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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
|_| 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.
---------------------------------------------------------------
(Exact name of small business issuer as specified 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, WA 99208
--------------------------------------
(Address of principal executive offices)
(509) 921-7322
-------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 |_|
Shares outstanding as of May 17, 2005: 90,549,719 shares of common stock, with
no par value
Transitional Small Business Disclosure Format (Check One): Yes |_| No |X|
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets ............................ 3
Consolidated Statements of Operations and
Accumulated Deficit .................................... 4
Consolidated Statements of Mineral Properties and
Deferred Exploration Costs ............................. 5
Consolidated Statements of Cash Flows .................. 6
Notes to Consolidated Financial Statements ............. 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 16
Item 3 Controls and Procedures ................................ 20
PART II - OTHER INFORMATION
Item 2 Changes in Securities .................................. 21
Item 6 Exhibits and Reports on Form 8-K ....................... 21
SIGNATURES ............................................................... 22
- 2 -
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars - Unaudited)
March 31, December 31,
2005 2004
------------ ------------
ASSETS
Current:
Cash and cash equivalents $ 7,833,505 $ 1,726,820
Receivables and prepaid expenses 109,111 111,570
------------ ------------
Total current assets 7,942,616 1,838,390
Mineral properties and deferred exploration costs (Note 4) 3,190,332 2,827,655
Investment (Note 5) 9,196,270 7,345,840
Equipment, net 89,389 97,655
------------ ------------
Total assets $ 20,418,607 $ 12,109,540
============ ============
LIABILITIES
Current:
Accounts payable and accruals $ 254,760 $ 257,268
Bank loan interest payable 19,591 3,913
------------ ------------
Total current liabilities 274,351 261,181
Bank loan (Note 6) 1,693,563 653,800
------------ ------------
Total liabilities 1,967,914 914,981
------------ ------------
SHAREHOLDERS' EQUITY
Preferred shares, no par value, unlimited number
Authorized, none issued -- --
Common shares, no par value, unlimited number authorized
Issued March 31, 2005 - 90,079,504 shares (Note 3)
Issued December 31, 2004 - 71,586,806 shares 36,487,955 28,711,334
Contributed surplus - stock option compensation 1,672,921 1,663,677
Accumulated deficit (19,710,183) (19,180,452)
------------ ------------
Total shareholders' equity 18,450,693 11,194,559
------------ ------------
Total liabilities and shareholders' equity $ 20,418,607 $ 12,109,540
============ ============
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.
- 3 -
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(U.S. Dollars - Unaudited)
Period from
Three Months Ended July 1, 1994
---------------------------- (commencement)
March 31, March 31, through
2005 2004 March 31, 2005
------------ ------------
Consulting fees 112,393 144,376 2,078,617
Depreciation 2,454 8,857 79,951
Equipment rental -- -- 21,522
Foreign exchange (gain) loss 16,430 (38,538) 113,113
Insurance 17,255 18,787 339,326
Legal, audit and accounting fees 36,792 81,003 1,547,997
Materials, supplies and maintenance -- -- 49,260
Office overhead and administration fees 46,417 56,905 2,435,161
Telephone 9,621 8,918 426,455
Transfer agent 947 1,530 117,703
Travel 22,656 19,091 481,483
Wages and benefits 52,013 47,474 2,109,030
Write-off of deferred exploration costs -- -- 8,540,235
------------ ------------ ------------
Total expenses 316,978 348,403 18,339,853
Gain on sale of equipment -- -- (112,330)
Gain on sale of property -- -- (898,241)
Loss on investment (Note 5) 145,068 -- 565,417
Interest income (7,851) (14,868) (548,254)
------------ ------------ ------------
Net loss for the period 454,195 333,535 17,346,445
------------ ------------ ------------
Accumulated deficit, beginning of the period, 19,180,452 16,356,398 --
as previously reported
Adjustment for change in accounting for stock-based
compensation (Note 2) -- 678,569 678,569
------------ ------------ ------------
19,180,452 17,034,967 678,569
Adjustment on acquisition of royalty interest -- -- 500,000
Share issue costs 75,536 86,580 1,167,954
Deficiency on acquisition of subsidiary -- -- 17,215
------------ ------------ ------------
Accumulated deficit, end of the period $ 19,710,183 $ 17,455,082 $ 19,710,183
============ ============ ============
Basic and diluted net loss per common share $ 0.01 $ 0.01
============ ============
Weighted average shares outstanding 73,532,878 61,880,754
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
- 4 -
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED STATEMENTS OF MINERAL PROPERTIES
AND DEFERRED EXPLORATION COSTS
(U.S. Dollars - Unaudited)
Period from
Three Months Ended July 1, 1994
--------------------------- (commencement)
March 31, March 31, through
2005 2004 March 31, 2005
------------ ------------ ------------
Administration fees $ -- $ -- $ 392,837
Assays and analytical 25,489 7,691 1,083,306
Construction and trenching -- 170 526,351
Consulting fees 47,151 23,692 1,219,944
Depreciation 6,253 -- 203,320
Drilling -- 242,798 1,193,283
Equipment rental 766 132,688 421,715
Geology 105,039 206,258 3,854,374
Geophysics 39,033 -- 348,935
Insurance -- -- 255,559
Legal 21,875 220 763,362
Maintenance 840 8,887 182,054
Materials and supplies 13,799 21,207 489,072
Project overhead 15,481 6,414 401,139
Property and mineral rights 11,646 28,890 1,424,245
Telephone 6,884 2,590 115,900
Travel 37,253 30,003 1,251,267
Wages and benefits 31,168 34,134 1,327,646
------------ ------------ ------------
Costs incurred during the period 362,677 745,642 15,454,309
Deferred costs, beginning of the period 2,827,655 915,299 --
Deferred costs, acquired -- -- 576,139
Deferred costs, contributed to MSC -- -- (2,320,980)
Deferred costs written off -- -- (8,540,235)
Mineral property option proceeds -- -- (1,978,901)
------------ ------------ ------------
Deferred costs, end of the period $ 3,190,332 $ 1,660,941 $ 3,190,332
============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
- 5 -
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars - Unaudited)
Period from
Three Months Ended July 1, 1994
---------------------------- (commencement)
March 31, March 31, Through
2005 2004 March 31, 2005
------------ ------------ ------------
Operating Activities:
Net loss for the period $ (454,195) $ (333,535) $(17,346,445)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Write-off of incorporation costs -- -- 665
Write-off of deferred exploration costs -- -- 8,540,235
Loss on investment 145,068 -- 565,417
Depreciation 2,454 8,857 79,951
Stock option compensation 9,244 30,866 648,152
Gain on sale of equipment -- -- (112,330)
Gain on sale of mineral properties -- -- (898,241)
Change in:
Receivables and prepaid expenses 2,459 16,678 (107,125)
Accounts payable and accruals (2,508) 305,634 235,559
Due to related parties -- (26,531) --
------------ ------------ ------------
Cash provided by (used in) operating activities (297,478) 1,969 (8,394,162)
------------ ------------ ------------
Investing Activities:
Incorporation costs -- -- (665)
Purchase of equipment (441) (8,768) (258,113)
Proceeds from sale of equipment -- -- 14,225
Proceeds from sale of property -- -- 898,241
Mineral properties and deferred exploration (356,424) (745,642) (15,277,431)
Investment (2,140,057) -- (7,981,353)
Proceeds from sale of subsidiaries -- -- 9,398
Acquisition of royalty interest -- -- (500,000)
Mineral property option proceeds 200,000 200,000 2,578,901
------------ ------------ ------------
Cash used in investing activities (2,296,922) (554,410) (20,516,797)
------------ ------------ ------------
- 6 -
MINERA ANDES INC.
"An Exploration Stage Corporation"
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars - Unaudited)
Period from
Three Months Ended July 1, 1994
------------------------- (commencement)
March 31, March 31, Through
2005 2004 March 31, 2005
----------- ----------- -----------
Financing Activities
Shares and subscriptions issued for cash, less issue costs 7,701,085 4,482,626 34,744,464
Bank loan proceeds received 1,000,000 -- 2,000,000
----------- ----------- -----------
Cash provided by financing activities 8,701,085 4,482,626 36,744,464
----------- ----------- -----------
Increase in cash and cash equivalents 6,106,685 3,930,185 7,833,505
Cash and cash equivalents, beginning of period 1,726,820 2,234,342 --
----------- ----------- -----------
Cash and cash equivalents, end of period $ 7,833,505 $ 6,164,527 $ 7,833,505
=========== =========== ===========
Supplementary disclosure of cash flow information:
Interest and taxes paid $ 7,337 $ -- $ 7,337
----------- ----------- -----------
Non-cash investing and financing activities and other
information:
Stock option compensation $ 9,244 $ 30,866 $ 648,152
----------- ----------- -----------
Capitalized interest (Note 6) $ 59,354 $ -- $ 59,354
----------- ----------- -----------
Depreciation capitalized to mineral properties $ 6,253 $ -- $ 32,695
----------- ----------- -----------
Adjustment for change in accounting for stock-based $ -- $ -- $ 678,569
compensation (Note 2)
----------- ----------- -----------
Deferred costs, acquired $ -- $ -- $ 576,139
----------- ----------- -----------
Deferred costs, contributed to MSC $ -- $ -- $ 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.
- 7 -
MINERA ANDES INC.
"An Exploration Stage Corporation"
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. Dollars-Unaudited)
1. Accounting Policies, Financial Condition and Liquidity
The accompanying consolidated financial statements of Minera Andes Inc. for the
three month periods ended March 31, 2005 and 2004 and for the cumulative period
from commencement (July 1, 1994) through March 31, 2005 have been prepared in
accordance with accounting principles generally accepted in Canada which differ
in certain respects from principles and practices generally accepted in the
United States, as described in Note 11. Also, they are unaudited but, in the
opinion of management, include all adjustments, consisting only of normal
recurring items, necessary for a fair presentation. Interim results are not
necessarily indicative of results which may be achieved in the future. The
December 31, 2004 financial information has been derived from our audited
consolidated financial statements.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 2004 included in our annual report on Form 10-KSB ("the 2004
10-KSB") for the year ended December 31, 2004 on file with SEDAR at
WWW.SEDAR.COM and with the Securities and Exchange Commission. The accounting
policies set forth in the audited annual consolidated financial statements are
the same as the accounting policies utilized in the preparation of these
consolidated financial statements, except as described in Note 2 and as modified
for appropriate interim presentation.
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 their
development, and future profitable production or disposition thereof. The
accompanying consolidated financial statements have been prepared using
accounting principles generally accepted in Canada applicable to a going
concern. The use of such principles may not be appropriate because, as of March
31, 2005, there was substantial doubt that we would be able to continue as a
going concern.
For the three months ended March 31, 2005, we had a loss of approximately
$454,000 and an accumulated deficit of approximately $19.7 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
sale of equity securities and joint venture arrangements. We expect to use
similar financing techniques in the future and is actively pursuing such
additional sources of financing.
Although there is no assurance that we will be successful in these actions,
management believes that they will be able to secure the necessary financing to
enable it to continue as a going concern. Accordingly, these financial
statements do not reflect adjustments to the carrying value of assets and
liabilities, and 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.
- 8 -
2. Change in Accounting Policy
Effective January 1, 2004, we adopted, on a retroactive basis without
restatement, the recommendations of CICA Handbook Section 3870, "Stock-based
compensation and other stock-based payments", which now requires companies to
adopt the fair value based method for all stock-based awards granted on or after
January 1, 2002. Previously we were only required to disclose the pro forma
effect of stock options issued to employees and directors in the notes to the
financial statements. The effect of this change in accounting policy was to
increase the deficit at January 1, 2004 by $678,569 with a corresponding
increase to reported contributed surplus.
3. Changes to Share Capital
Number
of Shares Amount
----------- -----------
Balance, December 31, 2004 71,586,806 $28,711,334
Issued for cash on exercise of warrants 22,500 9,230
Issued for cash on exercise of broker warrants 289,748 83,938
Issued for cash (private placement Cdn$0.55 each) 18,180,450 7,683,453
----------- -----------
Balance, March 31, 2005 90,079,504 $36,487,955
=========== ===========
During the three months ended March 31, 2005, we issued 22,500 common shares for
the exercise of 45,000 purchase warrants and 289,748 shares for the exercise of
broker warrants with gross proceeds of $93,168.
On March 22, 2005, we sold 18,180,450 units to accredited investors at a price
of Cdn$0.55 per unit for net proceeds of Cdn$9,299,300 (US$7,683,453). 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 5 years from the closing date. The issued securities are 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 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 2 years from the
date of issue. A total of 18,180,450 common shares were issued pursuant to the
private placement, and 9,090,225 common shares are reserved for issuance on
exercise of the warrants and 1,272,632 common shares are reserved for issuance
on the exercise of the agent's warrants.
Subsequent to March 31, 2005, we issued 25,000 common shares for the exercise of
stock options and 445,215 common shares for the exercise of broker warrants with
gross proceeds of $129,068.
4. Mineral Properties and Deferred Exploration Costs
At March 31, 2005, we, through our subsidiaries, hold interests in approximately
203,562 hectares of mineral rights and mining lands in three Argentine
provinces. Under its 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. Mineral property costs and deferred exploration costs, net of
mineral property option proceeds, are as follows:
- 9 -
2005 COSTS BY PROPERTY
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Santa Cruz General
Description San Juan Cateos Cateos Chubut Cateos Exploration Total
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Balance, beginning of period $ 1,065,399 $ 1,582,043 $ 180,213 $ -- $ 2,827,655
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Assays and analytical -- 25,489 -- -- 25,489
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Construction and trenching -- -- -- -- --
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Consulting fees 887 17,971 1,762 26,531 47,151
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Depreciation -- -- -- 6,253 6,253
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Drilling -- -- -- -- --
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Equipment Rental -- 766 -- -- 766
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Geology -- 96,897 1,455 6,687 105,039
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Geophysics -- 39,033 -- -- 39,033
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Legal -- -- -- 21,875 21,875
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Maintenance -- 162 -- 678 840
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Materials and supplies -- 10,339 52 3,408 13,799
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Project overhead 56 1,011 350 14,063 15,481
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Property and mineral rights 4,674 6,835 137 -- 11,646
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Telephone 1 4,533 8 2,342 6,884
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Travel 24 14,385 20 22,824 37,253
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Wages and benefits -- 2,388 -- 28,780 31,168
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Overhead allocation 2,832 128,710 1,900 (133,442) --
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
Balance, end of period $ 1,073,873 $ 1,930,562 $ 185,897 $ -- $ 3,190,332
---------------------------------- ---------------- --------------- ---------------- --------------- ----------------
The San Juan Province project is comprised of six properties totaling 20,900
hectares ("ha") in southwestern San Juan province. Land holding costs for 2005
are estimated at $1,616. Expenditures in the first quarter 2005 relate to an
ongoing land maintenance and exploration program at the Los Azules project.
In Santa Cruz, we control 20 cateos and 57 manifestations of discovery totaling
122,263 ha. Land holding costs for 2005 are estimated at $3,819. The first
quarter of 2005 expenditures on the Santa Cruz properties reflect the
continuation of a regional reconnaissance program.
We currently hold 20 manifestations of discovery, totaling 19,900 ha, in Chubut
province. Land holding costs for 2005 are estimated at $2,020. Expenditures in
the first quarter of 2005 relate to an ongoing reconnaissance exploration
program on lands acquired in 2002.
Wages and benefits were approximately $31,000 during the first quarter of 2005
compared to approximately $34,000 during the first quarter 2004. During 2005 and
2004, wage and benefit expense was for the benefit of all properties and was
prorated to each project.
- 10 -
5. Investment (San Jose Project)
The investment in Minera Santa Cruz S.A. is comprised of the following:
=============================================================================
2005
-----------------------------------------------------------------------------
Investment in MSC, January 1, 2005 $ 7,345,840
Plus:
Deferred costs incurred 186,498
Advances during the period 2,009,000
Option agreement proceeds (200,000)
Loss from equity investment (145,068)
-----------------------------------------------------------------------------
Investment in MSC, March 31, 2005 $ 9,196,270
=============================================================================
The San Jose project is owned by Minera Santa Cruz S.A. ("MSC"), an Argentine
corporation owned by Minera Andes Inc. (49%) and Mauricio Hoschschild & Cia.
Ltda. ("MHC") (51%). Our obligation will be 49% of the exploration costs related
to the San Jose project, to maintain our interest in MSC.
Deferred costs incurred for $186,498 include, among other things, engineering
consulting costs, legal fees, and interest and finance costs related to our
investment in MSC.
Subsequent to March 31, 2005, we made payments of $2,156,000 to fund our 49%
interest in the San Jose project.
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 assist in funding 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 5.1% 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. 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 is being accreted
and capitalized to our investment in MSC (Note 5) 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 began in January 2005.
- 11 -
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 $1,000,000 $ 346,200 $ 653,800
at January 1, 2005
Remainder of first tranche received 1,000,000 -- 1,000,000
Accretion of debt discount -- (39,763) 39,763
---------- ---------- ----------
Bank loan, initial tranche, being the balance $2,000,000 $ 306,437 $1,693,563
at March 31, 2005
---------- ---------- ----------
As at March 31, 2005, interest expense incurred of $23,015, and accreted
interest expense related to the debt discount of $39,763 were capitalized to the
Investment in MSC (Note 5).
7. Stock Options
A summary of the status of the Company's stock option plan as of March 31, 2005
is:
Weighted Ave.
Exercise
Options Price (Cdn)
--------- --------
Outstanding at December 31, 2004 and March 31, 2005 4,698,500 $ 0.49
--------- --------
Exercisable at March 31, 2005 4,638,500 $ 0.49
--------- --------
Exercisable at December 31, 2004 4,608,500 $ 0.49
--------- --------
The range of exercise prices is from Cdn$0.16 to Cdn$0.61 with a weighted
average remaining contractual life of 4 years at March 31, 2005.
At March 31, 2005, there were options held by directors, officers, employees and
consultants of the Company for the purchase of 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
Concerning stock option compensation, the fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing model. The
following weighted average assumptions were used for employee and non-employee
option grants:
- 12 -
2005 2004
------ ------
Dividend yield (%) - -
Expected volatility (%) 85 93
Risk-free interest rates (%) 3.40 2.90
Expected lives (years) 5.0 5.0
We recorded $9,244, and $30,866 of stock option compensation, related to the
vesting of certain non-employee stock options, during the three months ended
March 31, 2005 and 2004, respectively.
8. Warrants
Cdn
Wgt. Avg.
Warrants Exercise Price
---------- ----------
Outstanding and exercisable, January 1, 2005 20,422,759 $0.62
Purchase warrants 9,090,225 $0.70
Brokers' warrants 1,272,632 $0.70
Exercised (312,248) $0.36
---------- ----------
Outstanding and exercisable, March 31, 2005 30,473,368 $0.66
========== ==========
The range of exercise prices on outstanding warrants is Cdn$0.35 to Cdn$0.91
with a weighted average contractual life of 3.07 years at March 31, 2005.
9. Agreements, Commitments and Contingencies
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
period respectively, has been written off against our investment in MSC and is
included in our loss from equity investment (Note 5). Funds recovered in the
future related to the fraud will be recorded if and when they are received.
During the three months ended March 31, 2005, MSC signed agreements with third
party providers for security services and mine and camp construction. Our 49
percent portion of these commitments is approximately $268,000.
10. Related Party Transactions
During the period ended March 31, 2005 we incurred legal fees to a firm in which
a director and officer is an associate totaling $10,185 (March 31, 2004 -
$35,762). This transaction was in the normal course of operations was measured
at the exchange amount, which is the amount of consideration established and
agreed to by the related parties.
- 13 -
11. Differences Between Canadian and United States Generally Accepted
Accounting Principles
Differences between Canadian and U.S. generally accepted accounting principles
("GAAP") as they pertain to the Company relate to accounting for the acquisition
of Scotia Prime Minerals, Incorporated, compensation expense associated with the
release of shares from escrow, mineral properties and deferred exploration
costs, stock-based compensation, warrants and bank loan and are described in
Note 12 to our consolidated financial statements for the year ended December 31,
2004 in the 2004 10-KSB.
During 2004, we adopted new Canadian GAAP rules regarding the utilization of the
fair value based method to account for options granted to employees. U.S. GAAP
does not require the fair value based method to account for employee based
options as of January 1, 2002. Since we have not granted any options to
employees in 2005, the retroactive adoption without restatement of the new
Canadian requirements has not created differences between Canadian and U.S. GAAP
with respect to shareholders' equity at March 31, 2005 nor the net loss for the
three months ended March 31, 2005. There would however have been no adjustment
to retained earnings at January 1, 2004 under U.S. GAAP as was required under
Canadian GAAP.
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 Emerging Issues Task Force ("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 $2,274,351, as at March
31, 2005 (December 31, 2004 - $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. The fair value of
the warrants, as at March 31, 2005, 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 61% and an expected life of
21 months.
The impact of the above on the interim consolidated financial statements is as
follows:
March 31, Dec. 31,
2005 2004
------------ ------------
Shareholders' equity, end of period, per Canadian $ 18,450,693 $ 11,194,559
GAAP
Adjustment for mineral properties and deferred
exploration costs (3,190,332) (2,827,655)
Adjustment for investment (9,196,270) (7,345,840)
Adjustment for fair value of warrants 42,527 --
Adjustment for the debt discount (346,200) (346,200)
------------ ------------
Shareholders' equity, end of period, per
U.S. GAAP $ 5,760,418 $ 674,864
============ ============
- 14 -
Period from
Three Months Ended July 1, 1994
---------------------------- (commencement)
March 31, March 31, through
2005 2004 March 31, 2005
------------ ------------ ------------
Net loss for the period, per Canadian GAAP $ 454,195 $ 333,535 $ 17,346,445
Adjustment for acquisition of Scotia -- -- 248,590
Adjustment for compensation expense -- -- 6,022,300
Adjustment for fair value of warrants (42,527) -- (42,527)
Adjustment for deferred exploration costs, net 362,677 745,642 3,190,332
Adjustment for investment 1,850,430 (200,000) 9,196,270
------------ ------------ ------------
Net loss for the period, per U.S. GAAP $ 2,624,775 $ 879,177 $ 35,961,410
============ ============ ============
Basic and diluted net loss per common share, per
U.S. GAAP $ 0.04 $ 0.01
============ ============
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. We did not grant any options to employees during the
quarter ended March 31, 2005, therefore there was no pro-forma difference.
Recent U.S. Accounting Pronouncements
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.
We are assessing the effect on the consolidated financial statements as a result
of implementation of these new U.S. standards.
- 15 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Prepared as of May 17, 2005
The following discussion should be read in conjunction with Minera Andes'
audited consolidated financial statements and notes thereto for the year ended
December 31, 2004 and the unaudited consolidated interim financial statements
and notes thereto for the period ended March 31, 2005, which have been prepared
in accordance with generally accepted accounting principles ("GAAP") in Canada.
These statements along with additional information relating to Minera Andes are
available on SEDAR at WWW.SEDAR.COM. Financial condition and results of
operations are not necessarily indicative of what may be expected in future
years.
All amounts in this discussion are in US Dollars unless otherwise indicated
Note Regarding Forward-Looking Statements
-----------------------------------------
The information in this report includes "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 ("1934 Act"), and is subject to the safe harbor
created by those sections. Factors that could cause results to differ materially
from those projected include, but are not limited to, results of current
exploration activities, the market price of precious and base metals, the
availability of joint venture partners or sources of financing, and other risk
factors detailed in our Securities and Exchange Commission filings.
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 OTCBB under the symbol MNEAF.
The principal business of Minera Andes is the exploration and development of
mineral properties, located primarily in the Republic of Argentina, consisting
of mineral rights and applications for mineral rights, covering approximately
203,562 hectares in three provinces in Argentina. We carry out our 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. Our properties are all early stage
exploration properties and no proven or probable reserves have been identified
except at one project where reserve definition is underway.
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 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 underway at the San Jose
project. The program for 2005 consists of a comprehensive program with a
feasibility study that includes underground exploration/development totaling
about 3.5 kilometers of workings, environmental studies, metallurgical studies,
and construction with over 200 employees on site.
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.
Minera Andes' 49% portion of these costs is US$8.3 million of which US$2.0 had
been paid through March 31, 2005. It is anticipated that, following completion
of a positive bankable feasibility study in the second half of 2005, debt
financing will be sought for the remainder of the required mine development
budget.
- 16 -
Within our mineral exploration land in Argentina our focus is primarily on gold,
silver and copper mineralized targets. In addition, 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. Two properties, Cerro Mojon and San Agustin,
contain several mineralized structures with favorable geologic indicators and
silver values up to 10 ounces per ton. Other prospects contain structures with
sinter-like quartz veining.
Plan of Operations
------------------
At quarter end, we had working capital of approximately $7.7 million plus a
pending $2.0 million credit facility. Assuming a positive feasibility outcome,
MSC plans to seek non-recourse debt financing to complete construction of the
San Jose project. Funding requirements for the project may change depending on
exploration results, changes in feasibility completion and production decision
dates, and the time needed to complete the debt financing.
In addition to planned expenditures on the San Jose project, we plan to spend
$2.3 million on our mineral property and exploration activities and general and
administrative expenses through the remainder of 2005. We will be conducting
work on several properties including an ongoing reconnaissance program designed
to make new acquisitions. It is anticipated that exploration on other projects
and acquisition of new projects will require additional cash.
Results of Operations
---------------------
First quarter 2005 compared with first quarter 2004
We had a net loss of approximately $454,000 for the first quarter of 2005,
compared to a net loss of $334,000 for the first quarter of 2004 due to loss on
investment. Total mineral property and deferred exploration costs were
approximately $363,000 during the first quarter of 2005, compared with
approximately $746,000 spent in the first quarter of 2004. The costs are
associated with ongoing reconnaissance exploration programs, new property
acquisitions, evaluation of existing properties, and exploration at our Los
Azules project.
Administrative expenditures for the quarter ended March 31, 2005 included
$112,393 in consulting fees. The costs are associated with our investor
relations program and stock compensation expense for consultants. Legal, audit
and accounting activities were $36,792 for the quarter ended March 31, 2005
compared to $81,003 in the same period last year. Travel for the quarter ended
March 31, 2005 was $22,656 compared with $19,091 in the same period in 2004.
Foreign exchange loss was $16,430 for the quarter ended March 31, 2005 compared
with a gain of $38,538 in the same period in 2004, due to the effect of a
strengthening U.S. dollar offset by the associated impact on the value of cash
equivalents invested in Canadian dollar instruments.
In the first quarter of 2005, we issued 18,180,450 units through a private
placement at a price of Cdn$0.55 per unit for gross proceeds of Cdn$10 million.
Under terms of the offering, each unit consists 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 5 years from the closing date. The
securities are subject to a four-month hold period. Our agents received a 7%
commission and agents' warrants equal to 7% of the aggregate number of units
issued 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 2 years from the date of issue. We intend to use
the proceeds from the offering to fund our investment in MSC and for general
corporate purposes.
- 17 -
Liquidity and Capital Resources
-------------------------------
Due to the nature of the mining industry, 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, there can be no assurance
that we will be successful with such financings. See "Plan of Operations".
At March 31, 2005 we had cash and cash equivalents of approximately $7.8 million
compared to approximately $6.2 million at March 31, 2004. Working capital at
March 31, 2005 was approximately $7.7 million, sufficient, together with funds
from joint ventures on the San Jose project, as estimated by management, to
cover its budgeted expenditures for mineral property and exploration activities
on its properties in Argentina and general and administrative expenses through
the end of 2005. Our operating activities used approximately $282,000 in the
first quarter of 2005 compared with providing approximately $2,000 in the first
quarter of 2004. Administrative expenditures for the period included
approximately $112,000 in consulting fees (a decrease of $32,000 over the same
period last year); approximately $23,000 in travel; approximately $46,000 in
office overhead and approximately $10,000 in telephone expenditures. These costs
are due to our investor relations and public relations program.
Investing activities used approximately $2.3 million, due to funding our 49%
interest in the San Jose project, less property option proceeds received, and
expenditures related to mineral properties and deferred exploration in the first
quarter of 2005 compared with approximately $554,000 used in the first quarter
of 2004.
Financing activities provided approximately $8.7 million, as a result of a
private placement, exercise of warrants and bank loan proceeds received in the
first quarter of 2005 compared with approximately $4.5 million provided in the
first quarter of 2004. Cash and cash equivalents increased in the first quarter
by approximately $6 million in 2005 compared with an increase of approximately
$4 million in the same period in 2004.
The recoverability of amounts shown as mineral properties and deferred
exploration costs is dependent upon the existence of economically recoverable
reserves, our ability to obtain necessary financing to complete their
development, and future profitable production or disposition thereof. The
accompanying consolidated financial statements have been prepared using
accounting principles generally accepted in Canada applicable to a going
concern. The use of such principles may not be appropriate because, as of March
31, 2005, there was significant doubt that we would be able to continue as a
going concern. (See Auditor's Comment in the December 31, 2004 Audit Report and
Note 1 in the December 31, 2004 Financial Statements).
For the three months ended March 31, 2005, we had a loss of approximately
$454,000 and an accumulated deficit of approximately $19.7 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
sale of equity securities, debt and joint venture arrangements. We expect to use
similar financing techniques in the future and is actively pursuing such
additional sources of financing.
Although there is no assurance that we will be successful in these actions,
management believes that they will be able to secure the necessary financing to
enable it 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.
- 18 -
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 relate to mineralization and deferred development 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.
We review the carrying value of our investment in MSC and in other mineral
properties on a regular basis. This review includes, but is not limited to, the
timing of exploration and/or development work, work programs proposed, the
exploration results achieved by Minera Andes and others, sales and/or joint
venture value, current market price of minerals, ability to finance ongoing
development and, in the case of producing properties, the estimated future
operating results and net cash flows. When the carrying value of a property is
estimated to exceed its net recoverable amount, provision is made for the
decline in value. If a property is abandoned, the property and deferred
exploration costs will be written off to operations.
Recent U.S. Accounting Pronouncements
-------------------------------------
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.
We are assessing the effect on the consolidated financial statements as a result
of implementation of these new U.S. standards.
- 19 -
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As of the end of the period covered by this report, we carried out an evaluation
of the effectiveness of the design and operation of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 ("Exchange Act")
Rules 13a-14(c) and 15d-14(c)) under the supervision and with the participation
of management, including our President and Chief Financial Officer. Based upon
that evaluation, our President and Chief Financial Officer concluded that our
disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include, but
are not limited to, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management to allow timely decisions regarding
required disclosure.
Changes in Internal Controls
----------------------------
There were no significant changes in our internal controls or, to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the date we carried out this evaluation.
- 20 -
PART II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities
During the three months ended March 31, 2005, we issued 22,500 common shares for
the exercise of 45,000 purchase warrants and 289,748 shares for the exercise of
broker warrants with gross proceeds of US$93,168.
On March 22, 2005, we sold 18,180,450 units to accredited investors at a price
of Cdn$0.55 per unit for net proceeds of Cdn$9,299,300 (US$7,683,453). 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 5 years from the closing date. The issued securities are 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 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 2 years from the
date of issue. A total of 18,180,450 common shares were issued pursuant to the
private placement, and 9,090,225 common shares are reserved for issuance on
exercise of the warrants and 1,272,632 common shares are reserved for issuance
on the exercise of the agent's warrants.
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.
Item 6. Exhibits
Exhibit
Number Identification of Exhibit
31.1 Certification of President (Principal Executive Officer)
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
- 21 -
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MINERA ANDES INC.
Date: May 20, 2005 By: /s/ Allen V. Ambrose
------------ --------------------------------
Allen V. Ambrose
President
Date: May 20, 2005 By: /s/ William V. Schara
------------ --------------------------------
William V. Schara
Chief Financial Officer
- 22 -