Date: Thu, 20 Nov 1997 22:07:54 GMT Server: Apache/1.2.4 Last-Modified: Tue, 03 Jun 1997 18:05:46 GMT ETag: "3d0f5-7331-33945cfa" Content-Length: 29489 Accept-Ranges: bytes Connection: close Content-Type: text/html VISTA GOLD CORP. - Notes to Consolidated Financial Statements

1996 Annual Report

Notes to Consolidated Financial Statements

(Tabular information in thousands of United States dollars, except share data)

  1. NATURE OF OPERATIONS

    1. Vista Gold Corp. (the "Company")

      Vista Gold Corp., formerly Granges Inc. (see B below) is engaged in gold mining and related activities in the United States, Canada, and Latin America, including exploration, extraction, processing, refining and reclamation. Gold bullion is the Company's principal product, which is a commodity produced primarily in South Africa, the United States, Canada, Australia, and Latin America.

      The Company's results are impacted by the price of gold. Gold prices fluctuate and are affected by numerous factors, including, but not limited to, expectations with respect to the rate of inflation, exchange rates (specifically, the U.S. dollar relative to other currencies), interest rates, global and regional political and economic crises and governmental policies with respect to gold holdings by central banks. The demand for and supply of gold affect gold prices, but not necessarily in the same manner as demand and supply affect the prices of other commodities. The supply of gold consists of a combination of new mine production and existing stocks of bullion and fabricated gold held by governments, public and private financial institutions, industrial organizations and private individuals. The demand for gold consists of jewelry and investment demand, as well as consumer and speculator hedging activities. Gold can be readily sold on numerous markets throughout the world and its market value can be readily ascertained at any particular time. As a result, the Company is not dependent upon any one customer for the sale of its product.

    2. Acquisition of Da Capo Resources Ltd.

      On July 31, 1996, the boards of directors of Granges Inc. ("Granges") and Da Capo Resources Ltd. ("Da Capo") unanimously approved the amalgamation of the two companies to form a new gold mining company ("Vista Gold Corp."), subject to shareholder, court, and regulatory approval; entering into a definitive amalgamation agreement; and satisfactory completion of due diligence by Granges and Da Capo by August 6, 1996.

      The Supreme Court of British Columbia approved the amalgamation, effective November 1, 1996 under the name "Vista Gold Corp." Under the terms of the agreement, each holder of Granges shares received one Vista Gold Corp. share for each Granges share, and each holder of Da Capo shares received two Vista Gold Corp. shares for each Da Capo share. Vista Gold Corp. is owned 66.25 percent by Granges shareholders and 33.75 percent by Da Capo shareholders on a fully diluted basis.

      
  2. SIGNIFICANT ACCOUNTING POLICIES

    1. Generally Accepted Accounting Principles
      The consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in Canada. These principles differ in certain material respects from those accounting principles generally accepted in the United States. The differences are described in note 17.

    2. Principles of Consolidation
      The consolidated financial statements include the accounts of the Company, its subsidiaries and its proportionate share of the assets, liabilities, revenues and expenses of its unincorporated joint venture. The Company's subsidiaries and its percentage ownership in these entities as at December 31, 1996 are:

    1. Use of Estimates
      The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those reported.

    2. Foreign Currency Translation
      The consolidated financial statements of the Company have been historically expressed in Canadian (Cdn) dollars. As a result of sales revenues and a significant portion of expenses being denominated in United States (U.S.) dollars, the sale of exploration properties in Canada, the increasing international focus of the Company's operating activities, and the relocation of the Company's executive office to Denver, the U.S. dollar has become the principal currency of the Company's business. Accordingly, the U.S. dollar has been adopted as the reporting currency for the consolidated financial statements of the Company, effective January 1, 1996. The comparative information for the 1995 and 1994 financial statements has been translated into U.S. dollars at the December 31, 1995 year end at a rate of one U.S. dollar to Cdn $1.3652.

      Self-sustaining foreign operations are translated using the current rate method. Under this method, assets and liabilities are translated at the rate of exchange on the balance sheet date, and revenue and expenses at the average rate of exchange during the period. Exchange gains and losses are deferred and shown as a currency translation adjustment in shareholders' equity until transferred to earnings when the net investment in the foreign operation is reduced.

      Integrated foreign operations are translated using the temporal method. Under this method, monetary assets and liabilities are translated at the rate of exchange in effect at the balance sheet date and non-monetary assets and liabilities are translated at historical exchange rates, unless such items are carried at market, in which case they are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the rate of exchange in effect on the dates that they occur and depreciation and amortization of assets translated at historical rate are translated at the same exchange rates as the assets to which they relate. Exchange gains and losses are included in the determination of net income for the current period.

      Foreign currency denominated monetary items of the Company, excluding its foreign operations, are translated at the year-end exchange rate. Exchange gains and losses on these items are recognized in earnings in the year they arise.

    3. Revenue Recognition
      Sales are recorded as soon as the product is considered available for sale. Gains and losses on forward sales and option contracts are deferred until the related production is sold.

    4. Mineral Exploration
      Acquisition and exploration expenditures on mineral properties are expensed when incurred until such time as the property indicates the potential of being developed into a mine, and thereafter the expenditures are capitalized. Previously capitalized expenditures are expensed if the project is determined to be uneconomic.

    5. Cash Equivalents
      Cash equivalents are represented by investments in short-term investment funds consisting of highly liquid debt instruments such as certificates of deposit, commercial paper, and money market accounts purchased with an original maturity date of less than three months. The Company's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution.

    6. Marketable Securities
      Marketable securities are carried at the lower of cost or market value.

    7. Inventories
      Product inventory is valued at the lower of average cost or net realizable value. The direct cash costs associated with ore on the leach pads are inventoried and charged to operations as the contained gold is recovered. Based upon actual metal recoveries, ore grades and operating plans, management continuously evaluates and refines estimates in determining the carrying values of costs associated with ore under leach. It is possible that in the near term, estimates of recoverable ore, grade, and gold price could change causing the Company to revise the value of its heap leach inventory.

      Parts and supplies are valued at the lower of average cost or net replacement value.

    8. Property, Plant and Equipment

      1. Developed Mineral Properties

        Property acquisition and development costs are carried at cost less accumulated amortization and write downs. Amortization is provided on the unit-of-production method based on proven and probable reserves. Management reviews quarterly the carrying value of the Company's interest in each property and, where necessary, these properties are written down to their estimated recoverable amount determined on a non-discounted basis. Management's estimate of gold price, recoverable proven and probable reserves, operating, capital and reclamation costs are subject to risks and uncertainties affecting the recoverability of the Company's investment in property, plant and equipment. Although management has made its best estimate of these factors based on current conditions, it is possible that changes could occur in the near term that could adversely affect management's estimate of net cash flows expected to be generated from its operating properties and the need for possible asset impairment write downs.

      2. Plant and Equipment

        Plant and equipment are recorded at cost and depreciated using the units of production method or the straight-line method over their estimated useful lives.

      3. Deferred Stripping

        During production, mining costs associated with waste rock removal are deferred and charged to operations on the basis of the average strip ratio for the life of the mine. The average strip ratio is calculated as a ratio of the tons of waste expected to be mined to the tons of ore estimated to be mined. Although management has made its best estimate of these factors based on current conditions, it is possible that changes could occur in the near term that could adversely affect management's estimate of ore and waste in proven and probable reserves and the need for a change in the amortization rate of deferred stripping cost.

    9. Provision for Future Reclamation and Closure Costs
      All of the Company's operations are subject to reclamation, site restoration and closure requirements. Costs related to ongoing site restoration programs are expensed when incurred. A provision for mine closure and site restoration costs is charged to earnings over the lives of the mines on a unit-of-production basis. The Company calculates its estimates of the ultimate reclamation liability based on current laws and regulations and the expected future costs to be incurred in reclaiming, restoring and closing its operating mine sites. It is possible that the Company's estimate of its ultimate reclamation liability could change in the near term due to possible changes in laws and regulation and changes in cost estimates.

    10. Estimates of Proven and Probable Reserves
      Management's calculation of proven and probable reserves is based upon engineering and geological estimates and financial estimates including gold prices and operating costs. The Company depreciates some of its assets and accrues for reclamation on a unit-of-production basis over proven and probable reserves. Changes in geological interpretations of the Company's ore bodies and changes in gold prices and operating costs may change the Company's estimate of proven and probable reserves. It is possible that the Company's estimate of proven and probable reserves could change in the near term and could result in revised charges for depreciation and reclamation in future reporting periods.
      
  1. ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

  
  1. INVENTORIES

      
  1. INVESTMENT IN ZAMORA GOLD CORP.

    In October 1995, the Company completed a private placement with Zamora Gold Corp. (Zamora) for the issuance of 8,000,000 units at US$0.60 per unit. Each unit consists of one common share of Zamora and one common share purchase warrant entitling Granges to purchase one common share for US$0.75 until October 4, 1997. The Company's 8,000,000 shares represent 41 percent of the issued and outstanding shares of Zamora and the investment is accounted for using the equity method with the investment balance as follows.

      
  1. PROPERTY, PLANT AND EQUIPMENT

    1. Royalties
      The Crofoot property at the Hycroft mine is subject to four percent net profits royalties. No royalty payments were made in 1995, 1994 and 1993 because minimum royalty payments made prior to 1993 aggregating $2.8 million were available for credit towards the royalty obligations. Effective 1996, the Company agreed to apply this credit to reduce the maximum cumulative royalties payable of $10 million and to pay minimum royalty payments of $240,000 per year.

      The Lewis property at the Hycroft mine is subject to a five percent net smelter royalty. During 1996, 1995 and 1994, only nominal minimum royalties were required in relation to this property.

    2. Bolivian Mineral Properties
      As a result of the acquisition of Da Capo Resources Ltd. (Note 1), the Company acquired mineral properties in Bolivia which have been recorded using the purchase method of accounting and the results of operations have been consolidated from November 1, 1996. The Company's interest in the net assets acquired at assigned values are as follows:

      
  1. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

    Accounts payable at December 31, 1996 included $3.4 million to purchase mining equipment which was paid in early 1997.
     
  1. SHARE CAPITAL

    1. Authorized share capital comprises 2,500,000,000 (1995 - 750,000,000) common shares without par value and 500,000,000 (1995 - 750,000,000) preferred shares without par value.

    2. Common Shares Issued and Outstanding:

    1. Capital Reduction
      At the March 30, 1995 extraordinary meeting, the shareholders of the Company approved a special resolution to reduce the capital of the Company. Under this resolution the share capital and contributed surplus were reduced by $53.1 million and $2.8 million, respectively, with a corresponding decrease to the accumulated deficit of approximately $56.0 million. The effect of this capital reduction was to eliminate the consolidated accumulated deficit of the Company as of December 31, 1994 after giving effect to the estimated costs of the amalgamation. This deficit was caused primarily by prior write downs of mining assets.

    2. Common Share Options
      At December 31, 1996, 2,540,000 common shares were reserved for issuance under options granted to directors, officers and management employees. These options expire as follows: 1997 - 700,000; 1999 - 100,000; 2001 - 20,000; 2003 - 20,000; 2004 - 25,000; 2005 - 830,000; 2006 - 845,000.

      During 1995, options to purchase 35,000 shares at Cdn$ 3.30 per share were repriced to Cdn$2.78 per share.

    1. Special Warrants
      On April 25, 1996, a private placement of 9,699,800 Special Warrants was completed at a price of Cdn$2.60 per unit for gross proceeds of Cdn$25,219,480 (US$18,505,367). Each Special Warrant is exercisable into one common share and one half of one common share purchase warrant of the Company for no additional consideration. Each whole common share purchase warrant is exercisable into one common share of the Company at a price of Cdn$3.00 per share until October 31, 1997.

      On July 3, 1996, the Company filed a final short form prospectus with the securities commissions in British Columbia and Ontario relating to the private placement. The funds held in escrow were released to the Company on July 8, 1996. Net proceeds received were Cdn$23,684,564 (US$17,308,329).

      On July 10, 1996, all of the 9,699,800 outstanding special warrants were exercised, and 9,699,800 common shares in the capital of the Company and 4,849,900 common share purchase warrants were issued to the holders of the special warrants.

      
  1. COMMITMENTS AND CONTINGENCIES

    The Company is committed to U.S. dollar payments under certain operating leases for mining equipment. Future payments under these leases in each of the next five years and in the aggregate are:

    Letters of credit totalling $0.9 million (1995-$2.8 million) have been provided as collateral under these mine equipment operating leases.
      
  1. INCOME TAXES

    A reconciliation of the combined Canadian federal and provincial income taxes at statutory rates and the Company's effective income tax expenses is as follows:

    The Company has incurred income tax losses in prior periods of $16.9 million, which may be carried forward and applied against future taxable income when earned. No benefit in respect of these losses has been recorded in these accounts. The losses expire as follows:

      
  1. PRIOR PERIOD ADJUSTMENT

    During 1995, the Company received notification from the Manitoba Department of Finance of proposed assessments for the years 1983 to 1993 under the Mining Tax Act and for the period March 1, 1989 to December 31, 1994 under the Retail Sales Tax Act. The Company, subsequent to the end of the year, arrived at a settlement with the Department under which the total taxes and interest payable under both Acts amounted to $242,000 (Cdn$330,000), with $89,000 (Cdn$120,000) previously paid. This settlement has been treated as a prior period adjustment and the effect has been to increase mineral properties by $54,000, increase accounts payable by $154,000 at December 31, 1995, and by $242,000 at December 31, 1994 and to reduce retained earnings by $188,000 at December 31, 1994.

      
  2. AMALGAMATION OF GRANGES INC. AND HYCROFT RESOURCES & DEVELOPMENT CORPORATION.

    On March 30, 1995, the shareholders of Granges Inc. (Granges) and its 50.5 percent owned subsidiary, Hycroft Resources & Development Corporation (Hycroft), approved the amalgamation of the two companies, effective May 1, 1995 under the name Granges Inc. (Amalco).

    Under the terms of the amalgamation, the outstanding common shares of each of Granges and Hycroft were exchanged or cancelled on the following basis:

    1. each issued and outstanding common share of Granges was exchanged for one common share of Amalco;

    2. each issued and outstanding common share of Hycroft, except for those common shares registered in the name of Granges or its affiliates, was exchanged for 0.88 of a common share of Amalco;

    3. each issued and outstanding common share of Hycroft that was registered in the name of Granges or its affiliates was cancelled; and

    4. each authorized but unissued common share of Granges and each authorized but unissued common share of Hycroft was cancelled.

    No fractional shares of Amalco were issued and the number of shares received by a Hycroft shareholder was rounded down to the nearest whole number of shares of Amalco, if such a shareholder were otherwise entitled to receive a fraction of a share of Amalco. Immediately after the amalgamation, shareholders of Granges beneficially owned 34,214,500 common shares of Amalco and shareholders of Hycroft beneficially owned 11,718,411 common shares of Amalco, representing 74.5 percent and 25.5 percent of the issued and outstanding common shares of Amalco, respectively.

    As Granges already controlled Hycroft, the amalgamation was treated in a manner similar to a pooling of interest. Accordingly, the 1995 results of Amalco represent the consolidated results of Granges for the four months ended April 30, 1995 and the consolidated results of Amalco for the eight months ended December 31, 1995, with all comparative figures being the consolidated results of Granges.

    $1.2 million of costs to carry out the amalgamation have been treated as a capital transaction and charged directly to the deficit on the date of amalgamation.

      
  3. CHANGES IN WORKING CAPITAL, EXCLUDING CASH AND CASH EQUIVALENTS

      
  1. RETIREMENT PLANS

    The Company sponsors a qualified tax deferred savings plan in accordance with the provision of Section 401(K) of the U.S. Internal Revenue Service code, which is available to permanent U.S. employees. The Company makes contributions of up to four percent of eligible employee's salaries. The Company's contribution in 1996 was $323,000 (1995 - $113,000).

      
  2. SEGMENTED INFORMATION

    The Company operates in the mining industry in Canada and the United States, and has exploration and development properties in Latin America. Its major product is gold, and prior to 1995, it also produced copper and zinc. Geographic segments are presented below.

  
  1. SUBSEQUENT EVENT

    Subsequent to the end of the year, the Company, through its subsidiary, Hycroft Resources & Development Inc., arranged a $13 million revolving credit facility which bears interest at 1.5 percent above LIBOR. Withdrawals under the credit facility are limited to 80 percent of recoverable gold inventory at the Hycroft mine and are collateralized by the assets of Hycroft and a guarantee of the parent company. The borrowings under the facility are repayable after two years. The facility is renewable for two renewal periods of one year each.

      
  2. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

    The significant differences between generally accepted accounting principles (GAAP) in Canada and in the United States are as follows:

    1. Under Canadian GAAP, the amalgamation of Granges and Hycroft was treated in a manner similar to a pooling of interest. Under U.S. GAAP, the amalgamation does not meet the conditions for pooling of interest. Accordingly, the transaction is treated as a purchase under U.S. GAAP with the excess of proceeds over the net book value of Hycroft's net assets allocated to mineral properties.

    2. Under Canadian corporate law, the Company underwent a capital reduction in connection with the amalgamation of Granges and Hycroft whereby share capital and contributed surplus were reduced to eliminate the consolidated accumulated deficit of Granges as of December 31, 1994, after giving effect to the estimated costs of the amalgamation. Under U.S. corporate law, no such transaction is available and accordingly is not allowed under U.S. GAAP.

    3. Under Canadian GAAP, corporate income taxes are accounted for using the deferral method of income tax allocation. Under U.S. GAAP, corporate income taxes are accounted for using the liability method of income tax allocation. The Company has recorded no tax expense under either Canadian or U.S. GAAP due to cumulative net losses incurred by the Company. Additionally, any deferred tax assets resulting from cumulative net losses under U.S. GAAP would be offset by a valuation allowance.

      With regard to the purchase of Da Capo, under U.S. GAAP, the excess of purchase price over net book value acquired would be tax affected giving rise to a credit to deferred income taxes and a debit to mineral properties. This would result in a corresponding reduction in the valuation allowance with the resulting credit being allocated against mineral properties.

    4. In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective for fiscal years beginning after December 15, 1995. SFAS No. 121 requires that long-lived assets and associated intangibles be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. Under U.S. GAAP, the carrying value of the Hycroft mine, including the excess of proceeds over the net book value from (A) above, does not exceed the undiscounted cash flow. Accordingly, the Hycroft mine carrying value is being written down to fair value using the discounted cash method following U.S. GAAP.

    5. In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation," effective for fiscal years beginning after December 15, 1995. This standard established a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. Management elected the disclosure option under the standard and therefore, adoption does not give rise to any U.S./Canadian GAAP differences in either the balance sheet or income statement.

      The significant differences in the consolidated statements of earnings and deficit relative to U.S. GAAP were as follows:

      Cash flows for the Company under Canadian GAAP are presented in the consolidated statement of changes in cash resources. Under Canadian GAAP all financing and investment activities are presented on the face of the statement. Under U.S. GAAP only cash transactions are presented, with non-cash transactions disclosed separately. The purchase of Da Capo Resources Ltd. (Note 1, 6) was a non-cash transaction. Accordingly, under U.S. GAAP, the non-cash portion ($48,730,000) of the acquisition of, and issue of shares for, Da Capo Resources Ltd. would not be included in the statement. The 1995 gain on the sale of the CompanyÕs base metal properties was a non-cash transaction. Accordingly, under U.S. GAAP, the proceeds from the sale of mineral properties and marketable securities and the purchase of investments would both be reduced by $4,921,000, the value of the non-cash transaction.

      Supplemental Disclosures of Cash Flow Information

  

  
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