28th Jun 2006 07:01
Frontier Mining Ltd28 June 2006 Frontier Mining Ltd. ("the Company" or "Frontier") Final Results for the year ended 31 December 2005 Highlights: • Construction of the Naimanjal mine completed • Gold and silver production commenced in September 2005 • Two equity placings raised funds of £12.375 million (gross) • Exercise of all warrants and select options provided funds of £2.088 million Post Year End Highlights: • Two prospective gold targets 2km from current mining operations at Naimanjal identified and prioritised for exploration • Potential to significantly increase copper resources Brian Savage, CEO of Frontier commented, "The Company made good progress during2005 as we brought our first gold mine into production. We are working hard toachieve our stated objective of producing 25,000 oz of gold in 2006 and thestage is now set to accelerate the growth of our business. We believe Frontieris in a strong position, combining the producing Naimanjal mine with ourportfolio of exploration assets. Furthermore, we continue to enrich ourexperience of operating in Kazakhstan, which we believe to be highly prospectivefor further mineral discoveries." Enquiries Frontier Mining Ltd Brian Savage 020 7898 9100Parkgreen Communications Cathy Malins / Annabel Leather 020 7493 3713 Chairman's Statement I am pleased to report the financial results of Frontier for the financial yearended 31 December 2005. The Company made good progress in 2005, and we achievedour targets of both constructing the Naimanjal gold/silver mine and bringing itinto production. We also advanced all of our exploration projects to commercialdiscovery status and remain confident that we are operating in a region of greatmineral wealth that we believe holds the potential for significant new mineraldiscoveries. Financial Results During 2005, we completed two equity placings, raising a total of £12.375million gross proceeds. All of our pre-IPO warrants and IPO broker warrants andcertain employee options were exercised providing the Company with grossproceeds of £2.088 during the year. The cash was used to fund continued exploration across all of our projects,complete the development of the Naimanjal gold/silver mine, purchase a fleet ofmining equipment for Naimanjal with the remainder to be used to fund ourexploration programmes through 2007. We also used a portion of the fundsavailable to conduct due diligence on the potential acquisition of a substantialuranium project, although this was subsequently acquired by another party for avaluation in excess of what we were willing to pay. As of 31 December 2005 the Company had more than US$14 million of cash. Gold Projects: Naimanjal Gold/Silver Mine First gold was poured at Naimanjal in September 2005. This was behind ourinitial schedule of May 2005 due to delays in obtaining the required permits,but we did achieve our stated objective of producing metal within the first yearof listing on AIM. We focused our initial mining on a higher percentage of ore that only requiredscreening and agglomerating, which allowed us to postpone the installation of acrusher and shorten the development schedule. By the end of October 2005 we hadstacked more than 70,000 tonnes of screened and agglomerated ore, with thecoarse ore fraction stockpiled for processing after installation of the crushingcircuit. We saturated the pad with cyanide solution and achieved expectedpercolation characteristics through the heaps and were able to commission theMerrill Crowe gold/silver recovery circuit and produce gold and silver. Toensure we did not lose the integrity of the pad, due to the extreme coldtemperatures, we suspended leaching operations during the third week of November2005. The remaining gold and silver in solution not extracted duringcommissioning was returned and contained in the heap pad over the winter. We re-commenced operations in mid-April 2006, following winter, and have sincecommissioned a 225 tonne per hour crushing circuit and installed an additional150 tonne per hour screening circuit. Mining operations commenced in May 2006using contracted excavators and company owned bulldozers, front end loaders, andtrucks. Three new excavators have arrived at Naimanjal facilitating increasedmining rates. Stacking operations are currently about 65% of our targeted rateand these are increasing daily. We have begun leaching the stacked ore andproducing gold and silver. We are working hard to achieve our initial plan to mine and stack approximately896,000 tonnes of ore with an average grade of 1.38 grams of gold per tonne and10.24 grams of silver per tonne to produce 25,000 ounces of gold and 110,000ounces of silver this year. We have just over 600,000 tonnes of ore permittedto be mined under our Pilot Production license and have an additional 400,000tonnes of ore currently being permitted with the relevant government agencies.Our ultimate recovery is expected to be 74% of the gold and 44% of the silvercontained in ore stacked on the pad. We currently recover 85% of the gold andsilver contained in solution from the pad. The remaining 15% gold and silver isnot wasted, there is a time delay in its ultimate recovery, which is why we willcontinue to leach the pads for several months after stacking is complete. To date, we have stacked over 130,000 tonnes of ore. We expect to stack 100,000tonnes of ore in July 2006 and significantly exceed this rate thereafter. Thegold grade in our initial screened ore was less than 1 gram per tonne and thegold in coarse ore is greater than 1 gram per tonne and will be crushed andstacked this year. We expect that our average grade stacked will increase as weblend Naimanjal ore with higher grade Baritovy ore, which grades approximately 4grammes per tonne ("gpt") gold. The Board believes in the strength of the gold market and is taking the viewthat gold prices will remain high and are likely to go higher. As a result, weare currently working with Behre Dolbear on an alternative mine plan with alower cut-off grade. We are currently stockpiling ore that has gold gradesranging from 0.2 to 0.4 gpt. This allows us to blend with much higher grade oreor stack it as and when the metal prices increase. We are however prepared forlower prices with a forecast operating cost of US$250 per ounce. We have always discussed our plan for incremental expansion at Naimanjal and wepurchased larger processing equipment than budgeted, albeit at a competitivecost, in order to be prepared to handle increased throughput. We believe thatthis will result in significant cost savings in the long run as we will not berequired to replace certain items to manage and process this expansion. Withthis in mind, we now have a crushing and screening circuit capable of 2 milliontonnes of ore per year. We will continue to incrementally upgrade equipment toallow for additional crushing, screening, and stacking capacity. Our mining fleet consists of six 30-tonne Belaz trucks and three Daewoo 500LCVexcavators. We also have several front end loaders and bull dozers. We believethis mining fleet is sufficient for our current tonnage requirements and we willstudy whether it is more economic to purchase additional mining equipment orhire a contract miner to increase future mining capacity. We anticipate that all the current costs associated with the Naimanjal gold/silver mine will be funded from the Company's existing cash resources. Naimanjal and Satellites Exploration Exploration this year will be focused on the near surface oxides at Naimanjal,Naiman, and Baritovy. We are very excited about a number of targets we haverecently identified at Naimanjal and Naiman that are within 2 kilometres of theNaimanjal plant facility. Due to their proximity to the current miningoperations, these will be the priority targets in the coming year. Other Gold Exploration We are planning to spend just over US$1 million on gold exploration at Baltemirand Koskuduk with the majority of this used to drill 3,500 metres of core atBaltemir, and 9,300 metres of core at Koskuduk, where we are also planning atrenching programme of 15,000 m3. The results of this programme will be used inan updated resource estimate, expected in the next few months, and thecompletion of the pre-feasibility study. We are planning further exploration work at Baltemir, including 500 metres ofreverse circulation ("RC") drilling. Copper Projects: A US$1 million first phase exploration programme is planned for our copperprojects. Beschoku - Yubileiny A first phase copper exploration programme at Beschoku and Yubileiny iscurrently underway and includes 1,300 metres of core drilling at the Yubileinyprospect and 1,750 metres of core and 2,500 metres of RC drilling at Beschokuand 1,000 metres of RC drilling along the copper trend. We are also conductingadditional soil geochemistry and trenching work. Based on the results of thisinitial phase, we will determine our additional work programme for the remainderof 2006. We are planning a minor amount of exploration work at Kotansor in 2006. Baitimir A first phase copper exploration programme is also underway at Baitimir whichincludes 2,200 metres of RC drilling, additional soil geochemistry andtrenching. As with Beschoku and Yubileiny the results of this initial phasewill determine our additional work programme for the remainder of 2006. Outlook We continue to set aggressive growth targets for ourselves. We have not changedour stated goal of producing 25,000 ounces of gold in 2006, 50,000 ounces ofgold in 2007, and 100,000 ounces of gold in 2008. We expect Naimanjal to becomeself sustaining this year. Our exploration programmes are progressing well and we will be providing moreupdates in the coming weeks as to developments on our copper projects and othergold projects. The Company also continues to review a number of exciting acquisitionopportunities to provide for additional external growth. Finally, I would like to thank my fellow directors, staff and consultants fortheir hard work and dedication and also thank our loyal shareholders for theircontinued support for the Company. B C SavageChairman and Chief Executive Officer28 June 2006 FRONTIER MINING LTD CONSOLIDATED INCOME STATEMENTFOR THE YEAR ENDED DECEMBER 31, 2005 (Expressed in US Dollars) Notes 2005 2004 General and administrative expenses 4 2,867,619 2,172,797Business development expenses 515,645 - Finance costs 5 7,187 56,977Other income 6 (270,372) -Other expenses 7 341,731 -Foreign exchange loss/(gain), net 886,431 (136,536) Loss from operations 4,348,241 2,093,238 Taxation 25 - - Net loss 4,348,241 2,093,238 Loss per share - basic and diluted (cents per share) 26 5 9 CONSOLIDATED BALANCE SHEETFOR THE YEAR ENDED DECEMBER 31, 2005 (Expressed in US Dollars) Notes 2005 2004 ASSETS NON-CURRENT ASSETS: Exploration and development costs 8 6,883,607 3,210,726 Property and equipment, net 9 4,999,869 182,556 Intangible assets 10 49,691 47,329 Value-added tax receivable 11 400,622 - Restricted cash 12 112,000 - 12,445,789 3,440,611 CURRENT ASSETS: Inventory 13 934,835 - Trade accounts receivable 14 142,445 - Prepaid expenses 15 282,706 74,143 Other accounts receivable 16 249,174 26,103 Cash 17 13,958,038 2,650,743 15,567,198 2,750,989 TOTAL ASSETS 28,012,987 6,191,600 SHAREHOLDERS' EQUITY AND LIABILITIES SHAREHOLDERS' EQUITY: Share capital 18 1,325,816 611,179 Share premium 18 36,440,425 12,139,942 Treasury stock - (670) Accumulated deficit (12,729,233) (8,380,992) 25,037,008 4,369,459 NON-CURRENT LIABILITIES: Provision for future site restoration 19 119,187 112,000 Due to the Government of the Republic of Kazakhstan 20 689,605 - Debt to Trade Development Agency 21 240,000 340,000 1,048,792 452,000 CURRENT LIABILITIES: Account payable 22 863,287 201,340Debt to Trade Development Agency 21 100,000 -Short-term debt 23 - 521,735Due to the Government of the Republic of Kazakhstan 20 132,146 -Other current liabilities 24 831,754 647,066 1,927,187 1,370,141 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 28,012,987 6,191,600 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYFOR THE YEAR ENDED DECEMBER 31, 2005 (Expressed in US Dollars) Notes Share Treasury Share Accumulated Total capital stock premium deficit At December 31, 2003 18 15,995 (67) 3,931,766 (6,287,754) (2,340,060) Shares granted to directors, management and employees 8,390 - 809,319 - 817,709Capital contributionsin cash, net of directissue costs 233,433 - 4,126,784 - 4,360,217Conversion of operatingliabilities and loan notesto equity 186,902 - 3,437,929 - 3,624,831Stock split: 10 for 1 166,459 (603) (165,856) - -Net loss for the year - - - (2,093,238) (2,093,238) At December 31, 2004 18 611,179 (670) 12,139,942 (8,380,992) 4,369,459 Placing shareson open market 175,000 7,812,897 - 7,987,897Shares granted 6,350 239,013 245,363Private placement 400,000 12,359,240 12,759,240Exercise of warrants 131,954 670 3,850,673 - 3,983,297Exercise of options 1,333 38,660 39,993Net loss for the year - - (4,348,241) (4,348,241) At December 31, 2005 18 1,325,816 - 36,440,425 (12,729,233) 25,037,008 CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2005 (Expressed in US Dollars) Notes 2005 2004OPERATING ACTIVITESLoss from operations (4,348,241) (2,093,238)Adjustments for non cash flow items:Increase in provision for future siterestoration 19 - 16,466Depreciation of property and equipment 9 471,244 19,033Amortization of intangible assets 10 8,978 25,117Increase in provision for tax liabilities 24 30,000 -Finance costs 5 7,187 56,977Loss from disposal of property and equipment - 46,105 Operating cash flows before movements inworking capital (3,830,832) (1,929,540) Increase in value added tax receivable 11 (400,622) -Increase in inventory 13 (934,835) -Increase in trade accounts receivable 14 (142,445) -Increase in prepaid expenses 15 (208,563) -Increase in other receivable 16 (223,071) (86,494)Increase in accounts payable 22 661,947 112,746Increase in other current liabilities 24 154,688 1,109,598Increase in due to the Government of theRepublic of Kazakhstan 20 821,751 - NET CASH USED IN OPERATING ACTIVITIES (4,101,982) (793,690) INVESTING ACTIVITIESIncrease in exploration and development 8 (3,672,881) (1,902,068)costsPurchase of property and equipment, net 9 (5,288,557) (182,619)Purchase of intangible assets 10 (11,340) (32,411) NET CASH USED IN INVESTING ACTIVITIES (8,972,778) (2,117,098) CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE PERIOD ENDED December 31, 2005 (Expressed in US Dollars) Notes 2005 2004 FINANCING ACTIVITIESCapital contributions, net of direct issue cost * 18 25,015,790 4,360,217Proceeds received from convertible loan notes 18 - 2,306,126(Repayment) / proceeds of short term debts 23 (521,735) (552,894)Interest paid - (56,977)Repayment of notes payable - (495,823) NET CASH FROM FINANCING ACTIVIES 24,494,055 5,560,649 NET INCREASE IN CASH AND CASH EQUIVALENTS 11,419,295 2,649,861 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,650,743 882 CASH AND CASH EQUIVALENTS AT END OF YEAR ** 14,070,038 2,650,743 * The Company granted 650,000 ordinary shares to employees at 21.50 pence perordinary share (US$0.37625 per share equivalent at the exchange rate in effectat that date) ** Note: the amount includes $112,000 restricted for restoration purposes inaccordance with the subsurface use contract. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2005 (Expressed in US Dollars) 1. NATURE OF THE BUSINESS 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. The principal activities of the Company and its subsidiaries (the "Group") as ofDecember 31, 2005 are as follows: Operating Entity Principal Activity Country of incorporation Frontier Mining Ltd Management of the Group United States of AmericaFML Kazakhstan LLP Exploration and development Republic of KazakhstanBaltemir LLP Exploration Republic of Kazakhstan 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 Group is actively exploring anddeveloping its wholly owned Naimanjal and Baltemir contract and license areas. The Naimanjal contract dated August 16, 1999, represents the combinedexploration and extraction over a 30-year period. The Naimanjal license No.1166DD currently covers an approximate area of 529 square kilometres in NorthEastern Kazakhstan. The Baltemir license No. 1256D issued by the Competent Agency on August 16,1999, covers an area of approximately 154 square kilometres in North EasternKazakhstan. On August 27, 2005, the Company received regulatory approval for a 21/2 yearextension of the exploration period to evaluate four commercial discoveries onthe Naimanjal license. On August 27, 2005, the Company received regulatory approvals and commencedpilot production on the Naimanjal Mine. At December 31, 2005, the Company's registered office was located at: 2711Centerville Road, Suite 400, Wilmington, Delaware 19808, the USA. At December31, 2005, 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 number of employees of the Group at December 31, 2005 was 89 people (2004:50 employees). Organization history - On July 10, 1998, the founders of Frontier agreed thatFrontier, upon its incorporation, would issue 280,000 ordinary shares at US$0.01 par value per share to its founders as compensation and acquire, fromSEMTECH in exchange for the assets and assumption of liabilities and theissuance of 200,000 ordinary shares of Frontier at par value: • 100% of Polygon Resources LLP, • 70% of Besshoky LLP ("Besshoky") and • 50% of Semgeo LLP. Purchase accounting was used to account for the acquisition and, accordingly,the assets acquired and liabilities assumed were recorded at their respectivefair market values as of the acquisition date. On October 31, 1998 Polygon Resources LLP was re-registered in Kazakhstan as FMLKazakhstan LLP ("FMLK") to reflect the name change and the Company's 100%ownership. In September 1999, Frontier acquired 100% of Baltemir LLP by issuing the owners50,000 ordinary shares of Frontier and agreeing to pay historical explorationexpenses to the main shareholder. Besshoky LLP and Semgeo LLP ceased their operations and were liquidated by theCompany in January and February 2004, respectively. Political and economic environment - The Kazakhstan economy continues to displaycertain traits consistent with that of a market economy in transition. Thesecharacteristics have in the past included: • higher than normal historic inflation, • lack of liquidity in the capital markets, and • the existence of currency controls, which cause the national currency to be illiquid outside of Kazakhstan. The continued success and stability of the Kazakhstan economy will besignificantly impacted by the government's continued actions with regard tosupervisory, 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, 2005, 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. PRESENTATION OF FINANCIAL STATEMENTS Consolidated subsidiaries - FML Kazakhstan LLP (100% ownership) and Baltemir LLP(100% ownership). Basis of presentation - These consolidated annual financial statements have beenprepared in accordance with International Financial Reporting Standards ("IFRS"). These financial statements are presented in US Dollars ("US$" or "$"),unless otherwise indicated. The US Dollar is used as the functional andpresentation currency as the majority of the Group's transactions aredenominated and measured in US Dollars. Transactions in other currencies aretreated as transactions in foreign currencies. The consolidated annual financial statements are prepared under the historicalcost convention. Principles of consolidation - The consolidated annual financial statements ofthe Group include Frontier and the companies that it controls, and from which itobtains economic benefits. This control is normally evidenced when the Companyowns, either directly or indirectly, more than 50% of the voting rights of acompany's share capital and is able to govern the financial and operatingpolicies of an enterprise, so as to benefit from its activities and plans toretain this control for at least one year from the balance sheet date.Subsidiaries are consolidated from the date on which effective control istransferred to the Company and are no longer consolidated from the date controlis deemed to be temporary, if easily determinable with reasonable certainty. Thepurchase method of accounting is used to account for the acquisition ofsubsidiaries. The cost of an acquisition is measured at the fair value of theassets given up or liabilities undertaken at the date of acquisition, plus costsdirectly attributable to the acquisition. Intercompany balances andtransactions, including intercompany profits and unrealized profits and lossesare eliminated on consolidation. Consolidated annual financial statements areprepared using uniform accounting policies for like transactions and otherevents in similar circumstances. Use of estimates and assumptions - The preparation of consolidated annualfinancial statements in conformity with IFRS requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, revenues and expenses and the disclosure of contingent assets andliabilities. Due to the inherent uncertainty in making those estimates, actualresults reported in future periods could differ from such estimates. Going concern - These consolidated annual financial statements were prepared ona going concern basis and there is no evidence that the Group is intending orin a position to terminate or significantly reduce its operations in the nearfuture. The Group operates as a natural resources exploration company. To date, theGroup has not earned significant revenues and is considered to be in theexploration and development stage. The Group incurred losses of US$ 4,348,241and US$ 2,093,238 for the years ended December 31, 2005 and 2004 respectively.The Group has an accumulated deficit of US$ 13,355,480 and US$ 8,380,992 as atDecember 31, 2005 and December 31, 2004 respectively. These factors, as well asother factors, raise doubt about whether the Group can continue as a goingconcern. Additional financing will be required to fund any material expenditures relatingto new mineral exploration projects or advancing the Group's current projects.Whilst the Group has been successful in raising financing in the past, there canbe no assurance that the Group will be able to continue to raise such additionalfinancing as may be required for future operations. The Group intends to seek additional financing through the issuance of equity ordebt instruments. The consolidated annual financial statements do not include any adjustments toreflect the possible future effects on the recoverability and classification ofassets and liabilities that may result from the outcome of this uncertainty. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Property and equipment - Property and equipment are stated at cost lessaccumulated depreciation and accumulated 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. 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 (and classified as either tangible or intangibleassets) and carried at cost with the intention that these will be amortized bycharges against earnings 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, mining licenses; • 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 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 reaching designed commercial production capacity, exploration anddevelopment costs are amortised using the unit of production method based on thevolumes of proved and probable reserves of ore and are written off as the assetsare depleted. Site restoration costs Provision is made for the close down, restoration and, environmental clean upcosts, where there are 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 income statement. At the time ofestablishing the provision, a corresponding asset is capitalized and depreciatedon a unit of production basis upon the commencement of production. The provision is reviewed on an annual basis for changes in cost estimates oreconomic useful life of existing operations. Capitalized cost includes major expenditures for improvements and replacementsthat extend the useful lives of the assets or increase their revenue generatingcapacity. Repairs and maintenance expenditures that do not meet the foregoingcriteria for capitalization are charged to the consolidated income statement asincurred. Intangible assets - Intangible assets include licenses and computer software.Intangible assets under development are not amortized. Amortization of theseassets will begin when the related assets are placed in service. Licenses - Licenses are stated at cost net of accumulated amortization.Amortization is provided so as to write down the cost of an asset on astraight-line basis over its estimated useful economic life. Computer software - Computer software costs are recognized as assets at cost andare amortized on a straight-line basis over their useful lives, but notexceeding a period of seven years. Impairment of tangible and intangible assets - At each balance sheet date, theGroup reviews the carrying amounts of its tangible and intangible assets todetermine whether there is any indication that those assets have suffered animpairment loss. If any such indication exists, the recoverable amount of theasset is estimated in order to determine the extent of the impairment loss (ifany). Where it is impossible to estimate the recoverable amount of anindividual asset, the Company estimates the recoverable amount of thecash-generating unit to which the asset belongs. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset (orcash-generating unit) is reduced to its recoverable amount. Impairment lossesare recognized as an expense immediately, unless the relevant asset is land,buildings, other than investment property, or equipment, carried at a revaluedamount, in which case the impairment loss is treated as decrease in revaluationreserve. Equity instruments - Equity instruments issued by the Group are recorded at thetime proceeds are received, net of direct issue cost. Changes in the fair valueof a contract arising from variations in market interest rates do not affect theamount of cash or other financial assets to be paid or received, or the numberof equity instruments to be received or delivered. Changes in the fair value ofan equity instrument are not recognized in the financial statements. Inventories - Materials are stated at the lower of cost or net realizable value.Cost comprises direct materials, customs duties, and transportation and handlingcosts. Cost is calculated using the first-in-first-out method. Work in process is valued at the net unit cost of production based on thepercentage of completion method. Finished goods are measure at the lower of net production costs on the weightedaverage basis, or net realizable value. Net realizable value represents theestimated selling price less all estimated costs to completion and costs to beincurred in marketing, selling and distribution. Accounts receivable - Accounts receivable are stated at their net realizablevalue after deducting provisions for uncollectible amounts. Cash and cash equivalents - Cash includes cash on hands, deposits with bankswith original maturity terms not less than two years. Restricted cash - Restricted cash includes deposits with banks with originalmaturity terms not less than five years. Trade and other payables - Trade and other payable are stated at their nominalvalue. 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. For companies working underKazakhstan legislation current taxes are calculated in accordance with theregulations of the Republic of Kazakhstan and are based on the companies'operating results prepared under Kazakhstan Accounting Standards afteradjustments for tax purposes. As of December 31, 2005 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. Deferred income taxes are accounted for using the balance sheet liability methodin respect of temporary differences between the tax basis of assets andliabilities and their reported amounts in the accompanying consolidated annualfinancial statements to the extent that there is a reasonable expectation oftheir realization. Deferred tax liabilities are generally recognized for alltaxable temporary differences and deferred tax assets are recognized to theextent that it is probable that taxable profits will be available against whichdeductible temporary differences can be utilized. A valuation allowance is provided when it is probable that some portion or allof the deferred tax assets will not be realized. Deferred tax assets andliabilities are offset when they relate to income taxes levied by the sametaxation authority and the Company intends to settle its tax assets andliabilities on a net basis. Deferred tax assets and liabilities are measured using the tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. It is charged or credited to theconsolidated income statement, except when it relates to items credited orcharged directly to equity, in which case the deferred tax is also dealt with inequity. Employee benefit costs - The Group does not have any pension program from theState pension scheme of the Republic of Kazakhstan, which requires currentcontributions by the employer and employee calculated as a percentage of currentgross salary payments. Such contributions (social tax payments) are charged toexpense as incurred. Provisions - A provision is recognized when, and only when the Company has apresent obligation (legal or constructive) as a result of a past event and it isprobable (that is, 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 the provisionis determined based on the present value of the expenditures expected to berequired to settle the obligation. Borrowings costs - Borrowing costs are recognized as an expense in the period inwhich they are incurred, except to the extent that they are capitalized.Borrowing costs that are directly attributable to the acquisition, constructionor production of a qualifying asset should be capitalized as part of the cost ofthat asset. Reclassifications - Certain reclassifications have been made to the consolidatedannual financial statements for the year ended December 31, 2004 to conform totheir current period presentations. These reclassifications have not affectedpreviously reported results of operations or shareholders' equity. 4. GENERAL AND ADMINISTRATIVE EXPENSES 2005 2004 Payroll and related staff costs 1,092,553 535,869Travel and accommodation 434,986 191,733Shares grants and options to Directors, Management and employees 245,363 817,709Rent and office services 223,599 189,394Financial and consulting services 179,616 109,987Telecommunication 143,673 73,108Depreciation and amortization (refer to notes 9 and 10) 118,393 23,764Audit and accounting fees 112,047 43,750Public relations and promotion 74,101 -Printing stationary and office miscellaneous 67,620 29,090Taxes other than income tax 56,582 51,293Insurance 46,168 98,517Bank charges 30,056 3,199Other expenses 42,862 5,384 2,867,619 2,172,797 5. FINANCE COSTS 2005 2004 Interest on notes payable - 38,794Interest on loans from employees - 13,634Unwinding of discount for site restoration provision 7,187 4,549 7,187 56,977 6. OTHER INCOME 2005 2004 Gross revenue from sales of gold 231,781 -Interest on deposits 33,093 -Other 5,498 - 270,372 - In September 2005 the Group started pilot production at the Naimanjal mine. Therevenue for the period comprised of amounts invoiced to Metalor TechnologiesS.A. for initial sales of gold produced from September to December 2005. 7. OTHER EXPENSES 2005 2004 Start up expenses attributable to initial sales of gold 324,115 - Other 17,616 - 341,731 - 8. EXPLORATION AND DEVELOPMENT COSTS Cost:At December 31, 2003 1,308,658Additions 1,902,068 At December 31, 2004 3,210,726Additions 3,672,881 At December 31, 2005 6,883,607 9. PROPERTY AND EQUIPMENT, NET Cost: Machinery Transport Office Capital Total & equipment & vehicles equipment work in progress (Naimanjal complex) At December 31, 2003 37,919 - 56,044 1,900 95,863Additions 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 Additions 726,526 50,257 255,309 4,333,389 5,365,481Disposals (12,818) - (64,106) - (76,924)At December 31, 2005 781,451 81,481 313,141 4,335,289 5,511,362 AccumulatedDepreciation:At 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 - 9,572At December 31, 2004 (4,883) (2,478) (32,888) - (40,249) Charge for the year (328,497) (20,124) (122,623) - (471,244) At December 31, 2005 (333,380) (22,602) (155,511) - (511,493) Net book value:At December 31, 2004 62,860 28,746 89,050 1,900 182,556 At December 31, 2005 448,071 58,879 157,630 4,335,289 4,999,869 10. INTANGIBLE ASSETS Licenses Software TotalCost:At December 31, 2003 2,847 30,761 33,608Additions - 32,411 32,411At December 31, 2004 2,847 63,172 66,019 Additions 658 10,682 11,340 At December 31, 2005 3,505 73,854 77,359 Accumulated amortization:At December 31, 2003 (1,116) (13,282) (14,398)Charge for the year (192) (4,100) (4,292)At December 31, 2004 (1,308) (17,382) (18,690) Charge for the year (128) (8,850) (8,978) At December 31, 2005 (1,436) (26,232) (27,668) Net book value:At December 31, 2004 1,539 45,790 47,329 At December 31, 2005 2,069 47,622 49,691 11. VALUE-ADDED TAX RECEIVABLE Value-added tax (VAT) receivable was recorded in the books of FML Kazakhstan asof December 31, 2005 and has been classified as non-current assets. FMLKazakhstan is in pilot production and will be able to recover the VAT amount in2008 when the Group expects to commence commercial production as per the Kazakhtax code. 12. RESTRICTED CASH Restricted cash as of December 31, 2005 in the amount of US$ 112,000 (December31, 2004: nil), represents cash held in a restricted bank account for futuresite restoration works. Such costs are expected to be incurred at the end of themines' estimated economic useful life, approximately between the years 2025 to2026. 13. INVENTORY 2005 2004 Materials 221,602 -Gold in ore in stockpile 98,579Gold in ore on pad 475,782 -Gold in circuit 14,409Gold in dore 124,463 - 934,835 - 14. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable as of December 31, 2005 comprise of amount receivablefrom Metalor Technologies S.A. for initial sales of gold in December 2005. 15. PREPAID EXPENSES As of December 31, 2005 and December 31, 2004, Prepaid expenses primarily relateto materials, works and services for the construction of the camp and the plantat the Naimanjal mine. 16. OTHER ACCOUNTS RECEIVABLE 2005 2004 Due from employees 41,511 7,228Deferred expenses 112,771 16,407Other receivables 86,869 -Security deposit on office rent 8,023 2,468 249,174 26,103 17. CASH December 31, December 31, 2005 2004 GBP current bank account 13,627,397 2,465,042US Dollars current bank account 202,564 113,011KZT current bank account 5,484 67,410Cash on hand 2,243 5,280Cash in transit 120,350 13,958,038 2,650,743 18. SHARE CAPITAL As of December 31, 2005, the Company's authorized capital comprises 500,000,000ordinary shares of US$0.01 par value per share (December 31, 2004: 100,000,000shares at US $0.01 par value each) Movements in the issued share capital for the period ended December 31, 2005 wasas follows: Number of Ordinary Treasury Share Total shares and share stocks premium outstanding capitalDecember 31, 2003 1,599,500 15,995 (67) 3,931,766 3,947,694Shares granted to Directors and 200,000 2,000 - 598,000 600,000ManagementCapital contributions in cash 10,000 100 - 29,880 29,980Conversion of operating 40,000 400 - 119,600 120,000liabilities to equityTotal before split 1,849,500 18,495 (67) 4,679,246 4,697,674Stock split: 10 for 1 16,645,900 166,459 (603) (165,856) - Total shares after split 18,495,400 184,954 (670) 4,513,390 4,697,674 Conversion of short -term debt 5,993,526 59,935 - 1,138,770 1,198,705of Directors and Management toequityShares granted to Directors and 158,984 1,590 27,378 28,968Management Conversion of convertible loan 12,656,657 126,567 - 2,179,559 2,306,126notes to equityAIM placement, net of direct 23,333,330 233,333 - 4,096,904 4,330,237issue costsExercise of options 480,000 4,800 - 183,941 188,741 December 31, 2004 61,117,897 611,179 (670) 12,139,942 12,750,451AIM placement, net of direct 17,500,000 175,000 - 7,812,897 7,987,897issue costPrivate placement, net of direct 40,000,000 400,000 - 12,359,240 12,759,240issue costShares granted to Directors and 635,000 6,350 - 239,013 245,363ManagementExercise of warrants 13,262,366 131,954 670 3,850,673 3,983,297Exercise of options 133,300 1,333 - 38,660 39,993 December 31, 2005 132,648,563 1,325,816 - 36,440,425 37,766,241 On January 1, 2005, 43,310 options were exercised to purchase 43,310 ordinaryshares of US$ 0.01 par value per share at a price of US$ 0.30 per ordinary shareproviding the Company with proceeds of US$ 12,993. On March 4, 2005, the Company placed 17,500,000 ordinary shares of US$ 0.01 parvalue per share ("New Ordinary Shares") with institutional investors in theUnited Kingdom at a price of 25 pence per ordinary share to raise £4.375 millionbefore expenses (US$ 8,122 million equivalent at the exchange rate in effect onthat date). On June 17, 2005, Numis Securities Ltd exercised its options to purchase 605,709ordinary shares of US$ 0.01 par value per share at a price of 15 pence perordinary share (US$ 0.27 per ordinary share equivalent at the exchange rate ineffect on that date) providing the Company with proceeds of £90,856 (US$163,541.43 equivalent at the exchange rate in effect on that date). The ordinary shares issued upon exercise of warrants and options are admitted totrading on the AIM as soon as possible after their issuance. On December 14, 2005 the Company placed 40,000,000 ordinary shares of US $0.01par value each with private investors in the United Kingdom at a price of 20pence per ordinary share to raise £8 million before expenses (US $13.750 millionequivalent at the exchange rate in effect on that date). The ordinary shares areadmitted to trading on the AIM on December 28th 2005. As of December 31, 2005, all 12,656,657 warrants were exercised at a price of16.5 pence per ordinary share providing the Company with £1.576 millionadditional proceeds (US $2.993 million equivalent at the exchange rate in effecton that date). The ordinary shares issued upon exercise of warrants areadmitted to trading on the AIM as soon as possible after their issuance. Changes to the Company's warrants are summarised as follows: Balance as of Granted Exercised Balance as of Expiry 01/01/2005 31/12/2005 date Warrants at 16.5 pence 12,656,657 - (12,656,657) - 31/12/05Warrants at 15 pence 605,709 - (605,709) - 31/12/05 13,262,366 - (13,262,366) - Changes to the Company's stock options are summarised as follows: 2005 2004 Number of Wt. Avg. Number of Wt. Avg. options Option Price options Option Price Balance, Beginning of Year 303,300 303,300Granted 260,000 $0.38 480,000 $0.38Exercised (133,300) $0.30 (480,000) $0.38Expired (30,000) $0.30 - Balance, End of Year 400,000 303,300 The Company maintains an incentive stock option plan ("plan") under whichdirectors, officers and key personnel may be granted options to purchase commonshares of the Company. The Company intends to follow the Association of BritishInsurers' guidelines allowing up to 10% of the outstanding stock to be madeavailable in options to executive directors and employees The Company hasreserved 6,057,091 common shares for issuance upon the exercise of optionsgranted under the terms of the plan (2004 - 6,057,091). The Board of Directorsdetermined the exercise price of each option (140,000 shares at US$0.30,5,960,401 shares at 15 pence). The vesting periods established under theCompany's stock option plan and the term of the options are set by the board ofdirectors, subject to a maximum term for any option of 5 years. 19. PROVISION FOR FUTURE SITE RESTORATION As of December 31, 2005 environmental restoration provisions are related toobligations to restore and make safe mines after use and the estimated costs ofcleaning up any possible contamination. 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 programs 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 periodsended December 31, 2005 and December 31, 2004: 2005 2004 At the beginning of the year 112,000 90,985Site restoration provision - 16,466Unwinding of discount 7,187 4,549 119,187 112,000 20. DUE TO THE GOVERNMENT OF THE REPUBLIC OF KAZAKHSTAN The Company is obligated to reimburse to the Government of Kazakhstan of US$1,436,400 in respect of the historical cost of geological studies performed inrespect of the Naimanjal contract. US$ 14,364 was already paid by the Companyand the rest of the amount was discounted at 12%. Pursuant to the explorationcontract the cost of geologic studies is to be repaid in 40 equal, quarterlyinstallments, commencing from the date of commercial production. 2005 2004 Current portion of due to Republic of Kazakhstan 132,146 -Non-current portion of due to Republic of Kazakhstan 689,605 - 821,751 - 21. DEBT TO THE US TRADE AND DEVELOPMENT AGENCY 2005 2004 Current portion of debt to TDA 100,000 -Non-current portion of debt to TDA 240,000 340,000 340,000 340,000 As of December 31, 2004 short-term debt comprised of grant received from the USTrade and Development Agency ("TDA"). It is interest free grant and denominatedin US Dollars. In accordance with the terms of the grant, the grant isrefundable to the TDA when the Company succeeds in obtaining funding for theNaimanjal mine based on the feasibility study that the grant was provided tofinance. 22. ACCOUNTS PAYABLE As of December 31, 2005 and December 31, 2004 accounts payable comprisedpayables for geological, topographical and geophysical studies and consultingfees payable, which were denominated in US$. 2005 2004 Geological works and services 463,287 201,340Consulting services 400,000 - 863,287 201,340 23. SHORT-TERM DEBT As of December 31, 2005 and December 31, 2004 short-term debt comprised thefollowing: 2005 2004Loans from Small World Associates Company ("SWA") (refer to note 8) - 109,629Debt to Degelen LLP - 412,106 - 521,735 As of December 31, 2005 the debt of US $412,106 to Degelen LLP, the formershareholder of Baltemir LLP, was fully repaid. As of December 31, 2005 loans from SWA comprised payables for surveyor andgeochemical sampling services provided by SWA, was written off. The loans weredenominated in US Dollars, and interest free. 24. OTHER CURRENT LIABILITIES As of December 31, 2005 and December 31, 2004 other payables and accruedexpenses comprised the following: 2005 2004 Due to employees 322,283 218,429Tax penalties provision 365,618 335,618Taxes other than on income 91,330 32,223For audit services provided - 59,758Unused vacation reserve 51,514 -Other 1,009 1,038 831,754 647,066 25. TAXATION 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 period ended December 31, 2005 and December 31, 2004: 2005 2004 Loss before income tax (4,348,241) (2,093,238)Statutory tax rate 30% 30% Theoretical income tax benefit at the statutory rate (1,304,472) (627,971)Payroll and related staff costs 327,766 234,406Travel and accommodation 123,019 57,520Rent and office services 67,080 20,955Telecommunication 43,102 6,447Audit and accounting fees 33,614 -Taxes other than income tax 16,975 13,135Financial and consulting services 53,885 32,996Depreciation and amortization 35,517 7,129Printing stationary and office miscellaneous 20,286 8,727Bank charges 9,017 960Public relation 22,230Other operating expenses 20,335 572Insurance 13,850 29,555Changes in unrecognized deferred tax assets 517,796 215,569 - - As of December 31, 2005, 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. 2005 2004 Exploration and development cost capitalized in tax books 2,023,221 1,505,425Unrecognised deferred tax assets (2,023,221) (1,505,425)Deferred tax assets - - 26. LOSS PER SHARE Basic loss per share is calculated by dividing the net loss for the yearattributable to ordinary shareholders by the weighted average number of ordinaryshares outstanding during the year. Diluted loss per share is 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 loss and share data used in the basic and dilutedloss per ordinary share computations: December 31, December 31, 2005 2004 Net loss attributable to ordinary shareholders for basic loss per share (4,348,241) (2,093,238)Net loss attributable to ordinary shareholders for diluted loss per (4,348,241) (2,093,238)share Weighted average number of ordinary shares for basic loss per share 82,752,099 22,525,009Effect of dilution:Options 56,170 - Warrants 3,570,444 4,172,903 Adjusted weighted average number of ordinary shares for diluted loss 86,378,713 26,697,912per share The effect of warrants on loss per ordinary share for the year ended December31, 2005 and 2004 is anti-dilutive. 27. RELATED PARTY TRANSACTIONS In considering each possible related party relationship, attention is directedto the substance of the relationship, and not merely the legal form.Transactions with related parties for the year ended December 31, 2005 andbalances as of this date were carried out at market terms and were as follows: December 31, 2005 December 31, 2004 Related party Total Related party Total transactions category transactions category Due to employees (see Note 24) 41,511 112,790 218,429 218,429Short-term debt (see Note 23) - - 109,629 109,629Accounts payable (see Note 22) - 863,287 31,576 201,340Other accounts receivable (see Note 16) 322,284 374,807 7,228 26,013 12 months 2005 12 months 2004 Related party Total Related party Total transactions category transactions category Finance cost (see Note 5) - 7,187 52,428 56,977 As December 31, 2005, related parties primarily include the directors andmanagement of the Company who own the majority of the Company's share capital. Key management personnel totals to 3 persons as at December 31, 2005 (2004: 3persons). Total compensation to key management personnel included in general andadministrative expenses in the income statement was 614,400 US dollars for theyear ended December 31, 2005 (2004: 246,600 US dollars). 28. COMMITMENTS AND CONTINGENT LIABILITIES License commitments In 2005, the Group prolonged contracts for exploration and subsequent productionfor Naimanjal and Baltemir licenses. Each contract includes a work programdefining the Group's obligations for investment into exploration of the licensesand contracts. The total amount of the minimum work program commitments is US$500,000 to December 31, 2006. Taxation Legislation and regulations regarding taxation, foreign currency translationsand licensing of foreign currency loans in the Republic of Kazakhstan continueto evolve as the central government manages the transformation from a command toa market-oriented economy. The various legislation and regulations are not always clearly written and theirinterpretation is subject to the opinions of the local tax inspectors, NationalBank officials, and the Ministry of Finance. Instances of inconsistent opinionsbetween local, regional, and national tax authorities and between National Bankand the Ministry of Finance are not unusual. The current regime of penalties and interest related to reported and discoveredviolations of Kazakhstan's law, decrees and related regulations are severe.Penalties include confiscation of the amounts at issue (for currency lawviolations), as well as fines of generally 50% of the taxes unpaid. Interest isassessable at rates of generally 0.03% per day. As a result, penalties andinterest can result in amounts that are multiples of any unreported taxes. The Group believes that it has paid or accrued all taxes that are applicable.Where practice concerning the provision of taxes is unclear, the Group hasaccrued tax liabilities based on management's best estimate. Because of the uncertainties associated with the Kazakh tax and legal systems,the ultimate amount of taxes, penalties and interest, if any, assessed may be inexcess of the amount expensed to date and accrued at December 31, 2003. Althoughsuch amounts are possible and may be material, it is the opinion of theCompany's management that these amounts are either not probable, not reasonablydeterminable, or both. Environmental Matters The Group is subject to various environmental laws and regulations of theRepublic of Kazakhstan. While management believes that substantial compliancewith such laws and regulations has been achieved, there can be no assurancesthat contingent liabilities do not exist. Legal Issues In the ordinary course of business, the Group can be subject to legal actionsand complaints. Management is not aware of any current or pending legal actionor complaint. Management believes that the ultimate liability, if any, arisingfrom such actions or complaints will not have a material adverse effect on thefinancial condition or the results of future operations of the Group. 29. CONCENTRATION OF BUSINESS RISK The Group's main business activities are within the Republic of Kazakhstan.Laws and regulations affecting businesses operating in the Republic ofKazakhstan are subject to rapid changes and the Group's assets and operationscould be at risk due to negative changes in the political and businessenvironment. 30. SUBSEQUENT EVENTS As of June 20, 2006 the Company had purchased approximately US$ 4.5 million ofmining plant and equipment for its Naimanjal and Koskuduk projects. The Company, through its registrar, Computershare Investor Services (ChannelIslands) Limited, has established a depository arrangement whereby depositoryinterests representing Shares will be issued to investors who wish to hold theirShares in electronic form within the CREST system. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
FML.L