Developing the El Boleo mine - 2010
Baja Mining Corp. is a Canadian mining company. Baja, through Minera y Metalurgica del Boleo S.A.P.I. de C.V. (MMB), owns a 10% interest in the Boleo copper-cobalt-zinc-manganese project located in Baja California Sur, Mexico.
Message: Sedar : MD&A : QUARTERLY REPORT – June 30, 2009
BAJA MINING CORP. Management Discussion and Analysis QUARTERLY REPORT – June 30, 2009 This Management’s Discussion and Analysis (“MD&A”) of Baja Mining Corp. provides analysis of Baja Mining Corp.’s financial results for the quarter ended June 30, 2009. The following information should be read in conjunction with the accompanying interim unaudited consolidated financial statements, the notes to the interim unaudited consolidated financial statements and with the audited consolidated financial statements for the year ended December 31, 2008 and accompanying notes, all of which are available at the SEDAR website at www.sedar.com. Expressed in Canadian dollars, unless stated otherwise. This MD&A is current as
of August 11, 2009. Nature of Business Baja Mining Corp. (the “Company” or “Baja”) is engaged in the exploration and development of its mineral properties in Mexico, focusing on the financing and development of its El Boleo copper-cobalt-zincmanganese deposit (“Boleo Project” or “Boleo”) located at Santa Rosalia, Baja California Sur, Mexico. The Company owns its 70% interest in the Boleo Project through its wholly owned subsidiary, Mintec Processing Ltd., which owns 100% of a Mexican subsidiary, Invebaja S.A. de C.V. (“Invebaja”), which in turn owns 70% of the shares of Minera y Metalurgica del Boleo S.A. de C.V. (“MMB”). MMB holds all mineral and property rights for Boleo. The remaining 30% of Boleo is owned by a Korean Consortium (the “Consortium”), which acquired their interest from Invebaja in June 2008. The Boleo Project is located on the east coast of Baja California Sur, Mexico, near the town of Santa Rosalia, some 900 kilometres south of San Diego. The deposit contains seven mineralized seams, called “mantos”, stacked within a single formation, all dipping gently to the east towards the Sea of Cortez in a step-like fashion, due to post depositional faulting. The Boleo Project consists of roughly 12,000 hectares of mineral concessions and 7,000 hectares of surface occupancy rights, each assembled as part of a contiguous titled block. The project is located within the “buffer zone” of the El Vizcaino Biosphere, a Mexican National environmental reserve; and the required Environmental Impact Manifest (“EIM”) has been approved by Mexican authorities, allowing the project to be built and operated in the buffer zone of the biosphere. The Boleo Project is being developed as a series of underground mines using conventional soft rock mining methods, along with small open-cut mines, feeding ore to a processing plant. This plant will utilize a two-stage leaching circuit, followed by solid/liquid separation and solvent extraction/electrowinning to produce copper and cobalt as metal, zinc as zinc sulphate monohydrate and, at some point, manganese - probably as manganese carbonate. Overall Performance Corporate outlook During the second quarter of 2009 Baja focused on engineering while the Company completes the update of the Boleo capital costs. Our engineers, ICA Fluor, and all project staff have spent the past three months concentrating on the update and providing support to ensure the process remains on track. This work and the overall economic climate in the resource sector, which is showings signs of improvement, coupled with the relatively rapid copper price recovery, continue to provide increased optimism to Baja as it works towards achieving its 2009 corporate goals. 2 Even with this confidence, management continues to monitor current cash expenditures against budgets, and limit additional future commitments. Baja maintains its investment policy, and continues to invest its current cash reserves, the majority in $US, in guaranteed investment certificates with our Canadian chartered bank, Scotiabank. These actions are designed to protect the long term interests of the Baja shareholders. The Company and its partners, the Consortium, continue to work for all project stakeholders and look forward to delivering on our key objectives. Development Partner On June 30, 2008, the Company closed an agreement (the “Transaction”) with the Consortium in order to access a significant portion of the project funding for the Boleo Project, pursuant to which the Consortium acquired a 30% interest in the Boleo Project through the acquisition of a 30% interest in MMB. The Consortium is led by Korea Resources Corporation (“Kores”) and LS-Nikko Copper Inc. (“LS-Nikko”), and in addition, includes Hyundai Hysco Co. Ltd., SK Networks Co. Ltd. and Iljin Copper Foil Co. Ltd. Baja continues its working relationship withexcellent partners who bring natural resources experience and additional financial strength to the Boleo Project. The Consortium has remained a committed partner and continues to support the project financially and through the provision of personnel as the project is advanced. Current development in the quarter ended June 30, 2009 Engineering Update In April 2009 the Company appointed ICA Fluor on the revised scope of work tender for an Engineering, Procurement and Construction Management (“EPCM”) contract for the Boleo Project. A technical service agreement has been agreed to and accepted by ICA Fluor and the Company for the first phase of ICA Fluor’s work. The ICA Fluor team quickly worked to transition all work, and a project kick-off meeting occurred May 26 and 27. This signaled a significant and positive change in the engineering direction for the Boleo Project. Phase I work is ongoing, and includes the development of an open-book capital cost estimate and revised project construction schedule. The cost estimate will reflect current market conditions and be supported by the work performed to date (about 30% of engineering has been completed). The Phase I capital cost estimate will be subject to independent third party review by Minerals Advisory Group LLC (“MAG”), of Arizona. MAG is a very senior and experienced independent reviewer. Baja’s three key process package providers are also participating in the update by providing information directly to ICA Fluor. These packages include the acid plant and cogeneration facility with SNC Lavalin-Fenco; the front-end ore and limestone preparation circuits (crushing, grinding, and screening, as well as solid/liquid separation) with FL Smidth Minerals, Inc.; and the solvent extraction and electrowinning circuits with Bateman Litwin. Delivery of the ICA Fluor report is expected in late September 2009 with the MAG report to follow in early October 2009. The Phase I estimate will become the basis for a target price for the EPCM contract during the execution of the project in Phase II. Phase II will include the execution of engineering, procurement and construction management necessary to bring the project into production. The parties continue to negotiate an interim Memorandum of Understanding which will include the commercial terms of a reimbursable EPCM contract. Phase II will commence upon completion of construction financing. ICA Fluor is the leading industrial engineering and construction company in Mexico. The company specializes in engineering, procurement, maintenance and construction of industrial plants for the gas, oil, chemical, petrochemical, automotive, power, manufacturing, mining and telecommunication sectors. ICA Fluor is a joint venture of Empresas ICA and Fluor Corporation. For additional information on Empresas ICA see www.ica.com.mx .
3 Construction Update The Company continues to staff its Santa Rosalia office and the Boleo site, ensuring security for existing assets. During May 2009 the Company awarded a contract to complete the El Gato landfill facility, based upon permitting requirements. The work was completed at the end of July 2009 and was turned over to the municipality of Mulege. The Company completed and updated its strategic review of outstanding procurement based on the expected delivery of the revised project schedule during the third quarter of 2009. No new project procurement, except El Gato, has occurred since October 2008, but vital long lead equipment remains on track, allowing significant benefits to a revised project schedule. Construction Financing Update During the second quarter the Company and its financial advisors Endeavour Financial Corporation (“Endeavour”), continued discussions with numerous lending institutions, and have now targeted certain national development banks as the most effective path towards securing a revised financing package. The Company and Endeavour completed an updated, but not final, project financial model and revised the information memorandum (released in June 2009) for more detailed discussions with development lending institutions. Several senior level meetings occurred in June and July with positive outcomes. However, no formal commitments can be finalized until the completion of the updated capital costs and revised project schedule. Once a clear development schedule is completed, the Company and Endeavour will work with all the financing partners to finalize the project documents and arrange a banking group intent on completing revised credit facilities as quickly as feasible. Despite the efforts of management and the Company’s partners, there is currently no assurance that the necessary financing will be obtained in the immediate future. The recoverability of the Company’s investment in its mineral property remains dependent upon the Company’s ability to complete debt and, if required, equity financings and successfully construct and develop the Boleo Project. Personnel Update On June 3, 2009 Baja appointed Michael F. Shaw to the position of Chief Operating Officer of the Company. Mr. Shaw joined the Company in August 2007 as Vice President Construction and Engineering and the Company is pleased to advise of the expansion of Mr. Shaw’s role. As COO, Mr. Shaw will be responsible for leading the development of an open-book capital cost estimate and project construction schedule with ICA Fluor of Dublin, California, as well as the engineering and construction of Baja’s Boleo Project, Mexico, once construction financing is complete. Mr. Shaw will also be responsible for oversight of the organization, recruitment and implementation of the project site operating group, including all procurement, logistics, engineering, process and mining personnel. Finally, Mr. Shaw will be responsible for coordinating the transition from the engineering, procurement and construction phase to the operations phase at Boleo. Prior to joining Baja, Mr. Shaw worked for Newmont Mining Corporation as Project Director for the Minas Congas Project in northern Peru, a multi-billion dollar copper gold project. He also held the title of Regional Director of Projects at Newmont and was responsible for project execution in Africa. Mr. Shaw has been instrumental in the engineering, construction and startup of numerous copper, gold and nickel projects globally, both as an operator and engineer-constructor from 1969 to the present time, including: 4 Tiomin Resources Inc.’s Cerro Colorado copper deposit in Panama; CODELCO projects in Chile; Cyprus Amax Engineering and Project Development Company projects in Peru; and various projects for Phelps Dodge Corporation. Mr. Shaw also served as Project Manager for Bechtel and Davy McKee (now Aker Kvaerner). From 1999 to 2005 he held the position of Vice President, Project Manager of Apex Silver Mines Corporation and was responsible for engineering, permitting, construction and startup of the San Cristobal zinc/lead/silver mine project in Bolivia. Mr. Shaw graduated from the University of Texas, El Paso, with a Bachelor of Science in Chemistry and a Master of Science in Metallurgical Engineering in 1970 and 1975, respectively. He has over 38 years experience in the mining and metals industry, with 25 of those years dedicated to project engineering and construction management, mostly in Latin America. He is a member of the US Society for Mining, Metallurgy and Engineering (SME), the Mining and Metallurgical Society of America (MMSA), and has been admitted as a professional engineer in California, Arizona and New Mexico. Manganese Update A key milestone has been achieved towards manganese metal production at the Boleo project in Baja, Mexico. Staff at the University of British Columbia’s Hydrometallurgy Research Laboratory have successfully demonstrated that manganese metal can be manufactured from Boleo manganese carbonate using conventional hydrometallurgical processing steps. A sample of manganese carbonate produced during the 2006 demonstration pilot plant at SGS Lakefield was used as feedstock for the tests which were done under the supervision of Dr. Thomas Glück, Baja’s Manager Process Technology and Dr. David Dreisinger, Baja’s Vice President - Metallurgy, both of whom are Qualified Persons under NI 43-101. All technical results have been verified by Dr. Dreisinger and Dr. Gluck. The key features of the Boleo manganese metal process are: Boleo manganese carbonate is leached to greater than 99% efficiency in the manganese leach solution
(electrolyte from the manganese plating cell). Minor impurities present in solution are removed using sulfide precipitation and clarification. The purified solution is electrolyzed in a conventional manganese electrowinning cell. A smooth grey
deposit of manganese metal was plated over a six hour period at a current efficiency of 65% - which represents typical commercial performance. The manganese metal is plated without the addition of selenium—a condition that ensures a higher
quality product. Boleo is the world’s sixth largest manganese deposit. Current Boleo mining and processing plans would allow for the production of up to 100,000 tonnes (220 million pounds) of manganese metal per year. Manganese metal is used in alloying applications in the steel, aluminum and non ferrous alloy industries. Annual production of manganese metal is estimated to be over 1,000,000 tonnes worldwide. The spot price for electrolytic manganese metal containing selenium (manufactured in China) is currently $1.00 per pound and it is anticipated that the Boleo product would sell at a premium to this price. Further work on plating of Boleo manganese is ongoing at UBC and with other development partners toward the goal of producing a fully integrated flow sheet for converting Boleo manganese carbonate to manganese metal in the most efficient way possible. This ongoing work is being conducted as part of a Manganese Action Plan that is overseen by the Boleo Project’s Manganese Action Committee and includes the evaluation of alternate uses for Boleo’s manganese carbonate. The Manganese Action Committee is made up of nominated representatives from Baja and the Korean Consortium. A next key milestone in the Manganese Action Plan is the completion of a pre-feasibility study for manganese metal production and other possible saleable manganese products. 5 Results of Operations Comparison of the six-month period ended June 30, 2009 to the six-month period ended June 30, 2008 Operations During the six months ended June 30, 2009, the Company commenced the revision to the capital cost estimate which in part is reflected in the additions to mineral properties during the six-month period of $16.988 million. Expenditures on mineral properties decreased from $32.322 million in the six-month period in 2008 due to a curtailment of construction activities. At June 30, 2009, $143.35 million in development costs had been capitalized, as compared to $126.362 million at December 31, 2008. The Company currently has no revenue generating activities other than interest income. Expenses For the six-month period ended June 30, 2009, the Company recorded a loss of $3.498 million ($1.545 million in 2008), or loss per share of $0.02 (loss of $0.01 per share in 2008). The higher loss is predominantly due to the recording of stock-based compensation of $1.048 million ($0.172 million in 2008) which resulted from options granted during the period, as well as the re-pricing of 9,430,000 outstanding stock options. All outstanding stock options with exercise prices above $0.40 were re-priced to an exercise price of $0.40 per share. This re-pricing was approved by shareholders at the Company’s annual general meeting on 2009. Additional, significant variances are outlined as follows: Amortization and accretion: $0.392 million ($0.051 million in 2008) – the increase is mainly due to
the accretion of the refundable deposit; General and administration: $0.37 million ($0.641 million in 2008) – the decrease is the result of a
reduction in administration and travel during the first half of 2009 due to the construction slowdown; Research: $0.127 million ($0.012 in 2008) – the increase in evaluation and research relates entirely to
the work conducted on the manganese production project; Wages and subcontract: $0.945 million ($0.558 million in 2008) – the increase reflects severance
costs and the continued efforts by management to hire exceptional personnel to ensure that the resources that will be needed once the Company re-commences full-scale development and construction, are available; Other items Foreign exchange gain: $0.726 million (loss of $0.047 million in 2008) – During the quarter ended
June 30, 2009, the Canadian dollar strengthened considerably against the US dollar. As a result, the Company recognized unrealized foreign exchange gains on all of its US dollar-denominated long- and short-term liabilities. Additionally, previously accrued costs from the construction slow down have been settled for less than expected which also has had a foreign exchange effect; Gain on sale of property, plant and equipment: $Nil ($0.307 million in 2008) – During 2008, the
Company sold older mining equipment used in the test mine program for a significant gain, and used the proceeds to purchase other used mining equipment; Finance and development costs expensed: $0.785 million ($NIL in 2008) – Following the slowdown
of the project, the company incurred additional costs in the first quarter of 2009 and expensed bridge loan finance costs, previously capitalized in mineral properties, for which economic benefits were not expected in the immediate future; and Interest income and other: $0.188 million ($0.424million in 2008) – the decrease in interest income
resulted from the overall drop in investment yields and the lower US dollar yields even though the company had significantly more cash on hand in 2009. These funds continue to be invested in short term guaranteed investment certificates. 6 Comparison of the three-month period ended June 30, 2009 to the three-month period ended June 30, 2008 For the three-month period ended June 30, 2009, the Company recorded a loss of $1.869 million ($1.173 million in 2008), or a loss per share of $0.01 ($0.01 per share in 2008). Similar to the results for the six-month period ended, the most significant cause of the increased loss is the recording of stock-based compensation of $0.883 million ($0.133 million in 2008) relating to new stock options granted during the quarter, as well as the re-pricing of the outstanding stock options following the annual general meeting. Other significant variances were: Amortization and accretion: $0.192 million ($0.024 million in 2008) – the increase is mainly due to
the accretion of the refundable deposit; General and administration: $0.186 million ($0.350 million in 2008) – the decrease is the result of a
reduction in administration and travel during the first half of 2009 due to the construction slowdown; Research: $0.094 million ($0.012 in 2008) – the increase in evaluation and research relates entirely to
the work conducted on the manganese production project; Wages and subcontract: $0.734 million ($0.338 million in 2008) – the increase reflects the continued
efforts by management to hire exceptional personnel to ensure that the resources that will be needed once the Company re-commences full-scale development and construction, are available; Other items Foreign exchange gain: $0.444 million (loss of $0.024 million in 2008) – During the quarter ended
June 30, 2009, the Canadian dollar strengthened considerably against the US dollar. As a result, the Company recognized unrealized foreign exchange gains on all of its US dollar-denominated long- and short-term liabilities. Additionally, previously accrued costs from the construction slow down have been settled for less than expected which also has had a foreign exchange effect; 7 Summary of Quarterly Information The following quarterly financial data for the eight most recently completed quarters is presented in thousands of Canadian dollars , and has been prepared in accordance with Canadian generally accepted
accounting principles. Q3 Sep 30, 2007 Q4 Dec 31, 2007 Q1 Mar 31, 2008 Q2 Jun 30, 2008 Q3 Sep 30, 2008 Q4 Dec 31, 2008 Q1 Mar 31, 2009 Q2 Jun 30, 2009 Total Revenues $- $- $- $- $- $- $- $- (Loss)/ earnings for the period $(1,396) $(340) $(371) $(1,174) $(975) $227 $(1,629) $(1,869) Basic and diluted (loss)/ earnings per share for the period $(0.01) $(0.00) $(0.00) $(0.01) $(0.01) $0.00 $(0.01) $(0.01) The significant changes in quarterly earnings (losses) reflect the Company moving from exploration to development and then into early construction in Q2 2008. Since then, significant operating costs were incurred due to the extent of project activity and the development of the Boleo Project. During the fourth quarter of 2008 the Company held a significant amount of US$ and has experienced a significant foreign exchange gain on this currency that resulted in earnings during that period. The first half of 2009 reflects the slow down in the project. Liquidity The Company’s mineral exploration activities have provided the Company with no source of income and a history of losses, working capital deficiencies and deficit positions. However, given the nature of the business, the results of operations as reflected in the income and losses (and earnings and losses per share) do not provide meaningful interpretation of the Company’s non-financial performance and valuation. The Company’s working capital as at June 30, 2009 was $35.773 million compared with working capital of $56.246 million as at December 31, 2008. The decrease of $20.473 million was the result of spending on the project as the Company completed construction demobilization and procurement commitments. During the six-month period ended June 30, 2009 the Company raised $0.007 million (2008 - $2.539 million) through the exercise of warrants and options and issuance of common shares. During this period, the Company utilized $2.289 million ($4.249 million in 2008) on operations. This was measured after taking into account adjustments for non-cash items such as unrealized foreign exchange gains on the various liabilities of $2.969 million and the write-off of capitalized finance and development costs of $0.785 million. The operations also reflect that cash amounting to $1.953 million ($2.641 million in 2008) was invested in working capital. The Company also disposed of $NIL (2008 - $0.35 million), and purchased an additional $0.197 million (2008 - $0.572 million) in property, plant and equipment, while incurring cash expenditures on mineral properties of $20.127 million. This is considerably lower than the amount of $28.498 million spent on mineral properties and related development costs during the same period in 2008, when the Company was ramping up development and construction on the Boleo project. 8 The Company’s combined cash and cash equivalents and short-term deposits as at June 30, 2009 was $38.308 million compared with $60.235 million as of December 31, 2008. All cash balances and short term deposits are highly liquid and are available immediately, at fair value, if required. The decrease in the balance was the result of spending on the project as Baja completed construction demobilization and continued to settle procurement commitments. The Company has $5.376 million (2008 - $13.068 million) of current liabilities, with the decrease the result of the slow down. The additional items that make up the working capital balance are other receivables and deposits and prepaid expenses. Amounts receivable consist predominantly of $1.497 million of Mexican value added tax, compared to $3.220 million as at December 31, 2008. This reduction reflects the VAT refund of $1.615 million received in April 2009. The collection of the Mexican Value added tax is difficult, and we continue to work hard to obtain a full recovery. Although, the timing of receipt of the remaining amount is not predictable it is expected within the year. The remaining balance of amounts receivable is made up of Canadian Goods and Service tax and interest receivable from Canadian banks. Deposits and prepaid expenses include $0.842 million of deposits to vendors (69% of the total prepaid expenses) that will either be utilized in exchange for services or refunded to the Company. Management has determined that the Company has sufficient resources to meet its current obligations, which include accounts payable and accrued liabilities, the current portion of the special warrant liability, as well as the cash exposure to commitments relating to the development of the Boleo Project for the foreseeable future beyond the next 12 months. Establishment of Trust Fund for Conservation In 2007, the Company reached an agreement with the Commission of Natural Protected Areas (CONANP), Bank Monex, and Ecobanca, a Mexican non-profit organization, to establish a trust fund to support environmental conservation measures within the El Vizcaino Biosphere. The Company’s Boleo Project is located within the "Buffer Zone" of this Biosphere. The first cash payment to the fund was US$0.1 million, issued on January 31, 2007. Additionally, the fund was issued three Special Warrants for an aggregate of 180,000 Common Shares of the Company. These Special Warrants will mature in each of February, 2009 (converted), 2010, and 2011, respectively. Each Special Warrant may be converted, in whole or in part, at any time prior to maturity into 60,000 Common Shares of the Company. In addition, the trustee of the Special Warrants can require the Company to repurchase any or all of the Special Warrants represented by a certificate at a price of US$5.555 per underlying Common Share at any time within 30 days of the Maturity Date of each such Special Warrant. This repurchase option represented a liability of US$1 million if the share price has not reached US$5.555 and the holder exercises the repurchase option. The Special Warrants contain provisions for cancellation prior to a maturity date if development of the Boleo Project does not proceed. The Company honoured the conversion of the first 60,000 warrants and paid US$0.333 million in February 2009. If cancellation occurs after any of the maturity dates, any matured or exercised certificates are considered a final contribution to the trust fund. As at June 30, 2009, the Company has recognized a discounted liability of $0.68 million relating to the remaining outstanding warrants. 9 Commitments As at June 30, 2009, the Corporation had the following known undiscounted contractual obligations: Contractual Obligations Payments due by period Thousands of Canadian dollars Total Less than 1 year 1-3 years 3-5 years More than 5 years Accounts payable $4,549 $4,549 $Nil $Nil $Nil Operating lease obligations 1 $130 $52 $78 $Nil $Nil Contract and purchase commitments 2,,3 $11,640 $10,375 $1,265 $Nil $Nil Refundable deposit $11,625 $Nil $11,625 $Nil $Nil
Loans from noncontrolling interest $49,611 $Nil $Nil $Nil $49,611 Environmental Obligations 5 $1,513 $778 $735 $Nil $Nil Total $79,068 $15,754 $13,703 $Nil $49,611 1 During 2005, the Company entered into a sub-lease agreement, expiring in September 2010, on its head office lease at an
annual rental of $0.074 million. During 2006, the Company entered into a further sub-lease with its existing landlord for additional head office lease space at an annual triple net rental of $0.029 million. The Company has also committed to two operating leases for office space in Mexico City, both on a month to month basis. The combined monthly lease is 16,800 Pesos ($0.002 million). 2 The Company has entered into numerous contracts regarding development of the Boleo Project. Total contractual obligations
entered at June 30, 2009 are estimated to be $10.618 million. 3 The Company has entered into several management consulting agreements with companies whose directors or officers are in
common with the Company that contain future commitments for 2009 to 2010 aggregating $ 1.022 million. 4 Included in the proceeds from the sale of 30% of the Company’s interest in MMB was an amount of US$10 million which is
refundable to the Consortium should a decision be made not to produce manganese from the Boleo Project. The decision must be made by the Company on the later of the final economic completion of the Boleo Project or May 30, 2011. 5 On January 9, 2007 the Company issued three Special Warrants for an aggregate of 180,000 Common Shares of the Company. The Special Warrants will mature in each of February, 2009 (converted), 2010 and 2011, respectively. Each Special Warrant may be converted, in whole or in part, at any time prior to maturity into 60,000 Common Shares of the Company. In addition, the trustee of the Special Warrants can require the Company to repurchase any or all of the Special Warrants represented by a certificate at a price of US$5.555 (total US$1 million) per underlying Common Share at any time within 30 days of the Maturity Date of each such Special Warrant. The commitment per the table above is shown in Canadian dollars, applying the period-end exchange rate of Cdn$1.2669/US$1.00. As at June 30, 2009, the special warrants liability amounted to $0.774 million of which $0.387 million is payable within one year. The Company also recognized an asset retirement obligation of $0.739 million and the Company expects to incur $0.479 million of this total during 2009. Capital Resources The Company’s primary capital asset is the Boleo Project, which is discussed in detail in the section entitled ‘Overall Performance’. The Company has $41.149 million in current assets, with working capital of $35.773 million. The current assets include deposits, value added tax refunds and existing cash and short term deposits to fund the Company’s share of the project expenses. Due to the announced slow down in 2008, it is unclear how much capital funding can be obtained or will be required in the next twelve months. However, with the award of a new EPCM contractor in May 2009 and the delivery of an updated capital estimate and a revised construction schedule in the third quarter of 2009, the Company will be able to estimate the additional capital funding required. The Company has no revenue from 10 operations except interest income, and does not expect to generate any revenue from operations until completion of construction and commencement of operations, the timing of which are currently unknown due to the announced slow down and the uncertainty related to construction financing. As discussed in the Construction Financing Update , the Company intends to pursue senior project loan facilities required to fund
the construction costs, once market conditions improve. In line with the decision to slow down development and delay certain construction activities at the Boleo Project, current available cash funds are being closely monitored, as key objectives for 2009 are pursued. The 2009 budgets include administrative expenses and anticipated project costs estimated prior to completion of financing. The Company has adequate funds to cover all 2009 budgeted costs. Excluding expenditures related to the capital construction of the Boleo Project, which are currently under review, the Company anticipates or has committed to the following expenditures over the next 12 months: Permitting activities on the Boleo Project of approximately $0.64 million; Project, engineering and site costs of approximately $18.274 million; Wages, management fees and subcontracts of approximately $6.321 million; General and administrative expenses, including travel, legal, accounting and finance costs of
approximately $5.186 million. These expenditures will be made from existing cash, which includes significant project cash, and the Company has budgeted an additional Consortium funding requirement of approximately US$4.5 million in 2009. Environmental Action Plan The Company currently is a single purpose company, that purpose being the development and operation of the Boleo Project, Baja California Sur, Mexico. The Boleo Project is an historic mine in Mexico and the project site has numerous mine workings including building foundations, underground portals, shafts and open pits. There are also the remnants of a former leach precipitation plant (the “LPF Plant”), where the Mexican mining agency “Fomento Minero” attempted to use a sulphuric acid leach process in the late 1950’s and early 1960’s to recover copper. In addition, there is a small (2 million tonnes) tailings dam from the LPF Plant and the skeleton of the original smelter, built in the 1920’s to process run-of-mine ore by the French “Compagnie de Boleo”. None of the LPF Plant, LPF tailings dam or the former smelter are on land owned or controlled by the Company, nor does the Company have any environmental responsibility or liability with respect to these sites. The majority of the Boleo Project is located in the buffer zone of El Vizcaino Biosphere and, as discussed above and in Note 7 to the Company’s consolidated financial statements for the year ended December 31, 2008, the Company has established a compensation arrangement with the Mexican Commission for Natural Protected Areas; under which it has deposited US$0.1 million into a Compensation fund, as well as three special warrants totalling US$1 million to partially fund the remedial work within El Vizcaino. This fund may be used in other areas of the Biosphere and not necessarily at the mine site where remediation will be part of the mines normal reclamation program. Early work by the Company, prior to commencing construction activities, has included remediation of the existing uncontrolled landfill (garbage dump) utilized by the town to dispose of community trash, as well as waste from the local squid packing plants. Reclamation has been carried out under the Company’s control and at its expense, with the cooperation of local and state authorities and with the guidance of the Company’s environmental consultants. A temporary disposal facility has been developed, pending construction of a more permanent facility (on land owned by the Company located to the north of the project), which will be donated to the community. The cost of remediation to date has been approximately $0.300 million and is included as part of preliminary costs leading to construction. 11 The mine, mill and tailings facilities will disturb approximately 568 hectares of land during the first six years, and more than 700 hectares over a 25 year mine life. A mine closure and reclamation plan has been prepared and submitted to SEMARNAT, the Mexican Federal Environmental Agency. The total cost of reclamation and closure costs over the life of mine are estimated to be US$35 million (on an undiscounted basis). No financial reserve has yet been established in the Company’s financial statements for reclamation. It is anticipated that a sinking fund will be established, once production commences, to provide a fund for reclamation. The Company will, over the life of the Boleo Project, close approximately 33 mine portals. As portals are closed, in accordance with mine plans, the affected area will be remediated. Remedial costs for each portal site are currently estimated to be US$0,01 million. Considering that the annual projected operating budget (once full operation is achieved) is of the order of US$100 million per year, the cost of remediation is not considered material. Annual environmental monitoring costs are currently approximately US$0.012 million and, as operations commence will increase to approximately US$0.025 million/year. Again, in relation to the annual operating budget, this number is not considered material. An area of potential concern after construction of the project facilities would be an unanticipated event, such as a dramatic decline in metal prices, or technical failure of the process metallurgy that requires early complete closure, in contrast to a temporary closure of the mine. Following the completion of the construction of the facilities and the commencement of production, the expected cost of reclamation from an early closure (assuming a decision were to be made to permanently close the mine) is estimated at between US$10 million and US$15 million, depending on the amount of surface disturbance at the time and the cost of remediation of the plant site. In these circumstances, it is expected that the salvage value of the plant and equipment would adequately cover reclamation costs if the Company did not otherwise have available funds. As part of the Company’s Environmental Impact Manifest approval, the Company was required to identify local flora and fauna species that would be affected by its operation, and to preserve such species by relocation, or in the case of diseased flora, by taking genetic cuttings for re-growth of healthy species. The phase 1 removal and relocation program in the landfill and plant site areas has now been completed at an approximate cost of US$0.135 million. Continuing effort in the preservation and protection of plants and animals at El Boleo has resulted in the salvage of more than 30 hectares of vegetation, the ongoing monitoring of wildlife populations, and two scientific reports on this cutting edge project for biotic resources in the southern Baja. Environmental protection training has also been incorporated in the safety and entrance program for employees and visitors at El Boleo. Ongoing permitting, compliance, baseline inventory determinations, and monitoring are being conducted to maintain the company in readiness to move forward. Off-Balance Sheet Arrangements The Company has no material off-balance sheet arrangements such as guarantee contracts, contingent interests in assets transferred to an entity, or derivative instruments obligations. Transactions with Related Parties During the six-month period ended June 30, 2009, the Company paid $0.284 million ($0.336 million in 2008) in management fees to officers of the Company, and to companies controlled by officers of the Company. The Company also paid directors fees of $0.036 million ($0.04 million in 2008) during the same period. During the quarter, the Company received an additional contribution from the Korean Consortium amounting to US$0.78 million, bringing the balance of loans from non-controlling interest amounts to US$42.676 million ($49.611 million). Certain of the loans have been discounted as they were negotiated prior to the closing of 12 the 30% sale of MMB. This discounting has the effect of significantly reducing the fair value of the total loans outstanding, which are recorded at $37.96 million. The above transactions, and the consortium contributions post closing, occurring in the normal course of operations, are measured at the exchange amount, which is the consideration established and agreed to by the related parties. Financial instruments The carrying value of the Company’s financial instruments, which consist of cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities, environmental liabilities and the refundable deposit, are recorded at their fair values. The Company has a concentration of credit risk, which it accepts, as the majority of its cash and cash equivalents are on deposit with one financial institution, Scotiabank. The Company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations. The Company does not enter into foreign currency contracts to hedge its risk against foreign currency fluctuations. Share Capital information No additional stock options have been granted subsequent to June 30, 2009, while 20,000 stock options were forfeited. To the date of this report, no additional stock options or warrants have been exercised nor were any new shares or warrants issued. As at the date of this report, the Company had an unlimited amount of common shares authorized for issuance, with 143,084,337 issued and outstanding. The Company also had 13,435,000 outstanding stock options and 25,046,978 outstanding warrants available to be exercised. Critical Accounting Estimates These financial statements are presented in thousands of Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles applicable to a going concern, which assume that the Company will realize its assets and discharge its liabilities in the normal course of business. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results may differ from these estimates. Significant estimates critical to the Company include the recoverable amount of resources in mineral properties, foreign currency translations, provision for reclamation costs, and stock based compensation. Resource interests The Company is in the process of developing its mineral properties and has capitalized the acquisition costs for its property rights, mining concessions, and its development costs since June 1, 2007. The Company has adopted the policy of expensing mineral exploration costs incurred prior to the completion of an economic feasibility study. As at June 1, 2007, following the announced DFS results, the Company began capitalizing development costs. 13 Capitalized costs for a producing mine are amortized on a unit-of-production method based on the actual production relative to the estimated ore reserves, while capitalized costs for prospects abandoned or impaired are written off. Management reviews and evaluates the carrying value of its mineral properties for impairment when events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. During the year 2008, events such as declining commodity prices, declining share price, and changes in business climate indicated that impairment may have existed. If the total estimated future operating cash flows on an undiscounted basis are less than the carrying amount of the asset, an impairment loss is recognized and assets are written down to fair value, which is normally determined using the discounted value of future cash flows. Where estimates of future net cash flows are not available and where other conditions suggest impairment, management assesses whether carrying value can be recovered by considering alternative methods of determining fair value. When it is determined that a mineral property is impaired, it is written down to its estimated fair value. Management spent a significant amount of time reviewing all its assets for possible impairment, and conducting relevant tests. As a result, Management is satisfied that no impairment of its assets exists on the balance sheet date. Ownership in mineral properties involves certain inherent risks due to the difficulties of determining and obtaining clear title to claims, as well as the potential for problems arising from the frequently ambiguous conveyance history characteristic of many mineral properties. The Company has investigated ownership of its mineral properties and, to the best of its knowledge, ownership of its interests is in good standing. Foreign currency Foreign operations are integrated with the parent company and, consequently, the financial statements of foreign subsidiaries are translated into Canadian dollars using the temporal method. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates of exchange in effect at the date of the balance sheet. Non-monetary assets, liabilities and other items are translated at historical rates. Revenue and expenses are translated at average rates of exchange prevailing during the year. Exchange gains or losses arising from these translations are included in income of the year. Asset retirement and reclamation costs The Company recognizes a liability for legal obligations relating to the retirement of property, plant and equipment, and obligations arising from the acquisition, construction, development, or normal operation of those assets. Such asset retirement costs are recognized at fair value, when a reasonable estimate of fair value can be made, in the period in which the liability is incurred. A corresponding increase to the carrying amount of the related asset, where one is identifiable, is recorded and amortized over the life of the asset. Where a related asset is not easily identifiable with a liability, the change in fair value over the course of the year is expensed. The amount of the liability is subject to re-measurement at each reporting period. During the period, the Company assessed its obligation with regards to reclamation and decommissioning of assets at the Boleo Project. Accordingly, the Company estimated that, as at June 30, 2009, the undiscounted closure costs would amount to $0.905 million, taking into account an estimated inflation rate of 5%. In assessing the carrying amount for the asset retirement obligation, the Company applied a credit-adjusted riskfree discount rate of 8% (LIBOR + 6%), resulting in an asset retirement obligation of $0.852 million. To date, $0.166 million of the reclamation proposed to be performed in the next twelve months have been completed. 14 This estimate is based principally on legal and regulatory requirements. It is possible that the Company’s estimate of its ultimate reclamation liabilities could change as a result of changes in contractual requirements, laws or regulations, the extent of environmental remediation required or completed, the means of reclamation or changes in cost estimates. Changes in estimates are accounted for prospectively, commencing in the period the estimate is revised. Stock based compensation All stock-based awards made to employees and non-employees are measured and recognized using a fairvalue- based method. Compensation costs attributable to share options granted to employees are measured at the fair value at the grant date and charged to operations or are deferred over the vesting period, depending upon the contractual arrangement. Options granted to non-employees are measured as the vesting conditions related to the options are met. The increase in contributed surplus as a result of each grant is transferred to share capital, along with the consideration paid by the option holder, at the time options are exercised, and is recorded as an increase to share capital. Refundable deposit liability The refundable deposit liability meets the definition of a financial liability and is recognized at fair value, when a reasonable estimate of fair value can be made, in the period in which the liability is incurred. As such, an effective interest rate and a repayment term must be established to discount the face value to fair value. The result is a reduction of the liability and a credit to contributed surplus. In subsequent periods, the liability is accreted back to the face value over the estimated term with a corresponding amortization expense as the liability relates to the Company’s investigation of the potential to produce manganese at the project. Historical expenditure funding, included in loans from non-controlling interests During the negotiation of the sale of 30% of MMB to the Korean consortium, the principle of funding the Boleo project from development (June 1, 2007) was established. Baja and the Korean consortium agreed they would each fund MMB from development (June 1, 2007) forward based upon the same basis as their equity interest, 70%-Baja and 30%-Korean consortium. On closing, the Korean consortium was required to make a historical expenditure funding contribution to MMB for past funding by Baja. The terms of this amount were a non-interest bearing loan, repayable on demand but no sooner than 3 years after the completion of project financing repayment on the same terms as the Company’s project funding. The Baja loans to MMB eliminate upon consolidation, but the Korean consortium loans remain as financial liabilities, with this initial loan treated as a financial liability at fair value, not face value, as it was not with a related party. Considerable judgement must be applied to the estimated term of the loan and the discount rate. The result is a reduction of the liability and a credit to contributed surplus. In subsequent periods, the liability is accreted back to the face value over the estimated term, with a corresponding increase to the carrying amount of the related asset, where one is identifiable and when the asset continues to meet the Canadian and US GAAP criteria for capitalization of costs, in which case the amortization is capitalized and amortized over the life of the asset. In the future, should the actual term of the loan change, the Company will prospectively adjust the amortization period. Subsequent cash calls from the Korean consortium, included in loans from non-controlling interests Subsequent to closing, the Korean consortium advanced loans to MMB related to cash calls, and Baja funded MMB on the same basis as their equity interest being, 70%-Baja and 30%-Korean consortium. The terms of these advances are non-interest bearing loans, repayable on demand but no sooner than 3 years after the completion of project financing repayment. These are identical terms as for loans between Invebaja and MMB. The Invebaja loans to MMB eliminate upon consolidation, but the Korean consortium loans remain as financial liabilities. These loans are treated as financial liabilities at face value, because for Canadian GAAP 15 purposes, the Korean consortium has been dealing with MMB as a related party since the date of the sale of 30% of the Company’s interest in MMB to the Korean Consurtium.
Loading...
Loading...
New Message
Please
login
to post a reply