Yamana Reports Mine Operating Earnings of $8.6 Million.TORONTO -- (all figures in US$ unless otherwise stated) Yamana Gold Inc. (TSX:YRI)(AMEX:AUY)(LSE(AIM):YAU) reports mine operating earnings of $8.6 million and $4.8 million for the year and quarter ended December 31, 2005, respectively. Highlights - Cash balance of $151.6 million as at December 31, 2005. - Achieved average cash costs of $289 per ounce for the year and $282 per ounce for the fourth quarter from its Fazenda Nova and Fazenda Brasileiro mines. The following chart summarizes commercial production and cash costs per ounce for the end and quarter ended December 31, 2005:
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Quarter ended December 31, Year ended December 31,
2005 2004
---------------------------------------------------------------------
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Production Cash costs Production Cash costs
(oz.) per oz. (oz.) per oz.
---------------------------------------------------------------------
Fazenda Nova 12,740 $ 177 28,780 $ 208
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Fazenda Brasileiro 17,810 $ 357 74,570 $ 320
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TOTAL COMMERCIAL
PRODUCTION 30,550 $ 282 103,350 $ 289
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Fazenda Nova
Pre-operating - $ - 7,379 $ -
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Sao Francisco
Pilot Plant 1,212 $ - 4,843 $ -
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TOTAL PRODUCTION 31,762 $ - 115,572 $ -
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- Cash flow from operations of $6.4 million before changes in
non-cash working capital items.
- Net earnings for the year after giving effect to certain non-cash
items were as follows:
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Dec. 31, 2005 Dec. 31, 2004
(twelve months) (ten months)
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Net earnings (loss) per
consolidated financial
statements $ (4,111) $ 2,783
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Adjustments:
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Stock-based compensation 2,303 2,191
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Foreign exchange gain (369) (1,848)
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Unrealized losses on
commodity contracts 8,615 -
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Future income tax
(recovery) expense (4,447) (430)
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Adjusted net earnings (i) $ 1,991 $ 2,696
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Adjusted earnings per share (i) $ 0.01 $ 0.03
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(i) Non-GAAP measure - A cautionary note of non-GAAP measures
follows this press release.
- Revenues of $46 million and $16.7 million for the year and fourth quarter, respectively, from its Fazenda Brasileiro and Fazenda Nova mines. - Commenced commercial production at its Fazenda Nova Mine. - Commenced the start-up of mine operations at its Sao Francisco Mine with ore being loaded on to the heap leach pads by the end of November, in accordance with the mine plan. - Ahead of schedule with the construction of its Chapada copper-gold project. - Raised gross proceeds of $49.6 million from the early exercise Early Exercise When an option or other security is exercised prior to its maturity date.Notes: European options don't allow early exercise, whereas American-style options do. See also: American Option, European Option, Maturity Date
of its publicly traded warrants that otherwise would not have been
available to the Company until July 2008.- Raised $105.3 million in net proceeds from the public issue of 26 million common shares in October 2005. - Drew down on debt financing in the amount of $100 million for the construction of the Chapada copper-gold project. - Entered into smelter off-take agreements for 150,000 tonnes of copper concentrate from its Chapada copper-gold project currently under construction. - Initiated a copper hedging program during the fourth quarter that is intended to help secure a less than two year payback at its Chapada copper-gold project. - Subsequent to the year end, completed the purchase of RNC Gold Inc. whereby the Company acquired two additional mines: San Andres and La Libertad bringing total forecast gold production up to more than 500,000 ounces by 2007. We have also announced the takeover of Desert Sun Mining Corp ("DSM") which is subject to their shareholder vote on March 31, 2006. DSM's Jacobina mine produces gold at the 100,000 ounce level with an expansion plan to take it to 250,000 ounces annually. - Advanced three projects through exploration to the point where they now each have the potential to become our next new mine. - Increased proven and probable reserves by 1.2 million ounces which includes an increase in Sao Francisco gold reserves of 324,000 contained ounces and a grade increase of 22% in main ore. - Continued drilling and the development of E-Deep at the Fazenda Brasileiro Mine to further define and expand the size of the ore body. Financial Results Mine operating earnings were $8.6 million and $4.8 million for the year and quarter ended December 31, 2005, respectively. Mine operating earnings for the quarter increased by 227% from the third quarter ended September 30, 2005. Mine operating earnings for the fourth quarter reflect operations from the Fazenda Nova Mine coming on stream and the initiatives that the Company undertook to improve efficiency and reduce costs at the Fazenda Nova Mine. The Fazenda Nova Mine began commercial production as of May 1, 2005 and achieved cash costs per ounce of $208 and $177 for the year and quarter ended, respectively. Since completing construction of the Fazenda Nova Mine, the Company has undertaken measures to accommodate a heavier than normal rainfall, implemented operational modifications to improve efficiency and reduce costs. With these initiatives, US dollar cash costs per ounce steadily declined during fiscal 2005. This occurred despite the strengthening of the Real vis-a-vis the US dollar with an average exchange rate for 2005 of 2.4348 compared to an average exchange rate for 2004 of 2.9319, an increase of 17%. Additionally, cash costs during the fourth quarter of $177 per ounce were 5% lower than that contemplated in the feasibility study of $186 (life of mine). Cash costs for the year at the Fazenda Nova Mine were $208 per ounce on production of 28,780 ounces of gold. During the month of January 2006, they averaged $196 per ounce. Historically, the rainy season extends from December to the end of March, during which period, in normal course, cash costs are expected to be higher. Operations during the year at the Fazenda Brasileiro Mine were significantly affected by the impact of a strengthened Real vis-a-vis the US dollar, mining of lower grade material, lower recovery rates, and higher prices for consumables. A total of 74,570 ounces of gold were produced from the Fazenda Brasileiro Mine during the year at an average cash cost of $320 per ounce. Average cash costs per ounce in reais increased by 21% from the prior ten month period ended December 31, 2004 and 5.6% relative to the third quarter. Additionally, the average ore grade at the Fazenda Brasileiro Mine for the year was 2.44 g/t compared to 3.13 g/t during the comparative ten month period ended December 31, 2004, a decrease of 22%. The Company anticipated processing lower grade ore at the Fazenda Brasileiro Mine prior to gaining access to higher grade ore bodies and areas beneath the existing mine workings for further drilling and exploration. Mining of lower grade material will continue throughout 2006 as development work continues in higher grade lower areas at E-Deep. Commercial production from the Sao Francisco Mine is expected to commence during the second quarter of 2006. Sao Francisco is in the normal start up phase of a mine. The gravity plant started operating in January 2006. We are on track to exceed design capacity and will be approaching full capacity at the gravity plant by the end of March. Heap leaching of ore commenced early March 2006. Net earnings before giving effect to non-cash charges in respect to stock option expense, unrealized foreign exchange losses or gains, unrealized losses on commodity contracts and a future income tax recovery for the year was $2 million compared to $2.6 million for the comparative ten month period ended December 31, 2004. Net earnings before giving effect to these non-cash items for the quarter was $3.3 million. The Company believes that the presentation of adjusted net earnings is a better indication of the Company's profitability. The net loss for the year and the fourth quarter after giving effect to these non-cash items was $4.1 million and $73,000, respectively. During the fourth quarter, Yamana implemented an economic copper hedging program that is intended to help secure a less than two year payback at its Chapada copper-gold project and manage its exposure to copper prices, thus protect future earnings and cash flows from a decline in the market price of copper. The Company effectively sold forward 50 million pounds of 2007 copper production at a net price of $1.27 per pound, representing approximately 50% of projected copper production for 2007. However, the remaining 55 million pounds of copper production forecast for 2007 and all gold production remains unhedged. The financial instruments entered into were structured to hedge against the risk of declining copper prices on future copper concentrate sales, while permitting the Company to participate in market price increases at prices exceeding the $1.67 strike price of the call options involved in the transactions. These economic hedges do not meet the requirements for hedge accounting under current generally accepted accounting principles, however, Yamana has concluded that the above mentioned financial instruments provide an effective means to manage metal price risk and enable business planning with greater certainty. As accounting rules preclude Yamana from reflecting the economic substance of these transactions, mark-to-market values on these financial instruments will be recognized period to period. As such, the recognition of unrealized gains and losses on the fair value of these financial instruments will cause net earnings to fluctuate period to period. Yamana recognized an unrealized non-cash loss of $8.6 million on the mark-to-market of these copper hedging instruments during the fourth quarter. This unrealized loss does not represent an estimate of future losses or gains nor does it represent an economic obligation for the Company. It should be noted that the forward copper price used to value the hedge program at the year end was $1.62. If copper prices are at this level in 2007, then the unhedged portion of planned production for that year would generate additional gross revenue of $34 million as compared to the price assumption used in the feasibility study for the Chapada project. General and administrative expenses were $10.4 million for the year compared to $6.2 million for the comparative ten month period ended December 31, 2004 and $4.6 million for the year ended February 29, 2004. The increase in general and administrative expenses is reflective of the Company's growing infrastructure and accommodates production growth plans and acquisitions. Investment income was $4 million for the fiscal year, compared to $0.8 million for the comparative ten month period ended December 31, 2004 and $0.5 million for the year ended February 29, 2004. Investment income for the year mainly represents interest income earned in Brazil at an average rate of 19% as the Company held higher cash balances denominated in Brazilian reais than the previous year in order to help offset the impact of the strengthening Real. The Company recognized an income tax recovery of $4.3 and $8.2 million, respectively, for the year and fourth quarter ended December 31, 2005. The income tax recovery mainly represents the recognition of tax benefits from tax losses available in Canada.
Reserves
Summary Reserve and Resource Table(i)
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Gold M&I Reserve Inferred
Ounces Ounces Ounces
(000s) (000s) (000s)
-----------------------------------
Fazenda Brasileiro (underground) 378.1 187.4 107.4
Fazenda Brasileiro (open pit) 66.1 19.3 ---
-----------------------------------
444.2 206.7 107.4
C1-Santa Luz 982.4 556.0 199.7
Fazenda Nova 114.2 92.3 1.5
Sao Francisco (Main ore) 1,288.3 1,079.2 546.7
Sao Francisco (ROM ore) 363.2 283.2 332.4
-----------------------------------
1,651.5 1,362.4 879.1
Sao Vicente (Main ore) 486.6 361.3 84.9
Sao Vicente (ROM ore) 173.9 108.7 26.1
-----------------------------------
660.5 470.0 111.1
Ernesto 141.8 --- 71.4
Chapada 3045.5 2,547.5 1,226.0
-----------------------------------
Total Ounces 7,040.0 5,234.9 2,596.1
-----------------------------------
-----------------------------------
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Copper M&I Reserve Inferred
Pounds Pounds Pounds
(millions) (millions) (millions)
-----------------------------------
Chapada 2,620.4 2,349.7 1,393.7
-----------------------------------
-----------------------------------
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(i) Reserve ounces are included in Measured and Indicated ("M&I")
ounces. Inferred ounces are in addition to M&I ounces.
A table providing a breakdown of reserves and resources and
additional information is attached.
As at December 31, 2005, the Company had proven and probable reserves of 5.2 million contained ounces of gold, an increase of 1.2 million contained ounces from the previous year end despite production of 115,572 ounces of gold. The primary changes in proven and probable reserves were:
Increase in contained
Ounces (000's)
-------------------------------------------
C-1 Santa Luz 556
Sao Francisco 324
Sao Vicente 309
-------------------------------------------
Successful exploration efforts and the impact of a higher gold price assumption used in 2005 resulted in an increase in reserves. Reserves as at December 31, 2005 were estimated using a gold price of $425 per ounce compared to $325-$350 used to calculate reserve estimates as at December 31, 2004. Future Outlook The long-term plan of the Company includes increasing shareholder value through increases in reserves and production thereby increasing earnings per share and cash flow from operations. The Company's strategy involves optimizing operations, completing construction of projects currently under development, investing in high target exploration areas and growing through acquisitions of high quality accretive properties and projects. The focus for 2006 and 2007 will continue to include the following: - Advance exploration and development projects - Complete construction of the Chapada copper-gold project - Pursue acquisition targets - Continue an extensive exploration program in Brazil and Central America With the acquisition of RNC Gold Inc., (closed February 28, 2006) the Company acquired an additional two operating mines. The additional two operating mines are La Libertad in Nicaragua and San Andres in Honduras. The Company will have five mines in operation with Chapada operations beginning late 2006. Yamana also has four advanced exploration and development stage projects along with an extensive Brazilian and Central American exploration portfolio. Yamana's objective remains to achieve a sustainable annual gold production rate of at least 750,000 ounces of gold per year beginning in 2008. In addition the Company will have significant copper production by 2007. Subsequent to the year end, the Company also announced the potential acquisition of Desert Sun Mining Corp. which owns the Jacobina gold mine in the Bahia state of Brazil near the Company's Fazenda Brasileiro mine and its C1 Santa Luz pre-feasibility project. Yamana is a Canadian gold producer with significant gold production, gold and copper-gold development stage properties, exploration properties and land positions in Brazil and Central America. Yamana expects to produce gold at intermediate company production levels by 2006 in addition to significant copper production by 2007. Company management plans to build on this base through the advancement of its exploration properties and by targeting other gold consolidation opportunities in Brazil and elsewhere in Latin America. A conference call and audio webcast has been scheduled for March 21, 2006 at 11:00 a.m. E.S.T. to discuss the results. Conference Call Information: Local and Toll Free (North America): 800-814-4853 International: +1 416-644-3419 Participant Audio Webcast: www.yamana.com Conference Call REPLAY: Replay Call: 416-640-1917 Passcode 21180886# Replay Toll Free Call: 877-289-8525 Passcode 21180886# The conference call replay will be available from 1:00 p.m. E.S.T. on March 21, 2006 until 11:59 p.m. E.S.T. on March 28, 2006. For further information on the Conference Call or audio webcast, please contact the Investor Relations Department or visit our website, www.yamana.com. NON-GAAP MEASURES: Cost per ounce data and adjusted net earnings and adjusted earnings per share are provided to supplement Yamana's consolidated financial statements. The presentation of adjusted measures are not meant to be a substitute for net earnings (loss) or net earnings (loss) per share presented in accordance with GAAP, but rather should be evaluated in conjunction with such GAAP measures. The terms "adjusted net earnings (loss)" and "adjusted net earnings (loss) per share" do not have a standardized meaning prescribed by Canadian GAAP, and therefore the Company's definitions are unlikely to be comparable to similar measures presented by other companies. The Company's management believes that the presentation of adjusted net earnings (loss) and adjusted net earnings (loss) per share provide useful information to investors because they exclude non-cash charges and are a better indication of the Company's profitability from operations. The items excluded from the computation of adjusted net earnings (loss) and adjusted net earnings (loss) per share, which are otherwise included in the determination of net earnings (loss) and net earnings (loss) per share prepared in accordance with Canadian GAAP, are items that the Company does not consider to be meaningful in evaluating the Company's past financial performance or the future prospects and may hinder a comparison of its period to period profitability. Cost per ounce data and adjusted net earnings are a non-GAAP (Generally Accepted Accounting Principles) measure and are unaudited. Please see the note on non-GAAP Measures contained at the end of Management's Discussion and Analysis contained in the December 2005 annual report. FORWARD-LOOKING STATEMENTS: This news release contains "forward-looking statements", within the meaning of the United States Private Securities Litigation Reform Act of 1995 and similar Canadian legislation, concerning the business, operations and financial performance and condition of Yamana Gold Inc. Forward-looking statements include, but are not limited to, statements with respect to estimated production, synergies and financial impact of the proposed transaction; the benefits of the proposed transaction and the development potential of Yamana's properties; the future price of gold and copper; the estimation of mineral reserves and resources; the realization of mineral reserve estimates; the timing and amount of estimated future production; costs of production; capital expenditures; success of exploration activities; permitting time lines and permitting, mining or processing issues; currency exchange rate fluctuations; government regulation of mining operations; environmental risks; unanticipated reclamation expenses; title disputes or claims; and limitations on insurance coverage. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved". Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made, and they are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Yamana to be materially different from those expressed or implied by such forward-looking statements, including but not limited to risks related to: unexpected events during construction, expansion and start-up; variations in ore grade, tonnes mined, crushed or milled; variations in relative amounts of refractory, non-refractory and transition ores; delay or failure to receive board or government approvals; timing and availability of external financing on acceptable terms; the business of Yamana not being integrated successfully or such integration proving more difficult, time consuming or costly than expected; not realizing on the anticipated benefits from acquisition transactions or not realizing on such anticipated benefits within the expected time frame; risks related to international operations; actual results of current exploration activities; actual results of current reclamation activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of gold and copper; possible variations in ore reserves, grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining industry; delays in the completion of development or construction activities, as well as those factors discussed in or referred to in the current annual Management's Discussion and Analysis and current Annual Information Form of Yamana filed with the securities regulatory authorities in Canada and available at www.sedar.com, and Yamana's Annual Report on Form 40-F, filed with the United States Securities and Exchange Commission. Although management of Yamana has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Yamana does not undertake to update any forward-looking statements that are incorporated by reference herein, except in accordance with applicable securities laws. Mineral resources which are not mineral reserves do not have demonstrated economic viability. Readers should refer to the respective Annual Information Forms of Yamana for the year ended December 31, 2005, and other continuous disclosure documents filed by the Company available at www.sedar.com, for further information relating to the mineral resources and mineral reserves. Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: This news release uses the terms "Measured", "Indicated" and "Inferred" Resources. United States investors are advised that while such terms are recognized and required by Canadian regulations, the United States Securities and Exchange Commission does not recognize them. "Inferred Mineral Resources" have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
Yamana Gold Inc
Key Statistics
(Based on Canadian GAAP and expressed in U.S. dollars,
unless otherwise noted)
(Unaudited) (Audited)
For the three months ended For the fiscal year ended
Dec. 31, 2005 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2004
(10 months)
---------------------------------------------------------
Gold
production
(ounces):
Pre-commercial
Fazenda Nova - 2,745 7,379 2,849
Sao Francisco
pilot plant 1,212 846 4,843 3,214
---------------------------------------------------------
1,212 3,591 12,222 6,063
Commercial
Fazenda
Brasileiro 17,810 20,854 74,570 78,168
Fazenda Nova 12,740 - 28,780 -
---------------------------------------------------------
30,550 20,854 103,350 78,168
---------------------------------------------------------
31,762 24,445 115,572 84,231
---------------------------------------------------------
Commercial
gold sales
(ounces):
Fazenda
Brasileiro 19,257 23,982 72,074 79,882
Fazenda
Nova 15,463 - 31,698 -
---------------------------------------------------------
34,720 23,982 103,772 79,822
---------------------------------------------------------
Fazenda
Brasileiro
per ounce
data:
Average
realized
gold price $ 485 $ 434 $ 448 $ 409
Cash costs
per ounce
produced
Fazenda
Brasileiro $ 357 $ 224 $ 320 $ 205
Fazenda Nova $ 177 $ - $ 208 $ -
---------------------------------------------------------
$ 282 $ 224 $ 289 $ 205
Average ore
grade (g/t)
Fazenda
Brasileiro 2.31 2.82 2.44 3.13
Fazenda Nova 0.87 - 0.87 -
Average
recovery
rate (%)
Fazenda
Brasileiro 88.3 92.5 89.3 91.9
Fazenda Nova 90.0 - 81.0 -
Financial
Results
(thousands)
Gold sales $ 16,655 $ 10,305 $ 46,038 $ 32,298
Mine
operating
earnings $ 4,807 $ 2,923 $ 8,569 $ 10,377
Adjusted net
earnings $ 3,311 $ (1,263) $ 1,991 $ 2,696
Net earnings
(loss) $ (73) $ 804 $ (4,111) $ 2,783
Per share data:
Adjusted net
earnings
per share $ 0.02 $ (0.01) $ 0.01 $ 0.03
Basic (loss)
earnings
per share $ (0.00) $ 0.01 $ (0.03) $ 0.03
Diluted
(loss)
earnings
per share $ (0.00) $ 0.01 $ (0.03) $ 0.02
Weighted
average
number of
common
shares
(thousands) 190,197 111,737 144,888 100,036
Financial Position (thousands) Dec. 31, 2005 Dec. 31, 2004
-------------------------------------
Cash and cash equivalents $ 151,633 $ 87,054
Working capital $ 157,951 $ 88,936
Shareholders' equity $ 314,974 $ 160,309
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Reserves and Resources
December 31, 2005
Mineral Reserves (Proven and Probable)
Proven Reserves Probable Reserves
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Contained Contained
Tonnes Grade Oz. Tonnes Grade Oz.
(000) (g/t) (000's) (000) (g/t) (000's)
---------------------------------------------------------------------
Gold
---------------------------------------------------------------------
Fazenda
Brasileiro - U/G 1,100 3.100 109.9 969 2.490 77.5
---------------------------------------------------------------------
Fazenda
Brasileiro - O/P 249 2.420 19.3 - - -
---------------------------------------------------------------------
Total Fazenda
Brasileiro 1,349 2.979 129.2 969 2.487 77.5
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C1-Santa Luz - - - 9,200 1.880 556.0
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Fazenda Nova - - - 3,330 0.862 92.3
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Sao Francisco
- Main Ore 7,830 1.21 303.6 19,661 1.23 775.6
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Sao Francisco
- ROM Ore 12,291 0.23 92.5 24,224 0.25 190.8
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Total Sao Francisco 20,121 0.61 396.1 43,885 0.68 966.4
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Sao Vicente
- Main Ore 6,101 1.23 241.8 3,356 1.11 119.5
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Sao Vicente
- ROM Ore 9,106 0.23 68.3 5,322 0.24 40.3
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Total Sao Vicente 15,207 0.63 310.2 8,678 0.57 159.8
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Chapada 18,379 0.33 194.4 292,135 0.25 2,353.1
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Total Gold Reserves 55,056 0.58 1,029.8 358,197 0.37 4,205.1
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Contained Contained
Tonnes Grade Lbs Tonnes Grade Lbs
(000) (%) (mm) (000) (%) (mm)
---------------------------------------------------------------------
Copper
---------------------------------------------------------------------
Chapada 18,379 0.42% 169.6 292,135 0.34% 2,180.1
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Total - Proven and Probable
---------------------------------------------------------------------
Contained
Tonnes Grade Oz.
(000) (g/t) (000's)
---------------------------------------------------------------------
Gold
---------------------------------------------------------------------
Fazenda Brasileiro - U/G 2,069 2.817 187.4
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Fazenda Brasileiro - O/P 249 2.412 19.3
---------------------------------------------------------------------
Total Fazenda Brasileiro 2,318 2.773 206.7
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C1-Santa Luz 9,200 1.880 556.0
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Fazenda Nova 3,330 0.862 92.3
---------------------------------------------------------------------
Sao Francisco - Main Ore 27,491 1.22 1,079.2
---------------------------------------------------------------------
Sao Francisco - ROM Ore 36,515 0.24 283.2
---------------------------------------------------------------------
Total Sao Francisco 64,006 0.66 1,362.4
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Sao Vicente - Main Ore 9,457 1.19 361.3
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Sao Vicente - ROM Ore 14,428 0.23 108.7
---------------------------------------------------------------------
Total Sao Vicente 23,885 0.61 470.0
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Chapada 310,514 0.26 2,547.5
---------------------------------------------------------------------
Total Gold Reserves 413,253 0.39 5,234.9
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Contained
Tonnes Grade Lbs
(000) (%) (mm)
---------------------------------------------------------------------
Copper
---------------------------------------------------------------------
Chapada 310,514 0.34% 2,349.7
---------------------------------------------------------------------
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Mineral Resources (Measured, Indicated and Inferred) (Measured and
Indicated include Reserves as outlined above)
Measured Resources Indicated Resources
---------------------------------------------------------------------
Contained Contained
Tonnes Grade Oz. Tonnes Grade Oz.
(000) (g/t) (000's) (000) (g/t) (000's)
---------------------------------------------------------------------
Gold
---------------------------------------------------------------------
Fazenda
Brasileiro - U/G 1,158 3.14 116.9 2,722 2.99 261.2
---------------------------------------------------------------------
Fazenda
Brasileiro - O/P 249 2.42 19.3 937 1.55 46.8
---------------------------------------------------------------------
Total Fazenda
Brasileiro 1,407 3.01 136.2 3,658 2.62 308.0
---------------------------------------------------------------------
C1-Santa Luz - - - 18,400 1.66 982.4
---------------------------------------------------------------------
Fazenda Nova - - - 4,226 0.84 114.2
---------------------------------------------------------------------
Sao Francisco
- Main Ore 9,142 1.22 358.2 23,360 1.24 929.1
---------------------------------------------------------------------
Sao Francisco
- ROM Ore 15,255 0.23 113.0 32,213 0.24 250.2
---------------------------------------------------------------------
Total Sao Francisco 24,398 0.60 471.2 55,574 0.66 1,179.3
---------------------------------------------------------------------
Sao Vicente
- Main Ore 7,669 1.19 292.2 5,424 1.12 194.5
---------------------------------------------------------------------
Sao Vicente
- ROM Ore 13,117 0.23 95.4 10,804 0.23 78.4
---------------------------------------------------------------------
Total Sao Vicente 20,786 0.58 387.6 16,228 0.52 272.9
---------------------------------------------------------------------
Ernesto 160 5.26 27.1 682 5.23 114.7
---------------------------------------------------------------------
Chapada 25,200 0.30 243.1 396,200 0.22 2,802.4
---------------------------------------------------------------------
Total Gold Resources 71,951 0.55 1,265.2 494,969 0.36 5,773.8
---------------------------------------------------------------------
Contained Contained
Tonnes Grade Lbs Tonnes Grade Lbs
(000) (%) (mm) (000) (%) (mm)
---------------------------------------------------------------------
Copper
---------------------------------------------------------------------
Chapada 25,200 0.34% 188.9 396,200 0.30% 2,620.4
---------------------------------------------------------------------
Total - Measured and Indicated Inferred Resources
---------------------------------------------------------------------
Contained Contained
Tonnes Grade Oz. Tonnes Grade Oz.
(000) (g/t) (000's) (000) (g/t) (000's)
---------------------------------------------------------------------
Gold
---------------------------------------------------------------------
Fazenda
Brasileiro - U/G 3,880 3.03 378.1 780 4.28 107.4
---------------------------------------------------------------------
Fazenda
Brasileiro - O/P 1,185 1.73 66.1 - - -
---------------------------------------------------------------------
Total Fazenda
Brasileiro 5,065 2.73 444.2 780 4.28 107.4
---------------------------------------------------------------------
C1-Santa Luz 18,400 1.66 982.4 2,013 3.09 199.7
---------------------------------------------------------------------
Fazenda Nova 4,226 0.84 114.2 95 0.50 1.5
---------------------------------------------------------------------
Sao Francisco
- Main Ore 32,503 1.23 1,288.3 11,891 1.43 546.7
---------------------------------------------------------------------
Sao Francisco
- ROM Ore 47,469 0.24 363.2 48,604 0.21 332.4
---------------------------------------------------------------------
Total Sao Francisco 79,971 0.64 1,651.5 60,495 0.45 879.1
---------------------------------------------------------------------
Sao Vicente
- Main Ore 13,093 1.16 486.6 1,887 1.40 84.9
---------------------------------------------------------------------
Sao Vicente
- ROM Ore 23,921 0.23 173.9 3,771 0.22 26.1
---------------------------------------------------------------------
Total Sao Vicente 37,015 0.56 660.5 5,658 0.61 111.0
---------------------------------------------------------------------
Ernesto 842 5.24 141.8 483 4.60 71.4
---------------------------------------------------------------------
Chapada 421,400 0.22 3,045.5 250,870 0.15 1,226.0
---------------------------------------------------------------------
Total Gold Resources 566,920 0.39 7,040.0 320,395 0.25 2,596.1
---------------------------------------------------------------------
Contained Contained
Tonnes Grade Lbs Tonnes Grade Lbs
(000) (%) (mm) (000) (%) (mm)
---------------------------------------------------------------------
Copper
---------------------------------------------------------------------
Chapada 421,400 0.30% 2,809.3 250,870 0.25% 1,393.7
---------------------------------------------------------------------
Mineral Reserves and Resources Chapada's inferred resources were taken from a Micon International Limited NI 43-101 compliant technical report dated July 2003. Independent Mining Consultants estimated Chapada's inferred resources in their report dated February 2004 at 68 million tonnes grading 0.14 g/t gold and 0.2% copper. Mineral reserve and resource estimates presented were prepared by or under the supervision of external consultants as indicated in the table below in accordance with NI 43-101. In estimating the mineral reserves and mineral resources, such persons made assumptions, and used parameters and methods appropriate for each property, and verified the data disclosed, including sampling, analytical and test data underlying such estimates. These external reserve reports have been reviewed by Evandro Cintra Cintra: see Sintra, Portugal., Vice-President Exploration as "qualified person", as that term is defined in NI 43-101. These figures are estimates, however, and no assurance can be given that the indicated amounts of quantities of gold will be produced. Gold price fluctuations may render mineral reserves containing relatively lower grades of gold mineralization uneconomic. Moreover, short-term operating factors relating to the mineral reserves could affect the Company's profitability in any particular accounting period. The corporation is not aware of any environmental, permitting, legal, title, taxation, socio-political, marketing or other relevant issues which may materially affect the Corporation's mineral reserve and resource estimates, other than factors discussed above and in "Risks and Uncertainties" in the Management Discussion and Analysis section of the annual report.
Mineral Mineral
Reserves Resources Date Report
---------------------------------------------------------------------
Fazenda Geoexplore Geoexplore Jan-06 Mineral
Brasileiro Consultoria Consultoria Update
Reserves e Servicos Ltd. e Servicos Ltd.
and
Resource
C1-Santa Luz NCL Chile, NCL Moreno & Nov-05 Preliminary
Brasil Ltda., Associates Assessment
Study
Rezende Engenharia Feb-06 Resource
Estimate
Update
Chapada Independent Independent Feb-06 Chapada
Mining Mining Reserve
Consultants Inc. Consultants Update
Feb-04 Feasibility
Study
(mineral
resource)
Sao Francisco NCL Brasil Ltda. Geosystems Feb-06 Mineral
International Reserve
Update
and Resource
Model Update
Sao Vicente NCL Brasil Ltda. Geosystems Feb-06 Mineral
International Reserve
Update
and
Resource
Model Update
Ernesto ----------------- NCL Brasil Ltda.Feb-06 Mineral
Resource
Estimate
Fazenda Nova NCL Brasil Ltda. Moreno & Feb-06 Reserve
Associates Estimate
Update
Mine Mineral Gold Copper Mineral
Grade Reserve Cut-off Price Price Resources Cut-off
(g/t gold; (g/t gold;
% copper) % copper)
---------------------------------------------------------------------
Fazenda
Brasileiro 1.5 US$425 n/a 1.5
C1- Santa Luz 0.5 US$425 n/a 0.5 and 1.5 (1)
Chapada $2.20 (2) US$425 US$1.00 0.15% (3)
Sao Francisco 0.40 and 0.13 US$425 n/a 0.40 and 0.13
Sao Vicente 0.44 and 0.11 US$425 n/a 0.44 and 0.11
Ernesto -------------- US$425 n/a 1.5
Fazenda Nova 0.24 US$500 n/a 0.24
(1) 0.5 g/t cut-off for indicated resource and 1.5 g/t cut-off for
inferred resource (underground mine potential)
(2) Internal Net Smelter Return (NSR) cut-off versus grade cut-off
used
A cautionary note regarding forward-looking statements and non-GAAP measures follows this Management's Discussion and Analysis of Operations and Financial Condition. Management's Discussion and Analysis of Operations and Financial Condition (US dollars, in accordance with Canadian GAAP) 1. Core Business Yamana Gold Inc. is engaged in the acquisition, exploration and development, and operation of mineral properties. Revenue and cash flow from operations is currently generated from the sale of gold bullion. Future revenues and cash flows will include the sale of copper concentrate from its Chapada copper-gold mine which is currently under construction. To date, the Company's activities have been concentrated in Latin America. 2. Change in Year End In May 2004, the year end of the Company was changed from February 28/29 to December 31. As such, the current fiscal year is for the twelve month period ended December 31, 2005 with comparative figures for the ten month period ended December 31, 2004. 3. Highlights Significant achievements during the year include: - Cash balance of $151.6 million as at December 31, 2005 - Cash flow from operations of $6.4 million before changes in non-cash working capital items and cash flow from operations of $3.4 million after a reduction in non-cash working capital items of $3 million - Achieved average cash costs of $289 per ounce from its Fazenda Nova and Fazenda Brasileiro mines. - Commenced commercial production at its Fazenda Nova Mine. - Commenced the start-up of mine operations at its Sao Francisco Mine. - Ahead of schedule with the construction of its Chapada copper-gold project. - Raised gross proceeds of $49.6 million from the early exercise of its publicly traded warrants that otherwise would not have been available to the Company until July 2008. - Raised $105.3 million in net proceeds from the public issue of 26 million common shares. - Drew down on debt financing in the amount of $100 million for the construction of the Chapada copper-gold project. - Entered into smelter off-take agreements for 150,000 tonnes of copper concentrate from its Chapada copper-gold project currently under construction. - Initiated a copper hedging program that is intended to help secure a less than two year payback at its Chapada copper-gold project. - Pursued the purchase of RNC Gold Inc. whereby the Company acquired two additional mines: San Andres and La Libertad bringing total forecast gold production up to more than 500,000 ounces by 2007. The transaction was approved by RNC Gold Inc. shareholders on February 17, 2006, received court approval on February 22, 2006 and closed February 28, 2006. - Advanced three projects through exploration to the point where they now each have the potential to become our next new mine. - Increased proven and probable reserves by 1.2 million ounces. - Continued drilling and the development E-Deep at the Fazenda Brasiliero Mine to further define and expand the size of the ore body. 4. Subsequent events - Acquisitions RNC Gold Inc. On December 4, 2005, the Company announced transactions which provided for the acquisition of RNC Gold Inc. ("RNC") and 100% of the San Andres gold mine in Honduras. The total purchase price for these transactions was approximately $ 52 million, comprised of approximately 5.7 million Yamana common shares (0.12 of a common share for each RNC share) and other transaction costs and adjustments. Additionally, the Company paid $ 18.9 million in cash for the purchase of the San Andres Mine. The addition of San Andres in Honduras and La Libertad in Nicaragua to the Company's existing operations will increase gold production by 120,000 per year bringing total forecast gold production to approximately 500,000 to 550,000 ounces by 2007 and up to 650,000 ounces by 2008. The Company also acquired development stage properties including Cerro Quema in Panama. The Company recorded the RNC transaction in accordance with the purchase method of accounting for acquisitions under Canadian generally accepted accounting principles. As such, assets acquired and liabilities assumed under the transaction will be recorded by the Company at their fair market values as of the date of acquisition, February 28, 2006. Subsequent to the year end, on February 17, 2006 the shareholders of RNC Gold Inc. approved the transaction and all necessary regulatory and court approvals were obtained. The transaction closed on February 28, 2006. Desert Sun Mining On February 22, 2006, the Company entered into an arrangement agreement with Desert Sun Mining Corp. which owns the Jacobina gold mine in the Bahia state of Brazil near the Company's Fazenda Brasileiro mine and its C1 Santa Luz pre-feasibility project. The acquisition will be completed by way of a court approved Plan of Arrangement whereby each Desert Sun Mining common share will be exchanged for 0.6 of a Yamana common share. All Desert Sun Mining options and warrants will become exercisable for common shares of the Company based on the exchange ratio. As a result of the proposed transaction, the combined company would be held approximately 76% by existing Yamana shareholders and 24% by existing Desert Sun Mining shareholders. The total number of Yamana common shares outstanding would be approximately 262.1 million, calculated on a pro forma basis after giving effect to the Company's acquisition of RNC Gold Inc. Cash costs of the combined company are projected at $270 per ounce of gold in 2006, with $125 and $115 per ounce of gold projected for 2007 and 2008, respectively. Projected cash costs assume copper will be treated as a by-product credit. The Company's total measured and indicated resources based on information known at the time of announcement would comprise approximately 11.6 million ounces of measured and indicated resources including 7.6 million of proven and probable reserve gold ounces. Proven and probable copper reserves would be approximately 2.3 billion pounds. Inferred gold resources would total 6.1 million ounces. Taking into consideration the Company's updated reserves and resources as at December 31, 2005, following the Desert Sun acquisition, the Company would have measured and indicated resources of approximately 12.1 million ounces of which 8.1 million ounces would be proven and probable. Inferred resources would total 6.4 ounces and copper reserves would be 2.35 billion pounds. In addition to the upside in the production profile of the Company, the transaction would facilitate operational and administrative synergies, and broaden shareholder base and increases to share liquidity. The transaction is subject to all requisite regulatory and court approvals, Desert Sun shareholder approval, third party consents and other conditions customary in transactions of this nature. The combination must be approved by at least two-thirds of the votes cast by shareholders of Desert Sun. The transaction is expected to close during the second quarter of 2006. If the combination does not occur under certain circumstances, Desert Sun has agreed to pay the Company a break-fee of C$21.5 million. 5. Overview of Financial Results The table below presents selected financial data for the Company's three most recently completed fiscal years:
---------------------------------------------------------------------
Dec 31, Dec 31, Feb 29,
2005 2004 2004
(ten months)
----------------------------------
Financial results (in thousands
of dollars)
Revenues(1) $46,038 $32,298 $19,811
Mine operating earnings(4) $8,569 $10,377 $6,754
Net earnings (loss)(2) $(4,111) $2,783 $1,008
Adjusted net earnings(3) $1,991 $2,696 $1,788
Cash flow from operations $3,410 $8,536 $5,491
(after changes in non-cash
working capital items)
Cash flow from operations $6,445 $9,293 $4,953
(before changes in non-cash
working capital items)(3)
Per share financial results
Basic (loss) earnings per
share(2) (0.03) 0.03 0.02
Diluted (loss) earnings per
share(2) (0.03) 0.02 0.02
Adjusted earnings per share(3) 0.01 0.03 0.04
Financial position (in
thousands of dollars)
Total assets $465,697 $177,106 $93,948
Total long-term liabilities $119,281 $9,572 $7,657
Gold Production (ounces):
Pre-Commercial
Fazenda Nova 7,379 2,849 -
Sao Francisco pilot plant 4,843 3,214 283
----------------------------------
12,222 6,063 283
Commercial
Fazenda Brasileiro 74,570 78,168 56,794
Fazenda Nova 28,780 - -
----------------------------------
103,350 78,168 56,794
----------------------------------
115,572 84,231 57,077
----------------------------------
----------------------------------
Gold Sales (ounces)
Pre-Commercial
Fazenda Nova 4,694 1,704 -
Sao Francisco pilot plant 4,050 2,883 -
----------------------------------
8,744 4,587 -
Commercial
Fazenda Brasileiro 72,074 79,822 49,989
Fazenda Nova 31,698 - -
----------------------------------
103,772 79,822 49,989
----------------------------------
112,516 84,409 49,989
----------------------------------
----------------------------------
Non-GAAP Measures(3)
Per ounce data:
Cash costs per ounce produced(4)
Fazenda Brasileiro $320 $205 $208
Fazenda Nova $208 - -
----------------------------------
$289 $205 $208
Average gold price realized (1) $448 $409 $396
Average gold spot price $445 $409 $372
Operating statistics
Gold ore grade (g/t)
Fazenda Brasileiro 2.44 3.13 3.42
Fazenda Nova 0.87 - -
Gold recovery rate (%)
Fazenda Brasileiro 89.3 91.9 95.5
Fazenda Nova 81.0 - -
---------------------------------------------------------------------
(1) Revenues consist of sales net of sales taxes. Revenue per ounce
data is calculated based on gross sales.
(2) Net (loss) earnings, basic (loss) earnings per share and diluted
earnings per share for the year ended December 31, 2005 include
an unrealized non-cash loss on commodity contracts of $8.6
million.
(3) Non GAAP measure - see reconciliation table below. A cautionary
note of non-GAAP measures follows this Management's Discussion
and Analysis of Operations and Financial Condition.
(4) Certain mine general and administrative expenses have been
reclassified from cost of sales to general and administrative
expenses to conform with current year's presentation.
Net loss for the year included non-cash charges in respect of stock option expense, foreign exchange losses, unrealized losses on commodity contracts and a future income tax recovery. Net earnings for the year, adjusted for these non-cash items (a non-GAAP measure), was $2 million compared to $2.6 million for the comparative ten month period ended December 31, 2004. The following chart summarizes net earnings adjusted for these non-cash items:
---------------------------------------------------------------------
A non-GAAP Measure Dec. 31, Dec. 31, Feb. 29,
2005 2004 2004
(ten months)
---------------------------------------------------------------------
Net earnings (loss) per
consolidated financial
statements $ (4,111) $ 2,783 $ 1,008
Adjustments:
Stock-based compensation 2,303 2,191 612
Foreign exchange gain (369) (1,848) (157)
Unrealized losses on
commodity contracts 8,615 - -
Future income tax
(recovery) expense (4,447) (430) 324
---------------------------------------------------------------------
Adjusted net earnings $ 1,991 $ 2,696 $ 1,787
------------------------------------
Adjusted earnings per
share $ 0.01 $ 0.03 $ 0.04
------------------------------------
---------------------------------------------------------------------
An unrealized non-cash loss of $8.6 million was recognized on the mark-to-market of copper hedging instruments entered into during the year. The Company has effectively sold forward 50 million pounds of 2007 copper production at a net price of $1.27 per pound. This represents approximately 50% of the Company's projected copper production for 2007. The financial instruments entered into were structured to hedge against the risk of declining copper prices on future copper concentrate sales, while permitting the Company to participate in market price increases at prices exceeding the $1.67 strike price of the call options involved in the transactions, thereby maximizing the total exposure at $15 million. By putting this copper hedge in place, the Company is helping to ensure a less than two year pay back for its Chapada copper-gold project. The original pay back outlined in the Chapada feasibility study based on a copper price of $1.00 per pound was approximately two years. The formal requirements under generally accepted accounting standards permit this arrangement as a hedge so long as cash flows from sales come from copper solely. Since Chapada produces a concentrate of copper and gold which is sold in concentrate form, under accounting rules, hedge accounting is disallowed. Accordingly, changes in the fair value of the financial instruments will be reflected in current earnings from period to period. This will result in fluctuations in net earnings from period to period until which time the contracts are closed in 2007. The unrealized mark-to-market loss represents the value on cancellation of these contracts based on market values as at December 31, 2005 and does not represent an economic obligation for the Company nor does it represent an estimate of future gains or losses. The Company is currently considering entering into additional contracts to further lock-in the copper price for a portion of its 2008 forecast production. Details to the commodity contacts are further discussed in Section "Hedging Program". The basic loss per share, including the impact of the mark-to-market loss on the economic copper hedge for the fiscal year ended December 31, 2005 was $0.03. This compares to basic earnings per share of $0.03 per share and diluted earnings of $0.02 per share for the comparative ten month period ended December 31, 2004 and basic and diluted earnings of $0.02 per share for the year ended February 29, 2004. Earnings per share adjusted for non-cash items was $0.01 for the year. This compares to adjusted earnings per share of $0.03 for the comparative ten month period ended December 31, 2004 and $0.04 for the year ended February 29, 2004. Revenue for the fiscal year was $46 million, an increase of 43% over the preceding ten month period. Revenues for the year consisted of 72,074 ounces of gold sold from the Fazenda Brasileiro Mine and 31,698 ounces of gold sold from the Fazenda Nova Mine as of May 1, 2005 (commencement of commercial production). All gold sales were transacted in the spot market. In addition, a total of 8,744 ounces were sold during the year from pre-commercial activities at the Fazenda Nova Mine and the Francisco pilot plant. Hence, a total of 112,516 ounces of gold were sold in 2005. Sale proceeds prior to commercial production from the Fazenda Nova Mine and from the Sao Francisco pilot plant were credited against mine development costs. A total of 79,822 and 49,989 ounces were sold during the comparative ten month period ended December 31, 2004 and during the twelve month period ended February 29, 2004, respectively. Additionally, 4,587 ounces of gold were sold during the comparative ten month period ended December 31, 2004 from pre-commercial activities from the Fazenda Nova Mine and the Sao Francisco pilot plant. NOTE: To view the 'Gold Price per Ounce (US$)' graph, please visit the following link - http://www.ccnmatthews.com/docs/gpo0320.pdf The Company's average realized gold price during the year was $448 per ounce, an increase of 10% from an average realized price $409 per ounce during the comparative ten month period ended December 31, 2004. This also compares to an average spot price of $445 per ounce for the year ended December 31, 2005. The spot price itself increased 9% relative to the comparative ten month period ended December 31, 2004. A higher gold price positively affected the Company's revenues. The impact of a higher average gold price on mine operating earnings was partially offset by a strengthened Brazilian Real relative to the US dollar and higher operating costs.Higher local operating costs were a result of increases in maintenance costs, the price of fuel, the price of power, and other consumables. Mine operating earnings for the year were $8.6 million and consist of operations from the Fazenda Brasileiro Mine and the Fazenda Nova Mine as of May 1, 2005. This compares to operating earnings from the Fazenda Brasileiro Mine of $10.4 million for the comparative ten month period ended December 31, 2004 and $6.8 million for the year ended February 29, 2004. There were no earnings from the Fazenda Nova Mine for the comparative periods. A total 115,572 ounces of gold were produced during the year of which 103,350 ounces were produced from commercial production activities and 12,222 ounces were produced from pre-commercial activities. This compares to 84,231 ounces produced during the comparative ten month period ended December 31, 2004 and 57,077 ounces produced during the year ended February 29, 2004. Comparing fiscal 2005 versus fiscal 2004, Fazenda Nova commercial production increased by 28,780 ounces and Fazenda Brasileiro production declined by 3,598 ounces. Average cash costs for the year were $289 per ounce compared to $205 per ounce for the ten month comparative period ended December 31, 2004 and $208 per ounce for the comparative year ended February 29, 2004. Inventory as at December 31, 2005 was $11.4 million compared to $5.9 million as at December 31, 2004. Inventory increased as a result of production at the Fazenda Nova Mine, ore being stacked on the heap leach pads at the Sao Francisco Mine and ore stockpiled at the Chapada Mine which is currently under construction. Proven and probable reserves were 5.2 million ounces of contained gold and 2.3 billion pounds of contained copper as of December 31, 2005 based on a gold price of $425 per ounce (except for Fazenda Nova which is calculated assuming $500 gold price) and a copper price of $1.00 per pound. This represents an increase of 1.2 million ounces, a 31% increase after mining of 115,000 ounces during the year. Summary of increase in proven and probable gold reserves by mine/project:
-------------------------------------------------------
Mine Increase (Decrease)
in Contained Ounces
(000's)
-------------------------------------------------------
Fazenda Brasileiro (26)
Fazenda Nova (54)
C-1 Santa Luz 556
Sao Francisco 324
Sao Vicente 309
Chapada 54
-------------------------------------------------------
Total Increase 1,163
-------------------------------------------------------
Cash as at December 31, 2005 was $151.6 million compared to $87.1 million as at December 31, 2004. Significant cash transactions during the year included the full draw down on a $100 million loan facility, $48.1 million in net proceeds received on the early exercise of the Company's publicly traded warrants and $105.3 million received from an equity financing held in October and expenditures relating to construction of the Sao Francisco and Chapada mines of $55.3 million and $76.7 million, respectively. Cash flow from operations before changes in non-cash working capital items was $6.4 million for the year compared to $9.3 million for the comparative ten month period ended December 31, 2004 and $5 million for the year ended February 29, 2004. The decrease in cash from operations is primarily due to previously mentioned increases in local operating costs, a strengthening Real and the processing of lower grades at Fazenda Brasileiro. Working capital as at December 31, 2005 was $139 million compared to $88.9 million as at December 31, 2004 and $35.7 million as at February 29, 2004. The balance sheet as at December 31, 2005 reflects $13.2 million of Brazilian tax credit receivables recognized in advances and deposits ($4.4 million) and other assets ($8.9 million). A provision in the amount of approximately 15% ($372,900 of which $40,200 was charged to assets under construction) was recorded during the period against certain Brazilian tax credits. Other Brazilian tax credits may be applied against future income taxes payable and taxes payable on eligible local sales. It is expected that a portion of copper concentrate from the Chapada Mine will be sold locally in Brazil which will take advantage of some of these eligible tax credits. An increase in tax credits arose as operating expenditures and capital expenditures relating to construction and operations increased significantly during the year. Assets under construction of $154.3 million reflect construction of the Sao Francisco and Chapada mines. Construction costs include cash expenditures, capitalized interest, capitalized amortization of deferred financing charges and capitalized pre-operating net earnings. Construction of the Chapada mine is being financed by a $100 million debt facility. As at December 31, 2005, the Company owed $100 million in principal plus accrued interest of $6.8 million. General and administrative expenses were $10.4 million for the year compared to $6.2 million for the comparative ten month period ended December 31, 2004 and $4.6 million for the year ended February 29, 2004. The increase in general and administrative expenses is reflective of the Company's growing infrastructure related to its production growth plans and acquisitions. Investment income was $4 million for the fiscal year, compared to $0.8 million for the comparative ten month period ended December 31, 2004 and $0.5 million for the year ended February 29, 2004. Investment income for the year mainly represents interest income earned in Brazil at an average rate of 19% as the Company held higher cash balances denominated in Brazilian reais than the previous year in order to help offset the impact of the strengthening Real. 6. Mine Operations The following chart summarizes commercial production and cash costs per ounce for the year and quarter ended December 31, 2005 with comparative figures for the ten month period and quarter ended December 31, 2004:
---------------------------------------------------------------------
Quarter ended Quarter ended
December 31, 2005 December 31, 2004
---------------------------------------------------------------------
Production Cash costs Production Cash costs
(oz.) per oz. (oz.) per oz.
(a non-GAAP (a non-GAAP
measure) measure)
---------------------------------------------------------------------
Fazenda Nova 12,740 $ 177 - $ -
Fazenda Brasileiro 17,810 $ 357 20,854 $ 234
---------------------------------------------------------------------
TOTAL COMMERCIAL
PRODUCTION 30,550 $ 282 20,854 $ 234
Fazenda Nova
Pre-operating - $ - 2,745 $ -
Sao Francisco
Pilot Plant 1,212 $ - 846 $ -
---------------------------------------------------------------------
TOTAL PRODUCTION 31,762 $ - 24,445 $ -
--------------------------------------------------
--------------------------------------------------
---------------------------------------------------------------------
For the twelve months For the ten months
ended ended
December 31, 2005 December 31, 2004
---------------------------------------------------------------------
Production Cash costs Production Cash costs
(oz.) per oz. (oz.) per oz.
(a non-GAAP (a non-GAAP
measure) measure)
---------------------------------------------------------------------
Fazenda Nova 28,780 $ 208 - $ -
Fazenda Brasileiro 74,570 $ 320 78,168 $ 218
---------------------------------------------------------------------
TOTAL COMMERCIAL
PRODUCTION 103,350 $ 289 78,168 $ 218
Fazenda Nova
Pre-operating 7,379 $ - 2,849 $ -
Sao Francisco
Pilot Plant 4,843 $ - 3,214 $ -
---------------------------------------------------------------------
--------------------------------------------------
TOTAL PRODUCTION 115,572 $ - 84,231 $ -
--------------------------------------------------
--------------------------------------------------
---------------------------------------------------------------------
Mine operating earnings for the year ended December 31, 2005 were $8.6 million, a decrease of 17% from mine operating earnings of $10.4 million for the comparative ten month period ended December 31, 2004. Mine operating earnings for the year ended February 29, 2004 were $6.8 million. Mine operating earnings decreased relative to the prior fiscal year mainly due to the strengthening of the Real vis-a-vis the US dollar, an increase in Real denominated costs at the Fazenda Brasileiro Mine and lower head grades and recovery rates at the Fazenda Brasileiro Mine. Mine operating earnings for fiscal 2005 consisted of earnings from the Fazenda Nova and Fazenda Brasileiro mines. The Fazenda Nova Mine began commercial production as of May 1, 2005, thus mine operating earnings for the comparative periods reflect earnings solely from the Fazenda Brasileiro Mine. NOTE: To view the 'Mine Operating Earnings' graph, please visit the following link - http://www.ccnmatthews.com/docs/moe0320.pdf A total of 115,572 ounces of gold were produced during the year, including commercial production of 103,350 ounces at combined cash costs of $289 per ounce.This compares to 84,231 ounces of gold produced during the comparative ten month period ended December 31, 2004, including commercial production from the Fazenda Brasileiro Mine of 78,168 ounces at an average cash cost of $205 per ounce produced. A total of 57,077 ounces were produced during the year ended February 29, 2004 of which 56,794 ounces were commercially produced at an average cash cost of $208 per ounce at the Fazenda Brasileiro Mine.
---------------------------------------------------------------------
Dec. 31, 2005 Dec. 31, 2004 (ten months)
--------------------------------------------------------
Cash Cash
Production Costs(1) Production Costs(1)
--------------------------------------------------------
% % % %
oz. change $/oz change oz. change $/oz change
--------------------------------------------------------
Pre-Commercial
Production:
---------------------------------------------------------------------
Fazenda Nova 7,379 59% - - 2,849 - - -
---------------------------------------------------------------------
Sao Francisco 4,843 51% - - 3,214 1036% - -
---------------------------------------------------------------------
12,222 102% - - 6,063 2042% - -
--------------------------------------------------------
Commercial
Production:
---------------------------------------------------------------------
Fazenda Nova 28,780 - $208 - - - -
---------------------------------------------------------------------
Fazenda
Brasileiro 74,570 (5%) $320 56% 78,168 38% $205 (1%)
---------------------------------------------------------------------
103,350 32% $289 41% 78,168 38% $205 (1%)
--------------------------------------------------------
115,572 37% $289 41% 84,231 48% $205 (1%)
---------------------------------------------------------------------
---------------------------------------------------------------------
Feb. 29, 2004
------------------------------------
Cash
Production Costs(1)
------------------------------------
% %
oz. change $/oz change
------------------------------------
Pre-Commercial Production:
---------------------------------------------------------------------
Fazenda Nova - - - -
---------------------------------------------------------------------
Sao Francisco 283 - - -
---------------------------------------------------------------------
283 - - -
------------------------------------
Commercial Production:
---------------------------------------------------------------------
Fazenda Nova - - - -
---------------------------------------------------------------------
Fazenda Brasileiro 56,794 - $208 -
---------------------------------------------------------------------
56,794 - $208 -
------------------------------------
57,077 - $208 -
---------------------------------------------------------------------
(1) Non-GAAP measure - A cautionary note of non-GAAP measures follows
this Management's Discussion and Analysis of Operations and
Financial Condition.
Of the 103,350 commercially produced gold ounces during the year, 28,780 ounces were from the Fazenda Nova Mine at an average cash cost of $208 per ounce and 74,570 ounces were from the Fazenda Brasileiro Mine at an average cash cost of $320 per ounce. These cost levels compare favourably for the Fazenda Nova Mine from the previous quarter and represents an increase for the Fazenda Brasileiro Mine. Combined cash costs for the fourth quarter were $282 per ounce, a decrease of 3.1% from cash costs of $291 per ounce for the quarter ended September 30, 2005. NOTE: To view the 'Production Profile - Commercial Production' graph, please visit the following link - http://www.ccnmatthews.com/docs/pp0320.pdf NOTE: To view the 'Production Profile - Total Production' graph, please visit the following link - http://www.ccnmatthews.com/docs/pp20320.pdf Revenue for the year ended December 31, 2005 was $46 million from the sale of 103,772 ounces of gold compared to revenue of $32.3 million from the sale of 79,822 ounces of gold for the comparative ten month period ended December 31, 2004 and $19.8 million from the sale of 49,989 ounces of gold during the year ended February 29, 2004. Revenue for the year consisted of gold ounces sold from the Fazenda Nova and Fazenda Brasileiro mines. Revenue for the comparative periods consisted only of ounces sold from the Fazenda Brasileiro Mine. Inventory as at December 31, 2005 was $11.4 million compared to $5.9 million as at December 31, 2004. Inventory increased during the year with the start-up of commercial production at the Fazenda Nova Mine, ore being stacked on the heap leach pads at the Sao Francisco Mine and ore being stockpiled at the Chapada Mine which is currently under construction. Of the total inventory on hand as at December 31, 2005, $2.5 million consisted of supplies and materials, $8.3 million of in-circuit and gold in-process inventory and $0.5 million of finished product. Inventory as at December 31, 2005 consisted of approximately 6,700 ounces of gold at the Fazenda Brasileiro Mine, 9,600 ounces of contained gold at the Fazenda Nova Mine, 7,300 ounces of gold at the Sao Francisco Mine and 3.65 million pounds of copper inventories at the Chapada Mine. The contained gold inventory is primarily metal in the processing circuit or production in process. Inventory at the Sao Francisco Mine consisted of ore on the heap leach pads and inventory at Chapada consisted of ore stockpiled. Fazenda Nova Mine Fazenda Nova is an open pit heap leach mine constructed in fiscal year ended December 2004 at a cost of approximately $6.5 million before the capitalization of pre-operating costs. Commercial production at the Fazenda Nova Mine was declared May 1, 2005. The Fazenda Nova Mine has operated above expectations with mine operating earnings of $4.7 million for fiscal 2005 (for the period May 1 - December 31, 2005). Operating earnings for 2006 will include a full year of production. Mine operating earnings from the Fazenda Nova Mine represent approximately 54% of total mine operating earnings for 2005. Mine operating earnings for the fourth quarter were $3.7 million. Construction of the Fazenda Nova Mine was completed during the rainy season of fiscal December 2004. Since then, the Company has undertaken measures to accommodate a heavier than normal rainfall, implemented operational modifications to improve efficiency and reduce costs. A total of 36,159 ounces of gold were produced during the year at the Fazenda Nova Mine at an average recovery rate of 81% of which 28,780 ounces were commercially produced and the remaining 7,379 ounces were produced during pre-commercial activities. An aggregate of 2,849 ounces of gold were produced during the comparative ten month period ended December 31, 2004 during pre-commercial activities. There was no production at the Fazenda Nova Mine for the year ended February 29, 2004. An aggregate of 1.6 million tonnes of ore was stacked on the heap leach pads during the year. During the fourth quarter a total of 506,400 tonnes were stacked, an increase of 5.6% from the previous quarter. Mining costs at an average of $1.56 per tonne steadily decreased throughout the year. Total mining costs for the quarter were $1.40 per tonne, a decrease of 12.5% from $1.60 per tonne for the September quarter. With the initiatives that the Company undertook to improve efficiency, US dollar cash costs per ounce steadily declined during fiscal 2005. This occurred despite the strengthening of the Real vis-a-vis the US dollar with an average exchange rate for 2005 of 2.4348 compared to an average exchange rate for 2004 of 2.9319, an increase of 17%. Additionally, cash costs during the fourth quarter of $177 per ounce were 5% lower than that contemplated in the feasibility study of $186 (life of mine). Cash costs for the year at the Fazenda Nova Mine were $208 per ounce. During the month of January 2006, they averaged $196 per ounce. Historically, the rainy season extends from December to the end of March, during which period, in normal course, cash costs are expected to be higher. The following chart summarizes ore stacked, production and cash costs per ounce for the Fazenda Nova Mine by quarter for fiscal 2005:
--------------------------------------------------------------------
Cash
costs/oz.
Ore Stacked Production (A non-GAAP
(tonnes) (oz.) Measure)
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Pre-commercial 306,900 7,379 -
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Commercial Production:
Second Quarter (as of
May 1, 2005) 272,800 5,676 $ 265
Third Quarter 479,600 10,364 $ 215
Fourth Quarter 506,400 12,740 $ 177
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Commercial Production 1,258,800 28,780 $ 208
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Total Production 1,565,700 36,159 -
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The target production for 2006 is 30,000 to 33,000 ounces. The following table summarizes the major components of total average cash costs per ounce for the Fazenda Nova Mine for the current period:
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December 31, 2005
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Cash Percentage
costs / oz. of cash
(A non-GAAP Measure) costs / oz.
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Mining $ 69 33%
Crushing, agglomeration
and stacking 63 30%
Leaching and solution
neutralization 19 9%
Recovery plant 12 6%
General and
administrative 22 11%
Other (i) 23 11%
----------------------------------
Total $ 208 100%
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(i) Includes by-product revenues
One of the operating efficiency measures implemented during the year at the Fazenda Nova Mine is a coarser grind whereby volume throughput is increased and unit costs decreased. This is intended to maintain the level of total recovered gold ounces at lower unit costs notwithstanding lower recovery rates than in the feasibility study and an increase in the leaching period. The average ore grade for the year from the Fazenda Nova Mine was 0.87 g/t which is consistent with feasibility study grade expectations. Inventory at the Fazenda Nova Mine as at December 31, 2005 of $2.1 million consisted of gold in circuit and gold in process in the amount of approximately 9,600 ounces and materials and supplies. Quantities of recoverable gold placed on the heap leach pads are reconciled by comparing the grades of ore placed on the heap leach pads to the quantities of gold actually recovered, however, the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As such, engineering estimates are refined based on actual results over time. A total of 31,698 ounces of gold were sold during the year from the Fazenda Nova Mine at an average sale price of $458 per ounce for gross sales of $14.5 million. Additionally, 4,694 ounces of gold were sold from pre-commercial production. Sales during the comparative ten month period ended December 31, 2004 from Fazenda Nova production consisted of 1,704 ounces of gold for total gross revenue of $747,100 which was capitalized as part of pre-production activities. Fazenda Brasileiro Mine Fazenda Brasileiro was originally acquired in August 2003 with 2.5 years of remaining reserve life. The objective for the Fazenda Brasileiro Mine is to add resources and convert existing resources into reserves thereby increasing the life of the mine. Current resource estimates support an additional 4 to 6 years of mine life at production levels of 80,000 ounces per year. Operations during the year at the Fazenda Brasileiro Mine were significantly affected by the impact of a strengthened Real vis-a-vis the US dollar, mining of lower grade material, lower recovery rates, and higher prices for consumables. A total of 74,570 ounces of gold were produced from the Fazenda Brasileiro Mine during the year at an average cash cost of $320 per ounce. This compares to 78,168 ounces of gold produced during the comparative ten month period ended December 31, 2004 at an average cash cost of $205 per ounce, representing a decrease of 4.6% in production and an increase of 56% in cash cost per ounce as reported in U.S. dollars. Average cash costs per ounce in reais increased by 21% from the prior ten month period. A total of 56,794 ounces were produced during the year ended February 29, 2004 at an average cash cost of $208 per ounce. The Company anticipated processing lower grade ore at the Fazenda Brasileiro Mine prior to gaining access to higher grade orebodies and areas beneath the existing mine workings for further drilling and exploration. Mining of lower grade material will continue throughout 2006 as development work continues in higher grade lower areas at E-Deep. Mining of the C-Quartz orebody commenced late in the fourth quarter of 2005 and is expected to account for approximately 20% of ore production in 2006 at grades that exceed current levels. The benefits of higher grades are expected after the first quarter of 2006. The average ore grade at the Fazenda Brasileiro Mine for the year was 2.44 g/t compared to 3.13 g/t during the comparative ten month period ended December 31, 2004, a decrease of 22%. Cash costs for the year were affected by a 17% increase in the average annual Brazilian Real/US dollar exchange rate during the year. Additionally, Real denominated cash costs per ounce increased by approximately 21% relative to the comparative ten month period ended December 31, 2004. Cash costs were affected by higher prices for consumables and an increase in maintenance costs. Unit costs were further impacted by lower head grade and recovery rates. Cash costs for the quarter increased by 7.7% from the prior quarter, in US dollar terms. Increases in Real denominated costs for the quarter were most significant in maintenance related expenditures. In September 2005, the Company implemented cost cutting measures at the Fazenda Brasileiro Mine. Such measures included manpower reductions, a move to Company drilling rather than contract drilling, increasing the proportion of parts purchased in Brazil and an increased focus on cost effective purchasing. The impact of such cost cutting measures was offset by an increase in maintenance costs and higher priced consumables such as fuel and energy during the fourth quarter. The cost cutting measures will continue into 2006. Target production for 2006 is 80,000 ounces. Fazenda Brasileiro will be operated at a comparatively lower production rate to allow for cost reductions pending development of E-Deep. Moreover, as E-Deep is developed, further reductions are expected to occur in maintenance costs, in particular as equipment and trucking fleet are upgraded. The following table summarizes the major components of total average cash costs per ounce for the Fazenda Brasileiro Mine:
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December 31, 2005 December 31, 2004
(12 months) (10 months)
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Cash costs Percentage Cash costs Percentage
/ oz. of / oz. of
(A non-GAAP cash costs (A non-GAAP cash costs
Measure) / oz. Measure) / oz.
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Mining $ 170 53% $ 107 49%
Milling 97 30% 63 29%
General and admin 41 13% 37 17%
Other (i) 12 4% 11 5%
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Total $ 320 100% $ 218 100%
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(i) Includes by-product revenues
Mine operating earnings from the Fazenda Brasileiro Mine were $4 million for the year compared with $10.4 million for the ten month period ended December 31, 2004. Mine operating earnings for the fourth quarter were $1.1 million. The average plant recovery rate during the period was 89.3% compared to an average plant recovery rate of 91.9% during the comparative ten month period ended December 31, 2004 and 95.5% during the year ended February 29, 2004. Plant recovery rates continued to be affected by mill feed from carbonaceous ore from open pit material during the year. A total of 191,400 tonnes of open pit ore were mined during the year. Mining of carbonaceous open pit material is expected to be concluded in the first quarter 2006. An aggregate of 35,500 tonnes of carbonaceous open pit material was mined during the fourth quarter. An aggregate of 1.1 million tonnes were milled through the CIP circuit during the year in comparison to 826,400 tonnes milled during the comparative ten month period ended December 31, 2004. An aggregate of 650,000 tonnes were milled during the year ended February 29, 2004. Inventory as at December 31, 2005 at the Fazenda Brasileiro Mine consisted of approximately 6,800 ounces of gold of which 1,100 ounces were finished product and the remaining 5,700 ounces were in-circuit inventory and gold in process. Inventory and gold in process is not included in production for Fazenda Brasileiro and if accounted for would increase production from Fazenda Brasileiro to 80,270 ounces and total production to 121,272 ounces. A total of 72,074 ounces of gold were sold from the Fazenda Brasileiro Mine at an average sale price of $444 per ounce for total gross revenue of $32 million compared to 79,822 ounces during the comparative ten month period ended December 31, 2004 at an average sale price of $409 per ounce for total gross proceeds of $32.6 million. Sales for the year ended February 29, 2004 consisted of 49,989 ounces of gold at an average sale price of $396 per ounce from the Fazenda Brasileiro Mine that was acquired on August 15, 2003. Sao Francisco Mine Sao Francisco is in the normal start up phase of a mine. As at December 31, 2005, ore was being loaded onto the heap leach pads and the crushing circuit was operational. The gravity plant started operating in January 2006. The Company is on track to exceed capacity and will be approaching full capacity at the gravity plant by the end of March 2006. Heap leaching of ore commenced in March 2006. Commercial production from the Sao Francisco Mine is expected to commence during the second quarter of 2006. An aggregate of 572,300 tonnes were stacked on the heap leach pads as of December 31, 2005. This had risen to approximately 800,000 tonnes as of the end of February 2006, consistent with the mine plan. Total construction expenditures as at December 31, 2005 were $64 million or R$150.7 million (including amounts in payables). Construction expenditures were funded by existing cash resources and cash flow from operations. A total of $60.4 million of costs were incurred during 2005 of which $13.7 million were incurred during the fourth quarter. Almost all of the capital costs for the construction of Sao Francisco have been committed to date. Real denominated construction expenditures are forecast to be 14% over budget. This increase of 14% was largely due to higher steel prices, an extension of the power line and an increase in materials related to the intermediate stockpile for the crusher plant which was not contemplated in the feasibility study. Assets under construction as at December 31, 2005 in respect to the Sao Francisco Mine were $63 million and include capitalized pre-commercial production operations and the reallocation of inventory. Average annual production from Sao Francisco is targeted at 108,000 ounces with an initial mine life of approximately 7.5 years. 7. Liquidity and Capital Resources Cash and cash equivalents as at December 31, 2005 were $151.6 million compared to $87.1 million as at December 31, 2004, an increase of 74%. Factors that could impact on the Company's liquidity are monitored regularly and include the market price of gold, production levels, operating cash costs, capital expenditure requirements and obligations under the long term debt facility. The Company currently has adequate funding in place or available to fund its development projects. In addition to its ability to generate cash flow from operations, the Company has also demonstrated its ability to enter into the capital markets and it's ability to obtain debt financing. Cash on hand as at December 31, 2005 increased from the prior year mainly due to the following corporate activities: - draw down of the previously announced $100 million loan facility for the construction and development of the Chapada copper-gold project, - $48.1 million net proceeds received on the early conversion program of its publicly traded warrants which closed in August 2005, and - $105.3 million in net proceeds from a public share equity issue that closed in October 2005. Working capital increased to $139 million compared to $88.9 million as at December 31, 2004 and $35.7 million as at February 29, 2004. Operating Cash Flow Cash flow generated from operations before changes in non-cash working capital items for the year was $6.4 million compared to $9.3 million for the comparative ten month period ended December 31, 2005 and $5 million for fiscal February 29, 2004. Changes in non-cash working capital items for the year consisted of a reduction of $3 million. Cash flow from operations for 2005 consists of operating results from the Fazenda Brasileiro Mine and the Fazenda Nova Mine as of May 1, 2005. Cash flow from operations for the comparative periods consists solely of operating cash flow from the Fazenda Brasileiro Mine. A total of $4 million was incurred as capital costs at Fazenda Brasileiro relating to the development of E-Deep. Financing Activities Cash inflows from financing activities for the year ended December 31, 2005 were $250.5 million and included the following: - $48.1 million of net proceeds received on the issue of common shares related to the warrant early conversion program introduced in June 2005, - $105.3 net proceeds received from an equity financing that closed in October 2005, - $1.6 million received on the exercise of options and warrants, and - $100 million advanced under a loan facility for the construction and development of the Chapada copper-gold Project. In addition, an outflow of $4.6 million was incurred during the year in respect of expenditures relating to the loan facility (which have been deferred and amortized over the term of the loan). Cash inflows from financing activities for the fourth quarter consisted mainly of the October 2005 equity financing and were $105.3 million. Financing activities for the comparative ten month period ended December 31, 2004 included net cash inflows of $68.9 million. These cash inflows included an equity financing of 26.4 million common shares for gross proceeds of $76.1 million. Cash inflows from financing activities for the comparative year ended February 29, 2004 were $56.3 million. Equity Financing In August 2005, the majority of the Company's publicly traded warrants were exercised in connection with a Company proposal made to warrant holders in June 2005 to exercise their warrants early as described below under the warrant heading. In October 2005, the Company successfully raised aggregate gross proceeds of $110.9 million (C$130 million) through a share equity issue of 26 million common shares at a price of C$5.00 per share. Issue costs (including underwriter's fees) incurred on the transaction totaled $5.6 million. Debt Financing On April 29, 2005, the Company drew down on a $100 million debt facility for the development of the Chapada copper-gold project from a private investment fund and the lender advanced the funds. Upon drawdown, the funds were deposited in escrow pending perfection and registration of security interests, and receipt of certain authorizations, approvals and opinions relating to the perfection and registration of such security interests. The period for perfection and registration of security interests varied depending on the collateral class and registration process. To accommodate the applicable registration process, the Company and the lender under the facility provided for a two-staged release from escrow. The first $70 million (Series 1 Note Payable) was released on August 8, 2005 and transferred to Brazil and converted into Brazilian reais at an average rate of R$2.35:US$1.00. The remaining $30 million (Series 2 Note Payable) was released on October 7, 2005 and transferred to Brazil and converted into Brazilian reais at an average rate of R$2.2335:US$1.00. The secured notes are for a term of six years bearing interest at a rate of 10.95% per annum. Principal is repayable upon maturity of the notes. The Company has elected to defer interest payments for the first two years at a rate of 12.45% per annum, compounded semi-annually. An aggregate of $6.8 million of interest expense was accrued during the deferral period. The Company may also elect to defer interest payments for the third year at a rate of 13.95% per annum. Interest on the Series 2 note was payable at a reduced rate of LIBOR plus 1.5% prior to release from escrow. A total of $677,700 of interest expense was paid in this regard. Interest expense is capitalized as part of the Chapada project construction costs. As at December 31, 2005, a total of $7.5 million had been capitalized. Upon achieving commercial production at Chapada, interest from this point in time will be expensed. Loan proceeds held in escrow during the period earned interest income of $0.9 million. Interest income earned during the period was netted against Chapada construction costs. Approximately $583,100 of interest income earned on escrow funds were still held in escrow as at December 31, 2005 and subsequently released in January 2006. In addition to commitment fees and 2.5 million warrants issued during the period ended December 31, 2004, the Company issued an additional 2.5 million warrants to the lender upon funding. These warrants have an exercise price of C$4.70 and expire five years from the date of issue. Deferred financing charges in the amount of $1.4 million have been recorded in connection with the 2.5 million warrants. The warrants were recorded at fair value as calculated using the Black-Scholes pricing model. In addition to the issuance of 2.5 million warrants, $4.6 million of expenditures were incurred in connection with the debt financing during the year. This includes legal fees, advisory fees and $2.5 million paid to the lender upon funding and release of the $30 million from escrow. These expenditures were recorded as deferred financing charges and are being amortized over the life of the loan. A total of $1.1 million of amortization has been charged to Chapada construction costs during the year in respect to amortization taken on deferred financing charges. Investing Activities Cash flow from investing activities includes expenditures on fixed assets and construction. A cash outflow from investing activities of $192.6 million for the year consisted of construction related expenditures of $132 million, expenditures on mineral properties of $23.2 million, and property, plant and equipment acquisitions of $5.8 million. Additionally, investing cash outflows include $18.9 million advanced to RNC Gold Inc. and $12.6 million expended on other assets. This compares to an outflow of $27.1 million for the comparative ten month period ended December 31, 2004 and $28.1 million for the comparative year ended February 29, 2004 which included the acquisition of the Fazenda Brasileiro Mine for $22.1 million. Capital expenditures were as follows:
Dec. 31, Dec. 31, Feb 29,
(in millions of US$) 2005 2004 2004
(ten months)
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Construction of Chapada (1) $ 76.7 $ 3.2 $ -
Construction of Sao Francisco (1) 55.3 1.9 -
Construction of Fazenda Nova (1) - 6.5 0.1
Acquisition of Fazenda Brasileiro - - 22.1
Exploration 15.4 4.8 2.5
Capital expenditures at Fazenda
Brasileiro 8.3 8.2 1.7
Capital expenditures at Fazenda Nova 2.6 -
Feasibility studies 1.1 1.5 0.3
Mineral rights 0.9 -
Other 0.7 0.4 1.4
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$ 161.0 $ 26.5 28.1
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(1) Net of accounts payable and accrued liabilities
Capital expenditures at the Fazenda Brasileiro Mine included $4 million of mine development costs which includes the development of the underground ramp to provide access to E-Deep orebody. The remaining expenditures at the Fazenda Brasileiro Mine are primarily expenditures on equipment. Capital expenditures at the Fazenda Nova Mine primarily include expenditures for the construction and development of the heap leach pad lifts. The Company has allocated $148.2 million in the fiscal 2006 budget for capital expenditures. The 2006 capital budget of $148.2 million does not include capital requirements for the construction of Sao Vicente, Ernesto and C1 Santa Luz as these projects are subject to completion of either feasibility studies or favourable construction decisions. It also excludes capital expenditures relating to RNC and the potential Desert Sun acquisition. Exploration is budgeted at $9.5 million which includes $1.1 million for near-mine and regional exploration at the Fazenda Brasileiro Mine, $3 million on the Itapicuru Green Stone Belt and $3.4 million on the Santa Elina Gold Belt and Sao Vicente region. 8. Capitalization Shareholders' equity as at December 31, 2005 was $315 million compared to $160.3 million as at the fiscal year ended December 31, 2004. Share Capital As at December 31, 2005, the Company had 191.3 million (December 31, 2004 - 122.3 million; February 2004 - 95.1 million) common shares outstanding. The weighted average shares outstanding for the fiscal year end December 31, 2005 was 144.9 million common shares. The Company issued a total of 69.1 million common shares during the year. Of this total, 41.8 common shares were issued in connection with the early exercise of the Company's publicly traded warrants, 26 million common shares were issued in respect to an equity financing and 1.3 million common shares were issued on the exercise of employee stock options and share appreciation rights. The Company issued a total of 41.3 million common shares for net proceeds of $48.1 million pursuant to the early exercise of its publicly traded warrants. An additional 476,198 common shares were issued pursuant to the automatic exchange of warrants that were not exercised during the early exercise period without payment of the exercise price or any additional consideration. The Company completed an equity financing in October 2005 resulting in the issuance of 26 million common shares at a price of C$5.00 per share for total gross proceeds of $110.9 million (C$130 million). The Company plans to use the net proceeds of this financing for the advancement of its mineral properties, potential acquisitions and for general corporate purposes. Warrants As at December 31, 2005, the Company had a total of 5.3 million (December 31, 2004 - 43.4 million; February 2004 - 41.4 million) share purchase warrants outstanding with an average exercise price of C$4.43 per share. Expiry dates on share purchase warrants range from February 2006 to April 2010, and exercise prices range from C$2.09 to C$5.57. All outstanding warrants were exercisable at an average weighted exercise price of C$4.43 per share (December 31, 2004 - C$1.78 per share; February 29, 2004 - C$1.59 per share). The weighted average remaining life of warrants outstanding was 3.9 years (December 31, 2004 - 3.7 years; February 29, 2004 - 4.4 years). As of July 29, 2005, the Company effected an amendment of the terms of its 40,567,656 listed common share purchase warrants in order to encourage the early exercise of the warrants, each of which was exercisable to purchase one common share of the Company at a price of C$1.50 until July 31, 2008. An aggregate of 39,866,635 warrants were exercised during a 30 day voluntary early exercise period expiring on August 29, 2005 at a rate of 1.0356 common shares for each warrant exercised at the exercise price of Cdn.$1.50. This represented approximately 98.3% of the total listed warrants outstanding. An aggregate of 41,285,875 common shares were issued pursuant to the early exercise of the warrants. Upon the expiry of the voluntary early exercise period, the remaining 701,021 warrants were automatically exchanged, without payment of the exercise price or any additional consideration, at a rate of 0.6793 of a common share for each warrant exchanged, which in effect provided a premium to the in-the-money value of the warrant. An aggregate of 476,198 common shares were issued pursuant to the automatic exchange of warrants. This transaction provided total proceeds net of issue costs of approximately $48.1 million that otherwise would not have been available to the Company until July 2008. Proceeds from the early exercise of the warrants are being used for the advancement of the Company's mineral properties and for general corporate purposes. The Company also issued 2.5 million warrants during the period in connection with its loan facility. A nominal 11,234 of non-publicly traded warrants were exercised during the period for cash proceeds of $55,400. Additionally, 47,200 warrants expired during the period. Stock Options and Share Incentive Plan A significant contributing factor to the Company's future success is its ability to attract and maintain qualified and competent people. To accomplish this, the Company has adopted a Share Incentive Plan designed to advance the interests of the Company by encouraging employees, officers and directors, and consultants to have equity participation in the Company through the acquisition of common shares. The Company granted 2.8 million options to employees, officers and directors during the current fiscal year. A total of 1.3 million stock options were granted during the comparative ten month period ended December 31, 2004 and 5.3 million stock options were granted during the year ended February 29, 2004. A total of $2.3 million was charged to operations as stock-based compensation in 2005 with an off-setting credit to contributed surplus in respect to the options issued under the Share Incentive Plan during the year. A total of 1.5 million (December 31, 2004 - 41,000) stock options under the Share Incentive Plan were exercised during 2005. A total of 7.95 million (December 31, 2004 - 6.66 million; February 29, 2004 - 5.5 million) stock options were outstanding as at December 31, 2005 of which all were exercisable (December 31, 2004 - 6.5 million; February 29, 2004 - 5.3 million). Stock options outstanding as at December 31, 2005 had a weighted average exercise price of C$2.67 per share (December 31, 2004 - C$2.04 per share; February 29, 2004 - $1.73 per share) and a weighted average life of 8.16 years (December 31, 2004 - 8.28 years; February 29, 2004 - 9.05 years). 9. General and Administrative Expenses General and administrative expenses were $10.4 million for the year ended December 31, 2005. This compares to $6.2 million for the comparative ten month period ended December 31, 2004 and $4.6 million for fiscal year ended February 29, 2004. General and administrative expenses for the fourth quarter were $4.1 million. General and administrative expenses have increased as a result of growing operations. The Company continues to build its infrastructure and personnel reflecting the construction of the Sao Francisco and Chapada mines. This includes an increase in personnel head count and associated facilities and costs. General and administrative expenses are expected to stabilize at approximately $12.4 million for fiscal 2006. This forecast expense level does not assume the construction of our late stage development projects in 2006, the acquisition of RNC Gold Inc. or the potential Desert Sun acquisition. The acquisition of RNC Gold Inc. is expected to add $300,000 - $400,000 in additional general and administrative costs per annum. The acquisition of Desert Sun would add additional general and administrative expenses annually. Approximately $65,200 of general and administrative costs were incurred in respect to compliance with the SOX 404 during the year. Expenditures relating to compliance are expected to increase significantly in 2006. The Company has reclassified mine general and administrative expenses from mine operating earnings to general and administrative expenses for the comparative period to conform with the decision to centralize various functions and share services among various properties. 10. Foreign Exchange A foreign exchange gain of $0.4 million and loss of $3.1 million was recognized during the year ended December 31, 2005 and during the fourth quarter, respectively. This compares to an exchange gain of $1.8 million recognized for the comparative ten month period ended December 31, 2004 and $0.2 million recognized during the year ended February 29, 2004. The exchange gain of $0.4 million recognized during the year was comprised of an exchange gain in Canada of $1.8 million and an exchange loss in Brazil of $1.4 million. The Company translates non US dollar monetary items at period end rates and recognizes the gain or loss on translation in the period. As such, an unrealized foreign exchange gain is recognized during periods when the Canadian dollar and/or the Real appreciate vis-a-vis the US dollar on a net monetary asset position and an unrealized foreign exchange loss is recognized when the Canadian dollar and/or Real appreciate vis-a-vis the US dollar on a net monetary liability position. The Cdn-US dollar exchange rate as at December 31, 2005 was 1.163 compared to an exchange rate of 1.202 as at December 31, 2004 and 1.1627 as at September 30, 2005. This represents an increase of 3% during the year and 0.02% during the quarter. The Real-US dollar exchange rate as at December 31, 2005 was 2.3407 compared to 2.6544 as at December 31, 2004 and 2.222 as at the end of the third quarter ended September 30, 2005. This represents an increase of 11.8% for the year and a decrease of 5.3% for the quarter. NOTE: To view the 'Average Monthly Brazilian Real and Canadian Dollar vis-a-vis the US Dollar' graph, please visit the following link - http://www.ccnmatthews.com/docs/amb0320.pdf The Company's revenues are denominated in US dollars. However, the Company's expenses are incurred predominantly in Brazilian reais and to a lesser extent in Canadian and US dollars. Accordingly, fluctuations in the exchange rates could significantly impact the results of operations. For as long as this environment of a strong Real continues, the Company plans to hold the majority of its excess cash in Canadian dollars and Brazilian reais. As at year end, the Company held US$1.2 million, C$110.4 million and R$131.4 million. During the year, the Company converted excess cash into reais. Monies converted into reais were subsequently used for capital expenditures in Brazil at a higher Real exchange rate at the time of the expenditure than at the time of the original conversion. This has resulted in a foreign exchange loss and the recognition of capital expenditures at higher Reais historical exchange rates. The Company may consider looking into entering into derivative contracts designed to manage its exposure to movements in the Real against the US dollar, thus protect costs against the appreciation in the Real. 11. Investment Income and Currency Hedging The appreciation of the Real to the US dollar continued to be largely dependent on high interest rates in Brazil wh |