VISTA GOLD CORP - Quarter Report: 2009 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

Commission File Number 1-09025

 

VISTA GOLD CORP.

(Exact name of registrant as specified in its charter)

 

 

(720) 981-1185

(Registrant’s telephone number, including area code)

 

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 the filing requirements for the past 90 days:   Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       Yes    No  Not applicable

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  34,475,829

 

Common Shares, without par value, outstanding at May 6, 2009

 

 

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VISTA GOLD CORP.

(An Exploration Stage Enterprise)

FORM 10-Q

For the Quarter Ended March 31, 2009

INDEX

 

		Page
	PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4.	CONTROLS AND PROCEDURES	23
	PART II — OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	23
ITEM 1A.	RISK FACTORS	23
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	23
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	24
ITEM 5.	OTHER INFORMATION	24
ITEM 6.	EXHIBITS	25
	SIGNATURES	25

 

In this Report, unless otherwise indicated, all dollar amounts are expressed in United States dollars.

 

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PART I — FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

VISTA GOLD CORP. (An Exploration Stage Enterprise)

CONSOLIDATED BALANCE SHEETS - UNAUDITED

 

(U.S. dollars in thousands)		March 31, 2009			December 31, 2008
Assets:
Cash and cash equivalents - Note 7		$	10,982		$	13,266
Marketable securities - Note 4		9,406			8,153
Accounts receivable		120			127
Prepaids and other		431			466
Current assets		20,939			22,012
Mineral properties - Note 5		32,162			30,407
Amayapampa disposal consideration - Note 3		4,813			4,813
Property, plant and equipment - Note 6		18,690			18,533
		55,665			53,753
Total assets		$	76,604		$	75,765
Liabilities and Shareholders’ Equity:
Accounts payable		$	177		$	—
Accrued liabilities and other		1,403			803
Current liabilities		1,580			803
Convertible notes — Note 7		24,098			23,496
Other long-term liabilities		228			228
Total liabilities		25,906			24,527
Capital stock, no par value:
Common - unlimited shares authorized; shares outstanding: 2009 - 34,475,829 and 2008 — 34,475,829		225,098			225,098
Warrants		336			336
Options - Note 8		4,717			4,634
Contributed surplus — Note 9		1,463			1,387
Equity component of convertible notes - Note 7		6,298			6,298
Accumulated other comprehensive income - Note 10		5,783			4,602
Deficit — Note 2		(192,997		)	(191,117		)
Total shareholders’ equity		50,698			51,238
Total liabilities and shareholders’ equity		$	76,604		$	75,765

 

Subsequent events — Note 15

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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VISTA GOLD CORP. (An Exploration Stage Enterprise)

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS - UNAUDITED

 

		Three Months Ended March 31,						Cumulative during Exploration
(U.S. dollars in thousands, except share data)		2009			2008			Stage
					(restated — note 2)
Income:
Interest income		$	28		$	109		$	2,556
Other income		2			3			244
Total other income		$	30		$	112		$	2,800
Costs and expenses:
Exploration, property evaluation and holding costs		$	(333	)	$	(246	)	$	(3,171	)
Corporate administration and investor relations		(1,012		)	(1,287		)	(20,957		)
Costs of Arrangement		—			—			(2,901		)
Depreciation and amortization		(52		)	(39		)	(422		)
Gain/(loss) on currency translation		(23		)	(7		)	(416		)
Interest expense		(579		)	(184		)	(2,583		)
Write-down of marketable securities — Note 4		(112		)	—			(838		)
Gain/(loss) on disposal of marketable securities		(7		)	21			226
Total costs and expenses		(2,118		)	(1,742		)	(31,062		)
Loss from continuing operations before income taxes		$	(2,088	)	$	(1,630	)	$	(28,262	)
Income tax benefit/(expense)		208			(272		)	1,020
Loss from continuing operations after income taxes		$	(1,880	)	$	(1,902	)	$	(27,242	)
Loss from discontinued operations		$	—		$	(221	)	$	(16,879	)
Net loss		$	(1,880	)	$	(2,123	)	$	(44,121	)
Other comprehensive income:
Unrealized fair-value increase/(decrease) of available-for-sale securities		1,176			(1,523		)
Realized (gain)/loss on available-for-sale securities		5			(18		)
		1,181			(1,541		)
Comprehensive loss		$	(699	)	$	(3,664	)
Weighted average number of shares outstanding		34,475,829			34,002,312
Basic and diluted loss per share from continuing operations		$	(0.05	)	$	(0.06	)
Basic and diluted loss per share		$	(0.05	)	$	(0.06	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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VISTA GOLD CORP. (An Exploration Stage Enterprise)

CONSOLIDATED STATEMENTS OF DEFICIT - UNAUDITED

 

		Three Months Ended March 31,
(U.S. dollars in thousands)		2009			2008
					(restated - note 2)
Deficit, beginning of period		$	(191,117	)	$	(181,144	)
Net loss		(1,880		)	(2,123		)
Deficit, end of period		$	(192,997	)	$	(183,267	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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VISTA GOLD CORP. (An Exploration Stage Enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

 

		Three Months Ended March 31,						Cumulative during Exploration
(U.S. dollars in thousands)		2009			2008			Stage
					(restated — Note 2)
Cash flows from operating activities:
Loss for the period - continuing operations		$	(1,880	)	$	(1,902	)	$	(27,242	)
Adjustments to reconcile loss for the period to cash provided by / (used in) operations:
Depreciation and amortization		52			39			445
Stock-based compensation		125			296			5,944
(Gain)/loss on disposal of marketable securities		7			(21		)	(488		)
Future income tax (benefit)/expense		(208		)	272			(1,020		)
Accretion of convertible notes		260			81			1,098
Accrued interest		319			104			1,487
Write-down of marketable securities		112			—			838
Other non-cash items		—			—			1,660
Change in operating assets and liabilities:
Accounts receivable		7			(5		)	(518		)
Interest paid		—			—			(2,342		)
Prepaids and other		35			43			(251		)
Accounts payable, accrued liabilities and other		(11		)	(114		)	(892		)
Net cash used in operating activities		(1,182		)	(1,207		)	(21,281		)
Cash flows from investing activities:
Acquisition of marketable securities		—			(26		)	(1,026		)
Proceeds from sale of marketable securities		18			58			1,107
Additions to mineral properties, net of cost recoveries - Note 5		(911		)	(1,385		)	(21,301		)
Acquisition of mineral property		—			(452		)	(3,332		)
Additions to plant and equipment - Note 6		(209		)	(16,308		)	(18,851		)
Proceeds on disposal of plant and equipment		—			—			52
Cash transferred to Allied Nevada Gold Corp., net of receivable		—			—			(24,517		)
Net cash used in investing activities		(1,102		)	(18,113		)	(67,868		)
Cash flows from financing activities:
Net proceeds from equity financings		—			—			54,409
Proceeds from exercise of warrants		—			2,941			39,020
Proceeds from exercise of stock options		—			69			2,794
Issuance of convertible notes, net of issuance costs - Note 7		—			28,534			28,345
Prepaid transaction costs		—			—			(1,841		)
Net cash provided by financing activities		—			31,544			122,727
Net increase/(decrease) in cash and cash equivalents - continuing operations		(2,284		)	12,224			33,578
Net decrease in cash and cash equivalents - discontinued operations		—			(221		)	(23,270		)
Net increase/(decrease) in cash and cash equivalents		(2,284		)	12,003			10,308
Cash and cash equivalents, beginning of period		13,266			16,686			674
Cash and cash equivalents, end of period		$	10,982		$	28,689		$	10,982
Supplemental cash flow information - Note 12

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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VISTA GOLD CORP. (AN EXPLORATION STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(U.S. dollars unless specified otherwise)

 

1.                                      General

 

The consolidated interim financial statements of Vista Gold Corp. (an Exploration Stage Enterprise) (the “Corporation”), as of March 31, 2009 have been prepared by the Corporation without audit and do not include all of the disclosures required by generally accepted accounting principles in Canada for annual financial statements. As described in Note 14, generally accepted accounting principles in Canada differ in certain material respects from generally accepted accounting principles in the United States.  In the opinion of management, all of the adjustments necessary to fairly present the interim financial information set forth herein have been made.  These adjustments are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the operating results of a full year or of future years.  These interim financial statements should be read in conjunction with the financial statements and related footnotes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, as amended.

 

2.                                      Nature of operations and changes in accounting policies

 

Nature of operations

 

The Corporation evaluates, acquires and explores gold exploration and potential development projects. As such, the Corporation is considered an Exploration Stage Enterprise. The Corporation’s approach to acquisitions of gold projects has generally been to seek projects within political jurisdictions with well established mining, land ownership and tax laws, which have adequate drilling and geological data to support the completion of a third-party review of the geological data and to complete an estimate of the gold mineralization. In addition, the Corporation looks for opportunities to improve the value of its gold projects through exploration drilling, and/or reengineering the operating assumptions underlying previous engineering work.

 

In 2007, the Board of Directors and management reevaluated the corporate strategy regarding the development of the Corporation’s more advanced projects.  As a result of this reevaluation, the Corporation has begun moving its more advanced projects through advanced and pre-feasibility studies in preparation for mine development so that production decisions can be made on those projects.

 

Although the Corporation has reviewed and is satisfied with the title for all mineral properties in which it has a material interest, there is no guarantee that title to such concessions will not be challenged or impugned.

 

Changes in accounting policies

 

Effective September 30, 2008, the Corporation adopted the Emerging Issues Committee Abstract 172 (“EIC 172”), “Income Statement Presentation of a Tax Loss Carryforward Recognized Following an Unrealized Gain in Other Comprehensive Income.”  EIC 172 provides guidance on whether the tax benefit from the recognition of previously unrecognized tax loss carryforwards consequent to the recording of unrealized gains in other comprehensive income, such as unrealized gains on available-for-sale financial assets, should be recognized in net income or in other comprehensive income.  EIC 172 should be applied retrospectively, with restatement of prior periods from January 1, 2007, the date of adoption of the Canadian Institute of Chartered Accountants (“CICA”)  Section 3855, “Financial Instruments — Recognition and Measurement.”

 

The adoption of EIC 172 resulted in a reclassification of $1,132,000 of income tax recovery from the accumulated other comprehensive income balance to the accumulated deficit as of December 31, 2007.  It also increased the Corporation’s three-month loss for the period ended March 31, 2008 by $272,000.

 

In February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062, “Goodwill and Intangible Assets,” and results in a withdrawal of CICA Section 3450, “Research and Development Costs,” and amendments to Accounting Guideline (AcG) 11, “Enterprises in the Development Stage,” and CICA Section 1000, “Financial Statement Concepts.” The standard intends to reduce the differences with International Financial Reporting Standards (“IFRS”) in the accounting for intangible assets and results in closer alignment with U.S. GAAP. Under current Canadian standards, more items are recognized as assets than under IFRS or U.S. GAAP. The objectives of CICA Section 3064 are to reinforce the principle-based approach to the recognition of assets only in accordance with the definition of an asset and the criteria for asset recognition; and clarify the application of the concept of matching revenues and expenses such that the current practice of recognizing assets that do not meet the definition and recognition criteria are eliminated. This standard will be effective for fiscal years beginning on or after October 1, 2008. The Corporation has determined there is no impact on its current financial statements.

 

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3.                                      Amayapampa disposal consideration

 

On April 7, 2008, the Corporation entered into an agreement to dispose of its wholly-owned subsidiary Vista Gold (Antigua) Corp. (“Vista Gold Antigua”) to Republic Gold Limited (“Republic”). Vista Gold Antigua indirectly held the Corporation’s interest in the Amayapampa gold project in Bolivia. Under the terms of the transaction, Republic agreed to pay to the Corporation, $3.0 million in three payments of $1.0 million. The first of these payments will be due and payable upon the start of Commercial Production (as defined in the purchase and sale agreement) at Amayapampa followed by $1.0 million payments on each of the first and second anniversaries of the start of commercial production.  In addition, Republic agreed to pay to the Corporation a net smelter return royalty (“NSR”) on the gold produced by or on behalf of Republic from the Amayapampa project in varying percentages depending on the price of gold per ounce. When gold is between $500.01 and $650.00 per ounce, a 2% NSR is payable, when the price of gold is between $650.01 and $750.00 per ounce, a 3% NSR is payable, and when the price of gold is $750.01 per ounce and above, an NSR of 3.5% is payable. The NSR is capped at 720,000 gold equivalent ounces and no NSR payments are due to the Corporation if the gold price is below $500 per ounce.   The fair value of the consideration received upon the disposal of the Amayapampa project has been calculated as of March 31, 2009 using probability weighted cash flow scenarios and assumptions including future gold prices, estimated gold production and the timing of commencement of commercial production.  These inputs in the “income approach” valuation model used by the Corporation are considered to be level three unobservable inputs as defined by SFAS No. 157, “Fair Value Measurements.”  These are the Corporation’s own assumptions based on management’s best estimates and the best information available at the time.

 

4.             Marketable securities

 

		At March 31, 2009									At December 31, 2008
(U.S. dollars in thousands)		Cost			Unrealized gain/(loss)			Fair value			Cost			Unrealized gain/(loss)			Fair value
Allied Nevada Gold Corp. — Note 15		$	2,194		$	6,756		$	8,950		$	2,194		$	5,547		$	7,741
Esperanza Silver Corp.		10			40			50			10			35			45
Luzon Minerals Ltd.		12			12			24			12			—			12
Nevgold Resources Corp.		44			9			53			44			—			44
Other marketable securities		343			(14		)	329			480			(169		)	311
		$	2,603		$	6,803		$	9,406		$	2,740		$	5,413		$	8,153

 

At March 31, 2009, the Corporation determined that certain of its securities had become impaired.  The write-down of $112,000, less a tax benefit of $16,000, has been included on our Statement of Consolidated Loss.  The Corporation evaluated the remaining securities for impairment, but concluded that any decline in value was temporary due to the short amount of time that the security’s fair market value was under cost.

 

5.                                      Mineral properties

 

		2008			2009
(U.S. dollars in thousands)		December 31, balance			Acquisition costs			Option payments			Exploration & land costs			Capitalized interest			Year to date activity			March 31, ending balance
Long Valley, United States		960			—			—			1			—			1			961
Yellow Pine, United States		878			—			—			—			—			—			878
Paredones Amarillos, Mexico		9,237			—			—			477			763			1,240			10,477
Guadalupe de los Reyes, Mexico		3,136			—			—			(11		)	—			(11		)	3,125
Awak Mas, Indonesia		3,757			—			—			46			—			46			3,803
Mt. Todd, Australia		11,967			—			—			429			—			429			12,396
Other		472			—			50			—			—			50			522
		$	30,407		$	—		$	50		$	942		$	763		$	1,755		$	32,162

 

The recoverability of the carrying values of the Corporation’s mineral properties is dependent upon the successful start-up and commercial production from, or sale, or lease, of these properties and upon economic reserves being discovered or developed on the properties.  Development and/or start-up of any of these projects will depend, among other things, on management’s ability to raise additional capital for these purposes.  Although the Corporation has been successful in raising such capital in the past, there can be no assurance that it will be able to do so in the future.

 

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The Corporation has determined that no impairment provision is required.  A write-down in the carrying values of one or more of the Corporation’s mineral properties may be required in the future as a result of events and circumstances, such as the Corporation’s inability to obtain all the necessary permits, resulting in an evaluation of gold resources and the application of an impairment test which is based on estimates of gold resources and gold prices.

 

6.             Property, plant and equipment

 

		March 31, 2009									December 31, 2008
(U.S. dollars in thousands)		Cost			Accumulated Depreciation and Write-downs			Net			Cost			Accumulated Depreciation and Write-downs			Net
Paredones Amarillos, Mexico		18,070			16			18,054			18,006			12			17,994
Awak Mas, Indonesia		117			74			43			116			70			46
Mt. Todd, Australia		724			198			526			584			170			414
Corporate, United States		258			191			67			252			173			79
		$	19,169		$	479		$	18,690		$	18,958		$	425		$	18,533

 

7.                                      Brokered private placement of convertible notes

 

On March 4, 2008, the Corporation completed a private placement in which the Corporation issued and sold $30 million in aggregate principal amount of senior secured convertible notes (the “Notes”).  The Notes are secured only by the assets at the Paredones Amarillos gold project.  The Notes mature at face value on March 4, 2011 (the “Maturity Date”).  The Notes pay interest of 10% per annum. Interest is payable each year in two installments on June 15 and December 15, and the principal is payable on the Maturity Date.

 

The Notes are convertible at the holder’s or issuer’s discretion in accordance with the terms of the Notes.  The holder can convert all or part of the debt at any time prior to the Maturity Date or the business day immediately preceding the Redemption Date at a price of $6.00 per common share, subject to adjustment in certain circumstances.  The “Redemption Date” represents the date that the Notes will be redeemed in the event that the Corporation redeems the Notes.

 

The Corporation can convert all, but not part, of the Notes after March 4, 2009 if the weighted-average price of the Corporation’s common shares as quoted on the NYSE — AMEX (“AMEX”) has been equal to or greater than $9.00 per share for 15 consecutive trading days.  The notice of conversion must occur within 10 days of any such 15-day period and the share price must be equal to or greater than $9.00 on the date the notice is delivered.  The conversion price was originally $6.00 per common share and is subject to adjustments in certain circumstances.

 

Pursuant to the terms of the Notes, on March 4, 2009, the conversion price of the Notes was automatically adjusted from $6.00 per share to $4.80 per share.  As a result of the adjustment, 6.25 million Common Shares are issuable upon conversion of the Notes.  Prior to the adjustment, 5 million Common Shares were issuable upon the conversion of the Notes.

 

The Notes have been accounted for in accordance with EIC 164, “Convertible and other Debt Instruments with Embedded Derivatives”.  Under EIC 164, the fair value of the conversion feature is recorded as equity.  The issuance date fair value of the conversion feature was estimated to be $6.8 million and was classified as the equity component of convertible notes with the residual balance of $23.2 million being recorded as the fair value of the Corporation’s obligation to make principal and interest payments and has been classified as long-term debt.  The fees totaling $1,988,000 related to the issuance of the Notes have been allocated pro-rata between debt issuance costs of $1,531,000 and equity issuance costs of $457,000.

 

The Corporation capitalizes interest and accretion based on expenditures on qualifying assets.  As of March 31, 2009, the Corporation had qualifying expenditures of approximately $17.1 million related to the equipment purchase for the Paredones Amarillos project.  The Corporation has used approximately $24.5 million for ongoing operations at the Paredones Amarillos project.  This includes approximately $17.1 million towards the purchase of gold processing equipment to be used at the Paredones Amarillos project.  The remaining $5.6 million raised from the private placement, is restricted for, and will be used for ongoing development at the Paredones Amarillos project.

 

A reconciliation of the carrying value of the long-term liability portion of the Notes is as follows:

 

Principal amount of the Notes		$	30,000
Issuance costs allocated to long-term liabilities		(1,531		)
Conversion feature allocated to equity		(6,755		)
Carrying value of the Notes upon issuance		21,714
Accretion expense		2,384
Carrying value of the Notes at March 31, 2009		$	24,098

 

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8.             Options to purchase Common Shares

 

The fair value of stock options granted during the three-month period ended March 31, 2009, to employees and directors was estimated at the grant date using the Hull-White trinomial lattice option pricing model, using the following weighted average assumptions:

 

 

Option pricing models require the input of highly subjective assumptions including the expected price volatility.  Expected price volatility is based on the historical volatility of the Corporation’s common shares.  Changes in the subjective input assumptions can materially affect the fair value estimate.  The expected term of the options granted is derived from the output of the option pricing model and represents the period of time that the options granted are expected to be outstanding.  The risk-free rate for the periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.

 

A summary of option activity under the Corporation’s Stock Option Plan as of March 31, 2009, and changes during the three-month period then ended is set forth in the following table:

 

		Number of Shares Issuable upon Option Exercise		Weighted- Average Exercise Price ($ USD)			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value ($ 000)
Outstanding - December 31, 2008		2,184,747		$	4.39		3.55		$	—
Granted		50,000		2.15
Expired		(18,968	)	3.35
Cancelled		(7,500	)	4.13
Forfeited		(2,500	)	3.22
Outstanding - March 31, 2009		2,205,779		$	4.35		3.37		$	2
Exercisable — March 31, 2009		1,768,279		$	4.63		3.11		$	2

 

A summary of the fair-value changes included in options within Shareholders’ Equity as of March 31, 2009 is set forth in the following table:

 

 

The total number of options outstanding at the end of the quarter is 2,205,779 with exercise prices ranging from approximately $1.69 to $7.45 and remaining lives of 0.10 to 4.99 years.  The total number of options outstanding represents 6.4% of issued capital.

 

A summary of the status of the Corporation’s unvested stock options as of March 31, 2009, is set forth below:

 

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As of March 31, 2009, there was $226,539 of unrecognized compensation expense related to the unvested portion of options outstanding.  This expense is expected to be recognized over a weighted-average period of 0.4 years.

 

9.             Contributed surplus

 

		March 31,			December 31,
		2009			2008
Balance, beginning of year		$	1,387		$	253
Cancelled options—Note 8		14			341
Expired options—Note 8		62			262
Expired warrants		—			531
Balance, end of year		$	1,463		$	1,387

 

10.          Accumulated other comprehensive income

 

A reconciliation of the amounts contained in accumulated other comprehensive income is as follows:

 

		Accumulated other comprehensive income, before tax ($000’s)			Accumulated other comprehensive income, net of tax ($000’s)
As of December 31, 2008		$	5,413		$	4,602
Increases to fair market value during the period		1,383			1,176
Increases due to realization of loss		7			5
As of March 31, 2009		$	6,803		$	5,783

 

11.          Financial instruments

 

Financial assets and financial liabilities are classified into one of five categories:  held-to-maturity, available-for-sale, held-for-trading, loans and receivables and other financial liabilities.

 

All financial instruments classified as available-for-sale or held-for-trading are subsequently measured at fair value.  Changes in the fair value of financial instruments designated as held-for-trading are charged or credited to the statement of loss for the relevant period, while changes in the fair value of financial instruments designated as available-for-sale, excluding impairments, are charged or credited to other comprehensive income until the instrument is realized.  All other financial assets and liabilities are accounted for at cost or at amortized cost depending upon the nature of the instrument.  After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method.

 

Financial Assets

 

The carrying amounts and fair values of financial assets are as follows:

 

				March 31, 2009						December 31, 2008
U.S. dollars in thousands		Category		Estimated Fair Value			Carrying Value			Estimated Fair Value			Carrying Value
Cash and cash equivalents		Held-for-trading		$	10,982		$	10,982		$	13,266		$	13,266
Accounts receivable (1)		Loans and receivables		120			120			127			127
Amayapampa disposal consideration		Held-for-trading		4,813			4,813			4,813			4,813
Marketable securities (2)		Available-for-sale		9,406			9,406			8,153			8,153
Total financial assets				$	25,321		$	25,321		$	26,359		$	26,359

 

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(1)           Carrying amount is a reasonable approximation of fair value.

 

(2)           The fair value represents quoted market prices in an active market.

 

Financial liabilities

 

The carrying amounts and fair values of financial liabilities are as follows:

 

				March 31, 2009						December 31, 2008
U.S. dollars in thousands		Category		Estimated Fair Value			Carrying Value			Estimated Fair Value			Carrying Value
Accounts payable and accrued liabilities (1)		Other financial liabilities		$	1,403		$	1,403		$	803		$	803
Other long-term liabilities		Other financial liabilities		228			228			225			228
Convertible notes (2)		Other financial liabilities		26,642			24,098			25,896			23,496
Total financial assets				$	28,273		$	25,729		$	26,924		$	24,527

 

(1)           Carrying amount is a reasonable approximation of fair value.

 

(2)           The carrying value of the convertible notes is being accreted to their maturity value over their expected life using the effective interest rate method.

 

Financial instrument risk exposure and risk management

 

The Corporation is exposed in varying degrees to a variety of financial instrument related risks.  Management approves and monitors the risk management processes.  The types of risk exposure and the way in which such exposure is managed is provided as follows:

 

Credit risk

 

The Corporation’s credit risk is primarily attributable to its cash and cash equivalents.  The Corporation monitors its cash and cash equivalents in order to limit its exposure to credit risk.  The Corporation does not have any financial assets that are invested in asset-backed commercial paper.

 

Liquidity risk

 

The Corporation’s objective is that there is sufficient capital in order to meet short term business requirements, after taking into account the Corporation’s holdings of cash and cash equivalents and cash flows from financing activities.  The Corporation’s cash and cash equivalents are held in interest bearing liquid savings accounts.

 

Market risk

 

The significant market risk exposure to which the Corporation is exposed is interest rate risk.  The Corporation’s policy is to invest cash at floating rates of interest in short-term highly liquid cash savings accounts in order to maintain liquidity.  Fluctuations in interest therefore have little impact on the value of cash equivalents and short term investments.  With respect to financial liabilities, the convertible notes are not subject to interest rate risk because they bear interest at a fixed rate and are not subject to fluctuations in interest.

 

12.          Supplemental cash flow information

 

There were no significant non-cash transactions during the three-month period ended March 31, 2009.

 

Significant non-cash transactions during the three-month period ended March 31, 2008 included the Corporation’s issuance of 213,503 Common Shares as partial compensation for the acquisition of interests in various mineral properties adjacent to the Corporation’s Guadalupe de los Reyes project in Mexico as well as the issuance of 200,000 Common Share purchase warrants to Casimir Capital LP as partial compensation for serving as agent for the Corporation’s private placement of the Notes.

 

13.          Geographic and segment information

 

The Corporation evaluates, acquires and explores gold exploration and potential development projects.  These activities are focused principally in Mexico, Australia, North America and Indonesia. The Corporation reported no revenues in the three-month period ended March 31, 2009, or for the same period in 2008.  Geographic segmentation of mineral properties and plant and equipment is provided in Notes 5 and 6.

 

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14.          Differences between Canadian and United States generally accepted accounting principles

 

The Corporation prepares its financial statements in accordance with accounting principles generally accepted in Canada, which differ in some respects from those in the United States.  The significant differences between generally accepted accounting principles (“GAAP”) in Canada and in the United States, as they relate to these financial statements, are as follows:

 

(a)                               In accordance with U.S. GAAP, exploration, mineral property evaluation and holding costs are expensed as incurred.  When proven and probable reserves are determined for a property and a bankable feasibility study is completed, then subsequent development costs on the property would be capitalized.   Total capitalized cost of such properties is measured periodically for recoverability of carrying value under SFAS No. 144.  Under Canadian GAAP, all such costs are permitted to be capitalized.

 

 (b)                            Under Canadian corporate law, the Corporation underwent a capital reduction in connection with the amalgamation of Granges, Inc. (“Granges”) and Hycroft Resources & Development, Inc. whereby share capital and contributed surplus were reduced to eliminate the consolidated accumulated deficit of Granges as of December 31, 1994, after giving effect to the estimated costs of amalgamation. Under U.S. corporate law, no such transaction is available and accordingly is not allowed under U.S. GAAP.

 

(c)                                In accordance with U.S. GAAP (SFAS No. 123R), the fair value of all options granted after January 1, 2006 is calculated at the date of grant and expensed over the expected vesting period.  On transition to this new standard, the unvested portion of options granted to employees before January 1, 2006 is expensed over the remaining vesting period using the fair value on the date of grant.  Prior to January 1, 2006, the Corporation did not record any compensation cost on the granting of stock options to employees and directors as the exercise price was equal to or greater than the market price at the date of grants for U.S. GAAP purposes under APB Opinion No. 25.  SFAS No. 123R essentially aligns U.S. GAAP with Canadian GAAP for accounting for stock-based compensation.

 

(d)                               In accordance with U.S. GAAP, the entire amount of convertible debt is classified as a liability and recorded at fair value on the date of issuance. Under Canadian GAAP, the fair value of the conversion feature of the convertible debt is classified as equity and the residual balance is classified as a liability. Under Canadian GAAP a portion of the debt issuance costs were allocated to equity. Under U.S. GAAP all issuance costs were allocated to debt. The liability portion is accreted each period in amounts which will increase the liability to its full face amount of the convertible instrument as of the maturity date.

 

(e)                                In accordance with U.S. GAAP (SFAS No. 109), the reversal of a valuation allowance which is directly related to the gain or loss of available-for-sale securities, when a Corporation has no expectations of taxable income in future periods, is recorded in other comprehensive income/(loss). Under Canadian GAAP, the Corporation adopted EIC 172, effective September 30, 2008. This standard requires the recognition of the tax benefit or loss of previously unrecognized tax loss carryforwards associated with the unrealized holding gains and losses of available-for-sale securities to be recognized in net income or net loss. This abstract required retrospective restatement of all prior periods beginning with January 1, 2007. The adoption of EIC 172 resulted in a future income tax expense being recorded as part of the Corporation’s Net Loss, whereas under SFAS 109 the future income tax expense would be recorded as part of the Corporation’s Comprehensive Loss.

 

The significant differences in the consolidated statements of loss and comprehensive loss relative to U.S. GAAP were:

 

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CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS - UNAUDITED

 

		Three Months Ended March 31,						Cumulative during Exploration
(U.S. dollars in thousands, except share data)		2009			2008			Stage
Net loss — Canadian GAAP		$	(1,880	)	$	(2,123	)	$	(44,121	)
Exploration, property evaluation and holding costs - continuing operations (a)		(942		)	(1,482		)	(14,125		)
Exploration, property evaluation and holding costs - discontinued operations (a)		—			—			4,016
Accretion on convertible notes (d)		260			—			1,097
Amortization of debt issuance costs (d)		(62		)	—			(287		)
Future income tax (benefit)/expense (e)		(208		)	272			(1,020		)
Financing costs		—			—			(222		)
Stock-based compensation expense (c)		—			—			2,251
Beneficial conversion feature		—			—			(2,774		)
Net loss — U.S. GAAP		(2,832		)	(3,333		)	(55,185		)
Unrealized gain/(loss) on marketable securities (e)		1,390			(1,813		)	(782		)
Comprehensive loss — U.S. GAAP		$	(1,442	)	$	(5,146	)	$	(55,967	)
Basic and diluted loss per share — U.S. GAAP		$	(0.08	)	$	(0.10	)

 

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