Condensed Consolidated Financial Statements For the Three and Nine Months Ended
Adriana Resources Inc. Condensed Consolidated Statements of Financial Position (unaudited and expressed in Canadian dollars) December 31, 2011 November 1, 2010 (Note 20) (Note 20) ASSETS Note Current assets Cash and cash equivalents $ 53,476,050 $ 15,220,467 $ 1,879,633 Investment in equity securities 4 155,000 475,000 - Other receivables 372,658 1,169,364 494,988 Receivable from LOM 13 6,870 - - Prepaid expenses and deposits 164,552 434,678 103,201 54,175,130 17,299,509 2,477,822 Non-current assets Investment in LOM 5 28,938,598 - - Property, plant and equipment 6 51,402,077 77,068,740 62,200,069 $ 134,515,805 $ 94,368,249 $ 64,677,891 LIABILITIES Current liabilities Accounts payable and accrued liabilities 17 $ 3,358,162 $ 4,479,356 $ 4,145,664 Interest payable 7-1,670,834 35,858 Convertible debentures 7-6,278,912 3,399,018 3,358,162 12,429,102 7,580,540 Non-current liabilities Interest payable 7 - - 1,041,159 Convertible debentures 7 - - 6,017,895 - - 7,059,054 EQUITY Share capital 10 129,989,569 123,115,235 84,672,312 Capital reserves 6,476,196 6,242,054 5,989,767 Accumulated deficit (17,297,302) (59,094,937) (51,974,348) Equity attributable to owners of the Company 119,168,463 70,262,352 38,687,731 Non-controlling interests 9 11,989,180 11,676,795 11,350,566 131,157,643 81,939,147 50,038,297 $ 134,515,805 $ 94,368,249 $ 64,677,891 Commitments and contingencies (Note 14) Subsequent event (Note 19) The accompanying notes form an integral part of the condensed consolidated financial statements. Page 2
Adriana Resources Inc. Condensed Consolidated Statements of Comprehensive (Loss) / Income (unaudited and expressed in Canadian dollars) Three months ended Nine months ended October 31, 2011 October 31, 2011 (Note 20) (Note 20) Note Expenses Change in fair value of financial assets classified as fair value through profit or loss 4 $ 60,000 $ (40,000) $ 320,000 $ 375,000 Finder's fee 5 - - 6,763,361 - Foreign exchange gain (124,789) (132,424) (336,844) (37,781) General and administrative 18 796,181 643,631 2,973,818 2,168,416 Interest on convertible debentures 168,210 189,499 577,503 711,642 Loss on disposal of property, plant and equipment - 8,352 1,358 8,352 Share-based payment expense 10 426,092 249,330 1,454,579 865,292 Share of loss of LOM 5 101,634-218,617 - Professional and consulting fees 90,141 826,719 641,526 3,270,534 Total expenses 1,517,469 1,745,107 12,613,918 7,361,455 Interest income 215,585 53,942 582,890 242,298 Other income - 92,142-92,142 Gain on disposal of mineral property interests 5 - - 53,417,789 1,185,252 (Loss) / income before income taxes (1,301,884) (1,599,023) 41,386,761 (5,841,763) Income tax (expense) / recovery 8 - - (270,000) 976,100 (Loss) / income and total comprehensive (loss) / income for the period $ (1,301,884) $ (1,599,023) $ 41,116,761 $ (4,865,663) Attributable to: Owners of the Company (1,272,987) (1,594,666) 41,294,376 (4,655,894) Non-controlling interests 9 (28,897) (4,357) (177,615) (209,769) $ (1,301,884) $ (1,599,023) $ 41,116,761 $ (4,865,663) (Loss) / income per common share Basic $ (0.01) $ (0.01) $ 0.26 $ (0.04) Diluted N/A (anti-dilutive) N/A (anti-dilutive) $ 0.26 N/A (anti-dilutive) Weighted average number of common shares outstanding Basic 157,529,238 149,106,709 155,921,063 134,844,931 Diluted N/A (anti-dilutive) N/A (anti-dilutive) 158,535,050 N/A (anti-dilutive) The accompanying notes form an integral part of the condensed consolidated financial statements. Page 3
Adriana Resources Inc. Condensed Consolidated Statements of Changes in Equity (unaudited and expressed in Canadian dollars) Capital Accumulated Attributable to Non-controlling Share capital reserves deficit owners of the Company interests Total equity Balance, November 1, 2010 (Note 20) $ 84,672,312 $ 5,989,767 $ (51,974,348) $ 38,687,731 $ 11,350,566 $ 50,038,297 Private placements, net of costs 33,651,723 - - 33,651,723-33,651,723 Share-based payment expense - 729,518-729,518-729,518 Tax benefit renounced to flow-through shareholders (590,100) - (976,000) (1,566,100) - (1,566,100) Exercise of stock, warrants and compensation options - (557,653) - (557,653) - (557,653) Issue of shares/warrants upon exercise of options 1,189,734 108,955-1,298,689-1,298,689 Issue of shares upon exercise of warrants 280,585 (110,948) - 169,637-169,637 Issue of shares upon debenture conversions 3,748,797 (276,987) - 3,471,810-3,471,810 Non-controlling interest in cash contributions to Port Facility - - - - 588,000 588,000 Net loss for the period - - (5,134,564) (5,134,564) (277,040) (5,411,604) Balance, July 31, 2011 122,953,051 5,882,652 (58,084,912) 70,750,791 11,661,526 82,412,317 Share-based payment expense - 249,330-249,330-249,330 Exercise of stock, warrants and compensation options - (69,696) - (69,696) - (69,696) Issue of shares/warrants upon exercise of options 152,195 - - 152,195-152,195 Non-controlling interest in cash contributions to Port Facility - - - - 62,000 62,000 Net loss for the period - - (1,594,666) (1,594,666) (4,357) (1,599,023) Balance, October 31, 2011 123,105,246 6,062,286 (59,679,578) 69,487,954 11,719,169 81,207,123 Share-based payment expense - 181,007-181,007-181,007 Exercise of stock, warrants and compensation options - (1,239) - (1,239) - (1,239) Issue of shares/warrants upon exercise of options 9,989 - - 9,989-9,989 Non-controlling interest in cash contributions to Port Facility - - - - 86,000 86,000 Net income / (loss) for the period - - 584,641 584,641 (128,374) 456,267 Balance, December 31, 2011 123,115,235 6,242,054 (59,094,937) 70,262,352 11,676,795 81,939,147 Private placements, net of costs 4,574,958 - - 4,574,958-4,574,958 Share-based payment expense - 1,454,579-1,454,579-1,454,579 Exercise of stock, warrants and compensation options - (717,178) - (717,178) - (717,178) Issue of shares/warrants upon exercise of options 524,595 - - 524,595-524,595 Issue of shares upon exercise of warrants 1,774,781 - - 1,774,781-1,774,781 Maturity of convertible debenture - (503,259) 503,259 - - - Non-controlling interest in cash contributions to Port Facility - - - - 490,000 490,000 Net income / (loss) for the period - - 41,294,376 41,294,376 (177,615) 41,116,761 Balance, $ 129,989,569 $ 6,476,196 $ (17,297,302) $ 119,168,463 $ 11,989,180 $ 131,157,643 The accompanying notes form an integral part of the condensed consolidated financial statements. Page 4
Adriana Resources Inc. Condensed Consolidated Statements of Cash Flows (unaudited and expressed in Canadian dollars) Three months ended Nine months ended October 31, 2011 October 31, 2011 Operating activities Net (loss) / income $ (1,301,884) $ (1,599,023) $ 41,116,761 $ (4,865,663) Items not affecting cash and cash equivalents Amortization 9,750 17,999 29,888 57,039 Net finance costs / (income) (47,375) 189,499 (5,388) 553,346 Share-based payment expense 426,092 249,330 1,454,579 865,292 Gain on disposal of mineral property interests - - (53,417,789) (1,185,252) Loss on disposal of property, plant and equipment - 8,352 1,358 8,352 Change in fair value of financial assets classified as fair value through profit or loss 60,000 (40,000) 320,000 375,000 Unrealized portion of foreign exchange losses - (132,424) - (37,779) Income tax expense / (recovery) - - 270,000 (976,100) Changes in non-cash working capital Other receivables and prepaid expenses 174,578 (341,528) 924,517 (740,430) Amounts payable and accrued liabilities (216,733) (475,489) (781,168) 86,006 (895,572) (2,123,284) (10,087,242) (5,860,189) Investing activities Port facility expenditures (265,466) (316,334) (444,871) (762,450) Mineral property expenditures - (6,947,482) (565,600) (10,780,602) Office property, plant and equipment expenditures - (54,357) (8,371) (87,119) Extinguishment of half of the Lac Otelnuk Project royalty - - (5,500,000) - Cash interest received 215,585 106,370 582,890 286,517 Net proceeds from disposal of mineral property interests - - 51,633,611 465,252 Additional consideration from disposal of mineral property 8,739,684-8,739,684-8,689,803 (7,211,803) 54,437,343 (10,878,402) Financing activities Proceeds from share issuance, net of issue costs - - 894,958 26,143,107 Proceeds from exercise of options and warrants - 82,500 1,537,772 422,289 Cash payment on maturity of the convertible debenture (6,450,000) - (6,450,000) - Cash interest paid on maturity of convertible debenture (2,077,248) - (2,077,248) - Cash interest paid - - - (130,461) (8,527,248) 82,500 (6,094,518) 26,434,935 Net change in cash and cash equivalents during the period (733,017) (9,252,587) 38,255,583 9,696,344 Cash and cash equivalents - beginning of period 54,209,067 27,425,527 15,220,467 8,476,596 Cash and cash equivalents - end of period $ 53,476,050 $ 18,172,940 $ 53,476,050 $ 18,172,940 The accompanying notes form an integral part of the condensed consolidated financial statements. Page 5
1. Nature of Operations Adriana Resources Inc. (along with its subsidiaries, Adriana or the Company ) was incorporated under the laws of British Columbia and continued under the Canada Business Corporations Act. The Company s principal business activities include the investment in a joint venture company, Lac Otelnuk Mining Ltd. ( LOM ), formed to develop the Lac Otelnuk iron ore property in Nunavik, Québec (the Lac Otelnuk Property ) and the development of an iron ore port facility in Brazil (the Port Facility ). The Company s common shares (the Common Shares ) are listed on the TSX Venture Exchange under the symbol ADI. The Company s registered head office is 15 Toronto Street, Suite 1000, Toronto, Ontario, M5C 2E3, Canada. Adriana has no source of operating cash flows, has not yet achieved profitable operation, has accumulated losses to of $17,297,302 since its inception and expects to incur further losses in the development of its business. On January 12, 2012 Adriana closed a Joint Venture Agreement (the JV Agreement ) with a wholly-owned subsidiary of WISCO International Resources Development & Investment Limited ( WISCO ). With the closing of the JV Agreement on January 12, 2012, the resultant joint venture company was established to proceed with the continued exploration of the Lac Otelnuk and December Lake properties (the Lac Otelnuk Project ). Pursuant to the JV Agreement, WISCO funded $51,633,611 directly to Adriana and $40,000,000 was injected into LOM. The interest in the Lac Otelnuk Project was transferred to LOM. WISCO acquired a 60% interest in LOM, while Adriana holds the remaining 40% interest. LOM is accounted for as an investment in associate by Adriana, as the Company retains significant influence. In October 2011, Adriana announced its intention to change its fiscal year end from October 31 to December 31, effective as of December 31, 2011. Accordingly, for the 2011 fiscal period, Adriana reported its audited consolidated financial statements for the fourteen month period ended December 31, 2011, compared with the twelve month period ended October 31, 2010. The reporting periods and their respective comparative periods in 2012 will be: Period Comparative Period 3 months ended March 31, 2012 3 months ended April 30, 2011 6 months ended June 30, 2012 6 months ended July 31, 2011 9 months ended 9 months ended October 31, 2011 12 months ended December 31, 2012 14 months ended December 31, 2011 The condensed consolidated financial statements are presented in Canadian dollars except where otherwise indicated. 2. Basis of Preparation a) Statement of compliance These condensed consolidated financial statements are unaudited and have been prepared in accordance with IAS 34, Interim Financial Reporting ( IAS 34 ) using accounting policies consistent with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ). These condensed consolidated financial statements have been prepared using the accounting policies the Company expects to adopt in its annual consolidated financial statements for the year ending December 31, 2012. These are the Company s third IFRS condensed consolidated financial statements for part of the period to be covered by the Company s first IFRS annual consolidated financial statements for the year ending December 31, 2012, with a transition date of November 1, 2010. Previously, the Company prepared its annual consolidated and interim consolidated financial statements in accordance with pre-ifrs changeover Canadian generally accepted accounting principles ( Canadian GAAP ). The rules of first time adoption are set out in IFRS 1, First time Adoption of International Financial Reporting Standards ( IFRS 1 ). In Page 6
preparing the Company s IFRS financial statements, these transition rules have been applied to the amounts previously reported under Canadian GAAP. These condensed consolidated financial statements should be read in conjunction with the Company s December 31, 2011 annual Canadian GAAP financial statements and in consideration of the disclosure in Note 20. The condensed consolidated financial statements of the Company for the three and nine months ended were approved and authorized for issue by the Board of Directors on November 15, 2012. b) Basis of presentation The condensed consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in note 3. These condensed consolidated financial statements include the investment in associate (40% of LOM) and the accounts of the following subsidiaries: ADI Mining Limited 100% Brazore Resources Inc. 100% Brazore Holdings Ltd. ( Brazore Holdings ) 60% Brazore Representação, Importação, Exportação e Consultoria Ltda. ( Brazore Ltda. ) 56.1% (effective interest) Adriana Resources Mineracao Ltda. 100% Adriana Resources (BVI) Inc. (inactive) 100% Adriana Resources Mexico, SA de CV (inactive) 100% The 60%-owned subsidiary, Brazore Holdings, with its 93.5%-owned subsidiary Brazore Ltda. (56.1% effective interest), are collectively referred to as Brazore in these condensed consolidated financial statements. c) Adoption of new and revised standards and interpretations The IASB issued a number of new and revised International Accounting Standards, IFRS, amendments and related interpretations which are effective for the Company s financial year beginning on or after January 1, 2012. For the purpose of preparing and presenting the financial information for the relevant periods, the Company has consistently adopted all these new standards for the relevant reporting periods. At the date of authorization of these financial statements, the IASB and the International Financial Reporting Interpretations Committee ( IFRIC ) have issued the following new and revised standards and interpretations which are not yet effective for the relevant reporting periods: IFRS 9 New financial instruments standard that replaces IAS 39 for classification and measurement of financial assets and liabilities 3 IFRS 10 New standard to establish principles for the presentation of consolidated financial statements when an entity controls multiple entities 2 IFRS 11 New standard to account for the rights and obligations in accordance with a joint agreement 2 IFRS 12 New standard for the disclosure of interests in other entities 2 Page 7
IFRS 13 New standard on the measurement and disclosure of fair value 2 IAS 1 (Amendment) Presentation of other comprehensive income 1 IAS 19 (Amendment) Employee Benefits 1 IAS 27 (Amendment) New standard issued that supersedes IAS 27 to prescribe the accounting for separate financial statements 2 IAS 28 (Amendment) New standard issued that supersedes IAS 28 (2003) to prescribe the accounting for investments in associates and joint ventures 2 IFRIC 20 New standard issued that clarified the treatment for accounting for the costs of stripping activity in the production phase of mining 2 1 Effective for annual periods beginning on or after July 1, 2012 2 Effective for annual periods beginning on or after January 1, 2013 3 Effective for annual periods beginning on or after January 1, 2015 The Company has not early adopted these standards, amendments and interpretations. The Company is currently assessing the application of these standards, amendments and interpretations. 3. Summary of Significant Accounting Policies a) Basis of consolidation The condensed consolidated financial statements include the financial statements of the Company and its controlled subsidiaries. Control is achieved when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the period are included in the condensed consolidated statement of comprehensive income or loss from the effective date of acquisition or up to the effective date of disposal, as appropriate. All intercompany transactions, balances, income and expenses are fully eliminated on consolidation. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Company s equity therein. Non-controlling interests consist of the amount of those interests at the date of the original asset acquisition and the non-controlling interests share of changes in equity since the date of the asset acquisition. b) Investment in LOM Subsequent to the closing of the JV Agreement on January 12, 2012, the Company changed its accounting for LOM from consolidation of the mineral properties to accounting for LOM as an investment in associate. c) Interest income Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Page 8
d) Foreign currencies The condensed consolidated financial statements are presented in Canadian dollars. The individual financial statements of each entity are presented in their functional currency, which is the currency of the primary economic environment in which the entity operates. The functional currency of all of the Company s operations is the Canadian dollar. Transactions in foreign currencies are initially recorded at the functional currency rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the date of the statement of financial position and the impact is recorded in the statement of comprehensive income or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value is determined. e) Property, plant and equipment Property, plant and equipment ( PPE ) are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Office PPE is depreciated over the useful lives of the assets on the declining balance basis using rates from 20% to 100%. An item of PPE is derecognized upon disposal, when held for sale or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in the condensed consolidated statement of comprehensive income or loss. The Company conducts an annual assessment of the residual balances, useful lives and depreciation methods being used for PPE and any changes arising from the assessment are applied by the Company prospectively. f) Port Facility Costs capitalized to the Port Facility include permitting, environmental, geological, topographical, seismic surveying, travel to port site, design and development costs and royalty payments paid to Athena Holdings LLC ( Athena ). Accumulated port design and development costs will not be amortized until the construction of the Port Facility is completed and the facility is brought into use. g) Share-based payments Employees (including directors, senior executives and consultants) of the Company receive a portion of their remuneration in the form of share-based payment arrangements, whereby employees render services as consideration for equity instruments ( equity-settled transactions ). In situations where equity instruments are issued and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured at the fair value of the sharebased payment using the Black-Scholes option pricing model. Page 9
The costs of equity-settled transactions with employees are measured by reference to the fair value at the date on which they are granted. The costs of equity-settled transactions are recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ( the vesting date ). The cumulative expense is recognized for equity-settled transactions at each reporting date reflecting the Company s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the statement of comprehensive income or loss for a period represents the movement in cumulative expense recognized as at the beginning and end of that period, and the corresponding amount is reflected in other capital reserves. No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied provided that all other performance and/or service conditions are satisfied. Where the terms of an equity-settled award are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. h) Taxation Income tax expense represents the sum of tax currently payable and deferred tax. Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are substantively enacted on the date of the statement of financial position. Deferred income tax is determined using the liability method on temporary differences at the date of the statement of financial position between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets and liabilities are measured using substantively enacted tax rates and laws that currently apply to the year when the asset is expected to be realized or the liability is expected to be settled, as the case may be. Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the statement of comprehensive income or loss. i) Income or loss per share The basic income or loss per share is computed by dividing the net income or loss by the weighted average number of common shares outstanding during the period. The diluted income per share reflects the potential dilution of common share equivalents, such as outstanding stock options and share purchase warrants, in the weighted average number of common shares outstanding during the period, if dilutive. j) Financial assets All financial assets are initially recorded at fair value and designated upon inception into one of the following four categories: held to maturity, available for sale, loans and receivables or at fair value through profit or loss ( FVTPL ). Page 10
Financial assets classified as FVTPL are measured at fair value with unrealized gains and losses recognized through in the statement of comprehensive income or loss. Financial assets classified as loans and receivables and held to maturity are measured at amortized cost using the effective interest method less any allowance for impairment. The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and amounts paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Financial assets classified as available for sale are measured at fair value with unrealized gains and losses recognized in other comprehensive income or loss except for losses in value that are considered a significant or prolonged decline in the fair value of that investment below its cost. Transactions costs associated with FVTPL financial assets are expensed as incurred, while transaction costs associated with all other financial assets are included in the initial carrying amount of the asset. k) Financial liabilities All financial liabilities are initially recorded at fair value and designated upon inception as FVTPL or other financial liabilities. Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability or, where appropriate, a shorter period. Financial liabilities classified as FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as FVTPL. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Transaction costs on financial liabilities classified as FVTPL are expensed as incurred. Fair value changes on financial liabilities classified as FVTPL are recognized through the statement of comprehensive income or loss. At the end of each reporting period subsequent to initial recognition, financial liabilities at FVTPL are measured at fair value, with changes in fair value recognized directly in the statement of comprehensive income or loss in the period in which they arise. l) Impairment of financial assets The Company assesses at each date of the statement of financial position whether a financial asset is impaired. Assets carried at amortized cost If there is objective evidence that an impairment loss on assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the financial asset s original effective interest rate. The carrying amount of the asset is then reduced by the amount of the impairment. The amount of the loss is recognized in the statement of comprehensive income or loss. Page 11
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed to the extent that the carrying value of the asset does not exceed what the amortized cost would have been had the impairment not been recognized. Any subsequent reversal of an impairment loss is recognized in the statement of comprehensive income or loss. Available for sale If an available for sale asset is impaired, an amount comprising the difference between its cost and its current fair value, less any impairment loss previously recognized in the statement of comprehensive income or loss, is transferred from equity to the statement of comprehensive income or loss. Reversals in respect of equity instruments classified as available for sale are not recognized in the statement of comprehensive income or loss. m) Impairment of non-financial assets At each statement of financial position date, the Company reviews the carrying amounts of its tangible assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the assets belong. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the statement of comprehensive income or loss, unless the relevant asset is carried at a revalued amount. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but not to exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. An impairment of goodwill, however, is not subsequently reversed. n) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand, and short term deposits with an original maturity of three months or less, which are readily convertible into a known amount of cash. o) Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. Any increase in a provision due solely to the passage of time is recognized as interest expense. Page 12
p) Related party transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related party transactions that are in the normal course of business and have commercial substance are measured at the exchange amount. q) Significant accounting judgments and estimates The preparation of these financial statements requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its judgments and estimates in relation to assets, liabilities, revenues and expenses. Management uses historical experience and various other factors it believes to be reasonable under the given circumstances as the basis for its judgments and estimates. Actual outcomes may differ from these estimates under different assumptions and conditions. The most significant estimates relate to assessments of the recoverability and carrying value of the investments in LOM and the Port Facility, depreciation of property, plant and equipment, recoverability of tax credits, valuation of the convertible debentures and the calculation of share-based payments. The most significant judgments relate to recoverability of capitalized amounts, recognition of deferred tax assets and liabilities, the determination of the economic viability of a project and the functional currencies of the underlying entities. 4. Investment in Equity Securities The Company s investment in equity securities is comprised of 500,000 common shares of Cap-Ex Ventures Ltd. ( Cap-Ex ) that were acquired as part of the proceeds on sale of the Company s remaining Bedford Labrador mineral claims in April 2011. The marketable securities have been classified as financial assets at FVTPL. The shares were re-valued to their market value as of ($155,000; December 31, 2011 $475,000), resulting in an unrealized fair value loss in the three month period ended of $60,000 (October 31, 2011 unrealized fair value gain of $40,000). Cap-Ex s shares are listed on the TSX Venture Exchange and trade under the stock symbol CEV. 5. Investment in LOM On January 12, 2011, Adriana and WISCO entered into a binding framework agreement (the Framework Agreement ), where WISCO committed to contribute $120,000,000 to develop the Lac Otelnuk Project. On March 23, 2011, WISCO closed a private placement for aggregate proceeds of $28,366,389 representing 19.9% of the then issued and outstanding Common Shares of Adriana. On January 12, 2012 Adriana closed the JV Agreement with a wholly-owned subsidiary of WISCO to engage in the development and operation of the Lac Otelnuk Project. Pursuant to the JV Agreement, WISCO funded an aggregate of $91,633,611 of which $51,633,611 was paid directly to Adriana and the remaining $40,000,000 was paid to the joint venture company, LOM. Adriana has recognized a gain on the transfer of its interest in the amount of $53,417,789. The interest in the Lac Otelnuk Project and the interest in the December Lake property were transferred into LOM. WISCO acquired a 60% interest in LOM while Page 13
Adriana holds the remaining 40% interest. WISCO has agreed to use commercial best efforts to assist LOM to obtain project financing for 70% of the development and construction costs for the Lac Otelnuk Project, the size and scope of which will be determined by a bankable Feasibility Study. Under the terms of the JV Agreement, WISCO may provide dilution protection to Adriana by providing funding assistance of up to a maximum of $200,000,000 for a term of up to 12 months in the event that Adriana has difficulty in funding its share of any cash call prior to the achievement of commercial production. Adriana and WISCO have agreed to purchase from LOM all the production from the Lac Otelnuk Project at fair market value in proportion to their respective equity interests. The CEO of Adriana has been appointed as the CEO of LOM, and Adriana has appointed two of the five directors of LOM. On August 2, 2012, Adriana received additional consideration of $8,739,684 from LOM for certain expenditures incurred on the Lac Otelnuk Project from the date Adriana and WISCO entered into the original Framework Agreement to the closing of the JV Agreement. A fee in the amount of $6,763,361 was paid by Adriana to an arm s length third party in full satisfaction of the finder s fee agreement. On November 30, 2005, Adriana entered into an option agreement (the Lac Otelnuk Option ) to earn a 100% interest in certain claims comprising part of the Lac Otelnuk Property. Pursuant to the Lac Otelnuk Option, the optionor was entitled to a royalty (the Lac Otelnuk Royalty ) equal to: (i) 2.5% from the sale of iron ore products mined from the claims subject to the Lac Otelnuk Option; and (ii) 2.5% net smelter returns from the sale of any other minerals mined from such properties annually. The Lac Otelnuk Royalty was subject to minimum advances each year until commencement of commercial production. Adriana had the option to purchase one-half of the Lac Otelnuk Royalty for $5,500,000. In 2010, Adriana filed an application with the Quebec Superior Court for a judicial interpretation of certain provisions of the Lac Otelnuk Option. During the litigation process, the parties reached a settlement agreement that had as a condition precedent, the closing of a joint venture agreement with WISCO. As a result of the closing of the JV Agreement, all settlement conditions were satisfied and the litigation ended. Pursuant to the settlement agreement, Adriana issued 4,000,000 Common Shares at an ascribed value of $3,680,000 and acquired and extinguished on behalf of LOM, half of the 2.5% gross revenue royalty for cash consideration of $5,500,000 (leaving in place a 1.25% gross revenue royalty on 328 claims). The optionor is entitled to receive a minimum royalty advance of $450,000 each year from LOM until commencement of commercial production. Effective January 12, 2012, LOM is accounted for as an investment in associate by Adriana. Prior to that date, the Lac Otelnuk Project was accounted for as a mineral property. The Lac Otelnuk Property lies within the Labrador Trough in the Nunavik region of northern Québec, approximately 165 kilometres northwest of Schefferville and consists of 1,267 contiguous mineral claims totalling approximately 684 square kilometres. The December Lake iron ore property is comprised of 159 mineral claims totalling approximately 74 square kilometres near December Lake which is 65 kilometres from the Lac Otelnuk Property and 230 kilometres north of Schefferville, in the Nunavik region of Northern Québec. Page 14
Adriana s Investment in LOM is summarized as follows: Balance at December 31, 2011 $ - Closing of JV Agreement, accounted for as Investment in LOM 29,157,215 Share of loss for the period from January 12 to March 31, 2012 (39,099) Balance at March 31, 2012 29,118,116 Share of loss from April 1 to June 30, 2012 (77,884) Balance at June 30, 2012 29,040,232 Share of loss from July 1 to (101,634) Balance at $ 28,938,598 Summarized information in respect to LOM is set out below: Cash and cash equivalents $ 8,925,322 Total assets 153,955,654 Total liabilities 1,779,510 Net assets 152,176,144 Loss for the period from January 12 to (546,541) Property, plant and equipment Balance, January 1, 2012 $ - Acquisitions 121,462,369 Additions, net 20,610,160 Balance at $ 142,072,529 Page 15
6. Property, Plant and Equipment The Company s property, plant and equipment assets consist of the following: Port Facility Mineral properties Office Total Cost Balance, January 1, 2012 $ 50,347,188 $ 26,578,659 $ 227,570 $ 77,153,417 Additions 934,870-8,371 943,241 Disposals - (26,578,659) (3,309) (26,581,968) Balance, 51,282,058-232,632 51,514,690 Accumulated depreciation Balance, January 1, 2012 - - (84,677) (84,677) Charge for the period - - (29,888) (29,888) Disposals - - 1,952 1,952 Balance, - - (112,613) (112,613) Carrying value, January 1, 2012 $ 50,347,188 $ 26,578,659 $ 142,893 $ 77,068,740 Carrying value, $ 51,282,058 $ - $ 120,019 $ 51,402,077 Port Facility Mineral properties Office Total Cost Balance, November 1, 2010 $ 48,563,071 $ 13,505,360 $ 182,088 $ 62,250,519 Additions 1,784,117 13,073,299 45,482 14,902,898 Balance, December 31, 2011 50,347,188 26,578,659 227,570 77,153,417 Accumulated depreciation Balance, November 1, 2010 - - (50,450) (50,450) Charge for the period - - (34,227) (34,227) Balance, December 31, 2011 - - (84,677) (84,677) Carrying value, November 1, 2010 $ 48,563,071 $ 13,505,360 $ 131,638 $ 62,200,069 Carrying value, December 31, 2011 $ 50,347,188 $ 26,578,659 $ 142,893 $ 77,068,740 a) Port Facility The Company currently holds a 56.1% effective indirect interest in the Port Facility through a 60% owned indirect subsidiary, Brazore Holdings, which owns a 93.5% interest in Brazore Ltda., the Company s Brazilian subsidiary which owns and is developing the Port Facility. Pursuant to an agreement dated August 21, 2007 with Athena (the Brazore Transaction ), the Company transferred a 50% interest in its subsidiary, Brazore Holdings, to Athena in exchange for Athena s 93.5% interest in Brazore Ltda. Under the terms of the agreement, the Company maintained and increased its interest in Brazore by funding Brazore Ltda. s plan to develop the Port Facility as follows: (i) a first tranche of US$5,000,000 by October 20, 2007 to maintain a 50% ownership interest; and (ii) a second tranche of US$17,000,000 by November 29, 2007 to earn a 60% interest. The US$22,000,000 provided funding for the purchase of certain of the land for the Port Facility and for initial engineering and other environmental studies. On April 1, 2009, the Company provided notice to Athena that it would not proceed with the funding of an additional US$33,000,000 to earn a 75% interest in Brazore. The existing agreement does not provide for any capital contributions by Athena, nor for any additional dilution of Athena s interest beyond that Page 16
provided for above. Through, the Company has incurred $39,879,000 of cash expenditures (December 31, 2011 $38,634,000) relating to the Port Facility, including all out-of-pocket expenses. As at, the primary asset of Brazore was the land for the Port Facility located in Sepetiba Bay, approximately 70 kilometres west of Rio de Janeiro, comprised of certain parcels on the coast of Brazil, purchased in December 2007, and on the adjacent island, purchased in 2008. Costs capitalized to the Port Facility include permitting, environmental, geological, topographical, seismic surveying, travel to port site, design and development costs and royalty payments paid to Athena (see Note 14). b) Mineral Properties See the detailed discussion in Note 5 regarding the mineral properties. c) Office Office property, plant and equipment is comprised of office furniture and equipment, leasehold improvements, computer equipment and software for the Toronto and Brazil offices. 7. Convertible Debentures Three months ended Nine months ended Fourteen months ended December 31, 2011 Balance, beginning of the period $ 6,401,701 $ 6,278,912 $ 9,416,913 Add: Accretion of liability component of debentures 48,299 171,088 333,808 Less: Converted in period - - (3,471,809) Liability component of Convertible Debentures 6,450,000 6,450,000 6,278,912 Less: Current portion of liability - - (6,278,912) Less: Debenture repayment on September 10, 2012 (6,450,000) (6,450,000) - Balance, end of the period $ - $ - $ - On September 10, 2008, the Company issued $10,000,000 of unsecured subordinated convertible debentures bearing interest at an annual rate of 7%. Of that amount, debentures with a face value of $6,450,000 were issued to ArcelorMittal Netherlands B.V. ( ArcelorMittal ) in connection with the Port Facility, and the balance was issued to other third parties. Under IFRS, the liability portion of the convertible debenture was initially measured at fair value, with the residual amount allocated to equity, as the value of the conversion option. As a result of a subsequent agreement with ArcelorMittal, the Company deferred payment of its annual 7% interest payment on the convertible debenture held by ArcelorMittal for three years, along with a one-year deferral of repayment of the related principal to September 10, 2012. The debentures were convertible into Common Shares at a conversion price of $0.99 per Common Share if converted prior to maturity. During the three and nine month periods ended, there were no conversions. During the fourteen month period ended December 31, 2011, debentures with a face value of $3,550,000 were converted, resulting in the issuance of 3,585,856 Common Shares. On September 10, 2012, the maturity date of the only outstanding convertible debenture, ArcelorMittal declined their option to convert these debentures into shares. Adriana settled the obligation with a cash payment of $8,527,248 with respect to the face value of the debenture and the accrued interest payable. Page 17
8. Income Taxes As a result of the transactions related to the closing of the JV Agreement on January 12, 2012, the Company accrued $540,000 for Ontario corporate minimum tax during the first quarter of 2012. The accrual was reduced by $270,000 to incorporate the Company s subsequent losses. 9. Non-Controlling Interests Nine months ended Fourteen months ended December 31, 2011 Balance, beginning of the period $ 11,676,795 $ 11,350,566 Non-controlling interest in cash 490,000 736,000 Share of losses for period (177,615) (409,771) Balance, end of the period $ 11,989,180 $ 11,676,795 10. Share Capital and Share-based Payments a) Authorized The Company is authorized to issue an unlimited number of Common Shares. Page 18
b) Issued The Company has the following Common Shares issued and outstanding. Number of Common Shares Amount Balance, November 1, 2010 93,088,670 $ 84,672,312 Private placement, net of costs 21,621,620 7,508,616 Shares issued on exercise of options 738,830 828,397 Shares issued on exercise of warrants 102,187 72,780 Shares issued on debenture conversions 1,060,604 1,097,750 Balance, January 31, 2011 116,611,911 94,179,855 Private placement, net of costs 29,243,700 26,143,107 Shares issued on exercise of options 355,425 234,265 Shares issued on exercise of warrants 237,087 207,805 Shares issued on debenture conversions 505,050 524,265 Balance, April 30, 2011 146,953,173 121,289,297 Shares issued on exercise of compensation options 50,000 20,000 Shares issued on debenture conversions 2,020,202 2,126,782 Shares issued on exercise of options 83,334 107,072 Deferred income tax benefits on expenditures renounced to shareholders - (590,100) Balance, July 31, 2011 149,106,709 122,953,051 Shares issued on exercise of options 150,000 152,195 Balance, October 31, 2011 149,256,709 123,105,246 Shares issued on exercise of options 25,000 9,989 Balance, December 31, 2011 149,281,709 123,115,235 Private placement: settlement of litigation (i) 4,000,000 3,680,000 Private placement: pre-emptive right (ii) 972,780 894,958 Shares issued on exercise of options 625,300 434,938 Shares issued on exercise of warrants 111,603 93,212 Balance, March 31, 2012 154,991,392 128,218,343 Shares issued on exercise of options 100,000 45,231 Shares issued on exercise of compensation options 111,064 44,426 Shares issued on exercise of warrants 2,326,782 1,681,569 Balance, June 30, 2012 and 157,529,238 $ 129,989,569 (i) Pursuant to the settlement agreement further described in Note 5, Adriana issued 4,000,000 Common Shares on January 12, 2012 at an ascribed value of $3,680,000. (ii) Under the terms of WISCO s private placement of March 23, 2011 and the Framework Agreement, WISCO was granted certain rights including a pre-emptive right to subscribe for, at the same or equivalent cash subscription price, any equity securities that the Company proposes to issue, up to that number of offered securities as will enable WISCO, upon completion of the issuance, to maintain its then-current proportionate interest in the Company. This pre-emptive right will terminate if WISCO s ownership of Common Shares of the Company is reduced to less than 10% of Page 19
c) Options the issued and outstanding Common Shares of the Company. On February 24, 2012, the Company closed a private placement of 972,780 Common Shares with WISCO for $894,958 of cash proceeds pursuant to WISCO s pre-emptive right. Pursuant to the Company s stock option plan re-approved by the shareholders of the Company on June 21, 2012, options may be granted in respect of authorized and unissued shares provided that the maximum aggregate number of shares reserved for issuance and which may be purchased upon the exercise of all options shall not exceed 10% of the issued and outstanding Common Shares. As of, the maximum number of Common Shares which may be issued under the stock option plan is 15,752,923. The Company may grant options to directors, employees, or consultants. The exercise price per share shall be determined by the Company at the time the option is granted but, in any event, shall not be less than the closing price of the shares on the TSX Venture Exchange on the trading day immediately preceding the date of the grant of the option, unless the grant of the option occurs during a blackout period, in which case the exercise price per share shall not be less than the closing price of the shares on the TSX Venture Exchange on the second trading day immediately following the expiry of the blackout period. Options granted pursuant to the plan shall vest and become exercisable by an optionee in three tranches: one third of the number of options vesting in each of six, twelve and eighteen months following the date of grant. The continuity of options is as follows: Number of options Weighted average exercise price Balance, December 31, 2011 7,360,000 $ 0.59 Granted 2,475,000 1.04 Exercised (625,300) 0.47 Expired (249,700) 1.10 Balance, March 31, 2012 8,960,000 0.71 Granted 600,000 0.68 Exercised (100,000) 0.26 Balance, June 30, 2012 9,460,000 0.71 Expired (200,000) 0.99 Balance, 9,260,000 $ 0.71 During the three months ended, under the fair-value method, the amount of $426,092 in share-based payment expense was recorded for options granted to officers, directors, employees and consultants. Page 20