EXHIBIT
99.1
MANAGEMENT’S DISCUSSION AND ANALYSIS
YEARS ENDED DECEMBER 31, 2017 AND 2016
1
MANAGEMENT’S DISCUSSION AND ANALYSIS
This
Management’s Discussion and Analysis (“MD&A”)
of Pretium Resources Inc. (the “Company”,
“we” or “us”) provides information that
management believes is relevant to an assessment and understanding
of the consolidated financial condition and results of operations
of the Company. This MD&A should be read in conjunction with
the audited consolidated financial statements for the years ended
December 31, 2017 and 2016 as publicly filed on the System for
Electronic Document Analysis and Retrieval (“SEDAR”)
website.
We have
prepared the audited consolidated financial statements in
accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting
Standards Board.
Effective
January 1, 2017, the Company elected to change its presentation
currency from the Canadian dollar (“CAD” or
“C$”) to the United States dollar (“USD” or
“US$”). The Company applied the change to USD
presentation currency retrospectively and restated the comparative
financial information as if the new presentation currency had
always been the Company’s presentation currency. The
functional currency of the Company and its subsidiaries was
reassessed and the functional currency changed from CAD to USD,
commencing on January 1, 2017. Refer to the
“Changes in Accounting
Policies” section of this MD&A.
All
dollar amounts in this MD&A are expressed in thousands of USD,
except for share and per ounce data.
This
MD&A is prepared as of March 8, 2018 and includes certain
statements that may be deemed “forward-looking
statements”. We direct investors to the section
“Risks and
Uncertainties” and “Statement Regarding Forward-Looking
Information” included within this
MD&A.
Certain
non-IFRS financial performance measures are included in this
MD&A. We believe that these measures, in addition to measures
prepared in accordance with IFRS, provide investors an improved
ability to evaluate the underlying performance of the Company and
compare our results to other companies. These measures are intended
to provide additional information and should not be considered in
isolation or as a substitute for measures of performance prepared
in accordance with IFRS. These measures do not have any
standardized meaning prescribed under IFRS, and therefore may not
be comparable to other issuers. The non-IFRS financial performance
measures included in this MD&A are: total cash costs; all-in
sustaining costs (“AISC”); average realized gold price,
average realized cash margin; adjusted earnings (loss) and adjusted
earnings (loss) per share. Refer to the “Non-IFRS Financial Performance
Measures” section for a reconciliation of non-IFRS
measures.
Additional information relating to us, including our Annual
Information Form and Form 40-F, is available on the SEDAR website
at www.sedar.com and
on the EDGAR section of the SEC website at www.sec.gov.
2
2017 OVERVIEW
Fourth quarter & six months production summary
●
Production totaled
70,281 ounces of gold and 96,004 ounces of silver in the fourth
quarter of 2017, for a total of 152,484 ounces of gold and 179,237
ounces of silver produced during the first six months of production
ramp-up.
●
Mill feed grade
averaged 8.2 grams per tonne gold in the fourth quarter and 9.4
grams per tonne gold for the first six months of
ramp-up.
●
Gold recoveries
averaged 95.8% in the fourth quarter of 2017 for an average gold
recovery rate of 96.2% for the first six months of production
ramp-up.
●
Process plant
throughput averaged 2,951 tonnes per day during the fourth quarter
of 2017 for an average processing rate of 2,895 tonnes per day
during the first six months of production ramp-up.
●
Ore milled totaled
271,501 in the fourth quarter of 2017, for a total of 532,763
tonnes of ore milled during the first six months of production
ramp-up.
●
The Company
submitted an application to increase the Brucejack Mine production
rate to 3,800 tonnes per day in December.
Fourth quarter financial summary
●
The Company
generated revenue of $107,058 which included $106,464 of revenue
from contracts with customers plus a gain on revaluation of
derivatives in trade receivables of $594. The sale of 86,514 ounces
of gold contributed $104,794 of revenue at an average realized
price(1) of $1,211 per ounce.
The sale of 107,900 ounces of silver contributed $1,670 of
revenue.
●
Total cost of
sales, which includes production costs, depreciation and depletion,
royalties and selling costs was $80,168 or $927 per ounce of gold
sold(1).
Total cash cost(1)
was $700 per ounce of gold sold and AISC(1)
was $893 per ounce of gold sold.
●
Earnings from mine
operations(1)
were $26,890 for the three months ended
December 31, 2017.
●
Net loss was $2,720
for the three months ended December 31, 2017 compared to a net loss
of $8,564 in the comparable period. Adjusted earnings(1)
were $12,742 for the three months ended December 31,
2017.
●
Cash generated by
operations was $33,408 for the three months ended December 31, 2017
compared to cash used in operations of $4,924 in the comparable
period.
3
Annual financial summary
●
The Company
generated revenue of $177,933 which included $177,787 of revenue
from contracts with customers plus a gain on revaluation of
derivatives in trade receivables of $146. The sale of 141,927
ounces of gold contributed $175,793 of revenue at an average
realized price(1) of $1,239 per ounce.
The sale of 127,746 ounces of silver contributed $1,994 of
revenue.
●
Total cost of
sales, which includes production costs, depreciation and depletion,
royalties and selling costs was $125,080 or $881 per ounce of gold
sold(1).
Total cash cost(1)
was $683 per ounce of gold sold and AISC(1)
was $852 per ounce of gold sold.
●
Earnings from mine
operations(1)
were $52,853 for the year ended
December 31, 2017.
●
Net loss was
$16,453 for the year ended December 31, 2017 compared to a net loss
of $61,212 in the comparable period. Adjusted earnings(1)
were $17,426 for the year ended December 31, 2017.
●
Cash and cash
equivalents were $56,285 as at December 31, 2017 compared to
$141,791 as at December 31, 2016. The Company has working
capital(1)
of $40,557 excluding the current portion of long-term debt as at
December 31, 2017; refer to the “Liquidity and Capital Resources”
section of this MD&A.
●
Cash generated by
operations was $73,321 for the year ended December 31, 2017
compared to cash used in operations of $12,205 in the comparable
period.
4
The
operating and financial data for the periods are as
follows:
|
In thousands of USD,
except where noted
|
For the
three months ended
|
For the
year ended
|
|||
|
|
|
December
31,
2017
|
December
31,
2016
|
December
31,
2017
|
December
31,
2016
|
|
Operating data
|
|
|
|
|
|
|
Ore
mined
|
t
|
280,671
|
-
|
552,205
|
-
|
|
Mining
rate
|
tpd
|
3,051
|
-
|
3,001
|
-
|
|
|
|
|
|
|
|
|
Ore
milled
|
t
|
271,501
|
-
|
532,763
|
-
|
|
Head
grade
|
g/t
Au
|
8.2
|
-
|
9.4
|
-
|
|
Recovery
|
%
|
95.8
|
-
|
96.2
|
-
|
|
Mill
throughput
|
tpd
|
2,951
|
-
|
2,895
|
-
|
|
|
|
|
|
|
|
|
Gold ounces produced(1)
|
oz.
|
70,281
|
-
|
152,484
|
-
|
|
Silver
ounces produced
|
oz.
|
96,004
|
|
179,237
|
|
|
|
|
|
|
|
|
|
Gold
ounces sold
|
oz.
|
86,514
|
-
|
141,927
|
-
|
|
Silver
ounces sold
|
oz.
|
107,900
|
-
|
127,746
|
-
|
|
|
|
|
|
|
|
|
Financial data
|
|
|
|
|
|
|
Revenue
|
|
$107,058
|
-
|
177,933
|
-
|
|
Earnings
from mine operations(2)
|
|
$26,890
|
-
|
52,853
|
-
|
|
Net
loss for the period
|
|
$(2,720)
|
(8,564)
|
(16,453)
|
(61,212)
|
|
Per
share - basic
|
$/share
|
(0.01)
|
(0.05)
|
(0.09)
|
(0.35)
|
|
Per
share - diluted
|
$/share
|
(0.01)
|
(0.05)
|
(0.09)
|
(0.35)
|
|
|
|
|
|
|
|
|
Adjusted earnings (loss)(2)
|
|
$12,742
|
(6,869)
|
17,426
|
(11,324)
|
|
Per share - basic(2)
|
$/share
|
0.07
|
(0.04)
|
0.10
|
(0.07)
|
|
|
|
|
|
|
|
|
Total
cash and cash
equivalents
|
|
$56,285
|
141,791
|
56,285
|
141,791
|
|
Cash
generated by (used in) operating
activities
|
|
$33,408
|
(4,924)
|
73,321
|
(12,205)
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$1,671,537
|
1,450,436
|
1,671,537
|
1,450,436
|
|
Long-term
debt
|
|
$293,029
|
501,160
|
293,029
|
501,160
|
|
|
|
|
|
|
|
|
Total cash costs(2)
|
$/oz
|
700
|
-
|
683
|
-
|
|
All-in sustaining costs(2,3)
|
$/oz
|
893
|
-
|
852
|
-
|
|
|
|
|
|
|
|
|
Average realized price(2)
|
$/oz
|
1,211
|
-
|
1,239
|
-
|
|
Average realized cash margin(2)
|
$/oz
|
511
|
-
|
556
|
-
|
(1)
Gold ounces
produced for the year ended December 31, 2017 excludes 8,510 ounces
produced in the pre-commercial period.
(2)
Refer to the
“Non-IFRS Financial Performance Measures” section for a
reconciliation of these amounts.
(3)
All-in sustaining
costs for the year ended December 31, 2017 is only for the six
months ended December 31, 2017 as commercial production
results only commenced on July 1, 2017.
The
following abbreviations were used above: t (tonnes), tpd (tonnes
per day), g/t (grams per tonne), Au (gold) and oz
(ounces).
5
TABLE OF CONTENTS
6
BUSINESS
OVERVIEW
The
Company was incorporated on October 22, 2010 under the laws of the
Province of British Columbia and is listed on the Toronto Stock
Exchange (TSX.PVG) and New York Stock Exchange (NYSE.PVG). The
Company was formed for the acquisition, exploration, development
and operation of precious metal resource properties in the
Americas.
We
transitioned into operations after achieving commercial production
on July 1, 2017 at our 100% owned Brucejack Mine located in
northwestern British Columbia. The Brucejack Mine is comprised of
4 mining leases and 6 mineral claims totaling 3,304 hectares
in area and forms part of our contiguous claims package that
comprises over 122,000 hectares. The Brucejack Mine is a 2,700
tonnes per day high-grade gold underground mine and since July
2017, our focus is on the ramp-up of gold production.
Our
exploration and evaluation assets are the Snowfield Project and
Bowser Regional Project. The Snowfield Project mineral claims are
in good standing until 2028. We continue to conduct baseline
environmental studies for potential future
development.
Brucejack mine construction
Construction
and mechanical commissioning at the mine, the demobilization of
construction and contract crews and construction facilities have
been completed. The permanent operations team assumed full
management of the mine, and all of the main operating units in the
mill are performing as expected.
The
final cost to construct the Brucejack mine was $940,054 which
included non-cash items such as capitalized borrowing costs,
depreciation, share-based compensation and recognition of the
decommission and restoration provision. The cash costs to construct
the Brucejack mine were $827,707 which was $16,607 or 2.1% over the
forecast published in February 2017.
Brucejack commercial production
The
determination of commercial production for accounting purposes was
based on three factors: the ability of the underground mine to
supply the mill, the ability to sustain operations in the mill and
the ability to produce a saleable product. The commercial
production date was defined as the first day of the calendar month
immediately following the first calendar month during which the
process plant processed ore at an average rate of 60% of
one-twelfth of yearly nameplate capacity (985,500 tonnes per year
or 2,700 tonnes per day). The factors for accounting were the same
as those set forth in the credit agreement.
During
the month of June, the process plant at Brucejack processed 70,805
tonnes of ore (87.4% of one-twelfth of yearly nameplate capacity)
from low-grade ore stockpiles for an average of 2,360 tonnes
per day. As a result of processing the low-grade ore, we produced
doré and concentrate in June which constituted a saleable
product. As a result, effective July 1, 2017 commercial production
was achieved at the Brucejack Mine.
7
Gold and silver production
During
the six months ended December 31, 2017, the Brucejack Mine produced
152,484 ounces of gold, which excludes 8,510 ounces of gold from
pre-commercial production, and 179,237 ounces of silver from
low-grade stockpiles, development muck and stope ore. There is no
comparable information as the Brucejack Mine achieved commercial
production on July 1, 2017.
During
the six months ended December 31, 2017, the Company sold 141,927
ounces of gold and 127,746 ounces of silver. As at December 31
2017, there were 7,716 ounces of gold doré and
10,328 ounces of gold in concentrate in finished
goods.
Processing
During
the six months ended December 31, 2017, a total of 532,763 tonnes
of ore, equivalent to a throughput rate of 2,895 tonnes per day,
was processed.
The
mill feed grade was 9.4 grams per tonne gold and recovery was
96.2%. We continue to review the mill process to optimize
recoveries.
The
main operating units in the mill building are performing as
expected. Planning in underway to replace the concentrate bagging
system which caused increased mill downtime and maintenance
requirements.
On
December 20, 2017, the Company submitted an application to the BC
Ministry of Energy, Mines and Petroleum Resources and the BC
Ministry of Environment and Climate Change Strategy to increase the
Brucejack Mine production rate to 3,800 tonnes per day. The
increase would result in an annual average production rate of 1.387
million tonnes, up from 0.99 million tonnes (a daily average of
3,800 tonnes from 2,700 tonnes). The approval process is expected
to take approximately six to twelve months. Engineering is underway
to assess the mill capacity upgrades required to increase the
production rate. Based on preliminary engineering, the capital cost
to increase the mill capacity is estimated to be less than US$25
million. The estimate will be updated when the engineering process
is complete.
Mining
During
the six months ended December 31, 2017, 552,205 tonnes of ore were
mined, equivalent to a mining rate of 3,001 tonnes per
day.
During
the fourth quarter, gold production was lower than expected as
higher-grade stopes scheduled to be mined in December encountered
operational issues (equipment down-time and mining execution), that
prevented them from being mined and delivering higher grade ore to
the mill. Both long-hole drills went down and the stopes could not
be drilled off in time. Mining also encountered a hang-up when
blasting a long-hole slot. These issues, combined with the limited
stope inventory (no other high-grade stopes were accessible in the
quarter) contributed to the lower than expected gold
production.
8
Pretivm
has taken a number of steps to address these operational issues. To
improve access and build stope inventory, the rate of underground
development has been increased to 700 meters per month for 2018, up
from the 420 meters originally contemplated in the Brucejack
Feasibility Study. In addition, a third long-hole drill is now on
site to provide back-up and contribute to the build-up of stope
inventory.
During
the third and fourth quarter of 2017, two sills were established to
open up two mining horizons for 2018, the 1200-meter Level to the
1320-meter Level and the 1320-meter Level to the 1440-meter Level.
With the continued extension of the mining levels to the east and
west within the two mining horizons and the increase in rate of
development, stope inventory is expected to increase to 10 to 12
stopes with a range of grades by mid-year 2018. The availability of
stopes representing a range of grades, including multiple higher
grade stopes, will allow mining operations to optimize stope
blending and provide alternative stopes with comparable grades for
mining, if required. The increased stope inventory is expected to
improve the management of production grades as the ramp-up
continues.
Operational grade control
The
grade control program, designed to refine stope dimensions, reduce
dilution and optimize grade, is underway. The program comprises
sampling and drilling, and it currently being integrated into the
mining process.
Stope Ring Sampling
As part
of the grade control program, grade is estimated on a ring-by-ring
basis to refine the shape of the long-hole stope prior to mining.
Long-hole drill cuttings are selectively collected from each ring
within a stope and split into a reduced sample size for assaying.
Assayed data from each of the rings is then fed back into the
short-term mine planning cycle to refine stope
dimensions.
The
upgraded and modified underground sample splitting station is now
functional. The sample splitting station is used to further
validate the sampling process.
Reverse Circulation Drilling
Another
component of the grade control program, reverse circulation (RC)
drilling to optimize stope definition, has commenced on a trial
basis. The RC drill will cross-cut the stopes drilling 5-meter to
7.5-meter centers to refine stope location and dimensions prior to
mining. The RC drilling will provide a larger sample per meter and
is expected to be faster and more cost effective than core
drilling, which has been used for infill drilling to
date.
With
the operational grade control system now functioning and continued
high definition drilling, steady-state gold production is now
expected to be achieved by mid-to-late 2018.
9
Reconciliation of 2017 ramp-up production
Grade
reconciliation to the reserve model for the period August 1, 2017
to December 31, 2017 was approximately 75% to 80% and attributed
to: (a) the small, relatively unrepresentative sample size of
production being analyzed, (b) rudimentary grade control without
the grade control program operational and (c) lack of drill density
in a significant area of the contributing stopes. During the
period, ore from the stopes developed on the 1200-meter Level sill
provided approximately 25% of mill feed. These stopes were mined in
establishing the 1200-meter Level sill as part of the long-term
mine plan and had a lower drill density than stopes on other levels
of the mine. As the grade control program becomes operational and
mining moves up from the 1200-meter Level into areas with higher
drill density, reconciliation is expected to be more
robust.
Exploration Drilling for Porphyry Source
An
exploration drill program has been initiated to test for a porphyry
source and evaluate the potential extension of the Valley of the
Kings to the east. The drill program will follow-up on the success
of the 2015 regional grass-roots exploration drill program.
High-grade gold was intersected in the Flow Dome Zone, located
approximately 500 meters east of the Brucejack Mine, confirming the
presence of either a new stockwork zone or an extension of the
Valley of the Kings deposit (see
news release dated October 8, 2015). A drill has been set up
underground on the eastern edge of the 1200-meter Level of the
Valley of the Kings development. Two drill holes, each 1,600 meters
long will serve to provide a continuum of information from the
Valley of the Kings to the Flow Dome Zone. The drilling will also
test below the Flow Dome Zone where structural geology combined
with a geophysical anomaly suggests a potential porphyry
source.
Lyle
Morgenthaler, B.A.Sc., P.Eng., Chief Mine Engineer, Pretium
Resources Inc. is the Qualified Person (“QP”)
responsible for Brucejack Mine development. Warwick Board, Ph.D.,
P.Geo, Pr.Sci.Nat., Vice President, Geology and Chief Geologist,
Pretium Resources Inc. is the QP responsible for Brucejack Mine
reconciliation of 2017 ramp-up production and the Brucejack Mine
exploration drilling.
Sustaining capital
During
the year ended December 31, 2017, the Company spent $9,576 on
sustaining capital. Sustaining capital expenditures included the
paste booster station, the grade control sampling station and
gravity lab and normal course capitalized development costs
incurred during production. Capitalized development include costs
to build new ventilation raises and ramps that enable the Company
to physically access ore underground.
OUTLOOK
H1 2018 guidance
Gold
production at Brucejack for the first half of 2018 is expected in
the range of 150,000 ounces to 200,000 ounces, for total first year
ramp-up gold production of 302,000 ounces to 352,000 ounces (July
1, 2017 to June 30, 2018). Steady state mining is
now expected to be achieved in mid-to-late 2018. Production
guidance for the remainder of 2018 will be provided
mid-year.
10
2018 financial guidance
All-in
sustaining costs(1) for the first half
of 2018 are expected to range from $700 per ounce gold sold to $900
per ounce gold sold and include all site and head office costs. The
cost of the increased underground development to improve access and
build stope inventory is included in, and comprises, approximately
10% of the all-in sustaining costs. All-in sustaining costs do not
include the estimated US$25 million of capital cost required to
increase the mill capacity to 3,800 tpd. As operations
continue to ramp-up at the Brucejack Mine through 2018, an
increased focus will be placed on operational efficiency to reduce
costs, with a particular focus on optimizing mining operations,
reducing binder usage for paste backfill, establishing long-term
material and supply contracts and assessing the potential to
increase grind size.
REGIONAL
EXPLORATION
An
extensive regional exploration campaign was initiated in 2015 to
identify mineralized zones on the 1,250-square-kilometer,
wholly-owned property similar to the Valley of the Kings and Eskay
Creek deposits. A final data analysis is underway to refine
high-priority targets for drilling in spring 2018.
The
comprehensive regional exploration program has included the
collection of over 11,000 samples, regional mapping, prospecting,
airborne geophysics, ground geophysics, hyperspectral mapping, and
data compilation. To date, the program has resulted in the
identification of three distinct areas that have the potential to
host epithermal mineralization.
Several
gold and silver epithermal targets have been identified in the
American Creek Zone located approximately 25 kilometers southeast
of the Brucejack Mine. The American Creek valley is dominated by
kilometer-scale north-south structures and localized east-west
stockworks, which host elevated gold values of up to 62.5 grams of
gold per tonne in rocks of the Lower Hazelton Group, Unuk River
Formation, the same formation that hosts the Brucejack Mine.
Geophysical conductors identified in the American Creek Zone are
supported by coincident pathfinder minerals and trace elements
associated with epithermal mineralization.
The
Koopa Zone, located approximately 30 kilometers east-southeast of
the Brucejack Mine, is dominated by intensely quartz-sericite
pyrite altered Salmon River Formation volcanics and Quock Formation
sediments of the Upper Hazelton Group. As no previous work had been
completed at this zone, 2017 efforts focused on prospecting and
mapping, with ground geophysical surveys undertaken to assist with
interpretations at depth and in areas with limited exposure.
Prospective precious and base metal grab samples have been
collected across the zone returning results as high as 5.28 grams
of gold per tonne, 1,460 grams of silver per tonne, 9% lead and 25%
zinc with geochemical signatures similar to intrusion-related
epithermal gold deposits.
Approximately
15 kilometers east of the Brucejack Mine, numerous high-grade gold
boulders have been sampled at the Boulder Zone, with grades as high
as 19.25 grams of gold per tonne. Ground geophysics have been
conducted over the area to find the source of the boulders.
Alteration, geochemistry and Upper Hazelton Group rocks in the area
do indicate the boulders are potentially VMS related.
11
As
results continue to be received, review and analysis of the
extensive regional database continues with the expectation that
additional high- priority areas will be identified.
A
private placement of 329,000 flow-through common shares of the
Company at a price of C$15.20 per flow-through share was completed
in two tranches on June 30 and July 14, 2017 for total
gross proceeds of $3,891 (C$5,001). A portion of the proceeds of
the private placement of flow-through common shares were used to
fund the 2017 grass-roots exploration program. Planning is underway
for the 2018 grassroots exploration program on the wholly-owned
Bowser Claim Group, which is expected to begin in late
spring.
Kenneth
C. McNaughton, M.A.Sc., P.Eng., Chief Exploration Officer, Pretium
Resources Inc. is the QP responsible for the 2017 regional
grass-roots exploration program.
ADDITIONAL
CLAIMS
Our claims also include the Snowfield Project which borders
Brucejack to the north and is comprised of one mineral claim with
an area of 1,217 hectares. Since we acquired the Snowfield Project
in 2010, we have continued to carry out environmental studies in
conjunction with Brucejack. Snowfield represents a longer term gold
opportunity for our shareholders.
FINANCIAL
RESULTS
|
|
For the three months
ended
|
For the year
ended
|
||
|
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
|
|
Revenue
|
$107,058
|
-
|
$177,933
|
$-
|
|
|
|
|
|
|
|
Cost of
sales
|
80,168
|
-
|
125,080
|
-
|
|
|
|
|
|
|
|
Earnings from
mine operations
|
26,890
|
-
|
52,853
|
-
|
|
|
|
|
|
|
|
Corporate administrative costs
|
5,702
|
4,619
|
18,816
|
13,953
|
|
|
|
|
|
|
|
Operating
earnings (loss)
|
21,188
|
(4,619)
|
34,037
|
(13,953)
|
|
|
|
|
|
|
|
Interest and finance (expense)
income
|
(15,362)
|
213
|
(30,128)
|
909
|
|
Foreign
exchange gain
|
521
|
(2,463)
|
667
|
1,720
|
|
Loss on
financial instruments at fair value
|
(8,460)
|
(3,106)
|
(26,430)
|
(69,668)
|
|
|
|
|
|
|
|
Loss before
taxes
|
(2,113)
|
(9,975)
|
(21,854)
|
(80,992)
|
|
|
|
|
|
|
|
Current
income tax expense
|
(1,015)
|
-
|
(1,621)
|
-
|
|
Deferred income tax recovery
|
408
|
1,411
|
7,022
|
19,780
|
|
|
|
|
|
|
|
Net loss for the
year
|
$(2,720)
|
$(8,564)
|
$(16,453)
|
(61,212)
|
|
|
|
|
|
|
|
Other
comprehensive earnings (loss), net of tax
|
|
|
|
|
|
Items
that may be subsequently reclassified to earnings or
loss:
|
|
|
|
|
|
Foreign currency translation
adjustments
|
-
|
(19,099)
|
-
|
20,591
|
|
|
|
|
|
|
|
Comprehensive
loss for the year
|
$(2,720)
|
$(27,663)
|
$(16,453)
|
(40,621)
|
12
Three months ended December 31, 2017 compared to the three months
ended December 31, 2016
Net
loss for the three months ended December 31, 2017 was $2,720
compared to $8,564 for the comparable period ended December 31,
2016. The decrease in the loss was mainly attributed to earnings
generated from operations offset by an increase in interest and
finance expense. Earnings from mine operations were $26,890 for the
quarter ended December 31, 2017 compared to nil in the comparable
period as the Company did not have mine operations in
2016.
Net
comprehensive loss for the three months ended December 31, 2017 was
$2,720 compared to net comprehensive loss of $27,633 for the
comparable period ended December 31, 2016. In the comparable
period, comprehensive loss included $19,099 from the translation of
CAD functional currency results into the USD presentation currency.
Foreign currency translation adjustments will not recur in future
periods with the change in functional currency to USD commencing
January 1, 2017.
Revenue
Revenue
for the three months ended December 31, 2017 were $107,058 compared
to nil in the comparable period as the Company did not have mine
operations in 2016. Revenue includes a $594 gain on revaluation of
derivatives in trade receivables.
The
Company sold 86,514 ounces of gold at an average realized
price(1) of $1,211 per ounce
generating $104,794 in revenue from contracts with customers. The
Company sold 107,900 ounces of silver which generated $1,670 in
revenue. Treatment costs and refining charges associated with
concentrate sales, in the amount of $5,705, were included within
concentrate revenue. The average London Bullion Market Association
(“LBMA”) AM and PM market price over the quarter ended
December 31, 2017 was $1,276 per ounce.
Cost of sales
Cost of
sales for the three months ended December 31, 2017 was $80,168 or
$927 per ounce of gold sold(1). Cost of sales
includes production costs, depreciation and depletion, royalties
and selling costs and changes in inventories to reflect the
difference between produced and sold ounces.
Production costs
Production
costs for the three months ended December 31, 2017 were $58,521.
Production costs include mining, processing, maintenance, site
administration costs and site share-based
compensation.
A
majority of production costs were incurred in Canadian dollars.
During the quarter ended December 31, 2017, the average foreign
exchange rate was CAD$1.27 to US$1.00.
13
Depreciation and depletion
Depreciation
and depletion for the three months ended December 31, 2017 was
$17,272. The majority of the Company’s depreciation and
depletion is determined using the units of production method based
on total ounces mined over the estimated proven and probable
reserves.
Royalties and selling costs
During
the three months ended December 31, 2017, the Company incurred
$4,120 in selling costs and $255 in royalty expense. Selling costs
included transportation costs which were $3,502.
Total cash costs(1) and AISC(1)
Total
cash costs(1) for the three
months ended December 31, 2017 were $700 per ounce of gold sold.
AISC(1)
for the three months ended December 31, 2017 totaled $893 per ounce
of gold sold. Sustaining capital expenditures amounted to $4,533
(including $1,184 deferred development costs incurred during
production).
Corporate administrative costs
Corporate
administrative costs for the three months ended December 31, 2017
were $5,702 compared to $4,619 in the comparable
period.
Share-based
compensation for the three months ended December 31, 2017 was
$1,766 compared to $980 in the comparable period. The increase in
share-based compensation was due mainly to an increase in the
Company’s share price during the period.
Interest and finance expense (income)
During
the three months ended December 31, 2017, the Company incurred
interest and finance expense of $15,362 compared to interest income
of $213 in the comparable period. All interest and finance expenses
incurred prior to July 1, 2017 were capitalized as borrowing costs
to the Brucejack Mine.
The
Company incurred $13,288 in interest expense related to the credit
facility. The 7.5% per annum cash interest payable associated with
the credit facility is not settled until maturity.
The
Company incurred $1,970 in interest and finance expense related to
the convertible notes of which $567 was interest at a rate of 2.25%
per annum and $1,403 was accretion of the convertible
note.
14
Loss on financial instruments at fair value
The
September 2015 construction financing includes prepayment and term
extension options on the credit facility, the offtake obligation
and the stream obligation which are recorded on our statement of
financial position at fair value. During the three months ended
December 31, 2017, the changes in fair value of the offtake
obligation and stream obligation were a function of increases in
the gold price, increase in market expectations of future gold
prices, gold price volatility, a decrease in interest rates and
changes to the estimated production schedule.
The
change in fair value of the offtake obligation resulted in a loss
of $2,474 (2016 – gain of $435) and the change in fair value
of the stream obligation resulted in a loss of $5,712 (2016 -
$8,250). The prepayment and extension options in the senior secured
term credit facility decreased in value due to a decrease in
interest rate and the passage of time resulting in a loss of $274
(2016 - $255).
As the
stream is in substance a debt instrument, the effective interest on
the debt host was capitalized as a borrowing cost during the
construction of the Brucejack Mine. We capitalized nil (2016 -
$4,964) of interest on the stream obligation to mineral properties,
plant and equipment. The capitalized interest was reclassified from
the loss on financial instruments at fair value recorded in the
statement of loss.
Current and deferred income taxes
For the
three months ended December 31, 2017, current income tax expense
was $1,015 related to the 2% net current proceeds portion of the BC
Mineral Tax compared to nil in the comparable period.
During
the three months ended December 31, 2017, we recorded a deferred
income tax recovery of $408 compared to $1,411 for the comparable
period. The difference is related to the unrealized loss on
financial instruments at fair value including the offtake
obligation and stream obligation and recognition of 2017
non-capital losses.
Year ended December 31, 2017 compared to the year ended December
31, 2016
Net
loss for the year ended December 31, 2017 was $16,453 compared to
$61,212 for the comparable year ended December 31, 2016. The
decrease in the loss was mainly attributed to operating earnings
generated from production at the Brucejack mine and a considerable
decrease in the loss on financial instruments offset by an increase
in interest and finance expense.
Net
comprehensive loss for the year ended December 31, 2017 was $16,453
compared to net comprehensive loss of $40,621 for the comparable
year ended December 31, 2016. In the comparable year, comprehensive
income included $20,591 from the translation of CAD functional
currency results into the USD presentation currency. Foreign
currency translation adjustments will not recur in future periods
with the change in functional currency to USD commencing
January 1, 2017.
15
Revenue
Revenue
for the year ended December 31, 2017 were $177,933 compared to nil
in the comparable year as the Company did not have mine operations
in 2016. Revenue includes a $146 gain on revaluation of derivatives
in trade receivables.
The
Company sold 141,927 ounces of gold at an average realized
price(1) of $1,239 per ounce
generating $175,793 in revenue from contracts with customers. The
Company sold 127,746 ounces of silver which generated $1,994 in
revenue. Treatment costs and refining charges associated with
concentrate sales, in the amount of $6,749, were included within
concentrate revenue. The average LBMA AM and PM market price over
the six months ended December 31, 2017 was $1,277 per
ounce.
Cost of sales
Cost of
sales for the year ended December 31, 2017 was $125,080 or $881 per
ounce of gold sold(1). Cost of sales
includes production costs, depreciation and depletion, royalties
and selling costs and changes in inventories to reflect the
difference between produced and sold ounces.
Production costs
Production
costs for the year ended December 31, 2017 were $92,394. Production
costs include mining, processing, maintenance, site administration
costs and site share-based compensation.
A
majority of production costs were incurred in Canadian dollars.
During the year ended December 31, 2017, the average foreign
exchange rate was CAD$1.30 to US$1.00.
Depreciation and depletion
Depreciation
and depletion for the year ended December 31, 2017 was $25,378. The
majority of the Company’s depreciation and depletion is
determined using the units of production method based on total
ounces mined over the estimated proven and probable
reserves.
Royalties and selling costs
During
the year ended December 31, 2017, the Company incurred $5,968 in
selling costs and $1,340 in royalty expense. Selling costs included
transportation costs which were $5,398.
Total cash costs(1) and
AISC(1)
Total
cash costs(1) for the year ended
December 31, 2017 were $683 per ounce of gold sold.
AISC(1)
for the year ended December 31, 2017 totaled $852 per ounce of gold
sold. Sustaining capital expenditures amounted to $8,059 (including
$2,109 deferred development costs incurred during
production).
16
Corporate administrative costs
Corporate
administrative costs for the year ended December 31, 2017 were
$18,816 compared to $13,953 in the comparable year.
Salaries
and benefits for the year ended December 31, 2017 were $9,710 as
compared to $4,154 in the comparable year. The increase was
primarily due to a $4,469 provision related to the retirement
allowance clause in the employment agreement executed with the
Executive Chairman; refer to the “Related Party Transactions”
section below.
Loss on financial instruments at fair value
The
September 2015 construction financing includes prepayment and term
extension options on the credit facility, the offtake obligation
and the stream obligation which are recorded on our statement of
financial position at fair value. During the year ended December
31, 2017, the changes in fair value of the offtake obligation
and stream obligation were a function of increases in the gold
prices, increase in market expectations of future gold price, gold
price volatility, a decrease in interest rates and changes to the
estimated production schedule.
The
change in fair value of the offtake obligation resulted in a loss
of $11,926 (2016 - $19,931) and the change in fair value of the
stream obligation resulted in a loss of $23,000 (2016 - $63,023).
The prepayment and extension options in the senior secured term
credit facility decreased in value due to a decrease in interest
rate, the final advance on the credit facility and the passage of
time resulting in a loss of $1,624 (2016 - $5,792).
As the
stream is in substance a debt instrument, the effective interest on
the debt host was capitalized as a borrowing cost during the
construction of the Brucejack Mine. We capitalized $10,120 (2016 -
$19,078) of interest on the stream obligation to mineral
properties, plant and equipment. The capitalized interest was
reclassified from the loss on financial instruments at fair value
recorded in the statement of loss.
Current and deferred income taxes
For the
year ended December 31, 2017, current income tax expense was $1,621
related to the 2% net current proceeds portion of the BC Mineral
Tax compared to nil in the comparable period.
During
the year ended December 31, 2017, we recorded a deferred income tax
recovery of $7,022
compared to $19,780 for the comparable period. The difference is
related to the unrealized loss on financial instruments at fair
value including the offtake obligation and stream obligation and
recognition of 2017 non-capital losses.
LIQUIDITY AND
CAPITAL RESOURCES
The
Company manages liquidity risk by monitoring actual and projected
cash flows and matching the maturity profile of financial assets
and liabilities. Cash flow forecasting is performed regularly. The
Company monitors forecasts of the Company’s liquidity in the
form of cash and cash equivalents and requirements to ensure it has
sufficient cash to meet operational needs. Factors that can impact
the Company’s liquidity are monitored regularly and include
assumptions of gold market prices, foreign exchange rates,
production levels, operating costs and capital costs. Contractual
obligations and other commitments that could impact the
Company’s liquidity are detailed in the “Commitments” section of the
MD&A. We prepare annual expenditures budgets that are approved
by the Board of Directors.
17
Our
capital structure consists of debt instruments, convertible debt
instruments and equity attributable to common shareholders
comprised of issued share capital, contributed surplus, accumulated
comprehensive loss and accumulated deficit.
Liquidity and capital resources
Cash
generated by operations of $73,321 for the year ended December 31,
2017 reflects the first two quarters with revenue as we achieved
commercial production on July 1, 2017. For the year ended December 31, 2017, the
Company delivered 121,671 ounces of gold into the Offtake
agreement. The settlement of gold ounces resulted in a decrease in
the Offtake obligation of $1,543 due to the realized loss
attributable to the final settlement price in the defined pricing
period and the gold spot price on the date of
delivery.
Our
cash and cash equivalents as at December 31, 2017 totaled $56,285
decreasing $85,506 from $141,791 at December 31, 2016. The decrease
in cash is largely attributable to the completion of construction
of the Brucejack Mine offset by cash flow from operations in the
third and fourth quarters, the completed offering of convertible
notes and the final advance under the senior secured term credit
facility.
As at
December 31, 2017, the Company has working capital of $40,557
excluding the current portion of long-term debt. The current
portion of long-term debt includes the senior secured term credit
facility including principal and accumulated interest totaling
$365,890. The credit facility is due at maturity on
December 31, 2018; however, if necessary, the Company has
the option to extend the maturity date to December 31, 2019 upon
payment of an extension fee of 2.5% of the principal amount
including accumulated interest. The Company’s intention is to
re-finance the credit facility within the next year.
Working
capital items other than cash and cash equivalents consisted of
inventories of $25,673 (valued at cost), receivables and other of
$19,551 offset by accounts payable and accrued liabilities of
$60,438 and the current portion of long-term debt of $374,966
without considering the option to extend the credit facility to
December 31, 2019.
Receivables
and other is comprised primarily of $11,067 of trade receivables,
$6,166 of Goods and Services Tax refunds, and $2,064 of prepayments
and deposits.
Accounts
payable and accrued liabilities includes the employee benefit
liability ($4,783) and the current portion of the restricted share
unit liability ($2,219).
During
the year ended December 31, 2017, the exercise of share options
awards provided us with $13,894 (2016 – 16,735) of additional
liquidity.
18
Additional
sources of capital
In
2015, we completed the $540,000 construction financing with two
lending parties. The financing was comprised of a credit facility
for $350,000, a $150,000 prepayment under a callable gold and
silver stream agreement and a private placement of our common
shares for $40,000. The final advance of $100,000 under the credit
facility was completed on February 15, 2017.
On
February 14, 2017, we completed the offering of $100,000 aggregate
principal amount of 2.25% unsecured convertible senior
subordinated notes due 2022 which includes the exercise of the full
amount of the over-allotment option of $10,000 aggregate principal
amount of notes. The initial conversion rate for the notes is 62.5
common shares per $1 principal amount of notes, equivalent to an
initial conversion price of $16.00 per common share.
Cash flows
The
Company’s cash flows from operating, investing and financing
activities are summarized in the following table for the three
months and year ended December 31, 2017:
|
In thousands of USD
|
For the
three months ended
|
For the
year ended
|
||
|
|
December
31,
2017
|
December
31,
2016
|
December
31,
2017
|
December
31,
2016
|
|
|
|
|
|
|
|
Cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
Cash
generated by (used in) operations
|
$33,408
|
$(4,924)
|
$73,321
|
$(12,205)
|
|
Cash
used in investing activities
|
(36,392)
|
(121,382)
|
(370,501)
|
(387,245)
|
|
Cash
generated by financing activities
|
6,059
|
99,700
|
209,036
|
255,582
|
|
Effect
of foreign exchange rate changes on
cash and cash equivalents
|
(564)
|
(10,097)
|
2,638
|
5,366
|
|
Change in cash and cash equivalents
|
$2,511
|
$(36,703)
|
$(85,506)
|
$(138,502)
|
The
Company generated $33,408 and $73,321 in operating cash flows for
the three months and year ended December 31, 2017 compared to cash
used in operations of $4,924 and $12,205 for the comparable
periods. The increased cash flows generated from operations relates
to the financial results from operation of the Brucejack Mine which
achieved commercial production on
July 1, 2017.
Cash
used in investing activities for the three months and year ended
December 31, 2017 was $36,392 and $370,501, respectively (2016 -
$121,382 and $387,245, respectively). For the three months ended
December 31, 2017, the decrease in capital expenditures was the
result of the completion of construction activities at the
Brucejack Mine. For the year ended December 31, 2017, the investing
activities were comparable with 2016 as there was a higher level of
activity in the first half of 2017 as the Company moved toward the
completion of construction of the Brucejack Mine.
The
Company generated $6,059 and $209,036 in financing cash flow for
the three months and year ended December 31, 2017 (2016 - $99,700
and $255,582). For the year ended December 31, 2017, the
Company completed the final draw on the credit facility ($97,000)
and completed a convertible note financing for ($95,795) compared
to the comparable period where the Company completed equity
financings for $150,236 and the second draw on the credit facility
of $97,000.
19
SUMMARY OF
ANNUAL FINANCIAL RESULTS
|
In thousands of USD,
except per share data
|
2017
|
2016
|
2015
|
|
Revenue
|
$177,933
|
$-
|
$-
|
|
|
|
|
|
|
Earnings from mine operations(1)
|
$52,853
|
$-
|
$-
|
|
|
|
|
|
|
Net
loss
|
$(16,453)
|
$(61,212)
|
$(806)
|
|
|
|
|
.
|
|
Net
comprehensive loss
|
$(16,453)
|
$(40,621)
|
$(122,022)
|
|
|
|
|
|
|
Loss
per share - basic and diluted
|
$(0.09)
|
$(0.35)
|
$(0.01)
|
|
|
|
|
|
|
Total
assets
|
$1,671,537
|
$1,450,436
|
$1,069,986
|
|
|
|
|
|
|
Long-term
liabilities
|
$388,558
|
$514,835
|
$335,331
|
|
|
|
|
|
|
Cash
dividends
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$56,285
|
$141,791
|
$280,293
|
|
|
|
|
|
|
Mineral
properties, plant and equipment
|
$1,564,860
|
$1,270,457
|
$738,016
|
(1)
Refer to the
“Non-IFRS Financial Performance Measures” section for a
reconciliation of these amounts.
(2)
Long-term
liabilities does not include the current portion of the senior
secured credit facility in the amount of $365,890 as at December
31, 2017.
SUMMARY OF
QUARTERLY FINANCIAL RESULTS
The
following table contains selected quarterly information derived
from the Company’s unaudited quarterly financial statements
which are reported under IFRS applicable to interim financial
reporting.
|
In thousands of USD,
|
2017
|
2017
|
2017
|
2017
|
2016
|
2016
|
2016
|
2016
|
|
except per share data
|
Q4
|
Q3
|
Q2
|
Q1
|
Q4
|
Q3
|
Q2
|
Q1
|
|
Revenue
|
$107,058
|
$70,875
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from mine operations(1)
|
$26,890
|
$25,963
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$(2,720)
|
$(6,975)
|
$(2,495)
|
$(4,263)
|
$(8,564)
|
$(15,115)
|
$(26,656)
|
$(10,877)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
earnings
(loss)
|
$(2,720)
|
$(6,975)
|
$(2,495)
|
$(4,263)
|
$(27,663)
|
$(21,933)
|
$(29,075)
|
$38,050
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share -
|
|
|
|
|
|
|
|
|
|
basic
and diluted
|
$(0.01)
|
$(0.04)
|
$(0.01)
|
$(0.03)
|
$(0.05)
|
$(0.08)
|
$(0.15)
|
$(0.07)
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$1,671,537
|
$1,673,601
|
$1,649,593
|
$1,633,083
|
$1,450,436
|
$1,348,184
|
$1,324,613
|
$1,281,810
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
$388,558
|
$736,582
|
$709,269
|
$688,617
|
$514,835
|
$420,720
|
$400,759
|
$368,627
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$56,285
|
$53,774
|
$55,311
|
$171,945
|
$141,791
|
$178,494
|
$285,664
|
$370,051
|
|
|
|
|
|
|
|
|
|
|
|
Mineral
properties, plant
|
|
|
|
|
|
|
|
|
|
and
equipment
|
$1,564,860
|
$1,566,889
|
$1,558,652
|
$1,435,202
|
$1,270,457
|
$1,120,745
|
$989,038
|
$862,206
|
(1)
Refer to the
“Non-IFRS Financial Performance Measures” section for a
reconciliation of these amounts.
(2)
Long-term
liabilities does not include the current portion of the senior
secured credit facility in the amount of $365,890 as at December
31, 2017.
20
On July
1, 2017, the Company declared commercial production at the
Brucejack Mine. As a result, in Q3 2017, the Company generated
revenue from the sale of gold and silver for the first time. In the
comparable periods, there was no revenue as we were in the
construction phase at the Brucejack Mine.
For the
periods prior to January 1, 2017, the comprehensive earnings (loss)
amount is more volatile due to our change in presentation and
functional currency from CAD to USD. The Company applied the change
to USD presentation currency retrospectively and restated the
comparative financial information. The statements of financial
position for each period presented have been translated from the
CAD functional currency to the new USD presentation currency at the
rate of exchange prevailing at the respective financial position
date with the exception of equity items which have been translated
at accumulated historical rates from the Company’s date of
incorporation in 2010. The statements of loss and comprehensive
loss were translated at the average exchange rate for the reporting
period, or at the exchange rate prevailing at the date of
transactions. Exchange differences arising in 2016 on translation
from CAD functional currency to USD presentation currency have been
recognized in other comprehensive loss.
COMMITMENTS
The
following table provides our contractual obligations as of December
31, 2017:
|
In thousands of USD
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
Total
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
Purchase
commitments
|
$5,399
|
$-
|
$-
|
$-
|
$5,399
|
|
Decommissioning
and restoration provision
|
-
|
318
|
-
|
18,118
|
18,436
|
|
Office
lease
|
573
|
96
|
-
|
-
|
669
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
Repayment
of credit facility(1)
|
423,776
|
-
|
-
|
-
|
423,776
|
|
Repayment
of convertible notes
|
2,250
|
6,750
|
101,116
|
-
|
110,116
|
|
|
$431,998
|
$7,164
|
$101,116
|
$18,118
|
$558,396
|
(1)
The credit facility
matures December 31, 2018 and is subject to an extension for one
year, at the Company’s option upon payment of an extension
fee of 2.5% of the principal amount including accumulated
interest.
(a) Commitments – Brucejack Mine
The
Company and the Nisga’a Nation have entered into a
comprehensive Cooperation and Benefits Agreement in respect of the
Brucejack Mine. Under the terms of the Agreement, the Nisga’a
Nation will provide ongoing support for the development and
operation of Brucejack with participation in its economic
benefits.
The
Brucejack Mine is subject to a 1.2% net smelter returns royalty on
production in excess of cumulative 503,386 ounces of gold and
17,907,080 ounces of silver.
21
(b) Commitments – Offtake and stream obligation
In
addition, pursuant to the stream arrangement, we are obligated to
deliver, subject to prepayment options, 8% of up to 7,067,000
ounces of refined gold and 8% of up to 26,297,000 ounces of
refined silver commencing on January 1, 2020 and a
payment of $20,000.
Under
the offtake agreement, we are obligated to sell 100% of refined
gold (in excess of any delivered ounces pursuant to the stream
obligation) up to 7,067,000 ounces. The final purchase price to be
paid by the purchaser will be, at the purchaser’s option, a
market referenced gold price in US dollars per ounce during a
defined pricing period before and after the date of each
sale.
CONTINGENCIES
The
Company is involved in various claims, litigation and other matters
in the ordinary course and conduct of business. Some of these
pending matters will take a number of years to resolve. While it is
not possible to determine the ultimate outcome of such actions at
this time, and inherent uncertainties exist in predicting such
outcomes, it is the Company’s belief that the ultimate
resolution of such actions is not reasonably likely to have a
material adverse effect on its consolidation financial position or
results of operations.
Class action lawsuits
Following
the announcement on October 9, 2013 of the resignation of
Strathcona Mineral Services Ltd. (“Strathcona”), the
consultant responsible for overseeing and reporting on the
10,000-tonne bulk sample, and the announcement of
Strathcona’s reasons for resigning on October 22, 2013, the
price of our shares on the TSX and the NYSE had a significant drop
in value.
Canadian class action
On
October 29, 2013, David Wong, a shareholder of the Company, filed a
proposed class action against the Company, Robert Quartermain (a
director, the President and the CEO of the Company) and Snowden
Mining Industry Consultants Ltd. (the “Wong Action”).
The Wong Action was filed in the Ontario Superior Court of
Justice.
The
Wong Action claims C$60,000 in general damages on behalf of a class
of persons, wherever they reside, who acquired the Company’s
securities between July 23, 2013 and October 21, 2013. Snowden
Mining Industry Consultants Ltd. is no longer a defendant in the
Wong Action.
The
plaintiff in the Wong Action brought a motion for leave to commence
an action under the secondary market provisions in Part XXIII.1 of
the Ontario Securities Act. The motion was heard on
May 29 and 30, 2017. The Court allowed the
plaintiff’s motion on July 20, 2017. The Company was denied
leave to appeal this decision.
The
Company believes that the allegations made against it in the Wong
Action are meritless and will vigorously defend them, although no
assurance can be given with respect to the ultimate outcome. The
Company has not accrued any amounts for the Wong
Action.
22
United States of America Class Actions
Between
October 25, 2013 and November 18, 2013, five putative class action
complaints were filed in the United States against the Company and
certain of its officers and directors, alleging that defendants
violated the United States securities laws by misrepresenting or
failing to disclose material information concerning the Brucejack
Mine. All five actions were filed in the United States District
Court for the Southern District of New York (the
“Court”).
In
January 2014, the Court ordered that these actions be consolidated
into a single action, styled In re Pretium Resources Inc.
Securities Litigation, Case No. 13-CV-7552. The Court
appointed as lead plaintiffs in the consolidated action three
individuals who are suing on behalf of a putative class of
shareholders who purchased or otherwise acquired the
Company’s common shares between June 11, 2013 and
October 22, 2013.
In
March 2014, the plaintiffs filed a consolidated amended class
action complaint, which the Company moved to dismiss in May 2014.
In July 2014, the plaintiffs filed a second consolidated amended
class action complaint (“Second Amended Complaint”).
The Company moved to dismiss the Second Amended Complaint on
September 5, 2014. Plaintiffs filed their Opposition to the
Company’s Motion to Dismiss on October 20, 2014, and the
Company filed a reply brief on November 19, 2014.
In June
2017, the Court granted the Company’s Motion to Dismiss the
Second Amended Complaint. The Court ruled in favour of the Company
and the officers and directors named as defendants on all claims
and ordered the case closed. The plaintiffs filed their Notice of
Appeal from the decision, to the United States Court of Appeals for
the Second Circuit, on July 10, 2017. The plaintiff’s opening
brief on appeal was filed on October 2, 2017. The Company filed its
response brief on December 8, 2017 and the plaintiffs
filed their reply brief on December 22, 2017. Oral argument on the
plaintiff’s appeal is scheduled to be heard by the Second
Circuit on March 16, 2018.
The
Company believes that the allegations made against it in these
actions are meritless and will vigorously defend the matter,
although no assurance can be given with respect to the ultimate
outcome of such proceedings. The Company has not accrued any
amounts for these class actions.
Construction claims
On
April 24, 2017, Bear Creek Contracting Ltd. (“Bear
Creek”) filed a Notice of Civil Claim against the Company
(the “Bear Creek Action”) alleging that the Company
owes Bear Creek C$14,563 in general damages in connection with work
undertaken at the Brucejack Mine transmission line. The Bear Creek
Action was filed in the Supreme Court of British Columbia. The
Company filed a Response to Civil Claim on July 31, 2017, opposing
all of the claims and allegations made. Notices of Civil Claim have
also been filed by Blue Max Drilling Inc. (April 24, 2017) and More
Core Diamond Drilling Services Ltd. (March 27, 2017), who
were subcontractors working under Bear Creek. Responses to Civil
Claim have been filed in those actions and the claims are
understood to be subsumed in the amount claimed by Bear Creek. It
is expected that the three actions will be joined.
23
The
Company believes that the allegations made against it in the Bear
Creek Action, and the other actions, are meritless and will
vigorously defend the matter, although no assurance can be given
with respect to the ultimate outcome of such proceedings. The
Company has not accrued any amounts for any of the
actions.
OFF-BALANCE SHEET
ARRANGEMENTS
The
Company does not have any off-balance sheet
arrangements.
RELATED PARTY
TRANSACTIONS
We have
entered into employment agreements with each of our Executive
Chairman (our “Exec Chair”), our President and Chief
Executive Officer (our “CEO”), our Executive Vice
President and Chief Financial Officer (our “CFO”), our
Executive Vice President, Corporate Affairs and Sustainability (our
“EVP Corporate”) and our Vice President and Chief
Exploration Officer (our “CExO”).
Effective
January 1, 2017, under his employment agreement, the Exec Chair is
entitled to a retirement allowance which is due and payable in full
in the event the Exec Chair terminates his employment with the
Company. As a result, the entire retirement allowance was expensed
in the amount of $4,469 (C$6,000) and recorded as a current
liability. The Exec Chair is also entitled, on termination without
cause, including following a change of control, to twenty-four
months’ salary, the retirement allowance and twice the target
bonus.
Effective
January 1, 2018, under the employment agreements, the CEO, CFO,
CExO and EVP Corporate receive a base salary, extended benefits and
are eligible for an annual performance based bonus and long-term
incentive awards determined at the discretion of our Board of
Directors.
The
CEO, CFO, CExO and EVP Corporate are also entitled, on termination
without cause, including following a change of control, to
twenty-four months’ salary and twice the average annual
performance bonus earned in the three years immediately preceding
termination.
CRITICAL
ACCOUNTING ESTIMATES AND JUDGMENTS
The
preparation of financial statements requires the use of accounting
estimates. It also requires management to exercise judgment in the
process of applying its accounting policies. Estimates and
judgments are regularly 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 accounting estimates that the
Company has made in the preparation of the financial statements
including those estimates that could result in a material effect in
the next financial year on the carrying amounts of assets and
liabilities:
24
Mineral reserves and resources
The
Company estimates its mineral reserves and resources based on
information compiled by qualified persons as defined in accordance
with National Instrument 43-101, Standards of Disclosure for Mineral
Projects requirements. The estimation of ore reserves and
resources requires judgment to interpret available geological data
then select an appropriate mining method and establish an
extraction schedule. It also requires assumptions about future
commodity prices, exchange rates, production costs and recovery
rates. There are uncertainties inherent in estimating mineral
reserves and resources and assumptions that are valid at the time
of estimation and may change significantly when new information
becomes available. New geological data as well as changes in the
above assumptions may change the economic status of reserves and
may, ultimately, result in the reserves being revised.
Changes
in the proven and probable mineral reserves and measured and
indicated and inferred mineral resources estimates may impact the
carrying value of mineral properties, plant and equipment, the
calculation of depletion and depreciation expense, measurement of
the decommissioning and site restoration provision and recognition
of deferred tax amounts.
Impairment of mineral properties, plant and equipment
The
application of the Company’s accounting policy for impairment
of mineral properties, plant and equipment requires judgment to
determine whether indicators of impairment exist. The review of
impairment indicators includes consideration of both external and
internal sources of information, including factors such as market
and economic conditions, metal prices and forecasts, capital
expenditure requirements, future operating costs and production
volumes. Management has assessed impairment indicators on the
Company’s mineral properties, plant and equipment and has
concluded that no impairment indicators exist as of December 31,
2017.
Impairment of exploration and evaluation assets
The
application of the Company’s accounting policy for impairment
of exploration and evaluation assets requires judgment to determine
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 and evaluation of the results of exploration and
evaluation activities up to the reporting date. Management has
assessed impairment indicators on the Company’s exploration
and evaluation assets and has concluded that no impairment
indicators exist as of December 31, 2017.
Fair value of derivatives and other financial
liabilities
The
fair values of financial instruments that are not traded in an
active market are determined using valuation techniques. Management
uses its judgment to select a method of valuation and makes
estimates of specific model inputs that are based on conditions
existing at the end of each reporting period.
25
The
valuation of the convertible notes at inception was completed using
a discounted cash flow analysis that required various estimates and
assumptions, including the discount rate for a similar
non-convertible instrument.
Recovery of potential deferred tax assets
The
Company has carry-forward losses and other tax attributes that have
the potential to reduce tax payments in future years.
Judgment
is required in determining whether deferred tax assets are
recognized in the consolidated financial statements. Deferred tax
assets are recognized for all deductible temporary differences,
carry-forward of unused tax credits and tax losses to the extent it
is probable future taxable earnings will be available against which
they can be utilized. The carrying values of the deferred tax
assets are reviewed at each statement of financial position date
and may be reduced if it is no longer probable that sufficient
taxable earnings will be available to benefit from all or part of
the assets. Estimates of future taxable earnings are based on
forecasted cash flows from operations and the application of
existing tax laws.
Functional currency
The
determination of functional currency requires judgment where the
operations of the Company are changing or currency indicators are
mixed. Additionally, the timing of a change in functional currency
is a judgment as the balance of currency indicators may change over
time.
Commercial production
The
determination of when a mine is in the condition necessary for it
to be capable of operating in the manner intended by management
(referred to as “commercial production”) is a matter of
significant judgement. In making this determination, management
considers specific facts and circumstances. These factors include,
but are not limited to, whether the major capital expenditures to
bring the mine to the condition necessary for it to be capable of
operating in the manner intended by management have been completed,
completion of a reasonable period of commissioning and consistent
operating results being achieved at a pre-determined level of
design capacity for a reasonable period of time. The Company
achieved commercial production for the Brucejack Mine on July 1,
2017.
CHANGES
IN ACCOUNTING POLICIES
Our
significant accounting policies are presented in Note 3 to the
audited consolidated financial statements for the year ended
December 31, 2017. Changes in accounting policies included the
change in the Company’s approach to foreign currency
translation and additional accounting policies required as the
Brucejack Mine moved into production.
26
Functional currency
Items
included in the financial statements of each consolidated entity
are measured using the currency of the primary economic environment
in which the entity operates (the “functional
currency”). During the first quarter of 2017, the Company
commenced mine commissioning activities and is now generating
United States dollar (“USD”) cash flows from gold sales
as the Brucejack Mine is in production. Additionally, the Company
completed a USD convertible debt financing in the first quarter of
2017 for the purpose of funding working capital through the
commissioning process. As a result of these changes in underlying
transactions, events and circumstances, the functional currency of
the Company and its subsidiaries was reassessed. The functional
currency of the Company and its subsidiaries changed from the
Canadian dollar (“CAD” or “C$”) to the USD
commencing on January 1, 2017. The change in functional
currency was accounted for on a prospective basis, with no impact
of this change on prior year comparative information.
Presentation currency
On
January 1, 2017, the Company elected to change its presentation
currency from CAD to USD. The change in presentation currency is to
better reflect the Company’s business activities and to
improve investors’ ability to compare the Company’s
financial results with other publicly traded businesses in the
mining industry. The Company applied the change to USD presentation
currency retrospectively and restated the comparative financial
information as if the new presentation currency had always been the
Company’s presentation currency.
From
January 1, 2017, the USD presentation currency is consistent with
the functional currency of the Company. For periods prior to
January 1, 2017, the statements of financial position for each
period presented have been translated from the CAD functional
currency to the new USD presentation currency at the rate of
exchange prevailing at the respective financial position date with
the exception of equity items which have been translated at
accumulated historical rates from the Company’s date of
incorporation in 2010. The statements of loss and comprehensive
loss were translated at the average exchange rates for the
reporting period, or at the exchange rate prevailing at the date of
transactions. Exchange differences arising in 2016 on translation
from the CAD functional currency to the USD presentation currency
have been recognized in other comprehensive loss and accumulated as
a separate component of equity.
NEW ACCOUNTING
POLICIES
Our
significant accounting policies are presented in Note 3 to the
audited consolidated financial statements for the year ended
December 31, 2017. New accounting policies adopted during the year
related to the Company’s transition from construction into
production.
Inventories
Ore
stockpiles, in-circuit and finished metal inventory (gold and
silver) are valued at the lower of weighted average production cost
and net realizable value. Production costs include the cost of raw
materials, direct labour, mine-site overhead expenses and
applicable depreciation and depletion of mineral properties, plant
and equipment. Net realizable value is calculated as the estimated
price at the time of sale based on prevailing and long-term metal
prices less estimated future production costs to convert the
inventories into saleable form and estimated costs to
sell.
27
Ore
stockpile inventory represents ore on the surface or underground
that has been extracted from the mine and is available for further
processing. In-circuit inventory represents material in the mill
circuit that is in the process of being converted into a saleable
form. Finished metal inventory represents gold and silver doré
and concentrate located at the mine, in transit to customers and at
refineries.
Materials
and supplies inventories are valued at the lower of weighted
average cost and net realizable value. Replacement costs of
materials and spare parts are generally used as the best estimate
of net realizable value.
Any
write-downs of inventory to net realizable value are recorded
within cost of sales in the consolidated statement of loss. If
there is a subsequent increase in the value of inventory, the
previous write-downs to net realizable value are reversed up to
cost to the extent that the related inventory has not been
sold.
Mineral properties
Mineral
properties include the fair value attributable to mineral reserves
and resources acquired in a business combination or asset
acquisition, underground mine development costs and previously
capitalized exploration and evaluation costs. Upon commencement of
production, a mineral property is depleted on a unit-of-production
method. Unit-of-production depletion rates are determined using
gold ounces mined over the estimated recoverable proven and
probable reserves at the mine.
Development costs incurred during production
The
Company incurs development costs to build new raises and ramps
(vertical development) that enable the Company to physically access
ore underground. These underground development costs are
capitalized as incurred. Capitalized underground development costs
incurred to enable access to specific areas of the mine and which
only provide an economic benefit over a specific period of mining
are depleted using a unit-of-production method determined using
gold ounces mined over the estimated proven and probable reserves
in that particular area of the mine.
Plant and equipment
Plant
and equipment are measured at cost less accumulated depreciation
and accumulated impairment losses. The initial cost of an asset is
comprised of its purchase price or construction cost, any costs
directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management and the estimated future cost of dismantling
and removing the asset. The purchase price or construction cost is
the fair value of consideration given to acquire the
asset.
28
Depreciation
of plant and equipment commences when the asset has been fully
commissioned and is available for its intended use.
A
majority of mine and site infrastructure assets, including
buildings, roads and transmission lines are depreciated using a
unit-of-production method over the life of mine. Depreciation is
determined each period using gold ounces mined over the estimated
proven and probable reserves of the mine.
Depreciation
of other assets, including those ancillary to the Brucejack Mine
are calculated using the straight-line method to allocate cost to
the residual value over the estimated useful lives, as
follows:
|
Asset class
|
Estimated useful life
|
|
Mine
and mill equipment
|
5
– 18 years
|
|
Light
vehicles
|
3
– 5 years
|
|
Office
and computer equipment
|
3
– 5 years
|
|
Leasehold
improvements
|
Term of
lease
|
When
significant components of an asset have different useful lives,
depreciation is calculated on each separate component. Each asset
or component’s estimated useful life has due regard to both
its own physical life limitations and the present assessment of
economically recoverable reserves of the Brucejack
Mine.
Depreciation
methods and estimated useful lives and residual values are reviewed
annually. Changes in estimates are accounted for
prospectively.
Expenditures
on major maintenance or repairs includes the cost of the
replacement of parts of assets and overhaul costs. Where an asset
or part of an asset is replaced and it is probable that future
economic benefits associated with the item will be available to the
Company, the expenditure is capitalized and the carrying amount of
the item replaced is derecognized. Similarly, overhaul costs
associated with major maintenance are capitalized and depreciated
over their useful lives where it is probable that the future
economic benefits will be available and any remaining carrying
amounts of the cost of previous overhauls are derecognized. All
other costs are expensed as incurred.
An item
of plant and equipment is derecognized upon disposal or when no
future economic benefits are expected to arise from the continued
use of the asset. Any gain or loss arising on disposal of the
asset, determined as the difference between the net disposal
proceeds and the carrying amount of the asset, is recognized in the
consolidated statement of loss.
Revenue recognition
Revenue
is generated from the sale of refined gold and silver and gold and
silver bearing concentrates. The Company has adopted IFRS 15,
Revenue from Contracts with
Customers, effective from the commencement of operations at
the Brucejack Mine on July 1, 2017.
29
The
Company produces doré and concentrates which contain both gold
and silver. The doré is further processed to produce refined
metals for sale. The concentrates may be sold to smelters in
concentrate form or further processed to produce refined metals for
sale. The Company’s performance obligations relate primarily
to the delivery of gold and silver to its customers. For gold, the
Company is required to deliver gold equivalent to 100% of
production up to 7,067,000 ounces into an offtake
agreement.
Revenue
is recognized when control is transferred to the customer. Control
is achieved when a product is delivered to the customer, the
customer has full discretion over the product and there is no
unfulfilled obligation that could affect the customer’s
acceptance of the product.
Control
over the refined gold or silver produced from doré or
concentrate is transferred to the customer and revenue recognized
upon delivery to the customer’s bullion account. Control over
the gold and silver bearing concentrates is transferred to the
customer and revenue recognized at the time the Company elects to
settle the sale directly with the smelter.
For
each physical shipment of doré, 90% of the estimated contained
gold is available to be delivered to the offtaker’s bullion
account within approximately 10 days of arrival at the refinery.
The balance of the contained gold is delivered the offtaker’s
bullion account following the final processing
outturn.
For
each physical shipment of doré, 100% of the contained silver
is sold upon the final processing outturn. Silver revenue is
recorded at the spot price on the date of sale.
For
each physical shipment of concentrate, where the Company receives
the refined gold, 90% of the estimated contained gold is available
to be delivered to the customer’s bullion account within
approximately 15 – 20 days after the bill of lading date. The
balance of the contained gold is delivered to the customer’s
bullion account following the final processing
outturn.
For
each physical shipment of gold and silver bearing concentrate that
is sold to a smelter in concentrate form, control of the
concentrate passes to the customer at the time the Company elects
to settle the sale directly with the smelter. Revenue from these
sales are recognized net of treatment costs and refining
charges.
Revenue
is required to be recognized at an amount that reflects the
consideration to which an entity expects to be entitled in exchange
for transferring the product to the customer.
Sales
of refined gold and silver are delivered directly into the offtake
agreement and recorded at the spot price on the date of delivery.
The final price to be paid by the purchaser will be, at the
purchaser’s option, a market referenced gold price in US
dollars per ounce during a defined pricing period around the date
of each sale. The difference between the spot price on the date of
sale and the price paid by the purchaser reflects the settlement of
a portion of the offtake obligation previously recorded on the
statement of financial position. The Company receives payment for
90% of the value of each gold sale within 2 days of the date of
sale. A final payment for 10% of the value of each gold sale,
taking into account the purchaser’s pricing option, is
received on the 7th day after the date
of sale.
30
Concentrate
sales which are cash settled directly with the smelter are recorded
at the provisional price based on the estimated forward price to
the date of final settlement. The final purchase price for these
gold sales will be the average price for the month following the
bill of lading date. Adjustments are made in subsequent periods to
the customer receivables for these sales transactions based on
movements in market prices prior to final pricing. As a result,
concentrate sales receivables contain an embedded derivative which
is adjusted each period to reflect forward market prices to the
estimated settlement date. These changes in fair value are included
in revenue on the statement of loss. The Company receives payment
for 90% of the value of each concentrate shipment 15 days after the
loading of the material onto a ship. A final payment for 10% of the
value of each sale is received upon completion of final assays and
final pricing based on the defined pricing period.
NEW ACCOUNTING
STANDARDS AND RECENT PRONOUNCEMENTS
New
accounting standards and recent pronouncements were disclosed in
note 5 of the consolidated financial statements for the year ended
December 31, 2017. The following new standards are expected to have
a significant effect on the consolidated financial
statements:
●
IFRS 9,
Financial Instruments,
addresses the classification, measurement and recognition of
financial assets and financial liabilities. It replaces the
guidance in IAS 39, Financial
Instruments: Recognition and Measurement that relate to the
classification and measurement of financial instruments. IFRS 9
retains but simplifies the mixed measurement model and establishes
three primary measurement categories for financial assets:
amortized cost, fair value through other comprehensive earnings and
fair value through profit or loss (“FVTPL”). The basis
of classification depends on the entity’s business model for
managing its financial instruments and the contractual cash flow
characteristics of the instrument. For financial liabilities, the
standard retains most of the IAS 39 requirements. The main change
for liabilities is that, in cases where the fair value option is
taken for financial liabilities, the part of a fair value change
due to an entity’s own credit risk is recorded in other
comprehensive loss rather than in net loss. IFRS 9 is effective for
annual periods beginning on or after January 1, 2018, with early
adoption permitted. The Company has completed its assessment of the
impact of IFRS 9. Management expects a reclassification of the
portion of the gain (loss) on financial instruments at fair value
for the stream obligation related to the Company’s own credit
risk from net loss to comprehensive loss.
●
IFRS 16,
Leases addresses accounting
for leases and lease obligations. It replaces the existing leasing
guidance in IAS 17, Leases.
The objective of the new standard is to report all leases on the
statement of financial position and to define how leases and lease
liabilities are measured. IFRS 16 is effective from January 1,
2019. The Company is in the process of evaluating all lease
agreements to determine the impact of IFRS 16. The Company expects
that the recognition of leases on the statement of financial
position will result in an increase in the amount recorded as
leased assets and lease obligations.
There
are no other IFRS’s or International Financial Reporting
Interpretations Committee interpretations that are not yet
effective or early adopted that are expected to have a material
impact on the Company.
31
FINANCIAL INSTRUMENTS
Financial assets
We have
the following financial assets: cash and cash equivalents,
receivables and other, embedded derivatives associated with the
senior secured term credit facility and restricted
cash.
Cash
and cash equivalents and restricted cash are classified as loans
and receivables and are recorded at amortized cost. Interest income
is recognized by applying the effective interest rate.
Receivables
and other are classified as loans and receivables and accordingly
are recorded initially at fair value and subsequently measured at
amortized cost using the effective interest rate method, less any
impairment losses.
Derivative
instruments, including embedded derivatives, are recorded at FVTPL
and, accordingly, are recorded on the statement of financial
position at fair value. Unrealized gains and losses on derivatives
held for trading are recorded in earnings (loss) for the year. Fair
values for derivative instruments are determined using valuation
techniques, with assumptions based on market conditions existing at
the statement of financial position date or settlement date of the
derivative.
Financial liabilities
We have
the following financial liabilities: accounts payable and accrued
liabilities, the debt portion of the convertible notes and debt
instruments including the senior secured term credit facility,
offtake obligation and stream obligation.
Accounts
payable and accrued liabilities, the debt portion of the
convertible notes and the credit facility are classified as other
financial liabilities and are recognized initially at fair value,
net of any directly attributable transaction costs. Subsequent to
initial recognition these financial liabilities are held at
amortized cost using the effective interest method.
Derivative
instruments, including embedded derivatives, such as the offtake
obligation and stream obligation are recorded at fair value through
profit or loss and, accordingly, are recorded on the statement of
financial position at fair value. Fair values for derivative
instruments are determined using valuation techniques, with
assumptions based on market conditions existing at the statement of
financial position date or settlement date of the
derivative.
Financial risk management
We are
exposed to a variety of financial risks: market risk (including
currency risk, interest rate risk and commodity price risk), credit
risk and liquidity risk from our financial
instruments.
Risk
management is the responsibility of management and is carried out
under policies approved by the Board of Directors. Material risks
are monitored and are regularly discussed with the Audit Committee
and Board of Directors.The type of risk exposure and the way in
which such exposure is managed is provided as follows:
32
Market risk
Currency risk
The
Company is subject to currency risk on financial instruments which
are denominated in currencies that are not the same as the
functional currency of the entity that holds them. A significant
portion of the Company’s mine production costs, capital
expenditures and corporate administrative costs are denominated in
CAD. Consequently, fluctuations in the USD exchange rate against
the CAD increases the volatility of cost of sales and corporate
administrative costs. Exchange gains and losses would impact
earnings (loss).
The
Company is exposed to currency risk through cash and cash
equivalents, receivables and other excluding trade receivables,
restricted cash and accounts payable and accrued liabilities which
are denominated in CAD.
The
Company has not hedged its exposure to currency fluctuations at
this time.
Interest rate risk
The
Company is subject to interest rate risk with respect to its
investments in cash and cash equivalents. The Company’s
current policy is to invest cash at floating rates of interest and
cash reserves are to be maintained in cash and cash equivalents in
order to maintain liquidity, while achieving a satisfactory return
for shareholders. Fluctuations in interest rates when cash and cash
equivalents mature impact interest income earned.
The
Company is also subject to interest rate risk with respect to the
fair value of long-term debt, in particular, the fair value of the
embedded derivatives under the senior secured term credit facility,
the offtake obligation and the stream obligation, which are
accounted for at FVTPL.
Commodity price risk
The
Company is subject to commodity price risk from fluctuations in the
market prices for gold and silver. Commodity price risks are
affected by many factors that are outside the Company’s
control including global or regional consumption patterns, the
supply of and demand for metals, speculative activities, the
availability and costs of metal substitutes, inflation and
political and economic conditions.
The
financial instruments impacted by commodity prices are the trade
receivables, the offtake obligation (a derivative liability) and
the stream obligation.
Price
adjustments are made in subsequent periods to the customer
receivables for concentrate sales transactions based on movements
in market prices prior to final pricing. As a result, concentrate
sales receivables contain an embedded derivative which is adjusted
each period to reflect forward market prices to the estimated
settlement date.
The
Company has not hedged the price of any commodity at this time as
it is not permitted to hedge under the terms of the offtake and
stream obligation.
33
Credit risk
Credit
risk is the risk of potential loss to the Company if the
counterparty to a financial instrument fails to meet its
contractual obligations. The Company's credit risk is primarily
attributable to its liquid financial assets including cash and cash
equivalents, trade receivables, tax receivables and restricted
cash.
The
Company limits its exposure to credit risk on financial assets
through investing its cash and cash equivalents and restricted cash
with high-credit quality financial institutions. Management
believes the risk of loss related to these deposits to be low. The
Company continually evaluates changes in the status of its
counterparties.
The
Company sells its gold and silver to its lenders, refineries
located in Canada and the United States and a trading company. The
Company has not had any defaults from its counterparties. The
Company is not economically dependent on a limited number of
customers for the sale of its gold and silver as its products can
be sold through numerous world-wide commodity markets.
Liquidity risk
Liquidity
risk is the risk that we will not be able to meet our financial
obligations as they fall due. We try to ensure that there is
sufficient capital in order to meet short-term business
requirements, after taking into account cash flows from operations
and our holdings of cash and cash equivalents. Our cash and cash
equivalents are currently invested in business and savings accounts
with financial institutions of high credit quality which are
available on demand by us for our programs. To the extent we do not
believe there is sufficient liquidity to meet obligations, we will
consider securing additional debt or equity funding. For further
discussion, refer to the “Liquidity and Capital Resources”
section.
EVENTS AFTER REPORTING
DATE
The
Company does not have any events after the reporting date to
disclose.
NON-IFRS FINANCIAL PERFORMANCE
MEASURES
The
Company has included certain non-IFRS measures in this MD&A.
The Company believes that these measures, in addition to measures
prepared in accordance with IFRS, provide investors an improved
ability to evaluate the underlying performance of the Company and
to compare it to information reported by other companies. The
non-IFRS measures are intended to provide additional information
and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with IFRS. These
measures do not have any standardized meaning prescribed under
IFRS, and therefore may not be comparable to other
issuers.
34
Total cost of sales and cash costs
Total
cash costs is a common financial performance measure in the gold
mining industry but has no standard meaning. The Company reports
total cash costs on a gold ounce sold basis. The Company believes
that, in addition to measures prepared in accordance with IFRS,
such as revenue, certain investors can use this information to
evaluate the Company’s performance and ability to generate
operating earnings and cash flow from its mining operations.
Management uses this metric as an important tool to monitor
operating cost performance.
Total
cash costs include cost of sales such as mining, processing,
maintenance and site administration, royalties and selling costs
and changes in inventories less non-cash depreciation and
depletion, site share-based compensation and silver revenue divided
by gold ounces sold to arrive at total cash costs per ounce of gold
sold. Other companies may calculate this measure
differently.
The
following table reconciles this non-IFRS measure to the most
directly comparable IFRS measure disclosed in the financial
statements.
|
In thousands of USD,
|
For the
three months ended
|
For the
year ended
|
||
|
except for per ounce data
|
December
31,
2017
|
December
31,
2016
|
December
31,
2017
|
December
31,
2016
|
|
|
|
|
|
|
|
Gold
ounces sold
|
86,514
|
-
|
141,927
|
-
|
|
|
|
|
|
|
|
Cost of sales per ounce sold reconciliation
|
|
|
|
|
|
Cost
of sales
|
$80,168
|
$-
|
$125,080
|
$-
|
|
Cost
of sales per ounce of gold sold
|
$927
|
$-
|
$881
|
$-
|
|
|
|
|
|
|
|
Total cash costs reconciliation
|
|
|
|
|
|
Cost
of sales
|
$80,168
|
$-
|
$125,080
|
$-
|
|
Less:
Depreciation and depletion
|
(17,272)
|
-
|
(25,378)
|
-
|
|
Less:
Site share-based compensation
|
(703)
|
-
|
(827)
|
-
|
|
Less:
Silver revenue
|
(1,670)
|
-
|
(1,994)
|
-
|
|
Total cash costs
|
$60,523
|
$-
|
$96,881
|
$-
|
|
Total cash costs per ounce of gold sold
|
$700
|
$-
|
$683
|
$-
|
35
All-in sustaining costs
The
Company believes that AISC more fully defines the total costs
associated with producing gold. The Company calculates AISC as the
sum of total cash costs (as described above), sustaining capital
expenditures, accretion on decommissioning and restoration
provision, treatment and refinery charges netted against
concentrate revenue, site share-based compensation, and corporate
administrative costs, all divided by the gold ounces sold to arrive
at a per ounce amount.
Other
companies may calculate this measure differently as a result of
differences in underlying principles and policies applied.
Differences may also arise due to a different definition of
sustaining versus non-sustaining capital.
The
following table reconciles this non-IFRS measure to the most
directly comparable IFRS measure disclosed in the financial
statements.
|
In thousands of USD,
|
For the
three months ended
|
For the six months ended (3)
|
||
|
except for per ounce data
|
December
31,
2017
|
December
31,
2016
|
December
31,
2017
|
December
31,
2016
|
|
|
|
|
|
|
|
Gold
ounces sold
|
86,514
|
-
|
141,927
|
-
|
|
|
|
|
|
|
|
All-in sustaining costs reconciliation
|
|
|
|
|
|
Total
cash costs
|
$60,523
|
$-
|
$96,881
|
$-
|
|
Sustaining capital expenditures
(1)
|
4,533
|
-
|
8,059
|
-
|
|
Accretion
on decommissioning and restoration
provision
|
137
|
58
|
283
|
203
|
|
Treatment
and refinery charges
|
5,705
|
-
|
6,749
|
-
|
|
Site
share-based compensation
|
703
|
-
|
827
|
-
|
|
Corporate administrative costs (2)
|
5,669
|
4,592
|
8,153
|
13,849
|
|
Total all-in sustaining costs
|
$77,270
|
$4,650
|
$120,952
|
$14,052
|
|
All-in sustaining costs per ounce of gold sold
|
$893
|
$-
|
$852
|
$-
|
(1)
Sustaining capital
expenditures includes deferred development costs.
(2)
Includes the sum of
corporate administrative costs per the statement of loss and
comprehensive loss, excluding depreciation within those
figures.
(3)
All-in sustaining
costs for the year ended December 31, 2017 were not disclosed as
commercial production results only commenced on July 1, 2017.
Management elected to present AISC for the six months ended
December 31, 2017.
Total cash costs and AISC reconciliation
Total
cash costs and AISC are calculated based on the definitions
published by the World Gold Council (“WGC”) (a market
development organization for the gold industry comprised of and
funded by 18 gold mining companies from around the world). The WGC
is not a regulatory organization.
36
Average realized price and average realized cash
margin
Average
realized price and average realized cash margin per ounce sold are
used by management and investors to better understand the gold
price and cash margin realized throughout a period.
Average
realized price is calculated as revenue from contracts with
customers less silver revenue divided by gold ounces sold. Average
realized cash margin represents average realized price per gold
ounce sold less total cash costs per ounce sold.
The
following table reconciles this non-IFRS measure to the most
directly comparable IFRS measure disclosed in the financial
statements.
|
In thousands of USD,
|
For the
three months ended
|
For the
year ended
|
||
|
except for per ounce data
|
December
31,
2017
|
December
31,
2016
|
December
31,
2017
|
December
31,
2016
|
|
|
|
|
|
|
|
Revenue
from contracts with customers
|
$106,464
|
$-
|
$177,787
|
$-
|
|
Less:
Silver revenue
|
(1,670)
|
-
|
(1,994)
|
-
|
|
Gold revenue(1)
|
$104,794
|
$-
|
$175,793
|
$-
|
|
Gold
ounces sold
|
86,514
|
-
|
141,927
|
-
|
|
Average realized price
|
$1,211
|
$-
|
$1,239
|
$-
|
|
Less:
Total cash costs per ounce of gold sold
|
(700)
|
-
|
(683)
|
-
|
|
Average realized cash margin per ounce of gold sold
|
$511
|
$-
|
$556
|
$-
|
(1)
Revenue from
contracts with customers is recognized net of treatment costs and
refinery charges on revenue generated from concentrate sales in the
amount of $5,705 and $6,749 for the three months and year ended
December 31, 2017, respectively.
(2)
Gold revenue
excludes the gain on revaluation of derivatives in trade
receivables related to provisional pricing adjustments in the
amount of $594 and $146 for the three months and year ended
December 31, 2017, respectively.
Adjusted earnings (loss) and adjusted basic earnings (loss) per
share
Adjusted
earnings (loss) and adjusted basic earnings (loss) per share are
used by management and investors to measure the underlying
operating performance of the Company. Presenting these measures
helps management and investors evaluate earning trends more readily
in comparison with results from prior periods.
Adjusted
earnings (loss) is defined as net earnings (loss) adjusted to
exclude specific items that are significant, but not reflective of
the underlying operations of the Company, including: gain (loss) on
financial instruments at fair value, amortization of discount on
senior secured term credit facility, accretion on convertible
notes, impairment provisions and reversals and deferred income
taxes. Adjusted basic earnings (loss) per share is calculated using
the weighted average number of shares outstanding under the basic
method of earnings (loss) per share as determined under
IFRS.
37
The
following table reconciles this non-IFRS measure to the most
directly comparable IFRS measure disclosed in the financial
statements.
|
In thousands of USD,
|
For the
three months ended
|
For the
year ended
|
||
|
except for per share data
|
December
31,
2017
|
December
31,
2016
|
December
31,
2017
|
December
31,
2016
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
181,994,244
|
179,865,369
|
181,208,295
|
172,805,201
|
|
|
|
|
|
|
|
Adjusted earnings (loss) and adjusted basic earnings (loss) per
share reconciliation
|
|
|
||
|
|
|
|
|
|
|
Net
loss for the period
|
$(2,720)
|
$(8,564)
|
$(16,453)
|
$(61,212)
|
|
Adjusted
for:
|
|
|
|
|
|
Loss
on financial instruments at
fair value
|
8,460
|
3,106
|
26,430
|
69,668
|
|
Amortization
of discount on senior secured
term credit facility
|
6,007
|
-
|
11,664
|
-
|
|
Accretion
on convertible notes
|
1,403
|
-
|
2,807
|
-
|
|
Deferred
income tax recovery
|
(408)
|
(1,411)
|
(7,022)
|
(19,780)
|
|
Adjusted earnings (loss)
|
$12,742
|
$(6,869)
|
$17,426
|
$(11,324)
|
|
Adjusted basic earnings (loss) per share
|
$0.07
|
$(0.04)
|
$0.10
|
$(0.07)
|
Additional non-IFRS financial measures
The
Company has included the additional non-IFRS measures
“Earnings from mine operations” and “Working
capital” within this MD&A.
“Earnings
from mine operations” provides useful information to
management and investors as an indication of the Company’s
principal business activities before consideration of how those
activities are financed, sustaining capital expenditures, corporate
administrative costs, foreign exchange gains (losses), derivative
costs, interest and finance income and expense and
taxation.
“Working
capital” is defined as current assets less current
liabilities and provides useful information to management and
investors about liquidity of the Company.
OUTSTANDING
SHARE DATA
As at
March 8, 2018, the Company had the following number of securities
outstanding:
|
|
Number of
securities
|
Exercise price
($)
|
Exercise price currency
|
Weighted average remaining life (years)
|
|
Common
shares
|
182,390,374
|
|
|
-
|
|
Stock
options
|
5,567,577
|
$5.85 - $15.17
|
CAD
|
2.63
|
|
Convertible
notes
|
6,250,000
|
$16.00
|
USD
|
4.02
|
|
|
194,207,951
|
|
|
|
38
INTERNAL
CONTROLS OVER FINANCIAL REPORTING
Management
assessed the effectiveness of our internal control over financial
reporting (“ICFR”) as of December 31, 2017. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control – Integrated Framework (COSO
2013).
Management
is responsible for establishing and maintaining adequate internal
controls over financial reporting. Any system of internal control
over financial reporting, no matter how well designed, has inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Based upon the
results of that assessment at December 31, 2017, management
concluded that our internal controls over financial reporting are
appropriately designed and operating effectively to provide
reasonable assurance that the financial information is recorded,
processed, summarized and reported in a timely manner.
Except
for the controls that were implemented in relation to our
transition to operations, there were no changes in internal
controls over financial reporting during the year ended
December 31, 2017 that has materially affected, or is
reasonably likely to materially affect our internal control over
financial reporting.
Disclosure controls and procedures
Management
assessed the effectiveness of our disclosure controls and
procedures as of December 31, 2017. Based upon the results of
that evaluation, management concluded that our disclosure controls
and procedures were effective to provide reasonable assurance that
the information disclosed by us in the reports that we file were
appropriately recorded, processed, summarized and reported to allow
timely decisions regarding required disclosure.
RISKS AND
UNCERTAINTIES
Natural
resources exploration, development and operation involves a number
of risks and uncertainties, many of which are beyond our control.
These risks and uncertainties include, without limitation, the
risks discussed elsewhere in this MD&A and those identified in
our Annual Information Form dated March 30, 2017 and filed on
SEDAR, and in the United States on Form 40-F through EDGAR at the
SEC’s website at www.sec.gov.
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This
MD&A contains forward-looking information and forward looking
statements within the meaning of applicable Canadian and United
States securities legislation (collectively referred to herein as
“forward-looking statements”).
Forward-looking
statements may include, but are not limited to, information with
respect to:
●
the future price of
silver and gold;
●
our planned mining,
exploration and development activities;
●
the adequacy of our
financial resources;
39
●
the estimation of
mineral reserves and resources;
●
realization of
mineral reserves and resource estimates;
●
costs and timing of
future exploration and development;
●
completion of
ramp-up to production and positive cash flow;
●
production and
processing estimates;
●
capital and
operating cost estimates;
●
statements relating
to the economic viability of the Brucejack Mine, including mine
life, total tonnes mined and processed and mining
operations;
●
approvals, consents
and permits under applicable legislation;
●
our relationship
with community stakeholders;
●
our executive
compensation approach and practice;
●
litigation
matters;
●
currency
fluctuations; and
●
environmental
matters.
Wherever
possible, words such as “plans”, “expects”,
“projects”, “assumes”,
“budgeted”, “strategy”,
“scheduled”, “estimates”,
“forecasts”, “anticipates”,
“believes”, “intends” “modeled”
and similar expressions or statements that certain actions, events
or results “may”, “could”,
“would”, “might” or “will” be
taken, occur or be achieved, or the negative forms of any of these
terms and similar expressions, have been used to identify
forward-looking statements. Statements concerning mineral resource
estimates may also be deemed to constitute forward-looking
statements to the extent that they involve estimates of the
mineralization that will be encountered if the property is
developed. Any statements that express or involve discussions with
respect to predictions, expectations, beliefs, plans, projections,
objectives, assumptions or future events or performance are not
statements of historical fact and may be forward-looking
statements. Forward-looking statements are subject to a variety of
known and unknown risks, uncertainties and other factors that could
cause actual events or results to differ from those expressed or
implied by the forward-looking statements, including, without
limitation, risks related to:
●
uncertainty as to
the outcome of legal proceedings;
●
the effect of
indebtedness on cash flow and business operations;
●
our ability to
satisfy commitments under the Stream Agreement and the Offtake
Agreement;
●
the effect of
restrictive covenants in the Stream Agreement, Offtake Agreement,
and Credit Agreement;
●
assumptions
regarding expected operating costs and expenditures, production
schedules, economic returns and other projections;
●
our production
estimates, including the accuracy thereof;
●
our ability to
generate operating revenues in the future;
●
our ability to
raise enough capital to develop our mineral properties or to
complete further exploration programs;
●
dependency on the
Brucejack Mine for our future operating revenue;
●
the accuracy of our
resource and reserve estimates (including with respect to size,
grade and recoverability) and the geological, operational and price
assumptions on which they are based;
●
uncertainties
relating to inferred mineral resources being converted into
measured or indicated mineral resources;
40
●
commodity price
fluctuations, including gold price volatility;
●
our history of
negative operating cash flow, incurred losses and accumulated
deficit;
●
failure of
counterparties to perform their contractual
obligations;
●
general economic
conditions;
●
the inherent risk
in the mining industry;
●
the commercial
viability of our current and any acquired mineral
rights;
●
availability of
suitable infrastructure or damage to existing
infrastructure;
●
governmental
regulations, including environmental regulations;
●
non-compliance with
permits that are obtained or delay in obtaining or failure to
obtain permits required in the future;
●
increased costs and
restrictions on operations due to compliance with environmental
laws and regulations;
●
compliance with
emerging climate change regulation;
●
uncertainties
relating to additional claims and legal proceedings;
●
adequate internal
control over financial reporting;
●
potential
opposition from non-governmental organizations;
●
uncertainty
regarding unsettled First Nations rights and title in British
Columbia;
●
uncertainties
related to title to our mineral properties and surface
rights;
●
land reclamation
requirements;
●
our ability to
identify and successfully integrate any material properties we
acquire;
●
currency
fluctuations;
●
competition in the
mining industry for properties, qualified personnel and
management;
●
our ability to
attract and retain qualified management;
●
some of our
directors’ and officers’ involvement with other natural
resource companies;
●
potential inability
to attract development partners or our ability to identify
attractive acquisitions;
●
compliance with
foreign corrupt practices regulations and anti-bribery
laws;
●
certain actions
under U.S. federal securities laws may be
unenforceable;
●
changes to relevant
legislation, accounting practices or increasing insurance
costs;
●
our anti-takeover
provisions could discourage potentially beneficial third party
takeover offers;
●
significant growth
could place a strain on our management systems;
●
share ownership by
our significant shareholders and their ability to influence our
governance;
●
future sales or
issuances of our debt or equity securities;
●
the trading price
of our common shares is subject to volatility due to market
conditions;
●
future issuances of
equity securities or sales by existing shareholders which may cause
the price of our securities to fall;
●
we do not intend to
pay dividends in the near future;
●
our being treated
as a passive foreign investment company for U.S. federal income tax
purposes;
●
failure to comply
with certain terms of the convertible notes; and
●
risks related to
ensuring the security and safety of information systems, including
cyber security risks.
41
This
list is not exhaustive of the factors that may affect any of our
forward-looking statements. Although we have attempted to identify
important factors that could cause actual results to differ
materially from those contained in forward-looking statements,
there may be other factors that cause results not to be as
anticipated, estimated or intended. There can be no assurance that
such information will prove to be accurate, as actual results and
future events could differ materially from those anticipated in
such information. Forward-looking statements involve statements
about the future and are inherently uncertain, and our actual
achievements or other future events or conditions may differ
materially from those reflected in the forward-looking statements
due to a variety of risks, uncertainties and other factors,
including, without limitation, those referred to in this MD&A
under the heading “Risks and Uncertainties”. Our
forward-looking statements are based on the beliefs, expectations
and opinions of management on the date the statements are made. In
connection with the forward-looking statements contained in this
MD&A, we have made certain assumptions about our business,
including about our planned exploration, development and production
activities; the accuracy of our mineral resource estimates; capital
and operating cost estimates; production and processing estimates;
the results, costs and timing of future exploration and drilling;
timelines and similar statements relating to the economic viability
of the Brucejack Mine; timing and receipt of approvals, consents
and permits under applicable legislation; and the adequacy of our
financial resources. We have also assumed that no significant
events will occur outside of our normal course of business.
Although we believe that the assumptions inherent in the
forward-looking statements are reasonable as of the date of this
MD&A, forward-looking statements are not guarantees of future
performance and, accordingly, undue reliance should not be put on
such statements due to the inherent uncertainty therein. We do not
assume any obligation to update forward-looking statements, whether
as a result of new information, future events or otherwise, other
than as required by applicable law. For the reasons set forth
above, prospective investors should not place undue reliance on
forward-looking statements.
42
