CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 and 2010 (Expressed in US Dollars)
Independent Auditors Report To the Shareholders of Capstone Mining Corp. We have audited the accompanying consolidated financial statements of Capstone Mining Corp, which comprise the consolidated balance sheets as at December 31, 2011, December 31, 2010 and January 1, 2010, and the consolidated statements of earnings, comprehensive income, changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Capstone Mining Corp. as at December 31, 2011, December 31, 2010 and January 1, 2010 and its financial performance and its cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards. (Signed) Deloitte & Touche LLP Chartered Accountants March 13, 2012 Vancouver, Canada 2
Capstone Mining Corp. Consolidated Balance Sheets (expressed in thousands of US dollars) ASSETS December 31, 2011 December 31, 2010 January 1, 2010 Current Cash and cash equivalents (Note 23) $ 486,287 $ 165,945 $ 115,931 Restricted cash - 6,377 2,496 Short-term deposits (Note 6) - 20,039 - Receivables (Note 7) 29,099 16,392 6,946 Inventories (Note 8) 48,332 67,210 44,438 Prepaids and other 1,360 1,581 1,404 Derivative instrument asset (Note 13) 1,530 11,602-566,608 289,146 171,215 Investments (Note 9) 237 2,718 39,105 Mineral properties, plant and equipment (Note 10) 782,924 324,876 316,870 Promissory note receivable (Note 4) 62,520 - - Notes receivable (Note 11) 8 502 872 Taxes receivable 3,622 - - Deferred income tax asset (Note 18) 1,022 5,526 15,340 Other assets (Note 12) 704 670 505 Derivative instrument asset (Note 13) 1,890 3,635 - Total assets $ 1,419,535 $ 627,073 $ 543,907 LIABILITIES Current Accounts payable and accrued liabilities $ 18,699 $ 22,277 $ 19,782 Income taxes payable 2,452 8,524 8,041 Advances on concentrate inventories - 33,260 16,702 Current portion of other liabilities (Note 14) 12,324 48,116 47,999 33,475 112,177 92,524 Long-term debt (Note 15) - 11,573 10,821 Finance lease obligations (Note 16) - 10,280 18,425 Derivative instrument liability (Note 13) 1,543 8,812 21,757 Deferred revenue (Note 17) 46,567 60,677 73,465 Deferred income tax liability (Note 18) 41,472 31,285 32,087 Reclamation and closure cost obligations and other (Note 19) 21,593 14,531 10,472 Total liabilities 144,650 249,335 259,551 EQUITY Share capital (Note 20) 809,892 205,790 196,115 Reserve for equity settled share based transactions 42,441 18,496 16,737 Equity component of convertible debentures 1,146 1,146 1,174 Investment revaluation reserve (315) 821 8,955 Foreign currency translation reserve (7,131) 15,558 - Retained earnings 196,353 135,927 61,375 Total equity attributable to equity holders of the Company 1,042,386 377,738 284,356 Non-controlling interest 232,499 - - Total equity 1,274,885 377,738 284,356 Total liabilities and equity $ 1,419,535 $ 627,073 $ 543,907 Commitments (Note 26) Contingencies (Note 28) ON BEHALF OF THE BOARD: (Signed) Darren M. Pylot, Director (Signed) Dale C. Peniuk, Director See accompanying notes to these consolidated financial statements. 3
Capstone Mining Corp. Consolidated Statements of Earnings Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share and per share amounts) 2011 2010 Gross sales revenue $ 352,546 $ 301,322 Treatment and selling costs (24,781) (27,369) Net revenue 327,765 273,953 Operating costs Cost of sales (119,530) (105,623) Royalties (8,526) (6,715) Depletion and amortization (86,537) (43,314) Earnings from mining operations 113,172 118,301 General and administrative expenses (11,656) (10,069) Stock-based compensation (Note 20) (8,606) (4,682) Earnings from operations 92,910 103,550 Other income (expense) Foreign exchange loss (5,899) (1,496) Gain (loss) on derivative instruments (Note 13) 8,483 (15,459) Gain on disposal of investments (Note 9) 1,468 26,117 Loss on disposal of equipment (286) (63) Earnings before finance costs and income taxes 96,676 112,649 Interest and other income 4,408 867 Interest from discounting reclamation and closure cost obligations (349) (315) Interest on long term debt (611) (1,683) Interest on finance lease obligations (146) (1,418) Earnings before income taxes 99,978 110,100 Current income and mining tax expense (23,864) (25,707) Deferred income tax expense (15,688) (9,841) Net earnings $ 60,426 $ 74,552 Net earnings attributable to: Shareholders of Capstone Mining Corp. $ 60,692 $ 74,552 Non-controlling interest (266) - $ 60,426 $ 74,552 Earnings per share - basic (Note 21) $ 0.20 $ 0.37 Weighted average number of shares - basic 295,997,095 198,996,825 Earnings per share - diluted (Note 21) $ 0.20 $ 0.37 Weighted average number of shares - diluted 303,075,854 202,453,289 See accompanying notes to these consolidated financial statements. 4
Capstone Mining Corp. Consolidated Statements of Comprehensive Income Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars) 2011 2010 Net earnings $ 60,426 $ 74,552 Other comprehensive (loss) income Change in fair value of available-for-sale securities, net of tax of $64 (2010 - $914) (369) 6,859 Gain on the disposal of available-for-sale securities reclassified to net earnings on realization, net of tax of $132 (2010 - $2,443) (767) (14,993) Foreign currency translation adjustment (22,689) 15,558 (23,825) 7,424 Total comprehensive income $ 36,601 $ 81,976 Total comprehensive income attributable to: Shareholders of Capstone Mining Corp. $ 36,867 $ 81,976 Non-controlling interest (266) - $ 36,601 $ 81,976 See accompanying notes to these consolidated financial statements. 5
Capstone Mining Corp. Consolidated Statements of Cash Flows Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars) 2011 2010 Cash provided by (used in): Operating activities Net earnings $ 60,426 $ 74,552 Adjustments for: Net finance costs (3,302) 2,549 Current income tax expense 23,864 25,707 Depletion, amortization and accretion 86,940 43,630 Amortization of deferred revenue (13,711) (14,410) Stock-based compensation 8,606 4,682 Shares issued for compensation 267 309 Deferred income tax expense 15,688 9,841 Gain on disposal of investments (1,468) (26,117) Loss on disposal of equipment 286 63 Unrealized gain on derivative instruments (36,645) (18,503) Unrealized loss on foreign exchange 5,318 613 Other - 175 Interest received (paid) 2,719 (25,772) Income taxes paid (28,606) (2,885) Payments on reclamation and closure cost obligations (114) (125) Changes in non-cash working capital (Note 24) (33,837) 11,984 86,431 86,293 Investing activities (Increase) decrease in restricted cash 6,436 (3,544) Proceeds on sale of investments 2,979 60,912 Purchase of investments (199) (8,228) Mineral properties, plant and equipment additions (88,244) (55,526) Purchase of Far West net assets (Note 4) (56,690) - Sale of non-controlling interest in Far West net assets (Note 4) 277,378 - Proceeds on maturity of short-term deposits 40,000 - Purchase of short-term deposits (20,000) (20,000) Other deposits (64) (856) 161,596 (27,242) Financing activities Repayment of long-term debt (7,305) (9,800) Payment to fund KORES promissory note (Note 4) (83,213) - Repayment of KORES promissory note (Note 4) 5,454 - Repayment of finance lease obligations (10,603) (11,026) Proceeds from issuance of share capital 188,363 6,322 Share issue costs (1,431) - 91,265 (14,504) Effect of exchange rate changes on cash and cash equivalents (18,950) 5,467 Increase in cash and cash equivalents 320,342 50,014 Cash and cash equivalents - beginning of year 165,945 115,931 Cash and cash equivalents - end of year $ 486,287 $ 165,945 Supplemental cash flow information (Note 23) See accompanying notes to these consolidated financial statements. 6
Capstone Mining Corp. Consolidated Statements of Changes in Equity (expressed in thousands of US dollars, except share amounts) Number of shares Share capital Reserve for equity settled share based transactions Equity component of convertible debentures Investment revaluation reserve Foreign currency translation reserve Retained earnings Total Non-controlling interest Total equity December 31, 2010 201,454,802 $ 205,790 $ 18,496 $ 1,146 $ 821 $ 15,558 $ 135,927 $ 377,738 $ - $ 377,738 Private placement (Note 20) 40,198,632 177,958 - - - - - 177,958-177,958 Exercise of options 5,647,392 18,125 (7,720) - - - - 10,405-10,405 Stock-based compensation - - 8,606 - - - - 8,606-8,606 Issued for compensation 80,000 267 - - - - - 267-267 Share issue costs - (1,447) - - - - - (1,447) - (1,447) Deferred income tax on share issue costs - 365 - - - - - 365-365 Purchase of Far West net assets (Note 4) 128,753,385 408,575 23,318 - - - - 431,893-431,893 Sale of non-controlling interest in Far West net assets (Note 4) Attributable to equity holders of the Company - - - - - - - - 277,378 277,378 Reduction to carrying value of mineral property on sale of Far West net assets (Note 4) - - - - - - - - (44,879) (44,879) Issued for mineral properties 100,000 259 (259) - - - - - - - Change in fair value of available-for-sale securities - - - - (369) - - (369) - (369) Gains reclassified to earnings - - - - (767) - - (767) - (767) Net earnings - - - - - - 60,426 60,426-60,426 Foreign currency translation - - - - - (22,689) - (22,689) - (22,689) December 31, 2011 376,234,211 $ 809,892 $ 42,441 $ 1,146 $ (315) $ (7,131) $ 196,353 $ 1,042,386 $ 232,499 $ 1,274,885 January 1, 2010 197,645,802 $ 196,115 $ 16,737 $ 1,174 $ 8,955 $ - $ 61,375 $ 284,356 $ - $ 284,356 Exercise of options 3,560,753 8,986 (2,664) - - - - 6,322-6,322 Stock-based compensation - - 4,682 - - - - 4,682-4,682 Issued for compensation 123,390 309 - - - - - 309-309 Issued for mineral properties 100,000 259 (259) - - - - - - - Issued on conversion of convertible debentures 24,857 121 - (28) - - - 93-93 Change in fair value of availablefor-sale securities - - - - 6,859 - - 6,859-6,859 Gains reclassified to earnings - - - - (14,993) - - (14,993) - (14,993) Net earnings - - - - - - 74,552 74,552-74,552 Foreign currency translation - - - - - 15,558-15,558-15,558 December 31, 2010 201,454,802 $ 205,790 $ 18,496 $ 1,146 $ 821 $ 15,558 $ 135,927 $ 377,738 $ - $ 377,738 See accompanying notes to these consolidated financial statements. 7
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) 1. Nature of operations Capstone Mining Corp. (the Company or Capstone ), a publicly listed Canadian mining company on the Toronto Stock Exchange, is engaged in the exploration for and production of base and precious metals in Canada, Mexico, Chile, and Australia. Minto Explorations Ltd. ( Minto ), a wholly owned Canadian subsidiary, owns and operates the copper-gold-silver Minto Mine located in Yukon Territory, Canada. Capstone Gold, S.A. de C.V. ( Capstone Gold ), a wholly owned Mexican subsidiary, owns and operates the copper-silver-zinc-lead Cozamin Mine located in Zacatecas, Mexico. Minera Santo Domingo SCM ( Santo Domingo ), a 70% owned Chilean subsidiary, is advancing the Santo Domingo copper-iron-gold project in Chile towards a production decision. Kutcho Copper Corp. ( Kutcho Copper ), a wholly owned Canadian subsidiary, is advancing the Kutcho copper-zinc-silver-gold project in British Columbia, Canada towards a production decision. Far West Mining Pty Ltd. ( Far West Australia ), a 70% owned Australian subsidiary, holds active exploration properties in Australia. The head office, registered and records office and principal address of the Company are located at 999 West Hastings Street, Vancouver, British Columbia and the Company is incorporated in British Columbia. The financial statements were approved by the Board of Directors and authorized for issuance on March 13, 2012. 2. Significant accounting policies Basis of preparation and consolidation These consolidated financial statements represent the first annual financial statements of the Company and its subsidiaries prepared in accordance with International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standard Board ( IASB ). IFRS 1, First-time Adoption of IFRS, has therefore been applied in preparing these consolidated financial statements. These consolidated financial statements have been prepared in accordance with the accounting policies presented below and are based on the IFRS and International Financial Reporting Interpretations Committee ( IFRIC ) interpretations issued and effective as of December 31, 2011. The policies set out below were consistently applied to all the periods presented unless otherwise noted. The Company's consolidated financial statements were previously prepared in accordance with Canadian generally accepted accounting principles ( GAAP ), which differs in some areas from IFRS. In preparing these consolidated financial statements, management has amended certain accounting methods previously applied in the Canadian GAAP consolidated financial statements to comply with IFRS. The comparative figures for 2010 were restated to reflect these amendments. Reconciliations and descriptions of the effect of the transition from Canadian GAAP to IFRS on equity, earnings, and comprehensive income are provided in Note 29. Use of estimates and judgments The preparation of consolidated financial statements requires management to select accounting policies and make estimates and judgments that may have a significant impact on the consolidated financial statements. The Company regularly reviews its estimates; however, actual amounts could differ from the estimates used and, accordingly, materially affect the results of operations. Examples of significant estimates include: purchase price allocation on business combinations and acquisitions of assets; mineral resources and mineral reserves; the carrying values of inventories; estimated tonnes of waste material mined for calculation of deferred stripping costs; the carrying values of mineral properties, plant and equipment; rates of amortization of mineral properties, plant and equipment; the assumptions used for the determination of reclamation and closure cost obligations; the valuation of deferred income taxes and allowances; 8
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) estimates used in the assessment of impairment of mineral properties, plant and equipment; the valuation of financial instruments, including estimates used in provisional pricing calculations; the carrying values of receivables; and the valuation of share-based compensation. Examples of significant judgments, apart from those involving estimation, include: the accounting policies for mineral properties, plant and equipment; determination that the transaction with Far West Mining Ltd. constitutes an acquisition of assets; classification of financial instruments; classification of leases; and determination of functional currency. Translation of foreign currencies The Company considers the functional currency of its Canadian and Australian operations to be the Canadian dollar and the functional currency of its Mexican and Chilean operations to be the US dollar. The presentation currency of the Company is the US dollar. Financial statements of subsidiaries are maintained in their functional currencies and converted to US dollars for consolidation of the Company s results. The functional currency of each entity is determined after consideration of the primary economic environment of the entity. Transactions denominated in foreign currencies (currencies other than the functional currency of an operation) are translated at the exchange rates on the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated at reporting date exchange rates and any gain or loss on translation is recorded in the statement of earnings as a foreign exchange gain (loss). On translation of entities with functional currencies other than the US dollar, statement of earnings items are translated at average rates of exchange where this is a reasonable approximation of the exchange rate at the dates of the transactions. Balance sheet items are translated at closing exchange rates as at the reporting date. Exchange differences on the re-translation of the foreign currency entities at closing rates, together with differences between statement of earnings translated at average and closing rates, are recorded in the foreign currency translation reserve in equity. The following USD/CAD exchange rates have been applied: 2011 2010 January 1 opening rate 0.9946 1.0510 Quarterly average rate Q1 0.9856 1.0401 Q2 0.9680 1.0283 Q3 0.9808 1.0395 Q4 1.0230 1.0131 December closing rate 1.0170 0.9946 Business combinations Business combinations are accounted for using the acquisition method whereby identifiable assets acquired and liabilities assumed, including contingent liabilities, are recorded at 100% of their fair values at the date of acquisition. The acquisition date is the date at which the Company obtains control over the acquire, which is generally the date that consideration is transferred and the Company acquired the assets and assumes the liabilities of the acquiree. Acquisition related costs of business combinations are recorded as expenses. Non-controlling interests are recorded at their proportionate share of the fair value of identifiable net asets acquired on initial recognition and are classified as a separate component of equity. The excess of (i) total consideration transferred by the Company, measured at fair value, including contingent consideration, and (ii) the non-controlling interests in the acquiree, over the fair value of net assets acquired, is recorded as goodwill. 9
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) Cash, cash equivalents and restricted cash Cash and cash equivalents is comprised of cash on hand, demand deposits and short-term investments with a maturity less than 90 days on acquisition that are readily convertible into known amounts of cash. Restricted cash is comprised of cash collateral to secure future debt repayments as well as to fund future reclamation obligations. Short-term deposits The Company considers short-term deposits to include amounts held in banks and highly liquid investments with maturities of more than 90 days and less than one year on acquisition. Inventories Inventories for consumable parts and supplies, ore stockpiles and ore concentrates, are valued at the lower of cost and net realizable value. Costs allocated to consumable parts and supplies are based on average costs and include all costs of purchase, conversion and other costs in bringing these inventories to their existing location and condition. Costs allocated to ore stockpiles and ore concentrates are based on average costs, which include an appropriate share of direct mining costs, direct labour and material costs, mine site overhead, depletion and amortization. If carrying value exceeds net realizable amount, a write down is recognized. The write down may be reversed in a subsequent period if the circumstances which caused it no longer exist. Investments Investments in shares of companies over which the Company exercises neither control nor significant influence are designated as available-for-sale and recorded at fair value. Fair values are determined by reference to quoted market prices at the reporting date. Unrealized gains and losses on available-for-sale investments are recognized in the investment revaluation reserve. When available-for-sale investments are sold, the cumulative fair value adjustments previously recorded in the investment revaluation reserve are recognized in the statement of earnings as gain or loss on investments. Investments in warrants of companies over which the Company exercises neither control nor significant influence are designated as derivatives despite the fact they are generally held for long-term investment purposes. Warrants are recorded at fair value, with fair values determined by a Black-Scholes option pricing model at the balance sheet date. Unrealized gains and losses on warrants are recognized in the statement of earnings as gain or loss on derivative instruments. Mineral properties, plant and equipment Title to mineral properties involves certain inherent risks due to the difficulties of determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of many properties. The Company has investigated title to all of its mineral properties and, to the best of its knowledge, title to all of its properties is in good standing. Producing mineral properties Producing mineral properties are recorded at cost less accumulated depletion and impairment charges. The costs associated with producing mineral properties include acquired interests in production stage properties representing the fair value at the time they were acquired. Producing mineral properties also include additional capitalized costs after initial acquisition. Upon sale or abandonment of producing mineral properties, the cost and related accumulated depletion and impairment charges, are written off and any gains or losses thereon are included in the statement of earnings. Commercial production is deemed to have commenced when management determines that the operational commissioning of major mine and plant components is complete, operating results are being achieved consistently for a period of time and that there are indicators that these operating results will continue. The Company determines commencement of commercial production based on the following factors, which indicate that planned principal operations have commenced. These include one or more of the following: a significant portion of plant capacity is achieved; a significant portion of available funding is directed towards operating activities; a pre-determined, reasonable period of time has passed; and 10
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) a development project significant to the primary business objectives of the enterprise has been completed as to significant milestones being achieved. Deferred stripping Stripping costs are accounted for as variable production costs and included in the costs of inventory produced during the period that the stripping costs are incurred. However, stripping costs will be capitalized and recorded on the balance sheet as a component of mineral properties, plant and equipment when the stripping activity provides access to sources of reserves that will be produced in future periods that would not have otherwise been accessible in the absence of this activity. The deferred stripping will be amortized on a unit of production basis over the reserves that directly benefited from the stripping activity as those reserves are actually mined. Mineral exploration and development properties Mineral exploration and development properties comprise costs that are directly attributable to: researching and analysing existing exploration data; conducting geological studies, exploratory drilling and sampling; examining and testing extraction and treatment methods; and activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource. The costs associated with mineral exploration and development properties includes acquired interests in development and exploration stage properties representing the fair value at the time they were acquired. Mineral exploration and development properties also includes additional capitalized costs after initial acquisition. Mineral exploration and development properties expenditures for each area of interest are carried forward as an asset provided that one of the following conditions is met: such costs are expected to be recouped in full through successful development and exploration of the area of interest or alternatively, by its sale; or exploration and evaluation activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence of economically recoverable reserves, however active and significant operations in relation to the area are continuing, or planned for the future. The carrying values of capitalized amounts of mineral exploration and development properties are reviewed annually, or when there are indicators of impairment at each reporting date. In the case of undeveloped projects, there may be only inferred resources to allow management to form a basis for the impairment review. The review is based on the Company s intentions for development of such a project. If a project does not prove viable, all unrecoverable costs associated with the project are charged to the statement of earnings at the time the determination is made. Once management has determined that the development potential of the property is economically viable and the necessary permits are in place for its development, the costs of the exploration asset are reclassified to Producing mineral properties. Mill development costs Mill development costs are recorded at cost less accumulated amortization and impairment losses. Mill development costs includes in its purchase price, any costs directly attributable to the development of the mill. Upon abandonment of any mill development costs, the cost and related accumulated amortization and impairment losses, are written off and any gains or losses thereon are included in the statement of earnings. Plant and equipment Plant and equipment are recorded at cost less accumulated amortization and impairment losses. Plant and equipment includes in its purchase price, any costs directly attributable to bringing plant and equipment to the location and condition necessary for it to be capable of operating in the manner intended by management and the estimated close down and restoration costs associated with dismantling and removing the asset. Upon sale or abandonment of any plant and/or equipment, the cost and related accumulated amortization and impairment losses, are written off and any gains or losses thereon are included in the statement of earnings. 11
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) Construction in progress Mineral property development and plant and equipment construction commences when approved by management and/or the Board and the Company has obtained all regulatory permissions to proceed. Development and construction expenditures are capitalized and classified as Construction in progress. Once completed, the costs associated with all applicable assets related to the development and construction are reclassified to the appropriate category within mineral properties or plant and equipment. Depletion and amortization of mineral properties, plant and equipment The carrying amounts of mineral properties, plant and equipment are depleted or amortized to their estimated residual value over the estimated economic life of the specific assets to which they relate, using the depletion or amortization methods and rates as indicated below. Estimates of residual values and useful lives are reassessed annually and any change in estimate is taken into account in the determination of the remaining amortization rate. Amortization commences on the date the asset is available for its use as intended by management. Depletion and amortization is computed using the following rates: Item Methods Rates Producing mineral Units of production Estimated proven and probable reserves properties Deferred stripping costs Units of production Estimated proven and probable reserves accessible due to stripping activity Mill development costs Units of production Estimated proven and probable reserves Plant & equipment Straight line, Units of production 4 10 years, Estimated proven and probable reserves Equipment and facilities under finance leases Mineral exploration and development properties Construction in progress Straight line Not amortized Not amortized Lesser of lease term and estimated useful life (7 years) Borrowing costs Interest and other financing costs directly related to the acquisition, development and construction, and production of qualifying assets are capitalized as construction in progress or in mineral properties until they are complete and available for use, at which time they are transferred to the appropriate category within mineral properties, plant and equipment. Borrowing costs incurred after the asset has been placed into service as well as all other borrowing costs are charged to earnings when incurred. Impairment of long-lived assets At each reporting date, the Company reviews the carrying amounts of its assets to determine whether there are any indicators of impairment. If any such indicator exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. Where the asset does not generate cash inflows that are independent from other assets, the Company estimates the recoverable amount of the cash generating unit (CGU) to which the asset belongs. The recoverable amount is determined as the higher of fair value less direct costs to sell and the asset or CGU s value in use. In assessing value in use, the estimated future cash flows are discounted to their present value. Estimated future cash flows are calculated using estimated recoverable reserves, estimated future commodity prices and the expected future operating and capital costs. The pre-tax discount rate applied to the estimated future cash flows reflects current market assessments of the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted. Determining the discount rate includes appropriate adjustments for the risk profile of the country in which the individual asset or CGU operates. 12
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized in the statement of earnings. Assets that have been impaired are tested for possible reversal of the impairment whenever events or changes in circumstance indicate that the impairment may have reversed. Where an impairment subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but only so that the increased carrying amount does not exceed the carrying amount that would have been determined (net of amortization or depletion) had no impairment loss been recognized for the asset or CGU in prior periods. A reversal of impairment is recognized as a gain in the statement of earnings. Income taxes Current tax Current tax for each taxable entity in the Company is based on the local taxable income at the local statutory tax rate enacted or substantively enacted at the reporting date, and includes adjustments to tax payable or recoverable in respect of previous periods. Deferred tax Deferred tax is accounted for using the balance sheet liability method, providing for the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their respective tax bases. Deferred income tax liabilities are recognized for all taxable temporary differences except where the deferred income tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit or loss nor taxable profit or loss. Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax losses and unused tax credits, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax losses can be utilized, and except where the deferred income tax asset related to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit or loss nor taxable profit or loss. The carrying amount of deferred income tax assets is reviewed at each reporting date and is adjusted to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be utilized. To the extent that an asset not previously recognized fulfils the criteria for recognition, a deferred income tax asset is recorded. Deferred tax is measured on an undiscounted basis using the tax rates that are expected to apply in the period when the liability is settled or the asset is realized, based on tax rates and tax laws enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax relating to items recognized directly in equity are recognized in equity and not in the statement of earnings. Mining taxes and royalties are treated and disclosed as current and deferred taxes if they have the characteristics of an income tax. This is considered to be the case when they are imposed under government authority and the amount payable is calculated by reference to revenue derived (net of any allowable deductions) after adjustment for items comprising temporary differences. Taxes receivable Taxes receivable are comprised of recoverable value added taxes in Mexico and Chile and recoverable harmonized sales tax in Canada that the Company has paid. 13
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) Derivative instruments The Company uses derivative instruments to reduce the potential impact of changing metal prices and foreign exchange rates on its earnings. Derivative instruments are marked-to-market at the end of each reporting period and the mark-to-market adjustment is recorded as a gain or loss on derivative instruments in the statement of earnings. The Company does not apply hedge accounting to its derivative transactions. Embedded derivatives Derivatives may be embedded in other financial instruments (the host instrument ). Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with subsequent changes recognized in gains or losses on derivative instruments in the statement of earnings. Compound instruments The component parts of compound instruments are classified separately as financial liabilities and equity in accordance with the substance of the contractual agreement. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible instruments. This amount is recorded as a liability on an amortized cost basis until extinguished upon conversion or at the instrument s maturity date. The equity component is determined by deducting the amount of the liability component from the face value of the compound instrument as a whole. This is recognized and included in equity, net of income tax effects, and is not subsequently remeasured. Financial instruments On initial recognition, all financial instruments are recorded at fair value. Financial assets are designated upon inception as either: (i) held-to-maturity ; (ii) fair value through profit or loss ; (iii) available-for-sale ; or (iv) loans and receivables. The designation determines the method by which the financial assets are carried on the balance sheet subsequent to inception and how changes in value are recorded. Derivative instruments are classified as fair value through profit or loss with subsequent changes in fair value recognized in the statement of earnings. Cash and cash equivalents, restricted cash and short-term deposits are also classified as fair value through profit or loss. Receivables, the promissory note, and notes receivable are designated as loans and receivables and are carried on the balance sheet at amortized cost. Investments are designated as available-for-sale with changes in fair value recognized in other comprehensive income. Financial liabilities are designated as either: (i) fair value through profit or loss ; or (ii) other liabilities. The designation determines the method by which the financial liabilities are carried on the balance sheet subsequent to inception and how changes in value are recorded. Derivative instruments are classified as fair value through profit or loss with changes in fair value recognized in the statement of earnings. Accounts payable and accrued liabilities, advances on concentrate inventories and long-term debt are classified as other financial liabilities and carried on the balance sheet at amortized cost. Transaction costs associated with fair value through profit or loss financial instruments are expensed as incurred, whereas transaction costs associated with all other financial instruments are added to the initial carrying value of the asset or liability. Impairment and uncollectibility of financial assets An assessment is made at each reporting date to determine whether there is objective evidence that a financial asset or group of financial assets, other than those classified as fair value through profit and loss may be impaired. If such evidence exists, the estimated recoverable amount of the asset is determined and an impairment loss is recognized for the difference between the recoverable amount and the carrying amount as follows: the carrying amount of the asset is reduced to its recoverable amount discounted at the financial asset s original effective interest rate, either directly or through the use of an allowance account and the resulting loss is recognized in the statement of earnings for the period. When an available-for-sale financial asset is considered to be impaired, cumulative losses previously recognized in the investment revaluation reserve in equity are reclassified to the statement of earnings. With the exception of available-for-sale equity instruments, if, in a subsequent period, the amount of the impairment loss decreases, the previously recognized impairment loss is reversed through the statement of earnings to the extent 14
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognized. In respect of available-for-sale equity securities, impairment losses previously recognized in the statement of earnings are not reversed through the statement of earnings. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income. Deferred revenue Deferred revenue consists of payments received by the Company in consideration for future commitments to deliver payable gold and silver contained in concentrate at contracted prices. In addition, it includes the fair value of such commitments acquired by way of business combination. As deliveries are made, the Company records a portion of the deferred revenue as sales, based on a proportionate share of deliveries made compared with the total estimated contractual commitment. Leases Assets held under leases which result in the Company receiving substantially all the risks and rewards of ownership of the asset (finance leases) are capitalized at the lower of the fair value of the plant and equipment or the estimated present value of the minimum lease payments. The corresponding liability is recognized as a finance lease obligation. The interest element is allocated to accounting periods during the lease term to reflect the rate of interest on the remaining balance of the obligation. Operating lease assets are not capitalized and rental payments are included in the statement of earnings on a straight-line basis over the lease term. Reclamation and closure cost obligations A reclamation and closure cost obligation is recognized for close down, restoration and for environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the financial period when the related environmental disturbance occurs, based on the estimated future costs using information available at the balance sheet date. At the time of establishing the provision, a corresponding asset is capitalized, where it gives rise to a future benefit, and amortized over future production from the operations to which it relates. The provision is discounted using a current market-based pre-tax discount rate and the unwinding of the discount is included in the statement of earnings as interest expense from discounting reclamation and closure cost obligations. The obligation is reviewed each reporting period for changes to obligations, legislation or discount rates that impact estimated costs or lives of operations. The cost of the related asset is adjusted for changes in the provision resulting from changes in the estimated cash flows or discount rate and the adjusted cost of the asset is amortized prospectively. Provisions Provisions are recognized when the Company has a present obligation (legal or constructive), as a result of past events, and it is probable that an outflow of resources that can be reliably estimated will be required to settle the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where the effect is material, the provision is discounted to net present value using an appropriate current market-based pre-tax discount rate and the unwinding of the discount is included in the statement of earnings as interest expense from discounting obligations. Share capital The proceeds from the exercise of stock options or warrants together with amounts previously recorded over the vesting periods are recorded as share capital. Share capital issued for non-monetary consideration is recorded at an amount based on fair market value on the date of issue. The proceeds from the issue of units is allocated between common shares and common share purchase warrants on a pro-rata basis based on relative fair values as follows: the fair value of the common shares is based on the market close on the date the units are issued and the fair value of the common share purchase warrants is determined using the Black-Scholes option pricing model. 15
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) Flow-through shares Under the terms of Canadian flow-through share legislation, the tax attributes of qualifying expenditures are renounced to subscribers. To recognize the foregone tax benefits, a deferred income tax expense and offsetting deferred income tax liability are recognized as the related expenditures are renounced. In addition, any premiums paid for flow-through shares in excess of the market value of shares without the flow-through features at the time of issue is credited to other liabilities and recognized in the statement of earnings at the time the qualifying expenditures are made. Share-based payments The Company makes periodic grants of share-based awards to selected directors, officers, employees and others providing similar service. Contributions to the Company s employee share purchase plan ( ESPP ) are recorded on a payroll cycle basis as the Company s obligation to contribute is incurred. The fair value of the equity-settled awards is determined at the date of the grant by using the Black-Scholes option pricing model. At each reporting date prior to vesting, the cumulative expense representing the extent to which the vesting period has expired and management s best estimate of the awards that are ultimately expected to vest is computed. The movement in cumulative expense is recognized in the statement of earnings with a corresponding entry within equity, against the reserve for equity settled share based transactions. No expense is recognized for awards that do not ultimately vest. Revenue recognition Sales are recognized and revenue is recorded at market prices following the transfer of title and risk of ownership, provided that collection is reasonably assured, the price is reasonably determinable, the Company has no significant continuing involvement, and the costs incurred or to be incurred in respect of the transaction can be measured readily. The Company s metal concentrates are sold under a pricing arrangement where final prices are determined by quoted market prices in a period subsequent to the date of sale. Until prices are final, revenues are recorded upon delivery based on forward market prices for the expected period of final settlement. Subsequent variations in the final determination of the metal concentrate weight, assay and price are recognized as revenue adjustments as they occur until finalized. Under the terms of the Company s off-take agreements, it may request advances from its customers which are recorded as advances on concentrate inventories until the related revenue is recognized. Earnings per share Basic earnings per share is computed by dividing net earnings available (attributable) to common shareholders by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on earnings per share. The dilutive effect of convertible securities is reflected in diluted earnings per share by application of the "if converted" method. The dilutive effect of outstanding options and warrants and their equivalents is reflected in diluted earnings per share by application of the treasury stock method. 16
Capstone Mining Corp. Notes to Consolidated Financial Statements Years Ended December 31, 2011 and 2010 (expressed in thousands of US dollars, except share amounts) 3. Adoption of new and revised IFRS and IFRS not yet effective The accounting policies adopted in the preparation of the consolidated financial statements have been prepared on the basis of all IFRS and interpretations effective as at December 31, 2011. Comparative figures in the financial statements and notes as at January 1, 2010 and for the year ended December 31, 2010 have been restated to consistently apply the same IFRS used for the year ended December 31, 2011. The Company has not applied the following revised or new IFRS that have been issued but are not yet effective at December 31, 2011: Amendments to IAS 1, Presentation of Financial Statements (effective for annual periods beginning on or after July 1, 2012) require that elements of other comprehensive income that may subsequently be recycled through profit and loss be differentiated from those items that will not be recycled. IFRS 9, Financial Instruments (effective January 1, 2015) introduces new requirements for the classification and measurement of financial assets and liabilities. IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Associates and Joint Ventures (all effective January 1, 2013) provide guidance on the accounting treatment and associated disclosure requirements for joint arrangements and associates, and a revised definition of control for identifying entities which are to be consolidated. IAS 27, Separate Financial Statements and IAS 28, Investments in Associates and Joint Ventures were revised and reissued to align with the new consolidation guidance. IFRS 13, Fair Value Measurement (effective January 1, 2013) provides new guidance on fair value measurement and disclosure requirements. IAS 19, Employee Benefits (effective January 1, 2013) introduces changes to the accounting for defined benefit plans and other employee benefits that include modification of the accounting for termination benefits and classification of other employee benefits. IFRIC 20, Stripping Costs in the Production Phase of a Mine (effective January 1, 2013 with earlier application permitted) clarifies the requirements of accounting for the costs of stripping activity in the production phase when stripping improves the access to further quantities of material that will be mined in future periods. Amendments to IAS 32, Financial Instruments (effective for annual periods beginning on or after January 1, 2013) clarifies the application of the offsetting rules and requires additional disclosure on financial instruments subject to netting arrangements. The Company is currently assessing the impact that these new accounting standards will have on the consolidated financial statements. Detailed disclosures of the effects of transition to IFRS from Canadian GAAP can be found in Note 29. 4. Purchase of mineral properties Far West Mining Ltd. On April 15, 2011, Capstone and Far West Mining Ltd. ( Far West ) entered into an agreement to combine by way of a plan of arrangement, whereby Capstone agreed to purchase all of the outstanding common shares, warrants and options of Far West (the Transaction ). The Far West shareholders were entitled to elect to receive, in exchange for each Far West share held either (i) 1.825 shares of Capstone and C$1.00 in cash, (ii) 2.047 shares of Capstone and C$0.001 in cash, or (iii) C$9.19 cash, subject to proration on the basis of an aggregate maximum cash amount of approximately C$79.0 million and provided that no Far West shareholder that elected option (iii) above, would receive less than C$1.00 in cash per Far West share. On June 17, 2011, Capstone completed its purchase of Far West. Far West holds the Santo Domingo copper-iron-gold project in Chile as well as active exploration properties in Australia. The Company is continuing advancement of the Santo Domingo project in Chile towards a production decision. 17