UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10–K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 1–08733
NORD RESOURCES
CORPORATION
(Exact name of registrant as specified in its
charter)
| Delaware | 85–0212139 |
| (State or other jurisdiction of incorporation or | (IRS Employer Identification No.) |
| organization) | |
| 1 West Wetmore Road, Suite 203 | |
| Tucson, Arizona | 85705 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (520) 292–0266
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
(Title
of class)
Indicate by check mark if the registrant is a well–known
seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] Yes[ x ]
No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act
[ ] Yes[ x ]
No
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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.[ x ] Yes[ ] No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K.[ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non–accelerated filer [ ] (do not check if a smaller reporting company) | Smaller reporting company [ x ] |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b–2 of the Exchange Act).
[ ] Yes[ x ] No
- 2 -
The aggregate market value of the registrant’s common stock held by non–affiliates of the registrant as of June 30, 2009, computed by reference to the price at which such stock was last sold on the OTC Bulletin Board ($0.43 per share) on that date, was approximately $23,523,047.
The registrant had 110,520,915 shares of common stock outstanding as of March 15, 2010.
NORD RESOURCES CORPORATION
Form 10–K
- ii -
FORWARD–LOOKING STATEMENTS
The information in this annual report contains forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward–looking statements involve risks and uncertainties, including statements regarding our capital needs, business plans and expectations. Such forward–looking statements involve risks and uncertainties regarding the market price of copper, availability of funds, government regulations, common share prices, operating costs, capital costs, outcomes of ore reserve development and other factors. Forward–looking statements are made, without limitation, in relation to operating plans, property exploration and development, availability of funds, environmental reclamation, operating costs and permit acquisition. Any statements contained herein that are not statements of historical facts may be deemed to be forward–looking statements. In some cases, you can identify forward–looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology.
Forward–looking statements in this annual report include, but are not limited to, statements with respect to the following:
- the timing and possible outcome of pending regulatory and permitting matters;
- the parameters and design of our planned mining facilities on the Johnson Camp Mine;
- our future financial or operating performances and our projects;
- the estimation of mineral reserves and mineralized material;
- the estimation of future copper production
- the timing of exploration, development and production activities and estimated future production, if any;
- estimates related to costs of production, capital, operating and exploration expenditures;
- requirements for additional capital;
- government regulation of mining operations, environmental risks, reclamation and rehabilitation expenses;
- title disputes or claims;
- limitations of insurance coverage;
- the future price of copper or other metals; and
- our expectation that we will be in compliance with the continued listing requirements of the Toronto Stock Exchange when the Continued Listings Committee considers its de-listing decision at a meeting of the Committee scheduled to be held on April 21, 2010.
These forward–looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, the risks and uncertainties outlined under the sections titled “Risk Factors”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. If one or more of these risks or uncertainties materialize, or our underlying assumptions prove incorrect, our actual results may vary materially from those expressed or implied by our forward–looking statements anticipated, believed, estimated or expected.
We note, in particular, that the Johnson Camp Mine has limited recent operating history upon which to base estimates of future cash flows and operating costs. These and other estimates or projections (including our expectations with respect to annual copper production from our planned operations at the Johnson Camp Mine) are, to a large extent, based upon the interpretation of geological data obtained from drill holes and other sampling techniques performed in accordance with industry standards by third parties, the methodologies and results of which we have assumed are reasonable and accurate, which results form the basis for, and constitute a fundamental variable in, the feasibility study and technical report completed by Bikerman Engineering & Technology Associates which we have relied on.
1
The sampling data produced by third parties and amounts of metallurgical testing are less extensive than normal and our expected copper recovery rates at the Johnson Camp Mine significantly exceed historical experience at the Johnson Camp property. There is no assurance that we will be able to meet these expectations and projections at an operational level. For further information, you should carefully read and consider the section of this annual report entitled “Risk Factors” beginning on page 4.
We caution readers not to place undue reliance on any such forward–looking statements, which speak only to a state of affairs as of the date made. We disclaim any obligation subsequently to revise any forward–looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We qualify all the forward–looking statements contained in this annual report by the foregoing cautionary statements.
PART I
| ITEM 1. | BUSINESS |
Overview
We are a copper mining company and our principal asset is the Johnson Camp property located in Arizona. The Johnson Camp property includes the Johnson Camp Mine, an integrated open pit copper mine and a production facility that uses the solvent extraction, electrowinning (SX–EW) process. The Johnson Camp Mine includes two existing open pits, namely the Burro and the Copper Chief bulk mining pits. As described in more detail below, we commenced production of copper from new ore in February 2009 and achieved commercial copper cathode production from newly-mined ore on April 1, 2009.
Development of Our Business
We acquired the Johnson Camp Mine from Arimetco, Inc. pursuant to a Sales and Purchase Agreement that had been assigned to us in June 1999 by Summo USA Corporation, the original purchaser, following the completion of certain due diligence work by Summo. Although Arimetco had ceased mining on the property in 1997, we, like Arimetco before us, continued production of copper from ore that had been mined and placed on leach pads, and from 1999 to 2003 we (through our then subsidiary Nord Copper Company) produced approximately 4,490,045 pounds of copper cathode.
In August 2003, we placed the Johnson Camp Mine on a care and maintenance program due to weak market conditions for copper at that time. In June 2007 when conditions improved, we began the process of reactivating the Johnson Camp Mine.
In September 2007, Bikerman Engineering & Technology Associates, Inc. completed a technical report for us entitled, “Johnson Camp Mine Project, Feasibility Study, Cochise County, Arizona, USA, Technical Report” (the “Technical Report”), and prepared in accordance with National Instrument 43–101 Standards of Disclosure for Mineral Projects of the Canadian Securities Administrators (as required for us to comply with provincial securities laws in Canada that are applicable to our Company).
In January 2008 we commenced copper cathode production from leaching old leach pads, and during 2008, we produced approximately 2.9 million pounds of copper from residual leaching.
In February 2008, we entered into a long-term cathode sales agreement with Red Kite Master Fund Limited for 100% of the copper cathode production from the Johnson Camp Mine. The agreement runs through December 31, 2012 with renewable extensions by mutual agreement of both parties. Pursuant to the agreement, Red Kite accepts delivery of the cathodes at the Johnson Camp Mine, and pricing is based on the average monthly COMEX price for high–grade copper.
2
In August 2008, we received the Air Quality permit necessary to enable us to complete the construction related to the reactivation of the Johnson Camp Mine.
We commenced mining of new ore upon completion of the reactivation work in January 2009, and we commenced production of nominal amounts of copper from newly-mined ore during the testing and development phase of the mine in February and March 2009. We achieved commercial copper cathode production from newly-mined ore on April 1, 2009 and entered the production stage, following substantial completion of the testing and development phase.
We have continued to make substantial progress in ramping up copper production, but the rate of increase has been slower than expected. In late October 2009, the failure of a well casing in a primary water supply well contributed to several months of lower than forecasted flow rates of pregnant leach solution through our SX plant, which in turn have resulted in lower than expected copper production. We believe we have successfully taken measures to address these issues. For example, in early January 2010, we placed two new wells into operation at a capital cost of approximately $400,000. The new wells have resulted in significantly increased flow rates that now are at the levels that we forecasted as necessary to achieve our production targets. With the increase in flow rates of pregnant leach solution to our SX plant, and continual increase in solution grades, we expect copper production to increase to a level to allow for breakeven operational cash flow in April 2010, and to achieve positive operating cash flow in the second quarter of 2010. Our expectations in this regard are premised primarily on our assumption that our copper production levels will continue to rise as predicted, given the measures that we have taken to address the problems we have encountered in our mining and processing operations, and on our assumption that current input costs and copper prices will remain constant over the relevant period, which cannot be assured.
Financing Activities
In June 2008, we entered into an Amended and Restated Credit Agreement with Nedbank Limited, as administrative agent and lead arranger, which provided for a $25 million secured term loan credit facility. All of the funds available under such facility have been used by us to finance the construction, start–up and operation of mining and metal operations at the Johnson Camp Mine. As of December 31, 2009, this facility was fully drawn and the outstanding balance of the credit facility was $23,257,826.
In March 2009, our credit agreement with Nedbank was amended and restated to provide for, among other things, the deferral of certain principal and interest payments until December 31, 2012 and March 31, 2013. While we made the scheduled principal and interest payment that was due on December 31, 2009 in the approximate amount of $2,200,000, we were unable to make the scheduled principal and interest payment that was due on March 31, 2010 in the approximate amount of $2,175,000. Accordingly, our Company and Nedbank have entered into an unconditional forbearance and extension agreement dated March 30, 2010 that allows us a forbearance period of 21 days to negotiate an amendment to the credit agreement as it pertains to the March 31, 2010 payment and other terms therein. If upon the expiration of the 21 day period, we have not been successful in amending the credit agreement, Nedbank will have full authority to exercise its rights under the credit agreement, including the acceleration of the full amount due thereunder.
In addition, in March of 2009, we sold a 2.5% royalty on the mineral production sold from the existing mineral rights at the Johnson Camp Mine for net proceeds of approximately $4,950,000.
3
In November 2009, we completed an unregistered, brokered private placement of 40 million units (the “Units”) for total gross proceeds of $12,000,000. In connection with the offering, which was effected in an offshore transaction pursuant to Rule 903 of Regulation S promulgated under the Securities Act of 1933, as amended, we paid the placement agent a commission equal to $600,000, or 5% of the gross proceeds of the offering. Each Unit, priced at $0.30, consisted of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of our Company at a price of $0.38 per share until June 5, 2012. The proceeds of the offering were used to make debt service payments under the Nedbank credit facility, to purchase approximately $500,000 in additional equipment, to reduce accounts payable, and for general working capital purposes.
In connection with the private placement of the Units, we received an exemption from certain shareholder approval requirements under the rules of the Toronto Stock Exchange (the “TSX”), on the basis of financial hardship. Reliance on this exemption automatically triggered a TSX de-listing review to confirm that we continue to meet the TSX listing requirements. We have been informed by the TSX that the Continued Listings Committee has deferred its de-listing decision until after a meeting of the Committee scheduled to be held on April 21, 2010. We believe that we will be in compliance with the TSX’s continued listing requirements at that time.
Other Operations
The Johnson Camp property includes decorative and structural stone operations, which produce landscape and aggregate rock from the overburden piles at the Johnson Camp Mine. Until January 31, 2009 we leased the landscape and aggregate rock operations to a third party in exchange for sliding scale royalties. Effective February 1, 2009, we commenced managing the landscape rock operation; the aggregate rock operation continues to be leased to a third party.
We do not believe that the landscape and aggregate rock operations are now nor will be material to our financial results of operation in the future.
Incorporation and Principal Business Offices
We were formed under the laws of the State of Delaware on January 18, 1971. Our principal business offices are located at 1 West Wetmore Road, Suite 203, Tucson, Arizona 85705, and our telephone number is (520) 292–0266.
| ITEM 1A. | RISK FACTORS |
Much of the information included in this annual report includes or is based upon estimates, projections or other “forward looking statements”. Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein. We undertake no obligation to update forward looking statements to reflect events or circumstances occurring after the date of such statements.
Such estimates, projections or other “forward looking statements” involve various risks and uncertainties as outlined below. We caution readers of this annual report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other “forward looking statements”. In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.
4
Risks Related to Our Company
We have a history of losses, and our future profitability will depend on the successful operation of the Johnson Camp Mine, which cannot be assured.
We have a history of losses, and expect to incur losses in the future until we have reached full mining operations and production levels at the Johnson Camp Mine.
We had net income of $392,438 for the year ended December 31, 2009, but a net loss of $5,038,374 for the year ended December 31, 2008. As of December 31, 2009, we had a working capital deficiency of $7,652,818. This deficiency includes current liabilities of $15,434,206 representing the current portions of our long term debt, the current portion of derivative contracts and the current portion of deferred revenue.
We commenced production of copper from residual leaching in January 2008, mining of new ore in January 2009, and production of copper from new ore in February 2009. We achieved commercial copper cathode production from newly-mined ore on April 1, 2009 and entered the production stage, following substantial completion of the testing and development phase.
Although we have continued to make substantial progress in ramping up copper production, the rate of increase has been slower than expected. In late October 2009, the failure of a well casing in a primary water supply well contributed to several months of lower than forecasted flow rates of pregnant leach solution through our SX plant, which in turn has resulted in lower-than-expected copper production and operating cash flow. Although we believe that we have successfully taken measures to address these issues, we cannot provide any assurance that we will ramp up to full production or have successful mining and processing operations on the Johnson Camp property in the future.
We are dependent upon the success of the Johnson Camp Mine as a source of future revenue and profits, if any. Even if we should be successful in achieving our planned full copper production rate of 25 million pounds of copper per annum, an interruption in operations of the Johnson Camp Mine may have a material adverse effect on our business.
The reactivation and ramp up of operations at the Johnson Camp Mine, and the development of new mining operations on the Johnson Camp property will continue to require the commitment of substantial resources.
The reactivation and ramp up of operations at the Johnson Camp Mine, and the development of new mining operations on the Johnson Camp property, have required and will continue to require the commitment of substantial resources for operating expenses and capital expenditures. We incurred approximately $43,000,000 in capital costs in the reactivation of the mine, related primarily to the rehabilitation of the solution ponds, refurbishment and a modest expansion of our SX-EW copper production facility, installation of our primary stage crusher, the purchase and installation of two secondary stage crushers, an agglomerator and conveying equipment, and other project-related items.
We estimate we will incur an additional $12 to $15 million in capital costs during the next three years, primarily for the development and construction of a new leach pad. We also expect to incur expenses in connection with further exploratory drilling on the Johnson Camp property. In addition, any delay in our planned ramp up to full production may cause an increase in costs for us and could have a material adverse effect on our financial condition or results of operations.
5
Unforeseen conditions may affect our mining and processing efficiency, and we may not be able to execute the leaching operation as planned if we do not maintain proper control of ore grade.
The parameters used in estimating mining and processing efficiency are typically based on testing and experience with previous operations. Various unforeseen conditions can occur that may materially affect the estimates. In particular, unless proper care is taken to ensure that proper ore grade control is employed and that other necessary steps are taken, we may not be able to achieve production forecasts as planned. In addition, our projected production is based on anticipated copper recoveries at the Johnson Camp Mine that are in excess of historical experience, which may result in an overestimation of our mining and processing efficiency if our actual production does not meet our projected production.
We may never achieve our production estimates since they are dependent on a number of assumptions and factors beyond our control.
We have prepared estimates of future copper production; however, we cannot be certain that we will ever achieve these estimates. Our production estimates depend on, among other things: the accuracy of our reserve estimates; the accuracy of assumptions regarding ore grades and recovery rates; ground conditions and physical characteristics of the mineralization, such as hardness and the presence or absence of particular metallurgical characteristics; the accuracy of estimated rates and costs of mining and processing; and our ability to obtain and maintain all necessary permits at all levels of development and production. We are processing the copper mineralization using Leach-SX–EW technology. These techniques may not be as efficient or economical as we project. Our actual production may vary from our estimates if any of these assumptions prove to be incorrect, and we may never achieve our full production target rate of 25 million pounds of copper per annum.
A major increase in our input costs, such as those related to acid, electricity, fuel and supplies, may have an adverse effect on our financial condition.
Our operations are affected by the cost of commodities and goods such as electrical power, sulfuric acid, fuel and supplies. The Technical Report includes an economic analysis of the Johnson Camp Mine based on the mine plan, capital and operating cost estimates current as of the second quarter of 2007. Management prepares its cost and production guidance and other forecasts based on its review of current and estimated future costs. A major increase in any of these costs may have an adverse impact on our financial condition. For example, we expect that sulfuric acid and energy, including electricity and diesel fuel, will represent a significant portion of production costs at our operations, and if the costs increase, we could be negatively affected.
Shortages of sulfuric acid, electricity and fuel, may have an adverse effect on our financial condition.
Sulfuric acid supply for SX–EW projects in the southwestern U.S. is produced primarily as a smelter byproduct at smelters in the southwest U.S. and in Mexico. We have an agreement in place for a broker of acid to supply us with sulfuric acid through the end of 2010. However, we cannot be assured that the broker will be able to provide us with an adequate supply of sulfuric acid without interruptions and we continue to remain subject to market fluctuations in the price of sulfuric acid.
Continuation of our mining production is dependent on the availability of a sufficient water supply to support our mining operations.
Our mining operations require water for mining, ore processing and related support facilities. Production at the Johnson Camp Mine is dependent on continuous maintenance of our water rights. Under Arizona law groundwater outside an active management area may be withdrawn and used for reasonable and beneficial use. The character of the water right - that is groundwater versus surface water - may at some
6
point become at issue and may be subject to adjudication to the extent certain water is determined to be surface water. We are not subject to any such adjudication claims at this time. However, we cannot predict our potential involvement in or the outcome of any adjudication proceedings which may occur impacting our water rights and uses.
Production water for the Johnson Camp Mine is currently supplied from three wells controlled or located on the Johnson Camp property and from two wells located on private land adjacent to our property. In late October 2009, the failure of a well casing in one of our wells that provides make-up water for our leaching operation resulted in several months of below forecasted pregnant leach solution flow rates through our SX plant, and copper production was adversely affected. By early January 2010, we had placed two new wells into operation which have resulted in significantly improved pregnant leach solution flow rates that now are at the levels that we had forecasted as necessary to achieve our production targets. However, it may be necessary to drill additional wells on our property in order to expand our leaching operation. In addition, although some of the wells have been upgraded since 1999, further upgrades may have to be undertaken.
The loss of some or all water rights, in whole or in part, or shortages of water to which we have rights could require us to curtail or shut down mining production or could prevent us from pursuing expansion opportunities.
Our estimates of reserves are inherently subject to error, particularly since we have limited operating history on which to base such estimates. Our actual results may differ due to unforeseen events and uncontrollable factors that can have significant adverse impacts.
The Johnson Camp Mine has limited operating history upon which to base estimates of proven and probable ore reserves and estimates of future cash operating costs. Such estimates are, to a large extent, based upon the interpretation of geological data obtained from drill holes and other sampling techniques performed by third parties, the methodologies and results of which we have assumed - but cannot be assured - are reasonable and accurate. In addition, Bikerman Engineering & Technology Associates derived its estimates of cash operating costs at the Johnson Camp Mine from information provided by our Company. Such information and certain other factors, including anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of the mineral from the ore, comparable facility and equipment operating costs current as of the second quarter of 2007, and anticipated climatic conditions, form the basis for, and constitute fundamental variables in, the Technical Report. Actual cash operating costs and economic returns based upon development of proven and probable ore reserves may differ significantly from those originally estimated. Until reserves are actually mined and processed, the quantity of reserves must be considered as estimates only.
Our estimates of reserves are based in large part on sampling data produced by third parties and on amounts of metallurgical testing that are less extensive than normal. In addition, our expected copper recovery rates at the Johnson Camp Mine exceed historical experience at the property. There is no assurance that we will be able to meet these expectations and projections at an operational level.
Our expectations with respect to copper recovery rates exceed historical experience at the Johnson Camp Mine since we plan to continue to crush the ore to a smaller size with the expectation of higher copper recoveries. In addition, our projections of copper recovery are based on amounts of metallurgical testing that are less extensive than are commonly used in the industry for evaluating copper oxide deposits. Furthermore, our estimates of ore reserves reflect consumption projections for sulfuric acid and other consumable items that were developed using a limited number of samples taken by the former operators of the mine on the Johnson Camp property that may not be representative of the characteristics of the remaining reserves. There is no assurance that we will be able to meet these expectations and projections at an operational level.
7
Copper recovery rates for approximately 15% of our estimated total reserves may be less than optimal due to the presence of copper sulfide mineralization below the elevation of 4,560 feet.
Copper sulfide minerals are not as amenable to heap leach recovery techniques as are copper oxides. Since copper sulfide mineralization is evident below an approximate elevation of 4,560 feet in both the Burro and Copper Chief pits of the Johnson Camp Mine, we caution that copper recovery rates for ore anticipated to be mined below that elevation (estimated at approximately 15% of estimated total ore reserves) may be inhibited. In addition, although the column test on the sample of Abrigo ore (a type of copper bearing host rock at the Johnson Camp Mine) taken from an approximate elevation of 4,620 feet that contained 4.49% sulfides exhibiting good copper recoveries, the leaching of copper from ore mined at this depth may be less than optimal.
We have evaluated the commercial viability of the Johnson Camp Mine based on an estimate of ore reserves that is premised on a geologic resource model and estimate previously prepared that was based largely on drilling, sampling and assay data that had been developed by Cyprus Mines Corporation, Arimetco Inc. and Summo U.S.A. Corporation, the accuracy of which cannot be assured.
We have evaluated the commercial viability of the Johnson Camp Mine based on an estimate of ore reserves contained in the feasibility study. The resource model and estimate previously prepared and used as the basis for the feasibility study is based largely on drilling, sampling and assay data that had been developed by the previous operators of the Johnson Camp Mine, Cyprus and Arimetco, and by Summo. The validity of the estimates assumes the accuracy of the underlying drill hole electronic database.
We and Bikerman Engineering & Technology Associates have conducted limited additional due diligence, such as reviews of historical project geological drill logs and assay certificates, but no additional drilling. Complete accuracy of the drill hole electronic database cannot be assured.
Cyprus, Arimetco and Summo used different approaches to drilling, sampling and assay analysis, with the result that their respective results may not be comparable and thereby increase the risk of an overestimation of ore reserves.
Cyprus Mines Corporation (which owned the Johnson Camp property until 1989, operating under the name Cyprus Johnson Copper Company), Arimetco and Summo each used different approaches to drilling, sampling and assay analysis that may not be comparable to each other. In particular, the soluble copper assay techniques used by Arimetco for ore grade estimation are not directly comparable to the soluble copper assay techniques used by Cyprus. The use of two incomparable approaches by Cyprus and Arimetco may have led to inconsistencies in or the skewing of the data underlying our estimates, thereby increasing the risk of an overestimation of ore reserves at the Johnson Camp Mine, as well as increasing the risk of a material inaccuracy in the feasibility study.
Limited sampling work has been performed at the Johnson Camp Mine, and Bikerman Engineering & Technology Associates concluded that it is therefore not possible at this time to verify the entire drill hole electronic database used for the current resource model and ore reserve estimates. Bikerman Engineering & Technology Associates has largely assumed the reasonableness and accuracy of the drilling, sampling and assay methodologies and data which constitute a fundamental variable input in the feasibility study.
Bikerman Engineering & Technology Associates reviewed the results of limited sampling work undertaken at the Johnson Camp Mine in 2006 by another engineering company. Bikerman Engineering & Technology Associates has concluded that it is not possible for it to verify the entire original drill hole electronic database used for the current mineral resource model and ore reserve estimates. Consequently, Bikerman Engineering & Technology Associates and we have largely assumed the reasonableness and
8
accuracy of the drilling, sampling and assay methodologies and data. Accordingly, there is a risk that results may vary if additional sampling work is undertaken. This, in turn, could adversely impact the current mineral resource model and ore reserve estimates, as well as increase the risk of a material inaccuracy in the feasibility study.
Our estimate of ore reserves at the Johnson Camp Mine is based on total copper assays rather than on acid soluble copper assays and our expectations with respect to copper recovery are based on results of metallurgical testing that may not be duplicated in larger scale tests under onsite conditions or during production. As a result, there is a risk that we may have overestimated the amount of recoverable copper.
Our estimate of ore reserves at the Johnson Camp Mine is based on total copper assays rather than soluble copper assays. A reserve estimate based on total copper is an indirect measurement of copper recovery through leaching. There can be no assurance that metallurgical recoveries in small scale laboratory tests will be duplicated in larger scale tests under onsite conditions or during production. Accordingly, there is a risk that we may have overestimated the amount of recoverable copper.
We may require additional permits and renewals of permits to continue to operate the Johnson Camp Mine, the availability of which cannot be assured.
Although we have secured a number of permits for the restart and operation of the Johnson Camp Mine, we still need to obtain certain additional permits for long term operation of the mine, including an aquifer protection permit. In addition, certain permits will require applications for renewal from time to time during the life of the project and certain permits may be suspended or require additional applications in the event of a significant or substantial change to the Johnson Camp Mine operations or prolonged inactivity. To the extent other approvals are required and not obtained, we may: (i) be prohibited from continuing mining and/or processing operations; (ii) forced to reduce the scale of or all of our mining operations; or (iii) be prohibited or restricted from proceeding with planned exploration or development of mineral properties. For example, we are currently producing copper under an ADEQ Compliance Order. However, we anticipate that we will be required to immediately halt all of our operations at the Johnson Camp Mine if our application for an aquifer protection permit is denied.
We have incurred substantial debt and have granted a security interest in our assets. If we are unable to repay our loans when they become due, the lenders would be entitled to realize upon their security by taking control of all or a portion of our assets.
We are a party to an amended and restated credit agreement dated as of March 31, 2009 with Nedbank Limited, as the administrative agent and lead arranger, which provided a $25,000,000 secured term loan credit facility used by our Company to finance the reactivation of the Johnson Camp Mine. We have delivered a deed of trust, a collateral account agreement and certain other security agreements that grant to the lenders a first priority lien encumbering all of the real and personal property associated with the Johnson Camp property, including all patented mining claims, fee lands and unpatented mining claims in which we have an interest. The lenders would be entitled to realize upon their security interests and seize our assets if we were to be unable to repay or refinance the loans as they become due. In addition, pursuant to the terms of the credit agreement, we are required to meet specified financial tests any time that any loan proceeds remain outstanding under the credit agreement.
While we made the scheduled principal and interest payment that was due under our amended and restated credit agreement with Nedbank on December 31, 2009 in the approximate amount of $2,200,000, we were unable to make the scheduled principal and interest payment that was due on March 31, 2010 in the approximate amount of $2,175,000. Accordingly, our Company and Nedbank have entered into an unconditional forbearance and extension agreement dated March 30, 2010 that allows us a forbearance
9
period of 21 days to negotiate an amendment to the credit agreement as it pertains to the March 31, 2010 payment and other terms therein. If upon the expiration of the 21 day period, we have not been successful in amending the credit agreement, Nedbank will have full authority to exercise its rights under the credit agreement, including the acceleration of the full amount due thereunder and institution of foreclosure proceedings against the security. Any such actions could force us into bankruptcy or liquidation.
We may require additional financing to complete the ramp up of operations at the Johnson Camp Mine, the availability of which cannot be assured.
We may require additional financing to complete the ramp up of operations at Johnson Camp Mine. We also expect to incur an additional $12-$15 million in capital costs during the next three years, primarily for the development and construction of a new leach pad. We also expect to incur expenses in connection with further exploratory drilling on the Johnson Camp property. Our estimated capital costs and operating expenses may change with our actual experience as our mine plan is implemented. We cannot guarantee that we will be able to obtain any additional financing on commercially reasonable terms or at all. If we fail to obtain the necessary financing when needed, we may not be able to execute our mine plan and we may again be forced to place the Johnson Camp Mine on care and maintenance status.
Our indebtedness, as well as the current global recession, disruption in financial markets and lower copper prices generally, could, among other things, impede our access to capital or increase our cost of capital, which would have an adverse effect on our ability to fund our working capital and other capital requirements.
As of December 31, 2009, the outstanding principal and unpaid interest amount of our debt was $23,257,826. The widely reported domestic and global recession, and the unprecedented levels of disruption and continuing illiquidity in the credit markets have had an adverse effect on our operating results and financial condition, and if sustained or worsened, such adverse effects could continue or deteriorate. Disruptions in the credit and financial markets have adversely affected financial institutions, inhibited lending and limited access to capital and credit for many companies, including ours. In addition, copper prices have been highly volatile. Over the past two years copper prices have fluctuated in a range between $1.27/lb to $4.08/lb. On December 31, 2009, the spot price of copper on the LME was $3.33/lb. These conditions have made it difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations and have limited our flexibility to plan for, or react to, changes in our business and the markets in which we operate. If these conditions persist or deteriorate, they could, among other things, make it difficult for us to finance our working capital requirements and service our existing debt.
If future financing is not available to us when required, as a result of limited access to the credit markets or otherwise, or is not available on acceptable terms, we may not have sufficient working capital for our exploration, development and production programs. We may also be unable to take advantage of business opportunities or respond to competitive pressures. Any of these circumstances could have an adverse effect on our operating results and financial condition.
Title to the Johnson Camp property may be subject to other claims.
Although we believe we have exercised commercially reasonable due diligence with respect to determining title to the properties that we own or in which we hold an interest, we cannot guarantee that title to these properties will not be challenged or impugned. The Johnson Camp property may be subject to prior unrecorded agreements or transfers or to native land claims and title may be affected by undetected defects. There may be valid challenges to the title of the Johnson Camp property which, if successful, could impair development and/or operations.
10
The Johnson Camp property consists of 59 patented lode mining claims, 102 unpatented lode mining claims and 617 acres of fee simple lands. The copper processing facilities and the Copper Chief and Burro bulk mining pits that serve as focal points for our mine plan are located on the patented mining claims or fee simple parcels. However, we may in the future mine areas that are on unpatented mining claims. Unpatented mining claims are unique property interests, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations under the United States General Mining Law, including the requirement of a proper physical discovery of a valuable lode mineral within the boundaries of each claim and proper compliance with physical staking requirements. Also, unpatented mining claims are always subject to possible challenges by third parties or validity contests by the federal government. The validity of an unpatented mining or mill site claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of United States federal and state statutory and decisional law. In addition, there are few public records that definitively determine the issues of validity and ownership of unpatented mining claims.
We do not insure against all risks, and we may be unable to obtain or maintain insurance to cover the risks associated with our operations at economically feasible premiums. Losses from an uninsured event may cause us to incur significant costs that could have a material adverse effect upon our financial condition.
Our insurance will not cover all the potential risks associated with the operations of a mining company. We may also be unable to obtain or maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, we expect that insurance against risks such as environmental pollution or other hazards as a result of exploration and production may be prohibitively expensive to obtain for a company of our size and financial means. We might also become subject to liability for pollution or other hazards for which insurance may not be available or for which we may elect not to insure against because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could have a material adverse effect upon our financial condition and results of operations.
We compete with larger, better capitalized competitors in the mining industry. This may impair our ability to maintain or acquire attractive mining properties, and thereby adversely affect our financial condition.
The mining industry is competitive in all of its phases. We face strong competition from other mining companies in connection with the acquisition of properties producing, or capable of producing, base and precious metals. Many of these companies have greater financial resources, operational experience and technical capabilities than us. As a result of this competition, we may be unable to maintain or acquire attractive mining properties on terms we consider acceptable or at all. Consequently, our revenues, operations and financial condition could be materially adversely affected.
We are dependent on our key personnel, and the loss of any such personnel could adversely affect our Company.
Our success depends on our key executives and on certain operating personnel at the Johnson Camp Mine. We face intense competition for qualified personnel, and the loss of the services of one or more of such key personnel could have a material adverse effect on our business or operations. Our ability to manage administration, production, exploration and development activities, and hence our success, will depend in large part on the efforts of these individuals. We cannot be certain that we will be able to retain such personnel or attract a high caliber of personnel in the future.
11
In order to be successful during and after the ramp-up of our operations, we will have to maintain our workforce. We may not be successful in recruiting the necessary personnel, or in managing the new challenges that we will face with any significant growth.
Our mining operations require that we maintain a workforce at the Johnson Camp Mine of approximately 80 employees as well as various contractors. This requirement places substantial demands on our Company and our management. We will be required to retain, motivate and manage our employees. We will also have to adopt and implement new systems in all aspects of our operations. We have no assurance that we will be able to retain and recruit the personnel required to execute our programs or to manage these changes successfully.
The actual costs of reclamation are uncertain, and any additional amounts that we are required to spend on reclamation may have a material adverse effect on our financial condition.
The costs of reclamation included in the feasibility study are estimates only and may not represent the actual amounts which will be required to complete all reclamation activity. It is not possible to determine the exact amount that will be required, and the amount that we will be required to spend could be materially different than current estimates. Reclamation bonds or other forms of financial assurance represent only a portion of the total amount of money that will be spent on reclamation over the life of the Johnson Camp Mine operation. Any additional amounts required to be spent on reclamation may have a material adverse affect on our financial condition and results of operations.
Our directors and officers may have conflicts of interest.
Some of our directors and officers serve currently, and have served in the past, as officers and directors for other companies engaged in natural resource exploration and development, and may also serve as directors and/or officers of other companies involved in natural resource exploration and development in the future. We do not believe that any of our directors and officers currently has any conflicts of interest of this nature.
Certain legislation, including the Sarbanes–Oxley Act of 2002, may make it difficult for us to retain or attract officers and directors.
We may be unable to attract and retain qualified officers, directors and members of committees of the board of directors required to provide for our effective management as a result of the recent changes in the rules and regulations that govern publicly–held companies. In particular, the Sarbanes–Oxley Act of 2002 has resulted in a series of rules and regulations by the United States Securities and Exchange Commission (SEC) that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes, together with the risks associated with our business, may deter qualified individuals from accepting these roles.
There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.
We are now subject to the ongoing internal control provisions of Section 404 of the Sarbanes–Oxley Act of 2002. These provisions provide for the identification of material weaknesses in internal controls over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a
12
control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our Company have been detected. These inherent limitations include the realities that judgments in decision–making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur and not be detected.
In addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements. If we are unable to assert that our internal control over financial reporting are adequate, certain customers or suppliers may be discouraged from doing business with us, cause downgrades in our debt ratings leading to higher borrowing costs and affect how our stock trades. This could, in turn, negatively affect our ability to access public debt or equity markets for capital. Further, such an occurrence could make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage and/or to incur substantially higher costs to obtain the same or similar coverage. It could also make it more difficult for us to attract and retain qualified personnel to serve on our board of directors, on committees of our board of directors, or as executive officers.
Our officers and directors, and four shareholders holding 5% or more of our common stock, hold a significant amount of our issued and outstanding stock which may limit non–affiliated stockholders to influence corporate matters.
On November 5, 2009, we completed an unregistered, brokered private placement of 40 million units for total gross proceeds of $12,000,000. Each unit consisted of one common share and one common share purchase warrant exercisable until June 5, 2012. Upon completion of the private placement, Ross Beaty, acting through a wholly-owned holding company, and Riaz Shariff acquired 34,250,000 and 5,750,000 common shares, respectively, representing approximately 31% and 5.2%, respectively, of the outstanding common shares of our Company on a post-closing basis. Under rules promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, Mr. Beaty and Mr. Shariff are also considered to beneficially own the 34,250,000 and 5,750,000 common shares that are issuable upon exercise of the warrants forming part of their respective units, which together with their outstanding common shares, represent approximately 47.3% and 9.9%, respectively, of our Company’s issued and outstanding common shares (assuming non-exercise of certain outstanding options, warrants and other rights to acquire shares of our common stock).
In addition, we have two other shareholders who, according to reports filed by them under the Securities Exchange Act of 1934, as amended, beneficially own 7.9% and 6.1%, respectively, of our issued and outstanding common stock (assuming non-exercise of certain outstanding options, warrants and other rights to acquire shares of our common stock held by persons other than the relevant officer, director or 10% shareholder).
As of March 15, 2010, our officers and directors as a group beneficially own approximately 14.6% of our issued and outstanding common stock (assuming non-exercise of certain outstanding options, warrants and other rights to acquire shares of our common stock).
13
These factors may limit the ability of our non-affiliated stockholders to influence corporate matters.
Future sales of our common stock may depress our stock price thereby decreasing the value of your investment.
The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock.
The securities markets in the United States and Canada have experienced a high level of price and volume volatility recently, and the market price of our securities has also experienced wide fluctuations. There can be no assurance that continual fluctuations in our share price will not occur.
Recently, the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market price of securities of many companies, including ours, has experienced wide fluctuations in price which have not necessarily been related to operating performance, underlying asset values or prospects. There can be no assurance that fluctuations in our share price will not continue to occur during the foreseeable future.
If we fail to obtain a listing on an established stock exchange, you may be subject to U.S. federal income tax on the disposition of your securities.
We believe that we currently are a “United States real property holding corporation” under Section 897(c) of the Internal Revenue Code, referred to as a USRPHC, and that there is a substantial likelihood that we will continue to be a USRPHC. Generally, gain recognized by a Non–U.S. Holder on the sale or other taxable disposition of common stock should be subject to U.S. federal income tax on a net income basis at normal graduated U.S. federal income tax rates if we qualify as a USRPHC at any time during the 5–year period ending on the date of the sale or other taxable disposition of the common stock (or the Non–US. Holder’s holding period for the common stock, if shorter). Under an exception to these rules, if the common stock is “regularly traded on an established securities market,” the common stock should be treated as stock of a USRPHC only with respect to a Non–U.S. Holder that held (directly or under certain constructive ownership rules) more than 5% of the common stock during the 5–year period ending on the date of the sale or other taxable disposition of the common stock (or the Non–US. Holder’s holding period for the common stock, if shorter). There can be no assurances that the common stock will be “regularly traded on an established securities market”.
Our reliance on the financial hardship exemption from certain stockholder approval requirements of the Toronto Stock Exchange in connection with our recent $12,000,000 private placement triggered an automatic TSX de-listing review. We cannot give any assurance that we will be found to be in compliance with continued listing requirements when the TSX completes its review, failing which our common stock will be delisted from the TSX.
In connection with our $12,000,000 private placement of 40 million Units in November, 2009, we received an exemption from certain shareholder approval requirements under the rules of the Toronto Stock Exchange (the “TSX”), on the basis of financial hardship. Reliance on this exemption automatically triggered a TSX de-listing review to confirm that we continue to meet the TSX listing requirements. We have been informed by the TSX that the Continued Listings Committee has deferred its de-listing decision until after a meeting of the Committee scheduled to be held on April 21, 2010. Although we believe that we will be in compliance with the TSX’s continued listing requirements at that time, there is no assurance that the review will be determined in our favor, in which event our common stock will be delisted from the TSX.
14
We have not obtained a tax opinion to the effect that there has not been a change of control either during the time preceding the completion of our unregistered special warrant offering in September 2007, immediately following conversion of the special warrants into the underlying shares of common stock and warrants, or in relation to our unregistered $12 million unit offering that closed in November 2009. If a change in control is deemed to have occurred, our Company may not be able to fully utilize our net operating loss carry forwards.
At December 31, 2009, our Company had federal and state net operating loss carry forwards of approximately $79,600,000 and $15,500,000, respectively. We believe that for the purposes of section 382 of the Internal Revenue Code, a change of control occurred on or before November 5, 2009. However, we have not obtained a formal tax opinion to that effect. If any change of control is deemed to have occurred – for example, either during the time preceding the completion of our unregistered special warrant offering in September 2007, immediately following conversion of the special warrants into the underlying shares of common stock and warrants, or immediately following the completion of our unregistered $12 million unit offering in November 2009 – or if a change of control occurs at any time in the future, our Company’s ability to fully utilize its net operating loss carry forwards in computing its taxable income will be limited to an annual maximum of the value of our Company just prior to the change in control multiplied by the long term tax exempt rate.
Broker–dealers may be discouraged from effecting transactions in our common shares because they are considered a penny stock and are subject to the penny stock rules. This could severely limit the market liquidity of the shares.
Our common stock currently constitutes “penny stock”. Subject to certain exceptions, for the purposes relevant to us, “penny stock” includes any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share. Rules 15g–1 through 15g–9 promulgated under the United States Securities Exchange Act of 1934, as amended, impose sales practice and disclosure requirements on certain brokers–dealers who engage in certain transactions involving a “penny stock.” In particular, a broker–dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse), must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker–dealer or the transaction is otherwise exempt. A broker–dealer is also required to disclose commissions payable to the broker–dealer and the registered representative and current quotations for the securities. Finally, a broker–dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer’s account and information with respect to the limited market in penny stocks.
The additional sales practice and disclosure requirements imposed upon broker–dealers may discourage broker–dealers from effecting transactions in our shares, which could severely limit the market liquidity of the shares and impede the sale of our shares in the secondary market.
In the event that an investment in our shares is for the purpose of deriving dividend income or in expectation of an increase in market price of our shares from the declaration and payment of dividends, the investment will be compromised because we do not intend to pay dividends.
We have never paid a dividend to our shareholders and we intend to retain our cash for the continued development of our business. In addition, pursuant to the terms of our credit agreement with Nedbank, we are restricted from paying dividends or making distributions on shares of our common stock. Accordingly, we do not intend to pay cash dividends on our common stock in the foreseeable future. As a result, a return on investment will be solely determined by the ability to sell the shares in the secondary market.
15
Risks Related to Our Industry
The feasibility of our mine plan is based on certain assumptions about the sustainability of the current price of copper. We may be adversely affected by fluctuations in copper prices.
Copper prices fluctuate widely and are affected by numerous factors beyond our control such as interest rates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, global and regional supply and demand (including that related to housing), and the political and economic conditions of copper producing countries throughout the world. The aggregate effect of these factors on copper price is impossible to predict. Because mining operations are conducted over a number of years, it may be prudent to continue mining for some periods during which cash flows are temporarily negative for a variety of reasons, including a belief that the low price is temporary and/or the greater expense incurred in closing an operation permanently. The value and price of our common shares, our financial results, and our exploration, development and production activities may be significantly adversely affected by declines in the price of copper and other metals.
In addition to adversely affecting our share price, financial condition and exploration, development and mining activities, declining metal prices can impact operations by requiring a reassessment of reserve estimates and the commercial feasibility of a particular project. Significant decreases in actual or expected copper prices may mean that a mineral resource which was previously classified as a “reserve” will be uneconomical to produce and may have to be restated as a resource. Even if the project is ultimately determined to be economically viable, the need to conduct such a reassessment may cause substantial delays in development or may interrupt operations, if any, until the reassessment can be completed.
Our operations involve the exploration, development and production of copper and other metals, with the attendant risks of damage to or loss of life or property and legal liability.
Our operations are subject to all the hazards and risks normally encountered in the exploration, development and production of copper and other base or precious metals, including unusual and unexpected geologic formations, seismic activity, pit–wall failures, flooding and other conditions involved in the drilling and removal of material, any of which could result in damage to, or destruction of, mines and other producing facilities, damage to life or property, environmental damage and legal liability.
Government regulation impacting the mining industry may adversely affect our business and planned operations.
Our mining, processing, development and mineral exploration activities, if any, are subject to various laws governing prospecting, mining, development, production, taxes, labor standards and occupational health, mine safety, toxic substances, land use, water use, land claims of local people and other matters. New rules and regulations may be enacted or existing rules and regulations may be applied in such a manner as to limit or curtail our exploration, production or development. Amendments to current laws and regulations governing operations and activities of exploration, development mining and milling or more stringent implementation of these laws could have a material adverse effect on our business and financial condition and cause increases in exploration expenses, capital expenditures or production costs or reduction in levels of production (assuming we achieve production) or require abandonment or delays in development of new mining properties.
Certain groups opposed to mining may interfere with our efforts to reactive the Johnson Camp Mine.
In North America there are organizations opposed to mining, particularly to open pit mines such as the Johnson Camp Mine. Although we intend to comply with all environmental laws and permitting
16
obligations in conducting our business, there is still the possibility that those opposed to the operation of the Johnson Camp Mine will attempt to interfere with the operation of the Johnson Camp Mine, whether by legal process, regulatory process or otherwise. Such interference could have an impact on our ability to operate the Johnson Camp Mine in the manner that is most efficient or appropriate or at all, and any such impact would have a material adverse effect on our financial condition and results of operations.
Our operations are subject to environmental risks and environmental regulation. Our failure to manage such risks or comply with such regulation will potentially expose us to significant liability.
All phases of our operations are subject to federal, state and local environmental regulation. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner that we anticipate will require stricter standards and enforcement, increased fines and penalties for non–compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. Future changes, if any, in environmental regulation may adversely affect our operations, if any. Environmental hazards may exist on the Johnson Camp property or on properties that we hold or may acquire in the future that are unknown to us at present and that have been caused by previous or existing owners or operators of the properties.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions there under including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations or in the exploration or development of mineral properties may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Our failure to contain or adequately deal with hazardous materials may expose us to significant liability for which we are not insured.
Production, if any, at the Johnson Camp Mine involves the use of hazardous materials. Should these materials leak or otherwise be discharged from their containment systems, we may become subject to liability for hazards or cleanup work that are not covered by our insurance.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
We are a smaller reporting company as defined by Rule 12b–2 of the Exchange Act and are not required to provide the information required under this item.
| ITEM 2. | PROPERTIES |
A glossary of Technical Terms appears at page 89.
Johnson Camp Property
Technical Report
Unless stated otherwise, information of a technical or scientific nature related to the Johnson Camp property is summarized or extracted from the Technical Report. The Technical Report is also referred to as a feasibility study in this annual report. Management’s plans, expectations and forecasts related to our Johnson Camp property are based on assumptions, qualifications and procedures which are set out only in
17
the full Technical Report. The Technical Report was filed electronically on November 13, 2007, on the System for Electronic Document Analysis and Retrieval (commonly, known as “SEDAR”), and is publicly available on the Internet at www.sedar.com, under our Company’s profile.
Description and Location
We currently have one development property, the Johnson Camp property, which is located in Cochise County, approximately 65 miles (105 kilometers) east of Tucson, in Cochise County, Arizona, one mile north of the Johnson Road exit off of Interstate Highway 10 between the towns of Benson and Willcox in all or parts of Sections 22, 23, 24, 25, 26, 27, 35 and 36, Township 15 South, Range 22 West. (See Figure 1: Location Map).
The Johnson Camp project currently includes: two open pits; one waste dump; three heap leach pads; a crushing, agglomeration and conveying system; a SX–EW processing plant; and ancillary facilities. The Burro Pit is larger than the Copper Chief Pit and contains 60% of the project reserves. The Burro Pit is located east of the SX–EW process plant. The Copper Chief Pit is located approximately 2,000 feet northwest of the Burro Pit.
The existing heap leach pads are located west of the open pits. The leach pads are divided into two major sections with solution collection facilities downstream of the first pad and downstream of pads two and three. A new leach pad is planned for future use and is anticipated to be located north of the Burro Pit and northeast of the Copper Chief Pit. The mine waste dump is located immediately to the east of the Burro Pit.
18
Figure 1: Location Map
19
Titles
The Johnson Camp property consists of 59 patented lode mining claims, 102 unpatented lode mining claims and 617 acres of fee simple lands. (See Figure 2: Johnson Camp Land Status Map). The patented claims comprise approximately 871 acres and the unpatented claims comprise approximately 1,604 acres. Thus, the Johnson Camp property covers approximately 3,092 acres. All of the claims are contiguous, and some of the unpatented mining claims overlap. We keep the unpatented mining claims in good standing by paying fees of $13,250 per year to the United States Federal Government. We keep the fee simple and patented claims in good standing by paying property taxes and claims filing fees of approximately $35,000 per year. The copper processing facilities and the Copper Chief and Burro open pits that serve as focal points for our mine plan are located on the patented mining claims or the fee simple lands.
We are the owner of the Johnson Camp property and the owner or holder of the claims. We are allowed to mine, develop and explore the Johnson Camp property, subject to the required operating permits and approvals, and in compliance with applicable federal, state and local laws, regulations and ordinances. We believe that all of our claims are in good standing.
Our patented mining claims give us title to the patented lands and no further assessment work must be done; however, taxes must be paid. We have full mineral rights and surface rights on the patented lands. Unpatented mining claims give us the exclusive right to possess the ground (surface rights) covered by the claim, as well as the right to develop and exploit valuable minerals contained within the claim, so long as the claim is properly located and validly maintained. Unpatented mining claims however, may be challenged by third parties and the United States government. (See “Risk Factors – Risks Related to Our Company”).
20
Figure 2: Johnson Camp Land Status Map
Accessibility, Climate, Local Resources, Infrastructure and Physiography
Access to the Johnson Camp property is via Interstate Highway 10 and by gravel road. Due to its location just one mile north of Interstate Highway 10, the Johnson Camp property provides excellent access for transportation and delivery of bulk supplies and shipment of copper cathodes.
The Johnson Camp Mine is located on the eastern slope of the Little Dragoon Mountains. The average elevation of the property is approximately 5,000 feet above sea level. The climate of the region is arid, with hot summers and cool winters. Freezing is rare at the site. Historically, the Johnson Camp Mine was operated throughout the year with only limited weather interruptions.
Vegetation on the property is typical of the upper Sonoran Desert and includes bunchgrasses and cacti. Higher elevations support live oak and juniper, with dense stands of pinyon pine common on north–facing slopes.
The existing facilities include the SX-EW processing plant, an administrative and engineering office and warehouse, laboratory, truck shop, core storage building, plant mechanical shop, and various used vehicles, pumps and other equipment. The newly constructed crushing, conveying and stacking system include the following: One 42x65 inch gyratory crusher, conveyors feeding a 40,000 ton (10,000 ton live) coarse ore stockpile, three feeders and a conveyor that feeds two 6x20-foot screens, conveyor feeding a 100-ton surge bin, two conveyors feeding two H6800 hydrocone secondary crushers, conveyor feeding a 40,000 ton fine ore stockpile, three feeders and a conveyor feeding a 10x35-foot agglomerator, an approximate 3,000 foot overland conveyor feeding a stacking system that includes twenty-one 100-foot grasshopper conveyors and a 150-foot radial tele-stacker.
21
The SX-EW processing plant was refurbished and expanded to handle solution from the new crushed and stacked ore and is comprised of a solvent extraction plant, an electrowinning tank house, a tank farm and four solution storage ponds. The solvent extraction plant consists of four extraction mixer-settlers and two strip mixer-settlers, and has a capacity of 2,500 to 5,000 gallons per minute depending if the circuit is in a series or parallel configuration. The electrowinning tank house consists of 88 electrowinning cells that can produce up to 25 million pounds per year. The tank farm, located in front of the tank house, is used for intermediate storage of electrolyte. The four solution storage ponds have a total capacity of approximately 18 million gallons. A new automated cathode stripping machine has been installed to strip copper cathodes from the stainless steel blanks.
The plant also includes a new cell house crane, a new boiler and associated heat exchanger, a new set of electrolyte filters, a clay filter press, and an upgrade to the transformer/rectifier, new pumper-mixers, and a sulfuric acid storage tank.
There are several access rights of way and two water wells which are located on the Johnson Camp property and one well on private land where we have access and water rights. Two additional wells are located on surrounding property where we have installed equipment to pump additional water for the mining operation as required. Potential water well sites have been identified on our land near Section 19 and could be drilled if additional water is required.
The Johnson Camp property receives electrical power from Sulphur Springs Valley Electric Cooperative (SSVEC). Effective October 1, 2009, we entered into a one year contract (with annual renewals unless either party notifies the other at least 90 days prior to the end of the current term) with SSVEC for the purchase of power. Power is received at two substations owned by us that can handle the additional power loads required for the expanded operations.
Our workforce at the Johnson Camp Mine is approximately 80 employees. We utilize contractors under our supervision for mining, drilling, blasting, loading and hauling the mined material. We manage all other activities at the Johnson Camp Mine.
Geological Setting and Mineralization
The Johnson Camp property is located along the east fold of the Little Dragoon Mountains in southeastern Arizona. The rocks exposed on the Johnson Camp property range from the Pinal Schist that is located at the western end of the Johnson Camp property to the Escabrosa Limestone that is located at the eastern end of the Johnson Camp property, all of which contain some quartz monzonite porphyry. Large disseminated copper deposits occur in several rock formations at the Johnson Camp Mine. In the region of the Burro and Copper Chief open pits, the copper–bearing rocks dip moderately to the northeast and consist of sedimentary rocks that have been intruded by two diabase dikes.
The main copper bearing host rock units at the Johnson Camp Mine are the Abrigo, Bolsa quartzite, Pioneer Shale, and the Diabase formations. The diabase formation is positioned at the base of the copper bearing rock units, overlain by the Bolsa quartzite, and the lower and middle Abrigo formations. In the Burro pit, oxide copper is located primarily on bedding planes as veins and replacements and along various fractures. In the Copper Chief pit, located approximately 1,500 feet to the north of the Burro pit, oxide copper occurs as disseminations in the diabase formation and along fractures within the diabase and in the Bolsa quartzite units. Other bulk–mineable copper exploration targets lie along trend from both the Copper Chief and Burro deposits.
The style of mineralization and the type of alteration recently mapped on the northern lower benches of the Burro pit suggest the possible presence beneath the property of a mineralized porphyry–type deposit.
22
In addition to the alteration evidence, a prominent magnetic low anomaly is present between the Burro pit and Copper Chief deposit supporting the possible presence of a porphyry–type deposit at depth. Porphyry copper deposits are typically very large, low grade and require processing by recovery processes much different than those currently at Johnson Camp Mine.
The following cross section diagram illustrates the relative positions, and the geologic and mineralized nature of the various formations in the Burro pit.
Figure 3: Burro Pit Area
The following cross section diagram illustrates the relative positions, and the geologic and mineralized nature of the various formations in the Copper Chief pit.
23
Figure 4: Copper Chief Deposit
Historic Copper Production
From 1975 to 1986, Cyprus mined approximately 15,000,000 tons of ore grading approximately 0.6 percent total copper from the Burro pit. In addition, approximately 12,000,000 tons of waste rock was produced. All ore placed on the heaps was run–of–mine (that is, not crushed). In total, approximately 107,000,000 pounds of cathode copper were produced by SX–EW methods.
Cyprus used a variety of analytical techniques to determine acid soluble copper grades during its operation of the Johnson Camp property and the copper grades for ore placed for leach were reported as acid soluble copper. Recovery of copper by Cyprus totaled 80 percent of the acid soluble copper grade placed on the leach pads. After the closure, Cyprus dismantled the SX–EW plant and moved the plant to another mine. Cyprus continued to maintain ownership of the Johnson Camp property until 1989, when it sold its holdings in the district to Arimetco.
In mid–1990, Arimetco constructed a new SX–EW plant on the Johnson Camp property, and rehabilitated the leach systems on the existing Cyprus pads and the collection, raffinate, and plant feed ponds. Arimetco resumed mining in the Burro pit in 1991, and made further improvements to the facility between 1993 and 1996. Arimetco began limited open pit mining from the Copper Chief deposit in 1996, and continued mining in both the Burro and Copper Chief deposits until 1997 when production was terminated. Ore placed on the heaps from 1991 through 1995 was run–of–mine (not crushed).
24
In 1996, based on metallurgical testing it conducted, Arimetco added a crushing plant to reduce the particle size of ore placed on the heaps in an effort to improve recoveries. The metallurgical test work indicated improved recoveries from crushed ore. We believe that the initial results from leaching of crushed ore placed on a new liner system installed by Arimetco were an increase in leach solution copper grade and an improvement in recoveries to the point where they matched the metallurgical test work performed on certain ore at a similar crush size. However, crushed ore represented less than 25 percent of the total ore that Arimetco had under leach. According to the Technical Report these operating results, along with the column leach test results, clearly support the need to crush the ore to obtain reasonable recoveries under heap leach conditions.
Production by Arimetco between 1991 and 1997 for the Burro and Copper Chief pits totaled approximately 16,000,000 tons of ore grading approximately 0.35 percent total copper and 12,000,000 tons of waste, primarily from the Burro pit, producing approximately 50,000,000 pounds of cathode copper. Arimetco achieved recoveries of approximately 43 percent of the total copper grade from mostly uncrushed ore placed on the heaps. Arimetco ceased mining operations in mid–1997.
The acid soluble copper assay techniques used by Arimetco for ore grade estimation are not directly comparable to the acid soluble copper assay techniques used by Cyprus. Arimetco recoveries were calculated based on total copper assays. The use of two different assay techniques by Cyprus and Arimetco could have led to inconsistencies in or the skewing of the data underlying our estimates, thereby increasing the risk of an overestimation of ore reserves at Johnson Camp Mine. (See “Risk Factors –Risks Related to Our Company”).
Reserves
A summary of the Johnson Camp proven and probable reserves as of December 31, 2009 are presented in the table below. Further details about the reserves on the Johnson Camp property can be found in the Technical Report.
| Johnson Camp Mine | ||||||||||||
| Summary of Proven and Probable Reserves | ||||||||||||
| Reserves | ||||||||||||
| Description | Tons | Copper | Recoverable Copper | |||||||||
| (thousands) | Grade (% Cu) | (millions of lbs) | (millions of lbs) | |||||||||
| Proven Reserves | 51,543 | 0.341 | 352 | 267 | ||||||||
| Probable Reserves | 17,260 | 0.329 | 114 | 86 | ||||||||
| Total | 68,803 | 0.338 | 466 | 353 | ||||||||
Notes:
- The ore reserves were estimated in accordance with Industry Guide 7 of the Securities and Exchange Commission (sometimes referred to in this annual report as the “SEC”) and CIM Guidelines.
- The actual tonnage and grade of reserves are generally expected to be within 90–95% of the estimate for proven reserves, and 70–80% for probable reserves.
- Reserves are based on a copper price of $1.50/lb and on total copper assays. Bikerman Engineering & Technology Associates used a copper price of $1.50/lb.
- Initial reserve estimates were based on operating costs estimated as of the second quarter of 2007.
- The internal cutoff grade used in the reserve analysis was 0.063 – 0.069 percent total copper (depending on rock type). All inferred resource blocks were treated as waste, regardless of their estimated copper grade
- No new resource or reserve estimates were performed in calendar year 2009, therefore, these reserves were calculated by subtracting the material volumes reported as mined in 2009.
25
Other Mineralized Material
In addition to the above mentioned reserves, mineralized material is contained in the Burro and Copper Chief deposits at the Johnson Camp property and was estimated using the guidelines established in, and is compliant with, Canadian NI 43–101 standards. In addition, there are numerous other prospects of mineralized material that remain to be explored and tested.
Drilling
Initial Drill Hole Database
The initial drill hole database for the Johnson Camp Mine consists of a total of 293 drill holes totaling 90,418 feet. Of these, 142 drill holes are contained in the Burro pit area and 151 drill holes are contained within the Copper Chief pit area. This database includes 12 confirmation diamond drill holes in the Burro and Copper Chief pit areas totaling 5,793 feet that were completed by Summo in 1998.
From October 1999 to January 2000 we conducted four exploration drilling programs using reverse circulation drilling in areas of the Johnson Camp property other than the Burro and Copper Chief deposit areas. Forty–three holes were drilled in the North area (above the Copper Chief), 17 holes were drilled in the Keystone area about one–half mile south of the Burro pit, a deep hole was drilled in the area between the Burro pit and the Copper Chief pit, and three condemnation holes were drilled in the area of our planned future leach pad and plant. Although certain drill results achieved in these four exploration drilling programs were encouraging, we found no copper mineralization that could be classified as reserves as a result of these programs.
Further Exploratory Drilling
In January 2008, we completed the first phase of preliminary exploratory drilling around the periphery of the existing boundaries of the Burro and Copper Chief pits. Twenty-five vertical reverse-circulation drill holes were completed adjacent to and to the south of the Burro Pit and in the Copper Chief deposit area on the Johnson Camp property. All of the related sample preparation and assays were performed utilizing industry standard analytical models by Arizona Assayers Inc., a laboratory independent to our company and doing business in Tucson, Arizona, as Skyline Assayers & Laboratories. A sample quality assurance/quality check program was followed, which called for the regular insertion of independent standards, blanks and duplicate samples.
The newer drill results, when combined with a previous drill hole, S-13, indicate the continuation of copper mineralization from the current south edge of the Burro Pit approximately 1,000 feet further to the south. The drill results also indicate that the copper mineralization in this area is hosted in the same rock units as at the Burro Pit. The drilling at Copper Chief increases the drill hole density within the current planned pit in the north area of the deposit and also expands copper mineralization to the northwest and southeast of the planned pit boundaries.
These drill results have been incorporated into a new block model for both the Burro and Copper Chief pits and new economic analysis and mine plans will be completed in 2010 that will be the basis for end of year 2010 reserves and pit limits. Additional drilling, primarily between the two mining pits is planned for 2010. If the drilling is completed, the results will be incorporated in the new economic analysis and mine plans in 2010.
26
Mining Operations
Based on the Technical Report, we expect the Johnson Camp Mine to produce approximately 25 million pounds of copper per year, for an anticipated mine life of approximately 16 years.
The current operating plan for the crushed ore is as follows: The ore is crushed to a P-80 of one inch (80% is less than one inch) and sulfuric acid is added to the ore in the agglomerator, where the leaching kinetics begin. The ore is stacked on existing leach pads at a height of 30 feet and a raffinate solution is applied at varying application rates and leached for approximately 150 days. Once the new material has been placed on the large, existing pads and leached for approximately 150 days, a second 30-foot lift is placed on the pads. Based on our stacking plan, the existing leach pads have sufficient surface area for approximately one more year at which time a new leach pad and pond will be constructed.
Use of Total Copper Assays
For the reasons discussed below, our estimate of ore reserves at the Johnson Camp Mine is based on total copper assays and recoveries rather than soluble copper assays and recoveries.
Total copper values were available for both the Copper Chief and Burro deposits. However, only 39 percent of the Copper Chief assay intervals also had acid soluble copper values, and the available data on acid soluble copper was incomplete for all samples. In addition, the database of acid soluble copper values for the Burro deposit reflects two different analytical techniques: (a) a conventional acid soluble method used by Cyprus for 94 of the holes included in the drill hole database; and (b) a more aggressive methodology used by Arimetco for the other 48 drill holes included in the database for the purpose of estimating the ultimate recoveries that may be experienced in the heaps at the Johnson Camp Mine. In summary, total copper assays were the only common denominator for all drill hole assays included in the drill hole database. A reserve estimate based on total copper is an indirect measurement of the amount of copper that is metallurgically available for recovery. Accordingly, there is a risk that we may have overestimated the amount of recoverable copper. (See “Risk Factors – Risks Related to Our Company”).
Data Verification
Four different major categories or levels of data verification have been completed at Johnson Camp Mine by Cyprus Copper, Arimetco, Summo, and others in evaluating the geological, drill hole, and assay database. Each major category or level of data verification provides a measure of confidence in the database. Bikerman Engineering & Technology Associates has concluded that taken in aggregate, all four categories provide corroboration and thus a higher degree of confidence in the data. The categories include: individual inter–company verifications; intra–company verifications; third party reviews; and reconciliations.
Inter–Company Verifications
Cyprus conducted drilling and assaying with both internal and external check assay procedures for data verification. Cyprus had samples assayed at more than one external lab for both total copper and acid–soluble copper. Those external labs were reputable commercial analytical labs commonly employed by the mining and exploration industry at the time. A quality assurance quality control, or QA/QC, procedure was also in place whereby Cyprus composited sample pulps and re–submitted the composite for assay as a comparison with the average of individual assays. In addition, Cyprus did bottle roll tests on core samples to provide an additional analysis for comparison. Bikerman Engineering & Technology Associates has concluded that, while these procedures were not done for every hole and every sample, they were done in sufficient amount to detect either errors in the analytical process or high variability in assays as a result of the geology and no significant or consistent variances were noted.
27
The majority of the drill holes in the resource database are core holes drilled by Cyprus. Arimetco drilled with core and by reverse circulation methods. Although Arimetco did not have the same quantity of internal or external check assays as Cyprus, Arimetco made extensive use of an independent, reputable commercial lab that is still in business today. In addition, Bikerman Engineering & Technology Associates has concluded that the Arimetco basic data, drill logs and assays sheets were done in sufficient quality typical of industry activity at the time (1990’s).
In summary, Bikerman Engineering & Technology Associates has concluded that both Cyprus and Arimetco conducted standard documented copper analyses in–house and with external labs, had some degree of QA/QC procedures in place and detected no significant problems with repeatability or accuracy of copper assays.
Intra–Company Verifications
The Johnson Camp Mine was operated by Cyprus and Arimetco and evaluated by Summo prior to our Company’s ownership of the Johnson Camp property. Arimetco conducted drilling and assaying that confirmed the work of Cyprus, and Summo conducted mapping, drilling and assaying that confirmed the work of Cyprus and Arimetco. Bikerman Engineering & Technology Associates has concluded that it is a very compelling verification procedure when a second and third company does confirmation drilling and assaying, with different drilling techniques and analytical labs, and the data is correlative.
Summo drilled four holes in the Burro pit and nine in the Copper Chief pit as reverse circulation drill holes. Bikerman Engineering & Technology Associates examined the assay sheets and drill hole logs for a randomly selected Summo drill hole in the Burro pit and for adjacent drill holes by Cyprus and determined that the assay values in all three holes had the same general range of copper values, in the same lithological units, and while not intended as true twin–holes, each drill hole generally verifies the others.
Third Party Reviews
Various third party independent reviews have been conducted on the Johnson Camp property. For example, in 1999, Summo commissioned an engineering firm to complete a feasibility study for the Johnson Camp property. In 2000, we commissioned an engineering firm to complete a feasibility study and in 2005 we requested an updated feasibility study and technical report for the Johnson Camp property. In the opinion of Bikerman Engineering & Technology Associates, these firms are known as reputable consulting/engineering companies providing audits, resource/reserve estimations and feasibility level evaluations to the mining industry. Bikerman Engineering & Technology Associates has reviewed these reports and concluded that there are no serious data verification issues and that these reports are reasonable. Bikerman Engineering & Technology Associates found few database errors and omissions and acceptable limits of error.
The Summo commissioned feasibility study examined the drill hole database, geology, assays, bulk density measurements, QA/QC procedures and completed various block model–to–drill hole comparisons, and reconciliations of the model with historical productions. The Summo commissioned feasibility study verified the block model grades of their resource estimate against the Arimetco drill hole database. Bikerman Engineering & Technology Associates has reviewed the Summo commissioned feasibility study and concluded that this work verifies that the constructed resource block model, is representative of the data base and that the examination by the engineering company and the prior operators verifies the database.
Independent sampling of remaining core to compare with historical assays was attempted, however a large portion of the split core from Cyrus drilling is no longer available and assays for samples that have been archived for over 20 years are not a good comparison with the originally fresh core samples.
28
However, Bikerman Engineering & Technology Associates has concluded that of the limited number of samples collected, individual sample variances occur, but globally the grades do not differ much.
Reconciliations
As the drill hole database is the foundation of the resource and reserve estimates, Bikerman Engineering & Technology Associates has concluded that the most significant verification of the drill hole database is the comparison of its derived block model with the production of mined material. This is accomplished by a reconciliation of the drill hole determined block model tonnage and grade against the blast–hole determined tonnage and grade. The results of reconciliations indicate the model generally replicated or slightly underestimated grade for similar tonnages.
The feasibility study commissioned by Summo compared total historical production with the block model and found both tonnage and grade to be within 0.8% of the combined Cyprus and Arimetco production. Bikerman Engineering & Technology Associates has concluded that this is a close correlation between the historical production and the database–derived block model. Reconciliations between the current model and actual production in 2009 found a similar close correlation.
Additional Third Party Review
A third party consulting firm observed, and Bikerman Engineering & Technology Associates concurred, that the basic information upon which verification relies is available for the Johnson Camp Property, including: pre–mine and post–mine mapping; drill hole geological logs; copies of daily drill reports; drill core sampling procedures (Cyprus); original or copies of original assay certificates from commercial analytical labs and the Cyprus Johnson Camp Mine lab; documented sample preparation and analytical procedures; standard analytical procedures used by laboratories, several vintages of geological maps, rock density procedures by an independent laboratory; blast hole pattern assay maps; production records as truck counts to leach dumps; actual production records (from blast holes) versus forecast production (from the deposit model); pre–feasibility and feasibility reports; current availability of geological personnel who actually performed some of the work; and a limited library of core samples and sample pulps.
In 2006, we commissioned a third party consultant to review the applicability of the drill hole data base. Bikerman Engineering & Technology Associates reviewed the verification work done by the consultant and concurs with the conclusions of the consultant. In April 2006, the consultant visited the Johnson Camp Mine and prepared a spreadsheet summary listing all available drill hole data. The consultant tabulated the rotary, reverse circulation and core drilling done on the Burro and Copper Chief deposits.
In May 2006, the consultant visited our Company’s offices in Tucson, Arizona for the purpose of completing an exhaustive audit of the Copper Chief and Burro Pit deposit electronic database. The consultant verified geologic drill hole logs for the model and verified assay certificates to the electronic database. Bikerman Engineering & Technology Associates considers the results of the verification to be quite positive. For example, the consultant checked, and confirmed approximately 40% of the Copper Chief electronic database and found two typographical errors, and he checked approximately 20% of the Burro Pit electronic data base and found one omission.
With the exception of two shallow drilling programs by Cyprus and Arimetco all the assay certificates for all the data in the electronic database have been located. Additionally, geologic logs for over 95% of the drilling completed in the resource areas have been located and were reviewed by Bikerman Engineering & Technology Associates.
In summary, all four levels of data verification have shown only minor database errors. Bikerman Engineering & Technology Associates have concluded that the minor database errors are within acceptable levels and have no reason to believe that the Johnson Camp resource database does not accurately reflect the drill logs.
29
Metallurgical Test Work
Metallurgical testing was completed in two programs. The first was authorized by Arimetco in May 1995 and was completed at an independent laboratory. The two ore samples that were subjected to testing were collected at the Johnson Camp Mine by Arimetco personnel and consisted of, respectively, approximately 2,000 pounds of run–of–mine schist/shale ore and 8,500 pounds of run–of–mine diabase ore. Seven column tests were used to evaluate the influence of crush size on copper extraction and each ore was tested at a nominal crush size of three inches and a nominal crush size of one inch. The results of the tests showed that when leached for 60 days, crushing the ore significantly increased the copper extraction for both sizes of crushed ore. The ore was still leaching copper when the test program was stopped at 60 days.
The second test program was authorized by Summo in August 1998 and was completed at another independent laboratory. Summo personnel collected the bulk ore samples from the Burro and Copper Chief pits. The locations of the bulk samples were based on preliminary channel sampling. The rock types chosen for sampling from the Burro pit included Lower Abrigo Formation, Bolsa Quartzite and two types of diabase ore. Only a bulk sample of oxidized diabase was obtainable to represent the Copper Chief ore, but a study of polished mineralogical sections prepared from core and/or reverse circulation drill cuttings indicated that the diabase samples taken from the Burro pit were representative of the diabase material contained in the Copper Chief deposit.
Copper mineralogy varies within the deposits. In the Burro pit, approximately 76% of the total estimated ore reserve tonnage is located above a depth of 4,560 feet in a zone dominated by the copper oxide minerals chrysocolla and malachite. Some native copper has been observed disseminated throughout this range. In addition to copper oxide mineralization, copper sulfide mineralization is evident below an elevation of 4,600 feet “in a mixed zone”. Sulfide minerals, which typically convert to oxides on exposure to oxygen, are not as amenable to heap leach copper recovery techniques as oxides. Accordingly, we believe that approximately 24% of the ore reserve in the Burro pit could exhibit reduced copper recovery due to the presence of copper sulfide mineralization.
In the Copper Chief pit, the oxide copper mineralization is similar to that of the Burro pit. The entire Copper Chief pit ore reserve is located above the 4,560 elevation in the zone dominated by the copper oxide minerals chrysocolla and malachite. We do not expect that the recovery of copper from this deposit will be materially affected by sulfide mineralization.
In summary, for the total project, approximately 85% of the ore reserves are located above the 4,560 elevation in the zone dominated by the copper oxide minerals chrysocolla and malachite. Approximately 15% of the total ore reserves could exhibit reduced copper recovery due to the presence of copper sulfide mineralization.
The bulk samples for the Summo metallurgical testing were taken from several areas of the Burro and Copper Chief pits, with all sample locations above the 4,560 foot elevation in the zone dominated by the copper oxide minerals chrysocolla and malachite. The assay results for the Abrigo formation sample taken from an elevation of 4,620 feet, however, indicated a sulfide content of 4.49% . This suggests that the leaching of copper from ore mined at this elevation may be less than optimal.
The Summo test work initially consisted of five columns, each containing 135 kilograms (approximately 298 pounds) of ore, taken from five ore samples of approximately 1,000 pounds each. Some problems were encountered with the first five columns, however, so an additional six columns were prepared and tested. All column tests were conducted at a nominal crush size of one inch based on the results from the Arimetco program, except one which was done at a nominal crush size of ½ inch.
30
The forecasted recoveries of copper that were reviewed by Bikerman Engineering & Technology Associates in preparing their technical report are based on the column tests and are dependent on the crushing of the ore to a nominal size of one inch. The Arimetco test program indicated the importance of this parameter. Cyprus operated the Johnson Camp Mine for a run–of–mine operation whereby non–crushed ore was placed on the leach pads. Arimetco also ran the Johnson Camp Mine as a run–of–mine operation until late 1995 at which time it began crushing the ore to approximately 3 inches. Our current copper recovery estimates provide for extracting 74 to 81 percent of the total copper content of the ore mined, depending on ore type and with crushing to a nominal size of one inch.
According to Cyprus’ records, it achieved copper extraction of up to 80 percent of the acid soluble copper from uncrushed, run–of–mine material. However, the Arimetco operation, which leached new run–of–mine ore, old Cyprus run–of–mine ore, and 4,300,000 tons of ore reported to have been crushed to a nominal size of three inches, achieved copper recovery (from 1991 through 1998) of 43 percent of total copper. Arimetco’s records do not distinguish between copper extracted from old Cyprus material, new run–of–mine ore, and new crushed ore.
In preparing its technical report, Bikerman Engineering & Technology Associates reviewed the metallurgical test work and concurred with the metallurgical recovery estimates. As indicated above, however, the increase in projected copper recovery rates over the historic copper recovery rates is premised on ensuring that the ore is crushed to a nominal size of one inch prior to being placed on the leach pads. This is consistent with Arimetco’s initial results from leaching of crushed ore placed on a new liner system – namely, an increase in leach solution copper grade and an improvement in recoveries to the point where they matched the metallurgical test work performed on certain ore at a similar crush size.
In summary, our expectations with respect to copper recovery rates significantly exceed historical experience at the Johnson Camp Mine, as we are crushing the ore to a smaller size than previously crushed with the view to increasing leaching efficiency. We believe that our expectations are reasonable, given our view that Cyprus and Arimetco placed uncrushed or improperly crushed ore on the leach pads, which resulted in differing recovery projections and rates. However, there can be no assurance that we will be able to meet these expectations and projections at an operational level. (See “Risk Factors – Risks Related to Our Company”).
We caution that copper recovery rates for ore anticipated to be mined below the 4,560 foot elevation (approximately 15% of estimated total ore reserves) may be inhibited due to the presence of copper sulfide mineralization. In addition, although the column test on the sample of Abrigo ore which contained 4.49% sulfides exhibited good copper recoveries (as shown in the table below under the subheading “Recovery Curves”), the leaching of copper from ore mined below this elevation may be less than optimal.
Royalty Obligations
Copper metal produced from Johnson Camp Mine is subject to a $0.02 per pound royalty payable to Arimetco when copper prices are in excess of $1.00 per pound. The royalty is capped at an aggregate of $1,000,000. During 2009 and 2008, our Company accrued royalty expense of $164,849 and $58,032, respectively, and as of December 31, 2009, our Company has incurred and paid a total of $222,881 and $166,480, respectively, under this commitment.
On March 31, 2009, we sold a 2.5% royalty on the mineral production sold from the existing mineral rights at Johnson Camp to International Royalty Corporation, acting through its subsidiary, IRC Nevada Inc., for net proceeds of approximately $4,950,000. During 2009, we accrued royalty expense of $489,150 and made payments of $105,824.
31
United States Mining and Environmental Laws
Arizona State Mining Laws
Mining in the State of Arizona is subject to federal, state and local laws. Three types of these laws are of particular importance to the Johnson Camp property: those affecting land ownership and mining rights; those regulating mining operations; and those dealing with the environment. The Johnson Camp current mining operations are located on private land including both patented mining claims and fee simple lands.
Our exploration activities in the United States are subject to regulation by governmental agencies under various mining and environmental laws. The nature and scope of regulation depends on a variety of factors, including the type of activities being conducted, the ownership status of land on which the operations are located, the nature of the resources affected, the states in which the operations are located, the delegation of federal air and water–pollution control and other programs to state agencies, and the structure and organization of state and local permitting agencies. We evaluate our projects in light of the cost and impact of current regulations on the proposed activity, and evaluate new laws and regulations as they develop to determine the impact on, and changes necessary to, our operations.
The Johnson Camp property also includes unpatented claims. The rights of mineral claimants on federal lands are governed by both the Mining Law of 1872 and the mining claim location requirements of Arizona law. Under federal mining law, a mining claim may be patented and conveyed from the United States into fee ownership. An unpatented mining claim is a right of possession in the claimant to develop and mine federal lands and minerals owned by the United States. Mining claims are located in accordance with both state and federal law, which require notice by monumenting and registration with the county recorder; an annual affidavit showing monies spent on labor or improvements is required to maintain the claim. Congress has placed a moratorium on the processing of mineral patent applications filed after 1994.
Generally, compliance with environmental and related mining health and safety laws and regulations, including the federal Mine Safety and Health Act, requires us to obtain permits issued by regulatory agencies and to file various reports, keep records of our operations and respond to governmental inspections. Some permits require periodic renewal or review of their conditions and may be subject to a public review process during which opposition to our proposed operations may be encountered.
U.S. Federal and State Environmental Law
Our past and future activities in the United States may cause us to be subject to liability under various federal and state laws for the protection of the environment.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA), imposes strict, joint, and several liability on parties associated with releases or threats of releases of hazardous substances. Liable parties include, among others, the current owners and operators of facilities at which hazardous substances were disposed or released into the environment and past owners and operators of properties who owned such properties at the time of such disposal or release. This liability could include response costs for removing or remediating the release and damages to natural resources. Arizona’s analogue to CERCLA, is the Water Quality Assurance Revolving Fund (WQARF) statute.
Under the Resource Conservation and Recovery Act (RCRA) and related state laws, including the Arizona Hazardous Waste Management Act (HWMA), the generation, transport, treatment, storage, and disposal
32
of hazardous or solid wastes associated with certain mining–related activities are highly regulated. Administration of the federal RCRA programs was delegated to Arizona and is handled through the HWMA. RCRA and HWMA costs may also include corrective action or clean–up costs. Failure to comply can create a fineable condition.
Mining operations may produce air emissions, including fugitive dust and other air pollutants, from stationary equipment, such as crushers and storage facilities, and from mobile sources such as trucks and heavy construction equipment. All of these sources are subject to review, monitoring, permitting, and/or control requirements under the federal Clean Air Act and related state air quality laws. The substantive requirements of the Clean Air Act, including permitting and enforcement of standards are administered by Arizona and certain counties depending upon the size and nature of sources of air emissions. Air quality permitting rules may impose limitations on our production levels or create additional capital expenditures in order to comply with the permitting conditions and regulated emissions. In August 2008, we received an air quality permit from ADEQ.
Under the federal Clean Water Act and delegated state water–quality programs, point–source discharges into “Waters of the United States” are regulated by the National Pollution Discharge Elimination System (NPDES) program. Section 404 of the Clean Water Act regulates the discharge of dredge and fill materials into “Waters of the United States,” including wetlands. Storm water discharges also are regulated and permitted under the storm water program. All of those programs impose permitting and other requirements on our operations. Arizona has been delegated authority under the federal NPDES permitting program. We maintain an active Storm Water Pollution Prevention Plan onsite and regularly update the plan according to new rules and/or changes in on-site conditions. In addition, certain proposed activities (increased heap leach pad capacity, new ponds and waste dump facilities) indicated potential assessment for applicability of a U.S. Army Corps of Engineers section 404 Dredge & Fill Permit. We are evaluating this circumstance.
We have also adopted a Spill Prevention Control and Counter Measures Plan.
The federal Pollution Prevention Act of 1990, that implements the Community–Right–To–Know portions of CERCLA, from time–to–time may require us to file annual toxic chemical release forms. This is dependent on the amount and character of the materials we will have and use at the facility.
The National Environmental Policy Act (NEPA) requires an assessment of the environmental impacts of “major” federal actions. The “federal action” requirement can be satisfied if the project involves federal land or if the federal government provides financing or permitting approvals. NEPA does not establish any substantive standards. It merely requires the analysis of any potential impact. The scope of the assessment process depends on the size of the project. An Environmental Assessment (EA) may be adequate for smaller projects which are found to have no significant impacts. An Environmental Impact Statement (EIS), which is much more detailed and broader in scope than an EA, is required for larger projects with significant impacts. NEPA compliance requirements for any of our proposed projects, such as federal approval of a mine plan involving more than five acres per year on unpatented mining claims, could result in additional costs or delays. There is no current Arizona law or state procedure comparable to the federal NEPA and the EA/EIS process. Although all current mine facilities on the Johnson Camp property are situated on private land, future exploration on the Johnson Camp property and our other properties may involve unpatented mining claims.
The Endangered Species Act (ESA) is administered by the U.S. Department of Interior’s U.S. Fish and Wildlife Service. The purpose of the ESA is to conserve and recover listed endangered and threatened species of flora and fauna and their habitat. Under the ESA, “endangered” means that a species is in danger of extinction throughout all or a significant portion of its range. “Threatened” means that a species is likely to become endangered within the foreseeable future. Under the ESA, it is unlawful to “take” a listed species, which can include harassing or harming members of such species or significantly
33
modifying their habitat. Arizona has similar laws protecting wildlife and native plants. We conduct wildlife and plant inventories as required as part of the environmental assessment process prior to initiating exploration projects.
Under Arizona’s Aquifer Protection Permit Program facilities that “discharge”, including certain mining operations, are required to obtain an Aquifer Protection Permit (“APP”). An APP application is currently pending review at the Arizona Department of Environmental Quality for the Johnson Camp Mine.
The Johnson Camp property has undergone mining activities for a period of over 125 years. We acquired the Johnson Camp property from Arimetco subject to a number of conditions that constituted aquifer protection law violations and compliance measures. Accordingly, in connection with the acquisition, Consent Order P–139–99 was entered with the ADEQ in June 1999. We agreed to upgrade and improve certain of the facilities and complete certain remediation activities at the Johnson Camp property by September 2000. On January 3, 2001, Consent Order P–401–01 was entered with the ADEQ which replaced Consent Order P–139–99. Consent Order P–401–01 allowed the Johnson Camp Mine to continue to operate and to make improvements to the facility with the view to bringing it into compliance with current Arizona statutes.
On September 7, 2002, the ADEQ issued Compliance Order APP–1 14–02. That order required the following:
-
the Johnson Camp Mine be brought into compliance with Arizona’s aquifer protection laws;
-
a Stipulated Judgment and Stipulated Judgment Entry Agreement be entered with the ADEQ which provided for civil penalties in the amount of $4,325,000 as a consequence of violation of Consent Order #P401-1 and the aquifer protection laws, subject to the agreement by the ADEQ that it would not file for entry of the judgment unless Compliance Order APP–1 14– 02 was violated and the violation was not cured on a timely basis, or unless we became the subject of a bankruptcy, insolvency or receivership proceeding prior to achieving compliance with Compliance Order APP–1 14–02; and
-
an Escrow Agreement be entered with the ADEQ requiring a $1,500,000 deposit by our Company into an escrow account to be used solely to pay for the direct costs of bringing the Johnson Camp Mine into compliance with Compliance Order APP–1 14–02 and the aquifer protection laws.
In response to Compliance Order APP–1 14–02, we applied the $1,500,000 in escrowed funds to environmental remediation activities at the Johnson Camp Mine and to the preparation and filing of an Aquifer Protection Permit application with the ADEQ in June 2003.
The ADEQ responded to the aquifer protection permit application by letter dated September 2, 2003 which identified a comprehensive list of specific deficiencies. A partial response was submitted on September 28, 2006, however certain financial assurances required by the ADEQ could not be provided at that time. In reply, the ADEQ issued an Administrative Review Notice dated May 18, 2007 which included, among other things, lack of the required financial assurances as a deficiency. We submitted a response on July 2, 2007, but were unable to provide certain financial assurances in a form acceptable to the ADEQ. On July 6, 2007, a notice of violation was issued citing the failure to provide the required financial assurances. On August 1, 2007, the outstanding financial assurances were submitted to the ADEQ, and, on August 10, 2007, a formal response to the notice of violation including documentation evidencing submission of financial assurances was filed.
On August 15, 2007, the ADEQ declared that all components necessary for the Aquifer Protection Permit application were received by the ADEQ, at which time the ADEQ commenced its substantive technical
34
review process. Since then, the ADEQ has made subsequent requests for information and we have made additional submissions in response. The most recent request for information is dated July 31, 2009. Nord responded with technical information on October 19, 2009, which is under review by the ADEQ.
During this permitting process we are allowed to produce copper from the Johnson Camp Mine while we continue to comply with the mandates of Compliance Order APP–1 14–02.
In addition, the ADEQ issued a Notice of Violation dated June 26, 2008 concerning alleged violations of the APP Program and indicating that certain violations constituted non–compliance with the Compliance Order APP–1 14–02. We timely responded to the Notice of Violation by submittal dated August 7, 2008, indicating that no such violations occurred. In addition, we performed certain remedial type actions with respect to various areas referenced in the ADEQ’s Notice of Violation. The ADEQ responded, indicating that it was not completely satisfied with our Company’s position and response. The parties conferred and we submitted additional information dated January 15, 2009 in accordance with the parties’ discussions. On March 26, 2009 ADEQ issued a letter to Nord indicating that ADEQ had met the documenting compliance requirements of the Notice of Violation.
We are committed to materially complying with all requirements under applicable environmental laws and regulations. These laws and regulations are continually changing and, as a general matter, are becoming more restrictive. Our policy is to conduct our business in a manner that safeguards public health and mitigates the environmental effects of our business activities. To comply with these laws and regulations, we have made, and in the future may be required to make, capital and operating expenditures.
U.S. Federal and State Reclamation Requirements
We are subject to mine plan and land reclamation requirements under the Federal Land Policy and Management Act and/or the Arizona Mined Land Reclamation provisions, which are implemented through permits and operations and reclamation plans that apply to exploration and mining activities. These requirements mandate reclamation of disturbed areas and require the posting of bonds or other financial assurance in an amount sufficient to satisfy expected reclamation costs. If reclamation obligations are not met, the designated agency could draw on these bonds and letters of credit to fund expenditures for reclamation requirements.
Reclamation requirements generally include stabilizing, contouring, and re–vegetating disturbed lands, controlling drainage from portals and waste rock dumps, removing roads and structures, neutralizing or removing process solutions, monitoring groundwater at the mining site, and maintaining visual aesthetics. We believe that we are currently in substantial compliance with and are committed to maintaining all of our financial assurance and reclamation obligations pursuant to our permits and applicable laws.
Our Reclamation and Closure Plan
The previous owner of the Johnson Camp property, Arimetco Inc., had no reclamation or closure plans, nor is there a bond outstanding to perform reclamation and closure activities. We submitted our reclamation and mine closure plan to the Arizona State Mine Inspectors Office in July 2007 which plan contemplates reclaiming all mining disturbances occurring after 1987 to a level that will support the designated post–mining land use. Open pit mines are excluded from reclamation requirements; however, waste dumps, tailing piles, leach facilities, process water ponds, site buildings and roadways will require closure and reclamation.
Components of our reclamation plan and closure plan include four separate post mining land use objectives based on public safety, existing and historic land uses, climate, soil quantity and quality, and economic feasibility. These include: rangeland; future mineral exploration and development; storm water management and processing waste rock materials for sale as landscape material, riprap and railroad ballast to contractors and the public.
35
Our closure plan includes measures to be taken to prevent discharges of pollutants from the facility after operations cease, the methods that we will use to secure the facility, and any other measures needed to protect groundwater resources, including post–closure monitoring and maintenance as needed. Mine closure costs from existing and future impacts of the contemplated operations have been estimated to total $1,850,000. The financial projection assumes a salvage value of the mining, process and service equipment of $2,512,000, a value in excess of the estimated mine closure cost.
Status of Permits – Summary
The development, operation, closure and reclamation of mining projects in the United States requires numerous notifications, permits, authorizations and public agency decisions. This section does not attempt to exhaustively identify all of the permits and authorizations that need to be obtained, but instead focuses on those that are considered to be the main permits that are on the critical path for project startup. These are summarized in the table below:
| Permit | Status |
| Compliance Order |
Currently allows copper production from site. Compliance with this order requires material compliance with its contents and the issuance of the Aquifer Protection Permit. |
| Air Quality Permit |
In August 2008, an air quality permit was issued from the ADEQ which permitted construction and further mining and crushing operations at the Johnson Camp Mine. |
| Hazardous Material Transport and Storage |
None Required. Material Safety Data Sheets are maintained on property. |
| Explosives Storage and Use |
Mining Contractor is responsible for use and storage of explosives and is permitted accordingly. |
| Weights and Measures |
Site is licensed by the Arizona Department of Weights and Measures for the weighing of cathode copper for shipment and sale. |
| Aquifer Protection Permit (APP) |
Application is currently under technical review by ADEQ. |
| Storm Water National Pollutant Discharge Elimination System |
Permit number AZR05B377 issued on March 7, 2001. A Storm Water Pollution Prevention Plan has been fully developed and was revised and updated in December 2008. |
| Water Supply |
4 existing wells are permitted: Moore Mine (#36–66376), Republic Mine (#36–66377), Black Prince Mine (#36–66378) and Section 19 Well (#36–66379). Nord is currently working with its engineering consultant and ADEQ for approval of an on–site drinking water system. |
| Reclamation and Mine Closure Plan |
Reclamation and Mine Closure Plan with adequate financial assurances was submitted to the Arizona State Mine Inspectors Office in July 2007. The Plan is under review. |
36
Landscape and Aggregate Rock Operation
The Johnson Camp property includes decorative and structural stone operations, which produce landscape and aggregate rock from the overburden piles at the Johnson Camp Mine. Until January 31, 2009, we leased the landscape rock operation to JC Rock, LLC and the aggregate rock operation to Texas Canyon Rock & Sand Inc. in exchange for sliding scale royalties. Effective February 1, 2009, we commenced managing the landscape rock operation although the landscape rock is processed by a third party; the aggregate rock operation continues to be leased to Texas Canyon Rock & Sand.
The rock currently being sold for landscaping purposes is bolsa quartzite, and is known in the market as Coronado Brown. We caused Cochise Aggregates and Materials, Inc. to certify “Coronado Brown Landscape Rock” as a trade name in the State of Arizona on July 15, 2005. We do not consider that the landscape and aggregate rock operations material to our financial results of operation.
OTHER PROPERTIES
In addition to the Johnson Camp property, we have an option to acquire an interest in the Texas Arizona claim, an exploration stage project that we do not consider to be material to our overall operations at this time.
Texas Arizona Mines Project
In July 2004, we entered into an option agreement with an individual named Shirley Bailey to acquire a 100% interest in four unpatented mining claims for a polymetallic exploration target in Cochise County, Arizona, known as the Texas Arizona Mine. We paid $980 to acquire the option in 2004 and an additional $10,000 in 2008 to exercise the option. The claims are located in the Johnson Mining District approximately three miles from the Johnson Camp Mine.
| ITEM 3. | LEGAL PROCEEDINGS |
Other than as set forth below, we know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest. The outcome of open unresolved legal proceedings is presently indeterminable. Any settlement resulting from resolution of these contingencies will be accounted for in the period of settlement. We do not believe the potential outcome from any legal proceedings that remain unresolved will significantly impact our financial position, results of operations or cash flows.
Arizona Department of Environmental Quality (ADEQ) Compliance Order and Stipulated Judgment
As previously disclosed in prior annual reports on Form 10–KSB, the ADEQ issued a Compliance Order on September 7, 2002, requiring our Company to bring the Johnson Camp Mine into compliance with Arizona’s aquifer protection laws. Pursuant to the Compliance Order, we entered into a stipulated judgment with the ADEQ which assessed civil penalties against us in the amount of $4,325,000. The stipulated judgment can only be entered should a default notice issued pursuant to the Compliance Order not be cured within 60 days after notice is received. The Compliance Order further provides that any future violations of Arizona’s aquifer protection laws would subject us to additional civil penalties, including the entry of the stipulated judgment and the assessment of the civil penalties described in the stipulated judgment. See the discussion in Item 2, under the heading “Properties - United States Mining and Environmental Laws: U.S. Federal and State Environmental Law,” for additional information regarding status of the Compliance Order.
37
Patent Infringement Lawsuit
In January 2009, a lawsuit was filed by Corrosion IP Corp. and CTI Southwest, LLC against our Company alleging that certain containers for corrosive materials purchased by us from Novenco Consultants Limited infringe on three patents held by the plaintiffs, and further alleging that we have infringed on a copyrighted drawing owned by the plaintiffs. We have filed an answer denying all liability and have also filed a Third Party Complaint against Novenco. Prior to our purchase of the containers from Novenco, Novenco assured us that the containers did not infringe on any patents held by others and provided our Company with an indemnification agreement whereby Novenco agreed to indemnify our Company from any damages that might arise from a claim of patent infringement. We believe that the containers do not infringe on any patents held by the plaintiffs. We also believe that, in any event, Novenco will be held responsible for any possible damages. We are mitigating our risks associated with the litigation by assembling proof that the plaintiffs’ allegations are false and further through the Third Party Complaint against Novenco. We believe that if the plaintiffs are successful, the resulting award of damages against us, if any, will not be material to the financial condition of our Company.
Complaint by Former Employee
The Company received notice of Complaints filed with the U.S. Department of Labor and the Office of the Attorney General of the State of Arizona alleging discriminatory employment practices by our Company against a former employee in violation of Section 806 of the Corporate Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1514A and the Arizona Civil Rights. The Company denies all material allegations set forth in the Complaints and has engaged legal counsel to respond to the Complaints and represent the Company with respect to the investigations. The Company intends to vigorously defend itself against these matters and does not believe that it will be held liable for these claims. The Company also believes that if the former employee is successful, the resulting award of damages (net of insurance reimbursement) against the Company, if any, will not be material to the financial condition of the Company.
| ITEM 4. | (Removed and Reserved) |
PART II
| ITEM 5. | MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock was traded on the New York Stock Exchange from September 1985 until November 18, 1999. Thereafter, it was traded on the Over–The–Counter Bulletin Board until May 31, 2001 and Pink OTC Markets Inc. (formerly, Pink Sheets, LLC) until March 4, 2008. Our common stock commenced trading on the Toronto Stock Exchange, in Canadian dollars, under the symbol “NRD” on January 21, 2008, and on the OTC Bulletin Board under the symbol “NRDS” on March 5, 2008. The following table sets forth, for the calendar periods indicated, the high and low closing sale price of our common stock on the Pink Sheets LLC (now the Pink OTC Markets Inc.), the TSX and the OTC Bulletin Board. The prices relating to the OTC markets reflect inter–dealer prices, without retail mark–up, markdown or commission and may not represent actual transactions.
| OTC Bulletin Board | ||||||
| 2009 | 2008 | |||||
| 1st Quarter | $ | 0.15 – 0.32 | $ | 0.80 – 0.96 | (1) | |
38
| 2nd Quarter | 0.29 – 0.64 | 0.66 – 0.95 | ||||
| 3rd Quarter | 0.32 – 0.48 | 0.28 – 0.80 | ||||
| 4th Quarter | 0.36 – 0.56 | 0.08 – 0.59 | ||||
| (1) Since March 5, 2008 | ||||||
| Toronto Stock Exchange | ||||||
| 2009 | 2008 | |||||
| 1st Quarter | CDN$0.18 – 0.30 | CDN$0.67 – 1.15 | (1) | |||
| 2nd Quarter | 0.35 – 0.68 | 0.70 – 1.00 | ||||
| 3rd Quarter | 0.41 – 0.49 | 0.36 – 0.88 | ||||
| 4th Quarter | 0.42 – 0.59 | 0.06 – 0.61 | ||||
| (1) Since January 21, 2008 | ||||||
Holders
The number of record holders of our common stock, $0.01 par value, as of March 15, 2010 was 1,987.
Dividends
We have not, since the date of our incorporation, declared or paid any dividends on our common shares. In addition, pursuant to the terms of our Amended and Restated Credit Agreement with Nedbank, we are restricted from paying dividends or making distributions on shares of our common stock. Therefore, we anticipate that we will retain future earnings and other cash resources for the operation and development of our business for the foreseeable future. The payment of dividends in the future will depend on our earnings, if any, and our financial condition and such other factors as our board of directors considers appropriate.
Equity Compensation Plans
We have adopted a stock incentive plan (which includes a subpart governing deferred stock units in lieu of the DSU Plan) (the “2006 Stock Incentive Plan”) which was approved by our stockholders at our Annual General Meeting held on October 18, 2006. Amendments to the 2006 Stock Incentive Plan were approved by our stockholders at our Annual General Meeting held on October 15, 2008. The amendments have been incorporated into an Amended and Restated 2006 Stock Incentive Plan (the “Amended and Restated 2006 Stock Incentive Plan”) which has been filed with the SEC.
A total of 6,000,000 shares of common stock have been reserved for issuance under all awards that may be granted under the Amended and Restated 2006 Stock Incentive Plan. “Eligible Participants” who are entitled to participate in the Amended and Restated 2006 Stock Incentive Plan consist of employees, directors and consultants of (a) our Company or (b) any of the following entities: (i) any “parent corporation” as defined in section 424(e) of the Internal Revenue Code of 1986, as amended (the “Code”); (ii) any “subsidiary corporation” as defined in section 424(f) of the Code; or (iii) any business, corporation, partnership, limited liability company or other entity in which our Company, a parent corporation or a subsidiary corporation holds a substantial ownership interest, directly or indirectly.
The Amended and Restated 2006 Stock Incentive Plan provides for the granting to Eligible Participants of such incentive awards (each, an “Award”) as the administrator of the Amended and Restated 2006 Stock Incentive Plan (the “Administrator”) may from time to time approve. The Amended and Restated 2006 Stock Incentive Plan includes the following provisions:
39
| (a) |
the Administrator will be a Committee of the Board of Directors of our Company appointed to act in such capacity, or otherwise, the Board of Directors itself; |
| (b) |
each Award will be subject to a separate award agreement (an “Award Agreement”) to be executed by our Company and the Grantee, which shall specify the term of the Award; and |
| (c) |
subject to applicable laws, including the rules of any applicable stock exchange or national market system, the Administrator will be authorized to grant any type of Award to an Eligible Participant (9a “Grantee”) that is not inconsistent with the provisions of the plan, and the specific terms and provisions of which are set forth in an Award Agreement, and that by its terms involves or may involve the issuance of: (i) shares of common stock, (ii) a stock option, (iii) a stock appreciation right entitling the Grantee to acquire such number of shares of common stock or such cash compensation as will be determined by reference to any appreciation in the value of our Company’s common stock, (iv) restricted stock issuable for such consideration (if any) and subject to such restrictions as may be established by the Administrator, (v) unrestricted stock issuable for such consideration (if any) on such terms and conditions as may be established by the Administrator, (vi) restricted stock units, subject to such restrictions as may be imposed by the Administrator, and represented by notional accounts maintained in the respective names of the Grantees that are valued solely by reference to shares of common stock of our Company and payable only in shares after the restrictions have lapsed, (vii) deferred stock units issuable to eligible directors in lieu of certain eligible remuneration otherwise payable in shares of common stock, subject to settlement in accordance with the terms and conditions of the Award and represented by notional accounts maintained in the respective names of the Grantees, (viii) dividend equivalent rights, which are rights entitling the Grantee to receive credits for dividends that would be paid if the recipient had held a specified number of shares of common stock, (ix) any other security with the value derived from the value of our Company’s common stock, or (x) any combination of the foregoing. |
Any Award that is subject to a restriction will become fully exercisable only as set forth in the applicable Award Agreement. Nevertheless, the Amended and Restated 2006 Stock Incentive Plan provides the Administrator with the sole discretion, at any time, to declare any or all Awards to be fully or partially vested and exercisable, provided that the Administrator does not have the authority to accelerate or postpone the timing of payment or settlement with respect to Awards subject to Section 409A of the Code in a manner that would cause the Awards to be subject to certain related interest and penalty provisions. The Administrator may discriminate among Eligible Participants or among Awards in exercising such discretion.
The Amended and Restated 2006 Stock Incentive Plan has specific provisions which apply to grants of Awards intended to qualify as “performance–based compensation”, as defined under section 162(m) of the Code, to any employees who are “covered employees” for the purposes of section 162(m)(3) of the Code.
Under the Amended and Restated 2006 Stock Incentive Plan, stock options may be granted as either incentive stock options under section 422 of the Code and the related regulations, or as non–incentive stock options under section 83 of the Code. As of December 31, 2009, we have granted a total of 5,110,000 non–qualified stock options, 946,991 DSUs and 200,000 incentive stock options under the Amended and Restated 2006 Stock Incentive Plan. In addition, 679,330 previously issued non–qualified stock options have been cancelled.
We have also granted non–qualified stock options under individual compensation arrangements, which have been authorized by our board of directors. Such options have been granted outside of, and are therefore not subject to, the Amended and Restated 2006 Stock Incentive Plan.
To date, certain equity–based fees have been paid to our non–executive directors in the form of awards issued pursuant to our Company’s Amended and Restated 2006 Stock Incentive Plan. The non–executive directors have limited rights, exercisable within applicable time limits, to elect to have any percentage of such awards, and any percentage of cash fees, payable in deferred stock units. Each of our non–executive directors exercised such rights in respect of the equity–based fees payable to him for services rendered during the year ended December 31, 2009.
40
The following table provides a summary of the number of stock options and deferred stock units outstanding as at December 31, 2009.
| Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |
| Equity compensation plans approved by security holders |
5,007,602(1) |
0.51(3) |
422,339 |
| Equity compensation plans not approved by security holders |
1,281,674 |
0.51 | N/A |
| Total(2) | 6,289,276(1) | 0.51 | 422,339 |
Notes:
| (1) |
Includes 4,274,001 shares of common stock reserved for issuance in connection with stock options granted under the 2006 Stock Incentive Plan, and 733,601 shares of common stock reserved for issuance in connection with deferred stock units granted to our Company’s non–executive directors under the 2006 Stock Incentive Plan and 213,390 common shares issued pursuant to the conversion of deferred stock units. A total of 68,421 deferred stock units were not issued until January, 2010, but are included in this table as they were issued to our non–executive directors in respect of services rendered during the quarter ended December 31, 2009. Does not include 123,363 common shares issued pursuant to the conversion of deferred stock units. |
| (2) |
Includes certain options granted to executive officers pursuant to employment agreements described in more detail under the caption “Employment Contracts and Termination of Employment and Change–In–Control Arrangements.” |
| (3) |
The deferred stock units are disregarded for purposes of calculating the weighted average exercise price of outstanding options. |
Recent Sales of Unregistered Securities
We have reported sales of securities without registration under the Securities Act of 1933 during our fiscal year ended December 31, 2009 on the following quarterly reports on Form 10–Q, as filed with the Securities and Exchange Commission.
| Report | Date of Filing with SEC |
| Annual Report on Form 10–K for the year ended December 31, 2008 |
March 31, 2009 |
| Quarterly Report on Form 10–Q for the quarterly period ended March 31, 2009 |
May 15, 2009 |
| Quarterly Report on Form 10–Q for the quarterly period ended June 30, 2009 |
August 14, 2009 |
41
| Amended Quarterly Report on Form 10–Q/A for the quarterly period ended March 31, 2009 |
September 17, 2009 |
| Amended Annual Report on Form 10–K/A for the year ended December 31, 2008 |
September 17, 2009 |
| Quarterly Report on Form 10–Q for the quarterly period ended September 30, 2009 |
November 13, 2009 |
| Amended Quarterly Report on Form 10–Q for the quarterly period ended September 30, 2009 |
November 16, 2009
|
During the year ended December 31, 2009, we issued the following securities without registration under the Securities Act of 1933 which have not been reported on the Annual Report on Form 10–KSB and the Quarterly Reports on Form 10–Q described above:
To date, certain equity–based fees have been paid to our non–executive directors in the form of awards issued pursuant to our Company’s Amended and Restated 2006 Stock Incentive Plan. The non–executive directors have limited rights, exercisable within applicable time limits, to elect to have any percentage of such awards, and any percentage of cash fees, payable in deferred stock units. Each of our non–executive directors has exercised such rights in respect of the equity–based fees payable to him for services rendered during the year ended December 31, 2009. Our non–executive directors earned the following additional deferred stock units during the year ended December 31, 2009: John Cook, the Chairman of the Compensation Committee, earned 85,329 deferred stock units; Douglas Hamilton, the Chairman of our Audit Committee, earned 105,021 deferred stock units; Stephen Seymour, the Chairman of our Corporate Governance and Nominating Committee earned 85,329 deferred stock units; and T. Sean Harvey earned 65,638 deferred stock units. We issued these securities to the directors, each of whom is an accredited investor, relying on Section 4(2) of the Securities Act of 1933, as amended.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our shares of common stock or other securities during the year ended December 31, 2009.
| ITEM 6. | SELECTED FINANCIAL DATA |
We are a smaller reporting company as defined by Rule 12b–2 of the Exchange Act and are not required to provide the information required under this item.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of our financial condition, changes in financial condition and results of operations for the years ended December 31, 2009 and 2008 should be read in conjunction with our most recent audited consolidated financial statements for the years ended December 31, 2009 and 2008, which are included in this annual report, and the related notes to the financial statements. This discussion contains forward–looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward–looking statements as a result of many factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this annual report.
42
Overview of Our Business
We are a copper mining company. Our principal asset is the Johnson Camp Mine located in Arizona. The Johnson Camp Mine is an integrated open pit copper mine and a production facility that uses the solvent extraction, electrowinning (SX-EW) process. The Johnson Camp Mine includes two open pits, namely the Burro and the Copper Chief bulk mining pits. As described in more detail below, we have commenced production of copper from new ore in February of 2009 and achieved commercial copper cathode production from newly-mined ore on April 1, 2009.
We acquired the Johnson Camp Mine from Arimetco, Inc. pursuant to a Sales and Purchase Agreement that had been assigned to us in June 1999 by Summo USA Corporation, the original purchaser, following the completion of certain due diligence work by Summo. Although Arimetco had ceased mining on the property in 1997, we, like Arimetco before us, continued production of copper from ore that had been mined and placed on leach pads, and from 1999 to 2003 we (through our then subsidiary Nord Copper Company) produced approximately 4,490,045 pounds of copper cathode.
In August 2003, we placed the Johnson Camp Mine on a care and maintenance program due to weak market conditions for copper at that time. In June 2007 when conditions improved, we began the process of reactivating the Johnson Camp Mine.
On June 5, 2007, we completed an unregistered private placement offering of 30,666,700 special warrants for aggregate proceeds of approximately $23 million (net proceeds of approximately $21.3 million). In addition, we entered into our credit agreement dated as of June 28, 2007 with Nedbank Limited, as administrative agent and lead arranger, which provided for a $25 million secured term loan credit facility. As of September 30, 2009, we had drawn the entire credit facility. All of the funds available under such facility have been used by us to finance the construction, start-up and operation of mining and metal operations at the Johnson Camp Mine.
In September 2007, a feasibility study which forms part of a technical report was completed by Bikerman Engineering & Technology Associates, Inc. in accordance with National Instrument 43-101 Standards of Disclosure for Mineral Projects of the Canadian Securities Administrators (as required for us to comply with provincial securities laws in Canada that are applicable to our Company) and SEC Industry Guide No. 7. The feasibility study includes an economic analysis of the Johnson Camp Mine based on the mine plan, capital and operating cost estimates current as of the second quarter of 2007, and a three-year trailing average copper price of $2.45 per pound over the life of the mine. Bikerman Engineering & Technology Associates concluded in the feasibility study that resumption of operations at the Johnson Camp Mine in accordance with the mine plan will generate positive discounted cash flows over a 16 year mine life at 8%, 15% and 20% discount rates.
We commenced copper cathode production from leaching old dumps in January 2008 and completed the first copper cathode sale from these operations in February 2008.
We commenced mining of new ore upon completion of the reactivation work in January 2009. We commenced production of nominal amounts of copper from newly-mined ore during the testing and development phase of the mine in February and March 2009. We achieved commercial copper cathode production from newly-mined ore on April 1, 2009 and entered the production stage, following substantial completion of the testing and development phase.
The Johnson Camp property also includes a decorative and structural stone operation, which produces landscape and aggregate rock from the overburden piles at the Johnson Camp Mine. Beginning in February 2009, the Company took over the management of the landscape rock; however, we continue to lease the aggregate rock operation to a third party in exchange for a sliding scale royalty. Effective April 1, 2009, in accordance with the applicable guidance for accounting and reporting for by-products, we reclassified the revenue generated from the decorative and structural stone operation to costs applicable to sales on the condensed consolidated statement of operation.
43
Our Company was unable to make the payments of principal and interest, in the respective amounts of $1,789,201 and $456,612, due to Nedbank on September 30, 2009. On September 30, 2009, we entered into an extension agreement with Nedbank which allowed us additional time to arrange for a financing. On November 19, 2009, we paid the outstanding debt service payment plus an additional $29,153 in interest from the proceeds of the brokered private placement discussed below.
On November 5, 2009, we completed an unregistered, brokered private placement of 40 million units (the “Units”) for total gross proceeds of $12,000,000. In connection with the offering, which was effected in an offshore transaction pursuant to Rule 903 of Regulation S promulgated under the Securities Act of 1933, as amended, we paid the placement agent a commission equal to $600,000, or 5% of the gross proceeds of the offering. Each Unit, priced at $0.30, consisted of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of our Company at a price of $0.38 per share until June 5, 2012. Our net proceeds after payment of the costs of the offering, including agents’ commissions, were $11,237,809. The proceeds of the offering have been fully utilized to make debt service payments that under the Nedbank credit facility, to purchase approximately $500,000 in additional equipment, to reduce accounts payable, and for general working capital purposes. As of December 31, 2009, none of the warrants issued in this offering had been exercised.
On February 18, 2010, we received notice from Nedbank Capital Limited concerning our failure to fully pay the amount due on February 2, 2010 under our copper hedge agreement. At the time, we had paid $300,000 of the $674,895 amount due, and we were entitled to a curative period of 20 days within which to pay the outstanding balance of $374,895. We paid the balance of the payment due on February 2, 2010 under our copper hedge agreement with Nedbank Capital in early March 2010. We received a further notice from Nedbank Capital concerning our failure to make the $513,474 payment that was due on March 2, 2010 under the copper hedge agreement. This payment was made in full by mid-March 2010.
We received an exemption from certain shareholder approval requirements under the rules of the Toronto Stock Exchange in connection with the $12,000,000 private placement that we completed in November 2009, on the basis of financial hardship. Reliance on this exemption automatically triggered a de-listing review by the Toronto Stock Exchange to confirm that we continue to meet the Exchange’s listing requirements. While we believe that we continue to comply with such requirements, it is unclear what impact Nedbank Capital’s notices under the copper hedge agreement will have on the de-listing review. We have been informed by the Toronto Stock Exchange that the Continued Listings Committee has deferred its de-listing decision until after a meeting of the Committee scheduled to be held on April 21, 2010. We believe that we will be in compliance with the Exchange’s continued listing requirements at that time.
In March 2009, our credit agreement with Nedbank was amended and restated to provide for, among other things, the deferral of certain principal and interest payments until December 31, 2012 and March 31, 2013. While we made the scheduled principal and interest payment that was due on December 31, 2009 in the approximate amount of $2,200,000, we were unable to make the scheduled principal and interest payment that was due on March 31, 2010 in the approximate amount of $2,175,000. Accordingly, our Company and Nedbank have entered into an unconditional forbearance and extension agreement dated March 30, 2010 that allows us a forbearance period of 21 days to negotiate an amendment to the credit agreement as it pertains to the March 31, 2010 payment and other terms therein. If upon the expiration of the 21 day period, we have not been successful in amending the credit agreement, Nedbank will have full authority to exercise its rights under the credit agreement, including the acceleration of the full amount due thereunder and institution of foreclosure proceedings against the related security. Any such actions could force us into bankruptcy or liquidation.
44
Our Plan of Operations
Overview
We commenced the reactivation process at the Johnson Camp Mine in late June 2007. Our current reactivation plan includes an estimated full production rate of 25 million pounds of copper cathode per annum.
Our mining operations include residual leaching of the existing old dumps and an active leach program of newly mined ore. As indicated above, copper production from residual leaching operations and the mining of new ore commenced in January 2008 and January 2009, respectively, and we achieved commercial copper cathode production from newly-mined ore on April 1, 2009.
We had previously defined commercial production as either operating at a minimum of 75% of the designed capacity of our processing facilities at the Johnson Camp Mine, or generating positive cash flows from mine operations for a period of seven days for residual leaching or thirty days for mining and processing of new ore. Our previous definition of commercial production – that is, production of copper at a level that would effectively place it into the production phase - was based upon a range of criteria, such as:
-
A nominated percentage of design capacity for the mine;
-
Mineral recoveries at or near expected levels; and
-
The achievement of continuous production or other output.
Our business, and our ability to realize our business objectives and implement our operating plan, are subject to a number of additional risks and uncertainties, including those discussed under the heading “Risk Factors”.
Capital Costs
The initial capital costs to complete the reactivation of the Johnson Camp Mine were approximately $36 million. Such costs relate primarily to: (a) the rehabilitation of solution ponds; (b) refurbishment and a modest expansion of the SX-EW copper production facility; (c) the installation of our primary stage crusher, and the purchase and installation of two secondary stage crushers, an agglomerator and conveying equipment; and (d) other project-related items. Additional capital costs of approximately $8 million have been incurred to modify certain existing equipment and to enhance the material handling portion of the operation.
We estimate we will incur an additional $12 to $15 million in capital costs during the next three years, primarily for the development and construction of a new leach pad. These cost figures do not include estimated reclamation bonding requirements, and do not account for inflation, interest and other financing costs.
Liquidity and Financial Resources
Our Company’s continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to produce copper at a level where we can become profitable, to pay off existing debt and provide sufficient funds for general corporate purposes, all of
45
which is uncertain. Our condensed consolidated financial statements contain additional note disclosures to this effect, and the condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In ramping up the production of new ore, our Company has experienced some short-term challenges that resulted in a total production rate that has been less than management’s expectations. We do not consider such challenges to be unusual for a copper mining company during the development, testing and ramping up of mining operations and believe that they are only affecting the timing of reaching our target rate of 25 million pounds of copper production per year.
During the development, testing and ramping up of production, our Company made significant progress with a focus on increasing operating efficiencies. Continual optimization of mine plans is an important activity at any mine. Specifically, our Company has changed the mining pushback sequences that should allow us to achieve higher copper grades earlier in the mine life. We have achieved design crushing throughput rates on a daily basis and have made modifications to the crushing plant. These measures include modifications to the conveyor chutes and belt skirting to handle variations in the ore characteristics and installation of two vibratory feeders that will allow choke feeding the secondary crushers to improve particle size and extend liner life.
We have been placing newly crushed ore on top of the old ore on the old leach pads. Every pad has its own distinctive characteristics and can vary depending on whether the old material on the pad was run-of mine or crushed and whether historic channeling occurred, and the depth of the old leach pad. To reduce this uncertainty, we contoured, compacted and installed a french drain on the largest pad and it has significantly reduced the time for solution to report directly to the SX-EW plant.
Forecasting copper production during a ramp up period is difficult for any reactivation of a leaching operation where residual leaching was done for an extended period of time. During residual leaching, copper is extracted from ore that was retained in the pads during normal operations. When new ore is placed on top of these pads, some of this new copper is retained in the old pads until a more steady state is reached. This copper will eventually be extracted over time, but during a ramp up period it is difficult to forecast the related volumes.
The temporary delay in the ramp up of our production rate has negatively impacted our Company’s cash flow in the short term. Our Company closed a $12 million private placement on November 5, 2009. We paid a cash commission of $600,000, equal to 5% of the gross proceeds of the offering, leaving net proceeds to our Company approximately $11.4 million. As indicated above, the proceeds of the offering have been fully utilized to make debt service payments under the Nedbank credit facility, to purchase approximately $500,000 in additional equipment, to reduce accounts payable, and for general working capital purposes.
As disclosed above, while we made the scheduled principal and interest payment that was due under our amended and restated credit agreement with Nedbank on December 31, 2009, we were unable to make the scheduled principal and interest payment that was due on March 31, 2010 in the approximate amount of $2,175,000. Accordingly, our Company and Nedbank have entered into an unconditional forbearance and extension agreement dated March 30, 2010 that allows us a forbearance period of 21 days to negotiate an amendment to the credit agreement as it pertains to the March 31, 2010 payment and other terms therein. If upon the expiration of the 21 day period, we have not been successful in amending the credit agreement, Nedbank will have full authority to exercise its rights under the credit agreement, including the acceleration of the full amount due thereunder and institution of foreclosure proceedings against the related security. Any such actions could force us into bankruptcy or liquidation.
As also disclosed above, on February 18, 2010, we received notice from Nedbank Capital Limited concerning our failure to fully pay the amount due on February 2, 2010 under our copper hedge agreement.
46
At the time, we had paid $300,000 of the $674,895 amount due, and we were entitled to a curative period of 20 days within which to pay the outstanding balance of $374,895. We paid the balance of the payment due on February 2, 2010 under our copper hedge agreement with Nedbank Capital in early March 2010. We received a further notice from Nedbank Capital concerning our failure to make the $513,474 payment that was due on March 2, 2010 under the copper hedge agreement. This payment was made in full by mid-March 2010. We had until March 23, 2010 to make the full payment, failing which an event of default would have occurred.
An event of default under the copper hedge agreement, if any, would have triggered a cross-default under the $25 million secured loan facility with Nedbank. In that case, Nedbank would have been in a position to pursue any and all remedies under the copper hedge agreement and the secured loan agreement.
We caution that the rate of increase in our copper production rate has been slower than expected, and that this has affected our operating cash flow. In late October 2009, the failure of a well casing contributed to several months of pregnant leach solution flow rates through our SX plant which were below our forecasts, which in turn resulted in lower than expected copper production. We believe that we have successfully taken measures to address these issues. By early January 2010, we had placed two new wells into operation at a capital cost of approximately $400,000. The new wells have resulted in significantly increased plant flow rates that now are at the levels that we had forecasted as necessary to achieve our production targets. With the increase in flow rates and continual increase in solution grades, we expect copper production to increase to a level to allow for breakeven operational cash flow, excluding the impact settlement of copper hedges, in April 2010, and to achieve positive operating cash flow in the second quarter of 2010. Our expectations in this regard are premised primarily on our assumption that our copper production levels will continue to rise as predicted, given the measures that we have taken to address the problems we have encountered in our mining and processing operations, and on our assumption that current input costs and copper prices will remain constant over the relevant period, which cannot be assured.
Cash and Working Capital
The following table sets forth our cash and working capital as of December 31, 2009 and 2008:
| As of | As of | |||||
| December 31, | December 31, | |||||
| 2009 | 2008 | |||||
| Cash reserves | $ | 1,298,138 | (1) | $ | 4,465,245 | (2) |
| Working capital surplus (deficiency) |
$ |
(7,652,818 |
)(3) |
$ |
(2,849,660 |
)(4) |
Notes:
| (1) |
Excludes and $686,476 being held in conjunction with two letters of credit. | |
| (2) |
Excludes $1,533,662 in restricted cash being held in a Debt Service Reserve Account in conjunction with the close-out of a portion of our Company’s hedge contracts and $686,476 being held in conjunction with two letters of credit. The $1,533,662 was reclassified to unrestricted cash in March of 2009. | |
| (3) |
Includes $7,176,202 in current portion long-term debt and capital lease obligations | |
| (4) |
Includes $6,674,662 in current portion long-term debt and capital lease obligations. In March 2009, our Company entered into an Amended and Restated Credit Agreement which, among other things, deferred the payment of $3,333,333 in current portion of long-term debt until 2012. |
47
Special Warrant Financing
We completed an offering of 30,666,700 special warrants on June 5, 2007. The special warrants were offered and sold at a price of $0.75 per special warrant, for aggregate gross proceeds of $23,000,025. Our net proceeds after payment of the costs of the offering, including agents’ commissions, were $21,334,368.
Credit Agreement with Nedbank Limited, as Lead Arranger
We entered into a Credit Agreement dated as of June 28, 2007 with Nedbank Limited, as administrative agent and lead arranger, which provided for a $25 million secured term loan credit facility. The Credit Agreement was amended and restated as of June 30, 2008, and provided for a series of term loans to be funded from time to time by a syndicate of lenders in response to draw-down requests by our Company, with the aggregate amount of all term loans being $25 million. As of December 31, 2008, all of the $25,000,000 had been drawn down on the loan. The Credit Agreement is collateralized by substantially all of the Company’s assets, restricts the Company from incurring certain additional debt, and limits the Company’s ability to pay dividends and make restrictive payments. Effective March 31, 2010, the Company must comply with certain financial covenants, as defined in the amended and restated credit agreement. Proceeds from the loan have been used to fund the purchase and installation of equipment associated with the reactivation of the Johnson Camp Mine.
In March 2009, we agreed to further amend and restate our $25 million credit agreement with Nedbank. Although payments of principal and interest on the loan are required to be made on the last business day of March, June, September, and December in each year, starting with the last business day of September 2009 and ending on the last business day of March 2013, the payments scheduled to be paid on March 31 and June 30, 2009 (the “Deferred Payments”) have been deferred until December 31, 2012 and March 31, 2013, respectively. The loan now bears interest at an annual rate equal to LIBOR for the interest period in effect plus a margin of 6.06% . The margin will be reduced by 1.75% if we prepay the deferred payments, and will be reduced by an additional 0.5% upon meeting the requirements under the completion test of the Johnson Camp Mine, as defined in the amended and restated credit agreement, which has been rescheduled from March 31, 2010 to April 28, 2010.
Under the amended and restated credit agreement, we may sell certain copper price hedging instruments that we currently hold under copper price hedging agreements maturing on October 1, 2010 or later, if the net proceeds to our Company will be more than $2.2 million. If we elect to do so, we will be required to set aside $2.2 million in a segregated account to fund our debt service obligations under the credit facility. The existing loan will then be separated into two tranches, whereby the first tranche will be equal to the aggregate principal amount then outstanding minus $2.2 million, which will be the principal amount of the second tranche. The second tranche will be subject to an interest rate of LIBOR plus 5.00% per annum and scheduled for repayment on March 31, 2013. However, if we prepay the Deferred Payments, the second tranche will be amortized in equal portions over the number of quarters remaining until March 31, 2013. As of December 31, 2009, we have not sold any copper price hedging instruments under this provision.
While we made the scheduled principal and interest payment that was due on December 31, 2009 in the approximate amount of $2,200,000, we were unable to make the scheduled principal and interest payment that was due on March 31, 2010 in the approximate amount of $2,175,000. Accordingly, our Company and Nedbank have entered into an unconditional forbearance and extension agreement dated March 30, 2010 that allows us a forbearance period of 21 days to negotiate an amendment to the credit agreement as it pertains to the March 31, 2010 payment and other terms therein. If upon the expiration of the 21 day period, we have not been successful in amending the credit agreement, Nedbank will have full authority to exercise its rights under the credit agreement, including the acceleration of the full amount due thereunder and institution of foreclosure proceedings against the related security. During the forbearance period, the interest rate on the outstanding debt and related accrued interest will be increased by 3.00%.
48
Sale of a Royalty
In March 2009, our Company sold to International Royalty Corporation, acting through its subsidiary IRC Nevada Inc., a 2.5% net smelter royalty on the mineral production sold from the existing mineral rights at Johnson Camp. The net proceeds from the sale were $4,950,000. The royalty is payable in cash on a quarterly basis. During 2009, the Company accrued royalty expense of $489,150 and made payments of $105,824.
Private Placement
In November 2009, we completed an unregistered, brokered private placement of 40 million units (the “Units”) for total gross proceeds of $12,000,000. In connection with the offering, which was effected in an offshore transaction pursuant to Rule 903 of Regulation S promulgated under the Securities Act of 1933, as amended, we paid the placement agent a commission equal to $600,000, or 5% of the gross proceeds of the offering. Each Unit, priced at $0.30, consisted of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of our Company at a price of $0.38 per share until June 5, 2012. The proceeds of the offering were used to make debt service payments under Nedbank credit facility, to purchase approximately $500,000 in additional equipment, to reduce accounts payable, and for general working capital purposes. As of December 31, 2009, none of the warrants issued in conjunction with this offering had been exercised.
Results of Operations – Years Ended December 31, 2009 and 2008
The following table sets forth our consolidated loss from operations during the fiscal years ended December 31, 2009 and 2008.
Consolidated Gain (Loss) From Operations
| Year Ended December 31 | ||||||
| 2009 | 2008 | |||||
| Net sales | $ | 19,909,753 | $ | 8,155,820 | ||
| Costs applicable to sales (exclusive of
depreciation, depletion and amortization shown separately below) |
14,506,182 |
8,795,628 |
||||
| General and administrative expenses | 2,830,264 | 3,701,083 | ||||
| Write–down of inventory to net realizable value | – | 530,964 | ||||
| Depreciation, depletion and amortization | 1,431,040 | 251,487 | ||||
| Gain (loss) from operations | $ | 1,142,267 | $ | (5,123,342 | ) | |
Net Sales
We commenced commercial production from residual leaching on February 2008, and commenced production of nominal amounts of copper from newly-mined ore during the testing and development phase of the mine in February and March 2009. We entered the production stage as we achieved commercial copper cathode production from newly-mined ore in April 2009. One hundred percent of the copper cathode production from the Johnson Camp Mine was sold to Red Kite Master Fund Limited under the previously described off-take agreement.
During 2009, we recorded revenues of $19,909,753 (including $(643,287) from the settlement of copper hedges and $99,316 in amortization of deferred revenue) from the sale of 8,091,205 pounds of copper cathode. Additionally, during 2009, revenues earned from the sale of 280,728 pounds of copper cathode produced during the testing and development stage of the mine in the amount of $742,237 (including $271,897 from the settlement of copper hedges) were credited to mine development costs.
49
During 2008, we recorded revenues of $8,155,820 from the sale of 2,842,890 pounds of copper cathode, all of which was produced from residual leaching. Revenues earned from the sale of 58,723 pounds of copper cathode produced from residual leaching prior to the commencement of commercial production in the amount of $209,907 were credited to mine development costs.
Costs Applicable to Sales
Costs applicable to sales represents the costs incurred in converting the ore present in existing leach pads into salable copper cathodes. The conversion process includes leaching of stockpiles, solvent extraction and electrowinning. Costs include labor, supplies, energy, site overhead costs and other necessary costs associated with the extraction and processing of ore. The cost applicable to sales excludes depreciation, depletion and amortization, and the write-down of inventory to net realizable value.
During 2009, we incurred $14,506,182 of costs applicable to sales (including $5,899,057 in excess production costs) from the sale of copper. Direct costs incurred in the development and testing phase of the ramp up in the amount of $1,651,317 (net of pre-commercial revenue of $742,237) were capitalized and are being amortized using the units of production method over an estimated 374,000,000 pounds of copper which represents the estimated copper reserve base of the Johnson Camp mine.
We incurred $8,795,628 of costs applicable to sales from the commencement of commercial production (February 1, 2008) through December 31, 2008. Operating costs incurred from December 1, 2007 through January 31, 2008 in the amount of $572,765 (net of pre commercial revenue) were capitalized and are being amortized over the expected life of production of copper cathodes from existing heaps. In January 2009, management revised its estimate of the expected life of production of the existing heaps from five years to three years. As such, these costs are being amortized over a period of three years. As of December 31, 2009, $234,017 of the costs remain to be amortized.
Our primary cost associated with leaching copper is sulfuric acid which amounted to approximately $5.2 million and $4.1 million for the years ended December 31, 2009 and 2008, respectively. In contrast to 2008, when we were subject to significant price volatility in the sulfuric acid market (as prices rose from a low of approximately $150 per ton delivered in the first quarter of 2008 to a high of almost $300 per ton delivered in the fourth quarter of 2008), prices decreased significantly in early 2009 and remained in the $100 per ton range throughout the year.
Write–down of Inventory to Net Realizable Value
As a result of the decline in copper prices in the fourth quarter of 2008 and the impact of higher operating costs on inventory balances during 2008, our Company recorded charges totaling $530,964 to reduce the carrying value of copper and chemical inventories to net realizable value.
General and Administrative Expenses
Our general and administrative expenses decreased to $2,830,264 during 2009 as compared to $3,701,083 in 2008. The decrease general and administrative expenses is primarily due to $572,992 decrease in employee and director compensation, $156,401 decrease in stock listing fees, and $145,004 decrease in executive recruiting fees. In addition, during 2008 the Company incurred $83,309 in consulting fees related to the scoping studying on production expansion.
50
Our general and administrative expenses decreased to $3,701,083 during 2008 as compared to $6,135,527 in 2007. The higher general and administrative expenses in 2007 reflected, in part, $1,079,120 related to drilling expenditures incurred at Coyote Springs and Johnson Camp Mine, and $818,305 in legal, accounting and registration fees related to our special warrant offering. In addition, there was a $328,000 decrease in employee and director compensation during 2008. This decrease in general and administrative expenses between 2007 and 2008 was partially offset by a $194,326 increase related to the listing of our common stock on the Toronto Stock Exchange in January 2008.
Depreciation, Depletion and Amortization
Our depreciation, depletion and amortization expenses (“DD&A”) increased by $1,179,553 in 2009, as compared to 2008. The increase was primarily due to the transferring of approximately $41,300,000 in mining equipment from construction in progress to property and equipment during 2009 and the DD&A of these assets during the year.
Our depreciation and amortization expense increased by $127,719 in 2008, as compared to 2007, due to additional purchases of property and equipment associated with the restart of Johnson Camp being placed in service during 2008.
Other Income (Expense)
The following table sets forth our other income (expense) during the fiscal years ended December 31, 2009 and 2008:
| Year Ended December 31 | ||||||
| 2009 | 2008 | |||||
| Other income (expense) | ||||||
| Interest expense | $ | (2,142,005 | ) | $ | (408,202 | ) |
| Write-off of speculative mineral properties | – | (406,838 | ) | |||
| Miscellaneous income | 1,392,176 | 900,008 | ||||
| Total other income (expense) | $ | (749,829 | ) | $ | 84,968 | |
The following discussion highlights some of the more significant items included in the foregoing table.
Interest
Interest expense is primarily attributable to interest on loans that we have obtained to fund our business development and operations and the amortization of debt issuance costs on loans previously secured. During 2008, interest expense also included a non-cash interest expense of $125,137 resulting from our Company electing to extend the exercise period on 818,590 warrants held by Nedbank by six months. These warrants expired unexercised in November 2008. During 2009 and 2008, we capitalized interest costs incurred on the Nedbank project financing commitment in the amounts of $842,615 and $995,407, respectively.
During the years ended December 31, 2009 and 2008, we incurred $2,142,005 and $408,202, respectively, in interest expense, as follows:
| Year Ended December 31 | ||||||
| 2009 | 2008 | |||||
| Amortization of debt issuance costs | $ | 244,695 | $ | 239,772 | ||
| Accretion on modification of warrants | – | 125,137 | ||||
| Interest on hedged Nedbank facility | 2,166,786 | 995,407 | ||||
51
| Less interest capitalized to property and equipment | (359,167 | ) | (995,407 | ) | ||
| Other interest expenses | 89,691 | 43,293 | ||||
| Total | $ | 2,142,005 | $ | 408,202 |
Write-off speculative mineral properties
During 2008, the Company wrote-off carrying amounts of the Coyote Springs in the amount of $400,836 and Mimbres in the amount of $6,002 both of which were speculative mineral property projects that were abandoned during the year. We do not consider either of these projects to have been material to our overall operations.
Miscellaneous Income
Sources of miscellaneous income for the year ended December 31, 2009 were:
- Realized gain on ineffective copper hedges of $1,366,908; and
- Interest income of $25,268.
Sources of miscellaneous income for the year ended December 31, 2008 were:
- Royalty income from landscape aggregate business of $237,043;
- Interest income of $126,017;
- Realized gain on ineffective copper hedges of $521,577; and
- Other income of $15,371.
Net Loss
The following table reflects our net loss for the years ended December 31, 2009 and 2008, after taking into account the amounts recognized as other income or expenses.
| Year Ended December 31 | ||||||
| 2009 | 2008 | |||||
| Gain (loss) from operations | $ | 1,142,267 | $ | (5,123,342 | ) | |
| Other income (expense) | (749,829 | ) | 84,968 | |||
| Provision for income taxes | – | – | ||||
| Net income (loss) | $ | 392,438 | $ | (5,038,374 | ) | |
We recorded a net income of $392,438 for the year ended December 31, 2009 as compared to a net loss of $5,038,374 for the year ended December 31, 2008. The increase net income between these periods is primarily related to:
-
An increase in revenue in the amount of $11,753,933 and a corresponding increase in gross margin before DD&A of $6,043,379 resulting from an increase in the volume of copper cathode produced and sold from the mining of new ore versus the production of copper from residual leaching;
-
An increase in miscellaneous income (expense) of $492,168 primarily due to the settlement of copper derivatives that were designated as ineffective hedges;
-
A decrease in general and administrative expenses of $870,819 primarily due to a $572,992 decrease in employee compensation and a $156,401 decrease in stock listing fees and a $145,004 decrease in executive recruiting fees;
52
-
An increase in depreciation, depletion and amortization expense of $1,179,553 due the transfer of mining equipment from construction in progress to property and equipment effective January 1, 2009 and the depreciation of these assets during the period; and
-
The inclusion of $1,807,619 of interest expense on the hedged Nedbank credit facility since attainment of the production stage and the commencement of commercial production from the mining of new ore on April 1, 2009.
Cash Flows From Operating Activities
Our cash flows from operating activities during 2009 were ($5,487,764). Our cash flows from operating activities for 2009 include net income of $392,438, $1,431,040 in depreciation, depletion and amortization, an increase in inventory of $13,912,676, a $5,826,063 increase in accounts payable as a result of the reactivation of the Johnson Camp Mine and a $2,041,699 increase in accrued interest and other accrued expenses and liabilities.
Our cash flows from operating activities during 2008 were ($4,262,344), primarily due to the net loss of $5,038,374. Our cash flows from operating activities for 2008 also include an increase in inventory of $741,155 as a result of the reactivation of the Johnson Camp Mine.
Cash Flows From Investing Activities
Our cash flows from investing activities during 2009 were ($10,247,180) primarily due to $12,653,359 in construction costs related to the reactivation of the Johnson Camp Mine. This amount was offset in part by the decrease in restricted cash and marketable securities in the amount of $1,533,662 and the proceeds from the sale of cash flow hedges in the amount of $872,517.
Our cash flows from investing activities during 2008 were ($15,357,645) primarily due to $18,355,185 in construction costs related to the reactivation of the Johnson Camp Mine. This amount was offset in part by the decrease in restricted cash and marketable securities in the amount of $1,466,338 and the proceeds from the sale of cash flow hedges characterized as ineffective in the amount of $1,531,202. These proceeds were classified as restricted cash as of December 31, 2008 and reclassified to unrestricted cash in March 2009.
Cash Flows From Financing Activities
Our cash flows from financing activities during 2009 were $12,567,837 compared to $20,716,324 for the same period in 2008.
During 2009, we completed an unregistered, brokered private placement of 40 million units (the “Units”) for total proceeds of $11,237,809 (net of $762,191 in fees) . Each Unit, priced at $0.30, consisted of one common share and one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of our Company at a price of $0.38 per share until June 5, 2012. A portion of the proceeds of the offering were used to make principal payments of $3,580,196 on the Nedbank credit facility.
During 2009, we sold a 2.5% royalty interest in the Johnson Camp Mine to International Royalty Corporation in exchange $4,950,000 (net of $50,000 in fees).
During 2009, option holders exercised 356,670 options with an average exercise price of $0.14 into 356,670 shares of our Company’s common stock, resulting in proceeds to our Company of $51,268.
53
During 2008, we drew down $20,000,000 from our $25,000,000 secured term loan credit facility with Nedbank. Proceeds from the loan were used to purchase and install equipment, and to purchase supplies, associated with the reactivation of the Johnson Camp Mine. As of December 31, 2009 and 2008, our Company was fully drawn down on the facility. Interest on the term loan credit facility during 2009 and 2008 in the amounts of $842,615 and $995,407, respectively, were accrued and were added to the principal balance of the credit facility. Furthermore, the Company capitalized $359,167 and $995,407 of avoidable interest costs to property and equipment during the years ended December 31, 2009 and 2008, respectively. In addition, during 2008, we entered into a lease agreement for the purchase of equipment valued at $79,310, which has been accounted for as a non–cash transaction for purposes of the consolidated statement of cash flows, and we made principal payments on this and other capitalized leases of $10,115 and $35,676 during the years ended December 31, 2009 and 2008, respectively.
During 2008, warrant holders exercised 2,540,000 warrants with exercise prices ranging between $0.25 and $0.50 into 2,540,000 shares of our Company’s common stock resulting in proceeds to our Company of $702,000. In addition, one option holder exercised 250,000 options with an exercise price of $0.20 into 250,000 shares of our Company’s common stock, resulting in proceeds to our Company of $50,000.
Critical Accounting Policies And Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
We believe that our critical accounting policies and estimates include the accounting for inventories, marketable securities and long–lived assets, valuation of derivatives, stock options and warrants, income taxes, reclamation costs, and accounting for legal contingencies.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Such adjustments could be material. The Company’s continuation as a going concern is dependent upon its ability to meet its obligations under its Credit Agreement with Nedbank and to produce copper to sell at a level where the Company becomes profitable. The Company’s continued existence is dependent upon its ability to achieve its operating plan. If management cannot achieve its operating plan because of sales shortfalls, a reduction in copper prices, or other unfavorable events, the Company may find it necessary to dispose of assets, or undertake other actions as may be appropriate. The Company’s ramp up of production since the commencement of commercial production has been slower than originally forecasted. Consequently, the Company has been required to raise additional capital through the sale of equity and the sale of a royalty interest in the Johnson Camp Mine. As of March 31, 2010, the Company has not reached the production level necessary to breakeven from a cash flow perspective. The Company is currently evaluating a variety of alternatives to improve liquidity.
54
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Cochise Aggregates and Materials, Inc. (“Cochise”). Cochise was set up to produce and market landscape rock products and aggregates derived from the Johnson Camp Mine overburden piles. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves and the recovery rate of the Johnson Camp Mine that are the basis for future cash flow estimates; reclamation obligations; asset impairment (including long–lived assets and investments); valuation allowances for deferred tax assets; disclosures and reserves for contingencies and litigation; and the fair value and accounting treatment of financial instruments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Restricted Cash and Marketable Securities
As required by the Credit Agreement with Nedbank Limited (“Nedbank”) dated June 28, 2007 (the “Credit Agreement”), the Company is required to maintain a balance of the greater of (a) $3,000,000 or an amount equal to obligations scheduled to become due during the period of the next two consecutive fiscal quarters. During 2008, this requirement was clarified and the Company now believes that it is not required to maintain the Debt Service Reserve Balance until it is in the financial position to fund such an account. The balance at December 31, 2008, reflects proceeds received from the close–out of a portion of the Company’s hedge position. This amount was reclassified to unrestricted cash in the first quarter of 2009. The Company maintained restricted cash balances of $0 and $1,533,662 at December 31, 2009 and 2008, respectively.
Marketable securities at December 31, 2009 and 2008, consist of certificates of deposit (“CDs”) which are considered held-to-maturity securities and are stated at amortized cost of $686,476 on the consolidated balance sheet. The CDs expired in December 2009 and were simultaneously renewed for a 12 month period, extending their maturity date to December 2010. The CDs carried a stated interest rate of 2.03% per annum which dropped to .40% upon renewal. All marketable securities are defined as held-to-maturity securities, trading securities, or available-for-sale securities under the applicable guidance related to the accounting for certain investments in debt and equity securities. Management determines the appropriate classification of the Company’s investments in marketable debt and equity securities at the time of each purchase and re-evaluates such determination at each balance sheet date. Securities that are bought with the intent and ability to be held to maturity are classified as held-to-maturity securities. Held-to-maturity securities are carried at amortized cost on the consolidated balance sheet until sold.
55
Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and unrealized gains and losses are included in earnings. Debt securities, for which the Company does not have the intent or ability to hold to maturity, and equity securities are classified as available for sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The cost of investments sold is determined on the specific identification or the first-in, first-out method.
Accounts Receivable
The Company grants credit to all qualified customers and generally requires no collateral. Accounts receivable are carried at cost less an allowance for losses, if an allowance is deemed necessary. The Company does not accrue finance or interest charges. On a periodic basis, the Company evaluates its accounts receivable and determines the requirement for an allowance for losses, based upon history of past write–offs, collections and current credit conditions. A receivable is written off when it is determined that all reasonable collection efforts have been exhausted and the potential for recovery is considered remote. Management determined that no allowance for losses was required as of December 31, 2009 and 2008.
Revenue Recognition
The Company recognizes revenue from the sale of products, and related costs of products sold, where persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price is fixed or determinable and collectability is reasonably assured. This generally occurs when the customer receives the product or at the time title passes to the customer.
Inventories
As described below, costs that are incurred in or benefit the productive process are accumulated as stockpiles, ore on leach pads and inventories and classified as “inventories” on the consolidated balance sheet. Inventories are carried at the lower of average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long–term metals prices, less the estimated costs to complete production and bring the product to sale. Write–downs of inventories, resulting from net realizable value impairments, are reported as a component of income (loss) from operations. The current portion of inventories is determined based on the expected amounts to be processed within the next 12 months. Inventories not expected to be processed within the next 12 months are classified as long–term. The major classifications of inventories are as follows:
Stockpiles
Stockpiles represent ore that has been mined and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile, the number of contained pounds (based on assay data) and the estimated metallurgical recovery rates (based on the expected processing method). Stockpile ore tonnages are verified by periodic surveys. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore, including applicable overhead, depreciation, depletion and amortization relating to mining operations, and removed at each stockpile’s average cost per recoverable unit.
Ore on Leach Pads
The recovery of copper from certain copper oxide ores is achieved through the heap leaching process. Under this method, oxide ore is placed on leach pads where it is treated with a chemical solution, which dissolves the copper contained in the ore. The resulting “pregnant” solution is further processed in a plant where the copper is recovered.
56
Costs are added to ore on leach pads based on current mining costs, including applicable depreciation, depletion and amortization relating to mining operations. Costs are removed from ore on leach pads as pounds are recovered based on the average cost per estimated recoverable pound of copper on the leach pad.
The estimates of recoverable copper on the leach pads are calculated from the quantities of ore placed on the leach pads (measured tons added to the leach pads), the grade of ore placed on the leach pads (based on assay data) and a recovery percentage (based on ore type). In general, leach pads recover substantially all of the recoverable pounds in the first year of leaching.
Although the quantities of recoverable copper placed on the leach pads are reconciled by comparing the grades of ore placed on pads to the quantities of copper actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and estimates are refined based on actual results over time. Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write–downs to net realizable value are accounted for on a prospective basis.
In–process Inventory
In–process inventories represent materials that are currently in the process of being converted to a saleable product. The Company utilizes a solvent extraction electrowinning process to extract the copper from the ore. In–process material is measured based on assays of the material fed into the process and the projected recoveries of the respective plants. In–process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mine, stockpiles and/or leach pads plus the in–process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.
Finished Goods Inventory
Finished goods represent saleable copper cathodes. Finished goods are valued at the weighted average cost of source material or net realizable value.
Materials and Supplies
Materials and supplies are valued at the lower of average cost or net realizable value. Cost includes applicable taxes and freight.
Derivative Instruments and Hedging Activities
In connection with the Credit Agreement with Nedbank, the Company is required to maintain a hedging program with respect to a specified percentage of copper output from the Johnson Camp Mine. These contracts are carried on the consolidated balance sheet at their estimated fair value. As these contracts have been designated as cash flow hedges, the changes to their fair value are currently reflected in accumulated other comprehensive income (loss) within the consolidated statement of changes in stockholders’ equity (deficit). As of December 31, 2009 and 2008, the fair value of the forward contracts was a liability of $(12,726,715) and an asset of $19,154,102, respectively. In order to continue to account for the forward contracts as cash flow hedges, the Company must test the effectiveness of the contracts to properly hedge the volatility in the price of copper for which the Company sells its copper production. The Company performs this test on a quarterly basis with the unrealized and/or realized gains (losses) of hedges determined to be ineffective reclassified from other comprehensive income (loss) to miscellaneous income (loss) upon determination of their ineffectiveness.
57
During 2008, the Company entered into a contract to hedge the interest rate risk exposure on its $25 million Nedbank Credit Facility expiring between 2009 and 2012. Under the terms of the interest rate swap contract, the Company receives the three-month United States Dollar London Interbank Offered Rate (“LIBOR”) and pays a fixed rate of interest of 2.48% . The program requires no cash margins, collateral or other security from the Company. The contract is carried on the consolidated balance sheet at its estimated fair value. As this contract was designated as a cash flow hedge, changes to the fair value of this contract are reflected in accumulated other comprehensive income (loss). As of December 31, 2009, the carrying value of the interest rate swap derivative liability was $(342,243). The increase in fair value (decrease in liability) from December 31, 2008 was recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet. As of December 31, 2008, the carrying value of the interest rate swap derivative liability was $(437,084). The decrease in fair value (increase in liability) from the contract’s inception was recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet. In order to continue to account for the interest rate swap as a cash flow hedge, the Company must test the effectiveness of the contract to properly hedge the interest rate risk associated with the Nedbank Credit Facility. The Company performs this test on a quarterly basis, and with the exception of the notional amount of the interest rate swap, which is currently less than the principal balance of the Nedbank Credit Facility, all other critical terms of the interest rate swap match those of the Facility. Accordingly, the Company has determined that 100% of the interest rate swap has functioned as an effective hedge since its inception, with the related quarterly settlements being transferred from accumulated other comprehensive income (loss) to interest expense and the changes in fair value of the interest rate swap deferred in accumulated other comprehensive income (loss).
Fair Value Accounting
In September 2006, the Financial Accounting Standards Board (“FASB”) issued guidance which defined fair value, established a framework for measuring fair value in generally accepted accounting principles, and expanded disclosures about fair value measurements. The provisions of this guidance were adopted by the Company on January 1, 2008. In February 2008, the FASB staff issued additional guidance which delayed the effective date of this guidance for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted those provisions that relate to nonfinancial assets and liabilities on January 1, 2009.
In October 2008, the FASB issued guidance for determining the fair value of a financial asset when the market for that asset is not active. This guidance states that determining fair value in an inactive market depends on the facts and circumstances, requires the use of significant judgment and in some cases, observable inputs may require significant adjustment based on unobservable data. Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when determining fair value of an asset in an inactive market. This guidance was effective upon issuance and did not have a material impact on the Company.
The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
| Level 1 | Unadjusted quoted prices in
active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities; | |
| Level 2 | Quoted prices in markets that
are not active, or inputs that are observable, either directly or indirectly,
for substantially the full term of the asset or liability; | |
| Level 3 | Prices or valuation techniques
that require inputs that are both significant to the fair value measurement
and unobservable (supported by little or no market activity). |
58
The following table sets forth the Company’s financial assets and liabilities within the consolidated balance sheet as of December 31, 2009 and 2008 measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| Total | Level 1 | Level 2 | Level 3 | |||||||||
| December 31, 2009 | ||||||||||||
| Liabilities: | ||||||||||||
| Derivative contracts – copper cash flow hedges, net | $ | (12,726,715 | ) | - | $ | (12,726,715 | ) | - | ||||
| Derivative contract – interest rate swap contract | $ | (342,243 | ) | - | $ | (342,243 | ) | - | ||||
| December 31, 2008 | ||||||||||||
| Assets: | ||||||||||||
| Derivative contracts – copper cash flow hedges, net | $ | 19,154,102 | - | $ | 19,154,102 | - | ||||||
| Liabilities: | ||||||||||||
| Derivative contract – interest rate swap contract | $ | (437,084 | ) | - | $ | (437,084 | ) | - |
The Company’s derivative instruments, copper cash flow hedges and an interest rate swap contract, are valued using pricing models, and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs. The Company’s derivatives generally trade in liquid markets, and as such, model inputs can generally be verified and do not involve significant management judgment. Such instruments are classified within Level 2 of the fair value hierarchy.
Shipping and Handling Costs
The Company includes shipping and handling costs related to the transport of finished goods in operating expenses.
Debt Issuance Costs
Debt issuance costs are amortized over the life of the related loan as interest expense. During 2009, the Company incurred debt issuance costs of $180,929, consisting of $100,000 which represented the estimated fair value of warrants issued to Nedbank upon the March 2009 debt modification and $80,929 of legal expenses. The debt issuance costs incurred during 2009 and prior years are being amortized over the term of the related Nedbank financing facility using the straight–line method, which approximates the effective interest method. Accumulated amortization of debt issuance costs was $565,119 and $320,424 at December 31, 2009 and 2008, respectively. Unamortized debt issuance costs were $813,483 and $877,249 at December 31, 2009 and 2008, respectively.
Property and Equipment
Property and equipment are carried at cost. Mineral exploration costs, as well as drilling and other costs incurred for the purpose of converting mineral resources to proven and probable reserves or identifying new mineral resources at exploration, development or production stage properties, are charged to expense as incurred. Development costs are capitalized beginning after the existence of proven and probable reserves have been established. Development costs include costs incurred resulting from mine preproduction activities undertaken to gain access to proven and probable reserves including ramps,
59
permanent excavations, infrastructure, removal of overburden and the substantial completion of the testing phase of the mining and ore processing activities. Additionally, interest expense allocable to the cost of developing mining properties and of constructing new facilities is capitalized until the assets are ready for their intended use.
Construction in progress represents costs capitalized to refurbish and complete the reactivation of Johnson Camp Mine and to get it ready for its intended use. Such costs relate primarily to: (a) the rehabilitation of solution ponds; (b) refurbishment and a modest expansion of the SX-EW copper production facility; (c) the installation of a primary stage crusher, and the purchase and installation of two secondary stage crushers, an agglomerator and conveying equipment; and (d) other project-related items. In January 2009, upon placing these assets in service and the commencement of production of nominal amounts of copper from newly-mined ore during the testing and development phase of the mine, these costs were reclassified into property and equipment.
Expenditures for replacements and improvements are capitalized. Costs related to periodic scheduled maintenance are expensed as incurred. Depreciation for mining life-of-mine assets, infrastructure and other common costs is determined using the unit-of-production method based on total estimated recoverable proven and probable copper reserves. Development costs and acquisition costs for proven and probable reserves that relate to a specific ore body are depleted using the unit-of-production method based on estimated recoverable proven and probable reserves for the ore body benefited. Depreciation, depletion and amortization using the unit-of-production method is recorded upon extraction of the recoverable copper from the ore body, at which time it is allocated to inventory cost and ultimately included as a component of operating expenses. Other assets are depreciated on a straight-line basis over estimated useful lives of up to 16 years for buildings, 3 to 6 years for machinery and equipment, and 3 to 5 years for mobile equipment. During 2008, depreciation and amortization was only recorded on in-service machinery and equipment involved in the processing of ore from residual leaching and on mobile equipment and vehicles used in the general operation of the facility.
Long–Lived Assets
The Company reviews and evaluates its long–lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured as the amount by which the asset carrying value exceeds its fair value. Fair value is generally determined using valuation techniques such as estimated future cash flows. An impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows for the Johnson Camp Mine include estimates of recoverable pounds of copper, copper prices (considering current and historical prices, price trends and related factors), production rates and costs, capital and reclamation costs as appropriate, all based upon life–of–mine engineering plans and feasibility studies. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. No impairment losses were recorded during the years ended December 31, 2009 and 2008.
Reclamation Costs
Reclamation costs are allocated to expense over the life of the related assets and are adjusted for changes resulting from the passage of time and revisions to either the timing or amount of the original present value estimate. The asset retirement obligation is based on when the spending for an existing environmental disturbance and activity to date will occur. The Company reviews its asset retirement obligation, on an annual basis, unless a triggering event occurs that requires a more frequent evaluation. The asset retirement obligation at the mine site is accounted for in accordance with applicable GAAP for accounting for asset retirement obligations.
60
Stock Based Compensation
The Company accounts for its awards of stock based compensation under the fair value recognition provisions of applicable GAAP. The Company has granted incentive non–qualified stock options, and deferred stock units to its employees and directors under the terms of its 2006 Stock Incentive Plan. The Company has also granted non–qualified, non–plan stock options, which have been authorized by the Company’s board of directors. Stock options are granted at an exercise price equal to or greater than the quoted market price on the date of grant.
Net Loss per Share of Common Stock
Basic earnings (loss) per common share are computed by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is calculated based on the weighted average number of common shares outstanding adjusted for the dilutive effect, if any, of stock options and warrants. Outstanding options, warrants and other dilutive securities to purchase 18,782,357 and 23,395,025 shares of common stock for the years ended December 31, 2009 and 2008, respectively, are not included in the computation of diluted loss per share as the effect of the assumed exercise of these options and warrants would be anti–dilutive.
Income Taxes
The Company uses the liability method to account for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the financial statements. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense consists of the income tax payable or refundable for the current period and the change during the period in net deferred tax assets and liabilities.
Accumulated Other Comprehensive Income (Loss)
In addition to net income (loss), accumulated other comprehensive income (loss) includes all changes in equity during a period, including the effective portion of changes in fair value of derivative instruments that qualify as cash flow hedges.
Recently Issued Accounting Guidance
Effective July 1, 2009, the FASB’s Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the U.S. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. The Codification is required to be applied to financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP and did not impact the Company’s consolidated financial statements.
In September 2006, the FASB issued guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the FASB deferred the effective date to January 1, 2009 for all nonfinancial assets and liabilities, except for those that are recognized or disclosed at fair value on a recurring basis (that is, at least annually). With the adoption of new accounting rules, fair value is now determined as an exit price, representing the price that would be received in an orderly transaction between market participants based on the highest and best use of the asset, rather than as the result of an internally-generated cash flow analysis. The Company adopted this standard effective January 1, 2009, and it did not have a material impact on the Company’s consolidated financial statements.
61
In April 2009, the FASB issued guidance on interim disclosures about the fair value of financial instruments. The provisions of the guidance require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance became effective for interim reporting periods ending after June 15, 2009. The Company adopted the disclosure provisions of this standard effective April 1, 2009.
In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments. The standard makes the guidance more operational and improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This guidance became effective for interim reporting periods ending after June 15, 2009. The Company adopted the provisions of this standard effective April 1, 2009 which did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued guidance on accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. The guidance addresses the initial recognition and measurement of an asset acquired or a liability assumed in a business combination that arises from a contingency, provided the asset or liability's fair value on the date of acquisition can be determined. When the fair value cannot be determined, use of the guidance under accounting for contingencies, and reasonable estimation of the amount of a loss must be followed. This guidance was effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued guidance determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. Entities are required to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value. This guidance became effective for interim reporting periods ending after June 15, 2009. The Company adopted the provisions of this standard effective April 1, 2009 which did not have a material impact on the Company’s consolidated financial statements.
In June 2009, the FASB issued guidance related to accounting for transfers of financial assets, in order to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement in transferred financial assets. This guidance must be applied as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This guidance must be applied to transfers occurring on or after the effective date. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In June 2009, the FASB issued an amendment on the de-recognition guidance of accounting for transfers of financial assets and the elimination of the exemption from consolidation for qualifying special-purpose entities. The guidance is effective for financial asset transfers occurring after the beginning of an entity's first fiscal year that begins after November 15, 2009. The Company does not expect the provisions of the guidance to have a material effect on its consolidated financial statements.
In June 2009, the FASB issued guidance on consolidation applicable to variable interest entities. The provisions of the standard significantly affect the overall consolidation analysis. The guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The guidance will be effective for the Company beginning in 2010. The Company does not expect the provisions of the guidance to have a material effect on its consolidated financial statements.
62
In August 2009, the FASB issued guidance on the fair value measurement of liabilities and provided clarification that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The guidance is effective for the first reporting period, including interim periods, beginning after issuance. The guidance will be effective for the Company beginning in 2010. The Company does not expect the provisions of the guidance to have a material effect on its consolidated financial statements.
In December 2009, the FASB issued guidance changing how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design; and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The guidance also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The guidance is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. The Company does not expect the provisions of the guidance to have a material effect on its consolidated financial statements.
In January 2010, the FASB issued guidance to clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. The guidance is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of the provisions of the guidance did not have a material effect on its consolidated financial statements.
In January 2010, the FASB issued guidance that clarifies the scope of a decrease in ownership provisions that applies to: a subsidiary or group of assets that is a business or nonprofit activity; a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity (including an equity method investee or joint venture). The standard also clarifies that the decrease in ownership guidance does not apply to: (a) sales of in substance real estate; and (b) conveyances of oil and gas mineral rights, even if these transfers involve businesses. The standard expands the disclosure requirements about de-consolidation of a subsidiary or de-recognition of a group of assets to include: the valuation techniques used to measure the fair value of any retained investment; the nature of any continuing involvement with the subsidiary or entity acquiring the group of assets; and whether the transaction that resulted in the de-consolidation or de-recognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction. The guidance is effective beginning in the period that an entity adopts the guidance on non-controlling interests in consolidated financial statements. If an entity had previously adopted the guidance, the amendments are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. This guidance should be applied retrospectively to the first period that an entity adopts the standard. The adoption of the provisions of the guidance did not have a material effect on its consolidated financial statements.
In January 2010, the FASB issued guidance improving disclosures about fair value measurements. The guidance requires some new disclosures and clarifies some existing disclosure requirements about fair
63
value measurement as set forth in the ASC. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, the guidance now requires:
- A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and
- In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.
In addition, the guidance clarifies the requirements of the following existing disclosures:
- For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and
- A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted.
The Company is currently assessing the impact of the adoption of the provisions of the guidance on its consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for a Securities and Exchange Commission (SEC) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
Off–Balance Sheet Arrangements
We have no off–balance sheet arrangements.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are a smaller reporting company as defined by Rule 12b–2 of the Exchange Act and are not required to provide the information required under this item.
64
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our audited consolidated financial statements as of December 31, 2009 and 2008 and for the each of the two years in the period ended December 31, 2009, and the related notes to the financial statements, are filed as part of this annual report beginning on page F–1 below, and are incorporated by reference in this Item 8.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by our Company is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our President and Chief Executive Officer, Randy Davenport, and our Chief Financial Officer, Wayne Morrison, are responsible for establishing and maintaining disclosure controls and procedures for our Company.
Our management has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009 (under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer), pursuant to Rule 13a–15(b) promulgated under the Securities Exchange Act of 1934, as amended. As part of such evaluation, management considered the matters discussed below relating to internal control over financial reporting. Based on this evaluation, our Company’s Chief Executive Officer and Chief Financial Officer have concluded that our Company’s disclosure controls and procedures were effective as of December 31, 2009.
Internal Control over Financial Reporting
The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
-
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;
-
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and
-
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant’s assets that could have a material effect on the financial statements.
65
Management Report on Assessment of Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a–15(f) Securities Exchange Act of 1934, as amended. Management (under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer), assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the framework set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control was effective as of December 31, 2009.
This annual report does not include an attestation report of our Company’s registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only the management’s report in this annual report.
Inherent Limitation of the Effectiveness of Internal Control
Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2009, there was no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9A(T). | CONTROLS AND PROCEDURES |
Not applicable.
| ITEM 9B. | OTHER INFORMATION |
Not applicable.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers
The following table and information that follows sets forth the names and positions of our directors and executive officers:
| Name and Municipality of | Current Office with Nord Resources | ||
| Residence | Age | Corporation | Director Since |
| Ronald A. Hirsch(1)
Laguna Beach, CA |
66 |
Director and Chairman |
September 7, 2000
|
66
| Name and
Municipality of Residence |
Age |
Current Office with Nord Resources
Corporation |
Director Since |
| Stephen D. Seymour Baltimore, MD |
68 |
Director |
October 15, 2003 |
| T. Sean Harvey Port Carling, ON, Canada |
50 |
Director |
June 11, 2007 |
| Douglas P. Hamilton North Chatham, MA |
68 |
Director |
February 15, 2006 |
| John F. Cook Roslin, ON, Canada |
70 |
Director |
February 15, 2006 |
| Randy L. Davenport(2)
Tucson, AZ |
54 |
Chief Executive Officer |
N/A |
| Wayne M. Morrison(3) Tucson, AZ |
52 |
Vice–President, Secretary and Chief Financial Officer | N/A |
| John T. Perry(4)
Tucson, AZ |
42 |
Former Director, President and Chief Executive Officer | June 11, 2007
|
Notes
| (1) |
Mr. Hirsch also held the position of Chief Executive Officer of our Company until February 15, 2006. |
| (2) |
Mr. Davenport replaced Erland A. Anderson as our Vice–President and Chief Operating Officer on January 12, 2009. Effective February 16, 2010, Mr. Davenport was appointed as our Chief Executive Officer, upon the resignation of John Perry as President, Chief Executive Officer and a Director of our Company on that date. |
| (3) |
Mr. Morrison was appointed Vice President, Secretary and Chief Financial Officer on January 8, 2008. |
| (4) |
Mr. Perry resigned as President, Chief Executive Officer and a Director of our Company on February 16, 2010, to accept a position with another company. |
The following is a description of the business background of the directors, director nominees and executive officers of our Company:
Ronald A. Hirsch – Mr. Hirsch has been a director of our Company since September 7, 2000 and Chairman since October 20, 2003. He was also Chief Executive Officer from October 20, 2003 until February 15, 2006. Mr. Hirsch has over 30 years experience in the investment and corporate finance community. From January 2000 to October 2003, he was the President of Hirsch Enterprises, a private investment firm based in Laguna Beach, California. Until 1997, Mr. Hirsch was Senior Vice President –Investments with Lehman Brothers in New York where he was employed for 20 years and previous to that was with Dean Witter for five years. He holds a bachelors degree in economics from Michigan State University and pursued advanced studies in Finance at New York University.
We believe that the following experience, qualifications, attributes and skills possessed by Mr. Hirsch lend themselves to service as a director of our Company:
CEO/Executive Management Skills
Experience as Chairman, CEO and Director of our Company since September 2000.
Financial Experience
Experience as President of Hirsch Enterprises from January 2000 to October 2003, a private investment firm based in Laguna Beach, California. Senior Vice President – Investments with Lehman Brothers in New York for 20 years until 1997. Experience as Senior Vice-President – Dean Witter & Company and Option Specialist and Financial Advisor with Thomson McKinnon Auchincloss over five years.
67
Board Experience
Prior service on our Company’s Board of Directors as Chairman since October 20, 2003 and as a member of the Board since September 7, 2000
Stephen D. Seymour – Mr. Seymour was appointed a director of our Company on October 15, 2003. He has over 30 years experience in sales, marketing and finance. Mr. Seymour has owned and been employed by Rockland Investments since 1986. He spent 15 years with Westinghouse Broadcasting where he was head of all television sales and marketing and a member of the board of the Broadcasting Division. Since 1980, he has specialized in leveraged buy outs, turnaround situations and under managed and undercapitalized ventures. Mr. Seymour holds an undergraduate degree from Rutgers University and an MBA from Columbia University.
We believe that the following experience, qualifications, attributes and skills possessed by Mr. Seymour lend themselves to service as a director of our Company:
CEO/Executive Management Skills
15 years experience with Westinghouse Broadcasting where he was head of all television sales and marketing.
Financial Experience
Owned and employed by Rockland Investments since 1986. Specialized experience in leveraged buy-outs, turnaround situations and under managed and undercapitalized ventures.
Board Experience
Prior service on our Company’s Board of Directors since October 15, 2003. Currently serving as Chairman of the Corporate Governance and Nominating Committee. Experience as a Director with Westinghouse’s Broadcasting Division.
Douglas P. Hamilton – Mr. Hamilton has been a director of our Company since February 15, 2006. He has over 30 years of experience in operations and finance in the power generation, automotive and aerospace industries. Mr. Hamilton has been retired since 1997. Prior to his retirement, he was Senior Vice President – Finance and Chief Financial Officer of Barnes Group Inc. (1996–1997) and Vice President – Finance and Control of U.S. Power Generation Businesses for Asea Brown Boveri, Inc. (1993–1996). Prior to that, he held various executive and management positions at United Technologies, Corporation and Ingersoll–Rand Company. Mr. Hamilton holds an AB degree in Engineering Science from Dartmouth College and an MBA in accounting from Columbia University.
We believe that the following experience, qualifications, attributes and skills possessed by Mr. Hamilton lend themselves to service as a director of our Company:
CEO/Executive Management Skills
Experience as Senior Vice President – Finance and Chief Financial Officer of Barnes Group Inc. (1996–1997) and Vice President – Finance and Control of U.S. Power Generation Businesses for Asea Brown Boveri, Inc. 1993–1996). Prior to that, he held various executive and management positions at United Technologies Corporation and Ingersoll–Rand Company.
68
Board Experience
Prior service on our Company’s Board of Directors since February 15, 2006. Currently serving as Chairman of the Audit and member of the Corporate Governance and Nominating and Compensation Committees.
John F. Cook – Mr. Cook has been a director of our Company since February 15, 2006. Mr. Cook is the President of Tormin Resources Limited, a private company providing consulting services to the mining industry. He holds a Bachelor of Engineering (Mining), C. Eng UK, and P. Eng Ontario, and brings to Nord more than 40 years of experience in the operations and management of mining companies. Mr. Cook’s positions included Senior Mining and Managing Consultant, RTZ Consultants Ltd. (1974–78), Associate and Principal, Golder Associates Ltd. (1978–83), Senior Project Manager, General Manager, and Vice President Engineering, Lac Minerals Ltd. (1983–90), Vice President Operations, Goldcorp Inc. (1990–94), and Navan Resources Plc, Operations Director (1994–96). Currently, Mr. Cook serves as the Chairman of Premier Gold Mines Limited and the President of San Anton Resources Corporation. He is also a director of Anaconda Mining Inc., GLR Resources Inc., Uranium City Resources Inc., MBMI Resources Inc. and Homeland Uranium Inc.
We believe that the following experience, qualifications, attributes and skills possessed by Mr. Cook lend themselves to service as a director of our Company:
CEO/Executive Management Skills
Experience as President of Tormin Resources Limited, a private company providing consulting services to the mining industry, Chairman of Premier Gold Mines Limited, President of San Anton Resources Corporation. Director of Anaconda Mining Inc., GLR Resources Inc., Uranium City Resources Inc., MBMI Resources Inc. and Homeland Uranium Inc.
Board Experience
Prior service on our Company’s Board of Directors since February 15, 2006. Currently serving as Chairman of the Compensation Committee and as a member of the Audit and Corporate Governance and Nominating Committees.
Operational and Industry Expertise
Experience as a Senior Mining and Managing Consultant, RTZ Consultants Ltd. (1974–78), Associate and Principal, Golder Associates Ltd. (1978–83), Senior Project Manager, General Manager, and Vice President Engineering, Lac Minerals Ltd. (1983–90), Vice President Operations, Goldcorp Inc. (1990–94), and Operations Director, Navan Resources Plc (1994–96).
T. Sean Harvey – Mr. Harvey was appointed as a director of our Company on June 11, 2007. He is a co–founder and, since January 2004, has served as the Non–Executive Chairman of Andina Minerals, Inc., a Toronto–based exploration–stage mining company listed on the TSX Venture Exchange. Mr. Harvey also served as the President, Chief Executive Officer and a director of Orvana Minerals Corp. (April 2005 – May 2006), a mining company listed on the Toronto Stock Exchange, and as the President, Chief Executive Officer and a director of Atlantico Gold Inc. (May 2003 – January 2004), a private company that acquired the Amapari gold project in Brazil in 2003, and that was subsequently acquired by
69
Wheaton River Minerals Ltd. Prior to that, Mr. Harvey served as: the President, Chief Executive Officer, Chief Operating Officer and a director of TVX Gold Inc. (April 2001 – January 2003), a mining company listed on the Toronto and New York Stock Exchanges; a financial consultant to the EBX Group of Companies based in Rio de Janeiro (April 2000 – March 2001); a Director at Deutsche Bank Securities Limited (August 1998 – March 2000) in Toronto, where he was a member of the Investment Banking Group and the Global Mining and Metals team; a Director at Nesbitt Burns Inc. (Burns Fry Ltd.) (February 1990 – July 1998) in Toronto, where he was a member of the Investment Banking Group; a Financial Analyst at IBM Canada Limited (February 1989 – February 1990); and an Assistant Manager, CIBC (March 1988 – February 1989). Mr. Harvey holds an Honors Bachelor of Arts degree (Economics and Geography) and a Master of Arts degree (Economics) from Carleton University, a Bachelor of Laws degree from the University of Western Ontario and an MBA from the University of Toronto. He is also a member of the Law Society of Upper Canada.
We believe that the following experience, qualifications, attributes and skills possessed by Mr. Harvey lend themselves to service as a director of our Company:
CEO/Executive Management Skills
Experience as co–founder and, since January 2004, Non–Executive Chairman of Andina Minerals, a publicly traded company, President and Chief Executive Officer of Oravana Minerals Corp. (April 2005 –May 2006), a publicly listed mining company, President and Chief Executive Officer of Atlantico Gold Inc. (May 2003 – January 2004), a private company that acquired the Amapari gold project in Brazil in 2003 that was subsequently acquired by Wheaton River Minerals Ltd. and as President, Chief Executive Officer and Chief Operating Officer of TVX Gold Inc. at the time it was sold to Kinross Gold in 2003 (April 2001 – January 2003), a publicly traded company.
Financial Experience
Experience as a Financial Analyst at IBM Canada Limited (February 1989 – February 1990); and an Assistant Manager, CIBC (March 1988 – February 1989) and as a Financial consultant to the EBX Group of Companies based in Rio de Janeiro (April 2000 – March 2001).
Board Experience
Prior service on our Company’s Board of Directors since June 11, 2007. Currently serving as a member of the Audit and Compensation Committee. Recently appointed as a Non-executive Director and Canadian Resident Director of Allied Gold Limited, a publicly traded gold mining company. Experience as a Director of Orvana Minerals Corp. (April 2005 – May 2006), Director of Atlantico Gold Inc. (May 2003 – January 2004), Director of TVX Gold Inc. (April 2001 – January 2003), Director at Deutsche Bank Securities Limited (August 1998 – March 2000) in Toronto, where he was a member of the Investment Banking Group and the Global Mining and Metals team and a Director at Nesbitt Burns Inc. (Burns Fry Ltd.) (February 1990 – July 1998) in Toronto, where he was a member of the Investment Banking Group.
Randy L. Davenport – Mr. Davenport was appointed Chief Executive Officer on February 16, 2010, to replace John T. Perry, who resigned as a director and officer of our Company to accept a position with another company. Mr. Davenport previously had been appointed as our Company’s Vice President and Chief Operating Officer on January 12, 2009. Prior to joining our Company, Mr. Davenport held the position of Vice President, Resource Development, Freeport–McMorRan Copper & Gold Inc. from 2007 to 2008. In addition, he had previously held a number of senior positions during two decades with Phelps Dodge Corporation, then the world’s second–largest copper producer, which was acquired by Freeport–McMorRan in 2007. In his career at Phelps Dodge, Mr. Davenport’s responsibilities included managing
70
large copper mining operations, overseeing major mining construction projects, several feasibility and scoping studies, and directing the expansion of established operations and the start–up of green–field projects and acquisitions. Mr. Davenport’s career at Phelps Dodge also included five years as President of Sociedad Minera Cerro Verde, a Peruvian company majority owned and operated by Phelps Dodge and based in Arequipa, Peru, with a fully integrated open pit mining and solvent extraction electrowinning facility, the same process that our Company is using at its Johnson Camp Mine. Mr. Davenport earned a Bachelor of Science degree in Mining Engineering from the University of Idaho.
Wayne M. Morrison – Mr. Morrison was appointed Vice President and Chief Financial Officer on January 8, 2008. Prior to that, he served as our Controller from December 3, 2007 to January 8, 2008. Prior to joining our Company, Mr. Morrison was Vice President, Finance and Administration of AmpliMed Corp., a privately–held biotech company, from March 2005 until December 2007. From February 2002 to October 2004, Mr. Morrison held the position of Vice President and Chief Financial Officer of Fastrac 24/7, a privately–held information processing company, and from October 1997 to January 2002, he was President of Par One Golf Ventures, a privately–held golf promotion company. Mr. Morrison’s experience also includes past employment as a Certified Public Accountant with PricewaterhouseCoopers for four years. He earned a Bachelor of Science Degree in Accounting from the University of Delaware and an MBA from the Kenan–Flagler Business School of the University of North Carolina.
John T. Perry – Mr. Perry was a director of our Company from June 11, 2007 until February 16, 2010, and President and Chief Executive Officer from April 23, 2007 until February 16, 2010. Mr. Perry was appointed as our Senior Vice President and Chief Financial Officer on April 1, 2005 and Secretary and Treasurer in September 2005 and acted as such until January 2008. Mr. Perry has over 17 years (1989 to present) of mining and metals industry experience. Before joining our Company, Mr. Perry was Vice President, Director with CB Richard Ellis, International Mining and Metals Group from December 2003 to August 2005. Prior to that, he held various positions with BHP Billiton Base Metals and BHP Copper Inc., including Vice President Finance with BHP Billiton Base Metals from August 2002 to November 2003, President, BHP Copper, Inc. from August 1999 to August 2002, and Vice President Finance and Administration for BHP Copper, Inc. He is a Certified Public Accountant and holds an undergraduate degree in Accounting and Finance as well as an MBA from the University of Arizona. He is also a director of Homeland Uranium Incorporated.
Term of Office
All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
Significant Employees
There are no significant employees other than our executive officers.
Family Relationships
There are currently no family relationships between any of the members of our board of directors or our executive officers.
71
Board Independence
The board of directors determined that Douglas P. Hamilton, John F. Cook, Stephen Seymour and T. Sean Harvey each qualify as independent directors under the listing standards of the NYSE Amex Equities Exchange.
Committees of the Board of Directors
Our board of directors currently has three committees: an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee. These Committees were established in February 2006.
The information below sets out the current members of each of our Company’s board committees and summarizes the functions of each of the committees.
Audit Committee
Our Audit Committee has been structured to comply with Rule 10A–3 under the Securities Exchange Act of 1934, as amended. Our Audit Committee is comprised of Douglas P. Hamilton, John F. Cook, and T. Sean Harvey. Douglas P. Hamilton is the Chairman of the Audit Committee and our board of directors has determined that he satisfies the criteria for an audit committee financial expert under Item 407(d)(5) of Regulation S–K of the rules of the Securities and Exchange Commission. Each Audit Committee member is able to read and understand fundamental financial statements, including our consolidated balance sheet, consolidated statement of operations and consolidated statement of cash flows.
The Audit Committee meets with management and our external auditors to review matters affecting our financial reporting, the system of internal accounting and financial controls and procedures and the audit procedures and audit plans. The Audit Committee reviews our significant financial risks, is involved in the appointment of senior financial executives, and annually reviews our insurance coverage and any off–balance sheet transactions.
The Audit Committee is mandated to monitor the audit and preparation of our consolidated financial statements and to review and recommend to the board of directors all financial disclosure contained in our public documents. The Audit Committee is also mandated to appoint our external auditors, monitor their qualifications and independence and determine the appropriate level of their remuneration. The external auditors report directly to the Audit Committee and to the board of directors. The Audit Committee and board of directors each have the authority to terminate the external auditor’s engagement (subject to confirmation by our stockholders). The Audit Committee also approves in advance any permitted services to be provided by the external auditors which are not related to the audit.
Our Company provides appropriate funding as determined by the Audit Committee to permit the Audit Committee to perform its duties and to compensate its advisors. The Audit Committee, at its discretion, has the authority to initiate special investigations, and if appropriate, hire special legal, accounting or other outside advisors or experts to assist the Audit Committee to fulfill its duties.
The Audit Committee operates pursuant to a written charter, which complies with the applicable provisions of the Sarbanes–Oxley Act of 2002 and related rules of the SEC and the NYSE Amex Equities Exchange.
72
Compensation Committee
The Compensation Committee of our board of directors is comprised of Douglas P. Hamilton, John F. Cook and T. Sean Harvey. John F. Cook is the Chairman of the Compensation Committee. The Compensation Committee is responsible for considering and authorizing terms of employment and compensation of directors, executive officers and providing advice on compensation structures in the various jurisdictions in which our Company operates. In addition, the Compensation Committee reviews our overall salary objectives and any significant modifications made to employee benefit plans, including those applicable to directors and executive officers, and proposes any awards of stock options and incentive and deferred compensation benefits.
The Compensation Committee operates pursuant to a written charter, adopted by the Board of Directors in March 2008.
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee is comprised of Stephen Seymour, Douglas P. Hamilton and John F. Cook. Mr. Seymour is the Chairman of the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee is responsible for developing our approach to corporate governance issues and compliance with governance rules. The Corporate Governance and Nominating Committee is also mandated to plan for the succession of our Company, including recommending director candidates, review of board procedures, size and organization, and monitoring of senior management with respect to governance issues. The Committee is responsible for the development and implementation of corporate communications to ensure the integrity of our disclosure controls and procedures, internal control over financial reporting and management information systems. The purview of the Corporate Governance and Nominating Committee also includes the administration of our board of directors’ relationship with our management.
The Corporate Governance and Nominating Committee identifies individuals believed to be qualified to become board members and recommends individuals to fill vacancies. There are no minimum qualifications for consideration for nomination to be a director of our Company. The Committee will assess all nominees using the same criteria. In nominating candidates, the Committee takes into consideration such factors as it deems appropriate, including judgment, experience, skills and personal character, as well as the needs of our Company. The Corporate Governance and Nominating Committee will consider nominees recommended by stockholders if such recommendations are made in writing to the Committee and will evaluate nominees for election in the same manner whether the nominee has been recommended by a stockholder or otherwise.
The Corporate Governance and Nominating Committee operates pursuant to a written charter adopted by the Board of Directors in October 2008.
Involvement in Certain Legal Proceedings
Except as disclosed in this annual report, during the past ten years none of the following events have occurred with respect to any of our directors or executive officers:
| 1. |
A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; |
73
| 2. |
Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| 3. |
Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: |
| i. |
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; | |
| ii. |
Engaging in any type of business practice; or | |
| iii. |
Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws; |
| 4. |
Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3)(i) above, or to be associated with persons engaged in any such activity; | |
| 5. |
Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated; | |
| 6. |
Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; | |
| 7. |
Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: |
| i. |
Any Federal or State securities or commodities law or regulation; or | |
| ii. |
Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or | |
| iii. |
Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| 8. | Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
74
On September 23, 2009 Sandab Communications LP II filed for Chapter 11 protection in the New England District Court. Sandab owns and operates 4 Radio station. The president of the General Partner is Stephen D. Seymour who is also a director of Nord Resources.
There are currently no legal proceedings to which any of our directors or officers is a party adverse to us or in which any of our directors or officers has a material interest adverse to us.
Compliance with Section 16 of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the executive officers and directors, and persons who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. During the fiscal year ended December 31, 2009, except as disclosed below, these filings were made on a timely basis:
Reporting Person |
No. of Late Reports During the Fiscal
Year Ended December 31, 2009 |
No. of Late Reports During the Fiscal
Year Ended December 31, 2008 |
| Ronald Hirsch | Nil | 3 |
| John Perry | Nil | 1 |
| Sean Harvey | Nil | 4 |
| Wayne Morrison | Nil | 1 |
| Douglas Hamilton | 1 | 3 |
| Stephen Seymour | Nil | 5 |
| John Cook | 1 | 2 |
| Geologic Resource Partners, LLC | Nil | 2 |
Code of Ethics
Effective January 5, 2006, we adopted a Code of Ethics that applies to all of our directors and officers. This code summarizes the legal, ethical and regulatory standards that we must follow and is a reminder to our directors and officers of the seriousness of that commitment. Compliance with this code and high standards of business conduct is mandatory for each of our directors and officers. As adopted, our Code of Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
| 1) |
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |
| 2) |
compliance with applicable governmental laws, rules and regulations; | |
| 3) |
the prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code of Ethics; and | |
| 4) |
accountability for adherence to the Code of Ethics. |
75
We will provide a copy of the Code of Ethics to any person without charge, upon request. Requests can be sent to: Nord Resources Corporation, at 1 West Wetmore Road, Suite 203, Tucson, Arizona, USA 85705.
| ITEM 11. | EXECUTIVE COMPENSATION |
Summary Compensation Table
Particulars of compensation awarded to, earned by or paid during the last two fiscal years to:
| (a) |
the person(s) serving as our Company’s principal executive officer during the year ended December 31, 2009; | |
| (b) |
each of our Company’s two most highly compensated executive officers, other than the principal executive officer, who were serving as executive officers at the end of the year ended December 31, 2009, and whose total compensation exceeds $100,000 per; and | |
| (c) |
up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as an executive officer of our Company at the end of the year ended December 31, 2009; |
(individually a “Named Executive Officer” and collectively the “Named Executive Officers”) are set out in the summary compensation table below.
Name and Principal Position |
Year |
Salary ($) |
Bonus ($) |
Stock Awards ($) |
Option Awards ($) (1) |
Non– Equity Incentive Plan Compen– sation ($) |
Non– qualified Deferred Compen– sation Earnings ($) |
All Other Compen– sation Compen– sation ($)(5) |
Total ($) |
| Ronald A. Hirsch Chairman |
2009 2008 |
96,154 100,000 |
– – |
– – |
– 5,300 |
– – |
– |
– – |
96,154 105,300 |
| John T. Perry Former President, Chief Executive Officer, Secretary and Treasurer(3) |
2009 2008 |
193,292 200,402 |
– |
– – |
– 23,850 |
– – |
– – |
7,692 4,000 |
200,984 228,252 |
76
Name and Principal Position |
Year |
Salary ($) |
Bonus ($) |
Stock Awards ($) |
Option Awards ($) (1) |
Non– Equity Incentive Plan Compen– sation ($) |
Non– qualified Deferred Compen– sation Earnings ($) |
All Other Compen– sation Compen– sation ($)(5) |
Total ($) |
| Randy L. Davenport Interim Chief Executive Officer, Vice– President and Chief Operating Officer(2) |
2009 2008 |
212,307 – |
– – |
– – |
62,533 – |
– – |
– – |
4,954 – |
279,794 – |
| Wayne M. Morrison Vice– President, Chief Financial Officer, Secretary and Treasurer(4) |
2009 2008 |
145,925 150,112 |
– – |
– – |
– 13,250 |
– – |
– – |
4,958 3,000 |
150,883 166,362 |
Notes:
| (1) |
This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2009 and 2008 financial years for the fair value of stock options granted to each Named Executive Officer. The Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service– based vesting conditions. For additional information on the valuation assumptions with respect to the options, refer to Note 20 under the heading “Stock–Based Compensation” in our consolidated financial statements. |
| (2) |
Mr. Davenport was appointed Vice President and Chief Operating Officer effective January 12, 2009. |
| (3) |
Mr. Perry resigned as Chief Financial Officer, Secretary and Treasurer effective January 8, 2008 and as Chief Executive Officer on February 16, 2010. |
| (4) |
Mr. Morrison was appointed Vice President, Chief Financial Officer, Secretary and Treasurer effective January 8, 2008. |
| (5) |
Represents the dollar amount of the Company’s contribution to the Named Executive Officer’s 401(K) Retirement Plan. |
Outstanding Equity Awards as of December 31, 2009
The following table summarizes the outstanding equity awards as of December 31, 2009 for each of our named executive officers:
77
| Option Awards | Stock Awards | ||||||||
Name |
Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option Exercise Price ($) |
Option Expiration Date |
Number of Shares or Units of Stock That Have Not Vested (#) |
Market Value of Shares or Units of Stock That Have Not Vested ($) |
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
| Ronald Hirsch |
100,000 275,000 N/A |
N/A N/A 66,667 |
N/A N/A N/A |
$0.68 $0.85 $0.09 |
6/11/2017 7/11/2017 11/26/2013 |
N/A N/A N/A |
N/A N/A N/A |
N/A N/A N/A |
N/A N/A N/A |
| John T. Perry |
434,000 200,000 100,000 100,000 100,000 150,000 |
N/A N/A N/A N/A N/A 300,000 |
N/A N/A N/A N/A N/A N/A |
$0.68 $0.30 $0.40 $0.50 $0.60 $0.09 |
6/11/2017 4/1/2010 4/1/2010 4/1/2010 4/1/2010 11/26/2013 |
N/A N/A N/A N/A N/A N/A |
N/A N/A N/A N/A N/A N/A |
N/A N/A N/A N/A N/A N/A |
N/A N/A N/A N/A N/A N/A |
| Wayne M. Morrison |
133,333 N/A |
N/A 166,667 |
N/A N/A |
$1.10 $0.09 |
12/3/2012 11/26/2013 |
N/A N/A |
N/A N/A |
N/A N/A |
N/A N/A |
| Randy L. Davenport |
N/A |
333,333 |
N/A |
$0.21 |
1/12/2014 |
N/A |
N/A |
N/A |
N/A |
Equity Compensation Plans
As disclosed in more detail under the heading “Market For Common Equity And Related Shareholder Matters – Equity Compensation Plans”, we have granted options under the Amended and Restated 2006 Stock Incentive Plan. We have also granted stock options under individual compensation arrangements, and under the Coyote Springs option.
There are 5,555,675 stock options outstanding at December 31, 2009, of which 1,281,674 are non–qualified; non–plan stock options and 4,274,001 have been issued pursuant to the Company’s 2006 Stock Incentive Plan. The outstanding options expire at various dates from 2009 to 2017.
To date, certain equity–based fees have been paid to our non–executive directors in the form of awards issued pursuant to our Company’s Amended and Restated 2006 Stock Incentive Plan. The non–executive directors have limited rights, exercisable within applicable time limits, to elect to have any percentage of such awards, and any percentage of cash fees, payable in deferred stock units. Each of our non–executive directors exercised such rights in respect of the equity–based fees payable to him for services rendered during the year ended December 31, 2009.
Compensation of Directors
The following table summarizes the compensation of our Company’s directors for the year ended December 31, 2009:
78
Name(1) |
Fees Earned or Paid in Cash ($) |
Stock Awards (2) ($) |
Option Awards ($)(3) |
Non–Equity Incentive Plan Compen– sation ($) |
Non–qualified Deferred Compen– sation Earnings ($) |
All Other Compen– sation ($) |
Total ($) |
| T. Sean Harvey | 1,500 | 25,000(4) | – | – | – | – | 26,500 |
| Doug Hamilton | 3,000 | 40,000(4) | – | – | – | – | 43,000 |
| Stephen Seymour |
1,500 |
32,500(4) |
– |
– |
– |
– |
34,000 |
| John Cook | 1,500 | 32,500(4) | – | – | – | – | 34,000 |
Notes:
| (1) |
Ronald Hirsch a members of our board of directors and John Perry a member of our board of directors until his resignation on February 16, 2010, are Named Executive Officers and did not receive any compensation as directors that have not been disclosed in the summary compensation table above. |
| (2) |
This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2009 fiscal year for the fair value of deferred stock units, or DSUs, granted in 2009. Fair value is calculated using the average of the high and low price of our stock on the trading day prior to the date of grant. The outstanding DSUs for the directors at December 31, 2009 are as follows: Douglas Hamilton (288,423 DSUs), Stephen Seymour (220,708 DSUs), John Cook (85,329 DSUs) and T. Sean Harvey (139,141 DSUs). |
| (3) |
This column represents the fair value of the options awarded in 2009. Pursuant to SEC rules, the amount shown exclude the impact of estimated forfeitures related to service based vesting conditions. |
| (4) |
Fair value of deferred stock units issued pursuant to our Company’s Amended and Restated 2006 Stock Incentive Plan. |
On June 11, 2007, the board of directors granted 150,000 common stock purchase options to each of Ronald Hirsch, John Perry, Stephen Seymour, Douglas Hamilton, John Cook and Sean Harvey. These options were granted pursuant to our 2006 Stock Incentive Plan, and are exercisable for a period of ten years at a price of $0.68 per share. One–third of the options vested on the grant date and the remaining options will vest as to one–third on each of the first and second anniversaries of the grant date.
On July 11, 2007, the board of directors granted options to acquire 125,000 and 275,000 shares of common stock to Stephen Seymour and Ronald Hirsch, respectively. These options were granted pursuant to our 2006 Stock Incentive Plan and are exercisable for a period of ten years at a price of $0.85 per share. One–third of the options vested on the grant date and the remaining options will vest as to one–third on each of the first and second anniversaries of the grant date.
On November 26, 2008, the board of directors granted 100,000 common stock purchase options to each of Ronald Hirsch, John Perry, Stephen Seymour, Douglas Hamilton, John Cook and Sean Harvey. These options were granted pursuant to our Amended and Restated 2006 Stock Incentive Plan, and are exercisable for a period of five years at a price of $0.09 per share. One–third of the options vested March 2, 2009 (the “initial vesting date”) and the remaining options will vest as to one–third on each of the first and second anniversaries of the initial vesting date.
The board of directors has approved a compensation structure for our non–executive directors which is designed to fairly pay non–executive directors for work required while aligning the interests of the non–executive directors with the long–term interests of stockholders.
Non–executive directors are entitled to receive a $25,000 annual retainer, with an additional $15,000 payable annually to the Chairman of the Audit Committee and $7,500 payable annually to the Chairman of the Compensation Committee and the Chairman of the Nominating and Corporate Governance Committee. All of these fees are payable in stock, restricted stock, restricted stock units, or such other equity–based compensation as the board of directors determines.
79
To date, the equity–based fees have been payable in shares of our common stock pursuant to our 2006 Stock Incentive Plan. The non–executive directors have limited rights, exercisable within applicable time limits, to elect to have any percentage of such awards, and any percentage of cash fees, payable in DSUs. Each of our non–executive directors exercised such rights in respect of the equity–based fees payable to him for 2009 and 2008. Accordingly, all retainer fees paid during 2009 and 2008 were paid in DSUs. The DSUs are subject to the Amended and Restated 2006 Stock Incentive Plan. DSUs are awarded on a quarterly basis at the end of March, June, September and December, or as otherwise determined by the administrator of the Amended and Restated 2006 Stock Incentive Plan. The number of DSUs awarded each quarter is calculated by dividing the total fees payable to each director for that quarter by the fair market value of our common stock, determined in accordance with the Amended and Restated 2006 Stock Incentive Plan. Each DSU is the economic equivalent of one share of our common stock. The DSUs will be converted into shares of common stock upon the director’s termination of service, or as otherwise provided in their individual deferral election.
During 2009, T. Sean Harvey received 65,638 deferred stock units; Douglas Hamilton, the Chairman of our Audit Committee, received 105,021 deferred stock units; John Cook, the Chairman of our Compensation Committee, received 85,330 deferred stock units; and Stephen Seymour, the Chairman of our Corporate Governance and Nominating Committee received 85,330 deferred stock units. During 2009, 78,952 DSUs issued to John Cook were converted into common shares. The deferred stock units are subject to the Amended and Restated 2006 Deferred Stock Unit Plan.
We paid cash fees to our non–executive directors totaling $7,500 during the year ended December 31, 2009 as follows:
| Amount of Cash | |||
| Name | Fees Paid | ||
| T. Sean Harvey | $ | 1,500 | |
| Doug Hamilton | 3,000 | ||
| John Cook | 1,500 | ||
| Stephen Seymour | 1,500 | ||
| $ | 7,500 |
Employment Contracts and Termination of Employment and Change–In–Control Arrangements
Ronald Hirsch
Ronald Hirsch serves as Chairman of our Company’s board of directors pursuant to an executive employment agreement dated January 2, 2004. The executive employment agreement originally governed the terms of Mr. Hirsch’s employment as our Chief Executive Officer, until his resignation from that position effective February 15, 2006. The original term of this executive employment agreement was for three years, expiring on January 2, 2007. The executive employment agreement has been renewed until January 2, 2010, and is subject to automatic renewals for successive one year periods unless cancelled by either of the parties.
The executive employment agreement provides that, absent a change in control, if we were to terminate Mr. Hirsch for any reason not for cause (other than due to death or disability), we would have to pay to Mr. Hirsch: (i) his accrued unpaid salary, bonuses and expenses, if any; (ii) his base salary for 12 months; and (iii) his health insurance premiums until the earlier of the expiration of 12 months and the date he is eligible for similar health benefits with another employer. Following a change in control, in the event we
80
were to terminate Mr. Hirsch for any reason other than for death, disability or cause, we would be required to pay Mr. Hirsch all accrued unpaid salary, bonuses, and expenses, a lump sum equal to three times his annual base salary, and we would be required to pay for his health, medical, and disability insurance premiums for a period of 18 months. Mr. Hirsch may also elect to terminate his employment following a change of control and receive these payments.
Effective October 18, 2006, we entered into an agreement amending our executive employment agreement with Mr. Hirsch, pursuant to which we have paid Mr. Hirsch all of his accrued consulting fees for services provided by him to our Company between May 1, 2001 and October 19, 2003, and all of his accrued and unpaid salary (See “Certain Relationships and Related Transactions – Compensatory Arrangements”). As described in more detail below, the amended executive employment agreement contains certain provisions that will apply if our Company becomes a party to a “Significant Transaction,” which is defined to mean a significant transaction in which: (i) any person, together with all affiliates and associates of such person, becomes the beneficial owner, directly or indirectly, of securities of our Company representing or convertible into 51% or more of the common stock of our Company; or (ii) there is a sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of our Company or of assets of our Company valued at $12,000,000 or greater.
Our amended executive employment agreement with Mr. Hirsch provides, among other things, that:
-
Mr. Hirsch’s base salary in his capacity as Chairman from February 15, 2006, to February 15, 2007 continued at the original level provided for in his executive employment agreement of $200,000 per annum, and was reduced to $100,000 per annum thereafter.
-
Notwithstanding Mr. Hirsch’s retirement, resignation or termination for any reason other than for cause or as a result of a Significant Transaction which is accompanied by a change of majority ownership of our Company, our Company shall continue to provide health insurance benefits to Mr. Hirsch until he reaches the age of 65.
-
If our Company enters into an agreement with respect to a Significant Transaction which is accompanied by a change of majority ownership of our Company, Mr. Hirsch will voluntarily resign as Chairman effective immediately prior to the completion of the Significant Transaction.
-
In the event that Mr. Hirsch ceases to be employed by our Company (other than by way of termination for cause) in connection with the completion of a Significant Transaction, other than one which is accompanied by a change of majority ownership of our Company, we must provide to Mr. Hirsch certain payments and benefits set forth in the executive employment agreement – subject to execution and delivery by Mr. Hirsch to our Company of a mutual and general release of claims – including the payment to Mr. Hirsch of an amount equal to three times his annual base salary in a lump sum within 60 days following termination of employment.
-
In the event of the completion of a Significant Transaction which is accompanied by a change of majority ownership of our Company, Mr. Hirsch will not be entitled to receive the lump sum payment equal to three times his annual base salary.
Randy L. Davenport
Randy Davenport serves as our Company’s Chief Executive Officer. He continues to be subject to the executive employment agreement with our Company dated November 11, 2009, pursuant to which he has acted as our Vice President and Chief Operating Officer.
81
Mr. Davenport was initially engaged as our Vice President and Chief Operating Officer pursuant to the terms of a letter agreement dated January 12, 2009. Under the letter agreement, Mr. Davenport was entitled to a salary of $230,000 per annum. In addition Mr. Davenport was granted 500,000 stock options on January 12, 2009 pursuant to the Corporation’s 2006 Stock Incentive Plan, of which 166,667 vested on each of April 11, 2009 and January 12, 2010. The remaining 166,666 stock options will vest on January 12, 2011. The stock options have an exercise price of $0.205 per share and expire on January 12, 2014. During 2009, Mr. Davenport exercised 166,667 stock options.
The letter agreement also provided that Mr. Davenport would receive all customary benefits from our Company (including health care benefits, 401–K and 3 weeks of vacation annually), and that he would also be eligible for participation in bonus plans as implemented by the Board of Directors at a target level of 50% of his salary.
Our letter agreement with Mr. Davenport was superseded by the formal executive employment agreement effective November 11, 2009. Pursuant to the terms of the executive employment agreement, Mr. Davenport agreed to continue to serve as our Vice President and Chief Operating Officer., and to perform such duties and responsibilities as our board of directors may from time to time reasonably determine and assign, as is customarily performed by persons in an executive position.
In consideration for Mr. Davenports’s services, we have agreed to:
-
continue to pay Mr. Davenport an annual salary in the amount of $230,000 as provided in the letter agreement;
-
continue to provide Mr. Davenport with bonuses from time–to–time as determined by our compensation committee; and
-
continue to allow Mr. Davenport to participate in our 2006 Stock Incentive Plan, our Performance Incentive Plan, and such other plans that may from time to time be adopted by our Company during the term of employment to compensate or provide incentives to qualifying senior executives of our Company.
The executive employment agreement contains certain provisions that will apply if Mr. Davenport resigns or is terminated without cause following a change of control of our Company, including the following:
-
we will pay Mr. Davenport an amount equal to two times his base salary in a lump sum within 60 days;
-
if Mr. Davenport elects continuation of coverage of medical and dental benefits under the United States Consolidated Omnibus Budget Reconciliation Act of 1985, we will pay 100% of the premiums for the first 18 months of coverage; and
-
we will pay the premiums necessary for continuation of any supplemental disability policy or, at the election of our Company, a lump sum amount equal to the aggregate premiums to be paid on such a policy, in either case for a period of 12 months.
Mr. Davenport’s term of employment under the executive employment agreement will end on January 11, 2012. The executive employment agreement is subject to automatic extension for successive periods of one additional year unless either our Company or Mr. Davenport provides written notice of an intention not to renew the agreement no later than 90 days prior to the end of the then–current term of the agreement.
82
The executive employment agreement provides that we may terminate Mr. Davenport’s employment without cause, in which event:
-
Mr. Davenport will be entitled to continue to receive his base salary for 12 months (the “Davenport Severance Term”); and
-
if Mr. Davenport is eligible for and elects to continue his health insurance pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, following the date of his termination, we will pay the premiums until the earlier of (a) the expiration of the Davenport Severance Term, or (b) the date on which Mr. Davenport commences employment with another employer who provides health insurance benefits at least as favorable as those provided by us.
Wayne Morrison
Wayne Morrison has been appointed as our Company’s Vice President and Chief Financial Officer effective as of January 8, 2008. Our Company and Mr. Morrison are parties to a letter agreement dated December 3, 2007, whereby Mr. Morrison was offered the position of Controller of our Company, effective December 1, 2007, with a view toward Mr. Morrison’s appointment as Vice President and Chief Financial Officer upon confirmation of acceptability of Mr. Morrison as an executive officer from the Toronto Stock Exchange.
Effective September 9, 2008, we entered into an executive employment agreement with Mr. Morrison. Pursuant to the terms of the executive employment agreement, Mr. Morrison will continue serve as our Vice President and Chief Financial Officer. Mr. Morrison will perform such duties and responsibilities as set out in the Morrison Agreement and as our board of director’s may from time to time reasonably determine and assign as is customarily performed by persons in an executive position.
In consideration for Mr. Morrison’s services, we have agreed to:
-
continue to pay Mr. Morrison an annual salary in the amount of $175,000 (an increase of $25,000 over the $150,000 per annum originally provided for in the letter agreement);
-
continue to provide Mr. Morrison with bonuses from time–to–time as determined by our compensation committee; and
-
continue to allow Mr. Morrison to participate in our 2006 Stock Incentive Plan, our Performance Incentive Plan, and such other plans that may from time to time be adopted by our Company during the term of employment to compensate or provide incentives to qualifying senior executives of our Company.
The executive employment agreement contains certain provisions that will apply if Mr. Morrison resigns or is terminated without cause following a change of control of our Company, including the following:
-
we will pay Mr. Morrison an amount equal to three times his base salary in a lump sum within 60 days;
-
if Mr. Morrison elects continuation of coverage of medical and dental benefits under the United States Consolidated Omnibus Budget Reconciliation Act of 1985, we will pay 100% of the premiums for the first 18 months of coverage; and
83
- we will pay the premiums necessary for continuation of any supplemental disability policy or, at the election of our Company, a lump sum amount equal to the aggregate premiums to be paid on such a policy, in either case for a period of 12 months.
Mr. Morrison’s term of employment under the executive employment agreement will end on November 30, 2010. The executive employment agreement is subject to automatic extension for successive periods of one additional year unless either our Company or Mr. Morrison provides written notice of an intention not to renew the agreement no later than 90 days prior to the end of the then–current term of the agreement.
The executive employment agreement provides that we may terminate Mr. Morrison’s employment without cause, in which event:
-
Mr. Morrison will be entitled to continue to receive his base salary for 24 months (the “Morrison Severance Term”); and
-
if Mr. Morrison is eligible for and elects to continue his health insurance pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, following the date of his termination, we will pay the premiums until the earlier of (a) the expiration of the Morrison Severance Term, or (b) the date on which Mr. Morrison commences employment with another employer who provides health insurance benefits at least as favorable as those provided by us.
John T. Perry
John Perry served as our Company’s President and Chief Executive Officer until his resignation on February 16, 2010, pursuant to the terms of an executive employment agreement dated April 18, 2005. The executive employment agreement originally governed the terms of Mr. Perry’s employment as our Company’s Senior Vice President and Chief Financial Officer until his resignation from the position of Senior Vice President upon his appointment as President and Chief Executive Officer on April 23, 2007. The initial term of this agreement was for two years, subject to automatic renewal for successive one year periods unless cancelled by either of the parties. Mr. Perry’s annual base salary under the agreement was originally set at $175,000 annually, subject to his agreement to accept 20,000 shares of common stock per month in lieu of cash salary on an interim basis. Following the completion of our Company’s unregistered offering of special warrants in June 2007, Mr. Perry received his salary in cash. Given Mr. Perry’s increased responsibilities, the board of directors authorized an increase in his salary to $200,000 effective June 1, 2007.
At the time of his appointment as our Senior Vice President and Chief Financial Officer effective April 1, 2005, we agreed to issue 500,000 shares of common stock to Mr. Perry as a signing bonus, of which 250,000 were issued upon the execution of the memorandum of understanding, and the remaining 250,000 were issued in April 2006. We also issued options to Mr. Perry entitling him to purchase up to 500,000 shares of our common stock, exercisable for a term of five years, as follows: (a) 200,000 shares at an exercise price of $0.30 per share; (b) 100,000 at an exercise price of $0.40 per share; (c) 100,000 at an exercise price of $0.50 per share; and (d) 100,000 at an exercise price of $0.60 per share.
Effective October 18, 2006, we entered into an agreement amending our executive employment agreement with Mr. Perry. The amended executive employment agreement contained certain provisions that will apply if our Company becomes a party to a “Significant Transaction.” The definition of “Significant Transaction” in our amended executive employment agreement with Mr. Perry is identical to that contained in our amended executive employment agreements with Mr. Hirsch and Mr. Anderson.
84
Effective September 9, 2008, we entered into an amended and restated executive employment agreement with Mr. Perry. Pursuant to the terms of the amended and restated executive employment agreement, Mr. Perry agreed to continue to serve as our President and Chief Executive Officer.
In consideration for Mr. Perry’s services, we agreed to:
-
continue to pay Mr. Perry an annual salary in the amount of $200,000;
-
continue to provide Mr. Perry with bonuses from time–to–time as determined by our compensation committee; and
-
continue to allow Mr. Perry to participate in our 2006 Stock Incentive Plan, our Performance Incentive Plan, and such other plans that may from time to time be adopted by our Company during the term of employment to compensate or provide incentives to qualifying senior executives of our Company.
The amended and restated executive employment agreement contained certain provisions that were to apply if Mr. Perry resigned or was terminated without cause following a change of control of our Company.
Mr. Perry’s term of employment under the amended and restated executive employment agreement ended on April 22, 2009. However, the amended and restated executive employment agreement was subject to automatic extension for successive periods of one additional year unless either our Company or Mr. Perry provided written notice of an intention not to renew the agreement no later than 90 days prior to the end of the then–current term of the agreement.
The amended and restated executive employment agreement provided that we could terminate Mr. Perry’s employment without cause, in which event:
-
Mr. Perry was to be entitled to continue to receive his base salary for the greater of (a) the remainder of the then–current term of the amended and restated executive employment agreement, and (b) 12 months (the “Perry Severance Term”);
-
if Mr. Perry was eligible for and elected to continue his health insurance pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 following the date of his termination, we were to pay the premiums until the earlier of (a) the expiration of the Perry Severance Term, or (b) the date on which Mr. Perry commenced employment with another employer who provides health insurance benefits at least as favorable as those provided by us; and
-
immediate vesting and/or issuance of all unvested stock options, grants, rights or other equity.
On November 26, 2008, Mr. Perry was granted a total of 450,000 stock options, each entitling him to purchase one share of our Company’s common stock at an exercise price of $0.09 per share until November 23, 2013. Mr. Perry received 100,000 of these stock options in his capacity as a director of our Company. The balance of 350,000 options were granted to Mr. Perry in his capacity as an officer, subject to certain vesting conditions. At the time of his resignation as a director and officer of our Company, 150,000 options had not yet vested, but, in recognition of Mr. Perry’s significant contributions to our Company as a director and officer, our Board of Directors caused the vesting date to be accelerated to March 2, 2010.
85
2007 Performance Incentive Plan
On July 31, 2007, we adopted a performance incentive plan, or the 2007 Performance Plan, for the purpose of retaining and providing an incentive to certain key employees involved in restarting and commissioning the Johnson Camp Mine. In December 2008 and in March 2009, our Company revised certain targets or milestones, lowered the potential payout and modified the effective period of the plan. The 2007 Performance Plan covered the period of time from July 1, 2007, to April 30, 2009 and was based its payouts on the achievement of certain key targets and milestones associated with the restart and commissioning of the Johnson Camp Mine.
Our Compensation Committee was responsible for administering the 2007 Performance Plan, including selecting the employees eligible to participate therein, determining their participation level and establishing key target dates for payments to be made under the 2007 Performance Plan.
Under the 2007 Performance Plan, the achievement of targets or milestones was not on an “all or nothing” basis. If a milestone was achieved later than the target date set by the Compensation Committee, it will still have been achieved; however, it will have been achieved at less than 100%. The level of achievement reached with respect to the established targets or milestones was determined by the Chief Executive Officer and President, subject to approval by the Compensation Committee
In August, 2007, the Compensation Committee selected the employees entitled to participate in the 2007 Performance Plan and set the key target dates and payout levels under the 2007 Performance Plan. John Perry, our former President and Chief Executive Officer until his resignation effective February 16, 2010, and Erland A. Anderson, our former Executive Vice President and Chief Operating Officer, until his resignation effective January 12, 2009, were both participants under the 2007 Performance Plan and were entitled to a maximum payout of up to 110% of their base salary during the plan period if all targets or milestones are met at 100%. Upon appointment as Vice President and Chief Financial Officer on January 8, 2008, Wayne Morrison was also selected to participate in the 2007 Performance Plan. He was entitled to a maximum payout of up to 80% of his base salary during the remaining plan period if all targets or milestones are met at 100%. Various other employees participated in the 2007 Performance Plan at lower percentages. In June 2009, after a review of the milestones and our Company’s success in achieving them, the Compensation Committee determined that the 2007 Performance Plan payout to be $417,141. As of December 31, 2009, the entire amount of the payout remains unpaid.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information as of March 15, 2010 regarding the beneficial ownership of our common stock by:
-
each person who is known by us to beneficially own more than 5% of our shares of common stock; and
-
each named executive officer, each director and all of our directors and executive officers as a group.
The number of shares beneficially owned and the percentage of shares beneficially owned are based on 171,386,059 shares of common stock outstanding as of March 15, 2010.
For the purposes of the information provided below, shares that may be issued upon the exercise or conversion of options, warrants and other rights to acquire shares of our common stock that are exercisable or convertible within 60 days following March 15, 2010, are deemed to be outstanding and beneficially owned by the holder for the purpose of computing the number of shares and percentage ownership of that holder, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
86
| As of March 15, 2010 | ||||||
| Name and Address of Beneficial Owner(1) | Shares | Percent | ||||
| Named Executive Officers and Directors(2) | ||||||
| Ronald A. Hirsch Chairman |
8,122,675 |
(4) | 7.3% |
|||
| Stephen D. Seymour Director |
5,490,519 |
(5) | 4.9% |
|||
| Douglas P. Hamilton Director |
366,666 |
(6) | 0.3% |
|||
| John F. Cook Director |
587,109 |
(7) | 0.5% |
|||
| T. Sean Harvey Director |
823,416 |
(8) | 0.7% |
|||
| Randy L. Davenport(8) Chief Executive Officer |
408,333 |
(9) | 0.4% |
|||
| Wayne M. Morrison(11) Vice President, Chief Financial Officer, Secretary and Treasurer |
319,999 |
(10) | 0.3% |
|||
| Directors and Executive Officers as a Group
(Seven Persons) |
16,204,046 |
(11) | 14.4% |
|||
Notes
| (1) |
Under Rule 13d–3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of common shares actually outstanding on March 15, 2010. |
| (2) |
The address of the executive officers and directors is c/o Nord Resources Corporation, 1 West Wetmore Road, Suite 203, Tucson, Arizona, 85705. |
| (3) |
Mr. Davenport was appointed Chief Executive Officer on February 16, 2010. |
| (4) |
Includes 408,334 shares of common stock that may be acquired pursuant to options exercisable within 60 days. |
| (5) |
Includes 458,334 shares of common stock that may be acquired pursuant to options exercisable within 60 days. Also includes 1,575,000 shares of common stock held by Mr. Seymour as a co–trustee of a trust, and 36,300 owned by his spouse. Mr. Seymour disclaims beneficial ownership of the 36,300 shares of common stock owned by his spouse. |
| (6) |
Includes 333,667 shares of common stock that may be acquired pursuant to options exercisable within 60 days. |
| (7) |
Includes 141,491 outstanding shares of common stock, all of which are owned by Tormin Resources Limited, a company owned and controlled by Mr. Cook. Also includes 366,667 shares of common stock that may be acquired pursuant to options exercisable within 60 days. |
| (8) |
Includes 93,750 shares of common stock that may be acquired pursuant to warrants, and 166,667 shares of common stock that may be acquired pursuant to options, in each case exercisable within 60 days. |
| (9) |
Includes 166,667 shares of common stock that may be acquired pursuant to options exercisable within 60 days. |
| (10) |
Includes 216,666 shares of common stock that may be acquired pursuant to options exercisable within 60 days. |
87
| (11) |
Consists of 2,149,997 shares of common stock that may be acquired pursuant to options, and 93,750 shares of common stock that may be acquired pursuant to warrants, in each case exercisable within 60 days. |
The following table sets forth, as of March 15, 2010, certain information regarding beneficial ownership of our common stock by each person known by us to be the beneficial owner of more than 5% of our outstanding common stock.
| Common Stock Beneficially Owned | |||
| Name and Address Of Beneficial | Percent of | ||
| Owner | Title of Class | Number of Shares | Class(1) |
| Ross J. Beaty 864930 B. C. Ltd. 1550-625 Howe Street Vancouver, B.C. Canada V6C 2T6 |
Common Stock
|
68,500,000(2)
|
47.3% |
| Riaz Shariff 1704 Al Moosa Tower 1 Sheikh Zayed Road Dubai, U.A.E. |
Common Stock |
11,470,000(3) |
9.9% |
| Sprott Asset Management South Tower Royal Bank Plaza 200 Bay Street SL Level Toronto, ON Canada, M5J 2J5 |
Common Stock
|
8,984,250 (4)
|
7.9% |
| RBC Global Resources Fund 200 Bay Street Toronto, ON Canada, M5J 2J5 |
Common Stock |
6,900,000 (5) |
6.1% |
Notes
| (1) |
Applicable percentage of ownership is based on 171,386,059 shares of common stock outstanding as of March 15, 2010 together with securities exercisable or convertible into shares of common stock within 60 days of March 15, 2010, for each stockholder. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of March 15, 2010, are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
| (2) |
Includes 34,250,000 shares of common stock that may be acquired upon exercise of outstanding common stock purchase warrants. |
| (3) |
Includes 5,750,000 shares of common stock that may be acquired upon exercise of outstanding common stock purchase warrants. |
| (4) |
Includes 3,718,150 shares of common stock that may be acquired upon exercise of outstanding common stock purchase warrants. |
| (5) |
Includes 2,300,000 shares of common stock that may be acquired upon exercise of outstanding common stock purchase warrants. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Since the beginning of our last fiscal year, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any material interest, direct or indirect, in any transaction,
88
or in any proposed transaction, in which our Company was or is to be a participant and in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year–end for the last two completed fiscal years.
Compensatory Arrangements
Other than compensatory arrangements described under “Executive Compensation,” we have no other transactions, directly or indirectly, with our promoters, directors, senior officers or principal stockholders, which have materially affected or will materially affect us.
Where You Can Find More Information
Statements contained in this annual report as to the contents of any contract, agreement or other document referred to include those terms of such documents that we believe are material. Whenever a reference is made in this annual report to any contract or other document of ours, you should refer to the exhibits that are a part of the annual report for a copy of the contract or document.
You may read and copy all or any portion of the annual report or any other information that Nord Resources Corporation files at the SEC’s public reference room at One Station Place, 100 F Street, NE, Washington, DC 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1–800–SEC–0330 for further information on the operation of the public reference room. Our SEC filings, including the annual report, are also available to you on the SEC’s website at www.sec.gov.
Glossary of Technical Terms
SEC Industry Guide 7 Definitions
| reserve |
The term “reserve” refers to that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves must be supported by a feasibility study done to bankable standards that demonstrates the economic extraction. (“Bankable standards” implies that the confidence attached to the costs and achievements developed in the study is sufficient for the project to be eligible for external debt financing.) A reserve includes adjustments to the in–situ tons and grade to include diluting materials and allowances for losses that might occur when the material is mined. |
|
| |
| proven (measured) reserve |
The term “proven reserve” refers to reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape depth and mineral content of reserves are well–established. |
|
| |
| probable (indicated) reserve |
The term “probable reserve” refers to reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. |
89
| mineralized material | The term “mineralized material” refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction. |
| exploration stage | An “exploration stage” prospect is one which is not in either the development or production stage. |
| production stage | A “production stage” project is actively engaged in the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product. |
Following are definitions of certain technical terms used in this annual report.
Acid Soluble Copper. A measure of the estimated amount of copper in a rock sample that can be dissolved using a weak acid digestion. The acid soluble copper can be significantly less than the total copper in a rock.
Akaganeite. A tetragonal mineral, ferric oxyhydroxide beta–FeO(OH,Cl). A tetragonal mineral belongs to a system of crystallization having all three axes at right angles and the two lateral axes equal.
Anomaly. A geological feature, especially in the subsurface, distinguished by geological, geophysical, or geochemical means, which is different from the general surroundings and is often of potential economic value.
Assay. To analyze the proportions of metals in an ore; to test an ore or mineral for composition, purity, weight, or other properties of commercial interest. “Assay” can also refer to the test or analysis itself, as well as its results.
Block Model. Computer–generated block model of an ore deposit in which each block contains information about the geology, ore grade, tonnage, density and dimensions of that block in space. The purpose of the geological block model is to provide estimates of grade and tonnage for mine reserve estimating purposes and for mine planning.
Cathode Copper. A marketable product of copper resulting from SX–EW.
Chrysocolla. A monoclinic mineral, (Cu,Al)2 H2 Si2 O5 (OH) 4 .nH2 O. It can cryptocrystalline or amorphous, and forms incrustations and thin seams in oxidized parts of copper–mineral veins. Cryptocrystalline is descriptive of the texture of a rock consisting of crystals that are too small to be recognized and separately distinguished.
Column Test. A metallurgical test using columns of various diameters and heights filled with ore of various sizes to confirm recovery, recovery rate and reagent requirements for the tested ores.
Cut off Grade. The cutoff grade is the deemed grade of mineralization, established by reference to economic factors, above which material in included in mineral resource or reserve calculations and below which the material is considered waste. The cutoff grade may be either: (a) an external cutoff grade, which refers to the grade of mineralization used to control the external or design limits of an open pit based upon the expected economic parameters of the operation; or (b) an internal cutoff grade, which refers to the minimum grade required for blocks of mineralization present within the confines of a deposit to be included in resource or reserve estimates. In order for rock to be above the internal cutoff grade, the net revenue from processing the rock must exceed the sum of all cash operating costs, excluding mining costs. One of the reasons that cut off grade is important is that it determines how the mined ore will be processed.
90
Fault. A planar feature produced by breaking of the Earth’s crust with movement on one, or both, sides of the plane.
Feasibility Study. A comprehensive study of a deposit in which all geological, engineering, operating, economic and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production.
Geophysical. Surveys that are conducted to measure the Earth’s physical properties as a means of identify areas where anomalous features may exist.
Heap Leaching. A process whereby copper is recovered from ore by heaping broken ore on sloping impermeable pads, repeatedly irrigating the heaps with a diluted sulfuric acid solution which dissolves the copper content in the ore, collecting the copper–laden solutions (PLS), and stripping the solution of copper.
Kilovolt–Ampere. A unit of electrical power equal to 1000 volt–amperes.
Leach. The dissolution of soluble constituents from a rock or ore body by the natural or artificial action of percolating solutions.
Lerchs–Grossman Analysis. A method of precise open pit optimization commonly used in the mining industry. The technique, founded in 3–dimensional graph theory, relies on a regular system of blocks which defines the value (profit, loss) and type (ore, waste) of material contained in the blocks. Each block receives a positive or negative value representing the dollar value (profit/loss) that would be expected by excavating and extracting the mineral.
Lithology. The character of a rock described in terms of its structure, color, mineral composition, grain size, and arrangement of its component part. It is all those visible features that in the aggregate impart individuality to the rock.
Manto. A flat–lying, bedded deposit; either a sedimentary bed or a replacement strata–bound ore body.
Malachite. A monoclinic mineral, Cu2 CO3 (OH)2. It can be dimorphous with georgeite, and occurs with azurite (a monoclinic mineral, Cu3 (OH)2 (CO3 )2) in oxidized zones of copper deposits. Dimorphism describes the property of a chemical compound to crystallize in either of two different crystal structures.
Metallurgical Testing. The study of the physical properties of metals as affected by composition, mechanical working, and heat treatment.
Mine. An opening or excavation in the ground for the purpose of extracting minerals; a pit or excavation from which ores or other mineral substances are taken by digging; an opening in the ground made for the purpose of taking out minerals; an excavation properly underground for digging out some usable product, such as ore, including any deposit of any material suitable for excavation and working as a placer mine; collectively, the underground passage and workings and the minerals themselves.
Mineralized. Material added by hydrothermal solutions, principally in the formation of ore deposits. Often refers to the presence of a mineral of economic interest in a rock.
91
Mixer–settler. Extraction apparatus. A mixer–settler consists of an agitation tank (commonly known as a “mixer” or “mix box”) in which the aqueous and organic solutions are contacted (e.g. PLS and kerosene), and a shallow gravity settling basin (commonly known as a “settler”) where the mixed solutions are allowed to settle due to natural gravity. The resulting individual layers of solution are capable of separate discharge.
Open Pit Mining. The process of excavating an ore body from the surface in progressively deeper layered cuts or steps. Sufficient waste rock adjacent to the ore body is removed to maintain mining access and to maintain the stability of the resulting pit.
Open Pit. A surface mine working open to daylight, such as a quarry.
Ore. The naturally occurring material from which a mineral or minerals of economic value can be extracted profitably or to satisfy social or political objectives. The term is generally but not always used to refer to metalliferous material, and is often modified by the names of the valuable constituent.
Oxide. A mineral compound characterized by the linkage of oxygen with one or more metallic elements. Sulfide minerals typically convert to oxides on exposure to oxygen. Oxides are more amenable to heap leach techniques than are sulfides.
Patented Mining Claims. A patented mining claim is one for which the Federal Government has passed its title to the claimant, making it private land. A person may mine and remove minerals from a mining claim without a mineral patent. However. a mineral patent gives the owner exclusive title to the locatable minerals. It also gives the owner title to the surface and other resources.
Porphyry. An igneous rock containing conspicuous crystals or phenocysts in a fine–grained groundmass; type of mineral deposit in which ore minerals are widely disseminated, generally of a low grade by large tonnage.
PLS. Pregnant Leach Solution is acidic copper–laden water generated from stockpile leaching and heap leaching. Pregnant Leach Solution is used in the SX–EW process.
Raffinate. The portion of an original liquid (PLS) that remains after other components have been dissolved by a solvent.
Reverse Circulation. The circulation of bit–coolant and cuttings–removal liquids, drilling fluid, mud, air, or gas down the borehole outside the drill rods and upward inside the drill rods. Often used to describe an advanced drilling and sampling method that takes a discrete sample from a drill interval with the objective of maintaining sample integrity.
Reserve. Measurement of size and grade of a mineral deposit that infers parameters have been applied to assess the potential for economic development.
Run–of–Mine. Ore in its natural, unprocessed state as it is mined (no crushing, grinding, concentrating, metallurgical extraction, etc.). For example, for a copper deposit, run–of–mine ore is material that has been drilled from a mine and blasted into broken pieces of rock taken out and put directly on heap leach pads without any further crushing.
Sediments. Material that has been deposited on the surface of the Earth through geologic means, usually transported and deposited by water. This material may eventually be cemented into rock.
Strike. The course or bearing of the outcrop of an inclined bed, vein, or fault plane on a level surface; the direction of a horizontal line perpendicular to the direction of the dip.
92
Sulfide. A mineral compound characterized by the linkage of sulphur with a metal.
Solvent extraction–electrowinning (SX–EW). A hydrometallurgical process for the recovery of copper from oxide ores through the use of an organic solvent and strong acid to concentrate the metal in solution, and using electrolysis to plate the metal out of solution. Produces a high–grade product that can be treated and sold as refined metal.
Tons. A unit of weight measurement. In this annual report it means dry short tons (2,000 pounds).
Total Copper. A measure of the estimated amount of copper in a rock sample.
Unpatented mining claims. Land which has been staked and recorded in appropriate mining registries and in respect of which the owner has the right to explore for and exploit the minerals contained in such land and to conduct mining operations thereon. In this annual report, unpatented mining claims refers to lode claims (and not placer claims).
Volt–ampere. A unit of electric power equal to the product of one volt and one ampere, equivalent to one watt.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
We appointed Mayer Hoffman McCann P.C. to serve as our independent auditors for the years ended December 31, 2009 and December 31, 2008. We have not retained the services of any other independent auditors. Mayer Hoffman McCann P.C. performed the services listed below and was paid the fees listed below for the fiscal years ended December 31, 2009 and December 31, 2008:
Audit Fees
| 2009 | 2008 |
| $386,850 | $292,085 |
Audit Related Fees
| 2009 | 2008 |
| None | None |
Audit Fees, of which 100% thereof were approved by the Company’s audit committee, consist of fees billed for professional services rendered for the audits of our financial statements, reviews of interim financial statements included in quarterly reports, services performed in connection with filings with the Securities and Exchange Commission and related comfort letters and other services that are normally provided by Mayer Hoffman McCann P.C. in connection with statutory and regulatory filings or engagements.
Tax Fees
| 2009 | 2008 |
| $70,095 | $36,730 |
Tax Fees consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
93
All Other Fees
| 2009 | 2009 |
| None | None |
Audit Committee Pre–Approval of Audit and Permissible Non–Audit Services of Independent Auditors
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before an independent registered public accounting firm is engaged by us to render any auditing or permitted non–audit related service, the engagement be:
-
approved by our audit committee; or
-
entered into pursuant to pre–approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.
Our audit committee was formed in February 2006, and has assumed responsibility for the pre–approval of audit and permitted non–audit services to be performed by our Company’s independent auditor. The audit committee will, on an annual basis, consider and, if appropriate, approve the provision of audit and non–audit services by Mayer Hoffman McCann P.C. Thereafter, the audit committee will, as necessary, consider and, if appropriate, approve the provision of additional audit and non–audit services by Mayer Hoffman McCann P.C. which are not encompassed by the audit committee’s annual pre–approval and are not prohibited by law. The audit committee has delegated to the chair of the audit committee the authority to pre–approve, on a case–by–case basis, non–audit services to be performed by Mayer Hoffman McCann P.C.
PART IV
| ITEM 15. | EXHIBITS |
| Exhibit | |
| Number | Description |
| Articles of Incorporation and By–laws | |
| 3.1 | Certificate of Incorporation (as amended) of Nord Resources Corporation(1) |
| 3.2 | Amended and Restated Bylaws of Nord Resources Corporation(2) |
| 3.3 | Amendment to Amended Certificate of Incorporation(26) |
| Instruments defining the rights of security holders, including indentures | |
| 4.1 | Pages from Amended and Restated Bylaws of Nord Resources Corporation defining the rights of holders of equity or debt securities(1) |
| 4.2 | Convertible Promissory Note for $35,000 issued by Nord Resources Corporation to Ronald A. Hirsch dated June 29, 2004(1) |
| 4.3 | Amendment to Convertible Promissory Note dated June 29, 2004 issued by Nord Resources Corporation to Ronald A. Hirsch effective November 30, 2005(1) |
94
| 4.4 |
Convertible Promissory Note for $66,000 issued by Nord Resources Corporation to Stephen D. Seymour dated August 19, 2004(1) |
| 4.5 |
Amendment to Convertible Promissory Note dated August 19, 2004 issued by Nord Resources Corporation to Stephen D. Seymour effective September 26, 2005(1) |
| 4.6 |
Second Amendment to Convertible Promissory Note dated August 19, 2004 issued by Nord Resources Corporation to Stephen D. Seymour effective November 30, 2005(1) |
| 4.7 |
Convertible Promissory Note for $106,000 issued by Nord Resources Corporation to Ronald A. Hirsch dated October 4, 2004(1) |
| 4.8 |
Amendment to Convertible Promissory Note dated October 4, 2004 issued by Nord Resources Corporation to Ronald A. Hirsch effective September 26, 2005(1) |
| 4.9 |
Second Amendment to Convertible Promissory Note dated October 4, 2004 issued by Nord Resources Corporation to Ronald A. Hirsch effective November 30, 2005(1) |
| 4.10 |
Revolving Line of Credit Agreement, between Nord Resources Corporation and Ronald A. Hirsch and Stephen Seymour dated June 21, 2005(1) |
| 4.11 |
Security Agreement between Nord Resources Corporation and Ronald A. Hirsch and Stephen Seymour dated June 21, 2005(1) |
| 4.12 |
Secured Promissory Note ($600,000) between Nord Resources Corporation and Ronald A. Hirsch and Stephen Seymour dated June 21, 2005(1) |
| 4.13 |
Second Amended and Restated Revolving Line of Credit between Nord Resources Corporation and Ronald A. Hirsch and Stephen Seymour dated November 8, 2005(3) |
| 4.14 |
Amended and Restated Warrant Certificate issued by Nord Resources Corporation to Auramet Trading, LLC, dated as of October 17, 2005(5) |
| 4.15 |
Warrant Certificate issued by Nord Resources Corporation to Auramet Trading, LLC, dated April 17, 2006(5) |
| 4.16 |
Acknowledgement of Ronald A. Hirsch regarding Agreement for Credit Risk Participation dated November, 2005(1) |
| 4.17 |
Secured Promissory Note for $3,900,000 issued by Nord Resources Corporation to Nedbank Limited dated November 8, 2005(1) |
| 4.18 |
Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing among Nord Resources Corporation , First American Title Insurance Company and Nedbank Limited dated November 8, 2005(1) |
| 4.19 |
Warrant Certificate issued by Nord Resources Corporation to Nedbank Limited, dated May 8, 2006(4) |
| 4.20 |
Environmental Indemnity Agreement between Nord Resources Corporation and Nedbank Limited dated November, 2005(1) |
| 4.21 | Subordination Agreement among Ronald A. Hirsch, Stephen D. Seymour and Nedbank Limited dated November 8, 2005(1) |
95
| 4.22 | Letter from Nord Resources Corporation to Nedbank Limited regarding conditions subsequent, dated November 8, 2005(1) |
| 4.23 | Perfection Certificate completed by Nord Resources Corporation for Nedbank Limited, dated November 8, 2005(1) |
| 4.24 | Waiver Agreement and Amendment of Promissory Note between Nord Resources Corporation and Nedbank Limited, dated February 6, 2006(3) |
| 4.25 | Letter Agreement between Nord Resources Corporation and Nedbank Limited, dated May 5, 2006, extending the maturity date of the Secured Promissory Note dated November 8, 2005 in the principal amount of $3,900,000, to May 15, 2006(4) |
| 4.26 | Letter Agreement between Nord Resources Corporation, Ronald Hirsch and Stephen Seymour, dated May 5, 2006, extending the maturity date indebtedness under the Second Amended and Restated Revolving Line of Credit Agreement, among Nord Resources Corporation and Ronald A. Hirsch and Stephen Seymour dated November 8, 2005(7) |
| 4.27 | Modification Agreement between Nord Resources Corporation and Nedbank Limited, dated May 15, 2006(5) |
| 4.28 | Warrant Certificate issued by Nord Resources Corporation to Nedbank Limited, dated May 15, 2006(5) |
| 4.29 | Warrant Certificate issued by Nord Resources Corporation to Auramet Trading LLC, dated May 15, 2006(5) |
| 4.30 | Amended and Restated Secured Promissory Note, dated May 31, 2006, payable to Nedbank Limited in the principal amount of $4,900,000(6) |
| 4.31 | First Amendment to Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated May 31, 2006, among Nord Resources Corporation, First American Title Insurance Company and Nedbank Limited(6) |
| 4.32 | Amendment to Subordination Agreement, dated May 31, 2006, made for the benefit of Nedbank Limited by Ronald Hirsch and Stephen Seymour(6) |
| 4.33 | Warrant Certificate issued by Nord Resources Corporation to Auramet Trading, LLC, dated May 31, 2006 representing 250,000 common stock purchase warrants(6) |
| 4.34 | Letter Agreement between Nord Resources Corporation Nedbank Limited and Auramet Trading, LLC dated August 8, 2006, extending the maturity date of a secured loan in the principal amount of $4,900,000(9) |
| 4.35 | Agreement between Nord Resources Corporation, Ronald Hirsch and Stephen Seymour, dated August 14, 2006, extending the maturity date indebtedness under the Second Amended and Restated Revolving Line of Credit Agreement, among Nord Resources Corporation and Ronald A. Hirsch and Stephen Seymour dated November 8, 2005(11) |
| 4.36 | Amended and Restated Convertible Promissory Note for $35,000 issued by Nord Resources Corporation to Ronald A. Hirsch dated for reference June 29, 2004(12) |
96
| 4.37 |
Amended and Restated Convertible Promissory Note for $66,000 issued by Nord Resources Corporation to Stephen D. Seymour dated for reference August 19, 2004(12) |
| 4.38 |
Amended and Restated Convertible Promissory Note for $106,000 issued by Nord Resources Corporation to Ronald A. Hirsch dated for reference October 4, 2004(12) |
| 4.39 |
Agreement between Nord Resources Corporation, Ronald Hirsch and Stephen Seymour, dated August 17, 2006, extending the maturity date indebtedness under the Second Amended and Restated Revolving Line of Credit Agreement, among Nord Resources Corporation and Ronald A. Hirsch and Stephen Seymour dated November 8, 2005(12) |
| 4.40 |
Modification Agreement dated September 30, 2006 between Nord Resources Corporation and Nedbank Limited(13) |
| 4.41 |
Amendment agreement dated September 29, 2006 between Nord Resources Corporation and Stephen Seymour in respect of Amended and Restated Convertible Promissory Note dated for reference August 19, 2004, in the principal amount of $66,000(15) |
| 4.42 |
Amendment agreement dated September 29, 2006 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference October 4, 2004, in the principal amount of $106,000(15) |
| 4.43 |
Amendment agreement dated September 29, 2006 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference June 29, 2004, in the principal amount of $35,000(15) |
| 4.44 |
Amending agreement dated September 29, 2006 among Nord Resources Corporation, Ronald Hirsch and Stephen Seymour in respect of that certain $600,000 Revolving Line of Credit Agreement and that certain Secured Promissory Note, as previously amended, each dated for reference June 21, 2005(15) |
| 4.45 |
Letter Agreement among Nedbank Limited, Nord Resources Corporation and Auramet Trading, LLC dated for reference December 19, 2006 and executed on December 20, 2006(20) |
| 4.46 |
Amendment agreement dated December 22, 2006 between Nord Resources Corporation and Stephen Seymour in respect of Amended and Restated Convertible Promissory Note dated for reference August 19, 2004, in the principal amount of $66,000(20) |
| 4.47 |
Amendment agreement dated December 22, 2006 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference October 4, 2004, in the principal amount of $106,000(20) |
| 4.48 |
Amendment agreement December 22, 2006 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference June 29, 2004, in the principal amount of $106,000(20) |
| 4.49 |
Amending agreement dated December 22, 2006 among Nord Resources Corporation, Ronald Hirsch and Stephen Seymour in respect of that certain $600,000 Revolving Line of Credit Agreement and that certain Secured Promissory Note, as previously amended, each dated for reference June 21, 2005(20) |
97
| 4.50 |
Letter Agreement among Nedbank Limited, Nord Resources Corporation and Auramet Trading, LLC dated for reference January 11, 2007(21) |
| 4.51 |
Amendment agreement dated January 15, 2007 between Nord Resources Corporation and Stephen Seymour in respect of Amended and Restated Convertible Promissory Note dated for reference August 19, 2004, in the principal amount of $66,000(21) |
| 4.52 |
Amendment agreement dated January 15, 2007 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference October 4, 2004, in the principal amount of $106,000(21) |
| 4.53 |
Amendment agreement dated January 15, 2007 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference June 29, 2004, in the principal amount of $35,000(21) |
| 4.54 |
Amending agreement dated January 15, 2007 among Nord Resources Corporation, Ronald Hirsch and Stephen Seymour in respect of that certain $600,000 Revolving Line of Credit Agreement and that certain Secured Promissory Note, as previously amended, each dated for reference June 21, 2005(21) |
| 4.55 |
Letter Agreement among Nedbank Limited, Nord Resources Corporation and Auramet Trading, LLC dated for reference January 30, 2007(22) |
| 4.56 |
Amendment agreement dated January 31, 2007 between Nord Resources Corporation and Stephen Seymour in respect of Amended and Restated Convertible Promissory Note dated for reference August 19, 2004, in the principal amount of $66,000(22) |
| 4.57 |
Amendment agreement dated January 31, 2007 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference October 4, 2004, in the principal amount of $106,000(22) |
| 4.58 |
Amendment agreement dated January 31, 2007 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference June 29, 2004, in the principal amount of $35,000(22) |
| 4.59 |
Amending agreement dated January 31, 2007 among Nord Resources Corporation, Ronald Hirsch and Stephen Seymour in respect of that certain $600,000 Revolving Line of Credit Agreement and that certain Secured Promissory Note, as previously amended, each dated for reference June 21, 2005(22) |
| 4.60 |
Letter Agreement among Nedbank Limited, Nord Resources Corporation and Auramet Trading, LLC dated for reference February 23, 2007(23) |
| 4.61 |
Modification Agreement between Nedbank Limited and Nord Resources Corporation dated for reference February 23, 2007(23) |
| 4.62 |
Amendment agreement dated February 23, 2007 between Nord Resources Corporation and Stephen Seymour in respect of Amended and Restated Convertible Promissory Note dated for reference August 19, 2004, in the principal amount of $66,000(23) |
| 4.63 |
Amendment agreement dated February 23, 2007 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference October 4, 2004, in the principal amount of $106,000(23) |
98
| 4.64 |
Amendment agreement dated February 23, 2007 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference June 29, 2004, in the principal amount of $35,000(23) |
| 4.65 |
Amending agreement dated February 23, 2007 among Nord Resources Corporation, Ronald Hirsch and Stephen Seymour in respect of that certain $600,000 Revolving Line of Credit Agreement and that certain Secured Promissory Note, as previously amended, each dated for reference June 21, 2005(23) |
| 4.66 |
Term Sheet and Agreement between Nedbank Limited and Nord Resources Corporation dated for reference April 13, 2007(26) |
| 4.67 |
Letter Agreement among Nedbank Limited, Nord Resources Corporation and Auramet Trading, LLC dated for reference April 17, 2007(26) |
| 4.68 |
Amendment Agreement dated April 30, 2007 between Nord Resources Corporation and Stephen Seymour in respect of Amended and Restated Convertible Promissory Note dated for reference August 19, 2004, in the principal amount of $66,000(25) |
| 4.69 |
Amendment Agreement dated April 30, 2007 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference October 4, 2004, in the principal amount of $106,000(25) |
| 4.70 |
Amendment Agreement dated April 30, 2007 between Nord Resources Corporation and Ronald Hirsch in respect of Amended and Restated Convertible Promissory Note dated for reference June 29, 2004, in the principal amount of $35,000(25) |
| 4.71 |
Amending Agreement dated April 30, 2007 among Nord Resources Corporation, Ronald Hirsch and Stephen Seymour in respect of that certain $600,000 Revolving Line of Credit Agreement and that certain Secured Promissory Note, as previously amended, each dated for reference June 21, 2005(25) |
| 4.72 |
Special Warrant Indenture among Nord Resources Corporation, Blackmont Capital Inc. and Computershare Trust Company of Canada, as special warrant trustee, dated June 5, 2007(27) |
| 4.73 |
Warrant Indenture between Nord Resources Corporation and Computershare Trust Company of Canada, as warrant agent, dated June 5, 2007(27) |
| 4.74 |
Registration Rights Agreement among Nord Resources Corporation, Blackmont Capital Inc. and Salman Partners Inc. dated June 5, 2007(27) |
| 4.75 |
Agent’s Option Certificate issued to Blackmont Capital Inc., dated June 5, 2007(27) |
| 4.76 |
Agent’s Option Certificate issued to Salman Partners Inc., dated June 5, 2007(27) |
| Material Contracts | |
| 10.1 |
Executive Employment Agreement between Nord Resources Corporation and Ronald A. Hirsch dated January 2, 2004(1) |
| 10.2 | Waiver Agreement between Nord Resources Corporation and Ronald A. Hirsch dated February 15, 2006(3) |
99
| 10.3 | Executive Employment Agreement between Nord Resources Corporation and Erland Anderson dated January 2, 2004(1) |
| 10.4 | Waiver Agreement and Amendment of Employment Agreement between Nord Resources Corporation and Erland Anderson dated February 15, 2006(3) |
| 10.5 | Nord Resources Corporation Stock Option granted to Erland Anderson February 1, 2006(3) |
| 10.6 | Executive Employment Agreement between Nord Resources Corporation and John Perry dated April 18, 2005(1) |
| 10.7 | Waiver Agreement between Nord Resources Corporation and John Perry dated February 15, 2006(3) |
| 10.8 | Letter Agreement between Nord Resources Corporation and Nicholas Tintor regarding employment matters dated February 15, 2006(3) |
| 10.9 | Option to Purchase the “Coyote Springs” property from Thornwell Rogers, South Branch Resources LLC and MRPGEO LLC to Nord Resources Corporation dated January 28, 2004(1) |
| 10.10 | First Amendment to Option to Purchase Coyote Springs property among Thornwell Rogers, South Branch Resources LLC, MRPGEO LLC and Nord Resources Corporation dated December 14, 2004(1) |
| 10.11 | Second Amendment to the Terms of Agreement, Option to Purchase the “Coyote Springs” Property, Graham County, Arizona, between Nord Resources Corporation and Thornwell Rogers, South Branch Resources LLC and MRPGEO LLC, dated January 27, 2006(3) |
| 10.12 | Option to Purchase the “Mimbres” Property from Thornwell Rogers, South Branch Resources, LLC and MRPGEO, LLC to Nord Resources Corporation dated June 10, 2004(1) |
| 10.13 | Option Agreement between Shirley Bailey and Nord Resources Corporation dated July 19, 2004(1) |
| 10.14 | Debt Conversion between Nord Resources Corporation and Thornwell Rogers dated April 16, 2004(1) |
| 10.15 | Debt Conversion between Nord Resources Corporation and South Branch Resources LLC dated April 16, 2004(1) |
| 10.16 | Debt Conversion between Nord Resources Corporation and MRPGEO, LLC dated April 16, 2004(1) |
| 10.17 | Debt Conversion Agreement between Peifer, Hanson and Mullins P.A. and Nord Resources Corporation dated October 25, 2005(1) |
| 10.18 | Settlement Agreement and General Release between Nord Resources Corporation and W. Pierce Carson dated April 22, 2005(1) |
100
| 10.19 | Warrant Certificate issuing 250,000 warrants to W. Pierce Carson dated April 22, 2005(1) |
| 10.20 | Warrant Amendment Agreement between Nord Resource Corporation and Pierce Carson dated October 5, 2006(28) |
| 10.21 | Nord Resources Corporation form of Subscription Agreement for US Investors (2005 private placement)(1) |
| 10.22 | Nord Resources Corporation form of Subscription Agreement for Canadian Investors (2005 private placement)(1) |
| 10.23 | Nord Resources Corporation form of Warrant Certificate for US Purchasers (2005 private placement)(1) |
| 10.24 | Nord Resources Corporation form of Warrant Certificate for Canadian Purchasers (2005 private placement)(1) |
| 10.25 | Letter dated October 25, 2005, amending the terms of the 2005 private placement offering(1) |
| 10.26 | Letter dated November 15, 2005, amending the terms of the 2005 private placement offering(1) |
| 10.27 | Letter dated December 21, 2005, amending the terms of the 2005 private placement offering(1) |
| 10.28 | Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine between Nord Resources Corporation and JC Rock, LLC dated December 24, 2004(1) |
| 10.29 | Tenth Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated July 31, 2007(27) |
| 10.30 | Office Lease between Issa and Henrietta Hallaq, landlords, and Nord Resources Corporation, tenant, dated January 5, 2006(27) |
| 10.31 | Confidential Settlement and Release Agreement between Nord Resources Corporation (plaintiff/counter–defendant), and Titanium Resources Group, Ltd. and Edward Wayne Malouf (defendants/counter–plaintiffs) dated August 9, 2006(10) |
| 10.32 | Settlement Agreement between Nord Resources Corporation and Nicholas Tintor dated September 29, 2006(14) |
| 10.33 | Mutual General Release between Nord Resources Corporation and Nicholas Tintor dated September 29, 2006(14) |
| 10.34 | Third Amendment to the “Terms of Agreement, Option to Purchase the ‘Coyote Springs’ Property, Graham County, Arizona” among Nord Resources Corporation, Thornwell Rogers, South Branch Resources, LLC and MRGPEO, LLC dated October 17, 2006(16) |
| 10.35 | Second Amendment to the “Terms of Agreement, Option to Purchase the ‘Mimbres’ Property, Grant County, New Mexico” among Nord Resources Corporation, Thornwell Rogers, South Branch Resources, LLC and MRGPEO, LLC dated October 17, 2006(16) |
101
| 10.36 | Settlement Agreement dated October 18, 2006, between Nord Resources Corporation and TMD Acquisition Corporation(16) |
| 10.37 | Assignment Agreement dated October 18, 2006, between Nord Resources Corporation and TMD Acquisition Corporation(16) |
| 10.38 | Amended and Restated Waiver Agreement And Amendment of Employment Agreement between Nord Resources Corporation and Ronald Hirsch dated October 18, 2006(16) |
| 10.39 | Amendment of Employment Agreement between Nord Resources Corporation and Erland Anderson dated October 18, 2006(16) |
| 10.40 | Amendment of Executive Employment Agreement between Nord Resources Corporation and John Perry dated October 18, 2006(16) |
| 10.41 | Indemnification Agreement dated October 18, 2006 by Stephen Seymour, in his personal capacity, and by Stephen Seymour, Kathie Stevens and Louise Seymour, as Trustees U/A dated 7/27/82 FBO Louise Seymour, in favor of Nord Resources Corporation(16) |
| 10.42 | Agreement and Plan of Merger dated October 23, 2006 by and among Nord Resources Corporation, Platinum Diversified Mining, Inc., Platinum Diversified Mining USA, Inc. and PDM Merger Corp.(17) |
| 10.43 | Voting Agreement dated October 23, 2006 among Nord Resources Corp., Platinum Diversified Mining USA, Inc. and Ronald A. Hirsch(17) |
| 10.44 | Voting Agreement dated October 23, 2006 among Nord Resources Corp., Platinum Diversified Mining USA, Inc. and Stephen Seymour(17) |
| 10.45 | Deposit Escrow Agreement dated October 23, 2006 among Nord Resources Corp., Platinum Diversified Mining USA, Inc. and American Stock Transfer & Trust Company(17) |
| 10.46 | Letter Agreement respecting a performance bonus between Nord Resources Corporation and Ron A. Hirsch dated November 2, 2006(18) |
| 10.47 | Letter Agreement respecting a performance bonus between Nord Resources Corporation and Erland A. Anderson dated November 2, 2006(18) |
| 10.48 | Letter Agreement respecting a performance bonus between Nord Resources Corporation and John T. Perry dated November 2, 2006(18) |
| 10.49 | Amended and Restated Assignment Agreement dated as of October 18, 2006, between Nord Resources Corporation and TMD Acquisition Corporation(19) |
| 10.50 | Seventh Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated November 2, 2006(19) |
| 10.51 | Settlement Agreement dated March 7, 2007 among Nord Resources Corporation, Platinum Diversified Mining, Inc., Platinum Diversified Mining USA, Inc. and PDM Merger Corp.(24) |
102
| 10.52 | Eighth Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated January 19, 2007(26) |
| 10.53 | Ninth Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated as of April 30, 2007(26) |
| 10.54 | Agency Agreement among Nord Resources Corporation, Blackmont Capital Inc. and Salman Partners Inc. dated June 5, 2007(27) |
| 10.55 | 45Form of Subscription Agreement dated June 5, 2007 between Nord Resources Corporation and each purchaser of special warrants(27) |
| 10.56 | Credit Agreement dated as of June 28, 2007 between Nord Resources Corporation, Cochise Aggregates and Materials, Inc., Nedbank Limited and the Lenders from time to time party thereto(27) |
| 10.57 | Tenth Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated July 31, 2007(27) |
| 10.58 | Eleventh Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated October 31, 2007(29) |
| 10.59 | Long Term Cathode Sales Agreement effective February 1, 2008, with Red Kite Master Fund Limited (Portions of this document have been omitted and filed separately with the SEC pursuant to a Request for Confidential Treatment filed under 17 C.F.R. 200.80(b)(4) and 240.24b–2) (29) |
| 10.60 | Twelfth Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated January 31, 2008(29) |
| 10.61 | Thirteenth Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated April 30, 2008(31) |
| 10.62 | Amended and Restated Credit Agreement dated as of June 30, 2008 among Nord Resources Corporation, Cochise Aggregates and Materials Inc., Nedbank Limited and the Lenders from time to time party thereto(30) |
| 10.63 | Amended and Restated Executive Employment Agreement between the Company and John Perry dated September 9, 2008. (32) |
| 10.64 | Executive Employment Agreement between the Company and Wayne Morrison dated September 9, 2008. (32) |
| 10.65 | Processing Agreement with Texas Canyon Rock & Sand, Inc., dated October 31, 2008(33) |
| 10.66 | Fourteenth Amendment to the Agreement for Purchase and Sale of Waste Rock from the Johnson Camp Mine dated November 25, 2008(34) |
| 10.67 | Amended and Restated Credit Agreement dated as of March 31, 2009 among Nord Resources Corporation, Cochise Aggregates and Materials Inc., Nedbank Limited and the Lenders from time to time party thereto(35) |
103
| 10.68 | Agreement to Purchase Royalty dated as of March 31, 2009 between Nord Resources Corporation and IRC Nevada Inc.(35) |
| 10.69 | Royalty Deed and Assignment of Royalty dated as of March 31, 2009, from Nord Resources Corporation to IRC Nevada Inc.(35) |
| 10.70 | Forbearance Agreement between Nord Resources Corporation and Nedbank Limited dated March 30, 2010(36) |
| Subsidiaries of the Small Business Issuer | |
| 21.1 |
Subsidiaries of Small Business
Issuer: Cochise Aggregates and Materials, Inc. (Incorporated in Nevada) |
| Consents of Experts and Counsel | |
| 23.1 | Consent of Mayer Hoffman McCann P.C. (36) |
| Certifications | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a–14 and Rule 15d– 14(a), promulgated under the Securities and Exchange Act of 1934, as amended(36) |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a–14 and Rule 15d– 14(a), promulgated under the Securities and Exchange Act of 1934, as amended(36) |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes– Oxley Act of 2002(36) |
| Additional Exhibits | |
| 99.1 | Nord Resources Corporation Amended and Restated 2006 Stock Incentive Plan(8) |
| 99.2 | Nord Resources Corporation Performance Incentive Plan for the period from July 1, 2007 to December 31, 2008(27) |
Notes
| (1) |
Incorporated by reference from our annual report on Form 10–KSB for the year ended December 31, 2004, filed with the SEC on January 17, 2006. |
| (2) |
Incorporated by reference from our current report on Form 8–K dated February 15, 2006, filed with the SEC on February 16, 2006. |
| (3) |
Incorporated by reference from our annual report on Form 10–KSB for the year ended December 31, 2005, filed with the SEC on March 28, 2006. |
| (4) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on May 11, 2006. |
| (5) |
Incorporated by reference from our quarterly report on Form 10–QSB for the quarter ended March 31, 2006, filed with the SEC on May 15, 2006. |
104
| (6) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on May 31, 2006. |
| (7) |
Incorporated by reference from Amendment No. 1 to our annual report on Form 10–KSB for the year ended December 31, 2005, filed with the SEC on June 30, 2006. |
| (8) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on December 6, 2008. |
| (9) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on August 8, 2006. |
| (10) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on August 14, 2006. |
| (11) |
Incorporated by reference from our quarterly report on Form 10–QSB for the quarter ended June 30, 2006, filed with the SEC on August 14, 2006. |
| (12) |
Incorporated by reference from Amendment No. 3 to our annual report on Form 10–KSB for the year ended December 31, 2005, filed with the SEC on August 23, 2006. |
| (13) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on September 28, 2006. |
| (14) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on October 2, 2006. |
| (15) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on October 4, 2006. |
| (16) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on October 23, 2006. |
| (17) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on October 25, 2006. |
| (18) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on November 7, 2006. |
| (19) |
Incorporated by reference from our quarterly report on Form 10–QSB for the quarter ended September 30, 2006, filed with the SEC on November 13, 2006. |
| (20) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on December 26, 2006. |
| (21) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on January 16, 2007. |
| (22) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on February 5, 2007. |
| (23) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on February 26, 2007. |
| (24) |
Incorporated by reference from our annual report on Form 10–KSB for the year ended December 31, 2006, filed with the SEC on March 28, 2007. |
| (25) |
Incorporated by reference from our current report on Form 8–K, filed with the SEC on February 26, 2007. |
| (26) |
Incorporated by reference from our quarterly report on Form 10–QSB for the quarter ended March 31, 2007, filed with the SEC on May 9, 2007. |
| (27) |
Incorporated by reference from our quarterly report on Form 10–QSB for the quarter ended June 30, 2007, filed with the SEC on August 14, 2007. |
| (28) |
Incorporated by reference from our Form SB–2, filed with the SEC on October 19, 2007. |
| (29) |
Incorporated by reference from our annual report on Form 10–KSB for the year ended December 31, 2007, filed with the SEC on March 26, 2008. |
| (30) | Incorporated by reference from our current report on Form 8–K dated June 30, 2008 and filed with the SEC on July 7, 2008. |
105
| (31) | Incorporated by reference from our quarterly report on Form 10–Q for the quarter ended June 30, 2008, filed with the SEC on August 14, 2008. |
| (32) | Incorporated by reference from our current report on Form 8–K dated September 9, 2008 and filed with the SEC on September 12, 2008. |
| (33) | Incorporated by reference from our current report on Form 8–K dated October 31, 2008 and filed with the SEC on November 5, 2008. |
| (34) | Incorporated by reference from our current report on Form 8–K dated November 25, 2008 and filed with the SEC on November 28, 2008. |
| (35) | Incorporated by reference from our annual report on Form 10–K for the year ended December 31, 2008, filed with the SEC on March 31, 2009. |
| (36) | Filed herewith. |
106
FINANCIAL STATEMENTS FILED AS PART OF
THIS ANNUAL REPORT
ON FORM 10–K
| Index | |
| Consolidated Financial Statements | |
| Report of Independent Registered Public Accounting Firm | F–1 |
| Consolidated Balance Sheets as of December 31, 2009 and 2008 | F–2 / F–3 |
| Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008 | F–4 |
| Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2009 and 2008 | F–5 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008 | F–7 |
| Notes to Consolidated Financial Statements | F–8 |
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Nord
Resources Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Nord Resources Corporation and Subsidiary as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of Nord Resources Corporation and Subsidiary as of December 31, 2009 and 2008 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the consolidated financial statements, the Company reported net income of $392,438 during the year ended December 31, 2009 and a net loss of $5,038,374 during the year ended December 31, 2008. In addition, as of December 31, 2009 and 2008, the Company reported a deficit in net working capital of $(7,652,818) and $(2,849,660), respectively, and reported net cash used by operating activities of $(5,487,764) and $(4,262,344) for the years ended December 31, 2009 and 2008, respectively. As discussed in Note 2 to the consolidated financial statements, the Company’s significant historical operating losses, lack of liquidity, and inability to make the principal and interest payment due on March 31, 2010 under the terms of the Amended and Restated Credit Agreement with its senior lender raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 2. The consolidated financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
/s/ Mayer Hoffman McCann P.C.
Mayer Hoffman McCann P.C.
Phoenix, Arizona
March 31, 2010
F-1
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| CONSOLIDATED BALANCE SHEETS |
| At December 31, | ||||||
| 2009 | 2008 | |||||
| ASSETS | ||||||
| Current Assets: | ||||||
| Cash and cash equivalents | $ | 1,298,138 | $ | 4,465,245 | ||
| Accounts receivable | 781,393 | 320,493 | ||||
| Inventories | 15,685,103 | 221,271 | ||||
| Current portion of derivative contracts | – | 9,604,405 | ||||
| Prepaid expenses and other | 71,778 | 360,901 | ||||
| Total Current Assets | 17,836,412 | 14,972,315 | ||||
| Property and Equipment, at cost: | ||||||
| Property and equipment | 47,227,963 | 4,657,929 | ||||
| Less accumulated depreciation, depletion, and amortization | (4,358,804 | ) | (1,614,405 | ) | ||
| 42,869,159 | 3,043,524 | |||||
| Construction in progress | – | 36,944,454 | ||||
| Net Property and Equipment | 42,869,159 | 39,987,978 | ||||
| Other Assets: | ||||||
| Restricted cash and marketable securities | 686,476 | 2,220,138 | ||||
| Derivative contracts, less current portion | – | 9,549,697 | ||||
| Debt issuance costs, net of accumulated amortization | 813,483 | 877,249 | ||||
| Total Other Assets | 1,499,959 | 12,647,084 | ||||
| Total Assets | $ | 62,205,530 | $ | 67,607,377 | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-2
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| CONSOLIDATED BALANCE SHEETS |
| (Continued) |
| At December 31, | ||||||
| 2009 | 2008 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Current Liabilities: | ||||||
| Accounts payable | $ | 7,952,694 | $ | 9,694,716 | ||
| Accrued expenses | 1,900,720 | 887,438 | ||||
| Current portion of deferred revenue | 306,117 | – | ||||
| Current maturities of accrued interest | 185,802 | 265,442 | ||||
| Current maturities of long–term debt | 7,160,394 | 6,666,667 | ||||
| Current maturities of derivative contracts | 7,967,695 | 299,717 | ||||
| Current maturities of capital lease obligation | 15,808 | 7,995 | ||||
| Total Current Liabilities | 25,489,230 | 17,821,975 | ||||
| Long–Term Liabilities: | ||||||
| Derivative contracts, less current maturities | 5,101,263 | 137,367 | ||||
| Long–term debt, less current maturities | 16,097,432 | 18,333,333 | ||||
| Capital lease obligation, less current maturities | 27,087 | 45,015 | ||||
| Deferred revenue, less current portion | 4,544,567 | – | ||||
| Accrued interest, less current maturities | – | 729,965 | ||||
| Accrued reclamation costs | 157,580 | 144,256 | ||||
| Other | 884,987 | 47,103 | ||||
| Total Long–Term Liabilities | 26,812,916 | 19,437,039 | ||||
| Total Liabilities | 52,302,146 | 37,259,014 | ||||
| Commitments and contingencies | ||||||
| Stockholders’ Equity: | ||||||
| Common stock:
$.01 par value, 200,000,000 shares authorized,
110,435,586 and 69,493,635 shares issued and outstanding as of December 31, 2009 and December 31, 2008, respectively |
1,104,356 |
694,936 |
||||
| Additional paid–in–capital | 121,488,765 | 109,940,000 | ||||
| Accumulated deficit | (99,620,778 | ) | (100,013,216 | ) | ||
| Accumulated other comprehensive income (loss) | (13,068,959 | ) | 19,726,643 | |||
| Total Stockholders’ Equity | 9,903,384 | 30,348,363 | ||||
| Total Liabilities and Stockholders’ Equity | $ | 62,205,530 | $ | 67,607,377 | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| Years Ended December 31, | ||||||
| 2009 | 2008 | |||||
| Net sales | $ | 19,909,753 | $ | 8,155,820 | ||
| Costs applicable to sales (exclusive of depreciation,
depletion and amortization shown separately below) |
14,506,182 |
8,795,628 |
||||
| Operating expenses (includes stock based
compensation of $369,108 and $601,137, respectively) |
2,830,264 |
3,701,083 |
||||
| Write–down of inventory to net realizable value | – | 530,964 | ||||
| Depreciation, depletion and amortization | 1,431,040 | 251,487 | ||||
| Income (loss) from operations | 1,142,267 | (5,123,342 | ) | |||
| Other income (expense): | ||||||
| Interest expense | (2,142,005 | ) | (408,202 | ) | ||
| Write-off of speculative mineral properties | – | (406,838 | ) | |||
| Miscellaneous income | 1,392,176 | 900,008 | ||||
| Total other income (expense) | (749,829 | ) | 84,968 | |||
| Income (loss) before income taxes | 392,438 | (5,038,374 | ) | |||
| Provision for income taxes | – | – | ||||
| Net income (loss) | $ | 392,438 | $ | (5,038,374 | ) | |
| Net income (loss) per basic and diluted share of common stock: | ||||||
| Weighted average
number of basic common shares
outstanding |
76,415,799 |
67,824,759 |
||||
| Basic earnings (loss) per share of common stock | $ | 0.01 | $ | (0.07 | ) | |
| Weighted average
number of diluted common shares
outstanding |
78,370,270 |
67,824,759 |
||||
| Diluted earnings (loss) per share of common stock | $ | 0.01 | $ | (0.07 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY |
| FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 |
| Accumulated | ||||||||||||||||||
| Additional | Other Com- | Total | ||||||||||||||||
| Paid-in | Accumulated | prehensive | Stockholders’ | |||||||||||||||
| Common Stock | Capital | Deficit | Income (loss) | Equity | ||||||||||||||
| Shares | Amount | |||||||||||||||||
| Balance at December 31, 2007 | 66,659,224 | $ | 666,592 | $ | 108,439,030 | $ | (94,974,842 | ) | $ | (9,183,428 | ) | $ | 4,947,352 | |||||
| Comprehensive income (loss): | ||||||||||||||||||
| Net loss | – | – | – | (5,038,374 | ) | – | (5,038,374 | ) | ||||||||||
| Unrealized
mark
to market adjustment of cash flow hedges |
– |
– |
– |
– |
27,900,446 |
27,900,446 |
||||||||||||
| Realized
gain from
cash flow hedges |
– |
– |
– |
– |
1,531,202 |
1,531,202 |
||||||||||||
| Ineffective
portion
of copper hedges transferred to miscellaneous income |
– |
– |
– |
– |
(521,577 |
) | (521,577 |
) | ||||||||||
| Comprehensive income | – | – | – | – | – | 23,871,697 | ||||||||||||
| Stock
options issued
for Coyote Springs |
– |
– |
51,040 |
– |
– |
51,040 |
||||||||||||
| Exercise of warrants | 2,540,000 | 25,400 | 676,600 | – | – | 702,000 | ||||||||||||
| Common
stock issued
for deferred stock units |
44,411 |
444 |
(444 |
) | – |
– |
– |
|||||||||||
| Compensation expense from
issuance of stock options |
471,137 |
471,137 |
||||||||||||||||
| Modification of warrants | – | – | 125,137 | – | – | 125,137 | ||||||||||||
| Exercise of stock options | 250,000 | 2,500 | 47,500 | – | – | 50,000 | ||||||||||||
| Compensation from issuance of deferred stock units |
– |
– |
130,000 |
– |
– |
130,000 |
||||||||||||
| Balance at December 31, 2008 | 69,493,635 | 694,936 | 109,940,000 | (100,013,216 | ) | 19,726,643 | 30,348,363 | |||||||||||
| Comprehensive loss: | ||||||||||||||||||
| Net income | – | – | – | 392,438 | – | 392,438 | ||||||||||||
| Unrealized
mark to
market adjustment of cash flow hedges, net |
– |
– |
– |
– |
(31,785,976 |
) | (31,785,976 |
) | ||||||||||
|
Net realized losses from
cash flow hedges |
– |
– |
– |
– |
(380,982 |
) | (380,982 |
) | ||||||||||
| Effective
portion of
copper hedges transferred to net sales |
– |
– |
– |
– |
643,287 |
643,287 |
||||||||||||
|
Effective portion of
copper hedges transferred to capitalized mine development costs |
– |
– |
– |
– |
(271,897 |
) | (271,897 |
) | ||||||||||
| Ineffective
portion
of copper hedges transferred to miscellaneous income |
– |
– |
– |
– |
(1,366,908 |
) | (1,366,908 |
) | ||||||||||
| Effective
portion
of interest rate swap transferred to interest expense |
– |
– |
– |
– |
366,874 |
366,874 |
||||||||||||
| Comprehensive loss | – | – | – | – | – | (32,403,164 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY |
| FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 |
| (Continued) |
| Accumulated | ||||||||||||||||||
| Additional | Other Com- | Total | ||||||||||||||||
| Paid-in | Accumulated | prehensive | Stockholders’ | |||||||||||||||
| Common Stock | Capital | Deficit | Income (loss) | Equity | ||||||||||||||
| Shares | Amount | |||||||||||||||||
| Compensation expense from issuance of stock options |
– |
– |
239,108 |
– |
– |
239,108 |
||||||||||||
| Exercise of stock options | 356,670 | 3,567 | 47,701 | – | – | 51,268 | ||||||||||||
| Common stock issued to settle
outstanding claims |
506,329 |
5,063 |
194,937 |
– |
– |
200,000 |
||||||||||||
| Common stock issued in private placement (net of offering costs of $762,191) |
40,000,000 |
400,000 |
10,837,809 |
– |
– |
11,237,809 |
||||||||||||
| Common stock issued for deferred stock units |
78,952 |
790 |
(790 |
) | – |
– |
- |
|||||||||||
| Issuance of warrants to Nedbank Limited |
– |
– |
100,000 |
– |
– |
100,000 |
||||||||||||
| Compensation expense from issuance of deferred stock units |
– |
– |
130,000 |
– |
– |
130,000 |
||||||||||||
| Balance at December 31, 2009 | 110,435,586 | $ | 1,104,356 | $ | 121,488,765 | $ | (99,620,778 | ) | $ | (13,068,959 | ) | $ | 9,903,384 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 |
| 2009 | 2008 | |||||
| Cash Flows From Operating Activities: | ||||||
| Net income (loss) | $ | 392,438 | $ | (5,038,374 | ) | |
| Adjustments to reconcile net income (loss) to net cash used by operating activities: | ||||||
| Depreciation, depletion and amortization | 1,431,040 | 251,487 | ||||
| Accretion expense on reclamation costs | 13,324 | 13,115 | ||||
| Amortization of debt issuance costs | 244,695 | 239,772 | ||||
| Write–off of speculative mineral properties | – | 406,838 | ||||
| Write–down of inventory to net realizable value | – | 530,964 | ||||
| Accretion of modification of warrants | – | 125,137 | ||||
| Issuance of deferred stock units for services rendered | 130,000 | 130,000 | ||||
| Issuance of stock options for services rendered | 239,108 | 471,137 | ||||
| Gain on sale of cash flow hedges – ineffective portion | (1,366,908 | ) | (521,577 | ) | ||
| Loss on settlement of cash flow hedges – effective portion | 643,287 | – | ||||
| Payments on settlement of effective cash flow hedges | (886,625 | ) | – | |||
| Changes in assets and liabilities: | ||||||
| Accounts receivable | (460,900 | ) | (176,481 | ) | ||
| Inventories | (13,912,676 | ) | (741,155 | ) | ||
| Prepaid expenses and other assets | 289,123 | (292,889 | ) | |||
| Accounts payable | 5,826,063 | 692,690 | ||||
| Deferred revenue | (99,316 | ) | – | |||
| Other liabilities | (12,116 | ) | – | |||
| Accrued interest | 1,028,417 | – | ||||
| Accrued expenses and other liabilities | 1,013,282 | (353,008 | ) | |||
| Net Cash Used By Operating Activities | (5,487,764 | ) | (4,262,344 | ) | ||
| Cash Flows From Investing Activities: | ||||||
| Decrease in restricted cash and marketable securities | 1,533,662 | 1,466,338 | ||||
| Capital expenditures | (12,653,359 | ) | (881,196 | ) | ||
| Proceeds from the sale of ineffective cash flow hedges | 872,517 | 1,531,202 | ||||
| Construction in progress | – | (17,473,989 | ) | |||
| Net Cash Used By Investing Activities | (10,247,180 | ) | (15,357,645 | ) | ||
| Cash Flows From Financing Activities: | ||||||
| Debt issuance costs | (80,929 | ) | – | |||
| Principal payments on notes payable | (3,580,196 | ) | – | |||
| Proceeds from issuance of notes payable | – | 20,000,000 | ||||
| Proceeds from the sale of royalty interest | 4,950,000 | – | ||||
| Proceeds from issuance of common stock and warrants | 11,237,809 | – | ||||
| Principal payments on capital lease | (10,115 | ) | (35,676 | ) | ||
| Proceeds from exercise of stock options | 51,268 | 50,000 | ||||
| Proceeds from exercise of warrants | – | 702,000 | ||||
| Net Cash Provided By Financing Activities | 12,567,837 | 20,716,324 | ||||
| Net Increase (Decrease) in Cash and Cash Equivalents | (3,167,107 | ) | 1,096,335 | |||
| Cash and Cash Equivalents at Beginning of Year | 4,465,245 | 3,368,910 | ||||
| Cash and Cash Equivalents at End of Year | $ | 1,298,138 | $ | 4,465,245 | ||
| Supplemental Disclosure of Cash Flow Information: | ||||||
| Cash paid during the year for: | ||||||
| Interest | $ | 1,080,741 | $ | 43,293 | ||
| Income taxes | – | – |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| 1. | NATURE OF OPERATIONS |
Nord Resources Corporation and Subsidiary (the “Company”) is a United States based corporation involved in all phases of the mining business including exploration, permitting, developing and operating mining projects. The Company’s primary asset is the Johnson Camp Copper Mine (“Johnson Camp Mine”) located in Arizona. In July 2007, the Company commenced the reactivation of the Johnson Camp Mine. The Company commenced copper cathode production from leaching existing old dumps in January 2008. The Company commenced mining of new ore upon completion of the reactivation work in January 2009, and commenced production of nominal amounts of copper from newly-mined ore during the testing and development phase of the mine in February and March 2009. The Company achieved commercial copper cathode production from newly-mined ore on April 1, 2009 and entered the production stage, following substantial completion of the testing and development phase.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Such adjustments could be material. The Company’s continuation as a going concern is dependent upon its ability to meet its obligations under its Credit Agreement with Nedbank and to produce copper to sell at a level where the Company becomes profitable. The Company’s continued existence is dependent upon its ability to achieve its operating plan. If management cannot achieve its operating plan because of sales shortfalls, a reduction in copper prices, or other unfavorable events, the Company may find it necessary to dispose of assets, or undertake other actions as may be appropriate. The Company’s ramp up of production since the commencement of commercial production has been slower than originally forecasted. Consequently, the Company has been required to raise additional capital through the sale of equity and the sale of a royalty interest in the Johnson Camp Mine. As of March 31, 2010, the Company has not reached the production level necessary to breakeven from a cash flow perspective and, as a result, was unable to make the approximate $2,175,000 principal and interest payment due on March 31, 2010 under the terms of the amended and restated credit agreement with its senior lender, Nedbank. Accordingly, the Company and Nedbank have entered into a forbearance and extension agreement dated March 30, 2010 that allows the Company a forbearance and extension period of 21 days such that the parties can negotiate an amendment to the agreement as it pertains to the March 31, 2010 payment and other terms thereunder. The Company is also evaluating a variety of other alternatives to improve its liquidity.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Cochise Aggregates and Materials, Inc. (“Cochise”). Cochise was set up to produce and market landscape rock products and aggregates derived from the Johnson Camp Mine overburden piles. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
F-8
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves and the recovery rate of the Johnson Camp Mine that are the basis for future cash flow estimates; reclamation obligations; asset impairment (including long–lived assets and investments); valuation allowances for deferred tax assets; disclosures and reserves for contingencies and litigation; and the fair value and accounting treatment of financial instruments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Restricted Cash and Marketable Securities
As required by the Credit Agreement with Nedbank Limited (“Nedbank”) dated June 28, 2007 (the “Credit Agreement”), the Company is required to maintain a balance of the greater of (a) $3,000,000 or an amount equal to obligations scheduled to become due during the period of the next two consecutive fiscal quarters. During 2008, this requirement was clarified and the Company now believes that it is not required to maintain the Debt Service Reserve Balance until it is in the financial position to fund such an account. The balance at December 31, 2008, reflects proceeds received from the close–out of a portion of the Company’s hedge position. This amount was reclassified to unrestricted cash in the first quarter of 2009. The Company maintained restricted cash balances of $0 and $1,533,662 at December 31, 2009 and 2008, respectively. Marketable securities at December 31, 2009 and 2008, consist of certificates of deposit (“CDs”) which are considered held-to-maturity securities and are stated at amortized cost of $686,476 on the consolidated balance sheet. The CDs expired in December 2009 and were simultaneously renewed for a 12 month period, extending their maturity date to December 2010. The CDs carried a stated interest rate of 2.03% per annum which was dropped to .40% upon renewal. All marketable securities are defined as held-to-maturity securities, trading securities, or available-for-sale securities under the applicable guidance related to the accounting for certain investments in debt and equity securities. Management determines the appropriate classification of the Company’s investments in marketable debt and equity securities at the time of each purchase and re-evaluates such determination at each balance sheet date. Securities that are bought with the intent and ability to be held to maturity are classified as held-to-maturity securities. Held-to-maturity securities are carried at amortized cost on the consolidated balance sheet until sold. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and unrealized gains and losses are included in earnings. Debt securities, for which the Company does not have the intent or ability to hold to maturity, and equity securities are classified as available for sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The cost of investments sold is determined on the specific identification or the first-in, first-out method.
Accounts Receivable
The Company grants credit to all qualified customers and generally requires no collateral. Accounts receivable are carried at cost less an allowance for losses, if an allowance is deemed necessary. The Company does not accrue finance or interest charges. On a periodic basis, the Company evaluates its accounts receivable and determines the requirement for an allowance for losses, based upon history of past write–offs, collections and current credit conditions. A receivable is written off when it is determined that all reasonable collection efforts have been exhausted and the potential for recovery is considered remote. Management determined that no allowance for losses was required as of December 31, 2009 and 2008.
F-9
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Revenue Recognition
The Company recognizes revenue from the sale of products, and related costs of products sold, where persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price is fixed or determinable and collectability is reasonably assured. This generally occurs when the customer receives the product or at the time title passes to the customer.
Inventories
As described below, costs that are incurred in or benefit the productive process are accumulated as stockpiles, ore on leach pads and inventories and classified as “inventories” on the consolidated balance sheet. Inventories are carried at the lower of average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long–term metals prices, less the estimated costs to complete production and bring the product to sale. Write–downs of inventories, resulting from net realizable value impairments, are reported as a component of income (loss) from operations. The current portion of inventories is determined based on the expected amounts to be processed within the next 12 months. Inventories not expected to be processed within the next 12 months are classified as long–term. The major classifications of inventories are as follows:
Stockpiles
Stockpiles represent ore that has been mined and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile, the number of contained pounds (based on assay data) and the estimated metallurgical recovery rates (based on the expected processing method). Stockpile ore tonnages are verified by periodic surveys. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore, including applicable overhead, depreciation, depletion and amortization relating to mining operations, and removed at each stockpile’s average cost per recoverable unit.
Ore on Leach Pads
The recovery of copper from certain copper oxide ores is achieved through the heap leaching process. Under this method, oxide ore is placed on leach pads where it is treated with a chemical solution, which dissolves the copper contained in the ore. The resulting “pregnant” solution is further processed in a plant where the copper is recovered. Costs are added to ore on leach pads based on current mining costs, including applicable depreciation, depletion and amortization relating to mining operations. Costs are removed from ore on leach pads as pounds are recovered based on the average cost per estimated recoverable pound of copper on the leach pad.
The estimates of recoverable copper on the leach pads are calculated from the quantities of ore placed on the leach pads (measured tons added to the leach pads), the grade of ore placed on the leach pads (based on assay data) and a recovery percentage (based on ore type). In general, leach pads recover substantially all of the recoverable pounds in the first year of leaching.
Although the quantities of recoverable copper placed on the leach pads are reconciled by comparing the grades of ore placed on pads to the quantities of copper actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly
F-10
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
monitored and estimates are refined based on actual results over time. Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write–downs to net realizable value are accounted for on a prospective basis.
In–process Inventory
In–process inventories represent materials that are currently in the process of being converted to a saleable product. The Company utilizes a solvent extraction electrowinning process to extract the copper from the ore. In–process material is measured based on assays of the material fed into the process and the projected recoveries of the respective plants. In–process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mine, stockpiles and/or leach pads plus the in–process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.
Finished Goods Inventory
Finished goods represent saleable copper cathodes. Finished goods are valued at the weighted average cost of source material or net realizable value.
Materials and Supplies
Materials and supplies are valued at the lower of average cost or net realizable value. Cost includes applicable taxes and freight.
Derivative Instruments and Hedging Activities
In connection with the Credit Agreement with Nedbank, the Company is required to maintain a hedging program with respect to a specified percentage of copper output from the Johnson Camp Mine. These contracts are carried on the consolidated balance sheet at their estimated fair value. As these contracts have been designated as cash flow hedges, the changes to their fair value are currently reflected in accumulated other comprehensive income (loss) within the consolidated statement of changes in stockholders’ equity (deficit). As of December 31, 2009 and 2008, the fair value of the forward contracts was a liability of $(12,726,715) and an asset of $19,154,102, respectively. In order to continue to account for the forward contracts as cash flow hedges, the Company must test the effectiveness of the contracts to properly hedge the volatility in the price of copper for which the Company sells its copper production. The Company performs this test on a quarterly basis with the unrealized and/or realized gains(losses) of hedges determined to be ineffective reclassified from other comprehensive income (loss) to miscellaneous income (loss) upon determination of their ineffectiveness.
During 2008, the Company entered into a contract to hedge the interest rate risk exposure on its $25 million Nedbank Credit Facility expiring between 2009 and 2012. Under the terms of the interest rate swap contract, the Company receives the three-month United States Dollar London Interbank Offered Rate (“LIBOR”) and pays a fixed rate of interest of 2.48% . The program requires no cash margins, collateral or other security from the Company. The contract is carried on the consolidated balance sheet at its estimated fair value. As this contract was designated as a cash flow hedge, changes to the fair value of this contract are reflected in accumulated other comprehensive income (loss). As of December 31, 2009, the carrying value of the interest rate swap derivative liability was $(342,243). The increase in fair value (decrease in liability) from December 31, 2008 was recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet. As of December 31, 2008, the carrying value of the interest rate swap derivative liability was $(437,084). The decrease in fair value (increase in liability) from the contract’s inception was recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet. In order to continue to account for the interest rate swap as a cash flow
F-11
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
hedge, the Company must test the effectiveness of the contract to properly hedge the interest rate risk associated with the Nedbank Credit Facility. The Company performs this test on a quarterly basis, and with the exception of the notional amount of the interest rate swap, which is currently less than the principal balance of the Nedbank Credit Facility, all other critical terms of the interest rate swap match those of the Facility. Accordingly, the Company has determined that 100% of the interest rate swap has functioned as an effective hedge since its inception, with the related quarterly settlements being transferred from accumulated other comprehensive income (loss) to interest expense and the changes in fair value of the interest rate swap deferred in accumulated other comprehensive income (loss).
Fair Value Accounting
In September 2006, the Financial Accounting Standards Board (“FASB”) issued guidance which defined fair value, established a framework for measuring fair value in generally accepted accounting principles, and expanded disclosures about fair value measurements. The provisions of this guidance were adopted by the Company on January 1, 2008. In February 2008, the FASB staff issued additional guidance which delayed the effective date of this guidance for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted those provisions that relate to nonfinancial assets and liabilities on January 1, 2009.
In October 2008, the FASB issued guidance for determining the fair value of a financial asset when the market for that asset is not active. This guidance states that determining fair value in an inactive market depends on the facts and circumstances, requires the use of significant judgment and in some cases, observable inputs may require significant adjustment based on unobservable data. Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when determining fair value of an asset in an inactive market. This guidance was effective upon issuance and did not have a material impact on the Company.
The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; | |
| Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; | |
| Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
The following table sets forth the financial assets and liabilities within the consolidated balance sheet as of December 31, 2009 and 2008 measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
F-12
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Total | Level 1 | Level 2 | Level 3 | |||||||||
| December 31, 2009 | ||||||||||||
| Liabilities: | ||||||||||||
| Derivative contracts – copper cash flow hedges, net | $ | (12,726,715 | ) | – | $ | (12,726,715 | ) | – | ||||
| Derivative contract – interest rate swap contract | $ | (342,243 | ) | – | $ | (342,243 | ) | – | ||||
| December 31, 2008 | ||||||||||||
| Assets: | ||||||||||||
| Derivative contracts – copper cash flow hedges, net | $ | 19,154,102 | – | $ | 19,154,102 | – | ||||||
| Liabilities: | ||||||||||||
| Derivative contract – interest rate swap contract | $ | (437,084 | ) | – | $ | (437,084 | ) | – |
The Company’s derivative instruments, copper cash flow hedges and interest rate swap contracts are valued using pricing models, and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs. The Company’s derivatives generally trade in liquid markets, and as such, model inputs can generally be verified and do not involve significant management judgment. Such instruments are classified within Level 2 of the fair value hierarchy.
Shipping and Handling Costs
The Company includes shipping and handling costs related to the transport of finished goods in operating expenses.
Debt Issuance Costs
Debt issuance costs are amortized over the life of the related loan as interest expense. During 2009 the Company incurred debt issuance costs of $180,929, consisting of $100,000 which represented the estimated fair value of warrants issued to Nedbank upon the March 2009 debt modification and $80,929 of legal expenses. The debt issuance costs incurred during 2009 and prior periods are being amortized over the term of the related Nedbank financing facility using the straight–line method, which approximates the effective interest method. Accumulated amortization of debt issuance costs was $565,119 and $320,424 at December 31, 2009 and 2008, respectively. Unamortized debt issuance costs were $813,483 and $877,249 at December 31, 2009 and 2008, respectively.
Property and Equipment
Property and equipment are carried at cost. Mineral exploration costs, as well as drilling and other costs incurred for the purpose of converting mineral resources to proven and probable reserves or identifying new mineral resources at exploration, development or production stage properties, are charged to expense as incurred. Development costs are capitalized beginning after the existence of proven and probable reserves have been established. Development costs include costs incurred resulting from mine preproduction activities undertaken to gain access to proven and probable reserves including ramps, permanent excavations, infrastructure, removal of overburden and the substantial completion of the testing phase of the mining and ore processing activities. Additionally, interest expense allocable to the cost of developing mining properties and of constructing new facilities is capitalized until the assets are ready for their intended use. Accordingly, the Company capitalized $359,167 and $995,407 of interest costs incurred during the years ended December 31, 2009 and 2008, respectively.
F-13
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Construction in progress represents costs capitalized to refurbish and complete the reactivation of Johnson Camp Mine and to get it ready for its intended use. Such costs relate primarily to: (a) the rehabilitation of solution ponds; (b) refurbishment and a modest expansion of the SX-EW copper production facility; (c) the installation of a primary stage crusher, and the purchase and installation of two secondary stage crushers, an agglomerator and conveying equipment; and (d) other project-related items. In February 2009, upon placing these assets in service and the commencement of production of nominal amounts of copper from newly-mined ore during the testing and development phase of the mine, these costs were reclassified into property and equipment.
Expenditures for replacements and improvements are capitalized. Costs related to periodic scheduled maintenance are expensed as incurred. Depreciation for mining life-of-mine assets, infrastructure and other common costs is determined using the unit-of-production method based on total estimated recoverable proven and probable copper reserves. Development costs and acquisition costs for proven and probable reserves that relate to a specific ore body are depleted using the unit-of-production method based on estimated recoverable proven and probable reserves for the ore body benefited. Depreciation, depletion and amortization using the unit-of-production method is recorded upon extraction of the recoverable copper from the ore body, at which time it is allocated to inventory cost and ultimately included as a component of operating expenses. Other assets are depreciated on a straight-line basis over estimated useful lives of up to 16 years for buildings, 3 to 6 years for machinery and equipment, and 3 to 5 years for mobile equipment. During 2008, depreciation and amortization was only recorded on in-service machinery and equipment involved in the processing of ore from residual leaching and on mobile equipment and vehicles used in the general operation of the facility.
Long–Lived Assets
The Company reviews and evaluates its long–lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured as the amount by which the asset carrying value exceeds its fair value. Fair value is generally determined using valuation techniques such as estimated future cash flows. An impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows for the Johnson Camp Mine include estimates of recoverable pounds of copper, copper prices (considering current and historical prices, price trends and related factors), production rates and costs, capital and reclamation costs as appropriate, all based upon life–of–mine engineering plans and feasibility studies. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. No impairment losses were recorded during the years ended December 31, 2009 and 2008.
Reclamation Costs
Reclamation costs are allocated to expense over the life of the related assets and are adjusted for changes resulting from the passage of time and revisions to either the timing or amount of the original present value estimate. The asset retirement obligation is based on when the spending for an existing environmental disturbance and activity to date will occur. The Company reviews its asset retirement obligation, on an annual basis, unless a triggering event occurs that requires a more frequent evaluation. The asset retirement obligation at the mine site is accounted for in accordance with applicable GAAP for accounting for asset retirement obligations.
Stock Based Compensation
The Company accounts for its awards of stock based compensation under the fair value recognition provisions of applicable GAAP. The Company has granted incentive and non–qualified stock options to its employees and directors under the terms of its 2006 Stock Incentive Plan. The Company has also
F-14
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
granted non–qualified, non–plan stock options, which have been authorized by the Company’s board of directors. Stock options are generally granted at an exercise price equal to or greater than the quoted market price on the date of grant.
Net Income (Loss) per Share of Common Stock
Basic earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is calculated based on the weighted average number of common shares outstanding adjusted for the dilutive effect, if any, of stock options and warrants. Outstanding options and warrants to purchase 18,782,357 and 23,395,025 shares of common stock for the years ended December 31, 2009 and 2008, respectively, are not included in the computation of diluted earnings (loss) per share as the effect of the assumed exercise of these options and warrants would be anti–dilutive.
Income Taxes
The Company uses the liability method to account for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the financial statements. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense consists of the income tax payable or refundable for the current period and the change during the period in net deferred tax assets and liabilities.
Accumulated Other Comprehensive Income (Loss)
In addition to net income (loss), accumulated other comprehensive income (loss) includes all changes in equity during a period, including the effective portion of changes in fair value of derivative instruments that qualify as cash flow hedges.
Recently Issued Accounting Guidance
Effective July 1, 2009, the FASB’s Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the U.S. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. The Codification is required to be applied to financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP and did not impact the Company’s consolidated financial statements.
In September 2006, the FASB issued guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the FASB deferred the effective date to January 1, 2009 for all nonfinancial assets and liabilities, except for those that are recognized or disclosed at fair value on a recurring basis (that is, at least annually). With the adoption of new accounting rules, fair value is now determined as an exit price, representing the price that would be received in an orderly transaction between market participants based on the highest and best use of the asset, rather than as the result of an internally-generated cash flow analysis. The Company adopted this standard effective January 1, 2009, and it did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued guidance on interim disclosures about the fair value of financial instruments. The provisions of the guidance require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance became effective for interim reporting periods ending after June 15, 2009. The Company adopted the disclosure provisions of this standard effective April 1, 2009.
F-15
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments. The standard makes the guidance more operational and improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This guidance became effective for interim reporting periods ending after June 15, 2009. The Company adopted the provisions of this standard effective April 1, 2009 which did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued guidance on accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. The guidance addresses the initial recognition and measurement of an asset acquired or a liability assumed in a business combination that arises from a contingency, provided the asset or liability's fair value on the date of acquisition can be determined. When the fair value cannot be determined, use of the guidance under accounting for contingencies, and reasonable estimation of the amount of a loss must be followed. This guidance was effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued guidance determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. Entities are required to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value. This guidance became effective for interim reporting periods ending after June 15, 2009. The Company adopted the provisions of this standard effective April 1, 2009 which did not have a material impact on the Company’s consolidated financial statements.
In June 2009, the FASB issued guidance related to accounting for transfers of financial assets, in order to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement in transferred financial assets. This guidance must be applied as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This guidance must be applied to transfers occurring on or after the effective date. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In June 2009, the FASB issued an amendment on the de-recognition guidance of accounting for transfers of financial assets and the elimination of the exemption from consolidation for qualifying special-purpose entities. The guidance is effective for financial asset transfers occurring after the beginning of an entity's first fiscal year that begins after November 15, 2009. The Company does not expect the provisions of the guidance to have a material effect on its consolidated financial statements.
In June 2009, the FASB issued guidance on consolidation applicable to variable interest entities. The provisions of the standard significantly affect the overall consolidation analysis. The guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The guidance will be effective for the Company beginning in 2010. The Company does not expect the provisions of the guidance to have a material effect on the financial position, results of operations or cash flows of the Company.
F-16
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In August 2009, the FASB issued guidance on the fair value measurement of liabilities and provided clarification that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The guidance is effective for the first reporting period, including interim periods, beginning after issuance. The guidance will be effective for the Company beginning in 2010. The Company does not expect the provisions of the guidance to have a material effect on its consolidated financial statements.
In December 2009, the FASB issued guidance changing how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design; and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The guidance also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The guidance is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. The Company does not expect the provisions of the guidance to have a material effect on its consolidated financial statements.
In January 2010, the FASB issued guidance to clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. The guidance is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of the provisions of the guidance did not have a material effect on its consolidated financial statements.
In January 2010, the FASB issued guidance that clarifies the scope of a decrease in ownership provisions that applies to: a subsidiary or group of assets that is a business or nonprofit activity; a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity (including an equity method investee or joint venture). The standard also clarifies that the decrease in ownership guidance does not apply to: (a) sales of in substance real estate; and (b) conveyances of oil and gas mineral rights, even if these transfers involve businesses. The standard expands the disclosure requirements about de-consolidation of a subsidiary or de-recognition of a group of assets to include: the valuation techniques used to measure the fair value of any retained investment; the nature of any continuing involvement with the subsidiary or entity acquiring the group of assets; and whether the transaction that resulted in the de-consolidation or de-recognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction. The guidance is effective beginning in the period that an entity adopts the guidance on non-controlling interests in consolidated financial statements. If an entity had previously adopted the guidance, the amendments are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. This guidance should be applied retrospectively to the first period that an entity adopts the standard. The adoption of the provisions of the guidance did not have a material effect on its consolidated financial statements.
In January 2010, the FASB issued guidance improving disclosures about fair value measurements. The guidance requires some new disclosures and clarifies some existing disclosure requirements about fair
F-17
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
value measurement as set forth in the ASC. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, the guidance now requires:
- A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and
- In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.
In addition, the guidance clarifies the requirements of the following existing disclosures:
- For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and
- A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted.
The Company is currently assessing the impact of the adoption of the provisions of the guidance on its consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for a Securities and Exchange Commission (SEC) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
| 3. | INVENTORY |
Inventory is as follows:
| At December 31 | ||||||
| 2009 | 2008 | |||||
| Copper in process | $ | 15,072,292 | $ | 79,217 | ||
| Finished goods | 64,967 | 62,490 | ||||
| Material and supplies | 547,844 | 79,564 | ||||
| Total | $ | 15,685,103 | $ | 221,271 | ||
F-18
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The Company’s inventories are carried at the lower of cost or net realizable value. Cost for the product inventory is valued using the weighted average cost of production and includes all costs of purchase, costs of conversion (direct costs and an allocation of fixed and variable production overheads) and other costs incurred in bringing the inventories to their present location and condition. During 2008, the Company recorded write–downs of $530,964 in cost applicable to sales to reduce the carrying value of inventories to net realizable value. There were no write-downs of inventory during the year ended December 31, 2009.
| 4. | ACCRETION OF WARRANT MODIFICATION |
On May 8, 2008, the Company extended the exercise period on 743,590 and 75,000 common stock purchase warrants held by Nedbank Limited by six months, to November 8, 2008 and November 15, 2008, respectively. The other terms and conditions of the warrants, including their respective exercise prices, remain unchanged. The change in fair value, which was a non-cash charge to interest expense during 2008, resulting from this modification in the warrant expiry date was $125,137 and was calculated using the Black–Scholes option pricing model with the following assumptions:
| Risk–free interest rate | 1.7% | |
| Expected life | .5 years | |
| Expected volatility | 74% to 75% | |
| Expected dividend yield | 0% |
The warrants expired unexercised in November 2008.
| 5. | MINE DEVELOPMENT COSTS |
Costs incurred to get the mine ready for its intended purpose and that provide benefits to future periods, net of the realized value of nominal amounts of copper sold during the development period, are capitalized as mine development costs. Costs incurred upon the attainment of the production stage, which is determined upon the achievement of levels of commercial production that are not a result of the development and testing of the mining process, are expensed as incurred.
Production of Copper from Old Dumps
The Company commenced copper cathode production from leaching old dumps in January 2008 and completed the first copper cathode sale from these operations in February 2008. Accordingly, the attainment of the production stage from residual leaching operations was achieved effective February 1, 2008. Until December 31, 2008, the capitalized costs incurred in the development and testing of the old dumps were being amortized on a straight-line basis over the expected life of production of existing ore on the old dumps which was estimated to be 5 years. In January 2009, management revised its estimate of the expected life of production from the old dumps to 3 years. Consequently the unamortized balance as of December 31, 2008 in the amount of $468,034 is being amortized on a straight-line basis over the remaining 2 years. During 2009 and 2008, the Company amortized $234,017 and $104,731, respectively, in mine development costs from old dumps to cost of goods sold which is included in depreciation, depletion and amortization expense. The balance of the mine development costs, net of accumulated amortization, for old dumps was $234,017 as of December 31, 2009.
Production of Copper from Mining of New Ore
As a result of the development and testing of mining operations for the production of new ore, the Company began producing a nominal amount of copper cathode from newly-mined ore in February 2009. The Company achieved commercial production from the mining of new ore, which was based upon substantial completion of the testing and development phase, on April 1, 2009. Upon the achievement of
F-19
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
commercial production from the mining of new ore, the costs to operate the mine were expensed as incurred and the capitalized mine development costs associated with the production of copper from the mining of new ore commenced being amortized over the life of the mine based on a “units of production” method. During 2009, the Company capitalized $1,526,317 of mine development costs which was net of revenues in the amount of $470,340 realized from the sale of 280,728 pounds of incidental copper cathode produced during the testing and development phase and $271,897 from the settlement of copper derivatives related to this nominal production. As the Johnson Camp Mine attained the production stage on April 1, 2009, subsequently, no mine development costs were capitalized. During 2009, the Company amortized $97,956 in mine development costs from the development and testing of mining operations of new ore which is included in depreciation, depletion and amortization expense. The balance of the mine development costs, net of accumulated amortization, for development and testing of mining operations of new ore was $1,743,124 as of December 31, 2009.
| 6. | PROPERTY AND EQUIPMENT |
Property and equipment costs consist of the following:
| At December 31, | ||||||
| 2009 | 2008 | |||||
| Land | $ | 98,094 | $ | 98,094 | ||
| Buildings | 2,071,618 | 1,223,691 | ||||
| Mine development costs – existing dumps | 468,034 | 468,034 | ||||
| Mine development costs – new dumps | 1,841,080 | 314,763 | ||||
| Mining and other equipment | 42,749,137 | 2,553,347 | ||||
| Construction in Progress | – | 36,944,454 | ||||
| Total | $ | 47,227,963 | $ | 41,602,383 | ||
| Accumulated deprecation, depletion and amortization | (4,358,804 | ) | (1,614,405 | ) | ||
| Net property and equipment | $ | 42,869,159 | $ | 39,987,978 | ||
Total depreciation, depletion and amortization (“DD&A”) of property and equipment charged to operations was $1,431,040 and $251,487 for the years ended December 31, 2009 and 2008, respectively. Construction in progress represents costs capitalized to complete the refurbishment and reactivation of the Johnson Camp Mine to get it ready for its intended use. Such costs relate primarily to: (a) the rehabilitation of solution ponds; (b) refurbishment and a modest expansion of the SX-EW copper production facility; (c) the installation of a primary stage crusher, and the purchase and installation of two secondary stage crushers, an agglomerator and conveying equipment; and (d) other project-related items. During 2009, the Company transferred approximately $41,300,000 in mining equipment from construction in progress to property and equipment and began depreciating these assets.
| 7. | ACCRUED EXPENSES |
Accrued expenses consist of the following:
| At December 31, | ||||||
| 2009 | 2008 | |||||
| Accrued payroll expense | $ | 812,517 | $ | 827,664 | ||
| Accrued copper hedge payable | 672,072 | – | ||||
| Other accrued liabilities | 416,131 | 59,774 | ||||
| Total | $ | 1,900,720 | $ | 887,438 | ||
F-20
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| 8. | LONG–TERM DEBT |
Long–term debt consists of the following:
| At December 31, | ||||||
| 2009 | 2008 | |||||
| Project Financing Facility | $ | 23,257,826 | $ | 25,000,000 | ||
| Less current maturities | (7,160,394 | ) | (6,666,667 | ) | ||
| Total | $ | 16,097,432 | $ | 18,333,333 | ||
Project Financing Facility
In March 2009, the Company agreed to amend and restate its $25 million credit agreement with Nedbank. Payments of principal and interest on the loan are required to be made on the last business day of March, June, September, and December in each year, starting with the last business day of September 2009 and ending on the last business day of March 2013; the payments scheduled to be paid on March 31 and June 30, 2009 (the “Deferred Payments”) have been deferred until December 31, 2012 and March 31, 2013, respectively. The loan bears interest at an annual rate equal to LIBOR for the interest period in effect plus a margin of 6.06% (6.34% at December 31, 2009). The margin will be reduced by 1.75% if the Company prepays the deferred payments, and will be reduced by an additional 0.5% upon completion of the ramp up of mining operations at the Johnson Camp Mine, as defined in the amended and restated credit agreement, which is currently scheduled for the second quarter of 2010.
Under the amended and restated credit agreement (“Credit Agreement”), the Company may sell certain copper price hedging instruments that it currently holds under copper price hedging agreements maturing on October 1, 2010 or later, if the net proceeds to the Company will be more than $2.2 million. If the Company elects to do so, it will be required to set aside $2.2 million in a segregated account to fund its debt service obligations under the credit facility. The existing loan will then be separated into two tranches, whereby the first tranche will be equal to the aggregate principal amount then outstanding minus $2.2 million, which will be the principal amount of the second tranche. The second tranche will be subject to an interest rate of LIBOR plus 5.00% per annum and scheduled for repayment on March 31, 2013. However, if the Company prepays the Deferred Payments, the second tranche will be amortized in equal portions over the number of quarters remaining until March 31, 2013. As of December 31, 2009, these copper price hedges have not been sold.
From the inception of the loan through June 30, 2009, the Company had accrued $1,838,022 in interest on the loan which has been incorporated into the principal balance of the loan in accordance with the credit agreement, as amended and restated, with Nedbank. Under the amended and restated credit agreement dated March 31, 2009, the maturities on the project financing facility, including capitalized interest, will be as follows:
| 2010 | 7,160,394 | ||
| 2011 | 7,160,394 | ||
| 2012 | 7,160,394 | ||
| 2013 | 1,776,644 | ||
| Total | $ | 23,257,826 |
The project financing facility (Credit Agreement) is collateralized by substantially all of the Company’s assets, restricts the Company’s ability to incur certain additional debt, and limits the Company’s ability to pay dividends and make restrictive payments. Effective March 31, 2010, the Company must comply with certain financial covenants as defined within the amended and restated credit agreement, including a debt service coverage ratio of at least 1.5, an interest coverage ratio of at least 2.0, and a minimum debt to adjusted equity ratio of 1.3.
F-21
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In consideration of Nedbank’s agreement to amend and restate the credit agreement, the Company issued 731,480 common stock purchase warrants to N.B.S.A. Limited, a company affiliated with Nedbank. Each warrant is exercisable for two years and entitles the holder to purchase one share of the Company’s common stock at an exercise price of $0.30 per share. The $100,000 value of the warrants, as determined pursuant to the Black-Scholes model, has been capitalized as debt issuance costs and is being amortized to interest expense over the remaining life of the related debt. For the year ending December 31, 2009, the Company recognized $18,750 in amortization expense related to this issuance, respectively.
The Company was unable to make the payments of principal and interest, in the respective amount of $1,789,201 and $456,612, due to Nedbank on September 30, 2009. On September 30, 2009, the Company entered into an extension agreement with Nedbank which allowed the Company additional time to arrange for financing. As the Company completed a $12,000,000 private placement financing on November 5, 2009, the September 30, 2009 principal and interest payment remained in unconditional forbearance as the parties continued to negotiate revisions to the related amended and restated credit agreement. The Company agreed to pay Nedbank additional interest at the rate of 3% per annum on the outstanding amount of the loan until the debt service payment that was due on September 30, 2009 was made in November 2009.
While the Company made the scheduled principal and interest payment that was due on December 31, 2009 in the approximate amount of $2,200,000, they were unable to make the scheduled principal and interest payment that was due on March 31, 2010 in the approximate amount of $2,175,000. Accordingly, the Company and Nedbank have entered into an unconditional forbearance and extension agreement dated March 30, 2010 that allows the Company a forbearance period of 21 days to negotiate an amendment to the credit agreement as it pertains to the March 31, 2010 payment and other terms therein. If upon expiration of the 21 day period, the Company has not been successful in amending the credit agreement, Nedbank will have full authority to exercise its rights under the credit agreement, including the acceleration of the full amount due there under and the institution of foreclosure proceeds against the Johnson Camp Mine. During the forbearance period the interest rate on the outstanding debt and related accrued interest will be increased by 3.00%.
Note Payable With Mining Contractor
As of September 1, 2009, as approved by Nedbank, Fisher Industries, the Company’s mining contractor, agreed to defer $850,000 due them for a period of three years. The Company has agreed to pay Fisher, on a monthly basis, 12% per annum interest on the deferred payments. The Company may prepay the deferred payments at any time without penalty. As of December 31, 2009, the Company had accrued $59,500 in interest expense related to this loan.
| 9. | SALE OF ROYALTY |
On March 31, 2009, the Company sold to IRC Nevada Inc. a 2.5% net smelter royalty on the mineral production sold from the existing mineral rights at Johnson Camp. The net proceeds of the sale in the amount of $4,950,000 were recorded as deferred revenue and are being amortized to revenue over the life of the mine based on a “units of production” method. Amounts payable to IRC Nevada Inc., which are being calculated based on the revenue generated from the sale of copper, are being expensed in the period incurred. During 2009, the Company recognized $99,316 in revenue and recorded $489,150 in royalty expense related to this royalty within the consolidated statement of operations. Total deferred revenue is $4,850,684 as of December 31, 2009, of which $306,117 is expected to be amortized to revenue over the next twelve months.
| 10. | RECLAMATION COSTS |
F-22
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The Company estimates its asset retirement obligations using an expected cash flow approach, in which multiple cash flow scenarios were used to reflect a range of possible outcomes. The Company estimates the aggregate undiscounted obligation to be approximately $400,000 for the Johnson Camp Mine. To calculate the fair value of this obligation, the projected cash flows are discounted at the Company’s estimated credit–adjusted, risk free interest rate of 10% over the estimated sixteen year life of the Johnson Camp Mine. The majority of cash expenditures for reclamation and closure activities are expected to occur at the conclusion of production, currently anticipated to be in 2023 – 2024.
A reconciliation of the beginning and ending carrying amounts of the Company’s retirement obligation as of December 31, 2009 and 2008 is as follows:
| 2009 | 2008 | |||||
| Liability, beginning of year | $ | 144,256 | $ | 131,141 | ||
| Accretion expense | 13,324 | 13,115 | ||||
| Liability, end of year | $ | 157,580 | $ | 144,256 |
| 11. | OTHER INCOME (EXPENSE) |
Write-off of speculative mineral properties as of December 31, 2008 is comprised of the $400,836 and the $6,002 expenses to write–off the carrying amounts of the Coyote Springs and Mimbres speculative mineral property projects that were abandoned during the year ended December 31, 2008.
Other income as of December 31, 2009 and 2008 is comprised of the following:
| 2009 | 2008 | |||||
| Royalty income | $ | – | $ | 237,043 | ||
| Interest income | 25,268 | 126,017 | ||||
| Realized gain on ineffective copper hedges | 1,366,908 | 521,577 | ||||
| Other | – | 15,371 | ||||
| Total other income | $ | 1,392,176 | $ | 900,008 |
In 2009, the Company restructured the operations of its decorative rock and aggregate operations and, as such, no longer receives a royalty upon sale of the related rock. Instead, the Company sells the rock itself and accounts for such sales as byproduct revenue in accordance with the applicable GAAP. Accordingly, the Company credited cost of goods sold for the net byproduct revenues generated from the operation in the amount of $435,933 for the year ended December 31, 2009.
| 12. | COPPER PRICE PROTECTION PROGRAM |
In connection with the Credit Agreement dated June 28, 2007 with Nedbank, the Company agreed to implement a price protection program with respect to a specified percentage of copper output from the Johnson Camp Mine. The price protection program consists of financial derivatives whereby the Company entered into a combination of forward sale and call option contracts for copper quantities, based on a portion of the estimated production from the Johnson Camp Mine during the term of the loan. These financial derivatives do not require the physical delivery of copper cathode and are expected to be net cash settled upon maturity and/or settlement of the contracts. As of December 31, 2009, the estimated amount of copper production hedged was approximately 34% and 21% of the total estimated copper production for the years ending December 31, 2010 and 2011, respectively. The Company implemented
F-23
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
the price protection program by entering into forward sales contracts for 4,560, 3,600, and 2,400 metric tons of London Metal Exchange cash settlement copper for 2009, 2010, and 2011, respectively, at a net forward price of $5,538, $4,841 and $4,413 per metric ton for the same periods. As of December 31, 2009, the Company has in place forward contracts of 3,600 and 2,400 metric tons for 2010 and 2011, respectively, at a net forward price of $4,841 and $4,413 per metric ton for the same periods. The program also included the purchase of long call options for the same quantities with average strike prices of $8,523, and $8,723 per metric ton for the same periods, respectively, thereby permitting the Company to participate in price increases in the event that copper prices exceed the strike price of the long call options. The program requires no cash margins, collateral or other security from the Company.
These contracts are carried on the consolidated balance sheet at their fair value. As these contracts were designated as cash flow hedges, changes to the fair value of these contracts are reflected in accumulated other comprehensive income (loss). During 2009 and 2008, respectively, a decrease in fair value in the amount of ($31,880,817) and an increase in the amount of $29,868,732 was recorded as other comprehensive income (loss) in the consolidated balance sheets. During 2009 and 2008, contracts representing approximately 740 and 242 metric tons, respectively, of copper originally designated as cash flow hedges were reclassified to trading securities because the Company’s forecasted production of copper during the respective time periods no longer matched its hedged position, and, as such, the underlying derivative contracts were deemed to be ineffective. Accordingly, during 2009 and 2008, the proceeds from the sale of these contracts in the amount of $1,366,908 and $521,577, respectively, have been reclassified from accumulated other comprehensive income and reported within the consolidated statement of operation as miscellaneous income.
The Company’s inability to match its’ hedged position with actual production for the first six months of 2009 was primarily due to a delay in the completion of the reactivation work at the Johnson Camp Mine and ramp up issues experienced during the testing and development phase of the mine. The Company does not believe that either of these issues will have a long term impact on its ability to reach that amount of production that is hedged such that the hedging relationship between the actual amount of production hedged and the underlying derivatives is substantially maintained in the future in accordance with the requirements for hedge accounting under GAAP.
During 2008, the Company sold effective hedges in the amount of $1,009,625, the value of which continued to be reflected in accumulated other comprehensive income (loss) as of December 31, 2008, and was subsequently reclassified to the income statement during 2009 upon occurrence of the underlying forecasted transaction being hedged. As of December 31, 2009 and 2008, the fair value of the derivative was ($12,726,715) and $19,154,102, respectively. The amounts in accumulated other comprehensive income (loss) will be reclassified to the statement of operations upon the ultimate sale of the underlying hedged copper cathode or at the determination that the hedge is ineffective. Although this estimate is subject to changes in the forward price curve for copper, as of December 31, 2009, approximately ($7,653,709) of the amount deferred in accumulated other comprehensive income (loss) is expected to be reclassified to earnings within the next 12 months.
Fair Value of Copper Derivative Instruments
F-24
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Balance Sheet | Balance Sheet | |||||||||||
| Location | Fair Value | Location | Fair Value | |||||||||
| As of December 31, 2009 | ||||||||||||
| Commodity contracts | Current Liabilities | $ | 7,653,709 | Long Term Liabilities | $ | 5,073,006 | ||||||
| As of December 31, 2008 | ||||||||||||
| Commodity contracts | Current Assets | $ | 9,604,405 | Other Assets | $ | 9,549,697 |
| 13. | INTEREST RATE SWAP CONTRACT |
In November 2008, the Company entered into an interest rate swap agreement to hedge the interest rate risk exposure on its $25 million Nedbank Credit Facility expiring between 2009 and 2012. Under the terms of the interest rate swap contract, the Company receives LIBOR and pays a fixed rate of interest of 2.48% . The program requires no cash margins, collateral or other security from the Company. Under the terms of the interest rate swap, settlements began on March 31, 2009 and occur every three months thereafter until the contract expires on September 28, 2012.
This interest rate swap agreement is carried on the consolidated balance sheet at its estimated fair value. As these contracts were designated as cash flow hedges, changes to the fair value of this agreement is reflected in accumulated other comprehensive income (loss). An increase (decrease) in fair value in the amount of $94,841 and ($437,084) was recorded as other comprehensive income (loss) in the consolidated balance sheets as of December 31, 2009 and 2008, respectively. The amount deferred will be reclassified to the statement of operations upon the ultimate payment of the interest expense on the Company’s credit agreement with Nedbank or by declaration that the interest rate swap is ineffective. During 2009, the Company made payments of $366,874 under the terms of the interest rate swap, all of which was determined to be an effective hedge and classified as interest expense. As of December 31, 2009 and 2008, the estimated fair value of the derivative was a liability of ($342,243) and ($437,084), respectively. Although this estimate is subject to changes in the forward interest rate curve for LIBOR, as of December 31, 2009, approximately $(313,986) of the deferral in accumulated other comprehensive income (loss) is expected to be reclassified to earnings within the next 12 months.
Fair Value of Interest Rate Swap Derivative Instruments
| Balance Sheet | Balance Sheet | |||||||||||
| Location | Fair Value | Location | Fair Value | |||||||||
| As of December 31, 2009 | ||||||||||||
| Interest rate swap contracts | Current Liabilities | $ | 313,986 | Long Term Liabilities | $ | 28,257 | ||||||
| As of December 31, 2008 | ||||||||||||
| Interest rate swap contracts | Current Liabilities | $ | 299,717 | Long Term Liabilities | $ | 137,367 |
| 14. | ACCOUNTING FOR CASH FLOW HEDGES |
In accordance with the requisite disclosure provisions for derivatives and hedging activities, the following represents the results of the Company’s hedging activities for its copper price protection program and its interest rate swap contract for the years ended December 31, 2009 and 2008.
Copper Price Protection Program
F-25
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Year Ended | Year Ended | |||||
| December 31 2009 | December 31 2008 | |||||
| Effective Portion | ||||||
| Net gain (loss) deferred in accumulated other
comprehensive income (loss) (AOCI) |
$ | (31,880,817 | ) |
$ | 29,347,155 | |
| Net loss recognized in copper sales | $ | (643,287 | ) | $ | – | |
| Net gain capitalized as preproduction costs | $ | 271,891 | $ | – | ||
| Ineffective Portion | ||||||
| Net gains recognized in miscellaneous income | $ | 1,366,908 | $ | 521,577 |
Interest Rate Swap Contract
| Year ended | Year ended | |||||
| December 31 2009 | December 31 2008 | |||||
| Effective Portion | ||||||
| Net gain (loss) deferred in AOCI | $ | 94,841 | $ | (437,084 | ) | |
| Loss recognized in interest expense | $ | (366,874 | ) | $ | – |
| 15. | SALES AGREEMENT |
The Company has entered into a long term cathode sales agreement effective February 1, 2008, with Red Kite Master Fund Limited ("Red Kite") for 100% of the copper cathode production from the Johnson Camp Mine. The agreement runs through December 31, 2012 with renewable extensions by mutual agreement of both parties. Pursuant to the agreement, Red Kite will accept delivery of the cathodes at the Johnson Camp Mine, and pricing will be based on the average monthly COMEX price for high–grade copper. Accordingly, during the year ended December 31, 2009 and 2008, the Company sold approximately 8,371,933 (3,799 metric tons) and 2,901,613 pounds (1,316 metric tons) of copper cathode, respectively, to Red Kite under the terms of the agreement which represented 100% of the Company’s copper sales. In addition, amounts due from Red Kite comprised 91% and 53% of total accounts receivable as of December 31, 2009 and 2008, respectively.
| 16. | INCOME TAXES |
The components of the provision for income taxes as of December 31, 2009 and 2008 are as follows:
| 2009 | 2008 | |||||
| Current: | ||||||
| Federal | $ | 137,353 | $ | – | ||
| State | 19,622 | – | ||||
| Total current income tax expense | 156,975 | – | ||||
| Deferred: | ||||||
| Federal | (137,353 | ) | – | |||
| State | (19,622 | ) | – | |||
| Total deferred income tax expense | (156,975 | ) | – | |||
| Total | $ | – | $ | – |
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before the provision for income taxes as follows:
F-26
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| 2009 | 2008 | |||||
| Federal statutory rate | 35% | 35% | ||||
| State income taxes, net of federal benefits | 5% | 5% | ||||
| Valuation allowance | (40)% | (40)% | ||||
| Total | –% | –% |
Significant components of deferred income taxes as of December 31, 2009 and 2008 are as follows:
| 2009 | 2008 | |||||
| Net operating loss carry forwards | $ | 28,559,000 | $ | 33,248,000 | ||
| Capital loss carry forward | 3,618,000 | 3,618,000 | ||||
| Other tax credits | 1,540,000 | 1,540,000 | ||||
| Stock based compensation | 692,000 | 584,000 | ||||
| Deferred gain on cash flow hedges | – | 405,000 | ||||
| Accrued payroll expense | 252,000 | 273,000 | ||||
| Unrealized loss on cash flow hedges | 5,247,000 | 175,000 | ||||
| Inventory | 219,000 | 121,000 | ||||
| Accrued reclamation expense | 63,000 | 58,000 | ||||
| Other | 20,000 | 25,000 | ||||
| Valuation allowance | (39,650,000 | ) | (31,791,000 | ) | ||
| Total deferred tax asset | 560,000 | 8,256,000 | ||||
| Unrealized gain on cash flow hedges | – | (7,690,000 | ) | |||
| Depreciation and amortization | (560,000 | ) | (566,000 | ) | ||
| Total deferred tax liability | (560,000 | ) | (8,256,000 | ) | ||
| Net deferred tax asset | $ | – | $ | – |
The Company records a valuation allowance for certain temporary differences for which it is more likely than not that it will not receive future tax benefits. The Company assesses its past earnings history and trends, sales backlog and projections of future net income. The Company recorded a valuation allowance for the entire amount of the net deferred tax asset in 2009 and 2008 as the Company considered it to be unlikely to recognize sufficient operating income to realize the benefit of these assets over time until the Company has had a reasonable history of net income. Accordingly, the Company recorded a deferred tax valuation allowance in 2009 and prior years to offset the entire deferred tax asset arising from the tax loss carry forward and other temporary differences. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized, based upon criteria that include a recent history of demonstrated profits. The net change in the valuation allowance was an increase and a decrease of $(7,859,000) and $3,926,000 in 2009 and 2008, respectively. The Company will continue to review this valuation allowance and make adjustments as appropriate.
The tax benefits associated with employee exercises of non–qualified stock options and disqualifying dispositions of stock acquired with incentive stock options reduce income taxes currently payable. However, no benefits were recorded to additional paid–in–capital in 2009 or 2008 because their realization was not more likely than not to occur and consequently, a valuation allowance was recorded against the entire benefit.
At December 31, 2009, the Company had federal and state net operating loss (“NOL”) carry forwards of approximately $79,600,000 and $15,500,000, respectively. The Company also had a capital loss carry forward of approximately $9,000,000 which can be utilized to offset capital gains and expires in 2011.
F-27
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The NOL carry forwards expire in the years 2010 through 2029, and 2010 through 2014, for federal and state purposes, respectively. The Company believes that a change of control in accordance with section 382 of the Internal Revenue Code occurred on or before November 5, 2009, therefore, the Company’s ability to fully utilize its net operating loss carry forward in computing its taxable income will be limited to an annual maximum of the value of the Company just prior to the change in control multiplied by the long term tax exempt rate.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2009 and 2008, the Company made no provisions for interest or penalties related to uncertain tax positions. The tax years 2006 – 2009 remain open to examination by the Internal Revenue Service of the United States.
| 17. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The components of accumulated other comprehensive income (loss) for the Company include net realized and unrealized gains (losses), transfers of effective and ineffective cash flow hedges, and mark–to–market adjustments on cash flow hedges.
The activity in accumulated other comprehensive income (loss) for the years ended December 31, 2009 and 2008 consists of the following:
| 2009 | 2008 | |||||
| Balance, beginning of year | $ | 19,726,643 | $ | (9,183,428 | ) | |
| Unrealized losses on cash flow hedges | (31,785,976 | ) | (437,084 | ) | ||
| Unrealized gains on cash flow hedges | – | 28,337,530 | ||||
| Realized gains (losses) on effective cash flow hedges | (380,982 | ) | 1,531,202 | |||
| Realized gains transferred to mine development costs | (271,897 | ) | – | |||
| Transfer of realized losses on effective cash flow hedges | 1,010,161 | – | ||||
| Transfer of realized gains on ineffective cash flow hedges | (1,366,908 | ) | (521,577 | ) | ||
| Balance, end of year | $ | (13,068,959 | ) | $ | 19,726,643 |
| 18. | STOCKHOLDERS’ EQUITY |
Authorized Shares
In October 2007, the stockholders adopted a resolution approving an amendment to the Company’s Amended Certificate of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 200,000,000. On June 29, 2009, the Company increased the number of authorized shares of Common Stock from 100,000,000 to 200,000,000.
Common Stock
On November 5, 2009, the Company completed an unregistered brokered private placement of 40 million units (the “Units”) for total gross proceeds to the Company of $12,000,000. In connection with the offering, the Company paid the agents of the offering a commission equal to $600,000, or 5% of the gross proceeds of the offering. After deducting additional offering expenses of $162,191, the Company received net proceeds of $11,237,809. Each Unit, priced at $0.30 per Unit, consists of one common share (each a “Share”) and one common share purchase warrant (each a “Warrant”). Each Warrant entitles the holder
F-28
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
to purchase one additional common share of the Company at a price of $0.38 per share until June 5, 2012. The Warrants provide for adjustments in the event of stock dividends, subdivisions, consolidations, and other forms of capital reorganization. As of December 31, 2009, the total 40,000,000 warrants are still outstanding.
During 2009, 356,670 stock options were exercised resulting in net proceeds of $51,268 During 2008, 250,000 stock options were exercised at an exercise price of $50,000.
Deferred Stock Units
During the years ended December 31, 2009 and 2008, certain equity–based fees were paid to the Company’s non–executive directors in the form of awards issued pursuant to the Company’s 2006 Stock Incentive Plan. The non–executive directors have limited rights, exercisable within applicable time limits, to elect to have any percentage of such awards, and any percentage of cash fees, payable in deferred stock units (“DSUs”). Each of the Company’s non–executive directors exercised such rights in respect of the equity–based fees payable to them for 2009 and 2008. Accordingly, during 2009 and 2008, the Company credited a total of 341,317 and 315,807 DSUs, respectively, to its non–executive directors, and recognized compensation expense of $130,000 and $130,000, respectively, related to the issuance of these DSUs. During 2009 and 2008, 78,952 and 44,411 DSUs, respectively, were converted into common shares. As of December 31, 2009 and 2008, there were 733,601 and 471,236 DSUs outstanding, respectively.
As of December 31, 2009 and 2008, there were a total of 56,064,830 and 15,413,350 warrants, respectively, to purchase common shares of the Company at an average exercise price of $0.58 and $1.10 per share, respectively. As of December 31, 2009, 55,333,350 warrants expire in June 2012, and 731,480 warrants expire in March 2011.
| 19. | BASIC AND DILUTED EARNINGS PER SHARE |
Basic earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are calculated based on the weighted average number of common shares outstanding adjusted for the dilutive effect, if any, of stock options and warrants outstanding. Total outstanding stock options and warrants to purchase shares of the Company’s common stock were 61,620,505 and 23,395,025 as of December 31, 2009 and 2008, respectively. Outstanding options and warrants to purchase 18,782,357 and 23,395,025 shares of common stock for the years ended December 31, 2009 and 2008, respectively, are not included in the computation of diluted earnings (loss) per share as the effect of the assumed exercise of these options and warrants would be anti-dilutive. For the year ended December 31, 2009, 2,106,668 options and 40,731,480 warrants were included in the calculation of weighted average diluted common shares outstanding.
F-29
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The following table includes the computation of basic and diluted earnings (loss) per share for the years ended December 31, 2009 and 2008:
| 2009 | 2008 | |||||
| Numerator: | ||||||
| Net income (loss) available for common stock holders | $ | 392,438 | $ | (5,038,374 | ) | |
| Denominator: | ||||||
| Basic | ||||||
| Weighted average outstanding shares of common stock | 76,415,799 | 67,824,759 | ||||
| Diluted | ||||||
| Warrants | 625,584 | – | ||||
| Stock options | 1,328,887 | – | ||||
| Common stock and common stock equivalents | 78,370,270 | 67,824,759 | ||||
| Earnings Per Share: | ||||||
| Basic | $ | 0.01 | $ | (0.07 | ) | |
| Diluted | $ | 0.01 | $ | (0.07 | ) |
| 20. | STOCK–BASED COMPENSATION |
2006 Stock Incentive Plan
The Company has adopted a stock incentive plan (the “2006 Stock Incentive Plan”) which was approved by the stockholders of the Company at the Annual General Meeting of Stockholders held on October 18, 2006. A total of 6,000,000 shares of common stock have been reserved for issuance under all awards that may be granted under the 2006 Stock Incentive Plan. “Eligible Participants” who are entitled to participate in the 2006 Stock Incentive Plan consist of employees, directors and consultants of (a) the Company or (b) any of the following entities: (i) any “parent corporation” as defined in the Internal Revenue Code of 1986, as amended (the “Code”); (ii) any “subsidiary corporation” as defined in the Code; or (iii) any business, corporation, partnership, limited liability company or other entity in which the Company, a parent corporation or a subsidiary corporation holds a substantial ownership interest, directly or indirectly.
The 2006 Stock Incentive Plan provides for the granting to Eligible Participants of such incentive awards (each, an “Award”) as the administrator of the 2006 Stock Incentive Plan may from time to time approve. Subject to applicable laws, including the rules of any applicable stock exchange or national market system, the administrator is authorized to grant any type of Award to an Eligible Participant (each a “Grantee”) that by its terms involves or may involve the issuance of: (i) shares of common stock, (ii) a stock option, (iii) a stock appreciation right entitling the Grantee to acquire such number of shares of common stock or such cash compensation as will be determined by reference to any appreciation in the value of the Company’s common stock, (iv) restricted stock issuable for such consideration (if any) and subject to such restrictions as may be established by the administrator, (v) unrestricted stock issuable for such consideration (if any) on such terms and conditions as may be established by the administrator, (vi) restricted stock units, subject to such restrictions as may be imposed by the administrator, and represented by notional accounts maintained in the respective names of the Grantees that are valued solely by reference to shares of common stock of the Company and payable only in shares after the restrictions eligible remuneration otherwise payable in shares of common stock, subject to settlement in accordance with the terms and conditions of the Award and represented by notional accounts maintained in the respective names of the Grantees, (viii) dividend equivalent rights, which are rights entitling the Grantee to receive credits for dividends that would be paid if the recipient had held a specified number of shares of common stock, (ix) any other security with the value derived from the value of the Company’s
F-30
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
common stock, or (x) any combination of the foregoing. Subject to payment of the exercise price, the Company issues common stock from treasury on a fully paid and non-assessable basis upon exercise of any stock options granted as Awards under the 2006 Stock Incentive Plan.
Under the 2006 Stock Incentive Plan, stock options may be granted as either incentive stock options or non–qualified stock options.
Stock Options
There are 5,555,675 stock options outstanding at December 31, 2009, of which 1,281,674 are non–qualified; non–plan stock options and 4,274,001 have been issued pursuant to the Company’s 2006 Stock Incentive Plan. The outstanding options expire at various dates from 2009 to 2017.
During 2009, the Company granted 600,000 stock options to employees and recognized $239,108 in compensation expense. During 2008, the Company granted 1,810,000 stock options to employees and directors, granted 106,674 stock options to persons other than employees and directors and recognized $471,137 in compensation expense.
The following table summarizes annual activity for all stock options for each of the two years in the period December 31, 2009:
| Weighted Average | ||||||
| Number of Options | Exercise Price | |||||
| Options outstanding at December 31, 2007 | 6,615,001 | $ | .71 | |||
| Granted | 1,916,674 | .14 | ||||
| Exercised | (250,000 | ) | .20 | |||
| Cancelled/Expired | (300,000 | ) | .75 | |||
| Options outstanding at December 31, 2008 | 7,981,675 | .59 | ||||
| Granted | 600,000 | .23 | ||||
| Exercised | (356,670 | ) | .14 | |||
| Cancelled/Expired | (2,669,330 | ) | .72 | |||
| Options outstanding at December 31, 2009 | 5,555,675 | $ | .51 |
The following table summarizes certain additional information about the Company’s total and exercisable stock options outstanding as of December 31, 2009:
| Weighted | ||||||||||||
| Average | ||||||||||||
| Remaining | Weighted | |||||||||||
| Number | Contractual Life | Average | ||||||||||
| Outstanding | in Years | Exercise Price | Intrinsic Value | |||||||||
| Total stock options | 5,555,675 | 4.4 | $ | .51 | $ | 794,717 | ||||||
| Exercisable stock options | 4,095,677 | 4.7 | $ | .65 | $ | 234,105 |
The market price of the Company’s common stock on December 31, 2009 was $.51 per share. The weighted average exercise price of the total and exercisable stock options was $.51 and $.65, respectively. Accordingly, the intrinsic value of such total stock options and exercisable stock options on December 31, 2009 was $794,717 and $234,105, respectively. The total intrinsic value of stock options exercised during the year ended December 31, 2009 was $81,834.
F-31
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The following table summarizes the activity in unvested stock options for the years ended December 31, 2009 and 2008:
| Weighted Average | ||||||
| Grant Date | ||||||
| Number of Options | Fair Value | |||||
| Non–vested options outstanding at December 31, 2007 | 1,800,000 | $ | .57 | |||
| Granted | 1,916,674 | .08 | ||||
| Vested | (1,140,007 | ) | .58 | |||
| Cancelled/Forfeited | – | – | ||||
| Non–vested options outstanding at December 31, 2008 | 2,576,667 | .20 | ||||
| Granted | 600,000 | .14 | ||||
| Vested | (1,053,334 | ) | .19 | |||
| Cancelled/Forfeited | (663,335 | ) | .43 | |||
| Non–vested Options outstanding at December 31, 2009 | 1,459,998 | $ | .08 |
The total grant date fair value of options vested during the year ended December 31, 2009 was $202,073. The Company recognizes stock option compensation expense on stock options with a graded vesting schedule on a straight line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. As of December 31, 2009, 1,459,998 stock options remained unvested, resulting in $31,358 in compensation expense to be recognized over the next 5 quarters.
The Company uses the Black–Scholes option pricing model to estimate the fair value of stock options granted. The expected forfeiture rate of 8% in 2009 and 2008 was based on historical employee turnover rates and included actual forfeitures of stock options due to the resignation of one of the Company’s officers. Management believes that the historical forfeiture rate is reflective of expected future forfeitures. The expected life of the options granted is estimated using the formula set forth in Securities and Exchange Commission SAB No. 107. The risk–free interest rate is based upon the U.S. Treasury yield curve in effect at the date of grant and the expected volatility is based on the weighted historical volatility of the Company’s common stock and that of its peer group.
The fair values for the stock options granted during 2009 and 2008 were estimated at the respective dates of grant using the Black–Scholes option pricing model with the following assumptions:
| 2009 | 2008 | ||
| Risk–free interest rate | 1.1% to 1.4% | 1.4% to 2.3% | |
| Expected life | 2.8 to 3.0 years | 3.0 to 3.1 years | |
| Expected volatility | 97% to 104% | 78% to 91% | |
| Expected dividend yield | 0% | 0% |
| 21. | COMMITMENTS AND CONTINGENCIES |
Effective June 1, 2006, the Company entered into a lease agreement for office space in Tucson, Arizona. The amount of the lease was $4,000 per month, subject to 3% escalation per annum and rental tax, has a term of 5 years, and includes a right to terminate the lease at the end of the third year.
The following is a schedule of future minimum lease payments at December 31, 2009 under the Company’s operating lease that have initial or remaining non–cancelable lease terms in excess of one year:
F-32
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ending December 31, | |||
| 2010 | 53,765 | ||
| 2011 | 22,513 | ||
| Total | $ | 76,278 |
Rental expense charged to operations was $93,285 and $67,570 for the years ended December 31, 2009 and 2008, respectively.
401(k) Retirement Plan
Effective March 7, 2008, the Company adopted a 401(k) Plan for all of its employees. Under the 401(k) Plan, when an employee meets certain eligibility requirements, the Company will make non-elective contributions in an amount equal to up to 4% of such employee’s eligible compensation, pursuant to the tax deferral “safe harbor” provided for in section 401(k) of the Internal Revenue Code. The Company recognized $128,445 and $32,003 of expense related to the 401(k) plan during the year ended December 31, 2009 and 2008, respectively.
Coyote Springs
In January 2004, the Company acquired an exclusive option (“Coyote Springs Option”) to purchase the leasehold rights and mining claims located near Safford in Graham County, Arizona described as “Coyote Springs,” consisting of two State of Arizona exploration leases and 52 unpatented mining claims. The Coyote Springs property is a large tonnage porphyry copper–gold exploration target with exposed, surface copper oxides and considerable potential for deeper copper sulfides. Coyote Springs is situated adjacent to the Phelps Dodge Corporation Dos Pobres copper development project near Safford, which has been determined by the United States Geological Survey to be one of the largest undeveloped porphyry copper mining districts in the world with proven undeveloped reserves.
During 2008, the Company issued options to purchase 106,674 shares of common stock with exercise prices of $1.00 per share and a three year term expiring on July 24, 2010 and valued at $51,040. In addition, the Company paid $60,000 in cash during 2008. In December 2008, the Company elected to terminate the option it held to acquire an interest in the Coyote Springs exploration project. Consequently, the Company recorded a charge to other expenses in the amount of $400,836 to write off its investment in this property.
The stock options relative to the Coyote Springs Option were to be issued at an exercise price of 15% below the market price of the Company’s common stock on the date of grant, be immediately exercisable and expire in 36 months. However, due to Toronto Stock Exchange rules, the Company was required to issue these options with an exercise price equal to the fair market value of the Company’s common stock on the date of grant.
Mimbres
In June 2004, the Company acquired an exclusive option (“Mimbres Option”) to purchase the leasehold rights and mining claims for a large tonnage porphyry copper exploration target located near Silver City, New Mexico (“Mimbres”). The Company was under no obligation to issue any consideration until such time that the Mimbres Option conditions have been satisfied. During January 2008, the Company elected to terminate its option to purchase the Mimbres’ leasehold rights and mining claims. Consequently, the Company recorded a charge to other expenses in the amount of $6,002 to write off its investment in this property.
F-33
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Texas Arizona Mine
In July 2004, the Company entered into an option agreement to acquire a 100% interest in four unpatented mining claims in Cochise County, Arizona, known as the “Texas Arizona Mine”. The Company paid $980 to acquire the option and agreed to pay $10,000 within four years to acquire the Texas Arizona Mine. During 2008, the Company paid $10,000 to the owners of the Texas Arizona Mine. Both of the payments have been included in property and equipment in the accompanying consolidated balance sheet.
Consent/Compliance Orders
Effective with the acquisition of the Johnson Camp Mine, the Company agreed to a Consent Order with the Arizona Department of Environmental Quality (“ADEQ”). The Consent Order specifies actions the Company must take to remediate conditions at the mine that are not in compliance with current Arizona laws, including modifications to the current facilities that will be required to qualify for an Aquifer Protection Permit (“APP”) application. The Consent Order also sets forth a schedule under which the Company has agreed to file an application for an APP. The ADEQ may impose financial penalties on the Company for failure to meet the requirements of the Consent Order. The Company plans to meet its obligations under the Consent Order in the course of rehabilitating the mine and returning it to full production.
On September 7, 2002, the ADEQ issued a Compliance Order indicating that the Company’s operation of the Johnson Camp Mine was in violation of the Arizona Revised Statutes, the Arizona Administrative Code and the ADEQ Consent Order referenced above, and required the Company to bring the Johnson Camp Mine into compliance with Arizona’s aquifer protection laws. The Compliance Order superseded and replaced the Consent Order referenced above. Pursuant to the Compliance Order, the Company and the ADEQ entered into a stipulated judgment which assessed civil penalties against the Company in the amount of $4,325,000. In addition, the Compliance Order created an escrow account into which the Company was required to deposit $1,500,000 to be used to bring the mine into compliance. The Compliance Order provides that violation of said order will subject the Company to further civil penalties including entry of the stipulated judgment. Pursuant to the Compliance Order, the Company deposited $1,500,000 into an escrow account, all of which has been spent to bring the Johnson Camp Mine into compliance with the Compliance Order. Management believes that the Company is currently operating the mine in compliance with the Compliance Order.
Officer Indemnification
Under the Company’s organizational documents, the Company’s officers, employees, and directors are indemnified against certain liabilities arising out of the performance of their duties. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects any risk of loss to be remote. The Company also has an insurance policy for its directors and officers to insure them against liabilities arising from their performance in their positions with the Company or its subsidiaries.
Performance Incentive Plan
During 2007, the Company adopted a performance incentive plan, or the Performance Plan, for the purpose of retaining and providing an incentive to certain key employees involved in restarting and commissioning the Johnson Camp Mine. In December 2008, the Company revised certain targets or milestones, lowered the potential payout and modified the effective period of the Performance Plan. The Performance Plan covered the period of time from July 1, 2007, to April 30, 2009 and based its payouts on the achievement of certain key targets and milestones associated with the restart and commissioning of the Johnson Camp Mine.
F-34
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The Company’s Compensation Committee is responsible for administering the Performance Plan, including selecting the employees eligible to participate therein, determining their participation level and establishing key target dates for payments to be made under the Performance Plan.
Under the Performance Plan, the achievement of targets or milestones is not on an “all or nothing” basis. If a milestone is achieved later than the target date set by the Compensation Committee, it will still have been achieved; however, it will have been achieved at less than 100%. The level of achievement reached with respect to the established targets or milestones will be determined by the Chief Executive Officer and President, subject to approval by the Compensation Committee
In June 2009, after a review of the milestones and the Company’s success in achieving them, the Compensation Committee determined the Performance Plan payout to be $417,141. During 2009 and 2008, the Company recognized ($141,656) and $199,958, respectively, in accrued compensation expense associated with the Performance Plan. As of December 31, 2009, the Company had not paid any of the amount due under this plan.
Royalty Obligations
Copper metal produced from the Johnson Camp Mine is subject to a $0.02 per pound royalty payable to Arimetco when copper prices are in excess of $1.00 per pound. The royalty is capped at an aggregate of $1,000,000. During 2009 and 2008, the Company accrued royalty expense of $164,849 and $58,032, respectively, and made payments of $130,405 and $36,075, respectively. As of December 31, 2009, the Company has incurred and paid a total of $222,881 and $166,480, respectively, under this commitment.
During March 2009, the Company sold a 2.5% royalty on the mineral production sold from the existing mineral rights at Johnson Camp to International Royalty Corporation, acting through its subsidiary, IRC Nevada Inc., for net proceeds of approximately $4,950,000. This amount was recorded on the consolidated balance sheet as deferred revenue and is being amortized to revenue over the life of the mine based on a “units of production method” basis. During 2009, the Company recognized $99,316 in related royalty income, accrued $489,150 in royalty expense and made payments thereon of $105,824.
Letters of Credit
As part of its ongoing business and operations, the Company is required to provide bank letters of credit as financial support for various purposes, including environmental reclamation and other general corporate purposes. As of December 31, 2009 and 2008, there was $686,476 of outstanding letters of credit. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the market place. The obligations associated with these instruments are generally related to performance requirements that the Company addresses through its ongoing operations. As the specific requirements are met, the beneficiary of the associated instrument cancels and/or returns the instrument to the Company. Certain of these instruments are associated with operating sites with long–lived assets and will remain outstanding until closure.
| 22. | LITIGATION |
Other than as set forth below, as of December 31, 2009, the Company knows of no material, existing or pending legal proceedings against the Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a
F-35
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
material interest adverse to our interest. The outcome of open unresolved legal proceedings is presently indeterminable. Any settlement resulting from resolution of these contingencies will be accounted for in the period of settlement. The Company does not believe the potential outcome from any legal proceedings that remain unresolved will significantly impact its financial position, results of operations or cash flows. Furthermore, it is the Company’s policy to accrue for the legal expenses associated with contingencies as the expenses are incurred.
Arizona Department of Environmental Quality (ADEQ) Compliance Order and Stipulated Judgment
The ADEQ issued a Compliance Order on September 7, 2002, requiring the Company to bring the Johnson Camp Mine into compliance with Arizona’s aquifer protection laws. Pursuant to the Compliance Order, the Company entered into a stipulated judgment with the ADEQ which assessed civil penalties against it in the amount of $4,325,000. The stipulated judgment can only be entered should a default notice issued pursuant to the Compliance Order not be cured within 60 days after notice is received. The Compliance Order further provides that any future violations of Arizona’s aquifer protection laws would subject the Company to additional civil penalties, including the entry of the stipulated judgment and the assessment of the civil penalties described in the stipulated judgment.
The ADEQ has issued a Notice of Violation dated June 26, 2008 concerning alleged violations of the Company’s Aquifer Protection Permit Program and indicating that certain violations constituted non–compliance with the Compliance Order. The Company has responded to the Notice of Violation in a timely manner by submittal dated August 7, 2008, indicating that no such violations occurred. In addition, the Company has performed certain remedial type actions with respect to various areas referenced in the ADEQ’s Notice of Violation.
Patent Infringement Lawsuit
In January 2009, a lawsuit was filed by Corrosion IP Corp. and CTI Southwest, LLC against the Company alleging that certain containers for corrosive materials purchased by it from Novenco Consultants Limited infringe on three patents held by the plaintiffs, and further alleging that the Company has infringed on a copyrighted drawing owned by the plaintiffs. The Company has filed an answer denying all liability and have also filed a Third Party Complaint against Novenco. Prior to the Company’s purchase of the containers from Novenco, Novenco assured the Company that the containers did not infringe on any patents held by others and provided the Company with an indemnification agreement whereby Novenco agreed to indemnify the Company from any damages that might arise from a claim of patent infringement. The Company believes that the containers do not infringe on any patents held by the plaintiffs. The Company also believes that, in any event, Novenco will be held responsible for any possible damages. The Company is mitigating its risks associated with the litigation by assembling proof that the plaintiffs’ allegations are false and further through the Third Party Complaint against Novenco. The Company believes that if the plaintiffs are successful, the resulting award of damages against the Company, if any, will not be material to the financial condition of the Company.
Complaint by Former Employee
The Company received notice of Complaints filed with the U.S. Department of Labor and the Office of the Attorney General of the State of Arizona alleging discriminatory employment practices by our Company against a former employee in violation of Section 806 of the Corporate Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1514A and Arizona Civil Rights. The Company denies all material allegations set forth in the Complaints and has engaged legal counsel to respond to the Complaints and represent the Company with respect to the investigations. The Company intends to vigorously defend itself against these matters and it does not believe that it will
F-36
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
be held liable for the alleged claims. The Company also believes that if the former employee is successful, the resulting award of damages (net of insurance reimbursement) against the Company, if any, will not be material to the financial condition of the Company.
| 23. | RELATED PARTY TRANSACTIONS |
During 2008, the Company recorded $8,500 and paid $6,000 to Mr. John Cook, a Director of the Company, for consulting services related to reactivation of Johnson Camp Mine. During 2009, the Company did not engage Mr. Cook for consulting services.
| 24. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Disclosures about fair value of financial instruments for the Company’s financial instruments are presented in the table below. These calculations are subjective in nature and involve uncertainties and significant matters of judgment and do not include income tax considerations. Therefore, the results cannot be determined with precision and cannot be substantiated by comparison to independent market values and may not be realized in actual sale or settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used could significantly affect the results.
The following table presents a summary of the Company’s financial instruments as of December 31, 2009:
| Carrying | Estimated Fair | |||||
| Amount | Value | |||||
| Financial Assets: | ||||||
| Cash and cash equivalents | $ | 1,298,138 | $ | 1,298,138 | ||
| Restricted marketable securities | 686,476 | 686,476 | ||||
| Financial Liabilities: | ||||||
| Long–term debt | 23,257,826 | 21,475,000 | ||||
| Derivative instruments | 13,068,958 | 13,068,958 |
The carrying amounts for cash and cash equivalents, marketable securities, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short maturities of these financial instruments. The Company’s derivative instruments are recorded at fair value.
Interest rate risk is the risk to the Company’s earnings that arises from fluctuations in interest rates and the degree of volatility of these rates. In November 2008, the Company entered into contracts to hedge the interest rate risk exposure on its $25 million Nedbank Credit Facility expiring between 2009 and 2012. Under the interest rate swap contract terms, the company pays fixed–rate interest at a rate of 2.48% and receives a floating–rate interest amount based on LIBOR. The program requires no cash margins, collateral or other security from the Company. Under the terms of the interest rate swap, settlements began on March 31, 2009 and occur every three months thereafter until the contract expires on September 28, 2012.
As of December 31, 2009, the Company believes the fair value of the Nedbank credit facility is approximately $21,475,000. In March 2009, the Company amended its agreement with Nedbank to its current terms and conditions. However, due to insufficient working capital, the Company was unable to make its debt service payment on September 30, 2009. The Company believes that the 3% interest rate surcharge charged by Nedbank while the payment remained outstanding represents the additional credit risk at this time. Accordingly, the Company utilized the forward three month LIBOR curve, as adjusted for the 6.06% stated margin on the credit facility and the 3% credit risk adjustment in determining the appropriate discount rate to utilize in its estimate of the fair value of the credit facility at December 31, 2009.
F-37
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| 25. | CONCENTRATIONS OF CREDIT RISK |
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, marketable securities, accounts receivable and derivatives. The Company places its cash, marketable securities and derivative contracts with high quality financial institutions and limits its credit exposure with any one financial institution. At times, the Company’s bank account balances may exceed federally insured limits. As of December 31, 2009 and 2008, 91% and 53%, respectively, of the Company’s total accounts receivable were from one customer to whom 100% of the Company’s copper production is sold.
The Company had no potential direct loss due to credit risk on its derivative instruments as of December 31, 2009 as all derivatives were in a liability position; however the counterparty to the liabilities, Nedbank, is also the senior leader on the Company’s long term debt, for which substantially all of the Company’s assets are held as collateral. Accordingly, in accordance with the related credit agreement, a default on the derivative contracts would trigger a cross default under the credit agreement which would put Nedbank in a position to pursue any and all remedies under the related derivative contracts and credit agreement. Furthermore, under the credit agreement and derivative contracts, there is a master netting agreement which allows either party to offset an obligation by the other should either party be in default of its obligations.
The Company neither deposited nor holds any collateral related to its derivative financial instruments. In addition, to date the Company has not required any of its counterparties or customers to post collateral.
| 26. | NON–CASH INVESTING AND FINANCING ACTIVITIES |
| Supplemental Disclosure of Non–cash Investing and Financing Activities: | 2009 | 2008 | ||||
| Stock options issued for purchase of property | $ | – | $ | 51,040 | ||
| Stock options issued in connection with special warrant financing | – | – | ||||
| Warrants issued in connection with debt facilities | 100,000 | – | ||||
| Common stock issued for settlement of outstanding claims | 200,000 | – | ||||
| Note payable issued in exchange for accounts payable | 850,000 | – | ||||
| Common stock issued in exchange for deferred stock units | 790 | 444 | ||||
| Mark to market gains (losses) from cash flow hedges | (31,785,976 | ) | 28,910,071 | |||
| Capitalized interest | 359,167 | 995,407 | ||||
| Acquisition of equipment under lease | – | 79,310 | ||||
| Construction in progress financed by accounts payable | (6,518,085 | ) | 7,679,567 | |||
| Gain on sale of copper hedges-effective portion allocated to mine | ||||||
| development costs | (271,897 | ) | – | |||
| Depreciation expense allocated to inventory | 1,551,156 | – | ||||
| Accrued interest added to long term debt | 1,838,022 | – |
| 27. | SUBSEQUENT EVENTS |
Appointment of Interim Chief Executive Officer
In February 2010, the Company announced that Randy Davenport, the company's Vice-President and Chief Operating Officer, has been appointed Chief Executive Officer. Mr. Davenport succeeds John Perry who resigned as President, Chief Executive Officer and a Director of the Company following his acceptance of a position with another company. Mr. Perry has agreed to continue working with the Company during a transition period.
F-38
| NORD RESOURCES CORPORATION AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Payments on Copper Hedge Program
On February 18, 2010, the Company received notice from Nedbank Capital Limited concerning the Company’s failure to fully pay the amount due on February 2, 2010 under the copper hedge agreement between the Company and Nedbank Capital Limited. At the time, the Company had paid $300,000 of the $674,895 amount due, and it was entitled to a curative period of 20 days within which to pay the outstanding balance of $374,895. The Company paid the balance of the payment due on February 2, 2010 under the copper hedge agreement in early March 2010. The Company received a further notice from Nedbank Capital Limited concerning its failure to make the $513,474 payment that was due on March 2, 2010 under the copper hedge agreement. This payment was made in full by mid-March 2010. An event of default under the copper hedge agreement, if any, would have triggered a cross-default under the $25 million secured loan facility with Nedbank Limited. In that case, Nedbank Limited would have been in a position to pursue any and all remedies under the secured loan agreement.
Credit Agreement, As Amended and Restated with Nedbank
The Company was unable to make the approximate $2,175,000 principal and interest payment due on March 31, 2010 under the terms of the as amended and restated credit agreement with Nedbank. Accordingly, the Company and Nedbank have entered into an unconditional forbearance and extension agreement dated March 30, 2010 that allows the Company a forbearance period of 21 days to negotiate an amendment to the credit agreement as it pertains to the March 31, 2010 payment and other terms therein. If upon the expiration of the 21 day period, the Company has not been successful in amending the credit agreement, Nedbank will have full authority to exercise its rights under the credit agreement, including the acceleration of the full amount due thereunder and the institution of foreclosure proceedings against the Johnson Camp Mine. During the forbearance period the interest rate on the outstanding debt and related accrued interest will be increased by 3.00%.
TSX Delisting
In connection with the unregistered offering of 40 million Units completed by the Company on November 5, 2009 for gross proceeds of $12,000, the Company received an exemption from certain shareholder approval requirements under the rules of the Toronto Stock Exchange (the “TSX”), on the basis of financial hardship. Reliance on this exemption automatically triggered a TSX de-listing review to confirm that the Company continues to meet the TSX listing requirements. The Company has been informed by the TSX that the Continued Listings Committee has deferred its de-listing decision until after a meeting of the Committee scheduled to be held on April 21, 2010. The Company believes that it will be in compliance with the TSX’s continued listing requirements at that time.
F-39
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORD RESOURCES CORPORATION
| By: | /s/ Ronald A. Hirsch | |
| Ronald A. Hirsch | ||
| Chairman of the Board of Directors | ||
| Date: March 31, 2010 |
In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Randy Davenport | |
| Randy Davenport | ||
| (Principal Executive Officer) | ||
| Chief Executive Officer | ||
| Date: March 31, 2010 | ||
| By: | /s/ Wayne M. Morrison | |
| Wayne M. Morrison | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| Vice President, Chief Financial Officer, Secretary and Treasurer | ||
| Date: March 31, 2010 | ||
| By: | /s/ Ronald A. Hirsch | |
| Ronald A. Hirsch | ||
| Chairman of the Board of Directors | ||
| Date: March 31, 2010 | ||
| By: | /s/ Stephen Seymour | |
| Stephen Seymour | ||
| Director | ||
| Date: March 31, 2010 | ||
| By: | /s/ T. Sean Harvey | |
| T. Sean Harvey | ||
| Director | ||
| Date: March 31, 2010 |
| By: | /s/ Douglas P. Hamilton | |
| Douglas P. Hamilton | ||
| Director | ||
| Date: March 31, 2010 | ||
| By: | /s/ John F. Cook | |
| John F. Cook | ||
| Director | ||
| Date: March 31, 2010 |