Q1 2013 Q4 2012 Q3 2012 Q2 2012 Q1
ACCOUNTING POLICIES AND ESTIMATES
The Company’s financial statements are prepared in accordance with international financial reporting standards (IFRS). The accounting policies for the purposes of IFRS are described in Note 3 to the audited financial statements for the year ended April 30, 2012.
The preparation of the Company’s financial statements in conformity with IFRS requires the use of judgments and estimates that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenues and expenses during the year. The determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience and current and expected economic conditions. Actual results may differ from the amounts included in the financial statements. Areas of significance requiring the use of management judgments and estimates are:
i. Mineral reserves and resources (estimate)
The Company's reserves and resources are evaluated and reported on by a qualified person within the meaning of National Instrument 43-101. Reserve and resource estimates have a material impact on the depletion expense, impairment assessment and decommissioning liability, all of which could possibly have a material impact on net loss. The estimation of economically recoverable gold reserves and resources is based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve and resource recovery, timing and amount of capital expenditures, the price of gold, and future costs, all of which may vary from actual results. Assumptions that are valid at the time of estimation may change significantly when new information becomes available.
ii. Decommissioning liability (estimate)
The decommissioning liability represents management`s best estimate of the costs that will be incurred in the closure, decommissioning and reclamation of the mine and mill. The obligation is recognized at the net present value of the estimated future costs, based on current legal requirements. The eventual amount of these costs is uncertain and the cost estimates can vary in response to changes in legal requirements and restoration techniques, among other things. As a result, there could be a significant change to the obligation
iii. Recoverability of mine, mill and equipment including exploration and development assets (judgment)
At each reporting date, the Company assesses its mine, mill and equipment and exploration and development assets for impairment, to determine if there are events or changes in circumstances that indicate that the carrying values of the assets may not be recoverable. Determination as to whether and how much an asset is impaired involves management judgment on highly uncertain matters such as commodity prices, future capital requirements, future exploration potential and operating performance, discount rates and reserves. An impairment loss could result in a material loss in future periods but future depletion expense would be reduced as a result.
iv. Income taxes (estimate)
The Company calculates deferred income taxes based on rates substantively enacted at each reporting date and expected to be in effect when temporary differences reverse. Any changes in the estimated timing of these reversals could impact the deferred income tax rate and could materially impact the Company’s deferred income tax expense. In addition, all income tax filings are subject to audit and potential reassessment by the Canada Revenue Agency. As a result, the actual income tax liability could differ from the amount estimated by management and the impact on the Company’s deferred income tax expense could be material.
v. Share-based compensation and warrants (estimate)
The calculation of share-based compensation expense and the fair value of warrants issued includes estimates of risk-free interest rates, expected volatility of the Company’s share price and expected life of the outstanding instruments. By their nature, these estimates are subject to measurement uncertainty and could materially impact the financial statements.
The figures for resources and reserves presented in this and other documents are estimates and no assurance can be given that the anticipated level of recovery and/or grades of reserves or resources will be realized. Establishment of a gold reserve and development of a gold mine does not assure a profit on the investment or recovery of costs. In addition, geological complexity, mining hazards, or environmental conditions could increase the cost of operations, and various field operating conditions may adversely affect the production from a mine. These conditions include delays in obtaining governmental approvals or consents, insufficient transportation capacity or other geological and mechanical conditions. While diligent mine supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels. Moreover, short-term operating factors relating to ore reserves and resources, such as the need for orderly development of an ore body or the processing of new or different ore grades, may cause a mining operation to be unprofitable in any particular accounting period. The quantity of a given mineral tends to vary in all types of deposits. Due to the nature of drilling and building reserves, small variances both positive and negative must be anticipated. Resources are estimated based on samples that may or may not reflect the actual deposit. The combined effect of these factors could have material effects (negative or positive) on the Company’s business, financial conditions and prospects.
Mineral Properties, Leases, and Rights
The Company follows the accepted accounting practice of capitalizing acquisition, exploration, and development costs applicable to properties held. If the properties become productive, the costs will be amortized over the anticipated production of the property. If the property is abandoned, the applicable costs will be written off as the claims lapse.
From time to time, the Company acquires or disposes of properties pursuant to the terms of option agreements. Due to the fact that options are exercisable entirely at the discretion of the optionee, the amounts payable or receivable are not recorded. Option payments are recorded as resource property costs or recoveries when the payments are made or received.
Inventories
Finished gold, gold-in-circuit and broken ore are valued at the lower of average production cost and net realizable value (NRV). Production costs include the cost of raw materials, direct labour (including employee benefits), mine-site overhead expenses (based on normal operating capacity) and depreciation and depletion of applicable mine, mill and equipment. NRV is calculated as the estimated price at the time of sale based on prevailing metal prices less estimated costs to complete and costs to be incurred in the selling of the inventory. If carrying value exceeds NRV, a write-down is recognized.
Supplies are valued at the lower of average cost and NRV. Costs include acquisition, freight and other directly attributable expenses.
Evaluation and Exploration Expenditures
Exploration and evaluation expenditures are those incurred in the exploration for and evaluation of mineral resources prior to determining the technical feasibility and commercial viability of extracting a resource. Exploration and evaluation expenditures consist of:
Acquisition of exploration rights;
Exploratory drilling, trenching and sampling;
Gathering data through topographical and geological studies; and
Compiling data for technical feasibility and commercial viability.
Acquisition costs are capitalized when incurred. Other exploration and evaluation expenditures are expensed as incurred until there is a reasonable expectation that the resource will be mined. At that point, the costs are capitalized as ‘exploration and development assets’. Once a project reaches commercial production, the expenditures are transferred from ‘exploration and development assets’ to ‘producing properties’.
Due to the fact that options are exercisable entirely at the discretion of the optionee, the amounts payable or receivable are not recorded. Option payments are recorded as exploration and evaluation expenditures (or recoveries thereof) when the payments are made or received.
Mine, Mill and Equipment
Mine, mill and equipment consists of the Roy Lloyd mine, the EP mine, the Jolu gold mill and equipment, exploration and development assets, field equipment, assets under construction and other operational equipment. Mine, mill and equipment are stated at cost less accumulated depletion and depreciation and accumulated impairment loss.
The Roy Lloyd and EP gold mines are depreciated over their estimated remaining mine life on a unit of production basis.
The Jolu gold mill and equipment is depreciated over the anticipated production life on a unit of production basis.
Assets under construction will be depreciated when the assets become productive, over their anticipated production life.
The remaining components of plant and equipment are recorded at cost and depreciated on a straight-line basis over three years.
Stripping costs incurred during the development of a mine are capitalized along with other development costs. When incurred during the production phase, stripping costs are considered variable production costs and included in the cost of inventory.
Income Taxes
Deferred taxes are accounted for using the asset and liability method. Deferred taxes are recognized for the tax consequences of “temporary differences” by applying enacted or substantively enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in the period that includes the date of enactment or substantive enactment. Deferred tax assets are recognized to the extent that realization of the benefit of the deductible temporary difference is probable. Deferred tax liabilities that may arise from these timing differences are recorded in the period they arise. Income tax is recognized in the statement of comprehensive loss except to the extent it relates to items recognized directly in equity.
Share-based Payments
The Company accounts for share-based payments using the fair value method. Under this method, compensation expense for share-based awards granted is measured at fair value at the grant date using the Black-Scholes valuation model and recognized as an expense in the statement of comprehensive loss over the vesting period of the options granted. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value.
For share-based payment transactions with those other than employees and those providing similar services, measurement is based on the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case measurement is based on the fair value of the options granted at the date the Company obtains the goods or the counterparty renders the service.
Upon exercise of the options, consideration paid together with the amount previously recognized in contributed surplus is transferred from contributed surplus to share capital.
Basic and Diluted Loss Per Share
Basic income (loss) per share is computed by dividing the loss for the year by the weighted average number of common shares outstanding during the year.
exercised or converted to common shares. The dilutive effect of options and warrants and their equivalent is computed and the loss for the year and the weighted average number of common shares outstanding are adjusted for the dilutive effect. Fully diluted amounts are not presented when the effect of the computations are anti-dilutive due to a loss.
Common Shares and Flow-Through Shares
Common shares are classified as equity. Incremental costs directly attributable to the issuance of common shares are recognized as a deduction from equity.
The Company finances a portion of its exploration activities through the issue of flow-through shares. The Company provides certain share subscribers with a flow-through component for tax incentives available on qualifying Canadian exploration expenditures. The Company renounces the qualifying expenditures upon issuance of the respective flow-through shares and accordingly is not entitled to the related taxable income deductions for such expenditures.
The Company records a liability for the proceeds received for flow-through shares in excess of the market value of the Company’s shares on the transaction date. This flow-through premium liability is reduced pro-rata through the statement of comprehensive loss as eligible expenditures are incurred, as a recovery of deferred income taxes. In accordance with IFRS, deferred income taxes related to the temporary differences created by the renouncement of flow-through shares are recorded on a pro-rata basis when the qualified expenditures are incurred. At this time, the tax value of the renunciation is recorded on a pro-rata basis as a deferred income tax liability with a corresponding charge to deferred income tax expense.
Warrants
Costs incurred on the issuance of warrants are deducted from proceeds. Warrants are valued using the relative fair value method. The value on the warrants is recorded in contributed surplus. Upon exercise, the corresponding amount of contributed surplus related to the warrant is transferred from contributed surplus to share capital.
Financial Instruments
Upon initial recognition, financial instruments are recognized at fair value. Transaction costs that are directly attributable to the issuance of financial assets or liabilities which are classified as fair value through profit and loss (FVTPL) are expensed in the period in which they are incurred. Transaction costs for instruments classified as other than at FVTPL are accounted for as part of the carrying value at inception, and are recognized over the term of the assets or liabilities using the effective interest rate method. Subsequent measurement depends upon the classification of the financial instrument as FVTPL, available-for-sale, held-to-maturity, loans and receivables or other financial liabilities. Classification of financial instruments is determined with reference to their nature and purpose.
Financial assets and liabilities classified as FVTPL are recorded at fair value with transaction costs expensed in the statement of comprehensive loss. Any gains or losses resulting from changes in fair value are reflected in income in the period in which they arise. The reclamation bond, notes payable and certain of the Company’s marketable securities are designated as FVTPL.
Financial instruments classified as loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These instruments are carried at amortized cost. This Company has designated cash and cash equivalents and accounts receivable as loans and receivables.
Available-for-sale financial assets are recorded at fair value, with changes in the fair value recognized in other net income. The Company has designated certain of its marketable securities as available-for-sale financial assets.
Other financial liabilities are carried at amortized cost using the effective interest method. Accounts payable and accrued liabilities are classified as other financial liabilities.
A decommissioning liability is recognized for the present value of the future cost of decommissioning mines based on management's best estimates. A decommissioning liability is recognized only when a legal or constructive obligation arises. The liability is measured at each reporting date at the fair value of the estimated expenditures expected to settle the obligation using a risk-free interest rate. An equivalent amount is capitalized as part of mine, mill and equipment and depleted along with the related asset.
Changes in the estimated timing of settlement or future cash flows are dealt with prospectively by recording an adjustment to the decommissioning liability and a corresponding adjustment to the related asset. The unwinding of the discount on the decommissioning liability is charged to the statement of comprehensive loss. Actual expenditures are charged against the decommissioning liability as incurred.
Accounting standards and amendments issued but not yet adopted
IFRS 9, Financial Instruments, will replace IAS 39, Financial Instruments: Recognition and Measurement. This standard has a mandatory effective date of January 1, 2015, with early adoption permitted. The new standard uses a single approach in determining whether a debt instrument is measured at fair value through profit or loss or amortized cost and also replaces the models for measuring equity instruments.
IFRS 11, Joint Arrangements, is effective for periods beginning on or after January 1, 2013. It requires classification of a joint arrangement as either a joint venture or joint operation. This standard will eliminate the use of proportionate consolidation when accounting for joint ventures, as they will be accounted for using the equity method whereas joint operations will recognize their share of the assets, liabilities, revenue and expenses of the joint operation.
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other entities such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries forward existing disclosures and also introduces significant additional disclosure that address the nature of, and risks associated with, an entity’s interests in other entities and the effects of those interests on its financial position and performance.
IFRS 13, Fair Value Measurement, was issued in May 2011 and has an effective date of January 1, 2013, with early adoption permitted. This standard defines fair value and establishes a single source of guidance for measuring fair value and identifies the required disclosure pertaining to fair value measurement.
IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, was issued by the IASB in October 2011 and is effective for years beginning January 1, 2013. IFRIC 20 provides guidance on accounting for stripping costs during the production phase of surface mining when two benefits arise from the stripping activity: ore that can be used to produce inventory and an improvement in the access to further quantities of ore that can be mined.
The Company is currently assessing the potential impact of these revised standards and amendments on its financial statements and does not intend to early adopt any of them.