POLYMET MINING CORP.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 October 2006
U.S. Funds
Suite 2350 – 1177 West Hastings Street, Vancouver, British Columbia, Canada, V6E 2K3 |
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PolyMet Mining Corp.
Interim Consolidated Balance Sheets
As at 31 October and January 31
All figures in Thousands of U.S. Dollars
31 October | 31 January | |||||
2006 | 2006 | |||||
ASSETS | (unaudited) | (restated – note 2c)) | ||||
Current | ||||||
Cash | 14,191 | 11,671 | ||||
Accounts receivable and advances | 40 | 41 | ||||
Prepaid expenses | 50 | 75 | ||||
14,281 | 11,787 | |||||
Deferred Financing Costs(Note 7e)) | 1,247 | - | ||||
Property, Plant and Equipment(Notes 3 and 4) | 15,216 | 14,247 | ||||
30,744 | 26,034 | |||||
LIABILITIES | ||||||
Current | ||||||
Accounts payable and accrued liabilities | 1,045 | 1,669 | ||||
Due to related parties | 12 | 48 | ||||
Current portion of long term debt(Note 5) | 1,000 | 1,000 | ||||
2,057 | 2,717 | |||||
Long term | ||||||
Long term debt(Note 5) | 755 | 1,420 | ||||
Asset retirement obligation(Note 6) | 2,629 | 2,510 | ||||
5,441 | 6,647 | |||||
Contingent Liabilities and Commitments(Notes 4 and 10) | ||||||
SHAREHOLDERS’ EQUITY | ||||||
Share Capital- (Note 7) | 66,766 | 49,662 | ||||
Contributed Surplus– (Note 7d)) | 9,550 | 4,431 | ||||
Deficit | (51,013 | ) | (34,706 | ) | ||
25,303 | 19,387 | |||||
30,744 | 26,034 |
ON BEHALF OF THE BOARD:
“William Murray” | Director |
“David Dreisinger” | Director |
- See Accompanying Notes -
PolyMet Mining Corp.
Interim Consolidated Statements of Shareholders’ Equity
All figures in Thousands of U.S. Dollars, except for Shares
Common Shares (Note 7) | ||||||||||||||||||||
(restated – Note 2c)) | ||||||||||||||||||||
Deficit | Total | |||||||||||||||||||
Authorized | Share | Contributed | (restated – | (restated – | ||||||||||||||||
Shares | Shares | Amount | Subscriptions | Surplus | Note 2c | )) | Note 2c | )) | ||||||||||||
Balance – 31 January 2005 – Shares issued | Unlimited | 55,313,653 | 18,128 | 763 | 1,006 | (18,777 | ) | 1,120 | ||||||||||||
Shares allotted for exercise of warrants | - | 224,925 | 26 | - | - | - | 26 | |||||||||||||
Shares allotted for bonus | - | 1,590,000 | 873 | - | - | - | 873 | |||||||||||||
Balance – 31 January 2005 – Shares issued and allotted | Unlimited | 57,128,578 | 19,027 | 763 | 1,006 | (18,777 | ) | 2,019 | ||||||||||||
Loss for the year | - | - | - | - | - | (15,929 | ) | (15,929 | ) | |||||||||||
Reverse shares allotted for exercise of warrants | - | (224,925 | ) | (26 | ) | - | - | - | (26 | ) | ||||||||||
Reverse shares allotted for bonus | - | (1,590,000 | ) | (873 | ) | - | - | - | (873 | ) | ||||||||||
Issuance of shares for exercise of warrants | - | 224,925 | 26 | - | - | - | 26 | |||||||||||||
Issuance of shares for bonus | - | 1,590,000 | 873 | - | - | - | 873 | |||||||||||||
Shares issued for cash: | ||||||||||||||||||||
Private placements | - | 28,494,653 | 20,389 | (763 | ) | - | - | 19,626 | ||||||||||||
Share issuance costs | - | - | (909 | ) | - | - | - | (909 | ) | |||||||||||
Exercise of warrants | - | 5,700,628 | 3,296 | - | - | - | 3,296 | |||||||||||||
Exercise of options | - | 1,795,852 | 197 | - | - | - | 197 | |||||||||||||
Shares issued for finders’ fee | - | 852,915 | 617 | - | - | - | 617 | |||||||||||||
Non-cash share issuance costs | - | - | (617 | ) | - | - | - | (617 | ) | |||||||||||
Shares issued for property | - | 6,200,547 | 7,564 | - | - | - | 7,564 | |||||||||||||
Stock-based compensation | - | - | - | - | 3,523 | - | 3,523 | |||||||||||||
Fair value of stock options exercised | - | - | 98 | - | (98 | ) | - | - | ||||||||||||
Balance – 31 January 2006 | Unlimited | 100,173,173 | 49,662 | - | 4,431 | (34,706 | ) | 19,387 | ||||||||||||
Loss for the nine month period | - | - | - | - | - | (16,307 | ) | (16,307 | ) | |||||||||||
Issuance of shares for bonus | - | 2,350,000 | 1,289 | - | - | - | 1,289 | |||||||||||||
Shares issued for cash: | ||||||||||||||||||||
Exercise of warrants | - | 14,662,703 | 14,310 | - | - | - | 14,310 | |||||||||||||
Exercise of options | - | 2,193,000 | 765 | - | - | - | 765 | |||||||||||||
Stock-based compensation | - | - | - | - | 4,662 | - | 4,662 | |||||||||||||
Warrants issued for deferred financing costs | - | - | - | - | 1,197 | - | 1,197 | |||||||||||||
Fair value of stock options exercised | - | - | 740 | - | (740 | ) | - | - | ||||||||||||
Balance – 31 October 2006 – Shares issued (unaudited) | Unlimited | 119,378,876 | 66,766 | - | 9,550 | (51,013 | ) | 25,303 |
Figures since 31 January 2006 unaudited, prepared by management
- See Accompanying Notes -
PolyMet Mining Corp.
Interim Consolidated Statements of Loss
For the Periods Ended 31 October
All figures in Thousands of U.S. Dollars except per share amounts
Three | Three | Nine | Nine | |||||||||
months | months | months | months | |||||||||
ended | ended | ended | ended | |||||||||
31 October | 31 October | 31 October | 31 October | |||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
(restated – | (restated – | (restated – | (restated – | |||||||||
note 2c)) | note 2c)) | note 2c)) | note 2c)) | |||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||
Pre-feasibility Costs | ||||||||||||
See Schedule 1 (Note 2b)) | 1,708 | 3,772 | 8,844 | 6,847 | ||||||||
General and Administrative | ||||||||||||
Administration fees and wages | 58 | 48 | 177 | 146 | ||||||||
Amortization | 2 | 3 | 5 | 6 | ||||||||
Conferences | 2 | - | 24 | - | ||||||||
Consulting fees(Note 8) | 1,312 | 204 | 1,585 | 284 | ||||||||
Insurance | 10 | 6 | 26 | 25 | ||||||||
Investor relations and financing | 83 | 2 | 108 | 39 | ||||||||
Management fees | 60 | 36 | 151 | 89 | ||||||||
Office and telephone | 54 | 34 | 114 | 70 | ||||||||
Professional fees | 147 | 76 | 372 | 108 | ||||||||
Rent | 16 | 19 | 48 | 51 | ||||||||
Shareholders’ information | 27 | 16 | 99 | 52 | ||||||||
Stock-based compensation expense (Note | ||||||||||||
7c)) | 524 | 1,605 | 4,662 | 1,922 | ||||||||
Transfer agent and filing fees | 34 | 89 | 126 | 104 | ||||||||
Travel | 122 | 93 | 357 | 225 | ||||||||
2,451 | 2,231 | 7,854 | 3,121 | |||||||||
Other Expenses (Income) | ||||||||||||
Interest income, net | (89 | ) | (42 | ) | (318 | ) | (66 | ) | ||||
Loss (gain) on foreign exchange conversion | (190 | ) | (204 | ) | (44 | ) | (261 | ) | ||||
Rental income | (16 | ) | - | (29 | ) | - | ||||||
(295 | ) | (246 | ) | (391 | ) | (327 | ) | |||||
Loss for the Period | 3,864 | 5,757 | 16,307 | 9,641 | ||||||||
Deficit – Beginning of the Period | 47,149 | 22,661 | 34,706 | 18,777 | ||||||||
Deficit – End of the Period | 51,013 | 28,418 | 51,013 | 28,418 | ||||||||
Loss per Share | (0.03 | ) | (0.07 | ) | (0.14 | ) | (0.14 | ) | ||||
Weighted Average Number of Shares | 117,796,637 | 78,082,754 | 112,888,667 | 69,073,740 |
- See Accompanying Notes -
PolyMet Mining Corp.
Interim Consolidated Statements of Cash Flows
For the Periods Ended 31 October
All figures in Thousands of U.S. Dollars
Nine | ||||||||||||
Three | months | |||||||||||
months | Three | ended | Nine | |||||||||
ended | months | 31 October | months | |||||||||
31 October | ended | 2006 | ended | |||||||||
2006 | 31 October | (restated – | 31 October | |||||||||
(unaudited) | 2005 | note 2c)) | 2005 | |||||||||
(unaudited) | (unaudited) | (unaudited) | ||||||||||
Operating Activities | ||||||||||||
Loss for the period | (3,864 | ) | (5,757 | ) | (16,307 | ) | (9,641 | ) | ||||
Adjustments to reconcile loss to net cash | ||||||||||||
Amortization | 2 | 3 | 5 | 6 | ||||||||
Consulting fees(Note 8) | 1,290 | - | 1,290 | - | ||||||||
Stock-based compensation | 524 | 1,605 | 4,662 | 1,922 | ||||||||
Changes in current assets and liabilities | ||||||||||||
Accounts receivable and advances | 36 | (149 | ) | 1 | (132 | ) | ||||||
Prepaid expenses | (2 | ) | (5 | ) | 25 | 217 | ||||||
Accounts payable and accrued liabilities | (270 | ) | 2,551 | (624 | ) | 2,385 | ||||||
Net cash used in operating activities | (2,284 | ) | (1,752 | ) | (10,948 | ) | (5,243 | ) | ||||
Financing Activities | ||||||||||||
Share capital, net | 228 | 16,290 | 15,074 | 20,286 | ||||||||
Due to related parties | (10 | ) | - | (36 | ) | - | ||||||
Deferred financing costs | (50 | ) | - | (50 | ) | - | ||||||
Long term debt | (250 | ) | - | (750 | ) | - | ||||||
Net cash provided by (used in) financing | ||||||||||||
activities | (82 | ) | 16,290 | 14,238 | 20,286 | |||||||
Investing Activities | ||||||||||||
Property, plant and equipment | (748 | ) | - | (770 | ) | (4 | ) | |||||
Net cash used in investing activities | (748 | ) | - | (770 | ) | (4 | ) | |||||
Net Increase (Decrease) in Cash | (3,114 | ) | 14,538 | 2,520 | 15,039 | |||||||
Cash – Beginning of Period | 17,305 | 1,012 | 11,671 | 511 | ||||||||
Cash – End of Period | 14,191 | 15,550 | 14,191 | 15,550 | ||||||||
Non-Cash Financing and Investing Activities | ||||||||||||
Interest on long-term debt | 18 | - | 85 | - |
- See Accompanying Notes -
PolyMet Mining Corp. | Schedule 1 |
Interim Consolidated Schedule of Pre-Feasibility Costs | |
For the Periods Ended 31 October | |
All figures in Thousands of U.S. Dollars |
Three | Nine | |||||||||||
months | months | |||||||||||
ended | Three | ended | Nine | |||||||||
31 October | months | 31 October | months | |||||||||
2006 | ended | 2006 | ended | |||||||||
(unaudited) | 31 October | (restated – | 31 October | |||||||||
2005 | note 2c)) | 2005 | ||||||||||
(unaudited) | (unaudited) | (unaudited) | ||||||||||
Direct | ||||||||||||
Camp and general | 26 | 8 | 157 | 27 | ||||||||
Consulting fees | 224 | 164 | 819 | 465 | ||||||||
Drilling | 12 | 369 | 94 | 2,062 | ||||||||
Engineering | 167 | (112 | ) | 642 | 79 | |||||||
Environmental | 410 | 471 | 3,302 | 1,112 | ||||||||
Geological and geophysical | 4 | 5 | 55 | 35 | ||||||||
Insurance | 8 | - | 30 | - | ||||||||
Land lease, taxes and licenses | 43 | - | 127 | - | ||||||||
Metallurgical | - | 1,873 | 303 | 1,893 | ||||||||
Mine planning | 196 | 727 | 2,236 | 763 | ||||||||
Permitting | - | 136 | 2 | 136 | ||||||||
Plant maintenance and repair | 391 | - | 682 | - | ||||||||
Sampling | 227 | 131 | 395 | 275 | ||||||||
Total Costs for the Period (Note 2b)) | 1,708 | 3,772 | 8,844 | 6,847 |
- See Accompanying Notes -
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
1. | Nature of Business | |
PolyMet Mining Corp. (“the Company”) was incorporated in British Columbia, Canada on 4 March 1981 under the name Fleck Resources Ltd. The Company changed its name from Fleck Resources to PolyMet Mining Corp. on 10 June 1998. The Company is engaged in the exploration and development, when warranted, of natural resource properties. The Company’s primary mineral property is the NorthMet Project, a polymetallic project in northeastern Minnesota, USA. The realization of the Company’s investment in the NorthMet Project and other assets is dependant upon various factors, including the existence of economically recoverable mineral reserves, the ability to obtain the necessary financing to complete the exploration and development of the NorthMet Project, future profitable operations, or alternatively upon disposal of the investment on an advantageous basis. | ||
On 25 September 2006, the Company received the results of the Definitive Feasibility Study (“DFS)” prepared by Bateman Engineering (Pty) Ltd. (“Bateman”) that confirms the economic and technical viability of the NorthMet Project and, as such, the project has moved from the exploration stage to the development stage. | ||
2. | Significant Accounting Policies and Restatements | |
a) | Basis of Presentation | |
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada and follow the same accounting policies and methods consistent with those used in the preparation of the most recent annual audited financial statements. The interim consolidated financial statements do not include all information and note disclosures required by Canadian GAAP for annual financial statements, and therefore should be read in conjunction with the Company’s audited consolidated financial statements for the year ended 31 January 2006. | ||
b) | Mineral Operations | |
Mineral property costs, aside from mineral property acquisitions costs, incurred prior to determination of the feasibility of a mining operation are expensed as incurred. Mineral property development expenditures incurred subsequent to the determination of the feasibility of a mining operation and mineral property acquisition costs are deferred until the property is placed into production, sold, allowed to lapse or abandoned. Acquisition costs include cash and fair market value of common shares. These capitalized costs will be amortized over the estimated life of the property following commencement of commercial production or written off if the property is sold, allowed to lapse or abandoned or when an impairment of values has occurred. | ||
As a result of the Definitive Feasibility Study on the NorthMet Project, the Company has now entered the development stage and has elected to defer mineral property development expenditures related to the NorthMet Project effective 1 October 2006. |
1
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
c) | Restatements | |
During the third quarter, the Company re-examined its accounting for stock-based compensation and the share bonus program as well as its accrual procedures. As a result of this re-examination, the Company determined that stock-based compensation and pre-feasibility expense were inappropriately measured and recognized during the quarters ended 30 April and 31 July 2006. Furthermore, the Company determined that consulting fees charged to the consolidated statement of loss for the year ended 31 January 2005 under the share bonus program were understated by $638,000. | ||
The company has restated its financial statements for the items above and the impacts on certain line items of the financial statements with significant changes were as follows: |
Line Item | 30 April 2006 | 31 July 2006 | 31 July 2006 | ||||
(3 months ended) | (6 months ended) | ||||||
As | Revised | As | Revised | As | Revised | ||
Previously | Previously | Previously | |||||
Reported | Reported | Reported | |||||
Pre-feasibility costs | 3,453 | 3,695 | 2,793 | 3,441 | 6,246 | 7,136 | |
Stock-based | 1,952 | 3,789 | 4,168 | 349 | 6,120 | 4,138 | |
compensation | |||||||
General and administrative | 2,345 | 4,305 | 4,919 | 1,098 | 7,326 | 5,403 | |
costs | |||||||
Loss for the Period | 5,675 | 7,878 | 7,769 | 4,565 | 13,444 | 12,443 | |
Deficit | 39,742 | 42,584 | 47,511 | 47,149 | 47,511 | 47,149 | |
Loss per share | (0.05) | (0.07) | (0.07) | (0.04) | (0.12) | (0.11) | |
Accounts payable and | 491 | 799 | 333 | 1,315 | |||
accrued liabilities | |||||||
Share Capital | 60,201 | 60,839 | 64,454 | 65,092 | |||
Contributed Surplus | 5,890 | 7,727 | 9,967 | 7,986 |
2
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
3. | Resource Property Agreements |
NorthMet, Minnesota, U.S.A. - Lease | |
By an agreement dated 4 January 1989 and a subsequent amendment and assignment, the Company leases certain lands in St. Louis County, Minnesota from RGGS Land & Minerals Ltd., L.P. During the year ended 31 January 2005, United States Steel Corporation assigned the lease to RGGS Land & Minerals Ltd., L.P. The current term of the renewable lease is 20 years and calls for total lease payments of $1,475,000. All lease payments due have been paid or accrued to 31 October 2006. The agreement requires annual lease payments of $150,000 from 4 January 2006 to 2009. | |
The Company can, at its option, terminate the lease at any time by giving written notice to the lessor not less than 90 days prior to the effective termination date or can indefinitely extend the 20-year term by continuing to make $150,000 annual lease payments on each successive anniversary date. | |
The lease payments are considered advance royalty payments and shall be deducted from future production royalties payable to the lessor, which range from 3% to 5% based on the net smelter return received by the Company. The Company’s recovery of the advance royalty payments is subject to the lessor receiving a royalty amount not less than the amount of the annual lease payment due for that year. | |
4. | Property, Plant and Equipment |
Details are as follows: |
31 October | 31 January | ||||||||||||
2006 | 2006 | ||||||||||||
Accumulated | Net Book | Net Book | |||||||||||
31 October 2006 | Cost | Amortization | Value | Value | |||||||||
NorthMet Project | 15,189 | - | 15,189 | 14,226 | |||||||||
Computers | 15 | 5 | 10 | 14 | |||||||||
Furniture and equipment | 19 | 5 | 14 | 7 | |||||||||
Vehicles | 3 | - | 3 | - | |||||||||
15,226 | 10 | 15,216 | 14,247 |
Erie Plant, Minnesota, U.S.A.
By a Memorandum of Understanding dated 5 December 2003 and an option agreement dated 14 February 2004, the Company obtained an option (“Cliffs Option”) to acquire certain property, plant and equipment (“Cliffs Assets”) from Cleveland Cliffs of Cleveland, Ohio (“Cliffs”) located near the Company’s NorthMet Project.
As consideration for the exclusive Cliffs Option, the Company paid $500,000 prior to 31 January 2004 and issued to Cliffs 1,000,000 common shares on 30 March 2004, valued at $229,320 to maintain the exclusive rights until 30 June 2006.
On 14 September 2005 the Company reached an agreement in principle with Cliffs on the terms for the early exercise of the Company’s option to acquire 100% ownership of large portions of the former LTV Steel Mining Company ore processing plant in northeastern Minnesota (the “Asset Purchase Agreement”).
On 15 November 2005 the Company completed the acquisition under the Asset Purchase Agreement. The property, plant and equipment assets (the “Erie Plant”) now owned by the Company include land, crushing,
3
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
milling capacity, comprehensive spare parts, plant site buildings, real estate, tailings impoundments and mine work shops, as well as access to extensive mining infrastructure. The final allocation of the purchase price has not yet been agreed to between the parties.
As the assets are not in productive use, no amortization of these assets has been recorded to 31 October 2006. The consideration for the Asset Purchase Agreement was $3.4 million in cash ($1,645,000 paid) and the issuance of 6,200,547 common shares (issued on 15 November 2005 at fair market value of $7,564,444) in the capital stock of the Company. The remaining cash component of the payment of $2.4 million will be paid in quarterly installments of $250,000 plus interest(Note 5). Interest accrued in the amount of $104,000 has been capitalized as part of the cost of the NorthMet Project assets.
The Company has assumed certain ongoing site-related environmental and reclamation obligations. These environmental and reclamation obligations are presently contracted under the terms of the Purchase Agreement with Cliffs. Once the Company obtains its permit to mine and Cliffs is released from its obligations by the State agencies, the environmental and reclamation obligations will be direct with the governing bodies. The present value of the asset retirement obligation in the amount of $2.6 million(Note 6) has been recorded as an increase in the carrying amount of the NorthMet Project assets and will be amortized over the life of the asset.
On 15 September 2006, the Company announced that it had signed a Letter of Intent with Cliffs whereby PolyMet would acquire property and associated rights sufficient to provide it with a railroad connection linking the mine development site and the Erie Plant. It also includes a 120-railcar fleet, locomotive fuelling and maintenance facilities, water rights and pipelines, large administrative offices on site and an additional 6,000 acres to the east and west of and contiguous to its existing tailing facilities. This transaction (the “Asset Purchase Agreement II”) was closed on 20 December 2006.
The purchase price totalling 2 million shares and $15 million in cash is in four tranches:
• | 2 million shares of PolyMet, paid at closing; | |
• | $1 million in cash, paid at closing; | |
• | $7 million in cash, payable in quarterly instalments of $250,000 commencing 31 December 2006 with the balance payable upon receipt of commercial financing. Interest will be payable quarterly from 31 December, 2006 at theWall Street JournalPrime Rate; and, | |
• | $7 million in cash, payable in quarterly instalments of $250,000 commencing on 31 December 2009. No interest will be payable until 31 December 2009 after which it will be payable quarterly at theWallStreet JournalPrime Rate. | |
PolyMet has indemnified Cliffs for ongoing reclamation and remediation associated with the property. | ||
4
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
5. | Long Term Debt |
Pursuant to the Asset Purchase Agreement(Note 4)the Company signed a note payable to Cliffs in the amount of $2.4 million. The note is interest bearing at the annual simple rate of four percent (4%) and shall be repaid in quarterly instalments of $250,000 plus interest. As at 31 October 2006 the outstanding long term debt was as follows: |
31 October | 31 January | ||||||
2006 | 2006 | ||||||
Note payable | 1,750 | 2,400 | |||||
Accrued interest | 5 | 20 | |||||
Total debt | 1,755 | 2,420 | |||||
Less current portion | (1,000 | ) | (1,000 | ) | |||
Long term debt | 755 | 1,420 |
6. | Asset Retirement Obligation |
As part of the consideration for the Asset Purchase Agreement(Note 4), the Company assumed, under contract to Cliffs, the liability for final reclamation and closure of the mine. | |
Federal, state and local laws and regulations concerning environmental protection affect the Company’s operations. Under current regulations, the Company is contracted to indemnify Cliff’s requirement to meet performance standards to minimize environmental impact from operations and to perform site restoration and other closure activities. The Company’s provisions for future site closure and reclamation costs are based on known requirements. It is not currently possible to estimate the impact on operating results, if any, of future legislative or regulatory developments. The Company’s estimate of the present value of the obligation to reclaim the NorthMet Project is based upon existing reclamation standards at 31 October 2006 and Canadian generally accepted accounting principles. Once the Company obtains its permit to mine, the environmental and reclamation obligations will be direct with the governing bodies. | |
The Company’s estimates are based upon a 31 October 2006 liability estimate of $12.5 million, an annual inflation rate of 3.80%, a discount rate of 9.00% and a mine life of 28.5 years, commencing in the second half of 2008 and a reclamation period of 3 years. Accretion of the liability until the commencement of commercial production will be capitalized to the NorthMet Project assets. | |
5
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
7. | Share Capital | |
Shares have been issued and stock options and warrants have been priced in Canadian funds, with the exception of the 600,000 warrants issued to BNP Paribas Loan Services, as described inNote 10 d). | ||
a) | Share issuances during the nine month period included warrant exercises for 14,662,703 shares at prices between Cdn$0.10 and Cdn$2.00 (US$0.09 and US$1.77), for total proceeds of $14.3 million. There were 2,193,000 options exercised at prices between Cdn$0.21 and Cdn$1.36 (US$0.186 and US$1.20), for total proceeds of US$0.765 million. | |
Additionally, 2,350,000 shares were issued as bonus shares under Milestone 3 of the share bonus plan (Note 10a)). These shares were valued at Cdn$0.75 per share, or $1,762,500 (US$1,289,621) | ||
b) | The Company has a stock option plan that covers its employees, directors, officers and consultants. The options are granted for varying terms ranging from two to five years. During the nine month period, the Company granted 3,925,000 options. The maximum number of common shares under the stock option plan is 10% of the outstanding common shares of the Company at the time of granting of the options. | |
Details of stock option activity are as follows: |
Nine | |||||||
months | Year | ||||||
ended | ended | ||||||
31 October | 31 January | ||||||
2006 | 2006 | ||||||
Outstanding - Beginning of period | 6,783,700 | 4,999,552 | |||||
Granted | 3,925,000 | 3,580,000 | |||||
Cancelled | (700 | ) | - | ||||
Exercised | (2,193,000 | ) | (1,795,852 | ) | |||
Outstanding - End of period | 8,515,000 | 6,783,700 |
6
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
As at 31 October 2006, the following director, officer, consultant and employee stock options were outstanding:
Exercise Price | Exercise Price | |||
Expiry Date | (US) | (Cdn) | Number | |
$ | $ | |||
09 March 2009 | 0.36 | 0.40 | 225,000 | |
28 April 2009 | 0.67 | 0.75 | 150,000 | |
05 July 2009 | 0.59 | 0.66 | 1,125,000 | |
18 October 2009 | 0.70 | 0.79 | 50,000 | |
30 March 2010 | 0.58 | 0.65 | 425,000 | |
1 May 2010 | 0.76 | 0.85 | 350,000 | |
15 June 2010 | 0.84 | 0.94 | 40,000 | |
19 September 2010 | 1.21 | 1.36 | 1,690,000 | |
24 October 2010 | 1.07 | 1.20 | 280,000 | |
5 December 2010 | 1.03 | 1.15 | 255,000 | |
20 March 2011 | 2.46 | 2.76 | 3,200,000 | |
19 June 2011 | 2.65 | 2.97 | 325,000 | |
1 September 2011 | 3.41 | 3.82 | 325,000 | |
22 September 2011 | 3.13 | 3.51 | 75,000 | |
Weighted average exercise price | 1.66 | 1.86 | 8,515,000 |
As at 31 October 2006 all options had vested and were exercisable. | ||
c) | Stock-Based Compensation | |
During the nine month period ended 31 October 2006, the Company granted 3,925,000 options to directors, officers, consultants and employees with exercise prices between Cdn$2.76 and Cdn$3.82 (US$2.46 and US$3.41) per option. | ||
The fair value of stock-based compensation in the amount of $4,662,000 has been recorded in the accounts of the Company as an expense with the offsetting entry to contributed surplus. This value is estimated at the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions: |
Risk-free interest rate | 4.05% | |
Expected dividend yield | Nil | |
Expected stock price volatility | 59.91% to 83.01% | |
Expected option life in years | 2.33 |
The weighted average fair value of the options granted was Cdn$1.37 (US$1.19) .
Option pricing models require the input of highly subjective assumptions including the estimate of the share price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
7
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
d) | Contributed Surplus | |
Contributed surplus includes accumulated stock-based compensation expense, reduced by the fair value of the stock options exercised. | ||
Details are as follows: |
Nine | |||||||
months | Year | ||||||
ended | ended | ||||||
31 October | 31 January | ||||||
2006 | 2006 | ||||||
Balance – Beginning of period | 4,431 | 1,006 | |||||
Current year fair value of stock-based compensation | 4,662 | 3,523 | |||||
Deferred financing costs | 1,197 | - | |||||
Fair value of stock options exercised during the period and | |||||||
transferred to share capital | (740 | ) | (98 | ) | |||
Balance – End of period | 9,550 | 4,431 |
e) | Share Purchase Warrants | |
Details of stock purchase warrant activity is as follows: |
Nine | |||||||
months | Year | ||||||
ended | ended | ||||||
31 October | 31 January | ||||||
2006 | 2006 | ||||||
Outstanding – Beginning of period | 14,663,000 | 5,841,000 | |||||
Issued | 600,000 | 15,175,000 | |||||
Exercised | (14,663,000 | ) | (5,925,000 | ) | |||
Expired | - | (428,000 | ) | ||||
Outstanding – End of period | 600,000 | 14,663,000 |
On 31 October 2006, the Company issued 600,000 warrants to BNP Paribas Loan Services as partial consideration under the agreement described inNote 10 d).These warrants are not exercisable until approved by regulators, have an exercise price of US$4.00 per share and expire on 30 October 2010. The fair value of these warrants is $1,197,000. | ||
f) | Shareholder Rights Plan | |
Effective 4 December 2003, the Company adopted a Shareholder Rights Plan (“Rights Plan”), which was approved by the Company’s shareholders’ on 27 May 2004. All common shares issued by the Company during the term of the Rights Plan will have one right represented for each common share held by the shareholder of the Company. The term of the Rights Plan is 10 years, unless the rights are earlier redeemed or exchanged. The Rights issued under the Rights Plan become exercisable only if a party acquires 20% or more of the Company's common shares without complying with the Rights Plan or without the approval of the Board of Directors of the Company. |
8
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
Each Right entitles the registered holder thereof to purchase from the Company on the occurrence of certain events, one common share of the Company at the price of Cdn$50 per share, subject to adjustment (the “Exercise Price”). However, upon certain events occurring (as defined in the Rights Plan), each Right would then entitle the registered holder to receive, upon payment of the Exercise Price, that number of common shares that have a market value at the date of that occurrence equal to twice the Exercise Price. The Rights are not exercisable until the Separation Time, as defined in the Rights Plan.
8. | Related Party Transactions |
In addition to transactions disclosed elsewhere in these financial statements, the Company has conducted transactions with officers, directors and persons or companies related to directors and paid or accrued amounts as follows: |
Nine | Nine | ||
months | months | ||
ended | ended | ||
31 October | 31 October | ||
2006 | 2005 | ||
$ | $ | ||
Consulting fees (includes $1,290 related to issuance of bonus shares) | 1,585 | 176 | |
Legal fees | 57 | - | |
1,642 | 176 |
The amounts charged to the Company for the services provided have been determined by negotiation among the parties and, in certain cases, are covered by signed agreements. These transactions were in the normal course of operations and were measured at the exchange value, which is the amount of consideration established and agreed to by the related parties. | |
9. | Segmented Information |
The Company is in the process of developing its mineral property in the U.S. and conducts its financing and administrative functions at the head office located in Canada. Segmented information on a geographic basis is as follows: |
Canada | U.S. | Consolidated | ||
31 October 2006 | $ | $ | $ | |
Segment operating loss for the nine months ended | 7,327 | 8,980 | 16,307 | |
Identifiable assets | 14,978 | 15,766 | 30,744 |
Canada | U.S. | Consolidated | ||
31 October 2005 | $ | $ | $ | |
Segment operating loss for the nine months ended | 2,591 | 7,050 | 9,641 | |
Identifiable assets | 14,808 | 1,688 | 16,496 | |
9
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
10. | Contingent Liabilities and Commitments | |
a) | The Company has instituted a share bonus plan as part of its employment, management and consulting contracts for directors, key management and project personnel. This bonus plan adds incentive for key personnel to reach certain prescribed milestones required to reach commercial production at the NorthMet Project. As at 31 October 2006, the Company had received shareholder approval of the Bonus Shares for Milestones 1 – 4 and regulatory approval for Milestones 1, 2 and 3. Milestone 4 is subject to regulatory approval, which will be sought when the Company is closer to completing this Milestone. To date 3,940,000 shares have been issued for the achievement of Milestones 1 and 3. The bonus shares allocated for Milestones 1 thru 4 are valued using the Company’s closing trading price on 28 May 2004 of Cdn$0.75 per share, the date of the approval of the bonus plan by the disinterested shareholders. | |
The summary of the share bonus plan is as follows: |
Bonus Shares | |||
Milestone 1 | 1,590,000 | (i) issued | |
Milestone 2 | 1,300,000 | (ii) | |
Milestone 3 | 2,350,000 | (iii) issued | |
Milestone 4 | 3,240,000 | (iv) |
(i) | Milestone 1 – Completion of an agreement with Cliffs-Erie LLC for the option to purchase of Cliffs-Erie facility to be used as a part of mining and processing operations for the NorthMet Project. This milestone was achieved on 16 February 2004 and shareholder and regulatory approval were received in the first quarter of fiscal 2006, therefore, during the year ended 31 January 2005, the Company expensed a Cdn$1,192,500 ($872,552) bonus as consulting fees and allotted 1,590,000 shares. These shares were issued in March 2005. | |
(ii) | Milestone 2 – Negotiation and completion of an off-take agreement with a senior metals producer for the purchase of raw materials to be produced from the NorthMet Project. | |
(iii) | Milestone 3 – Completion of a “bankable feasibility study” which indicates that commercial production from the NorthMet Project is viable. This milestone was achieved on 25 September 2006 and therefore, during the nine months ended 31 October 2006, the Company expensed a Cdn$1,762,500 ($1,289,621) bonus as consulting fees and allotted 2,350,000 shares. These shares were issued in October 2006. | |
(iv) | Milestone 4 – Commencement of commercial production at the NorthMet Project at a time when the Company has not less than 50% ownership interest. | |
(v) | At the Annual General Meeting of shareholders of the Company, held on 21 June 2006, the shareholders approved the issuance of shares under Milestone 3. Shareholders also approved accelerated vesting of bonus shares whereby, in the event the Company is the subject of a take-over bid, all shares that remain subject to issuance under Milestones 2 through 4 shall be vested and issued provided that no individual will benefit from both accelerated vesting and terminated severance allowances as described in paragraph b) below. |
b) | As a part of certain employment and management contracts, the Company had agreed to severance allowances for key employees and management in the event of a take-over bid. These allowances were based upon the Company’s implied market capitalization at the time of the take-over bid, calculated by multiplying the number of shares outstanding on a fully diluted basis by the take-over bid price per share. These severance allowances have been terminated pursuant to oral or written amendments to these |
10
PolyMet Mining Corp. |
Notes to Consolidated Financial Statements |
31 October 2006 |
Tabular amounts in Thousands of U.S. Dollars, except for price per share, shares and options |
Unaudited – prepared by management |
contracts and will be replaced by termination agreements representing three times the average annual compensation in the three years prior to change of control. | ||
c) | Pursuant to the Company’s Asset Purchase Agreement and Asset Purchase Agreement II with Cliffs (Note 4), for as long as Cliffs owns 1% or more of the Company’s issued shares, Cliffs will have the right to participate on a pro-rata basis in future cash equity financings. This agreement also includes a first right of refusal in favour of the Company should Cliffs wish to dispose of its interest. | |
d) | On 31 October 2006 the Company entered into an agreement with BNP Paribas Loan Services (“BNPP”) whereby BNPP will advise and assist PolyMet in all aspects of preparation for construction finance. As part of this agreement, BNPP was issued warrants, subject to regulatory approval, to purchase 600,000 shares of the Company’s common stock at a price of US$4.00 per share at any time prior to 30 October 2010. Further, upon delivering a bona fide offer of project financing, warrants to purchase an additional 500,000 shares of the Company at a price of US$4.00 per share at any time prior to 30 October 2010 will vest. | |
11