CENTURY MINING CORPORATION
Consolidated Results
To December 31, 2005
April 28, 2006
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
The following management’s discussion and analysis (MD&A) should be read in conjunction with the consolidated financial statements and related notes. All dollar amounts are stated in Canadian dollars unless otherwise stated. This discussion is based on information available to April 28, 2006.
Overview
Century Mining Corporation is a Canadian-based gold producer with operations in Val d’Or, Québec. In September 2004, the Company completed the acquisition of the Sigma – Lamaque Complex from the trustee of the Sigma – Lamaque Limited Partnership. The Company commenced commercial gold production at the Sigma Mine on May 25, 2005 after completing the mining and processing of a 250,000 tonne bulk sample.
The Company is also engaged in the exploration, development and acquisition of mineral properties and mining assets with a focus on gold and precious metals. In September 2004, the Company acquired an option to purchase a 70% interest in the dormant Carolin gold mine in British Columbia. The Company also has interests in nine exploration properties on the Juneau Gold Belt in Alaska.
In March 2006, the Company incorporated Century Mining Peru S.A.C. based in Lima and announced that it has reached an agreement with the owners and secured creditor to purchase 60% controlling interest in San Juan Gold Mines S.A.A., and 60% interest in Minera Chorunga S.A.A. On April 28, 2005 the Company completed the purchase from Banco Wiese Sudameris of US$9.9 million of debt securing the majority of the mining concessions owned by San Juan Gold Mines S.A.A. and Minera Chorunga S.A.A. for US$2.5 million. The closing of this transaction is subject to regulatory approvals and finalizing of documentation.
Century’s shares trade on the TSX Venture Exchange under the symbol CMM.
Results of Operations
Pursuant to completing a bulk sample program, the Sigma Mine commenced commercial gold production on May 25, 2005. The increases in revenues and expenses from 2004 to 2005 reflect the Company’s growth from exploration and development to production. There was no revenue from mining operations in 2004.
In the year ended December 31, 2005 the Company reported an operating profit from mining operations, before royalty expenses and depreciation, amortization and accretion, of $1,777,747 (2004 – expenses of $73,747) from revenues of $24,183,331 at
the Sigma Mine. Expenses incurred in the mining operations were $22,405,584. Prior to May 25 operating costs were capitalized and netted against revenues from gold produced during the bulk sample program. Geological fees and other revenue was $384,198 in 2005 (2004 - $83,221). In 2005, total revenues were $24,567,529 (2004 - $83,221).
For the year ended December 31, 2005 the Company reported a net loss of $9,226,378, or $0.22 per share, compared to a net loss of $1,963,393, or $0.15 per share in the prior year. The increase in net loss of $7,262,985 reflects costs and expenses incurred in bringing the Sigma Mine into commercial production, including higher corporate administration expenses; depreciation amortization and accretion; the financing costs incurred in 2005 associated with funding the Sigma-Lamaque acquisition in 2004; funding working capital requirements for the mine in 2005; unrealized losses on derivative contracts and a non-operating loss on foreign exchange.
The following table shows a comparison of expenses for the years ended December 31, 2005 and 2004.
Expenses 2005 2004
$ $
Mining operations 22,405,584 73,747
Operating royalties 536,226 -
Depreciation, amortization and accretion 2,327,492 65,160
Amortization on deferred finance fees 909,780 61,500
Accretion on convertible debentures 1,040,000 200,875
Corporate administration 2,272,575 1,460,802
Interest on long-term debt 918,398 68,679
Interest and fees on convertible debentures 2,020,179 523,263
Stock based compensation 622,100 451,150
Total expenses 33,052,334 2,905,176
In 2005, expenses of $22,405,584 at the Sigma Mine accounted for 68% of total expenses of $33,052,335 before other items.
In 2005, the Company recorded production royalty expenses of $648,165 (Note 6) of which $65,038 was paid in cash and $583,127 was recorded as a non-cash obligation. Out of the total of $648,165, the Company capitalized $111,939 during the bulk sample pre-production period, and recorded $536,226 (2004 - $Nil) as a direct royalty expense.
Depreciation, amortization and accretion expenses were $2,327,492 in 2005 (2004 - $65,160), the majority of which related to accumulated amortization on equipment, mining and plant equipment.
In 2005, certain cost items incurred prior to the commencement of commercial production were deferred. Amortization on deferred finance fees was $909,780 (2004 - $61,500).
In 2004, the Company issued $8.50 million of 10% Convertible Debentures to finance, in part, the acquisition of the Sigma-Lamaque Complex, and in 2005 issued a further $2.85 million of 10% Convertible Debentures to provide working capital for the Sigma Mine.
The maturity date is December 31, 2006 on both issuances. The fair value of the conversion option associated with the Convertible Debentures is recorded as equity portion in shareholders’ equity on the balance sheet (Note 10) while the accretion on the debentures is charged to earnings ratably to maturity. In 2005, the accretion charge was $1,040,000 (2004 - $200,875). In March of 2006 the Company redeemed the outstanding balance of the Convertible Debentures after several partial conversions by the debenture holders.
In 2005, corporate administration expenses of $2,272,575 (2004 - $1,460,802) reflected the higher level of head office activity associated with bringing the Sigma Mine into commercial production, including salaries and benefits at higher staffing levels, as well as increased travel and accommodation expenses. In addition, the Company pursued the search for and evaluation of acquisition opportunities to grow the Company.
In 2005, equity and debt financings provided working capital and resulted in higher financing charges and interest expenses compared to the previous year. In 2005, interest on long-term debt, which was deferred, was $918,398 (2004 - $68,679). The Company elected to pay interest and fees on convertible debentures in shares rather than cash (Note 10), which amounted to $1,734,205 and the withholding tax was paid in part in cash with the balance being accrued. The total amount expensed was $2,020,179 in 2005 (2004 - $523,263).
In 2005 stock-based compensation expenses were $622,100 (2004 - $451,150).
Other items in 2005 included unrealized losses on derivative contracts of $1,293,463 (2004 - $Nil) and a foreign exchange loss of $136,185 (2004 – gain of $27,542). In 2005, the Company recorded a future income tax recovery of $688,075 (2004 - $831,020).
Summary of Annual Results
The following table summarizes the Company’s operating results for each of the last three fiscal years:
Period Total assets ($) Long-term
liabilities Revenue ($) Net loss ($) Net loss per share ($) (1)
2005 57,106,214 16,574,641 24,567,529 9,226,378 0.22
2004 34,823,719 13,544,000 83,221 1,963,393 0.15
2003 1,133,632 - - 532,188 0.12
At the end of 2005, total assets increased to $57,106,214 from $34,823,719 at the end of 2004. The increase of $22,282,495 mainly reflects the increase in book value of equipment, mining and plant equipment at the Sigma – Lamaque Complex, as well as an increase in current assets of receivables, in-process gold inventory and other inventory items at the Sigma Mine.
(1) Net loss per share in 2003 has been restated for the 3:1 stock consolidation effected in 2003.
Summary of Quarterly Results
The following table summarizes the Company’s operating results for each of the eight most recently completed quarters:
Period Revenue ($) Net loss ($) Net loss per share ($) (1)
Q4-05 9,612,458 4,438,074 0.10
Q3-05 10,109,551 2,630,370 0.06
Q2-05 4,768,276 1,187,843 0.03
Q1-05 77,244 970,091 0.03
Total 24,567,529 9,226,378 0.22
Q4-04 39,336 893,059 0.05
Q3-04 19,824 483,893 0.04
Q2-04 24,061 423,326 0.04
Q1-04 - 163,115 0.02
Total 83,221 1,963,393 0.15
The Sigma Mine commenced commercial production on May 25, 2005. Prior to this date revenues from gold produced during the bulk sample program were netted against expenses and deferred. The level of expenditures increased each quarter during the start-up of the Sigma Mine and after commercial production commenced as the tonnage of ore and waste mined increased to budgeted production levels. In the third and fourth quarters of 2005 the Sigma Mine generated positive cash flow. Operating margins increased as operating costs were reduced and gold prices continued to rise. In the fourth quarter of 2005, financing expenses and fees impacted the net loss. Depreciation, amortization and accretion expenses of $2,327,492 for the year were recorded in the fourth quarter. Mine operating expenses increased to $9,243,378 in the fourth quarter from $8,874,167 in the prior quarter as production levels at the Sigma Mine increased.
Several non-cash items that were expensed, such as interest on long-term debt, interest and fees on convertible debentures and accretion on debentures, contributed to higher quarterly losses in 2005 than in the prior year, particularly in the third and fourth quarters Depreciation, amortization and accretion expenses; accretion on convertible debentures; interest on long-term debt; and interest and fees on convertible debentures were substantially higher than in comparable quarters in 2004. The increased quarterly losses also reflect increasing corporate expenses as staffing levels increased commensurate with managing the Sigma operation and the growth of the Company.
Liquidity and Capital Resources
As at December 31, 2005 the Company had a working capital deficiency of $8,511,024 compared to positive working capital of $1,154,112 at the end of the prior year. The net change of $9,665,136 in working capital mainly reflects the change in current assets and
liabilities associated with the start-up and commencement of commercial production at the Sigma Mine in 2005.
Current assets increased from $1,945,837 at the end of 2004 to $5,276,441 at year-end 2005. Cash and term deposits decreased from $1,568,776 at the end of 2004 to $808,896 at the end of 2005, the decrease of $759,880 reflecting mainly cash used at the Sigma Mine. The principal increase in current assets was in receivables, in-process gold inventory and consumables inventory, which in total was $4,201,484 at December 31, 2005 compared with $40,354 at year-end 2004.
The increase in current assets was offset by an increase in current liabilities from $791,725 at year-end 2004 to $13,787,465 at December 31, 2005, which reflected Century’s growth from an exploration and development company in 2004 to a gold producer in 2005. Accounts payable increased from $791,725 to $7,386,932 at year-end 2005. A Working Capital Gold Facility was put in place in 2005, the amount outstanding at year-end being $1,287,219. In addition, the current portion of long-term liabilities of $3,819,851 (2004 - $Nil), comprising capital lease payment obligations and interest on long-term notes, were recorded as current liabilities in 2005 to reflect maturity dates. An unrealized loss on derivative contracts of $1,293,463 was recorded as a current liability.
In 2004, the Company funded, in part, the acquisition of the Sigma-Lamaque Complex by assuming a Note of $13,544,000 from Investissement Québec (IQ) (Note 9). The balance owing to IQ at December 31, 2005 is $14,461,472, which includes principal and interest. The long-term liability of this note is $12,768,472 at year-end 2005. The current liability is $1,693,000.
At December 31, 2005, the long-term liability on the issuance of 10% Convertible Debentures in 2004 and 2005 is $9,859,875 (2004 - $7,093,875) after assigning the fair value of the conversion option of $2,021,000 (2004 - $1,607,000) to shareholders’ equity and charging the accretion on the debentures of $1,040,000 (2004 - $200,875) to the statements of operations and deficit.
The Company has a capital lease obligation on mining equipment of $5,933,020 at year-end 2005 (2004 – $Nil). Other obligations at December 31, 2005 include: operating royalties on gold production of $583,127 (2004 – $Nil); and payments to unsecured creditors that were assumed during the purchase of the Sigma-Lamaque assets of $2,645,120 (2004 - $4,993,750). At the Company’s option it issued shares in part fulfillment of this obligation in 2005. The Company is committed to expend $784,935 pursuant to flow-through shares issued in 2005.
Cash flows from operating activities
In 2005, before net changes to non-cash working capital balances, cash flows provided by operating activities were $134,720 (2004 – cash flows used $1,674,221). As previously mentioned, in 2005 there were a number of significant financing charges to operations that did not require a cash payment. These items, in addition to other non-cash amortization and depreciation charges, operating royalties, unrealized losses on derivative contracts, and stock based compensation expenses offset the net loss of $9,226,378 in 2005. After the net change to non-cash working capital balances, cash
flows provided by operating activities in 2005 were $4,943,168 (2004 – cash flows used in operating activities $1,125,510).
Cash flows from financing activities
In 2005, net cash flows provided by financing activities was $8,525,563 (2004 - $11,883,329). Advances on convertible debentures of $2,850,000 in 2005 provided the Sigma Mine with working capital. Proceeds from private placement equity offerings and from warrants exercised of $6,025,563 provided funds for working capital at Sigma, exploration at the Val d’Or properties, and general corporate purposes.
In 2004, net cash flows from financing activities provided the Company with $11,883,329 to fund acquisitions and preparations for the bulk sample program at the Sigma Mine. Advances on convertible debentures of $9,000,000 were used to fund, in part, the acquisition of the Sigma-Lamaque assets. Equity instruments provided the Company with $3,483,329 in 2004.
Equity and convertible debt financings are expected to provide the major sources of funds for the Company until it generates sufficient cash flow from the Sigma Mine to meet all its financial obligations.
Cash flows from investing activities
In 2005, cash flows used in investing activities was $14,228,611 (2004 - $9,419,687). Purchases and payment for properties and equipment, principally at the Sigma Mine was $12,422,223 in 2005 compared to $1,554,585 in 2004. Capitalized stripping costs were $1,737,956 in 2005 (2004 – $Nil). In 2004, $7,690,102 was invested in the acquisition of the Sigma-Lamaque assets (2005 - $Nil).
In aggregate, cash flows from operating, financing and investing activities resulted in a decrease in cash of $759,880 in 2005 compared to an increase in cash of $1,338,132 in 2004. When added to cash and cash equivalents of $1,568,776 at the beginning of the year, cash and cash equivalents at the end of 2005 was $808,896.
Outstanding Share Data
As at April 28, 2006 the Company had 107,348,708 common shares issued and outstanding. In addition, there were 17,110,946 shares reserved for issuance for the exercise of warrants, and 4,475,000 shares reserved for issuance for the exercise of stock options. Assuming exercise of all stock options and warrants, which would result in approximately $21.3 million added to the Company’s treasury, there are 128,934,654 shares on a fully diluted basis.
In connection with the purchase of the Sigma – Lamaque assets, there are additional purchase obligations that may be settled by payment in cash, or by the issuance of shares at the option of the Company. In the event that shares are issued, a total of 4,108,390 common shares would be issued on May 15 and September 15 on the balance owing for this purchase obligation. These shares have been reserved for issuance.
Transactions with Related Parties
As noted in the consolidated financial statements, the Company was involved in the following related party transactions:
a) In 2005, the Company paid $25,657 (2004 - $18,000) in office rent to a company controlled by a director and officer and by a Family Trust of a director and officer. The Company leased space from this company on a month-to-month basis at US$2,062 per month. There was no outstanding amount due at the end of 2005.
b) Included in corporate administrative expenses are legal fees of $190,525 (2004 - $416,885), paid to a firm, which the Company’s Corporate Secretary is a partner. At December 31, 2005 included in accounts payable was $107,742 (2004 - $138,802) due to the legal firm.
c) Included in accounts receivable is a credit of $44,080 (2004 - $40,354) due from a company with common officers and directors of the Company. The Company also recorded revenues of $336,705 (2004 - $64,136) for geological consulting services to this same company. The Company also received $12,533 (2004 - $Nil) for the rental of equipment and $60,744 (2004 - $Nil) as reimbursement for other office facilities.
d) In 2004, the Company paid a total of $410,000 to a company with common officers and directors in exchange for the Carolin Mine property (Note 4). Of this total amount, $275,000 was paid in cash and the remaining $135,000 was paid via the issuance of 300,000 common shares of the Company.
All related party transactions in the normal course of business have been measured at the agreed upon exchange amounts, which is the amount of consideration established and agreed to by the related parties. Exchange amounts approximate fair values.
Subsequent Events
a) In February 2006, the Company announced the incorporation of a wholly owned Peruvian subsidiary, Century Mining Peru S.A.C., based in Lima. The formation of the subsidiary is the first step of an aggressive expansion program into Peru. The Company has acquired by mineral claim petition approximately 5,000 hectares for a new exploration project called Colina Dorada.
b) In the first quarter of 2006, all remaining convertible debentures that had not been converted into common shares in 2005 were converted, either in partial conversions at the option of the debenture holders, or conversions that were forced by the Company. Subsequent to year-end, the Company issued 15,355,182 common shares on conversion of the remaining principal amount of $7,790,000 of the original $8,500,000 10% Convertible Debentures having a conversion price of $0.51 per share on issue. Also in the first quarter, the Company issued 6,477,271 common shares on conversion of the $2,850,000 principal amount of 10% Convertible Debentures having a conversion price of $0.44 per share.
c) Subsequent to the end of the year, a total of 8,055,794 common shares were issued on exercise of warrants for cash proceeds of $3,405,203. The exercise prices were $0.45 and $0.50 per share and expiry dates ranged from May 22, 2006 and September 23, 2007.
d) Subsequent to the end of the year, 645,000 stock options were issued to employees and consultants with exercise prices from $0.40 to $1.16 per share and expiry dates from January 19 to March 23, 2011.
e) On March 29, 2006 the Company reached an agreement with SGF Mines Inc. to buy back the SGF royalty on gold production from the Sigma-Lamaque Complex. The Company paid SGF $2.0 million in cash and issued 3.0 million common shares of Century to SGF at a deemed price of $1.50 per share in full settlement of past royalties due and owing and all future obligations.
f) On March 30, 2006 the Company announced that it reached an agreement with the owners and secured creditor to purchase 60% controlling interest in San Juan Gold Mines S.A.A., and 60% interest in Minera Chorunga S.A.A. in Peru. The remaining 40% interest is owned by the existing labour force. As consideration for the purchase, the Company will pay a total of US$4.5 million in cash, US$600,000 worth of common shares of Century, and 1.0 million common shares of Century. As part of the transaction, the Company will purchase US$9.9 million of outstanding bank debt that currently secures the majority of the mining concessions. On April 28, 2006, this bank debt was purchased for US$2.5 million and is part of the total US$4.5 million consideration. The balance of the cash purchase price and Century shares will be used to pay the shareholder and pay down unsecured creditors, leaving San Juan and Minera Chorunga essentially free of liabilities other than the secured debt that Century is purchasing as part of this transaction.
g) Subsequent to year-end, the Company entered into equipment capital lease contracts that require payments as follows:
2006 $64,105
2007 $70,605
2008 $77,266
h) On April 11, 2006 the Company announced a non-brokered private placement of
Units of up to $25 million. Each unit is priced at $1.25 and consists of one common share plus one-half common share purchase warrant exercisable at $2.00 for a period of 24 months. Warrants will become exercisable within 10 days if the 20-day weighted average closing share price exceeds $2.25. On April 19 the Company closed the first tranche of this financing for gross proceeds of $18.75 million and completed the transaction on April 28, 2006.
Evaluation of disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Company’s Chief Executive Officer and Vice President of Investor Relations absent a
Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure. As at the end of the period covered by this MD&A, management of the Company, with the participation of the Chief Executive Officer and the Vice President of Investor Relations, evaluated the effectiveness of the Company’s disclosure controls and procedures as required by Canadian securities laws. Based on that evaluation, the Chief Executive Officer and the Vice President of Investor Relations have concluded that, as of the end of the period covered by this MD&A, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s annual filings and interim filings (as such terms are defined under Multilateral Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim Filings) and other reports filed or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those laws and that material information is accumulated and communicated to management of the Company, including the Chief Executive Officer and the Vice President of Investor Relations, as appropriate to allow for accurate disclosure to be made on a timely basis.
Risk and Uncertainties
The business of operating mines and exploring and developing mineral properties are highly uncertain and risky by their very nature. The Company’s mining operations in Québec commenced generating positive cash flow in the third quarter of 2005. The Company may require securing additional equity and/or debt capital to maintain positive working capital and continue as a going concern until such time as the Company generates substantial free cash flow from its Sigma operations that will contribute significantly to the Company’s cash requirements to meet all its financial obligations and commitments. The Company will require securing additional equity and debt financing to fund acquisitions of mining assets to growth the Company.
While a Company’s success may result from good fortune, it is more often dependent on management’s knowledge and expertise and its ability to acquire profitable gold producing assets, identify and advance attractive projects and targets from exploration through development into production, as well as secure the necessary financing to fund these activities. The Company continues to recruit well-qualified and experienced professionals to manage its Sigma-Lamaque operations and growth of the Company.
Regulatory standards continue to change, making the review and due diligence processes longer, more complex, and more costly. Even if an apparently mineable deposit is discovered, there is no assurance that it will ever reach production or be profitable, as its results are influenced by many key factors, such as commodity prices and foreign exchange rates, which cannot be controlled by management, as well as more stringent environmental regulations. Due to high gold prices, the mining industry is experiencing high demand for capital equipment, spare parts, consumables and supplies, as well as for experienced professional staff and operating personnel, all of which have an impact on operations.
While it is impossible to eliminate all of the risks associated with mining and exploration and development, it is management’s intention to manage its affairs, to the extent possible, to ensure that the Company’s assets are protected and that its efforts will result in increased value for the Company’s shareholders. The Company assesses and minimizes risks by applying high operating standards, including careful management and
planning of its facilities, hiring qualified personnel, establishing and maintaining internationally recognized standards, performing independent audits, and purchasing insurance policies.
The Company’s mining and milling operations at the Sigma Mine will expose the Company to various financial and operational risks that could have an adverse impact on its profitability, level of operating cash flows, and financial condition.
In March 2006, the Company incorporated a wholly owned subsidiary, Century Mining Peru S.A.C. and opened an office in Lima to pursue the acquisition of mineral properties and mining assets. Carrying on business in Peru will expose the Company to risks and uncertainties associated with operating in foreign countries, including political and financial and other risks.
Outlook
Commencement of commercial production at the Sigma Mine in the second quarter of 2005 reflected growth of the Company from exploration and development to a gold producer. The Sigma Mine generated positive cash flow in the third and fourth quarters of 2005. The Company plans to produce 90,000 ounces of gold in 2006 at an estimated cash cost of US$325 to US$350 per ounce. At current gold prices the Company expects that the Sigma Mine will continue to generate positive cash flow.
In the first quarter of 2006 the Company reduced its debt by redeeming the outstanding 10% Convertible Debentures. The redemption of the Convertible Debentures will provide the Company with flexibility to finance future growth on more attractive terms.
In April 2006 the Company completed a $25.0 million equity private placement, the proceeds of which will be used for purchase of mining equipment at the Sigma Mine; development of the Lamaque underground mine; the acquisition of the San Juan Gold Mine in Peru, and for general corporate purposes.
The Company is well positioned to grow in value as management creates and pursues new opportunities, particularly in Québec and Peru, with an emphasis on the acquisition of producing gold mines and assets that generate cash flow or that can be returned to profitability in the near term.
Forward-Looking Statements
The Company’s press releases, annual and quarterly financial statements and other literature frequently contain forward-looking statements within the meaning of section 27A of the Securities Exchange Act of 1933 and as amended in Section 27E of the 1934 Act.
Additional Information and Continuous Disclosure
This MD&A has been prepared as of April 28, 2006. Additional information on the Company is available through regular filings of press releases, annual and quarterly financial statements and its Annual Information Form on SEDAR (www.sedar.com).
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tanoose........................lets see how they improve in qtr one?? |
