30th Jun 2005 07:01
Frontier Mining Ltd30 June 2005 30 June 2005 FRONTIER MINING LTD. ("Frontier" or "The Company") AUDITED FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 Highlights of 2004: • Raised £1.27m of pre IPO financing • Listed on AIM in September 2004, raising £3.5m • Issue price on AIM was 15p, stock closed the year at 20.5p, an increase of approximately 37per cent. • Significant progress made across Frontier's portfolio of gold / copper projects in Kazakhstan Post Year End Highlights: • £4.375 was raised via a placing • Proceeds of placing used to fund the first phase of a feasibility study on a portion of the company's 25 kilometre copper/gold trend and advance resources and reserves at its Naimanjal, Koskuduk, and Baltemir gold and silver projects • Center KazNedra, the regional agency in Kazakhstan responsible for exploration and mining approved four "commercial discoveries" including Naimanjal, Koskuduk, Baitimir, and the copper-gold trend (Beschoku to Yubileiny) • Uranium acquisition targets currently under review in CIS countries • Warrant holders have exercised 9,552,240 warrants providing the Company with approximately £1.58m • Production to begin imminently at the Naimanjal gold mine Brian Savage, CEO of Frontier, comments, "2004 has marked a pivotal time inFrontier's development and we are now on the verge of making the significantchange from a development company to a fully fledged mining company with aproducing gold mine." Enquiries Frontier Mining Ltd Brian Savage 020 7849 6530Parkgreen Communications Cathy Malins / Annabel Leather 020 7493 3713 Chairman's Statement I am pleased to report the financial results of Frontier for the financial yearto 31 December 2004. 2004 was an exciting and pivotal year for Frontier. We started the year withhigh expectations, with less than US$1,000 in the bank, and with liabilities ofUS$3.7 million. By early March we had raised gross proceeds of £1.27 million(US$2.35 million) by way of a private placement of Loan Notes. The proceedswere used primarily to complete an in-fill drilling programme at our Naimanjalgold mine, but also to retain SRK Consultants to perform a technical review andvaluation of Frontier's assets, and to begin exploration at our other gold andcopper projects. Stock market conditions deteriorated during the summer of 2004and Frontier was admitted to trading on AIM on 2 September at a discount of 50per cent. to the SRK valuation at an initial price of 15 pence per ordinaryshare and raised gross proceeds of £3.5 million. We converted a substantialportion of the liabilities into equity following the IPO and repaid US$495,823of notes payable. On 31 December 2004, we had US$2.7 million in the bank andliabilities of only US$1.7 million. We set aggressive targets for all of ourprogrammes and began development of the Naimanjal gold mine. The stock closedthe year at 20.5 pence per share, an increase of almost 37 per cent. from theIPO price. Through the first six months of 2005, we completed a secondary offering of17,500,000 ordinary shares at 25 pence per share for gross proceeds of £4.38million (US$8.1 million) to fund the first phase of a copper feasibility study,reserve expansion at Naimanjal, Koskuduk, and Baltemir, and uranium acquisitiondue diligence. Warrant holders have exercised 9,552,240 warrants providing theCompany with approximately £1.58 million (US$2.92 million) of additionalproceeds. We have also extended the exploration portion of the Naimanjalcontract and licence to December 2007, extended the Baltemir explorationcontract and license to March 2007, received approval from Center KazNedra forfour commercial discoveries including Naimanjal, Koskuduk, Baitimir, and thecopper-gold trend (Beschoku to Yubileiny). We also started a review of uraniumexploration and development projects in the CIS countries, of which duediligence is ongoing. Frontier currently has just over US$5 million in the bank. I am pleased to report that we have exceeded our expectations by identifying apreliminary P1 resource of 2.48 million tonnes of contained copper, of whichapproximately 620,000 tonnes is in oxide ore and amenable to sx-ew technology.Frontier also produced 4.4 kilogrammes of copper cathode from the metallurgicaltest work proving the copper is recoverable by sx-ew technology, and advancedthe development of the Naimanjal gold mine. Our development schedule included aggressive targets for obtaining permits andlicences from the government of Kazakhstan. Due to the significant increase inactivity in the mining sector certain permits, including our cyanide licence,have not yet been issued. We received our pilot production licence on 15 June2005 and we expect to obtain our remaining permits and licences in the very nearfuture. Therefore, regrettably we will not meet our stated target of pouringgold in June 2005 although we are optimistic that our first pour will take placeby the end of August. We certainly could not have achieved so much in such a short time without superbcontributions from our employees. Their hard work and dedication is greatlyappreciated by me. We are planning to hold the annual general meeting of shareholders on 21September 2005, and plan to ask shareholders to approve an increase in theCompany's authorised number of shares to provide management the flexibility toissue stock for acquisitions and future capital raisings. B C SavageChairman and Chief Executive Officer30 June 2005 CONSOLIDATED BALANCE SHEET As of December 31, 2004 (in US Dollars) Notes 2004 2003ASSETSNon-current assetsProperty and equipment 4 182,556 65,075Exploration and Development costs 5 3,210,726 1,308,658Intangible assets 6 47,329 40,035Total Non-current assets 3,440,611 1,413,768Current assetsTrade and other receivables 7 100,246 13,752Cash and cash equivalents 8 2,650,743 882Total Current assets 2,750,989 14,634 TOTAL ASSETS 6,191,600 1,428,402 SHAREHOLDERS' EQUITY AND LIABILITIESShareholders' equityShare capital 9 611,179 15,995Additional paid-in-capital 9 12,139,942 3,931,766Treasury stock 9 (670) (67)Accumulated deficit (8,380,992) (6,287,754) 4,369,459 (2,340,060)Non-current liabilitiesSite restoration provision 10 112,000 90,985 Current liabilitiesShort term debt 11 861,735 2,613,334Notes payable 12 - 495,823Trade accounts payable 13 201,340 208,594Other current liabilities 14 647,066 359,726 1,710,141 3,677,477TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6,191,600 1,428,402 Signed and authorized for release on behalf of the Board of the Company: Chairman & Chief Executive Officer Brian Charles Savage Chief Financial Officer Thomas Ian Sinclair June 27, 2005 CONSOLIDATED STATEMENT OF OPERATIONS For the year ended December 31, 2004 (in US Dollars) Notes 2004 2003 General and administrative expenses 15 2,172,797 237,805Gain from disposal of investment in associate - (706)Other income - (14)Finance costs 16 56,977 739,030Loss from operations 2,229,774 976,115 Foreign exchange gain, net (136,536) -Loss before taxation 2,093,238 976,115 Taxation 17 - 106 Consolidated net loss 2,093,238 976,221 Loss per share - basic and fully diluted 18 ($0.09) ($1.01) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the year ended December 31, 2004 (in US Dollars) Notes Share capital Additional Treasury Accumulated Total paid-in-capital stock deficit At December 31, 2002 11,354 2,056,408 (67) (5,311,533) (3,243,838) Conversion of short-term 9 4,541 1,845,458 - - 1,849,999debt to equityCapital contributions in 9 100 29,900 - - 30,000cashNet loss - - - (976,221) (976,221) At December 31, 2003 15,995 3,931,766 (67) (6,287,754) (2,340,060) Shares granted to Directors, 9 8,390 809,319 - - 817,709Management and employeesCapital contributions in 9 233,433 4,126,784 - - 4,360,217cash, net of direct issuecostsConversion of operating 9 186,902 3,437,929 - - 3,624,831liabilities and loan notesto equityStock split: 10 for 1 9 166,459 (165,856) (603) - -Net loss - - - (2,093,238) (2,093,238) At December 31, 2004 611,179 12,139,942 (670) (8,380,992) 4,369,459 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended December 31, 2004 (in US Dollars) Notes 2004 2003Cash flows from operating activities:Loss before income tax (2,093,238) (976,115)Adjustments for:Depreciation and amortisation 44,150 32,710Finance costs 52,428 739,030Gain from disposal of investment in associate - (706)Loss from disposal of property and equipment 46,105 8,958(Reversal of) provision for bad debts - (359,600)Operating loss before working capital changes (1,950,555) (555,723)Changes in operating assets and liabilities:Decrease (increase) in trade and other receivables (86,494) 369,712Increase in site restoration provision 21,015 -Increase (decrease) in trade accounts payable * 112,746 3,465Increase in other current liabilities ** 1,109,598 51,001Net cash flows used in operating activities (793,690) (131,545)Cash flows from investing activities:Exploration and development assets (1,902,068) (18,722)Proceeds from disposal of associate - 600Purchase of property and equipment and intangible assets (215,030) -Net cash flows used in investing activities (2,117,098) (18,122)Cash flows from financing activities:Capital contributions, net of direct issue costs (see note 4,360,217 30,0009)Proceeds received from convertible loan notes 2,306,126 -Proceeds received from short term debts - 238,128Repayment of short term debts *** (552,894) -Proceeds received from notes payable - 10,000Repayment of notes payable (495,823) (69,212)Interest paid (56,977) (61,557)Net cash flows from financing activities 5,560,649 147,359Net increase/(decrease) in cash and cash equivalents 2,649,861 (2,308)Cash and cash equivalents at the beginning of year 8 882 3,190Cash and cash equivalents at the end of year 8 2,650,743 882 * - the Company issued 40,000 ordinary shares at $3.00 per ordinary share in satisfaction of certainoperating liabilities (see note 9). ** - the Company granted 200,000 ordinary shares at $3.00 per ordinary share and 158,984 ordinaryshares at 10.05 pence per ordinary share ($0.1822 per share equivalent at the exchange rate in effecton that date) to Directors and management, and 480,000 ordinary shares at 20.50 pence per ordinaryshare (US$0.3932 per share equivalent at the exchange rate in effect on that date) to employees (seenote 9). *** - the Company issued 5,993,526 ordinary shares at $0.20 per ordinary share in satisfaction ofloans and accumulated interest from Directors (see note 9). The accompanying notes on pages 8 to 22 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2004 1. GENERAL Principal Activity Frontier Mining Ltd ("Frontier" or 'the Company") was incorporated under thelaws of the state of Delaware on August 5, 1998, for the purpose of exploring,and if warranted developing gold and copper deposits in the Republic ofKazakhstan. Through its wholly owned subsidiaries, FML Kazakhstan LLP ("FMLK") and BaltemirLLP, Frontier holds interests in, or is the beneficial owner of, non-producinggold and copper properties in Kazakhstan. The Company is actively exploring anddeveloping its wholly owned Naimanjal and Baltemir contract and license areas. The Naimanjal contract is for the combined 30 year exploration and extractiondated August 16, 1999. The Naimanjal license No. 1166DD currently covers anapproximate area of 4,172 square kilometers in North Eastern Kazakhstan. The Baltemir license covers an area of approximately 154 square kilometers inNorth Eastern Kazakhstan. At December 31, 2004 the Company's registered office was located at: 2711Centerville Road, Suite 400, Wilmington, Delaware 19808, the USA. At December31, 2004 the Company had four representative offices, two of which were locatedin the Republic of Kazakhstan, one in Colorado, USA and one in London, England. The Company employed a total of 50 employees as of December 31, 2004 (2003: 9employees). Organization On July 10, 1998, the founders of Frontier agreed that Frontier, upon itsincorporation, would issue 280,000 shares of common stock at US $0.01 par valueper share to its founders as compensation and acquire, from SEMTECH, 100% ofPolygon Resources, 70% of Besshoky LLP ("Besshoky") and 50% of Semgeo LLP inexchange for the assets and assumption of liabilities and the issuance of200,000 shares of Frontier common stock at par value. The acquisition wasaccounted for as a purchase for accounting purposes and, accordingly, the assetsacquired and liabilities assumed were recorded at their respective fair marketvalues as of the acquisition date. Polygon Resources LLP was re-registered onOctober 31, 1998 in Kazakhstan as FML Kazakhstan ("FMLK") to reflect the namechange and the Company's 100% ownership. In September 1999, Frontier acquired 100% of Baltemir LLP by issuing the owners50,000 shares of Frontier common stock and agreeing to pay historicalexploration expenses to the main shareholder. Besshoky LLP and Semgeo LLP ceased their operations and were liquidatd by theCompany in January and February 2004, respectively. Political and economic environment The Kazakhstan economy while deemed to be of market status beginning in 2002,continues to display certain traits consistent with that of a market economy intransition. These characteristics have in the past included higher than normalhistoric inflation, lack of liquidity in the capital markets, and the existenceof currency controls, which cause the national currency to be illiquid outsideof Kazakhstan. The continued success and stability of the Kazakhstan economywill be significantly impacted by the government's continued actions with regardto supervisory, legal, and economic reforms. Meanwhile, the Company's operations and financial position will continue to beaffected by Kazakhstan political developments including the application ofexisting and future legislation and tax regulations. The likelihood of suchoccurrences and their effect on the Company could have a significant impact onthe Company's ability to continue operations. As of December 31, 2004, theCompany does not believe that any material matters exist relating to thedeveloping markets and evolving fiscal and regulatory environment in Kazakhstan,including current pending or future governmental claims and demands, which wouldrequire adjustment to the accompanying financial statements in order for thosestatements not to be misleading. 2. BASIS OF PREPARATION Consolidated Subsidiaries The consolidated financial statements include the following companies for theyear ended December 31, 2004: Subsidiary Ownership Domicile Principal Business License/Mine site Frontier Mining LTD 100% Delaware, USA Management of the - CompanyFML Kazakhstan LLP 100% Semipalatinsk region, Exploration and Naimanjal Kurchatov city developmentBaltimir LLP 100% Semipalatinsk region, Exploration Baltemir Kurchatov city Basis of presentation These consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards ("IFRS"). These financial statementsare presented in US Dollars ("US $"), unless otherwise indicated. The US Dollaris used as the reporting and measurement currency as the majority of theCompany's transactions are denominated and measured in US Dollars. Transactionsin other currencies are treated as transactions in foreign currencies. The financial statements are prepared under the historical cost convention. Principles of Consolidation The consolidated financial statements of the Company include Frontier and thecompanies that it controls, and from which it obtains economic benefits. Thiscontrol is normally evidenced when the Company owns, either directly orindirectly, more than 50% of the voting rights of a company's share capital andis able to govern the financial and operating policies of an enterprise, so asto benefit from its activities and plans to retain this control for at least oneyear from the balance sheet date. Subsidiaries are consolidated from the date onwhich effective control is transferred to the Company and are no longerconsolidated from the date control is deemed to be temporary, if easilydeterminable with reasonable certainty. The purchase method of accounting isused to account for the acquisition of subsidiaries. The cost of an acquisitionis measured at the fair value of the assets given up or liabilities undertakenat the date of acquisition, plus costs directly attributable to the acquisition.Intercompany balances and transactions, including intercompany profits andunrealized profits and losses are eliminated on consolidation. Consolidatedfinancial statements are prepared using uniform accounting policies for liketransactions and other events in similar circumstances. Use of estimates The preparation of consolidated financial statements in conformity with IFRSrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. Going Concern These consolidated financial statements were prepared on going concern basis andthere is no evidence whether the Company is intended or in position to terminateor significantly reduce its operations in the near future. The Company operates as a natural resources exploration company. To date theCompany has not earned significant revenues and is considered to be in theexploration and development stage. The Company incurred losses of US $2,049,270and US $976,221 for the years ended December 31, 2004 and 2003 respectively.These factors, as well as other factors, raise doubt about whether the Companycan continue as a going concern. Additional financing will be required to fund any material expenditures relatingto new mineral exploration projects or advancing its current projects. Whilstthe company has been successful in raising additional financing, there can be noassurance that the Company will be able to continue to raise such additionalfinancing as may be required for future operations. The Company intends to seek additional financing through the issuance of equityor debt instruments. The consolidated financial statements do not include any adjustments to reflectthe possible future effects on the recoverability and classification of assetsand liabilities that may result from the outcome of this uncertainty. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Cash includes cash on hand and cash held with banks. Cash equivalents areshort-term, highly liquid investments that are readily convertible to knownamounts of cash with original maturities of three months or less and that aresubject to an insignificant risk of change in value. Inventories Materials are valued using the weighted-average method and carried at cost lessallowance for obsolete and slow moving items. Goods are valued using the weighted-average method and carried at lower of costor net realized value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation andaccumulated impairment loss. Depreciation is computed on a straight-line basis over the following estimateduseful lives: YearsBuildings and constructions 10 - 14Machinery and equipment 4-10Other 5 - 12 The useful life and depreciation method are reviewed periodically to ensure thatthe method and period of depreciation are consistent with the expected patternof economic benefits from items of property and equipment. The initial cost of property and equipment comprises its purchase price,including import duties and non-refundable purchase taxes and any directlyattributable costs of bringing the asset to its working condition and locationfor its intended use. Expenditures incurred after the property and equipment have been put intooperation, such as repairs and maintenance and overhaul costs, are normallycharged to income in the period the costs are incurred. In situations where itcan be clearly demonstrated that the expenditures have resulted in an increasein the future economic benefits expected to be obtained from the use of an itemof property and equipment beyond its originally assessed standard ofperformance, the expenditures are capitalized as an additional cost of propertyand equipment Exploration and development costs The decision to develop a mine property within a project area is based on anassessment of the commercial viability of the property, the availability offinancing and the existence of markets for the product. Once the decision toproceed to development is made, development and other expenditures relating tothe project are capitalized (either tangible or intangible assets) and carriedat cost with the intention that these will be depreciated by charges againstearnings from future mining operations. Exploration and development assets are measured at cost. Expenditures related to the following activities are included in the initialmeasurement of exploration and development assets: • acquisition of rights to explore;• topographical, geological, geochemical and geophysical studies;• exploratory drilling;• trenching;• sampling; and• activities in relation to evaluating technical feasibility and commercial viability of extracting a mineral resource. Expenditures are not included in the initial measurement of exploration anddevelopment assets are: • the development of a mineral resource once technical feasibility and commercial viability of extracting a mineral resource have been established; and• administration and other general overhead costs. Upon commencement of production, exploration and development costs are amortisedusing the unit of production method based on the volumes of proved and probablereserves of ore and are written off as the assets are abandoned. Site restoration costs Provision is made for the close down, restoration and, environmental clean upcosts, where there is a legal or constructive obligations to do so, (whichincludes the dismantling and demolition of infrastructure, removal of residualmaterials and remediation of disturbed areas) in the accounting period when therelated environmental disturbance occurs, based on the estimated future costs.The provision is discounted where material and the unwinding of the discount isshown as a finance cost in the consolidated statements of operations. At thetime of establishing the provision, a corresponding asset is capitalized anddepreciated on a unit of production basis upon the commencement of production. The provision is reviewed on an annual basis for changes in cost estimated orlives of operations. Impairment of Assets Property, equipment and intangible assets, including mine development costs, arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Whenever thecarrying amount of an asset exceeds its recoverable amount, an impairment lossis recognized in income for items carried at cost (i.e. intangibles) and treatedas a revaluation decrease for assets that are carried at revalued amount to theextent that the impairment loss does not exceed the amount held in therevaluation surplus for that same asset. The recoverable amount is the higher ofan asset's net selling price and value in use. The net selling price is theamount obtainable from the sale of an asset in an arm's length transaction whilevalue in use is the present value of estimated future cash flows expected toarise from the continuing use of an asset and from its disposal at the end ofits useful life. Recoverable amounts are estimated for individual assets or, ifit is not possible, for the cash-generating unit. The carrying value of theCompany's assets as of December 31, 2004 does not exceed their recoverableamount. Intangible Assets Intangible assets include goodwill, licenses, and computer software. Licenses Licenses are stated at cost net of accumulated amortization. Amortization isprovided so as to write down the cost of an asset on a straight-line basis overits estimated useful economic life. The useful life is seven years. Computer Software Computer software development costs are recognized as assets at cost and areamortized on a straight-line basis over their useful lives, but not exceeding aperiod of seven years. Acquired computer software is accounted for under thesame policies. Intangible assets under development are not amortized. Amortization of theseassets will begin when the related assets are placed in service. Goodwill Goodwill represents the excess of the cost of the acquisition over the fairvalue of identifiable net assets of a subsidiary at the date of acquisition.Goodwill is amortized on a straight-line basis over six years. It is reviewedfor impairment when events or changes in circumstances indicate that thecarrying value may not be recoverable. Trade and Other Receivables Trade and other receivables are stated at the unpaid balance of receivables lessspecific and general allowance for doubtful accounts. In order to determine theallowance for doubtful accounts, the Company's management estimates amounts ofpossible losses on receivables and advances on a case by case basis. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received,net of direct issue cost. Taxation The Company is not subject to taxation on a consolidated basis. Frontier is subject to United States federal, state and foreign income taxes.There are no currently payable income taxes. Deferred income taxes are providedfor the tax consequences of differences between the financial statement and taxbases of assets and liabilities. A valuation allowance is recognized if, basedon the weight of available evidence, it is more likely than not that someportion or all of the deferred tax asset will not be realized. As of December 31, 2004 net deferred tax assets, primarily related to netoperating loss carryforwards, have been entirely offset by a valuation allowancedue to the uncertainty associated with the Company being able to generatetaxable income in the future. For companies working under Kazakhstan legislation current taxes are calculatedin accordance with the regulations of the Republic of Kazakhstan and are basedon the companies' operating results prepared under Kazakhstan AccountingStandards ("KAS") after adjustments for tax purposes. Deferred income taxes are accounted for under the liability method and reflectthe tax effect of all significant temporary differences between the tax basis ofassets and liabilities and their reported amounts in the accompanyingconsolidated financial statements to the extent that there is a reasonableexpectation of their realization. A valuation allowance is provided when it isprobable that some portion or all of the deferred tax assets will not berealized. Deferred taxes are calculated using the balance sheet liability method. Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Deferred tax assets and liabilitiesare measured using the tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The measurement of deferred tax liabilities and deferred tax assetsreflects the tax consequences that would follow from the manner in which theenterprise expects, at the balance sheet date, to recover or settle the carryingamount of its assets and liabilities. Deferred tax assets and liabilities are recognized regardless of when thetemporary difference is likely to reverse. Deferred tax assets and liabilitiesare not discounted and are classified as non-current assets (liabilities) in thebalance sheet. Deferred tax assets are recognized when it is probable thatsufficient taxable profits will be available against which the deferred taxassets can be utilized. At each balance sheet date, the Company re-assessesunrecognized deferred tax assets and the carrying amount of deferred tax assets.The enterprise recognizes a previously unrecognized deferred tax asset to theextent that it has become probable that future taxable profit will allow thedeferred tax asset to be recovered. The Company conversely reduces the carryingamount of a deferred tax asset to the extent that it is no longer probable thatsufficient taxable profit will be available to allow the benefit of all or apart of that deferred tax asset to be utilized. Kazakhstan also has various taxes that are assessed on a Company's activities.These taxes are included separately in other expenses. Employee benefit costs The Company does not have any pension program. Subsidiaries also do not have anypension arrangements separate from the State pension scheme of the Republic ofKazakhstan, which requires current contributions by the employer and employeecalculated as a percentage of current gross salary payments. Such contributions(social tax payments) are charged to expense as incurred. Provisions A provision is recognized when, and only when the Company has a presentobligation (legal or constructive) as a result of a past event and it isprobable (i.e. more likely than not) that an outflow of resources embodyingeconomic benefits will be required to settle the obligation, and a reliableestimate can be made of the amount of the obligation. Provisions are reviewed ateach balance sheet date and adjusted to reflect the current best estimate. Wherethe effect of the time value of money is material, the amount of a provision isthe present value of the expenditures expected to be required to settle theobligation. Borrowings Costs Borrowing costs are recognized as an expense in the period in which they areincurred, except to the extent that they are capitalized. Borrowing costs thatare directly attributable to the acquisition, construction or production of aqualifying asset should be capitalized as part of the cost of that asset. Foreign Currency Translation Monetary amounts denominated in Tenge are translated to US $ at the exchangerate in effect at the balance sheet date. Non-monetary amounts denominated in aforeign currency are translated at historical rates. Revenues and expensesarising in Tenge or other foreign currencies are translated at the exchange ratein effect at the date the transaction occurred. Foreign exchange gains or lossesresulting from the translation of Tenge into US $ are included in or charged tooperations for the year. Contingencies Contingent liabilities are not recognized in the financial statements. They aredisclosed unless the possibility of an outflow of resources embodying economicbenefits is remote. A contingent asset is not recognized in the financialstatements but disclosed when an inflow of economic benefits is probable. Related parties Related parties include the Company's shareholders, key management personnel,associates and enterprises in which a substantial interest in the voting poweris owned, directly or indirectly, by the Company's shareholders or keymanagement personnel. 4. PROPERTY AND EQUIPMENT The movement of property, plant, and equipment for the year ended December 31,2004 was as follows: Cost: Machinery & Transport Office Capital work in Total equipment & vehicles equipment, progress IT and otherAt December 31, 2002 37,919 - 72,366 1,900 112,185Disposal - - (16,322) - (16,322)At December 31, 2003 37,919 - 56,044 1,900 95,863 Additions 29,824 31,224 121,571 - 182,619Disposal - - (55,677) - (55,677)At December 31, 2004 67,743 31,224 121,938 1,900 222,805 Accumulated Depreciation:At December 31, 2002 (4,746) - (24,336) - (29,082) Charge for the year (1,328) - (7,742) - (9,070)Disposal - - 7,364 - 7,364At December 31, 2003 (6,074) - (24,714) - (30,788) Charge for the year (1,846) (2,478) (14,709) - (19,033)Disposal 3,037 - 6,535 - 9,572 At December 31, 2004 (4,883) (2,478) (32,888) - (40,249) Net Carrying Amount:At December 31, 2002 33,173 - 48,030 1,900 83,103 At December 31, 2003 31,845 - 31,330 1,900 65,075 At December 31, 2004 62,860 28,746 89,050 1,900 182,556 5. EXPLORATION AND DEVELOPMENT COSTS The movement of exploration and development assets for the year ended December31, 2004 was as follows: Cost:At December 31, 2002 1,273,470Additions 35,188At December 31, 2003 1,308,658Additions 1,902,068At December 31, 2004 3,210,726 6. INTANGIBLE ASSETS The movement of intangible assets for the year ended December 31, 2004 was asfollows: Licenses Software Goodwill TotalCost:At December 31, 2003 2,847 30,761 124,907 158,515Additions - 32,411 - 32,411At December 31, 2004 2,847 63,172 124,907 190,926 Accumulated Amortisation:At December 31, 2002 (924) (10,652) (83,264) (94,840)Charge for the year (192) (2,630) (20,818) (23,640)At December 31, 2003 (1,116) (13,282) (104,082) (118,480)Charge for the year (192) (4,100) (20,825) (25,117)At December 31, 2004 (1,308) (17,382) (124,907) (143,597) Net Carrying Amount:At December 31, 2003 1,731 17,479 20,825 40,035 At December 31, 2004 1,539 45,790 - 47,329 Goodwill arose at the acquisition of FML Kazakhstan LLP and Baltermir LLP in1998 and 1999, respectively. 7. TRADE AND OTHER RECEIVABLES As of December 31, trade and other receivables comprised: 2004 2003Trade receivables 24,845 -Prepayments for works and services 49,298 -Security deposit on office rent 2,468 2,468Due from employees 7,228 8,000Other 16,407 3,284 100,246 13,752 As of December 31, 2004 trade and other receivables were mainly denominated inUS Dollars. 8. CASH AND CASH EQUIVALENTS As of December 31, cash and cash equivalents comprised the following: 2004 2003US Dollars current bank account 113,011 6GBP current bank account 2,465,042 -KZT current bank account 67,410 169Cash on hand 5,280 707 2,650,743 882 9. SHARE CAPITAL As of December 31, 2004, the Company's authorized capital comprises 100,000,000ordinary shares of US $0.01 par value each. (2003: 2,000,000 shares at US $0.01par value each) Movements in the share capital for the year ended December 31, 2004 was asfollows: Number of Nominal Treasury Additional paid Total shares and amount stocks in capital outstanding December 31, 2002 1,135,400 11,354 (67) 2,056,408 2,067,695Conversion of notes payable 454,100 4,541 - 1,845,458 1,849,999to equityCapital contributions in 10,000 100 - 29,900 30,000cashDecember 31, 2003 1,599,500 15,995 (67) 3,931,766 3,947,694Shares granted to Directors 200,000 2,000 - 598,000 600,000and ManagementCapital contributions in 10,000 100 - 29,880 29,980cashConversion of operating 40,000 400 - 119,600 120,000liabilities to equityTotal before split 1,849,500 18,495 (67) 4,679,246 4,697,674Stock split: 10 for 1 16,645,900 166,459 (603) (165,856) -Total shares after split 18,495,400 184,954 (670) 4,513,390 4,697,674 Conversion of short term 5,993,526 59,935 - 1,138,770 1,198,705debt of Directors andManagement to equityShares granted to Directors 158,984 1,590 27,378 28,968and ManagementConversion of convertible 12,656,657 126,567 - 2,179,559 2,306,126loan notes to equityAIM placement, net of direct 23,333,330 233,333 - 4,096,904 4,330,237issue costsShares granted to employees 480,000 4,800 - 183,941 188,741December 31, 2004 61,117,897 611,179 (670) 12,139,942 12,750,451 At December 31, 2004, the Company had 61,117,897 ordinary shares authorized,issued and fully paid with par value of US $0.01 (2003: 1,599,500 ordinaryshares). During 2002, the Company purchased 6,667 treasury shares of US $0.01par value each. Shareholders are permitted one vote per share. All common shares rank equallywith regard to the Company's residual assets. On 27 February 2004, by a vote of its shareholders, the Company increased itsauthorized share capital from 2,000,000 ordinary shares to 100,000,000 ordinaryshares of US $0.01 par value each. On 31 March 2004, the Company issued 250,000 ordinary shares of US $0.01 parvalue each at a price of US $3.00 per ordinary share, including 200,000 ordinaryshares that were granted to management, 40,000 ordinary shares at a price of US$3.00 per ordinary share were issued in satisfaction of operating liabilities,and 10,000 ordinary shares at a price of US $2.998 per ordinary share wereissued for cash. On 2 August 2004, each of the existing ordinary shares of US $0.01 par valueeach in the capital of the Company was subdivided into 10 ordinary shares of US$0.01 par value each On 2 September 2004, the Company converted US $1,198,705 loans from employees inexchange for 5,993,526 ordinary shares at a price of US $0.20 per ordinaryshare. Those loans were denominated in US Dollars and were payable on demand.The Company issued 158,985 ordinary shares at a price of 10.05 pence perordinary share (US $28,968 equivalent at the exchange rate in effect on thatdate) were granted to Directors. On 2 September 2004, the Company converted £1,271,994 face value ConvertibleLoan Notes into 12,656,657 ordinary shares of US $0.01 par value each at a priceof 10.05 pence per ordinary share (US $2,306,125 equivalent at the exchange ratein effect on that date) and 12,656,657 warrants to purchase one ordinary shareof US $0.01 par value each at a price of 16.5 pence per ordinary share at anytime on or before 31 December 2005. The 12,656,657 ordinary shares wereadmitted to trading on the Alternative Investment Market of the London StockExchange ("AIM") on 2 September 2004. No warrants were converted into ordinaryshares as at December 31, 2004. On 2 September 2004, the Company placed 23,333,334 ordinary shares of US $0.01par value each with institutional investors in the United Kingdom at a price of15 pence per ordinary share to raise £3.5 million (US $6,345,500 equivalent atthe exchange rate in effect on that date) before expenses. These ordinary shareswere admitted to trading on AIM on 2 September 2004. The Company incurred US$2,015,263 of issuance costs on admission to the AIM. Those costs includedregistration and regulatory fees, legal, accounting and professional advisoryfees, printing costs, stamp duties and internal costs of the enterprise. Costswere deducted from the proceeds of share issuance. On 2 September 2004, the Company's 24,580,920 ordinary shares of US $0.01 parvalue each already issued and outstanding were admitted to trading on AIM. On 31 December 2004, the Company granted 480,000 ordinary shares to theiremployees in exchange for cash for their contribution in the development of theCompany. Ordinary shares were trading at 20.50 pence per ordinary share on thatday (US $0.3932 equivalent at the exchange rate in effect on that date). 10. SITE RESTORATION PROVISION As of December 31, 2004 environmental restoration provisions related toobligations to restore and make safe mines after use and the estimated costs ofcleaning up any chemical leakage. Most of these costs are expected to beincurred at the end of the mines' useful operations, approximately between theyears 2025 to 2026. The extent and cost of future remediation programmes areinherently difficult to estimate. They depend on the estimated lives of themines, the scale of any possible contamination and the timing and extend ofcorrective actions. The movements in the site restoration provision were as follows for the yearsended December 31: 2004 2003At the beginning of the year 90,985 70,970Site restoration provision 16,466 16,466Unwinding of discount 4,549 3,549At the end of the year 112,000 90,985 11. SHORT-TERM DEBT As of December 31, short-term debt comprised the following: 2004 2003Loans from directors and management - 1,725,695Debt to Degelen LLP 412,106 412,106Loans from Small World Associates Company ("SWA") 109,629 135,533 521,735 2,273,334 Debt to the Trade Development Agency of the United 340,000 340,000States of America ("TDA") 861,735 2,613,334 Loans from directors and management were repaid and converted to ordinary sharesafter the Company successfully admitted to AIM in September 2004 (see note 9). As of December 31, 2004 the debt to Degelen LLP, the former shareholder ofBaltemir LLP, comprised payables for technical services related to geologicalworks and was denominated in US Dollars. These payables are interest free andpayable on demand. As of December 31, 2004 loans from SWA comprised payables for surveyor andgeochemical sampling services provided by SWA. The loans are denominated in USDollars, interest free and payable on demand. As of December 31, the grant from the Trade Development Agency of the USA wasinterest free and denominated in US Dollars. In accordance with the terms of thegrant, the grant is refundable to the TDA when the Company succeeds in obtainingfunding for the Naimanjal Project based on feasibility study that the grant wasprovided to finance. During the year, the Company received proceeds from Convertible Loan Notes inthe amount of £1,271,994 (US $2,306,125 equivalent at the exchange rate ineffect on that date) issued to third party investors (2003: nil). The loanagreements were unsecured, interest free, and carried no fixed terms ofrepayment. On 2 September 2004, the Company converted 100% of the outstandingConvertible loan Notes into 12,656,657 Ordinary Shares (see note 9). 12. DEMAND NOTES PAYABLE In September 2004, notes payable denominated in US Dollars and carrying interestrates ranging from 5% to 20% per annum were fully repaid after the Company wassuccessfully admitted to AIM. None of the notes were converted into ordinaryshares. 13. ACCOUNTS PAYABLE As of December 31, 2004 trade accounts payable comprise payables for geological,topographical and geophysical studies and general administrative expenses whichwere denominated in US Dollars. 14. OTHER CURRENT LIABILITIES As of December 31 other current liabilities comprised the following: 2004 2003Taxes other than on income 32,223 19,960Tax penalties provision 335,618 305,618Due to employees 218,429 13,596For audit services provided 59,758 20,552Other 1,038 - 647,066 359,726 15. GENERAL AND ADMINISTRATIVE EXPENSES The composition of general and administrative expenses for the years endedDecember 31 was as follows: 2004 2003Payroll and related staff costs 535,869 333,326Shares grants and options to Directors, Management 817,709and employeesTravel and accommodation 191,733 42,508Taxes other than income tax 51,293 47,112Audit and accounting fees 43,750 36,969Rent and office services 189,394 33,733Depreciation and amortization 23,764 32,710Telecommunication 73,108 19,473Loss from disposal of property and equipment 3,475 8,958Printing stationary and office miscellaneous 29,090 8,006Insurance 98,517 6,209Transportation expenses - 2,937Bank charges 3,199 1,041Financial and consulting services 109,987 60Bad debt provision - (359,600)Other expenses 1,909 24,363 2,172,797 237,805 16. FINANCE COSTS The composition of finance costs for the years ended December 31 was as follows: 2004 2003Interest on the loan from Voyager Fund - 521,005Interest on the loan from employees 13,634 67,249Interest on notes payable 38,794 130,285Interest on loans from SWA - 16,942Unwinding of discount for site restoration 4,549 3,549provision 56,977 739,030 17. TAXATION The Corporate income tax expenses as of December 31, 2004 comprises: 2004 2003 Current tax charge - 106 The effective income tax rate differs from statutory income tax rates. Areconciliation of the income tax expenses based on statutory rates with actualis as follows for year ended December 31, 2004: Loss before income tax (2,093,238) (976,115)Statutory tax rate 30% 30%Theoretical income tax benefit at the statutory rate (627,971) (292,835) - 106 Payroll and related staff cost 234,406 90,285Travel and accommodation 57,520 21,905Taxes other than income tax 13,135 13,633Audit and accounting fees - 4,047Rent and office expenses 20,955 5,414Depreciation and amortisation 7,129 7,246Telecommunication services 6,447 8,264Loss from disposal of property and equipment - 2,687Printing stationary and office miscellaneous 8,727 1,855Insurance 29,555 2,053Transportation expenses - 179Bank charges 960 593Financial and consulting services 32,996 589Bad debt provision - (107,880)Other expenses 573 12,376Changes in unrecognized deferred tax assets 215,569 229,589 - 106 As of December 31, 2004, for financial reporting purposes, the deferred taxassets were not recognized in accordance with the prudence concept due to theuncertainty that these deferred tax assets will be realized. Exploration and development cost capitalized in tax 1,505,425 1,289,856booksUnrecognised deferred tax assets (1,505,425) (1,289,856)Deferred tax assets - - 18. LOSSES PER SHARE Basic losses per share are calculated by dividing the net losses for the yearattributable to common shareholders by the weighted average number of commonshares outstanding during the year. Diluted losses per share are calculated by dividing the net loss for the yearattributable to ordinary shareholders by the weighted average number of ordinaryshares outstanding during the year (adjusted for the effects of dilutiveoptions, warrants and other shares reserved for issuance). The following reflects the losses and share data used in the basis and dilutedlosses per share computations: 2004 2003 Net loss attributable to common shareholders for (2,093,238) (976,221)basic earnings per shareNet loss attributable to common shareholders for (2,093,238) (2,093,238)diluted earnings per share Weighted average number of common shares for basic 22,525,009 961,897earnings per shareEffect of dilution:Convertible debt - 461,699Warrants 4,172,903 -Adjusted weighted average number of common shares 26,697,912 1,423,596for diluted earnings per share There have been no other transactions involving common shares or potentialcommon shares since the reporting date and before the completion of thesefinancial statements. The effect of warrants on earnings per share is anti-dilutive. 19. FINANCIAL COMMITMENTS AND CONTINGENT LIABILITIES License Commitments In 2005 the Company prolonged contracts for exploration and production forNaimanjal and Baltemir sites. Each contract includes a work program definingthe Company's obligations for investment into research and exploration of theRelated Shares:
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