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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, 1998
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 $24.5 million as of March 12, 1999, based on the
closing price of the shares on the American Stock Exchange of $0.81 per share.
Number of Common Shares outstanding as at March 12, 1999: 30,292,249
DOCUMENTS INCORPORATED BY REFERENCE
The Company's 1999 Proxy Statement and Information Circular for the 1999 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1998 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 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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 15 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, changes in gold price, the
establishment, quantification and recovery of reserves and mineralized
material, the timing and scope of future drilling, results of pending and
future feasibility studies, political, economic and operational risks of
foreign operations, force majeure events, impacts of the year 2000 problem
and its effect on joint venture partners and third party suppliers,
competition, uninsured risks, capitalization and commercial viability and
expectation regarding the receipt of permits and licenses. (See "Item 1.
Risk Factors".)
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- ------ -----------------------
Overview
Golden Star Resources Ltd. ("Golden Star" or the "Company" or "we") is an
international gold and diamond exploration company with a diverse portfolio of
active and inactive exploration and development projects, and a non-operating
interest in a producing 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 projects in various stages of
development in Guyana, French Guiana (through its approximately 71% owned
publicly traded subsidiary, Guyanor Ressources S.A.), Suriname and Brazil in
South America, and in Ivory Coast and Kenya in Africa. 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. During 1998, the Company abandoned or suspended its activities on
several projects to focus on its most promising prospects.
As at March 12, 1999, 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 study was completed in 1997 on
the Company's second major project, Gross Rosebel, located in Suriname. The
study contained a description and analysis of the economic and commercial
viability of bringing into production and operating a mine on Gross Rosebel
assuming a gold price of between $380 and $400 during the life of the mine. Mine
development at Gross Rosebel has been deferred pending receipt of all necessary
approvals from the Government of Suriname (including approval of the feasibility
study), the resolution of several development issues and an improved gold price
(See "Item 2. Description of Properties - Suriname - Gross Rosebel").
The Company was established under the Canada Business Corporations Act on May
15, 1992 as a result of 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.
Reference to common shares herein means 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 12, 1999, the Company and its subsidiaries had a total of approximately
180 full-time employees, of which 14 were based in Denver, 12 are expatriate
geologists and the balance are mostly nationals of the various countries in
South America and Africa where the Company and its subsidiaries carry on their
operations.
The Company has established a decentralized structure in order to facilitate
effective management of its geographically diverse portfolio of mineral
properties. The Company owns a 71% interest in Guyanor Ressources S.A.
("Guyanor"), a French public company. Guyanor was originally established in
order to comply with the laws
3
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 Nouveau Marche of the Bourse de Paris under the
symbol "GUYN".
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 dependent on availability of adequate capital (see "Risk
Factors - Risks associated with our limited financial resources") and is
comprised of the following elements:
. Focus on exploration. The Company believes that the greatest potential
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, and, to a lesser extent, the 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. To preserve cash, our early and
intermediate stage projects are placed in care and maintenance. The Company
continues to pursue new opportunities and may, if warranted, make selective
additional acquisitions of promising properties.
. Corporate Transactions. In view of the current gold market environment, the
Company intends to focus on corporate transactions that offer the potential
to provide cash or cash flow to fund exploration and development. Various
transactions being considered include merger with other companies and
acquisitions.
. 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 1998 and Recent Developments
Important changes in the management of the Company were made during 1998 and
1999. Mr. James Askew was appointed President and Chief Executive Officer of
the Company on March 8, 1999. Prior to joining the Company, Mr. Askew was
President and CEO of Rayrock Resources. From 1986 to 1996, Mr. Askew served as
President and CEO of Golden Shamrock Mines, Ltd. Before being acquired by
Ashanti Goldfields Limited in October 1996, Golden Shamrock operated four mines
and had a $20 million annual exploration budget. Mr. Pierre Gousseland, Chairman
of the Company since January 1, 1998, acted as CEO during the interim period
following Mr. David Fennell's resignation as President and Chief Executive
Officer on October 27, 1998. Under a Separation Agreement and Release which
became irrevocable on November 7, 1998, the Company paid to Mr. Fennell
$597,000, the equivalent of two year's salary and reimbursed Mr. Fennell for
$10,000 of expenses.
4
In light of the low gold prices that prevailed in 1998 and that have continued
since, the Company has substantially curtailed its exploration activities and
general and administrative expenses in an effort to conserve cash resources. As
of February 28, 1999 the Company had approximately $6 million. As a result, the
number of employees of the Company has been reduced from approximately 350 in
December 1997 to approximately 180 in March 1999.
On April 21, 1998, the Company acquired the balance of the outstanding common
shares of Pan African Resources Corporation ("PARC") not already held by the
Company (then a 64% owned publicly-traded subsidiary of the Company), pursuant
to a share exchange under a statutory plan of arrangement among PARC and its
shareholders. As a result of the exchange, the Company issued 388,574 additional
common shares to minority holders of PARC common shares and PARC ceased to be a
publicly-traded company.
As a result of low copper prices and reduced exploration budgets, ASARCO
Incorporated ("ASARCO") decided to significantly curtail its joint venture
spending and withdrew in May 1998 from its joint venture agreements with Guyanor
on the St-Elie and Paul-Isnard projects (See French Guiana - St-Elie and Paul-
Isnard.)
On June 12, 1998 the Company acquired 2,380,000 Class B common shares of Guyanor
at a price of FF9.53 or Cdn$2.34 per share. Payment of the total consideration
of FF22,681,400 or approximately Cdn$5,570,000 for the shares was satisfied by
reducing the equivalent amount of debt owed by Guyanor to the Company. As a
result, the Company's equity interest in Guyanor increased from approximately
69.3% to approximately 71%.
The Company entered into an option agreement with North Exploration (Overseas)
Pty Limited ("North") in July 1998. Under the terms of the agreement, North may
earn a 60% participating interest in the Tanda property located in Ivory Coast
by spending (i ) a minimum of $400,000 on exploration during the first 12 months
and (ii) an aggregate of $3,000,000 over a period of 36 months in order to earn
a 60% interest in Tanda.
On August 14, 1998, the Company announced that an internal review of the
estimates of mineralized inventory of the Paul-Isnard project previously
published in February 1998 identified several inappropriate parameters which led
to an over-estimation of open pit mineralized inventory and, to a much lesser
degree, geologic inventories. A new estimate was prepared and independently
verified using more appropriate parameters taking into consideration the overall
confidence of the geologic model and grade estimations given the wide spaced
drilling information for the project. The restatement reduced open pit
mineralized inventory at the Montagne d'Or deposit at Paul Isnard from 16.3
million tonnes grading 2.5 g Au/t to 4.6 million tonnes grading 2.6 g Au/t.
Geologic mineralized inventory were modified from 28.6 million tonnes grading
2.0 grading 2.0 g Au/t to 34.7 million tonnes grading 1.4 g Au/t.
In December 1998, the Company withdrew from an option agreement on the Dieu-
Merci project in French Guiana. (See "Item 2. Description of Properties - French
Guiana - St. Elie.")
5
Reserves
The following table presents current reported reserves for Omai mine. These
reserves were estimated by Cambior Inc., the mine manager. See "Item 2.
Description of Properties," for a description of Omai Gold Mines and "Risk
Factors" for a discussion of items which could affect the Company's reserve
estimates.
RESERVES (Proven & Probable)
- ----------------------------------------------------------------------------------------------------------------------
Tonnes Gold Grade Contained Ounces Contained Ounces
Project (100%) g/t (100%) (the Company's share)
- ----------------------------------------------------------------------------------------------------------------------
Omai Mine 1,2 42,929,000 1.40 1,888,000 580,000
- ----------------------------------------------------------------------------------------------------------------------
Total 42,929,000 1.40 1,888,000 580,000
- ----------------------------------------------------------------------------------------------------------------------
(1) This estimation has assumed a $325/oz gold price.
(2) Results reported by Cambior as of December 31, 1998.
The definitions of Proven (Measured) & Probable (Indicated) Reserves (see
glossary of terms) are those used in the United States by the Securities and
Exchange Commission and set forth in SEC Industry Guide 7. These definitions are
substantially the same as those applied in Canada as set forth in National
Policy No. 2-A.
Mineralized Material
The following table presents mineralized material by property. Mineralized
material has been estimated by Cambior Inc. or by the Company as indicated
below. See "Item 2. Description of Properties" for a description of each
property and see "Risk Factors" below for a discussion of items that could
affect the Company's estimates of mineralized material.
Mineralized material does not represent reserves and has not been included in
the Proven and Probable Reserve estimates because even though enough drilling
and trenching indicate a sufficient amount and grade to warrant further
exploration or development expenditures, these mineral deposits do not qualify
under the U.S. Securities and Exchange Commission standards as being
commercially minable until further drilling, metallurgical work and other
economic and technical feasibility factors based upon such work are resolved.
The Company only reports mineralized material if the potential exists for
reclassification to reserves following additional drilling and/or final
technical, economic, and legal factors have been determined for the project.
MINERALIZED MATERIAL /1/
- -------------------------------------------------------------------------------------------------------------
Tonnes Tonnes Gold Grade
Project (100%) (the Company's share) g/t
- -------------------------------------------------------------------------------------------------------------
Gross Rosebel /2/ 41,350,000 20,675,000 1.6
Yaou /2/ 9,280,000 4,640,000 2.4
Dorlin /2/ 7,207,000 3,604,000 1.3
Paul Isnard /3/ 6,178,000 3,954,000 2.8
---------- ----------
Total 64,015,000 32,873,000 1.8
- -------------------------------------------------------------------------------------------------------------
/1/ All estimates reflect mineralized material within open pits designed using
geologic, economic and design constraints that the Company believes are
realistic assuming a $325/oz gold price.
/2/ Results reported by Cambior as of December 31, 1998.
/3/ Results estimated by the Company in February 1999.
6
RISK FACTORS
READERS SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH BELOW.
Risks associated with our limited financial resources
We have limited financial resources. To date, and for the reasonably foreseeable
future, our exploration and development activities have not generated, and are
not expected to generate, substantial revenues. As at February 28, 1999, we had
approximately $6 million in cash and short-term investment and we do not expect
to have any operating revenues in 1999. Our exploration activities require
significant expenditures. The low gold price adversely affects our ability to
obtain financing and therefore our abilities to develop our current portfolio of
properties. We cannot assure you that additional funding will be available in
1999. This situation affects our flexibility to invest funds in exploration and
development. We may, in the future, be unable to continue our exploration or
development programs and fulfill our obligations under our agreements with our
partners or under our permits and licenses. Although we have been successful in
the past in obtaining financing through partnership arrangements and the sale of
equity securities, we cannot assure you that in the future we will be able to
obtain adequate financing on acceptable terms. If we are unable to obtain such
additional financing, we may need to delay or indefinitely postpone further
exploration and development of our properties. As a result we may lose our
interest in some of our properties and may be obliged to sell some of our
properties. Without a financing or other capital raising transaction such as a
sale of assets, and based on the current budget, we expect to have only $300,000
of cash available as of December 31, 1999. If no money is raised before then, it
will materially and adversely affect our operations and our ability to continue
as a going concern.
Low gold price
Changes in gold prices may significantly affect the development of our projects.
The price of gold can fluctuate significantly. In 1998, the market price of
gold declined to the lowest levels in over eighteen years. It has remained
below $300 for most of 1998.
Numerous factors affect gold prices, including:
. demand and supply of gold;
. central bank loans, sales and purchases of gold;
. production cost and volumes of world gold production;
. forward sales of gold by producers;
. inflation expectations;
. interest rates;
. confidence in the global monetary system and the strength of the U.S.
dollar and other currencies; and
. international or regional political or economic events.
The current demand for, and supply of, gold affects gold prices. The supply of
gold is provided by new mine production and existing stocks of bullion gold held
by government central banks, 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. Mobilization of gold stocks held by central banks through
lending and sales may have a significant adverse impact on the gold price.
If gold prices decline below the cost of production at the Omai mine and remain
at such levels for any sustained period, Omai Gold Mines Limited could determine
that it is not economically feasible to continue commercial production. If gold
prices decline below estimated cash costs of production at any of our
exploration and development properties, we could determine that it is not
economically feasible to continue the development of some or all of our projects
and material write-downs of our investment in mining properties may be required.
In addition, declining gold prices materially affect our ability to obtain
additional funds to finance our activities.
7
The following table sets forth for the last ten years the high and low selling
prices of gold:
Year High Low
- --------------------------------- ------------------ ---------------------
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
1998 $314.70 $275.60
The closing trading price per ounce of gold quoted by the New York Commodities
Exchange on March 12, 1999 was $293.40.
Gold exploration is speculative in nature
Gold exploration involves a high degree of risk and exploration projects are
frequently unsuccessful. Few prospects which are explored are ultimately
developed into producing mines. The long-term success of our operations is
directly related to the cost and success of our exploration programs. We cannot
assure you that our gold exploration efforts will be successful. The risks
associated with gold exploration include:
. the identification of potential gold mineralization based on surficial
analysis;
. the quality of our management and our geological and technical
expertise; and
. the capital available for exploration and development.
Substantial expenditures are required to determine if a project has economically
mineable mineralization. It may take several years to establish proven and
probable reserves and to develop and construct mining and processing facilities.
As a result of these uncertainties, we cannot assure you that current and future
exploration programs will result in the discovery of ore reserves, the expansion
of our existing reserves and the development of mines.
Uncertainty involved in the development projects and in mining
Mining projects frequently require a number of years and significant
expenditures during the mine development phase before production is possible.
Development projects are subject to the completion of successful feasibility
studies, issuance of necessary governmental permits and receipt of adequate
financing. The economic feasibility of such development projects is based on
many factors such as:
. estimation of reserves,
. metallurgical recoveries,
. future gold prices, and
. capital and operating costs of such projects.
For example, we have deferred the development of our Gross Rosebel project
until, among other considerations, gold prices improve.
Exploration and development projects have no operating history upon which to
base estimates of future operating costs and capital requirements. Estimates of
proven and probable reserves and operating costs determined in the feasibility
studies are based on geologic and engineering analyses. As a result, the risks
and uncertainties attached to an exploration company are very high.
8
We have a 30% interest in the Omai Mine in Guyana. To that extent, we are
subject to risks and hazards inherent to the mining industry, including:
. unanticipated grade and tonnage of ore to be mined and processed;
. unanticipated adverse geotechnical conditions;
. costs of constructing and operating a mine in a specific environment;
. processing and refining facilities;
. availability of economic sources of energy;
. adequacy of water supply;
. adequate access to the site, unanticipated transportation costs;
. 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);
. fluctuations in gold prices; and
. accidents, labor force and force majeure factors.
The occurrence of any of these factors could materially and adversely affect the
development of a project and as a result our business, financial condition,
results of operations and cash flow.
Lack of technical expertise to manage development and operating stages
We currently do not have adequate technical expertise to manage the development
and operating stages of the projects in which we have an interest. We currently
rely on our partners for the development of our most advanced projects.
Therefore, we have less control over such matters than we would if we were the
operator. Cambior Inc. manages our most advanced projects, the Omai Mine in
Guyana, Gross Rosebel in Suriname and Yaou-Dorlin in French Guiana.
Uncertainty in the estimation of reserve and mineralized material
There are numerous uncertainties inherent in estimating proven and probable
reserves and mineralized material, including many factors beyond our control.
The estimation of reserves and mineralized material is a subjective process and
the accuracy of any such estimate is a function of the quantity and quality of
available data and of the judgments used in engineering and geological
interpretation. 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. In 1998, we issued two press releases revising
certain estimates previously made in estimating the mineralized inventory for
our Paul-Isnard and St-Elie projects. Internal reviews indicated that we had
previously used inappropriate parameters in our mineralized inventory
estimations which led us to over-estimate our mineralized material.
Consequently, we prepared new estimates using more appropriate parameters. Our
new estimates are significantly lower than those reported previously. We cannot
assure you that similar revisions will not be required in the future.
To estimate reserves we must also rely on assumptions about gold prices.
Estimated reserves may have to be recalculated when gold prices change. As a
result of the recent decline in the market price of gold, the reserves of Omai
mine were recalculated using a lower gold price assumption and our proven and
probable reserves have decreased. Increased production costs or reduced
recovery rates may also cause the decrease of reserves, asset write-downs,
deferral or abandonment of the development of a project or mining at one or more
of the Company's properties. Due to economic and operating uncertainties, the
reserve estimates for the Gross Rosebel project in Suriname were recently re-
classified by Cambior from mineral reserve to mineral resources.
9
Diamond exploration is highly speculative
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. We cannot assure you that our current or future
exploration programs will result in profitable commercial diamond mining
operations.
Whether a diamond deposit will be commercially viable depends on a number of
factors, including 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. We
cannot accurately predict the effect of these factors. We may not be able to
receive an adequate return on invested capital.
Marketability of diamonds depends on several factors
If we discover an economically exploitable diamond deposit, the marketability of
the diamonds will be affected by numerous factors beyond our control. These
factors include the structure of the world diamond market, market fluctuations,
governmental regulations, including regulations relating to prices, taxes,
royalties, land tenure, land use, importing and exporting of diamonds and
environmental protection. We cannot accurately predict the exact effect of
these factors. The combination of these factors can impair our ability to
receive 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.
Risks of exploration and development in foreign countries
Certain laws, regulations and statutory provisions in certain countries in which
we have mineral rights could, as they are currently written, have a material
negative impact on our ability to develop a commercial mine. The range and
diversity of the laws and regulations are such that we cannot adequately
summarize them in this document. We intend to negotiate mineral agreements with
the governments of these countries and seek variances or otherwise be exempted
from the provisions of these laws, regulations and/or statutory provisions. We
cannot assure you, however, that we will be successful in obtaining mineral
agreements or variances or exemptions on commercially acceptable terms.
Our assets and operations are affected by various political and economic
uncertainties, including:
. the risks of war or civil unrest;
. expropriation and nationalization;
. renegotiation or nullification of existing concessions, licenses,
permits, and contracts;
. illegal mining;
. changes in taxation policies;
. restrictions on foreign exchange and repatriation; and
. changing political conditions, international monetary fluctuations,
currency controls and foreign governmental regulations that favor or
require the awarding of contracts to local contractors or require
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction.
In the event of a dispute arising at our foreign operations, we 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. We may also be hindered or prevented from enforcing our rights with
respect to a governmental instrumentality because of the doctrine of sovereign
immunity. Currently, we cannot predict developments or changes of law or policy
which could have a material adverse impact on our operations.
10
French Guiana has no history or tradition of large-scale commercial mining. As a
result, regulatory risk may increase as projects become more advanced and
applications are made for all of the various permits required to develop a
modern mining operation. This risk includes regulatory-related delays and/or
failures to receive required permits. French Guiana's mining tradition is
small-scale, alluvial gold mining, which began in approximately 1855 and is
reported to have resulted in approximately 5.4 million ounces (175 tonnes)
produced to date. These small-scale miners, called orpailleurs, often operate in
or near areas being explored by Guyanor as well as other areas under active
exploration by other companies. Certain groups of orpailleurs have organized
themselves and represent a political force that has sought to gain exclusive
preference to near-surface mineralization throughout French Guiana, regardless
of the legal rights of legitimate permit holders under French law. This may
result in increased pressure from the government to accept small scale miners on
our properties.
Despite the fact that we have hired security personnel to protect our
properties, illegal miners have also been working on our properties in Suriname
and Brazil. The issue of orpailleurs' rights to near-surface mineralization in
French Guiana and the issue of illegal miners in Suriname and Brazil could lead
to project delays and disputes regarding the development of commercial gold
deposits. The work performed by the illegal workers also causes environmental
damages for which we could potentially be held responsible.
Requirements for permits and licenses
Many of our mineral rights and interests are conditional upon obtaining
government approvals. The approvals may be subject to the discretion of the
applicable governments or governmental officials some of which may not be
favorably disposed toward us. For example, in French Guiana many governmental
officials have been highly critical of the Company's activities. This may impact
our ability to obtain satisfactory permits or concessions. We therefore cannot
assure you that we will be successful in obtaining, in a timely fashion, the
approvals necessary to obtain the licenses and permits required to continue our
activities on all our projects. We also cannot assure you that we will be able
to maintain them in full force and effect without modification or revocation.
We may from time to time be temporarily in breach of certain provisions of such
laws, regulations, licenses and permits. Such licenses and permits are subject
to modification or revocation as discussed above in "Risks of Exploration and
Development in Foreign Countries", and, from time to time, there may also be
changes in laws and regulations and in various operating circumstances. We
cannot assure you that we will be able to obtain or maintain in force all
necessary licenses and permits or comply in all material respects with all
applicable laws and regulations that may be required 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.
Dependence on key personnel; Recent management changes
We are dependent on the services of certain key officers and employees,
including our recently appointed Chief Executive Officer and certain geologists
responsible for our most advanced projects. There is a fair amount of
competition in the mineral exploration industry for qualified individuals, and
the loss of any of our key officers or employees, if not replaced, could have a
material adverse effect on our business and operations. We have entered into
agreements with certain officers which provide for payments upon termination
without cause or, in certain cases, upon a change of control of Golden Star.
In the fourth quarter of 1998, Mr. David Fennell resigned as President and Chief
Executive Officer and Mr. Adrian Fleming resigned as Executive Vice President
Exploration. Mr. James Askew was appointed in March 1999 to replace Mr. Fennell
as President and Chief Executive Officer of Golden Star.
11
Operational hazards and responsibilities
Our activities are subject to a number of risks and hazards including:
. environmental hazards;
. discharge of pollutants or hazardous chemicals;
. industrial accidents;
. labor disputes;
. unusual or unexpected geological or operating conditions;
. slope failures;
. cave-ins;
. failure of pit walls or dams, fire;
. changes in the regulatory environment;
. natural phenomena such as inclement weather conditions, floods and
earthquakes; and
. other hazards.
These 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. We may
incur liability as a result of pollution and other casualties. We may not be
able to insure fully or at all against such risks, due to political or other
reasons, or we may decide not to insure against such risks as a result of high
premiums or for other reasons. This can result in delayed production, increase
in production costs or liability. Paying compensation for obligations resulting
from such liability may be very costly and could have an adverse effect on our
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.
Compliance with environmental regulations
We cannot assure you that compliance with existing regulations governing the
discharge of materials into the environment, or otherwise relating to
environmental protection, in the jurisdictions where we have projects will not
have a material adverse effect in the future on our exploration activities,
earnings, expenditures or competitive position. New or expanded regulations,
if adopted, could affect the exploration or development of our projects or
otherwise have a material adverse effect our operations.
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 our business, financial
condition, results of operations and cash flows.
Competition
We compete with major mining companies and other natural resource companies in
the acquisition, exploration, financing and development of new prospects. Many
of these companies are more experienced, larger, and better capitalized than us.
Our competitive position depends upon our ability to successfully and
economically explore, acquire and develop new and existing mineral prospects.
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. We also compete with other mining companies for skilled geologists,
geophysicists and other technical personnel. This may result in higher turnover
and greater labor costs.
Effects of foreign currency on our capital
We have in the past raised our equity capital in Canadian and U.S. dollars. We
primarily maintain our accounts in U.S. dollars and convert such U.S. dollars
into various local currencies on an as needed basis in order to conduct
12
local operations. We maintain the majority of our working capital in U.S.
dollars or U.S. dollar denominated securities and convert funds to foreign
currencies as payment obligations become due. Accordingly, fluctuations in the
rates of currency exchange between the U.S. dollar and these currencies may
materially affect our financial position and results of operations. We currently
have future obligations which are payable in French francs and Brazilian reals
and receivables payable in French francs. We do not actively take steps to hedge
against such risks.
Effective January 1, 1999, eleven of the fifteen member countries of the
European Monetary Union ("EMU") adopted a single European currency, the "Euro",
as their common legal currency. During the next three years, business conducted
within the EMU will be conducted in both the existing national currency and the
Euro. As a result, companies operating in EMU member states will need to ensure
that their financial systems are capable of processing transactions and properly
handle these currencies, including the Euro. The operations of our 71% owned
subsidiary Guyanor are affected by this change but we do not expect a material
impact on our operations as a result of the transition to the Euro.
Risk of being classified as a Passive Foreign Investment Company
Under the United States Internal Revenue Code of 1986, as amended , we may be
classified as a passive foreign investment company (a "PFIC"). United States
shareholders of a PFIC are subject to certain adverse tax consequences, as
discussed below. 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". We have been advised by
PricewaterhouseCoopers LLP that we should not be treated as a PFIC with respect
to shares purchased by United States shareholders during the years 1993 through
1998, although we could potentially be a PFIC with respect to shares acquired by
United States shareholders prior to 1993. We also intend to engage
PricewaterhouseCoopers LLP, or such other advisor, in the future to analyze
whether we are a PFIC in 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 PricewaterhouseCoopers LLP, or such other advisor, will
conclude that we are a PFIC for such period. Moreover, even if
PricewaterhouseCoopers LLP, or such other advisor, concludes that we are not a
PFIC, its conclusion is not binding on the United States Internal Revenue
Service.
The PFIC analysis involves a complex analysis of many factors, including, among
other things, the price of gold and the cash flow of OGML. For example, without
increasing the amount of income and assets that produce active income through
the development or acquisition of producing mines, a modest increase in these
specific factors could result in our becoming a PFIC. Accordingly, it is
possible that the PFIC rules will apply to holders of common shares. See Item
5. "Market for the Registrant's Common Equity and Related Stockholder Matters -
Certain United States 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 short ton 1 square mile = 2.59 square kilometres
1 short ton (2000 = 0.9072 tonne 1 square kilometre = 100 hectares
pounds)
1 metric tonne = 1,000 kg or 2,204.6 pounds
1 kilogram = 2.2 pounds or 32.151 troy ounce
The following abbreviations of measurements are used herein:
Au = gold m/2/ = square metre
ct = carat m/3/ = cubic metre
ct/m2 = carats per square metre mg = milligram
gm = gram mg/m/3/ = milligrams per cubic metre
g/t = grams per tonne t = metric tonne
ha = hectare oz = troy ounce
km = kilometre oz/t = troy ounces per ton
km2 = square kilometres ppb = parts per billion
kg = kilogram
m = metre
Note: All units in the text are stated in metric measurements unless otherwise
noted.
14
GLOSSARY OF TERMS
Note: The definitions of Proven (Measured) and Probable (Indicated) reserves set
forth below are those used in the United States by the Securities and Exchange
Commission and are set forth in SEC Industry Guide 7. (Formerly Form S-18, Item
17A.)
These definitions are substantially the same as those applied in the Canada as
set forth in National Policy No.2-A.
Reserve That part of a mineral deposit which could be economically
and legally extracted or produced at the time of the
reserve determination.
Proven (Measured) Reserves for which (a) quantity is computed from
Reserves dimensions revealed in outcrops, trenches, workings or
drill holes; grade and/or quality are computed from the
results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely
and the geologic character is so well defined that size,
shape, depth, and mineral content of reserves are well-
established.
Probable (Indicated) Reserves Reserves for which quantity and grade and/or
quality are computed from information similar to that used
for proven (measured) reserves, but the sites for
inspection, sampling and measurement are farther apart or
are otherwise less adequately spaced. The degree of
assurance, although lower than that for proven (measured)
reserves, is high enough to assume continuity between
points of observation.
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 prospect 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 prospect 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 prospect 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 prospect by identifying a well defined zone of
mineralization that suggests the potential of
mineralization continuing to depth.
advanced stage an advanced exploration stage prospect 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 trenching and drilli ng.
pre-feasibility stage a pre-feasibility stage prospect typically involves a
target for which sufficient geologic information exists
about the mineralized zone to determine potential for
estimating reserves. During the pre-feasibility stage,
infill drilling is often done to increase the confidence
of estimated mineralization. Wider spaced step-out
drilling is often conducted to test for extensions of
mineralized zones or to identify additional zones. The
objective of the pre-feasibility stage is to identify
sufficient mineralization which could potentially become
reserves and which could support a rate of production over
a sufficient period of time to justify the investment of
capital to extract the reserves, based on realistic
economic and financial assumptions.
feasibility stage during the feasibility stage, exploration continues to
further increase confidence in mineralization while
attempting to further expand them. During this stage,
management of the project is often transferred to the
operating partner which develops in detail the necessary
engineering and costing for mining, processing, power and
infrastructure, as well as the designs for the plant and
equipment
15
required to construct and operate a modern mining operation. It
is at the end of this stage that mineralization may be
categorized as proven and/or probable reserves if a positive
mining decision is justified.
mine mining is the process of transforming a reserve 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 life of the mine
operations as the exploration potential of the deposit is
realized.
- --------------------------------------------------------------------------------
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
anomaly a deviation from uniformity or regularity in geochemical or
geophysical quantities
assay to analyze the proportions of metals in an ore
basic an igneous rock having a relatively low silica content, sometimes
delimited arbitrarily as less than 54%
BLEG (Bulk Leach Extractable Gold) an analytical method for determining very
low levels of gold in material
clastic a rock or sediment composed of broken fragments derived from
preexisting rocks or minerals
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
dilation deformation by an increase in volume
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 where minerals occur as scattered particles in the rock
elluvial an incoherent ore deposit resulting from decomposition or
disintegration of rock in place
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 a curve or bend of a planar structure such as rock strata, bedding
planes, foliation, or cleavage
formation a distinct layer of sedimentary rock of similar composition
geochemistry the study of the distribution and amounts of the chemical elements
in minerals, ores, rocks, solids, water, and the atmosphere
geochemistry the study of the distribution and amounts of the chemical
elements in minerals, ores, rocks, solids, water, and the atmosphere
geological mapping the recording of 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
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
greenstone a sequence of usually metamorphosed volcanic-sedimentary rock
assemblages
hydrothermal the products of the actions of heated water, such as a mineral
deposit precipitated from a hot solution
laterite highly weathered residual surficial soils and decomposed rocks, rich
in iron and aluminum oxides that are characteristically developed in tropical
climates
mafic an adjective describing an igneous rock composed mostly of one or more
ferromagnesian, dark-colored minerals; also, said of those minerals
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
metasediment a sedimentary rock which shows evidence of having been subjected
to metamorphism
metavolcanic a volcanic rock which shows evidence of having been subjected to
metamorphism
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 body of mineralization which has been delineated by
trenching and/or drilling and/or underground sampling to support the
determination of tonnage and average grade of metal(s). Mineralized inventory
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 mineralized inventory will ever become a reserve.
Mobile Metal Ion (MMI) a special geochemical method which detects low levels of
metals in soil and other surface samples
outcrop that part of a geologic formation or structure that appears at the
surface of the earth
Proterozoic the more recent time division of the Precambrian; rocks aged
between 2500 and 550 million years old.
quartz crystalline silica; silicon dioxide
reverse circulation drilling (RC) 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
rotary air blast drilling (RAB), a drilling method used in geological
appraisals whereby air or drilling fluid passes inside the inner tube of a
double tube system to a down-
16
the-hole percussion bit and returns to the surface outside the inner tube but
inside the outer tube carrying chips of rock
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
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 often surrounded by younger
rocks, e.g. Guyana Shield.
stock an igneous intrusion that is less than 100 square kilometres in surface
exposure
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
strike the direction or trend that a structural surface, e.g. a bedding or
fault plane, takes as it intersects the horizontal
strip to remove overburden in order to expose ore
surficial situated, formed, or occurring on or close to the Earth's surface
syncline a concave downward fold, the core of which contains the
stratigraphically younger rocks
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
volcanic massive sulfide (VMS) mineral deposits formed by volcanic processes
and the activities of thermal springs at the bottom of bodies of water.
volcanics those originally molten rocks, generally fine grained, that have
reached or nearly reached the Earth's surface before solidifying
wall rock the rock adjacent to 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
17
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.
18
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 12, 1999, 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 as well as Kenya and Ivory Coast 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 12, 1999,
are situated in geologic domains 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 gold exploration activity in the Guiana Shield, a regional exploration
program was also established to search for possible primary diamond sources.
This diamond exploration program has led to the identification of diamond
targets in French Guiana, Suriname and Guyana. Regional geophysical surveys
conducted in Ivory Coast have also led to the identification of diamond
targets. In light of the Company's reduced exploration expenditures, diamond
exploration efforts in the Guyana Shield have been significantly curtailed.
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 yielded comparatively few large scale mining
operations, due largely 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 had not until recently been fully explored with modern
techniques and equipment.
All of the Company's mineral properties are located in developing countries,
with the exception of French Guiana, a department 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 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 pursuant to 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 exploration and development
in foreign countries and Requirements for permits and licenses".)
19
Total consolidated expenditures and property abandonment costs for the
Company's exploration projects for the fiscal year ended December 31, 1998 were
as follows:
Deferred Capitalized Capitalized Joint Proceeds Property Deferred
Exploration Exploration Acquisition Venture From Abandon- Exploration
Expenditures Expenditures Expenditures Recov- Sale of ments/ Expenditures
as at eries Property Write- as at 12/31/98
12/31/97 Interest downs
=========================================================================================
In Thousands of Dollars
GUYANA (1)
Eagle Mountain $ 1,136 228 - - - - 1,364
Quartz Hill 1,347 - - - - - 1,347
Mazaruni/Upper
Mazaruni Diamond (4) - - - - 4 -
Five Stars Gold (Makapa) 3,684 501 - - - (3,366) 819
Five Stars Diamond 2,360 179 - - - (2,539) -
BHP Gold Projects 333 70 - (65) - (338) -
Guyana Diamond Permits 109 - - - - (109) -
Other 101 (10) - - - (34) 57
-----------------------------------------------------------------------------------------
Sub-total 9,066 968 (65) - (6,382) 3,587
-----------------------------------------------------------------------------------------
SURINAME (1)
Benzdorp/Lawa 3,344 8 - - - - 3,352
Gross Rosebel 13,892 1,275 - (624) - - 14,543
Headley's Right of
Exploration 311 2 - - - - 313
Thunder Mountain 453 3 - - - - 456
Saramacca 1,862 374 - (263) - - 1,973
Sara Kreek 581 7 - - - - 588
Tempati Reconnaissance 344 19 - (16) - - 347
Tapanahony Reconnaissance 251 8 - (25) - - 234
Kleine Saramacca 107 - - - - - 107
Lawa Antino 2,096 69 - (56) - - 2,109
Ulemari Reconnaissance 291 (54) - - - - 237
Other (17) 300 - - - - 283
-----------------------------------------------------------------------------------------
Sub-total 23,515 2,011 - (984) - - 24,542
-----------------------------------------------------------------------------------------
FRENCH GUIANA (2)
(Guyanor Ressources S.A.)
Dorlin 1,330 1,551 - (518) - - 2,363
St-Elie 1,973 672 - (268) - - 2,377
Dieu-Merci 382 644 - (109) - (917) -
Yaou 7,130 533 - (177) - - 7,486
Paul-Isnard/Eau Blanche 3,629 1,139 - (118) - - 4,650
Paul-Isnard Alluvials 1,987 - - - - - 1,987
Dachine 1,234 247 - - - - 1,481
Other 81 (81) - - - - -
-----------------------------------------------------------------------------------------
Sub-total 17,746 4,705 - (1,190) - (917) 20,344
-----------------------------------------------------------------------------------------
20
Deferred Capitalized Capitalized Joint Proceeds Property Deferred
Exploration Exploration Acquisition Venture From Abandon Exploration
Expenditures Expenditures Expenditures Recov- Sale of ments / Expenditures
as at eries Property Write- as at
12/31/97 Interest downs 12/31/98
================================================================================================
In Thousands of Dollars
AFRICA (3)
(Pan African
Resources Corporation)
Ivory Coast / Comoe 2,092 2,212 - - - - 4,304
Kenya / Ndori 1,677 888 - - - - 2,565
Burkina Faso 8 - - - - (8) -
------------------------------------------------------------------------------------------------
Sub-total 3,777 3,100 - - - (8) 6,869
------------------------------------------------------------------------------------------------
LATIN AMERICA (1)
Brazil / Andorinhas 8,490 129 200 - - (8,819) -
Brazil / Abacaxis 2,096 352 50 - - - 2,498
Brazil / Other 189 387 - - - (301) 275
Bolivia / Other 173 - - - - (173) -
------------------------------------------------------------------------------------------------
Sub-total 10,948 868 250 - - (9,293) 2,773
------------------------------------------------------------------------------------------------
OTHER 108 (20) - - - - 88
------------------------------------------------------------------------------------------------
TOTAL $ 65,160 $ 11,632 $ 250 $ (2,239) - $(16,600) $ 58,203
================================================================================================
(1) A division of the Company.
(2) Approximately 71% owned by the Company as of March 12, 1999.
(3) Wholly owned subsidiary of the Company.
The following is a description of the principal mineral property interests held
by the Company as of March 12, 1999. As a result of continuing weak gold
prices, most, if not all, earlier stage projects have been abandoned or put on
care and maintenance. Management may decide to modify expenditures currently
budgeted for 1999 (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 Gold Mines Limited
OGML is 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.
OGML owns the Omai Mine, the Eagle Mountain, OMAI River and Quartz Hill
prospecting licenses.
Omai Mine
The Omai mine is owned by OGML. 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, among other things, OGML was granted the
right to obtain a mining license (which was granted on December 12,
21
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 OGML'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 at 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 OGML'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 year ended December 31, 1998, the Company received
$1,738,411 as a result of the redemption of Class I preferred shares, for a
total of $8,051,730 in redemption of Class I preferred shares since the
beginning of production in 1993. 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, 1998, OGML had $115.7 million in debt
and a total of $50.2 million worth of Class II and III preferred shares
outstanding. The Class III preferred shares have past cumulative unpaid
dividends totaling $57.4 million as of December 31, 1998.
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. As a consequence of the tailings dam failure, there are
approximately 330 outstanding claims against OGML in Guyana. Such claims are
currently being settled, without admission of liability, or being contested in
good faith, as applicable. Amounts claimed as at March 12, 1999 against OGML do
not exceed $400,000 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. There can also be no assurance that all or any of such additional
costs will be covered by appropriate insurance.
Production and Reserves of Omai Mine
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 from 1993 through 1998 totaled 1,552,755 ounces.
Gold production in 1998 was 327,546 ounces, compared to 338,496 ounces in 1997
and 254,950 ounces in 1996. The 3% decrease in production in 1998 was primarily
attributable to a lower average head grade of 1.44 g Au/t compared to 1.54 g
Au/t in 1997, while throughput averaged approximately 21,100 tonnes per day
processing 63% hard rock during 1998, compared to 20,100 tonnes per day
processing 73% in 1997. Gold recovery rates were 92%
22
in 1998 compared to 93% in 1997, while direct mining costs, including royalties,
were $240 per ounce in 1998, a slight improvement over the $245 per ounce
experienced in 1997. Quarterly production statistics for the Omai mine for 1998
are as follows:
1998
--------------------------------------------------------------------------------------------
First Second Third Fourth Total / Average
Quarter Quarter Quarter Quarter 1998
- -----------------------------------------------------------------------------------------------------------------------
Ore milled (mt) 1,880,506 1,895,797 1,918,248 2,011,071 7,705,622
- -----------------------------------------------------------------------------------------------------------------------
Rate (mt/day) 20,895 20,833 20,850 21,859 21,111
- -----------------------------------------------------------------------------------------------------------------------
Grade (g Au/mt) 1.45 1.46 1.32 1.51 1.44
- -----------------------------------------------------------------------------------------------------------------------
Recovery (%) 92 93 92 92 92
- -----------------------------------------------------------------------------------------------------------------------
Gold Production (oz) 80,620 82,743 75,058 89,125 327,546
- -----------------------------------------------------------------------------------------------------------------------
Cash cost of 244 242 247 228 240
production ($/oz)
- -----------------------------------------------------------------------------------------------------------------------
For 1999, the Omai mine is expected to produce approximately 306,000 ounces of
gold at a direct mining cost of approximately $240 per ounce. Throughput is
budgeted at approximately 20,400 tonnes per day processing approximately 67%
hard rock. Head grades are anticipated to average 1.4 g Au/t with a budgeted
gold recovery of 93%. During 1999, the continued stripping of waste is expected
to result in a waste to ore ratio of approximately 3.6:1, compared to a life of
mine waste to ore ratio of 1.9:1. As a result, the cost of additional waste
stripping in excess of the average life of mine ratio will continue to be
deferred and amortized in later years.
In reaction to continuing weak gold prices, OGML restated its proven and
probable reserves for year-end 1998 using a $325 gold price compared to a $350
gold price used in 1997. On the basis of a $325 gold price, Omai's proven and
probable reserves at December 31, 1998 stood at 42.9 million tonnes at an
average grade of 1.4 g Au/t, representing approximately 1.89 million ounces of
gold. This is compared to proven and probable reserves at December 31, 1997 of
54.1 million tonnes at an average grade of 1.4 g Au/t, representing
approximately 2.52 million ounces of gold. Reserves at Omai are derived
from four sources: the Fennell Pit, the Wenot Lake Pit, alluvial deposits and
stockpiles. The following table summarizes the reserves for these sources
at year end 1997 and 1998:
23
December 31, 1998 December 31, 1997
---------------------------------------------------------------------------------------------
Proven and Grade Contained Proven and Grade Contained
Probable (g Au/t) Gold (oz) Probable (g Au/t) Gold (oz)
Reserves (1) Reserves (1)
(tonnes) (tonnes)
- --------------------------------------------------------------------------------------------------------------
Fennell Pit 22,894,000 1.47 1,086,600 27,266,000 1.54 1,347,000
- --------------------------------------------------------------------------------------------------------------
Wenot Lake 9,420,000 1.69 511,200 15,721,000 1.72 872,000
Pit
- --------------------------------------------------------------------------------------------------------------
Alluvials 1,117,000 0.90 32,300 1,117,000 0.90 32,000
- --------------------------------------------------------------------------------------------------------------
Stockpiles 9,498,000 0.84 257,900 10,025,000 0.82 266,000
- --------------------------------------------------------------------------------------------------------------
TOTAL 42,929,000 1.37 1,888,000 54,129,000 1.44 2,517,000
- --------------------------------------------------------------------------------------------------------------
(1) Reserves are calculated using a price of gold of $350 per ounce for 1997 and
$325 per ounce for 1998 with a cutoff grade of 0.35 g Au/t for soft rock
reserves and 0.70 g Au/t for hard rock reserves.
Eagle Mountain
The Eagle Mountain project is located in Central Guyana, 50 km from the Omai
Mine. Prior to its sale in December 1998, the Company owned a 100% interest in
the Eagle Mountain Prospecting License. The transfer of the Eagle Mountain
License by the Company to OGML was approved by the Guyana government on December
21, 1998. The purchase agreement between the Company, OGML and Cambior Inc. was
executed on December 23, 1998 and, in accordance with the agreement, the Company
received $80,000 on December 31, 1998 and the amount of $3,169,230 was advanced
to the Company by OGML. This unsecured loan is non-interest bearing until
September 30, 2010 and must be repaid from the proceeds of redemption of Class I
Preference Shares of OGML held by the Company. Starting October 1, 2010, the
loan will bear interest at the US dollar prime rate. In addition, upon
commencement of commercial production, OGML will have to pay the Company a 1.5%
net smelter royalty. OGML will also pay to the Company an amount equal to $1
million at the end of each of the first five twelve-month periods following
commencement of commercial production. As a result of the transfer to OGML, the
Company now has a 30% indirect interest in the Eagle Mountain project. In
consideration for receiving a 5% free carried interest (its interest in OGML),
the government of Guyana has accepted to charge a consumption tax of only 5% on
fuel used with respect to the Eagle Mountain property.
Gold Exploration Projects
Total expenditures by the Company on gold exploration projects in Guyana during
1998 amounted to $1.0 million, $0.1 million of which were reimbursed by the
Company's joint venture partners. In 1997, total expenditures were $3.6
million, $0.1 million of which were reimbursed by joint venture partners.
In an effort to conserve cash resources, most exploration activity in Guyana has
been temporarily suspended for 1999. Expenditures at the Company's Guyana
operations are budgeted to be $0.2 million after recovery of bonds for certain
properties and after sales of certain assets. The Company recorded a write-down
of deferred exploration in the fourth quarter of 1998 of approximately $6.4
million related to projects in Guyana.
24
Makapa (Five Stars)
The Makapa project, part of the Five Stars area, 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 1998, a limited core drilling program consisting of 17 holes totaling
approximately 1,070 meters, was completed to test the strike and depth potential
of quartz vein related gold mineralization previously defined through soil
geochemistry, augering and trenching. The program failed to demonstrate
potential for an economic bulk tonnage deposit. Based on the results, the
Makapa project was put on care and maintenance in mid 1998 due to budget
constraints and project prioritization. The larger Makapa Prospecting License
remains prospective but will remain on care and maintenance until such time as
further early stage exploration is warranted.
SURINAME PROPERTIES
- -------------------
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 1998, the Company incurred total expenditures in Suriname of $2.0
million, $1.0 million of which was reimbursed by the Company's joint venture
partners. Total expenditures during 1997 amounted to $11.8 million, $4.7
million of which was reimbursed by the Company's joint venture partners.
The Company's operations in Suriname in 1999 will consist primarily of care and
maintenance for Gross Rosebel and continued engineering evaluation of the
project. The Company's total Suriname expenditures in 1999 are budgeted to be
approximately $0.5 million.
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. As of 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 $1.0 million to Grassalco pursuant to the terms of the Gross
Rosebel Agreement . 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 is to be granted to an operating company (the "Operating
Company"). Within 30 days of the
25
grant of the right of exploitation, the Company and Cambior will be obligated to
pay to Grassalco the total 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 assumed managerial responsibility for the preparation of the
feasibility study. Cambior has the right to be appointed manager of all
subsequent mining and related operations of the project.
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
26
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.
Mineralized Material
Cambior recently announced its year end 1998 mining reserves and mineral
resources, restated at a $325 gold price, compared to a price of $350 per ounce
for year end 1997. For year end 1997, both the Company and Cambior reported
their 50% share of proven and probable mining reserves at Gross Rosebel, using a
$350 gold price, as 17.6 million tonnes grading 1.8 g Au/t, representing 996,000
ounces in situ. At year end 1998, Cambior has estimated its 50% share of Gross
Rosebel at 20.7 million tonnes grading 1.6 g Au/t, representing 1,074,500 ounces
of gold in situ, using a $325 gold price, but reclassified them according to
current Canadian Reporting Policy as "mineral resources" instead of proven and
probable reserves. Under SEC rules and regulations in the United States unlike
in Canada, companies may only report proven and probable reserves. The Company
has not yet reviewed the estimate prepared by Cambior for year end 1998. The
Company intends to have it verified, taking into account the parameters used in
Cambior's re-estimation, a $325 gold price and the recently revised operating
costs. As a result of Cambior's reclassification, the Company cannot report
proven and probable reserves for the Gross Rosebel project for year-end 1998.
Instead the Company is reporting results for Gross Rosebel as mineralized
material. See "Item 1. - Mineralized Material Table".
Mineralized material does not represent reserves and has not been included in
the Proven and Probable Reserve estimates because even though enough drilling
and trenching indicate a sufficient amount and grade to warrant further
exploration or development expenditures, these mineral deposits do not qualify
under the U.S. Securities and Exchange Commission standards as being
commercially minable until further drilling, metallurgical work and other
economic and technical feasibility factors based upon such work are resolved.
Mine Development
A study was submitted to the Government of Suriname in May 1997. The study
contained a description and analysis of the economic and commercial viability of
bringing into production and operating a mine on Gross Rosebel assuming a gold
price of between $380 and $400 during the life of the mine. Development of the
Gross Rosebel project has been deferred pending receipt of necessary
governmental approvals including approval of the feasibility study, resolution
of several development issues, economic concessions from the government and
improved gold prices. There can be no assurance that the government of Suriname
will approve the feasibility study and the environmental impact statement and
therefore grant a right of exploitation to the Operating Company. Some of the
development issues that must be resolved prior to construction, include, amongst
other things, 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. Although the Company believes that these issues
can be resolved, there can be no assurance that will be the case. The project
will continue to be on care and maintenance until the issues are resolved.
Metallurgical test were performed during 1998 on soft rock ore from Gross
Rosebel. The tests have demonstrated favorable agglomeration and gold recovery
characteristics for soft rock ore. Average recoveries of 88% were obtained over
a 30 day leach cycle. Metallurgical tests were also completed on Gross Rosebel
transition and hard rock ores, yielding average gold recoveries in the range of
40% to 50% over a 30 day period in heap leach column tests. These tests have
also demonstrated that crushing to -19mm does not significantly improve gold
recoveries.
27
For 1999, engineering costs of $194,000 are budgeted for scoping studies which
will consider heap leaching alternatives as well as other saprolite-only and
staged development mining alternatives. These studies are intended to determine
the viability of alternative processing designs which may make the project
feasible at lower gold prices by reducing capital and operating costs. These
studies are anticipated to be completed by mid 1999 and will determine scope of
further evaluation work and/or development programs.
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. The
Antino Right 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.
Core drilling in 1996 and 1997 consisted of 46 holes totaling approximately
6,320 meters which identified relatively high grade shear hosted gold
mineralization over approximately 800 meters of strike length. The Antino
project remained on care and maintenance during 1998 following the Company's
budgeting and prioritization process and the determination of relatively high
expected exploration costs to define reserves in narrow, high grade underground
targets such as Antino. Management believes that further drilling is warranted
at Antino and continues to assess cost-effective means of continuing
exploration, including seeking a joint venture partner for the property.
28
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 each withdraw from
the agreement upon 30 days' notice.
During 1998, work was conducted on the BHP joint venture areas, particularly the
Saramacca area, which hosts the Goliath anomaly identified in 1997. This work
included follow up soil sampling involving a MMI (mobile metal ion) survey over
previously defined BLEG (bulk leach extractable gold) anomalies and deep
augering. Results provided two targets that warranted follow up. A reverse
circulation drilling program of 41 holes, totaling approximately 1,170 meters,
was completed over the anomalies but failed to produce any significant results.
In mid 1998, BHP relinquished its interest in the Tempati, Ulemari and part of
the Sarramacca areas. The Company is free to pursue exploration at these
projects when warranted. The joint venture retains an interest in several areas
in Suriname including Klein Sarramacca and the Tapanahony/Tempati and Western
Suriname reconnaissance areas. Exploration rights over several areas in
Suriname have yet to be finalized and the joint venture does not intend to
initiate further work programs until such time as these exploration rights are
secured.
FRENCH GUIANA PROPERTIES
- ------------------------
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 mining laws have recently undergone revisions
insofar as they apply to metropolitan France. The application decrees
determining the extent to which the new French Mining Code, with some
modifications, applies in the French overseas departments (including French
Guiana) have not been adopted yet. 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. 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 it relates. There are
two types of exploration permits, the most common of which is the "B" type
permit. 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,
whether A or B, is entitled to the issuance of an exploitation permit if such
holder has demonstrated the presence of an exploitable mineral deposit within
the area covered by the exploration permit. Exploitation permits are granted
for a term of four years and are automatically renewed if production is actually
taking place.
29
A mineral concession confers upon its holder an immovable right, which is
distinct from the actual ownership of the underlying land for a term of up to 50
years. 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, Yaou, Dorlin, Paul-Isnard, Eau-Blanche and Dachine properties. All of the
properties are in the exploration stage, except the Yaou and Dorlin projects
which are currently undergoing comprehensive development studies.
During 1998, Guyanor spent $4.7 million in continuing exploration and
acquisition expenditures, of which $1.2 million were reimbursed by joint venture
partners and $3.5 million was advanced by the Company. As of December 31, 1998,
Guyanor owed $3.3 million to the Company. In 1997, Guyanor had spent $11.9
million, $10.0 million of which was reimbursed by joint venture partners. Total
budgeted exploration expenditures by Guyanor for 1999 are $2.4 million. The
Company has committed, subject to availability of adequate funding, to continue
funding on a reasonable best effort basis the operations of Guyanor during 1999.
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 bankable 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.
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 an operating company which would hold the Yaou and Dorlin
Permits in French Guiana. Cambior exercised the option after having spent the
$11.0 million expenditure commitment in September 1997. Since then,
expenditures have been funded equally by Cambior and Guyanor. The acquisition by
Cambior of any interest in the Yaou and Dorlin Permits is subject to French
governmental approval. There can be no assurance that such approval will be
granted. Cambior is responsible for the preparation of a feasibility study on
the properties and will, if warranted, manage the development and operation of
future mining operations.
Two of the 12 type "B" permits initially granted expired in February 1998.
The remaining ten type "B" permits will expire in March and May 1999 and will
no longer be renewable. The Societe Miniere Yaou-Dorlin ("SMYD"), a French
company, was recently created. The ten remaining type "B" permits will, subject
to governmental approval, be transferred to SMYD. Cambior and Guyanor will each
hold 50% of the shares of SMYD. In addition, in order to preserve their rights
to the Yaou and Dorlin properties, Guyanor and Cambior through their new
30
subsidiary, SMYD, intend to file prior to March 31, 1999 an application for two
mining concessions which would cover the Yaou and Dorlin properties. Under
French law, an application for a mining concession must be supported by studies,
called "Memoires Techniques." The studies must provide a comprehensive framework
for the development of each project, including preliminary engineering,
environmental impact assessments and economic analysis of development options.
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
During 1998, efforts at Yaou and Dorlin focused on reinterpretation of all
geologic data, especially new core drilling data from late 1997 programs, and
re-estimation of mineralized material at each project. Metallurgical test work
was carried out for both Yaou and Dorlin to evaluate processing alternatives and
field visits were made to begin examining possible layouts for potential mining
and processing operations. This activity and other environmental and
engineering work was in support of the "Memoires Techniques", or development
studies, required for planned mining concession applications. The studies were
initiated in the second half of 1998 and are expected to be completed by March
31, 1999. The current development concept under evaluation involves
consideration of a 10,000 tonne per day milling operation at Yaou and concurrent
development of a 5,000 tonne per day heap leach operation for soft rock
mineralization at Dorlin. Following completion of mining at Yaou, the milling
facilities would be moved to Dorlin, approximately 45 kilometers east of Yaou,
where hard rock mining and milling would then begin. The studies will serve as
the basis for the mining concession applications, which if granted, will
preserve Guyanor's rights in the properties through the conversion of the
exploration permits into mining concession. There can be no assurance that any
of these applications will be granted or that the projects will be economically
feasible.
During 1998, Guyanor's expenditures on Yaou and Dorlin totaled $2.1 million,
$0.7 million of which was reimbursed by Cambior under the above-mentioned
agreement. During 1997, Guyanor spent a total of $5.5 million on the Yaou
project, of which $4.7 million was reimbursed by Cambior. Guyanor has budgeted
$0.6 million in 1999 for its shares of expenditures at Yaou and Dorlin.
Mineralized Material
Cambior recently announced its year end 1998 mining reserves and mineral
resources (mineralized material), restated at a $325 gold price compared to a
price of $350 per ounce for year end 1997. For year end 1997, both Guyanor and
Cambior reported their 50% share of mineral resources (mineralized material) at
Yaou / Dorlin, using a $350 gold price, as 8.4 million tonnes grading 1.9 g/t.
At year end 1998, Cambior has estimated its 50% share of Yaou / Dorlin, using a
$325 gold price, as 8.2 million tonnes grading 1.9g/t.
The above results reflect work performed by Cambior to investigate the potential
of mining these mineral deposits. Open pits have been modeled using reasonable
slopes and using average mining and milling costs for Yaou of $1.10 per tonne
and $7.50 per tonne respectively and using average mining and milling costs for
Dorlin of $0.90 per tonne and $6.50 per tonne respectively. These results only
reflect mineralized material from within the pits modeled.
The Company is reporting these results as mineralized material. Mineralized
material does not represent reserves and has not been included in the Proven and
Probable Reserve estimates because even though enough drilling and
31
trenching indicate a sufficient amount and grade to warrant further exploration
or development expenditures, these mineral deposits do not qualify under the
U.S. Securities and Exchange Commission standards as being commercially minable
until further drilling, metallurgical work and other economic and technical
feasibility factors based upon such work are resolved.
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 Societe de Travaux Publics et de Mines Auriferes en Guyane ("SOTRAPMAG").
SOTRAPMAG holds, directly or indirectly, eight mineral concessions (the "Paul-
Isnard Concessions") and four type "B" exploration permits (the "Eau-Blanche
Permits"). One of the type "B" permits was relinquished in September 1998. 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 yet been granted.
The type "A" permit would include the area covered by 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 therefore, 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
had 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. After
discussions with Guyanor regarding the 1998 budget, ASARCO decided in May 1998
to withdraw from the joint venture. Under a termination and settlement agreement
between Guyanor and ASARCO, ASARCO paid $0.4 to Guyanor. ASARCO spent a total of
$4.3 million under the joint venture agreement on the Paul-Isnard and Eau
Blanche projects.
As at December 31, 1998, Guyanor's interest in the Paul-Isnard and Eau-Blanche
projects had increased to approximately 90% as a result of LaSource's decision
to not contribute its share of 1997 and 1998 exploration expenditures. Pursuant
to the joint venture agreement, if LaSource's participating interest decreases
below 10%, LaSource's interest converts to a 2.5% of net profits interest in
each respective project.
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.
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 ultramafic to felsic intrusives.
32
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 followed by a core drilling program in 1996. During the first half of 1997,
a ground geophysical survey, involving induced polarization, resistivity and
magnetism, was carried out over the mineralized felsic unit. A second and third
phase core drilling program were also completed during 1997.
On January 15, 1998, the Company and Guyanor jointly announced the results from
the third phase of core drilling over the Montagne d'Or target at Paul-Isnard
conducted 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 volcanic
massive sulfide (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.
During the second half of 1998, Guyanor completed a geophysical survey and a
limited follow-up core drilling campaign to identify and confirm semi-massive
sulfide mineralization (SMS) previously intercepted in the Montagne d'Or deposit
located on the Paul-Isnard property in French Guiana. Eight core holes,
totaling approximately 1,600 meters, were completed to test the most robust
geophysical conductors. SMS mineralization was intercepted in seven of the
eight holes drilled, thereby confirming the results of the geophysical survey.
The SMS zones intercepted yielded a weighted average gold grade (uncut) of 23.1
g Au/t over an average length of 1.1 meters, which were included in an average
mineralized interval around these SMS zones exhibiting a weighted average grade
of 4.2 g Au/t (uncut) over an average length of 6.4 meters. The results are
consistent with previous drilling and have improved the confidence level for
both geologic and grade continuity by reducing the drill hole spacing to a
nominal 50 meters over 400 meters of strike length in the eastern half of the
Montagne d'Or deposit.
Total expenditures in 1998 were $1.0 million for Paul-Isnard and $0.1 million
for Eau-Blanche, of which $0.1 million were reimbursed by ASARCO. Total
expenditures in 1997 were $1.8 million for Paul-Isnard and $0.1 million for Eau-
Blanche all of which was funded by ASARCO.
Exploration expenditures for Paul-Isnard of approximately $0.5 million are
budgeted for 1999. Efforts in 1999 will focus primarily on identification of
additional targets to supplement what had been previously outlined at Montagne
d'Or. Work will include follow-up geochemical evaluation and trenching at the
Elysee target, northwest of the Montagne d'Or deposit and continued evaluation
of the Montagne d'Or VMS setting. Additional work may include, subject to
availability of funding, an airborne geophysical survey of the entire project
area to investigate the possibility of additional geologic settings similar to
that found at Montagne d'Or.
Mineralized Material
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
inventory. This was followed by the results of an internal estimate published in
the same month. A new estimate was prepared in August 1998 using more
appropriate parameters taking into consideration the overall confidence of the
geologic model and grade estimations given the wide spaced drilling information
for the project. These studies identified the application of several
inappropriate parameters in the February estimate which led to an over-
estimation of open pit mineralized inventory and, to a much lesser degree,
geologic inventories. The revised estimates were independently reviewed and
confirmed by SRK Consulting, an international mining consulting firm, in a
report dated September 3, 1998. The restatement reduced open pit mineralized
inventory at the Montagne d'Or deposit at Paul Isnard from 16.3 million tonnes
grading 2.5 g Au/t to 4.6 million tonnes grading 2.6 g Au/t. Geologic
mineralized inventory were modified from
33
28.6 million tonnes grading 2.0 g Au/t to 34.7 million tonnes grading 1.4 g
Au/t. Both estimates used a gold price of $350 per ounce.
In February 1999, Guyanor updated its geologic model following the extension of
one drillhole and the addition of eight drillholes. A new estimate was taking
account of the additional information gained from the drilling program and the
subsequent increase in confidence. Open pits were modeled using reasonable
slopes and using average mining and milling cost of $1.10 per tonne and $9.10
per tonne respectively. The Company has estimated its 64% share of Paul-Isnard,
using a $325 gold price, as 3.9 million tonnes grading 2.8 g/t. This report only
reflects mineralized material estimated to be present within the open pits
modeled by the Company.
The Company is reporting these results as mineralized material. Mineralized
material does not represent reserves and has not been included in the Proven and
Probable Reserve estimates because even though enough drilling and trenching
indicate a sufficient amount and grade to warrant further exploration or
development expenditures, these mineral deposits do not qualify under the U.S.
Securities and Exchange Commission standards as being commercially minable until
further drilling, metallurgical work and other economic and technical
feasibility factors based upon such work are resolved.
St-Elie
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. Pursuant to the new mining code, when adopted, the
concession will expire on December 31, 2018 but will be renewable for an
additional period of up to 25 years. Under the agreement, $5.4 million was spent
on the St-Elie and Dieu Merci projects in 1996 and 1997, all of which was paid
by ASARCO. After discussion with Guyanor regarding the 1998 budget, ASARCO
decided in May 1998 to withdraw from the St-Elie and Dieu Merci projects. Under
the termination and settlement agreement between Guyanor and ASARCO, ASARCO paid
Guyanor $0.6 million and ASARCO's shares in SMSE were transferred back to
Guyanor. As a result, Guyanor presently holds a 100% interest in SMSE.
On February 19, 1997, SMSE and TEXMINE S.A., a French company ("Texmine")
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 had to (i) make payments
of FF4.0 million ($0.7 million) in year one, FF1.5 million ($0.2 million) in
year two, FF2.5 million ($0.4 million) in year three and FF2.5 million ($0.4
million) in year four and (ii) incur minimum expenditures on the Dieu-Merci
property of FF5.5 million ($0.9 million) (including a 3,000 metre core drilling
campaign) during year one and FF5.0 million ($0.8 million) during each
subsequent year of the option period.
On December 17, 1998, SMSE notified TEXMINE of its intention to terminate the
Dieu-Merci option agreement. After several attempts to substantially reduce or
eliminate the minimum commitments and property payments specified in the
agreement failed, SMSE decided to withdraw from the option agreement. Management
felt that, in the current business climate where cost reduction is a priority,
it should instead focus its efforts on the Yaou, Dorlin,
34
St-Elie and Paul-Isnard projects. Following the termination of the option
agreement, the owner of the Dieu-Merci project has demanded from SMSE payment of
the sum of 2,000,000 French Francs (approximately $350,000), which according to
the French company is owed to it in spite of the termination of the option
agreement. SMSE does not believe that such sum is owed and, will defend itself
vigorously against any legal action which the French company may take to obtain
payment. There can be no assurance, however, that SMSE will be successful.
As a result of the decision to withdraw from the Dieu-Merci option agreement,
Guyanor recorded a write-down in the fourth quarter of 1998 of $0.9 million of
deferred exploration expenditures relating to Dieu-Merci. The termination of the
Dieu-Merci option agreement had no material impact on the Company's reported
mineralized material.
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. St-Elie is 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 1998, Guyanor's exploration expenditures on St-Elie amounted to $0.7
million, of which $0.3 was reimbursed by ASARCO pursuant to the termination and
settlement agreement. During 1997, Guyanor's exploration spending on the St-
Elie and Dieu-Merci projects totaled $3.3 million, all of which were reimbursed
by ASARCO.
Guyanor has budgeted exploration expenses of approximately $0.5 million at St-
Elie during 1999. Exploration will focus on continued shallow auger and
geochemical evaluation of an area representing approximately 75% of the St-Elie
concession that has not yet been explored with the objective of defining new
targets for more advanced exploration.
Mineralized Material
The review of the estimates of mineralized inventory for the Michel Zone on the
St-Elie project previously reported in February 1998 found that several
inappropriate parameters led to the over estimation of mineralized material at
St-Elie. A new geologic model and estimation of the mineralized material was
completed. The new estimate is less than 50% of the February estimate, however,
the reduction in mineralized material at St-Elie does not affect the Company's
proven and probable mining reserves. Furthermore, the February estimate for St-
Elie accounts for approximately 3% of total geologic mineralized material for
the Company, therefore, the February estimates and the new lower estimates for
St-Elie are not considered material in relation to the Company's total
mineralized material. As a result, estimates of mineralized material at St-Elie
will no longer be reported unless they become material.
Dachine
The Dachine 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.
35
In 1996 and 1997, Guyanor completed an alluvial bulk sampling program under an
agreement it had with BHP Minerals International ("BHP"). A second alluvial bulk
sampling program commenced after the withdrawal of BHP was completed in December
1997. The second program, designed to quickly and cost effectively recover
diamonds, was intended to firstly, establish the clear presence of macrodiamonds
and secondly, yield a large enough parcel, though not necessarily representative
of the deposit in situ, so as to establish a preliminary distribution and
quality range of macrodiamonds at Dachine.
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 as measured by 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 the
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
project was put on care and maintenance in 1998. The next phase of exploration
at Dachine would consist of geological mapping and drilling to further
characterize the diamond and facies variability within the body identified by
the 1996 core drilling. The Company and Guyanor are continuing their efforts to
secure a joint venture partner to advance the project. Until then, the project
will continue to be on care and maintenance.
In 1998, $0.2 million was spent for the care and maintenance of the project.
During 1997, $0.7 million were spent on exploration and other holding costs.
BRAZIL PROPERTIES
- -----------------
Brazil is the fifth largest country in the world with an area of 8,510,700 km2.
Most of the country is located in the tropics. The Amazon River system drains
over one-half of Brazil's area. Brazil has a population of approximately 160
million and is divided into 26 states and a Federal District where the capital
city of Brasilia is located. 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 a democratic
system. 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
Company has two projects in Brazil: Abacaxis and Andorinhas.
Abacaxis
The Abacaxis property covers approximately 30,000 ha. and is located
approximately 270 km southeast of the city of Manaus, in the District of Maues,
State of Amazonas, Brazil. It is accessible by boat, small fixed-wing aircraft
or helicopter. Abacaxis is in the Tapajos area, which is one of the most
actively worked areas mined by garimpeiros in Brazil. At Abacaxis, narrow
quartz-sulfide-gold veins cut Proterozoic metasedimentary rocks. The veins are
reported to be exceptionally high grade, at more than 30 g Au/t. Adjacent wall
rocks also locally contain anomalous values of gold with as much as 2 to 4 g
Au/t. The area is at the margin of a failed Proterozoic rift that may have been
remobilized during younger tectonic events.
The Company indirectly acquired a working right and five-year option to acquire
100% of the right, title and interest of Matapi and Ourobras to three "alvaras",
or exploration licenses, issued in favor of Matapi, collectively known as the
Abacaxis property. Ourobras has a preexisting joint venture agreement with
Matapi with respect to the Abacaxis property. In order to keep its option and
working right in force, the Company has to: (i) pay Matapi
36
approximately $150,000 on December 1, 1997 and $0.3 million on December 1, 1998
and (ii) incur expenditures on the property of at least $0.2 million by June 19,
1997, an aggregate of $0.5 million by June 19, 1998, an aggregate of $1.1
million by June 19, 1999 and an aggregate of $2.0 million by June 19, 2000. In
December 1998, the option agreement was amended and the December 1998 payments
were revised as follow: $150,000 will be due each on June 1, 1999 and on
December 1, 1999. The Company paid Matapi and Ourobras approximately $0.4
million to date in connection with the option and incurred $2.1 million in
exploration expenditures.
Work plans for 1999 in Brazil consist primarily of completing the Abacaxis
drilling program initiated in late 1998. A 1,700 m drilling program was just
completed in early March at a cost of approximately $200,000. The Company will
be reviewing the data and evaluating means of continuing exploration beyond the
first quarter program, including seeking a joint venture partner.
Andorinhas
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.
Under an agreement with Companhia Vale do Rio Doce ("CVRD") entered into in May
1996, the Company (through its wholly-owned subsidiary, Southern Star Resources
Ltd.) earned the exclusive right to a 50% participating interest in an
association with CVRD to be created to exploit any gold discovered on the
property. This right 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. Under the agreement, the Company must also
evidence by November 2000 the existence of measured and/or indicated resources
of approximately 1,000,000 oz. failing which the agreement will be automatically
terminated. 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. 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 may therefore be diluted. CVRD may change however
its position in the future and elect to contribute its then proportional
interest to expenditures.
As part of the agreement with CVRD, and in lieu of cash property payments to
CVRD, the Company had also to reach agreements with the surface owners and
occupants of portions of the land covered by the three exploration licenses
comprising Andorinhas in connection with its exercise of the exploration
activities. Agreements were 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 and 1998.
The agreement with the key land owners contemplated the payment by the
Company of approximately $5 million over the next two years. On November 5,
1998, the Company notified these land owners of its intention to terminate its
agreement with them pursuant to which it acquired improvements and surface
rights over the three principal target areas on the Andorinhas property. After
several attempts to negotiate substantial reductions in these property payments
with the land owners failed, the Company decided to withdraw from the agreement.
Management believed that, in the current business climate where cost reduction
is a priority, it was more justified to spend funds on other projects.
In February 1999, the Company sold the Santa Ines farm and certain equipment to
its former owners in consideration for the reimbursement of the amount of the
purchase price already paid to the former owners up to the date of termination
and the release of any liability the Company may have had to the land owners in
connection with the termination of the agreement mentioned in the preceding
paragraph.
37
The Andorinhas project is being put on care and maintenance. The Company
incurred a write-down in the fourth quarter of 1998 of approximately $9.1
million of deferred exploration expenditures related to the Andorinhas project
and other activities in Brazil. Total 1999 budgeted expenditures in Brazil,
including certain closure and other administration costs, are estimated to be
$0.4 million.
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. PARC is a wholly owned subsidiary of the
Company, as a result of the Company acquiring the 19,429,282 shares of PARC
held by the minority shareholders who received in exchange 388,574 common shares
issued by the Company. This transaction became effective on April 21, 1998.
During 1998, approximately $1.3 million was spent on exploration in Africa as
compared to $3.1 million in 1997. The Company has budgeted $0.1 million for
exploration and administration for its remaining projects in Africa for 1999.
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 Company has currently three exploration permits all of which are accessible
by paved road from Abidjan, the principal city in Ivory Coast. Seven exploration
permits were relinquished in 1998. The exploration permits are valid for three
years and are renewable twice for two additional years. At the time of each
renewal, 50% of the permit area must be relinquished. The minimum expenditure
requirements for the three remaining permits vary from approximately $240,000 to
$2,200,000 over a three-year period. The two most important are Tanda and
Tortiya. During 1998, PARC spent approximately $1.1 million on the Ivory Coast
projects as compared to $0.9 million in 1997.
Tanda
Tanda, a 832 km2 exploration permit located in central eastern Ivory Coast, was
granted to the Company in March 1996. A renewal application was filed in
December 1998. Tanda was joint ventured to North Exploration (Overseas) Pty
Limited ("North") in July 1998. Under the terms of the agreement, North may earn
a 60% participating interest in the Tanda property by spending a minimum of
$400,000 on exploration during the first 12 months of the joint venture and it
must spend at least $3,000,000 over a total of 36 months to earn a 60% interest
in the project. North also has the option of earning an additional 10% interest,
for a total of 70%, by fully funding feasibility work and providing or
arranging, on a best efforts basis, project financing for any eventual
development. North is acting as manager and operator of the joint venture.
North initiated exploration programs in the fourth quarter of 1998 consisting of
detailed geologic mapping (98 kilometers) of anomalous areas previously
identified by the Company, particularly the Assoufou anomaly. Additional soil
and rock sampling (449 and 417 samples, respectively) defined two other
anomalous trends, Pala to the southwest of Assoufou and Babango to the northwest
of Assoufou. This work was completed in anticipation of defining targets for RAB
drilling in the second quarter of 1999. North has planned 9,000 meters of RAB
drilling to test the main Assoufou anomaly at depth, targeting southerly and
northerly dipping quartz vein sets identified in
38
previous trenching and road cuts. The results of this program will be used in
planning additional exploration by North.
Tortiya
On February 25, 1998, PARC was granted an exploration permit for diamonds
covering 790 km2 over an area in Ivory Coast known as Tortiya. Pursuant to an
agreement dated February 19, 1998, PARC and the Company have 25% and 75%
beneficial interests, respectively, in the property. Commercial diamond mining
was conducted at Tortiya between 1947 and 1974 by the French company SAREMCI,
which extracted over 4 million carats of gem and near-gem quality diamonds
consisting of lateritic gravels overlying Early Proterozoic Birrimian
metasedimentary rocks. Associated alluvial deposits were also exploited. In
1975, SAREMCI ceased mining operations due to declining grades. The deposit is
currently being exploited by small-scale miners.
During 1998, exploration work included detailed geologic mapping of the area,
pitting and stream sediment sampling. Both pitting and stream sediment samples
were manually processed for heavy minerals on site followed by further
processing in the Company's Georgetown, Guyana laboratory. The resulting heavy
mineral samples were examined by mineralogists with heavy minerals of interest
submitted to laboratories in Australia and Canada for SEM analysis and
microprobing to determine chemical compositions. Eight microdiamonds (>0.25mm)
were recovered from a 2,000 kilogram collected at depth through pitting while
stream sediment sampling identified an anomalous area for G-10 garnets, an
important diamond indicator mineral. These results are indicative of a possible
primary diamond source in the area. A total of $0.3 million was spent on direct
project exploration expenditures in 1998. PARC has budgeted approximately $0.08
million for work on the Tortiya property in the first half of 1999.
Work programs are being considered for 1999 which include additional pitting and
stream sediment sampling in the areas of interest as well as geophysical
surveys. The Company believes further work is warranted at Tortiya and is
evaluating cost effective means of continuing exploration, including seeking a
joint venture partner for the project.
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.
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, was renewed as of January 1, 1998 for a 10 year term. 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. 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
39
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.
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
$4,000 per month. As a result, $0.2 million was spent in 1998 compared to $0.8
million in 1997. PARC is actively seeking a joint venture partner for the
project.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
Except as disclosed in Item 2 under Omai Mine and under St-Elie, 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".
40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
Executive Officers of the Registrant
------------------------------------
(as of March 12, 1999)
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
- --------------------------------------------------------------------------------------------------------------------
James E. Askew 50 President and Chief Executive Officer of the Company since 1999
March 1999; prior thereto President and Chief Executive Officer
Rayrock Resources from September 1998 to March 1999; from 1997
to present, President and Chairman of International Mining and
Finance Corporation; from 1986 to 1996, President and Chief
Executive Officer of Golden Shamrock.
- --------------------------------------------------------------------------------------------------------------------
Gordon J. Bell 41 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 47 President of Guyanor Ressources S.A. since December 1998; Vice 1993
President, Brazil since June 1997, prior thereto Vice
President, Exploration (Eastern Division) since 1993.
- --------------------------------------------------------------------------------------------------------------------
Louis O. Peloquin 41 Vice President, General Counsel and Secretary of the Company 1993
since June 1993.
- --------------------------------------------------------------------------------------------------------------------
Hilbert N. Shields 43 Vice President, Guyana since June 1997 and prior thereto Vice 1993
President, Exploration (Western Division) since 1993.
- --------------------------------------------------------------------------------------------------------------------
Richard A. Winters 36 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.
- --------------------------------------------------------------------------------------------------------------------
41
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 12, 1999, 30,292,249 common shares were
outstanding and the Company had 837 shareholders of record. On March 12, 1999,
the closing sale price per share for the Company's common shares, as reported by
the TSE was Cdn$1.25 and as reported by the AMEX was $0.81. The following table
sets forth, for the periods indicated, the high and low market closing prices
per share of the Company's common shares as reported by the TSE and the AMEX.
Toronto Stock Exchange American Stock Exchange
---------------------- -----------------------
Cdn$ Cdn$ $ $
High Low High Low
---- --- ---- ---
1998:
First Quarter 7.00 4.00 4.81 2.75
Second Quarter 6.50 3.05 4.50 2.06
Third Quarter 3.10 1.51 2.19 0.94
Fourth Quarter 4.10 1.45 2.75 0.94
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
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.
42
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 PricewaterhouseCoopers LLP that it should not be
treated as a PFIC with respect to shares purchased by U.S. shareholders during
1993, 1994, 1995, 1996, 1997 and 1998, 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 PricewaterhouseCoopers LLP in the future to analyze
whether it is a PFIC in 1999 and subsequent years and will continue to notify
shareholders of the results of such future analyses. The PFIC analysis involves
a complex analysis of many factors, including, among other things, the price of
gold and the cash flow of OGML. For example, without increasing the amount of
income and assets that produce active income through the development or
acquisition of producing mines, a modest increase in these specific factors
could result in our becoming a PFIC.
43
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.
44
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, 1998, 1997, 1996, 1995 and 1994, 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".
45
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,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Working capital $ 6,516 $ 16,427 $ 15,287 $ 11,092 $ 34,940
- ----------------------------------------------------------------------------------------------------
Current assets 8,216 20,152 22,182 16,074 38,603
- ----------------------------------------------------------------------------------------------------
Total assets 68,597 89,122 96,283 77,609 85,540
- ----------------------------------------------------------------------------------------------------
Current liabilities 1,700 3,725 6,895 4,982 3,663
- ----------------------------------------------------------------------------------------------------
Shareholders' equity $ 58,471 $ 79,557 $ 78,094 $ 68,388 $ 79,695
- ----------------------------------------------------------------------------------------------------
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,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Revenue $ 635 $ 1,698 $ 2,801 $ 5,590 $ 2,736
- ----------------------------------------------------------------------------------------------------
Net loss (22,248) (26,584) (7,780) (12,181) (8,785)
- ----------------------------------------------------------------------------------------------------
Net loss per $ (0.74) $ (0.92) $ (0.31) $ (0.54) $ (0.42)
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.
46
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 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,
1998 1997 1996
---- ---- ----
Net loss under Canadian GAAP $ (22,248) $ (26,584) $ (7,780)
Net effect of the deferred exploration expenditures
on loss for the period 4,901 1,189 (10,231)
Effect of recording compensation expense under
stock option plans - (83) (85)
Foreign exchange loss 26 92 (2)
Reversal of the gain on subsidiary's issuance of
common stock - - (7,719)
Reversal of the loss for severance accruals - (1,115) 1,115
Effect of Omai Preferred Share Redemption 788 1,152 520
-------- -------- --------
Loss under U.S. GAAP before minority interest (16,533) (25,349) (24,182)
Minority interest as adjusted 1,138 (1,489) (1,097)
-------- -------- --------
Net Loss under U.S. GAAP $ (15,395) $ (26,838) $ (25,279)
Other comprehensive income foreign exchange loss (26) (92) 2
-------- -------- --------
Comprehensive income (15,421) (26,930) (25,277)
======== ======== ========
Basic and diluted net loss per share under U.S. GAAP $ (0.51) $ (0.94) $ (1.00)
======== ======== ========
The Company currently has limited cash resources. See "Item 1. - Risk Factors -
Risks associated with our limited financial resources" and "Liquidity and
Capital Resources" and "Outlook" below.
47
1998 Compared to 1997
The Company reported a net loss of $22.2 million in 1998 as compared to a net
loss of $26.6 million in 1997. During 1998, the Company recorded property
abandonment charges of $16.6 million, including $2.6 million and $3.7 million,
respectively, from the relinquishment of certain diamond and gold properties in
Guyana, $0.9 million for the Dieu Merci in French Guiana, $8.8 million for the
Andorinhas project and $0.3 million for other properties in Brazil, and $0.2
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
in light of limited capital available to fund exploration projects. 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 reserves and mineralized material. Of the $16.6
million of property abandonments described above, $16.4 million were recorded in
the fourth quarter of 1998. The abandonments taken in the fourth quarter
resulted from the company's review of exploration results to date,
prioritization of projects, and results of negotiations with property owners.
The Company's consolidated share of the write-downs for Guyanor was $0.7
million, net of the minority shareholders' portion of the loss.
Total revenues in 1998 decreased to $0.6 million as compared to $1.7 million in
1997 due to the shutdown of the alluvial mining operations at SOTRAPMAG in April
1997 and the lower interest income earned. Interest and other revenues
decreased from $1.3 million in 1997 to $0.6 million in 1998 due to the decrease
in the average cash balance invested during 1998 as compared to 1997 combined
with lower interest rates during the period. Cost of goods sold were nil for
1998 as compared to $1.0 million for 1997 as a result of the discontinuation of
production at SOTRAPMAG during 1997, with no revenue from gold sales in 1998,
compared to revenue of $0.4 million in 1997. SOTRAPMAG's cost of goods sold
exceeded revenues in 1997 by $0.5 million.
General and administrative expenditures totaled $7.7 million for 1998, as
compared to $8.9 million for 1997. The decrease in general and administrative
expenditures resulted from a $1.8 million reduction in expenses due to the
Company's ongoing cost reduction efforts offset by the $0.6 million paid to
David Fennell under a separation and release agreement. Depreciation expense
decreased $0.3 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 $3.5 million for the year ended December 31, 1998,
compared to a net income of $5.8 million for the year ended December 31, 1997.
The Omai Mine produced 327,546 oz of gold in 1998 versus 338,496 oz of gold in
1997. Decreased gold grades and a lower than expected recovery rate were the
reason for the decrease in production in 1998. Approximately $1.7 million was
distributed to the Company in 1998 via the redemption of Class I preferred
shares of OGML, as compared to $2.5 million during 1997.
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, 1998, the Company's share of cumulative equity loss was $0.6 million as
compared to $1.5 million as at December 31, 1997.
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.
48
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 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 generating reserves and mineralized material. 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 were
$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.
LIQUIDITY and CAPITAL RESOURCES
- -------------------------------
Consolidated cash and short-term investments as of December 31, 1998 of $7.4
million decreased $10.0 million from $17.4 million as of December 31, 1997. The
reduction is a result of the Company's net exploration expenditures of $9.6
million in 1998 offset by Omai preferred share redemptions of $1.7 million, a
loan from OGML of $3.1 million, transfer of Eagle Mountain concession to OGML in
exchange for $0.08 million and other
49
working capital changes. Working capital as of December 31, 1998 decreased by
$9.7 million to $6.7 million from $16.4 million as of December 31, 1997.
On December 23, 1998, OGML, as part of the purchase from the Company of the
Eagle Mountain project, advanced to the Company $3.17 million, as an unsecured
non-interest bearing loan to be repaid on a dollar-for-dollar basis as and when
Class I preferred shares of OGML held by GSR shall be redeemed by OGML from time
to time. The loan is non-interest bearing until September 30, 2010; after this
date the loan bears interest at the US dollar prime rate per annum, calculated
and compounded quarterly until repayment in full with interest on overdue
interest at the same rate. Of the $1.7 million of Class I preferred shares
redeemed in 1998 approximately $0.2 million was used to reduce the outstanding
loan balance. OGML has budgeted for the redemption of $1.3 million of Class I
preferred shares in OGML to be paid to the Company during 1999, compared to $1.7
million received in 1998.
Product and supplies inventories, accounts receivable and other current assets
decreased $1.8 million during the year resulting primarily from a decrease in
outstanding accounts receivable due to reduced exploration spending in 1998 and
collection of outstanding balances owed upon the termination of two joint
ventures.
Cash used in investing activities of $7.5 million in 1998 decreased from $19.6
million in 1997 primarily due to the decrease in exploration expenditures
related to the Company's operations in South America and Africa.
Cash provided by financing activities in 1998 decreased to $5.2 million from
$29.9 million in 1997. The decrease results primarily from share offerings by
the Company in 1997 which did not recur in 1998, offset by the issuance of long-
term debt for the transfer of the Eagle Mountain property to OGML for proceeds
of $3.1 million. Share capital increased by $1.2 million in 1998, compared with
$28.0 million in, 1997, reflecting proceeds from warrant exercises and the May
1997 common stock offering which did not recur in 1998.
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
prospectus as of March 13, 1999, and there can be no assurance that the Company
can raise capital using the Registration Statement or the prospectus.
Guyanor Ressources S.A.
Total exploration expenditures for the year ended December 31, 1998, amounted to
$4.7 million, offset by joint venture recoveries of $1.2 million, compared to
1997 expenditures of $11.9 million, offset by 1997 joint venture recoveries of
$10.0 million. Guyanor recorded property write-downs of $0.9 million in 1998
related to the relinquishment of the Dieu Merci Project as compared to $1.0
million related to the relinquishment of the Regina Est property and $0.4
million related to the write-down of other projects in 1997.
On June 12, 1998, the Company acquired an additional 2,380,000 Class B common
shares of Guyanor at a price of FF9.53 or Cdn$2.314. The total consideration of
FF22,681,400 or Cdn$5,579,624 for the shares was satisfied by reducing the
receivable for the equivalent amount of funds advanced to Guyanor by the
Company. The transaction resulted in an increase in the Company's interest in
Guyanor from 69.3% to 71%.
As of December 31, 1998, the Company owned approximately 71% of the outstanding
common shares of Guyanor.
50
A preliminary budget prepared by Guyanor estimates total spending for 1999 of
approximately $4.0 million with recoveries from joint venture partners of
approximately $0.7 million for net expenditures of $3.3 million. As at December
31, 1998, Guyanor had $0.1 million in cash. Net expenditures are expected to be
funded by cash on hand, receivables from joint venture partners for work
conducted in 1998 and from working capital provided by Golden Star. Golden Star
has committed to provide sufficient working capital to fund all of Guyanor's
operations for 1999, however, it will be necessary for additional capital to be
obtained by Guyanor or Golden Star for these expenditures to be funded.
Guyana
Total 1998 spending on the Company's projects in Guyana amounted to $0.9 million
with joint venture recoveries of $0.1 million, compared to 1997 spending of $3.6
million. During 1998, the Company incurred $6.4 million of property abandonment
charges related to various gold and diamond properties. The Company has
budgeted approximately $0.4 million for administration and limited exploration
in Guyana during 1999.
Suriname
Activities in Suriname during 1998 focused principally on the Gross Rosebel gold
project in joint venture with Cambior. Total Suriname spending in 1998 amounted
to $2.0 million, offset by joint venture recoveries of $1.0 million, as compared
to 1997 spending of $11.8 million, which was offset by joint venture recoveries
of $4.7 million. Budgeted 1999 exploration and acquisition expenditures for
Suriname are $0.9 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 study of the Gross Rosebel project was completed in May 1997 as required by
the agreement and then updated. The study estimated the project's proven and
probable gold reserves 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 as mineralized material using a gold price of $325 per
ounce resulting in 41.4 million tonnes grading 1.6 g Au/t, representing
approximately 2.15 million ounces in situ. Capital costs for development of the
mine are estimated in the 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 and subsequent modifications, is
estimated at approximately $25.0 million. 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 $25.0
million development expenditures in 1999. 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 $25.0 million development cost. The
Company and Cambior are also investigating alternative mining and processing
methods such as heap leaching which may lower capital and for operating costs
and enhance the project's economic returns.
Brazil and Bolivia
During 1998, the Company spent approximately $1.2 million on exploration and
project acquisition, compared to $7.1 million in 1997. Anticipated
reconnaissance and exploration expenditures for 1999 of $0.5 million relate
primarily to exploration efforts and property acquisition costs for the Abacaxis
project in Brazil. The Company recorded property write-offs of $8.8 million
for the Andorinhas project and $0.3 million for other projects in 1998.
The Company recorded property write-downs of $0.2 million in 1998 as a result of
relinquishment of the other properties in Bolivia.
51
Pan African Resources Corporation
On April 21, 1998, the Company completed a Plan of Arrangement that resulted in
the purchase of all of the outstanding shares held by minority shareholders of
Pan African Resources Corporation ("PARC"). As a result, the Company issued
388,574 of its common shares with a market value of $0.9 million to the minority
shareholders of PARC.
Total exploration and acquisition expenditures in Africa for 1998 amounted to
$3.1 million (compared to $3.1 million in 1997). Expenditures in 1998 primarily
reflect exploration activities in the Ivory Coast and Kenya and a $1.8 million
allocation of excess purchase price over the value of the assets acquired to
these properties as a result of the Plan of Arrangement between the Company and
PARC. During 1998, the Company recorded property abandonments of $0.01 million
for other projects as compared to $8.5 million in 1997. Total budgeted
expenditures on exploration and administration for 1999 are budgeted at $0.1
million representing minimum holding costs for the Company's property interests
in Cote d'Ivoire and Kenya.
In 1998, the Company's obligations under its customs duty obligations in Cote
d'Ivoire were met and the performance bond of $0.25 million was released.
On July 24, 1998, the Company announced an agreement had been reached with North
Exploration (Overseas) Pty Limited ("North") for the exploration and development
of the Company's Tanda property, located in central eastern Cote d'Ivoire.
Under the terms of the agreement, North may earn a 60% participating interest in
the Tanda property by spending a minimum of $400,000 on exploration during the
first 12 months of the joint venture and a minimum of $3.0 million over a total
of 36 months. North also has the option of earning an additional 10% interest,
for a total of 70%, by fully funding feasibility work and providing or
arranging, on a best efforts basis, project financing for any eventual
development. North will act as manager and operator of the joint venture.
Year 2000 Compliance
The Company recognizes the importance of ensuring that its business operations
are not disrupted as a result of Year 2000 problems. The Company has prepared a
three step plan to identify and resolve Year 2000 issues. First, the Company is
compiling an inventory of its Information Technology ("IT") systems, and non-IT
systems (which are those which typically include "embedded" technology such as
microprocessors or chips) and performing a survey of the state of Year 2000
readiness of third party suppliers, vendors, joint venture partners and OGML.
Second, the Company is prioritizing the IT and non-IT systems and vendor
responses. Third, the Company has prepared a Year 2000 testing plan to assess
the ability of IT and non-IT systems to handle the Year 2000. Those systems
that are not Year 2000 compliant are being modified or replaced to ensure that
they are Year 2000 compliant. These steps are in various stages of completion.
The Company anticipates that all steps will be completed by June 30, 1999. The
Company estimates the internal and external cost of Year 2000 compliance to be
approximately $0.1 million.
The Company believes that the greatest risk presented by the Year 2000 problem
is from third parties, such as suppliers and financial institutions who may not
have adequately addressed the problem. A failure of any such third party's
computer or other applicable systems in sufficient magnitude could materially
and adversely impact the Company. The Company is not presently able to quantify
this risk but believes that it is minimal based upon the survey responses
received to date from third party suppliers, vendors, joint venture partners and
OGML.
The Company is undertaking a contingency planning effort to identify
alternatives that could be used to mitigate the effects of Year 2000 related
failures. The Company keeps printed back-up of all material transactions which
could facilitate the continuation of business operations and remediation of data
loss in the event of a system failure.
Effects of the European Monetary Union Currency
Effective January 1, 1999, eleven of the fifteen member countries of the
European Monetary Union ("EMU") adopted a single European currency, the "Euro",
as their common legal currency. During the next three years,
52
business conducted within the EMU will be conducted in both the existing
national currency and the Euro. As a result, companies operating in EMU member
states will need to ensure that their financial systems are capable of
processing transactions and properly handle these currencies, including the
Euro. The operations of the Company's 71% owned subsidiary Guyanor Ressources
S.A. are affected by this change. The Company has not had and does not expect a
material impact on its results of operations from foreign currency gains or
losses as a result of the transition to the Euro.
Other Matters
The Company conducts all of its exploration and development of mineral
properties in countries other than Canada and the United States directly and
through joint ventures. 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 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 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
The Company must rely primarily on the capital markets to fund its operations
and exploration activities until it can achieve sustained positive cash flow
from mining operations. The Company's ability to continue as a going concern is
dependent upon its ability to raise additional capital to fund its exploration
and development efforts. The current market for gold shares is weak and equity
capital is difficult to obtain. The Company anticipates that additional capital
will be required in 1999 in order to fund operations and exploration activities.
The Company is exploring various transactions which would enable it to have
sufficient capital to continue its operations. Various transactions being
considered include mergers with other companies, acquisitions, and the issuance
of new equity. Other sources for such capital may include, among other things,
the establishment of joint ventures and sale of property interests.
If the current depressed market for gold prices and gold shares continues into
1999, it may be necessary for the Company to modify its 1999 budget to achieve
further reductions in activity and general and administrative expenses. Capital
is allocated to those projects which in the opinion of management, offer the
greatest potential to generate additional reserves and mineralized material. A
significant portion of the exploration and development expenditures for the
Company and its subsidiaries represent discretionary spending and can be
adjusted to reflect, among other things, results of exploration and development
activities and the Company's capital resources. In 1999, the Company is required
to make property rental payments and minimum exploration expenditures totaling
$0.6 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.
53
Whether and to what extent alternative financing options are completed by the
Company or its subsidiaries will depend on a number of factors including, among
others, the successful acquisition of additional properties or projects, the
price of gold and management's assessment of the capital markets. The low gold
price adversely affects our ability to obtain financing and therefore our
abilities to develop our current portfolio of properties. We cannot assure you
that additional funding will be available in 1999. This situation affects our
flexibility to invest funds in exploration and development. We may, in the
future, be unable to continue our exploration and development programs and
fulfill our obligations under our agreements with our partners or under or
permits and licenses. Although we have been successful in the past in obtaining
financing though partnership arrangements and sale of equity securities, we
cannot assure you that we will be able to obtain adequate financing on
acceptable terms. If we are unable to obtain such additional financing, we may
need to delay or indefinitely postpone further exploration and development of
our properties. As a result we may lose our interest in some of our properties
and may be obliged to sell some or our properties.
As at December 31, 1998, the Company held consolidated cash and short-term
investments of $7.4 million. Management anticipates consolidated total
expenditures of $7.9 million for 1999, with consolidated net expenditures after
recoveries from joint venture partners and other working capital changes of
approximately $7.2 million. The Company has committed, subject to the
availability of adequate funding, to continue funding on a reasonable best
efforts basis the operations of Guyanor, in the amount of $3.4 million which
amount is included in the net spending of $7.2 million. Without a financing or
other capital raising transaction such as a sale of assets, and based on the
current budget, management expects the Company will have a consolidated cash of
position of $0.3 million as of December 31, 1999 absent any additional
financings or transactions in 1999. This would materially and adversely affect
our operations and our ability to continue as a going concern.
The Company's planned spending during 1999 is anticipated to be directed
primarily toward pre-feasibility work at the Yaou and Dorlin projects,
exploration work at Paul Isnard and St-Elie in French Guiana, and Abacaxis in
Brazil, continued engineering work at Gross Rosebel in Suriname. No field work
is planned for Gross Rosebel; however expenditures have been budgeted for
additional work on the feasibility study related to engineering and
metallurgical work for to the investigation of heap leaching alternatives and
ongoing holding costs of the project.
The Company does not expect to receive cash flow from OGML in 1999 through
redemptions of Class I preferred shares as any redemptions will be utilized to
reduce the debt owed to OGML. The amount of redemptions, if any, is dependent
on the net cash flow of OGML. The Company received $1.7 million from
redemptions of Class I preferred shares in 1998.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is limited to changes in interest rates on
the Company's investment portfolio. The Company does not utilize derivative
financial instruments. The Company invests its cash in debt instruments of the
U.S. Government and its agencies, and in high-quality corporate issuers, and
limits the amount of exposure to any one issuer. Investments in both fixed rate
and floating rate interest earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to a rise in interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to these factors the
Company's future investment income may fall short of expectations due to changes
in interest rates or the Company may suffer losses in principal if forced to
sell securities which have declined in market value due to changes in interest
rates.
54
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.......................... 56
Auditors' Report............................................................... 57
Consolidated Balance Sheets as of December 31, 1998 and 1997................... 58
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................................... 59
Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................................... 60
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................................... 61
Notes to the Consolidated Financial Statements................................. 62-89
55
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 5, 1999, 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 four 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
PricewaterhouseCoopers LLP, 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.
/s/ Pierre Gousseland /s/ Gordon J. Bell
- --------------------- -----------------------
Chairman of the Board Vice President and
Chief Financial Officer
56
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, 1998 and 1997 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, 1998. 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 an 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, these consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1998 and 1997, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1998, in accordance with accounting principles generally accepted
in Canada.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Calgary, Canada
March 5, 1999
Comments by the Auditors for U.S. Readers on Canada-U.S. Reporting Difference
- -----------------------------------------------------------------------------
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern such as those. described in
Note 3 of the consolidated financial statements. Our report to the shareholders
dated March 5, 1999, is expressed in accordance with Canadian reporting
standards which do not permit a reference to such conditions and events in the
auditors' report when these are adequately disclosed in the financial
statements.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Calgary, Canada
March 5, 1999
57
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of United States Dollars except share amounts)
ASSETS As of December 31,
1998 1997
---- ----
CURRENT ASSETS
Cash and short-term investments $ 7,350 $ 17,399
Accounts receivable 511 2,238
Inventories 181 356
Other assets 174 159
-------- --------
Total Current Assets 8,216 20,152
RESTRICTED CASH - 250
DEFERRED EXPLORATION 58,203 65,160
INVESTMENT IN OMAI GOLD MINES LIMITED 1,337 2,126
FIXED ASSETS 685 1,280
OTHER ASSETS 156 154
-------- --------
Total Assets $ 68,597 $ 89,122
======== ========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 921 $ 2,825
Accrued wages and payroll taxes 779 900
-------- --------
Total Current Liabilities 1,700 3,725
LONG-TERM DEBT (Note 10) 2,948 -
OTHER LIABILITIES 56 115
-------- --------
Total Liabilities 4,704 3,840
-------- --------
MINORITY INTEREST 5,422 5,725
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 18) - -
SHAREHOLDERS' EQUITY
SHARE CAPITAL 159,163 158,001
(Common shares, without par value,
unlimited shares authorized.
Shares issued and outstanding:
1998 - 30,292,249; and 1997 - 29,797,432)
Stock option loans (4,012) (4,012)
DEFICIT (96,680) (74,432)
-------- --------
Total Shareholders' Equity 58,471 79,557
-------- --------
Total Liabilities and
Shareholders' Equity $ 68,597 $ 89,122
======== ========
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
58
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,
1998 1997 1996
---- ---- ----
REVENUE
Precious metals sales $ - $ 443 $ 1,723
Interest and other 635 1,255 1,078
--------- --------- --------
635 1,698 2,801
--------- --------- --------
COSTS AND EXPENSES
Cost of goods sold - 987 4,097
Depreciation and depletion 230 772 1,246
Exploration expense 443 779 408
General and administrative 7,712 8,936 9,114
Write-offs & abandonment of mineral properties 16,600 22,437 10,365
Gain on disposal of assets - (302) (33)
Interest expense 36 22 189
Foreign exchange loss (gain) 26 92 (2)
Loss on suspension of mining activities - - 2,085
Loss on impairment of inventories and fixed assets - 1,522 -
Recovery of abandonment loss - - (936)
--------- --------- --------
25,047 35,245 26,533
--------- --------- --------
LOSS BEFORE THE UNDERNOTED (24,412) (33,547) (23,732)
Gain on subsidiaries issuance of common shares - - 7,719
Omai preferred share redemption surplus 950 1,388 626
--------- --------- --------
Loss before minority interest (23,462) (32,159) (15,387)
Minority interest 1,214 5,575 7,607
--------- --------- --------
NET LOSS $ (22,248) $ (26,584) $ (7,780)
========= ========= ========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.74) $ (0.92) $ (0.31)
========= ========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING (in millions of shares) 30.2 28.8 25.2
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
59
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, 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 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 Loss - - - (26,584)
---------- -------- ------- ---------
Balance at December 31, 1997 29,797,432 $158,001 $(4,012) $ (74,432)
Shares Issued 421,357 987 - -
Shares Issued Under Options 73,460 175 - -
Net Loss - - - $ (22,248)
---------- -------- ------- ---------
Balance at December 31, 1998 30,292,249 $159,163 $(4,012) $( 96,680)
========== ======== ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
60
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of United States Dollars)
-----------------------------------------------------------------------
For the Years Ended December 31,
Operating Activities: 1998 1997 1996
----------- ----------- ---------
Net Loss $(22,248) $(26,584) $ (7,780)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and depletion 230 772 1,246
Premium on Omai preferred share redemption (950) (1,388) (626)
Gain on disposal of assets - (302) (33)
Write offs and abandonment of mineral properties 16,600 22,437 10,365
Recovery of abandonment loss - - (936)
Gain on issuance of common shares by subsidiary - - (7,719)
Write-down of equipment - 1,522 450
Minority interest (1,214) (5,575) (7,607)
Changes in non-cash operating working capital (137) 516 1,990
-------- -------- --------
Net Cash Used in Operating Activities (7,719) (8,602) (10,650)
-------- -------- --------
Investing Activities:
Expenditures on mineral properties, net of joint venture recoveries (9,643) (22,877) (24,279)
Depreciation capitalized as deferred exploration 367 342 -
Proceeds from sale of property interest - - 640
Equipment purchases (50) (353) (1,735)
Omai Preferred Share Redemption 1,738 2,541 1,145
Proceeds from sale of equipment 47 486 -
Other assets and investment (7) 266 787
-------- -------- --------
Net Cash Used in Investing Activities (7,548) (19,595) (23,442)
-------- -------- --------
Financing Activities:
Restricted cash 250 1,765 450
Change in other liabilities (52) 22 (6)
Proceeds from issuance of subsidiary stock - - 19,987
Offering costs of subsidiary stock issues - (25) (1,461)
Increase in minority interest 910 124 518
Issuance of long-term debt 3,169 - -
Repayment of long-term debt (220) - -
Issuance of share capital and warrants, net of issue costs 1,161 28,047 23,610
Stock option loan additions - - (2,841)
-------- -------- --------
Net Cash Provided by Financing Activities 5,218 29,933 40,257
-------- -------- --------
Increase (Decrease) in cash and short-term investments (10,049) 1,736 6,165
Cash and short-term investments, beginning of period 17,399 15,663 9,498
-------- -------- --------
Cash and short-term investments, end of period $ 7,350 $ 17,399 $ 15,663
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
61
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 its 71% owned subsidiary Guyanor Ressources S.A.), and
Brazil (through its wholly owned 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 wholly 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. Liquidity and Going Concern
- ----------------------------------
The Company must rely primarily on the capital markets to fund its operations
and exploration activities until it can achieve sustained positive cash flow
from mining operations. The Company's ability to continue as a going concern is
dependent upon its ability to raise additional capital to fund its exploration
and development efforts. The current market for gold shares is weak and equity
capital is difficult to obtain. The Company anticipates that additional capital
will be required in 1999 in order to fund operations and exploration activities.
The Company is exploring various transactions which would enable it to have
sufficient capital to continue its operations. Various transactions being
considered include mergers with other companies, acquisitions, and the issuance
of new equity. Other sources for such capital may include, among other things,
the establishment of joint ventures and sale of property interests.
If the current depressed market for gold prices and gold shares continues into
1999, it may be necessary for the Company to modify its 1999 budget to achieve
further reductions in activity and general and administrative expenses. Capital
is allocated to those projects which in the opinion of management, offer the
greatest potential to generate additional reserves and mineralized material. A
significant portion of the exploration and development expenditures for the
Company and its subsidiaries represent discretionary spending and can be
adjusted to reflect, among other things, results of exploration and development
activities and the Company's capital resources. In 1999, the
62
Company is required to make property rental payments and minimum exploration
expenditures totaling $0.6 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.
Whether and to what extent alternative financing options are completed by the
Company or its subsidiaries will depend on a number of factors including, among
others, the successful acquisition of additional properties or projects, the
price of gold and management's assessment of the capital markets. The low gold
price adversely affects our ability to obtain financing and therefore our
abilities to develop our current portfolio of properties. We cannot assure you
that additional funding will be available in 1999. This situation affects our
flexibility to invest funds in exploration and development. We may, in the
future, be unable to continue our exploration and development programs and
fulfill our obligations under our agreements with our partners or under or
permits and licenses. Although we have been successful in the past in obtaining
financing though partnership arrangements and sale of equity securities, we
cannot assure you that we will be able to obtain adequate financing on
acceptable terms. If we are unable to obtain such additional financing, we may
need to delay or indefinitely postpone further exploration and development of
our properties. As a result we may lose our interest in some of our properties
and may be obliged to sell some of our properties.
As at December 31, 1998, the Company held consolidated cash and short-term
investments of $7.4 million. Management anticipates consolidated total
expenditures of $7.9 million for 1999, with consolidated net expenditures after
recoveries from joint venture partners and other working capital changes of
approximately $7.2 million. The Company has committed, subject to the
availability of adequate funding, to continue funding on a reasonable best
efforts basis the operations of Guyanor, in the amount of $3.4 million which
amount is included in the net spending of $7.2 million. Without a financing or
other capital raising transaction such as a sale of assets, and based on the
current budget, management expects the Company will have a consolidated cash of
position of $0.3 million as of December 31, 1999 absent any additional
financings or transactions in 1999. This would materially and adversely affect
our operations and our ability to continue as a going concern.
The Company's planned spending during 1999 is anticipated to be directed
primarily toward pre-feasibility work at the Yaou and Dorlin projects,
exploration work at Paul Isnard and St-Elie in French Guiana, and Abacaxis in
Brazil, continued engineering work at Gross Rosebel in Suriname. No field work
is planned for Gross Rosebel; however expenditures have been budgeted for
additional work on the feasibility study related to engineering and
metallurgical work for to the investigation of heap leaching alternatives and
ongoing holding costs of the project.
The Company does not expect to receive cash flow from OGML in 1999 through
redemptions of Class I preferred shares as any redemptions will be utilized to
reduce the debt owed to OGML. The amount of redemptions, if any, is dependent
on the net cash flow of OGML. The Company received $1.7 million from
redemptions of Class I preferred shares in 1998.
4. 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.
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. Certain reclassifications have been made to
the 1997 and 1996 notes to the consolidated financial statements to conform to
the 1998 presentation. The consolidated group includes the following as of
December 31, (all entities are 100% owned by the Company, unless otherwise
noted):
63
1998: 1997:
- ----- -----
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 Pan African Resources Corporation
(63.9%)
Southern Star Resources Ltd. Southern Star Resources Ltd.
Guyanor Ressources S.A. (71%) Guyanor Ressources S.A. (69.3%)
Societe de Travaux Publics Societe de Travaux Publics
et de Mines Auriferes en et de Mines Auriferes en
Guyane ("SOTRAPMAG") (99%) Guyane ("SOTRAPMAG") (99%)
Societe des Mines de St-Elie ("SMSE") (100%) Societe des Mines de St-Elie ("SMSE") (50%)
Caystar Holdings Ltd. 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
values, if any, over their estimated useful lives. The net book value of fixed
assets at property locations is charged
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
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, accrued wages, payroll taxes and long-term debt. 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 10. The fair value of
the Company's long-term debt is equal to the value of the OGML Preferred I
Shares contained in Note 10.
65
NOTES TO THE CONSELIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
5. Inventories
- ------------------
December 31, December 31,
1998 1997
-------- --------
Gold Inventory $ - $ 53
Materials and Supplies 181 303
----- -----
$ 181 $ 356
===== =====
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 8.) In September 1997, the
remaining materials and supplies inventories of $0.08 million held by SOTRAPMAG
were charged to loss.
6. Sale of Common Shares and Warrants by Subsidiaries
- ---------------------------------------------------------
Issuances of Common Shares and Warrants by Guyanor Ressources S.A.
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 had
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 FF11,570,000 or
Cdn$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%.
On June 16, 1998, the Company and Guyanor announced that the Company had agreed
to acquire an additional 2,380,000 Class B common shares of Guyanor at a price
of FF9.53 or Cdn $2.34. The total consideration of FF22,681,400 or
Cdn$5,579,624 for the shares will be satisfied by reducing the equivalent amount
of funds advanced to Guyanor by the Company. The Class B Shares were issued on
June 12, 1998, and the transaction resulted in an increase in the Company's
interest in Guyanor from 69.3% to 71%.
Issuances of Common Shares and Warrants by Pan African Resources Corporation
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. On February 6, 1996, PARC Yukon was
amalgamated under the Yukon Business Corporation Act with Humlin Red Lake Mines
Limited, an Ontario corporation ("Humlin"). The amalgamated company is referred
to as PARC. As a result of the amalgamation, each share issued under the PARC
Yukon private placement was deemed exchanged for 1.001 share of PARC and each
series A Warrant was deemed exchanged for one PARC 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 PARC.
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.
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
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 received $1.0 million in proceeds from
exercise of 1,063,500 of the Series A warrants. On October 31, 1996, PARC
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.
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 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
increased to 63.9%.
7. Purchase of PARC Minority Interest
- -----------------------------------------
On April 21, 1998, the Company completed a Plan of Arrangement that resulted in
the purchase of all of the outstanding shares held by minority shareholders of
PARC. As a result, the Company issued 388,574 of its common shares with a
market value of $0.9 million to the minority shareholders of PARC. As a result
of this transaction, the Company allocated the amount of purchase price in
excess of the value of the assets acquired of approximately $1.8 million to the
Comoe and Ndori properties.
The following is the pro-forma income and loss for the Company for the twelve
months ended December 31, 1998 and 1997, showing the results of operations had
the transaction been completed on January 1, 1997:
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
--------------------------------- ---------------------------------
Revenue $ 635 $ 1,698
Net Loss $ (21,039) $ (29,877)
Net Loss per Share $ (0.73) $ (1.04)
8. 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
67
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ----------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
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.
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
9. Deferred Exploration
- ---------------------------
December 31, 1998 December 31, 1997
------------------------ -----------------------
GUYANA
Eagle Mountain $ 1,364 $ 1,136
Quartz Hill 1,347 1,347
Five Star Diamond - 2,360
Five Stars Gold (Makapa) 819 3,684
BHP Gold Projects - 333
Guyana Diamond Permits - 109
Other 57 97
------- -------
3,587 9,066
------- -------
SURINAME
Benzdorp / Lawa 3,352 3,344
Gross Rosebel 14,543 13,892
Headley's Right of Exploration 313 311
Thunder Mountain 456 453
Saramacca 1,973 1,862
Sara Kreek 588 581
Tempati Reconnaissance 347 344
Tapanahony Reconnaissance 234 251
Kleine Saramacca 107 107
Lawa / Antino 2,109 2,096
Ulemari Reconnaissance 237 291
Other 283 (17)
------- -------
24,542 23,515
------- -------
FRENCH GUIANA (Guyanor Ressources S.A.)
Dorlin 2,363 1,330
St-Elie 2,377 1,973
Dieu-Merci - 382
Yaou 7,486 7,130
Paul-Isnard / Eau Blanche 4,650 3,629
Paul Isnard Alluvials 1,987 1,987
Dachine 1,481 1,234
Other - 81
------- -------
20,344 17,746
------- -------
AFRICA (Pan African Resources Corporation)
Ivory Coast / Comoe 4,304 2,092
Kenya / Ndori 2,565 1,677
Other - 8
------- -------
6,869 3,777
------- -------
LATIN AMERICAN (Southern Star Resources Ltd.)
Brazil / Andorinhas - 8,490
Brazil / Abacaxis 2,498 2,096
Brazil / Other 275 189
Bolivia / Other - 173
------- -------
2,773 10,948
------- -------
OTHER 88 108
------- -------
TOTAL DEFERRED EXPLORATION COSTS $58,203 $65,160
======= =======
69
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 Africa America Other
--------------------------------------------------------------------------------
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
Deferred Exploration
Expenditures 11,632 968 2,011 4,705 3,100 868 (20)
Additions & Acquisitions 250 - - - - 250 -
Write-offs & Property
Abandonments (16,600) (6,382) - (917) (8) (9,293) -
Joint Venture Recoveries (2,239) (65) (984) (1,190) - - -
--------------------------------------------------------------------------------
December 31, 1998 $ 58,203 $ 3,587 $24,542 $ 20,344 $ 6,869 $ 2,773 $ 88
================================================================================
The recoverability of amounts shown for deferred exploration is dependent upon
sale or the 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.
In 1999, the Company is required to make property rental payments and minimum
exploration expenditures totaling $0.6 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 $22.2 million in 1998 as compared to a net
loss of $26.6 million in 1997. During 1998, the Company recorded property
abandonment charges of $16.6 million, including $2.7 million and $3.7 million,
respectively, from the relinquishment of certain diamond and gold properties in
Guyana, $0.9 million for the Dieu Merci property in French Guiana, $8.8 million
for the Andorinhas project and $0.3 million for other property areas in Brazil,
and $0.2 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. Of the $16.6 million of property abandonments
described above, $16.4 million were recorded in the
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
fourth quarter of 1998. The abandonments taken in the fourth quarter resulted
from the company's review of annual exploration results, prioritization of
projects, and results of negotiations with property owners.
On July 30, 1998, the Company announced that a preliminary agreement was reached
on the material terms for the exploration and development of the Company's Eagle
Mountain property. Under the terms of the agreement, Omai Gold Mines Limited
("OGML") in which Cambior Inc., the Company and the Government of Guyana hold
65%, 30% and 5% equity interests, respectively, could acquire a 100% interest in
Eagle Mountain by (i) paying the Company $80,000; and (ii) advancing the Company
$3.17 million, as a non-interest bearing loan to be repaid through the normal
redemption of Class I Preference shares owed to the Company. After closing,
OGML will fund 100% of exploration and feasibility costs associated with future
programs at Eagle Mountain through completion of a final feasibility study.
Additionally, if exploration is successful in defining a reserve resulting in a
positive feasibility study and mine development, OGML will pay a 1.5% net
smelter royalty to the Company upon achievement of commercial production. OGML
will also pay to the Company an amount equal to $1.0 million at the end of each
year of commercial production for a period of five years. The closing of the
acquisition was subject to the fulfillment of certain conditions, including the
approval by the Government of Guyana of the transfer of the Eagle Mountain title
to OGML. All conditions were fulfilled and the agreement was executed, effective
December 23, 1998.
On July 24, 1998, the Company announced that an agreement with North Exploration
(Overseas) Pty Limited ("North") for the exploration and development of the
Company's Tanda property, located in central eastern Cote d'Ivoire. Under the
terms of the agreement, North may earn a 60% participating interest in the Tanda
property by spending a minimum of $400,000 on exploration during the first 12
months of the joint venture and a minimum of $3.0 million over a total of 36
months. North also has the option of earning an additional 10% interest, for a
total of 70%, by fully funding feasibility work and providing or arranging, on a
best efforts basis, project financing for any eventual development. North is
acting as manager and operator of the joint venture.
On May 27, 1998, Golden Star and Guyanor announced the resolution of the budget
deadlock with ASARCO Incorporated ("Asarco") regarding the spending levels and
work programs at the Paul Isnard/Eau Blanche and St-Elie/Dieu-Merci gold
projects. Under the termination and settlement agreement reached between Guyanor
and Asarco and subject to certain conditions, Asarco was required to pay Guyanor
amounts totaling approximately $1.0 million. Upon settlement, Asarco
relinquished all rights and obligations under the joint venture agreements.
Accordingly, Guyanor now holds a 100% interest in the St-Elie project, and ,
approximately 89% of the Paul Isnard/Eau Blanche project, with LaSource holding
the remaining 11% interest in Paul Isnard/Eau Blanche. During July 1998,
Guyanor obtained the consent of LaSource and all amounts owing Guyanor by Asarco
were fully paid.
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 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. PARC was required to
relinquish 50% of the original property area in 1998 and must relinquish a
further 25% of the original area in 1999.
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 has relinquished the Concession area, with minimal
work on the area performed in 1997. The Company's share of this write-down was
$2.3 million after minority interest.
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
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 8.)
10. Investment in Omai Gold Mines Limited
- ---------------------------------------------
During 1991, the Company acquired a 35% common share equity interest for a
nominal amount in 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 $1.1 million, $2.5 million and $1.7 million in 1996, 1997 and
1998 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.
On December 23, 1998, OGML advanced to the Company $3.17 million, as an
unsecured non-interest bearing loan to be repaid on a dollar-for-dollar basis as
and when Class I preferred shares of OGML held by GSR are redeemed by OGML from
time to time. The loan is non-interest bearing until September 30, 2010. After
this date the loan bears interest at the US Dollar prime rate per annum,
compounded quarterly until repayment in full with interest on overdue interest
at the same rate. Of the $1.7 million of Class I preferred shares redeemed in
1998 approximately $0.2 million was used to reduce the outstanding loan balance.
As of December 31, 1998, the Company owed OGML approximately $2.9 million under
this loan. The full balance was classified as long-term debt as of December 31,
1998.
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, 1996, 1997, and 1998. The Company will commence recognition of
equity income when its share of accumulated income exceeds the amount of
unrecognized equity losses.
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
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, 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
Less:
Preferred Share Redemptions - (1,738)
Add:
Premium on Preferred Share Redemptions - 950
-------- ---------
December 31, 1998 $ - $ 1,338
======== =========
The Company's Share of
Accumulated Losses at:
December 31, 1996 $ (2,713)
========
December 31, 1997 $ (1,507)
========
December 31, 1998 $ (628)
========
Summarized Financial Information of OGML:
As of December 31,
1998 1997
======== ========
Current assets $ 24,550 $ 25,175
Non-current assets 189,818 200,367
Current liabilities 12,815 11,671
Non-current liabilities 149,013 162,629
Redeemable preferred shares:
Class I 3,107 5,305
Class II - -
Class III 50,243 50,243
The Class III Redeemable Preferred Shares carry a 15% cumulative dividend. As
of December 31, 1998 and 1997, approximately $57.4 million and $42.6 million of
dividends were accrued and unpaid on these shares.
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
For the Years Ended December 31,
1998 1997 1996
---- ---- ----
Revenues $135,345 $145,087 $107,199
Expenses 131,849 139,309 104,463
-------- -------- --------
Net income $ 3,496 $ 5,778 $ 2,736
======== ======== ========
At December 31, 1998 and 1997, 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,
1998 1997
---- ----
30% of OGML net assets $15,761 $15,373
Carrying value of investments 1,337 2,126
------- -------
Difference $14,424 $13,247
======= =======
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 $0.4 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.
11. Fixed Assets
- --------------------
As of December 31,
1998 1997
---- ----
Machinery & equipment $ 2,851 $ 3,239
Accumulated depreciation (2,166) (1,959)
------- -------
$ 685 $ 1,280
======= =======
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.
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
12. 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, 1998.
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.
On April 21, 1998, the Company completed a Plan of Arrangement that resulted in
the purchase of all of the outstanding shares held by minority shareholders of
Pan African Resources Corporation ("PARC"). As a result, the Company issued
388,574 of its common shares with a market value of $0.9 million to the minority
shareholders of PARC.
b) Stock Option Plan
Stock Options
As a result of changes in U.S. securities laws, the Company adopted 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, 1998, was 3,317,770. The number of common shares vested and exercisable
under the plan as of December 31, 1997, was 3,352,681.
Stock Option Loans
As of December 31, 1998, and 1997, 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$5.3 million and Cdn$5.3 million, respectively. Of the 1998 and 1997
outstanding loan balances, approximately Cdn$5.3 million and Cdn$5.3 million,
respectively, relate to loans to two employees, one a former officer and
currently a director, and the other a former 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
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
of the underlying shares regarding outstanding loans as at December 31, 1998,
and 1997 was Cdn$5.26 for both periods. The loans outstanding at December 31,
1998, are due as follows:
1999 $4,012
2000 -
2001 -
2002 -
------
$4,012
======
As a result of the resignation of David Fennell as President and Chief Executive
Officer from the Company on October 27, 1998, outstanding stock option loans in
the amount of Cdn$4.4 million were due and payable 30 days after his departure
from the Company. The Company has been informed that there will be no repayment
of these loans. Due to the non-recourse nature of these loans the Company is in
the process of canceling the Cdn$4.4 million of share loans and the
corresponding 667,792 outstanding common shares. This cancellation process is
expected to be completed in the second quarter of 1999.
Schedule of Stock Option Activity
Shares Under Option Price (Cdn$)
------------------- ------------
Shares Under Option at
December 31, 1995 2,991,550 $2.76 to $17.00
Activity:
Granted 992,250 $9.50 to $14.40
Exercised (1,059,469) $2.76 to $16.20
Canceled (40,100) $7.63 to $16.20
----------
Shares Under Option at
December 31, 1996 2,884,231 $2.76 to $24.40
Activity:
Granted 1,221,450 $3.40 to $18.50
Exercised (97,833) $2.76 to $9.25
Canceled (50,500) $7.63 to $16.20
----------
Shares Under Option at
December 31, 1997 3,957,348 $3.40 to $24.40
Activity:
Granted 209,500 $1.55 to $6.65
Exercised (73,460) $3.40
Canceled (596,658) $3.40 to $23.00
----------
Shares Under Option at
December 31, 1998 3,496,730 $1.55 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 may grant bonus common shares on terms
that it 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 January 1, 1996, a total of 30,712 common shares were declared for certain
employees under the Bonus Plan as compensation for 1995. A total of 60,296
common shares were issued in December 1997 pursuant to the December 9, 1997
bonuses. During 1998, a total of 32,783 common shares were issued to certain
employees
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
pursuant to the Bonus Plan. The Company recognized compensation expenses related
to bonuses under the Bonus Plan during both 1998 and 1997 of $0.1 million. In
connection with the bonus common shares allocated in 1998 and 1997, with one
exception paid by the Company as authorized by the Compensation committee, each
of the employees is responsible to pay any applicable income taxes which may be
assessed 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 entitled 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, warrant
holders were 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 had
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 consisted of one common share and one-
half of a common share purchase warrant. Each whole warrant was 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 (now CIBC Mellon 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.
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 17)
13. Income Taxes
- --------------------
Losses carried forward for income tax purposes in Canada, approximating Cdn$35.0
million are available for the reduction of future years' taxable incomes. These
losses expire as follows (in thousands):
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
CDN$
-------
1999 $ 2,266
2000 1,664
2001 1,702
2002 5,524
2003 6,525
2004 7,531
2005 9,752
-------
Total $34,964
=======
No recognition has been given in these financial statements to any potential tax
savings that may arise from the application of these losses. The Company's
effective tax rate is nil.
14. Operations by Geographic Area
- -------------------------------------
Information on the Company's continuing operations by geographic area for the
years ended December 31, 1998, 1997 and 1996 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.
Operating Net Identifiable
Revenues (Loss) Assets
--------- ------ ------------
1998
South America $ 8 $(18,448) $52,711
Africa - (6) 6,865
Corporate 627 (3,794) 9,021
--------- ------ ------------
Total $ 635 $(22,248) $68,597
==============================================================================
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
==============================================================================
15. 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.
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
(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 APB 25 "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 (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 subsidiaries 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.
The Company has no available-for-sale securities as of December 31, 1998.
(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.
(j) Under U.S. GAAP, items such as foreign exchange gain and losses are
required to be shown separately in derivation of Comprehensive Income.
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
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,
1998 1997 1996
----------------------- -------------------- --------------------
Net loss under Canadian GAAP $(22,248) $(26,584) $ (7,780)
Net effect of the deferred exploration expenditures
on loss for the period (a) 4,901 1,189 (10,231)
Effect of recording compensation expense under
stock option plans (d) - (83) (85)
Foreign exchange loss 26 92 (2)
Reversal of the gain on subsidiary's issuance of
common stock (f) - - (7,719)
Reversal of the loss for severance accruals (i) - (1,115) 1,115
Effect of Omai Preferred Share Redemption (c) 788 1,152 520
-------- -------- --------
Loss under U.S. GAAP before minority interest (16,533) (25,349) (24,182)
Minority interest as adjusted 1,138 (1,489) (1,097)
-------- -------- --------
Net Loss under U.S. GAAP $(15,395) $(26,838) $(25,279)
Other comprehensive income foreign exchange loss (j) (26) (92) 2
-------- -------- --------
Comprehensive income (j) (15,421) (26,930) (25,277)
======== ======== ========
Basic and diluted net loss per share under U.S. GAAP $(0.51) $(0.94) $(1.00)
======== ======== ========
(For items (a) to (j), see page 79.)
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.
80
NOTES TO THE CONSOLIDATED FINANICIAL 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, 1998 December 31, 1997
-------------------------- --------------------------
Canadian GAAP U.S. GAAP Canadian GAAP U.S. GAAP
-------------- ---------- -------------- ----------
Cash (e) $ 7,350 $ 3,145 $ 12,458 $ 12,458
Short term investments (e) - 1,590 4,941 1,999
Marketable securities (h) - - - -
Other current assets 866 866 2,753 2,753
Restricted cash - - 250 250
Deferred exploration (a) 58,203 18,183 65,160 20,239
Investment in OGML (c) 1,337 - 2,126 -
Long-term investments (e) - 2,615 - 2,942
Other assets 841 841 1,434 1,435
-------- --------- -------- ---------
Total Assets $ 68,597 $ 27,240 $ 89,122 $ 42,076
======== ========= ======== =========
Liabilities (i) $ 4,704 $ 4,704 $ 3,840 $ 3,840
Minority interest (a) 5,422 5,637 5,725 7,076
Share capital, net of stock
option loans (g) 155,151 152,360 153,989 151,200
Cumulative translation
adjustments (b) - 1,595 - 1,595
Accumulated comprehensive
income - (593) - (567)
Deficit (a) (c) (d) (f) (i) (96,680) (136,463) (74,432) (121,068)
-------- --------- -------- ---------
Total Liabilities and
Shareholders' Equity $ 68,597 $ 27,240 $ 89,122 $ 42,076
======== ========= ======== =========
(For items (a) to (i), see page 79.)
Under U.S. GAAP, receivables would be separately disclosed as follows:
1998 1997
------------ -----------------
Receivables from employees $ 55 $ 396
Receivables from joint venture partners 96 805
Interest receivable 72 85
Other 288 952
Allowance for doubtful accounts - -
----- ------
Total Receivables $ 511 $2,238
===== ======
Of the December 31, 1998 and 1997 accounts receivable balance, $0.05 million and
$0.1 million respectively, relates to loans to two officers of the Company.
81
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
(i)
Common (b) Accumulated
Stock Stock Cumulative Unrealized Accumulated
Number of Share Option Translation Gains on Comprehensive
Shares Capital Loans Adjustment Investments Deficit Income
--------- ------- ------ ----------- ----------- ------- -------------
Balance at December 31, 1995 22,769,872 $ 95,666 $(1,170) $ 1,595 $ 127 $(65,668) $ (477)
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) -
Comprehensive Income (j) - - - - - - 2
Net Loss (a) (c) (d) (f) (I) - - - - - (25,279) -
---------- -------- ------- --------- ------------ --------- --------
Balance at December 31, 1996 25,941,103 127,080 (4,012) 1,595 - (94,229) (475)
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 Based Compensation Expense (d) - 83 - - - - -
Comprehensive Income (j) - - - - - - (92)
Net Loss (a) (c) (d) (f) (i) - - - - - (26,838) -
---------- -------- ------- --------- ------------ --------- --------
Balance at December 31, 1997 29,797,432 155,210 (4,012) 1,595 - (121,068) (567)
Shares Issued 421,357 987 - - - - -
Shares Issued under Options 73,460 175 - - - - -
Comprehensive Income (j) - - - - - - (26)
Net Loss (a)(c)(d)(f)( i ) - - - - - (15,395) -
---------- -------- ------- --------- ------------ --------- --------
Balance at December 31, 1998 30,292,249 $156,372 $(4,012) $(1,595) $ - $(136,463) $(593)
========== ======== ======= ========= ------------ ========= ========
Statements of Cash Flows Under U.S. GAAP
Net Cash Provided By (Used In): Operating Activities Investing Activities Financing Activities
---------------------------- ---------------------------- --------------------------
Canadian U.S. Canadian U.S. Canadian U.S.
For the Years Ended, GAAP GAAP GAAP GAAP GAAP GAAP
- -------------------- ---- ---- ---- ---- ---- ----
December 31, 1998 $ (7,719) $(14,792) $ (7,548) $ 2,743 $ 5,218 $ 2,327
December 31, 1997 $ (8,602) $(27,045) $(19,595) $(2,670) $29,933 $30,009
December 31, 1996 $(10,650) $(30,024) $(23,442) $(3,963) $40,257 $40,331
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 $0.5 million, $0.0 million and $0.9 million for the
years ended December 31, 1996, 1997 and 1998, 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,
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMETNS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
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, 1998 and 1997, 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:
As of December 31,
------------------------------------------------------
1998 1997
-------------------------- --------------------------
Temporary differences relating to net assets:
Other current assets $ 62 $ 81
Property & equipment 405 396
Deferred exploration 21,076 18,587
Investment in OGML 1,120 1,781
Offering costs 1,103 1,103
Tax loss and credit carryforwards 10,201 8,806
-------- --------
Gross deferred tax asset 33,967 30,754
-------- --------
Valuation allowance (33,967) (30,754)
-------- --------
Net deferred tax assets $ - $ -
======== ========
The valuation allowance increased by $3.2 million in 1998 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).
Stock Based Compensation Plans
At December 31, 1998, the Company has two 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:
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
1998 1997
--------------------- ---------------------
Net loss under U.S. GAAP As reported $(15,272) $(26,930)
Pro forma $(19,831) $(32,660)
Net Loss per share under U.S. GAAP As reported $ (0.51) $ (0.94)
Pro forma $ (0.66) $ (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 shall
not be less than 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 shorter term 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 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 Board of Directors.
Under the Guyanor Ressources S.A. Stock Option Plan (the "Guyanor Plan"),
Guyanor may grant options to its employees 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 shall not be less than (i) the equivalent of
the Canadian Dollar amount equal to the closing price of the shares on the
Toronto Stock Exchange on the trading day immediately prior to the day the
option is granted and (ii) 80% of the average closing price on the Noveau Marche
of the Bourse de Paris during the 20 consecutive trading days immediately
preceding the date the option is granted. An option's term is ten years.
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.
The Pan African Resources Corporation Stock Option Plan (the "PARC Plan") was
canceled upon the completion of the Plan of Arrangement discussed in Note 7.
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 1998, 1997 and 1996:
1998
GSR Plan Guyanor Plan PARC Plan
--------------------------------------------------------------------------------
Expected volatility 105.9% N/A N/A
Risk-free interest rate 4.37% to 5.70% N/A N/A
Expected lives 5 years N/A N/A
Dividend yield 0% N/A N/A
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%
84
The following tables summarize information about stock options under the GSR
Plan:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 3,957 $10.79 2,884 $13.07 2,991 $ 9.40
Granted 210 $ 2.47 1,221 $ 5.08 992 $19.34
Exercised (73) $ 3.40 (98) $ 3.30 (1,059) $ 6.37
Forfeited (597) $15.27 (50) $17.31 (40) $12.23
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,497 $10.40 3,957 $10.79 2,884 $13.07
Options exercisable at year-end 3,318 3,353 2,221
Weighted-average fair value of
options granted during the year $ 1.90 $ 5.08 $19.34
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Number Number
GSR Plan Outstanding Weighted-Average Weighted-Average Exercisable at Weighted-Average
Range of Exercise at Dec. 31, 1998 Remaining Exercise Price Dec. 31, 1998 Exercise Price
Prices (Cdn$) (000) Contractual Life (Cdn$) (000) (Cdn$)
- ------------------------------------------------------------------------------------------------------------------------------------
$1.55 to $2.76 217 7.83 $ 2.00 217 $ 7.83
$3.40 to $7.63 1,553 7.75 $ 5.26 1,374 $ 5.50
$8.05 to $12.05 255 7.28 $ 9.39 255 $ 9.39
$12.15 to $17.90 683 5.43 $14.36 683 $14.36
$18.45 to $24.40 789 6.86 $19.72 789 $19.72
- ------------------------------------------------------------------------------------------------------------------------------------
3,497 3,318
The following tables summarize information about stock options for the Guyanor
plan:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Guyanor Plan (000) (Cdn$) (000) (Cdn$) (000) (Cdn$)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 3,143 $3.60 2,726 $3.97 1,611 $2.13
Granted - - 511 $1.64 1,306 $6.04
Exercised (11) $1.64 (40) $2.68 (191) $2.35
Forfeited (97) $5.07 (54) $5.08 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,035 $3.56 3,143 $3.60 2,726 $3.97
Options exercisable at year-end 3,035 2,213 1,591
Weighted-average fair value of N/A
options granted during the year $1.64 $6.04
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Number
Guyanor Plan Number Outstanding Weighted-Average Weighted-Average Exercisable at Weighted-Average
Range of Exercise at Dec. 31, 1998 Remaining Exercise Price Dec. 31, 1998 Exercise Price
Prices (Cdn$) (0000) Contractual Life (Cdn$) (000) (Cdn$)
- ------------------------------------------------------------------------------------------------------------------------------------
$1.64 to $3.30 2,557 6.94 $2.35 2,456 $2.38
$9.20 to $12.40 478 7.80 $0.04 478 $7.80
- ------------------------------------------------------------------------------------------------------------------------------------
3,035 2,934
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
The following tables summarize information about stock options for the PARC
plan:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
PARC Plan (000) (Cdn$) (000) (Cdn$) (000) (Cdn$)
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,338 $0.90 2,357 $0.90 - -
Granted - - 48 $0.69 2,367 $0.90
Exercised - 0 - (10) $0.99
Forfeited (2,338) $0.90 (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 N/A $0.69 $0.90
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.
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. The Company has complied with
the requirements of this statement.
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 has
complied with 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.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
FAS 133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. FAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. At this time
the Company has no derivative instruments that are subject to the requirements
of this 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, 1998, 1997 and 1996 is shown below.
Operating earnings from continuing operations are total revenues less operating
expenses of the geographic areas.
Operating Net Identifiable
Revenues Loss Assets
--------- ---- ------------
1998
South America $ 8 $ (8,626) $18,520
Africa - (3,002) 1,034
Corporate 627 (3,767) 7,686
- -----------------------------------------------------------------------------------------------------------
Total $ 635 $(15,395) $27,240
===========================================================================================================
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
===========================================================================================================
16. Subsequent Events
- ------------------------
On January 15, 1999, the Board of Directors of Golden Star Resources Ltd.
approved, subject to any necessary regulatory and shareholder approvals, the
amendment of certain stock options. The number of shares that can be purchased
under these outstanding options has been reduced by 20%. The exercise price of
outstanding stock options previously granted by the Corporation to certain
directors and officers ("Insiders"), employees and consultants ("Non-Insiders")
of the Company was amended to Cdn$1.80 (if the exercise price was larger than
Cdn$1.80). The exercise price of the stock options being repriced ranges from
Cdn$2.76 to Cdn$22.40. The total number of shares of the stock options being
repriced is 2,525,780. Of that amount 2,026,780 are held by insiders and
499,000 are held by non-insiders. Upon receiving the necessary approvals, the
insiders options will be reduced to 1,621,424 (a reduction of 405,356) and the
Non-Insiders options will be reduced to 399,200 (a reduction of 99,800).
On March 8, 1999, Mr. James Askew was appointed President and Chief Executive
Officer of the Company. In conjunction with his employment agreement with the
Company, Mr. Askew was granted an option to purchase 1,000,000 shares of the
Company's stock at the price of Cdn$1.80. This option vests as to one-third on
the date of grant and one-third on each of the first and second anniversary
dates.
17. Related Parties
- -----------------------
To consolidate exploration and possible development of the Quartz Hill area with
the adjacent Omai property in 1995, the Company entered into a letter of
understanding 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 letter of understanding 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
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
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. 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.
18. 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 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
In 1998, PARC's custom duty obligations in the Ivory Coast expired and the bank
guarantee of $0.25 million was cancelled.
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.
Potential Litigation
On December 17, 1998, SMSE notified Texmine of its intention to terminate the
Dieu-Merci option agreement. After several attempts to substantially reduce or
eliminate the minimum commitments and property payments specified in the
agreement failed, SMSE decided to withdraw from the option agreement. Following
the termination
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- ------------------------------------------------------------
(All tabular amounts in thousands of United States Dollars)
of the option agreement, the owner of the Dieu-Merci project demanded from SMSE
the sum of ff 2,000,0000 (approximately $350,000), which according to Texmine is
owed to it in spite of the termination of the option agreement. SMSE does not
believe that such sum is owed and , therefore, intends to defend itself
vigorously against any legal action that Texmine may take to obtain payment.
There can be no assurance, however, that SMSE will be successful.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------- -----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
There have been no disagreements with PricewaterhouseCoopers LLP, the Company's
chartered accountants, regarding any matter of accounting principles or
practices or financial statement disclosure.
89
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.
90
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, 1998 and 1997
Consolidated Statements of Operations Years Ended December 31, 1998, 1997
and 1996
Consolidated Statement of Changes in Shareholders' Equity Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997
and 1996
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 with the Securities and Exchange Commission on November
5, 1998 a Form 8-K announcing the resignation of David A. Fennell as
President and Chief Executive Officer and as director of the Company.
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
91
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 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 Omitted
10.11 Omitted
10.12 Omitted
10.13 Omitted
10.14 Omitted
10.15 Omitted
10.16 Omitted
10.17 Omitted
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 Omitted
10.20 Omitted
10.21 Omitted
10.22 Omitted
92
10.23 Omitted
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 Omitted
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)
10.30 Omitted
10.31 Omitted
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)
93
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, Bertoni and Shields, dated May
15, 1992, 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
(incorporated by reference to Exhibit 10.38(a) to the Company's Form
10-K for the year ended December 31, 1997.)
10.38(b) Change In Control Agreements between the Company and Messrs. Bell,
Fennell, Fleming, Peloquin and Winters dated December 17, 1997
(incorporated by reference to Exhibit 10.38(b) to the Company's Form
10-K for the year ended December 31, 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 (incorporated by reference to Exhibit 10.39(b) to the
Company's Form 10-K for the year ended December 31, 1997.)
10.39(b) Agreements between the Company and its outside directors dated December
8, 1998 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)
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 PricewaterhouseCoopers LLP, Chartered Accountants
23.2 Consent of SRK Consulting
27.1 Financial Data Schedule
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GOLDEN STAR RESOURCES LTD.
Registrant
By: /s/ James E. Askew
------------------
JAMES E. ASKEW
President and Chief Executive Officer
Date: March 26, 1999
--------------
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/ James E. Askew By: /s/ Gordon J. Bell
-------------------- ------------------------------------------
Name: James E. Askew Name: Gordon J. Bell
-------------------- ------------------------------------------
Title: President and CEO Title: Vice-President and Chief Financial Officer
-------------------- -------------------------------------------
Date: March 26, 1999 Date: March 26, 1999
-------------------- ------------------------------------------
By: /s/ David K. Fagin By: /s/ Pierre Gousseland
-------------------- ------------------------------------------
Name: David K. Fagin Name: Pierre Gousseland
-------------------- ------------------------------------------
Title: Director Title: Director
-------------------- ------------------------------------------
Date: March 29, 1999 Date: March 29, 1999
-------------------- ------------------------------------------
By: /s/ Philip S. Martin By: /s/ Ernest C. Mercier
-------------------- ------------------------------------------
Name: Philip S. Martin Name: Ernest C. Mercier
-------------------- ------------------------------------------
Title: Director Title: Director
-------------------- ------------------------------------------
Date: March 29, 1999 Date: March 29, 1999
-------------------- ------------------------------------------
95
By: /s/ Roger D. Morton By: /s/ Richard A. Stark
------------------- --------------------
Name: Roger D. Morton Name: Richard A. Stark
------------------- --------------------
Title: Director Title: Director
------------------- --------------------
Date: March 29, 1999 Date: March 29, 1999
------------------- --------------------
By: /s/ Robert R. Stone
-------------------
Name: Robert R. Stone
---------------
Title: Director
--------
Date: March 29, 1999
--------------
96