Gabriel Resources Ltd. - Third Quarter Report

2006-11-14

TSXV - TSX Venture Exchange · Gold · Silver · Canada

TSX Trading Symbol: GBU

TORONTO, Nov. 14 /CNW/ -

<< Highlights

Financial performance

Third quarter net loss was $2.2 million, or $0.01 per share. Year-to- date net loss was $7.5 million, or $0.04 per share. Third quarter monthly expenditures averaged $3.0 million per month, or $9.0 million in total during the third quarter and $28.6 million for the first 9 months; including A total of $7.0 million was spent on our two development projects during quarter, $21.4 million for the first 9 months.

Liquidity and capital resources

Working capital at September 30, 2006 totaled $120.4 million. Gabriel Resources Ltd. ("Gabriel" or the "Company") raised a total of $94.4 million during the third quarter through an equity issue and the exercise of stock options. Fourth quarter expenditures are expected to total about $9.0 million for permitting and corporate costs. In addition, the Company expects to spend US$35 million under our US$638 million definitive feasibility study budget estimate. Project financing discussions are well underway with a goal of completing final term sheets for both the senior and subordinated debt in parallel with our EIA approval expected in the first quarter 2007.

"Consistent progress continues to be made on all fronts toward the development of our 80% owned Rosia Montana Project," said Alan R. Hill, President and Chief Executive Officer. "We have worked very diligently to make sure the Project complies with all relevant Romanian and European laws, as well as international best practices for mining development, and I am very proud that this will serve as a model mine development not only for Romania but for Europe at large."

Rosia Montana Project Development

Environmental Impact Assessment

The EIA was completed by an independent team of specialists and submitted to the Romanian Government in early May 2006. The Company participated in 16 public consultation meetings in Romania and Hungary between July 24 and August 30, 2006. The Company anticipates receipt during November 2006 of an official list of questions, gathered during the public consultation process and judged by the Romanian Government to require a response. In preparation, our EIA team has prepared answers for all expected questions from the 16 meetings, the questions provided by the Hungarian Ministry of Environment, as well as other third party questions and comments in the media. We expect our preparatory efforts will allow us to submit our responses promptly in the form of an Annex to the EIA in December 2006. The delay in receipt of the questions has extended the permitting process into the first quarter 2007, an extension of one quarter over our previous guidance. The Alba Iulia Court of Appeal dismissed in early July 2006 the application submitted by the NGO Alburnus Maior to suspend the assessment process for the EIA for the Rosia Montana project. Alburnus Maior has appealed the decision.

Updated Rosia Montana Project Timeline

The delay in receipt of the questions from the Romanian Government has extended the permitting process into first quarter 2007, an extension of one quarter over our previous guidance. While we expect EIA approval in first quarter 2007, the Romanian Government ultimately determines the timing of approval. We are targeting receipt of our construction permit in spring of 2007, following receipt of EIA approval, other permits and approvals required for the construction permit and the necessary surface rights. We estimate that it will take over two years to construct the mine, putting first pour of gold target date in the summer of 2009. The first pour date has been extended by one quarter due to the later than expected delivery of certain long lead-time equipment. While estimates during the preparation of the feasibility study earlier this year indicated 60 weeks for the critical mill components, tenders received during fourth quarter 2006 forecast up to 100 weeks, resulting in the one quarter extension to the construction schedule.

Archaeological Discharge Certificate

The Romanian Supreme Court (the "Supreme Court") has decided that the series of lower court decisions that resulted in the annulment of archaeological discharge certificate no. 4 ("Discharge Certificate") were not conducted properly, and therefore has overturned the previous annulment. The Supreme Court has referred the matter back to a different lower court, the Brasov Court of Appeal, to be retried on its merits. The retrial began in October 2006. Notwithstanding the pace of the retrial, we already have the necessary discharge certificates for the area required to begin construction in the spring of 2007.

Acquisition of Surface Rights

As of September 30, 2006, the Company owned outright or had options to purchase 60 percent of the residential properties located within the project area, which comprises the industrial zone, protected area and buffer zone. On October 9, 2006 the Company began acquiring residential properties. The estimated cost to acquire 100 percent of the homes in the project area increased from US$48 million to US$68 million, reflecting the general increase in real estate prices in Romania and our efforts to address issues raised by the community regarding the compensation program. In preparing the definitive feasibility study budget for the Project, we anticipated higher compensation costs and as a result, the current budget covers the higher costs. Overall, the Company has acquired or has options for 111 of the 379 remaining homes within the industrial area needed to build and operate the project over its 16 year life. More importantly, the Company now has over half of the homes required for construction and the first five years of operations.

Community Support

In early July 2006, the NGO ProRosia held a fund raising barbeque in support of the project, attracting over 600 people to raise funds to ensure the community voice is heard. In late July 2006 the Company held an open house and barbeque for the residents of Rosia Montana to unveil plans and home designs for the new town at Piatra Alba attracting 2,000 people. Support for the community and project was also received from a group of Romanian NGO's in early July 2006. A total of 18 NGO's in favour of the project issued a press release indicating: the project should proceed if it complies with all laws; neither Alburnus Maior nor Pro Rosia Montana represent the interests of the local community; and that the area of Rosia Montana is socially, economically and environmentally disastrous and people do not have jobs and life is hard.

New Appointments

On September 29, 2006, Mr. Simon Prior-Palmer, with more than 30 years experience in the international financial markets, was appointed to the Board of Directors effective as of October 1, 2006. On September 29, 2006 the Company announced the resignation of Mr. James McClements from the Board of Directors, effective as of October, 1, 2006 and extended its appreciation for his 8 years of service. On October 18, 2006 the Company announced the appointment of David Christensen as Vice President, Corporate Development. Mr. Christensen has spent more than 15 years as a senior metals and mining analyst.

About Gabriel

MANAGEMENT'S DISCUSSION AND ANALYSIS >>

This Management Discussion and Analysis ("MD&A") provides a discussion and analysis of the financial conditions 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-nine-month periods ended September 30, 2006 in comparison to the corresponding prior-year periods. The MD&A is intended to supplement Gabriel Resources Ltd's ("Gabriel" or the "Company") unaudited consolidated financial statements and notes thereto ("Statements") for the three and nine-month periods ended September 30, 2006 which are included in the quarterly report. You are encouraged to review the Statements in conjunction with this document. This MD&A should be read in conjunction with both the annual audited consolidated financial statements and the related MD&A, which includes a detailed description of risks for the two-year period ended December 31, 2005. All amounts included in the MD&A are in Canadian dollars, unless specified. Readers are encouraged to read the Company's Annual Information Form dated March 27, 2006, which can be viewed via the SEDAR website (www.sedar.com).

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. 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 as Romania enters the EU 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.

Key issues

Environmental/permitting

The Environmental Impact Assessment ("EIA") for the Rosia Montana project was submitted, in both Romanian and English to meet the requirements of the Romanian Government and the international Espoo Convention, in early May 2006. While it is not a legal requirement, the Company elected to have the Non-Technical Summary of the EIA translated into Hungarian to assist interested parties in Hungary to better participate in the public consultation process. During the third quarter, the Company participated in 14 public consultation meetings in Romania, held from July 24, 2006 to August 25, 2006. Following the meetings in Romania, the Company participated in two meetings in Hungary during the final week of August, 2006 to meet Espoo Convention commitments. The Company anticipates receipt during November 2006 of an official list of questions, gathered during the public consultation process and judged by the Romanian Government to require a response by the Company. In preparation, our EIA team has prepared answers for all of the anticipated questions from the 16 public meetings, the questions provided by the Hungarian Ministry of Environment as well as other third party questions and comments made in the media. Once the official list of questions is received, we expect our preparatory efforts to allow us to submit our responses promptly in the form of an Annex to the EIA during December 2006. The delay in receipt of the questions has extended the permitting process into first quarter 2007, an extension of one quarter over our previous guidance. While we expect EIA approval first quarter of 2007, the Romanian Government ultimately determines the timing of the approval. While the EIA is by far the most important project permit, other permits are required according to the Urbanistic Certificate, such as the zonal urbanistic plans for the industrial and protected areas, the forestry permit, the land use change permit, as well as other permits and approvals that result from the EIA approval, to obtain the construction permit. The process for each of these permits and approvals is underway to run parallel with or follow EIA approval. As Gabriel is the first company to permit a project under the new European legislation, it is pioneering with the Government of Romania the permitting process. As a result, we along with the government are working our way through new legislation that has never been applied. On July 11, 2006 the Alba Iulia Court of Appeal dismissed the application of the foreign-funded non-government organization Alburnus Maior to suspend the assessment process for our EIA. While Alburnus Maior initiated its actions against the Romanian Ministry of Environment and not Gabriel, the Company intervened in the case to present its arguments together with the Ministry of Environment. With the Court's decision, the public consultation process began as scheduled on July 24, 2006. Alburnus Maior has appealed the decision of the Court of Appeal and that appeal is currently pending. Over the past several years, Alburnus Maior has 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 Rosia Montana project. While few of the actions have been successful, 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 as sanctions cancellation of the permit or authorization. We, through Rosia Montana Gold Corporation (RMGC), have 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. Our permitting and construction schedule does not make any allowance for legal challenges that may arise. We have been very successful in the past in these legal challenges and have designed the project and attempted to follow all applicable laws to protect and prevent, as much as possible, potential future legal challenges.

Surface Rights

During the third quarter, the Company raised $93 million in an equity offering, the majority of which was allocated to fund the purchase of the homes and properties in the project area. During August, 2006 the Company updated the real estate survey in the region to determine appropriate prices for homes and properties. The estimated cost to acquire 100 percent of the homes in the project area increased from US$48 million to US$68 million, reflecting the general increase in real estate prices in Romania and our efforts to address issues raised by the community regarding the compensation program. The definitive feasibility study budget covers the higher costs. The new prices were announced to the community and public meetings were held in September, as required under World Bank Guidelines. As of September 30, 2006, the Company owned outright or had options to purchase 60 percent (42 percent owned and 18 percent optioned) of the residential properties located within the project area. On October 9, 2006 the Company began purchasing homes in the project area, which is comprised of the industrial zone, the protected area and the buffer zone. While the Company only needs homes which are located in the industrial zone to build the project, as a consideration to community opinion, an offer to purchase homes in the protected area and buffer zone was made to those residents at their request. The focus of management's attention is to acquire the homes in the industrial zone, particularly those homes required for construction that are not already owned by the Company. However, since not all the homes in the industrial zone are necessary to start construction, this issue will be managed in the context of the phases of mining. Overall, the Company has acquired or has options on 111 of the 379 remaining homes within the industrial area needed to build and operate the project over its 16 year life. More importantly, the Company now has over half of the homes required for construction and the first five years of operation. In addition to the private properties required, the Company needs to acquire about 35% of the project area 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 and we expect to start to obtain access rights to those properties by the end of the year.

Community Support

Support for the project in the Rosia Montana community continues to gain momentum. Following up on the pro-project march during second quarter 2006 in which over 500 residents marched in favour of the project, in early July 2006 ProRosia, a local pro-project NGO, hosted a fund raising barbeque which attracted over 600 people. In addition, the Company held an open house and barbeque for the residents of Rosia Montana at the new town site at Piatra Alba on July 20, 2006 where 2,000 people gathered for the unveiling of the new town and home designs. Support continued through the public consultation hearings, with many residents attending all 14 of the public meetings in Romania to show support for the project. Support for the community and the project was also received from a group of Romanian NGO's in early July 2006. A total of 21 NGO's visited Rosia Montana and 18 NGO's issued a press release supportive of the project, with two NGO's asserting their neutrality and one NGO being against the project. The main conclusions of the 18 NGO's were:

During October 2006 a committee of 28 members of the Romanian Parliament visited the site. The mayors of the villages of Rosia Montana, Abrud and Bucium openly made public comments in support of the project during the course of the visit.

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. The area has been mined for at least two thousand years and, in spite of the damages done by 20th Century mining, continues to provide traces of the earlier activity. Over the past five years we have been granted several discharge permits to acknowledge completion of the program. On July 11, 2006 we -- along with the Minister of Culture and Religious Affairs -- won our appeal when the Romanian Supreme Court (the "Court") decided that the series of lower court decisions that resulted in the annulment of our archaeological discharge certificate no. 4 (the "Discharge Certificate") was not conducted properly, and as a result, overturned the previous annulment. The Supreme Court has referred the matter back to a different lower court, the Brasov Court of Appeal, to be retried on its merits. The retrial, which began in October, should not delay the commencement of construction of the Rosia Montana project, as the Discharge Certificate relates to an area not required for construction start up. All discharge certificates required to begin construction next spring have been secured.

Financing

At September 30, 2006, we have $120.4 million in working capital. Our rate of expenditure was approximately $9.0 million for the quarter, or $3 million per month, excluding working capital adjustments. This rate is higher than third quarter 2005 when we spent $4.5 million for the quarter, or an average of $1.5 million per month, largely due to increased corporate activity related to the progress of the project, higher communications costs and completion of the public meetings for the EIA. The expenditure rate is expected to rise in the fourth quarter as we begin to acquire properties, begin detailed engineering, ordering long-lead-time equipment and begin construction of the new village at Piatra Alba. Project financing discussions are well underway with the goal of completing a final term sheet for both senior and subordinated debt during first quarter 2007 to coincide with the expected timing of EIA approval. The Risk Assessment Report ("Report") was completed by the banks technical consultants during the third quarter. The Report confirms that the Project is Equator Principle compliant, which is a necessary pre-condition for project financing. Based on discussions with financial institutions and our target debt financing requirements, some form of price guarantee (hedging) will be required. The level and type of price guarantee has not been discussed. The final amount will be a function of negotiations with lenders and spot gold prices at the time. The cost to construct the project is estimated at US$638 million based on a definitive feasibility study updated in early 2006 and released concurrent with our 2005 year end results. The estimated total cash cost to produce gold over the first five years is expected to average US$181 per ounce and average US$237 per ounce over the life of the project. The increase in both capital and operating costs over the previous estimates from early 2003 reflects in part significant cost pressures due to strengthening of currencies, higher raw material costs, higher steel and fuel costs as well as higher wages. While the updated cost estimate to build and operate the project contains contingencies, if these trends continue, these contingencies may not be sufficient to absorb the higher costs. Gabriel currently anticipates that it will need to raise between US$700 and US$750 million, of which US$88 million was raised in the third quarter, to place the Rosia Montana project into production. These amounts are a combination debt and equity and included working capital. A cost overrun facility, which is required by lenders in financings of this type, is being negotiated over and above the amounts targeted above. On the positive side, gold prices are at their highest level in 25 years, which overall have increased the return and the profitability of the Rosia Montana project. The estimated internal rate of return of the project based on US$500 gold is 18% and the estimated return increases to 26% at US$600 gold. Also impacting the increase in capital is the fact that the Company has made certain changes to the project to improve the design, to reduce community impact and ensure compliance with changes in regulations. The project has been designed to meet the highest environmental, social and sustainable development standards.

Gabriel Resources Ltd. - Third Quarter Report

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