Crystallex Reports 2006 Year End Results
Crystallex International Corporation (TSX: KRY)(AMEX: KRY) today reported its financial results for the year ending December 31, 2006. All dollar figures are in US Dollars unless otherwise indicated.
Commenting on the Company’s progress, Gordon Thompson, President and Chief Executive Officer of Crystallex said, “Since taking the position as Crystallex President and CEO in February, 2007, I have had several opportunities to meet with Venezuelan Officials regarding our investments there and plans for Las Cristinas. Additionally, I have confirmed the final Permit required for Las Cristinas is advancing through the Ministry of the Environment and Natural Resources (“MARN”), the final step in the process.”
Several key objectives achieved during 2006 included:
– Converted $7.5 million of Standard Bank’s (“SBL”) debt to equity. SBL’s outstanding bank debt reduced to $3.2 million at year-end.
– Produced 47,345 ounces of gold at the Revemin Plant
– Successfully completed Equity Unit Financing, Private Placement and early warrant exercise to improve Company’s working capital
– Launched in-fill and step-out drill program on Las Cristinas
– Adopted new Shareholder Rights Plan
– Received MIBAM (Ministry of Basic Industry and Mining) formal approval of all the technical, economic and financial aspects of the Feasibility Study for the Las Cristinas project
At December 31, 2006, Proven and probable gold reserves at Las Cristinas estimated at $450 per ounce were 14.0 million ounces. Proven reserves were 50 million tonnes grading 1.25 g/t and probable reserves were 328 million tonnes grading 1.14 g/t. Total proven and probable reserves were 378 million tonnes grading 1.15 g/t. The $450 per ounce reserve estimate by Mine Development Associates used the pit design from the 2005 Development Plan which was based on a $350 per ounce gold price assumption. Using the same $350 per ounce pit design and other physical parameters and costs from the 2005 Development Plan, the following table presents Las Cristinas reserves at various gold prices:
———————————————————————– —- Contained Gold Gold Price Ore (million tonnes) Au Grade (g/t) (million ounces) Strip Ratio ————————————————————————— $450 378 1.15 14.0 1.0 ————————————————————————— $500 405 1.10 14.4 0.9 ————————————————————————— $550 431 1.06 14.7 0.8 —————————————————————————
Mr. Thompson confirmed, “In late 2006 Crystallex launched drill program at Las Cristinas (Crystallex News Release November 1, 2006) with the goal to upgrade existing inferred mineral resources into measured and indicated mineral resources, as well as to increase resources and enable an updated gold reserve and resource estimate. The 13,500 metre drill program was completed in February, 2007. We expect to receive the drill hole assay results in the near term and will press release the data upon receipt. The revised reserve and resource estimate based on the new drill data should be completed and released by the end of the second quarter, 2007.”
Management’s Discussion and Analysis For the Year Ended December 31, 2006 (All dollar amounts in US dollars, unless otherwise stated)
This Management’s Discussion and Analysis (“MD&A”) of the audited financial condition and results of the operations of Crystallex International Corporation (“Crystallex” or the “Company”) for the year ended December 31, 2006 should be read in conjunction with the Company’s annual audited consolidated financial statements and the notes relating thereto. The audited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). All dollar amounts in this MD&A are in US dollars, unless otherwise specified. This MD&A was prepared as of March 27, 2007.
Highlights
– The Government of Venezuela, through the Ministry of Basic Industries and Mining, (“MIBAM”) formal approval of the Las Cristinas Feasibility Study, announced March 27, 2006.
– Gold reserves at Las Cristinas of 14.0 million ounces based on a $450 per ounce gold price.
– Completed a 13,500 metre drilling program at Las Cristinas in February 2007. New resource and reserve estimate expected by the end of the second quarter 2007.
– Gold production of 47,345 ounces at the Revemin Mill.
– Corporate debt reduced by $9.2 million.
– Net loss for the year of $35.7 million, ($0.15) per share.
Key Statistics ————————————————————————– ————————————————————————– 2006 2005 2004 ————————————————————————– Operating Statistics Gold Production (ounces) 47,345 53,178 48,973 Gold Sold (ounces) 48,570 55,217 49,478 Per Ounce Data: Total Cash Cost(1) $ 552 $ 401 $ 365 Average Realized Gold Price $ 578 $ 453 $ 409 Average Spot Gold Price $ 604 $ 445 $ 410 Gold Reserves(2) (ounces): Operating Mines – 38,100 90,400 Las Cristinas 14,006,000 13,594,000 12,849,000 Financial Results ($ 000′s) Revenues $ 28,088 $ 24,990 $ 20,246 Net Loss $ (35,684)$ (45,207) $ (60,654) Net Loss per Basic Share $ (0.15)$ (0.23) $ (0.35) Cash Flow from Operating Activities $ (32,053)$ (32,714) $ (36,005) Financial Position ($000′s) Cash and Cash Equivalents $ 28,573 $ 4,070 $ 5,767 Short-term Investments – – $ 30,277 Restricted Cash and Equivalents – $ 21,323 $ 98,006 Total Debt $ 87,697 $ 96,938 $ 85,088 Shareholders’ Equity $ 196,043 $ 132,067 $ 143,554 Weighted Average Shares Outstanding – Basic (millions) 230.2 194.7 172.2 ————————————————————————– ————————————————————————– (1) For an explanation, refer to the section on Non-GAAP measures. The calculation is based on ounces of gold sold. (2) Calculated in accordance with National Instrument 43-101 as required by Canadian securities regulatory authorities.
Financial Results Overview
The Company recorded a net loss of $35.7 million, or $0.15 per share in 2006, compared with a net loss of $45.2 million or $0.23 per share in 2005. The higher net loss in 2005 is attributable to a $6.6 million write-down of investments in subsidiaries and a $3.8 million commodity contract loss.
Revenue of $28.1 million in 2006 was 12% higher than the $25.0 million of revenue generated in 2005 and reflects higher realized prices on gold sales, which offset the reduction of ounces sold. In 2006, the Company sold 48,570 ounces of gold at an average realized price of $578 per ounce, while in 2005, 55,217 ounces of gold were sold at an average realized price of $453 per ounce. The average spot gold price in 2006 was $604 per ounce, 36% higher than the 2005 average of $445 per ounce.
Operating cash flow was a deficit of $32.1 million in 2006, compared with a deficit of $32.7 million in 2005. The cash flow deficit in 2006 includes general and administrative expenses of $20.4 million, $10.0 million of cash interest payments and a $5.4 million utilization of working capital. The 2005 deficit reflected a similar level of expenditures on general and administrative expenses and cash interest payments, but also included $12.0 million of expenditures for settling gold contract positions, partially offset by a $4.8 million positive contribution from working capital changes. Capital expenditures were $48.4 million in 2006, a decrease of $46.0 million from the prior year due to a reduction in spending on Las Cristinas. At year end 2006, the Company had cash and cash equivalents of $28.6 million.
Development Project
Las Cristinas
Overview
In September 2002, the Company signed a Mining Operation Agreement, (“MOA”) with the State owned Corporacion Venezolana de Guayana, (“CVG”) which granted Crystallex exclusive rights to develop and exploit the gold deposits on the Las Cristinas property. Since signing the MOA, Crystallex has achieved a number of important milestones in the development of Las Cristinas, including:
– September 2003 – completed a Feasibility Study for a 20,000 tonnes per day, (“tpd”) operation. Gold production at 20,000 tpd averages approximately 270,000 ounces per year over a 41 year mine life.
– March 2004 – the Las Cristinas Feasibility Study is approved by the CVG.
– April 2004 – SNC Lavalin Engineers and Constructors Inc., (“SNCL”) appointed as Engineering, Procurement and Construction Management, (“EPCM”) contractors.
– April 2004 – Environmental Impact Statement, (“EIS”) submitted to the Ministry of Environment and Natural Resources, (“MARN”).
– August 2004 – the first and prerequisite permit, the Land Occupation Permit, which authorizes the use of the Las Cristinas properties for mining was confirmed.
– August 2005 – SNCL completed a comprehensive update to the September 2003 Feasibility Study, titled Development Plan 2005. The Development Plan 2005 is a National Instrument 43-101 compliant Technical Report.
– October 2005 – SNCL completed a Pre-Feasibility Study considering an expansion of Las Cristinas from 20,000 tpd to 40,000 tpd. Gold production at 40,000 tpd averages approximately 490,000 ounces per year over a 23 year mine life.
– March 2006 – the Ministry of Basic Industries and Mining, (“MIBAM”) approved the Las Cristinas Feasibility Study.
– March 2007 – All long lead time mining and processing equipment has been received and paid for. Approximately $61 million of equipment is in storage, primarily in Houston, Texas. Engineering design was largely completed at the end of 2005. The construction camp at site is operational and includes kitchen and recreation facilities (with services provided by a catering contractor), refurbished accommodation and a malarial clinic. A 1,000 metre tarred airstrip at site and a 19 kilometre access road are operational. Community social programs continue, and the principal projects for 2007 include construction of a sewage treatment plant and designing and initiating construction of a new medical facility in the town of Las Claritas.
Permitting Progress
Mining projects in Venezuela require a land use permit and an authorization to impact the natural resources, both of which are issued by the MARN. The Land Use Permit was confirmed for Las Cristinas in August 2004. The Permit to Impact Natural Resources, (the “Permit”) authorizes the developer to construct and operate its mine.
At a meeting in Venezuela in October 2006, the MARN indicated its intention to expedite the permitting process for Las Cristinas. MARN requested that Crystallex and Gold Reserve Inc., (Gold Reserve is developing the Las Brisas property to the south of Las Cristinas) cooperate on a number of shared projects to reduce the overall environmental impact of both projects in the Km 88 region. The joint projects include use of a shared airstrip, use of a shared explosives plant, designing and constructing a single National Guard command post for both projects, consideration of sharing access roads and agreeing to work with the community of San Isidro in designing and building a solid waste landfill facility to ultimately be handed to the community for administration.
Crystallex and Gold Reserve have reached agreements in principal on these joint environmental related projects and have recently provided the MARN with supporting documentation on these and other requests.
At the same October meeting, the MARN representatives confirmed that Las Cristinas and Las Brisas were recognized as separate and distinct projects by the Ministry and that each will be issued its own permit and that the timing for granting of the permits for each project would be independent of one another.
Reserves and Resources
In August 2005, SNCL completed a comprehensive update to the September 2003 Las Cristinas Feasibility Study. The updated report titled “Development Plan – 2005″ represents the Company’s current Technical Report as defined by the Canadian Securities Administrators in National Instrument 43-101. The Development Plan included an updated estimate of resources and reserves at Las Cristinas. The Development Plan reserve estimate incorporated new operating cost estimates, the results of Crystallex drilling programs in 2004 and 2005 and was based on an open pit design using a $350 per ounce gold price. For year-end 2006 reserve reporting, Mine Development Associates (“MDA”) was engaged to provide an estimate of reserves at Las Cristinas using a $450 per ounce gold price. The pit design (based on $350 per ounce) and other parameters and costs from the Development Plan – 2005 did not change. At $450 per ounce, proven and probable reserves at Las Cristinas are estimated to be 14.0 million ounces of gold. Total proven and probable reserves are 378 million tonnes grading 1.15 g/t, including proven reserves of 50 million tonnes grading 1.25 g/t and probable reserves of 328 million tonnes grading 1.14 g/t. There is no change to the resource estimate, which includes Measured and Indicated resources of 501 million tonnes grading 1.1 grams per tonne gold, containing 17.7 million ounces of gold. The reserves are included in the resource estimate.
Crystallex completed a 13,500 metre drill program at Las Cristinas in February 2007. MDA has been engaged to incorporate the new drill results in an updated resource and reserve estimate. The Las Cristinas open pit will be redesigned using a $450 per ounce gold price. The new resource and reserve estimate should be available by the end of the second quarter 2007.
2006 Development Expenditures
In 2006, Crystallex spent $48.4 million on development expenditures for Las Cristinas as compared with $94.4 million in 2005. The reduction in expenditures in 2006 reflects the fact that engineering design was largely completed at the end of 2005 and also the majority of payments for long lead time equipment were made in 2005. Considering 2006 expenditures, approximately $26 million was for engineering services, equipment purchases, camp catering and freight and storage costs as detailed in the Development Plan – 2005 capital budget of $293 million and governed by the EPCM contract. The balance of $22.4 million was expended in areas not included in the $293 million capital budget, including site security, general and administrative expenditures at the camp, social and community development programs, exploration and environmental work.
Since the inception of the EPCM contract in April 2004, expenditures related to Las Cristinas have totalled $181 million. Of this amount, approximately $115 million is related to items governed by the EPCM contract and included in the 2005 capital estimate of $293 million. The Company intends to update both capital and operating cost estimates following receipt of the Permit.
Operations Review Production ———————————————————————— ———————————————————————— Gold Production (ounces) 2006 2005 2004 ———————————————————————— Tomi Open Pits 19,428 30,290 35,961 Tomi Underground 22,210 19,811 5,891 La Victoria 3,260 1,491 2,412 Purchased Material 2,447 1,586 4,709 ———————————————————————— Total Gold Production (ounces) 47,345 53,178 48,973 ———————————————————————— ———————————————————————— Total Ore Processed(1) (tonnes) 367,667 418,414 443,504 Head Grade of Ore Processed (g/t) 4.4 4.2 3.7 Total Recovery Rate (%) 92% 94% 93% Total Recovered (ounces) 47,345 53,178 48,973 ———————————————————————— ———————————————————————— Total Cash Cost Per Ounce Sold $ 552 $ 401 $ 365 ———————————————————————— ———————————————————————— Mine Operating Cashflow(2) ($,000) $ 1,300 $ 2,235 $ 2,208 Capital Expenditures ($,000) – $ 856 $ 9,900 Mine Cash Flow After Capital(3) ($,000) $ 1,300 $ 1,379 $ (7,692) ———————————————————————— ———————————————————————— (1) Ore from Tomi, La Victoria and purchased material is processed at the Company’s Revemin mill. (2) Mining Revenue less Operating Expenses (adjusted for non-cash items and excludes exploration costs of $621,000 in 2006). This is a non-GAAP item. (3) Capital Expenditures at the El Callao operating mines, excludes Las Cristinas. Since the second quarter of 2005, all costs at the El Callao operations have been expensed due to the short reserve life of these mines.
For the past three years, over 85% of the Company’s gold production has been sourced from mines on the Tomi concession, located near El Callao in Bolivar state.
The Company produced 47,345 ounces of gold at its Venezuelan operations in 2006, an 11% decrease from 2005. The decrease in gold production was attributable to mining significantly more waste material, and mining and processing fewer tonnes of ore. The Revemin mill, which processes ore from Tomi, La Victoria and purchased material, processed approximately 368,000 tonnes of ore in 2006, a 12% decrease from 2005.
At Tomi, open pit mining was conducted principally at the Mackenzie and Fosforito pits, with a modest amount of mining undertaken at the Milagrito 1 pit until its depletion at the end of the first quarter. As compared with the year earlier period, gold production from the Tomi open pits declined by 36% in 2006. Lower ore production from the Tomi pits was attributable to a significant increase in the requirement for waste stripping. The strip ratio (the ratio of waste rock mined to ore mined) increased by 58%, from 6.3:1.0 in 2005 to 10.0:1.0 in 2006. The strip ratio is expected to remain high for the first half of 2007, then decline as the pits are exhausted in 2008. Lower production from the Tomi open pits was partially offset by production increases at the Tomi underground mine and the La Victoria open pit mine.
During 2007, the Company plans to conduct exploration on the Tomi properties with the aim of finding sufficient open pit ore to supply the Revemin mill after the depletion of the existing Tomi pits in 2008. The Company also plans to mine and process over 100,000 tonnes of non-refractory ore from the La Victoria deposit in 2007 and is evaluating fine grinding of the La Victoria refractory sulphide ore prior to treatment in the Revemin mill. An in-pit crusher at La Victoria is currently being used to crush waste rock which is trucked to Las Cristinas for use as construction aggregate.
The mining operations generated cash flow of approximately $1.3 million in 2006, as compared with $1.4 million in 2005. The decrease was attributable to lower gold sales and an increase in operating costs, which offset higher realized gold prices.
Tomi ———————————————————————– —- —————————————————————— ——— 100% Basis 2006 2005 2004 ————————————————————————— Tomi Open Pits (100% Crystallex) Tonnes Ore Mined 227,845 313,599 334,289 Tonnes Waste Mined 2,287,217 1,971,402 2,751,124 Tonnes Ore Processed 211,936 319,287 350,008 Average Grade of Ore Processed (g/t) 3.1 3.2 3.5 Recovery Rate (%) 94% 93% 92% ————————————————————————— Production (ounces) 19,428 30,290 35,961 ————————————————————————— ————————————————————————— Tomi Underground (100% Crystallex) Tonnes Ore Mined 89,689 72,177 26,966 Tonnes Ore Processed 88,183 63,319 28,454 Average Grade of Ore Processed (g/t) 8.4 10.2 6.9 Recovery Rate (%) 93% 95% 94% ————————————————————————— Production (ounces) 22,210 19,811 5,891 ————————————————————————— ————————————————————————— La Victoria ————————————————————————– ————————————————————————– 100% Basis 2006 2005 2004 ————————————————————————– La Victoria Tonnes Ore Mined 64,222 24,892 36,012 Tonnes Waste Mined 353,052 126,704 481,210 Tonnes Ore Processed 51,424 25,649 25,974 Average Grade of Ore Processed (g/t) 2.3 2.02 3.18 Recovery Rate (%) 86% 89% 91% ————————————————————————– Production (ounces) 3,260 1,491 2,412 ————————————————————————– ————————————————————————–
Income Statement
Revenue
Mining revenue in 2006 was $28.1 million, as compared with $25.0 million in 2005. The increase in revenue in 2006 was attributable to realizing a higher average price on gold sales, which more than offset a reduction in ounces of gold sold. In 2006 the Company sold 48,570 ounces of gold and realized an average gold price of $578 per ounce as compared with 2005 sales of 55,217 ounces at an average realized price of $453 per ounce. Spot gold prices averaged $604 per ounce in 2006 and $445 per ounce in 2005. Crystallex presently sells all its gold to the Venezuelan Central Bank and receives the prevailing spot gold price. Gold sales proceeds are received in local currency and are used to fund ongoing operations and capital projects in Venezuela.
Revenue in 2005 was $25.0 million, as compared with $20.2 million in 2004. Higher revenue in 2005 was due to selling approximately 11% more gold than the prior year and realizing a higher average price on gold sales. Gold sales in 2005 were 55,217 ounces, compared with 49,478 in 2004. The increase in ounces sold was due to higher gold production. The Company realized an average gold sales price of $453 per ounce in 2005, up from $409 per ounce in 2004. Spot gold prices averaged $445 per ounce in 2005 and $410 per ounce in 2004.
Operating Expenses
The Company’s total cash costs of sales include mining, processing, mine administration, royalties and production taxes and exclude general and administrative expenses, depreciation and depletion, financing costs, capital costs and reclamation accruals. Since the second quarter of 2005, the Company has expensed all costs at its Venezuelan operations near El Callao due to the short remaining life at the Tomi mines.
The Company’s cash costs of sales for 2006 were $27.1 million, compared with $22.8 million in 2005. The increase in costs of sales primarily reflects higher underground mining contractor rates, which were renegotiated in 2006 and an increase in the amount of waste material mined from the open pits. Waste stripping increased by 26%, or approximately 540,000 tonnes in 2006 as compared with 2005. To a lesser extent, higher costs in 2006 also reflect global inflation in the mining industry for consumables and commodities used in the production of gold. The Company experienced significant increases in explosives costs, which were approximately 20% higher on a cost per tonne mined basis in 2006 as compared with 2005. There were also material increases in the cost of consumables used in the mill, including cyanide, steel grinding balls and lime and increases in costs for mill maintenance. Security expenses also increased, as did royalties and exploitation taxes that are linked to higher revenues from gold sales.
On a unit cost basis, total cash costs were $552 per ounce of gold sold in 2006, compared with $401 per ounce in 2005. Unit costs were higher in 2006 due to the combined impact of higher operating costs and fewer ounces sold.
The Company’s costs of sales and unit costs reflect the expensing of all costs at the El Callao operations, including costs that would typically be capitalized, such as underground ramp development and expenditures on the Revemin mill.
In 2005, cash costs of sales were $22.8 million, as compared with $18.0 million in 2004. Although tonnes of waste and ore mined were 30% lower in 2005 than in 2004 and less ore was processed, operating costs were higher in 2005 for a number of reasons. For the last nine months of 2005, all costs at the mining operations were expensed. Higher operating costs in 2005 also reflect the impact of worldwide price inflation of commodities, including mining and processing consumables, particularly explosives, cyanide and steel grinding media. The Tomi open pit operations are relatively high cost due to the significant amount of waste rock required to be mined. The strip ratio (the ratio of waste mined to ore mined) at the Tomi open pits averaged 6.3:1.0 in 2005. In addition, the 2005 operating expense figure includes costs associated with the BIOX pilot plant and concentrate studies for the La Victoria deposit.
On a unit cost basis, total cash costs were $401 per ounce of gold sold in 2005, compared with $365 per ounce in 2004. Unit costs were higher in 2005 as the increase in operating costs more than offset the increase in ounces sold.
Amortization and Depletion
Amortization and depletion expense related to the operations decreased by $0.9 million in 2006 as compared with 2005. The decrease was primarily due to the amortization of substantially all of the remaining carrying value of the Revemin mill by the end of September 2006. The amortization expense in 2005 was for a full 12 months.
Comparing 2005 with 2004, operation’s amortization expense increased by $1.2 million in 2005 due to the decision to, commencing in 2005, amortize the remaining carrying value of the Revemin mill over a two year period to reflect the estimate at the time of a two year life of reserves to be processed at the mill. Depletion expense decreased from $4.9 million in 2004 to $330,000 in 2005 as a result of a write-down of various mineral properties at the end of 2004.
General and Administrative Expenses
General and Administrative expenses were $20.4 million in 2006, as compared with $19.5 million in 2005 and $18.2 million in 2004. In 2006, an increase legal fees, principally related to the Las Cristinas project, were partially offset by a decrease in capital taxes, payroll and travel expenses.
Comparing expenditures of $19.5 million and $18.2 million in 2005 and 2004 respectively, higher legal fees related to Las Cristinas, and higher capital taxes were offset, in part, by a reduction in payroll related charges.
Interest Expense
Interest expense was $12.9 million in 2006, as compared with $11.8 million in 2005. In both 2006 and 2005, $9.4 million of interest expense was cash interest payments on the Company’s $100 million of 9.375% senior unsecured notes. The $1.1 million increase in interest expense in 2006 was primarily due to the fact that the restructured Standard Bank debt, which was entered into in December 2005, was interest bearing throughout 2006.
A portion of interest expense is non-cash ($2.96 million in 2006 and $2.67 million in 2005) and represents interest accretion on the senior unsecured notes and the Standard Bank debt, both of which are instruments with debt and equity components, (refer to Note 7 in the Company’s Notes to the Consolidated Financial Statements).
Comparing 2005 with 2004, interest on debt increased to $11.8 million from $548,000. The increase in 2005 was due to interest expense on the $100 million senior unsecured notes issued in December 2004
Forward Sales and Written Call Options
Crystallex eliminated its gold contract positions in 2005. During 2005, the Company spent cash of $12.0 million to financially settle 93,119 ounces of gold contracts. An additional 71,239 ounces of gold contract positions were closed out on December 23, 2005 and the settlement amount of $14.3 million was converted into a term loan facility with Standard Bank Plc maturing in December 2008, (see Financing Activities). In 2005, the Company recorded a commodity contract loss of $3.8 million.
Write-Down of Property Plant and Equipment and Investment in Subsidiaries
The Company did not incur any write-downs in property, plant and equipment in 2005 or 2006. With the exception of the Las Cristinas project, all property, plant and equipment for operating assets had been fully depleted and amortized by December 31, 2006. During 2005, the Company incurred a charge of $6.6 million due to the write-down of its investment in ECM, (refer to Note 10 in the Notes to the Company’s Consolidated Financial Statements).
In 2004, Crystallex incurred write-downs of mineral properties and plant and equipment of $32.0 million. Of this amount, $13.8 million, was attributed to writing down the carrying value of the Revemin mill to reflect the two year estimated life of reserves to be processed at the mill. Mineral property write-downs included the Albino concession ($10.4 million) Tomi Concession ($3.6 million) and three exploration properties ($4.1 million).
Liquidity and Capital Resources
Crystallex’s principal sources of liquidity have been equity and debt financings. The Company does not expect to generate positive operating cashflow (after corporate general and administrative expenses) until the Las Cristinas project is operating at full capacity. At its current rate of expenditures, the Company will need to raise additional funds by the end of the second quarter of 2007.
An update of the capital estimate for Las Cristinas will be undertaken after receipt of the Permit. At that time, the Company will determine its overall funding requirements to cover the period through commercial production of Las Cristinas. The funding requirement will include the balance of capital required to complete the development of Las Cristinas, and funds to meet the Company’s general and administrative expenses, debt service and financing fees. The Company intends to fund the overall requirement with existing cash and from a combination of limited recourse project debt financing and other forms of public market debt and equity financing.
Cash and Cash Equivalents
On December 31, 2006, the Company had cash and cash equivalents of $28.6 million, as compared with $25.4 million (including $21.3 million of restricted cash) at year end 2005. The restricted cash at the end of 2005 represented the balance of proceeds of a $100 million senior unsecured note financing held in escrow to pay for approved capital expenditures for Las Cristinas and to partially fund interest payments for the senior unsecured notes. The restricted cash was fully utilized in 2006.
The change in the cash balance during 2006 is reconciled as follows:
$ millions Cash, Cash Equivalents and Restricted Cash on December 31, 2005 $25.4 Common Share and Warrant Financing Activities $88.9 Debt Borrowings 0 Total Sources of Cash $88.9 Operating Cash Flow Deficit ($32.1) Capital Expenditures – Las Cristinas (48.4) Debt Repayments (5.2) Total Uses of Cash ($85.7) Net Addition to Cash and Cash Equivalents $3.2 Cash and Cash Equivalents on December 31, 2006 $28.6
Cash Flow from Operating Activities
Cash flow from operations (before capital expenditures) is principally affected by general and administrative expenditures, cash interest expense, the level of gold sales, realized gold prices, cash operating costs, and movements in non-cash working capital. In previous years, cash flow from operations was also impacted by expenditures on reducing the Company’s gold sales commitments, which were eliminated at the end of 2005.
Cash flow from operations was a deficit of $32.1 million in 2006, compared with a deficit of $32.7 million the year earlier. The cash flow deficit in 2006 reflects general and administrative expenses of $20.4 million, $10.0 million of cash interest payments and a $5.4 million utilization of working capital. In 2005, the cash flow deficit of $32.7 million was largely attributable to $19.5 million of general and administrative expenditures, $12.0 million of expenditures for settling gold contract positions and $9.3 million of cash interest payments, offset in part by a $4.8 million positive contribution from working capital changes.
Cash flow from operations was a deficit of $32.7 million in 2005, compared with a deficit of $36.0 million in 2004. The larger deficit in 2004 was mainly due to higher spending on settling gold contract positions. In 2004, the Company spent $19.1 million on settling gold contracts, as compared with $12 million in 2005.
Investing Activities
Capital expenditures totalled $48.4 million in 2006, as compared with $94.4 million in 2005. The decrease in capital expenditures is attributable to the delay in receiving the Permit to commence site development of Las Cristinas. Capital spending in 2006 was exclusively used for advancing the development of Las Cristinas and included expenditures for engineering design and equipment procurement under the EPCM contract and also for owner’s costs, including security, site general and administrative costs, environmental work, socio-economic programs, exploration drilling and legal and professional fees. Higher capital expenditures in 2005, as compared to both 2006 and 2004, reflect greater activity in the areas of engineering design and equipment procurement.
Until the Permit is received, capital expenditures for Las Cristinas are expected to largely comprise the owner’s costs described above and EPCM governed costs, such as SNC Lavalin charges, camp catering, freight and storage.
Capital expenditures for 2004-2006 are summarized as follows: ————————————————————————— ————————————————————————— $ millions 2006 2005 2004 ————————————————————————— Las Cristinas $48.4 $93.5 $40.7 Revemin/ Tomi – 0.4 9.1 Albino – 0.5 0.8 Corporate – – 0.3 Total $48.4 $94.4 $50.9 ————————————————————————— —————————————————————————
The amount of capital spending in 2007 depends upon the timing of the receipt of the Las Cristinas Permit and the timing of future financings.
Financing Activities
In August 2006, the Company raised net proceeds of $26.9 million in a public offering of 10,125,000 units, with each unit consisting of one common share of the Company and one half of one common share purchase warrant. Each whole warrant entitles the holder to purchase one common share of the Company at a price of C$4.25 on or before February 10, 2008.
In February 2006, the Company completed a private placement of 10,799,000 units at a purchase price of $2.90 per unit for net proceeds of $30.3 million. The units consisted of 10,799,000 common shares and 12,250,000 share purchase warrants. Each warrant allows the holder to purchase a common share of the Company for $4.25 per share for a period of 18 months, exercisable 45 days following the receipt of the Permit for the Las Cristinas project.
The Company received proceeds of $21.3 million during the third quarter of 2006 from the exercise of common share purchase warrants. Approximately $6.0 million of these proceeds were received in July 2006, when the Company agreed to amend the terms of 2,197,727 warrants, expiring September 15, 2006 and issue new warrants in exchange for the early exercise of the 2,197,727 warrants. Upon the early exercise of the warrants, the Company issued 2,197,727 common shares and issued 0.398 new common share purchase warrants for each warrant exercised, for an aggregate issue of 875,000 new warrants. Each new warrant entitles the holder to purchase one common share of the Company at an exercise price of $4.00 per share until July 14, 2008.
Standard Bank Loan
On December 23, 2005, the Company closed out the remaining 71,239 ounces of gold contract positions and converted the $14.3 million settlement amount into an amortizing term loan facility with Standard Bank Plc maturing on December 31, 2008. The loan consisted of a $7.5 million convertible portion and a $6.8 million non-convertible portion. During the second quarter of 2006, Standard Bank elected to convert the entire $7.5 million convertible portion of their loan into common shares of Crystallex. As a result of the conversion, the Company issued 3,765,841 common shares to Standard Bank.
The Company is required to make monthly principal and interest payments totalling $150,000 under the term loan agreement. In addition, the terms of the loan agreement require the Company to make mandatory loan prepayments upon the issue of equity or equity linked debt securities, including convertible or exchangeable debt securities. The prepayment amount is tied to the net proceeds of new equity financings. As a result of the private placement financing in February 2006 and the unit financing in August 2006, the Company made mandatory prepayments to Standard Bank of $2.1 million and $1.9 million respectively. At December 31, 2006, there was $3.2 million outstanding under the Standard Bank term loan.
Crystallex is providing a guarantee of the obligations under the term loan. The loan is secured by the Company’s Tomi and Revemin assets. The non-convertible portion of the term facility ranks pari passu with unsecured and unsubordinated debt of Crystallex.
Equity Draw Down Facility
The Company has a C$60 million equity draw down facility with a counterparty. Under the terms of the equity facility, the Company has the right, but not the obligation, to require the counterparty to purchase up to C$60 million of the Company’s common shares in a series of draws over a 24 month period, from September 14, 2005 to September 14, 2007. The minimum share price at which the Company will sell shares to the counterparty is C$1.00. On January 26, 2006, the Company exercised a fifth draw under the equity draw down facility and issued 1,661,130 common shares to the counterparty for gross proceeds of C$5.0 million. At December 31, 2006, a total of C$26.6 million had been drawn under the facility.
The Company issued the following common shares to the counterparty upon the exercise of four draws under the equity draw down facility.
———————————————————————– —- —————————————————————— ——— Date Shares Issued Gross Proceeds ————————————————————————— October 5, 2005 4,092,680 C$6.0 million October 31, 2005 2,924,259 C$4.6 million November 30, 2005 3,163,657 C$6.0 million December 16, 2005 2,092,640 C$5.0 million January 26, 2006 1,661,130 C$5.0 million ————————————————————————— —————————————————————————
Asset Retirement Obligations
The estimate of future cash flows required for asset retirement obligations was reduced by approximately $0.4 million during 2006. The decrease was mainly attributable to a reduction in the estimate of costs associated with the retirement of the Revemin mill.
In 2005, the estimate for asset retirement obligations was reduced by $1.1 million, as compared with 2004. This reduction was mainly as a result of the reduction in the estimate of surface area to require rehabilitation at the Company’s Lo Increible properties.
Contractual Obligations and Commitments
The Company’s contractual obligations and commitments, as at December 31, 2006, are tabled below:
———————————————————————– —- —————————————————————— ——— Less than 1 – 3 4 – 5 More Than $ millions One Year Years Years 5 Years Total ————————————————————————— Long Term Debt Repayments(1) $3.4 $2.0 $100.0 – $105.4 ————————————————————————— Asset Retirement Obligations $0.2 $1.0 – – $1.2 ————————————————————————— Operating Lease Obligations $0.17 $0.21 – – $0.38 ————————————————————————— (1) Included in the debt repayment schedule is $1.8 million of exchangeable notes, payable in two equal instalments in June and December 2007. The Noteholders may elect to exchange the instalments for shares of the Company and the Company has the option to satisfy the instalment obligation with shares. Subsequent to year-end, the Company received notice that the Noteholders have elected to receive shares of the Company for the June 2007 instalment.
In addition, the Company has approximately $1.9 million in outstanding commitments related to long lead time equipment ordered for Las Cristinas.
The Company has royalty commitments that are only payable if gold is produced. There is no obligation to make payments if gold is not produced. Currently, the Company’s only gold production is from the Tomi concession, which is subject to a 1.75% royalty on gold revenue. All gold production in Venezuela is subject to an exploitation tax, established under the Mining Law, which is payable to the Republic of Venezuela. The exploitation tax is presently 3% of gold revenue.
In the normal course of business, the Company has entered into contracts that contain commitments to pay amounts dependent upon future events. Such amounts, if any, are not determinable by the year end; consequently, no amounts have been accrued in the financial statements with respect to these commitments.
Related Party Transactions
During 2005 and 2006, Crystallex entered into the following material transactions with related parties:
Orion Securities Inc.: Orion Securities Inc. is an investment dealer that provided underwriting services to the Company in 2005 and 2006. Mr. Robert Fung is an employee of Orion Securities Inc. and is Chairman of the Board of Directors of Crystallex. During 2006, Orion was paid $2,947,156 for these services, none of which was to the benefit of Mr. Fung. During 2005, Orion was paid $121,000. The increase in 2006 was attributable to Orion’s role in the Company’s financing activities during the year.
During 2005, a portion of the Company’s legal fees were paid to a related party. McMillan Binch Mendelsohn LLP provides legal services to the Company. David Matheson is counsel to McMillan Binch Mendelsohn LLP and was a member of the Board of Directors of Crystallex until June 24, 2005. During that period in 2005, McMillan Binch Mendelsohn LLP was paid C$730,000 for providing legal services to Crystallex.
Outstanding Share Data
At March 26, 2007, 246,196,806 common shares of Crystallex were issued and outstanding. In addition, at March 26, 2007 options to purchase 11,289,089 common shares of Crystallex were outstanding under the Company’s stock option plan and warrants to purchase 18,687,500 common shares of Crystallex were issued and outstanding.
Quarterly Data
———————————————————————– —- —————————————————————— ——— US$,000 2006 Q4 Q3 Q2 Q1 Revenue $5,720 $9,769 $5,520 $7,079 Net (Loss) ($11,617) ($8,815) ($8,296) ($6,956) ————————————————————————— ————————————————————————— ————————————————————————— ————————————————————————— US$,000 2005 Q4 Q3 Q2 Q1 Revenue $6,623 $7,020 $6,301 $5,046 Net (Loss) ($18,585) ($10,338) ($8,295) ($7,989) ————————————————————————— —————————————————————————
Quarterly revenue in 2006, as compared with 2005 reflects lower gold sales; however, in some quarters, notably the third quarter of 2006, this is offset by higher realized gold prices. The net loss in the fourth quarter of 2005 reflects the impact of a $6.6 million write-down of an investment in a subsidiary company.
The quarterly trends are consistent with the explanations of the annual trends set out in this MD&A.
Critical Accounting Policies and Estimates
Critical accounting estimates are those estimates that have a high degree of uncertainty and for which changes in those estimates could materially impact the Company’s results. Critical accounting estimates for the Company include property evaluations, capitalization of exploration and development costs and commodity derivative contracts.
Use of Estimates
The preparation of financial statements in conformity with accounting principals generally accepted in Canada requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets at the date of the consolidated financial statements. Significant estimates used herein include those relating to gold prices, recoverable proven and probable reserves, available resources, fair values of commodity derivative contracts, (principally fixed forward contracts and written call options) available operating capital and required reclamation costs. Among other things, these estimates each affect management’s evaluation of asset impairment and the recorded balances of inventories, site closure and reclamation and remediation obligations. It is reasonably possible that actual results could differ in the near term from these and other estimates used in preparing these financial statements and such differences could be material.
Property Evaluations
The Company reviews and evaluates the recoverability of the carrying amounts of all its producing properties and related plant and equipment annually or when events and changes in circumstances indicate that the carrying value may not be recoverable. Estimated net future cashflows, on an undiscounted basis, are calculated using estimated recoverable ounces of gold (considering current proven and probable reserves), estimated future commodity price realization (considering historical and current prices, price trends and related factors), operating costs, future capital expenditures, project financing costs, reclamation costs and income taxes. Reductions in the carrying amount of property, plant and equipment, with corresponding charges to earnings, are recorded to the extent that the estimated future discounted net cashflows are less than the carrying amount.
Capitalization of Exploration and Development Costs
Mineral exploration costs such as topographical, geochemical, and geophysical studies are capitalized and carried at cost until the properties to which they relate are placed into production, sold, or where management has determined there to be a permanent impairment in value. Development costs incurred to access ore bodies identified in the current mining plan are expensed as incurred after production has commenced. Development costs necessary to extend a mine beyond those areas identified in the current mining plan and which are incurred to access additional reserves are deferred until the incremental reserves are mined. Mineral properties and development costs, including the mineral acquisition and direct mineral exploration costs relating to the current mining plan are depleted and amortized using the unit-of-production method over the estimated life of the ore body based on proven and probable reserves.
Commodity Derivative Contracts
The Company has in the past entered into commodity derivative contracts, principally fixed forward contracts and written call options, to economically hedge exposure to fluctuations in the market price of gold. These instruments were not designated as hedges for accounting purposes and were carried on the balance sheet under the captions Commodity Contract Obligations at estimated fair market value.
Premiums received at the inception of written call options are initially recognized on the balance sheet as a liability. Unrealized gains or losses arising from changes in the fair market value of the liability related to both fixed forward contracts and written call options and realized gains/losses on commodity derivative contracts which are either settled financially or through physical delivery, are recognized in the statement of operations in the period of the change or settlement as commodity contract loss/gain.
Special Note Regarding Forward Looking Statements
Certain statements included or incorporated by reference in this Management Discussion and Analysis, including information as to the future financial or operating performance of the Company, its subsidiaries and its projects, constitute forward-looking statements. The words “believe,”"expect,”"anticipate,”"contemplate,”"target,”"plan,”"intends,”"continue,”"budget,”"estimate,”"may,”"schedule” and similar expressions identify forward-looking statements. Forward-looking statements include, among other things, statements regarding targets, estimates and assumptions in respect of gold production and prices, operating costs, results and capital expenditures, mineral reserves and mineral resources and anticipated grades and recovery rates. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Company, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many factors could cause the Company’s actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, the Company. Such factors include, among others, risks relating to additional funding requirements, reserve and resource estimates, gold prices, exploration, development and operating risks, illegal miners, political and foreign risk, uninsurable risks, competition, limited mining operations, production risks, environmental regulation and liability, government regulation, currency fluctuations, recent losses and write-downs and dependence on key employees. See “Risk Factors” in the Company’s 2005 40-F/Annual Information Form. Due to risks and uncertainties, including the risks and uncertainties identified above, actual events may differ materially from current expectations. Investors are cautioned that forward-looking statements are not guarantees of future performance and, accordingly, investors are cautioned not to put undue reliance on forward-looking statements due to the inherent uncertainty therein. Forward-looking statements are made as of the date of this Management Discussion and Analysis and the Company disclaims any intent or obligation to update publicly such forward-looking statements, whether as a result of new information, future events or results or otherwise.
Risk Factors
The business and operations of the Crystallex Group are subject to risks. In addition to considering the other information in the Annual Information Form, you should carefully consider the following factors. Any of the following risks could have a material adverse effect on the Corporation, its business and future prospects.
Risks Associated with Operating in Developing Countries
The Corporation’s mineral exploration and mining operations are located in Venezuela and may be adversely affected by whatever political instability and legal and economic uncertainty that might exist in such country. The risks associated with the Corporation’s foreign operations may include political unrest, labour disputes, invalidation of governmental orders, permits, agreements or property rights, risk of corruption including violations under U.S. and Canadian foreign corrupt practices statutes, military repression, war, civil disturbances, criminal and terrorist actions, arbitrary changes in laws, regulations and policies, taxation, price controls, exchange controls, delays in obtaining or the inability to obtain necessary permits, opposition to mining from environmental or other non-governmental organizations, limitations on foreign ownership, limitations on the repatriation of earnings, limitations on mineral exports, high rates of inflation and increased financing costs. These risks may limit or disrupt the Corporation’s projects or operations, restrict the movement of funds or result in the deprivation of contractual rights or the taking of property by nationalization, expropriation or other means without fair compensation.
Risks Specific to Operations in Venezuela
Political and Economic Instability
The Corporation’s principal mineral properties are located in Venezuela and as such the Corporation may be affected by political or economic instabilities there. The risks associated with carrying on business in Venezuela, in addition to those highlighted above, include, but are not limited to violent crime, which is prevalent throughout the country and includes kidnapping, smuggling and drug trafficking especially in remote areas. Changes in resource development or investment policies or shifts in political attitudes in Venezuela may adversely affect the Corporation’s business. Operations may be affected in varying degrees by government regulations with respect to restrictions in production, price controls, export controls, exchange controls, income taxes, expropriation of property, maintenance of claims, environmental legislation, land use, unauthorized mining activities, land claims of local people, water use and mine safety. The effect of these factors cannot be accurately predicted.
Environmental Permit Still Required
MIBAM completed its overall approval process of Las Cristinas on March 26, 2006. However, the Corporation has experienced delays in acquiring the environmental permit necessary to allow commencement of construction of the mine. The Corporation continues to await the issuance of the Permit, the initial application of which was submitted in April 2004. Continued development and the ultimate commencement of commercial production are dependent upon receipt of the Permit, which will allow the Corporation to proceed to put in place financing to fund construction. As the Las Cristinas project is the Corporation’s primary development project, the failure to obtain the Permit or to obtain the Permit in a timely manner could have a material adverse affect on the future of the Corporation’s business. There can be no assurance as to when or if the Permit will be granted.
Exchange Controls
Venezuela currently has exchange controls that affect the ability of companies doing business in Venezuela to convert Venezuelan source income into foreign currency. The Central Bank of Venezuela enacted such exchange control measures in 2003 in order to protect international reserves. The exchange rate, originally fixed at approximately 1,600 Bolivars /US$, has since been adjusted twice upwards and presently stands fixed at 2,150 Bolivars/US$. There can be no assurance that exchange controls will not continue and, if they do, that they will not adversely affect the Corporation’s operations, including its ability to satisfy its foreign currency obligations.
Mine Operation Agreement
Lack of Ownership Rights
Under the Venezuelan Mining Law of 1999 (“VML”), all mineral resources belong to the Republic of Venezuela. In accordance with the VML, the Government of Venezuela has reserved for itself the right to directly explore and exploit the Las Cristinas Deposits and has elected to do so through the CVG. See “Las Cristinas Project – Mine Operation Agreement.” The Mine Operation Agreement is an operation agreement and does not transfer any property ownership rights or title rights to the gold produced to the Corporation. Rather, the Corporation has been authorized to exploit the Las Cristinas Deposits for the CVG in accordance with to the Mine Operation Agreement. The interests of the Corporation in the Las Cristinas Deposits are contingent upon the Corporation continuing to satisfy its obligations under the Mine Operation Agreement. Failure to do so could result in the CVG having the right to terminate the Mine Operation Agreement.
Lack of Copper Rights
In addition to gold, the Las Cristinas Deposits also contain very low levels of copper, 0.13% on average. Under the Mine Operation Agreement, the Corporation is only entitled to exploit the gold contained in the Las Cristinas Deposits. Based on the feasibility studies carried out by the Corporation and following discussions with the CVG, the Corporation has determined that exploiting the copper contained in the Las Cristinas Deposits would detract from the economics of the Las Cristinas Project. The Corporation does not need the right to exploit the copper contained in the Las Cristinas Deposits in order to exploit the gold and does not currently intend to negotiate with the CVG for the right to exploit the copper contained in the Las Cristinas Deposits.
Although the Corporation does not believe that the MIBAM would do so, the MIBAM retains the right to grant exploitation and other rights with respect to the copper contained in the Las Cristinas Deposits to the CVG or a third party. The Corporation has been advised by its Venezuelan counsel that:
(a) if the MIBAM grants the right to exploit the copper contained in the Las Cristinas Deposits to the CVG, subject to fulfilling all necessary requirements of Venezuelan law (including the additional grant by the MIBAM to the CVG of the right to negotiate the exploitation of the copper with third parties), the CVG has agreed under the terms of the Mine Operation Agreement to negotiate the exploitation of the copper with the Corporation; and
(b) if the MIBAM grants the right to exploit the copper contained in the Las Cristinas Deposits to a third party, the Corporation’s right under the Mine Operation Agreement to exploit the gold contained in the Las Cristinas Deposits would, as a matter of Venezuelan law, take precedence over the third party’s right to exploit the copper.
If the MIBAM grants the right to exploit the copper contained in the Las Cristinas Deposits to the CVG, there can be no assurance that the MIBAM will grant to the CVG the additional right to negotiate the exploitation of the copper with third parties or that the Corporation will be able to negotiate an agreement with respect to the exploitation of the copper with the CVG. Also, if the MIBAM grants the right to exploit the copper contained in the Las Cristinas Deposits to a third party, or if the MIBAM grants the right to exploit the copper contained in the Las Cristinas Deposits to the CVG and the CVG grants the right to exploit the copper to a third party, there can be no assurance that the Corporation will be successful under Venezuelan law in asserting that its right to exploit the gold contained in the Las Cristinas Deposits takes precedence over the third party’s right to exploit the copper.
Proposed Amendments to Mining Laws
In 2005, the Government of Venezuela announced that it would be changing the mining title regime from a system where title was granted in the form of either concessions or operating contracts to a system where all “new” economic interests would be granted in the form of joint ventures or operating contracts. In order to effect this change, the Government of Venezuela, advised that it would need to create a national mining company which would be the nation’s contracting party covering the entire country of Venezuela. The Government of Venezuela also indicated that, given this change in title regime, it would also be appropriate to review all existing mining companies in a single comprehensive exercise to ensure that only companies found to be in compliance with their existing title terms and conditions would continue to qualify under the new regime on the same terms and conditions. The Government of Venezuela further stated that all those companies found not to be in compliance would have their operations turned over to small mining cooperatives supported by the Government of Venezuela via the national mining company. MIBAM issued its formal approval of Las Cristinas on March 26, 2006.
Arbitration Proceedings
The Corporation is a party interested in, but not a party to, an ongoing arbitration.
Sale of Gold
For the past several years the Corporation sold all of its Venezuelan gold production to the Central Bank of Venezuela. In June 2006, the Central Bank of Venezuela informed the Corporation it was suspending purchase of gold from the Corporation. During June and July, the Corporation sold gold to accredited third parties within Venezuela and in August 2006 the Central Bank