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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission file number 0-21708
GOLDEN STAR RESOURCES LTD.
(Exact Name of Registrant as Specified in Its Charter)
CANADA 98-0101955
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1660 LINCOLN STREET, SUITE 3000
DENVER, COLORADO 80264-3001
(Address of Principal Executive Office) (Zip Code)
(303) 830-9000
(Registrant's telephone number, including area code)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
Name of Exchange
Title of Each Class on which Registered
------------------- -------------------
COMMON SHARES AMERICAN STOCK EXCHANGE
TORONTO STOCK EXCHANGE
Securities registered or to be registered pursuant to Section 12(g) of the
Act: NONE
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 that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form l0-K. ______
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $104 million as of March 13, 1998, based
on the closing price of the shares on the American Stock Exchange of $3.50
per share.
Number of Common Shares outstanding as at March 13, 1998: 29,847,892
DOCUMENTS INCORPORATED BY REFERENCE
The Company's 1998 Proxy Statement and Information Circular for the 1998
Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 1997 pursuant to
Regulation 14A under the Securities Exchange Act of 1934, is incorporated
by reference into Part III hereof.
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. DESCRIPTION OF PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
The Registrant will furnish a copy of any exhibit filed as part of this
report to any shareholder of record upon receipt of a written request from
such person and payment of the Registrant's reasonable expenses for
furnishing such exhibit. Requests should be made to the Secretary of the
Registrant at the address set forth on the cover page of this report.
REPORTING CURRENCY AND FINANCIAL INFORMATION
All amounts in this Report are expressed in United States dollars, unless
otherwise indicated. References to (i) "Cdn" are to Canadian dollars, (ii)
"FF" are to French francs and (iii) "R" are to Brazilian reals.
Financial information is presented in accordance with accounting principles
generally accepted in Canada. Differences between accounting principles
generally accepted in the United States and those applied in Canada, as
applicable to the Company, are explained in Note 17 to the Consolidated
Financial Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of The Private Securities Litigation Reform
Act of 1995 (the "Reform Act"). Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause
the actual results, performance, or achievements of the Company to be
materially different from any future results, performance, or achievements
expressly stated or implied by such forward-looking statements. Such
factors include, among others, the following: gold and diamond exploration
and development costs and results, fluctuation of gold prices, foreign
operations and foreign government regulations, competition, uninsured
risks, recovery of reserves, capitalization and commercial viability and
requirement for obtaining permits and licenses. (See "Item 1. Risk
Factors".)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
- ------- -----------------------
General
Golden Star Resources Ltd. ("Golden Star" or the "Company") is an international
gold and diamond exploration company with a diverse portfolio of active
exploration and development projects, and an operating mine. The Company's core
focus is on the acquisition, discovery and development of gold and diamond
projects and, if appropriate, the execution of partnership arrangements with
major mining companies to develop and operate mines. The Company currently has
active projects in various stages of development in Guyana, French Guiana
(through its approximately 69% owned publicly traded subsidiary, Guyanor
Ressources S.A.), Suriname and Brazil in South America, and in Ivory Coast and
Kenya in Africa (through its approximately 64% owned publicly traded subsidiary,
Pan African Resources Corporation). In this report, "Company" refers to Golden
Star Resources Ltd. and its subsidiaries unless the context specifies otherwise.
The Company's efforts are concentrated in a geologic domain known as greenstone
belts, which are ancient volcanic-sedimentary rock assemblages. Greenstone
belts are known to be favorable geologic environments for gold mineralization
and account for a significant proportion of the world's historic gold
production. The Company began its exploration activities in 1985 in the
tropical, Proterozoic greenstone belts of the Guiana Shield, and extended its
activities in the 1990's to the geologically related greenstone belts of the
Brazilian Shield and West African Shield and to the greenstone belts of East
Africa.
As at March 13, 1998, the Company's interest in gold production was in the form
of a 30% common share equity interest in Omai Gold Mines Limited, a company
incorporated under the laws of Guyana ("OGML"), the owner and operator of the
Omai gold mine in Guyana (the "Omai Mine") (see "Item 2. Description of
Properties - Guyana Properties - Omai Mine"). A feasibility study was completed
during 1997 on the Company's second major project, Gross Rosebel, located in
Suriname. Mine development at Gross Rosebel has been deferred pending receipt
of all necessary approvals from the Government of Suriname, the resolution of
several issues related to development and an improved gold price (See "Item 2.
Description of Properties - Gross Rosebel).
The Company was established under the Canada Business Corporations Act on May
15, 1992 as a result of the amalgamation (the "Amalgamation") of South American
Goldfields Inc. a Canadian corporation, and Golden Star Resources Ltd., a
corporation originally incorporated under the provisions of the Alberta Business
Corporations Act on March 7, 1984 as Southern Star Resources Ltd. Concurrent
with the Amalgamation, the common shares of the Company were consolidated on a
one-for-two basis (the "Share Consolidation"). Reference to common shares
herein shall, unless otherwise indicated, mean common shares of the Company
after the Amalgamation and the Share Consolidation. The fiscal year of the
Company ends on December 31.
The head office of the Company is located at 1660 Lincoln Street, Suite 3000,
Denver, Colorado 80264-3001, and the registered and records office is located at
19th Floor, 885 West Georgia Street, Vancouver, British Columbia V6C 3H4. As at
March 13, 1998, the Company and its subsidiaries had a total of approximately
350 full-time employees, of which 23 were based in Denver, two in Miami and the
balance in the various countries of South America and Africa where the Company
and its subsidiaries carry on their operations.
The Company has established a decentralized structure through region-specific
subsidiaries in order to facilitate effective management of its geographically
diverse portfolio of mineral properties, to improve access to capital markets
and to allow equity markets to better value the Company's mineral property
portfolio. The Company currently directly manages all its activities in Guyana
and Suriname and indirectly manages its activities outside of Guyana and
Suriname through subsidiaries. The Company has created two publicly traded
subsidiaries: Guyanor Ressources S.A. ("Guyanor") and Pan African Resources
Corporation ("PARC"). Guyanor is approximately 69% owned by the Company and is
incorporated under the laws of France. Guyanor was originally established in
order to comply with the laws of France which require that mining title in
France be held by a French company. Guyanor's Class B common shares are listed
on the Toronto Stock Exchange under the symbol "GRL.B" and on the
3
Nouveau Marche of the Bourse de Paris under the symbol "GUYN". PARC, a
corporation incorporated under the laws of the Yukon Territory in Canada, is
approximately 64% owned by the Company and was created in recognition of the
unique risk profile of establishing exploration projects in Africa. PARC's
common shares are quoted on the Canadian Dealing Network under the symbol
"PARC". A special meeting of the shareholders of PARC has been called to
consider a proposal from the Company, the present controlling shareholder of
PARC, to effect a share exchange through a plan of arrangement (the
"Arrangement") pursuant to which shareholders of PARC other than the Company
(the "Minority Shareholders") would receive one common share of the Company for
each 50 common shares of PARC. The effect of the Arrangement will be to
transform PARC into a wholly-owned subsidiary of the Company and the Minority
Shareholders will become shareholders of the Company. The special meeting of the
shareholders of PARC is scheduled to be held on April 7, 1998 (See "Certain
Significant Events in 1997 and Recent Developments" below).
BUSINESS STRATEGY
The Company's business strategy is to focus on its core skills of gold and
diamond exploration and property acquisition, with the ultimate goal of holding
significant interests in large scale gold and diamond mines. The Company's
business strategy is comprised of the following elements:
* Focus on exploration. The Company believes that the greatest increase in
shareholder value in the gold and diamond mining sector comes from the discovery
and development of mineral deposits. The Company intends to continue to
concentrate its exploration efforts in its areas of expertise, gold and diamond
exploration, in the tropical greenstone belts of the Guiana Shield, Brazilian
Shield, West African Shield and East Africa.
* Concentrate on current portfolio of properties. The Company intends to focus
its efforts on advancing the most promising projects within its portfolio of
properties to the feasibility stage. The Company continues to pursue new
opportunities and may, if warranted, make selective additional acquisitions of
promising properties.
* Partner with major mining companies. The Company intends to continue to
leverage its exploration capital by entering into partnership arrangements with
major mining companies that have the technical skills and financial resources to
develop and operate large modern mining operations. This strategy enables the
Company to transfer a portion of the business and financial risks associated
with exploration and development to its partners and, therefore, utilize a
greater portion of its funds to explore and develop additional projects.
* Maintain a strong local presence in the countries where the Company operates.
The Company intends to continue its practice of locating offices, the majority
of its employees and certain of its executives in countries where the Company
has exploration, development and mining interests. Many of the Company's
employees are from countries in which the Company operates. The Company
believes that its local presence and hiring practices support its exploration
efforts by enabling the Company to establish and maintain good communications
with local government officials and business leaders. In addition, the Company
believes that its decentralized local management structure enables it to make
more efficient exploration and management decisions.
CERTAIN SIGNIFICANT EVENTS IN 1997 AND RECENT DEVELOPMENTS
On January 30, 1997, the Company and Guyanor announced their intent to
discontinue alluvial gold production in French Guiana through Societe de
Travaux Publics et de Mines Auriferes en Guyane ("SOTRAPMAG"), a wholly-owned
subsidiary of Guyanor. SOTRAPMAG had experienced continuing operating losses
since its acquisition in 1994. Outside consultants engaged in 1996 to review
the operation and make recommendations on how to make the operation profitable
concluded that without a significant capital investment to increase production,
changes in certain work practices and a reduction in fuel taxes, the operation
could not achieve profitability. As a result of these factors, mining
operations were suspended on April 17, 1997. Closure procedures, including land
rehabilitation and out-placement services for employees, were substantially
completed by the end of 1997. (See "Item 2. Guyanor Ressources S.A. - Paul-
Isnard and Eau-Blanche" - Discontinuation of Mining Operations.)
4
On February 19, 1997, an option agreement was signed by Societe des Mines de St-
Elie, SARL a 50% owned subsidiary of Guyanor ("SMSE") and a French company
pursuant to which SMSE has the right to acquire three concessions and one
exploration permit immediately adjacent to the east and the south of the St-Elie
concession, covering an area of over 155 km2 known as "Dieu-Merci". (See "Item
2. French Guiana Properties - St-Elie and Dieu-Merci".)
On May 5, 1997, the Company announced the closing of an offering of 3,025,000
common shares of the Company at US$7.50 per share for total net proceeds of
US$22,687,500.
In May 1997, PARC entered into a demand revolving line of credit with the
Company, whereby the Company could loan PARC up to $2.0 million. On June 30,
1997, the Company announced the conversion of loans made by the Company to PARC
in the amount of US$2.0 million plus accrued interest of US$18,591 into
7,333,328 common shares of PARC, thereby increasing its ownership in PARC from
58.2% to 63.9%.
On July 1, 1997, Mr. Jean-Pierre Lefebvre resigned as a director of the Company.
On September 30, 1997, Messrs. Philip S. Martin and Robert R. Stone were
appointed to the Board of Directors of the Company.
On July 25, 1997, the Company together with Guyanor, Cambior Inc. and Cambiex
Exploration Inc. announced estimated mineralized inventory at the Yaou and
Dorlin projects in French Guiana of approximately 35 million tonnes grading 1.6
g Au/t, including 18.2 million tonnes grading 2.0 g Au/t at Yaou and 16.8
million tonnes grading 1.2 g Au/t at Dorlin. Cambior Inc. also announced the
adoption of a new policy of only reporting probable reserves when a
prefeasibility study has been completed. Due to continuing weak gold prices,
Yaou and Dorlin's mineralized inventory were restated in February of 1998 using
a $350 per ounce gold price, resulting in a mineralized inventory within
Whittle pits of approximately 16.8 million tonnes at an average grade of
approximately 1.9 g au/t, including 10.3 million tonnes at Yaou at an average
grade of 2.3 g Au/t and 6.5 million tonnes at Dorlin at an average grade of 1.3
g Au/t. The restated mineralized inventories at Yaou and Dorlin represent a
reduction of approximately 10% from the estimates reported in July 1997.
On August 8, 1997, the Company filed with the United States Securities and
Exchange Commission ("SEC") a shelf registration statement on Form S-3 (the
"Registration Statement"), with respect to the proposed issuance by the Company
from time to time of up to $47,687,500 of its common shares, preferred shares,
convertible debt securities and/or warrants. The Registration Statement also
includes $52,312,500 in securities previously registered by the Company pursuant
to a registration statement declared effective by the SEC on November 8, 1996.
On August 13, 1997, the Company filed with nine Canadian provincial securities
commissions a short-form shelf prospectus, with respect to the proposed issuance
by the Company from time to time of up to 12 million common shares and/or 12
million common share purchase warrants and a short-form shelf prospectus with
respect to the proposed issuance from time to time of up to $100 million of
convertible debt securities. The Canadian prospectuses relate to the same
securities registered with the SEC and they replace the Canadian prospectuses
previously filed in November 1996.
On August 13, 1997, the Company announced that, in response to continuing weak
gold prices, Management had implemented a program for the second half of 1997 to
conserve cash by reducing administrative and exploration expenses. In connection
therewith, Management assessed and prioritized exploration projects to ensure
continued progress on the most promising projects in the Company's portfolio
until gold prices improve. The objective of the revised budgets was to fund
the programs the Company believed would offer the greatest potential for
meaningful results and new resources and reserves. As a result of Management's
assessment of project priorities, primary exploration efforts for the remainder
of 1997 focused on advanced stage projects and higher priority, earlier stage
projects including: Andorinhas in Brazil, Yaou, Dorlin, St-Elie and Paul-Isnard
in French Guiana, and Eagle Mountain in Guyana. Work also continued on gold
anomalies established through the Company's joint ventures with BHP in Suriname
and Guyana, as well as the Dachine diamond project in French Guiana and the Five
Stars diamond projects in north western Guyana. Most other earlier stage
projects were put on care and maintenance while awaiting improved market
conditions.
On August 13, 1997, the Company announced that construction of the Gross Rosebel
project in Suriname had been deferred pending receipt of necessary government
approvals, resolution of certain issues related to development
5
and improved gold prices. Work to update the feasibility study continued during
the second half of 1997. The revised budget for the second half of 1997 at Gross
Rosebel was $2.05 million of which 50% or $1.03 million was paid by the Company.
This amount included $576,000 for continuing engineering and $180,000 to pay for
equipment already ordered. The Company's previously budgeted 1997 construction
expenditures of $5.74 million for Gross Rosebel was consequently deferred. On
October 6, 1997, the Company and Cambior Inc. announced an increase in estimated
mining reserves at Gross Rosebel. Proven and probable mining reserves at Gross
Rosebel based on a gold price of US$400 per ounce totaled approximately 49
million tonnes grading 1.6 g Au/t, representing approximately 2.4 million ounces
of gold in situ, a 32% increase over the May 1997 estimate and 74% increase over
the September 1996 estimate. In February 1998, the proven and probable reserves
at Gross Rosebel were restated based on a $350 per ounce gold price and now
stand at approximately 35.5 million tonnes at an average grade of 1.8g Au/t,
representing approximately 2.0 million ounces of gold in situ, a reduction of
approximately 20% over the October 1997 estimate.
On August 20, 1997, Guyanor announced the completion of 10 core holes at the
Paul-Isnard project in French Guiana, totaling 1,995 meters. Nine of the ten
holes intersected significant gold mineralization exhibiting a weighted average
grade of 2.0 g Au/t over an average mineralized interval of 6.0 metres. These
holes, drilled on wide spacings of 200 to 400 metres, confirmed east and west
extensions of the sulfide-rich, felsic volcanic unit discovered through core
drilling in 1996. Significant mineralization was encountered in core holes over
a strike length of approximately 2.4 kilometres with varying widths from 200 to
400 metres. On January 15, 1998, the Company announced that twenty additional
holes had been completed during the third phase of drilling over the Montagne
d'Or target at Paul Isnard, totaling approximately 4,134 metres. All but two of
the 20 holes encountered significant gold mineralization, exhibiting a weighted
average grade of approximately 4.6 g Au/t (high values cut to 30 g Au/t) over an
average mineralized interval of approximately 5.7 metres. A mineralized
inventory based on a $350 per ounce gold price was announced in February 1998.
(See "Restated Reserves and Mineralized Inventory" below and "Item 2. French
Guiana Properties - Paul-Isnard and Eau-Blanche".)
On October 1, 1997, the Company acquired 1,000,000 Class B common shares of
Guyanor at a price of FF11.57 (approximately Cdn$2.71). The total consideration
of FF11,570,000 or Cdn$2,710,000 for the shares was satisfied by reducing the
equivalent amount of funds advanced to Guyanor by Golden Star. As a result,
the Company's interest in Guyanor was increased from 68.5% to 69.3%.
On December 18, 1997, the Company announced that it had proposed the Arrangement
to the Board of Directors of PARC pursuant to which the Company will acquire all
the shares of PARC not already owned by the Company. On February 20, 1998, the
Company and PARC announced that the Board of Directors of PARC had approved the
Arrangement. Under the Arrangement, the Company will issue one common share of
the Company in exchange for each 50 common shares of PARC not owned by the
Company. The issuance of the common shares of the Company pursuant to the
Arrangement has been approved by the Board of Directors of the Company. In
addition, on February 13, 1998, PARC updated the public on the status of its
properties, including the relinquishment of many properties in which it had an
interest (See "Item 2. African Properties".)
On January 1, 1998, Mr. Pierre Gousseland became Chairman of the Company. Mr.
Gousseland has served as a director of the Company since June 1996. Mr. David
K. Fagin who was Chairman of the Company from May 1992 to January 1, 1998
continues to serve as a director.
On February 13, 1998, the Company announced the restatement of its gold reserves
on the basis of a $350 gold price. The amounts below indicate the Company's
attributable portion of its gold reserves as well as the mineralized inventories
within Whittle pits for its most advanced projects and their larger respective
geologic mineralized inventories. (See "Item 2. Description of Properties" for
more details.)
6
PROVEN AND PROBABLE RESERVES, $350 PER OUNCE
WEIGHTED AVERAGE In situ
MM TONNES GRADE G AU/T OUNCES
- -----------------------------------------------------------------------------------------------------------
Omai Mine 16.2 1.4 755,400
- -----------------------------------------------------------------------------------------------------------
Gross Rosebel 17.7 1.8 996,000
- -----------------------------------------------------------------------------------------------------------
TOTAL 33.9 1.6 1,751,400
- -----------------------------------------------------------------------------------------------------------
MINERALIZED INVENTORY WITHIN WHITTLE PITS, $350 PER OUNCE
WEIGHTED AVERAGE
MM TONNES GRADE G AU/T
- --------------------------------------------------------------------------------
Yaou 3.6 2.3
- --------------------------------------------------------------------------------
Dorlin 2.3 1.3
- --------------------------------------------------------------------------------
Andorinhas (1) 0.3 13.3
- --------------------------------------------------------------------------------
Paul-Isnard 5.4 2.5
- --------------------------------------------------------------------------------
St-Elie 0.5 4.2
- --------------------------------------------------------------------------------
TOTAL 12.1 2.5
- --------------------------------------------------------------------------------
(1) A scoping study determined the economic parameters for an underground mining
operation based on three deposits in the Mamao zone at Andorinhas.
TOTAL GEOLOGIC MINERALIZED INVENTORY
WEIGHTED AVERAGE
MM TONNES GRADE G AU/T
- --------------------------------------------------------------------------------
Gross Rosebel 38.5 1.5
- --------------------------------------------------------------------------------
Yaou 6.4 2.0
- --------------------------------------------------------------------------------
Dorlin 5.9 1.2
- --------------------------------------------------------------------------------
Paul-Isnard 9.5 2.0
- --------------------------------------------------------------------------------
St-Elie 1.2 3.3
- --------------------------------------------------------------------------------
Eagle Mountain 4.0 1.4
- --------------------------------------------------------------------------------
TOTAL 65.5 1.6
- --------------------------------------------------------------------------------
RISK FACTORS
The following contains certain forward-looking statements within the meaning of
the Reform Act. Actual results, performance or achievements of the Company
could differ materially from those projected in the forward-looking statements
due to a number of factors, including those set forth below and elsewhere in
this Annual Report on Form 10-K.
1. RISKS OF EXPLORATION AND DEVELOPMENT
Mineral exploration and development involves a high degree of risk and few
properties which are explored ultimately are developed into commercially
producing mines. The long-term success of the Company's operations is
substantially and directly related to the cost and success of its exploration
programs. The risks associated with the exploration for new deposits include
the identification of potential gold mineralization based on surficial analysis,
the attraction and retention of experienced geologists and drilling personnel,
the quality and availability of third party assaying, sampling errors,
geological, geophysical, geochemical and other technical analyses and other
factors. Substantial early stage expenditures are required to outline mineral
deposits and establish ore reserves through, among other things, drilling and
the preparation of feasibility studies and mine plans, and to develop and
construct the mining and processing facilities at any site chosen for mining.
Although substantial benefits may be
7
derived from the discovery of a major deposit, no assurance can be given that
(i) minerals will be discovered in sufficient quantities and/or grades to
constitute reserves or justify commercial operations, (ii) the Company will be
successful in partnering with other companies to develop and operate those
properties that are commercially attractive on acceptable terms or (iii) the
funds required for development can be obtained by the Company or any of its
partners on a timely or commercially reasonable basis. Further, even if reserves
are delineated, it may require a number of years and significant expenditures
until production is possible, during which time the parameters that made
development and exploration of a property feasible may change. Additionally, the
Company will rely on its partners in each project for technical expertise in the
development and operation phases of the project, and, in certain instances, for
financing, until cash flow is generated from the property for the Company's
account. Finally, to the extent the Company's mineral reserves are produced and
sold, the Company must continually acquire new mineral prospects and explore for
and develop new mineral reserves to replace such reserves.
2. UNCERTAINTY OF RESERVE AND OTHER MINERALIZATION ESTIMATES
There are numerous uncertainties inherent in estimating proven and probable
reserves and other mineralization, including many factors beyond the control of
the Company. The estimation of reserves and other mineralization is a
subjective process and the accuracy of any such estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgment. Results of drilling, metallurgical testing and production and the
evaluation of mine plans subsequent to the date of any estimate may justify
revision of such estimates. No assurance can be given that the volume and grade
of reserves recovered and rates of production will not be less than anticipated.
Assumptions about prices are subject to great uncertainty since gold prices have
fluctuated widely in the past. Declines in the market price of gold or other
precious metals also may render reserves or other mineralization containing
relatively lower grades of mineralization or requiring more extensive processing
uneconomic to exploit. If the price realized by the Company for its gold
bullion were to decline substantially below the price at which ore reserves were
calculated for a sustained period of time, the Company potentially could
experience reductions in reserves and asset write-downs. Under such
circumstances, the Company may discontinue the development of a project or
mining at one or more of its properties. Further, changes in operating and
capital costs and other factors, including, but not limited to, short-term
operating factors such as the need for sequential development of ore bodies and
the processing of new or different ore grades, may materially and adversely
affect reserves.
3. RISKS ASSOCIATED WITH THE FLUCTUATION OF GOLD PRICES
To the extent that the Company has any revenues from operations, such revenues
are expected to be in large part derived from the mining and sale of gold. The
price of gold can fluctuate significantly and recently has been at depressed
levels compared to its price in the past several years. The price of gold is
affected by numerous factors beyond the Company's control, including
international economic and political trends, inflation expectations, interest
rates, central bank loans, sales and purchases, global or regional consumptive
patterns (such as the development of gold coin programs), speculative activities
and increased production due to new mine developments and improved mining and
production methods. The effect of these and other factors on the price of gold
cannot be predicted accurately.
The current demand for, and supply of, gold affect gold prices but not
necessarily in the same manner as they affect the prices of other commodities.
The potential supply of gold consists of new mine production plus existing
stocks of bullion and fabricated gold held by governments, financial
institutions, industrial organizations and individuals. Since mine production
in any single year constitutes a very small portion of the total potential
supply of gold, normal variations in current production do not necessarily have
a significant effect on the supply of gold or on its price.
If gold prices should decline below the Company's cash costs of production at
any existing mine, or estimated cash costs of production at any of its
exploration and development properties, and remain at such levels for any
sustained period, the Company could determine that it is not economically
feasible to continue commercial production at its mines or to pursue further
exploration or development activities.
8
Moreover, at the time the Company's ore reserves are estimated, the parameters
used in estimating such reserves are based on a variety of factors, including
the spot and future prices of gold at the time of such calculation. If the
Company were to determine that its reserves and future cash flows should be
recalculated at significantly lower gold prices than those that were used on the
measurement date, there would likely be a material reduction in the amount of
its gold reserves. Current gold prices are below the prices used in the
calculation of reserves and mineralized inventory within Whittle pits at the
Company's Omai, Gross Rosebel, Yaou/Dorlin, Andorinhas, St-Elie and Paul-Isnard
properties. In addition, should gold prices continue at current levels for an
extended period, delays in the development of certain projects may occur, and
material write-downs of the Company's investment in mining properties may be
required.
The following table sets forth for the last ten years the high and low selling
prices of gold, as provided by the New York Commodities Exchange ("COMEX"):
Year High Low
- ---- ------------------ ---------------------
1988 $487.00 $394.00
1989 $418.90 $358.10
1990 $422.40 $346.80
1991 $403.20 $344.30
1992 $359.30 $329.70
1993 $407.00 $326.30
1994 $398.00 $370.60
1995 $395.40 $371.20
1996 $414.70 $368.00
1997 $360.00 $283.00
The closing trading price per ounce of gold quoted by COMEX on March 13, 1998
was $295.90.
4. CAPITALIZATION AND COMMERCIAL VIABILITY
The Company has limited financial resources. To date, and for the reasonably
foreseeable future, its exploration and development activities have not
generated, and are not expected to generate, substantial revenues, which has
caused, and is expected to continue for the reasonably foreseeable future to
cause, the Company to incur losses. In addition, the Company historically has
incurred significant expenditures in connection with its exploration activities
and contemplates doing so for the foreseeable future. The Company's ability to
obtain financing may be negatively affected by the price of gold which recently
has been at depressed levels compared to the past several years. There can be
no assurance that additional funding will be available to the Company for
further exploration or development of its properties or to fulfill its
obligations under any applicable agreements with its partners or the countries
in which the Company is operating. Although the Company has been successful in
the past in obtaining financing through the sale of equity securities and
partnership arrangements , there can be no assurance that the Company will be
able to obtain adequate financing in the future or that the terms of such
financing will be favorable, or that such partnership arrangements will continue
to be available on acceptable terms. Failure to obtain such additional
financing could result in delay or indefinite postponement of further
exploration and development of the Company's properties with the possible loss
of the Company's interest in such properties.
If the Company proceeds to production on a particular property, commercial
viability will be affected by certain factors that are beyond the Company's
control, including the specific attributes of the deposit (such as mineral grade
and stripping ratio), the fluctuations in metal prices, the costs of
constructing and operating a mine in a specific environment, processing and
refining facilities, the availability of economic sources of energy, adequacy of
water supply, adequate access, government regulations (including regulations
relating to prices, royalties, duties, taxes, restrictions on production, quotas
on exportation of minerals, as well as the costs of protection of the
environment and agricultural lands). The occurrence of any such factors may
materially and adversely affect the Company's business, financial condition,
results of operations and cash flow.
9
5. RISKS ASSOCIATED WITH DIAMOND EXPLORATION
The exploration and development of diamond deposits involve exposure to
significant financial risks over a significant period of time. Very few
properties which are explored are ultimately developed into producing mines.
Major expenses over a period of several years may be required to establish
reserves by sampling and drilling and to construct mining and processing
facilities at a site. There can be no assurance that the current or future
exploration programs of the Company, will result in a profitable commercial
diamond mining operations.
Whether a diamond deposit will be commercially viable depends on a number of
factors, some of which are the particular attributes of the deposit, such as its
size, the size, quantity and quality of the diamonds, proximity to
infrastructure, financing costs and governmental regulations, including
regulations relating to prices, taxes, royalties, land tenure, land use,
importing and exporting of diamonds and environmental protection. The effect of
these factors cannot be accurately predicted, but the combination of these
factors may result in the Company not receiving an adequate return on invested
capital.
6. MARKETABILITY OF DIAMONDS
The marketability of diamonds which may result from projects undertaken by the
Company will be affected by numerous factors beyond the control of the Company.
These factors include market fluctuations, governmental regulations, including
regulations relating to prices, taxes, royalties, land tenure, land use,
importing and exporting of diamonds and environmental protection. The exact
effect of these factors cannot be accurately predicted, but the combination of
these factors may result in the Company not receiving an adequate return on
invested capital. The price for diamonds is, among other things, based on the
size, cut, color and quality of individual diamonds sold and, to a lesser
extent, the market supply and demand for diamonds in general.
7. RISKS OF FOREIGN OPERATIONS
In certain countries in which the Company has mineral rights (whether directly
or indirectly), there are certain laws, regulations and statutory provisions
which, as currently written, could have a material negative impact on the
ability of the Company to develop a commercial mine in such countries. The
range and diversity of such laws and regulations are such that the Company could
not adequately summarize them in this document. Through, among other things,
the negotiation of mineral agreements with the governments of these countries,
Management of the Company intends to seek variances or otherwise be exempted
from the provisions of these laws, regulations and/or statutory provisions.
There can be no assurance, however, that the Company will be successful in
obtaining such mineral agreements, that any such variances or exemptions can be
obtained on commercially acceptable terms or that such agreements will be
enforceable in accordance with their terms.
Further, many of the mineral rights and interests of the Company are subject to
government approvals, licenses and permits. Such approvals, licenses and
permits are, as a practical matter, subject to the discretion of the applicable
governments or governmental officials. No assurance can be given that the
Company will be successful in obtaining any or all of such approvals, licenses
and permits, will obtain them in a timely fashion or will be able to maintain
them in full force and effect without modification or revocation.
The Company's assets and operations are subject to various political, economic
and other uncertainties, including, among other things, the risks of war or
civil unrest, expropriation, nationalization, renegotiation or nullification of
existing concessions, licenses, permits, approvals and contracts, changes in
taxation policies, foreign exchange and repatriation restrictions, changing
political conditions, international monetary fluctuations, currency controls and
foreign governmental regulations that favor or require the awarding of drilling
contracts to local contractors or require foreign contractors to employ citizens
of, or purchase supplies from, a particular jurisdiction. In addition, in the
event of a dispute arising from foreign operations, the Company may be subject
to the exclusive jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of courts in the United States or
Canada. The Company also may be hindered or prevented from enforcing its rights
with respect to a governmental instrumentality because of the doctrine of
sovereign immunity. Currently, it is not possible for the Company to accurately
predict such developments or changes of law or policy and which, if any, of such
developments or changes may have a material adverse impact on the Company's
operations.
10
8. REQUIREMENTS FOR PERMITS AND LICENSES
The operations of the Company require licenses and permits from various
governmental authorities. Except as otherwise described herein, Management
believes that the Company presently holds substantially all necessary licenses
and permits to carry on the activities which it currently is conducting under
applicable laws and regulations in respect of its properties, and also believes
the Company is presently complying in all material respects with the terms of
such laws, regulations, licenses and permits, although the Company may be in
breach of certain provisions of such laws, regulations, licenses and permits
from time to time. Such licenses and permits are subject to modification or
revocation as discussed above in "Risks of Foreign Operations", as well as
changes in regulations and in various operating circumstances. While Management
does not believe that any such breaches will have a material adverse effect on
its operations, there can be no assurance that the Company will be able to
obtain or maintain in force all necessary licenses and permits that may be
required for it to conduct further exploration or commence construction or
operation of mining facilities at properties under exploration or to maintain
continued operations at economically justifiable costs.
9. DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the services of certain key officers and employees,
including its Chief Executive Officer, its Chief Financial Officer and certain
of its geologists. Competition in the mining exploration industry for qualified
individuals is intense, and the loss of any of these key officers or employees,
if not replaced, could have a material adverse effect on the Company's business
and operations. The Company has entered into agreements with certain of its
officers which provide for payments upon termination without cause or, in
certain cases, upon a change in control of the Company.
10. OPERATION HAZARDS AND RESPONSIBILITIES
The business of gold mining is generally subject to a number of risks and
hazards, including environmental hazards, the discharge of pollutants or
hazardous chemicals, industrial accidents, labor disputes, encountering unusual
or unexpected geological or operating conditions, slope failures, cave-ins,
failure of pit walls or dams and fire, changes in the regulatory environment and
natural phenomena such as inclement weather conditions, floods and earthquakes,
as well as other hazards. Such occurrences could result in damage to, or
destruction of, mineral properties or production facilities, personal injury or
death, environmental damage, delays in mining, monetary losses and possible
legal liability. The Company may incur liability as a result of pollution and
other casualties. The Company may not be able to insure fully or at all against
such risks, due to political or other reasons, or the Company may decide not to
insure against such risks as a result of high premiums or for other reasons.
Such occurrences, against which it cannot insure, or may elect not to insure,
may delay production, increase production costs or result in liability. Paying
compensation for obligations resulting from such liability may entail
significant costs for the Company and may have an adverse effect on its
financial position. Furthermore, insurance against certain risks (including
certain liabilities for environmental pollution or other hazards as result of
exploration and production) is not generally available to the Company or to
other companies within the industry.
11. MINING AND PROCESSING
The Company's business operations are subject to risks and hazards inherent to
the mining industry, including, but not limited to, unanticipated grade and
other geological problems, water conditions, surface or underground conditions,
metallurgical and other processing problems and mechanical equipment performance
problems, the unavailability of materials and equipment, accidents, labor force
and force majeure factors, unanticipated transportation costs and weather
conditions, and prices and production levels of by-products, any of which can
materially and adversely affect, among other things, the development of
properties, production quantities and rates, costs and expenditures and
production commencement dates. In addition, the Company relies upon its
partners to manage the development and operating stages of the projects in which
it has an interest and, therefore, has less control over such matters than would
be the case if the Company were the operator.
11
In the case of the Company's exploration properties, there generally is no
operating history upon which to base estimates of future operating costs and
capital requirements. The economic feasibility of any individual project is
based upon, among other things, the interpretation of geological data obtained
from drill holes and other sampling techniques, feasibility studies, which
derive estimates of cash operating costs based upon anticipated tonnage and
grades of ore to be mined and processed, the configuration of the ore body,
expected recovery rates of metals from the ore, comparable facility and
equipments costs, anticipated climatic conditions, estimates of labor
productivity and other factors. Such exploration properties also are subject to
the successful completion of final feasibility studies, issuance of necessary
permits and receipt of adequate financing. Accordingly, uncertainties related
to operations are magnified in the case of exploration properties.
As a result of the foregoing risks, expenditures on any and all projects, actual
production quantities and rates and cash operating costs, among other things,
may be materially and adversely affected and may differ materially from
anticipated expenditures, production quantities and rates, and costs, just as
estimated production dates may be delayed materially, in each case. Any such
events can materially and adversely affect the Company's business, financial
condition, results of operations and cash flows.
12. COMPETITION
The Company competes with major mining companies and other natural resource
companies in the acquisition, exploration, financing and development of new
properties and projects. Many of these companies are more experienced, larger,
and better capitalized than the Company. The Company's competitive position
will depend upon its ability to successfully and economically explore, acquire
and develop new and existing mineral properties or projects. Factors which
allow producers to remain competitive in the market over the long term are the
quality and size of the ore body, cost of operation, and proximity to market.
The Company also competes with other mining companies for skilled geologists,
geophysicists and other technical personnel. This may result in higher turnover
and greater labor costs for the Company.
13. CURRENCY
The Company has in the past raised its equity capital in Canadian and U.S.
dollars, primarily maintains its accounts in U.S. dollars and converts such U.S.
dollars into various local currencies on an as needed basis in order to conduct
local operations. The Company currently maintains all or the majority of its
working capital in U.S. dollars or U.S. dollar denominated securities and
converts funds to foreign currencies as payment obligations become due.
Accordingly, the Company is subject to fluctuations in the rates of currency
exchange between the U.S. dollar and these currencies, and such fluctuations may
materially affect the Company's financial position and results of operations.
The Company currently has future obligations which are payable in French francs
and Brazilian reals and receivables payable in French francs. The Company
currently does not actively take steps to hedge against such risks.
It is anticipated that, on January 1, 1999, the European Union will introduce a
single currency (the "Euro"), which will be legal tender in substitution for the
national currencies of The European Union member states that adopt the Euro. It
is anticipated that the Council of the European Union and the member states will
adopt regulations providing specific rules for the introduction of the Euro.
Management cannot predict when and if the Euro will be adopted or what effect
the adoption of the Euro may have, if any, on the Company's French franc
denominated obligations and receivables or the price of gold.
14. GOVERNMENTAL REGULATIONS
Management believes that compliance with existing regulations in the
jurisdictions where the Company operates which are applicable to the discharge
of materials into the environment, or otherwise relating to environmental
protection, will not have a material adverse effect on the Company's exploration
activities, earnings, expenditures or competitive position. However, there can
be no assurance that this will always be the case. New or expanded regulations,
if adopted, could affect the exploration or development of the Company's mining
projects or otherwise have a material adverse effect on the operations of the
Company.
12
15. RISK OF COMPANY BEING CLASSIFIED AS A PASSIVE FOREIGN INVESTMENT COMPANY
Under the United States Internal Revenue Code of 1986, as amended (the "Code"),
the Company may be classified as a passive foreign investment company (a
"PFIC"). United States shareholders of a PFIC are subject to certain adverse
tax consequences. These consequences can be mitigated, under certain
circumstances, if the United States shareholder makes a timely election to treat
the Company as a "qualified electing fund" (a "QEF"), or a "mark-to market"
election.
The Company has been advised by Coopers & Lybrand L.L.P. that it should not be
treated as a PFIC with respect to shares purchased by United States shareholders
during the years 1993 through 1997, although it could potentially be a PFIC with
respect to shares acquired by United States shareholders prior to 1993. The
Company also intends to engage Coopers & Lybrand L.L.P, or such other advisor,
in the future to analyze whether it is a PFIC in 1998 and subsequent years and
will continue to notify shareholders of the results of such future analyses.
There can be no assurance as to whether or not Coopers & Lybrand L.L.P, or
another qualified advisor, will conclude that the Company is a PFIC for any such
period. Moreover, even if Coopers & Lybrand L.L.P. concludes that the Company
is not a PFIC, its conclusion is not binding on the United States Internal
Revenue Service. Accordingly, it is possible that the PFIC rules will apply to
holders of the Company's common shares. (See "Item 5. Market for the
Registrant's Common Equity and Related Stockholder Matters - Certain United
States Federal Income Tax Considerations".)
13
Conversion Factors and Abbreviations
For ease of reference, the following conversion factors are provided:
1 acre = 0.4047 hectare 1 mile = 1.6093 kilometres
1 foot = 0.3048 metre 1 troy ounce = 31.1035 grams
1 gram per tonne = 0.0292 ounce per ton 1 square mile = 2.59 square kilometres
1 ton (2000 pounds) = 0.9072 tonne 1 square kilometre = 100 hectares
1 metric tonne = 1,000 kg or 2,204.6 pounds
1 kilogram = 2.2 pounds or 32.151 oz
The following abbreviations of measurements are used herein:
Au = gold m2 = square metre
ct = carats m3 = cubic metre
ct/m2 = carats per square metre mg = milligrams
gm = grams mg/m3 = milligrams per cubic metre
g/t = grams per tonne t = metric tonne
ha = hectares oz = troy ounces
km = kilometres oz/t = troy ounces per ton
km2 = square kilometres ppb = parts per billion
kg = kilogram
m = metre
14
GLOSSARY OF TERMS
Note: The definitions of proven (measured) and probable (indicated) reserves
(ore) set forth below are those used in Canada by certain provincial securities
regulatory authorities and are set forth in National Policy No. 2-A (of Canada).
These definitions are substantially the same as those applied in the United
States by the Securities and Exchange Commission, and those accepted by the
United States Bureau of Mines and the United States Geological Survey.
PROBABLE RESERVES
(INDICATED RESERVES) that material for which tonnage and grade are computed
partly from specific measurements, samples or production
data, and partly from projection for a reasonable distance
on geological evidence, and for which the sites available
for inspection, measurement and sampling are too widely or
otherwise inappropriately spaced to outline the material
completely or to establish its grade throughout.
PROVEN RESERVES
(MEASURED RESERVES) that material for which tonnage is computed from dimensions
revealed in outcrops or trenches or underground workings or
drill holes and for which the grade is computed from the
results of adequate sampling, and for which the sites for
inspection, sampling and measurement are so spaced and the
geological character so well defined that the size, shape
and mineral content are established and for which the
computed tonnage and grade are judged to be accurate within
limits which shall be stated and for which it shall be
stated whether the tonnage and grade of proven ore or
measured ore are in situ or extractable, with dilution
factors shown, and reasons for the use of these dilution
factors clearly explained.
The following definitions of the stages of the exploration and development
process are used by the Company. There can be no assurance that the terminology
used by the Company is consistent with the terminology used by other companies
in the mining industry or by industry analysts.
EARLY STAGE an early stage exploration project typically involves one
or more targets within an area which have been determined
to merit further follow-up work based on a combination of
geological, geochemical and geophysical analysis. The
objective of an early stage project typically is to better
define targets that have the potential to be advanced to
the next state of exploration and level of financial
commitment.
INTERMEDIATE STAGE an intermediate stage exploration project typically
involves establishing near surface mineralization through
such techniques as deep augering and trenching. Depending
on spacing, drilling (both reverse circulation ("RC") and
core) may be an intermediate stage exploration tool. The
objective of the intermediate exploration stage is to
advance a project by identifying a well defined zone of
mineralization that suggests the potential of
mineralization continuing to depth.
ADVANCED STAGE an advanced exploration stage project typically involves
testing targets at depth and generating the information
necessary to develop a three dimensional geologic model of
the mineralized zone, which may be used to demonstrate
mineralized materials and/or reserves. This typically is
accomplished by both core and RC drilling, although reserves
also can be established through trenching.
PRE-FEASIBILITY STAGE
a pre-feasibility stage project typically involves a target
for which sufficient geologic information exists about the
mineralized zone to determine reserves. During the pre-
feasibility stage, drilling often is done to infill the
information set on the mineralized
15
zone in order to increase the certainly of calculated
reserves. Wider spaced step-out drilling also is conducted
to extend upon known mineralized zones or to test for
additional zones. The objective of the pre-feasibility stage
is to prove sufficient reserves to allow for a rate of
production over a sufficient period of time to justify the
investment of capital to extract the reserves, based on
various economic and financial assumptions.
FEASIBILITY STAGE during the feasibility stage, exploration continues in order
to better define known reserves of a project while
attempting to further expand them. During this stage,
management of the project often is transferred to the
operating partner which develops the necessary engineering
and costing for mining, processing, power and
infrastructure, as well as the designs for the plant and
equipment required to construct and operate a modern mining
operation.
MINE mining is the process of transforming a valuable mineral
reserve or deposit into benefits for its owners (debt,
equity and employees), governments and communities.
Exploration continues during the mining process and, in many
cases, reserves are expanded during the early years of mine
operations as the exploration potential of the deposit is
realized.
- --------------------------------------------------------------------------------
ACIDIC said of an igneous rock with a high silica content, generally greater
than 65%
AEROMAGNETIC SURVEY a magnetic survey made with an airborne magnetometer
ALLUVIUM, ALLUVIALS a general term for clay, silt, sand, gravel or other
material deposited by a body of water usually during recent geological time
ALTERATION any change in the mineral composition of a rock brought about by
physical or chemical means
AMPHIBOLES a group of dark, rock-forming, ferromagnesian silicate minerals
closely related in crystal form and chemical composition
AMPHIBOLITE FACIES a characteristic suite of metamorphic minerals which
indicate an intermediate intensity of metamorphism
ANDESITE a dark-colored, fine-grained volcanic rock
ANOMALY a deviation from uniformity or regularity in geophysical quantities
ARCHAEN an age designator for rocks older than 2,400 million years
ARKOSE a feldspar-rich typically coarse-grained sedimentary rock
ARSENOPYRITE a white or gray mineral, arsenic and iron bearing sulfide mineral
ASSAY to analyze the proportions of metals in an ore
BASEMENT COMPLEX a complex of undifferentiated rocks that underlie the oldest
identifiable rocks in an area
BASIC an igneous rock having a relatively low silica content, sometimes
delimited arbitrarily as less than 54%
BATHOLITH a large, generally discordant, plutonic mass that has more than 100
km2 in surface exposure and is composed mostly of medium to coarse-grained rocks
BEDDING the arrangement of a sedimentary rock in beds or layers of varying
thickness and character
BIF (BANDED IRONSTONE FORMATION) a rock formation of iron oxides and amorphous
silica occurring in distinguishable layers of brown, red and black
BLEG (Bulk Leach Extractable Gold) an analytical method for determining very
low levels of gold in material
BRECCIA a coarse-grained rock composed of large angular pieces of broken rock
CARBONATE a mineral compound characterized by a fundamental structure of carbon
and oxygen
CARBONACEOUS a rock or sediment rich in carbon
CLASTIC a rock or sediment composed of broken fragments derived from
preexisting rocks or minerals
CONGLOMERATE a coarse-grained, clastic sedimentary rock composed of rounded or
subangular fragments
CONTINENTAL FRACTURE a through going fracture of crustal scale, usually the
result of plate tactonics
CRATON a part of the Earth's crust which is stable and has not undergone
deformation over a significant period of time
CUPOLA an upward projection of an igneous intrusion into its roof
DACITE a fine-grained volcanic rock of intermediate composition
DEGRADATION the wearing down or away, and the general lowering or reduction of
the Earth's surface by the natural processes of weathering and erosion
DETRITAL pertaining to fragmented material worn off or removed by mechanical
means
DIABASE a fine grained intrusive rock whose main components are two specific
dark minerals and characterized by a distinctive mineral structure
DIAMOND DRILLING a variety of rotary drilling in which diamond bits are used as
the rock-cutting tool to produce a recoverable core of rock for observation and
assay
16
DIKE a tabular igneous intrusion that cuts across the planar structures of the
surrounding rock
DILATION deformation by a change in volume but not shape
DIORITE a usually medium grained igneous rock of mafic composition with a
specific mineral assemblage - the intrusive equivalent of andesite
DIP the angle that a structural surface, a bedding or fault plane, makes with
the horizontal, measured perpendicular to the strike of the structure
DISSEMINATED said of a mineral deposit in which the minerals occur as scattered
particles in the rock that make the deposit a worthwhile ore
ELUVIAL an incoherent ore deposit resulting from decomposition or
disintegration of rock in place
EN-ECHELON geologic features that are in an overlapping or staggered
arrangement, e.g. faults
FAULT a surface or zone of rock fracture along which there has been
displacement
FELSIC an adjective describing an igneous rock having most light colored
minerals and rich in Si, K and Na
FOLD AXIS a line that connects the central point of each constituent stratum of
the fold, from which its limbs bend
FOLD CLOSURE the vertical distance between the top of the fold and its lowest
point
FOLD a curve or bend of a planar structure such as rock strata, bedding planes,
foliation, or cleavage
FORMATION the basic rock-stratigraphic unit in the local classification of
rocks
GABBRO a dark-colored mafic medium to coarse grained intrusive igneous rock
GEOCHEMISTRY the study of the distribution and amounts of the chemical elements
in minerals, ores, rocks, solids, water, and the atmosphere
GEOLOGICAL MAPPING mapping based on recorded geologic information such as the
distribution and nature of rock units and the occurrence of structural features,
mineral deposits, and fossil localities
GEOPHYSICS the study of the earth; in particular the physics of the solid
earth, the atmosphere and the earth's magnetosphere
GNEISS a foliated rock formed by regional metamorphism in which bands or
lenticles of granular minerals alternate with bands and lenticles with flaky or
elongate prismatic appearance
GRANODIORITE a medium to coarse-grained intrusive igneous rock, intermediate in
composition between quartz diorite and quartz monzonite
GRANITE a medium to coarse grained igneous intrusive rock in which quartz
constitutes 10 to 50 percent of the felsic components
GRANITOID a nonporphyritic igneous rock , generally of intermediate to felsic
composition, usually in sizable bodies (plutons)
GRAPHITE a hexagonal mineral, representing a naturally occurring crystalline
form of carbon
GRAYWACKE a rock name that applies to dark, hard, tough, and firmly indurated,
coarse-grained sandstone
GREENSTONE a sequence of usually metamorphosed volcanic-sedimentary rock
assemblages
HORIZON a plane of stratification assumed to have been once horizontal and
continuous
HYDROTHERMAL the products of the actions of heated water, such as a mineral
deposit precipitated from a hot solution
IMBRICATION the steeply inclined, overlapping arrangement of thrust sheets, as
in a stack of cards
INCLUSION a fragment of older, previously crystallized rock within an igneous
rock to which it may or may not be genetically related
INTERBEDDED said of rock beds laid between or alternating with others of
different character
INTERCALATION the existence of a layer or layers between other layers
INTERMEDIATE an igneous rock that is transitional between basic and acidic,
generally having a silica content of 54% to 65%
INTERSTRATIFIED layers of strata laid between or alternating with others of
different character; especially said of sedimentary rocks laid down in sequence
in an alternating arrangement
INTRUSION the process of emplacement of magma (naturally occurring molten rock
material generated within the Earth) in pre-existing rock
LANDSAT a recently launched artificial satellite which provides various images
of the Earth's surface
LATERITE highly weathered residual surficial soils and decomposed rocks, rich
in iron and aluminum oxides that are characteristically developed in tropical
climates
LODE a mineral deposit consisting of a vein or a zone of veins
LOELLINGITE a silver-white iron and arsenic bearing sulfide mineral
MAFIC an adjective describing an igneous rock composed mostly of one or more
ferromagnesian, dark-colored minerals; also, said of those minerals
MANGANIFERROUS rich in manganese
MAGNETITE a black, isometric, strongly magnetic, opaque iron bearing mineral of
the spinel group
MASSIVE said of a mineral deposit, especially sulfides, characterized by a great
concentration of ore in one place, as opposed to a disseminated or veinlike
deposit
METABASIC an adjective describing a basic rock that has been metamorphosed
17
METALLURGY the science and art of separating metals from their ores by
mechanical and chemical processes
METAMORPHOSED the mineralogical and structural adjustment of solid rocks to
physical and chemical conditions which have been imposed at depth below the
surface zones of weathering and cementation
METAPELITE a sedimentary rock composed of clay that has been metamorphosed
METASEDIMENT a sediment or sedimentary rock which shows evidence of having been
subjected to metamorphism
METAVOLCANIC a volcanic rock which shows evidence of having been subjected to
metamorphism
MICA SCHIST a schist whose essential constituent is mica
MICROGRANITE a fine grained igneous rock of granitic composition that appears
crystalline only under the microscope
MINERAL a naturally formed chemical element of compound having a definite
chemical composition and, usually, a characteristic crystal form
MINERALIZATION a natural occurrence in rocks or soil of one or more
metalliferous minerals
MINERALIZED INVENTORY a mineralized body which has been delineated by
appropriate drilling and/or underground sampling to support the determination
of tonnage and average grade of metal(s). Such a deposit does not qualify as a
reserve until a comprehensive evaluation based upon unit cost, grade,
recoveries and other material factors conclude legal and economic feasibility.
Consequently, although the potential exists, there is no assurance that such
mineralized inventory will ever become ore reserves.
MINERALIZED INVENTORY WITHIN WHITTLE PITS the estimation of the portion of a
geologic mineralized inventory that could be exploited economically utilizing
open pit mining methods through the application of economical and technical
parameters in a mathematical algorithm, including metal prices, exploration
costs, metallurgical recoveries, pit slope angles and mining bench heights.
Computer applications of the Whittle algorithm are common in the mining
industry, the result of which is the determination of that portion of a
geologic inventory that could be exploited profitability from an open pit,
including tonnage, grade and the relationship of waste to ore, based upon the
geologic model and the economic and technical parameters in the Whittle pits
estimation. There is however, no assurance that such mineralized inventory
within Whittle pits will ever become ore reserves.
MOBILE METAL ION (MMI) a special geochemical method which detects low levels of
metals in soil and other surface samples
MONOGENETIC resulting, originating or developing from one formation or derived
from one source
ORTHOGNEISS gneiss derived from an igneous rock, i.e. a metamorphosed igneous
rock
OXIDE a mineral compound characterized by the linkage of oxygen with one
metallic element
OUTCROP that part of a geologic formation or structure that appears at the
surface of the earth
OVERBURDEN barren rock material overlying a mineral deposit
OVERTHRUST a low-angle thrust fault of large scale, generally measured in
kilometres
PALEOPLACER an ancient surficial mineral deposit formed by mechanical
concentration of mineral particles from weathered debris
PAN CONCENTRATE a small proportion, generally of heavy minerals, typically of a
weathered rock or stream sediment, obtained by manual use of a "gold pan".
PELITIC composed of the finest detritus, generally clays
PHOTOGEOLOGY the identification, recording, and study of geologic features and
structures by means of photography
PILLOW LAVA a general term for those mafic lavas displaying pillow structure
and considered to have formed in an underwater environment
PLACER a surficial mineral deposit formed by mechanical concentration of
mineral particles from weathered debris
PLUG a vertical pipe-like body of solidified magma that represents the conduit
to a former volcanic vent
PLUNGE the inclination of a fold axis or other geological structure, measured
by its departure from the horizontal
PLUTON an igneous intrusion of intermediate size, smaller than a batholith
POLYGENETIC resulting from more than one process of formation or derived from
more than one source
PORPHYRITIC an igneous texture in which larger crystals are set in a finer
groundmass which may be crystalline or glassy or both
PORPHYRY an igneous rock of any composition that contains conspicuous larger
fully-formed crystals in a fine-grained groundmass, i.e. a porphyritic texture
PORPHYRY COPPER a copper deposit in which the copper-bearing minerals occur as
disseminated grains and/or veinlets through a large volume of rock, commonly an
intrusive rock
PROTEROZOIC the more recent time division of the Precambrian; rocks younger
than 2,400 million years
18
PROXIMAL a sedimentary deposit consisting of coarse clastics and formed nearest
the source area
PYROCLASTIC clastic rock material formed by volcanic explosion or aerial
expulsion from a volcanic vent
PYRRHOTITE a common reddish-brown hexagonal iron sulfide mineral
PYRITE a common, pale-bronze or brass-yellow, isometric iron sulfide mineral
QUARTZ crystalline silica; silicon dioxide
QUARTZ DIORITE an intrusive igneous rock having the composition of diorite but
with an appreciable amount of quartz
QUARTZ MONZONITE an intermediate composition intrusive igneous rock of a
particular mineralogy in which quartz comprises 10 to 50% of the felsic
constituents
QUARTZITE a very hard, often metamorphosed, sandstone consisting chiefly of
tightly cemented quartz grains
RADIOMETRIC SURVEY survey using a radiation-measuring instrument, usually to
detect specific elements in the ground
REFRACTORY ORE an ore from which it is difficult or expensive to recover its
valuable constituents
REVERSE CIRCULATION DRILLING a drilling method used in geological appraisals
whereby the drilling fluid passes inside the drill stem to a down-the-hole
precision bit and returns to the surface outside the drill stem carrying chips
of rock
REVERSE FAULT a thrust fault with a dip of 45" or less in which the hanging
wall appears to have moved upward relative to the footwall
ROTARY AIR BLAST DRILLING (RAB), a precussion drilling technique using
compressed air are for rapid drilling of shallow holes
SANDSTONE a medium-grained sedimentary rock composed of abundant fragments of
sand size set in a fine-grained matrix of silt or clay
SAPROLITE a soft, earthy, clay-rich and thoroughly decomposed rock formed in
place by chemical weathering of igneous, sedimentary or metamorphic rocks which
retains the original structure of the unweathered rock
SCHIST a strongly foliated crystalline rock formed by dynamic metamorphism
SERICITE a white fine-grained potassium mica which results from the alteration
of various rock-forming minerals
SHALE a fine-grained detrital sedimentary rock formed by the consolidation of
clay, silt, or mud, and characterized by finely stratified structure
SHEAR ZONE a tabular zone of rock that has been crushed and brecciated by many
parallel fractures due to shear strain
SHEAR a form of strain resulting from stresses that cause or tend to cause
contiguous parts of a body of rock to slide relatively to each other in a
direction parallel to their plane of contact
SHIELD a large area of exposed basement rocks in a craton, usually of
Precambrian age, and surrounded by younger sediment covered platforms
SILICEOUS an adjective describing a rock containing abundant silica
SILICIFIED the introduction of, or replacement by silica, generally resulting
in the formation of fine-grained quartz
STOCK an igneous intrusion that is less than 100 square kilometres in surface
exposure
STOCKWORK a mineral deposit in the form of a network of veinlets diffused in
the country rock
STRATIFORM having the form of a layer, bed, or stratum; consisting of roughly
parallel bands or sheets
STRIKE the direction or trend that a structural surface, e.g. a bedding or
fault plane, takes as it intersects the horizontal
STRIKE-SLIP the component of the movement or slip that is parallel to the
strike of the fault
STRINGER a mineral veinlet or filament occurring in a discontinuous pattern in
the host rock
STRIP to remove overburden in order to expose ore
SUBPARALLEL somewhat parallel
SUPERGENE a mineral deposit formed by post-mineral modification, occasionally
with enrichment, of a primary (hypogene) deposit
SUPERGROUP a formally named assemblage of related groups, or of formations and
groups, having significant lithologic features in common
SUPRACRUSTAL rocks that overlie the basement
SURFICIAL situated, formed, or occurring on the Earth's surface
SYNCLINE a concave upward fold, the core of which contains the
stratigraphically younger rocks
TONALITE a rock similar to quartz diorite
TOURMALINE a mineral commonly found as an accessory in intermediate to felsic
igneous rocks, metamorphic rocks, and certain sedimentary rocks
TUFF a compacted pyroclastic deposit of volcanic ash and dust that may or may
not contain up to 50% sediments such as sand or clay
ULTRAMAFIC an igneous rock composed chiefly of mafic minerals with unusually
high % of Mg, Ca and Fe
VEIN a thin, sheetlike crosscutting body of hydrothermal mineralization,
principally quartz
VLF-EM SURVEY Very Low Frequency ElectroMagnetic Survey: a survey utilizing a
worldwide-generated radio signal to measure
19
variations in the electromagnetic properties of the rocks
VOLCANICLASTIC a clastic rock containing volcanic material in whatever
proportion, and without regard to its origin or environment
VOLCANICS those igneous rocks, generally fine grained, that have reached or
nearly reached the Earth's surface before solidifying
WALL ROCK the rock enclosing a vein
WEATHERING the destructive process constituting that part of erosion whereby
earthy and rocky materials on exposure to atmospheric agents at or near the
Earth's surface are changed in character with little or no transport of the
loosened or altered material
20
FIGURE 1
MAP - SOUTH AMERICA
Map of "GOLDEN STAR RESOURCES LTD. - OPERATIONS IN SOUTH AMERICA," showing
specific project locations in Guyana, Suriname, French Guiana and Brazil.
FIGURE 2
MAP - AFRICA
Map of "PAN AFRICAN RESOURCES CORPORATION - OPERATIONS IN AFRICA," showing
specific project locations in Ivory Coast and Kenya.
21
ITEM 2. DESCRIPTION OF PROPERTIES
- ------- -------------------------
The following contains certain forward-looking statements within the meaning of
the Reform Act. Actual results, performance or achievements of the Company
could differ materially from those projected in the forward-looking statements
due to a number of factors, including those set forth under "Risk Factors" and
elsewhere in this Annual Report on Form 10-K.
GENERAL
As of March 13, 1998, the Company owned, or had entered into agreements to
acquire, direct and indirect, interests in mineral properties located in the
following countries: Guyana, France (French Guiana), Suriname, Bolivia and
Brazil in South America; Kenya, Ivory Coast and Mali in Africa. The location of
the Company's current active projects are illustrated in Figures 1 and 2 above.
All of the properties in which the Company had an interest as at March 13, 1998,
are situated in geologic domain known as greenstone belts, which are ancient
volcanic-sedimentary rock assemblages. Greenstone belts are known to be
favorable geologic environments for gold mineralization and account for a
significant proportion of the world's gold production, e.g., the greenstone
----
belts of the Canadian Shield in Eastern Canada, the Pilbara and Yilgarn Blocks
of Western Australia, the greenstone belts of East and West Africa and the
Guiana and Brazilian Shields of South America. In addition, as a result of the
Company's regional exploration activity for gold in the Guiana Shield, a
regional exploration program was also established to search for possible primary
diamond sources. So far, this diamond exploration program has led to the
identification of diamond targets in French Guiana and Guyana. Regional
geophysical surveys conducted in Suriname and Ivory Coast have also led to the
identification of diamond targets in these countries.
Gold exploration and mining have, in the past, been conducted within most of the
areas where the Company's properties are located. However, with a few
exceptions, the areas have comparatively few large scale mining operations, due
mostly to a difficult physical environment, poor infrastructure, and until
recently, adverse political and business conditions. Although there are, or
have been, numerous artisanal mining operations scattered throughout the areas
where the Company's properties are located, with very few exceptions, these
areas have generally not yet been fully explored using modern techniques and
equipment.
All of the Company's mineral properties are located in developing countries,
with the exception of Brazil and France. There are certain business and
political risks inherent in doing business in developing countries. In
particular, the regulatory framework for conducting mining and exploration
activities in these countries, including the tax and general fiscal regimes and
the manner in which rights and title to mineral properties are established and
maintained, are often uncertain, incomplete, in a state of flux or subject to
change without notice. Further, in many countries in which the Company's
projects are located, it may not be economically feasible to develop a
commercial mine unless special tax or other fiscal and regulatory concessions
are obtained from the applicable government and regulatory authorities. Such
concessions are typically sought in a mineral agreement (also known as foreign
investment agreements and establishment agreements). A mineral agreement thus
serves to establish the legal and financial framework under which mining will
take place in countries where such framework might be otherwise unclear,
uncertain or not commercially viable. There can be no assurance, however, that
the Company will be able to execute or enforce satisfactory mineral agreements
or obtain satisfactory political risk insurance on commercially reasonable terms
for any or all of its properties. Consequently, the Company may have to abandon
or relinquish otherwise valuable mineral rights if it determines that it will
not be able to profitably exploit any discovery under existing laws and
regulations. (See "Item 1. Risk Factors - "Risks of Foreign Operations" and
"Requirements for Permits and Licenses".)
22
Total consolidated expenditures and property abandonment for the various
exploration projects for the fiscal year ended December 31, 1997 were as
follows:
In Thousands of Dollars
Deferred Proceeds Property Deferred
Exploration Joint From Sale Abandon- Exploration
Expenditures Capitalized Capitalized Venture of ments/ Expenditures
as at Exploration Acquisition Recov- Property Write- as at
12/31/96 Expenditures Expenditures eries Interest downs 12/31/97
=================================================================================================
GUYANA (1)
Eagle Mountain $ 111 1,025 - - - - 1,136
Quartz Hill 1,347 - - - - - 1,347
Upper Potaro Diamond /
Amatuk Diamond 1,010 144 8 - - (1,162) -
Mazaruni / Upper
MazaruniDiamond 2,729 72 (60) - - (2745) (4)
Wenamu Gold 512 - - - - (512) -
Five Stars Gold 5,767 797 (108) - - (2772) 3,864
Five Stars Diamond 1,097 1,519 48 - - (304) 2,360
BHP Gold Projects 151 184 - - - (2) 333
Guyana Diamond Permits 27 201 - (119) - - 109
Other 1,376 (194) - - - (1,081) 101
--------------------------------------------------------------------------------------------------
Sub-total 14,127 3,748 (112) (119) - (8,578) 9,066
--------------------------------------------------------------------------------------------------
SURINAME (1)
Benzdorp / Lawa 3,341 3 - - - - 3,344
Gross Rosebel 9,494 8,904 - (4,506) - - 13,892
Headley's Right of Exploration 311 - - - - - 311
Thunder Mountain 453 - - - - - 453
Saramacca 1,569 365 98 (170) - - 1,862
Sara Kreek 155 351 75 - - - 581
Tempati Reconnaissance 161 108 75 - - - 344
Tapanahony Reconnaissance 86 90 75 - - - 251
Kleine Saramacca 104 3 - - - - 107
Lawa Antino 764 1,332 - - - - 2,096
Suriname Diamond Projects 310 177 - - - (487) -
Ulemari Reconnaissance 53 238 - - - - 291
Other Exploration 20 (22) - - - 2 -
Other 232 (66) - - - (183) (17)
--------------------------------------------------------------------------------------------------
Sub-total 17,053 11,483 323 (4,676) - (668) 23,515
--------------------------------------------------------------------------------------------------
FRENCH GUIANA (2)
(Guyanor Ressources S.A.)
Dorlin 628 3,936 - (3,234) - - 1,330
St-Elie 1,973 2,144 - (2,144) - - 1,973
Dieu-Merci 382 931 252 (1,183) - - 382
Yaou 7,087 1,583 - (1,540) - - 7,130
Paul-Isnard / Eau Blanche 3,629 1,947 - (1,947) - - 3,629
SOTRAPMAG 1,520 333 134 - - - 1,987
Dachine 575 704 - (45) - - 1,234
Regina 913 14 - - - (927) -
Other 622 (43) - - - (498) 81
Diamond Projects - - - - - - -
--------------------------------------------------------------------------------------------------
Sub-total 17,329 11,549 386 (10,093) - (1,425) 17,746
--------------------------------------------------------------------------------------------------
23
IN THOUSANDS OF DOLLARS
Deferred Proceeds Property Deferred
Exploration Joint From Abandon- Exploration
Expenditures Capitalized Capitalized Venture Sale of ments/ Expenditures
as at Exploration Acquisition Recov- Property Write- as at
12/31/96 Expenditures Expenditures eries Interest downs 12/31/97
==========================================================================================
AFRICA (3)
(Pan African
RESOURCES CORPORATION)
Gabon / Eteke - - - - - - -
Ivory Coast / Comoe 3,951 896 - - - (2,755) 2,092
Mali / Dioulafoundou 2,763 375 42 - - (3,180) -
Mali / Melgue 56 64 - - - (120) -
Mali / Other 30 37 - - - (67) -
Ethiopia / Dul - 353 - - - (353) -
Eritrea / Galla Valley 1,317 593 4 - - (1,914) -
Eritrea / Other 55 7 - - - (62) -
Kenya / Ndori 901 776 - - - - 1,677
Burkina Faso - 16 - - - (8) 8
Other 53 (53) - - - - -
------------------------------------------------------------------------------------------
Sub-total 9,126 3,064 46 - - (8,459) 3,777
------------------------------------------------------------------------------------------
LATIN AMERICA (1)
Brazil / Andorinhas 3,371 3,772 1,347 - - - 8,490
Brazil / Abacaxis 1,307 732 57 - - - 2,096
Brazil / Other 869 552 - - - (1,232) 189
Bolivia / San Simon 768 22 - - - (790) -
Bolivia / Sunsas 198 184 1 - - (383) -
Bolivia / Other 584 373 30 - - (814) 173
Other (11) 114 - - - (103) -
------------------------------------------------------------------------------------------
Sub-total 7,086 5,749 1,435 - - (3,322) 10,948
------------------------------------------------------------------------------------------
OTHER - 95 (2) - - 15 108
------------------------------------------------------------------------------------------
TOTAL $64,721 $35,688 $2,076 $(14,888) - $(22,437) $65,160
==========================================================================================
(1) A division of the Company.
(2) Approximately 69% owned by the Company as of March 13, 1998.
(3) Approximately 64% owned by the Company as of March 13, 1998.
The following is a description of the principal mineral property interests held
by the Company as of March 13, 1998. As a result of continuing weak gold
prices, most earlier stage projects have been put on care and maintenance.
Management may decide to modify expenditures budgeted for 1998 (as described
below) later during the year if market and investment considerations warrant.
GUYANA PROPERTIES
- -----------------
The Co-operative Republic of Guyana ("Guyana"), a former British colony,
obtained independence in 1966. It has a surface area of 216,000 km2 with a
population of approximately 800,000. The official language is English and the
climate is tropical. Guyana is governed as a democratic republic, and the legal
and land title systems are based on the English common law.
OMAI MINE
The Omai mine is owned by OMGL, an equity joint venture of the Government of
Guyana, the Company and Cambior Inc. ("Cambior"). The Company owns a 30% common
share equity interest in OGML. Cambior and the Government of Guyana own 65% and
5% of OGML, respectively. Cambior is the manager of all mining and related
operations. The mine is located on a 52 km2 mining license on the Essequibo
River, approximately 160 km southwest of Georgetown, Guyana. Access to the mine
is by improved road and ferry or by fixed-wing aircraft to an all-weather
airstrip.
The Company and Cambior entered into an agreement with the Guyana Geology and
Mines Commission ("GGMC") and the Government of Guyana on August 16, 1991 (the
"OMAI Mineral Agreement"), whereby,
24
among other things, OGML was granted the right to obtain a mining license (which
was granted on December 12, 1991), and to carry out mining operations in
accordance with the terms of the Omai Mineral Agreement. In addition, the Omai
Mineral Agreement provides for the payment to the Government of Guyana of a 5%
in-kind royalty from the Omai Mine. It also provides that capital and profits
may be repatriated without restrictions.
Pursuant to OMGL's articles of incorporation, the Government of Guyana was
granted the option to acquire from the combined holdings of the Company and
Cambior in the common shares of OGML (i) after the expiration of eight years
from commencement of commercial production from the Omai Mine (which was
achieved in January 1993), but before the expiration of the tenth year, 5% of
the common shares of OGML issued and outstanding at such time; and (ii) after
the expiration of ten years from commencement of commercial production, but
before the expiration of the twelfth year, an additional 22% of the common
shares of OGML issued and outstanding at such time, at a price to be determined
on the basis of the then current capital market values of the common shares of
OGML. The Company and Cambior have each undertaken to sell and deliver to the
Government of Guyana one-half of the total number of common shares of OGML
required to be sold to the Government of Guyana upon exercise of the options
mentioned above. If the Government of Guyana were to exercise both of its
options as set forth above, the Company's common share equity interest in OGML
would be reduced to 16.5%.
Pursuant to OMGL's articles of incorporation, the Company received
approximately $11.0 million of Class "I" redeemable preferred shares of OGML in
recognition of past exploration costs incurred by the Company. These preferred
shares must be redeemed prior to any distribution to the common shareholders of
OGML out of 10% of net cash flow from operations of OGML (as defined in the Omai
Mineral Agreement). The reimbursements are calculated and paid quarterly to the
Company. During the fiscal years ended December 31, 1995, 1996 and 1997, the
Company received $1,209,467, $1,144,876 and $2,540,744 respectively, as a
result of the redemption of Class I preferred shares. As at December 31, 1997,
the Company had a total of $2,125,858 million in Class I preferred shares
outstanding. The Company does not expect to receive dividends from its common
share holdings in OGML until debt owed by OGML and guaranteed by Cambior is
repaid and Class II and III preferred shares held by Cambior are redeemed. As of
December 31, 1997, OGML had $131.8 million in debt and a total of $53.2 million
worth of Class II and III preferred shares outstanding.
On August 19, 1995, a failure occurred in the main section of the tailings dam
at the Omai Mine. The failure resulted in the discharge of cyanide-contaminated
water into the Omai River, which in turn flowed into the Essequibo River.
Production at the Omai Mine was suspended from August 19, 1995, and resumed on
February 4, 1996, after the Government of Guyana and OGML executed an agreement
authorizing, under certain conditions, OGML to recommence commercial production
at the Omai Mine. Under the terms of this agreement, OGML agreed to: provide
an independent geotechnical review of the new tailings pond constructed at the
Omai Mine; install additional equipment to ensure compliance with the original
discharge criteria set forth in the Project Environmental Impact Statement dated
January 1991; study alternative technologies for cyanide reduction; plan and
implement a public education program regarding cyanide; comply with new
environmental legislation to be enacted by the Government of Guyana; conduct
additional environmental monitoring of tailings, surface and ground waters;
provide technical and financial assistance to the Government of Guyana,
(including the allocation of $0.1 million for laboratory equipment for
environmental monitoring purposes); cooperate in the creation of a National
Disaster Response Agency or similar body; prepare a closure plan in connection
with the ultimate cessation of operations at the Omai Mine and for the
reclamation of the original tailings pond together with appropriate measures to
ensure the adequate funding of such closure plans; and create a Consultative
Committee on environmental matters.
As a consequence of the tailings dam failure, OGML received approximately 500
claims in Guyana. Such claims are currently being settled, without admission of
liability, or being contested in good faith, as applicable. Amounts claimed to
date against OGML do not exceed $1.5 million in the aggregate and insurance
coverage may be available to OGML in relation to a substantial portion of these
claims. OGML and its shareholders, including the Company, may become involved
as defendants, plaintiffs or otherwise in a variety of additional legal
proceedings in Guyana or elsewhere in relation to this incident. There can be
no assurance that such additional litigation will not result in material
additional costs arising from out-of-court settlements, damage awards or other
sanctions against OGML or the Company. Moreover, there can be no assurance that
all or any of such additional costs will be covered by appropriate insurance.
25
In December 1997, an arbitration award with respect to the wages of hourly
employees at the Omai Mine fixed wage increases of 12% for 1997 and 7% for 1998.
Management believes that the new wage structure will not have a significant
impact on Omai's cost structure. Wages for hourly employees currently account
for approximately 8% of cash operating costs.
Geology and Reserves
The Omai Mine was brought into commercial production in January 1993 and
currently is the only gold producing property in which the Company has an
interest. Gold production for 1993, 1994, 1995 and 1996 totaled 206,537 oz,
250,642 oz, 175,080 oz and 254,950 oz of gold, respectively. Gold production in
1996 was lower than the budgeted amount of 276,030 oz due primarily to the
August 19, 1995 tailings dam failure and resulting reduced levels of production
in early 1996. However, production consistently improved during every quarter
in 1996.
Gold production in 1997 totaled approximately 338,000 ounces of gold, an
approximately 33% increase over 1996. Increased production was the result of a
full year of higher throughput in the expanded mill commissioned in the second
quarter of 1996, and has since averaged a throughput of approximately 20,000
tonnes per day. The average cash cost of gold produced in 1997 was $245 per
ounce compared to $252 per ounce in 1996. During 1997, the average head grade
was approximately 1.5 g Au/t with a recovery rate of 93% compared to 1.7 g Au/t
and a 91% recovery rate in 1996. In 1998, gold production is scheduled to
reach 345,000 ounces of gold at a target cash cost per ounce of $240 due to a
slightly higher head grade and lower consumable costs. The average head grade
is anticipated to be approximately 1.6 g Au/t with a projected recovery rate of
93%.
In reaction to continuing weak gold prices, Omai restated its proven and
probable reserves for year-end 1997, using a gold price of $350 per ounce
compared to $425 in past years. On the basis of a $350 per ounce gold price,
Omai's proven and probable reserves as at December 31, 1997 stood at 54.1
million tonnes at an average grade of 1.44 g Au/t, representing approximately
2.52 million ounces of gold in situ. This is compared to proven and probable
reserves at December 31, 1996 of 66.6 million tonnes grading 1.5 g Au/t,
representing approximately 3.2 million ounces of gold in situ. At year-end
1997, Omai had hard rock reserves of approximately 45 million tonnes grading
1.54 g Au/t for 2.2 million ounces of gold and soft rock reserves of
approximately 9.0 million tonnes grading 0.97 g Au/t for 0.3 million ounces of
gold. Despite the restatement of reserves at a $350 gold price, Omai does not
intend to make any changes to the mine plan for 1998 and anticipates maintaining
a mill feed consisting of 65% hard rock/35% soft rock. Hard rock reserves
currently make up approximately 85% of the total reserves at Omai.
Quarterly production statistics for the Omai Mine (1) for 1997 was as follows:
First Second Third Fourth Total
Quarter Quarter Quarter Quarter 1997
- ----------------------------------------------------------------------------------------------------------------------------
Tonnes milled 1,802,359 1,808,347 1,880,684 1,857,262 7,348,652
Rate (t/day) 20,026 19,872 20,442 20,188 20,134
Grade (g/t) 1.65 1.55 1.43 1.51 1.54
Recovery (%) 94.7 93.6 92.6 91.9 93.0
Gold production (oz) 90,454 84,316 80,660 83,066 338,496
Cash cost of production (2)($/oz) $ 236 $ 251 $ 258 $ 237 $ 245
(1) The Company has a 30% equity interest in OGML which owns the Omai Mine.
(2) Cash cost of production includes mining and milling costs, power generation
and general services charges.
26
Ore reserves at the Omai Mine are derived from four sources: the Fennell pit,
the Wenot Lake pit, the alluvial deposits and stockpiles. The following table
summarizes the ore reserves for these sources as at year end 1996 and 1997:
December 31, 1997 December 31, 1996
----------------------------------------------------------------------------------------------------------
Proven and Proven and
Probable Probable
Reserves Grade Contained Gold Reserves Grade Contained Gold
(tonnes) (1) (g Au/t) (oz) (tonnes) (1) (g Au/t) (oz)
----------------------------------------------------------------------------------------------------------
Fennell Pit 27,266,000 1.54 1,347,000 40,427,000 1.6 2,054,800
Wenot Lake Pit 15,721,000 1.72 872,000 15,559,000 1.7 859,500
Alluvials 1,117,000 0.90 32,000 1,119,000 0.9 34,900
Stockpiles 10,025,000 0.82 266,000 9,507,000 0.8 258,400
TOTAL 54,129,000 1.44 2,517,000 66,612,000 1.5 3,027,600
==========================================================================================================
(1) Reserves are calculated using a gold price of $350 per ounce with a cutoff
grade of 0.35 g Au/t for soft rock reserves and 0.70 g Au/t for hard rock
reserves and recovery rate of 94%.
GOLD EXPLORATION PROJECTS
Total expenditures on gold exploration projects in Guyana during 1997 amounted
to $3.6 million, $0.1 million of which were reimbursed by the Company's joint
venture partners. In 1996, total expenditures were $4.3, $0.1 million of which
were reimbursed by joint venture partners. Total budgeted 1998 exploration,
acquisition and reconnaissance expenditures for the first half of 1998 in Guyana
are $1.0 million.
MAKAPA
The Makapa project, located in northwestern Guyana, was identified on the basis
of work completed during the Company's 1994 and 1995 reconnaissance program.
Access to the property is by canoe or helicopter. The Makapa prospecting
license was granted to the Company in June 1996. The term of the license is
three years, renewable twice for a period of up to one year each. The Company
owns a 100% interest in the Makapa prospecting license.
During 1997, follow up exploration at the Makapa target included soil sampling
(deep augering totaling approximately 1,620 metres), and trenching (totaling
approximately 840 metres). This work identified two anomalous zones of 800 to
1,200 metres in strike and 100 to 200 metres wide. Trenching and augering
further confirmed the existence of a 1.75 metre wide mineralized quartz vein
over a strike length of approximately 200 metres. Trenching results in the area
of the quartz vein included 32 metres exhibiting a weighted average grade of 1.4
g Au/t and 46.5 metres exhibiting a weighted average grade of 2.6 g Au/t.
Twenty additional rock samples from three different areas in the vicinity of the
vein exhibited grades ranging from approximately 4 to 96 g Au/t.
Given the potentially high grade nature of the Makapa project and relatively
low mobilization costs, an initial core drilling program has been planned for
the first quarter of 1998. The program is intended to involve 12 to 15 core
holes designed to test the geometry and depth potential of the quartz vein
hosted mineralization as well as to test for possible strike extension and/or
the occurrence of other similar structures underlying the Makapa anomalies.
EAGLE MOUNTAIN
The Eagle Mountain gold project is located in central Guyana. On October 30,
1997, the Eagle Mountain prospecting license was extended for a three year term
expiring in October 2000. The Company owns a 100% interest in the Eagle
Mountain prospecting license.
During 1997, the Company completed 27 holes totaling approximately 2,400 metres
over several geochemical anomalies (>0.5 g Au/t). The largest of these
anomalies, known as the Kilroy zone, is approximately 750 x 200 metres in size
and was the principal target of the initial core drilling campaign. Three other
areas, the Millionaire
27
zone, No. 1 Hill zone and Minnehaha shear zone, were also tested with limited
core drilling. All but one of the 14 core holes drilled in the Kilroy zone
intercepted significant mineralization, exhibiting an average mineralized
interval of approximately 16 metres with a weighted average grade of
approximately 1.8 g Au/t. Preliminary geologic modeling on the basis of deep
augering (74 holes totaling 810 metres), trenching (800 metres in 15 trenches)
and core drilling conducted by the Company indicated the presence of a
mineralized inventory within the Kilroy zone of approximately 4.0 million tonnes
grading 1.4 g Au/t. The mineralized inventory includes 2.0 million tonnes of
saprolite material grading 1.2 g Au/t and 2.0 million tonnes of transition and
hard rock material grading 1.6 g Au/t.
Work during the first six months is expected to include further geologic
evaluation modeling, mapping and surveying. Efforts to secure a joint venture
arrangement to finance exploration are in progress. A follow-up core drilling
campaign may be considered during the second half of 1998.
DIAMOND EXPLORATION PROJECTS
In 1997, the aeromagnetic data obtained by the Company from the airborne
geophysical survey conducted in 1994 over the Company's Five Stars
Reconnaissance Area in Northwest Guyana was completely re-interpreted by
specialists from a recognized consulting geophysical firm who selected over one
hundred targets from the surveys. Very high resolution helicopter-borne magnetic
surveying was subsequently conducted over several prospecting licenses obtained
by the Company pursuant to the original reconnaissance permit and a total of
5,825 line kilometers was flown.
Twelve targets over the Piai Head prospecting license area were selected for
later follow-up, the work comprising line cutting, ground magnetometry, and
geological mapping. Eight of the anomalies were core drilled with 13 holes
totaling 1,520 m. The remaining targets were tested by deep auger drilling
and/or pitting and trenching. The Piai Head prospecting license was granted to
the Company in January of 1996. Although the Company had originally applied for
a prospecting license for gold and diamonds, the government of Guyana granted to
the Company a prospecting license for gold only. The Company immediately asked
the government of Guyana to correct the situation and grant also to the Company
the right to explore for diamonds within the Piai Head prospecting license. The
government of Guyana has published a notice of intention to grant to the Company
a prospecting license for golds, other precious stones and minerals over this
area. There can be no assurance, however, that the amended prospecting license
will be granted to the Company.
Seven anomalies were also tested on the Noseno prospecting license area with
line cutting, ground magnetometry, geological mapping and selected pitting and
deep auger drilling. Complete results for the core and auger drilling, pitting
and trenching are expected to be available during the second quarter of 1998.
The Noseno prospecting license granted to the Company in June 1996 entitles the
Company to explore for gold and precious stones. Follow-up work for the Guyana
diamond program in 1998 will be based on the results.
SURINAME PROPERTIES
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GENERAL
Suriname, a former Dutch colony, became independent in 1975. It has a surface
area of 163,000 km2, a tropical climate, and a population of approximately
470,000. The official language is Dutch with English spoken as a second
commercial and technical language. Suriname has a democratically elected
government.
During 1997, the Company incurred total exploration expenditures in Suriname of
$11.8 million, $4.7 million of which were reimbursed by the Company's joint
venture partners. Total exploration expenditures during 1996 amounted to $12.0
million, $6.4 million of which were reimbursed by the Company's joint venture
partners. Total budgeted exploration and acquisition expenditures for the
first 6 months of 1998 in Suriname are $1.0 million, including $0.4 million in
joint venture recoveries.
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GROSS ROSEBEL
Pursuant to a mineral agreement, dated May 8, 1992, as amended and restated on
April 7, 1994 (the "Gross Rosebel Agreement"), between the Company, the
Government of Suriname and the state mining company, Grasshopper Aluminum
Company N.V. ("Grassalco"), Grassalco assigned to the Company its interest in
the Gross Rosebel right of exploration, a 170 km2 area in north-central
Suriname. The Gross Rosebel Agreement was ratified by the National Assembly of
Suriname on March 1, 1994.
As partial consideration for the transfer of the Gross Rosebel right of
exploration, the Company issued 60,000 common shares to Grassalco on June 28,
1994. Under the terms of the Gross Rosebel Agreement, the Company committed to
expend an aggregate of $8.0 million on exploration activities over a five-year
period commencing on May 8, 1992. Through May 8, 1997, the Company had spent
approximately $25.8 million on the Gross Rosebel property and, as a result,
fulfilled its expenditure requirement. Of the amounts expended by the Company,
Cambior has contributed $14.1 million by way of joint venture recoveries (see
discussion of Cambior Joint Venture below). In addition, in consideration for
Grassalco making the Gross Rosebel property available for exploration, the
Company paid pursuant to the terms of the Gross Rosebel Agreement $1.0 million
to Grassalco. A feasibility study and an environmental impact statement were
submitted to the Government of Suriname in May 1997.
Upon approval by the Suriname Government of the feasibility study and the
environmental impact statement, the Gross Rosebel right of exploration may be
converted into a right of exploitation for an initial term of 25 years. The
right of exploitation will be granted to an operating company (the "Operating
Company"). Within 30 days of the grant of the right of exploitation, the
Company will be obligated to pay to Grassalco the sum of $2.5 million as
compensation for previous exploration expenditures incurred by Grassalco.
Upon the grant of a right of exploitation to the Operating Company, Grassalco
will have the option, for a period of 60 days, to purchase an undiluted 20%
common share equity interest in the Operating Company by paying 20% of all
exploration costs previously incurred by the Company and 20% of all subsequent
costs of the Operating Company. Grassalco has a further option to purchase a
second undiluted 20% interest in the shares of the Operating Company eight years
following the date of commencement of commercial production (as defined in the
Gross Rosebel Agreement) in consideration for the payment of a sum equal to 90%
of the market value of such shares, as determined in accordance with the terms
of the Gross Rosebel Agreement.
The Gross Rosebel Agreement provides that (i) a royalty of two percent of the
gold produced from the Gross Rosebel property is payable in kind to Grassalco
and (ii) an additional one-quarter of one percent royalty is payable for the
life of the project to a charitable fund to promote national resources
development in Suriname. In addition, a royalty of two percent of the proceeds
received on any other minerals produced (less transportation and processing
costs) is also payable to Grassalco. An advance royalty payment against the
above-mentioned royalties of $6.5 million must be made to Grassalco within 90
days of receipt of the first proceeds from the sale of minerals at Gross Rosebel
and a further $6.5 million must be made 12 months later. Further, in the event
the price of gold exceeds $500 per ounce Grassalco is entitled to an additional
6.5% royalty on that portion of the sales price which exceeds $500 per ounce.
The Cambior Joint Venture
The Company entered into an agreement on June 7, 1994, pursuant to which Cambior
was granted the option to earn an undivided 50% interest in the Company's rights
in the Gross Rosebel Agreement and Gross Rosebel property. On January 8, 1996,
Cambior announced its decision to exercise its option to acquire 50% of the
Company's rights in the Gross Rosebel property after expending $6.0 million in
exploration and development activities on the property, as required by the June
1994 option agreement. As also required, Cambior has advanced a further $2.5
million in expenditures to be repaid out of initial project earnings. Since
April 1996, when Cambior earned a 50% interest in Gross Rosebel, the Company and
Cambior have been contributing equally to programs and budgets with respect to
the Gross Rosebel property.
Under the June 1994 option agreement, Cambior must use its best efforts to
secure financing for at least 65% of eventual mine development costs from third
parties. Cambior has assumed managerial responsibility for the
29
preparation of the feasibility study. Cambior has the right to be appointed
manager of all subsequent mining and related operations of the project. There
is, however, no management fee attached to this right.
The Property
The Gross Rosebel right of exploration covers 170 km2 (17,000 ha.) and is
located 80 km south of the capital city of Paramaribo. Access is via a paved
highway followed by an all-weather laterite surface road. Gold was reportedly
first discovered in the area in 1879 and since then more than half of Suriname's
recorded production has been produced from the district by dredging and small
artisanal surface and underground workings. Commencing in 1974, Surplacer N.V.,
a subsidiary of Placer Development, a Canadian mining company (now Placer Dome),
conducted an extensive exploration program of trenching, hand augering and
rotary drilling over a period of three years. Subsequent field work was
conducted by Grassalco over a period of seven years and a feasibility study was
prepared and completed in 1984 by a Canadian engineering firm controlled by
Grassalco.
The Gross Rosebel right of exploration is underlain by Proterozoic Armina,
Paramaca, and Rosebel metasedimentary and metavolcanic greenstone formations.
These units are intruded by a large tonalitic stock near the southern boundary
of the property, which has resulted in doming of the adjacent Armina rocks and
the development of steep reverse faults. The greenstone units are folded into a
broad east-west trending and westerly plunging synclinal structure. Gold
mineralization associated with at least five generations of hydrothermal quartz
veins occur over large areas both in the south and north limbs of the syncline
where these are cut by strong west-northwest trending shear zones. Locally,
mineralization is controlled by zones of dilation along the shear planes and by
drag folding. Intense tropical weathering has developed a residual surface
laterite and saprolite profile of up to 50 m thick, overlying bedrock. Gold
mineralization has been established by the Company within at least ten separate
target areas including Royal Hill, Mayo, Rosebel, Koolhoven, Pay Caro, East Pay
Caro, "J" Zone, Bigi Asanjangmoni, Mama Kreek and Spin Zone. All of these
target areas are capped by mineralized laterite blankets typically between 3 to
10 m in thickness overlying less continuous shear and/or fold related
mineralization in saprolite and bedrock. Both types of deposits are being
defined for potential mining.
Geology and Reserves
In May 1997, a feasibility study was submitted to the Government of Suriname.
In October 1997, the Company and Cambior reported a 32% increase in proven and
probable open pittable gold reserves for the Gross Rosebel project from the
previous estimate of approximately 1.8 million ounces announced in May 1997.
Total proven and probable reserves of approximately 49 million tonnes grading
1.6 g Au/t were reported using a $400 per ounce gold price. This represents
approximately 2.4 million mineable ounces of gold in situ, of which Golden Star
presently has a 50% interest under the terms of the joint venture agreement with
Cambior. Approximately 85% of the total mining reserves are hosted in soft rock
(saprolite and laterite) and transition material with the remainder being hosted
in hard rock. The mining reserves were completed using the inverse distance
squared technique, five metre benches and a 40 degree average pit slope, soft
rock and hard rock mining and processing costs based on conventional milling and
cyanide leaching utilizing upon experience developed at the Omai Mine in Guyana,
a 93% gold recovery and a $400 per ounce gold price.
Due to continuing weak gold prices, Gross Rosebel's open pittable proven and
probable reserves have been restated based on a gold price of $350 per ounce to
stand at approximately 35.5 million tonnes at an average grade of approximately
1.8 g Au/t. This represents approximately 2.0 million mineable ounces of gold
in situ i.e., a reduction of approximately 20% compared to the reserves reported
in October 1997 using a $400 gold price.
During the second half of 1997, optimization of the feasibility study reduced
estimated cash costs to $228 per ounce compared to $237 per ounce in the May
1997 feasibility study, and increased throughput of 16,000 tonnes per day
compared to 14,000 tonnes per day in the May feasibility study. A revised
feasibility study was submitted to the government in November 1997. Capital
costs for mine construction are estimated at approximately $175 million. Annual
production for the proposed mine and mill complex is targeted at approximately
200,000 to 275,000 ounces of gold over a nine year mine life.
30
Mine Development
Development of the Gross Rosebel project has been deferred pending receipt of
necessary governmental approvals, resolution of several development issues and
improved gold prices. Some of the development issues that must be resolved
prior to construction, include the structure of the operating company, the
ability to secure foreign investment insurance, availability of financing from
banks and other financial institutions, and relocation of Nieuw Koffiekamp, a
small village located within the concession. The Company and Cambior continue
to discuss with the Government of Suriname all of these development issues.
Although the Company believes that these issues can be resolved, there can be no
assurance that will be the case. The project is presently on care and
maintenance with additional metallurgical test work planned to evaluate the
potential of other processing alternatives such as heap leaching. The Company
expects to incur costs of $0.16 million at Gross Rosebel in the first half of
1998.
ANTINO
The Antino property covers an area of approximately 240 km2 and is
located in the Sipaliwini District in southeastern Suriname along the Lawa
River, on the western border of French Guiana, in the locality of Benzdorp.
Benzdorp, a former gold trade center, is 240 km southeast of Paramaribo and 220
km south and upstream from Albina on the lower Marowijne River (also called
Maroni River in French Guiana).
Gold bearing alluvials in the area of the Antino property were discovered in
1885. From 1895 to 1928 the Compagnie d'Or de la Guyane Hollandaise recorded
production of 9,854 kg of gold from the property. During the period from 1928 to
1963, a further 2,657 kg of gold were reportedly produced. Some dredging was
carried out from 1963 to 1969, after which activity was limited to local
artisanal miners.
Access to the area is by air or boat. Small fixed wing aircraft may land at a
maintained grass strip on an island in the Lawa River in front of the Benzdorp
landing or on a recently constructed 600 metre dirt strip on the property. The
entire eastern boundary of the Antino property is accessible from the Lawa
River. Access into the current exploration site is by 30 km of wilderness road
passable by four wheel drive vehicles. The main camp at Fatoe Switie is 17 km
from the Benzdorp landing. The camp is fully equipped for up to 37 persons.
Pursuant to a letter dated January 22, 1993 the Company entered into a service
contract with a local company regarding the right of reconnaissance known in
Suriname as "South Benzdorp". The essential terms of the letter agreement were
restated in an option agreement in 1994, by which the Company was granted the
option to acquire, subject to governmental approval, a 100% interest in any
right of exploration to be issued pursuant to the South Benzdorp right of
reconnaissance. Assuming exercise of the South Benzdorp option, the Company
must complete a feasibility study six months prior to the expiration of such
rights or any extension thereof or reassign the right of exploration to the
local company. In the event the Company or a related party enters into a
mineral agreement with the Government of Suriname with respect to any portion of
the right of exploration, the Company will be obligated to pay the local company
the sum of $50,000. The Company has also agreed to grant the local company a
10% net profits interest with respect to any portion of the right of exploration
which may be brought into commercial production, subject to the Company's right
to repurchase half of such entitlement, within 60 days of obtaining a Right of
exploitation, for the sum of $3.0 million.
Antino represents the northernmost portion of the former 194,000 hectares South
Benzdorp right of reconnaissance. It is where the Antino Right of exploration
was granted to the same local company in 1996 for a period of three years which
may be extended until 2005. The option is valid until the expiration of such
right of exploration and any extension thereof. The Company has met its minimum
expenditure requirement of $250,000 and as a result, the Company may, subject to
governmental approval, at any time prior to its expiration, exercise its option
to acquire a 100% interest in the Antino right of exploration. The Company has
spent approximately $2.1 million in the Antino project area since its initial
involvement in 1993.
Following the late 1996 discovery of relatively high grade shear zone hosted
gold mineralization in the Antino property in a first phase of drilling
involving 43 core holes totaling 3537 metres, a second phase of follow up core
drilling involving 23 holes totaling on extension of the system 2780 metres was
conducted to test for the continuity along strike of the mineralized shear. The
program confirmed strike extension of the mineralized shear zone over
31
600 metres. Work was suspended and the Antino property placed on care and
maintenance in the second quarter of 1997 as part of the Company's budgeting and
prioritization process given the relatively high expected exploration cost to
define reserves in narrow, high grade underground targets such as Antino.
Management believes that further drilling is warranted and is assessing cost-
effective options to continue Antino's exploration program, including seeking a
joint venture partner on the property.
BHP RECONNAISSANCE JOINT VENTURE IN SURINAME
On August 19, 1996, the Company entered into a heads of agreement with BHP
Mineral International Exploration Inc. ("BHP") covering several projects in
Suriname. The projects include areas covered by applications for rights of
reconnaissance filed or to be filed with the Government of Suriname by the
Company and BHP. The project areas may be modified by the parties from time to
time. The August 1996 heads of agreement provides that BHP will have a 60%
participating interest and the Company a 40% participating interest in any joint
venture to be formed with respect to a specific area. BHP and the Company
participate jointly in the exploration costs of each different project area on
the basis of their respective deemed participating interest in any future joint
venture with respect to such area. BHP and the Company may withdraw from the
agreement by giving 30 days' notice.
During 1997, the Company and BHP conducted reconnaissance programs over
approximately 25,000 km2 of prospective terrain under their August 1996 heads of
agreement. The Company acts as exploration contractor under the agreement. The
reconnaissance program initially involved wide spaced BLEG stream silt sampling
which identified four principal anomalies. The most significant anomaly
(>100ppb) named Goliathberg is located in central Suriname. A follow-up BLEG
survey was conducted to confirm the results from the initial survey and was
further followed up by wide spaced soil sampling on 800 metre lines as well as
deep auger sampling over the major anomalies. A MMI survey was also conducted
selectively over the Goliathberg anomaly to assist in the definition of initial
drill targets.
Based upon 1997 results, BHP and the Company intend to continue exploration at
Goliathberg. Planning is currently underway for an initial, limited reversed
circulation drilling campaign, to begin testing the Goliathberg target at depth.
This program is anticipated to be completed during the first six months of 1998.
The Company has budgeted approximately $0.5 million for exploration on this
project for the first half of 1998 with recoveries from BHP of approximately
$0.3 million.
FRENCH GUIANA PROPERTIES
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GENERAL
French Guiana is part of the French national territory and has been an overseas
"Departement" of France since 1946. The Departement, with an area of 84,000 km2
and a population of approximately 130,000, has two representatives in the
French National Assembly and one representative in the French Senate. Under the
French Constitution, French Guiana is governed by the same laws as metropolitan
France, subject to modifications (including those affecting tax and mining laws
and regulations) that may be adopted to reflect the historical, cultural,
geographical and economic characteristics of French Guiana and provide for
regional administration. French miming laws have recently undergone revisions
insofar as they apply to metropolitan France. The French Senate and the French
National Assembly passed a bill in early 1997 determining the extent to which
the new French Mining Code, with some modifications, applies in the French
overseas departments (including French Guiana) but the bill has not yet been
published and therefor does not yet have the force of law. An appointed Prefect,
representing the Government of France, holds governmental and administrative
powers locally. A 19-member, locally-elected General Council votes on
departmental budget and other local matters.
The granting of mining titles in French Guiana is administered, depending upon
the type of mining title, by the Direction Regionale de l'Industrie, de la
Recherche et de l'Environnement ("DRIRE"), the Ministry of Industry or the
Conseil d'Etat. To apply for and acquire a mining title, a company must obtain
a Personal Mining Authorization, or "Autorisation Personnelle Miniere" ("APM").
Under an APM, a company is granted the right to hold up to a certain number of
permits. Guyanor was granted an APM on October 6, 1993, effective January 7,
1994, authorizing it to hold up to 15 mining titles for gold and related
substances. This APM was amended to
32
include precious metals or precious stones on March 21, 1995. The APM was
further amended on August 13, 1996 to allow Guyanor to hold ten additional
mining titles. SOTRAPMAG and Societe Guyanaise des Mines ("SGM") (see below -
"SOTRAPMAG and Paul-Isnard and Eau-Blanche Properties") each have APMs
authorizing them to hold 11 permits and three permits, respectively.
There are two different types of mining titles under French law as it currently
applies in French Guiana: permits and concessions. An exploration permit
conveys for a specific area of land the exclusive right of prospection and
exploration for the substances to which the permit relates. There are two types
of exploration permits, the most common of which is the "B" type permit
currently held by the Company. Type "B" permits are valid for two years and
renewable twice for periods of two years each. The type "B" permit relates to a
square area of 25 km2 each. Type "A" permits are valid for five years and can
be renewed at least once for an additional five year term. The holder of an
exploration permit is entitled to the issuance of an exploitation permit if such
holder has demonstrated the presence of an exploitable mineral deposit within
the area of the exploration permit. Exploitation permits are granted for a term
of four years and are automatically renewed if production is actually taking
place.
A mineral concession confers upon its holder an immovable right, which is
distinct from the actual ownership of the underlying land. Such concessions,
which, as a matter of policy, are no longer granted by the Government of France,
have no limitation in terms of duration. Concessions may be mortgaged, leased,
sold or otherwise transferred or inherited, in whole or in part and may be
merged or subdivided, subject to authorization for the transaction being granted
by a decree issued by the French government after consultation with specific
agencies.
GUYANOR RESSOURCES S.A.
All of the Company's mineral interests in French Guiana are held through
Guyanor, a societe anonyme incorporated under the laws of France on April 20,
1993. Guyanor's head and registered offices are located at Lot. Calimbe 2,
Route du Tigre, B.P. 750, 97300 Cayenne, French Guiana.
Guyanor has interests (either directly or through its subsidiaries) in the St-
Elie, Dieu-Merci, Yaou, Dorlin, Paul-Isnard, Eau-Blanche and Dachine properties.
Guyanor's interests are held by way of exploration permits, concessions,
property purchase agreements and joint venture and option agreements. All of
the properties are in the exploration stage, except the Yaou and Dorlin projects
which are currently undergoing pre-feasibility studies.
During 1997, Guyanor spent $11.9 million in continuing exploration and
acquisition expenditures, of which $10.0 million were reimbursed by joint
venture partners. In 1996, Guyanor had spent $9.3 million, $6.9 million of
which was reimbursed by joint venture partners. Budgeted exploration
expenditures for the first half of 1998 have not been finalized and will be
determined by the outcome of discussions with ASARCO on funding alternatives for
the St-Elie and Paul-Isnard projects.
ST-ELIE AND DIEU-MERCI
On October 25, 1993, Guyanor entered into an agreement to acquire the St-Elie
concession for FF1.0 million (approximately $0.2 million). Guyanor also paid
approximately $0.9 million to Compagnie Miniere Esperance S.A. ("CME") in
consideration for the relinquishment of certain contractual rights which CME
held in the St-Elie concession. The aggregate amount of $1.1 million
represented the Company's original expenditure for the St-Elie concession and
was satisfied by Guyanor's issuance of a $1.1 million promissory note payable to
the Company. This amount was canceled in March 1995 in consideration for the
issuance to the Company of Guyanor shares. Pursuant to an agreement dated
October 22, 1993, CME agreed to relinquish to Guyanor certain residual alluvial
exploitation rights in consideration for $0.5 million and a royalty of 5% of any
fine gold extracted from the concession, up to a maximum of 3,215 ounces.
By agreement dated February 18, 1995, Guyanor transferred to ASARCO Guyane
Francaise S.A.R.L. ("ASARCO") a 50% equity interest in Societe des Mines de St-
Elie S.A.R.L. ("SMSE"), a company then wholly owned by Guyanor and to which the
St-Elie concession was later transferred by decree of the French government
dated April 24, 1996. SMSE has an APM, authorizing it to hold up to three
mining titles. In order to remain the owner to its 50% equity interest, ASARCO
must fund 100% of all costs required to advance the St-Elie concession to the
33
development stage for a mining operation, including reimbursement of certain
expenses incurred by Guyanor and completion of a feasibility study within five
years or any shorter period as provided in the agreement. In particular, and as
part of its funding obligation, ASARCO has to spend a minimum of $10.0 million
on the concession over a five-year period. If ASARCO completes the feasibility
study for less than $10.0 million, ASARCO must expend the remaining balance on
the St-Elie concession before Guyanor be required to contribute its
proportionate share of expenses. ASARCO may decide at any time to terminate its
obligations under the agreement and stop funding the project. ASARCO and Guyanor
will be entitled to reimbursement of all expenses related to the St-Elie
concession incurred by each of them and Guyanor will be entitled to a finder's
fee of $1.8 million, on a pro rata basis, prior to any distribution of revenues
based upon each party's participating interest in SMSE. The agreement provides
that ASARCO's 50% interest in SMSE will return automatically to Guyanor if
ASARCO's various commitments described above are not met.
On February 19, 1997, SMSE and a French company entered into an agreement
pursuant to which SMSE was granted the four-year option to acquire a 100%
undivided interest in three concessions and one exploration permit immediately
adjacent to the St-Elie property and covering a 155 km2 (15,500 ha.) area known
in French Guiana as Dieu-Merci. In order to maintain its rights under the Dieu-
Merci option, SMSE must (i) make payments of FF4.0 million (approximately
$0.7 million) in year one, FF1.5 million (approximately $0.2 million) in year
two, FF2.5 million (approximately $0.4 million) in year three and FF2.5 million
(approximately $0.4 million) in year four and (ii) incur minimum expenditures on
the Dieu-Merci property of FF5.5 million (approximately $0.9 million) (including
a 3,000 meter core drilling campaign) during year one and FF5.0 million
(approximately $0.8 million) during each subsequent year of the option period.
SMSE may exercise the option at any time by paying the difference between FF21.5
million (approximately $3.5 million) and the annual payments made as of the
exercise date. In addition, upon exercise of the option, the optionor will be
entitled to receive a 3% net smelter royalty from future production from the
Dieu-Merci property. In the event the St-Elie property is mined first, the
optionor will be entitled to a 1% net smelter royalty from the St-Elie property.
The Dieu-Merci property is subject to the ASARCO joint venture regarding the St-
Elie property. As at December 31, 1997, ASARCO had expended approximately $7.0
million on the St-Elie and Dieu-Merci properties.
The Property
The St-Elie concession was originally constituted by the government of France in
1889 and covers a rectangular area of 99 km2 (9,900 ha.) located in north
central French Guiana, 110 km west of Cayenne, the departmental capital. The
Dieu-Merci property covers an area of 155 km2 (15,500 ha.) adjacent to the
eastern and southeastern portions of the St-Elie concession. The Dieu-Merci
property is composed of three concessions (Dieu-Merci, La Victoire and
Renaissance) and one exploitation permit (Couriege). St-Elie and Dieu-Merci are
located in a virtually undeveloped region of French Guiana. Access to the
concession is by helicopter, airplane, or by a recently completed 20 km private
road from Tigre Creek.
Work Program
During the first half of 1997, 20 holes totaling 3,049 meters, were completed on
the Kerouani and Virgile prospects at the Dieu-Merci project. At both Kerouani
and Virgile 10 holes were drilled to test the depth potential of near surface
gold mineralization over areas approximately 300 by 250 meters each. At
Kerouani, significant mineralization was encountered in each of the 10 holes
(DM97-01 to DM97-10) through the saprolite profile and into hardrock, yielding
an average mineralized interval of approximately six meters with a weighted
average gold grade of 2.0 g/t. At Virgile, significant mineralization was
encountered in 70% of the holes drilled (DM97-11 to DM97-20), yielding an
average mineralized interval of approximately five meters with a weighted
average gold grade of 2.2 g/t. At Michel, a 16 hole infill core drilling
campaign totaling 2,124 meters was completed to confirm and extend gold
mineralization discovered in 1996. Significant gold mineralization was
encountered in 11 of the 12 holes for which results are available, yielding an
average mineralized interval of approximately 14 meters with a weighted average
gold grade of 2.8 g/t. In addition, 22 holes were drilled on the Pactole,
Jonquemont and Chemin de Fer zones for a total of 2,575 m.
During the second half of 1997, Guyanor completed 29 core holes, totaling 4,875
metres, on the Michel zone at St-Elie for both infill drilling over the known
zone of mineralization and step out drilling to expand the zone. The
34
drilling expanded the strike length of the Michel zone over 1.5 kilometres which
remains open along strike and at depth. At the Dieu-Merci property, the
exploration program in the second half of 1997 involved close-spaced power
augering to a depth of 10 metres and demonstrated the effectiveness of the
technique in defining surficial mineralization. The areas of interest for
potentially defining near surface gold mineralization encompass approximately
three square kilometres, including the Kerouani, Virgile, Cesar and Devis-Sud
targets on the Dieu-Merci property as well as 12 hectares at the Chemin de Fer
target on the St-Elie property. 6 core holes, totaling 830 metres were completed
on the Devis Sud zone.
Geological modeling of the Michel zone was completed in February 1998 for the
purpose of estimating mineralized inventories resulting in an estimated
mineralized inventory within Whittle pits of 1.4 million tonnes grading at 4.2g
Au/t. The current estimates of mineralized inventories within Whittle pits for
the Michel zone are based on results from 53 core holes, totaling 7,632 metres.
Estimates of mineralized inventory within Whittle pits were calculated using
the inverse distance squared technique; a 48 degree pit slope; a gold price of
$350; gold recoveries of 93%; soft and hard rock mining costs of $1.10/tonne and
$1.50/tonne; and soft and hard rock processing costs of $6.00/tonne and
$8.50/tonne. Additional costs of $4.00/tonne of ore were applied for general
and other costs reflecting the higher costs associated with operations in French
Guiana compared to Guyana or Suriname.
Guyanor and ASARCO have not yet been able to agree on a work program and budget
for the first six months of 1998. Guyanor was informed by ASARCO in February
1998 of its intention to defer exploration spending at the St-Elie/Dieu Merci
project for the first half of 1998 due to the impact of low copper prices.
ASARCO has however reiterated its long-term commitment to the project and
informed the Company of its intention to resume drilling when conditions permit.
The agreement between Guyanor and ASARCO contains specific provisions on what
would happen in the event of a deadlock on a work program and budget. Guyanor is
currently discussing with ASARCO how to resolve the current deadlock, in
addition to the possible revision of the exploration programs and reduction of
activity during the first half of 1998.
During 1997, Guyanor's exploration expenditures on the St-Elie and Dieu-Merci
projects amounted to $3.0 million , all of which were reimbursed by ASARCO
pursuant to the February 1995 agreement. During 1996, Guyanor's exploration
spending on the St-Elie and Dieu-Merci projects totaled $2.4 million, all of
which were reimbursed by ASARCO.
YAOU AND DORLIN
Pursuant to an agreement dated July 16, 1993, the Company acquired from BHP for
$4.3 million a 63.3% participating interest in a joint venture between BHP and
BRGM with respect to six type "B" exploration permits covering an area known as
Yaou (the "Yaou Permits") and six type "B" exploration permits covering an area
known as Dorlin (the "Dorlin Permits") in French Guiana. In August 1993, the
Company transferred its 63.3% participating interest in the joint venture to
Guyanor at cost. Further to an agreement dated August 3, 1993, between the
Company and BRGM and a subsequent agreement, dated September 23, 1993, among the
Company, Guyanor and BRGM, Guyanor acquired for $2.5 million BRGM's 36.7%
interest in the joint venture assets owned for the benefit of the joint venture
by BRGM. In addition, Guyanor agreed to pay to BRGM a further FF14.0 million
(approximately $2.8 million) as follows: FF7.0 million at the time of
completion of a feasibility study on either the Yaou or Dorlin properties and
FF7.0 million at the time of commencement of commercial production on either of
these properties. The transfer of the Yaou and Dorlin Permits from BRGM to
Guyanor was approved by the relevant French regulatory authorities on May 25,
1994. Both BHP and BRGM are arms' length parties to Guyanor and the Company.
The 12 type "B" permits were initially granted for a two-year period and they
were all renewed for additional two-year periods. Two of the twelve permits
expired in February 1998 and cannot be renewed. Applications for the remaining
ten type "B" permits for a second and last time are currently pending. Those
permits will, if renewed, expire in 1999 and won't be renewable. Guyanor also
filed an application for two type "A" exploration permits that would, once
issued, replace the 12 type "B" exploration permits. Under French law, in order
to preserve its rights to the Yaou and Dorlin properties, Guyanor must be
granted exploitation permits or type "A" exploration permits over the area.
There can be no assurance that any of these applications will be granted.
Guyanor and the Company entered into an option agreement with Cambior, dated as
of May 11, 1994, pursuant to which Cambior was granted the option to acquire a
50% interest in a sole purpose company which would hold the Yaou and Dorlin
Permits in French Guiana. In September 1997, Cambior became entitled to
exercise the option after having spent the $11.0 million expenditure
commitment. Subsequent expenditures have been funded equally by Cambior and
Guyanor. The sole purpose company has not been formed yet. The acquisition by
Cambior of any
35
interest in the Yaou and Dorlin Permits is subject to French governmental
approval. There can be no assurance that such approval will be granted. The
agreement also provides that Guyanor is to manage the exploration of the Yaou
and Dorlin Permits and Cambior is to undertake the preparation of a feasibility
study on the properties and to manage the development and operation of future
mining operations.
The Properties
The Yaou Permits currently cover a total area of 100 km2 (10,000 ha.) and are
located some 210 km southwest of Cayenne. Access to the property is by
helicopter or four wheel drive vehicle on 17 km of dirt road from the town of
Maripasoula, which is accessible by chartered and daily scheduled fixed-wing
aircraft from Cayenne.
The Dorlin Permits cover a total area of 150 km2 (15,000 ha.) and are located
some 180 km southwest of Cayenne and 60 km east of Maripasoula. The property is
accessible by helicopter. A 500 m airstrip located on the property is suitable
for fixed wing aircraft. Access is also available by boat during the rainy
season.
Work Program
In July 1997, a mineralized inventory within Whittle pits (calculated using a
$400 gold price, 40 degree average pit slopes, soft rock and hard rock minerals
and processing cost based on experience elsewhere in the Guiana Shield and a 93%
recovery rate) totaling 19.7 million tonnes grading 1.8 g Au/t has been defined
at the projects, including 11.2 million tonnes grading 2.2 g Au/t at Yaou and
8.5 million tonnes grading 1.3 g Au/t at Dorlin. These are estimated to be part
of a larger geologic mineralized inventory at Yaou and Dorlin of approximately
35 million tonnes grading 1.6 g Au/t, including 18.2 million tonnes grading 2.0
g Au/t at Yaou and 16.8 million tonnes grading 1.2 g Au/t. The reclassification
of the September 1996 estimate of probable reserves at Yaou to mineralized
inventory in July 1997 reflected a more conservative policy of reporting proven
or probable reserves only when accompanied by an economic scoping or
prefeasibility study.
Due to continuing weak gold prices, Yaou and Dorlin's mineralized inventory
within Whittle pits were restated in early 1998 using a $350 per ounce gold
price. On the basis of a $350 per ounce gold price, Yaou and Dorlin's
mineralized inventory within Whittle pits are approximately 16.8 million tonnes
at an average grade of approximately 1.9 g au/t, including 10.3 million tonnes
at Yaou at an average grade of 2.3 g Au/t and 6.5 million tonnes at Dorlin at
an average grade of 1.3 g Au/t. The restated Whittle pit mineralized
inventories at Yaou and Dorlin represent a reduction of approximately 10% from
the estimates reported in July 1997.
At Yaou, the mineralized inventory is derived from three zones, Yaou Central,
Chaina and J North. By the third quarter of 1997, Guyanor had completed
considerably more core drilling at Yaou than at Dorlin. More than 180 core
holes totaling approximately 30,900 metres were drilled at Yaou in comparison to
only 146 holes totaling approximately 20,300 metres at Dorlin. On November 13,
1997, the Company and Guyanor reported results from core drilling on the East
and West Nivre zones at Dorlin. The objective of the drilling campaign was to
expand the known zones of mineralization at East Nivre along strike as well as
to increase the density of drilling to allow for updated mineralized inventory
estimations in support of planned prefeasibility studies. Results were
available from 65 additional holes, totaling approximately 9,200 metres. All but
two holes exhibited significant mineralization yielding an average mineralized
interval of approximately 11 metres with a weighted average grade of 1.4 g Au/t,
with near surface mineralization exhibiting a weighted average grade of 1.3 g
Au/t and hard rock mineralization exhibiting a weighted average grade of 1.5 g
Au/t. The results from the recent 9,200 metres of drilling at Dorlin are not
reflected in the current estimate of mineralized inventories for Yaou and
Dorlin, but are being incorporated into a new geologic model. Yaou was put on
care and maintenance early in the third quarter of 1997 in order to direct the
exploration budget defining further resources at Dorlin.
Cambior and Guyanor are currently preparing a geologic model and conducting
metallurgical test work and preliminary engineering and costing for the
prefeasibility studies which are scheduled to be completed during the second
half of 1998. Limited field work will be conducted at Yaou and Dorlin during
the first six months of 1998 while the prefeasibility studies are being
completed. The results of the prefeasibility studies will help determine the
need for additional exploration activity at Yaou and Dorlin during the second
half of 1998.
36
During 1997, Guyanor's exploration expenditures on Yaou and Dorlin totaled $5.5
million, $4.7 of which was reimbursed by Cambior under the above-mentioned
agreement. During 1996, Guyanor spent a total of $1.1 million on the Yaou
project, of which $1.0 million was reimbursed by Cambior. Guyanor has budgeted
$1.3 million in the first half of 1998, primarily for on-going geologic
evaluation and reserve estimation and preparation of pre-feasibility studies.
PAUL-ISNARD AND EAU-BLANCHE
On October 29, 1994, Guyanor acquired an interest in the Paul-Isnard and Eau-
Blanche properties by way of the acquisition of all of the outstanding shares
of SOTRAPMAG. SOTRAPMAG holds a 99.7% interest in SGM. Guyanor also directly
acquired the 0.3% interest in SGM not owned by SOTRAPMAG. SOTRAPMAG holds,
directly or indirectly, eight mineral concessions (the "Paul-Isnard
Concessions") and four type "B" exploration permits (the "Eau-Blanche Permits").
An application for a type "A" exploration permit covering an area of
approximately 326 km2 was filed by Guyanor in January 1996 but it has not been
granted yet. The type "A" permit would include two of the four type "B" permits
as well as a new area adjacent to the Paul-Isnard property. There can be no
assurance that the type "A" exploration permit will be granted.
Joint Venture with ASARCO and LaSource
In conjunction with Guyanor's acquisition of SOTRAPMAG, BRGM relinquished its
rights under an option from Alcatel Alsthom Compagnie Generale d'Electricite to
acquire any primary deposit located within the Paul-Isnard Concessions. In
consideration therefor, Guyanor paid to BRGM the sum of FF2.5 million
(approximately $505,000) and LaSource Developpement S.A., a company affiliated
to BRGM ("LaSource"), received an initial 25% participating interest in two
joint ventures for the exploration and exploitation of primary gold deposits on
the Paul-Isnard and Eau-Blanche projects. Pursuant to joint venture and option
agreements entered into on June 26, 1996 by ASARCO, LaSource and Guyanor, ASARCO
has the right to acquire a 50% interest in SOTRAPMAG's remaining interest in
the primary deposits on each of the Paul-Isnard and Eau-Blanche projects. In
order to acquire its interests in one of these projects, ASARCO must , by June
2001, complete a feasibility study and spend at least $10 million on such
project, or to combine the Paul-Isnard and Eau-Blanche projects into a single
project with a minimum five-year expenditure of $20 million. Until completion of
a feasibility study, SOTRAPMAG's share of expenditures on a project will be
funded by ASARCO unless ASARCO withdraws from such project. ASARCO may
terminate its right to acquire a participating interest in a project at any time
by giving written notice to SOTRAPMAG of its intent to withdraw from such
project at least 90 days prior to the end of the applicable program period for
such project. ASARCO is also obligated to use its best efforts to obtain
financing on a project finance basis for 80% of project development costs, with
SOTRAPMAG and ASARCO each contributing in their respective percentage interest
of the remainder of such costs. Guyanor currently acts as project manager for
the exploration phase at both projects. Under the option agreement, SOTRAPMAG
has the authority to appoint the manager. Upon completion of an initial
feasibility study, the manager will be appointed by the participant having the
largest participating interest. If SOTRAPMAG and ASARCO's participating
interests are equal, ASARCO will become manager.
As at December 31, 1997, Guyanor's interest in the Paul-Isnard and Eau-Blanche
projects had increased to, subject to ASARCO's option, approximately 87% and 83%
respectively as a result of LaSource's decision to not contribute its share of
1997 exploration expenditures. Guyanor acts as exploration manager. LaSource
held as at the same date approximate 13% and 17% participating interests in the
Paul-Isnard and Eau-Blanche projects, respectively. As of December 31, 1997,
ASARCO had expended $3.8 million on the Paul-Isnard and Eau-Blanche projects
while LaSource had expended $0.3 million.
The Properties
The Paul-Isnard and Eau-Blanche properties are located in the western part of
French Guiana, some 200 km west of Cayenne. The properties are accessed from
St-Laurent-du-Maroni, either by air, at a distance of 75 km to the south, or by
means of a 115 km-long laterite road. The first 62 km section of this road is
maintained by the government and the remaining 53 km section by SOTRAPMAG.
37
There are two prominent mountain chains bordering the properties which form the
edges of a basin in which alluvial gold deposits have accumulated. Management
believes this alluvial gold originated from gold-bearing rocks from the Decou-
Decou and Lucifer mountains and was transported downward by high-energy streams,
concentrating the gold in the gravel beds of streams in the Citron area of the
Paul-Isnard property. The Decou-Decou mountain to the south of the property is
formed of volcanic rocks that, at the summit, are covered by degraded lateritic
layers. The Lucifer mountain to the north-east is formed of basic intrusive
rocks. The basin between the mountains is underlain by a Proterozoic sequence
of mafic to felsic volcanics and clastic sediments of the Paramaca and Bonidoro
groups, cut by ultramafics to felsic intrusives.
Work Program
Guyanor began an exploration program in 1995 to identify what may have
contributed to the formation of the alluvial gold deposits in the Paul-Isnard
area. An outcrop sampling program, involving approximately 746 channel samples,
outlined a zone of strongly sheared, mineralized felsic volcanic rocks
approximately 3 km in length yielding an average gold grade of approximately 2.0
g Au/t.
A core drilling campaign in 1996 targeted approximately 1.1 km of the strike
length of this zone and involved the completion of 18 holes totaling 3,232 m.
Gold mineralization is believed to be associated with the presence of sulfides,
primarily pyrite, pyrrhotite, arsenopyrite and chalcopyrite. Mineralization
encountered within the felsic volcanic unit at depth over the strike length
drilled appears, in the Company's opinion, to be consistent with a massive
sulfide type of mineralization similar to deposits currently being mined along
the Cadillac Break in Quebec, Canada. Of particular interest is semi-massive to
massive sulfide mineralization encountered in two holes of this drill campaign.
Polymetallic assays on semi-massive to massive sulfide mineralization
intersected in one hole yielded weighted average metal grades of 3.7 g Au/t, 17
g/t silver, approximately 0.3% copper and trace zinc values, within a larger, 25
m interval with an average weighted grade of 2.8 g Au/t.
During the first half of 1997, a ground geophysical survey, involving induced
polarization, resistivity and magnetism, was carried out over the mineralized
felsic unit.
On August 20, 1997, the Company and Guyanor announced results from the second
phase core drilling program at the Paul Isnard project. Ten core holes were
completed on 200 to 400 metre spacing, totaling 1,995 metres, over the Montagne
d'Or volcanogenic massive sulfide ("VMS") target at Paul Isnard. Nine of the
ten holes intersected significant gold mineralization exhibiting a weighted
average grade of 2.0 g Au/t over an average mineralized interval of 6.0 metres.
The drilling extended the known zone of mineralization over a strike length of
approximately 2.4 kilometres with varying widths from 200 to 400 metres.
Polymetallic assays were conducted selectively on 71 samples from the second
phase of core drilling. Copper values were recorded in 80% of the samples
yielding a weighted average grade of 0.11% copper while silver values were
recorded in 100% of the samples yielding a weighted average grade of 4.1 g/t.
On January 15, 1998, the Company and Guyanor jointly announced the results from
the third phase of core drilling completed over the Montagne d'Or target at Paul
Isnard during the second half of 1997. Twenty holes were completed during the
third phase of drilling, totaling approximately 4,134 metres, with the aim of
infill drilling over the known strike length of the Montagne d'Or VMS system and
step out drilling to test for further strike extension, primarily to the east.
All but two of the 20 holes encountered significant gold mineralization
exhibiting a weighted average grade of approximately 4.6 g Au/t (high values cut
to 30 g Au/t) over an average mineralized interval of approximately 5.7 metres.
Three styles of gold mineralization have been confirmed at Montagne d'Or: (i)
steeply dipping, semi-massive to massive sulfide zones and adjacent alteration,
(ii) steeply dipping zones of disseminated sulfide mineralization, and (iii)
coarse gold associated with steeply dipping quartz veins and adjacent
alteration.
To date, the semi-massive to massive sulfide style of gold mineralization has
been intersected in eight holes drilled into the Montagne d'Or VMS system. The
semi-massive to massive sulfide zones in these eight holes exhibit a weighted
average grade of 33.3 g Au/t (uncut) over an average length of 1.1 metres while
the mineralized interval around these semi-massive to massive sulfide zones
exhibit a weighted average grade of 9.0 g Au/t (uncut) over an average length of
5.5 metres. Samples from these and other holes with significant gold values
have been selected for multi-metal assays and whole rock geochemistry. The
results from several holes verified multiple zones of
38
significant gold mineralization in disseminated sulfides. In addition, coarse
gold in and around quartz veins was encountered in the three core holes farthest
to the east and west, a type of mineralization similar to that found at the
Michel zone on the St-Elie project in French Guiana.
In February 1998, the Company and Guyanor announced the completion of geologic
modeling for the Montagne d'Or zone for the purpose of estimating mineralized
inventories, resulting in an estimated mineralized inventory with Whittle pits
of 18.7 million tonnes grading 2.5g Au/t. The estimates for the Montagne d'Or
zone are based upon 48 core holes, totaling 9,362 metres. Estimates of
mineralized inventory within Whittle pits were calculated using the inverse
distance squared technique; a 48 degree pit slope; a gold price of $350; gold
recoveries of 90%; soft and hard rock mining costs of $1.10/tonne and
$1.50/tonne; and soft and hard rock processing costs of $6.00/tonne and
8.50/tonne. Additional costs of $3.00/tonne of ore were applied for general and
other costs reflecting the higher costs associated with operations in French
Guiana compared to Guyana or Suriname.
SOTRAPMAG and ASARCO have not yet been able to agree on a work program and
budget for the first six months of 1998. SOTRAPMAG and the Company were informed
by ASARCO in February 1998 of its intention to defer exploration spending at the
Paul-Isnard and Eau-Blanche projects for the first half of 1998 due to the
impact of low copper prices. ASARCO has however reiterated its long-term
commitment to the projects and informed the Company of its intention to resume
drilling when conditions permit. The agreement between SOTRAPMAG and ASARCO
contains specific provisions on what would happen in the event of a deadlock on
a work program and budget. The Company is currently discussing with ASARCO how
to resolve the current deadlock, in addition to the possible revision of the
reduction of activity during the first half of 1998.
Total expenditures by all parties for 1997 were $1.8 million for Paul-Isnard and
$0.1 million for Eau-Blanche, all of which were reimbursed by ASARCO Total
expenditures in 1996 were $1.4 million for Paul-Isnard and $0.1 million for Eau-
Blanche of which $1.5 million was funded by ASARCO.
Discontinuation of Mining Operations
SOTRAPMAG commenced alluvial gold production at the Paul-Isnard property in
1987. SOTRAPMAG experienced continuing operating losses since its acquisition by
Guyanor in 1994 with operating losses of $1.8 million in 1995 and $2.4 million
in 1996. As a result of the conclusions of an outside consultant report, Guyanor
began implementation of a program to discontinue alluvial operations during the
first quarter of 1997. Mining operations were suspended on April 17, 1997.
Alluvial gold production continued during the period from January 1 to April 17,
1997, with operating losses of $0.5 million. Closure procedures, including land
rehabilitation and company-provided outplacement services, were substantially
completed by the end of 1997.
DACHINE
The property is a square, 5x5 km area accessible only by helicopter or, during
the rainy season, by canoe from Maripasoula. Microdiamonds were found for the
first time in 1983 in alluvium/colluvium by BRGM during strategic prospecting
work for the Mineral Inventory of French Guiana. No further exploration was
conducted at Dachine until Guyanor, after examining the existing literature and
conducting preliminary reconnaissance in the field, was granted a type "B"
exploration permit by the French government covering a 25 km2 area in southwest
French Guiana known as Dachine (formerly known as Inini). An application was
filed in December of 1995 for a type "A" permit covering an area of 337 km2
which would include the current type "B" permit. As of today, the type "A"
permit has not been granted.
BHP and Guyanor entered into an agreement in December 1995 whereby BHP could
earn a 51% interest in the Dachine project by spending $3.5 million by May 31,
1998. After review of the final results of an initial bulk sampling program,
BHP withdrew from the agreement effective as of March 31, 1997.
On December 3, 1997, the Company and Guyanor reported results from a second
alluvial bulk sampling program commenced after the withdrawal of BHP. The
program was designed to quickly and cost effectively recover diamonds, first, to
establish the clear presence of macrodiamonds, and second, to yield a large
enough parcel, though not necessarily representative of the body in situ, so as
to establish a preliminary distribution and quality range of macrodiamonds at
Dachine.
39
Thirteen samples ranging in size from 3 to 17.9 bank cubic metres were collected
from three creeks, one of which is located on the Dachine body while the other
two are located within one kilometre to the east and west of the body. Due to
logistical and budget constraints, only 27.1 cubic metres, or 32% of the total
collected sample, was processed. A total of 5,142 macrodiamonds greater than
1.0 mm round aperture Antwerp sieve were recovered, ranging in size to just over
4.5mm, or 0.88 carats, and yielding a total of 73.93 carats. The size
distribution of the diamonds is fairly log normal indicating there is a
possibility that larger stones may exist. The value of the stones, which were
examined by two experts in Canada and Europe, was estimated in the $1 to $3 per
carat range. Diamond quality is a critical aspect for the Dachine project. The
next phase of exploration at Dachine will consist of geological mapping and
drilling to further characterize the diamond and facies variability within the
body identified by the 1996 core drilling. Guyanor and the Company are
evaluating the most cost effective means of conducting this next phase of work
as well as funding alternatives, including seeking a joint venture partner.
During 1997, $0.7 million were spent on exploration and other holding costs.
During 1996, Guyanor spent $1.2 million for exploration at the Dachine property,
$1.1 million of which was reimbursed by BHP under the above-mentioned agreement.
No expenditures are budgeted for Dachine in 1998.
BRAZIL PROPERTIES
- -----------------
Brazil is the fifth largest country in the world with an area of 8,510,700 km2.
The majority of the country is located in the tropics The Amazon River system
drains over half of Brazil's area. Brazil has 26 states and the Federal
District of Brasilia, the capital city. Brazil has a population of
approximately 160 million. Brazil's two main cities are Sao Paulo and Rio de
Janeiro. Brazil declared its independence in 1822. From 1964 to 1985, although
under a military regime, Brazil experienced considerable economic growth and
development. In 1985, the country returned to democracy. A new Constitution
was implemented in 1988. Even though Brazil has a free enterprise system, there
is still considerable state and semi-state participation in various strategic
sectors, such as transportation and utilities. Special legislation has been
enacted to privatize many companies, but the process is moving slowly. The
government has recently been successful in reducing the rate of inflation.
Brazil hosts the world's largest deposit, and is the world's largest producer,
of iron ore. Major export products include soybeans, orange juice, cocoa,
coffee and manufactured goods. The Company's property interests in Brazil are
located in the central and eastern Amazon region. The administrative offices of
the Company are located in Brasilia. The principal property of the Company in
Brazil is Andorinhas. The Company's other project in Brazil, Abacaxis, was put
on care and maintenance.
ANDORINHAS
On December 5, 1995, Companhia Vale do Rio Doce ("CVRD") announced that the
Company was selected as the successful bidder to earn a right to associate with
CVRD for the possible future development and exploitation of the Andorinhas gold
property in Brazil. CVRD is one of the world's largest resource and
transportation logistics companies. CVRD is a major producer of iron ore,
bauxite, manganese, precious metals and other mineral products. CVRD is also
one of the largest individual producer of gold in Latin America thanks to its
extensive land holdings in Brazil. The Andorinhas tender represented CVRD's
first effort to secure outside partners to assist in the development of CVRD's
gold resource potential in Brazil.
An agreement with CVRD was executed in May 1996. Under the agreement, the
Company's exclusive right (through its wholly-owned subsidiary, Southern Star
Resources Ltd.) to earn a 50% participating interest in an association with
CVRD to be created to exploit any gold discovered on the property is conditional
upon the Company matching CVRD's previous exploration expenditures of R5.2
million (approximately $4.6 million, subject to monthly adjustments to account
for Brazilian inflation), completion of a positive feasibility study, and CVRD
obtaining any necessary legal or governmental approvals to form an association
for development and exploitation of a mine on the property. Upon making
exploration expenditures of R5.2 million, the Company and CVRD must share
equally in all remaining exploration and development costs or suffer dilution.
The Company has the right to terminate the agreement and let its right to form
an association lapse without any further obligations at any time. In December
of 1997, the Company met its R5.2 million expenditure commitment on the
property.
As part of an agreement with CVRD, and in lieu of cash property payments to
CVRD, the Company must also reach agreements with the surface owners and
occupants of portions of the land covered by the three exploration licenses
40
comprising Andorinhas in connection with its exercise of the exploration
activities. Agreements have been reached with several key land owners to
acquire improvements and surface right over the three principal target areas
on the property, Mamao, Babacu and Lagoa Seca. Approximately $1.3 million was
paid out pursuant to these agreements in 1997. The Company may terminate those
agreements without further liability if it decides to abandon, in whole or in
part, the property. These agreements contemplate aggregate cash payments by the
Company of approximately $5.8 million payable over the next four or five years,
with approximately $400,000 of this amount payable in 1998. More than a dozen
additional people own areas less critical and peripheral to the main target
areas. There can be no assurance that satisfactory agreements will be concluded
with these remaining land owners.
The Property
The Andorinhas project covers approximately 25,000 ha. and is located in the
state of Para in the eastern Amazon near the town of Rio Maria, approximately
150 km south of the Carajas district. It is accessible by paved road to Rio
Maria and then dirt road for 35 km. Scheduled planes service the city of
Redencao about 100 km south of Rio Maria.
Andorinhas is an advanced stage exploration project. Gold mineralization was
discovered at Andorinhas in the late 1970s by Rio Doce Geologia e Mineracao
S.A., CVRD's exploration subsidiary. The geologic setting and mineralization of
discoveries in the area appear to share the same characteristics of many of the
notable underground mines in the Abitibi mineral province of Canada, with high
grade gold-quartz vein mineralization occurring in multiple zones. Surface work
and approximately 15,000 m of drilling by CVRD in late 1970s identified three
primary zones of interest, Mamao and Babacu along a 14 km shear zone trending
northeast-southwest through the southern leg of the property and Lagoa Seca on a
parallel 8 km shear zone to the north. The drilling results averaged 2.7 m at
17.1 g Au/t from 11 holes at the Mamao prospect, 19.8 m at 4.7 g Au/t from 9
holes at the Lagoa Seca prospect and 2 m at 8.1 g Au/t from 6 holes at Babacu.
In the early 1980s, the Andorinhas area experienced a significant influx of
garimpeiros (illegal miners) who caused most legitimate exploration activity to
cease in the area during that period and mined multiple surface zones of
enriched mineralization along the shear zones. Garimpeiro mining diminished
significantly in the mid 1980s as gold prices fell and pits from the surface
mining of gold bearing material began to encounter the water table. Several
such pits still exist today at the two primary target areas on the southern 14
km regional shear, Mamao and Babacu. At the Mamao area five distinct pits
remain: Melechete, Matinha, Cantina, Maria Bonita and Mandioca. One garimpeiro
established an underground mine on the Melechete ore shoot from the bottom of
the Melechete pit. Access roads were improved, a power line was brought to the
property and a small mill and carbon treatment plant were constructed.
Work Program
On April 17, 1997, the Company announced core drilling results for the
Andorinhas gold project. Core drilling completed since the last report on
January 29, 1997, totaled approximately 4,060 meters in 14 holes, MAF-51 to MAF-
64. Significant mineralized intersections of the Melechete zone were
encountered in 11 of the 14 holes. Six of nine step out holes, drilled to
extend the down-dip limits of the Melechete/Matinha zone, intercepted
significant mineralization exhibiting a weighted average grade of approximately
11.3 g Au/t over an average thickness of approximately 4.3 metres.
Core drilling at the Mamao zone to date involved 65 holes, totaling 13,289
metres on a nominal 50 by 50 metre spacing, and resulted in the identification
of three parallel orebodies, Melechete, M2 and Arame. An estimate of
mineralized inventory at the Mamao zone was prepared for the three orebodies in
support of the scoping study and totaled 466,540 tonnes at a grade of 13.27 g
Au/t (based on a cut-off grade of 4.0 g Au/t and a minimum mining width of 1.5
metres). Removal of the pillars in the existing Mamao mine has been estimated
to provide an additional 40,000 tonnes at approximately the same grade to the
total mineralized inventory for the Mamao zone. The orebodies at the Mamao zone
represent ductile shear zones dipping at approximately 42 degrees with an
average thickness of approximately 3.6 metres. All three orebodies at the Mamao
zone remain open at depth. On December 23, 1997, Golden Star announced the
results from a scoping study completed by engineering consultants, Kilborn
International of Denver, Colorado, for the Mamao zone.
41
Consistent with the objective of the Company and CVRD, the study involved
estimating the operating and cost parameters for developing a 1,000-tonne per
day underground mining operation. Initial metallurgical studies indicated 96%
to 98% gold recoveries from the Mamao zone ore and were followed by further
studies which provided an optimized recovery of 94.3% utilizing a crush, grind,
floatation, regrind, carbon-in-pulp (CIP) flow sheet. Mine access was planned
for maximum mining flexibility utilizing a decline ramp from which development
headings would be excavated at 20 metre vertical intervals down the dip of the
ore bodies. Proposed mining methods include conventional open stoping with
jackleg drills and slushers where the orebody is narrow, requiring more
selective mining, and mechanized blasthole stoping where the orebody is thicker,
requiring less selective mining. Closer spaced delineation drilling will be
required before the optimal mining method(s) can be determined and, as a result,
the more conservative conventional open stoping method was adopted in the study
to provide an estimate of total operating costs per ounce of gold produced. On
the basis of the Mamao zone orebodies, the scoping study estimated cash costs of
$156 per ounce, including an 11.6 g Au/t diluted head grade, $35.6 per tonne
mining costs, $11.20 per tonne milling costs and $8.00 per tonne milled general
and administrative costs. The capital costs estimated for a 1,000 tonne per day
operation were $88.2 million including indirect and contingency costs. While
the mineralized inventory outlined to date at the Mamao zone alone would not
justify the development of a 1,000 tonne per day operation, the orebodies at
Mamao exhibit favorable economics. This should play an important role in any
mine development strategy.
During the fourth quarter of 1997, exploration focused on the Lagoa Seca trend,
a second major shear zone at Andorinhas approximately six kilometres to the
northeast of the Mamao zone. Work included the compilation of past work by
CVRD, detailed geologic mapping and an induced polarization (IP) geophysical
survey over approximately two kilometres of the mineralized trend. Along with
the results of the scoping study Golden Star also reported results from CVRD's
past core drilling, which involved 40 core holes, totaling approximately 5,500
metres, on two contiguous zones known as Lagoa Seca 1 and Lagoa Seca 2, over a
strike length of approximately 1.1 kilometres. Weak to strong mineralization
was intercepted in 33, or 83% of the holes drilled, with 20, or 50% considered
strongly mineralized (greater than 2 g Au/t and 2 metres in length). The 20
holes exhibiting strong mineralization yielded an average mineralized interval
of approximately 7.4 metres with a weighted average grade of approximately 6.6 g
Au/t. Approximately 35% of the holes exhibited strong, near surface
mineralization, within the top 30 metres, yielding an average mineralized
interval of approximately 9.5 metres with a weighted average grade of
approximately 5.3 g Au/t while approximately 67% of the holes exhibit strong
mineralization at depth, yielding an average mineralized interval of
approximately 6.0 metres with a weighted average grade of approximately 7.6 g
Au/t. The mineralized horizons at Lagoa Seca are more steeply dipping
(approximately 75 - 80 degrees), have a greater apparent thickness and a higher
overall sulfide content than the Mamao zone ore bodies. Previous metallurgical
studies by CVRD resulted in estimated gold recoveries in excess of 90% using a
conventional CIP flow sheet similar to that suggested for the Mamao orebodies.
The work program for Andorinhas during the first six months of 1998 will focus
on conducting an initial core drilling campaign to confirm CVRD's past results
and test the potential for down dip extension of the known zones of
mineralization over the 1.1-kilometre strike length of the Lagoa Seca zones.
The parameters of the scoping study will be used to evaluate development
options, including smaller scale operations or staged development, as additional
resources at Lagoa Seca and other potential targets on the Andorinhas property
become better understood through further exploration.
During 1997, the Company spent $5.1 million on Andorinhas in continuing
exploration and acquisition expenditures. Total exploration and acquisition
expenditures in 1996 on the Andorinhas property were $3.4 million. On or about
January 30, 1998, CVRD indicated to the Company that it does not intend to
contribute in the future its share of the programs and budgets for the project
and will therefore be diluted. CVRD may change its position and elect to
contribute its then proportional interest to future expenditures. Budgeted
expenditures by the Company at the project for the first six months of 1998 are
$0.9 million.
42
AFRICAN PROPERTIES
- ------------------
GENERAL
All of the Company's interests in mineral properties located in Africa are held
through PARC. PARC was established under the Business Corporations Act (Yukon
Territory) on February 6, 1996, as a result of the amalgamation, i.e., the
----
merger and continuation as one company (the "PARC Amalgamation"), of Humlin Red
Lake Mines Limited, an Ontario corporation ("Humlin"), and PARC, which was then
an approximately 85% owned subsidiary of the Company. PARC became a publicly
traded company on February 8, 1996, with its common shares quoted on the
Canadian Dealing Network.
In February 1998, the Board of Directors of PARC approved a proposal by the
Company for a plan of arrangement (the "Arrangement") pursuant to which the
Company would acquire all the shares of PARC not already owned by the Company.
Under the Arrangement, the Company will issue one common share of the Company in
exchange for each 50 common shares of PARC not owned by the Company. The
issuance of the common shares by the Company pursuant to the Arrangement has
been approved by the Board of Directors of the Company. The effect of the
Arrangement will be to transform PARC into a wholly-owned subsidiary of the
Company with the minority shareholders of PARC becoming shareholders of the
Company. Based on the terms of the proposed transaction the Company will issue
388,590 common shares to acquire the 19,429,282 PARC shares not held by the
Company. The special meeting of the shareholders of PARC is scheduled to be
held on April 7, 1998 and the Company anticipates the transaction to close in
April 1998.
As at December 31, 1997 PARC, had approximately $120,000 in cash which is
insufficient to fund its ongoing administration and exploration activities.
PARC's limited cash resources have also restricted PARC's ability to seize new
opportunities in Africa. The significant decline in the price of gold and the
corresponding negative impact on share prices of gold companies has had a
material adverse affect on the ability of PARC to access capital on reasonable
terms to fund its activities. Acquiring the PARC common shares held by the
minority shareholders would allow the Company to better allocate its capital and
other resources among its various projects, including those of PARC. The
Company would then be in a better position to fund PARC's ongoing exploration
activities and continue to seek new growth opportunities in Africa.
All of PARC's mineral properties are located in developing countries where there
is a certain amount of political risk inherent in doing business. PARC was
initially established to acquire a portfolio of projects in a number of
countries across Africa in order to reduce the Company's total risk associated
with conducting its activities in this region of the world by ensuring that
adverse changes in the business or political environment in one or more
countries would not affect PARC's activities in other countries where it
operates.
During 1997, PARC spent approximately $3.1 million on exploration and property
acquisition as compared to $5.9 million in 1996. The Company has budgeted $0.7
million to explore and administer PARC's remaining projects for the first six
months of fiscal 1998.
PARC and its subsidiaries, unless the context specifies otherwise, are
hereinafter referred to collectively as PARC.
COMOE PROJECT, IVORY COAST
The Republique de Cote d'Ivoire ("Ivory Coast"), located on the southern
coastline of West Africa, covers an area of 322,000 km2 with a population of
about 12 million people. Formerly a French colony, Ivory Coast achieved
independence in 1960 and is currently governed as a democratic republic. The
legal and land title systems of the country are based on French law and the
official language is French.
The center of the Comoe property is located approximately 240 km due north of
Abidjan, the principal city in Ivory Coast and is accessable by paved road from
Abidjan.
On January 10, 1995, the Company and the Ministry of Mines and Energy of the
Ivory Coast executed a Protocole d'Accord (the "Comoe Agreement") authorizing
the Company to prospect in the Nassian-Bondoukou area, also
43
known in Ivory Coast as the Comoe area. Under the terms of the Comoe Agreement,
the Company was granted exclusive reconnaissance rights over a 15,000 km2 area
in Ivory Coast until December 1, 1995, together with the right to apply for
exploration permits in respect of up to 25% of the Comoe property area (i.e., up
---
to 3,750 km2) by that date. The reconnaissance work included an airborne
geophysical survey and ground reconnaissance programs in respect of up to 25% of
the Comoe property area. Upon the demonstration of the existence of a
commercially exploitable deposit over a specific area an exploration permit may
subsequently be converted, under certain conditions, into an exploitation permit
covering the such area. PARC still holds five of the twelve exploration permits
for gold, diamonds and related minerals that were granted under the Comoe
Agreement. PARC has relinquished its rights to the seven other exploration
permits that were initially granted under the Comoe agreements . The remaining
exploration permits are valid for three years and are renewable for up to four
additional years. The minimum expenditure requirements for these permits vary
from $170,000 to $640,000 over a three-year period.
The Company formally assigned as of November 29, 1995 its rights in the Comoe
Agreement (and any permits derived therefrom) to PARC, subject to approval of
the Ivory Coast government. Prior to the assignment, all work and expenditures
relating to the Comoe property in furtherance of the Comoe Agreement had already
been supervised and funded through PARC.
Work Program
During 1997, PARC spent approximately $890,000 on continued exploration over
four of the Comoe permits with the best results from and emphasis placed on the
Tanda permit in the northeast of the Comoe property. Work completed on the
Tanda permit included a reinterpretation of prior airborne geophysical surveys,
240 kilometres of soil traverses, detailed geologic mapping, 53 auger holes
totaling approximately 209 metres and 820 channel samples.
The work on the Tanda permit identified over 20 distinct semi-continuous zones
of anomalous gold mineralization over an area 10 kilometres long, close to the
faulted contact between Birimian metavolcanic rocks and Tarkwain sediments.
Mineralization appears to be associated with low angle thrust sheets that
separate the sediments from the metavolcanics. Soil sampling identified 20
anomalies along the zones (>100 metres, > 100 ppb Au) with intervals up to 0.73
g Au/t over 670 metres. On a road cut near the village of Assafou, channel
sampling was conducted over 820 metres across an outcrop of what appears to be
silicified quartz veined Tarkwain sediments. The majority of the deep road cut
proved anomalous with one interval of 210 metres exhibiting a weighted average
grade of approximately 1.1 g Au/t.
A budget of approximately $275,000 has been proposed for work on the Tanda
permit during the first six months of 1998. The work will focus on better
defining and further delineating zones of gold mineralization near the village
of Assafou with its anomalous road cut and inferred thrust zones. Proposed work
includes further detailed mapping, ground geophysical surveys, detailed soil
sampling, augering and rotary air blast (RAB) drilling. The Company is also
seeking a partnership arrangement to fund exploration at the project.
NDORI, KENYA
Kenya is a former British colony which gained independence in 1963. The country
has a population of approximately 28 million and covers an area of approximately
583,000 km2 in East Africa The official language is English. The government of
Kenya is a democratic republic. Kenya had a vigorous gold mining industry
during the early 1900's up to World War II. During the period of political
turmoil in the 1950's and early 1960's leading up to independence, the Kenyan
gold mining industry declined significantly. The current economy is dominated
by tourism, coffee and other agricultural exports.
The Ndori property covers 1,300 km2 in western Kenya on the shores of Lake
Victoria, due northwest of the city of Kisumu. Access to the property is good
with a major road through the center of the property and several other
traversing roads.
44
Pursuant to an agreement dated December 12, 1996, with San Martin Mining
Research and Investment Company ("San Martin") and San Martin 96 S.A., PARC was
granted the immediate and exclusive right to conduct prospecting, exploration,
development or related activities on properties covering an area of
approximately 1,300 km2 known as Ndori in the Kisumu region of Kenya. The Ndori
license, which permits prospecting and exploration for gold and other precious
metals, became effective on March 29, 1988, and expired on December 31, 1997. By
its terms, the license is renewable "on application" to the Commissioner of
Mines and Geology, made three months prior to expiration, "subject to
negotiation" with the Commissioner. PARC was told by San Martin, the title
holder and optionor, that it has filed a timely request for renewal and received
a written confirmation from the Commissioner of Mines and Geology prior to the
date of expiration stating that the license "will be renewed for another term"
as soon as possible after its expiration, subject to the provisions of the
mining code and the conditions of the license, among other things. The renewal
has not been issued to date and there can be no assurance that the renewal will
in fact be granted until all conditions are formally deemed met and the license
formally renewed. PARC was also granted an exclusive option to apply for and
acquire a 75% or greater interest in any mining lease issued pursuant to the
Ndori license and any successor rights. In order to maintain its working right
and option, PARC must incur expenditures of at least $0.6 million during each
of the first and second twelve month periods of the agreement. Any first year
expenditures by PARC in excess of $0.6 million shall be credited against PARC's
expenditure commitments during the second year. PARC also committed to incur
minimum expenditures during the third, fourth and fifth years of the agreement
sufficient to maintain the Ndori License in good standing.
The geology of the Ndori property is an extension of the Lake Victoria Gold
Field to the south in Tanzania, with the property lying within a well
differentiated suite of Archean volcanics. Available geologic data from
previous exploration programs by the United Nations Development Program and
previous owners suggest the potential for quartz reef hosted, shear zone hosted
and intrusive related gold mineralization. Approximately 40 old mines have been
exploited on the property, 20 of which included milling facilities. Available
records from exploration carried out in the 1980s by third parties indicate an
existing calculated mineralized inventory of 100,000 tonnes grading 11.4 g Au/t
at the Ngiga mine, 100,000 tonnes grading 13.7 g Au/t at the Coronation mine and
75,000 tonnes grading 9.5 g Au/t at the Kidson mine, totaling approximately
104,000 oz.
During 1997, PARC spent approximately $775,000 to complete a reconnaissance
program over the whole of the Ndori property and initiate further investigation
of the highest priority anomalies. Existing airborne geophysical surveys and
satellite imagery over the property area was digitized and reinterpreted.
Termite mound sampling was conducted at a density of one sample per square
kilometre over the 1,300 square kilometre property. A total of 1,967 samples,
including follow up samples, were collected and analyzed using the BLEG
technique. In addition, 428 rock samples were collected and analyzed.
The 1997 work identified four anomalous areas: Western Area, where gold
mineralization appears to be controlled by large intersecting structures and
granitic intrusions; Abom-Odendo, where mineralization has been identified in
and along the margin of a granodiorite intrusion and along cross cutting
structures; Barding-Nduru, where gold mineralization appears to be controlled by
intersecting structures; and Bondo, where gold mineralization appears also to be
controlled by intersecting structures. These four areas host a number of old
mines and produced anomalous rock and termite samples. Further follow up work,
including 900 metres of trenching and 125 metres of augering, identified the
Western Area as the highest priority target with three anomalous zones, Abimbo,
Kitson and Kopolo, exhibiting elevated gold values associated within
granodiorite intrusions and intersecting structures.
As a result of the Company's budgetary prioritization process, the Ndori
property has been placed on care and maintenance at a cost of approximately
$10,000 per month. PARC is actively seeking a joint venture partner to fund
exploration in exchange for an interest in the property.
OTHER PROPERTIES IN AFRICA
On January 10, 1997, PARC sold its interest in Lafayette Mining Gabon Ltd.
("LMG"), which held an exploration permit on the Eteke property in Gabon,
pursuant to the exercise of a right of first refusal by Lafayette Holdings Corp.
("Lafayette") under an option agreement (dated September 4, 1994) and a joint
venture agreement (dated May 5, 1995) between Lafayette and PARC. Under its
first right of refusal, Lafayette purchased all of PARC's interest in LMG and
all related rights and obligations of PARC under the joint venture agreement,
the option
45
agreement and any other related agreement for the sum of $640,000. PARC no
longer has any interest in the Eteke property.
PARC has an indirect interest in a small scale exploitation authorization and an
exploration permit covering the Dioulafoundou project in Mali. The
Dioulafoundou project, including the Dioulafoundou and Fougala properties, is
located in the Kenieba District of western Mali, situated approximately 350
kilometres west of Bamako, thecountry's capital, and 170 kilometres south of the
town of Kayes. On March 7, 1997, PARC granted African Selection Mining
Corporation ("ASM") a three-year option to acquire 50% of PARC's current,
pending and future rights with respect to the four square kilometre
Dioulafoundou property and the contiguous 24 square kilometre Fougala property.
During 1997, exploration was conducted at the Dioulafoundou project by ASM,
including ground geophysical surveys, soil and rock sampling, limited trenching
and core drilling. By September 1997, ASM had met its minimum exploration
expenditures under the option agreement of $450,000. In October 1997, ASM
informed PARC of its decision to terminate the option agreement. Following
ASM's decision to terminate the option agreement and after evaluating
alternatives, PARC relinquished its rights in the Dioulafoundou project and is
in the process of relinquishing its rights in the Fougala property.
The Galla Valley property covers an area 30 kilometres long and 10 kilometres
wide, located south of the capital city of Asmara in Eritrea. Pursuant to an
agreement in 1996 with the Ministry of Energy, Mines and Water Resources of
Eritrea, PARC and the Company were granted exclusive rights to explore six
license areas of 50 square kilometres each, for a total area of 300 square
kilometres in an area known in Eritrea as the Galla Valley. Core drilling in
late 1996 and early 1997 failed to demonstrate the potential for bulk-minable
gold mineralization at the Adi Rassi and Torat targets in the southern half of
the property area. Phase II work through the remainder of 1997 included
completion of the regional exploration program over the property and follow up
exploration at the Adi Casci target in the northern half of the property area.
The initial trenching results obtained at Adi Casci were not extended to depth
by a limited 11 hole, 846 meter reverse circulation drilling campaign in late
1997. Since completion of the 1997 program identified no further targets, PARC
informed the Ministry of its intention to abandon the property at the conclusion
of year two under the agreement in June 1998. After consultation with the
Ministry, PARC initiated closure of its Asmara office in December 1997.
The Dul Mountain property is located approximately 500 kilometres west-northwest
of Addis Ababa, the capital of Ethiopia. The western boundary of the property
is situated along the border with Sudan. Exploration licenses for the Dul
Mountain property were granted to the Company pursuant to an agreement with the
Ethiopian Ministry of Mines and Energy. The Company subsequently assigned its
rights and the exploration licenses granted under the agreement, to PARC.
During 1997, PARC completed a limited program to follow up anomalies identified
during 1996 in the eastern portion of the Dul Mountain property following the
relinquishment of the western 75% of the property area. Since this program
failed to identify any new areas of interest, PARC informed the Ministry of
Mines and Energy of Ethiopia of its intention to relinquish the property at the
conclusion of year three under the agreements in May 1998. PARC spent
approximately $353,000 on exploration on the property in 1997. After
consultation with the Ministry, PARC initiated closure of its Addis Ababa office
in August 1997.
The Kolissen property covers 2,870 km2 in central Gabon. The Company was
granted in August 1995 a three year exploration permit on the Kolissen
property. The Company assigned its rights in the permit to PARC as of November
29, 1995, subject to the approval of the Government of Gabon. On February 18,
1997, PARC and the Company signed an option agreement with Adamas Resources
Corp. ("Adamas") granting Adamas the sole and exclusive option to acquire a 50%
interest in all of PARC's current and future rights to the Kolissen property.
Adamas recently informed PARC of its decision to withdraw from the option
agreement and therefore relinquish any rights it may have had in the property.
PARC does not plan on any further work on this project.
The Melgue property is located approximately 60 kilometres north of the regional
centre of Kayes in Western Mali. PARC entered into a mineral agreement dated
October 18, 1995 with the Government of Mali represented by the Ministry of
Mines, Energy and Hydrology for the Melgue property. The agreement has a term
of up to 30 years. An exploration permit covering the Melgue property was
granted pursuant to the agreement to PARC on December 11, 1995, for a period of
three years. During 1997, PARC conducted limited follow up soil sampling and
46
geologic mapping over areas of interest defined during the 1996 regional
exploration program. This follow up program failed to identify anomalous zones
warranting further work. PARC is in the process of preparing a final report to
the Mali Ministry of Geology and Mines on the Melgue property. PARC has
informed the Ministry of its intention to relinquish the permit following
acceptance by the government of the final report. PARC has committed to spend
at least $680,000 in connection with the Melgue property during the first 24
months following the grant of the exploration permit on December 11, 1995
failing which PARC will have to reimburse the Government of Mali an amount
equal to the difference between its commitment of $680,000 and the amount spent
on the project. PARC is currently trying to be released from the $560,000
balance of its expenditure commitment in connection with the Melgue property.
Although PARC expects to be released from this commitment, there can be no
assurance that the government will accede to PARC's request.
On January 20, 1998, PARC and the Company notified Harry Winston Inc., Precious
Stones Sierra Leone Baomahun Inc. and Baomahun Gold Mines Ltd. that they were
terminating the option agreement concerning the Baomahun, Victoria and Waia
properties in Sierra Leone, effective as of the date of the notice, as a result
of the duration of a state of "force majeure" under the option agreement for a
period of over three years.
In 1997, the Company and PARC jointly applied for an exploration permit for
diamonds covering 790 km2 over an area in Ivory Coast known as Tortiya. On
February 25, 1998, PARC was notified by the government of the Ivory Coast that
the permit has been granted to PARC. Pursuant to an agreement dated February
19, 1998, PARC and the Company have 25% and 75% beneficial interests,
respectively, in the property. The Tortiya alluvial/eluvial diamond occurrence
was discovered in 1947 and was mined industrially until 1975 producing
substantial quantities of gem and near-gem quality diamonds. PARC has budgeted
approximately $120,000 for initial stage exploration work on the Tortiya
property in the first half of 1998.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
There are currently no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or to which any of its properties or those
of any of its subsidiaries is subject. The Company and its subsidiaries are,
however, engaged in routine litigation incidental to their business. No
material legal proceedings involving the Company are pending, or, to the
knowledge of the Company, contemplated, by any governmental authority. The
Company is not aware of any material events of non-compliance with environmental
laws and regulations. The exact nature of environmental control problems, if
any, which the Company may encounter in the future cannot be predicted,
primarily because of the changing character of environmental requirements that
may be enacted within foreign jurisdictions. For a description of the type of
legal and regulatory environment in which the Company does business. (See "Item
1. Description of Business - Risk Factors" and "Item 2. Description of
Properties - General".)
47
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
Executive Officers of the Registrant
------------------------------------
(as of March 13, 1998)
The executive officers of the Company, their ages and their business experience
and principal occupations during the past five years are:
Name Age Office and Experience Officer Since
- --------------------------------------------------------------------------------------------------------------------
Jeffrey T. Abbott 56 Vice President & Chief Geologist since May 1997 and President 1995
of Southern Star Resources Ltd. since March 1995; prior thereto
Manager of the Latin America division from October 1994; prior
thereto Vice President of Homestake International & Minera
Homestake Chile.
- --------------------------------------------------------------------------------------------------------------------
Gordon J. Bell 40 Vice President and Chief Financial Officer of the Company since 1995
November 1995; prior thereto, Vice President and Director, RBC
Dominion Securities Inc. from October, 1994; Vice President,
RBC Dominion Securities Inc. from December, 1991 to October
1994.
- --------------------------------------------------------------------------------------------------------------------
Carlos H. Bertoni 46 Vice President, Brazil since June 1997, prior thereto Vice 1993
President, Exploration (Eastern Division) since 1993 and prior
thereto, Exploration Manager.
- --------------------------------------------------------------------------------------------------------------------
David A. Fennell 45 Chief Executive Officer of the Company since May 1996; 1992
President of the Company since May 1992.
- --------------------------------------------------------------------------------------------------------------------
Adrian W. Fleming 49 Executive Vice President, Exploration of the Company since May 1994
1996; President of PARC since 1995 and of PARC Barbados since
1994; Director, Barnu Pty Limited (industrial minerals mining
company) from 1990 to 1993.
- --------------------------------------------------------------------------------------------------------------------
Louis O. Peloquin 40 Vice President, General Counsel and Secretary of the Company 1993
since June 1993; prior thereto, Attorney, McCarthy, Tetrault
(law firm).
- --------------------------------------------------------------------------------------------------------------------
Hilbert N. Shields 42 Vice President, Guyana since June 1997 and prior thereto Vice 1993
President, Exploration (Western Division) since 1993 and prior
thereto, Exploration Manager.
- --------------------------------------------------------------------------------------------------------------------
Richard A. Winters 35 Vice President, Corporate Development since August 1995; prior 1995
thereto Senior Analyst, Robertson Stephens & Co. from August
1994; prior thereto Senior Engineer, Phelps Dodge Mining Co.
from January 1993 to August 1994.
- --------------------------------------------------------------------------------------------------------------------
48
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -----------------------------------------------------
STOCKHOLDER MATTERS
- -------------------
The Company's common shares are listed on the Toronto Stock Exchange ("TSE")
under the trading symbol GSC and the American Stock Exchange ("AMEX") under the
trading symbol GSR. As at March 13, 1998, 29,847,892 common shares were
outstanding and the Company had 666 shareholders of record. On March 13, 1998,
the closing sale price per share for the Company's common shares, as reported by
the TSE was Cdn$4.90 and as reported by the AMEX was $3.50. The following table
sets forth, for the periods indicated, the high and low market closing prices
per share of the Company's common shares as reported by the TSE and the AMEX.
Toronto Stock Exchange American Stock Exchange
---------------------------------------- ----------------------------------------
Cdn$ Cdn$ $ $
High Low High Low
------------------- ------------------- ------------------- -------------------
1997:
First Quarter 22.45 14.25 16.75 10.13
Second Quarter 14.80 9.25 10.63 6.50
Third Quarter 11.00 5.55 8.13 4.00
Fourth Quarter 9.65 3.20 3.56 2.19
1996:
First Quarter 22.00 7.25 16.25 5.19
Second Quarter 26.00 17.25 19.13 12.88
Third Quarter 27.10 16.75 19.75 11.75
Fourth Quarter 28.25 18.00 21.00 12.75
The Company has not declared or paid cash dividends on its common shares since
its inception. The Company's dividend policy is reviewed from time to time by
its Board of Directors. Future dividend decisions will consider then current
business results, cash requirements and the financial condition of the Company.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
- --------------------------------------------------
The following summarizes the principal Canadian federal income tax
considerations applicable to the holding and disposition of a common share of
the Company (a "Common Share") by a holder (the "Holder") of one or more Common
Shares who is resident in the United States of America and holds the Common
Shares as capital property. This summary is based on the current provisions of
the Canada-United States Income Tax Convention (1980) (the "Treaty"), Income Tax
Act (Canada) (the "Tax Act"), the regulations thereunder and all amendments to
the Tax Act publicly proposed by the government of Canada to the date hereof.
It is assumed that each such amendment will be enacted as proposed and there is
no other relevant change in any governing law, although no assurance can be
given in these respects.
Every Holder is liable to pay a withholding tax on every dividend that is or is
deemed to be paid or credited to him on his Common Shares. Under the Treaty,
the rate of withholding tax is 5% of the gross amount of the dividend where the
Holder is a company that owns at least 10% of the voting stock of the Company
and beneficially owns the dividend, and 15% in any other case.
Under the Tax Act, a Holder will not be subject to Canadian tax on any capital
gain realized on an actual or deemed disposition of a Common Share, including a
deemed disposition at death, provided that he did not hold the Common Share as
capital property used in carrying on a business in Canada, and that neither he
nor persons with whom he did not deal at arm's length alone or together owned
25% or more of the issued shares of any class of the Company at any time in the
five years immediately preceding the disposition.
49
A Holder who is liable under the Tax Act for Canadian tax in respect of a
capital gain realized on an actual or deemed disposition of a Common Share will
be relieved under the Treaty from such liability unless
(a) the Common Share formed part of the business property of a permanent
establishment or fixed base in Canada that the Holder has or had
within the twelve-month period preceding the disposition, or
(b) the Holder
(i) was resident in Canada for 120 months during any period of 20
consecutive years preceding the disposition, and
(ii) was resident in Canada at any time during the ten years
immediately preceding the disposition, and
(iii) owned the Common Share when he ceased to be a resident of
Canada.
This summary is of a general nature and is not intended, nor should it be
construed, to be legal or tax advice to any particular Shareholder.
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE INCOME AND OTHER
TAX CONSEQUENCES ARISING IN THEIR PARTICULAR CIRCUMSTANCES.
CERTAIN UNITED STATES INCOME TAX CONSIDERATIONS
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Under the United States Internal Revenue Code of 1986, as amended (the "Code"),
the Company may be classified as a passive foreign investment company (a
"PFIC"). U.S. shareholders of a PFIC are subject to certain adverse tax
consequences. These consequences can be mitigated, under certain circumstances,
if the U.S. shareholder makes a timely election to treat the Company as a
"qualified electing fund" (a "QEF"). ALL U.S. SHAREHOLDERS ARE THEREFORE URGED
TO CONSULT THEIR OWN TAX ADVISORS ABOUT THE ADVISABILITY OF MAKING A QEF
ELECTION WITH RESPECT TO THE COMPANY. ALL U.S. SHAREHOLDERS ARE ALSO URGED TO
CONSULT THEIR OWN TAX ADVISERS ABOUT THE POSSIBILITY OF CREDITING CANADIAN TAXES
PAID AGAINST U.S. TAX PAYABLE.
DEFINITION OF A PFIC
A PFIC is a corporation not formed in the United States (a "Non-U.S.
Corporation") and either (i) 75% or more of its gross income is passive income
or (ii) 50% or more of the average value of its assets produce, or are held for
the production of, passive income. Passive income for these purposes includes
interest, dividends, and certain rents and royalties. For purposes of the
foregoing tests, if a Non-U.S. Corporation owns at least 25% by value of the
stock of another corporation, it is treated as if it instead owned its
proportionate share of the other corporation's assets and received directly its
proportionate share of the other corporation's income.
The Company has been advised by Coopers & Lybrand L.L.P. that it should not be
treated as a PFIC with respect to shares purchased by U.S. shareholders during
1993, 1994, 1995, 1996, and 1997, although it could potentially be a PFIC with
respect to shares acquired by U.S. shareholders prior to 1993. The Company also
intends to engage Coopers & Lybrand L.L.P. in the future to analyze whether it
is a PFIC in 1998 and subsequent years and will continue to notify shareholders
of the results of such future analyses.
50
CONSEQUENCE OF PFIC CLASSIFICATION IF NO QEF ELECTION MADE
If the Company is classified as a PFIC, U.S. shareholders who do not make timely
QEF Elections (as discussed below) will be subject to a number of special
adverse tax rules. For example, gain recognized on disposition of PFIC stock or
the receipt of an "excess distribution" from a PFIC is (i) treated as if it were
ordinary income earned ratably on each day in the taxpayer's holding period for
the stock at the highest marginal rate in effect during the period in which it
was deemed earned and (ii) subject to an interest charge as if the resulting tax
had actually been due in such earlier year or years. (An excess distribution is
the amount of any distribution received by the U.S. shareholder during the
taxable year that exceeds 125% of the immediately preceding three year average
of distributions received from the corporation, subject to certain adjustments.)
Proposed United States Treasury Regulations broadly define a disposition to
include any transaction or event that constitutes an actual or deemed transfer
of property for any purpose under the Code, including (but not limited to) a
sale, exchange, gift, transfer at death, and the pledging of PFIC stock to
secure a loan. If the tax described above is not imposed on a transfer at
death, the recipient of the PFIC stock receives a basis in the transferred stock
equal to the lesser of the fair market value or the adjusted basis of the stock
in the hands of the shareholder immediately before death. Finally, the
foregoing rules will continue to apply with respect to a U.S. shareholder who
held the stock of the Company while the Company met the definition of a PFIC
even if the Company ceases to meet the definition of a PFIC.
The proposed PFIC regulations herein were proposed to be effective in April 1992
and may apply to all post-1986 years. However, there can be no assurance that
such regulations will be adopted in their present form.
CONSEQUENCES OF PFIC CLASSIFICATION IF QEF ELECTION MADE
Most of the foregoing adverse tax consequences can be avoided if (i) the U.S.
shareholder makes a timely election to treat the Company as a QEF (a "QEF
Election") for the first year of the shareholder's holding period in which the
Company is a PFIC (or in a year for which the Shareholder also makes the "Deemed
Sale Election" described below) and (ii) the Company provides the U.S.
shareholder with a "PFIC Annual Information Statement" pursuant to Temporary
Regulations issued by the Internal Revenue Service. U.S. shareholders of a PFIC
who make a QEF Election, however, will be taxable currently on their pro rata
share of the PFIC's ordinary earnings and net capital gain, unless they make a
further election to defer payments of tax on amounts included in income for
which no distribution has been received (subject to an interest charge).
Special adjustments are provided to prevent inappropriate double taxation of
amounts so included in a U.S. shareholder's income upon a subsequent
distribution or disposition of the stock.
A U.S. shareholder makes a QEF Election by filing a Form 8621 with its tax
return. In the case of stock owned through a U.S. entity, the election
generally must be made at the entity level. A QEF Election must be filed by the
due date (taking into account extensions) for filing the U.S. shareholder's
income tax return for the taxable year for which the election is made. A copy
of the Form 8621 must also be filed with the Philadelphia Internal Revenue
Service Center. Once made, the election is effective for the shareholder's
taxable year for which it is made and all subsequent taxable years, and may not
be revoked without consent of the Secretary of the Treasury. If a U.S.
shareholder wishes to make a QEF Election subsequent to the first year of his
holding period for stock of a Non-U.S. Corporation that is a PFIC, the U.S.
shareholder may further elect to recognize gain (the "Deemed Sale Election") as
if it had sold the QEF stock on the first day of the taxable year in which the
QEF election is made if (i) the U.S. shareholder holds stock in the PFIC on that
day and (ii) the shareholder can establish the fair market value of such stock
on that day.
In the event that the Company is classified as a PFIC, the Company intends to
comply with the reporting requirements prescribed by Temporary Treasury
regulations. In particular, the Company will maintain information so that the
ordinary earnings and net capital gains of the Company may be determined.
However, future regulations may contain reporting and record-keeping
requirements that are so onerous that it would not be practicable for the
Company to comply. If, after review of the requirements, the Company determines
that it would not be practicable to comply, it will so notify its shareholders.
51
MARK TO MARKET ELECTION
Under the recently enacted Taxpayer Relief Act of 1997, a U.S. holder of
"marketable stock" under the PFIC rules may be able to avoid the imposition of
the special tax and interest charge by making a "mark-to-market election".
Generally, pursuant to this election, such U.S. holder would include in ordinary
income, for each taxable year during which such stock is held, an amount equal
to the increase in value of the stock, which increase will be determined by
reference to the value of such stock at the end of the current taxable year as
compared with its value as of the end of the prior taxable year. U.S. holders
desiring to make the mark-to-market election should consult their tax advisors
with respect to the application and effect of making such election.
TAXATION OF DIVIDENDS ON THE COMPANY'S STOCK
Subject to the PFIC rules described above for U.S. Federal income tax purposes,
dividends paid by the Company (including any Canadian tax withheld thereon) will
constitute ordinary dividend income to the extent of the Company's current or
accumulated earnings and profits as determined for U.S. Federal income tax
purposes, and to the extent in excess of earnings and profits, will first be
applied against and reduce the shareholder's basis in such holder's stock, and
to the extent in excess of such basis will be treated as gain from the sale or
exchange of property. Because the Company is not a U.S. corporation, dividends
that it pays will not be eligible for the dividends-received deduction provided
for in Section 243 of the Code. If a U.S. shareholder receives a dividend
payment in any currency other than U.S. dollars, the amount of the dividend
payment for United States Federal income tax purposes will be the U.S. dollar
value of the dividend payment (determined at the spot rate on the date of such
payment) regardless of whether the payment is in fact converted into U.S.
dollars. In such case, U.S. shareholders may recognize ordinary income or loss
as a result of currency fluctuations during the period between the date of a
dividend payment and the date such dividend payment is converted into U.S.
dollars.
Subject to the limitations provided in the Code, the Canadian tax withheld with
respect to such dividends should be eligible for the benefits of the foreign tax
credit rules of the Code. A shareholder who does not elect the benefits of the
foreign tax credit provisions of the Code will be entitled to a deduction for
the amount of the Canadian tax withheld.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The selected financial data set forth below are derived from the audited
consolidated financial statements of the Company for the years ended December
31, 1997, 1996, 1995, 1994 and 1993, included elsewhere herein, and should be
read in conjunction with those financial statements and the footnotes thereto.
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). For United States
GAAP reconciliation items, see the attached consolidated financial statements
and notes. Reference should also be made to "Item 7. Management's Discussion
and Analysis of Financial Conditions and Results of Operations".
52
SUMMARY OF FINANCIAL CONDITION DATA AT END OF PERIOD
(Amounts in thousands except per share data)
As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
Working capital $16,427 $15,287 $11,092 $34,940 $16,735
- --------------------------------------------------------------------------------------------
Current assets 20,152 22,182 16,074 38,603 17,574
- --------------------------------------------------------------------------------------------
Total assets 89,122 96,283 77,609 85,540 47,299
- --------------------------------------------------------------------------------------------
Current 3,725 6,895 4,982 3,663 839
liabilities
- --------------------------------------------------------------------------------------------
Shareholders' $79,557 $78,094 $68,388 $79,695 $46,460
equity
- --------------------------------------------------------------------------------------------
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Revenue $ 1,698 $ 2,801 $ 5,590 $ 2,736 $ 772
- -----------------------------------------------------------------------------------------------
Net loss (26,584) (7,780) (12,181) (8,785) (1,650)
- -----------------------------------------------------------------------------------------------
Net loss per $ (0.92) $ (0.31) $ (0.54) $ (0.42) $ (0.10)
share
- -----------------------------------------------------------------------------------------------
Note: Golden Star did not pay any cash dividends during the fiscal years
indicated above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements and related notes. The financial
statements have been prepared in accordance with Canadian GAAP. For the U.S.
GAAP reconciliation, see attached consolidated financial statements, as well as
"Results of Operations" below.
CAUTIONARY STATEMENT FOR PURPOSES OF REFORM ACT
The following contains certain forward-looking statements within the meaning of
the Reform Act. Actual results, performance or achievements of the Company
could differ materially from those projected in the forward-looking statements
due to a number of factors, including those set forth under "Risk Factors" and
elsewhere in this Annual Report on Form 10-K. Readers are cautioned not to put
undue reliance on forward-looking statements. 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.
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW
The Company's current business activity focus is the exploration and development
(if warranted) of precious metal and diamond deposits within specific geological
domains. Under Canadian GAAP, expenditures relating to these
53
activities are capitalized in recognition of the potential future value of
prospective targets. Upon completion of the exploration phase, a decision to
proceed to the development phase requires that these expenditures reflect the
cost of the resultant reserves and be depleted on the unit of production basis
over the estimated total reserve to be mined. A decision to discontinue
exploration or not to proceed to the development stage for a specific project
would result in reducing the capitalized total cost of the exploration program
and charging those costs against income. As such, reported net income or loss
for the Company may be volatile and principally represents investment revenues
received through the investment of idle funds, the surplus received on
redemption of preferred shares in OGML held by the Company, and other revenues,
as offset by those expenditures which cannot be directly attributed to a
specific project and those costs for projects the Company has elected to
abandon.
Under U.S. GAAP, exploration and general and administrative expenses related to
projects are charged to expense as incurred, whereas under Canadian GAAP, such
expenses are capitalized as discussed above. Property acquisition costs are
deferred for both Canadian and U.S. GAAP until it is determined whether a
project is commercially feasible. In addition, under U.S. GAAP, compensation
expense is recorded for the excess of the quoted market price over the option
price granted to employees and directors at the date of grant under stock option
plans. Under Canadian GAAP, no compensation expense is recorded for such
awards. The gains on issuance of subsidiary's common stock recorded under
Canadian GAAP in respect of the PARC and Guyanor equity financings would not be
recorded under U.S. GAAP. Under U.S. GAAP, accrued severance and social charges
resulting from the shut-down of alluvial mining operations at SOTRAPMAG would
not have been recorded as of December 31, 1996, as the requirements for accrual
were not satisfied.
The effect of the differences in accounting under Canadian GAAP and U.S. GAAP on
the statement of net loss is as follows:
For the years ended December 31,
(In thousands except per share amounts)
1997 1996 1995
----------------- ----------------- -----------------
Net loss under Canadian GAAP $(26,584) $ (7,780) $(12,181)
Effect of the deferred exploration
expenditures on loss for the period 1,189 (10,231) (13,610)
Effect of recording compensation expense
under stock option plans (83) (85) (256)
Reversal of the gain on subsidiary's issuance
of common stock - (7,719) (2,575)
Reversal of accruals for severance costs (1,115) 1,115 -
Effect of Omai Preferred Share Redemption 1,152 520 548
-------- -------- --------
Net loss under U.S. GAAP before minority
interest (25,441) (24,180) --------
-------- -------- (28,074)
--------
Minority interest (1,489) (1,097) (256)
-------- -------- --------
Net loss under U.S. GAAP $(26,930) $(25,277) $(28,330)
======== ======== ========
Basic and diluted net loss per share under $(0.94) $(1.00) $(1.24)
U.S. GAAP ======== ======== ========
1997 Compared to 1996
The Company reported a net loss of $26.6 million in 1997 as compared to a net
loss of $7.8 million in 1996. During 1997, the Company recorded property
abandonment charges of $22.4 million, including $4.2 million and $4.4 million,
respectively, from the relinquishment of certain diamond and gold properties in
Guyana, $0.7 million from the write-off of certain diamond properties in
Suriname, $1.0 million for the Regina Est property and $0.4 million for other
property areas in French Guiana, $2.8 million for portions of property areas in
Cote d'Ivoire, $3.4 million for projects in Mali, $2.0 million for the Galla
Valley project, $1.2 million for certain gold properties in Brazil and $2.1
million related to various property interests in Bolivia. The abandonment of
these projects was the result of several factors including exploration results
and the assessment and prioritization of exploration projects by
54
Management to ensure continued focus on the most promising projects in the
Company's portfolio. The objective of the project prioritization is to ensure
continued funding of projects that the Company believes would offer the greatest
potential for meaningful results and new resources and reserves. Of the $22.4
million of property abandonments described above, $12.9 million were recorded in
the fourth quarter of 1997.
The Company's consolidated share of the write-downs for Guyanor and PARC was
$1.0 million and $5.4 million, respectively, net of minority shareholders'
portion of the loss.
The Company, through Guyanor, incurred impairment losses totaling $1.5 million
in 1997 for certain inventories and fixed assets at SOTRAPMAG related to the
shutdown of alluvial mining operations at SOTRAPMAG. These losses were offset
by gains of $0.3 million from the sale of certain equipment from SOTRAPMAG. The
Company's consolidated share of these losses was $0.8 million, net of the
minority shareholders' portion of the loss.
Total revenues in 1997 decreased to $1.7 million as compared to $2.8 million in
1996 principally due to the shutdown of the alluvial mining operations at
SOTRAPMAG in April 1997. Interest and other revenues increased from $1.1
million in 1996 to $1.3 million in 1997 due to the increase in the average cash
balance invested during 1997 as compared to 1996. Cost of goods sold decreased
to $1.0 million for 1997 as compared to $4.1 million for 1996 as a result of the
discontinuation of production at SOTRAPMAG during 1997, with revenue from gold
sales in 1997 of $0.4 million, compared to revenue of $1.7 million in 1996.
SOTRAPMAG's cost of goods sold exceeded revenues in 1997 by $0.5 million and in
1996 by $2.4 million.
General and administrative expenditures totaled $8.9 million for 1997, as
compared to $9.1 million for 1996. Depreciation expense decreased $0.5 million
as a result of the decrease in the depreciable asset base due to the write-down
of equipment at SOTRAPMAG.
OGML, in which the Company maintains a 30% common share equity interest,
reported net income of $5.8 million for the year ended December 31, 1997,
compared to a net income of $2.7 million for the year ended December 31, 1996.
The Omai Mine produced 338,496 oz of gold in 1997 versus 254,950 oz of gold in
1996. The commissioning of the expanded mill facilities in the third quarter of
1996 contributed to higher production levels in 1997. Approximately $2.5
million was distributed to the Company in 1997 via the redemption of Class "I"
preferred shares of OGML, as compared to $1.1 million during 1996.
Under the equity method of accounting, the Company is required to record its
share of OGML's losses to the extent that the losses do not exceed the cost of
the common share investment in OGML. Accordingly, the Company has not recorded
the loss amount, and will commence recognition of future income when its share
of accumulated income exceeds its share of accumulated losses. As of December
31, 1997, the Company's share of cumulative equity loss was $1.5 million as
compared to $2.7 million as at December 31, 1996.
Various factors, such as market price fluctuations of gold, increased production
costs and/or reduced recovery rates may render ore reserves uneconomic or may
ultimately result in a restatement of ore reserves or asset write-downs.
Moreover, short term factors relating to the ore reserves, such as the need for
orderly development of ore bodies, the processing of variable ore grades, and/or
other potential problems may impair the profitability of the Omai Mine.
1996 COMPARED TO 1995
The Company reported a net loss of $7.8 million in 1996 as compared to a net
loss of $12.2 million in 1995. During 1996, the Company incurred a charge of
$5.3 million for the write-off of capitalized exploration for the Eteke project
in Gabon, as a result of the sale of the Company's interest in the Eteke project
in January. The Company and PARC decided to discontinue exploration activities
at Eteke as the project did not meet the standards required by the Company for
further exploration activities and the 20% minority interest owner exercised its
right of first refusal under the property agreement, purchasing all of PARC's
interest for $0.6 million. The Company also incurred a charge to earnings of
$4.0 million for write-down of costs capitalized for the Dul Mountain project in
Ethiopia. Management came to the conclusion in 1996 that the majority of the
property area of the Dul project did not meet the Company's standards and the
Company therefore relinquished approximately 75% of the concession
55
area. The Company's consolidated share of the write-downs for the Eteke and Dul
projects was $3.1 million and $2.3 million, respectively, net of minority
shareholders' portion of the loss.
The Company, through Guyanor, incurred losses totaling $3.2 million in the
fourth quarter for write-downs and accruals related to the shutdown of alluvial
mining operations at SOTRAPMAG. (See below.) The Company's consolidated share
of these losses net of minority interests was approximately $2.2 million.
Offsetting these charges were dilution gains totaling $7.7 million resulting
from the sale of shares and exercise of stock options and warrants in the
Company's publicly traded subsidiaries PARC and Guyanor. The Company also
recorded a gain of $0.9 million on the recovery of abandonment losses recorded
in 1995 resulting from the exit of activities in Venezuela.
Total revenues decreased to $2.8 million as compared to $5.6 million in 1995
principally due to operating difficulties and reduced production by SOTRAPMAG.
Interest and other revenues decreased from $1.6 million in 1995 to $1.1 million
in 1996 due to the decrease in the average cash balance invested during 1996 as
compared to 1995. Cost of goods sold decreased to $4.1 million for 1996 as
compared to $5.8 million for 1995 as a result of the reduced production levels
at SOTRAPMAG during 1996, with revenue from gold sales in 1996 of $1.7 million,
compared to revenue of $4.0 million in 1995. Total gold production at SOTRAPMAG
in 1996 was 143,562 grams (4,616 oz) compared to 1995 production of 347,295
grams (approximately 11,165 oz). SOTRAPMAG's cost of goods sold exceeded
revenues in 1996 by $2.4 million and in 1995 by $1.8 million primarily as a
result of higher unit operating costs resulting from lower than expected grades
of gold ore mined, lower than planned recoveries of gold due to the delays in
changing the recovery methods used, and inefficiencies due to inherited plant
operating design and methods. During 1996 and 1995, approximately $0.9 million
and $1.0 million, respectively, was spent on improvements in infrastructure and
mining and recovery processes at SOTRAPMAG in an effort to increase production
and lower unit operating costs.
The alluvial operations conducted through SOTRAPMAG experienced operating losses
from its acquisition in 1994 until its closure in 1997. Outside consultants
engaged in 1996 to review the operations and make recommendations on how to
render the operation profitable concluded that without a significant capital
investment to increase production, changes in certain work practices and a
reduction in fuel taxes, the operation could not achieve profitability. As a
result, the Company, through Guyanor, began in 1996 implementation of a program
to discontinue the alluvial operations conducted by SOTRAPMAG. The Company
incurred charges to fourth quarter 1996 earnings totaling $3.2 million,
including $0.8 million resulting from the write-down of certain fixed assets and
inventories, $1.1 million for the write-down of certain capitalized exploration
costs related to the alluvial mining operations, $0.1 million for accrual of
land rehabilitation and mine closure costs, and $1.1 million for accrual of the
severance and other social costs associated with the discontinuation of alluvial
production. The Company's share of these losses as at December 31, 1996, was
$2.2 million after minority interest. Certain fixed assets, equipment and
inventories owned by SOTRAPMAG will be utilized in the ongoing exploration at
the Paul Isnard project area and were not subject to a write-down. The final
amount of severance and other costs associated with the discontinuation of
alluvial production are contingent upon negotiation with the representative of
the workers and the French government. The Company also expects to incur
operating losses of approximately $0.5 million during the shut-down process
during the first quarter of 1997.
General and administrative expenditures totaled $9.1 million for 1996, as
compared to $9.4 million for 1995. Depreciation expense increased $0.2 million
as a result of an increase in the depreciable asset base through equipment
purchases of $1.7 million during 1996 for exploration and support services and
inclusion of a full year of depreciation for assets purchased in 1995.
OGML, in which the Company maintains a 30% common share equity interest,
reported net income of $2.7 million for the year ended December 31, 1996,
compared to a net loss of $2.1 million for the year ended December 31,1995. The
Omai Mine produced 254,950 oz of gold in 1996 versus 175,080 oz of gold in 1995.
The increase in both earnings and production was achieved after the temporary
shut down of the mine resulting from a tailings dam failure in August 1995. The
mine re-opened on February 4, 1996. Although the first quarter of 1996 was
adversely impacted by the mine closure, the mine achieved record quarterly
production in the fourth quarter of
56
1996. The commissioning of the expanded mill facilities in the third quarter of
1996 contributed to higher production levels. Approximately $1.1 million was
distributed to the Company in 1996 via the redemption of Class "I" preferred
shares of OGML as compared to $1.2 million during 1995.
Under the equity method of accounting, the Company is required to record its
share of OGML's losses to the extent that the losses do not exceed the cost of
the common share investment in OGML. Accordingly, the Company has not recorded
the loss amount, and will commence recognition of future income when its share
of accumulated income exceeds its share of accumulated losses. As of December
31, 1996, the Company's share of cumulative equity loss was $2.7 million.
The minority interest share of the Company's consolidated losses increased to
$7.6 million in 1996 from $4.9 million in 1995 due to the increase in minority
ownership of PARC resulting from the private placement in February 1996,
increase in minority ownership of Guyanor resulting from the October 1996
offering, and the minority interest shares of property abandonments and
operating losses in 1996 for both PARC and Guyanor.
LIQUIDITY and CAPITAL RESOURCES
- -------------------------------
Consolidated cash and short term investments as of December 31, 1997 of $17.4
million increased $1.7 million from $15.7 million as of December 31, 1996, as a
result of the Company's public offering in May 1997 of $22.7 million, exercise
of Cdn$11.00 warrants for proceeds of $5.4 million, Omai preferred share
redemptions of $2.5 million and interest income of $1.2 million, principally
offset by net exploration expenditures of $22.8 million and administrative
expenditures of $8.9 million during 1997 and other working capital changes of
$1.6 million. Working capital as of December 31, 1997, increased $1.1 million
to $16.4 million as compared to $15.3 million as of December 31, 1996.
Product and supplies inventories, accounts receivable and other current assets
decreased $3.8 million during the year resulting primarily from a decrease in
accounts receivable due to reduced exploration spending in 1997 by joint venture
partners, collection of outstanding balances owed by the partners and a write-
down of inventory totaling $0.1 million related to the shut-down of alluvial
mining operations at SOTRAPMAG.
Cash used in investing activities of $19.6 million in 1997 decreased from $23.4
million in 1996 primarily due to the decrease in exploration expenditures
related to the Company's operations in Latin America and Africa.
Cash provided by financing activities in 1997 decreased to $29.9 million from
$40.3 million in 1996. On May 5, 1997, the Company sold through a prospectus
offering 3,025,000 common shares at $7.50 per share for total proceeds of $22.7
million. During 1997, the Company raised $0.2 million from the exercise of
stock options and $5.4 million from the exercise of warrants. The Company
received $0.1 million from the exercise of Guyanor stock options in 1997 as
compared to proceeds of $0.3 million in 1996. Restricted cash balances
decreased in 1997 by $1.7 million to $0.3 million, reflecting the reduction in
the Company's work program obligations in Ethiopia and Eritrea.
On August 8, 1997, the Company filed with the SEC a shelf registration statement
on Form S-3 (the "Registration Statement"), with respect to the proposed
issuance by the Company from time to time of up to $47,687,500 of its common
shares, preferred shares, convertible debt securities and/or warrants. The
Registration Statement also includes $52,312,500 in securities previously
registered by the Company pursuant to a Registration Statement declared
effective by the SEC on November 8, 1996.
On August 13, 1997, the Company filed with nine Canadian provincial securities
commissions a short-form shelf prospectus, with respect to the proposed issuance
by the Company from time to time of up to 12 million common shares and/or 12
million common share purchase warrants and a short-form shelf prospectus with
respect to the proposed issuance from time to time of up to $100 million of
convertible debt securities. The Canadian prospectuses relate to the same
securities being registered with the SEC.
No shares had been issued under either Registration Statement or the Canadian
prospectuses as of March 13, 1998.
57
PAN AFRICAN RESOURCES CORPORATION
Total expenditures by PARC in 1997 were $3.1 million, as compared to 1996
expenditures of $5.9 million. During 1997, the Company recorded property
abandonments of $8.5 million as the result of the write-down of $2.8 million for
portions of property areas in Cote D'Ivoire. $3.3 million for projects in Mali
and $2.0 million for the Galla Valley project. During 1996, the Company
recorded property write-offs of $4.0 million for expenditures on the Dul
Mountain Property in Ethiopia. Total budgeted expenditures on exploration and
administration for the first six months of 1998 submitted by management to
PARC's Board of Directors were $0.7 million. These expenditures are primarily
related to exploration of the Tanda and Tortiya projects in the Ivory Coast,
holding costs associated with maintaining the Ndori property in Kenya and
general and administrative expenses.
On June 5, 1997, PARC's performance bond requirements under its exploration
license agreement with the Government of Eritrea were reduced from $1.3 million
to $0.7 million. As a result, the bank guarantee and restricted cash collateral
supporting the performance bond were reduced by $0.6 million. In August 1997,
the remaining performance bond requirements were released by the Government of
Eritrea and the bank guarantee and restricted cash collateral supporting the
performance bond were reduced by the remaining $0.7 million. As of September
30, 1997, the Company had no remaining restricted cash balances relating to
Eritrea. The Company's performance bond of $0.45 million for the benefit of the
Ministry of Mines and Energy in Ethiopia guaranteeing the second year
exploration program at the Dul project in Ethiopia expired on October 16, 1997.
The letter of credit collateralizing the performance bond expired on October 31,
1997, and the funds held as restricted cash collateral for the letter of credit
were released in November 1997.
In May 1997, PARC entered into a demand revolving line of credit with Golden
Star, whereby Golden Star would loan PARC up to $2.0 million. On June 27, 1997,
the principal and interest on outstanding advances due from PARC totaling
$2,018,591 were converted into 7,333,328 PARC Common Shares at a conversion
price of Cdn$0.38 per share. As a result, Golden Star's interest in PARC was
increased to 63.9%.
As at December 31, 1997, PARC held consolidated cash and short-term investments
of approximately $150,000. PARC does not have sufficient cash on hand to fund
administrative and exploration expenditures budgeted for the first six months
of fiscal 1998.
For most of 1997, PARC relied on capital provided by the Company to fund its
operating activities. The significant decline in the price of gold and the
corresponding negative impact on the share prices of gold companies has had a
material adverse impact on the ability of PARC to access capital on reasonable
terms to fund its activities. Due to these factors, the Company announced on
December 18, 1997, that it had proposed the Arrangement to the Board of
Directors of PARC for the acquisition by the Company of the shares of PARC not
already owned by the Company. On February 20, 1998, the Company and PARC
announced that the Board of Directors of PARC had approved a proposal by the
Company for the Arrangement by PARC which would, if implemented, result in the
acquisition by the Company of the shares of PARC not already owned by the
Company. Under the Arrangement, the Company will issue one common share of the
Company in exchange for each 50 common shares of PARC not owned by the Company.
The Company has committed to provide sufficient funds to allow PARC to operate
until completion of the Arrangement. The Arrangement is expected to be
completed in April 1998. If the Arrangement is approved, PARC will become a
wholly owned subsidiary of the Company.
As of December 31, 1997, the Company owned approximately 63.9% of the
outstanding common shares of PARC.
GUYANOR RESSOURCES S.A.
Total exploration expenditures for the year ended December 31, 1997, amounted to
$11.9 million, offset by joint venture recoveries of $10.0 million, compared to
1996 expenditures of $9.3 million, offset by 1996 joint venture recoveries of
$6.9 million. Guyanor recorded property write-downs of $1.0 million related to
the relinquishment of the Regina Est project and $0.4 million related to the
write-down of other projects.
58
On October 1, 1997, the Company and Guyanor announced that the Company acquired
an additional 1,000,000 Class B common shares of Guyanor at a price of FF11.57
or Cdn$2.71. The total consideration of FF11,570,000 or Cnd$2,710,0000 for the
shares was satisfied by reducing the equivalent amount of funds advanced to
Guyanor by the Company. The Class B common shares were issued as of October 1,
1997, and the transaction resulted in an increase in the Company's interest in
Guyanor from 68.5% to 69.3%.
Guyanor and ASARCO have not yet been able to agree on a work program and budget
for the first six months of 1998. Guyanor was informed by ASARCO in February
1998 of its intention to defer exploration spending at the St. Elie/Dieu Merci
and Paul Isnard/Eau Blanche projects for the first half of 1998 due to the
impact of low copper prices. ASARCO has however reiterated its long term
commitment to the projects and informed the Company of its intention to resume
drilling when conditions permit. The agreement between Guyanor and ASARCO
contains specific provisions on what would happen in the event of a deadlock on
a work program and budget. Guyanor is currently discussing with ASARCO how to
resolve the current deadlock, in addition to the possible revision of the
exploration programs and reduction of activity during the first half of 1998.
In September 1997, Cambior reached its minimum $11.0 million spending commitment
at the Yaou/Dorlin projects. As a result, Guyanor began contributing its 50%
share of expenditures at Yaou/Dorlin.
As of December 31, 1997, the Company owned approximately 69.3% of the
outstanding common shares of Guyanor.
A preliminary budget prepared by Guyanor estimates total spending for the first
six months of 1998, exclusive of the St-Elie and Paul Isnard projects of
approximately $2.6 million with recoveries from joint venture partners of
approximately $0.8 million for net expenditures of $1.8 million. As at December
31, 1997, Guyanor had $0.7 million in cash. Net expenditures are expected to be
funded by cash on hand, receivables from joint venture partners for work
conducted in 1997 and from working capital provided by Golden Star. Golden Star
has committed to provide sufficient working capital to fund Guyanor's operations
for the first six months of 1998.
GUYANA
Total 1997 spending on the Company's projects in Guyana amounted to $3.6 million
with joint venture recoveries of $0.1 million, compared to 1996 spending of $4.3
million. During 1997, the Company incurred $8.6 million of property abandonment
charges related to various gold and diamond properties. The Company has
budgeted approximately $0.9 million for exploration on projects in Guyana during
the first six months of 1998. OGML has budgeted for the redemption of $2.0
million of Class "I" preferred shares in OGML to be paid to the Company during
1998, compared to $2.5 million received in 1997.
SURINAME
Activities in Suriname during 1997 focused principally on the Gross Rosebel gold
project in joint venture with Cambior. Total Suriname spending in 1997 amounted
to $11.8 million, offset by joint venture recoveries of $4.7 million, as
compared to 1996 spending of $12.0 million, which was offset by joint venture
recoveries of $6.4 million. During 1997, the Company incurred $0.7 million of
property abandonment charges related to diamond properties in Suriname.
Budgeted 1998 exploration and acquisition expenditures for Suriname are $1.0
million, with budgeted joint venture recoveries of $0.4 million. Expenditures
at the Gross Rosebel project are shared equally between the Company and Cambior.
A feasibility study of the Gross Rosebel project was completed in May 1997 as
required by the agreement and then updated. Proven and probable gold reserves
were estimated at 48.6 million tonnes grading 1.6 g Au/t, representing 2.43
million oz in situ using a gold price of $400 per ounce. Reserves have been
subsequently restated using a gold price of $350 per ounce to 35.5 million
tonnes grading 1.8 g Au/t, representing approximately 1.99 million ounces in
situ. Capital costs for development of the mine are estimated in the
feasibility study at $175 million. Cambior is obligated to use its best efforts
to arrange debt financing for 65% of mine construction and related costs, with
the Company and Cambior each contributing 50% of the remainder of such costs.
The Company's share of total mine development costs for Gross Rosebel, based on
the feasibility study, is estimated at approximately $30.0 million.
59
Development of the Gross Rosebel project has been postponed pending resolution
of certain development issues and improvement in gold prices. The Company has
not budgeted for any of the $30.0 million development expenditures in 1998. At
such time as the decision is made to proceed with the development of Gross
Rosebel, the Company will evaluate various funding alternatives including the
issuance of debt or equity securities or the sale of other assets to fund the
$30.0 million development cost.
BRAZIL AND BOLIVIA
During 1997, the Company spent approximately $7.1 million on exploration and
project acquisition, compared to $6.3 million in 1996. Anticipated
reconnaissance and exploration expenditures for the first six months of 1998 of
$1.2 million relate primarily to exploration efforts and property acquisition
costs for the Andorinhas projects in Brazil.
The Company recorded property write-downs of $3.3 million in 1997 as a result of
relinquishment of the Sunsas and San Simon properties in Bolivia and the write-
down of other costs in Brazil. The Company has closed its Bolivian office and
suspended its Bolivian operations indefinitely.
YEAR 2000 ISSUES
The Company has determined that it will need to modify or replace portions of
its hardware and software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company also has
initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
remediate properly their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team of
internal staff. The team's activities are designed to ensure that there is no
adverse effect on the Company's core business operations and that transactions
with customers, suppliers and financial institutions are fully supported. The
Company is well under way with these efforts, which are scheduled to be
completed by mid-1999. While Management believes its planning efforts are
adequate to address its Year 2000 concerns, there can be no guarantee that the
systems of other companies on which the Company's systems and operations rely
will be converted on a timely basis and will not have a material effect on the
Company. The cost of the Year 2000 initiatives is not expected to be material
to the Company's results of operations or financial position.
OTHER MATTERS
The Company conducts all of its exploration and development of mineral
properties in countries other than Canada and the United States. To date, the
vast majority of all funding has been through equity financing transactions
completed in Canada and in Canadian currency (with the exception of the Guyanor
offering of its Class B shares on the Nouveau Marche in France and the U.S.
$22.7 million raised by the Company in May 1997). The Company currently
maintains all or the majority of its working capital in U.S. dollars or U.S.
dollar denominated securities and converts funds to foreign currencies as
payment obligations come due. Accordingly, the Company is subject to
fluctuations in the rates of currency exchange between the U.S. dollar and these
currencies, and such fluctuations may materially affect the Company's financial
position and results of operations. The Company currently has future
obligations which are payable in French francs and Brazilian reals and
receivables collectible in French francs. The Company currently does not
actively take steps to hedge against such risks. The Company also utilizes the
services of outside advisors who provide the Company with market information and
strategies to employ in protecting the cash and short term investments held by
the Company.
The Company believes that its current activities are in material compliance with
applicable laws and regulations designed to protect the environment, except to
the extent that non-compliance would not have a material adverse effect on the
Company's operations or financial condition. The Company periodically engages
specialists to evaluate potential environmental issues for specific projects.
The results of these evaluations are utilized in the
60
property evaluation process, where applicable. The Company also evaluates the
need for reclamation reserves in light of current laws and regulations and will
make provisions for such reserves as they become necessary based on the
Company's activities in Africa and South America.
OUTLOOK
In previous years, Management prepared a 12-month budget for presentation to the
Board of Directors in December of each year. Due to the uncertainties created
by the current low gold price and the resulting impact on the Company's access
to capital to fund its operations, this year Management prepared a budget only
for the first half of 1998. A budget for the second half of 1998 is expected to
be presented for approval by the Board of Directors in June and will reflect the
results of the first half exploration efforts, the outlook for gold prices, the
demand for gold equities which impacts the Company's access to capital and
Management's assessment of alternative sources of capital.
As at December 31, 1997, the Company held consolidated cash and short term
investments of $17.4 million. Management anticipates consolidated total
expenditures for the first half of 1998 of $11.6 million, with consolidated net
expenditures after recoveries from joint venture partners, redemption of
preferred shares of OGML and other working capital changes of approximately $7.5
million. The Company has committed to continue funding the working capital
requirements of Guyanor for the first half of 1998, which are estimated to be
$1.0 million of Guyanor's projected cash needs of $1.6 million for the first
half of 1998 million. Management expects the Company to have a consolidated
cash position of approximately $10.9 million at June 30, 1998.
The Company's spending during the first half of 1998 is anticipated to be
directed primarily toward exploration programs at Andorinhas in Brazil, the
Makapa project in Guyana, the BHP Reconnaissance program in Suriname and the
Tanda and Tortiya projects in Cote d'Ivoire. Pre-feasibility work is ongoing at
the Yaou and Dorlin projects in French Guiana. Existing geologic models of
Dorlin are being updated and will serve as the basis for determining mining
reserves in support of the pre-feasibility studies, which are anticipated to be
completed during the second quarter of 1998. The results of the pre-feasibility
studies will guide the determination of additional exploration activity at Yaou
and Dorlin during the second half of 1998. Work at the St-Elie and Paul Isnard
projects for the first half of 1998 are dependent upon the result of further
discussions with Asarco.
No field work is planned at Gross Rosebel in Suriname; however, expenditures
have been budgeted for additional work on the feasibility study and
environmental impact statement, further engineering and metallurgical work,
including the investigation of heap leaching alternatives, and for ongoing
holding costs. Expenditures have also been budgeted to complete analytical work
associated with core drilling completed on the northwest Guyana diamond projects
in late 1997.
Golden Star continues to closely monitor exploration progress at each of its
prioritized projects to ensure work programs and capital are allocated to those
projects that offer the greatest potential to generate additional reserves and
resources. Comprehensive cost reduction programs are being implemented at all
operating divisions and at the corporate headquarters to conserve cash
resources. Most of the exploration and development spending for the Company and
its subsidiaries represent discretionary spending and can be adjusted to
reflect, among other things, results of exploration and development activities,
the successful acquisition of additional properties or projects, the price of
gold and Management's assessment of capital markets.
The Company anticipates that its current cash balances, together with proceeds
from the redemption of preferred shares of OGML, proceeds from the exercise of
options and warrants, financing provided by joint venture partners the sale of
property interests or assets and the sale of common shares and/or debt
securities will be sufficient to fund anticipated operating and exploration
expenditures for 1998. Whether, and to what extent, such alternative financing
options are pursued by the Company or its subsidiaries in 1998 will depend on a
number of factors including, among others, results of exploration and
development activities; the successful acquisition of additional properties or
projects; the price of gold and management's assessment of the capital markets.
In 1998, the Company is required to make property rental payments and minimum
exploration expenditures totaling $3.1 million in order to maintain its current
property interests per existing mineral agreements. The Company is negotiating
the reduction or deferral of these payments where possible.
61
The Company expects to receive cash flow of approximately $2.0 million from OGML
in 1998 through redemptions of Class "I" preferred shares. The amount of
redemptions, if any, is dependent on the net cash flow of OGML. The Company
received $2.5 million of Class "I" preferred share redemptions in 1997.
62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
Index to Consolidated Financial Statements
of Golden Star Resources Ltd. and Subsidiaries
Management's Responsibility for Financial Information.......................... 64
Auditors' Report............................................................... 65
Consolidated Balance Sheets as of December 31, 1997 and 1996................... 66
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................................... 67
Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995.......................................... 68
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................................... 69
Notes to the Consolidated Financial Statements................................. 70 - 96
63
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL INFORMATION
TO THE SHAREHOLDERS OF GOLDEN STAR RESOURCES LTD.
The consolidated financial statements and all information in the Annual Report
are the responsibility of the Board of Directors and management. The
consolidated financial statements have been prepared by management based on
information available to March 25, 1998, and are in accordance with accounting
principles generally accepted in Canada.
A system of internal accounting and administrative controls is maintained by
management in order to provide reasonable assurance that financial information
is accurate and reliable, and that the Company's assets are safeguarded.
Limitations exist in all cost effective systems of internal controls. The
Company's systems have been designed to provide reasonable but not absolute
assurance that financial records are adequate to allow for the completion of
reliable financial information and the safeguarding of its assets.
The Company believes that the systems are adequate to achieve the stated
objectives. Regular testing of these systems is employed to ensure continued
effectiveness of the controls, and actions are taken when necessary to correct
deficiencies when they are identified.
The Audit and Corporate Governance Committee of the Board of Directors is
comprised of five outside directors, and meets regularly with management and the
independent auditors to ensure that management is maintaining adequate internal
controls and systems and to approve the annual and quarterly consolidated
financial statements of the Company. The committee also reviews the audit plan
of the independent auditors and discusses the results of their audit and their
report prior to submitting the consolidated financial statements to the Board of
Directors for approval.
The consolidated financial statements have been audited by Coopers & Lybrand,
Chartered Accountants, who were appointed by the shareholders. The auditors'
report outlines the scope of their examination and their opinion on the
consolidated financial statements.
DAVID A. FENNELL GORDON J. BELL
President and Vice President and
Chief Executive Officer Chief Financial Officer
64
AUDITORS' REPORT
To the Shareholders of
Golden Star Resources Ltd.:
We have audited the consolidated balance sheets of Golden Star Resources Ltd. as
of December 31, 1997 and 1996 and the consolidated statements of operations,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Golden Star
Resources Ltd. as of December 31, 1997 and 1996, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1997, in accordance with accounting principles generally accepted
in Canada.
/s/ Coopers & Lybrand
Chartered Accountants
Calgary, Canada
March 25, 1998
65
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of United States Dollars except share amounts)
ASSETS As of December 31,
1997 1996
-------------------- --------------------
CURRENT ASSETS
Cash and short-term investments $ 17,399 $ 15,663
Accounts receivable 2,238 5,116
Inventories 356 1,027
Other assets 159 376
-------- --------
Total Current Assets 20,152 22,182
RESTRICTED CASH 250 2,015
DEFERRED EXPLORATION 65,160 64,721
INVESTMENT IN OMAI GOLD MINES LIMITED 2,126 3,279
FIXED ASSETS 1,280 3,666
OTHER ASSETS 154 420
-------- --------
Total Assets $ 89,122 $ 96,283
======== ========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 2,825 $ 5,830
Accrued wages and payroll taxes 900 1,065
-------- --------
Total Current Liabilities 3,725 6,895
OTHER LIABILITIES 115 92
-------- --------
Total Liabilities 3,840 6,987
-------- --------
MINORITY INTEREST 5,725 11,202
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 20) - -
SHAREHOLDERS' EQUITY
SHARE CAPITAL 158,001 129,954
(Common shares, without par value,
unlimited shares authorized.
Shares issued and outstanding:
1997 - 29,797,432; and 1996 - 25,941,103
Stock option loans (4,012) (4,012)
DEFICIT (74,432) (47,848)
-------- --------
Total Shareholders' Equity 79,557 78,094
-------- --------
Total Liabilities and
Shareholders' Equity $ 89,122 $ 96,283
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
Approved by the Board:
By: /s/ Pierre Gousseland By: /s/ Richard A. Stark
- ---------------------------- --------------------------
Director Director
66
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands of United States Dollars except per share amounts)
For the Years Ended December 31,
1997 1996 1995
-------------------- ---------------- -----------------
REVENUE
Precious metals sales $ 443 $ 1,723 $ 4,007
Interest and other 1,255 1,078 1,583
-------- -------- --------
1,698 2,801 5,590
-------- -------- --------
COSTS AND EXPENSES
Cost of goods sold 987 4,097 5,805
Depreciation and depletion 772 1,246 1,084
Exploration expense 779 408 977
General and administrative 8,936 9,114 9,358
Write offs & abandonment of mineral properties 22,437 10,365 8,750
Loss (gain) on disposal of assets (302) (33) 152
Interest expense 22 189 8
Foreign exchange loss (gain) 92 (2) (211)
Loss on suspension of mining activities - 2,085 -
Loss on impairment of inventories and fixed assets 1,522 - -
Recovery of abandonment loss - (936) -
-------- -------- --------
35,245 26,533 25,923
-------- -------- --------
PROFIT (LOSS) BEFORE THE UNDERNOTED (33,547) (23,732) (20,333)
Gain on subsidiaries issuance of common shares - 7,719 2,575
Omai preferred share redemption surplus 1,388 626 661
-------- -------- --------
Net profit (loss) before minority interest (32,159) (15,387) (17,097)
-------- -------- --------
Minority interest 5,575 7,607 4,916
-------- -------- --------
NET PROFIT (LOSS) $(26,584) $ (7,780) $(12,181)
======== ======== ========
NET PROFIT (LOSS) PER SHARE $(0.92) $(0.31) $(0.54)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING (in millions of shares) 28.8 25.2 22.7
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
67
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Stated in thousands of United States Dollars except share amounts)
COMMON STOCK SHARE STOCK
Number of Shares Capital Option Loans DEFICIT
---------------------- ------------------- -------------------- --------------
Balance at December 31, 1994 22,569,972 $105,380 $(1,080) $(24,605)
Shares Issued 105,208 659 - -
Shares Issued Under Options 94,692 285 - -
Issue Costs - 20 - -
Stock Option Loans - - (90) -
Net Profit (Loss) - - - (12,181)
---------- -------- ------- --------
Balance at December 31, 1995 22,769,872 $106,344 $(1,170) $(36,786)
Shares Issued 1,780,712 13,574 - -
Shares Issued Under Options 1,059,469 6,744 - -
Shares Issued Under Warrants 331,050 3,983 - -
Issue Costs - (691) - -
Stock Option Loans - - (2,902) -
Stock Option Loan Repayments - - 60 -
Other - - - (3,282)
Net Profit (Loss) - - - (7,780)
---------- -------- ------- --------
Balance at December 31, 1996 25,941,103 $129,954 $(4,012) $(47,848)
Shares Issued 3,085,296 22,840 - -
Shares Issued Under Options 97,833 235 - -
Shares Issued Under Warrants 673,200 5,429 - -
Issue Costs - (457) - -
Net Profit (Loss) - - - (26,584)
---------- -------- ------- --------
Balance at December 31, 1997 29,797,432 158,001 $(4,012) $(74,432)
========== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements
68
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of United States Dollars)
For the Years Ended December 31,
OPERATING ACTIVITIES: 1997 1996 1995
----------- ---------- ----------
Net profit (loss) $(26,584) $ (7,780) $(12,181)
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and depletion 772 1,246 1,084
Premium on Omai preferred share redemption (1,388) (626) (661)
Loss (Gain) on disposal of assets (302) (33) 152
Write offs and abandonment of mineral properties 22,437 10,365 8,750
Recovery of abandonment loss - (936) -
Gain on issuance of common shares by subsidiary - (7,719) (2,575)
Write-down of equipment 1,522 450 -
Minority interest (5,575) (7,607) (4,916)
Changes in non-cash operating working capital 516 1,990 (1,176)
-------- -------- --------
Net Cash Used in Operating Activities (8,602) (10,650) (11,523)
-------- -------- --------
INVESTING ACTIVITIES:
Expenditures on mineral properties, net of joint venture recoveries (22,877) (24,279) (21,295)
Proceeds from sale of property interest - 640 -
Equipment purchases (353) (1,735) (1,723)
Depreciation capitalized as deferred exploration 342 - -
Omai Preferred Share Redemption 2,541 1,145 1,209
Proceeds from sale of equipment 486 - -
Other assets and investment 266 787 652
-------- -------- --------
Net Cash Used in Investing Activities (19,595) (23,442) (21,157)
-------- -------- --------
Financing Activities:
Restricted cash 1,765 450 (2,465)
Other liabilities 22 (6) (4)
Proceeds from issuance of subsidiary stock - 19,987 9,426
Offering costs of subsidiary stock issues (25) (1,461) (1,118)
Increase in minority interest 124 518 1,078
Issuance of share capital and warrants, net of issue costs 28,047 23,610 964
Stock option loan receipts (additions) - (2,841) (90)
-------- -------- --------
Net Cash Provided by Financing Activities 29,933 40,257 7,791
-------- -------- --------
Increase (Decrease) in cash and short-term investments 1,736 6,165 (24,889)
Cash and short-term investments, beginning of period 15,663 9,498 34,387
-------- -------- --------
Cash and short-term investments, end of period $ 17,399 $ 15,663 $ 9,498
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(All tabular amounts in thousands of United States Dollars)
1. FORMATION OF THE COMPANY
- -------------------------------
In May of 1992, the shareholders of Golden Star Resources Ltd. ("Golden Star" or
the "Company") and South American Goldfields ("South American"), respectively
agreed to a business combination of the two companies. Neither company was
under common control prior to the amalgamation. This combination was considered
to be an amalgamation under the Canada Business Corporations Act and was
effective May 15, 1992. The amalgamation was treated as a purchase by the
Company for accounting purposes. Concurrent with the amalgamation, the common
shares of the Company were consolidated on a one-for-two basis. The Company's
fiscal year end is December 31, and commencing on May 15, 1992, the Company
changed its reporting currency to the United States dollar. However, if the
Company were to declare a dividend to its shareholders, it would be paid in
Canadian dollars.
2. DESCRIPTION OF BUSINESS
- ------------------------------
The Company is engaged in the business of exploration, acquisition and
development of precious minerals deposits in both South America and Africa. The
Company's common shares trade on the Toronto Stock Exchange under the symbol
"GSC", and on the American Stock Exchange under the symbol "GSR".
Efforts in South America are focused on property interests in Guyana, Suriname,
French Guiana (through Guyanor Ressources S.A.), and Brazil (through Southern
Star Resources Ltd.). The Company is also actively pursuing new projects in
these countries in addition to other South American countries.
Efforts in Africa are focused on property interests in Kenya and Ivory Coast and
are conducted through the Company's majority owned subsidiary, Pan African
Resources Corporation.
All of the Company's projects are conducted through agreements with third
parties and national governments and/or pursuant to permits and licenses granted
by appropriate authorities. When deemed appropriate, certain projects are
pursued on a joint venture basis to share the associated risk and to assist in
project funding.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------
These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). The following
policies have been adopted by the Company.
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its more than 50% owned subsidiaries. All material intercompany balances and
transactions have been eliminated. The consolidated group includes the
following as of December 31, (all entities are 100% owned by the Company, unless
otherwise noted):
1997: 1996:
- ------------------------------------------------------- ---------------------------------------------------------
Golden Star Holdings Ltd. Golden Star Holdings Ltd.
Venezuela Investments Ltd. Venezuela Investments Ltd.
Golden Star Management Ltd. Golden Star Management Ltd.
Pan African Resources Corporation (63.9%) Pan African Resources Corporation (58%)
Southern Star Resources Ltd. Southern Star Resources Ltd.
Guyanor Ressources S.A. (69.3%) Guyanor Ressources S.A. (68%)
Societe de Travaux Publics Societe de Travaux Publics
et de Mines Auriferes en et de Mines Auriferes en
Guyane ("SOTRAPMAG") (99%) Guyane ("SOTRAPMAG") (99%)
Caystar Holdings Ltd.
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments consist primarily of high credit quality United
States and Canadian money market investments and fixed and variable income
commercial paper, which are capable of reasonably prompt liquidation, and are
stated at amortized cost, which approximates market value.
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments. The Company
restricts investment of temporary cash balances to financial institutions with
high credit standing. The Company strives to minimize its credit risk through
diversification of investment and financial institutions.
INVENTORIES
Gold inventory includes gold and gold concentrate and is recorded at its
estimated market value. Materials and supplies are valued at the lower of
average cost or replacement cost.
RESTRICTED CASH
In certain countries where the Company conducts business, the governments
require performance bonds to be placed for certain amounts of the agreed-upon
exploration expenditures. The cash collateralizing these bonds is shown as a
non-current asset as the funds are not available for use in operations until the
bond amounts are reduced or released by the governments.
DEFERRED EXPLORATION
Acquisition, administration, exploration and development costs of mineral
properties are capitalized and will be depleted on a unit of production basis at
such time as production commences or charged against income if the property is
abandoned. Administration costs incurred after commencement of production will
be charged against operations in the period incurred.
FIXED ASSETS
Fixed assets are stated at cost and include buildings, machinery, equipment and
vehicles. Depreciation is computed using the straight-line method at rates
calculated to depreciate the cost of the assets less their anticipated residual
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
values, if any, over their estimated useful lives. The net book value of fixed
assets at property locations is charged against income if the site is abandoned
and it is determined that the assets cannot be economically transferred to
another project or sold.
FOREIGN CURRENCIES AND FOREIGN CURRENCY TRANSLATION
Certain South American and African currencies are not readily negotiable outside
their respective countries. United States of America funds transferred to these
countries are used to purchase local currency to be used for labor, local
supplies, and other items associated with the exploration and development of
mineral properties. Accordingly, cash balances in these countries have been
reclassified to deferred exploration.
As the functional currency of the Company is the U.S. dollar, monetary assets
and liabilities are translated at the rate of exchange prevailing at the end of
the period. Non-monetary assets and liabilities are translated at the rates of
exchange prevailing when the assets were acquired or the liabilities assumed.
Revenue and expense items are translated at the average rate of exchange during
the year. Translation gains or losses are included in the determination of net
income for the period. Fully integrated foreign subsidiary accounts are
translated using the same method.
Canadian currency in these financial statements is denoted as "Cdn$", French
currency is denoted as "FF", and Brazilian currency is denoted as "R".
NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the year. Common share equivalents
are not included as the effect would be anti-dilutive.
INVESTMENT IN OMAI GOLD MINES LIMITED
The investment in Omai Gold Mines Limited ("OGML") is accounted for using the
equity method. Redemptions of preferred shares of OGML are allocated to the
Investment in Omai account and to Premium on Omai Preferred Share Redemption on
the basis of the Company's share of costs incurred as a percentage of the total
value of the preferred shares.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are comprised of short-term investments,
accounts receivable, restricted cash, the investment in OGML, accounts payable,
accrued liabilities and accrued wages and payroll taxes. The fair value of cash
and short-term investments, accounts receivable, accounts payable, accrued
liabilities and accrued wages and payroll taxes equals their carrying value due
to the short-term nature of these items. The fair value of restricted cash is
equal to the carrying value as the cash is invested in short-term high quality
instruments. The fair value of the Company's investment in OGML cannot be
determined with sufficient reliability, and information concerning the terms and
conditions of this investment is contained in Note 8.
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
4. INVENTORIES
- ------------------
December 31, December 31,
1997 1996
------------------------------- -------------------------------
Gold Inventory $ 53 $ 384
Materials and Supplies 303 643
----- ------
$ 356 $1,027
===== ======
In December 1996, the Company initiated a program to discontinue alluvial mining
operations conducted by SOTRAPMAG. An evaluation of the materials and supplies
inventories held by SOTRAPMAG and used in the alluvial mining operations was
conducted. As a result, inventories totaling $0.3 million were deemed obsolete
and were charged to loss in 1996. (See Note 6.) In September 1997, the
remaining materials and supplies inventories of $0.08 million held by SOTRAPMAG
were charged to loss.
5. Sale of Common Shares and Warrants by Subsidiaries
- ---------------------------------------------------------
GUYANOR RESSOURCES S.A. PLAN OF ARRANGEMENT AND PUBLIC OFFERINGS
On March 14, 1995, the Company completed a Plan of Arrangement under the Canada
Business Corporations Act involving its subsidiary, Guyanor. As part of the
arrangement, the Company distributed to each of its shareholders one new Golden
Star common share and one-fifth of one Class B common share in exchange for each
outstanding Golden Star common share as at the record date for the arrangement.
Prior to the effectiveness of the arrangement, Guyanor's share capital was
increased to permit the issuance of additional common shares which were
subdivided and redesignated as Class A common shares and to permit the creation
and issuance of Class B common shares. The Class A common shares and Class B
common shares are equal in all respects except the holders of Class A common
shares are entitled to receive the par value of their Class A common shares in
priority to holders of Class B common shares in the event of a distribution of
assets upon liquidation, dissolution or winding up of Guyanor.
Concurrent with the arrangement, Guyanor completed an initial public offering in
Canada of 6,000,000 Class B common shares at a price of Cdn$2.10 per share. The
net proceeds of the offering, after commissions and expenses, were approximately
$8.2 million (Cdn$11.6 million). As a result of this offering, the Company
recorded a gain of $1.6 million in March of 1995.
Immediately prior to the effectiveness of the arrangement and the closing of the
offering, the Company converted all of the outstanding debt owed to it at
January 31, 1995 by Guyanor with accrued interest, aggregating $22.1 million, as
follows: (i) Guyanor issued to the Company 13,250 common shares in exchange for
$8.8 million in debts and accrued interest which, following subdivision and
redesignation of the common shares as Class A common shares and the transfer to
the Company by each holder of "qualifying" shares all but one common share,
equaled 22.5 million Class A common shares, and (ii) 8,837,802 Class B common
shares at an issue price of Cdn$2.10 per share reducing the debt by a further
$13.3 million. After the arrangement and the public offering, the Company owned
approximately 70% of the outstanding voting shares of Guyanor.
On October 30, 1996, Guyanor obtained the approval of a final prospectus
entitling Guyanor to list its Class B common shares for trading on the Nouveau
Marche of the Bourse de Paris in France, and for the sale of 1.0 million of its
Class B shares (the "Offering"). Trading of Guyanor's Class B shares on the
Nouveau Marche began on October 30, 1996. The offering of Guyanor shares in
Europe was completed on November 5, 1996, and as a result, Guyanor received net
proceeds of approximately FF45.5 million (approximately $8.9 million), and the
Company's interest in Guyanor was reduced to approximately 68%. Because the
price per Class B share issued exceeded the net book value per common share
(including both Class A and Class B shares), the Company recorded a gain of
approximately $5.4 million in connection with this transaction.
On October 9, 1997, the Company and Guyanor announced that the Company has
agreed to acquire an additional 1,000,000 Class B common shares of Guyanor at a
price of FF11.57 or Cdn$2.71. The total consideration of
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
FF11,570,000 or Cnd$2,710,000 for the shares will be satisfied by reducing the
equivalent amount of funds advanced to Guyanor by the Company. The Class B
common shares were issued on October 30, 1997, and the transaction resulted in
an increase in the Company's interest in Guyanor from 68.5% to 69.3%.
ISSUANCES OF COMMON SHARES AND WARRANTS BY PAN AFRICAN RESOURCES CORPORATION
On November 7, 1994, the Company's wholly owned subsidiary Pan African Resources
Corporation ("PARC") completed an equity financing of 2.4 million units for
Cdn$0.45 per unit. Each unit consisted of one PARC common share and one PARC
common share purchase warrant. The net proceeds of the placement was $0.8
million. In addition, the Company subscribed for 1.5 million common share
purchase warrants of PARC, whereby each warrant entitled the holder to purchase
one common share of PARC for Cdn$0.70. As a result of the offering, the
Company's ownership percentage of PARC was reduced to approximately 91.4%.
Because the price per common share issued exceeded the net book value per common
share, a gain of $0.7 million was recorded by the Company in connection with
this transaction.
On May 15, 1995, the Company exercised 1.5 million warrants to purchase PARC
common shares, after extension of the exercise period by PARC. In consideration
for the exercise price of the warrants, the debt due to the Company by PARC was
reduced by $0.8 million. In addition, 2,374,000 common share purchase warrants
held by third parties were exercised in May for total net proceeds of $1.2
million. The remaining outstanding 26,000 warrants expired. Because the price
per common share issued exceeded the net book value per common share, a gain of
$0.9 million was recorded by the Company in connection with this transaction.
As of December 31, 1995, the Company beneficially owned approximately 85% of the
outstanding common shares of PARC.
On February 5, 1996, Pan African Resources Corporation, a Yukon company ("PARC
Yukon"), and a subsidiary of the Company, completed a private placement of 13.2
million units at Cdn$1.00 per unit. Each unit consisted of one common share and
one-half of one common share purchase warrant of PARC Yukon. Each whole warrant
("Series A Warrant") entitled the holder to purchase one common share of PARC
Yukon at Cdn$1.25 until November 1, 1996. The private placement generated net
proceeds of approximately $9.0 million after payment of commissions and
expenses. Because the price per common share issued exceeded the net book value
per common share, a gain of approximately $2.0 million was recorded by the
Company in the first quarter of 1996. During the year ended December 31, 1996,
PARC (as defined below) received $1.0 million in proceeds from exercise of
1,063,500 of the Series A warrants. On October 31, 1996, PARC (as defined
below) extended the exercise date of its $1.25 Series A Warrants issued from
November 1, 1996, to January 31, 1997. On January 31, 1997, the remaining
5,536,500 unexercised warrants expired.
On February 6, 1996, PARC Yukon was amalgamated under the Yukon Business
Corporation Act with Humlin Red Lake Mines Limited, an Ontario corporation
("Humlin"). As a result of the amalgamation, each share issued under the PARC
Yukon private placement was deemed exchanged for 1.001 share of PARC (as defined
below) and each series A Warrant was deemed exchanged for one PARC (as defined
below) Series A Warrant. As a result of the private placement and the
amalgamation, the Company's interest was reduced to approximately 60% of the
45.3 million outstanding shares of Pan African Resources Corporation, the
amalgamated company. PARC, as a result of the amalgamation, became a publicly
traded company in Canada on February 8, 1996, with its common shares quoted on
the Canadian Dealing Network.
Prior to the amalgamation with Humlin, indebtedness totaling $12.3 million owed
by Pan African Resources Corporation, a Barbados company ("PARC Barbados"), and
a wholly-owned subsidiary of PARC Yukon, to the Company as of December 11, 1995,
was converted by the Company, under the terms of two convertible debentures
between PARC Barbados and the Company, into 24.9 million common shares of PARC
Barbados. Upon completion of these loan conversions, 24.9 million PARC Barbados
shares held by the Company were surrendered for cancellation in exchange for the
issuance to the Company of 7.975 million warrants of PARC Barbados, each warrant
entitling the Company to purchase one share of PARC Barbados at Cdn$1.50 until
July 15, 1997. After the PARC amalgamation, the PARC Barbados warrants were
surrendered to PARC Barbados in exchange for the issuance by PARC to the Company
of 7.975 million PARC Series B warrants. Each PARC Series B warrant entitles
the Company to purchase one PARC common share at Cdn$1.50 until July 15, 1997.
In addition, the Company
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
forgave indebtedness owed to it by PARC Barbados of $0.3 million, incurred for
funding of PARC Barbados' exploration activities from December 1995 through
completion of the private placement.
In May 1997, PARC entered into a demand revolving line of credit with Golden
Star, whereby Golden Star would loan PARC up to $2.0 million. On June 27, 1997,
the principal and interest on outstanding advances due from PARC totaling
$2,018,591 were converted into 7,333,328 PARC Common Shares at a conversion
price of Cdn$0.38 per share. As a result, Golden Star's interest in PARC was
increased to 63.9%.
6. SUSPENSION OF ALLUVIAL MINING OPERATIONS AT SOTRAPMAG
- ------------------------------------------------------------
The alluvial operations conducted through SOTRAPMAG experienced continuing
operating losses since their acquisition in 1994 with operating losses of $1.8
million in 1995 and $2.4 million in 1996. As a result of the conclusions from a
report by outside consultants in 1996, management decided to discontinue the
alluvial operations conducted by SOTRAPMAG. Closure procedures, including land
rehabilitation and Company-provided outplacement services were substantially
completed by the end of 1997.
The Company, through its ownership interest in Guyanor, incurred charges to 1996
earnings totaling $3.2 million, including $0.8 million resulting from the write-
down of certain fixed assets and inventories, $1.1 million for the write-down of
certain capitalized exploration costs related to the alluvial mining operations,
$0.1 million for accrual of land rehabilitation and mine closure costs, and $1.1
million for accrual of the severance and other social costs associated with the
discontinuation of alluvial production. All accruals for future obligations are
included in current liabilities. In 1997, the Company incurred, through its
ownership interest in Guyanor, additional losses on impairment of assets of $1.5
million offset by gains on sales of assets of $0.3 million.
7. Deferred Exploration
- ---------------------------
December 31, 1997 December 31, 1996
-------------------------- -------------------------
GUYANA
Eagle Mountain $ 1,136 $ 111
Quartz Hill 1,347 1,347
Upper Potaro Diamond / Amatuk Diamond - 1,010
Mazaruni / Upper Mazaruni Diamond - 2,729
Five Star Diamond 2,360 1,097
Wenamu Gold - 512
Five Stars Gold 3,684 5,767
BHP Gold Projects 333 151
Guyana Diamond Permits 109 27
Other 97 1,376
------- -------
9,066 14,127
------- -------
SURINAME
Benzdorp / Lawa 3,344 3,341
Gross Rosebel 13,892 9,494
Headley's Right of Exploration 311 311
Thunder Mountain 453 453
Saramacca 1,862 1,569
Sara Kreek 581 155
Tempati Reconnaissance 344 161
Tapanahony Reconnaissance 251 86
Kleine Saramacca 107 104
Lawa / Antino 2,096 764
Suriname Diamond Projects - 310
Ulemari Reconnaissance 291 53
Other (17) 252
------- -------
23,515 17,053
------- -------
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
December 31, 1997 December 31, 1996
------------------------ ------------------------
FRENCH GUIANA (Guyanor Ressources S.A.)
Dorlin $ 1,330 $ 628
St-Elie 1,973 1,973
Dieu-Merci 382 382
Yaou 7,130 7,087
Paul-Isnard / Eau Blanche 3,629 3,629
SOTRAPMAG 1,987 1,520
Dachine 1,234 575
Other Diamond Projects - 204
Other 81 1,331
------- -------
17,746 17,329
------- -------
AFRICA (PAN AFRICAN RESOURCES CORPORATION)
Mali / Dioulafoundou 2,763
Mali / Melgue - 56
Mali / Other - 30
Ivory Coast / Comoe 2,092 3,951
Eritrea / Galla Valley - 1,317
Eritrea / Other - 55
Kenya / Ndori 1,677 901
Other 8 53
------- -------
3,777 9,126
LATIN AMERICAN (SOUTHERN STAR RESOURCES LTD.)
Brazil / Andorinhas 8,490 3,371
Brazil / Abacaxis 2,096 1,307
Brazil / Other 189 869
Bolivia / San Simon - 768
Bolivia / Sunsas - 198
Bolivia / Other 173 573
------- -------
10,948 7,086
------- -------
OTHER 108 -
------- -------
TOTAL DEFERRED EXPLORATION COSTS $65,160 $64,721
======= =======
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
DEFERRED EXPLORATION BY COUNTRY / GEOGRAPHIC REGION
FRENCH LATIN
TOTAL GUYANA SURINAME GUIANA VENEZUELA AFRICA AMERICA OTHER
---------------------------------------------------------------------------------------------
December 31, 1994 $ 38,952 $ 7,412 $ 8,577 $ 14,994 $ 3,920 $ 3,934 $ 71 $ 44
Deferred Exploration
Expenditures 29,844 4,358 6,924 6,547 1,398 9,872 745 -
Additions & Acquisitions 775 29 - - - 705 41 -
Write-offs & Property
Abandonments (8,750) (1,786) - (156) (5,318) (1,404) (65) (21)
Joint Venture Recoveries (9,485) - (4,313) (5,172) - - - -
Net Drilling (Recoveries)
Expenditures 121 (41) 268 (106) - - - -
Reclass to other properties (10) - - - - - - (10)
---------------------------------------------------------------------------------------------
DECEMBER 31, 1995 51,447 9,972 11,456 16,107 - 13,107 792 13
Deferred Exploration
Expenditures 33,481 3,482 11,232 8,878 - 5,121 4,768 -
Additions & Acquisitions 4,279 812 770 403 - 768 1,526 -
Write-offs & Property
Abandonments (10,365) (9) - (1,126) - (9,230) - -
Joint Venture Recoveries (13,468) (130) (6,405) (6,933) - - - -
Proceeds From Sale of
Property Interest (640) - - - - (640) - -
Reclass to Other Properties (13) - - - - - - (13)
---------------------------------------------------------------------------------------------
DECEMBER 31, 1996 64,721 14,127 17,053 $ 17,329 - 9,126 7,086 -
Deferred Exploration
Expenditures 35,688 3,748 11,483 11,549 - 3,064 5,749 95
Additions & Acquisitions 2,076 (112) 323 386 - 46 1.435 (2)
Write-offs & Property
Abandonments (22,437) (8,578) (668) (1,425) - (8,459) (3,322) 15
Joint Venture Recoveries (14,888) (119) (4,676) (10,093) - - - -
---------------------------------------------------------------------------------------------
DECEMBER 31, 1997 $ 65,160 $ 9,066 $23,515 $ 17,746 - $ 3,777 $10,948 $108
=============================================================================================
In 1998, the Company is required to make property rental payments and minimum
exploration expenditures totaling $3.1 million in order to maintain its current
property interests per existing mineral agreements. The Company is attempting
to negotiate the reduction or deferral of these payments where possible.
The Company reported a net loss of $26.6 million in 1997 as compared to a net
loss of $7.8 million in 1996. During 1997, the Company recorded property
abandonment charges of $22.4 million, including $4.2 million and $4.4 million,
respectively, from the relinquishment of certain diamond and gold properties in
Guyana, $0.7 million from the write-off of certain diamond properties in
Suriname, $1.0 million for the Regina Est property and $0.4 million or other
property areas in French Guiana, $2.8 million for portions of property areas in
Cote d'Ivoire, $3.4 million for projects in Mali, $2.0 million for the Galla
Valley project, $1.2 million for certain gold properties in Brazil and $2.1
million related to various property interests in Bolivia. The abandonment of
these projects was the result of several factors including exploration results
and the assessment and prioritization of exploration projects by Management to
ensure continued focus on the most promising projects in the Company's
portfolio. The objective of the project prioritization is to ensure continued
funding of projects that the Company believes would offer the greatest potential
for meaningful results and new resources and reserves. Of the $22.4 million of
property abandonments described above, $12.9 million were recorded in the fourth
quarter of 1997.
In December 1996, PARC was granted an option by San Martin Mining and Investment
Company Limited ("San Martin") relating to the Ndori property in Kenya. Under
the terms of PARC's option to acquire 75% of the Ndori
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
property, PARC has made payments to San Martin totaling $0.6 million and must
make minimum annual expenditures of $0.6 million for each of two years. In
addition, PARC must relinquish 50% of the original property area after 24 months
and a further 25% of the original area after 36 months.
In January 1997, PARC announced the sale of its 80% interest in Lafayette Mining
Gabon Ltd. ("LMGL"), the indirect holder of the Eteke Exploration Permit, to
Lafayette Holdings Corp., the 20% minority interest owner of LMGL. Lafayette
Holdings Corp. exercised its right of first refusal under the LMGL shareholder
agreement and purchased PARC's 80% interest in LMGL for $640,000. As a result,
the Company wrote off deferred exploration expenses related to the Eteke
Exploration Permit totaling $5.3 million in the fourth quarter of 1996. The
Company's share of this charge, after minority interest, was $3.1 million.
The Company also incurred a charge to earnings in the fourth quarter of 1996 of
$4.0 million for write-down of capitalized costs for the Dul Mountain Project in
Ethiopia. The majority of the property area did not meet the Company's
standards and the Company intends to relinquish approximately 75% of the
Concession area, with minimal work on the area budgeted for 1997. The Company's
share of this write-down was $2.3 million after minority interest.
In the fourth quarter of 1996, the Company decided to discontinue alluvial
mining operations at SOTRAPMAG and, as a result, wrote-off certain capitalized
exploration costs related to the alluvial operations in 1996 totaling $1.1
million. (See Note 6.)
On December 8, 1995, the Company announced its plan to write off past
expenditures covering the Baomahun gold property in Sierra Leone, Africa. On
October 19, 1994, PARC signed an option agreement covering the Baomahun
property. Due to increasing security problems and civil unrest in Sierra Leone,
the Company announced a temporary suspension of activities in Sierra Leone on
March 6, 1995. Since that time, the Baomahun option agreement has been under
force majeure. On January 20, 1998, PARC and the Company notified Harry Winston
Inc., Precious Stones Sierra Leone Baomahun Inc., and Baomahun Gold Mines Ltd.
that they were terminating the option agreement concerning the Baomahun,
Victoria and Waia properties in Sierra Leone, effective as of the date of the
notice, as a result of the duration of a state of force majeure under the option
agreement for a period of over three years. The decision to write off the
expenditure is a result of the 1996 budgeting and project prioritization process
for PARC and recognition of continuing security problems and civil unrest in
Sierra Leone that may not be resolved in the near term. The expenditures in
Sierra Leone written off by the Company in the fourth quarter of 1995 totaled
$1.2 million.
In addition, certain 1994 capitalized exploration expenditures for PARC totaling
$0.2 million were charged to property abandonments as of December 31, 1995, as
the exploration areas associated with these costs will not be pursued in the
foreseeable future.
As a result of the 1996 budgeting process and related project prioritization,
the Company decided to charge costs related to various exploration prospects in
Latin America by Southern Star to exploration expense as of December 31, 1995.
The charge against earnings was $0.9 million. In addition, certain related
costs incurred during 1994 were charged to property abandonment, totaling $0.1
million.
On July 18, 1995, the Company announced that Venhold Investments (1994) Ltd.,
its indirectly controlled subsidiary, and BPC Corporation (collectively, the
"VenStar Purchasers") had given notice to Lindley Associated S.A. ("Lindley") of
their election to exercise their option ("Put Option") to "put" back to Lindley
their common and preferred shares in VenStar Gold Ltd. ("VenStar") in return for
the reimbursement by Lindley of all purchase price payments and all exploration
expenditures of the VenStar Purchasers. The aggregate amount owed to the
Company under the Put Option was approximately $1.6 million.
In February 1996, Lindley indicated to the VenStar Purchasers that it would not
pay the amounts owed under the Put Option until it had found another purchaser
or joint venture partner for the Venezuelan properties. As a result of the
notification, the Company incurred a charge of $4.5 million to write off the
capitalized deferred exploration in
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
Venhold Investments (1994) Ltd., and the related entities as of December 31,
1995. The Company's share of this charge, after minority interest, was $1.4
million.
The Company also wrote off $0.8 million in costs incurred by the Company related
to the Venezuelan properties.
In June 1996, Lindley informed the Company that it had found a purchaser for the
Venezuelan properties and intended to pay the amounts owed under the Put Option.
The Company agreed to a final termination and settlement agreement in June 1996
in connection with the "unwinding" of its purchase of an interest in VenStar.
Under the terms of the settlement, the Company, through Venhold, received a cash
reimbursement in the amount of $1.6 million from Lindley, consisting of $1.3
million in cash from Lindley and $0.3 million in cash held in the management
company. This amount represents a recovery of certain purchase price payments
and exploration expenditures incurred through July 18, 1996, which were
previously written off. As such, the Company recorded a gain of approximately
$0.9 million in the second quarter of 1996 as a result of the transaction, and
has no remaining interests in Venezuela at this time.
On July 11, 1995, the Company gave formal notice to the Company's joint venture
partner of its election not to exercise its option on the Aranka property in
Guyana and to terminate its agreement relating thereto. This decision was made
during the second quarter of 1995 after the Company's geologists concluded that
the geological potential of the property failed to meet the Company's standards
for further exploration and development. The charge against earnings for the
year ended December 31, 1995 is $1.4 million. In addition, $0.4 million of
capitalized costs were charged to property abandonment for a prospecting area in
Guyana which will not be pursued in the future.
On March 31, 1993, Guyanor signed an option agreement under which it could earn
a 100% interest in an exploration permit on a property known as Esperance. In
March 1995, Guyanor elected not to exercise this option. The option lapsed on
March 31, 1995. This decision was made after Guyanor's geologists concluded
that the potential for a large tonnage disseminated gold deposit on the property
was limited. The charge against earnings for the twelve months ended December
31, 1995 was $0.2 million.
The recoverability of amounts shown for deferred exploration is dependent upon
the sale or discovery of economically recoverable reserves, the ability of the
Company to obtain necessary financing to complete the development, and upon
future profitable production or proceeds from the disposition thereof. The
amounts deferred represent costs to be charged to operations in the future and
do not necessarily reflect the present or future values of the properties.
8. INVESTMENT IN OMAI GOLD MINES LIMITED
- --------------------------------------------
During 1991, the Company acquired a 35% common share equity interest for a
nominal amount OGML, a Guyanese company established to build and operate the
Omai Mine in Guyana. This common share equity interest was reduced to 30% on
April 1, 1993 pursuant to the exercise of an option granted to Cambior.
In addition, the Company received approximately $11.0 million of Class "I"
redeemable preferred shares of OGML in recognition of cumulative exploration
costs amounting to $5.0 million incurred to date by the Company on the Omai
project with the remainder incurred by a former joint venture partner. In
accordance with the Omai Mineral Agreement these preferred shares are required
to be redeemed quarterly with a minimum redemption amount equal to 10% of the
operating cash flow, as defined, of OGML. The Company received preferred share
redemptions of $1.2 million, $1.1 million and $2.5 million in 1995, 1996 and
1997 respectively. These amounts are allocated to the Investment in OGML
account and to Premium on Omai Preferred Share Redemption on the basis of the
Company's share of costs incurred as a percentage of the total value of the
Class "I" preferred shares.
Under the equity method of accounting, equity investors are required to record
their share of the net loss of the investee to the extent that these losses do
not exceed the investment in common share equity of the investee. Accordingly,
the Company has not recorded its share of OGML's loss for the years ended
December 31, 1994,
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
1995, 1996 and 1997. The Company will commence recognition of equity income when
its share of accumulated income exceeds the amount of unrecognized equity
losses.
Details regarding the Company's investment in the common and preferred share
equity and its share of equity losses not recorded are as follows:
Common Preferred
Shares Shares
-------------------------- -------------------------
December 31, 1994 $ - $ 4,346
Less:
Preferred Share Redemptions - (1,209)
Add:
Premium on Preferred Share Redemptions $ - 661
---------- -------
December 31, 1995 $ - $ 3,798
Less:
Preferred Share Redemptions - (1,145)
Add:
Premium on Preferred Share Redemptions - 626
---------- -------
December 31, 1996 $ - $ 3,279
Less:
Preferred Share Redemptions - (2,541)
Add:
Premium on Preferred Share Redemptions - 1,388
---------- -------
December 31, 1997 $ - $ 2,126
========== =======
THE COMPANY'S SHARE OF
ACCUMULATED LOSSES AT:
December 31, 1995 $ (3,401)
==========
December 31, 1996 $ (2,713)
==========
December 31, 1997 $ (1,507)
==========
SUMMARIZED FINANCIAL INFORMATION OF OGML:
As of December 31,
1997 1996
----------------------- -----------------------
Current assets $ 25,175 $ 29,923
Non-current assets 200,367 219,997
Current liabilities 11,671 25,961
Non-current liabilities 162,629 172,995
Redeemable preferred shares:
Class I 5,305 7,886
Class II - 2,919
Class III 50,243 50,242
For the Years Ended December 31,
1997 1996 1995
-------------------- -------------------- ---------------------
Revenues $145,087 $107,199 $74,622
Expenses 139,309 104,463 78,584
Net income (loss) $ 5,778 $ 2,736 $(2,125)
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
At December 31, 1997 and 1996, the difference between the Company's carrying
value of its investment in OGML and its equity share of net assets was as
follows:
As of December 31,
1997 1996
----------------------- ----------------------
30% of OGML net assets $15,373 $15,289
Carrying value of investments 2,126 3,279
------- -------
Difference $13,247 $12,010
======= =======
This difference between the Company's equity share of OGML net assets and its
carrying value has not been recorded.
On August 19, 1995, a failure occurred in the main section of the tailings dam
at the Omai Mine. The failure resulted in the discharge of cyanide-contaminated
water into the Omai River, which in turn flowed into the Essequibo River. The
discharge began on August 19, 1995, and continued until the leakage was fully
controlled by Omai personnel on August 24, 1995. To minimize environmental
damage, a portion of the discharged water was diverted into the Fennell Pit, the
main source of gold at the Omai Mine. Production at the Omai Mine was suspended
from August 19, 1995, until February 4, 1996, when operations resumed.
As a consequence of the Omai tailings dam failure, OGML has been named as a
defendant in a variety of civil proceedings in Guyana. Such proceedings are
currently being settled, without admission of liability, or being contested in
good faith, as applicable. Amounts claimed under currently instituted
proceedings against OGML do not exceed $1.5 million in the aggregate and
insurance coverage may be available to OGML in relation to a substantial portion
of these claims.
OGML and its shareholders, including the Company, may become involved as
defendants, plaintiffs or otherwise in a variety of additional legal proceedings
in Guyana or elsewhere in relation to this incident. There can be no assurance
that such additional litigation will not result in material additional costs
arising from out-of-court settlements, damage awards or other sanctions against
OGML or the Company. Moreover, there can be no assurance that all or any of
such additional costs will be covered by appropriate insurance.
9. FIXED ASSETS
- -------------------
December 31, December 31,
1997 1996
---------------------------- --------------------------
Building $ 0 $ 1,833
Machinery & equipment 3,239 4,676
------ -------
3,239 6,509
------
Accumulated depreciation (1,959) (2,843)
------ -------
$1,280 $ 3,666
====== =======
In December 1996, the Company initiated a program to discontinue alluvial mining
operations conducted by SOTRAPMAG. An evaluation of the fixed assets held by
SOTRAPMAG and used in the alluvial mining operations was conducted. As a
result, fixed assets totaling $0.4 million were deemed obsolete and were charged
to loss for 1996. (See Note 8.) During 1997, the Company sold certain
machinery and equipment from the mine site and recognized gains of $0.3 million.
In September 1997, the decision was made that the remaining assets were not
saleable and would be written off and charged to loss.
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
10. SHARE CAPITAL
- ---------------------
A) ISSUANCE OF SHARE CAPITAL
On August 8, 1997, the Company filed with the SEC a shelf registration statement
on Form S-3 (the "Registration Statement"), with respect to the proposed
issuance by the Company from time to time of up to $47,687,500 of its common
shares, preferred shares, convertible debt securities and/or warrants. The
Registration Statement also includes $52,312,500 in securities previously
registered by the Company pursuant to a Registration Statement declared
effective by the SEC on November 8, 1996.
On August 13, 1997, the Company filed with nine Canadian provincial securities
commissions a short-form shelf prospectus, with respect to the proposed issuance
by the Company from time to time of up to 12 million common shares and/or 12
million common share purchase warrants and a short-form shelf prospectus with
respect to the proposed issuance from time to time of up to $100 million of
convertible debt securities. The Canadian prospectuses relate to the same
securities being registered with the SEC.
No shares were issued under either Registration Statement or the Canadian
prospectuses as of December 31, 1997.
On May 5, 1997, the Company sold through a prospectus offering 3,025,000 common
shares at $7.50 per share for total proceeds of $22.7 million. These shares
were issued under the Company's shelf prospectus in the United States and Canada
dated September 25, 1996, and October 15, 1996, respectively.
B) STOCK OPTION PLANS
STOCK OPTIONS
As a result of changes in U.S. securities laws, the Company adopted in 1997 a
new stock option plan, the 1997 Stock Option Plan (the "1997 Plan"). Under this
plan, the Employees' and Directors' Plans were combined into one plan. The
Company obtained shareholder approval for this plan on June 10, 1997. The
Employees' and Directors' Plans were terminated as of June 10, 1997, and the
outstanding options were assumed under the 1997 Plan. Options granted under the
1997 Plan are non-assignable and are exercisable for a period of ten years or
such other date as stipulated in a stock option agreement between the Company
and an optionee. The maximum number of shares issuable under the plan is
5,600,000. The number of common shares vested and exercisable under the plan at
December 31, 1997, was 3,352,681. The number of common shares vested and
exercisable under the Employees' and Directors' Plans as of December 31, 1996,
was 2,221,227.
STOCK OPTION LOANS
As of December 31, 1997, and 1996, employees had exercised their rights under
employee stock option loan agreements and purchased 1,029,012 and 1,029,012
common shares, respectively, against which there were outstanding loans of
Cdn$4.0 million and Cdn$4.0 million, respectively. Of the 1997 and 1996
outstanding loan balances, approximately Cdn$4.0 million and Cdn$4.0 million,
respectively, relates to loans to two employees, one a director and the other an
officer of the Company. These loans are non-interest bearing and must be repaid
within five years from the date of exercise unless the loan term is extended by
vote of the Board of Directors. The shares are held by a trustee and, in the
event of non-payment, the sole recourse for repayment and recovery of the loans
shall be as against pledged shares. In the event that the loans are not repaid
and the shares are sold at a loss, only the net proceeds will be credited to
share capital. The average exercise price of the underlying shares regarding
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
outstanding loans as at December 31, 1997, and 1996 was Cdn$5.26 and Cdn$5.26,
respectively. The loans outstanding at December 31, 1997, are due as follows:
1998 518
1999 497
2000 94
2001 2,903
------
$4,012
======
SCHEDULE OF STOCK OPTION ACTIVITY
SHARES UNDER OPTION PRICE (CDN$)
EMPLOYEES DIRECTORS EMPLOYEES Directors
----------- ---------- ---------------- ---------------
SHARES UNDER OPTION AT DECEMBER 31,
1994 1,655,092 342,500 $2.30 to $17.10 $2.30 to $16.88
Activity:
Granted 1,101,550 80,000 $6.38 to $9.38 $8.67 to $10.50
Exercised (62,192) (32,500) $2.30 to $5.50 $2.30 to $4.50
Canceled (92,900) - $9.38 to $17.10 -
---------- -------
SHARES UNDER OPTION AT DECEMBER 31,
1995 2,601,550 390,000 $2.76 to $17.00 $2.76 to $16.88
Activity:
Granted 862,250 130,000 $18.45 to $23.00 $9.50 to $24.40
Exercised (1,039,469) (20,000) $2.76 to $16.20 $2.76 to $8.67
Canceled (40,100) - $7.63 to $16.20 -
---------- -------
SHARES UNDER OPTION AT DECEMBER 31,
1996 2,384,231 500,000 $2.76 to $23.00 $2.76 to $24.40
Activity:
Granted 1,011,450 210,000 $3.40 to $18.50 $3.40 to $18.50
Exercised (57,833) (40,000) $2.76 to $9.25 $2.76
Canceled (50,500) - $7.63 to $16.20 -
---------- -------
SHARES UNDER OPTION AT DECEMBER 31,
1997 3,287,348 670,000 $3.40 to $23.00 $2.76 to $24.40
========== =======
C) STOCK BONUS PLAN
In December 1992, the Company established an Employees' Stock Bonus Plan (the
"Bonus Plan") for any full-time or part-time employee (whether or not a
Director) of the Company or any of its subsidiaries who has rendered meritorious
services which contributed to the success of the Company or any of its
subsidiaries. The Bonus Plan provides that a specifically designated committee
of the Board of Directors of the Company (currently the
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
Compensation Committee) may grant bonus common shares on terms that the
Compensation Committee may determine, within the limitations of the Bonus Plan
and subject to the rules of applicable regulatory authorities. The maximum
number of common shares issuable under the Bonus Plan is 320,000.
On February 1, 1995, a total of 95,000 bonus common shares were issued to three
employees of the Company under the Bonus Plan. These bonus common shares were
distributed in accordance with a specific distribution schedule. In connection
with the bonus common shares allocated to them, two of the employees will also
be entitled to receive from the Company an amount equal to any applicable income
taxes which may be payable by them as a result of the issuance of such bonus
common shares. As of December 31, 1996, no additional amounts have been paid by
the Company for any related tax liabilities of these employees. Compensation
expenses related to bonuses under the Bonus Plan during the year ended December
31, 1995 of $0.8 million is included in the determination of net loss.
On April 1, 1995, a total of 10,208 bonus common shares were issued to certain
employees under the Bonus Plan. On January 1, 1996, bonuses totaling $0.2
million were declared for certain employees under the Bonus Plan as compensation
for 1995. A total of 30,712 common shares were issued in January 1996 pursuant
to the January 1, 1996, bonuses. A total of 60,296 common shares were issued in
December 1997 pursuant to the December 9, 1997 bonuses. The Company recognized
compensation expenses related to bonuses under the Bonus Plan during 1997 of
$0.1 million. In connection with the bonus common shares allocated to them in
1997, each of the employees is responsible to pay any applicable income taxes
which may be payable by them as a result of the issuance of such bonus common
shares.
D) WARRANTS
On February 2, 1994, the Company closed a private placement of 2.5 million
Special Warrants at a price of Cdn$21.00 per Special Warrant for gross proceeds
of Cdn$52.5 million. Each Special Warrant entitles the holder thereof to
receive one common share and one half of one common share purchase warrant at no
additional cost. One whole common share purchase warrant was exercisable at a
price of Cdn$25.00 up to July 31, 1995. As a result of the Plan of Arrangement
between the Company and its shareholders effected on March 14, 1995, a warrant
holder is entitled to receive, upon the exercise of two warrants and a payment
of Cdn$25.00, one common share of the Company and one-fifth of one Class B
common share of Guyanor. On July 24, 1995 the Company announced that it
obtained all necessary approvals for a one-year extension of the expiration date
of the Company's common share purchase warrants to July 31, 1996. During 1996,
129,250 of the Company's common share purchase warrants were exercised for
proceeds of $2.4 million. On July 31, 1996, the remaining 1,120,750 of these
warrants expired unexercised.
On March 6, 1996, the Company completed a public offering in Canada of 1.75
million units at a price of Cdn$10.50 per unit for total proceeds of $12.9
million (Cdn$18.375 million). Each unit consists of one common share and one-
half of a common share purchase warrant. Each whole warrant is exercisable into
one common share of the company for a period of 12 months at a price of
Cdn$11.00. During 1996, 201,800 of the Company's Cdn$11.00 warrants were
exercised for proceeds of $1.6 million. All of the remaining Cdn$11.00 warrants
were exercised in 1997 for proceeds of $5.4 million.
E) SHAREHOLDER RIGHTS PLAN
In April 1996, the Company's Board of Directors adopted a Shareholder Rights
Plan (the "Rights Plan"). The Rights Plan is designed to expire in June 1999.
Under the Rights Plan, the Company issued one right (a "Right") for each common
share of the Company outstanding on April 24, 1996. The Company will also issue
one Right for each common share issued in the future. The Rights were issued
pursuant to the Rights Agreement dated April 24, 1996, between the Company and
The R-M Trust Company as rights agent. Each Right will entitle the holder to
purchase from the Company one common share at $200, subject to adjustments and
the provisions of the Rights Plan. The Board may, at any time, redeem the
rights until their expiration and may amend the rights under certain limited
circumstances until they become exercisable.
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
F) OTHER
Under the terms of an agreement dated September 10, 1987, South American
acquired all of the outstanding interest in the GuyGold Syndicate ("Syndicate")
for consideration of Cdn$1,750,000. The assets of the Syndicate consisted of
interest in mineral properties, each of which consisted of a 20 square mile
block, pursuant to an agreement negotiated with the Government of Guyana. As at
December 31, 1996, all of the mineral properties were abandoned except for the
Quartz Hill property. A further 76,923 common shares will be issued if and when
Quartz Hill is brought into production. All members of the Syndicate were
directors or former directors of the Company and three were former officers.
The Company's potential obligations under this agreement may be affected by the
terms of the new agreement with OGML (see Note 15).
11. INCOME TAXES
- -----------------
Losses carried forward for income tax purposes in Canada, approximating Cdn$27.7
million are available for the reduction of future years' taxable incomes. These
losses expire as follows (in thousands):
CDN$
------------------------
1998 2,515
1999 2,266
2000 1,664
2001 1,702
2002 5,524
2003 6,525
2004 7,531
=======
Total $27,727
=======
No recognition has been given in these financial statements to any potential tax
savings that may arise from the application of these losses.
12. OPERATIONS BY GEOGRAPHIC AREA
- ----------------------------------
Information on the Company's continuing operations by geographic area for the
years ended December 31, 1997, 1996 and 1995 is shown below. During the periods
presented, the Company had one customer who accounted for 100% of sales.
However, because the Company is principally selling a commodity, concentration
of credit risk is not considered significant.
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
Operating Revenues NET (LOSS) IDENTIFIABLE ASSETS
1997
South America $ 539 $(16,833) $64,702
Africa 71 (6,237) 3,936
Corporate 1,088 (3,514) 20,484
- --------------------------------------------------------------------------------------------------------------------
Total $1,698 $(26,584) $89,122
====================================================================================================================
1996
South America $1,811 $ (5,760) $65,283
Africa 224 (5,706) 12,893
Corporate 766 3,686 18,107
- --------------------------------------------------------------------------------------------------------------------
Total $2,801 $ (7,780) $96,283
====================================================================================================================
1995
South America $4,435 $ (8,978) $48,430
Africa 1 (2,288) 13,383
Corporate 1,154 (915) 15,796
- --------------------------------------------------------------------------------------------------------------------
Total $5,590 $(12,181) $77,609
====================================================================================================================
13. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
- --------------------------------------------------------------------------------
The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada which differ in certain respects from
those principles that the Company would have followed had its financial
statements been prepared in accordance with accounting principles generally
accepted in the United States. Differences which materially affect these
consolidated financial statements are:
(a) For United States GAAP ("U.S. GAAP") exploration and general and
administrative costs related to projects are charged to expense as
incurred. As such, the majority of costs charged to Exploration Expense
and Abandonment of Mineral Properties under Canadian GAAP would have been
charged to earnings in prior periods under U.S. GAAP. Property acquisition
costs are capitalized for both Canadian and U.S. GAAP.
(b) For periods prior to May 15, 1992, (the "amalgamation"), the Company's
reporting currency was the Canadian dollar. Subsequent to the Company's
amalgamation and moving of corporate headquarters to the United States, the
reporting currency was changed to the U.S. dollar. As such, for the
financial statements for the period prior to May 15, 1992, the Company's
financial statements were translated into U.S. dollars using a translation
of convenience. U.S. GAAP requires translation in accordance with the
current rate method.
(c) Under U.S. GAAP, the investment in OGML would have been written off in
prior years and, therefore, the entire Omai Preferred Share Redemption
would have been included in income. Under Canadian GAAP a portion of the
Omai Preferred Share Redemption is included in income with the remainder
reducing the carrying value of the Company's preferred stock investment.
(d) U.S. GAAP requires that compensation expense be recorded for the excess of
the quoted market price over the option price granted to employees and
directors under stock option plans, since the Company has adopted the
disclosure provisions of APB25 "Accounting for Stock Issued to Employees".
Under Canadian GAAP, no compensation expense is recorded for such awards.
(e) Canadian GAAP allows classification of investments which are capable of
reasonably prompt liquidation as current assets. As such, all of the
Company's investments are included under the caption "short-term
investments" on the balance sheet under current assets. U.S. GAAP requires
classification as current or long term assets based upon the anticipated
maturity date of such instruments. Under U.S. GAAP, cash
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
(and cash equivalents) includes bank deposits, money market instruments,
and commercial paper with original maturities of three months or less.
Canadian GAAP permits the inclusion of temporary investments with
maturities greater than 90 days in cash.
(f) The gains on subsidiary's issuance of common shares recorded under Canadian
GAAP in respect of the Guyanor public offering and the PARC private
placement as discussed in Note 6 are not appropriate under U.S. GAAP.
(g) The Company eliminated its accumulated deficit through the amalgamation
(defined as a reorganization under U.S. GAAP) effective May 15, 1992.
Under U.S. GAAP the cumulative deficit was greater than the deficit under
Canadian GAAP due to the write-off of certain deferred exploration costs
described in (a) above.
(h) Under U.S. GAAP, available-for-sale securities are recorded at fair value
and unrealized gains and losses are recorded as a separate component of
shareholders' equity. Fair value is determined by quoted market prices.
At December 31, 1995, the Company held one type of available-for-sale
security. The Company has available-for-sale securities as of December 31,
1997.
(i) Under U.S. GAAP, accrued severance and social charges of $1.1 million
resulting from suspension of alluvial mining operations at SOTRAPMAG would
not have been recorded as the requirements for accrual under U.S. GAAP were
not satisfied as of December 31, 1996. These charges were recorded in 1997
as all requirements had been met.
Had the Company followed GAAP in the United States, certain items on the
statements of operations and balance sheets would have been reported as follows:
For the Years Ended December 31,
1997 1996 1995
-------------------- -------------------- --------------------
Net loss under Canadian GAAP $(26,584) $ (7,780) $(12,181)
Net effect of the deferred exploration expenditures
on loss for the period (a) 1,189 (10,231) (13,610)
Effect of recording compensation expense under
stock option plans (d) (83) (85) (256)
Reversal of the gain on subsidiary's issuance of
common stock (f) - (7,719) (2,575)
Reversal of the loss for severance accruals (i) (1,115) 1,115 -
Effect of Omai Preferred Share Redemption (c) 1,152 520 548
-------- -------- --------
Loss under U.S. GAAP before minority interest (25,441) (24,180) (28,074)
Minority interest as adjusted (1,489) (1,097) (256)
-------- -------- --------
Loss under U.S. GAAP $(26,930) $(25,277) $(28,330)
======== ======== ========
Basic and diluted loss per share under U.S. GAAP $(0.94) $(1.00) $(1.24)
======== ======== ========
(For items (a) to (i), see pages 87 and 88.)
Under U.S. GAAP the Omai preferred share redemption would be included with costs
and expenses before the caption "Loss Before the Undernoted" on the consolidated
statements of loss and deficit. Weighted average common shares outstanding are
substantially the same under U.S. GAAP as under Canadian GAAP for the periods
presented.
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
The effect of the differences in accounting under Canadian GAAP and U.S. GAAP on
the balance sheets and statements of cash flows are as follows:
BALANCE SHEET
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- --------------------------
CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP
-------------- ---------- -------------- ----------
Cash (e) $ 12,458 $ 12,458 $ 9,664 $ 9,664
Short term investments (e) 4,941 1,999 5,999 2,500
Marketable securities (h) - - - -
Other current assets 2,753 2,753 6,519 6,519
Restricted cash 250 250 2,015 2,015
Deferred exploration (a) 65,160 20,239 64,721 18,611
Investment in OGML (c) 2,126 - 3,279 -
Long-term investments (e) - 2,942 - 3,499
Other assets 1,434 1,435 4,086 4,087
-------- --------- -------- --------
Total Assets $ 89,122 $ 42,076 $ 96,283 $ 46,895
======== ========= ======== ========
Liabilities (i) $ 3,840 $ 3,840 $ 6,987 $ 5,872
Minority interest (a) 5,725 7,076 11,202 11,064
Share capital, net of stock
option loans (g) 153,989 151,200 125,942 123,068
Cumulative translation
adjustments (b) - 1,595 - 1,595
Deficit (a) (c) (d) (f) (i) (74,432) (121,635) (47,848) (94,704)
-------- --------- -------- --------
Total Liabilities and
Shareholders' Equity $ 89,122 $ 42,076 $ 96,283 $ 46,895
======== ========= ======== ========
(For items (a) to (i), see pages 87 and 88.)
Under U.S. GAAP, receivables would be separately disclosed as follows:
1997 1996
---------------------- ----------------
Receivables from employees $ 396 $ 325
Receivables from joint venture partners 805 2,387
Interest receivable 85 137
Other 952 2,267
Allowance for doubtful accounts - -
------ ------
Total Receivables $2,238 $5,116
====== ======
Of the December 31, 1997, accounts receivable balance, $0.1 million relates to
loans to two officers of the Company.
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY UNDER U.S. GAAP
(b) (i)
Cumu- Accumu-
lative lated
Common Trans- Unrealized
Stock Stock lation Gains on
Number of Share Option Adjust- Invest-
Shares Capital Loans ment ments Deficit
------ ------- ----- ------ ------ -------
BALANCE AT DECEMBER 31, 1994 22,569,972 $ 91,871 $(1,080) $1,595 - $ (37,815)
Shares Issued 105,208 659 - - - -
Shares Issued Under Options 94,692 285 - - - -
Issue Costs - 20 - - - -
Stock Option Loans - - (90) - - -
Reclass of Gain of Subsidiary Stock (f) - 2,575 - - - -
Stock Based Compensation Expense (d) - 256 - - - -
Accumulated Unrealized Gains on
Investments (i) - - - - 127 -
Net Loss (a) (c) (d) (f) - - - - - (28,330)
---------- -------- --------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1995 22,769,872 95,666 (1,170) 1,595 127 (66,145)
Shares Issued 1,780,712 13,574 - - - -
Shares Issued Under Options 1,059,469 6,744 - - - -
Shares Issued Under Warrants 331,050 3,983 - - - -
Issue Costs - (691) - - - -
Stock Option Loans - - (2,902) - - -
Stock Option Loan Repayments - - 60 - - -
Reclass of Gain of Subsidiary Stock (f) - 7,719 - - - -
Stock Based Compensation Expense (d) - 85 - - - -
Accumulated Unrealized Gains on
Investments (i) - - - - (127) -
Other - - - (3,282)
Net Loss (a) (c) (d) (f) (j) - - - - - (25,277)
---------- -------- --------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1996 25,941,103 $127,080 $(4,012) $1,595 $ - $ (94,704)
Shares Issued 3,085,296 22,840 - - - -
Shares Issued Under Options 97,833 235 - - - -
Shares Issued Under Warrants 673,200 5,429 - - - -
Issue Costs - (457) - - - -
Stock Option Loans - - - - - -
Stock Option Loan Repayments - - - - - -
Reclass of Gain of Subsidiary Stock (f) - - - - - -
Stock Based Compensation Expense (d) - 83 - - - -
Accumulated Unrealized Gains on
Investments (i) - - - - - -
Other - - - - - -
Net Loss (a) (c) (d) (f) (i) - - - - - (26,930)
---------- -------- --------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1997 29,797,432 $155,210 $(4,012) $1,595 $ - $(121,634)
========== ======== ========= ======== ======== =========
STATEMENTS OF CASH FLOWS UNDER U.S. GAAP
NET CASH PROVIDED BY (USED IN): Operating Activities INVESTING ACTIVITIES FINANCING ACTIVITIES
---------------------------- ---------------------------- --------------------------
Canadian GAAP U.S. GAAP Canadian GAAP U.S. GAAP Canadian GAAP U.S. GAAP
For the Years Ended December 31,
- --------------------------------
1997 $ (8,602) $(27,045) $(19,595) $(2,670) $29,933 $30,009
1996 $(10,650) $(30,024) $(23,442) $(3,963) $40,257 $40,331
1995 $(11,523) $(31,137) $(21,157) $14,359 $ 7,791 $ 8,093
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
The statements of cash flows reflect the impact of the previously discussed
adjustments (a) (c) (d) (f) and the following non-cash items:
U.S. GAAP does not permit the presentation of non-cash items in investing
or financing activities in the consolidated statements of cash flows, and
consequently deferred exploration costs and share capital and warrants
would be reduced by $0.8 million, $0.5 million and $0.0 for the years ended
December 31, 1995, 1996 and 1997, respectively.
U.S. GAAP TAX CONSIDERATIONS
U.S. GAAP changes the Company's method of accounting for income taxes from
the deferred method, as recorded under Canadian GAAP, to an asset and
liability approach. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributed to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Use of
the asset and liability method has no effect on the U.S. GAAP financial
statements as the Company has concluded that a full valuation allowance
must be applied to the deferred tax asset resulting from the Company's net
operating loss carryforwards (see Note 13). For the years ended December
31, 1997 and 1996, the Company has recorded no current tax expense under
Canadian or U.S. GAAP due to the cumulative net losses incurred by the
Company. Under U.S. GAAP, the Company would not record any deferred tax
expense based on the same rationale.
The Company operates in Africa, French Guiana, Guyana, Suriname, and
Brazil. In Africa and French Guiana, the Company is currently negotiating
its tax position with the related governments and as such, the differences
between the book bases and tax bases of the Company's assets and
liabilities cannot be determined.
Certain of the Company's operations are subject to Canadian taxes including
the office headquarters, Guyana and Suriname which are all divisions of the
Company.
Summarized below are the components of deferred taxes:
December 31, 1997 December 31, 1996
----------------- -----------------
Temporary differences relating to net assets:
Other current assets $ 81 $ 118
Property & equipment 396 432
Deferred exploration 18,587 14,540
Investment in OGML 1,781 2,746
Offering costs 1,103 1,103
Tax loss and credit carryforwards 8,806 6,804
-------- --------
Gross deferred tax asset 30,754 25,743
--------
Valuation allowance (30,754) (25,743)
-------- --------
Net deferred tax assets $ - $ -
======== ========
The valuation allowance increased by $5.0 million in 1997 due to the taxable
losses and increase in temporary differences. Any income tax benefits resulting
from utilization of net operating loss carry forwards existing at May 15, 1992,
the date of the quasi-reorganization under U.S. GAAP, would be excluded from
results of operations and credited directly to share capital, resulting in lower
earnings than would be reported absent the quasi-reorganization (see (g) above).
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
STOCK BASED COMPENSATION PLANS
At December 31, 1997, the Company has three stock-based compensations plans,
which are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans in its U.S. GAAP presentations. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the plans
consistent with the method described in Statement of Financial Accounting
Standards No. 123, the Company's consolidated net loss and loss per share under
U.S. GAAP would have been increased to the pro forma amounts indicated below:
1997 1996
-------- --------
Net loss under U.S. GAAP As reported $(26,930) $(25,277)
Pro forma $(32,660) $(28,533)
Loss per share under U.S. GAAP As reported $ (0.94) $ (1.00)
Pro forma $ (1.13) $ (1.13)
Under the 1997 Stock Option Plan ("GSR Plan"), the Company may grant options to
employees, consultants and directors of the Company or its subsidiaries for up
to 5,600,000 shares of common stock. Under the GSR Plan, the options may take
the form of non-qualified stock options, the exercise price of each option
equals the market price of the Company's stock on the date of grant, and an
option's maximum term is ten years or such other date as stipulated in a stock
option agreement between the Company and the optionee. Options under the GSR
Plan are granted from time to time at the discretion of the Compensation
Committee of the Board of Directors. Options granted under the GSR Plan vest
over periods ranging from immediately to four years from the date of grant and
vesting periods are determined at the discretion of the Compensation Committee
of the Board of Directors.
Under the Guyanor Ressources S.A. Stock Option Plan (the "Guyanor Plan"),
Guyanor may grant options to its employees and subsidiaries and affiliates for
up to 4,367,889 shares of Class B common shares. The options may take the form
of non-qualified stock options, the exercise price of each option equals the
market price of Guyanor's stock on the date of grant, and an option's maximum
term is ten years for such other date as stipulated in a stock option agreement
between Guyanor and the optionee. Options under the Guyanor plan are granted
from time to time at the discretion of Guyanor's Board of Directors and vest
over periods ranging from immediately to three years.
Under the Pan African Resources Corporation Stock Option Plan (the "PARC Plan"),
PARC may grant options to the employees, consultants and directors of PARC and
its affiliates for up to 4,407,600 shares of its common stock. The options may
take the form of non-qualified stock options, the exercise price of each option
equals the market price of PARC's stock on the date of grant, and an option's
maximum term is five years for such other date as stipulated in a stock option
agreement between PARC and the optionee. Options under the PARC Plan are granted
from time to time at the discretion of PARC's Board of Directors and vest over
periods ranging from immediately to four years, with vesting periods determined
at the discretion of PARC's Board of Directors.
91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
The fair value of each option grant is estimated on the date of grant for all
plans using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1997 and 1996:
1997
GSR Plan Guyanor Plan PARC Plan
--------------------------------------------------------------------------------
Expected volatility 79% 56% 81%
Risk-free interest rate 5.74% - 6.55% 5.92% 6.16% - 6.53%
Expected lives 5 years 5 years 5 years
Dividend yield 0% 0% 0%
1996
GSR Plan Guyanor Plan PARC Plan
--------------------------------------------------------------------------------
Expected volatility 55% 73% 93%
Risk-free interest rate 5.30% to 6.77% 5.50% to 6.39% 5.25% to 6.28%
Expected lives 5 years 5 years 5 years
Dividend yield 0% 0% 0%
The following tables summarize information about stock options under the GSR
Plan:
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
GSR Plan (000) (Cdn$) (000) (Cdn$) (000) (Cdn$)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,884 $13.07 2,991 $ 9.40 1,998 $10.99
Granted 1,221 $ 5.08 992 $19.34 1,181 $ 7.84
Exercised (98) $ 3.30 (1059) $ 6.37 (95) $ 4.01
Forfeited (50) $17.31 (40) $12.23 (93) $14.58
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,957 $10.79 2,884 $13.07 2,991 $ 9.40
Options exercisable at year-end 3,353 2,221 2,341
Weighted-average fair value of
options granted during the year $ 5.08 $19.34 $ 7.84
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------------
Number Weighted- Number
GSR Plan Outstanding at Average Weighted-Average Exercisable at Weighted-Average
Range of Exercise December 31, 1997 Remaining Exercise Price December 31, 1997 Exercise Price
Prices (Cdn$) (000) Contractual Life (Cdn$) (000) (Cdn$)
- -----------------------------------------------------------------------------------------------------------------------------------
$2.76 to $2.76 70 4.49 $ 2.76 70 $ 2.76
$3.40 to $7.63 1,808 8.90 $ 5.04 1,441 $ 5.46
$8.05 to $12.05 323 8.13 $ 9.51 323 $ 9.51
$12.15 to $17.90 781 6.48 $14.43 764 $14.35
$18.45 to $24.40 975 8.82 $19.54 755 $19.57
- ---------------------------------------------------------------------------------------------------------------------------
3,957 3,353
92
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
The following tables summarize information about stock options for the Guyanor
plan:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Guyanor Plan (000) (Cdn$) (000) (Cdn$) (000) (Cdn$)
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,726 $3.97 1,611 $2.13 - -
Granted 511 $1.64 1,306 $6.04 1,677 $2.13
Exercised (40) $2.68 (191) $2.35 (43) $2.10
Forfeited (54) $5.08 - - (23) $2.10
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,143 $3.60 2,726 $3.97 1,611 $2.13
Options exercisable at year-end 2,213 1,591 626
Weighted-average fair value of
options granted during the year $1.64 $6.04 $2.13
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------
Number
Outstanding
at Number
Guyanor Plan Dec. 31 Weighted-Average Weighted-Average Exercisable at Weighted-Average
Range of Exercise 1997 Remaining Exercise Price December 31, 1997 Exercise Price
Prices (Cdn$) (000) Contractual Life (Cdn$) (000) (Cdn$)
- ----------------------------------------------------------------------------------------------------------------------------------
$1.64 to $3.30 2,627 7.96 $2.35 1,825 $2.36
$9.20 to $12.40 516 8.81 $9.97 388 $9.89
- ----------------------------------------------------------------------------------------------------------------------------------
3,143 2,213
The following tables summarize information about stock options for the PARC
plan:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
PARC Plan (000) (Cdn$) (000) (Cdn$) (000) (Cdn$)
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,357 $0.90 - - - -
Granted 48 $0.69 2,367 $0.90 - -
Exercised 0 - (10) $0.99 - -
Forfeited (67) $0.86 - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,338 $0.90 2,357 $0.90 - -
Options exercisable at year-end 1,765 1,161
Weighted-average fair value of
options granted during the year $0.69 $0.90 -
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
PARC Plan Number Outstanding Weighted-Average Weighted-Average Number Exercisable Weighted-Average
Range of Exercise at Dec. 31, 1997 Remaining Exercise Price (Cdn$) at Dec. 31, 1997 Exercise Price
Prices (Cdn$) Contractual Life (Cdn$)
- ------------------------------------------------------------------------------------------------------------------------------------
$0.38 to $0.99 2,338 3.34 $0.90 1,765 $0.89
Impact of Recently Issued Accounting Standards
In February 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", effective for financial statements for periods ending after December 15,
1997. The Statement requires dual presentation of basic and diluted earnings
per share on the face of the income statement. The Company adopted the
Statement effective December 31, 1997, for U.S. GAAP reporting.
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure", effective for financial statements for periods ending after
December 15, 1997. The Statement requires disclosures about certain preferences
and rights of outstanding securities and certain information about redeemable
capital stock. At this time the Company has no preferential or redeemable
securities that are subject to the new disclosure requirements of the Statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
effective for financial statements for periods beginning after December 15,
1997. The Statement establishes standards for reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income for the Company will include items which have historically been included
in Shareholders' Equity, such as unrealized gains or losses on marketable
equity securities and foreign exchange gains and losses.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for financial statements for
periods beginning after December 15, 1997. The Statement requires the Company
to report certain information about operating segments in its financial
statements and certain information about its products and services, the
geographic areas in which it operates and its major customers. The Company is
reviewing the effects of the disclosure requirements of the Statement.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Post-retirement Benefits", effective for fiscal years
beginning after December 15, 1997. The Statement standardizes the disclosure
requirements for pensions and other post-retirement benefits to provide
information that is more comparable and concise. At this time the Company has
no pension or other post-retirement benefit plans that are subject to the
requirements of the Statement.
OPERATIONS BY GEOGRAPHIC AREA UNDER U.S. GAAP
Information on the Company's continuing operations by geographic area under U.S.
GAAP for the years ended December 31, 1997, 1996 and 1995 is shown below.
Operating earnings from continuing operations are total revenues less operating
expenses of the geographic areas.
OPERATING NET IDENTIFIABLE
REVENUES (LOSS) ASSETS
1997
South America $ 539 $(21,500) $22,666
Africa 71 (2,876) 1,197
Corporate 1,088 (2,554) 18,213
- ---------------------------------------------------------------------------------------------------------------------
Total $1,698 $(26,930) $42,076
=====================================================================================================================
1996
South America $1,811 $(18,431) $27,121
Africa 224 (3,261) 4,944
Corporate 766 (3,585) 14,830
- ---------------------------------------------------------------------------------------------------------------------
Total $2,801 $(25,277) $46,895
=====================================================================================================================
1995
South America $4,435 $(15,295) $24,267
Africa 1 (9,867) 1,667
Corporate 1,154 (3,168) 12,125
- ---------------------------------------------------------------------------------------------------------------------
Total $5,590 $(28,330) $38,059
=====================================================================================================================
14. Subsequent Events
- ------------------------
On February 20, 1998, the Company and PARC announced that the Board of Directors
of PARC had approved a proposal by the Company for the Arrangement by PARC which
would, if implemented, result in the acquisition by the Company of the shares of
PARC not already owned by the Company. Under the Arrangement, the Company
94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
will issue one common share of the Company in exchange for each 50 common shares
of PARC not owned by the Company. The Company has committed to provide
sufficient funds to allow PARC to operate until completion of the Arrangement.
The Arrangement is expected to be completed in April. If the Arrangement is
approved, PARC will become a wholly owned subsidiary of the Company.
15. RELATED PARTIES
- -----------------------
To consolidate exploration and possible development of the Quartz Hill area with
the adjacent Omai property in 1995, the Company enteredinto a letter agreement
with OGML whereby the Company relinquished all of its right, title, and interest
in the Quartz Hill prospecting license in exchange for a beneficial interest in
any prospecting license granted to OGML with respect to the same area. Under
the agreement, OGML may acquire 100% of the Company's beneficial interest by
either: (i) making quarterly payments to the Company equal to 25% of net cash
flow generated from mining activity on the Quartz Hill property; or (ii) issuing
to the Company, upon commencement of production at Quartz Hill, 1,386,000 Class
IV Preference Shares with a par value of $1.00 per share, i.e., the equivalent
of the approximate historical book value of the Company's investment in the
Quartz Hill property. Such shares would be fully redeemable in equal quarterly
installments during the 36-month period following commencement of commercial
production from Quartz Hill. In January 1997, OGML was awarded prospecting
licenses for the Quartz Hill area and the Omai River area, adjacent to the Omai
permit area. A budget of $1.0 million to be funded by OGML has been allocated
in 1997 for the Quartz Hill and Omai River properties, as well as the Omai Mine
license. Execution of a definitive agreement between Cambior, OGML and the
Company is subject to execution of an acceptable mineral agreement regarding the
Quartz Hill and Omai River properties. This agreement is subject to approval by
the Board of Directors of OGML, and, for certain matters, approval of OGML's
shareholders.
16. COMMITMENTS AND CONTINGENCIES
- -------------------------------------
ENVIRONMENTAL REGULATIONS
The Company is not aware of any events of material non-compliance in its
operations with environmental laws and regulations which could have a material
adverse effect on the Company's operations or financial condition.. The exact
nature of environmental control problems, if any, which the Company may
encounter in the future cannot be predicted, primarily because of the changing
character of environmental requirements that may be enacted within foreign
jurisdictions.
BUSINESS RISK
All of the Company's mineral properties are located in developing countries with
the exception of Brazil and French Guiana, a Departement of France. There are
certain business and political risks inherent in doing business in developing
countries. In particular, the regulatory framework for conducting mining and
exploration activities in these countries, including the tax and general fiscal
regimes and the manner in which mineral rights and title to mineral properties
are established and maintained are often uncertain, incomplete, in a state of
flux or subject to change without notice. Further, in many of the countries in
which the Company's projects are located it may not be economically feasible to
develop a commercial mine unless special tax or other fiscal and regulatory
concessions are obtained from the applicable government and regulatory
authorities. There can be no assurance that the Company will be able to execute
or enforce satisfactory mineral agreements or to obtain satisfactory political
risk insurance on commercially reasonable terms for any or all of its
properties.
LETTERS OF CREDIT AND GUARANTEE
On June 5, 1997, PARC's performance bond requirements under its Exploration
License Agreement with the Government of Eritrea were reduced from $1.3 million
to $0.7 million. As a result, the bank guarantee and restricted cash collateral
supporting the performance bond were reduced by $0.6 million. In August 1997,
the remaining performance bond requirements were released by the Government of
Eritrea and the bank guarantee and restricted cash collateral supporting the
performance bond were reduced by the remaining $0.7 million. As of
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars
September 30, 1997, the Company had no remaining restricted cash balances
relating to Eritrea. The Company's performance bond of $0.45 million for the
benefit of the Ministry of Mines and Energy in Ethiopia guaranteeing the second
year exploration program at the Dul project in Ethiopia expired on October 16,
1997. The letter of credit collateralizing the performance bond expired on
October 31, 1997, and the funds held as restricted cash collateral for the
letter of credit were released in November 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ------------------------------------------------- --------------
FINANCIAL DISCLOSURE
---------------------
There have been no disagreements with Coopers & Lybrand, the Company's chartered
accountants, regarding any matter of accounting principles or practices or
financial statement disclosure.
96
PART III
ITEMS 10, 11, 12 AND 13.
- ------------------------
In accordance with General Instruction G(3), the information required by Part
III (with the exception of certain information regarding the Company's executive
officers set forth above under Item 4A of this Form 10-K) is hereby incorporated
by reference from the Company's proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
97
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- -------- -------------------------------------------------------
FORM 8-K
--------
(a) The following documents are filed as part of this Report:
1. Financial Statements
Management's Report
Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations Years Ended December 31, 1997, 1996
and 1995
Consolidated Statement of Changes in Shareholders' Equity Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Financial Statement schedules have been omitted since they are either not
required, are not applicable, or the required information is shown in the
financial statements or related notes.
(b) Reports on Form 8-K.
The Company filed no Form 8-K for the fourth quarter period ending December
31, 1997.
EXHIBITS
--------
Seq. Page No.
-------------
2.1 Articles of Arrangement dated March 7, 1995 with Plan of Arrangement
attached (incorporated by reference to Exhibit 2.1 to the Company's Form
10-K for the year ended December 31, 1994)
3.1 Articles of Amalgamation of the Company (incorporated by reference to
Exhibit 1.1 to the Company's Registration Statement on Form 20-F, filed on
May 10, 1993)
3.2 By-laws of the Company (incorporated by reference to Exhibit 1.2 to the
Company's Registration Statement on Form 20-F, filed on May 10, 1993)
3.2(a) By-law Number One amended and restated (incorporated by reference to
Exhibit 3 to the Company's Form 10-Q for quarter ended June 30, 1995)
4.1 Form of Stock Certificate (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-8 filed on July 15, 1994)
4.1(a) Registration Statement Form S-3 (333-12673) (incorporated by reference
as filed on October 2, 1997)
4.2 Omitted
10.1 Omitted
10.2 Memorandum of Association of Omai Gold Mines dated August 15, 1990 and
entered into among Cambior, the Company and the Government of Guyana
(incorporated by reference
98
to Exhibit 3.4 to the Company's Registration Statement on Form 20-F, filed
on May 10, 1993)
10.3 Omai Mineral Agreement dated August 16, 1992 respecting the Omai Gold Mine
(incorporated by reference to Exhibit 3.10 to the Company's Registration
Statement on Form 20-F, filed on May 10, 1993)
10.4 Omitted
10.5 Omitted
10.6 Gross Rosebel Mineral Agreement dated April 7, 1994 between The Republic of
Suriname, Grasshopper Aluminum Company N.V. and the Company (English
translation) (incorporated by reference to Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 1994)
10.7 Option Agreement dated June 1, 1994 between Cambior Inc. and the Company
regarding the Gross Rosebel property (incorporated by reference to Exhibit
10.10 to the Company's Form 10-K for the year ended December 31, 1994)
10.8 Option Agreement dated May 11, 1994 between Cambior Inc. and the Company
regarding Yaou and Dorlin properties (incorporated by reference to Exhibit
10.11 to the Company's Form 10-K for the year ended December 31, 1994)
10.9 Omitted
10.10 Agreement dated February 25, 1995 between Guyanor Ressources S.A.,
Societe des Mines de St-Elie, Asarco Incorporated and Asarco Guyane
Francaise regarding the St-Elie property (incorporated by reference to
Exhibit 10.16 to the Company's Form 10-K for the year ended December 31,
1994)
10.11 Omitted
10.12 Omitted
10.13 Agreement dated April 30, 1995, between The Ministry of Mines and Energy
of Ethiopia and the Company, for the exploration of gold at Dul Locality
(incorporated by reference to Exhibit 10.13 to the Company's Form 10-K
for the year ended December 31, 1995)
10.14 Omitted
10.15 Agreement of Purchase and Sale dated January 10, 1997, between Pan
African Resources Corporation (Barbados) and Lafayette Holdings Corp., re
Eteke properties in Gabon terminating the agreements (incorporated by
reference as Exhibit 10.15 to the Company's Form 10-K for the year ended
December 31, 1995)
10.16 Mineral Agreement dated October 1995, between Pan African Resources
Corporation and the Minister Responsible for Mining, Industry and
Hydraulics of the Government of Mali, for the Melgue property, together
with English summary thereof (incorporated by reference to Exhibit 10.16
to the Company's Form 10-K for the year ended December 31, 1995)
10.17 Omitted
99
10.18 Management Services Agreement dated January 1, 1995 between the Company
and Guyanor Ressources S.A. (incorporated by reference to Exhibit 10.18 to
the Company's Form 10-K for the year ended December 31, 1995)
10.19 Management Services Agreement dated January 1, 1996 between the Company
and Pan African Resources Corporation (incorporated by reference to
Exhibit 10.19 to the Company's Form 10-K for the year ended December 31,
1995)
10.20 Omitted
10.21 Omitted
10.22 Omitted
10.23 License Agreement dated April 19, 1996, between the Government of the
State of Eritrea and the Company for the Grant of Exploration Right and
License in the Galla Valley area (incorporated by reference to Exhibit
10.23 to the Company's Form 10-K for the year ended December 31, 1996)
10.24 English translation of the Exploration Agreement dated May 13, 1996,
between the Company's wholly owned subsidiary Southern Star Resources Ltd.
and its wholly-owned Brazilian subsidiary, Estrela Sul do Brasil
Empreendimentos Ltda. and Companhia Vale do Rio Doce and its subsidiary Rio
Doce Geologia e Mineracao S.A. (incorporated by reference to Exhibit 10.24
to the Company's Form 10-K for the year ended December 31, 1996)
10.25 Termination and Settlement Agreement dated July 29, 1996, between
Venezuela Investments Ltd., a wholly owned subsidiary of the Company and
various other entities including VenStar Gold Ltd., Venhold Investments
(1994) Ltd., Lindley Associated S.A., Golden Star Management Ltd., General
Mining de Guyana C.A., Krysos Mining S.A., Servicios Consultmin S.A.,
GenVen Holdings Ltd., KrysVen Holdings Ltd. and ConsultVen Holdings Ltd.
(incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for
the year ended December 31, 1996) terminating the underlying agreements
(incorporated by reference as Exhibit 10.13 to the Company's Form 10-K for
the year ended December 31, 1994)
10.26 English translation of the Option and Joint Venture Agreement dated June
26, 1996, between Societe de Travaux Publics et de Mines Aurifiere en
Guyane, Societe Guyanaise des Mines, LaSource Developpement SAS and ASARCO
Exploration Company for the Paul Isnard property (incorporated by
reference to Exhibit 10.26 to the Company's Form 10-K for the year ended
December 31, 1996)
10.27 Heads of Agreement dated July 22, 1996, between the Company and BHP
Minerals International Exploration Inc. regarding the Guyana Reconnaissance
Project (incorporated by reference to Exhibit 10.27 to the Company's Form
10-K for the year ended December 31, 1996)
10.28 Heads of Agreement dated November 13, 1996, between the Company and BHP
Minerals International Exploration Inc. regarding the South Benzdorp
Project in Suriname (incorporated by reference to Exhibit 10.28 to the
Company's Form 10-K for the year ended December 31, 1996)
10.29 Heads of Agreement dated August 19, 1996, and amendment No. 1 dated
October 25, 1996, between the Company and BHP Minerals International
Exploration Inc. regarding the Suriname Reconnaissance Project
(incorporated by reference to Exhibit 10.29 to the Company's Form 10-K for
the year ended December 31, 1996)
100
10.30 English translation of the Underwriting Agreement dated October 29, 1996,
between Guyanor Ressources S.A., Banque Paribas, Banque Bruxelles Lambert
France, Banque Nationale De Paris, CIBC Wood Gundy Securities, Yorkton
Securities Inc., Societe De Bourse De Portzamparc S.A. and the Company
(incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for
the year ended December 31, 1996)
10.31 English translation of Convention D'Etablissement dated October 15, 1996,
between the Government of the Republic of Mali and PARC Fougala S.A.
(incorporated by reference to Exhibit 10.31 to the Company's Form 10-K for
the year ended December 31, 1996)
10.32 Omitted
10.33 Omitted
10.33(a) 1997 Stock Option Plan (incorporated by reference to Exhibit 10 to
the Company's Form 10-Q for the period ended June 30, 1997)
10.34 Employees' Stock Bonus Plan amended and restated to June 7, 1995
(incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for
the year ended December 31, 1995)
10.35 Guyanor Ressources S.A. Stock Option Plan (English translation)
(incorporated by reference to Exhibit 10.26 to the Company's Form 10-K for
the year ended December 31, 1995)
10.36 Pan African Resources Corporation Stock Option Plan (incorporated by
reference to Exhibit 10.27 to the Company's Form 10-K for the year ended
December 31, 1995)
10.37 Standardized Adoption Agreement for a 401-K Savings Plan adopted January
1, 1996 (incorporated by reference to Exhibit 10.28 to the Company's Form
10-K for the year ended December 31, 1995)
10.38 Employment Contracts of Messrs. Fagin, Fennell, Fleming, Bertoni and
Shields, dated May 15, 1992, May 15, 1992, May 5, 1994, January 1, 1994, and
January 1, 1994, respectively. (incorporated by reference to Exhibit 10.29 to
the Company's Form 10-K for the year ended December 31, 1995)
10.38(a) Employment contracts of Messrs. Bell, Peloquin and Winters dated
October 24, 1995, November 25, 1997, and August 7, 1995, respectively
10.38(b) Change In Control Agreements between the Company and Messrs. Bell,
Fennell, Fleming, Peloquin and Winters dated December 17, 1997
10.39 Agreements between the Company and its outside directors, dated December
8, 1995, and December 10, 1996 (incorporated by reference as Exhibit 10.39 to
the Company's Form 10-K for the year ended December 31, 1996) granting them
options to purchase Guyanor Class "B" common shares
10.39(a) Agreements between the Company and its outside directors, dated
December 9, 1997 granting them options to purchase Guyanor Class "B" common
shares
10.40 Amendment of Employment Agreement dated May 1, 1996, amending the
Employment Agreement dated May 15, 1992, between the Company and David K.
Fagin (incorporated by reference to Exhibit 10.40 to the Company's Form
10-K for the year ended December 31, 1996)
101
10.41 Omitted
10.42 Rights Agreement dated April 24, 1996, between the Company and The R-M
Trust Company (incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated May 7, 1996)
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand, Chartered Accountants
27.1 Financial Data Schedule
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GOLDEN STAR RESOURCES LTD.
Registrant
By: /s/ David A. Fennell
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DAVID A. FENNELL
President and Chief Executive Officer
Date: March 30, 1998
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
By: /s/ David A. Fennell By: /s/ Gordon J. Bell
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Name: David A. Fennell Name: Gordon J. Bell
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Title: President and CEO Title: Vice-President and Chief Financial
(Principal Executive Officer) Officer (Principal Financial and
Accounting Officer)
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Date: March 25, 1998 Date: March 25, 1998
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By: /s/ David K. Fagin By: /s/ David A. Fennell
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Name: David K. Fagin Name: David A. Fennell
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Title: Director Title: Director
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Date: March 25, 1998 Date: March 25, 1998
By: /s/ Pierre Gousseland By: /s/ Philip S. Martin
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Name: Pierre Gousseland Name: Philip S. Martin
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Title: Director Title: Director
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Date: March 25, 1998 Date: March 25, 1998
103
By: /s/ Donald F. Mazankowski By: /s/ Ernest C. Mercier
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Name: Donald F. Mazankowski Name: Ernest C. Mercier
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Title: Director Title: Director
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Date: March 25, 1998 Date: March 25, 1998
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By: /s/ Robert Minto By: /s/ Roger D. Morton
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Name: Robert Minto Name: Roger D. Morton
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Title: Director Title: Director
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Date: March 25, 1998 Date: March 25, 1998
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By: /s/ Richard A. Stark By: /s/ Robert R. Stone
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Name: Richard A. Stark Name: Robert R. Stone
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Title: Director Title: Director
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Date: March 25, 1998 Date: March 25, 1998
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104