Gabriel Resources Year End 2005 Report
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TORONTO, March 7 /CNW/ -
Highlights
2005 net loss was $8.5 million, or 5 cents per share, compared to a net loss of $8.6 million, or 6 cents per share in 2004
Monthly expenditures averaged $1.8 million, or $5.4 million in total spending per quarter, with a total of $16.9 million invested in our two development projects during 2005
Working capital at December 31, 2005 totaled $52.9 million - including $30 million from the exercise of warrants during the fourth quarter
Forecast spending through third quarter 2006 to average $2.5 million per month
Updated feasibility study for Rosia Montana:
Estimated capital cost to construct project of US$638 million Annual production of approximately 635,000 ounces of gold at total cash costs of US$181 per ounce over the first five years of production Annual production of approximately 500,000 ounces of gold at total cash costs of US$237 per ounce for life of mine At US$500 per ounce gold - 3.8 year payback and 18% internal rate of return
EIA on track for completion at end of First Quarter 2006
On track to receive construction permit in second half 2006, with first gold pour expected in spring 2009
Loss for the period
For the year ended December 31, 2005, we incurred a loss of $8.5 million, or 5 cents per share, compared to a loss of $8.6 million, or 6 cents per share in 2004. The marginally lower loss in 2005 reflects an increase in interest income due to higher cash balances during 2005, while lower project financing costs were more than offset by reorganization severance costs, settlement of a lawsuit and an increase in non-cash charges related to stock option compensation. "We are on track," said Alan R. Hill, President and Chief Executive Officer. "We've made significant strides to improve our communications program meeting with key stakeholders in the village of Rosia Montana and the surrounding area, as well as Bucharest, combined with a nationwide media campaign. In just a few weeks, we will complete our EIA, giving all stakeholders a comprehensive view of how we will develop Rosia Montana and the specific benefits - economic, environmental, cultural and social - that the Project will bring Romania."
Development activities
We invested $16.9 million in our two development projects during 2005, compared to $33.7 million in 2004. For 2005, expenditures declined in all major project areas as we focused primarily on permitting and communications activities. Once we receive our archaeological discharge and approved EIA, both of which are expected in third quarter 2006, expenditures would rise as we complete property purchase options, order long-lead-time equipment and prepare for the commencement of construction later this year or early 2007.
Liquidity and capital resources
The Company remains well financed to complete permitting. We had $52.9 million in working capital as at December 31, 2005, including $30 million added through the exercise of warrants in the fourth quarter. We averaged monthly total expenditures for the Company of $1.8 million per month, or $5.4 million per quarter. This rate is lower than 2004 when we invested on average $3.5 million per month or $10.6 million per quarter, reflecting reduced engineering, property acquisition and permitting costs during 2005. The expenditure rate is expected to rise to approximately $2.5 million per month during the first three quarters of 2006, peaking at $3.5 million per month in the first quarter, as we finalize and submit our EIA and prepare for mine construction.
Rosia Montana Project Development
Capital and Operating Cost Update
Project economics for Rosia Montana remain robust. A revised feasibility study of the capital and operating costs for Rosia Montana has been recently completed, indicating capital cost for construction of the project to be US$638 million at total cash costs of US$237 per ounce over the life of the project. During the first five years, gold production is expected to average 635,000 ounces per annum at total cash costs of US$181 per ounce, which will enable a payback of 3.8 years on the construction costs, generating an 18% internal rate of return at gold prices of US$500 per ounce. "We believe that the revised feasibility study is conservative and that additional value will be realized as the project moves forward through a continued focus on optimizing the capital and operating costs," added Mr. Hill. The increase in both capital and operating costs reflects significant cost pressures due to strengthening currencies, rising raw material costs including steel and fuel, as well as higher wages. In addition, increased costs reflect an enhanced design to further strengthen management's commitment to meet the highest environmental, social and sustainable development standards.
Mineral Reserve Estimate Update
Reserves are expected to decline by approximately 5%, primarily as a result of expanding the buffer zone around the protected area reducing the size of three of the four pits, as well as a more conservative estimating method. We are currently waiting for Romanian regulatory approval prior to releasing details of updated reserves.
Acquisition of Surface Rights
During the fourth quarter we published the new Property Purchase Program (the "PPP"), which reflects both changes in World Bank/IFC guidelines, as well as a number of changes in local conditions and circumstances, and held a series of information meetings in both Rosia Montana and Corna Valley for the residents to explain the new elements of the program. The updated PPP introduces a mechanism for the residents of the village of Rosia Montana to enter into option agreements with respect to the acquisition of their properties, thereby allowing us to continue the process of securing rights to the surface area required to develop the Rosia Montana project, with fair and equitable prices ensured to property sellers, but without the immediate cost outlay of an outright purchase. The option program will allow us to expedite the acquisition of properties once we receive the approval of our EIA. The new option program should cost approximately US$1 million over the course of the first nine months of 2006.
Archaeological Discharge Certificate
We received a copy of the Alba Court's written reasons for its decision to annul archaeological discharge certificate no. 4 in late September 2005. Joining with the Romanian Minister of Culture and Religious Affairs, we have appealed the decision to the Romanian Supreme Court in Bucharest, based on advice of Romanian counsel that the Alba Court incorrectly applied the laws governing archaeological discharges and based its decision on a number of matters irrelevant to the granting of archaeological discharges. The appeal is scheduled to be heard in April 2006. The ruling of the Alba Court does not prevent us from continuing our archaeological discharge program and we retain the right to reapply for a new archaeological discharge certificate at any time, either before or after the Supreme Court hears our appeal. The court challenge to our discharge certificate is one example of a series of legal challenges initiated over the past year by one non-government organization in particular, seizing any pretense to question 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 Rosia Montana project. While Gabriel is typically not the primary target of this strategy of legal obstruction, we 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 Romanian laws.
Environmental Impact Assessment
The last step in the EIA process prior to submittal - turning the EIA over to the independent team of specialists - was completed during fourth quarter 2005. As we enter 2006, the independent team of specialists is finalizing the EIA, which will be submitted in both Romanian and English to meet the requirements of the Romanian Government and the Espoo Convention. We are on track to complete the EIA by the end of first quarter 2006.
Broad Communications Program
During the second half of 2005 and continuing through the first quarter of 2006, our communications program emphasized face-to-face meetings and a national media campaign. We met with Romanian Government officials, senior European Union officials, hosted press conferences with the Romanian media, organized site tours for Romanian journalists, as well as sessions with Romanian business leaders to introduce the new corporate and Romanian management teams and highlight project benefits. As a complement to our coordinated communications campaign, we began a national media campaign during fourth quarter 2005, including television, print and billboards, to creating a more positive climate of opinion on the many benefits of building the Rosia Montana mine. Viewers of both the television commercial and print ads are encouraged to visit www.truestory.ro - a website custom-built to provide additional information on the positive impacts of the Rosia Montana project. "We are making real progress on communicating the many benefits to the stakeholders of this project in Romania. The feedback has been very positive, creating an improved climate for the submittal of our EIA and the public consultation phase of the project," added Mr. Hill.
Rosia Montana Project Timeline Update
As indicated in our Second Quarter Report 2005 Report to Shareholders, we expect to complete our EIA by the end of first quarter 2006. If we are able to complete our archaeology discharges in parallel with the approval of our EIA, we would expect to begin purchasing properties in the village in the third quarter, putting us on track to receive our construction permit in the second half of 2006. The project should take approximately two years to construct, putting our projected first gold pour in spring 2009.
Schedule 1
Gabriel Resources Ltd.
Rosia Montana Project
Update Feasibility Study - Summary Information
(United States Dollars)
1. Resources
Measured and Indicated Resources Tonnes 350,300,000
Grade (0.6g/t gold cut-off grade) Grams per tonne gold 1.3 Grams per tonne silver 6 Contained Ounces Gold 14,600,000 Silver 64,900,000
Inferred Resources Tonnes 30,300,000 Grade (0.6g/t gold cut-off grade) Grams per tonne gold 1.2 Grams per tonne silver 3 Contained Ounces Gold 1,200,000 Silver 3,000,000
2. Mining and Processing
Plant Throughput (tonnes) Annual Average 13,432,000 Hourly Design 1,625 Ore Mined (tonnes) (x) including low grade stockpile Total 214,905,000 Waste Mined (tonnes) Total 256,926,000
Waste to Ore Stripping Ratio 1.2:1
Mine Life (Years) 15.6
Mining Conventional Open Pit
Processing Conventional Mill / CIL Cyanide Destruct Circuit S02 / Air Metallurgical Recovery Gold 79% Silver 61%
Initial 60 Months Life of Mine Gold Production (ounces) Total 3,176,000 7,943,000 Average Annual 635,000 509,000 Silver Production (ounces) Total 13,907,000 28,891,000 Average Annual 2,680,000 1,806,000
3. Capital Costs Dollars Initial Capital (Millions)
Mining 45 Process Plant & Infrastructure 142 Tailings Management Facility 43 Infrastucture and Utilities 82 Sub-Total: 311 EPCM 65 Other Indirects 90 Sub-Total: 156 Community Development (All Stages) 61 Owners' Costs 55 Sub-Total: 116 Contingency 55 Total: 638
Sustaining Capital (Millions) Mining 76 Process Plant & Infrastructure 2 Tailings Management Facility 116 Administration 14 Mine Closure & Reclamation 70 Total: 278
4. Operating Costs
Initial 60 Months Life of Mine Onsite Operating Costs Dollars Per Tonne of Ore Mining 2.76 2.41 Processing 6.31 6.09 General, Administrative and other 1.05 0.96 Total: 10.12 9.46
Cash Operating Costs Per ounce of gold Mining 56 65 Processing 128 165 Administrative 18 23 Refining, Treatment and Transport 4 3 Silver By-Product Credit -36 -31 Cash Operating Cost 170 225 Royalty and Environmental tax 11 12 Total Cash cost 181 237
5. Financial Analysis
Gold Price US$450 US$500 US$550
Pay Back Period (Years) 4.6 3.8 3.2
Internal Rate of Return (100% Equity Basis) 12.8% 17.6% 21.8%
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, 2005 and 2004. The MD&A is intended to supplement the audited consolidated financial statements and notes thereto ("Statements") of Gabriel Resources Ltd. (the "Company") as at and for the years ended December 31, 2005 and 2004. 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 7, 2006, and the Company's public filings, including its most recent Annual Information Form, can be reviewed on the SEDAR website (www.sedar.com).
Overview
The change in management at the Company during second quarter 2005 has provided the opportunity to reaffirm our goals and objectives as a company. 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 in Romania 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 safety or operational practices, we pledge to do it right.
Key Issues
Environmental/Permitting
When developed, Rosia Montana will be the largest gold mine in Europe and one of the largest gold mines in the world. This is also the first mine Romania will permit under its new environmental laws, which were harmonized with those of the European Union in 2003. The size, scope and location of the proposed operation dictate a comprehensive permitting process for both the Company and the Government. As we enter 2006, three of the four steps required of the Company before submitting the Environmental Impact Assessment ("EIA") to the Romanian Government have been completed. The first was the submission of the Project Presentation Report ("PPR"), filed in December of 2004, which provided an overview of the project. The second step was the response from the Romanian Government based on the PPR, which was received in late May 2005 and is referred to as the Terms of Reference ("TOR"). The TOR outlines the matters that need to be considered and addressed in the EIA. During third quarter 2005, we completed the third step which involved incorporating the issues outlined in the TOR into our EIA. The last step in the EIA process, turning the EIA over to the independent team of specialists, was completed during fourth quarter 2005. As we enter 2006, the independent team of specialists is finalizing the EIA, which will be submitted in both Romanian and English to meet the requirements of the Romanian Government and the Espoo Convention. We are on track to complete the EIA by the end of first quarter 2006.
Surface Rights
Obtaining surface rights is a critical path item for the project. We have already acquired 400 homes to date. We need to acquire a further 560 homes, as well as a number of government and community buildings to complete the acquisition of all surface rights in the project area. During third quarter 2005, we completed the update of our Property Purchase Program (the "PPP") to reflect both changes in World Bank/IFC guidelines, as well as a number of changes in local conditions and circumstances. The updated program introduces a mechanism for the residents of the village of Rosia Montana to enter into option agreements with respect to the acquisition of their properties. This will allow us to continue the process of securing rights to the surface area required to develop the Rosia Montana project, with fair and equitable prices ensured to property sellers, but without the immediate cost outlay of an outright purchase. The option program will allow us to expedite the acquisition of properties once we receive the approval of our EIA. The new option program began in early December, following the publication of the PPP and the communication of the new program to the residents of Rosia Montana. The new option program should cost approximately US$1 million over the course of the first nine months of 2006, committing the Company to acquire approximately US$33 million in local properties in the project area. The commitment becomes binding once the EIA is approved.
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 extensive mine work in the 20th century, still provides many traces of the earlier activity. We have spent approximately US$9 million sponsoring a program of rescue archaeology to recover and document the remaining evidence. While over the past four years we have received several discharge permits to acknowledge completion of the program, one of the discharges - for a part of the Cirnic Massif - was annulled by the Alba Iulia Court of Appeal (the "Alba Court") in June 2005. We received a copy of the Court's written reasons for its decision to annul archaeological discharge certificate no. 4 in late September 2005 and along with the Romanian Minister of Culture and Religious Affairs, we have appealed the decision to the Supreme Court in Bucharest, based on counsel that the Alba Court incorrectly applied the laws governing archaeological discharges and based its decision on a number of matters we consider irrelevant to the granting of archaeological discharges. The appeal is scheduled to be heard in April 2006. The ruling of the Alba Court does not prevent us from continuing our archaeological discharge program and we retain the right to reapply for a new archaeological discharge certificate at any time, either before or after the Supreme Court hears our appeal.
Financing
At the end of December 2005, we had $52.9 million in working capital. Our rate of expenditure was approximately $5.4 million per quarter, or $1.8 million per month during 2005, excluding working capital adjustments. This rate is lower than 2004 when we spent on average $10.6 million per quarter or $3.5 million per month, reflecting lower engineering, property acquisition and permitting costs in 2005. The expenditure rate is expected to rise to approximately $2.5 million per month during the first three quarters of 2006, peaking at $3.5 million per month in the first quarter, as we finalize and submit our EIA and prepare for mine construction. Concurrent with our year end results, we updated the cost to construct and operate the project. The cost to construct the mine increased from US$437 million, based on a definitive feasibility study completed in early 2003, to US$638 million, while the total cash cost to produce gold increased from an average of US$152 per ounce to US$237 per ounce. Despite higher capital and cash costs, the internal rate of return at US$500 per ounce gold remains robust at 18%, resulting in a 3.8 year payback on the US$638 million in capital. The increase in costs reflects in part significant cost pressures due to the strengthening of currencies, higher raw material costs, higher steel and fuel costs, as well as higher wages. In addition, there have been certain changes to the project to improve the design and to ensure compliance with changes in regulations. The project has been designed to meet the highest environmental, social and sustainable development standards. The higher capital and operating costs are not expected to hinder our ability to finance the project, as gold prices have increased from the low US$300-per-ounce level when the original estimate was calculated to over US$550 per ounce today, which more than offsets the higher costs, resulting in the continuation of strong returns. Reserves are expected to decline by approximately 5%, primarily a result of expanding the buffer zone around the protected area reducing the size of 3 of the 4 pits as well as a more conservative estimating method. We are currently waiting for Romanian regulatory approval.