Cardero Resource Corp. - Exhibit 99.2 - Filed by newsfilecorp.com
 |
| CARDERO RESOURCE CORP. |
| Form 51-102F1 |
| Management’s Discussion and Analysis |
| For the nine months ended July 31, 2014 |
| |
INTRODUCTION
This Management Discussion and Analysis (“MD&A”) for
Cardero Resource Corp. (“Cardero” or the “Company”) for the nine months ended
July 31, 2014 has been prepared by management, in accordance with the
requirements of National Instrument 51-102, as of September 12, 2014, and
compares its financial results for the nine and three months ended July 31, 2014
to the nine and three months ended July 31, 2013. This MD&A provides a
detailed analysis of the business of Cardero and should be read in conjunction
with the Company’s audited consolidated financial statements and the
accompanying notes for the years ended October 31, 2013 and October 31, 2012.
The Company’s reporting currency is the Canadian dollar and all amounts in this
MD&A are expressed in Canadian dollars unless otherwise noted. The Company
reports its financial position, results of operations and cash-flows in
accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board.
Forward-Looking Statements
This MD&A contains forward-looking statements and
forward-looking information (collectively, “forward-looking statements”) within
the meaning of applicable Canadian and US securities legislation. These
statements relate to future events or the future activities or performance of
the Company. All statements, other than statements of historical fact, are
forward-looking statements. Information concerning mineral resource/reserve
estimates and the economic analysis thereof contained in preliminary economic
analyses or prefeasibility studies also may be deemed to be forward-looking
statements in that they reflect a prediction of the mineralization that would be
encountered, and the results of mining that mineralization, if a mineral deposit
were developed and mined. Forward-looking statements are typically identified by
words such as: believe, expect, anticipate, intend, estimate, postulate, plans
and similar expressions, or which by their nature refer to future events. These
forward looking statements include, but are not limited to, statements
concerning:
-
the Company’s strategies and objectives, both generally and specifically in
respect of the Carbon Creek Metallurgical Coal project in north-east British
Columbia (“Carbon Creek”);
-
the potential for a production decision to be made concerning Carbon Creek,
the potential commencement of any development of a mine at Carbon Creek
following a production decision and the potential for any production from the
Carbon Creek deposit;
-
the timing of decisions regarding the timing and costs of exploration
programs with respect to, and the issuance of the necessary permits and
authorizations required for, the Company’s ongoing exploration programs on its
properties;
-
the Company’s estimates of the quality and quantity of the resources and
reserves at its mineral properties;
-
the timing and cost of any proposed future work with respect to Carbon
Creek;
-
general business and economic conditions;
-
the Company’s ability to meet its financial obligations as they come due,
and to be able to raise the necessary funds to continue operations; and
-
the Company’s ability to negotiate acceptable option/joint venture or sale
agreements for some or all of its “non-core” properties.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 2 |
Although the Company believes that such statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Inherent in forward looking statements are risks and uncertainties
beyond the Company’s ability to predict or control, including, but not limited
to, risks related to the Company’s inability to raise the necessary capital to be able to continue in business and to
implement its business strategies, to identify one or more economic deposits on
its properties, variations in the nature, quality and quantity of any mineral
deposits that may be located, variations in the market price of any mineral
products the Company may produce or plan to produce, the Company’s inability to
obtain any necessary permits, consents or authorizations required for its
activities, to produce minerals from its properties successfully or profitably,
to continue its projected growth, and other risks identified herein under “Risk
Factors”. The Company cautions investors that any forward-looking statements by
the Company are not guarantees of future performance, and that actual results
are likely to differ, and may differ materially, from those expressed or implied
by forward looking statements contained in this MD&A. Such statements are
based on a number of assumptions which may prove incorrect, including, but not
limited to, assumptions about:
-
the Company’s future cash requirements, and the ability of the Company to
raise the funding necessary to carry out its planned activities and to meet
its anticipated general and administrative expenses for the remainder of the
fiscal year ending October 31, 2014 and, in particular, past the next 2 to 3
months;
-
the level and volatility of the price of commodities, and coal in
particular;
-
general business and economic conditions;
-
the timing of the receipt of regulatory and governmental approvals, permits
and authorizations necessary to implement and carry on the Company’s proposed
work programs, particularly at Carbon Creek;
-
conditions in the financial markets generally;
-
the Company’s ability to secure the necessary consulting, drilling and
related services and supplies on favourable terms in connection with its
ongoing and planned exploration programs;
-
the Company’s ability to attract and retain key staff;
-
the accuracy of the Company’s resource/reserve estimates (including with
respect to size and grade) and the geological, operational and price
assumptions on which these are based;
-
the timing of the ability to commence and complete any proposed work at
Carbon Creek;
-
the anticipated terms of the consents, permits and authorizations necessary
to carry out the planned exploration programs at the Company’s properties and
the Company’s ability to comply with such terms on a safe and cost-effective
basis;
-
the ongoing relations of the Company with its underlying optionors/lessors,
its joint venture partners, the applicable regulatory agencies, First Nations
in British Columbia and indigenous groups in other countries; and
-
that the metallurgy and recovery characteristics of samples from certain of
the Company’s mineral properties are reflective of the deposit as a whole.
These forward looking statements are made as of the date hereof
and the Company does not intend and does not assume any obligation, to update
these forward looking statements, except as required by applicable law. For the
reasons set forth above, investors should not attribute undue certainty to or
place undue reliance on forward-looking statements.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 3 |
Caution Regarding Adjacent or Similar Mineral Properties
This MD&A contains information with respect to adjacent or similar mineral properties in respect of which the Company has no interest or rights to explore or mine. The Company advises US investors that the mining guidelines of the US Securities
and Exchange Commission (the “SEC”) set forth in the SEC’s Industry Guide 7 (“SEC Industry Guide 7”) strictly prohibit information of this type in documents filed with the SEC. Because the Company meets the definition
of a “foreign private issuer” under applicable SEC rules and is preparing this MD&A pursuant to Canadian disclosure requirements under the Canada-U.S. Multi-Jurisdictional Disclosure System, this MD&A is not subject to the
requirements of SEC Industry Guide 7. Readers are cautioned that the Company has no interest in or right to acquire any interest in any such properties, and that mineral deposit on adjacent or similar properties are not indicative of mineral
deposits on the Company’s properties.
Caution Regarding Reference to Resources and Reserves
National Instrument 43-101 Standards of Disclosure of Mineral Projects (“NI 43-101”) is a rule developed by the Canadian Securities Administrators which establishes standards for all public disclosure an issuer makes of scientific and
technical information concerning mineral projects. Unless otherwise indicated, all reserve and resource estimates contained in or incorporated by reference in this MD&A have been prepared in accordance with NI 43-101 and the guidelines set out
in the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) Standards on Mineral Resource and Mineral Reserves, adopted by the CIM Council on November 14, 2004 (the “CIM Standards”) as they may be amended from
time to time by the CIM and, with respect to coal, in the Geological Survey of Canada Paper 88-21 entitled “A Standardized Coal Resource/Reserve Reporting System for Canada” originally published in 1988.
The terms “mineral reserve”, “proven mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with NI 43-101 and the CIM Standards. These definitions differ from the
definitions in SEC Industry Guide 7. The SEC has taken the position that mineral reserves for a mineral property may not be designated unless: (i) competent professional engineers conduct a detailed engineering and economic study, and the
“bankable” or “final” feasibility study demonstrates that a mineral deposit can be mined profitably at a commercial rate; (ii) a historic three-year average commodity price is used in any reserve or cash flow analysis used to
designate reserves; and (iii) the company has demonstrated that the mineral property will receive its governmental permits, and the primary environmental document has been filed with the appropriate governmental authorities.
In addition, the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in and required to be disclosed by NI 43-101 and the CIM
Standards; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of
mineral deposits in these categories will ever be converted into reserves. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot
be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in
rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian
regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC Industry Guide 7 standards as in place tonnage and grade without reference to unit measures.
Accordingly, information contained in this MD&A and the documents incorporated by reference herein contain descriptions of the Company’s mineral deposits that may not be comparable to similar information made public by U.S. companies
subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 4 |
Caution Regarding Historical Results
Historical results of operations and trends that may be
inferred from the discussion and analysis in this MD&A may not necessarily
indicate future results from operations. In particular, the current state of the
global securities markets may cause significant reductions in the price of the
Company’s securities and render it difficult or impossible for the Company to
raise the funds necessary to continue operations. See “Risk Factors - Share
Price Volatility”.
All of the Company's public disclosure filings, including its
most recent management information circular, material change reports, press
releases and other information, may be accessed via www.sedar.com and
readers are urged to review these materials, including the technical reports
filed with respect to the Company’s mineral properties.
DATE
This MD&A reflects information available as at September12,
2014.
RESULTS OF OPERATIONS
Background
Cardero is a junior resource mineral exploration company. Its
assets consist of interests in mineral properties, investments and cash. The
Company funds its operations primarily through the sale of its equity
securities, its investments and interests in its mineral properties and, more
recently, debt. The mineral exploration business is very high risk (See “Risk
Factors”).
Exploration Activities
General
Cardero is focussed on advanced stage projects, and on bulk
commodities such as metallurgical coal, where it can add value through
identification and acquisition of advanced projects. Metallurgical coal markets
are experiencing a sustained downturn at present and Cardero’s strategy is to
maintain ownership of metallurgical coal assets, where holding costs are
appropriate to market conditions, and to acquire additional coal resources where
opportunities arise. Cardero is also reviewing a number of opportunities outside
of metallurgical coal, in particular, copper project.
The Company’s strategy in respect of Carbon Creek is to
maintain its interest to the extent that it makes financial sense and the
Company has the ability to do so. To this end, on May 31, 2014, the Company
surrendered its interest in the Carbon Creek Coal Lease, as it could not justify
making the approximately $12.5 million in advance royalties required in the next
5 years.
Property |
Total Costs
Capitalized at
October 31, 2013 |
Total Costs
Capitalized at
July 31, 2014 |
Proposed Fiscal 2014
Expenditures(1) |
| Carbon Creek Metallurgical Coal Project, BC,
Canada |
$78,152,650 |
$ 57,308,724 |
$1,000,000 |
|
Note: |
1. |
This amount represents the estimated exploration
expenditures for the entire fiscal year ending October 31, 2014 and does
not include property acquisition costs. Estimated expenditures are
contingent upon ongoing successful results justifying further
expenditures, as well as the Company raising the necessary
financing to carry out its planned work, as it does not currently have the
required funds to carry out the planned work.
|
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 5 |
Material Mineral Property
Carbon Creek Metallurgical Coal Deposit, British Columbia,
Canada
The Carbon Creek Metallurgical Coal Project (“Carbon Creek”) is
the Company’s flagship asset and its sole material property at this time. Carbon
Creek is an advanced metallurgical coal development project located in the Peace
River Coal District of northeast British Columbia, Canada. The Carbon Creek
property, held by Cardero Coal Ltd. (a wholly owned subsidiary of the Company
(“Cardero Coal”)) lies approximately 60 kilometers (km) northwest of the town of
Chetwynd, BC and 40km west of the town of Hudson’s Hope. Improved forest service
roads connect the property with British Columbia Highway 29 between the towns of
Chetwynd and Hudson’s Hope. The CN Rail line connecting Fort St. John and
Tumbler Ridge areas with Prince George passes 40km south of the property. The CN
Rail line provides direct access to the ports of Vancouver and Ridley Terminals
in Prince Rupert, BC. The northern end of the property is adjacent to the
Williston Lake and is approximately 175km east of Mackenzie, BC by water.
The Carbon Creek project is a joint venture between Cardero
Coal Ltd. (a wholly owned subsidiary of the Company) (“Cardero Coal”) and the
Carbon Creek Partnership, with Cardero Coal acting as the manager of the joint
venture. Having completed the acquisition of its interest in Carbon Creek in
June 2011, the Company released results of an independent preliminary economic
assessment in December 2011, followed by a Prefeasibility Study (“PFS”) in
September 2012.
Until May 31, 2014, Carbon Creek consisted of four coal
licenses and a coal lease (“Coal Lease”) over the coal underlying certain
contiguous crown granted district lots, comprising a contiguous tenure parcel of
17,200 hectares. Effective May 31, 2014 the Company withdrew from the Coal
Lease. The withdrawal from the Coal Lease does not affect the status of the
joint venture, but reduces the number of coal tenures held by the joint venture.
Prior to issuing notice of withdrawal from the Coal Lease, the
Company discussed options and alternatives in detail with the Company’s
investment banking advisors at Macquarie Capital Markets. The current
metallurgical coal commodity market is at an historical low, with benchmarked
Hard Coking Coal (“HCC”) quarterly prices of US $120 per tonne. The time-scale
within which HCC prices may recover, and the extent of the expected recovery, is
unknown. In the context of this market, the making of the scheduled aggregate
$12.5 million in advance royalty payments over the coming 5 years was simply not
justifiable and not in the best interests of the Company’s shareholders.
The Company advises shareholders that, with the Company’s
withdrawal from the Coal Lease and the consequent reduction in the size of
Carbon Creek, there is no longer a current NI 43-101 report on Carbon Creek and
the previous PFS for Carbon Creek dated November 6, 2012 is no longer valid and
can no longer be relied upon.
The Company intends, subject to raising the necessary
financing, to commission a new NI 43-101 report on Carbon Creek during 2014. It
is anticipated that the new report will take account of a number of factors:
-
The Carbon Creek resources will consist only of those coal seams located
within the coal licenses held by the joint venture (“Licenses”) and will
exclude any coal seams previously covered by the Coal Lease.
-
An additional 23,000 metres of drilling was completed on the Licenses after
publication of the Prefeasibility Study in 2012. The new 43-101 report will be
based on a new geological model and will contain a new resource estimate,
which will include the data from the additional drilling.
-
The new drill data has substantially increased the number of seams included
in the geological model (from 27 to 47), primarily through improved confidence
in correlating seams from hole to hole. It is anticipated that, while the
quantum of the resource on the Licenses is not expected to change materially,
the increase in the number of seams should allow a re-evaluation of potential
mining methods, which may increasing the percentage of surface mineable
resources on the Licenses.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 6 |
On September 5, 2014, Cardero Coal completed the acquisition from Peace River Coal Ltd. of 13 applications for coal licenses. The total price for these applications was $235,000, which was paid in cash on closing. These applications cover
15,300 hectares of lands lying to the east and west, and contiguous to, the Licenses, or other applications held by Cardero Coal.
Other Mineral Properties
Sheini Hills Iron Ore Project, Ghana
Cardero Ghana Ltd. (an indirect wholly owned Ghanaian subsidiary of the Company (“Cardero Ghana”), has entered into three separate joint ventures (one for each prospecting license), each dated December 12, 2011 (the “Effective
Date” of each joint venture) with Emmaland Resources Ltd. (“Emmaland”) to explore and, if warranted, develop, the lands subject to three prospecting licenses covering lands located in the Zabzugu-Tatale District in the Northern
Region of the Republic of Ghana and referred to as the Sheini Hills Iron Ore Project (approximately 400 square kilometres in aggregate). Pursuant to the joint ventures, Cardero Ghana can acquire a 100% joint venture interest in each of the three
prospecting licenses, subject to (a) a 10% NPI in favour of Emmaland and (b) a 10% fully carried interest, in favour of the Government of Ghana, in the portions of the license areas that become the subject of one or more mining licenses subsequently
issued to Emmaland.
Cardero Ghana did not make the payment due under the Sheini North joint venture in December 2012, and has not made the payments due under the Sheini North, Central or South joint ventures due in December 2013. The Company has been negotiating with
Emmaland for extensions of such payments for an additional year. However, it has been unable to conclude such negotiations and has determined to withdraw from the respective joint ventures and terminate its interest in the Sheini project.
Accordingly, On August 16, 2014, Cardero Ghana sent a formal Notice of Withdrawal to Emmaland withdrawing from the North, Middle and South Sheini Joint Ventures. The withdrawal from such joint ventures will become effective 60 days thereafter.
Organullo Project, Argentina
On September 9, 2011, the Company entered into an option/joint venture agreement with Artha Resources Corporation (“Artha”), whereby an Argentinean subsidiary of Artha can earn a 55% working interest in the Organullo property, and
thereafter form a joint venture with Cardero Argentina S.A., a wholly owned subsidiary of the Company (“Cardero Argentina”). On September 11, 2013, Artha officially notified the Company that Artha did not incur the required expenditures
and has consequently dropped its option to acquire any interest in the property. The Company’s Argentinean subsidiary holds the Organullo property directly, and there are no underlying agreements.
The Company continues to investigate ways of bringing shareholders some value from this gold exploration project. There can be no certainty that the Company will be successful in completing a deal.
Pirquitas Property, Argentina
During the three months ended July 31, 2014, Cardero Argentina disposed of all of its interest in the Minas Pirquitas property in Argentina for gross proceeds of USD 50,000. The Company received a facilitation fee of USD 850,000 for services
rendered in connection with the termination of an option agreement with Artha, thereby permitting the disposition to proceed. The Company paid a finder’s fee of USD 22,500 to an arm’s length individual and USD 212,942 to Artha in
consideration of Artha terminating its existing option agreement with respect to the Minas Pirquitas property.
Titac Property, Minnesota
Effective August 12, 2014, the Company withdrew from and terminated the mining lease with respect to the Titac property, Minnesota, and returned the property to the lessor.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 7 |
Qualified Person(s) and Quality Control/Quality Assurance
EurGeol Keith Henderson, PGeo, Cardero’s Executive Vice President and a qualified person as defined by NI 43-101, has supervised the preparation of the scientific and technical information that forms the basis for the mineral property
disclosure in this MD&A and has approved the disclosure herein. Mr. Henderson is not independent of the Company, as he is an employee and holds incentive stock options.
Risk Factors
The Company is in the business of acquiring, exploring and, if warranted, developing and exploiting natural resource properties, primarily in British Columbia, Canada. Due to the nature of the Company’s proposed business and the present stage
of exploration of its mineral properties (which are primarily early to advanced stage exploration properties with no known resources and or known reserves), the following risk factors, among others, will apply:
Lack of Operating Funds: At the present time, the Company is experiencing significant difficulty in raising additional capital to continue its operations. The Company has taken steps to conserve cash by reducing staffing, halting/delaying
further work on its properties, including the Environmental Assessment Application and planned BFS for Carbon Creek, moving to shut down its subsidiaries in Peru and the United States and selling, joint venturing or surrendering its interest in its
properties other than Carbon Creek. Although the Company continues to pursue potential funding opportunities, there can be no assurance that it will be successful in doing so. If the Company is unable to secure additional financing, it may be forced
to further curtail or cease operations and may lose its interest in some or all of its properties, including Carbon Creek, which is its only material property at this time.
Resource Exploration and Development is Generally a Speculative Business: Resource exploration and development is a speculative business and involves a high degree of risk, including, among other things, unprofitable efforts resulting both
from the failure to discover mineral deposits and from finding mineral deposits which, though present, are insufficient in size and grade at the then prevailing market conditions to return a profit from production. The marketability of natural
resources which may be acquired or discovered by the Company will be affected by numerous factors beyond the control of the Company. These factors include market fluctuations, the proximity and capacity of natural resource markets, government
regulations, including regulations relating to prices, taxes, royalties, land use, importing and exporting of minerals and environmental protection. The exact effect of these factors cannot be accurately predicted, but the combination of these
factors may result in the Company not receiving an adequate return on invested capital.
There are no known reserves or resources on any of the Company’s properties. The majority of exploration projects do not result in the discovery of commercially mineable deposits of ore. Substantial expenditures are required to
establish ore reserves through drilling and metallurgical and other testing techniques, determine metal content and metallurgical recovery processes to extract metal from the ore, and construct, renovate or expand mining and processing facilities.
No assurance can be given that any level of recovery of ore reserves will be realized or that any identified mineral deposit, even it is established to contain an estimated resource, will ever qualify as a commercial mineable ore body which can be
legally and economically exploited. Mineral resources are not mineral reserves and there is no assurance that any mineral resources will ultimately be reclassified as proven or probable reserves. Mineral resources which are not mineral reserves do
not have demonstrated economic viability.
Fluctuation of Commodity Prices: Even if commercial quantities of mineral deposits are discovered by the Company, there is no guarantee that a profitable market will exist for the sale of the minerals produced. The Company’s long-term
viability and profitability depend, in large part, upon the market price of minerals which have experienced significant movement over short periods of time, and are affected by numerous factors beyond the control of the Company, including
international economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates and global or regional consumption patterns, speculative activities and increased production due to improved mining and production
methods. The recent price fluctuations in the price of all commodities for which the Company is presently exploring is an example of a situation over which the Company has no control and may materially adversely affect the Company in a manner that
it may not be able to compensate for. The supply of and demand for minerals are affected by various factors, including political events, economic conditions and production costs in major producing regions.
There can be no assurance that the price of any minerals produced from the
Company’s properties will be such that any such deposits can be mined at a
profit.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 8 |
Recent market events and conditions: Since 2008,
the U.S. credit markets have experienced serious disruption due to a
deterioration in residential property values, defaults and delinquencies in the
residential mortgage market (particularly, sub-prime and non-prime mortgages)
and a decline in the credit quality of mortgage backed securities. These
problems have led to a slow-down in residential housing market transactions,
declining housing prices, delinquencies in non-mortgage consumer credit and a
general decline in consumer confidence. These conditions caused a loss of
confidence in the broader U.S. and global credit and financial markets and
resulting in the collapse of, and government intervention in, major banks,
financial institutions and insurers and creating a climate of greater
volatility, less liquidity, widening of credit spreads, a lack of price
transparency, increased credit losses and tighter credit conditions.
Notwithstanding various actions by the U.S. and foreign governments, concerns
about the general condition of the capital markets, financial instruments,
banks, investment banks, insurers and other financial institutions caused the
broader credit markets to further deteriorate and stock markets to decline
substantially. In addition, general economic indicators have deteriorated,
including declining consumer sentiment, increased unemployment and declining
economic growth and uncertainty about corporate earnings.
While these conditions appear to have improved slightly in 2013
and into 2014, unprecedented disruptions in the credit and financial markets
have had a significant material adverse impact on a number of financial
institutions and have limited access to capital and credit for many companies.
These disruptions could, among other things, make it more difficult for the
Company to obtain, or increase its cost of obtaining, capital and financing for
its operations. The Company’s access to additional capital may not be available
on terms acceptable to it or at all.
General Economic Conditions: The recent unprecedented
events in global financial markets have had a profound impact on the global
economy. Many industries, including the gold and base metal mining industry, are
impacted by these market conditions. Some of the key impacts of the current
financial market turmoil include contraction in credit markets resulting in a
widening of credit risk, devaluations and high volatility in global equity,
commodity, foreign exchange and precious metal markets, and a lack of market
liquidity. A continued or worsened slowdown in the financial markets or other
economic conditions, including but not limited to, consumer spending, employment
rates, business conditions, inflation, fuel and energy costs, consumer debt
levels, lack of available credit, the state of the financial markets, interest
rates, and tax rates may adversely affect the Company’s growth and
profitability. Specifically:
-
The global credit/liquidity crisis could impact the cost and availability
of financing and the Company’s overall liquidity
-
the volatility of commodity prices may impact the Company’s future
revenues, profits and cash flow
-
volatile energy prices, commodity and consumables prices and currency
exchange rates impact potential production costs
-
the devaluation and volatility of global stock markets impacts the
valuation of the Common Shares, which may impact the Company’s ability to
raise funds through the issuance of Common Shares
These factors could have a material adverse effect on the
Company’s financial condition and results of operations.
Share Price Volatility: In recent years, worldwide
securities markets, particularly those in the United States and Canada, have
experienced a high level of price and volume volatility, and the market price of
securities of many companies, particularly those considered exploration or
development stage companies, have experienced unprecedented fluctuations in
price which have not necessarily been related to the operating performance,
underlying asset values or prospects of such companies. Most significantly, the
share prices of junior natural resource companies have experienced an
unprecedented decline in value and there has been a significant decline in the
number of buyers willing to purchase such securities. In addition, significantly
higher redemptions by holders of mutual funds has forced many of such funds
(including those holding the Company’s securities) to sell such securities at
any price. As a consequence, despite the Company’s past success in securing
significant equity financing, market forces may render it difficult or
impossible for the Company to secure placees to purchase new share issues at a price which will not lead to severe dilution to existing shareholders, or at all. Therefore, there can be no assurance that significant fluctuations in the trading price of the Company’s common shares will not
occur, or that such fluctuations will not materially adversely impact on the Company’s ability to raise equity funding without significant dilution to its existing shareholders, or at all.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 9 |
Permits and Licenses: The operations of the Company will require licenses and permits from various governmental authorities. There can be no assurance that the Company will be able to obtain all necessary licenses and permits that may be
required to carry out exploration, development and mining operations at its projects, on reasonable terms or at all. Delays in obtaining, or a failure to obtain, such licenses and permits, or a failure to comply with the terms of any such licenses
and permits that the Company does obtain, could have a material adverse effect on the Company.
Acquisition of Mineral Properties under Agreements: The agreements pursuant to which the Company has the right to acquire a number of its properties provide that the Company must make a series of cash payments and/or share issuances over
certain time periods, expend certain minimum amounts on the exploration of the properties or contribute its share of ongoing expenditures. Failure by the Company to make such payments, issue such shares or make such expenditures in a timely fashion
may result in the Company losing its interest in such properties. There can be no assurance that the Company will have, or be able to obtain, the necessary financial resources to be able to maintain all of its property agreements in good standing,
or to be able to comply with all of its obligations thereunder, with the result that the Company could forfeit its interest in one or more of its mineral properties.
Title Matters: The acquisition of title to mineral properties can be a very detailed and time-consuming process. Title to, and the area of, mineral properties may be disputed. While the Company has diligently investigated title to all
mineral properties in which it has an interest and, to the best of its knowledge, title to all such properties is in good standing or, where not yet granted, the application process appears to be proceeding normally in all the circumstances, this
should not be construed as a guarantee of title or that any such applications for concessions will be granted. Title to mineral properties may be affected by undetected defects such as aboriginal or indigenous peoples’ land claims, or
unregistered agreements or transfers. The Company has not obtained title opinions for the majority of its mineral properties. Not all the mineral properties in which the Company has an interest have been surveyed, and their actual extent and
location may be in doubt.
Surface Rights and Access: Although the Company acquires the rights to some or all of the minerals in the ground subject to the mineral tenures that it acquires, or has a right to acquire, in most cases it does not thereby acquire any rights
to, or ownership of, the surface to the areas covered by its mineral tenures. In such cases, applicable mining laws usually provide for rights of access to the surface for the purpose of carrying on mining activities, however, the enforcement of
such rights through the courts can be costly and time consuming. It is necessary to negotiate surface access or to purchase the surface rights if long-term access is required. There can be no guarantee that, despite having the right at law to access
the surface and carry on mining activities, the Company will be able to negotiate satisfactory agreements with any such existing landowners/occupiers for such access or purchase of such surface rights, and therefore it may be unable to carry out
planned mining activities. In addition, in circumstances where such access is denied, or no agreement can be reached, the Company may need to rely on the assistance of local officials or the courts in the applicable jurisdiction, the outcomes of
which cannot be predicted with any certainty. The inability of the Company to secure surface access or purchase required surface rights could materially and adversely affect the timing, cost or overall ability of the Company to develop any mineral
deposits it may locate. This is a particular problem in many areas of Argentina and Ghana, where blockades of access to the Company’s properties, hostile actions by local communities and indigenous peoples and the potential unwillingness of
local police or governmental officials to assist a foreign company against its own citizens can result in the Company being unable to carry out any exploration activities despite being legally authorized to do so and having complied with all
applicable local laws and requirements. Such issues can also occur in Canada, especially in connection with actions concerning resource development projects and involving first nations and environmental protest groups.
No Assurance of Profitability: The Company has no history of production or earnings and due to the nature of its business there can be no assurance that the Company will be profitable. The Company has not paid dividends on its shares since
incorporation and does not anticipate doing so in the foreseeable future. All of the Company’s properties are in the exploration stage and, with the exception of Carbon Creek, the Company has not defined or delineated any proven or probable
reserves on any of its properties. None of the Company’s properties are currently under development. Continued exploration of its existing properties and the future development of any properties found to be economically feasible, will require significant funds. The only present source of funds available to the Company is through
the sale of its equity securities, the sale or optioning of a portion of its interest in its mineral properties or debt financing, none of which may be available at any particular time. Even if the results of exploration are encouraging, the
Company may not have sufficient funds to conduct the further exploration that may be necessary to determine whether or not a commercially mineable deposit exists. While the Company may generate additional working capital through further equity
offerings, through the sale or possible syndication of its properties, or through short-term debt facilities, there is no assurance that any such funds will be available through any of such methods on favourable terms, or at all. At present, it is
impossible to determine what amounts of additional funds, if any, may be required. Failure to raise such additional capital could put the continued viability of the Company at risk.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 10 |
Uninsured or Uninsurable Risks: Exploration, development and mining operations involve various hazards, including environmental hazards, industrial accidents, metallurgical and other processing problems, unusual or unexpected rock
formations, structural cave-ins or slides, flooding, fires, metal losses and periodic interruptions due to inclement or hazardous weather conditions. These risks could result in damage to or destruction of mineral properties, facilities or other
property, personal injury, environmental damage, delays in operations, increased cost of operations, monetary losses and possible legal liability. The Company may not be able to obtain insurance to cover these risks at economically feasible premiums
or at all. The Company may elect not to insure where premium costs are disproportionate to the Company’s perception of the relevant risks. The payment of such insurance premiums and of such liabilities would reduce the funds available for
exploration and production activities.
Government Regulation: Any exploration, development or mining operations carried on by the Company will be subject to government legislation, policies and controls relating to prospecting, development, production, environmental protection,
mining taxes and labour standards. The Company cannot predict whether or not such legislation, policies or controls, as presently in effect, will remain so, and any changes therein (for example, significant new royalties or taxes), which are
completely outside the control of the Company, may materially adversely affect to ability of the Company to continue its planned business within any such jurisdictions.
Foreign Countries and Political Risk: The Company has mineral properties located in Argentina, the United States and Ghana. In such countries, mineral exploration and mining activities may be affected in varying degrees by political or
economic instability, expropriation of property and changes in government regulations such as tax laws, business laws, environmental laws and mining laws. Any changes in regulations or shifts in political conditions are beyond the control of the
Company and may materially adversely affect it business, or if significant enough, may make it impossible to continue to operate in certain countries. Operations may be affected in varying degrees by government regulations with respect to
restrictions on production, price controls, foreign exchange restrictions, export controls, income taxes, and expropriation of property, environmental legislation and mine safety.
Dependence Upon Others and Key Personnel: The success of the Company’s operations will depend upon numerous factors, many of which are beyond the Company’s control, including (i) the ability of the Company to enter into strategic
alliances through a combination of one or more joint ventures, mergers or acquisition transactions; and (ii) the ability to attract and retain additional key personnel in exploration, mine development, sales, marketing, technical support and
finance. These and other factors will require the use of outside suppliers as well as the talents and efforts of the Company. There can be no assurance of success with any or all of these factors on which the Company’s operations will depend.
The Company has relied and may continue to rely, upon consultants and others for operating expertise.
Exploration and Mining Risks: Fires, power outages, labour disruptions, flooding, explosions, cave-ins, landslides and the inability to obtain suitable or adequate machinery, equipment or labour are other risks involved in the operation of
mines and the conduct of exploration programs. Substantial expenditures are required to establish reserves through drilling, to develop metallurgical processes, to develop the mining and processing facilities and infrastructure at any site chosen
for mining. Although substantial benefits may be derived from the discovery of a major mineralized deposit, no assurance can be given that minerals will be discovered in sufficient quantities to justify commercial operations or that funds required
for development can be obtained on a timely basis. The economics of developing mineral properties is affected by many factors including the cost of operations, variations of the grade of ore mined, fluctuations in the price of gold or other
minerals produced, costs of processing equipment and such other factors as government regulations, including regulations relating to royalties, allowable production, importing and exporting of minerals and environmental protection. In addition, the grade of mineralization ultimately
mined may differ from that indicated by drilling results and such differences could be material. Short term factors, such as the need for orderly development of ore bodies or the processing of new or different grades, may have an adverse effect on
mining operations and on the results of operations. There can be no assurance that minerals recovered in small scale laboratory tests will be duplicated in large scale tests under on-site conditions or in production scale operations. Material
changes in geological resources, grades, stripping ratios or recovery rates may affect the economic viability of projects.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 11 |
Currency Fluctuations: The Company presently maintains its accounts in Canadian dollars. Due to the nature of its operations in such countries, the Company also maintains accounts in U.S. dollars, Argentinean pesos and Ghanaian cedis. The
Company’s operations in the United States, Argentina and Ghana and its proposed payment commitments and exploration expenditures under many of the agreements pursuant to which it holds, or has a right to acquire, an interest in its mineral
properties are denominated in U.S. dollars, making it subject to foreign currency fluctuations. Such fluctuations are out of its control and may materially adversely affect the Company’s financial position and results. The Company does not
engage in any hedging programs with respect to currencies.
Environmental Restrictions: The activities of the Company are subject to environmental regulations promulgated by government agencies in different countries from time to time. Environmental legislation generally provides for restrictions and
prohibitions on spills, releases or emissions into the air, discharges into water, management of waste, management of hazardous substances, protection of natural resources, antiquities and endangered species and reclamation of lands disturbed by
mining operations. Certain types of operations require the submission and approval of environmental impact assessments. Environmental legislation is evolving in a manner which means stricter standards, and enforcement, fines and penalties for
non-compliance are more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers and employees. The cost of compliance with changes in governmental regulations has
a potential to reduce the profitability of operations.
Regulatory Requirements: The activities of the Company are subject to extensive regulations governing various matters, including environmental protection, management and use of toxic substances and explosives, management of natural
resources, exploration, development of mines, production and post-closure reclamation, exports, price controls, taxation, regulations concerning business dealings with indigenous peoples, labour standards on occupational health and safety, including
mine safety, and historic and cultural preservation. Failure to comply with applicable laws and regulations may result in civil or criminal fines or penalties, enforcement actions thereunder, including orders issued by regulatory or judicial
authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions, any of which could result in the Company incurring significant
expenditures. The Company may also be required to compensate those suffering loss or damage by reason of a breach of such laws, regulations or permitting requirements. It is also possible that future laws and regulations, or more stringent
enforcement of current laws and regulations by governmental authorities, could cause additional expense, capital expenditures, restrictions on or suspension of the Company’s operations and delays in the exploration and development of the
Company’s properties.
Limited Experience with Development-Stage Mining Operations: The Company has limited experience in placing resource properties into production, and its ability to do so will be dependent upon using the services of appropriately experienced
personnel or entering into agreements with other major resource companies that can provide such expertise. There can be no assurance that the Company will have available to it the necessary expertise when and if it places its resource properties
into production.
Estimates of Mineral Reserves and Resources and Production Risks: The mineral resource estimates presented in the Company’s filings with securities regulatory authorities, press releases and other public statements that may be made from
time to time are based upon estimates made by Company personnel and independent geologists, and no assurance can be given that any particular level of recovery of minerals will in fact be realized or that an identified reserve or resource will ever
qualify as a commercially mineable (or viable) deposit which can be legally and economically exploited. The estimating of mineral resources and mineral reserves is a subjective process and the accuracy of mineral resource and mineral reserve
estimates is a function of the quantity and quality of available data, the accuracy of statistical computations, and the assumptions
used and judgments made in interpreting available engineering and geological
information. There is significant uncertainty in any mineral resource or mineral
reserve estimate and the actual deposits encountered and the economic viability
of a deposit may differ materially from the Company’s estimates. Accordingly,
there can be no assurance that:
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 12 |
-
these estimates will be accurate;
-
reserve, resource or other mineralization figures will be accurate; or
-
this mineralization could be mined or processed profitably.
Because the Company has not commenced production at any of its
properties, and has not defined or delineated any proven or probable reserves on
any of its properties, mineralization estimates for the Company’s properties may
require adjustments or downward revisions based upon further exploration or
development work or actual production experience. In addition, the grade of
mineralization ultimately mined may differ from that indicated by drilling
results and such differences could be material. There can be no assurance that
minerals recovered in small-scale tests will be duplicated in large-scale tests
under on-site conditions or in production scale. Production can be affected by
such factors as permitting regulations and requirements, weather, environmental
factors, unforeseen technical difficulties, unusual or unexpected geological
formations and work interruptions. Short term factors, such as the need for
orderly development of deposits or the processing of new or different grades,
may have a material adverse effect on mining operations and on the results of
operations. There can be no assurance that minerals recovered in small scale
laboratory tests will be duplicated in large scale tests under on-site
conditions or in production scale operations. Material changes in reserves or
resources, grades, stripping ratios or recovery rates may affect the economic
viability of projects. The estimated resources described in the Company’s
filings with securities regulatory authorities, press releases and other public
statements that may be made from time to time should not be interpreted as
assurances of mine life or of the profitability of future operations. Estimated
mineral resources and mineral reserves may have to be re-estimated based on
changes in applicable commodity prices, further exploration or development
activity or actual production experience. This could materially and adversely
affect estimates of the volume or grade of mineralization, estimated recovery
rates or other important factors that influence mineral resource or mineral
reserve estimates. Market price fluctuations for coal, iron ore and other
commodities, increased production costs or reduced recovery rates or other
factors may render any particular reserves uneconomical or unprofitable to
develop at a particular site or sites. A reduction in estimated reserves could
require material write downs in investment in the affected mining property and
increased amortization, reclamation and closure charges.
Mineral resources are not mineral reserves and there is no
assurance that any mineral resources will ultimately be reclassified as proven
or probable reserves. Mineral resources which are not mineral reserves do not
have demonstrated economic viability.
Enforcement of Civil Liabilities: As many of the assets
of the Company and its subsidiaries are located outside of Canada and the United
States, and certain of the directors and officers of the Company are resident
outside of Canada and/or the United States, it may be difficult or impossible to
enforce judgements granted by a court in Canada or the United States against the
assets of the Company or its subsidiaries or the directors and officers of the
Company residing outside of such country.
Mining Industry is Intensely Competitive: The Company’s
business of the acquisition, exploration and development of mineral properties
is intensely competitive. The Company may be at a competitive disadvantage in
acquiring additional mining properties because it must compete with other
individuals and companies, many of which have greater financial resources,
operational experience and technical capabilities than the Company. The Company
may also encounter increasing competition from other mining companies in efforts
to hire experienced mining professionals. Competition for exploration resources
at all levels is currently very intense, particularly affecting the availability
of manpower, drill rigs and helicopters. Increased competition could adversely
affect the Company’s ability to attract necessary capital funding or acquire
suitable producing properties or prospects for mineral exploration in the
future.
The Company may be a “passive foreign investment company”
under the U.S. Internal Revenue Code, which may result in material adverse U.S.
federal income tax consequences to investors in Common Shares that are U.S.
taxpayers: Investors in Common Shares that are U.S. taxpayers should be
aware that Cardero believes that it has been in one or more prior tax years, and
may be in current and future tax years, a “passive foreign investment company” under Section 1297(a) of the U.S. Internal Revenue
Code (a “PFIC”). However, no determination has been made regarding Cardero’s
PFIC status for any particular tax year. If Cardero is or becomes a PFIC,
generally any gain recognized on the sale of the Common Shares and any “excess
distributions” (as specifically defined) paid on the Common Shares must be
rateably allocated to each day in a U.S. taxpayer’s holding period for the
Common Shares. The amount of any such gain or excess distribution allocated to
prior years of such U.S. taxpayer’s holding period for the Common Shares
generally will be subject to U.S. federal income tax at the highest tax
applicable to ordinary income in each such prior year, and the U.S. taxpayer
will be required to pay interest on the resulting tax liability for each such
prior year, calculated as if such tax liability had been due in each such prior
year. The amount of any such gain or excess distribution allocated to the tax
year of disposition or distribution of the excess distribution and to years
before the entity became a PFIC, if any, would be taxed as ordinary income.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 13 |
Alternatively, a U.S. taxpayer that makes a “qualified electing
fund” (a “QEF”) election with respect to Cardero generally will be subject to
U.S. federal income tax on such U.S. taxpayer’s pro rata share of Cardero’s “net
capital gain” and “ordinary earnings” (as specifically defined and calculated
under U.S. federal income tax rules), regardless of whether such amounts are
actually distributed by Cardero. U.S. taxpayers should be aware, however, that
there can be no assurance that Cardero will satisfy record keeping requirements
under the QEF rules or that Cardero will supply U.S. taxpayers with required
information under the QEF rules, if Cardero is a PFIC and a U.S. taxpayer wishes
to make a QEF election. As a second alternative, a U.S. taxpayer may make a
“mark-to-market election” if Cardero is a PFIC and the Common Shares are
“marketable stock” (as specifically defined). A U.S. taxpayer that makes a
mark-to-market election generally will include in gross income, for each taxable
year in which Cardero is a PFIC, an amount equal to the excess, if any, of (a)
the fair market value of the Common Shares as of the close of such taxable year
over (b) such U.S. taxpayer’s adjusted tax basis in the Common Shares.
The above paragraphs contain only a brief summary of certain
U.S. federal income tax considerations. Investors should consult their own tax
advisor regarding the PFIC rules and other U.S. federal income tax consequences
of the acquisition, ownership, and disposition of Common Shares.
Financial Results of Operations
During the nine months ended July 31, 2014, the Company
incurred a net loss of $24,700,030 (2013 – $25,851,647) and during the three
months ended July 31, 2014 the Company incurred a net loss of $261,245 (2013 –
$16,091,678).
The following discussion explains the variations in key
components of these numbers. Quarterly results can vary significantly depending
on whether the Company has abandoned any properties or granted any stock
options.
Nine Months ended July 31, 2014 compared to nine months
ended July 30, 2013
The Company’s operating expenses were $23,274,788 (2013-
$23,633,737), and reviews of the major items are as follows:
-
Consulting fees decreased to $219,374 (2013 - $998,396), primarily due to a
reduction in activity in the Company’s subsidiaries and cost reductions
implemented by the Company due to less activity;
-
Insurance costs decreased to $79,942 (2013 - $161,848), primarily due to a
reduction in activity in the Company’s subsidiaries and an adjustment of
$35,774 to the understated insurance expenses related to 2013;
-
Investor relations costs decreased significantly to $12,926 (2013 -
$142,596), due to a decrease in share based payments to $Nil (2013 - $37,644),
as well as a significant reduction in investor relations activities due to the
lack of corporate funds and reduction in the Company’s activities. For the
same reason, corporate development costs declined to $52,860 (2013 - $167,942)
as did travel costs, which fell to $44,925 (2013 - $226,699);
-
Office costs of $361,971 (2013 - $623,430) decreased primarily due to a
slow-down of activities in the Company, the curtailing of operations in
Cardero Coal, and significant reductions in the activities of the Company’s Ghanaian, Peruvian and Argentinean
subsidiaries due to a curtailing of exploration activities in these countries;
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 14 |
- Professional fees of $308,866 (2013 - $1,474,733), decreased due to
significant reduction in the Company’s overall activities and the fact that
significant legal fees incurred in the prior year due to a loan facility that
did not close and renegotiation of short term loan structure were not repeated
in the current period;
- Salaries and benefits of $800,607 (2013 - $2,894,397) decreased due to the
termination of all of the employees of Cardero Coal, a significant reduction
in work force at the Ghanaian subsidiary and a salary reduction for remaining
employees of the Company. Share-based payments of $185,785 (2013 - $390,774)
is included in salaries and benefits; and
- Impairment losses on exploration and evaluation assets of $21,004,470
(2013 - $16,511,763). On May 31, 2014, the Company withdrew from the Coal
Lease which formed part of property subject to the Carbon Creek joint venture.
As a consequence of such withdrawal, the Company determined that the carrying
value of Carbon Creek was impaired and wrote off cumulative costs incurred to
date of $21,004,470 as an impairment charge in the consolidated statements of
loss. In 2013 the Company determined that the carrying value of TiTac and
Longnose property in the USA and the Sheini property in Ghana were impaired
and wrote off cumulative costs incurred to date of, $3,775,254 and $12,736,509
respectively, as an impairment charge in the condensed consolidated statement
of loss.
Other items showed a loss of $1,659,383 (2013 - $2,266,651).
Due to their nature, these transactions relate to events that do not necessarily
generate comparable effects on the Company’s operating results. Significant
areas of change include:
-
Interest expenses increased significantly to ($3,130,489) (2013 -
$608,512), representing the interest on the USD 5.7M secured notes issued in
August, 2013 and on the USD 5.0M line of credit established in December, 2013
(of which USD 4.07M has been drawn down);
-
The realized loss on Trevali warrants in the current period of $87,470
(2013 - $Nil). These warrants expired, unexercised, on January 16, 2014;
-
Due to a decrease in the fair value of available-for-sale investments the
Company recorded a loss of $130,661 (2013 – $1,353,989). These changes are due
to market fluctuations which are entirely outside of the Company’s control;
-
The Company recognized a gain of $1,563,016 (2013 - $Nil) on the settlement
of certain debts to trade creditors;
-
The Company received a facilitation fee of $671,717 (2013 - $Nil) in
connection with services rendered by the Company so as to enable Cardero
Argentina to proceed with the sale of its interest in the Minas Pirquitas
property in Argentina;
-
As a consequence of a flow-through share private placement completed in
December, 2012 (“Placement”), the Company was required to incur certain
exploration expenditures for flow-through purposes on or before December 31,
2013. The Company did not incur $1,661,521 of these expenditures and was
therefore required to pay to the Canada Revenue Agency Flow-Through Part XII.6
interest and penalties in the amount of $166,152 (2013 $Nil); and
-
The Company entered into an agreement with one of the investors in the
Placement to absorb all of the reduction in required expenditures and thereby
accept a reduced renunciation, in consideration of the payment by the Company
of the sum of $227,500.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 15 |
Three Months ended July 31, 2014 compared to three months
ended July 31, 2013
The Company’s operating expenses were $462,218 (2013 -
$15,225,7938), and reviews of the major items are as follows:
-
Consulting fees decreased to $792 (2013 - $485,382), primarily due to a
reduction in activity in the Company’s subsidiaries and cost reductions
implemented by the Company due to less activity;
-
Investor relations costs decreased significantly to $Nil (2013 - $20,768),
due to a significant reduction in investor relations activities due to the
lack of corporate funds and reduction in the Company’s activities. For the
same reason, corporate development costs declined to $6,238 (2013 - $21,172)
as did travel costs, which fell to $21,497 (2013 - $39,241);
-
Professional fees decreased significantly to $146,103 (2013 - $474,557),
due to significant reduction in the Company’s overall activities and the fact
that significant legal fees incurred in the prior year due to a loan facility
that did not close and renegotiation of short term loan structure were not
repeated in the current period;
-
Office costs of $102,799 (2013 - $179,104), decreased primarily due to a
slow-down of activities in the Company, the curtailing of operations in
Cardero Coal, and significant reductions in the activities of the Company’s
Ghanaian, Peruvian and Argentinean subsidiaries due to a curtailing of
exploration activities in these countries;
-
Salaries and benefits of $203,085 (2013 - $1,119,242), decreased due to the
termination of all of the Cardero Coal employees, a reduction in work force at
the Ghanaian subsidiary and a salary reduction for remaining employees of the
Company. Share-based payments of $Nil (2013 - $323,649) is included in
salaries and benefits; and
-
Impairment losses on exploration and evaluation assets of $3,523 were
significant less that in 2013 ($12,736,509). In 2013 the Company determined
that the carrying value of TiTac and Longnose properties in the USA and the
Sheini property in Ghana were impaired and wrote off cumulative costs incurred
to date of, $3,775,254 and $12,736,509 respectively, as an impairment charge
in the condensed consolidated statement of loss.
Other items showed a gain of $203,184 in the current period
versus a loss of $877,327 in the comparable period of 2013. Due to their nature,
these transactions relate to events that do not necessarily generate comparable
effects on the Company’s operating results. Significant areas of change include:
-
Interest expenses increased significantly to ($599,668) (2013 - $575,832),
representing the interest on the USD 5.7M secured notes issued in August, 2013
and on the USD 5.0M line of credit established in December, 2013 (of which USD
4.07M has been drawn down);
-
There was no unrealized loss on warrants of Trevali in the current period
(2013 - $51,564);
-
Due to a decrease in the fair value of available-for-sale investments the
Company recorded a loss of $58,532, which was significantly less than in 2013
($241,454). These changes are due to market fluctuations which are entirely
outside of the Company’s control; and
-
The Company received a facilitation fee of $671,717 (2013 - $Nil) in
connection with services rendered by the Company so as to enable Cardero
Argentina to proceed with the sale of its interest in the Minas Pirquitas
property in Argentina.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 16 |
SELECTED ANNUAL INFORMATION
The Company’s consolidated financial statements for the year
ended October 31, 2013 have been prepared in accordance with IFRS. The following
selected financial information for the year ended October 31, 2013 is taken from
the Company’s audited consolidated financial statements for the year ended
October 31, 2013. The information for the years ended October 31, 2012 and 2011
are taken from the audited consolidated financial statements for the years ended
October 31, 2012 and 2011. This information should be read in conjunction with
those statements. Selected annual financial information appears below.
| |
|
October 31, 2013 |
|
|
October 31, 2012 |
|
|
October 31, 2011 |
|
| |
|
|
|
|
|
|
|
|
|
| Interest (expense) revenue |
$ |
(1,389,964 |
) |
$ |
149,434 |
|
$ |
1,659,273 |
|
| Loss for the year |
$ |
(29,759,663 |
) |
$ |
(11,594,099 |
) |
$ |
(25,148,877 |
) |
| Net loss per share |
$ |
(0.27 |
) |
$ |
(0.13 |
) |
$ |
(0.36 |
) |
| Total assets |
$ |
89,114,381 |
|
$ |
106,301,442 |
|
$ |
108,478,339 |
|
SUMMARY OF QUARTERLY RESULTS
The table below sets out the quarterly results for the past
eight quarters:
Fiscal 2014
| |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
| Interest income (expenses) |
$ |
(1,508,216 |
) |
$ |
(1,022,605 |
) |
$ |
(599,668 |
) |
| Gain (loss) on sale of investments |
|
(4,589 |
) |
|
(4,024 |
) |
|
71 |
|
| Impairment (losses) on available-for-sale
investments |
|
(10,144 |
) |
|
(61,985 |
) |
|
(58,532 |
) |
| Write-off of exploration and evaluation assets |
|
- |
|
|
(21,000,947 |
) |
|
(3,523 |
) |
| Net loss |
|
( 1,438,413 |
) |
|
(23,000,371 |
) |
|
(261,245 |
) |
| Net loss per share |
|
(0.01 |
) |
|
(0.20 |
) |
|
(0.01 |
) |
| Comprehensive loss |
$ |
(1,272,568 |
) |
$ |
(23,126,774 |
) |
$ |
(307,027 |
) |
Fiscal 2013
| |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
| Interest income (expenses) |
$ |
16,705 |
|
$ |
(49,385 |
) |
$ |
(575,832 |
) |
$ |
(781,452 |
) |
| Gain (loss) on sale of investments |
|
17,230 |
|
|
- |
|
|
- |
|
|
(56,792 |
) |
| Impairment losses on available-for-sale
investments |
|
(596,766 |
) |
|
(515,769 |
) |
|
(241,454 |
) |
|
(83,041 |
) |
| Write-off of exploration and evaluation assets |
|
(3,775,254 |
) |
|
- |
|
|
(12,736,509 |
) |
|
64,650 |
|
| Net loss |
|
( 6,456,276 |
) |
|
(3,303,693 |
) |
|
(16,091,678 |
) |
|
(3,908,016 |
) |
| Net loss per share |
|
(0.06 |
) |
|
(0.03 |
) |
|
(0.14 |
) |
|
(.04 |
) |
| Comprehensive loss |
$ |
(6,384,719 |
) |
$ |
(3,383,243 |
) |
$ |
(15,851,258 |
) |
$ |
(3,961,245 |
) |
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 17 |
Fiscal 2012
| |
|
Fourth Quarter |
|
| Interest income |
$ |
(1,944 |
) |
| Gain (loss) on sale of investments |
|
(2,138,529 |
) |
| Impairment loss |
|
(3,335,434 |
) |
| Gain on loan settlement |
|
- |
|
| Write-off of exploration and evaluation
assets |
|
(3,554,667 |
) |
| Net income (loss) |
|
(11,887,299 |
) |
| Net income (loss) per share |
|
(0.14 |
) |
| Comprehensive
income (loss) |
$ |
5,829,841 |
|
| Notes: |
1) |
There were no discontinued
operations or extraordinary items in the periods under review. |
| |
2) |
The basic and diluted losses per
share were the same in each of the periods. |
The variation seen over such quarters is primarily dependent
upon the success of the Company’s ongoing property evaluation program and the
timing and results of the Company’s exploration activities on its then current
properties, none of which are possible to predict with any accuracy. There are
no general trends regarding the Company’s quarterly results, and the Company’s
business of mineral exploration is not seasonal. Quarterly results can vary
significantly depending on whether the Company has abandoned any properties or
granted any stock options or paid any employee bonuses and these are the factors
that account for material variations in the Company’s quarterly net losses, none
of which are predictable. While the Company may seek, in the future, to sell
some or all of the interests in other of its exploration and evaluation assets,
the timing and potential effect of any such sale is impossible to predict. The
write-off of exploration and evaluation assets can have a material effect on
quarterly results as and when they occur. Another factor which can cause a
material variation in net loss on a quarterly basis is the grant of stock
options due to the resulting share-based payment charges which can be
significant when they arise. The payment of any employee bonuses, being
once-yearly charges, can also materially affect operating losses for the
quarters in which they occur. General operating costs other than the specific
items noted above tend to be quite similar from period to period, although the
Company has taken steps, particularly over the past 4 quarters, to reduce its
general operating costs as detailed elsewhere in this MD&A. The variation in
income is related solely to the interest earned on funds held by the Company,
which is dependent upon the success of the Company in raising the required
financing for its activities which will vary with overall market conditions, and
is therefore difficult to predict. Interest expense is dependent to a large
degree upon the necessity of the Company to secure funding through long or short
term debt (until April, 2013, the Company did not have any short or long-term
debt or the associated interest expense) and the success of the Company in
securing such debt financing, as well as the relative interest rate negotiated,
which cannot be predicted in advance. However, the increasing reliance by the
Company on short-term debt/lines of credit will have the effect of significantly
increasing interest expense over that seen in the quarters prior to the second
quarter of the fiscal year ended October 31, 2013 and this is not expected to
change for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no revenue generating operations from which it
can internally generate funds. Over the past three fiscal years, the Company’s
ongoing operations have been predominantly financed by the sale of its equity
securities by way of private placements and the subsequent exercise of share
purchase warrants and broker options issued in connection with such private
placements. However, the exercise of warrants/options is dependent primarily on
the market price and overall market liquidity of the Company’s securities at or
near the expiry date of such warrants/options (over which the Company has no
control) and therefore there can be no guarantee that any existing
warrants/options will be exercised. The Company has also successfully generated
operating funds through the sale of certain of its resource related investments,
some of which had significantly increased in value since their acquisition.
However, such returns are subject to fluctuations in the market for the shares
of the companies in which the Company has invested, and therefore there can be
no assurance that the Company will continue to be able to generate significant
additional funds through the liquidation of its investments. As illustrative of
this, the current market conditions for junior resource equities have resulted
in a significant decline in the market value, and hence the price at which the Company can sell, any of its remaining resource related investments, and the Company does not presently envision raising any further significant funds through the sale of such investments. In addition, the Company has already
disposed of the bulk of its resource-related investments and therefore does not anticipate being able to generate material funds through further sales in the foreseeable future. The Company can raise funds through the sale of interests in its
mineral properties, and negotiations in this regard are underway, although there can be no assurance that it will be successful in doing so.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 18 |
In 2013 the Company successfully secured funding through the sale of senior secured notes and establishing secured lines of credit, which, while they generate working capital, also bring with them significant interest expense. In addition, as such
financings are denominated in US dollars, they increase the foreign exchange loss risk to the Company as the US-Canadian exchange rate may be significantly lower upon repayment that when the funding was initially secured or advanced.
On August 9, 2013 the Company completed a private placement of senior secured notes (the “Kopple Notes”) in the aggregate principal amount of USD 5,700,000 with entities controlled by Robert C. Kopple of Los Angles, California, USA (the
“Kopple Lenders”). The full proceeds of the Kopple Notes were used to pay off the indebtedness owing to the holders of certain senior secured notes issued in April 2013 immediately following closing of the Kopple Note transaction.
Kopple Notes in the amount of USD 3,700,000 were due no later than March 14, 2014, while USD 2,000,000 of the Kopple Notes is due on August 8, 2014. Interest will accrue at the rate of 10 per cent per year, payable quarterly. The Kopple Notes are
secured by a general security agreement over the assets of the Company, as well as a specific pledge of the shares of Cardero Coal. Cardero Coal also provided a corporate guarantee. The Kopple Notes may be redeemed by the Company at any time at par
plus accrued interest. Should there be a change of control of the Company or Cardero Coal while the Kopple Notes remain outstanding, other than a change of control caused by the Kopple Lenders or their associates or affiliates, the holders of the
Kopple Notes will have the right to put the Kopple Notes to the Company for an amount equal to 110% of par plus accrued interest.
As additional consideration for purchasing the Kopple Notes, the Kopple Lenders were issued transferrable warrants (“August Kopple Warrants”) to purchase an aggregate of 28,359,066 common shares of the Company. The August Kopple Warrants
have a term of seven years, and are exercisable at a price of 9.5 cents.
On December 5, 2013 the Company completed the implementation of a USD 5,000,000 million line of credit (“Credit Line”) from the Kopple Lenders. The Credit Line reflects or includes all amounts advanced by the Kopple Lenders since the
purchase of the Kopple Notes, interest due under the Kopple Notes, and amounts to be advanced in the future. Interest is payable by the Company on the amount outstanding under the Credit Line from time to time at the rate of 10% per annum. The
security granted by the Company in connection with the Kopple Notes will extend to all indebtedness of the Company under the Credit Line. In conjunction with the establishment of the Credit Line, the maturity date for USD 3,700,000 million of the
Kopple Notes was extended from December 31, 2013 subsequently to February 28, 2014 and further extended to March 31, 2014. All amounts outstanding under the Credit Line are due and payable on or before January 5, 2016. The Kopple Lenders will have
the right to seek representation on the Company’s board of directors.
In March, 2014, the Company received a total of $3,774,651 (including interest) in connection with its application for the BC Mineral Exploration Tax Credit (“BCMETC”). On receipt, the BCMETC funds were used to make part of the
payment of USD 3,906,794 (representing the USD 3,700,000 principle amount plus USD 206,794 in interest) due on or before March 14, 2014 under the Kopple Notes, with the balance of USD 545,838 in excess of the BCMETC being paid from the Credit Line.
On August 25, 2014, the Company made a payment of USD 480,000 under the Credit Line, thereby reducing the amount owing and interest thereon. This amount will be available for subsequent advances under the Credit Line.
The Company did not repay the USD 2,000,000 of Kopple Notes due August 8, 2014, nor was it successful in raising, by way of one or more private placements of equity or subordinated debt, an aggregate minimum net amount of USD 2,200,000 by August 1,
2014 as required under the terms of the Credit Line. The failure to make the required repayment and to complete such placement(s) are both events of default under the Credit Line. As at the date of this MD&A the Kopple Lenders have not issued a
notice of default to the Company, and the Company is presently in negotiations with the Kopple Lenders to extend the due date of the USD 2,000,000 (plus accrued interest of USD 200,000) in Kopple Notes, and the requirement to complete one or more private placements of equity or subordinated debt, for
a one year period. While the Company believes that it will be successful in doing so, if the Company is unable to negotiate an extension to complete the required private placements, and to extend the due date of the Kopple Notes still
outstanding, the Company will be in default under both the Kopple Notes and the Credit Line, and the Lenders will have the right to issue a notice of default and thereafter realize on their security. If this occurs, it is likely that the Company
would lose all interest in Cardero Coal, and hence Carbon Creek. There can be no assurance that the Company will be successful in negotiating the extensions detailed above.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 19 |
As additional consideration for the establishment and funding of the Credit Line, the Company agreed to issue to the Lenders transferrable common share purchase warrants to purchase an aggregate of 38,417,398 common shares of the Company (the
“December Kopple Warrants”). Of this number, 28,359,066 were issued to the Kopple Lenders on the closing of the Credit Line on December 5, 2013. The issuance of the additional 10,058,330 December Kopple Warrants is subject to the
approval thereof by the Company’s shareholders (subsequently obtained, see below). The December Kopple Warrants have a term of seven years, and are exercisable at a price of $0.139 (subsequently reduced, see below).
At its 2014 Annual General Meeting held April 4, 2014 in Vancouver, British Columbia (“AGM”), the Company’s shareholders approved, by 95.12% of the votes cast (excluding any votes cast by Robert C. Kopple or his affiliates or
associates), each of the following matters:
|
1. |
the issuance of additional December Kopple Warrants to purchase an additional 5,029,165 common shares to E.L. II Properties Trust and warrants to purchase an additional 5,029,165 common shares to the Kopple Family Partnership,
LP., and thereby resulting in the Company having made issuable, within a three month period, a number of common shares in excess of 25% of the number of common shares outstanding at the commencement of such three month period;
|
| | |
|
2. |
the reduction in the exercise price, from $0.139 to $0.10, of the issued, and to be issued, December Kopple Warrants;
|
| | |
|
3. |
the extension of the expiry date of certain incentive stock options to purchase 3,600,000 common shares of the Company at $0.10 held by Robert C. Kopple (“Kopple Options”) to July 3, 2020 (unless sooner exercised)
notwithstanding that Mr. Kopple sooner ceases, for any reason, to be qualified to hold incentive stock options under the 2012 Incentive Stock Option Plan of the Company; and
|
| | |
|
4. |
the exercise, by Mr. Robert C. Kopple, and any of his associates or affiliates, including, without limitation, the Lenders, of the Kopple Option, the August Kopple Warrants, the December Kopple Warrants, which exercises may result
in Robert C. Kopple, together with his associates and affiliates (including the Lenders), holding in excess of 19.99% of the then issued common shares of the Company, and the consequent creation of Robert C. Kopple as a control person of the
Company.
|
The Lenders have requested that the Company amend the August Kopple Warrants and the December Kopple Warrants to include a “cashless” exercise feature, and the Company has agreed to do so, subject to settling approved wording in respect
thereof. The amendment of the warrants to include such a feature does not require TSX acceptance, provided that an exercise formula acceptable to the TSX is used and it is the intention of the parties to use such a formula.
In December 2013, the Company successfully completed a number of debt settlements with a number of arm’s length creditors. Pursuant to such settlements, on December 12, 2013, the Company settled an aggregate of $2,690,473 of outstanding
trade debts in consideration of the payment, either on closing or over time, of an aggregate of $1,038,367 in cash plus the issuance of 3,219,617 common shares at a deemed price of $0.16 per share. The Company continues to seek to negotiate
additional settlements with other creditors for cash, or cash plus shares, although there can be no certainty that it will be successful in doing so.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 20 |
The Company expects that it will operate at a loss for the
foreseeable future. While the Company has secured financing through the
establishment of the Credit Line, the Company requires additional funding in
order to carry on business and meet its objectives of advancing the Carbon Creek
project. The Company is focussed on securing additional funding but, at this
time, currently has no funding commitments or arrangements for additional
financing beyond the Credit Line and there can be no assurance that it will be
successful in doing so.
As July 31, 2014, the Company reported cash and cash
equivalents of $29,963 compared to $291,277 at October 31, 2013. The change in
cash and cash equivalents over the year is comprised of funds used by investing
activities of $2,379,603 and ($3,314,122) from operations, and $673,205 provided
by financing activities due to drawdowns under the Credit Line and repayment of
loan. As at July 31, 2014, the Company had a working capital deficit of
$4,807,519 compared to working capital of $6,498,875 at October 31, 2013.
Over the past year, the Company has recently taken steps to
reduce its cash requirements, including terminating all of the employees of
Cardero Coal and several of the Company’s employees, terminating certain
consulting agreements, implementing a 20% reduction in the salaries of the
remaining employees of the Company, stopping work on the BFS and determining not
to proceed with application for an EAC for Carbon Creek, selling off or shutting
down the operations of its subsidiaries in Mexico, Peru, Argentina and Ghana and
reducing its office space and concurrent expenses. The Company also disposed of
its materials testing laboratory, including all laboratory equipment, in South
Carolina, in consideration of receiving public company securities valued at
$100,000 (subsequently sold by the Company) and the forgiveness of USD 35,000
owing by the Company.
The Company anticipates that its monthly burn rate for general
and administrative expenses is approximately $140,000, and that the undrawn
amount available under its current secured line of credit is approximately USD
1,065,212 as at September 12, 2014. This amount is sufficient to fund the
Company’s anticipated general and administrative expenditures for the balance of
the fiscal year ending October 31, 2014. However, in order to prepare the new
43-101 report in respect of Carbon Creek, and to carry out any work on any of
its properties, including Carbon Creek, the Company will be required to raise
additional funding. If the Company is unsuccessful in doing so, then it will
not be able to proceed with the preparation of the new 43-101 report on Carbon
Creek or to carry out any meaningful activities at Carbon Creek.
Other than cash held by its subsidiaries for their immediate
operating needs in the United States, Argentina, Peru and Ghana, all of the
Company’s cash reserves are on deposit with major financial institutions or
invested in Government of Canada Treasury Bills or Banker’s Acceptances issued
by major Canadian chartered banks. The Company does not believe that the credit,
liquidity or market risks with respect thereto have increased as a result of the
current market conditions. However, in order to achieve greater security for the
preservation of its capital, the Company has, of necessity, been required to
accept lower rates of interest which has also lowered its potential interest
income.
During the period ended July 31, 2014 and to the date of this
MD&A, there has been a material change, being a significant reduction, in
the Company’s contractual obligations for mineral property lease and option
payments and committed operating lease obligations as disclosed in its annual
MD&A. Such reduction occurred as a result of the Company’s withdrawal from
the Coal Lease, which has reduced the estimated expenditures for advance
royalties. In addition, as the Company has made the decision to withdraw from
the Sheini joint ventures, the anticipated payments under those joint ventures
are no longer planned. As a consequence, the payments due for Mineral Property
Leases/Options have been reduced form a total of $38,609,230 to approximately
$27,000 per year, representing the anticipated yearly fees payable to the BC
Government in respect of the 4 existing coal licenses at Carbon Creek. When and
if additional applications for coal licenses are granted, and new coal licenses
are issued in respect thereof, such fees will increase correspondingly.
OFF BALANCE-SHEET ARRANGMENTS
The Company has no off-balance sheet arrangements.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 21 |
RELATED PARTY TRANSACTIONS
During the three and nine months ended July 31, 2014, the
Company entered into the following transactions with related parties and paid or
accrued the following amounts, excluding share-based payment charges in
connection therewith:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Purpose of |
|
Three Months |
|
|
Nine Months |
|
| Name |
Relationship |
|
transaction |
|
Ended |
|
|
Ended |
|
| Hendrik van Alphen |
CEO, President & a Director
of the Company |
|
Wages and Salaries |
$ |
52,000 |
|
$ |
156,000
|
|
| Lawrence W Talbot |
VP & General Counsel of the Company |
|
Wages and Salaries |
$ |
20,000 |
|
$ |
60,000 |
|
| Keith Henderson |
Executive Vice President of the
Company |
|
Wages and Salaries |
$ |
48,000 |
|
$ |
80,000 |
|
| Blaine Bailey |
CFO of the Company |
|
Wages and Salaries |
$ |
25,000 |
|
$ |
90,000 |
|
| Glenn Hoffman |
CEO of Cardero Iron Ore |
|
Wages and Salaries($US) |
$ |
- |
|
$ |
26,666 |
|
| Marla Ritchie |
Corporate Secretary of the Company |
|
Wages and Salaries |
$ |
15,000 |
|
$ |
54,000 |
|
| Stephan Fitch |
Director of the Company |
|
Director's fees |
$ |
3,000 |
|
$ |
7,000 |
|
| Stephan Fitch |
Director of the Company |
|
Consulting fees |
$ |
- |
|
$ |
6,000 |
|
| Robert Van Doorn |
Director of the Company |
|
Director's fees |
$ |
4,000 |
|
$ |
4,000 |
|
| Leonard Harris |
Director of the Company |
|
Director's fees |
$ |
3,000 |
|
$ |
7,000 |
|
| Lawrence W. Talbot Law Corporation |
Company controlled by an
officer of the Company |
|
Professional fees |
$ |
22,068 |
|
$ |
66,205 |
|
| Acuitas
Consulting Ltd. |
Company controlled by Executive Vice President of the Company
|
|
Consulting fees |
$ |
- |
|
$ |
64,000 |
|
During the period ended July 31, 2014 and to the date of this
MDA the following stock options where granted to related parties:
| |
(a) |
On February 7, 2014, there were 2,036,000 stock options,
exercisable at $0.18 per share until February 7, 2016, granted to related
parties, as follows: |
| Name |
Relationship |
Options |
| Hendrik van Alphen |
CEO & President of the Company |
600,000 |
| Keith Henderson |
Executive Vice-President of the Company |
600,000 |
| Stephan Fitch |
Director of the Company |
336,000 |
| Blaine Bailey |
CFO of the Company |
150,000 |
| Marla Ritchie |
Corporate Secretary of the Company |
150,000 |
PROPOSED TRANSACTIONS
Except as noted elsewhere in this MD&A, although the
Company is currently investigating/negotiating with a number of potential
financing sources for equity or debt financings and is entertaining proposals
for the sale or option/joint venture of one or more of its properties, as at the
date of this MD&A there are no proposed transactions where the Board of
Directors, or senior management who believe that confirmation of the decision by
the Board is probable, have decided to proceed with and which are not disclosed
previously or herein.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 22 |
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires management to
use judgment in applying its accounting policies and estimates and assumptions
about the future. Estimates and other judgments are continuously evaluated and
are based on management’s experience and other factors, including expectations
about future events that are believed to be reasonable under the circumstances.
The following discusses the most significant accounting judgments and estimates
that the Company has made in the preparation of the financial statements.
Mineral property impairment
At the end of each reporting period, the Company assesses each
of its mineral resource properties to determine whether any indication of
impairment exists. Judgment is required in determining whether indicators of
impairment exist, including factors such as the period for which the Company has
the right to explore, expected renewals of exploration rights, whether
substantive expenditures on further exploration and evaluation of resource
properties are budgeted or planned and results of exploration and evaluation
activities on the exploration and evaluation assets. The Company concluded that,
as a result of the withdrawal from the Coal Lease, which formed part of Carbon
Creek, an impairment indicator existed. The Company determined that all
attributed expenditures for acquisition and exploration costs on the Coal Lease
(and the precursor coal lease option agreement) would be written off. The joint
venture with CCP, and the Company’s interest in the remaining coal tenures under
the joint venture, is in good standing and further exploration is planned once
additional financing has been obtained. Based on an impairment test performed on
the Company’s remaining interest in Carbon Creek, the Company concluded that no
additional impairment was required as at July 31, 2014.
CHANGES IN ACCOUNTING POLICIES, INCLUDING INITIAL ADOPTION
Please refer to note 2 of the July 31, 2014 the condensed
interim consolidated financial statements for a comprehensive review of the
accounting policies adopted during the current period.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
The Company’s cash at July 31, 2014 was $29,963 of which $3,382
was held in US, Argentinean, Ghanaian and Peruvian currencies.
The Company’s receivables and payables at July 31, 2014 were
normal course business items. The accounts receivable are settled on a regular
basis. The Company’s investments in Abzu, Wealth, Artha, and Xiana are carried
at quoted market value or an estimate thereof, and are classified as
“available-for-sale” for accounting purposes. All resource related investments
in warrants are classified as fair value through profit or loss and are
considered derivative financial instruments where changes to the fair value are
included in net income. The Company intends to dispose of its resource-related
investments as necessary to fund ongoing operations, although the current market
prices and lack of liquidity for certain of such investments seriously affects
the Company’s ability to so dispose of those investments.
EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal control over financial reporting means a process
designed by, or under the supervision of, the Company’s certifying officers, and
effected by the Company’s board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with the Company’s GAAP and includes those policies and procedures that:
| |
(a) |
pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of
the assets of the Company; |
| |
|
|
| |
(b) |
are designed to provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with the Company’s GAAP, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company;
and |
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 23 |
| |
(c) |
are designed to provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on
the annual financial statements or interim financial
statements. |
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.
The Company’s management, including the CEO and CFO, have
evaluated the effectiveness of the Company’s internal control over financial
reporting as of April 30, 2014. This evaluation was based on the framework in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (1992 Edition).
Based on that assessment, management concluded that the
Company’s internal control over financial reporting was not effective as of July
31, 2014.
Material Weakness
A material weakness is a deficiency (as defined in PCAOB
Auditing Standard No 5), or a combination of deficiencies, such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis.
As of July 31, 2014, the Company identified the following
material weakness that applies to both disclosure controls and procedures and
internal controls over financial reporting;
Due to the significantly reduced number of employees over prior
years the Company does not have sufficient resources to maintain adequate
segregation of duties as is necessary to ensure complete and accurate financial
reporting. Specifically, the Company’s Chief Financial Officer is responsible
for preparing, authorizing and reviewing information that is integral to the
preparation of financial reports. He is also responsible for preparing and
reviewing the resulting financial reports. The weakness has the potential to
result in material misstatements in the Company’s consolidated financial
statements that would not be prevented or detected, and as such has been
determined to be a material weakness in internal controls over financial
reporting which also impacts the Company’s disclosure controls and procedures.
As of the date of this report, management has not yet developed
a plan to remediate the material weakness. Management has concluded that, taking
into account the present stage of the Company’s development and the significant
difficulty in securing ongoing operating funding, the Company does not have
sufficient size and scale to warrant, and cannot realistically afford, the
hiring of the additional staff that would be required to correct the weakness at
this time.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and Chief Financial Officer have
concluded that there has been no change in the Company’s internal control over
financial reporting during the period beginning on May 1, 2014 and ended on July
31, 2014, that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
In 2013, the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) updated the Internal Control – Integrated Framework
(1992) used by the Company to assess its ICFR and released the Internal Control
– Integrated Framework (2013). COSO’s enhancements to the framework are intended
to address the significant changes in the business environment and associated
risks since 1992, specify criteria to use in the development and assessment of
internal control, and increase the focus on operations, compliance and
nonfinancial reporting objectives. As part of its release of the 2013 framework,
COSO indicated that it will consider the 1992 framework superseded as of
December 15, 2014. The Company is presently assessing the changes contained in
the 2013 framework with a view to formulating a plan to transition to
the 2013 framework commencing in the fiscal year ending October 31, 2015.
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 24 |
DISCLOSURE OF OUTSTANDING SHARE DATA
| 1. |
Authorized and Issued capital stock:
As at July 31, 2014: |
| |
Authorized |
|
Issued |
|
|
Book Value |
|
| |
An unlimited number of common shares without par value |
|
117,366,887 |
|
$ |
126,163,632 |
|
As at September 12, 2014:
| |
Authorized |
|
Issued |
|
|
Book Value |
|
| |
An unlimited number of common shares without par value |
|
117,366,887 |
|
$ |
126,163,632 |
|
| 2. |
Options Outstanding: As at July 31,
2014: |
| |
Number |
Exercise Price |
Expiry Date |
| |
125,000 |
$ 0.78 |
September 27, 2014 |
| |
1,925,000 |
$
0.20 |
May 28, 2015 |
| |
6,404,000 |
$ 0.11 |
July 3, 2020 |
| |
2,036,000 |
$ 0.18 |
February 6, 2016 |
| |
|
|
|
| |
10,490,000 |
|
|
As September 12, 2014:
| |
Number |
Exercise Price |
Expiry Date |
| |
125,000 |
$ 0.78 |
September 27, 2014 |
| |
1,925,000 |
$
0.20 |
May 28, 2015 |
| |
6,404,000 |
$ 0.11 |
July 3, 2020 |
| |
2,036,000 |
$ 0.18 |
February 6, 2016 |
| |
|
|
|
| |
10,490,000 |
|
|
| 3. |
Warrants Outstanding: As at July 31,
2014: |
| |
Number |
Exercise Price |
Expiry Date |
| |
28,359,066 |
$ 0.095 |
August 9, 2020 |
| |
28,359,066 |
$ 0.10 |
December 5, 2020 |
| |
10,058,330(1) |
$ 0.10 |
December 5, 2020 |
| |
|
|
|
| |
66,776,462 |
|
|
| |
(1) |
Warrants not yet issued, although the Company is
committed to issue these, shareholder approval having been obtained on
April 4, 2014. |
| Cardero Resource Corp. |
|
| Form 51-102F1 |
|
| Management Discussion & Analysis |
|
| Nine months
ended July 31, 2014 |
Page 25 |
As at September 12, 2014:
| Number |
Exercise Price |
Expiry Date |
| 28,359,066 |
$ 0.095 |
August 9, 2020 |
|
28,359,066 |
$ 0.10 |
December 5, 2020 |
| 10,058,330(1) |
$ 0.10 |
December 5, 2020 |
| |
|
|
| 66,776,462 |
|
|
| |
(1) |
Warrants not yet issued, although the Company is
committed to issue these, shareholder approval having been obtained on
April 4, 2014. |
ADDITIONAL SOURCES OF INFORMATION
Additional disclosures pertaining to the Company, including its
most recent Annual Information Form, financial statements, management
information circular, material change reports, press releases and other
information, are available on the SEDAR website at www.sedar.com or on the Company’s website at www.cardero.com. Readers are urged to review these
materials, including the technical reports filed with respect to the Company's
mineral properties.
