GREAT BASIN DOES JOINT VENTURE WITH HECLA: TO PROCEED WITH PRODUCTION.
Management Discussion
9/9/02
MANAGEMENT DISCUSSION AND ANALYSIS Great Basin Gold Ltd. is a mineral exploration company which has one main property, the Ivanhoe gold-silver project in Nevada, USA and one minor property, the Casino copper-gold project in Yukon, Canada. In 2002, the Company is continuing to focus its activities on the Ivanhoe property. Ivanhoe Property Great Basin's exploration efforts at the Ivanhoe Property have resulted in the discovery and delineation of several high-grade gold-silver vein systems. Detailed interpretive work and modeling in 2000 and 2001 of high-grade mineralization within three of these systems - Clementine, Gwenivere and South Gwenivere - resulted in an initial resource estimate. At a cut-off grade of 0.25 oz Au/ton, the inferred mineral resource is estimated to be 719,000 tons grading 1.29 oz Au/ton and 7.00 oz Ag/ton, containing one million gold equivalent ounces using a gold price of US$290/oz and a silver price of US$4.50/oz. There is excellent potential to expand the mineral resources. In November 2001, a preliminary economic assessment of the capital and operating costs to develop of the high-grade vein systems was completed by Ross Glanville, P.Eng., MBA, and Ross Banner, P.Eng. The preliminary assessment was updated subsequent to year-end to reflect metal prices in early 2002. For the envisaged 600 tons per day underground mine, utilizing a local toll mill for ore treatment, and based on a gold price of US$300 per ounce and a silver price of US$4.40 per ounce, the economic model forecasts a net present value of CDN$203 million (US$127 million) at a discount rate of 0% and CDN$161 million (US$101 million) at a discount rate of 6%. The undiscounted stream of annual operating profits before interest, taxes and depreciation yields a project internal rate of return of 136%. As a preliminary assessment is conceptual in nature and utilizes inferred mineral resources that are considered geologically speculative, there is no certainty that the economic considerations or results will be realized. Details of the resource estimate and preliminary economic assessment are provided in the 'Summary Report of the Ivanhoe Project'dated April 2002 and filed on www.sedar.com. On June 10, 2002, Great Basin and New York Stock Exchange-listed Hecla Mining Company ('Hecla') announced that they had entered into an exploration and development letter of intent for the Hollister Development Block, encompassing the area of the Clementine-Gwenivere vein systems on the Ivanhoe Property. On August 2, 2002, the arrangement was formalized into an Earn-In Agreement and a Joint Operating Agreement. The Agreements provide that Hecla will vest in a 50% working interest in the Hollister Development Block, subject to a purchase price royalty in favour of Great Basin, providing that Hecla funds a US$21.8 million, two-stage, advanced exploration and development program, or otherwise achieves commercial production, and issues 4 million Hecla share purchase warrants to Great Basin. Concurrent with and in proportion to the Hecla warrants, Great Basin will issue 2 million share purchase warrants to Hecla. Hecla, an experienced and efficient underground miner, will manage the exploration, development and mining operations. Economic modeling in the preliminary assessment forecast annual production from the Hollister Development Block to be approximately 180,000 ounces of gold and 920,000 ounces of silver, at a cash cost of US$114 per ounce of gold equivalent. Due to the nearby location of several competing processing plants and the relatively easy access to develop the high-grade veins, the projected total capital cost of the project (Stage I and II) is forecast to be about US$21.8 million. Hecla has already commenced engineering and permitting work to facilitate the underground drive into the gold veins. Upon receipt of permits, Hecla will complete the Stage 1 program in about 12 months. Thereafter, to vest in its 50% working interest, Hecla must proceed to Stage 2 within 60 days and complete the Stage 2 program in approximately the next 12 months. A US$50/oz sliding scale Purchase Price Royalty is also payable by Hecla to Great Basin when cash operating profits per ounce of gold equivalent production are within the range of US$100-200/oz. The Royalty will be payable by Hecla on its portion or gold production commencing at the point it has recovered its Stage 1 and Stage 2 expenditures plus 15%, estimated to be within about nine months from the date of commercial production. Casino Property On July 15, 2002, Great Basin agreed to option the Casino property (the 'Property') to CRS Copper Resources Ltd. ('CRS'). Under the terms of the agreement, GBG has granted CRS an option ('the Option') to purchase 100% of Great Basin's interest in the claims and interests comprising the Property for $1,000,000, plus applicable taxes, payable at the option of CRS in cash or CRS common shares, providing that CRS shares are listed on the TSX Venture Exchange or another recognized exchange (the 'Exchange'). CRS shares would be valued based on the 20 consecutive trading-day weighted average trading price for the 20-day period ending four days prior to the delivery of the notice of the exercise of the Option, and also dependent on whether there has been a minimum average trading volume of 25,000 CRS shares per day for the 20-day period. The Option may be exercised at any time from the date of the agreement to July 15, 2007, subject to written notice and confirmation that the terms of the Option have been met. If CRS elects to terminate the agreement without exercising the Option or allows it to lapse, CRS must pay to Great Basin a 'break fee'of $25,000, plus applicable taxes. CRS is required to make interim option payments to Great Basin at the time that CRS is listed on an Exchange of 100,000 CRS shares plus warrants to buy another 100,000 shares for a period of two years at an exercise price, which reflects the maximum discount for the prevailing CRS market price permitted by the policies of the Exchange, and will issue a further such warrant on each anniversary date thereafter to a maximum of warrants to buy 300,000 CRS shares. If CRS is not listed by December 31, 2002, CRS must pay to Great Basin $50,000 plus applicable taxes in lieu of the 100,000 shares to keep the Option in good standing. A further $50,000 plus taxes is payable on December 31, 2003 if CRS is not listed by that date. Great Basin may terminate the Option on or after December 31, 2003, unless the cash payments have been made, in which event the Option can be extended to accommodate a listing no later than December 31, 2004 (and providing that such a listing is continuous thereafter). CRS has the right to conduct exploration work on or in respect of the Property at its cost, or make payments in lieu to keep the Property in good standing during the period of the Option. If the Option is not exercised and is terminated, CRS is required to pay Property holding costs for a minimum period of two years from the effective date of termination. In the event that the Option is exercised and the decision is made to put the Property into commercial production, CRS will pay to Great Basin $1,000,000 in cash, plus applicable taxes, within 30 days of that decision. The agreement is subject to net profits royalty agreements, and the purchase agreement on a portion of the claims held by Wildrose Resources Ltd. Market Trends Market analysts have forecast gold prices to increase to as high as US$340/oz in 2002. At August 2002, gold has been trading at more than $300/oz for several months, and reached as high as US$320/oz in June and July. Financial review On June 3, 2002, Great Basin completed a $7.8 million private placement financing for 5,616,612 Units (each comprising a share and a warrant exercisable for one year at $1.65) to sophisticated investors in Canada and the United States. The proceeds of this financing are planned for the underground exploration and development program at Ivanhoe. At this time, Hecla has initiated work toward permitting and detailed planning, so the proceeds remain in the company's working capital. At June 30, 2002, Great Basin has a strong working capital position of $17.2 million, as compared to $10.0 million at March 31, 2002, and is debt free. The Company has 46,699,649 issued and outstanding common shares. On June 28, 2002, the Company received shareholder approval to increase the authorized share capital from 100 million to 200 million common shares. At the end of August 2002, the Company received regulatory approval and completed a private placement financing of 125,715 units at a price of $1.65 per unit with sophisticated investors and institutions outside of Canada. Each unit is comprised one common share and a common share purchase warrant exercisable at $1.85 for 16 months. The warrants are subject to an accelerated expiry of 45 days if the Company's shares trade on the TSX Venture Exchange for ten consecutive days at or above $2.78. Results of Operations Interest income revenue increased in the second quarter of fiscal 2002 to $42,984 from $28,144 in the previous quarter. Interest revenue increased from the first quarter of 2002 due to higher cash balances on deposit. Expenses in the second quarter of $740,611, have increased from the prior quarter but have reduced in the year to date ($924,023) when compared to the first six months of 2001 ($2,833,471) because of reduced exploration activity. Administrative expenses, before interest income, have increased from the prior quarter (June 30, 2002 - $397,489; Mar 31 2002 - $193,412) and from the same quarter in the fiscal 2001 (June 30 2001 - $318,664). In terms of administration, the main quarter to quarter differences are an increase in the cost of office and administration, from $13,464 in Q1 2002 to $176,024 in Q2 2002; salaries and benefits, from $42,834 to $67,041; legal accounting and audit expenses from $14,911 to $66,463 due to financing activities and negotiations surrounding completion of the agreement with Hecla Mining Company. Some legal accounting and audit costs were also incurred for litigation proceedings associated with claims by US Fidelity and Guaranty Company against Touchstone Resources Company, a wholly owned subsidiary company of Great Basin (see Legal below). Shareholder communications increased from $17,843 in Q1 to $52,611 in Q2, associated with dissemination of information on the financing and the Hecla deal. Office and administration and shareholder communications for the first six months of 2002 are the only two areas in which expenses have been higher than for the same period in fiscal 2001. Exploration costs to date in 2002 have decreased overall and in most categories from 2001, but costs were higher in the current quarter (June 30, 2002 - $343,122) compared to the prior quarter (Mar 31, 2002 - $86,128). The main increase was for environmental, socio-economic and land fees, related to studies toward permitting for the underground access and exploration program, and land maintenance. These costs increased from $15,714 in the prior quarter to $196,359 in Q2. Other increases during the quarter were for engineering (Q2 - $42,843; Q1 - $13,415) and geological (Q2 - $54,233; Q1 - $26,116); these costs are related to the completion of a 43-101 compliant summary report on the resource estimate and preliminary assessment for the high-grade veins at Ivanhoe. Related Party Transactions Hunter Dickinson Inc. is a private management company, with certain common directors, that provides geological, corporate development, administrative and management services, and reimbursement of third party costs on a full cost recovery basis to Great Basin pursuant to an agreement dated December 31, 1996. The amount paid to HDI in Q2 2002 increased to $181,054 from $112,545 in the previous quarter. As at June 30, 2002 Great Basin has prepaid $2.6 million for future services and exploration programs to Hunter Dickinson Inc. in preparation of re-evaluating the existing data on the Ivanhoe property and the preparation of a major underground exploration program entailing the creation of an underground access and approximately 40,000 feet of drilling pursuant to the Summary Report of the Ivanhoe Project dated April 2002, prepared jointly by Ross Glanville & Associates Ltd. and R.H. Banner Ltd. In addition, these funds are being utilized to evaluate additional mineral projects for the Company. Legal During the quarter, there was a status change in the lawsuit with United States Fidelity and Guaranty Company in the US District Court of Northern Nevada against the Company's subsidiary, Touchstone Resources Company ('Touchstone'), for which the details are described in Note 4(a) of the Notes to the Financial Statements). On April 26, 2002, the US District Court for the District of Northern Nevada accepted the stipulation for dismissal (no costs or damages) without prejudice of all action by US Fidelity against all parties including Great Basin's subsidiary, Touchstone. There has also been a change in the status of the statement of Claim in Ontario, Canada in which an intended Purchaser of Great Basin's Bissett Creek graphite property in Ontario sought damages against the Company. On April 1, 1999 the Company terminated an agreement with the intended Purchaser after the intended Purchaser defaulted on its financial obligations to the Company, as well as defaulting on the other maintenance obligations concerning the graphite property. In December 2001, the graphite property was returned to the underlying owners and written off by Great Basin. In May 2002, the claim was settled by an agreement signed between the Company and the Purchaser, whereby the Purchaser dismissed the action and has agreed to return all the documents related to the Property.
CONTACT: TEL: (604) 684-6365 Great Basin Gold Ltd.
FAX: (604) 684-8092
Website: www.hdgold.com |
