Auditors’ Report and Consolidated Financial Statements of
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
March 31, 2005
Deloitte & Touche LLP
2800 - 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada
Tel: (604) 669-4466
Fax: (604) 685-0395
www.deloitte.ca
Auditors’ Report
To the Shareholders of
Silvercorp Metals Inc.
(formerly SKN Resources Limited)
We have audited the consolidated balance sheets of Silvercorp Metals Inc. (formerly SKN Resources Limited) as at
March 31, 2005 and April 30, 2004 and the consolidated statements of operations and deficit and cash flows for the
eleven month period ended March 31, 2005 and the year ended April 30, 2004. 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 statements present fairly, in all material respects, the financial position
of the Company as at March 31, 2005 and April 30, 2004 and the results of its operations and its cash flows for the
eleven month period ended March 31, 2005 and the year ended April 30, 2004 in accordance with Canadian
generally accepted accounting principles.
(Signed) Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
June 3, 2005
Member of
Deloitte Touche Tohmatsu
SILVERCORP METALS INC.
(formerly SKN Resources Ltd.)
CONSOLIDATED BALANCE SHEETS
March 31,
2005
April 30,
2004
2,371,882 $
4,200,000
105,504
115,802
-
61,654
6,854,842
1,946,099
586,373
1,041,333
1,668,740
10,000
1,929,633
5,000,000
128,671
162,046
71,208
66,240
7,357,798
-
649,738
-
1,232,712
10,000
12,107,387 $
9,250,248
237,254 $
43,784
-
281,038
27,211,096
(101,091)
2,926,855
-
(18,210,511)
11,826,349
182,604
-
27,414
210,018
24,124,435
-
1,842,378
9,000
(16,935,583)
9,040,230
9,250,248
$
12,107,387 $
$
$
$
Stated in Canadian dollars
ASSETS
Current Assets
Cash
Short-term investments (Note 3)
Accounts receivable
Prepaid expenses
Amount due from related parties (Note 9)
Amount due from joint venture parties
Investment at equity (Note 4)
Property, plant and equipment (Note 5)
Long term investment (Note 7)
Investment in and Expenditures on Resource Properties
Mineral properties (Note 6)
Reclamation deposits
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities
Amount due to related parties (Note 9)
Deposit for sale of property
SHAREHOLDERS' EQUITY
Share capital (Note 8)
Treasury shares held for cancellation (Note 8)
Contributed surplus
Share subscriptions received
Deficit
Approved on behalf of the Board:
"Rui Feng"
Director
"Paul Simpson"
Director
(The accompanying notes are an integral part of these consolidated financial statements)
SILVERCORP METALS INC.
(formerly SKN Resources Ltd.)
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
Stated in Canadian dollars
Expenses
Bank charges and interest
Consulting
Depreciation
Foreign exchange loss
General exploration expenses
Mineral properties written off
Office and miscellaneous
Shareholder relations
Stock-based compensation
Professional fees
Transfer agent and filing fees
Other income and expenses
Equity income in investment
Gain on disposal of furniture
Gain on disposal of subsidiary (Note 6b)
Mineral property option income (Note 6c)
Interest income
Other income
Net loss for the period
Deficit, beginning of period, as previously reported
Stock-based compensation expenses, cumulative effect (Note 2g)
Deficit, beginning of period, as restated
Deficit, end of period
Basic and diluted loss per share
Eleven months
ended
March 31,
2005
Year ended
April 30,
2004
$
$
$
$
5,612
159,281
62,175
143,133
274,423
-
277,150
107,304
786,910
132,442
25,006
1,973,436
18,381
-
503,518
529,406
104,282
607
1,156,194
5,004
313,525
18,810
64,883
537,022
299,417
515,982
297,446
1,421,483
244,998
59,224
3,777,794
-
147
-
-
73,328
-
73,475
(817,242)
(16,935,583)
(457,686)
(17,393,269)
(3,704,319)
(13,231,264)
-
(13,231,264)
(18,210,511)
$
(16,935,583)
-0.02 $
-0.13
Weighted Average Number of Shares Outstanding
37,459,614
27,873,060
(The accompanying notes are an integral part of these consolidated financial statements)
SILVERCORP METALS INC.
(formerly SKN Resources Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Eleven months
ended
March 31,
2005
Year ended
April 30,
2004
$
(817,242)
$
(3,704,319)
Stated in Canadian dollars
Cash provided by (used for)
Operating activities
Net loss for the period
Add (deduct) items not affecting cash :
Equity income
Gain on disposal of furniture
Gain on disposal of subsidiary
Mineral property option income
Mineral properties written off
Stock-based compensation
Non-cash general exploration expenses
Depreciation
Net change in non-cash working capital
Accounts receivable
Prepaid expenses
Accounts payable and accrued liabilities
Deposit for sale of property
Cash used in operating activities
Investing activities
Resource property additions
Equipment and furniture additions
Sale (purchase) of short-term investment
Investment in Henan Found Mining Co. Ltd. (Note 4)
Proceeds from disposal of furniture
Cash used in investing activities
Financing activities
Advance from (to) related companies
Advance to joint venture parties
Share subscriptions for cash, net of commissions
Purchase of treasury shares
Proceeds from disposal of treasury shares
Cash provided by financing activities
Increase (decrease) in cash
Cash, beginning of period
Cash, end of period
Supplemental information:
Interest paid
Income taxes paid
Non-cash investing activities:
2,000,000 shares of Dajin Resources Ltd. received
for the disposal of Victor Gold Ltd. (Note 6b)
804,167 shares of New Pacific Metals Corp. received as
partial consideration for the Option Agreement in
relation to the Kian Dian Project (Note 6c)
$
$
$
$
$
(18,381)
-
(503,518)
(529,406)
-
786,910
-
62,175
(1,019,462)
23,167
46,244
54,650
(27,414)
(922,815)
(436,028)
(7,217)
800,000
(1,927,718)
-
(1,570,963)
114,992
4,586
2,875,035
(151,636)
93,050
2,936,027
442,249
1,929,633
2,371,882
1,898
429
500,000
541,333
$
$
$
$
$
-
(147)
-
-
299,417
1,421,483
240,000
18,810
(1,724,756)
(107,479)
(156,546)
136,883
27,414
(1,824,484)
(1,242,985)
(640,418)
(5,000,000)
-
1,471
(6,881,932)
(71,208)
(66,240)
8,339,922
-
-
8,202,474
(503,942)
2,433,575
1,929,633
1
-
-
-
Non-cash financing activities:
During the eleven months ended March 31, 2005, the Company issued 15,000 common shares for
subscriptions received in a prior period.
(The accompanying notes are an integral part of these consolidated financial statements)
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
1.
CONTINUING OPERATIONS
Silvercorp Metals Corp., formerly SKN Resources Limited, together with its subsidiaries
(individually and collectively referred to as the “Company”), is a development stage company
engaged in the acquisition and exploration of mineral properties in the People’s Republic of
China (“China”).
These financial statements have been prepared on the basis of accounting principles applicable to
a going concern which assume that the Company will realize its assets and discharge its liabilities
in the normal course of business. The Company has incurred losses since inception of
$18,210,511. The Company’s continued existence is dependent on the ability to obtain loan
financing, the raising of additional equity capital through sales of its common stock or other
means to fund its operations and the Company’s ability to ultimately attain profitable operations.
If the going concern assumption were not applicable in the preparation of these financial
statements, adjustments would be necessary to the carrying values of assets and liabilities, the
reported net loss and the balance sheet classifications used.
Although the Company has taken steps to verify title to the mineral properties in which it,
through its subsidiaries, has an interest, in accordance with industry standards for the stage of
exploration of such property, those procedures do not guarantee the Company’s title. Property
title may be subject to unregistered prior agreements and non-compliance with regulatory
requirements.
During the year, the Company changed its fiscal year end from April 30 to March 30, 2005. As a
result, the results of the operations and cash flows of the current period represent the eleven
month period ended March 31, 2005.
2.
SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in Canada. The significant accounting policies used in these
consolidated financial statements are as follows:
(a)
Principles of consolidation
These consolidated financial statements of the Company include the accounts of the
Company and its subsidiaries, Yunnan Jin Chang Jiang Mining Co. Ltd., Fortune Mining
Ltd., Fortune Copper Ltd., Fortress Mining Inc., Lachlan Gold Ltd., Victor Resources
Ltd., Fortress Gold Mining Inc. and Victor Mining Ltd. All significant inter-company
balances and transactions have been eliminated upon consolidation.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
2.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b)
Accounting estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in Canada requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates.
(c)
Foreign currency translation
The accounts of the foreign operations are translated into Canadian dollars as follows:
•
•
•
monetary assets and liabilities at the rate prevailing at the balance sheet date
non-monetary assets and liabilities at historical rates
income and expenses at the average rate in effect during the year
The resulting translation adjustment is charged to operations for the year.
(d)
Cash and cash equivalents
Cash and cash equivalents includes cash and short-term investments maturing within 90
days of the original date of acquisition. The outstanding balance as at March 31, 2005
was consisted of cash only.
(e)
Mineral properties
Acquisition costs of mineral properties and direct exploration and development
expenditures thereon are capitalized. Costs incurred for general exploration that does not
result in the acquisition of mineral properties with ongoing exploration or development
potential are charged to operations. Costs relating to properties abandoned are written-off
when such decision is made. When production is attained, the capitalized costs will be
amortized using the unit of production method based upon estimated proven and probable
recoverable reserves.
The Company reviews the carrying value of each property that is in the exploration or
development stage by reference to the project economics including the timing of the
exploration and/or development work, the work programs and the exploration results
experienced by the Company and others. The review of the carrying value of each
producing property is made by reference to the estimated future operating results and net
cash flows. When the carrying value of a property exceeds its estimated net realizable
amount, provision is made for the decline in value.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
2.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e)
Mineral properties (continued)
The recoverability of the amounts capitalized for the undeveloped mineral properties and
deferred development costs 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.
(f)
Property, plant and equipment
Property, plant and equipment are recorded at cost. Amortization is computed using the
straight-line method at the following rates calculated to amortize the cost of the assets
less their residual values over their estimated useful lives.
Motor vehicle
Equipment and furniture
Computer equipment
Computer software
Mining equipment
20%, straight line
20%, declining balance (except for
equipment and furniture located in China
which is 20%-50% straight line)
30%, declining balance (except for
computer equipment located in China
which is 50% straight line)
50%, straight line
10%, straight line
(g)
Stock-based compensation plans
Effective May 1, 2004, the Company adopted the new requirements of the Canadian
Institute of Chartered Accountants Standard 3870 which requires an expense to be
recognized in the financial statements for all forms of employee and non-employee stock-
based compensation, including stock options. All stock-based awards are measured and
recognized using a fair value based method. Awards that the Company has the ability to
settle in stock are recorded as equity. Previously, the Company did not record any
compensation cost on the granting of stock options to employees and directors as the
exercise price was equal to or greater than the market price at the date of the grants. The
Company has adopted this policy retroactively without restatement.
Accordingly, the opening deficit as at May 1, 2004 was increased to reflect the effect of
compensation expense associated with stock option grants to employees, non-employees,
directors and consultants from January 1, 2002 to April 30, 2004, in the amount of
$457,686, and share capital and contributed surplus increased by $122,325 and $335,361
respectively, to reflect the assigned value of the stock options issued.
Unvested options for consultants are measured at their then-current value at each
reporting date. This re-measurement continues until the vesting date.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
2.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h)
Long-term investments
Long-term investments in which the Company does not control nor wield significant
influence nor control are valued at cost, less a provision for other than temporary
impairments in value.
Investments in which the Company has a significant influence are accounted for by the
equity method, whereby the Company records its proportionate share of the investee’s
income or loss.
Quoted market values presented do not necessarily reflect the long-term net realizable
value and assume that the Company is able to dispose of all shares held at the closing
trading price at year end.
(i)
Income taxes
Future income tax assets and liabilities are computed based on differences between the
carrying amounts of assets and liabilities on the balance sheet and their corresponding tax
values, using the enacted or substantively enacted, as applicable, income tax rates at each
balance sheet date. Future income tax assets also result from unused loss carryforwards
and other deductions. The valuation of future income tax assets is reviewed yearly and
adjusted, if necessary, by use of a valuation allowance to reflect the estimated realizable
amount.
(j)
Loss per common share
The basic loss per share is computed by dividing the net loss by the weighted average
number of common shares outstanding during the year. The diluted loss per share
reflects the potential dilution of common share equivalents, such as outstanding stock
options and share purchase warrants, in the weighted average number of common shares
outstanding during the year, if dilutive. For this purpose, the “treasury stock method” is
used whereby the assumed proceeds upon the exercise of stock options and warrants are
used to purchase common shares at the average market price during the year.
(k)
Comparative figures
Certain of the comparative figures have been reclassified to conform with the
presentation as at and for the eleven months ended March 31, 2005.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
3.
SHORT-TERM INVESTMENTS
Short term investments of $4,200,000 (2004 - $5,000,000) are made up of Guaranteed Investment
Certificates with the following terms:
Principal Amount
Interest Rate
Maturity Date
$
$
2,000,000
2,200,000
4,200,000
2.40%
2.18%
November 15, 2005
October 6, 2005
As of March 31, 2005, the related interest receivable is $41,011 (2004 - $35,059).
4.
INVESTMENT AT EQUITY
In May 2004, the Company, through its wholly-owned subsidiary, Victor Mining Ltd., entered
into a cooperative joint venture agreement with a Chinese party to acquire a 77.5% interest in the
high grade Ying Silver-Gold Project located in Hennan Province, China. Under the cooperative
agreement with the Chinese party, the Company holds the right to acquire 77.5% of the Ying
Project by funding exploration and development of the Project in the amount of US$3,670,000
($4,439,232) to the joint venture company, Hennan Found Mining Co. Ltd. (“HFMC”), over a
period of three years for a 55% interest in HFMC and pay US$1,500,000 ($1,814,400) to the
Chinese party over a period of three years to acquire another 22.5% interest in HFMC. After the
Company has earned its 77.5% interest, contributions to fund the exploration and development of
the Project will be made on a pro rata basis. The interest of the Chinese party can be diluted to
not less than 10% if it elects not to make cash contributions.
As of March 31, 2005, the Company has contributed US$1,350,500 ($1,664,957) to the registered
capital of HFMC, representing a 20.24% interest in HFMC. The Company also incurred $262,761
exploration expenses on the project.
The Company accounts for its investment in HFMC on the equity basis, which is carried at cost,
adjusted for the Company’s proportionate share of HFMC’s undistributed earnings or losses.
Advances to HFMC
Exploration expenditures
Equity in undistributed income of investee company
Investment In HFMC on the equity basis
$
$
1,664,957
262,761
18,381
1,946,099
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
4.
INVESTMENT AT EQUITY (Continued)
Summarized financial information for HFMC is as follows:
Balance Sheet
Total assets
Total liabilities
Total shareholders' equity
Statement of Income
Income
Expenses
Net Income
2005
$
2,025,555
243,739
1,781,816
$
275,406
184,589
90,817
$
5.
PROPERTY, PLANT AND EQUIPMENT
2005
Accumulated
Depreciation
Net Book
Value
2004
Net Book
Value
Cost
Motor vehicle
Equipment and furniture
Computer equipment
Computer software
Mining equipment
6.
MINERAL PROPERTY
Tuobuka Property (a)
Ying Property (Note 4)
Kang Dian Property ( c)
Gou Gold Property (b)
$
$
$
$
77,956
40,024
87,771
2,714
482,108
690,573
18,333
11,565
44,211
2,601
27,490
104,200
59,623
28,459
43,560
113
454,618
586,373
$
$
$
$
72,487
27,011
65,901
1,357
482,982
649,738
2005
2004
$
$
1,668,740
-
-
-
1,668,740
1,101,069
65,568
45,047
21,028
1,232,712
$
$
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
6.
MINERAL PROPERTY (Continued)
(a)
Tuobuka Property
On August 1, 2003, the Company, through its wholly-owned subsidiary Lachlan Gold
Ltd., signed a cooperative joint venture agreement with a Chinese party to form a Sino-
Foreign Joint Venture Cooperative Company, Yunnan Jin-Chang-Jiang Mining Co. Ltd.
(“YJCJM”), to explore the Tuobuka Gold Property located in Yunnan Province, China.
Under the terms of the cooperative joint venture agreement, the Chinese party held a 20%
interest in YJCJM in consideration of the transference of the Tuobuka Project exploration
permit to YJCJM, and the Company was to earn its 80% interest in YJCJM by
contributing RMB8,000,000 ($1,324,800) to YJCJM over three years and paying
RMB1,000,000 ($165,000) (paid) to the Chinese party. On January 13, 2004, the
Company acquired the remaining 20% interest in YJCJM from the Chinese party by
paying an additional RMB1,600,000 ($256,978) (paid). The Company now has a 100%
interest in the Tuobuka Gold Project and no longer has any remaining commitments
under the joint venture agreement.
(b)
Gou Gold Property
On February 4, 2004, Dajin Resources Corp. (“Dajin”), previously known as Windridge
Technology Corp., signed an acquisition agreement with the Company whereby Dajin
would acquire 100% of the Company’s rights in the Gou Gold Project through the
purchase of 100% of the issued and outstanding shares of Victor Gold Ltd.. Under the
terms of the agreement, Dajin would issue 2,000,000 (an interest of approximately 8%) of
its common shares (received) to the Company at a market price of $0.25 per share and
reimburse the Company the sum of US$20,000 (received) for expenses previously
incurred in relation to its acquisition of the Gou Property. The transaction was completed
on January 19, 2005 and 2,000,000 shares of Dajin Resources Corp. have been received
by the Company as consideration. A gain on disposal of subsidiary of $503,518 has been
recorded on the income statement.
(c)
Kang Dian Property
In November 2003, the Company, through a wholly owned subsidiary SKN Nickel &
Platinum Ltd. (“SNP”), entered into two letter agreements with the respective holders of
the permits and permit applications comprising the Kang Dian Project located in Sichuan
Province, China, thereby obtaining the rights to acquire 75% and 90% interests,
respectively, in the exploration permits by contributing US$2,500,000 ($3,024,000) to
fund the exploration and development of the Project over a period of four years and
paying US$80,000 ($96,768) to a Chinese party within 10 days after obtaining the
approvals from China government. After SNP has earned its 75% and 90% interests,
respectively, contributions to fund the exploration and development of the Project will be
made pro rata. The interest of the Chinese property owners can be diluted to not less than
10% to 12%, respectively, if they elect not to make cash contributions.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
6.
MINERAL PROPERTY (Continued)
(c)
Kang Dian Property (continued)
The Company has signed a letter agreement with New Pacific Metals Corp. (“NPM”), a
related party by way of common director, whereby NPM has the option to acquire SNP
and thereby the Kang Dian Project through the issuance of a total of 6,500,000 common
shares at a market price as at the date of release. The common shares will be issued on
the basis of 2,500,000 common shares on issuance of a Bulletin by the TSX Venture
Exchange accepting the transaction; a further 2,000,000 shares will be issued upon
successful completion of the US$374,000 ($452,390) work program recommended under
the Technical Report that has been completed on the Project; and 2,000,000 shares will
be issued on completion of US$1,000,000 ($1,209,600) in funding obligations by SNP
under the agreement with one of the permit holders. The initial 2,500,000 common shares
will be subject to escrow with a release of 650,000 common shares upon receipt of
exchange approval and 154,167 every quarter over the 3 year escrow period. The
common shares remaining in escrow are subject to cancellation in the event NPM
determines not to continue contributing to the joint venture company to be created. The
Company has the right to place a representative on the NPM board of directors.
As of March 31, 2005, NPM issued into escrow the first 2,500,000 common shares. From
this tranche, 650,000 and 154,167 shares were released to the Company on December 20,
2004 and March 1, 2005 respectively. Mineral property option income of $529,406 has
been recorded on the income statement after offsetting the mineral property cost of
$11,927.
7.
LONG TERM INVESTMENTS
Dajin Resources Corp.
-
2,000,000 common shares ((Note 6(b))
(market value at March 31, 2005: $520,000)
New Pacific Metals Corp.
-
804,167 common shares ((Note 6(c))
(market value at March 31, 2005: $329,708)
2005
2004
$
500,000
$
-
541,333
-
$
1,041,333
$
-
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
8.
SHARE CAPITAL
(a)
Authorized
Unlimited number of common shares without par value
(b)
Issued and outstanding
Changes in outstanding common shares were as follows:
Number of
Shares
Amount
Balance, April 30, 2003
Issued for cash under private placement in September 2003
Issued for cash under private placement in November 2003
Issuance of brokers warrants for commission on private
24,050,542
220,000
2,750,000
$
15,073,268
187,000
4,578,750
placement
Issuance for finders' fee of the projects
Exercise of warrants
Cash received
Transfer from warrants account
Exercise of options
Cash received
Transfer from stock options account
Balance, April 30, 2004
Retroactive application of fair value method
of accounting for stock options
Shares issued for subscription received
Issued for cash under private placement in February 2005
Issuance of brokers warrants for commission on private
placement
Exercise of warrants
Exercise of options
Cash received
Transfer from contributed surplus
Balance, March 31, 2005
-
150,000
5,885,145
-
523,125
-
33,578,812
-
15,000
1,500,000
-
5,164,095
(712,500)
240,000
3,371,546
1,151,903
193,625
40,843
24,124,435
122,325
9,000
2,126,523
(57,500)
568,264
337,500
-
40,595,407
180,250
137,799
27,211,096
$
In February 2005, the Company completed a non-brokered private placement of
1,500,000 Units at $1.50 per Unit for net proceeds of $2,126,523. Each Unit is comprised
of one common share and one-half share purchase warrant. Each whole warrant entitles
the holder to acquire one additional common share at a price of $1.75 per share for a
period of one year. A finder’s fee of $105,000 was paid in cash, together with the issue
of 50,000 warrants (5%) exercisable at $1.75 for one year.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
8.
SHARE CAPITAL (Continued)
(b)
Issued and outstanding (continued)
In September 2004, the Company acquired on the open market 300,000 shares of its
common stock at prices ranging from $0.48 to $0.51 per share for total cost of $151,636.
100,000 of these shares were sold in January 2005 at prices ranging from $0.94 to $0.96
per share for proceeds of $93,901. The gain on disposal of these shares in the amount of
$42,505 has been recorded as contributed surplus. The remaining 200,000 shares at a
cost of $101,091 were cancelled on April 14, 2005.
(c)
Share purchase warrants
The following is a summary of warrant transactions:
Balance, April 30, 2003
Issued for cash on non-brokered private placement
Issued for cash on brokered private placement
Issued for broker commission on private placement
Warrants exercised and shares issued
Warrants exercised but shares not issued
Balance, April 30, 2004
Issued for cash on brokered private placement
Issued for broker commission on private placement
Warrants exercised
Warrants expired
Balance, March 31, 2005
Number of
Warrants
10,789,690
220,000
1,375,000
250,000
(5,885,145)
(15,000)
6,734,545
750,000
50,000
(5,164,095)
(1,370,450)
1,000,000
Weighted
Average
Exercise
Price
$
0.31
1.05
2.25
2.18
(0.57)
(0.60)
0.57
1.75
1.75
0.11
2.24
1.61
$
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
8.
SHARE CAPITAL (Continued)
(c)
Share purchase warrants (continued)
The warrants will expire on the following dates:
Number of
Warrants
Exercise
Price
Expiry Date
200,000
800,000
1,000,000
1.05
1.75
September 23, 2005
February 23, 2006
As part of the consideration of arranging the private placement on February 15, 2005,
50,000 share purchase warrants were granted to the agent. These warrants are exercisable
until February 23, 2006 at a price of $1.75 per share. A fair value of $57,500 has been
recorded as a cost of the private placement, which is estimated on the date of grant using
the Black-Scholes option pricing model with weighted average assumptions for grants as
follows:
Risk free interest rate
Expected life
Expected volatility
Dividend per share
(d)
Stock options
1.43%
1 year
147%
$0.00
The Company is able to grant stock options to acquire up to 5,100,000 shares. The
options are exercisable for a period of up to ten years from the date of grant, as
determined by the Board of Directors. The exercise price cannot be less than the last price
on the TSX Venture Exchange immediately preceding the grant of the option. Options
vest over a minimum period of eighteen months from the date of grant.
A summary of the status of the Company’s stock options as of March 31, 2005 and
April 30, 2004, and changes during the period and year ended on those dates is presented
below:
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
8.
SHARE CAPITAL (Continued)
(d)
Stock options (continued)
Balance, April 30, 2003
Options granted
Options exercised
Balance, April 30, 2004
Options granted
Options exercised
Options cancelled
Balance, March 31, 2005
Number of
Shares
2,042,000
665,000
(523,125)
2,183,875
1,590,000
(337,500)
(20,000)
3,416,375
Weighted
Average
Exercise Price
Per Share
$
0.35
0.71
(0.39)
0.45
0.81
0.53
0.63
0.59
$
During the year, the Company granted incentive stock options to directors, employees
and consultants for 1,590,000 shares at a price ranging from $0.40 to $1.90 per share and
exercisable for between two to five years. 25% of options were vested on grant date and
12.5% of the options are vested every three months after the date of grant for one and half
years.
The fair value of unvested options issued to consultants as at March 31, 2005 was
$515,125.
The fair value of each option granted is estimated on the date of grant using the Black-
Scholes option pricing model with weighted average assumptions for grants as follows:
Risk free interest rate
Expected life of options in years
Expected volatility
Dividend per share
2005
2004
3.25% to 3.84% 3.00% to 4.47%
2 to 5 years
155% to 157%
$0.00
2 to 5 years
149% to 153%
$0.00
The weighted average grant date fair value of options granted during the year is $0.81.
For the eleven months ended March 31, 2005, $786,910 has been recorded as
compensation expense.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
8.
SHARE CAPITAL (Continued)
(d)
Stock options (continued)
For the period from January 1, 2002 to April 30, 2004, the Company accounted for its
stock-based compensation plans using
intrinsic value method whereby no
the
compensation costs have been recognized in the financial statements for stock options
granted to employees, officers and directors. If the fair value method had been used for
options granted subsequent to January 1, 2002 and before April 30, 2004, compensation
cost of $285,476 would have been recorded for the year ended April 30, 2004. The
Company’s net loss and net loss per share would approximate the following pro forma
amounts:
Net loss as reported
Net loss pro forma
April 30,
2004
$
$
(3,704,319)
(3,989,795)
Pro forma net loss per common share basic and diluted
$
(0.14)
The following table summarizes information about stock options outstanding at
March 31, 2005:
Range of
Exercise
Prices
Outstanding at
March 31,
2005
Remaining
Contractual
Life (Years)
Average
Exercise
Price
Exercisable at
March 31,
2005
Average
Exercise
Price
$0.35-$0.50
0.55-0.70
0.96-1.90
$0.35-$0.50
1,854,500
1,156,250
405,625
3,416,375
2.72
3.82
4.54
3.31
$
0.38
0.57
1.66
$0.59
1,757,000
606,250
113,125
2,476,375
$
0.37
0.59
1.59
0.48
9.
RELATED PARTY TRANSACTIONS
(a)
During the eleven months ended March 31, 2005, the Company:
(i)
(ii)
incurred consulting fees of $123,500 (year ended April 30, 2004 - $122,150)
payable to an officer and director;
incurred legal fees of $45,111 (year ended April 30, 2004 - $116,645) payable to
a law firm of which a director of the Company is the proprietor.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
9.
RELATED PARTY TRANSACTIONS (Continued)
(a)
(continued)
(iii)
(iv)
incurred management fees of $110,000 (year ended April 30, 2004 - $97,500)
payable to an officer and director.
incurred accounting fees of $15,751 (year ended April 30, 2004 - $Nil) payable
to an accounting firm of which an officer is a partner.
Included in accounts payable is an amount of $49,866 (April 30, 2004 - $76,461) due to a
law firm of which a director of the Company is the proprietor.
Included in accounts payable is an amount of $11,250 (April 30, 2004 - $14,025) due to a
director for his services in March 2005 and for expenses incurred on behalf of the
Company respectively.
Included in accounts payable is an amount of $6,918 (April 30, 2004 - $Nil) due to an
accounting firm of which an officer is a partner.
Included in due to related party is an amount of $9,652 (April 30, 2004 - $Nil) due to a
director for his services in March 2005 and for expenses incurred on behalf of the
Company.
Included in due to related party is an amount of $34,132 (April 30, 2004 - $Nil) due to
two related companies by common director for expenses incurred on behalf of the
Company.
Included in accounts receivable is an amount of $973 (April 30, 2004 - $12,471) due
from a director as travel advances for normal business courses.
Included in due from related party is an amount of $Nil (April 30, 2004 - $71,208) due
from a related company by common director for advances for normal business courses.
(b)
(c)
(d)
(e)
(f)
(g)
(h)
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
10.
INCOME TAXES
The provision for income taxes differs from the amount computed by applying the cumulative
Canadian federal and provincial income tax rates to the loss before income tax provision due to
the following:
Canadian basic statutory tax rate
Expected income tax recovery
Effect of lower tax rate in foreign jurisdictions
Non-deductible expenses
Losses producing no current tax benefit
2005
35.62%
2004
37.62%
$
291,102
373,356
(284,093)
(380,365)
$
-
$
1,393,565
-
(540,017)
(853,548)
$
-
The approximate tax effect of each type of temporary difference that gives rise to the Company’s
future tax assets is as follows:
Future income tax assets arising from tax loss carryforwards
Unused cumulative exploration and development expenses
Valuation allowance
Net future income tax assets
2005
2004
$
1,562,498
1,202,989
2,765,487
(2,765,487)
$
1,409,700
1,486,804
2,896,504
(2,896,504)
$
-
$
-
Due to the uncertainty surrounding the realization of future income tax assets in future income tax
returns, the Company has made a 100% valuation allowance against its future income tax assets.
The Company has non-capital losses of approximately $4,370,000 available to apply against
future Canadian income for tax purposes. The non-capital losses will expire as follows:
2006
2007
2008
2009
2010
2011
2015
$
508,000
401,000
236,000
186,000
140,000
1,745,000
1,154,000
4,370,000
$
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
10.
INCOME TAXES (Continued)
The Company also has capital losses of approximately $16,000 available to apply against future
capital gain.
11.
FINANCIAL INSTRUMENTS
The fair values of the Company’s cash, joint venture receivables, short-term investments,
accounts receivable, and accounts payable are estimated to approximate their carrying values.
The fair value of the long-term investments is estimated using the market price as disclosed in
Note 7. Due to the non-arms length nature of amounts due from a related company, the fair value
is not determinable.
The Company undertakes transactions denominated in foreign currencies and as such is exposed
to risk due to fluctuations in foreign exchange rates. The Company does not use derivative
instruments to reduce its exposure to foreign currency risks.
Credit risk arises from the potential that a counterparty will fail to perform its obligations. The
Company invests its cash balances in money market instruments with financial institutions with
high credit standing.
SILVERCORP METALS INC.
(Formerly SKN Resources Limited)
Notes to the Consolidated Financial Statements
Eleven months ended March 31, 2005 and year ended April 30, 2004
12.
SEGMENTED INFORMATION
(a)
Industry information
The Company operates in one reportable operating segment, being the acquisition,
exploration and development of mineral properties.
(b)
Geographic information
British Virgin
Islands
China
Canada
Total
Eleven months ended March 31, 2005
Other income
Net (loss) income
Mineral properties
Property, plant and equipment
Investment at equity
Long term investments
$
1,033,193
1,291,448
-
-
1,946,099
1,041,333
$
19,325
(243,282)
1,668,740
544,861
-
-
$
103,676
(1,865,408)
-
41,512
-
-
1,156,194
(817,242)
1,668,740
586,373
1,946,099
1,041,333
Year ended April 30, 2004
Other income
Net loss
Mineral properties
Property, plant and equipment
$
255
(261,899)
-
-
$
140
(243,366)
1,232,712
599,669
$
73,080
(3,199,054)
-
50,069
$
73,475
(3,704,319)
1,232,712
649,738