Date: Thu, 20 Nov 1997 22:17:55 GMT Server: Apache/1.2.4 Last-Modified: Wed, 07 May 1997 06:55:35 GMT ETag: "3c5f4-5c30-33702767" Content-Length: 23600 Accept-Ranges: bytes Connection: close Content-Type: text/html BEMA GOLD CORPORATION - Notes to Consolidated Financial Statements

(All tabular amounts are in thousands of Canadian dollars unless otherwise stated)

  

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada, which differ in some respects from accounting principles generally accepted in the United States (see Note 18). Certain of the prior years' comparative figures have been reclassified to conform with the presentation adopted for the current year.

  1. Principles of consolidation
    These consolidated financial statements include the accounts of Bema Gold Corporation and its subsidiaries. The accounts of Puma Minerals Corp. ("Puma Minerals") (fomerly Abo Resource Corp.) are consolidated from the date of acquisition (see Note 167). Prior to March 23, 1995, the Company consolidated the accounts of El Callao Mining Corp. ("El Callao Mining"); since this date, the Company accounts for its investment in El Callao Mining on an equity basis as the Company's shareholding in El Callao Mining, on a fully diluted basis, fell below 50%. Inter-company transactions have been eliminated.

  2. Joint ventures
    Compania Minera Maricunga ("CCM") and Compania Minera San Damian ("San Damian") are accounted for using the proportionate consolidation method whereby the Company's pro rata share of the assets, liabilities, revenues and expenses of the joint ventures are included with those of the Company (see Note 15).

  3. Property, plant and equipment
    Property, plant and equipment are recorded at cost. The cost of mineral properties includes direct exploration and development costs as well as interest charges, amortization of deferred financing costs, foreign exchange gains or losses, advance royalty payments, salaries and overhead charges relating to operations personnel that can be directly related to the specific projects.

    Depreciation and depletion on the mine and mining equipment have been provided on the following basis:

    1. Mine property, plant and machinery - unit-of-production method
    2. Mining equipment - straight-line over estimated useful life of 8 to 10 years

    Depreciation for other depreciable assets is calculated on the declining balance basis at rates of 20% to 30% which amorizes the cost of the fixed assets over their estimated productive lives.

    Some of the Company's properties are in the exploration and development stage and have not yet attained commercial production. The ultimate realization of the value of properties in the exploration and development stage is dependent upon the successful development or sale of these properties.

    Costs related to properties abandoned are written-off when it is determined that the property has no continuing value.

  4. Revenue recognition
    Revenue, net of refining and selling costs, is recorded at the estimated net realizable value when the gold and silver is available to be processed by the smelter or refinery. Adjustments to these amounts are made after final prices, weights and assays are established. The Company may fix the price it will receive for part or all of its production by entering into forward sales or option contracts. The benefit or cost of hedging activities is included in revenue at the time that the hedged production is sold.

  5. Deferred costs
    Financing costs, incurred on issuance of debt, are deferred and charged against earnings over the term of the indebtedness except for those amounts capitalized to mineral properties.

  6. Reclamation costs
    A provision for estimated future reclamation and mine closure costs is provided for on a unit-of-production basis over the life of the operation. Costs related to ongoing programs are expensed when incurred.

  7. Foreign exchange translation
    The Company's foreign operations are integrated subsidiaries and financial statements are translated using the temporal method. Exchange gains or losses arising on translation are included in income for the year except for those gains or losses that have been capitalized to mineral properties. Exchange gains or losses arising from the translation of long-term monetary assets or liabilities with a fixed or ascertainable life are deferred and amortized over the life of the respective asset or liability.

  8. Cash
    Cash includes all highly liquid money market instruments which have a maturity of three months or less.

  9. Gold loans
    Gold loans are initially recorded at the gold price received on the draw down date and are revalued at the market price of gold prevailing at each balance sheet date. The unrealized gain or loss resulting from the mark-to-market adjustment is recorded as either a deferred revenue or a deferred charge. When the Company delivers gold from production to repay the loan, the amount repaid will be recorded as gold revenue based on the initial draw down price.
  

The Company has cash of $21,300,000 and short-term investements of $5,579,000 consisting of $10 million and U.S.$10 million held in escrow at December 31, 1995 as part of its gold loan guarantee (see Note 6) and U.S.$2.4 million held in escrow to cover the 1996 interest payments on the 7.5% convertible debentures (see Note 10) (December 31, 1994 escrow cash - $35.3 million).
  

The market price per share at December 31, 1995 of Arizona Star Resource Corp., El Callao Mining Corp., Victoria Resource Corporation and Westview Resources Inc. was $0.65, $0.60, $0.33 and $0.08, respectively. As at March 23, 1995, the Company began accounting for its investment in El Callao Mining on an equity basis (see Note 1.a). The investment in El Callao Mining on an equity basis was initially the net of the following assets and liabilities (which were subsequently excluded from the consolidated accounts): cash $281,000, accounts receivable $152,000, note receivable $4,029,000, exploration property $23,791,000, other assets $433,000, accounts payable $467,000, mortgage payable $700,000, other liabilities $51,000 and non-controlling interest $17,768,000.
  

During 1995, long-term debt interest expense of $6,003,000 (1994 - $516,000) was capitalized to the Refugio Mine development costs.
  

  

  1. On November 23, 1994, CMM entered into a gold loan agreement with a group of banks for U.S.$85 million to be used for the construction of the Refugio Mine in Chile. On February 14, 1995 CMM drew down the U.S.$85 million loan monetized at a price of U.S.$380 per ounce of gold representing a borrowing of 223,684 ounces of which the Company's portion is U.S.$42.5 million. The Company is guaranteeing its 50% proportionate share of the loan until the Release Date, which it estimates will occur in November, 1996, after which the loan becomes a non-recourse project loan. The interest rate on the loan is referenced to the London Interbank Offered Rate ("LIBOR") (December 31, 1995 - 6.167%). Repayment of the loan is to be made in ten equal semi-annual instalments commencing on December 31, 1996 with provision for mandatory accelerated repayments based on CMM's cash reserves.

  2. As part of the gold loan guarantee, the Company is required to maintain $10 million and U.S.$10 million in Deposit Accounts until the Release Date. The U.S.$10 million was funded by a loan from the joint venture partner to Bema Gold (Bermuda) Ltd. on February 14, 1995 ("JV Loan"). Interest on the JV Loan is LIBOR based (December 31, 1995 - 7.375%), payable on the Release Date. All interest received on the U.S.$10 million Deposit Account is paid to the joint venture partner and is applied against the outstanding JV Loan interest due on the Release Date.
  

  

On June 22, 1995, the Company acquired an option from Minera Anglo-American Chile Ltda. to acquire its 49% interest in the Aldebaran property in Chile for payments totalling U.S.$4 million, payable in cash or shares with U.S.$300,000 due on signing of a formal agreement (paid) and U.S.$3.7 million payable on June 22, 1996 (included above under total option payments for 1996). In addition, the Company is required to fund 49% of all exploration and development expenditures on the property.

In a separate agreement with Arizona Star Resource Corp. ("Arizona Star"), 51% owners of the Aldebaran property, Arizona Star will transfer to the Company 2% of its interest in the property in the event that the Company arranges production financing for at least 60% of the total project mine construction costs.

The Company is required to fund initial exploration expenses of U.S.$500,000, on the San Damian property in Chile, not later than 24 months after commencement of production from the Refugio Mine in Chile. As at December 31, 1995, the Company has expended U.S.$420,000 in exploration expenditures.

Furthermore, in order to maintain its interest in the Uspallata property in Argentina, the Company is required to incur cumulative exploration expenditures totalling U.S.$6.5 million by December 1, 1997. As at December 31, 1995, the Company has incurred exploration expenditures totalling U.S.$3.2 million.

With respect to the Yeguas Heladas property in Chile, the Company is required to fund 49% of the following work commitments: U.S.$50,000 by January 1, 1995 (spent), a further U.S.$250,000 by January 1, 1996 (spent) and a further U.S.$500,000 by January 1, 1997.

The Company, through CMM, is to make future production royalty payments of between 1% and 2.5% of net smelter return depending on the price of gold. The royalty is capped at 37,000 ounces of gold.

  

At December 31, 1995, the Company had option contracts maturing as follows:

The gold loan agreement required CMM to maintain sufficient gold hedges to cover the Refugio Mine's operating costs for an ongoing period of two and one-half years. Bema has pledged 7.05 million El Callao Mining shares as collateral for these put options.
  

On October 1, 1994, the Company issued U.S.$33 million in Special Warrants which were exchanged on February 27, 1995 into a like principal amount of 7.5% unsecured subordinated convertible debentures ("Debentures") maturing February 28, 2000 and convertible by the holder at any time at U.S.$2.05 per share ("Conversion Price") (see Note 19.1). Interest is payable semi-annually beginning April 1, 1995.

The Company has the option to redeem the Debentures plus accrued interest ("Redemption Amount") in shares or cash after September 30, 1997. As it is the intention of the Company to have the Debentures converted to equity, they are reported under the heading of "Convertible Debentures and Shareholders' Equity" in order to reflect the permanent nature of this capital.

After September 30, 1997, the Company may redeem prior to maturity at the Redemption Amount if the weighted average share price exceeds 125% of the Conversion Price for the 20 consecutive trading days ending five trading days preceding the date of the redemption, otherwise, a pre-payment charge equal to U.S.$100 principal amount of Debentures is added to the Redemption Amount ("Adjusted Redemption Amount"). When the price per share does not exceed 125% of the Conversion Price, the shares to be issued are obtained by dividing the Adjusted Redemption Amount by 95% of the weighted average share trading price.

On maturity, the Company may at its option satisfy the principal and accrued interest on the Debentures in cash or in shares based on 95% of the weighted average share trading price if the shares are trading below the Conversion Price.

  

The shareholders adopted a shareholder protection rights plan, creating the potential for substantial dilution of an acquirer's position.

The following options and warrants remain outstanding as at December 31, 1995:

  1. 4,025,000 non-transferale share purchase warrants, with two such warrants entitling the holder to purchase one common share at $3.25 to August 15, 1996 (see Note 19.i);

  2. 3,166.500 directors' and employees' stock options exercisable at prices ranging from $0.80 to $2.59 per share and expiring at dates varying from February 25, 1997 to December 12, 2000 (see Note 19.iii, iv, v).
  

  

In addition to transactions disclosed elsewhere in the financial statements, the Company:

  1. provided management services and evaluation and assessment work on resource properties to associated companies managed by Bema totalling $928,000 in 1995 (1994 - $111,000; 1993 - $155,000). As at December 31, 1995, the Company had an accounts and notes receivable balance of $1,644,000 (1994 - $49,000) with respect to these companies;

  2. provided management services and evaluation and assessment work on resource properties to companies having directors in common and managed by Bema totalling $41,000 in 1995 (1994 - $325,000; 1993 - $392,000). As at December 31, 1995, the Company had an accounts and notes receivable balance of $86,000 (1994 - $396,000) with respect to these companies;

  3. was billed in 1995 by entities related to directors of the Company for legal and consulting services totalling $267,000 (1994 - $1,004,000; 1993 - $927,000) and financing costs totalling $169,000 (1994 - $2,088,000, 1993 - $159,000). As at December 31, 1995, the Company had an accounts payable balance of $9,000 (1994 - $282,000) with respect to these entities.

In 1986 and 1987, the Company provided loans to certain directors and officers for the purchase of shares under share purchase plans. The loans are repayable in annual instalments over ten years and, if in default, bear interest at prime plus 1/4%. Current loans receivable of $52,000 as at December 31, 1995 (December 31, 1994 - $43,000) are included in accounts receivable.

  

Non-capital loss carry-forwards for Canadian tax purposes of $10,243,000 commence to expire in 1996 to 2002 unless utilized (1996 - $808,000; 1997 - $996,000; 1998 - $1,804,000; 1999 - $1,602,000; 2000 - $18,000; 2001 - $1,122,000; 2002 - $3,893,000). For U.S. income tax purposes loss carry-forwards of $17 million commences to expire in the year 2000 through 2009 unless utilized (2000 - $555,000; 2001 - $518,000; 2002 - $882,000).
  

The Company has included in its account the following aggregate amounts with respect to CMM and San Damian which are incorporated joint ventures:

  

Pursuant to the Uspallata property option agreement signed January 27, 1995 between the Company and Puma Minerals, the Company acquired a controlling interest in Puma Minerals on March 29, 1995, through a private placement of 4.95 million shares of Puma Minerals at $0.60 per share which increased the Company's interest from 40.62% to 63.98%. This acquisition has been accounted for using the purchase method.

Details of this acquisition are as follows:

  

The Company operates in one industry and the following geographical locations.

All revenues were derived from one bullion dealer on which the Company was not economically dependent as alternative markets for the sale of gold and silver were readily available.
  

The consolidated statements of the Company have been prepared according to Canadian generally accepted accounting principles ("GAAP") which differ in some respects from U.S. GAAP. The material differences between Canadian and U.S. GAAP and their effect on the Company's financial statements are summarized below:

  1. Purchase method
    U.S. GAAP requires the amalgamation of companies to be accounted for under the purchase method if one of the amalgamation companies owns 10% or more of the total outstanding voting common stock of any of the combining enterprises, whereas Canadain GAAP allows the pooling of interests method to be used. Under the purchase method, the market value of the amalgamated company's shares exchanged to acquire the assets is used to determine the value of the assets purchased. These assets are then recorded at fair market value, offset by an increase to the capital stock of the new Company.

  2. Long-term investments
    U.S. GAAP requires long-term investments accounted for under the equity method to be recorded at the lower of cost and market. Canadian GAAP does not require a write-down to market value unless the impairment to long-term investments is considered to be permanent or has persisted for several consecutive years. Furthermore, under U.S. GAAP the gain or loss resulting from shares issued by a subsidiary is treated as additional paid-in capital, while under Canadian GAAP the gain or loss is reflected in earnings.

  3. Exploration and development properties
    U.S. GAAP requires that only expenses that are direct and incremental to a specific project be capitalized. Under Canadian GAAP, minimum advance royalty payments and costs directly attributable to an exploration or development property can be capitalized whether incremental or not.

  4. Exchange on long-term monetary items
    U.S. GAAP requires unrealized exchange gains or losses on long-term monetary items with fixed or ascertainable lives to be included in income as they arise, while under Canadian GAAP such items are deferred and amortized over the remaining life of the related item.

  5. Pooling of interests
    U.S. GAAP requires that the acquisition of a company by way of an exchange of common shares between companies, that were not related within two years before the plan of combination is initiated, be treated as a pooling of interests. Under Canadian GAAP the purchase method is used if an acquirer can be identified. The major difference between the two methods is that the pooling of interests method requires the assets of the combining companies be recorded at book value, while the purchase method requires the assets of the acquired company be recorded at the fair market value as of the date of acquisition.

  6. Incorporated joint ventures
    U.S. GAAP requires investments in incorporated joint ventures to be accounted for under the equity method, while under Canadian GAAP, the accounts of incorporated joint ventures are proportionately consolidated. However, under rules promulgated by the Securities and Exchage Commission, a foreign registrant may, subject to the provision of additional information, continue to follow proportionate consolidation for purposes of registration and other filings, notwithstanding the departure from U.S. GAAP. Consequently, the balance sheets have not been adjusted to restate the accounting under U.S. GAAP and additional information concerning the Company's interests in joint ventures is presented in Note 15.

  7. Stock option plan
    U.S. GAAP requires the difference between the market price of the stock at the date of grant and the exercise price of the stock option be expensed as compensation cost over the period between the date of granting the option and the date it is first exercisable. Under Canadian GAAP, stock options are accounted for as an issue of share capital when the option is exercised.
  

Subsequent to December 31, 1995, the Company:

  1. issued 143,902 shares on conversion of U.S. $295,000 of Debentures at U.S.$2.05 per share (see Note 10);

  2. issued 570,000 shares on exercise of 1,140,000 share purchase warrants expiring August 15, 1996 at $3.25 per share for proceeds of $1,853,000;

  3. issued 49,000 shares on exercise of directors' and employees stock options at $0.80 per share for proceeds of $39,000;

  4. issued 1,041,750 shares on exercise of directors' and employees' stock options at $2.07 per share for proceeds of $2,156,000;

  5. allocated, subject to regulatory approval, a total of 600,000 shares for directors' and employees' stock options exercisable at $5.12 per share and expiring on February 21, 2001.
  
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