GALIANO GOLD INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2022 and 2021
(Expressed in United States dollars, unless otherwise noted)
TABLE OF CONTENTS
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management's Report on Financial Statements
The consolidated financial statements of Galiano Gold Inc. have been prepared by, and are the responsibility of, the Company's management. The consolidated financial statements have been prepared by management on a going concern basis in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not exact since they include certain amounts based on estimates and judgements. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects.
The Board of Directors is responsible for ensuring management fulfills its financial reporting responsibilities. The Audit Committee meets with the Company's management and external auditors to discuss the results of the audits and to review the consolidated financial statements prior to the Audit Committee's submission to the Board of Directors for approval. The Audit Committee also reviews the quarterly financial statements and recommends them for approval to the Board of Directors, reviews with management the Company's systems of internal control, and reviews the scope of the external auditors' audit and non-audit work. The Audit Committee is appointed by the Board, and all of its members are independent directors.
The consolidated financial statements have been audited by KPMG LLP, Chartered Professional Accountants, in accordance with the standards of the Public Company Accounting Oversight Board (United States) on behalf of the shareholders.
Management's Report on Internal Controls over Financial Reporting
Management has developed and maintains systems of internal accounting and administrative controls in order to provide, on a reasonable basis, assurance that the financial information is relevant, reliable and accurate and that the Company's assets are appropriately accounted for and adequately safeguarded. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore, may not prevent or detect misstatements. Management has assessed the effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management's assessment, the Company's internal control over financial reporting is effective as at December 31, 2022.
"Matt Badylak" | "Matthew Freeman" | |
Matt Badylak | Matthew Freeman | |
Director, President and Chief Executive Officer | Executive Vice President and Chief Financial Officer |
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KPMG LLP Chartered Professional Accountants PO Box 10426 777 Dunsmuir Street Vancouver BC V7Y 1K3 Canada | Telephone (604) 691-3000 Fax (604) 691-3031 Internet www.kpmg.ca |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Galiano Gold Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Galiano Gold Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), cash flow and changes in equity, for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and its financial performance and its cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
Chartered Professional Accountants
Vancouver, Canada
March 28, 2023
We have served as the Company's auditor since 2011.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.
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GALIANO GOLD INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 2022 AND 2021 (In thousands of United States Dollars) |
December 31, 2022 | December 31, 2021 | ||||||
Note | $ | $ | |||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | 6 | 56,111 | 53,521 | ||||
Receivables | 54 | 55 | |||||
Receivable due from related party | 7 | 1,684 | 7,326 | ||||
Prepaid expenses and deposits | 756 | 766 | |||||
58,605 | 61,668 | ||||||
Non-current assets | |||||||
Financial assets | 8 | 66,809 | 72,426 | ||||
Investment in joint venture | 9 | 54,148 | - | ||||
Right-of-use asset | 277 | 381 | |||||
Property, plant and equipment | 55 | 93 | |||||
Exploration and evaluation assets | 10 | - | 1,628 | ||||
121,289 | 74,528 | ||||||
Total assets | 179,894 | 136,196 | |||||
Liabilities | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities | 4,330 | 2,536 | |||||
Payable due to related party | 7 | 1,364 | - | ||||
Lease liability | 110 | 107 | |||||
5,804 | 2,643 | ||||||
Non-current liabilities | |||||||
Long-term incentive plan liabilities | 12 | 195 | 478 | ||||
Lease liability | 204 | 312 | |||||
399 | 790 | ||||||
Total liabilities | 6,203 | 3,433 | |||||
Equity | |||||||
Share capital | 11 | 579,591 | 579,591 | ||||
Equity reserves | 12 | 51,998 | 51,879 | ||||
Accumulated deficit | (457,898 | ) | (498,707 | ) | |||
Total equity | 173,691 | 132,763 | |||||
Total liabilities and equity | 179,894 | 136,196 | |||||
Commitments and contingencies | 13 |
The accompanying notes form an integral part of these consolidated financial statements.
Approved on behalf of the Board of Directors: | ||
"Matt Badylak" | “Greg Martin” | |
Director | Director |
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GALIANO GOLD INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (In thousands of United States Dollars, except dollar per share amounts) |
2022 | 2021 | |||||||
Note | $ | $ | ||||||
Share of net income (loss) related to joint venture | 9 | 46,517 | (51,528 | ) | ||||
Service fee earned as operators of joint venture | 7 | 5,413 | 5,071 | |||||
General and administrative expenses | 14 | (11,100 | ) | (13,477 | ) | |||
Exploration and evaluation expenditures | 15 | (1,411 | ) | (642 | ) | |||
Income (loss) from operations and joint venture | 39,419 | (60,576 | ) | |||||
Impairment reversal (loss) on investment in joint venture | 9 | 7,631 | (7,631 | ) | ||||
Impairment of exploration and evaluation assets | 10 | (1,628 | ) | - | ||||
Finance income | 16(a) | 1,036 | 257 | |||||
Finance expense | 16(b) | (5,647 | ) | (925 | ) | |||
Foreign exchange loss | (2 | ) | (8 | ) | ||||
Net income (loss) after tax and comprehensive income (loss) for the year | 40,809 | (68,883 | ) | |||||
Weighted average number of shares outstanding: | ||||||||
Basic | 18 | 224,943,453 | 224,729,084 | |||||
Diluted | 18 | 224,947,807 | 224,729,084 | |||||
Net income (loss) per share: | ||||||||
Basic | 0.18 | (0.31 | ) | |||||
Diluted | 0.18 | (0.31 | ) |
The accompanying notes form an integral part of these consolidated financial statements.
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GALIANO GOLD INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (In thousands of United States Dollars, except for number of common shares) |
Number of shares | Share capital | Equity reserves | Accumulated deficit | Total equity | ||||||||||||
Note | $ | $ | $ | $ | ||||||||||||
Balance as at December 31, 2020 | 224,253,522 | 578,750 | 49,957 | (429,824 | ) | 198,883 | ||||||||||
Issuance of common shares on exercise of stock options | 12(a) | 689,931 | 841 | (272 | ) | - | 569 | |||||||||
Share-based compensation expense | 12(a) | - | - | 2,194 | - | 2,194 | ||||||||||
Net loss and comprehensive loss for the year | - | - | - | (68,883 | ) | (68,883 | ) | |||||||||
Balance as at December 31, 2021 | 224,943,453 | 579,591 | 51,879 | (498,707 | ) | 132,763 | ||||||||||
Share-based compensation expense | 12(a) | - | - | 119 | - | 119 | ||||||||||
Net income and comprehensive income for the year | - | - | - | 40,809 | 40,809 | |||||||||||
Balance as at December 31, 2022 | 224,943,453 | 579,591 | 51,998 | (457,898 | ) | 173,691 |
The accompanying notes form an integral part of these consolidated financial statements.
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GALIANO GOLD INC. CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (In thousands of United States Dollars) |
2022 | 2021 | ||||||
Note | $ | $ | |||||
Operating activities: | |||||||
Net income (loss) for the year | 40,809 | (68,883 | ) | ||||
Adjustments for: | |||||||
Share of net (income) loss related to joint venture | 9 | (46,517 | ) | 51,528 | |||
Impairment (reversal) loss on investment in joint venture | 9 | (7,631 | ) | 7,631 | |||
Impairment of exploration and evaluation assets | 10 | 1,628 | - | ||||
Depreciation | 146 | 148 | |||||
Share-based compensation | 12,14 | 1,646 | 3,175 | ||||
Finance income | 16(a) | (1,036 | ) | (257 | ) | ||
Finance expense | 16(b) | 5,642 | 906 | ||||
Unrealized foreign exchange (loss) gain | (1 | ) | 2 | ||||
Operating cash flow before working capital changes | (5,314 | ) | (5,750 | ) | |||
Change in non-cash working capital | 19 | 7,098 | (7,185 | ) | |||
Cash provided by (used in) operating activities | 1,784 | (12,935 | ) | ||||
Investing activities: | |||||||
Redemption of preferred shares in joint venture | 8 | - | 5,000 | ||||
Acquisition of exploration and evaluation assets, net of cash acquired | - | (1,470 | ) | ||||
Interest received | 1,036 | 407 | |||||
Expenditures on property, plant and equipment | (4 | ) | (31 | ) | |||
Cash provided by investing activities | 1,032 | 3,906 | |||||
Financing activities: | |||||||
Shares issued for cash on exercise of stock options | 12(a) | - | 569 | ||||
Office lease payments | (130 | ) | (128 | ) | |||
Cash (used in) provided by financing activities | (130 | ) | 441 | ||||
Impact of foreign exchange on cash and cash equivalents | (96 | ) | (42 | ) | |||
Increase (decrease) in cash and cash equivalents during the year | 2,590 | (8,630 | ) | ||||
Cash and cash equivalents, beginning of year | 53,521 | 62,151 | |||||
Cash and cash equivalents, end of year | 56,111 | 53,521 | |||||
Supplemental cash flow information | 19 |
The accompanying notes form an integral part of these consolidated financial statements .
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
1. Nature of operations
Galiano Gold Inc. ("Galiano" or the "Company") was incorporated on September 23, 1999 under the Business Corporations Act of British Columbia, Canada. The Company's head office and principal address is located at 1640 - 1066 West Hastings Street Vancouver, British Columbia, V6E 3X1, Canada. The Company's registered and records office is located at Suite 2600, Three Bentall Centre, 595 Burrard Street, Vancouver, V7X 1L3. The Company's common shares trade on the Toronto Stock Exchange ("TSX") and NYSE American Exchange ("NYSE American") under the ticker symbol "GAU".
The Company's principal business activity is the operation of the Asanko Gold Mine ("AGM") through a joint venture arrangement (the "JV") associated with the Company's 45% equity interest in the AGM (see note 9) and exploration and development of the JV's mineral property interests. The Government of Ghana has a 10% free-carried interest in the AGM. The AGM consists of four main open-pit mining areas: Abore, Miradani North, Nkran and Esaase, multiple satellite deposits and exploration projects located on the Asankrangwa Gold Belt in the Amansie West District of the Republic of Ghana ("Ghana"), West Africa.
In addition to its interest in the AGM, the Company holds the 100% owned Asumura property in Ghana.
2. Basis of presentation
(a) Statement of compliance
These consolidated financial statements have been prepared using accounting policies in accordance with IFRS as issued by the IASB and Interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC").
These consolidated financial statements were authorized for issue and approved by the Board of Directors on March 28, 2023.
(b) Basis of presentation and consolidation
These consolidated financial statements have been prepared on a historical cost basis, except for financial instruments carried at fair value.
All amounts are expressed in thousands of United States dollars, unless otherwise stated, and the United States dollar is the functional currency of the Company and each of its subsidiaries. References to C$are to Canadian dollars.
These consolidated financial statements incorporate the financial information of the Company and its subsidiaries as at December 31, 2022. Subsidiaries are entities controlled by the Company. Control exists when the Company has power, directly or indirectly, to govern the financial and operating policies of an entity as to obtain benefits from its activities. Subsidiaries are included in the consolidated financial statements of the Company from the effective date of acquisition up to the effective date of disposition or loss of control.
All significant intercompany amounts and transactions between the Company and its subsidiaries have been eliminated on consolidation.
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GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
2. Basis of presentation (continued)
The principal subsidiaries and joint arrangements to which the Company is a party, as well as their geographic locations, were as follows as at December 31, 2022:
Affiliate name | Location | Interest | Classification and accounting method |
Galiano Gold South Africa (PTY) Ltd. | South Africa | 100% | Consolidated |
Galiano International (Isle of Man) Ltd. | Isle of Man | 100% | Consolidated |
Galiano Gold (Isle of Man) Ltd. | Isle of Man | 100% | Consolidated |
Galiano Gold Exploration Mali SARL | Mali | 100% | Consolidated |
Asanko Gold Exploration Ghana Ltd. | Ghana | 100% | Consolidated |
Asanko Gold Ghana Ltd. | Ghana | 45% | Joint venture; equity method |
Adansi Gold Company (GH) Ltd. | Ghana | 50% | Joint venture; equity method |
Shika Group Finance Limited | Isle of Man | 50% | Joint venture; equity method |
3. Significant accounting policies
The accounts policies described in this section were those applied by the Company and/or the JV (see note 9) during the years ended December 31, 2022 and 2021.
(a) Investments in joint arrangements
The Company conducts a portion of its business through joint arrangements where the parties are bound by contractual arrangements establishing joint control and decisions about the activities that significantly affect the returns of the investee require unanimous consent. A joint arrangement is classified as either a joint operation or a joint venture, subject to the terms that govern each investor's rights and obligations in the arrangement.
In a joint operation, the investor has rights and obligations to the separate assets and liabilities of the investee and in a joint venture, the investors have rights to the net assets of the joint arrangement. For a joint operation, the Company recognizes its share of the assets, liabilities, revenue, and expenses of the joint arrangement, while for a joint venture, the Company accounts for its investment in the joint arrangement using the equity method.
Under the equity method, the Company's investment in a joint venture is initially recognized at cost and subsequently increased or decreased to recognize the Company's share of net earnings or losses of the joint venture, after any adjustments necessary for impairment losses or reversal of impairment losses after the initial recognition date. The total carrying amount of the Company's investment in a joint venture also includes any long-term debt interests which in substance form part of the Company's net investment. The Company's share of a joint venture's losses that are in excess of its investment are recognized only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the joint venture. The Company's share of net earnings or losses of a joint venture are recognized in net earnings during the period. Dividends and repayment of capital received from a joint venture are accounted for as a reduction in the carrying amount of the Company's investment. Balances between the Company and its joint ventures are not eliminated, but rather disclosed as related party transactions or balances.
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GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
At the end of each reporting period, the Company assesses whether there is any objective evidence that an investment in a joint venture is impaired. Objective evidence includes observable data indicating there is a measurable decrease in the estimated future cash flows of the joint venture's operations. When there is objective evidence that an investment is impaired, the carrying amount of such investment is compared to its recoverable amount, being the higher of its fair value less costs of disposal and value-in-use. If the recoverable amount of an investment is less than the carrying amount, the carrying amount is reduced to its recoverable amount and a corresponding impairment loss is recognized in the period in which the relevant circumstances are identified. When an impairment loss reverses in a subsequent period, the carrying amount of the investment is increased to the revised estimate of the recoverable amount to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had an impairment loss not been previously recognized. Following an impairment reversal, the Company will continue to recognize its share of net earnings to the extent the investment is anticipated to be recoverable through future cash flows of the joint venture. A reversal of an impairment loss is recognized in net earnings in the period in which the reversal occurs.
Similar to the assessment of impairment for subsidiaries, the Company reviews the mining properties and plant and equipment for a joint arrangement at the cash-generating unit level to determine whether there is any indication that these assets are impaired.
(b) Foreign currency translation
Transactions in foreign currencies are initially recorded at the functional currency rate of exchange at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange at the date of the statement of financial position. Foreign exchange gains (losses) are recorded in the consolidated statement of operations and comprehensive income (loss) for the year.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
(c) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and short-term investments with original maturity dates of ninety days or less, or that are fully redeemable without penalty or loss of interest.
(d) Inventories
Gold on hand, gold in process and stockpiled ore inventories are recorded at the lower of weighted average production cost and net realizable value. The cost of inventories include the cost of raw materials, direct labour, mine-site overhead expenses and applicable depreciation and depletion. Net realizable value is calculated as the estimated price at the time of sale based on prevailing and long-term metal prices less estimated future costs to convert the inventories from their respective states into saleable form less estimated costs to sell.
Production costs are included in work-in-process inventory based on current costs incurred up to the point of dore production. The costs of finished goods represent the costs of work-in-process inventories plus applicable treatment costs. The costs of inventories sold during the period are presented as production costs and depreciation and depletion, as applicable, in the statement of operations and comprehensive income (loss) for the period.
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GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
Additions to the cost of ore stockpiles are based on the related current cost of production for the period, while reductions in the cost of ore stockpiles are based on the weighted-average cost per tonne of ore in the stockpile. Stockpiles are segregated between current and non-current inventories in the consolidated statement of financial position based on the planned period of usage.
Supplies and spare parts are valued at the lower of weighted-average cost and net realizable value. Replacement costs of materials and spare parts are generally used as the best estimate of net realizable value. Provisions are recorded to reduce the carrying amount of materials and spare parts inventory to net realizable value to reflect current intentions for the use of redundant or slow-moving items, or for physically obsolete items. Provisions for redundant and slow-moving items are made by reference to specific items of inventory. The Company reverses write-downs where there is a subsequent increase in net realizable value and where the inventory is still on hand.
(e) Mineral properties, plant and equipment ("MPP&E")
(i) Mineral properties
Recognition
Capitalized costs of mining properties include the following:
- costs assigned to mining properties acquired in business combinations;
- expenditures incurred to develop mineral properties including pre-production stripping costs;
- stripping costs in the production phase of a mine if certain criteria have been met (see below);
- costs to define and delineate known economic resources and develop the project;
- borrowing costs attributable to qualifying mining properties; and
- estimates of reclamation and closure costs.
Stripping costs
In open pit mining operations, it is necessary to incur costs to remove overburden and other mine waste materials in order to access the ore from which minerals can be extracted economically. Stripping costs incurred in order to provide initial access to the ore body (referred to as pre-production stripping) are capitalized as incurred. Stripping costs incurred during the production stage of an open pit mine are accounted for as production costs in the consolidated statement of operations and comprehensive income (loss) during the period that the stripping costs were incurred, unless these costs provide a future economic benefit. Production phase stripping costs are considered to generate a future economic benefit when (i) it is probable that future economic benefit associated with the stripping activity will flow to the entity; (ii) the entity can identify the component of the ore body for which access has been improved; and (iii) the costs relating to the stripping activity associated with that component can be measured reliably. These costs are capitalized as mineral properties, plant and equipment.
Production costs are allocated between inventory produced and the stripping asset based on the volume of waste extracted compared with the expected volume, for a given volume of ore production. Stripping costs incurred and capitalized during the production phase are depleted using the units-of-production method over the proven and probable reserves (ore tonnes) of the component of the ore body to which access has been improved as a result of the specific stripping activity.
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GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
Management reviews the estimates of the waste and ore in each identified component of operating open pit mines at the end of each financial year, and when events and circumstances indicate that such a review should be made. Deferred stripping assets are written down to their recoverable amount when their carrying value is not considered supportable. Changes to the estimated identification of components and the associated waste and ore within each component are accounted for prospectively.
Exploration and evaluation expenditures
Exploration and evaluation expenditures include the costs of acquiring rights to explore, exploratory drilling and related exploration costs incurred on sites without an existing mine and on areas outside the boundary of a known mineral deposit which contain proven and probable reserves. Exploration and evaluation expenditures incurred on a mineral deposit, with the exception of acquisition costs and costs arising from the recognition of an asset retirement provision, are expensed as incurred up to the date of establishing that costs incurred on a mineral deposit are technically feasible and commercially viable.
Expenditures incurred on a mineral deposit subsequent to the establishment of its technical feasibility and commercial viability are capitalized and included in the carrying amount of the related mining property.
The technical feasibility and commercial viability of a mineral deposit is assessed based on a combination of factors, such as, but not limited to:
- the extent to which mineral reserves or mineral resources have been identified through a feasibility study or similar level document;
- the results of optimization studies and further technical evaluation carried out to mitigate project risks identified in the feasibility study;
- the status of environmental permits, and
- the status of mining leases or permits.
Borrowing costs
Borrowing costs directly relating to the financing of qualifying assets are added to the capitalized cost of those related assets until such time as the assets are substantially ready for their intended use or sale which, in the case of mining properties, is when they are capable of commercial production. Where funds have been borrowed specifically to finance a project, the amount capitalized represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of rates applicable to relevant general borrowings of the Company during the period. Capitalized borrowing costs are depreciated over the life of the related asset.
All other borrowing costs are recognized in the consolidated statement of operations and comprehensive income (loss) in the year in which they are incurred. Borrowing costs are included as part of interest paid in the statement of cash flows.
Depletion
Mineral properties in production are depleted on a deposit-by-deposit basis using the units-of-production method over the mine's estimated proven and probable reserves, with the exception of deferred stripping which is depleted using the unit-of-production method over the reserves that directly benefit from the specific stripping activity and will commence when the mine is capable of operating in the manner intended by management. In the event proven and probable reserves are not identified management will use their best estimate from internally generated information.
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GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
The Company uses a number of criteria to assess whether the mine is in the condition necessary for it to be capable of operating in a manner intended by management. These criteria include, but are not limited to:
- completion of operational commissioning of each major mine and plant component;
- demonstrated ability to mine and mill consistently and without significant interruption at a pre-determined average rate of designed capacity;
- the passage of a reasonable period of time for testing of all major mine and plant components;
- gold recoveries at or near expected production levels; and
- a significant portion of available funding is directed towards operating activities.
Mineral properties in development are not depleted.
(ii) Plant and equipment
Recognition
The cost of plant and equipment consists of the purchase price, costs directly attributable to the delivery of the asset to the location and the condition necessary for it to be capable of operating in the manner intended by management, including the cost of testing whether these assets are operating in the manner intended by management. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. Where significant components of an asset have differing useful lives, depreciation is calculated on each separate component.
Depreciation
Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.
The carrying amounts of plant and equipment are depreciated using either the straight-line or units-of-production method over the shorter of the estimated useful life of the asset or the life of mine. The significant classes of depreciable plant and equipment and their estimated useful lives are as follows:
Asset Class | Estimated Useful Life |
Fixed plant & related components and infrastructure | Units of production over life of mine |
Mobile and other mine equipment components | 3 to 12 years |
Computer equipment and software | 3 years |
Right-of-use assets | Straight-line over lease term |
Management reviews the estimated useful lives, residual values and depreciation methods of the Company's plant and equipment at the end of each financial year, and when events and circumstances indicate that such a review should be made. Changes to estimated useful lives, residual values or depreciation methods resulting from such review are accounted for prospectively.
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GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
Major maintenance and repairs
Expenditure on major maintenance and repairs includes the cost of replacement parts of assets and overhaul costs. Where an asset or part of an asset is replaced and it is probable that future economic benefits associated with the item will be available to the Company, that expenditure is capitalized and the carrying amount of the item replaced derecognized. Similarly, overhaul costs associated with major maintenance are capitalized when it is probable that future economic benefits will be available and any remaining carrying amounts of the cost of previous overhauls are derecognized. All other maintenance and repair costs are expensed as incurred.
(iii) Impairment of non-financial assets
The carrying amounts of assets included in mineral properties, plant and equipment are reviewed for impairment when events and changes in circumstances indicate that the related carrying amounts may not be recoverable. If any such indication exists, the recoverable amount of the relevant cash-generating unit ("CGU") is estimated in order to determine the extent of impairment. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
The carrying amounts of the CGUs are compared to their recoverable amounts where the recoverable amount is the higher of value-in-use ("VIU") and fair value less costs to sell ("FVLCS"). FVLCS is defined as the amount that would be obtained from the sale of the asset in an orderly transaction between market participants at the measurement date. VIU is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and from its ultimate disposal. The fair value of mine sites is generally determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects. If a reliable estimate of future cash flows cannot be made, then fair value is determined by reference to market prices for comparable assets. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount. An impairment is recognized immediately in the consolidated statement of operations and comprehensive income (loss).
Mineral properties, plant and equipment that have been impaired are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. When an impairment loss reverses in a subsequent period, the revised carrying amount shall not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset previously, less subsequent depletion and depreciation. Reversals of impairment losses are recognized in the consolidated statement of operations and comprehensive income (loss) in the period in which the reversals occur.
(iv) Derecognition
Upon disposal or abandonment, the carrying amounts of mineral properties and plant and equipment are derecognized and any associated gains or losses are recognized in the consolidated statement of operations and comprehensive income (loss).
13
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
(f) Leases
At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether it has the right to obtain substantially all of the economic benefits from and to direct the use of the identified asset.
At commencement or on modification of a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices.
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset, or the site on which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Company by the end of the lease term or the cost of the right-of-use asset reflects that the Company will exercise a purchase option. In that case, the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. The Company determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased.
Lease payments included in the measurement of the lease liability comprise the following:
fixed payments, including in-substance fixed payments;
variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
amounts expected to be payable under a residual value guarantee; and
the exercise price under a purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.
14
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company's estimate of the amount expected to be payable under a residual value guarantee, if the Company changes its assessment of whether it will exercise a purchase, extension or termination option, or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in the consolidated statement of operations and comprehensive income (loss) if the carrying amount of the right-of-use asset has been reduced to zero.
Short-term leases and leases of low-value assets
The Company has elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases, including office equipment. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
(g) Provisions
General
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of operations and comprehensive income (loss), net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as finance expense in the consolidated statement of operations and comprehensive income (loss).
Asset retirement provisions
An obligation to incur restoration, rehabilitation and environmental costs arises when environmental disturbance is caused by the exploration, development or ongoing production of a mineral property interest. The Company records the estimated present value of future cash flows associated with site reclamation as a liability when the liability is incurred with a corresponding increase in the carrying value of the related assets. Discount rates using a pre-tax, risk-free rate that reflect the time value of money are used to calculate the net present value. The liability is accreted over time to reflect the unwinding of the discount with the accretion expense included in finance costs in the consolidated statement of operations and comprehensive income (loss). Changes in estimates or circumstances include changes in legal or regulatory requirements, increased obligations arising from additional mining and exploration activities, changes to cost estimates, changes to the discount rate and changes to the risk-free interest rates.
(h) Revenue from contracts with customers
Revenue is derived from the sale of gold and by-products. Revenue is recognized for contracts with customers when there is persuasive evidence that all of the following criteria are met:
15
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
- the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;
- the Company can identify each party's rights regarding the goods or services to be transferred;
- the Company can identify the payment terms for the goods or services to be transferred;
- the contract has commercial substance (i.e. the risk, timing or amount of the Company's future cash flows is expected to change as a result of the contract); and
- it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Revenue from gold and any by-product metals is generally recorded at the time of physical delivery of the refined gold, which is also the date when control of the gold passes to the customer. Revenue from saleable gold produced during the testing phase of production activities, and the cost of producing those items, is recognized in profit or loss.
(i) Government royalties
Royalty payments to governments which are based on gross revenue are not considered income taxes and are recognized as an expense in the statement of operations and comprehensive income (loss).
(j) Financial instruments
(i) Financial assets
Recognition and measurement
The Company recognizes a financial asset in its statement of financial position when the Company becomes party to the contractual provisions of the instrument. All financial assets are initially recorded at fair value plus directly attributable transaction costs and classified as either (i) financial assets subsequently measured at amortized cost, (ii) financial assets subsequently measured at fair value through other comprehensive income or (iii) financial assets subsequently measured at fair value through profit or loss. The basis of classification takes into consideration both the Company's business model for managing and the contractual cash flow characteristics of the financial assets.
A financial asset is measured at amortized cost if the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
A financial asset is measured at fair value through other comprehensive income if the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
A financial asset is measured at fair value through profit or loss unless it is measured at amortised cost or at fair value through other comprehensive income. Fair value changes in financial assets classified as fair value through profit or loss, if any, are recognized in the consolidated statement of operations and comprehensive income.
16
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:
- the contractual rights to receive cash flows from the asset have expired, or
- the Company has transferred its contractual rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through 'arrangement; and either (a) the Company has transferred substantially all the risks and rewards of ownership of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
(ii) Financial liabilities
Recognition and measurement
All financial liabilities are initially recorded at fair value less transaction costs. All financial liabilities are subsequently measured at amortized cost using the effective interest method, except for:
- financial liabilities at fair value through profit or loss;
- financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies;
- financial guarantee contracts;
- commitments to provide a loan at a below-market interest rate; and
- contingent consideration recognized by an acquirer in a business combination to which IFRS 3, Business combinations, applies.
An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair value through profit or loss when a contract contains one or more embedded derivatives, or when doing so results in more relevant information, because either (a) it eliminates or significantly reduces a measurement or recognition inconsistency (i.e. an accounting mismatch); or (b) a group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis.
Fair value changes of financial liabilities classified as fair value through profit or loss, if any, are recognized in the consolidated statement of operations and comprehensive income (loss).
17
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
(k) Share-based compensation
The Company has a share option plan and share unit plan which are described in note 12. The Company records all share-based compensation for options using the fair value method with graded vesting. Under the fair value method, share-based payments are measured at the fair value of the consideration received or the fair value of the equity instruments issued or liabilities incurred, whichever is more reliably measurable, and are charged over the vesting period to the consolidated statement of operations and comprehensive income (loss). The offset is credited to equity reserves ratably over the vesting period, after adjusting for the number of awards that are expected to vest. For share options, the fair value of share-based compensation awards is determined at the date of grant using the Black-Scholes option pricing model.
Expenses recognized for unvested forfeited awards are reversed. For awards that are cancelled, any expense not yet recognized is recognized immediately in the statement of operations and comprehensive income (loss).
Where the terms of an equity-settled award are modified, as a minimum an expense is recognized as if the terms had not been modified over the original vesting period. In addition, an expense is recognized for any modification which increases the total fair value of the share-based payment arrangement as measured at the date of modification, over the remainder of the vesting period.
For cash-settled share-based payments (see note 12), the Company measures the goods or services acquired and the liability incurred at the fair value of the liability. The corresponding share-based compensation expense is recognized over the vesting period of the award. As these awards will be settled in cash, the liability is remeasured at fair value at each reporting period and at the date of settlement, with changes in fair value recognized in the consolidated statement of operations and comprehensive income (loss) in the period incurred.
(l) Income taxes
Income tax on the profit or loss for the periods presented comprises current and deferred income tax. Income tax is recognized in the consolidated statement of operations and comprehensive income (loss) except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current income tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.
Deferred income tax is recognized in respect of unused tax losses, tax credits and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the tax rates that have been substantively enacted at the reporting date.
A deferred income tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a future income tax asset will be recovered, it does not recognize the asset.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its tax assets and liabilities on a net basis.
18
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
3. Significant accounting policies (continued)
The Company records foreign exchange gains and losses representing the impacts of movements in foreign exchange rates on the tax bases of non-monetary assets and liabilities which are denominated in foreign currencies. Foreign exchange gains and losses relating to the translation of the deferred income tax balance from local statutory accounts to functional currency accounts are included in deferred income tax expense or recovery in the consolidated statement of operations and comprehensive income (loss).
(m) Income per share
Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The computation of diluted income per share assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on income per share. For this purpose, the treasury stock method is used for the assumed proceeds upon the exercise of stock options that are used to purchase common shares at the average market price during the period.
4. Changes in accounting standards
(a) Accounting standards adopted during the year
There were no new standards effective January 1, 2022 that materially impacted the Company's consolidated financial statements.
(b) Accounting standards and amendments issued but not yet adopted
The following standards and interpretations, which may be applicable to the Company or the JV, have been issued but are not yet effective as of December 31, 2022:
Amendments to IAS 1
On February 12, 2021, the IASB issued Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2, Making Materiality Judgements). The amendments help companies provide useful accounting policy disclosures and include requiring companies to disclose their material accounting policies rather than their significant accounting policies; clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a company's financial statements. The amendments are effective for annual periods beginning on or after January 1, 2023, with early adoption permitted. The Company is evaluating how the amendments to IAS 1 will impact the disclosures in its consolidated financial statements in future periods.
19
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
5. Significant accounting judgements and estimates
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Management believes the judgements, estimates and assumptions used in these consolidated financial statements are reasonable; however, actual results could differ from those estimates and could impact future results of operations and cash flows.
The accounting judgements and estimates which have the most significant effect on these financial statements and the financial results of the JV are as follows:
Judgements
Impairment indicators of equity investment in joint venture and MPP&E
The Company considers both external and internal sources of information in assessing whether there are any indications that its equity investment in the JV and/or the JV's MPP&E are impaired, or if a previously recognized impairment has reversed. External sources of information the Company considers include changes in the market, economic and legal environment in which the JV operates that are not within its control and affect the recoverable amount of the Company's equity investment. Internal sources of information the Company considers include the manner in which MPP&E of the JV are being used or are expected to be used and indications of economic performance of the assets. The judgements are subject to risk and uncertainty; hence, there is the possibility that changes in circumstances will alter these assumptions, which may impact the recoverable amount of the assets. In such circumstances, the carrying value of the Company's equity investment in the JV and/or the JV's MPP&E may be impaired or a prior period's impairment charge reversed with the impact recorded in the consolidated statement of operations and comprehensive income (loss).
Estimates
Impairment assessments of the equity investment in the JV and MPP&E
When facts and circumstances suggest the carrying value of the Company's equity investment in the JV and/or the JV's MPP&E may be impaired, or a previously recognized impairment may have reversed, the Company is required to estimate the recoverable amount through a FVLCS or VIU approach. Estimating the recoverable amount requires management to make significant estimates about the future life of mine cash flows of the AGM which may include, but may not be limited to, changes to the current estimates of in-situ ounces, ore tonnes to be mined in future periods, strip ratios, head grades, recovery rates, gold price assumptions, mining costs, processing costs, trucking costs, capital and closure costs, as well as discount rates.
When assessing the recoverable amount of a CGU without defined mineral reserves, management may be required to make significant estimates about the fair value of in-situ mineral resources by reference to market rates for comparable assets.
When facts and circumstances suggest the carrying value of the JV's MPP&E may be impaired or a previously recognized impairment has reversed, the same policies and set of assumptions as described above are applied.
Mineral reserves
Estimates of the quantities of proven and probable mineral reserves form the basis for the JV's life-of-mine plans, which are used for a number of key business and accounting purposes, including: the calculation of depletion expense, the capitalization of stripping costs, the forecasting and timing of cash flows related to the asset retirement provision and impairment assessments, if any. To the extent that these estimates of proven and probable mineral reserves vary, there could be changes in depletion expense, stripping assets, asset retirement provisions and impairment charges (or reversals) recorded.
20
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
5. Significant accounting judgements and estimates (continued)
Depletion of mineral interests and plant and equipment
Estimates are made of recoverable ounces in the JV's mining properties which are depleted based on recoverable tonnes contained in proven and probable reserves. To the extent that changes are made to the estimate of proven and probable reserves, the depletion charge may change.
Plant and equipment are depreciated to their estimated residual value over the estimated useful life of the asset. Should the actual useful life of the plant or equipment vary, future depreciation charges may change.
Inventory valuation of production costs
The JV estimates quantities of ore in stockpiles and in process and the recoverable gold contained in this material in order to determine the cost of inventories and the weighted average costs of finished goods sold during the period. To the extent that these estimates vary, production costs of finished goods may change.
Net realizable value of inventory
Estimates of net realizable value are based on the most reliable evidence available, at the time that the estimates are made, of the amount that the inventories are expected to realize. In order to determine the net realizable value of gold dore, gold-in-process and stockpiled ore, the JV estimates future metal selling prices, production forecasts, realized grades and recoveries, timing of processing, and future costs to convert the respective inventories into saleable form, if applicable. Reductions in metal price forecasts, increases in estimated future costs to convert, reductions in the number of recoverable ounces, and a delay in timing of processing can result in a write-down of the carrying amounts of the JV's stockpiled ore inventory.
Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, to the extent net realizable value of materials and spares must be estimated, replacement costs of the materials and spare parts are generally used as the best estimate of net realizable value.
Current and deferred Income taxes
In assessing the probability of realizing income tax assets recognized, management makes estimates related to expectations of future taxable income, applicable tax opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. Levels of future taxable income are affected by, among other things, market gold prices, production costs, quantities of proven and probable gold reserves, interest rates and foreign currency exchange rates.
Where applicable tax laws and regulations are either unclear or subject to varying interpretations, it is possible that changes in these estimates could occur that materially affect the amounts of deferred income tax assets and liabilities recorded in the financial statements. Changes in deferred tax assets and liabilities generally have a direct impact on earnings in the period that the changes occur.
Deferred stripping
To determine whether stripping costs incurred during the production phase of a mining property relate to proven and probable reserves that will be mined in a future period and therefore should be capitalized, the JV makes estimates of the stripping activity over the life of the component of mineral reserves which have been made accessible. In addition, judgement is involved when allocating production costs between inventory produced and the stripping asset; the allocation is based on the volume of waste extracted compared with the expected volume, for a given volume of ore production. To the extent that these estimates and judgements change, there could be a change to the amount of production costs which are deferred to the statement of financial position.
21
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
5. Significant accounting judgements and estimates (continued)
Asset retirement provisions
Provisions for reclamation and closure cost obligations represent management's best estimate of the present value of the future cash outflows required to settle closure cost liabilities. Significant judgements and estimates are required in forming assumptions of future activities, future cash outflows and the timing of those cash outflows. These assumptions are formed based on environmental and regulatory requirements or the Company's environmental policies which may give rise to constructive obligations. The JV's assumptions are reviewed at the end of each reporting period and adjusted to reflect management's current best estimate and changes in any of the above factors can result in a change to the provision recognized by the JV. Changes to these estimates and judgements may result in actual expenditures in the future differing from the amounts currently provided for.
Preferred shares
The Company holds preferred shares (without a fixed redemption date) in the JV which have been classified as financial assets measured at fair value through profit or loss. As at December 31, 2022, management estimated the fair value of these preference shares by discounting the forecast future preference share redemptions from the AGM. Several estimates were made to determine the forecast future cash flows including, but not limited to, long-term realized gold prices, mineable reserves, mining and processing costs per tonne, ore grades, and metallurgical recoveries. Additionally, judgement was required to determine the appropriate discount rate used to calculate the present value of the forecast future cash flows.
As at December 31, 2021, as the JV did not have proven and probable reserves upon which to base a life of mine plan, management estimated the fair value of these preference shares by reference to a fair value of the AGM's in-situ mineral resources, plus the carrying value of stockpile inventories and other working capital balances. Several estimates were made to determine the fair value including, but not limited to, mineable resources, recoveries and a dollar per ounce market rate for in-situ mineral resources.
6. Cash and cash equivalents
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Cash held in banks | 18,563 | 53,521 | ||||
Short-term investments (maturities of 90 days or less) | 37,548 | - | ||||
Cash and cash equivalents | 56,111 | 53,521 |
The Company's short-term investments have original maturity dates of 90 days or less, or are fully redeemable without penalty or loss of interest, and are held with highly rated Canadian financial institutions.
7. Balances due from/to related party
Under the terms of the Joint Venture Agreement (the "JVA") that governs the management of the JV (note 9), the Company remains the manager and operator of the JV and currently receives an arm's length fee for services rendered to the JV of $7.1 million per annum (originally $6.0 million, but adjusted annually for inflation).
During the year ended December 31, 2022, the Company earned a service fee of $5.4 million (year ended December 31, 2021 - $5.1 million). For the year ended December 31, 2022, the service fee was comprised of a gross service fee of $6.8 million less withholding taxes payable in Ghana of $1.4 million (year ended December 31, 2021 - gross service fee of $6.3 million less withholding taxes of $1.2 million). As at December 31, 2022, the Company had a receivable due from the JV in respect of the service fee in the amount of $1.7 million, net of withholding taxes (December 31, 2021 - $7.3 million).
22
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
7. Balances due from/to related party (continued)
As at December 31, 2022, the Company had a payable due to the JV in the amount of $1.4 million relating to administrative and exploration services performed by the JV during the year on the Company's wholly owned Asumura property in Ghana (December 31, 2021 - nil).
All transactions with related parties have occurred in the normal course of operations and were measured at the exchange amount agreed to by the parties. All amounts are unsecured, non-interest bearing and have no specific terms of settlement.
8. Financial assets
As part of the JV Transaction (note 9), the Company initially subscribed to 184.9 million non-voting fixed redemption price redeemable preferences shares in Shika Group Finance Limited (the "preference shares"), which were issued at a par value of $1 per redeemable share. The preference shares have no fixed redemption date. As these preference shares have no contractual fixed terms of repayment that arise on specified dates, they are measured at fair value through profit or loss at each reporting period end.
The following table summarizes the change in the carrying amount of the Company's preference shares held in the joint venture during the years presented:
December 31, 2022 | December 31, 2021 | ||||||||
Number of shares | $ | $ | |||||||
Balance, beginning of year | 132,400,000 | 72,426 | 78,299 | ||||||
Fair value adjustment for the year | - | (5,617 | ) | (873 | ) | ||||
Redemption of preferred shares during the year | - | - | (5,000 | ) | |||||
Balance, end of year | 132,400,000 | 66,809 | 72,426 |
As at December 31, 2022, the Company re-measured the fair value of the redeemable preference shares to $66.8 million. As a result of the reinstatement of mineral reserves at the AGM at the balance sheet date (see Impairment reversal at the AGM in note 9), management's best estimate of the fair value of the preference shares was determined by discounting forecast future preference share redemptions using a discount rate of 14.8%. For the year ended December 31, 2021, the fair value of the preference shares was estimated by applying a dollar per ounce (based on a range of market values for similar assets) to the JV's in-situ mineral resources, estimating the net realizable value of stockpiled ore and considering other working capital items.
For the year ended December 31, 2022, the Company recognized a downward fair value adjustment on its preference shares of $5.6 million in finance expense (year ended December 31, 2021 - $0.9 million downward fair value adjustment in finance expense). The preference shares are classified as a Level 3 financial asset in the fair value hierarchy.
23
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
On July 31, 2018, the Company completed a transaction (the "JV Transaction") with a subsidiary of Gold Fields Limited ("Gold Fields"), following which:
the Company and Gold Fields each own a 45% equity interest in Asanko Gold Ghana Ltd. ("AGGL"), which owns the AGM, with the Government of Ghana retaining a 10% free-carried interest in the AGGL;
the Company and Gold Fields each own a 50% interest in Adansi Gold Company (GH) Ltd. ("Adansi Ghana"), which owns a number of exploration licenses; and
the Company and Gold Fields each acquired a 50% interest in the JV entity, Shika Group Finance Limited ("Shika").
As the JV is structured within the legal entities of AGGL, Adansi Ghana and Shika, the JV represents a joint venture as defined under IFRS 11 - Joint Arrangements, and the Company commenced equity accounting for its interest in the JV effective July 31, 2018.
The following table summarizes the change in the carrying amount of the Company's investment in the joint venture:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Balance, beginning of year | - | 59,159 | ||||
Company's share of the JV's net income (loss) for the year | 46,517 | (51,528 | ) | |||
Impairment reversal (loss) on investment in JV | 7,631 | (7,631 | ) | |||
Balance, end of year | 54,148 | - |
The Company recognized its 45% interest in the JV's net earnings for the year ended December 31, 2022, which amounted to $46.5 million. Additionally, due to the reinstatement of mineral reserves by the AGM as of December 31, 2022, the Company reversed in 2022 the $7.6 million impairment charge recorded on its equity investment at December 31, 2021.
24
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
Operating and financial results of the AGM JV for the years ended December 31, 2022 and 2021
Summarized financial information for the Company's investment in the JV is outlined in the table below.
All disclosures in this note 9 are on a 100% JV basis, unless otherwise indicated. The JV applies the same accounting policies as the Company.
Statement of Income (Loss) for the years ended December 31, 2022 and 2021
2022 | 2021 | ||||||
Note | $ | $ | |||||
Revenue | (i) | 297,136 | 382,380 | ||||
Production costs | (ii) | (179,849 | ) | (255,058 | ) | ||
Depreciation and depletion | (30,767 | ) | (50,177 | ) | |||
Royalties | (iii) | (14,867 | ) | (19,119 | ) | ||
Income from mine operations | 71,653 | 58,026 | |||||
Impairment reversal (loss) on MPP&E | (iv) | 63,200 | (153,164 | ) | |||
Exploration and evaluation expenditures | (10,536 | ) | (10,521 | ) | |||
General and administrative expenses | (viii) | (20,753 | ) | (9,576 | ) | ||
Income (loss) from operations | 103,564 | (115,235 | ) | ||||
Finance expense | (xii) | (6,471 | ) | (2,908 | ) | ||
Finance income | 801 | 275 | |||||
Foreign exchange gain | 5,329 | 3,396 | |||||
Net income (loss) after tax for the year | 103,223 | (114,472 | ) | ||||
Company's share of net income (loss) of the JV for the year | 46,517 | (51,528 | ) |
25
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
The assets and liabilities of the AGM JV, on a 100% basis, as at December 31, 2022 and 2021 were as follows:
December 31, 2022 | December 31, 2021 | |||||||
Note | $ | $ | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | (xiii) | 91,271 | 49,211 | |||||
Receivables | 2,771 | 14,285 | ||||||
Inventories | (v) | 54,003 | 75,696 | |||||
Prepaid expenses and deposits | 2,907 | 2,944 | ||||||
VAT receivable | 6,235 | 6,296 | ||||||
157,187 | 148,432 | |||||||
Non-current assets | (v),(vi),(vii) | 180,640 | 145,888 | |||||
Total assets | 337,827 | 294,320 | ||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | 30,811 | 57,948 | ||||||
Lease liabilities | 778 | 10,025 | ||||||
31,589 | 67,973 | |||||||
Non-current liabilities | ||||||||
Lease liabilities | 113 | 467 | ||||||
Long-term incentive plan liability | - | 98 | ||||||
Asset retirement provisions | (ix) | 58,148 | 81,028 | |||||
58,261 | 81,593 | |||||||
Total liabilities | 89,850 | 149,566 | ||||||
Equity | (xi) | 247,977 | 144,754 | |||||
Total liabilities and equity | 337,827 | 294,320 |
26
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
The Company has provided the following incremental disclosures for stakeholders to evaluate the financial performance and financial condition of the AGM. All amounts in the following tables and descriptions are on a 100% basis.
(i) Revenue
AGGL has an offtake agreement (the "Offtake Agreement") with a special purpose vehicle of Red Kite Opportunities Master Fund Limited ("Red Kite") under which the AGM will sell 100% of future gold production from the AGM up to a maximum of 2.2 million ounces. The gold sale price will be a spot price selected by Red Kite during a nine-day quotational period following shipment of gold from the mine. Should AGGL wish to terminate the Offtake Agreement, a termination fee will be payable according to a schedule dependent upon the amount of gold delivered under the Offtake Agreement at the time of termination.
During the year ended December 31, 2022, the AGM sold a portion of its production to the Bank of Ghana under the country's gold buying program. Gold sales made to the Bank of Ghana were under renewed commercial terms. As agreed with Red Kite, gold ounces sold to the Bank of Ghana in 2022 were considered delivered under the Offtake Agreement, and in consideration the AGM paid to Red Kite a "make whole" payment which was calculated in a similar manner to a nine-day quotational period. The "make whole" payments made to Red Kite were recognized as a reduction of revenues.
During the year ended December 31, 2022, the AGM delivered 167,849 ounces of gold to Red Kite in accordance with the Offtake Agreement (year ended December 31, 2021 - 216,076 ounces).
As of December 31, 2022, the AGM has delivered 1,467,105 ounces to Red Kite under the Offtake Agreement.
Included in revenue of the AGM is $0.6 million relating to by-product silver sales for the year ended December 31, 2022 (year ended December 31, 2021 - $0.6 million).
(ii) Production costs
The following is a summary of production costs by nature, on a 100% basis, incurred during the years ended December 31, 2022 and 2021:
December 31, 2022 $ | December 31, 2021 $ | |||||
Raw materials and consumables | (57,265 | ) | (54,422 | ) | ||
Salary and employee benefits | (27,649 | ) | (37,449 | ) | ||
Contractors (net of deferred stripping costs) | (56,133 | ) | (135,244 | ) | ||
Change in stockpile, gold-in-process and gold dore inventories | (20,867 | ) | (7,825 | ) | ||
Insurance, government fees, permits and other | (17,935 | ) | (20,118 | ) | ||
Total production costs | (179,849 | ) | (255,058 | ) |
During the year ended December 31, 2022, the AGM recognized a $15.3 million reversal of previously recorded net realizable value adjustments on its stockpile inventory, of which $11.0 million was credited against production costs and $4.3 million was credited against depreciation expense. The gold price assumption applied in the net realizable value calculation was $1,850 per ounce, and management estimated future costs of processing the stockpiles based upon historical and projected information.
27
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
During the year ended December 31, 2021, the AGM recognized a $26.4 million downward net realizable value adjustment to the carrying value of its stockpile inventory, of which $19.6 million was recorded as production costs and $6.8 million recorded as depreciation expense. The gold price assumption applied in the net realizable value calculation was $1,835 per ounce, and management estimated future costs of processing the stockpiles based upon historical and projected information.
(iii) Royalties
All of the AGM's concessions are subject to a 5% gross revenue royalty payable to the Government of Ghana. The AGM's Akwasiso mining concession is also subject to an additional 2% net smelter return royalty payable to the previous owner of the mineral tenement, and the AGM's Esaase mining concession is also subject to an additional 0.5% net smelter return royalty payable to the Bonte Liquidation Committee.
(iv) Impairment reversal on MPP&E
On February 25, 2022, the Company announced that gold recoveries at the AGM had been lower than expected. The Company determined the AGM was not in a position to declare mineral reserves in its updated National Instrument 43-101 ("NI 43-101") Technical Report filed on March 29, 2022, with an effective date of February 28, 2022. As of December 31, 2021, these factors were considered to be an indicator of impairment of the AGM's MPP&E and, accordingly, a $153.2 million impairment charge on MPP&E was recorded by the AGM.
On September 29, 2022, the Company announced that independent metallurgical test work conducted on the Esaase deposit achieved weighted average recoveries that were in-line with metallurgical recoveries previously assigned to the Esaase deposit. Positive results from the metallurgical test work were included in an updated independent Feasibility Study ("FS") report for the AGM which was prepared by SRK Consulting (Canada) Inc. On February 22, 2023, the Company reported the results of the independent FS, which included the reinstatement of mineral reserves at the AGM effective December 31, 2022, and an updated NI 43-101 Technical Report was filed on March 28, 2023 ("2023 Technical Report").
The mineral reserve estimate forms the basis of a revised Life of Mine ("LOM") plan at the AGM, encompassing four main open-pit mining areas: Abore, Miradani North, Esaase and Nkran, and two satellite deposits: Dynamite Hill and Adubiaso. The independent FS demonstrates an operating plan with a total LOM production of 1.85 million ounces of gold, an estimated mine life of 8.5 years and average annual production of 217,000 ounces per year.
The Company considered the positive results received from the Esaase metallurgical test work and reinstatement of mineral reserves at the AGM as of December 31, 2022 to be indicators that the 2021 impairment may have decreased or no longer exists. Accordingly, the Company assessed the recoverable amount of the AGM cash-generating unit ("CGU"), which was based on the higher of management's estimates of the FVLCS and value-in-use. The FVLCS was estimated based on the AGM's discounted LOM cash flow projections, fair value of mineral resources beyond proven and probable reserves and estimated costs to sell.
28
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
The following table summarizes the estimated recoverable amount of the AGM CGU and its carrying value at December 31, 2022:
Asanko Gold Mine CGU | |||
$ | |||
Net present value of estimated LOM cash flows (18% discount rate) | 146,517 | ||
Value beyond proven and probable reserves | 28,000 | ||
Cost to sell (2% selling fee) | (3,490 | ) | |
Estimated recoverable amount of the AGM CGU | 171,027 | ||
Carrying value of AGM CGU at December 31, 2022 | 107,827 | ||
Reversal of impairment on MPP&E for the year ended December 31, 2022 | 63,200 |
The recoverable amount of the AGM CGU (on a 100% basis) was estimated to be $171.0 million compared to a carrying value of $107.8 million at December 31, 2022 (had no impairment loss been previously recognized). Accordingly, an impairment reversal on MPP&E of $63.2 million was recognized at the AGM for the year ended December 31, 2022. Management's estimate of the fair value of the AGM is classified as Level 3 in the fair value hierarchy.
The Company's impairment reversal analysis at December 31, 2022 incorporated the following assumptions:
Production
Annual gold ounces sold are based on LOM production, grades and recoveries as outlined in the 2023 Technical Report.
Pricing assumption
The Company's estimated gold prices considered analysts' consensus pricing for the estimated duration of the AGM LOM plan. The gold price assumptions were as follows:
Gold price assumption | 2023 | 2024 | 2025-2027 | Long-term | Weighted Average |
Gold price (US$/oz) | $1,750 | $1,750 | $1,700 | $1,650 | $1,685 |
The above gold price assumptions above were further revised to account for an estimated 2% adjustment relating to the offtake agreement with Red Kite for the remaining 0.7 million ounces to be sold under the new LOM plan.
Discount rate assumption
Projected cash flows were discounted using a post-tax discount rate of 18.0% which represents the weighted-average cost of capital commensurate with the risks associated with the AGM's cash flows, and includes estimates for risk-free interest rates, country risk premium, market value of equity, market return on equity, share volatility, cost of debt and a target debt-to-equity ratio.
Value beyond proven and probable reserves
The AGM's 2023 Technical Report reported mineral resources as follows: 158,000 ounces of measured, 3,346,000 ounces of indicated and 1,084,000 of inferred. Of these amounts, 2,068,000 ounces are expected to be mined over the LOM as proven and probable mineral reserves. The Company assessed the fair value of the balance of mineral resources, totaling 2,520,000 ounces, by applying a probability of converting these resources to a higher classification and using a $30 per ounce fair value (based on market valuations of comparable West African junior mining companies). The fair value of mineral resources beyond proven and probable reserves was estimated to be $28.0 million at December 31, 2022.
29
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
Sensitivity analysis
Due to the sensitivity of the recoverable amount to various judgements and estimates, specifically long-term metal prices, as well as unforeseen factors, any significant change in key assumptions and inputs could result in changes in impairment charges to be recorded in future periods. The following table highlights the assumptions and estimates that management believes are most sensitive to estimating the recoverable amount. Any change in these assumptions and estimates could have a material impact on the estimated recoverable amount of the AGM.
Assumption | Sensitivity | Impact on recoverable amount (100% basis) | |
Increase ($'millions) | Decrease ($'millions) | ||
Gold price | +/- $50/oz | $31.2 | $31.7 |
Discount rate | -/+ 1.0% | $9.2 | $8.6 |
Value of mineral resources beyond proven and probable reserves | +/- $10/oz | $9.0 | $9.0 |
(v) Inventories
The following is a summary of inventories held by the AGM, on a 100% basis, as at December 31, 2022 and 2021:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Gold dore on hand | 3,592 | 3,244 | ||||
Gold-in-process | 937 | 1,563 | ||||
Ore stockpiles | 23,802 | 51,470 | ||||
Materials and spare parts | 25,672 | 24,562 | ||||
Total inventories | 54,003 | 80,839 | ||||
Less non-current inventories: | ||||||
Ore stockpiles | - | (5,143 | ) | |||
Total current inventories | 54,003 | 75,696 |
(vi) Reclamation deposit
The AGM is required to provide security to the Environmental Protection Agency of Ghana ("EPA") for the performance by the AGM of its reclamation obligations in respect of its mining leases.
The AGM deposits a reclamation deposit in a Ghanaian bank and the reclamation deposit is required to be held until receiving a final reclamation completion certificate from the EPA. The AGM is expected to be released from this requirement 45 days following the third anniversary of the date that the AGM receives a final completion certificate. The reclamation deposit accrues interest and is $5.0 million at December 31, 2022 (December 31, 2021 - $1.9 million). Additionally, bank guarantees of $11.8 million were provided to the EPA, 50% of which is provided by the Company (see note 13).
30
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
(vii) Mineral properties, plant and equipment
Additions to mineral properties, plant and equipment
During the year ended December 31, 2022, the AGM capitalized $17.1 million in expenditures related to mineral properties, plant and equipment, excluding capitalized deferred stripping costs and asset retirement costs (year ended December 31, 2021 - $35.8 million).
Deferred stripping
During the year ended December 31, 2022, the AGM did not defer any costs relating to stripping activities (year ended December 31, 2021 - $7.1 million of stripping costs capitalized to depletable mineral interests).
Impairment reversal
As discussed above, the AGM recorded an impairment reversal on MPP&E of $63.2 million for the year ended December 31, 2022 (year ended December 31, 2021 - impairment loss on MPP&E of $153.2 million).
(viii) Severance
In light of the changing nature of operations at the AGM, the Company completed a process of right-sizing its workforce and during the year the AGM recognized an $18.0 million severance expense associated with restructuring its labour force. As of December 31, 2022, the AGM had settled all outstanding obligations relating to the workforce restructuring.
(ix) Asset retirement provisions
The following table shows the movement in the asset retirement provisions of the AGM as at December 31, 2022 and 2021:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Balance, beginning of year | 81,028 | 72,693 | ||||
Accretion expense | 2,527 | 1,191 | ||||
Change in estimate | (25,331 | ) | 7,307 | |||
Reclamation undertaken during the year | (76 | ) | (163 | ) | ||
Total asset retirement provisions, end of year | 58,148 | 81,028 |
The asset retirement provisions consist of reclamation and closure costs for the JV's Ghanaian mining properties. Reclamation and closure activities include land rehabilitation, dismantling of buildings and mine facilities, ongoing care and maintenance and other costs.
As at December 31, 2022, the AGM's reclamation cost estimates were discounted using a long-term risk-free discount rate of 3.9% (December 31, 2021 - 1.5%). The decrease in the carrying value of the asset retirement provisions was due to an increase in the risk-free discount rate, a change in estimated reclamation costs and a change in the timing of forecast reclamation activities.
31
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
(x) Legal provision
A services provider of the AGM filed a dispute with an arbitration tribunal alleging the AGM breached the terms of a services agreement and claimed approximately $25 million in damages. A provision of $2.0 million has been recorded as of December 31, 2022 as management’s best estimate to settle the claim. While the Company cannot reasonably predict the ultimate outcome of these actions, and inherent uncertainties exist in predicting such outcomes, the Company believes the estimated provision is reasonable based on the information currently available.
(xi) Preferred shares
The following table shows the movement in the JV partners' preferred share investments in the JV for the years ended December 31, 2022 and 2021:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Balance, beginning of year | 264,880 | 274,880 | ||||
Distributions to partners during the year | - | (10,000 | ) | |||
Balance, end of year | 264,880 | 264,880 |
(xii) Finance expense
The following is a summary of finance expense incurred by the JV during the years ended December 31, 2022 and 2021:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Premiums paid for hedging instruments | - | (381 | ) | |||
Accretion charges on asset retirement provisions (note ix) | (2,527 | ) | (1,191 | ) | ||
Interest and fees associated with RCF (note xiv) | (400 | ) | (761 | ) | ||
Interest on lease liabilities | (207 | ) | (396 | ) | ||
Withholding taxes | (3,134 | ) | - | |||
Other | (203 | ) | (179 | ) | ||
Total finance expense | (6,471 | ) | (2,908 | ) |
During the year ended December 31, 2022, the Ghana Revenue Authority ("GRA") conducted a regulatory audit of AGGL's 2016 to 2020 fiscal years and raised a variety of matters for consideration. For the year ended December 31, 2022, the AGM recorded a $3.1 million expense related to the GRA's audit findings with respect to the interpretation of withholding tax obligations pursuant to the Offtake Agreement.
32
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
9. Investment in joint venture (continued)
(xiii) The cash flows of the AGM, on a 100% basis, were as follows for the years ended December 31, 2022 and 2021:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Cash provided by (used in): | ||||||
Operating activities | 75,479 | 86,602 | ||||
Investing activities | (16,452 | ) | (45,891 | ) | ||
Financing activities | (15,590 | ) | (55,522 | ) | ||
Impact of foreign exchange on cash and cash equivalents | (1,377 | ) | (232 | ) | ||
Increase (decrease) in cash and cash equivalents during the year | 42,060 | (15,043 | ) | |||
Cash and cash equivalents, beginning of year | 49,211 | 64,254 | ||||
Cash and cash equivalents, end of year | 91,271 | 49,211 |
(xiv) Revolving credit facility
In October 2019, the JV entered into a $30.0 million revolving credit facility (the "RCF") with Rand Merchant Bank ("RMB"). During the year, the maturity date of the RCF was extended to September 30, 2023 (with utilization subject to credit review) with the AGM paying a facility maintenance fee of 0.70% per annum. As at December 31, 2022, the balance drawn under the RCF was nil (December 31, 2021 - nil).
During the year ended December 31, 2022, the AGM recognized commitment and maintenance fees associated with the RCF of $0.4 million (year ended December 31, 2021 - interest expense and other fees of $0.8 million).
10. Exploration and evaluation assets
The Company's exploration and evaluation ("E&E") assets consist of its wholly owned exploration properties in Mali. The Company's existing exploration licenses in Mali are set to expire in 2023 and, as of December 31, 2022, the Company's intention is to not renew these licenses. As such, the Company assessed the fair value of its E&E assets and determined the recoverable amount of these assets to be nil at December 31, 2022. Accordingly, the Company recognized an impairment loss on its E&E assets of $1.6 million during the year ended December 31, 2022.
11. Share capital
(a) Authorized:
Unlimited common shares without par value or restrictions.
(b) Base shelf prospectus
On December 21, 2022, the Company filed a final short form base shelf prospectus (the "Prospectus") under which the Company may sell from time-to-time common shares, warrants, subscription receipts, units, debt securities and/or share purchase contracts of the Company, up to an aggregate of $300 million. The Prospectus has a term of 25-months from the filing date. As of December 31, 2022, no securities were issued under the Prospectus.
33
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
12. Equity reserves and long-term incentive plan awards
The Company has a stock option plan, and a share unit plan under which restricted share units ("RSUs"), performance share units ("PSUs") and deferred share units ("DSUs") may be awarded to directors, officers, employees and other service providers. All awards under the share unit plan may be designated by the Company's Board of Directors to be settled in either cash, shares or a combination thereof. As of December 31, 2022, all units awarded have been cash-settled.
Under the two plans, when combined, the number of shares issuable cannot exceed 9% of the issued and outstanding common shares of the Company. Specifically, shares reserved for issuance under the share unit plan, when designated as equity-settled, may not exceed 5% of the issued and outstanding common shares of the Company. Share units awarded as cash-settled units will not be considered in computing the limits of the share unit plan.
RSUs, PSUs and DSUs are cash-settled awards and therefore represent a financial liability which is required to be marked-to-market at each reporting period end with changes in fair value recognized in the Statement of Operations and Comprehensive Income (Loss). The financial liability associated with these cash-settled awards is recorded in accounts payable and accrued liabilities for amounts expected to be settled within one year, and a separate long-term incentive plan liability for amounts to be settled in excess of one year.
(a) Stock options
Options granted typically vest in 1/3 increments every twelve months following the grant date for a total vesting period of three years. Stock options have a maximum term of 5 years following the grant date.
The following table is a reconciliation of the movement in stock options for the years ended December 31, 2022 and 2021:
Weighted average exercise price | ||||||
Number of Options | C$ | |||||
Balance, December 31, 2020 | 8,330,820 | 1.81 | ||||
Granted | 5,653,000 | 1.49 | ||||
Exercised | (689,931 | ) | 1.02 | |||
Cancelled/Expired/Forfeited | (1,613,719 | ) | 2.43 | |||
Balance, December 31, 2021 | 11,680,170 | 1.61 | ||||
Granted | 4,790,000 | 0.66 | ||||
Cancelled/Expired/Forfeited | (7,973,000 | ) | 1.65 | |||
Balance, December 31, 2022 | 8,497,170 | 1.04 |
During the year ended December 31, 2022, the Company recognized share-based compensation expense relating to stock options of $0.1 million (year ended December 31, 2021 - $2.2 million).
During the year ended December 31, 2022, there were no stock options exercised (year ended December 31, 2021 - 689,931 stock options exercised with a weighted average exercise price of C$1.02 for total aggregate proceeds of $0.6 million).
The fair value of stock options granted is determined using the Black Scholes pricing model. For options granted during the year ended December 31, 2022, the weighted average expected life, dividend yield and forfeiture rate were 3.76 years, nil and 15.92%, respectively. For options granted during the year ended December 31, 2021, the weighted average expected life, dividend yield and forfeiture rate were 3.77 years, nil and 15.87%, respectively.
34
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
12. Equity reserves and long-term incentive plan awards (continued)
Other weighted-average conditions and assumptions used in the Black Scholes models were as follows for options granted in the years presented:
Number of options granted | Weighted average exercise price | Weighted average risk- free interest rate | Weighted average volatility | Weighted average Black- Scholes value | |||||||||||
C$ | C$ | ||||||||||||||
Year ended December 31, 2021 | 5,653,000 | 1.49 | 0.54% | 63.57% | 0.64 | ||||||||||
Year ended December 31, 2022 | 4,790,000 | 0.66 | 2.71% | 57.94% | 0.30 |
The following table summarizes the stock options outstanding and exercisable as at December 31, 2022:
Total options outstanding | Total options exercisable | |||||||||||||||||
Range of exercise price | Number of options | Weighted average contractual life (years) | Weighted average exercise price C$ | Number of options | Weighted average contractual life (years) | Weighted average exercise price C$ | ||||||||||||
C$0.00-C$1.00 | 4,740,002 | 4.03 | 0.68 | 498,002 | 1.85 | 0.91 | ||||||||||||
C$1.01-C$2.00 | 3,504,168 | 2.86 | 1.43 | 1,673,821 | 2.65 | 1.41 | ||||||||||||
C$2.01-C$3.00 | 253,000 | 2.63 | 2.20 | 168,666 | 2.63 | 2.20 | ||||||||||||
8,497,170 | 3.51 | 1.04 | 2,340,489 | 2.48 | 1.36 |
(b) Restricted share units
The following table is a reconciliation of the movement in RSUs for the years ended December 31, 2022 and 2021:
Number of RSUs | ||||||
December 31, 2022 | December 31, 2021 | |||||
Balance, beginning of year | 1,184,594 | 2,421,200 | ||||
Granted | 299,900 | 271,400 | ||||
Settled in cash | (599,107 | ) | (937,624 | ) | ||
Cancelled/Forfeited | (350,879 | ) | (570,382 | ) | ||
Balance, end of year | 534,508 | 1,184,594 |
For all RSUs granted during the year ended December 31, 2022, the awards vest in three equal tranches over a service period of three years and had an estimated forfeiture rate of 22.8% (year ended December 31, 2021 - awards granted vest over a service period of three years and had an estimated forfeiture rate of 20.1%).
35
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
12. Equity reserves and long-term incentive plan awards (continued)
The following table is a reconciliation of the movement in the RSU liability for the years presented:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Balance, beginning of year | 575 | 1,658 | ||||
Awards vested and change in fair value during the year, net of cancelled/forfeited awards | (95 | ) | 65 | |||
Settled in cash during the year | (311 | ) | (1,148 | ) | ||
Total RSU liability, end of year | 169 | 575 | ||||
Less: current portion of RSU liability | (143 | ) | (408 | ) | ||
Total non-current RSU liability, end of year | 26 | 167 |
(c) Performance share units
The following table is a reconciliation of the movement in PSUs for the years ended December 31, 2022 and 2021:
Number of PSUs | ||||||
December 31, 2022 | December 31, 2021 | |||||
Balance, beginning of year | 571,000 | - | ||||
Granted | 1,588,900 | 893,400 | ||||
Settled in cash | (88,167 | ) | - | |||
Cancelled/Forfeited | (332,332 | ) | (322,400 | ) | ||
Balance, end of year | 1,739,401 | 571,000 |
PSUs vest in either 1/2 or 1/3 increments every twelve months following the grant date for a total vesting period of two or three years and also contain a performance criterion applied to the number of units that vest on a yearly basis. The number of units that vest will be determined by the Company's relative share price performance in comparison to a peer group of companies or upon achievement of certain Company strategic objectives. The PSU performance multiplier ranges from 0% to 150%.
The following table is a reconciliation of the movement in the PSU liability for the years presented:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Balance, beginning of year | 87 | - | ||||
Awards vested and change in fair value during the year, net of cancelled/forfeited awards | 462 | 87 | ||||
Settled in cash during the year | (46 | ) | - | |||
Total PSU liability, end of year | 503 | 87 | ||||
Less: current portion of PSU liability | (334 | ) | (53 | ) | ||
Total non-current PSU liability, end of year | 169 | 34 |
36
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
12. Equity reserves and long-term incentive plan awards (continued)
(d) Deferred share units
The following table is a reconciliation of the movement in DSUs for the years ended December 31, 2022 and 2021:
Number of DSUs | ||||||
December 31, 2022 | December 31, 2021 | |||||
Balance, beginning of year | 844,200 | - | ||||
Granted | 2,287,800 | 844,200 | ||||
Balance, end of year | 3,132,000 | 844,200 |
DSUs have no vesting terms or conditions and as such the Company recognizes 100% of the fair value of the DSUs on the grant date in the Statement of Operations and Comprehensive Income (Loss). The DSUs will be paid to directors upon their retirement from the Board of Directors of the Company or upon a change of control.
The following table is a reconciliation of the movement in the DSU liability for the years presented:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Balance, beginning of year | 608 | - | ||||
Awards vested and change in fair value during the year | 1,056 | 608 | ||||
Total DSU liability, end of year | 1,664 | 608 |
The financial liability associated with cash-settled DSU awards is presented in the Statement of Financial Position within accounts payable and accrued liabilities.
(e) Phantom share units
On November 6, 2020, the Company granted 1,000,000 cash-settled phantom share units to the Chair of the Board. The units will vest three years from the grant date, but will only become payable upon the Chair's departure from the Board or upon a change of control of the Company, in a cash settlement amount equal to the value of 1,000,000 common shares (in C$) as at the Chair's departure date or date of change of control.
The phantom share units represent a financial liability, as they will be settled in cash, and are marked-to-market at each reporting period end and presented in the Statement of Financial Position within accounts payable and accrued liabilities.
The following table is a reconciliation of the movement in the phantom share unit liability for the years ended December 31, 2022 and 2021:
December 31, 2022 | December 31, 2021 | |||||
$ | $ | |||||
Balance, beginning of year | 277 | 56 | ||||
Awards vested and change in fair value during the year | 104 | 221 | ||||
Total phantom share unit liability, end of year | 381 | 277 | ||||
Less: current portion of phantom share unit liability | (381 | ) | - | |||
Total non-current phantom share unit liability, end of year | - | 277 |
37
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
13. Commitments and contingencies
Commitments
The following table reflects the Company's contractual obligations as they fall due, excluding commitments and liabilities of the JV, as at December 31, 2022 and 2021:
Within 1 year | 1 - 5 years | Over 5 years | December 31, 2022 | December 31, 2021 | |||||||||||
Accounts payable, accrued liabilities and payable due to related party | 3,173 | - | - | 3,173 | 1,467 | ||||||||||
Long-term incentive plan (cash-settled awards) | 2,521 | 195 | - | 2,716 | 1,547 | ||||||||||
Corporate office leases | 127 | 221 | - | 348 | 501 | ||||||||||
Total | 5,821 | 416 | - | 6,237 | 3,515 |
In addition to the above commitments, the Company has provided various parent company guarantees related to the unfunded portion of the AGM's reclamation bond in the amount of $5.9 million (December 31, 2021 - $5.9 million).
Contingencies
Due to the nature of its business, the Company and/or the AGM JV may be subject to regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of its business. While the Company cannot reasonably predict the ultimate outcome of these actions, and inherent uncertainties exist in predicting such outcomes, the Company believes that the ultimate resolution of these actions is not reasonably likely to have a material adverse effect on the Company's or JV's financial condition or future results of operations.
14. General and administrative expenses
The following is a summary of general and administrative ("G&A") expenses incurred by the Company during the years ended December 31, 2022 and 2021. The G&A expenses for the years presented include, but are not limited to, those expenses incurred in order to earn the service fee as operators of the JV (note 7).
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Wages, benefits and consulting | (6,515 | ) | (7,594 | ) | ||
Office, rent and administration | (1,324 | ) | (1,192 | ) | ||
Professional and legal | (724 | ) | (589 | ) | ||
Share-based compensation | (1,646 | ) | (3,175 | ) | ||
Travel, marketing, investor relations and regulatory | (745 | ) | (779 | ) | ||
Depreciation | (146 | ) | (148 | ) | ||
Total G&A expense | (11,100 | ) | (13,477 | ) |
38
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
15. Exploration and evaluation expenditures
The following is a summary of E&E expenses incurred by the Company during the years ended December 31, 2022 and 2021. E&E expenses incurred relate to work performed on the Company's wholly owned Asumura and Mali properties.
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Contractors and consulting | (326 | ) | (189 | ) | ||
Drilling and assays | (603 | ) | (43 | ) | ||
Field supplies and camp costs | (109 | ) | (157 | ) | ||
Crop compensation, community and permitting | (368 | ) | (239 | ) | ||
Other | (5 | ) | (14 | ) | ||
Total E&E expenditures | (1,411 | ) | (642 | ) |
16. Finance income and expense
(a) Finance income
The following is a summary of finance income earned by the Company during the years ended December 31, 2022 and 2021:
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Interest income and other | 1,036 | 257 | ||||
Total finance income | 1,036 | 257 |
(b) Finance expense
The following is a summary of finance expense recorded by the Company during the years ended December 31, 2022 and 2021:
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Downward fair value adjustment on redeemable preference shares (note 8) | (5,617 | ) | (873 | ) | ||
Interest on lease liability | (25 | ) | (32 | ) | ||
Other | (5 | ) | (20 | ) | ||
Total finance expense | (5,647 | ) | (925 | ) |
39
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
17. Income tax
(a) Tax expense
Income tax expense differs from the amount that would result from applying the Canadian federal and provincial income tax rates to earnings from continuing operations before taxes. These differences result from the following items:
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Average statutory tax rate | 27% | 27% | ||||
Income (loss) before income taxes | 40,809 | (68,883 | ) | |||
Expected income tax (recovery) expense | 11,018 | (18,598 | ) | |||
Increase in income tax expense (recovery) resulting from: | ||||||
Permanent differences: | ||||||
Share of net (income) loss related to joint venture | (12,560 | ) | 13,913 | |||
Impairment (reversal) loss on equity investment in joint venture | (2,060 | ) | 2,060 | |||
Fair value adjustment and accretion on redeemable preferences shares | 1,517 | 236 | ||||
Impairment loss on exploration and evaluation assets | 440 | - | ||||
Share-based compensation | 32 | 592 | ||||
Other | 2 | 95 | ||||
True-up prior year balances | 194 | (170 | ) | |||
Effect of differences in tax rate in foreign jurisdictions | (110 | ) | 36 | |||
Change in unrecognized tax assets | 1,529 |
| 1,862 | |||
Foreign exchange and other | (2 | ) | (26 | ) | ||
Income tax expense | - | - |
40
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
17. Income tax (continued)
(b) Deferred tax liabilities and assets
The significant components of the Company's deferred tax assets and liabilities were as follows:
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Lease liability | 85 | 113 | ||||
Right-of-use asset | (85 | ) | (113 | ) | ||
Total | - | - |
As at December 31, 2022, the Company has tax losses of $73.9 million (December 31, 2021 - $69.9 million) in Canada which expire between 2029 and 2042.
Deductible temporary differences and unused tax losses for which no deferred tax assets have been recognized are attributable to the following:
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Property, plant and equipment | 126 | 81 | ||||
Share issuance costs | 2 | 10 | ||||
Investment in associate | 275 | 275 | ||||
Accounts payable and accrued liabilities | 600 | 578 | ||||
Lease liability | 10 | 10 | ||||
Capital losses | 2,476 | 2,494 | ||||
Non-capital losses carried forward | 20,492 | 19,004 | ||||
Total | 23,981 | 22,452 |
The aggregate amount of deductible temporary differences associated with investments in subsidiaries for which deferred taxes have not been recognized as at December 31, 2022 was $133.1 million (December 31, 2021 - deductible temporary differences of $181.8 million).
41
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
18. Income (loss) per share
For the years ended December 31, 2022 and 2021, the calculation of basic and diluted earnings (loss) per share is based on the following data:
Year ended December 31, | ||||||
2022 | 2021 | |||||
Net income (loss) after tax for the year | 40,809 | (68,883 | ) | |||
Number of shares | ||||||
Weighted average number of ordinary shares - basic | 224,943,453 | 224,729,084 | ||||
Effect of dilutive share options | 4,354 | - | ||||
Weighted average number of ordinary shares - diluted | 224,947,807 | 224,729,084 |
For the year ended December 31, 2022, excluded from the calculation of weighted average shares outstanding were 1,400,539 stock options that were determined to be anti-dilutive.
For the year ended December 31, 2021, the effect of all potentially dilutive securities was anti-dilutive given that the Company reported a net loss for the year.
19. Supplemental cash flow information
The following table summarizes the changes in non-cash working capital for the years ended December 31, 2022 and 2021:
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Receivables and receivable due from related party | 5,643 | (4,628 | ) | |||
Prepaid expenses and deposits | 10 | (235 | ) | |||
Accounts payable, accrued liabilities and payable due to related party | 1,445 | (2,322 | ) | |||
Change in non-cash working capital | 7,098 | (7,185 | ) |
42
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
20. Segmented information
Geographic Information
As at December 31, 2022, the Company has only one reportable operating segment being the corporate function with its head office in Canada. Total assets in West Africa include the Company's 45% interest in the Asanko Gold Mine JV.
Geographic allocation of total assets and liabilities
December 31, 2022 | Canada | West Africa | Total | ||||||
$ | $ | $ | |||||||
Current assets | 58,568 | 37 | 58,605 | ||||||
Property, plant and equipment and right-of-use assets | 332 | - | 332 | ||||||
Other non-current assets | - | 120,957 | 120,957 | ||||||
Total assets | 58,900 | 120,994 | 179,894 | ||||||
Current liabilities | 4,363 | 1,441 | 5,804 | ||||||
Non-current liabilities | 399 | - | 399 | ||||||
Total liabilities | 4,762 | 1,441 | 6,203 |
December 31, 2021 | Canada | West Africa | Total | ||||||
$ | $ | $ | |||||||
Current assets | 61,629 | 39 | 61,668 | ||||||
Property, plant and equipment and right-of-use assets | 474 | - | 474 | ||||||
Other non-current assets | - | 74,054 | 74,054 | ||||||
Total assets | 62,103 | 74,093 | 136,196 | ||||||
Current liabilities | 2,598 | 45 | 2,643 | ||||||
Non-current liabilities | 790 | - | 790 | ||||||
Total liabilities | 3,388 | 45 | 3,433 |
43
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
20. Segmented information (continued)
Geographic allocation of the Statement of Operations and Comprehensive Income (Loss)
For the year ended December 31, 2022:
Canada | West Africa | Total | |||||||
$ | $ | $ | |||||||
Share of net earnings related to joint venture | - | 46,517 | 46,517 | ||||||
Service fee earned as operators of joint venture | 5,413 | - | 5,413 | ||||||
General and administrative expenses | (10,914 | ) | (186 | ) | (11,100 | ) | |||
Exploration and evaluation expenditures | - | (1,411 | ) | (1,411 | ) | ||||
(Loss) income from operations and joint venture | (5,501 | ) | 44,920 | 39,419 | |||||
Impairment reversal on investment in joint venture | - | 7,631 | 7,631 | ||||||
Impairment of exploration and evaluation assets | - | (1,628 | ) | (1,628 | ) | ||||
Finance income | 1,036 | - | 1,036 | ||||||
Finance expense | (30 | ) | (5,617 | ) | (5,647 | ) | |||
Foreign exchange gain (loss) | 1 | (3 | ) | (2 | ) | ||||
Net (loss) income and comprehensive (loss) income for the year | (4,494 | ) | 45,303 | 40,809 |
For the year ended December 31, 2021:
Canada | West Africa | Total | |||||||
$ | $ | $ | |||||||
Share of net loss related to joint venture | - | (51,528 | ) | (51,528 | ) | ||||
Service fee earned as operators of joint venture | 5,071 | - | 5,071 | ||||||
General and administrative expenses | (13,429 | ) | (48 | ) | (13,477 | ) | |||
Exploration and evaluation expenditures | - | (642 | ) | (642 | ) | ||||
Loss from operations and joint venture | (8,358 | ) | (52,218 | ) | (60,576 | ) | |||
Impairment of investment in joint venture | - | (7,631 | ) | (7,631 | ) | ||||
Finance income | 257 | - | 257 | ||||||
Finance expense | (51 | ) | (874 | ) | (925 | ) | |||
Foreign exchange loss | (8 | ) | - | (8 | ) | ||||
Net loss and comprehensive loss for the year | (8,160 | ) | (60,723 | ) | (68,883 | ) |
44
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
21. Capital management
The Company's objectives in managing capital are to ensure that the Company has the financial capacity to support its operations with sufficient capability to manage unforeseen operational or industry developments, to ensure the Company has the capital and capacity to support the long-term growth strategies of the JV, and to provide returns for shareholders and benefits for other stakeholders. The Company defines capital that it manages as total shareholders' equity, being a total of $173.7 million as at December 31, 2022 (December 31, 2021 - $132.8 million).
The Company is not subject to externally imposed capital requirements or covenants.
The Company manages its capital structure and makes adjustments to it in light of general economic conditions, the risk characteristics of the underlying assets and the Company's working capital requirements associated with ongoing operations and corporate development plans. The Company does not currently pay dividends. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as capital and operating budgets. The Company's investment policy is to invest its cash in highly liquid short-term interest-bearing investments with maturities of 180 days or less from the original date of acquisition.
The Company has not made any changes to its policies and processes for managing capital during the year.
22. Financial instruments
As at December 31, 2022, the Company's financial instruments consist of cash and cash equivalents, receivable due from related party, preferred shares in the JV, accounts payable and accrued liabilities, payable due to related party and long-term incentive plan liabilities. The Company classifies cash and cash equivalents, accounts receivable, the related party receivable, accounts payable and accrued liabilities and accounts payable due to related party as financial assets or liabilities and are measured at amortized cost. The preferred shares in the JV and long-term incentive plan liabilities are a financial asset and a financial liability, respectively, measured at fair value through profit or loss and fall within Level 3 of the fair value hierarchy as discussed below.
The fair value hierarchy comprises:
Level 1 - fair values based on unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - fair values based on inputs that are observable for the asset or liability, either directly or indirectly; and
Level 3 - fair values based on inputs for the asset or liability that are not based on observable market data.
There were no transfers between the levels during the years ended December 31, 2022 or 2021.
The fair values of all financial assets and liabilities measured at amortized cost approximate their carrying values given their short-term to maturity.
The risk exposure arising from these financial instruments is summarized as follows:
(a) Credit risk
Credit risk is the risk of an unexpected loss if a customer or the issuer of a financial instrument fails to meet its contractual obligations. The Company is subject to credit risk on cash and cash equivalent balances held at banks in Canada, South Africa, Isle of Man and Mali. The risk of loss associated with cash investments is considered to be low as the majority of the Company's cash and cash equivalents are held with highly rated banking institutions.
45
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
22. Financial instruments (continued)
As at December 31, 2022, the Company had a receivable due from the JV of $1.7 million (December 31, 2021 - $7.3 million). Credit risk associated with the related party receivable is considered to be low based on the liquidity of available funds of the JV.
In addition, the Company is exposed to credit risk on its preferred share investments in the JV (note 8). With respect to the 132.4 million preference shares, credit risk is mitigated by monitoring the financial condition of the JV on a regular basis. The Company's maximum exposure to credit risk in relation to the preferred shares at the reporting date is the carrying value of the financial asset totaling $66.8 million.
(b) Liquidity risk
Liquidity risk encompasses the risk that the Company cannot meet its financial obligations as they fall due. The Company manages liquidity risk through a rigorous planning and budgeting process, which is reviewed and updated on a regular basis, to help determine the funding requirements to support current operations, expansion and development plans, and by managing the Company's capital structure (note 21). By managing liquidity risk, the Company aims to ensure that it will have sufficient liquidity to settle obligations and liabilities as they fall due. Subsequent to the JV Transaction, the Company's only direct source of revenue is the service fee earned as operators of the AGM JV, as any free cash flows generated by AGM are no longer within the Company's exclusive control as the disposition of cash from the JV is governed by the JVA (note 9). However, through a combination of the Company's cash balance and interest earned thereon, cash flows from its investment in the JV, and the ongoing management fee receipts from the JV (note 7), the Company believes it is in a position to meet all working capital requirements, contractual obligations and commitments as they fall due. The Company's cash flows, however, and its ability to meet working capital requirements and contractual obligations are significantly influenced by the price of gold and the performance of the AGM. The Company aims to manage its liquidity by ensuring that, even in a low gold price environment, it can manage spending and provide adequate cash flow to meet all commitments.
As at December 31, 2022, the Company had a cash and cash equivalents balance of $56.1 million (December 31, 2021 - $53.5 million) allowing it to settle current liabilities of $5.8 million (December 31, 2021 - $2.6 million) as they become due.
(c) Market risk
(i) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. As disclosed in note 8, the Company holds preferred shares in the JV which are carried at fair value through profit or loss with fair value determined by reference to a discounted cash flow model. Changes in interest rates would impact the discount rate applied to forecast future cash flows and accordingly the fair value of the preferred shares; however, changes in interest rates would not impact the amount or timing of forecast future cash flows.
With all other variables unchanged, a 1% decrease (increase) in the annualized interest rate would have resulted in a $2.8 million increase and a $2.7 million decrease, respectively, to the Company's after tax net income for the year ended December 31, 2022.
During the year ended December 31, 2021, the Company was not exposed to any material interest rate risks with respect to its preference shares, given the change in methodology to estimate the fair value of the Company's preferred shares in the JV as at December 31, 2021.
46
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
22. Financial instruments (continued)
The Company's cash and cash equivalents earn interest income at variable rates and accordingly future interest income is subject to fluctuations in short-term interest rates. A +/-1% change in short-term interest rates during the year would have resulted in a $0.5 million increase or decrease to the Company's interest income for the year ended December 31, 2022 (year ended December 31, 2021 - $0.6 million increase or decrease).
(ii) Foreign currency risk
As at December 31, 2022 and 2021, the Company's exposure to foreign currency risk was limited to the balances presented below. Acronyms of "ZAR" and "XOF" refer to the South African Rand and West African Franc, respectively.
December 31, 2022 | Foreign currency amount | USD Equivalent | ||||||||||
C$(000s) | ZAR (000s) | XOF (000s) | $ | |||||||||
Cash and cash equivalents | 1,614 | 691 | 17,954 | �� | 1,261 | |||||||
Receivables | 61 | - | - | 45 | ||||||||
Accounts payable and accrued liabilities | (2,139 | ) | (402 | ) | (36,830 | ) | (1,662 | ) | ||||
Long-term incentive plan liabilities | (3,681 | ) | - | - | (2,716 | ) | ||||||
Lease liability | (425 | ) | - | - | (314 | ) | ||||||
Net exposure to foreign currency | (4,570 | ) | 289 | (18,876 | ) | (3,386 | ) |
December 31, 2021 | Foreign currency amount | USD Equivalent | ||||||||||
C$(000s) | ZAR (000s) | XOF (000s) | $ | |||||||||
Cash and cash equivalents | 2,615 | 645 | 21,958 | 2,130 | ||||||||
Receivables | 65 | - | - | 51 | ||||||||
Accounts payable and accrued liabilities | (1,746 | ) | (379 | ) | (26,088 | ) | (1,439 | ) | ||||
Long-term incentive plan liabilities | (1,971 | ) | - | - | (1,547 | ) | ||||||
Lease liability | (534 | ) | - | - | (419 | ) | ||||||
Net exposure to foreign currency | (1,571 | ) | 266 | (4,130 | ) | (1,223 | ) |
A +/-10% change in the prevailing exchange rates as at December 31, 2022, with all other variables held constant, would have resulted in a $0.3 million decrease (increase) to the Company's after tax net income for the year ended December 31, 2022 (year ended December 31, 2021 - $0.1 million decrease (increase) to after tax net income).
(iii) Price risk
Price risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market prices, other than those arising from currency risk or interest rate risk. Future cash flows from the JV are expected to be received as redemptions of the Company’s preference shares in the JV (note 8). From time to time, the JV enters into hedging programs to manage the AGM’s exposure to gold price risk with an objective of margin protection. For the year ended December 31, 2022, the fair value of the preference shares would not be materially impacted by a 10% increase (decrease) in the gold price as there would be no change to the estimated timing of distributions made to the JV partners.
47
GALIANO GOLD INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(In thousands of United States Dollars, unless otherwise noted)
22. Financial instruments (continued)
For the year ended December 31, 2021, changes in the gold price may have impacted the fair value of the AGM's in-situ mineral resources. A +/- 10% change in the fair value per ounce of in-situ mineral resources of 2.9 million gold ounces, with all other variables held constant, would have resulted in a $7.0 million decrease (increase) to the Company's after tax net loss for the year ended December 31, 2021.
23. Related party transactions
In addition to the service fee earned as operator of the JV and administrative and exploration services provided by the JV to the Company on its wholly owned Asumura property (note 7), the Company's related party transactions included compensation paid to key management personnel (being directors and executive officers of the Company), which was as follows for the years presented:
Year ended December 31, | ||||||
2022 | 2021 | |||||
$ | $ | |||||
Salaries and benefits | 1,942 | 2,943 | ||||
Share-based compensation | 1,343 | 2,413 | ||||
Total compensation | 3,285 | 5,356 |
48