ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The Company's consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles (GAAP). These consolidated
financial statements differ in material respects from U.S. GAAP. The difference
is disclosed in note 10 of the audited financial statements. These consolidated
financial statements include the accounts of the company and its wholly owned
subsidiaries, Spur Chemicals (BVI) Inc., Spur Ventures (BVI) Inc., International
Phosphate Mining Corporation (International Phosphate) and Kunlun Potash Ltd.
(Kunlun Potash). International Phosphate and Kunlun Potash were incorporated to
carry out mineral exploration and development programs in China and are not
material Spur Ventures (BVI) Inc. was deregistered during 2001 and is not
material to he Company.
In the opinion of management, all adjustments of a normal recurring nature
necessary for a fair presentation have been included. The information contained
in this annual report should be read in conjunction with the Company's latest
annual consolidated financial statements and the notes thereto.
The Company's Critical Accounting Policies are as follows:
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent 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 those reported.
Mineral properties - The Company records its interest in mineral properties at
cost. Exploration and development expenditures relating to properties that have
economically recoverable reserves or significant mineralization requiring
additional exploration, as well as interest and costs to finance those
expenditures, are deferred and will be amortized against future production
following commencement of commercial production, or written off if the
properties are sold, allowed to lapse, or abandoned.
Management of the Company regularly reviews the net carrying value of each
mineral property. Where information is available and conditions suggest
impairment, estimated future net cash flows from each property are calculated
using estimated future prices, proven and probable reserves, and operating,
capital and reclamation costs on an undiscounted basis. Reductions in the
carrying value of each property would be recorded to the extent the net book
value of the investment exceeds the estimated future cash flows.
Where estimates of future net cash flows are not available and where other
conditions suggest impairment, management assess if carrying value can be
recovered.
Management's estimates of mineral prices, recoverable proven and probable
reserves, and operating, capital and reclamation costs are subject to certain
risks and uncertainties which may affect the recoverability of mineral property
costs. Although management has made its best estimate of these factors, it is
possible that changes could occur in the near term, which could adversely affect
management's estimate of the net cash flow to be generated from its properties.
The acquisition of title to mineral properties is a detailed and time-consuming
process. The Company has taken steps, in accordance with industry standards, to
verify mineral properties in which it has an interest. Although the Company has
taken every precaution to ensure that legal title to its properties is properly
recorded in the name of the Company, there can be no assurance that such title
will ultimately be secured.
Stock based compensation - Effective January 1, 2004, the Company adopted the
new requirements of the Canadian Institute of Chartered Accountants Standard
3870 which requires an expense to be recognized in the financial statements for
all forms of employee stock-based compensation, including stock options.
Previously, the Company did not record any compensation cost on the granting of
stock options to employees and directors as the exercise price was equal to or
greater than the market price at the date of the grants. Accordingly, the
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opening deficit was restated on a retroactive basis to show the effect of
compensation expense associated with stock option grants to employees and
directors from January 1, 2002 to December 31, 2003.
A. Operating Results
The Company's activities in the last five years can be divided into three
different projects: (1) oil and gas investments in Canada, (2) the Yichang
phosphate fertilizer project in China, and (3) the Golmud potash projects in
China. The expenditures incurred in these projects are itemized in the Tables
5.1 to 5.4.
Table 5.1. Amount capitalized and expensed in relation to the natural gas
operation
(in Canadian $)
Project - Year Year Year Year Year
Natural Gas 2003 2002 2001 2000 1999
Amount capitalized
Balance brought forward - - $ - $ 520,000 $ 520,000
Addition during the period -
Amount written off - - - - -
Disposition during the period - - - (520,000 ) -
Balance carry forward $ - $ - $ - $ - $ 520,000
Amortization
Balance brought forward - - $ - $ 301,250 $ 270,000
Amortization for the period - - - 6,510 31,250
Disposition during the period - - - (307,760 ) -
Balance carry forward $ - $ - $ - $ - $ 301,250
Net balance $ - $ - $ - $ - $ 218,750
Table 5.2. The amount capitalized and expensed in relation to the China venture
- Yichang Phosphate
(in Canadian $)
China Project - Year Year Year Year Year
Yichang Phosphate 2003 2002 2001 2000 1999
Amount
capitalized
Balance
brought
forward $ 2,562,753 $ 2,251,568 $ 2,075,527 $ 1,026,838 $ 318,231
Addition
during the
period 43,782 311,185 176,041 1,048,689 708,607
Write-down
during the
period (760,490 ) - - - -
Balance carry
forward $ 1,846,045 $ 2,562,753 $ 2,251,568 $ 2,075,527 $ 1,026,838
Amortization
Balance
brought
forward $ - $ - $ - $ - $ -
Amortization
for the
period - - - - -
Balance carry
forward $ - $ - $ - $ - $ -
Net balance $ 1,846,045 $ 2,562,753 $ 2,251,568 $ 2,075,527 $ 1,026,838
Table 5.3. Amount capitalized and expensed in relation to the China venture -
Golmud Potash
(in Canadian $)
China Project - Year Year Year Year Year
Golmud Potash 2003 2002 2001 2000 1999
Amount capitalized
Balance brought forward $ - $ - $ 151,807 $ 151,807 $ 148,778
Write down of mineral property - - (151,807 ) - -
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Addition during the period - - - - 3,029
Balance carry forward $ - $ - $ - $ 151,807 $ 151,807
Amortization
Balance brought forward $ - $ - $ - $ - $ -
Amortization for the period - - - - -
Balance carry forward $ - $ - $ - $ - $ -
Net balance $ - $ - $ - $ 151,807 $ 151,807
Table 5.4. The amount capitalized in relation to the China ventures (in Canadian
$)
China Year Year Year Year Year
Projects 2003 2002 2001 2000 1999
Golmud
Potash
Projects
- Net
balance
per Table
5.2
Yichang
Phosphate
Project -
Net
balance $ - $ - $ - $ 151,807 $ 151,807
per Table
5.3 1,846,045 2,562,753 2,251,568 2,075,527 1,026,838
Total $ 1,846,045 $ 2,562,753 $ 2,251,568 $ 2,075,527 $ 1,178,645
The following makes reference to loss for the year under Canadian GAAP and US
GAAP. A reconciliation for loss for the year under Canadian GAAP and US GAAP is
shown in Note 10 of the Consolidated Financial Statements for the years ended
December 31, 2003, 2002, and 2001.
Year Ended December 31, 2003 and Subsequent Events
The Company incurred a loss for the year of $1,310,054. The Company incurred a
loss for the year under US GAAP of $589,746. The difference between the loss
under Canadian GAAP and under US GAAP is due to the write off of exploration
expenditures of $760,490.
In November, 2003, the Company entered into an agreement with YPCC to purchase a
72.18% interest in a new joint venture called Yichang Spur Chemicals Ltd.
("YSC"). In December, 2003, the Company received government approval for the YSC
joint venture. On April 20, 2004, the Company's interest in YSC was finalized
based on closing adjustments as at December 31, 2003 and final negotiations. The
Company's interest has been agreed at 72.18%, an increase from the previously
announced 65%. YSC was formerly called Xinyuan Chemicals Ltd., but has been
renamed and converted into a Sino-foreign joint venture company to accommodate
the Company's participation.
The YSC joint venture owns a fertilizer plant in Yichang. The fertilizer plant
has been operating substantially below its rated capacity of 100,000 tonnes of
annual NPK production since being commissioned in 2000 due to shortages of
phosphoric acid, a key ingredient for NPK fertilizer production. To earn its
72.18% interest in YSC, the Company agreed to contribute US$2,500,000 for
construction of a 60,000 tpa phosphoric acid plant (the "acid plant"), and
agreed to undertake the expansion of the fertilizer plant to 300,000 tpa. The
Company has advanced a first payment of US$1,250,000 ($1,658,534) in Q1 2004 and
a second payment of US$1,250,000 has been made in Q2 2004 for the construction
of the acid plant. The budget for construction of the acid plant is
US$2,500,000, but the joint venture is considering increasing the size of
certain of the equipment and infrastructure to accommodate future expansions, at
an additional cost of approximately US$1 million. No decision has been made on
any expansion of the fertilizer plant, other than construction of the acid
plant, which will supply enough phosphoric acid for a 300,000 tpa fertilizer
plant. Until the acid plant is commissioned, the YSC joint venture is not
expected to be profitable. The Company also has agreed to pay interest on the
existing debt of one of its partners for 5 years of approximately US$128,307 per
year. However, the Company has no obligation to the repayment of debt of its
partner.
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As a result of the acquisition of an interest in the YSC joint venture, the
terms of the original YMC joint venture were renegotiated since the new concept
has the fertilizer plant being held and initially expanded under YSC. On April
20, 2004, the Company finalized the restructuring of the YMC joint venture, with
the Company's interest in YMC adjusted to 78.72% with YPCC holding 21.28% . The
original development plan for YMC called for Spur to earn a 90% interest in YMC
by developing a 1 million tpa fertilizer plant integrated with the phosphate
mine, originally estimated to cost approximately US$325 million.
The remaining principal assets of YMC are the phosphate deposits and the
associated mine development. Due to the need to maintain the nature and scope of
the YMC joint venture contract consistent with previous government approvals,
the Company agreed that the development of the phosphate deposits and any
expansion beyond 300,000 tonnes in annual capacity of the fertilizer plant, be
undertaken under the YMC joint venture. Consequently, the estimated investment
for the development of 700,000 tonnes of additional fertilizer plant capacity
(the other 300,000 tonnes to be undertaken by YSC at the same site), plus the
mine development and associated infrastructure has been reduced. The
restructuring of the YMC joint venture was completed on April 20, 2004. Final
government approval for the restructuring is expected shortly.
On April 20, 2004, the Company acquired a 72.18% interest in YSC, and
accordingly the financial statements of the Company for the quarter ending June
30, 2004 will include the assets and liabilities (including bank debt of
approximately the equivalent of US$2,500,000) of YSC on a consolidated basis. An
opening set of financial statements for YSC is being prepared and audited at the
closing date to enable consolidation into the Spur accounts for the June
quarter. The Company has not guaranteed the liabilities of YSC.
Under the new terms of the YMC joint venture, the Company is required to make a
US$3,834,000 capital contribution into YMC within three months of receipt of
Chinese government approval for the restructuring. This amount represents the
estimated cost of commissioning a mining facility capable of producing
sufficient phosphate rock to supply at least a 100,000 tpa NPK fertilizer
facility. The Company has already advanced $700,000 of this amount for costs
associated with the issue of the mining license, engineering and design work, of
which $500,000 was advanced in Q1 2004 and $200,000 advanced during 2002.
The total investment to be made by the Company in YMC is US$25,561,000 over 5
years, of which only the initial US$3,834,000 is a firm commitment. The balance
of US$21,727,000 is to be invested over five years on a best efforts basis, as
follows:
º a cumulative total of US$8,946,000 within two years of receipt of approval
for the restructuredagreement;
º a cumulative total of US$16,614,000 within four years; and
º the balance of US$25,561,000 within five years.
The US$25,561,000 represents the estimated minimum equity required to finance
the total investment over the next five years to develop the phosphate mine and
to expand the fertilizer plant from 300,000 tpa to 1 million tpa, estimated at
US$93 million. The cost of mine development to supply a 1.2 million tpa mining
rate is estimated at USD$29.8 million, including the value of YPCC's
contribution of the deposit, working capital and contingencies over the 5 year
development period. The estimated capital cost of expanding the fertilizer plant
from 300,000 tpa capacity to 1 million tpa is approximately US$49.8 million,
plus working capital, contingencies and capitalized interest during construction
over the next 5 years for a total of US$63.1 million. The balance above the
equity to be contributed by the Company is anticipated to be financed though
debt and cash flow.
On June 22, 2004, the Company completed a brokered private placement of
11,000,000 units at $1.50 per unit, for gross proceeds of $16,500,000. Each unit
consists of one share and one-half of one warrant, with each full warrant
exercisable for two years at $1.50. A 6% commission was paid, and 330,000
broker's warrants were issued, each exercisable on the same terms as the
warrants.
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Year Ended December 31, 2002
The Company incurred a loss for the year of $245,872. The Company incurred a
loss for the year under US GAAP of $557,057. The difference between the loss
under Canadian GAAP and under US GAAP is due to the write off of exploration
expenditures of $311,185.
The following events occurred on the Company's Yichang phosphate project in
2002:
Following the completion of feasibility study on the Yichang phosphate project,
Spur commissioned Jacobs Engineering Inc. to examine the project implementation
and reconfiguration alternatives. The study was completed in April 2002. In the
study, Jacobs proposed a two-phased project implementation plan. Phase I will
involve the construction of an NPK fertilizer production facility, a river jetty
and associated infrastructure to produce approximately 1.1 million t/y
high-analysis phosphate fertilizer NPK by outsourcing phosphoric acid. Phase II
will be started, when Phase I is in production, by backward integrating Phase I
facilities into phosphate rock mining and phosphoric acid production. The
reconfiguration reduces the initial capital requirement to approximately $120
million (including working capital) from the original $341 million.
In early 2002, Spur commenced its application for mining permit through its
Chinese joint venture partner, YPCC. The application involves two stages. Stage
one is to file an application to delineate the area covering the mineral
deposits and to designate the deposits for development by Spur and YPCC. The
Chinese Ministry of Land and Mineral Resources gave its approval to this
application in February 2003. In stage two, an independent valuation will be
conducted on the mineral property to give it a deemed value as part of YPCC's
contribution to the Yichang project.
In December 2002, Spur and YPCC signed joint venture contract. The joint venture
contract mandates the both parties to set up a joint venture company, Yichang
Maple Leaf Chemicals Company, to develop the Yichang project. According to the
contract, Yichang Maple Leaf Chemicals Company is owned 90% by Spur and 10% by
YPCC.
To advance the Yichang project, Spur raised $2.5 million in May 2003 through
non-brokered private placement in which 5 million units were issued at $0.50 per
unit. Each unit is comprised of one share and one non-transferable warrant
exercisable at $0.60 per share for two years. The warrants were exercised in
December 2003 and January 2004.
Year Ended December 31, 2001
The Company incurred a loss for the year of $244,635. The Company incurred a
loss for the year under US GAAP of $420,676. The difference between the loss
under Canadian GAAP and under US GAAP is due to the write off of exploration
expenditures of $176,041.
The following events have occurred on the Company's Yichang phosphate project in
2001:
Environmental Impact Assessment Study Completed - Following the completion of
the feasibility study on the Yichang project in October 2000, Spur further
finished its Environmental Impact Assessment Study in early 2001. The
environmental study was conducted jointly by Hubei Environmental Research
Institute, Wuhuan Chemical Engineering Corp. and three collaborating engineering
companies. The study concluded that the potential gas emissions, fluid
discharges, and solid disposals from the proposed facilities all satisfy the
standards set by Chinese environmental regulations. In particular, the study
noted that the Yichang Project's proposed chemical complex was designed based on
the highest environmental standards in North America. In March 2001, China State
Environmental Protection Bureau finished its review and gave its final approval
to the study.
Project Optimization Conducted - In 2001, Spur commissioned Jacobs Engineering
to conduct further studies to examine different alternatives for project
implementation and product mix. The purpose of these efforts is to further
optimize the project economics and to make project more compatible with
corporate strategies of
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potential strategic partners. In one scenario, Jacobs proposed to execute the
project in two stages. In stage one, fertilizer plant is built using purchased
phosphoric acid. The construction of mining and phosphoric acid facilities will
be started in stage two a few years after stage one is completed. This
implementation strategy will reduce the initial capital requirement to
approximately $120 million from $341 million. In another scenario, Jacobs
proposed to reconfigure the product mix to produce fertilizer NPK and animal
feed additive dical (di-calcium phosphate).
In 2001, the Company put the Golmud potash projects on hold and write off the
project in the 2001 fiscal year in accordance with an Accounting Guideline
"Enterprises in the Development Stage" which requires that when there has been a
delay in development activity extending beyond three years, there is a
presumption that a writedown of deferred development costs is necessary.
Year Ended December 31, 2000
The Company incurred a loss for the year of $49,281. The Company incurred a loss
for the year under US GAAP of $999,532. The difference between the loss under
Canadian GAAP and under US GAAP is due to the write off of exploration
expenditures of $1,048,689 and deferred taxes of $98,438.
The following events have occurred on the Company's Yichang phosphate project in
2000:
The feasibility study on the Yichang project was completed in October 2000. The
report concluded that the Yichang phosphate project is technically and
economically feasible.
Hubei Environmental Research Institute, Wuhuan Chemical Engineering Corp., and
three other collaborating engineering firms commenced environmental impact study
on the Yichang project in May 2000. The study was completed in November 2000.
In March 2000, the Company sold its minority oil and gas interest to the
operator, Berkley Petroleum Corp. In consideration of the property sold, the
company received 41,752 shares of Berkley Petroleum Corp. The shares were
subsequently disposed at market for proceeds of $473,885.
Year Ended December 31, 1999
The Company incurred a loss for the year of $222,444. The Company incurred a
loss for the year under US GAAP of $920,017. The difference between the loss
under Canadian GAAP and under US GAAP is due to the write off of exploration
expenditures of $711,636 and deferred taxes of $14,063. The following events
have occurred on the Company's Yichang phosphate project in 1999.
Subsequent to the project approval from the Federal Planning Commission in
August 1998, in February 1999 the State Council held special meetings to review
major investment projects and gave final approval to the Yichang project, the
giving the Company the exclusive right to develop the Yichang phosphate project.
In January 1999, Jacobs Engineering Inc. ("Jacobs") commenced with the
feasibility study by sending a team of 6 engineers to Yichang to conduct field
trip and technical due diligence on the Yichang project. In June 19999, the
Company received Jacobs' conceptual report. The report indicates that the lower
cost of phosphate rock should give the Yichang project a significant cost
advantage over imported granular fertilizers. It also concluded that the Yichang
project is technically feasible and no fatal flaws were discovered. Jacobs
considers that the alternatives and configurations for the Yichang project are
already well defined and elected to bypass the phase II of the feasibility study
and to proceed with the final phase.
During fiscal year ending December 31, 1999 the Company received $73,691 after
deduction of operating costs from its 5% working interest in its Ft. St. John
gas wells joint venture.
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B. Liquidity and Capital Resources
The following table presents major Company financial data in summary form for
the periods of 2003 and 2002 and for the first quarter of 2004:
Year Current assets Total assets Current liabilities
Q1 2004 $5,601,425 $7,479,745 $71,778
2003 $5,321,672 $7,194,380 $38,616
2002 $321,360 $2,884,113 $75,196
There were no long-term liabilities in the above-mentioned periods.
As at March 31, 2004, the Company had no long-term liabilities and had accounts
payable and current accrued liabilities of $71,778 against cash and other
current assets of $5,601,425.
As at December 31, 2003, the Company had no long-term liabilities and had
accounts payable and current accrued liabilities of $38,616 against cash and
other current assets of $5,321,672.The increase in current assets was attributed
to a partial subscription of a $2.5 million private placement, which was closed
on May 13, 2003. Management acknowledges that if the Yichang phosphate property
proves to be successful then it will require significant equity and debt
financing. There is no assurance that the company will be successful in raising
this finance.
As at December 31, 2002, the Company had no long-term liabilities and had
accounts payable and current accrued liabilities of $75,196 against cash and
other current assets of $321,360. The decrease in current assets in 2002 was
attributed to the management and operating costs and payments to the engineering
firms to complete the implementation and reconfiguration study on the Yichang
phosphate project.
Management considers that the company has sufficient funding to meet its
obligations and maintain administrative and operational expenditures for at
least the next 12 months. The Company's working capital will be used to finance
the Company's effort of evaluating financing alternatives for the Yichang
projects. When necessary, the Company may in the future conduct equity financing
to supplement its working capital to advance the Yichang project. For the future
major project financing, the Company will rely on any or a combination of the
equity financing, bank loans, and participation of strategic partners.
C. Research and Development, Patents and Licenses
Not applicable.
D. Trend Information
Not applicable.
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E. Off Balance Sheet Arrangements
The Company's 72.18% owned joint venture subsidiary YSC has committed to take
over the existing loans and liabilities of the former operators of the
fertilizer plant held by YSC. The amount of this debt is estimated at US$2.5
million, but has not been finally determined, pending an audit of YSC as of the
closing date. The amount of the debt will be consolidated into the financial
statements of the Company for the quarter ended June 30, 2004. In addition, the
Company also agreed to pay for the interest of a loan borrowed by one of the
equity partners of YSC for the upcoming years 2004 to 2008 of approximately
US$128,307 per year.
F. Tabular Disclosure of Contractual Obligations
Payments due by Period (1)
More
Contractual Less than 1 than 5
Obligation Total Year 1-3 Years 3-5 Years Years
Obligations US$3,834,000 US$3,834,000 Nil Nil Nil
under YMC
Agreement(2)
Obligations to US$641,535 US$128,307 $236,614 $236,614 Nil
YSC Partner
(estimated)
Obligations US$2,500,000 US$2,500,000 Nil Nil Nil
under YSC Joint
Venture
Rent on Office $33,966 $29,114 $4852 Nil Nil
Head office
(1) From June 30, 2004
(2) Pursuant to YMC Joint Venture Agreement dated April 20, 2004
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