Annual results
Golden Rule Resources Ltd GNU
Shares issued 26,654,081 Mar 3 close $0.83
Wed 4 Mar 98 Company Review
Mr Glen Harper reviews the company
In fiscal 1997 Golden Rule began mining gold in Saskatchewan and announced
encouraging assay results from the Stenpad project in West Africa. The
company's wholly owned subsidiary, Waddy Lake Resources, initiated
production from the Komis gold mine in September 1996 at a rate of 440 tons
per day. By December, 1996 further assay results from the Stenpad property
(which was being explored in a joint venture with Hixon Gold) prompted a
multi-million dollar exploration program to evaluate four jointly owned
gold properties in West Africa.
The construction of the Komis gold mine and the rehabilitation of the Jolu
mill were completed in the last quarter of fiscal 1996 and the start-up
phase of the operation was undertaken in the first quarter of fiscal 1997.
After about four months of production, it was apparent that the levels of
gold production and operating costs projected in both internal and
independent feasibility studies were not what had been anticipated. In
addition, a change to shrinkage sloping mining methods resulted in higher
operating costs and working capital requirements. Consequently, further
stope development work was suspended in January 1997 pending a complete
technical and financial review by the company's bankers and an independent
engineering advisory firm.
After considering all relevant factors, a decision was made to shut down
the Komis mine once the broken ore, both underground and in the surface
stockpile, had been processed. By July 1997, the shutdown was substantially
completed. Measures were undertaken to suspend mining and milling
operations in accordance with mining regulations applicable in
Saskatchewan. The costs associated with the project were subsequently
written down resulting in an extraordinary charge of $24,564,062 or $0.95
per share to Golden Rule.
In spring 1997, the company suffered another set-back when check sampling
instituted on the Stenpad trenching program and gold-in-soil geochemical
surveys returned gold assays significantly different in distribution and
significantly lower than those reported earlier in the year. These check
sample assays were obtained just as the first diamond drilling campaign on
the Stenpad property was about to commence.
As a result, management modified the exploration program and retained
independent consultants to advise the joint venture and to conduct a
technical review and audit. Project management, geological personnel, and
field crews were restructured, and steps were taken to refine the
continuing exploration program. Diamond drilling was suspended after six
drill holes were completed pending further analysis.
In August 1997, it became apparent that most of the assay data from the
earlier sampling programs was not credible. A decision was made to repeat
much of the previous exploration work using different geological and field
crews, improved sampling and security procedures, and more closely
supervise personnel and assay laboratories. By December 1997 this
exploration work was substantially completed. In addition, ground
geophysical surveying was completed over priority areas of the property.
The results of this program indicate that there appears to be a correlation
between anomalous geochemical results and geological structures identified
on the property. A $450,000 1998 exploration program and budget has been
proposed by independent consultants who have confirmed that the Stenpad
property is a property of merit worthy of further exploration.
Hixon Gold financed major exploration programs on four gold prospects in
West Africa.
Northern Abitibi Mining continued to participate in the exploration of its
properties in the South Voisey's Bay area of Labrador. In fall 1997, three
diamond drill holes encountered massive sulphide mineralization containing
interesting base metals values. As a consequence the drilling budget for
the project was increased by almost $1,000,000. Teck Corporation, on behalf
of Northern Abitibi's joint venture partner, Donner Minerals is responsible
for exploration on Northern Abitibi's claims. Golden Rule has agreed to
purchase up to 2,800,000 units of Northern Abitibi to raise $2,000,000 for
the purpose of financing the balance of the 1997 drill program and an
expanded diamond drilling campaign anticipated to begin in spring 1998.
This financing requires the approval of the shareholders of Northern
Abitibi at that company's AGM to be held in mid March 1998.
Manson Creek Resources, although relatively inactive in 1997, remains in a
strong financial position with about $2,500,000 in its treasury. Manson
Creek is generating a new program to acquire, explore and develop
prospective silver-lead-zinc prospects in the Yukon Territory. The recent
strong uptrend in the price of silver to the $10.00 Canadian level has had
a positive impact on the economic potential for this type of deposit. A
major exploration effort will commence in summer 1998 to evaluate these
silver prospects.
In 1997 Golden Rule and Tyler Resources continued exploration on the
jointly owned Bahuerachi copper oxide project in Mexico. An initial diamond
drill program outlined a zone of interesting copper values. Prospecting on
other areas of the large property identified additional copper oxide zones
and epithermal veins that contain interesting gold values. Further
exploration is planned for 1998. Golden Rule owns over 2,000,000 shares of
Tyler Resources.
In January 1997, Golden Rule decided to terminate its exposure to the oil
and gas industry as significant additional equity financing was required by
Stade Exploration. As a result, Golden Rule sold its entire share position
in Stade for $1,501,150.
FINANCIAL
The small increase in consolidated revenues in 1997 reflects a modest
increase in exploration overhead fees from increased activity and higher
interest income from larger available cash balances.
Consolidated 1997 corporate expenses increased by $1,273,000, which can be
attributed to long-term debt interest of $453,000 and amortization of
long-term debt financing costs of $140,000, increase in depreciation of
$74,000, administrative costs related to the Ghana, West Africa office of
$313,000 and increased corporate administrative costs of $293,000.
In 1997, gains of $445,000 were realized on sales of investments compared
to $751,000 in 1996. Writeoffs of various exploration projects were
$2,180,000 in 1997 compared to $1,346,000 in 1996. Writeoffs in 1997 relate
primarily to the Venezuelan projects and costs related to the Voisey's Bay
area of Manson Creek and the Wedge Lake project of Golden Rule. The gain on
reduction of the company's interest in affiliates and subsidiaries was
$1,533,000 in 1997 compared to $807,000 in 1996, due to a greater number of
share issues by the subsidiaries to minority interests, and the sale of
subsidiaries shares by Golden Rule.
Komis Mine Operations
The Jolu mill, owned by the company, commenced processing ore from the
Komis mine, owned by Waddy Lake Resources, a wholly-owned subsidiary of the
company, in September 1996. The company capitalized operating results for
the period September 1 1996 to December 31 1996. In February 1997, as a
result of lower gold prices, higher mining costs than forecast and a lower
grade than projected, the company applied for a temporary closure permit
for the Komis mine. The company has reflected the production property and
equipment comprised of the Komis mine and Jolu mill at their estimated net
recoverable values. As a result the company recorded a writedown for the
Komis mine of $23,132,000 and $1,432.000 (net of deferred income tax
recovery of $1,182,500) for the Jolu mill. During the period January 1 1997
to September 30 1997, the Komis operations incurred costs of $10,186,000,
sold gold bullion totaling $9,623,000 and closed out gold hedging contracts
at a gain of $1,492,000, for net operating income of $930,000.
During the year ended September 30 1996, the company had negotiated a loan
facility of US$4,000,000 to be used to partially finance pre-production
costs of the Komis mine. The company had drawn $2,995,802 as at September
30 1996 and drew the balance of $2,452,540 in October 1996. During 1997,
the company made payments of $1,948,815 on the loan including $1,500,000
from the proceeds of the sale of the Tessex Energy shares. In addition the
company placed on deposit with the lender $2,727,657 cash, including
$1,350,000 from the close out of the gold hedging contracts, which has been
reflected as an offset against the balance of the loan. Subsequent to
September 30 1997, the loan has been repaid in full.
The company received net proceeds of $5,431,000 in 1997 on the exercise of
stock options and warrants.
The issue of shares by subsidiary companies to minority shareholders
provided $2,722,000 compared to $2,095,000 in 1996.
The company realized proceeds of $4,638,000 from the disposal of
investments compared to $2,807,000 in 1996. These proceeds were $1,882,000
from the sale of portfolio investments, compared to $845,000 in 1996 and a
total of $2,756,000 from the sale of the company's shares of subsidiaries
to facilitate their financing, compared to $1,962,000 in 1996 from this
source.
Capitalized operating costs and other costs for the Komis mine totalled
$2,936,947, compared to construction, pre-production and other costs of
$10,739,388 in 1996.
Expenditures on exploration properties increased to $4,045,254 in 1997 from
$3,339,366 in 1996. The significant areas of expenditure in 1997 were
$3,071,000 in Ghana incurred by Hixon and $376,000 in exploration on the
company's Mexican properties.
Other asset additions increased to $1,142,000 in 1997 from $356,000 in
1996. The increases are primarily due to additions to fixed assets of
$700,000 with $585,000 relating to the company's activities in Ghana and
proceeds from a settlement agreement in the amount of $340,000 to be
received by Northern Abitibi.
At the end of 1997, the company had consolidated working capital of
$5,944,000 compared to $2,322,000 in 1996.
Golden Rule will continue to provide financial assistance to its subsidiary
and affiliated companies as market conditions warrant. In this respect,
Golden Rule has agreed to a private placement with Northern Abitibi,
whereby Golden Rule will subscribe for 2,800,000 units at $0.72. Each unit
will be comprised of one share and one warrant which may be exercised at
$0.84 in the first year and $1.00 in the second. The private placement has
been conditionally accepted by the ASE, subject to approval of the
shareholders of Northern Abitibi. At this time it has not been determined
whether or not Golden Rule will finance the private placement from existing
working capital or from other sources.
STATEMENT OF EARNINGS
Year ended September 30
1997 1996
Revenue
Interest $ 343,674 $ 260,968
Recovery of
indirect costs
& other 148,414 116,280
------------ ------------
492,088 377,248
------------ ------------
Expenses
General & admin 1,589,222 983,228
Interest on
long-term debt 452,728 -
Amortization &
depreciation 243,257 29,294
------------ ------------
2,285,207 1,012,522
------------ ------------
Loss from
operations (1,793,119) (635,274)
Other
Gain on disposal
of investments 445,186 750,529
Abandonments &
writedown of
exploration
properties (2,180,306) (1,345,895)
Equity in
income of
investees 14,690 36,769
Gain on reduction
of interest in
affiliates &
subsidiaries 1,533,226 807,386
------------ ------------
(187,204) 248,789
------------ ------------
Loss before
income taxes (1,980,323) (386,485)
Income taxes (416,669) (478,000)
------------ ------------
Loss before
the undernoted (2,396,992) (864,485)
Komis mine
operations (23,634,114) -
Minority
interests 1,109,157 802,946
------------ ------------
Net earnings
(loss) $(24,921,949) $ (61,539)
Earnings (loss)
per share $(0.96) $(0.03)
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