Geomark Exploration Ltd. (TSX VENTURE:GME)
NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED
STATES
Financial and Operational Highlights
Three Months Ended Nine Months Ended
September 30 September 30
2010 2009 2010 2009
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Financial ($000s, except $ per share)
Revenue
Mineral Division 13,636 59 13,779 175
Oil and Gas Division 523 367 1,767 1,349
Cash Flow from Operations 60 123 223 (215)
Per Share Basic (1) 0.00 0.00 0.00 (0.00)
Per Share Diluted (1) 0.00 0.00 0.00 (0.00)
Net Earnings (Loss) 13,276 (460) 13,098 (887)
Per Share Basic (1) 0.26 (0.01) 0.25 (0.02)
Per Share Diluted (1) 0.26 (0.01) 0.25 (0.02)
Capital Expenditures
Mineral Division 47 - 47 -
Oil and Gas Division 1 112 158 460
Total Assets
Mineral Division 40,167 28,241
Oil and Gas Division 10,796 9,466
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Oil and Gas Operations
Barrels of Oil Equivalent (BOE) per
Day (2) 161 139 156 157
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(1) Geomark issued one share upon incorporation on April 20, 2010, and on
July 6, 2010 issued 52,039,760 common shares as consideration for the
net investment in Geomark Operations with an ascribed net book value
of $21,152,000 as at December 31, 2009 and cancelled the original share.
For purposes of the per share calculations, it was assumed that all
52,039,760 shares issued have been outstanding since January 1, 2009.
(2) Barrels of Oil Equivalent (BOE) are calculated using a conversion ratio
of 6 MCF to 1 barrel of oil. The conversion is based on an energy
equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead and as such
may be misleading if used in isolation.
Report to Shareholders
Geomark Exploration Ltd. ("Geomark" or "the Company") is pleased to announce its
financial and operational results for the three months and nine months ended
September 30, 2010.
Geomark commenced operations on July 6, 2010 following the successful completion
of a plan of arrangement (the "Arrangement") involving Comaplex Minerals Corp.
(Comaplex), Agnico-Eagle Mines Limited (Agnico-Eagle) and Geomark.
Geomark is a well-financed exploration company with proven management,
experienced staff, a large cash position and immediate cash flow from its oil
and gas and investment assets. As part of the Arrangement, Comaplex transferred
to Geomark the Geomark Carved Out Operations' assets consisting of all the
assets and related liabilities other than those relating to the Meliadine
properties and related assets. Geomark issued a total of 52,039,760 common
shares to the former Comaplex shareholders (excluding Agnico-Eagle and Perfora)
as consideration for the Non-Meliadine Operations.
Geomark's assets include:
- Working capital of approximately $39.9 million (which includes a short-term
$20 million loan to Bonterra Energy Corp.);
- The non-Meliadine mineral properties located in Ontario, the Northwest
Territories and Nunavut;
- Oil and gas properties located primarily in the Harmattan area of
south-western Alberta, which generate between $1.0 to $2.0 million in cash flow
per year; and
- Investments which have a current combined value of approximately $8.8 million.
As a junior exploration company, Geomark is assessing its existing minerals
properties in Canada and is seeking out opportunities to develop new prospects
internally, either through grassroots efforts or through negotiated transactions
with other companies. The Company intends to target projects with gold and
associated precious metal potential and base metals.
Geomark's business strategy is to generate the majority of its prospects
internally and conduct appropriate exploration programs to develop the economic
potential of mineral properties in its portfolio. The Company is currently
focused on the investigation and development of its mining assets located in the
Timmins area in the province of Ontario. Geomark has recently completed the
consolidation of all eight of the Timmins area gold properties with interests
ranging from 90 to 100 percent. Two of the properties are located in the
currently active West Timmins area near the Lake Shore gold properties and
several are on strike with multi-million ounce historic gold producers.
Preparation and planning is currently underway for the start of geophysical
surveys (Quantec Titan 24) on several of the Timmins area assets. This is
expected to commence in late Q4 2010 or early Q1 2010. Depending on the results
of the geophysics, Geomark is contemplating a diamond drill program on one or
more of the Timmins area properties in the first half of 2011.
Geomark's business strategy also includes the acquisition of additional mineral
interests. The Company remains excited and has begun its assessment of a number
of properties and their potential opportunities.
Subsequent to quarter-end, the Board of Directors of Geomark announced the
appointment of Mark Balog to the position of President and Chief Operating
Officer (previously Chief Operating Officer) and George Fink to the position of
Chief Executive Officer and Chairman of the Board (previously Chief Executive
Officer and President). Mr. Balog has been involved with Comaplex and Geomark
for over 20 years. This promotion will result in additional management
responsibilities for Mr. Balog.
Basis of Presentation
Geomark Exploration Ltd. ("Geomark" or "the Company") was incorporated on April
20, 2010 as a 100 percent wholly-owned subsidiary of Comaplex Minerals Corp.
(Comaplex). Pursuant to an acquisition agreement between Comaplex, Agnico-Eagle
Mines Ltd. (Agnico-Eagle) and Geomark (the "Arrangement"), Agnico-Eagle acquired
on July 6, 2010 all of the issued and outstanding common shares of Complex on
the basis of one Comaplex share for 0.1576 of an Agnico-Eagle share. Also on
July 6, 2010, Geomark was capitalized with Comaplex's Carved Out Operations'
assets and obligations (Geomark Operations), including a 100 percent
wholly-owned subsidiary WMC International Limited. In return, Geomark's common
shares were distributed to the shareholders of Comaplex, other than Agnico-Eagle
and Perfora Investments S.a.r.l. (Perfora), on the basis of one Geomark share
for every Comaplex share (the "Arrangement"). The initial share issued to
Comaplex was then cancelled.
As Geomark and the Geomark Operations were under common control, these
consolidated financial statements have been presented on a
continuity-of-interest basis of accounting and represent the activities of the
above noted entities from the date each commenced operations. The consolidated
financial statements presented for comparative purposes reflect the financial
position, results of operations and cash flows as if Geomark had been
consolidated with the Geomark Operations since inception.
Forward-Looking Statements
Certain statements contained in this report include statements which contain
words such as "anticipate", "could", "should", "expect", "seek", "may",
"intend", "likely", "will", "believe" and similar expressions, statements
relating to matters that are not historical facts, and such statements of our
beliefs, intentions and expectations about development, results and events which
will or may occur in the future, constitute "forward-looking information" within
the meaning of applicable Canadian securities legislation and are based on
certain assumptions and analysis made by us derived from our experience and
perceptions. Forward-looking information in this report includes, but is not
limited to: expected cash provided by continuing operations; future capital
expenditures, including the amount and nature thereof; oil and natural gas
prices and demand; expansion and other development trends of the oil and gas
industry; business strategy and outlook; expansion and growth of our business
and operations; and maintenance of existing customer, supplier and partner
relationships; supply channels; accounting policies; credit risks; and other
such matters.
All such forward-looking information is based on certain assumptions and
analyses made by us in light of our experience and perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe are appropriate in the circumstances. The risks,
uncertainties, and assumptions are difficult to predict and may affect
operations, and may include, without limitation: foreign exchange fluctuations;
equipment and labour shortages and inflationary costs; general economic
conditions; industry conditions; changes in applicable environmental, taxation
and other laws and regulations as well as how such laws and regulations are
interpreted and enforced; the ability of oil and natural gas companies to raise
capital; the effect of weather conditions on operations and facilities; the
existence of operating risks; volatility of oil and natural gas prices; oil and
gas product supply and demand; risks inherent in the ability to generate
sufficient cash flow from operations to meet current and future obligations;
increased competition; stock market volatility; opportunities available to or
pursued by us; and other factors, many of which are beyond our control. The
foregoing factors are not exhaustive and are further discussed in the Comaplex's
Annual Information Form filed on SEDAR at www.sedar.com.
QUARTERLY COMPARISONS
2010
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Q3 Q2 Q1
Financial ($ 000s, except $ per share)
Revenue
Mineral Division 13,636 73 70
Oil and Gas Division 523 676 568
Net Earnings (Loss) 13,276 (12) (166)
Per Share Basic and Diluted (1) 0.26 (0.00) (0.00)
Cash Flow From Operations 60 (41) 204
Per Share Basic and Diluted (1) 0.00 (0.00) 0.00
Capital Expenditures and Acquisitions
Mineral Division 47 - -
Oil and Gas Division 1 - 157
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Oil and Gas Operations
Barrels of Oil Equivalent (BOE) per day (2) 161 148 161
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2009
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Q4 Q3 Q2 Q1
Financial ($ 000s, except $ per share)
Revenue
Mineral Division 72 59 77 39
Oil and Gas Division 549 367 425 557
Net Earnings (Loss) (674) (461) (318) (109)
Per Share Basic and Diluted (1) (0.01) (0.01) (0.01) (0.00)
Cash Flow From Operations (77) 123 (262) (76)
Per Share Basic and Diluted (1) (0.00) 0.00 (0.01) (0.00)
Capital Expenditures and Acquisitions
Mineral Division - - - -
Oil and Gas Division 170 112 184 164
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Oil and Gas Operations
Barrels of Oil Equivalent (BOE) per
day (2) 139 139 150 177
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2008
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Q4 Q3 Q2 Q1
Financial ($ 000s)
Revenue
Mineral Division 152 328 136 192
Oil and Gas Division 817 948 914 789
Net Earnings (Loss) 498 438 (18) 58
Capital Expenditures and Acquisitions
Mineral Division - - - -
Oil and Gas Division 253 115 41 18
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Oil and Gas Operations
Barrels of Oil Equivalent (BOE) per
day (2) 195 179 162 186
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(1) Geomark issued one share upon incorporation on April 20, 2010, and on
July 6, 2010 issued 52,039,760 common shares as consideration for the
net investment in Geomark Operations with an ascribed net book value of
$21,152,000 as at December 31, 2009 and cancelled the original share.
For purposes of the per share calculations, it was assumed that all
52,039,760 shares issued have been outstanding since January 1, 2009.
(2) Barrels of Oil Equivalent (BOE) are calculated using a conversion ratio
of 6 MCF to 1 barrel of oil. The conversion is based on an energy
equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead and as such
may be misleading if used in isolation.
RESULTS OF OPERATIONS
Revenues
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000s) 2010 2010 2009 2010 2009
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Mineral Division Revenue:
Receipt of contingent
consideration 13,500 - - 13,500 -
Interest and other 136 73 59 279 175
Oil and Gas Division Revenue:
Oil and Gas Sales 427 507 369 1,491 1,244
Dividend income 135 128 86 374 246
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Gross Revenue 14,198 708 514 15,644 1,665
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Average Realized Prices
(Cdn $):
Natural gas (per MCF) 3.74 4.50 3.48 4.43 4.20
Natural gas liquids (per
barrel) 49.00 62.07 49.62 57.82 37.04
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During the third quarter of 2010, Geomark received the $13,500,000 contingent
receivable from Perfora. The contingent consideration is pursuant to the
purchase and sale agreement dated December 18, 2009 between Comaplex and
Perfora. On July 6, 2010 pursuant to the Arrangement Agreement between Comaplex,
Agnico-Eagle and Geomark (the "Arrangement"), Agnico-Eagle acquired all of the
issued and outstanding common shares of Complex on the basis of one Comaplex
share for 0.1576 of an Agnico-Eagle share. As part of the Arrangement, Comaplex
transferred a right to receive the contingent consideration to Geomark.
Subsequent to the Arrangement, Perfora sold all of the Agnico-Eagle common
shares that it received from the Arrangement for in excess of $53.93 per share,
and therefore Geomark received the maximum amount of consideration of
$13,500,000. Geomark recorded the amount as income.
Interest and other income in the first nine months of 2010 increased by $104,000
from the 2009 nine month period. The increase in interest income was mainly
attributable to a larger cash balance from an August 2009 financing. Mineral
division revenue for Q3 2010 was higher than Q2 2010 due to interest income from
the receipt of the $13,500,000 contingent receivable from Perfora.
Revenue for the first three quarters of 2010 from the petroleum and natural gas
properties increased compared to the first three quarters of 2009 due to
increases in commodity prices. This was partially offset by lower production
volumes. Quarter over quarter revenue decreased due to a decline in commodity
prices, partially offset by increased production volumes.
On February 1, 2009, the operator of one of the oil and gas properties
unilaterally stopped allocating natural gas production (approximately 55 MCF per
day) to Geomark Operations and the other minority interest partners based on the
operator's interpretation of the unit agreement. It is the Company's position
that this interpretation of the agreement is incorrect and the non-operating
partners should continue to receive this production. No amount of the natural
gas in dispute has been recorded as sales from this property. Geomark has filed
an objection with the operator outlining its position and management will
actively defend its position through whatever legal options it has. Until the
matter is resolved, no amounts will be accrued in respect of this production.
Dividend income from Bonterra Energy Corp. (Bonterra) increased for the nine
month period of 2010 over the first nine month period of 2009. This was due to
Bonterra increasing its dividends to $1.83 per share for the first nine months
of 2010 from $1.20 per share for the nine months ended September 30, 2009.
Production
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
2010 2010 2009 2010 2009
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Natural gas (MCF per day) 731 622 602 693 718
Natural gas liquids
(barrels per day) 39 44 39 41 37
Total BOE per day 161 148 139 156 157
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The annual decline rate on the oil and natural gas production is approximately
12 percent, which was partially offset by production adjustments in the third
quarter of 2010, on one of Geomark Operations' largest properties. Production
increased in Q3 2010 from Q2 2010 due to the production adjustments.
Royalties
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000s) 2010 2010 2009 2010 2009
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Crown royalties (recovery) 21 (64) 70 33 77
Gross overriding royalties 18 23 18 65 64
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Total royalty expense
(recovery) 39 (41) 88 98 141
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Crown royalties for the first nine months of 2010 were lower than the 2009 nine
month period as $102,000 of crown royalties was recovered in the second quarter
of 2010 relating to the prior year. Q3 2010 crown royalties increased over Q2
crown royalties for the same reason.
Geomark Operations acquired two crown royalty drilling credits of $102,000 per
credit from Bonterra for $51,000 each. One of the credits was acquired in the
first quarter of 2010 and the other in the last quarter of 2009 (discussed
further in the related party section of this report). These drilling credits
reduced crown royalty expense.
Production Costs
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000s) 2010 2010 2009 2010 2009
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Production costs -
natural gas/NGLs 195 151 266 475 571
$ per BOE 13.21 11.23 20.73 11.14 13.32
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The decrease in production costs for the first nine months of 2010 over the
first nine months of 2009 was due to a Q1 2009 settlement in respect of 2008
processing fees. Q3 2010 production costs increased in relation to Q2 2010 due
to the payment of 13 month equalizations in the third quarter on one of the
Company's main properties.
General and Administrative (G&A)
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000s) 2010 2010 2009 2010 2009
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G&A costs - Minerals Division 493 375 238 1,194 946
G&A costs - Oil and Gas
Division 36 43 36 114 107
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Total G&A 529 418 274 1,308 1,053
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General and administrative costs increased by $248,000 in the first nine months
of 2010 compared to the first nine months of 2009 due to increased legal and
compliance costs with regard to the incorporation and commencement of operations
for Geomark. The increase in Q3 2010 G&A over Q2 2010 is for the same reasons.
The Oil and gas division G&A costs have remained relatively unchanged.
Stock-Based Compensation
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000s) 2010 2010 2009 2010 2009
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Stock-based compensation 345 160 247 678 727
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Stock-based compensation is a statistically calculated value representing the
estimated expense of issuing employee stock options. As Geomark Operations will
be keeping the employees it has recorded a compensation expense over the vesting
period based on the fair value of options granted to employees, directors and
consultants. Stock-based compensation decreased to $678,000 in the first nine
months of 2010 from $727,000 for the first nine months of 2009. The decrease was
due primarily to the granting of 731,000 stock options in September, 2008, with
the majority of the stock-based compensation being recognized in the first year
after issuance. Stock-based expense increased $185,000 from Q2 2010 due to the
vesting of the remaining Comaplex stock options upon the July 6, 2010
Arrangement.
Subsequent to the Arrangement, the Company issued 2,997,000 (2009 - 22,500)
stock options with an estimated fair value of $977,000 (2009 - $26,000); $0.33
per option (2009 - $1.15 per option) using the Black-Scholes option pricing
model with the following key assumptions:
2010 2009
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Weighted-average risk free interest rate (%) 1.8 1.4
Dividend yield (%) 0.0 0.0
Expected life (years) 3.3 3.0
Weighted-average volatility (%) 57.0 51.0
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Depletion, Depreciation and Accretion Expense
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000s) 2010 2010 2009 2010 2009
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Depletion, depreciation
and accretion expense 90 93 70 256 216
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The increase in depletion, depreciation and accretion expense for the first nine
months of 2010 compared with the first nine months of 2009 was due primarily to
increased depreciation and depletion on tangible oil and gas assets. No mineral
property abandonment costs were incurred in the first nine months of 2010. The
policy is to review the carrying value in relation to the fair value of its
mineral properties on an ongoing basis and if the fair value is lower than the
property values will be reduced.
Income Tax Expense (Recovery)
The future tax recovery of $269,000 in the first three quarters of 2010 compared
to a future tax recovery of $156,000 in the first three quarters of 2009 was
primarily due to changes in the estimates, tax rates and other differences in
the Geomark Operations' statements from Comaplex's legal entity tax returns
prior to July 6, 2010. The right to the contingent consideration was transferred
to Geomark at fair value ($13,500,000) on July 6, 2010. The tax related to the
funds was accounted for within Comaplex.
Net Earnings (Loss)
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000s) 2010 2010 2009 2010 2009
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Net Earnings (Loss) 13,276 (12) (460) 13,098 (887)
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Net Earnings for the first nine months of 2010 increased by $13,985,000 compared
to the first nine months of 2009. The increase was mainly due to the receipt of
the contingent consideration of $13,500,000 and to a lesser extent by increased
oil and gas revenue, dividend and interest income. The increase in net earnings
in Q3 2010 compared to Q2 2010 is mainly attributable to the contingent
consideration.
Other Comprehensive Income
Other comprehensive income relates entirely to the mark to market valuation on
Geomark Operations' investments in Bonterra and Pine Cliff Energy Ltd. (Pine
Cliff). During the first three quarters of 2010, the market value of the
investments increased by $1,635,000. In the first three quarters of 2009, the
market value of the investments increased by $1,888,000.
Cash Flow (Deficiency) from Operations
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000s) 2010 2010 2009 2010 2009
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Cash flow (deficiency)
from operations 60 (41) 123 223 (215)
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Cash flow from operations increased $438,000 in the first nine months of 2010
compared to the first nine months of 2009. The increase was primarily due to
increased oil and gas revenue and increased dividend and interest income. Q3
2010 increased from Q2 2010 due to adjustments in non-cash working capital items
offset partially by increased G&A costs.
Liquidity and Capital Resources
At September 30, 2010, Geomark had a working capital position of $39,885,000
(December 31, 2009 - $27,893,000). These numbers do not include the value of
liquid investments of $8,828,000 at September 30, 2010 (December 31, 2009 -
$7,193,000).
Capital expenditures of $47,000 (2009 - $Nil) were conducted on Geomark
Operations' mineral projects. Capital expenditures of $158,000 (2009 - $460,000)
were incurred on Geomark Operations' oil and natural gas assets for capital
maintenance projects. The Company has a projected mineral capital budget of
$850,000 for mineral exploration and consolidating ownership in existing
exploration plays during the remainder of 2010 and the first quarter of 2011.
Capital expenditures for the oil and natural gas assets are expected to be less
than $250,000 for 2010.
Related Party Transactions
A management fee to Bonterra of $249,000 (2009 - $247,500) was paid by Geomark
Operations. Geomark also shares office rental costs with Bonterra and reimburses
Bonterra for costs related to employee benefits and office materials. These
costs have been included in general and administrative costs. In addition,
Bonterra owns 689,682 (December 31, 2009 - 689,682) common shares in Geomark and
previous to July 6, 2010 the equivalent amount in Comaplex. Services provided by
Bonterra include executive services (executive and finance duties), accounting
services, oil and gas administration and office administration. All services
performed are charged at estimated fair value. As at September 30, 2010, Geomark
had an account payable to Bonterra of $33,000 (December 31, 2009 - $105,000).
During the nine month period ended September 30, 2010, Bonterra sold $102,000 of
drilling royalty credits to Geomark for $51,000 (2009 - $Nil). Drilling royalty
credits will be used to offset future crown royalties.
Geomark assets include at September 30, 2010, 204,633 (December 31, 2009 -
204,633) common shares in Bonterra representing just over one percent of the
outstanding shares of Bonterra. The shares have a fair value of $8,704,000
(December 31, 2009 - $7,093,000). In 2010, Geomark Operations received dividend
income of $374,000 (2009 - $246,000).
As at September 30, 2010, Geomark has loaned Bonterra $20,000,000 (December 31,
2009 - $12,000,000). Effective May 1, 2010, interest is charged at a rate of
Canadian Chartered Bank Prime less 5/8 percent. Prior to May 1, 2010, interest
was charged at a rate of Canadian Chartered Bank Prime less 0.25 percent. The
loan is subordinated to Bonterra's bank debt and is unsecured. The loan is
payable upon demand subject to availability under Bonterra's line of credit. As
at September 30, 2010, Bonterra has sufficient room under its line of credit to
repay the loan. Interest earned on the loan during the period was $193,000 (2009
- $134,000). This loan results in a substantial benefit to Bonterra and to the
Company. The interest paid by Bonterra is substantially lower than the bank
interest rate and for the Company, the interest earned is substantially higher
than it would receive by investing in bank instruments such as bankers'
acceptance or guaranteed investment certificates.
Geomark assets also include, at September 30, 2010, 346,000 (December 31, 2009 -
346,000) common shares in Pine Cliff. Pine Cliff has common directors and
management with the Company. Pine Cliff trades on the TSX Venture Exchange. As
of September 30, 2010 the common shares have a fair value of $124,000 (December
31, 2009 - $100,000). The ownership of 346,000 common shares represents less
than one percent of the total issued and outstanding common shares of Pine
Cliff. There were no transactions between Pine Cliff and Geomark.
Additional information relating to the Company may be found on www.sedar.com and
by visiting our website at www.geomark.ca.
The following consolidated financial statements and notes to the consolidated
financial statements have been provided for further details.
GEOMARK EXPLORATION LTD.
Consolidated Balance Sheets
(See Note 1: Basis of Presentation)
As at September 30, 2010 and December 31, 2009
(unaudited)
($ 000s) 2010 2009
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Assets
Current
Cash 20,021 16,051
Accounts receivable 293 359
Prepaid expenses 62 246
Loan to related party (Note 3) 20,000 12,000
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40,376 28,656
Investments (Note 3) 8,828 7,193
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Property and Equipment
Property and equipment 10,323 10,172
Accumulated depletion, depreciation and
amortization (8,564) (8,314)
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Net Property and Equipment 1,759 1,858
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50,963 37,707
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Liabilities
Current
Accounts payable and accrued liabilities (Note 3) 491 763
Asset Retirement Obligations 168 179
Future Income Tax Liability (Note 4) - 20
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659 962
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Shareholders' Equity (Note 5)
Share capital 20,511 21,152
Contributed surplus 103 -
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20,614 21,152
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Retained earnings 24,196 11,098
Accumulated other comprehensive income (Note 6) 5,494 4,495
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29,690 15,593
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Total Shareholders' Equity 50,304 36,745
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50,963 37,707
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See accompanying notes to these consolidated financial statements.
GEOMARK EXPLORATION LTD.
Consolidated Statements of Net Earnings (Loss) and Retained Earnings
(See Note 1: Basis of Presentation)
For the Periods Ended September 30 (unaudited)
Three Months Nine Months
($ 000s) 2010 2009 2010 2009
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Minerals Division
Receipt of contingent consideration
(Note 9) 13,500 - 13,500 -
Interest and other 136 59 279 175
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13,636 59 13,779 175
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Oil and Gas Division
Oil and gas sales 427 369 1,491 1,244
Royalties (39) (88) (98) (141)
Dividend income (Note 3) 135 86 374 246
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523 367 1,767 1,349
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Total Net Revenue 14,159 426 15,546 1,524
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Expenses
Oil and gas production costs 195 266 475 571
General and administrative (Note 3)
Minerals division 493 238 1,194 946
Oil and gas division 36 36 114 107
Stock-based compensation 345 247 678 727
Depletion, depreciation and accretion 90 70 256 216
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1,159 857 2,717 2,567
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Net Earnings (Loss) Before Taxes 13,000 (431) 12,829 (1,043)
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Income Taxes (Recovery)
Current - - - -
Future (276) 29 (269) (156)
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(276) 29 (269) (156)
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Net Earnings (Loss) for the Period 13,276 (460) 13,098 (887)
Retained earnings, beginning of period 10,920 12,232 11,098 12,659
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Retained Earnings, End of Period 24,196 11,772 24,196 11,772
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Net Earnings (Loss) Per Share - Basic
and Diluted (Note 5) 0.26 (0.01) 0.25 (0.02)
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See accompanying notes to these consolidated financial statements.
GEOMARK EXPLORATION LTD.
Consolidated Statements of Comprehensive Income
(See Note 1: Basis of Presentation)
For the Periods Ended September 30 (unaudited)
Three Months Nine Months
($ 000s) 2010 2009 2010 2009
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Net Earnings (Loss) for the period 13,276 (460) 13,098 (887)
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Other Comprehensive Income
Unrealized gain on investments 1,589 979 1,635 1,888
Future taxes on unrealized gain on
investments (630) (142) (636) (278)
Future tax adjustment on exchange of
investments - - - 514
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Other comprehensive income (Note 6) 959 837 999 2,124
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Comprehensive income 14,235 377 14,097 1,237
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Comprehensive income per share - Basic
and Diluted (Note 5) 0.27 0.01 0.27 0.02
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See accompanying notes to these consolidated financial statements.
GEOMARK EXPLORATION LTD.
Consolidated Statements of Cash Flow
(See Note 1: Basis of Presentation)
For the Periods Ended September 30 (unaudited)
Three Months Nine Months
($ 000s) 2010 2009 2010 2009
----------------------------------------------------------------------------
Operating Activities
Net Earnings (Loss) for the period 13,276 (460) 13,098 (887)
Items not affecting cash
Receipt of contingent consideration (13,500) - (13,500) -
Stock-based compensation 345 247 678 727
Depletion, depreciation and
accretion 90 70 256 216
Future income taxes (276) 29 (269) (156)
----------------------------------------------------------------------------
(65) (114) 263 (100)
----------------------------------------------------------------------------
Change in non-cash operating working
capital items
Accounts receivable 113 (25) 66 113
Prepaid expenses 57 32 184 35
Accounts payable and accrued
liabilities (33) 244 (272) (242)
Asset retirement obligations settled (12) (14) (18) (21)
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125 237 (40) (115)
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Cash Provided By (Used in) Operating
Activities 60 123 223 (215)
----------------------------------------------------------------------------
Financing Activities
Net investment by Comaplex Minerals
Corp. (103) 15,338 (1,608) 6,856
----------------------------------------------------------------------------
Cash Provided By Financing
Activities (103) 15,338 (1,608) 6,856
----------------------------------------------------------------------------
Investing Activities
Mineral exploration property and
equipment
Expenditures (47) - (47) -
Oil and gas property and equipment
expenditures (1) (112) (158) (460)
Proceeds on oil and gas property and
equipment disposals - - 60 -
Loan to related party (8,000) - (8,000) (12,000)
Receipt of contingent consideration 13,500 - 13,500 -
----------------------------------------------------------------------------
Cash Used in Investing Activities 5,452 (112) 5,355 (12,460)
----------------------------------------------------------------------------
Net Cash Inflow (Outflow) 5,409 15,349 3,970 (5,819)
Cash, Beginning of Period 14,612 702 16,051 21,870
----------------------------------------------------------------------------
Cash, End of Period 20,021 16,051 20,021 16,051
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Cash interest paid - - - -
Cash taxes paid - - - -
----------------------------------------------------------------------------
See accompanying notes to these consolidated financial statements.
GEOMARK EXPLORATION LTD.
Notes to the Consolidated Interim Financial Statements
As at September 30, 2010 and for the three and nine month periods ended
September 30, 2010 and 2009 (unaudited)
1. BASIS OF PRESENTATION
Geomark Exploration Ltd. ("Geomark" or "the Company") was incorporated on April
20, 2010 as a 100 percent wholly-owned subsidiary of Comaplex Minerals Corp.
(Comaplex). Geomark, on July 6, 2010, was capitalized with Comaplex's Carved Out
Operations' assets and obligations (Geomark Operations), including a 100 percent
wholly-owned subsidiary WMC International Limited. In return, Geomark's common
shares were distributed to the shareholders of Comaplex, other than Agnico-Eagle
Mines Limited (Agnico-Eagle) and Perfora Investments S.a.r.l. (Perfora), on the
basis of one Geomark share for every Comaplex share.
As Geomark and the Geomark Operations were under common control, these
consolidated financial statements have been presented on a
continuity-of-interest basis of accounting and represent the activities of the
above noted entities from the date each commenced operations. The consolidated
financial statements presented for comparative purposes reflect the financial
position, results of operations and cash flows as if Geomark had been
consolidated with the Geomark Operations since inception.
The interim financial statements for Geomark as at and for the three and nine
months ended September 30, 2010 should be read in conjunction with the audited
financial statements of Comaplex Minerals Corp.'s Non-Meliadine Operations as at
and for the year ended December 31, 2009, which can be found in the Comaplex
Mineral Corp. Management Information Circular dated June 4, 2010 available on
www.geomark.ca. The disclosures provided within are incremental to those
included with the annual financial statements.
2. CHANGE IN ACCOUNTING POLICIES
Property and equipment
Petroleum and Natural Gas Properties and Related Equipment
On January 1, 2010, Geomark prospectively changed its policy of depreciating
petroleum and natural gas plant and equipment to using the declining balance
method at 20 percent per year, from the straight-line method. The change of
estimate was due to the declining balance method providing a better reflection
of the estimated service life of the related assets. Geomark incurred $100,000
less depreciation under the declining balance method, than under the
straight-line method.
Recent Accounting Pronouncements
The Canadian Accounting Standards Board has confirmed that International
Financial Reporting Standards (IFRS) will replace Canadian GAAP effective
January 1, 2011, including comparatives for 2010, for Canadian publicly
accountable enterprises.
3. RELATED PARTY TRANSACTIONS
Geomark Operations paid a management fee of $249,000 (2009 - $247,500) to
Bonterra Energy Corp. (Bonterra) a publically traded oil and gas corporation
listed on the Toronto Stock Exchange, that has common directors and management
with Geomark. Geomark also shares office rental costs with Bonterra and
reimburses Bonterra for costs related to employee benefits and office materials.
These costs have been included in general and administrative expenses. Services
provided by Bonterra include executive services (executive and finance duties),
accounting services, oil and gas administration and office administration.
During the nine month period ended September 30, 2010, Bonterra sold $102,000 of
drilling royalty credits to Geomark Operations for $51,000 (2009 - $Nil).
Drilling royalty credits will be used to offset future crown royalties.
Bonterra owns 689,682 (December 31, 2009 - 689,682) common shares in Geomark.
As at September 30, 2010, Geomark had an account payable to Bonterra of $33,000
(December 31, 2009 - $105,000).
As at September 30, 2010, Geomark has loaned Bonterra $20,000,000 (December 31,
2009 - $12,000,000). Effective May 1, 2010, interest is charged at a rate equal
to the Canadian Chartered Bank Prime rate less 5/8 percent. Prior to May 1,
2010, interest was charged at a rate equal to the Canadian Chartered Bank Prime
rate less 0.25 percent. The loan is subordinated to Bonterra's bank debt and is
unsecured. The loan is payable upon demand subject to availability under
Bonterra's line of credit. As at September 30, 2010, Bonterra has sufficient
room under its line of credit to repay the loan. Interest earned on the loan
during the period was $193,000 (2009 - $134,000).
Geomark at September 30, 2010 owns 204,633 (December 31, 2009 - 204,633) shares
in Bonterra representing just over one percent of the outstanding shares of
Bonterra. The shares have a fair value of $8,704,000 (December 31, 2009 -
$7,093,000). In 2010, Geomark Operations received dividend income of $374,000
(2009 - $246,000).
Geomark at September 30, 2010 owns 346,000 (December 31, 2009 - 346,000) common
shares in Pine Cliff Energy Ltd. (Pine Cliff). Pine Cliff has common directors
and management with Geomark. Pine Cliff shares trade on the TSX Venture
Exchange. As of September 30, 2010, the common shares have a fair value of
$124,000 (December 31, 2009 - $100,000). Geomark's ownership of 346,000 common
shares represents less than one percent of the total issued and outstanding
common shares of Pine Cliff.
These transactions are in the normal course of operations and are measured at
the exchange amount, which is the amount of the consideration established and
agreed to by the related parties.
4. INCOME TAXES
The Company has recorded a full valuation allowance for its future income tax
assets as it has been determined that their recoverability is not likely.
September 30, December 31,
($ 000s) 2010 Amount 2009 Amount
----------------------------------------------------------------------------
Future income tax liabilities:
Capital assets 975 28
Investments (222) (228)
Asset retirement obligations 42 46
Other - 32
Attributed crown royalty income - 102
Loss carry-forward 173 -
Valuation allowance (968) -
----------------------------------------------------------------------------
- (20)
----------------------------------------------------------------------------
The Company has the following tax pools which may be used to reduce taxable
income in future years, limited to the applicable rates of utilization:
Rate of
Utilization Amount
(%) ($000)
----------------------------------------------------------------------------
Undepreciated capital costs 30 1,203
Canadian development expenditures 30 4,430
Canadian exploration expenditures 100 25
Non-capital loss carryforward (1) 100 691
----------------------------------------------------------------------------
6,349
----------------------------------------------------------------------------
(1) Expires 2030.
5. SHARE CAPITAL
Authorized
Unlimited number of common shares without nominal or par value
Unlimited number of first preferred shares
Issued
2010
Number Amount ($000)
----------------------------------------------------------------------------
Common Shares
Balance, January 1(1) 52,039,760 21,152
Additional net investment to Comaplex (641)
----------------------------------------------------------------------------
Balance, September 30 52,039,760 20,511
----------------------------------------------------------------------------
(1) Geomark issued one share upon incorporation on April 20, 2010, and on
July 6, 2010 issued 52,039,760 common shares as consideration for the
net investment in Geomark Operations with an ascribed net book value
of $21,152,000 as at December 31, 2009 and cancelled the original
share. For purposes of the earnings per share calculation, it was
assumed that all 52,039,760 shares issued have been outstanding since
January 1, 2009.
Contributed surplus consists of $103,000 of stock-based compensation on the
stock options issued in Geomark after July 6, 2010. Prior to July 6, 2010
Geomark operations expensed a further $575,000 of Comaplex stock options that
vested and were exercised. This expense was booked as a capital contribution to
Geomark.
The number of weighted average basic and diluted shares outstanding for the
three and nine months ended September 30:
Three Months Nine Months
2010 2009 2010 2009
----------------------------------------------------------------------------
Basic shares outstanding(1) 52,039,760 52,039,760 52,039,760 52,039,760
Dilutive share options 113,772 - 113,772 -
----------------------------------------------------------------------------
Diluted shares outstanding 52,153,532 52,039,760 52,153,532 52,039,760
----------------------------------------------------------------------------
(1) Basic shares outstanding are used to calculate basic and diluted loss
per share when the Company is in a loss position.
The Company provides a stock option plan for its directors, officers, employees
and consultants. Under the plan, the Company may grant options for up to 10
percent of the outstanding common shares which as of September 30, 2010 was
5,203,976. The exercise price of each option granted equals the market price of
the Company's stock on the date of grant and the option's maximum term is five
years. Options generally vest one-third each year for the first three years of
the option term.
A summary of the status of the Company's stock option plan as of September 30,
2010 and changes during the period ended September 30, 2010:
September 30, 2010
----------------------------------------------------------------------------
Weighted-
Average
Options Exercise Price
----------------------------------------------------------------------------
Outstanding at beginning of period - $ -
Options issued 2,997,000 $ 0.80
Options exercised - -
Options cancelled - -
----------------------------------------------------------------------------
Outstanding at end of period 2,997,000 $ 0.80
----------------------------------------------------------------------------
Options exercisable at end of period - $ 0.80
----------------------------------------------------------------------------
The following table summarizes information about options outstanding at
September 30, 2010:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted-
Average Weighted- Number Weighted-
Number Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise At Exercise
Exercise Prices At 09/30/10 Life Price 09/30/10 Price
----------------------------------------------------------------------------
$ 0.80 2,997,000 3.1 years $ 0.80 - $ -
----------------------------------------------------------------------------
The Company records compensation expense over the vesting period based on the
fair value of options granted to employees, directors and consultants. The
Company issued 2,997,000 stock options with an estimated fair value of $977,000
($0.33 per option) using the Black-Scholes option pricing model with the
following key assumptions:
2010
----------------------------------------------------------------------------
Weighted-average risk free interest rate (%) 1.8
Dividend yield (%) 0.0
Expected life (years) 3.3
Weighted-average volatility (%) 57.0
----------------------------------------------------------------------------
6. ACCUMULATED OTHER COMPREHENSIVE INCOME
Other
January 1, Comprehensive September 30,
($ 000s) 2010 Income 2010
----------------------------------------------------------------------------
Unrealized gains on
available-for-sale investments 4,495 999 5,494
----------------------------------------------------------------------------
Other
January 1, Comprehensive December 31,
2009 Income 2009
----------------------------------------------------------------------------
Unrealized gains on
available-for-sale investments 931 3,564 4,495
----------------------------------------------------------------------------
7. BUSINESS SEGMENT INFORMATION
Geomark Operations' activities are represented by two industry segments
comprised of mineral exploration and oil and gas production:
Three Months ended Nine Months ended
September 30 September 30
----------------------------------------------------------------------------
($ 000s) 2010 2009 2010 2009
----------------------------------------------------------------------------
Gross revenue
Mineral exploration 13,636 59 13,779 175
Oil and Gas 562 455 1,865 1,490
----------------------------------------------------------------------------
14,198 514 15,644 1,665
----------------------------------------------------------------------------
Depletion, depreciation, accretion,
and abandonment
Mineral exploration - - - -
Oil and Gas 90 70 256 216
----------------------------------------------------------------------------
90 70 256 216
----------------------------------------------------------------------------
Net earnings (loss)
Mineral exploration 13,126 (456) 12,412 (1,226)
Oil and Gas 150 (4) 686 339
----------------------------------------------------------------------------
13,276 (460) 13,098 (887)
----------------------------------------------------------------------------
Property and equipment expenditures
Mineral exploration 47 - 47 -
Oil and Gas 1 112 158 460
----------------------------------------------------------------------------
48 112 205 460
----------------------------------------------------------------------------
Total assets (2009 amounts as of December 31, 2009)
Mineral exploration 40,167 28,241
Oil and Gas 10,796 9,466
----------------------------------------------------------------------------
50,963 37,707
----------------------------------------------------------------------------
8. FINANCIAL AND CAPITAL RISK MANAGEMENT
Financial Risk Factors
Geomark undertakes transactions in a range of financial instruments including:
- Cash deposits;
- Receivables;
- Loan to related party;
- Investments;
- Payables;
Geomark's activities result in exposure to a number of financial risks including
market risk (commodity price risk, interest rate risk and foreign exchange risk)
credit risk and liquidity risk. Financial risk management is carried out by
senior management under the direction of the Directors.
Geomark does not enter into risk management contracts to sell its oil and gas
commodities. Commodities are sold at market prices at the date of sale in
accordance with the Board directive.
Capital Risk Management
Geomark's objectives when managing capital, which Geomark defines to include
equity and working capital balances, are to safeguard Geomark's ability to
continue as a going concern, so that it can continue to provide returns to its
Shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital. Geomark has a large working
capital balance to fund its future exploration activities.
Geomark believes that it is adequately capitalized to allow it to continue its
future mineral exploration and oil and gas activities.
The following section (a) of this note provides a summary of the underlying
economic positions as represented by the carrying values, fair values and
contractual face values of the financial assets and financial liabilities.
The following section (b) addresses in more detail the key financial risk
factors that arise from Geomark's activities including its policies for managing
these risks.
a) Financial assets, financial liabilities
The carrying amounts, fair value and face values of Geomark's financial assets
and liabilities are shown in Table 1.
Table 1
As at September 30, 2010 As at December 31, 2009
----------------------------------------------------------------------------
Carrying Fair Face Carrying Fair Face
($ 000s) Value Value Value Value Value Value
----------------------------------------------------------------------------
Financial assets
Cash 20,021 20,021 20,021 16,051 16,051 16,051
Accounts receivable 293 293 297 359 359 453
Loan to related party 20,000 20,000 20,000 12,000 12,000 12,000
Investments 8,828 8,828 - 7,193 7,193 -
----------------------------------------------------------------------------
Financial liabilities
Accounts payable and
accrued liabilities 491 491 491 763 763 763
----------------------------------------------------------------------------
Financial instruments consisting of accounts receivable, loan to related party
and accounts payable and accrued liabilities carried on the consolidated balance
sheet are carried at amortized cost. Cash and investments are carried at fair
value. All of the fair value items are transacted in active markets. Geomark
classifies the fair value of these transactions according to the following
hierarchy based on the amount of observable inputs used to value the instrument.
Level 1 - Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. Active markets are those in which
transactions occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active markets included
in Level 1. Prices in Level 2 are either directly or indirectly observable as of
the reporting date. Level 2 valuations are based on inputs, including quoted
forward prices for commodities, time value and volatility factors, which can be
substantially observed or corroborated in the marketplace.
Level 3 - Valuations in this level are those with inputs for the asset or
liability that are not based on observable market data.
Geomark's cash and investments have been assessed on the fair value hierarchy
described above and are all considered Level 1.
b) Risks and mitigations
Market risk is the risk that the fair value or future cash flow of Geomark's
financial instruments will fluctuate because of changes in market prices.
Components of market risk to which Geomark is exposed are discussed below.
Commodity price risk
Geomark's principal operation is the exploration of mineral properties. Geomark
also engages in the production and sale of oil and natural gas. Fluctuations in
prices of these commodities may directly impact Geomark's performance and
ability to continue with its operations.
The Company's management, at the direction of the Board of Directors, currently
does not use risk management contracts to set price parameters for its
production.
Sensitivity Analysis
Geomark is still in the exploration stage of development of its mineral
exploration properties and therefore generates nominal cash flow or earnings
from these properties. In addition, Geomark's petroleum and natural gas
operations provide only moderate cash flow and as such, changes of $1.00 U.S.
per barrel in the price of crude oil, $0.10 per MCF in the price of natural gas
and $0.01 change in the Cdn/U.S. exchange rate would have no significant impact
on net earnings or comprehensive income.
Interest rate risk
Interest rate risk refers to the risk that the value of a financial instrument
or cash flows associated with the instrument will fluctuate due to changes in
market interest rates. Interest rate risk arises from interest bearing financial
assets and liabilities that Geomark uses. The principal exposure to Geomark is
on its cash balances and its loan to related party which have a variable
interest rate which gives rise to a cash flow interest rate risk.
Geomark's cash consists of Canadian and U.S. investment chequing accounts. Since
these funds need to be accessible for the development of capital projects,
management does not reduce its exposure to interest rate risk through entering
into term contracts of various lengths.
Sensitivity Analysis
Based on historic movements and volatilities in the interest rate markets and
management's current assessment of the financial markets, Geomark believes that
a one percent variation in the Canadian prime interest rate is reasonably
possible over a 12-month period.
A one percent change in the Canadian prime rate would increase or decrease
annual net earnings and comprehensive income by $300,000.
Foreign exchange risk
Geomark has no foreign operations and currently makes all of its product sales
in Canadian currency. Geomark has an insignificant U.S. cash balance. Geomark
does not mitigate Cdn $/U.S. $ exchange rate risk by using risk management
contracts.
Credit risk
Credit risk is the risk that a contracting party will not complete its
obligations under a financial instrument and cause Geomark to incur a financial
loss. Geomark is exposed to credit risk on all financial assets included on the
balance sheet. To help mitigate this risk:
- Geomark only maintains its cash balances with low risk exposure which
frequently results in receiving lower interest rates on investments.
- The investments are only with entities that have common management with Geomark.
Accounts receivable balance at September 30, 2010 ($293,000) and December 31,
2009 ($359,000) primarily consist of product sales with major oil and gas
marketing companies, all of which have always paid within 30 days, federal and
provincial government refunds and credits, and interest from a major Canadian
Bank.
Geomark assesses its financial assets quarterly to determine if there has been
any impairment. Geomark wrote-off $84,000 of receivables that had a full
allowance in a previous period. No impairment provision was required on the oil
and gas financial assets. Geomark does not have any significant credit risk
exposure to any single counterparty or any group of counterparties having
similar characteristics.
The carrying value of accounts receivable approximates their fair value due to
the relatively short periods to maturity on this instrument. The maximum
exposure to credit risk is represented by the carrying amount on the balance
sheet. There are no material financial assets that Geomark considers past due.
Liquidity risk
Liquidity risk includes the risk that, as a result of Geomark's operational
liquidity requirements:
- Geomark will not have sufficient funds to settle a transaction on the due date;
- Geomark will not have sufficient funds to continue with its exploration projects;
- Geomark will be forced to sell assets at a value which is less than what they
are worth; or
- Geomark may be unable to settle or recover a financial asset at all.
To help reduce these risks, Geomark:
- Has a significant working capital base;
- Holds current investments that are readily tradable should the need arise; and
- Maintains a continuous evaluation approach as to the financing requirements
for its exploration programs.
9. CONTINGENT CONSIDERATION
In December 2009, Comaplex acquired Meliadine Resources Ltd. from Perfora
Investments S.a.r.l. (Perfora) (a wholly owned subsidiary of Resource Capital
Fund III L.P.), by issuance of 12,750,000 common shares of Comaplex. As part of
the Purchase and Sale Agreement, Perfora is required to pay additional
consideration to Comaplex for the issued common shares upon their sale to a
maximum of $13,500,000.
The right to the contingent consideration was transferred to Geomark as part of
the Geomark Operations assets, pursuant to an acquisition agreement between
Comaplex, Agnico-Eagle and Geomark (the "Arrangement"). Agnico-Eagle acquired on
July 6, 2010 all of the issued and outstanding common shares of Complex on the
basis of one Comaplex share for 0.1576 of an Agnico-Eagle share. Perfora sold
all of its 2,009,400 Agnico-Eagle common shares (12,750,000 times 0.1576
exchange ratio) in the third quarter of 2010. Geomark has received the maximum
consideration of $13,500,000 and has booked the amount as income.
Geomark Exploration Ltd. (TSXV:GME)
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