================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934
for the fiscal year ended December 31, 2004
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934
for the transition period from to
---------- ----------
Commission file number 000-22731
MINERA ANDES INC.
--------------------------------------------
(Name of small business issuer in its charter)
Alberta, Canada
------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
None
----------------------------------
(I.R.S. Employer Identification No.)
111 E. Magnesium Road, Suite A, Spokane, Washington 99208
--------------------------------------
(Address of principal executive offices)
(509) 921-7322
-------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
None
Securities registered under Section 12(g) of the Act:
Common shares without par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer is in the exploration stage and has no revenues for its most recent
fiscal year.
The aggregate market value of the voting stock held by non-affiliates as of
March 31, 2005 was $42,510,609.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 31, 2005 the Registrant
had 90,079,504 common shares outstanding.
Transitional Small Business Disclosure Format (Check one:) Yes [ ] No [X]
================================================================================
TABLE OF CONTENTS
-----------------
PART I Page
----
Item 1 Description of Business 3
Item 2 Description of Properties 10
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote
of Security Holders 26
PART II
Item 5 Market for Common Equity and Related
Shareholder Matters 27
Item 6 Management's Discussion and Analysis or
Plan of Operations 29
Item 7 Financial Statements 44
Item 8 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 74
Item 8A Controls and Procedures 74
Item 8B Other Information 74
PART III
Item 9 Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 75
Item 10 Executive Compensation 77
Item 11 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 80
Item 12 Certain Relationships and Related Transactions 83
Item 13 Exhibits 83
Item 14 Principal Accountant Fees and Services 83
2
PART I
Preliminary Note Regarding Forward-Looking Statements; Currency Disclosure
This report contains both historical and prospective statements concerning
Minera Andes Inc. and its operations. Historical statements are based on events
that have already happened; examples include the reported financial and
operating results, descriptions of pending and completed transactions, and
management and compensation matters. Prospective statements, on the other hand,
are based on events that are reasonably expected to happen in the future;
examples include the timing of projected operations, the likely effect or
resolution of known contingencies or other foreseeable events, and projected
operating results. In this report, Minera Andes Inc. is referred to as "Minera
Andes", "we", "our", and the "Company".
Prospective statements (which are known as "forward-looking statements" under
the Private Securities Litigation Reform Act of 1995) may or may not prove true
with the passage of time because of future risks and uncertainties.
All currency amounts in this report are stated in U.S. dollars unless otherwise
indicated. On March 31, 2005, the late New York trading rate of exchange, as
reported by The Wall Street Journal for conversion of United States dollars into
Canadian dollars was U.S.$1.00 = Cdn$1.2099 or Cdn$1.00 = U.S. $0.82650.
ITEM 1. DESCRIPTION OF BUSINESS
Minera Andes Inc. is engaged in the exploration and development of mineral
properties located in the Republic of Argentina. Our objective is to identify
and acquire properties with promising mineral potential, explore them to an
advanced stage or to the feasibility study stage, and then, if warranted, to
pursue development of the properties, typically through joint ventures or other
collaborative arrangements with partners that have expertise in mining
operations.
Our business grew out of a program begun by N.A. Degerstrom, Inc.
("Degerstrom"), a contract mining company based in Spokane, Washington, to
identify properties in Argentina that possessed promising mineral potential.
Based on the study of available remote sensing satellite data and experience
gained from drilling work performed by Degerstrom, beginning in 1991 Degerstrom
identified a number of areas which it believed had exploration potential and
began the process of filing applications for exploration concessions with the
provincial governments in Argentina and negotiating option agreements with
private landowners. Degerstrom conveyed these property interests to Minera Andes
in 1995. See "Description of Properties - The Degerstrom Agreement" and
"Management's Discussion and Analysis or Plan of Operations."
Our current properties and projects consist of mineral rights and applications
for mineral rights covering approximately 203,562 hectares in three Argentine
provinces. The lands comprise option-to-purchase contracts, exploration and
mining agreements and direct interests through our filings for exploration
concessions. Our properties are all early stage exploration prospects except for
the San Jose project, which is an advanced stage exploration project. No proven
or probable reserves have yet been identified. See "Description of Properties."
We have three full time employees and several project-specific contract
consultants.
Operating Structure
Minera Andes is the product of an amalgamation in November 1995 of Minera Andes
and Scotia Prime Minerals, Incorporated, a then inactive Alberta corporation
which previously had its Common Shares listed for trading on the Alberta Stock
Exchange. Since April 8, 2002 our Common Shares have been listed on the TSX
Venture Exchange ("TSX-V"), which replaced the Alberta Stock Exchange. Our
interests in Argentinean properties are held through two Argentinean
subsidiaries: Minera Andes S.A. ("MASA") and Minera Santa Cruz S.A. ("MSC").
3
The corporate structure of Minera Andes is as follows:
Minera Andes Inc.
Alberta, Canada
-------------------- ------------------- ------------ -----------------
Minera Andes Minera Andes Minera Andes Minera Andes S.A.
(Cayman) Inc. (Cayman 2) Inc. (USA) Inc. Argentina
Cayman Islands, BWI Cayman Islands, BWI Spokane, WA (95%)
(100%) (100%) (100%) ("MASA")
("MACI") ("MACI2") ("MUSA")
-------------------- ------------------- ------------ -----------------
-----------------
Minera Santa Cruz
S.A.
Argentina (49%)
("MSC")
-----------------
We hold 19 of the 20 issued and outstanding shares of MASA as well as an
irrevocable transferable option to purchase the one remaining MASA share. The
single share is held by a natural person shareholder as required by local law.
MASA holds 5,047,000 shares of the 10,300,000 shares issued and outstanding of
Minera Santa Cruz S.A.
In July 2003, we announced that Mauricio Hochschild & Cia. Ltda. S.A. ("MHC")
had acquired 51% of the shares of the project company, MSC, upon satisfaction of
the vesting requirements of the Option and Joint Venture Agreement for the
development of the Huevos Verdes gold/silver project in southern Argentina. The
agreement required MHC to expend US$3 million on the further exploration and
development of the Huevos Verdes project, owned by MSC, in order to vest. Minera
Andes holds a 49% interest in MSC through our subsidiary, MASA.
Through 2003, Degerstrom provided management services to us and acted as
operator of our properties and projects pursuant to an operating agreement
entered into in March 1995 ("Operating Agreement"). Under the Operating
Agreement, Degerstrom operated and managed the exploration program on all
properties and provided related offsite administrative assistance as required.
Degerstrom is principally involved in contract mining and road and bridge
construction. Degerstrom provides a full range of contract services including
geological studies, site drilling, metallurgical analysis, and engineering of
pit, process and recovery systems.
On December 2, 2003, we cancelled our Operating Agreement with Degerstrom,
effective December 31, 2003. We are an established exploration company and felt
the need to update the arrangements with Degerstrom. At the time that these
agreements were signed, Degerstrom was a significant shareholder of ours,
however, their shareholdings had been reduced to approximately 10.5% of our
issued and outstanding shares at the end of 2003. In addition, the reasons for
4
entering into the Operating Agreement, which included using the established
Argentina i 1 nfrastructure of Degerstrom at the time we were listed, are no
longer applicable. We are no longer a newly formed junior public company and
have been in existence for ten years. The management and the board of directors
thought it was also prudent for corporate governance reasons to separate itself
from Degerstrom. As of March 31, 2005, Degerstrom owned 6% of our issued and
outstanding shares.
Our management office is 111 E. Magnesium Road, Suite A, Spokane, Washington,
99208, and our principal business address is Coronel Moldes 837/820, (5500)
Mendoza, Argentina. Our registered address is 350 - 7th Ave. S.W., Calgary,
Alberta, T2P 3N9 Canada.
Risks Related to our Business
Ownership of our Common Shares involves a high degree of risk. Shareholders
should consider, among other things, the following factors relating to our
business and properties and our present stage of development:
Risks Inherent in Minerals Exploration. There are a number of uncertainties
inherent in any exploration or development program, including location of
economic ore bodies, the development of appropriate metallurgical processes, and
the receipt of necessary governmental permits. Substantial expenditures may be
required to pursue such exploration and, if warranted, development activities.
Assuming discovery of an economic ore body and depending on the type of mining
operation involved, several years may elapse from the initial stages of
development until commercial production is commenced. New projects frequently
experience unexpected problems during exploration and development stages and
frequently result in abandonment of the properties as potential development
projects. Most exploration projects do not result in the discovery of minable
deposits of ore. We cannot assure you that our exploration efforts will yield
reserves or result in any commercial mining operations.
Many of the properties that we intend to explore in Argentina are the subject of
applications for concessions and licenses, many of which have not yet been
granted. The filing of an application for a concession grants the holder the
exclusive right to obtain the concession conditioned on the outcome of the
approval process. In Argentina, the approval process is an administrative
procedure under the authority of the province in which the property is located.
The process includes a public notice and approval procedure allowing third
parties to give notice of opposition or prior claim, if any, before the title to
the concession is granted. Although we believe that we have taken all necessary
steps with respect to the application, approval and registration process for the
property concessions and licenses we have currently applied for and property
transactions to which we are a party, there is no assurance that any or all
applications will result in issued concessions or that the public registrations
will be timely approved.
Risks Inherent in the Mining Industry. Exploration, development and mining
operations are subject to a variety of laws and regulations relating to
exploration, development, employee safety and environmental protection; mining
activities are subject to substantial operating hazards including rock bursts,
cave-ins, fires and flooding, some of which are not insurable or may not be
insured for economic reasons. We currently have no insurance against such risks.
We may also incur liability as a result of pollution and other casualties
involved in the drilling and mining of ore. There may be limited availability of
water and power, which are essential to mining operations; and interruptions may
be caused by adverse weather conditions.
We or our joint venture or investment partners must obtain necessary
governmental approvals and make necessary capital expenditures before production
may commence on most of our projects.
Need for Additional Capital. The exploration and, if warranted, development of
Minera Andes' properties would require substantial financing. Our ability to
obtain additional financing will depend, among other things, on the price of
gold, silver, copper and other metals and the industry's perception of their
future price. Therefore, availability of funding depends largely on factors
outside of our control and cannot be accurately predicted; financing may not be
5
available when needed or on terms satisfactory to us and may be dilutive to our
shareholders. We have historically obtained funds for a portion of our capital
expenditure from joint venture or investment partners. However, we cannot assure
you that such joint venture or investment partners will provide such funds and
such project financing for mining projects may be limited. Failure to obtain
sufficient financing could result in delay or indefinite postponement of
exploration, development or production on any or all of Minera Andes' projects
or loss of properties. For example, certain agreements pursuant to which we have
the right to conduct exploration activities carry work commitments which, if not
met, could result in losing our right to acquire an interest in the subject
property. We cannot assure you that additional capital or other types of
financing will be available when needed or that, if available, the terms of such
financing will be favorable to Minera Andes.
Competitive Business Conditions. The exploration and development of mineral
properties in the Republic of Argentina is a highly competitive business. Other
companies compete with us in the acquisition, exploration and development of
mining properties. Many of these competing companies are significantly larger
than we are and have substantially greater economic and technical resources than
us. While we seek to compete by identifying properties for exploration,
acquiring exclusive rights to conduct such exploration and carrying out
exploration and development of the properties with joint venture or investment
partners, there can be no assurance that we will be successful in any of these
efforts.
Foreign Operations. Minera Andes' properties are located in Argentina. In the
early 1990s Argentina emerged from periods of political and economic instability
but has recently shown signs of returning instability. Foreign properties,
operations and investments may be adversely affected by local political and
economic developments, including nationalization, exchange controls, currency
fluctuations, taxation and laws or policies as well as by laws and policies of
the United States and Canada affecting foreign trade, investment and taxation.
It is important that we maintain good relationships with the governments in
Argentina. We may not be able to maintain such relationships if the governments
change.
Difficulties in Developing Remote Areas. Many of the areas in which we conduct
exploration and, if warranted, development activities are in particularly remote
and mountainous regions, with limited infrastructure and limited access to
essential resources. Exploration or development projects in these areas may
require us or our joint venture partners to develop power sources,
transportation systems and communications systems, and to secure adequate
supplies of fuel, machinery, equipment and spare parts. Consequently,
exploration and development in these areas is particularly difficult, requiring
significant capital expenditures, and may be subject to cost over-runs or
unanticipated delays.
Fluctuation in the Price of Minerals. The market price of minerals is volatile
and beyond our control. If the price of a mineral should drop dramatically, the
value of the properties we are exploring or developing for that mineral could
also drop dramatically and we might not be able to recover our investment in
those properties. The decision to put a mine into production, and the commitment
of the funds necessary for that purpose, must be made long before the first
revenues from production will be received. Price fluctuations between the time
that such a decision is made and the commencement of production can change
completely the economics of the mine. Although it is possible to protect against
price fluctuations by hedging in certain circumstances, the volatility of
mineral prices represents a substantial risk in the mining industry generally
which no amount of planning or technical expertise can eliminate.
Environmental and Other Laws and Regulations. Mining operations and exploration
activities in Argentina are subject to various federal, provincial and local
laws and regulations governing mineral rights, exploration, development and
mining, exports, taxes, labor, protection of the environment and other matters.
Compliance with such laws and regulations may necessitate significant capital
outlays, materially affect the economics of a given project, or cause material
changes or delays in our intended activities. Minera Andes has obtained or is in
the process of obtaining authorizations currently required to conduct its
operations. New or different standards imposed by governmental authorities in
the future or amendments to current laws and regulations governing operations
and activities of mining companies or more stringent implementation thereof
could have an adverse impact on Minera Andes' activities.
6
Liquidity; Limited Trading Market. There currently is a limited trading market
for our securities. There is no assurance that an active trading market will
ever develop. Investment in us is not suitable for any investor who may have to
liquidate such investment on a timely basis and should only be considered by
investors who are able to make a long-term investment in us.
Glossary of Geologic and Mining Terms; Statement of Abbreviations and Conversion
Factors
"andesite" is a type of dark colored, fine grained volcanic rock;
"anomalous" means either a geophysical response that is higher or lower than the
average background or rock samples that return assay values greater than the
average background;
"argillic" means pertaining to clay or clay minerals;
"Bankable Feasibility Study" means the study, prepared to industry standards,
based upon which a bank or other lending institution may loan Minera Andes, MASA
or MSC funds for production development on the Claims;
"breccia" means a course grained rock, composed of angular broken rock fragments
held together by a finer grained matrix;
"Cateo" means an exploration concession for mineral rights granted to an
individual or company in the Republic of Argentina, as defined by the Republic
of Argentina Mining Code, as amended;
"Claims" means the Cateos, Manifestacion de Descubrimiento, Mina, Estaca Mina
(as defined by the Republic of Argentina Mining Code, as amended) described
herein issued to MASA, MSC or Minera Andes by the government of Argentina or any
provincial government;
"dacite" is a type of fine-grained extrusive rock;
"Estaca Mina" means areas granted to extend the area covered by existing Minas;
"felsic" describes an igneous rock having abundant light colored minerals;
"graben" means an elongate crustal block that is bounded by faults on its long
sides;
"grab sample" means one or more pieces of rock collected from a mineralized zone
that when analyzed do not represent a particular width of mineralization nor
necessarily the true mineral concentration of any larger portion of a
mineralized area;
"igneous rock" means a rock formed by the cooling of molten rock either
underground or at the surface of the earth;
"illitic" is a general name for a group of clay minerals;
"intrusive rock" means an igneous rock that, when in the molten or partially
molten state, penetrated into or between other rocks, but cooled beneath the
surface;
"low sulfidation" applies to a type of mineralization low in sulfur content;
7
"Manifestacion de Descubrimiento" (literally, manifestation of discovery) means
the intermediate stage between the exploration phase and exploitation phase of
development;
"metamorphic rock" means an igneous or sedimentary rock that has been altered by
exposure to heat and pressure (resulting from deep burial, contact with igneous
rocks, compression in mountain building zones or a combination of these factors)
but without complete melting. Metamorphosis typically results in partial
recrystallization and the growth of new minerals. "Metasediment" refers to
metamorphosed sedimentary rock. "Metavolcanics" refers to metamorphosed volcanic
rock;
"Mina" means an exploitation grant based on Manifestacion de Descubrimiento;
"net smelter return royalty" is a form of royalty payable as a percentage of the
value of the final product of a mine, after deducting the costs of transporting
ore or concentrate to a smelter, insurance charges for such transportation, and
all charges or costs related to smelting the ore. Normally, exploration,
development and mining costs are not deducted in calculating a net smelter
return royalty. However, such royalties are established by contract or statute
(in the case of property owned by governments), and the specific terms of such
contracts or statutes govern the calculation of the royalty;
"net profits royalty" is a form of royalty payable as a percentage of the net
profits of a mining operation. In contrast to net smelter return royalties,
costs relating to exploration, development and mining may be deducted from the
net proceeds of the operation in calculating the royalty. However, such
royalties are established by contract or statute (in the case of property owned
by governments), and the specific terms of such contracts or statutes govern the
calculation of the royalty;
"orebody" means a continuous well-defined mass of material containing enough ore
to make extraction economically feasible;
"porphyry" means an igneous rock of any composition that contains conspicuous
large mineral crystals in a fine-grained ground mass;
"pyroclastic" means pertaining to rock material formed by volcanic explosion or
expulsion from a volcanic vent;
"rhyolite" is a type of felsic lava flow;
"stratabound" means a mineral deposit confined to a single stratigraphic unit;
"stratigraphy" means the science of rock strata;
"synvolcanic"means formed at the time of volcanic activity;
"tuffaceous" is a general term for all consolidated pyroclastic rocks;
"Underlying Royalty" means any royalties on the Claims that are part of the
lease, purchase or option of said Claim from the owner or any royalties that may
be imposed by the provincial government;
"vein" means a mineral filling of a fault or fracture in the host rock,
typically in tabular or sheet-like form;
"VLF-EM" means a very low frequency electromagnetic geophysical instrument used
in exploration to measure variances of conductivity in surficial sediments and
bedrock;
8
"volcanic rock" (basalt, pillowed-flows, rhyolite) means an igneous rock that
has been poured out or ejected at or near the earth's surface;
"volcanoclastic rock" (wacke, tuff, turbidite) means a sedimentary rock derived
from the transportation and deposition of volcanic rock fragments by air (tuff)
or water (wacke or turbidite).
The following is a list of abbreviations used throughout this 10-KSB for
technical terms:
Ag silver
Au gold
As arsenic
Cu copper
g/t Au grams per tonne gold
g/t Ag grams per tonne silver
g/t grams per tonne
ha hectare(s)
Hg mercury
IP/RES induced polarization and resistivity (survey)
kg kilogram(s)
km kilometer(s)
m meter(s)
Mo molybdenum
NSR Net Smelter Return
oz ounce
Pb lead
ppb parts per billion
ppm parts per million
Sb antimony
sq. square
VLF-EM very low frequency electromagnetic (survey)
Zn zinc
The following table sets forth certain standard conversions from Standard
Imperial units to the International System of Units (or metric units).
To Convert From Imperial To Metric Multiply by
acres hectares 0.404686
feet meters 0.30480
miles kilometers 1.609344
tons tonnes 0.907185
ounces (troy)/ton grams/tonne 34.2857
1 mile = 1.609 kilometers
1 yard = 0.9144 meters
1 acre = 0.405 hectares
2,204.62 pounds = 1 metric ton = 1 tonne
2,000 pounds (1 short ton) = 0.907 tonnes
1 ounce (troy) = 31.103 grams
1 ounce (troy)/ton = 34.2857 grams/tonne
9
Available Information
We make available, free of charge, on or through our Internet Web site, our
annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act") as soon as reasonably practicable after we electronically
file such material with, or furnish it to the SEC.
ITEM 2. DESCRIPTION OF PROPERTIES
Our exclusive business is the exploration and development of mineral properties
("Claims") located in the Republic of Argentina. Our interests in the
Argentinean Claims are held through MASA and MSC, in which MASA holds a 49%
share interest. MASA holds properties and is the company in which the daily
business operations in Argentina are conducted. MASA was formed and registered
as a mining company in order for us to receive the benefits of the new mining
laws in Argentina. Our principal properties are described under the heading
"Principal Properties" below.
The Degerstrom Agreement
A number of the Claims were originally held by Degerstrom. Pursuant to the March
1995 Asset and Share Acquisition Agreement among Minera Andes, MASA, NAD S.A.
("NADSA") and Degerstrom (the "Degerstrom Agreement"), Degerstrom transferred
its interest in those Claims to NADSA and MASA in consideration for a royalty.
Degerstrom also conveyed the MASA and NADSA capital stock it held to us. In
consideration for those shares, Minera Andes (i) issued to Degerstrom 4,000,000
Common Shares and the right to acquire an additional 1,213,409 Common Shares if
any of the properties comprising the Claims became the subject of a Bankable
Feasibility Study, (ii) agreed to pay a royalty on any existing or future
properties held by us or our affiliates as described below, and (iii) agreed to
pay the aggregate amount of the cost and expenses incurred by Degerstrom on our
behalf, from July 1, 1994 through March 15, 1995. Minera Andes also acquired
from Brian Gavin, a Minera Andes officer, the shares he held in MASA. In 2001 we
sold our interest in NADSA to Degerstrom.
The royalty payable to Degerstrom by MASA would be a percentage of the net
smelter return earned on those Claims or any future Claims acquired. The Claims
were subject to a royalty equal to the difference between 3% and the Underlying
Royalty, subject to a maximum royalty of 2%. If MASA acquired all or part of the
Underlying Royalty, the royalty payable, if any, to Degerstrom would not
increase. If Degerstrom collected a royalty on any of the Claims held, MASA
would at any time have the option, upon giving notice to Degerstrom, to
repurchase up to one-half of the royalty payable to Degerstrom upon payment of
$1,500,000, for each 1% of the royalty repurchased.
Minera Andes, MASA, NADSA and Degerstrom also entered into an Operating
Agreement, appointing Degerstrom as operator of the Claims and any future Claims
acquired in Argentina. Under the terms of the Operating Agreement, Degerstrom
operated and managed the exploration program on all properties and provided
related offsite administrative assistance as required. In consideration for
these operating services, Degerstrom was entitled to reimbursement for its costs
of labor, materials and supplies incurred in connection with its services plus
an additional 15% of such costs as a management fee. Included in the Operating
Agreement were fixed usage rates for the equipment owned by Degerstrom.
Degerstrom had the right to terminate the Operating Agreement if we did not
maintain a program and budget in excess of Cdn$300,000 per year. If we elected
to develop a property and contract with a third party for development or
production, we had to give notice to Degerstrom of the terms and conditions of
the proposed arrangement. Degerstrom had the right for a period of 30 days to
meet the contract bid by a third party.
10
On December 2, 2003, the Company, Degerstrom, MASA and MACI entered into a
Settlement Agreement to terminate certain agreements in place between the
parties, to assign royalties payable to Degerstrom to our wholly owned
subsidiary, MACI, and cancel certain obligations payable to Degerstrom for the
consideration of US$500,000. We received TSX-V approval on January 13, 2004, for
an effective date of December 31, 2003.
Terms of the Settlement Agreement
1. The parties terminated the Operating Agreement effective December 31,
2003. As a result of the termination, we vacated the office space
previously provided by Degerstrom under the Operating Agreement. In
addition, we set up our own accounting systems.
2. There is a termination of the lock up agreement that had been
previously entered into in the summer of 2003, when we were reviewing
potential merger candidates.
3. The parties to the Settlement Agreement acknowledged that the
Degerstrom Royalty covered the current properties held by us and our
subsidiaries. Degerstrom agreed to assign the Degerstrom Royalty
payable under the asset agreement on the current properties to MACI
and agreed to cancel the Performance Right.
4. The consideration for the assignment of the Royalty and cancellation
of Performance Right was the payment of $500,000. In addition, a
payment of $250,000 is payable if any of the current properties other
than the properties comprising the San Jose project, meet certain
conditions such as bankable feasibility or commercial production.
PRINCIPAL PROPERTIES
I. ARGENTINA
Recent Mining and Economic History in Argentina
Argentina is the second largest country in South America, over 2.7 million sq.
km in area. In 1983, Argentina returned to a multiparty democracy, which brought
to an end nearly a half century of military intervention and political
instability. The country then began to stabilize; however, it was not until
1989, with the election of the government under President Carlos Menem, that
Argentina's economy began to improve. Menem initiated economic reforms that
included the privatization of many state companies and the implementation of the
Convertibility Plan, which fixed the Argentine peso to the U.S. dollar at par,
fully backed by reserves of foreign exchange, gold and dollar-denominated bonds
of the Central Bank of Argentina. Results of the reforms were positive;
Argentina's gross domestic product grew at up to 8% per annum in the early 1990s
and inflation dropped to between 1% and 3% per annum. However, following a
recession in 1999 and 2000, a severe political and economic crisis occurred in
late 2001. In early 2002, with five presidents in less than five weeks, the
current president, Eduardo Duhalde, chose to devalue the peso, first to $1.00 to
Peso$1.40, before allowing the Peso to float in February 2002. The economic
reforms associated with the devaluation of the Peso included the conversion of
all U.S. dollar denominated contracts into Pesos on a one-to-one basis and all
US dollar bank accounts into Pesos. At the beginning of January 2004 the Peso
stood at Peso$2.93 to $1.00; at the end of December 2004, the peso stood at
Peso$2.98 to $1.00.
In 1993, the Mining Investments Act instituted a new system for mining
investment to encourage mineral exploration and foreign investment in Argentina.
Key incentives provided by the Act include guaranteed tax stability for a
30-year period, 100% income tax deductions on exploration costs, accelerated
amortization of investments in infrastructure, machinery and equipment, and the
exemption from import duties on capital goods, equipment and raw materials used
in mining and exploration. Repatriation of capital or transfer of profits is
unrestricted. Argentina's mineral resources, administered by its 23 provinces,
are subject to a provincial royalty capped at 3% of the "mouth of mine" value of
production, although provinces may opt to waive this royalty.
11
Argentina's mineral potential is largely unexplored, particularly in comparison
to that of its immediate neighbors and, as a consequence, information pertaining
to the country's resource base is lacking. Copper and gold mineralization
discovered to date occurs predominantly in the southern Andean copper belt which
extends over 1,000 km through northwestern Argentina. The Bajo de la Alumbrera
porphyry copper deposit has been brought onstream. Other copper deposits
currently under development include the Agua Rica and El Pachon deposits. In
addition, gold deposits are concentrated in the Argentine portion of the Central
Andes' Maricunga-El Indio gold belts and in the newly discovered Santa Cruz gold
belt in southern Patagonia.
In 1989, fewer than a dozen foreign exploration companies had offices in
Argentina; by 1996 there were approximately 60 such companies. Exploration
expenditures grew from $5 million in 1991 to over $90 million in 1995, but have
since shrunk with the prolonged low gold price market. In recent years no more
than a handful of exploration companies have been active in Argentina. There has
been a very modest resurgence in exploration activity in Argentina.
We initiated gold exploration in Argentina in 1991, in conjunction with
Degerstrom. As of December 2004, we had Argentine land holdings totaling 203,562
ha in three Argentine provinces (Figure 1 below). Our exploration efforts
initially focused on evaluating prospects generated by 1960's United Nations
development exploration programs and on targets generated by satellite image
analysis. We developed techniques of processing and interpreting satellite
imagery to assist in identifying promising exploration targets. Currently, we
are completing exploration work that includes geophysical surveys, mechanical
trenching and reverse-circulation drilling on the most advanced targets in our
property portfolio, and conducting grassroots exploration to evaluate our other
properties and to generate new targets.
Property and Title in Argentina
The laws, procedures and terminology regarding mineral title in Argentina differ
considerably from those in the United States and in Canada. Mineral rights in
Argentina are separate from surface ownership and are owned by the federal
government. Mineral rights are administered by the provinces. The following
summarizes some of the Argentinean mining law terminology in order to aid in
understanding our land holdings in Argentina.
1. Cateo: A cateo is an exploration concession which does not permit mining
but gives the owner a preferential right to a mining concession for the
same area. Cateos are measured in 500 ha unit areas. A cateo cannot exceed
20 units (10,000 ha). No person may hold more than 400 units in a single
province. The term of a cateo is based on its area: 150 days for the first
unit (500 ha) and an additional 50 days for each unit thereafter. After a
period of 300 days, 50% of the area over four units (2,000 ha) must be
dropped. At 700 days, 50% of the area remaining must be dropped. Time
extensions may be granted to allow for bad weather, difficult access, etc.
Cateos are identified by a file number or "expediente" number. Cateos are
awarded by the following process:
a. Application for a cateo covering a designated area. The application
describes a minimum work program for exploration;
b. Approval by the province and formal placement on the official map or
graphic register;
c. Publication in the provincial official bulletin;
d. A period following publication for third parties to oppose the claim;
e. Awarding of the cateo.
12
The length of this process varies depending on the province, and commonly
takes up to two years. Accordingly, cateo status is divided into those that
are in the application process and those that have been awarded. If two
companies apply for cateos on the same land, the first to apply has the
superior right. During the application period, the first applicant has
rights to any mineral discoveries made by third parties in the cateo
without its prior consent. While it is theoretically possible for a junior
applicant to be awarded a cateo, because applications can be denied, we
know of no instances where this has happened.
Applicants for cateos may be allowed to explore on the land pending formal
award of the cateo, with the approval of the surface owner of the land. The
time period after which the owner of a cateo must reduce the quantity of
land held does not begin to run until 30 days after a cateo is formally
awarded. Our goal is to determine whether our cateos contain commercial
grade ore deposits before portions of the cateos must be relinquished. Our
ability to do so is dependent upon adequate financing for exploration
activities. It is likely that several of our cateos will be relinquished
after preliminary exploration because no promising mineral deposits have
been discovered.
Until August 1995, a "canon fee", or tax, of Peso$400 per unit was payable
upon the awarding of a cateo. A recent amendment to the mining act requires
that this canon fee be paid upon application for the cateo.
2. Mina: To convert an exploration concession to a mining concession, some or
all of the area of a cateo must be converted to a "mina". Minas are mining
concessions which permit mining on a commercial basis. The area of a mina
is measured in "pertenencias". Each mina may consist of two or more
pertenencias. "Common pertenencias" are six hectares and "disseminated
pertenencias" are 100 ha (relating to disseminated deposits of metals
rather than discrete veins). The mining authority may determine the number
of pertenencias required to cover the geologic extent of the mineral
deposit in question. Once granted, minas have an indefinite term assuming
exploration development or mining is in progress. An annual canon fee of
Peso$80 per pertenencia is payable to the province.
Minas are obtained by the following process:
a. Declaration of manifestation of discovery in which a point within a
cateo is nominated as a discovery point. The manifestation of
discovery is used as a basis for location of pertenencias of the sizes
described above. Manifestations of discovery do not have a definite
area until pertenencias are proposed. Within a period following
designation of a manifestation of discovery, the claimant may do
further exploration, if necessary, to determine the size and shape of
the orebody.
b. Survey ("mensura") of the mina. Following a publication and opposition
period and approval by the province, a formal survey of the
pertenencias (together forming the mina) is completed before the
granting of a mina. The status of a surveyed mina provides the highest
degree of mineral land tenure and rights in Argentina.
3. Estaca Minas: These are six-hectare extensions to existing surveyed minas
that were granted under previous versions of the mining code 14 . Estaca
minas are equivalent to minas. New Estaca minas were eliminated from the
mining code in August 1996.
4. Provincial Reserve Areas: Provinces are allowed to withdraw areas from the
normal cateo/mina process. These lands may be held directly by the province
or assigned to provincial companies for study or exploration and
development.
All mineral rights described above are considered forms of real property and can
be sold, leased or assigned to third parties on a commercial basis. Cateos and
minas can be forfeited if minimum work requirements are not performed or if
annual payments are not made. Generally, notice and an opportunity to cure
defaults is provided to the owner of such rights.
13
Grants of mining rights, including water rights, are subject to the rights of
prior users. Further, the mining code contains environmental and safety
provisions administered by the provinces. Prior to conducting operations, miners
must submit an environmental impact report to the provincial government
describing the proposed operation and the methods to be used to prevent undue
environmental damage. The environmental impact report must be updated
biennially, with a report on the results of the protection measures taken. If
protection measures are deemed inadequate, additional environmental protection
may be required. Mine operators are liable for environmental damage. Violators
of environmental standards may be caused to shut down mining operations.
Minera Andes Properties
The sections that follow discuss certain properties that are or have been the
subject of joint venture agreements with third parties or that we have more
intensively explored.
14
{GRAPHIC OMITTED}
Figure 1
15
A. San Juan Project Summary Which Includes Los Azules
--------------------------------------------------
1. San Juan Project Location
The San Juan Province Project comprises five properties totaling 20,900 ha
in southwestern San Juan province. Elevation ranges from 2,500 m to 5,500 m
and moderate to high relief.
2. San Juan Area Project Geology
The project area extends from the western margin of the Cordillera Frontal
to the Cordillera Principal. The area is principally underlain by
Permo-Triassic Choiyo Group volcanic rocks, a multi-phase igneous sequence
comprising volcanic breccias, ignimbrites, tuffs and rhyolites, intruded by
granites and overlain by extrusive acidic volcanic rocks. Jurassic
continental, marine and volcanic derived sedimentary rocks unconformably
overlay Permo-Triassic rocks. The youngest rocks in the project area
comprise Tertiary volcanic and intrusive rocks, which are common hosts of
epithermal gold mineralization as evidenced by deposits in the Chilean
Andes.
3. San Juan Project Exploration
No formal records of previous exploration in the project area exist.
Evidence of prospecting (small trenches or pits) exists on some of the
cateos. The area is currently active with pre-development work at the El
Pachon copper deposit.
The San Juan Province project is a regional reconnaissance program, focused
on epithermal gold and gold-copper porphyry targets in the eastern
cordillera. All of the lands were acquired based on the results of
satellite image analysis. Preliminary field examination, including rock
chip sampling and property-wide stream sediment sampling, has been
completed on all properties.
Detailed work at Los Chonchones included reconnaissance-scale geologic
mapping and geochemical surveys. Results returned a number of anomalous
gold and/or copper values in all sample types, scattered throughout the
color anomalies and concentrating in the center of the southwest anomaly.
Lands are held pending possible joint ventures.
4. San Juan Area Project Ownership
Our lands in San Juan consist of three applications for cateos and 4
manifestations of discovery and total 20,900 ha. At present, these lands
are not subject to a royalty, however, the government of San Juan has not
waived its rights to retain up to a 3% "mouth of mine" royalty from
production. Property canon fees for the properties in 2005 are estimated at
$1,616.
5. Los Azules Project Geology
In April 1999, the Company signed an agreement with Battle Mountain Gold
Corporation regarding a joint venture on Minera Andes' Los Azules cateo
application in Calingasta Department, San Juan. Battle Mountain controlled
land contiguous to the Los Azules property. Battle Mountain failed to meet
their exploration obligations and subsequently withdrew from the agreement
in April of 2000.
The hydrothermal system at Los Azules is an altered area approximately 5 km
by 8 km surrounding a core mineralized porphyry target that is about 1 km
by 3 km in size. The target straddles the Minera Andes property boundary
where drilling on the adjacent property has revealed copper grades and
thicknesses that increase toward the Minera Andes ground and contain up to
0.55% total copper and 2.1gm silver over 143 meters in holes that end in
16
mineralization. Surface sampling on the Minera Andes porphyry target
reveals gold values ranging from nil to 0.3 grams gold in a stockwork zone
that is leached. The Minera Andes target remains to be tested by drilling.
The 100 percent-owned Los Azules project is 3,418 hectares (8,633 acres)
and was discovered by Minera Andes' geologists through regional exploration
in the Andes. The project is situated in Argentina near the Argentina/Chile
border between two prolific mineral belts that straddle the border and is
held as an application for a exploration permit (cateo). To the north of
the property, the El Indio gold belt is host to multi-million ounces of
gold, and includes significant gold discoveries such as Veladero,
Sancarron, Pascua and El Indio-El Tambo. The property lies in a belt of
porphyry copper prospects such as El Pachon (Noranda), El Altar (Rio Tinto)
and los Piuquenes (Rio Tinto).
6. Los Azules Exploration
Minera Andes' geologists discovered the Los Azules property through
regional exploration and prospecting using Landsat imaging, mapping and
sampling. The acquired land position covers approximately half of a large
area of hydrothermal alteration typically associated with mineralized
systems. Exploration drilling in 1998 within 1.2km of the northern property
boundary by Battle Mountain Gold ("BMG") discovered significant copper
intervals including a 117-meter interval of 0.61% copper).
BMG also completed an airborne magnetics survey over the entire Los Azules
target area. This work also validates the porphyry target on the Minera
Andes ground. The base of information for Los Azules is taken primarily
from an unsigned "Battle Mountain Gold" report, titled "Los Azules
Project", Final Report, dated September 1999, by Battle Mountain Canada
Ltd., San Juan, Argentina and includes drilling data presented on Los
Azules along with some of the technical information provided to Minera
Andes Inc. by Battle Mountain Gold under the terms of a joint venture
agreement.
In December 2003 Minera Andes initiated an exploration program at Los
Azules. including geologic mapping and sampling, ground magnetic and
induced polarization geophysical surveys and core drilling. In May of 2004
we reported the discovery of a large, enriched (chalcocite) copper. The
mineralized area is approximately 1500 meters by 2000 meters. Drilling
returned up to 0.8% copper over 36 meters and 120 meters of 0.54% copper
within an area defined by geology, MIMDAS deep penetration IP and magnetic
geophysical surveys.
Nine reconnaissance core holes totaling 2,050 meters were drilled in the
campaign to depths of between 154 to 330 meters. The primary focus of the
drilling was to test the extension of known leachable (chalcocite) copper
mineralization identified on the adjacent property. Minera Andes' drilling
tested a deep penetrating IP chargeability high anomaly as well as a
well-defined magnetic low on its eastern flank. Drilling at Los Azules
encountered features typical of many porphyry copper systems. In the
discovery zone, strongly leached cap rock extends from 65 to 161 meters
depth followed by an enriched zone of secondary copper mineralization
(chalcocite) overlying a zone of mixed secondary and primary (chalcopyrite)
copper mineralization. The mineralization in our drilling is consistent
with the mineralization observed in a prior drill hole by Battle Mountain
Gold some 220 meters north of Minera Andes' property, which contained a
117-meter interval of 0.61% copper in the enriched zone.
17
-----------------------------------------------------------------------------
Significant Drilling Results at Los Azules
-----------------------------------------------------------------------------
TD Intersection True Total
From To Thickness Copper
Drill Hole (m) (m) (m) (m) Percentage
---------- ------- ------------ ----------- ----------------- ---------------
AZ-04-01 195 130 195 56 0.62
150 192 including 36 0.82
---------- ------- ------------ ----------- ----------------- ---------------
AZ-04-02 330.5 164 304 140 0.38
164 190 including 26 0.47
230 304 and 72 0.42
---------- ------- ------------ ----------- ----------------- ---------------
AZ-04-04 300.8 162 282 120 0.54
162 202 including 40 0.59
236 282 and 46 0.64
---------- ------- ------------ ----------- ----------------- ---------------
AZ-04-07 168.8 96 152 56 0.44
126 152 including 26 0.58
---------- ------- ------------ ----------- ----------------- ---------------
Hole AZ-04-03, drilled within the enriched copper target, penetrated 154
meters of leached cap but failed to reach the enriched copper target. Other
reconnaissance holes examined the outer boundaries of the target and tested
these areas for the presence of primary sulfide mineralization. Drill hole
AZ-05 tested an outcrop to the west of the geophysical anomalies and
encountered fresh rhyolite. Core holes AZ-04-08 and AZ- 04-09 were drilled
in the center of the induced polarization chargeability high and
encountered mostly primary sulfides ranging from nil up to 0.25% copper. In
addition, surface sampling encountered gold in breccias ranging from nil up
to 6.94 grams per tonne in grab samples.
B. San Jose Project Summary
------------------------
1. San Jose Project Location
Formerly known as El Pluma/Cerro Saavedra, the San Jose property package is
located in the Santa Cruz province of Argentina, 230 km southwest of the
city of Comodoro Rivadavia, near latitude 46E41'S and longitude
70(degree)17'W. The property consists of one cateo and 46 manifestations of
discovery covering a total of 40,499 ha (approximately 404 km2).
Road access to the property is good and consists of paved highways to
within 80 km and then via a well-maintained gravel road. Topography varies
from gently rolling to locally rugged; elevations range from 300 to 700 m
above sea level. Most day-to-day supply requirements can be met by the
settlements of Las Heras (130 km from the property), Caleta Olivia (250 km
from the property) or Comodoro Rivadavia; specialized supplies and
equipment must be procured from Buenos Aires, Mendoza, or abroad. Major
hydroelectric transmission lines pass within 50 km of the property.
2. San Jose Project Geology
The project area occurs in the Deseado Massif, a package of Middle to Upper
Jurassic volcanic rocks locally overlain by Cretaceous sediments and
Tertiary to Quaternary basalts. The Jurassic rocks are divided into the
Bajo Pobre Formation, of intermediate composition, and the felsic Bahia
Laura Group. The Bahia Laura Group is in turn subdivided into the Chon Aike
Formation (dominantly ignimbrites) and the La Matilde Formation (dominantly
volcaniclastic rocks). Several potentially important, low sulfidation
epithermal deposits have recently been discovered in the massif, including
the Cerro Vanguardia deposit which has a reserve of greater than 3.2 Moz Au
equivalent. Exploration by a number of companies is ongoing in the massif.
18
On the San Jose property the prospective Jurassic stratigraphy is exposed
in erosional windows through the overlying sediments and basalts. The Bajo
Pobre Formation, the oldest unit, consists of massive andesitic flows,
volcaniclastic material and minor dacite. Ignimbrites and lesser sediments
tentatively correlated with the La Matilde Formation occur in a synvolcanic
subsidence graben known as the Saavedra West basin. Pebble dikes, varying
in thickness from one centimeter to ten meters, are common in the southwest
part of the Saavedra West basin. Ignimbrites and minor rhyolites of the
Chon Aike Formation, younger than the La Matilde basin-fill material, occur
as a complicated series of dikes along the bounding faults of the west part
of the Saavedra West basin, as a sequence of extrusive ignimbrites at Cerro
Celular and in isolated pockets elsewhere in the northern third of the
property.
Cretaceous sediments locally overlie the Jurassic volcanics. Poorly exposed
over most of the property, these sediments are up to 50 m thick in the
northern part of the project area. The youngest rocks are Tertiary to
Quaternary basalts which form cliffs up to ten meters high and extensive
plateaus. Approximately 60% of the property is covered by five to 50 meters
of post-mineralization, Cretaceous to Quaternary rocks.
The San Jose project contains a variety of target areas, the two most
important of which are Huevos Verdes and Saavedra West.
Huevos Verdes is a system of en echelon, variably mineralized,
north-northwest trending quartz veins with associated strong argillic
alteration, cutting the Bajo Pobre Formation. In this area, the Bajo Pobre
Formation consists of massive and fragmental andesite. The vein system
occurs over a strike length of at least 2.2 km and possibly as much as 3.5
km. The central and northwest parts of the system are covered by Cretaceous
tuffs and sediments and locally by Tertiary basalt; geophysical work has
confirmed the continuity of the system below cover. Mineralized quartz
veins with true thicknesses up to 11 meters (36.1') have been intersected
in drill holes and trenches over the entire length of the Huevos Verdes
vein system.
Saavedra West is interpreted as a synvolcanic graben developed within the
Bajo Pobre Formation, and infilled by pyroclastic and lesser sedimentary
rocks correlated with the La Matilde Formation. Pebble dikes are abundant
within the graben and ignimbrites that may be correlative with the Chon
Aike Formation occur as dikes. At Saavedra West mineralization occurs in a
200 m section of epithermal quartz vein, and an ovoid-shaped, 20 meter by
60 meter high-grade breccia zone immediately adjacent to the vein.
Additional targets on the property are associated with four structural
trends. These trends are defined by geophysical anomalies, intermittently
exposed vein, breccias, and vein float, with high-grade gold/silver values
over a total of more than 30 km of potential strike length. These features
are consistent with a large, partially eroded epithermal low sulfidation
precious metals mineralized system.
3. San Jose Project Exploration
Santa Cruz is one of Argentina's least well-explored provinces. The area
was explored under the Argentine government-United Nations regional
exploration Plan Patagonia-Comahue in the 1970s. In the 1980s, FOMICRUZ,
S.E., a state owned company, completed reconnaissance surveys in the
province to delineate areas of interest for mineral reserves.
The San Jose property has not previously been staked. There is no record of
any previous sustained exploration, although portions of the area may have
been sampled during at least one regional reconnaissance program.
19
Work since 2001, conducted by MHC (see "San Jose Project Ownership" below),
consisted of underground development work and drilling, core drilling,
trenching, geological and geophysical surveys, surveying and metallurgical
studies. Work on the property from 1997 to 2001 by Minera Andes and from
2001 to the present by MHC has consisted of the following:
Underground development:
Horizontal 1,912 meters
Vertical 510 meters
Underground drilling 8 holes for 266 meters
Reverse circulation drilling: 83 holes for 8,295 meters
Core drilling: 50 holes for 7,850 meters
Trenching: 201 trenches for 8,852 meters
Rock sampling: 3450 samples
Soil sampling: 2302 samples
Stream sediment sampling: 368 samples
CSAMT geophysics: 42 line kilometers
Gradient array I.P.: 183.7 line kilometers
RealSection I.P.: 23.5 line kilometers
Ground magnetic surveys: 186 line kilometers
In addition significant camp infrastructure (sufficient for a work force of
200) has been built.
In July 2004 a feasibility study was commissioned by the joint venture
operating company, Minera Santa Cruz (MSC). The feasibility study is being
compiled and managed by MTB Project Management Professionals, Inc., of
Denver, CO. The purpose of the study, to be completed in mid-2005, is to
establish a basis for both project financing, and regulatory and permitting
approvals. The study will also serve as a foundation for detailed
engineering, including mine design and ore reserve development.
Exploration in 2004 at San Jose resulted in the discovery of high-grade
gold-silver mineralization in drill holes at Huevos Verdes East (2 km
northeast of the resource area at Huevos Verdes). This new high-grade zone
is defined by three drill holes with the best drill intercept in the new
zone averages 1.57 opt (53.75 g/t) gold and 50 opt (1,711.6 g/t) silver
over 1.04 m in drill hole SJD-31. This intercept is part of a larger 41 ft
(l2.5 m) interval with multiple zones of high-grade gold/silver
mineralization.
Also in 2004, three new zones of gold/silver mineralization were recently
discovered at the Aguas Vivas area located on trend about 10 km to the
northwest of Huevos Verdes. The location and style of mineralization at
Aguas Vivas suggests it may be a northwestern extension of the Huevos
Verdes/El Pluma mineralized trend. The sample, taken from both vein outcrop
and float, yielded results ranging from nil to 14.3 g/t gold and 45.6 g/t
silver.
The underground exploration work currently underway includes the sinking of
two 45-degree angle decline shafts and the construction of tunnels or
galleries on two levels of the main Huevos Verdes vein. During 2004 some
1,912m of horizontal and 510m of vertical workings were completed. The
immediate objective is to define a minable ore reserve through bulk
sampling and drilling on these two levels. This is an essential step prior
to considering the mine development decision. It is estimated that the
length of the galleries that will permit exploration along the vein will
initially be approximately 2,270 m (about 7,500 feet).
20
a. Mineralized Material
We are reporting these results as mineralized material.
Mineralized material does not represent proven and probable
reserves because even though enough drilling and trenching
indicate a sufficient amount and grade to warrant further
exploration or development expenditures, these mineral deposits do
not qualify under the U.S. Securities and Exchange Commission
standards as being commercially minable until further drilling,
metallurgical work and other economic and technical feasibility
factors based upon such work are resolved. We report mineralized
material on the basis that the potential exists for
reclassification of significant amounts of this material to
reserves following additional drilling and/or final technical,
economic, and legal factors have been determined for the project.
An estimate was done under contract for Minera Andes by Snowden
Mining Industry Consultants Inc. ("Snowden"). Snowden, an
internationally recognized consulting engineering firm
headquartered in Australia, provided a report dated July 26, 2002
authored by Robert Cinits, P.Geo., and Steven Blower, P. Geo.,
pursuant to Canadian National Instrument 43-101 (the "Report").
The Snowden staff based in Vancouver, B.C. completed the study.
The Report was previously filed on SEDAR on August 16, 2002 and is
available for review on their Web site.
Our summary of this study indicates mineralized material
containing 922,600 gold equivalent ounces or 55.4 million silver
equivalent ounces above a 50 g/t silver cutoff grade from the
Huevos Verdes and the Saavedra West areas of the San Jose project.
(Au equivalent is based upon $300 gold and $5.00 silver prices, or
a 60:1 silver/gold ratio, which does not take into consideration
possible differences in metal recoveries.)
i. Huevos Verdes Mineralized Material
In a 2.2 km section of epithermal vein at Huevos Verdes
Snowden estimated mineralized material to total 3,584,000
tonnes grading 235.3 g/t silver and 2.72 g/t gold using a
cutoff grade of 50 g/t Ag. Table 1 summarizes the classified
mineralized material estimate for the Huevos Verdes zone at
various silver cutoff grades.
==============================================================
Table 1. Huevos Verdes Mineralized Material
==============================================================
Ag Tonnage Au
Cutoff Tonnes Ag Grade Au Grade Equivalent*
(g/t) (x1000) (g/t) (g/t) (g/t)
--------------------------------------------------------------
750 163 884.1 8.88 23.61
--------------------------------------------------------------
500 381 725.2 7.50 19.59
--------------------------------------------------------------
250 1073 475.1 5.03 12.95
--------------------------------------------------------------
200 1536 399.4 4.16 10.82
--------------------------------------------------------------
150 2100 339.4 3.70 9.36
--------------------------------------------------------------
100 2599 297.6 3.34 8.30
--------------------------------------------------------------
50 3584 235.3 2.72 6.64
--------------------------------------------------------------
(*) Au equivalent is based upon $300 gold and $5.00 silver
prices, or a 60:1 silver/gold ratio, which does not
take into consideration possible differences in metal
recoveries.
==============================================================
The estimate of mineralized material was based on drilling by
Minera Andes and MHC. To date, 32 of 53 holes drilled in four
campaigns at Huevos Verdes have intersected high-grade gold
21
and silver mineralization over potentially mineable widths.
This drilling is confined to approximately 2.2 kilometers of
the known 5 kilometers of strike length for the Huevos Verdes
vein, which remains open at depth and along strike. The Huevos
Verdes vein is one of four vein targets with a combined
potential strike length of over 20 km.
ii. Saavedra West Mineralized Material
The gold/silver mineralization currently identified at
Saavedra West is comprised of: 1) a 200 m section of
epithermal quartz vein, and 2) an ovoid-shaped, 20 meter by 60
meter high-grade breccia zone immediately adjacent to the
vein. Snowden estimated mineralized material to total 961,000
tonnes grading 245.9 g/t silver and 1.00 g/t gold, using a
cutoff grade of 50 g/t Ag. Table 2 summarizes the classified
mineralized material estimate at various silver cutoff grades.
===========================================================
Table 2. Saavedra West Mineralized Material
===========================================================
Ag Tonnage Au
Cutoff Tonnes Ag Grade Au Grade Equivalent
(g/t) (x1000) (g/t) (g/t) (g/t)
----------------------------------------------------------
750 34 807.9 6.04 19.51
----------------------------------------------------------
500 85 683.8 4.49 15.89
----------------------------------------------------------
250 305 447.0 2.45 9.90
----------------------------------------------------------
200 556 342.3 1.58 7.28
----------------------------------------------------------
150 657 317.0 1.36 6.65
----------------------------------------------------------
100 794 283.5 1.19 5.92
----------------------------------------------------------
50 961 245.9 1.00 5.10
----------------------------------------------------------
(*) Au equivalent is based upon $300 gold and $5.00 silver
prices, or a 60:1 silver/gold ratio, which does not
take into consideration possible differences in metal
recoveries.
==========================================================
23
b. Metallurgical Studies
Metallurgical test work, commissioned by MHC tested 485 kg of
material composed of drill cuttings from 17 reverse-circulation
holes containing high-grade gold and silver from the Huevos Verdes
vein. The test work and report was completed by TECSUP in Lima,
Peru, a private technology institute that performs research,
training, and commercial work for the mining industry. TECSUP
receives support and funding from the Peruvian mining industry,
including MHC. The metallurgical samples were collected so as to
be representative of the mineralized material at Huevos Verdes
described above.
A total of 37 samples were collected totaling 485 kg of high-grade
gold/silver mineralization representative of the estimated
resource at Huevos Verdes. Before combining into a bulk sample the
individual samples were crushed and a 1 kg sample was extracted
and blended with the other extracted samples to create the
representative composite sample. Fire assay was used to define the
metal recoveries.
Gravity concentration, flotation and chemical cyanide leaching
tests were conducted on the samples. The best recoveries are from
the combined flotation and leaching tests with total gold
recoveries of 94.0%, and silver, 92.1%. Gravimetric concentration
combined with cyanide leaching gives a recovery of 94.2% gold and
89.2% silver. Recovery efficiency and cost reduction benefits are
22
likely to be enhanced during process optimization, as the
mineralized material has a simple mineralogical composition and is
low in sulfides and detrimental compounds.
4. San Jose Project Ownership
The San Jose project area is made up of one cateo and 46 manifestations of
discovery totaling 40,499 ha. The cateos are located in the western half of
the province of Santa Cruz. All of the cateos are controlled 100% by Minera
Santa Cruz S.A., a holding and operating company set up under the terms of
the agreement with MHC. Any production from these lands may be subject to a
provincial royalty. Holding costs for 2005 are estimated to be $332,800.
On March 15, 2001, we signed an option and joint venture agreement with MHC
for the exploration and possible development of Minera Andes' epithermal
gold-silver exploration land package at El Pluma/Cerro Saavedra (now
referred to as the San Jose project), including Huevos Verdes.
Under the agreement, MHC could earn a 51% ownership in the JV by spending a
total of $3 million in three years, and a minimum of $100,000 per year on
exploration targets within the JV other than Huevos Verdes, the most
advanced prospect. In addition, MHC will make semiannual payments totaling
$400,000 per year until pilot plant production is achieved. Lands have been
transferred to a holding and operating company, MSC, which is owned 49% by
MASA.
Once MHC vested at 51% ownership, we had the option of participating in the
development of a pilot production plant that would process a minimum of 50
tons per day (tpd). We could participate on either a pro-rata basis, or by
choosing to retain a 35% "carried" ownership interest. Upon the successful
completion and operation of the 50 tpd plant, we would have the option of
participating on a pro-rata basis, or choosing a 15% interest in return to
being "carried" to first production of 500 tpd. Failure by either party to
contribute to work programs will result in simple dilution of that party's
interest in the project.
On May 6, 2003 we received notice from MHC pursuant to the option agreement
with MHC that it had completed $3,000,000 in expenditures and would vest
51% in the San Jose project.
On July 1, 2003, MHC acquired 51% of the issued and outstanding shares of
MSC pursuant to the option agreement with MHC.
On July 24, 2003 we announced that MSC has a planned exploration program
and budget which covers a 17-month period to November 2004 and will consist
of a comprehensive program that includes underground
exploration/development, environmental studies, metallurgical studies, and
construction and commissioning of a pilot plant at the Huevos Verdes vein
area. In addition, a program of geophysics, surface sampling and drilling
is planned for targets at the San Jose project, other than Huevos Verdes.
The program is budgeted at $12.2 million as follows:
Additional exploration at San Jose: $2.0 million
Underground exploration and reserve development at Huevos Verdes: $4.2
million
Metallurgical testing and pilot plant construction at Huevos Verdes: $6.0
million
On September 11, 2003 we notified MHC that we opted to retain our 49%
ownership in MSC.
At Huevos Verdes, MHC, as operator of the project, is currently
constructing two inclined shafts and a series of workings (4,259 m in
total) on two levels to facilitate underground exploration with the goal of
upgrading the existing gold-silver resource to the reserve category.
23
In October 2004, an amendment to the joint venture agreement eliminated a
requirement for initial preliminary production from a 50 ton-per-day (tpd)
pilot plant to process mined ore if the Huevos Verdes vein proceeds to
production. The amendment allows the parties to eliminate a costly pilot
plant and proceed directly to full production based on a positive bankable
feasibility study.
C. Santa Cruz Project Property Summary
-----------------------------------
1. Santa Cruz Project Location
Minera Andes currently holds 20 cateos and 57 manifestations of discovery
in the Deseado Massif region of Santa Cruz. These properties are located at
moderate elevations (300 to 1,000 m above sea level). Topography varies
from gently rolling to locally rugged. The Deseado Massif is a cold desert.
Access to the properties is by dirt road and trail.
2. Santa Cruz Project Geology
The project area covers the Deseado Massif, a package of Middle to Upper
Jurassic volcanic rocks locally overlain by Cretaceous sediments and
Tertiary to Quaternary basalts. The Jurassic rocks are divided into the
Bajo Pobre Formation, of intermediate composition, and the felsic Bahia
Laura Group. The Bahia Laura Group is in turn subdivided into the Chon Aike
Formation (dominantly ignimbrites) and the La Matilde Formation (dominantly
volcaniclastic rocks). Several potentially important, low sulfidation
epithermal deposits have recently been discovered in the massif, including
the Cerro Vanguardia deposit which has a reserve of greater than 3.2
million oz Au equivalent. Exploration by a number of companies is ongoing
in the massif.
3. Santa Cruz Project Exploration
Santa Cruz is one of Argentina's least well-explored provinces. The area
was explored under the Argentine government-United Nations regional
exploration Plan Patagonia-Comahue in the 1970s. In the 1980s, FOMICRUZ,
S.E., a state owned company, completed reconnaissance surveys in the
province to delineate areas of interest for mineral reserves.
Minera Andes has been actively exploring in the region since 1997. The
properties have been acquired on the basis of geologic and geochemical
reconnaissance. Geologic evaluation of these grassroots targets is ongoing.
In 2004 Minera Andes identified four new gold/silver prospects and drilled
two properties, El Trumai and La Huella, in Santa Cruz province. Additional
drilling at these and other properties will be undertaken in 2005.
4. Santa Cruz Project Ownership
We currently control 20 cateos and 57 manifestations of discovery (totaling
122,263 ha) in Santa Cruz province. Land holding costs for 2005 are
estimated at $3,819.
D. Chubut Project Property Summary
-------------------------------
1. Chubut Project Location
We currently hold 20 manifestations of discovery in the Precordilleran and
Patagonian Massif regions of Chubut totaling 19,900 ha. These properties
are located at moderate elevations (300 to 1000 m above sea level) in
central and western Chubut. Access to the properties is by dirt road and
trail.
24
2. Chubut Project Geology
Jurassic-Cretaceous volcanic terranes have been the focus of exploration in
the southern Chilean Cordillera over the past decade. These rocks are
potential hosts of epithermal gold and gold rich replacement deposits
attested to by the discoveries, in Chile, at Fachinal (epithermal Au-Ag),
El Toque (base metal, stratabound replacement deposit with a minor precious
metal credit) and, in Argentina, the Esquel Project. This high-grade vein
system contains an announced resource of 4.2 million ounces of gold, and
7.8 million ounces of silver. In Argentina, rocks of the same age and type
occur in both Andean and extra-Andean Patagonia. These areas are relatively
unexplored.
3. Chubut Project Exploration
Chubut was included in the United Nations and Argentina government's Plan
Patagonia-Comahue exploration program in the 1960s and 1970s. This campaign
delineated several prospects with weak to moderate base metal anomalies.
The samples were not analyzed for their precious metal content.
In 1997, Minera completed reconnaissance surface sampling and mapping on
five properties in the western Chubut province. This work indicates the
potential for mineralized epithermal and porphyry or intrusive-related
systems.
At the El Valle property, the initial exploration located a north-northeast
trending zone of illitic alteration and mineralization about 1.5 km wide
and three km long. Numerous northwest and northeast trending veins, some up
to five meters wide and more than 500 m long, have also been located in
tuffaceous rocks within the zone of alteration. The zone is open to the
west and south under Quaternary alluvium in valleys, and open-ended to the
north and east under Quaternary alluvium and post-mineral Tertiary basalt.
Results from the 40-sample reconnaissance program on this property show
gold values ranging from below detection limit to 14.6 g/t. Several high
values, above 3 g/t gold, are from outcrops and float from multistage
epithermal quartz veins. Some of the samples with low gold values show
strongly anomalous pathfinder elements such as mercury (in the low 2,000 to
13,000 ppb range) that may indicate higher levels in the gold system. No
exploration was done at El Valle in 2002 or 2003.
On the basis of fixed-wing overflights and general geological
reconnaissance, an additional ten cateos were acquired in late 2002 in the
northern Patagonian Massif and Precordilleran regions of Chubut.
Expenditures in 2004 relate to an ongoing reconnaissance exploration
program on these lands. A similar level of expenditure is planned for 2005.
4. Chubut Project Ownership
We currently control 20 manifestations of discovery, totaling 19,900 ha, in
Chubut province. Holding costs for 2005 are estimated at $2,020.
In August 2000, Minera Andes Inc. and Brancote Holdings PLC subsidiaries
signed an agreement to purchase two of Minera Andes' gold exploration
properties in Chubut province, southern Argentina. The agreements cover the
Willimanco, Leleque and Leon properties. Brancote's Argentine subsidiaries,
Minera El Desquite S.A. and Cordon Leleque S.A., had a four-year option to
purchase Willimanco and Leleque (and adjoining Leon properties) for a
combined total of $1.25 million and a 2% net smelter return royalty.
Following the acquisition of Brancote Holdings PLC by Meridian Gold Inc.,
Minera Andes completed the sale to Meridian Gold of the Willimanco, Leleque
and Leon properties for US$720,000 and Peso$200,000 for an approximate
total of US$777,000.
25
Summary
The above disclosure on our properties has been prepared by, and/or reviewed by
Brian Gavin, Vice President-Exploration of Minera Andes Inc. and a "qualified
person" within the meaning of Canada's National Instrument 43-101.
ITEM 3. LEGAL PROCEEDINGS
We are not currently aware of any material legal proceeding, actual,
contemplated or threatened, to which we are a party or of which any of our
property interests is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2004.
26
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Shares are listed on the TSX Venture Exchange ("TSX-V") under the
trading symbol MAI and, since November 5, 1997, the Common Shares have also been
quoted on the NASD's OTC Bulletin Board over -the-counter market under the
trading symbol MNEAF.
The high and low prices for the Common Shares reported by the TSX-V for each of
the quarters during the years ended December 31, 2004 and 2003 are set forth in
the table below:
High ($Cdn) Low ($Cdn)
2003 January - March 0.55 0.25
April - June 0.31 0.25
July - September 0.43 0.24
October - December 0.65 0.31
2004 January - March 0.84 0.47
April - June 0.58 0.38
July - September 0.65 0.36
October - December 0.79 0.60
The high and low prices for the Common Shares reported for the OTC Bulleting
Board for each of the quarters during the years ended December 31, 2004 and
December 31, 2003 are set forth in the table below:
High ($US) Low ($US)
2003 January - March 0.35 0.18
April - June 0.25 0.18
July - September 0.32 0.18
October - December 0.51 0.24
2004 January - March 0.63 0.33
April - June 0.45 0.28
July - September 0.51 0.28
October - December 0.63 0.49
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
As of December 31, 2004, there were approximately 227 holders of record of our
Common Shares. No dividends have ever been paid on our Common Shares, and we
intend to retain any earnings for use in the business and do not expect to pay
dividends in the foreseeable future.
At December 31, 2004, 309,000 options were available for grant under our stock
option plan ("the Plan"). The aggregate number of shares to be delivered upon
exercise of all options granted under our stock options plan shall not exceed
20% of our issued and outstanding Common Shares up to a maximum of 6,000,000
shares. No participant may be granted an option under the Plan which exceeds the
number of shares permitted to be granted pursuant to rules or policies of any
stock exchange on which the Common Shares is then listed.
27
Under the Plan, the exercise price of the shares covered by each option shall be
determined by the directors and shall be not less than the closing price of our
Common Shares on the stock exchange or stock exchanges on which the shares are
listed on the last trading day immediately preceding the day on which the stock
exchange is notified of the proposed issuance of option, less any discounts
permitted by the policy or policies of such stock exchange or stock exchanges.
If an option is granted within six months of a public distribution of our Common
Shares by way of prospectus, then the minimum exercise price of such option
shall, if the policy of such stock exchange or stock exchanges requires, be the
greater of the price determined pursuant to the provisions of the Plan and the
price per share paid by the investing public for our Common Shares acquired by
the public during such public distribution, determined in accordance with the
policy of such stock exchange or stock exchanges. Options granted under the Plan
will not be transferable and, if they are not exercised, will expire one (1)
year following the date the optionee ceases to be director, officer, employee or
consultant of Minera Andes by reason of death, or ninety (90) days after ceasing
to be a director, officer, employee or consultant of Minera Andes for any reason
other than death.
EQUITY COMPENSATION PLAN INFORMATION
====================================================================================================================
No. of securities to be Weighted-average No. of securities
issued upon exercise exercise price of remaining available for
of outstanding outstanding options, future issuance under
options, warrants and warrants and rights equity compensation
rights plans (excluding securities
reflected in column (a))
(a) (b) (c)
Plan Category
====================================================================================================================
Equity compensation 4,698,500 Cdn$0.49 309,000
plans approved by
security holders
--------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders -- -- --
--------------------------------------------------------------------------------------------------------------------
Total 4,698,500 Cdn$0.49 309,000
====================================================================================================================
Recent Sale of Unregistered Securities
On March 22, 2005, we sold 18,180,450 units to accredited investors at a price
of Cdn$0.55 per unit for an aggregate of approximately Cdn$10 million
(US$8,261,778). Each unit consists of one common share and one-half of one
common share purchase warrant. One whole common share purchase warrant entitles
the holder to purchase one additional common share at an exercise price of
Cdn$0.70 per share for a period of 60 months from the closing date. The agents
for the offering were Canaccord Capital Corporation and Raymond James Ltd., with
offers and sales in the United States made by Canaccord Capital U.S.A. The
agents received cash commissions of 7% of the gross proceeds and agents'
warrants for the purchase of 1,272,632 common shares (7% of the aggregate number
of units sold in the offering) at an exercise price of Cdn$0.70 per common share
for a period of 24 months from the date of issue. In reliance on Rule 903 of
Regulation S under the Securities Act of 1933, as amended (the "Securities
Act"), units were offered and sold to purchasers outside of the United States
subject to Category 2 offering restrictions, without any directed selling
efforts. In reliance on Rule 506 of Regulation D under the Securities Act, units
were also offered and sold, without general solicitation or advertising and
subject to resale restrictions, to accredited investors in the United States who
represented they were purchasing with investment intent and without a view to
distribute the units.
28
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OF OPERATIONS
The following discussion should be read in conjunction with our audited
consolidated financial statements and notes thereto for the years ended December
31, 2004 and 2003 which have been prepared in accordance with generally accepted
accounting principles ("GAAP") in Canada. Differences from U.S. GAAP are
described in Note 12 to the audited consolidated financial statements. Our
financial condition and results of operations are not necessarily indicative of
what may be expected in future years.
Overview
Minera Andes was incorporated in Alberta in July 1994 and went public in
November 1995 through an amalgamation with Scotia Prime Minerals, Incorporated,
also an Alberta corporation. We are a reporting issuer in Alberta, British
Columbia, Ontario and Nova Scotia and trade our common shares on the TSX Venture
Exchange under the symbol MAI. We are also a Form 10-KSB filer in the U.S. and
trade on the NASD OTC Bulletin Board under the symbol MNEAF.
Our principal business is locating, acquiring, exploring, and, if warranted,
developing mineral properties located in the Republic of Argentina. From 1997
through 2000, we were also active in Colombia and Romania but elected to abandon
the properties in these countries at the end of 2000. We carry out our business
by acquiring, exploring, and evaluating mineral properties through our ongoing
exploration program, and either joint-venturing or developing these properties
further, or disposing of them if the properties do not meet our requirements.
Our current properties and projects consist of mineral rights and applications
for mineral rights covering approximately 203,562 hectares in three Argentine
provinces. The lands comprise option-to-purchase contracts, exploration, and
mining agreements and direct interests through our filings for exploration
concessions. Our properties are all early stage exploration prospects, except
for the San Jose property, which is an advanced-stage exploration project. No
proven or probable reserves have yet been identified, however, at the San Jose
property a feasibility study is underway that plans to convert some of the
mineralized material to the proven and probable categories. See "Description of
Properties."
Through our subsidiaries and joint ventures we own a 49% equity interest in MSC,
which owns the San Jose gold/silver property in Southern Argentina, and a 100%
interest in over 10 mineral properties in Argentina. San Jose is currently in
advanced exploration and underground development and a production decision is
expected in the third quarter of 2005 when the feasibility study is planned for
completion.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make a wide variety of estimates
and assumptions that affect (i) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the
financial statements, and (ii) the reported amounts of revenues and expenses
during the reporting periods covered by the financial statements. Our management
routinely makes judgments and estimates about the effect of matters that are
inherently uncertain. As the number of variables and assumptions affecting the
future resolution of the uncertainties increases, these judgments become even
more subjective and complex. The most significant accounting policies that are
most important to the portrayal of our current financial condition and results
of operations relates to mineralization and deferred development costs. Other
accounting policies are disclosed in Note 2 of Notes to Consolidated Financial
Statements.
29
Mineral properties consist of exploration and mining concessions, options and
contracts. Acquisition and leasehold costs and exploration costs are capitalized
and deferred until such time as the property is put into production or the
properties are disposed of either through sale or abandonment. If put into
production, the costs of acquisition and exploration will be depreciated over
the life of the property, based on estimated economic reserves. Proceeds
received from the sale of any interest in a property will first be credited
against the carrying value of the property, with any excess included in
operations for the period. If a property is abandoned, the property and deferred
exploration costs will be written off to operations.
Business Strategy and Development
Our business and development strategy since our inception in 1994 has been to
focus primarily on the acquisition and development of exploration stage
gold/silver and copper properties in Argentina and on the exploration and
development of these properties. Our current portfolio of properties consists of
mineral rights and applications for mineral rights, covering approximately
203,562 hectares in three provinces in Argentina.
We carry out business by acquiring, exploring and evaluating mineral properties
through our ongoing exploration program. Following exploration, we either seek
to enter joint ventures to further develop these properties or dispose of them
if the properties do not meet our requirements. We have one advanced stage
exploration property, the San Jose property, and several early stage exploration
properties with no proven or probable reserves currently identified.
Given our developing mineral resource at San Jose, our partner, who owns a 51%
interest in the project, is currently carrying out technical studies including a
feasibility study to define a mineable reserve. At the San Jose project, our
partner commenced underground exploration in 2003, and now expects to reach a
production decision in the second half of 2005. The production decision
originally anticipated last year has taken longer due to positive exploration
results which expanded the exploration program and feasibility study. If the
production decision is positive we could attain gold production commencing in
2006. However, there can be no assurance that a production decision will be
positive and start-up can be completed as anticipated or that our production
will be achieved.
Our objective is to grow our business to become a gold/silver producer over the
next few years and to add new properties that have the potential to become
profitable, producing mines. Due to higher gold prices and our improved
financial condition, we believe we are well placed to pursue the acquisition or
development of exploration properties in Argentina. We are actively
investigating the potential acquisition of new mineral exploration properties.
However, we presently have no agreement or understanding with respect to any
potential transaction. We have increased exploration activities and expenditures
on our current exploration properties in Argentina.
Overview of 2004
Our financial condition showed an improvement during 2004 through the raising of
funds through equity financing and completion of a credit facility. Cash and
cash equivalents at the end of 2004 was $1.7 million, a decrease of $.5 million
from the end of 2003. Equity offerings and warrant and option exercises provided
a net of $5 million during the year and $1 million was drawn on the credit
facility. In addition, several other significant milestones were achieved during
2004:
Minera Andes and its joint venture partner commissioned a feasibility study at
the San Jose project.
o We completed public equity offerings which provided a net $4.5 million;
o We completed a credit facility of up to $4 million for feasibility
completion and underground construction at the San Jose project;
30
o We funded and maintained our 49% interest in the San Jose project;
o We acquired several new exploration land packages in southern Argentina;
o Our partner in the San Jose project completed 2.3 km of underground
exploration workings on the Huevos Verdes vein and continued engineering
and geologic studies of the economic potential of the property;
o We advanced exploration on several wholly owned mineral properties and made
gold and silver discoveries on two properties that have advanced to the
drilling stage, and;
o We continued to pursue new growth opportunities.
Trends Affecting our Operations During 2004
Gold prices have now trended generally upward for nearly four years from a low
of $256 in early April 2001 to $454 per ounce in December 2004, an average
annual increase of 14%. The higher gold price increased our ability to equity
finance during 2004.
The market for gold company equities generally strengthened during 2004. Our
common share price began the year at $0.53 and ended the year at $0.70. The
increased interest in investing in gold and gold mining companies during the
past three years has made exploration and development capital more readily
available. As a result, we successfully raised $5 million of new equity funds
during 2004, including option and warrant exercises. We used portions of the
cash to make joint venture payments, acquire new exploration properties in
Argentina, and to fund exploration and development activities at the San Jose
project and other projects in our property portfolio. In 2005 we anticipate
using our cash to maintain our interest in the San Jose project, and to fund
other exploration activities and for other general corporate purposes. We also
expect we may have to raise additional funds to maintain our programs and
interest in the San Jose project.
Plan of Operations
We have budgeted and plan to spend approximately $3.0 million on our mineral
property and exploration activities and general and administrative expenses
through 2005, with work being conducted on several properties including an
ongoing reconnaissance program designed to make new acquisitions. See
"Description of Properties." In addition, there are plans to spend $8.2 million
for exploration, development, and feasibility completion by the third quarter of
2005 on the San Jose project that is owned by MSC, an Argentine corporation
owned by Minera Andes Inc. (49%) and MHC (51%). Assuming a positive feasibility
outcome MSC plans to seek non-recourse debt financing to complete construction
of the project. If this financing is available we may not be required to spend
additional equity funds on the project, however, the financing of the project is
uncertain at this time. To maintain our 49% interest in MSC we may need to raise
additional funds in 2005. If we cannot match MHC pro rata, we expect to have our
interest in the San Jose project diluted in accordance with the joint venture
agreement. Failure by either party to contribute to work programs will result in
simple dilution of that party's interest in the project. If additional funds are
raised during 2005 through the exercise of warrants or options, through a
further equity financing, through debt financing, by the sale of property
interests, or by joint venture financing, additional exploration would be
planned and carried out on our properties. If we were to develop a property or a
group of properties beyond the exploration stage, substantial additional
financing would be necessary. Such financing would likely be in the form of
equity, debt, or a combination of equity and debt. There is no assurance that
such financing, if necessary, would be available to us on favorable terms.
As of December 31, 2004, the Company had working capital of approximately $1.6
million, and a pending $2 million loan facility, sufficient, together with funds
from the joint venture on the San Jose property, as estimated by management, to
31
cover its budgeted expenditures for mineral property and exploration activities
on its properties outside the San Jose project in Argentina, and general and
administrative expenses through at least the end of 2005.
On March 15, 2001, we signed an option and joint venture agreement with MHC,
Lima, Peru, for the exploration and possible development of Minera Andes'
217,000-acre (88,000 hectares) epithermal gold-silver exploration land package
in southern Argentina. The land package, known as San Jose (formerly El
Pluma/Cerro Saavedra), includes Huevos Verdes, a high-grade gold/silver vein
system target, and Minera Andes' most advanced exploration prospect.
Under the agreement, MHC could earn a 51% ownership in the JV by spending a
total of $3 million in three years, and a minimum of $100,000 per year on
exploration targets within the JV, other than Huevos Verdes, the most advanced
prospect. In addition, MHC will make semiannual payments totaling $400,000 per
year (subsequently amended to $200,000 per year as noted below) until pilot
plant production is achieved. To date, MHC has made all required payments.
On May 6, 2003, we received notice from MHC that, according to their records,
they have fulfilled all obligations necessary to enable MHC to vest at 51% in
the San Jose project, including all obligations under section 4.1.2 of the
Option and Joint Venture Agreement dated March 15, 2001 (see Item 2 in the 2002
Form10-KSB and Exhibit 10.19 to the 2000 Form 10-KSB). The Company has reviewed
and accepted the information submitted by MHC.
Once MHC had vested at 51% ownership, Minera Andes had the option of
participating in the development of a pilot production plant that would process
a minimum of 50 tons per day (tpd). Minera Andes had the option to participate
on either a pro-rata basis, or by choosing to retain a 35% "carried" ownership
interest. Upon the successful completion and operation of the 50 tpd plant,
Minera Andes would have the option of participating on a pro-rata basis, or
choosing a 15% interest in return to being "carried" to first production of 500
tpd.
In the fourth quarter 2003, we notified MHC of our intent to subscribe for
additional equity in MSC, so as to maintain our 49% interest. We made a payment
to MSC of $1.7 million that will fund our 49% interest in the San Jose project
through MSC.
Effective December 31, 2003, we entered into an agreement with Degerstrom that
cancelled an agreement that was part of the original property assets vended into
Minera Andes. Terms of the Settlement Agreement are:
o The Operating Agreement was cancelled whereby management, accounting,
office and technical services were provided to us;
o A share bonus payable when a property reached a bankable feasibility was
cancelled;
o A potential underlying royalty on the San Jose project was also purchased.
As a result of these changes, we have moved our offices to a new location, set
up our own internal accounting system, and set up a new U.S. corporation to
employ certain personnel directly.
In September 2003, Allan J. Marter, a financially competent person on the audit
committee, resigned from the board of directors, due to other obligations. As of
December 31, 2004, our board of directors has determined that we did not have a
financial expert, as defined by Item 401(e) of Reg. S-B, on the audit committee.
We are seeking to add a new director to the audit committee who would qualify as
a financial expert.
On October 20, 2004, Minera Andes and MHC reached an amendment to the joint
venture agreement whereby the advanced-stage San Jose/Huevos Verdes project can
proceed directly to a large-scale milling operation should the feasibility study
underway reach a positive production decision outcome.
32
The amendment to the joint venture agreement eliminates a requirement for
initial preliminary production from a 50 ton-per-day (tpd) pilot plant to
process mined ore if the project proceeds to production. The amendment allows
the parties to eliminate the costly pilot plant and proceed directly to full
production based on a positive bankable feasibility study.
As exploration and construction has advanced at the project, it has become
apparent that a costly pilot plant can be eliminated by using a smaller,
off-site bench-scale pilot plant at a metallurgical laboratory. Eliminating the
50 tpd pilot plant will save considerable time and money should a positive
feasibility study be produced early next year. Underground construction and
exploration has revealed higher grade silver/gold mineralization than was
discovered in surface drilling, as well as previously unknown parallel veins and
mineralized offshoots from the main Huevos Verdes vein. The new discoveries hold
potential for increased production tonnage.
A bankable feasibility study is now underway by MSC to determine the economic
viability of Huevos Verdes. The study is being managed by MTB Project Management
Professionals, Inc., of Denver. The purpose of the feasibility study, due for
completion in the third quarter of 2005, is to provide an independent third
party determination of the technical and economic viability of Huevos Verdes.
The property payment structure from MHC to Minera Andes has also been changed in
the amendment where original payments totaled US$400,000 a year until a 50-ton
per day pilot was built. In lieu of building the pilot plant, the Corporation
will receive payments from MHC of US$400,000 annually that will continue until a
positive feasibility study is received. Payments are then reduced to US$200,000
annually until the MSC board of directors approves a positive mine completion
plan. When the plan is approved by the board, payments terminate.
On October 21, 2004, we accepted an offer letter from Macquarie Bank Limited
(OMacquarieO) to provide a loan facility of up to $4 million. This facility is
to be provided in two tranches to provide funding for our 49% portion of the
costs of completing a bankable feasibility study and related development work
for the San Jos project. Macquarie is an international banking group active in
providing project financing to the mining sector.
The $4 million debt facility to be provided by Macquarie consists of an initial
tranche of $2.0 million available for two years from draw-down and a further
facility of $2.0 million to be provided prior to 30 June 2005, subject to
achievement of positive exploration and development at Huevos Verdes to the
satisfaction of Macquarie. This facility will act as bridge financing for our
share of the costs of completing a feasibility study and initial work with
respect to establishing a mine at Huevos Verdes. We received $1.0 million of the
first tranche in December 2004 and the remaining $1.0 million of the first
tranche in February 2005.
The commercial terms of the loan include a facility fee of 1.5% of the principal
amount of the initial tranche and interest of Libor plus 2% per annum (p.a.),
currently totaling approx 4.1% p.a. In addition we have issued share purchase
warrants to acquire approximately 2,738,700 Common Shares of the Corporation at
an exercise price of approximately Cdn$0.91 per share. The warrants exercise
price is calculated at a 20 percent premium to the volume weighted average of
the Corporation's common stock determined from the ten business days prior to
acceptance of this offer. Each warrant is to be exercisable for two years.
Additional share purchase warrants may be issued in regard to the second tranche
of $2.0 million, on terms calculated in a similar manner at that time, upon
fulfillment of conditions precedent for that tranche.
33
Results of Operations
2004 compared to 2003
In 2004, our net loss was $2.1 million (3 cents per share), compared with a net
loss of $1.5 million (4 cents per share) in 2003. Our general and administrative
costs were $1.7 million in 2004 compared to $1.5 million in 2003. The following
table summarizes the significant changes in operations in 2004 compared to 2003.
Description 2004 2003
----------- ---- ----
Legal, audit and accounting fees1 $ 235,973 $223,824
Consulting Fees2 $ 527,838 $418,730
Foreign Exchange3 $(260,549) $(74,005)
Insurance4 $ 69,180 $ 17,598
Office Overhead and administration fees5 $ 526,279 $177,256
Wages and benefits6 $ 508,943 $187,374
Notes:
(1) Audit and accounting fees increased this year due to an overall increase in
audit fees. Legal expenses were higher in 2003 due to the review of a
potential merger that year.
(2) There were additional consultants hired in 2004 due to our increased public
and investor relations program, which increased consultant fees. Additional
consultants were also hired in 2004 to assist with accounting and financial
matters. In addition, stock option compensation relating to consultants,
valued at $127,516, was expensed to consulting fees.
(3) We realized a gain in foreign exchange. This is mostly related to the
effect of a weakening U.S. dollar offset by the associated impact on the
value of cash equivalents invested in Canadian dollar instruments.
(4) We increased our directors and officers insurance in 2004 and there was
also a substantial increase in our general liability insurance.
(5) Office overhead increased due to public and investor relations program
expenses, including a substantial direct mailing, increased advertising and
numerous conferences attended during the year, and expenses relating to the
move of our corporate headquarters.
(6) Stock option compensation relating to employees and directors, valued at
$478,020, was expensed to wages and benefits expense. Previously the
Company was only required to disclose the pro forma effect of stock options
issued to employees and directors in the notes to the financial statements.
In 2005 we will be continuing the prospecting, acquisition, exploration and
evaluation of property interests that have been our hallmark since our
inception, and we will focus on the Santa Cruz, Chubut and San Juan properties.
As in the past, if a property or program does not meet our requirements in the
future, costs associated with abandonment of the property or program will result
in a charge to operations. For this reason, we may incur additional write-offs
in future periods, although the amounts of such write-offs are difficult to
predict, as they will be determined by the results of future exploration
activities.
34
Mineral property and deferred exploration costs in 2004 amounted to $1.9 million
compared to $0.5 million in 2003.
The following table summarizes the significant changes in exploration expense
for 2004 compared to 2003.
Description 2004 2003
----------- ---- ----
Geology1 $729,425 $ 89,845
Legal2 $ 47,659 $ 29,230
Travel3 $ 93,951 $ 78,222
Project Overhead4 $ 64,503 $ 8,018
Notes:
(1) Geology increased due to an expanded exploration program, and work on our
projects including drilling.
(2) Legal fees increased due to increased land acquisitions and due diligence
work.
(3) Travel increased due to an expanded exploration program.
(4) Project overhead increased due to increased rentals, and the increase of
expenses at the field office.
2003 compared to 2002
In 2003, our net loss was $1.5 million (4 cents per share), compared with a net
income of $0.4 million (1 cent per share) in 2002. Our general and
administrative costs were $1.5 million in 2003 compared to $0.5 million in 2002.
Income from the gain on sale of the Chubut properties was $0.9 million in 2002,
which gave us our first net income.
Mineral property and deferred exploration costs in 2003 amounted to $0.5 million
compared to $0.3 million in 2002. We focused nearly all our available
exploration resources on the San Jose project in Santa Cruz province during
2003, and the success of the exploration carried out on these properties over
the last few years resulted in the joint venture arrangement which was signed
March 15, 2001. We received mineral property option proceeds of $400,000 from
the joint venture in 2003 and in 2002. In 2002, we sold two of our Chubut
properties (Willimanco and Leleque) to Meridian Gold Inc. for $777,142. The
properties were related to the purchase and sales agreement with Brancote
Holding PLC, which merged with Meridian Gold Inc. in 2002. Meridian Gold Inc.
became the surviving entity of the merger.
Contractual Obligations, Contingent Liabilities and Commitments
We enter into operating leases in the normal course of business. Substantially
all lease agreements have fixed payment terms based on the passage of time. Some
lease agreements provide us with the option to renew the lease. Our future
operating lease obligations would change if we exercised these renewal options
and if we entered into additional lease agreements. In addition we also enter
into loan facilities as sources of financing for our advanced projects.
35
Our lease and loan obligations are as follows:
----------------------------------------- ------------------------------------------------
Contractual Obligations Payments Due by Period
----------------------------------------- ------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
----------------------------- ----------- ------------ ----------- ----------- -----------
Long Term Debt $2,000,000 $ -- $ 2,000,000 $ -- $ --
----------------------------- ----------- ------------ ----------- ----------- -----------
Operating Lease Obligations 36,184 30,112 6,072 -- --
----------------------------- ----------- ------------ ----------- ----------- -----------
Purchase Obligations 444,320 444,320 -- -- --
----------------------------- ----------- ------------ ----------- ----------- -----------
Capital Lease Obligations 115,220 115,220 -- -- --
----------------------------- ----------- ------------ ----------- ----------- -----------
Other long-term liabilities -- -- -- -- --
----------------------------- ----------- ------------ ----------- ----------- -----------
Total $2,595,724 $ 589,652 $ 2,006,072 $ -- $ --
----------------------------- ----------- ------------ ----------- ----------- -----------
On December 2, 2003, we signed an agreement that obligated us to pay Degerstrom
a royalty of $250,000 if any of the current properties, other than the
properties comprising the San Jose project, meet certain conditions such as
bankable feasibility or commercial production. Our obligation expires December
31, 2013. This royalty is not included in the above table. Additionally, we are
obligated to fund our 49% of future costs at San Jose or our ownership will be
diluted. These costs are excluded from the above table.
On December 16, 2004, Minera Andes Inc. closed on the US$2 million first tranche
of the US$4 million loan facility from Macquarie Bank Limited ("Macquarie").
This facility is being provided in two tranches for funding of Minera Andes' 49%
portion of the costs of completing a bankable feasibility study and related
development work for the San Jose/Huevos Verdes silver/gold project in
Argentina. Macquarie is an international banking group active in providing
project financing to the mining sector.
In December 2004, Macquarie advanced US$1 million of the first US$2 million
tranche, and the balance of US$1 million was advanced in February 2005. This
first tranche of US$2 million is available for up to two-years from draw-down.
The second tranche of the facility, being an additional US$2 million, is to be
provided prior to June 30, 2005, subject to achievement of positive exploration
and development at Huevos Verdes to the satisfaction of Macquarie, regulatory
approvals, and completion of documentation.
The commercial terms of the loan include a facility fee of 1.5% of the principal
amount of the initial tranche and an interest rate of Libor plus 2% p.a.,
currently totaling approx 4.1% p.a. In addition, a success fee of US$20,000,
being one percent of the principal amount of the first tranche, is payable to
Xystus Limited for assisting with the structuring and negotiation of the loan
facility. A similar success fee will be paid for the second tranche.
In connection with the first tranche of the facility, Minera Andes has issued
share purchase warrants to Macquarie to acquire 2,738,700 Common Shares of
Minera Andes at an exercise price of Cdn$0.91 per share. The warrants exercise
price was calculated at a 20 percent premium to the volume weighted average of
Minera Andes' common stock determined from the ten business days prior to
acceptance of this offer. Each warrant is to be exercisable for two years and
will expire on December 15, 2006. Additional share purchase warrants will be
issueable to Macquarie in regard to the second tranche of US$2.0 million, on
terms calculated in a similar manner at that time, upon fulfillment of
conditions precedent for that tranche and appropriate regulatory approvals.
36
During 2004, MSC signed agreements with third party providers relating to a
feasibility evaluation, camp construction and communication services which will
be completed or fulfilled during 2005. Our 49 percent portion of these
commitments is $444,320.
Also during 2004, MSC signed capital lease agreements with a third party for the
provision of four scoops and related maintenance service which will be completed
or fulfilled during 2005. Our 49 percent portion of these commitments is
$115,220.
In addition, mineral rights in Argentina are owned by the federal government and
administered by the provinces. The provinces can levy a maximum 3% "mouth of
mine" (gross proceeds) royalty. The provinces of Mendoza and Neuquen have waived
their right to a royalty. The provinces of Rio Negro, San Juan, Santa Clara and
Chubut have not yet established a policy regarding the royalty.
Exploration
Minera Andes has made significant strides in its business plan during 2004,
particularly with development at the advanced-stage Huevos Verdes silver/gold
vein, located within the San Jose project area in southern Argentina. In
addition, new gold, silver and copper discoveries were made by Minera Andes on
its 100 percent-owned exploration projects in Argentina. Management has been
active in Argentina for eleven years and has developed a strong expertise in all
aspects of conducting exploration/development business therein.
We currently have a portfolio of properties totaling about 10 projects on about
203,562 hectares of mineral exploration land in Argentina. The properties
primarily contain gold, silver and copper mineralization targets. Several new
exploration properties have been acquired through the filing of mineral
applications. These properties reveal numerous similarities to Minera Andes' San
Jose property in northern Santa Cruz province. In addition two properties
advanced last year, Cerro Mojon and San Agustin, contain several mineralized
structures with favorable geologic indicators and silver values up to 10 ounces
per ton. These characteristics mirror much that has been discovered about San
Jose. Other prospects contain structures with sinter-like quartz veining and
anomalous arsenic and mercury.
All of our programs are supervised by Brian Gavin, vice president of
exploration, who has reviewed the programs and is the qualified person under
Canada's National Instrument 43-101.
Los Azules Project
In May of 2004 we reported the discovery of a large, enriched (chalcocite)
copper zone at our 100% owned Los Azules property. The overall target area is
approximately 1500 meters by 2000 meters. Drilling returned up to 0.8% copper
over 36 meters and 120 meters of 0.54% copper within an area defined by geology,
MIMDAS deep penetration IP and magnetic geophysical surveys. This new zone has
been confirmed by four drill holes showing enriched copper over an area 1000
meters by 500 meters. A fifth drill hole penetrated a thick section of related
surface alteration before stopping short of its target depth.
Nine reconnaissance core holes totaling 2,050 meters were drilled in the
campaign to depths of between 154 to 330 meters. The primary focus of the
drilling was to test the extension of known leachable (chalcocite) copper
mineralization identified on the adjacent property. Minera Andes' drilling
tested a deep penetrating IP chargeability high anomaly as well as a
well-defined magnetic low on its eastern flank. Drilling at Los Azules
encountered features typical of many porphyry copper systems. In the discovery
zone, strongly leached cap rock extends from 65 to 161 meters depth followed by
an enriched zone of secondary copper mineralization (chalcocite) overlying a
zone of mixed secondary and primary (chalcopyrite) copper mineralization. The
mineralization in our drilling is consistent with the mineralization observed in
a prior drill hole by Battle Mountain Gold some 220 meters north of Minera
Andes' property, which contained a 117-meter interval of 0.61% copper in the
enriched zone.
37
-------------------------------------------------------------------------------
Significant Drilling Results at Los Azules
-------------------------------------------------------------------------------
Intersection True Total
TD From To Thickness Copper
Drill Hole (m) (m) (m) (m) Percentage
-------------------- --------- ------- ------- ---------------- ---------------
AZ-04-01 195 130 195 56 0.62
150 192 including 36 0.82
-------------------- --------- ------- ------- ---------------- ---------------
AZ-04-02 330.5 164 304 140 0.38
164 190 including 26 0.47
230 304 and 72 0.42
-------------------- -------- -------- ------ ---------------- ---------------
AZ-04-04 300.8 162 282 120 0.54
162 202 including 40 0.59
236 282 and 46 0.64
-------------------- --------- ------- ------- ---------------- ---------------
AZ-04-07 168.8 96 152 56 0.44
126 152 including 26 0.58
-------------------- --------- ------- ------- ---------------- ---------------
Hole AZ-04-03 drilled within the enriched copper target penetrated 154 meters of
leached cap but failed to reach the enriched copper target. Other reconnaissance
holes examined the outer boundaries of the target and tested these areas for the
presence of primary sulfide mineralization. Drill hole AZ-05 tested an outcrop
to the west of the geophysical anomalies and encountered fresh rhyolite. Core
holes AZ-04-08 and AZ- 04-09 were drilled in the center of the induced
polarization chargeability high and encountered mostly primary sulfides ranging
from nil up to 0.25% copper. In addition, surface sampling encountered gold in
breccias ranging from nil up to 6.94 grams per tonne in grab samples.
San Jose Project
A significant exploration and development program is underway at the San Jose
gold/silver project in southern Argentina. The 2005 work program at the project
is designed to complete the feasibility study and related exploration and
development of the underground workings. The program will also complete
construction of surface buildings and infrastructure and explore other vein
targets already identified on the property. The development site at Huevos
Verdes currently has a work force of 188 personnel.
The 2005 San Jose budget has been expanded to total approximately US$17 million,
consisting of US$13.2 million in construction and reserve development of the
Huevos Verdes vein, US$1.5 million for the completion of the feasibility study,
and US$2.3 million for the exploration of additional targets on the property. It
is anticipated that, following completion of a positive bankable feasibility in
mid 2005, debt financing will be sought for the remainder of the required mine
development budget.
An important part of the work underway at the San Jose project is a three-part
drilling program designed to accelerate the conversion of resources into
reserves, explore existing drill discoveries such as Huevos Verdes East and to
test the new targets identified from the property-wide exploration program.
The drill program at San Jose will total approximately 30,000 meters in 96 drill
holes. The total drilling program called for about 10,000 meters in 34 holes at
Huevos Verdes; 11,180 meters in 38 holes at Huevos Verdes East and 8,000 meters
in 24 holes on exploration targets within the San Jose property.
38
Several major events occurred in 2004 to advance the San Jose/Huevos Verdes
construction project. The accelerated development at this vein-hosted,
low-sulfidation, epithermal silver/gold mineralization system has moved the
joint venture much closer to a production decision.
o A comprehensive, third-party feasibility study was commissioned to assess
possible mine production.
o Underground construction commenced focused on an area of drill-proven,
high-grade mineralization of some 2.3 km in length.
o Underground testing discovered new high-grade silver/gold zones and
previously unknown veins. These discoveries hold potential for increased
grade and tonnage at Huevos Verdes. One sample reported last year
encountered bonanza grades of 728 ounces per ton (22,653 g/t) silver and
6.4 ounces per ton (198 g/t) gold.
o Metallurgical testing of Huevos Verdes' silver/gold mineralization
demonstrated high recoveries (over 90 percent for both silver and gold) are
possible using standard industry technology.
o Reflecting confidence in Huevos Verdes, pre-production employment at San
Jose project exceeded 160 by December 2004 compared to 53 in January 2004,
an increase in work-force of over 300%.
o Access routes to the project area were completed, including a 28 km
all-weather road with bridge access, and selected surface land rights were
purchased at San Jose.
o Exploration at Huevos Verdes continued to identify more silver/gold
mineralization. The Huevos Verdes vein itself remains open at depth and
laterally. The entire San Jose project area is host to four parallel vein
structures totaling some 32 kilometres in combined length, as outlined by
reconnaissance field work and geophysical surveys conducted by Minera
Andes. Only some 15% of the outlined vein package has yet been drilled.
o Drilling at Huevos Verdes East intersected significantly higher-grade
silver/gold mineralization than is currently known at Huevos Verdes. The
Huevos Verdes East vein is a parallel vein approximately two kilometers to
the east of the Huevos Verdes vein and has excellent potential to expand
the projects reserves.
Investor Relations
During 2004 we increased our attendance at trade shows and gold conferences to
increase awareness in our activities in the mining industry. We also contracted
a substantial direct mailing and advertised our corporate profile on several
Web-based sites and in the news media. In addition, we have retained the
services of a media consultant to design company presentations and literature.
Liquidity and Capital Resources
Due to the nature of the mining business, the acquisition, exploration, and
development of mineral properties requires significant expenditures prior to the
commencement of production. To date, we have financed our activities through the
sale of equity securities and joint venture arrangements. We expect to use
similar financing techniques in the future, however, we cannot assure you that
we will be successful in our financing activities in the future. Our ability to
continue in operation is dependent on our ability to secure additional
financing, and while we have been successful in doing so in the past (including
the property and financing transactions in "Plan of Operations" and "Results of
Operations" above), we cannot assure you that we will be able to do so in the
future. Management is actively pursuing such additional sources of financing;
39
however, in the event this does not occur, there is doubt about the ability to
continue as a going concern. Our financial statements do not include the
adjustments that would be necessary should we be unable to continue as a going
concern.
In recognition of our liquidity and capital resources, our independent public
accountants have included a comment in their report on our accompanying
consolidated financial statements for the year ended December 2004, that would
express substantial doubt as to our ability to continue as a going concern .
Our exploration and development activities and funding opportunities, as well as
those of our joint venture partner, may be materially affected by precious and
base metal price levels and changes in those levels. The market prices of
precious and base metals are determined in world markets and are affected by
numerous factors which are beyond our control.
At December 31, 2004, we had cash and cash equivalents of $1.7 million, compared
to cash and cash equivalents of $2.2 million as of December 31, 2003. Working
capital at December 31, 2004 was $1.6 million compared with $2.3 million at the
end of 2003. Net cash used in operating activities during 2004 was $0.9 million
compared with $1.0 million in 2003. Investing activities in 2004 used $5.6
million, compared with $2.4 million used in 2003. The increase in investing
activity is due to the investment in the San Jose project.
Also in 2004, we secured a two-year loan facility of up to $4 million from
Macquarie Bank Limited ("Macquarie"). All amounts advanced are due in December
2006. This facility is to be provided in two tranches to fund our 49% portion of
the costs of completing a bankable feasibility study and related development
work for the San Jose/Huevos Verdes gold/silver project in Argentina.
We received $1,000,000 of the first tranche in December 2004 and the remaining
$1,000,000 of the first tranche in February 2005. As at December 31, 2004,
interest expense incurred was $33,913, of which all was capitalized to the
Investment in MSC.
The principal financing activities during 2004 were a private placement which
raised proceeds of $4,545,455, net of agents' commissions, through the issuance
of 10,000,000 units at a price of Cdn$0.65 per unit; gross proceeds of $250,401
for the exercise of 648,375 warrants; gross proceeds of $239,610 for the
exercise of 867,566 broker warrants; and $78,400 for the exercise of 330,000
stock options.
The principal financing activities during 2003 were a private placement which
raised proceeds of $4,674,790, net of agents' commissions, through the issuance
of 22,000,000 units at a price of Cdn$0.30 per unit; gross proceeds of $11,287
for the exercise of 50,000 warrants; gross proceeds of $48,677 for the exercise
of 441,667 broker warrants; and $66,696 for the exercise of 345,000 stock
options.
Outlook
We expect that the San Jose project will reach a production decision in 2005,
but will require additional cash for the development of the project described
above. It is anticipated that exploration on other projects and acquisition of
new projects will require additional cash.
At December 31, 2004 there was approximately $1.7 million of cash and cash
equivalents on hand and a pending credit facility of up to $3.0 million. In
addition, in March of 2005, we completed an equity financing that netted $7.45
million. We anticipate capital spending of approximately $11.2 million in 2005;
however, our cash needs may change for the San Jose project, as new exploration
may cause the budget to increase or decrease depending on its success.
40
Looking Ahead
Our main objectives in 2005 are to:
o maintain our 49% interest in the San Jose joint venture;
o continue to evaluate and advance our current property portfolio;
o substantially increase exploration efforts with a focus on gold and silver
targets in southern Argentina and elsewhere;
o continue efforts to seek out and evaluate acquisition and growth
opportunities in Argentina, and;
o complete a bankable feasibility and advance the San Jose project toward a
production decision at San Jose by the second half of 2005.
o complete bank project financing assuming a positive feasibility outcome and
start process plant construction.
As more fully disclosed in Item 1 - "Risk Factors Related to our Business",
numerous factors could cause our estimates and expectations to be wrong or could
lead our management to make changes in our plans. Under any of these
circumstances, the estimates described above would likely change materially.
Mining in Argentina
We constantly review the social and political aspects of Argentina in general to
apprise ourselves of the social situation and political risks that exist in the
region. Argentina has benefited from an extended period of political stability
and a democratic governmental system including orderly governmental transitions.
It is our belief that Argentina is committed to creating a stable political and
economic environment that will foster additional economic growth.
Argentina is endowed with abundant mineral resources and is actively pursuing
policies designed to support expansion of its mineral industry. Because of the
political stability and supportive policies, several international mineral
companies have initiated activities in Argentina in recent years and we
understand that these companies now have in place plans to invest significant
new sums in gold/silver and copper exploration and development.
It is our intent to be a responsible corporate citizen of Argentina and as such
we have worked diligently to establish excellent working relationships with both
local and federal governmental authorities as well as with the local citizens in
the areas surrounding our operations.
Seasonality
Most of our projects are in generally arid climates which experience four
seasons. The exploration season is short in areas of higher elevation due to
winter snow conditions. Low elevation areas can be worked year around. Winter
months can present muddy travel conditions on primitive roads.
Recent U.S. Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
a revision to this interpretation (FIN 46(r)). FIN 46(r) clarifies the
41
application of Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements." FIN 46 clarifies the application of ARB No. 51 to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. We adopted FIN 46(r) in its entirety for the period
ended December 31, 2004, which did not have a material effect on our
consolidated financial statements.
In December 2003, the FASB revised SFAS No. 132 "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits - an amendment of FASB Statements
No. 87, 88, and 106." SFAS No. 132 has been revised to include additional
disclosures about the assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit post-retirement
plans. The revisions do not change the measurement or recognition of those plans
required by existing standards. The revised SFAS No. 132 did not have a material
effect on our consolidated financial statements.
In April 2004, the Financial Accounting Standards Board ("FASB") ratified
Emerging Issues Task Force ("EITF") Issue No. 04-2, which amends Statement of
Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" to the
extent all mineral rights are to be considered tangible assets for accounting
purposes. There has been diversity in practice related to the application of
SFAS No. 141 to certain mineral rights held by mining entities that are not
within the scope of SFAS No. 19 "Financial Accounting and Reporting by Oil and
Gas Producing Companies." The SEC staff's position previously was entities
outside the scope of SFAS No. 19 should account for mineral rights as intangible
assets in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets."
The adoption of EITF 04-02 has no effect on the consolidated financial
statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
("SFAS") No. 123 (revised 2004), "Share-Based Payment." SFAS No. 123(R) requires
the Company to measure all employee stock-based compensation awards using a fair
value method and record such expense in its consolidated financial statements.
In addition, SFAS No. 123(R) requires additional accounting related to the
income tax effects and additional disclosure regarding the cash flow effects
resulting from share-based payment arrangements. For public entities that do not
file as a small business issuer, SFAS No. 123(R) is effective for the first
annual reporting period beginning after December 15, 2005.
In December 2004, FASB issued SFAS No. 153 to amend Opinion 29 by eliminating
the exception for non-monetary exchanges of similar productive assets and
replaces it with general exception for exchanges of non-monetary assets that do
not have commercial substance. A non-monetary exchange is defined to have
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange.
The implementation of the not yet adopted US standards is not expected to have a
material effect on the Company's financial statements.
Subsequent Events
On March 11, 2005, we issued 224,748 common shares for the exercise of broker
warrants for net proceeds of $65,312.
On March 9, 2005, we received a $200,000 payment on the option agreement entered
into with MHC, the majority shareholder of the Argentine Corporation formed to
develop the San Jose project.
On March 22, 2005, we issued 18,180,450 units through a private placement at a
price of Cdn$0.55 per unit for gross proceeds of approximately Cdn$10 million.
42
Under terms of the offering, each unit will consist of one common share and
one-half of one common share purchase warrant. One whole common share purchase
warrant entitles the holder to purchase one additional common share at an
exercise price of Cdn$0.70 per share for a period of 60 months from the closing
date. The issued securities are subject to a four month hold period.
Our agents will receive a 7% commission and agent's warrants equal to 7% of the
aggregate number of units sold pursuant to the offering. Each agent's warrant
upon exercise will entitle the holder to acquire one common share at an exercise
price of Cdn$0.70 per common share for a period of 24 months from the date of
issue.
In reliance on Rule 903 of Regulation S under the Securities Act of 1933, as
amended (the "Securities Act"), units were offered and sold to purchasers
outside of the United States subject to Category 2 offering restrictions,
without any directed selling efforts. In reliance on Rule 506 of Regulation D
under the Securities Act, units were also offered and sold, without general
solicitation or advertising and subject to resale restrictions, to accredited
investors in the United States who represented they were purchasing with
investment intent and without a view to distribute the units.
We intend to use the proceeds from the offering to fund our share of the
construction costs for gold/silver ore reserve development and feasibility work
at the advanced-stage San Jose/Huevos Verdes project in southern Argentina, as
well as for other exploration and general corporate purposes. At Huevos Verdes,
a work force of 180 is developing the underground workings exploring the main
gold/silver vein. Surface facilities, including a work camp, compressor and
maintenance facilities, have been completed and a 28-km all-weather road and
bridge to access the work site is in daily use.
Other MD&A Requirements
The Management Discussion & Analysis should be read in conjunction with the
Corporation's audited financials for the year ended December 31, 2004 also filed
at WWW.SEDAR.COM.
Outstanding Share Data (as at March 31, 2005):
------------------------------ ---------------- -------------------------- ---------------------------------------
Class and Series of Security Number Expiry Date of Relevant Terms
Outstanding Convertible Securities
------------------------------ ---------------- -------------------------- ---------------------------------------
Common shares 90,079,504
------------------------------ ---------------- -------------------------- ---------------------------------------
Stock options 4,638,500 Various (August 28, 2005 Exercisable for one common share each
(vested) to March 21, 2013) at Cdn$0.16 to Cdn$0.61
------------------------------ ---------------- -------------------------- ---------------------------------------
Purchase warrants 28,158,047 Various (September 12, Exercisable for one common share each
2005 to March 22, 2010) at Cdn$0.50 to Cdn$0.91
------------------------------ ---------------- -------------------------- ---------------------------------------
Broker warrants 2,315,318 Various (September 12, Exercisable for one common share each
2005 to March 22, 2007) at Cdn$0.35 to Cdn$0.80
------------------------------ ---------------- -------------------------- ---------------------------------------
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to
have, a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
43
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements Page
Report of Independent Registered Public Accounting Firm 45
Comments by the Auditors for U.S. Readers on Canada - U.S.
Reporting Differences 46
Consolidated Balance Sheets at December 31, 2004 and 2003 47
Consolidated Statements of Operations and Accumulated Deficit
for the years ended December 31, 2004 and 2003 and for the
period from July 1, 1994 (commencement) through December 31, 2004 48
Consolidated Statements of Mineral Properties and Deferred
Exploration Costs for the years ended December 31, 2004 and
2003 and for the period from July 1, 1994 (commencement)
through December 31, 2004 49
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 and for the period from July 1, 1994
(commencement) through December 31, 2004 50
Notes to Consolidated Financial Statements 52
44
BDO DUNWOODY LLP
Report of Independent Registered Public Accounting Firm
To the Shareholders of Minera Andes Inc.:
We have audited the consolidated balance sheets of Minera Andes Inc. (an
exploration stage corporation) as at December 31, 2004 and 2003 and the
consolidated statements of operations and accumulated deficit, mineral
properties and deferred exploration costs and cash flows for the years then
ended. We have also audited the consolidated statements of operations and
accumulated deficit, mineral properties and deferred exploration costs and cash
flows for the period from July 1, 1994 (commencement) through December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Minera Andes Inc. (an exploration
stage corporation) as at December 31, 2004 and 2003 and the results of its
operations and its cash flows for the years then ended and for the period from
July 1, 1994 (commencement) through December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
/s/ BDO Dunwoody LLP
---------------------
BDO Dunwoody LLP
Chartered Accountants
Vancouver, B.C. Canada
March 4, 2005
(except for Note 13, March 22, 2005)
45
Comments by the Auditors for U.S. Readers on Canada - U.S. Reporting Differences
Public Company Accounting Oversight Board (United States) reporting standards
for auditors require the addition of an explanatory paragraph (following the
opinion paragraph) when the financial statements are affected by conditions and
events that cast substantial doubt on the Company's ability to continue as a
going concern such as those described in Note 1 of the consolidated financial
statements. Public Company Accounting Oversight Board (United States) reporting
standards also require the addition of an explanatory paragraph (following the
opinion paragraph) when changes in accounting policies, such as those involving
2004 stock-based compensation and 2004 asset retirement obligations described in
Note 2 of the consolidated financial statements, have a material effect on the
consolidated financial statements. Our report to the shareholders dated March 4
2005, (except for Note 13, March 22, 2005) is expressed in accordance with
Canadian reporting standards, which do not permit a reference to such conditions
and events in the auditors' report when these are adequately disclosed in the
financial statements.
/s/ BDO Dunwoody LLP
---------------------
BDO Dunwoody LLP
Chartered Accountants
Vancouver, B.C. Canada
March 4, 2005
(except for Note 13, March 22, 2005)
46
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars)
December 31, December 31,
2004 2003
------------ ------------
ASSETS
Current:
Cash and cash equivalents (Note 3) $ 1,726,820 $ 2,234,342
Receivables and prepaid expenses 111,570 228,123
------------ ------------
Total current assets 1,838,390 2,462,465
Mineral properties and deferred exploration costs (Note 4) 2,827,655 915,299
Investment (Note 4 (b)) 7,345,840 4,063,127
Equipment, net (Note 5) 97,655 88,238
------------ ------------
Total assets $ 12,109,540 $ 7,529,129
============ ============
LIABILITIES
Current:
Accounts payable and accruals $ 257,268 $ 96,640
Bank loan interest payable 3,913 --
Due to related parties (Note 9) -- 30,531
------------ ------------
Total current liabilities 261,181 127,171
Bank loan (Note 6) 653,800 --
------------ ------------
Total liabilities 914,981 127,171
------------ ------------
Commitments and contingencies (Notes 1 and 8)
SHAREHOLDERS' EQUITY
Share capital (Note 7):
Preferred shares, no par value, unlimited number
authorized, none issued
Common shares, no par value, unlimited number authorized
Issued December 31, 2004--71,586,806 shares 28,711,334 23,597,468
Issued December 31, 2003--59,740,865 shares
Contributed capital - stock option compensation 1,663,677 160,888
(Notes 2 and 7)
Accumulated deficit (19,180,452) (16,356,398)
------------ ------------
Total shareholders' equity 11,194,559 7,401,958
------------ ------------
Total liabilities and shareholders' equity $ 12,109,540 $ 7,529,129
============ ============
Approved by the Board of Directors:
/s/ Allen V. Ambrose /s/ Bonnie L. Kuhn
----------------------------------- -----------------------------------
Allen V. Ambrose, Director Bonnie L. Kuhn, Director
The accompanying notes are an integral part of
these consolidated financial statements.
47
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(U.S. Dollars)
Year Ended Period from
---------------------------- July 1, 1994
(commencement)
through
December 31, December 31, December 31,
2004 2003 2004
------------ ------------ ------------
Consulting fees (Note 7 (c)) $ 527,838 $ 418,730 $ 1,966,224
Depreciation 13,347 2,191 77,497
Equipment rental -- -- 21,522
Foreign exchange (gain) loss (260,549) (74,005) 96,683
Insurance 69,180 17,598 322,071
Legal, audit and accounting fees 235,973 223,824 1,511,205
Materials, supplies and maintenance -- 1,250 49,260
Office overhead and administration fees 526,279 177,256 2,388,744
Telephone 22,856 28,869 416,834
Transfer agent 9,077 9,106 116,756
Travel 65,191 58,777 458,827
Wages and benefits (Note 7 (c)) 508,943 187,374 2,057,017
Write-off of deferred exploration costs (Note 4 (e)) -- 422,112 8,540,235
------------ ------------ ------------
Total expenses 1,718,135 1,473,082 18,022,875
Gain on sale of equipment (7,742) -- (112,330)
Gain on sale of property -- -- (898,241)
Loss on investment (Note 4 (b)) 420,349 -- 420,349
Interest income (71,837) (13,584) (540,403)
------------ ------------ ------------
Net loss for the period 2,058,905 1,459,498 16,892,250
------------ ------------ ------------
Accumulated deficit, beginning of the period, as 16,356,398 14,263,900 --
previously reported
Adjustment for change in accounting for 678,569 -- 678,569
stock-based compensation (Note 2)
------------ ------------ ------------
17,034,967 14,263,900 678,569
Adjustment on acquisition of royalty interest (Note 9) -- 500,000 500,000
Share issue costs 86,580 133,000 1,092,418
Deficiency on acquisition of subsidiary -- -- 17,215
------------ ------------ ------------
Accumulated deficit, end of the period $ 19,180,452 $ 16,356,398 $ 19,180,452
============ ============ ============
Basic and diluted loss per common share $ 0.03 $ 0.04
============ ============
Weighted average shares outstanding 68,393,266 40,162,950
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
48
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED STATEMENTS OF MINERAL PROPERTIES
AND DEFERRED EXPLORATION COSTS
(U.S. Dollars)
Year Ended Period from
------------------------ July 1, 1994
(commencement)
through
December 31, December 31, December 31,
2004 2003 2004
---------- ----------- ------------
Administration fees $ -- $ 20,316 $ 392,837
Assays and analytical 112,871 5,542 1,057,817
Construction and trenching 2,661 15,733 526,351
Consulting fees 109,779 108,522 1,172,793
Depreciation 26,442 -- 197,067
Drilling 264,450 -- 1,193,283
Equipment rental 176,025 -- 420,949
Geology 729,427 89,845 3,749,335
Geophysics -- -- 309,902
Insurance -- 9,426 255,559
Legal 47,659 29,230 741,487
Maintenance 18,097 1,936 181,214
Materials and supplies 39,089 1,714 475,273
Project overhead 64,503 8,018 385,658
Property and mineral rights 88,762 19,683 1,412,599
Telephone 22,697 3,684 109,016
Travel 93,950 78,222 1,214,014
Wages and benefits 115,944 130,072 1,296,478
---------- ----------- ------------
Costs incurred during the period 1,912,356 521,943 15,091,632
Deferred costs, beginning of the period 915,299 3,536,448 --
Deferred costs, acquired -- -- 576,139
Deferred costs, contributed to MSC -- (2,320,980) (2,320,980)
Deferred costs written off -- (422,112) (8,540,235)
Mineral property option proceeds, net -- (400,000) (1,978,901)
---------- ----------- ------------
Deferred costs, end of the period $2,827,655 $ 915,299 $ 2,827,655
========== =========== ============
The accompanying notes are an integral part of
these consolidated financial statements.
49
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars)
Year Ended Period from
-------------------------- July 1, 1994
(commencement)
through
December 31, December 31, December 31,
2004 2003 2004
----------- ----------- ------------
Operating Activities:
Net loss for the period $(2,058,905) $(1,459,498) $(16,892,250)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of incorporation costs -- -- 665
Write-off of deferred exploration costs -- 422,112 8,540,235
Loss on investment 420,349 -- 420,349
Depreciation 13,347 2,191 77,497
Stock option compensation 478,020 127,516 638,908
Gain on sale of equipment (7,742) -- (112,330)
Gain on sale of mineral properties -- -- (898,241)
Change in:
Receivables and prepaid expenses 116,553 (164,829) (109,584)
Accounts payable and accruals 160,628 73,396 238,067
Bank loan interest payable 3,913 -- 3,913
Due to related parties (30,531) 4,785 --
----------- ----------- ------------
Cash used in operating activities (904,368) (994,327) (8,092,771)
----------- ----------- ------------
Investing Activities:
Incorporation costs -- -- (665)
Purchase of equipment (29,247) (84,949) (257,672)
Proceeds from sale of equipment 14,225 -- 14,225
Proceeds from sale of property -- -- 898,241
Mineral properties and deferred exploration (1,912,356) (521,943) (14,921,007)
Investment (4,103,062) (1,742,147) (5,845,209)
Proceeds from sale of subsidiaries -- -- 9,398
Acquisition of royalty interest -- (500,000) (500,000)
Mineral property option proceeds 400,000 400,000 2,378,901
----------- ----------- ------------
Cash used in investing activities (5,630,440) (2,449,039) (18,223,788)
----------- ----------- ------------
50
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(U.S. Dollars)
Period from
July 1, 1994
Year Ended (commencement)
-------------------------- through
December 31, December 31, December 31,
2004 2003 2004
----------- ----------- -----------
Financing Activities:
Shares and subscriptions issued for cash, less issue costs 5,027,286 4,668,450 27,043,379
Bank loan proceeds received 1,000,000 -- 1,000,000
----------- ----------- -----------
Cash provided by financing activities 6,027,286 4,668,450 28,043,379
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (507,522) 1,225,084 1,726,820
Cash and cash equivalents, beginning of period 2,234,342 1,009,258 --
----------- ----------- -----------
Cash and cash equivalents, end of period $ 1,726,820 $ 2,234,342 $ 1,726,820
=========== =========== ===========
Supplementary disclosure of non-cash investing and financing
activities and other information:
Stock option compensation (Note 7) $ 478,020 $ 127,516 $ 638,908
----------- ----------- -----------
Retroactive adjustment on adoption of S3870 (Note 2(l)) $ -- $ -- $ 678,569
----------- ---------- -----------
Deferred costs, contributed to MSC (Note 4 (b)) $ -- $ 2,320,980 $ 2,320,980
----------- ----------- -----------
Shares issued for acquisition $ -- $ -- $ 575,537
----------- ----------- -----------
Interest and taxes paid $ -- $ -- $ --
----------- ----------- -----------
The accompanying notes are an integral part of
these consolidated financial statements.
51
52
MINERA ANDES INC.
"An Exploration Stage Corporation"
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. Dollars)
1. NATURE OF OPERATIONS AND ABILITY TO CONTINUE AS A GOING CONCERN
We are in the business of acquiring, exploring and evaluating mineral
properties, and either entering into joint ventures, developing these properties
further, or disposing of them when the evaluation is completed. At December 31,
2004, we were in the exploration stage and had interests in properties in three
provinces in the Republic of Argentina.
The recoverability of amounts shown as mineral properties and deferred
exploration costs is dependent upon the existence of economically recoverable
reserves, the ability to obtain necessary financing to complete our development,
and the future profitable production or disposition thereof. The accompanying
consolidated financial statements have been prepared using Canadian generally
accepted accounting principles applicable to a going concern. The use of such
principles may not be appropriate because, as of December 31, 2004, there was
significant doubt that we would be able to continue as a going concern.
At December 31, 2004, we had an accumulated deficit of approximately $19
million. In addition, due to the nature of the mining business, the acquisition,
exploration and development of mineral properties requires significant
expenditures prior to the commencement of production. To date, we have financed
our activities through the issuance of equity securities and joint venture
arrangements. We expect to use similar financing techniques in the future and
are actively pursuing such additional sources of financing (see Note 13).
Although there is no assurance that we will be successful in these actions,
management believes that it will be able to secure the necessary financing to
enable the Company to continue as a going concern. Accordingly, these financial
statements do not reflect adjustments to the carrying value of assets and
liabilities, the reported revenues and expenses and balance sheet
classifications used that would be necessary if the going concern assumption
were not appropriate. Such adjustments could be material.
Although we have taken steps to verify title to mineral properties in which we
have an interest, in accordance with industry standards for the current stage of
exploration of such properties, these procedures do not guarantee title.
Property title may be subject to unregistered prior agreements and noncompliance
with regulatory requirements.
2. SIGNIFICANT ACCOUNTING POLICIES
The statements are expressed in United States dollars because the majority of
our exploration activities are incurred in U.S. dollars.
a. Consolidation/Reporting
These consolidated financial statements include the accounts of Minera
Andes Inc., an Alberta Corporation, and its wholly-owned subsidiaries,
Minera Andes S.A. ("MASA"), Minera Andes (Cayman) Inc. ("MACI"),
Minera Andes (Cayman 2) Inc. ("MACI2"), and Minera Andes (USA) Inc.
("MUSA"). Our investment in Minera Santa Cruz S.A. ("MSC"), an
Argentine corporation, is accounted for by the equity method, whereby
the Company records its investment and its 49% share of the income and
expense of MSC. All significant intercompany transactions and balances
have been eliminated from the consolidated financial statements.
b. Foreign Currency Translation
Our consolidated operations are integrated and balances denominated in
currencies other than U.S. dollars are translated into U.S. dollars
using the temporal method. This method translates monetary balances at
the rate of exchange at the balance sheet date, non-monetary balances
at historic exchange rates and revenues and expense items at average
exchange rates. The resulting gains and losses are included in the
statement of operations in the reporting period.
53
c. Cash and Cash Equivalents
We consider cash and cash equivalents to include amounts held in banks
and highly liquid investments with remaining maturities at point of
purchase of three months or less. We place our cash and cash
investments with institutions of high credit worthiness. At times,
such investments may be in excess of federal insurance limits.
d. Mineral Properties and Deferred Exploration Costs
Mineral properties consist of exploration and mining concessions,
options and contracts. Acquisition and leasehold costs and exploration
costs are capitalized and deferred until such time as the property is
put into production or the properties are disposed of either through
sale or abandonment. If put into production, the costs of acquisition
and exploration will be depreciated over the life of the property,
based on estimated economic reserves. Proceeds received from the sale
of any interest in a property will first be credited against the
carrying value of the property, with any excess included in operations
for the period. If a property is abandoned, the property and deferred
exploration costs will be written off to operations. On a quarterly
basis, we evaluate the future recoverability of our mineral properties
and deferred exploration costs.
e. Investment
Investments, over which we exert significant influence, are accounted
for using the equity method. Under this method, our share of the
earnings and losses is included in operations and our investment
therein is adjusted by a like amount. Where in management's opinion
there has been a loss in value that is other than a temporary decline,
the carrying value is reduced to estimated realizable value.
f. Equipment and Depreciation
Equipment is recorded at cost, and depreciation is provided on a
declining - balance basis over their estimated useful lives of up to
five years at an annual rate of up to 40% to a residual value of 10%.
g. Share Issue Costs
Commissions paid to underwriters on the issuance of our shares are
charged directly to share capital. Other share issue costs, such as
legal, accounting, auditing and printing costs, are charged to
accumulated deficit.
h. Accounting for Income Taxes
Income taxes are calculated using the liability method of accounting.
Temporary differences arising from the difference between the tax
basis of an asset or liability and its carrying amount on the balance
sheet are used to calculate future income tax liabilities or assets.
Future income tax assets and liabilities are measured using tax rates
and laws that are expected to apply when the temporary differences are
expected to reverse.
i. Basic and Diluted Loss Per Common Share
Basic loss per share ("LPS") is calculated by dividing net loss
applicable to common shareholders by the weighted-average number of
common shares outstanding for the year. Diluted LPS reflects the
potential dilution that could occur if potentially dilutive securities
were exercised or converted to common stock.
For the years ended December 31, 2004 and 2003, potentially dilutive
common shares (relating to options and warrants outstanding at year
end) totaling 25,031,259 (2003 - 17,561,500) were not included in the
computation of loss per share because their effect was anti-dilutive.
j. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
based on information available at the time, and assumptions that
54
affect the reported amount of assets, particularly the recoverability
of mineral properties and deferred exploration expenses, and the
recording of liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenditures during the reporting period.
Actual results could differ from management's best estimates.
k. Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, receivables,
accounts payable and accruals, bank loan interest payable and due to
related parties, approximate their fair values due to the short term
nature of the instruments. The fair value of the bank loan equals its
carrying value since the debt agreement was entered into during
December 2004. The fair value of the investment was not practical to
determine. Unless otherwise noted, it is management's opinion that we
are not exposed to significant foreign currency or other risks arising
from these financial instruments.
l. Stock Based Compensation
Effective January 1, 2004 we adopted on a retroactive basis without
restatement, the new recommendations of CICA Handbook Section 3870,
"Stock-Based Compensation and Other Stock-Based Payments", which
requires companies to adopt the fair value method for all stock-based
awards granted on or after January 1, 2002. Previously we used the
intrinsic value method of accounting for stock options granted to
employees and directors (for services rendered as a director) whereby
we were only required to disclose the pro forma effect of stock
options granted to the above noted parties in the notes to the
financial statements. The effect of this change in accounting policy
was to increase the accumulated deficit at January 1, 2004 by $678,569
with a corresponding increase to contributed surplus.
m. Asset Retirement Obligations
Effective January 1, 2004, we adopted CICA 3110, "Asset Retirement
Obligations" which requires us to record the fair value of an asset
retirement obligation as a liability in the period in which it
incurred a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The obligation is
measured initially at fair value using present value methodology, and
the resulting costs capitalized into the carrying amount of the
related asset. In subsequent periods, the liability will be adjusted
for any changes in the amount or timing of the underlying future cash
flows. Capitalized asset retirement costs are depreciated on the same
basis as the related asset and the discounted accretion of the
liability is included in determining the results of operations.
There is no material impact on the consolidated financial statements
resulting from the adoption of section 3110 in the current or prior
periods presented.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of the following:
----------- -----------
2004 2003
----------- -----------
Cash on hand - US dollar denominated bank accounts $ 1,704,662 $ 205,783
Cash on hand- Canadian dollar denominated bank account 87,784 2,033,465
(Overdraft) - Argentina Peso denominated bank account (65,626) (4,906)
----------- -----------
$ 1,726,820 $ 2,234,342
=========== ============
55
4. MINERAL PROPERTIES, DEFERRED EXPLORATION COSTS AND INVESTMENTS
At December 31, 2004, we, through our subsidiaries and investment,
hold interests in a total of approximately 203,562 hectares of mineral
rights and mining lands in three Argentine provinces. Under our
present acquisition and exploration programs, we are continually
acquiring additional mineral property interests and exploring and
evaluating our properties. If, after evaluation, a property does not
meet our requirements, then the property and deferred exploration
costs are written off to operations. All properties in Argentina are
subject to a royalty agreement as disclosed in Note 8. Mineral
property costs and deferred exploration costs, net of mineral property
option proceeds, are as follows:
2004 COSTS BY PROPERTY
------------------------------------ -------------- --------------- -------------- --------------- ----------------
San Juan Santa Cruz Chubut General Total
Description Cateos Cateos Cateos Exploration
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Balance, beginning of year $ 378,806 $ 393,886 $ 142,607 $ -- $ 915,299
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Assays and analytical 31,093 81,331 -- 447 112,871
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Construction and trenching 2,491 170 -- -- 2,661
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Consulting fees 7,067 35,012 10,182 57,518 109,779
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Depreciation -- -- -- 26,442 26,442
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Drilling 263,469 645 -- 336 264,450
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Equipment Rental 132,688 43,337 -- -- 176,025
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Geology 164,738 539,224 2,529 22,936 729,427
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Legal -- 220 -- 47,439 47,659
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Maintenance 3 15,217 -- 2,877 18,097
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Materials and supplies 2,537 28,192 244 8,116 39,089
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Project overhead 5,153 9,399 562 49,389 64,503
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Property and mineral rights 10,660 60,770 17,301 31 88,762
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Telephone 2,844 10,158 20 9,675 22,697
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Travel 7,965 54,006 495 31,484 93,950
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Wages and benefits 12,463 26,618 -- 76,863 115,944
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Overhead allocation 43,422 283,858 6,273 (333,553) --
------------------------------------ -------------- --------------- -------------- --------------- ----------------
Balance, end of year $ 1,065,399 $ 1,582,043 $ 180,213 $ -- $ 2,827,655
------------------------------------ -------------- --------------- -------------- --------------- ----------------
56
2003 COSTS BY PROPERTY
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
San Juan San Santa Cruz Chubut Neuquen Rio Negro General Total
Description Cateos Jose Cateos Cateos Cateos Cateos Exploration
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Balance, beginning of year $ 327,959 $2,389,526 $ 552,936 $ 246,154 $ 6,852 $ 13,021 $ -- $3,536,448
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Assays and analytical 223 -- 1,548 3,759 -- 12 -- 5,542
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Administration fees -- 11,180 -- -- -- -- 9,136 20,316
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Construction and trenching 15,733 -- -- -- -- -- -- 15,733
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Consulting fees 484 74,381 15,273 14,773 671 -- 2,940 108,522
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Geology 17,785 4,000 32,523 7,812 -- 4,002 23,723 89,845
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Insurance -- -- -- -- -- -- 9,426 9,426
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Legal -- 29,230 -- -- -- -- -- 29,230
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Maintenance -- 1,052 884 -- -- -- -- 1,936
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Materials and supplies 16 54 383 412 -- 116 733 1,714
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Project overhead 36 1,971 1,825 764 -- 29 3,393 8,018
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Property and mineral
rights 15,622 -- 2,833 1,228 -- -- -- 19,683
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Telephone 130 2,068 429 179 -- 15 863 3,684
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Travel 515 55,403 4,885 1,671 -- 477 15,271 78,222
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Wages and benefits -- 74,532 -- -- -- -- 55,540 130,072
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Write-off of abandoned
properties (7,960) -- (236,294) (150,381) (7,607) (19,870) -- (422,112)
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Overhead allocation 8,263 77,583 16,661 16,236 84 2,198 (121,025) --
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Outside investment -- (400,000) -- -- -- -- -- (400,000)
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Deferred costs,
contributed to MSC -- (2,320,980) -- -- -- -- -- (2,320,980)
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
Balance, end of year $ 378,806 $ -- $ 393,886 $ 142,607 $ -- $ -- $ -- $ 915,299
-------------------------- ------------ ------------- ------------- ------------ ----------- ----------- ------------ -----------
57
a. San Juan Project
The San Juan Province project comprises six properties totaling 20,900
hectares ("ha") (2003 - 37,568 ha) in southwestern San Juan province.
At present, these lands are not subject to a royalty; however, the
government of San Juan has not waived its rights to retain up to a 3%
"mouth of mine" royalty from production. Land holding costs for 2005
are estimated at $1,616.
Expenditures in 2004 largely relate to land maintenance and an
exploration program at the Los Azules project, which is expected to
continue through 2005.
b. San Jose Project (Investment in MSC)
The investment in Minera Santa Cruz S.A. is comprised of the
following:
----------- ----------
2004 2003
----------- ----------
Investment in MSC, beginning of year $ 4,063,127 $ --
Plus:
Deferred costs contributed to MSC -- 2,320,980
Deferred costs incurred 196,993 --
Advances during the year 3,906,069 1,742,147
Option agreement proceeds (400,000) --
Loss from equity investment (420,349) --
----------- ----------
$ 7,345,840 $4,063,127
=========== ==========
As MSC is a private company, the fair value of the investment is not
reasonably determinable.
The San Jose project area is made up of one cateo and 46
manifestations of discovery totaling 40,499 ha. The cateos are located
in the western half of the province of Santa Cruz. All of the cateos
are controlled 100% by Minera Santa Cruz S.A. ("MSC"), a holding and
operating company set up under the terms of an agreement with Mauricio
Hoschschild & Cia. Ltda. ("MHC"). Any production from these lands may
be subject to a provincial royalty. Holding costs for 2005 are
estimated to be $3,100.
In October of 2000, following completion of a 30-day due diligence
period under a memorandum of understanding, MHC exercised an option to
enter into a joint venture ("JV") on the project.
On March 15, 2001, we signed an option and joint venture agreement
with MHC for the exploration and possible development of Minera Andes'
epithermal gold-silver exploration land package at El Pluma/Cerro
Saavedra (now referred to as San Jose), including Huevos Verdes.
Under the agreement, in July 2003 MHC earned a 51% ownership in the JV
by spending a total of $3 million, including a minimum of $100,000 per
year on exploration targets within the JV, other than Huevos Verdes,
the most advanced prospect. In addition, MHC is making semiannual
payments totaling $400,000 per year until pilot plant production is
achieved. To date, MHC has made all required payments.
Following MHC's vesting at 51% ownership; Minera Andes opted to
participate in the development of the project on a pro-rata basis.
58
In the fourth quarter of 2003, we notified MHC of our intent to
subscribe for additional equity in MSC, so as to maintain a 49%
interest. We made payments of $3.9 million and $1.7 million in 2004
and 2003, respectively, to fund our 49% interest in the project.
As a result of the fact that we do not control the JV, we are
accounting for this investment under the equity method. All costs,
including those previously capitalized under "Mineral Properties and
Deferred Exploration" relating to the San Jose project that were
effectively contributed to the JV, have been reclassified to
investment in 2003.
Expenditures in 2004 consisted of drilling, detailed topographic
surveys, detailed mapping and sampling. Development work included
completion of the shafts and additional work related to
pre-feasibility and feasibility studies.
Subsequent to December 31, 2004, we made payments of $2,009,000 to
fund our 49% interest in the San Jose project.
c. Chubut Projects
We hold 20 (2003 - 15) manifestations of discovery in the
Precordilleran region of Chubut, totaling 19,900 hectares. In August
2000, we signed an agreement with Brancote Holdings PLC subsidiaries
to purchase two of our Chubut gold exploration properties. The
agreements covered the Willimanco, Leleque and Leon properties. All
required payments pursuant to the agreements had been received by
December 31, 2001 and in November 2002, we negotiated a buy-out of
these Chubut properties with Meridian Gold Inc. (surviving entity of
Brancote Holdings PLC merger) for $204,000 (Argenitna Peso$720,000)
and $56,700 (Argentina Peso$200,000), resulting in a gain of $898,241.
Expenditures in 2004 relate to an ongoing reconnaissance exploration
program on lands acquired in 2002. A similar level of expenditure is
planned for 2005. Land holding costs for 2005 are estimated at $2,020.
d. Santa Cruz Projects
We currently control 20 (2003 - 17) cateos and 57 (2003 - 30)
manifestations of discovery totaling 122,263 (2003 - 80,398) ha in the
Santa Cruz province. Land holding costs for 2005 are estimated at
$3,819. We have been actively exploring in the region since 1997. The
properties have been acquired on the basis of geologic and geochemical
reconnaissance. Expenditures in 2004 relate to land acquisition and
reconnaissance geologic surveys on the acquired properties. Geologic
evaluation of these grassroots targets is ongoing.
e. Write-Off of Mineral Property and Deferred Exploration Costs
Having completed an impairment review, we did not write-off any
mineral property and deferred exploration costs in 2004 (2003 -
$422,112).
59
5. EQUIPMENT
December 31, 2004 December 31, 2003
------------------------------------------ --------------------------------------------
Accumulated Accumulated
Cost Depreciation Net Cost Depreciation Net
------------ ------------ ------------ ------------ ------------ ------------
Field
Equipment $ 96,049 $ 34,186 $ 61,863 $ 83,451 $ 26,545 $ 56,906
Office Equipment 77,343 41,551 35,792 60,232 28,900 31,332
------------ ------------ ------------ ------------ ------------ ------------
Total $ 173,392 $ 75,737 $ 97,655 $ 143,683 $ 55,445 $ 88,238
============ ============ ============ ============ ============ ============
6. BANK LOAN
In December 2004, we secured a two-year loan facility of up to $4 million
from Macquarie Bank Limited ("Macquarie"). All amounts advanced are due in
December 2006. This facility is to be provided in two tranches to fund our
49% portion of the costs of completing a bankable feasibility study and
related development work for the San Jose/Huevos Verdes gold/silver project
in Argentina.
The commercial terms of the loan include a facility fee of 1.5% of the
principal amount of each tranche at the time of the advance and interest of
LIBOR plus 2% per year, currently totaling approximately 4.1% per year. In
addition, we issued share purchase warrants to acquire 2,738,700 of our
Common Shares at an exercise price of Cdn$0.91 per share (Note 7 (d)). The
warrants exercise price was calculated at a 20 percent premium to the
volume weighted average of our common stock determined from the ten
business days prior to acceptance of the loan facility. Each warrant is
exercisable for two years. Additional share purchase warrants may be issued
in regard to the second tranche of US$2.0 million, on terms calculated in a
similar manner at that time, upon fulfillment of conditions precedent for
that tranche. The loan is collateralized by our interest in Minera Andes
S.A., our 49% interest in MSC, and personal property.
The fair value of the warrants was calculated using the Black-Scholes
option pricing model with the following assumptions: dividend yield - Nil;
risk free interest rate - 3.53%; expected volatility of 62% and an expected
life of 24 months. The difference between the allocated fair value and the
face value of the debt of $346,200 was initially recorded as a debt
discount with a corresponding entry to contributed surplus. The debt
discount will be accreted to interest expense over the term of the debt
using the effective interest rate method. No amount of the discount was
accreted in 2004 since the debt agreement only became effective in December
2004. The accretion of the debt discount will begin in January 2005.
We received $1,000,000 of the first tranche in December 2004 and the
remaining $1,000,000 of the first tranche in February 2005. The bank loan
and debt discount are summarized as follows:
Face Carrying
Amount Discount Value
---------- ---------- ----------
Bank loan, initial tranche, being the balance
at December 31, 2004 $1,000,000 $ 346,200 $ 653,800
As at December 31, 2004, interest expense incurred of $3,913, and the
facility fee of $30,000 were capitalized to the Investment in MSC (Note 4
(b)).
60
7. SHARE CAPITAL
a. Authorized
We have authorized capital of an unlimited number of Common Shares,
with no par value, and an unlimited number of preferred shares, with no
par value.
b. Issued, Allotted and/or Subscribed:
Number
of Shares Amount
---------------- -----------------
Common shares issued:
Issued for cash on incorporation 1 $ 1
Issued for acquisition of subsidiaries 4,000,000 575,537
Subscriptions received for private placement -- 57,069
---------------- ----------------
Balance, December 31, 1994 4,000,001 632,607
Issued for cash (Cdn$0.10 each) 1,000,000 70,850
Issued for cash (Cdn$0.40 each) 2,345,094 669,058
Issued for cash (Cdn$1.00 each) 3,031,000 2,237,071
Issued for finder's fee 150,000 --
Issued for services 168,000 --
Issued for subsidiary 336,815 --
Subscriptions applied -- (57,069)
---------------- -----------------
Balance, December 31, 1995 11,030,910 3,552,517
Issued for cash (Cdn$1.50 each) 1,433,333 1,535,553
Issued for broker special warrants 90,400 --
Issued for cash (Cdn$3.42 each) 877,194 2,174,388
Issued to N.A. Degerstrom, Inc.:
For cash (Cdn$1.44 each) 500,000 514,608
For cash on exercise of warrants (Cdn$1.75 each) 500,000 625,392
Issued for cash on exercise of warrants (Cdn$1.80 each) 67,500 89,220
Subscriptions received for private placement -- 4,873,336
---------------- ----------------
Balance, December 31, 1996 14,499,337 13,365,014
Issued for cash on exercise of warrants (Cdn$1.80 each) 1,271,233 1,689,102
Issued for cash (private placement-Cdn$2.10 each) 3,370,481 4,873,336
Subscriptions applied -- (4,873,336)
Issued for cash on exercise of options (Cdn$1.44 each) 75,000 78,146
---------------- ----------------
61
Number
of Shares Amount
---------------- -----------------
Balance, December 31, 1997 19,216,051 15,132,262
Issued for cash on exercise of warrants (Cdn$1.60 each) 720,383 806,136
Issued for cash on exercise of options (Cdn$1.15 each) 15,000 11,936
Issued for cash on exercise of warrants (Cdn$1.53 each) 438,597 464,332
---------------- ----------------
Balance, December 31, 1998 20,390,031 16,414,666
Issued for cash (by prospectus Cdn$0.25 each) 3,214,540 545,874
Issued for broker's fees 128,582 --
---------------- ----------------
Balance, December 31, 1999 23,733,153 16,960,540
Issued for cash (by prospectus Cdn$0.25 each) 5,985,460 1,032,973
Issued for broker's fees 191,418 --
Issued for cash on exercise of options (Cdn$0.55 each) 90,000 34,109
Subscriptions received for private placement -- 162,242
---------------- ----------------
Balance, December 31, 2000 30,000,031 18,189,864
Issued for cash on exercise of options (Cdn$0.25 each) 46,000 7,558
---------------- ----------------
Balance, December 31, 2001 30,046,031 18,197,422
Issued for cash on exercise of options (Cdn$0.16 each) 91,500 9,449
Issued for cash (private placement Cdn$0.15 each) 4,416,667 402,224
Issued for exercise of special warrants 1,175,000 --
Issued for cash on exercise of warrants (Cdn$0.25 each) 1,175,000 186,923
---------------- ------------------
Balance, December 31, 2002 36,904,198 18,796,018
Issued for cash on exercise of options 345,000 66,696
Issued for cash on exercise of warrants 50,000 11,287
Issued for cash on exercise of broker warrants 441,667 48,677
Issued for cash (private placement Cdn$0.30 each) 22,000,000 4,674,790
---------------- ----------------
Balance, December 31, 2003 59,740,865 23,597,468
Issued for cash on exercise of options 330,000 78,400
Issued for cash on exercise of warrants 648,375 250,401
Issued for cash on exercise of broker warrants 867,566 239,610
Issued for cash (private placement Cdn$0.65 each) 10,000,000 4,545,455
---------------- ----------------
Balance, December 31, 2004 71,586,806 $ 28,711,334
================ ================
62
i. On November 13, 2003, we sold 22,000,000 units to accredited
investors at a price of Cdn$0.30 per unit for net proceeds of
Cdn$6,138,000 (US$4,674,790). Each unit consisted of one common
share and one-half of one common share purchase warrant. One
whole common share purchase warrant entitles the holder to
purchase one additional common share at an exercise price of
Cdn$0.50 per share for a period of 60 months from the closing
date.
The agents received a cash commission of 7% of the gross proceeds
of the financing. The agents also received agents' warrants equal
to 10% of the aggregate number of units sold pursuant to the
offering. Each agents' warrant upon exercise will entitle the
holder to acquire one common share at an exercise price of
Cdn$0.35 per common share for a period of 24 months from the date
of issue. A total of 22,000,000 common shares have been issued
pursuant to the private placement, and 11,000,000 common shares
have been reserved for issuance on exercise of the warrants. In
addition, 2,200,000 common shares have been reserved for issuance
on the exercise of the agents' warrants.
ii. During 2003, we issued 345,000 shares for the exercise of stock
options, 50,000 shares for exercise of purchase warrants and
441,667 shares for the exercise of broker warrants (from a June
25, 2002 financing), with gross proceeds to the Company of
$126,660.
iii. On March 12, 2004, we sold 10,000,000 units to accredited
investors at a price of Cdn$0.65 per unit for net proceeds of
Cdn$5,929,908 (US$4,545,455). Each unit consisted of one common
share and one-half of one common share purchase warrant. One
whole common share purchase warrant entitles the holder to
purchase one additional common share at an exercise price of
Cdn$0.80 per share for a period of 18 months from the closing
date. The issued securities were subject to a four-month hold
period.
The agents received a cash commission of 7% of the gross proceeds
of the financing. The agents also received agent's warrants equal
to 10% of the aggregate number of units sold pursuant to the
offering. Each agent's warrant upon exercise will entitle the
holder to acquire one common share at an exercise price of
Cdn$0.80 per common share for a period of 18 months from the date
of issue. A total of 10,000,000 common shares were issued
pursuant to the private placement, and 5,000,000 common shares
are reserved for issuance on exercise of the warrants and
1,000,000 common shares are reserved for issuance on the exercise
of the agent's warrants.
iv. During 2004, we issued 330,000 shares for the exercise of stock
options; 648,375 shares for the exercise of 1,296,750 purchase
warrants and 867,566 shares for the exercise of broker warrants
for net proceeds of $568,411.
v. Subsequent to December 31, 2004, we issued 22,500 common shares
for the exercise of 45,000 purchase warrants and 65,000 shares
for the exercise of broker warrants for net proceeds of $27,894.
63
c. Stock Options
The aggregate number of shares to be delivered upon exercise of all
options granted under our stock option plan ("the Plan") shall not
exceed 20% of our issued and outstanding Common Shares up to a maximum
of 6,000,000 shares. No participant may be granted an option under the
Plan which exceeds the number of shares permitted to be granted
pursuant to rules or policies of any stock exchange on which the
Common Shares is then listed.
Under the Plan, the exercise price of the shares covered by each
option shall be determined by the directors and shall not be less than
the closing price of our Common Shares on the stock exchange or stock
exchanges on which the shares are listed on the last trading day
immediately preceding the day on which the stock exchange is notified
of the proposed issuance of option, less any discounts permitted by
the policy or policies of such stock exchange or stock exchanges. If
an option is granted within six months of a public distribution of our
Common Shares by way of prospectus, then the minimum exercise price of
such option shall, if the policy of such stock exchange or stock
exchanges requires, be the greater of the price determined pursuant to
the provisions of the Plan and the price per share paid by the
investing public for our Common Shares acquired by the public during
such public distribution, determined in accordance with the policy of
such stock exchange or stock exchanges. Options granted under the Plan
will not be transferable and, if they are not exercised, will expire
one (1) year following the date the optionee ceases to be a director,
officer, employee or consultant of Minera Andes Inc. by reason of
death, or ninety (90) days after ceasing to be a director, officer,
employee or consultant of Minera Andes Inc. for any reason other than
death. Options vest immediately, except for options granted for
investor relations related work which vest 25% each three-month period
from the date of grant.
At December 31, 2004, 309,000 (2003 - 929,000) options were available
for grant under the Plan.
A summary of the status of our stock option plan as of December 31,
2004 and 2003, and changes during the years ended on those dates is:
2004 2003
-------------------------------------------------------
(Cdn) (Cdn)
Weighted Weighted
Ave. Ave.
Exercise Exercise
Options Price Options Price
---------- ---------- ---------- ----------
Outstanding at beginning of year 4,408,500 $0.47 2,848,500 $0.44
Granted 1,650,000 $0.55 2,240,000 $0.51
Exercised (330,000) $0.32 (345,000) $0.26
Forfeited (1,030,000) $0.55 (335,000) $0.63
---------- ---------- ---------- ----------
Outstanding at end of year 4,698,500 $0.49 4,408,500 $0.47
========== ========== ========== ==========
Exercisable at end of year 4,608,500 $0.49 4,361,500 $0.47
========== ========== ========== ==========
Weighted average grant-date fair value
of options granted during the year $0.39 $0.38
========== ========== ========== ==========
64
The range of exercise prices is from Cdn$0.16 to Cdn$0.61 (2003 -
Cdn$0.16 to Cdn$0.59) with a weighted average remaining contractual
life of 4.3 years at December 31, 2004 (2003 - 3.9 years).
At December 31, 2004 there were options held by directors, officers
and employees for the purchase of our Common Shares as follows:
Number of Shares Exercise Price Expiry Date
---------------- -------------- -----------
253,500 Cdn$0.16 August 28, 2005
715,000 Cdn$0.40 June 27, 2007
25,000 Cdn$0.36 August 27, 2008
1,500,000 Cdn$0.59 December 5, 2008
100,000 Cdn$0.50 March 29, 2009
1,500,000 Cdn$0.55 September 10, 2009
50,000 Cdn$0.61 December 14, 2009
555,000 Cdn$0.31 March 21, 2013
---------
4,698,500
Prior to January 1, 2004, Canadian generally accepted accounting
principles only required disclosure of compensation expense for the
stock option plan as if the value of all options granted had been
determined based on the fair market value-based method. The Company's
net loss for the prior period and net loss per common share would have
been increased to the pro forma amounts below had the fair value based
method, adopted as at January 2004, been followed:
Period from
July 1, 1994
(commencement)
through
Loss applicable to common shareholders: 2004 2003 December 31, 2004
------------ ------------ ------------
As reported $ 2,058,905 $ 1,459,498 $ 16,892,250
Stock-based employee compensation expense
determined under fair value based method
for all awards not included in net loss -- 508,697 678,569
------------ ------------ ------------
Pro forma $ 2,058,905 $ 1,968,195 $ 17,570,819
============ ============ ============
Loss applicable to common shareholders
per share:
As reported $ 0.03 $ 0.04
Pro forma $ 0.03 $ 0.05
The fair value of each option granted was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants.
65
2004 2003
---------------------------
Dividend yield (%) -- --
Expected volatility (%) 86.6 97.6
Risk-free interest rates (%) 3.5 3.5
Expected lives (years) 5.0 6.6
In connection with the vesting of certain non-employees, employees and
directors stock options, we have recorded stock option compensation of
$478,020 ($302,614 to wages and benefits and $175,406 to consulting
fees) and $127,516 (to consulting fees) during the twelve months ended
December 31, 2004 and 2003, respectively.
d. Warrants
2004 2003
------------------------------------------------------
Cdn Cdn
Wgt. Avg. Wgt. Avg.
Warrants Exercise Price Warrants Exercise Price
---------- ---------- ---------- ----------
Outstanding and exercisable at 13,200,000 $0.49 4,858,334 $0.33
beginning of year
Purchase warrants 7,738,700 $0.82 11,000,000 $0.50
Brokers' warrants 1,000,000 $0.80 2,200,000 $0.35
Forfeited -- -- (4,366,667) $0.35
Exercised (1,515,941) $0.44 (491,667) $0.17
---------- ---------- ---------- ----------
Outstanding and exercisable
at end of year 20,422,759 $0.62 13,200,000 $0.49
========== ========== ========== ==========
The range of exercise prices on outstanding warrants is Cdn$0.35 to
Cdn$0.91 (2003 - Cdn$0.35 to Cdn$0.50) with a weighted average
contractual life of 2.64 years at December 31, 2004 (2003 - 4.0
years).
8. AGREEMENTS, COMMITMENTS AND CONTINGENCIES
a. Mineral rights in Argentina are owned by the federal government and
administered by the provinces. The provinces can levy a maximum 3%
"mouth of mine" (gross proceeds) royalty. The provinces of Mendoza and
Neuquen have waived their right to a royalty. The provinces of Rio
Negro, San Juan, Santa Clara and Chubut have not yet established a
policy regarding the royalty.
b. We rent office space in Spokane, Washington for $2,060 per month with
a commitment through November 2005.
c. We rent office space in Vancouver, British Columbia, Canada for $738
per month, without a commitment.
66
d. We rent office space in Argentina for $345 per month with a commitment
through August 2006.
e. We rent a storage space in Argentina for $276 per month with a
commitment through December 2006.
f. On December 2, 2003, we signed an agreement that obligated us to pay
N.A. Degerstrom ("Degerstrom") a royalty of $250,000 if any of the
current properties, other than the properties comprising the San Jose
project, meet certain conditions such as bankable feasibility or
commercial production prior to December 2, 2013.
g. During 2004, MSC signed agreements with third party providers relating
to a feasibility evaluation, camp construction and communication
services which will be completed or fulfilled during 2005. Our 49
percent portion of these commitments is $444,320.
h. During 2004, MSC signed capital lease agreements with a third party
for the provision of four scoops and related maintenance service which
will be completed or fulfilled during 2005. Our 49 percent portion of
these commitments is $115,220.
i. In March 2005, MSC discovered an alleged employee fraud committed by
the former purchasing manager during the period June 2004 through
March 2005. Respective to our 49% interest, the fraud amounted to
approximately $57,000 in 2004 and $39,000 in 2005. MSC will vigorously
pursue full recovery but the final amount recoverable is not certain
at this time. Canadian accounting standards require a high level of
certainty in recording a recovery on the balance sheet that is
contingent on future events, as a result the full amount of the fraud
for each year respectively, has been written off against our
investment in MSC and is included in our loss from equity investment
(Note 4(b)). Funds recovered in the future related to the fraud will
be recorded if and when they are received.
9. RELATED PARTY TRANSACTIONS
a. To December 31, 2003, under the terms of an Operating Agreement with
Degerstrom, Degerstrom operated and managed the exploration program on
all properties and provided related off-site administrative
assistance, as required. Consideration was 15% of the costs incurred
by Degerstrom on our behalf. Costs paid directly by us were not
subject to the fee.
On January 13, 2004, we received approval from the TSX Venture
Exchange regarding an agreement with Degerstrom dating from 1995, when
Degerstrom's Argentina properties, equipment and data were put into
Minera Andes in exchange for common stock. As approved by the TS 68 X
Venture Exchange, the Operating Agreement with Degerstrom has been
terminated at no cost, effective December 31, 2003. We also purchased
back a production bonus that would have required the issuance of
1,213,409 common shares to Degerstrom when a bankable feasibility
study was completed for a property and a royalty of up to a 2% net
smelter return on all properties. We paid Degerstrom $500,000 to
terminate the production bonus and acquire the royalty. We will also
pay $250,000 to Degerstrom should any Minera Andes property, other
than the advanced-stage Huevos Verdes silver/gold property, reach a
production decision prior to December 2, 2013.
In the opinion of management, the value of royalty and production
bonus acquired exceeded the exchange value; however, it was
impractical to obtain independent evidence supporting valuation,
accordingly, no valuation was obtained. The transaction was recorded
at carrying value of nil, with the difference between the exchange and
carrying value being charged against the deficit in 2003.
b. During the year ended December 31, 2004, there were no administrative
fees paid to Degerstrom. The Operating Agreement with Degerstrom was
terminated effective December 31, 2003. During the year ended December
31, 2003, administrative fees were paid to Degerstrom of $49,226 on
total costs incurred by us of $377,402.
67
During 2004 and 2003, we incurred the following transactions with
related parties: financial consulting to a director totaling $nil and
$1,120; geological consulting to a director totaling $nil and $3,613,
and legal fees to a firm in which a director and officer is an
associate, totaling $81,412 and $112,019, respectively. The above noted
transactions were in the normal course of operations and were measured
at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
10. INCOME TAXES
Due to the losses we incurred, there is no income tax provision or benefit
recorded for the years presented. The net future tax asset at December 31, 2004
of approximately $1,554,000 (2003 - $1,215,000) is comprised only of net
operating loss carryforwards which is totally offset by an identical valuation
allowance. No future tax asset has been recognized due to the uncertainty of
future realization.
We had Canadian non-capital losses available to carry forward to apply against
future taxable income of approximately $4.4 million expiring as follows:
2005: $454,000
2006: 706,000
2007: 537,000
2008: 365,000
2009: 450,000
2010: 1,089,000
2014: 839,000
---------
$4,440,000
==========
The tax benefit of net operating losses carried forward and the associated
valuation allowance were reduced by approximately $210,000 in 2004 (2003 -
$178,000) representing the tax effect of losses which expired during the year.
Major items causing our effective tax rate to differ from the statutory rate are
as follows:
December 31, 2004 December 31, 2003
-------------------------------------------------
Income tax (benefit) at statutory rate ($721,000) (35%) ($510,824) (35%)
Change in statutory rate -- --% 82,810 6%
Expiry from loss 210,000 10% 178,014 12%
Permanent difference 164,000 8% 270,000 18%
Changes in valuation allowance 347,000 17% (20,000) (1%)
---------- ---------- ---------- ----------
$ -- --% $ -- --%
========== ========== ========== ==========
68
11. COMPARATIVE FIGURES
Certain financial statement line items from prior years have been reclassified
to conform with the current year's presentation. These reclassifications had no
effect on the net income and accumulated deficit as previously reported.
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
As discussed in Note 2, these financial statements are prepared in accordance
with Canadian generally accepted accounting principles ("GAAP"). Differences
between Canadian and United States generally accepted accounting principles
("U.S. GAAP") as they apply to these financial statements are summarized as
follows:
a. Compensation Expense Associated with Release of Shares from Escrow
Under U.S. GAAP, stock compensation expense is recorded as shares held
in escrow become eligible for release based upon the number of shares
eligible for release and the market value of the shares at that time.
Under Canadian GAAP, no value is attributed to such shares released
and no compensation expense is recorded. Shares become eligible for
release from escrow based on deferred exploration expenditure in
accordance with the Escrow Agreement and with the consent of the TSX
Venture Exchange. During the years ended December 31, 2004 and 2003
and for the period from July 1, 1994 (commencement) through December
31, 2004, we would have recorded compensation expense of $nil, $nil
and $6,324,914 respectively, under U.S. GAAP.
b. Mineral Properties and Deferred Exploration Costs
The U.S. Securities and Exchange Commission staff has taken the
position that a U.S. registrant without proven and probable economic
reserves, in most cases, could not support the recovery of the
carrying value of deferred exploration costs. Therefore, we have
presented the effect of expensing all deferred exploration costs as a
reconciling item between U.S. and Canadian GAAP.
As our investment in MSC is effectively an investment in a property
without proven and probable reserves it has been expensed for U.S.
GAAP purposes.
During 2003 we recorded, for Canadian GAAP purposes, the acquisition
of royalty interests at carrying value, nil (Note 75 9 (a)). Under
U.S. GAAP, the acquisition would be recorded at the $500,000 exchange
value; charged as a deferred exploration cost and expensed.
c. Stock Based Compensation
Effective January 1, 2004, we adopted, on a retroactive basis without
restatement, the Canadian GAAP fair-value-based method for all
stock-based awards granted on or after January 1, 2002. U.S. GAAP does
not require the fair-value-based method to account for employee based
options as of January 1, 2002. Since we granted options to employees
in 2004, the retroactive adoption without restatement of the new
Canadian requirements has created differences between Canadian and
U.S. GAAP with respect to the net loss for the year ended December 31,
2004. There would however be no adjustment to retained earnings as
well as contributed surplus at January 1, 2004 under U.S. GAAP as was
required under Canadian GAAP.
d. Warrants
Under Canadian GAAP, no value was assigned to the warrants granted to
the agents in connection with the private placement of 10,000,000
(2003 - 22,000,000) units which were issued in March 2004 and November
2003, respectively (Note 7). Under US GAAP, the warrants were valued
on the closing date of the private placements, respectively, using the
Black-Scholes option pricing model with the following weighted average
assumptions:
69
Agent Warrants
-------------------------
2004 2003
-------------------------
Number of Warrants 1,000,000 2,200,000
Risk-free rate 2.73% 3.29%
Dividend yield Nil% Nil%
Volatility factor of the expected market price of
the Company's common shares 60% 95%
Weighted average expected life of the warrants
(months) 18 24
Value of warrants $ 72,761 $ 446,472
The value of the agent warrants was charged against share capital as
share issuance costs; the net effect on shareholders' equity was $Nil
(2003 - $Nil).
e. Bank Loan
Under Canadian GAAP, the corresponding entry to record the debt
discount of $346,200 related to the warrants granted to Macquarie Bank
in connection with a credit facility (Note 6) was to contributed
surplus. Under US GAAP, as the Company is required to maintain its
listed company status as part of the loan covenant, in accordance with
EITF 00-19, the corresponding entry to record the debt discount is to
a liability. This would result in total liabilities for US GAAP
purposes to be $1,261,181. Subsequently, the discount will be
remeasured on each balance sheet date based on the fair value of the
warrants with the adjustment charged to the Statement of Operations.
f. New Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities." In December 2003, the
FASB issued a revision to this interpretation (FIN 46(r)). FIN 46(r)
further clarifies the application of Accounting Research Bulletin
(ARB) No. 51, "Consolidated Financial Statements." FIN 46 clarifies
the application of ARB No. 51 to certain entities in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. The adoption of FIN 46 in 2003 and the
provisions then in effect, did not have a material effect on our
consolidated financial statements. We adopted FIN 46(r) in its
entirety for our consolidated financial statements ending December 31,
2004.
In December 2003, the FASB revised SFAS No. 132 "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits - an
amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132 has
been revised to include additional disclosures about the assets,
obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit post-retirement plans.
The revisions do not change the measurement or recognition of those
plans required by existing standards. The adoption of revised SFAS No.
132 did not have a material effect on our consolidated financial
statements.
In April 2004, the Financial Accounting Standards Board ("FASB")
ratified Emerging Issues Task Force ("EITF") Issue No. 04-2, which
amends Statement of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations" to the extent all mineral rights are to be
considered tangible assets for accounting purposes. There has been
diversity in practice related to the application of SFAS No. 141 to
certain mineral rights held by mining entities that are not within the
scope of SFAS No. 19 "Financial Accounting and Reporting by Oil and
Gas Producing Companies." The SEC staff's position previously was
70
entities outside the scope of SFAS No. 19 should account for mineral
rights as intangible assets in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets." The adoption of EITF 04-02 has no effect
on the consolidated financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB")
issued ("SFAS") No. 123 (revised 2004), "Share-Based Payment." SFAS
No. 123(R) requires the Company to measure all employee stock-based
compensation awards using a fair value method and record such expense
in its consolidated financial statements. In addition, SFAS No. 123(R)
requires additional accounting related to the income tax effects and
additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. For public entities that do not file
as a small business issuer, SFAS No. 123(R) is effective for the first
annual reporting period beginning after December 15, 2005.
In December 2004, FASB issued SFAS No. 153 to amend Opinion 29 by
eliminating the exception for non-monetary exchanges of similar
productive assets and replaces it with general exception for exchanges
of non-monetary assets that do not have commercial substance. A
non-monetary exchange is defined to have commercial substance if the
future cash flows of the entity are expected to change significantly
as a result of the exchange.
The implementation of the not yet adopted U.S. standards is not
expected to have a material effect on the Company's financial
statements.
g. Impact on Consolidated Financial Statements The impact of the above on
the consolidated financial statements is as follows:
Dec. 31, Dec. 31,
2004 2003
------------ ------------
Shareholders' equity, end of year,
per Canadian GAAP $ 11,194,559 $ 7,401,958
Adjustment for mineral properties and
deferred exploration costs (2,827,655) (915,299)
Adjustment for investment (7,345,840) (4,063,127)
Adjustment for the debt discount (346,200) --
------------ ------------
Shareholders' equity, end of year, per US GAAP $ 674,864 $ 2,423,532
============ ============
71
Period from
July 1, 1994
Year Ended (commencement)
----------------------------- through
Dec. 31, Dec. 31, December 31,
2004 2003 2004
----------- ----------- ------------
Net loss for the period, per Canadian GAAP $(2,058,905) $(1,459,498) $(16,892,250)
Adjustment for acquisition of Scotia -- -- (248,590)
Adjustment for compensation expense 302,614 -- (6,022,300)
Adjustment for deferred exploration costs, net (1,912,356) (199,831) (2,827,655)
Adjustment for investment $(3,282,713) $(1,742,147) $ (7,345,840)
----------- ----------- ------------
Net loss for the period, per U.S. GAAP $(6,951,360) $(3,401,476) $ (33,336,635)
=========== =========== =============
Basic and diluted net loss per common share, per
U.S. GAAP $ (0.10) $ (0.09)
=========== ===========
During 1995, we issued 336,814 Common Shares for the acquisition of
Scotia Prime Minerals, Incorporated ("Scotia"). Under U.S. GAAP, these
shares would be valued at $248,590, the fair market value of the
shares issued. This value, plus the $17,215 of net liabilities of
Scotia assumed by the Company, would have been recorded as property
rights at the acquisition date under U.S. GAAP.
We continue to account for stock-based compensation awarded to
employees using the intrinsic method. Consequently, related pro-forma
information as described in SFAS No. 123 has been disclosed, as
follows:
Year Ended
----------------------------
Dec. 31, Dec. 31,
2004 2003
----------- -----------
Net loss for the period under U.S. GAAP as
reported $(6,951,360) $(3,401,476)
Deduct: Total stock-based employee
compensation expense determined under fair-
value-based method for all awards. (302,614) (508,697)
----------- -----------
Pro-forma net loss for the period $(7,253,974) $(3,910,173)
=========== ===========
Basic and diluted net loss per common share -
pro-forma $ (0.11) $ (0.10)
The fair value of each option granted was estimated on the date of
grant using the Black-Scholes option-pricing model with assumptions as
disclosed in Note 7.
72
13. SUBSEQUENT EVENTS
a. On March 11, 2005, we issued 224,748 common shares for the exercise of
broker warrants for net proceeds of $65,312.
b. On March 9, 2005, we received a $200,000 payment on the option
agreement entered into with MHC, the majority shareholder of the
Argentine Corporation formed to develop the San Jose project.
c. On March 22, 2005, we issued 18,180,450 units through a private
placement at a price of Cdn$0.55 per unit for gross proceeds of
approximately Cdn$10 million.
Under terms of the offering, each unit will consist of one common
share and one-half of one common share purchase warrant. One whole
common share purchase warrant will entitle the holder to purchase one
additional common share at an exercise price of Cdn$0.70 per share for
a period of 60 months from the closing date. The private placement is
subject to receiving regulatory approval and issued securities are
subject to a four-month hold period.
Our agents will receive a 7% commission and agents' warrants equal to
7% of the aggregate number of units issued pursuant to the offering.
Each agents' warrant upon exercise will entitle the holder to acquire
one common share at an exercise price of Cdn$0.70 per common share for
a period of 24 months from the date of issue.
73
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our President and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Our
disclosure controls and procedures are designed to provide a reasonable level of
assurance of reaching our desired disclosure control objectives. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Our President and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective in reaching that level of assurance.
As of the end of the period being reported upon, we carried out an evaluation,
under the supervision and with the participation of management, including our
President and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the foregoing, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective.
ITEM 8B. OTHER INFORMATION
None.
74
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Information with respect to our directors, executive officers and significant
employees is set forth below.
Name Age Positions Held
Allen Ambrose 48 President and Director
Brian Gavin 51 Vice-President of Exploration, Director of MASA
Jorge Vargas 63 Director and President of MASA & MSC
Gary Craig 56 Director
John Johnson Crabb 79 Director
A.D. (Darryl) Drummond 68 Director
Bonnie L. Kuhn 39 Secretary, CFO and Director
Allen Ambrose, President and Director, has 25 years of experience in the mining
industry and has been a director of Minera Andes since November 1995. Mr.
Ambrose was employed by Degerstrom from 1988 to 2003. Prior to joining
Degerstrom, Mr. Ambrose was a geologist for Cyprus Minerals, Kidd Creek Mines,
Molycorp, Boise Cascade and Dennison Mines. Mr. Ambrose has extensive experience
in all phases of exploration, project evaluation and project management and has
worked as a geologist consultant in the U.S., Venezuela and most recently
Argentina. He holds a B.Sc. degree in Geology from Eastern Washington
University. While consulting for Gold Reserve Corporation, he was a
co-discoverer of the auriferous massive sulfide exposure that led to their
acquisition of the Brisas project in Venezuela. Mr. Ambrose sat on the board of
directors of Cadre Resources Ltd. until March 2001 and has been a director of
Saxony Explorations Ltd. and Kaieteur Resource Corporation since July 2002.
Brian Gavin, Vice President of Exploration, Director of MASA, has 25 years of
experience in exploration geology. Mr. Gavin has extensive experience in all
phases of exploration, project evaluation and project management in the search
for precious and base metals, industrial minerals and has worked in the field as
project manager and consultant in the U.S., Mexico, Nigeria, Argentina and most
recently, in Romania. He holds a B. Sc. (Honours) degree in Geology from the
University of London and M. S. degree in Geology and Geophysics from the
University of Missouri-Rolla. From 1981 to 1993, he was a consultant with Ernest
K. Lehman & Associates, which is a geological mining consulting firm. From 1993
to 2003, he was employed by Degerstrom. Mr. Gavin has served as an officer and
director of Franconia Minerals Corporation since June 2001.
Jorge Vargas, President and Director of MASA and MSC, received his law degree in
1967 from the National University of Buenos Aires, Argentina. He has been in
private practice since 1967. Dr. Vargas also studied mining law at the Law
Faculty of the University of Mendoza and was on the organizing committee of the
First International Water Rights Conference in Mendoza in 1968. Dr. Vargas is a
registered attorney in the provinces of Mendoza and San Juan, and at the Federal
level.
75
Gary A. Craig, Director, has been a director since April 12, 2002. Mr. Craig has
a degree in Civil Engineering and is currently Vice President of Operations for
N.A. Degerstrom, Inc. His responsibilities for Degerstrom include managing 350
employees at various job sites throughout the U.S. and Argentina. Before his
employment with Degerstrom, Mr. Craig worked 27 years for Dravo Corporation. The
last 20 years with Dravo he worked as project manager for a phosphate mining
operation, where he oversaw 100 employees.
John Johnson Crabb, Director, graduated from the University of British Columbia
in 1951 with a Masters Degree in Geology and has been a director of Minera Andes
since November 1995. He was a director of Inland Resources, Inc. from 1985 to
November 1995. Mr. Crabb was the director of Pegasus Gold Inc. and Vice
President of Exploration for Crowsnest Resources Ltd., a wholly owned subsidiary
of Shell Canada.
A.D. (Darryl) Drummond, Director, is a Ph.D. and a professional engineer and has
been a director of Minera Andes since June 1996. He graduated from the
University of British Columbia with a B.A.Sc. in Geological Engineering in 1959
and with a M.A.Sc. in 1961. He obtained his Doctorate degree in 1966 from the
University of California at Berkeley. As an undergraduate and graduate, he
worked with Kennco Explorations (Western) Ltd. during the period 1958 to 1961.
He has been associated with the Placer Development Group of Companies since
1963, first with Craigmont Mines Ltd., then Endako Mines and Gibraltar Mines. At
the Placer head office since 1967, he initially was a Research Geologist and
then Assistant Exploration Manager, Western Canada, for Canex Placer Ltd. During
1977 to 1979, he was Manager of Placer Development y Cia. Ltda. in Santiago,
Chile, then returned to the position of Research Geologist with the Technical
Services Advisory Group for the Placer Group of Companies in Vancouver. On March
1, 1981, he and David Howard became principals in a mineral exploration
management firm called D.D.H. Geomanagement Ltd. with offices in Vancouver,
British Columbia. Since 1981, consulting tasks have concentrated on all aspects
of mineral deposit evaluation covering precious metal, base metal and industrial
mineral types in such countries as Argentina, Canada, Chile, China, Costa Rica,
Ecuador, Guyana, Mexico, Philippines, United States of America and Venezuela. He
is a member of the Society of Economic Geology and a member of the Geology
Section of the Canadian Institute of Mining and Metallurgy. He was the President
of D.D.H. Geomanagement from 1981 to November 10, 2004; director of Cadre
Resources Ltd. from November 1994 to February 1995; director of All North
Resources Ltd. from May 1995 to July 9, 1996; and director of International
All-North Resources Ltd. from July 10, 1996 to December 23, 1998; director of
The Quinto Mining Corporation from September 11, 1996 to August 10, 1997;
director of Riverdance Resources Corporation from January 1998 to December 15,
1998; director of Kaieteur Resources Corporation from December 23, 1998 to
January 12, 2005; director of Saxony Explorations Ltd. from February 2000 to
September 24, 2003; and director of Valerie Gold Resources from November 6, 1998
to March 27, 2003; director of Valgold Resources Ltd. from March 27, 2003 to
present; director of Wollasco Minerals Inc. from October 12, 2004 to December
16, 2004; director of Gold Port Resources Ltd. from December 16, 2004 to
present, and director of Samba Gold Inc. from January 12, 2005 to present.
Bonnie L. Kuhn, Secretary, Chief Financial Officer and Director, has been the
Secretary and a director of Minera Andes since June 1997 and has been Chief
Financial Officer since May 2000. From July 2001 to January 2005, Ms. Kuhn was a
senior associate of Field LLP, Barristers and Solicitors. She had been a
solicitor with the firm Ogilvie and Company, Barristers and Solicitors, Calgary,
Alberta, from January 1994 to December 31, 1998. Ogilvie and Company of Calgary
changed its name to Armstrong Perkins Hudson LLP in 1999. From January 1, 1999
to June 2001, Ms. Kuhn was a partner with Armstrong Perkins Hudson. From August
1993 to December 1994, Ms. Kuhn was a Crown prosecutor with the Government of
Alberta, Department of Justice. Ms. Kuhn is a member of the Law Society of
Alberta and the Canadian Bar Association. She obtained her LLB from the
University of Manitoba in 1989. Ms. Kuhn was a director of Talon Petroleums
Ltd., an oil and gas exploration company, from September 1997 to September 1999.
Ms. Kuhn was a director of Tajzha Ventures Ltd., an oil and gas exploration
company from October 2000 to April 2005. Ms. Kuhn is an officer and director of
Franconia Minerals Corporation.
76
We have five directors, two of whom are executive officers. Directors serve
terms of one year or until their successors are elected or appointed. No
remuneration of any kind has been paid to any director, in their capacity as
such, and there is no intention that they will be remunerated in that capacity
in the immediate future. We reimburse expenses incurred by directors in
connection with their activities on our behalf.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the exemption in Exchange Act Rule 3a12-3(b), this item does not apply
because Minera Andes is, and at all times during the applicable reporting period
has been, a foreign private issuer as defined in Exchange Act Rule 3b-4.
Code of Ethics
At this time, we have not adopted a formal code of ethics that applies to our
President and Chief Financial Officer. We have, however, followed an informal
code of ethics requiring Board of Director approval of any transaction in which
our President or our Chief Financial Officer has a material interest. We believe
this procedure reasonably deters material wrongdoing and promotes honest and
ethical conduct from our executive officers.
We plan to adopt a formal code of ethics during the current year. After adopting
a formal code of ethics, we intend to disclose substantive amendments to and
waivers from that code of ethics on our Web site at http://www.minandes.com.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Executive Compensation
The following table sets forth compensation paid, directly or indirectly, by
Minera Andes during the last fiscal year for services rendered by Allen Ambrose,
President, and Brian Gavin, Vice President of Exploration ("Named Executives").
Summary Compensation Table
---------------------------- -------------------------------------------------------- --------------------------------
Annual Compensation Long Term Compensation
---------------------------- -------------------------------------------------------- --------------------------------
Other Annual
Fiscal Salary Compensation Securities Underlying
Executive Year ($) ($) Options/SARs (#)
---------------------------- ---------- -------------------- ------------------------ --------------------------------
Allen Ambrose (1) 2004 109,236 15,085(2) 370,000
President 2003 109,236 12,013 510,000
2002 87,444 9,903 160,000
Brian Gavin (1) 2004 109,236 15,382(3) 370,000
Vice President of 2003 109,236 12,013 510,000
Exploration 2002 87,444 9,903 160,000
77
Notes:
(1) For Fiscal Years 2003 and prior, Allen Ambrose and Brian Gavin, as
employees of Degerstrom, provided services under the Operating Agreement
(See "Description of the Business") which services were invoiced to us
under the Operating Agreement.
(2) During the 2004 fiscal year, the following benefits were provided to Mr.
Ambrose:
401K Match $ 4,369
Medical Insurance $10,716
(3) During the 2004 fiscal year, the following benefits were provided to Mr.
Gavin:
401K Match $ 4,369
Medical Insurance $11,013
Stock Options Granted in 2004
The following table sets forth certain information concerning individual stock
options granted to the Named Executives during the year ended December 31, 2004.
Option Grants in the Last Fiscal Year
-------------------------------------------------------------------------------------------------------------------
Percentage of
Total Options
Number of Granted to Exercise
Securities Underlying Employees in Price Expiration
Executive Options Granted Fiscal Year (Cdn$/Share) Date
-------------------------------------------------------------------------------------------------------------------
Allen Ambrose 370,000 22.4% $0.55 September 10, 2009
Brian Gavin 370,000 22.4% $0.55 September 10, 2009
Aggregated Option Exercises
The following table sets forth certain information concerning the number of
shares covered by both exercisable and unexercisable stock options as of
December 31, 2004. Also reported are values of "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding stock options and the fair market value of our Common Shares as of
December 31, 2004.
Fiscal Year-End Option Values
---------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Shares Number of Shares Underlying In-the-Money Options at Fiscal
Acquired Value Options at Fiscal Year End Year End (1) (2)
Executive on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---------------------------------------------------------------------------------------------------------------------
Allen Ambrose 0 $0 1,140,000 0 $213,094 $0
Brian Gavin 0 $0 1,140,000 0 $213,094 $0
78
Notes:
(1) There were 1,140,000 stock options for each Named Executive that were
in-the-money as of December 31, 2004. On December 31, 2004 the closing
price of the Common Shares on TSX-V was Cdn$0.70.
(2) The currency exchange rate applied in calculating the value of unexercised
in-the-money options was the late New York trading rate of exchange for
December 31, 2004 as reported by the Wall Street Journal for conversion of
United States dollars into Canadian dollars was U.S.$1.00 = Cdn$1.1995 or
Cdn$1.00 = U.S.$0.8337.
Stock Option Plan
The board of directors adopted a stock option plan (the "Plan") which was
approved with amendments by the shareholders of the Company at the Annual and
Special Meeting of Shareholders held on June 26, 1996, which was subsequently
amended at our Annual and Special Meeting of Shareholders held on June 26, 1998,
June 23, 1999 and September 3, 2003. The purpose of the Plan is to afford the
persons who provide services to Minera Andes or any of its subsidiaries or
affiliates, whether directors, officers or employees of Minera Andes or its
subsidiaries or affiliates, an opportunity to obtain a proprietary interest in
Minera Andes by permitting them to purchase Common Shares and to aid in
attracting, as well as retaining and encouraging the continued involvement of
such persons with us. Under the terms of the Plan, the board of directors has
full authority to administer the Plan in accordance with the terms of the Plan
and at any time amend or revise the terms of the Plan provided, however, that no
amendment or revision shall alter the terms of options already granted. The
aggregate number of shares to be delivered upon exercise of all options granted
under the Plan shall not exceed 20% of the issued and outstanding Common Shares
up to a maximum of 6,000,000 shares. No participant may be granted an option
under the Plan which exceeds the number of shares permitted to be granted
pursuant to rules or policies of any stock exchange on which the Common Shares
is then listed.
Under the Plan, the exercise price of the shares covered by each option shall be
determined by the directors and shall be not less than the closing price of our
Common Shares on the stock exchange or stock exchanges on which the shares are
listed on the last trading day immediately preceding the day on which the stock
exchange is notified of the proposed issuance of option, less any discounts
permitted by the policy or policies of such stock exchange or stock exchanges.
If an option is granted within six months of a public distribution of our Common
Shares by way of prospectus, then the minimum exercise price of such option
shall, if the policy of such stock exchange or stock exchanges requires, be the
greater of the price determined pursuant to the provisions of the Plan and the
price per share paid by the investing public for our Common Shares acquired by
the public during such public distribution, determined in accordance with the
policy of such stock exchange or stock exchanges. Options granted under the Plan
will not be transferable and, if they are not exercised, will expire one (1)
year following the date the optionee ceases to be director, officer, employee or
consultant of Minera Andes by reason of death, or ninety (90) days after ceasing
to be a director, officer, employee or consultant of Minera Andes for any reason
other than death.
At December 31, 2004, 309,000 options were available for grant under the Plan.
79
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial
ownership, as of March 31, 2005, of the Common Shares by (i) each person known
by us to own beneficially more than 5% of the Common Shares, (ii) each director
of Minera Andes, (iii) the Named Executive Officers (iv) all directors and
executive officers as a group. Except as otherwise noted, we believe the persons
listed below have sole investment and voting power with respect to the Common
Shares owned by them.
Shares
Named Executive Beneficially Percentage of
Officers and Directors Owned (1) Common Shares (1)
---------------------- --------- -----------------
Allen Ambrose 1,257,200 (2) 1.38
111 E. Magnesium Road
Spokane, WA 99208
John Johnson Crabb 245,000 (3) 0.27
111 E. Magnesium Road
Spokane, WA 99208
Gary A. Craig 215,000 (4) 0.24
3303 N. Sullivan Road
Spokane, WA 99216
A.D. (Darryl) Drummond 225,000 (5) 0.25
111 E. Magnesium Road
Spokane, WA 99208
Brian Gavin 1,260,400 (2) 1.38
111 E. Magnesium Road
Spokane, WA 99208
Bonnie L. Kuhn 349,500 (6) 0.39
111 E. Magnesium Road
Spokane, WA 99208
5% or Greater Shareholders
Neal A. and Joan L. Degerstrom 5,445,000 (7) 6.04
3303 North Sullivan Road
Spokane, WA 99216
Libra Fund LP 3,112,819 (8) 5.63
604 Third Ave, 4th Floor
New York, NY 10022
Passport Management, LLC 4,958,300 (9) 8.50
402 Jackson Street
San Francisco, CA 94111
Proton Global Ltd 3,345,784 (10) 6.93
19 Camp Road, Wimbledon
United Kingdom, SW19 H4W
Sprott Asset Management Inc. 5,767,100 (11) 8.41
Royal Bank Plaza, South Tower
Suite 2700
Toronto, ON M5J 2J1
All directors and
executive officers
as a group (6 persons) 3,552,100 (12) 3.81
80
Notes:
(1) Shares which the person or group has the right to acquire within 60 days
after March 31, 2005 are deemed to be outstanding in determining the
beneficial ownership of the person or group and in calculating the
percentage ownership of the person or group, but are not deemed to be
outstanding as to any other person or group. Percentage ownership has been
calculated based on a total of 90,079,504 shares outstanding.
(2) Includes stock options entitling the holder to acquire 100,000 shares upon
payment of Cdn$0.16, 160,000 shares upon payment of Cdn$0.40, 150,000
shares upon payment of Cdn$0.31, 360,000 shares upon payment of Cdn$0.59,
and 370,000 shares upon payment of Cdn$0.55.
(3) Includes stock options entitling the holder to acquire 60,000 shares upon
payment of Cdn$0.40, 40,000 shares upon payment of Cdn$0.31, 75,000 shares
upon payment of Cdn$0.59, and 40,000 shares upon payment of Cdn$0.55.
(4) Includes stock options entitling the holder to acquire 60,000 shares upon
payment of Cdn$0.40, 40,000 shares upon payment of Cdn$0.31, 75,000 shares
upon payment of Cdn$0.59, and 40,000 shares upon payment of Cdn$0.55.
(5) Includes stock options entitling the holder to acquire 75,000 shares upon
payment of Cdn0$0.59 and 50,000 shares upon payment of Cdn$0.55.
(6) Includes stock options entitling the holder to acquire 8,500 shares upon
payment of Cdn$0.16, 80,000 shares upon payment of Cdn$0.40, 60,000 shares
upon payment of Cdn$0.31, 120,000 shares upon payment of Cdn$0.59, and
80,000 shares upon payment of Cdn$0.55.
(7) The Common Shares are owned beneficially by Mr. and Mrs. Degerstrom by
virtue of their combined majority control of the record owner, N.A.
Degerstrom, Inc.
(8) Libra Fund LP holds 5.63% of our shares (including warrants to acquire
2,071,909 common shares).
(9) Passport Master Fund, LP, a British Virgin Islands International Limited
Partnership holds 5.17% of our shares (including warrants to acquire
1,815,935 common shares), through which Passport Management, LLC, a
Delaware Limited Liability Company, exercises investment discretion and
voting authority in respect to the shares. In addition, Passport Master
Fund II, LP owns 3.47% of our shares (including warrants to acquire
1,134,065 common shares) through which Passport Management, LLC exercises
investment discretion and voting authority in respect the shares. Passport
Management, LLC disclaims beneficial ownership of all such shares.
(10) Proton Global Ltd holds 6.93% of our shares (including warrants to acquire
3,116,682 common shares).
(11) Sprott Gold and Precious Minerals Fund holds 6.82% of our shares (including
warrants to acquire 1,479,300 common shares) through which Sprott Asset
Management Inc. exercises investment discretion and voting authority in
81
respect to the shares. In addition, Sprott Strategic Offshore Gold Fund
Ltd. holds 1.66% of our shares (including warrants to acquire 500,000
common shares) through which Sprott Asset Management Inc. exercises
investment discretion and voting authority in respect to the shares.
(12) Includes stock options to acquire 208,500 shares upon payment of Cdn$0.16,
520,000 shares upon payment of Cdn$0.40, 440,000 shares upon payment of
Cdn$0.31, 1,065,000 shares upon payment of Cdn$0.59 and 950,000 shares upon
payment of Cdn$0.55.
82
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2004 and 2003, we incurred the following transactions with related
parties: financial consulting to a director totaling $0 and $1,120; geological
consulting to a director totaling $0 and $3,613, and legal fees to a firm in
which Bonnie L. Kuhn, a director and officer of Minera Andes, is an associate,
totaling $81,412 and $112,019, respectively. The above noted transactions were
in the normal course of operations and were measured at the exchange amount,
which is the amount of consideration established and agreed to by the related
parties.
ITEM 13. EXHIBITS
The Exhibits as indexed on pages 83 through 85 of this report are included as
part of this Form 10-KSB.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
a. Audit Fees
The fees billed for each of the fiscal years ended December 31, 2004
and December 31, 2003 for professional services rendered by BDO
Dunwoody LLP for the audit of our annual financial statements and
review of financial statements included in our quarterly reports on
Form 10-QSB or services that are normally provided by BDO Dunwoody in
connection with statutory and regulatory filings or engagements for
each of those fiscal years were $35,500 and $18,521, respectively.
b. Audit Related Fees
There were no other audit related fees in fiscal 2003 or 2004.
c. Tax Fees
Aggregate fees billed by BDO Dunwoody for tax compliance, tax advice
and tax planning for each of the fiscal years ended December 31, 2004
and December 31, 2003 were $2,025 and $2,134, respectively. These fees
include fees relating to the reviews of tax returns, tax consulting
and planning.
d. All Other Fees
Fees billed by BDO Dunwoody products or services, other than those
services covered in Item 14(a) and (b) were $4,880 and $0 for the
fiscal years ended December 31, 2004 and December 31, 2003. These fees
relate to Private Placement due diligence.
e. Audit Committee Approval of Audit and Non-Audit Services
In 2004, the Audit Committee pre-approved the use of BDO Dunwoody for
specific tax-related services. The Audit Committee set a specific
annual limit on the amount of such tax-related services we obtained
from BDO Dunwoody, and required management to report the specific
engagements to the Audit Committee. All other non-audit services other
than the pre-approved services set forth above and any services that
exceed the annual limits set forth in the policy must be pre-approved
by the Audit Committee.
83
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
2.1
Asset and Share Acquisition Agreement between MASA, NADSA, Minera
Andes Degerstrom, Brian Gavin, Jorge Vargas, and Enrique Rufino
Marzari Elizalde, dated March 8, 1995, as amended on April 19,
1996 (incorporated by reference to Exhibit 2.1 to Minera Andes'
Registration Statement on Form 10-SB, Commission File No.
000-22731 (the "Form 10-SB")).
2.2 Arrangement between Minera Andes and Scotia Prime Minerals, Inc.
(incorporated by reference to Exhibit 2.2 to the Form 10-SB).
3.1 Articles of Incorporation (incorporated by reference to Exhibit
3.1 to the Form 10-SB).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Form
10-SB).
10.1 Conveyance Agreement between NADSA and N.A. Degerstrom, Inc.,
dated July 1, 1994 (incorporated by reference to Exhibit 10.1 to
the Form 10-SB).
10.2 Conveyance Agreement between NADSA and N.A. Degerstrom, Inc.,
dated July 1, 1994 (incorporated by reference to Exhibit 10.2 to
the Form 10-SB).
10.3 Operating Agreement between Minera Andes and N.A. Degerstrom,
Inc. dated March 15, 1995 (incorporated by reference to Exhibit
10.3 to the Form 10-SB).
10.4 Share Option Agreement between Minera Andes and Jorge Vargas,
dated March 15, 1995 (incorporated by the reference to Exhibit
10.4 to the Form 10-SB).
10.5 Share Option Agreement between Minera Andes and Enrique Rufino
Marzari Elizalde, dated March 15, 1995 (incorporated by reference
to Exhibit 10.5 to the Form 10-SB).
10.6 Special Warrant Indenture between Minera Andes and Montreal Trust
Company of Canada, dated December 13, 1996 (incorporated by
reference to Exhibit 10.18 to the Form 10-SB).
10.7 Purchase Warrant Indenture between Minera Andes and Montreal
Trust Company of Canada, dated December 13, 1996 (incorporated by
reference to Exhibit 10.19 to the Form 10-SB).
10.8 Agreement dated April 30, 1996 between Minera Andes and Waiata
Resources for the provision of financial advisory services
(incorporated by reference to Exhibit 10.20 to the Form 10-SB).
10.9 Amended Stock Option Plan, dated June 26, 1996, as amended June
26, 1998, as amended June 23, 2000 (incorporated by reference to
Exhibit 10.15 to the Form 10-KSB for the fiscal year ended
December 31, 2000).
84
10.10 Purchase and Sales Agreement (Chubut cateos, Mina Leon I, Mina
Leon II and Leleque) dated August 28, 2000 between Minera Andes
S.A. and Cordon Leleque S.A.(incorporated by reference to Exhibit
10.17 to the Form 10-KSB for the fiscal year ended December 31,
2000).
10.11 Purchase and Sales Agreement (Chubut cateos, Willimanco) dated
August 28, 2000 between Minera Andes S.A. and Minera El Desquite
S.A.(incorporated by reference to Exhibit 10.18 to the Form
10-KSB for the fiscal year ended December 31, 2000).
10.12 Option and Joint Venture Agreement (El Pluma/Cerro Saavedra
properties, now referred to as San Jose) between Minera Andes and
Mauricio Hochschild & Cia. Ltda. dated March 15,
2001(incorporated by reference to Exhibit 10.19 to the Form
10-KSB for the fiscal year ended December 31, 2000).
10.13 Amendment to the Option and Joint Venture Agreement (El
Pluma/Cerro Saavedra properties, now referred to as San Jose)
between Minera Andes and Mauricio Hochschild & Cia. Ltda. of
March 15, 2001 dated May 14, 2002 (incorporated by reference to
Exhibit 10.20 to the third quarter 2002 10-QSB).
10.14 Second Amendment to the Option and Joint Venture Agreement (El
Pluma/Cerro Saavedra properties, now referred to as San Jose)
between Minera Andes and Mauricio Hochschild & Cia. Ltda. of
March 15, 2001 dated August 27, 2002 (incorporated by reference
to Exhibit 10.21 to the third quarter 2002 10-QSB).
10.15 Key Executive Employment Contract between Allen Ambrose and
Minera Andes, effective January 1, 2003 (incorporated by
reference to Exhibit 10.15 to the Form 10-KSB for the fiscal year
ended December 31, 2002).
10.16 Key Executive Employment Contract between Brian Gavin and Minera
Andes, effective January 1, 2003 (incorporated by reference to
Exhibit 10.15 to the Form 10-KSB for the fiscal year ended
December 31, 2002).
10.17 Amendment to Key Executive Employment Contract between Allen
Ambrose and Minera Andes (incorporated by reference to Exhibit
10.1 to the third quarter 2003 10-QSB).
10.18 Amendment to Key Executive Employment Contract between Brian
Gavin and Minera Andes (incorporated by reference to Exhibit 10.1
to the third quarter 2003 10-QSB).
10.19 Amended Stock Option Plan dated September 3, 2003 (incorporated
by reference to Exhibit 10.1 to the third quarter 2003 10-QSB).
10.20 Settlement Agreement dated December 2, 2003 between Minera Andes
Inc. and N.A. Degerstrom, Inc. (incorporated by reference to
Exhibit 10.20 to the Form 10-KSB for the fiscal year ended
December 31, 2003).
10.21 Macquarie Bank Limited Credit Agreement dated December 10, 2004.*
21.1 List of subsidiaries.*
23.1 Consent of BDO Dunwoody LLP.*
31.1 Certification of President (Principal Executive Officer) pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.*
85
31.2 Certification of Chief Financial Officer (Principal Financial
Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
32.1 Certification of President pursuant to 18 U.S.C. Section 1350, as
adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
* Exhibits filed herewith
86
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MINERA ANDES INC.
Registrant
By: /s/ Allen V. Ambrose
------------------------------------
Allen V. Ambrose, President
Date: April 29, 2005
---------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: April 29, 2005 By: /s/ Allen V. Ambrose
--------------------------------- ---------------------------------
Allen V. Ambrose, Director
and Principal Executive
Officer
Date: April 29, 2005 By: /s/ John Johnson Crabb
--------------------------------- ---------------------------------
John Johnson (Jack) Crabb,
Director
Date: April 29, 2005 By: /s/ Gary A. Craig
--------------------------------- ---------------------------------
Gary A. Craig, Director
Date: April 29, 2005 By: /s/ A.D. Drummond
--------------------------------- ---------------------------------
A.D. (Darryl) Drummond,
Director
Date: April 29, 2005 By: /s/ Bonnie L. Kuhn
--------------------------------- ---------------------------------
Bonnie L. Kuhn, Director
and Principal Accounting
and Financial Officer
87