Gabriel Resources Ltd. - Year End 2006 Report

2007-03-06

TSXV - TSX Venture Exchange · Gold · Silver · Canada

TSX Trading Symbol: GBU

TORONTO, March 6 /CNW/ -

Highlights

Financial performance

Fourth quarter net loss was $5.1 million, or $0.03 per share. Full year loss was $12.6 million, or $0.07 per share. Fourth quarter expenditures totaled $38.5 million on our two development projects and $60.0 million for the full year.

Liquidity and capital resources

Working capital at December 31, 2006 totaled $79.9 million. An additional $20.6 million of cash is expected to be added to working capital with the expiry of 7.5 million warrants, which are currently in the money, at the end of first quarter 2007. The Company expects to spend US$190 million of the US$638 million definitive feasibility study budget estimate in 2007 - based on fall 2007 construction permit receipt. Project financing discussions are well underway, with a goal of completing final term sheets for both senior and subordinated debt in parallel with our EIA approval expected in summer 2007.

Expected Financing Plan

The estimated capital cost to complete the development of Rosia Montana project - including interest, financing and corporate costs is approximately US$750 million. The Company anticipates financing these costs with approximately 20 percent equity - US$150 million, of which US$80 million was raised in the third quarter of 2006 - and 80 percent debt, which could include senior and mezzanine or high yield debt. The estimated capital cost to complete does not include a provision for (i) a cost overrun facility, (ii) a financial guarantee (reclamation deposit), or (iii) hedging program if required. These additional items could add $100 million to the financing plan.

Rosia Montana Project Development

Environmental Impact Assessment

On January 31, 2007, the Company received the official list of questions gathered during the public consultation process and judged by the Romanian Government to require a response. In total, approximately 5,600 questions and 95 statements were included in the official list of questions. In preparation, the Company, the project design team and the EIA team have drafted answers for 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. These preparatory efforts, together with an in depth expert examination of all new issues raised, should allow the Annex to the EIA to be submitted with robust responses during spring 2007. The delay in receipt of the questions, which had been expected before the end of 2006, has extended the permitting process into summer 2007. While we expect EIA approval in summer 2007, the Romanian Government ultimately determines the timing of the decision.

"With the questions in hand, we are well underway to completing the annex this spring," said Alan R. Hill, President and Chief Executive Officer. "Looking longer term, we made solid strides in 2006 and our aim in 2007 is to obtain all permits and approvals, as well as financing to begin construction in the fall."

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 the archaeological discharge certificate no. 4 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 fall 2007.

Acquisition of Surface Rights

On October 9, 2006 the Company recommenced acquiring residential properties. In total $25.3 million was spent during the fourth quarter acquiring residential properties. At December 31, 2006, the Company acquired or has options to acquire 134 of the 379 remaining homes within the industrial zone 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. The pace of acquisitions has decreased during first quarter 2007 as the Company and the community find a solution to a surge in the construction of illegal wood structures referred to as "cabins", for which sellers expect compensation. The Company is confident that a solution will soon be reached and that the pace of acquisitions will pick up to levels consistent with those in fall 2006.

Updated Rosia Montana Project Timeline

The delay in receipt of the questions has extended the permitting process into summer 2007. We are targeting receipt of our construction permit in fall 2007, following receipt of EIA approval and other permits and approvals required for the construction permit and the necessary surface rights. We estimate that it will take approximately two years to construct the mine, putting the first pour of gold target date in fall 2009. The first pour date has been extended by one quarter, due to the longer than anticipated lead time for critical equipment and the delay in receipt of the questions. Lead time for some equipment has nearly doubled from the estimated time in the definitive feasibility study.

Romania's Accession to European Union

Romania's accession to the European Union took place as planned on January 1, 2007. With EU Accession, robust economic growth continues but the coalition government has become less cohesive during the past several weeks. No allowance has been made in our schedule for any delay that may result from the current political environment.

New Appointments

On March 1, 2007, Mr. Ronald Simkus, with more than 30 years experience in the international mining industry, was appointed to the Board of Directors.

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.

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 years ended December 31, 2006 and 2005. The MD&A is intended to supplement the audited consolidated financial statements and notes thereto ("Statements") of Gabriel Resources Ltd. ("Gabriel" or the "Company") as at and for the years ended December 31, 2006 and 2005. You are encouraged to review the Statements in conjunction with this document.

All amounts included in the MD&A are in Canadian dollars, unless otherwise specified. This report is dated as at March 5, 2007, and the Company's public filings, including its most recent Annual Information Form, can be reviewed on the SEDAR website (www.sedar.com).

Overview

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 its EU era 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 to the Romanian Government in May 2006. A translation of the study in English was also submitted to meet the requirements for the international Espoo Convention for communications to adjacent States. While it is not a legal requirement, the Company elected to have the Non-Technical Summary of the EIA translated into Hungarian to further assist interested parties in Hungary to better participate in the public consultation process due to the concerns of Hungarians toward the Project. 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. On January 31, 2007, the Company received the official list of questions gathered during the public consultation process and judged by the Romanian Government to require a response. In total approximately 5,600 questions and 95 statements were included in the official list of questions. In preparation, Gabriel, the project design team and the EIA team have drafted answers for 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. These preparatory efforts, together with an in depth expert examination of all new issues raised should allow the Annex to the EIA to be submitted with robust responses promptly during the spring 2007. The delay in receipt of the questions, which had been expected before the end of 2006, has extended the permitting process into summer 2007. While we expect EIA approval in summer 2007, the Romanian Government ultimately determines the timing of the decision.

While the EIA is by far the most important project permit, the Urbanistic Certificate lays out approximately 80 other permits and approvals required, 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 within 60 days of EIA approval. As Gabriel, through Rosia Montana Gold Corporation, 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 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 NGO 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.

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 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 as sanctions cancellation of the permit or authorization. Gabriel, through Rosia Montana Gold Corporation (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 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 against and prevent, as much as possible, potential future legal challenges.

Surface Rights

During third quarter 2006, 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 increase in costs is not expected to effect the overall project budget as the definitive feasibility study budget contained a contingency and covered more properties then required to construct the mine. The new prices were announced to the community and public meetings were held in September 2006, as required under World Bank Guidelines.

On October 9, 2006, the Company recommenced 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 134 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.

The pace of acquisitions has decreased during the first quarter 2007 as the Company and the community find a solution to a surge in the construction of illegal wood structures referred to as "cabins," for which sellers expect compensation. The Company is confident that a solution will soon be reached and that the pace of acquisitions will pick up to levels consistent with those in fall 2006.

In addition to the private properties required, the Company needs to acquire about 35% of the project area which is 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 obtain access rights to those properties required for construction and the first five years of operations by the time the EIA is approved.

Community Support

Support for the project in the Rosia Montana community continued to gain momentum in 2006. Following up on the 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 in July 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 across Romania to show community support for the project.

Support for the community and the project was also received from a group of Romanian NGO's in 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:

1. If the Rosia Montana project complies with all applicable laws then the project should proceed; 2. Neither Alburnus Maior nor ProRosia represent the interests of the local community of Rosia Montana, but the interests of a small group of people; and 3. The opinion shared by most participants was that the Rosia Montana area is socially, economically and environmentally disastrous -- that people do not have jobs and life is very hard.

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. After the visit, some Parliamentarians vocally expressed their disapproval of the project. Pro or con, the Parliamentarians have no role in the permitting process, which takes place in the Executive/Ministerial branch of the Romanian Government.

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 damage done by 20th Century mining, continues to provide traces of the earlier activity. We have spent approximately US$10 million sponsoring a program of rescue archaeology to recover and document the remaining evidence. Over the past five years we have been granted several discharge permits to acknowledge completion of the program.

Here as on other issues, project opponents have used the courts to obstruct the discharge process. 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 2006, 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 in 2007 have been secured.

Financing

At December 31, 2006, we have $79.9 million in working capital. Our rate of expenditure was approximately $3.8 million per month during 2006, excluding working capital adjustments and the commencement of home acquisitions in fourth quarter 2006, which cost an additional $25.3 million. This rate is higher than 2005 when we spent an average of $1.8 million per month, largely due to increased corporate activity related to the progress of the project, higher communications costs and completion of the EIA. The expenditure rate is expected to rise in 2007 as we continue to acquire properties, complete detailed engineering, order long-lead-time equipment and begin construction of the new village at Piatra Alba and Alba Iulia. Once the Company receives the construction permit, which is expected in fall 2007, the nature and rate of expenditure changes significantly as site construction begins. Based on fall 2007 construction permit receipt, we expect to spend approximately $200 million in 2007 for corporate activities (US$10 million) and project related activities (US$190 million) leading up to construction and commencement of construction in the fall of 2007. The strong demand for mining and process equipment has forced the Company to accelerate the ordering of long-lead-time equipment and has resulted in larger deposits than was historically the case. Long-lead-time equipment and permitting are the critical path items in meeting our schedule for first pour of gold in fall 2009.

Gabriel Resources Ltd. - Year End 2006 Report

Earlier from Lahontan Gold Corp.