Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
1
Nature of operations
The main focus of the company is on the business of developing
an integrated fertilizer business in China. The recoverability of the
amounts shown as mineral properties is dependent upon the existence of
economically recoverable reserves, the ability of the company to obtain
the necessary financing to complete the exploration and development of
the properties, and upon future profitable production or proceeds from
the disposition of the properties.
For the year ended December 31, 2003, the company had a
loss of $1,310,054 (2002 - loss of $245,872), working capital of $5,283,056
(2002 - $246,164) and a deficit of $4,732,692 (2002 - deficit of $3,422,638).
In addition, the company had a cash balance of $4,965,571 (2002 - overdraft
of $14,091).
Management acknowledges that if the Yichang phosphate property
proves to be successful then it will require significant equity and debt
financing. Management believes that it can successfully raise financing
for this project; however, there is no assurance that the company will
be successful in raising this financing. 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.
In addition, although the company has entered into preliminary
agreements to secure the title of the mineral properties, these agreements
are subject to contribution of capital by the company to earn its interest
in the properties. Although these arrangements are in accordance with
industry standards for the stage of exploration of such properties, these
procedures do not guarantee the company’s title. Property title may
also be subject to unregistered prior agreements and regulatory requirements
before title can be guaranteed by the company.
2
Significant accounting policies
Accounting principles
These 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, as disclosed in note 10.
Principles of consolidation
These consolidated financial statements include the accounts
of the company and its wholly owned subsidiaries, 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.
(1)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
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 amounts 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.
Marketable securities
Marketable securities are carried at the lower of cost and market value.
Income taxes
The company follows the asset and liability method for accounting for
income taxes. Under this method, future income tax assets and liabilities
are determined based on the differences between the tax basis of assets
and liabilities and the amounts reported in the financial statements.
The future tax assets or liabilities are calculated using the tax rates
for the periods in which the differences are expected to be settled. Future
tax assets are recognized to the extent that they are considered more
likely than not to be realized.
Cash and cash equivalents
Cash and cash equivalents consist of cash and short-term deposits maturing
within 90 days of the original date of acquisition. To limit its exposure,
the company deposits its funds with large financial institutions.
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 assesses if carrying value
can be recovered.
(2)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
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 title to 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.
Loss per common share
Loss per common share is calculated using the weighted average number
of common shares issued and outstanding during the year. The effect of
exercise of share options and warrants would be anti-dilutive.
Translation of foreign currencies
All of the company’s foreign subsidiaries are considered fully
integrated operations. Monetary assets and liabilities are translated
at the exchange rate in effect at the balance sheet date and non-monetary
assets and liabilities at the exchange rates in effect at the time of
acquisition or issue. Income and expenses are translated at exchange rates
in effect at the time of the transactions. Exchange gains or losses arising
on translation are included in loss for the year.
Financial instruments
The carrying values of cash and cash equivalents, accounts receivable
and prepaid expenses, and accounts payable and accrued liabilities approximate
their fair values due to the short periods to maturity. The fair value
of investments is disclosed in note 4.
Stock option plan
The company has adopted the new Canadian standard for accounting for
stock-based compensation. As permitted by the standard, the company has
elected not to follow the fair value method of accounting for stock options
granted. Under this method, no compensation expense is recognized when
the options are granted pursuant to the plan. Any consideration paid by
employees and directors on exercise of stock options is credited to share
capital. If stock options are repurchased from employees and directors,
the excess of the consideration paid over the carrying amount of the stock
options is charged to deficit.
Compensation expense is determined when stock options are issued to
non-employees and non-directors and is determined as the fair value of
the option at the date of grant using an option-pricing model and is credited
to stock options and warrants within shareholders’ equity.
(3)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
3
Mineral properties
2003
2002
$
$
Mineral property expenditures
Yichang phosphate
1,846,045
2,562,753
Yichang phosphate
In 1996, the company entered into a preliminary agreement with Yichang
Phosphorous Chemical Industries Group Co. Under the agreement, the company
has obtained an exclusive right to develop the Yichang phosphate deposit,
which is located in Hubei province in China. The company can earn a 90%
interest in the property by taking the property to production. The Chinese
government will earn a 10% interest by contributing land and the mineral
rights.
In 1999, the company completed the preliminary feasibility study report
conducted jointly by the Northern China Chemical Mine Planning and Design
Institute and China Wuhuan Chemical Engineering Corp. Final project approval
was also received from the Chinese government.
In November 2000, a feasibility study and an environmental impact assessment
study were completed.
During 2001, the China Environment Protection Bureau approved the environmental
study of the Yichang project. Letters of intent were signed with China
Merchant Bank and China Agriculture Bank, contingent upon equity financing,
to provide US$47 million bank loans and partial working capital line.
In April 2002, the feasibility study was updated by Jacobs Engineering
Corporation.
In early 2002, the company commenced its application for a mining permit
through its joint venture partner, Yichang Phosphorus Chemical Industries
Company (Yichang). Preliminary approval (stage one) of the application
has been received from the Chinese Ministry of Land and Resources. Stage
two of the application is in progress.
In 2002, the company engaged Triennex Pty Ltd. of South Africa to arrange
total project financing based on a pre-arranged success fee. In December
2002, the company signed separately with four banks in Yichang that they
will provide bank loans to the Yichang project.
In December 2002, the company and its joint venture partner Yichang
signed a joint venture contract that will result in the setting up of
a joint venture company, Yichang Maple Leaf Chemicals Company, which is
to undertake the development of the Yichang phosphate project.
(4)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
In December 2003, the company entered into a letter of intent with Yichang
Phosphorous Chemical Industries Group Co. to acquire approximately a 65%
interest in an existing fertilizer facility owned by Xinyuan Chemicals Ltd.
in Yichang. The Xinyuan plant has the capacity to produce 100,000 tonnes
per annum of sulphate-based NPK fertilizer. During 2003, $760,490 of deferred
mineral property expenditures was written off, being the amount deferred
in relation to the Jacobs Engineering Corporation study on the development
of a plant, which due to the purchase of an existing fertilizer facility
will no longer be required.
4
Marketable securities
2003
2002
$
$
Energy trusts
98,500
95,000
Energy trusts
The company initially acquired energy trust units in 2001, and during
2002 and 2003 the company both acquired and disposed of a number of these
units. At December 31, 2003, the remaining units held had a cost of $101,100
(2002 - $102,000) and, consistent with its accounting policy, the company
has recognized a loss of $1,500 (2002 - $7,000) as a result of writing
these investments down to their market value during the year. The trusts
were sold in January 2004 for a small profit.
5
Capital stock
Authorized
100,000,000
common shares without par value
100,000,000
preferred shares without par value, issuable in series and with special
rights and restrictions to be determined on
issuance
Issued
Number of
common
Amount
shares
$
December 31, 2001 and 2002
17,949,328
6,231,555
Exercise of stock
options
300,000
210,000
Private
placement
5,370,000
2,800,000
Exercise of warrants
4,670,000
2,802,000
Commission
and finders’ fee
-
(196,779
)
December 31, 2003
28,289,328
11,846,776
(5)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
Stock options
Under the 2003 Employee Stock Option Plan, the company may grant options
to its directors, officers, and service providers for up to 4,589,865
common shares or such additional amount as may be approved from time to
time by the shareholders of the company. Under the plan, the exercise
price of each option equals the market price of the company’s stock
on the date of grant and an option’s maximum term is 10 years. The
directors of the company may determine and impose terms upon which each
option shall become vested in respect of option shares. All options outstanding
at the fiscal year-end are currently vested.
A summary of the company’s options at December 31, 2003 and 2002
and the changes for the years then ended is presented below:
2003
2002
Weighted
Weighted
average
average
Options
exercise
Options
exercise
outstanding
price
outstanding
price
$
$
At January 1
1,000,000
0.90
1,325,000
0.90
Granted
3,185,000
0.79
-
-
Exercised
(300,000
)
0.75
-
-
Cancelled/expired
-
-
(325,000
)
0.90
At December 31
3,885,000
0.77
1,000,000
0.90
The following table summarizes information about the options
outstanding and exercisable at December 31, 2003:
Weighted
average
Weighted
Options
remaining
average
Exercise
outstanding
contractual
exercise
price
and
life
price
$
exercisable
(years)
$
0.79 - 0.90
3,885,000
3.86
0.77
(6)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
The company has elected not to follow the fair value method of accounting
for stock options granted to employees and directors. Accordingly, no compensation
expense is recorded on the grant of share options to employees and directors
where the exercise price is equal to the market price at the date of grant.
Had the company followed the fair value method of accounting, the company
would have recorded a compensation expense of $1,715,463 (2002 - $nil) in
respect of granted stock options to directors and employees. The fair value
of the options granted has been calculated using the Black-Scholes option
pricing method, using the following assumptions:
risk-free interest rate
4.44% per annum
expected life
5 years
expected volatility
86%
dividend yield
-
Pro forma information determined under the fair value method
of accounting for stock options is as follows:
2003
2002
$
$
Loss for the year
As reported
(1,310,054
)
(245,872
)
Compensation
expense
(1,715,463
)
-
Pro forma loss for the year
(3,025,517
)
(245,872
)
Basic and diluted loss per share
As reported
(0.06
)
(0.01
)
Pro
forma
(0.14
)
(0.01
)
Options granted to consultants in the year have been calculated
using the Black-Scholes model based on the same assumptions. A charge of
$21,445 (2002 - $nil) has been expensed in the year and credited to fair
value of options and warrants within shareholders’ equity.
(7)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
Warrants
In connection with private placements, the company issued warrants as
follows:
2003
2002
Weighted
Weighted
average
average
Warrants
exercise price
Warrants
exercise price
outstanding
$
outstanding
$
Outstanding - Beginning of
year
-
-
-
-
Granted
5,370,000
0.63
-
-
Exercised
(4,670,000
)
0.60
-
-
Expired
-
-
-
-
Outstanding - End of year
700,000
0.81
-
-
Of the outstanding warrants, 400,000 with an exercise price
of $0.60 expire in May 2005 and 300,000 with an exercise price of $1.10
expire in July 2005. Included in the warrants are 70,000 warrants issued
as a finders’ fee. These have been valued at $20,235 using the Black-Scholes
model and credited to stock options and warrants within shareholders’
equity.
6
Related party transactions
Included in expenses are the following amounts paid to companies with
common directors:
2003
2002
2001
$
$
$
Consulting fees (a)
255,243
76,129
71,261
Management fees (b)
27,833
50,000
50,000
Legal fees (c)
27,511
13,549
10,591
310,587
139,678
131,852
a)
Directors of the company receive consulting fees for their management
services. A total of $255,243 was paid in 2003 (2002 - $76,129; 2001 - $71,261).
b)
Management fees of $27,833 (2002 - $50,000; 2001 - $50,000) were paid
to companies owned by a director.
c)
Legal fees of $27,511 (2002 - $13,549; 2001 - $10,591) were paid to a
law firm of which a director is a partner.
(8)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
7
Due from joint venture partner
In 2002, the company advanced $200,000 to its joint venture partner,
Yichang, that was to be converted into an investment in the joint venture
company, Yichang Maple Leaf Chemicals Company, or returned to the company.
During 2003, the joint venture company received regulatory approval for
the mining rights the joint venture will undertake and the company continues
to negotiate the final terms of the joint venture.
8
Segmented information
Management considers the exploration of phosphate and potash interests
in China to be the company’s principal activity. All of the expenditures
incurred in China in respect of this activity to date have been capitalized.
2003
China
Consolidated
$
$
Current assets
5,321,672
-
5,321,672
Fixed assets - net
26,663
-
26,663
Mineral properties
-
1,846,045
1,846,045
Total assets
5,348,335
1,846,045
7,194,380
2002
Canada
China
Consolidated
$
$
$
Current assets
321,360
-
321,360
Mineral properties
-
2,562,753
2,562,753
Total assets
321,360
2,562,753
2,884,113
(9)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
9
Income taxes
A reconciliation of the combined Canadian federal and provincial income
taxes at statutory rates and the company’s effective income tax expense
is as follows:
2003
2002
$
$
Income tax provision at statutory rates
(235,917
)
(51,528
)
Increase in taxes from:
Non-deductible
items
2,882
1,338
Benefit of losses
not recognized
233,035
50,190
–
–
The company has a potential future tax asset of $491,056
(2002 - $505,000) that arises principally from non-capital tax losses
available for carry-forward. Management believes the realization of income
tax benefits related to these losses is not more likely than not to occur,
and therefore, no future income tax asset has been recognized.
At December 31, 2003, the company has estimated non-capital losses for
tax purposes of $1,233,000 (2002 - $1,117,000) with expiry dates as shown
below:
$
2004
327,000
2005
98,000
2006
182,000
2008
117,000
2009
113,000
2010
396,000
1,233,000
(10)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
10
Differences between Canadian and U.S. generally
accepted accounting principles
a)
The company’s consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in Canada. The
material measurement differences between GAAP in Canada and the United States
that would have an effect on these financial statements are as follows:
2003
2002
$
$
Marketable securities - under Canadian GAAP
98,500
95,000
Adjusted for fair market value
3,600
-
Marketable securities - under U.S. GAAP
102,100
95,000
Mineral properties - under Canadian GAAP
1,846,045
2,562,753
Feasibility study/technical evaluation
(1,846,045
)
(2,562,753
)
Mineral properties - under U.S. GAAP
-
-
Capital stock - under Canadian GAAP
11,846,776
6,231,555
Compensatory escrow release value
697,500
697,500
Flow-through share premium
(135,000
)
(135,000
)
Capital stock - under U.S. GAAP
12,409,276
6,794,055
Deficit - under Canadian GAAP
(4,732,692
)
(3,422,638
)
Feasibility study/technical evaluation
(1,846,045
)
(2,562,753
)
Compensatory escrow release value
(697,500
)
(697,500
)
Deferred taxes
135,000
135,000
Fair market value of marketable securities
3,600
-
Deficit - under U.S. GAAP
(7,137,637
)
(6,547,891
)
(11)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
The impact on the consolidated statements of operations and deficit would
be as follows:
2003
2002
2001
$
$
$
Loss for the year -
under Canadian GAAP
(1,310,054
)
(245,872
)
(244,635
)
Feasibility study/technical evaluation
(43,782
)
(311,185
)
(176,041
)
Mineral property written off in year
760,490
-
151,807
Marketable securities
3,600
-
-
Loss for the year -
under U.S. GAAP
before
comprehensive
income adjustments
(589,746
)
(557,057
)
(268,869
)
Adjustment to arrive at
comprehensive
income
Unrealized
recovery on
investments
-
-
(59,941
)
Comprehensive loss
(589,746
)
(557,057
)
(328,810
)
Loss per common share -
under U.S. GAAP
before
comprehensive
income adjustments
0.02
0.03
0.06
b)
Income taxes
Under U.S. GAAP, the sale of flow-through shares results in a deferred
credit being recognized for the excess of the purchase price paid by investors
over the fair value of common shares without the flow-through feature.
The fair value of the shares is recorded as equity. When the tax deductibility
of the qualifying expenditures is renounced, a temporary difference arises
with the natural gas interests. A deferred tax liability is established
in the amount of the tax benefit foregone, and tax expense is recorded
for the difference between the deferred tax liability and the premium
received upon issuance of the flow-through shares. This deferred tax liability
reverses due to loss carry-forwards available.
c)
Accounting for stock-based compensation
For U.S. GAAP purposes, the company accounts for stock-based compensation
arrangements using the intrinsic value method prescribed in Accounting
Principles (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees”. Accordingly, since options are granted at exercise prices
that are at or above the quoted market value of the company’s common
shares at the date of grant, there is no compensation cost to be recognized
by the company. As such, for each of the years in the three-year period
ended December 31, 2003, there are no differences in accounting for stock
options.
(12)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
d)
Mineral property expenditures
Mineral property expenditures are accounted for in accordance with Canadian
GAAP as disclosed in note 2. For U.S. GAAP purposes, the company expenses
expenditures relating to unproven mineral properties as they are incurred.
When proven and probable reserves are indicated as a bankable feasibility
study for a property, subsequent exploration and development costs of
the property are capitalized. The capitalized costs of such properties
would then be measured periodically to ensure that the carrying value
can be recovered on an undiscounted cash flow basis. If the carrying value
cannot be recovered on this basis, the mineral properties would be written
down to net recoverable value on a discounted cash flow basis.
e)
Issue of escrow shares
U.S. GAAP requires that compensation expense be recorded for the excess
of the quoted market price over the price granted to employees and directors
under escrow share agreements that are based on more than mere passage
of time and require performance. The compensation expense is recorded
when the shares become eligible for release. Under Canadian GAAP, no compensation
expense is recorded for such escrow share agreements.
f)
Supplemental cash flow information
Under U.S. GAAP, the direct method of presenting the consolidated statements
of cash flows for 2003, 2002 and 2001 would not show exploration expenditures
under investing activities. These balances of $43,782, $311,185 and $176,041,
respectively, would instead be included in cash paid to suppliers and
employees under operating activities. This would result in totals for
2003, 2002 and 2001 for cash paid to suppliers and employees of $669,605,
$646,145 and $423,760, respectively.
g)
Recent accounting pronouncements
The Canadian Institute of Chartered Accountants (CICA) has issued amendments
to Section 3870 - “Stock-based Compensation and Other Stock-based
Payments”, which require an expense to be recognized in the financial
statements for all forms of employee stock-based compensation, including
stock options. The company will be required to adopt the standard on January
1, 2004, which will result in compensation expense on stock options granted
to directors and employees, previously only disclosed on a pro forma basis,
to be charged to earnings.
h)
Marketable securities
For U.S. GAAP purposes, unrealized gains and losses for available-for-sale
securities are included in comprehensive income, a separate component
of shareholders’ equity, except where the decline in value is other
than temporary in which case Canadian and U.S. GAAP are the same.
(13)
Spur
Ventures Inc.
(an exploration stage company)
Notes to Consolidated Financial Statements
December 31, 2003, 2002
and 2001
(expressed in Canadian dollars)
11
Commitments and contingencies
a)
In November 2003, the company entered into an agreement with a Chinese
partner to acquire a 65% interest in a joint venture company, Yichang
Spur Chemicals Ltd. (YSC). YSC acquired a 100% interest in an existing
fertilizer facility in Yichang, China. The company must make the initial
investment in YSC of US$1.25 million (paid January 6, 2004) within 10
days of the issuance of a business license (the license was issued on
December 23, 2003) and will make a further payment of US$1.25 million
(subject to a final net asset valuation based on the audited financial
statements) within 90 days of the first instalment. The company has also
committed to pay interest on the existing debt of one of the YSC partners
for the upcoming years 2004 to 2008 of US$128,307 per year.
The acquisition is expected to be completed in April 2004.
b)
During the upcoming years, the company has the following rental commitments:
$
2004
27,210
2005
27,210
12
Subsequent events
In January 2004, the company paid the first instalment of US$1.25
million to acquire an existing fertilizer facility in Yichang. The acquisition
was completed in April 2004 and the funds are currently held in trust
to be disbursed as the company’s management considers necessary.
On April 27, 2004, the company announced the agreed restructuring
of the terms of the Yichang Maple Leaf Chemicals Company joint venture.
The estimated investment for the development of 700,000 tonnes of fertilizer
plus the mine development and associated infrastructure has been reduced
to US$93 million (from US$325 million) over the next five years. Accordingly,
the company’s interest will be adjusted to 79%.
In April 2004, closing was finalized on the YSC acquisition. After
completion of final due diligence and audit of the accounts of the Xinyuan
plant, the company’s ownership has been agreed at 72%, an increase
from the percentage previously anticipated of 65%.
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