Financial Statements of WALLBRIDGE MINING COMPANY LIMITED Years ended December 31, 2015 and 2014 (Expressed in Canadian Dollars)
KPMG LLP Telephone (416) 777-8500 Bay Adelaide Centre Fax (416) 777-8818 333 Bay Street Suite 4600 Internet www.kpmg.ca Toronto ON M5H 2S5 Canada INDEPENDENT AUDITORS REPORT To the Shareholders of Wallbridge Mining Company Limited We have audited the accompanying financial statements of Wallbridge Mining Company Limited, which comprise the statements of financial position as at December 31, 2015 and December 31, 2014, the statements of loss, comprehensive loss, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the 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 KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG Network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP
appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the 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 financial statements present fairly, in all material respects, the financial position of Wallbridge Mining Company Limited as at December 31, 2015 and December 31, 2014, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 1 in the financial statements, which describes that the Company has prepared the financial statements on a going concern basis. The Company has had recurring losses, and its continuation as a going concern is dependent on the Company s ability to successfully fund its operations by obtaining additional financing and/or by generating sufficient cash flow from operations. These conditions along with other matters as set forth in Note 1 in the financial statements indicate the existence of material uncertainties that cast significant doubt about the Company s ability to continue as a going concern. Chartered Professional Accountants, Licensed Public Accountants March 24, 2016 Toronto, Canada
Statements of Financial Position December 31, 2015 and December 31, 2014 2015 2014 Assets Current assets: Cash and cash equivalents $ 2,300,524 $ 3,831,897 Restricted cash (note 22 (c)) 290,400 556,374 Restricted cash (note 14 (c)(iii)) - 205,478 Derivative asset (note 7) 140,000 592,800 Amounts receivable (note 8) 2,512,574 6,189,372 Inventory (note 10) - 1,615,852 Deposits and prepaid expenses (note 11) 390,175 233,939 Investment in Duluth Metals Limited (note 12) - 2,283,777 Marketable securities 818 13,981 Assets held for sale (note 13) - 3,372,746 5,634,491 18,896,216 Restricted cash (note 22 (c)) 287,674 192,074 Investment in Carube Copper Corp. (note 13) 544,736 - Exploration and evaluation assets (note 14) 16,358,796 15,654,749 Property and equipment (note 15) 378,411 3,506,652 $ 23,204,108 $ 38,249,691 Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities (note 16) $ 4,306,307 $ 11,891,790 Deposit from Partner (note 14 (c)(iii)) - 205,478 Current portion of provision for closure plan (note 22(b)) 71,091 331,000 Current portion of long-term debt (note 18) 15,424 1,844,716 Liabilities held for sale (note 13) - 951,305 4,392,822 15,224,289 Long-term debt (note 18) - 15,424 Provision for closure plan (note 22 (b)) 262,600 167,000 Deferred tax liability (note 19) 53,000 638,000 4,708,422 16,044,713 Equity (note 20): Equity attributable to Wallbridge Mining Company Limited shareholders: Share capital 55,761,678 55,745,478 Warrants 8,000 146,000 Contributed surplus 8,041,085 7,751,110 Deficit (45,315,077) (43,042,731) Accumulated other comprehensive income - 1,065,762 Equity attributable to Wallbridge Mining Company Limited shareholders 18,495,686 21,665,619 Non-controlling interest (note 13) - 539,359 Total Equity 18,495,686 22,204,978 Nature of operations and going concern (note 1) Commitments and contingencies (notes 14 and 22) $ 23,204,108 $ 38,249,691 See accompanying notes to financial statements. Approved by the Board: "Alar Soever" Director "Marz Kord" Director 1
Statements of Loss 2015 2014 Revenue (note 21) $ 26,023,749 $ 16,272,920 Mining Operating Costs Production costs 22,543,043 15,029,283 Royalty expense (note 16) 421,009 193,686 Amortization and depletion (note 15) 3,338,896 2,478,700 Impairment charges (note 10) - 66,831 26,302,948 17,768,500 Loss from mining operations 279,199 1,495,580 Other expenses and (income): General and administrative expenses (note 17) 1,893,902 1,997,776 Amortization of property and equipment 76,228 94,458 Interest on current and long-term debt 56,609 412,251 Interest income (35,485) (14,804) Unrealized loss (gain) on marketable securities 13,163 (9,937) Unrealized gain on derivative contract (note 7) (140,000) (592,800) Realized gain on metals derivative contract (360,052) (108,542) Realized loss on foreign currency derivative contract 587,337 - Loss on disposition of property and equipment 12,644 5,279 Gain on loss of control of Miocene Resources Limited (note 13) (298,483) - Impairment of investment in Carube Copper Corp (note 13) 1,536,592 - Share of loss in Carube Copper Corp (note 13) 97,618 - Impairment of promissory note and amounts receivable (note 9 and 17) 494,710 - Impairment of investment in Duluth Metals Limited (note 12) - 6,546,814 Gain on sale of investment in Duluth Metals Limited (note 12) (1,065,762) (1,065,762) Foreign exchange (gain) loss (92,826) 64,052 2,776,195 7,328,785 Loss before income taxes 3,055,394 8,824,365 Deferred tax recovery (note 19) (585,000) (601,000) Loss for the year $ 2,470,394 $ 8,223,365 Attributable to: Equity holders of Wallbridge Mining Company Limited $ 2,294,587 $ 7,782,881 Non-controlling interest 175,807 440,484 $ 2,470,394 $ 8,223,365 Weighted average number of common shares - basic and diluted 167,180,780 165,459,140 Net loss per share - basic and diluted $ 0.01 $ 0.05 See accompanying notes to financial statements. 2
Statements of Comprehensive Loss 2015 2014 Net loss for the year $ 2,470,394 8,223,365 Other comprehensive income (loss), net of tax: Items that may be reclassified subsequently to profit or loss: Unrealized loss on available-for-sale investment arising before impairment loss recorded - 5,481,065 (net of tax 2014 - $nil) Unrealized (gain) loss on available-for-sale investment - (2,131,524) arising subsequent to impairment loss recorded Reclassification adjustment for impairment loss included in net loss during the year - (6,546,814) Reclassification adjustment for gain included in net loss during the year 1,065,762 1,065,762 Comprehensive loss for the year 3,536,156 6,091,854 Attributable to non-controlling interest 175,807 440,484 Attributable to equity holders of Wallbridge Mining Company Limited $ 3,360,349 5,651,370 See accompanying notes to financial statements. 3
Statements of Changes in Equity Number of Shares Share Capital Contributed Surplus Accumulated Other Comprehensive Income (loss) Equity attributable to Wallbridge shareholders Noncontrolling interests (note 13) Warrants Deficit Total Balance, December 31, 2013 162,270,882 $ 55,385,863 103,000 7,499,312 (35,275,033) (1,065,749) 26,647,393 832,550 27,479,943 Private placements, net of share issuance costs 4,889,556 368,615 35,000 - - - 403,615-403,615 Warrants issued in connection with bridge financing - - 8,000 - - - 8,000-8,000 Finders' compensation units - (9,000) - 9,000 - - - - - Share issuances in Miocene - - - - - - - 136,293 136,293 Dilution gain in Miocene Metals Limited - - - - 15,183-15,183-15,183 Share based compensation - - - 145,000 - - 145,000 11,000 156,000 Deferred share units - - - 97,798 - - 97,798-97,798 Unrealized loss on available for sale securiites, net of tax - - - - - (5,481,065) (5,481,065) - (5,481,065) Transfer of accumulated other comprehensive loss to net loss - - - - - 6,546,814 6,546,814-6,546,814 Unrealized gain on sale of available for sale securities, net of tax - - - - - 2,131,524 2,131,524-2,131,524 Transfer of gain on sale of available for sale securtities, net of tax - - - - - (1,065,762) (1,065,762) - (1,065,762) Net loss for the year - - - - (7,782,881) - (7,782,881) (440,484) (8,223,365) Balance, December 31, 2014 167,160,438 $ 55,745,478 146,000 7,751,110 (43,042,731) 1,065,762 21,665,619 539,359 22,204,978 Share issuances and dilution gain in Miocene Resources Limited - - - - 22,241-22,241 172,759 195,000 Restricted share units vested 675,000 16,200 (16,200) - - Expiration of warrants - - (138,000) 138,000 - - - - - Share based compensation - - - 120,175 - - 120,175-120,175 Deferred share units - - - 48,000 - - 48,000-48,000 Transfer of gain on sale of available for sale securities, net of tax - - - - - (1,065,762) (1,065,762) - (1,065,762) Net loss for the year - - - - (2,294,587) - (2,294,587) (175,807) (2,470,394) Deconsolidation of Miocene Resources Limited (536,311) (536,311) Balance, December 31, 2015 167,835,438 $ 55,761,678 8,000 8,041,085 (45,315,077) - 18,495,686-18,495,686 See accompanying notes to financial statements. 4
Statements of Cash Flows 2015 2014 Cash flows from (used in) operating activities: Net loss for the year $ (2,470,394) (8,223,365) Adjustments for: Deferred tax recovery (585,000) (601,000) Impairment of inventory - 66,831 Amortization and depletion of property and equipment 3,415,124 2,573,158 Interest on current and long-term debt 56,609 412,251 Interest on note receivable (28,552) - Impairment of investment in Carube Copper Corp. 1,536,592 - Loss on disposition of property and equipment 12,644 5,279 Unrealized loss in investment of Duluth Metals Limited - 6,546,814 Gain on disposition of investment of Duluth Metals Limited (1,065,762) (1,065,762) Gain on loss of control of Miocene Resources Limited (298,483) - Share of Carube Copper Corp. loss 97,618 - Gains on derivative contracts (500,052) (701,342) Cash received on settlement of derivative contracts 952,852 108,542 Impairment of promissory note and amounts receivable 494,710 - Unrealized loss (gain) on marketable securities 13,163 (9,937) Share based compensation 120,175 156,000 Deferred stock units 48,000 97,798 Closure plan obligations (164,309) - Changes in assets and liabilities held for sale 4,388 - Changes in non-cash working capital: Amounts receivable 3,696,328 (6,185,594) Inventory 1,380,883 (1,380,883) Prepaid expenses (156,236) (177,313) Accounts payable and accrued liabilities (7,429,115) 11,846,087 (868,817) 3,467,564 Cash flows from (used in) financing activities: Share issuances in Miocene Resources Limited 195,000 155,000 Issuance of share capital, net of share issuance costs - 403,615 Interest paid on current and long-term debt (164,823) (274,716) Deposit from partner - 205,478 Proceeds from line of credit - 1,250,000 Payment on line of credit (1,000,000) (1,000,000) Proceeds from bridge loan - 1,350,873 Payment on bridge loan (782,625) (710,188) Payments on long-term debt (19,783) (18,930) (1,772,231) 1,361,132 Cash flows from (used in) investing activities: Exploration and evaluation assets expenditures (1,272,932) (1,563,927) Exploration and evaluation assets option payments received 412,038 999,993 BC Mining Exploration tax credit received - 32,012 Cash in Miocene Resources Limited classified to Assets held for sale - (156,021) Restricted partner cash - (205,478) Restricted cash for letters of credit 170,374 (178,798) Purchase of investment in Carube Copper Corp. (610,000) - Received on line of credit receivable from Miocene Resources Limited 123,418 - Proceeds from sale of investment in Duluth Metals Limited 2,283,777 2,283,778 Proceeds on disposition of property and equipment 3,000 2,228 Property and equipment purchases - (2,964,830) 1,109,675 (1,751,043) Net increase (decrease) in cash and cash equivalents (1,531,373) 3,077,653 Cash and cash equivalents, beginning of year 3,831,897 754,244 Cash and cash equivalents, end of year $ 2,300,524 3,831,897 See accompanying notes to financial statements. 5
1. Nature of operations and going concern: Wallbridge Mining Company Limited ( Wallbridge or the Company ) is incorporated under the laws of Ontario and is engaged in the business of locating and exploring mineral properties. On August 1, 2014, the Company began operations at its first polymetallic mine, producing copper, platinum, palladium, and gold from the Broken Hammer open pit mine in Sudbury, Ontario. The mining operations were completed on October 30, 2015. The Company s head office is located at 129 Fielding Road in Lively, Ontario. These financial statements have been prepared on the going concern basis, which contemplates that the Company will be able to realize its assets and discharge liabilities in the normal course of business. There can be no assurance that the Company will either achieve or maintain profitability in the future. The Company has had recurring losses. There can be no assurance that the Company will either achieve or maintain profitability in the future. In order to meet its planned activities, exploration and evaluation expenditures, cover its administrative costs, and meet current liabilities, the Company must raise additional financing. The continuation of the Company as a going concern is dependent on the Company s ability to successfully fund its cash obligations through operations and financing. Although the Company has been successful in obtaining the necessary financing to date, there can be no assurance that adequate or sufficient financing will be available in the future, or available under terms acceptable to the Company, or the Company will be able to generate sufficient positive cash flow from operations. These circumstances indicate that the existence of a material uncertainty which casts significant doubt as to the ability of the Company to meet its obligations as they come due, and accordingly, the appropriateness of the use of the accounting principles applicable to a going concern. These financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. Should the Company be unable to generate sufficient cash flow from operations or financing activities, the carrying value of the Company s assets could be subject to material adjustments and other adjustments may be necessary to these financial statements should such adverse events impair the Company s ability to continue as a going concern. On March 24, 2016, the Company s Board of Directors approved the financial statements for the year ended December 31, 2015 and authorized them for issue. 6
2. Significant accounting policies: (a) Basis of presentation: These financial statements ( financial statements ) have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). These financial statements have been prepared on a historical cost basis except for certain financial assets and liabilities which are measured at fair value. (b) Business Combinations The Company accounts for business combinations using the acquisition method when control is obtained. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. (c) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when an investor is exposed, or has rights, to variable returns from its involvement with an investee and has the ability to affect those returns through its power over the investee. Subsidiaries are included in the financial statements from the date control is obtained until the date control ceases. Where the Company s interest in a subsidiary is less than 100%, the Company recognizes non-controlling interests. All intercompany balances, transactions, income, expenses, profits and losses, including unrealized gains and losses have been eliminated on consolidation. Wallbridge began consolidating Miocene Resources Limited (formerly Miocene Metals Limited) ( Miocene ) in the financial statements in January 2013. On June 18, 2015, upon the completion of a reverse takeover transaction between Miocene and Carube Resources Inc., the Company began accounting for its investment using the equity method (note 13). At December 31, 2015, Wallbridge does not have any subsidiaries. (d) Non-controlling interests: Non-controlling interests in the Company s subsidiary are classified as a separate component of equity. On initial recognition, non-controlling interest was measured at their proportionate share of the identifiable net assets of the subsidiary, measured at fair value. Subsequent to acquisition date, adjustments are made to the carrying amount of non-controlling interests for the non-controlling interests share of changes to the subsidiary s equity. Changes in the Company s ownership interest in a subsidiary that do not result in a loss of control are recorded as equity transactions. The carrying amount of non-controlling interests is adjusted to reflect the change in the non-controlling interests relative interest in the subsidiary and the difference between the adjustment to the carrying amount of non-controlling interests and the Company s share of proceeds received and or consideration paid is recognized directly in equity and attributed to shareholders of the Company. 7
2. Significant accounting policies (continued): (e) Assets held for Sale: A non-current asset is reclassified as held for sale and reclassified to current assets if the Company expects that its carrying value will be recovered principally through a sale transaction and not through its continued use provided that the asset is available for immediate sale in its present condition and realization of its sale is highly probable. A high probability of sale is considered to exist when the Company is committed to a plan to sell the asset, has undertaken an active program to actively market the asset and locate a buyer at a price reasonable in relation to fair value of the asset, and expects the sale process to be concluded within one year following the date of reclassification. The assets and liabilities of any subsidiary for which the Company is committed to sell and for which loss of control of the subsidiary is expected to occur are also reclassified as held for sale. (f) Associates: Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are recognized initially at cost. The Company s investment includes goodwill and other purchase price adjustments identified on acquisition based on the fair value of the assets acquired, and the investment is net of any accumulated impairment losses. The financial statements include the Company s share of the income and expenses and equity movements of the associate, after adjustments to align the accounting policies with those of the Company and other adjustments arising from the elimination of intercompany transactions, from the date that significant influence commences until the date that significant influence ceases. When the Company s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. 8
2. Significant accounting policies (continued): (g) Financial instruments: Classification and measurement initial recognition: On initial recognition, all financial assets and financial liabilities are recorded at fair value plus directly attributable transaction costs, other than financial assets and liabilities classified at fair value through profit and loss ( FVTPL ). The directly attributable transaction costs of financial assets and liabilities classified as FVTPL are expensed in the period they are incurred. Subsequent measurement: Subsequent measurement of financial assets and liabilities depends on the classifications of such assets and liabilities. Classified as fair value through profit or loss: Financial assets and liabilities classified as FVTPL are measured at fair value with changes in fair value recognized in net loss. Financial assets and liabilities are classified as FVPTL when they are acquired or incurred principally for short-term profit taking or they meet the criteria for being designated as FVTPL and have been designated as such on initial recognition. Classified as available for sale: A financial asset is classified as available for sale when it is not classified as a loan and receivable, a held-to-maturity investment, or as FVTPL and has been designated as available for sale on initial recognition. A financial asset classified as available for sale is measured at fair value with gains and losses recognized in other comprehensive income ( OCI ) and accumulated in accumulated other comprehensive income ( AOCI ) within equity until the financial asset is derecognized or there is objective evidence that the asset is impaired. When available for sale financial assets are derecognized, the cumulative gains or losses that have been previously recognized in OCI are reclassified to earnings for the period. Any increase in the fair value of an asset available for sale after an impairment loss has been recognized is treated as a revaluation and is recognized in OCI. 9
2. Significant accounting policies (continued): (g) Financial instrument (continued): Loans and receivables and other financial liabilities: Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are measured at amortized cost using the effective interest method, less any impairment losses. Other financial liabilities are measured at amortized cost using the effective interest method. Such liabilities are de-recognized when the obligations are discharged, cancelled or expired. The effective interest method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating the effective interest over the term of the financial asset or financial liability. The effective interest rate is the rate that exactly discounts estimated future cash flows throughout the term of the financial instrument to the net carrying amount. Derivative Assets (Liabilities): The Company holds derivative financial instruments to minimize its market price exposures. Derivatives are recognized initially at fair value and any associated transaction costs are recognized in profit and loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes are recognized in profit and loss. Classifications: Cash and cash equivalents and restricted cash are designated as fair value through profit and loss and are measured at cost, which approximates fair values. Marketable securities are designated as fair value through profit and loss. Long-term investments in equity securities, where the Company cannot exert significant influence are designated as available-for sale. Accounts payable and accrued liabilities, deposit from partner, other payables and long-term debt are classified as other financial liabilities. Amounts receivable are designated as fair value through profit and loss. Impairment of financial assets: The Company assesses at the end of each reporting period whether there is objective evidence that financial assets are impaired. A financial asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows of the financial asset that can be reliably estimated. 10
2. Significant accounting policies (continued): (h) Exploration and evaluation assets: These assets relate to mineral rights acquired and exploration and evaluation expenditures capitalized in respect of projects that are in the exploration or predevelopment stage. Exploration and evaluation expenditures include costs which are directly attributable to acquisition, surveying, geological, geochemical, geophysical, exploratory drilling, land maintenance, sampling, and assessing technical feasibility and commercial viability. These expenditures are capitalized until the technical feasibility and commercial viability of the extraction of mineral reserves in a project is demonstrated. The Company assesses whether there is any indication of impairment. Indicators of impairment include, but are not limited to: i) The right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed; ii) Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned; iii) Exploration for and evaluation of mineral resources in the specific area have not led to the commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area; and iv) Sufficient data exists to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale. In circumstances where indicators of impairment exist, an impairment test is required to determine if the carrying amount of the exploration and evaluation asset exceeds its estimated recoverable amount. The estimated recoverable amount is the greater of fair value less costs of disposal, and value in use (which is discounted expected future cash flows). If the exploration and evaluation asset is determined to be impaired, the exploration and evaluation asset is written down to the estimated recoverable amount. 11
2. Significant accounting policies (continued): (i) Property and equipment: Property and equipment are carried at cost, less accumulated depreciation. Depreciation is provided using the following methods and annual rates: Asset Basis Rate Buildings and bridges Declining-balance 5% Vehicles and equipment Declining-balance 20% - 30% Leasehold Declining-balance 20% Broken Hammer Asset Straight-line over life 13 months Management reviews the estimated lives, residual values and depreciation methods of the Company s property and equipment at the end of each financial year and when events and circumstances indicate that such a review should be made. Changes to estimated useful lives, residual values or depreciation methods resulting from such review are accounted for prospectively. Once a mining project has been established as commercially viable, technically feasible, and a development decision has been made, costs are no longer capitalized to exploration and evaluation assets, an impairment test is completed on the asset, and the unimpaired costs are transferred from Exploration and Evaluation assets to property and equipment. Costs associated with development of the project are capitalized to property and equipment. The operations of the Broken Hammer mine were completed on October 30, 2015 and the asset has been fully depleted. At each reporting date, the Company reviews the carrying amounts of its property and equipment to determine whether there is any indication of impairment. If any such impairment exists, then the asset s recoverable amount is estimated. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash-generating units ( CGU ). The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs of disposal. An impairment is recognized, if the carrying amount of an asset or CGU exceeds its recoverable amount, in the statement of loss. 12
2. Significant accounting policies (continued): (j) Cash and cash equivalents and restricted cash: Cash and cash equivalents consists of cash on hand and deposits in banks which may be settled on demand or have a maturity no longer than a 90 day period from the date of purchase. Restricted cash, classified as current, consists of deposits in banks to be used in exploration joint ventures. Restricted cash, classified as long-term, consists of cash balances assigned to support one-year letters of credit in support of various agreements and in support of credit card contingencies (note 22 (b) and (c)). (k) Share based payments: The fair value of the stock options, restricted share units, and deferred share units granted to employees, officers and directors is recognized as an expense over the graded vesting period with a corresponding increase to contributed surplus. The fair values for stock options are determined at the grant date by applying the Black-Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price, expected volatility, weighted average expected life, expected dividends, expected forfeiture rate and the risk free interest rate. Under graded vesting the fair value of each tranche is recognized over its respective vesting period. Restricted share units and deferred share units are measured at the fair value of the shares at the grant date and are equity settled. Other share based payments are measured at the fair value of goods or services received. In situations where equity instruments are issued and some or all of the goods or services received by the Company as consideration cannot be specifically identified, they are measured at fair value of the share based payment. (l) Provision for restoration, rehabilitation and environmental obligations: A legal or constructive obligation to incur restoration, rehabilitation and environmental costs may arise when environmental disturbance is caused by the exploration, development or ongoing production of a mineral property interest. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their net present value, are provided for and capitalized at the start of each project to the carrying amount of the asset, as soon as the obligation to incur such costs arises. Discount rates to reflect the time value of money are specific to the liability. These costs are charged against profit or loss over the economic life of the related asset, through amortization using a unit-of-production methodology. The related liability is adjusted each period for the unwinding of the discount rate and for changes to the current marketbased discount rate and amount or timing of the underlying cash flows needed to settle the obligation. The unwinding of the discount is recognized as a finance cost. 13
2. Significant accounting policies (continued): (m) Income taxes: Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in OCI. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. Deferred tax is measured at the tax rates expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (n) Earnings (loss) per share: Basic earnings (loss) per share are computed by dividing earnings (loss) by the weighted average number of shares outstanding during the year. The Company uses the treasury stock method for calculating diluted earnings per share. Diluted earnings per share are computed similar to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options and warrants. 14
2. Significant accounting policies (continued): (o) Flow-through common shares: The Company finances a portion of its exploration activities through the issue of flowthrough shares. Canadian tax legislation permits a company to issue flow-through instruments whereby the deduction for tax purposes relating to qualified resource expenditures is claimed by the investors rather than the Company. Common shares issued on a flow-through basis typically include a premium because of the tax benefits provided to the investor. At the time of issue, the Company estimates the proportion of the proceeds attributable to the premium and the common shares. The premium is estimated as the excess of the subscription price over the trading price of the shares and is recorded as a deferred liability. The Company recognizes a pro rata amount of the premium through the statement of loss as other income relating to flow-through share premium with a corresponding reduction to the deferred liability as the flow-through expenditures are incurred. (p) Revenue from sales of metals concentrate and accounts receivable: Revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer as evidenced by an executed sales agreement. The Company recognizes revenue from the sale of its metals upon the delivery of concentrate to the smelter or the designated shipping point, which is when title transfers and significant rights and obligations of ownership pass. The Company s smelter contracts provide for the final prices to be determined by quoted market prices in a period subsequent to the date of concentrate delivery. Revenue from the sale of metals concentrate is calculated using the forward price of the commodity for the period the contract is to be settled. Variations between the price recorded on initial revenue recognition and the final price received due to changes in market prices and foreign exchange represents an embedded derivative in the sales contact. Revenue in every period is adjusted for any change in the value of the contract using the period end forward price for the period the contract is expected to settle. The variance between the forward price and the final price received is recorded in revenue. 15
2. Significant accounting policies (continued): (q) Inventory: Inventory consists of crushed ore and concentrate. The inventory is valued at the lower of production cost and net realizable value. Net realizable value is calculated as the estimated price at the time of sale based on estimated metal prices less estimated future costs to convert the inventories into saleable form and estimated costs to sell. Crushed ore stockpiles represent coarse ore that has been extracted and crushed from the mine and is available for further processing. Concentrate inventory is processed ore that has not been shipped to a smelter and consists of gravity concentrate and copper concentrate. Costs of the concentrate inventory are allocated on a pro rata basis. Included in production costs are costs that are directly attributable to mineral extraction and processing that are incurred in extracting and processing ore, including depletion and amortization. (r) Significant accounting judgments and estimates: The preparation of financial statements in accordance with IFRS requires management to make judgments, estimates and 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. Estimates and assumptions are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from these estimates. Significant Judgments in Applying Accounting Policies: The areas which require management to make significant judgments in applying the Company s accounting policies in determining carrying values include, but are not limited to: Amortization of property and equipment: Significant judgment is involved in the determination of useful life and residual values for the computation of amortization of property and equipment and no assurance can be given that actual useful lives and residual values will not differ from current assumptions. Determination of development phase: The Company applies significant judgment when determining and assessing its criteria used to determine technical feasibility and commercial viability is demonstrable. Commercial production: The determination of the date on which a mine enters the commercial production stage is a significant judgment since capitalization of certain costs ceases and the recording of revenues and expenses commences upon entering commercial production. As a mine is constructed, certain costs incurred are capitalized and proceeds from sales are offset against the capitalized costs. This continues until the mine is available for use in the manner intended by management, which requires significant judgment. 16
2. Significant accounting policies (continued): (r) Significant accounting judgments and estimates (continued): Significant Accounting Estimates and Assumptions: The areas which require management to make significant estimates and assumptions in determining carrying values include, but are not limited to: Impairment of exploration and evaluation properties: While assessing whether any indications of impairment exist for exploration and evaluation properties, consideration is given to both external and internal sources of information. Information the Company considers includes changes in the market, economic and legal environment in which the Company operates that are not within its control that could affect the recoverable amount of exploration and evaluation properties. Internal sources of information include the manner in which exploration and evaluation properties are being used or are expected to be used and indications of expected economic performance of the assets. Income taxes and recoverability of potential deferred tax assets: In assessing the probability of realizing income tax assets recognized, management makes estimates related to expectations of future taxable income, applicable tax planning opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. The Company considers whether relevant tax planning opportunities are within the Company s control, are feasible and are within management s ability to implement. Examination by applicable tax authorities is supported based on individual facts and circumstances of the relevant tax position examined in light of all available evidence. Where applicable tax laws and regulations are either unclear or subject to ongoing varying interpretations, it is reasonably possible that changes in these estimates can occur that materially affect the amounts of income tax assets recognized. Also, future changes in tax laws could limit the Company from realizing the tax benefits from the deferred tax assets. The Company reassesses unrecognized income tax assets at each reporting period. 17
2. Significant accounting policies (continued): (r) Significant accounting judgments and estimates (continued): Stock-based compensation and warrants: Management determines costs for share-based payments using market-based valuation techniques. The fair value of the market-based and performance-based share awards are determined at the date of grant using generally accepted valuation techniques. Assumptions are made and judgment used in applying valuation techniques. These assumptions and judgments include estimating the future volatility of the stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors and corporate performance. Similar calculations are made in order to value warrants. Such judgments and assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates. Reserves and Resources: During 2014, the Company commenced production at its Broken Hammer open pit mine. Significant estimates and assumptions relate to recoverability of mining operations. Certain assumptions are based upon reserves, which represent the estimated amount of ore that can be economically and legally extracted from the Company s property. Changes in reserves may affect the Company s financial results and financial position as follows: (i) (ii) (iii) Asset carrying values; Amortization charged in the statement of operations that are determined by the units of production basis or over the estimated life of the mine; and Site restoration and environmental provisions may change where changes in estimated reserves affect expectations about the timing or cost of these activities; Revenue recognition: The Company s smelter contracts provide for the final prices to be determined by quoted market prices in a period subsequent to the date of concentrate delivery. Revenue from the sale of metals concentrate is calculated using the forward price of the commodity for the period the contract is to be settled. The actual amounts in the settlement period may vary from the amount estimated. Production inventories: The allocation of costs to inventories and the determination of net realizable value involve the use of estimates. There is a high degree of judgment in estimating future costs, future production levels, contained metals ounces, recovery levels, and prices. There can be no assurance that actual results will not differ significantly from estimates used in the determination of the carrying value of inventories. 18
3. Recent accounting pronouncements: New standards not yet adopted: IFRS 9 Financial Instruments ( IFRS 9 ) replaces the current standard IAS 39 Financial Instruments: Recognition and measurement, replacing the current classification and measurement criteria for financial asset and liabilities with only two classification categories: amortized cost and fair value. The effective date for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company will evaluate the impact of the change to its financial statements based on the characteristics of its financial instruments at the time of adoption. IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ) was issued to clarify the principles for recognizing revenue. IFRS 15 establishes principles to address the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. IFRS will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company is currently assessing the effect of this standard on the financial statements. IFRS 16, Leases ( IFRS 16 ) was issued in January 2016. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard is effective for annual periods beginning on or after January 1, 2019, and permits early adoption, provided IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company is in the process of determining the impact of IFRS 16 on its financial statements. 4. Capital management: The Company considers its capital structure to be shareholders equity of $18,495,686 at December 31, 2015 (2014 - $21,665,619). The Company s objective when managing capital is to maintain adequate levels of funding to support its exploration and mining activities and to maintain corporate and administrative functions necessary to support operational activities. Funds are primarily secured through equity capital raised by way of private placements. There can be no assurances that the Company will be able to continue raising equity capital in this manner. The Company invests all capital that is surplus to its immediate operational needs in shortterm, liquid and highly-rated financial instruments, such as cash and other short-term guaranteed deposits, and all are held in a major Canadian chartered bank. 19
5. Financial risk factors: A summary of the Company s risk exposures as it relates to financial instruments are reflected below: (a) Credit risk: Credit risk refers to cash and cash equivalents, amounts receivable and derivative contracts and arises from the possibility that any party to the contracts fail to perform. The Company monitors the credit worthiness of its customers and joint venture partners. The Company s cash and cash equivalents are held in a major Canadian chartered bank and the Company has no investments in non-bank asset-backed commercial paper. The Company s exposure to credit risk at December 31, 2015 was the carrying value of the cash and cash equivalents, amounts receivable, and derivative asset. (b) Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. At December 31, 2015, the Company has cash, current restricted cash, receivables, and investments of $5,104,316 to settle amounts payable and accrued liabilities, deposits with partner, and current portion of the provision for closure plan and current portion of debt of $4,392,822. In order to meet its planned operations and exploration and evaluation expenditures, cover its administrative costs, and meet current liabilities, the Company must raise additional financing. The continuation of the Company as a going concern is dependent on the Company s ability to successfully fund its cash obligations through operations or financing. 20
5. Financial risk factors: (c) Market risk: Commodity price risk Commodity price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of the changes in commodity prices. The Company is exposed to changes in commodity prices from its sale of metals. Accounts receivable are subject to commodity price risk due to fluctuations in the metal prices to the final settlement. To mitigate some of its risk, the Company holds derivative financial instruments to minimize its market price exposures (note 7). The timing of settlement specified in the financial contracts matches the final pricing settlement periods for the metals pricing with the smelter. The metals forward sales contracts are being recognized on a mark-to-market basis as a gain or loss in the statement of loss. The fair value of these contracts is $140,000 at December 31, 2015 (2014 - $592,800). The Company has provided a deposit to cover mark-to-market risk associated with forward contracts (note 11). Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is exposed to currency fluctuations in the U.S. dollar. The Company s metals sales are in US dollars ( USD ). The Company s expenditures are in Canadian dollars. Fluctuations in the USD relative to the Canadian dollar will create volatility in the Company s cash flows and the reported amounts for revenue by period. The Company s accounts receivable of $586,851 is exposed to USD currency risk at December 31, 2015. Assuming all other variables remained the same, a 1% change in the Canadian dollar against the USD, would have a $5,868 effect in the statement of loss for the year. The Company s revenue is affected by foreign currency risk, such that a weakening Canadian dollar against the US dollar will result in additional revenues and a strengthening would result in lower revenues. The Company entered into agreements to sell USD to limit its exposure to fluctuations in the USD (note 7). Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company had $2,300,524 in cash and cash equivalents at December 31, 2015. The Company invests cash in an interest bearing account held in a major Canadian chartered bank. The Company periodically assesses the quality of its investments with the bank and is satisfied with the credit rating of the bank. The Company s cash is held primarily in interest bearing accounts, the rates of which are not fixed. A 100 basis point change in the interest rate at December 31, 2015 would affect the Company by an annualized amount of interest equal to approximately $23,005. 21