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2008-08-07 05:00:00
TORONTO, ONTARIO–(EMWNews – Aug. 7, 2008) – Gabriel Resources Ltd. (TSX:GBU) –
Highlights
“We now have in place the strongest team we have ever had, both in Toronto and in Romania,” said Alan R. Hill President and CEO. “All of our energy is focused on getting the Rosia Montana Project back on track – laying the groundwork now so that when the project review begins again, we can move forward quickly.”
Financial performance
– Second quarter loss was $16.2 million, or $0.06 per share basic and diluted. Year-to-date loss was $5.3 million, or $0.02 per share basic and diluted.
– The second quarter loss includes a provision for income taxes of $10.7 million related to a reassessment of the fiscal years 2003 and 2004.
– The year-to-date results also include foreign exchange gains, amounting to $9.7 million on EURO cash balances held to finance planned future EURO-denominated development activities.
– A total of $10.5 million was spent on our development projects during the quarter increasing the year-to-date amount to $24.3 million.
Liquidity and capital resources
– Cash, cash equivalents and restricted cash at June 30, 2008 totaled $116.5 million.
– Project related expenditures are expected to total $65 million in 2008, below 2007 levels as the Company placed most activities on hold until environmental impact assessment (the “EIA”) approval.
– The Company is forecasting a cash, cash equivalents and restricted cash position at December 31, 2008 of approximately $65 million.
– Project financing discussions with the Company’s advisors are expected to restart during the third quarter.
Rosia Montana Project Development
Overview
– As discussed in previous annual and quarterly reports, the Project has long faced opposition from a group of foreign-funded non-governmental organizations (“NGOs”), certain Romanian organizations and some members of the Hungarian Government.
– In September 2007, the Minister of Environment announced it was impossible to continue the EIA review process for the Project. He suspended the Technical Assessment Committee (the “TAC”) EIA review meetings, asserting a linkage between a minor procedural certificate and the EIA review process that, we believe, lacks any basis in law.
– As a result of the Minister’s arbitrary action, the Company is focused on doing everything within its power to restart the permitting process. To that end, the Company stepped up its advocacy efforts in Romania and abroad.
– Those efforts have been focused on creating an open and transparent review of the Project. Management’s goal is that these stakeholder outreach efforts will create a non-partisan environment for the Project’s evaluation.
– In addition to stakeholder outreach, the Company continues to ensure that all licenses and approvals are maintained in good standing in order to preserve the value of our investment.
Political Situation
– Romania became a full member of the EU on January 1, 2007. Since accession, however, the country’s ruling coalition has disintegrated, with the departure of two of the parties in government, the first in January and the second in April 2007.
– A minority government comprised of the Liberal party and ethnic Hungarian UDMR party, representing approximately 23 percent of the Parliament, was formed in April 2007 under the sitting Prime Minister.
– Efforts on the part of the minority government to blunt or evade efforts to prosecute cases of high-level corruption were criticized by the European Commission in its January and July 2008 Post Accession Monitoring Reports on Romania.
– In its July 2008 Report, the EU notes that: “Politicization of corruption cases by the Romanian Parliament and the failure of the judicial system to deliver sentences in high-level corruption cases has weakened the public perception of respect for the rule of law.”
– While management is making every effort – legal and political – to restart the EIA review process, it is becoming increasingly likely that a change in government will be required to restart the permitting process.
– Local elections took place in June and the proposed date for national elections is November 23 or November 30, 2008. The election date is expected to be finalized in late August.
– With the expected change in government the Company expects that the obstruction by various government ministries we have seen will be replaced by a fair and open review process.
Environmental/Permitting
– In addition to initiating court challenges designed to frustrate our ability to permit the Project in a timely manner, the opposition has orchestrated the tabling of a “private members bill” in the Romanian Parliament to ban the use of cyanide in mining operations in Romania.
– The industry commission, the third and final commission responsible for reviewing the proposed cyanide ban in mining, amended the bill to ban cyanide in excess of EU limits. The amended bill was placed on the agenda of the Chamber of Deputies on April 15, 2008, whereupon the Chamber decided to have the amended bill sent back to the industry commission for further review.
– It is unclear when or if this bill will re-emerge from the industry commission for vote by Parliament, as the commission awaits clarification from the constitutional commission to determine how to proceed.
– The Company has designed the Project to be compliant with the EU Mine Waste Directive from day one of operations.
– Management continues to believe the proposed ban on cyanide is unlikely to have enough support in Parliament to become law.
– Parliament has begun its summer recess until September. The fall session is expected to be abbreviated because of the national elections, providing only a small window to pass legislation this year.
– In addition to the bill to ban cyanide, one of its Senate co-authors has put forward two new initiatives which would declare Rosia Montana an archaeological and natural reserve, as well as declare Rosia Montana along with certain other areas archeological sites of national importance.
– Similar to the procedures applied to the proposed bill to ban cyanide, specific committees have been assigned to deliberate on these proposed bills. The Reporting deadlines for the lead committees deliberating on the two bills passed during the second quarter 2008 and extensions have been requested.
– The timing of these final reports is uncertain, as are the implications of these bills on our Project given the current legal framework.
Tax Audits
– During the first quarter of 2008, the Company received a tax assessment in the amount of $4.8 million related to a Romanian tax audit, completed during the first quarter of 2008, for the period January 1, 2005 to June 30, 2007.
– On June 24, 2008, the Company received another tax assessment in the amount of $9.7 million for the fiscal years 2003 and 2004 related to a tax audit initiated and completed during the second quarter of 2008.
– While the Company has fully provided for these assessments in the financial statements and paid all of the tax related to the assessments, based on the advice of its professional tax advisors, the Company believes that the tax authorities have misapplied the legislation. As a result, the Company plans to vigorously contest the State’s position in court.
– It is expected to take approximately 18 months to resolve the court cases.
Environmental/Permitting
– The Company filed a lawsuit against the Ministry of Environment and Sustainable Development (MESD), for suspending the permitting TAC review process, in November 2007, with the first hearing taking place on February 20, 2008. The lawsuit is ongoing, and the Company expects the court to rule during 2008.
– The MESD’s suspension of the TAC review process was the most prominent of its efforts to stall the Project. MESD has also withheld final signature on our dam safety permits, which were approved in the spring of 2007 along with a number of other dam safety permits for unrelated projects by a committee of experts. As a result, we may ultimately have to file a second lawsuit against the MESD.
– In the absence of any other extraordinary events, legal or otherwise, we expect these permitting processes to be completed within six months of EIA approval; however at present, most of these other permits and approvals have been stopped by virtue of the suspension of the EIA review process.
Litigation
– Since summer 2007, the Company has lost a number of court cases, causing greater concern for the rule of law in Romania, as well as concern for potential setbacks to the Project.
– Alburnus Maior has commenced legal action in the Alba Court of Appeal seeking an order compelling the National Agency for Mineral Resources (NAMR) to annul the Rosia Montana exploitation concession license, on the basis of a minor administrative fine imposed on state-run mining company Minvest in 2004.
– A similar claim seeking the cancellation of the Rosia Montana mineral license was recently heard by the High Court of Cassation and Justice (the “Supreme Court”) and was rejected on its merits.
Surface Rights
– As a result of the suspension of the EIA review process, on February 1, 2008, the surface acquisition program was suspended indefinitely.
– Construction of the Alba Iulia resettlement site began in summer 2007. Infrastructure was largely completed during the second quarter 2008 and of the 123 homes to be built, 78 homes are under construction of which 60 are expected to be completed by year end with the balance of all homes completed by June 30, 2009.
– It is expected to take another 12 months to complete all 128 homes at the Alba Iulia resettlement site.
– Construction of the resettlement site at Piatra Alba is suspended until EIA approval.
– As of February 2008, when the purchase program was suspended, the Company owns or has options on 77 percent of the homes in the industrial zone, protected area and the buffer zone.
– Once we complete the agreements for institutional properties, our ownership will rise to approximately 85 percent of the three zones of the Project, further demonstrating strong local support for the Project.
Archaeology
– An NGO commenced legal action in the Alba Court of Appeal in 2004 and obtained an annulment with respect to archaeological discharge Certificate No. 4. After a successful appeal to the Supreme Court and a retrial of the matter on its merits in the Brasov Court of Appeal, a second annulment of archaeological discharge Certificate No. 4 was ordered by the Brashov Court of Appeal.
– Gabriel has appealed this second annulment to the Supreme Court. The Company expects the Supreme Court to rule on the case by the end of 2008.
– The opposition has also challenged the issuance of archaeological discharge Certificate No. 5 (“Certificate No. 5”) on grounds similar to their challenge of Certificate No. 4, and this matter is also currently before the Romanian courts.
Financing
– The budgeted expenditures for the Rosia Montana Project for 2008 are approximately $65 million, as the Company placed most activities on hold until the EIA permit is approved. This is the minimum level of expenditures required to maintain the value of our investment.
– The control estimate scheduled for completion during the fourth quarter 2007 has been placed on hold until the EIA permit is approved.
– No further long-lead-time equipment orders will be placed and installment payments under equipment previously ordered will be deferred to the extent possible under the terms of the agreements.
Expected Financing Plan
– Based on a definitive feasibility study completed in early 2006, the cost to construct the Project was estimated at US$638 million.
– The Company has placed the updated cost estimate, referred to as the control estimate, on hold until EIA approval.
– While the estimate is not complete, costs are higher in line with industry-wide factors. Once the EIA is approved, we will update the control estimate and revise our Financing Plan.
– As a result, the updated Financing Plan will look very different from the original Financing Plan announced in the spring of 2006.
Board of Directors / Management Additions
– At the Company’s Annual General Meeting on June 19, 2008, in addition to the eight incumbent Directors who were re-elected, 5 new nominees were elected to the Board of Directors.
– Three of the new members were nominated by Electrum Strategic Holdings LLC, and two were nominated by Newmont Mining Corporation.
– The Company further strengthened its management team – both in Toronto and Romania – during the second quarter of 2008. In Toronto, Jonathan Weisstub joined the Company as Vice President, Corporate Affairs.
– In Romania, Dragos Tanase, who joined in the first quarter 2008 as Vice-President Finance of RMGC, was promoted to Managing Director. Mr. Tanase further strengthened the Romanian team by hiring some of Romania’s top communications, government affairs, legal and financial professionals to join RMGC during the quarter.
– Yani Roditis, Gabriel’s COO, who had been country manager for the past three years, has returned to North America to focus on project engineering and the cost control estimate.
Rosia Montana Project Timeline
– The Company is using all means at its disposal to get the TAC process back on track, even as it continues to evaluate the implications associated with a prolonged delay. Once the TAC process recommences, and in the absence of any other extraordinary events, legal or otherwise, Gabriel anticipates that it would take at least 6 months to:
– complete the EIA approval process;
– complete the purchase of the outstanding properties;
– receive all other permits and approvals, including initial construction permits; and
– update the control estimate and complete the financing plan.
– Construction of the mine would then take approximately 24 months. Ultimately, the Romanian Government determines the timing of issuance of the EIA approval and all other permits and approvals required for the Rosia Montana Project, subject to the Romanian courts dealing with litigation from NGO’s in a timely manner.
About Gabriel
Gabriel is a Canadian based resource company committed to responsible mining and sustainable development in the communities in which it operates. Gabriel is currently engaged in the exploration and development of mineral properties in Romania and is presently engaged in the development of its 80% owned Rosia Montana gold project. For more information please visit the Company’s website at www.gabrielresources.com.
The Company will be hosting its Second Quarter 2008 Conference Call and Webcast Thursday, August 7, 2008 at 9:00 am EST. North American callers dial 1-888-713-4216; International callers dial 617-213-4868 – Participant Passcode: 82502887.
Management’s Discussion and Analysis
This Management’s Discussion and Analysis (“MD&A”) provides a discussion and analysis of the financial condition and results of operations to enable a reader to assess material changes in the financial condition and results of operations as at and for the three-and-six-months ended June 30, 2008 and 2007. The MD&A should be read in conjunction with the unaudited consolidated financial statements and notes thereto (“Statements”) of Gabriel Resources Ltd. (“Gabriel” or the “Company”) as at and for the three-and-six-months ended June 30, 2008 and 2007, as well as the audited Consolidated Financial Statements of the Company as at and for the year ended December 31, 2007 including notes thereto. The Company’s Consolidated Financial Statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“Canadian GAAP”).
All amounts included in the MD&A are in Canadian dollars, unless otherwise specified. This report is dated as of August 6, 2008. Readers are encouraged to read the Company’s Annual Information Form dated March 26, 2008 and the Company’s other public filings, which can be reviewed on the SEDAR website (www.sedar.com).
Overview
Gabriel is a Canadian based resource company committed to responsible mining and sustainable development in the communities in which it operates. Gabriel is engaged in the exploration and development of mineral properties in Romania and is presently developing its 80% owned Rosia Montana gold project (the “Project”).
Our vision is to create value for all of our stakeholders from responsible mining. Our mission is to build Rosia Montana and, as a result, to be a catalyst for sustainable economic, environmental, cultural and community development. As we develop the world-class Rosia Montana project, we will strive to set high standards through good governance, open and transparent communications, and operations and reclamation based on Best Available Techniques – all in the service of sustainable development. Whether the issue is corporate governance, community development, environmental responsibility or operational practices, we pledge to do it right.
As discussed in previous annual and quarterly reports, the Project has long faced opposition from a group of foreign-funded non-governmental organizations (“NGOs”), certain Romanian organizations and some members of the Hungarian Government. During 2007, however, the nature and magnitude of the opposition changed. A change in Romania’s Government, resulting in the appointment of a Minister for the Ministry of Environment and Sustainable Development (“MESD”) who is a member of Romania’s ethnic-Hungarian political union, positioned anti-project political forces to delay the Project. In September 2007, the Minister of Environment announced it was impossible to continue the environmental impact assessment (the “EIA”) review process for the Project. He suspended the Technical Assessment Committee (the “TAC”) EIA review meetings, asserting a linkage between a minor procedural certificate and the EIA review process that, we believe, on the advice of local counsel, lacks any basis in law.
As a result of the Minister’s arbitrary action, the Company is focused on doing everything within its power to restart the permitting process. To that end, the Company stepped up its advocacy efforts in Romania and abroad. Those efforts have been focused on creating an open and transparent review of the Project. Management’s goal is that these stakeholder outreach efforts will create a non-partisan environment for the Project’s evaluation. In addition to stakeholder outreach, the Company continues to ensure that all licenses and approvals are maintained in good standing in order to preserve the value of our investment.
Key Issues
Political Situation
Romania became a full member of the EU on January 1, 2007. Since accession, however, the country’s ruling coalition has disintegrated, with the departure of two of the parties in government, the first in January and the second in April 2007. Open disputes between the presidential and parliamentary branches of government now dominate the political agenda, causing gridlock and delay.
A minority government comprised of the Liberal party and ethnic Hungarian UDMR party, representing approximately 23 percent of the Parliament, was formed in April 2007 under the sitting Prime Minister. In the resulting reshuffle of ministry portfolios, the UDMR negotiated to obtain the Ministry of Environment and Sustainable Development. The new Minister arbitrarily suspended the Project’s EIA review process in September 2007.
The current minority government has seen several resignations, as ministers were charged with corruption, while other officials from the governing party have open files with Romania’s anti-fraud investigators. Efforts on the part of the minority government to blunt or evade efforts to prosecute cases of high-level corruption were criticized by the European Commission in its January and July 2008 Post Accession Monitoring Reports on Romania. In its July 2008 Report, the EU notes that: “Politicization of corruption cases by the Romanian Parliament and the failure of the judicial system to deliver sentences in high-level corruption cases has weakened the public perception of respect for the rule of law.”
While management is making every effort – legal and political – to restart the EIA review process, it is becoming increasingly likely that a change in government will be required to restart the permitting process. With the expected change in government the Company expects that the obstruction by various government ministries we have seen will be replaced by a fair and open review process. Local elections took place in June and the proposed date for national elections is November 23 or November 30, 2008. The election date is expected to be finalized in late August.
In addition to initiating court challenges designed to frustrate our ability to permit the Project in a timely manner, the opposition has orchestrated the tabling of a “private members bill” in the Romanian Parliament to ban the use of cyanide in mining operations in Romania. This is the second time in recent years that a private members bill has been brought forward to ban cyanide. The previous bill was not supported by the Romanian Government and was rejected. The currently proposed bill was initially opposed by the minority government when introduced in April 2007, which argued the merits of mining conducted to high EU standards. The Romanian Government then changed its position without explanation to support the private members bill in June 2007.
Before the bill was introduced into Parliament, three commissions from the Chamber of Deputies reviewed it. The legal commission indicated the proposed bill poses no constitutional concerns in August 2007. The environmental commission rejected the proposed bill in September 2007. The industry commission, the third and final commission responsible for reviewing the proposed cyanide ban in mining, amended the bill to ban cyanide in excess of EU limits. The amended bill was placed on the agenda of the Chamber of Deputies on April 15, 2008, whereupon the Chamber decided to have the amended bill sent back to the industry commission for further review. It is unclear when or if this bill will re-emerge from the industry commission for vote by Parliament, as the commission awaits clarification from the constitutional commission to determine how to proceed.
Against the backdrop of a potential Romanian Parliamentary vote on a ban on the use of cyanide in the mining industry, the Romanian Government is also obliged, pursuant to the terms of the EU Directive 2006/21/EC on the management of waste from extractive industries (the “EU Mine Waste Directive”), to transpose the EU Mine Waste Directive into domestic Romanian law on or before May 1, 2008. While the EU Mine Waste Directive is currently in the process of being transposed into Romania law, there is no firm timetable for the new law to be finalized. The EU Mine Waste Directive provides strict guidelines for the regulation of cyanide usage in ponds and specifically does not contemplate a blanket ban on its use. The Company has designed the Project to be compliant with the EU Mine Waste Directive from day one of operations.
As the current Government represents only a parliamentary minority, proposed bills require the support of a large portion of the opposition parties. Management has spent considerable time informing and educating parliamentarians from all parties on modern mining methods governing the safe use of cyanide. Management believes that a majority of legislators support a strong Romanian mining industry, as evidenced by the rejection of the proposed ban on cyanide by the environmental commission and its amendment by the industry commission to permit cyanide use within EU limits (in accordance with the EU Mine Waste Directive). As a result, management continues to believe the proposed ban on cyanide is unlikely to have enough support in Parliament to become law. Parliament has begun its summer recess until September. The fall session is expected to be abbreviated because of the national elections, providing only a small window to pass legislation this year.
If however, a cyanide ban were to pass, the Company would advocate and pursue all legal avenues possible to have the law overturned, as there are no other economic and environmentally safe technologies available to develop the Rosia Montana Project. While the Company’s legal and political positions would be strong, passage of the cyanide ban would cause further delays in the timeline to develop the Project. In addition, the passage of a cyanide ban would cause management to undertake an impairment test of the recoverability of capital assets and mineral properties.
In addition to the bill to ban cyanide, one of its Senate co-authors has put forward two new initiatives which would declare Rosia Montana an archaeological and natural reserve, as well as declare Rosia Montana along with certain other areas archeological sites of national importance. Similar to the procedures applied to the proposed bill to ban cyanide, specific committees have been assigned to deliberate on these proposed bills. The reporting deadlines for the lead committees deliberating on the two bills passed during the second quarter 2008 and extensions have been requested. The timing of these final reports is uncertain, as are the implications of these bills on our Project given the current legal framework.
Tax Audits
During the third quarter of 2007, tax authorities in Romania initiated various tax audits to assess the appropriateness the Company’s tax filing positions since January 1, 2005. As a consequence of the tax audits being undertaken, during the third quarter 2007, the Company accrued $700 thousand of withholding tax liabilities arising from payments made to non-Romanian resident suppliers of services.
During the first quarter of 2008, the Company received a second tax assessment in the amount of $4.8 million related to a subsequent Romanian tax audit, completed during the first quarter of 2008, for the period January 1, 2005 to June 30, 2007, in respect of the assessment which arose from the disallowance of the application of state tax incentives related to unrealized foreign exchange gains on inter-company debt.
On April 10, 2008, the Company was advised by Romanian tax authorities that they were reopening the fiscal years 2003 and 2004 which had previously been audited.
On June 24, 2008, the Company received another tax assessment in the amount of $9.7 million related to the third tax audit, for the fiscal years 2003 and 2004, initiated and completed during the second quarter of 2008. This assessment also arose from the disallowance of the application of state tax incentives related to unrealized foreign exchange gains on inter-company debt.
While the Company has fully provided for the assessment, in the financial statements, and paid all of the tax related to the assessments, based on the advice of its professional tax advisors, the Company believes that the tax authorities have misapplied the legislation. As a result, the Company plans to vigorously contest the State’s position in court. It is expected to take approximately 18 months to resolve the court cases.
Environmental/Permitting
On September 12, 2007 the Company received a letter from the MESD indicating that the review process for the EIA had been suspended. The MESD based its action on a court challenge by Alburnus Maior, an NGO opposing the Project, regarding the validity of an urbanism certificate wholly unrelated to the EIA review process.
An urbanism certificate is an information document detailing the legal, economic and technical regime for any project, as well as the list of documents needed to apply for a construction permit. It is not a permit or approval, nor does it authorize the undertaking of any activities. Anyone is entitled to ask for an urbanism certificate and the relevant local council is obligated to provide a copy to anyone who asks. Tens of thousands of these documents are provided each year across Romania as a matter of routine. To the Company’s knowledge, only one – the Company’s urbanism certificate – has been annulled in a Romanian court.
The Company’s position, supported by legal counsel, is that an urbanism certificate is not required for the TAC review process. On September 21, 2007, the Company filed an Administrative Complaint against the MESD regarding its decision to suspend the TAC review process. While the MESD responded to the Administrative Complaint on October 19, 2007, the MESD’s fourteen page response failed to address the grounds of the complaint. As a result, the Company filed a lawsuits against the MESD as well as the Minister himself and the State Secretary in November 2007, with the first hearing taking place on February 20, 2008. The lawsuits are ongoing, and the Company expects the court to rule during 2008.
The MESD’s suspension of the TAC review process was the most prominent of its efforts to stall the Project. MESD has also withheld final signature on our dam safety permits, which were approved in the spring of 2007 along with a number of other dam safety permits for unrelated projects by a committee of experts. While all other dams approved by the committee promptly received their necessary permits, our permits alone await final signature by the MESD. The Company filed an Administrative Complaint with the MESD regarding the withholding of the dam safety permits, a required precursor to litigation, in February 2008. The MESD reconvened an extraordinary second meeting of the dam safety committee in March 2008, requesting that they reconsider their earlier decision to grant RMGC its permits. The dam safety committee again voted to grant RMGC its permits. Despite this second meeting, the MESD continues to withhold the final signature for our dam safety permits. As a result, we may ultimately have to file a second lawsuit against the MESD.
While the EIA is by far the most important Project permit, there are a number of other permits and approvals required to advance the Project, such as the zonal urbanistic plans for the industrial and protected areas, the forestry and land use change permits, dam safety permits as well as other permits and approvals that follow the EIA approval, to obtain the construction permit. The processes for each of these permits and approvals were underway in parallel with the EIA review process. In the absence of any other extraordinary events, legal or otherwise, we expect these permitting processes to be completed within six months of EIA approval; however at present, most of these other permits and approvals have been stopped by virtue of the suspension of the EIA review process.
Litigation
A number of foreign-funded NGOs, including the Hungarian-registered Alburnus Maior, the Soros Foundation Romania (formerly Open Society Institute/Romania), the Independent Centre for the Development of Environmental Resources (a “new” NGO formed in 2007 by the members of Alburnus Maior), Terra Mileniul III Foundation and the Center for Legal Resources (working on behalf of Alburnus Maior), have initiated a multitude of legal challenges against virtually every local, regional and national Romanian regulatory authority that has the administrative authority to grant permits, authorizations and approvals for any aspect of the exploration and development of the Project. While few of the actions have been successful and most have been frivolous, they include both civil actions and criminal complaints against both the regulatory authorities and individuals within such regulatory authorities; in general, they claim that such regulatory authorities are acting in violation of Romanian laws and ask for cancellation of the license, permit or approval. Gabriel, through RMGC, has intervened in the majority of these cases in order to ensure that the Romanian courts considering these actions are presented with a legally correct, fair and balanced analysis as to why the various Romanian regulatory authorities’ actions are in accordance with the relevant and applicable laws. While we have designed the Project to follow all applicable laws to protect against permitting delays of the Project, multiple legal challenges that abuse the privileged access to courts enjoyed by NGOs in Romania and the incorrect application of the law in some court decisions increase the litigation uncertainty and potential setbacks to the Project.
Since summer 2007, the Company has lost a number of court cases, causing greater concern for the rule of law in Romania, as well as concern for potential setbacks to the Project. Alburnus Maior has commenced legal action in the Alba Court of Appeal seeking an order compelling the National Agency for Mineral Resources (NAMR) to annul the Rosia Montana exploitation concession license, on the basis of a minor administrative fine imposed on state-run mining company Minvest in 2004. This action is the latest in a series of legal actions initiated by Alburnus Maior seeking the annulment of the Rosia Montana mineral license. A similar claim seeking the cancellation of the Rosia Montana mineral license was recently heard by the High Court of Cassation and Justice (the “Supreme Court”) and was rejected on its merits. The action before the Alba Court of Appeal was suspended pending this ruling by the Supreme Court, and given the similarity of facts between the two cases, the Company remains hopeful that the law will be applied uniformly in the Alba case as well.
Surface Rights
As a result of the suspension of the EIA review process, and in order to align the Company’s activities to the pace of the approval process, management met with the community to discuss a full shut down of the home purchase program. On February 1, 2008, the program was suspended indefinitely.
In an effort to demonstrate continued commitment to the local community in spite of the EIA review suspension, construction of the Alba Iulia resettlement site began in summer 2007. Infrastructure was largely completed during the second quarter 2008 and of the 123 homes to be built, 78 homes are under construction of which 60 are expected to be completed by year end with the balance of all homes completed by June 30, 2009. The access road to the Piatra Alba resettlement site was completed and handed over to the local administration, and tenders for construction for phase one of the new village were received during the second half of 2007. While final construction permits were expected to be issued during the first half of 2008, the Ministry of Forestry has refused to grant our forestry license, essentially preventing RMGC from moving forward on the second resettlement site. In any event, commencement of construction of the resettlement site at Piatra Alba is suspended until EIA approval.
In addition to the private properties required, the Company needs to acquire properties (about 35 percent of the surface area of the Project) which are owned by institutions, including the local administrations of Rosia Montana and Abrud, as well as certain churches and state-owned mining companies. The process to acquire the institutional properties is well underway.
As of February 2008, when the purchase program was suspended, the Company owns or has options on 77 percent of the homes in the industrial zone, protected area and the buffer zone. Once we complete the agreements for institutional properties, our ownership will rise to approximately 85 percent of the three zones of the Project, further demonstrating strong local support for the Project.
Ultimately, the Company’s ability to obtain construction permits for the mine and plant is predicated on securing 100 percent of the surface rights in the industrial zone.
Archaeology
An archaeological review of historic mining activity at Rosia Montana is a critical step in the granting of the construction permit to build the Project. An archaeological discharge is required for all of the area under the footprint of the proposed mine. Over the past five years as our program progressed, we have been granted several discharge permits to acknowledge completion of the archaeological program.
Here as on other issues, the opposition has used the Romanian courts to challenge the actions of the various Ministries of the Romanian Government. An NGO commenced legal action in the Alba Court of Appeal in 2004 and obtained an annulment with respect to archaeological discharge Certificate No. 4. After a successful appeal to the Supreme Court and a retrial of the matter on its merits in the Brasov Court of Appeal, a second annulment of archaeological discharge Certificate No. 4 was ordered by the Brasov Court of Appeal. Gabriel has appealed this second annulment to the Supreme Court. The Company expects the Supreme Court to rule on the case by the end of 2008. If archaeological discharge Certificate No. 4 is ultimately annulled, then Gabriel will reapply for a new discharge certificate based on the recommendations cited in the Supreme Court decision.
The opposition has also challenged the issuance of archaeological discharge Certificate No. 5 (“Certificate No. 5”) on grounds similar to their challenge of Certificate No. 4, and this matter is also currently before the Romanian courts.
Financing
Cash, cash equivalents at June 30, 2008 totaled $116.5 million. During the second quarter of 2008, we spent $10.5 million for Project development activities compared to $22.2 million in the second quarter of 2007. The higher expenditure rate in 2007 reflects the commencement of the acquisition of properties, which began in the fourth quarter of 2006 and extended throughout 2007, as well as ordering of long-lead-time equipment in addition to other permitting activities. The higher levels of expenditures in 2007 were in response to and in anticipation of Project permitting approval by the Romanian Government in the third quarter of 2007.
The budgeted expenditures for the Rosia Montana Project for 2008 are approximately $66 million, as the Company placed most activities on hold until the EIA permit is approved. This is the minimum level of expenditures required to maintain the value of our investment. The control estimate scheduled for completion during the fourth quarter 2007 has been placed on hold until the EIA permit is approved. No further long-lead-time equipment orders will be placed and installment payments under equipment previously ordered will be deferred to the extent possible under the terms of the agreements. Construction of the Alba Iulia resettlement site will continue while the home purchase program and the development of the Piatra Alba resettlement have been suspended. Once the Company receives the construction permit, the nature and rate of expenditure changes significantly as site construction begins.
Project financing discussions with traditional lenders had been put on hold with the suspension of the EIA process. We expect to restart financing discussions this fall with potential lenders. A key condition to accessing the debt facilities will be acquiring 100 percent of the surface rights in the industrial zone.
Expected Financing Plan
Based on a definitive feasibility study completed in early 2006, the cost to construct the Project was estimated at US$638 million. The Company has placed the updated cost estimate, referred to as the control estimate, on hold until EIA approval. The control estimate updates the feasibility study based on additional engineering undertaken since the definitive feasibility study was prepared, which provides a higher degree of accuracy including firm vendor bids for equipment, materials and labour, as well as incorporating the Company’s actual experience to date in the placing of the long-lead-time equipment orders. While the estimate is not complete, costs are higher in line with industry-wide factors. Once the EIA is approved, we will update the control estimate and revise our Financing Plan. As a result, the updated Financing Plan will look very different from the original Financing Plan announced in the spring of 2006. While the feasibility study cost estimate to build and operate the Project contained contingencies, continued strengthening of currencies against the United States dollar and escalating costs exceed the estimated Project contingencies. Inflationary tendencies in the resource industry are causing many projects’ costs to materially exceed feasibility study estimates.
While the mining industry continues to witness dramatic capital and operating cost escalation, record high gold prices are more than offsetting the higher costs, resulting in record earnings and improved Project returns.
With the recent and well publicized global credit crises in today’s marketplace, credit is more restricted and likely more expensive than management originally contemplated. We believe that based on the recent experience of other mining companies, the high-yield bond market option is closed and we have no basis upon which to predict when it might re-open. While the conventional debt market appears to be open, we believe that any company seeking to finance a project of our magnitude will face additional concerns with respect to a bank’s ability to syndicate the transaction; additionally we will need to address the concerns bankers are likely to raise with respect to estimating the required amount of contingent overrun funding in an environment where capital costs are rising. Historically, contingent funding required by banks has been 10-15 percent of capital cost. In the current market we expect it to be higher. This is expected to result in higher financing costs or possibly a larger equity component.
The Company raised $148.6 million during first quarter of 2007 to bring the total equity raised over the past two years to develop the Project to $241.6 million. The proceeds of the offering were and will continue to be used to finance the development of the Rosia Montana Project, specifically to complete the permitting process, acquire necessary surface rights, in addition to covering the costs of engineering, the ordering of long-lead-time equipment, corporate overhead and the construction of resettlement sites.
Board of Directors / Management Additions
At the Company’s Annual General Meeting on June 19, 2008, in addition to the eight incumbent Directors who were re-elected, 5 new nominees were elected to the Board of Directors. Three of the new members were nominated by Electrum Strategic Holdings LLC, a shareholder (representing 15.0% of the Company’s issued and outstanding shares) and two were nominated by Newmont Mining Corporation, a shareholder (representing 19.7% of the Company’s issued and outstanding common shares). Each of these individuals brings significant industry experience to Gabriel, and we look forward to the contributions they will make as we move the Project forward.
The Company further strengthened its management team – both in Toronto and Romania – during the second quarter of 2008. In Toronto, Jonathan Weisstub joined the Company as Vice President, Corporate Affairs. In addition to his legal background, Mr. Weisstub brings with him extensive experience in politics, having worked in the Canadian Prime Minister’s Office under the Right Honorable Paul Martin. In Romania, Dragos Tanase, who joined in the first quarter 2008 as Vice-President Finance of RMGC, was promoted to Managing Director. Mr. Tanase further strengthened the Romanian team by hiring some of Romania’s top communications, government affairs, legal and financial professionals to join RMGC during the quarter. Yani Roditis, Gabriel’s COO, who had been country manager for the past three years, has returned to North America to focus on project engineering and the cost control estimate.
Project Timeline
– The EIA was submitted in the second quarter of 2006.
– In January 2007, the Company received the list of official questions from the Romanian Government, raised during the public consultation process.
– The Company responded to the questions in the form of an Annex to the EIA, in early May 2007.
– TAC and Espoo Convention meetings went well during the third quarter, until TAC meetings were suspended in September 2007.
The Company is using all means at its disposal to get the TAC process back on track, even as it continues to evaluate the implications associated with a prolonged delay. Once the TAC process recommences and in the absence of any other extraordinary events, legal or otherwise, Gabriel anticipates that it would take at least 6 months to:
– complete the EIA approval process;
– complete the purchase of the outstanding properties;
– receive all other permits and approvals, including initial construction permits; and
– update the control estimate and complete the financing plan.
Construction of the mine would then take approximately 24 months. Ultimately, the Romanian Government determines the timing of issuance of the EIA approval and all other permits and approvals required for the Rosia Montana Project, subject to the Romanian courts dealing with litigation from NGOs in a timely manner.
2008 Outlook
With the current suspension of the EIA review process, our key objectives for 2008 include:
1. Pursuing all political and legal means to get the EIA review process back underway;
2. Obtaining approval of our EIA and all other required permits;
3. Ensuring that the Company maintains all existing licenses and approvals in good standing;
4. Reviewing all Project activities with a goal of reducing spending until the EIA permitting process is underway;
5. Ensuring that we maintain all activities that will position the Company to gain all approvals once the EIA permitting process is recommenced; and
6. Strengthening dialogue and communications with all stakeholders.
Results of Operations
The results of operations are summarized in the following tables, which have been prepared in accordance with Canadian Generally Accepted Accounting Principles:
in thousands of Canadian dollars 2008 Q2 2008 Q1 2007 Q4 2007 Q3
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Statement of Loss (Income)
Loss (Income) $ 16,241 $ (10,970) $ 7,821 $ 6,785
Loss (Income) per share 0.06 (0.04) 0.03 0.03
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Balance Sheet
Working capital 80,513 110,021 118,299 147,157
Total assets 513,965 521,269 507,955 513,490
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Statement of Cash Flows
Investments in exploration and
development including working
capital 4,375 17,211 24,708 15,448
changes
Cash flow (used in) provided by 1,015 (52) - (31)
financing activities
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in thousands of Canadian dollars 2007 Q2 2007 Q1 2006 Q4 2006 Q3
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Statement of Loss (Income)
Loss $ 5,966 $ 2,471 $ 5,103 $ 2,156
Loss per share 0.02 0.01 0.03 0.01
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Balance Sheet
Working capital 199,073 213,440 79,724 120,201
Total assets 503,381 491,356 338,056 330,489
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Statement of Cash Flows
Investments in exploration and
development including working
capital 24,107 13,318 31,490 6,663
changes
Cash flow from financing activities 18,389 152,091 1,953 94,641
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Statement of Loss (Income)
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars,
except per share amounts 2008 2007 2008 2007
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Total operating expenses for the
period $ 4,149 $ 3,899 $ 6,633 $ 6,955
Loss for the period 16,241 5,966 5,271 8,437
Loss per share - basic and diluted 0.06 0.02 0.02 0.04
Total operating expenses for the three-and-six-month periods ending June 30, 2008 remained comparable to the corresponding 2007 periods. Loss for the three-month period ended June 30, 2008 was primarily due to income taxes accrued in response to a Romanian tax assessment received in June 2008. During the second quarter 2008, the Company accrued $9.7 million with respect to the receipt of a third tax assessment, which arose from the disallowance of the application of state tax incentives related to unrealized foreign exchange gains on inter-company debt for the fiscal years 2003 and 2004. In response to the tax assessment received, the Company accrued an additional $1 million in tax liabilities arising from unrealized foreign exchange gains for the six-month period ended June 30, 2008 (2007 – $Nil). The losses in the three-and-six-month periods ended June 30, 2008, are partially offset by interest income and foreign exchange gains on foreign currency cash balances held to finance planned foreign currency expenditures.
We expect to incur operating losses until commercial production commences and revenues are generated.
Expenses
Corporate, General and Administrative
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2008 2007 2008 2007
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Finance $ 353 $ 416 $ 699 $ 579
External communications 210 630 497 1,113
Information technology 142 318 271 655
Legal 586 339 703 581
Payroll 684 785 1,424 1,508
Other 376 540 746 1,015
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Corporate, general and
administrative expense $ 2,351 $ 3,028 $ 4,340 $ 5,451
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Corporate, general and administrative costs — those costs incurred by the corporate office in Toronto — decreased for the three-and-six-month periods ending June 30, 2008 primarily due to lower external communications and information technology costs partially offset by higher legal costs. Corporate, general and administrative costs are anticipated to remain at current levels for the foreseeable future.
Stock Based Compensation
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2008 2007 2008 2007
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DSUs - expensed (recovered) $ 570 $ 130 $ 447 $ (11)
Stock option compensation -
expensed 471 451 990 840
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Stock based compensation -
expensed 1,041 581 1,437 829
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DSUs - capitalized $ 60 $ 9 $ 45 $ (5)
Stock option compensation -
capitalized 282 304 547 602
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Stock based compensation -
capitalized 342 313 592 597
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DSU compensation
----------------
Number of DSUs granted - 5,319 14,793 11,160
Average value ascribed to each
DSU granted $ - $ 4.70 $ 1.69 $ 4.48
DSUs expensed and capitalized increased for the three-and-six-months ended June 30, 2008 compared to the same periods of 2007. The increase in DSU costs relates to the increase in our share price during the second quarter of 2008. Initially valued at the market price of the stock at date of issue, DSUs are revalued each period based on the closing share price at the period end, with the difference between the total value of the DSUs at period end compared to the value at the end of the previous period. If the value is higher, as it was at the end of the second quarter of 2008, the difference is charged to the Statement of Loss, increasing costs for the period. If the share price declines, as it did for the six-month period ended June 30, 2007, the lower value of the DSUs is credited against costs during the period. Overall, for the three-month period ended June 30, 2008, our share price increased by $1.07 compared to March 31, 2008 and $0.79 compared to December 31, 2007, while for the same period in 2007, our share price increased by $0.47 from March 31, 2007 but decreased by $0.29 compared to December 31, 2006.
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian
dollars 2008 2007 2008 2007
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Stock option compensation
-------------------------
Number of stock options
granted 5,935,000 450,000 5,935,000 1,405,000
Average value ascribed to
each
option granted $ 1.05 $ 1.63 $ 1.05 $ 1.88
Options granted to corporate
employees,
consultants, officers, and
directors 1,900,000 450,000 1,900,000 930,000
Options granted to
development
project
employees and consultants 4,035,000 - 4,035,000 475,000
The fair value of stock options when granted is typically amortized over the period in which the options vest, which is normally three years. For those options that vest on issuance, the entire fair value of the options is recognized immediately, while for those options that begin to vest after a deferral period, the fair value of the options is amortized proportionately over the total vesting and delay period. For options issued where the vesting occurs upon the achievement of a performance milestone, the fair value of those options is measured and recognized upon achievement of the milestone, which serves as the ‘measurement date’. Fair value of stock options granted to personnel working on development projects is capitalized over the vesting period.
During the second quarter 2008, the Company granted 3 million options which vest upon completion of certain milestones, including approval of the EIA, completion of project financing commitments, loan documentation and first draw down. The estimated fair value of the options will be recognized and capitalized during the period in which the milestones are achieved and the value can be reasonably measured. For the three-and-six-month period ended June 30, 2008, the amount capitalized was $NIL (2007 – $NIL)
Project Financing Costs
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2008 2007 2008 2007
---------------------------------------------------------------------------
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Project financing costs $ 12 $ 214 $ 34 $ 536
For the three-and-six-months ended June 30, 2008, Project financing costs declined compared to the same period of 2007, as a result of financing activities being put on hold due to the suspension of the EIA review process.
Project financing activities include advisory services for the various facilities under our financing plan. Project finance activities are expected to restart during the second half of 2008.
Severance and Termination Costs
In December 2007, in light of the suspension of the EIA review process, the Company announced and enacted plans to scale back activities. In the fourth-quarter 2007, the Company expensed $1.4 million, being its total liability related to the retrenchment of 170 employees in Romania. During the quarter, concurrent with the modification of payment terms of its remaining obligation, the Company accrued a further $668 thousand in respect of its obligation, and has classified its entire outstanding obligation as a current liability.
As at June 30, 2008 the Company paid $1.3 million in termination benefits.
Interest Income
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2008 2007 2008 2007
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Interest income $ 991 $ 2,446 $ 2,334 $ 3,339
Lower interest income in 2008 relates to lower average cash balances and lower interest rates in 2008 compared to 2007. For the remainder of 2008, interest income should decrease as our cash balance declines due to ongoing resettlement site development costs, installment payments made under our long-lead-time equipment orders and corporate and Romanian overhead costs, as well as lower interest rates on cash balances when compared to 2007.
The Company maintains an investment policy that prohibits investments in asset-backed-commercial-paper. As a result, the Company has not been exposed to the credit risk of the asset-backed-commercial-paper market. Approximately 87 percent of cash balances are invested in government guaranteed instruments with the balance invested in Term Deposits.
Foreign Exchange
3 months ended 6 months ended
June 30, June 30,
in thousands of Canadian dollars 2008 2007 2008 2007
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Foreign exchange gain (loss) -
realized $ 3,752 $ (1,158) $ 4,168 $ (1,047)
Foreign exchange gain (loss) -
unrealized (6,115) (3,355) 5,580 (3,774)
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Total foreign exchange gain (loss) $ (2,363) $ (4,513) $ 9,748 $ (4,821)
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During 2007, we converted the majority of our Canadian dollar cash balances to foreign currencies to match anticipated foreign denominated expenditures. In the three-months ended June 30, 2008, the Canadian dollar weakened relative to the remaining foreign currencies acquired, causing unrealized foreign exchange losses in the period. Offsetting these losses were realized foreign exchange gains caused by selling som
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