Orosur Mining Regulatory News (OMI)

13 Oct 2005 16:38

Uruguay Mineral Exploration Inc13 October 2005 13 October 2005 Uruguay Mineral Exploration Inc. Consolidated Interim Financial Statements For the three month period ended August 31, 2005 Management Discussion & Analysisfor the three month period ended August 31, 2005 Management's discussion and analysis ("MD&A") provides a discussion of theCompany's financial and operating results for the quarter ended 31 August 2005,with comparisons to previous quarters. This MD&A accompanies, and should be read in conjunction with, the unauditedinterim financial statements of Uruguay Minerals Exploration Inc ("UME" or "Company") for the three month period ended August 31, 2005. All amounts areexpressed in thousands of US$, unless otherwise indicated. The reader shouldalso refer to the audited financial statements for the two years ended May 312005 and 2004. HIGHLIGHTS Highlights for the quarter ended August 31, 2005 include. • Gold production of 25,163 ounces at an average cash cost of $US 212 per ounce. • Net profit after tax of $ 2,240 K or $ .048 per share. • Cash flow from operations of $ 4,189 K before non cash working capital movements. • Sales were $ 11,721 K and the average price of gold sold was $ 432 per ounce. FINANCIAL PERFORMANCE Sales Sales for the quarter were $ 11,721 K from 26,049 ounces of gold at an averageprice of $ 432 per ounce. This compares to $ 6,077 K in the correspondingquarter of 2004, which resulted from sales of 14,782 ounces of gold at anaverage price of $ 396 per ounce. All gold option contracts expired unexercisedduring the period. The net profit interest attributed to earnings from Arenal during the period was$ 306 K. Operating Earnings Net profit after tax for the quarter was $ 2,240 K or $.048 per share, comparedto $ 192 K or $.004 per share for the first quarter of 2004. Contribution marginfor the quarter was $5,655 K compared to $ 1,543 K in quarter 1 2005. Thisimproved financial performance resulted from the increase in gold production andgold price. Tax expense for the quarter was $ 798 K compared to nil in the correspondingquarter of 2005. Metal Production During the quarter 312,016 tonnes of ore at an average grade of 2.63 g/t wereprocessed at San Gregorio to produce 25,163 ounces of gold. This productionlevel represents the first quarter in which the targeted production rate of100,000 ounces per annum has been achieved. The grade of ore processed during the quarter increased in comparison to theAugust 2004 quarter as Arenal ore represented the primary source of plant feed. 265,505 tonnes or ore and 1,814,505 tonnes of waste were mined during thequarter from the Arenal deposit. The balance of ore treated came fromstockpiles. Production statistics are summarized below. Quarterly production statistics Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year Quarter 1 Aug 2004 Nov 2004 Feb 2005 May 2005 2005 Aug 2005 Ore processed (tonnes) 304,551 307,993 275,849 306,238 1,194,631 312,016Grade processed (g/t Au) 1.65 1.70 2.24 2.67 2.06 2.63Recovery 95.1% 94.5% 95.2% 95.2% 95.0% 95.3%Gold produced (ounces) 15,352 15,934 18,896 24,844 75,026 25,163 Expenses Operating expenses were $ 5,760 K in the August 2005 quarter after deferring$795 K in deferred stripping costs. Cash cost per ounce was $ 212. In the firstquarter of the prior year operating expenses were $ 4,535 K with a cash cost perounce of $ 295. The lower unit cost is attributed to higher production resultingfrom an increase in the average grade of material processed for the quarter to2.63 g/t. Amortisation and depreciation expense increased from $ 243 K in the firstquarter of the prior year to $1,749 K in the current quarter as historicalexploration expenses relating to Arenal and the replacement of the new miningfleet are amortised. Other Revenues and Expenses The unrealized fair value loss on gold derivative transactions was $ 197 K forthe quarter compared to a loss of $ 210 K in the corresponding quarter of theprior year. Stock compensation expense was nil as no employee stock options wereissued during the quarter. FINANCIAL POSITION Cash and other liquid resources At August 31, 2005, UME had cash resources of $ 7,382 K compared to $ 5,501 K at31 May 2005. Cash flow from operations was $ 4,548 K after non-cash workingcapital items contributed $ 359 K. Accounts payable increased during the quarterdue to an accrual for net profit interest. Capital Expenditure Expenditure on property plant and equipment for the quarter was $ 4,103 K ofwhich $ 968 K was financed using deferred equipment purchases. Investments inproperty plant and equipment for the quarter included $ 1,330 K on new miningequipment, $ 400 K on re-furbishment of a exploration drill rig, $186 K ontailings dam construction and $ 260 K on pre-strip of the San Gregorio East andSanta Teresa pits. Near mine site exploration expenditure was $ 439 K for thequarter with an additional $537 exploration expenditure targeted at increasingresources at the San Gregorio operation. Near mine exploration expenditure hasbeen included in property plant and equipment investment. Part of the historical mining fleet was sold during the quarter for proceeds of$300 K. Financing During the quarter the Company agreed to purchase an additional $1,352 K in mineequipment from Komatsu Latin America Corporation. This equipment is beingpurchased on deferred payment terms with an initial payment of 25%, twelvemonthly installments equal to 15% and a final balloon payment of 60% 12 monthsfrom the date that equipment is assembled and ready to work. Interest on allbalances outstanding accrues at the 90 day Libor rates plus 4%. Subsequent to period end, the Company accepted an offer from Macquarie BankLimited to extend its working capital facility in the amount of $2,000 K untilSeptember 30, 2006. The facility availability is subject to finalisingdocumentation and satisfaction of conditions precedents. During the quarter 84,000 employee options were converted into shares to provideproceeds of $ $ 168 K. At August 31, 2005 UME had 250,000 warrants, 2,685,000stock options and 46,191,413 common shares outstanding. EXPLORATION AND DEVELOPMENT Exploration activities during the quarter focused on; • Improving definition of resources at Arenal and San Gregorio, • mapping, soil sampling, geophysical surveys and drilling of regional gold and nickel targets on the Isla Crystallina • regional evaluation work on the Dom Feliciano mobile belt including air photo interpretation and soil sampling. • planning for the Lascano airborne gravity and magnetic survey in the next quarter Arenal and San Gregorio RC and DDH drilling has continued to test the eastern and western extensions ofArenal. Nineteen (19) RC holes (3,015 metres) and four (4) diamond drill holes(763 metres) were completed during the reporting period. The main focus of the Arenal drilling was to complete infill and check drilling,with some step out drilling along strike and down dip on the eastern end of themineralized sequence. This drilling confirmed that the mineralized sequencecontinues but generally with lower grade, however there are indications thatanother high-grade lens is appearing to the south-east at depth. Previous drilling during 2003 identified Ombu, a new resource that represented acontinuation of the San Gregorio system to the west of the historical main pitof San Gregorio. A further RC and diamond drill program aimed at improvingresource definition was undertaken on the Ombu mineralized zone during thequarter. 3,321 meters or RC and 700 meters of diamond drilling were performed.An indicated resource estimate was calculated for this area to a depth of RL0 of768,000 tonnes grading 1.41 g/t Au. During the quarter an RC and diamond drill program commenced at Rieles/SanGregorio East to test the mineralized sequence to the east of the San Gregoriomain pit. Two pits that have previously been filled with waste are being emptiedto allow this program to be finished during early 2006. 2,242 meters of RCdrilling were performed during the quarter. The objective of the Rieles and Ombu programs is to study the potential for there-development of the San Gregorio pit to the east, west and at depth. Regional Gold and Nickel Targets on Isla Cristalina Following the suspension of mining at Zapucay, exploration work re-commenced toassess the potential along the Zapucay shear zone for repetitions of themineralization. Mapping of 20 square kilometers has identified three targetzones. Trenching performed during the quarter identified best results of 2 m at1.9 g/t Au, 2 m at 1.33 g/t Au and 2 m at 6.06 g/t Au. Drilling of target areaswill occur during the November quarter. The Carpentaria Nickel project lies approximately 40 km to the east of Arenal.An extensive sequence of extrusive ultramafic rocks interbedded withcarbonaceous shales and volcanic tuffs is associated with granitic intrusives.Work during the quarter comprised mapping, soil sampling and geophysical surveysover a 25 square kilometer area. Disseminated sulphides (including pentlanditeand pyrrhotite) have been identified by petrographic studies, and coherentnickel soil anomalies up to 0.4% Ni have been outlined. Mapping and geophysicalsurveys are continuing. Dom Feliciano Mobile Belt A consultant was engaged to undertake an interpretation of aerial photography ofthe Isla Patrulla section of the Dom Feliciano Mobile Belt. This work wascommissioned to support ground mapping and geochemical surveys, which have beenundertaken in this area over the past two years. This interpretation confirmedcertain geological theories, and identified seven new targets to be evaluated inconjunction with the existing evaluation program. Geophysical surveys (Max/Min)were also commenced during the quarter. Lascano The Lascano project is located approximately 250 kilometers north east ofMontevideo and comprises a very large and very strong gravity anomalyapproximately 70 kilometers long by up to 40 kilometers wide. Agreement has been reached with Bell Geospace to conduct an airborne gravity andmagnetic survey over the anomaly during the November quarter. Information fromthe survey will become available in late 2005 and following approximately sixmonths of evaluation, a drill program is likely to commence on this project. OUTLOOK The Company plans to maintain plant throughput at an average of 100,000 tonnesper month at an average grade of 2.75 g/t to produce 100,000 ounces of gold forthe 2006 financial year. The cash cost per ounce is targeted to be approximately$200/oz per ounce. Critical non-controllable elements in achieving this costtarget are fuel and electricity prices, which are both subject to marketadjustments. FINANCIAL INSTRUMENTS UME does not enter into financial instruments for trading or speculativepurposes. The levels of derivatives contracts entered into will be consistentwith forecast production and must ultimately be capable of satisfaction throughby delivery. The Company currently has put option contracts totaling 25,000 ounces at aforward price of $US 400 per ounce. To cover the cost of the put optioncontracts the company has sold 25,000 call options at a forward price of $US 436per ounce. The put and call options are matched in timing and will be deliveredinto on a monthly basis at a rate of 2,500 ounces per month. Subsequent to period end, the Company entered into an additional 10,000 ouncesof gold option contracts. The Company has purchased 10,000 put options at astrike price of $ 430 per ounce and 10,000 call options at a strike price of $486.5 per ounce. Put and call options are equally matched with deliveries of2,500 ounces per month commencing July 2006. The Company has established a policy that permits a maximum of 25% of plannedmonthly production to be hedged for a period of 18 months. Given currentproduction levels this equates to 37,500 ounces over an 18 month period. Thislevel of hedging is considered a prudent level to protect short term plansagainst an unfavorable movement in the price of gold. RELATED PARTY TRANSACTIONS The Company has minimal related party transactions. These are disclosed in Note6 to the interim financial statements CONTRACTUAL OBLIGATIONS AND COMMITMENTS There has been no material change to contractual obligations and commitmentssince 31 May 2005. CRITICAL ACCOUNTING ESTIMATES There has been no material change to critical accounting estimates since 31 May2005. QUARTERLY RESULTS Quarterly Results (in thousands of US$ except where otherwise noted) Quarter 1 Quarter 4 Quarter 3 Quarter 2 Quarter 1 Quarter 4 Quarter 3 Quarter 2 August May February November August May February November 2005 2005 2005 2004 2004 2004 2004 2003 Gold sold (ounces) 26,049 22,904 17,591 14,397 14,782 6,541 14,683 12,977Average sales price ($/ 432 422 428 422 396 360 407 399oz)Cash operating cost ($/ 212 229 245 363 295 297 348 362oz) Operating revenues 11,721 10,284 7,874 6,328 6,077 2,512 6,105 5,372Net profit interest (306) (253) - - - - - -Operating expenses (5,760) (5,818) (4,767) (5,468) (4,535) (1,784) (4,510) (4,459)Operating income 5,655 4,213 3,107 860 1,542 728 1,595 913 Administration (592) (1,015) (1,348) (701) (341) (366) (302) (253)Depreciation and (1,749) (1,785) (1,293) (694) (243) (183) (238) (226)amortizationInterest and financing (93) (189) (99) (71) (196) (15) (28) (34)costsStock-based - - - (348) (408) - 0 (310)compensationFair value adjustment (197) 639 831 (1,440) (210)Other 14 71 11 (41) 48 39 (9) (211)Income Tax (798) 610 - - -Net income (loss) for 2,240 2,544 1,209 (2,435) 192 203 1,018 (121)the periodBasic earnings (loss) .048 0.056 0.028 (0.056) 0.004 .005 .024 (.003)per share Cash flow from (used 4,548 2,173 (316) (121) 388 (238) (449) 1,395in) operationsCash from financing 168 2,221 2,719 2,258 1,049 5,363 2,575 1,339Cash invested (2,835) (1,791) (2,490) (3,354) (2,206) (2,630) (291) (3,179)Cash on hand 7,382 5,501 2,898 2,985 4,202 3,581 5,416 4,971 Total Assets 46,635 42,651 37,782 35,644 28,648 21,327 24,805 25,994Shareholders Equity 33,728 31,321 22,513 19,311 21,198 15,067 18,755 20,361 NON GAAP MEASURES Cash flow from operations, contribution margin and cash cost per ounce are notmeasures that have any standardized meaning prescribed by Canadian GAAP and areconsidered non GAAP measures. Therefore these measures may not be comparable tosimilar measures presented by other issuers. These measures have been presentedin this MD&A as additional information regarding the company's financialperformance and financial position. Cash flow from operations is calculated by adding back non-cash items toearnings. Contribution margin has been calculated by deducting operatingexpenses from sales. Operating expenses include movements in inventories anddeferred stripping adjustment but exclude operating depreciation andamortization. Cash cost per ounce are determined according to the Gold Institute Standard andconsist of site costs for all mining, processing, administration, royalties,refining charges, silver credits and inventory adjustments relating to metalproduction. Capital expenditure, depreciation and amortisation and financingcosts are not included. Cash costs are total cash costs divided by gold ouncesproduced. This calculation is detailed below. Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year Quarter 1 Aug 2004 Nov 2004 Feb 2005 May 2005 2005 Aug 2005 Operating expenses (000) 4,535 5,468 4,767 5,818 20,588 5,760Other (000) (13) 317 (134) (123) 47 (424)Total cash costs (000) 4,522 5,785 4,633 5,695 20,635 5,336Gold production in ounces 15,352 15,934 18,896 24,844 75,026 25,163Total cash costs per ounce 295 363 245 229 275 212 Consolidated Balance Sheets(Unaudited, prepared by management)(Thousands of United States Dollars, except where indicated) As at August 31, May 31, 2005 2005 (Audited) $ $Assets Current assets Cash and cash equivalents (Note 9) 7,382 5,501Accounts receivable 2,053 1,785Inventories 6,840 7,170Prepaid expenses and other 778 722 17,053 15,178 Property plant and equipment (Note 2) 21,381 19,675Deferred exploration and development costs (Note 3) 5,528 5,088Deferred income tax assets 989 1,787Other non current assets and deferred costs (Note 4) 1,684 923Total assets 46,635 42,651 Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities 5,598 4,945Deferred payment on equipment (Note 5) 4,730 4,256Unrealized fair value of derivative instruments (Note 10) 377 180 10,705 9,381 Deferred payment on equipment (Note 5) 623 391Asset retirement obligation 1,579 1,558Total liabilities 12,907 11,330 Equity instruments (Note 6) 29,904 29,571Contributed surplus (Note 7) 1,411 1,577Cumulative translation adjustment (19) (19)Retained earnings 2,432 192Total shareholder's equity 33,728 31,321 Total liabilities and shareholder's equity 46,635 42,651 Commitments and contingencies (Note 11) Approved by the Board of Directors "Chris Clark" Director "Tony Shearer" Director Consolidated Statements of Income and Retained Earnings (Deficit)(Unaudited, prepared by management)(Thousands of United States Dollars, except where indicated) Three months ended August 31 August 31 2005 2004 $ $ Sales 11,721 6,078 Net profit interest (Note 11 (a)) (306) -Net sales 11,415 6,078 Operating expenses 5,760 4,535 Contribution margin 5,655 1,543 Other expensesAmortization, depletion and accretion 1,749 243Compensation expense - stock based - 408General and administrative 592 342Fair value adjustment for derivatives 197 210Interest and financing fees 93 196 2,631 1,399 Income before other items and taxes 3,024 144 Other itemsInterest and other income 32 6Foreign exchange gain (18) 42 Income before taxes 3,038 192 Income taxes 798 - Net income for the period 2,240 192 Retained earnings (deficit), beginning of period 192 (1,318) Retained earnings (deficit), end of period 2,432 (1,126) Basic earnings per share 0.048 0,004Diluted earnings per share 0.046 0,004 Basic weighted average no. of shares 46,191,413 42,887,246Diluted weighted average no. of shares 49,126,413 48,759,746 Consolidated Statements of Cash Flows(Unaudited, prepared by management)(Thousands of United States Dollars, except where indicated) Three months ended August 31 August 31 2005 2004 $ $Operating activities Net income for the period 2,240 192Adjustments for:Amortization, depletion and accretion 1,749 243Deferred Stripping (795) -Future Income taxes 798 -Fair value adjustment of derivatives 197 210Compensation expense - stock based - 408Finance fees - stock based - 188 4,189 1,241Net change in non-cash working capital balances (Note 9) 359 (853) 4,548 388 Financing activities Proceeds from the issue of share capital, net of issue costs 168 49Proceeds from bank debt - 1,000 168 1,049 Investing activitiesRefundable deposits - (37)Net proceeds from sale of assets 300Purchase of property, plant and equipment (2,695) (1,551)Payments for exploration (440) (618) (2,835) (2,206) Increase (decrease) in cash 1,881 (769) Cash and cash equivalents, beginning of period 5,501 4,971 Cash and cash equivalents, end of period (Note 9(b)) 7,382 4,202 Notes to Consolidated Financial Statements(Unaudited, prepared by management)(Thousands of United States Dollars, except where indicated) 1. Significant Accounting Policies The consolidated financial statements of the Company have been prepared bymanagement in accordance with Canadian generally accepted accounting principles.The reporting currency used in the United States dollars which is also theCompany's functional currency. The preparation of consolidated financialstatements in conformity with Canadian generally accepted accounting principlesrequires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and accompanying notes.Actual results could differ from those estimates. The consolidated financialstatements have, in management's opinion, been properly prepared using carefuljudgment with reasonable limits of materiality. These interim consolidatedfinancial statements should be read in conjunction with the most recent annualconsolidated financial statements. The significant accounting policies followthat of the most recently reported annual consolidated financial statementsexcept for the following: (a) Property, plant and equipment Pant and equipment are recorded at cost less accumulated amortization. Plantand other equipment are amortized on a straight line method over the estimatedproductive life of the related asset ranging from 2 to 5 years. Productive livesfor mobile and other equipment range from 2 to 5 years, but do not exceed therelated estimated useful life of the asset. Mineral properties Mineral properties include development costs incurred to bring a miningproperty into production, develop new ore bodies or develop mining areas inadvance of production are capitalized and charged to operations using the unitsof production method based on the estimated life of mine. Amounts shown asdevelopment costs are net of metal recoveries prior to production. Property evaluations The Company reviews and evaluates the carrying value of its producing mineralproperties on a periodic basis. Estimated future discounted net cash flows arecalculated for each property using estimated recoverable reserves and/orresources, estimated current commodity price and after deducting estimatedproduction related expenses, capital abandonment and reclamation costs. If thecarrying value of the property exceeds the undiscounted cash flows, animpairment loss will be determined. The impairment loss is measured as theamount by which the carrying amount of the assets capitalized in a cost centerexceeds the fair value. (b) Deferred exploration and development costs The Company is engaged in the acquisition, exploration and development ofexploration properties. All acquisition, exploration such as topographical,geochemical and geophysical studies and related direct and indirect overheadexpenditures, as appropriate, are deferred and carried at cost until theproperties to which they relate are placed into commercial operations, sold orwhere management has determined there to be a permanent impairment in value.Mineral properties and development costs including acquisition costs, directmineral exploration costs and capitalized indirect overheads. These costs arecapitalized and deferred until the property is in commercial production, whenthese costs will be depleted as detailed in Note 1(a) above. The costs relatingto a property abandoned are written off when the decision to abandon is made, orwhen there has been a delay in development activities that extend beyond threeyears, unless there is persuasive evidence to the contrary. The amount recorded as capitalized indirect overheads under deferredexploration and development costs is based on estimates and breakdown betweenexploration and development costs versus general and administrative activities.By their nature, these estimates are based on management's judgment and plannedcourse of action. These estimates are subject to measurement uncertainty and theeffect on the consolidated financial statements for changes in estimates infuture periods could be significant. The recoverability of amounts shown for deferred exploration and developmentcosts is dependent upon the discovery of economically recoverable reserves,continued confirmation of the Company's interest in the underlying concessions,the ability of the Company to obtain the necessary financing to complete thedevelopment and future profitable production or proceeds from disposition orfarm-out of existing mining interests. The total amount recorded for deferredexploration and development costs represents expenditures incurred to date anddoes not reflect nor is it an indicator of present or future values. (c) Measurement uncertainty The value assigned to ore stockpiles, in process inventories and finished metalinventories are based on estimated volumes and grades. These inventories arecosted at average costs of mining, processing and production. Volume and gradeestimates are made relying on assays and other sampling tests. Costing is basedon standard costing principles. By their nature, such estimation methodologiesare subject to measurement uncertainties and the effect on consolidatedfinancial statements of changes in estimates in future periods could besignificant. The amounts recorded for amortization and depletion, deferred stripping, andaccretion of mineral properties and equipment, the liability for assetretirement obligations and the amount recorded for future income taxes are basedon estimates. The impairment test is based on estimates of proved reserves,production rates, mineral prices, future costs and other relevant assumptions.The deferred stripping calculation is based on the stripping ratio of waste toore mined over the life of mine and the estimated future waste mining costs. Bytheir nature, these estimates are subject to measurement uncertainty and theeffect on the consolidated financial statements of changes in estimates infuture periods could be significant 2. Property, Plant and Equipment August 31,2005 (Audited) Accumulated Net Book Cost Amortization Value Land and lease rights $ 671 $ - $ 671Plant and equipment 16,740 3,899 12,841 Mineral properties 9,889 2,020 7,869 $ 27,300 $ 5,919 $ 21,381 May 31 2005 Accumulated Net Book Cost Amortization Value Land and lease rights $ 671 $ - $ 671Plant and equipment 14,234 2,780 11,454 Mineral properties 8,995 1,445 7,550 $ 23,900 $ 4,225 $ 19,675 The Arenal project reached commercial production on October 1, 2004. Accumulateddeferred exploration and development costs of $ 6,551 relating to the Minas deCorrales project were capitalized and amortized on units of production basis. The plant is located on leased land. The lease expires in 2026. No furtherpayments are due on the lease. Included in plant and equipment is $ 271 (2005 -$ 288) of spare parts that are amortized over 5 years. Included in mineralproperties is $ 1,418 (2005 - $ 982) of mine development costs that have not yetbeen amortized as these are pre-stripping and development costs for depositsfrom which production has not commenced. 3. Deferred Exploration and Development Costs May 31, August 31, 2005 2005 (audited) Acquisition costs and option payments $ 775 $ 775Exploration, development and other property costs 3,377 2,972Capitalized indirect overheads, net of exchange gains 1,376 1,341 $ 5,528 $ 5,088 (a) The Uruguay Mining legislation requires all mining titles to be supportedby guarantees for any environmental rehabilitation requirements resulting fromexploration or mining activities. These guarantees are required to be posted bynon-title holders. As a result, certain of the Company's employees, officersand directors have provided personal assets as guarantees. The Company intendsto compensate these individuals in the event that the guarantee is called. TheCompany has also agreed to pay a guarantee fee to the individuals at ratesadvantageous to the Company. This fee is based on the amount of the guaranteeand is negotiated on a case-by-case basis. The total guarantees provided atAugust 31, 2005 were approximately $ 1,005 (2005 - $ 974). These relate topotential site restoration responsibilities associated with explorationactivities. In addition, as a consequence of the acquisition of the SanGregorio mine, the Company has assumed full responsibility for therehabilitation of the mining site. This obligation is supported by arehabilitation guarantee of US$1,500. During the period the sum of US$1,500 heldin escrow to support this guarantee was released and replaced by a letter ofcredit provided by Macquarie Bank. The Company's current site restoration liability in respect of its explorationactivities is not material. 4. Other Non Current Assets and Deferred Costs August 31, May 31 2005 2005 (audited) Refundable deposits $ 140 $ 140Capitalized debt issue costs 181 215Deferred stripping (Note 3(b)) 1,363 568 $ 1,684 $ 923 Costs and fees relating to the working capital facility have been capitalizedand will be amortized over the life of the facilities, commencing December 1,2004. Warrants with a value of $ 188 given as compensation for the interimworking capital facility have been expensed. 5. Debt and Deferred Payment of Equipment. August 31, May 31 2005 2005 (audited) Drawn debt facilitiesWorking capital facility (a) $ - $ -Vendor equipment finance (b)(c) 5,353 4,647 5,353 4,647Less non current portion 4,730 4,256 $ 623 $ 391Available debt facilitiesWorking capital facility (a) $ 2,150 $ 1,000Vendor equipment finance (b)(c) 5,353 4,762 $ 7,503 $ 5,762 (a) On August 8, 2004, the Company entered into a secured $2,000 interimworking capital facility with Macquarie Bank Limited. On October 26, 2004 thisinterim facility was increased to $3,000. On December 8, 2004 the Company signeddocumentation for a secured financing facility of $6,500 replacing the interimworking capital facility with Macquarie Bank Limited. This facility will provide$1,500 for environmental bonds and $5,000 for working capital needs. Thefacility will bear interest at a rate of Libor plus 2%, and is secured by ageneral floating charge over all of the Company's assets. The working capitalfacility is due to expire in February 2006 and the environmental bond facilityin December 2006. (b) On August 5, 2004, a subsidiary of the Company signed a sale and purchaseagreement for the purchase of $6,349 in mine equipment from Komatsu LatinAmerica Corporation. The equipment is being purchased on deferred payment termswith an initial payment of 25%, twelve monthly installments equal to 15% and afinal balloon payment of 60% 12 months from the date that equipment is assembledand ready to work. Interest on all balances outstanding accrues at the 90 dayLibor rates plus 4% and is secured by a pledge over the assets financed. Thenet book value of the equipment under the agreement at May 31, 2005 is $ 5,491. (c) On 15 June 2005 a subsidiary of the Company signed an amendmentto the August 5, 2004 sale and purchase agreement to purchase an additional$1,352 in mine equipment from Komatsu Latin America Corporation. This equipmentis being purchased on deferred payment terms with an initial payment of 25%,twelve monthly installments equal to 15% and a final balloon payment of 60% 12months from the date that equipment is assembled and ready to work. Interest onall balances outstanding accrues at the 90 day Libor rates plus 4%. Additionalamounts relating to assembly and freight included in deferred payments onequipment will be paid following the final commissioning of the equipment. 6. Equity Instruments (a) Authorized Unlimited number of Common Shares (b) Issued Common shares August 31, 2005 May 31, 2005 Number Amount Number Amount (000s) (000s)Issued and outstanding, beginning 46,107 $ 30,308 42,865 $ 21,194of periodIssued for stock options exercised 84 342 612 600Issued for exercise of warrants - - 2,630 8,514for cashIssued and Outstanding 46,191 30,650 46,107 30,308Less: cumulative share issue costs (925) (925)(1)Less: subscriptions receivable (9) -Balance, end of period 46,191 $ 29,716 46,107 $ 29,383Weighted average number of shares 46,191 43,844 Warrants August 31, 2005 May 31, 2005 Number Amount Number Amount Issued and outstanding, 250 $ 188 2,630 $ 548beginning of periodIssued as fee for financing - - 250 188facilities (note 4a)Exercised - - (2,630) (548)Issued and outstanding, end of 250 $ 188 250 $ 188period Total equity instruments $ 29,904 $ 29,571 (1) These costs have been recorded gross of any related tax effect, as theultimate utilization of any related tax benefit is currently uncertain. (c) Warrants Issued During August 2004, the Company issued 250,000 warrants at a exercise price of$3.75 per share in satisfaction of a financing fee on the facilities detailed atNote 5(a). The fair value of these options were estimated using the Black andScholes option pricing model with the following assumptions: Dividend yield(nil), Expected volatility (.4), risk free rate (3%) and a weighed average lifeof 2 years. As such a value of $US 188,146 was attributed to these warrants. At August 31, 2005, the Company has 250,000 (May 31, 2005 - 250,000) warrantsoutstanding. During the period, the Company issued nil (2005 - 250,000)warrants. The outstanding warrants are exercisable as follows: Number of Warrants Option Price Expiry Date CDN $ 250,000 3.75 August 8, 2006 (d) Options Effective June 1, 2004 the Company adopted the recommendations of the CICAHandbook with respect to stock-based compensation and commenced to expense stockoptions granted from June 1, 2004 using the fair value method. Previously, novalue was assigned to stock options or warrants issued in exchange for employee,directors and officers services. The Company has an option Plan for its officers, directors and employees of theCompany. Options under the plan are typically granted in such numbers asreflects the responsibility of the particular optionee and his or hercontribution to the business and activities of the Company. The Company canissue a maximum of 6,000,000 stock options under this plan. Options grantedunder the plan have a term of up to 5 years. Except in specified circumstances,options are not assignable and terminate on the optionee ceasing to be employedby or associated with the Company. The terms of the plan further provide thatthe price at which shares may be issued under the Plan cannot be less than themarket price (net of permissible discounts) of the shares when the relevantoptions were granted. The following table summarizes information regarding the Company's outstandingoptions as at August 31, 2005: Weighted Number of Option Price per Average Exercise Shares Share Range Price (000s) CDN $ CDN $ Options outstanding, May 31, 2004 2,705 $0.30 - $4.00 0.75Options - granted 676 $3.00 - $5.40 3.74Options - exercised (612) $0.30 - $3.00 1.02Options outstanding, May 31, 2005 2,769 $0.40 - $5.40 2.02Options - exercised (84) $0.40 - $3.00 2.61Options outstanding, August 31, 2005 2,685 $0.40 - $5.40 1.94 The following table summarizes information about the stock options outstandingto the officers, directors and staff at August 31, 2005: Options Weighted Average Outstanding Option price Exercise Price Remaining (000,s) CDN $ CDN $ Contractual Life 550 $ 0.40 $ 0.40 1.4 years 235 $ 0.75 $ 0.75 2.5 years 150 $ 1.00 $ 1.00 2.0 years 915 $ 1.50 $ 1.50 3.0 years 275 $ 3.00 $ 3.00 3.7 years 60 $ 3.40 $ 3.40 3.8 years 300 $ 4.00 $ 4.00 3.6 years 200 $ 5.40 $ 5.40 4.2 years 2,685 All of the options detailed above are fully exercisable. For the purposes of stock based compensation, the fair value of each option wasdetermined on the date of granting using the Black-Sholes option pricing modelwith the following assumptions: Dividend yield (Nil) (2005 - Nil), expectedvolatility (0.40) (2005 - range of 0.40 to 0.50), risk-free interest rate (3.0%)(2005 - 3%), and weighted average life of 4.0 years (2005 - 4.0 years). 7. Contributed Surplus The following table summarises the movements in contributed surplus for theperiod ended August 31, 2005 and May 31 2005. August 31, May 31,2005 2005 (audited) Balance, beginning of period $ 1,577 $ 881Expense for the period - 756Transfer on exercise of options 166 60 $ 1,411 $ 1,577 8. Segment Information The Company has three reportable segments: Gold, exploration and corporate. Thecorporate segment is responsible for corporate financing and other businessdevelopment activities for the Company. The Gold segment operates the SanGregorio gold mine and the exploration segment is devoted to the acquisition andexploration of mineral properties. The gold and exploration segments operatesolely in Uruguay. Precious metals are refined and sold in the United Kingdom. 2005 Gold Exploration Corporate Total For the three months endingSales, net of net profit interest $ 11,415 $ - $ $ 11,415Net income (loss) $ 2,464 $ (31) $ (193) $ 2,240 As at August 31, 2005Property, plant and equipment $ 21,222 $ 149 $ 10 $ 21,381Deferred exploration and $ 514 $ 5,014 $ - $ 5,528development 2004 Gold Exploration Corporate TotalFor the three months endingSales, net of net profit interest $ 6,078 $ - $ - $ 6,078Net income (loss) $ 627 $ (5) $ (430), $ 192 As at August 31, 2004Property, plant and equipment $ 5,401 $ 1,182 $ 10 $ 6,593 Deferred exploration and $ - $ 10,310 $ - $ 10,310development 9. Supplementary Cash Flow Information (a) The net change in working capital items is as follows: Three months ended August 31 August 31 2005 2004 Prepaid expenses and other (55) (231)Accounts receivable (265) (224)Accounts payable and accrued liabilities 652 330Inventory 27 (729)Net change in non-cash working capital balances 359 854 (b) Included in cash and cash equivalents is nil (2004- $ 1,500,000) of cashheld in escrow to support environmental bonds. 10. Financial Derivatives The Company holds various forms of financial instruments. The nature of theseinstruments and the Company's operations expose the Company to commodity pricerisk, currency risk, credit risk, and fair value risk. The Company uses financial derivatives to mitigate the effect of certain risksthat are inherent in its business. As at August 31, 2005 the Company had enteredinto a number of financial derivatives to reduce its exposure to fluctuations inthe gold price. These instruments consist of gold option contracts. The companyintends to deliver into these contracts. For these contracts the fair value was calculated using the spot price at periodend, expected future prices and volatilities. The nature and level of thesecontracts are such that they offer a degree of downside protection whileallowing the company to participate in price appreciation. The fair value ofthese contracts is noted below. The net value of these contracts have beenrecorded as a liability. Asset/(liability) August 31, May 31, 2004 2005 Audited Gold put options $ 48 $ 165Gold call options (425) (345) $ (377) $ (180) The Company has entered into put option contracts on 25,000 ounces at a forwardprice of $US 400 per ounce. To cover the cost of the put option contracts thecompany has sold 25,000 call options at a forward price of $US 436 per ounce.The put and call options are matched in timing and will be delivered into on amonthly basis at a rate of 2,500 ounces per month. 11. Commitments and Contingencies In addition, to the commitments detailed in Note 3 on exploration of mineralproperties, the Company has the following commitments: (a) Minas De Corrales Project - the Company finalized the acquisition of100% of the issued capital of Loryser, and in return granted a 10% net profitsinterest from gold obtained from Loryser's areas. The Company had previouslymanaged Loryser as part of the Minas de Corrales Joint Venture. The Company'sArenal gold deposit is situated on the Loryser ground. (b) The Texas and Mal Abrigo interests acquired by the Company are subjectto a 2% net profits interest and a 1% net smelter return respectively, payableto the vendor. 12. Subsequent Events (a) Subsequent to period end, the Company entered into an additional 10,000ounces of gold option contracts. The Company has purchased 10,000 put options ata strike price of $ 430 per ounce and 10,000 call options at a strike price of $486.5 per ounce. Put and call options are equally matched with deliveries of2,500 ounces per month commencing July 2006. (b) Subsequent to period end, the Company accepted an offer from MacquarieBank Limited to extend its working capital facility of $2,000 until September30, 2006. The facility availability is subject to finalising documentation andsatisfaction of conditions precedents. Schedule of Deferred Costs(Unaudited, prepared by management)(Thousands of United States Dollars, except where indicated) Abandonments/ May 31, 05 Expenditures Transfers August 31, 05 Minas de Corrales Gold Project (1) Acquisition $ 125 - - $ 125 Exploration 252 94 - 346 Deferred administration 34 9 - 43 411 103 - 514Base Metals Projects (2) Acquisition 105 - - 105 Exploration 1,806 306 - 2,112 Deferred administration 923 26 - 949 2,834 332 - 3,166Other Gold Projects (3) Acquisition 480 - - 480 Exploration 531 2 - 533 Deferred administration 356 - - 356 1,367 2 - 1,369Diamonds Projects (4) Acquisition 65 - - 65 Exploration 96 3 - 99 Deferred administration 28 - - 28 189 3 - 192Regional Exploration (5) Acquisition - - - - Exploration and overhead 287 - - 287 $ 5,088 440 - $ 5,528 No amounts directly related to these projects were expensed. During the periodended August 31, 2005, total expenditures for deferred exploration and mineralproperties were $ 440 (2005 - $645). Mineral Property Portfolio(Unaudited, prepared by management)(Thousands of United States Dollars, except where indicated) (1) Minas de Corrales Gold Project (MCGP): The MCGP is situatedapproximately 450 kilometers north of Montevideo and features Uruguay's onlyoperating gold mine. The Corporation controls 100% of this historic goldfield, which is characterized by widespread gold mineralization. The twolargest deposits discovered to-date are the San Gregorio deposit, which hasproduced over 500,000 ounces since it was discovered in the mid 1880's, and theArenal deposit, which was discovered in 2004. Arenal, which is now inproduction, contains an inferred resource of over 750,000 ounces, and is stillopen in all directions. Other known, unmined deposits in the area include SobreSaliente and Castrillon, where indicated resources of approximately 200,000 and20,000 ounces of gold respectively have been delineated. The company has anaggressive exploration effort underway in the area targeting further"Arenal-style" deposits within a 50 km radius of the MCGP. (2) Base Metals Projects: These include the Isla Patrulla/Texas copper/gold project where a substantial zone of copper and gold anomalism has beenidentified approximately 300 km north-east of Montevideo. A number of targetshave been identified using a combination of stream geochemistry and airbornegeophysics, and these targets are being progressively tested. Previous drillingat the Texas prospect intersected high-grade, but narrow width copper/gold/lead/silver mineralization, and the object of the current search is for locationswhere this mineralization will have accumulated in greater thicknesses. At MalAbrigo, located approximately 140 km WNW of Montevideo, a large, layered mafic/ultramafic complex is the subject of study for nickel/copper/platinoids.Disseminated copper and nickel sulphides are visible at the surface in a numberof places and work is underway to identify zones where massive sulphides mayhave accumulated. At Lascano, located approximately 250 kilometers north-eastof Montevideo, a very strong gravity high approximately 70 kilometers long by upto 40 kilometers wide is considered to be a capable of hosting Norilsk-stylenickel mineralisation. A detailed airborne airmag/gravity survey is scheduledfor September/October 2005, with the expectation of generating drill targets for2006. At Carpinteria, which is situated approximately 500 km north ofMontevideo, an extensive sequence of komatiitic basalts and ultramafic flowswith strong nickel anomalism is currently being evaluated. (3) Other Gold Projects. These include Presidente Terra, which islocated approximately 240 kilometers north east of Montevideo, where workconducted during 2000 and 2001 identified high-grade mineralized float over a 12km strike length of a large gold-mineralized shear system. This project hasbeen on hold due to competing priorities. Mirta, which is located near Coloniain the south-west of Uruguay, is a complex, shear-hosted gold deposit and thecompany has been assessing the mineralisation controls in order to definefurther drill targets. The deposit is characterized (so far) by a series ofshort, plunging, high-grade ore zones contained within a broader, low-grademineralisation envelope. At Chamizo, which is located approximately 120 km ENEof Montevideo, a gold-bearing metamorphosed acid tuff is being investigated. (4) Diamonds including Cinco Rios Project. This project is located inthe North of Uruguay and includes the Minas de Corrales area as well as theproperties obtained with the acquisitions of Cinco Rios SA. Systematic drainagesampling has identified an area where positive kimberlite indicator minerals areclustered, and a close-space airborne gravity survey is scheduled for October2005. The company has previously recovered several macro-and micro-diamonds,together with G9 and G10 garnets from this area. (5) Regional Exploration. The company has an ongoing program ofidentifying and field-checking geochemical anomalies obtained from reviewingdata held within the company's proprietary data-base. Where appropriatesuccessful prospects are designated and allocated to the major project groupingsshown above. This information is provided by RNS The company news service from the London Stock ExchangeEN