL process may never be utilized for the Brisas project.
Initially the Brisas preliminary feasibility study contemplated a
traditional off-site smelter to process gold/copper concentrates. As a
result of 20-year low gold and copper prices, the Company subsequently
reviewed several alternatives to improve the Brisas project economics. One
alternative, the Cominco Engineering Services Limited (CESL) technology
utilizes an autoclave for pressure oxidation of the concentrates followed by
a series of leaching sequences to recover the gold and copper.
Notwithstanding any successful implementation of the CESL technology for the
Brisas project, management may ultimately deploy another, commercially proven
concentrate pressure oxidation and leaching process to produce the gold and
copper on-site. Likewise, and as a result of significantly lower concentrate
treatment and refining charges, the bankable feasibility study may conclude
that processing concentrates at an off-site smelter is the better
alternative for development of the Brisas project.
Industry competition for new properties could limit the Company's ability to
grow in the future.
We face strong competition from other mining companies in connection with
the acquisition of future properties considered to have commercial
potential. Many of these companies have greater financial resources,
operational experience and technical capabilities. As a result, we may be
unable to acquire additional mining properties, thereby limiting future
growth.
Acquiring and retaining key personnel in the future could have a significant
impact on future operating results.
We are dependent upon the abilities and continued participation of key
management personnel. If the services of our key employees were lost, 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. The
Company'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.
Organizational Structure
References to the "Company" throughout this report refer primarily to Gold
Reserve Inc., Gold Reserve Corporation (domiciled in Canada and the U.S.,
respectively), Gold Reserve de Venezuela, 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")
(U.S. corporations), 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 of 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 $70 million has been expended on the Brisas project since its
acquisition in 1992. During 2004, the Company expects to expend up to $10
million directly and indirectly on the project, including approximately $7
million to complete the bankable feasibility study. See-"PROPERTIES-Brisas
Project" for a detailed discussion of the Brisas project.
Choco 5 Property
The Choco 5 property, a grass-roots gold/copper 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 the acquisition and exploration costs
and expects during 2004, to expend up to $500,000 on further exploration.
See-"PROPERTIES-Choco 5 Property" for a detailed discussion of the Choco 5
project.
Financial Position
As of March 31, 2004, the Company held approximately $17.6 million in cash and
investments. We will be required to seek additional funding in the next
twelve months in order to fund the construction of the Brisas project, if
warranted. We expect to evaluate a number of financing options in the coming
months in conjunction with the completion of the bankable feasibility study.
Significant additional financing will be needed if and when construction on
the Brisas project commences. At this time, although we have received
indications of interest, we have no proposals or firm commitments to proceed
with financing the Brisas project.
Shares Issued
As of March 31, 2004, the Company had the following Class A common shares,
equity units and share purchase options issued:
Class A common shares 27,750,258
Equity Units* 1,237,880
----------
Total Issued 28,988,138
Class A common share purchase warrants 2,021,000
Class A common share purchase options 3,204,124
----------
Fully diluted 34,213,262
==========
* 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.
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 (229 miles),
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, and applications for
other mineralization 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.
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 ("MEM"),
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 MEM, 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
MEM. 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 we estimate is approximately eight
percent (8%) of the combined Brisas property mineralization, provides the
MEM 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 MEM 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 MEM chose to exercise such right pursuant to the concession.
Regional Infrastructure
The Brisas project site is located in the State of Bolivar, Guayana region.
The nearest major city is Puerto Ordaz, with approximately 700,000
inhabitants. Puerto Ordaz has major port facilities, accessible to
ocean-going vessels from the Atlantic Ocean, via the Orinoco river. 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. A
400 kV power line runs through the community of Las Claritas, nearby the
project, and is expected to supply sufficient power for the Brisas project.
A transformer station is located 3 km from the property.
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. There are also port facilities 428
km northwest of Puerto Ordaz on the Caribbean coast. Guanta, near Barcelona,
would likely be the port of entry for most construction, mining and milling
equipment. 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 on into Brazil.
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 tonolite 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.
Preliminary Feasibility Study
The preliminary feasibility study was originally completed in 1998 with the
assistance of JE MinCorp, a Division of Jacobs Engineering Group Inc., and a
number of other independent consultants and updated in early 2000.
BRISAS PROJECT ECONOMICS
The results of the preliminary feasibility study indicated a large-scale
open pit mining operation with a plant to process an estimated 50,000 tonnes
per day, yielding an estimated average annual production of 362,000 ounces of
gold and 46 million pounds of copper, over a mine life of at least 14 years.
The Brisas project will utilize economies of scale production methods with
expected higher production rates resulting in lower unit costs. Estimated
cost per ounce of gold is determined net of copper revenues. Pre-feasibility
estimates of capital requirements for initial construction of the mill and
on-site copper production were approximately $353 million, including working
capital of approximately $19.5 million. Ongoing life-of-mine requirements
were estimated at $59 million.
Construction of the planned facility is expected to take approximately 18 to
24 months, with commissioning and achievement of commercial production
expected shortly thereafter. Most operating supplies will be imported and
electrical power is available from 400kV transmission line and transformer
station, which passes within a few kilometers of the property. The project
water requirements will be obtained by water pumped from the pit de-watering
system and by rainfall stored in the tailings water pond. On site
accommodations will be provided for employees.
The preliminary feasibility study evaluated two processing flowsheets
including conventional milling with a gyratory crusher and grinding with SAG
and ball mills followed by gravity separation to recover coarse gold,
flotation and cyanidation of cleaner flotation tailings. The second
alternative contemplated the implementation of on-site copper processing
using the Cominco Engineering Services Limited (CESL) technology. The CESL
process utilizes an autoclave for pressure oxidation of the concentrates
followed by a series of leaching sequences to recover the copper and gold.
The CESL process eliminates significant transportation costs for the
copper/gold concentrates to an out-of-country smelter, possibly resulting in
improved project economics.
Using reserve estimates completed in 2000 and the assumptions included in
the preliminary feasibility study, cash operating costs (based on Gold
Institute guidelines) were estimated at $153 per ounce of gold (using $0.90
per pound copper and CESL on-site copper processing) and total after-tax
costs were estimated at $243 per ounce of gold (including operating costs,
working capital, initial capital and life of mine capital less sunk costs).
Likewise, with traditional smelting of concentrate and using the 2000
reserve estimates, the assumptions included in the preliminary feasibility
study and current expected long term smelting and refining charges, cash
operating costs (based on Gold Institute guidelines) were estimated at $189
per ounce of gold (using $0.90 per pound copper) and total after-tax costs
were estimated at $275 per ounce of gold (including operating costs, working
capital, initial capital and life of mine capital less sunk costs).
Preliminary feasibility estimates of capital requirements for construction
of the mill with traditional smelter copper production was approximately
$304 million, including working capital of approximately $19.5 million.
Ongoing life-of-mine requirements were estimated at $37 million for the
conventional smelting scenario.
The economics of the Brisas project are sensitive to the price of copper.
Estimated cost per ounce of gold is determined net of copper revenues. For
both CESL and smelter cases, a $0.10 increase or decrease in copper price,
results in an estimated $12 corresponding change to the cash operating cost
per gold ounce.
The ultimate design and future cost of construction of a plant is subject
to the results of a bankable feasibility study which will be required to be
completed before a production decision can be made in the future. Actual
production rates and cost of production may vary from the preliminary
feasibility study estimates based on the results of the bankable feasibility
study, as well as factors encountered if and when production commences.
MINERAL RESOURCE AND RESERVE ESTIMATES
Behre Dolbear audited our data collection procedures and modeling and
mineral reserve methodology for the preliminary feasibility study. Behre
Dolbear concluded in their reports that: technical data collection
procedures met or exceeded accepted industry standards; assay laboratories
provided reliable and acceptable results; and the compiled database was of a
quality appropriate for utilization in a mineral reserve study suitable for
obtaining financing. Further, Behre Dolbear concluded that the estimating
techniques used were an accurate representation for the mineral reserves;
drill hole spacing was sufficient to generate future estimates of proven and
probable mineral reserves; and the database was correct and reliable. The
Behre Dolbear audits also concluded that the mineral reserve risk for the
project is low and there is upside potential for additional mineral reserves
at the Brisas project because the mineralization can be extrapolated with
quite high confidence beyond the current drilling in the down dip direction
and to the north.
Behre Dolbear calculated the mineral resource and reserve estimates
contained herein, most recently in August 2003. The qualified person
involved in the property evaluation and the resource and reserve estimates
is Dr. Qingping Deng, C.P.Geol.-AIPG of Behre Dolbear. In addition, Brad
Yonaka, Exploration Manager for Gold Reserve was involved in the geologic
analysis. Behre Dolbear has advised Gold Reserve that it believes that it
has an adequate basis for supporting the estimated mineral reserves at the
Brisas project in accordance with Canadian National Instrument 43-101,
Standards of Disclosure for Mineral Projects as well as the standards
contained in the U.S. Securities and Exchange Commission Industry Guide 7.
MINERAL RESOURCE ESTIMATES
CESL Process
The Brisas project, using the CESL process for treating copper concentrates,
is estimated to contain a measured and indicated mineral resource of 9.9
million ounces of gold and approximately 1.4 billion pounds of copper (based
on 0.4 gram per tonne gold equivalent cut-off). The August 2003, measured and
indicated mineral resource utilizing the CESL process, which includes the
mineral reserve, is summarized in the following table:
(kt= 1,000 tonnes) Measured (proven) Indicated (probable) Measured and Indicated
- ----------------------------------------------------------------------------------------------
Au Eq
Cutoff Au Cu Au Cu Au Cu
Grade kt (gpt) (%) kt (gpt) (%) kt (gpt) (%)
- ----------------------------------------------------------------------------------------------
0.40 273,013 0.730 0.119 194,573 0.557 0.160 467,586 0.658 0.136
==============================================================================================
(In Millions) Measured (proven) Indicated (probable) Measured and Indicated
- ----------------------------------------------------------------------------------------------
Au Eq
Cutoff Au Cu Au Cu Au Cu
Grade oz. lb. oz. lb. oz. lb
- ----------------------------------------------------------------------------------------------
0.40 - 6.405 717 - 3.484 687 - 9.889 1,404
==============================================================================================
The estimated inferred mineral resource, based on the CESL process (0.4 gram
per tonne cutoff), is estimated at 93.1 million tonnes containing 0.56 grams
gold per tonne and 0.14 percent copper, or 1.67 million ounces of gold and
282 million pounds of copper.
Smelter Process
The Brisas project, using an off-site smelter process for treating copper
concentrates, is estimated to contain a measured and indicated mineral
resource of 9.5 million ounces of gold and approximately 1.2 billion pounds
of copper (based on 0.4 gram per tonne gold equivalent cut-off). The August
2003, estimated measured and indicated mineral resource utilizing an
off-site smelter process, which includes the mineral reserve, is summarized
in the following table:
(kt= 1,000 tonnes) Measured (proven) Indicated (probable) Measured and Indicated
- ----------------------------------------------------------------------------------------------
Au Eq
Cutoff Au Cu Au Cu Au Cu
Grade kt (gpt) (%) kt (gpt) (%) kt (gpt) (%)
- ----------------------------------------------------------------------------------------------
0.40 252,227 0.769 0.117 162,264 0.625 0.155 414,491 0.712 0.132
==============================================================================================
(In Millions) Measured (proven) Indicated (probable) Measured and Indicated
- ----------------------------------------------------------------------------------------------
Au Eq
Cutoff Au Cu Au Cu Au Cu
Grade oz. lb. oz. lb. oz. lb
- ----------------------------------------------------------------------------------------------
0.40 - 6.233 649 - 3.258 554 - 9.491 1,203
==============================================================================================
The estimated inferred mineral resource, based on an off-site smelter
process (0.4 gram per tone cutoff), is estimated at 77.2 million tonnes
containing 0.64 grams gold per tonne and 0.12 percent copper, or 1.58
million ounces of gold and 205 million pounds of copper.
MINERAL RESERVE ESTIMATE
CESL Process
The Brisas project in-pit mineral reserve estimate utilizing the CESL
process for treating copper concentrate is estimated to contain
approximately 328.5 million tonnes of ore with an average grade of 0.71
grams per tonne gold, 0.15 percent copper and a waste to ore ratio of
1.80:1. The August 2003 mineral reserve estimate presented below was
calculated using an average gold and copper price of $325 per ounce and
$0.85 per pound, respectively and the Company believes it has been prepared
in accordance with reporting requirements of applicable Canadian and U.S.
securities commissions:
Reserve Au Cu Waste Total
tonnes Au grade Cu grade ounces pounds tonnes tonnes Strip
Class (thousands) (gpt) (%) (thousands) (millions) (thousands) (thousands) Ratio
- -----------------------------------------------------------------------------------------------
Proven 224,174 0.770 0.132 5,547 650
Probable 104,288 0.575 0.188 1,928 433
- -----------------------------------------------------------------------------------------------
Total 328,462 0.708 0.150 7,475 1,083 591,722 920,184 1.80
===============================================================================================
Smelter Process
The Brisas project in-pit mineral reserve estimate utilizing a smelter
process for treating copper concentrate is estimated to contain
approximately 256.6 million tonnes of ore with an average grade of 0.81
grams per tonne gold, 0.135 percent copper and a waste to ore ratio of
2.19:1. The August 2003 mineral reserve estimate presented below was
calculated using an average gold and copper price of $325 per ounce and
$0.85 per pound, respectively and the Company believes it has been prepared
in accordance with reporting requirements of applicable Canadian and U.S.
securities commissions:
Reserve Au Cu Waste Total
tonnes Au grade Cu grade ounces pounds tonnes tonnes Strip
Class (thousands) (gpt) (%) (thousands) (thousands)(thousands) (thousands) Ratio
- -----------------------------------------------------------------------------------------------
Proven 193,685 0.841 0.124 5,237 528,000
Probable 62,930 0.694 0.170 1,404 236,000
- -----------------------------------------------------------------------------------------------
Total 256,615 0.805 0.135 6,641 764,000 562,579 819,194 2.19
===============================================================================================
BRISAS PROJECT WORK TO DATE
Over $70 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, proven
and probable reserves.
Previous activities on the property include:
Extensive geology, geophysics and geochemistry
802 exploration drill holes
Approximately 180,000 meters of drilling
Audits by Behre Dolbear 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
Pre-feasibility study with JE MinCorp
Supplement to the pre-feasibility study with JE Mincorp
Bench scale testing of CESL on-site copper process
During the first quarter of 2003, MEM approved an operating plan for the
alluvial and hardrock ore and project infrastructure for the Brisas project.
Based on this operating plan, the Company is in the process of updating its
Environmental Impact Statement ("EIS") for submittal to MARN in order to
obtain the necessary environmental permits for construction. Although MEM
has approved the operating plan for the Brisas project, the previously filed
but un-granted concession and permit applications that are an integral part
of the plan are still pending the resolution of the Imataca matter.
Exploitation activities including preparations for production activities are
typically required to commence within two years from the approval of the
operating plan, but the MEM has indicated that any delay in the resolution
of the Imataca matter further delays any obligation required of the
concession and/or contract holder.
In late 2003, the Company extracted a 700 tonne bulk sample from the Brisas
gold/copper project for large scale pressure oxidation testing. In April
2004, the material was processed into a gold-copper concentrate at SGS
Lakefield Research Limited in Canada, to be tested for the possible
deployment of an on-site pressure oxidation and leaching process. The
results of this test are expected to be incorporated as one alternative in
the bankable feasibility study.
Further to Behre Dolbear's recommendations, in November 2003, the Company
commenced an additional drilling program at the Brisas project. The drill
program consisted of approximately 40 core holes totaling approximately
15,000 meters, costing approximately US $800,000. The focus of the drilling
was to test the down-dip extension and southern extension of the ore body,
and the high-grade zone southeast of the existing pit design. The results of
the drill program will be incorporated in the bankable feasibility study
mineral reserve.
Also in November 2003, the Company selected Aker Kvaerner Metals, Inc., a
subsidiary of the international engineering and construction services group,
Aker Kvaerner, to complete the bankable feasibility study for the
construction and operation of the Brisas project. Vector Colorado LLC and
Pincock, Allen & Holt will also participate in the completion of the Brisas
feasibility study.
2004 Brisas Work Plan
During 2004 we expect to continue the activities on the Brisas project that
are required to complete a bankable feasibility study. The bankable
feasibility study is to be used for securing finance, initiating procurement
of long delivery items and commencing construction activities. The purpose of
the study is to determine an optimum case for technical and economic
viability of the project to a level of confidence required to make a
decision to proceed with development.
The bankable feasibility study will contemplate a conventional milling
facility with a range of possible plant throughput tonnages from 20,000 to
70,000 tonnes per day and the possible use of contract mining. Contract
mining would significantly lower initial capital costs for the project,
however operating costs would increase as a result.
The optimum processing plant will be determined from an evaluation of three
alternatives. All of the flowsheets will commence with crushing, grinding and
flotation of sulfide concentrate. One of the base flowsheets will assume
direct shipment of the concentrate to an off-site smelter while the second
flowsheet will assume processing the concentrate through a high temperature
pressure oxidation (HTPOX) process to produce copper cathodes on-site.
Similar to the HTPOX alternative, the third alternative flowsheet will
assume processing the concentrate through the CESL process to produce copper
cathodes on-site.
The Company anticipates results for HTPOX and CESL may be quite similar,
however HTPOX is a commercially proven process. Likewise, and as a result of
significantly lower long term concentrate treatment and refining charges, the
bankable feasibility study may ultimately conclude that processing
concentrates at an off-site smelter is the best economic alternative for the
development of the Brisas project.
The bankable feasibility study will generate a cash flow model and capital
and operating cost estimates for a preferred process plant flowsheet design
and capacity. Estimates will include general and administrative costs and
support facilities for the mining and processing facility. The bankable
feasibility study will incorporate a marketing study for copper concentrates
as well as sales of cathode copper. In addition, the bankable feasibility
study will include design, equipment selection, and capital and operating
cost estimates for; tailings dam and facilities, mine planning and mine
equipment selection, and environmental compliance and reclamation. Likewise,
the bankable feasibility study will incorporate all site hydrology
requirements, including pit de-watering, ground water depressurization, site
drainage, water balances, water control, water discharge and management
planning, including capital and operating cost estimates. The completion of
the bankable feasibility study is expected to cost approximately $7
million.
Management currently plans to complete the required feasibility study in
late 2004 to make a production decision thereafter. The timing of these
activities is subject to, among other things, typical environmental and
regulatory permits as well as the scheduling of third party consultants and
contractors.
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 of Puerto 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 MEM 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.
2004 Choco 5 Work Plan
During 2004 we expect to commence a variety of exploration activities on the
Choco 5 property. 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.
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 MEM, 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 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 MEM 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 MEM. 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
tax are assessed as follows:
Gold, silver, platinum and associated metals to the later, 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 MEM can reduce this tax from 3% to 1% (and subsequently increase
it back to 3%) if economic conditions warrant
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.
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 MEM 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 MEM in a timely manner for
conversion thereof into mining concessions. MEM has indicated they expect to
act on these conversion applications upon the resolution of the Imataca
issue. The Company, in conjunction with Minerven, expects to apply for the
conversion of the Choco 5 property contract to a concession in the future.
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 three different
permits from the MARN: 1) Permit to Occupy the Territory ("Occupation
Permit"), 2) Permit to Affect for Exploration and 3)Permit to Affect for
Construction and Exploitation.
Although not consistently applied in the past, regulations state that the
MEM 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 MEM, 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
US$30,000 depending on exchange rates. Other Venezuelan taxes that apply or
may eventually apply to the Company's subsidiaries include a 1% tax on the
value of tangible and intangible business assets, a 16% 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 from value added tax and import duties to mining companies.
Management expects to apply for exemption, where available, in the future.
There can be no assurances, however, that exemption will be granted. See
also "-Gold Sales" for a discussion of certain taxes.
Political and Economic Situation
See- "Risk Factors-Our mining assets are concentrated in Venezuela-Political
and Economic Environment"
Exchange Control Regulations
See- "Risk Factors-Our mining assets are concentrated in Venezuela-Currency
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
should be read in conjunction with the Company's consolidated financial
statements, included herein.
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.
In November 2003, the Company engaged a number of engineering and
construction services consultants to complete the bankable feasibility study
for the construction and operation of the Brisas project. The study
contemplates the previously disclosed 50,000 tonne per day conventional
milling facility utilizing two copper concentrate-processing alternatives:
1) a traditional off-site smelter or 2) various alternatives for on-site
copper processing. Completion of the feasibility study will be the
Company's primary focus in 2004. Management expects to make a production
decision during the first part of 2005.
Venezuela has experienced high levels of inflation during the last several
years as well as ongoing political instability and civil unrest, including
national work stoppages and a number of civil disturbances. In addition,
Venezuela has experienced fuel shortages, currency and exchange controls,
and a 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.
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.
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 has no material long-term contracts or
obligations. See footnote 6 to the consolidated financial statements for
disclosure of related party transactions.
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, as described in Item 4 "Information on the Company-History
and Development of the Company-Properties."
2002 Compared To 2001. The consolidated net loss for the year ended December
31, 2002 was $3,008,122 or $0.13 per share, an increase of approximately
$2,200,000 from the prior year. Other income for 2002 amounted to $703,000,
which is a decrease of approximately $497,000 from the previous year. Other
income decreased as a result of a reduction in gain on sale of marketable
securities and lower investment yields. Operating expenses for the year
amounted to $3,711,122, which is an increase from the prior year of
approximately $1,660,000. This increase is primarily due to a non-cash
foreign currency loss of $418,258, related to certain assets denominated in
Bolivars. The remaining amount of the increase, approximately $1.2 million,
primarily relates to Venezuela-based costs that in previous years were
capitalized to the Brisas project, but were expensed currently as no
significant exploration and development activities were being conducted on
the Brisas project.
Selected Quarterly Financial Data
Quarter ended 12/31/03 9/30/03 6/30/03 3/31/03 12/31/02 9/30/02 6/30/02 3/31/02
- ----------------------------------------------------------------------------------------------------------------------------
Other Income 291,218 145,664 140,899 192,600 230,035 167,034 130,252 175,679
Net loss before tax (1,603,873) (809,276) (715,181) (549,688) (759,865) (643,273) (978,667) (626,317)
Per share (0.07) (0.03) (0.03) (0.02) (0.03) (0.03) (0.04) (0.03)
Fully diluted (0.07) (0.03) (0.03) (0.02) (0.03) (0.03) (0.04) (0.03)
Net loss (1,608,606) (809,276) (715,181) (549,688) (759,865) (643,273) (978,667) (626,317)
Per share (0.07) (0.03) (0.03) (0.02) (0.03) (0.03) (0.04) (0.03)
Fully diluted (0.07) (0.03) (0.03) (0.02) (0.03) (0.03) (0.04) (0.03)
The quarterly results of operations are substantially consistent from
quarter to quarter during the periods shown above. 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 bulk sample intended to be used for tests related 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 $70 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 feasibility and related costs,
capitalized interest expense and support costs related to the Brisas
project.
There were no significant investing activities in 2003, other than the
purchase and sale of marketable securities, which, on a net basis, totaled
approximately $2.6 million in sales of marketable securities.
During 2004 we expect to continue the activities on the Brisas project that
are required to complete a bankable feasibility study. These activities,
which are expected to cost approximately $7 million, will include further
analysis of the applicability of producing copper cathode on-site, further
metallurgical testing, drilling, geotechnical studies and environmental
studies, final feasibility and engineering, as well as permitting and
on-going maintenance. Management plans to complete the feasibility study in
late 2004 in order to make a production decision thereafter. Development of
the Brisas project, as presently proposed in the Brisas preliminary
feasibility study, is estimated to cost $353 million over a twelve to
eighteen month construction period.
Financing. On September 26, 2003, the Company completed a private placement
financing of 4,042,000 units at Cdn $3.50 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 Cdn $5.25 for a period of 18
months following the closing of the private placement. As of December 31,
2003, 2,021,000 warrants were outstanding and exercisable. The net proceeds
of the private placement amounted to approximately Canadian $13.0 million
(US$ 9.6 million).
In connection with the September 2003 private placement, the Company agreed
to issue to the underwriters 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. Both the option and the unit expire on March 28, 2005. The Company
would receive an aggregate of Cdn $1,266,156 if the options and underlying
warrants were exercised in full.
Under TSX rules the 4,042,000 units issued represented the maximum number of
shares issuable pursuant to a private placement, without obtaining
shareholder approval. As a result, shareholders of the Company will be asked
to pass a resolution at the next annual meeting of shareholders authorizing
the Company to issue up to 303,150 Class A common shares of the Company that
could be issued in connection with the exercise of the options and related
underlying securities.
In the event that shareholders do not approve the issuance of the options,
the Company is obligated to pay to the underwriters a fee equal to the then
cash value of the options of approximately Cdn $450,000 (based on the
Black-Scholes model and recent stock prices) or with the TSX approval, the
Company could issue the cash value equivalent in common shares in full
satisfaction of the fee, which based on current stock prices, would be
approximately 82,000 Class A common shares.
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 Company's KSOP plan and 60,000 shares were issued primarily as
non-employee director compensation.
As of April 16, 2004, the Company held approximately $17 million in cash and
investments. As noted elsewhere in this document, we will be required to seek
significant additional funding in the next twelve months in order to fund the
construction of the Brisas project, if warranted. We expect to evaluate a
number of financing options in the coming months in conjunction with the
completion of the bankable feasibility study. We have not commenced our
financing activities, although we have received indications of interest.
In the near-term management believes that current cash and investment
balances are sufficient to allow the Company to fund its activities through
2004. 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 2004-2005 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.
Operations. Cashflow used by operations for 2003 was approximately $2.9
million, which was an increase over 2002 of approximately $0.7 million. The
increase from 2002 was primarily due to higher operating costs related to
the development of the Brisas project and expenses associated with the Choco
5 property.
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 or Gold Reserve Corporation, the
predecessor issuer. Directors serve until the next annual meeting.
Name - Age
Principal Occupation
Director and/or Officer Since
Rockne J. Timm - 58
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.
March 1984
A. Douglas Belanger - 50
President, Director
President of the Company. Director and
Executive Vice President of MGC Ventures, Inc.
and Great Basin Energies, Inc.
Resides: Spokane, Washington.
August 1988
James P. Geyer - 51
Senior Vice President, Director
Senior Vice President of the Company.
Resides: Spokane, Washington.
June 1997
James H. Coleman - 53
Non-Executive Chairman, Director
Senior Partner of Macleod Dixon LLP of Calgary, Alberta
and Director of various public companies.
Resides: Calgary, Alberta.
February 1994
Patrick D. McChesney - 54
Director
President of LMO Test Systems, Inc.
(an automated test equipment manufacturer).
Director of MGC Ventures, Inc. and Great Basin Energies, Inc.
Resides: Spokane, Washington.
August 1988
Chris D. Mikkelsen - 52
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.
June 1997
Jean Charles Potvin - 50
Director
President and Chief Executive Officer of Tiomin
Resources Inc. Resides: Toronto, Ontario
November 1993
Mary E. Smith - 51
Vice President -Administration and Secretary
Vice President-Administration and Secretary of the Company.
Vice President-Administration and Secretary of MGC Ventures, Inc.
and Great Basin Energies, Inc.
Resides: Colbert, Washington.
January 1997
Robert A. McGuinness - 48
Vice President-Finance and Chief Financial Officer
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.
March 1993
There are no family relationships or arrangements or
understandings pursuant to which any person was
appointed as a Director or member of senior management.
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, 2003.
(1)Securities
Under
Options/ (2)All
SARs Other
Name and Granted Compensation
Principal Position Year Salary (#) ($)
- ----------------------------------------------------------------------------------
Rockne J. Timm 2003 195,000 696,700 42,000
Chief Executive Officer 2002 195,000 696,700 31,144
2001 195,000 696,700 25,500
A. Douglas Belanger 2003 175,000 573,955 39,040
President 2002 175,000 573,955 29,000
2001 175,000 573,955 25,500
James P. Geyer 2003 175,000 284,209 39,040
Senior Vice President 2002 175,000 284,209 29,000
2001 175,000 284,209 25,500
Mary E. Smith 2003 65,000 115,000 14,273
Vice President-Administration 2002 65,000 106,367 10,697
and Secretary 2001 65,000 106,367 9,750
Robert A. McGuinness 2003 120,000 301,122 26,770
Vice President-Finance 2002 120,000 306,622 19,849
and Chief Financial Officer 2001 120,000 306,622 18,000
Officers as a group (5) 2003 730,000 1,970,986 161,123
2002 730,000 1,967,853 119,690
2001 730,000 1,967,853 104,250
1) 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.
2) 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
2003, 2002, and 2001, respectively, as follows: Mr. Timm: 39,463 shares,
49,387 shares, 44,232 shares; Mr. Belanger: 36,681 shares, 45,988 shares,
44,232 shares; Mr. Geyer: 36,681 shares, 45,988 shares, 44,232 shares; Ms.
Smith: 13,834 shares, 16,964 shares, 16,912 shares; and Mr. McGuinness:
25,153 shares, 31,476 shares, 31,223 shares. See- "KSOP Plan" below.
Options granted for shares of the Company during the year ended December 31,
2003
The following stock options to purchase Class A common shares were granted
during 2003 to Named Executive Officers.
Date Number of Exercise Expiration
Name of grant securities granted Price Date
- ----------------------------------------------------------------------------
Mary E. Smith 5/19/03 13,633 $ 1.56 5/19/08
Mary E. Smith 10/29/03 11,000 $ 4.14 10/29/08
Robert A. McGuinness 10/29/03 11,500 $ 4.14 10/29/08
Aggregated option exercises during the year ended
and option values as of December 31, 2003
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 Number of unexercised Dollar value of unexercised
securities options at fiscal in-the-money options at
acquired on Aggregate Value year-end exercisable/ fiscal year-end exercisable/
Name exercise Realized (1) unexercisable unexercisable (2)
- ----------------------------------------------------------------------------------------------------------
Rockne J. Timm - - 696,700/- $2,832,552/-
A. Douglas Belanger - - 573,955/- 2,333,571/-
James P. Geyer - - 284,209/- 1,155,741/-
James H. Coleman 80,000 $381,700 136,666/- 548,342/-
Patrick D. McChesney 10,000 34,686 132,385/- 540,043/-
Chris D. Mikkelsen 35,000 152,110 97,278/25,000 374,091/82,750
Jean Charles Potvin 50,000 122,000 120,612/- 486,016/-
Mary E. Smith 16,000 55,498 108,184/6,816 397,556/22,561
Robert A. McGuinness 17,000 58,967 301,122/- 1,184,508/-
1) 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.
2) 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, 2003, the closing price of the shares
of common stock on the American Stock Exchange was $4.87. Options range in
price of between $0.72 and $4.14 and generally expire between 2005 and 2008.
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 common
shares for services in 2003. The value of each share on the grant date was
US$5.60. In addition, Mr. Coleman billed the Company approximately $63,000
for professional services and out-of-pocket expenses primarily related to his
activities as a director during the fiscal year ended December 31, 2003.
Directors of the Company received no other 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 2003). The Plan provides for the
issuance of up to 2,500,000 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 500,000 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 31, 2004, options for the purchase of 3,226,7624 Class A common
shares remained outstanding and 342,641 Class A common shares remained
available for grant under the Plan. To date, 323,500 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 outstanding at December 31,
2003. As a group, officers and Directors of the Company (9 persons) held
2,482,927 options to purchase Class A common shares of the Company.
No. of Class A common
Name shares subject to option Exercise Price Expiry date
- ------------------------------------------------------------------------------
Rockne J. Timm 486,867 $ 0.72 June 2006
209,833 1.00 June 2005
A. Douglas Belanger 401,303 0.72 June 2006
172,652 1.00 June 2005
James P. Geyer 199,473 0.72 June 2006
84,736 1.00 June 2005
James H. Coleman 69,444 0.72 June 2006
67,222 1.00 June 2005
Patrick D. McChesney 98,974 0.72 June 2006
33,411 1.00 June 2005
Chris D. Mikkelsen 41,519 0.72 June 2006
30,759 1.00 June 2005
50,000 1.56 May 2008
Jean Charles Potvin 68,741 0.72 June 2006
51,871 1.00 June 2005
Mary E. Smith 61,578 0.72 June 2006
28,789 1.00 June 2005
13,633 1.56 May 2008
11,000 4.14 October 2008
Robert A. McGuinness 197,415 0.72 June 2006
92,207 1.00 June 2005
11,500 4.14 October 2008
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 (9 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 $0.72, a
50% premium to the market price of the Company's shares at the date of
approval and fifty-percent of all vested options, or immediately exercisable
options, were unvested for the following twelve month time period. All
repriced options have five-year lives from the date of approval by
shareholders The following table details the re-pricing information:
Length of Original
Exercise Price at Time Option Term Remaining
Securities Under Options/ of Re-pricing or at Date of
Date Approved by SARs Amendment Re-pricing or
Name Shareholders Repriced Or Amended (#) ($/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
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
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
Mary E. Smith June 2000 28,789 3.75 2.8 years
June 2001 20,000 1.50 3.1 years
June 2001 34,367 2.59 2.2 years
June 2001 1,000 2.88 7.0 years
June 2001 22,211 3.75 2.2 years
KSOP Plan
The Company also maintains a 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 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.
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 2004 to $13,000 ($16,000 limit for
participants who are 50 or more years of age, or who turn 50 during 2004),
special contributions by the Company equal to a percentage of the employee's
compensation during the year, and discretionary contributions by the Company
determined in each year by the Company. Employer allocations are made in
the form of Class A common shares.
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 2004) to a maximum of $41,000 ($44,000 limit for participants
who are 50 or more years of age or who turn 50 during 2004). The annual
dollar limit is an aggregate limit, which applies to all contributions made
under this plan or any other cash or deferral arrangements. For Plan year
2004 the Company has adopted a "Safe Harbor" contribution of 3% of eligible
compensation.
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 2003, 2002 and 2001were $216,432, $153,003 and $133,304,
respectively. See footnote 2 of "-Executive Compensation."
Change of Control Agreements
In 2003, the Company entered into agreements with each of the Named
Executive Officers and certain other employees in order to induce them to
remain employed by the Company in the event of a change of control. A change
of control generally means the acquisition, directly or indirectly, of shares
of the Company which is equal to or greater than 25% of the total issued and
outstanding voting shares of the Company; a change in the majority of the
Board of Directors without the approval of the Company; or a determination
otherwise by the Board of Directors that there has been an effective change
of control of the Company. 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 (generally defined as: change in
duties, change in base salary, relocation of place of employment greater
than 50 miles, failure to provide employment or the employee provides the
Company with written notice of election to treat the employment as
terminated not before the first day of the seventh month following a change
of control) at any time within seven months following the change of control,
such individual will be entitled to receive in a lump-sum, among other
things, two 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
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 in person twice and held thirteen meetings by phone during
2003. 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 2003, 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 four times during 2003, 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 three times during 2003, 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 31, 2004, at which time
the number of Class A Common Shares outstanding was 27,552,171.
Number of Common Shares Percent
Name Beneficially Owned (1) Ownership
- -------------------------------------------------------------------------
Rockne J. Timm (2)(3)(4) 1,519,878 5.4
A. Douglas Belanger (2)(3) 1,425,982 5.1
James P. Geyer 471,451 1.7
James H. Coleman (2)(3) 202,750 0.7
Patrick D. McChesney (2)(3) 229,362 0.8
Chris D. Mikkelsen (2)(3)(4) 292,000 1.1
Jean Charles Potvin 109,934 0.4
Mary E. Smith (2)(3) 187,439 0.7
Robert A. McGuinness (2)(3) 458,021 1.7
(1) Includes for each individual shares issuable pursuant to presently
exercisable options for Common Shares as of April 9, 2004 or options
exercisable within 60 days of April 9, 2004 as follows: Mr. Timm, 696,700;
Mr. Belanger, 573,955; Mr. Geyer, 284,209; Mr. Coleman, 155,416; Mr.
McChesney, 132,385; Mr. Mikkelsen, 109,778; Mr. Potvin, 100,612; Ms. Smith
111,592 and Mr. McGuinness 281,122.
(2) Messrs. Timm, Belanger, Coleman, McChesney, Mikkelsen, Ms. Smith and Mr.
McGuinness are Directors and/or officers of Great Basin Energies, Inc., which
owns 516,720 Gold Reserve Class A common shares, or 1.8% of the outstanding
Class A common shares of the Company. The foregoing individuals beneficially
own 9.4%, 6.1%, 2.4%, 1.6%, 1.3%, 0.5% and 0.9% 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, Coleman, McChesney, Mr. Mikkelsen, Ms. Smith and
Mr. McGuinness are Directors and/or officers of MGC Ventures, Inc., which
owns 276,642 Gold Reserve Class A common shares, or 1.0% of the outstanding
Class A common shares of the Company. The foregoing individuals beneficially
own 10.6%, 10.5%, 4.3%, 3.3%, 2.3%, 0.8% and 1.5% respectively, of the
outstanding Common Shares of MGC Ventures, Inc. and may be deemed indirectly
to have an interest in the Company through their respective management
positions and/or ownership interests in MGC Ventures, Inc. Each of the
foregoing individuals disclaims any beneficial ownership of the Common
Shares owned by MGC Ventures, Inc.
(4) Excludes 81,141 Common Shares of which Mr. Mikkelsen is trustee for the
benefit of members of Mr. Timm's family. Mr. Mikkelsen and Mr. Timm
disclaim any beneficial ownership of the 81,141 Common Shares.
Number of Employees
As of March 31, 2004, the Company employed eight full time personnel in its
Spokane, Washington, office and approximately 30 people in Venezuela, of
which approximately 20 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 4,896,817 shares (including 2,445,769
shares subject to options exercisable within 60 days), or 16.3% of the total
shares issued. To the best of our knowledge, Mr. Timm and Mr. Belanger are
the only 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 31, 2004:
Amount
Involvement of (1)Largest amount outstanding at
Name and Principal Position issuer or subsidiary outstanding during 2003 March 31, 2004
- -----------------------------------------------------------------------------------------------
Rockne J. Timm-
Chief Executive
Officer and Director Lender $23,500 $23,500
James P. Geyer-
Senior Vice President
and Director Lender 18,200 18,200
Robert A. McGuinness-
Vice President-Finance and
Chief Financial Officer Lender (2) 62,500 62,500
1) 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 holds promissory notes for each amount loaned at
an interest rate of 4.57%. and are due in full in 2005.
2) Includes an outstanding 1996 loan of $50,000, bearing interest at 5.2%,
secured by a residential second mortgage and is due in 2005.
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS
None of the Directors, officers of the Company, nor any person or
corporation owning more than 10% or 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 U.S., please refer to note 11 to the consolidated financial
statements, included elsewhere in this annual report. A consolidated balance
sheet is presented for fiscal 2003 and 2002 along with consolidated
statements of operations, cashflow and changes in shareholders' equity,
which are presented for fiscal 2003, 2002 and 2001. 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." Neither the Company's equity units and the related underlying
securities nor the 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
U.S. 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
April(through 4/15/04)$5.70 $4.96 $4.31 $3.68
March 5.60 4.68 4.24 3.50
February 5.25 4.56 3.97 3.36
January 6.89 4.39 5.33 3.35
December 7.58 5.70 5.86 4.25
November 6.53 5.53 5.10 4.09
October 6.65 4.32 5.05 3.25
Last Nine Quarters TSX AMEX (1)
2004 2004
High Low High Low
First Quarter $6.89 $4.39 $5.33 $3.35
2003 2002 2003 2002
High Low High Low High Low High Low
Canadian Dollars U.S. Dollars
Fourth Quarter $7.58 $4.32 $2.06 $1.31 $5.86 $3.25 $1.36 $0.88
Third Quarter 4.25 2.10 3.10 1.65 3.16 1.56 2.00 1.07
Second Quarter 2.55 2.10 3.31 1.45 1.91 1.41 2.24 0.91
First Quarter 2.94 1.77 1.86 1.06 2.00 1.16 1.10 0.71
Last Five Years TSX AMEX (1)
High Low High Low
Canadian Dollars U.S. Dollars
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
1999 2.32 1.02 1.56 0.72
(1) Previous to October 3, 2003, quotes are from the OTC market.
On March 31, 2004, the closing price for a Class A common share of the
Company was Cdn $5.59 per share on the TSX and US $4.24 per share on the
AMEX. As of March 31, 2004, there were a total of 27,816,258 Class A common
shares issued and 1,237,880 Class B common shares issued.
The number of holders of Class A and Class B common shares of record on
March 31, 2004 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 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 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 ''Canadian 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 ''Treaty''), is a
resident of the United States (a ''Non-Canadian Holder''). 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 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 ''taxable 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 listed on a prescribed stock
exchange, there are no clearance certificate requirements imposed by the
Canadian Act on a U.S. Holder in respect of a disposition of Class A common
shares. As long as the Class B common shares are not listed on a prescribed
stock exchange, 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 that 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, 2003, 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, dividends on the shares will generally constitute foreign
source "passive income" or, in the case of certain U.S. Holders, "financial
services income." 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 or exchange 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 or exchange and such U.S. Holder's adjusted
tax basis in the 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 or exchange. 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
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), 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 distributed. In
addition, gain on the sale of stock in a CFC realized by a "United States
shareholder" is treated as ordinary income 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 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 U.S. Shareholder.
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, 2003, the Company was considered 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 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 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 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 qualifies as 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, 2003. 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 deemed 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 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 normally available step-up in tax basis to fair market value will not be
available. Rather, 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 has become a PFIC, within two months after the
end of each 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, 2003 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 or certificate of foreign status 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. 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 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, 2005.
c) Not applicable for annual reports for fiscal years ending prior to July
15, 2005.
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, 2003, 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 the 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), 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 (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
(in $ thousands)
Audit Audit-related Tax All Others Total
2002 $ 59,050 - - - $ 59,050
2003 $ 44,309 $ 4,931 - $ 360 $ 49,600
Audit-related Services provided primarily consist of services connected with
securities filing documents, accounting issues research and technical
assistance.
Our Audit Committee is responsible for the oversight of our independent
auditor's work. Our Audit Committee's policy is to pre-approve all audit
services provided by PwC. The Audit Committee sets forth its pre-approval in
detail, listing the particular audit services that are pre-approved.
Non-audit services provided by PwC are approved individually, on an
as-needed basis. These non-audit services may include tax services, services
connected with securities filing documents, accounting issues research and
technical assistance or other similar services. In urgent circumstances, the
Audit Committee's Chair may issue such a pre-approval. PwC and our management
then report to the Audit Committee on a quarterly basis regarding the extent
of services actually provided in accordance with the applicable
pre-approval, and regarding the fees for the services performed.
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, their review of internal accounting controls 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 and
auditing 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
April 16, 2004 April 16, 2004
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Gold Reserve Inc.
We have audited the consolidated balance sheets of Gold Reserve Inc. as at
December 31, 2003 and 2002 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, 2003. 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 in the 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, 2003 and 2002 and the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 2003 in
accordance with Canadian generally accepted accounting principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, B.C.
February 17, 2004
GOLD RESERVE INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
2003 2002
ASSETS
Cash and cash equivalents $ 11,331,503 $ 1,584,632
Marketable securities 8,450,478 10,945,768
Deposits, advances and other 310,820 348,798
Accrued interest 68,651 148,893
- ------------------------------------------------------------------------------
Total current assets 20,161,452 13,028,091
Property, plant and equipment, net 46,126,317 46,144,396
Other 742,713 670,036
- ------------------------------------------------------------------------------
Total assets $ 67,030,482 $ 59,842,523
==============================================================================
LIABILITIES
Accounts payable and accrued expenses $ 765,860 $ 350,261
Minority interest in consolidated
subsidiaries 1,126,151 1,080,241
- ------------------------------------------------------------------------------
Total liabilities 1,892,011 1,430,502
Commitments
SHAREHOLDERS' EQUITY
Serial preferred stock, without par value
Authorized: Unlimited
Issued: None
Common shares and Equity Units: 112,971,425 102,498,071
Class A common shares, without par value
Authorized: Unlimited
Issued: 2003... 27,750,258
2002... 22,996,158
Outstanding: 2003... 27,456,171
2002... 22,702,071
Equity Units
Issued: 2003... 1,237,880
2002... 1,289,980
Outstanding: 2003... 738,605
2002... 790,705
Less, common shares and
equity units held by affiliates (674,598) (674,598)
Accumulated deficit (47,054,004) (43,346,668)
KSOP debt (104,352) (64,784)
- ------------------------------------------------------------------------------
Total shareholders' equity 65,138,471 58,412,021
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 67,030,482 $ 59,842,523
==============================================================================
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, 2003, 2002 and 2001
2003 2002 2001
Other Income:
Interest income $ 594,006 $ 676,550 $ 837,048
Gain on sale of marketable
securities 176,375 26,450 362,858
- -------------------------------------------------------------------------------------
770,381 703,000 1,199,906
Expenses:
General and administrative 1,860,312 1,329,920 1,205,729
Technical services 2,027,391 1,478,756 349,278
Corporate communications 419,394 279,093 279,628
Legal and accounting 276,291 173,472 93,341
Foreign currency (gain) loss (156,314) 418,258 97,297
Minority interest in net income
of consolidated subsidiaries 45,910 31,623 25,839
- -------------------------------------------------------------------------------------
4,472,984 3,711,122 2,051,112
Net loss before tax (3,702,603) (3,008,122) (851,206)
Income tax 4,733 - -
- -------------------------------------------------------------------------------------
Net loss $ (3,707,336) $ (3,008,122) $ (851,206)
=====================================================================================
Net loss per share-basic
and diluted $ (0.15) $ (0.13) $ (0.04)
=====================================================================================
Weighted average
common shares
outstanding 24,636,083 23,316,423 22,986,958
=====================================================================================
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, 2003, 2002 and 2001
Common Shares
Common Shares and Equity Units Issued Accumulated and Equity Units
Common Shares Equity Units Amount Deficit Held by Affiliates
Balance, December 31, 2000 22,196,242 1,446,396 102,105,986 (39,487,340) (674,598)
Equity units exchanged for
common shares 133,380 (133,380)
Net loss (851,206)
Common shares issued 325,500 159,925
- ---------------------------------------------------------------------------------------------------------
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)
=========================================================================================================
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, 2003, 2002 and 2001
2003 2002 2001
Cash Flow from Operating Activities:
Net loss $ (3,707,336) $ (3,008,122) $ (851,206)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 44,630 58,527 43,534
Amortization of premium
on corporate debt securities 106,583 107,930 25,777
Foreign currency (gain) loss (156,314) 418,258 97,297
Minority interest in net income of
consolidated subsidiaries 45,910 31,623 25,839
Net gain on disposition of marketable securities (176,375) (26,450) (362,858)
Shares issued for compensation and KSOP 520,032 238,203 141,962
Changes in non-cash working capital:
(Increase) decrease in deposits, advances
and accrued interest 9,120 (94,172) 19,571
Increase (decrease) in accounts payable
and accrued expenses 415,599 29,479 (14,321)
Net cash used by operating activities (2,898,151) (2,244,724) (874,405)
Cash Flow from Investing Activities:
Purchase of marketable securities (7,375,099) (11,461,632) (8,335,886)
Purchase of property, plant and equipment (26,551) (5,489) (1,420,896)
Proceeds from the sale and maturity of marketable securities 9,940,182 9,443,246 6,228,289
Other 192,735 75,606 55,167
Net cash provided (used) by investing activities 2,731,267 (1,948,269) (3,473,326)
Cash Flow from Financing Activities:
Proceeds from issuance of common shares 9,913,755 12,960 4,285
Net cash provided by financing activities 9,913,755 12,960 4,285
Change in Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents 9,746,871 (4,180,033) (4,343,446)
Cash and cash equivalents - beginning of year 1,584,632 5,764,665 10,108,111
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 11,331,503 $ 1,584,632 $ 5,764,665
=======================================================================================================
Supplemental Cash Flow Information
Non-cash investing and financing activities:
Issuance of common shares as compensation $ 303,600 $ 85,200 $ 15,000
Issuance of common shares to KSOP Plan $ 256,000 $ 134,000 $ 140,640
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 US 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 and control is other than
temporary. 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, 2003 and 2002, the Company had approximately $64,000
and $43,000, respectively, in Venezuelan and offshore banks.
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 U.S. treasury and
agency obligations and 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 recoverable
amount. 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.
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, 2002, the Company adopted the
new standard concerning the accounting for stock-based compensation. As
allowed by the standard, the Company elected not to adopt the fair value
method of accounting for stock options granted to employees. No compensation
expense is recognized if the exercise price of the stock options at date of
grant is equal to market value. 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 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 substantive 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 on-going public protests of the
President's policies and agendas in the last several years. These protests
have resulted in national work stoppages and a number of civil
disturbances, and have lead to high levels of inflation, fuel shortages,
currency and exchange controls, and a decline in industrial output and
foreign investment. The opposition to the President has demanded a change in
the policies of the current government, including calling for the removal of
the President by recall referendum. Ongoing challenges to the current
administration are likely to cause further social discontent.
Management's capitalization of exploration and development costs and
assumptions regarding the future recoverability of such costs is subject to
the risks and uncertainties of developing an economic reserve on the Brisas
project which is based on engineering and geological estimates, future 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, 2003, 2002 and
2001, there were 3,204,124, 3,368,549 and 3,421,950 shares, respectively,
available for issuance pursuant to the exercise of previously granted share
options. In addition, at December 31, 2003 there were 2,021,000 shares
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.
2. Marketable Securities:
Amortized Cost/ Quoted
Carrying Value Market Value
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
=======================================================================
2002
Temporary:
Corporate debt securities $ 9,213,755 $ 9,267,015
Equity securities 1,732,013 1,773,197
- -----------------------------------------------------------------------
Total $ 10,945,768 $ 11,040,212
=======================================================================
Debt securities at December 31, 2003 yield between 2% and 7%.
3. Property, Plant and Equipment:
Accumulated
Cost Depreciation Net
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
=============================================================================
2002
United States
Furniture and office equipment $ 266,056 $ (198,239) $ 67,817
Leasehold improvements 35,633 (27,683) 7,950
- -----------------------------------------------------------------------------
$ 301,689 $ (225,922) $ 75,767
=============================================================================
Foreign
Property and mineral rights $ 11,252,335 $ 11,252,335
Capitalized exploration costs 34,765,993 34,765,993
Buildings 266,141 $ (224,561) 41,580
Furniture and office equipment 403,187 (394,622) 8,565
Transportation equipment 264,790 (264,790) -
Machinery and equipment 310,166 (310,010) 156
- -----------------------------------------------------------------------------
$ 47,262,612 (1,193,983) 46,068,629
- -----------------------------------------------------------------------------
Total $ 47,564,301 $ (1,419,905) $ 46,144,396
=============================================================================
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 2003, 2002 and 2001 of $216,432, $153,003 and $133,304,
respectively. As of December 31, 2003, 98,042 common shares remain
unallocated to plan participants.
5. Share Option Plan:
The Company's Equity Incentive Plan (the "Plan") as amended in 2003, allows
for the issuance of up to 2,500,000 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:
2003 2002 2001
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding at
beginning of year 3,368,549 $ 0.80 3,421,950 $ 0.81 3,305,471 $ 2.23
Options exercised (400,000) 0.74 (18,000) 0.72 (5,500) 0.78
Options canceled (50,901) 1.21 (128,021) 1.25
Options granted 235,575 2.74 15,500 1.10 250,000 0.71
Options outstanding at
end of year 3,204,124 $ 0.95 3,368,549 $ 0.80 3,421,950 $ 0.81
Options exercisable
at end of year 3,087,588 $ 0.94 3,335,217 $ 0.80 3,259,784 $ 0.81
Price Price Price
Range Range Range
Exercise price
at end of year $ 0.55 - $ 4.14 $ 0.50 - $ 1.50 $ 0.50 - $ 1.50
Exercise price for
exercisable shares $ 0.55 - $ 4.14 $ 0.50 - $ 1.50 $ 0.50 - $ 1.50
As of December 31, 2003, the weighted average remaining contractual life of
total options outstanding was 1.85 years. The weighted average exercise
price of total options outstanding and those options, which were exercisable
at December 31, 2003, was $0.95 and $0.94, respectively.
In December 2000, the Board approved a resolution amending the exercise
price of certain incentive stock options previously granted under the Plan.
Shareholder and regulatory approval was obtained in June 2001. Under a
program, Executive Officers, Directors and other employees were permitted to
exchange certain options with exercise prices in excess of $0.72. The market
price at the date of re-pricing was $0.47 and the new exercise price of the
subject options was set at 150 percent of the market value or $0.72 per
share. In addition, the vesting schedules of all the re-priced stock options
held by Executive Officers, Directors and other employees were modified as
follows: fifty-percent of all re-priced stock options, which were vested
prior to the date of the re-pricing, were no longer vested, or immediately
exercisable, but vested 12 months from the date the re-pricing was approved
by the Board. The new options expire five years from the date of shareholder
approval.
The Company elected not to adopt the fair value method of accounting for
stock options. Had the fair value method of accounting been followed, 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 was calculated using the Black-Scholes model assuming 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. This adjustment 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, 2003 and 2002,
the Company owned 12,062,953 and 23,512,074 common shares of MGC Ventures
respectively, which represented 47% and 63% of its outstanding shares. MGC
Ventures owned 276,642 common shares of the Company at December 31, 2003 and
2002. In addition, MGC Ventures owned 280,000 common shares of Great Basin
at December 31, 2003 and 2002. During the last three years, the Company
sublet a portion of its office space to MGC Ventures for $6,000, $6,000 and
$1,200 per year, respectively.
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, 2003 and 2002,
the Company owned 15,661,595 and 24,354,521 common shares of Great Basin
respectively, which represented 47% and 58% of its outstanding shares. Great
Basin owned 516,720 common shares of the Company at December 31, 2003 and
2002. Great Basin also owned 170,800 common shares of MGC Ventures at
December 31, 2003 and 2002. During the last three years, the Company sublet
a portion of its office space to Great Basin for $6,000, $6,000 and $1,200
per year, respectively.
Fees Paid to Director. During 2003, 2002 and 2001, the Company incurred
expenses of approximately $63,000, $59,000 and $22,000, respectively,
primarily for director related services performed by Mr. Coleman.
Notes Receivable from Officers. As of December 31, 2003 and 2002, the
Company had approximately $109,100 in notes receivable due from officers.
The notes bear interest at between 4.6% and 5.2% and are due on December 31,
2005.
7. Income Tax:
No income tax benefit has been recorded for the three years ended December
31, 2003. 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, 2003. Income tax accrued by the Company's domestic
subsidiaries during 2003, 2002 and 2001 amounted to $4,733, $0 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, 2003 and
2002 were as follows:
Future Tax Asset (Liability)
2003 2002
Accounts payable and accrued expenses $ 7,470 $ 4,483
Investment income (26,769) (56,829)
Property, plant and equipment 8,507,672 8,505,089
- --------------------------------------------------------------------------
Total temporary differences 8,488,373 8,452,743
Net operating loss carryforward 5,531,788 4,572,384
Alternative minimum tax credit 19,871 19,871
- --------------------------------------------------------------------------
Total temporary differences, operating losses
and tax credit carryforwards 14,040,032 13,044,998
Valuation allowance (14,040,032) (13,044,998)
- --------------------------------------------------------------------------
Net deferred tax asset $ - $ -
==========================================================================
7. Income Tax, continued:
At December 31, 2003, 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 $ 303,042 2006
1,650,395 202,807 2007
1,244,312 296,964 2008
688,808 390,887 2009
341,750 885,733 2010
645,622 2011
1,424,144 2012
1,386,674 2018
1,621,230 2019
665,664 2020
896,833 2021
1,435,774 2022
1,488,962 2023
$ 13,762,416 $ 2,079,433
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:
United States Venezuela Consolidated
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 12,901,078 797,049 13,698,127
Total identifiable assets $ 12,976,845 $ 46,865,678 $ 59,842,523
2001
Other income $ 1,199,906 $ 1,199,906
Depreciation 43,534 43,534
Net loss 762,142 $ 89,064 851,206
Identifiable assets
Property, plant and equipment, net $ 101,685 $ 46,095,749 $ 46,197,434
General corporate assets 15,040,310 1,314,870 16,355,180
Total identifiable assets $ 15,141,995 $ 47,410,619 $ 62,552,614
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 2003, 2002 and 2001 was
$110,442, 108,477 and 106,002, respectively. Future minimum annual rent
payable under the lease is $112,352 in 2004, $112,680 for each of the years
2005 through 2008 and $18,780 in 2009.
10. Shareholder Rights Plan:
At the 1997 annual meeting of shareholders, a "Shareholder Rights Plan" was
voted upon and 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. There are no differences between U.S. and Canadian GAAP as
they relate to cash flows.
Canadian GAAP Change U.S. GAAP
2003
Total assets $ 67,030,482 $ 3,114,125A $ 70,144,607
Total shareholders' equity 65,138,471 3,114,125 A 68,252,596
Net loss (3,707,336) (7,704,726) B (11,412,062)
2002
Total assets $ 59,842,523 $ 41,184 A $ 59,883,707
Total shareholders' equity 58,412,021 41,184 A 58,453,205
Net loss (3,008,122) (1,162,804) B (4,170,926)
2001
Total assets $ 62,552,614 $ 160,000 A $ 62,712,614
Total shareholders' equity 61,168,980 160,000 A 61,328,980
Net loss (851,206) (851,206)
A Under U.S. GAAP, marketable securities would be divided between
held-to-maturity securities and available-for-sale securities. Those
securities classified as available-for-sale would be recorded at market
value and the unrealized gain or loss would be recorded as a separate
component of shareholders' equity.
B For U.S. GAAP purposes, the Company accounts for stock-based employee
compensation arrangements using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No.25, "Accounting for Stock
Issued to Employees". Under US 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.
12. Common Shares
On September 26, 2003, the company completed a private placement financing
of 4,042,000 units at Canadian $3.50 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 $5.25 for a period
of 18 months following the closing of the private placement. As of December
31, 2003, 2,021,000 warrants were outstanding and exercisable. The net
proceeds of the private placement amounted to approximately Canadian $13.0
million (US$ 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.
13. New standards
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150), which addresses how to classify and measure certain
financial instruments with characteristics of both liabilities (or assets in
some circumstances) and equity. SFAS No. 150 requirements apply to issuers'
classification and measurement of freestanding financial instruments,
including those that comprise more than one option or forward contract. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. Adoption of SFAS No. 150 on
July 1, 2003 had no impact the Company s financial position and results of
operations.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 Consolidation of
Variable Interest Entities (FIN No. 46). FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to only certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities obtained after that date. It applies
at the end of the first annual reporting period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest which was acquired before February 1, 2003. Adoption of FIN No. 46
on January 1, 2004 will not materially impact the Company s financial
position or results of operations.
Stock-Based Compensation
The Canadian Institute of Chartered Accountants (CICA) has issued amendments
to Section 3870 - "Stock-based Compensation and Other Stock-based Payments,"
which require an expense to be recognized in financial statements for all
forms of employee stock-based compensation, including stock options. The
company will be required to adopt the standard on January 1, 2004, which
will result in compensation expense on stock options granted to directors
and employees, previously only disclosed on a pro forma basis, to be charged
to earnings.
ITEM 18. Financial Statements - Not Applicable
ITEM 19. Financial Statements and Exhibits
Index to Consolidated Financial Statements
Management's Report
Report of Independent Accountants
Consolidated Balance Sheets
December 31, 2003 and 2002
Consolidated Statements of Operations
for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
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
12.2 Certificate of Gold Reserve Inc. Vice President-Finance pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
13.1 Certificate of Gold Reserve Inc. Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
13.2 Certificate of Gold Reserve Inc. Vice President-Finance pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Consent of PricewaterhouseCoopers LLP
99.2 Consent of Behre Dolbear & Company, Inc.
The following exhibits previously filed are incorporated by reference.
Exhibit
Number Exhibit
1.0 Restated Articles of Incorporation of the Company. Filed as Exhibit 3.1
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 Exhibit 3.2 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 GR-Merger 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 Exhibit 4.1 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.
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 Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GOLD RESERVE INC.
By: s/Rockne J. Timm
Rockne J. Timm, its Chief Executive Officer April 23, 2004
By: s/Robert A. McGuinness
Robert A. McGuinness, its Vice President of Finance, Chief Financial
Officer, and its Principal Financial and Accounting Officer
April 23, 2004
Exhibit 12.1 - Chief Executive Officer's Section 302 Certification
I, Rockne J. Timm, certify that:
1. I have reviewed this annual report on Form 20-F 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: April 23, 2004
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 annual report on Form 20-F 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: April 23, 2004
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 Annual Report of Gold Reserve Inc. on Form 20-F for
the year ending December 31, 2003 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 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 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
April 23, 2004
Exhibit 13.2 -President's Section 906 Certification
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 Annual Report of Gold Reserve Inc. on Form 20-F for
the year ending December 31, 2003 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 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 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
April 23, 2004
Exhibit 99.1 - Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (File No. 033-110928 and No. 333-110927) of Gold
Reserve Inc. of our report dated February 17, 2004 relating to the financial
statements, which appears in this Form 20-F.
s/ PricewaterhouseCoopers LLP
Vancouver, B.C.
April 23, 2004
Exhibit 99.2 - Consent of Behre Dolbear & Company, Inc.
Behre Dolbear & Company, Inc. does hereby consent to the reference to this
firm in the Annual Report on Form 20F of Gold Reserve, Inc. filed with the
Securities and Exchange Commission on or about April 23, 2004. We also
consent to the incorporation by reference in the Registration Statements on
Forms S-8 (File No. 033-110928 and File No. 333-110927) of Gold Reserve
Inc., the reference to this firm, which appears in this Form 20-F. 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/ BEHRE DOLBEAR & COMPANY, INC.
April 23, 2004
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 2004, 1,920 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
MEM 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
MEM 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 MEM to
explore and, if warranted, produce minerals from a specified property.
Corporacion 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.
property.
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 Energy
and Mines (MEM)... Venezuelan governmental entity, 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... The economically mineable part of an indicated
mineral reserve, 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.
Proterozoic... That part of the Precambrian time represented by rocks in
which traces of life appear or the younger part of Precambrian time.
proven mineral reserve... The economically mineable part of an indicated
mineral reserve, 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 is justified.
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