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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2010
Commission file number
001-04192
Terra Nova Royalty
Corporation
(Exact name of Registrant as
specified in its charter)
British Columbia,
Canada
(Jurisdiction of incorporation
or organization)
Suite 1620 – 400
Burrard Street, Vancouver, British Columbia, Canada V6C
3A6
(Address of principal
offices)
|
Michael J. Smith
Suite 1620 – 400 Burrard Street Vancouver, British Columbia, Canada V6C 3A6 Telephone: +1 604-683-8286 Facsimile: +1 604-683-3205 |
with a copy to:
H.S. Sangra
,
Sangra Moller
LLP
1000 Cathedral Place, 925 West Georgia Street Vancouver, British Columbia , Canada V6C 3L2 Facsimile: +1 604-669-8803 |
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact
Person)
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
|
New York Stock Exchange |
Securities registered or to be
registered pursuant to Section 12(g) of the Act:
None.
Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act:
None.
Indicate the number of outstanding shares of each of the
issuer’s classes of capital or common stock as of the close
of the period covered by the annual report.
There were 62,561,421 common shares, without par value,
issued and outstanding as of December 31, 2010.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
o
YES
þ
NO
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934.
o
YES
þ
NO
Note — Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
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 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.
þ
YES
o
NO
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.
|
Large accelerated
filer
o
|
Accelerated filer þ | Non-accelerated filer o |
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this
filing.
|
U.S.
GAAP
o
|
International Financial Reporting Standards as issued by the International Accounting Standards Board þ | Other o |
If “Other” has been checked in response to the
previous question, indicate by check mark which financial
statement item the registrant has elected to
follow.
o
Item 17
o
Item 18
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2
of the Exchange
Act)
o
YES
þ
NO
Table of Contents
TERRA NOVA ROYALTY CORPORATION
DEAR FELLOW SHAREHOLDERS
2010 has been a year of transition for our company. During the year, we completed the distribution
of our former subsidiary, KHD Humboldt Wedag International AG (“KID”) to our shareholders and we
acquired Mass Financial Corp. (“Mass”). This has allowed us to create a very interesting platform
for future growth. Our current goal is to expand our existing businesses and to grow by our
traditional acquisition method, with a focus on larger projects.
All references to dollar amounts are in United States dollars unless otherwise stated.
Here is how we look in a simple way:
|
Book value
|
$ | 548 | million | |
|
Book value per share
|
$ | 8.76 | ||
|
Cash & securities
|
$ | 426 | million | |
|
Working capital
|
$ | 412 | million | |
|
2011 Projected revenues with Mass*
|
$ | 410 to 425 | million | |
| Common share listing | New York Stock Exchange | |||
| * | note: This projection, without new projects, is being provided for illustrative purposes for our company going forward after the acquisition of Mass and is based on various assumptions made by management, including that the financial results of the businesses remain consistent with the preceding year and is based on current economic and operating conditions. Readers are cautioned that such information is subject to various risks and uncertainties, including those set forth under Risk Factors in our annual report on Form 20-F, is not indicative of actual results and is not appropriate for other purposes. |
Results
It should be clearly noted that our results of operations for 2010 only include the results of the
businesses acquired through our acquisition of Mass from November 16, 2010, or less than 30 working
days. Accordingly, they are not comparable to prior periods.
The results also include expenses for the period and negative goodwill in the amount of $41.1
million, which do not have a direct relationship to our business platform going forward.
For the year ended December 31, 2010, our total revenues were $85.4 million (excluding negative
goodwill of $41.1 million) with net income to our shareholders of $30.3 million or $0.85 per
diluted share.
Revenues for 2009 from our continuing operations were $14.7 million, and net income to our
shareholders was $36.7 million, or $1.21 per share.
At December 31, 2010, we had $426 million in cash and securities, our current ratio was 3.77 and
our long-term debt-to-shareholders’ equity ratio was 0.09. Our acid test ratio (cash, receivable
and short term investments, divided by current liabilities) was 3.07 and book value was $8.76 per
share.
CHAIRMAN’S LETTER
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TERRA NOVA ROYALTY CORPORATION
Our total revenues by operating segment were as follows for each of the years ended December
31, 2010 (which includes less than 30 working days for the consolidation of Mass and excludes the
negative goodwill described below) and 2009.
All amounts in thousands
| 2010 | 2009 | |||||||
|
Commodities and resources
|
$ | 76,478 | $ | 13,530 | ||||
|
Merchant banking
|
4,821 | — | ||||||
|
Other
|
4,131 | 1,188 | ||||||
|
|
||||||||
|
Total revenues
|
$ | 85,430 | $ | 14,718 | ||||
|
|
||||||||
Negative
Goodwill
In 2010, we recognized negative goodwill in the amount of $41.1 million, which arose as the market
price of our shares on the acquisition dates, being $7.99 was less than the fair value of the net
identifiable assets acquired from Mass. Also, Mass had positive goodwill on its books, in the
amount of $5.4 million, which was offset against such negative goodwill.
Pro
Forma Consolidated Results for 2010
The following table presents the results of our continuing operations as if the businesses of Mass
had been acquired and consolidated as of January 1, 2010. The amounts include the results of Mass,
depreciation, amortization and depletion of the acquired fixed assets and intangible assets
recognized on acquisition. The amounts do not include any possible synergies from the acquisition.
The results of Mass for the period before acquisition have not been adjusted to reflect our
accounting policies nor to reflect the fair value adjustments made on acquisition. The information
is provided for illustrative purposes only and does not necessarily reflect the actual results that
would have occurred, nor is it necessarily indicative of our future results and is not appropriate
for other purposes.
All amounts in thousands (unaudited)
|
Revenues
|
$ | 379,695 | ||
|
Net income
|
$ | 29,307 | ||
|
Net income attributable to equity shareholders
|
$ | 28,619 |
CHAIRMAN’S LETTER
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TERRA NOVA ROYALTY CORPORATION
Liquidity
Our management believes we currently have adequate liquidity and acceptable financial ratios. As
at December 31, 2010, we had cash and securities of
$426 million, working capital of $412 million,
total assets of $854 million and our shareholders’ equity was $548 million.
We also have lines of credit in the amount of $379 million. As part of our activities, we
establish, utilize and maintain various kinds of credit lines and facilities with banks, insurers
and finance providers, including accounts receivable financing and letters of credit. We often
enhance the credit of such facilities through insurance. Trade finance is often layered with
varying limitations and exceptions.
We believe that cash flow from operating activities together with cash on hand and borrowings
available under our credit facilities will be sufficient to fund currently anticipated capital
spending and debt service requirements. We generally fund our operations from cash generated by
operations.
Financial Highlights
All amounts in thousands, except per share data
| December 31 | 2010 | 2009 | ||||||
|
Cash and cash equivalent
|
$ | 397,697 | $ | 38,046 | ||||
|
Securities
|
$ | 27,894 | $ | 11,212 | ||||
|
Current assets
|
$ | 560,471 | $ | 736,747 | ||||
|
Total assets
|
$ | 854,256 | $ | 951,720 | ||||
|
Current liabilities
|
$ | 148,551 | $ | 365,926 | ||||
|
Working capital
|
$ | 411,920 | $ | 370,821 | ||||
|
Current ratio
|
3.77 | 2.01 | ||||||
|
Acid test ratio
|
3.07 | 8.72 | ||||||
|
Long-term debt, less current portion
|
$ | 48,604 | N/A | |||||
|
Long-term debt-to-shareholders’ equity
|
0.09 | N/A | ||||||
|
Total liabilities
|
$ | 301,816 | $ | 510,628 | ||||
|
Shareholders’ equity
|
$ | 547,756 | $ | 435,689 | ||||
|
Equity per common share
|
$ | 8.76 | $ | 14.40 | ||||
CHAIRMAN’S LETTER
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TERRA NOVA ROYALTY CORPORATION
Business
We are active in a broad spectrum of activities related to the integrated combination of
commodities and resources and merchant banking. Our business is divided into three reportable
segments: (i) commodities and resources, which includes our commodities trading activities and
mineral and royalty interests; (ii) merchant banking, which includes our trading, trade finance,
financial services and proprietary investing activities; and (iii) other, which encompasses our
corporate and other investments, including our medical supplies and services businesses.
Trading of Commodities and Resources
Our commodities and resources operations include our integrated commodities trading activities and
our mineral interests. We conduct trading primarily through our subsidiaries based in Vienna,
Austria and supply various commodities, including minerals and metals, chemicals and plastics and
wood products to our customers. Such commodities originate either from our directly or indirectly
held interests in resource projects or are secured by us from third parties. Our commodities
trading activities are globally focused. We also derive production royalty revenue from a mining
sub-lease of the lands upon which the Wabush iron ore mine is situated.
Through our commodities and resources business, we also provide logistics and other services to
producers and consumers of commodities. These activities are supported by strategic direct or
indirect investments in resource assets operating in our core commodities, including plastics,
non-ferrous metals and minerals, including iron ore.
Our commodities trading activities include purchasing, selling and conducting product swaps of
various commodities. To a lesser extent, we also act as a trading agent for clients. Our trading
activities often utilize innovative trading strategies and structures. We currently trade with
commodity and other producers who are unable to effectively realize sales due to their specific
circumstances.
Generally we purchase or produce the underlying commodity and sell it to an end buyer or further
trade it for another commodity which will subsequently be sold. Further, commodity producers and
end customers often work with us to better manage their internal supply, distribution risk, and
currency and capital requirements. In such trading activities, we try to capture various trading,
financing and currency spreads. Through our trading activities, we have been able to
develop ongoing relationships with commodity producers, end customers and trade financiers.
We generally source commodities from Asia, Africa, Europe, the United States and the Middle East.
Our commodities sales for the most part include the European, Middle Eastern, Asian and North and
South American markets.
Through our commodities trading activities, we have sourced, supplied and traded, primarily for our
own account, the following commodities:
CHAIRMAN’S LETTER
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TERRA NOVA ROYALTY CORPORATION
| Metals and Minerals | Chemicals and Plastics | Wood Products | ||
|
iron-ore
bauxite manganese-ore cobalt base metals magnesium steel products zinc alloys aluminum foils aluminum sheets coal clinker cement ferrous alloys silicon metals |
polystyrene
high density polyethylene linear low density polyethylene low density polyethylene polyethylene terephthalate polypropylene polyvinyl chloride |
pulp
saw logs round logs sawn timber plywood medium density fiberboard wood pellets |
Merchant Banking
Our merchant banking business includes merchant banking and financial services, including
specialized banking, corporate finance, trade finance and other services, proprietary investing and
our real estate and investment properties. We seek to invest in many industries, emphasizing those
businesses or assets where the perceived intrinsic value is not properly recognized nor properly
reflected in their share price valuation. Our investments are generally not passive. We seek
investments where our management and financial expertise can be used to actively add or unlock
value. Our merchant banking activities also include our trading and financial experience and
relationships to provide trading services, such as transportation and logistics and trade finance
services to our trading customers.
Other
Our other segment encompasses corporate and our investments in joint ventures through our
subsidiary which provides medical equipment and supplies. Specifically, we are engaged in the
operation of technically advanced eye care centers through cooperative joint ventures with
government-controlled hospitals in China. These hospitals provide the necessary space and medical
staff to operate the centers, and we provide the specialized medical equipment and supplies,
training and supervision with respect to certain surgical procedures. We also sell and service
medical equipment.
Transactions Highlights for 2010
| • | January 6 th , we announced our intention to restructure our assets and operations by dividing into two independent publicly traded companies; one company to focus on the industrial engineering business and the other to focus on our resource-focused business. To effect this division we effected a reorganization whereby substantially all of our subsidiaries engaged in the industrial engineering business were transferred to KID. |
CHAIRMAN’S LETTER
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TERRA NOVA ROYALTY CORPORATION
| • | February 26 th , we entered into an Arrangement Agreement with KID, which was approved by our shareholders on March 29, 2010. | ||
| • | March 30 th , pursuant to the arrangement we separated into two distinct owned and operated businesses: a mineral royalty and natural resources business conducted by Terra Nova Royalty Corporation; and an industrial plant technology, equipment and service business conducted by our former subsidiary, KID. | ||
| • | March 30 th , we distributed to our shareholders, by way of return of capital, approximately 26% of the issued KID shares at such time without any withholding taxes. This was tax efficient. | ||
| • | July 1 st , we distributed to our shareholders approximately 23% of the issued KID shares at such time, for which there was Canadian withholding tax of 15% for U.S. residents, which was not tax efficient. | ||
| • | July 27 th , we announced a rights offering (the “Rights Offering”), pursuant to which, each holder of our common shares of record as of August 6, 2010, received one transferable right (a “Right”) for every common share held. Every four Rights entitled a holder to purchase one common share at a price of $6.60. On September 8, 2010, we announced that the Rights Offering was fully subscribed. We issued a total of 7,571,227 common shares under the Rights Offering, representing total gross proceeds of approximately $50 million. The Rights Offering provided us with much needed paid-up capital to assist with further distributions of the KID shares. | ||
| • | September 23 rd , we distributed to our shareholders, by way of a return of capital, approximately 29% of the issued KID shares at such time without any withholding taxes. This was tax efficient. | ||
| • | September 27 th , we announced that we had entered into an agreement with Mass for us to acquire all of the issued and outstanding shares of Mass by way of a take-over bid. We offered one of our common shares for each Mass share pursuant to our offer, valuing the transaction at approximately $225 million. The offer ratio was based upon the adjusted book value of each company and valued our shares at $8.91 per share. | ||
| • | November 9 th , we announced the expiry of our offer to acquire all of the common shares of Mass through our wholly-owned subsidiary. Mass shares, representing over 93% of the outstanding shares of Mass, were tendered pursuant to the Offer. | ||
| • | December 31 st , we distributed to our shareholders by way of a return of capital, the substantial balance of the KID shares held by us, without any withholding tax for our shareholders. This was tax efficient. |
We also established an annual dividend policy as follows:
| • | The annual dividend is based on the annual dividend yield of the New York Stock Exchange Composite Index for the preceding year plus 25 basis points. |
CHAIRMAN’S LETTER
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TERRA NOVA ROYALTY CORPORATION
| • | On January 15, 2011, we announced the declaration of an aggregate cash dividend for 2011 of $0.20 per common share, representing a dividend yield of 2.58 percent, payable in quarterly instalments. | ||
| • | The first payment of $0.05 per common share was paid on January 31, 2011 to shareholders of record on January 20, 2011. The second payment will be made on April 11, 2011 to shareholders of record on March 31, 2011. In the future, we plan to announce and declare the cash dividend during the first full week of each year. The declaration, timing and payment of future dividends will depend on, among other things, our financial results. |
Accounting Changes
We have changed our financial reporting standards from Canadian GAAP to International Financial
Reporting Standards (“IFRS”) from January 1, 2010. Pursuant to
IFRS 1, First-time Adoption of
International Financial Reporting Standards,
we increased the value of the Wabush royalty asset to
its fair value as of January 1, 2009. Based upon our January 1, 2009 valuation including the then
royalty rates and forecasted demand, the effect of such an increase was as follows:
All amounts in thousands, except per share data
|
Carrying value January 1, 2009
|
$ | 24,861 | ||
|
Valuation increase
|
$ | 175,139 | ||
|
Revised book value
|
$ | 200,000 | ||
|
Deferred income tax liability
|
$ | (51,133 | ) | |
|
Increase in shareholders’ equity
|
$ | 124,006 | ||
|
Shares outstanding (000’s)
|
62,561 | |||
|
Increase in shareholder’s equity per share
|
$ | 1.98 |
| notes: | Number of shares outstanding after the acquisition of 100 percent of the common shares of Mass. |
The above-mentioned increase of our royalty asset valuation does not take into consideration
the increase in the current pricing developments of the underlying commodity.
The final distribution of the KID shares in the fourth quarter and the change to IFRS allows us to
present a clearer picture of our financial position by presenting KID as a discontinued operation
which, in effect removes KID results from our profit and loss statement and year end balance sheet.
We believe this presentation provides a very clearer foundation going forward, but is not helpful
in reviewing the 2010 year.
CHAIRMAN’S LETTER
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TERRA NOVA ROYALTY CORPORATION
Corporate Tax
We are a company organized under the laws of Canada, with operations through a subsidiary that is
organized under the laws of Barbados and licensed as an “international business company” under
Barbados laws. As an international business company, it is subject to Barbados income tax at
regressive rates ranging from 2.5% to 1%. Such rates being 2.5% on all profits and gains up to
Barbados dollars (“Bds”) $10 million, 2% on all profits and gains exceeding Bds$10 million but not
exceeding Bds$20 million, 1.5% on all profits and gains exceeding Bds$20 million but not exceeding
Bds$30 million and 1% on all profits and gains in excess of Bds$30 million. Barbados does not levy
any form of tax on capital gains, nor does it tax earnings of foreign corporations in which there
is an equity interest. In 2010 we recorded a mining royalty tax of $6.7 million and tax on other
income of $231,000.
Objectives
Our prime objective is simply to do good business. Given our liquid resources, we are well
positioned to take advantage of opportunities arising from the global market downturn. These are
interesting times for business opportunities but we must maintain our financial discipline. As we
progress this year, we plan to change our name and image to better reflect our new direction and
platform.
Management Disappointments for 2010
Our disappointments for last year included the following:
| • | Our general and administrative expenses are still way too high. It should now come down as we have completed all our major transactions in 2010; | ||
| • | we have several new projects that we are working on, but have yet completed, but we are pleased that we controlled our risk in assessing these new opportunities; and | ||
| • | we did not cut off all expenses related to the former industrial business quickly enough. |
These are the key areas for management to improve upon.
Summary
We believe that the growth of our asset base and net worth are the only true valuation measures of
our performance. Going forward, we will utilize our foundation of commodities and resources and
merchant banking and our strategic of operating businesses to vigorously pursue international
opportunities for future growth. We will continue to manage our business activities for the long
term, investing on the basis of our traditional disciplined approach while paying particular
attention to the potential value to be realized by applying our financial expertise and patience.
I would like to thank our shareholders for their support and look forward to generating a return on
our assets.
Respectfully Submitted,
Michael J. Smith
Chairman of the Board
CHAIRMAN’S LETTER
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TERRA
NOVA ROYALTY CORPORATION
Form 20-F
TABLE OF
CONTENTS
Table of Contents
Table of Contents
FORWARD-LOOKING
STATEMENTS
This document contains certain forward-looking information and
statements, including statements relating to matters that are
not historical facts and statements of our beliefs, intentions
and expectations about developments, results and events which
will or may occur in the future, which constitute
“forward-looking information” within the meaning of
applicable Canadian securities legislation and
“forward-looking statements” within the meaning of the
“safe harbour” provisions of the
United States
Private Securities Litigation Reform Act of 1995
,
collectively referred to as “forward-looking
statements”. Forward-looking statements are typically
identified by words such as “anticipate”,
“could”, “should”, “expect”,
“seek”, “may”, “intend”,
“likely”, “will”, “plan”,
“estimate”, “believe” and similar
expressions suggesting future outcomes or statements regarding
an outlook.
Forward-looking statements are included throughout this document
and include, but are not limited to, statements with respect to:
our projected revenues; markets; production, demand and prices
for products and services, including iron ore and other
minerals; trading; trends, economic conditions, performance,
business prospects, results of operations; capital expenditures;
the economy; foreign exchange rates; derivatives; our ability to
expand our business; and other such matters. All such
forward-looking statements are based on certain assumptions and
analyses made by us in light of our experience and perception of
historical trends, current conditions and expected future
developments, as well as other factors we believe are
appropriate in the circumstances. These statements are, however,
subject to known and unknown risks and uncertainties and other
factors. As a result, actual results, performance or
achievements could differ materially from those expressed in, or
implied by, these forward-looking statements and, accordingly,
no assurance can be given that any of the events anticipated by
the forward-looking statements will transpire or occur, or if
any of them do so, what benefits will be derived therefrom.
These risks, uncertainties and other factors include, among
others:
| • | our financial results may fluctuate substantially from period to period; | |
| • | our earnings and, therefore, our profitability, may be affected by commodities price volatility; | |
| • | a weak global economy can adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources; | |
| • | the commodities and resources and merchant banking businesses are highly competitive; | |
| • | the operation of the Wabush iron ore mine is generally determined by a third party owner and we have no decision making power as to how the property is operated. In addition, we have no or very limited access to technical or geological data respecting the mine including as to reserves. The owner’s failure to perform or other operating decisions made by the owner, including as to scaling back or ceasing operations, could have a material adverse effect on our revenue, our results of operations and financial condition; | |
| • | the profitability of our commodities and resources operations depends, in part, on the availability of adequate sources of supply; | |
| • | we may face a lack of suitable acquisition or merger or other proprietary investment candidates, which may limit our future growth; | |
| • | we may be unable to successfully compete for mineral interests with companies that have greater financial resources; | |
| • | strategic investments or acquisitions and joint ventures, or our entry into new business areas, may result in additional risks and uncertainties in our business; | |
| • | we may fail to realize all of the anticipated benefits of our acquisition of Mass Financial Corp., referred to as “Mass”; | |
| • | the industries in which we operate may be affected by disruptions beyond our control; | |
| • | our trading activities are subject to counterparty risks associated with performance of obligations by our trading partners and suppliers; | |
| • | larger and more frequent capital commitments in our merchant banking business increase the potential for significant losses; |
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| • | our income from royalty and other similar interests will be dependent on the payments made by the owners and operators of our royalty and similar interests, and any delay in or failure of such royalty payments will affect the revenues generated by our royalty interests; | |
| • | we are subject to transaction risks that may have a material adverse effect on our business, results of operations, financial condition and cash flow; | |
| • | our risk management strategies expose us to unidentified or unanticipated risks that could impact our risk management strategies in the future and could negatively affect our results of operations and financial condition; | |
| • | derivative transactions may expose us to unexpected risks and potential losses; | |
| • | fluctuations in interest rates and foreign currency exchange rates may affect our results of operations and financial condition; | |
| • | our operations and infrastructure may malfunction or fail; | |
| • | the exploration and development of resource properties is inherently dangerous and subject to risks beyond our control; | |
| • | our commodities and resources operations are subject to environmental laws and regulations that may increase the costs of doing business and may restrict such operations; | |
| • | we or the operators of our current and any future resource interests may not be able to secure required permits and licenses; | |
| • | there can be no assurance that we will be able to obtain adequate financing in the future or that the terms of such financing will be favourable and, as a result, we may have to raise additional capital through the issuance of additional equity, which will result in dilution to our shareholders; | |
| • | limitations on our access to capital could impair our liquidity and our ability to conduct our business; | |
| • | we may substantially increase our debt in the future; | |
| • | we are exposed to political, economic, legal, operational and other risks as a result of our global operations that could negatively affect our business, and our results of operations, financial condition and cash flow could be adversely affected; | |
| • | we are exposed to litigation risks in our business that are often difficult to assess or quantify. We anticipate that we will incur significant legal expenses every year in defending against litigation; | |
| • | we rely significantly on the skills and experience of our executives and the loss of these individuals could harm our business; | |
| • | we may experience difficulty attracting and retaining qualified management and technical personnel to efficiently operate our business, and the failure to operate our business effectively could have a material and adverse effect on our profitability, financial condition and results of operations; | |
| • | certain of our directors and officers may, from time to time, serve in similar positions with other public companies, which may put them in a conflict position from time to time; | |
| • | we conduct business in countries with a history of corruption and transactions with foreign governments increases the risks associated with our international activities; | |
| • | employee misconduct could harm us and is difficult to detect and deter; | |
| • | we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters; | |
| • | investors’ interests may be diluted and investors may suffer dilution in their net book value per share if we issue additional shares or raise funds through the sale of equity securities; | |
| • | our constating documents contain indemnification provisions, and we have entered into agreements indemnifying our officers and directors against all costs, charges and expenses incurred by them; and |
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| • | certain factors may inhibit, delay or prevent a takeover of our company, which may adversely affect the price of our common shares. |
Although we believe that the expectations reflected in such
forward-looking information and statements are reasonable, we
can give no assurance that such expectations will prove to be
accurate. Accordingly, readers should not place undue reliance
upon any of the forward-looking information and statements set
out in this document. All of the forward-looking information and
statements of ours contained in this document are expressly
qualified, in their entirety, by this cautionary statement. The
various risks to which we are exposed are described in
additional detail in this document under the section entitled
“
Item 3: Key Information — D. Risk
Factors
”. The forward-looking information and
statements are made as of the date of this document, and we
assume no obligation to update or revise them except as required
pursuant to applicable securities laws.
As used in this annual report, the terms “we”,
“us” and “our” mean Terra Nova Royalty
Corporation and our subsidiaries, unless otherwise indicated.
CURRENCY
Unless otherwise indicated, all references in this document to
“$” and “dollars” are to United States
dollars and all references to “CDN$” and
“Canadian dollars” are to Canadian dollars and all
references to “Euro” or “€” are to the
European Union Euro. On March 25, 2010, the noon buying
rate in New York City for cable transfers as certified by the
Federal Reserve Bank of New York for the conversion of Canadian
dollars and Euros to United States dollars was CDN$1.00 =
0.9779 and €1.00 = 1.4144, respectively.
PRESENTATION
OF FINANCIAL INFORMATION
In December 2010, applicable Canadian securities commissions
granted us exemptive relief permitting us to adopt International
Financial Reporting Standards as issued by the International
Accounting Standards Board, referred to as “IFRS”,
effective from January 1, 2010. In connection therewith, we
have filed amended financial statements, and related
Management’s Discussion and Analysis, prepared in
accordance with IFRS for each of the interim periods ended
March 31, June 30 and September 30, 2010 with Canadian
securities regulators and on
Form 6-K
with the United States Securities and Exchange Commission.
Unless otherwise stated, all financial information presented
herein has been prepared in accordance with IFRS. All prior
period amounts have been reclassified to conform to IFRS. Please
note that our prior annual financial statements were prepared in
accordance with Canadian generally accepted accounting
principles, which may not be comparable to the financial
statements contained herein. Please refer to Note 36 of our
annual financial statements included herewith for a discussion
on the impact of our transition from Canadian generally accepted
accounting principles to IFRS.
In 2010, we disposed of our former industrial plant technology,
equipment and service business, referred to as the
“Industrial Business”, which resulted in its being
accounted for as discontinued operations in our financial
statements. See the section of this annual report on
Form 20-F
entitled “
Item 5: Operating and Financial Review
and Prospects — Operating Results —
Discontinued Operations
” for further information
respecting such discontinued operations.
| ITEM 1: | Identity of Directors, Senior Management and Advisers |
Not applicable.
| ITEM 2: | Offer Statistics and Expected Timetable |
Not applicable.
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| ITEM 3: | Key Information |
| A. | Selected Financial Data |
The following table summarizes selected consolidated financial
data prepared in accordance with IFRS, for each of the fiscal
years ended December 31, 2010 and 2009. The information in
the table was extracted from the detailed consolidated financial
statements and related notes included elsewhere in this annual
report on
Form 20-F
and should be read in conjunction with such financial statements
and with the information appearing under the heading
“
Item 5: Operating and Financial Review and
Prospects
”.
Selected
Financial Data
(Stated in United States dollars in accordance with IFRS)
(in thousands, other than per share amounts)
(Stated in United States dollars in accordance with IFRS)
(in thousands, other than per share amounts)
| Fiscal Years Ended December 31, | ||||||||
| 2010 (1) | 2009 | |||||||
|
Net sales
|
$ | 84,476 | $ | 14,718 | ||||
|
Net income (loss) from continuing
operations
(2)
|
45,839 | (16,320 | ) | |||||
|
Net income (loss) income from discontinued
operations
(2)
|
(15,523 | ) | 52,992 | |||||
|
Basic earnings (loss) per share:
|
||||||||
|
Continuing operations
|
1.28 | (0.54 | ) | |||||
|
Discontinued operations
|
(0.43 | ) | 1.75 | |||||
|
Diluted earnings (loss) per share
|
||||||||
|
Continuing operations
|
1.28 | (0.54 | ) | |||||
|
Discontinued operations
|
(0.43 | ) | 1.75 | |||||
|
Net
income
(2)
|
30,316 | 36,672 | ||||||
|
Net income per share
|
||||||||
|
Basic
|
0.85 | 1.21 | ||||||
|
Diluted
|
0.85 | 1.21 | ||||||
|
Total assets
|
854,256 | 951,720 | ||||||
|
Net assets
|
552,440 | 441,092 | ||||||
|
Long-term debt, less current portion
|
48,604 | — | ||||||
|
Shareholders’ equity
|
547,756 | 435,689 | ||||||
|
Capital stock, net of treasury stock
|
314,172 | 58,270 | ||||||
|
Weighted average common stock outstanding, diluted
|
35,859 | 30,354 | ||||||
Notes
| (1) | We consolidated the operations of Mass from November 16, 2010. | |
| (2) | Net income attributable to our shareholders. |
| B. | Capitalization and Indebtedness |
Not applicable.
| C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
| D. | Risk Factors |
Certain statements in this annual report on
Form 20-F
are forward-looking statements, which reflect our
management’s expectations regarding our future growth,
results of operations, performance, and business prospects
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and opportunities. Forward-looking statements consist of
statements that are not purely historical, including any
statements regarding beliefs, plans, expectations, projections
or intentions regarding the future. While these forward-looking
statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding
the direction of our business, actual results will almost always
vary, sometimes materially, from any estimates, predictions,
projections, assumptions or other future performance suggested
herein.
Such estimates, projections or other forward-looking statements
involve various risks and uncertainties as outlined below. We
caution the reader that important factors in some cases have
affected and, in the future, could materially affect actual
results and cause actual results to differ materially from the
results expressed in any such estimates, projections or other
forward-looking statements.
An investment in our common shares involves a number of risks.
You should carefully consider the following risks and
uncertainties in addition to other information in this annual
report on
Form 20-F
in evaluating our company and our business before purchasing our
common shares. Our business, operations and financial condition
could be materially and adversely affected by one or more of the
following risks.
Risk
Factors Relating to Our Business
Our
financial results may fluctuate substantially from period to
period.
We expect our business to experience in the future significant
periodic variations in its revenues and results of operations.
These variations may be attributed in part to the fact that our
merchant banking revenues are often earned upon the successful
completion of a transaction, the timing of which is uncertain
and beyond our control. In many cases, we may receive little or
no payment for engagements that do not result in the successful
completion of a transaction. Additionally, through our merchant
banking business, we seek to acquire undervalued assets where we
can use our experience and management to realize upon the value.
Often we will hold or build upon these assets over time and the
timing of its realization is not predictable. As a result, we
are unlikely to achieve steady and predictable earnings, which
could in turn adversely affect our financial condition and
results of operations.
Our
earnings and, therefore, our profitability, may be affected by
commodities price volatility.
The majority of our revenue from our commodities and resources
business is derived from the sale of commodities, including
metals, plastics and other materials. As a result, our earnings
are directly related to the prices of these commodities. In
addition, our revenues from our royalty business and our other
iron ore interests are directly connected to the price of iron
ore. There are many factors influencing the price of metals,
plastics and other commodities, including expectations for
inflation; global and regional demand and production; political
and economic conditions; and production costs in major producing
regions. These factors are beyond our control and are impossible
for us to predict. Changes in the prices of iron ore, plastics,
metals and other commodities may adversely affect our operating
results. We have not engaged in material hedging transactions or
alternative measures to manage possible price fluctuations.
A weak
global economy can adversely affect our business and financial
results and have a material adverse effect on our liquidity and
capital resources.
Our business, by its nature, does not produce predictable
earnings, and it may be materially affected by conditions in the
global financial markets and economic conditions generally.
Global financial markets experienced extreme and unprecedented
disruption in the latter part of 2008, including, among other
things, extreme volatility in security prices, severely
diminished liquidity and credit availability, rating downgrades
of certain investments and declining valuations of others.
Although financial markets stabilized and signs of a global
economic recovery began to emerge in the latter part of 2009 and
continued through 2010, the economic environment, particularly
in the United States and Europe, continues to be generally weak
and we remain exposed to a number of risks associated with weak
or adverse economic conditions.
Market deterioration and weakness can result in a material
decline in the number and size of the transactions that we
execute for our own account and for our clients and to a
corresponding decline in our revenues. Market weakness can
further result in losses to the extent that we own assets in
such market.
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The nature of the recovery in the global economy in general
remains uncertain, and there can be no assurance that market
conditions will continue to improve in the near future.
The
commodities and resources and merchant banking businesses are
highly competitive.
All aspects of the commodities and resources and merchant
banking businesses are highly competitive, and we expect them to
remain so.
Our competitors include merchant and investment banks, brokerage
firms, commercial banks, private equity firms, hedge funds,
financial advisory firms and natural resource and mineral
royalty companies. Many of our competitors have substantially
greater capital and resources, including access to commodities
supply, than we do. We believe that the principal factors
affecting competition in our business include transaction
execution, our products and services, client relationships,
reputation, innovations, credit worthiness and price. We have
experienced price competition in some of our trading business.
The scale of our competitors has increased in recent years as a
result of substantial consolidation. These firms have the
ability to offer a wider range of products than we do which may
enhance their competitive position. They also have the ability
to support their business with other financial services such as
commercial lending in an effort to gain market share, which has
resulted, and could further result, in pricing pressure in our
businesses.
If we are unable to compete effectively with our competitors,
our business and results of operations will be adversely
affected.
The
operation of the Wabush iron ore mine is generally determined by
a third party owner and we have no decision making power as to
how the property is operated. In addition, we have no or very
limited access to technical or geological data respecting the
mine including as to reserves. The owner’s failure to
perform or other operating decisions made by the owner,
including as to scaling back or ceasing operations, could have a
material adverse effect on our revenue, our results of
operations and financial condition.
The commodities and resources segment of our business includes
our royalty interests in the Wabush iron ore mine. The revenue
derived from the interest is based on production generated by
the mine’s third party owner. The owner generally has the
power to determine the manner in which the iron ore is
exploited, including decisions to expand, continue or reduce
production from the mine, and decisions about the marketing of
products extracted from the mine. The interests of the third
party owner and our interests may not always be aligned. As an
example, it will, in almost all cases, be in our interest to
advance production as rapidly as possible in order to maximize
near-term cash flow, while the third party operator may, in many
cases, take a more cautious approach to development as it is at
risk with respect to the cost of development and operations. Our
inability to control the operations of the mine can adversely
affect our profitability, results of operations and financial
condition. Similar adverse effects may result from any other
interests we may acquire that are primarily operated by a third
party owner.
In addition, we have no or very limited access to technical,
geological data relating to the Wabush iron ore mine, including
data as to reserves, nor have we received a Canadian National
Instrument
43-101
compliant technical report in respect of the Wabush iron ore
mine. As such, we cannot independently determine reserve amounts
or the estimated life of the mine and are instead wholly
dependent on the determination of the reserves by the owner of
the mine. We can provide no assurances as to the level of
reserves at the mine. If the owner of the mine determines there
are insufficient reserves to economically operate the mine, it
may scale back or cease operations, which could have a material
adverse effect on our profitability, results of operations and
financial condition.
The
profitability of our commodities and resources operations
depends, in part, on the availability of adequate sources of
supply.
Our commodities and resources business relies, among other
things, on numerous outside sources of supply for our trading
activities. These suppliers generally are not bound by long-term
contracts and will have no obligation to provide commodities to
us in the future. In periods of low industry prices, suppliers
may elect to hold commodities to wait for higher prices or
intentionally slow their activities. If a substantial number of
suppliers cease selling commodities to us, we will be unable to
execute commodities trades at desired levels and our results of
operations and financial condition could be materially adversely
affected.
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We may
face a lack of suitable acquisition or merger or other
proprietary investment candidates, which may limit our
growth.
In order to grow our business, we may seek to acquire or merge
with or invest in new companies or opportunities. Our failure to
make acquisitions or investments may limit our growth. In
pursuing acquisition and investment opportunities, we face
competition from other companies having similar growth and
investment strategies, many of which may have substantially
greater resources than us. Competition for these acquisitions or
investment targets could result in increased acquisition or
investment prices, higher risks and a diminished pool of
businesses, services or products available for acquisition or
investment.
We may be
unable to successfully compete for mineral interests with
companies having greater financial resources than we
have.
Mines have limited lives and as a result, we seek to expand our
commodities and resources business through the acquisition of
additional mineral interests. As there is a limited supply of
desirable mineral deposits in the regions in which we operate,
we face strong competition for such interests from other
companies, some of which have greater financial resources than
we have. Accordingly, we may not be able to acquire attractive
additional mineral interests, including obtaining sufficient
supply for our trading operations, on acceptable terms, which
may adversely affect our financial condition and results of
operations.
Strategic
investments or acquisitions and joint ventures, or our entry
into new business areas, may result in additional risks and
uncertainties in our business.
We have grown and intend to continue to grow our business both
through internal expansion and through strategic investments,
acquisitions or joint ventures. When we make strategic
investments or acquisitions or enter into joint ventures, we
expect to face numerous risks and uncertainties in combining or
integrating the relevant businesses and systems, including the
need to combine accounting and data processing systems and
management controls and to integrate relationships with
customers and business partners.
Acquisitions also frequently result in recording of goodwill and
other intangible assets, which are subject to potential
impairments in the future that could have a material adverse
effect on our operating results. Furthermore, the costs of
integrating acquired businesses (including restructuring charges
associated with the acquisitions, as well as other acquisition
costs, such as accounting fees, legal fees and investment
banking fees) could significantly impact our operating results.
Although we perform diligence on the businesses we purchase, in
light of the circumstances of each transaction, an unavoidable
level of risk remains regarding the actual condition of these
businesses. We may not be able to ascertain the value or
understand the potential liabilities of the acquired businesses
and their operations until we assume operating control of the
assets and operations of these businesses.
Furthermore, any future acquisitions of businesses or facilities
could entail a number of risks, including:
| • | problems with the effective integration of operations; | |
| • | inability to maintain key pre-acquisition business relationships; | |
| • | increased operating costs; | |
| • | exposure to substantial unanticipated liabilities; | |
| • | difficulties in realizing projected efficiencies, synergies and cost savings; | |
| • | the risks of entering markets in which we have limited or no prior experience; and | |
| • | the possibility that we may be unable to recruit additional managers with the necessary skills to supplement the management of the acquired businesses. |
In addition, geographic and other expansions, acquisitions or
joint ventures may require significant managerial attention,
which may be diverted from our other operations. If we are
unsuccessful in overcoming these risks, our business, financial
condition or results of operations could be materially and
adversely affected.
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We may
fail to realize all of the anticipated benefits of our
acquisition of Mass.
In 2010 we completed the acquisition of all of the outstanding
shares of Mass. Realization of the anticipated benefits of the
combination of the companies will require the successful
integration of Mass’s business with ours. It is possible
that the integration process could result in the disruption to
our ongoing businesses or in inconsistencies in standards,
controls, procedures and policies that may adversely affect our
ability to maintain relationships with clients, customers and
employees. If we experience difficulties with the integration
process, the anticipated benefits of the successful completion
of the acquisition of Mass may not be realized fully or at all,
or may take longer to realize than expected. Integration efforts
will also divert management attention and resources. These
integration matters could have an adverse effect for an
undetermined period.
The
industries in which we operate may be affected by disruptions
beyond our control.
Our commodities and resources operations include direct or
indirect investments in assets, such as smelting, refining,
mining and processing operations. Transport disruption, weather
and natural disasters such as hurricanes and flooding,
unexpected maintenance problems, collapse or damage to mines,
unexpected geological variations, labor disruptions and changes
in laws and regulations relating to occupational safety, health
and environmental matters are some of the factors that may
adversely affect our financial condition and results of
operations. These factors can affect costs at particular
industrial assets for varying periods. In addition, smelting,
refining, mining and processing operations also rely on key
inputs, such as labor, spare parts, fuel and electricity.
Disruption to the supply of key inputs, or changes in their
pricing, may have a significant adverse impact on our future
results.
Our
trading activities are subject to counterparty risks associated
with performance of obligations by our trading partners and
suppliers.
Our business is subject to commercial risks, which include
counterparty risk, such as failure of performance by commodities
suppliers and failure of payment by our trading customers. We
seek to reduce the risk of supplier non-performance by requiring
credit support from creditworthy financial institutions where
appropriate. We attempt to reduce the risk of non-payment by
purchasers of commodities by imposing limits on open accounts
extended to creditworthy customers and imposing credit support
requirements for other customers. Nevertheless, we are exposed
to the risk that parties owing us or our clients and other
financial intermediaries may default on their obligations to us
due to bankruptcy, lack of liquidity, operational failure or
other reasons. These counterparty obligations may arise, for
example, from placing deposits, the extension of credit in
trading and investment activities, and participation in payment,
securities and commodity trading transactions on our behalf and
as an agent on behalf of our clients. If any of these parties
defaults on their obligations, our business, results of
operations, financial condition and cash flow could be adversely
affected.
Larger
and more frequent capital commitments in our merchant banking
business increase the potential for significant
losses.
We may enter into large transactions in which we commit our own
capital as part of our commodities and resources business to
facilitate client trading activities. The number and size of
these large transactions may materially affect our results of
operations in a given period. Market fluctuations may also cause
us to incur significant losses from our trading activities. To
the extent that we own assets, i.e., have long positions, a
downturn in the value of those assets or in the markets in which
those assets are traded could result in losses. Conversely, to
the extent that we have sold assets we do not own, i.e., have
short positions, in any of those markets, an upturn in those
markets could expose us to potentially large losses as we
attempt to cover our short positions by acquiring assets in a
rising market.
We will
be dependent on the payments made by the owners and operators of
our royalty and similar interests, and any delay in or failure
of such royalty payments will affect the revenues generated by
such interests.
To the extent that we retain our current royalty interest, we
will be dependent to a large extent upon the financial viability
and operational effectiveness of owners and operators of our
interests. Payments from production generally flow through the
operator, and there is a risk of delay and additional expense in
receiving such revenues. Payments may be delayed by restrictions
imposed by lenders, delays in the sale or delivery of products,
accidents, the recovery by operators of expenses incurred in the
operation of any royalty properties, the establishment by
operators of reserves for such expenses or the insolvency of an
operator. Our rights to payment under the royalties will likely
have to be enforced by
8
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contract. This may inhibit our ability to collect outstanding
royalties upon a default. Failure to receive any payments from
the owners and operators of mines in which we have or may
acquire a royalty interest may result in a material and adverse
effect on our profitability, results of operations and financial
condition.
As a royalty holder, we have no or very limited access to
operational data or to the actual properties underlying our
royalty interests. Such limited access will likely be the case
with any future royalty or similar interests acquired by us.
Operators of royalty interests may inaccurately report data
relating to the calculation of our royalty payments and underpay
such royalty payments to us, which could adversely affect our
results of operations and financial condition.
To the extent grantors of royalties and other interests do not
abide by their contractual obligations, we may be forced to take
legal action to enforce our contractual rights. Such litigation
may be time consuming and costly and, as with all litigation,
there is no guarantee of success. Should any such decision be
determined adversely to us, such decision may have a material
and adverse effect on our profitability, results of operations
and financial condition.
We are
subject to transaction risks that may have a material adverse
effect on our business, results of operations, financial
condition and cash flow.
We manage transaction risks through allocating and monitoring
our capital investments in circumstances where the risk to our
capital is minimal, carefully screening clients and
transactions, and engaging qualified personnel to manage
transactions. Nevertheless, transaction risks can arise from,
among other things, our trading and merchant banking activities.
These risks include market and credit risks associated with our
merchant banking operations. We intend to make investments in
highly unstructured situations and in companies undergoing
severe financial distress. Such investments often involve severe
time constraints. These investments may expose us to significant
transaction risks. An unsuccessful investment may result in the
total loss of such an investment and may have a material adverse
effect on our business, results of operations, financial
condition and cash flow.
Our risk
management strategies leave us exposed to unidentified or
unanticipated risks that could impact our risk management
strategies in the future and could negatively affect our results
of operations and financial condition.
We use a variety of instruments and strategies to manage
exposure to various types of risks. For example, we use
derivative foreign exchange contracts to manage our exposure and
our clients’ exposure to foreign currency exchange rate
risks. If any of the variety of instruments and strategies we
utilize to manage our exposure to various types of risk are not
effective, we may incur losses. Many of our strategies are based
on historical trading patterns and correlations. However, these
strategies may not be fully effective in mitigating our risk
exposure in all market environments or against all types of
risk. Unexpected market developments may affect our risk
management strategies during this time, and unanticipated
developments could impact our risk management strategies in the
future.
Derivative
transactions may expose us to unexpected risk and potential
losses.
We, from time to time, enter into derivative transactions that
require us to deliver to the counterparty the underlying
security, loan or other obligation in order to receive payment.
In a number of cases, we may not hold the underlying security,
loan or other obligation and may have difficulty obtaining, or
be unable to obtain, the underlying security, loan or other
obligation through the physical settlement of other
transactions. As a result, we are subject to the risk that we
may not be able to obtain the security, loan or other obligation
within the required contractual time frame for delivery. This
could cause us to forfeit the payments due to us under these
contracts or result in settlement delays with the attendant
credit and operational risk as well as increased costs to us.
Fluctuations
in interest rates and foreign currency exchange rates may affect
our results of operations and financial condition.
Fluctuation in interest rates may affect the fair value of our
financial instruments sensitive to interest rates. An increase
in market interest rates may decrease the fair value of our
fixed interest rate financial instrument assets and a decrease
in market interest rates may decrease the fair value of our
fixed interest rate financial instrument liabilities, thereby
resulting in a reduction in the fair value of our equity.
Similarly, fluctuations in foreign currency exchange rates may
affect the fair value of our financial instruments sensitive to
foreign currency exchange rates.
9
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Our
operations and infrastructure may malfunction or fail.
Our business is highly dependent on our ability to process, on a
daily basis, a number of transactions across diverse markets,
and the transactions we process have become increasingly
complex. The inability of our systems to accommodate an
increasing volume of transactions could also constrain our
ability to expand our businesses. If any of these systems do not
operate properly or are disabled, or if there are other
shortcomings or failures in our internal processes, people or
systems, we could suffer impairments, financial loss, a
disruption of our businesses, liability to clients, regulatory
intervention or reputational damage.
The
exploration and development of mining and resource properties is
inherently dangerous and subject to risk beyond our
control.
Companies engaged in resource activities are subject to all of
the hazards and risks inherent in exploring for and developing
natural resource projects. These risks and uncertainties
include, but are not limited to, environmental hazards,
industrial accidents, labor disputes, increase in the cost of
labour, social unrest, fires, changes in the regulatory
environment, impact of non-compliance with laws and regulations,
fire, explosion, encountering unusual or unexpected geological
formations or other geological or grade problems, unanticipated
metallurgical characteristics or less than expected mineral
recovery, encountering unanticipated ground or water conditions,
cave-ins, pit wall failures, flooding, rock bursts, periodic
interruptions due to inclement or hazardous weather conditions,
earthquakes, seismic activity, other natural disasters or
unfavourable operating conditions and losses. Should any of
these risks or hazards affect a company’s exploration or
development activities, it may (i) cause the cost of
development or production to increase to a point where it would
no longer be economic to produce the metal or oil and natural
gas from the company’s resources or expected reserves,
(ii) result in a write down or write-off of the carrying
value of one or more projects, (iii) cause delays or
stoppage of mining or processing, (iv) result in the
destruction of properties, processing facilities or third party
facilities necessary to the company’s operations,
(v) cause personal injury or death and related legal
liability, or (vi) result in the loss of insurance
coverage. The occurrence of any of above mentioned risks or
hazards could result in an interruption or suspension of
operation of the properties in which we hold an interest or any
other properties we acquire in the future and have a material
and adverse effect on our results of operations and financial
condition.
Our
commodities and resources operations are subject to
environmental laws and regulations that may increase the costs
of doing business and may restrict the operations.
All phases of a resource business present environmental risks
and hazards and are subject to environmental regulation pursuant
to a variety of government laws and regulations. Compliance with
such laws and regulations can require significant expenditures
and a breach may result in the imposition of fines and
penalties, which may be material. Environmental legislation is
evolving in a manner expected to result in stricter standards
and enforcement, larger fines and liability and potentially
increased capital expenditures and operating costs. Any breach
of environmental legislation by the operator of properties
underlying our interests or by us, as an owner or operator of a
property, could have a material impact on the viability of the
relevant property and impair the revenue derived from the owned
property or applicable royalty or other interest, which could
have a material and adverse affect on our results of operations
and financial condition.
Operating cost increases could have a negative effect on the
value of, and income from, any royalty interests we may acquire
by potentially causing an operator to curtail, delay or close
operations at a mine site.
We or the
operators of our current and any future resource interests may
not be able to secure required permits and licenses.
Operations underlying our resource interests may require
licenses and permits from various governmental authorities.
There can be no assurance that we or the operator of any given
project will be able to obtain all necessary licenses and
permits that may be required to carry out exploration,
development and mining operations.
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There can
be no assurance that we will be able to obtain adequate
financing in the future or that the terms of such financing will
be favourable and, as a result, we may have to raise additional
capital through the issuance of additional equity, which will
result in dilution to our shareholders.
There can be no assurance that we will be able to obtain
adequate financing in the future or that the terms of such
financing will be favourable. Failure to obtain such additional
financing could result in delay or indefinite postponement of
further business activities. We may require new capital to grow
our business and there are no assurances that capital will be
available when needed, if at all. It is likely such additional
capital will be raised through the issuance of additional equity
which would result in dilution to our shareholders.
Limitations
on our access to capital could impair our liquidity and our
ability to conduct our businesses.
Liquidity, or ready access to funds, is essential to companies
engaged in commodities trading and financing and merchant
banking. Failures of financial firms have often been
attributable in large part to insufficient liquidity. Liquidity
is of particular importance to our commodities and resources
business and perceived liquidity issues may affect our
clients’ and counterparties’ willingness to engage in
transactions with us. Our liquidity could be impaired due to
circumstances that we may be unable to control, such as a
general market disruption or an operational problem that affects
our clients, counterparties, our lenders or us. Further, our
ability to sell assets may be impaired if other market
participants are seeking to sell similar assets at the same time.
We may
substantially increase our debt in the future.
We expect that it may be necessary for us to obtain financing
with a bank or financial institution to provide funds for
working capital, capital purchases, potential acquisitions and
business development. However, because of our cash flow
position, we do not expect that we will have any immediate need
to obtain additional financing. Interest costs associated with
any debt financing may adversely affect our profitability.
Further, the terms on which amounts may be borrowed —
including standard financial covenants regarding the maintenance
of financial ratios, the prohibition against engaging in major
corporate transactions or reorganizations and the payment of
dividends — may impose additional constraints on our
business operations and our financial strength.
As a
result of our global operations, we are exposed to political,
economic, legal, operational and other risks that could
adversely affect our business, our results of operations,
financial condition and cash flow.
In conducting our business in major markets around the world, we
are subject to political, economic, legal, operational and other
risks that are inherent in operating in other countries. These
risks range from difficulties in settling transactions in
emerging markets to possible nationalization, expropriation,
price controls and other restrictive governmental actions, and
terrorism. We also face the risk that exchange controls or
similar restrictions imposed by foreign governmental authorities
may restrict our ability to convert local currency received or
held by us in their countries into Swiss francs, Canadian
dollars, Euros or other hard currencies, or to take those other
currencies out of those countries. If any of these risks become
a reality, our business, results of operations, financial
condition and cash flow could be negatively impacted.
We are
exposed to litigation risks in our business that are often
difficult to assess or quantify. We anticipate that we will
incur significant legal expenses every year in defending against
litigation.
We are exposed to legal risks in our business and the volume and
amount of damages claimed in litigation against financial
intermediaries are increasing. These risks include potential
liability under securities or other laws for materially false or
misleading statements made in connection with securities and
other transactions, potential liability for advice we provide to
participants in corporate transactions, and disputes over the
terms and conditions of complex trading arrangements. We also
face the possibility that counterparties in complex or risky
trading transactions will claim that we improperly failed to
tell them of the risks involved or that they were not authorized
or permitted to enter into such transactions with us and that
their obligations to us are not enforceable. During a prolonged
market downturn, we expect these types of claims to increase. We
are also exposed to legal risks in our merchant banking
activities.
We seek to invest in undervalued businesses or assets often as a
result of financial, legal, regulatory or other distress
affecting them. Investing in distressed businesses and assets
can involve us in complex legal issues relating to priorities,
claims and other rights of stakeholders. These risks are often
difficult to assess or quantify and their existence and
11
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magnitude often remains unknown for substantial periods of time.
We may incur significant legal and other expenses in defending
against litigation involved with any of these risks and may be
required to pay substantial damages for settlements
and/or
adverse judgments. Substantial legal liability or significant
regulatory action against us could have a material adverse
effect on our results of operations.
We rely
significantly on the skills and experience of our executives and
the loss of these individuals may harm our business.
Our future success depends to a significant degree on the
skills, experience and efforts of our executives and the loss of
their services may compromise our ability to effectively conduct
our business. We do not maintain “key person”
insurance in relation to any of our employees.
We may
experience difficulty attracting and retaining qualified
management and technical personnel to efficiently operate our
business, and the failure to operate our business effectively
could have a material and adverse effect on our profitability,
financial condition and results of operations.
We are dependent upon the continued availability and commitment
of our management, whose contributions to immediate and future
operations are of significant importance. The loss of any such
management could negatively affect our business operations. From
time to time, we will also need to identify and retain
additional skilled management and specialized technical
personnel to efficiently operate our business. The number of
persons skilled in the acquisition, exploration and development
of royalties and interests in natural resource properties is
limited and competition for such persons is intense. Recruiting
and retaining qualified personnel is critical to our success and
there can be no assurance of our ability to attract and retain
such personnel. If we are not successful in attracting and
training qualified personnel, our ability to execute our
business model and growth strategy could be affected, which
could have a material and adverse impact on our profitability,
results of operations and financial condition.
Certain
of our directors and officers may, from time to time, serve in
similar positions with other public companies, which may put
them in a conflict position from time to time.
Certain of our directors and officers may, from time to time,
serve as directors or officers of other companies involved in
similar businesses to us and, to the extent that such other
companies may participate in the same ventures in which we may
seek to participate, such directors and officers may have a
conflict of interest in negotiating and concluding terms
respecting the extent of such participation. In all cases where
our directors and officers have an interest in other companies,
such other companies may also compete with us in commodities
trading, financing and merchant banking and for the acquisition
of royalties, similar interests or resources properties or
projects. Such conflicts of our directors and officers may
result in a material and adverse effect on our results of
operations and financial condition.
We
conduct business in countries with a history of corruption and
transactions with foreign governments, and doing so increases
the risks associated with our international
activities.
As we operate internationally, we will be subject to the United
States
Foreign Corrupt Practices Act
, and other laws that
prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by United
States and other business entities that have securities
registered in the United States for the purpose of obtaining or
retaining business. We have operations and agreements with third
parties in countries known to experience corruption. Further
international expansion may involve more exposure to such
practices. Our activities in these countries create the risk of
unauthorized payments or offers of payments by one of our
employees or consultants that could be in violation of various
laws including the
Foreign Corrupt Practices Act
, even
though these parties are not always subject to our control. It
is our policy to implement safeguards to discourage these
practices by employees. However, our existing safeguards and any
future improvements may prove to be less than effective, and our
employees or consultants may engage in conduct for which we
might be held responsible. Violations of the
Foreign Corrupt
Practices Act
may result in criminal or civil sanctions, and
we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition.
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Employee
misconduct could harm us and is difficult to detect and
deter.
It is not always possible to detect and deter employee
misconduct. The precautions we take to detect and prevent
employee misconduct may not be effective in all cases, and we
could suffer significant reputational and economic harm for any
misconduct by our employees. The potential harm to our
reputation and to our business caused by such misconduct is
impossible to quantify.
We may
incur losses as a result of unforeseen or catastrophic events,
including the emergence of a pandemic, terrorist attacks or
natural disasters.
The occurrence of unforeseen or catastrophic events, including
the emergence of a pandemic or other widespread health emergency
(or concerns over the possibility of such an emergency),
terrorist attacks or natural disasters, could create economic
and financial disruptions, could lead to operational
difficulties (including travel limitations) that could impair
our ability to manage our business and could expose our
insurance subsidiaries to significant losses.
General
Risks Faced by Us
Investors’
interests may be diluted and investors may suffer dilution in
their net book value per share if we issue additional shares or
raise funds through the sale of equity securities.
Our constating documents authorize the issuance of our common
shares, class A common shares and class A preference
shares, issuable in series. In the event that we are required to
issue any additional shares or enter into private placements to
raise financing through the sale of equity securities,
investors’ interests in us will be diluted and investors
may suffer dilution in their net book value per share depending
on the price at which such securities are sold. If we issue any
such additional shares, such issuances will also cause a
reduction in the proportionate ownership of all other
shareholders. Further, any such issuance may result in a change
of control of our company.
Our
constating documents contain indemnification provisions, and we
have entered into agreements indemnifying our officers and
directors against all costs, charges and expenses incurred by
them.
Our constating documents contain indemnification provisions, and
we have entered into agreements with respect to the
indemnification of our officers and directors against all costs,
charges and expenses, including amounts payable to settle
actions or satisfy judgments, actually and reasonably incurred
by them, and amounts payable to settle actions or satisfy
judgments in civil, criminal or administrative actions or
proceedings to which they are made a party by reason of being or
having been a director or officer of our company. Such
limitations on liability may reduce the likelihood of litigation
against our officers and directors and may discourage or deter
shareholders from suing our officers and directors based upon
breaches of their duties to us, though such an action, if
successful, might otherwise benefit us and our shareholders.
Certain
factors may inhibit, delay or prevent a takeover of our company,
which may adversely affect the price of our common
shares.
Certain provisions of our charter documents and the corporate
legislation which govern us may discourage, delay or prevent a
change of control or changes in our management that shareholders
may consider favourable. Such provisions include authorizing the
issuance by our board of directors of preferred stock in series,
providing for a classified board of directors with staggered,
three-year terms and limiting the persons who may call special
meetings of shareholders. In addition, the
Investment Canada
Act
imposes certain limitations on the rights of
non-Canadians to acquire our common shares, although it is
highly unlikely that this will apply. If a change of control or
change in management is delayed or prevented, the market price
of our common shares could decline.
| ITEM 4: | Information on the Company |
| A. | History and Development of the Company |
Corporate
Information
We are a corporation organized under the laws of the Province of
British Columbia, Canada. We were originally incorporated in
June 1951 by letters patent issued pursuant to the
Companies
Act of 1934
(Canada). We were continued
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under the
Canada Business Corporations Act
in March 1980,
under the
Business Corporations Act
(Yukon) in August
1996 and under the
Business Corporations Act
(British
Columbia) in November 2004. Our name was changed from “MFC
Bancorp Ltd.” to “KHD Humboldt Wedag International
Ltd.” on October 28, 2005 and, in connection with the
divestiture of our Industrial Business, to “Terra Nova
Royalty Corporation” on March 30, 2010.
Our principal office is located at Suite 1620 –
400 Burrard Street, Vancouver, British Columbia, Canada V6C 3A6
and the telephone number is
(604) 683-8286.
Our registered office is located at Suite 1000 –
925 West Georgia Street, Vancouver, British Columbia,
Canada, V6C 3L2.
General
We are active in a broad spectrum of activities related to the
integrated combination of commodities and resources, which
includes commodity trading and our resource interests and
merchant banking, which includes trade finance, financial
services and proprietary investing. Until the first quarter of
2010, we were also active in the Industrial Business through our
interest in KHD Humboldt Wedag International (Deutschland) AG,
referred to as “KID”. Our former Industrial Business
supplied plant systems as well as machinery and equipment
worldwide for the manufacture of cement, whether for new plants,
redevelopments of existing plants or capacity increases for
existing plants. It also designed and provided equipment that
produced clinker and cement and offered basic engineering,
detail engineering, plant and equipment for complete plants and
plant sections. In the fourth quarter of 2009, we considered the
merits of dividing our Industrial Business into a separate
publicly-traded company. Our board considered the feasibility,
benefits and other considerations of dividing the Industrial
Business into a separate, stand-alone entity, including
implications for our shareholders, potential market reaction and
the financial viability after giving effect to such a
transaction. Following consideration of such factors, our board
subsequently determined that such a separation would be
beneficial to our shareholders and, during the course of 2010,
we distributed our shares of KID to our shareholders. Upon the
distribution to our shareholders of our Industrial Business, we
operated primarily in the royalty and resources business.
In connection with our long-term strategic plans, involving
internal growth initiatives, acquisitions or business
combinations, we seek out and evaluate strategic acquisition
candidates. As a result of the deconsolidation of our Industrial
Business, our board reviewed opportunities and strategic
alternatives to enhance shareholder value in light of our then
focus on the resources business. In the third quarter of 2010,
our board of directors gave serious consideration as to whether
or not a business combination with Mass could be accomplished on
favourable terms. Mass was engaged in the commodities, merchant
banking and proprietary investment business. In the fourth
quarter of 2010, we acquired all of the outstanding shares of
Mass and consolidated its results of operations from
November 16, 2010.
Recent
Developments
The following is a summary of selected key developments in our
business that occurred in 2010 and the start of 2011.
Separation
of the Industrial Business
On March 30, 2010, we effected a reorganization and plan of
arrangement, referred to as the “Arrangement”,
pursuant to which, among other things, we distributed a portion
of our interest in KID, which held our Industrial Business, to
our shareholders and ceased to consolidate KID as at
March 31, 2010.
Pursuant to the terms of the Arrangement, among other things,
our shareholders received one share of KID for every three and
one-half of our common shares held (calculated after a
two-for-one
forward split of KID). As a result, we distributed approximately
26% of KID’s outstanding shares (at such time) to our
shareholders. In connection with the Arrangement, we entered
into a shareholder agreement with another corporate shareholder
of KID, referred to as the “Custodian”, dated
March 27, 2010, pursuant to which we engaged the Custodian
to direct the voting of the remainder of our holdings of KID
shares. As a result, and given that we did not share any common
directors or officers with KID, we no longer considered KID a
subsidiary and ceased to consolidate it as at March 31,
2010.
In 2010, we distributed the balance of the KID shares held by us
to our shareholders as follows:
| • | approximately 23% of the total issued shares of KID (at such time) were distributed to our shareholders of record on July 1, 2010 by way of a pro-rata special dividend on the basis of one common share of KID for every four of our common shares held; |
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| • | approximately 29% of the total issued shares of KID (at such time) were distributed to our shareholders of record on September 23, 2010, by way of a pro-rata return of capital on the basis of one common share of KID for every four of our common shares held; and | |
| • | approximately 19.3% of the total issued shares of KID (at such time) were distributed to our shareholders of record on December 31, 2010, by way of a pro-rata return of capital on the basis of one share of KID for every ten of our common shares held. |
Rights
Offering
On July 27, 2010, we announced a rights offering, referred
to as the “Rights Offering”, pursuant to which each
holder of our common shares of record as of August 6, 2010
received one transferable right, referred to as a
“Right”, for every common share held as of such date.
Every four Rights entitled a holder to purchase one common share
at a price of $6.60. The Rights Offering expired on
September 2, 2010, and on September 8, 2010 we
announced that the Rights Offering was oversubscribed, with
subscriptions and requests for oversubscription amounting to
over twice the amount we offered for sale. A total of 7,571,227
of our common shares, representing approximately 25% of our
issued and outstanding common shares, as of September 8,
2010, were issued under the Rights Offering pursuant to the
subscription privileges, representing total gross proceeds of
approximately $50.0 million.
Acquisition
of Mass Financial Corp.
On September 27, 2010, we announced that we had entered
into an agreement with Mass and our wholly-owned subsidiary,
which provided for our acquisition of Mass by way of a
multi-step transaction, including a tender offer for all of the
outstanding common shares of Mass, referred to as the
“Offer”, and the subsequent amalgamation of Mass with
our wholly-owned subsidiary. The Offer was made on
October 7, 2010 on the basis of one of our common shares
for each common share of Mass. The Offer expired on
November 8, 2010 and, pursuant thereto, we acquired
approximately 93% of the outstanding common shares of Mass,
excluding Mass shares already held by us. We completed our
acquisition of Mass by effecting a compulsory acquisition of the
Mass shares not tendered under the Offer pursuant to applicable
laws and, subsequently, caused the amalgamation of Mass and our
wholly-owned subsidiary in December 2010. As a result of the
successful Offer, we commenced consolidating Mass’s
operations, including its commodities and merchant banking
activities from November 16, 2010.
Cash
Dividend Policy
On January 10, 2011, we announced that our board of
directors had adopted an annual dividend policy, providing for
an annual dividend based on the annual dividend yield of the New
York Stock Exchange, referred to as the “NYSE”,
Composite Index for the preceding year plus 25 basis points. On
the same date, we announced an annual cash dividend for 2011 of
$0.20 per common share, payable in four quarterly instalments.
The first dividend payment of $0.05 per share was made on
January 31, 2011 to shareholders of record on
January 20, 2011. On March 15, 2011, we announced that
the second 2011 cash dividend payment of $0.05 per share would
be made on April 11, 2011 to shareholders of record on
March 31, 2011.
| B. | Business Overview |
As a result of the acquisition of Mass, we are now active in a
broad spectrum of activities related to the integrated
combination of commodities and resources, commodities trading
and our resource interests and merchant banking, including trade
finance, financial services and proprietary investing.
Business
Segments
Our business is divided into three reportable segments:
(i) commodities and resources, which includes our mineral
and royalty interests and commodities trading activities;
(ii) merchant banking, which includes our trade finance,
financial services and proprietary investing activities; and
(iii) other, which encompasses our corporate and other
investments and business interests.
15
Table of Contents
Commodities
and Resources
Our commodities and resources operations include our integrated
commodities trading activities and our mineral interests. We
conduct trading primarily through our subsidiaries based in
Vienna, Austria and supply various commodities, including
minerals and metals, chemical and plastics and wood products to
our customers. Such commodities originate either from our
directly or indirectly held interests in resource projects or
are secured by us from third parties. Our commodities trading
activities are globally focused. We also derive production
royalty revenue from a mining
sub-lease
of
the lands upon which the Wabush iron ore mine is situated.
Through our commodities and resources business, we also provide
logistics and other services to producers and consumers of
commodities. These activities are supported by strategic direct
or indirect investments in natural resource assets operating in
our core commodities, including the production of plastics,
non-ferrous metals and minerals, including iron ore.
Our commodities trading activities include purchasing, selling
and conducting product swaps of various commodities. To a lesser
extent, we also act as a trading agent for our clients. Our
trading activities often utilize innovative trading strategies
and structures. We currently trade with commodity and other
producers who are unable to effectively realize sales due to
their specific circumstances.
Generally we purchase or produce the underlying commodity and
sell it to an end buyer or further trade it for another
commodity which will subsequently be sold. Further, commodity
producers and end customers often work with us to better manage
their internal supply, distribution risk, and currency and
capital requirements. In such trading activities, we try to
capture various trading, financing and currency spreads. Through
our trading activities, we have been able to develop ongoing
relationships with commodity producers, end customers and trade
financiers and integrate them into our financial activities.
Through our commodities trading activities, we have sourced,
supplied and traded, primarily for our own account, the
following commodities:
|
Metals and Minerals
|
Chemicals and Plastics | Wood Products | ||
|
• iron-ore;
|
• general purpose polystyrene; | • pulp and saw logs; | ||
|
• bauxite;
|
• high density polyethylene; | • round logs; | ||
|
• manganese-ore;
|
• linear low density polyethylene; | • sawn timber; | ||
|
• cobalt;
|
• low density polyethylene; | • plywood; | ||
|
• base metals;
|
• polyethylene terephthalate; | • medium density fiberboard; and | ||
|
• magnesium;
|
• polypropylene; and | • wood pellets. | ||
|
• steel products;
|
• polyvinyl chloride. | |||
|
• zinc alloys;
|
||||
|
• aluminum foils and sheets;
|
||||
|
• coal;
|
||||
|
• clinker;
|
||||
|
• cement;
|
||||
|
• ferrous alloys; and
|
||||
|
• silicon metals
|
We generally source commodities from Asia, Africa, Europe,
Australia, the United States and the Middle East. Our
commodities sales include the European, Middle Eastern, Asian
and North and South American markets.
In the polyethylene terephthalate, referred to as
“PET”, market, we source material from Malaysia,
Taiwan, India and the Middle East. Through our agents in Europe
and the United States, we sell PET on an outright basis, with a
major portion of our PET sales being made to the pre-bottling
industry in such regions. We have off-take agreements with
sizeable polyvinyl chloride, referred to as “PVC”, and
chemicals producers, which allow us to sell their products in
the European market. Through an off-take agreement with a
Southeast Asian supplier, we source and sell polymers mainly to
the Middle Eastern markets as well as Germany and the United
Kingdom.
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Table of Contents
Our trading activities are supported by our logistics and
finance activities in order to provide cost effective and
efficient transportation, as well as granting of payment terms
for working capital requirements for our customers and partners.
Our commodities and resources business employs over
320 people worldwide. Our main marketing office is located
in Vienna, Austria. In addition, we establish relationships with
and seek to further market our products through agents located
worldwide. Our marketing and investment activities in the
commodities and resource sector are supported by a global
network of agents and relationships. This network provides us
with worldwide sourcing and distribution capabilities.
We have entered into agreements, through a subsidiary, with a
third party leaseholder or an iron ore mine in Goa, India,
pursuant to which the leaseholder has agreed to sell iron ore to
our subsidiary at a fixed price per ton based on the extraction
costs plus a royalty payment to the owner dependent upon the
iron content of the iron ore. Pursuant to the agreements, our
subsidiary has also been contracted to extract iron ore on
behalf of the leaseholder at a fixed fee per ton. The initial
term of the agreements expires on September 4, 2011 and our
subsidiary has been granted the right to renew the agreements
for three year terms until September 4, 2020.
We currently indirectly derive production royalty revenue from a
mining
sub-lease
of
the lands upon which the Wabush iron ore mine is situated in
Newfoundland and Labrador, Canada. This
sub-lease
commenced in 1956 and expires in 2055. The lessor is Knoll Lake
Minerals Ltd., referred to as “Knoll Lake Minerals”,
which holds a direct mining lease from the Province of
Newfoundland and Labrador. The mine is currently operated by
Cliffs Natural Resources Inc., referred to as
“Cliffs”. Iron ore is shipped from the Wabush iron ore
mine to Pointe Noire, Québec, Canada, where it is
pelletized. In 2010, 2009 and 2008, 3.8 million,
3.2 million and 4.0 million tons of iron pellets,
respectively, were shipped from Pointe Noire. Such shipments are
subject to seasonal and cyclical fluctuations.
Pursuant to the terms of the mining
sub-lease,
the royalty payment is not to be less than CDN$3.25 million
per annum until its expiry. In 1988, the royalty rate was
amended to require a base royalty rate of CDN$1.685 per ton with
escalations as defined in the
sub-lease.
We are indirectly obligated to make royalty payments of CDN$0.22
per ton on shipments of iron ore pellets from Pointe Noire,
Québec, to Knoll Lake Minerals, which holds the direct
lease over the Wabush mine property with the Province of
Newfoundland and Labrador. Cliffs applies a portion of the
royalty payments under the
sub-lease
to
make such royalty payments to Knoll Lake Minerals on our behalf.
The Wabush royalty is paid quarterly and is based on the tonnage
of iron ore pellets shipped from Pointe Noire, Quebec. One of
the major components in the calculation of the Wabush royalty
rate payable is based on the most recently published prices of a
basket of five particular iron ore pellets, only two of which
were published in the latter part of 2010.
Historically, iron-ore benchmark prices were determined in the
first quarter of the calendar year through negotiations between
the major producers and their most significant customers. These
prices were then generally adopted by the other suppliers when
published.
The significant increase in benchmark prices from 2007 to 2008
was resisted by the major Chinese steel mills in particular, who
also refused to accept the lowered benchmark pricing offered in
2009. This led many major iron ore suppliers to move away from
the annual international benchmark pricing mechanism that had
been prevalent in the industry and in many customer supply
agreements. This resulted in a shift in the industry towards
shorter term pricing arrangements linked more closely to the
spot market. In 2010, major iron ore producers moved to
quarterly benchmark pricing which culminated in the negotiation
of proprietary pricing agreements with specific customers that
were not published.
This shift in the marketplace has, among other things, made
obsolete certain of the world iron ore pellet pricing
methodology for calculating the royalty rate due to us contained
in our
sub-lease
for the Wabush iron mine. As a result of these market changes,
and as the
sub-lease
permits us to renegotiate an increase in the royalty rates when
the mine achieves certain profitability thresholds, which we
believe have been obtained, we have served the mine owner with
notice of arbitration respecting our entitlement to a new base
rate for the royalty. We have also provided the mine owners
notice of arbitration seeking recovery for royalty underpayments
in 2010. The outcome of such proceedings cannot be determined at
this time.
Iron ore is typically sold either as a concentrate, whereby the
iron ore is in granular form, or as a pellet, whereby iron ore
concentrate has been mixed with a binding agent, formed into a
pellet and then fired in a furnace. Iron ore pellets can be
charged directly into blast furnaces without further processing
and are primarily used to produce pig iron which is subsequently
transformed into steel. As such, the demand and, consequently
the pricing of iron ore are dependent upon the raw material
requirements of integrated steel producers. Demand for blast
furnace steel is in turn cyclical in nature and is influenced
by, among other things, the level of global economic activity.
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The Wabush iron ore mine is operated by Cliffs, who on
February 1, 2010 announced that it had acquired the
interests of its other joint venture partners in the mine. Under
the mining
sub-lease,
Cliffs pays royalties to the holder of the royalty interest
based upon the amount of iron ore pellets shipped. One of the
major components in the calculation of the Wabush royalty rate
payable is based on the most recently published prices of a
basket of five particular iron ore pellets. Although there can
be no assurance as to future production levels, our management
believes that since the operator is now also the sole owner of
the Wabush iron ore mine, production from the mine will
generally be maintained at relatively consistent levels, subject
to market conditions.
The following highlights selected key developments relating to
our royalty interest in the Wabush iron ore mine in 2010:
| • | we received a favorable decision from the arbitration panel relating to our claims against the mine owners and received an award for an aggregate royalty underpayment of approximately CDN$11.7 million. We are currently seeking to recover interest and expenses of approximately CDN$4.0 million. | |
| • | the current royalty rate went up to CDN$6.63 per ton in the fourth quarter from CDN$6.57, CDN$5.96 and CDN$5.16 per ton, for the third, second and first quarters of 2010, respectively; | |
| • | the fourth quarter of 2010 showed a slightly lower than average tons shipped, primarily related to approximately 18 days of scheduled maintenance taken by the mine operator; | |
| • | we have given notice pursuant to our rights under the terms of the lease agreement underlying the Wabush royalty to renegotiate the royalty rate; and | |
| • | the operator of the Wabush mine has indicated planned capital expenditures for 2011 of approximately $40.0 to $45.0 million for conversion of the production lines to reduce manganese, an additional $30.0 million for other equipment upgrades and replacement and approximately $30.0 million for environmental matters. |
The following table sets forth historical total iron ore
shipments (which include pellets, chips and concentrates) and
royalty payments to us based upon the amounts reported to us by
the Wabush mine operator:
|
Gross
|
||||||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||||||
|
Total
|
Gross
|
Royalty
|
||||||||||||||||||||||||||
| Tonnage Shipped |
Tonnage
|
Royalties
|
Rate/Ton
|
|||||||||||||||||||||||||
|
Year
|
Q1 | Q2 | Q3 | Q4 | Shipped | Received (1) | Received | |||||||||||||||||||||
| (In thousands, other than the Royalty Rate) | ||||||||||||||||||||||||||||
| (All monetary amounts in Canadian dollars) | ||||||||||||||||||||||||||||
|
2005
|
789 | 1,392 | 1,299 | 982 | 4,462 | $ | 13,736 | $ | 3.08 | |||||||||||||||||||
|
2006
|
751 | 1,296 | 942 | 1,289 | 4,278 | 16,393 | 3.83 | |||||||||||||||||||||
|
2007
|
472 | 1,607 | 1,591 | 1,339 | 5,009 | 22,357 | 4.46 | |||||||||||||||||||||
|
2008
|
694 | 1,437 | 1,117 | 705 | 3,953 | 31,288 | 7.91 | |||||||||||||||||||||
|
2009
|
402 | 386 | 1,202 | 1,198 | 3,188 | 17,350 | 5.44 | |||||||||||||||||||||
|
2010
|
874 | 941 | 832 | 1,105 | 3,752 | 22,915 | (2) | 6.11 | ||||||||||||||||||||
|
Average Shipments (Tons)
|
664 | 1,177 | 1,164 | 1,102 | 4,107 | |||||||||||||||||||||||
Notes
| (1) | Subject to a 20% resource property revenue tax. | |
| (2) | Does not include the amount of arbitration award. |
Merchant
Banking
Our merchant banking operations include merchant banking and
financial services, including specialized banking, corporate
finance, trade finance and other services, proprietary investing
and our real estate and investment properties. We seek to invest
in many industries, emphasizing those business opportunities
where the perceived intrinsic value is not properly recognized.
We use our financial and management expertise to add or unlock
value within a relatively short time period. Our merchant
banking activity is generally not passive and we seek
investments where our financial expertise and
18
Table of Contents
management can add or unlock value. Proprietary investments are
generated and made as part of our overall merchant banking
activities and are realized upon over time, sometimes taking
more than one year. In addition, we often seek to acquire
interests or establish relationships with commodity producers to
realize upon potential synergies. Such interests can be acquired
through purchases of, or investments in, commodity producers, or
through contractual arrangements with them, including off-take
agreements. The investments we make in commodity producers are
part of our merchant banking strategy.
Our activities include making proprietary investments through
investing our own capital and utilizing our expertise to capture
investment opportunities. We seek to invest in businesses or
assets whose intrinsic value is not properly reflected in their
share or other price. Often such investments are in companies or
assets that are under financial, legal or regulatory distress
and our services include resolving such distress. Our investing
takes many forms and can include acquiring entire businesses or
portions thereof, investing in equity, investing in the existing
indebtedness (secured and unsecured) of a business or in new
equity or debt issues. Our investing is generally not passive
and we invest where we believe our expertise in financial
restructuring and management and complementary trading and
corporate finance capabilities can add or unlock value. Our
investing in distressed businesses
and/or
assets can result in complex and intricate legal issues relating
to priorities, claims and other rights of stakeholders. Such
issues can result in our being involved in legal and other
claims as part of our overall proprietary investment strategy.
Our proprietary investments are often made as a part of, or
complementary to our commodity and resources trading activities.
We consider investment opportunities where: (i) our
existing participation in the marketing and production of
commodities provides expert insight; (ii) we can obtain a
satisfactory return of future capital investment; and
(iii) such investment integrates with our business. Our
philosophy is to utilize our financial strength to realize the
commercial potential of assets in markets where we have a
comprehensive understanding of the drivers of value.
Our merchant banking operations provide innovative finance
services for corporate and trade finance transactions. We focus
on meeting the financial needs of small to mid-sized companies
and other business enterprises primarily in Europe and Asia. We
believe that many of these clients are underserviced by the
large global investment banks and financial service providers.
We specialize in advising and structuring business enterprises
involved in unstructured and novel situations where a strong
financial partner is needed and traditional,
off-the-shelf
solutions are not workable.
In addition, we utilize our established relationships with
international financial institutions, credit insurance and
factoring companies to provide flexible customized financial
tools, extensive credit and risk management and structured
finance to our customers. Working closely with our customers,
our professional staff arranges support of hedging and trading
of materials, arrangements of financing and risk management
solutions.
Our merchant banking activities also include leveraging our
trading and financial experience and relationships to provide
trading services, such as transportation and logistics, and
trade finance services to our trading customers.
Our merchant banking business generates revenues in the form of
corporate and trade finance service fees and interest income. We
also realize gains from time to time on our proprietary
investments, upon their sale, upon the execution of an equity or
debt restructuring, or the completion of other forms of
divestment.
Through our acquisition of Mass in November 2010, we acquired an
indirect 52.9% interest in Canoro Resources Ltd., referred to as
“Canoro”, which operated certain oil and gas interests
in India. Prior to our consolidation of Mass, Canoro’s
interests in such assets were terminated by the governmental
regulator. The matter is currently subject to arbitration and
appeal, the outcome of which cannot be determined at this time.
As a result, we have not recognized such oil and gas interests
in our statement of financial position as at December 31,
2010.
Other
Our other segment includes our corporate and investments, which
include financing joint ventures through our Shanghai-based
subsidiary which provides medical equipment and supplies.
Specifically, such subsidiary is engaged in the operation of eye
care centers through joint ventures with government-controlled
hospitals in China. Under such joint ventures, the hospitals
provide the necessary space and medical staff to operate the
centers, and our subsidiary provides the centers with
specialized medical equipment and supplies, training and
supervision with respect to certain surgical procedures. We
retain ownership of the equipment we supply to the centers
during the term of such joint ventures. We also sell and service
medical equipment.
19
Table of Contents
Company
Strategy
Our primary and over-riding business objective is to enhance
value and create wealth for our shareholders. The key elements
of our strategy include the following:
| • | Investing in Undervalued Opportunities. We seek to invest in businesses or assets whose intrinsic value is not properly reflected in their share price, or where we perceive that our commodities and financial expertise and management can add or unlock value. These include investments in highly unstructured situations and in companies undergoing financial or operational stress. Such investments often involve severe time constraints, and given our liquid resources, we are well positioned to capitalize on such opportunities. Unlike traditional companies in the financial services sector, our investing is generally not passive. | |
| • | Geographic Scope of Operations. We operate globally so we supply a diversified range of commodities to our customers, develop new relationships with producers and consumers of commodities and selectively target new business and investment opportunities worldwide. | |
| • | Strategic Investments. Strategic investments in resource assets are an important component of our commodities trading activities and value added services. We pursue selective strategic acquisitions and alliances to support and strengthen our commodities operations as and when opportunities arise. We will continue to apply our investment criteria to our acquisitions, pursuing investments in assets that are of strategic importance to our core businesses. At the same time, we continue to evaluate dispositions of investments or assets, in particular when they are no longer deemed to support our core business or when attractive selling opportunities arise. | |
| • | Create Shareholder Value. The nature of our business is cyclical and affected by several factors that do not lend themselves to regular evaluation. Therefore, we do not evaluate our performance and do not believe we should be scrutinized in terms of our price-to-earnings multiple. We seek to grow our asset base and net worth and believe these are the best valuation measures for our business. | |
| • | Financial Profile. We seek to maintain our fiscal profile so we can access necessary financing on competitive terms. In addition, we believe our fiscal approach helps us to manage acquisition risks and maintain a high level of liquidity. | |
| • | Risk Approach. We have adopted policies intended to mitigate and manage commodity price and counterparty risks associated with our commodities trading activities. For example, a substantial portion of our inventory of commodities is at any time under contract for sale at a pre-determined price. We also reduce the risk of non-payment by customers by imposing limits on open accounts extended to creditworthy customers and imposing credit support requirements for other customers. |
Competitive
Strengths
We believe that our competitive strengths include the following:
| • | International Capabilities. Unlike other similarly sized companies, we have sought to develop a broad geographic scope rather than focusing on any one particular market. While many of our larger competitors have greater presences in more international markets, including merchant and investment banks, trading firms, brokerage firms, commercial banks and hedge funds, we believe our smaller size and collegiality allow us to work as a team on cross-border transactions better than many of our competitors. | |
| • | Liquidity. Liquidity is of critical importance to companies in the merchant banking industry and commodities and resources business and is key to strategic acquisitions to further expand and support our commodities and resources business. We therefore maintain liquidity in order to be able to capitalize on business opportunities in time sensitive transactions, fund our core businesses to continue to generate revenues, and fund a broad range of potential cash outflows in stressed environments, including financing obligations. Our approach to liquidity allows us to meet immediate obligations without needing to sell other assets or depend on additional funding from credit-sensitive markets, and affords us significant flexibility in structuring our affairs and managing through difficult funding environments. Historically, we have funded our businesses with cash generated from our operations. | |
| • | Independence. We are an independent company managed by our directors and officers, rather than part of a larger, diversified financial services institution. Such financial services companies can develop conflicts with their |
20
Table of Contents
| clients due to the large number of customers they service, their own investment and trading position and the broad range of products and services they offer. We believe that awareness of these potential conflicts has heightened and that such awareness has resulted in increased opportunities for independent firms like us in respect of merger, acquisition, restructuring and similar transactions. |
| • | Management. We believe that our management has expertise in the commodities and resources and merchant banking industries, including critical expertise with respect to our specialized financial services and corporate finance services internationally, including on corporate restructurings and mergers and acquisitions. | |
| • | Integrated Service Approach. We believe our logistics and financing activities allow us to provide a full-service solution to our commodities trading customers and suppliers. We are able to provide our customers and suppliers assistance with transportation and logistics as well as trading, hedging, financing and risk management services. | |
| • | Operating Structure Allows Prompt Response to Investment Opportunities. We have a lean operating structure and are therefore able to quickly assess whether a business venture represents an appropriate investment for us, responding promptly to all desirable business opportunities. We carefully select the business opportunities we investigate and do not move forward unless we have a high level of confidence that the opportunities fit within our objectives and core competencies. |
Competitive
Conditions
All segments of our business are intensely competitive, and we
expect them to remain so.
Our operations are relatively small compared to our competitors.
Many of our competitors have far greater financial resources, a
broader range of products and services, larger customer bases,
greater name recognition and marketing resources, a larger
number of senior professionals to serve their clients’
needs, greater global reach and more established relationships
with clients than we do. These competitors may be better able to
respond to changes in business conditions, to compete for
skilled professionals, to finance acquisitions, to fund internal
growth and to compete for market share generally. Further many
companies are engaged in the acquisition of resource interests.
We may also be at a competitive disadvantage in acquiring such
properties and interests as many competitors may have greater
financial resources and technical staff. Accordingly, there can
be no assurance that we will be able to compete successfully
against other companies in acquiring additional interests and
resource properties.
The scale of our competitors in the merchant banking business
has increased in recent years as a result of substantial
consolidation among companies, especially in the banking and
financial industries. These firms have the ability to offer a
wider range of products than we do which may enhance their
competitive position. They also have the ability to support
their businesses with other services such as commercial lending
in an effort to gain market share, which has resulted, and could
further result, in pricing pressure in our businesses.
We believe that our experience and operating structure permit us
to respond more rapidly to our clients’ needs than many of
our larger competitors. These traits are important to small and
mid-sized business enterprises, many of which do not have large
internal corporate finance departments to handle their capital
requirements. We develop a partnership approach to assist
clients. This often permits us to develop multiple revenue
sources from the same client. For example, we may purchase and
sell a client’s products, or commit our own capital to make
a proprietary investment in its business or capital structure.
21
Table of Contents
| C. | Organizational Structure |
The following table describes our direct and indirect
significant subsidiaries as at the date hereof, their respective
jurisdictions of organization and our beneficial interest in
respect of each subsidiary. The table excludes subsidiaries
which only hold inter-company assets and liabilities and do not
have any active business.
|
Country of
|
Beneficial
|
|||||
| Incorporation | Interest (1) | |||||
|
M Financial Corp.
|
Barbados | 100 | % | |||
|
MFC Commodities GmbH
|
Austria | 100 | % | |||
|
MFC Trade & Financial Service GmbH
|
Austria | 100 | % | |||
|
IC Management Service GmbH
|
Austria | 100 | % | |||
|
Global Bulk Transport GmbH
|
Austria | 100 | % | |||
|
International Trade Service GmbH
|
Austria | 100 | % | |||
|
Magnum Minerals Private Limited
|
India | 100 | % | |||
|
AFM Aluminiumfolie Merseberg GmbH
|
Germany | 55 | % | |||
|
MAW Mansfelder Alumiumwerk GmbH
|
Germany | 55 | % | |||
|
MFC(A) Ltd
|
Marshall Islands | 100 | % | |||
|
MFC(D) Ltd
|
Marshall Islands | 100 | % | |||
|
Brock Metals s.r.o.
|
Slovakia | 100 | % | |||
|
MFC Corporate Services AG
|
Switzerland | 100 | % | |||
|
Mednet (Shanghai) Medical Technical Developing Co., Ltd
|
China | 90 | % | |||
|
Chongqing Lasernet Guangji Eye Hospital (a limited company)
|
China | 52 | % | |||
|
Hangzhou Zhe-er Optical Co. Ltd
|
China | 46 | % | |||
|
MFC Metal Trading GmbH
|
Austria | 100 | % | |||
|
MEG International Services Ltd
|
Canada | 100 | % | |||
Note
| (1) | Percentages rounded to nearest whole number. |
| D. | Property, Plants and Equipment |
Office
Space
Our principal office is located at Suite 1620 —
400 Burrard Street, Vancouver, British Columbia, Canada V6C 3A6.
We also maintain offices in Vienna, Austria, Hong Kong and
Shanghai, China and Goa, India.
We believe that our existing facilities are adequate for our
needs through the end of the year ending December 31, 2011.
Should we require additional space at that time, or prior
thereto, we believe that such space can be secured on
commercially reasonable terms.
Royalty
Interest
We participate in a royalty interest which consists of a mining
sub-lease
of
the lands upon which the Wabush iron ore mine is situated. For a
discussion of the royalty interest, see “
Item 4:
Information on the Company — B. Business
Overview — Business Segments — Commodities
and Resources”
.
| ITEM 4A: | Unresolved Staff Comments |
None.
22
Table of Contents
| ITEM 5: | Operating and Financial Review and Prospects |
The following discussion and analysis of our financial
condition and results of operations for the fiscal years ended
December 31, 2010 and 2009 should be read in conjunction
with our audited consolidated financial statements and related
notes included in this annual report on
Form 20-F.
Our financial statements included in this annual report on
Form 20-F
were prepared in accordance with IFRS. We adopted IFRS as of
January 1, 2010. The impact of the transition from Canadian
generally accepted accounting principles to IFRS is explained in
Note 36 to the audited consolidated financial statements
included in this annual report on
Form 20-F.
General
We are an integrated commodities and resources and merchant
banking company and conduct our operations internationally. Our
activities include the supply and sale of commodities. We also
commit our own capital to promising enterprises and invest and
otherwise trade to capture investment opportunities for our own
account. We seek to invest in businesses or assets whose
intrinsic value is not properly reflected in their share price
or value. Our investing is generally not passive. We actively
seek investments where our financial expertise and management
can add or unlock value.
Our results of operations have been and may continue to be
affected by many factors of a global nature, including economic
and market conditions, the availability of capital, the level
and volatility of equity prices and interest rates, currency
values, commodity prices and other market indices, technological
changes, the availability of credit, inflation and legislative
and regulatory developments. Our results of operations may also
be materially affected by competitive factors. Competition
includes firms traditionally engaged in merchant banking and
financial services such as merchant and investment banks, along
with other capital sources such as hedge funds, private equity
firms and insurance companies, and other trade companies engaged
in commodities in Europe, Asia and globally.
Our results of operations for any particular period may also be
materially affected by our realization on proprietary
investments. These investments are made to maximize total return
through long-term appreciation and recognized gains on
divestment. We realize on our proprietary investments through a
variety of methods including sales, capital restructuring or
other forms of divestment.
A majority of our revenues has traditionally been derived from
resources, commodities sales and trade and financial services.
The remaining portions are generally derived from sales of
properties and net realized and unrealized gains on securities.
Business
Environment
Our financial performance is, and our consolidated results in
any period can be, materially affected by global economic
conditions and financial markets generally.
Our favourable business environment is characterized by many
factors, including a stable geopolitical climate, transparent
financial markets, low inflation, low interest rates,
availability of credit, low unemployment, strong business
profitability and high business and investor confidence.
Unfavourable or uncertain economic and market conditions can be
caused by declines in economic growth, business activity or
investor or business confidence, limitations on the availability
or increase in the cost of credit and capital, increases in
inflation, interest rates, exchange rate volatility, outbreaks
of hostilities or other geopolitical instability, corporate,
political or other scandals that reduce investor confidence in
the capital markets, or a combination of these or other factors.
Commencing in mid-2008 and continuing through most of 2009, the
macro business environment for many of our activities was
extremely challenging. During such period, capital and
securities markets generally were materially and adversely
affected by significant declines in the values of nearly all
investment classes and by a serious lack of liquidity. The
global markets were characterized by substantially increased
volatility and an overall loss of investor confidence, initially
in financial institutions, but later in companies in a number of
other industries and in the broader markets. The decline in
asset values has caused increases in margin calls for investors,
requirements that derivatives counterparties post additional
collateral and redemptions by mutual and hedge fund investors,
all of which have increased the downward pressure on asset
values and outflows of funds across the financial services
industry. In addition, increased redemptions and unavailability
of credit caused hedge funds and other investors to rapidly
reduce leverage, which has increased volatility and further
contributed to the decline in asset values.
23
Table of Contents
Although economic conditions recovered through 2010, such
recovery remains generally weak and the pace of recovery is
still uncertain. There can be no assurance that these economic
conditions will continue to improve in the near term.
Operating
Results
We are active in a broad spectrum of activities related to the
integrated combination of commodities and resources and merchant
banking. Our business is divided into three reportable segments:
(i) commodities and resources, which includes our
commodities trading activities and mineral and royalty
interests; (ii) merchant banking, which includes trading,
trade finance, logistics and financial services and proprietary
investing activities; and (iii) other, which encompasses
our corporate and other investments and business interests,
including our medical supplies and servicing business and
corporate.
During the third quarter of 2010, our board of directors began
evaluating the benefits of acquiring Mass and integrating its
commodities trading and merchant banking business with our
increased focus on mineral royalties and resources interests. On
September 27, 2010, we announced that we had entered into
an agreement with Mass and our wholly-owned subsidiary, which
provided for our acquisition of Mass by way of the Offer and the
subsequent amalgamation of Mass and our wholly-owned subsidiary.
The Offer was made on October 7, 2010 on the basis of one
of our common shares for each common share of Mass. Pursuant to
the Offer, we acquired approximately 93% of the outstanding
shares of Mass other than shares held by us and our affiliates.
Accordingly, we consolidated Mass from November 16, 2010.
Subsequently, we completed our acquisition of Mass by effecting
a compulsory acquisition of the Mass shares not tendered under
the Offer pursuant to applicable laws, and caused the
amalgamation of Mass with our wholly-owned subsidiary in
December 2010.
As a result of the economic and competitive factors discussed
above, our results of operations may vary significantly from
period to period. We intend to manage our business for the
long-term and to mitigate the effects of such factors by
focusing on our core operations.
Discontinued
Operations
Until March 30, 2010, we also operated in the Industrial
Business through KID. As at March 30, 2010, we effected the
Arrangement pursuant to which, among other things, we
distributed approximately 26% of the outstanding shares of KID
(at such time) to our shareholders and ceased to consolidate KID
as at March 31, 2010. We distributed the substantial
balance of our interest in KID over the course of 2010.
The disposition of our former Industrial Business in 2010
resulted in the Industries Business being accounted for as
discontinued operations. Accordingly, prior period financial
statements have been reclassified to reflect this change. Please
refer to the discussion in Note 4 to our consolidated
annual financial statements included in this annual report.
Because we are reclassifying prior years’ financial
statements for the presentation of discontinued operations, our
reported results including, among other things, earnings and
earnings per share, may not be consistent with that which was
originally presented.
24
Table of Contents
Summary
of Quarterly Results
The following tables provide selected financial information for
the most recent eight quarters presented in accordance with IFRS:
|
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||
| 2010 (1) | 2010 | 2010 | 2010 | |||||||||||||
| (United States dollars in thousands, except per share amounts) | ||||||||||||||||
|
Net sales
|
$ | 57,006 | $ | 17,622 | $ | 5,836 | $ | 4,012 | ||||||||
|
Equity income
|
954 | — | — | — | ||||||||||||
|
Total revenues
|
57,960 | 17,622 | 5,836 | 4,012 | ||||||||||||
|
Net income (loss) from continuing
operations
(2)
|
46,565 | 71 | 1,004 | (1,801 | ) | |||||||||||
|
Basic earnings (loss) from continuing operations, per share
|
0.92 | 0.00 | 0.03 | (0.06 | ) | |||||||||||
|
Diluted earnings (loss) from continuing operations, per share
|
0.92 | 0.00 | 0.03 | (0.06 | ) | |||||||||||
|
Net income
(loss)
(2)
|
46,374 | 4,941 | (1,721 | ) | (19,278 | ) | ||||||||||
|
Basic earnings (loss), per share
|
0.92 | 0.15 | (0.06 | ) | (0.64 | ) | ||||||||||
|
Diluted earnings (loss), per share
|
0.92 | 0.15 | (0.06 | ) | (0.64 | ) | ||||||||||
Notes
| (1) | We consolidated the operations of Mass from November 16, 2010. | |
| (2) | Net income attributable to our shareholders. |
|
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||
| 2009 | 2009 | 2009 | 2009 | |||||||||||||
| (United States dollars in thousands, except per share amounts) | ||||||||||||||||
|
Net sales and total revenues
|
$ | 5,573 | $ | 4,914 | $ | 1,920 | $ | 2,311 | ||||||||
|
Net loss from continuing
operations
(1)
|
(1,483 | ) | (2,246 | ) | (11,049 | ) | (1,542 | ) | ||||||||
|
Basic loss from continuing operations, per share
|
(0.05 | ) | (0.07 | ) | (0.36 | ) | (0.05 | ) | ||||||||
|
Diluted loss from continuing operations, per share
|
(0.05 | ) | (0.07 | ) | (0.36 | ) | (0.05 | ) | ||||||||
|
Net income
(loss)
(1)
|
37,691 | 5,883 | (7,751 | ) | 849 | |||||||||||
|
Basic earnings (loss), per share
|
1.25 | 0.19 | (0.26 | ) | 0.03 | |||||||||||
|
Diluted earnings (loss), per share
|
1.25 | 0.19 | (0.26 | ) | 0.03 | |||||||||||
Note
| (1) | Net income attributable to our shareholders. |
25
Table of Contents
Overview
of 2010 Results Compared to 2009
The following table sets forth, for the periods indicated,
certain key operating results and other financial information:
| Year Ended December 31 | ||||||||
| 2010 (1) | 2009 | |||||||
| (United States dollars in thousands, except per share amounts) | ||||||||
|
Net sales
|
$ | 84,476 | $ | 14,718 | ||||
|
Gross revenues
|
85,430 | 14,718 | ||||||
|
Costs and expenses
|
70,724 | 22,763 | ||||||
|
Costs of sales
|
49,352 | 8,525 | ||||||
|
Selling, general and administrative expense
|
18,316 | 16,474 | ||||||
|
Net income (loss) from continuing
operations
(2)
|
45,839 | (16,320 | ) | |||||
|
Net income (loss) from discontinued
operations
(2)
|
(15,523 | ) | 52,992 | |||||
|
Net
income
(2)
|
30,316 | 36,672 | ||||||
|
Basic earnings (loss) per share:
|
||||||||
|
Continuing operations
|
1.28 | (0.54 | ) | |||||
|
Discontinued operations
|
(0.43 | ) | 1.75 | |||||
|
Diluted earnings (loss) per share:
|
||||||||
|
Continuing operations discontinued operations
|
1.28 | (0.54 | ) | |||||
|
Discontinued operations
|
(0.43 | ) | 1.75 | |||||
Notes
| (1) | We consolidated the operations of Mass from November 16, 2010. | |
| (2) | Net income attributable to our shareholders. |
Year
Ended December 31, 2010 Compared to the Year Ended
December 31, 2009
The following is a breakdown of our total revenues by activity
for each of the fiscal years ended December 31, 2010 and
2009:
| December 31, | ||||||||
| 2010 (1) | 2009 | |||||||
| (United States dollars in thousands) | ||||||||
|
Gross Revenues:
|
||||||||
|
Commodities and resources
|
$ | 76,478 | $ | 13,530 | ||||
|
Proprietary investing
|
4,821 | — | ||||||
|
Other
|
4,131 | 1,188 | ||||||
| $ | 85,430 | $ | 14,718 | |||||
Note
| (1) | The operations of Mass were consolidated from November 16, 2010. |
26
Table of Contents
The following charts illustrate geographic distribution of our
revenues in 2010 and 2009:
|
|
Based upon the yearly average exchange rates for the year ended
December 31, 2010, the United States dollar increased by
approximately 4.7% in value against the Euro and decreased by
approximately 9.8% in value against the Canadian dollar,
compared to the yearly average exchange rates in 2009. As at
December 31, 2010, the United States dollar had increased
by approximately 7.0% against the Euro and decreased by 5.0%
against the Canadian dollar since December 31, 2009.
Gross revenues for the fiscal year ended December 31, 2010
increased to $85.4 million (consisting of net sales of
$84.5 million and equity income from medical joint ventures
of $1.0 million) from $14.7 million (consisting wholly
of net sales) in 2009, primarily as a result of the
consolidation of Mass and its commodities operations from
November 16, 2010 and increased shipments from the Wabush
iron ore mine and the collection of underpayment of resource
property royalties in prior years during 2010.
Gross revenues for our commodities and resources business were
$76.5 million for the fiscal year ended December 31,
2010, compared to $13.5 million for the same period in
2009, primarily as a result of the consolidation of Mass and its
commodities operations from November 16, 2010, increased
shipments from the Wabush iron ore mine and the collection of
underpayment of resource property royalties in prior years
during 2010.
Gross revenues for our merchant banking business were
$4.8 million for the fiscal year ended December 31,
2010, compared to $nil for the same period in 2009, primarily as
a result of the consolidation of Mass from November 16,
2010.
Gross revenues for our other segment were $4.1 million for
the fiscal year ended December 31, 2010, compared to
$1.2 million for the same period in 2009, primarily as a
result of the consolidation of Mass’s operations from
November 16, 2010.
During 2010, income generated by the Wabush royalty increased to
approximately $31.7 million from approximately
$13.5 million in 2009. This increase in royalty income was
mainly attributable to a higher royalty rate and increased
shipments from Pointe Noire, Québec, and the collection of
underpayment of resource property royalty of $11.2 million
in prior years. A total of 3.8 tons and 3.2 tons of iron ore
pellets were shipped from Pointe Noire, Québec by the
Wabush iron ore mine during 2010 and 2009, respectively.
Costs of sales increased to $49.4 million during the fiscal
year ended December 31, 2010 from $8.5 million for the
same period in 2009, primarily as a result of the consolidation
of Mass’s operations from November 16, 2010.
Selling, general and administrative expenses, excluding
share-based compensation increased slightly to
$18.3 million in 2010 from $16.5 million in 2009. The
increase is primarily linked to increases in the professional
fees on our projects and activities and the consolidation of
Mass’s operations from November 16, 2010.
Share-based compensation expense was $72,000 in the year ended
December 31, 2010, compared to $2.7 million recovered
during the year ended December 31, 2009. The $72,000
expense in 2010 was due to a subsidiary’s stock option plan.
27
Table of Contents
We incurred a loss on derivative contracts in the amount of
$2.0 million for the fiscal year ended December 31,
2010 compared to $nil for the same period in 2009, primarily as
a result of unfavourable changes in exchange rates on our
currency contracts.
We incurred no loss or gain from the settlement of investment in
preferred shares of former subsidiaries for the fiscal year
ended December 31, 2010 compared to a loss of
$9.5 million for the same period in 2009.
We recognized a gain of $41.1 million on negative goodwill
during fiscal year ended December 31, 2010 in connection
with the acquisition of Mass. The negative goodwill arose as the
market price of our common shares on the acquisition dates was
less than the fair value of the net identifiable assets acquired
from Mass.
We recognized an income tax expense of $7.0 million
(provision for income taxes of $0.2 million and provision
for resource property taxes of $6.7 million) in 2010,
compared to an income tax recovery of $4.5 million
(recovery of income taxes of $7.5 million and resource
property taxes of $3.0 million) in 2009. Our statutory tax
rate was 28.5% in 2010, compared to 29% in 2009, and our
effective tax rates are lower than our statutory tax rates. The
increase in income tax expense was primarily a result of
profitable operations in the current year, partially offset by
non-taxable income. We paid $3.0 million cash in income tax
(other than resource property revenue tax) in 2010, compared to
$nil in 2009. The increase in income tax paid is mainly due to
the withholding tax on dividends collected from KID in 2010
which had been reallocated to discontinued operations.
In 2010, our income from continuing operations was
$45.8 million, or $1.28 per share on a basic and diluted
basis. In 2009, our loss from continuing operations was
$16.3 million, or $0.54 per share on a basic and diluted
basis.
Liquidity
and Capital Resources
General
Liquidity is of importance to companies in our businesses.
Insufficient liquidity often results in underperformance and can
even result in the failure of such businesses.
Our objective when managing capital is to safeguard our ability
to continue as a going concern, generate revenues and realize
upon strategic opportunities, even during adverse market
conditions. We actively and regularly review and manage capital
structure to ensure optimal shareholder returns when evaluating
our capital structure. Our management takes into consideration
future capital requirements and capital efficiency, prevailing
and projected profitability, projected operating cash flows,
projected capital expenditures and projected strategic
investment opportunities.
Liquidity is of importance to companies in our businesses.
Insufficient liquidity often results in underperformance and can
even result in the failure of such businesses.
Our objectives when managing capital are: (i) to safeguard
our ability to continue as a going concern so that we can
continue to provide returns for shareholders and benefits for
other stakeholders, (ii) to provide an adequate return to
our shareholders by pricing products and services commensurately
with the level of risk, and (iii) to maintain a flexible
capital structure which optimizes the cost of capital at
acceptable risk. We set the amount of capital in proportion to
risk. We manage our capital structure and make adjustments to it
in the light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain
or adjust the capital structure, we may adjust the amount of
dividends paid to shareholders, return capital to shareholders,
issue new shares or sell assets to reduce debt.
Consistently with others in our industry, we monitor capital on
the basis of our
debt-to-adjusted
capital ratio and long-term
debt-to-equity
ratio. The
debt-to-adjusted
capital ratio is calculated as net debt divided by adjusted
capital. Net debt is calculated as total debt less cash and cash
equivalents. Adjusted capital comprises all components of equity
and some forms of subordinated debt, if any. The long-term
debt-to-equity
ratio is calculated as long-term debt divided by
shareholders’ equity. The computations are based on
continuing operations.
| 2010 | 2009 | |||||||
| (United States dollars in thousands) | ||||||||
|
Total debt
|
$ | 52,748 | $ | — | ||||
|
Less: cash and cash equivalents
|
(397,697 | ) | (38,046 | ) | ||||
|
Net debt (net cash and cash equivalents)
|
(344,949 | ) | (38,046 | ) | ||||
|
Shareholders’ equity
|
547,756 | 435,689 | ||||||
|
Debt-to-adjusted
capital ratio
|
Not applicable | Not applicable | ||||||
28
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There were no amounts in accumulated other comprehensive income
relating to cash flow hedges nor were there any subordinated
debt instruments as at December 31, 2010 and 2009. The
debt-to-adjusted
capital ratio in 2010 and 2009 were not applicable as we had a
net cash and cash equivalents balance.
| 2010 | 2009 | |||||||
| (United States dollars in thousands) | ||||||||
|
Long-term debt
|
$ | 48,604 | $ | — | ||||
|
Shareholders’ equity
|
547,756 | 435,689 | ||||||
|
Long-term
debt-to-equity
ratio
|
0.09 | Not applicable | ||||||
During 2010, our strategy, which was unchanged from 2009, was to
maintain the
debt-to-adjusted
capital ratio and the long-term
debt-to-equity
ratio at a low level. We had a net cash and cash equivalent
balance after deduction of the total debt. Our long-term
debt-to-equity
ratio was 0.09 and nil as at December 31, 2010 and 2009,
respectively.
Financial
Position
The following table sets out our selected financial information
as at the dates indicated:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (United States Dollars in thousands) | ||||||||
|
Cash and cash equivalents
|
$ | 397,697 | $ | 38,046 | ||||
|
Short-term securities
|
27,894 | 11,212 | ||||||
|
Total assets
|
854,256 | 951,720 | ||||||
|
Working capital
|
411,920 | 370,821 | ||||||
|
Long-term debt, less current portion
|
48,604 | — | ||||||
|
Shareholders’ equity
|
547,756 | 435,689 | ||||||
We maintain a level of liquidity, with a substantial amount of
our assets held in cash and cash equivalents, and securities.
The liquid nature of these assets provides us with flexibility
in managing and financing our business and the ability to
realize upon investment or business opportunities as they arise.
We also use this liquidity in client-related services by acting
as a financial intermediary for third parties (e.g. by acquiring
a position or assets and reselling such position or assets) and
for our own proprietary trading and investing activities.
As at December 31, 2010, cash and cash equivalents were
$397.7 million, compared to $38.0 million as at
December 31, 2009. The increase in cash was primarily a
result of the consolidation of Mass. As at December 31,
2010: (i) short-term securities increased to
$27.9 million from $11.2 million at December 31,
2009; (ii) trade receivables and other receivables were
$13.1 million and $12.1 million, respectively,
compared to $nil and $5.7 million at December 31,
2009; (iii) the value of our inventories were
$67.1 million, compared to $nil as at December 31,
2009; (iv) the value of real estate held for sale was
$12.5 million, compared to $nil as at December 31,
2009; and (v) the value of contract deposits, prepaid and
other assets was $20.8 million as at December 31,
2010, compared to $0.8 million as at December 31,
2009. The respective increases in such current assets were
primarily a result of assets acquired pursuant to our
consolidation of Mass.
The value of current assets of discontinued operations was $nil
as at December 31, 2010 compared to $681.0 million as
at December 31, 2009, as a result of the reclassification
and disposition of our former Industrial Business.
Short-Term
Bank Loans and Facilities
As part of our merchant banking and financial service
activities, we establish, utilize and maintain various kinds of
credit lines and facilities with banks, insurers and trade
finance providers. Most of these facilities are short-term.
These facilities are used for
day-to-day
business, trade financing and activities in commodities, and
structured trade finance, a special trade financing. The amounts
drawn under such facilities fluctuate with the kind and level of
transactions being undertaken.
29
Table of Contents
As at December 31, 2010, we had credit facilities aggregating
$379.0 million as follows: (i) we had unsecured revolving credit
facilities aggregating $190.8 million from banks. The banks
generally charge an interest rate at the inter-bank rate plus an
interest margin; (ii) we had revolving credit facilities
aggregating $7.4 million from banks for structured trade
finance, a special trade financing. The margin is negotiable
when the facility is used; (iii) we had a non-recourse revolving
factoring arrangement with a bank up to a credit limit of $113.8
million for our commodities activities. Generally, we factor our
trade receivable accounts upon invoicing at the inter-bank rate
plus a margin; and (iv) we had a foreign exchange credit
facility of $67.0 million with a bank. All of these facilities
are renewable on a yearly basis.
Other than lines of credit drawn and as may be outstanding for
trade financing and commodities and structured trade financing
activities, as of December 31, 2010, the maturities of
long-term debt were as follows:
|
Maturity
|
Principal | Interest (1) | ||||||
| (United States dollars in thousands) | ||||||||
|
2011
|
$ | 4,144 | $ | 1,841 | ||||
|
2012
|
27,845 | 1,076 | ||||||
|
2013
|
19,152 | 585 | ||||||
|
2014
|
1,607 | 33 | ||||||
| $ | 52,748 | $ | 3,535 | |||||
Note
| (1) | Undiscounted. |
We expect our maturing debt to be satisfied primarily through
the settlement of underlying commodities transactions, trade
financing transactions, including structured trade finance
transactions, cash on hand and cash flow from operations. Much
of our maturing debt may either subsequently be made
re-available to us by the applicable financial institution or we
may replace such facilities with new facilities depending upon
particular capital requirements.
Cash
Flows
Due to the type of businesses we engage in, our cash flows are
not necessarily reflective of net earnings and net assets for
any reporting period. As a result, instead of using a
traditional cash flow analysis, our management believes it is
more useful and meaningful to analyze our cash flows by the
overall liquidity and credit availability. Please see the
discussion on our financial position, short-term bank loans,
facilities and long term debt earlier in this section.
Our business and, in particular, the commodities and resources
and merchant banking, can be cyclical and the cash flows vary
accordingly. Our principal operating cash expenditures are for
financing trading of securities, commodities for customers, for
our own account, and general and administrative expenses.
Working capital levels fluctuate throughout the year and are
affected by the level of our trading activities, the markets and
prices for commodities and the timing of receivables and the
payment of payables and expenses. Changes in trading activities
by customers and for our own account can affect the level of
receivables and influence overall working capital levels. We
have a high level of cash on hand and credit facility amounts.
Our management is of the opinion that we have sufficient cash
flow from operations to meet our working capital and other
requirements and to meet unexpected cash demands.
Cash
from Operating Activities
Operating activities provided cash of $43.9 million in
2010, compared to using cash of $7.6 million in 2009,
primarily due to an increase of accounts payable. In 2010,
changes in short — term securities used cash of
$0.4 million, versus $nil in the comparable period of 2009.
A decrease in restricted cash provided $0.7 million in
2010, compared to $nil in 2009. A decrease in receivables
provided cash of $4.4 million in 2010, versus using cash of
$1.0 million resulting from increases in receivables in
2009. An increase of inventories used cash of $4.4 million
in 2010, compared to $nil in 2009. An increase in accounts
payables and accrued expenses provided cash of
$23.8 million in 2010, compared to a decrease in same using
cash of $1.7 million in 2009. A decrease in contract
deposits, prepaid and other provided cash of
30
Table of Contents
$7.3 million in 2010, compared to $0.4 million in
2009. A decrease of short-term bank borrowings used
$4.9 million in 2010, compared to $nil in 2009.
Cash
Flows from Investing Activities
Investing activities provided cash of $224.2 million in
2010, compared to $6.2 million in 2009, primarily as a
result of the acquisition of Mass, which provided cash of
$213.9 million compared to $nil in 2009. A net increase in
loan receivables used cash of $1.7 million for 2010,
compared to $nil in 2009. In 2010, proceeds from sales of
long-term investments, net of purchases, provided cash of
$12.2 million, compared to $nil in 2009. Purchases of
property, plant and equipment, net of sales, used cash of
$1.1 million compared to $6,000 in 2009. Settlement of
investment in preferred shares of former subsidiaries provided
no cash in 2010 compared to $6.2 million in 2009.
Cash
Flows from Financing Activities
Net cash provided by financing activities was $46.2 million
in 2010, compared to $nil in 2009, primarily as a result of an
increase in the issuance of shares, which provided cash of
$48.2 million in 2010, compared to $nil in 2009. There was
a net increase in debt repayment which used cash of
$0.8 million in 2010, compared to $nil in 2009. Dividends
paid to non-controlling interests used $1.2 million in
2010, compared to $nil in 2009.
Future
Liquidity
We had no material commitments to acquire assets or operating
businesses as at December 31, 2010. We anticipate that
there will be acquisitions of businesses or commitments to
projects in the future. To achieve the long-term goals of
expanding our assets and earnings, including through
acquisitions, capital resources will be required. Depending on
the size of a transaction, the capital resources that will be
required can be substantial. The necessary resources will be
generated from cash flow from operations, cash on hand,
borrowing against our assets, sales of proprietary investments
or the issuance of securities.
Foreign
Currency
Substantially all of our operations are conducted in
international markets and our consolidated financial results are
subject to foreign currency exchange rate fluctuations.
Our reporting currency is the United States dollar. We translate
foreign self-sustained subsidiaries’ assets, liabilities,
contingent liabilities and other financial obligations into
United States dollars at the rate of exchange on the balance
sheet date. Revenues and expenses are translated at exchange
rates approximating those at the date of the transactions. As a
substantial amount of revenues are received in Euros, Chinese
yuans and Canadian dollars, the financial position for any given
period, when reported in United States dollars, can be
significantly affected by the exchange rates for Euros, Chinese
yuans and Canadian dollars prevailing during that period.
In the year ended December 31, 2010, we reported
approximately a net $3.9 million currency transaction loss,
compared to a net gain of $16.9 million in 2009.
31
Table of Contents
Contractual
Obligations
The following table sets out our contractual obligations and
commitments as at December 31, 2010, in connection with our
long — term liabilities.
| Payments Due by Period | ||||||||||||||||
|
Less than
|
More than
|
|||||||||||||||
|
Contractual
Obligations
(1)(2)
|
1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||
| (United States dollars in thousands) | ||||||||||||||||
|
Long-term debt obligations
|
$ | 5,985 | $ | 48,658 | $ | 1,640 | $ | — | ||||||||
|
Capital lease obligations
|
— | — | — | — | ||||||||||||
|
Operating lease obligations
|
2,077 | 2,581 | 1,471 | 12 | ||||||||||||
|
Purchase obligations
|
32,748 | — | — | — | ||||||||||||
|
Other long — term liabilities, provision
|
362 | 232 | — | — | ||||||||||||
|
Total
|
$ | 41,172 | $ | 51,471 | $ | 3,111 | $ | 12 | ||||||||
Notes
| (1) | The table does not include non-financial instrument liabilities and guarantees. | |
| (2) | In addition to the tabular information, we have granted a credit facility up to $20.0 million to an affiliate, of which $5.8 million had been drawn and remains outstanding as at December 31, 2010. |
Indebtedness
As at December 31, 2010, our total short-term bank loans
have been increased to approximately $70.0 million from
$nil at December 31, 2009.
Risk
Management
Risk is an inherent part of our business and activities. The
extent to which we properly and effectively identify, assess,
monitor and manage each of the various types of risk involved in
our activities is critical to our financial soundness and
profitability. We seek to identify, assess, monitor and manage
the following principal risks involved in our business
activities: market, credit, liquidity, operational, legal and
compliance, new business, reputational and other. Risk
management is a multi-faceted process that requires
communication, judgment and knowledge of financial products and
markets. Our management takes an active role in the risk
management process and requires specific administrative and
business functions to assist in the identification, assessment
and control of various risks. Our risk management policies,
procedures and methodologies are fluid in nature and are subject
to ongoing review and modification.
Sensitivities
Our earnings are sensitive to, among other things, fluctuations
in:
Interest Rates.
Our long-term debt may
be exposed to interest rate price risk. At December 31,
2010, if benchmark interest rates at that date had been
100 basis points (1.0% per annum) lower with all other
variables held constant, income from continuing operations for
the year would have been $0.1 million higher. Conversely,
if benchmark interest rates at that date had been 100 basis
points (1.0% per annum) higher with all other variables held
constant, income from continuing operations for the year would
have been $0.1 million lower.
Foreign Exchange
.
Our major trading
currencies are United States dollars and Euros. At
December 31, 2010, if the U.S. dollar had weakened 10%
against the local functional currencies with all other variables
held constant, income from continuing operations for the year
would have been $11.6 million lower. Conversely, if the
U.S. dollar had strengthened 10% against the local
functional currencies with all other variables held constant,
income from continuing operations for the year would have been
$11.6 million higher.
At December 31, 2010, if the Euro had weakened 10% against
the local functional currencies with all other variables held
constant, income from continuing operations for the year would
have been $13.4 million lower. Conversely, if the Euro had
strengthened 10% against the local functional currencies with
all other variables held constant, income from continuing
operations for the year would have been $16.1 million
higher.
32
Table of Contents
Equity Prices
.
We face equity price
risk with respect to our investments in securities. At
December 31, 2010, if the equity price in general had
weakened 10% with all other variables held constant, income and
comprehensive income from continuing operations for the year
would have been $2.3 million and $1.0 million lower,
respectively. Conversely, if the equity price in general had
strengthened 10% with all other variables held constant, income
and comprehensive income from continuing operations would have
been $2.3 million and $1.0 million higher,
respectively.
Inflation
We do not believe that inflation has had a material impact on
our revenues or income over the past two fiscal years. However,
increases in inflation could result in increases in our
expenses, which may not be readily recoverable in the price of
services provided to our clients. To the extent that inflation
results in rising interest rates and has other adverse effects
on capital markets, it could adversely affect our financial
position and profitability.
Application
of Critical Accounting Policies
The preparation of financial statements in conformity with IFRS
requires our management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods.
Our management routinely makes judgments and estimates about the
effects of matters that are inherently uncertain. As the number
of variables and assumptions affecting the probable future
resolution of the uncertainties increase, these judgments become
even more subjective and complex. We have identified certain
accounting policies, described below, that are the most
important to the portrayal of our current financial condition
and results of operations. Our significant accounting policies
are disclosed in Note 1 to our audited consolidated
financial statements included in this annual report on
Form 20-F.
The following accounting policies are the most important to our
ongoing financial condition and results of operations:
Revenue
Recognition
We currently earn royalty income from our interest in the
resource property which is situated in Newfoundland and
Labrador, Canada. The property is leased to an operator and our
royalty is based on a pre-determined formula consisting of
certain market variables and shipment tonnage. We receive the
royalty computation information from the operator.
Inventories
Our inventories consist of raw materials,
work-in-progress
and finished goods.
In general, inventories are recorded at the lower of cost or
estimated net realizable value. Commodities acquired in
commodity broker-trader activities with the purpose of selling
in the near future and generating a profit from fluctuations in
price or broker-traders’ margin are measured at fair value
less costs to sell. Accordingly, our management must make
estimates about their pricing when establishing the appropriate
provisions for inventories. For the finished goods and commodity
inventories, the estimated net selling price is the most
important determining factor. However, our management also
considers whether there are any alternatives to enhance the
value of the finished goods by various marketing strategies and
channels. Actual selling price could differ from the estimated
selling price, and such differences could be material.
Receivables
Typically, receivables are financial instruments which are not
classified as held for trading or available for sale. They are
net of an allowance for credit losses, if any. We perform
ongoing credit evaluations of customers and adjust our allowance
accounts for specific customer risks and credit factors.
Receivables are considered past due on an individual basis based
on the terms of the contracts. Our allowance for credit losses
is maintained at an amount considered adequate to absorb
estimated credit-related losses. Such allowance reflects
management’s best estimate of the losses in our receivables
and judgments about economic conditions. As at December 31,
2010, we had recognized receivables (including loans, trade and
other) aggregating $31.0 million.
33
Table of Contents
Valuation
of Securities
Securities held for trading are carried at current market value.
Any unrealized gains or losses on securities held for trading
are included in our results of operations.
Available-for-sale
securities are also carried at current market value when current
market value is available. Any unrealized gains or losses are
included in other comprehensive income. When there has been a
loss in value of an
available-for-sale
security that is other than a temporary decline, the security
will be written down to recognize the loss in the determination
of income. In determining whether the decline in value is other
than temporary, quoted market price is not the only deciding
factor, particularly for thinly traded securities, large block
holdings and restricted shares. We consider, but such
consideration is not limited to, the following factors:
(i) the trend of the quoted market price and trading
volume; (ii) the financial position and results for a
period of years; (iii) liquidity or going concern problems
of the investee; (iv) changes in or reorganization of the
investee
and/or
its
future business plan; (v) outlook of the investee’s
industry; (vi) the current fair value of the investment
(based upon an appraisal thereof) relative to its carrying
value; and (vii) our business plan and strategy to divest
the security or to restructure the investee.
Recent market volatility has made it extremely difficult to
value certain securities. Subsequent valuations, in light of
factors prevailing at such time, may result in significant
changes in the values of these securities in future periods. Any
of these factors could require us to recognize further
impairments in the value of our securities portfolio, which may
have an adverse effect on our results of operations in future
periods.
Income
Taxes
Management believes that it has adequately provided for income
taxes based on all of the information that is currently
available. The calculation of income taxes in many cases,
however, requires significant judgment in interpreting tax rules
and regulations, which are constantly changing.
Our tax filings are also subject to audits, which could
materially change the amount of current and future income tax
assets and liabilities. Any change would be recorded as a charge
or a credit to income tax expense. Any cash payment or receipt
would be included in cash from operating activities.
We currently have deferred tax assets which are comprised
primarily of tax loss carry-forwards and deductible temporary
differences, both of which will reduce taxable income in the
future. The amounts recorded for deferred tax are based upon
various judgments, assumptions and estimates. We assess the
realization of these deferred tax assets on a periodic basis to
determine to what extent that it is probable that taxable profit
will be available against which the deductible temporary
differences and the carry-forward of unused tax credits and
unused tax losses can be utilized. We determine whether it is
probable that all or a portion of the deferred tax assets will
be realized, based on currently available information,
including, but not limited to, the following:
| • | the history of the tax loss carry-forwards and their expiry dates; | |
| • | future reversals of temporary differences; | |
| • | our projected earnings; and | |
| • | tax planning opportunities. |
On the reporting date, we also reassess unrecognized deferred
tax assets. We recognized a previously unrecognized deferred tax
asset to the extent that it has become probable that future
taxable profit will allow the deferred tax asset to be recovered.
We provide for future liabilities in respect of uncertain tax
positions where additional tax may become payable in future
periods and such provisions are based on our management’s
assessment of exposures. We did not recognize the full deferred
tax liability on taxable temporary differences associated with
investments in subsidiaries, joint ventures and associates where
we are able to control the timing of the reversal of the
temporary differences and it is probable that the temporary
differences will not reverse in the foreseeable future. We may
change our investment decision in the normal course of our
business, thus resulting in additional tax liability.
34
Table of Contents
New
Standards and Interpretations Not Yet Adopted
Certain pronouncements were issued by the International
Accounting Standards Board that are mandatory for accounting
periods beginning after January 1, 2011 or later periods.
The following new accounting standards and amendments are
expected to have significant effects on our accounting policies,
financial positions
and/or
financial statement presentation.
IFRS 9,
Financial Instruments,
is expected to replace IAS
39,
Financial Instruments: Recognition and Measurement,
from 2013. New requirements for the classification and
measurement of financial liabilities, derecognition of financial
instruments, impairment and hedge accounting are expected to be
added to IFRS 9.
Amendments, set out in
Disclosures — Transfers of
Financial Assets,
were issued to amend IFRS 7,
Financial
Instruments,
so as to enhance the disclosure requirements
for transfers of financial assets that result in derecognition.
These amendments respond, in part, to the recent financial
crisis. Entities will be required to provide more extensive
quantitative and qualitative disclosures about: (i) risk
exposures relating to transfers of financial assets that are:
(a) not derecognized in their entirety; or
(b) derecognized in their entirety, but with which the
entity continues to have some continuing involvement; and
(ii) the effect of those risks on an entity’s
financial position. The amendments are effective for annual
periods beginning on or after July 1, 2011. Earlier
application is permitted.
Amendments, set out in
Deferred Tax: Recovery of Underlying
Assets,
were issued to amend IAS 12,
Income
Taxes.
IAS 12 requires an entity to measure the
deferred tax relating to an asset depending on whether the
entity expects to recover the carrying amount of the asset
through use or sale. It can be difficult and subjective to
assess whether recovery will be through use or through sale when
the asset is measured using the fair value model in IAS 40,
Investment Property
. The amendment provides a practical
solution to the problem by introducing a presumption that
recovery of the carrying amount will, normally, be through sale.
The amendments are effective for annual periods beginning on or
after January 1, 2012.
IAS 24,
Related Party Disclosures,
was revised to
simplify the disclosure requirements for government-related
entities and clarify the definition of a related party. The
revised standard is effective for annual periods beginning on or
after January 1, 2011, with earlier application permitted.
We are currently evaluating the impact, if any, that these new
standards will have on our consolidated financial statements.
Trend
Information
For a discussion of trends relating to revenues derived from our
royalty interest, please see “
Item 4: Information
on the Company — B. Business Overview —
Business Segments — Commodities and
Resources
”.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors.
We have outstanding issued guarantees held by our trading and
financial partners in connection with our commodities and
resources activities, and as of December 31, 2010, we had
outstanding issued guarantees of up to a maximum of
$45.0 million. As of December 31, 2010,
$24.8 million have been used and outstanding and have not
been recorded as liabilities in the consolidated balance sheet.
There has been no claim against the guarantees.
Safe
Harbour
Not Applicable.
35
Table of Contents
| ITEM 6: | Directors, Senior Management and Employees |
| A. | Directors and Senior Management |
We have no arrangement or understanding with major shareholders,
customers, suppliers or others pursuant to which any of our
directors or officers was selected as a director of officer. The
following table sets forth the names of each of our directors
and officers, as at the date hereof:
|
Date of
|
||||||||||
|
Commencement of
|
Expiration of
|
|||||||||
|
Office with our
|
Term of Office
|
|||||||||
|
Name (Age)
|
Present Position | Company | with our Company | |||||||
|
Michael J. Smith (62)
|
Chairman, Chief Executive Officer,
Interim Chief Financial Officer and Director |
1986 | 2011 | |||||||
|
Dr. Shuming Zhao
(55)
(1)(2)(3)
|
Director | 2004 | 2013 | |||||||
|
Robert Ian Rigg
(64)
(1)(2)(3)
|
Director | 2010 | 2011 | |||||||
|
Indrajit Chatterjee
(66)
(1)(2)(3)
|
Director | 2005 | 2012 | |||||||
Notes
| (1) | Member of our audit committee. | |
| (2) | Member of our compensation committee. | |
| (3) | Member of our nominating and corporate governance committee. |
Michael
J. Smith — Chairman, Chief Executive Officer and
Director
Mr. Smith has been our Chairman since 2003 and a director
of our company since 1986. Mr. Smith was appointed our
Chief Executive Officer in March 2010. He was our Chief
Financial Officer from 2003 until October 16, 2007, is
currently our interim Chief Financial Officer and was our
Secretary until March 1, 2008. Mr. Smith was also our
Chief Executive Officer between 1996 and 2006. Mr. Smith is
the President, Secretary and a director of Blue Earth Refineries
Inc., a public company with its common shares registered with
the Securities and Exchange Commission under the
Securities
Exchange Act of 1934
. Mr. Smith was also previously the
President, Chief Executive Officer, Secretary and a director of
Mass. He is also a director of Canoro. Mr. Smith has
experience in corporate finance, restructuring and taxation
planning.
Dr. Shuming
Zhao — Director
Dr. Zhao has been a director of our company since 2004.
Dr. Zhao is a professor and the Dean of the School of
Business, Nanjing University and the Dean of the School of
Graduate Studies, Macau University of Science and Technology.
Dr. Zhao is President of Jiangsu Provincial Association of
Human Resource Management and Vice President of Jiangsu
Provincial Association of Business Management and Entrepreneurs.
Dr. Zhao is also a director of Little San Company Ltd.
(China). Dr. Zhao organized and held four international
symposia on multinational business management in 1992, 1996,
1999 and 2002. Since 1994, Dr. Zhao has also acted as a
management consultant for several Chinese and international
firms. Since 1997, Dr. Zhao has been a visiting professor
at the Marshall School of Business at the University of Southern
California and he has lectured in countries including the United
States, Canada, Japan, the United Kingdom, Germany, Australia,
the Netherlands and Singapore. Since 2004, Dr. Zhao has
been an independent director on the board of directors of Suning
Electronic Co. Ltd.
Robert
Ian Rigg — Director
Mr. Rigg has been a director of our company since 2010.
Mr. Rigg holds a commerce degree in economics and
accounting from the University of Melbourne and was a member of
the Institute of Chartered Accountants in Canada. Mr. Rigg
has experience as both a director and chief financial officer of
several public companies.
Indrajit
Chatterjee — Director
Mr. Chatterjee has been a director of our company since
2005. Mr. Chatterjee is a retired businessman who was
formerly responsible for marketing with the Transportation
Systems Division of General Electric for India.
Mr. Chatterjee is experienced in dealing with Indian
governmental issues.
36
Table of Contents
Family
Relationships
There are no family relationships between any of our director
and executive officers.
| B. | Compensation |
During fiscal year ended December 31, 2010, we paid an
aggregate of approximately $2.1 million in cash
compensation to our directors and officers, excluding
directors’ fees. No other funds were set aside or accrued
by our company during the fiscal year ended December 31,
2010 to provide pension, retirement or similar benefits for our
directors or officers pursuant to any existing plan provided or
contributed to by us.
Executive
Officers
The following table provides a summary of compensation paid by
us during the fiscal year ended December 31, 2010 to the
senior management of our company:
|
Non-Equity Incentive Compensation Plan
|
||||||||||||||||||||||||||||||||
|
Compensation
|
||||||||||||||||||||||||||||||||
| ($) | ||||||||||||||||||||||||||||||||
|
Share-
|
Option-
|
Long-
|
||||||||||||||||||||||||||||||
|
Based
|
Based
|
Annual
|
Term
|
Pension
|
All Other
|
Total
|
||||||||||||||||||||||||||
|
Salary
|
Awards
|
Awards
|
Incentive
|
Incentive
|
Value
|
Compensation
|
Compensation
|
|||||||||||||||||||||||||
|
Name and Principal Position
|
($) | ($) | ($) (1) | Plans | Plans | ($) | ($) | ($) | ||||||||||||||||||||||||
|
Michael J. Smith
Chairman and Chief Executive Officer |
250,034 | — | — | 100,000 | — | — | 150,670 (1 | ) | 500,704 | |||||||||||||||||||||||
|
Jouni
Salo
(2)
|
135,176 | — | — | — | — | — | 52,559 (3 | ) | 187,735 | |||||||||||||||||||||||
|
Former President and Chief Executive Officer
|
||||||||||||||||||||||||||||||||
|
Alan
Hartslief
(4)
|
265,404 | — | — | — | — | — | 150,042 (5 | ) | 415,446 | |||||||||||||||||||||||
|
Former Chief Financial Officer and Secretary
|
||||||||||||||||||||||||||||||||
|
James
Purkis
(6)
|
109,124 | — | — | — | — | — | 847,747 (7 | ) | 956,871 | |||||||||||||||||||||||
|
Former Chief Operating Officer
|
||||||||||||||||||||||||||||||||
Notes
| (1) | Consisting of housing expenses and medical expenses. | |
| (2) | Mr. Salo was appointed as our President and Chief Executive Officer effective April 13, 2009. Mr. Salo ceased acting as our President and Chief Executive Officer effective March 30, 2010 and was replaced by Michael J. Smith. | |
| (3) | Consisting of medical, health and other expenses. | |
| (4) | Mr. Hartslief ceased acting as our Chief Financial Officer in October 2010. | |
| (5) | Consisting of medical, housing and other expenses. | |
| (6) | Mr. Purkis was appointed the President of our Construction Division effective June 1, 2008, Executive Vice-President effective November 1, 2008, and Chief Operating Officer effective August 12, 2009. Mr. Purkis resigned as Chief Operating Officer effective March 31, 2010. | |
| (7) | Consisting of automobile, housing and termination payments. |
37
Table of Contents
Directors’
Compensation
The following table provides a summary of compensation paid by
us during the fiscal year ended December 31, 2010 to the
directors of our company.
DIRECTOR
COMPENSATION TABLE
|
Share-
|
Option-
|
Non-Equity
|
||||||||||||||||||||||||||
|
Fees
|
Based
|
Based
|
Incentive Plan
|
Pension
|
All Other
|
|||||||||||||||||||||||
|
Earned
|
Awards
|
Awards
|
Compensation
|
Value
|
Compensation
|
Total
|
||||||||||||||||||||||
|
Name
|
($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
|
Michael J.
Smith
(1)
|
3,000 | — | — | — | — | — | 3,000 | |||||||||||||||||||||
|
Dr. Shuming Zhao
|
39,750 | — | — | — | — | — | 39,750 | |||||||||||||||||||||
|
Ian
Rigg
(2)
|
21,000 | — | — | — | — | — | 21,000 | |||||||||||||||||||||
|
Indrajit Chatterjee
|
114,750 | — | — | — | — | — | 114,750 | |||||||||||||||||||||
|
Gerhard
Rolf
(3)
|
20,585 | — | — | — | — | — | 20,585 | |||||||||||||||||||||
|
Silke
Stenger
(3)
|
3,750 | — | — | — | — | — | 3,750 | |||||||||||||||||||||
Notes
| (1) | Compensation provided to our Chairman, Michael Smith, is disclosed in the table above under the heading “ Executive Officers ”. | |
| (2) | Ian Rigg was appointed as director of our company on March 30, 2010. | |
| (3) | Gerhard Rolf and Silke Stenger resigned as directors of our company effective March 30, 2010. |
A total of $0.2 million was paid to our directors for
services rendered as directors, or for committee participation
or assignments, during our most recently completed financial
year. Our directors are each paid an annual fee of $30,000 and
$750 for each directors’ meeting attended as well as
additional fees, as applicable, for their respective
participation on our Audit and Compensation Committees. We also
reimburse our directors and officers for expenses incurred in
connection with their services as directors and officers.
Termination
and Change of Control Benefits
Effective March 1, 2008, we entered into an independent
consulting agreement with Michael Smith, our Chairman and Chief
Executive Officer, pursuant to which he provides consulting
services to us. In the event that the agreement is terminated by
us or in the event of a change of control, Mr. Smith is
entitled to receive a termination payment equal to the sum of
three times the aggregate consulting fee paid to Mr. Smith
in the previous twelve months plus the higher of his current
bonus or the highest bonus received by him in the previous five
years prior to such termination. In addition, all unvested
rights in any stock options or other equity awards made to
Mr. Smith will vest in full in the event of a change of
control. Mr. Smith will also be entitled, for a period of
365 days following the earlier of the date of the
termination of the agreement and the date of the change of
control, to require us to purchase all or any part of our common
shares held by Mr. Smith on the date of termination or date
of change of control, at a price equal to the average closing
market price of our common shares on the NYSE for the ten
preceding trading days. Assuming a discontinuance of
Mr. Smith’s services as a result of termination or a
change of control effective December 31, 2010, we would
have been required to make a maximum payment to Mr. Smith
in the aggregate amount of $2,432,650 pursuant to the terms of
his consulting arrangement.
Effective January 1, 2009, we entered into a new employment
arrangement with Jouni Salo whereby he agreed to act as our
President and Chief Executive Officer and as an executive of one
of our subsidiaries. Mr. Salo ceased acting as our
President and Chief Executive Officer effective March 30,
2010 and did not receive any termination payment in connection
therewith pursuant to the terms of his employment arrangement.
Effective January 1, 2009, we entered into a new employment
arrangement with Alan Hartslief whereby he agreed to act as our
Chief Financial Officer and as an executive of one of our
subsidiaries. Mr. Hartslief ceased acting as our Chief
Financial Officer in October 2010.
Effective January 1, 2009, we entered into a new employment
arrangement with James Purkis whereby he agreed to act as our
Chief Operating Officer and as an executive of one of our
subsidiaries. Mr. Purkis resigned as of March 31, 2010
38
Table of Contents
and received an aggregate payment of $792,000 (including certain
incentive amounts) in connection therewith pursuant to the terms
of his employment arrangement.
Pension
Plan Benefits
As of December 31, 2010, we did not have any defined
benefit, defined contribution or deferred compensation plans for
any of our senior officers or directors.
| C. | Board Practices |
Our Articles provide for three classes of directors with
staggered terms. Each director holds office until the expiry of
his or her term or until his or her successor is elected or
appointed, unless such office is earlier vacated in accordance
with our Articles or with the provisions of the British Columbia
Business Corporations Act
. At each annual meeting of our
company, a class of directors is elected to hold office for a
three-year term. Successors to the class of directors whose
terms expire are identified as being of the same class as the
directors they succeed and are elected to hold office for a term
expiring at the third succeeding annual meeting of shareholders.
A director appointed or elected to fill a vacancy on the board
of directors holds office for the unexpired term of his
predecessor. The following table sets forth the date of
expiration of the current term of office of each of our
directors, as well as the period during which that person has
served as a director:
|
Expiration of
|
||||||||
|
Name of Director
|
Director Since | Current Term | ||||||
|
Michael J. Smith
|
1986 | 2011 | ||||||
|
Ian Rigg
|
2010 | 2011 | ||||||
|
Indrajit Chatterjee
|
2005 | 2012 | ||||||
|
Dr. Shuming Zhao
|
2004 | 2013 | ||||||
Other than as discussed elsewhere herein, there are no service
contracts between our company and any of our directors providing
for benefits upon termination of employment.
Our board of directors has established an audit committee. Our
audit committee currently consists of Dr. Shuming Zhao, Ian
Rigg and Indrajit Chatterjee. The audit committee operates
pursuant to a charter adopted by the board of directors. A copy
of our audit committee charter is attached as Exhibit 99.1
to our annual report filed with the Securities and Exchange
Commission on April 3, 2006. The audit committee is
appointed and generally acts on behalf of the board of
directors. The audit committee is responsible primarily for
monitoring: (i) the integrity of our financial statements;
(ii) compliance with legal and regulatory requirements; and
(iii) the independence and performance of our internal and
external auditors. The audit committee also oversees our
company’s financial reporting process and internal controls
and consults with management and our independent auditors on
matters related to our annual audit and internal controls,
published financial statements, accounting principles and
auditing procedures being applied.
Our board of directors has established a compensation committee.
Our compensation committee currently consists of
Dr. Shuming Zhao, Ian Rigg and Indrajit Chatterjee. The
compensation committee operates pursuant to a compensation
committee charter adopted by the board of directors. A copy of
our compensation committee charter is attached as
exhibit 99.2 to our annual report filed with the Securities
and Exchange Commission on April 3, 2007. The compensation
committee is appointed and generally acts on behalf of the board
of directors. The compensation committee is responsible for
reviewing and approving annual salaries, bonuses and other forms
and items of compensation for the senior officers and employees
of our company. Except for plans that are, in accordance with
their terms or as required by law, administered by our board of
directors or another particularly designated group, the
compensation committee also administers and implements all of
our stock option and other stock-based and equity-based benefit
plans (including performance-based plans), recommends changes or
additions to those plans and reports to our board of directors
on compensation matters. Our Chief Executive Officer does not
vote upon or participate in the deliberations regarding his
compensation.
Effective July 15, 2005, we formed a nominating and
corporate governance committee. The nominating and corporate
governance committee currently consists of Ian Rigg,
Dr. Shuming Zhao and Indrajit Chatterjee. The nominating
and corporate governance committee operates pursuant to a
charter adopted by our board of directors. A copy of our
nominating and corporate governance charter is attached as
Exhibit 99.3 to our annual report filed with the Securities
and Exchange Commission on April 3, 2007. The primary
function of the nominating and corporate governance
39
Table of Contents
committee is to assist our board of directors in developing our
approach to corporate governance issues and monitoring
performance against the defined approach. The nominating and
corporate governance committee is also responsible for the
nomination of directors by identifying and reporting on
candidates to be nominated to our board of directors.
| D. | Employees |
At December 31, 2010, 2009 and 2008, we employed
approximately 678, 780 and 1,270 people, respectively.
| E. | Share Ownership |
There were 62,561,421 common shares, 2,635,000 stock options and
no share purchase warrants issued and outstanding as of
March 31, 2011. Of the shares issued and outstanding on
that date, our directors and officers, who served in such
positions at any time during the fiscal year ended
December 31, 2010, owned the following common shares:
|
Common Shares
|
Percentage of Total
|
|||||||||||
|
Beneficially
|
Common Shares
|
Stock Options
|
||||||||||
|
Owned
|
Outstanding
|
Held
|
||||||||||
|
Name and Principal Position
|
(#) | (%) | (#) | |||||||||
|
Michael J. Smith
|
92,727 | 0.1 | 390,000 | |||||||||
|
Chairman and Chief Executive Officer
|
||||||||||||
|
Director
|
||||||||||||
|
Dr. Shuming Zhao
|
— | — | 55,000 | |||||||||
|
Director
|
||||||||||||
|
Ian Rigg
|
7,230 | 0.0 | 55,000 | |||||||||
|
Director
|
||||||||||||
|
Indrajit Chatterjee
|
— | — | 55,000 | |||||||||
|
Director
|
||||||||||||
Stock
Option Plan
We have an incentive stock option plan that provides for the
grant of incentive stock options to purchase our common shares
to our directors, officers and key employees and other persons
providing ongoing services to us. Our stock option plan is
administered by our board of directors. The maximum number of
our common shares which may be reserved and set aside for
issuance under our stock option plan is 5,524,000. Each option
upon its exercise entitles the grantee to purchase one common
share. The exercise price of an option may not be less than the
closing market price of our common shares on the NYSE, on the
day prior to the date of grant of the option. In the event our
common shares are not traded on such day, the exercise price may
not be less than the average of the closing bid and ask prices
of our common shares on the NYSE, for the ten trading days
immediately prior to the date the option is granted. Options may
be granted under our stock option plan for an exercise period of
up to ten years from the date of grant of the option. We did not
grant any options during the year ended December 31, 2010.
There were no options outstanding as at December 31, 2010.
There were 1,732,344 options available for grant under the stock
option plan as at December 31, 2010. We granted 1,720,000
options subsequent to December 31, 2010.
Incentive
Plan
At our annual and special meeting of our shareholders held in
September 2008, our shareholders passed a resolution approving
an equity incentive plan, referred to as the “Incentive
Plan”, to further align the interests of employees and
directors with those of our shareholders by providing incentive
compensation opportunities tied to the performance of our common
shares and by promoting increased ownership of our common stock
by such individuals.
Pursuant to the terms of the Incentive Plan, our board of
directors, our compensation committee or such other committee as
is appointed by our board of directors to administer the
Incentive Plan, may grant Awards (as hereinafter defined) under
the Incentive Plan, establish the terms and conditions for those
Awards, construe and interpret the Incentive Plan and establish
the rules for the Incentive Plan’s administration. Such
committee may grant nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock awards,
stock unit awards, stock awards, performance stock awards and
tax bonus awards, each referred to as an “Award”,
under the Incentive Plan. Awards may be granted to employees,
directors, officers or consultants of ours or any affiliate or
any person to whom an offer of employment with us or any
affiliate is extended. Such committee has the authority to
determine which employees, directors, officers,
40
Table of Contents
consultants and prospective employees should receive Awards.
Non-employee directors and consultants may not receive incentive
stock options.
The maximum number of our common shares that may be issuable
pursuant to all Awards granted under the Incentive Plan is
1,500,000 common shares. Forfeited, cancelled, returned and
lapsed Awards are not counted against the 1,500,000 common
shares. Any Awards or portions thereof that are settled in cash
and not by issuance of our common shares are not counted against
the 1,500,000 common shares. As of the date of this annual
report on
Form 20-F,
915,000 Awards have been issued pursuant to the Incentive Plan
and 585,000 Awards are available for issuance.
| ITEM 7: | Major Shareholders and Related Party Transactions |
| A. | Major Shareholders |
There were 62,561,421 common shares issued and outstanding as of
March 31, 2011. The following table sets forth, as of
March 31, 2011, persons known to us to be the beneficial
owner of more than five percent (5%) of our common shares:
|
Name
|
Amount Owned | Percent of Class (1) | ||||||
|
Peter Kellogg
|
13,820,910 (2 | ) | 22.1 | % | ||||
Notes
| (1) | Based on 62,561,421 common shares issued and outstanding on March 31, 2011. | |
| (2) | In his public filings, Mr. Kellogg disclaims beneficial ownership of 10,097,211 of the shares, or approximately 16.1% of the issued and outstanding common shares. |
The voting rights of our major shareholders do not differ from
the voting rights of holders of our company’s shares who
are not major shareholders.
As of March 25, 2011, there were 62,561,421 common
shares issued and outstanding held by 587 registered
holders. Of those common shares issued and outstanding,
62,380,757 common shares were registered in the
United States (525 registered shareholders).
To the best of our knowledge, we are not directly or indirectly
owned or controlled by another corporation, by any foreign
government or by any other natural or legal person.
There are no arrangements known to us, the operation of which
may at a subsequent date result in a change in the control of
our company.
| B. | Related Party Transactions |
Other than as disclosed herein, to the best of our knowledge, in
2010 there have been no material transactions or loans between
our company and (a) enterprises that directly or indirectly
through one or more intermediaries control or are controlled by,
or are under common control with, our company;
(b) associates; (c) individuals owning, directly or
indirectly, an interest in the voting power of our company that
gives them significant influence over our company, and close
members of any such individual’s family; (d) key
management personnel of our company, including directors and
senior management of our company and close members of such
individuals’ families; and (e) enterprises in which a
substantial interest in the voting power is owned, directly or
indirectly, by any person described in (c) or (d) or
over which such a person is able to exercise significant
influence.
In the normal course of operations, we enter into transactions
with related parties which include, among others, affiliates
whereby we have a significant equity interest (10% or more) in
the affiliates or have the ability to influence the
affiliates’ or our operating and financing policies through
significant shareholding, representation on the board of
directors, corporate charter
and/or
bylaws. These related party transactions are measured at the
exchange value, which represents the amount of consideration
established and agreed to by all the parties.
41
Table of Contents
Continuing
Operations
1. Transactions with related parties from January 1,
2010 until December 31, 2010:
| (United States dollars in thousands) | ||||
|
Dividend income on common
shares
(1)
|
$ | 193 | ||
|
Royalty expense paid and
payable
(1)
|
(800 | ) | ||
|
Fee income
|
3 | |||
|
Purchase of goods
|
(1,856 | ) | ||
|
Fee expense for managing resource property
|
(1,575 | ) | ||
|
Fee expense for management services, including expense
reimbursements
|
(333 | ) | ||
|
Interest income
|
44 | |||
|
|
||||
Note
| (1) | Included in income from royalty interest in resource property. |
2. Balance with related parties at December 31, 2010:
| (United States dollars in thousands) | ||||
|
Loan receivable
|
$ | 5,792 | ||
|
Other receivables, due from an affiliate
|
8 | |||
|
Contract deposits, prepaid and other
|
16,942 | |||
|
Long-term securities
|
1,233 | |||
|
Equity method investments
|
5,713 | |||
|
Accounts payable and accrued expenses, due to affiliates
|
524 | |||
Discontinued
Operations
| (United States dollars in thousands) | ||||
|
Fee expense for management services, including expense
reimbursements
|
$ | (127 | ) | |
Transactions with related parties are made in arm’s length
transactions at normal market prices and on normal commercial
terms.
In addition to transactions in the above two tables, in 2010 we
entered into an agreement with our former wholly-owned
subsidiary whereby we agreed to offset its payables to the
former subsidiary against its note receivable
(CDN$1.7 million) from the former subsidiary plus accrued
interest thereon. Please refer to Note 13 of the audited
annual financial statements for further information.
Furthermore, we obtained bridge financing of $8.0 million
from the affiliate for three days. We did not pay any interest
and fees to this affiliate in relation to such bridge financing.
| C. | Interests of Experts and Counsel |
Not applicable.
| ITEM 8: | Financial Information |
| A. | Consolidated Statements and Other Financial Information |
Effective January 1, 2010, we adopted IFRS following
approval from the Canadian Securities Administrators under
National Instrument
52-107,
Acceptable Accounting Principles, Auditing Standards and
Reporting Currency
. The consolidated financial statements
have been prepared in compliance with IFRS. See
“
Item 18 — Financial
Statements”
. The consolidated unaudited
management’s discussion and analysis and interim financial
statements for each of the interim periods ended March 31,
June 30 and September 30, 2010, have been restated in
accordance with IFRS. Refer to Note 36 of the audited
consolidated financial statements for explanations and the
impact of the transition to IFRS.
42
Table of Contents
Legal
Proceedings
Other than as described in this annual report on
Form 20-F,
we are not involved in any material legal proceedings, nor are
we aware of any proceedings that are contemplated that we
believe would have a material adverse effect upon our financial
condition or results of operations. We are subject to routine
litigation incidental to our business and are named from time to
time as a defendant in various legal actions arising in
connection with our activities, certain of which may include
large claims for punitive damages.
Dividend
Distributions
On January 10, 2011, we announced that our board of
directors had adopted an annual dividend policy, providing for
an annual dividend based on the annual dividend yield of the
NYSE Composite Index for the preceding year plus 25 basis
points. We declared a cash dividend of $0.20 per common share
for 2011, which is payable in four quarterly installments. The
first dividend payment of $0.05 per common share was made on
January 31, 2011 to shareholders of record on January 20,
2011 and a second payment of $0.05 per common share will be made
on April 11, 2011 to shareholders of record on
March 31, 2011.
The actual timing, payment and amount of dividends paid on our
common shares is determined by our board of directors, based
upon things such as our cash flow, results of operations and
financial condition, the need for funds to finance ongoing
operations and such other business consideration as our board of
directors considers relevant.
| B. | Significant Changes |
Please refer to “
Item 4 — A. History and
Development of the Company — Recent
Developments
” and Notes 3 and 4 of our annual
financial statements included herewith for a discussion of
significant events that have occurred after December 31,
2010.
| ITEM 9: | The Offer and Listing |
| A. | Offer and Listing Details |
Since June 18, 2007, our common shares have been quoted on
the NYSE, currently under the symbol “TTT”.
Previously, our common shares were traded on the Nasdaq Global
Select Market under the symbol “KHDH”. We voluntarily
terminated our listing on the Nasdaq Global Select Market, and
the last day of trading of our common shares
43
Table of Contents
on the Nasdaq Global Select Market was June 15, 2007. The
following table sets forth the high and low sales of prices of
our common shares on the NYSE and the Nasdaq Global Select
Market for the periods indicated.
| Exchange (1) | ||||||||
|
Low
|
||||||||
| High (U.S.$) (2) | (U.S.$) (2) | |||||||
|
Annual Highs and Lows
|
||||||||
|
2006
|
22.10 | 10.34 | ||||||
|
2007
|
45.74 | 18.00 | ||||||
|
2008
|
35.79 | 6.50 | ||||||
|
2009
|
14.20 | 6.65 | ||||||
|
2010
|
16.10 | 6.60 | ||||||
|
Quarterly Highs and Lows
|
||||||||
|
2009
|
||||||||
|
First Quarter
|
13.59 | 6.65 | ||||||
|
Second Quarter
|
9.60 | 6.81 | ||||||
|
Third Quarter
|
12.39 | 8.12 | ||||||
|
Fourth Quarter
|
14.20 | 8.90 | ||||||
|
2010
|
||||||||
|
First Quarter
|
16.10 | 11.82 | ||||||
|
Second Quarter
|
14.94 | 7.00 | ||||||
|
Third Quarter
|
8.94 | 6.60 | ||||||
|
Fourth Quarter
|
8.79 | 7.46 | ||||||
|
Monthly Highs and Lows
|
||||||||
|
September 2010
|
8.57 | 6.60 | ||||||
|
October 2010
|
8.18 | 7.46 | ||||||
|
November 2010
|
8.36 | 7.64 | ||||||
|
December 2010
|
8.79 | 7.76 | ||||||
|
January 2011
|
7.87 | 7.15 | ||||||
|
February 2011
|
8.79 | 7.50 | ||||||
|
March 2011
|
9.00 | 7.72 | ||||||
Notes
| (1) | Shares were traded on the Nasdaq Global Select Market up to and including June 15, 2007 and then on the NYSE on and after June 18, 2007. | |
| (2) | All numbers have been adjusted to reflect the two (2) for one (1) stock split effective September 10, 2007. |
The transfer of our common shares is managed by our transfer
agent, BNY Mellon Shareowner Services, 480 Washington Boulevard,
Jersey City, NJ 07310 (Tel:
201-680-5258;
Fax:
201-680-4604).
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
Our common shares are quoted on the NYSE under the symbol
“TTT”.
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
44
Table of Contents
| F. | Expenses of the Issue |
Not applicable.
| ITEM 10: | Additional Information |
| A. | Share Capital |
Not Applicable.
| B. | Memorandum and Articles of Association |
We are organized under the laws of the Province of British
Columbia, Canada and have been assigned the number C0707841.
Our Articles do not contain a description of our objects and
purposes.
Our Articles do not restrict a director’s power to vote on
a proposal, arrangement or contract in which the director is
materially interested, vote compensation to themselves or any
other members of their body in the absence of an independent
quorum or exercise borrowing powers. There is no mandatory
retirement age for our directors and our directors are not
required to own securities of our company in order to serve as
directors.
Our authorized capital consists of an unlimited number of common
shares without par value and an unlimited number of Class A
preferred shares without par value. Our Class A preferred
shares may be issued in one or more series and our directors may
fix the number of shares which is to comprise each series and
designate the rights, privileges, restrictions and conditions
attaching to each series.
Holders of our common shares are entitled to vote at all
meetings of shareholders, except meetings at which only holders
of a specified class of shares are entitled to vote, receive any
dividend declared by us and, subject to the rights, privileges,
restrictions and conditions attaching to any other class of
shares, receive the remaining property of our company upon
dissolution.
Our Class A preferred shares of each series rank on a
parity with our Class A preferred shares of any other
series and are entitled to a preference over our common shares
with respect to the payment of dividends and the distribution of
assets or return of capital in the event of liquidation,
dissolution or
winding-up
of our company.
The provisions in our Articles attaching to our common shares
and Class A preferred shares may be altered, amended,
repealed, suspended or changed by the affirmative vote of the
holders of not less than two-thirds of the common shares and
two-thirds of the Class A preferred shares, respectively,
present in person or by proxy at any such meeting of holders.
Our Articles provide for three classes of directors with
staggered terms. Each director holds office until the expiry of
his term or until his successor is elected or appointed, unless
his office is earlier vacated in accordance with our Articles or
with the provisions of the British Columbia
Business
Corporations Act
. At each annual meeting of our company, a
class of directors is elected to hold office for a three-year
term. Successors to the class of directors whose terms expire
are identified as being of the same class as the directors they
succeed and are elected to hold office for a term expiring at
the third succeeding annual meeting of shareholders. A director
appointed or elected to fill a vacancy on the board of directors
holds office for the unexpired term of his predecessor.
An annual meeting of shareholders must be held at such time in
each year that is not later than fifteen months after the last
preceding annual meeting and at such place as our board of
directors, or failing it, our Chairman, Managing Director or
President, may from time to time determine. The holders of not
less than five percent of our issued shares that carry the right
to vote at a meeting may requisition our directors to call a
meeting of shareholders for the purposes stated in the
requisition. The quorum for the transaction of business at any
meeting of shareholders is two persons who are entitled to vote
at the meeting in person or by proxy. Only persons entitled to
vote, our directors and auditors and others who, although not
entitled to vote, are otherwise entitled or required to be
present, are entitled to be present at a meeting of shareholders.
Except as provided in the
Investment Canada Act
, there
are no limitations specific to the rights of non-Canadians to
hold or vote our common shares under the laws of Canada or
British Columbia, or in our charter documents. See the
45
Table of Contents
section of this annual report on
Form 20-F
entitled “
Exchange Controls
” below for a
discussion of the principal features of the
Investment Canada
Act
for non-Canadian residents proposing to acquire our
common shares.
As set forth above, our Articles contain certain provisions that
would have an effect of delaying, deferring or preventing a
change in control of our company, including authorizing the
issuance by our board of directors of preferred stock in series,
providing for a classified board of directors with staggered,
three-year terms and limiting the persons who may call special
meetings of shareholders. Our Articles do not contain any
provisions that would operate only with respect to a merger,
acquisition or corporate restructuring of our company.
Our Articles do not contain any provisions governing the
ownership threshold above which shareholder ownership must be
disclosed.
Our Articles are not significantly different from the
requirements of the
Business Corporations Act
(British
Columbia), and the conditions imposed by our Articles governing
changes in capital are not more stringent than what is required
by the
Business Corporations Act
(British Columbia).
| C. | Material Contracts |
The following summary of certain material provisions of the
agreements referenced below is not complete and these provisions
are qualified in their entirety by reference to the full text of
such agreements.
In September 2010, we entered into an agreement with Mass and
our wholly-owned subsidiary, which provided for our acquisition
of Mass by way of a multi-step transaction, including the offer
to purchase all of the outstanding class A common shares of
Mass and the subsequent amalgamation of Mass with our
wholly-owned subsidiary. For further information, please see the
section of this annual report on
Form 20-F
entitled “
Item 4: Information on the Company
—
History and Development of the
Company
”.
In February 2010, we entered into an Arrangement Agreement with
KID whereby we agreed, subject to receipt of shareholder
approval and the satisfaction of other conditions as set forth
in the agreement, to distribute to our shareholders all of the
shares of KID currently held by us in several distributions.
Pursuant to the Arrangement Agreement, we made distributions of
the KID shares held by us to our shareholders on March 30,
2010, July 1, 2010, September 23, 2010 and
December 31, 2010. For further information, please see the
section of this annual report on
Form 20-F
entitled “
Item 4: Information on the
Company — History and Development of the
Company
”.
| D. | Exchange Controls |
There are presently no governmental laws, decrees or regulations
in Canada which restrict the export or import of capital, or
which impose foreign exchange controls or affect the remittance
of interest, dividends or other payments to non-resident holders
of our common shares. However, any remittances of dividends to
shareholders not resident in Canada are subject to withholding
tax in Canada. See “
Item 10: Additional
Information — Taxation
”.
Except as provided in the
Investment Canada Act
, there
are no limitations specific to the rights of non-Canadians to
hold or vote our common shares under the laws of Canada or
British Columbia or in our charter documents. The following
summarizes the principal features of the
Investment Canada
Act
for non-Canadian residents proposing to acquire our
common shares.
This summary is of a general nature only and is not intended
to be, and should not be construed to be, legal advice to any
holder or prospective holder of our common shares, and no
opinion or representation to any holder or prospective holder of
our common shares is hereby made. Accordingly, holders and
prospective holders of our common shares should consult with
their own legal advisors with respect to the consequences of
purchasing and owning our common shares.
The
Investment Canada Act
governs the direct or indirect
acquisition of control of an existing Canadian business by
non-Canadians. Under the
Investment Canada Act
,
non-Canadian persons or entities acquiring “control”
(as defined in the
Investment Canada Act
) of a
corporation carrying on business in Canada are required to
either notify, or file an application for review with, Industry
Canada, unless a specific exemption, as set out in the
Investment Canada Act
, applies. Industry Canada may
review any transaction which results in the direct or indirect
acquisition of control of a Canadian business, where the gross
value of corporate assets exceeds certain threshold levels
(which are higher for investors from members of the World Trade
Organization, including United States residents, or World Trade
Organization member-controlled
46
Table of Contents
companies) or where the activity of the business is related to
Canada’s cultural heritage or national identity. No change
of voting control will be deemed to have occurred, for purposes
of the
Investment Canada Act
, if less than one-third of
the voting control of a Canadian corporation is acquired by an
investor. In addition, the
Investment Canada Act
permits
the Canadian government to review any investment where the
responsible Minister has reasonable grounds to believe that an
investment by a non-Canadian could be injurious to national
security. No financial threshold applies to a national security
review. The Minister may deny the investment, ask for
undertakings, provide terms or conditions for the investment or,
where the investment has already been made, require divestment.
Review can occur before or after closing and may apply to
corporate re-organizations where there is no change in ultimate
control.
If an investment is reviewable under the
Investment Canada
Act
, an application for review in the form prescribed is
normally required to be filed with Industry Canada prior to the
investment taking place, and the investment may not be
implemented until the review has been completed and the Minister
responsible for the
Investment Canada Act
is satisfied
that the investment is likely to be of net benefit to Canada. If
the Minister is not satisfied that the investment is likely to
be of net benefit to Canada, the non-Canadian applicant must not
implement the investment, or if the investment has been
implemented, may be required to divest itself of control of the
Canadian business that is the subject of the investment. The
Minister is required to provide reasons for a decision that an
investment is not of net benefit to Canada.
Certain transactions relating to our common shares will
generally be exempt from the
Investment Canada Act
,
subject to the Minister’s prerogative to conduct a national
security review, including:
| (a) | the acquisition of our common shares by a person in the ordinary course of that person’s business as a trader or dealer in securities; |
| (b) | the acquisition of control of our company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions of the Investment Canada Act ; and |
| (c) | the acquisition of control of our company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of our company, through ownership of our common shares, remains unchanged. |
| E. | Taxation |
Material
Canadian Federal Income Tax Consequences
We consider that the following general summary fairly describes
the principal Canadian federal income tax consequences
applicable to a holder of our common shares who is a resident of
the United States, who is not, will not be and will not be
deemed to be, a resident of Canada for purposes of the
Income
Tax Act
(Canada) and any applicable tax treaty and who does
not use or hold, and is not deemed to use or hold, his common
shares in the capital of our company in connection with carrying
on a business in Canada, referred to as a “non-resident
holder”.
This summary is based upon the current provisions of the
Income Tax Act
, the regulations thereunder, referred to
as the “Regulations”, the current publicly announced
administrative and assessing policies of the Canada Revenue
Agency and the Canada-United States Tax Convention (1980), as
amended, referred to as the “Treaty”. This summary
also takes into account the amendments to the
Income Tax Act
and the Regulations publicly announced by the Minister of
Finance (Canada) prior to the date hereof, referred to as the
“Tax Proposals”, and assumes that all such Tax
Proposals will be enacted in their present form. However, no
assurances can be given that the Tax Proposals will be enacted
in the form proposed, or at all. This summary is not exhaustive
of all possible Canadian federal income tax consequences
applicable to a holder of our common shares and, except for the
foregoing, this summary does not take into account or anticipate
any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account
provincial, territorial or foreign income tax legislation or
considerations, which may differ from the Canadian federal
income tax consequences described herein.
This summary is of a general nature only and is not intended
to be, and should not be construed to be, legal, business or tax
advice to any particular holder or prospective holder of our
common shares, and no opinion or representation with respect to
the tax consequences to any holder or prospective holder of our
common shares is made. Accordingly, holders and prospective
holders of our common shares should consult their own tax
advisors with respect to the income tax consequences of
purchasing, owning and disposing of our common shares in their
particular circumstances.
47
Table of Contents
Dividends
Dividends paid on our common shares to a non-resident holder
will be subject under the
Income Tax Act
to withholding
tax which tax is deducted at source by our company. The
withholding tax rate for dividends prescribed by the
Income
Tax Act
is 25% but this rate may be reduced under the
provisions of an applicable tax treaty. Under the Treaty, the
withholding tax rate is reduced to 15% on dividends paid by our
company to residents of the United States and is further reduced
to 5% where the beneficial owner of the dividends is a
corporation resident in the United States that owns at least 10%
of the voting shares of our company.
Capital
Gains
A non-resident holder is not subject to tax under the
Income
Tax Act
in respect of a capital gain realized upon the
disposition of a common share of our company unless such share
is “taxable Canadian property” (as defined in the
Income Tax Act
) of the non-resident holder. Our common
shares generally will not be taxable Canadian property of a
non-resident holder unless the non-resident holder alone or
together with non-arm’s length persons owned, or had an
interest in an option in respect of, not less than 25% of the
issued shares of any class of our capital stock at any time
during the 60-month period immediately preceding the disposition
of the shares. In the case of a non-resident holder resident in
the United States for whom shares of our company are taxable
Canadian property, no Canadian taxes will generally be payable
on a capital gain realized on such shares by reason of the
Treaty unless the value of such shares is derived principally
from real property situated in Canada.
Material
United States Federal Income Tax Consequences
The following is a general discussion of certain possible United
States Federal foreign income tax matters under current law,
generally applicable to a U.S. Holder (as defined below) of
our common shares who holds such shares as capital assets. This
discussion does not address all aspects of United States Federal
income tax matters and does not address consequences peculiar to
persons subject to special provisions of Federal income tax law,
such as those described below as excluded from the definition of
a U.S. Holder. In addition, this discussion does not cover
any state, local or foreign tax consequences. See
“
Certain Canadian Federal Income Tax
Consequences
” above.
The following discussion is based upon the
Internal Revenue
Code of 1986
, as amended, referred to as the
“Code”, Treasury Regulations, published by the
Internal Revenue Service, referred to as “IRS”,
rulings, published administrative positions of the IRS and court
decisions that are currently applicable, any or all of which
could be materially and adversely changed, possibly on a
retroactive basis, at any time. In addition, this discussion
does not consider the potential effects, both adverse and
beneficial, of any recently proposed legislation which, if
enacted, could be applied, possibly on a retroactive basis, at
any time. No assurance can be given that the IRS will agree with
such statements and conclusions, or will not take, or a court
will not adopt, a position contrary to any position taken herein.
The following discussion is for general information only and
is not intended to be, nor should it be construed to be, legal,
business or tax advice to any holder or prospective holder of
our common shares, and no opinion or representation with respect
to the United States Federal income tax consequences to any such
holder or prospective holder is made. Accordingly, holders and
prospective holders of common shares are urged to consult their
own tax advisors with respect to Federal, state, local and
foreign tax consequences of purchasing, owning and disposing of
our common shares.
U.S.
Holders
As used herein, a “U.S. Holder” includes a holder
of less than 10% of our common shares who is a citizen or
resident of the United States, a corporation created or
organized in or under the laws of the United States or of any
political subdivision thereof, any entity which is taxable as a
corporation for United States tax purposes and any other person
or entity whose ownership of our common shares is effectively
connected with the conduct of a trade or business in the United
States. A U.S. Holder does not include persons subject to
special provisions of Federal income tax law, such as tax-exempt
organizations, qualified retirement plans, financial
institutions, insurance companies, real estate investment
trusts, regulated investment companies, broker-dealers,
non-resident alien individuals or foreign corporations whose
ownership of our common shares is not effectively connected with
the conduct of a trade or business in the United States and
shareholders who acquired their shares through the exercise of
employee stock options or otherwise as compensation.
48
Table of Contents
Distributions
The gross amount of a distribution paid to a U.S. Holder
will generally be taxable as dividend income to the
U.S. Holder for United States Federal income tax purposes
to the extent paid out of our current or accumulated earnings
and profits, as determined under United States federal income
tax principles. Distributions which are taxable dividends and
which meet certain requirements will be “qualified dividend
income” and taxed to U.S. Holders at a maximum United
States Federal rate of 15%. Distributions in excess of our
current and accumulated earnings and profits will be treated
first as a tax-free return of capital to the extent the
U.S. Holder’s tax basis in the common shares and, to
the extent in excess of such tax basis, will be treated as a
gain from a sale or exchange of such shares.
Capital
Gains
In general, upon a sale, exchange or other disposition of common
shares, a U.S. Holder will generally recognize a capital
gain or loss for United States Federal income tax purposes in an
amount equal to the difference between the amount realized on
the sale or other distribution and the U.S. Holder’s
adjusted tax basis in such shares. Such gain or loss will be a
United States source gain or loss and will be treated as a
long-term capital gain or loss if the U.S. Holder’s
holding period of the shares exceeds one year. If the
U.S. Holder is an individual, any capital gain will
generally be subject to United States Federal income tax at
preferential rates if specified minimum holding periods are met.
The deductibility of capital losses is subject to significant
limitations.
Foreign
Tax Credit
A U.S. Holder who pays (or has had withheld from
distributions) Canadian income tax with respect to the ownership
of our common shares may be entitled, at the option of the
U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United
States Federal income taxes on a
dollar-for-dollar
basis, while a deduction merely reduces the taxpayer’s
income subject to tax. This election is made on a
year-by-year
basis and generally applies to all foreign income taxes paid by
(or withheld from) the U.S. Holder during that year. There
are significant and complex limitations which apply to the tax
credit, among which is an ownership period requirement and the
general limitation that the credit cannot exceed the
proportionate share of the U.S. Holder’s United States
income tax liability that the U.S. Holder’s foreign
source income bears to his or its worldwide taxable income. In
determining the application of this limitation, the various
items of income and deduction must be classified into foreign
and domestic sources. Complex rules govern this classification
process. The availability of the foreign tax credit and the
application of these complex limitations on the tax credit are
fact specific and holders and prospective holders of our common
shares should consult their own tax advisors regarding their
individual circumstances.
Passive
Foreign Investment Corporation
We do not believe that we are a passive foreign investment
corporation, referred to as a “PFIC”. However, since
PFIC status depends upon the composition of a company’s
income and assets and the market value of its assets and shares
from time to time, there is no assurance that we will not be
considered a PFIC for any taxable year. If we were treated as a
PFIC for any taxable year during which a U.S. Holder held
shares, certain adverse tax consequences could apply to the
U.S. Holder.
If we are treated as a PFIC for any taxable year, gains
recognized by such U.S. Holder on a sale or other
disposition of shares would be allocated ratably over the
U.S. Holder’s holding period for the shares. The
amount allocated to the taxable year of the sale or other
exchange and to any year before we became a PFIC would be taxed
as ordinary income. The amount allocated to each other taxable
year would be subject to tax at the highest rate in effect for
individuals or corporations, as applicable, and an interest
charge would be imposed on the amount allocated to such taxable
year. Further, any distribution in respect of shares in excess
of 125% of the average of the annual distributions on shares
received by the U.S. Holder during the preceding three
years or the U.S. Holder’s holding period, whichever
is shorter, would be subject to taxation as described above.
Certain elections may be available to U.S. Holders that may
mitigate some of the adverse consequences resulting from PFIC
status. However, regardless of whether such elections are made,
dividends paid by a PFIC will not be “qualified dividend
income” and will generally be taxed at the higher rates
applicable to other items of ordinary income.
U.S. Holders and prospective holders should consult
their own tax advisors regarding the potential application of
the PFIC rules to their ownership of our common shares.
49
Table of Contents
| F. | Dividends and Paying Agents |
Not applicable.
| G. | Statement by Experts |
Not applicable.
| H. | Documents on Display |
Documents and agreements concerning our company may be inspected
at the offices of Sangra Moller LLP, 1000 Cathedral Place,
925 West Georgia Street, Vancouver, British Columbia,
Canada.
| I. | Subsidiary Information |
For a list of our significant wholly-owned direct and indirect
subsidiaries and significant non-wholly-owned subsidiaries, see
“
Item 4: Information on the Company —
Organizational Structure
”.
| ITEM 11: | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to various market risks from changes in interest
rates, foreign currency exchange rates and equity prices which
may affect our results of operations and financial condition
and, consequently, our fair value. Generally, our management
believes that our current financial assets and financial
liabilities, due to their short-term nature, do not pose
significant financial risks. We use various financial
instruments to manage our exposure to various financial risks.
The policies for controlling the risks associated with financial
instruments include, but are not limited to, standardized
company procedures and policies on matters such as hedging of
risk exposures, avoidance of undue concentration of risk and
requirements for collateral (including letters of credit) to
mitigate credit risk. We have risk managers to perform audits
and checking functions to ensure that company procedures and
policies are complied with.
We use derivative instruments to manage certain exposures to
currency exchange rate risks. The use of derivative instruments
depends on our management’s perception of future economic
events and developments. These types of derivative instruments
are generally highly speculative in nature. They are also very
volatile as they are highly leveraged given that margin
requirements are relatively low in proportion to notional
amounts.
Many of our strategies, including the use of derivative
instruments and the types of derivative instruments selected by
us, are based on historical trading patterns and correlations
and our management’s expectations of future events.
However, these strategies may not be fully effective in all
market environments or against all types of risks. Unexpected
market developments may affect our risk management strategies
during this time, and unanticipated developments could impact
our risk management strategies in the future. If any of the
variety of instruments and strategies we utilize is not
effective, we may incur losses.
Please refer to Note 30 of our annual consolidated
financial statements for a qualitative and quantitative
discussion of our exposure to market risks.
| ITEM 12: | Description of Securities Other Than Equity Securities |
Not applicable.
| ITEM 13: | Defaults, Dividend Arrearages and Delinquencies |
Not applicable.
| ITEM 14: | Material Modifications to Rights of Security Holders and Use Of Proceeds |
Not applicable.
50
Table of Contents
| ITEM 15: | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required
to be disclosed in our company’s reports filed or submitted
under the
Securities Exchange Act of 1934
is recorded,
processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules
and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed in our company’s
reports filed under the
Securities Exchange Act of 1934
is accumulated and communicated to management, including our
company’s Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding
required disclosure.
As required by
Rule 13a-15
under the
Securities Exchange Act of 1934
, we have
carried out an evaluation of the effectiveness of the design and
operation of our company’s disclosure controls and
procedures as of the end of the period covered by this annual
report on
Form 20-F,
being December 31, 2010. This evaluation was carried out by
our Chief Executive Officer (being our principal executive
officer) and Chief Financial Officer (being our principal
financial officer). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
company’s disclosure controls and procedures are effective.
Report
of Management on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f)
or
13d-15(f)
under the Securities Exchange Act of 1934, as amended. Our
internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated
financial statements for external purposes in accordance with
IFRS. Our 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 our assets and our consolidated entities; | |
| 2. | provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with IFRS, and that receipts and expenditures of our company are being made only in accordance with authorizations of management and our directors; and | |
| 3. | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements. |
Management, including our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness
of our internal control over financial reporting as of
December 31, 2010. In conducting this evaluation,
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control — Integrated Framework
.
Based on this evaluation, management concluded that, as of
December 31, 2010, our company’s internal control over
financial reporting was effective.
The effectiveness of our company’s internal control over
financial reporting as of December 31, 2010 has been
audited by our independent registered chartered accountants, a
member of NEXIA International, Davidson & Company LLP,
who also audited our consolidated financial statements for the
year ended December 31, 2010. Davidson & Company
LLP have expressed an unqualified opinion on the effectiveness
of our internal control over financial reporting as of
December 31, 2010. Their report is included in this annual
report on
Form 20-F.
Acquired
Business
In the fourth quarter of 2010, we acquired all of the
outstanding shares of Mass and consolidated its results of
operations from November 16, 2010. The businesses acquired
pursuant to our acquisition of Mass have been excluded from
management’s report on internal control over financial
reporting as there was not sufficient time to complete an
assessment of the internal controls of such businesses between
the date of the acquisition and the date of management’s
assessment of internal controls. Such acquired businesses
represent $511.6 million of our total assets as at
December 31, 2010 and $53.3 million of our total
revenues for the year ended December 31, 2010.
51
Table of Contents
Changes
in Internal Control over Financial Reporting
As of January 1, 2010, we early adopted IFRS as our
standard for financial reporting. In connection with the
adoption of IFRS, we updated our internal controls over
financial reporting, as necessary, to facilitate the IFRS
convergence and transition as well as the ongoing compliance
with the IFRS reporting requirements. The impact of the adoption
of IFRS on our accounting systems was minimal. Other than the
adoption of IFRS and our acquisition of Mass, no other
significant changes in internal controls over financial
reporting occurred during the period covered by this annual
report on
Form 20-F
that have materially affected, or are reasonably likely to
materially affect our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent
limitations. Internal control over financial reporting is a
process that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that
material misstatements will not be prevented or detected on a
timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate,
this risk.
| ITEM 16: | [Reserved] |
| ITEM 16A: | Audit Committee Financial Expert |
Our board of directors has determined that Dr. Shuming
Zhao, a member of our audit committee, qualifies as an
“audit committee financial expert” and is
“independent” as the term is used in
Section 303A.02 of the NYSE’s Listed Company Manual.
Dr. Shuming Zhao is the Dean, a professor and Ph.D. Advisor
of the School of Business, Nanjing University and the Dean of
the School of Graduate Studies, Macau University of Science and
Technology. He received his B. A. (English Language and
Literature) from Nanjing University and his M. A. (Education)
and Ph.D. in Higher Education Administration and Human Resource
Management from Claremont Graduate School, U.S.A. He is one of
the leading business educators in China. Under his leadership,
Nanjing University has been selected as a National Key Program
in Business Administration. He is a member, Science and
Technology Academic Committee of the Ministry of Education; Vice
Chairman, Advisory Committee for Business Programs, Ministry of
Education; member, Review Committee for Management Sciences,
National Natural Science Foundation of China; member, National
MBA Advisory Committee; and member, Human Resource Development
Committee of Macau Special Administration Region Government.
Dr. Zhao is Vice President, China Human Resource Management
Research Association; President, Jiangsu Province Human Resource
Association; Vice President, Jiangsu Province Enterprise
Management Association; and Vice President, Jiangsu Province
Entrepreneur Association. Dr. Zhao organized and held four
international symposia on multinational business management in
1992, 1996, 1999 and 2002. Since 1994, Dr. Zhao has also
acted as a management consultant for several Chinese and
international firms. Since 1997, Dr. Zhao has been a
visiting professor at the Marshall School of Business at the
University of Southern California and he has lectured in
countries including the United States, Canada, Japan, the United
Kingdom, Germany, Australia, the Netherlands and Singapore.
Since 2004, Dr. Zhao has been an independent director on
the board of directors of Suning Electronic Co. Ltd.
| ITEM 16B: | Code of Ethics |
Code
of Ethics and Code of Conduct
Our board of directors encourages and promotes a culture of
ethical business conduct through the adoption and monitoring of
our codes of ethics and conduct, the insider trading policy and
such other policies as may be adopted from time to time.
Our Audit Committee adopted a Code of Ethics for the Senior
Executive Officers and Senior Financial Officers on
November 9, 2006. Since that date, our board of directors
has conducted an assessment of its performance, including the
extent to which the board and each director comply with the Code
of Ethics. It is intended that such assessment will be conducted
annually. The Code of Ethics applies to our Chief Executive
Officer, President, Chief Financial Officer,
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Principal Executive Officer, Principal Financial Officer,
Principal Accounting Officer, Controller, persons performing
similar functions, and other officers or employees of our
company with prominent positions with respect to the filing of
reports with securities regulators.
The purpose of the Code of Ethics is to promote: honest and
ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships; full, fair, accurate and timely disclosure in all
reports and documents filed with securities regulators;
compliance with applicable governmental laws, rules and
regulations; the prompt internal reporting of violations of the
Code of Ethics; and accountability for adherence to the Code of
Ethics.
There has been no conduct of any director or officer that would
constitute a departure from the Code of Ethics, and therefore,
no material change reports have been filed in this regard.
In addition, our Audit Committee has adopted a written Code of
Conduct, which sets out the standards of ethical behaviour
required for all employees and officers of our company and our
subsidiaries. Our board of directors conducts regular reviews
with management for compliance with such policies. The basic
principles of the Code of Conduct include: providing customers
with the best quality products and services at competitive
prices; providing employees with a fair, polite and respectful
work environment; keeping company information confidential;
keeping client and business partner information confidential;
being fair and honest to all parties having business
relationships with our company; not doing business with any
third parties who are likely to harm our company’s
reputation; refraining from any form of discrimination or
harassment; and being mindful of the interest of the public and
the environment. The Code of Conduct emphasizes that all
employees of our company, regardless of their position or
status, are accountable for complying with all applicable legal
requirements, the general provisions stipulated by the Code of
Conduct, and our other business policies.
We will provide a copy of the Code of Ethics or the Code of
Conduct to any person without charge, upon request. Requests can
be sent by mail to: Terra Nova Royalty Corporation,
Suite 1620 — 400 Burrard Street, Vancouver,
British Columbia, Canada V6C 3A6.
| ITEM 16C: | Principal Accountant Fees and Services |
Audit
Fees
The aggregate fees billed for audit services rendered for the
audit of our annual financial statements for the fiscal years
ended December 31, 2010 by a member of NEXIA International,
Davidson & Company LLP, and December 31, 2009 by
Deloitte & Touche LLP were CDN$100,000 and
CDN$1,802,425, respectively (including all fees related to the
audit of our annual financial statements for the fiscal years
ended December 31, 2010 and 2009).
Audit
Related Fees
For the fiscal years ended December 31, 2010 and 2009, a
member of NEXIA International, Davidson & Company LLP,
and Deloitte & Touche LLP, respectively, performed
assurance or related services relating to the performance of the
audit or review of our financial statements which are not
reported under the caption “Audit Fees” above, for
aggregate fees totalling CDN$185,000 and CDN$56,858,
respectively.
Tax
Fees
For the fiscal years ended December 31, 2010 and 2009, the
aggregate fees billed for tax compliance, tax advice and
tax planning by a member of NEXIA International,
Davidson & Company LLP, and Deloitte &
Touche LLP, respectively, were $217,050 and $72,407,
respectively.
All
Other Fees
For the fiscal year ended December 31, 2010 the aggregate
fees billed by a member of NEXIA International,
Davidson & Company LLP, for non-audit professional
services was CDN$46,950 in connection with non-management
support services and for the fiscal year ended December 31,
2009 Deloitte & Touche LLP, did not perform any
non-audit professional services, other than those services
listed above.
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Table of Contents
Audit
Committee Pre-approval Policies and Procedures
The audit committee pre-approves all services provided by our
independent auditors. All of the services and fees described
under the categories of “Audit Fees”, “Audit
Related Fees”, “Tax Fees” and “All Other
Fees” were reviewed and approved by the audit committee
before the respective services were rendered and none of such
services were approved by the audit committee pursuant to
paragraph (c)(7)(i)(c) of
Rule 2-01
of
Regulation S-X.
The audit committee has considered the nature and amount of the
fees billed for the fiscal year ended December 31, 2010 by
a member of NEXIA International, Davidson & Company
LLP, and December 31, 2009 by Deloitte & Touche
LLP, and believes that the provision of the services for
activities unrelated to the audit is compatible with maintaining
the independence of a member of NEXIA International,
Davidson & Company LLP, and Deloitte &
Touche LLP, respectively.
| ITEM 16D: | Exemptions From the Listing Standards for Audit Committees |
Not applicable.
| ITEM 16E: | Purchases of Equity Securities by the Issuer And Affiliated Purchasers |
In 2010, neither we nor any affiliated purchaser (as defined in
the
Securities Exchange Act of 1934
) purchased any of our
common shares.
| ITEM 16F: | Change in Registrant’s Certifying Accountant |
During the year ended December 31, 2010, one independent
accountant who was previously engaged as the principal
accountant to audit our financial statements,
Deloitte & Touche LLP, resigned.
Resignation
of Deloitte & Touche LLP
Upon mutual agreement, Deloitte & Touche LLP resigned
as our principal accountant effective November 24, 2010 and
we appointed a member of NEXIA International, Davidson &
Company LLP as our independent registered public accounting firm
for the year ended December 31, 2010. Our Audit Committee
and board of directors considered and approved the decision to
change accountants.
The audit reports of Deloitte & Touche LLP on our
financial statements for the fiscal years ended
December 31, 2009 and 2008 prepared in accordance with
Canadian GAAP did not contain an adverse opinion, a disclaimer
of opinion, a modification or a qualification.
During our two most recent fiscal years and any subsequent
interim period preceding such resignation, there were no
disagreements with Deloitte & Touche LLP on any matter
of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of Deloitte &
Touche LLP, would have caused it to make reference to the
subject matter of the disagreements in connection with its
report.
None of the following events occurred within our two most recent
fiscal years and any subsequent interim period preceding
Deloitte & Touche LLP’s resignation:
| (A) | Deloitte & Touche LLP advised us that the internal controls necessary for us to develop reliable financial statements did not exist; |
| (B) | Deloitte & Touche LLP advised us that information came to Deloitte & Touche LLP attention that has led it to no longer be able to rely on our management’s representations, or that had made it unwilling to be associated with the financial statements prepared by our management; | |
| (C) | Deloitte & Touche LLP advised us of the need to expand significantly the scope of its audit, or that information came to Deloitte & Touche LLP’s attention during our two most recent fiscal years and any subsequent interim period, that if further investigated may: |
| (i) | materially impact the fairness or reliability of either: a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including |
54
Table of Contents
| information that may prevent it from rendering an unqualified audit report on those financial statements); or |
| (ii) | cause it to be unwilling to rely on our management’s representations or be associated with our financial statements; and |
| due to Deloitte & Touche LLP’s resignation (due to audit scope limitations or otherwise), or for any other reason, Deloitte & Touche LLP did not so expand the scope of its audit or conduct such further investigation; or |
| (D) | Deloitte & Touche LLP advised us that information came to Deloitte & Touche LLP’s attention that it had concluded materially impacts the fairness or reliability of either: |
| (i) | a previously issued audit report or the underlying financial statements, or | |
| (ii) | the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to Deloitte & Touche LLP’s satisfaction, would prevent it from rendering an unqualified audit report on those financial statements); and |
due to Deloitte & Touche LLP’s resignation (due
to audit scope limitations or otherwise), or for any other
reason, the issue had not been resolved to Deloitte &
Touche LLP’s satisfaction prior to its resignation.
Appointment
of a Member of NEXIA International, Davidson & Company
LLP
Our board of directors appointed a member of NEXIA
International, Davidson & Company LLP, to be our
principal accountant effective November 24, 2010.
During our two most recent fiscal years and any subsequent
interim period prior to engaging a member of NEXIA
International, Davidson & Company LLP, we did not
consult them regarding (i) the application of accounting
principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on
our financial statements, or (ii) any matter that was
either the subject of a disagreement or a reportable event as
described in Item 16F(a)(1)(v) of
Form 20-F.
Disclosure
Provided to Former Accountants
We have provided Deloitte & Touche LLP and a member of
NEXIA International, Davidson & Company LLP, with a
copy of our disclosure under Item 16F of this annual report
on
Form 20-F.
We have requested that Deloitte & Touche LLP, and
provided the opportunity to Davidson & Company LLP, to
furnish us with a letter addressed to the Commission stating
whether it agrees with the statements made by us in response to
this Item 16F(a) and if not, stating the respects in which
it does not agree. We have filed the letter from
Deloitte & Touche LLP as Exhibit 15.1 to this
annual report on
Form 20-F.
| ITEM 16G: | Corporate Governance |
Shares of our common stock are listed on the NYSE. Summarized
below are the significant differences between our corporate
governance rules and the corporate governance rules applicable
to U.S. domestic issuers under the listing standards of the
NYSE:
| • | Section 303A.03 of the NYSE’s Listed Company Manual requires the non-management directors of a listed company to meet at regularly scheduled executive sessions without management. |
| Since January 1, 2006, our independent directors (all of whom are non-management directors) have not held any meetings at which non-independent directors and members of management were not in attendance. |
| • | Section 303A.08 of the NYSE’s Listed Company Manual requires shareholder approval of all equity compensation plans and material revisions to such plans. |
Our current stock option plan requires shareholder approval of
the plan, but not shareholder approval of material revisions to
the plan.
55
Table of Contents
Table of Contents
| ITEM 18: | Financial Statements |
The following attached financial statements are incorporated
herein:
57
Table of Contents
INDEPENDENT
AUDITORS’ REPORT
To the Board of Directors and Shareholders of
Terra Nova Royalty Corporation
(formerly KHD Humboldt Wedag International Ltd.)
We have audited the accompanying consolidated statements of
financial position of Terra Nova Royalty Corporation (formerly
KHD Humboldt Wedag International Ltd.) and subsidiaries (the
“Company”) as at December 31, 2010, 2009 and
January 1, 2009 and the related consolidated statements of
operations, comprehensive income, changes in equity and cash
flows for the years ended December 31, 2010 and 2009. The
Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at December 31, 2010, 2009 and January 1,
2009, and the results of its operations and cash flows for each
of the years ended December 31, 2010 and 2009 in accordance
with International Financial Reporting Standards as issued by
the International Accounting Standards Board.
The consolidated statements of financial position as at
December 31, 2009 and 2008 and the consolidated statements
of income, shareholders’ equity and comprehensive income
(loss) and cash flows for each of the two years in the period
ended December 31, 2009 (not presented separately herein),
prepared in accordance with Canadian generally accepted
accounting principles, as presented in Note 36 to these
consolidated financial statements, were audited by other
auditors who expressed an opinion without reservation on those
statements in their report dated March 26, 2010.
We have also audited, in accordance with the standards of the
Public Accountability Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2010, based on
criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 31, 2011 expressed an unqualified opinion.
“DAVIDSON & COMPANY LLP”
| Vancouver, Canada | Chartered Accountants |
March 31, 2011
58
Table of Contents
INDEPENDENT
AUDITORS’ REPORT
To the Board
of Directors and Shareholders of
Terra Nova Royalty Corporation
(formerly KHD Humboldt Wedag International Ltd.)
We have audited the internal control over financial reporting of
Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag
International Ltd.) and subsidiaries (the “Company”)
as of December 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). As described in Management’s Report on
Internal Control over Financial Reporting, management excluded
from its assessment the internal control over financial
reporting of Mass Financial Corp. and its subsidiaries
(“Mass”) which it acquired on November 15, 2010.
The assets of Mass consist of 60% of the Company’s total
assets; 47% of the Company’s net assets; 60% of the
Company’s revenues; 12% of the income before income taxes;
and 13% of the income from continuing operations as of and for
the year ended December 31, 2010. Accordingly, our audit
did not include the internal control over financial reporting of
Mass. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit 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, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
Company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the Company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. 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.
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Table of Contents
Because of the inherent limitations, internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. 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.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have also audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States), the
consolidated financial statements as at and for the year ended
December 31, 2010 of the Company and our report dated
March 31, 2011 expressed an unqualified opinion.
“DAVIDSON &
COMPANY LLP”
| Vancouver, Canada | Chartered Accountants |
March 31, 2011
60
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Deloitte &
Touche LLP
2800 – 1055
Dunsmuir Street
4
Bentall Centre
P.O.
Box 49279
Vancouver
BC V7X 1P4
Canada
Tel:
604-669-4466
Fax:
604-685-0395
www.deloitte.ca
Report of
Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of
Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag International Ltd.)
Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag International Ltd.)
We have audited the consolidated balance sheets of Terra Nova
Royalty Corporation (formerly KHD Humboldt Wedag International
Ltd.) and subsidiaries (the “Company”) as at
December 31, 2009 and 2008 and the consolidated statements
of income (loss), shareholders’ equity and comprehensive
income (loss) and cash flows for each of the two years in the
period ended December 31, 2009 (not presented separately
herein). These financial statements are the responsibility of
the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits 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 the audit to obtain
reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of
Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag
International Ltd.) and subsidiaries as at December 31,
2009 and 2008 and the results of their operations and their cash
flows for the years then ended in accordance with Canadian
generally accepted accounting principles.
Independent Registered Chartered Accountants
March 26, 2010
March 26, 2010
61
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(United States Dollars in Thousands)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(United States Dollars in Thousands)
|
December 31,
|
December 31,
|
January 1,
|
||||||||||||||
| Notes | 2010 | 2009 | 2009 | |||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current Assets
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 397,697 | $ | 38,046 | $ | 42,111 | ||||||||||
|
Securities
|
6 | 27,894 | 11,212 | 54 | ||||||||||||
|
Restricted cash
|
7 | 3,464 | — | — | ||||||||||||
|
Loan receivable
|
8 | 5,792 | — | — | ||||||||||||
|
Trade receivables
|
9 | 13,088 | — | — | ||||||||||||
|
Other receivables
|
10 | 12,107 | 5,666 | 13,243 | ||||||||||||
|
Inventories
|
11 | 67,102 | — | — | ||||||||||||
|
Real estate held for sale
|
12,480 | — | — | |||||||||||||
|
Contract deposits, prepaid and other
|
12 | 20,847 | 774 | 1,008 | ||||||||||||
|
Current assets of discontinued operations
|
4 | — | 681,049 | 647,594 | ||||||||||||
|
Total current assets
|
560,471 | 736,747 | 704,010 | |||||||||||||
|
Non-current Assets
|
||||||||||||||||
|
Note receivable
|
13 | — | 1,672 | — | ||||||||||||
|
Investment in preferred shares of former subsidiaries
|
13 | — | — | 19,125 | ||||||||||||
|
Securities
|
14 | 7,262 | — | — | ||||||||||||
|
Equity method investments
|
15 | 5,713 | — | — | ||||||||||||
|
Investment property
|
16 | 38,584 | — | — | ||||||||||||
|
Property, plant and equipment
|
17 | 4,202 | 152 | 186 | ||||||||||||
|
Interests in resource properties
|
18 | 231,297 | 191,488 | 200,000 | ||||||||||||
|
Deferred income tax assets
|
19 | 6,727 | 12,115 | 5,571 | ||||||||||||
|
Non-current assets of discontinued operations
|
4 | — | 9,546 | 7,693 | ||||||||||||
|
Total non-current assets
|
293,785 | 214,973 | 232,575 | |||||||||||||
| $ | 854,256 | $ | 951,720 | $ | 936,585 | |||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||
|
Current Liabilities
|
||||||||||||||||
|
Short-term bank borrowings
|
20 | $ | 69,979 | $ | — | $ | — | |||||||||
|
Debt, current portion
|
21 | 4,144 | — | — | ||||||||||||
|
Account payables and accrued expenses
|
22 | 47,130 | 6,022 | 7,903 | ||||||||||||
|
Provisions
|
23 | 362 | — | — | ||||||||||||
|
Income tax liabilities
|
3,803 | 278 | 125 | |||||||||||||
|
Deferred sale liabilities
|
11 | 23,133 | — | — | ||||||||||||
|
Current liabilities relating to discontinued operations
|
4 | — | 359,626 | 419,583 | ||||||||||||
|
Total current liabilities
|
148,551 | 365,926 | 427,611 | |||||||||||||
|
Long-term Liabilities
|
||||||||||||||||
|
Debt, less current portion
|
21 | 48,604 | — | — | ||||||||||||
|
Provisions
|
23 | 232 | — | 51,133 | ||||||||||||
|
Deferred income tax liabilities
|
19 | 64,436 | 48,664 | — | ||||||||||||
|
Deferred sale liabilities
|
11 | 39,993 | — | — | ||||||||||||
|
Long-term liabilities relating to discontinued operations
|
4 | — | 96,038 | 68,212 | ||||||||||||
|
Total long-term liabilities
|
153,265 | 144,702 | 119,345 | |||||||||||||
|
Total liabilities
|
301,816 | 510,628 | 546,956 | |||||||||||||
|
Equity
|
||||||||||||||||
|
Capital stock
|
24 | 381,673 | 141,604 | 143,826 | ||||||||||||
|
Treasury stock
|
24 | (67,501 | ) | (83,334 | ) | (93,793 | ) | |||||||||
|
Contributed surplus
|
5,775 | 7,232 | 7,623 | |||||||||||||
|
Retained earnings
|
213,519 | 354,334 | 328,264 | |||||||||||||
|
Accumulated other comprehensive income
|
14,290 | 15,853 | — | |||||||||||||
|
Total shareholders’ equity
|
547,756 | 435,689 | 385,920 | |||||||||||||
|
Non-controlling interests
|
4,684 | 5,403 | 3,709 | |||||||||||||
|
Total equity
|
552,440 | 441,092 | 389,629 | |||||||||||||
| $ | 854,256 | $ | 951,720 | $ | 936,585 | |||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
62
Table of Contents
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010 and 2009
(United States Dollars in Thousands, Except Earnings per Share)
| Notes | 2010 | 2009 | ||||||||||
|
Net sales
|
5&26 | $ | 84,476 | $ | 14,718 | |||||||
|
Equity income
|
5&15 | 954 | — | |||||||||
|
Gross revenues
|
85,430 | 14,718 | ||||||||||
|
Costs and Expenses:
|
||||||||||||
|
Costs of sales
|
26 | 49,352 | 8,525 | |||||||||
|
Selling, general and administrative
|
18,316 | 16,474 | ||||||||||
|
Share-based compensation (recovery) — selling, general
and administrative
|
25 | 72 | (2,713 | ) | ||||||||
|
Interest
|
30 | 974 | 477 | |||||||||
|
Loss on derivative contracts
|
2,010 | — | ||||||||||
| 70,724 | 22,763 | |||||||||||
| 14,706 | (8,045 | ) | ||||||||||
|
Other items:
|
||||||||||||
|
Currency transaction loss, net
|
(3,608 | ) | (3,208 | ) | ||||||||
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
13 | — | (9,538 | ) | ||||||||
|
Negative goodwill
|
3 | 41,058 | — | |||||||||
|
Income (loss) before income taxes
|
52,156 | (20,791 | ) | |||||||||
|
Income tax (expense) recovery:
|
||||||||||||
|
Income taxes
|
27 | (231 | ) | 7,510 | ||||||||
|
Resource property revenue taxes
|
27 | (6,744 | ) | (3,039 | ) | |||||||
| (6,975 | ) | 4,471 | ||||||||||
|
Income (loss) from continuing operations
|
45,181 | (16,320 | ) | |||||||||
|
Income (loss) from discontinued operations
|
4 | (15,449 | ) | 54,042 | ||||||||
|
Net income for the year
|
29,732 | 37,722 | ||||||||||
|
Less: Net (income) loss attributable to non-controlling interests
|
584 | (1,050 | ) | |||||||||
|
Net income attributable to owners of the parent company
|
$ | 30,316 | $ | 36,672 | ||||||||
|
Consisting of: Continuing operations
|
$ | 45,839 | $ | (16,320 | ) | |||||||
|
Discontinued operations
|
4 | (15,523 | ) | 52,992 | ||||||||
| $ | 30,316 | $ | 36,672 | |||||||||
|
Basic earnings (loss) per
share: Continuing operations
|
$ | 1.28 | $ | (0.54 | ) | |||||||
|
Discontinued operations
|
(0.43 | ) | 1.75 | |||||||||
| $ | 0.85 | $ | 1.21 | |||||||||
|
Diluted earnings (loss) per
share Continuing operations
|
$ | 1.28 | $ | (0.54 | ) | |||||||
|
Discontinued operations
|
$ | (0.43 | ) | 1.75 | ||||||||
| $ | 0.85 | $ | 1.21 | |||||||||
|
Weighted average number of common shares outstanding
|
||||||||||||
|
— basic
|
28 | 35,857,873 | 30,354,207 | |||||||||
|
— diluted
|
28 | 35,858,911 | 30,354,207 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
63
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2010 and 2009
(United States Dollars in Thousands)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2010 and 2009
(United States Dollars in Thousands)
| 2010 | 2009 | |||||||
|
Net income for the year
|
$ | 29,732 | $ | 37,722 | ||||
|
Other comprehensive income (loss), net of tax
|
||||||||
|
Unrealized gains and losses on translating financial statements
of self-sustaining foreign operations and adjustments from the
application of U.S. dollar reporting
|
(7,810 | ) | 16,916 | |||||
|
Reclassification adjustment for translation gains and losses to
income statements for subsidiaries deconsolidated
|
3,928 | — | ||||||
|
Fair value gain on
available-for-sale
securities
|
10,313 | — | ||||||
|
Reclassification of fair value gain on
available-for-sale
securities to statements of operations for securities distributed
|
(8,322 | ) | — | |||||
|
Other comprehensive income (loss)
|
(1,891 | ) | 16,916 | |||||
|
Comprehensive income for the year
|
27,841 | $ | 54,638 | |||||
|
Less: comprehensive (income) loss attributable to
non-controlling interests
|
(912 | ) | 2,113 | |||||
|
Comprehensive income attributable to owners of the parent company
|
$ | 28,753 | $ | 52,525 | ||||
|
Consisting of: Continuing operations
|
$ | 52,069 | $ | (2,288 | ) | |||
|
Discontinued operations
|
(23,316 | ) | 54,813 | |||||
| $ | 28,753 | $ | 52,525 | |||||
The accompanying notes are an integral part of these
consolidated financial statements.
64
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended December 31, 2010 and 2009
(United States Dollars in Thousands)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended December 31, 2010 and 2009
(United States Dollars in Thousands)
|
Accumulated Other
|
||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive Income | ||||||||||||||||||||||||||||||||||||||||||||
| Capital Stock | Treasury Stock |
Available-
|
Currency
|
Total
|
Non-
|
|||||||||||||||||||||||||||||||||||||||
|
Number of
|
Number of
|
Contributed
|
Retained
|
for-Sale
|
Translation
|
Shareholders’
|
controlling
|
Total
|
||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Surplus | Earnings | Securities | Adjustment | Equity | Interests | Equity | ||||||||||||||||||||||||||||||||||
|
Balance at January 1, 2009
|
36,135,528 | $ | 143,826 | (5,612,883 | ) | $ | (93,793 | ) | $ | 7,623 | $ | 328,264 | $ | — | $ | — | $ | 385,920 | $ | 3,709 | $ | 389,629 | ||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 36,672 | — | — | 36,672 | 1,050 | 37,722 | |||||||||||||||||||||||||||||||||
|
Settlement with an affiliate
|
— | — | (262,734 | ) | (2,365 | ) | — | — | — | — | (2,365 | ) | — | (2,365 | ) | |||||||||||||||||||||||||||||
|
Cancellation of treasury stock
|
(558,373 | ) | (2,222 | ) | 558,373 | 12,824 | — | (10,602 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Purchase of shares in a subsidiary
|
— | — | — | — | — | — | — | — | — | (419 | ) | (419 | ) | |||||||||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | — | — | (391 | ) | — | — | — | (391 | ) | — | (391 | ) | ||||||||||||||||||||||||||||||
|
Translation adjustment
|
— | — | — | — | — | — | — | 15,853 | 15,853 | 1,063 | 16,916 | |||||||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
35,577,155 | $ | 141,604 | (5,317,244 | ) | $ | (83,334 | ) | $ | 7,232 | $ | 354,334 | $ | — | $ | 15,853 | $ | 435,689 | $ | 5,403 | $ | 441,092 | ||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 30,316 | — | — | 30,316 | (584 | ) | 29,732 | ||||||||||||||||||||||||||||||||
|
Dividend paid
|
— | — | — | — | — | — | — | — | — | (1,212 | ) | (1,212 | ) | |||||||||||||||||||||||||||||||
|
Cancellation of treasury stock
|
(2,174,988 | ) | (8,676 | ) | 2,174,988 | 18,459 | — | (9,783 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Purchase of shares in a company
|
41,400 | 303 | — | — | — | — | — | — | 303 | — | 303 | |||||||||||||||||||||||||||||||||
|
Purchase of shares in a subsidiary
|
— | — | — | — | — | — | — | — | — | (12 | ) | (12 | ) | |||||||||||||||||||||||||||||||
|
Distribution of shares in a former subsidiary
|
— | — | — | — | — | (161,348 | ) | — | — | (161,348 | ) | (3,930 | ) | (165,278 | ) | |||||||||||||||||||||||||||||
|
Rights offering
|
7,571,227 | 49,549 | — | — | — | — | — | — | 49,549 | — | 49,549 | |||||||||||||||||||||||||||||||||
|
Acquisition of Mass Financial Corp.
|
24,992,122 | 198,487 | (328,239 | ) | (2,626 | ) | — | — | — | — | 195,861 | 5,313 | 201,174 | |||||||||||||||||||||||||||||||
|
Exercise of stock options
|
25,000 | 406 | — | — | (80 | ) | — | — | — | 326 | — | 326 | ||||||||||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | — | — | (1,377 | ) | — | — | (1,377 | ) | 34 | (1,343 | ) | |||||||||||||||||||||||||||||||
|
Net change in
available-for-sale
securities
|
— | — | — | — | — | — | 1,991 | — | 1,991 | — | 1,991 | |||||||||||||||||||||||||||||||||
|
Translation adjustment
|
— | — | — | — | — | — | — | (3,554 | ) | (3,554 | ) | (328 | ) | (3,882 | ) | |||||||||||||||||||||||||||||
|
Balance at December 31, 2010
|
66,031,916 | $ | 381,673 | (3,470,495 | ) | $ | (67,501 | ) | $ | 5,775 | $ | 213,519 | $ | 1,991 | $ | 12,299 | $ | 547,756 | $ | 4,684 | $ | 552,440 | ||||||||||||||||||||||
Components
of Capital Stock
| Common Shares | Class A Common Shares* | Preferred Shares* | Total Capital Stock | |||||||||||||||||||||||||||||
|
Number of
|
Number of
|
Number of
|
Number of
|
|||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
|
Balance at January 1, 2009
|
36,135,528 | $ | 143,826 | — | $ | — | — | $ | — | 36,135,528 | $ | 143,826 | ||||||||||||||||||||
|
Cancellation of treasury stock
|
(558,373 | ) | (2,222 | ) | — | — | — | — | (558,373 | ) | (2,222 | ) | ||||||||||||||||||||
|
Balance at December 31, 2009
|
35,577,155 | 141,604 | — | — | — | — | 35,577,155 | 141,604 | ||||||||||||||||||||||||
|
Cancellation and re-issuance
|
(5,317,244 | ) | (21,210 | ) | 2,174,988 | 8,676 | 3,142,256 | 12,534 | — | — | ||||||||||||||||||||||
|
Cancellation of treasury stock
|
— | — | (2,174,988 | ) | (8,676 | ) | — | — | (2,174,988 | ) | (8,676 | ) | ||||||||||||||||||||
|
Purchase of shares in subsidiaries
|
41,400 | 303 | — | — | — | — | 41,400 | 303 | ||||||||||||||||||||||||
|
Rights offering
|
7,571,227 | 49,549 | — | — | — | — | 7,571,227 | 49,549 | ||||||||||||||||||||||||
|
Acquisition of Mass Financial Corp.
|
24,992,122 | 198,487 | — | — | — | — | 24,992,122 | 198,487 | ||||||||||||||||||||||||
|
Exercise of stock options
|
25,000 | 406 | — | — | — | — | 25,000 | 406 | ||||||||||||||||||||||||
|
Balance at December 31, 2010
|
62,889,660 | $ | 369,139 | — | $ | — | 3,142,256 | $ | 12,534 | 66,031,916 | $ | 381,673 | ||||||||||||||||||||
| * | All the Class A Common Shares and Preferred Shares were and are held by the Group as treasury stock. |
The accompanying notes are an integral part of these
consolidated financial statements.
65
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2010 and 2009
(United States Dollars in Thousands)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2010 and 2009
(United States Dollars in Thousands)
| 2010 | 2009 | |||||||
|
Cash flows from continuing operating activities
|
||||||||
|
Income from continuing operations
|
$ | 45,181 | $ | (16,320 | ) | |||
|
Adjustments for:
|
||||||||
|
Amortization, depreciation and depletion
|
11,766 | 8,563 | ||||||
|
Foreign currency transaction (gains) losses, net
|
3,608 | 3,208 | ||||||
|
(Gain) loss on short-term securities
|
171 | (324 | ) | |||||
|
Stock-based compensation (recovery)
|
72 | (2,713 | ) | |||||
|
Future income taxes
|
(1,447 | ) | (7,598 | ) | ||||
|
Equity income
|
(954 | ) | — | |||||
|
Market value increment on commodity inventories
|
(1,982 | ) | — | |||||
|
Negative goodwill
|
(41,058 | ) | — | |||||
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
— | 9,538 | ||||||
|
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions
|
||||||||
|
Short-term securities
|
(395 | ) | — | |||||
|
Restricted cash
|
723 | — | ||||||
|
Receivables
|
4,380 | (958 | ) | |||||
|
Inventories
|
(4,403 | ) | — | |||||
|
Contract deposits, prepaid and other
|
7,334 | 371 | ||||||
|
Short-term bank borrowings
|
(4,893 | ) | — | |||||
|
Accounts payable and accrued expenses
|
23,755 | (1,692 | ) | |||||
|
Income tax liabilities
|
318 | 129 | ||||||
|
Provisions
|
(73 | ) | — | |||||
|
Other
|
1,795 | 175 | ||||||
|
Cash flows (used in) provided by continuing operating activities
|
43,898 | (7,621 | ) | |||||
|
Cash flows from continuing investing activities
|
||||||||
|
Purchases of property, plant and equipment, net
|
(1,111 | ) | (6 | ) | ||||
|
Purchases of long-term investments
|
(1,338 | ) | — | |||||
|
Proceeds from sales of long-term investments
|
13,519 | — | ||||||
|
Settlement of investment in preferred shares of former
subsidiaries
|
— | 6,195 | ||||||
|
Increase in loan receivables
|
(9,715 | ) | — | |||||
|
Decrease in loan receivables
|
8,000 | — | ||||||
|
Acquisition of a subsidiary (net of cash acquired)
|
213,850 | — | ||||||
|
Other
|
981 | — | ||||||
|
Cash flows provided by continuing investing activities
|
224,186 | 6,189 | ||||||
|
Cash flows from continuing financing activities
|
||||||||
|
Debt repayment
|
(813 | ) | — | |||||
|
Issuance of shares
|
48,224 | — | ||||||
|
Dividend paid to non-controlling interests
|
(1,212 | ) | — | |||||
|
Cash flows provided by continuing financing activities
|
46,199 | — | ||||||
|
Cash flows used in discontinued operating activities
|
(15,671 | ) | (2,227 | ) | ||||
|
Cash flows (used in) provided by discontinued investing
activities
|
(286,375 | ) | 1,095 | |||||
|
Cash flows used in discontinued financing activities
|
(10,329 | ) | — | |||||
|
Exchange rate effect on cash and cash equivalents
|
(24,762 | ) | 14,028 | |||||
|
Change in cash and cash equivalents
|
(22,854 | ) | 11,464 | |||||
|
Cash and cash equivalents, beginning of year
|
420,551 | 409,087 | ||||||
|
Cash and cash equivalents, end of year
|
$ | 397,697 | $ | 420,551 | ||||
|
Cash and cash equivalents at end of year consisted of:
|
||||||||
|
Cash
|
$ | 219,109 | $ | 406,219 | ||||
|
Money market and highly liquid funds
|
178,588 | 14,332 | ||||||
| $ | 397,697 | $ | 420,551 | |||||
|
Continuing operations
|
$ | 397,697 | $ | 38,046 | ||||
|
Discontinued operations
|
— | 382,505 | ||||||
| $ | 397,697 | $ | 420,551 | |||||
|
Supplemental cash flows disclosure (see Note 32).
|
||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
66
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
| Note 1. | Nature of Business and Summary of Significant Accounting Policies |
Terra Nova Royalty Corporation (“Terra Nova” or the
“Company”) is incorporated under the laws of British
Columbia, Canada. Terra Nova holds an indirect interest in the
Wabush iron ore mine in the Province of Newfoundland and
Labrador, Canada and is active in the royalty industry.
In November and December 2010, Terra Nova, through a share
exchange, acquired all of the issued and outstanding shares of
Mass Financial Corp. (“Mass”) (see Note 3). Mass
and its subsidiaries (collectively, “Mass Group”) are
primarily in the commodities and resources business, and
merchant banking. The Group consolidated the results of the
operations of Mass Group since November 16, 2010.
Until the end of March 2010, Terra Nova also operated in the
industrial plant technology, equipment and service business for
the cement and mining industries through its former subsidiary
KHD Humboldt Wedag International AG in Germany and its
subsidiaries and affiliates (collectively “KID”).
Terra Nova ceased to consolidate KID from March 31, 2010
and completed the spin-off of KID by December 31, 2010 (see
Note 4). As a result, the results of operations of KID have
been presented as discontinued operations. Accordingly, prior
period financial statements, including business segment
information as disclosed in Note 5, have been reclassified
to reflect this change.
| A. | Basis of Presentation |
These consolidated financial statements represent the first
annual consolidated financial statements of Terra Nova prepared
in accordance with the English language version of International
Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”),
which also include International Accounting Standards
(“IAS”) and Interpretations (“IFRIC” and
“SIC”). Terra Nova adopted IFRS in accordance with
IFRS 1,
First-time Adoption of International Financial
Reporting Standards
. The first date at which IFRS was
applied was January 1, 2009. In accordance with IFRS, Terra
Nova has:
| • | provided comparative financial information; | |
| • | applied the same accounting policies throughout all periods presented; | |
| • | retrospectively applied all effective IFRS as of December 31, 2010, as required; and | |
| • | applied certain optional exemptions and certain mandatory exceptions as applicable for first time IFRS adopters. |
Terra Nova’s consolidated financial statements were
previously prepared in accordance with accounting principles
generally accepted in Canada (“Canadian GAAP”).
Canadian GAAP differs in some areas from IFRS. In preparing
these financial statements, management has amended certain
accounting, measurement and consolidation methods previously
applied in the Canadian GAAP financial statements to comply with
IFRS. See Note 36 for reconciliations and descriptions of
the effect of the transition from Canadian GAAP to IFRS on
equity, earnings and comprehensive income along with
line-by-line
reconciliations of the statements of financial position as at
December 31, 2009 and January 1, 2009 and the
statement of operations and statement of comprehensive income
for the year ended December 31, 2009.
These financial statements were prepared on going concern and
accrual bases (except for cash flow information), under the
historical cost convention, as modified by the revaluation of
investment property and certain financial assets and financial
liabilities at fair value through the statement of operations.
The presentation currency of these consolidated financial
statements is the United States (“US”) dollars ($), as
rounded to the nearest thousand (except per share amounts).
Principles
of Consolidation
The consolidated financial statements include the accounts of
Terra Nova and entities it controls (collectively, the
“Group” in these consolidated financial statements).
Control comprises the power to govern the financial and
operating
67
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
policies of the investee so as to obtain benefit from its
activities and is achieved through direct and indirect ownership
of voting rights; currently exercisable or convertible potential
voting rights; or by way of contractual agreement. Subsidiaries
are consolidated from the date of their acquisition, being the
date on which the Group obtains control, and continue to be
consolidated until the date that such control ceases. The
financial statements of subsidiaries are prepared for the same
reporting year as Terra Nova, using consistent accounting
policies. All intercompany balances and transactions, including
unrealized profits arising from intragroup transactions, have
been eliminated in full. Unrealized losses are eliminated unless
the transaction provides evidence of an impairment of the asset
transferred. Non-controlling interests represent the portion of
profit or loss and net assets in subsidiaries that is not held
by the Group.
Interest in a special interest entity
(“SPE”)
— A SPE is usually created to
accomplish a narrow and well-defined objective. The Group
consolidates a SPE because the substance of the relationship
between the SPE and the Group indicates that the SPE is
controlled by the Group pursuant to SIC-12,
Consolidation — Special Purpose Entities.
Interests in joint ventures
— A joint venture
is a contractual arrangement whereby two or more parties
(venturers) undertake an economic activity that is subject to
joint control. Joint control exists only when the strategic
financial and operating decisions relating to the activity
require the unanimous consent of the venturers. A jointly
controlled entity is a joint venture that involves the
establishment of a company, partnership or other entity to
engage in economic activity that the group jointly controls with
its fellow venturers.
The results, assets and liabilities of a jointly controlled
entity are incorporated in these financial statements using the
equity method of accounting. Under the equity method, the
investment in a jointly controlled entity is carried in the
statement of financial position at cost, plus post-acquisition
changes in the Group’s share of net assets of the jointly
controlled entity, less distributions received and less any
impairment in value of the investment. Loans advanced to jointly
controlled entities are also included in the investment on the
consolidated statement of financial position. The consolidated
statement of operations reflects the Group’s share of the
results after tax of the jointly controlled entity.
Financial statements of jointly controlled entities are prepared
for the same reporting year as the Group. Where necessary,
adjustments are made to those financial statements to bring the
accounting policies used into line with those of the Group.
Unrealized gains on transactions between the Group and its
jointly controlled entities are eliminated to the extent of the
Group’s interest in the jointly controlled entities.
Unrealized losses are also eliminated unless the transaction
provides evidence of an impairment of the asset transferred.
The Group ceases to use the equity method of accounting on the
date from which it no longer has joint control or significant
influence over the joint venture, or when the interest becomes
held for sale.
Interests in associates
— An associate is an
entity over which the Group is in a position to exercise
significant influence through participation in the financial and
operating policy decisions of the investee, but which is not a
subsidiary or a joint venture. The results, assets and
liabilities of an associate are incorporated in these financial
statements using the equity method of accounting as described
above for jointly controlled entities.
Foreign
Currency Translation
The presentation currency of the Group’s consolidated
financial statements is the US dollar. The Group conducts its
businesses throughout the world through its subsidiaries whose
principal functional currency is any of Canadian dollars, Euros,
Chinese yuans, Swiss francs and Indian rupees. The Group chose
to use US dollars as its presentation currency because the
majority of its shareholders are from the US.
Functional currency is the currency of the primary economic
environment in which an entity operates and is normally the
currency in which the entity primarily generates and expends
cash.
In individual companies, transactions in foreign currencies are
initially recorded in the functional currency by applying the
rate of exchange ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign
68
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
currencies are retranslated into the functional currency at the
rate of exchange ruling at the date of the statement of
financial position. Any resulting exchange differences are
included in the statement of operations. Non-monetary assets and
liabilities, other than those measured at fair value, are not
retranslated subsequent to initial recognition.
In the consolidated financial statements whose presentation
currency is US dollars, the assets and liabilities of non-US
dollar functional currency subsidiaries, joint ventures and
associates, including related goodwill, are translated into US
dollars at the rate of exchange ruling at the date of the
statement of financial position. The results and cash flows of
non-US dollar functional currency subsidiaries, joint ventures
and associates are translated into US dollars using average
rates of exchange. Exchange adjustments arising when the opening
net assets and the profits for the year retained by non-US
dollar functional currency subsidiaries, joint ventures and
associates are translated into US dollars are taken to a
separate component of equity and reported in the other
comprehensive income.
Exchange gains and losses arising on long-term intragroup
foreign currency borrowings used to finance the Group’s
non-US dollar investments are also taken to equity and reported
in other comprehensive income. On disposal of a non-US dollar
functional currency subsidiary, joint venture or associate, the
deferred cumulative amount of exchange gains and losses
recognized in equity relating to that particular non-US dollar
operation is reclassified to the statement of operations.
The following table sets out exchange rates for the conversion
of Canadian dollars (CDN), Euros (EUR or €) and Chinese
yuans (Renminbi or RMB), which represented the major trading
currencies of the Group, into US dollars:
| CDN | EUR | RMB | ||||||||||
|
Closing rate at December 31, 2010
|
1.0054 | 1.3390 | 0.1517 | |||||||||
|
Average rate for the year 2010
|
0.9710 | 1.3264 | 0.1477 | |||||||||
|
Closing rate at December 31, 2009
|
0.9555 | 1.4332 | 0.1465 | |||||||||
|
Average rate for the year 2009
|
0.8757 | 1.3884 | 0.1464 | |||||||||
Use
of Estimates and Assumptions and Measurement
Uncertainty
The preparation of financial statements in conformity with IFRS
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Management’s best
estimates are based on the facts and circumstances available at
the time estimates are made, historical experience, general
economic conditions and trends, and management’s assessment
of probable future outcomes of these matters. Actual results
could differ from these estimates, and such differences could be
material.
| B. | Significant Accounting Policies |
(i) Financial
Instruments
All financial assets and financial liabilities are to be
classified by characteristic
and/or
management intent. Except for certain financial instruments
which are excluded from the scope, all financial assets are
classified into one of four categories: at fair value through
profit or loss,
held-to-maturity,
loans and receivables, and
available-for-sale;
and all financial liabilities are classified into one of two
categories: at fair value through profit or loss and other
financial liabilities.
Generally, a financial asset or financial liability at fair
value through profit or loss is a financial asset or financial
liability that meets either of the conditions: (a) it is
classified as held for trading if it is (i) acquired or
incurred principally for the purpose of selling or repurchasing
it in the near term; (ii) part of a portfolio of identified
financial instruments that are managed together and for which
there is evidence of a recent actual pattern of short-term
profit taking; or (iii) a derivative, except for a
derivative that is a designated and effective hedging
instrument; or (b) it is designated by the Group upon
initial recognition as at fair value through profit or loss when
certain conditions are met. Generally, a financial instrument
cannot be reclassified into or out of the fair value through
profit or loss category while it is held or issued. Only if a
financial asset is no longer held for the purpose of selling it
in the near term or in the rare circumstances that a reliable
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
measure of fair value is no longer available, the Group
reclassifies the financial asset at its fair value on the date
of reclassification.
Available-for-sale
financial assets are those non-derivative financial assets that
are designated as available for sale, or that are not classified
as loans and receivables,
held-to-maturity
investments, or fair value through profit or loss.
Non-derivative financial liabilities are classified as other
financial liabilities.
When a financial asset or financial liability is recognized
initially, the Group measures it at its fair value. The
subsequent measurement of a financial instrument and the
recognition of associated gains and losses is determined by the
financial instrument classification category.
After initial recognition, the Group measures financial assets,
including derivatives that are assets, at their fair values,
without any deduction for transaction costs it may incur on sale
or other disposal, except for the following financial assets:
(a) held-to-maturity
investments which are measured at amortized cost using the
effective interest method; (b) loans and receivables which
are measured at amortized cost using the effective interest
method; (c) investments in equity instruments that do not
have a quoted market price in an active market and whose fair
value cannot be reliably measured and derivatives that are
linked to and must be settled by delivery of such unquoted
equity instruments are measured at cost. All financial assets
except those measured at fair value through profit or loss are
subject to review for impairment.
After initial recognition, the Group measures all financial
liabilities at amortized cost using the effective interest
method, except for financial liabilities that are classified as
at fair value through profit or loss (including derivatives that
are liabilities) which are measured at their fair values (except
for derivative liabilities that are linked to and must be
settled by delivery of an unquoted equity instrument whose fair
value cannot be reliably measured, which should be measured at
cost).
A gain or loss on a financial asset or financial liability
classified as at fair value through profit or loss is recognized
in the statement of operations for the period in which it
arises. A gain or loss on an
available-for-sale
financial asset is recognized directly in other comprehensive
income, except for impairment losses, until the financial asset
is derecognized, at which time the cumulative gain or loss
previously recognized in accumulated other comprehensive income
is recognized in profit or loss for the period. For financial
assets and financial liabilities carried at amortized cost, a
gain or loss is recognized in the statement of operations when
the financial asset or financial liability is derecognized or
impaired, and through the amortization process.
Whenever quoted market prices are available, bid prices are used
for the valuation of financial assets while ask prices are used
for financial liabilities. When the market for a financial
instrument is not active, the Group establishes fair value by
using a valuation technique. Valuation techniques include using
recent arm’s length market transactions between
knowledgeable, willing parties, if available; reference to the
current fair value of another instrument that is substantially
the same; discounted cash flow analysis; option pricing models
and other valuation techniques commonly used by market
participants to price the instrument.
An entity classifies fair value measurements using a fair value
hierarchy that reflects the significance of the inputs used in
making the measurements. The fair value hierarchy has the
following levels:
| (a) | quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); |
| (b) | inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) (Level 2); and |
| (c) | inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). |
Assessing the significance of a particular input to the fair
value measurement in its entirety requires judgment, considering
factors specific to the asset or liability.
70
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Transaction costs related to the acquisition of
held-for-trading
financial assets and liabilities are expensed as incurred.
Transaction costs are incremental costs that are directly
attributable to the acquisition or disposal of a financial asset
or liability.
(ii) Cash
and Cash Equivalents
Cash and cash equivalents are measured at fair value through
profit or loss and include cash on hand, cash at banks and
highly liquid investments (e.g. money market funds) readily
convertible to a known amount of cash and subject to an
insignificant risk of change in value. They have original
maturities of three months or less and are generally interest
bearing.
(iii) Restricted
Cash
Restricted cash, whose use is restricted pursuant to the terms
of a contract or an agreement, is measured at fair value through
profit or loss.
(iv) Securities
Securities are classified as at fair value through profit or
loss (i.e. held for trading), or short-term or long-term
available-for-sale
securities.
Publicly-traded securities (debt and equity) which are acquired
principally for the purpose of selling in the near term are
classified as held for trading. Securities held for trading are
marked to their bid prices on the reporting date and unrealized
gains and losses are included in the statement of operations.
Available-for-sale
securities consist of publicly-traded securities and unlisted
equity securities which are not held for trading and not held to
maturity. Long-term
available-for-sale
securities are purchased with the intention to hold until market
conditions render alternative investments more attractive. The
available-for-sale
securities are stated at bid price whenever quoted market prices
are available. When the market for the
available-for-sale
security is not active, the Group establishes fair value by
using a valuation technique. Unrealized gains and losses are
recorded in other comprehensive income unless there has been an
other than temporary decline in value, at which time the
available-for-sale
security is written down and the write-down is included in the
statement of operations.
Gains and losses on sales of securities are recognized on the
average cost basis.
(v) Receivables
Typically, receivables are financial instruments which are not
classified as at fair value through profit or loss or
available-for-sale.
They are classified as loans and receivables and are measured at
amortized cost without regard to the Group’s intention to
hold them to maturity.
Receivables are net of an allowance for credit losses, if any.
The Group performs ongoing credit evaluation of customers and
adjusts the allowance accounts for specific customer risks and
credit factors. Receivables are considered past due on an
individual basis based on the terms of the contracts.
(vi) Allowance
for Credit Losses
The Group applies credit risk assessment and valuation methods
to its loans, trade and other receivables. The Group’s
allowance for credit losses is maintained at an amount
considered adequate to absorb estimated credit-related losses.
Such allowance reflects management’s best estimate of the
losses in the Group’s receivables and judgments about
economic conditions. Estimates and judgments could change in the
near-term, and could result in a significant change to a
recognized allowance. Credit losses arise primarily from
receivables but may also relate to other credit instruments
issued by or on behalf of the Group, such as guarantees and
letters of credit. An allowance for credit losses may be
increased by provisions which are charged to income and reduced
by write-offs net of any recoveries.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Specific provisions are established on an individual basis. A
country risk provision may be made based on exposures in less
developed countries and on management’s overall assessment
of the underlying economic conditions in those countries.
Write-offs are generally recorded after all reasonable
restructuring or collection activities have taken place and
there is no realistic prospect of recovery.
(vii) Derivative
Financial Instruments
Derivative financial instruments are financial contracts whose
value is derived from interest rates, foreign exchange rates or
other financial or commodity indices. These instruments are
either exchange-traded or negotiated. Derivatives are included
on the consolidated statement of financial position and are
measured at fair value. The recognition and measurement of
derivative financial instruments are covered by IAS 39,
Financial Instruments: Recognition and Measurement,
which
does not apply to contracts that are entered into and continue
to be held for the purpose of the receipt or delivery of a
non-financial item in accordance with the entity’s expected
purchase, sale or usage requirements.
The Group uses derivative financial instruments to manage
interest rate risk and to hedge exposures to fluctuations in
foreign currencies and commodity prices in accordance with its
risk management policy. The Group does not use derivative
financial instruments for speculative purposes. A description of
the Group’s objectives, policies and strategies with regard
to derivatives and other financial instruments is set out in
Note 30.
Derivatives are initially recognized in the statement of
financial position at fair value on the date the derivative
transaction is entered into and are subsequently remeasured at
their fair values. Changes in the fair value of derivatives that
are designated and qualify as fair value hedges are recognized
in the statement of operations together with any changes in the
fair value of the hedged item that are attributable to the
hedged risk.
Changes in the fair value of the effective portion of
derivatives that are designated and qualify as cash flow hedges
are recognized in equity through other comprehensive income.
Changes in the fair value of the ineffective portion of cash
flow hedges are recognized in the statement of operations.
Amounts accumulated in equity are transferred to the statement
of operations when the underlying transaction occurs or, if the
transaction results in a non-financial asset or liability, are
included in the initial cost of that asset or liability.
Hedge accounting is discontinued when the hedging instrument
expires or is sold, terminated, or exercised, or no longer
qualifies for hedge accounting. At that time, any cumulative
gain or loss on the hedging instrument recognized in equity is
retained in equity until the forecasted transaction occurs. If a
hedged transaction is no longer expected to occur, the net
cumulative gain or loss recognized in equity is transferred to
the statement of operations.
The Group does not hedge its net investment in a foreign
operation.
Changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognized in the
statement of operations as they arise.
Derivatives embedded in other financial instruments or other
host contracts are treated as separate derivatives and recorded
on the statement of financial position at fair value when their
risks and characteristics are not closely related to those of
the host contract. Changes in the fair value of those embedded
derivatives recognized in the statement of financial position
are recognized in the statement of operations as they arise.
Where the Group has both the legal right and intent to settle
derivative assets and liabilities simultaneously with a
counterparty, the net fair value of the derivative positions is
reported as an asset or liability, as appropriate.
(viii) Inventories
Inventories consist of raw materials,
work-in-progress,
and finished goods. Inventories are recorded at the lower of
cost or estimated net realizable value. Cost, where appropriate,
includes an allocation of manufacturing overheads incurred in
bringing inventories to their present location and condition.
Net realizable value represents the estimated selling price less
all estimated costs of completion and cost to be incurred in
marketing, selling and distribution. The
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amount of any write-down of inventories to net realizable value
and all losses of inventories are recognized as an expense in
the period the write-down or loss occurs. The amount of any
reversal of any write-down of inventories arising from an
increase in net realizable value is recognized as a reduction in
the amount of inventories recognized as an expense in the period
in which the reversal occurs.
Commodities acquired in commodity broker-trader activities with
the purpose of selling in the near future and generating a
profit from fluctuations in price or broker-traders’ margin
are measured at fair value less costs to sell.
(ix) Properties
for Sale
Properties for sale are real estate intended for sale in the
ordinary course of business or in the process of construction or
development for such sale.
Properties for sale are accounted for as inventories at the
lower of cost (on a specific item basis) and net realizable
value. Net realizable value is determined by reference to sale
proceeds of properties sold in the ordinary course of business
less all estimated selling expenses around the reporting date,
or by management estimates based on prevailing market
conditions. The amount of any write-down of properties to net
realizable value is recognized as an expense in the period the
write-down occurs. The amount of any reversal of any write-down
arising from an increase in net realizable value is recognized
in the period in which the reversal occurs.
(x) Investment
Property
Investment property is property that is held for generating
rental income or for capital appreciation or both. The
Group’s investment property comprises freehold land and
buildings. Investment property is initially recognized at
historical cost including related transaction costs. After
initial recognition, investment property is held at fair value,
with changes in value recognized in the Group’s profit or
loss for the period in which it arises.
The fair value of investment property is the price at which the
property could be exchanged between knowledgeable, willing
parties in an arm’s length transaction. Fair value
specifically excludes an estimated price inflated or deflated by
special terms or circumstances, special considerations or
concessions granted by anyone associated with the sale. An
entity determines fair value without any deduction for
transaction costs it may incur on sale or other disposal. Fair
value on the Group’s investment property is based on
valuations prepared annually by external evaluators in
accordance with guidance issued by the International Valuation
Standard Committee and reviewed by the Group in accordance with
guidance on fair value in IAS 40,
Investment Property
.
(xi) Property,
Plant and Equipment
Property, plant and equipment are carried at cost, net of
accumulated depreciation and, if any, accumulated impairment
losses. The initial cost of an asset comprises its purchase
price or construction cost, any costs directly attributable to
bringing the asset into operation, the initial estimate of any
decommissioning obligation, if any, and, for qualifying assets,
borrowing costs. The purchase price or construction cost is the
aggregate amount paid and the fair value of any other
consideration given to acquire the asset. Where an asset or part
of an asset that was separately depreciated is replaced and it
is probable that future economic benefits associated with the
item will flow to the Group, the expenditure is capitalized and
the carrying amount of the replaced asset is derecognized.
Inspection costs associated with major maintenance programs are
capitalized and amortized over the period to the next inspection.
Property, plant, and equipment are amortized according to the
following lives and methods:
| Lives | Method | |||||||
|
Buildings (including leasehold improvement)
|
up to 25 years | straight-line | ||||||
|
Processing plant equipment
|
3 to 20 years | straight-line | ||||||
|
Office equipment
|
3 to 10 years | straight-line | ||||||
73
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amortization expense is included in either cost of sales or
selling, general and administrative expense, whichever is
appropriate.
The expected useful lives of property, plant and equipment are
reviewed on an annual basis and, if necessary, changes in useful
lives are accounted for prospectively. The carrying value of
property, plant and equipment is reviewed for impairment
whenever events or changes in circumstances indicate the
carrying value may not be recoverable.
An item of property, plant and equipment is derecognized upon
disposal or when no future economic benefits are expected to
arise from the continued use of the asset. Any gain or loss
arising on derecognition of the asset (calculated as the
difference between the net disposal proceeds and the carrying
amount of the item) is included in the statement of operations
in the period in which the item is derecognized.
Maintenance costs are expensed as incurred.
(xii) Interests
in Resource Properties
Interests in resource properties are stated at cost, net of
accumulated amortization and, if any, accumulated impairment
losses. Depletion expense is provided on the unit of production
basis. The estimate of the reserve of iron ore is reviewed
annually. The resource properties are tested for recoverability
whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable and an impairment loss
is measured and any resulting write-down to fair value is
included in the statement of operations. No such losses have
been recorded in these consolidated financial statements.
(xiii) Impairment
of Property, Plant and Equipment
The Group assesses assets or groups of assets for impairment
whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If any
indication of impairment exists, the Group makes an estimate of
the asset’s recoverable amount. Individual assets are
grouped for impairment assessment purposes at the lowest level
at which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. An
asset group’s recoverable amount is the higher of its fair
value less costs to sell and its value in use. Where the
carrying amount of an asset group exceeds its recoverable
amount, the asset group is considered impaired and is written
down to its recoverable amount. In assessing value in use, the
estimated future cash flows are adjusted for the risks specific
to the asset group and are discounted to their present value
using a pre-tax discount rate that reflects current market
assessments of the time value of money.
An assessment is made at each reporting date as to whether there
is any indication that previously recognized impairment losses
may no longer exist or may have decreased. If such indication
exists, the recoverable amount is estimated. A previously
recognized impairment loss is reversed only if there has been a
change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was
recognized. If that is the case, the carrying amount of the
asset is increased to its recoverable amount. That increased
amount cannot exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been
recognized for the asset in prior years. Such reversal is
recognized in the statement of operations. After such a
reversal, the depreciation charge is adjusted in future periods
to allocate the asset’s revised carrying amount, less any
residual value, on a systematic basis over its remaining useful
life.
(xiv) Decommissioning
Liabilities for decommissioning costs are recognized when the
Group has an obligation to dismantle and remove a facility or an
item of plant and to restore the site on which it is located,
and when a reliable estimate of that liability can be made.
Where an obligation exists for a new facility, this will be on
construction or installation. An obligation for decommissioning
may also crystallize during the period of operation of a
facility through a change in legislation or through a decision
to terminate operations. The amount recognized is the present
value of the estimated future expenditure determined in
accordance with local conditions and requirements. A
corresponding item of property, plant and equipment
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of an amount equivalent to the provision is also recognized.
This is subsequently amortized as part of the asset. Other than
the unwinding discount on the provision, any change in the
present value of the estimated expenditure is reflected as an
adjustment to the provision and the corresponding item of
property, plant and equipment. Such changes include foreign
exchange gains and losses arising on the retranslation of the
liability into the functional currency of the reporting entity,
when it is known that the liability will be settled in a foreign
currency.
(xv) Provisions
and Contingencies
Provisions are recognized when the Group has a present
obligation as a result of a past event, it is probable that an
outflow of resources embodying economic benefits will be
required to settle the obligation and a reliable estimate can be
made of the amount of the obligation. Provisions are measured at
the management’s best estimate of the expenditure required
to settle the obligation at the reporting date. Where
appropriate, the future cash flow estimates are adjusted to
reflect risks specific to the liability. If the effect of the
time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate
that reflects current market assessments of the time value of
money. Where discounting is used, the increase in the provision
due to the passage of time is recognized within finance costs.
Contingent liabilities are possible obligations whose existence
will only be confirmed by future events not wholly within the
control of the Group. Contingent liabilities, other than those
assumed in connection with business combinations which are
measured at fair value at the acquisition date, are not
recognized in the financial statements but are disclosed unless
the possibility of an outflow of economic resources is
considered remote. Legal costs in connection with a loss
contingency are recognized when incurred.
(xvi) Own
Equity Instruments
The Group’s holdings of its own equity instruments,
including common stock and preferred stock, are classified as
“treasury stock”, and are deducted from
shareholders’ equity at cost and in the determination of
the number of equity shares outstanding. No gain or loss is
recognized in the statement of operations on the purchase, sale,
re-issue or cancellation of equity shares.
(xvii) Revenue
Recognition
Revenues include proceeds from sales of commodities and
resources, properties, medical instruments and supplies,
provisions of financial and other services, income from and fair
value gains on investment property, royalty income and net gain
on securities.
Revenue from the sale of goods is recognized when: (a) the
Group has transferred to the buyer the significant risks and
rewards of ownership of the goods (which generally coincides
with the time when the goods are delivered to customers and
title has passed); (b) the Group retains neither continuing
managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated
with the transaction will flow to the Group; and (e) the
costs incurred or to be incurred in respect of the transaction
can be measured reliably.
Revenue from rendering of services is recognized when:
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated
with the transaction will flow to the Group; (c) the stage
of completion of the transaction at the reporting date can be
measured reliably; and (d) the costs incurred for the
transaction and the costs to complete the transaction can be
measured reliably.
Revenue is measured at the fair value of the consideration
received or receivable and represents amounts receivable for
goods provided in the normal course of business, net of
discounts, customs duties and sales taxes. When the Group
charges shipping and handling fees to customers, such fees are
included in the sale revenue. Where the Group acts as an agent
on behalf of a third party to procure or market goods, any
associated fee income is recognized but no purchase or sale is
recorded.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For interest, royalty and dividend income, recognition is
warranted when it is probable that economic benefits will flow
to the Group and the amount of income can be measured reliably.
Interest income is recognized on a time proportion basis, taking
into account the effective yield on the asset. Royalty income is
recognized on an accrual basis, in accordance with the terms of
the underlying agreement and is reported net of royalties paid
and government levy. Dividend income is recognized when the
Group’s right as a shareholder to receive payment has been
established.
(xviii) Costs
of Sales
Costs of sales include the cost of goods (commodities and
resources, properties, medical instruments and supplies) sold.
The cost of goods sold includes both the direct cost of
materials and indirect costs, freight charges, purchasing and
receiving costs, inspection costs, distribution costs, as well
as provision for warranty when applicable.
The costs of sales also include the write-downs of inventories
and
available-for-sale
securities, credit losses on loans and receivables and net loss
on the securities. The reversal of write-downs of inventories
and allowance for debts reduce the cost of sales.
(xix) Employee
Benefits
Wages, salaries, bonuses, social security contributions, paid
annual leave and sick leave are accrued in the period in which
the associated services are rendered by employees of the Group.
The employee benefits are included in either cost of sales or
selling, general and administrative expense, as applicable.
(xx) Share-Based
Compensation
The cost of equity-settled transactions with employees is
measured by reference to the fair value at the date at which
equity instruments are granted and is recognized as an expense
over the vesting period, which ends on the date on which the
relevant employees become fully entitled to the award. Fair
value is determined by using an appropriate valuation model. No
expense is recognized for awards that do not ultimately vest. At
each reporting date before vesting, the cumulative expense is
calculated, representing the extent to which the vesting period
has expired and management’s best estimate of the
achievement or otherwise of non-market conditions and the number
of equity instruments that will ultimately vest. The movement in
cumulative expense since the previous reporting date is
recognized in the statement of operations, with a corresponding
entry in equity.
When the terms of an equity-settled award are modified or a new
award is designated as replacing a cancelled or settled award,
the cost based on the original award terms continues to be
recognized over the original vesting period. In addition, an
expense is recognized over the remainder of the new vesting
period for the incremental fair value of any modification, based
on the difference between the fair value of the original award
and the fair value of the modified award, both as measured on
the date of the modification. No reduction is recognized if this
difference is negative. When an equity-settled award is
cancelled, it is treated as if it had vested on the date of
cancellation and any cost not yet recognized in the statement of
operations for the award is expensed immediately.
The share-based compensation expenses are classified as selling,
general and administrative expenses. When the options are
exercised, the exercise price proceeds together with the amount
initially recorded in the contributed surplus account are
credited to common stock.
(xxi) Research
Research costs are expensed as incurred and included in selling,
general and administrative expenses.
(xxii) Finance
Costs
Finance costs directly attributable to the acquisition,
construction or production of qualifying assets, which are
assets that necessarily take a substantial period of time to get
ready for their intended use, are added to the cost of those
assets,
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NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
until such time as the assets are substantially ready for their
intended use. All other finance costs are recognized in the
statement of operations in the period in which they are incurred.
Share capital and debt are recorded at the proceeds received,
net of direct issue costs. Finance charges, including premiums
payable on settlement or redemption and direct issue costs, are
charged to income on an accrual basis using the effective
interest method and are added to the carrying amount of the
instrument to the extent that they are not settled in the period
in which they arise.
(xxiii) Income
Taxes
The tax expense represents the sum of the tax currently payable
and deferred tax. The tax currently payable is based on the
taxable profits for the period. Taxable profit differs from net
profit as reported in the statement of operations because it
excludes items of income or expense that are taxable or
deductible in other periods and it further excludes items that
are never taxable or deductible. The Group’s liability for
current tax is calculated using tax rates that have been enacted
or substantively enacted by the reporting date. Deferred tax is
provided, using the liability method, on all temporary
differences at the reporting date between the tax bases of
assets and liabilities and their carrying amounts for financial
reporting purposes.
Deferred tax liabilities are recognized for all taxable
temporary differences:
| • | except where the deferred tax liability arises on goodwill that is not tax deductible or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. | |
| • | in respect of taxable temporary differences associated with investments in subsidiaries, joint ventures and associates, except where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. |
Deferred tax assets are recognized for all deductible temporary
differences, carry-forward of unused tax credits and unused tax
losses, to the extent that it is probable that taxable profit
will be available against which the deductible temporary
differences and the carry-forward of unused tax credits and
unused tax losses can be utilized:
| • | except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. | |
| • | in respect of deductible temporary differences associated with investments in subsidiaries, joint ventures and associates, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. |
On the reporting date, management reviews the Group’s
deferred tax assets to determine whether it is probable that the
benefits associated with these assets will be realized. The
Group also reassesses unrecognized deferred tax assets. This
review and assessment involve evaluating both positive and
negative evidence. The Group recognized a previously
unrecognized deferred tax asset to the extent that it has become
probable that future taxable profit will allow the deferred tax
asset to be recovered.
Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply to the year when the asset is
realized or the liability is settled, based on tax rates and tax
laws that have been enacted or substantively enacted at the
reporting date. Tax relating to items recognized directly in
equity is recognized in equity and not in the statement of
operations.
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to set off current tax assets
against current tax liabilities, and when they relate to income
tax levied by the same taxation authority and the Group intends
to settle its current tax assets and liabilities on a net basis.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Resource taxes and withholding taxes are treated as income taxes
when they have the characteristics of a tax. This is considered
to be the case when they are imposed under government authority
and the amount payable is calculated by reference to revenue
derived.
The Group includes interest charges and penalties on current tax
liabilities as a component of financing costs.
(xxiv) Earnings
Per Share
Basic earnings per share is determined by dividing net income
applicable to common shares by the weighted average number of
common shares outstanding for the year, net of treasury stock.
Diluted earnings per share is determined using the same method
as basic earnings per share except that the weighted average
number of common shares outstanding includes the potential
dilutive effect of stock options. For the purpose of calculating
diluted earnings per share, the Group assumes the exercise of
its dilutive options and warrants with the assumed proceeds from
these instruments regarded as having been received from the
issue of common shares at the average market price of common
shares during the period. The difference between the number of
common shares issued and the number of common shares that would
have been issued at the average market price of common shares
during the period is treated as an issue of common shares for no
consideration. The amount of the dilution is the average market
price of common shares during the period minus the issue price
and the issue price includes the fair value of services to be
supplied to the Group in the future under the share-based
payment arrangement.
If the share-based payments were granted during the period, the
shares issuable are weighted to reflect the portion of the
period during which the payments were outstanding. The shares
issuable are also weighted to reflect forfeitures occurring
during the period. When options are exercised during the period,
shares issuable are weighted to reflect the portion of the
period prior to the exercise date and shares issued are included
in the weighted average number of shares outstanding from the
exercise date.
| C. | Major Sources of Estimation Uncertainty |
The major assumptions and other sources of estimation
uncertainty that have a significant risk of resulting in a
material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below.
These items require management’s most difficult, subjective
or complex judgments.
(i) Recoverable
Value of Receivables
The Group had recognized receivables (including loans, trade and
other) aggregating $30,987 at December 31, 2010. The
recoverability of the trade receivables is regularly reviewed
and specific provisions are recognized for balances considered
to be irrecoverable. The irrecoverable amounts are estimated
based on reviewing the macro-economic environment and available
micro-economic information specific to each receivable.
(ii) Provison
for inventories
The Group had recorded inventories of $67,102 at
December 31, 2010. The provision for the inventories is
regularly reviewed and general and specific provisions are
recognized for balances considered to be irrecoverable. The
irrecoverable amounts are estimated based on reviewing the
macro-economic environment and available micro-economic
information specific to the product categories.
(iii) Impairment
of Property, Plant and
Equipmen
t
The Group had property, plant and equipment and interests in
resource properties aggregating $235,499 at December 31,
2010. Determining whether these tangible assets are impaired
requires an estimation of the recoverable amounts which in turn
requires an estimation of the timing and amount of future cash
flows arising from the property and a suitable discount rate in
order to calculate the present value.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(iv) Impairment
of Equity Method Investments
The Group had investments in joint ventures and associates
accounted for by the equity method aggregating $5,713 at
December 31, 2010. Investments in joint ventures and
associates are reviewed for impairment at the reporting date.
Determining whether an investment balance is impaired requires
an estimation of the value in use of the joint venture or
associate. The value in use calculation requires an estimate to
be made of the timing and amount of future cash flows expected
to arise from the joint venture or associate and the application
of a suitable discount rate in order to calculate the present
value.
(v) Taxation
The Group is subject to tax in a number of jurisdictions and
judgment is required in determining the worldwide provision for
income taxes. Deferred tax is accounted for on temporary
differences using the liability method, with deferred tax
liabilities generally being provided for in full (except for
taxable temporary differences associated with investments in
subsidiaries, joint ventures and associates where the Group is
able to control the timing of the reversal of the temporary
differences and it is probable that the temporary differences
will not reverse in the foreseeable future) and deferred tax
assets being recognized to the extent that it is probable that
future taxable profits will be available against which the
temporary differences can be utilized.
The operations and organization structures of the Group are
complex, and related tax interpretations, regulations and
legislation are continually changing. As a result, there are
usually some tax matters in question that result in uncertain
tax positions. The Group only recognizes the income tax benefit
of an uncertain tax position when it is probable that the
ultimate determination of the tax treatment of the position will
result in that benefit being realized.
The Group had deferred tax assets of $6,727 at December 31,
2010. In assessing the realizability of future tax assets,
management considers whether it is probable that some portion or
all of the future tax assets will be realized. The ultimate
realization of future tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible or before the tax
loss carry-forwards expire. Management considers the future
reversals of existing taxable temporary differences, projected
future taxable income, taxable income in prior years and tax
planning strategies in making this assessment.
The Group provides for future liabilities in respect of
uncertain tax positions where additional tax may become payable
in future periods and such provisions are based on
management’s assessment of exposures. The Group did not
recognize the full deferred tax liability on taxable temporary
differences associated with investments in subsidiaries, joint
ventures and associates where the Group is able to control the
timing of the reversal of the temporary differences and it is
probable that the temporary differences will not reverse in the
foreseeable future. The Group may change its investment decision
in its normal course of business, thus resulting in additional
tax liability.
| D. | Recent Accounting Standards and Amendments not yet Adopted |
Certain pronouncements were issued by the IASB that are
mandatory for accounting periods beginning after January 1,
2011 or later periods. The following new accounting standards
and amendments are expected to have significant effects on the
Group’s accounting policies, financial positions
and/or
financial statement presentation.
IFRS 9,
Financial Instruments,
is expected to replace IAS
39,
Financial Instruments: Recognition and Measurement,
from 2013. New requirements for the classification and
measurement of financial liabilities, derecognition of financial
instruments, impairment and hedge accounting are expected to be
added to IFRS 9.
Amendments, set out in
Disclosures — Transfers of
Financial Assets,
were issued to amend IFRS 7,
Financial
Instruments,
so as to enhance the disclosure requirements
for transfers of financial assets that result in derecognition.
These amendments respond, in part, to the recent financial
crisis. Entities will be required to provide more extensive
quantitative and qualitative disclosures about: (i) risk
exposures relating to transfers of financial assets that are:
(a) not derecognized in their entirety; or
(b) derecognized in their entirety, but with which the
entity continues to have some
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
continuing involvement; and (ii) the effect of those risks
on an entity’s financial position. The amendments are
effective for annual periods beginning on or after July 1,
2011. Earlier application is permitted.
Amendments, set out in
Deferred Tax: Recovery of Underlying
Assets,
were issued to amend IAS 12,
Income Taxes.
IAS 12 requires an entity to measure the deferred tax relating
to an asset depending on whether the entity expects to recover
the carrying amount of the asset through use or sale. It can be
difficult and subjective to assess whether recovery will be
through use or through sale when the asset is measured using the
fair value model in IAS 40,
Investment Property
. The
amendment provides a practical solution to the problem by
introducing a presumption that recovery of the carrying amount
will, normally, be through sale. The amendments are effective
for annual periods beginning on or after January 1, 2012.
IAS 24,
Related Party Disclosures,
was revised to
simplify the disclosure requirements for government-related
entities and clarify the definition of a related party. The
revised standard is effective for annual periods beginning on or
after 1 January 2011, with earlier application permitted.
| Note 2. | Capital Disclosure on the Group’s Objectives, Policies and Processes for Managing Its Capital Structure |
The Group’s objectives when managing capital are:
(i) to safeguard the entity’s ability to continue as a
going concern so that it can continue to provide returns for
shareholders and benefits for other stakeholders, (ii) to
provide an adequate return to shareholders by pricing products
and services commensurately with the level of risk, and
(iii) to maintain a flexible capital structure which
optimizes the cost of capital at acceptable risk.
The Group sets the amount of capital in proportion to risk. The
Group manages the capital structure and makes adjustments to it
in the light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain
or adjust the capital structure, the Group may adjust the amount
of dividends paid to shareholders, return capital to
shareholders, issue new shares, or sell assets to reduce debt.
Consistently with others in the industry, the Group monitors
capital on the basis of the
debt-to-adjusted
capital ratio and long-term
debt-to-equity
ratio. The
debt-to-adjusted
capital ratio is calculated as net debt divided by adjusted
capital. Net debt is calculated as total debt less cash and cash
equivalents. Adjusted capital comprises all components of equity
and some forms of subordinated debt, if any. The long-term
debt-to-equity
ratio is calculated as long-term debt divided by
shareholders’ equity. The computations are based on
continuing operations.
| 2010 | 2009 | |||||||
|
Total debt
|
$ | 52,748 | $ | — | ||||
|
Less: cash and cash equivalents
|
(397,697 | ) | (38,046 | ) | ||||
|
Net debt (net cash and cash equivalents)
|
$ | (344,949 | ) | $ | (38,046 | ) | ||
|
Shareholders’ equity
|
$ | 547,756 | $ | 435,689 | ||||
|
Debt-to-adjusted
capital ratio
|
Not applicable | Not applicable | ||||||
There were no amounts in accumulated other comprehensive income
relating to cash flow hedges nor were there any subordinated
debt instruments as at December 31, 2010 and 2009. The
debt-to-adjusted
capital ratio in 2010 and 2009 were not applicable since the
Group had a net cash and cash equivalents balance.
| 2010 | 2009 | |||||||
|
Long-term debt
|
$ | 48,604 | $ | — | ||||
|
Shareholders’ equity
|
$ | 547,756 | $ | 435,689 | ||||
|
Long-term
debt-to-equity
ratio
|
0.09 | — | ||||||
During 2010, the Group’s strategy, which was unchanged from
2009, was to maintain the
debt-to-adjusted
capital ratio and the long-term
debt-to-equity
ratio at a low level. The Group had a net cash and cash
equivalent balance after
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
deduction of the total debt. The Group’s long-term
debt-to-equity
ratio was 0.09 and nil as at December 31, 2010 and 2009,
respectively.
| Note 3. | Acquisitions of Subsidiaries |
Year
2010
On September 27, 2010, Terra Nova announced that it entered
into an agreement with Mass for Terra Nova to acquire all of the
issued and outstanding common shares of Mass by way of a
take-over bid (the “Offer”). The Offer was one common
share of Terra Nova for each common share of Mass. The Offer was
based upon the adjusted book value of each company on a diluted
basis and valued Terra Nova’s common shares at $8.91 per
share.
Mass’s business encompasses a broad spectrum of activities
related to the integrated combination of commodities and
resources and merchant banking, which include trading,
commercial trade, proprietary investing and financial services.
The board of directors of Terra Nova considered a number of
factors, including, among other things, strategic growth through
acquisition, adjusted book value valuation, increased scope,
complementary businesses, management team, fairness opinion,
meaningful cost savings and other synergies facilitating the
Mass acquisition. Terra Nova received authorization from the New
York Stock Exchange in October 2010 to list the shares to be
issued pursuant to the Offer and over 99% of its shareholders
voting at its special meeting on October 29, 2010 approved
the same.
The Offer was completed and closed on November 15, 2010 and
23,317,912 common shares of Mass were submitted for exchange. As
a result, 23,317,912 Terra Nova common shares were issued. In
December 2010, Terra Nova acquired the common shares held by the
non-controlling interests of Mass by mandatory acquisition by
issuing 1,674,210 Terra Nova common shares. The aggregated fair
value of shares issued was $200,139, before deducting the costs
of issuing shares totalling $1,652.
Prior to the acquisition date, the Group held approximately a
4.6% equity interest in Mass with a fair value of $9,388 on the
acquisition date. The Group recognized a loss of $1,806 which
was included in the net gains on securities in the consolidated
statement of operations.
The Offer was a part of a multi-step transaction, which included
the subsequent merger of Mass and a subsidiary of Terra Nova,
designed to effect a combination.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The acquisition was accounted for as a business combination
pursuant to IFRS 3 (Revised). The aggregated cost of the
acquisition totalled $209,527. The fair value of the assets
acquired and liabilities assumed at the acquisition date was
allocated as follows:
|
Cash
|
$ | 213,850 | ||
|
Receivables, net
|
23,040 | |||
|
Other current assets
|
131,371 | |||
|
Property, plant and equipment
|
3,840 | |||
|
Interest in resource property
|
51,000 | |||
|
Treasury stock
|
2,626 | |||
|
Other non-current assets
|
67,362 | |||
|
Current liabilities
|
(128,444 | ) | ||
|
Non-current liabilities
|
(108,747 | ) | ||
|
Non-controlling interests
|
(5,313 | ) | ||
|
Total identifiable net assets acquired
|
$ | 250,585 | ||
|
Total consideration transferred
|
$ | 209,527 | ||
|
Negative goodwill
|
41,058 | |||
| $ | 250,585 | |||
The negative goodwill arose as the share market prices of Terra
Nova on the acquisition dates were less than the fair values of
the net identifiable assets acquired from Mass.
At the acquisition date, the gross contractual amounts of
receivables acquired was $23,591 and the best estimate of the
contractual cash flows not expected to be collected was $551,
resulting in a fair value of $23,040.
The amounts of revenue and net income of Mass since the
acquisition date (i.e. from November 16 to December 31,
2010) included in the consolidated statement of
comprehensive income for 2010 was $53,276 and $5,652,
respectively.
The following illustrative summary presents the results of the
Group’s continuing operations as if the businesses acquired
had been acquired on 1 January 2010. The amounts include
the results of the acquired businesses, depreciation,
amortization and depletion of the acquired fixed assets and
intangible assets recognized on acquisition. The amounts do not
include any possible synergies from the acquisition. The results
of acquired companies for the period before acquisition have not
been adjusted to reflect the Group’s accounting policies
nor to reflect the fair value adjustments made on acquisition.
The information is provided for illustrative purposes only and
does not necessarily reflect the actual results that would have
occurred, nor is it necessarily indicative of the future results
of the combined companies.
| (Unaudited) | ||||
|
Revenues
|
$ | 379,695 | ||
|
Net income
|
29,307 | |||
|
Net income attributable to equity shareholders
|
28,619 | |||
Year
2009
There was no business combination transaction in 2009.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Note 4. | Discontinued Operations |
2010 —
KID
Until the end of March 2010, the Group, through its former
subsidiary KID and its subsidiaries and affiliates, focused on
the industrial plant technology, equipment and service business
for the cement and mining industries and on maintaining
leadership in supplying technologies, equipment and engineering
services for the cement and mining sectors, as well as designing
and building plants that produce clinker and cement and process
coal and other minerals, such as copper, gold and diamonds. In
the fourth quarter of 2009, the Group divested its interest in
its coal and minerals customer group, such that the business of
the Group was then focused on the cement industry.
On January 6, 2010, Terra Nova announced that it intended
to restructure its assets and operations by dividing into two
independent publicly traded companies; one company to focus on
the industrial engineering business and the other company on
Terra Nova’s resource-focused business. To effect this
division, Terra Nova, among other things, effected a
reorganization whereby substantially all of its subsidiaries
engaged in the industrial engineering business were transferred
to KID.
Terra Nova entered into an Arrangement Agreement with KID on
February 26, 2010 to effect an arrangement (the
“Arrangement”) under Section 288 of the British
Columbia Business Corporations Act, which was approved by the
Terra Nova shareholders on March 29, 2010 and was
subsequently approved by the British Columbia Supreme Court.
Pursuant to the Arrangement, among other things, approximately
26% of the issued and outstanding common shares of KID were
distributed, on a pro rata basis, one common share of KID for
every three and one-half of Terra Nova common shares held, to
the non-subsidiary shareholders of Terra Nova as a return of
capital. The carrying amount of these common shares of KID was
within the fair value range obtained from a valuation. For
financial statement presentation purposes, the distribution of
common shares of KID was accounted for as a dividend in kind and
the carrying amount was charged against retained earnings. This
was a non-cash transaction.
As a result of the Arrangement and related amendment to Terra
Nova’s articles, two publicly traded companies were
created. As well in connection with the Arrangement, Terra Nova
entered into a shareholders agreement (the “Shareholders
Agreement”) with another corporate shareholder of KID (the
“Custodian”) whereby Terra Nova engaged the Custodian
to direct the voting of the common shares of KID that Terra Nova
continues to hold after consummation of the Arrangement. As a
result of the execution of the Shareholders Agreement, Terra
Nova ceased to hold its continuing power to determine the
strategic operating, investing and financing policies of KID.
There have been no common directors and officers between the two
entities. Accordingly, Terra Nova no longer considered KID as
its subsidiary since March 31, 2010. Pursuant to SIC-12
,
management of the Group analyzed its continuing interests in
KID and concluded that KID was not a SPE of the Group because
the substance of the relationship between the Group and KID did
not indicate that KID was controlled by the Group. Management of
the Group believed that KID’s total equity investment at
risk was sufficient to permit the entity to finance its
activities without additional subordinated financial support
provided by any parties, including the Group, and the facts that
the guarantees then provided by the Group would expire in the
ordinary course pursuant to their terms and KID would get credit
facilities on its own. (Pursuant to a subsequent amendment to
the bonding agreement, all guarantees previously provided by the
Group expired on December 31, 2010.) Accordingly, the Group
ceased to consolidate KID from March 31, 2010. At
March 31, 2010, the carrying amount of the Group’s
investment in KID common shares approximated its fair value and
there was no gain or loss recognized in connection with the
cessation of the consolidation of KID. Effective March 31,
2010, the Group classified its investment in these common shares
of KID as available for sale. The shares are measured at their
fair value, net of income tax, with changes in fair value
recorded in other comprehensive income until they are disposed
of.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As at March 31, 2010, assets and liabilities of the
industrial engineering business ceased to be consolidated were
as follows:
|
Cash
|
$ | 285,739 | ||
|
Other assets
|
237,561 | |||
|
Liabilities
|
(356,720 | ) | ||
|
Non-controlling interests
|
(3,930 | ) | ||
|
Net identifiable net assets
|
$ | 162,650 | ||
In June 2010, Terra Nova declared a special dividend whereby it
distributed approximately 23% of the total issued and
outstanding common shares of KID to Terra Nova’s
shareholders of record on July 1, 2010, on a pro rata
basis, one common share of KID for every four of Terra Nova
common shares held. The special dividend was recorded at its
carrying amount (which approximated its fair value) in the
consolidated financial statements for the quarter ended
June 30, 2010.
In September 2010, Terra Nova distributed, as a return of
capital, approximately 29% of the total issued and outstanding
common shares of KID to Terra Nova’s shareholders of record
on September 23, 2010, on a pro rata basis, one common
share of KID for every four of Terra Nova common shares held.
The carrying amount of these common shares of KID was within the
fair value range obtained from a valuation. For financial
statement presentation purposes, the distribution of common
shares of KID was accounted for as a dividend in kind and the
carrying amount was charged against retained earnings. This was
a non-cash transaction.
In December 2010, Terra Nova distributed, as a return of
capital, approximately 19% of the total issued and outstanding
common shares of KID to Terra Nova’s shareholders of record
on December 31, 2010, on a pro rata basis, one common share
of KID for every 10 of Terra Nova common shares held. The
carrying amount of these common shares of KID was within the
fair value range obtained from a valuation. This was the fourth
and final distribution of KID shares. For financial statement
presentation purposes, the distribution of common shares of KID
was accounted for as a dividend in kind and the carrying amount
was charged against retained earnings. This was a non-cash
transaction.
Management is of the opinion that the KID common shares were not
quoted in an active market until December 31, 2010 when the
fourth distribution of KID commons shares was made and,
accordingly, the KID common shares had been measured using
Level 3 of the fair value hierarchy. The valuation was
based on the earnings forecast of the operations of industrial
plant technology, equipment and service business, as well as the
expected earning multiple and discount rate. Upon the final
distribution of KID common shares on December 31, 2010, the
Group held approximately 2.9% of the then outstanding KID shares
and reclassified its investment at its carrying amount from
Level 3 to Level 1 of the fair value hierarchy. The
investment in KID common shares is the only item in Level 3
of the fair value hierarchy during 2010 and no gain or loss was
recognized while it stayed in Level 3. The reason for the
reclassification of the investment in KID common shares from
Level 3 to Level 1 is that, after four distributions
of KID common shares by December 31, 2010, an active market
for KID common shares has been created.
Income taxes included capital gain taxes of $5,974 on the
disposition and the outside basis difference of the KID common
shares and a withholding tax of $2,514 deducted at source on the
cash dividend paid by KID to the Group. The capital gain taxes
were offset by Terra Nova’s non-capital loss carry-forwards
and, accordingly, did not involve cash payments.
2009 —
Workshop and Coal and Minerals Customer Groups (part of
KID)
Effective September 30, 2009, management, as duly
authorized by the board of directors, committed to a plan to
sell the workshop in Cologne and the Group’s coal and
minerals customer group, each in their respective present
conditions, to a third party. The sale was completed and
executed in early October, 2009 and there were no significant
changes to the sale plan prior to closing.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pursuant to the sale agreement, the Group received cash of
$7,500 and might receive contingent payments based on unutilized
severance payments for the workshop’s employees and certain
other contingencies. The Group also agreed to grant the buyer
the right to continue to manufacture the roller press for the
Group for a period of three years from the closing date,
provided this was done on normal commercial terms. Further, for
a period of three years, the Group would offer the Cologne
workshop contracts to manufacture equipment required for the
Group’s cement business that had traditionally been
manufactured at the workshop and the buyer had agreed to
undertake such orders on a priority basis. The buyer had also
agreed to assume certain liabilities, including pension
obligations, from the Group. The disposal group had been
reported in the industrial plant technology, equipment and
service business segment.
A gain of $5,254 was recognized on the sale of the workshop and
coal and minerals customer groups in the Group’s
consolidated statement of operations.
For reporting purposes, the results of operations of KID,
including workshop and coal and mineral customer groups, have
been presented as discontinued operations. Following is the
summary of operating results for the discontinued operations:
| 2010 | 2009 | |||||||
|
Sale revenues
|
$ | 101,585 | $ | 576,408 | ||||
|
Other revenues
|
1,765 | 10,895 | ||||||
|
Expenses
|
(101,435 | ) | (510,448 | ) | ||||
|
Gain on sale (included in income before income taxes)
|
— | 5,254 | ||||||
|
Income before income taxes
|
1,915 | 82,109 | ||||||
|
Income taxes
|
17,364 | 28,067 | ||||||
|
Net income (loss)
|
(15,449 | ) | 54,042 | |||||
|
Non-controlling interests
|
(74 | ) | (1,050 | ) | ||||
|
Net income (loss) attributable to equity shareholders
|
$ | (15,523 | ) | $ | 52,992 | |||
| Note 5. | Business Segment Information |
In reporting to management, the Group’s operating results
are categorized into the following operating segments:
commodities and resources, merchant banking and all other
segments.
Until the end of March 2010, the Group, through its former
subsidiary, focused on the industrial plant technology,
equipment and service business for the cement and mining
industries. Terra Nova started to spin off the former subsidiary
on March 31, 2010, which was completed on December 31,
2010. Accordingly, the spin-off of the industrial plant
technology, equipment and service business in 2010 resulted in
reclassification of prior years’ financial information
including segment information.
Basis
of Presentation
In reporting segments, certain of the Group’s business
lines have been aggregated where they have similar economic
characteristics and are similar in each of the following areas:
(i) the nature of the products and services; (ii) the
methods of distribution, and (iii) the types or classes of
customers/clients for the products and services.
Commodities and resources segment includes trading of
commodities and resources, as well as the related producing,
processing and extracting activities. It also includes the
royalty income from the Group’s interests in resource
properties.
Merchant banking segment includes proprietary investing and
provision of financial services. The Group seeks investments in
many industries, emphasizing those business opportunities where
the perceived intrinsic value is properly
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recognized. The Group uses its financial and management
expertise to add or unlock value within a relative short time
period. The merchant banking business also provides trade
finance and services.
All other segment includes the Group’s corporate and
operating segments whose quantitative amounts do not exceed 10%
of any of the Group’s (a) reported revenue,
(b) net income or (c) combined assets. They primarily
include business activities in medical equipment, instruments,
supplies and services.
The accounting policies of the operating segments are the same
as those described in the summary of significant accounting
policies. The chief operating decision maker evaluates
performance on the basis of profit or loss from operations
before tax expense and does not consider acquisition accounting
adjustments in assessing the performance of reporting units. The
segment information presented in this Note is prepared according
to the following methodologies: (a) revenues and expenses
directly associated with each segment are included in
determining pre-tax earnings; (b) intersegment sales and
transfers are accounted for as if the sales or transfers were to
third parties at current market prices; (c) certain general
and administrative expenses paid by corporate, particularly
incentive compensation and share-based compensation, are not
re-allocated to reporting units; (d) all intercompany
investments, receivables and payables are eliminated in the
determination of the segment’s assets and liabilities; and
(e) deferred tax assets and liabilities are not reallocated
further.
Products
and Services
The Group’s total revenues comprised the following for the
year ended December 31, 2010 and 2009, respectively:
| 2010 | 2009 | |||||||
|
Commodities and resources
|
$ | 74,608 | $ | 13,530 | ||||
|
Fees
|
2,602 | — | ||||||
|
Gains on securities
|
402 | 324 | ||||||
|
Interest
|
2,792 | 435 | ||||||
|
Dividend
|
467 | 1 | ||||||
| 954 | — | |||||||
|
Other
|
3,605 | 428 | ||||||
|
Total revenues
|
$ | 85,430 | $ | 14,718 | ||||
The Group’s revenues for 2010 consolidated the revenues of
Mass and its subsidiaries from November 16, 2010.
Segment
Operating Results
| Year ended December 31, 2010 | ||||||||||||||||
|
Commodities
|
Proprietary
|
|||||||||||||||
| and resources | Investing | All other | Total | |||||||||||||
|
Revenues from external customers
|
$ | 76,478 | $ | 4,821 | $ | 4,131 | $ | 85,430 | ||||||||
|
Intersegment sale
|
37 | 978 | — | 1,015 | ||||||||||||
|
Interest expense
|
||||||||||||||||
|
External
|
909 | 9 | 56 | 974 | ||||||||||||
|
Internal
|
— | — | 252 | 252 | ||||||||||||
|
Income (loss) from continuing operations before income taxes
|
23,901 | 44,206 | (15,951 | ) | 52,156 | |||||||||||
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year ended December 31, 2009 | ||||||||||||||||
|
Commodities
|
Proprietary
|
|||||||||||||||
| and resources | Investing | All other | Total | |||||||||||||
|
Revenues from external customers
|
$ | 13,530 | $ | — | $ | 1,188 | $ | 14,718 | ||||||||
|
Interest expense
|
||||||||||||||||
|
External
|
— | — | 477 | 477 | ||||||||||||
|
Internal
|
— | — | 52 | 52 | ||||||||||||
|
Income (loss) from continuing operations before income taxes
|
3,148 | — | (23,939 | ) | (20,791 | ) | ||||||||||
| As at December 31, 2010 | ||||||||||||||||
|
Commodities
|
Proprietary
|
|||||||||||||||
| and resources | Investing | All other | Total | |||||||||||||
|
Segment assets
|
$ | 409,146 | $ | 418,490 | $ | 26,620 | $ | 854,256 | ||||||||
|
Equity method investments
|
— | — | 5,713 | 5,713 | ||||||||||||
| As at December 31, 2009 | ||||||||||||||||
|
Commodities
|
Proprietary
|
|||||||||||||||
| and resources | Investing | All other | Total | |||||||||||||
|
Segment assets
|
$ | 196,273 | $ | — | $ | 64,852 | $ | 261,125 | ||||||||
|
Add: assets of discontinued operations
|
690,595 | |||||||||||||||
|
Consolidated total assets
|
$ | 951,720 | ||||||||||||||
| As at December 31, 2010 | ||||||||||||||||
|
Commodities
|
Proprietary
|
|||||||||||||||
| and resources | Investing | All other | Total | |||||||||||||
|
Segment liabilities
|
$ | 252,897 | $ | 44,082 | $ | 4,837 | $ | 301,816 | ||||||||
| As at December 31, 2009 | ||||||||||||||||
|
Commodities
|
Proprietary
|
|||||||||||||||
| and resources | Investing | All other | Total | |||||||||||||
|
Segment liabilities
|
$ | 50,196 | $ | — | $ | 4,768 | $ | 54,964 | ||||||||
|
Add: liabilities relating to discontinued operations
|
455,664 | |||||||||||||||
|
Consolidated total liabilities
|
$ | 510,628 | ||||||||||||||
Geographic
Information
Due to the highly integrated nature of international
commodities, resources and merchant banking activities and
markets, and a significant portion of the Group’s
activities require cross-border coordination in order to serve
the Group’s customers and clients, the methodology for
allocating the Group’s profitability to geographic regions
is dependent on estimates and management judgment.
87
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic results are generally allocated as follows:
|
Segment
|
Basis for attributing revenues
|
|
|
Commodities and resources
|
Locations of external customers | |
|
Merchant banking
|
Locations of clients, assets or the reporting units, whichever is appropriate | |
|
All other segments
|
Locations of the reporting units |
Due to the nature of cross-border business, the Group presents
its geographic information by geographic regions, instead of by
countries. The following table presents revenues from external
customers attributed to Terra Nova’s country of domicile
(i.e. Canada) and all foreign geographic regions from which the
Group derives revenues:
| 2010 | 2009 | |||||||
|
Canada
|
$ | 33,303 | $ | 13,567 | ||||
|
Africa
|
1,508 | — | ||||||
|
Americas
|
6,277 | 407 | ||||||
|
Asia
|
7,735 | 617 | ||||||
|
Europe
|
36,607 | 127 | ||||||
| $ | 85,430 | $ | 14,718 | |||||
Income from an interest in resource property is earned from a
third party entity operating in Canada and amounted to $31,715
and $13,530, respectively, in 2010 and 2009.
Except for the geographic concentrations as indicated in the
above table, there were no revenue concentrations in 2010 and
2009.
The following table presents non-current assets from continuing
operations other than financial instruments and deferred tax
assets by geographic area based upon the location of the assets.
| 2010 | 2009 | |||||||
|
Canada
|
$ | 182,192 | $ | 191,640 | ||||
|
Asia
|
50,879 | — | ||||||
|
Europe
|
41,012 | — | ||||||
| $ | 274,083 | $ | 191,640 | |||||
The non-current assets located in Canada comprised primarily the
Group’s interest in resource property.
| Note 6. | Securities |
Short-term
securities
| 2010 | 2009 | |||||||
|
Trading securities:
|
||||||||
|
Common shares, at fair value
|
$ | 25,145 | $ | 11,212 | ||||
|
Available-for-sale
security:
|
||||||||
|
Common shares, at fair value (see Note 30)
|
2,733 | — | ||||||
|
Investment in a private company, at cost
|
16 | — | ||||||
| $ | 27,894 | $ | 11,212 | |||||
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2010, investments in publicly-listed common
shares trading securities comprised 12 companies (of which
four companies represented 71%). The
available-for-sale
common shares trading securities comprised one company only.
At December 31, 2009, investments in publicly-listed common
shares comprised three companies (of which one company (which
was a former subsidiary amounted to $11,194) represented 99.8%).
The common shares in the former subsidiary were received upon
the conversion of a promissory note receivable due from the
former subsidiary (see Note 13).
| Note 7. | Restricted Cash |
| 2010 | 2009 | |||||||
|
Cash pledged with a bank in connection with sales of securities
|
$ | 125 | $ | — | ||||
|
Cash deposit with a bank in connection with currency derivative
contracts
|
2,822 | — | ||||||
|
Bank accounts temporarily restricted pursuant to court orders
|
431 | — | ||||||
|
Other
|
86 | — | ||||||
| $ | 3,464 | $ | — | |||||
Cash pledged with a bank in connection with sales of
publicly-traded equity securities will be released whenever the
securities are bought back.
| Note 8. | Loan Receivable |
| 2010 | 2009 | |||||||
|
Loans to an affiliate under a credit facility of $20,000,
interest at London Inter-Bank Offered Rate (“LIBOR”)
plus 3.5% per annum (4.38% at December 31, 2010) and
payable monthly, collateralized by a charge on all the
borrower’s undertaking, goodwill and other assets and
property, ranking only behind the charges created in favour of
the purchaser under a forward sales agreement. The credit
facility is to expire in December 2011 and may be extended for
one additional term of up to six months at the option of the
Group
|
$ | 5,792 | $ | — | ||||
|
Total — current
|
$ | 5,792 | $ | — | ||||
As at December 31, 2010, none of the loan receivable was
past due or impaired.
| Note 9. | Trade Receivables |
| 2010 | 2009 | |||||||
|
Trade receivables, gross amount
|
$ | 13,789 | $ | — | ||||
|
Less: Allowance for credit losses
|
(701 | ) | — | |||||
|
Trade receivables, net amount
|
$ | 13,088 | $ | — | ||||
Trade receivables primarily arise from commodity activities. The
terms with affiliates in the normal course of the Group’s
activities are no different from third party customers.
The Group has a non-recourse factoring arrangement with a bank
for the Group’s trade receivables (see Note 20).
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As at December 31, 2010, trade receivables of $2,445 (2009:
$nil) were past due but not impaired. The aging analysis of
these trade receivables as at December 31, 2010 and 2009 is
as follows:
|
Past-Due
|
2010 | 2009 | ||||||
|
Below 30 days
|
$ | 1,170 | $ | — | ||||
|
Between 31 and 60 days
|
537 | — | ||||||
|
Between 61 and 90 days
|
354 | — | ||||||
|
Between 91 and 365 days
|
131 | — | ||||||
|
Over 365 days
|
253 | — | ||||||
| $ | 2,445 | $ | — | |||||
As at December 31, 2010, trade receivables of $1,501 (2009:
$nil) were impaired and an allowance for credit losses of $701
(2009: $nil) has been provided. Not all past-due account
balances are uncollectible as some of the accounts are covered
by credit insurance or other collection procedures. Credit risk
from trade accounts receivable is mitigated since the customers
generally have high credit quality
and/or
provide performance guarantees, advance payments, letters of
credit, credit insurance and other credit enhancements (see
Note 30). The aging analysis of these trade receivables as
at December 31, 2010 and 2009 is as follows:
|
Past-Due
|
2010 | 2009 | ||||||
|
Below 30 days
|
$ | 3 | $ | — | ||||
|
Between 31 and 60 days
|
8 | — | ||||||
|
Between 61 and 90 days
|
4 | — | ||||||
|
Between 91 and 365 days
|
48 | — | ||||||
|
Over 365 days
|
1,438 | — | ||||||
| $ | 1,501 | $ | — | |||||
The movement of the allowance for credit losses during the
current period under review is as follows:
| 2010 | 2009 | |||||||
|
Balance, beginning of the year
|
$ | — | $ | — | ||||
|
Additions
|
698 | — | ||||||
|
Reversals
|
— | — | ||||||
|
Write-offs
|
— | — | ||||||
|
Cumulative translation adjustment
|
3 | — | ||||||
|
Balance, end of the year
|
$ | 701 | $ | — | ||||
As at December 31, 2010 and 2009, there was no trade
receivable which would otherwise be past due or impaired if the
terms had not been renegotiated.
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Note 10. | Other Receivables |
| 2010 | 2009 | |||||||
|
Investment income (of which $nil and $43 were due from
affiliates at December 31, 2010 and 2009, respectively)
|
$ | 827 | $ | 43 | ||||
|
Government taxes (primarily value-added and
goods-and-services
taxes)
|
2,997 | 168 | ||||||
|
Due from affiliates
|
8 | — | ||||||
|
Royalty income from an interest in resource property
|
5,650 | 4,584 | ||||||
|
Employees
|
25 | — | ||||||
|
Derivative assets
|
12 | — | ||||||
|
Other
|
2,588 | 871 | ||||||
| $ | 12,107 | $ | 5,666 | |||||
The receivables generally arise in the normal course of business
and are expected to be collected within one year from the year
end.
As at December 31, 2010 and 2009, there was no other
receivable which would otherwise be past due or impaired if the
terms had not been renegotiated.
| Note 11. | Inventories |
| 2010 | 2009 | |||||||
|
Raw materials
|
$ | 6,467 | $ | — | ||||
|
Work-in-progress
|
10,842 | — | ||||||
|
Finished goods
|
4,968 | — | ||||||
|
Commodity inventories (including
goods-in-transit
of $30,603)
|
44,825 | — | ||||||
| $ | 67,102 | $ | — | |||||
The Group entered into sale and repurchase agreements with other
commodity broker-traders pursuant to which the Group sold an
agreed quantity of commodities at agreed prices and undertakes
to buy back the same quantity of the same commodities at the
same agreed prices in the future periods. These sale and
repurchase transactions are accounted for as financing
arrangements. The cash received is discounted at the market
interest rate and shown as deferred sale liabilities. As at
December 31, 2010, the Group recognized current and
long-term deferred sale liabilities of $23,133 and $39,993,
respectively. The long-term deferred liability is due on various
dates in 2012.
As at December 31, 2010 and 2009, there was no inventory
pledged as security for liabilities.
| Note 12. | Contract Deposits, Prepaid and Other |
| 2010 | 2009 | |||||||
|
Prepayments and deposits for inventories (of which $16,942 was
prepaid to an affiliate)
|
$ | 18,657 | $ | — | ||||
|
Taxes on stockpile
|
325 | 201 | ||||||
|
Prepaid, deposits and other
|
1,865 | 573 | ||||||
| $ | 20,847 | $ | 774 | |||||
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Note 13. | Note Receivable |
| 2010 | 2009 | |||||||
|
Note receivable from a former subsidiary (CDN$ nil and CDN$1,750
at December 31, 2010 and 2009, respectively)
|
$ | — | $ | 1,672 | ||||
The Company held an investment in the preferred shares of former
subsidiaries which were acquired by the Company in connection
with the Company’s spin-off of Mass in 2006. As at
December 31, 2008, the Company held all of the
Series 2 Class B preferred shares in Mass and
preferred shares in one of its former subsidiaries having an
aggregate face value of CDN$127,866 and a financial liability of
CDN$37,000 owing to Mass. The Company and Mass had a right to
set off the recognized amounts and determined to settle on a net
basis or simultaneously. Accordingly, the financial asset and
the financial liability were offset and the net amount was
reported in the consolidated statement of financial position. As
at December 31, 2008, the net amount was written down to
its estimated fair value of CDN$23,420 ($19,125) using a
valuation model. There was no change in fair value in terms of
Canadian dollars between December 31, 2008 and the
settlement date. On May 12, 2009, the Company entered into
and completed an agreement with Mass for the settlement of the
non-transferable preferred shares of Mass and its former
subsidiary for net consideration of CDN$12,284, which
represented the gross settlement amount of the preferred shares
of CDN$49,284 offset by the indebtedness of CDN$37,000 owed by
the Company to Mass. The payment of the CDN$12,284 was settled
as follows: (a) CDN$8,284 being satisfied by Mass agreeing
to transfer to the Company 788,201 of the Company’s common
shares. 262,734 of the Company’s common shares, valued at
CDN$2,762, were delivered to the Company on May 12, 2009
and the remainder (which was equivalent to CDN$5,522) would be
delivered no later than July 20, 2009. In July 2009, Mass,
as permitted in the agreement, elected to deliver the remainder
in cash to the Company; (b) CDN$1,710 being satisfied by
way of cash payment by Mass to the Company on May 12, 2009;
(c) CDN$1,750 being satisfied by way of issuance by Mass to
the Company of a promissory note having a principal amount of
CDN$1,750, a term of 24 months and an interest rate of 4%
per annum payable annually in cash. The note was repayable at
the option of the issuer by the issuance of common shares of
Mass. The promissory note could be repaid or be redeemed at any
time in cash at the option of the issuer. The note was
outstanding as of December 31, 2009 and was classified
under non-current assets in the consolidated statement of
financial position. Pursuant to an agreement in the first
quarter of 2010, the Company agreed to offset its payables to
Mass against the note receivable plus accrued interest thereon
due from Mass.; and (d) CDN$540 being satisfied by
setting-off accrued and unpaid interest on indebtedness owed by
the Company to Mass pursuant to a loan agreement with Mass dated
January 31, 2006. Mass also settled CDN$11,346 in respect
of the accrued dividends on the preferred shares of Mass by way
of the issuance of a promissory note having a principal amount
of CDN$11,346, a term of 24 months and an interest rate of
4% per annum payable annually in cash. The note was repayable at
the option of the issuer by the issuance of common shares of
Mass. On December 31, 2009, Mass exercised the conversion
option and repaid the CDN$11,346 note by issuing and delivering
1,203,627 common shares of Mass to the Company. As a result of
the settlement of the preferred shares of Mass and one of its
former subsidiaries, the Company recognized a loss of $9,538 in
the second quarter of 2009. This investment was the only item in
Level 3 of the fair value hierarchy in 2009.
| Note 14. | Long-term securities |
| 2010 | 2009 | |||||||
|
Available-for-sale
securities:
|
||||||||
|
Publicly-traded
|
$ | 7,235 | $ | — | ||||
|
Unlisted
|
27 | — | ||||||
| $ | 7,262 | $ | — | |||||
At December 31, 2010,
available-for-sale
securities comprised six publicly-traded equity securities and
investment funds (of which the largest company represented 43%).
In addition, included in
available-for-sale
securities was an investment in a corporation in which the Group
has approximately a 9.9% equity interest. The carrying amount of
such
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
investment was $1,233 and $nil, respectively, as at
December 31, 2010 and 2009. The corporation is related to
Terra Nova as a result of a common officer.
| Note 15. | Equity method investments |
All of the following investees were acquired in 2010 through the
business combination of Mass. Accordingly, there was no
comparable data for 2009.
| 2010 | ||||
|
Joint ventures
|
$ | 5,534 | ||
|
Other
|
179 | |||
| $ | 5,713 | |||
Joint
ventures
The following table shows the indirect significant joint
ventures in China as at December 31, 2010:
|
Proportion of
|
||||
|
Ownership
|
||||
|
Joint ventures
|
Interest | |||
|
Zhejiang University No. 2 Hospital Hangzhou Eye Center
|
55 | % | ||
|
Chongqing Lasernet Guangji Eye Hospital (incorporated)
|
58 | % | ||
|
Chongqing Fuling Lasernet Eye Center
|
65 | % | ||
|
Sichuan Suining Lasernet Eye Center
|
40 | % | ||
The following table presents the book values of the assets and
liabilities related to the Group’s interest in the joint
ventures as of December 31, 2010:
| 2010 | ||||
|
Current assets
|
$ | 3,901 | ||
|
Long-term assets
|
3,795 | |||
| 7,696 | ||||
|
Liabilities
|
(2,162 | ) | ||
|
Net
|
$ | 5,534 | ||
|
Income
|
$ | 1,918 | ||
|
Expenses
|
(964 | ) | ||
|
Net
|
$ | 954 | ||
In respect of its interests in the joint ventures in China, the
Group recognized assets (primarily medical equipment) under
joint ventures with an amount of $5,534 as of December 31,
2010 which were financed by its own funds. The Group did not
receive any fees to manage the joint ventures in 2010.
As at December 31, 2010, the Group has not incurred any
contingent liabilities or capital commitments in relation to its
interests in joint ventures, by the Group itself, or through the
joint venturers or the joint venture.
93
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Note 16. | Investment property |
All of the investment property was acquired in 2010 through
acquisition of Mass. Accordingly, there was no comparable data
for 2009.
| 2010 | ||||
|
Balance at beginning of the year
|
$ | — | ||
|
Acquired through business combination
|
39,405 | |||
|
Additions
|
— | |||
|
Change of fair value during the year
|
(294 | ) | ||
|
Cumulative translation adjustment
|
(527 | ) | ||
|
Balance at end of the year
|
$ | 38,584 | ||
The change of fair value of the investment property was included
in the revenues in the statement of operations.
The amounts recognized in the statement of operations in
relation to the investment property during 2010 are as follows:
| 2010 | ||||
|
Rental income
|
$ | 194 | ||
|
Direct operating expenses (including repairs and maintenance)
from investment property that generated rental income during the
period
|
109 | |||
There were no restrictions on the realizability of investment
property or the remittance of income and proceeds or disposal.
As at December 31, 2010, contractual obligations to
purchase, construct or develop the investment property or for
repairs, maintenance or enhancements were $nil.
| Note 17. | Property, Plant and Equipment |
The following changes in property, plant and equipment were
recorded in 2010:
|
Acquisition
|
Cumulative
|
|||||||||||||||||||||||
|
Opening
|
through
|
translation
|
Ending
|
|||||||||||||||||||||
|
Historical costs
|
balance | consolidation | Additions | Divestiture | adjustments | balance | ||||||||||||||||||
|
Land and building
|
$ | — | $ | 384 | $ | 50 | $ | — | $ | 6 | $ | 440 | ||||||||||||
|
Processing plant and equipment
|
— | 2,457 | 164 | — | (66 | ) | 2,555 | |||||||||||||||||
|
Office equipment
|
964 | 999 | 303 | (110 | ) | 38 | 2,194 | |||||||||||||||||
| $ | 964 | $ | 3,840 | $ | 517 | $ | (110 | ) | $ | (22 | ) | $ | 5,189 | |||||||||||
|
Acquisition
|
Cumulative
|
|||||||||||||||||||||||
|
Opening
|
through
|
translation
|
Ending
|
|||||||||||||||||||||
|
Accumulated depreciation
|
balance | consolidation | Additions | Divestiture | adjustments | balance | ||||||||||||||||||
|
Land and building
|
$ | — | $ | — | $ | 17 | $ | — | $ | 2 | $ | 19 | ||||||||||||
|
Processing plant and equipment
|
— | — | 121 | — | (42 | ) | 79 | |||||||||||||||||
|
Office equipment
|
812 | — | 128 | (82 | ) | 31 | 889 | |||||||||||||||||
| $ | 812 | $ | — | $ | 266 | $ | (82 | ) | $ | (9 | ) | $ | 987 | |||||||||||
|
Net book value
|
$ | 152 | $ | 4,202 | ||||||||||||||||||||
94
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following changes in property, plant and equipment were
recorded in 2009:
|
Cumulative
|
||||||||||||||||||||
|
Opening
|
translation
|
Ending
|
||||||||||||||||||
|
Office equipment
|
balance | Additions | Divestiture | adjustments | balance | |||||||||||||||
|
Historical costs
|
$ | 839 | $ | 7 | $ | (23 | ) | $ | 141 | $ | 964 | |||||||||
|
Accumulated depreciation
|
(652 | ) | (52 | ) | 9 | (117 | ) | (812 | ) | |||||||||||
|
Net book value
|
$ | 187 | $ | 152 | ||||||||||||||||
| Note 18. | Interests in Resource Properties |
The Group’s interests in resource properties comprised the
following:
| 2010 | 2009 | |||||||
|
Interest in an iron ore mine in Newfoundland and Labrador, Canada
|
$ | 181,772 | $ | 191,488 | ||||
|
Interest in an iron ore extracting facility in Goa, India
|
49,525 | — | ||||||
|
Total
|
$ | 231,297 | $ | 191,488 | ||||
Newfoundland
and Labrador, Canada
The lease of the Canadian iron ore mine is to expire in 2055.
The iron ore deposit is currently leased to a third party entity
under certain lease agreements which will expire in 2055. The
Group collects the royalty payment directly from the entity
based on a pre-determined formula, with a minimum payment not to
be less than CDN$3,250 per year.
Goa,
India
The Group has entered into a series of contracts with a third
party Lease Holder (the “LH”) to recover iron ore.
The Group has contracted with LH to extract iron ore on behalf
of the LH for which the Group receives a fixed fee per ton. The
LH has contracted to sell the iron ore to the Group for a price
per ton based on the extraction costs (the fixed fee) plus a
royalty payment to the owner dependant upon the iron content of
the iron ore. A memorandum of understanding exists between the
Group and the LH relating to the two contracts whereby a certain
profit sharing between the LH and the Group has been fixed. The
LH has granted a power of attorney to the Group granting the
Group the right to extract, crush, screen and store the iron ore
on the site of the LH. The Group has obtained the licences in
compliance with all regulations and legal requirements on behalf
of the LH, thus securing the surface rights.
The initial term for the two contracts is five years, expiring
on September 4, 2011. The Group has been granted the right
to renew the contracts for a further three years until
September 4, 2014, then for a further three years until
September 4, 2017 and then for a final term of another
three years until September 4, 2020. The LH has the right
to terminate the contracts in the event that no mining
activities are conducted over a continuous period of six months.
The Group is a registered exporter of iron ore who contracts
with the LH for the purchase of iron ore.
The following changes in interests in resource properties were
recorded in 2010:
|
Acquisition
|
Cumulative
|
|||||||||||||||||||
|
Opening
|
through
|
translation
|
Ending
|
|||||||||||||||||
|
Historical costs
|
balance | consolidation | Additions | adjustments | balance | |||||||||||||||
|
Interest in iron ore mine in Canada
|
$ | 200,000 | $ | — | $ | 303 | $ | — | $ | 200,303 | ||||||||||
|
Interest in iron ore extracting facility in India
|
— | 51,001 | — | 26 | 51,027 | |||||||||||||||
| $ | 200,000 | $ | 51,001 | $ | 303 | $ | 26 | $ | 251,330 | |||||||||||
95
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Acquisition
|
Cumulative
|
|||||||||||||||||||
|
Opening
|
through
|
translation
|
Ending
|
|||||||||||||||||
|
Accumulated depletion
|
balance | consolidation | Additions | adjustments | balance | |||||||||||||||
|
Interest in iron ore mine in Canada
|
$ | 8,512 | $ | — | $ | 10,019 | $ | — | $ | 18,531 | ||||||||||
|
Interest in iron ore extracting facility in India
|
— | — | 1,481 | 21 | 1,502 | |||||||||||||||
| $ | 8,512 | $ | — | $ | 11,500 | $ | 21 | $ | 20,033 | |||||||||||
|
Net book value
|
$ | 191,488 | $ | 231,297 | ||||||||||||||||
The following changes in interests in resource property were
recorded in 2009:
|
Opening
|
Ending
|
|||||||||||
|
Interest in iron ore mine in Newfoundland and Labrador,
Canada
|
balance | Additions | balance | |||||||||
|
Historical costs
|
$ | 200,000 | — | $ | 200,000 | |||||||
|
Accumulated depletion
|
— | (8,512 | ) | (8,512 | ) | |||||||
|
Net book value
|
$ | 200,000 | $ | 191,488 | ||||||||
| Note 19. | Deferred Income Tax Assets and Liabilities |
The tax effect of temporary differences and tax loss
carry-forwards that give rise to significant components of
future tax assets and liabilities are as follows:
| 2010 | 2009 | |||||||
|
Non-capital tax loss carry-forwards
|
$ | 5,639 | $ | 11,004 | ||||
|
Interest in resource property
|
(62,531 | ) | (48,664 | ) | ||||
|
Other assets
|
1,512 | 1,160 | ||||||
|
Other liabilities
|
(2,329 | ) | (49 | ) | ||||
| $ | (57,709 | ) | $ | (36,549 | ) | |||
|
Deferred income tax assets and liabilities are included in the
consolidated statement of financial position as follows:
|
||||||||
|
Deferred income tax assets
|
$ | 6,727 | $ | 12,115 | ||||
|
Deferred income tax liabilities
|
(64,436 | ) | (48,664 | ) | ||||
|
Net future income tax liabilities
|
$ | (57,709 | ) | $ | (36,549 | ) | ||
At December 31, 2010, the Group had estimated accumulated
non-capital losses which expire in the following countries as
follows. Management is of the opinion that not all of these
non-capital losses are probable to be utilized in the future.
|
Country
|
Amount | Expiration dates | ||||
|
Canada
|
$ | 52,163 | 2021-2030 | |||
|
Germany
|
543 | Indefinite | ||||
|
Switzerland
|
2,373 | 2014-2017 | ||||
|
China
|
101 | 2014 | ||||
|
US
|
20,662 | 2011-2030 | ||||
|
Austria
|
11,946 | Indefinite | ||||
|
India
|
63,573 | 2013-2018 | ||||
96
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2010, Terra Nova had an aggregate amount of
$41,326 of temporary differences associated with its investments
in subsidiaries, associates and interests in joint ventures, for
which deferred tax liabilities have not been recognized because
the Group is in a position to control the timing of the reversal
of such temporary differences and it is probable that such
differences will not reverse in the foreseeable future.
| Note 20. | Short-term Bank Borrowings |
Generally, short-term bank borrowings are repayable within a
year.
Short-term
bank borrowings
| 2010 | 2009 | |||||||
|
Credit facilities from banks
|
$ | 69,979 | $ | — | ||||
| $ | 69,979 | $ | — | |||||
As at December 31, 2010, the Group had credit facilities
aggregating $378,955 as follows: (i) the Group had
unsecured revolving credit facilities aggregating $190,807 from
banks. The banks generally charge an interest rate at inter-bank
rate plus an interest margin; (ii) the Group also has
revolving credit facilities aggregating $7,377 from banks for
structured trade finance (“STF”), a special trade
financing. The margin is negotiable when the facility is used;
(iii) the Group had a non-recourse revolving factoring
arrangement with a bank up to a credit limit of $113,819 for the
Group’s commodities activities. Generally, the Group
factors its trade receivable accounts upon invoicing, at
inter-bank rate plus a margin; and (iv) the Group had a
foreign exchange credit facility of $66,952 with a bank. All
these facilities are renewable on a yearly basis.
| Note 21. | Debt |
| 2010 | 2009 | |||||||
|
Due to a bank, €14,350 at December 31, 2010, interest
fixed at Austria’s Oesterreichische Kontrollbank
Aktiengesellschaft (“OeKB”) financing rate of 3.7% per
annum and payable quarterly, secured by a guarantee of the
Republic of Austria and due in January 2012
|
$ | 19,215 | $ | — | ||||
|
Due to a bank, €1,172 at December 31, 2010, interest
fixed at 4.05% per annum and payable quarterly, secured by a
charge on land and due in quarterly payments with a balloon
final payment in March 2013
|
1,569 | — | ||||||
|
Due to a bank, €4,070 at December 31, 2010, interest
at interbank rate plus an interest margin (2.7% at
December 31, 2010) and payable quarterly and due in
2011 to 2012
|
5,450 | — | ||||||
|
Due to a bank, €3,000 at December 31, 2010, interest
at interbank rate plus an interest margin (2.1% at
December 31, 2010) and payable monthly and due in
December 2012
|
4,017 | |||||||
|
Due to a bank, €4,800 at December 31, 2010, interest
at Austria’s OeKB financing rate plus an interest margin
(2.8% at December 31, 2010) and payable quarterly,
secured by a guarantee of the Republic of Austria and due in
2011 to 2014 in four equal instalments
|
6,428 | |||||||
|
Due to a bank, €12,000 at December 31, 2010, interest
fixed at OeKB’s financing rates between 4.6% and 4.9% per
annum and payable quarterly, secured by a guarantee of the
Republic of Austria and due in 2013
|
16,069 | — | ||||||
| $ | 52,748 | $ | — | |||||
|
Current portion
|
$ | 4,144 | $ | — | ||||
|
Long-term portion
|
48,604 | — | ||||||
| $ | 52,748 | $ | — | |||||
97
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2010, the maturities of debt are as
follows:
|
Maturity
|
Principal | Interest | Total | |||||||||
|
2011
|
$ | 4,144 | $ | 1,841 | $ | 5,985 | ||||||
|
2012
|
27,845 | 1,076 | 28,921 | |||||||||
|
2013
|
19,152 | 585 | 19,737 | |||||||||
|
2014
|
1,607 | 33 | 1,640 | |||||||||
| $ | 52,748 | $ | 3,535 | $ | 56,283 | |||||||
No interest expense was capitalized in both years ended
December 31, 2010 and 2009.
| Note 22. | Accounts Payable and Accrued Expenses |
| 2010 | 2009 | |||||||
|
Trade and accounts payables
|
$ | 35,536 | $ | 3,496 | ||||
|
Value-added,
goods-and-sales
and other taxes (other than income taxes)
|
3,023 | 983 | ||||||
|
Affiliates
|
524 | 1,522 | ||||||
|
Compensation
|
2,060 | — | ||||||
|
Interest
|
42 | 21 | ||||||
|
Derivative liabilities
|
5,821 | — | ||||||
|
Short-sale
|
124 | — | ||||||
| $ | 47,130 | $ | 6,022 | |||||
The trade payables arise from the Group’s
day-to-day
trading activities. The terms with affiliates in the normal
course of the Group’s activities are no different from
third parties. The Group’s expenses for services and other
operational expenses are included in other payables. Generally,
these payable and accrual accounts do not bear interest and they
have a maturity of less than a year.
| Note 23. | Provisions |
|
Termination of
|
||||||||||||
| office lease | Warranty | Total | ||||||||||
|
Acquisitions through business combination
|
$ | 500 | $ | 144 | $ | 644 | ||||||
|
Additions
|
— | — | — | |||||||||
|
Paid
|
(21 | ) | — | (21 | ) | |||||||
|
Reversal
|
— | (31 | ) | (31 | ) | |||||||
|
Cumulative translation adjustment
|
— | 2 | 2 | |||||||||
|
Balance, December 31, 2010
|
$ | 479 | $ | 115 | $ | 594 | ||||||
|
Current portion
|
$ | 362 | ||||||||||
|
Long-term portion
|
232 | |||||||||||
| $ | 594 | |||||||||||
There were no provisions for 2009.
98
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Note 24. | Share Capital |
The authorized share capital of Terra Nova consists of an
unlimited number of common shares without par value and without
special rights or restrictions and an unlimited number of
Class A Preference shares without par value and with
special rights and restrictions.
Holders of common shares may receive dividends when, as and if
declared by the board, subject to the preferential dividend
rights of any other classes or series of preferred shares issued
and outstanding. In no event may a dividend be declared or paid
on the common shares if payment of the dividend would cause the
realizable value of the assets of the Company to be less than
the aggregate of its liabilities. Holders of common shares are
entitled to one vote per share at any meeting of shareholders of
any class of common shares, and in general and subject to
applicable law, all matters will be determined by a majority of
votes cast other than fundamental changes with respect to the
Company. The common shareholders shall be entitled, in the event
of a distribution of assets of the Company on the liquidation,
dissolution or
winding-up
of the Company (a “Liquidation Distribution”), to
receive, before any Liquidation Distribution is made to the
holders of the class A common shares or any other shares of
the Company ranking junior to the common shares, but after any
prior rights of any preferred shares, the stated capital with
respect to each common share held by them, together with all
declared and unpaid dividends (if any and if preferential)
thereon, up to the date of such Liquidation Distribution, and
thereafter the common shares shall rank pari passu with all
other classes of common shares in connection with the
Liquidation Distribution.
The Class A Preference shares may include one or more
series and the directors may alter the special rights and
restrictions to such series, or alter such rights or
restrictions. Except as may be set out in the rights and
restrictions, the holders of the Class A Preference shares
are not entitled to vote at or attend shareholder meetings.
Holders of Class A Preference shares are entitled to
receive repayment of capital on the liquidation or dissolution
of Terra Nova before distribution is made to holders of common
shares.
All the treasury stock are held by the wholly-owned subsidiaries.
| Note 25. | Share-Based Compensation |
Terra Nova has a 1997 Stock Option Plan and a 2008 Equity
Incentive Plan.
1997
Stock Option Plan (Amended)
Terra Nova has a stock option plan which enables certain
employees and directors to acquire common shares and the options
may be granted under the plan exercisable over a period not
exceeding ten years. Terra Nova is authorized to issue up to
5,524,000 shares under this plan.
2008
Equity Incentive Plan
Subject to the terms of the 2008 Equity Incentive Plan, a
committee, as appointed by the board of directors, may grant
awards under the plan, establish the terms and conditions for
those awards, construe and interpret the plan and establish the
rules for the plan’s administration. The committee may
grant nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock awards, stock unit awards,
stock awards, performance stock awards and tax bonus awards
under the plan. The maximum number of common shares of Terra
Nova that are issuable under all awards granted under the plan
is 1,500,000 common shares.
99
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following is a summary of the status of the plans:
| 2008 Plan | 2008 Plan | 1997 Plan | 1997 Plan | |||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Number of
|
Exercise Price
|
Number of
|
Exercise Price
|
|||||||||||||
| Awards | Per Share | Options | Per Share | |||||||||||||
|
Outstanding at December 31, 2008
|
— | — | 1,579,720 | 24.96 | ||||||||||||
|
Cancelled by agreements
|
— | — | (72,500 | ) | 31.16 | |||||||||||
|
Forfeited
|
— | — | (1,065,556 | ) | 23.74 | |||||||||||
|
Outstanding at December 31, 2009
|
— | — | 441,664 | 26.89 | ||||||||||||
|
Exercised
|
— | — | (25,000 | ) | 13.06 | |||||||||||
|
Forfeited
|
— | — | (416,664 | ) | 27.72 | |||||||||||
|
Outstanding at December 31, 2010
|
— | — | — | — | ||||||||||||
|
As at December 31, 2010
|
— | |||||||||||||||
|
Options granted and exercised
|
— | 3,791,656 | ||||||||||||||
|
Options available for granting in the future periods
|
1,500,000 | 1,732,344 | ||||||||||||||
No stock options expired or were granted in 2010 and 2009.
See Note 34 on options granted in January 2011 to purchase
2,635,000 common shares of Terra Nova.
The following tables summarize the stock-based compensation
expenses recognized by the Group:
| 2010 | 2009 | |||||||
|
Stock-based compensation recovery (expenses) arising from
options granted by:
|
||||||||
|
Terra Nova
|
$ | 1,415 | $ | 391 | ||||
|
A Canadian non-wholly owned subsidiary
|
(72 | ) | — | |||||
|
Total
|
$ | 1,343 | $ | 391 | ||||
|
As allocated to:
|
||||||||
|
Continuing operations
|
$ | (72 | ) | $ | 2,713 | |||
|
Discontinued operations
|
1,415 | (2,322 | ) | |||||
|
Total
|
$ | 1,343 | $ | 391 | ||||
The stock-based compensation cost is not tax deductible under
the Canadian income tax act and, therefore, the Group did not
recognize any tax benefit from granting stock options.
| Note 26. | Consolidated Statements of Operations |
Revenues
| 2010 | 2009 | |||||||
|
Gross revenues as reported
|
$ | 85,430 | $ | 14,718 | ||||
For the components of the Group’s total revenues, please
see Note 5.
100
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Group’s revenues included the following items:
| 2010 | 2009 | |||||||
|
Realized gain on
available-for-sale
securities
|
$ | 568 | $ | — | ||||
|
Holding gains on advance sales of securities
|
4 | — | ||||||
|
Collection of underpayment of resource property royalty from
prior years
|
11,219 | — | ||||||
|
Market value increment on commodities
|
1,982 | — | ||||||
Expenses
The Group’s costs of sales comprised:
| 2010 | 2009 | |||||||
|
Commodities and resources
|
$ | 35,975 | $ | — | ||||
|
Depletion of Wabush resource property
|
10,019 | 8,512 | ||||||
|
Loss on dispositions of subsidiaries
|
834 | — | ||||||
|
Credit losses on loans and receivables
|
795 | — | ||||||
|
Revaluation adjustment on investment property
|
294 | — | ||||||
|
Revaluation adjustment on properties for sale
|
241 | — | ||||||
|
Other
|
1,194 | 13 | ||||||
|
Total costs of sales
|
$ | 49,352 | $ | 8,525 | ||||
The Group included the following items in its costs of sales:
| 2010 | 2009 | |||||||
|
Inventories as costs of goods sold
|
$ | 34,647 | $ | — | ||||
|
Write-down of inventories
|
88 | — | ||||||
Additional
information on the nature of expenses
| 2010 | 2009 | |||||||
|
Depreciation, amortization and depletion
|
$ | 11,766 | $ | 8,563 | ||||
|
Employee benefits expenses
|
3,758 | 2,759 | ||||||
| Note 27. | Income Taxes |
Terra Nova’s statutory tax rate was 28.5% and 29.0% in 2010
and 2009, respectively.
101
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the provision for income taxes calculated at
applicable statutory rates in Canada to the provision in the
consolidated statements of operations is as follows:
| 2010 | 2009 | |||||||
|
Income (loss) before income taxes from continuing operations
|
$ | 52,156 | $ | (20,791 | ) | |||
|
Computed recovery of (provision for) income taxes at Terra
Nova’s statutory rates
|
$ | (14,865 | ) | $ | 6,030 | |||
|
(Increase) decrease in taxes resulting from:
|
||||||||
|
Foreign tax rate differences
|
374 | (155 | ) | |||||
|
Non-taxable negative goodwill
|
11,702 | — | ||||||
|
Other non-taxable income
|
926 | 7 | ||||||
|
Stock-based compensation
|
(19 | ) | 807 | |||||
|
Net tax reductions unrecognized in prior years
|
1,352 | 3,112 | ||||||
|
Resource property revenue taxes
|
(6,744 | ) | (3,039 | ) | ||||
|
Unrecognized losses in current year
|
(363 | ) | — | |||||
|
Permanent differences
|
135 | 487 | ||||||
|
Reduction in future tax rate
|
34 | (330 | ) | |||||
|
Loss on investment in preferred shares of former subsidiaries
|
— | (2,828 | ) | |||||
|
Other, net
|
493 | 380 | ||||||
|
Recovery of (provision for) income taxes
|
$ | (6,975 | ) | $ | 4,471 | |||
|
Consisting of:
|
||||||||
|
Resource property revenue taxes
|
$ | (6,744 | ) | $ | (3,039 | ) | ||
|
Other income tax expense (recovery)
|
(231 | ) | 7,510 | |||||
| $ | (6,975 | ) | $ | 4,471 | ||||
In addition, the aggregate current and deferred tax relating to
items that are charged to equity was $256 and $nil,
respectively, in 2010 and 2009.
The Group’s tax expense above does not include any amounts
for joint ventures and associates or discontinued operations
whose results are included in the statement of operations net of
taxes.
In general, dividend payable by Terra Nova to its shareholders
is subject to customary Canadian withholding tax for
non-resident shareholders. Pursuant to applicable tax treaties
the withholding rate for eligible US resident shareholders is
15%. The dividend is an eligible dividend under the
Income
Tax Act
(Canada).
| Note 28. | Earnings (Loss) Per Share |
Earnings (loss) per share data for the years ended December 31
from operations is summarized as follows:
| 2010 | 2009 | |||||||
|
Basic earnings (loss) from continuing operations available to
holders of common shares
|
$ | 45,839 | $ | (16,320 | ) | |||
|
Effect of dilutive securities:
|
— | — | ||||||
|
Diluted earnings (loss) from continuing operations
|
$ | 45,839 | $ | (16,320 | ) | |||
102
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Number of Shares | ||||||||
| 2010 | 2009 | |||||||
|
Weighted average number of common shares outstanding —
basic
|
35,857,873 | 30,354,207 | ||||||
|
Effect of dilutive securities:
|
||||||||
|
Options
|
1,038 | — | ||||||
|
Weighted average number of common shares outstanding —
diluted
|
35,858,911 | 30,354,207 | ||||||
As at December 31, 2009, there were 441,664 stock options,
respectively, outstanding that could potentially dilute basic
earnings per share in the future, but were not included in the
calculation of diluted earnings per share because they were
antidilutive for 2009. There were no stock options outstanding
as at December 31, 2010.
See Note 34 on options granted in January 2011 to purchase
2,635,000 common shares of Terra Nova, which would have changed
the number of common shares or potential common shares
outstanding at the end of 2010 if those transactions had
occurred before the end of 2010.
| Note 29. | Commitments and Contingencies |
Leases
as lessors
The Group leases out land and buildings, primarily classified
under investment property, under non-cancellable operating lease
agreements. The leases have varying terms, subject to the
customary practices in the particular regions.
Future minimum commitments under long-term non-cancellable
operating leases are as follows:
|
Year
|
Amount | |||
|
2011
|
$ | 2,098 | ||
|
2012
|
960 | |||
|
2013
|
247 | |||
|
2014
|
35 | |||
|
2015
|
21 | |||
|
Thereafter
|
— | |||
| $ | 3,361 | |||
The leases have varying terms, subject to the customary
practices in the local regions. The Group recognized rental
income of $330 and $nil for the years ended December 31,
2010 and 2009, respectively.
Leases
as lessees
Future minimum commitments under long-term non-cancellable
operating leases are as follows:
|
Year
|
Amount | |||
|
2011
|
$ | 2,077 | ||
|
2012
|
1,570 | |||
|
2013
|
1,011 | |||
|
2014
|
763 | |||
|
2015
|
708 | |||
|
Thereafter
|
12 | |||
| $ | 6,141 | |||
103
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The leases have varying terms, subject to the customary
practices in the local regions. Minimum lease payments
recognized as expenses were $800 and $281 for the years ended
December 31, 2010 and 2009, respectively.
Litigation
The Group is subject to litigation in the normal course of
business. Management considers the aggregate liability which may
result from such litigation not material at December 31,
2010.
Guarantees
Guarantees are treated as contingent liabilities unless it
becomes probable that the Group will be required to make payment
under the guarantee.
The Group has issued a guarantee to a former subsidiary for its
unsecured bonds up to an amount of $869. This guarantee expires
in 2016.
As at December 31, 2010, the Group had issued guarantees up
to a maximum of $44,965 to its trading and financing partners in
the normal course of its commodities activities, of which
$24,812 has been used and outstanding and has not been recorded
as liabilities in the consolidated statement of financial
position. There has been no claim against the guarantees.
Loan
Commitment
The Group has granted a credit facility up to $20,000 to an
affiliate, of which $5,792 had been drawn and outstanding as at
December 31, 2010 (see Note 8). The credit facility is
to expire in December 2011 and may be extended for one
additional term of up to six months at the option of the Group.
Purchase
Obligations
As at December 31, 2010, the Group had open purchase
contracts aggregating $32,748 with respect to its commodities
activities.
104
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Note 30. | Financial Instruments |
The fair value of financial instruments at December 31 is
summarized as follows:
| 2010 | 2009 | |||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Financial Assets:
|
||||||||||||||||
|
Fair value through profit or loss:
|
||||||||||||||||
|
Cash and cash equivalents (including short-term cash deposits
and restricted cash)
|
$ | 401,161 | $ | 401,161 | $ | 38,046 | $ | 38,046 | ||||||||
|
Short-term securities
|
25,145 | 25,145 | 11,212 | 11,212 | ||||||||||||
|
Derivative assets
|
12 | 12 | — | — | ||||||||||||
|
Loans and receivables:
|
||||||||||||||||
|
Receivables*
|
27,978 | 27,978 | 5,498 | 5,498 | ||||||||||||
|
Available-for-sale
instruments:
|
||||||||||||||||
|
Securities, at market value
|
9,968 | 9,968 | — | — | ||||||||||||
|
Available-for-sale
instruments that do no have a quoted market price in an active
market:
|
||||||||||||||||
|
Securities, unlisted
|
43 | 43 | — | — | ||||||||||||
|
Total
|
$ | 464,307 | $ | 464,307 | $ | 54,756 | $ | 54,756 | ||||||||
|
Financial Liabilities:
|
||||||||||||||||
|
Other financial liabilities:
|
||||||||||||||||
|
Short-term borrowings
|
$ | 69,979 | $ | 69,979 | $ | — | $ | — | ||||||||
|
Accounts payable and accrued expenses and provisions*
|
38,765 | 38,765 | 5,039 | 5,039 | ||||||||||||
|
Debt
|
52,748 | 53,399 | — | — | ||||||||||||
|
Held for trading:
|
||||||||||||||||
|
Derivative liabilities
|
5,821 | 5,821 | — | — | ||||||||||||
|
Total
|
$ | 167,313 | $ | 167,964 | $ | 5,039 | $ | 5,039 | ||||||||
| * | not including derivative financial instruments |
Fair value of a financial instrument can be characterized as the
amount at which a financial instrument could be bought or sold
in a current transaction between willing parties under no
compulsion to act (that is, other than in a forced transaction,
involuntary liquidation or distressed sale). The best evidence
of fair value is published price quotations in an active market.
When the market for a financial asset or financial liability is
not active, an entity establishes fair value by using a
valuation technique. The chosen valuation technique makes
maximum use of inputs observed from markets, and relies as
little as possible on inputs generated by the entity.
Entity-generated inputs take into account factors that market
participants would consider when pricing the financial
instruments, such as liquidity and credit risks. Use of judgment
is significantly involved in estimating fair value of financial
instruments in inactive markets and actual results could
materially differ from the estimates.
The fair value of cash and cash equivalents, restricted cash and
term deposits is based on reported market value. The fair value
of short-term trading securities is based on quoted market
prices (Level 1 fair value hierarchy). The fair value of
unlisted securities is based on their estimated net realizable
values. The fair value of
available-for-sale
securities is based on quoted market prices; except for those
which are not quoted in an active market, they will be measured
by an appropriate valuation method (Level 3 fair value
hierarchy). The fair values of short-term receivables,
short-term
105
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
borrowings and accounts payable and accrued expenses, due to
their short-term nature and normal trade credit terms,
approximate their carrying value. The fair values of non-current
receivables, long-term debt and other long-term liabilities were
determined using discounted cash flows at prevailing market
rates of interest for a similar instrument with a similar credit
rating. The fair values of the foreign currency derivative
financial instruments are based on the quotes from foreign
exchange dealers
and/or
brokers and reviewed and confirmed by management of the Group
using readily observable market input, such as forward exchange
rates (Level 2 fair value hierarchy). Generally, the Group
gets quotes from two or three foreign exchange dealers/brokers
for comparison and such quotes are binding if the Group chooses
to accept.
The following table presents the financial instruments measured
at fair value classified by the fair value hierarchy as at
December 31, 2010 and 2009:
|
As at December 31, 2010
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Financial Assets:
|
||||||||||||||||
|
Held for trading:
|
||||||||||||||||
|
Short-term securities
|
$ | 25,145 | $ | — | $ | — | $ | 25,145 | ||||||||
|
Derivative assets
|
— | 12 | — | 12 | ||||||||||||
|
Available-for-sale
securities
|
9,968 | — | — | 9,968 | ||||||||||||
|
Total
|
$ | 35,113 | $ | 12 | $ | — | $ | 35,125 | ||||||||
|
Financial Liabilities:
|
||||||||||||||||
|
Held for trading:
|
||||||||||||||||
|
Derivative liabilities
|
$ | — | $ | 5,821 | $ | — | $ | 5,821 | ||||||||
|
As at December 31, 2009
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Financial Assets:
|
||||||||||||||||
|
Held for trading:
|
||||||||||||||||
|
Short-term securities
|
$ | 11,212 | $ | — | — | $ | 11,212 | |||||||||
|
Total
|
$ | 11,212 | $ | — | $ | — | $ | 11,212 | ||||||||
|
Financial Liabilities:
|
||||||||||||||||
|
Held for trading:
|
||||||||||||||||
|
Derivative liabilities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Movement of Level 3 of fair value hierarchy:
|
2010 | 2009 | ||||||
|
Opening balance
|
$ | — | $ | 19,125 | ||||
|
Settlement (see Note 13)
|
— | (19,125 | ) | |||||
|
Additions (see Note 4)
|
162,958 | — | ||||||
|
Distributions to shareholders (see Note 4)
|
(161,348 | ) | — | |||||
|
Reclassification to Level 1 of fair value hierarchy (see
Notes 4 and 6)
|
(1,610 | ) | — | |||||
|
Ending balance
|
$ | — | $ | — | ||||
Generally, management of the Group believes that the current
financial assets and financial liabilities, due to their
short-term nature, do not pose significant financial risks. The
Group uses various financial instruments to manage its exposure
to various financial risks. The policies for controlling the
risks associated with financial instruments include, but are not
limited to, standardized company procedures and policies on
matters such as hedging of risk exposures, avoidance of undue
concentration of risk and requirements for collateral (including
letters of credit) to mitigate credit risk. The
106
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Group has risk managers and other personnel to perform checking
functions and risk assessments to ensure that Group’s
procedures and policies are complied with.
Many of the Group’s strategies, including the use of
derivative instruments and the types of derivative instruments
selected by the Group, are based on historical trading patterns
and correlations and the Group’s management’s
expectations of future events. However, these strategies may not
be fully effective in all market environments or against all
types of risks. Unexpected market developments may affect the
Group’s risk management strategies during the period, and
unanticipated developments could impact the Group’s risk
management strategies in the future. If any of the variety of
instruments and strategies the Group utilizes is not effective,
the Group may incur losses.
The Group does not trade in financial instruments, including
derivative financial instruments, for speculative purposes.
The nature of the risk that the Group’s financial
instruments are subject to is set out in the following table:
| Risks | ||||||||||||||||||||
| Market Risks | ||||||||||||||||||||
|
Financial Instrument
|
Credit | Liquidity | Currency | Interest Rate | Other Price | |||||||||||||||
|
Cash and cash equivalents, short-term cash deposits and
restricted cash
|
X | X | X | |||||||||||||||||
|
Short-term securities
|
X | X | ||||||||||||||||||
|
Long-term securities
|
X | X | X | |||||||||||||||||
|
Derivative assets and liabilities
|
X | X | X | X | ||||||||||||||||
|
Receivables
|
X | X | ||||||||||||||||||
|
Short-term bank borrowings
|
X | X | X | |||||||||||||||||
|
Accounts payable and accrued expenses
|
X | X | ||||||||||||||||||
|
Provisions
|
X | |||||||||||||||||||
|
Long-term debt
|
X | X | ||||||||||||||||||
A sensitivity analysis for each type of market risk to which the
Group is exposed at the end of the reporting period is provided,
showing how profit or loss and equity would have been affected
by changes in the relevant risk variable that were reasonably
possible at that date. These ranges of parameters are estimated
by management, which are based on the facts and circumstances
available at the time estimates are made, and an assumption of
stable socio-economic and geopolitical states. No unusual and
exceptional events, for example, natural disasters or human-made
crises and calamities, are taken into consideration when the
sensitivity analysis is prepared. Actual occurrence could differ
from these assumptions and such differences could be material.
Interest
rate risk
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate due to
changes in market interest rates. Short-term financial assets
and financial liabilities are generally not exposed to interest
rate risk, because of their short-term nature. The Group’s
long-term debt is not exposed to significant interest rate cash
flow risk as the interest rates have been fixed for two-thirds
of the Group’s long-term debt.
Sensitivity
analysis:
At December 31, 2010, if benchmark interest rates (such as
LIBOR or prime rates) at that date had been 100 basis
points (1.00%) per annum lower with all other variables held
constant, income from continuing operations for the year 2010
would have been $110 higher, arising mainly as a result of lower
net interest expense. Conversely, if benchmark interest rates at
that date had been 100 basis points (1.00%) per annum
higher with all other variables held constant, income from
continuing operations for the year 2010 would have been $109
lower, arising mainly as a result of higher net interest
expense. There would have been no impact on the Group’s
other comprehensive loss.
107
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Credit
risk
Credit risk is the risk that one party to a financial instrument
will fail to discharge an obligation and cause the other party
to incur a financial loss. Financial instruments which
potentially subject the Group to concentrations of credit risk
consist of cash and cash equivalents, restricted cash, term
deposits and derivative and credit exposures to customers,
including outstanding receivables and committed transactions.
The Group has deposited the cash and cash equivalents,
restricted cash, term deposits and derivative financial
instruments with reputable financial institutions with high
credit ratings, from which management believes the risk of loss
to be remote. The Group has receivables from various entities
including customers, governmental agencies and affiliates.
Management does not believe that any single customer or
geographic region represents significant credit risk. Credit
risk concentration with respect to trade receivables is limited
due to the Group’s large and diversified customer base.
Credit risk from trade accounts receivable is mitigated since
the customers generally have high credit quality
and/or
provide performance guarantees, advance payments, letters of
credit, credit insurance and other credit enhancements. The
performance guarantees, advance payments and letters of credit
are generally issued by the bankers of the customers. The credit
analysis is performed by the Group internally. The Group also
uses non-recourse factoring and credit insurances to manage the
credit risk.
The average contractual credit period for trade receivables is
about
60-90 days.
However, due to the use of the non-recourse factoring
facilities, the average life time of trade receivables are
reduced to about 10 days.
The maximum credit risk exposure as at December 31, 2010 is
as follows:
|
Amounts recognized on the consolidated statement of financial
position:
|
||||
|
Cash and cash equivalents and restricted cash
|
$ | 401,161 | ||
|
Derivative assets
|
12 | |||
|
Loans and receivables
|
27,978 | |||
| 429,151 | ||||
|
Amount of credit facility committed but not drawn (see
Note 29)
|
14,208 | |||
|
Guarantee (see Note 29)
|
44,965 | |||
|
Maximum credit risk exposure
|
$ | 488,324 | ||
As at December 31, 2010, the Group had issued guarantees up
to a maximum of $44,965 to its trading and financing partners in
the normal course of its commodities activities. As of
December 31, 2010, $24,812 has been used and outstanding
and has not been recorded as liabilities in the consolidated
statement of financial position. There has been no claim against
the guarantees. In the past five years, no claim has been made
against the guarantees issued by the Group. Typically, these
guarantees are issued on behalf of the Group’s trading and
financing partners and, in case of non-performance by a trading
or financing partner and a claim is made against the Group, the
Group can make the claim against the defaulting trading or
financing partner to recover the loss.
Currency
risk
Currency risk is the risk that the value of a financial
instrument will fluctuate due to changes in foreign exchange
rates. Currency risk does not arise from financial instruments
that are non-monetary items or from financial instruments
denominated in the functional currency. The Group operates
internationally and is exposed to risks from changes in foreign
currency rates, particularly Euros and the United States
dollars. Currency risk arises principally from future trading
transactions, and recognized assets and liabilities. In order to
reduce the Group’s exposure to foreign currency risk on
material contracts denominated in foreign currencies (other than
the functional currencies of the subsidiaries), the Group may
use foreign currency forward contracts and options to protect
its financial positions. As at December 31, 2010 and 2009,
the Group had derivative financial instruments (foreign currency
forward contracts and options) with aggregate notional amounts
of $236,015 and $nil, respectively, and a net unrealized fair
value loss of $5,078 and $nil, respectively. As at
December 31, 2010, the Group did not adopted hedge
accounting.
108
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sensitivity
analysis:
At December 31, 2010, if the US dollar had weakened 10%
against the local functional currencies with all other variables
held constant, income from continuing operations for the year
2010 would have been $11,610 lower. Conversely, if the US dollar
had strengthened 10% against the local functional currencies
with all other variables held constant, income from continuing
operations would have been $11,610 higher. The reason for such
change is mainly due to certain US dollar-denominated financial
assets (net of liabilities) held by entities whose functional
currency is not the US dollar. There would have been no material
impact on other comprehensive income in either case.
At December 31, 2010, if the Euro had weakened 10% against
the local functional currencies with all other variables held
constant, income from continuing operations for the year 2010
would have been $13,376 lower. Conversely, if the Euro had
strengthened 10% against the local functional currencies with
all other variables held constant, income from continuing
operations would have been $16,093 higher. The reason for such
change is primarily due to the foreign currency forward
contracts and options outstanding at the year end. There would
have been no impact on other comprehensive income in either case.
Other
price risk
Other price risk is the risk that the value of a financial
instrument will fluctuate as a result of changes in market
prices, whether those changes are caused by factors specific to
the individual instrument or its issuer or factors affecting all
instruments traded in the market. The Group’s other price
risk includes equity price risk whereby the Group’s
investments in equities in other entities held for trading or
available-for-sale
securities are subject to market price fluctuation. The Group
did not hold any asset-backed securities.
Sensitivity
analysis:
At December 31, 2010, if the equity price in general had
weakened 10% with all other variables held constant, income and
comprehensive income from continuing operations for the year
2010 would have been $2,327 and $950, respectively, lower.
Conversely, if the equity price in general had strengthened 10%
with all other variables held constant, income and comprehensive
income from continuing operations would have been $2,327 and
$950, respectively, higher.
The Group buys and sells commodities future contracts on the
London Metal Exchange. Management uses the future contracts to
manage the price fluctuation for its own account or for
customers. As at December 31, 2010, the Group had
outstanding commodity derivative financial instruments with
aggregate notional amounts of $8,803 and a net unrealized fair
value loss of $731.
The Group executes contracts with third parties for the sale and
physical delivery of commodities so as to intend to achieve a
targeted price. Contracts for such are not typically financial
instruments and therefore excluded from the fair value and
sensitivity analysis below.
Sensitivity
analysis:
At December 31, 2010, if the commodity price in the
financial instrument contracts in general had weakened 10% with
all other variables held constant, income from continuing
operations for the year 2010 would have been $360 lower.
Conversely, if the commodity price in the financial instrument
contracts in general had strengthened 10% with all other
variables held constant, income from continuing operations would
have been $360 higher. There would have been no impact on other
comprehensive income in either case.
Liquidity
risk
Liquidity risk is the risk that an entity will encounter
difficulty in raising funds to meet commitments associated with
financial instruments. The Group’s approach to managing
liquidity is to ensure, as far as possible, that it always has
sufficient liquidity to meet its liabilities when they fall due,
under normal and stress conditions, without incurring
109
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unacceptable losses. The Group is not subject to material
liquidity risk because of its strong cash position. The Group
also maintains adequate banking facilities, including the
factoring arrangements. It is the Group’s policy to invest
cash in highly liquid, diversified money market funds or bank
deposits for a period of less than three months. The Group may
also invest in cash deposits with an original maturity date of
more than three months so as to earn a higher interest income.
The Group also maintains an acid test ratio greater than one,
which indicates that the Group has strong short-term assets to
cover its immediate liabilities without selling inventory.
Generally, trade payables are due within 90 days and other
payables and accrued expenses are due within one year. All
derivative financial liabilities are to be settled within one
year. Please also refer to Note 21 for debt maturity
schedule.
Cash
flow risk
Cash flow risk is the risk that future cash flows associated
with a monetary financial instrument will fluctuate in amount.
Although the Group is subject to cash flow risk for its
short-term bank borrowings, such risk does not impact adversely
on the Group’s going concern as the Group has a strong cash
position. The Group is not exposed to material cash flow risk as
the Group does not have significant long-term floating interest
rate financial assets and financial liabilities.
Concentration
risk
Management determines the concentration risk threshold amount as
any single financial asset (or liability) exceeding 10% of the
aggregate financial assets (or liabilities) in the Group’s
consolidated statement of financial position.
The Group regularly maintains cash balances in financial
institutions in excess of insured limits. The Group has
deposited the cash and cash equivalents, restricted cash and
term deposits with reputable financial institutions with high
credit rating, and management believes the risk of loss to be
remote. As at December 31, 2010, the Group had cash and
cash equivalents aggregating $291,584 with and an investment of
$275 in a banking group in Austria. The Group also owed $54,688
in aggregate short-term banking borrowings and debt to the
Austria banking group.
Additional
disclosure
In addition to information disclosed elsewhere in these
financial statements, the Group had significant items of income,
expense, and gains and losses resulting from financial assets
and financial liabilities which were included in the statement
of operations in 2010 and 2009 as follows:
| 2010 | 2009 | |||||||
|
Interest income on financial assets not at fair value through
profit and loss
|
$ | 2,044 | $ | 309 | ||||
|
Interest income on financial assets classified at fair value
through profit and loss
|
748 | 126 | ||||||
|
Total interest income
|
$ | 2,792 | $ | 435 | ||||
|
Interest expense on financial liabilities not at fair value
through profit and loss
|
$ | (397 | ) | $ | (473 | ) | ||
|
Interest expense on financial liabilities classified at fair
value through profit and loss
|
(577 | ) | (4 | ) | ||||
|
Total interest expense
|
$ | (974 | ) | $ | (477 | ) | ||
|
Dividend income on financial assets at fair value through profit
and loss
|
$ | 467 | $ | 1 | ||||
|
Dividend income on financial assets classified as available for
sale*
|
193 | 280 | ||||||
|
Net gain (loss) on financial assets at fair value through profit
and loss
|
(170 | ) | 324 | |||||
|
— including change in fair value of the trading
securities
|
3,346 | 324 | ||||||
|
Credit losses
|
795 | — | ||||||
| * | included in income from interest in resource property |
110
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Note 31. | Related Party Transactions |
In the normal course of operations, the Group enters into
transactions with related parties which include affiliates which
the Group has a significant equity interest (10% or more) in the
affiliates or has the ability to influence the affiliates’
or the Group’s operating and financing policies through
significant shareholding, representation on the board of
directors, corporate charter
and/or
bylaws. The affiliates also include Terra Nova’s directors,
President, Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer and their close family members. These
related party transactions are measured at the exchange value,
which represents the amount of consideration established and
agreed to by the parties. In addition to transactions disclosed
elsewhere in these financial statements, the Group had the
following transactions with affiliates.
Continuing
operations
| 2010 | 2009 | |||||||
|
Dividend income on common shares*
|
$ | 193 | $ | 280 | ||||
|
Royalty expense paid and payable*
|
(800 | ) | (614 | ) | ||||
|
Fee income
|
3 | — | ||||||
|
Purchases of goods
|
(1,856 | ) | — | |||||
|
Fee expense for managing resource property
|
(1,575 | ) | (839 | ) | ||||
|
Fee expense for management services, including expense
reimbursements
|
(333 | ) | (3,069 | ) | ||||
|
Interest income
|
44 | 309 | ||||||
|
Interest expense
|
— | (447 | ) | |||||
| * | included in income from interest in resource property |
Discontinued
Operations
| 2010 | 2009 | |||||||
|
Fee income
|
$ | — | $ | 494 | ||||
|
Fee expense for management services, including expense
reimbursements
|
(127 | ) | (990 | ) | ||||
Transactions with related parties are made in arm’s length
transactions at normal market prices and on normal commercial
terms.
In addition to transactions in the above two tables, in 2010,
the Group entered into an agreement with its former wholly-owned
subsidiary whereby the Group agreed to offset its payables to
the former subsidiary against its note receivable (CAD$1,750)
from the former subsidiary plus accrued interest thereon (see
Note 13). Furthermore, the Group obtained bridge financing
of $8,000 from the affiliate for three days. The Company did not
pay any interest and fees to this affiliate in relation to such
bridge financing.
Key
management personnel
The remuneration of key management personnel of the Group was as
follows:
|
Year Ended December 31
|
2010 | 2009 | ||||||
|
Short-term employee benefits
|
$ | 1,277 | $ | 2,247 | ||||
|
Post-employment benefits
|
— | 44 | ||||||
|
Other long term benefits
|
— | — | ||||||
|
Termination benefits
|
784 | — | ||||||
|
Share-based payments
|
— | — | ||||||
|
Directors’ fees
|
203 | 451 | ||||||
111
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Key management personnel comprises the members of the Board of
Directors, President, Chief Executive Officer, Chief Financial
Officer and Chief Operating Officer. The short-term employee
benefits include management fee expenses paid to a corporation
which was associated with a former Chief Executive Officer.
The termination benefits in 2010 represented amounts paid to the
former Chief Operating Officer.
In addition, in 2010, the Group paid $1,026 (comprising $998 in
cash and $28 (net book value at the time of settlement) in a
used vehicle) in aggregate to its former chief executive officer
as a termination benefit which was not included in the above
remuneration table. The termination occurred in 2009 and the
termination benefit was not recorded in 2009 until settled in
2010. It was included in the discontinued operations.
| Note 32. |
|
Income and expenses paid on a cash basis during 2010 and 2009
are as follows:
| 2010 | 2009 | |||||||
|
Interest income
|
$ | 2,277 | $ | 126 | ||||
|
Dividend income
|
466 | 281 | ||||||
|
Interest expense
|
(463 | ) | (478 | ) | ||||
|
Income taxes
|
(9,647 | ) | (3,039 | ) | ||||
The Group had the following nonmonetary transactions.
Nonmonetary transactions in 2010: (1) the offsetting of a
promissory note of CDN$1,750 plus accrued interest thereon
against payable due to the affiliate (see Note 13);
(2) the Company acquired all of the issued and outstanding
common shares of Mass by issuing its own shares (see
Note 3); (3) the Company acquired shares in a former
special purpose entity by issuing 41,400 common shares of Terra
Nova, valued at $303; and (4) the Group exchanged a
publicly-traded security with a carrying value of $152 for
another publicly-traded security with a fair value of $217,
resulting in a gain of $65.
Nonmonetary transactions in 2009: (1) the settlement of the
investment in the preferred shares of former subsidiaries and
accrued dividend thereon for promissory notes; and (2) the
conversion of a promissory note of CDN$11,346 into common shares
of the former subsidiary (see Note 13).
| Note 33. | Terra Nova and its Significant Subsidiaries |
Terra Nova has its principal executive office at
Suite 1620 — 400 Burrard Street, Vancouver,
British Columbia, Canada.
112
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows the direct and indirect significant
subsidiaries as at December 31, 2010. The table excludes
subsidiaries which only hold intercompany assets and liabilities
and do not have an active business.
|
Proportion of
|
||||||
|
Subsidiaries
|
Country of Incorporation
|
Ownership Interest | ||||
|
TTT Acquisition Corp.
|
Barbados | 100 | % | |||
|
MFC Commodities GmbH
|
Austria | 100 | % | |||
|
MFC Trade & Financial Service GmbH
|
Austria | 100 | % | |||
|
IC Management Service GmbH
|
Austria | 100 | % | |||
|
Global Bulk Transport GmbH
|
Austria | 100 | % | |||
|
International Trade Service GmbH
|
Austria | 100 | % | |||
|
Magnum Minerals Private Limited
|
India | 100 | % | |||
|
AFM Aluminiumfolie Merseberg GmbH
|
Germany | 55 | % | |||
|
MAW Mansfelder Alumiumwerk GmbH
|
Germany | 55 | % | |||
|
MFC(A) Ltd.
|
Marshall Islands | 100 | % | |||
|
MFC(D) Ltd.
|
Marshall Islands | 100 | % | |||
|
Brock Metals s.r.o.
|
Slovakia | 100 | % | |||
|
MFC Corporate Services AG
|
Switzerland | 100 | % | |||
|
Mednet (Shanghai) Medical Technical Developing Co., Ltd.
|
China | 90 | % | |||
|
Chongqing Lasernet Guangji Eye Hospital (a limited company)
|
China | 52 | % | |||
|
Hangzhou Zhe-er Optical Co. Ltd.
|
China | 46 | % | |||
|
MFC Metal Trading GmbH
|
Austria | 100 | % | |||
|
MEG International Services Ltd.
|
Canada | 100 | % | |||
Explanatory notes:
| (a) | The proportion of ownership interest is the same as the proportion of voting power held; | |
| (b) | Subsidiaries whose results did not, in the opinion of the Directors, materially affect the results or net assets of the Group are not shown. |
| Note 34. | Subsequent Events |
Stock
Options
In January 2011, options to purchase 2,635,000 common shares of
Terra Nova were granted to directors and certain employees of
the Group. The exercise price per share is $7.81 and the options
vested immediately upon granting. The Group used the
Black-Scholes-Merton formula to compute the share-based
compensation for the stock options and determined that the fair
value of the options was $2.767 per unit.
Dividend
On January 10, 2011, Terra Nova announced it has declared
an annual cash dividend and established an annual dividend
policy as follows:
| • | The annual dividend will be based on the annual dividend yield of the New York Stock Exchange Composite Index (the “NYSE Composite Index”) for the preceding year plus 25 basis points. | |
| • | For 2011, an aggregate cash dividend will be $0.20 per common share, representing a dividend yield of 2.58 percent. | |
| • | The 2011 annual cash dividend will be paid in quarterly installments. |
113
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| • | The first payment of $0.05 per common share would be paid on January 31, 2011 to shareholders of record on January 20, 2011. | |
| • | The remaining quarterly dividend payments will be made in each of March, June and September, 2011. | |
| • | In the future, Terra Nova will announce and declare the cash dividend during the first full week of each year. |
| Note 35. | Approval of Consolidated Financial Statements |
These consolidated financial statements were approved by the
Board of Directors and authorized for issue on March 30,
2011.
| Note 36. | Reconciliation of Prior Periods’ Consolidated Financial Statements |
Terra Nova’s consolidated financial statements for the year
ended December 31, 2010 are the first annual financial
statements that comply with IFRS, including the application of
IFRS 1. Pursuant to IFRS 1, Terra Nova has made an explicit and
unreserved statement in these financial statements of compliance
with IFRS.
IFRS 1 also requires that comparative financial information be
provided. As a result, the first date at which the Company has
applied IFRS is January 1, 2009 (the “Transition
Date”). IFRS requires first-time adopters to
retrospectively apply all effective IFRS standards as of the
reporting date, which for the Company is December 31, 2010.
However, it also provides for certain optional exemptions and
certain mandatory exceptions for first time IFRS adopters.
Initial
Elections upon Adoption
Set forth below are the IFRS 1 applicable exemptions and
exceptions applied in the conversion from Canadian GAAP to IFRS.
IFRS
Exemption Options
(i)
Business combinations
— IFRS 1
provides the option to apply IFRS 3 (Revised),
Business
Combinations,
retrospectively or prospectively from the
Transition Date. The Company elected not to retrospectively
apply IFRS 3 (Revised) to business combinations that occurred
prior to its Transition Date and such business combinations have
not been restated.
(ii)
Cumulative translation differences
—
IFRS 1 allows first time adopters to use the exemption to reset
the cumulative transaction differences for all foreign options
to zero at the Transition Date. The Company elected to reset all
cumulative translation adjustments to zero in opening retained
earnings at its Transition Date.
(iii)
Deemed cost
— A first time adopter
may elect to measure an item of property, plant and equipment at
the Transition Date at its fair value and use that fair value as
its deemed cost at that date. The Company elected to measure its
interest in the Wabush mine resource property at its fair value
and use that fair value as its deemed cost at January 1,
2009.
IFRS
Mandatory Exceptions
Set forth below is the applicable IFRS 1 exception applied in
the conversion from Canadian GAAP to IFRS.
Estimates
— Hindsight is not used to create or
revise estimates. The estimates previously made by the Company
under Canadian GAAP were not revised for application of IFRS
except where necessary to reflect any difference in accounting
policies.
Reconciliations
of Canadian GAAP to IFRS
IFRS 1 requires an entity to reconcile equity, comprehensive
income and cash flows for prior periods. The Company’s
first time adoption of IFRS did not have an impact on the total
operating, investing or financing cash flows.
114
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliations of equity at the Transition Date (i.e.
January 1, 2009) and at the end of the latest period
presented in the Company’s most recent annual financial
statements in accordance with Canadian GAAP (i.e.
December 31, 2009) are as follows:
| January 1, 2009 | December 31, 2009 | |||||||
|
Equity in accordance with Canadian GAAP
|
||||||||
|
Shareholders’ equity
|
$ | 261,914 | $ | 319,788 | ||||
|
Minority interests
|
3,709 | 5,403 | ||||||
| 265,623 | 325,191 | |||||||
|
Revaluation of interest in resource property, gross
|
175,139 | 168,404 | ||||||
|
Deferred tax liability, revaluation of interest in resource
property
|
(51,133 | ) | (48,664 | ) | ||||
|
Reversal of impairment
|
— | 227 | ||||||
|
Translation loss on interest in resource property
|
— | (4,066 | ) | |||||
|
Equity in accordance with IFRS
|
$ | 389,629 | $ | 441,092 | ||||
Reconciliation of total comprehensive income for the latest
period in the Company’s most recent annual financial
statements is as follows:
|
For the year ended December 31, 2009
|
||||
|
Total comprehensive income in accordance with Canadian GAAP
|
$ | 60,630 | ||
|
Additional amortization on interest in resource property, net of
income taxes
|
(4,266 | ) | ||
|
Comprehensive income attributable to non-controlling interest
|
2,113 | |||
|
Reversal of impairment
|
227 | |||
|
Translation loss on interest in resource property
|
(4,066 | ) | ||
|
Total comprehensive income in accordance with IFRS
|
$ | 54,638 | ||
During the year ended December 31, 2009, the Company
recognized an impairment charge of $227 in accordance with
Canadian GAAP, which was reversed in accordance with IFRS. The
impairment charge was included in the restructuring costs in the
consolidated statement of operations.
Change
in Accounting Policies
(i) Amortization
method for interest in resource property
Pursuant to IFRS 1, the Company elected to measure its interest
in the Wabush mine resource property at its fair value and use
that fair value as its deemed cost at January 1, 2009. In
connection with the use of the fair value measurement for its
interest in the resource property, the Company changed its
amortization to the unit of production method from the
straight-line method, effective from January 1, 2009.
Management is of the opinion that it is appropriate to change to
the
unit-of-production
method as the shipment of iron pellets involves seasonal and
cyclical fluctuations. Such change resulted in an increase in
gross depletion charge by $6,735 in the fiscal year 2009.
(ii) Business
combinations
As stated in the section entitled “IFRS
Exemption Options”, the Company applied the exemption
in IFRS 1 for business combinations. Consequently, business
combinations concluded prior to January 1, 2009 have not
been restated. The Company did not have any business
combinations in 2009 and, accordingly, the adoption of IFRS 3
(Revised) did not have an impact on the Company’s 2009
consolidated financial statements.
115
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(iii) Income
taxes
Canadian GAAP
— In acquisitions that are not
business combinations, an excess of the value of income tax
assets, which management believes is more likely than not to be
realized, over the consideration paid for such assets is
recorded as a deferred credit and recognized in the statement of
operations in the same period that the related tax asset is
realized.
IFRS
— There is no such requirement under IFRS.
(iv) Foreign
currency translation adjustment
As noted in the section entitled “IFRS
Exemption Options”, the Company has applied the
one-time exemption to set the foreign currency cumulative
translation adjustment (“CTA”) to zero as of
January 1, 2009. The CTA balance as of January 1, 2009
of $48,577 was recognized as an adjustment to retained earnings.
The application of the exemption had no impact on net equity.
(v) Reversal
of impairments
Canadian GAAP
— Reversal of impairment losses
in not permitted.
IFRS
— Reversal of impairment losses is
required for assets other than goodwill if certain criteria are
met. As a result, the Company reversed an impairment recognized
under IFRS.
Presentation
Reclassifications
(i) Deferred
taxes
Canadian GAAP
— Deferred taxes are split
between current and non-current components on the basis of
either (1) the underlying asset or liability or
(2) the expected reversal of items not related to an asset
or liability.
IFRS
— All deferred tax assets and liabilities
are classified as non-current.
(ii) Non-controlling
interests
Canadian GAAP
— Minority interests in the
equity of consolidated subsidiaries are classified as a separate
component between liabilities and shareholders’ equity in
the consolidated balance sheet and are excluded from the
determination of consolidated net income or loss. As part of the
adoption of IFRS, the term “minority interests” has
been replaced with “non-controlling interests” in
accordance with IAS 1.
IFRS
— Non-controlling interests are classified
as a component of equity in the consolidated statement of
financial position and are included in the determination of
consolidated net income or loss.
Amended
Terra Nova’s Consolidated Financial
Statements
The following are reconciliations of the financial statements
previously presented under Canadian GAAP to the amended
financial statements prepared under IFRS.
116
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TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation of Consolidated Statement of Operations for
the Year Ended December 31, 2009
|
Canadian
|
||||||||||||||||||||||
|
GAAP
|
Discontinued
|
IFRS
|
IFRS
|
IFRS
|
||||||||||||||||||
|
Canadian GAAP accounts
|
balance | Operations | adjustments | reclassifications | balance |
IFRS accounts
|
||||||||||||||||
|
Revenues
|
$ | 576,408 | $ | (576,408 | ) | $ | — | $ | — | |||||||||||||
|
Cost of revenues
|
(457,847 | ) | 457,847 | — | — | |||||||||||||||||
|
Reduction in loss on terminated customer contracts
|
17,829 | (17,829 | ) | — | — | |||||||||||||||||
|
Gross profit
|
136,390 | (136,390 | ) | — | — | |||||||||||||||||
|
Income from interest in resource property
|
13,530 | — | — | — | $ | 13,530 | Income from interest in resource property | |||||||||||||||
| — | (6,735 | ) | (1,777 | ) | (8,512 | ) | Amortization, resource property | |||||||||||||||
|
Selling, general and administrative expense
|
(74,796 | ) | 56,545 | — | 1,777 | (16,474 | ) | Selling, general and administrative expense | ||||||||||||||
|
Stock-based compensation — general and administrative
|
391 | 2,322 | — | — | 2,713 | Share-based compensation — general and administrative | ||||||||||||||||
|
Restructuring costs
|
(9,220 | ) | 9,220 | — | — | |||||||||||||||||
|
Gain on sale of workshop and related assets
|
5,254 | (5,254 | ) | — | — | |||||||||||||||||
|
Operating income
|
71,549 | (73,557 | ) | (6,735 | ) | — | (8,743 | ) | Operating loss | |||||||||||||
|
Interest income
|
7,043 | (6,608 | ) | — | — | 435 | Interest income | |||||||||||||||
|
Interest expense
|
(2,793 | ) | 2,316 | — | — | (477 | ) | Interest expense | ||||||||||||||
|
Foreign currency transaction losses, net
|
(2,006 | ) | (1,202 | ) | — | — | (3,208 | ) | Foreign currency transaction losses, net | |||||||||||||
|
Share of loss of equity method investee
|
(254 | ) | 254 | — | — | |||||||||||||||||
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
(9,538 | ) | — | — | — | (9,538 | ) |
Loss on settlement of investment in preferred shares
of former subsidiaries
|
||||||||||||||
|
Other income, net
|
3,825 | (3,085 | ) | — | — | 740 | Other income, net | |||||||||||||||
|
Income before income taxes and minority interests from
continuing operations
|
67,826 | (81,882 | ) | (6,735 | ) | — | (20,791 | ) | Loss before income taxes from continuing operations | |||||||||||||
|
Provision for income taxes:
|
Income tax recovery: | |||||||||||||||||||||
|
Income taxes
|
(23,026 | ) | 28,067 | 2,469 | — | 7,510 | Income taxes recovery | |||||||||||||||
|
Resource property revenue taxes
|
(3,039 | ) | — | — | — | (3,039 | ) |
Resource property revenue taxes
|
||||||||||||||
| (26,065 | ) | 28,067 | 2,469 | — | 4,471 | |||||||||||||||||
|
Income before minority interests from continuing operations
|
41,761 | (53,815 | ) | (4,266 | ) | — | (16,320 | ) | Loss from continuing operations | |||||||||||||
| 53,815 | 227 | — | 54,042 | Income from discontinued operations | ||||||||||||||||||
| — | (4,039 | ) | — | 37,722 | Net income | |||||||||||||||||
|
Minority interests
|
(1,050 | ) | — | — | — | (1,050 | ) | Less: net income attributable to non-controlling interests | ||||||||||||||
|
Net income
|
$ | 40,711 | $ | — | $ | (4,039 | ) | $ | — | $ | 36,672 | Net income attributable to equity shareholders | ||||||||||
|
Basic earnings per share
|
$ | 1.34 | $ | 1.21 | Basic earnings per share | |||||||||||||||||
|
Diluted earnings per share
|
$ | 1.34 | $ | 1.21 | Diluted earnings per share | |||||||||||||||||
|
Weighted average number of common shares outstanding
|
Weighted average number of common shares outstanding | |||||||||||||||||||||
|
Basic
|
30,354,207 | 30,354,207 | Basic | |||||||||||||||||||
|
Diluted
|
30,354,207 | 30,354,207 | Diluted | |||||||||||||||||||
117
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reformat
of Consolidated Statement of Operations for the Year Ended
December 31, 2009
The following table reconciles the consolidated statement of
operations for the year ended December 31, 2009 under IFRS
to the current year’s presentation.
|
IFRS
|
Reclassification adjustments |
Final
|
||||||||||||||||
|
IFRS accounts
|
balance | Revenues | Expenses | balance |
IFRS accounts
|
|||||||||||||
| $ | — | $ | 14,718 | $ | — | $ | 14,718 | Revenues | ||||||||||
| Costs and expenses | ||||||||||||||||||
|
Income from interest in resource property
|
13,530 | (13,530 | ) | — | ||||||||||||||
|
Amortization, resource property
|
(8,512 | ) | — | 8,512 | ||||||||||||||
| — | — | (8,525 | ) | (8,525 | ) | Costs of sales | ||||||||||||
|
Selling, general and administrative expense
|
(16,474 | ) | — | — | (16,474 | ) | Selling, general and administrative expense | |||||||||||
|
Share-based compensation recovery — selling, general
and administrative expense
|
2,713 | — | — | 2,713 | Share-based compensation recovery — selling, general and administrative expense | |||||||||||||
| — | — | (477 | ) | (477 | ) | Interest | ||||||||||||
|
Operating loss
|
(8,743 | ) | 1,188 | (490 | ) | |||||||||||||
| (22,763 | ) | |||||||||||||||||
| (8,045 | ) | |||||||||||||||||
|
Interest income
|
435 | (435 | ) | — | ||||||||||||||
|
Interest expense
|
(477 | ) | — | 477 | ||||||||||||||
|
Foreign currency transaction losses, net
|
(3,208 | ) | — | — | (3,208 | ) | Currency transaction loss, net | |||||||||||
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
(9,538 | ) | — | — | (9,538 | ) | Loss on settlement of investment in preferred shares of former subsidiaries | |||||||||||
|
Other income, net
|
740 | (753 | ) | 13 | — | |||||||||||||
|
Loss before income taxes from continuing operations
|
(20,791 | ) | — | — | (20,791 | ) | Loss before income taxes from continuing operations | |||||||||||
|
Income tax recovery:
|
Income tax recovery: | |||||||||||||||||
|
Income taxes
|
7,510 | — | — | 7,510 | Income taxes | |||||||||||||
|
Resource property revenue taxes
|
(3,039 | ) | — | — | (3,039 | ) | Resource property revenue taxes | |||||||||||
| 4,471 | — | — | 4,471 | |||||||||||||||
|
Loss from continuing operations
|
(16,320 | ) | — | — | (16,320 | ) | Loss from continuing operations | |||||||||||
|
Income from discontinued operations
|
54,042 | — | — | 54,042 | Income from discontinued operations | |||||||||||||
|
Net income
|
37,722 | — | — | 37,722 | Net income | |||||||||||||
|
Less: net income attributable to non-controlling interests
|
(1,050 | ) | — | — | (1,050 | ) | Less: net income attributable to non — controlling interests | |||||||||||
|
Net income attributable to equity shareholders
|
$ | 36,672 | $ | — | $ | — | $ | 36,672 | Net income attributable to equity shareholders | |||||||||
118
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation
of Consolidated Statement of Comprehensive Income for the Year
Ended December 31, 2009
|
Canadian
|
||||||||||||||||||
|
GAAP
|
IFRS
|
IFRS
|
IFRS
|
|||||||||||||||
|
Canadian GAAP accounts
|
balance | adjustments | reclassifications | balance |
IFRS accounts
|
|||||||||||||
|
Net income for the period
|
$ | 40,711 | $ | (4,039 | ) | $ | 1,050 | $ | 37,722 | Net income for the period | ||||||||
|
Other comprehensive income, net of tax
Unrealized gains and losses on translating financial statements of self-sustaining foreign operations |
19,919 | (4,066 | ) | 1,063 | 16,916 |
Other comprehensive income, net of tax
Unrealized gains and losses on self- sustaining foreign operations |
||||||||||||
|
Other comprehensive income
|
19,919 | (4,066 | ) | 1,063 | 16,916 | Other comprehensive income | ||||||||||||
|
Comprehensive income for the period
|
$ | 60,630 | $ | (8,105 | ) | $ | 2,113 | $ | 54,638 | Comprehensive income for the period | ||||||||
| Attributable to: | ||||||||||||||||||
|
Comprehensive income for the period
|
$ | 60,630 | $ | (8,105 | ) | $ | — | $ | 52,525 |
Shareholders of common shares of
Terra Nova Royalty Corporation |
||||||||
| 2,113 | 2,113 | Non-controlling interests | ||||||||||||||||
| $ | 60,630 | $ | (8,105 | ) | $ | 2,113 | $ | 54,638 | ||||||||||
|
Canadian
|
||||||||||||||||||||||
|
GAAP
|
Discontinued
|
IFRS
|
IFRS
|
IFRS
|
||||||||||||||||||
|
Canadian GAAP accounts
|
balance | operations | adjustments | reclassifications | balance |
IFRS accounts
|
||||||||||||||||
|
ASSETS
|
ASSETS | |||||||||||||||||||||
|
Current Assets
|
Current Assets | |||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 420,551 | $ | (382,505 | ) | $ | — | $ | — | $ | 38,046 | Cash and cash equivalents | ||||||||||
|
Short-term deposits
|
6,916 | (6,916 | ) | — | — | |||||||||||||||||
|
Securities
|
16,432 | (5,220 | ) | — | — | 11,212 | Securities | |||||||||||||||
|
Restricted cash
|
24,979 | (24,979 | ) | — | — | |||||||||||||||||
|
Accounts receivable, trade
|
96,982 | (96,982 | ) | — | — | |||||||||||||||||
|
Other receivables
|
36,179 | (30,513 | ) | — | — | 5,666 | Other receivables | |||||||||||||||
|
Inventories
|
80,815 | (80,815 | ) | — | — | |||||||||||||||||
|
Contract deposits, prepaid and other
|
53,893 | (53,119 | ) | — | — | 774 |
Contract deposits, prepaid and other
|
|||||||||||||||
|
Future income tax assets
|
1,748 | — | (1,748 | ) | — | |||||||||||||||||
| 681,049 | — | — | 681,049 | Current assets of discontinued operations | ||||||||||||||||||
|
Total current assets
|
738,495 | — | (1,748 | ) | — | 736,747 | Total current assets | |||||||||||||||
|
Non-current Assets
|
Non-current Assets | |||||||||||||||||||||
|
Note receivable
|
1,672 | — | — | — | 1,672 | Note receivable | ||||||||||||||||
|
Accounts receivable, trade
|
4,660 | (4,660 | ) | — | — | |||||||||||||||||
|
Property, plant and equipment
|
2,257 | (2,105 | ) | — | — | 152 | Property, plant and equipment | |||||||||||||||
|
Interest in resource property
|
27,150 | — | 164,338 | — | 191,488 | Interest in resource property | ||||||||||||||||
|
Equity method investments
|
73 | (73 | ) | — | — | |||||||||||||||||
|
Future income tax assets
|
13,405 | (1,290 | ) | — | — | 12,115 | Deferred tax assets | |||||||||||||||
|
Other non-current assets
|
1,191 | (1,191 | ) | — | — | |||||||||||||||||
| 9,319 | 227 | — | 9,546 |
Non-current assets of discontinued
operations
|
||||||||||||||||||
|
Total non-current assets
|
50,408 | — | 164,565 | — | 214,973 | Total non-current assets | ||||||||||||||||
| $ | 788,903 | $ | — | $ | 162,817 | $ | — | $ | 951,720 | |||||||||||||
119
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Canadian
|
||||||||||||||||||||||
|
GAAP
|
Discontinued
|
IFRS
|
IFRS
|
IFRS
|
||||||||||||||||||
|
Canadian GAAP accounts
|
balance | operations | adjustments | reclassifications | balance |
IFRS accounts
|
||||||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
LIABILITIES AND EQUITY | |||||||||||||||||||||
|
Current Liabilities
|
Current Liabilities | |||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 191,746 | $ | (185,724 | ) | $ | — | $ | — | $ | 6,022 |
Accounts payable and accrued expenses
|
||||||||||
|
Progress billings above costs and estimated earnings on
uncompleted contracts
|
77,841 | (77,841 | ) | — | — | |||||||||||||||||
|
Advance payments received from customers
|
26,927 | (26,927 | ) | — | — | |||||||||||||||||
|
Income tax liabilities
|
18,092 | (17,814 | ) | — | — | 278 | Income tax liabilities | |||||||||||||||
|
Deferred credit, future income tax assets
|
1,748 | — | (1,748 | ) | — | |||||||||||||||||
|
Accrued pension liabilities, current portion
|
2,070 | (2,070 | ) | — | — | |||||||||||||||||
|
Provision for warranty costs, current portion
|
28,282 | (28,282 | ) | — | — | |||||||||||||||||
|
Provision for supplier commitments on terminated customer
contracts
|
12,943 | (12,943 | ) | — | — | |||||||||||||||||
|
Provision for restructuring costs
|
8,025 | (8,025 | ) | — | — | |||||||||||||||||
| 359,626 | — | — | 359,626 |
Current liabilities relating
to discontinued operations
|
||||||||||||||||||
|
Total current liabilities
|
367,674 | — | (1,748 | ) | — | 365,926 | Total current liabilities | |||||||||||||||
|
Long-term Liabilities
|
Long-term Liabilities | |||||||||||||||||||||
|
Long-term debt, less current portion
|
11,649 | (11,649 | ) | — | — | |||||||||||||||||
|
Accrued pension liabilities, less current portion
|
28,861 | (28,861 | ) | — | — | |||||||||||||||||
|
Provision for warranty costs, less current portion
|
25,711 | (25,711 | ) | — | — | |||||||||||||||||
|
Future income tax liability
|
14,210 | (14,210 | ) | 48,664 | — | 48,664 | Deferred tax liability | |||||||||||||||
|
Other long-term liabilities
|
15,607 | (15,607 | ) | — | — | |||||||||||||||||
| 96,038 | — | — | 96,038 |
Long-term liabilities relating to discontinued
operations
|
||||||||||||||||||
|
Total long-term liabilities
|
96,038 | — | 48,664 | — | 144,702 | Total long-term liabilities | ||||||||||||||||
|
Total liabilities
|
463,712 | 46,916 | — | 510,628 | Total liabilities | |||||||||||||||||
|
Minority interests
|
5,403 | — | — | (5,403 | ) | |||||||||||||||||
| Equity | ||||||||||||||||||||||
|
Shareholders’ Equity
|
Shareholders’ equity | |||||||||||||||||||||
|
Common stock
|
141,604 | — | — | — | 141,604 | Common stock | ||||||||||||||||
|
Treasury stock
|
(83,334 | ) | — | — | — | (83,334 | ) | Treasury stock | ||||||||||||||
|
Contributed surplus
|
7,232 | — | — | — | 7,232 | Contributed surplus | ||||||||||||||||
|
Retained earnings
|
185,790 | — | 168,544 | — | 354,334 | Retained earnings | ||||||||||||||||
|
Accumulated other comprehensive income
|
68,496 | — | (52,643 | ) | — | 15,853 |
Accumulated other comprehensive income
|
|||||||||||||||
|
Total shareholders’ equity
|
319,788 | — | 115,901 | — | 435,689 | |||||||||||||||||
| — | — | 5,403 | 5,403 | Non-controlling interests | ||||||||||||||||||
| — | 115,901 | 5,403 | 441,092 | Total equity | ||||||||||||||||||
| $ | 788,903 | $ | — | $ | 162,817 | $ | — | $ | 951,720 | |||||||||||||
120
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation
of Consolidated Statement of Financial Position as of
January 1, 2009
|
Canadian
|
||||||||||||||||||||||
|
GAAP
|
IFRS
|
|||||||||||||||||||||
|
balance
|
Discontinued
|
IFRS
|
IFRS
|
balance
|
||||||||||||||||||
|
Canadian GAAP accounts
|
Dec 31, 2008 | operations | adjustments | reclassifications | Jan 1, 2009 |
IFRS accounts
|
||||||||||||||||
|
ASSETS
|
ASSETS | |||||||||||||||||||||
|
Current Assets
|
Current Assets | |||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 409,087 | $ | (366,976 | ) | $ | — | $ | — | $ | 42,111 | Cash and cash equivalents | ||||||||||
|
Securities
|
2,987 | (2,933 | ) | — | — | 54 | Securities | |||||||||||||||
|
Restricted cash
|
32,008 | (32,008 | ) | — | — | |||||||||||||||||
|
Accounts receivable, trade
|
62,760 | (62,760 | ) | — | — | |||||||||||||||||
|
Other receivables
|
28,313 | (15,070 | ) | — | — | 13,243 | Other receivables | |||||||||||||||
|
Inventories
|
110,161 | (110,161 | ) | — | — | |||||||||||||||||
|
Contract deposits, prepaid and other
|
58,694 | (57,686 | ) | — | — | 1,008 |
Contract deposits, prepaid and other
|
|||||||||||||||
|
Future income tax assets
|
7,679 | (3,467 | ) | (4,212 | ) | — | ||||||||||||||||
| 651,061 | (3,467 | ) | — | 647,594 |
Current assets of discontinued operations
|
|||||||||||||||||
|
Total current assets
|
711,689 | — | (7,679 | ) | — | 704,010 | Total current assets | |||||||||||||||
|
Non-current Assets
|
Non-current Assets | |||||||||||||||||||||
|
Property, plant and equipment
|
2,489 | (2,303 | ) | — | — | 186 |
Property, plant and equipment
|
|||||||||||||||
|
Interest in resource property
|
24,861 | — | 175,139 | — | 200,000 | Interest in resource property | ||||||||||||||||
|
Equity method investments
|
325 | (325 | ) | — | — | |||||||||||||||||
|
Future income tax assets
|
6,339 | (768 | ) | — | — | 5,571 | Deferred tax assets | |||||||||||||||
|
Investment in preferred shares of former subsidiaries
|
19,125 | — | — | — | 19,125 |
Investment in preferred shares of former
subsidiaries
|
||||||||||||||||
|
Other non-current assets
|
830 | (830 | ) | — | — | |||||||||||||||||
| 4,226 | 3,467 | — | 7,693 |
Non-current assets of discontinued
operations
|
||||||||||||||||||
|
Total non-current assets
|
53,969 | — | 178,606 | — | 232,575 | Total non-current assets | ||||||||||||||||
| $ | 765,658 | $ | — | $ | 170,927 | $ | — | $ | 936,585 | |||||||||||||
121
Table of Contents
TERRA
NOVA ROYALTY CORPORATION
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Formerly KHD HUMBOLDT WEDAG INTERNATIONAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation of Consolidated Statement of Financial
Position as of January 1, 2009 (Continued)
|
Canadian
|
||||||||||||||||||||||
|
GAAP
|
IFRS
|
|||||||||||||||||||||
|
balance
|
Discontinued
|
IFRS
|
IFRS
|
balance
|
IFRS
|
|||||||||||||||||
|
Canadian GAAP accounts
|
Dec 31, 2008 | operations | adjustments | reclassifications | Jan 1, 2009 |
accounts
|
||||||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
LIABILITIES AND EQUITY | |||||||||||||||||||||
|
Current Liabilities
|
Current Liabilities | |||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 178,582 | $ | (170,679 | ) | $ | — | $ | — | $ | 7,903 |
Accounts payable and accrued expenses
|
||||||||||
|
Progress billings above costs and estimated earnings on
uncompleted contracts
|
171,843 | (171,843 | ) | — | — | |||||||||||||||||
|
Advance payments received from customers
|
11,331 | (11,331 | ) | — | — | |||||||||||||||||
|
Income tax liabilities
|
9,112 | (8,987 | ) | — | — | 125 | Income tax liabilities | |||||||||||||||
|
Deferred credit, future income tax assets
|
4,212 | — | (4,212 | ) | — | |||||||||||||||||
|
Accrued pension liabilities, current portion
|
2,158 | (2,158 | ) | — | — | |||||||||||||||||
|
Provision for warranty costs, current portion
|
30,856 | (30,856 | ) | — | — | |||||||||||||||||
|
Provision for supplier commitments on terminated customer
contracts
|
23,729 | (23,729 | ) | — | — | |||||||||||||||||
| 419,583 | — | — | 419,583 |
Current liabilities relating
to discontinued operations
|
||||||||||||||||||
|
Total current liabilities
|
431,823 | — | (4,212 | ) | — | 427,611 | Total current liabilities | |||||||||||||||
|
Long-term Liabilities
|
||||||||||||||||||||||
|
Long-term debt, less current portion
|
11,313 | (11,313 | ) | — | — | |||||||||||||||||
|
Accrued pension liabilities, less current portion
|
29,209 | (29,209 | ) | — | — | |||||||||||||||||
|
Provision for warranty costs, less current portion
|
7,524 | (7,524 | ) | — | — | |||||||||||||||||
|
Deferred credit, future income tax assets
|
4,176 | (4,176 | ) | — | — | |||||||||||||||||
|
Future income tax liability
|
7,646 | (7,646 | ) | 51,133 | — | 51,133 | Deferred tax liability | |||||||||||||||
|
Other long-term liabilities
|
8,344 | (8,344 | ) | — | — | |||||||||||||||||
| 68,212 | — | — | 68,212 |
Long-term liabilities relating to
discontinued operations
|
||||||||||||||||||
|
Total long-term liabilities
|
68,212 | — | 51,133 | — | 119,345 | Total long-term liabilities | ||||||||||||||||
|
Total liabilities
|
500,035 | — | 46,921 | — | 546,956 | Total liabilities | ||||||||||||||||
|
Minority interests
|
3,709 | — | — | (3,709 | ) | |||||||||||||||||
| Equity | ||||||||||||||||||||||
|
Shareholders’ Equity
|
Shareholders’ equity | |||||||||||||||||||||
|
Common stock
|
143,826 | — | — | — | 143,826 | Common stock | ||||||||||||||||
|
Treasury stock
|
(93,793 | ) | — | — | — | (93,793 | ) | Treasury stock | ||||||||||||||
|
Contributed surplus
|
7,623 | — | — | — | 7,623 | Contributed surplus | ||||||||||||||||
|
Retained earnings
|
155,681 | — | 172,583 | — | 328,264 | Retained earnings | ||||||||||||||||
|
Accumulated other comprehensive income
|
48,577 | — | (48,577 | ) | — | |||||||||||||||||
|
Total shareholders’ equity
|
261,914 | — | 124,006 | — | 385,920 | |||||||||||||||||
| — | — | 3,709 | 3,709 | Non-controlling interests | ||||||||||||||||||
| — | 124,006 | 3,709 | 389,629 | Total equity | ||||||||||||||||||
| $ | 765,658 | $ | — | $ | 170,927 | $ | — | $ | 936,585 | |||||||||||||
122
Table of Contents
| ITEM 19: | Exhibits |
Exhibits Required
by
Form 20-F
|
Exhibit
|
||||
|
Number
|
Description
|
|||
| 1 | .1 | Articles of Terra Nova Royalty Corporation. Incorporated by reference from our Form F-4 dated October 7, 2010. | ||
| 4 | .1 | Amendment to Mining Lease Agreement dated January 1, 1987 between Terra Nova Royalty Corporation and Wabush Iron Co. Limited, Stelco Inc. and Dofasco Inc. Incorporated by reference from our Form 10-K for the year ended December 31, 1989. | ||
| 4 | .2 | Memorandum of Agreement dated November 24, 1987 between Terra Nova Royalty Corporation and Wabush Iron Co. Limited, Stelco Inc. and Dofasco Inc. Incorporated by reference from our Form 10-K for the year ended December 31, 1989. | ||
| 4 | .3 | First Amendment to the Memorandum of Agreement between Terra Nova Royalty Corporation and Wabush Iron Co. Limited, Stelco Inc. and Dofasco Inc. Incorporated by reference from our Form 10-K for the year ended December 31, 1989. | ||
| 4 | .4 | Amended 1997 Stock Option Plan. Incorporated by reference from our Form S-8 dated May 23, 2007. | ||
| 4 | .5 | Arrangement Agreement dated February 26, 2010 between Terra Nova Royalty Corporation and KHD Humboldt International (Deutschland) AG. Incorporated by reference from our Form 6-K dated March 3, 2010. | ||
| 4 | .6 | Agreement dated September 24, 2010 between Terra Nova Royalty Corporation and Mass Financial Corp. Incorporated by reference from our Form 6-K dated September 30, 2010. | ||
| 4 | .7 | 2008 Equity Incentive Plan. Incorporated by reference from our Form F-4 dated October 7, 2010. | ||
| 8 | .1 | List of significant subsidiaries of our company as at March 31, 2011. | ||
| 11 | .1 | Code of Ethics. Incorporated by reference from our Form 6-K dated October 5, 2009. | ||
| 12 | .1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 12 | .2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 13 | .1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 13 | .2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 15 | .1 | Letter dated March 31, 2011 of Deloitte & Touche LLP as required by Item 16F of Form 20-F. | ||
| 15 | .2 | Consent dated March 31, 2011 of a member of NEXIA International, Davidson & Company LLP. | ||
| 15 | .3 | Consent dated March 31, 2011 of Deloitte & Touche LLP. | ||
123
Table of Contents
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on
Form 20-F
and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
TERRA NOVA ROYALTY CORPORATION
/s/ Michael
J. Smith
Michael J. Smith
Chairman, Chief Executive Officer and President
Date: March 31, 2011
124
TABLE OF CONTENTS
Part IItem 1: Identity Of Directors, Senior Management and AdvisersItem 2: Offer Statistics and Expected TimetableItem 3: Key InformationItem 4: Information on The CompanyItem 4A: Unresolved Staff CommentsItem 5: Operating and Financial Review and ProspectsItem 6: Directors, Senior Management and EmployeesItem 7: Major Shareholders and Related Party TransactionsItem 8: Financial InformationItem 9: The Offer and ListingItem 10: Additional InformationItem 11: Quantitative and Qualitative Disclosures About Market RiskItem 12: Description Of Securities Other Than Equity SecuritiesPart IIItem 13: Defaults, Dividend Arrearages and DelinquenciesItem 14: Material Modifications To Rights Of Security Holders and Use Of ProceedsItem 15: Controls and ProceduresItem 16: [reserved]Item 16A: Audit Committee Financial ExpertItem 16B: Code Of EthicsItem 16C: Principal Accountant Fees and ServicesItem 16D: Exemptions From The Listing Standards For Audit CommitteesItem 16E: Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F: Change in Registrant S Certifying AccountantItem 16G: Corporate GovernanceItem 17: Financial Statements Not Applicable. See Item 18 Financial Statements . 56Item 17: Financial StatementsItem 18: Financial StatementsNote 1. Nature Of Business and Summary Of Significant Accounting PoliciesNote 2. Capital Disclosure on The Group S Objectives, Policies and Processes For Managing Its Capital StructureNote 3. Acquisitions Of SubsidiariesNote 4. Discontinued OperationsNote 5. Business Segment InformationNote 6. SecuritiesNote 7. Restricted CashNote 8. Loan ReceivableNote 9. Trade ReceivablesNote 10. Other ReceivablesNote 11. InventoriesNote 12. Contract Deposits, Prepaid and OtherNote 13. Note ReceivableNote 14. Long-term SecuritiesNote 15. Equity Method InvestmentsNote 16. Investment PropertyNote 17. Property, Plant and EquipmentNote 18. Interests in Resource PropertiesNote 19. Deferred Income Tax Assets and LiabilitiesNote 20. Short-term Bank BorrowingsNote 21. DebtNote 22. Accounts Payable and Accrued ExpensesNote 23. ProvisionsNote 24. Share CapitalNote 25. Share-based CompensationNote 26. Consolidated Statements Of OperationsNote 27. Income TaxesNote 28. Earnings (loss) Per ShareNote 29. Commitments and ContingenciesNote 30. Financial InstrumentsNote 31. Related Party TransactionsNote 32. Consolidated Statements Of Cash Flows Supplemental DisclosureNote 33. Terra Nova and Its Significant SubsidiariesNote 34. Subsequent EventsNote 35. Approval Of Consolidated Financial StatementsNote 36. Reconciliation Of Prior Periods Consolidated Financial StatementsItem 19: Exhibits