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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2005
Commission file number 1-12284
GOLDEN STAR RESOURCES LTD.
(Exact Name of Registrant as Specified in Its Charter)
Canada 98-0101955
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10901 West Toller Drive, Suite 300
Littleton, Colorado 80127-6312
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (303) 830-9000
Securities registered or to be registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Shares American Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Warrants Issued February 2003
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 Section 15(d) of the Act. Yes ___ No _X__
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"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. Yes _X__ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K (ss. 229.405 of this chapter) 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 l0-K. ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act).
(Check one): Large accelerated filer: ___ Accelerated filer: _X__
Non-accelerated filer: ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ___ No _X_
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant was approximately $437 million as of June 30,
2005, based on the closing price of the shares on the American Stock Exchange of
$3.10 per share.
Number of Common Shares outstanding as at March 27, 2006: 207,265,758
1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A in connection with the 2006
Annual Meeting of Shareholders are incorporated by reference to Part III of this
Report on Form 10-K.
REPORTING CURRENCY, FINANCIAL AND OTHER INFORMATION
All amounts in this Report are expressed in United States ("US") dollars, unless
otherwise indicated. Canadian currency is denoted as "Cdn$." Euros are denoted
as "(euro)".
Financial information is presented in accordance with accounting principles
generally accepted in Canada ("Cdn GAAP" or "Canadian GAAP"). Differences
between accounting principles generally accepted in the US ("US GAAP") and those
applied in Canada, as applicable to Golden Star Resources Ltd., are explained in
Note 28 to the Consolidated Financial Statements.
Information in Parts I and II of this report includes data expressed in various
measurement units and contains numerous technical terms commonly used in the
gold mining industry. To assist readers in understanding this information, a
conversion table and glossary are provided below.
References to "Golden Star," the "Company," "we," "our," and "us" mean Golden
Star Resources Ltd., its predecessors and consolidated subsidiaries, or any one
or more of them, as the context requires.
NON-GAAP FINANCIAL MEASURES
In this Form 10-K, we use the terms "total cash cost per ounce" and "cash
operating cost per ounce" which are considered Non-GAAP financial measures as
defined in SEC Regulation S-K Item 10 and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with GAAP.
See Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations for a definition of these measures as used in this Form
10-K.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K and the documents incorporated by reference in this Form 10-K
contain forward-looking statements, within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, with respect to our
financial condition, results of operations, business, prospects, plans,
objectives, goals, strategies, future events, capital expenditures, and
exploration and development efforts. Words such as "anticipates," "expects,"
"intends," "forecasts," "plans," "believes," "seeks," "estimates," "may,"
"will," and similar expressions identify forward-looking statements.
Although we believe that our plans, intentions and expectations reflected in
these forward-looking statements are reasonable, we cannot be certain that these
plans, intentions or expectations will be achieved. Actual results, performance
or achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained or incorporated by reference
in this Form 10-K.
These statements include comments regarding: the establishment and estimates of
mineral reserves and resources, recovery rates, production, production
commencement dates, production costs, cash operating costs, total cash costs,
grade, processing capacity, potential mine life, feasibility studies, permitting
and licensing, development costs, expenditures, exploration activities and
expenditures, funding for EURO Ressources S.A., recovery of deferred stripping
charges at Bogoso/Prestea, equipment replacement, anticipated benefits of the
acquisition of St. Jude Resources Ltd., ability to announce Mineral Reserve
estimates as the St. Jude properties in 2006, our expansion plans for
Bogoso/Prestea, related permitting and capital costs and anticipated production
and other estimates at Bogoso/Prestea in 2006 and 2007, cash requirements and
sources, production capacity, operating costs and gold recoveries, estimated
capital spending in 2006, effectiveness of and anticipated provisions of the new
Ghanaian Minerals and Mining Bill.
The following, in addition to the factors described under "Risk Factors" in Item
1 below are among the factors that could cause actual results to differ
materially from the forward-looking statements:
o unexpected changes in business and economic conditions;
o significant increases or decreases in gold prices;
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o changes in interest and currency exchange rates;
o timing and amount of gold production;
o failure to realize the anticipated benefits of the acquisition of St. Jude;
o failure to develop reserves on the St. Jude properties;
o unanticipated grade changes;
o unanticipated recovery or production problems;
o effects of illegal miners on our properties;
o changes in mining and processing costs including changes to costs of raw
materials, supplies, services and personnel;
o changes in metallurgy and processing;
o availability of skilled personnel, materials, equipment, supplies and
water;
o changes in project parameters;
o costs and timing of development of new reserves;
o results of current and future exploration activities;
o results of pending and future feasibility studies;
o joint venture relationships;
o political or economic instability, either globally or in the countries in
which we operate;
o local and community impacts and issues;
o timing of receipt of and maintenance of government approvals and permits;
o accidents and labor disputes;
o environmental costs and risks;
o competitive factors, including competition for property acquisitions; and
o availability of capital at reasonable rates or at all.
These factors are not intended to represent a complete list of the general or
specific factors that could affect us. Your attention is drawn to other risk
factors disclosed and discussed in Item 1 below. We undertake no obligation to
update forward-looking statements.
3
CONVERSION FACTORS AND ABBREVIATIONS
For ease of reference, the following conversion factors are provided:
1 acre = 0.4047 hectare 1 mile = 1.6093 kilometers
1 foot = 0.3048 meter 1 troy ounce = 31.1035 grams
1 gram per metric tonne = 0.0292 troy ounce/short 1 square mile = 2.59 square kilometers
ton
1 short ton (2000 pounds) = 0.9072 tonne 1 square kilometer = 100 hectares
1 tonne = 1,000 kg or 2,204.6 lbs 1 kilogram = 2.204 pounds or 32.151 troy oz
1 hectare = 10,000 square meters 1 hectare = 2.471 acres
The following abbreviations may be used herein:
Au = gold m(2) = square meter
g = gram m(3) = cubic meter
Au g/t = grams of gold per tonne Mg or mg = milligram
ha = hectare mg/m(3) = milligrams per cubic meter
km = kilometer T or t = tonne
km(2) = square kilometers oz = troy ounce
kg = kilogram ppb = parts per billion
m = meter Ma = million years
Note: All units in this report are stated in metric measurements unless
otherwise noted.
GLOSSARY OF TERMS
We report our reserves to two separate standards to meet the requirements for
reporting in both Canada and the United States ("US"). Canadian reporting
requirements for disclosure of mineral properties are governed by National
Instrument 43-101 ("NI 43-101"). The definitions in NI 43-101 are adopted from
those given by the Canadian Institute of Mining, Metallurgy and Petroleum. US
reporting requirements for disclosure of mineral properties are governed by SEC
Industry Guide 7. These reporting standards have similar goals in terms of
conveying an appropriate level of confidence in the disclosures being reported,
but embody differing approaches and definitions.
We estimate and report our resources and reserves according to the definitions
set forth in NI 43-101 and modify and reconcile them as appropriate to conform
to Industry Guide 7 for reporting in the U.S. The definitions for each reporting
standard are presented below with supplementary explanation and descriptions of
the parallels and differences.
NI 43-101 DEFINITIONS
mineral reserve The term "mineral reserve" refers to the economically
mineable part of a measured or indicated mineral resource
demonstrated by at least a preliminary feasibility study.
The study must include adequate information on mining,
processing, metallurgical, economic, and other relevant
factors that demonstrate, at the time of reporting, that
economic extraction can be justified. A mineral reserve
includes diluting materials and allowances for losses that
might occur when the material is mined.
proven mineral The term "proven mineral reserve" refers to the economically
reserve mineable part of a measured mineral resource demonstrated by
at least a preliminary feasibility study. This study must
include adequate information on mining, processing,
metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic
extraction is justified.(1)
probable mineral The term "probable mineral reserve" refers to the
reserve economically mineable part of an indicated, and in some
circumstances, a measured mineral resource demonstrated by
at least a preliminary feasibility study. This study must
include adequate information on mining, processing,
metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic
extraction can be justified.
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mineral resource The term "mineral resource" refers to a concentration or
occurrence of natural, solid, inorganic or fossilized
organic material in or on the Earth's crust in such form and
quantity and of such a grade or quality that it has
reasonable prospects for economic extraction. The location,
quantity, grade, geological characteristics and continuity
of a mineral resource are known, estimated or interpreted
from specific geological evidence and knowledge.
measured mineral The term "measured mineral resource" refers to that part of
resource a mineral resource for which quantity, grade or quality,
densities, shape and physical characteristics are so well
established that they can be estimated with confidence
sufficient to allow the appropriate application of technical
and economic parameters, to support production planning and
evaluation of the economic viability of the deposit. The
estimate is based on detailed and reliable exploration,
sampling and testing information gathered through
appropriate techniques from locations such as outcrops,
trenches, pits, workings and drill holes that are spaced
closely enough to confirm both geological and grade
continuity.
indicated mineral The term "indicated mineral resource" refers to that part of
resource a mineral resource for which quantity, grade or quality,
densities, shape and physical characteristics can be
estimated with a level of confidence sufficient to allow the
appropriate application of technical and economic
parameters, to support mine planning and evaluation of the
economic viability of the deposit. The estimate is based on
detailed and reliable exploration and testing information
gathered through appropriate techniques from locations such
as outcrops, trenches, pits, workings and drill holes that
are spaced closely enough for geological and grade
continuity to be reasonably assumed.
inferred mineral The term "inferred mineral resource" refers to that part of
resource a mineral resource for which quantity and grade or quality
can be estimated on the basis of geological evidence and
limited sampling and reasonably assumed, but not verified,
geological and grade continuity. The estimate is based on
limited information and sampling gathered through
appropriate techniques from locations such as outcrops,
trenches, pits, workings and drill holes.
qualified person(2) The term "qualified person" refers to an individual who is
an engineer or geoscientist with at least five years of
experience in mineral exploration, mine development or
operation or mineral project assessment, or any combination
thereof, has experience relevant to the subject matter of
the project and the technical report and is a member in good
standing of a professional association.
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
tonnes and grade to include diluting materials and
allowances for losses that might occur when the material is
mined.
proven 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.
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probable 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.
mineralized The term "mineralized material" refers to material that is
material(3) not included in the reserve as it does not meet all of the
criteria for adequate demonstration for economic or legal
extraction.
non-reserves The term "non-reserves" refers to mineralized 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.
development stage A "development stage" project is one which is undergoing
preparation of an established commercially mineable deposit
for its extraction but which is not yet in production. This
stage occurs after completion of a feasibility study.
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.
1. For Industry Guide 7 purposes this study must include adequate information
on mining, processing, metallurgical, economic, and other relevant factors
that demonstrate, at the time of reporting, that economic extraction is
justified.
2. Industry Guide 7 does not require designation of a qualified person.
3. This category is substantially equivalent to the combined categories of
measured and indicated mineral resources specified in NI 43-101.
ADDITIONAL DEFINITIONS
alteration - any change in the mineral composition of a rock brought about by
physical or chemical means
ancillary equipment - service equipment not directly associated with primary
process
artisanal - current or historic informal mining typically of a low tech,
manually intensive nature
assay - a measure of the valuable mineral content
Au - gold
bio-oxidation or BIOX(R) - a processing method that uses bacteria to oxidize
refractory sulfide ore to make it amenable to normal oxide ore processing
techniques such as carbon-in-leach
Birimian - a thick and extensive sequence of Proterozoic age metamorphosed
sediments and volcanics first identified in the Birim region of southern Ghana
cash operating cost per ounce - is equal to total cash cost for the period less
production royalties and production taxes, divided by the number of ounces of
gold sold during the period. (This definition is consistent with the Gold
Institute's definition)
CIL or carbon-in-leach - an ore processing method involving the use of cyanide
where activated carbon which has been added to the leach tanks is used to absorb
gold as it is leached by cyanide
craton - a stable relatively immobile area of the earth's crust
cut-off grade - when determining economically viable mineral reserves, the
lowest grade of mineralized material that qualifies as ore, i.e. that can be
mined and processed at a profit
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cyanidation - the process of introducing cyanide to ore to recover gold
diamond drilling - rotary drilling using diamond-set or diamond-impregnated
bits, to produce a solid continuous core of rock sample
dip - the angle that a structural surface, a bedding or fault plane, makes with
the horizontal, measured perpendicular to the strike of the structure
diorite - a group of intrusive rocks intermediate in composition between acidic
and basic, characteristically composed of dark-colored amphibole, acid
plagioclase, pyroxene and sometimes a small amount of quartz.
disseminated - where minerals occur as scattered particles in the rock
dore - unrefined gold bullion bars containing various impurities such as silver,
copper and mercury, which will be further refined to near pure gold
fault - a surface or zone of rock fracture along which there has been
displacement
feasibility study - a definitive engineering and economic study addressing the
viability of a mineral deposit taking into consideration all associated
technical factors, costs, revenues and risks. We recognize three levels of
feasibility studies; (i) a directional feasibility study or scoping study; (ii)
a pre-feasibility study; and (iii) a feasibility study. A feasibility study that
satisfies the requirements for external financing is known as a bankable
feasibility study.
fold - a curve or bend of a planar structure such as rock strata, bedding
planes, foliation, or cleavage
formation - a distinct layer of sedimentary rock of similar composition
gabbro - a group of dark-colored basic intrusive igneous rocks, (the intrusive
equivalent to basalt)
gabbroic - rock masses made up of gabbro and other similar dark-colored basic
igneous rock
geochemistry - the study of the distribution and amounts of the chemical
elements in minerals, ores, rocks, solids, water, and the atmosphere
geochemical prospecting - a prospecting technique which measures the content of
certain metals in soils and rocks used to define anomalies for further testing
geophysics - the study of the mechanical, electrical and magnetic properties of
the earth's crust
geophysical surveys - a survey method used primarily in the mining industry as
an exploration tool, applying the methods of physics and engineering to the
earth's surface
geotechnical - the study of ground stability
grade - quantity of metal per unit weight of host rock
greenstone - a sequence of usually metamorphosed volcanic-sedimentary rock
assemblages
granodiorite - a group of coarse-grained plutonic rocks intermediate in
composition between quartz diorite and quartz monzonite containing quartz,
plagioclase, potassium feldspar with biotite and hornblende
heap leach - a mineral processing method involving the crushing and stacking of
an ore on an impermeable liner upon which solutions are sprayed to dissolve
metals i.e. gold/copper etc.; the solutions containing the metals are then
collected and treated to recover the metals
host rock - the rock in which a mineral or an ore body may be contained
hydrothermal - the products of the actions of heated water, such as a mineral
deposit precipitated from a hot solution
in-situ - in its natural position
7
life-of-mine - a term commonly used to refer to the likely term of a mining
operation and normally determined by dividing the tonnes of mineral reserve by
the annual rate of mining and processing
mapped or geological mapping - the recording of geologic information including
rock units and the occurrence of structural features, and mineral deposits on
maps
metasediment - a sedimentary rock which shows evidence of having been subjected
to metamorphism
metavolcanic - a volcanic rock which shows evidence of having been subjected to
metamorphism
mineral - a naturally occurring inorganic crystalline material having a definite
chemical composition
mineralization - a natural accumulation or concentration in rocks or soil of one
or more potentially economic minerals, also the process by which minerals are
introduced or concentrated in a rock
National Instrument 43-101 or NI 43-101 - Canadian standards of disclosure for
mineral projects
non-refractory - ore containing gold that can be satisfactorily recovered by
basic gravity concentration or simple cyanidation
outcrop - that part of a geologic formation or structure that appears at the
surface of the earth
open pit or open cut - surface mining in which the ore is extracted from a pit
or quarry, the geometry of the pit may vary with the characteristics of the ore
body
ore - mineral bearing rock that can be mined and treated profitably under
current or immediately foreseeable economic conditions
ore body - a mostly solid and fairly continuous mass of mineralization estimated
to be economically mineable
ore grade - the average weight of the valuable metal or mineral contained in a
specific weight of ore i.e. grams per tonne of ore
oxide - gold bearing ore which results from the oxidation of near surface
sulfide ore
pH - a measure on a scale of 1 to 14 of the acidity or alkalinity of a solution
where 7 is neutral, greater than 7 is basic and less than 7 is acidic
plunge - the angle from the horizontal of a linear geological feature on a plane
Proterozoic - the more recent time division of the Precambrian; rocks aged
between 2,500 million and 550 million years old
put - a financial instrument that provides the right, but not the obligation, to
sell a specified number of ounces of gold at a specified price
pyrite - common sulfide of iron
QA/QC - Quality Assurance/Quality Control is the process of controlling and
assuring data quality for assays and other exploration and mining data
quartz - a mineral composed of silicon dioxide, SiO2 (silica)
RAB (rotary air blast) drilling - relatively inexpensive and quick exploration
drilling method returning rock chips from the drill hole using high pressure air
RC (reverse circulation) drilling - a drilling method using a tri-cone bit,
during which rock cuttings are pushed from the bottom of the drill hole to the
surface through an outer tube, by liquid and/or air pressure moving through an
inner tube
run-of-mine - usually refers to the average ore material being mined and
processed, i.e. run-of-mine grade of ore delivered to the processing plant
reef - general term that typically refers to a tabular ore body
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refractory - ore containing gold that cannot be satisfactorily recovered by
basic gravity concentration or simple cyanidation
rock - indurated naturally occurring mineral matter of various compositions
SAG - semi-autogeneous grinding
sampling and analytical variance/precision - an estimate of the total error
induced by sampling, sample preparation and analysis
sediment - particles transported by water, wind or ice
sedimentary rock - rock formed at the earth's surface from solid particles,
whether mineral or organic, which have been moved from their position of origin
and re-deposited
sericitic - a rock with abundant amounts of sericite, a white fine grained
potassium mica occurring as an alteration product of various aluminosilicate
minerals
shear - a form of strain resulting from stresses that cause or tend to cause
contiguous parts of a body of rock to slide relatively to each other in a
direction parallel to their plane of contact
shield - a large area of exposed basement rocks often surrounded by younger
rocks, e.g. Guiana Shield
stratigraphic or stratigraphically - geology that deals with the origin and
succession of strata
strike - the direction or trend that a structural surface, e.g. a bedding or
fault plane, takes as it intersects the horizontal
strip - to remove overburden in order to expose ore
sulfide - a mineral including sulfur (S) and iron (Fe) as well as other
elements; metallic sulfur-bearing mineral often associated with gold
mineralization
syncline - a concave downward fold, the core of which contains the
stratigraphically younger rocks
tailings - fine ground wet waste material produced from ore after economically
recoverable metals or minerals have been extracted
Tarkwaian - a group of sedimentary rocks of Proterozoic age named after the town
of Tarkwa in southern Ghana where they were found to be gold bearing
tonne - metric tonne, equal to 1,000 kilograms or 2,204.6 pounds
total cash cost per ounce - is equal to total production costs as found on our
consolidated statement of operations less depreciation, depletion, amortization
and asset retirement obligation accretion divided by the number of ounces of
gold sold during the applicable period. (This definition is consistent with the
Gold Institute's definition).
total production cost per ounce - is equal to total production costs as found on
our consolidated statement of operations divided by the ounces of gold sold in
the period; total production costs include all mine-site operating costs,
including the costs of mining, processing, maintenance, work in process
inventory changes, mine-site overhead, production taxes and royalties,
depreciation, depletion, amortization, asset retirement obligations and
by-product credits, but does not include exploration costs, corporate general
and administrative expense, impairment charges, corporate business development
costs, gains and losses on asset sales, interest expense, foreign currency gains
and losses, gains and losses on investments and income tax
transition ore - is an ore zone lying between the oxide ore and the sulfide ore;
ore material that is partially weathered and oxidized
vein - a thin, sheet like crosscutting body of hydrothermal mineralization,
principally quartz
volcanics - those originally molten rocks, generally fine grained, that have
reached or nearly reached the earth's surface before solidifying
9
volcano-sedimentary - rocks composed of materials of both volcanic and
sedimentary origin
wall rock - the rock adjacent to a vein
weathering - near surface alteration and oxidation of minerals and rocks by
exposure to the atmosphere or ground water
wire frame - a mesh of triangles used to define a volume in generating
computerized geological models
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ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW OF GOLDEN STAR
We are a Canadian incorporated international gold mining and exploration company
producing gold in Ghana, West Africa. We also conduct gold exploration in West
Africa and in South America. Golden Star Resources Ltd. was established under
the Canada Business Corporations Act on May 15, 1992 as a result of the
amalgamation of South American Goldfields Inc., a corporation incorporated under
the federal laws of Canada, and Golden Star Resources Ltd., a corporation
originally incorporated under the provisions of the Alberta Business
Corporations Act on March 7, 1984 as Southern Star Resources Ltd. Our principal
office is located at 10901 West Toller Drive, Suite 300, Littleton, Colorado
80127, and our registered and records offices are located at 66 Wellington St.
W, 42nd floor, Box 20, Toronto Dominion Bank Tower, Toronto Dominion Centre,
Toronto, ON M5K 1N6. Our fiscal year ends on December 31.
Through our subsidiaries and joint ventures we own a controlling interest in
four significant gold properties in southern Ghana in West Africa: the
Bogoso/Prestea property ("Bogoso/Prestea"), the Wassa property ("Wassa"), the
St. Jude properties ("St. Jude Properties") and the Prestea Underground property
("Prestea Underground").
The Bogoso/Prestea property encompasses the adjoining Bogoso and Prestea mining
concessions, which are operated as a single operation and referred to as
"Bogoso/Prestea." Bogoso/Prestea is owned by our 90% owned subsidiary Bogoso
Gold Limited ("BGL"). In 2005, we sold 131,898 ounces of gold from
Bogoso/Prestea. BGL also owns a 90% operating interest in the Prestea
Underground. We are currently conducting exploration and engineering studies to
determine if the Prestea Underground mine can be reactivated on a profitable
basis.
Wassa, which is located 35 kilometers east of Bogoso/Prestea, is owned by our
90% owned subsidiary Wexford Goldfields Limited ("WGL"). Wassa completed
construction and commissioning of a new processing plant and open pit mine at
the end of March 2005 and the project was placed in service on April 1, 2005.
Wassa produced and sold 69,070 ounces of gold during 2005, following its April
1, 2005 in service date.
The St. Jude Properties in southwest Ghana were acquired in December 2005 as a
result of our acquisition of St. Jude Resources Ltd. ("St. Jude"), as discussed
below. The St. Jude Properties consist of the Hwini-Butre and Benso concessions
covering an area of 201 square kilometers and located between 60 and 85
kilometers south of Wassa. We currently hold a 100% interest in these properties
but the Government of Ghana is entitled to a 10% carried interest when mining
permits are issued.
We also hold several exploration properties including interests in an
exploration joint venture in Sierra Leone and active exploration properties in
Ghana, Cote d'Ivoire, Suriname and French Guiana. We hold indirect interests in
gold exploration properties in Peru and Chile through an investment in Goldmin
Consolidated Holdings. We also own a 53% interest in EURO Ressources S.A.
("EURO"), a French registered, publicly traded royalty holding company (formerly
known as Guyanor Ressources S.A.). EURO holds a participation right which
requires Cambior Inc. to make quarterly payments to EURO, the amounts of which
are based upon the gold price and gold production from Cambior Inc.'s Rosebel
gold mine in Suriname.
All of our operations, with the exception of certain exploration projects,
transact business in US dollars and keep financial records in US dollars. Our
accounting records are kept in accordance with Canadian GAAP.
We are a reporting issuer or the equivalent in all provinces of Canada and the
United States and file disclosure documents with the Canadian securities
regulatory authorities and the United States Securities and Exchange Commission.
ACQUISITION OF ST. JUDE
On December 21, 2005, we completed the acquisition of St. Jude, a Canadian
corporation, pursuant to a court ordered plan of arrangement under the Canada
Business Corporation Act (the "Arrangement") under which Golden Star acquired
100% of the issued and outstanding common shares and other securities of St.
Jude. Following the completion of the Arrangement, St. Jude became a
wholly-owned subsidiary of Golden Star.
Under the terms of the Arrangement, (i) the holders of St. Jude common shares
exchanged their St. Jude common shares for common shares of Golden Star on the
basis of 0.72 of a Golden Star common share for each St. Jude common share, and
(ii) the outstanding warrants and options of St. Jude were exchanged for Golden
11
Star warrants or options, such that each holder will be entitled to receive on
the exercise thereof that number of Golden Star common shares that is equal to
the number of St. Jude common shares that would otherwise have been issuable
upon the exercise thereof multiplied by 0.72, with the exercise price being
appropriately adjusted as well. A total of 31.4 million of our common shares
were issued in the Arrangement and a further 5.8 million are issuable upon
exercise of warrants and options exchanged for warrants and options of St. Jude.
GOLD SALES AND PRODUCTION
Ghana has been a significant gold producing country for over 100 years with
AngloGold Ashanti's Obuasi mine and the underground mine at Prestea historically
being the two major producers. Several other areas in Ghana have also produced
significant amounts of gold. The gold industry in Ghana is currently
experiencing growth in exploration and development and gold production. Annual
gold production in Ghana has exceeded 2 million ounces in recent years and is
expected to increase as planned developments and expansions now underway reach
the production stage.
All of our gold production is sold to a South African gold refinery. Our gold is
sold in the form of dore bars which average approximately 91% gold by weight
with the remaining portion being primarily silver. Revenue is recognized when
title is transferred at the refinery. The sales price is based on the London
P.M. fix on the day of delivery to the refinery.
GOLD PRICE HISTORY
The price of gold is volatile and is affected by numerous factors beyond our
control such as the sale or purchase of gold by various central banks and
financial institutions, inflation or deflation, fluctuation in the relative
values of the US dollar and foreign currencies, changes in global and regional
gold demand, and the political and economic conditions of major gold-producing
countries throughout the world.
The following table presents the high, low and average afternoon fixed prices
for gold per ounce on the London Bullion Market over the past ten years:
Average Price Received
Year High Low Average by Golden Star
-----------------------------------------------------------------------------------------------------------
1996 415 367 388 N/A
1997 362 283 331 N/A
1998 313 273 294 N/A
1999 326 253 279 293
2000 313 264 279 280
2001 293 256 271 271
2002 349 278 310 311
2003 416 320 363 364
2004 454 375 410 410
2005 537 411 445 446
To March 27, 2006 572 525 553 551
--------------------
Data Source: www.kitco.com
12
The following diagram depicts the organizational structure of Golden Star and
its significant subsidiaries:
------------
GOLDEN STAR
RESOURCES
LTD.
(Canada)
------------
|
|
---------------------------------------------------
| | |
| | |
-------------- ---------------- ------------------
EURO RESOURCES Caystar Holdings St. Jude Resources
S.A. (France) (Cayman Islands) Ltd. (Canada)
Approximately (100%) (100%)
(53%)
|
|
---------------------------------------------------
| |
| |
---------------- ------------------
Bogoso Holdings Wasford Holdings
(Cayman Islands) (Cayman Islands)
(100%) (100%)
| |
| |
---------------- ------------------
Bogoso Gold Wexford Goldfields
Limited Limited
(Ghana) (Ghana)
(90%) (90%)
|
|
----------------
Prestea
Underground Joint
Venture (Ghana)
(90%)
BUSINESS STRATEGY AND DEVELOPMENT
Since 1999, our business and development strategy has been focused primarily on
the acquisition of producing and development stage gold properties in Ghana and
on the exploration, development and operation of these properties. Our overall
objective over the past five years has been to grow our business organically and
through acquisitions. As part of the effort to achieve this goal, we actively
investigate potential acquisition and merger candidates. These efforts resulted
in our acquisition of St. Jude.
Our ore processing plant and open pit mine at Wassa were completed and placed in
service on April 1, 2005, and we are currently carrying out construction of a
sulfide ore processing facility at Bogoso/Prestea. If the expansion and
development plans at Bogoso/Prestea are completed as expected in late 2006 and
assuming a full year of production from the sulfide plant during 2007, our
annualized production is expected to increase to 500,000 ounces of gold in 2007.
Achievement of this target is subject to numerous risks. See the discussion of
risk factors below.
We also conduct gold exploration in West Africa and South America investing
approximately $17 million in such activities during 2005. In Ghana, we are
actively seeking to expand reserves around our existing mines, and we are
planning to commence exploration activities with respect to the St. Jude
Properties in 2006. We employ a number of different strategies to achieve our
exploration goals including the following:
o we maintain a staff of geologists in Ghana responsible for exploring for
new resources in Ghana and for developing new reserves in areas around the
existing operations;
13
o we contract with geologic consultants who advise us on existing holdings
and who seek to identify new exploration opportunities;
o we have purchased equity ownership in gold exploration companies that use
the equity funds provided by us to explore in their areas of expertise;
o we provide funding to joint venture partners that use our funding to
conduct active exploration efforts; and
o we maintain an international exploration group that carries out work on
various properties in the Guiana Shield area of South America and in other
areas of Africa outside of Ghana.
OUR ASSETS
Bogoso/Prestea Property- We own and operate the Bogoso/Prestea gold mine in
southwest Ghana. Ore is currently mined from the Plant-North open-pit surface
operation at Prestea and trucked approximately 15 kilometers to the Bogoso
processing plant where the ore is processed. The current nominal capacity of the
Bogoso processing plant is approximately 1.5 million tonnes per year. The Bogoso
processing plant utilizes CIL technology along with gravity and flotation
processes to separate gold from the ore. CIL, gravity and flotation technologies
are well known and are widely used for treating gold ores. In addition to the
mine and processing plant facility, Bogoso/Prestea's assets include a fleet of
mining equipment, numerous ancillary facilities including warehouses,
maintenance shops, roadways, administrative offices and a residential complex.
Historical gold output at the Bogoso processing plant has typically ranged
between 130,000 and 175,000 ounces per year. See the "Gold Production and Unit
Costs" table below for additional details on historical production and operating
costs.
A new 3.5 million tonne per year bio-oxidation processing plant utilizing
proprietary BIOXPP(R) technology is currently under construction at Bogoso. The
new facility is located next to the existing Bogoso plant and will process
refractory sulfide ores from the Bogoso and Prestea properties as well as from
other deposits in the local area. The currently existing plant will continue to
process oxide and certain non-refractory ores. The two side-by-side plants will
have a combined capacity of approximately 5 million tonnes of ore per annum and
should yield approximately 370,000 ounces of gold per annum once construction is
completed in late 2006.
Mampon - The Mampon deposit, located approximately 35 kilometers north of the
Bogoso processing plant, was acquired in 2003 as part of the Dunkwa property
acquisition. Mampon is an undeveloped gold deposit with 1.6 million tonnes of
mineral reserves at an average grade of 4.53 g/t most of which should be
recoverable by open pit mining methods. Development of this deposit as a
satellite to our Bogoso/Prestea property is scheduled to begin in 2007.
Pampe - The Pampe deposit is located approximately 19 kilometers west of the
Bogoso processing plant. While we have owned the rights to Pampe for several
years, drilling during 2005 identified an indicated mineral resource of 0.2
million tonnes at an average grade of 4.4 g/t, most of which should be
recoverable by open pit mining methods. Development of this deposit as a
satellite to our Bogoso/Prestea property is scheduled to begin in late 2006.
Prestea Underground - The Prestea Underground is located directly beneath the
Prestea property. It consists of a large underground gold mine that operated for
over 100 years, under a number of former owners, producing a total of
approximately nine million ounces of gold prior to its closure in early 2002. We
are continuing to conduct exploration and development drilling and carry out
engineering, geological and economic analysis of the mine to determine if it can
be reopened on a profitable basis. The mine includes several useable shafts and
several kilometers of underground workings on numerous levels extending as deep
as 1,400 meters below the surface.
Wassa Property- We own and operate the Wassa gold mine in southwest Ghana. The
mine includes an open-pit mine, a CIL processing plant, a fleet of mining
equipment, ancillary facilities including an administration building, a
warehouse, a maintenance shop, a stand-by power generating facility and a
residential site with associated facilities. The new Wassa processing plant was
completed in early 2005 and placed in service on April 1, 2005. Wassa's 2005
gold production and operating costs are shown on the "Gold Production and Unit
Costs" table below.
St. Jude Properties - The St. Jude Properties consist of the Hwini-Butre and
Benso concessions containing undeveloped zones of gold mineralization and which
together cover an area of 201 square kilometers. These two properties are
located between 60 and 85 kilometers south of our Wassa mine. Prior to being
acquired by us, St. Jude conducted extensive exploration work at the St. Jude
Properties, and based on our review of this past work we estimated a measured
and indicated gold resource of approximately 5.3 million tonnes at an average
grade of 4.56 g/t.
14
Rosebel Participation Right - Through our 53% owned subsidiary EURO, we own a
participation right referred to as the "Rosebel Royalty." This royalty is paid
to our subsidiary by Cambior Inc., operator of the Rosebel gold mine in
Suriname. Royalty income totaled $4.7 million in 2005 and $3.0 million in 2004.
Exploration Assets - We have interests in numerous gold exploration properties
in Ghana, Sierra Leone, Burkina Faso, Niger, French Guiana, Suriname and in
other areas of South America.
GOLD PRODUCTION AND UNIT COSTS
The following table shows historical and projected gold production and unit
costs.
2006
Production and Cost Per Ounce (1) 2003 2004 2005 Projected
------------------------------------------------------ ---- ---- ---- ---------
BOGOSO/PRESTEA
Ounces (thousands) 174.3 147.9 131.9 180.0
Cash Operating Cost ($/oz) 166 250 338 330
Total Cash Cost ($/oz) 184 264 351 344
Total Operating Cost ($/oz) 216 350 423 420
WASSA(3)
Ounces (thousands) - - 69.1 120.0
Cash Operating Cost ($/oz) - - 468 340
Total Cash Cost ($/oz) - - 482 354
Total Operating Cost ($/oz) - - 587 420
CONSOLIDATED
Consolidated Total Ounces(2) (thousands) 174.3 147.9 201.0 300.0
Consolidated Cash Operating Cost ($/oz) 166 250 383 335
Consolidated Total Cash Cost ($/oz) 184 264 396 348
Consolidated Total Operating Cost ($/oz) 216 350 479 420
(1) See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS for definitions of the cost per ounce measures as used in
this table.
(2) Gold production is shown on a 100% basis, which represents our current
beneficial interest in gold production and revenues. The Government of
Ghana, which has a 10% carried interest in Bogoso/Prestea and Wassa, would
receive 10% of any dividends distributed from Bogoso/Prestea and Wassa once
all of the capital has been repaid.
(3) Wassa's 2005 production figures are for the nine-month period following its
April 1, 2005 in-service date.
MINERAL RESERVES
Our proven and probable Mineral Reserves are estimated in conformance with
definitions set out in NI 43-101. Technical Reports on our Mineral Reserves for
Bogoso/Prestea and Wassa have been filed as required by NI 43-101. The proven
and probable Mineral Reserves are those ore tonnages contained within
economically optimized pits, configured using current and predicted mining and
processing methods and related operating costs and performance parameters. We
believe that our Mineral Reserves are calculated on a basis consistent with the
definition of proven and probable mineral reserves prescribed for use in the US
by the US Securities and Exchange Commission and set forth in SEC Industry Guide
7. See our "Glossary of Terms."
We prepare our estimates of Mineral Reserves based on information compiled
and/or validated by Mr. William Tanaka, our employee, who holds the position of
Group Reserves Manager. Mr. Tanaka is a qualified geological engineer with 20
years of experience and is a member of the Australian Institute of Mining and
Metallurgy. Mr. Tanaka is considered a qualified person under NI 43-101.
15
The proven and probable Mineral Reserves as of December 31, 2005 have been
estimated at an economic cut-off grade based on a gold price of $400 per ounce,
which approximately equates to the three year-rolling average gold price. This
compares to $360 per ounce used for the estimate of our Mineral Reserves at
December 31, 2004. The cut-off grade defines reserve material that is
demonstrated to be technically and economically feasible to extract. In
determining reserves, we first design an economically optimized pit based on all
operating costs, including the costs to mine. Since all material lying within
the optimized pit shell will be mined, the cut-off grade used in determining our
reserves is calculated on the basis of material that, having been mined, is
economic to transport and process without regard to primary mining costs (i.e.
mining costs that were appropriately applied at the economic optimization
stage).
The QA/QC controls program used in connection with the estimation of our
reserves consists of regular insertion and analysis of blanks and standards to
monitor laboratory performance. Blanks are used to check for contamination.
Standards are used to check for grade-dependence biases. A total of eleven
standards are used, five generated by Golden Star ranging from 0.24 to 4.55 g/t
and six commercially available standards ranging from 0.22 to 3.42 g/t.
The following table summarizes our estimated proven and probable Mineral
Reserves as of December 31, 2005 and December 31, 2004:
16
PROVEN AND PROBABLE MINERAL
RESERVES As of December 31, 2005 As of December 31, 2004
----------------------------------------------------------------------------------------------------------------------
Property Tonnes Gold Grade Ounces Tonnes Gold Grade Ounces
Mineral Reserve Category (millions) (g/t) (millions) (millions) (g/t) (millions)
----------------------------------------------------------------------------------------------------------------------
Bogoso/Prestea
Proven Mineral Reserves:
Non-refractory 1.9 3.82 0.23 3.0 4.20 0.41
Refractory 13.0 3.00 1.25 11.4 2.97 1.09
----------------------------------------------------------------------------------------------------------------------
14.9 3.11 1.48 14.5 3.23 1.51
----------------------------------------------------------------------------------------------------------------------
Probable Mineral Reserves:
Non-refractory 7.0 2.26 0.51 7.3 2.34 0.55
Refractory 11.4 2.42 0.89 9.0 2.60 0.76
----------------------------------------------------------------------------------------------------------------------
18.4 2.36 1.40 16.4 2.48 1.31
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable:
Non-refractory 8.9 2.59 0.74 10.4 2.89 0.96
Refractory 24.4 2.73 2.14 20.5 2.81 1.85
----------------------------------------------------------------------------------------------------------------------
Total Bogoso/Prestea Proven and
Probable 33.3 2.69 2.88 30.9 2.83 2.81
----------------------------------------------------------------------------------------------------------------------
Mampon
Probable Mineral Reserves:
Non-refractory 1.0 3.54 0.12 0.3 4.63 0.04
Refractory 0.5 6.37 0.11 0.7 5.35 0.12
----------------------------------------------------------------------------------------------------------------------
Total Mampon Probable 1.5 4.53 0.23 1.0 5.16 0.16
----------------------------------------------------------------------------------------------------------------------
Wassa
Probable Mineral Reserves:
Non-refractory 21.9 1.34 0.94 19.3 1.31 0.81
----------------------------------------------------------------------------------------------------------------------
Total Wassa Probable 21.9 1.34 0.94 19.3 1.31 0.81
----------------------------------------------------------------------------------------------------------------------
Total
Proven Mineral Reserves:
Non-refractory 1.9 3.82 0.23 3.0 4.20 0.41
Refractory 13.0 3.00 1.25 11.5 2.97 1.09
----------------------------------------------------------------------------------------------------------------------
14.9 3.11 1.48 14.5 3.23 1.51
----------------------------------------------------------------------------------------------------------------------
Probable Mineral Reserves:
Non-refractory 30.0 2.26 1.57 26.9 1.62 1.40
Refractory 11.9 2.42 1.00 9.7 2.60 0.88
----------------------------------------------------------------------------------------------------------------------
41.9 1.90 2.57 36.6 1.94 2.28
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable:
Non-refractory 31.9 2.59 1.80 29.9 1.89 1.82
Refractory 24.9 2.73 2.25 21.2 2.89 1.97
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable 56.8 2.22 4.05 51.1 2.30 3.78
----------------------------------------------------------------------------------------------------------------------
(1) The terms "non-refractory" and "refractory" refer to the ore type and are
defined in the Glossary of Terms. We plan to process the refractory ore in
our BIOX(R) bio-oxidation plant that is currently being constructed at
Bogoso and to process the non-refractory ore using more traditional
gravity, flotation and/or cyanidation techniques in our existing processing
plants at Bogoso and Wassa.
(2) Mineral Reserves are expressed on a 100% basis. Golden Star's share of the
Mineral Reserves is subject to the Government of Ghana's 10% carried
interest which entitles them to a 10% dividend once our capital costs have
been recovered.
17
Stockpiled Ores
Included in Bogoso/Prestea's proven and probable Mineral Reserves at year-end
2005 and 2004 are stockpiled ores of 0.4 and 0.3 million tonnes at an average
grade of 2.42 g/t and 2.67 g/t, respectively. Ounces in stockpiles at Wassa were
nil at the end of 2005. The table below summarizes the Bogoso/Prestea stockpiled
ores.
----------------------------------------------------------------------------------------------------------
STOCKPILES INCLUDED IN
RESERVES As of December 31, 2005 As of December 31, 2004
----------------------------------------------------------------------------------------------------------
Property Tonnes Gold Grade Ounces Tonnes Gold Grade Ounces
Mineral Reserves Category (millions) (g/t) (millions) (millions) (g/t) (millions)
----------------------------------------------------------------------------------------------------------
Bogoso/Prestea
Proven Stockpiles:
Non-refractory 0.20 2.39 0.02 0.1 2.74 0.01
Refractory 0.16 2.44 0.01 0.2 2.64 0.02
----------------------------------------------------------------------------------------------------------
Total Proven Stockpiles 0.36 2.42 0.03 0.3 2.69 0.03
----------------------------------------------------------------------------------------------------------
Reconciliation of Mineral Reserves as shown under NI 43-101 and under SEC
Industry Guide 7
Since we report our Mineral Reserves to both NI 43-101 and SEC Industry Guide 7
standards, it is possible for our reserve figures to vary between the two. Where
such a variance occurs it will arise from the differing requirements for
reporting Mineral Reserves. For example, NI 43-101 has a minimum requirement
that reserves be supported by a pre-feasibility study, whereas Industry Guide 7
requires support from a detailed feasibility study that demonstrates that
economic extraction is justified.
For the Mineral Reserves at December 31, 2005 and 2004, there is no difference
between the Mineral Reserves as disclosed under NI 43-101 and those disclosed
under Industry Guide 7, and therefore we do not provide reconciliation.
Reconciliation of Proven and Probable Mineral Reserves - December 31, 2004 to
December 31, 2005
-----------------------------------------------------------------------------
Reconciliation Tonnes Contained Tonnes Contained
(millions) Ounces (% of Opening) Ounces
(millions) (% of Opening)
-----------------------------------------------------------------------------
Opening Mineral Reserves 51.1 3.78 100 100
Gold Price 7.4 0.44 15 12
Exploration 11.0 0.77 21 20
Mining Depletion(1) (6.4) (0.39) (13) (10)
Operating cost increases (5.4) (0.50) (10) (13)
Design changes (0.9) (0.10) (2) (2)
-----------------------------------------------------------------------------
Closing Mineral
Reserves(2) 56.8 4.00 111 107
-----------------------------------------------------------------------------
(1) Depletion represents contained ounces of Mineral Reserves processed during
2005 before considering recovery losses and therefore does not equal 2005
actual gold production.
(2) Increases and decreases in Mineral Reserves can result from the discovery
of new mineralization, conversion of Non-Reserve Mineral Resources to
Mineral Reserves, and changes in price assumptions, unit costs and
recoveries or any combination of these factors. The increases in Mineral
Reserves during 2005 were due primarily to the results of exploration at
Bogoso/Prestea and Wassa, and an increase to $400 per ounce from $360 per
ounce in the estimated gold price used to calculate Mineral Reserves.
NON-RESERVES - MEASURED AND INDICATED MINERAL RESOURCES
Measured and Indicated Mineral Resources
18
Cautionary Note to US Investors concerning estimates of Measured and Indicated
Mineral Resources
This section uses the terms "measured Mineral Resources" and "indicated Mineral
Resources." We advise US investors that while those terms are recognized and
required by Canadian regulations, the US Securities and Exchange Commission does
not recognize them. US investors are cautioned not to assume that any part or
all of the mineral deposits in these categories will ever be converted into
mineral reserves.
Our measured and indicated Mineral Resources which are reported in this Form
10-K do not include that part of our Mineral Resources that have been converted
to proven and probable Mineral Reserves as shown above, and have been estimated
in conformance with definitions set out in NI 43-101. We have filed Technical
Reports on our Mineral Reserves and Mineral Resources (Mineral Resources stated
in the Technical Reports include Mineral Reserves) for Bogoso/Prestea and Wassa
as required by NI 43-101. See our "Glossary of Terms."
The total measured and indicated Mineral Resources for our properties have been
estimated at an economic cut-off grade based on a gold price of $480 per ounce
for December 31, 2005 and $430 per ounce for December 31, 2004 and on economic
constraints that we consider are realistic. The economic cut-off grades for
resources are higher than those for reserves and are indicative of the fact that
the resource estimates include material that may become economic under more
favorable conditions including increases in gold price.
The following table summarizes our estimated non-reserves (measured and
indicated Mineral Resources) as of December 31, 2005 and December 31, 2004:
------------------------ ------------------------------- ---------------------------- -----------------------------
Property Measured Indicated Measured & Indicated
------------------------------- ---------------------------- -----------------------------
Tonnes Gold Grade Tonnes Gold Grade Tonnes Gold Grade
(millions) (g/t) (millions) (g/t) (millions) (g/t)
------------------------ --------------- --------------- ------------- -------------- --------------- -------------
Bogoso/Prestea 4.8 2.05 29.2 2.07 34.0 2.07
Wassa - - 11.3 0.76 11.3 0.76
Pampe - - 0.2 4.38 0.2 4.38
Benso - - 2.6 3.77 2.6 3.77
Hwini-Butre - - 2.7 5.27 2.7 5.27
------------------------ --------------- --------------- ------------- -------------- --------------- -------------
Total 2005 4.8 2.05 46.0 2.05 50.8 2.05
------------------------ --------------- --------------- ------------- -------------- --------------- -------------
Total 2004 7.8 1.55 27.8 2.14 35.6 2.01
------------------------ --------------- --------------- ------------- -------------- --------------- -------------
Notes to Non-Reserves - Measured and Indicated Mineral Resources Table:
(1) The qualified person for the estimates of measures and indicated Mineral
Resources is our Exploration Manager, Mr. S. Mitch Wasel. Mr. Wasel is a
qualified geologist who has 16 years of experience in gold and base metal
exploration and is a member of the Australasian Institute of Mining and
Metallurgy.
(2) The measured and indicated Mineral Resources are shown on a 100% basis.
Golden Star's share of the Mineral Resources shown above is subject to the
Government of Ghana's 10% carried interest which entitles them to a 10%
dividend once our capital costs have been recovered.
(3) Table may not add due to rounding.
NON-RESERVES - INFERRED MINERAL RESOURCES
Inferred Mineral Resources
Cautionary Note to US Investors concerning estimates of Inferred Mineral
Resources
This section uses the term "inferred Mineral Resources." We advise US investors
that while this term is recognized and required by Canadian regulations, the US
Securities and Exchange Commission does not recognize it. "Inferred Mineral
Resources" have a great amount of uncertainty as to their existence, and great
uncertainty as to their economic and legal feasibility. It cannot be assumed
that all or any part of inferred Mineral Resources will ever be upgraded to a
higher category. In accordance with Canadian rules, estimates of inferred
Mineral Resources cannot form the basis of feasibility or other economic
studies. US investors are cautioned not to assume that part or all of the
inferred Mineral Resource exists, or is economically or legally mineable.
19
Our inferred Mineral Resources which are reported in this Form 10-K do not
include that part of the Mineral Resources converted to proven and probable
Mineral Reserves or measured and indicated Mineral Resources as shown above, and
have been estimated in conformance with definitions set out in NI 43-101. We
have filed Technical Reports on our Mineral Reserves and Mineral Resources
(Mineral Resources stated in the Technical Reports include Mineral Reserves) for
Bogoso/Prestea and Wassa as required by NI 43-101. See our "Glossary of Terms."
The inferred Mineral Resources for our properties have been estimated at
economic cut-off grades based on gold prices of $480 and $430 per ounce as of
December 31, 2005 and December 31, 2004, respectively, and economic constraints
that we consider are realistic.
The following table summarizes our estimated non-reserves - inferred Mineral
Resources as of December 31, 2005 as compared to the total for December 31,
2004:
------------------------ -------------------------------
Inferred
Property -------------------------------
Tonnes Gold Grade
(millions) (g/t)
------------------------ --------------- ---------------
Bogoso/Prestea 24.5 2.10
Wassa 10.1 1.20
Pampe 0.8 3.76
Benso 0.9 3.57
Hwini-Butre 0.2 3.21
Prestea Underground 6.1 8.14
Goulagou 4.4 1.55
Paul Isnard 8.2 1.78
------------------------ --------------- ---------------
Total 2005 55.2 2.57
------------------------ --------------- ---------------
Total 2004 70.4 2.15
------------------------ --------------- ---------------
Notes to Non-Reserves - Inferred Mineral Resources Table
(1) The qualified person for the estimates of the inferred Mineral Resources at
all properties except Paul Isnard, is our Exploration Manager, Mr. S. Mitch
Wasel. Mr. Wasel is a qualified geologist who has 16 years of experience in
gold and base metal exploration and is a member of the Australasian
Institute of Mining and Metallurgy. The qualified person for the estimates
of inferred Mineral Resources at Paul Isnard is Mr. Colin Jones, an
independent mineral resources consultant. Mr. Jones is a professional
geologist with 22 years of experience. Mr. Jones is a member of the
Australasian Institute of Mining and Metallurgy.
(2) Inferred Mineral Resources are shown on a 100% basis. Golden Star's share
of the inferred Mineral Resources shown above for Bogoso/Prestea, Wassa,
Pampe, Benso and Hwini-Butre are or will be subject to the Government of
Ghana's 10% carried interest which entitles the government to a 10%
dividend once our capital costs have been recovered. Inferred Mineral
Resources at the Prestea Underground are subject to a Government of Ghana
19% carried interest. Inferred Mineral Resources at Goulagou are subject to
the Government of Burkina Faso's 10% carried interest.
(3) The Paul Isnard property, located in French Guiana, is owned by EURO, a 53%
owned subsidiary. Golden Star has the right to earn a 100% interest in this
property pursuant to the terms of a joint venture agreement with EURO. The
amount of Inferred Mineral Resource at the Paul Isnard property that might
have been removed by illegal mining is not known but could be material. See
Risk Factors below.
(4) Table may not add due to rounding.
EMPLOYEES
20
As of December 31, 2005, Golden Star, including our majority-owned subsidiaries,
had approximately 1,500 employees and contract employees, a 30% increase from
the approximately 1,150 people employed at the end of 2004. Employees hired
during 2005 at our new Wassa operations made up most of the increase. The 2005
total includes 12 employees and one contract employee at our principal office in
Littleton, Colorado, four employees and one contract employee in Delta, British
Columbia and three people in South America.
CUSTOMERS
Currently all our gold production is sold to a South African gold refinery in
accordance with a long-term contract. We receive payment for gold sold
approximately five working days after the gold leaves the mine site. We
recognize revenue when title passes to the buyer which occurs upon delivery to
the refinery, unless we decide to retain title and hold the gold as inventory.
During 2005 we sold all of the gold shipped, retaining no inventory of saleable
dore bars. The global gold market is competitive with numerous banks and
refineries willing to buy gold on short notice, therefore we believe that the
loss of our current customer would not materially delay or disrupt revenues.
COMPETITION
Our competitive position depends upon our ability to successfully and
economically explore, acquire and develop new and existing mineral properties.
Factors that allow producers to remain competitive in the market over the long
term include the quality and size of ore bodies, costs of operation, and the
acquisition and retention of qualified employees. We compete with other mining
companies and other natural mineral resource companies in the acquisition,
exploration, financing and development of new mineral properties. Many of these
companies are larger and better capitalized than we are. There is significant
competition for the limited number of gold acquisition and exploration
opportunities.
We also compete with other mining companies for skilled mining engineers, mine
and processing plant operators and mechanics, geologists, geophysicists and
other technical personnel. This could result in higher turnover and greater
labor costs.
AVAILABLE INFORMATION
We make available, free of charge, on or through our Internet website, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC. Our Internet address is www.gsr.com. Our Internet website and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
RISK FACTORS
You should consider the following discussion of risks in addition to the other
information contained in or included by reference in this Form 10-K. In addition
to historical information, the information in this form 10-K contains
"forward-looking" statements about our future business and performance. Our
actual operating results and financial performance may be very different from
what we expect as of the date of this Form 10-K. The risks below address
material factors that may affect our future operating results and financial
performance.
FINANCIAL RISKS
A substantial or prolonged decline in gold prices would have a material adverse
effect on us.
The price of our common shares, our financial results and our exploration,
development and mining activities have previously been, and would in the future
be, significantly adversely affected by a substantial or prolonged decline in
the price of gold. The price of gold is volatile and is affected by numerous
factors beyond our control such as the sale or purchase of gold by various
central banks and financial institutions, inflation or deflation, fluctuation in
the value of the United States dollar and foreign currencies, global and
regional demand, and the political and economic conditions of major
gold-producing countries throughout the world. Any drop in the price of gold
adversely impacts our revenues, profits and cash flows. In particular, a
sustained low gold price could:
21
o cause suspension of our mining operations at Bogoso/Prestea and Wassa if
such operations become uneconomic at the then-prevailing gold price, thus
further reducing revenues;
o cause us to be unable to fulfill our obligations under agreements with our
partners or under our permits and licenses which could cause us to lose our
interests in, or be forced to sell, some of our properties;
o cause us to be unable to fulfill our debt payment obligations;
o halt or delay the development of new projects;
o reduce funds available for exploration, with the result that depleted
reserves are not replaced; and
o reduce or eliminate the benefit of enhanced growth opportunities
anticipated from the St. Jude acquisition.
Furthermore, the need to reassess the feasibility of any of our projects because
of declining gold prices could cause substantial delays or might interrupt
operations until the reassessment can be completed. Mineral reserve calculations
and life-of-mine plans using significantly lower gold prices could result in
reduced estimates of mineral reserves and non-reserve mineral resources and in
material write-downs of our investment in mining properties and increased
amortization, reclamation and closure charges.
We may incur substantial losses in the future that could make financing our
operations and business strategy more difficult.
We had a net loss of $13.5 million during the year ended December 31, 2005 and
annual earnings of $2.6 million, $22.0 million and $4.9 million in 2004, 2003
and 2002, respectively. We reported net losses of $20.6 million in 2001 and
$14.9 million in 2000. Numerous factors, including declining gold prices, lower
than expected ore grades or higher than expected operating costs (including
increased commodity prices), and impairment write-offs of mine property and/or
exploration property costs, could cause us to be unprofitable in the future. The
acquisition of St. Jude, which has no operating properties, may result in
increased future losses. Any future operating losses could make financing our
operations and our business strategy, including pursuit of the growth
opportunities anticipated as a result of our acquisition of St. Jude, or raising
additional capital, difficult or impossible and could materially and adversely
affect our operating results and financial condition.
Our obligations could strain our financial position and impede our business
strategy.
We had total consolidated debt and liabilities as of December 31, 2005 of $165.7
million, including $7.6 million payable to banks, $15.8 million in equipment
financing loans, $47.7 million in senior convertible notes maturing on April 15,
2009, $26.1 million of current trade payables, accrued current and other
liabilities, $45.1 million of future taxes, $12.0 million of derivative
liabilities and an $11.4 million accrual for environmental rehabilitation
liabilities. We expect that our indebtedness and other liabilities will increase
as a result of our corporate development activities. These liabilities could
have important consequences, including the following:
o increasing our vulnerability to general adverse economic and industry
conditions;
o limiting our ability to obtain additional financing to fund future working
capital, capital expenditures, operating and exploration costs and other
general corporate requirements;
o requiring us to dedicate a significant portion of our cash flow from
operations to make debt service payments, which would reduce our ability to
fund working capital, capital expenditures, operating and exploration costs
and other general corporate requirements;
o limiting our flexibility in planning for, or reacting to, changes in our
business and the industry; and
o placing us at a disadvantage when compared to our competitors that have
less relative to their market capitalization.
Our estimates of mineral reserves could be inaccurate, which could cause
production and costs to differ from estimates. Our estimates of non-reserves
mineral resources could also be inaccurate.
There are numerous uncertainties inherent in estimating proven and probable
mineral reserves and non-reserve measured, indicated and inferred mineral
resources, including many factors beyond our control. The accuracy of estimates
of mineral reserves and non-reserves is a function of the quantity and quality
22
of available data and of the assumptions made and judgments used in engineering
and geological interpretation, which could prove to be unreliable. These
estimates of mineral reserves and non-reserves may not be accurate, and mineral
reserves and non-reserves may not be able to be mined or processed profitably.
Fluctuation in gold prices, results of drilling, metallurgical testing and
production, and the evaluation of mine plans subsequent to the date of any
estimate could require revision of the estimates. The volume and grade of
mineral reserves mined and processed and recovery rates might not be the same as
currently anticipated. Any material reductions in estimates of our mineral
reserves and non-reserves, or of our ability to extract these mineral reserves
and non-reserves, could have a material adverse effect on our results of
operations and financial condition.
We currently have only two major sources of operational cash flows, which will
likely be insufficient by themselves to fund our continuing exploration and
development activities.
While we have received significant infusions of cash from sales of equity and
debt, our only current significant internal sources of funds are operational
cash flows from Bogoso/Prestea and Wassa. The newly constructed Wassa processing
plant and open pit mine were completed and placed in service on April 1, 2005,
and we currently process through the plant a mixture of ore from the open pit
and materials from the prior owner's heap leach pads. Production at Wassa was
69,070 ounces during the last nine months of 2005 and is expected to average
approximately 120,000 to 130,000 ounces per year after 2005. However, Wassa's
production goal may not be achieved. The anticipated continuing exploration and
development of our properties will require significant expenditures over the
next several years, which we expect to increase with the acquisition of St.
Jude. We expect that these expenditures will exceed free cash flows generated by
Bogoso/Prestea and Wassa during 2006 and possibly in later years and therefore
we expect in the future to require additional external debt or equity financing.
Lower gold prices during the five years prior to 2002 adversely affected our
ability to obtain financing, and recurring lower gold prices could have similar
effects in the future. In the future, we may not be able to obtain adequate
financing on acceptable terms. If we are unable to obtain additional financing
on acceptable terms, we might need to delay or indefinitely postpone further
exploration and development of our properties, and as a result, we could lose
our interest in, or could be forced to sell, some of our properties.
Implementation of a gold hedging program might be unsuccessful and incur losses.
EURO Ressources S.A., our 53% owned subsidiary, has entered into a cash-settled
forward gold price agreement with its lender designed to reduce in part the
impact of gold price fluctuations on expected future Rosebel royalty revenues it
receives from Cambior Inc., as required by its loan agreement. While there is a
risk of loss if the derivative positions were to be liquidated early and during
a period of unfavorable gold prices, loan covenants prohibit liquidation of the
position prior to the end of the loan repayment. Also, while the derivatives
EURO has entered into are economically effective, accounting for the derivatives
on a mark-to-market basis could show large swings in any period as any
unrealized, non-cash losses/gains are recognized through the statement of
operations.
We have purchased and may continue to purchase put options ("puts") and sell
call options ("calls") from time to time during the construction phase of the
new processing plant at Bogoso in Ghana. Puts give us the right but not the
obligation to sell gold in the future at a fixed price. Calls are contractual
commitments which require us to sell gold at a fixed price on specified future
dates. If the spot market gold price exceeds the call option price on the
specified sale date we would receive the call price rather than the higher spot
market price for the gold ounces covered by the call option. Our call options
are set at $525 per ounce. There will be no cost to us unless the spot market
price of gold exceeds this level on the call options' specified sales dates. Of
our 2006 production, approximately 17% is subject to calls at $525 per ounce,
and approximately 50% is protected by puts at a floor price of $406 per ounce.
We continue to review whether or not, in light of the potential for gold prices
to fall, it would be appropriate to establish a more general hedging program. To
date, we have decided not to implement a more general hedging program on gold
production from our own properties.
We are subject to fluctuations in currency exchange rates, which could
materially adversely affect our financial position.
Our revenues are in United States dollars, and we maintain most of our working
capital in United States dollars or United States dollar-denominated securities.
We typically convert our United States funds to foreign currencies as payment
obligations become due. Accordingly, we are subject to fluctuations in the rates
of currency exchange between the United States dollar and these foreign
23
currencies, and these fluctuations could materially affect our financial
position and results of operations. A significant portion of the operating costs
at Bogoso/Prestea and Wassa is based on the Ghanaian currency, the Cedi. We are
required to convert into Cedis only 20% of the foreign exchange proceeds that we
receive from selling gold, but the Government of Ghana could require us to
convert a higher percentage of gold sales proceeds into Cedis in the future. In
addition, we currently have future obligations that are payable in South African
Rand and Euros, and receivables collectible in Euros. We obtain construction and
other services and materials and supplies from providers in South Africa and
other countries. The costs of goods and services could increase due to changes
in the value of the United States dollar or the Cedi, Euros, the South African
Rand or other currencies, such as the recent cost increase due to the decrease
in the value of the United States dollar relative to other currencies.
Consequently, operation and development of our properties might be more costly
than we anticipate.
We have purchased, and expect to continue to purchase South African Rand and
Euro forward contracts to hedge the expected purchase of capital assets in South
Africa and Europe in connection with the Bogoso sulfide expansion project. We
may engage in additional currency hedges in the future in connection with other
projects. Implementation of a currency hedging program may not adequately
protect us from the effects of fluctuation in currency exchange rates.
Risks inherent in acquisitions that we might undertake could adversely affect
our current business and financial condition and our growth.
We plan to continue to pursue the acquisition of producing, development and
advanced stage exploration properties and companies, and we have recently
completed the acquisition and joint venture of exploration and development
properties in Ghana and Sierra Leone and the acquisition of St. Jude on December
21, 2005. The search for attractive acquisition opportunities and the completion
of suitable transactions are time consuming and expensive, divert management
attention from our existing business and may be unsuccessful. Our success in our
acquisition activities depends on our ability to complete acquisitions on
acceptable terms and integrate the acquired operations successfully with those
of Golden Star. Any acquisition would be accompanied by risks. For example,
there may be a significant change in commodity prices after we have committed to
complete a transaction and established the purchase price or exchange ratio, a
material ore body may prove to be below expectations or the acquired business or
assets may have unknown liabilities which may be significant. We may lose the
services of our key employees or the key employees of any business we acquire or
have difficulty integrating operations and personnel. The integration of an
acquired business or assets may disrupt our ongoing business and our
relationships with employees, suppliers and contractors. Any one or more of
these factors or other risks could cause us not to realize the anticipated
benefits of an acquisition of properties or companies, and could have a material
adverse effect on our current business and financial condition and on our
ability to grow.
We are subject to litigation risks
All industries, including the mining industry, are subject to legal claims, with
and without merit. We are involved in various routine legal proceedings, which
include labor matters such as unfair termination claims, supplier matters and
property issues incidental to our business. Defense and settlement costs can be
substantial, even with respect to claims that have no merit. Due to the inherent
uncertainty of the litigation process, the resolution of any particular legal
proceeding could have a material effect on our financial position and results of
operations.
OPERATIONAL RISKS
The technology, capital costs and cost of production of refractory mineral
reserves and non-reserves at Bogoso/Prestea remain subject to a number of
uncertainties, including funding uncertainties.
Based upon the completion of our Bogoso sulfide project feasibility studies in
2001 and 2005, the refractory material at Bogoso/Prestea has been included in
our proven and probable mineral reserves, which are prepared in accordance with
NI 43-101 of the Canadian securities regulators. While the sulfide project
feasibility study indicated that refractory mineral reserves can be profitably
mined and processed at current gold prices, the capital cost to construct a new
bio-oxidation or BIOX(R) plant at Bogoso to process refractory ore, together
with related mining equipment and facilities, is significant, and is forecast to
be $125 million, of which approximately $36 million had been spent on the
project through December 31, 2005. While the processing technology envisioned in
the feasibility study has been successfully utilized at other mines, and despite
our testing, engineering and analysis, the technology may not perform
successfully at commercial production levels on the Bogoso/Prestea refractory
sulfide ores, in which case our production estimates may not be achieved.
24
The integration of Golden Star and St. Jude may not occur as planned.
We have only recently begun the process of integrating the operations of Golden
Star and St. Jude. The acquisition of St. Jude was proposed with the expectation
that its successful completion would over time result in enhanced growth
opportunities and the synergies resulting from the combination of increased
earnings and reduced costs. These anticipated benefits depend in part on whether
the operations of Golden Star and St. Jude can be integrated in an efficient and
effective manner and whether the St. Jude Properties can be developed. If these
do not occur, the benefits we receive from the acquisition will be significantly
less than anticipated. Most operational and certain staffing decisions with
respect to the combined company have not yet been made. These decisions and the
integration of the two companies will present challenges to management,
including the integration of systems and personnel of the two companies, and
special risks, including possible unanticipated liabilities and costs.
We are subject to a number of operational hazards that can delay production or
result in liability to us.
Our activities are subject to a number of risks and hazards including:
o environmental hazards;
o discharge of pollutants or hazardous chemicals;
o industrial accidents;
o labor disputes and shortages;
o supply and shipping problems and delays;
o shortage of equipment and contractor availability;
o difficulty in applying technology such as bio-oxidation processing;
o unusual or unexpected geological or operating conditions;
o slope failures;
o cave-ins of underground workings;
o failure of pit walls or dams;
o fire;
o marine and transit damage and/or loss;
o changes in the regulatory environment; and
o natural phenomena such as inclement weather conditions, floods and
earthquakes.
These or other occurrences could result in damage to, or destruction of, mineral
properties or production facilities, personal injury or death, environmental
damage, delays in mining, delayed production, monetary losses and possible legal
liability. We could incur liabilities as a result of pollution and other
casualties. Satisfying such liabilities could be very costly and could have a
material adverse effect on our financial position and results of operations.
Our mining operations are subject to numerous environmental laws, regulations
and permitting requirements that can delay production and adversely affect
operating and development costs.
Compliance with existing regulations governing the discharge of materials into
the environment, or otherwise relating to environmental protection, in the
jurisdictions where we have projects may have a material adverse effect on our
exploration activities, results of operations and competitive position. New or
expanded regulations, if adopted, could affect the exploration or development of
our projects or otherwise have a material adverse effect on our operations.
25
A significant portion of our Dunkwa property and portions of our Wassa property,
as well as some of our exploration properties in Ghana, are located within
forest reserve areas. Although Dunkwa and Wassa have been identified by the
Government of Ghana as eligible for mining permits subject to normal procedures
and a site inspection, permits for projects in forest reserve areas may not be
issued in a timely fashion, or at all, and such permits may contain special
requirements with which it is burdensome or expensive to comply.
Mining and processing gold from the south end of the Prestea property, the new
tailings dam at Bogoso and other activities will require mining and other
permits from the Government of Ghana. These permits may not be issued on a
timely basis or at all, and such permits, when issued, may be subject to
requirements or conditions with which it is burdensome or expensive to comply.
Such permitting issues could adversely affect our projected production
commencement dates, production amounts and costs.
Due to an increased level of non-governmental organization activity targeting
the mining industry in Ghana, the potential for the Government of Ghana to delay
the issuance of permits or impose new requirements or conditions upon mining
operations in Ghana may be increased. Any changes in the Government of Ghana's
policies may be costly to comply with and may delay mining operations. The exact
nature of other environmental control problems, if any, which we may encounter
in the future cannot be predicted, primarily because of the changing character
of environmental requirements that may be enacted within various jurisdictions.
To the extent that we are subject to any such changes, they may have a material
adverse effect on our operations.
As a result of the foregoing risks, project expenditures, production quantities
and rates and cash operating costs, among other things, could be materially and
adversely affected and could differ materially from anticipated expenditures,
production quantities and rates, and costs. In addition, estimated production
dates could be delayed materially. Any such events could materially and
adversely affect our business, financial condition, results of operations and
cash flows.
The development and operation of our mining projects involve numerous
uncertainties that could affect the feasibility or profitability of such
projects.
Mine development projects, including our recent development at Wassa and
expansion at Bogoso/Prestea, and the potential development of any of the St.
Jude Properties if reserves are established, typically require a number of years
and significant expenditures during the development phase before production is
possible.
Development projects are subject to the completion of successful feasibility
studies and environmental assessments, issuance of necessary governmental
permits and receipt of adequate financing. The economic feasibility of
development projects is based on many factors such as:
o estimation of mineral reserves and mineral resources;
o anticipated metallurgical recovery rates;
o environmental considerations and permitting;
o future gold prices; and
o anticipated capital and operating costs.
Our mine development projects could have limited relevant operating history upon
which to base estimates of future operating costs and capital requirements.
Estimates of proven and probable mineral reserves and operating costs determined
in feasibility studies are based on geologic and engineering analyses and might
not prove to be accurate.
The management of mine development projects and start up of new operations are
complex, and we do not have a history of simultaneously managing an ongoing
operation, the start-up of a new operation and a significant development
project. Completion of development and the commencement of production may be
subject to delays, as occurred at Wassa. Any of the following events, among
others, could affect the profitability or economic feasibility of a project:
o unanticipated changes in grade and tonnage of ore to be mined and
processed;
o unanticipated adverse geotechnical conditions;
26
o incorrect data on which engineering assumptions are made;
o costs of constructing and operating a mine in a specific environment;
o availability and cost of processing and refining facilities;
o availability of economic sources of power;
o adequacy of water supply;
o adequate access to the site including competing land uses (such as
agriculture and illegal mining);
o unanticipated transportation costs and shipping incidents and losses;
o significant increases in the cost of diesel fuel, cyanide or other major
components of operating costs;
o government regulations (including regulations relating to prices,
royalties, duties, taxes, permitting, restrictions on production, quotas on
exportation of minerals, as well as the costs of protection of the
environment and agricultural lands);
o fluctuations in gold prices; and
o accidents, labor actions and force majeure events.
Adverse effects on the operations or further development of a project could also
adversely affect our business, financial condition, results of operations and
cash flow. Because of these uncertainties, and others identified in these "Risk
Factors," our production estimates at Bogoso/Prestea and Wassa may not be
achieved.
We need to continually discover, develop or acquire additional mineral reserves
for gold production and a failure to do so would adversely affect our business
and financial position in the future.
Because mines have limited lives based on proven and probable mineral reserves,
we must continually replace and expand our mineral reserves as our mines produce
gold. At current average production rates, we estimate that Bogoso/Prestea has
about ten years of mine life and Wassa has about five years of mine life, but
our estimates might not be correct and the mine life would be shortened if we
expand production. Our ability to maintain or increase our annual production of
gold will be dependent in significant part on our ability to bring new mines
into production and to expand or extend the life of existing mines.
Gold exploration is highly speculative, involves substantial expenditures, and
is frequently non-productive.
Gold exploration, including the exploration of the Prestea Underground and the
St. Jude Properties and other projects, involves a high degree of risk and
exploration projects are frequently unsuccessful. Few prospects that are
explored end up being ultimately developed into producing mines. To the extent
that we continue to be involved in gold exploration, the long-term success of
our operations will be related to the cost and success of our exploration
programs. We cannot assure you that our gold exploration efforts will be
successful. The success of gold exploration is determined in part on the
following factors:
o the identification of potential gold mineralization based on superficial
analysis;
o availability of prospective land;
o availability of government-granted exploration and exploitation permits;
o the quality of our management and our geological and technical expertise;
and
o the capital available for exploration and development.
Substantial expenditures are required to determine if a project has economically
mineable mineralization. It could take several years to establish proven and
probable mineral reserves and to develop and construct mining and processing
facilities. As a result of these uncertainties, we cannot assure you that
current and future exploration programs will result in the discovery of mineral
reserves, the expansion of our existing mineral reserves and the development of
mines.
27
We face competition from other mining companies in connection with the
acquisition of properties.
We face strong competition from other mining companies in connection with the
acquisition of properties producing, or capable of producing, precious metals.
Many of these companies have greater financial resources, operational experience
and technical capabilities. As a result of this competition, we might 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.
Title to our mineral properties could be challenged.
We seek to confirm the validity of our rights to title to, or contract rights
with respect to, each mineral property in which we have a material interest. We
have mining leases with respect to our Bogoso/Prestea, Wassa and Prestea
Underground properties. However, we cannot guarantee that title to our
properties will not be challenged. Title insurance generally is not available,
and our ability to ensure that we have obtained a secure claim to individual
mineral properties or mining concessions could be severely constrained. We
generally do not conduct surveys of our properties until they have reached the
development stage, and therefore, the precise area and location of such
properties could be in doubt. Accordingly, our mineral properties could be
subject to prior unregistered agreements, transfers or claims, and title could
be affected by, among other things, undetected defects. In addition, we might be
unable to operate our properties as permitted or to enforce our rights with
respect to our properties.
We depend on the services of key executives.
We are dependent on the services of key executives including our President and
Chief Executive Officer and a small number of highly skilled and experienced
executives and personnel. Due to the relatively small size of our management
team, the loss of these persons or our inability to attract and retain
additional highly skilled employees could adversely affect the exploration and
development of our properties, which could have a material adverse effect on our
business and future operations. We have obtained key person insurance only with
respect to our President and Chief Executive Officer.
The period of weak gold prices prior to 2002 resulted in depletion of the number
of trained and experienced professionals and managers in our industry. Higher
gold prices have resulted in an increased demand for these people, and it could
therefore be more difficult to attract or retain such experienced professionals
and managers without significantly increasing the cost to us.
Our insurance coverage could be insufficient.
Our business is subject to a number of risks and hazards generally, including:
o adverse environmental conditions;
o industrial accidents;
o labor disputes;
o unusual or unexpected geological conditions;
o ground or slope failures;
o cave-ins;
o changes in the regulatory environment;
o marine transit and shipping damage and/or losses;
o natural phenomena such as inclement weather conditions, floods and
earthquakes; and
o political risks including expropriation and civil war.
Such occurrences could result in:
o damage to mineral properties or production facilities;
28
o personal injury or death;
o loss of legitimate title to properties;
o environmental damage to our properties or the properties of others;
o delays in mining, processing and development;
o monetary losses; and
o possible legal liability.
Although we maintain insurance in amounts that we believe to be reasonable, our
insurance might not cover all the potential risks associated with our business.
We might also be unable to maintain insurance to cover these risks at
economically feasible premiums. Insurance coverage might not continue to be
available or might not be adequate to cover any resulting liability. Moreover,
insurance against risks such as environmental pollution or other hazards as a
result of exploration and production is not generally available to us or to
other companies in the mining industry on acceptable terms. We might also become
subject to liability for pollution or other hazards which we cannot insure
against or which we might elect not to insure against because of premium costs
or other reasons. Losses from these events might cause us to incur significant
costs that could have a material adverse effect upon our financial performance
and results of operations. In addition, as of the completion of the Arrangement
with St. Jude, our insurance policies do not cover St. Jude and its properties,
and we may not be able to obtain insurance to cover St. Jude and its properties
at economically feasible premiums or at all.
GOVERNMENTAL AND REGULATORY RISKS
As a holding company, limitations on the ability of our operating subsidiaries
to make distributions to us could adversely affect the funding of our
operations.
We are a holding company that conducts operations through foreign (principally
African) subsidiaries and joint ventures, and substantially all of our assets
consist of equity in these entities. Accordingly, any limitation on the transfer
of cash or other assets between the parent corporation and these entities, or
among these entities, could restrict our ability to fund our operations
efficiently, or to repay our convertible notes or other debt. Any such
limitations, or the perception that such limitations might exist now or in the
future, could have an adverse impact on available credit and our valuation and
stock price.
We are subject to changes in the regulatory environment where we operate which
may increase our costs of compliance.
Our mining operations and exploration activities are subject to extensive
regulation governing various matters, including:
o licensing;
o production;
o taxes;
o disposal of process water or waste rock;
o toxic substances;
o development and permitting;
o exports;
o imports;
o labor standards;
o occupational health and safety;
29
o mine safety; and
o environmental protections;
Compliance with these regulations increases the costs of the following:
o planning;
o designing;
o drilling;
o operating;
o developing;
o constructing; and
o closure and reclamation.
We believe that we are in substantial compliance with current laws and
regulations in Ghana and elsewhere. However, these laws and regulations are
subject to frequent change and reinterpretation. Due to the substantial increase
in mining development in Ghana in recent years, the Government of Ghana has been
reviewing the adequacy of reclamation bonds and guarantees throughout the
country and in some cases has requested higher levels of bonding than previously
had been required. Our bonds may be increased. Amendments to current laws and
regulations governing operations and activities of mining companies or more
stringent implementation or interpretation of these laws and regulations could
have a material adverse impact on us, cause a reduction in levels of production
and delay or prevent the development or expansion of our properties in Ghana.
Government regulations limit the proceeds from gold sales that could be
withdrawn from Ghana. Changes in regulations that increase these restrictions
could have a material adverse impact on us, as Bogoso/Prestea and Wassa are
currently our only sources of internally generated operating cash flows.
The Government of Ghana has the right to increase its ownership and control of
certain subsidiaries.
The Government of Ghana is entitled to a 10% carried interest in gold properties
in Ghana. The carried interest comes into existence at the time the government
issues a mining license. As such, the Government of Ghana currently has a 10%
carried interest in our subsidiaries that own the Bogoso Prestea mine, the Wassa
mine and a 19% carried interest in the Prestea Underground property in Ghana.
The Government of Ghana also has: (a) the right under the current mining law to
acquire up to an additional 20% equity interest in each of these subsidiaries
for a price to be determined by agreement or arbitration (although this right
does not exist in the new Minerals and Mining Bill which is expected to receive
Presidential assent in 2006); (b) the right to acquire a special share or
"golden share" in such subsidiaries at any time for no consideration or such
consideration as the Government of Ghana and such subsidiaries might agree; and
(c) a pre-emptive right to purchase all gold and other minerals produced by such
subsidiaries. The Government of Ghana may seek to exercise one or more of these
rights, which could reduce our equity interest. A reduction in our equity
interest could reduce our income or cash flows from Bogoso/Prestea or Wassa,
reducing amounts available to us for reinvestment and adversely affecting our
ability to take certain actions.
We are subject to risks relating to exploration, development and operations in
foreign countries.
Certain laws, regulations and statutory provisions in certain countries in which
we have mineral rights could, as they are currently written, have a material
negative impact on our ability to develop or operate a commercial mine. For
countries where we have exploration or development stage projects, we intend to
negotiate mineral agreements with the governments of these countries and seek
variances or otherwise be exempted from the provisions of these laws,
regulations and/or statutory provisions. We cannot assure you, however, that we
will be successful in obtaining mineral agreements or variances or exemptions on
commercially acceptable terms.
In addition, our assets and operations are affected by various political and
economic uncertainties, including:
o the risks of war, civil unrest, coups or other violent or unexpected
changes in government;
30
o political instability and violence;
o expropriation and nationalization;
o renegotiation or nullification of existing concessions, licenses, permits,
and contracts;
o illegal mining;
o changes in taxation policies;
o restrictions on foreign exchange and repatriation; and
o changing political conditions, currency controls, and governmental
regulations that favor or require the awarding of contracts to local
contractors or require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction.
Illegal mining occurs on our properties, is difficult to control, can disrupt
our business and can expose us to liability.
We continue to experience significant illegal mining activity on our
Bogoso/Prestea property involving illegal miners numbering in the thousands.
Most of this activity is close to our Plant-North pit and planned Bogoso North
and Beta Boundary pit areas and includes areas where we have established
reserves. It is difficult to quantify the exact impact of this activity on our
reserves and non-reserve mineral resources. The impact of this illegal mining,
to the extent known at this time, on our currently reported Mineral Reserves and
Non-Reserve Mineral Resources, has been reflected in our year-end 2005 reserve
figures. While we are proactively working with local, regional and national
governmental authorities to obtain protection of our property rights on a
timelier basis, any action on the part of such authorities may not occur, may
not fully address our problems or may be delayed.
In addition to the impact on our mineral reserve and non reserve mineral
resources, the presence of illegal miners could lead to project delays and
disputes and delays regarding the development or operation of commercial gold
deposits. The work performed by the illegal miners could cause environmental
damage or other damage to our properties, or personal injury or death for which
we could potentially be held responsible. Illegal miners work on other of our
properties from time to time, including on the Paul Isnard property in French
Guiana, and they may in the future increase their presence and have increased
negative impacts such as those described above on such other properties.
Our activities are subject to complex laws, regulations and accounting standards
that can adversely affect operating and development costs, the timing of
operations, the ability to operate and financial results.
Our business, mining operations and exploration and development activities are
subject to extensive Canadian, United States, Ghanaian and other foreign,
federal, state, provincial, territorial and local laws and regulations governing
exploration, development, production, exports, taxes, labor standards, waste
disposal, protection of the environment, reclamation, historic and cultural
resource preservation, mine safety and occupational health, toxic substances,
reporting and other matters, as well as accounting standards. Compliance with
these laws, regulations and standards or the imposition of new such requirements
could adversely affect operating and development costs, the timing of
operations, the ability to operate and financial results.
We have identified a material weakness in our internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act; failure in the future to
achieve and maintain effective internal controls could have a material adverse
effect on our business and share price.
We are required to annually test our internal control procedures in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which
requires annual management assessments of the effectiveness of our internal
control over financial reporting and a report by our independent auditor
addressing these assessments. In connection with management's assessments for
the year ended December 31, 2005, management identified a material weakness in
our internal control over financial reporting related to not maintaining
appropriate documentation to support the use of hedge accounting in our
subsidiary, EURO Ressources S.A. We determined that Golden Star did not have the
necessary controls in place to properly identify the lack of documentation,
which was necessary to properly evaluate the derivative instruments to determine
if hedge accounting was appropriate. As a result of this, management has
concluded that, for the year ended December 31, 2005, Golden Star did not
maintain effective control over financial reporting. As a result, our
independent registered public accounting firm has issued an adverse opinion on
our internal control over financial reporting as of December 31, 2005.
31
The treatment of the EURO derivative contracts has been properly reflected in
this Annual Report on Form 10-K, and we plan to restate our consolidated
financial statements for the quarters ended March 31, June 30 and September 30,
2005 to reflect such change in accounting treatment. We have taken steps to
remediate the material weakness discussed above; however failure in the future
to achieve and maintain an effective internal control environment could have a
material adverse effect on our business and share price.
MARKET RISKS
The market price of our common shares could experience volatility and could
decline significantly.
Our common shares are listed on the American Stock Exchange ("AMEX") and the
Toronto Stock Exchange ("TSX"). Securities of small-cap companies have
experienced substantial volatility in the past, often based on factors unrelated
to the financial performance or prospects of the companies involved. These
factors include macroeconomic developments in North America and globally and
market perceptions of the attractiveness of particular industries. Our share
price is also likely to be significantly affected by short-term changes in gold
prices or in our financial condition or results of operations as reflected in
our quarterly earnings reports. Other factors unrelated to our performance that
could have an effect on the price of our common shares include the following:
o the extent of analytical coverage available to investors concerning our
business could be limited if investment banks with research capabilities do
not continue to follow our securities;
o the trading volume and general market interest in our securities could
affect an investor's ability to trade significant numbers of common shares;
o the size of the public float in our common shares may limit the ability of
some institutions to invest in our securities; and
o a substantial decline in our stock price that persists for a significant
period of time could cause our securities to be delisted from the AMEX and
the TSX, further reducing market liquidity.
As a result of any of these factors, the market price of our common shares at
any given point in time might not accurately reflect our long-term value.
Securities class action litigation often has been brought against companies
following periods of volatility in the market price of their securities. We
could in the future be the target of similar litigation. Securities litigation
could result in substantial costs and damages and divert management's attention
and resources.
Investors could have difficulty or be unable to enforce certain civil
liabilities on us, certain of our directors and our experts.
Golden Star is a Canadian corporation. Substantially all of our assets are
located outside of Canada and the United States, and our head office is located
in the United States. It might not be possible for investors to collect
judgments obtained in Canadian courts predicated on the civil liability
provisions of Canadian or U.S. securities legislation. It could also be
difficult for you to effect service of process in connection with any action
brought in the United States upon our directors and experts. Execution by United
States courts of any judgment obtained against us or, any of the directors,
executive officers or experts named in this report in the United States courts
would be limited to our assets or the assets of such persons or corporations, as
the case might be, in the United States. The enforceability in Canada of United
States judgments or liabilities in original actions in Canadian courts
predicated solely upon the civil liability provisions of the federal securities
laws of the United States is doubtful.
There may be certain tax risks associated with investments in Golden Star.
Potential investors that are United States taxpayers should consider that we
could be considered to be a "passive foreign investment company" ("PFIC") for
U.S. federal income tax purposes. Although we believe that we currently are not
a PFIC and do not expect to become a PFIC in the future, the tests for
determining PFIC status are dependent upon a number of factors, some of which
are beyond our control, and we can not assure you that we would not become a
PFIC in the future. If we were deemed to be a PFIC, then a United States
taxpayer who disposes of common shares at a gain, or who received a so-called
"excess distribution" on the common shares, generally would be required to treat
such gain or excess distribution as ordinary income and pay an interest charge
on a portion of the gain or distribution.
32
The existence of outstanding rights to purchase or acquire common shares could
impair our ability to raise capital.
As of March 27, 2006 approximately 18.6 million common shares are issuable on
exercise of warrants, options or other rights to purchase common shares
(including options and warrants issued in exchange for St. Jude options and
warrants) at prices ranging from Cdn$0.29 to Cdn$9.07. In addition, 11.1 million
common shares are currently issuable upon conversion of our senior convertible
notes issued in April 2005. During the life of the warrants, options, notes and
other rights, the holders are given an opportunity to profit from a rise in the
market price of common shares, with a resulting dilution in the interest of the
other shareholders. Our ability to obtain additional financing during the period
such rights are outstanding could be adversely affected, and the existence of
the rights could have an adverse effect on the price of our common shares. The
holders of the warrants, options, notes and other rights can be expected to
exercise or convert them at a time when we would, in all likelihood, be able to
obtain any needed capital by a new offering of securities on terms more
favorable than those provided by the outstanding rights.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
33
ITEM 2. DESCRIPTION OF PROPERTIES
DESCRIPTION OF PROPERTIES
MAPS OF OPERATIONS AND PROPERTIES
The maps below show the locations of Bogoso, Prestea, Wassa, the Prestea
Underground and Mampon in Ghana, and various exploration properties in Africa
and South America. These properties are described in further detail below.
GHANA OPERATIONS AND PROPERTIES MAP
34
WEST AFRICAN OPERATIONS AND EXPLORATION PROPERTIES MAP
35
SOUTH AMERICAN PROPERTIES MAP
PROPERTY STATUS TABLE
The chart below summarizes information regarding our more significant
properties, which are described in further detail below:
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Property Type of Interest Expiry Date Property size 2005 Comments
Status
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Bogoso Government granted mining 8/21/2017 95 km(2) Active Mining stage
(Ghana) leases held by a 90% owned 8/16/2018
subsidiary
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Prestea Government granted mining 7/6/2031 129 km(2) Active Mining stage
(Ghana) lease held by a 90% owned
subsidiary
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Wassa Government granted mining 9/16/2022 102 km(2), Active Mining stage
(Ghana) lease held by a 90% owned another 172
subsidiary km(2) applied
for
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Prestea Underground Government granted mining 7/6/2031 129 km(2) lies Active Exploration stage
(Ghana) lease, 81%P(2)P beneficial directly below
interest Prestea
surface lease
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Dunkwa- Mampon Prospecting License 1/26/07 66 km(2) Active Development stage
(Ghana)
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Dunkwa-Mansiso Prospecting License Renewal 56 km(2) Active Exploration stage
(Ghana) pending.
Expected in
2006
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Pampe Prospecting License 5/3/06 5.8 km(2) Active Development stage
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
36
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Hwini-Butre 2 Prospecting Licenses 3/10/08 180 km(2) Active Exploration stage
(Ghana)
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Benso 3 Prospecting Licenses 05/16/06 21 km(2) Active Exploration stage
(Ghana)
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Afema Permis de Recherche 09/28/07 2,012 km(2) Active Exploration stage
(Cote d'Ivoire)
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Mano JV 7 Prospecting Permits Various ~750 km(2) Active Exploration stage
(Sierra Leone)
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Goulagou, Rounga, 3 Permis de Recherche 6/1/09 691 km(2) Active Advanced exploration
Tiato Agreements allow earning up stage
(Burkina Faso) to 90%.
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Deba & Tialkam 2 Permis de Recherche 11/24/07 1,842 km(2) Active Exploration stage
(Niger)
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
Saramacca Various Government granted Renewals 660 km(2) Active Exploration stage
(Suriname) rights of exploration and Pending
option agreements
-------------------- ------------------------------ -------------- ---------------- --------- ----------------------
MINING IN GHANA
Ghanaian Ownership and Special Rights
Ghana is situated on the West Coast of Africa, approximately 600 kilometers
north of the equator on the Gulf of Guinea. Accra, the capital city of Ghana, is
located on the Prime Meridian. Following a period as a British colony, Ghana
achieved independence in 1957 and it is now a republic with a democratically
elected government. Ghana has a population of approximately 21 million people.
English is the official and commercial language. The total land area of the
country is approximately 238,000 square kilometers and the topography is
relatively flat. Ghana has a tropical climate with two rainy seasons and two dry
seasons each year.
Rights to explore and develop a mine are administered by the Minister of Mines
through the Minerals Commission, a governmental organization designed to promote
and control the development of Ghana's mineral wealth in accordance with the
current mining law. A company or individual can apply to the Minerals Commission
for a renewable exploration concession granting exclusive rights to explore for
a particular mineral in a selected area for a period of two years subject to
renewal. When exploration has successfully delineated a mineable mineral
reserve, an application is made to the Minerals Commission for conversion to a
mining lease, granting a company the right to produce a specific product from
the concession area, normally for a period of 20 to 30 years. Production must
typically begin within two years of the date of grant of a mining lease.
An amendment made to the current mining law in 1994 requires that any person who
intends to acquire a controlling share of the equity of any mining company that
has been granted a mining lease by the Government of Ghana shall first give
notice of such intention to the Government and obtain its consent prior to
acquiring such controlling share.
In accordance with the current mining law, the Government of Ghana is granted a
10% carried interest in all companies such as BGL and WGL that hold mining
leases. The 10% carried interest entitles the Government of Ghana to a pro-rata
share of future dividends (none have been declared to date), if any, from BGL
and WGL once all capital is repaid, and the Government of Ghana has no
obligation to contribute development or operating expenses. BGL and WGL owe
$142.5 million and $120.6 million, respectively, to Golden Star or its
subsidiaries as of December 31, 2005 for past advances, and these amounts would
be repaid to us before payment of any dividends. Under the current mining law
the Government of Ghana is entitled to acquire up to an additional 20% interest
in our operating companies. If the Government of Ghana wished to exercise this
right, it must first give reasonable notice, and pay a mutually agreed price.
Under the new Minerals and Mining bill, which will become law when it receives
Presidential assent, expected later in 2006, the Government of Ghana would no
longer have the right to acquire this additional interest.
The Government of Ghana is also entitled to acquire a special or golden share in
BGL or WGL or any mining company at any time for no consideration or such
consideration as the Government of Ghana and BGL or WGL might agree. The special
share would constitute a separate class of shares with such rights as the
Government of Ghana and BGL or WGL might agree. In the absence of such
agreement, the special share would have the following rights:
37
o the special share would carry no voting rights, but the holder would be
entitled to receive notice of and attend and speak at any general meeting
of the members or any separate meeting of the holders of any class of
shares;
o the special share could only be issued to, held by, or transferred to the
Government or a person acting on behalf of the Government;
o the written consent of the holder of the special share would be required
for all amendments to the organizational documents of the company, the
voluntary winding-up or liquidation of the company or the disposal of any
mining lease or the whole or any material part of the assets of the
company; and
o the holder of the special share would be entitled to the payment of a
nominal sum of 1,000 Ghanaian Cedis in a winding-up or liquidation of the
company in priority to any payment to other members and could require the
company to redeem the special share at any time for a nominal sum of 1,000
Cedis.
BGL and WGL have not issued nor to date been requested to issue any such special
share to the Government of Ghana.
The Government of Ghana has a pre-emptive right to purchase all gold and other
minerals produced by BGL and WGL. The purchase price would be agreed by the
Government of Ghana and BGL and WGL, or the price established by any gold
hedging arrangement between BGL or WGL and any third party approved by the
Government, or the publicly quoted market price prevailing for the minerals or
products as delivered at the mine or plant where the right of preemption was
exercised. The Government of Ghana has agreed to take no preemptive action
pursuant to its right to purchase gold or other minerals so long as BGL and WGL
sell gold in accordance with certain procedures approved by the Bank of Ghana.
The existing legal structure for mining in Ghana has been under review with the
intent to make it more competitive and bring it in line with international best
practice. To this end the new Minerals and Mining Bill was placed before the
Ghanaian parliament in late 2004. After being subjected to public critique by
various stakeholders, a revised bill was considered by the Ghanaian Parliament
and passed in late December 2005. The new law will come into force when it has
been given Presidential assent and gazette notification as required by the Ghana
constitution. Based on currently available information, we do not believe that
the implementation of the new Bill will have a material impact on our operations
in Ghana.
Ghanaian Royalty Requirements
Under the laws of Ghana, a holder of a mining lease is required to pay quarterly
a royalty of not less than 3% per annum and not more than 12% per annum of the
total revenues earned from the lease area. Under the new Minerals and Mining
Bill, the upper limit on the royalty would be capped at 6%. The Government of
Ghana determines the royalty percentage each year based on the ratio that the
operating margin bears to the value of gold produced from a mining lease in that
year. Based on the Mineral Royalty Regulation of 1987, the royalty is 3% when
the operating ratio is 30% or less, the royalty increases 0.225% for each 1%
increase in operating ratio until the royalty reaches a maximum of 12% (see
above) at an operating ratio of 70%. In 2005, 2004 and 2003 the royalty rate for
BGL was 3% of revenues and BGL paid $1.8 million, $1.8 million and $1.9 million,
respectively. The royalty payments from BGL have not exceeded 3% per annum in
any year. WGL also paid a 3% royalty in 2005 or $0.9 million.
Ghanaian Environmental Regulations
All environmental matters in Ghana, including those related to mining, fall
under the oversight of the Ghana Environmental Protection Agency ("EPA"). The
EPA has formulated rules and guidelines which govern environmental impact
statements, mine operations, and mine closure and reclamation, to which our
operations are subject.
In conformance with EPA requirements, we posted reclamation bonds for the Wassa
and Bogoso/Prestea properties in 2005. We bonded $3.0 million to cover future
reclamation obligations at Wassa comprised of a $2.85 million letter of credit
and cash deposit of $0.15 million. We also bonded $9.45 million for
Bogoso/Prestea comprised of an $8.55 million letter of credit and $0.9 million
of cash. Signed bonding agreements are now in place for both Wassa and
Bogoso/Prestea.
38
BGL completed significant work during 1999 to identify the outstanding
reclamation liabilities for Bogoso/Prestea and to prepare a rehabilitation work
plan. Significant work has been performed since that time to advance this plan
and to reduce the outstanding historic reclamation liability. Expenditures for
ongoing rehabilitation work, including the capping of sulfide material,
back-filling of worked out pits, and the contouring and re-vegetation of waste
dumps, were approximately $0.7 million, $0.7 million and $0.8 million in 2005,
2004, and 2003, respectively. In addition to the bonds detailed above, as at
December 31, 2005, BGL still had $3.4 million of restricted cash set aside for
environmental reclamation of the Bogoso mine since 1999 when we purchased Bogoso
from the International Finance Corporation and a consortium of banks.
The Plant-North pit at Prestea has been developed in stages with the development
of the final stage (Phase 3) commencing in August 2005. Initiation of Phase 3
mining was conditional on a number of mitigation measures identified in our
Environmental Impact Statement. The EPA requested suspension of mining of the
Plant-North Phase 3 pit on September 13, 2005 and of the Plant-North pit on
September 28, 2005 until certain outstanding mitigation measures were completed.
The mitigation measures were completed and inspected by the EPA on October 19,
2005. On November 1, 2005, we received approval from the EPA to recommence
mining operations at the Plant-North pit and mining activity was recommenced a
few days later following a series of informational meetings with the Prestea
community.
During the mining suspension at Plant-North, processing operations continued at
the Bogoso processing plant using stockpiled ore. Mining and processing
operations at the Wassa mine and construction activities on the Bogoso sulfide
expansion project also continued without interruption.
To our knowledge, all our operations in Ghana are currently in substantial
compliance with all environmental requirements.
COMMUNITY DEVELOPMENT PROGRAMS AND SUSTAINABILITY
It is our policy and our intent to be a responsible corporate citizen of Ghana
and in all other areas where we conduct our business. We believe our success as
an employer, as a citizen of the local community and as a participant in the
local economy is dependent on achieving and maintaining good community
relationships. As such, we strive to accommodate and support local efforts to
improve the economic and overall well being of the communities around our
operations.
Alternative Livelihood and Sustainable Development Program (ALSD) - In mid-2001
we initiated the ALSD program in the Bogoso/Prestea area and expanded the
program during 2004 to include Wassa. The goals of the ALSD program are to
assist the communities in the vicinity of our mining operations to create
alternative employment opportunities, promote growth of sustainable economic
development and to reduce the community's dependence on mining.
Given the importance of agriculture in the local economy, much of our efforts
have been focused on agricultural opportunities.
Palm Oil - Palm oil is a major cash crop for many farmers in Southern Ghana and
based on the historical success of Ghana's palm oil industry, we believe palm
oil farming has the potential to make a significant contribution to the local
community's economic development. Palm oil production requires land.
Historically the economic base of many of the communities surrounding our
operations has been based on mine employment. As a result many of the residents
have not acquired land and have thus been excluded from farming in general and
the palm oil business specifically.
In the past three years we have assisted and trained in excess of 300 local
residents to establish palm oil plantations on approximately 1,050 acres of
reclaimed waste rock dumps and other areas around our mines. In 2006 we plan to
initiate a new four-year program to significantly expand on the success of our
initial palm oil program. To this end we have procured about 2,400 acres of
additional land holding and aim to increase this to 5,000 acres of additional
land in 2006. The land will be used to expand the palm oil cooperative program
providing employment and eventual land ownership to as many as 2,000 local
residents. We are also negotiating with a business partner in the palm oil
business who will assist by providing a processing facility and a market for the
oil. These plantations should fully mature in about three years with an expected
yield of about 4,200 metric tonnes of fresh fruit bunch annually.
Fish Farm - We have established a fish farm in one of the completed pits at
Bogoso. The fish have done well and we now estimate there are approximately 10
tonnes of fish ready for harvesting. We hope that the success of this project
will encourage development of private fish farms in the local communities.
Sericulture - We have established a mulberry plantation and silk worm rearing
facility at Bogoso. Thirty local farmers are now participating in this project
and have to date produced 45 kilograms of silk cocoons.
39
Poultry - Our demonstration farm is also training and assisting local farmers
with poultry production. A ban on importation of poultry products from several
countries due to bird flu concerns has created this opportunity for local
farmers. The program has implemented 12 poultry projects with 2,650 chicks in
ten communities. The poultry project will focus on egg production.
Other Projects - Other projects we are supporting or plan to support in 2006
include snail farming, mushrooms, citrus production and vocational training.
In collaboration with government agencies, the Ghana Department of Cooperatives
is assisting us in developing the project beneficiary groups into commodity
based associations including the Oil Palm Farmers Association, Poultry Farmers
Association and Sericulture Farmers Association and four Ministry of Agriculture
staff are providing technical support to the beneficiary farmers in the areas
surrounding our operations. Other contacts have been made with local and
international non-governmental organizations in developing micro-credit schemes
on behalf of the company.
Community Assistance Programs - In addition to the alternative livelihood
projects described above, we are involved in the ongoing funding of several
community assistance projects. Over the past few years we have provided funding
and assistance for school improvements and equipment, libraries, day care
centers, community centers, potable water systems and wells, sports facilities,
toilet facilities, electrification projects, health facilities, road
improvements and hospital equipment.
At our corporate headquarters in Denver, Colorado the employees and their family
members initiated a book donation program in late 2005 seeking to obtain 150,000
books which will be used to stock libraries in the communities around our
operations. To date approximately 25,000 volumes have been donated, sorted and
packed for shipment. Local high school student volunteers have done most of the
sorting and packing. The books acquired to date include a wide assortment of
topics including primary and secondary school texts, children's books, novels,
reference, travel and general interest books.
Endowment Fund - In late 2005, we established two endowment funds in Ghana, one
at Wassa and one at Bogoso. The purposes of the endowment funds are to promote
and facilitate sustainable socio-economic development and to improve the quality
of life in the communities surrounding our operations and in 2006 we will
transition to channeling all of our community assistance programs through these
funds. The funds will provide funding for development projects and charitable
causes. The fund will receive periodic cash contributions from BGL and WGL based
on gold production and net income.
OPERATING PROPERTIES
The Bogoso/Prestea Gold Mine
Overview of the Bogoso/Prestea Operation
Bogoso/Prestea consists of a gold mining and processing operation located along
the Ashanti Trend in western Ghana, approximately 35 kilometers northwest of the
town of Tarkwa. It can be reached by paved roads from Tarkwa and from Accra, the
capital of Ghana. Bogoso and Prestea are adjoining mining concessions that
together cover approximately 40 kilometers of strike of the southwest trending
Ashanti gold district. The mining areas at Prestea are linked to the Bogoso
processing plant by approximately 12 kilometers of paved and gravel haul-roads
located on our properties. Equipment and facilities at Bogoso/Prestea include
several open pit mines, a nominal 6,000 tonne per day CIL gold processing plant
and a fleet of haul trucks, loaders and mining support equipment. In addition,
there are numerous ancillary support facilities such as power and water supply
equipment, haul roads, housing for management and technical staff, a medical
clinic, tailings storage facility, waste dumps, warehouse, maintenance shops,
offices and administrative facilities. The Bogoso/Prestea properties and mining
rights are granted under four mining leases, which expire on or after August
2017.
Commercial mining at Bogoso dates back to the early years of the 20th century.
During its 20-year period of operations from 1935 to 1955, production totaled
over 900,000 ounces of gold at an average recovered grade of 3.73 g/t. From 1873
to 1965, the current Prestea property was comprised of a number of different
licenses operated by independent mining companies, which in 1965 were
amalgamated by the Government of Ghana into Prestea Goldfields Limited, under
the aegis of the State Gold Mining Corporation.
Total gold production from the Prestea area since recorded mining commenced in
the 1870s is reported by the Ghana Mineral Commission to be in excess of nine
million ounces, making it the second largest historical gold producing area in
Ghana, after the Obuasi mine.
40
We acquired Bogoso in late 1999 and all of our production came from reserves
located on the Bogoso concession until October 2001 when we commenced surface
mining on the adjoining Prestea concession. The Prestea concession was acquired
in mid-2001. From 1999 through 2005 we have produced 811,800 ounces of gold from
Bogoso/Prestea.
Operating Results for Bogoso/Prestea
The following table displays historical operating results at Bogoso/Prestea.
Bogoso/Prestea Operating Results 2005 2004 2003
-------------------------------------- ---- ---- ----
Ore milled (t) 1,557,881 1,650,412 2,093,600
Rate (t/day) 4,268 4,526 5,736
Grade milled (g/t) 4.14 4.09 3.29
Recovery % 60.7 67.3 81.2
Total gold production (oz)(1) 131,898 147,875 174,315
Cash operating cost ($/oz) 338 250 166
Total cash cost ($/oz) 351 264 184
(1) Gold production is shown on a 100% basis, which represents our current
beneficial interest in gold production and revenues. Once all capital has
been repaid, the Government of Ghana would receive 10% of the dividends
from the subsidiaries owning the Bogoso/Prestea and Wassa mines.
Bogoso/Prestea Expansion Project
Gold ore reserves in general and specifically at Bogoso/Prestea can be
segregated into two general ore types referred to as "refractory" and
"non-refractory." Refractory ores typically contain un-oxidized sulfide minerals
with the gold trapped within the sulfide minerals. Such ores are also commonly
referred to as "sulfide" ores and they cannot be economically processed in
conventional CIL circuits such as our existing Bogoso processing plant.
Non-refractory ores typically contain no sulfides or the sulfide minerals have
been naturally oxidized. There are also certain sulfide ores that are
non-refractory if the gold exists on surface of the sulfide minerals rather than
embedded within the sulfide minerals. Ores that have been naturally oxidized are
referred to as "oxide" ores. Non-refractory ores, including oxide ores, can be
efficiently processed through the existing Bogoso CIL processing plant.
Since 75% of the remaining ore reserves at Bogoso/Prestea are refractory and
cannot be processed by our existing plant, a decision was made in June 2005 to
construct a new 3.5 million tonne per annum processing facility at Bogoso,
located next to the existing non-refractory processing plant, which will utilize
a proprietary BIOX(R) bio-oxidation technology to treat the refractory sulfide
ore. When completed in late 2006, the new sulfide plant together with the
existing CIL plant, are expected to be able to process a combined 5.0 million
tonnes per year of ore. Completion on schedule and anticipated production levels
for the new facility are subject to a number of risks, including the issuance in
a timely manner of all necessary development and operating permits.
The existing CIL processing plant will retain its current configuration and will
continue to process non-refractory ores during the construction phase of the new
BIOX(R) plant. After the new BIOX(R) plant comes on line, it is anticipated that
the existing Bogoso CIL processing plant will process mostly oxide ores and the
BIOX(R) plant will process mostly refractory sulfide ores and mixed
oxide-refractory ores. The two plants sitting side-by-side are expected to
provide operational efficiencies since they will share management, labor,
reagents, warehouse parts and maintenance efforts. And with the two plants and
their differing technologies, we should be able to effectively process all of
the ore types known to exist in the Bogoso/Prestea area.
Construction work on the BIOX(R) plant is proceeding within schedule and budget.
Ordering of long lead-time items is substantially complete as is the detailed
engineering design. Concrete work is well progressed for all of the equipment.
The stainless steel BIOX(R) reactor tanks have been erected and structural steel
erection has commenced. Erection of the CIL tanks is also nearing completion
which will allow structural steel erection to also commence in this area. The
electrical contractor has mobilized and has commenced work. The crusher and new
SAG mill were shipped to Ghana in March and the ball mill is already on site and
mounted on its pedestal.
41
The design and construction of the expansion project is being managed by GRD
Minproc on an engineering, procurement and construction management basis. Work
has proceeded under a letter of agreement entered into in February 2005 and a
definitive contract is expected to be finalized shortly.
Pre-stripping of two sulfide pits in readiness for the commissioning of the
BIOX(R) plant has already commenced and will be accelerated when additional
trucks are delivered, commencing in April 2006. The non-refractory plant will
continue to process non-refractory ores from the Plant-North pit at Prestea
until completion of mining in the fourth quarter of 2006. Afterward we plan to
feed the non-refractory plant with oxide ores from Pampe, Mampon and various
areas on the south end of the Prestea property.
We estimate that the total capital cost of the new sulfide plant project,
including the expansion of the mining fleet, to be approximately $125 million,
and we expect a 15 to 18 month construction period, ending in late 2006. At the
end of 2005, approximately $36 million of the total had been spent.
In 2007, following the completion of the BIOX(R) plant, we expect the combined
gold production from the two Bogoso plants to be approximately 370,000 ounces
per annum at an average cash operating cost of $330 per ounce. Based on our test
work, we expect gold recoveries from the BIOX(R) process to average 86% and vary
between 78% and 88%.
Geology at Bogoso/Prestea
The Bogoso/Prestea property lies within the Eburnean Tectonic Province in the
West African Precambrian Shield along a 40 kilometer stretch of the Ashanti
Trend located immediately south of the town of Bogoso. The area is dominated by
a major northeast-southwest trending structural fault zone referred to as the
Ashanti Trend, which hosts the Prestea, Bogoso, Obuasi and Konongo gold
deposits, among others. Parallel to the Ashanti Trend is the Akropong Trend,
which hosts the Ayanfuri deposit. The Akropong Trend is about 15 kilometers west
of the Ashanti Trend in the Bogoso region, and gradually converges with it,
converging at Obuasi and forming the basis for the Obuasi deposit, owned and
operated by AngloGold Ashanti Limited.
Mineral Reserves and Non-Reserve Mineral Resources at Bogoso/Prestea
Bogoso/Prestea has proven and probable Mineral Reserves, excluding the Mineral
Reserves at Mampon discussed below, of 33.3 million tonnes at a grade of 2.69
g/t containing approximately 2.88 million ounces of gold (before any reduction
for the Government of Ghana's 10% minority interest). Total measured and
indicated Mineral Resources, excluding those Mineral Resources at Mampon and
Pampe discussed below, total 20.7 million tonnes with a grade of 2.18 g/t before
a reduction for the 10% minority interest. Assuming no new reserves are
discovered, the current proven and probable Mineral Reserves should support
mining operations for approximately seven years, although we expect the mine
life to be extended as we continue to evaluate mineral resources through ongoing
exploration efforts. See the Proven and Probable Mineral Reserves table and the
Non-Reserves - Measured and Indicated Mineral Resource table in Item 1 of this
Form 10-K.
Exploration at Bogoso/Prestea
Exploration activities on the Bogoso property in 2005 focused on defining and
expanding the sulfide reserves in advance of initiation of a sulfide ore
pre-strip program in early 2006. The drilling also focused on requirements to
finalize pit designs at Chujah and Buesichem. These two pits are scheduled to
provide sulfide feed to the new sulfide plant in 2006, 2007 and into 2008. In
addition, drilling at other areas at Bogoso was conducted to understand and
expand the sulfide reserves beneath several of the other old oxide pits. A total
of $7.5 million was spent on exploration at Bogoso in 2005.
Surface exploration drilling on the Prestea property during 2005 was limited to
the evaluation of shallow underground targets in the Plant-North pit vicinity.
While results in areas drilled during 2005 were not encouraging, other zones
directly beneath the Plant-North pit will be tested in 2006. A Bogoso/Prestea
regional geologic mapping program initiated in 2004 continued during 2005. The
program will cover approximately 265 square kilometers around the Bogoso and
Prestea properties when completed in early 2006.
The Mampon Project
The Mampon deposit, which is located within the Dunkwa properties, is
approximately 35 kilometers north of the Bogoso processing plant. It was
acquired in 2003, as part of the Dunkwa property acquisition. An analysis of the
drilling and other geologic data provided by the former owner as well as our own
drilling in 2004 and 2005 has established a probable reserve of approximately
1.6 million tonnes grading 4.53 grams per tonne or approximately 230,000 ounces
of gold which is accessible by open pit mining methods. The geology of the
42
Mampon deposit is similar to the geology at Bogoso/Prestea. Our current plan is
to haul the Mampon ore by truck to the Bogoso processing plant to supplement
ores from the Bogoso/Prestea deposits. Our current long-term plan calls for
mining Mampon in 2007 and 2008. Mampon ore is approximately 50% refractory and
50% non-refractory.
The Pampe Project
The Pampe deposit is located approximately 19 kilometers west of the Bogoso
processing plant on the Akropong trend. While we have owned the rights to Pampe
for several years, drilling during 2005 identified a measured and indicated
resource of 0.2 million tonnes at an average grade of 4.4 g/t most of which is
either oxide ore or non-refractory sulfide ore and most of which should be
recoverable by open pit mining methods. Permitting for this project is now
underway and haul road construction is scheduled for 2006. We expect to commence
mining at Pampe before the end of 2006.
Bondaye/Tuapim Area
Due to the presence of illegal miners no work was carried out on the south end
of the Prestea property during 2005. Once the illegal miner situation is
resolved, we anticipate additional exploration work in these areas with the
ultimate goal of mining oxide ores for the Bogoso oxide plant after 2007. We
also expect to further investigate initially the shallow and ultimately the
deeper underground potential of this area.
The Wassa Gold Mine
Overview of the Wassa Gold Mine
The Wassa gold mine located approximately 35 kilometers east of Bogoso/Prestea,
was initially developed in the late 1990s by a consortium of European mining
companies and consisted of an open pit mine, a crusher and a conventional heap
leach operation. While operating as a heap leach property, Wassa produced
approximately 90,000 ounces of gold per annum for a period of just over two
years beginning in 1999 and ending in mid-2001 when mining operations were
suspended.
In September 2002 WGL, our 90% owned subsidiary, acquired the inactive Wassa
gold property located 35 kilometers east of Bogoso/Prestea. As with
Bogoso/Prestea, the Government of Ghana holds a 10% carried interest which
entitles it to 10% of any future dividends (none have been declared to date).
Dividend payments will not be made until WGL has repaid all contributed capital
and shareholder advances to Golden Star.
In late 2003, following completion of a feasibility study we initiated
construction of a nominal 3.5 million tonnes per year (10,000 tonne per day) CIL
processing plant at Wassa. The construction phase ended in early 2005, and the
Wassa open-pit mine and plant was placed in service on April 1, 2005. In the
nine months ended December 31, 2005, Wassa processed 2.7 million tonnes of ore
at an average grade of 0.91 grams per tonne and shipped 69,070 ounces of gold at
an average total cash cost per ounce of $482. Plant feed is a mixture of newly
mined ore from the Wassa pit blended with material from the heap leach pads left
by the prior owners.
During 2006, we expect to produce approximately 120,000 ounces of gold at Wassa
at an average cash operating cost of approximately $340 per ounce. We expect
production to increase and unit costs to decline later in 2006 and beyond as we
expose higher grade ores at deeper levels in the pit and also resolve certain
plant design issues which have limited plant through-put to less than design
capacity since its in-service date. In 2007, we expect annual gold production of
approximately 130,000 ounces per year, at an average cash operating cost of
around $340 per ounce. The reserves at Wassa at the end of 2005 should be
sufficient to support operations to early 2011.
Geology at Wassa
Wassa lies within the Eburnean Tectonic Province in the West African Precambrian
Shield. The Proterozoic rocks that comprise most of the West African craton and
host the major gold mineralization in Ghana are subdivided into metasedimentary
and volcanic rocks of the Birimian and Tarkwaian sequences.
Wassa is hosted within the same Birimian volcano-sedimentary greenstone package
as Bogoso/Prestea. Wassa is situated on the southeastern limb of the Tarkwa
Syncline while Bogoso and Prestea occur along the northwestern limb. The
northwestern belt hosts the Obuasi, Prestea, and Bogoso gold mines but the
southeastern limb also is characterized by gold mines and mineral occurrences.
Tarkwaian-hosted deposits along the southeastern limb include Goldfield's Tarkwa
and Abosso mines, while Birimian-hosted gold occurrences include our Hwini-Butre
concession and Wassa.
43
Mineral Reserves and Mineral Resources at Wassa
At December 31, 2005, Wassa has a probable mineral reserve of 21.9 million
tonnes with an average grade of 1.34 g/t containing approximately 0.94 million
ounces of gold before any reduction for the Government of Ghana's 10% minority
interest. Total indicated mineral resources consist of 11.3 million tonnes with
a grade of approximately 0.76 g/t before any reduction for the 10% minority
interest. See the Proven and Probable Mineral Reserves table and the
Non-Reserves - Measured and Indicated Mineral Resource table in Item 1 of this
10-K.
Exploration at Wassa
Exploration activities at Wassa during 2005 concentrated on RC drilling of two
parallel geochemical anomalies identified in 2004 which extend southwest
approximately 2 kilometers from the main pit area. Other than one narrow zone
that typically carried 3 to 3.5 grams per tonne, results were not encouraging.
Various other geochemical anomalies were also tested at Wassa by RAB drilling
during 2005 and while most of these projects are at a very preliminary stage,
results were encouraging with several intercepts at various places on the
property exceeding minimum ore grades. Work continued on the South Akyempim zone
discovered in 2004. We have now identified approximately 2.7 million tonnes of
near-surface ore at an average grade of 1.47 grams per tonne in this area and we
have initiated the process to acquire mining permits to allow mining of this
deposit in the second half of 2006.
EXPLORATION STAGE PROPERTIES IN GHANA
Prestea Underground
Overview
The Prestea Underground is an inactive underground gold operation located
directly beneath our Prestea property consisting of two operating shafts and
extensive underground workings and support facilities. Support facilities
include an administrative office, maintenance shops, a warehouse and electrical
substations. Access to the mine site is via a paved road from Tarkwa and Accra
maintained by the Government of Ghana. Any potential future production from the
Prestea Underground would most likely be trucked to the Bogoso processing plant
for processing.
The Prestea Underground has produced approximately nine million ounces of gold,
the second highest production of any mine in Ghana. The underground workings are
extensive, reaching depths of approximately 1,400 meters and extending along a
strike length of approximately ten kilometers. Underground workings can
currently be accessed via two shafts, one near the town of Prestea and a second
approximately four kilometers to the southwest. Underground operations ceased in
early 2002, following an extended period of low gold prices. In March 2002, our
subsidiary BGL entered into a joint venture agreement with the former owners to
further explore and evaluate the remaining potential of the underground
operations.
In late 2003, our partner in the Prestea Underground joint venture filed for
bankruptcy in Ghana. Our partner's position, under the provisions of the joint
venture agreement has now reverted to a 2.5% net profits interest, which is
currently controlled by the former partner's bankruptcy trustee. Since there is
currently no production from the Prestea Underground mine there is no net profit
to share with our bankrupt partner. BGL now holds a 90% ownership in the Prestea
Underground. The Government of Ghana continues to hold a 10% ownership in
Prestea Underground as well as its 10% holding in BGL, resulting in an 81%
beneficial ownership by Golden Star.
Geology of Prestea Underground
The Prestea deposits are found along the Ashanti Trend which extends over 220
kilometers and which accounts for 80% to 90% of the total quartz lode-hosted
gold extracted in Ghana. Other mines located along the same shear are our Bogoso
pits and the Obuasi and Konongo mines owned by others.
Two types of gold hosts have historically been recognized at Prestea:
fault-related hydrothermal quartz veins; and disseminated sulfide-hosted gold
mineralization associated with metavolcanic pods. The first type of ore was the
focus of intense mining during Prestea's past production. We intend to evaluate
both types of mineralization.
44
Mineral Resources at Prestea Underground
As of December 31, 2005 we have identified total non-reserve inferred mineral
resources at the Prestea Underground of 6.1 million tonnes at an average grade
of 8.1 g/t before any reduction for the 19% minority interest.
Exploration Activities at Prestea Underground
A total of 8,096 meters of underground exploration drilling was completed at the
Prestea Underground during 2005. The drilling focused on testing extensions of
the high grade West Reef shoot between levels 17-24 (a depth of between 700 and
900 meters) and also prospective zones of remnant mineralization lying below and
to the south of the Plant-North pit which could be exploited via a decline at
the base of the pit. Results from both these areas have been encouraging with
drilling to continue in 2006.
A deep surface hole at Bondaye was initiated during 2004 to test the down plunge
extension of high grade mineralization to approximately 250 meters below the
extent of current historical workings. Although technical problems and delays
were seen in 2004, the drilling was completed mid 2005 for a total of 2,109
meters including a parent hole to 1,604 meters and a "wedged" daughter hole to
1,504 meters. Only spotty, discontinuous gold mineralization was encountered in
the reef zone at both the parent and daughter hole. However this may simply
reflect the typical "pinch and swell" character of the Prestea reef system and
cannot be considered a definitive test of the Bondaye plunge potential.
Total spending on long term assets at Prestea Underground totaled $12.1 million
in 2005, up from $7.1 million during 2004. Spending in 2005 included $2.6
million on underground drilling and other geological activities, $5.8 million on
feasibility work, $2.3 million on dewatering, security and site maintenance, and
$1.4 million on equipment purchases. Support crews continue to maintain the
underground and surface facilities in good working order and assist the
underground drilling teams.
By the end of 2005, dewatering efforts had cleared the lowest sections of the
old underground workings and an extensive underground drilling program has been
initiated which will continue during most of 2006 to test areas immediately
below the deepest old workings. We believe these deeper levels provide the best
opportunities for significant new discoveries in the Prestea Underground. We
intend to complete an initial feasibility study by the end of 2006 evaluating
the economic potential of restarting production from the Prestea Underground
mine.
St. Jude Properties
The St. Jude Properties were acquired in late December 2005 as part of the St.
Jude acquisition. These properties consist of the Hwini-Butre and Benso gold
concessions (prospecting licenses) at the southeastern end of the Ashanti gold
belt region in Ghana. While we now hold a 100% interest in these properties
(through our subsidiaries), the Government of Ghana will become entitled to a
10% carried interest at the time mining permits are granted.
The Hwini-Butre concession is located approximately 80 kilometers south of Wassa
and occupies an area of approximately 180 square kilometers. St. Jude and its
predecessors have previously carried out numerous exploration programs on the
concessions and identified two significant zones of gold mineralization.
The St. Jude Properties also include the Benso concession, located in the Tarkwa
District, directly north of the Hwini-Butre concession and about 40 kilometers
south of Wassa. The Benso concession covers an area of approximately 21 square
kilometers, and consists of three blocks: the Amantin, Subriso, and Chichiwelli
blocks. St. Jude and its predecessors previously conducted a geochemical soil
sampling survey over the Benso concession and drill programs on the three
blocks.
We commenced our own exploration activities on the St. Jude Properties in early
2006, and have budgeted approximately $4.6 million for the program in 2006.
The Hwini-Butre and Benso concessions lie along the southeastern flank of the
Birimian-aged (lower Proterozoic) Ashanti Belt, along the same structural trend
as Wassa. The southwestern part of the Hwini-Butre concession covers the Mpohor
Complex, a syn-volcanic mafic intrusive that is bound to the east and north by
the Butre volcanic sequence. The Mpohor Complex is a polyphase intrusion with
compositions ranging from gabbroic to granophyric, with intermediate phases such
as diorite and granodiorite. The Butre volcanic sequence, which also underlies
the Benso concession further north, mostly comprises volcanic flows with minor
metasediment horizons. The main regional structural orientation trends
northeasterly but extensive north to northwest trending cross-cutting fracture
systems are also well developed. The latter host much of the mineralization in
45
the district, with vein systems at Dabokrom, Father Brown, Adoikrom, the Subriso
zones and Amantin located within or marginal to the Mpohor Complex.
Mineralization on the Hwini-Butre concession is typically associated with
shallowly east-dipping narrow quartz veins and their associated sericitic
alteration halos, with coarse free gold associated with sulfides and as specks
within the quartz veins and altered host rocks. In contrast, mineralization at
Subriso West and Central Subriso forms a series of relatively steep dipping,
north-trending zones characterized by strong shearing and pervasive silica
replacement with local silica flooding and only minor thin quartz veining.
Studies will be carried out during 2006 to determine if ore from the St. Jude
Properties should be hauled to the Wassa plant for processing or if a
stand-alone processing plant should be built in the general vicinity of the St.
Jude Properties.
Akropong Trend Properties
During 2005, we continued working on the Akropong Trend properties located
approximately 10 to 20 kilometers to the west of Bogoso/Prestea. The objective
of this work was to identify additional mineral reserve opportunities in the
immediate vicinity of Bogoso/Prestea that could, in the future, provide
additional sources of processing plant feed for the Bogoso processing plants. As
explained above, drilling at the Pampe property established a measured and
indicated resource at Pampe during 2005. The other Akropong Trend projects are
still at an early stage of exploration and to date they do not have, and
ultimately might not have, proven and probable mineral reserves.
We spent approximately $1.4 million on Akropong projects during 2005 compared to
$0.4 million in 2004. Most of the Akropong spending was related to RAB and RC
drilling at the Pampe property.
Dunkwa Properties (including Mampon)
Overview of the Dunkwa Properties
In 2003, we purchased two prospecting licenses, Asikuma and Mansiso, along the
Ashanti Trend from Birim Goldfields Inc., which we refer to as the Dunkwa
properties. These properties cover 45 kilometers of strike along the Ashanti
Trend directly north of and contiguous with the current Bogoso concession. They
are accessible by Ghanaian public roads. The addition of the Asikuma and Mansiso
prospecting licenses, which cover 56 and 69 square kilometers, respectively,
increases our property holdings along the trend to over 100 kilometers in
length. In 2003, we also acquired from Ashanti Goldfields Company Limited the
rights to the Mampon prospect located on the Asikuma license. Ore from Mampon is
expected to be trucked to the Bogoso processing plant commencing in 2007.
The Mampon prospect was discovered in 1988 using regional geochemical methods
and consists of narrow quartz veins with strong pyrite and arsenopyrite
mineralization in the wall rocks ranging up to 15% total sulfides. These
prospects are also associated with shearing and/or graphitic faults, similar to
those seen at Bogoso. There are five known gold prospects on the Dunkwa
concession. All of these occur in the same approximate stratigraphic position
within lower Birimian sediments from 1 to 1.5 kilometers west of the contact
with the Birimian metavolcanics.
Exploration Activities at the Dunkwa Properties
Most of the work on the Dunkwa properties during 2005 was focused on the Mampon
area where data was gathered to assist in pit design for surface mining now
scheduled for late 2007. Late in 2005 we began a drilling program on an
unexplored nine kilometer section of the property covered by Opon river valley
sediments which coincides with a conductivity anomaly. Spending in the Dunkwa
area totaled $1.4 million in 2005.
Regional Activities in Ghana
In 2005, we continued with several early stage regional projects in southern
Ghana by conducting geochemical surveys over extensive areas to the east and
south of the Bogoso/Prestea and Wassa areas extending east to within 30
kilometers of Accra (see map at the beginning of Item 2 Description of
Properties.) This work has identified gold anomalies which will be followed up
with additional sampling in 2006. We applied for and received prospecting
licenses on these properties, referred to as Breman-Asikuma and Takoradi North.
46
OTHER EXPLORATION STAGE PROPERTIES IN AFRICA
Mano River Joint Venture, Sierra Leone
In late 2003 we entered into a joint venture agreement with Mano River Resources
Inc., which holds seven gold properties in Sierra Leone totaling approximately
750 square kilometers. A diamond core drilling program commenced in mid-March
2004 at the Yirisen prospect on the North Pampana license, and 26 holes were
completed. Grades and gold mineralization proved to be variable and
discontinuous. However, due to the prospective nature of the local area, as
evidenced by numerous artisanal workings and favorable geology, a reconnaissance
soil sampling program was initiated over all the joint venture properties in
late 2004 which continued into 2005. Final assay results were received near the
end of the third quarter 2005 and showed anomalies worthy of follow up on the
Pampana and Sonfon projects. In the meantime, it has been agreed with our joint
venture partner, Mano River Resources Inc., that the earn-in period will be
extended by 12 months. A minimum of $750,000 is budgeted for exploration on this
project in 2006.
Moto Goldmines Investment
Moto Goldmines Limited ("Moto") is a Canadian listed gold exploration company
which focuses its activities in the Democratic Republic of the Congo in central
Africa. At the end of 2005 we owned approximately 11.1% or five million of
Moto's outstanding common shares plus warrants to acquire a further one million
shares before June 2006 at an exercise price of Australian $2.25 per share. Our
Vice President of Exploration serves on Moto's board of directors. In March
2006, we exercised the remaining warrants, at a cost of $1.7 million, bringing
our total ownership to six million shares and immediately afterward sold all the
shares in a bought-deal transaction in Canada for Cdn$7.50 per share for net
proceeds to Golden Star of Cdn$45.0 million ($38.9 million).
Afema, Cote d'Ivoire
In March 2005, we entered into an option to purchase the Afema project in Cote
d'Ivoire from the Ivorian parastatal company Societe d'Etat pour le
Developpement Minier de la Cote d'Ivoire (`SO.DE.MI."). The Afema property
covers an area of 2,012 square kilometers of prospective Birimian rocks in south
east Cote d'Ivoire which represent the southeastern extension of the Sefwi Belt
meta-volcanics and the Kumasi Basin meta-sedimentary rocks. In Ghana this
`belt-basin' contact hosts the multi-million ounce Chirano and Bibiani gold
deposits. Under the terms of the acquisition agreement, we made an immediate
payment of $0.1 million to SO.DE.MI. which gave us the right to carry out a six
month detailed technical due diligence, after which we will have the right to
complete the transaction to acquire 100% of SO.DE.MI.'s rights in the Afema
property for $1.5 million (subject to a statutory 10% interest by the Government
of Cote d'Ivoire). If we proceed with the acquisition, in addition to the
acquisition payments, Golden Star will pay to SO.DE.MI. a royalty on future gold
production from the Afema property indexed to the gold price. At current gold
prices (in the range of $550 per ounce) the royalty rate would be 2.5%.
Golden Star undertook an intensive exploration program at Afema during the six
months following signing of the option, including the collection and analysis of
over 12,000 soil samples and compilation and assessment of previous exploration
data. Despite this work, we were unable to come to a definitive decision on the
merits of the project and hence a six month extension to the option period was
requested, which SO.DE.MI. has granted. We plan to use the extension to continue
the assessment of previous data and to complete infill sampling and trenching of
some of the better anomalies defined by the initial program. Approximately $1.0
million was spent on this project in 2005, and a further $2.2 million (including
the option exercise payment) is budgeted for 2006.
Goulagou, Burkina Faso
We hold an 80% beneficial interest in the Goulagou and adjoining Rounga gold
properties, which were acquired as part of the St. Jude acquisition in late
2005. Together the two contiguous properties cover approximately 691 square
kilometers and are located approximately 100 kilometers west of Ouagadougou, the
capital city of Burkina Faso, and 20 kilometers north of the city of Ouahigouya.
Drilling program carried out by St. Jude and their predecessors identified
several areas of gold enrichment including two parallel gold mineralized zones
on the Goulagou property.
Deba and Tialkam Projects, Niger
The Deba and Tialkam properties are gold exploration properties in Niger
acquired as part of the St. Jude acquisition in late 2005. Through our
subsidiary, St. Jude, we hold a 100% interest in the two exploration permits,
subject to the 10% interest of the Government of Niger. St. Jude obtained
certain data from exploration carried out by previous owners and initiated a new
drilling program in late 2005. The first phase results of the drilling program
are being evaluated.
47
Mininko, Mali
In early 2005, a review of 2004 drill results at Mininko indicated a limited
potential for this project. We withdrew from the joint venture in the first
quarter of 2005 and wrote off all of the $1.1 million of costs incurred in the
project.
EXPLORATION STAGE PROPERTIES IN SOUTH AMERICA
Saramacca Property
The Saramacca project is located in Suriname and is owned 100% by Golden Star.
Two successive soil auger sampling programs completed in 2003-04 evaluated a
series of stream sediment gold anomalies and defined a 5 kilometer long soil
anomaly forming a series of en-echelon zones. Deep augering in 2004 further
confirmed the anomaly now termed `Anomaly M'.
Shallow diamond core drilling comprising 24 holes for a total of 1,315 meters
commenced at Anomaly M in March 2005. This work was undertaken with a
lightweight man-portable drill rig due to the rugged terrain, limiting hole
depths to less than 100 meters. Mineralization intersected within drill cores
consisted of variably sheared silicified pyritic metasediments of tuffaceous
origin and volcanic conglomerates, often with little or no quartz veining.
Significant gold assays were also intersected within the upper 5 to 10 meters of
enriched lateritic duricrust and mottled saprolite. Based on the encouraging
results from the 2005 work, we plan to follow up with a second phase of deeper
core drilling and a program of mechanized trenching in an attempt to elucidate
the structure of the host rocks beneath the duricrust capping. A budget of $1
million has been earmarked for this work in 2006, but we are also investigating
joint venture possibilities for the property.
Bon Espoir Property
The Bon Espoir property is located in French Guiana and is owned 100% by Golden
Star. It covers a sheared "belt-basin" volcanic-sediment contact zone analogous
to those we are exploring in similar aged (lower Proterozoic) terrains in Ghana.
During 2005, we conducted a regional soil sampling along much of the 40
kilometer long sediment-volcanic contact shear zone that hosts the Wayamaga
prospect drilled by previous owners of the Bon Espoir permit. This soil sampling
program was completed during July, with some 32.2 kilometers of baseline and 120
kilometers of cross lines cut, and soil sampling completed on 26 cross lines
spaced 1600 meters apart on 100 meter centers. As expected, the assay results
identified coherent zones of anomalous low grade zones of gold and arsenic along
the main Wayamaga structural break; however the tenor of the anomalism was not
strong enough to warrant immediate follow-up. It is planned to reduce the Bon
Espoir permit area to cover the best of these anomalies while regional
extensions of the Wayamaga structure are investigated.
Paul Isnard
The Paul Isnard project is located in the western part of French Guiana, some
200 km west of Cayenne. The project covers rocks of the Lower Proterozoic
Paramacca Formation which contain gold mineralization in the form of pyritic
disseminated zones or stringer zones and sulfide-rich shear zones, which can be
reasonably correlated between the current widely spaced (200 meter) drill
sections.
An inferred mineral resource of 8.2 million tonnes grading 1.78g/t has been
identified at Montagne d'Or on the southern boundary of the Paul Isnard
concession. Further work is warranted to identify additional sources of hard
rock mineralization, which together with the mineral resource at Montagne d'Or
could support a future mining operation. In 2005, we reviewed the historical
work on the property and as a result in early 2006 reduced the area of the
permit to 140 km(2) covering only the most prospective areas.
Benzdorp
The 72 km(2) Benzdorp South gold project is located along the eastern border of
Suriname, approximately 220 km southeast of Paramaribo. The Benzdorp mining
district is underlain by the Lower Proterozoic Paramacca greenstone and a felsic
intrusive assemblage. Recorded and estimated alluvial gold production from
historical dredging and present-day small-scale alluvial mining is in excess of
600,000 ounces. Exploration to date by Golden Star has identified several zones
of bedrock mineralization but none of these are regarded as being economically
viable at current gold prices. In early 2006 a third party was conducting due
diligence on the property as a prelude to acquiring it from Golden Star.
48
Minera IRL
Minera IRL is a private, junior exploration company active in Peru and Chile in
which we hold an approximate 19% interest through our shareholding in Goldmin
Consolidated Holdings. Minera IRL has developed a portfolio of exploration
projects, the most advanced of which, Corihuarmi in Peru, was drilled in 2003
with encouraging results. Corihuarmi, located 250 km east of Lima near Huancayo,
consists of an extensive high sulfidation epithermal system with gold
mineralization hosted in massive/vuggy silica and alunite zones. The focus of
Minera IRL's exploration has been two massive siliceous outcrops known as Susan
and Diana, which crop-out boldly above the surrounding softer argillically
altered volcanic rocks. It is thought that the better-grade oxide gold
mineralization at Susan and Diana is structurally controlled within silicified
crackle breccia zones where they are cut by feeder structures. Several similar
zones have been identified and additional drilling was completed in 2005 to
expand the size of the current gold resource in readiness for a full feasibility
study in 2006.
Other earlier-stage projects being investigated by Minera IRL include: 1)
Frontera, located in northern Chile, 90 km northeast from the seaport of Arica,
and just across the Peruvian border from Minsur's Checocollo project, which has
been intensively drilled over the last 12 months, 2) Cushuro in the La Libertad
district of northern Peru, and 3) the Chama prospect near Abancay. Minera IRL is
actively assessing other properties throughout the Andean cordillera.
Other Areas
In addition to the project work discussed above we have undertaken several
regional reconnaissance initiatives using both our own staff and contract
geologists in Ghana, Cote d'Ivoire, Mauritania, Brazil, Argentina and Bolivia,
spending approximately $0.9 million in 2005 for such activities. We have also
held discussions with other companies to identify opportunities for joint
venture exploration efforts in several areas, including the Guiana Shield.
ITEM 3. LEGAL PROCEEDINGS
Prestea Gold Resources Limited ("PGR"), our joint venture partner in the Prestea
Underground, entered receivership in March 2003. The joint venture agreement
between BGL and PGR specified that if either party to the joint venture were to
go into receivership any remaining interest held in the partnership by the
insolvent partner would immediately vest with the solvent partner. While PGR's
official liquidator affirmed that the vesting of this interest in BGL was proper
under the terms of the joint venture agreement, the transfer and vesting of
PGR's ownership was challenged in an action brought before the High Court in
Accra, Ghana against the official liquidator by Merchant Bank (Ghana) Ltd, in
its capacity as a judgment creditor of PGR. The action was commenced on February
28, 2005 and sought an order of the court to compel the official liquidator to
take control of PGR's residual interest in the joint venture and to have the
interest valued with the ultimate goal of making proceeds available for
distribution among all the creditors of PGR.
The judgment creditor's claim was based on the assertion that the vesting of the
residual interest in BGL under the joint venture agreement was either illegal
and void and/or that such vesting should necessarily go with the assumption by
BGL of all PGR's obligations owed to third parties, including those unrelated to
the joint venture.
In June 2005, the High Court issued a preliminary finding in favor of the
Merchant Bank (Ghana) Ltd. While the ruling transferred PGR's ownership position
to the liquidator, it did not require BGL to assume any of PGR's obligations.
Nevertheless, by September 30, 2005, continued project spending by BGL had
diluted PGR's original ownership position to less than 10%. Under the terms of
the joint venture agreement, if either partner allows itself to be diluted to
10% or less, that partner's residual interest would immediately convert into a
2.5% net profit interest in potential future earnings from the Prestea
Underground mine. While the court's ruling has effectively given the 2.5% net
profits interest to the bankruptcy trustee, the trustee still must establish the
fair value of the interest and then find a buyer. At a bankruptcy hearing in
December 2005, none of the creditors were willing to fund a valuation study.
We are also engaged in routine litigation incidental to our business none of
which is deemed to be material. No material legal proceedings, involving us or
our business are pending, or, to our knowledge, contemplated, by any
governmental authority. We are not aware of any material events of noncompliance
with environmental laws and regulations.
49
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2005.
50
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common shares trade on the Toronto Stock Exchange ("TSX") under the trading
symbol "GSC" and on the American Stock Exchange under the symbol "GSS." As of
March 27, 2006, 207,265,758 common shares were outstanding and we had 966
shareholders of record. On March 27, 2006, the closing price per share for our
common shares as reported by the TSX was Cdn $3.96 and as reported by the
American Stock Exchange was $3.42.
The following table sets forth, for the periods indicated, the high and low
market closing prices per share of our common shares as reported by the TSX and
the American Stock Exchange:
Toronto Stock Exchange American Stock Exchange
Cdn$ Cdn$ $ $
2005 High Low High Low
-------------------- -------------------- ------------------- ---------------------
First Quarter 4.94 3.15 4.04 2.58
Second Quarter 4.02 3.01 3.23 2.35
Third Quarter 4.33 3.40 3.73 2.84
Fourth Quarter 3.78 2.54 3.32 2.12
Toronto Stock Exchange American Stock Exchange
Cdn$ Cdn$ $ $
2004 High Low High Low
-------------------- -------------------- ------------------- ---------------------
First Quarter 9.43 7.00 7.25 5.29
Second Quarter 9.20 5.90 7.07 4.27
Third Quarter 6.73 4.91 5.27 3.71
Fourth Quarter 7.10 4.32 5.61 3.50
We have not declared or paid cash dividends on our common shares since our
inception and we expect for the foreseeable future to retain all of our earnings
from operations for use in expanding and developing our business. Future
dividend decisions will consider then current business results, cash
requirements and our financial condition.
RECENT SALE OF UNREGISTERED SECURITIES
In the Arrangement with St. Jude in which we acquired 100% of the issued and
outstanding common shares and other securities of St Jude, we issued a total of
31,377,588 Golden Star common shares in exchange for St. Jude common shares and
issued Golden Star options and warrants exercisable for an additional 5,773,176
Golden Star common shares in exchange for St. Jude options and warrants. The
common shares were issued pursuant to Section 3(a)(10) under the Securities Act.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following summarizes the principal Canadian federal income tax
considerations applicable to the holding and disposition of our common shares by
a holder of one or more common shares, who for Canadian income tax purposes is
resident in the United States of America and holds the common shares as capital
property. This summary is based on the current provisions of the Canada-United
States Income Tax Convention (1980) (the "Treaty"), Income Tax Act (Canada) (the
"Tax Act"), the regulations there under and all amendments to the Tax Act
publicly proposed by the Government of Canada to the date hereof. It is assumed
that each such amendment will be enacted as proposed and there is no other
relevant change in any governing law, although no assurance can be given in
these respects. Limited liability corporations created under the limited
liability company legislation of certain U.S. states and treated as a
partnership or disregarded entity under US tax law cannot access any of the
benefits of the Treaty as described in the paragraphs below.
51
Dividends paid or credited by us to a holder of one or more common shares will
be subject to Canadian non-resident withholding tax at the rate of 25%. Under
the Treaty, the rate of withholding tax is reduced to 5% of the gross amount of
the dividend where the holder is a company that owns at least 10% of the
company's voting stock and beneficially owns the dividend, and 15% in any other
case.
Under the Tax Act, a holder will not be subject to Canadian tax on any capital
gain realized on an actual or deemed disposition of a common share, including a
deemed disposition at death, provided that he did not hold the common share as
capital property used in carrying on a business in Canada, and that neither he
nor persons with whom he did not deal at arm's length, alone or together, owned
(or have an option or interest in) 25% or more of the issued shares of any class
of our stock at any time in the 60 month period immediately preceding the
disposition.
A holder who is liable under the Tax Act for Canadian tax in respect of a
capital gain realized on an actual or deemed disposition of a common share could
be relieved under the Treaty from such liability unless:
(a) the common share formed part of the business property of a
permanent establishment or fixed base in Canada that the holder
has or had within the twelve-month period preceding the
disposition; or
(b) the holder was an individual; and
(i) was resident in Canada for 120 months during any period of
20 consecutive years preceding the disposition; and
(ii) was resident in Canada at any time during the ten years
immediately preceding the disposition; and
(iii) owned the common share when he ceased to be a resident of
Canada.
To the extent that no Treaty relief is available, generally, one-half of any
capital gain realized by a holder in a taxation year must be included in the
income of the holder for the year, and one-half of any capital loss realized by
a holder in a taxation year must be deducted from taxable capital gains realized
by the holder in that year. Capital losses for a taxation year in excess of
taxable capital gains for that year generally may be carried back and deducted
in any of the three preceding taxation years or carried forward and deducted in
any subsequent taxation year against net taxable capital gains realized in such
years. A holder is required to file a Canadian income tax return if such holder
disposes of a common share and the gain or loss is subject to tax in Canada,
based on the application of the rules outlined in the above paragraphs, even
where the Treaty applies to relieve the Canadian tax liability.
This summary is of a general nature and is not intended, nor should it be
construed, to be legal or tax advice to any particular shareholder. SHAREHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE INCOME AND OTHER TAX
CONSEQUENCES ARISING IN THEIR PARTICULAR CIRCUMSTANCES.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Potential investors that are US taxpayers should consider that we could be
considered to be a "passive foreign investment company" ("PFIC") for federal
income tax purposes. Although we believe that we currently are not a PFIC and do
not expect to become a PFIC in the near future, the tests for determining PFIC
status are dependent upon a number of factors, some of which are beyond our
control, and we can not assure you that we would not become a PFIC in the
future. If we were deemed to be a PFIC, then a US taxpayer who disposes or is
deemed to dispose of our shares at a gain, or who received a so-called "excess
distribution" on the shares, generally would be required to treat such gain or
excess distribution as ordinary income and pay an interest charge on a portion
of the gain or distribution unless the taxpayer makes a timely qualified
electing fund election (a "QEF" election). A US taxpayer who makes a QEF
election generally must report on a current basis his or her share of any of our
ordinary earnings and net capital gain for any taxable year in which we are a
PFIC, whether or not we distribute those earnings. Special estate tax rules
could be applicable to our shares if we are classified as a PFIC for income tax
purposes.
52
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from our audited
consolidated financial statements for the years ended December 31, 2005, 2004,
2003, 2002 and 2001, and should be read in conjunction with those financial
statements and the notes thereto. The consolidated financial statements have
been prepared in accordance with Canadian GAAP. Selected financial data derived
in accordance with US GAAP has also been provided and should be read in
conjunction with Note 28 to the financial statements. Reference should also be
made to "Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Summary of Financial Condition
(Amounts in thousands except per share data)
Canadian GAAP As of Dec. As of Dec. As of Dec. As of Dec. As of Dec.
31, 2005 31, 2004 31, 2003 31, 2002 31, 2001
-----------------------------------------------------------------------------------------
Working capital $91,974 $61,366 $96,784 $21,963 $(5,149)
Current assets 132,789 78,846 104,935 32,843 9,636
Total assets 564,603 252,160 222,391 74,135 36,552
Current liabilities 40,815 17,480 8,151 10,880 14,785
Long-term liabilities 124,919 10,367 8,402 8,973 7,765
Shareholder's equity 392,240 217,960 198,362 49,384 12,342
-----------------------------------------------------------------------------------------
Canadian GAAP For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------
Revenues $95,465 $65,029 $64,370 $38,802 $24,658
Net income/(loss) (13,531) 2,642 21,956 4,856 (20,584)
Net income/(loss) per share -
basic (0.094) 0.019 0.198 0.067 (0.488)
-----------------------------------------------------------------------------------------
US GAAP As of Dec. As of Dec. As of Dec. As of Dec. As of Dec.
31, 2005 31, 2004 31, 2003 31, 2002 31, 2001
-----------------------------------------------------------------------------------------
Working capital $91,974 $61,366 $96,784 $22,262 $(5,149)
Current assets 132,789 78,846 104,935 33,391 9,636
Total assets 522,443 219,972 200,337 62,644 24,232
Current liabilities 40,815 17,480 8,151 10,880 14,785
Long-term liabilities 127,253 10,367 8,402 8,973 7,818
Shareholder's equity 352,411 188,226 180,417 41,069 1,533
-----------------------------------------------------------------------------------------
US GAAP For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------
Revenues $102,237 $65,029 $64,370 $38,802 $24,658
Net income/(loss) (28,948) (9,146) 13,357 6,752 (5,352)
Net income/(loss) per share -
basic (0.202) (0.066) 0.120 0.093 (0.126)
-----------------------------------------------------------------------------------------
53
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements and related notes. The financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada ("Cdn GAAP"). For a reconciliation to accounting principles
generally accepted in the United States ("US GAAP"), see Note 28 to the
consolidated financial statements. This Management's Discussion and Analysis of
Financial Condition and Results of Operations includes information available to
March 27, 2006.
In this Form 10-K, we use the terms "total operating cost per ounce," "total
cash cost per ounce" and "cash operating cost per ounce."
Total operating cost per ounce for a period is equal to "Total mine operating
costs" for the period, as found on our consolidated statements of operations
divided by the ounces of gold sold in the period. Total mine operating costs
include all mine-site operating costs, including the costs of mining,
processing, maintenance, work in process inventory changes, mine-site overhead,
production taxes and royalties, mine site depreciation, depletion, amortization,
asset retirement obligations and by-product credits, but do not include
exploration costs, corporate general and administrative expenses, impairment
charges, corporate business development costs, gains and losses on asset sales,
interest expense, mark-to-market gains and losses on derivatives, foreign
currency gains and losses, gains and losses on investments and income tax.
Total cash cost per ounce for a period is equal to "Mining operations" costs for
the period, as found on our consolidated statements of operations divided by the
number of ounces of gold sold during the period.
Cash operating cost per ounce for a period is equal to "total cash costs" for
the period less production royalties and production taxes, divided by the number
of ounces of gold sold during the period.
The calculations of total cash cost per ounce and cash operating cost per ounce
are in compliance with an industry standard for such measures established in
1996 by the Gold Institute, a non-profit industry group.
The following table shows the derivation of these measures and a reconciliation
of "total cash cost per ounce" and "cash operating cost per ounce."
Derivation of Total Mine Operating Cost 2005
--------------------------------------------------
Wassa (1) Bogoso/Prestea Total
---------------------------------------------------------------------------------------------------
Mining operations $33,277 $46,322 $79,599
---------------------------------------------------------------------------------------------------
Mining related depreciation, depletion &
amortization 7,105 8,878 15,983
---------------------------------------------------------------------------------------------------
Accretion of asset retirement obligations 190 562 752
---------------------------------------------------------------------------------------------------
Total mine operating costs $40,572 $55,762 $96,334
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Ounces sold 69,070 131,898 200,968
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Derivation of Costs per Ounce:
---------------------------------------------------------------------------------------------------
Total operating cost per ounce - GAAP ($/oz) 587 423 479
---------------------------------------------------------------------------------------------------
Less depreciation, depletion & amortization
($/oz) 103 67 80
---------------------------------------------------------------------------------------------------
Less accretion of asset retirement obligation
($/oz) 3 4 4
---------------------------------------------------------------------------------------------------
Total cash cost ($/oz) 482 351 396
---------------------------------------------------------------------------------------------------
Less royalties and production taxes ($/oz) 14 13 13
---------------------------------------------------------------------------------------------------
Cash operating cost ($/oz) 468 338 383
---------------------------------------------------------------------------------------------------
(1) The Wassa mine was placed in service on April 1, 2005 and thus includes
only nine months of operational data to December 31, 2005.
54
Derivation of Total Mine Operating Cost 2004
--------------------------------------------------
Wassa Bogoso/Prestea Total
---------------------------------------------------------------------------------------------------
Mining operations $- $39,095 $39,095
---------------------------------------------------------------------------------------------------
Mining related depreciation, depletion &
amortization - 8,096 8,096
---------------------------------------------------------------------------------------------------
Accretion of asset retirement obligations - 645 645
---------------------------------------------------------------------------------------------------
Total mine operating costs $- $47,836 $47,836
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Ounces sold - 147,875 147,875
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Derivation of Costs per Ounce:
---------------------------------------------------------------------------------------------------
Total operating cost per ounce - GAAP ($/oz) - 323 323
---------------------------------------------------------------------------------------------------
Less depreciation, depletion & amortization
($/oz) - 55 55
---------------------------------------------------------------------------------------------------
Less accretion of asset retirement obligation
($/oz) - 4 4
---------------------------------------------------------------------------------------------------
Total cash cost ($/oz) - 264 264
---------------------------------------------------------------------------------------------------
Less royalties and production taxes ($/oz) - 14 14
---------------------------------------------------------------------------------------------------
Cash operating cost ($/oz) - 250 250
---------------------------------------------------------------------------------------------------
(1) The Wassa mine did not commence commercial production until April 2005.
We use total cash cost per ounce and cash operating cost per ounce as key
operating indicators. We monitor these measures monthly, comparing each month's
values to prior period's values to detect trends that may indicate increases or
decreases in operating efficiencies. These measures are also compared against
budget to alert management to trends that may cause actual results to deviate
from planned operational results. We provide these measures to our investors to
allow them to also monitor operational efficiencies of our mines. We calculate
these measures for both individual operating units and on a consolidated basis.
Total cash cost per ounce and cash operating cost per ounce should be considered
as non-GAAP financial measures as defined in SEC Regulation S-K Item 10 and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with GAAP. There are material limitations
associated with the use of such non-GAAP measures. Since these measures do not
incorporate revenues, changes in working capital and non-operating cash costs,
they are not necessarily indicative of operating profit or cash flow from
operations as determined under GAAP. Changes in numerous factors including, but
not limited to, mining rates, milling rates, gold grade, gold recovery, and the
costs of labor, consumables and mine site general and administrative activities
can cause these measures to increase or decrease. We believe that these measures
are the same as, or similar to the measures of other gold mining companies, but
may not be comparable to similarly titled measures in every instance.
All figures and amounts in this Item 2 are shown on a 100% basis, which
represents our current beneficial interest in gold production and revenues. Once
all capital has been repaid, the Government of Ghana would receive 10% of the
dividends distributed from the subsidiaries owning the Bogoso/Prestea and Wassa
mines.
OUR BUSINESS
Through our subsidiaries and joint ventures we own a controlling interest in
four significant gold properties in southern Ghana in West Africa: the
Bogoso/Prestea property, which comprises the adjoining Bogoso and Prestea mining
leases ("Bogoso/Prestea"), the Wassa property ("Wassa"), the Prestea Underground
property ("Prestea Underground") and the St. Jude Properties.
Bogoso/Prestea is owned by our 90% owned subsidiary Bogoso Gold Limited ("BGL").
All of our gold production prior to April 2005 came from Bogoso/Prestea.
Bogoso/Prestea produced and sold 131,898 ounces of gold during 2005.
Through another 90% owned subsidiary, Wexford Goldfields Limited ("WGL"), we own
the Wassa gold mine located some 35 kilometers east of Bogoso/Prestea.
Construction and commissioning of Wassa's new processing plant and open pit mine
was completed at the end of March 2005 and the project was placed in service on
April 1, 2005. Wassa produced and sold 69,070 ounces of gold in 2005 following
its April 2005 in-service date.
The Prestea Underground is located on the Prestea property and consists of a
currently inactive underground gold mine and associated support facilities. BGL
owns a 90% operating interest in the Prestea Underground. We are currently
conducting exploration and engineering studies to determine if the underground
mine can be reactivated on a profitable basis.
55
Through our 100% owned subsidiary, St. Jude Resources Ltd. ("St. Jude"), we own
the St. Jude Properties in southwest Ghana. The St. Jude Properties consist of
the Hwini-Butre and Benso concessions which together cover an area of 201 square
kilometers. Both concessions contain undeveloped zones of gold mineralization.
These two concessions are located between 40 and 85 kilometers south of Wassa.
The mineralized zones have been delineated through the efforts of the prior
owner who conducted extensive exploration work from the mid-1990s to 2005.
We hold interests in several gold exploration projects in Ghana and elsewhere in
Africa including Sierra Leone, Ghana, Burkina Faso, Niger and Cote d'Ivoire. We
also hold and manage exploration properties in Suriname and French Guiana. We
hold indirect interests in gold exploration properties in Peru and Chile through
a 19% shareholding investment in Goldmin Consolidated Holdings. We also own a
53% interest in EURO Ressources S.A., ("EURO") a French registered,
publicly-traded royalty holding company (formerly known as Guyanor Ressources
S.A.) which owns a royalty interest based on gold production at Cambior Inc.'s
Rosebel gold mine in Suriname.
Our corporate headquarters is located in Littleton, Colorado. Our accounting
records are kept in compliance with Canadian GAAP and all of our operations,
except for certain exploration projects, transact business in US dollars and
keep financial records in US dollars.
BUSINESS STRATEGY AND DEVELOPMENT
Since 1999 our business and development strategy has been focused primarily on
the acquisition of producing and development stage gold properties in Ghana and
on the exploration, development and operation of these properties. Since 1999
our exploration efforts have been focused on Ghana, other West African countries
and South America.
In line with our business strategy we acquired Bogoso in 1999 and have operated
the Bogoso processing plant since that time. In 2001 we acquired Prestea and
have been mining at Prestea since late 2001. In late 2002 we acquired Wassa and
following completion of a feasibility study, constructed a new CIL processing
plant at Wassa which began commercial operation in April 2005. We are currently
constructing a new processing plant at Bogoso designed to expand production at
Bogoso/Prestea from approximately 130,000 ounces (in 2005) to approximately
370,000 ounces in 2007. Based on currently known reserves we expect a mine life
of approximately seven years at Bogoso/Prestea. Achievement of this target is
subject to numerous risks. See the discussion of Risk Factors in Item 1A above.
In late 2005, we acquired the St. Jude Properties where we plan to carry out
geological and engineering studies during 2006 to determine the economic
viability of these undeveloped gold properties.
Our overall objective since 1999 has been to grow our business to become a
mid-tier gold producer (which we understand to be a producer with annual
production of approximately 500,000 ounces). With the benefit of a full year's
production from the Bogoso expansion project in 2007, we now anticipate reaching
this goal in 2007. We continue to actively investigate potential acquisition and
merger candidates which could further increase our annual gold production,
however we presently have no agreement or understanding with respect to any
specific potential transaction.
SIGNIFICANT TRENDS AND EVENTS DURING 2005
Quarterly Restatement for 2005 and Mark-to-Market Reporting
In the first quarter of 2005, EURO implemented hedge accounting for its forward
gold pricing derivatives established in January. EURO also used hedge accounting
for additional derivatives acquired in August 2005. In completing our audited
consolidated financial statements for 2005, it was concluded that EURO's forward
gold pricing derivatives did not qualify for hedge accounting under Cdn GAAP,
AcG-13, "Hedging Relationships". As a result, EURO will restate its unaudited
financial statements and we will restate our unaudited consolidated financial
statements for the first three quarters of 2005. EURO and Golden Star will now
be required to recognize mark-to-market valuations of EURO's forward gold
pricing derivatives through the statements of operations at the end of each
period. During 2005, EURO and Golden Star recognized gains and losses from the
forward gold pricing derivatives in the statements of operations only in the
periods in which they settled. Since EURO is a majority owned subsidiary, the
impact of these changes flows through to Golden Star's consolidated financial
statements in the same amounts and in the same periods as in EURO. The effect of
the change on our first three quarters' results are as shown below:
56
ACCOUNT First Quarter 2005 Second Quarter 2005 Third Quarter 2005
--------------------------------------------------------------------------
( in $ millions, except per share As Reported As Restated As Reported As Restated As Reported As Restated
data)
---------------------------------------------------------------------------------------------------------------
Royalty income $1.1 $1.1 $1.1 $1.0 $1.1 $1.0
Loss on derivative - 1.3 0.5 0.6 0.5 5.5
Provision for future income taxes 0.4 0.1 0.1 - - 1.7
Net loss (1.4) (2.2) (3.6) (3.7) (3.3) (6.7)
Loss per share (basic) (0.01) (0.02) (0.03) (0.03) (0.02) (0.05)
Future tax asset 1.2 1.6 1.1 1.6 1.1 3.3
Loan fees 1.1 0.2 1.6 1.0 1.0 1.0
Fair value of derivatives 1.0 1.3 0.5 1.9 0.6 7.4
Other accrued liabilities 10.3 10.2 13.2 12.7 23.3 22.4
---------------------------------------------------------------------------------------------------------------
Golden Star will issue restated unaudited quarterly reports on Form 10-Q/As for
the first three quarters of 2005, reflecting the impact of these changes.
St. Jude Acquisition
In late December 2005, we completed the acquisition of 100% of the outstanding
shares of St. Jude. Our total cost to acquire St. Jude was $112.8 million. This
includes issuance of 31.4 million of our common shares at a price of $3.45 each,
3.3 million warrants with an aggregate fair value of $1.0 million and 2.5
million options at an aggregate fair value of $1.6 million and $1.9 million of
transaction costs. The transaction resulted in St. Jude shareholders holding
approximately 19% of Golden Star on a fully diluted basis at the date of the
acquisition.
St. Jude's principal assets are the Hwini-Butre and Benso gold projects at the
southeastern end of the Ashanti gold belt region in Ghana. Based on our analysis
of St. Jude's past exploration work, we reported in February 2006 measured and
indicated Mineral Resources of 2.7 million tonnes at an average grade of 5.3
grams per tonne at Hwini-Butre and 2.6 million tonnes at an average grade of
3.77 grams per tonne at Benso. In addition, St. Jude has other exploration
projects in Ghana, Burkina Faso and Niger.
Equity Financing
On December 30, 2005, we closed a bought deal equity offering of approximately
31.59 million common shares at Cdn$2.80 ($2.40) per common share and realized
gross proceeds of approximately Cdn$88.5 million ($75.8 million). The net
proceeds of the offering are being used to fund the development of the Bogoso
sulfide expansion project and for general corporate purposes.
Wassa Start-Up
Following the completion of construction and commissioning in the first quarter
of 2005, the Wassa mine was placed in service on April 1, 2005. Wassa has since
processed 2.7 million tonnes of ore at an average rate of 9,789 tonne per day
and an average grade of 0.91 grams per tonne, and has shipped and sold 69,070
ounces of gold.
Sale of Convertible Notes
On April 15, 2005 we sold $50 million of senior unsecured convertible notes (the
"Notes") maturing on April 15, 2009, to a private investment fund. The Notes
were issued at par and bear interest at 6.85%. The Notes are convertible to
common shares at a fixed conversion price of $4.50 per share, a 48% premium to
the closing price of the common shares on April 5, 2005. Proceeds from the sale
of the Notes are being used for the Bogoso sulfide expansion project and for
general corporate purposes.
Put and Call Options
We purchased gold put options ("puts") during 2005 to provide down-side gold
price protection for a portion of our expected gold sales spread equally over
the Bogoso sulfide expansion project construction period. This action reduced
the risk of reduced cash flow from operations during the construction period
that would otherwise have occurred as a result of a drop in gold prices. We sold
call options ("calls") to offset the cost of a portion of the puts.
57
Each put gives us the right, but not the obligation, to sell an ounce of gold to
a counter party on a specified future date at a contractually agreed upon strike
price. Each put has a specified expiry date. The strike price of the put is set
at a point below the spot market price on the date the put is established. The
closer the put strike price is to the spot market price, the higher the cost of
the put. We paid an average of $7.10 per ounce for the puts purchased in the
second quarter of 2005 locking in an average strike price of $409.75 per ounce
when the spot market price was between $427 and $429 per ounce.
A put, in effect, becomes an insurance policy that guarantees us a minimum gold
price on ounces covered by the puts. Through our puts we have guaranteed that we
will receive at least $409.75 per ounce for 140,000 ounces to be sold during
2006 and early 2007. If, on the expiry date, the spot market price is above the
put strike price we will allow the put to expire unused. We are not required to
deliver gold to cover a put.
Each call obligates us to sell an ounce of gold at a specified future date to a
counter party at a contractually agreed upon price. If the spot market gold
price exceeds the call strike price we will receive only the lower call strike
price on ounces covered by the calls. We sell calls to and receive payment from
a counterparty. If the counterparty declines to exercise the call on its expiry
date (i.e. the spot market price of gold is below the calls strike price) the
calls expire unused with no additional financial impact.
In the third quarter of 2005, we bought an additional 90,000 puts and at the
same time sold 90,000 calls. The strike prices of the calls and the puts were
set so that the revenue on the sale of the calls exactly offsets the cost of the
puts, and thus no cash was required for the transactions. The strike price of
the puts was set at $400 per ounce and the calls at $525 per ounce. At the time
that these puts and calls were acquired the spot price of gold was between $424
and $440 per ounce.
Puts acquired in the second quarter of 2005 and outstanding at December 31, 2005
expire as follows: 90,000 in 2006 and 22,500 in 2007. Puts and calls acquired in
the third quarter of 2005 expire at a rate of 5,000 per month between October
2005 and March 2007. In December 2005 we repurchased calls on 15,000 ounces at
an average price of $4.13 per covered ounce. The repurchased calls were for
December 2005 and January and February 2006.
Derivative accounting rules require that at the end of each period, the
remaining unexpired puts and calls be revalued to their mark-to-market fair
value (the price at which we could sell the puts or the price at which we could
buy back the call options). The initial mark-to-market value of the puts was
equal to the price we paid for them. The mark-to-market values at December 31,
2005 decreased because gold prices rose after we bought the puts thereby making
it less likely that the floor price established by the puts would provide a
future benefit. The $0.9 million decrease in the mark-to-market value of the
puts as of December 31, 2005, has been recorded in our Consolidated Statement of
Operations. The remaining fair value of the puts at December 31, 2005 was $0.1
million.
If the gold price were to fall in the future, the mark-to-market value of the
puts would increase since it would be more likely that the floor price mechanism
in the puts would provide an economic benefit. In such a case we would recognize
a gain equal to the increase in the mark-to-market value of the puts.
The value of the call options is also marked to market each period in a manner
similar to the put options. The only difference is that the mark-to-market value
would be based on the price we would have to pay to the counter party to buy
back the call options. As gold prices increase, the value of calls increase. The
fair value of calls (the price we would have to pay to buy back the calls) was
$2.3 million as of December 31, 2005 and we recognized a non-cash expense of
this amount in our Consolidated Statement of Operations for the increase in the
buy-back cost. It is noted that the mark-to-market fair value will be brought
back into revenue in the statement of operations over the next 15 months.
Rand and Euro Forwards
During 2005 we established forward contracts for South African Rand and for
Euros. We took this action to limit the potential impact of unfavorable foreign
currency fluctuations on the cost of equipment and services we expect to acquire
from South African and European vendors during the construction phase of the
Bogoso sulfide expansion project.
At December 31, 2005 we held forward positions that allow us to buy 122.1
million South African Rand at an average exchange rate of 6.801 Rand per the
dollar. All of these Rand forward positions as of December 31, 2005 expire in
2006. The fair value of the Rand positions at December 31, 2005 was $1.1 million
more than we paid for them. This gain helped to offset the fair value loss on
58
the puts and calls. We also held at December 31, 2005 forward positions that
allow us to buy 2.5 million Euros at an average exchange rate of 0.8009 Euros
per the dollar. At the end of December the fair value our Euro positions had
dropped resulting in a $0.2 million loss. All of these Euro forwards expire in
the first five months of 2006.
Acquisition of the Afema Property
In March 2005 we entered into an agreement allowing us to acquire a 90% interest
in the Afema gold property in south east Cote d'Ivoire from Societe d'Etat pour
le Developpement Minier de la Cote d'Ivoire. The Government of Cote d'Ivoire
retains a 10% interest in this property. The Afema property covers an area of
2,012 square kilometers of the Sefwi Belt meta-volcanics and the Kumasi Basin
meta-sedimentary rocks which extend into the Cote d'Ivoire. In Ghana, this
`belt-basin' contact hosts the multi-million ounce Chirano and Bibiani gold
deposits. In the 1990s approximately 125,000 ounces of gold were produced from
oxide ores on the Afema property from several small open pits along a 12
kilometer strike-length. (See "Afema - Cote d'Ivoire" discussion above in "Item
2 Description of Properties" for additional information about the acquisition
and activities at Afema during 2005.)
Temporary Mining Suspension at Bogoso/Prestea's Plant-North Pit
The Plant-North pit at Prestea has been developed in stages with the development
of the final stage (Phase 3) commencing in August 2005. Initiation of Phase 3
mining was conditional on a number of mitigation measures identified in the
Environmental Impact Statement. The Ghana Environmental Protection Agency
("EPA") requested suspension of mining of the Plant-North Phase 3 pit on
September 13, 2005 and of the Plant-North pit on September 28, 2005 until
certain outstanding mitigation measures were completed. The mitigation measures
were completed and inspected by the EPA on October 19, 2005. On November 1,
2005, we received approval from the EPA to recommence mining operations at the
Plant-North pit and mining activity was recommenced a few days later following a
series of informational meetings with the Prestea community.
During the mining suspension at Plant-North, processing operations continued at
the Bogoso processing plant using stockpiled ore. Mining and processing
operations at the Wassa mine and construction activities on the Bogoso sulfide
expansion project also continued without interruption.
Environmental Reclamation Bonds
In compliance with Ghana EPA requirements we provided environmental reclamation
bonds during 2005 for both Bogoso/Prestea and Wassa. We bonded $3.0 million to
cover future reclamation obligations at Wassa, with a $2.85 million letter of
credit and $0.15 million of cash which was deposited with the EPA. We have also
bonded $9.0 million to cover future reclamation obligations at Bogoso/Prestea,
with an $8.1 million letter of credit and a $0.9 million cash bond.
EURO Ressources Loans and Derivatives
On January 8, 2005 EURO, a 53% owed subsidiary (formerly named Guyanor
Ressources S.A.), drew down, under a loan agreement, $6.0 million from a
commercial bank and paid the full amount to Golden Star as the first installment
for the purchase of the Rosebel participation right (the "Rosebel Royalty")
which it purchased from Golden Star for $12.0 million (plus contingent future
payments based on production from the Rosebel mine in excess of 2.0 million
ounces) in December 2004. In August 2005, EURO borrowed an additional $3.0
million from the same commercial bank and forwarded the proceeds to Golden Star
leaving an outstanding balance due to Golden Star of $3.0 million (plus the
future payments). As required by the loan agreements, EURO also entered into
cash-settled forward gold pricing agreements with its lender designed to reduce
in part the impact of gold price fluctuations on expected future Rosebel Royalty
revenues it receives from Cambior Inc. EURO is now seeking funding to allow
payment of the final $3.0 million owed to Golden Star. Covenants in the loan
agreements preclude EURO from acquiring any additional debt without the bank's
approval.
The first derivative agreement specifies that beginning April 20, 2005 and every
three months thereafter until July 30, 2007, when the average gold price for the
prior quarter is less than $421 per ounce, the bank will pay to EURO in cash an
amount equal to 5,700 ounces times the difference between the $421 per ounce and
the average gold price for the quarter. In quarters where the average gold price
exceeds $421 per ounce, EURO will pay cash to the bank in an amount equal to
5,700 ounces times the difference between the average gold price and $421 per
ounce. The 5,700 ounces is a notional amount agreed to by EURO and the bank.
Neither EURO nor the bank is required to deliver gold under the agreement. The
net effect of the agreement is that EURO receives royalty revenue on the first
5,700 ounces of gold mined at the Rosebel mine each quarter based on $421 per
ounce gold price regardless of the actual gold price. We expect the Rosebel mine
to produce approximately 80,000 ounces of gold per quarter.
59
As required under the August 2005 loan, EURO entered into another derivative
agreement on 5,700 ounces per quarter from October 30, 2007 to January 29, 2010
at a price of $458.50 per ounce. The second derivative is structured exactly as
the first derivative described above except for the higher agreed sales price.
Gold prices averaged $427, $427, $439 and $484 per ounce during the first,
second, third and fourth quarters of 2005 resulting in EURO making payments to
the bank of $0.04, $0.04, $0.1 and $0.4 million respectively in the four
quarters of 2005. Since quarterly gold prices exceeded $421 per ounce (the
forward sales price per the agreement) EURO's royalty revenues received from
Cambior on the first 5,700 ounces in each quarter of 2005, were higher by the
same amounts, thereby exactly offsetting the payments to the bank.
As required by its loan agreement with the bank, all Rosebel Royalty proceeds
are initially deposited with the bank. Funds are subsequently disbursed to EURO
on an as-needed basis. Excess funds retained by the bank are classified as
restricted cash on the Golden Star consolidated balance sheet.
During 2005, EURO and Golden Star reported their unaudited quarterly financial
results on the assumption that hedge accounting could be used for the
derivatives, but in completing our audited consolidated financial statements for
2005, it was concluded that EURO's forward gold pricing derivatives did not
qualify for hedge accounting under Cdn GAAP, AcG-13, "Hedging Relationships". As
a result, EURO and Golden Star will restate their unaudited financial statements
for the first three quarters of 2005 as discussed above. EURO and Golden Star
will now be required to recognize mark-to-market valuations of EURO's forward
gold pricing derivatives through the statements of operations at the end of each
period. Since EURO is a majority-owned subsidiary, the impact of these changes
flows through to Golden Star's consolidated financial statements in the same
amounts and in the same periods as in EURO.
EURO Private Placement
EURO sold four million of its common shares at (euro)0.20 each in a private
placement in December 2005 raising (euro)0.8 million. EURO also received, as
part of the same transaction, (euro)0.05 million from the sale of 1.0 million
warrants which allow the holder to purchase EURO's common shares at (euro) 0.45
each until December 12, 2007. EURO plans to use the proceeds to augment its
working capital and to pursue new investment opportunities.
Based on the dilutive effect of the private placement on Golden Star's ownership
position and on a zero value in EURO's minority interest account, Golden Star
recognized a $1.0 million gain on the transaction.
Gold Prices
Gold prices have generally trended upward during the last five years, from a low
of just under $260 per ounce in early 2001 to a high above $560 per ounce in
January 2006. Much of the price increase during this period appears to be
related to decreases in the value of the US dollar versus other major foreign
currencies, but in recent quarters prices appear to be responding to additional
influences with a resulting increase in the rate of increase. Our realized gold
price for shipments during 2005 averaged $446 per ounce compared to $410 per
ounce average price received in 2004.
Illegal Mining
There has been a significant increase in illegal gold mining in Ghana over the
past two years which has impacted most of the gold producers in the country
including us. This trend is raising concern about property rights, environmental
degradation, security and safety issues. Many of the major producers, including
Golden Star, have sought government assistance to find peaceful and equitable
resolutions to these problems.
Most of the illegal mining on our properties has taken place at Prestea,
particularly toward the southern end of the Prestea property. Due to security
concerns and our policy of avoiding unnecessary confrontation, we have limited
access to many of the areas on our property where illegal mining is occurring.
As a result we have not been able to update estimates made in the fourth quarter
of 2004 of gold illegally removed from our property. In addition, we have not
been able to carry out a comprehensive survey of the environmental degradation
caused by the illegal miners, but aerial surveys indicate it is extensive and it
includes improper disposal of waste, mercury pollution from the mercury used by
the illegal miners to recover the gold, deforestation and possible acid mine
drainage.
60
In February 2005, Ghana government authorities resolved formally, with the
support of the Chamber of Mines and other stakeholders, that illegal mining
would not be tolerated and accordingly notice was given by the Ghana government
to illegal miners nationwide that they were to cease all illegal mining
operations. In particular, the government singled out illegal miners who are
operating on our Bogoso/Prestea property, and the government announced that they
would undertake measures using government security agencies to remove the
illegal miners if they did not voluntarily depart. The notice given by the Ghana
government has expired.
Separately, the Ghanaian Minister for Lands, Forestry and Mines commenced an
initiative to simplify the process for persons to become legitimate small scale
miners and to identify suitable areas for legitimate small scale mining. Several
areas, which are outside our property holdings, have been designated by the
Ghana Minerals Commission for such purposes. The Ghana government and its
agencies have also carried out educational programs for the illegal miners and
the nearby communities relating to the negative social, health and environmental
impacts of illegal mining. The program also seeks to make illegal miners aware
of the government's small scale mining initiative and educates them on
environmental and safety issues.
We, and most of the other gold mining companies working in Ghana, are working
closely with the Ghana government to reduce tensions in the area and to reduce
the risk of an escalation of the situation and possible injury to people and
damage to property. Unfortunately, the actions proposed by the government have
caused unrest in the community at Prestea resulting in a number of protests and
demonstrations during which violence has occurred and during which illegal
miners have entered our pits where they damaged property and removed ore.
RESULTS OF OPERATIONS
2005 Compared to 2004 - Summary
Summary - We incurred a net loss of $(13.5) million or $(0.094) per share on
revenues of $96.0 million during 2005 versus net income of $2.6 million or
$0.019 per share on revenues of $65.0 million during 2004. While gold revenues
in 2005 were $29.0 million higher than in 2004, due mostly to production from
our new Wassa mine and from higher realized gold prices, operating costs were
$48.5 million higher, also due mostly to costs from Wassa and increased costs at
Bogoso/Prestea. The major factors contributing to the $16.1 million swing in
operating results include a $9.1 million operating loss at Wassa, a $10.0
million reduction in operating income at Bogoso/Prestea on lower gold production
and higher operating costs and a $9.6 million unrealized, non-cash
mark-to-market adjustment for the EURO derivatives. In addition, a $2.3 million
increase in interest expense and $1.4 million of impairment write offs of
exploration properties were partially offset by a $4.3 million reduction in
corporate development costs, a $1.7 million increase in royalty income and a
$1.0 million gain from sale of common shares by our subsidiary EURO. Recognition
of a $6.4 million tax asset at EURO, the recognition of a $4.9 million tax asset
related to the 2006 sale of Moto shares and a $1.5 million increase in tax
assets at BGL reduced our net loss by $12.9 million. Realized gold prices
averaged $446 per ounce during 2005, a 9% increase from the $410 per ounce
realized in 2004.
SUMMARY OF FINANCIAL RESULTS 2005 2004 2003
----------------------------------------------------------------------------------------------
Gold sold (oz) 200,968 147,875 174,315
Average price realized ($/oz) 446 410 364
Total revenues (in $ thousands) 95,465 65,029 64,370
Cash flow provided by operations 1,060 13,910 29,076
Net income/(loss) (in $ thousands) (13,531) 2,642 21,956
Net income/(loss) per share - basic ($) (0.094) 0.019 0.198
----------------------------------------------------------------------------------------------
Bogoso/Prestea Operations - Bogoso/Prestea generated $3.3 million of after-tax
operating income during 2005 on sales of 131,898 ounces of gold, down from $13.3
million of after-tax operating income on sales of 147,875 ounces in 2004. The
major factors contributing to 2005's lower earnings were lower gold sales and
increases in operating costs. Gold production was down 15,977 ounces in 2005
versus 2004 due to a combination of lower plant through-put and lower gold
recovery, both of which were caused by the metallurgical characteristics of the
deeper, harder non-refractory sulfide Plant-North ores processed in 2005 versus
the shallower and softer oxide and non-refractory sulfide ores milled in 2004.
The first five months of 2004 benefited from the oxide ores processed in that
period which yield higher mill throughput rates, better recovery and lower
operating costs than did the transition and non-refractory sulfide ores
processed during 2005. Processing of low grade stock pile material in September
and October 2005, during the EPA's requested mining stoppage also contributed to
the decrease in ounces of gold sold.
61
BOGOSO/PRESTEA
------------------------------------------------
OPERATING RESULTS 2005 2004 2003
-------------------------------------------------------------------------------
Ore mined (t) 1,646,276 1,411,243 2,001,905
Waste mined (t) 10,740,550 8,065,915 6,791,926
Ore processed (t) 1,557,881 1,650,412 2,093,600
Grade processed (g/t) 4.14 4.09 3.29
Recovery (%) 60.7 67.3 81.2
Gold sold (oz) 131,898 147,875 174,315
Cash operating cost ($/oz) 338 250 166
Royalties ($/oz) 13 14 18
Total cash cost ($/oz) 351 264 184
-------------------------------------------------------------------------------
Mining costs in 2005 increased $6.2 million at Bogoso/Prestea versus 2004.
Increases in fuel and labor charges accounted for approximately half of the
increase in costs. The balance of the increase was a combination of higher costs
for supplies and consumables including explosives, ore haulage contracts,
drilling supplies, grinding balls, maintenance and tires.
The Bogoso processing plant processed an average of 4,268 tonnes per day at an
average grade of 4.14 grams per tonne, as compared to 4,526 tonnes per day at
4.09 grams per tonne in the same period in 2004. Gold recovery dropped to 60.7%
in 2005 from 67.3% in 2004, the higher recovery in 2004 a function of the oxide
ore processed in the first half of 2004.
The lower gold output and higher mine operating costs resulted in a significant
increase in unit costs. Cash operating costs averaged $338 per ounce in 2005,
compared to $250 per ounce in 2004, and total cash costs averaged $351 per
ounce, up from $264 per ounce in 2004.
Wassa Operations - The Wassa operating results discussed below are for the nine
month period following Wassa's April 1, 2005 in-service date. There was no
production from Wassa in 2003 and 2004.
Wassa generated a $9.1 million after-tax operating loss in the nine months ended
December 31, 2005 on sales of 69,070 ounces of gold. Cash operating costs
averaged $468 per ounce and total cash costs averaged $482 per ounce. The Wassa
processing plant processed an average of 9,789 tonnes per day at an average
grade of 0.91 grams per tonne with a gold recovery of 88.7%.
WASSA
------------------------------------------------
OPERATING RESULTS 2005 2004 2003
-------------------------------------------------------------------------------
Ore mined (t) 2,059,777 - -
Waste mined (t) 7,848,410 - -
Ore processed (t) 2,691,923 - -
Grade processed (g/t) 0.91 - -
Recovery (%) 88.7 - -
Gold sold (oz) 69,070 - -
Cash operating cost ($/oz) 468 - -
Royalties ($/oz) 14 - -
Total cash cost ($/oz) 482 - -
-------------------------------------------------------------------------------
Overall, Wassa's operating results were disappointing. We had anticipated higher
mill through-put, higher grades, and lower operating costs than those achieved.
Operating costs were adversely impacted early in the year by high power costs
from our diesel fired, on-site power plant. This was remedied by late June when
Wassa was connected to the national power grid. Mining costs were also higher
than expected early in the year as we utilized contract miners and used smaller
than optimal, rented mining equipment. By the end of 2005 we had completed the
acquisition of our own fleet of new nominal 100 tonne haulage trucks and
hydraulic loaders. The lower power costs and more efficient mining equipment
should contribute to lower costs during 2006.
62
Several design bottlenecks were discovered at the processing plant during
Wassa's first nine months of operations and certain improvements were made
during the year, but at year end we were still dealing with frequent plant
blockages mostly related to the high clay content of the weathered, near-surface
ores mined and processed in 2005. By the end of 2005 we had mined to sufficient
depth in the pit to access fresher ores which have lower clay content and which
we expect will reduce some of the plant blockage problems in the future. As a
result we expect better mill throughput in 2006. Finally, as we progress deeper
into the fresh ore we expect the ore grades to improve. The higher grades are
also expected to help achieve higher gold recovery rates.
Derivatives - The $12.4 million in unrealized, non-cash mark-to-market losses
were mostly a result of the impact of higher gold prices on EURO's forward gold
price agreements (a loss of before tax of $9.6 million), Golden Star's calls (a
loss of $2.3 million), and puts (a loss of $0.9 million.) Our Euro currency
accounts lost $0.2 million. A $1.1 million mark-to-market gain on the forward
Rand positions partially offset the put, call and EURO losses. EURO also
recognized a $0.5 million reduction in royalty revenues for cash payments made
related to its derivative positions, such payments being related to increases in
gold prices during the year.
Interest - The increase in interest expense is a function of increased balances
on equipment financing loans, EURO's bank loans and interest on the $50 million
of convertible notes sold during 2005. In addition to the interest expense shown
on the consolidated statement of operations, $1.8 million of interest was
capitalized as part of the Bogoso sulfide expansion project.
Other revenues and costs - The operating and non-operating losses and higher
costs were partly offset by a $1.6 million increase in royalty income from the
Rosebel royalty related to higher gold prices and increased output from Cambior
Inc.'s Rosebel mine. The increase in the royalty also reflects the fact that the
Rosebel mine and its associated royalty did not commence production until near
the end of the first quarter in 2004, yielding only a partial year of operations
in 2004. Corporate development charges in 2005 were down from 2004 when we
incurred $4.5 million of expense in an unsuccessful merger attempt.
2004 Compared to 2003
Net income for 2004 totaled $2.6 million or $0.019 per share on revenues of
$65.0 million, versus net income of $22.0 million or $0.198 per share on
revenues of $64.4 million during 2003. Higher gold prices and ore grades in 2004
were more than offset by decreased gold production, higher costs per ounce and
$4.5 million of corporate development expenses mostly related to an unsuccessful
merger attempt. Recognition of future tax assets added $1.5 million to net
income in 2004 versus nil in the prior year.
Realized gold prices averaged $410 per ounce for the year, a 13% increase from
the $364 per ounce realized in 2003. Gold revenues were based on sales of
147,875 ounces, a 15% decrease from 174,315 ounces in 2003. The change in ore
type during 2004 was the major factor contributing to the reduced gold output
versus the prior year. During 2003 we processed exclusively oxide ores while
during most of 2004 we processed harder and more complex transition and
non-refractory sulfide ores which, due to the harder ore and complex metallurgy,
resulted in lower gold recovery and lower plant throughput. We processed a
mixture of oxide, transition and non-refractory sulfide ores in the first half
of 2004 and a mixture of transition and non-refractory ores in the second half
of the year. Gold recovery averaged 73.6% during the first half of 2004 but
dropped to approximately 60.2% in the second half. Plant throughput averaged
5,141 tonnes per day in the first half of the year but decreased to 3,884 tonnes
per day in the second half. Unusually high rainfall also impeded ore
availability and plant efficiency in the third quarter by causing flooding in
the pit and wet ore handling problems at the processing plant.
As anticipated, operating costs increased both in absolute terms and on a per
unit basis at Bogoso/Prestea during 2004 due primarily to the harder nature of
the transition and non-refractory sulfide ores processed after April 2004.
Increases in fuel and electric power costs added approximately $1.5 million to
operating costs during the year. Plant maintenance, explosives, liner costs and
grinding media costs all increased by a total of approximately $1.6 million as
compared to 2003. The harder ore required increased amounts of certain
consumables which increased costs by another $0.7 million. We also experienced
increased costs in other maintenance areas, labor, community assistance, camp
costs and other overhead areas. A reduction in work-in-process inventory and a
$0.7 million provision for redundancies also contributed to the higher costs.
The lower gold output and higher mine operating costs resulted in a significant
increase in unit costs. Cash operating costs averaged $250 per ounce, compared
to $166 per ounce in 2003, and total cash costs averaged $264 per ounce, up from
$184 per ounce in 2003.
63
Depreciation and amortization were higher than in 2003 mostly due to the
amortization costs of new assets added in late 2003 and in 2004 such as the
flotation plant at Bogoso. Increases in corporate general and administrative
costs contributed to the lower income versus 2003. Higher compensation costs
relating to additional administrative personnel relative to 2003, increases in
investor relations costs, higher insurance costs, Sarbanes-Oxley compliance
costs and an overall higher level of corporate activity in response to the
growth of the company all contributed to the increase in general and
administrative costs.
A $1.5 million tax benefit was recorded during 2004. Recognition of a deferred
tax asset was deemed appropriate at the end of 2004 in light of the continued
operating profits at BGL. We have substantial tax assets in Canada and France
mostly due to past losses, capital allowances and tax pools, but a tax valuation
allowance has been provided in an amount equal to net tax assets in these
jurisdictions.
DEVELOPMENT PROJECTS
Bogoso Sulfide Expansion Project
Nearly 75% of the remaining ore reserves at Bogoso/Prestea are refractory and
cannot be processed at our existing plant. We therefore made a decision in June
2005 to construct a new 3.5 million tonne per annum processing facility at
Bogoso alongside the existing non-refractory processing plant. The new plant,
which is currently under construction, will utilize the proprietary BIOX(R)
bio-oxidation technology to treat the refractory sulfide ore. When completed in
late 2006, the new sulfide processing plant and the existing CIL plant are
together expected to process a combined 5.0 million tonnes per year. The
existing CIL mill will retain its current configuration and will continue to
process non-refractory ores during the construction phase of the new BIOX(R)
plant. After the new BIOX(R) plant comes on line, it is anticipated that the
existing Bogoso CIL plant will process mostly oxide ores and the BIOX(R) plant
will process mostly refractory sulfide ores and mixed oxide-refractory ores. The
two plants sitting side-by-side are expected to provide operational efficiencies
since they will share common management, labor, reagent inventories, warehouse
parts and maintenance efforts. And with the two plants and their differing
technologies, we should be able to effectively process all of the ore types
known to exist in the Bogoso/Prestea area.
Construction work is proceeding within schedule and budget. Ordering of long
lead-time items is substantially complete as is the detailed engineering design.
Concrete work is well progressed for all of the equipment. The stainless steel
BIOX(R) reactor tanks have been erected and structural steel erection is
commencing. Erection of the CIL tanks is also nearing completion which will
allow structural steel erection to also commence in this area. The electrical
contractor has mobilized and has commenced work. The crusher and new SAG mill
were shipped to Ghana in March and the ball mill is already on site and mounted
on its pedestal.
The design and construction of the expansion project is being managed by GRD
Minproc on an engineering, procurement and construction management basis. Work
has proceeded under a letter of agreement entered into in February 2005 and a
definitive contract is expected to be finalized shortly.
During the first several years of its life, the new BIOX(R) plant is expected to
process sulfide ores from pits on the Bogoso property. Pre-stripping at two of
these sulfide pits is now underway using new mining equipment acquired since
mid-2005. The non-refractory plant will continue to process non-refractory ores
from the Plant-North pit at Prestea until completion of mining in the fourth
quarter of 2006. Afterward we plan to feed the non-refractory plant with oxide
ores from Pampe, Mampon and various areas on the south end of the Prestea
property.
We estimate that the total capital cost of the new sulfide plant project,
including the expansion of the mining fleet, to be approximately $125 million,
and expect construction to be completed by late 2006. At the end of 2005
approximately $36.7 million of the total had been spent.
In 2007, following completion of the BIOX(R) plant, we expect combined gold
production from the two Bogoso plants to be approximately 370,000 ounces at an
average cash operating cost of $330 per ounce. Based on our metallurgical
testwork, gold recoveries from the BIOX(R) process are expected to average 86%
and vary between 78% and 88%.
Prestea Underground
Underground drilling and sampling continued during 2005 at the Prestea
Underground resulting in an increase in the non-reserve inferred resource of 6.1
million tonnes at an average grade of 8.14 grams per tonne. By the end of 2005
dewatering efforts had provided access to some of the lowest levels of the old
64
workings and new drills were mobilized underground to start work on the deep
levels where ore grade material was being extracted when mining ceased in 2002.
We intend to accelerate the underground drilling, especially at the lower levels
during 2006 and expect to have a much better assessment of the potential of the
underground potential by year-end 2006.
St. Jude Properties
We have budgeted approximately $4.6 million of exploration work during 2006 on
the St. Jude Properties including the evaluation of several previously untested
areas on the St. Jude Properties. If our exploration, testing and studies verify
St. Jude's earlier exploration results we would anticipate releasing Mineral
Reserve numbers for the St. Jude Properties during 2006.
EXPLORATION PROJECTS
Total expenditures on exploration activities in 2005 were $17.1 million, down
slightly from $18.2 million in 2004. During 2006 we plan to continue our
exploration efforts to identify exploration opportunities and new resources in
Africa, South America and elsewhere. The main exploration focus in 2005 was to
increase the level of confidence in our resources and reserves around our
existing mining operations at Bogoso-Prestea and Wassa, and to use our knowledge
of the regional geology of southwest Ghana and adjacent areas to acquire and
explore properties that provide significant synergies with our existing
operations.
Exploration in Ghana
During 2005 our exploration in Ghana focused on converting resources to
reserves, and defining mineralization that could be economically processed
through our existing facilities at Bogoso and Wassa. The Ghana exploration
activities totaled approximately $13.4 million and accounted for approximately
78% of our 2005 exploration spending including:
o Drilling of refractory sulfide mineralization at Chujah and Dumasi at
Bogoso, which converted a substantial proportion of the previously inferred
and indicated resources to reserves. These reserves will underpin the
Bogoso sulfide expansion project currently nearing completion.
o Drilling around the South Akyempim zone at Wassa, which delineated
significant new zones of mineralization at higher grades and provided the
basis for most of the 16% net increase in reserves at Wassa.
o Drilling at Pampe on the Akropong Trend west of Bogoso, which defined a
modest non-refractory resource which potentially can be processed through
the Bogoso oxide circuit commencing in late 2006 and in 2007.
o Drilling at Mampon, which increased the confidence in the reserves there in
preparation for permitting for mining in 2007 and 2008.
Only limited drilling of oxide targets was undertaken during 2005, with the
emphasis on increasing sulfide reserves to support Bogoso sulfide expansion
project.
Exploration Elsewhere in Africa
Exploration continued on our Mano River joint venture in Sierra Leone, with
regional soil sampling programs revealing major new zones of gold anomalism on
the Pampana and Sonfon properties. In 2006 we plan to more closely define these
anomalies with further soil sampling prior to drilling.
In early 2005 we entered into an option to purchase the 2012 square kilometer
Afema property in southeast Cote d'Ivoire. This property lies within extensions
of the prolific Birimian Sefwi Belt, which in Ghana hosts the multi-million
ounce Ahafo, Bibiani and Chirano deposits. Initial exploration has revealed
extensive new gold-in-soil anomalies that will be a focus for further
exploration in 2006.
Following disappointing results from the Mininko joint venture in Mali, this
project was dropped in the first quarter of 2005.
65
Exploration on the Guiana Shield
Due to similarities in the geology and ages of the rocks, we consider the Guiana
Shield in the northeast corner of South America as a geological extension of the
West African shield where our Ghanaian properties are located. Following a
restructuring of our holdings on the Guiana Shield during 2004 we have
revitalized our exploration there, with an emphasis on our properties in
Suriname and French Guiana.
In Suriname we completed a limited diamond core drilling program at Saramacca to
test a previously identified 5 kilometer long gold-in-soil anomaly, termed
Anomaly M. This drilling returned encouraging results from a number of holes,
and in 2006 we plan to follow up the initial relatively shallow drilling with a
second phase of core drilling to test the mineralization at greater depths.
In French Guiana we completed broad-spaced first-pass soil sampling on the Bon
Espoir property, targeting a major mineralized shear zone. Initial results have
not been encouraging but have highlighted the regional potential of the
structure for future work.
2006 Opportunities
We have budgeted $16.5 million for exploration in 2006, and intend to focus our
efforts on core assets in Ghana, including the newly acquired St Jude Properties
at Hwini-Butre and Benso. Key areas where we plan to be active include:
o Mineralized areas around the operating mines;
o Prestea Underground, where we have intensified exploration to allow
feasibility (upper levels) and scoping studies (deep levels) to commence in
early 2007;
o Prestea South - Bondaye area, where we plan to resume drilling of the known
oxide targets to allow feasibility and permitting to be completed by end
2006;
o Hwini-Butre and Benso, where intensive drilling programs are planned to be
undertaken to allow feasibility and permitting by the end of 2006.
By the end of 2005, dewatering efforts at the Prestea Underground had cleared
the lowest sections of the old underground workings and an extensive underground
drilling program has been initiated which will continue during most of 2006 to
test areas immediately below the deepest old workings. We believe these deeper
levels provide the best opportunities for significant new discoveries in the
Prestea Underground. We intend to complete an initial feasibility study by the
end of 2006 evaluating the economic potential of restarting production from the
Prestea Underground mine.
Other opportunities include:
o Saramacca Anomaly M in Suriname, where we plan to follow up the encouraging
2005 drilling;
o Cote d'Ivoire and Sierra Leone, where we plan to advance our interests to
key decision points;
LIQUIDITY AND CAPITAL RESOURCES
Operations generated $1.1 million of cash during the year. This compares to
$13.9 million of cash generated by operations in 2004. Lower gold output at
Bogoso/Prestea and higher than expected operating costs at both Bogoso/Prestea
and Wassa contributed to the decrease in cash flow from operations.
Financing activities provided $143.3 million of cash in 2005. New debt,
including equipment financing loans, convertible notes and bank loans accounted
for $71.2 million of the total and an equity offering in December 2005
contributed $71.7 million after issuance costs. Option and warrant exercises
yielded $1.4 million of cash during 2005.
66
Capital assets and capital projects including deferred exploration, new mining
equipment and our major development projects used $110.8 million during the
year. Approximately $36.7 million was spent on the Bogoso sulfide project during
2005 including construction costs of the new sulfide plant and additional
sulfide development drilling in and around the sulfide pits at Bogoso. A total
of $36.3 million was spent on plant and equipment needs with completion of
construction of the new plant at Wassa, new mining equipment at Wassa and Bogoso
and development drilling in and around Wassa and Bogoso/Prestea being the major
items making up the total. A total of $6.0 million was spent on exploration
projects outside the Wassa and Bogoso/Prestea operation areas.
Our cash and cash equivalent balance stood at $89.7 million at December 31,
2005, up from $51.7 million at the end of 2004. At December 31, 2005, working
capital was $90.0 million, versus $61.3 million at the end of 2004.
Liquidity Outlook
Capital expenditure plans for 2006 include the following projects:
Amount
Capital Spending (millions)
----------------------------------------------------------------------
Development
----------------------------------------------------------------------
Bogoso Expansion Project $ 89.0
----------------------------------------------------------------------
Bogoso/Prestea pre-stripping and inventory build up 25.0
----------------------------------------------------------------------
Pampe 4.0
----------------------------------------------------------------------
Mampon 1.2
----------------------------------------------------------------------
St. Jude properties 1.0
----------------------------------------------------------------------
----------------------------------------------------------------------
Sustaining Capital
----------------------------------------------------------------------
Bogoso/Prestea 7.0
----------------------------------------------------------------------
Prestea Underground care and maintenance 4.8
----------------------------------------------------------------------
Wassa 6.2
----------------------------------------------------------------------
----------------------------------------------------------------------
Exploration
----------------------------------------------------------------------
Bogoso/Prestea 1.7
----------------------------------------------------------------------
Prestea Underground 3.3
----------------------------------------------------------------------
Wassa 0.9
----------------------------------------------------------------------
St. Jude properties 4.6
----------------------------------------------------------------------
Other 6.3
----------------------------------------------------------------------
----------------------------------------------------------------------
Total $155.0
----------------------------------------------------------------------
Approximately 80% of the expected Bogoso expansion project spending is scheduled
in the first half of 2006. And 90% of all capital spending is scheduled in the
first three quarters of 2006.
Cash on hand stood at $89.7 million at December 31, 2005. At current gold prices
(approximately $550 per ounce) we expect both Bogoso/Prestea and Wassa to
generate positive operating cash flows in 2006, but this source of funding along
with the $89.7 million of cash at the start of 2006, will not meet all of our
growth needs. In March 2006, we exercised the remaining Moto warrants bringing
our total Moto ownership to six million shares and immediately sold all the
shares in a bought-deal transaction in Canada for Cdn$7.50 per share. The sale
of the six million shares resulted in net proceeds to Golden Star of Cdn$45.0
million ($38.9 million). We are currently negotiating with banks to set up a $30
million revolving line of credit that could be drawn on if we find that cash
from operations and cash on hand, including proceeds from the Moto shares in
March 2006, are not sufficient to meet our projected needs. We may also consider
selling other non-key assets if necessary to complete our capital plans during
2006.
LOOKING AHEAD
Our main objectives for 2006 include:
o completion of mining and commencement of reclamation at the Prestea
Plant-North pit;
o permitting and commencement of oxide mining from Pampe on the Akropong
trend west of Bogoso, to provide oxide ore to the Bogoso plant following
exhaustion of the Prestea Plant-North ores;
o commencement of sulfide mining at Bogoso;
o completion of construction and commissioning of the Bogoso sulfide
expansion project by the end of 2006;
67
o achievement of improved production rates and costs at Wassa;
o a continued high level of exploration effort;
o continued evaluation of the Prestea Underground potential;
o assimilation and further exploration of the St. Jude Properties; and
o continuation of efforts to identify and pursue acquisition and growth
opportunities in Ghana and elsewhere.
We expect gold production at Bogoso/Prestea during 2006 to total approximately
180,000 ounces at an average cash operating cost for the year of $330 per ounce.
We expect production in the first quarter to be 20,000 ounces at a
commensurately higher cash operating cost reflecting scheduled lower throughput
and grades in that quarter. Production is the expected to increase gradually
through the second and third quarter, and significantly in the fourth quarter
when production from the new BIOX(R) facility is expected to commence.
We expect 2006 gold production at Wassa to total approximately 120,000 ounces at
an average cash operating cost of approximately $340 per ounce. We expect
production in the first quarter of about 24,000 ounces and for production to
increase gradually throughout the remainder of the year as a result of improving
throughput and increasing grade. Cash operating costs should decrease
significantly after the first quarter due to a lower stripping ratio through the
rest of the year and should improve gradually through the remaining three
quarters commensurately with the increasing grade and gold production profile.
As more fully disclosed in the Risk Factors Item 1A above, numerous factors
could cause our estimates and expectations to be wrong or could lead to changes
in our plans. Under any of these circumstances, the estimates described above
could change materially.
MINING IN GHANA
We regularly monitor and evaluate the social and political aspects of Ghana in
particular and of West Africa in general to apprise ourselves of the social
situation and political risks that exist in the region. Ghana has benefited from
an extended period of political stability and a democratic governmental system
including orderly governmental transitions via free elections. It is our belief
that Ghana is committed to creating a stable political and economic environment
that will foster additional economic growth.
Ghana is endowed with abundant mineral resources and is actively pursuing
policies designed to support expansion of its mineral industry. Because of the
political stability and supportive policies, several international mineral
companies have initiated exploration and mining activities in Ghana in recent
years and we are now seeing some of these companies making significant
investments in gold exploration and development.
68
It is our policy and our intent to be a responsible corporate citizen of Ghana
and as such we have worked diligently to establish good working relationships
with both local and national governmental authorities as well as with the local
citizens in the areas adjacent to our operations.
Recently, however, we have experienced ongoing and escalating incidents of
artisanal miners illegally working on our properties in Ghana. While we are
sympathetic to the economic needs of those engaged in this activity, such mining
is illegal, unsafe and results in uncontrolled environmental damage. In
addition, failure to discourage illegal mining on our properties could
jeopardize legal title to our mineral rights. As such we have sought to stop
this activity both by dialogue with the government and by establishing a
security presence. The governmental authorities in western Ghana are aware of
the illegal mining situation and have been of assistance in our efforts to
discourage such activity but more needs to be done.
SEASONALITY
Most of our operations are in tropical climates which experience annual rainy
seasons. Typically mining operations are not materially affected by the rainy
seasons in Ghana but unusually high rainfall in the late summer of 2004 impeded
mine production at Bogoso/Prestea and also interrupted underground drilling in
the Prestea Underground. Exploration efforts in Ghana and in the Guiana Shield
in South America are generally timed to avoid the rainy periods to ease
transportation logistics associated with wet roads and swollen rivers.
RELATED PARTY TRANSACTIONS
During 2005 we obtained legal services from a legal firm to which our Chairman
is counsel. Total value of all services purchased during 2005 was $1.2 million.
Our Chairman did not personally perform any legal services for us during 2005
nor did he benefit directly or indirectly from payments for the services
performed by the firm.
During 2005, a corporation controlled by Michael A. Terrell provided management
services (including those of Mr. Terrell) to St. Jude for which it was paid
Cdn$250,000. Mr. Terrell became a director of Golden Star following our
acquisition of St. Jude in December.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements reflect the application of Cdn GAAP, which is different
in certain material respects from US GAAP. The accounting policies reflected
therein are generally those applied by similarly situated mining companies in
Canada. Our accounting policies under Cdn GAAP are described in Note 1 to our
consolidated financial statements.
Preparation of our consolidated financial statements requires the use of
estimates and assumptions that can affect reported amounts of assets,
liabilities, revenues and expenses. Accounting policies relating to asset
impairments, depreciation and amortization of mining property, plant and
equipment, tax assets and site reclamation/closure accruals are subject to
estimates and assumptions regarding reserves, gold recoveries, future gold
prices, future operating and reclamation costs and future mining activities.
Decisions to write off, or not to write off, all or a portion of our investment
in various properties, especially exploration properties, subject to impairment
analysis, are based on our judgment as to the actual value of the properties and
are therefore subjective in most cases. We have written off substantially all of
our pre-1999 investments in exploration properties based upon our assessments of
the amounts recoverable from these properties. Additional exploration properties
have been found to be impaired and were written off in 2005, 2004 and 2003. We
continue to retain title to certain properties after impairment write-offs as
future events and discoveries may ultimately prove that they have significant
value.
Listed below are the accounting policies and estimates that we believe are
critical to our financial statements due to the degree of uncertainty regarding
the estimates or assumptions involved and the magnitude of the asset, liability,
revenue or expense being reported.
o Ore stockpiles: Stockpiles represent coarse ore that has been extracted
from the mine and is available for further processing. Stockpiles are
measured by estimating the number of tonnes of ore added and removed from
the stockpile, the number of contained ounces based on assay data, and the
estimated recovery percentage based on the expected processing method.
Stockpiles are valued based on mining costs incurred up to the point of
stockpiling the ore including applicable depreciation, depletion and
amortization relating to mining operations. Costs are added to a stockpile
based on current mining costs and are removed at the average mining cost
per tonne for material processed. Stockpiles are reduced as material is
removed and fed to the mill. A 10% adjustment of the stockpile value, based
on stockpile levels in recent periods, would change the carrying value of
the stockpile inventory by approximately $0.6 million and a 10% change in
operating costs would yield the same amount.
69
o Impairment Charges: We periodically review and evaluate our long-lived
assets for impairment when events or changes in circumstances indicate the
related carrying amounts may not be recoverable from continued operation of
the asset. An asset impairment is considered to exist if the sum of all
estimated future cash flows, on an undiscounted basis, are less than the
carrying value of the long-lived asset. The determination of expected
future cash flows requires numerous estimates about the future including
gold prices, operating costs, gold recovery, reclamation spending, ore
reserves and capital expenditures. A review of Bogoso/Prestea's and Wassa's
expected future cash flows as of December 31, 2005 indicated that there is
no impairment.
o Mining properties: Mine properties recorded on our financial records are
amortized using a units-of-production method over proven and probable
reserves. Reserve estimates, which serve as the denominator in units of
production amortization calculations, involve the exercise of subjective
judgment and are based on numerous assumptions about future operating
costs, future gold prices, continuity of mineralization, future gold
recovery rates, spatial configuration of gold deposits, and other factors
that may prove to be incorrect. A 10% adjustment in estimated reserves
could result in an approximately $1.6 million annual change in amortization
expense.
o Tax Assets: Recognition of future tax assets requires an analysis of future
taxable income expectations to evaluate the probability of sufficient
future taxable income to utilize the accrued tax benefits. Determination of
expected future taxable income requires numerous estimates of future
variable including but not limited to, gold prices, operating costs, gold
recovery, ore reserves, gold production, ore grades, administrative costs,
tax rates, and potential changes in tax laws.
o Asset retirement obligation and reclamation expenditures: Accounting for
reclamation obligations requires management to make estimates at each
mining operation of reclamation and closure costs to be incurred in the
future as required to complete the reclamation and environmental
remediation work mandated by existing laws, regulations and customs. Actual
costs incurred in future periods could differ from amounts estimated.
Additionally, future changes to environmental laws and regulations could
increase the extent of reclamation and remediation work required. Based
upon our current situation, we estimate that a 10% increases in total
future reclamation and closure costs would result in an approximately $1.2
million increase in our asset retirement obligations.
RECENT ACCOUNTING PRONOUNCEMENTS
Section 3831 - Non-Monetary Transactions: Issued in June 2005, replaces the
previous recommendations of Section 3830 and establishes new guidelines for the
evaluation and disclosure relating to non-monetary transactions. Its provisions
determine whether a non-monetary transaction is to be measured at fair value or
at book value. This section will be effective for non-monetary transactions
concluded in periods beginning on or after January 1, 2006.
Section 1530 - Comprehensive Income: Introduces new disclosure requirements
regarding comprehensive income and its components, as well as net income, in its
financial statements. As a consequence, certain unrealized gains and losses,
which would otherwise be excluded from the calculation of net income and be
assigned directly to shareholders' equity, will be used to calculate
comprehensive income. This section will be effective for fiscal years beginning
on or after October 1, 2006. We will adopt this new requirement in our 2007
reporting.
Section 3855 - Financial Instruments, Recognition and Measurement: Determines
the time and value at which a financial instrument must be recorded in the
balance sheet. In some cases, it may be measured at fair value or, in other
cases, at cost. The standard also provides for the manner in which gains and
losses related to financial instruments are to be recorded. This section will be
effective for interim periods and fiscal years beginning on or after October 1,
2006. We will adopt this new requirement in our January 2007 reporting.
Section 3861 - Financial Instruments - Disclosures and Presentation: Replaces
Section 3860 "Financial Instruments - Disclosure and Presentation", and
establishes requirements for presentation and disclosure of financial
instruments and non-financial derivatives.
70
Section 3865 - Hedges: Provides guidance for hedge accounting when applied to
certain derivatives that meet the definition of a hedge. Application of Section
3865 to derivatives that qualify as hedges is optional, but once a derivative is
classified as a hedge, the provisions of Section 3865 are then mandatory.
Section 3865 replaces AcG-13, "Hedging Relationships" and completes the
provisions of Section 1650, "Foreign Currency Translation", by addressing how to
account for hedges and related disclosure of information requirements. This
section will be effective for fiscal years beginning on or after October 1,
2006. We will adopt this new requirement in our January 2007 reporting.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
TABLE OF CONTRACTUAL OBLIGATIONS
Contractual Obligations Payment due by period (thousands)
---------------------------------------------------------------
(as of December 31, 2005) Total Less than 1 1 to 3 years 3 to 5 years More than
year 5 years
-----------------------------------------------------------------------------------------------------
Long term debt (1) $73,486 $6,855 $12,448 $54,183 $-
-----------------------------------------------------------------------------------------------------
Interest on long term debt 15,869 5,057 9,418 1,394 -
-----------------------------------------------------------------------------------------------------
Operating lease obligations 441 143 298 - -
-----------------------------------------------------------------------------------------------------
Asset retirement obligations(2) 20,129 3,107 4,478 2,161 10,383
-----------------------------------------------------------------------------------------------------
Total $109,925 $15,162 $26,642 $57,738 $10,383
-----------------------------------------------------------------------------------------------------
(1) Includes $50.0 million of convertible notes maturing in 2009.
Golden Star has the right to repay the $50.0 million in cash or
in common shares at the due date under certain circumstances. The
presentation shown above assumes payment is made in cash and also
assumes no conversions of the debt to common shares by the note
holders prior to the maturity date.
(2) Other long term liabilities represent asset retirement
obligations. Asset retirement obligations include several
estimates about future reclamation costs, mining schedules,
timing of the performance of reclamation work and the quantity of
ore reserves which in turn determine the ultimate closure date,
which in turn impacts the discounted amounts of future asset
retirement liabilities. The discounted value of these projected
cash flows is recorded as "Asset retirement obligations" on the
balance sheet of $11.4 million as of December 31, 2005. The
amounts shown above are undiscounted to show full expected cash
requirements.
OUTSTANDING SHARE DATA
This MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION includes information available to March 27, 2006. As of March 27, 2006
we had outstanding 207,265,758 common shares, options to acquire 6,828,451
common shares, warrant to acquire 11,724,334 common shares and convertible notes
which are convertible into 11,111,111 common shares.
71
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk includes, but is not limited to, the following
risks: changes in interest rates on our investment portfolio and debt, changes
in foreign currency exchange rates, commodity price fluctuations and equity
price risk.
Interest Rate Risk
From time to time we invest excess cash in high quality short-term debt
instruments. The rates received on such investments may fluctuate with changes
in economic conditions. As a result, our investment income may fall short of
expectations during periods of lower interest rates. We estimate that, given the
cash balances expected during 2006, a 1% change in interest rates would result
in a $0.1 to $0.3 million change in annual interest income.
We have both fixed rate and variable rate debt. At December 31, 2005 we had $7.7
million of variable rate debt which carries an interest rate of LIBOR plus 2.5%.
We estimate that a 1% increase in the interest rate on the variable rate debt
would result in a $0.1 million change in annual interest expense. We have not
entered into any agreements to hedge against unfavorable changes in interest
rates, but may in the future actively manage our exposure to interest rate risk.
Foreign Currency Exchange Rate Risk
While our major operating units transact most of their business in US dollars,
many purchases of labor, operating supplies and capital assets are denominated
in Euros, British pounds, Australian dollars, South African Rand and Ghanaian
Cedis. As a result, currency exchange fluctuations may impact the costs incurred
at our operations. Gold is sold throughout the world based principally on the US
dollar price, but portions of our operating expenses and some of our capital
purchases are incurred in currencies other than the US dollar. The appreciation
of non-US dollar currencies against the US dollar increases production costs and
the cost of capital assets in US dollar terms at mines located outside the US,
which can adversely impact our net income and cash flows. Conversely, a
depreciation of non-US dollar currencies usually decreases production costs and
capital asset purchases in US dollar terms.
The value of cash and cash equivalent investments denominated in foreign
currencies also fluctuates with changes in currency exchange rates. Appreciation
of non-US dollar currencies results in a foreign currency gain on such
investments and a decrease in non-US dollar currencies results in a loss.
While in the past we have not utilized market risk sensitive instruments to
manage our exposure to foreign currency exchange rates, during 2005 we entered
into forward purchase contracts for the South African Rand and the Euro to hedge
expected future purchases of capital assets in South Africa and Europe
associated mostly with the Bogoso sulfide expansion project. We also hold
portions of our cash reserves in non-US dollar currencies.
Commodity Price Risk
Gold is our primary product and, as a result, changes in the price of gold could
significantly affect our results of operations and cash flows. According to
current estimates, a $10 per ounce change in our average realized price of gold
for 2006 would result in a $2.5 million to $3.0 million change in pre-tax
earnings and cash flows.
During 2005, to reduce the risk of unfavorable gold price fluctuations on our
operating cash flows during the construction period of the Bogoso sulfide
expansion project, we purchased puts to lock in minimum gold prices for portions
of our expected gold sales in 2005, 2006 and 2007. As of December 31, 2005 we
have 187,500 put options remaining which establish an average minimum price of
$405 per ounce on 187,500 ounces of expected gold production spread monthly
through 2006 and early 2007.
We also sold calls during 2005 to offset a portion of the costs of purchasing
the puts. At December 31, we had 65,000 call options remaining which expire in
2006 and early 2007, each carrying a strike price of $525 per ounce.
Since the Rosebel Royalty revenues received by EURO fluctuate with gold prices,
EURO's loan agreements required that EURO enter into a series of cash-settled
forward gold price agreements with the lender designed to eliminate a portion of
the potential impact of gold price fluctuations on expected future Rosebel
royalty revenues. These cash-settled forward gold price agreements meet the
definition of a derivative.
72
During 2005, EURO and Golden Star reported their unaudited quarterly financial
results assuming hedge accounting could be used for the derivatives, but in
completing our audited consolidated financial statements for 2005, it was
concluded that EURO's forward gold pricing derivatives did not qualify for hedge
accounting under Cdn GAAP, AcG-13, "Hedging Relationships". As a result, EURO
and Golden Star will restate their unaudited financial statements for the first
three quarters of 2005. EURO and Golden Star will now be required to recognize
mark-to-market valuations of EURO's forward gold pricing derivatives through the
statements of operations at the end of each period, which is likely to create
large unrealized, non-cash losses if gold prices continue to rise. Since EURO is
a majority-owned subsidiary, the impact of these changes flows through to Golden
Star's consolidated financial statements in the same amounts and in the same
periods as in EURO.
We are experiencing significant price increases in certain operating consumables
including fuel, cyanide, tires, and other chemical reagents used in our
processing plants. Fuel prices have risen from $0.60 per liter in September 2004
to $0.85 in September 2005 and we have seen a 43% increase in the price of
cyanide. The price paid for several other consumables, including truck tires,
have risen 20% to 40% in the past 12 months.
Equity Price Risk
We have in the past and may in the future seek to acquire additional funding by
sale of common shares. Movements in the price of our common shares have been
volatile in the past and may also be volatile in the future. As a result, there
is a risk that we may not be able to sell new common shares at an acceptable
price should the need for new equity funding arise.
73
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements of
Golden Star Resources Ltd.
Auditors' Report..................................................................................... 75
Consolidated Balance Sheets as of December 31, 2005 and 2004......................................... 78
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003............................................................ 79
Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 2005, 2004 and 2003............................................................ 80
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003 ........................................................... 81
Notes to the Consolidated Financial Statements....................................................... 82 - 106
74
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Golden Star Resources Ltd.
We have audited the accompanying consolidated balance sheets of Golden Star
Resources Ltd. (the "Company") at December 31, 2005 and 2004 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2005. We have also
audited the effectiveness of the Company's internal control over financial
reporting as at December 31, 2005 based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and management's assessment
thereof included in Management's Report on Internal Control Over Financial
Reporting. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on these financial
statements, an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audits.
A company's internal control over financial reporting is a process designed 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. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
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 company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
75
We conducted our audits of the Company's financial statements in accordance with
Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. A financial statement audit also
includes assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We
conducted our audit of the effectiveness of the Company's internal control over
financial reporting and management's assessment thereof 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management's assessment identified the following material weakness:
As of December 31, 2005, management did not maintain effective controls over the
presentation and documentation of certain derivatives. Specifically, the Company
did not prepare and maintain sufficient documentation to support the designation
and effectiveness of hedges of certain gold future contracts entered into by its
subsidiary, EURO Ressources S.A., during 2005. This control deficiency resulted
in the requirement for the restatement of the Company's consolidated financial
statements for the quarters ended March 31, June 30 and September 30, 2005 and
an audit adjustment to the 2005 annual consolidated financial statements. In
addition, this control deficiency could result in a misstatement of derivative
related accounts including fair value of derivatives and mark-to-market
adjustments that would result in a material misstatement of the interim or
annual consolidated financial statements that would not be prevented or
detected. Accordingly, management has concluded that this control deficiency
constitutes a material weakness. This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit
of the 2005 consolidated financial statements, and our opinion regarding the
effectiveness of the Company's internal control over financial reporting does
not affect our opinion on those consolidated financial statements.
76
As described in Management's Report on Internal Control Over Financial
Reporting, management has excluded St. Jude Resources Ltd. from its assessment
of internal control over financial reporting as of December 31, 2005 because it
was acquired by the Company in a purchase business combination on December 21,
2005. For this reason, we have also excluded St. Jude Resources Ltd. from our
audit of internal control over financial reporting. St. Jude Resources Ltd. is a
wholly-owned subsidiary whose total assets represent 28% of the Company's
consolidated assets as of December 31, 2005.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2005 in accordance
with Canadian generally accepted accounting principles.
In our opinion, management's assessment that the Company did not maintain
effective internal control over financial reporting as of December 31, 2005 is
fairly stated, in all material respects, based on criteria established in
Internal Control -- Integrated Framework issued by the COSO.
In our opinion, because of the effect of the material weakness described above
on the achievement of the objectives of the control criteria, Golden Star
Resources Ltd. has not maintained effective internal control over financial
reporting as of December 31, 2005 based on criteria established in Internal
Control -- Integrated Framework issued by the COSO.
/s/ PricewaterhouseCoopers LLP
................................
Chartered Accountants
Calgary, Alberta, Canada
March 27, 2006
77
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of US dollars except shares issued and outstanding)
--------------------------------------------------------------------------------------------------------
As of December 31,
2005 2004
--------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $89,709 $12,877
Short term investments (Note 2) - 38,850
Accounts receivable 6,560 3,592
Inventories (Note 3) 23,181 15,366
Due from sale of property (Note 4) - 1,000
Future tax assets (Note 19) 6,248 1,542
Fair value of derivatives (Note 14) 1,220 -
Deposits (Note 5) 5,185 5,102
Prepaids and other 686 517
--------------------------------------------------------------------------------------------------------
Total Current Assets 132,789 78,846
RESTRICTED CASH (Note 16c) 3,865 3,351
LONG TERM INVESTMENTS (Note 6) 8,160 5,528
DEFERRED EXPLORATION AND DEVELOPMENT COSTS (Notes 7 and 24) 167,532 7,452
PROPERTY, PLANT AND EQUIPMENT (Note 8) 84,527 28,653
MINING PROPERTIES (Note 9) 118,088 74,197
CONSTRUCTION IN PROGRESS (Note 10) 36,707 51,159
DEFERRED STRIPPING (Note 11) 1,548 1,357
LOAN ACQUISITION COSTS (Note 13) 1,020 -
FUTURE TAX ASSETS (Note 19) 8,223 -
OTHER ASSETS 2,144 1,617
--------------------------------------------------------------------------------------------------------
Total Assets $564,603 $252,160
========================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable $9,093 $7,010
Other accrued liabilities 17,051 9,203
Fair value of derivatives (Note 14) 4,709 -
Asset retirement obligations 3,107 -
Current debt (Note 12) 6,855 1,267
--------------------------------------------------------------------------------------------------------
Total Current Liabilities 40,815 17,480
LONG TERM DEBT (Note 12) 64,298 1,707
ASSET RETIREMENT OBLIGATIONS (Note 15) 8,286 8,660
FAIR VALUE OF DERIVATIVES (Note 14) 7,263 -
FUTURE TAX LIABILITY (Notes 19 and 24) 45,072 -
--------------------------------------------------------------------------------------------------------
Total Liabilities 165,734 27,847
MINORITY INTERESTS 6,629 6,353
COMMITMENTS AND CONTINGENCIES (Note 16) - -
SHAREHOLDERS' EQUITY
SHARE CAPITAL
First preferred shares, without par value, unlimited shares
authorized. No shares issued. - -
Common shares, without par value, unlimited shares authorized.
Shares issued and outstanding:
205,954,582 at December 31, 2005; 142,244,112 at December 31, 2004
522,510 340,888
CONTRIBUTED SURPLUS 6,978 3,646
EQUITY COMPONENT OF CONVERTIBLE NOTES (Note 12c) 2,857 -
DEFICIT (140,105) (126,574)
--------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 392,240 217,960
--------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $564,603 $252,160
========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
By: /s/ David K. Fagin - Director By: /s/ Peter J. Bradford - CEO
------------------------------ ----------------------------
78
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands of US dollars except per share amounts)
For the years ended December 31,
2005 2004 2003
-------------------------------------------------------------------------------------------------------
REVENUE
Gold sales $89,663 $60,690 $63,512
Royalty income 4,178 3,049 -
Interest and other 1,624 1,290 858
-------------------------------------------------------------------------------------------------------
Total revenues 95,465 65,029 64,370
-------------------------------------------------------------------------------------------------------
EXPENSES
Mining operations 79,609 39,095 32,125
Depreciation, depletion and amortization 15,983 8,096 4,993
Accretion of asset retirement obligations 752 645 578
-------------------------------------------------------------------------------------------------------
Total mine operating costs 96,344 47,836 37,696
Exploration expense 951 895 594
Corporate general and administrative and options expense 8,631 8,197 5,556
Corporate development expense 248 4,504 10
Loss on equity investments 239 331 -
Abandonments and impairments 1,403 470 175
Derivative mark-to-market adjustments 11,820 - -
Interest expense 2,416 139 42
Gain on sale of marketable securities - - (1,905)
Gain on subsidiary's sale of common shares (977) - -
Foreign exchange (gain)/loss 574 280 (2,331)
-------------------------------------------------------------------------------------------------------
Total expenses 121,649 62,652 39,837
-------------------------------------------------------------------------------------------------------
Income/(loss) before minority interest (26,184) 2,377 24,533
Minority interest (277) (1,277) (2,577)
-------------------------------------------------------------------------------------------------------
Net income/(loss) before income tax (26,461) 1,100 21,956
Provision for future income taxes 12,930 1,542 -
-------------------------------------------------------------------------------------------------------
Net income/(loss) $(13,531) $2,642 $21,956
=======================================================================================================
Net income/(loss) per common share - basic (Note 20) $(0.094) $0.019 $0.198
Net income/(loss) per common share - diluted (Note 20) $(0.094) $0.018 $0.186
Weighted average shares outstanding (millions of shares) 143.6 138.3 111.0
-------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
79
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Stated in thousands of United States dollars except share amounts)
------------------------------------------------------------------------------------------------------
Equity
Component
Contributed of
Number of Surplus Convertible
Common Share --------------------
Shares Capital Warrants Options Debentures Deficit
------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 87,400,702 $198,954 $2,085 $- $- $(151,655)
------------------------------------------------------------------------------------------------------
Shares issued 33,030,000 107,598 - - - -
Issue costs - (6,455) - - - -
Warrants issued - - 1,780 - - -
Warrants exercised - 1,504 (1,504) - - -
Options issued - net of forfeitures - - - 955 - -
Shares issued under options 1,518,420 2,858 - - - -
Shares issued under warrants 8,167,956 8,595 - - - -
Stock bonus 57,200 118 - - - -
Shares issued to acquire property 2,750,000 11,090 - - - -
Cumulative effect of change in
accounting method - - - - - 483
Net income - - - - - 21,956
------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 132,924,278 324,262 2,361 955 - (129,216)
------------------------------------------------------------------------------------------------------
Warrants exercised - 755 (755) - - -
Options issued - net of forfeitures - - - 1,218 - -
Shares issued under options 767,180 1,239 - (133) - -
Shares issued under warrants 8,494,609 14,332 - - - -
Shares issued to acquire property 58,045 300 - - - -
Net income - - - - - 2,642
------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 142,244,112 340,888 1,606 2,040 - (126,574)
------------------------------------------------------------------------------------------------------
Shares issued 31,589,600 75,864 - - - -
Issue costs - (4,168) - - - -
Warrants issued - - 992 - -
Warrants exercised - 22 (22) - - -
Options issued - net of forfeitures - - - 2,476 - -
Shares issued under options 312,940 722 - (114) - -
Shares issued under warrants 385,000 718 - - - -
Stock bonus 45,342 166 - - - -
Shares issued to acquire property 31,377,588 108,298 - - - -
Equity Component of Convertible
Debentures - - - - 2,857 -
Net loss - - - - - (13,531)
------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 205,954,582 $522,510 $2,576 $4,402 $2,857 $(140,105)
------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
80
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of US dollars)
------------------------------------------------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income/(loss) $(13,531) $2,642 $21,956
Reconciliation of net income to net cash provided by operating
activities:
Depreciation, depletion and amortization 16,042 8,096 4,993
Amortization of loan acquisition costs 228 - -
Stock based compensation 1,007 1,386 1,085
Deferred stripping (191) (1,357) -
Loss on equity investment 239 331 -
Abandonment and impairment of mineral properties 1,413 470 175
Sale of common shares by subsidiary (977) - -
Fair value of derivatives 10,752 - -
Provision for future income tax (12,930) (1,542)
Accretion of asset retirement obligations 752 645 578
Cash used for reclamation (691) (730) (841)
Accretion of convertible debt 523 - -
Minority interests 277 1,277 2,577
------------------------------------------------------------------------------------------------------------
2,913 11,218 30,523
Changes in assets and liabilities:
Accounts receivable (2,853) (2,802) 1,187
Inventories (7,815) (2,705) (4,240)
Deposits 163 - -
Marketable securities - - 906
Accounts payable and accrued liabilities 8,817 8,204 690
Other (165) (5) 10
------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,060 13,910 29,076
------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Expenditures on deferred exploration and development (5,954) (5,260) (4,539)
Expenditures on mining properties (26,631) (18,302) (29,950)
Expenditures on property, plant and equipment (36,321) (12,286) (10,691)
Expenditures on construction in progress (35,530) (23,783) (22,833)
Sale of property 1,000 1,000 1,000
Change in payable on capital expenditures 434 - -
Short term investments 38,850 (38,850) -
Long term investments (2,871) (4,971) (888)
Deposits (246) (5,102) -
Other (220) (894) (139)
------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (67,489) (108,448) (68,040)
------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of share capital, net of issue costs 73,132 15,270 113,408
Debt repayments (Note 13) (3,678) (153) (5,289)
Issuance of debt (Note 13) 71,334 2,328 799
Equity portion of convertible notes 2,857 - -
Other (384) - -
------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 143,261 17,445 108,918
------------------------------------------------------------------------------------------------------------
Increase/(decrease) in cash and cash equivalents 76,832 (77,093) 69,954
Cash and cash equivalents, beginning of period 12,877 89,970 20,016
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents end of period $89,709 $12,877 $89,970
------------------------------------------------------------------------------------------------------------
See Note 21 for supplemental cash flow information
The accompanying notes are an integral part of these consolidated financial statements.
81
STAR RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in tables are in thousands of US Dollars unless noted otherwise)
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Basis of Consolidation and the Preparation of Financial Statements
These consolidated financial statements are prepared and reported in United
States ("US") dollars and in accordance with generally accepted accounting
principles in Canada ("Canadian GAAP") which differ in some respects from GAAP
in the United States ("US GAAP"). These differences in GAAP are quantified and
explained in Note 28. The consolidated financial statements include the accounts
of the Company and its majority owned subsidiaries whether owned directly or
indirectly. All material inter-company balances and transactions have been
eliminated.
Certain prior period comparative figures in the preceding financial statements
and in the following notes have been reclassified to conform to current period
presentation.
Fiscal Year
Our fiscal year runs from January 1 to December 31.
Use of Estimates
Preparation of our consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that can affect reported amounts of assets, liabilities,
revenues and expenses. The more significant areas requiring the use of estimates
include asset impairments, stock based compensation, depreciation and
amortization of assets, and site reclamation and closure accruals. Accounting
for these areas is subject to estimates and assumptions regarding, among other
things, gold reserves, gold recoveries, future gold prices, future operating
costs, asset usage rates, and future mining activities. Management bases its
estimates on historical experience and on other assumptions we believe to be
reasonable under the circumstances. However, actual results may differ from our
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash deposits, in any currency, residing in
checking, interest bearing checking accounts, money market funds and sweep
accounts. Cash equivalents consist of highly liquid short term investments. We
consider all highly liquid marketable securities with maturities of less than 91
days at date of purchase to be cash equivalents. Our cash equivalents consist
mostly of US and Canadian government treasury bills and agency notes.
Short Term Investments
When cash is invested in auction rate certificates, which are short term
positions in long term investments, such investments are deemed "Short Term
Investments" and displayed as a current asset next to Cash and Cash Equivalents
on the Consolidated balance Sheets.
Marketable Securities
Short term investments in publicly traded marketable securities are recorded at
the lower of cost or quoted market prices, with unrealized losses included in
income. The market value is based on the closing price at the end of the period,
as reported on recognized securities exchanges.
Inventories
Inventories classifications include "stockpiled ore," "in-process inventory,"
"finished goods inventory" and "materials and supplies." All of our inventories
are recorded at the lower of cost or market. The stated value of all inventories
include direct production costs and attributable overhead and depreciation
except for materials and supplies inventories.
82
Stockpiled ore represents coarse ore that has been extracted from the mine and
is ready for further processing. Stockpile ore is measured by estimating the
number of tonnes (via truck counts or by physical surveys) added or removed from
the stockpile, the number of contained ounces (based on assay data) and the
estimated gold recovery percentage. Stockpiled ore value is based on the costs
incurred (including depreciation and amortization) in bringing the ore to the
stockpile. Costs are added to the stockpiled ore based on current mining costs
per tonne and are removed at the average cost per recoverable ounce of gold in
the stockpile.
In-process inventory represents material that is currently being treated in the
processing plants to extract the contained gold and to transform it into a
saleable product. The amount of gold in the in-process inventory is determined
by assay and by measure of the quantities of the various gold-bearing materials
in the recovery process. The in-process gold is valued at the average of the
beginning inventory and the cost of material fed into the processing stream plus
in-process conversion costs including applicable depreciation and amortization
related to the processing facilities.
Finished goods inventory is composed of saleable gold in the form of dore bars
that have been poured but not yet delivered to the buyer. The bars are valued at
the lower of total cost or market value. Included in the total costs are the
direct costs of the mining and processing operations as well as direct
overheads, amortization and depreciation.
Materials and supplies inventories consist mostly of equipment parts, fuel and
lubricants and reagents consumed in ore processing. Materials and supplies are
valued at the lower of average cost or replacement cost.
Reserve Quantities Used in Units-of-Production Amortization
Gold ounces contained in ore stockpiles recognized in inventory balances on the
balance sheet are excluded from total reserves when determining
units-of-production amortization of mining property, asset retirement assets and
other assets.
Exploration Costs
Exploration costs related to specific, identifiable properties, including the
cost of acquisition, exploration and development, are capitalized until
viability of the exploration property is determined. Exploration costs not
directly related to an identifiable property are expensed as incurred.
Management periodically reviews, on a property-by-property basis, the carrying
value of such properties including the costs of acquisition, exploration and
development incurred to date. A decision to abandon, reduce or expand a specific
project is based upon many factors including general and specific assessments of
contained or potential mineralized materials, potential reserves, anticipated
future mineral prices, the anticipated costs of additional exploration and, if
warranted, costs of potential future development and operational costs, and the
expiration terms and ongoing expenses of maintaining leased mineral properties.
We do not set a pre-determined holding period for properties with unproven
reserves; however, properties which have not demonstrated suitable metal
concentrations at the conclusion of each phase of an exploration program are
re-evaluated to determine if future exploration is warranted and if their
carrying values are appropriate.
If an exploration property is abandoned or it is determined that its carrying
value cannot be supported by future production or sale, the related costs are
charged against operations in the year of abandonment or determination of value.
Any subsequent costs incurred for that property are expensed as incurred.
The accumulated costs of mineral properties are reclassed as mine property and
depleted on a units-of-production basis at such time as production commences.
Impairment of Long-Lived Assets
We review and evaluate our long-lived assets for impairment at least annually
and also when events or changes in circumstances indicate the related carrying
amounts may not be recoverable. Asset impairment is considered to exist if the
total estimated future cash flows, on an undiscounted basis, are less than the
carrying amount of the long-lived asset. An impairment loss is measured and
recorded based on discounted estimated future cash flows. Future cash flows are
based on estimated quantities of recoverable minerals, expected gold and other
commodity prices (considering current and historical prices, price trends and
related factors), production levels and cash costs of production, capital and
reclamation costs, all based on detailed engineering life-of-mine plans.
The significant assumptions used in determining the future cash flows for each
operating unit at December 31, 2005, apart from production cost and capitalized
expenditure assumptions unique to each operation, included a long-term gold
price of $556 per ounce plus future contango. In estimating future cash flows,
assets are grouped at the lowest levels for which there are identifiable cash
flows that are largely independent of future cash flows from other asset groups.
83
With the exception of other mine-related exploration potential and exploration
potential in areas outside of the immediate mine-site, all assets at a
particular operation are considered together for purposes of estimating future
cash flows. In the case of mineral interests associated with other mine-related
exploration potential and exploration potential in areas outside of the
immediate mine-site, cash flows and fair values are individually evaluated based
primarily on recent exploration results.
Various factors could impact our ability to achieve forecasted production
schedules from proven and probable reserves. Additionally, commodity prices,
capital expenditure requirements and reclamation costs could differ from the
assumptions used in the cash flow models used to assess impairment. The ability
to achieve the estimated quantities of recoverable minerals from exploration
stage mineral interests involves further risks in addition to those factors
applicable to mineral interests where proven and probable reserves have been
identified, due to the lower level of confidence that the identified mineralized
material can ultimately be mined economically.
Material changes to any of these factors or assumptions discussed above could
result in future impairment charges to operations.
Property, Plant, Equipment and Mine Development
Property, plant and equipment assets, including, machinery, processing
equipment, mining equipment, mine site facilities, vehicles and expenditures
that extend the life of such assets are recorded at cost, including direct
acquisition costs. Depreciation for mobile equipment and other assets having
estimated lives shorter than the estimated life of the ore reserves, is computed
using the straight-line method at rates calculated to depreciate the cost of the
assets, less their anticipated residual values, if any, over their estimated
useful lives.
Mineral property acquisition, exploration and development costs, buildings,
processing plants and other long-lived assets which have an estimated life equal
to or greater than the estimated life of the ore reserves, are amortized over
the life of the reserves of the associated mining property using a
units-of-production amortization method. The net book value of property, plant
and equipment assets at property locations is charged against income if the site
is abandoned and it is determined that the assets cannot be economically
transferred to another project or sold.
Deferred Stripping
We employ a deferred stripping accounting convention to capitalize the costs of
waste rock mined from one of our open pit mines during periods when waste rock
is removed in amounts that exceed the life-of-mine average waste removal rate.
The amount of stripping costs to be capitalized in each period is calculated by
determining the tonnes of waste moved in excess of the life-of-pit average strip
ratio and valuing the excess tonnage of removed waste at the average mining cost
per tonne during the period. Costs are recovered in periods when the actual
tonnes of waste moved are less than what would have been moved at the average
life-of-pit rate, such tonnes being valued at the rolling average cost of the
waste tonnage amounts capitalized.
The capitalized component of waste rock removal costs is shown on our
consolidated balance sheets in the line item titled "Deferred Stripping." The
cost impact is included in the Statements of Operations in the line item titled
"Mining operations."
Environmental Rehabilitation and Closure
In accordance with the requirements of the CICA Handbook Section 3110, "Asset
Retirement Obligations" environmental reclamation and closure liabilities are
recognized at the time of environmental disturbance in amounts equal to the
discounted value of expected future reclamation and closure costs. The
discounted cost of future reclamation and closure activities is capitalized into
mine property and amortized over the life of the property. The estimated future
cash costs of such liabilities are based primarily upon environmental and
regulatory requirements of the various jurisdictions in which we operate. Cash
expenditures for environmental remediation and closure are netted against the
accrual as incurred.
Foreign Currencies and Foreign Currency Translation
Our functional currency is the US dollar. Transaction amounts denominated in
foreign currencies are translated to US dollars at exchange rates prevailing at
the date of the transaction. The carrying value of monetary assets and
liabilities is translated at the rate of exchange prevailing at the balance
sheet date. Non-monetary assets are translated at the rates of exchange
prevailing when the assets were acquired or the liabilities assumed. Revenue and
expense items are translated at the average rate of exchange during the period.
Translation gains or losses are included in net earnings for the period.
84
Canadian currency in these financial statements is denoted as "Cdn$," European
Common Market currency is denoted as "Euro" or " (euro)," and Ghanaian currency
is denoted as "Cedi" or "Cedis."
Income and Mining Taxes
Income and mining taxes comprise the provision (or recovery) for taxes actually
paid or payable and for future taxes. Future income and mining taxes are
computed using the asset and liability method whereby future income and mining
tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Future income and mining tax assets and liabilities are computed using income
tax rates in effect when the temporary differences are expected to reverse. The
effect on the future tax assets and liabilities of a change in tax rates is
recognized in the period of substantive enactment. The provision or relief for
future taxes is based on the changes in future tax assets and liabilities during
the period. In estimating future income and mining tax assets, a valuation
allowance is determined to reduce the future tax assets to amounts that are more
likely than not to be realized.
Net Income per Share
Basic income per share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. In periods with earnings the calculation of diluted net income per
common share uses the treasury stock method to compute the dilutive effects of
stock options, warrants and other dilutive instruments. In periods of loss,
diluted net income per share is equal to basic income per share.
Revenue Recognition
Revenue from the sale of gold is recognized when title and the risk of ownership
pass to the buyer. Title and risk of ownership pass to the buyer when dore is
delivered into the buyer's custody. Our gold is sold to a South African gold
refinery and revenue is recognized when title is transferred to the customer at
the refinery. The sales price is based on the London P.M. fix on the day of
delivery.
Credits from by-products are credited against operating costs and not included
in revenues. By-product costs have been de minimis to date at our existing
properties.
Stock Based Compensation
In accordance with the requirements of CICA Handbook Section 3870, "Stock Based
Compensation and other Stock-based Payments" we use the fair value method to
expense the fair value of options granted to employees and directors. The fair
value of options granted is established at the date of the grant, using the
Black-Scholes option-pricing model. Compensation expense for options with
immediate vesting is recognized in the period of the grant. Compensation expense
for options with graded vesting is recognized on a straight line basis over the
vesting periods.
Derivatives and Hedges
We utilize forward foreign exchange and commodity price derivatives to manage
exposure to fluctuations in foreign currency exchange rates and gold prices. We
do not employ derivative financial instruments for trading purposes or for
speculative purposes.
Derivative instruments that do not qualify as a hedge under AcG-13, or are not
designated as a hedge, are recorded on the balance sheet at fair value with
changes in fair value recognized in earnings at the end of each period in an
account titled mark-to-market adjustments.
When financial instruments are designated as hedges, we formally document the
relationships between the hedge instrument and the hedged items, as well as the
risk management objectives and strategy for undertaking the hedge transaction.
The effectiveness of the hedging relationship is also documented. The gains and
losses on derivative instruments designated as hedges are not recognized on the
balance sheet and gains and losses are recognized in income in the period when
the instrument is settled. We did not utilize hedge accounting for any of our
derivatives in 2005.
85
Reclassifications
For comparative purposes, certain prior year amounts have been reclassified to
conform to the current year presentation.
Recent Accounting Pronouncements
Section 3831 - Non-Monetary Transactions Section 3831, issued in June 2005,
replaces the previous recommendations of Section 3830 and establishes new
guidelines for the evaluation and disclosure relating to non-monetary
transactions. Its provisions determine whether a non-monetary transaction is to
be measured at fair value or at book value. This section will be effective for
non-monetary transactions concluded in periods beginning on or after January 1,
2006.
Section 1530 - Comprehensive Income / This Section introduces new disclosure
requirements regarding comprehensive income and its components, as well as net
income, in its financial statements. As a consequence, certain unrealized gains
and losses, which would otherwise be excluded from the calculation of net income
and be assigned directly to shareholders' equity, will be used to calculate
comprehensive income. This section will be effective for fiscal years beginning
on or after October 1, 2006. We will adopt this new requirement in our January
2007 reporting.
Section 3855 - Financial Instruments - Recognition and Measurement Section 3855
determines the time and value at which a financial instrument must be recorded
in the balance sheet. In some cases, it may be measured at fair value or, in
other cases, at cost. The standard also provides for the manner in which gains
and losses related to financial instruments are to be recorded. This section
will be effective for interim periods and fiscal years beginning on or after
October 1, 2006. We will adopt this new requirement in our January 2007
reporting.
Section 3865 - Hedges - Section 3865 provides guidance for hedge accounting when
applied to certain derivatives that meet the definition of a hedge. Application
of Section 3865 to derivatives that qualify as a hedges is optional, but once a
derivative is classified as a hedge, the provisions of Section 3865 are then
mandatory. Section 3865 replaces AcG-13, "Hedging Relationships" and completes
the provisions of Section 1650, "Foreign Currency Translation", by addressing
how to account for hedges and related disclosure of information requirements.
This section will be effective for fiscal years beginning on or after October 1,
2006. We will adopt this new requirement in our January 2007 reporting.
Section 3861 - Financial Instruments - Disclosure and Presentation Section 3861
replaces Section 3860, "Financial Instruments - Disclosure and Presentation",
and establishes the requirements for presentation and disclosure of financial
instruments and non-financial derivatives.
EIC-160 - Stripping Costs Incurred in the Production Phase of a Mining Operation
- In response to an EITF issued in the US in mid-2005 which prohibits use of
deferred stripping accounting during the production phase, the Emerging Issues
Committee ("EIC") in Canada issued a "Draft Abstract of Issue Discussed" titled
"D56 Accounting for Stripping Costs in the Mining Industry" which concluded that
deferred stripping could be retained as an acceptable accounting method in
Canada under certain circumstances. In late 2005 the EIC issued further guidance
in EIC-160 "Stripping Costs Incurred in the Production Phase of a Mining
Operation". EIC-160 concluded that "stripping costs should be accounted for
according to the benefit received by the entity. Generally, stripping costs
should be accounted for as variable production costs that should be included in
the costs of the inventory produced (that is, extracted) during the period that
the stripping costs are incurred. However stripping costs should be capitalized
of the stripping activity can be shown to represent a betterment the mineral
property. The EIC also concluded that "capitalized stripping costs should be
amortized in a rational and systematic manner over the reserves that directly
benefit from the specific activity. In the mining industry, the units of
production is generally the appropriate method." The EIC went on to state that
capitalized stripping costs should appear in the statement of cash flow as an
investing activity. Provisions of EIC-160 are applicable to years beginning
after July 1, 2006.
2. Short Term Investments
Short term investments are comprised of funds invested in AA or AAA rated
Auction Rate Certificates. The certificates are short term positions in long
term securities. The interest rate received is reset every 7, 28 or 35 days, and
the certificates can be liquidated for cash at each interest reset date.
86
3. Inventories
As of
December 31,
----------------------------------------
2005 2004
-------------------------------------------------------------------
Stockpiled ore $5,753 $3,659
In-process 3,106 2,858
Materials and supplies 14,322 8,849
-------------------------------------------------------------------
Total inventories $23,181 $15,366
-------------------------------------------------------------------
There were approximately 16,000 and 15,400 recoverable ounces of gold in ore
stockpile inventories at December 31, 2005 and 2004 respectively. These ounces
contained in ore stockpile inventories are included in ore reserves. The
stockpile inventories are for the most part short-term surge piles which will be
processed in the next 12 months or less.
4. Due from Sale of Property
In late 2001 we sold our interest in the Rosebel exploration property in South
America to Cambior Inc. ("Cambior"). In addition to a $5.0 million payment
received at closing in 2002, terms of the sale agreement provided that Cambior
would make three deferred payments of $1.0 million each plus Price Participation
Right (royalty) payments on the first seven million ounces of gold production.
The deferred payments were received in the first quarters of 2003, 2004 and 2005
respectively.
5. Deposits
Represents cash advances for equipment, and materials purchases at WGL and BGL.
6. Long Term Investments
We hold a 19% interest in Goldmin Consolidated Holdings, a privately held gold
exploration company with a focus on South America. The investment is carried on
an equity investment basis at $1.2 million, and we recognized $0.2 million and
$0.3 million of equity losses in 2004 and 2005, respectively.
As of December 31, 2005 we also held approximately 11% of the outstanding common
shares of Moto Goldmines Limited ("Moto"), a gold exploration and development
company publicly traded in Canada, with a focus on gold exploration and
development in the Democratic Republic of Congo. Our investment in Moto
increased by $2.9 million during 2005 to $7.0 million upon the exercise of a
portion of our Moto warrants. We also held 1.0 million additional Moto warrants
which if exercised would require the investment of an additional $2.25 million
Australian dollars. The fair value of our approximately 11% interest in Moto,
based on the market price of its shares on December 31, 2005, was $15.1 million,
which exceeded our cost basis by $8.1 million.
In March 2006 we exercised the remaining 1.0 million warrants bringing our total
ownership to 6.0 million shares and immediately afterward sold all six million
common shares in a bought-deal transaction in Canada for Cdn$7.50 per share. The
sale of the six million shares resulted in net proceeds to Golden Star of
Cdn$45.0 million ($38.9 million). The sale is expected to realize approximately
$30.3 million of pre-tax capital gain for Golden Star, which will be recorded as
income in the first quarter of 2006.
87
7. Deferred Exploration and Development Costs
Consolidated property expenditures on our exploration projects for the year
ended December 31, 2005 were as follows:
Deferred Deferred
Exploration Exploration
& &
Development Capitalized Development
Costs Exploration Acquistion Costs
as of Expenditures Costs Impairments as of
12/31/04 12/31/05
---------------------------------------------------------------------------------------------
AFRICAN PROJECTS
Akropong trend and other Ghana $2,443 $3,114 $- $(320) $5,237
Prestea property - Ghana 2,067 7 - - 2,074
Mininko - Mali 1,033 50 - (1,083) -
Mano River - Sierra Leone 758 527 - - 1,285
Afema - Ivory Coast - 918 110 - 1,028
Hweni-Butre/South Benso - Ghana - - 135,832 - 135,832
Goulagou - Burkina Faso - - 18,247 - 18,247
Other Africa - - 1,460 1,460
SOUTH AMERICAN PROJECTS
Saramacca - Suriname 394 337 - - 731
Bon Espoir - French Guiana 501 881 - - 1,382
Paul Isnard - French Guiana 256 - - - 256
---------------------------------------------------------------------------------------------
TOTAL $7,452 $5,834 $155,649 $(1,403) $167,532
---------------------------------------------------------------------------------------------
Consolidated property expenditures on our exploration projects for the year
ended December 31, 2004 were as follows:
Deferred Deferred
Exploration Exploration
& &
Development Capitalized Reclassified Development
Costs Exploration Acquistion to mining Costs
as of Expenditures Costs Impairments Property as of
12/31/03 12/31/04
----------------------------------------------------------------------------------------------------------------
AFRICAN PRODUCTS
Bogoso Sulfide Project - Ghana $5,930 $ - $ - $ - $(5,930) $ -
Akropong Trend & Other - Ghana 2,037 406 - - - 2,443
Prestea Property Projects - Ghana - 2,537 - (470) - 2,067
Beta Boundary - Ghana 814 - - (814) -
Mininko - Mali 130 903 - - - 1,033
Mano River - Sierra Leone - 758 - - - 758
SOUTH AMERICAN PROJECTS
Saramacca - Suriname 197 197 - - - 394
Bon Espoir - French Guiana - - 501 - - 501
Paul Isnard - French Guiana - - 256 - - 256
----------------------------------------------------------------------------------------------------------------
TOTAL $9,108 $4,801 $ 757 $(470) $(6,744) $ 7,452
----------------------------------------------------------------------------------------------------------------
88
8. Property, Plant and Equipment
As of December 31, 2005 As of December 31, 2004
------------------------------------------------------------------------------------
Property, Plant Accumulated Property, Property, Accumulated Property,
and Equipment Depreciation Plant and Plant and Depreciation Plant and
at Cost Equipment Net Equipment at Equipment Net
Book Value Cost Book Value
-------------------------------------------------------------------------------------------------------
Bogoso/Prestea $40,802 $8,240 $32,562 $27,722 $5,057 $22,665
Prestea Underground 2,748 - 2,748 238 - 238
EURO Ressources 1,456 1,449 7 1,969 1,951 18
Wassa 50,701 1,985 48,716 5,460 - 5,460
Corporate & Other 611 117 494 1,060 788 272
-------------------------------------------------------------------------------------------------------
TOTAL $96,318 $11,791 $84,527 $36,449 $7,796 $28,653
-------------------------------------------------------------------------------------------------------
9. Mining Properties
As of December 31, 2005 As of December 31, 2004
---------------------------------------------------------------------------
Mining Accumulated Mining Mining Accumulated Mining
Properties Amortization Properties, Properties Amortization Properties,
at Cost Net Book at Cost Net Book
Value Value
-----------------------------------------------------------------------------------------------------
Bogoso/Prestea $46,970 $28,792 $18,178 $43,420 $23,113 $20,307
Prestea Underground 21,612 21,612 12,984 - 12,984
Wassa 50,810 5,104 45,706 9,653 - 9,653
Bogoso Sulfide 13,065 13,065 13,065 - 13,065
Mampon 15,062 15,062 13,676 - 13,676
Other 4,465 4,465 4,512 - 4,512
-----------------------------------------------------------------------------------------------------
TOTAL $151,984 $33,896 $118,088 $97,310 $23,113 $74,197
-----------------------------------------------------------------------------------------------------
Some prior period numbers have been adjusted to conform to the 2005
presentation.
10. Mine Construction-in-Progress
At December 31, 2004, mine construction in progress represents costs incurred at
the Wassa project subsequent to acquisition, including feasibility study costs,
equipment purchases and construction costs, including interim payments to the
construction contractor and development costs.
At December 31, 2005, mine construction in progress represents costs incurred
during 2005 at the Bogoso sulfide expansion project. The balance is made up of
development drilling costs, equipment purchases, materials and construction
costs, including payments to the construction contractors.
11. Deferred Stripping
In recent years mining at the Plant North pit at Prestea has trended toward
deeper pits with longer lives and higher and more variable stripping ratios than
in the past. Stripping ratios at the Plant-North pit increased from 2.3 to 1 in
2002, to 3.4 to 1 in 2003, to 5.1 to 1 in 2004 and to 6.5 to 1 during 2005. In
response to the changing stripping rate we initiated a deferred waste stripping
policy at the Plant-North pit in the third quarter of 2004.
The amount of stripping costs to be capitalized in each period is calculated by
determining the tonnes of waste moved in excess of the life-of-pit average strip
ratio and valuing the excess tonnage of removed waste at the average mining cost
per tonne during the period. Costs are recovered in periods when the actual
tonnes of waste moved are less than what would have been moved at the average
life-of-pit rate, such tonnes being valued at the rolling average cost of the
waste tonnage amounts capitalized.
89
The capitalized component of waste rock removal costs is shown on our
consolidated balance sheets in the line item titled "Deferred Stripping." The
cost impact is included in the Statements of Operations in the line item titled
"Mining operations." In periods when the strip ratio exceeds the pit average,
the costs of the excess stripping are excluded from our cost per ounce
calculations. In periods when the strip ratio is less than the pit average,
capitalized waste costs are added back to operating costs and included in cost
per ounce calculations.
Based on actual results from 2004 and our January 1, 2005 mine plan, we expected
to move 3.7 million tonnes of ore and 18.0 million tonnes of waste during the
overall life of the Plant-North pit and thus the expected strip ratio was 4.8 to
1. Deferrals during 2005 were based on this average rate, which will also be the
rate for deferrals in 2006.
A total of $1.4 million of Plant-North deferred waste stripping cost, which
would have been included in operating costs under our previous policy, was
capitalized in 2004. During 2005, an additional $3.6 million of deferred
stripping costs were deferred but, as explained below, $3.4 million of this
deferral was reversed in December 2005.
A new mining plan was completed in January 2006 adding four months of mining
life and 38,000 ounces of gold output to the Plant North pit's life. But the new
plan also added significant amounts of unanticipated waste tonnage versus the
December 2004 mining plan and projections of the life-of-mine strip ratio
resulting from the new plan indicated that $3.4 million of deferred stripping
costs accrued as of December 31, 2005 would not be recovered. As a result, a
$3.4 million write-off was taken in December 2005 leaving a balance of $1.5
million in the account at the end of 2005. The current Plant North mining plan
anticipates that this amount will be recovered by the fourth quarter of 2006
when we expect to complete mining of the Plant North.
See Note 1 "Summary of Significant Accounting Policies - Recent Accounting
Pronouncements" for additional discussion of new guidance for deferred stripping
accounting in Canada and Note 28 "Generally Accepted Accounting Principles in
Canada and the United States - Impact of Recently Issued Accounting Standards"
for other new developments in deferred stripping accounting in the US.
12. Debt
As of As of
DEBT December 31, 2005 December 31, 2004
-----------------------------------------------------------------------------------------------
Current debt:
Bank loan - at EURO Ressources (Note a) $2,667 $ -
CAT equipment financing loans (Note b) 4,188 1,267
-----------------------------------------------------------------------------------------------
Total current debt $6,855 $1,267
-----------------------------------------------------------------------------------------------
Long term debt:
Bank loan - at EURO Ressources (Note a) $5,000 $ -
CAT equipment financing loans (Note b) 11,632 1,707
Convertible notes (Note c) 47,666 -
-----------------------------------------------------------------------------------------------
Total long term debt $64,298 $1,707
-----------------------------------------------------------------------------------------------
(a) Bank debt - In January 2005, EURO Ressources S.A. ("EURO") drew down
$6.0 million under a credit facility from a bank and paid the funds to
Golden Star as the first installment on its purchase of the Rosebel
royalty. The loan is repayable in nine equal payments of $666,667
beginning July 29, 2005. Accrued interest is added to each quarterly
payment. The interest rate for each period is set at LIBOR plus 2.5%
and EURO may choose a 1, 2 or 3 month interest period. The loan is
collateralized by the assets of EURO, including the Rosebel royalty.
The lender has no recourse to Golden Star.
In September 2005 EURO borrowed an additional $3.0 million from the
same commercial bank and forwarded the proceeds to Golden Star leaving
an outstanding balance due Golden Star of $3.0 million (plus a future
royalty). The interest rate on the new debt is set at LIBOR plus 2.5%
and EURO may choose a 1, 2 or 3 month interest period. The $3.0
million is to be repaid by five quarterly payments of $0.6 million
each commencing October 31, 2007. Fair value of the bank debt
including the current portion, is essentially equal to its carrying
value.
(b) Equipment financing credit facility - We have established a $25
million equipment financing facility between Caterpillar Financial
Services Corporation, BGL and WGL, with Golden Star as the guarantor
of all amounts borrowed. The facility provides credit for a mixture of
new and used mining equipment. This facility is reviewed annually and
90
was renewed for 12 months in April 2005. Amounts drawn under this
facility are repayable over five years for new equipment and over two
years for used equipment. The interest rate for each draw-down is
fixed at the date of the draw-down using the Federal Reserve Bank
2-year or 5-year swap rate plus 2.38% or a floating interest rate of
LIBOR plus 2.38%. As of December 31, 2005, $15.8 million was
outstanding under this facility. The average interest rate on the
outstanding CAT loans is approximately 6.8%. Fair value of the
equipment financing debt including the current portion, is essentially
equal to its carrying value.
(c) Convertible notes - We sold $50 million of senior unsecured
convertible notes to a private investment fund on April 15, 2005.
These notes, maturing on April 15, 2009, were issued at par and bear
interest at 6.85% with a conversion price of $4.50 per common share.
At the maturity date, we have the option, at our discretion and
assuming the market price of our common shares exceeds $4.50 per
share, to pay the outstanding notes with cash or by issuing common
shares to the note holders. If the notes are paid in common shares the
number of shares will be determined by dividing the loan balance by an
amount equal to 95% of the average price of the 20 trading day period
ended five days before the notes are due. Due to the conversion
feature, approximately $47.1 million of the note balance was initially
classified as a liability and $2.9 million was classified as equity.
Periodic accretion will increase the liability to the full $50 million
amount due (after adjustments for converted notes) by the end of the
note life. The periodic accretion is classified as interest expense. A
total of $1.8 million of interest on the convertible notes was
capitalized into the Bogoso sulfide expansion project costs. Fair
value of the convertible notes is essentially equal to their carrying
value.
13. Loan Acquisition Costs
In the second quarter of 2005 approximately $0.9 million of loan acquisition
fees were incurred in obtaining the $50 million of convertible notes. This
amount was capitalized and is being amortized to interest expense over the life
of the notes. In addition we recorded loan acquisition costs at EURO related to
its January 2005 and its August 2005 borrowings. As with the convertible notes,
the balance is being amortized to interest expense over the life of the loan.
The net balance of loan acquisition costs was $1.0 million as of December 31,
2005.
14. Hedging and Derivatives
In January 2005, EURO, a majority owned subsidiary, entered into a series of
contracts that qualify as a derivative as part of a $6.0 million loan agreement
(see note 12a). EURO's derivative is tied to a future stream of gold royalty
payments EURO expects to receive from a Canadian mining company that purchased a
mining property interest from Golden Star in 2002. Golden Star originally owned
the royalty but sold the royalty to EURO in 2004. The derivative provides that
(a) when the average gold price for a quarter exceeds $421 per ounce, EURO will
pay to the counter party cash equal to the difference between the quarter's
average gold price per ounce and $421 per ounce, times 5,700 ounces, and (b)
when the average quarterly gold price is below $421 per ounce, EURO will receive
a cash payment from the counterparty equal to the difference between $421 per
ounce and the average gold price per ounce times 5,700 ounces. The $421 per
ounce figure was the spot gold price on the date EURO entered into the
derivative. The derivative agreement established 10 tranches of 5,700 ounces
each which settle quarterly over ten quarters beginning in the first quarter of
2005.
In August 2005, EURO entered into a second set of derivative position related to
a $3.0 million debt facility. These positions are spread over ten quarters
beginning in the last quarter of 2007, and have a fixed price of $458.50 per
ounce which was approximately $18 per ounce over the spot price on the date of
the agreement. The quarterly cash payments are determined exactly as with the
first derivative describe above except $458.50 per ounce is the reference price
for calculating the quarterly payments.
During 2005, we recorded a $0.5 million reduction in royalty revenues for the
cash settlement of the first four quarterly tranches and in addition we recorded
$9.6 million of unrealized, non-cash mark-to-market losses as of December 31,
2005.
Gold Derivatives - To provide gold price protection during the 2005/2006
construction phase of the Bogoso sulfide expansion project, we purchased a
series of gold puts. In the second quarter of 2005 we purchased put options on
140,000 ounces of gold at an average floor price of $409.75 paying approximately
$1.0 million in cash for the options. During the third quarter we purchased an
additional 90,000 put options locking in a $400 per ounce floor for each of the
90,000 ounces. Due to increases in gold prices since purchasing the puts the
mark-to-market value of the puts at December 31, 2005 stood at $0.1 million
dollars or $0.9 million less than we paid for them. This decline in value has
been recognized in our statement of operations for the year ended December 31,
2005.
91
During the third quarter we sold 90,000 ounces of call options with a strike
price of $525 per ounce. The revenues from sale of the call options exactly
offset the cost of the put options bought in the third quarter. Due to the
increase in gold prices since the call options were sold, the mark-to-market
value has fallen by $2.3 million at December 31, 2005 and this amount was
recognized in our statement of operations for the year ended December 31, 2005.
Foreign Currency Forward Positions - To help control the potential adverse
impact of fluctuations in foreign currency exchange rates on the cost of
equipment and materials we expect o purchase during the 2006 construction phase
of the Bogoso sulfide expansion project, we have entered into Rand and EURO
forward contracts. These contracts, established without cost, had a positive
fair value of $1.0 million at December 31, 2005 and the $1.0 million gain was
recognized in our statement of operations at December 31, 2005.
The following table summarizes our derivative contracts at December 31, 2005:
Fair Amount Outstanding/ Total /
Value Average Price Average
-------------------------------------------------------------------
At December 31, 2005 12/31/2005 2006 2007 Thereafter
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Gold Forward Contracts (EURO Ressources)
---------------------------------------------------------------------------------------------------------------------
Ounces (thousands) 22.8 22.8 51.3 96.9
Average price per ounce 421 430 459 443
---------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $(9,560)
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Gold Put Options (Golden Star)
---------------------------------------------------------------------------------------------------------------------
Ounces (thousands) 150 37.5 - 187.5
Average price per ounce 407 405 - 407
---------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $74
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Gold Call Options (Golden Star)
---------------------------------------------------------------------------------------------------------------------
Ounces (thousands) 50 15 - 65
Average price per ounce 525 525 - 525
---------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $(2,250)
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Foreign Exchange Forward Contracts (Golden Star)
---------------------------------------------------------------------------------------------------------------------
South African Rand (millions) 122.1 - - 122.1
Average Rate (ZAR/$) 6.8 - - 6.8
---------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $1,146
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Euros (millions) 2.5 - - 2.5
Average Rate (EUR/$) 0.80 - - 0.80
---------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $(162)
---------------------------------------------------------------------------------------------------------------------
The puts, calls and foreign exchange forward contracts are comprised of numerous
individual contracts each with a different settlement date.
15. Asset Retirement Obligations
Our Asset Retirement Obligations ("ARO") are equal to the present value of all
estimated future closure cost associated with reclamation, demolition and
stabilization of our Bogoso/Prestea and Wassa mining and ore processing
properties. Included in this liability are the costs of mine closure and
reclamation, processing plant and infrastructure demolition, tailings pond
stabilization and reclamation and environmental monitoring costs. While the
majority of these costs will be incurred near the end of the mines' lives, it is
expected that cash costs will be incurred in interim periods reclaiming areas
where mining has been completed, such costs being netted against the ARO
provision.
The changes in the carrying amount of the ARO during 2005 and 2004 were as
follows:
92
Year ended
December 31, 2005
-------------------------------------------------------------------------
Balance at December 31, 2004 $8,660
Accretion expense 752
Cost of reclamation work performed (691)
New AROs incurred during the period 2,672
-------------------------------------------------------------------------
Balance at December 31, 2005 $11,393
-------------------------------------------------------------------------
Current portion $3,107
Long term portion $8,286
-------------------------------------------------------------------------
Year ended
December 31, 2004
-------------------------------------------------------------------------
Balance at December 31, 2003 $7,745
Accretion expense 645
Cost of reclamation work performed (730)
New AROs incurred during the period 1,000
-------------------------------------------------------------------------
Balance at December 31, 2004 $8,660
-------------------------------------------------------------------------
16. Commitments and Contingencies
Our commitments and contingencies include the following items:
(a) Environmental Regulations and Asset Retirement Obligations - The exact
nature of environmental control problems we may encounter in the
future cannot be predicted, primarily because of the changing
character of environmental requirements that may be enacted within
various jurisdictions. ARO liabilities, which include environmental
rehabilitation liabilities for reclamation and for closure costs, were
$8.1 million at Bogoso/Prestea at December 31, 2005, up from $6.0
million at December 31, 2004. ARO liabilities at Wassa totaled $3.3
million at December 31, 2005, up from $2.7 million at the end of 2004.
(b) Environmental Bonding in Ghana - In March 2005, at the request of the
Ghana Environmental Protection Agency ("EPA"), we bonded $3.0 million
to cover future reclamation obligations at Wassa. To meet the bonding
requirements we established a $2.85 million letter of credit and
deposited $0.15 million of cash with the EPA. An $8.55 million letter
of credit has been established to cover our obligations for
Bogoso/Prestea bonding and $0.9 million of cash has been deposited
with the EPA. Final signatures were received from the EPA in February
2006 thereby completing our obligations.
(c) Cash Restricted for Environmental Rehabilitation Liabilities - In
1999, we were required, according to the acquisition agreement with
the sellers of BGL, to restrict $6.0 million of cash to be used for
the ongoing and final reclamation and closure costs at Bogoso. The
withdrawal of these funds must be agreed to by the sellers, who are
ultimately responsible for the reclamation in the event of our
non-performance. Between 1999 and 2001 we drew $2.6 million of the
restricted cash to cover our out-of-pocket cash reclamation costs.
There have been no disbursements of the restricted cash since 2001.
Now that the BGL reclamation bonding process is completed, we will
seek to amend the agreement with the original sellers of BGL and
obtain their consent to allow us to withdraw the remaining $3.4
million of restricted cash.
(d) Royalties -
(i) Dunkwa Properties: As part of the acquisition of the Dunkwa
properties in August 2003, we agreed to pay the seller a net
smelter return royalty on future gold production from the Mansiso
and Asikuma properties. Per the acquisition agreement, there will
be no royalty due on the first 200,000 ounces produced from
Mampon which is located on the Asikuma property. The amount of
the royalty is based on a sliding scale which ranges from 2% of
net smelter return at gold prices at or below $300 per ounce up
to 3.5% for gold prices in excess of $400 per ounce.
93
(ii) Government of Ghana: Under the laws of Ghana, a holder of a
mining lease is required to pay an annual royalty of not less
than 3% and not more than 12% of the total revenues earned from
the lease area. The royalty is payable on a quarterly basis. We
currently pay a 3% annual royalty on gold production from
Bogoso/Prestea and Wassa production. The Government of Ghana
retains the right to increase the amount of the royalty to as
much as 12% based upon a formula related to operating margins.
(iii) Benso: Benso is subject to two royalties. The first is a 1.5%
net smelter return. The royalty can be purchased for $4.0 million
or for $6.0 million if a feasibility study indicates more than
3.5 million ounces of recoverable gold. The second royalty is
$1.00 per ounce of gold produced. This royalty can be purchased
for $0.5 million.
(e) Mano River Joint Venture - We entered into a joint venture agreement
in late 2003 to invest up to $6 million over four years in the Mano
River project in Sierra Leone via an earn-in agreement with a junior
exploration company, Mano River Resources Inc. which holds a group of
gold exploration properties in Sierra Leone. The initial $6 million,
if fully funded, would yield a 51% interest in the joint venture.
Further provisions of the joint venture agreement provide the
opportunity to acquire up to 85% of the joint venture by continued
long term funding. Spending in 2004 totaled $0.8 million, leaving $0.2
million on our minimum commitment to the project. We spent $0.5
million on the Mano River project during 2005, thereby meeting the
minimum commitment. In addition, agreement has been reached with our
partner to extend the earn in period by 12 months.
(f) Afema Project - On March 29, 2005 we entered into an agreement with
Societe d'Etat pour le Developpement Minier de la Cote d'Ivoire
("SO.DE.MI."), the Cote d'Ivoire state mining and exploration company,
to acquire their 90% interest in the Afema gold property in south-east
Cote d'Ivoire. A $0.1 million initial payment to SO.DE.MI. gave us the
right to carry out a six month detailed technical due diligence
program which was essentially completed by September of 2005. We now
have the right to acquire 100% of SO.DE.MI.'s rights in the Afema
property for an additional $1.5 million. A six month extension to
March 2006 has subsequently been granted by SO.DE.MI. to allow Golden
Star to carry out further due diligence work and to analyze the large
quantity of data collected during 2005 before making a decision on the
$1.5 million payment. In addition to the acquisition payments, we
agreed to pay SO.DE.MI. a royalty on any future gold production from
the Afema property. The royalty is indexed to the gold price and
ranges from 2% of net smelter returns at gold prices below $300 per
ounce to 3.5% of net smelter returns for gold prices exceeding $525
per ounce. If we proceed with the $1.5 million payment to acquire full
rights to the property the purchase agreement requires us to spend an
additional $3.5 million on exploration work at Afema, subject to
exploration success, over the following three and a half years.
(g) Pending Legal Issues - Prestea Gold Resources Limited ("PGR"), our
joint venture partner in the Prestea Underground, entered receivership
in March 2003. The joint venture agreement between BGL and PGR
specified that if either party to the joint venture were to go into
receivership any remaining interest held in the partnership by the
insolvent partner would immediately vest with the solvent partner.
While PGR's official liquidator affirmed that the vesting of this
interest in BGL was proper under the terms of the joint venture
agreement, the transfer and vesting of PGR's ownership was challenged
in an action brought before the High Court in Accra, Ghana against the
official liquidator by Merchant Bank (Ghana) Ltd, in its capacity as a
judgment creditor of PGR. The action was commenced on February 28,
2005 and sought an order of the court to compel the official
liquidator to take control of PGR's residual interest in the joint
venture and to have the interest valued with the ultimate goal of
making proceeds available for distribution among all the creditors of
PGR.
The judgment creditor's claim was based on the assertion that the
vesting of the residual interest in BGL under the joint venture
agreement was either illegal and void and/or that such vesting should
necessarily go with the assumption by BGL of all PGR's obligations
owed to third parties, including those unrelated to the joint venture.
In June 2005, the High Court issued a finding in favor of the Merchant
Bank (Ghana) Ltd. While the ruling transferred PGR's ownership
position to the liquidator, it did not require BGL to assume any of
PGR's obligations. Nevertheless, in subsequent periods following the
vesting of PGR's ownership position in BGL, continued project spending
by BGL diluted PGR's original ownership position to less than 10% by
September 30, 2005. The joint venture agreement further specifies that
if either partner allowed itself to be diluted to 10% or less, the
residual value would immediately convert into a 2.5% net profit
interest in potential future earnings from the Prestea Underground
mine. While the court's ruling has effectively given the 2.5% net
profits interest to the bankruptcy trustee, the trustee still must
establish the fair value of the interest and then find a buyer. The
trustee has approached the creditors asking for funding of a valuation
study but to-date the creditors have not provide the requested
funding.
We are also engaged in routine litigation incidental to our business.
No material legal proceedings, involving us or our business are
pending, or, to our knowledge, contemplated, by any governmental
authority. We are not aware of any material events of noncompliance
with environmental laws and regulations.
94
17. Warrants
The following warrants were outstanding as of December 31, 2005.
Warrants Expiration
Date issued outstanding Exercise price date
Issued with:
-----------------------------------------------------------------------------------------
Equity Offering February 14, 2003 8,448,334 Cdn$4.60 February 14, 2007
-----------------------------------------------------------------------------------------
St. Jude Acquisition December 21, 2005 3,240,000 Cdn$4.17 November 20, 2008
-----------------------------------------------------------------------------------------
Total 11,688,334
-----------------------------------------------------------------------------------------
The 8.4 million warrants expiring February 14, 2007 are traded on the Toronto
Stock Exchange under the symbol GSC.WT.A. During 2005, 385,000 warrants were
exercised resulting in cash proceeds of $0.7 million to Golden Star.
18. Stock Based Compensation
Stock Options - We have one stock option plan, the 1997 Stock Option Plan, as
amended (the "GSR Plan") and options are granted under this plan from time to
time at the discretion of the Compensation Committee. Options granted are
non-assignable and are exercisable for a period of ten years or such other
period as stipulated in a stock option agreement between Golden Star and the
optionee. Under the GSR Plan, we may grant options to employees, consultants and
directors of the Company or its subsidiaries for up to 15,000,000 shares of
common stock. Options take the form of non-qualified stock options, and the
exercise price of each option is not less than the market price of our stock on
the date of grant. Options typically vest over periods ranging from immediately
to four years from the date of grant. Vesting periods are determined at the
discretion of the Compensation Committee.
The following tables summarize information about options under the GSR Plan:
2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
GSR Plan Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
(000s) (Cdn$) (000s) (Cdn$) (000s) (Cdn$)
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 5,271 3.17 5,241 2.41 4,489 1.36
Granted 3,047 2.56 855 6.95 2,354 3.99
Exercised (313) 2.37 (767) 2.12 (1,518) 1.73
Forfeited (615) 5.42 (58) 4.31 (84) 2.92
-------------------------------------------------------------------------------------------------------------------------------
Outstanding end of
year 7,390 2.75 5,271 3.17 5,241 2.41
Options vested and
exercisable at
year-end 6,414 2.34 4,140 2.54 3,803 1.81
Weighted-average fair
value of options granted
during the year 0.95 2.45 1.25
-------------------------------------------------------------------------------------------------------------------------------
95
GSR Plan Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-
Exercise Outstanding at Remaining Exercise Price Exercisable at Average
Prices December 31, Contractual Life December 31, Exercise
2005 2005 Price
(Cdn$) (000s) (years) (Cdn$) (000s) (Cdn$)
---------------------------------------------------------------------------------------------
0.00 to .99 140 1.1 0.29 140 0.29
1.00 to 2.50 5,099 4.1 1.77 5,024 1.76
2.51 to 4.00 655 7.1 3.21 481 3.19
4.01 to 7.00 1,419 8.5 6.00 730 5.90
7.01 to 10.00 76 7.9 8.39 38 8.39
---------------------------------------------------------------------------------------------
7,390 5.2 2.75 6,414 2.34
---------------------------------------------------------------------------------------------
Options granted during 2005:
Date Number of Options Strike Price Fair Value per Total Fair Value Option
Granted (000s) (Cdn$) option (Cdn$) (000s of Cdn$) Life
----------------------------------------------------------------------------------------------------
January 26, 2005 345 4.58 1.68 579 5
January 26, 2005 169 4.58 1.37 231 3.5
December 21, 2005 339 1.82 1.16 393 3.5
December 21, 2005 612 2.50 0.68 416 3
December 21, 2005 140 0.29 2.41 338 6 months
December 21, 2005 722 1.82 0.91 658 6 months
December 21, 2005 720 2.50 0.37 266 6 months
----------------------------------------------------------------------------------------------------
Total 3,047 2.56 0.95 2,881
----------------------------------------------------------------------------------------------------
Options granted during 2004:
Date Number of Options Strike Price Fair Value per Total Fair Value Option
Granted (000s) (Cdn$) option (Cdn$) (000s of Cdn$) Life
----------------------------------------------------------------------------------------------------
May 14, 2004 855 6.95 2.45 2,094 10 years
----------------------------------------------------------------------------------------------------
Total 855 6.95 2.45 2,094 10 years
----------------------------------------------------------------------------------------------------
The fair value of options granted during 2005, 2004 and 2003 were estimated at
the grant dates using the Black-Scholes option-pricing model with the following
weighted average assumptions:
2005 2004 2003
--------------------------------------------------------------------------------------------
Expected volatility 27.3% - 34.9% 36% 34%
Risk-free interest rate 2.75% - 3.5% 3.72% - 4.06% 3.01% - 4.46%
Expected lives 0.5 to 5 years 3.5 to 5 years 3.5 to 5 years
Dividend yield 0% 0% 0%
--------------------------------------------------------------------------------------------
In November 2003 the Accounting Standards Board of the Canadian Institute of
Certified Accountants amended CICA Handbook CICA 3870, - "Stock-based
Compensation and other Stock-based Payments" to require expensing of all stock
based compensation awards for fiscal years beginning on or after January 1,
2004. In light of this development we adopted the new provision of CICA 3870 in
2003. As a result, we recognized stock based compensation expense of
approximately $0.9 million and $1.4 million in 2005 and 2004 respectively for
stock options granted during 2005 and 2004.
Stock Bonus Plan - In December 1992, we established an Employees' Stock Bonus
Plan (the "Bonus Plan") for any full-time or part-time employee (whether or not
a director) of the Company or any of our subsidiaries who has rendered
meritorious services which contributed to the success of the Company or any of
its subsidiaries. The Bonus Plan provides that a specifically designated
committee of the Board of Directors may grant bonus common shares on terms that
it might determine, within the limitations of the Bonus Plan and subject to the
rules of applicable regulatory authorities. The Bonus Plan, as amended, provided
for the issuance of 900,000 common shares of bonus stock of which 491,162 common
shares have been issued as of December 31, 2005.
96
During 2005, 2004 and 2003 a total of 45,342, nil and 57,200 common shares
respectively were issued to employees pursuant to the Bonus Plan. We recognized
compensation expense related to bonuses under the Bonus Plan during 2005, 2004
and 2003 of $0.2 million, nil and $0.1 million
19. Income Taxes
We recognize future tax assets and liabilities based on the difference between
the financial reporting and tax basis of assets and liabilities using the
enacted tax rates expected to be in effect when the taxes are paid or recovered.
We provide a valuation allowance against future tax assets for which we do not
consider realization of such assets to meet the required "more likely than not"
standard.
Our future tax assets and liabilities at December 31, 2005 and 2004 include the
following components:
2005 2004
----------------------------------------------------------------------
Future tax assets:
Offering costs $2,577 $2,218
Loss carryovers 62,745 48,163
Capital loss carryovers 12,206 11,632
Tax pools 10,840 18,132
Reclamation costs 1,226 -
Derivatives 4,288 -
Other 1,479 -
Valuation allowance (39,240) (64,399)
----------------------------
Future tax assets $56,121 $15,746
----------------------------
Future tax liabilities:
Mine property costs $85,575 $13,805
Derivatives 388 -
Conversion feature discount 759 -
Reclamation costs - 399
----------------------------
Deferred tax liabilities 86,722 14,204
----------------------------------------------------------------------
Net future tax assets/(liability) $(30,601) $1,542
----------------------------------------------------------------------
The composition of our valuation allowance is summarized as follows:
2005 2004
----------------------------------------------------------------------
Canada $23,712 $32,756
France 5,584 26,141
Ghana 9,944 5,502
----------------------------
Total valuation allowance $39,240 $64,399
----------------------------------------------------------------------
During 2005, we released $3.3 million and $4.9 million, respectively, of
valuation allowance related to our net future tax assets in France and Canada.
The release of the French valuation allowance related to projected future
royalty income. The release of the Canadian valuation allowance resulted from
the anticipated utilization of $30 million of capital loss carryovers against
the March 2006 gain on the sale of Moto shares. Valuation allowances were not
provided on the future tax assets resulting from 2005 losses in France and Ghana
totaling $3.2 million and $1.5 million, respectively.
The provision for income taxes includes the following components:
97
2005 2004 2003
----------------- -------------- ---------------- --------------
Current
Canada $ - $ - $ -
Foreign - - -
----------------- -------------- ---------------- --------------
Total $ - $ - $ -
----------------- -------------- ---------------- --------------
Deferred
Canada $ (4,926) $ - $ -
Foreign (8,004) (1,542) -
----------------- -------------- ---------------- --------------
Total $ (12,930) $ (1,542) $ -
----------------- -------------- ---------------- --------------
A reconciliation of expected income tax on net income before minority interest
at statutory rates with the actual expenses (recovery) for income taxes is as
follows:
2005 2004 2003
-------------------------------------------------------------------------------------------
Net income (loss) before minority interest $(26,184) $2,377 $24,533
Statutory tax rate 32.5% 32.1% 34.1%
-------------------------------------------------------------------------------------------
Tax expense (benefit) at statutory rate (8,515) 763 8,365
-------------------------------------------------------------------------------------------
Enacted future tax rate reductions - - (490)
Foreign tax rates (3,296) (152) (6,489)
Change in tax rates 568 - -
Nondeductible portion of capital losses 270 3,174 -
Expired loss carryovers 16,287 1,450 2,866
Ghana investment allowance (666) (316) (636)
Nondeductible stock option compensation 274 445 129
Nondeductible expenses 163 119 -
Tax loss sale of EURO shares - (2,898) -
Loss carryover not previoulsy recognized (444) 4,447 -
Intercompany asset basis not deductible 6,320 - -
Ghana property basis not previously recognized 862 (2,733) 716
Nondeductible Ghana property basis 597 - -
Change in future tax assets due to echange
rates 238 (3,919) (8,283)
Change in valuation allowance (25,588) (1,922) 3,822
-------------------------------------------------------------------------------------------
Income tax expense (recovery) $(12,930) $(1,542) $ -
-------------------------------------------------------------------------------------------
During 2005, 2004 and 2003, we recognized $4.2 million, $0.3 million and $6.4
million, respectively, of share offering costs. Shareholders' equity has been
credited in the amounts of $1.3 million, $0.1 million and $2.1 million for the
tax benefits of these deductions; however a valuation allowance had been
provided against their full amount. In addition, in 2005 we reported a $2.9
million discount related to our convertible debt. Shareholders' equity has been
charged in the amount of $0.9 million for the associated tax expense. A $0.4
million valuation allowance has been provided in shareholders' equity for the
net tax impact of the share offering costs and discount items.
At December 31, 2005 we had loss carryovers expiring as follows:
Canada Ghana France
------------------------------
2006 $2,595 $- $-
2007 356 - -
2008 1,901 - -
2009 2,344 - -
2010 1,101 - -
2014 10,645 - -
2015 4,569 - -
Indefinite 42,623 182,283 28,288
------------------------------
Total $66,134 $182,283 $28,288
--------------------------------------------
20. Earnings per Common Share
The following table provides a reconciliation between basic and diluted earnings
per common share:
98
For the years ended December 31,
----------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------
Net Income/(Loss) ($13,531) $2,642 $21,956
------------------------------------------------------------------------------------------
Shares (in millions)
--------------------------------------------------
Weighted average number of common shares 143.6 138.3 111.0
Impact of Dilutive Securities:
Options 2.7 2.9 2.7
Convertible notes - - -
Warrants - 2.5 4.2
------------------------------------------------------------------------------------------
Weighted average number of dilutive common shares 146.3 143.7 117.9
------------------------------------------------------------------------------------------
Basic Income/(Loss) Per Common Share ($0.094) $0.019 $0.198
Diluted Income/(Loss) Per Common Share ($0.094) $0.018 $0.186
------------------------------------------------------------------------------------------
21. Supplemental Cash Flow Information
The following is a summary of non-cash transactions:
2005 2004 2003
---------------------------------------------------------------------------------------------------------------
Barnex royalty buy-
back $- $- $12,045
Common shares issued for Barnex royalty buy-back - - (12,045)
Investment in Goldfields Miniere S.A. - 300 -
Common shares issued to purchase Goldfields Miniere S.A. - (300) -
Non-Cash Component of Investment in St. Jude Resources Ltd. 110,924
Common shares, warrants and options issued to purchase St. Jude Resources Ltd. (110,924) -
---------------------------------------------------------------------------------------------------------------
There was no cash paid for income taxes during 2005, 2004 and 2003. Cash paid
for interest was $3.1 million in 2005, $0.1 million in 2004 and $0.1 million in
2003. A total of $0.06 million of depreciation was included in general and
administrative costs or was capitalized into projects.
22. Operations by Segment and Geographic Area
The following segment and geographic data includes revenues based on product
shipment origin and long-lived assets based on physical location. The corporate
entity is incorporated in Canada and domiciled in the United States.
Africa - Ghana
---------------------------
(as of December 31 or for Bogoso/ Wassa Other South Corporate Total
the year ended) Prestea America
--------------------------------------------------------------------------------
2005
Revenues $58,534 $31,405 $- $4,282 $1,244 $95,465
Net Income/(Loss) 4,578 (8,994) (20) (412) (8,683) (13,531)
Total Assets 143,111 103,506 200,287 10,604 107,095 564,603
--------------------------------------------------------------------------------
2004
Revenues $61,002 $- $- $3,145 $882 $65,029
Net Income/(Loss) 12,533 (168) - 1,772 (11,495) 2,642
Total Assets 90,297 70,681 31,080 817 59,285 252,160
--------------------------------------------------------------------------------
2003
Revenues $63,640 $- $- $102 $628 $64,370
Net Income/(Loss) 23,253 (171) - (1,411) 285 21,956
Total Assets 64,828 44,523 20,058 352 92,630 222,391
--------------------------------------------------------------------------------
99
23. Related Parties
During 2005, we obtained legal services from a legal firm to which our Chairman
is of counsel. Total cost of all services purchased during 2005 was $1.2
million. Our Chairman did not personally perform any legal services for us
during 2005 nor did he benefit directly or indirectly from payments for the
services performed by the firm.
During 2005, a corporation controlled by Michael A. Terrell provided management
services (including those of Mr. Terrell) to St. Jude for which it was paid
Cdn$250,000. Mr. Terrell became a director of Golden Star following our
acquisition of St. Jude in December.
24. Acquisitions
In late December 2005, we completed the acquisition of 100% of the outstanding
shares of St. Jude Resources Ltd., a Canadian company with a focus on Ghana and
other West African countries. Our total cost to acquire St. Jude was $112.8
million. This included issuance of 31.4 million of our common shares at a price
of $3.45 each, 3.2 million warrants with a fair value of $1.0 million, 2.5
million options at a fair value of $1.6 million and $1.9 million of transaction
costs. The transaction resulted in St. Jude shareholders holding approximately
19% of Golden Star on a fully diluted basis at the date of the transaction. St.
Jude's earnings were recognized in our consolidated statement of operations
beginning on December 22, 2005. Since the acquisition was completed so late in
the fiscal year, the allocation of the purchase costs shown below should be
considered a preliminary allocation. Further analysis of the fair value of St.
Jude's assets, liabilities and the costs inherent in combining personnel and
operations in 2006 may require adjustments to the allocation. Furthermore
several estimates were required to accrue transaction costs. Many of the
decisions about severance and office closures, it any, and other aspects of
combining the two entities have not yet been addressed due to timing of the
acquisition in relation to the end of our fiscal year.
The purchase cost and the allocation of the purchase costs to St. Jude's assets
and liabilities are as follows:
ST. JUDE ACQUISITION COSTS
AMOUNT VALUE
----------------------------
Golden Star Common Shares issued 31,377,588 $108,298
Golden Star Common Share Options Issued 2,533,176 1,634
Golden Star Common Share Warrants Issued 3,240,000 992
Golden Star's transaction costs - 1,869
---------------
Total Acquisition Cost $112,793
----------------------------------------------------------------------
ALLOCATION OF PURCHASE COSTS
Current assets $2,803
Mineral properties - Ghana - Hinwi-
Butre/Benso 135,832
Mineral properties - Burkina Faso -
Goulagou and Other 18,247
Mineral properties - Ghana - Shein Hills 1,095
Mineral properties - Niger 365
Equipment net 203
---------------
Total Assets $158,545
Accounts Payable and Accrued Expenses $680
Future Tax Liability 45,072
---------------
Total Liabilities $45,752
---------------
Net Asset Value $112,793
===============
An analysis of St. Jude's current assets and current liabilities indicated they
were carried at fair value. Amounts allocated to mineral properties were based
on comparable sales or on cash flow projections for properties where sufficient
data was available to prepare cash flow projections. Cash flow projections were
based on resource data received from St. Jude. Construction costs, sustaining
capital costs and operating costs were included in the projections. The future
tax liability recognizes the fact that while the long term assets were revalued
to fair value as required for purchase accounting, there was no corresponding
step-up in the tax basis of the long term assets and thus future book
amortization will exceed tax amortization.
100
The following condensed unaudited pro forma consolidated results of operations
for 2004 and for 2005 are presented as if the acquisition of St. Jude had taken
place on January 1, 2004 and on January 1, 2005. The pro forma results
incorporate St. Jude's 2004 and 2005 revenues and expenses as adjusted to
reflect adjustments required to harmonize St. Jude's accounting policies with
ours and to convert St. Jude's results to US dollars.
Cdn GAAP US GAAP
------------------------------------------
(in $ million, except per share amounts) 2004 2005 2004 2005
--------------------------------------------------------------------------------------
Net sales $65.2 $95.6 $65.2 $102.4
Income before changes in accounting
principles 1.0 (15.2) (15.4) (34.2)
Net income/(loss) 1.0 (15.2) (15.4) (34.2)
Earnings/(loss) per common share $0.01 $(0.09) $(0.09) $(0.20)
--------------------------------------------------------------------------------------
Comprehensive income NA NA (15.4) (26.0)
--------------------------------------------------------------------------------------
These differences include converting St. Jude balances from Cdn$ to US$,
converting St. Jude accounting policies to match Golden Star policies and
adjustments for corporate entity costs that would not have been incurred by St.
Jude.
The unaudited pro forma information is not necessarily indicative of what the
actual combined results of operation would have been had the acquisition
occurred at the beginning of the respective periods presented.
25. Financial Instruments
Fair Value - Our financial instruments are comprised of cash, short-term
investments, accounts receivable, restricted cash, accounts payable, accrued
liabilities, accrued wages, payroll taxes and debt. The fair value of cash and
short-term investments, accounts receivable, accounts payable, accrued
liabilities and accrued wages, payroll taxes and current debt equals their
carrying value due to the short-term nature of these items. The fair value of
restricted cash is equal to the carrying value as the cash is invested in
short-term, high-quality instruments. See Note 12 for fair values of long term
debt.
26. Gain on Sale of Subsidiaries Sale of Common Shares
EURO sold 4.0 million of their common shares at (euro)0.20 each in a private
placement in December 2005 raising (euro)0.8 million. EURO also received, as
part of the same transaction, (euro)0.05 million in exchange for 1.0 million
warrants which allow the holder to purchase EURO's common shares at (euro) 0.45
each until December 12, 2007. Based on the dilutive effect of the private
placement on Golden Star's ownership position and on a nil value in EURO's
minority interest account, Golden Star recognized a $1.0 million gain on the
transaction.
27. Subsequent Event
In March 2006, we exercised our remaining 1.0 million Moto warrants bringing our
total ownership in Moto to 6.0 million shares and immediately afterward sold all
six million common shares in a bought-deal transaction in Canada for Cdn$7.50
per share. The sale of the six million shares resulted in net proceeds to Golden
Star of Cdn$45.0 million ($38.9 million). The sale is expected to realize
approximately $30.3 million of pre-tax capital gain for Golden Star, which will
be recorded as income in the first quarter.
28. Generally Accepted Accounting Principles in the United States
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada, which differ from US GAAP.
The effect of applying US GAAP to our financial statements is shown below.
101
(a) Consolidated Balance Sheets Under US GAAP As of December 31,
----------------------------
2005 2004
----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $89,709 $12,877
Short term investments - 38,850
Accounts receivable 6,560 3,592
Inventories 23,181 15,366
Due from sale of property - 1,000
Current tax assets 6,248 1,542
Fair value of derivatives 1,220 -
Deposits 5,185 5,102
Other current assets 686 517
----------------------------------------------------------------------------------------------
Total current assets 132,789 78,846
Restricted cash 3,865 3,351
Long term investments (Notes d1 and d2) 15,182 4,132
Deferred exploration and development costs (Notes d3 and d4) 155,649 -
Property, plant and equipment (Note d5) 83,813 28,653
Mine construction in progress 36,706 49,430
Mining properties (Notes d3, d4 and d5) 81,504 52,586
Deferred stripping (Note d6) 1,548 1,357
Loan acquisition costs 1,020 -
Deferred tax asset 8,223 -
Other assets 2,144 1,617
----------------------------------------------------------------------------------------------
Total assets $522,443 $219,972
==============================================================================================
LIABILITIES
Current liabilities $40,815 $17,480
Long term debt (Note d7) 66,632 1,707
Asset retirement obligations 8,286 8,660
Future tax liability 45,072 -
Fair value of long term derivatives 7,263 -
----------------------------------------------------------------------------------------------
Total liabilities 168,068 27,847
----------------------------------------------------------------------------------------------
Minority interest 1,964 3,899
Commitments and contingencies - -
SHAREHOLDERS' EQUITY
Share capital (Note d8) 519,540 339,524
Contributed surplus 8,294 2,040
Accumulated comprehensive income and other (Note d2) 8,179 1,316
Deficit (183,602) (154,654)
----------------------------------------------------------------------------------------------
Total shareholders' equity 352,411 188,226
----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $522,443 $219,972
----------------------------------------------------------------------------------------------
102
(b) Consolidated Statements of Operations under US GAAP For the Years ended December 31,
----------------------------------
2005 2004 2003
-------------------------------------------------------------------------------------------------------------
Net income under Cdn GAAP $(13,531) $2,642 $21,956
Deferred exploration expenditures expensed per US GAAP (Note d3) (14,597) (5,735) (5,252)
Net loss at Wasa mine prior to Canadian GAAP in-service date (Note d5) (4,888) - -
Write-of of deferred exploration properties (Note d3) 1,403 - -
Capitalized mine property acquisition costs expensed for US GAAP (Note d4) - (6,799) (4,763)
Other (Notes d3 and d7) 455 - -
-------------------------------------------------------------------------------------------------------------
Net income/(loss) under US GAAP before minority interest (31,158) (9,892) 11,941
Minority interest, as adjusted 2,210 746 933
-------------------------------------------------------------------------------------------------------------
Net income/(loss) under US GAAP before cumulative effect of change in
accounting method (28,948) (9,146) 12,874
Cumulative effect of change in accounting method - - 483
-------------------------------------------------------------------------------------------------------------
Net Income/(loss) under US GAAP (28,948) (9,146) 13,357
Other comprehensive income - gain on marketable securities (Note d2) 8,179 - (548)
-------------------------------------------------------------------------------------------------------------
Comprehensive income/(loss) $(20,769) $(9,146) $12,809
-------------------------------------------------------------------------------------------------------------
Basic net income/(loss) per share under US GAAP before cumulative effect of
change in accounting method $(0.202) $(0.066) $0.116
Cumulative effect of change in accounting method - - 0.004
Basic net income/(loss) per share under US GAAP after cumulative effect of
change in accounting method $(0.202) $(0.066) $0.120
-------------------------------------------------------------------------------------------------------------
Diluted net income/(loss) per share under US GAAP before cumulative effect
of change in accounting method $(0.202) $(0.066) $0.109
Cumulative effect of change in accounting method - - 0.004
Diluted net income/(loss) per share under US GAAP after cumulative effect
of change in accounting method $(0.202) $(0.066) $0.113
-------------------------------------------------------------------------------------------------------------
(c) Consolidated Statements of Cash Flows under US GAAP For the years ended December 31,
--------------------------------
2005 2004 2003
-------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating Activities $(27,530) $ 575 $ 19,029
Investing activities (38,899) (95,113) (57,993)
Financing activities 143,261 17,445 108,918
-------------------------------------------------------------------------------------------------------------
Increase/(Decrease) in cash and cash equivalents for the year 76,832 (77,093) 69,954
Cash and cash equivalent beginning of the year 12,877 89,970 20,016
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents end of the year $ 89,709 $ 12,877 $ 89,970
-------------------------------------------------------------------------------------------------------------
(e) Notes.
(1) Minority investments in entities whose major business is mineral
exploration are deemed for US GAAP to be equivalent to exploration
spending and are expensed as incurred.
(2) Under US GAAP, investments in marketable equity securities are marked
to fair value at the end of each period with gains and losses
recognized in the statement of operations. Under Cdn GAAP gains and
losses on marketable equity securities are noted in the foot notes and
recognized in the statement of operations only when the investment is
sold.
(3) Under US GAAP, exploration, acquisition and general and administrative
costs related to exploration projects are charged to expense as
incurred. Under Cdn GAAP, exploration, acquisition and direct general
and administrative costs related to exploration projects are
capitalized. In each subsequent period, the exploration, engineering,
financial and market information for each exploration project is
reviewed by management to determine if any of the capitalized costs
are impaired. If found impaired, the asset's cost basis is reduced in
accordance with Cdn GAAP provisions.
(4) Under US GAAP, the initial purchase cost of mining properties is
capitalized. Pre-acquisition costs and subsequent development costs
incurred, until such time as a final feasibility study is completed,
are expensed in the period incurred. Under Cdn GAAP, the purchase
costs of new mining properties as well as all development costs
incurred after acquisition are capitalized and subsequently reviewed
each period for impairment. If found impaired, the asset's cost basis
is reduced in accordance with Cdn GAAP provisions.
103
(5) Under US GAAP new production facilities are placed in service once the
facility has been constructed and fully tested to the point where it
can be shown that it is capable of producing its intended product.
Under Cdn GAAP new production facilities are placed in service when
output reaches a significant portion of the facility's design
capacity. As such, the new Wassa mine and processing operation was
placed in service on January 1, 2005 for US GAAP purposes and was
placed in service on April 1, 2005 for Cdn GAAP purposes. All
operating expenses, including ARO accretion, depreciation, depletion
and amortization and work in process inventory adjustments were
recognized in the statement of operations for US GAAP during the first
quarter of 2005 while such costs were capitalized net of revenues
generated for Cdn GAAP.
(6) In March 2005, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued statement 04-6 "Accounting for
Stripping Costs Incurred During Production in the Mining Industry"
("EITF 04-6") which precludes deferral of stripping costs during a
mine's production phase. EITF 04-6 requires that deferred stripping
costs be considered a variable production cost. The new pronouncement
is effective January 1, 2006 and transition provisions allow any
remaining balances in deferred stripping asset accounts to be closed
directly to retained earnings on January 1, 2006. In Canada the
Emerging Issues Committee ("EIC") has since issued a "Draft Abstract
of Issue Discussed" titled "D56 Accounting for Stripping Costs in the
Mining Industry" which concludes that deferred stripping could be
retained as an acceptable accounting method in Canada under certain
circumstances. We have opted to discontinue deferral of production
phase stripping costs as of January 1, 2006 for both US and Cdn GAAP
and thus will have no accounting differences between US and Canadian
GAAP in this area.
(7) For US GAAP purposes, 100% of the $50.0 million of convertible notes
issued in the second quarter of 2005 was classified as a liability.
Under Cdn GAAP, the fair value of the conversion feature is classified
as equity and the balance is classified as a liability. Under Cdn
GAAP, the liability portion is accreted each period in amounts which
will increase the liability to its full amount as of the maturity date
and the accretion is recorded as interest expense.
(8) Numerous transactions since the Company's organization in 1992 have
contributed to the difference in share capital versus the Cdn GAAP
balance, including: (i) under US GAAP, compensation expense was
recorded for the difference between quoted market prices and the
strike price of options granted to employees and directors under stock
option plans while under Cdn GAAP, recognition of compensation expense
was not required; (ii) in May 1992 our accumulated deficit was
eliminated through an amalgamation (defined as a quasi-reorganization
under US GAAP); - under US GAAP the cumulative deficit was greater
than the deficit under Cdn GAAP due to the past write-offs of certain
deferred exploration costs; and (iii) gains recognized in Cdn GAAP
upon issuances of subsidiaries' shares are not allowed under US GAAP.
(9) Impact of Recently Issued Accounting Standards.
In June 2005, the Financial Accounting Standards Board, which we
refer to as the "FASB", issued SFAS No. 154, "Accounting Changes
and Error Corrections", applying to all voluntary accounting
principle changes as well as the accounting for and reporting of
such changes. SFAS No. 154 replaces APB Opinion No. 20,
"Accounting Changes", and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements." SFAS No. 154 is
effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. We do not
expect SFAS No. 154 to affect our financial condition or results
of operations.
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"),
Accounting for Conditional Asset Retirement Obligations." FIN 47
clarifies that an entity must record a liability for a
"conditional" asset retirement obligation if the fair value of
the obligation can be reasonably estimated. The provision is
effective no later than the end of fiscal years ending after
December 15, 2005. FIN 47 had no material impact on our financial
condition or results of operations in 2005.
104
In December 2004, the FASB finalized SFAS No. 123R Share-Based
Payment, amending SFAS No. 123, effective beginning our first
quarter of fiscal 2006. SFAS 123R requires the Company to expense
stock options based on grant date fair value in its financial
statements. Further, the SFAS 123R requires additional accounting
related to the income tax effects and additional disclosure
regarding the cash flow effects resulting from share-based
payment arrangements. In March 2005, the U.S. Securities and
Exchange Commission (the "SEC") issued Staff Accounting Bulletin
("SAB") No. 107, which expresses views of the SEC staff regarding
the interaction between SFAS 123R and certain SEC rules and
regulations, and provides the staff's views regarding the
valuation of share-based payment arrangements for public
companies. We adopted the optional provisions of FAS 123 in 2003
and have expensed share based payments since that time.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets, an Amendment of APB Opinion No. 29", which
is effective for non-monetary exchanges occurring in fiscal
periods beginning after June 15, 2005. SFAS No. 153 amends APB
Opinion No. 29, "Accounting for Non-monetary Transactions" to
eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. We do not expect SFAS
No. 153 to affect our financial condition or results of
operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs
an amendment of ARB 43, Chapter 4." SFAS No. 151 clarifies that
abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials(spoilage) should be recognized as
current-period charges and requires the allocation of fixed
productions overheads to inventory based on the normal capacity
of the production facilities. SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005. We do not expect SFAS
No. 151 to affect our financial condition or results of
operations.
FASB Staff Position No. FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments" (the "FSP"), was issued in November 2005 and
addresses the determination of when an investment is considered
impaired; whether the impairment is other than temporary; and how
to measure an impairment loss. The FSP also addresses accounting
considerations subsequent to the recognition of an
other-than-temporary impairment on a debt security, and requires
certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The FSP replaces
the impairment guidance in EIFT Issue No. 03-1 with references to
existing authoritative literature concerning other-than-temporary
determinations (principally SFAS No. 115 and SEC Staff Accounting
Bulletin 59). Under the FSP, impairment losses must be recognized
in earnings equal to the entire difference between the security's
cost and its fair value at the financial statement date, without
considering partial recoveries subsequent to that date. The FSP
also requires that an investor recognize an other-than-temporary
impairment loss when a decision to sell a security has been made
and the investor does not expect the fair value of the security
to fully recover prior to the expected time of sale. The FSP is
effective for reporting periods beginning after December 15,
2005. We do not expect a material impact on our financial
condition or results of operations upon adoption of this new
guidance.
In March 2005, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued statement 04-6 "Accounting for
Stripping Costs Incurred During Production in the Mining
Industry" ("EITF 04-6") which precludes deferral of stripping
costs during a mine's production phase. EITF 04-6 requires that
deferred stripping costs be considered a variable production
cost. The new pronouncement is effective January 1, 2006 and
transition provisions allow any remaining balances in deferred
stripping asset accounts to be closed directly to retained
earnings on January 1, 2006. In line with this new pronouncement,
we will close the $1.5 million remaining deferred stripping asset
balance directly to retained earnings on January 1, 2006.
105
Following the change in US GAAP, the Emerging Issues Committee
("EIC") in Canada issued a "Draft Abstract of Issue Discussed"
titled "D56 Accounting for Stripping Costs in the Mining
Industry" which concluded that deferred stripping could be
retained as an acceptable accounting method in Canada. Based on
this new development in Cdn GAAP, we plan to continue using a
deferred stripping policy for our Cdn GAAP financial statements
and will thus have a US/Cdn GAAP difference related to deferred
stripping costs after December 31, 2005.
29. Quarterly Financial Data
Summary of Quarterly Results
($ millions, execept per share data) (unaudited)
------------------------------------------------------------------------------------------
2005 Quarters ended (1) 2004 Quarters ended
-----------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
------------------------------------------------------------------------------------------
Revenues $27.7 $24.7 $24.9 $18.1 $15.2 $13.4 $16.5 $19.9
Net
earnings/(loss) (1.0) (6.7) (3.7) (2.2) 0.6 (4.3) 1.1 5.2
------------------------------------------------------------------------------------------
Net earnings/(loss)
per share
Basic $(0.01) $(0.05) $(0.03) $(0.02) $0.00 $(0.03) $0.01 $0.04
Diluted $(0.01) $(0.05) $(0.03) $(0.02) 0.00 (0.03) 0.01 0.04
------------------------------------------------------------------------------------------
(1) Quarters one, two and three have been restated as if hedge accounting had
not been applied to EURO's gold futures contracts. (See Item 9A below). EURO did
not apply hedge accounting to quarter four and thus it is not restated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with PricewaterhouseCoopers LLP, our auditors,
regarding any matter of accounting principles or practices or financial
statement disclosure.
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As of December 31, 2005, an evaluation was carried out under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of Golden Star's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934). Based on the evaluation the Chief Executive Officer and Chief Financial
Officer have concluded that as of December 31, 2005 disclosure controls and
procedures were not effective, because of the material weakness discussed in
managements report on internal control over financial reporting.
Management's report on internal control over financial reporting:
Management of Golden Star is responsible for establishing and maintaining
adequate internal control over financial reporting. Golden Star's internal
control over financial reporting is a process designed under the supervision of
Golden Star's Chief Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting
purposes in accordance with Canadian GAAP.
As of December 31, 2005, management conducted an assessment of the effectiveness
of the Company's internal control over financial reporting based on the criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). This assessment
identified one control deficiency in the Company's internal control over
financial reporting that constitutes a material weakness, as defined by the
Public Company Accounting Oversight Board's Auditing Standard No. 2, that
existed as of December 31, 2005. As of December 31, 2005, management did not
maintain effective controls over the presentation and documentation of certain
derivatives. Specifically, the Company did not prepare and maintain sufficient
documentation to support the designation and effectiveness of hedges of certain
gold future contracts entered into by its subsidiary, EURO Ressources S.A.,
during 2005. This control deficiency resulted in the requirement for the
restatement of the Company's consolidated financial statements for the quarters
ended March 31, June 30 and September 30, 2005 and an audit adjustment to the
2005 annual consolidated financial statements. In addition, this control
deficiency could result in a misstatement of derivative related accounts
including fair value of derivatives and mark-to-market adjustments that would
result in a material misstatement of the interim or annual consolidated
financial statements that would not be prevented or detected. Because of the
existence of the deficiency in question at year-end, management has concluded
that the Company's internal control over financial reporting was ineffective as
of December 31, 2005.
Our assessment excluded St. Jude Resources Ltd. because it was acquired by the
Company in a purchase business combination on December 21, 2005. St. Jude
Resources assets represent 28% of our consolidated assets as of December 31,
2005.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report appearing on pages 75 and 76 of the Consolidated
Financial Statements, which expresses an unqualified opinion on management's
assessment and, due to the control deficiency described above, an adverse
opinion with respect to the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005.
Management's report on Consolidated Financial Statements
Management has concluded that the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as at
December 31, 2005 and 2004 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2005 in accordance
with Canadian generally accepted accounting principles. The consolidated
financial statements have been audited by PricewaterhouseCoopers LLP as stated
in their report which expressed an unqualified opinion thereon.
ITEM 9B. OTHER INFORMATION
None.
106
ITEMS 10, 11, 12, 13 AND 14
In accordance with General Instruction G(3), the information required by Part
III is hereby incorporated by reference from our proxy statement to be filed
pursuant to Regulation 14A not later than 120 days after the fiscal year covered
by this report.
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(h) The following documents are filed as part of this Report:
(i) Financial Statements
o Management's Report
o Auditors' Report
o Consolidated Balance Sheets as of December 31, 2005 and 2004
o Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
o Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2005, 2004 and 2003
o Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
o Notes to the Consolidated Financial Statements
(ii) Financial Statement Schedules
Financial Statement schedules have been omitted since they are
either not required, are not applicable, or the required
information is shown in the financial statements or related
notes.
(i) Exhibits
3(i) Incorporating Documents of the Company, including: Articles of Arrangement
dated May 14, 1992, with Plan of Arrangement attached, with Certificate of
Amendment with respect thereto dated May 15, 1992; Certificate of Amendment
dated May 15, 1992, with Articles of Amendment; Certificate of Amendment
dated March 26, 1993, with Articles of Amendment; Articles of Arrangement
dated March 7, 1995, with Plan of Arrangement attached, with Certificate of
Amendment with respect thereto dated March 14, 1995; Certificate of
Amendment dated July 29, 1996, with Articles of Amendment; and Certificate
of Amendment dated July 10, 2002, with Articles of Amendment (all
incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on
January 23, 2003); Articles of Amendment dated May 6, 2005
3(ii) Bylaws of the Company, including: Bylaw Number One, amended and restated
as of April 3, 2002 (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-3 (Reg. No. 333-102225) filed on
December 27, 2002); Bylaw Number Two, effective May 15, 1992 (incorporated
by reference to Exhibit 4.2 to the Company's Form 8-K filed on January 23,
2003); and Bylaw Number Three, effective May 15, 1992 (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K filed on January 23,
2003)
4.1 Form of Specimen Certificate for Common Shares (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-3/A (Reg.
No. 333-91666) filed on July 15, 2002)
4.2 Amended and Restated Shareholder's Rights Plan dated as of May 20, 2004
between the Company and CIBC Mellon Trust Company, as rights agent
(incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed
June 3, 2004)
4.9 Warrant Indenture, dated as of February 14, 2003, between the Company and
CIBC Mellon Trust Company, including the Form of Warrant (incorporated by
reference to Exhibit 4.1 of the Company's Form 8-K filed on February 14,
2003)
4.11 Securities Purchase Agreement dated April 15, 2005 between the Company and
Amaranth LLC (incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K filed on April 19, 2005)
107
4.12 Form of Senior Convertible Note dated April 15, 2005 (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K filed on April 19, 2005)
4.13 Registration Rights Agreement dated April 15, 2005 between the Company and
Amaranth LLC (incorporated by reference to Exhibit 4.3 to the Company's
Form 8-K filed on April 19, 2005)
4.14 Form of Warrant issued to warrantholders of St. Jude Resources Ltd.
4.15 Form of Option issued to optionholders of St. Jude Resources Ltd.
10.1 Summary of Executive Management Performance Bonus Plan (incorporated by
reference to Exhibit 10.1 of the Company's Form 8-K filed on January 23,
2003)
10.2 Second Amended and Restated 1997 Stock Option Plan, effective as of April
8, 2004 (incorporated by reference to Exhibit 10.2 to the Company's Form
10-K for the year ended December 31, 2004)
10.3 Form of Indemnification Agreement between the Company and its officers and
directors (incorporated by reference to Exhibit 10.3 of the Company's Form
8-K filed on January 23, 2003)
10.4 Employees' Stock Bonus Plan amended and restated to April 6, 2000
(incorporated by reference to Exhibit 10(j) to the Company's Form 10-K for
the year ended December 31, 2000)
10.5 Guyanor Ressources S.A. Stock Option Plan amended and restated as of June
15, 1999 (English translation) (incorporated by reference to Exhibit
10.35(a) to the Company's Form 10-K for the year ended December 31, 1999)
10.6 Amended and Restated Employment Agreement with Mr. Peter Bradford dated
April 30, 2004 (incorporation by reference to Exhibit 10.7 to the Company's
Form 10-K for the year ended December 31, 2004); Letter Agreement amending
Mr. Bradford's Amended and Restated Employment Agreement dated February 3,
2005 (incorporated by reference to the Company's Form 10-K for the year
ended December 31, 2004)
10.7 Amended and Restated Employment Agreement with Mr. Allan J. Marter dated
April 30, 2004 (incorporation by reference to Exhibit 10.8 to the Company's
Form 10-K for the year ended December 31, 2004)
10.8 Amended and Restated Employment Agreement with Dr. Douglas Jones dated
April 30, 2004 (incorporation by reference to Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 2004)
10.9 Amended and Restated Employment Agreement with Mr. Bruce Higson-Smith dated
April 30, 2004 (incorporation by reference to Exhibit 10.10 to the
Company's Form 10-K for the year ended December 31, 2004)
10.10 Amended and Restated Employment Agreement with Mr. Richard Q. Gray dated
April 30, 2004 (incorporation by reference to Exhibit 10.11 to the
Company's Form 10-K for the year ended December 31, 2004)
10.11 Agreements between the Company and its outside directors granting them
options to purchase Guyanor Class "B" common shares, (1) dated December 8,
1995, and December 10, 1996 (incorporated by reference as Exhibit 10.39 to
the Company's Form 10-K for the year ended December 31, 1996), (2) dated
December 9, 1997 (incorporated by reference to Exhibit 10.39(a) to the
Company's Form 10-K for the year ended December 31, 1997), (3) dated
December 8, 1998 (incorporated by reference to Exhibit 10.39(b) to the
Company's Form 10-K for the year ended December 31, 1998), (4) dated June
15, 1999 (incorporated by reference to Exhibit 10.39(c) to the Company's
Form 10-K for the year ended December 31, 1999), and (5) dated August 16,
2001 (incorporated by reference to Exhibit 10.11 to the Company's Form 10-K
for the year ended December 31, 2002)
10.12 Agreement, dated November 16, 2001, between Bogoso Gold Limited and
Prestea Gold Resources Limited for the purchase of Prestea mining lease
rights and option payments (incorporated by reference to Exhibit 10.2 to
the Company's Form 8-K filed on March 6, 2002)
10.13 Guiana Shield Transaction Agreement with Cambior Inc. dated October 25,
2001 for the sale and swap of Golden Star's interest in Gross Rosebel and
other properties (incorporated by reference to Exhibit 10.3 to the
Company's Form 8-K filed March 6, 2002)
10.14 Mining lease, dated August 16, 1988, between the Government of the
Republic of Ghana and Canadian Bogosu Resources Limited, relating to the
Bogoso property
108
10.15 Mining lease, dated August 21, 1987, between the Government of the
Republic of Ghana and Canadian Bogosu Resources Limited, relating to the
Bogoso property
10.16 Mining lease, dated June 29, 2001, between the Government of the Republic
of Ghana and Bogoso Gold Limited, relating to the Prestea property
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
on March 6, 2002)
10.17 Mining lease, dated September 17, 1992 between the Government of the
Republic of Ghana and Satellite Goldfields Limited, with letter dated April
25, 2002 form the Ministry of Mines consenting to assignment to Wexford
Goldfields Ltd., relating to the Wassa property (incorporation by reference
to Exhibit 10.26 to the Company's Form 10-K for the year ended December 31,
2004)
10.18 Mining lease dated June 29, 2001, between the Government of the Republic
of Ghana and Prestea Gold Resources, relating to the Prestea underground
property (incorporation by reference to Exhibit 10.27 to the Company's Form
10-K for the year ended December 31, 2004)
10.19 Joint Operating Agreement, dated January 31, 2002, between Bogoso Gold
Limited and Prestea Gold Resources Limited (incorporated by reference to
Exhibit 10.25 to the Company's Form 10-K for the year ended December 31,
2002)
10.20 Memorandum of Agreement, dated March 14, 2002, among Prestea Gold
Resources, Bogoso Gold Limited and others (incorporated by reference to
Exhibit 10.26 to the Company's Form 10-K for the year ended December 31,
2002)
10.21 Letter agreement between the Company and Guyanor Ressources S.A. dated
September 30, 2004 relating to sale of Gross Rosebel Participation Right
(incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for
the year ended December 31, 2004)
10.22 Arrangement Agreement dated November 11, 2005 between the Company and St.
Jude Resources Ltd. (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed on November 17, 2005)
10.23 Executive Employment Agreement, dated July 1, 2002, between St. Jude
Resources Ltd. and Bluestar Management Inc.
10.24 License Agreement, dated June 28, 2004 between Biomin Technologies S.A.
and Bogoso Gold Limited
14 Code of Ethics for Directors, Senior Executive and Financial Officers and
Other Executive Officers
21 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Colin Jones
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certificate of Principal Executive Officer pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
32.2 Certificate of Principal Financial Officer pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
GOLDEN STAR RESOURCES LTD.
Registrant
By: /s/ Peter J. Bradford
----------------------------------------------------------
Peter J. Bradford
President and Chief Executive Officer
Date: March 27, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Peter J. Bradford By: /s/ Allan J. Marter
-------------------------------------------- -------------------
Name: Peter J. Bradford Name: Allan J. Marter
Title: President and Chief Executive Officer Title: Senior Vice-President and Chief Financial Officer
Date: March 27, 2006 Date: March 27, 2006
By: /s/ James E. Askew By: /s/ David L. Bumstead
-------------------------------------------- ---------------------
Name: James E. Askew Name: David L. Bumstead
Title: Director Title: Director
Date: March 27, 2006 Date: March 27, 2006
By: /s/ David K. Fagin By: /s/ Ian MacGregor
-------------------------------------------- -----------------
Name: David K. Fagin Name: Ian MacGregor
Title: Director Title: Director
Date: March 27, 2006 Date: March 27, 2006
By: /s/ Michael Martineau By: /s/ Michael Terrell
-------------------------------------------- -------------------
Name: Michael Martineau Name: Michael Terrell
Title: Director Title: Director
Date: March 27, 2006 Date: March 27, 2006
110
EXHIBITS
3(i) Incorporating Documents of the Company, including: Articles of Arrangement
dated May 14, 1992, with Plan of Arrangement attached, with Certificate of
Amendment with respect thereto dated May 15, 1992; Certificate of Amendment
dated May 15, 1992, with Articles of Amendment; Certificate of Amendment
dated March 26, 1993, with Articles of Amendment; Articles of Arrangement
dated March 7, 1995, with Plan of Arrangement attached, with Certificate of
Amendment with respect thereto dated March 14, 1995; Certificate of
Amendment dated July 29, 1996, with Articles of Amendment; and Certificate
of Amendment dated July 10, 2002, with Articles of Amendment (all
incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on
January 23, 2003); Articles of Amendment dated May 6, 2005
3(ii) Bylaws of the Company, including: Bylaw Number One, amended and restated
as of April 3, 2002 (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-3 (Reg. No. 333-102225) filed on
December 27, 2002); Bylaw Number Two, effective May 15, 1992 (incorporated
by reference to Exhibit 4.2 to the Company's Form 8-K filed on January 23,
2003); and Bylaw Number Three, effective May 15, 1992 (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K filed on January 23,
2003)
4.1 Form of Specimen Certificate for Common Shares (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-3/A (Reg.
No. 333-91666) filed on July 15, 2002)
4.2 Amended and Restated Shareholder's Rights Plan dated as of May 20, 2004
between the Company and CIBC Mellon Trust Company, as rights agent
(incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed
June 3, 2004)
4.9 Warrant Indenture, dated as of February 14, 2003, between the Company and
CIBC Mellon Trust Company, including the Form of Warrant (incorporated by
reference to Exhibit 4.1 of the Company's Form 8-K filed on February 14,
2003)
4.11 Securities Purchase Agreement dated April 15, 2005 between the Company and
Amaranth LLC (incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K filed on April 19, 2005)
4.12 Form of Senior Convertible Note dated April 15, 2005 (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K filed on April 19, 2005)
4.13 Registration Rights Agreement dated April 15, 2005 between the Company and
Amaranth LLC (incorporated by reference to Exhibit 4.3 to the Company's
Form 8-K filed on April 19, 2005)
4.14 Form of Warrant issued to warrantholders of St. Jude Resources Ltd.
4.15 Form of Option issued to optionholders of St. Jude Resources Ltd.
10.1 Summary of Executive Management Performance Bonus Plan (incorporated by
reference to Exhibit 10.1 of the Company's Form 8-K filed on January 23,
2003)
10.2 Second Amended and Restated 1997 Stock Option Plan, effective as of April
8, 2004 (incorporated by reference to Exhibit 10.2 to the Company's Form
10-K for the year ended December 31, 2004)
10.3 Form of Indemnification Agreement between the Company and its officers and
directors (incorporated by reference to Exhibit 10.3 of the Company's Form
8-K filed on January 23, 2003)
10.4 Employees' Stock Bonus Plan amended and restated to April 6, 2000
(incorporated by reference to Exhibit 10(j) to the Company's Form 10-K for
the year ended December 31, 2000)
10.5 Guyanor Ressources S.A. Stock Option Plan amended and restated as of June
15, 1999 (English translation) (incorporated by reference to Exhibit
10.35(a) to the Company's Form 10-K for the year ended December 31, 1999)
10.6 Amended and Restated Employment Agreement with Mr. Peter Bradford dated
April 30, 2004 (incorporation by reference to Exhibit 10.7 to the Company's
Form 10-K for the year ended December 31, 2004); Letter Agreement amending
Mr. Bradford's Amended and Restated Employment Agreement dated February 3,
2005 (incorporated by reference to the Company's Form 10-K for the year
ended December 31, 2004)
111
10.7 Amended and Restated Employment Agreement with Mr. Allan J. Marter dated
April 30, 2004 (incorporation by reference to Exhibit 10.8 to the Company's
Form 10-K for the year ended December 31, 2004)
10.8 Amended and Restated Employment Agreement with Dr. Douglas Jones dated
April 30, 2004 (incorporation by reference to Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 2004)
10.9 Amended and Restated Employment Agreement with Mr. Bruce Higson-Smith dated
April 30, 2004 (incorporation by reference to Exhibit 10.10 to the
Company's Form 10-K for the year ended December 31, 2004)
10.10 Amended and Restated Employment Agreement with Mr. Richard Q. Gray dated
April 30, 2004 (incorporation by reference to Exhibit 10.11 to the
Company's Form 10-K for the year ended December 31, 2004)
10.11 Agreements between the Company and its outside directors granting them
options to purchase Guyanor Class "B" common shares, (1) dated December 8,
1995, and December 10, 1996 (incorporated by reference as Exhibit 10.39 to
the Company's Form 10-K for the year ended December 31, 1996), (2) dated
December 9, 1997 (incorporated by reference to Exhibit 10.39(a) to the
Company's Form 10-K for the year ended December 31, 1997), (3) dated
December 8, 1998 (incorporated by reference to Exhibit 10.39(b) to the
Company's Form 10-K for the year ended December 31, 1998), (4) dated June
15, 1999 (incorporated by reference to Exhibit 10.39(c) to the Company's
Form 10-K for the year ended December 31, 1999), and (5) dated August 16,
2001 (incorporated by reference to Exhibit 10.11 to the Company's Form 10-K
for the year ended December 31, 2002)
10.12 Agreement, dated November 16, 2001, between Bogoso Gold Limited and
Prestea Gold Resources Limited for the purchase of Prestea mining lease
rights and option payments (incorporated by reference to Exhibit 10.2 to
the Company's Form 8-K filed on March 6, 2002)
10.13 Guiana Shield Transaction Agreement with Cambior Inc. dated October 25,
2001 for the sale and swap of Golden Star's interest in Gross Rosebel and
other properties (incorporated by reference to Exhibit 10.3 to the
Company's Form 8-K filed March 6, 2002)
10.14 Mining lease, dated August 16, 1988, between the Government of the
Republic of Ghana and Canadian Bogosu Resources Limited, relating to the
Bogoso property
10.15 Mining lease, dated August 21, 1987, between the Government of the
Republic of Ghana and Canadian Bogosu Resources Limited, relating to the
Bogoso property
10.16 Mining lease, dated June 29, 2001, between the Government of the Republic
of Ghana and Bogoso Gold Limited, relating to the Prestea property
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
on March 6, 2002)
10.17 Mining lease, dated September 17, 1992 between the Government of the
Republic of Ghana and Satellite Goldfields Limited, with letter dated April
25, 2002 form the Ministry of Mines consenting to assignment to Wexford
Goldfields Ltd., relating to the Wassa property (incorporation by reference
to Exhibit 10.26 to the Company's Form 10-K for the year ended December 31,
2004)
10.18 Mining lease dated June 29, 2001, between the Government of the Republic
of Ghana and Prestea Gold Resources, relating to the Prestea underground
property (incorporation by reference to Exhibit 10.27 to the Company's Form
10-K for the year ended December 31, 2004)
10.19 Joint Operating Agreement, dated January 31, 2002, between Bogoso Gold
Limited and Prestea Gold Resources Limited (incorporated by reference to
Exhibit 10.25 to the Company's Form 10-K for the year ended December 31,
2002)
112
10.20 Memorandum of Agreement, dated March 14, 2002, among Prestea Gold
Resources, Bogoso Gold Limited and others (incorporated by reference to
Exhibit 10.26 to the Company's Form 10-K for the year ended December 31,
2002)
10.21 Letter agreement between the Company and Guyanor Ressources S.A. dated
September 30, 2004 relating to sale of Gross Rosebel Participation Right
(incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for
the year ended December 31, 2004)
10.22 Arrangement Agreement dated November 11, 2005 between the Company and St.
Jude Resources Ltd. (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed on November 17, 2005)
10.23 Executive Employment Agreement, dated July 1, 2002, between St. Jude
Resources Ltd. and Bluestar Management Inc.
10.24 License Agreement, dated June 28, 2004 between Biomin Technologies S.A.
and Bogoso Gold Limited
14 Code of Ethics for Directors, Senior Executive and Financial Officers and
Other Executive Officers
21 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Colin Jones
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certificate of Principal Executive Officer pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
32.2 Certificate of Principal Financial Officer pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
113