CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
(Expressed in U.S. Dollars)
1
Auditors’ report
To the Shareholders of
Capstone Mining Corp.
We have audited the consolidated balance sheets of Capstone Mining Corp. as at December 31, 2008, and
2007, and the consolidated statements of income (loss), comprehensive income (loss), shareholders’
equity and cash flows for the years ended December 31, 2008 and 2007. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, these consolidated financial statement present fairly, in all material respects, the financial
position of the Company as at December 31, 2008 and 2007, and the results of its operations and its cash
flows for the years ended December 31, 2008 and 2007 in accordance with Canadian generally accepted
accounting principles.
(Signed) Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
March 30, 2009
Capstone Mining Corp.
Consolidated Balance Sheets
(expressed in thousands of U.S. dollars)
Current
Cash
Restricted cash
Receivables (Notes 6)
Inventories (Notes 7)
Prepaids and other
Future income tax asset (Notes 19)
Current portion of derivative instruments asset (Note 14)
Investments (Note 8)
Property, plant and equipment (Note 9)
Notes receivable (Note 10)
Taxes receivable
Mineral property costs (Notes 11 & 12)
Future income tax asset (Note 19)
Other assets (Note 13)
Derivative instruments asset (Note 14)
LIABILITIES
Current
Accounts payable and accrued liabilities
Taxes payable
Advance on concentrates
Current portion of other liabilities (Note 15)
Long term debt (Note 16)
Capital lease obligations (Note 17)
Deferred revenue (Note 18)
Derivative instruments
Future income tax liability (Note 19)
Asset retirement obligations and other (Note 20)
SHAREHOLDERS’ EQUITY
Share capital (Note 21)
Contributed surplus
Convertible debentures – equity component (Note 16)
Accumulated other comprehensive loss (Note 23)
Retained earnings (deficit)
Continuing operations (Note 1)
Commitments (Note 28)
Subsequent events (Note 30)
December 31, 2008
(Note 2)
December 31, 2007
(Note 2)
$
$
$
$
27,267
14,345
12,768
37,005
954
2,665
48,522
143,526
8,064
118,124
571
2,271
161,024
7,100
350
56,822
497,852
12,884
669
20,632
73,904
108,089
22,048
16,654
82,854
-
39,143
4,821
273,609
146,314
12,559
8,191
(8,840)
66,019
224,243
497,852
$
$
$
$
6,280
-
2,760
24,695
411
-
-
34,146
-
163,425
-
-
26,410
-
739
-
224,720
17,141
-
9,603
37,594
64,338
74,001
10,275
-
53,101
5,232
3,061
210,008
60,400
7,713
8,191
4,210
(65,802)
14,712
224,720
ON BEHALF OF THE BOARD:
(Signed) Colin K. Benner
, Director
(Signed) Larry Bell
, Director
See accompanying notes to these consolidated financial statements.
2
Capstone Mining Corp.
Consolidated Statements of Income (Loss)
(expressed in thousands of U.S. dollars except share and per share amounts)
Gross sales revenues (Note 2)
Treatment and selling costs
Net revenue
Operating costs
Cost of sales
Royalty
Depletion and amortization
Accretion of asset retirement obligations
Income (loss) from mining operations
General and administrative expenses
Stock-based compensation (Note 14)
Income (loss) from operations
Other income (expense)
Interest on long term debt
Interest on capital lease obligations
Financing fees
Foreign exchange gain (loss)
Gain (loss) on derivative instruments (Note 14)
Gain on sale of mineral claim
Interest and other income (net)
Impairment charges (Note 12)
Gain on acquisition of Capstone Mining Corp. (Note 4)
Income (loss) before income taxes
Income and mining taxes
Future income tax (expense) recovery
Net income (loss)
Earnings (loss) per share – basic
Weighted average number of shares - basic
Earnings (loss) per share – diluted
Weighted average number of shares - diluted
$
$
$
See accompanying notes to these consolidated financial statements.
Twelve months ended
December 31, 2008
(Note 2)
122,838
(16,886)
105,952
Twelve months ended
December 31, 2007
(Note 2)
855
(125)
730
$
$
(62,599)
(587)
(22,734)
(178)
19,854
(6,517)
(3,259)
10,078
(7,547)
(938)
(1,465)
(7,463)
123,591
1,118
361
(53,435)
72,043
136,343
(667)
(3,855)
131,821
$
(2,275)
(4)
(538)
(182)
(2,269)
(2,075)
(4,627)
(8,971)
(3,892)
(168)
(1,366)
8,553
(36,405)
-
921
-
-
(41,328)
-
626
(40,702)
1.47 $
(0.59)
89,825,636
68,825,846
1.31 $
103,752,580
(0.59)
68,825,846
3
Capstone Mining Corp.
Consolidated Statements of Comprehensive Income (Loss)
(expressed in thousands of U.S. dollars)
Net income (loss)
Change in fair value of available-for-sale securities, net of
taxes
Currency translation adjustment
Comprehensive income (loss)
$
$
Twelve months ended
December 31, 2008
(Note 2)
131,821
Twelve months ended
December 31, 2007
(Note 2)
(40,702)
$
(1,024)
(12,026)
-
3,883
118,771
$
(36,819)
See accompanying notes to these consolidated financial statements.
4
Capstone Mining Corp.
Consolidated Statements of Cash Flows
(expressed in thousands of U.S. dollars)
Twelve months ended
December 31, 2008
(Note 2)
Twelve months ended
December 31, 2007
(Note 2)
Cash provided by (used in):
Operating activities
Net income (loss) for the period
Depletion, amortization and accretion
Amortization of deferred revenue
Non-cash cost of sales
Stock-based compensation
Future income taxes
Financing fees
Gain on sale of exploration properties
Gain on acquisition of Capstone Mining Corp. (Note 4)
Impairment charges (Note 12)
Unrealized (gain) loss on derivative instruments
Unrealized (gain) loss on foreign exchange
Equity component of financing fees
Changes in non-cash working capital (Note 26)
Investing activities
Short term deposits
Restricted cash
Reclamation and other deposits
Property, plant and equipment additions
Mineral property cost additions
Proceeds from forward sale of metal production (Note 18)
Acquisition of Capstone Mining (Note 4)
Acquisition of mineral property, net of cash acquired (Note 4)
Financing activities
Short term credit facility
Repayments of capital lease obligations
Project loan facility (repayment) drawdown
Subordinated loan facility drawdown
Proceeds from issuance of convertible debentures
Proceeds from private placements, options and warrants
Effect of exchange rate changes on cash balances
Net increase in cash
Cash position - beginning of period
Cash position - end of period
Supplemental cash flow information (Note 25)
$
$
See accompanying notes to these consolidated financial statements.
131,821
24,264
(458)
1,148
3,259
3,855
1,387
(1,093)
(72,043)
53,435
(126,272)
8,758
-
(9,327)
18,734
-
(15,499)
(14)
(19,845)
(12,541)
37,500
31,789
(356)
21,034
1,374
(2,594)
(27,757)
-
-
9,965
(19,012)
231
20,987
6,280
27,267
$
$
(40,702)
1,972
-
-
4,627
(626)
-
-
-
-
36,739
(8,655)
(410)
(10,549)
(17,604)
9,418
1,124
593
(67,995)
(4,651)
-
-
-
(61,511)
-
(1,578)
26,793
10,192
37,211
6,942
79,560
3,499
3,944
2,336
6,280
5
Capstone Mining Corp.
Consolidated Statements of Shareholders’ Equity
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Number of
shares Share capital
Contributed
surplus
Equity
component of
convertible
debentures
Accumulated
other
comprehensive
income
Retained
earnings
(deficit)
Total
42,227,066
$
51,707
$
3,646
$
-
$
327
$
(25,100)
$
30,580
December 31, 2006
Private placements
Exercise of options
Exercise of warrants
Share issue costs
Stock-based compensation
Shares issued as contract
incentive
Future income tax on flow-
through shares
Equity - convertible debentures
issued
Net income
Effects of foreign currency
translation
December 31, 2007
Private placements
Exercise of options
Exercise of warrants
Share issue costs
Acquisition of mineral
property (Note 4)
Debt financing fees
Property payment
Acquisition of Capstone
Mining (Note 4)
845,000
1,146,933
457,250
-
138,200
44,814,449
1,205,000
875,100
331,175
4,255
3,249
951
(61)
-
925
(626)
-
-
-
60,400
7,196
3,611
831
(57)
6,606,874
32,205
19,000
1,600
100
8
Sherwood shares exchanged
Capstone shares received in
exchange for Sherwood
ahares
(53,853,198)
84,334,104
-
-
Outstanding shares of
Capstone acquired in
reverse takeover
Stock-based compensation
Future income tax on flow-
through shares
Change in fair value of
available-for-sale securities
Net income
Effects of foreign currency
translation
80,370,781
43,658
-
(1,638)
-
-
-
December 31, 2008
164,704,885
$
146,314
-
(1,283)
(168)
-
5,518
-
-
-
-
-
7,713
-
(1,453)
(172)
-
1,179
1,287
-
-
-
651
3,354
-
-
-
-
-
-
-
-
-
-
8,191
-
-
8,191
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,255
1,966
783
(61)
5,518
925
(626)
8,191
(40,702)
(40,702)
3,883
4,210
-
(65,802)
-
-
-
-
-
-
-
-
-
-
-
-
(1,024)
-
-
-
-
-
-
-
-
-
-
-
-
-
3,883
14,712
7,196
2,158
659
(57)
33,384
1,387
8
-
-
44,309
3,354
(1,638)
(1,024)
-
131,821
131,821
-
12,559
$
$
-
8,191
(12,026)
(8,840)
$
-
66,019
$
(12,026)
224,243
$
See accompanying notes to these consolidated financial statements.
6
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
1. Continuing operations
Capstone Mining Corp. (the “Company”) is a Canadian mining company engaged in the exploration for and
production of strategic metals in Canada and Mexico. On November 24, 2008, the Company completed a
reverse takeover transaction with Sherwood Copper Corporation (“Sherwood”) (Note 4(a)).
Minto Explorations Ltd. (“MintoEx”), a wholly owned Canadian subsidiary of the Company, owns and operates
the high-grade copper-gold Minto mine located in Yukon Territory, Canada. Capstone Gold, S.A. de C.V.
(“Capstone Gold”), a wholly owned Mexican subsidiary of the Company, owns and operates the high-grade
copper-silver-zinc-lead Cozamin mine located in Zacatecas, Mexico. Kutcho Copper Corp., (“Kutcho
Copper”), another wholly owned Canadian subsidiary of the Company, formerly Western Keltic Mines Inc.
(“Western Keltic”), is advancing the high-grade Kutcho project in British Columbia a towards production
decision (Note 4(b)).
These financial statements have been prepared on a going concern basis, which assumes the realization of assets
and satisfaction of liabilities in the normal course of operations. During the current and prior year the Company
recorded income from operations of $10.1 million and a loss from operations of $9.0 million respectively, and
had working capital of $35.4 million at December 31, 2008. In addition, the Company recorded an impairment
charge at the Minto mine in the amount of $53.4 million in 2008. Subsequent to December 31, 2008, the
Company redeemed convertible debentures for an aggregate cost of $31.8 million and received proceeds of
$40.0 million as a result of entering into a new credit facility as described in Note 30.
At this time, based on the forecasted cash flow from the 2009 production from both the Minto and Cozamin
mines, combined with its available credit facilities, the Company believes it has the financial capability in 2009
to fund its debt obligations, planned exploration activities, and operational and corporate activities including the
Kutcho Creek technical work. There can be no assurance, however, that the forecasted cash flow from
operations and available credit facilities will be realized as expected. In the event that the going concern
assumption was not appropriate for these financial statements, then material changes would be required to the
carrying value of assets and liabilities and the balance sheet classifications used.
2. Significant accounting policies
Basis of presentation and consolidation
The consolidated financial statements of the Company have been prepared in accordance with Canadian
Generally Accepted Accounting Principles (“GAAP”) and include the accounts of the Company and its wholly
owned subsidiaries. All significant inter-company transactions and balances have been eliminated.
Effective November 24, 2008, Capstone completed the 100% acquisition of the outstanding shares of Sherwood
(Note 4). As the shareholders of Sherwood obtained control of the Company through the exchange of their shares
of Sherwood for shares of Capstone, the acquisition of Sherwood has been accounted for in these financial
statements as a reverse takeover. Consequently, the consolidated statements of income and loss and cash flows
reflect the results from the operations and cash flows of Sherwood, the legal subsidiary, for the years ended
December 31, 2008 and 2007, combined with those of Capstone, the legal parent, from the acquisition on
November 24, 2008 to December 31, 2008, in accordance with generally accepted accounting principles for
reverse takeovers.
7
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Change in reporting currency
Effective December 31, 2008, the Company changed its reporting currency from the Canadian dollar to the U.S.
dollar. As a result of the reverse takeover of Sherwood, combined with the fact that the Company’s concentrate
revenues and certain of its long-term liabilities are denominated in U.S. dollars, management believes that this
change will result in more useful information to the financial statement users. For the year ended December 31,
2007 and for all prior periods, the Company reported its financial statements in Canadian dollars. The
comparative figures disclosed in these financial statements have been restated to the U.S. dollar as if the U.S.
dollar had been used as the reporting currency for all prior periods.
The Company has used the current rate method to translate the financial statements and corresponding notes
prior to January 1, 2007 presented for comparison in these financial statements. All assets and liabilities have
been translated into U.S. dollars at the exchange rates prevailing at the respective balance sheet dates, and all
revenue, expense and cash flow items have been translated using the average rates in effect in the period in
which the transactions occurred. All resulting exchange differences have been reported in accumulated other
comprehensive income (loss), with an opening adjustment of $0.3 million recorded on January 1, 2007.
Use of estimates
The preparation of consolidated financial statements in accordance with generally accepted accounting
principles requires management to select accounting policies and make estimates. Such estimates may have a
significant impact on the consolidated financial statements. The Company regularly reviews its estimates;
however, actual amounts could differ from the estimates used and, accordingly, affect the results of operations.
These estimates include:
•
•
•
•
•
•
•
•
•
purchase price allocation on business combinations,
the carrying values of inventories,
the carrying values of mineral properties and property, plant and equipment,
rates of amortization of mineral properties and property, plant and equipment,
the assumptions used for the determination of asset retirement obligations,
the valuation of future income taxes and allowances
the valuation of financial instruments,
the carrying values of the receivables,
the valuation of stock-based compensation.
Translation of foreign currencies
The Company considers the currency of measurement of its Canadian operation to be the Canadian dollar and
the currency of measurement of its self-sustaining Mexican mining operations to be the US dollar. The
reporting currency of the Company is the US dollar.
The accounts of self-sustaining foreign operations are translated into Canadian dollars at year-end exchange
rates, and revenues and expenses and cash flows are translated at the average exchange rates. Differences
arising from these foreign currency translations are recorded as cumulative translation adjustments within other
comprehensive income and as accumulated other comprehensive income until they are realized by a reduction
in the investment.
For integrated foreign operations, monetary assets and liabilities are translated into Canadian dollars at year-end
exchange rates and non-monetary assets and liabilities are translated at historical rates. Revenues, expenses and
cash flows are translated at average exchange rates, except for items related to non-monetary assets and
liabilities which are translated at historical rates. Gains or losses on translation of monetary assets and monetary
liabilities are included in earnings.
8
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Cash
Cash is comprised of cash on hand and demand deposits.
Short-term deposits
The Company considers short-term deposits to include amounts held in banks and highly liquid investments
with maturities at the point of purchase of more than 90 days and less than one year.
Inventories
Inventories for consumable parts and supplies, ore stockpile, and ore concentrate, are valued at the lower of cost
and net realizable value. Costs allocated to consumable parts and supplies are based on average costs. Costs
allocated to stockpile and concentrate are based on average costs, which include an appropriate share of direct
mining costs, direct labour and material costs, mine site overhead, depreciation and depletion.
Investments
Investments in shares of companies over which the Company exercises neither control nor significant influence
are designated as available-for-sale and recorded at fair value. Fair values are determined by reference to
quoted market prices at the balance sheet date. Unrealized gains and losses on available-for-sale investments are
recognized in other comprehensive income, other than unrealized losses considered other than temporary, which
are recorded in the statement of income (loss).
Investments in shares of associated companies over which the Company exercises significant influence are
accounted for by the equity method whereby the investment is initially recorded at cost, adjusted to recognize
the Company’s share of earnings or loss in the investment and reduced by dividends received.
Property, plant and equipment
Items are recorded at cost. Amortization is computed using the following rates:
Item
Property, plant &
equipment
Methods
Straight line,
Units of Production
Rates
4 – 10 years,
Estimated
reserves
proven
and
probable
Development costs
Units of Production Estimated
proven
and
probable
Equipment and facilities
under capital leases
Straight line
reserves
7 years
Deferred stripping costs Units of Production Estimated
proven
reserves accessible due to stripping
and
probable
Amortization begins when the asset is placed into service.
Mineral property costs
The Company capitalizes acquisition and exploration expenditures related to mineral properties on an individual
prospect basis until such time as an economic ore body is defined or a prospect is abandoned. Amortization of
assets used in connection with capitalized mineral property costs is also capitalized. Unrecoverable costs for
projects determined not to be commercially feasible are expensed in the period in which the determination is
made. Holding costs to maintain a property on a care and maintenance basis are expensed as incurred.
9
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
The recoverability of the amounts capitalized for the undeveloped mineral properties is dependent upon the
determination of economically recoverable ore reserves, confirmation of the Company’s interest in the
underlying mineral claims, the ability to obtain the necessary financing to complete their development and
future profitable production or proceeds from the disposition thereof.
Title to mineral properties involves certain inherent risks due to the difficulties of determining the validity of
certain claims as well as the potential for problems arising from the frequently ambiguous conveyancing history
characteristic of many mineral properties. The Company has investigated title to all of its mineral properties
and, to the best of its knowledge, title to all of its properties is in good standing.
Taxes receivable
Taxes receivable are comprised of value added taxes in Mexico and GST in Canada that the Company has paid.
The Company has classified certain value added taxes in Mexico as non-current due to delays in review and
assessment by the taxation authorities.
Intangible assets
Intangible assets are recorded at cost. Amortization is computed using units of production and begins when the
expected future benefits of the asset flow to the Company.
Deferred revenue
Deferred revenue consists of payments received by the Company in consideration for future commitments to
deliver payable gold and silver contained in concentrate at contracted prices. In addition, it includes the fair
value of such commitments acquired by way of business combination. As deliveries are made, the Company
records a portion of the deferred revenue as sales, based on a proportionate share of deliveries made compared
with the total estimated contractual commitment.
Capital lease obligations
Leases are classified as either capital or operating. Leases that transfer substantially all of the benefits and risks
of ownership of property to the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded with its obligation. Payments made under operating leases are expensed as
incurred or capitalized, if applicable.
Income and mining taxes
The asset and liability method is used for determining future taxes. Under the asset and liability method, the
change in the net future tax asset or liability is included in income. Future tax assets and liabilities are
determined based on the differences between the tax basis of assets and liabilities and the amount reported in
the financial statements. Future tax assets also result from unused loss carry forwards, resource-related pools,
and other deductions. Future tax assets and liabilities are measured using substantively enacted rates that are
expected to apply in the years in which temporary differences are expected to be recovered or settled. The
amount of future tax assets recognized is limited to the amount that is more likely than not to be realized. The
valuation of future tax assets is adjusted, if necessary, by the use of a valuation allowance to reflect the
estimated realizable amount.
10
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Asset retirement obligations
The Company’s asset retirement obligation (“ARO”) relates to required mine reclamation and closure activities.
An ARO is recognized initially at fair value with a corresponding increase in related assets. The ARO is
accreted to full value over time through periodic accretion charges recorded to operations using the Company’s
credit adjusted risk free rate. In subsequent periods, the Company adjusts the carrying amounts of the ARO and
the related asset for changes in estimates of the amount or timing of underlying future cash flows.
Share capital
The proceeds from the exercise of stock options or warrants together with amounts previously recorded on grant
date or issue date are recorded as share capital.
Share capital issued for non-monetary consideration is recorded at an amount based on fair market value on the
date of issue.
The proceeds from the issue of units is allocated between common shares and common share purchase warrants
on a pro-rata basis based on relative fair values as follows: the fair value of the common shares is based on the
market close on the date the units are issued and the fair value of the common share purchase warrants is
determined using the Black-Scholes option pricing model.
Stock-based compensation
Contributions to the Company’s employee share purchase plan (“ESPP”) are recorded on a payroll cycle basis
as the employer’s obligation to contribute is incurred.
The fair value of stock options granted under the Company’s stock option plan is estimated at the grant date
using the Black-Scholes option pricing model. Compensation expense is recognized on a straight-line basis
over the stock option vesting period.
Revenue recognition
Sales are recognized and revenue is recorded at market prices following the transfer of title and risk of
ownership provided that collection is reasonably assured, and the price is reasonably determinable. The
Company’s metal concentrates are sold under a pricing arrangement where final prices are determined by
quoted market prices in a period subsequent to the date of sale. Until prices are final, revenues are recorded
upon delivery based on forward market prices for the expected period of final settlement. Subsequent variations
in the final determination of the metal concentrate weight, assay, and price are recognized as revenue
adjustments as they occur until finalized. Under the terms of the Company’s off-take agreements it may request
advances from its customers which are recorded as advances on concentrate until the related revenue is
recognized.
Earnings per share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding during the year. The computation of diluted earnings per share
assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or
issuance would have a dilutive effect on earnings per share. The dilutive effect of convertible securities is
reflected in diluted earnings per share by application of the "if converted" method. The dilutive effect of
outstanding options and warrants and their equivalents is reflected in diluted earnings per share by application of
the treasury stock method.
11
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Impairment of long-lived assets
The Company assesses the possibility of impairment in the net carrying value of its long-lived assets when
events or circumstances indicate impairment may have occurred. Management calculates the estimated
undiscounted future net cash flows relating to the asset or asset group using estimated future prices, proven and
probable reserves and other mineral resources, and operating, capital and reclamation costs. When the carrying
value of an asset exceeds the related undiscounted cash flows, the asset is written down to its estimated fair
value, which is usually determined using discounted cash flows.
Derivative instruments
The Company uses derivative instruments to reduce the potential impact of changing metal prices and foreign
exchange rates as required under lending agreements. Derivative instruments are marked to market at the end
of each period and recorded as a gain or loss on derivative instruments on the Consolidated Statements of
Income (Loss). The Company does not apply hedge accounting to its derivative transactions.
Capitalized interest
Interest and other financing costs relating to the construction of property, plant and equipment are capitalized as
construction in progress until they are complete and available for use, at which time they are transferred to
property, plant and equipment. Interest costs incurred after the asset has been placed into service are charged to
operations.
Flow-through shares
Under the terms of Canadian flow-through share legislation, the tax attributes of qualifying expenditures are
renounced to subscribers. To recognize the foregone tax benefits, share capital is reduced and a future income
tax liability is recognized as the related expenditures are renounced. This future income tax liability may then
be reduced by the recognition of previously unrecorded future income tax assets on unused tax losses and
deductions.
Commercial and pre-commercial production
Commercial production is deemed to have commenced when management determines that the operational
commissioning of major mine and plant components is complete, operating results are being achieved
consistently for a period of time and that there are indicators that these operating results will continue. The
Company determines commencement of commercial production based on the following factors, which indicate
that planned principal operations have commenced. These include one or more of the following:
(i)
(ii)
(iii)
(iv)
a significant portion of plant/mill capacity is achieved;
a significant portion of available funding is directed towards operating activities;
a pre-determined, reasonable period of time has passed; and
a development project significant to the primary business objective of the enterprise has been
completed as to significant milestones being achieved.
Financial instruments
Financial instruments are measured at fair value on initial recognition of the instrument. Measurement in
subsequent periods depends on whether the financial instrument has been classified as “held-for-trading”,
“available-for-sale”, “held-to-maturity”, “loans and receivables”, or “other financial liabilities” as defined by
the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3855, Financial Instruments –
Recognition and Measurement.
Financial assets and financial liabilities “held-for-trading” are measured at fair value with changes in those fair
values recognized in net earnings. Financial assets “available-for-sale” are measured at fair value, with changes
in those fair values recognized in other comprehensive income (“OCI”) except for other-than-temporary
12
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
impairment which is recorded as a charge to other expenses. Financial assets “held-to-maturity”, “loans and
receivables” and “other financial liabilities” are measured at amortized cost.
Cash, restricted cash, and short-term deposits are designated as “held-for-trading” and are measured at fair
value. Receivables and long-term deposits are designated as “loans and receivables”. Accounts payable and
accrued liabilities, long term debt, and capital lease obligations are designated as “other financial liabilities”.
Derivative financial instruments are classified as “held-for-trading”.
Deferred stripping
Stripping costs are accounted for as variable production costs and included in the costs of inventory produced
during the period that the stripping costs are incurred. However, stripping costs will be capitalized and recorded
on the balance sheet as deferred stripping, as a component of property, plant and equipment, if the stripping
activity can be shown to represent a betterment to the mineral property. Betterment occurs when the stripping
activity provides access to sources of reserves that will be produced in future periods that would not have
otherwise been accessible in the absence of this activity. The deferred stripping will be amortized on a unit of
production basis over the reserves that directly benefited from the deferred stripping when they are actually
mined.
Comparative figures
Certain of the 2007 figures have been reclassified to conform to the 2008 presentation.
3. Changes in accounting policies
Accounting policies implemented effective January 1, 2008
On January 1, 2008, the Company adopted Section 3862, Financial Instruments – Disclosures (“Section 3862”)
and Section 3863, Financial Instruments – Presentation (“Section 3863”). Section 3862 requires disclosure of
financial and market risks, including detail by financial asset and liability categories. Section 3863 establishes
standards for presentation of financial instruments and non-financial derivatives. Section 3863 deals with the
classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the
classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and
financial liabilities are offset. These sections have been adopted effective January 1, 2008 (Note 5).
On January 1, 2008, the Company adopted Section 1535, Capital Disclosures. This section establishes
standards for disclosing information about an entity’s objectives, policies, and processes for managing its
capital (Note 27).
On January 1, 2008, the Company adopted Section 3031, Inventories, which provides more guidance on the
measurement and disclosure requirements for inventories. Specifically the new pronouncement requires
inventories to be measured at the lower of cost and net realizable value, and provides guidance on the
determination of cost and its subsequent recognition as an expense, including any write-down to net realizable
value. Upon adoption of this standard there were no resulting material changes to the Company’s financial
position or results of operations.
Effective January 1, 2008, the Company elected to early adopt CICA Section 1582, Business Combinations,
Section 1601, Consolidations, and Section 1602, Non-controlling Interests. These new standards are
harmonized with International Financial Reporting Standards (IFRS). Section 1582 specifies a number of
changes, including: an expanded definition of a business, a requirement to measure all business acquisitions at
fair value, a requirement to measure non-controlling interests at fair value, and a requirement to recognize
acquisition-related costs as expenses. Section 1601 establishes the standards for preparing consolidated
financial statements. Section 1602 specifies that non-controlling interests be treated as a separate component of
equity, not as a liability or other item outside of equity. As a result of adopting the new standards, the Company
13
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
has recorded a gain of $72.0 million on the acquisition of Capstone Mining (Note 4), the result of acquiring net
assets with a fair market value in excess of the consideration paid.
Future Accounting Pronouncements
The CICA issued new accounting standard, Section 3064, Goodwill and Intangible Assets, that establishes
standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. This
standard, which is effective beginning January 1, 2009, is not expected to materially impact the consolidated
financial position or results of operations for the Company.
International Financial Reporting Standards
The Canadian Accounting Standards Board recently confirmed that International Financial Reporting Standards
(“IFRS”) will replace Canadian standards and interpretations on January 1, 2011. The process of changing from
current Canadian GAAP to IFRS will be a significant undertaking that may materially affect reported financial
position and results of operations, and also affect certain business functions.
The Company has not yet completed a full evaluation of the adoption of IFRS and its impact on its financial
position and results of operations. The full evaluation and an implementation plan will be completed during
2009. The progress of the evaluation and implementation plan will be addressed in the Company’s 2009
quarterly and annual MD&A’s. The evaluation and implementation plan will address the impact of IFRS on:
• Accounting policies, including choices among policies permitted under IFRS and implementation
decisions such as whether changes will be applied on a retrospective or a prospective basis;
Information technology and data systems;
Internal control over financial reporting;
•
•
• Disclosure controls and procedures, including investor relations and external communications plans;
• Financial reporting expertise, training requirements and the need for assistance from outside expertise;
• Post implementation monitoring to access any future developments of IFRS.
4. Acquisitions
Sherwood Copper Corporation
Pursuant to a share exchange agreement with an effective date of November 24, 2008, Capstone acquired all of
the issued and outstanding shares of Sherwood. Capstone issued 84,334,104 common shares in exchange for
53,853,198 shares of Sherwood, with the effect that subsequent to the transaction the former shareholders of
Sherwood controlled 51.20% of the outstanding common shares. Prior to this exchange, Capstone had
80,370,781shares outstanding. Taking into account the composition of the Board and senior management and
the relative ownership percentages of Sherwood and Capstone shareholders in the newly combined enterprise,
from an accounting perspective Sherwood is considered to have acquired Capstone, and hence the transaction
has been recorded as a reverse takeover.
For financial reporting purposes, the Company is considered to be a continuation of Sherwood, the legal
subsidiary, except with regard to the authorized and issued share capital, which is that of Capstone, the legal
parent. The consolidated statements of operations and cash flows for the year ended December 31, 2008
include the results of operations and cash flows of Sherwood for the period from January 1, 2008 to November
23, 2008, and the results of operations and cash flows of both Capstone and Sherwood for the period from
November 24, 2008 to December 31, 2008. The primary reason for the business combination was to create a
well-funded, low-cost, growth-oriented copper company with two producing mines in politically stable and
mining friendly jurisdictions.
The acquisition has been accounted for as a business combination using the purchase method of accounting.
The purchase price has been determined based on the number of share that Sherwood would have had to issue
14
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
on the date of closing to give the owners of Capstone the same percentage equity (48.80%) of the combined
entity as they hold subsequent to the reverse takeover.
The costs of the acquisition have been allocated as follows (expressed in thousands, except share amounts):
Consideration transferred:
Deemed issuance of Sherwood shares*
Deemed issuance of Sherwood options and warrants
Net assets acquired:
Cash
Non-cash current assets**
Investments
Property, plant and equipment
Mineral property
Derivative instruments asset
Other assets**
Current liabilities
Concentrate advances
Unfavourable contract to deliver silver (Note 18)
Capital lease obligations
Asset retirement obligation
Future income taxes
Gain on acquisition
$
$
43,657
651
44,308
$
31,789
26,658
8,200
21,540
102,348
16,704
2,840
(7,833)
(6,231)
(45,700)
(117)
(2,102)
(31,745)
(72,043)
44,308
$
* Based on the deemed issuance of 51,328,829 common shares of Sherwood at a price of CAD $1.05 per share, converted at the
exchange rate of 1.2345 USD/CAD on the date of transaction.
** Included in the net assets acquired are receivables totaling $11.5 million, against which management has not provided any
allowance for bad debt.
As part of the acquisition, Capstone issued 7,178,512 and 4,142,546 options and warrants, respectively, in
exchange for 4,637,667 and 2,645,306 options and warrants of Sherwood, respectively. Those issued by
Capstone were on the same terms and conditions as those exchanged by Sherwood holders. No amount has
been recorded in respect of these actual issuances of options and warrants. Rather, given that this business
combination has been accounted for as a reverse takeover of Capstone by Sherwood, from an accounting
perspective it is Sherwood that is deemed to have issued options and warrants to Capstone holders. At
November 24, 2008, Capstone had 3,194,000 and 3,835,986 options and warrants outstanding, respectively.
The fair value of the deemed issuance of 3,194,000 options and 3,835,986 and warrants of Capstone was $0.7
million, and this amount has been included as a component of the purchase price. Costs related to the
transaction were $5.2 million, and were expensed as incurred.
During the fourth quarter of 2008 the price of copper declined sharply, resulting in a decline in market prices for
the shares of Sherwood and Capstone. Given that the acquisition was effected by way of a pre-determined
share exchange ratio negotiated in September 2008, the effect of recording the share consideration exchanged
using market prices for the shares on the closing date of the transaction resulted in an excess of $72.0 million
with respect to the fair value of identifiable net assets over the fair value of the consideration transferred, which
has been recorded as a gain during the period in other income.
15
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Had the acquisition occurred on January 1, 2008, the unaudited pro forma net revenue and net income of the
combined Company for the year ended December 31, 2008 would have been $163.1 million and $152.1 million,
respectively. Unaudited pro forma net income for the year ended December 31, 2008 includes the gain on
acquisition of Capstone Mining Corp. in the amount of $72.0 million and business combination expenses
relating to the acquisition of $5.2 million.
The pro forma results of operations give effect to certain adjustments including the increase in depletion and
amortization resulting from adjustments to carrying values of mining assets upon acquisition. This information
may not necessarily be indicative of the future combined results of operations of the Company.
Western Kelitc Mines Inc.
In November 2007 Sherwood entered into an agreement with Western Keltic, owner of the Kutcho project,
under which Sherwood offered to acquire all of Western Keltic’s shares through the issuance of 0.08 of a share
of Sherwood for each share of Western Keltic. On February 11, 2008 Sherwood acquired a controlling interest
in Western Keltic, and its results of operations and cash flows have been consolidated with those of Sherwood
since that date. On May 27, 2008 Sherwood acquired, by plan of arrangement, the remaining outstanding
shares of Western Keltic. Western Keltic and a wholly owned subsidiary of Sherwood were then amalgamated
and named Kutcho Copper Corp. The Company is continuing advancement of the Kutcho project in north-
western British Columbia towards a production decision.
The transaction has been recorded as an asset purchase of mineral property interests with the costs of the
acquisition allocated as follows (expressed in thousands, except share amounts):
Purchase price:
Common shares of Sherwood issued (6,606,874 shares)
Warrants and options exchanged
Transaction costs
Net assets acquired:
Cash
Investments
Equipment
Mineral property interest
Other assets
Non-cash operating working capital (net)
Asset retirement obligation
Future income and mining tax liability
$
$
$
32,205
1,179
1,020
34,404
657
24
36
44,720
51
(5,629)
(50)
(5,405)
34,404
$
As part of the acquisition, Sherwood issued 323,640 and 1,134,496 options and warrants, respectively, in
exchange for 4,045,500 and 14,181,200 options and warrants of Western Keltic, respectively. Those issued by
Sherwood were on the same terms and conditions as those exchanged by Western Keltic holders. As a result of
these exchanges, Sherwood recorded the fair value of the vested options and warrants of $1.2 million as a cost
of the transaction (Note 21).
5. Financial instruments
Overview
16
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
The Company’s activities expose it to financial risks of varying degrees of significance which could affect its
ability to achieve its strategic objectives for growth and shareholder returns. The principal financial risks to
which the Company is exposed are commodity price risk, credit risk, foreign exchange rate risk, and liquidity
risk. The Board of Directors has overall responsibility for the establishment and oversight of the Company’s
risk management framework and reviews the Company’s policies on an ongoing basis.
Commodity price risk
The Company is exposed to commodity price risk given that its revenues are derived from the sale of metals,
the prices for which have been historically volatile. It manages this risk by entering into forward sale
agreements with various counterparties, both as a condition of certain debt facilities as well as to mitigate price
risk when management believes it a prudent decision. Currently the Company has in place derivative contracts
for the sale of copper from both its Minto and Cozamin mines. Additionally, it has sold forward to Silverstone
Resources Corp. the gold and silver production from the Minto mine and silver production from the Cozamin
mine (Note 18).
For the year ended December 31, 2008, with all other variables unchanged, an increase of $0.10 in the price of
copper would have increased pre-tax earnings by $4.2 million, not taking into consideration any changes with
respect to price participation of smelters on changes to the commodity price or the derivative financial
instruments. An increase of $0.10 in the forward price of copper for all future periods would decrease the
unrealized gain on derivative instruments and income before income taxes by $9.6 million.
Credit risk
The Company is exposed to trade credit risk through its trade receivables on concentrate sales. The Company
manages this risk by requiring provisional payments of 90 percent of the value of the concentrate shipped. The
Company enters into derivative instruments with a number of counterparties. These counterparties are large,
well diversified multinational corporations, and credit risk is considered to be minimal.
As at December 31, 2008, the Company’s maximum exposure to credit risk is the carrying value of its cash and
restricted cash, receivables, note receivables and derivative instruments asset.
Foreign exchange risk
The Company is exposed to foreign exchange risk as the Company’s operating costs will be primarily in
Canadian dollars and Mexican Pesos, while revenues will be received in US dollars, hence any fluctuation of
the US dollar in relation to these currencies may impact the profitability of the Company and may also affect
the value of the Company’s assets and liabilities. The Company currently does not enter in to financial
instruments to manage this risk but the draws on debt facilities are made in US dollars to mitigate the risk on
loan repayments if available.
17
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
As at December 31, 2008, the Company is exposed to currency risk through the following assets and liabilities
denominated in currencies other than the measurement currency of the applicable subsidiary (expressed in
thousands):
Cash and restricted cash
Accounts receivable & other current assets
Derivative instruments asset
Accounts payable & accrued liabilities
Long term debt
Future income tax liabilities
Capital lease obligations
Total
1
US dollar
$
Mexican peso
$
21,813
410
69,659
(17,745)
(29,926)
-
(9,410)
34,801
604
9,342
-
(1,114)
-
(14,809)
-
(5,977)
$
$
Based on the above net exposures at December 31, 2008 a 10% appreciation of the US dollar relative to the
Canadian dollar would result in a $3.5 million increase in the Company’s income before income taxes. A 10%
appreciation of the Mexican peso would result in a $0.6 million decrease in the Company’s income before
income taxes.
Liquidity risk
The Company has in place a planning and budgeting process to help determine the funds required to ensure the
Company has the appropriate liquidity to meet its operating and growth objectives. The Company maintains
adequate cash balances and credit facilities in order to meet short and long term business requirements, after
taking into account cash flows from operations and believes that these sources will be sufficient to cover the
likely short and long term cash requirements. The Company’s cash is invested in business accounts with quality
financial institutions and which is available on demand for the Company’s programs, and is not invested in any
asset backed commercial paper.
Interest rate risk
Currently the Company’s long term liabilities are based on both fixed and variable interest rates. The Company
is exposed to interest rate risk on its variable rate debt facilities. Variable interest rates are based on both US
dollar and Canadian dollar London Inter-bank Offered Rates (“LIBOR”) plus a fixed margin. The Company
does not enter into derivative contracts to manage this risk.
The Company’s project loan facility carries an interest rate of US dollar LIBOR plus 2.25% while its
subordinated loan facility carries an interest rate of Canadian LIBOR plus 2.65%. At December 31, 2008, with
all other variables unchanged, a 1% increase in interest rates would result in a pre-tax interest expense of $0.4
million on an annualized basis on the Company’s variable rate debt facilities.
Financial instruments carrying value and fair value
The Company’s financial instruments consist of cash, restricted cash, receivables, long term investments,
accounts payable and accrued liabilities, concentrate advances, debt facilities, convertible debentures, capital
lease obligations, and derivative instruments.
Cash, restricted cash, and derivative instruments are classified as “held-for-trading” and measured at fair value.
Certain of the Company’s long term investments that are not accounted for using the equity method are
classified as "available-for-sale”. Receivables and long-term deposits are designated as “loans and receivables”.
Long term investments are designated as “available for sale”. Accounts payable and accrued liabilities,
advances on concentrate sales, loan facilities, convertible debentures, and capital lease obligations are
designated as “other financial liabilities”.
18
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
The carrying value of receivables, and accounts payable and accrued liabilities approximate their fair values due
to their immediate or short-term maturity. Investments that are available-for-sale are recorded at fair value
based on quoted market prices at the balance sheet date. Management believes that the fair value of the
Company’s loan facilities and capital lease obligations are approximated by their carrying values given that the
facilities bear interest at variable rates or, in the case of capital lease obligations, the interest rates have not
changed materially. The fair value of the convertible debentures based on the market price at December 31,
2008 was $35.8 million. The fair value of the derivative contracts is based on quoted market prices for
comparable contracts and approximates the amount the Company would have received from (or paid to) a
counterparty to settle the contract at the market rates in effect at the balance sheet date.
As of December 31, 2008 the Company’s liabilities have contractual maturities which are summarized below
(expressed in thousands):
Total
2009
2010 - 2011 2012 - 2013 After 2013
Accounts payable & accrued
liabilities
Taxes payable
Long-term debt
Capital lease obligations
Total*
$
$
12,884
669
84,745
25,618
123,916
12,884
669
60,156
4,871
78,580
$
-
-
17,379
7,419
24,798
$
$
-
-
2,797
6,816
9,613
$
$
-
-
4,413
6,512
10,925
$
$
$
* Amounts above do not include payments related to the Company's asset retirement obligations and other mine closure costs
(Note 20 ).
6. Receivables
Details are as follows (expressed in thousands):
Taxes
Other
Current portion of notes receivable (Note 10)
Total receivables
7. Inventories
Details are as follows (expressed in thousands):
Consumable parts and supplies
Ore stockpile
Concentrate
Total inventories
December 31, 2008 December 31, 2007
2,025
$
735
-
2,760
8,631
3,536
601
12,768
$
$
$
December 31, 2008 December 31, 2007
1,987
$
7,843
14,865
24,695
7,807
10,953
18,245
37,005
$
$
$
19
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
8. Investments
Details are as follows (expressed in thousands):
Investments in available-for-sale securities
Equity investment in Silverstone Resources Corp.
Total investments
a) Available-for-sale investments
December 31, 2008 December 31, 2007
$
198
7,866
8,064
-
$
-
$
-
$
Investments in available-for-sale securities consist of marketable securities in companies over which the
Company does not exercise significant influence. They are recorded at fair value, with any unrealized gains and
losses recognized in other comprehensive income.
In accordance with an agreement effective May 23, 2008 between MintoEx and Northern Tiger Resources Inc.
(“Northern Tiger”), MintoEx transferred to Northern Tiger a 100% interest in four exploration properties and an
exploration database of the region. In consideration for the exploration properties and database, Northern Tiger
issued to MintoEx 4,343,878 common shares, representing approximately 17.81% of the outstanding common
shares of Northern Tiger, at a fair value of $0.30 per share. The shares are held in escrow for a period of three
years pursuant to a TSX Venture Exchange Form 5D Value Security Escrow Agreement. A gain of $1.2
million, representing the difference between the fair value of the Northern Tiger shares received and the
carrying value of the exploration properties disposed, was recorded with respect to the disposition of the
properties.
b) Equity investment in Silverstone Resources Corp.
On November 24, 2008, the Company acquired Capstone Mining (Note 4), owner of an equity investment in
Silverstone Resources Corp. (“Silverstone”). As part of the purchase price equation, the Company allocated
$8.2 million of fair value to the investment.
The investment in Silverstone resulted from the forward sale of silver production from the Cozamin mine in
2007 (Note 18), for which the upfront consideration received was 19,155,310 special warrants of Silverstone with
a value of $24.0 million. These special warrants are convertible into common shares of Silverstone at no
additional cost. At the date of acquisition, 16,407,882 special warrants have been converted into common
shares, which when added to the other common shares acquired in the reverse takeover results in a total
ownership of 24,042,340 shares and 2,747,428 special warrants. As at December 31, 2008, the Company held
approximately 19.5% of the issued and outstanding common shares in Silverstone, excluding the special
warrants.
20
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Details are as follows (expressed in thousands):
Investment in common shares
At January 1, 2008
Acquisition of Capstone Mining (Note 4)
Foreign currency translation adjustments
At December 31, 2008
Investment in special warrants
At January 1, 2008
Acquisition of Capstone Mining (Note 4)
Foreign currency translation adjustments
At December 31, 2008
Total investment
Shares
Amount
-
24,042,340
-
24,042,340
-
$
7,359
(300)
7,059
$
-
2,747,428
-
2,747,428
-
841
(34)
807
$
$
7,866
9. Property, plant and equipment
Details are as follows (expressed in thousands):
December 31, 2008
Property, plant and equipment
Development costs
Equipment and facilities under
capital leases
Deferred stripping costs
Construction in progress
Cost
$
86,095
59,638
20,982
18,293
1,861
186,869
$
Accumulated
amortization
(12,297)
(6,741)
$
Impairment
$
(Note 12) Net book value
64,479
(9,319)
22,198
(30,699)
$
(2,918)
(6,771)
-
(28,727)
$
-
-
-
(40,018)
$
18,064
11,522
1,861
118,124
$
0.9913
December 31, 2007
Property, plant and equipment
Development costs
Equipment and facilities under capital
leases
Deferred stripping costs
Construction in progress
Cost
$
74,277
54,226
14,582
6,143
18,644
167,872
$
Accumulated
amortization
(1,791)
(930)
$
Impairment
(Note 12) Net book value
72,486
53,296
$
-
$
-
(1,595)
(131)
-
(4,447)
$
-
-
-
$
-
12,987
6,012
18,644
163,425
$
At December 31, 2008, construction in progress relates to capital costs incurred in connection with sustaining
capital at the Minto mine site. At December 31, 2007, construction in progress related to capital costs incurred
in connection with further development of the Minto mine site which at December 31, 2008 are included in
property, plant and equipment costs.
21
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
10. Notes receivable
On November 24, 2008, the Company acquired Capstone Mining (Note 4), owner of notes receivable in respect
of agreements with a contractor at the Cozamin mine. As part of the purchase price equation, the Company
allocated $0.6 million of fair value to the notes receivable. Under the terms of the agreement, the contractor has
agreed to purchase mining equipment which the Company holds under capital lease through monthly payments
over a three year period, such payments inclusive of interest at 8% per annum.
Details are as follows (expressed in thousands):
Total notes receivable
Current portion
Long term portion
11. Mineral property costs
December 31, 2008 December 31, 2007
$
601
(601)
$
-
-
$
-
$
-
Details are as follows (expressed in thousands):
0.9913
December 31, 2008
MintoEx
Cozamin
Kutcho Copper
MintoEx
Kutcho Copper
Cozamin
Cost
$
32,063
108,774
43,197
184,034
$
$
Accumulated
amortization
(2,981)
(6,612)
-
(9,593)
$
Impairment
$
(Note 12) Net book value
15,665
(13,417)
102,162
-
43,197
-
161,024
(13,417)
$
$
$
0.9913
December 31, 2007
Cost
$
$
26,804
-
-
26,804
$
Accumulated
amortization
(394)
-
-
(394)
$
Impairment
$
(Note 12) Net book value
26,410
-
-
26,410
-
$
-
-
$
-
$
Depletable
22,012
$
-
-
22,012
$
December 31, 2007
Non-depletable
4,398
$
-
-
4,398
$
Total
$
26,410
-
-
26,410
$
0.9913
December 31, 2008
$
Depletable Non-depletable
8,312
$
-
43,197
51,509
7,353
102,162
-
109,515
$
$
MintoEx
Cozamin
Kutcho Copper
12. Asset impairment
Total
$
15,665
102,162
43,197
161,024
$
An asset impairment charge of $53.4 million was recorded against the Minto mine at December 31, 2008. Due
to the significant reduction in the copper price over the period, the Company, following CICA Section 3063 -
22
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Impairment of Long Lived Assets, performed an undiscounted life of mine cash flow the analysis using
management’s best estimate of future commodity prices, reserves and resources, recovery rates and future
operating costs. As the undiscounted cash flows were not sufficient to recover the net book value of the long
lived assets, the cash flows were discounted at a rate of 15%, with the differential to the net book value being
recorded as the impairment. The Minto mine undiscounted cash flows are very sensitive to the copper price, the
US dollar exchange rate, copper grade, reserves and resources and other estimates and there would be material
adjustments to the amount of the impairment if different estimates were assumed.
13. Other assets
Details are as follows (expressed in thousands):
Deferred acquisition costs re: Western Keltic Mines Inc.
Security deposit on port facility
Total other assets
14. Derivative instruments
December 31, 2008 December 31, 2007
389
$
-
350
350
739
350
$
$
$
As a condition of the loans with Macquarie (Note 16) the Company must maintain a price protection program of
forward metal sales contracts as they relate to the Minto mine. Additionally, the Company uses forward sales
contracts for its Cozamin mine in order to manage price risk on its future production.
Details of the Company’s forward sales contracts at December 31, 2008 are as follows:
Metal
Maturity
Quantity
(pounds 000's)
Forward Price
(per pound)
Copper
2009
2010
2011
2012
2013
43,054
34,412
22,293
2,646
1,984
104,389
$
$
$
$
$
$
2.61
2.38
2.41
3.22
3.12
2.52
As at December 31, 2008, the Company has a mark-to-market derivative instruments asset of $105.3 million
(December 31, 2007 – $59.8 million liability) recorded against these forward sales contracts, of which $48.5
million (December 31, 2007 – $6.7 million liability) relates to derivative contracts due in less than one year and
$56.8 million (December 31, 2007 – $53.1 million liability) relates to derivative contracts with a due date
greater than one year.
During 2008 the Company closed out all of its gold and silver forward sales contracts as a condition of the
Precious Metal Sale with Silverstone (Note 18).
15. Current portion of other liabilities
Details are as follows (expressed in thousands):
23
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Current portion of:
Long term debt (Note 16)
Capital lease obligations (Note 17)
Derivative instruments liability (Note 14)
Future income tax liability (Note 19)
Total current portion of other liabilities
16. Long term debt
Details are as follows (expressed in thousands):
Macquarie Bank Ltd – project loan facility
Macquarie Bank Ltd – subordinated loan facility
Yukon Energy Corporation – capital cost contribution
Convertible debentures
Total long term debt
Current portion
Long term portion
December 31, 2008 December 31, 2007
$
$
52,010
3,497
-
18,397
73,904
28,764
2,153
6,677
-
37,594
$
$
$
December 31, 2008 December 31, 2007
57,530
$
10,088
-
35,147
102,765
(28,764)
74,001
29,926
8,211
5,911
30,010
74,058
(52,010)
22,048
$
$
As of December 31, 2008 the long term debt repayments for each of the next five years ending December 31 are
as follows (expressed in thousands):
2009
2010
$
$
22,000
-
-
35,796
57,796
$
$
7,926
8,210
-
-
16,136
2011
-
$
-
-
-
$
-
2012
-
$
-
147
-
147
$
2013
-
$
-
1,836
-
1,836
$
Macquarie - PLF
Macquarie - SLF
Yukon Energy Corporation
Convertible debentures
Total
Macquarie Bank Limited loan facility
In October 2006, Minto, received credit approval from Macquarie Bank Limited (“Macquarie”) for a debt
package comprised of a $57.8 million Project Loan Facility (“PLF”) and a C$20.0 million subordinated loan
facility (“SLF”). The PLF carries an interest rate of US dollar LIBOR plus 2.25% and is repayable over three
years with the first payment due April 1, 2008 and the final payment due on May 31, 2010. During the current
period of the PLF, US dollar LIBOR ranged from 2.4 – 5.1%. The PLF was drawn in US dollars to mitigate the
Minto mine’s potential exposure to currency fluctuations, given that mine revenues are being generated in US
dollars. The total amount drawn against the PLF at December 31, 2008 was $29,926,073, consisting of
$22,000,000 current and $7,926,073 long-term. The SLF carries an interest rate of Canadian dollar LIBOR plus
2.65% with the first payment due October 1, 2010 and the final payment due May 31, 2011. As at December
31, 2008, CAD $10,000,000 had been drawn against the SLF, all of which is long term. During the current
period LIBOR ranged from 3.2 – 5.8%.
The PLF and SLF are secured against the Minto mine, and are guaranteed by the Company, which has pledged
its shares in MintoEx as security for the loans. The lender requires certain minimum debt service reserves and
ratios relating to projected debt service coverage and ratios. Failure to meet certain of these tests could result in
a possible acceleration of the loan repayments.
24
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Yukon Energy Corporation capital cost contribution
In February 2007, MintoEx executed the Power Purchase Agreement (“PPA”) with Yukon Energy Corporation
(“YEC”). Under the terms of the agreement, MintoEx agreed to make payments representing its capital cost
contribution on the Carmacks-Minto Landing portion of the main line. These payments carry an implied interest
rate of 7.5% on a stated principal of C$7.2 million. As per the repayment schedule, the monthly payments
during the first 48 months will represent interest only on the principal followed by equal blended payments of
interest and principal during the ensuing 36 months such that the principal is fully repaid at the end of seven
years, respectively. Minto’s connection to the YEC’s electrical grid in November 2008 triggered the first of 72
monthly payments to commence in December 2008.
Convertible debentures
In February 2007, the Company issued convertible senior unsecured debentures (the “Debentures”) to a
syndicate of underwriters, led by BMO Capital Markets, for gross proceeds of C$43.6 million. The Debentures,
due March 31, 2012, bear interest at a rate of 5.0% per annum payable semi-annually in arrears on March 31
and September 30 of each year commencing on September 30, 2007. Each Debenture is convertible at the
option of the holder at anytime into common shares of the Company at a conversion rate of 158.7302 common
shares per C$1000 principal amount of Debentures, which is equal to a Conversion Price of C$6.30 per
common share. The Company may redeem the Debentures on or after April 1, 2010 at a redemption price equal
to their principal amount, provided that the weighted average trading price of the common shares of the
Company for 20 consecutive days is at least 125% of the Conversion Price. The Company may repay the
principal amount in common shares at the then market price or cash.
Generally accepted accounting principles for compound financial instruments require the Company to allocate
the proceeds received from the Debentures between; (i) the estimated fair value of the holder’s option to convert
the debentures into common shares and (ii) the estimated fair value of the future cash outflows related to the
debentures. At issuance, the Company estimated the fair value of the conversion option by deducting the
present value of the future cash outflows of the convertible debentures, calculated using a risk-adjusted discount
rate of 11.5%, from the face value of the principal of the convertible debentures. The residual value allocated to
the conversion option is added to the face value of the convertible debentures over the life of the debentures by
a charge to earnings, using the effective interest rate method.
25
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
The financial liability component of the convertible debentures at December 31, 2008 is as follows (expressed in
thousands):
Principal amount of convertible debentures
Less: residual value allocated to the conversion option*
Financial liability component at issuance (present value of future cash outflows)
$
37,211
(8,601)
28,610
Accretion of the residual value allocated to the conversion option
Foreign currency translation adjustments
Balance of financial liability component
Less: current portion of financial liability component
Long term balance of financial liability component
2,867
(1,467)
30,010
(30,010)
$
-
* Excludes issue expenses allocated to the equity component of the conversion option in the amount of $0.4 million.
The principal amount of the convertible debentures plus accrued interest to December 31, 2008 amounted to
$36.2 million. Subsequent to year-end, the Company redeemed the majority of its outstanding convertible
debentures as part of a requirement to make an offer to all convertible debenture holders upon a change of
control (Note 30).
17. Capital lease obligations
The Company has certain assets that are classified as capital leases, with the applicable costs included in
property and equipment. Future minimum lease payments are as follows (expressed in thousands):
2009
2010
2011
2012
2013
Thereafter until 2017
Total minimum lease payments
Less: interest at rates from 7.0% to 9.4%
Balance of unpaid obligations
Less: current portion
Long term portion
December 31, 2008
4,871
$
3,821
3,598
3,408
3,408
6,512
25,618
(5,467)
20,151
(3,497)
16,654
$
18. Deferred revenue
(a) Minto mine
During 2008, the Company sold all of its gold and silver production from the Minto mine over the life of mine
to Silverstone in consideration for an upfront payment of $37.5 million and a further payment of the lesser of
US$300 per ounce of gold and US$3.90 per ounce of silver (subject to a 1% inflationary adjustment after three
years and each year thereafter) and the prevailing market price on the London Metal Exchange for each ounce
delivered. If production from the Minto Mine exceeds 50,000 oz of gold in the first two years of the agreement
or 30,000 oz of gold per year thereafter, Silverstone will be entitled to purchase only 50% of the amount in
26
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
excess of those thresholds. The Company has recorded the proceeds received as deferred revenue and will
recognize this amount as an adjustment to revenue as the appropriate ounces are delivered.
(b) Cozamin mine
As part of the reverse takeover transaction between Capstone and Sherwood during 2008 (Note 4), the Company
acquired a commitment to sell the Cozamin mine’s silver production over a 10 year period to Silverstone.
Under the terms of the arrangement, Silverstone agreed to pay for each ounce of refined silver from the mine
the lesser of $4.00 per ounce of silver and the prevailing market price on the London Metal Exchange for each
ounce of silver. Further, the Company agreed to deliver a minimum of 10 million ounces of silver to
Silverstone over a ten year period. If, at the end of ten years, the Company has not delivered the agreed upon
10 million ounces of silver, then it has agreed to pay Silverstone $1.00 per ounce of silver not delivered. From
the date of the reverse takeover on November 24, 2008 to the end of the year, the Company delivered
concentrate containing 0.1 million ounces (2007 – nil) of silver to Silverstone. To date, a total of 1.6 million
ounces have been delivered against the contract since its inception. The Company has recorded this
commitment (which represents an obligation to deliver silver at other than market rates) at its estimated fair
value on the date of acquisition of the Cozamin mine. The value assigned to the commitment will be recorded
as an adjustment to revenue as the related ounces are delivered.
Details of deferred revenue are as follows (expressed in thousands):
Deferred revenue on sale of Minto production
Fair value of commitment to deliver silver on acquisition of
Capstone Mining (Note 4)
Amortization on delivery of gold and silver
Foreign currency translation adjustments
Total deferred revenue
December 31, 2008 December 31, 2007
$
$
-
37,500
45,700
(458)
112
82,854
$
-
-
-
$
-
27
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
19. Income and mining taxes
Income tax expense differs from the amount that would result from applying the Canadian federal and
territorial income tax rates to earnings before income taxes. These differences result from the following items
(expressed in thousands):
Earnings (loss) before income items
Canadian federal and provincial income tax rates
Income tax expense (recovery) based on the above rates
Increase (decrease) due to:
Non-deductible stock based compensation & other
Non-deductible (non-taxable) foreign exchange
Non-deductible interest accretion
Difference between Canadian and foreign tax rates
Losses and temporary differences for which no future
income tax asset has been recognized
Yukon mining taxes
Income tax benefit recognition from issuance of flow-
through shares
Gain on acquisition of Capstone not subject to tax
Twelve months ended
$
December 31, 2008
(Note 2)
136,343
34.50%
47,038
$
December 31, 2007
(Note 2)
(41,327)
37.12%
(15,341)
1,264
2,533
363
(523)
-
(3,905)
-
(24,855)
1,440
(1,694)
477
-
15,118
-
(626)
-
Benefit of previously unrecognized future income tax assets
Income tax expense/(recovery)
$
(17,393)
4,522
$
-
(626)
Breakdown of income tax expense/(recovery)
Current
Future
667
3,855
4,522
$
-
(626)
(626)
$
28
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
The components of future income taxes are as follows (expressed in thousands):
Future income and mining tax assets
Non-capital losses
Accounts receivable and other current items
Share issue costs and other
Derivative instruments
Property, plant and equipment
Mineral property costs
Capital leases and long term debt
Asset retirement obligations
Future income and mining tax assets
Valuation allowance
Net future income and mining tax assets
Future income and mining tax liabilities
Inventory
Property, plant and equipment
Derivative instruments
Mineral property costs
Long term debt
Future income and mining tax liabilities
Twelve months ended
December 31, 2008
(Note 2)
December 31, 2007
(Note 2)
$
1,810
281
3,640
-
9,653
8,171
888
1,279
25,722
(1,195)
24,527
$
4,555
-
1,463
19,727
-
-
4,101
1,010
30,856
(21,607)
9,249
4,439
9,729
31,773
26,361
-
72,302
951
10,680
1,407
-
1,443
14,481
Net future income and mining tax liability
$
47,775
$
5,232
Breakdown of net future income and mining tax liability
Current asset
Long term asset
Current liability
Long term liability
(2,665)
(7,100)
18,397
39,143
47,775
$
-
-
-
5,232
5,232
$
The Company has non-capital loss carry-forwards of approximately $7.0 million that may be available for tax
purposes. The loss carry-forwards are all in respect of Canadian operations and expire as follows (expressed in
thousands):
2011
2012
2013
2024
2025
2026
2028
$
321
321
423
746
2,013
1,154
2,002
6,980
$
A valuation allowance has been recorded against the net potential future income tax assets associated with certain
deductible temporary differences as their utilization is not considered more likely than not at this time.
29
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
20. Asset retirement obligations and other provisions
The asset retirement obligations relate to the operations of the Minto and Cozamin mines, as well as the Kutcho
development project.
Details are as follows (expressed in thousands):
Balance, December 31, 2006
Changes in estimates
Accretion expense
Foreign currency translation adjustments
Balance, December 31, 2007
Accretion expense
Obligations assumed on acquisition of Capstone
Mining (Note 4)
Obligations assumed on acquisition of Western
Keltic assets (Note 4)
Accretion expense
Foreign currency translation adjustments
Balance, December 31, 2008
Asset
Retirement
Obligations
$
1,623
824
182
432
3,061
178
Other
Long Term
Obligations
-
$
-
-
-
-
-
Total
$
1,623
824
182
432
3,061
178
1,673
50
-
(583)
4,379
$
428
-
9
5
442
$
2,101
50
9
(578)
4,821
$
Asset retirement obligations have been recognized in respect of the mining operations of the Minto mine,
including associated infrastructure and buildings. The estimated undiscounted cash flows required to satisfy the
Minto Project asset retirement obligations as at December 31, 2008 was $4.5 million Canadian dollars, which
have then been discounted using credit-adjusted risk free rates ranging from 4.0% to 6.4%. The asset retirement
obligations for the Minto mine at December 31, 2008 totalled $2.6 million, virtually all of which is secured by a
letter of credit from Macquarie Bank Ltd. in favour of the Yukon Government. The remaining unsecured
amount is covered by a short term deposit of $0.1 million.
On November 24, 2008, the Company acquired Capstone Mining, owner of the Cozamin mine in Mexico (Note
4). As part of the purchase price equation, the Company allocated $2.2 million for future site restoration and
other mine closure costs. The restoration costs were determined based on the current life of mine plan,
estimated on an undiscounted basis to be 23.3 million Mexican pesos, and then discounted using a credit-
adjusted risk-free interest rate of 6.2%. The asset retirement obligations for the Cozamin mine at December 31,
2008 totalled $1.7 million, with an additional $0.4 million to other mine close costs related to severance.
On February 11, 2008, the Company acquired the Kutcho project in Canada (Note 4). As part of the purchase
price equation, the Company allocated $50,000 for future site restoration costs. The restoration costs were
determined based on the known disturbance to date, the full amount of which has been provided for in the form
of a term deposit in favour of the regulatory authorities. These deposits will be released to the Company on
satisfactory reclamation of the properties.
In view of uncertainties concerning asset retirement obligations, the ultimate costs could be materially different
from the amounts estimated. The estimate of future asset retirement obligations is subject to change based on
amendments to applicable laws and legislation. Futures changes in asset retirement obligations, if any, could
have a significant impact.
30
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
21. Share capital
Authorized
An unlimited number of common voting shares without par value.
Issued and outstanding
On November 24, 2008 Sherwood acquired Capstone in a reverse takeover transaction whereby shareholders of
Sherwood exchanged their shares at a rate of 1.566 shares of Capstone for each share of Sherwood (Note 4). The
share capital of each company prior to the business combination was as follows (expressed in thousands, except share
amounts):
Capstone Mining Corp.
August 31, 2006
Exercise of options
Exercise of agent's options
Exercise of warrants
Issued as compensation
Shares repurchased and cancelled
December 31, 2007
Exercise of options
Exercise of agent's options
Exercise of warrants
Issued as compensation
Shares repurchased and cancelled
Balance as at November 24, 2008 prior to
business combination with Sherwood
Shares outstanding
Share capital
81,732,351
20,000
6,625
496,539
2,500
(815,500)
81,442,515
614,500
75,629
541,187
242,000
(2,545,050)
$
64,031
35
6
657
5
(790)
63,944
1,028
102
734
578
(2,341)
80,370,781
$
64,045
31
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Sherwood Copper Corporation
December 31, 2006
Private placement
Share issue costs
Exercise of options
Exercise of warrants
Shares issued as contract incentive
Future income tax on flow-through shares
December 31, 2007
Private placement
Share issue costs
Exercise of options
Exercise of warrants
Acquisition of mineral property (Note 4)
Debt financing fees
Property payment
Future income tax on flow-through shares
Balance as at November 24, 2008 prior to
business combination with Capstone
Shares outstanding
Share capital
42,227,066
845,000
-
1,146,933
457,250
138,200
-
44,814,449
1,205,000
-
875,100
331,175
6,606,874
19,000
1,600
-
$
51,707
4,255
(61)
3,249
951
925
(626)
60,400
7,196
(57)
3,611
831
32,205
100
8
(1,638)
53,853,198
$
102,656
Subsequent to the reverse takeover, the share capital of the Company was as follows (expressed in thousands, except
share amounts):
Capstone Mining Corp.
Balance as at November 24, 2008 prior to
business combination with Sherwood
Increase in the share capital to that of
Sherwood upon reverse takeover (Note 4)
Issued pursuant to reverse takeover in
exchange for shares of Sherwood (Note 4)
December 31, 2008
Shares issuances
Shares outstanding
Share capital
80,370,781
$
64,045
-
80,370,781
38,611
102,656
84,334,104
164,704,885
$
43,658
146,314
In March 2008 Sherwood completed a non-brokered private placement of 1,205,000 flow through shares priced
at C$6.00 for aggregate proceeds of $7.2 million. Proceeds were to be used to incur Canadian Exploration
Expenditures in advancing the Kutcho Copper project in British Columbia towards a production decision and at
the Minto mine in the Yukon.
During fiscal year 2008 up to November 24, 2008, a total of 875,100 common shares of Sherwood were issued
upon the exercise of options at prices between C$1.00 and C$4.05 per option for total cash proceeds of $2.2
million. As a result of these exercises, $1.4 million was transferred from contributed surplus to share capital.
32
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
During fiscal year 2008 up to November 24, 2008, a total of 331,175 common shares of Sherwood were issued
upon the exercise of warrants at C$2.00 per warrant for total cash proceeds of $0.6 million. As a result of these
exercises, $0.2 million was transferred from contributed surplus to share capital.
On November 24, 2008, the date of the reverse takeover transaction, a total of 84,334,104 common shares of
Capstone were issued in exchange for 53,853,198 shares of Sherwood. These shares were added to the then
current Capstone shares outstanding balance of 80,370,781 for a total shares outstanding of 164,704,885.
Stock options
Pursuant to the Company’s stock option plan, directors may, from time to time, authorize the issuance of
options to directors, officers, employees and consultants of the Company to a maximum of 10% of the issued
and outstanding common shares at the time of grant, with a maximum of 5% of the Company’s issued and
outstanding shares reserved for any one person on a yearly basis. Options granted under the plan have a term
not to exceed 5 years and vesting periods that range from zero to 2.5 years.
The outstanding options of each company prior to the business combination was as follows:
Capstone Mining Corp.
August 31, 2006
Exercised
December 31, 2007
Issued
Exercised
Cancelled
Balance as at November 24, 2008 prior to
business combination with Sherwood
Sherwood Copper Corporation
December 31, 2006
Issued
Exercised
Forfeited
December 31, 2007
Issued
Exchanged for Western Keltic options (Note 4)
Exercised
Cancelled
Expired
Forfeited
Balance as at November 24, 2008 prior to
business combination with Capstone
Options outstanding
Weighted average
exercise price
($C)
2,582,000
(20,000)
2,562,000
1,269,000
(614,500)
(22,500)
$
1.45
1.25
1.45
2.93
3.16
1.30
3,194,000
$
2.15
3,559,400
2,035,000
(1,146,933)
(11,700)
4,435,767
1,582,000
291,640
(855,100)
(125,000)
(341,640)
(400,000)
$
2.22
5.02
1.84
2.00
3.61
5.10
5.81
2.48
4.05
5.62
5.31
4,587,667
$
4.20
33
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Subsequent to the reverse takeover, the options outstanding of the Company were as follows:
Capstone Mining Corp.
Balance as at November 24, 2008 prior to
business combination with Sherwood
Issued pursuant to reverse takeover in
exchange for options of Sherwood (Note 4)
Issued
Expired
December 31, 2008
Options outstanding
Weighted average
exercise price
($C)
3,194,000
$
2.15
7,178,512
78,300
(366,700)
10,084,112
2.66
0.78
3.10
2.47
$
As at December 31, 2008, the following options were outstanding:
Weighted average
exercise price
($C)
Weighted average
remaining life
(years)
$
Exercise prices
($C)
$0.64 - $0.95
$1.05 - $1.95
$2.32 - $2.98
$3.16 - $3.99
Number of options
1,155,234
2,445,685
1,891,039
4,592,154
10,084,112
$
As at December 31, 2008, the following options were both outstanding and exercisable:
Weighted average
exercise price
($C)
Weighted average
remaining life
(years)
$
Exercise prices
($C)
$0.64 - $0.95
$1.05 - $1.95
$2.32 - $2.98
$3.16 - $3.99
Number of options
1,010,379
2,445,685
1,887,907
2,922,284
8,266,255
$
0.74
1.58
2.54
3.35
2.47
0.73
1.58
2.54
3.34
2.32
1.8
2.4
3.0
4.1
3.2
1.4
2.4
3.0
4.0
3.0
The Company uses the fair value method of accounting for all stock-based payments to employees, directors
and officers. During the year ended December 31, 2008, the stock-based compensation had a total fair value of
$4.1 million (2007 – $5.5 million). Of this total, $3.3 million (2007 – $4.6 million) was recorded as an expense,
$0.1 million (2007 – $0.9 million) was capitalized to mineral property costs and construction in progress, $0.1
million (2007 – $nil) related to the consideration paid to acquire the Kutcho project (Note 4), and $0.6 million
(2007 – $nil) related to the consideration transferred in the reverse takeover of Capstone (Note 4). The portion of
stock-based compensation recorded is based on the vesting schedule of the options.
34
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
During the year ended December 31, 2008, the exercise price of options granted was based on the closing stock
price on the date of grant. The total fair value of options granted or exchanged was $4.5 million (2007 – $5.2
million) and had a weighted average grant-date fair value of C$0.75 (2006 – C$2.74) per option. The fair
values of the stock options granted were estimated on the respective issue dates using the Black-Scholes option
pricing model, with the following ranges of assumptions:
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected life
December 31, 2008
December 31, 2007
1.68 - 3.57%
nil
51 - 129%
0.1 - 4.7 years
4.00%
nil
72%
4.2 years
Option pricing models require the input of subjective assumptions including the expected price volatility.
Changes in the assumptions can materially affect the fair value estimate, and therefore the existing models do
not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
Share purchase warrants
Capstone Mining Corp.
August 31, 2006
Issued
Exercised
Expired
December 31, 2007
Exercised
Balance as at November 24, 2008 prior to
business combination with Sherwood
Sherwood Copper Corporation
December 31, 2006
Issued
Exercisd
December 31, 2007
Issued
Exchanged for Western Keltic options (Note 4)
Exercised
Expired
Balance as at November 24, 2008 prior to
business combination with Capstone
Warrants
outstanding
Weighted average
exercise price
(C$)
4,332,463
3,312
(496,539)
(3,250)
3,835,986
(541,187)
$
1.39
1.30
1.33
1.30
1.40
1.40
3,294,799
$
1.40
1,715,452
755,405
(457,250)
2,013,607
755,405
1,134,496
(331,175)
(927,027)
$
2.88
6.75
1.86
4.56
5.25
5.63
2.00
3.70
2,645,306
$
5.84
35
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Subsequent to the reverse takeover, the warrants outstanding of the Company was as follows:
Capstone Mining Corp.
Balance as at November 24, 2008 prior to
business combination with Sherwood
Issued pursuant to reverse takeover in
exchange for warrants of Sherwood (Note 4)
Expired
December 31, 2008
Warrants
outstanding
Weighted average
exercise price
(C$)
3,294,799
$
1.40
4,142,546
(3,294,799)
4,142,546
3.73
1.40
3.73
$
As at December 31, 2008, the following warrants were outstanding:
Expiry date
February 20, 2009
November 23, 2009
March 7, 2010
Warrants
outstanding
Exercise price
(C$)
$
1,776,618
1,182,964
1,182,964
4,142,546
3.59
4.31
3.35
3.73
$
During 2008, warrants issued or exchanged had a total fair value of $2.4 million. Of this total, $1.3 million was
expensed as financing fees related to the establishment of a corporate credit facility with Macquarie, $1.1
million related to the acquisition costs of Western Keltic (Note 4), and $0.1 million related to the reverse takeover
costs of Capstone (Note 4). The fair values were estimated on the respective issue dates using the Black-Scholes
option pricing model, with the following ranges of assumptions:
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected life
December 31, 2008
December 31, 2007
1.85 - 3.44%
nil
47 - 125%
0.1 - 2 years
3.67%
nil
51%
1 year
Warrant pricing models require the input of subjective assumptions including the expected price volatility.
Changes in the 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.
Employee share purchase plan
The Company has an ESPP which allows employees of the Company to purchase the Company’s shares
through payroll deductions. Employees may contribute up to a maximum of 7% of their annual base salary and
the Company will match 50% of the employee’s contribution.
36
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
22. Earnings (loss) per share
Earnings (loss) per share, calculated on a basic and diluted basis, is as follows (expressed in thousands, except share and
per share amounts):
Earnings (loss) per share
Basic
Diluted
December 31, 2008 December 31, 2007
$
$
1.47
1.31
$
$
(0.59)
(0.59)
Net income (loss)
Net income (loss) available to common shareholders -
basic
Interest obtainable upon conversion of debentures, net
of tax
Net income (loss) available to common shareholders -
diluted
$
131,821
$
(40,702)
3,656
-
$
135,477
$
(40,702)
Weighted average shares outstanding
Weighted average shares outstanding - basic
Dilutive securities
Stock options
Share purchase warrants
Convertible securities
Weighted average shares outstanding - diluted
Weighted average shares excluded
Stock options
Share purchase warrants
Convertible securities
89,825,636
68,825,846
3,089,227
-
10,837,717
103,752,580
5,246,742
2,645,306
-
-
-
-
68,825,846
6,946,411
3,153,309
10,837,717
23. Accumulated other comprehensive loss
Details are as follows (expressed in thousands):
Accumulated other comprehensive income (loss)
Mark-to-market losses on available-for-sale
securities, net of tax of $nil
Currency translation adjustment
December 31, 2008 December 31, 2007
$
$
(1,024)
(7,816)
(8,840)
$
-
4,210
4,210
$
24. Related party balances and transactions
The Company entered into the following transactions with related parties:
a. The Company has a management and cost sharing agreement with International Northair Mines Ltd.
("Northair"), a company with directors and officers in common. The agreement is automatically renewed
from year to year and either party can terminate the agreement by giving three months written notice prior
to the anniversary date of September 1. During the year ended December 31, 2008 the Company incurred
management fees with Northair of $0.1 million (2007 – $0.1 million). Also during the year ended
37
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
December 31, 2008, the Company incurred costs for the services of a director of $0.1 million (2007 – $0.1
million), an amount that was included in salaries and benefits. Included in accounts payable as at
December 31, 2008 is $0.2 million (December 31, 2007 - $0.2 million) due to Northair.
b. During the year ended December 31, 2008 the Company sold silver of $0.8 million (2007 - $nil) to our
affiliate Silverstone (Note 8). At December 31, 2008, the Company has an amount payable of $0.3 million
(December 31, 2008 – $nil) related to these silver sales. Additionally, the Company received from this
public company exploration services for $nil (2007 - $nil) and at December 31, 2008 has an amount
included in accounts payable $1.1 million (December 31, 2007 – $nil) related to such services provided
prior to the acquisition of Capstone on November 24, 2008 (Note 4).
These transactions are in the normal course of operations and are measured at the exchange amount of
consideration established and agreed to by the related parties. Amounts due to related parties are unsecured,
non-interest bearing and have no specific repayment terms.
25. Supplemental cash flow information
The significant non-cash financing and investing transactions during the period (expressed in thousands):
Common shares issued to acquire Capstone Mining (Note 4)
Options and warrants issued to acquire Capstone Mining (Note 4)
Common shares issued to acquire Kutcho project (Note 4)
Options and warrants issued to acquire Kutcho project (Note 4)
Equipment and vehicles acquired under capital lease obligations
Exploration expenditures included in accounts payable
Construction in progress expenditures included in accounts payable
Reclamation liability capitalized to mineral property costs
Future income tax capitalized to property, plant and equipment
Fair value of stock options and warrants allocated to share capital upon
exercise
Deferred financing charges included in construction in progress
2008
(Note 2)
$
43,657
$
651
$
32,205
$
1,179
$
10,005
$
395
$
14
$
-
$
-
2007
(Note 2)
-
$
$
-
$
-
$
-
$
10,642
$
208
$
3,483
$
902
$
1,590
$
1,625
$
-
$
$
1,446
2,989
Stock-based compensation capitalized to property, plant and equipment
$
-
$
704
Shares issued as contractual inventive included in construction in progress
Promissory note cancelled
$
-
$
-
$
$
903
545
Operating activities during the period included the following cash payments (expressed in thousands):
Interest paid
Income taxes paid
2008
(Note 2)
8,268
2
$
2007
(Note 2)
2,752
-
$
26. Changes in non-cash working capital
The changes in non-cash working capital items are comprised of (expressed in thousands):
38
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Receivables
Inventories
Prepaids
Accounts payable and accured liabilities
Taxes payable
Advances on concentrate sales
Net change in non-cash working capital
27. Capital Management
$
December 31, 2008 December 31, 2007
86
$
(24,695)
(227)
14,287
-
-
(10,549)
(3,361)
151
(175)
(12,812)
558
6,312
(9,327)
$
$
The Company considers that its capital consists of the items included in shareholders’ equity, short term credit
facilities, long term debt, and capital lease obligations. The Company manages the capital structure and makes
adjustments in light of changes in economic conditions and the risk characteristics of the Company’s assets.
The Company’s capital management objectives are intended to safeguard the entity’s ability to support the
Company’s normal operating requirements on an ongoing basis as well as continue the development and
exploration of its mineral properties and support any expansionary plans.
To effectively manage its capital requirements, the Company has in place a planning and budgeting process to
help determine the funds required to ensure the Company has the appropriate liquidity to meet its operating and
growth objectives. The Company ensures that there are sufficient committed loan facilities to meet its short
term business requirements, taking into account its anticipated operational cash flows and its cash balances.
The PLF and SLF contains various covenants, including ratios of estimated future cash flows to total debt; debt
coverage ratios with respect to minimum proven and probable reserves for the life of mine plan approved by
Macquarie; and a tangible net worth.
28. Commitments
Agreements with the Selkirk First Nation
Under the terms of a co-operation agreement between Minto and the Selkirk First Nation (“Selkirk”) dated
September 16, 1997, the Company has various commitments to Selkirk, including a net sales royalty of 0.5% on
production from the Minto mine, various job commitments, as well as training and scholarship opportunities.
In June 2006, the Company entered into five leases with the Selkirk for the use of the surface areas in and
around the planned development of the Minto Project. The leases have a term of ten years and three months,
expiring June 30, 2016. The total annual rent payable under the terms of these leases is C$52,044.
39
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Off-take agreements
The Company has a concentrate off-take agreement with MRI Trading AG (“MRI”) whereby MRI will
purchase 100% of the concentrate produced by the Minto mine up to the end of June 2010. As part of the
agreement, MRI has provided Minto with an inventory financing facility.
The Company has a concentrate off-take agreement with Trafigura Beheer B.V. (“Trafigura”) whereby
Trafigura will purchase 100% of the copper concentrate produced by the Cozamin mine up to the end of
December 2011.
The Company has a concentrate off-take agreement with Louis Dreyfus Commodities Metals Suisse SA (“Louis
Dreyfus”) whereby Louis Dreyfus will purchase 100% of the lead concentrate produced by the Cozamin mine
up to the end of December 2011.
The Company has a concentrate off-take agreement with MRI Trading AD (“MRI”) whereby MRI will
purchase 100% of the zinc concentrate produced by the Cozamin mine up to the end of December 2011.
Power purchase agreement
In February 2007, Minto signed a Purchase Power Agreement (the “PPA”) with the Yukon Energy Corp.
(“YEC”), which was subsequently amended and approved by the Yukon Utilities Board in May 2007, whereby
the YEC will deliver grid power to the Minto mine by constructing the Carmacks/Minto main line and the spur
line to the mine site. Minto is obligated to repay C$7.2 million of the costs of the main line and C$10.8 million
for the cost of the spur line. The repayment terms will be over seven years at an interest rate of 7.5%, starting
on the commencement of power delivery, which occurred in November 2008. Minto is obligated to purchase a
minimum of C$3.0 million of power for each of the first four years of the agreement, to a maximum of C$12.0
million. Power pricing is fixed at C$15.00/KVA and C$0.076/KWH as per YEC Rate Schedule 39 (Industrial
Primary) until December 31, 2009, then subject to escalation once each calendar year, starting January 1, 2010,
based on the latest percentage increase in the 12 month implicit chain price index for gross domestic product at
market for Canada as reported by Stats Canada. After four years (post take-or-pay period), YEC will perform
its normal cost of service analysis to set go forward rates. The Company is obligated to fund the mine spur line
reclamation costs on the closure of the mine.
29. Segmented information
The Company is engaged in mining, exploration and development of mineral properties, and has operating
mines in Canada and Mexico. The Company has two reportable segments as identified by the individual mining
operations at each of the Minto and Cozamin mines. Segments are operations reviewed by the executive
management. Each segment is identified based on quantitative factors whereby its revenues or assets comprise
10% or more of the total revenues or assets of the Company.
Sales from the Company’s Minto mine are to a single customer as per the off-take agreement, whereby sales
from its Cozamin mine are to different customers depending on the nature of the concentrate (copper, lead or
zinc).
40
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Operating segment details are as follows (expressed in thousands):
Net revenue
Cost of sales
Royalty
Depletion and amortization
Accretion of asset retirement
obligations
Income (loss) from mining
operations
Interest expense
Impairment charges
Gain on acquisition of Capstone
Other corporate income (expense)
Income (loss) before income taxes
Income taxes
Net income
Total assets
Net revenue
Cost of sales
Royalty
Depletion and amortization
Accretion of asset retirement
obligations
Income (loss) from mining
operations
Interest expense
Other corporate income (expense)
Income (loss) before income taxes
Income taxes
Net income
Total assets
Minto
Cozamin
Other
Total
December 31, 2008
$
103,387
(56,700)
(578)
(21,712)
$
2,565
(5,899)
(9)
(1,020)
(178)
-
24,219
(4,454)
(53,435)
-
124,264
90,594
(3,459)
87,135
244,681
(4,363)
-
-
-
12,136
7,773
(2,069)
5,704
188,713
-
$
-
-
(2)
-
(2)
(4,031)
-
72,043
(30,034)
37,976
1,006
38,982
64,458
$
105,952
(62,599)
(587)
(22,734)
(178)
19,854
(8,485)
(53,435)
72,043
106,366
136,343
(4,522)
131,821
497,852
Minto
$
730
(2,275)
(4)
(538)
December 31, 2007
Cozamin
-
$
-
-
-
Other
-
$
-
-
-
Total
$
730
(2,275)
(4)
(538)
(182)
(2,269)
(1,234)
(31,557)
(35,060)
-
(35,060)
223,486
-
-
-
-
-
-
-
-
-
-
(2,826)
(3,442)
(6,268)
626
(5,642)
1,234
(182)
(2,269)
(4,060)
(34,999)
(41,328)
626
(40,702)
224,720
41
Capstone Mining Corp.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(expressed in U.S. dollars., except share amounts)
Geographic segment details are as follows (expressed in thousands):
Net revenue
Property, plant & equipment
Mineral property costs
December 31, 2008
Canada
$
103,387
88,358
59,122
Mexico
$
2,565
22,024
102,162
United States
-
$
7,742
-
Total
$
105,952
118,124
161,284
Net revenue
Property, plant & equipment
Mineral property costs
December 31, 2007
Canada
$
730
151,755
26,410
Mexico
-
$
-
-
United States
-
$
11,670
-
Total
$
730
163,425
26,410
30. Subsequent events
Redemption of Convertible Debentures
The 5% convertible debentures (the “debentures”) issued by Sherwood in 2007 include a provision whereby
within 30 days of the occurrence of a change of control, an offer to purchase all debentures then outstanding
must be made. Following the change of control on November 24, 2008 as a result of the reverse takeover
transaction with Sherwood, the Company made an offer on December 24, 2008 to purchase all outstanding
debentures at a price equal to the 101% of the principal amount of the debentures, plus accrued and unpaid
interest. On January 22, 2009, the Company paid $31.3 million (C$39.3 million) for debentures tendered under
the offer with an aggregate book value at the date of redemption of $33.4 million (C$41.3 million), consisting
of the debt component of $26.1 million (C$32.7 million) and the equity component of $7.3 million (C$8.6
million). As a result the Company will recognize a gain during the period ending March 31, 2009 on settlement
of the debt component of $0.6 million and a gain on the settlement of the equity component of $1.1 million.
The outstanding debentures have therefore been reduced from $37.5 million (C$46.3 million) to $4.1 million
(C$5.0 million) at the date of redemption.
New Credit Facility
Subsequent to year end, Capstone completed a $40 million corporate revolving term credit facility with The
Bank of Nova Scotia (the "RT Facility"). Under the terms of the RT Facility, the funds are re-drawable over a
three year term, subject to a reduction of $8 million every six months commencing on the first anniversary, and
it attracts an interest rate of US LIBOR plus 3.5% (adjustable in certain circumstances). The one-month US
LIBOR rates have averaged between 0.3% and 0.5% to date during 2009.
Silverstone Shares
Subsequent to year end, Capstone entered into a voting agreement with Silver Wheaton Corp. whereby it has
agreed to vote its shares in favour of the proposed plan of arrangement between Silverstone and Silver Wheaton
Corp. whereby Silver Wheaton will acquire all of Capstone’s shares and special warrants in Silverstone at a
ratio of 0.185 shares of Silver Wheaton Corp. per common share or special warrant of Silverstone held by
Capstone. Capstone currently holds 24,042,340 shares and 2,747,428 warrants of Silverstone (Note 8).
42