Orosur Mining Regulatory News (OMI)

27 Jan 2005 08:24

Uruguay Mineral Exploration Inc27 January 2005 27 January 2004 Uruguay Mineral Exploration Inc Consolidated Interim Financial Statements For the six month period ended November 30, 2004 (Unaudited - prepared by management) (United States Dollars) Report from the Chairman This is our first opportunity to report since the AGM in London last November.Many thanks to those of you (about 40 in total) who were able to join us on thatoccasion - another pleasing turn-out. Those present saw an excellent 3D graphicwhich clearly showed the distribution of the various orebodies in the Minas deCorrales goldfield, and the opportunities that exist for further "Arenal-style"discoveries. The President, Chris Clark also explained that, because of thecircumstances where we acquired the San Gregorio mill before we had fullyevaluated Arenal, we have had to develop the deposit the "wrong way round". Putsimply, your Company has made a significant discovery, and brought it intoproduction, not only very cheaply, but within eighteen months, a process thatwould normally take up to 5 years. As a result some of the "comfort factors"that one would normally expect for this kind of operation, are still beinggenerated. For example, exploration companies normally have to spend several years, andmillions of dollars, proving up their resources and reserves to the high levelsof confidence demanded by banks and financiers in order to justify the largecapital investment needed for the production facilities. The opportunity toacquire the operating, fully permitted San Gregorio mill arose before we hadfully evaluated Arenal properly. This meant that we had to take a calculatedrisk in acquiring the plant before we actually knew the full dimensions ofArenal. The risks were mitigated by the price paid - a matter of record. Butit also has meant that we are in the unique position of being in production (atsubstantial levels), without a conventional "reserves base". At the AGM, MikeSchwabe explained the reporting regulations and the process that we have to gothrough to define a reportable resources/reserves base. That process isunderway, and we hope to make our first disclosure in mid year, but because weare dealing with a producing asset, this will always be a "moving target". On 15th December 2004 our shares were listed on London's Alternative InvestmentMarket ("AIM"), meeting a commitment that we had given to shareholders. Thishas enabled us to start to expand the UK-based institutions shareholder base.This is particularly important given that in April 2005 almost all the remainingwarrants that we have on issue are scheduled to be exercised. On the exploration front, progress in 2004 was significantly constrained by theneed to focus management attention on San Gregorio - including providingbridging feed for the mill, replacing the mine fleet, renovating the plant,obtaining the permits for Arenal and the tailings dam expansion, arrangingfinance - as well as achieving the AIM listing, all while still managing withinthe limited cash we had available. However, that is now mostly behind us, and 2005 will be a year in which weexpect to see the benefits which will flow from the stronger cash flow fromArenal, the strengthened management team, and the "R & D" that has gone into ourgrass-roots exploration programs. These benefits should also include renewedprogress on the exploration front. The current status of our exploration program and the results from the Minas deCorrales Gold Project are described in more details in the Management Discussionand Analysis which accompany the attached Financial Statement. As a final comment, shareholders should be aware that Uruguay held itsquintennial elections in October last, resulting in the election of a left winggovernment for the first time in its 180 year history. Congratulations toPresident - elect Tabare Vasquez and his new team, with whom UME looks forwardto working in the future. Tony Shearer, Chairman26 January 2005 In accordance with National Instrument 51-102 released by the CanadianSecurities Administrators, the Company discloses that its auditors have notreviewed the un-audited financial statements for the period ended 30 November2004. Uruguay Mineral Exploration Inc. Consolidated Balance Sheets (Unaudited - prepared by management) (United States Dollars) As at As at As at November 30, 2004 May 31, November 30, 2004 2003 (Audited) (restated) $ $ $Assets Current Cash and cash equivalents (Note 9) 2,983,768 4,970,680 3,580,033Accounts receivable 1,789,812 1,442,021 624,981Inventories 4,789,935 4,087,809 5,343,623Prepaid expenses and other 906,238 668,526 434,236 10,469,753 11,169,036 9,982,873 Property, plant and equipment (Note 2) 19,461,660 5,034,228 2,344,731Deferred exploration and development costs (Note 3) 4,371,844 9,665,431 8,862,927Other assets and deferred costs (Note 4) 238,083 125,378 136,405 Total assets 34,541,340 25,994,073 21,326,936 Liabilities Current Accounts payable and accrued liabilities 3,972,676 3,570,273 3,146,720Debt (Note 5) 3,000,000 - -Unrealized fair value of derivatives (Note 10) 1,654,000 - -Deferred payment on equipment (Note 5) 4,986,337 - -Deferred payment on acquisition 200,000 700,000 2,000,000 13,813,013 4,270,273 5,146,720 Asset retirement obligation 1,394,542 1,362,542 939,969Deferred subscriptions (Note 7c) 125,271 - 173,160Total liabilities 15,332,826 5,632,815 6,259,849 Shareholders' EquityEquity instruments (Note 7) 21,257,738 20,817,115 16,729,450Contributed surplus 1,636,204 880,700 570,974Cumulative translation adjustment (18,620) (18,620) (18,620)Deficit (3,666,808) (1,317,937) (2,214,717)Total Shareholders Equity 19,208,514 20,361,258 15,067,087 Total Liabilities and Shareholders Equity 34,541,340 25,994,073 21,326,936 Commitments and contingencies (Note 12) Consolidated Statements of Operations and Deficit (Unaudited - prepared by management) (United States Dollars) Three months ended November 30 Six months ended November 30 2004 2003 2004 2003 $ $Sales 6,328,501 2,512,376 12,406,157 2,512,376 Operating expenses 5,605,510 1,784,165 10,140,764 1,784,165 Contribution margin 722,991 728,211 2,265,393 728,211 Other expensesAmortization, depletion and accretion 660,190 183,820 903,059 183,889Compensation expense - stock based 347,376 - 755,504 510,954Fair value adjustment for derivatives 1,444,000 - 1,654,000 -General and administrative 700,833 365,858 1,042,677 401,574Interest and financing fees 70,922 14,945 266,804 14,945 3,223,321 564,623 4,622,044 1,111,362 Income (loss) before other items and taxes (2,500,330) 163,588 (2,356,651) (383,151) Other itemsInterest and other income 23,003 - 29,069 -Foreign exchange gain (63,655) 39,541 (21,289) 39,541 Income (loss) before taxes (2,540,982) 203,129 (2,348,871) (343,610) Income taxes - - - - Net income (loss) for the period (2,540,982) 203,129 (2,348,871) (343,610) Deficit, beginning of period (1,125,826) (2,417,846) (1,317,937) (1,871,107) Deficit, end of period (3,666,808) (2,214,717) (3,666,808) (2,214,717) Earnings per share data Basic earnings (loss) per share (0.058) 0.005 (0.055) (0.010) Diluted earnings (loss) per share (0.052) 0.005 (0.048) (0.008) Consolidated Statements of Cash Flows (Unaudited - prepared by management) (United States Dollars) Three months ended Six months ended November 30 November 30 2004 2003 2004 2003 $ $Operating activities Net income/(loss) for the period (2,540,982) 203,129 (2,348,871) (343,610)Adjustments for:Amortization, depletion and accretion 660,190 183,820 903,059 183,889Foreign exchange - - - -Fair value adjustment of derivatives 1,444,000 - 1,654,000 -Compensation expense - stock based 347,376 - 755,504 510,954Finance fees - stock based - - 188,146 - (89,416) 386,949 1,151,838 351,233Net change in non-cash working capital balances (31,690) (655,284) (885,302) (632,889)(Note 9(a)) (121,106) (268,335) 266,536 (281,656) Financing activities Proceeds from the issue of share capital, net 203,655 5,185,553 254,477 5,185,553of costsDeferred subscriptions 125,271 176,821 125,271 176,821Proceeds from bank debt, net of costs 1,929,246 - 2,929,246 - 2,258,172 5,362,374 3,306,994 5,362,374 Investing activitiesRefundable deposits (5,232) 30,000 (41,951) 30,001Purchase of property, plant and equipment (2,236,295) (19,260) (3,761,139) (113,339)Payments for exploration (612,647) (448,615) (1,257,352) (852,945)Payments on subsidiaries acquired, net of cash (500,000) (2,161,570) (500,000) (2,161,570)acquired (3,354,174) (2,599,445) (5,560,442) (3,097,853) Increase (decrease) in cash (1,217,108) 2,494,594 (1,986,912) 1,982,865 Cash and cash equivalents, beginning of period 4,200,876 1,085,439 4,970,680 1,597,168 Cash and cash equivalents, end of period (Note 2,983,768 3,580,033 2,983,768 3,580,0339(b)) 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. Significant accounting policies relevant tothese financial statements are as follows: (a) Stock-based Compensation Plan The Company uses the fair value method to measure the cost of awards understock-based compensation plans with the change in fair value reported in thestatements of operations. The Company records a compensation expense whenoptions are issued to employees. Any consideration paid by employees on theexercise of the options is credited to capital stock. Compensation expense isrecorded for options issued to employees, consultants and qualifyingnon-employees. (b) Financial Derivatives The Company's cash flow and profitability are affected by the market price ofgold. To mitigate this risk on a proportion of the company's income that willbe used to repay debt the Company uses financial derivatives. During the period the company entered into spot deferred gold contracts. Thesespot deferred contracts were then restructured into a longer term priceprotection program that matches the Company's debt profile using gold put andcall options. Management believes that these contracts were effective and continue to beeffective in mitigating the company's downside exposure to the gold price.However under the CICA Accounting Guideline 13 "Hedging relationships" it isunlikely that all transactions completed during the period would meet therequirements necessary for hedge accounting. To maintain a consistent policy inthe use of financial derivatives all contracts have been marked to market withthe fair value of the derivative instruments recognized as unrealized gains andlosses in the statement of operations and deficit. (c) Property, plant and equipment Plant and equipment are recorded at cost less accumulated amortization.Plant and equipment are amortized on a straight line method over the estimatedproductive life of the asset. Productive lives for mobile and other equipmentrange from 2 to 5 years, but do not exceed the related estimated life of themine. 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, and are capitalized and charged to operations using theunits of production method based on the estimated life of mine. Amounts shown asdevelopment costs are net of metal recoveries prior to production. Onceproducing, the group expenses open pit stripping costs as incurred. Proceeds from disposition of mineral properties are normally credited to thecapitalized costs with no gain or loss being recognized unless the sale issignificant relative to the particular capitalized property costs. For suchsignificant dispositions, a gain or loss would be recognized. Expendituresattributed to abandoned projects are written off in the year that the project isabandoned. (d) Deferred exploration and development costs The Company is engaged in the acquisition, exploration and development ofexploration properties. The costs of all acquisition, geological, geochemicaland geophysical studies and related direct and indirect overhead expendituresare deferred and carried at cost until the properties to which they relate areplaced into commercial operations, sold or where management has determined thereto be a permanent impairment in value. Mineral properties and development costsincluding acquisition costs, direct mineral exploration costs and capitalizedindirect overheads. These costs are capitalized and deferred until the propertyis in commercial production, when these costs will be depleted as detailed inNote 1(c) above. The costs relating to a property abandoned are written off whenthe decision to abandon is made, or when there has been a delay in developmentactivities that extend beyond three years, unless there is persuasive evidenceto the contrary. During the period the Company's operations at Minas de Corrales reachedcommercial production and $6,550,939 was transferred from deferred explorationand development costs to mineral properties. Regional exploration within theMinas de Corrales district but outside of the designated mining areas willcontinue to be capitalised as deferred exploration and development. 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. (e) Foreign Currency Translation The functional currency of all of the Company's self sustaining mining operationis the United States Dollar ('the US dollar"). For this operation the companytranslates foreign currencies into US dollars on the following basis: - Non-monetary assets and liabilities using historical rates; - Monetary assets and liabilities using period end rates; and - Income and expenses are translated at average rates of exchangeduring the period. Gains and losses arising from the translation of foreign currency balances intoUS dollars and from foreign currency transactions are recorded in earnings. (f) Balances and results for the period to 30 November 2003 have been restatedto reflect year end adjusts for stock options and acquisition accounting. 2. Property, Plant and Equipment November 30,2004 Cost Accumulated Net Book Amortization ValueLand and lease rights $ $ $ 670,670 - 670,670Plant and equipment 12,879,682 11,530,861 1,348,821Mineral properties 7,453,760 7,260,129 193,631 $ $ $ 19,461,660 21,004,112 1,542,452 May 31 2004 (audited) Cost Accumulated Net Book Amortization ValueLand and lease rights $ 670,670 $ - $ 670,670 Plant and equipment 4,225,736 671,843 3,553,893 Mineral properties 809,665 - 809,665 $ 5,706,071 $ 671,843 $ 5,034,228 November 30 2003 (Restated) Cost Accumulated Net Book Amortization ValueLand and lease rights $ 670,670 $ - $ 670,670 Plant and equipment 1,882,538 208,477 1,674,061 Mineral properties - - - $ 2,553,208 $ 208,477 $ 2,344,731 The Arenal project reached commercial production during the quarter. Accumulateddeferred exploration and development costs of $ 6,550,939 relating to the Minasde Corrales project were capitalized and amortized for production during theperiod. 3. Deferred Exploration and Development Costs November 30 May 31, November 30 2004 2004 2003 (audited)Acquisition costs and option payments $ 650,360 $ 1,536,944 $ 1,536,944Exploration, development and other property costs 2,172,395 4,990,339 4,293,340Capitalized indirect overheads, net of exchange gains 1,549,089 3,138,148 3,032,643 $ 4,371,844 $ 9,665,431 $ 8,862,927 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 atNovember 30, 2004 were approximately US$ 825,973. These relate to potentialsite restoration responsibilities associated with exploration activities. Inaddition, as a consequence of the acquisition of the San Gregorio mine, theCompany has assumed full responsibility for the rehabilitation of the miningsite. This obligation is supported by a rehabilitation guarantee ofUS$1,500,000, which guarantee is in turn supported by the sum of US$1,500,000held in escrow in a Canadian Bank. No projects were abandoned in the current period. 4. Other Assets and Deferred Costs November 30 May 31, November 30 2004 2004 2003 (audited)Refundable deposits $ 167,329 $ 125,378 $ 136,405Capitalized debt issue costs 70,754 - - $ 238,083 $ 125,378 $ 136,405 Costs and fees relating to the secured financing facility have been capitalizedand will be amortised over the life of the facilities, commencing December 1,2004. Warrants with a value of $ 188,146 given as compensation for the interimworking capital facility have been expensed. 5. Debt November 30 May 31, November 30 2004 2004 2003 (audited)Drawn debt facilitiesWorking capital facility (a) $ 3,000,000 - -Deferred payment on equipment (b)(c) 4,986,337 - - $ 7,986,337 - - Available debt facilitiesWorking capital facility (a) $ 3,000,000 - -Deferred payment on equipment (b)(c) 4,986,337 - - $ 7,986,337 - (a) On August 8, 2004, the Company entered into a secured $2,000,000 interimworking capital facility with Macquarie Bank Limited. On October 26, 2004 thisinterim facility was increased to $3,000,000. On December 8, 2004 the Companysigned documentation for a secured financing facility of $6,500,000 replacingthe interim working capital facility with Macquarie Bank Limited. This facilitywill provide $1,500,000 for environmental bonds and $5,000,000 for workingcapital needs. The facility will bear interest at a rate of Libor plus 2% and issecured by a general floating charge over all of the Company's assets. (b) On August 5, 2004, Loryser S.A. signed a sale and purchase agreement forthe purchase of $6,349,247 in mine equipment. The equipment is being purchasedon deferred payment terms with an initial payment of 25%, twelve monthlyinstallments equal to 15% and a final balloon payment of 60% 12 months from thedate that equipment is assembled and ready to work. Interest on all balancesoutstanding accrues at the 90 day Libor rates plus 4%. Additional amountsrelating to assembly and freight included in deferred payments on equipment willbe paid following the final commissioning of the equipment. (c) On July 1, 2004, Loryser S.A. signed a sale and purchase agreement for thepurchase of $410,402 in mine equipment. The equipment is being purchased ondeferred payment terms with an initial payment of 25%, seven monthlyinstallments equal to 25% and a final balloon payment of 50% on December 31,2004. This equipment was paid for in full subsequent to period e 6. Related Party Transactions Included in accounts receivable is $nil (2003 - US $39,497) in employee loans.The employee loans were used for the benefit of the Company to provide certainguarantees as required by the Uruguayan Government in relation to prospectingand exploration activities. The entire balance of US $39,497 was repaid on 30November 2004. 7. Equity Instruments (a) Authorized Unlimited number of Common Shares (b) Issued Common shares November 30, 2004 May 31, 2004 Number Amount Number Amount Issued and outstanding, beginning 42,865,413 $ 21,193,763 36,297,080 $ 12,278,459of yearIssued for stock options exercised 386,500 229,631 150,000 44,710Issued for cash - - 2,400,000 4,628,582Issued for exercise of warrants 8,000 24,512 4,018,333 4,242,012for cashIssued and Outstanding 43,259,913 $ 21,447,906 42,865,413 $ 21,193,763Less: cumulative share issue costs - (924,643) (924,643)(1)Balance, end of year 43,259,913 $ 20,523,262 42,865,413 $ 20,269,120 Weighted average number of shares 43,174,913 39,590,211 Warrants November 30, 2004 May 31, 2004 Number Amount Number AmountIssued and outstanding, 2,630,000 $ 547,995 4,008,333 $ 140,000beginning of yearIssued for finance fee 250,000 188,146 - -Issued for private placement - - 2,400,000 500,000Issued as a commission for - - 240,000 50,075private placementExercised (8,000) (1,666) (4,018,333) (142,080)Issued and outstanding, end of 2,872,000 $ 734,475 2,630,000 $ 547,995year Total equity instruments $ 21,257,738 $ 20,817,115 (1) These costs have been recorded gross of any related tax effect, as theultimate utilization of any related tax benefit is currently uncertain. (c) Deferred Subscriptions During the period the company received $ 125,271 ($CDN 150,000) relating to theexercise of 100,000 options at $CDN 1.50 per option. The shares were issued inDecember 2004. (d) Warrants Issued During August 2004, the Company issued 250,000 warrants at an exercise price of$3.75 per share in satisfaction of a financing fee on the facilities detailed atNote 4(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 $US188,146 was attributed to these warrants. (e) Options and Warrants At November 30, 2004, the Company has 2,872,000 (May 31, 2004 - 2,630,000)options and warrants outstanding. During the period, the Company issued 250,000(2003 - 2,640,000) warrants. The outstanding warrants are exercisable asfollows: Number of Warrants Option Price Expiry Date CDN $ 2,622,000 3.75 April 21, 2005 250,000 3.75 August 8, 2006 The Company has a director and employee stock option plan under which it maygrant options to its directors, officers, employees and consultants of theCompany and its subsidiaries. The employee option Plan is for officers,directors and employees of the Company. Options under the plan are typicallygranted in such numbers as reflects the responsibility of the particularoptionee and his or her contribution to the business and activities of theCompany. Options granted under the plan have a term of up to 5 years. Except inspecified circumstances, options are not assignable and terminate on theoptionee ceasing to be employed by or associated with the Company. The terms ofthe plan further provide that the price at which shares may be issued under thePlan cannot be less than the market price (net of permissible discounts) of theshares when the relevant options were granted. The following table summarizes information regarding the Company's outstandingoptions as at November 30, 2004: Weighted Average Exercise Number of Shares Option Price per Share Price Range CDN $ CDN $Options outstanding, May 31, 2003 1,435,000 $0.30 - $1.00 0.53Options - granted 1,420,000 $1.50 - $4.00 2.03Options - exercised (150,000) $0.40 0.40Options outstanding, May 31, 2004 2,705,000 $0.30 - $1.00 0.75Options - granted 676,000 $3.00 - $5.40 3.74Options - exercised (386,500) $0.30 - $1.50 0.73Options outstanding, November 30, 2004 2,994,500 $0.40 - $5.40 1.29 The following table summarizes information about the stock options outstandingto the officers, directors and staff at November 30, 2004: Weighted Average Remaining Options Option price Exercise Price Contractual Life Outstanding CDN $ CDN $ 613,500 $ 0.40 $ 0.40 2.20 years 235,000 $ 0.75 $ 0.75 3.30 years 150,000 $ 1.00 $ 1.00 2.81 years 1,020,000 $ 1.50 $ 1.50 3.76 years 416,000 $ 3.00 $ 3.00 4.51 years 60,000 $ 3.40 $ 3.40 4.55 years 300,000 $ 4.00 $ 4.00 4.44 years 200,000 $ 5.40 $ 5.40 4.98 years 2,994,500 All of the options detailed above are fully exercisable. 8. Segmented 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 Project and the exploration segment is devoted to the acquisitionand exploration of mineral properties. The gold and exploration segments operatesolely in Uruguay. Precious metals are refined and sold in the United Kingdom. November 30 2004 Gold Exploration Corporate TotalFor the 3 months endingSales $ 6,328,501 $ - $ $ 6,328,501 Net income (loss) $ (2,022,165) $ (202,487) $ (316,330) $ (2,540,982) For the 6 months endingSales $ $ $ - $ 12,406,157 12,406,157 Net income (loss) $ (1,395,176) $ (207,463) $ (746,232) $ (2,348,871) As at 30 NovemberProperty, plant and equipment $ 19,251,495 $ 200,156 $ 10,009 $ 19,461,660 Deferred exploration and $ - $ 4,371,844 $ - $ 4,371,844development November 30 2003 Gold Exploration Corporate TotalFor the 3 months endingSales $ $ $ $ 2,512,376 - - 2,512,376 Net income (loss) $ 569,007 $ - $ (365,858) $ 203,149 For the 6 months endingSales $ $ $ $ 2,512,376 - - 2,512,376 Net income (loss) $ $ $ $ 569,007 - (912,597) (343,590) As at 30 NovemberProperty, plant and equipment $ $ $ $ 2,342,213 - 2,418 2,344,631 Deferred exploration and $ - $ $ - $development 8,862,927 8,862,927 Exploration expenditure on the Minas de Corrales gold project and associatedexploration equipment included in property plant and equipment were transferredfrom the exploration segment to the gold segment during the quarter. 9. Supplementary cash flow information (a) The net change in working capital items is as follows: Three months ended November 30 Six months ended November 30 2004 2003 2004 2003 Prepaid expenses and other $ (6,254) $ (133,454) $ (237,712) $ (145,700)Accounts receivable (124,269) (65,747) (347,791) (65,748)Accounts payable and accrued liabilities 71,918 586,640 402,327 621,282Inventory 26,915 (1,042,723) (702,126) (1,042,723)Net change in non-cash working capital $ (31,690) $ (655,284) $ (885,302) $ (632,889)balances (b) Included in cash and cash equivalents is $ 1,500,000 of cash held in escrowto support environmental bonds. This cash was released from escrow subsequentto the end of the period. 10. Financial Derivatives The Company uses financial derivatives to mitigate the effect of certain risksthat are inherent in its business. As at November 30, 2004 the Company hadentered into a number of financial derivatives to reduce its exposure to thegold 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, future prices and volatilities. The nature and level of these contracts aresuch that they offer a degree of downside protection while allowing the companyto participate in price appreciation. The fair value of these contracts is notedbelow. The net value of these contracts have been recorded a liability. November 30, May 31, November 30 2004 2004 2003 (audited)Gold put options $ 271,000 - -Gold call options (1,887,000) - -Gold spot deferred contract (38,000) - - $ (1,654,000) - - The company has entered into put option contracts on 47,500 ounces at a forwardprice of $US 400 per ounce. To cover the cost of the put option contracts thecompany has sold 47,500 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. At 30 November the companyalso had a spot deferred contract for 2,500 ounces at $US 436 per ounce. The increase in the gold price during the period has meant that the combinedfair value of these options has increased from $ 210,000 at August 31, 2004 to $1,654,000 at November 30, 2004. The loss for the quarter of $ 1,444,000represents this movement.. 11. Subsequent Events Subsequent to the period end, 110,000 staff stock options were exercisedproviding proceeds of $CAD 159,000 and 473,000 warrants were exercised providingproceeds of $CAD 1,773,750. 12. Commitments and Contingencies The Company has entered into consultancy and other agreements with variousparties associated with listing on the London Stock Exchange. Commitments underthese agreements are approximately $ 750,000. 13. Differences between Canadian GAAP and International Financial ReportingStandards The Group prepares its financial statements in accordance with Canadian GAAP,which conforms to IFRS in all respects material to the Consolidated FinancialStatements presented by the Group. No significant reconciling items betweenamounts reported under Canadian GAAP and IFRS were identified. Schedule of Deferred Exploration and Development Costs (Unaudited) (United States Dollars) May 31, 04 Expenditures Transfers November 30, 04 Minas de Corrales Gold Project (1) Acquisition 900,000 (900,000) $ - Exploration 2,876,817 869,804 (3,664,946) 81,675 Deferred administration 1,915,587 83,562 (1,985,993) 13,156 5,692,404 953,366 (6,550,939) 94,831 Base Metals Projects (2) Acquisition 105,180 - - 105,180 Exploration 1,268,463 242,596 - 1,511,059 Deferred administration 848,970 23,306 - 872,276 2,222,613 265,902 - 2,488,515 Other Gold Projects (3) Acquisition 480,000 - - 480,000 Exploration 515,309 8,450 - 523,759 Deferred administration 354,235 812 - 355,047 1,349,544 9,262 - 1,358,806 Diamonds Projects (4) Acquisition 65,180 - - 65,180 Exploration 29,606 26,296 - 55,902 Deferred administration 19,356 2,526 - 21,882 114,142 28,822 - 142,964 Regional Exploration (5) Acquisition - - - - Exploration and overhead 286,728 - - 286,728 $ 9,665,431 1,257,352 (6,550,939) $ 4,371,844 No amounts directly related to these projects were expensed. During the sixmonth period ended November 30, 2004, total expenditures for deferredexploration and mineral properties were $1,257,352 (2004 year - $1,655,421). Mineral Properties Portfolio (1) Minas de Corrales Gold Project: The MCGP is situated approximately450 kilometres north of Montevideo and is Uruguay's only operating gold mine.The Corporation controls 100% of this historic gold field, which ischaracterized by widespread gold mineralization. The two largest depositsdiscovered to-date are the San Gregorio deposit, which has produced over 500,000ounces since it was discovered in the mid 1880's, and the Arenal deposit, whichwas discovered in 2003. Arenal, which is still being evaluated, contains aninferred resource of over 750,000 ounces. Mining commenced at Arenal in October2004. Other mineable deposits in the area include Sobre Saliente andCastrillon, where indicated resources of approximately 200,000 and 20,000 ouncesof gold respectively have been delineated. The Company has an aggressiveexploration effort underway in the area targeting further "Arenal-style"deposits. (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 evaluated using a program of detailedgeological mapping and soil sampling. Previous drilling at the Texas prospectintersected high-grade, but narrow width copper/gold/lead/silver mineralization,and the search now is for locations where this mineralization will haveaccumulated in greater thicknesses. At Mal Abrigo, located approximately 140 kmWNW of Montevideo, a large, layered mafic/ultramafic complex is the subject ofstudy for nickel/copper/platinoids. Disseminated copper and nickel sulphidesare visible at the surface in a number of places and work is underway toidentify areas where massive sulphides may have accumulated. At Lascano,located approximately 250 kilometres north-east of Montevideo, a very stronggravity high approximately 70 kilometres long by up to 40 kilometres wide isbeing explored as a nickel/copper/platinoid project. Following the drilling ofa 450 meter-deep stratigraphic hole in 2002, further modeling work has changedthe understanding of the complex. Further geophysical work is required beforenew drill targets can be accurately defined. At Paso del Lugo, (nickel/copper)approximately 250 km north-west of Montevideo, work is suspended pending titlegrant. (3) Other Gold Projects. These include Presidente Terra, which islocated approximately 240 kilometres north east of Montevideo, where workconducted during 2000 and 2001 identified high-grade mineralized float over a 12kilometer strike length of a large gold-mineralized shear system. PresidenteTerra project has been on hold due to competing priorities, but work isscheduled to resume in 2005. Mirta, which is located near Colonia in thesouth-west of Uruguay, is a complex, shear-hosted gold deposit. The deposit ischaracterized by a series of short, plunging, high-grade ore zones containedwithin a broader, low-grade mineralisation envelope. At Chamizo, which islocated approximately 120 km WNW of Montevideo, a gold-bearing metamorphosedacid tuff is being investigated. Drill results released to-date include 11.3metres grading 4.86 g/t Au. (4) Diamonds including Cinco Rios Project. This project is located inthe North of Uruguay and includes the area around Minas de Corrales, as well asthe properties obtained through the acquisition of Cinco Rios SA. Results of aclose-spaced stream sampling program are awaited. The Company has previouslyrecovered several macro-and micro-diamonds, together with kimberlite indicatorminerals (including G10 garnets) in the area and the current work program isdirected at closing down the size of the areas where to source rocks might befound. (5) Regional Exploration. The Company maintains 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. Uruguay Mineral Exploration Inc. Management's Discussion and Analysis November 30, 2004 Management's discussion and analysis ("MD&A") provides a discussion of theCompany's material financial and operating results for the three and six monthsending on 30 November 2004, with comparisons to previous quarters. This MD&Ashould be read in conjunction with the consolidated financial statements andaccompanying notes and represents management's knowledge thereof. The EffectiveDate of this MD&A is January 26, 2005 and all amounts are expressed in UnitedStates currency unless otherwise stated. FINANCIAL RESULTS For the three months to 30 November, 2004 UME incurred a net loss of $2,540,982equal to $0.058 per share compared to a profit of $203,129 or $0.005 per sharefor the second quarter of 2004. Following a profit of $ 192,111 in the firstquarter the year to date loss is $ 2,348,871. Results for the current quarterwere affected by: • Higher operating costs associated with expensing thedevelopment costs at the new Arenal mine; • Unrealized losses of $1,444,000 arising from "mark tomarket" on gold derivatives; and • Compensation "expense" of $347,376 associated withexecutive stock options issued and vesting during the quarter. It should be noted that neither of the latter two items, which must be expensedunder accounting guidelines, are cash items. In particular, the "mark-to-market"on the gold derivatives was done at $451/oz. San Gregorio production at 15,934 ounces of gold was the highest quarterlyproduction since UME acquired the operation in October 2003. Production was 582oz higher than the previous quarter (15,352 oz) and 5,335 oz higher than thecorresponding quarter of the prior year that contained only 2 months ofproduction. Sales revenues for the quarter was $ 6,328,501, a significant increase over thesame period in the prior year which included 2 months of operations and reducedsales due to the recent acquisition of the mine. 14,396 ounces of gold were soldduring the quarter at an average price of $ 422 per ounce. No deliveries intohedge contracts occurred in the quarter. The contribution margin of $ 722,991, was similar to the corresponding quarterof the prior year ($728,221) but considerably lower when compared to the Augustquarter figure of $1,542,402. Higher current quarter costs reflect thedetrimental impact of expensing Arenal development costs, higher maintenancecosts associated with the old mining fleet, a major mill shutdown during theperiod, and increases in the cost of energy. Unit cash operating costs for theNovember quarter were $372 per oz, up significantly when compared to August 2004quarter figure ($295). Amortisation and depletion expense increased to $660,190 in the November quarteras a consequence of transferring historical exploration expenditure relating tothe Minas de Corrales Gold Project to Mine Properties. Amortising of thesecosts commenced during the quarter. In summary, while the quarterly results are affected by abnormal costs (most ofthe costs associated with the development of Arenal were expensed during thisquarter), management is confident that gold production and cost performanceremains on track with projections. This is borne out by December figures(post-period end) which reflect the continued development of Arenal (mill headgrade in December was 2.08 g/t Au, and production was a new record 6,539 oz),and show that operating costs have peaked and are starting to fall. Full production at Arenal is expected to be achieved by the end of February2005. OPERATIONS Mill throughput for the November quarter was 307,993 tonnes, 1.13% higher thanthe previous quarter (August 2004), reflecting higher plant availability, itselfthe result of improved plant maintenance performance. Mill feed for the quarterwas sourced principally from Arenal (44%), Zapucay (29%), and low-gradestockpile material (26%). The balance (1%) came from San Gregorio (Ombu) (1%),where waste development took place principally to produce material for thetailings dam expansion. The ore derived from Arenal was largely lower grade material from the easternmargin of the pit, since access to the richer, western side of the pit wasconstrained by civil works associated with the flood barrier to the CorralesRiver. As a result, the mill head grade for the quarter was 1.70 g/t Au, up 3%over the previous quarter. Mill recovery averaged 94.5%, a slight decline(0.63%) over the previous quarter, reflecting the impact of the near-surfacematerial being sourced from the upper levels of Arenal. This effect wastransitory, and gold recoveries from treating Arenal ore post the reportingperiod are above 95%. Production statistics for the prior 5 quarters are summarized below. Quarter 2 * Quarter 3 Quarter 4 Quarter 1 Quarter 2 FYTD Nov 2003 Feb 2004 May 2004 Aug 2004 Nov 2004 04/05Ore Tonnes Processed 173,623 237,163 257,535 304,551 307,993 612,544Grade (g/t Au) 1.97 1.80 1.56 1.65 1.70 1.67Recovery 91.2% 94.2% 95.0% 95.1% 94.5% 94.8%Gold produced (ounces) 10,017 12,951 12,301 15,352 15,934 31,286 * The San Gregorio operation was acquired with effect from 1 October 2003. Graphical presentation of this production information can be found at UME'swebsite www.uruguayminerals.com. PRODUCTION COSTS Mine operating costs were $ 5,605,510 for the second quarter with an averagecash cost of production of $ 374 per ounce. This compares to $ 4,535,254 andcash operating costs of $ 295 per ounce in the previous quarter. The major reason for the cost increase in the current quarter is that alldevelopment costs for the Arenal mine have been expensed, rather thancapitalized. These costs included site preparation, pre-stripping, and othercivil works. These additional activities, which were undertaken in tightlyconstrained working areas, resulted in lower productivity and higher total andunit costs. These costs were expensed as management took the view that themining activity was of an ongoing nature, and therefore the cost impact willobviously mitigate as mining operations ramp up, and development activitiesscale down. Higher costs were also experienced as a consequence of maintainingthe old fleet during the phasing in of the new Komatsu equipment. These highercosts will reduce with the transition to the new mining fleet, which isscheduled to be complete by the end of January. OTHER REVENUES AND EXPENSES Stock based compensation expense for the quarter was $347,376 which representsthe fair value of 200,000 employee options issued at an exercise prices of $C5.40 per share. The corresponding quarter of 2004 reported no stock basedcompensation expense. The full stock compensation expense for employee options is recognized in thesame period as the options are issued as these options vest on issue. Thischarge to current earnings is high, and results from an assessment calculatedusing the Black and Scholes model. This calculation, whilst an industry standardis subjective, does not necessarily represent the fair market value of theseoptions, and is a non-cash item. The Company will continue to issue stockoptions, as they are an important factor in attracting and retaining the keyemployees needed as the company enters an important growth phase. The use ofoptions in the remuneration package conserves important cash, and provides abenefit to employees that only crystallizes when share price growth occurs. In the current quarter an unrealized non-cash fair value expense of $1,444,000was recorded on financial derivatives bringing the year to date expense to$1,654,000. This loss represents the present value of closing out all futuregold put and call options on 30 November 2004. The loss has occurred as aresult of the increase in gold price to $451 at 30 November 2004. General and administrative expenses increased to $ 700,833, reflecting thestrengthening of the Company's executive group, the allocation of most indirectadministrative costs to G&A rather than to indirect exploration and developmentcosts as was the practice in previous years, and higher Uruguayan capital andfinancing taxes relating to the San Gregorio operation. FINANCIAL POSITION Cash and other liquid resources At November 30, 2004, UME had cash resources of $2,983,768 including cash held