AuRico Metals Inc.

  • Date: 2016-02-03

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Financial Statements (in thousands of United States Dollars, unless otherwise stated)

December 31, 2015     

Management’s Responsibility for Financial Reporting The accompanying financial statements of AuRico Metals Inc. (the “Company”) and the information in this annual report are the responsibility of management and have been reviewed and approved by the Company’s board of directors (the “Board of Directors”). The financial statements have been prepared by management in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. In preparation of these financial statements, estimates are sometimes necessary when transactions affecting the current accounting period cannot be finalized with certainty until future periods. Management believes that such estimates, which have been properly reflected in the accompanying financial statements and are described in note 4 to the financial statements, are based on the best estimates and judgements of management. Management has prepared the financial information presented elsewhere in the annual report and has ensured that it is consistent with that in the financial statements. To discharge its responsibilities for financial reporting and safeguarding of assets, management depends on the Company’s systems of internal control over financial reporting. These systems are designed to provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of financial statements. The Board of Directors oversees management’s responsibilities for the financial statements primarily through the activities of its Audit Committee, which is composed solely of directors who are neither officers nor employees of the Company. This Committee meets with management and the Company’s independent auditors, KPMG LLP, to ensure that management is properly fulfilling its financial reporting responsibilities, review the financial statements, and recommend approval to the Board of Directors. These financial statements have been audited by KPMG LLP on behalf of shareholders. The Audit Committee provides full and unrestricted access to the independent auditors and also meets with the independent auditors, without the presence of management, to discuss the scope and results of their audit, the adequacy of internal control over financial reporting, and the quality of financial reporting.

Chris Richter Chief Executive Officer Toronto, Ontario February 2, 2016

Robert Chausse Chief Financial Officer

KPMG LLP

Bay Adelaide Centre 333 Bay Street Suite 4600 Toronto ON M5H 2S5 Canada

Telephone Fax Internet

(416) 777-8500 (416) 777-8818 www.kpmg.ca

 

INDEPENDENT AUDITORS’ REPORT To the Shareholders of AuRico Metals Inc. We have audited the accompanying financial statements of AuRico Metals Inc., which comprise the balance sheets as at December 31, 2015 and December 31, 2014, the statements of comprehensive loss, cash flows and shareholders’ equity for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility 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. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of AuRico Metals Inc. as at December 31, 2015 and December 31, 2014, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

Chartered Professional Accountants, Licensed Public Accountants February 2, 2016 Toronto, Canada

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG Network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

 

BALANCE SHEET (in thousands of United States dollars)

December 31 2015

As at ASSETS Current assets Cash Receivables (Note 6) Current taxes receivable Supplies inventories Prepaids

$

Non-current assets Restricted cash (Note 10) Property, plant and equipment & mining interests (Note 7) Royalty assets (Note 8) Goodwill (Notes 5 & 9)

LIABILITIES Current liabilities Trade payables and accrued liabilities Current income taxes payable Obligation to incur exploration expenditures (Note 2) Current portion of reclamation provision (Note 10)

8,370 2,988 5,076 228 16,662

December 31 2014

$

1,800 259 1,129 5,334 88 8,610 16,007 106,069 20,716 -

13,695 81,338 48,868 640 $

161,203

$

151,402

$

2,461 253 1,699 321 4,734

$

843 425 1,268

Non-current liabilities Reclamation provision (Note 10) Deferred income tax liability (Note 11) SHAREHOLDERS' EQUITY Share capital (Note 12) Contributed surplus Deficit Owner's net investment (Note 12) $

12,611 28,257 45,602

15,160 10,229 26,657

116,835 423 (1,657) 115,601

124,745 124,745

161,203

$

151,402

Events after the reporting period (Notes 2 and 21)

Signed on b ehalf of the Board: Chris Richter, Director

See accompanying notes to the financial statements

Richard Colterjohn, Director



STATEMENT OF COMPREHENSIVE LOSS (in thousands of United States dollars)

For the years ended December 31 Revenue

2015 $

4,306

2014 $

2,463

Expenses General and administrative Care and maintenance Amortization and depletion Loss from operations (Note 13)

(2,651) (5,573) (2,200) (6,118)

(1,428) (6,325) (13,288) (18,578)

Finance costs Foreign exchange gain / (loss) Other income / (loss) (Note 14) Loss before income taxes

(178) 190 5,377 (729)

(365) (935) (5) (19,883)

Current income tax expense (Note 11) Deferred income tax (expense) / recovery (Note 11)

Net and comprehensive loss

(853) (1,698) (2,551)

451 451

$

(3,280)

$

(19,432)

$ $

(0.03) (0.03)

$ $

(0.16) (0.16)

Loss per share (Note 15) Basic loss per share Diluted loss per share Weighted average number of shares outstanding (Note 15) Basic Diluted

See accompanying notes to the financial statements  

121,829,920 121,829,920

118,120,000 118,120,000



STATEMENT OF CASH FLOWS (in thousands of United States dollars)

For the years ended December 31 OPERATING ACTIVITIES Net loss Non-cash adjustments to net loss (Note 16) Payment of obligation to incur exploration expenditures Payments to settle reclamation provisions Payment of income taxes Receipt of interest income Change in non-cash operating working capital (Note 16)

2015 $

Operating cash flows INVESTING ACTIVITIES Expenditures on property, plant and equipment, mining interests and intangible assets Acquisition of Mineral Streams, net of cash acquired (Note 5) Proceeds on termination of retained interest royalty (Note 8) Proceeds on disposal of property, plant and equipment (Increase) / decrease in restricted cash

FINANCING ACTIVITIES Proceeds from private placement Distribution from Alamos (Note 2) Net distributions to Owner Financing cash flows

(11,302)

(9,911)

(1,968)

-

16,725 (299)

500 235 (9,176)

4,222 20,000 (9,282)

(27)

14,940

(27) (178) 1,147

1,800

Cash, beginning of period

 

10,528

6,570

Net increase in cash

$

(19,432) 14,736 (487) 203 15,508

(11,318)

(208)

Impact of foreign exchange on cash

See accompanying notes to the financial statements

$

3,156

Investing cash flows

Cash, end of period

(3,280) (1,522) (5,448) (194) (611) 201 (464)

2014

8,370

653 $

1,800



STATEMENT OF SHAREHOLDERS’ EQUITY (in thousands of United States dollars) December 31 2015

For the years ended Share capital Balance, beginning of period Issuance of common shares to Alamos (Note 2) Issuance of common shares through private placement (Note 12) Shares issued to complete acquisition of Mineral Streams (Note 5) Balance, end of period Contributed surplus Balance, beginning of period Share-based compensation Balance, end of period Deficit Balance, beginning of period Net loss Balance, end of period Owner's net investment Balance, beginning of period Net loss Distributions Equity adjustments on distribution (Note 2) Distribution of net assets from Alamos (Note 2)

 

$

110,118 4,222 2,495

$

-

$

116,835

$

-

$

423

$

-

$

423

$

-

$

(1,657)

$

-

$

(1,657)

$

-

$

124,745 (1,623) (9,282) (3,722) (110,118)

$

144,204 (19,432) (27) -

$

124,745

$

124,745

Balance, end of period

$

Total shareholders' equity

$

See accompanying notes to the financial statements

December 31 2014

115,601



NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) 1.

Corporate Information

AuRico Metals Inc. (“AuRico Metals” or “the Company”) was incorporated under the Business Corporations Act (Ontario) on May 7, 2015. Until July 2, 2015, the Company was a wholly-owned subsidiary of Alamos Gold Inc. (“Alamos”), which was formerly named AuRico Gold Inc. (“AuRico Gold”). On July 2, 2015, pursuant to the Arrangement Agreement described below, AuRico Metals ceased to be an Alamos subsidiary and began operations. On July 6, 2015, the Company was publicly listed on the Toronto Stock Exchange under the trading symbol “AMI”. The Company is incorporated and domiciled in Canada and its head office and registered office is located at 110 Yonge Street, Suite 1601, Toronto, Ontario, M5C 1T4. On September 18, 2015, the Company acquired all of the issued and outstanding shares of Mineral Streams Inc. (“Mineral Streams”), as described in Note 5. Mineral Streams held royalty assets in Canada. On November 30, 2015, the Company and Mineral Streams amalgamated, such that the Company no longer has any subsidiaries. The financial statements of the Company were authorized for issue in accordance with a resolution of the Board of Directors dated February 2, 2016. 2.

Basis of preparation and statement of compliance

These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The financial statements are presented in United States dollars (“US dollars”), which is the Company’s functional currency. The financial statements have been prepared on a continuity-of-interests basis, on the basis of the transfer of an existing business to an entity under common control, whereby the predecessor entity’s historical accounting basis for the assets acquired and liabilities assumed continues to be used as the accounting basis in the successor’s financial statements. Accordingly, these financial statements include the financial position, results of operations, changes in owner’s net investment and cash flows based on the historical accounting records of the predecessor entity for periods prior to July 2, 2015, and the actual results of AuRico Metals from July 2, 2015 until December 31, 2015. On July 2, 2015, AuRico Gold and Alamos Gold Inc. (“Former Alamos”) merged by way of a statutory arrangement (the “Arrangement”) with the combined company being named Alamos. Pursuant to the Arrangement, the following assets were acquired and liabilities were assumed by the Company: (i) (ii) (iii) (iv) (v) (vi) (vii)

the Kemess project, including any and all concessions, lands, mineral rights, mineral and surface leases, books and records or other assets used, held for use or pertaining to the Kemess project; certain AuRico trade-marks; cash collateral or deposits posted on account of reclamation obligations relating to the Kemess project; cash in an amount equal to $20,000 less the Converted Committed Amount (as defined below); cash in an amount equal to the Converted Committed Amount (which amount must be spent by AuRico Metals as agent and on behalf of Alamos on Canadian exploration expenses); certain royalties, including a 1.5% net smelter return royalty on Alamos’ Young-Davidson mine, and the Fosterville, Leviathan and Stawell net smelter return royalties; and reclamation obligations and accounts payable associated with the assets listed above.

Within the Arrangement, AuRico Metals granted to Alamos a right to earn up to a 30% interest in the Kemess East project by spending $20,000 Canadian dollars (“CAD”) on the Kemess East project by December 31, 2016, of which $9,500 CAD, is a committed amount (the “Earn-In Committed Amount”, or, such amount converted into US dollars, $7,560, or the “Converted Committed Amount”). Subsequent to December 31, 2015, Alamos’ right to earn an interest in the Kemess East Project expired. Alamos will not be entitled to any credit, refund or other compensation or reimbursement for the Earn-In Committed Amount. In addition, AuRico Metals has provided an indemnity, up to a maximum of CAD $3,000, relating to potential tax exposures.

5   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) The accounting records of the predecessor entity were adjusted for certain transactions contemplated by the Arrangement, with all adjustments recorded to owner’s net investment on July 2, 2015. Cash Working capital and restricted cash Property, plant and equipment & mining interests Royalty assets Assets acquired

$

$

Predecessor 22,970 113,321 8,549 144,840

Working capital, provisions and other liabilities Obligation to incur exploration expenditures Deferred income tax liability Liabilities assumed

$

$

16,602 14,398 31,000

Net assets acquired

$

113,840

$

Adjustments 20,000 (a) (992) (b) (37,170) (c) 37,000 (d)

$

18,838

$

$

(135) 7,560 15,135 22,560

$

(3,722)

$

$ $

Final 20,000 21,978 76,151 45,549 163,678

$

16,467 7,560 29,533 53,560

$

110,118

(e) (f)

(a)

The adjustment to cash represents the cash received by the Company in accordance with the Arrangement.

(b)

The adjustments to working capital represent tax receivables that remained with Alamos.

(c)

The adjustment to property, plant and equipment & mining interests represents a revaluation charge recognized by Alamos upon classification of the Kemess assets as held for distribution.

(d)

The adjustment to intangible assets represents the 1.5% net smelter return royalty on the Young-Davidson mine acquired by the Company in accordance with the Arrangement.

(e)

The adjustment to the obligation to incur exploration expenditures represents the Company’s obligation to spend the Committed Converted Amount on qualifying exploration expenditures at the Kemess East project in accordance with the Arrangement.

(f)

The adjustments to the deferred income tax liability represent the income tax impact resulting from the estimated amounts of tax pools transferred to the Company on July 2, 2015.

3.

Summary of significant accounting policies

(a) Basis of consolidation Prior to amalgamation on November 30, 2015, these financial statements included the accounts of the Company and Mineral Streams, a wholly-owned subsidiary with royalty assets in Canada. Subsequent to amalgamation, the Company does not have any subsidiaries. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. All intra-group transactions, balances, income and expenses were eliminated in full on consolidation. (b) Foreign currency Functional and presentation currency These financial statements are expressed in US dollars, which is the functional currency of the Company and the presentation currency of the financial statements. Translation of transactions and balances into the functional currency Transactions in currencies other than an entity’s functional currency (“foreign currencies”) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated at the rates prevailing at that date. Foreign currency non-monetary items that are measured in terms of historical cost are not retranslated. Exchange differences are recognized in net loss in the period in which they arise.

6   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) (c) Business combinations Acquisitions of businesses are accounted for using the acquisition method whereby assets acquired and liabilities assumed are recorded at their fair values as of the date of acquisition and any excess of the purchase price over such fair value is recorded as goodwill. The purchase price includes the fair values of the assets transferred and the equity interests issued by the Company, but does not include any acquisition-related costs, which are expensed as incurred. The measurement period for finalizing the accounting for a business combination does not exceed one year from the date of acquisition. During the measurement period, the Company retrospectively adjusts the preliminary amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts as of that date. The Company also recognizes additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the date of acquisition that, if known, would have resulted in the recognition of those assets and liabilities. (d) Revenue recognition Royalty revenue is recognized when the underlying commodity is extracted, the amount of revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the Company. (e) Cash Cash is comprised of cash on hand. (f)

Inventories

Supplies inventory consists of supplies and consumables used in the operation of the Kemess project, and is valued at the lower of average cost and net realizable value. (g) Long-lived assets Property, plant and equipment Property, plant and equipment is recorded at cost, less accumulated amortization and impairment losses. The initial cost of an asset is comprised of its purchase price or construction cost, any costs directly attributable to bringing the asset to its location and present condition and, the initial estimate of any reclamation obligation. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Subsequent costs are included in the asset’s carrying amount when it is probable that future economic benefits associated with the asset will flow to the Company, and the costs can be measured reliably. This would include costs related to the refurbishment or replacement of major components of an asset, when the refurbishment results in a significant extension in the physical life of the component. All other repairs and maintenance costs are recognized in net loss as incurred. Substantially all property, plant and equipment of the Company is currently not in use and is therefore not being depreciated. Exploration and evaluation assets Expenditures incurred prior to the Company obtaining the right to explore are expensed in the period in which they are incurred. Exploration and evaluation expenditures include costs such as exploratory drilling, sample testing and pre-feasibility studies. Subsequent to obtaining the legal right to explore, these costs are capitalized on a project-by-project basis pending determination of the technical feasibility and commercial viability of the project. All capitalized exploration and evaluation expenditures are monitored for indications of impairment, to ensure that exploration activities related to the property are continuing and/or planned for the future. If indicators of impairment exist, the property is assessed to determine whether the carrying amount is in excess of the recoverable amount. If the carrying amount is in excess of the recoverable amount, an impairment loss is recognized in the period in which that determination is made. Exploration and evaluation assets are not depleted. These amounts are reclassified from exploration and evaluation assets to mining interests once a decision has been made to develop the property. Prior to being reclassified to mining interests, exploration and evaluation assets are assessed for impairment. Derecognition Upon disposal or abandonment of a long-lived asset, the carrying amount of the asset is derecognized, with any associated gains or losses recognized within the other income on the Statement of Comprehensive Income. 7   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) (h) Royalty assets Identifiable royalty assets are recorded at fair value on the date of acquisition. Subsequent to initial recognition, they are recorded at cost less accumulated depletion and accumulated impairment losses. Depletion of royalty assets is determined using the unit-of-production method over the life of the property to which the royalty relates. The life of the property is estimated using life of mine models specifically associated with the mineral property to which the royalty relates, which include proven and probable reserves and may include a portion of resources expected to be converted into reserves. Where life of mine models are not available, the Company uses publically available statements of reserves and resources and other information gathered from historical experience to develop a best estimate of ounces to be produced and delivered under the contract. (i)

Goodwill

Goodwill represents the difference between the consideration transferred in a business combination and the fair value of the identifiable net assets acquired, and is not amortized. Goodwill, upon acquisition, is allocated to the cash-generating unit (“CGU”) or group of CGUs expected to benefit from the related business combination for the purposes of impairment testing. A CGU is defined as the smallest identifiable group of assets that generates cash inflows, which are largely independent of the cash inflows from other assets. Each of the Company’s royalty assets is a CGU for purposes of goodwill impairment testing. (j)

Impairment of non-financial assets

The carrying amounts of non-financial assets, excluding inventories and deferred income tax assets, are reviewed for impairment at each reporting date, or whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. If there are indicators of impairment, or on an annual basis for CGUs which contain goodwill, a review is undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. Reviews are undertaken on an asset-by-asset basis, except where the recoverable amount for an individual asset cannot be determined, in which case the review is undertaken at the CGU level. If the carrying amount of a CGU or non-financial asset exceeds the recoverable amount, being the higher of its fair value less costs of disposal and its value-in-use, an impairment loss is recognized in net loss as the excess of the carrying amount over the recoverable amount. With respect to CGUs, impairment losses are first applied against any recognized goodwill and any residual impairment loss is then allocated to reduce the carrying amounts of the assets in the CGU on a pro-rata basis. (k) Impairment of financial assets At each reporting date, the Company assesses whether there is any objective evidence that a financial asset, other than those classified as fair value through profit or loss, is impaired. A financial asset is deemed to be impaired if there is objective evidence of an impairment as a result of one or more events that have occurred after the initial recognition of the asset that negatively impact the estimated future cash flows of the financial asset. (l)

Reclamation provisions

The Company’s mining and exploration activities are subject to various governmental laws and regulations relating to the protection of the environment. These environmental regulations are continually changing, and the Company has made, and intends to make in the future, expenditures to comply with such laws and regulations. The timing of these expenditures is dependent upon a number of factors including the life of the mine, the operating licence conditions, and the laws, regulations, and environment in which the mine operates. Reclamation provisions are recognized at the time an environmental disturbance occurs and are measured at the Company’s best estimate of the expected future cash flows required to reclaim the disturbance, which are adjusted to reflect inflation, and discounted to their present value. The inflation rate used is determined based on external forecasts for inflation in the country in which the related mine operates. Expected future cash flows reflect the risks and probabilities that alternative estimates of cash flows could be required to settle the obligation. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money specific to the currency in which the cash flows are expected to be paid. The discount rate does not reflect risks for which the cash flows have been adjusted. Significant estimates are involved in forming expectations of future activities and the amount and timing of the associated cash flows. Those expectations are based on existing environmental and regulatory requirements or, if more stringent, Company policies that give rise to a constructive obligation. Upon initial recognition of a reclamation provision, the corresponding cost is capitalized as an asset, representing part of the cost of acquiring the future economic benefits of the operation. The capitalized cost of reclamation and rehabilitation activities is recognized in mining interests and depreciated in accordance with the Company’s policy for the related asset. 8   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) The provision is progressively increased over the life of the obligation as the effect of discounting unwinds, creating an expense included in finance costs. Reclamation provisions are adjusted for changes in estimates. Such adjustments are accounted for as a change in the corresponding capitalized cost, except where a reduction in the provision is greater than the unamortized capitalized cost of the related assets or where the related mine has been closed. In instances where the capitalized cost of the related assets is nil, or where the related mine has been closed, the remaining adjustment is recognized as a gain or loss in the Statement of Comprehensive Income. Factors influencing such changes in estimates include revisions to estimated reserves, resources and lives of mines; developments in technologies; regulatory requirements and environmental management strategies; changes in estimated costs of anticipated activities, including the effects of inflation and movements in foreign exchange rates; and movements in interest rates affecting the discount rate applied. (m) Employee benefits The Company accrues liabilities for short-term employee benefits such as wages, salaries, bonuses, paid vacation, and other benefits expected to be settled within 12 months from the end of the reporting period. The liabilities for short-term benefits are measured on an undiscounted basis at the amounts expected to be paid when the liabilities are settled. These amounts are recognized in trade payables and accrued liabilities, with offsetting charges to care and maintenance costs or general and administrative expense. (n) Share-based compensation The Company measures all equity-settled share-based awards made to employees and others providing similar services (collectively, “employees”) based on the fair value of the options or units on the date of grant. The grant date fair value of options is estimated based on the fair value of goods and services received. If the fair value of goods and services received is not determinable, fair value is estimated using an option pricing model. The fair value of the Company’s deferred share units, performance share units and equity-settled restricted share units are determined based on the market value of the Company’s shares on the date of grant. The total grant date fair value of options and units is recognized as compensation expense over the vesting period, based on the number of options that are expected to vest. A corresponding increase is recognized in equity. Fair value is measured using the Black-Scholes option pricing valuation model. Expected volatility is estimated by considering historic average share price volatility, or based on the volatility of comparable companies, where insufficient historical data is available. Any consideration paid or received upon the exercise of all share-based awards is credited to share capital. (o) Income taxes Income tax expense is comprised of current and deferred income tax. Current and deferred income taxes are recognized in net loss except to the extent that they relate to a business combination, or to items recognized directly in equity. The predecessor entity was not a legal entity and as such was not a standalone taxable entity. Current and deferred income taxes and income tax expense for periods prior to July 2, 2015 were recognized in the historical accounting records of the predecessor entity as if the predecessor entity was a separate taxable entity, using a standalone taxpayer approach. Current income taxes Current income tax expense represents the income tax on the Company’s taxable earnings for the year using rates that are enacted or substantively enacted at the balance sheet date. Taxable earnings differ from accounting earnings due to differences in timing of amounts deductible or taxable for tax purposes and due to exclusions of items that are not taxable or deductible. Current income tax includes adjustments for tax expense expected to be payable or recoverable in respect of previous periods. Deferred income taxes Deferred income tax assets and liabilities represent income taxes on differences between the carrying amount of assets and liabilities and the corresponding tax basis used in the computation of taxable earnings. Deferred income tax assets also represent income taxes expected to be recoverable on unused tax losses and tax credits carried forward. Deferred income tax is calculated using the liability method on temporary differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred income taxes are measured using the enacted or substantively enacted tax rates at the balance sheet date that are expected to be in effect when the differences reverse or when unclaimed losses are utilized. Deferred income tax liabilities are generally recognized for all taxable temporary differences, with some exceptions described below. Deferred income tax 9   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) assets are recognized to the extent that it is probable that taxable earnings will be available against which deductible temporary differences, unused tax losses and tax credits can be used. Neither deferred income tax liabilities, nor deferred income tax assets, are recognized as a result of temporary differences that arise from (a) the initial recognition of goodwill, (b) a transaction, other than a business combination, that affects neither accounting earnings nor taxable earnings, or (c) differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset to the extent there is a legally enforceable right to offset current income tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but the entity intends to settle current income tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and adjusted to the extent that it is no longer probable that sufficient taxable earnings will be available to allow the benefit, or all or part of the asset, to be utilized. To the extent that an asset not previously recognized fulfils the criteria for asset recognition, a deferred income tax asset is recognized. (p) Loss per share Basic loss per share is calculated based on the weighted average number of common shares and common share equivalents outstanding for the period. Diluted loss per share is calculated using the treasury method, which assumes that outstanding stock options with an average exercise price below the market price of the underlying shares, are exercised and the assumed proceeds are used to repurchase common shares of the Company at the average market price of the common shares for the period. (q) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decisionmaker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. The Company’s operating segments have been identified as the Company’s royalty asset portfolio and the Kemess project. (r) Financial instruments Financial instruments are measured at fair value on initial recognition of the instrument. Measurement in subsequent periods depends on whether the financial instrument has been classified as “financial assets at fair value through profit or loss”, “available-for-sale financial assets”, “held-to-maturity investments”, “loans and receivables”, “financial liabilities at fair value through profit or loss”, or “other financial liabilities”. The Company’s financial instruments are classified and subsequently measured as follows: Asset / Liability Cash Receivables Trade payables and accrued liabilities Obligation to incur exploration expenditures

Classification Fair value through profit or loss Loans and receivables Other financial liabilities Other financial liabilities

Subsequent Measurement Fair value Amortized cost Amortized cost Amortized cost

Financial assets and financial liabilities classified as fair value through profit or loss are measured at fair value with changes in those fair values recognized in net loss. Financial assets and liabilities classified as loans and receivables or other financial liabilities are measured at amortized cost, and assessed for impairment in accordance with the policy in Note 3(k). Financial assets are derecognized when the rights to receive cash flows from the asset have expired or have been transferred and the Company has transferred substantially all of the risks and rewards of ownership. Financial liabilities are derecognized when they have been settled by the Company, or when an obligation expires. Financial assets and financial liabilities are offset and the net amount reported only if there is an enforceable legal right to offset the recognized amounts and the intention is to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. Interest income is recognized on an accrual basis when earned. (s) Standards issued but not yet adopted For the purposes of preparing and presenting the Company’s financial statements, the Company has adopted all applicable standards and interpretations issued other than those discussed below. These standards have not been adopted because they are not effective for the Company until subsequent to December 31, 2015. 10   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) Standards and interpretations issued, but not yet adopted include:

Amendments to IAS 16, Property, Plant and Equipment Amendments to IAS 38, Intangibles IFRS 15, Revenue from Contracts with Customers IFRS 9, Financial Instruments

Effective for the Company January 1, 2016 January 1, 2016 January 1, 2018 January 1, 2018

In May 2014, the IASB issued amendments to IAS 16, Property, Plant and Equipment and IAS 38, Intangibles. These amendments prohibit the use of revenue-based depreciation methods for property, plant and equipment and limit the use of revenue-based amortization for intangible assets. These amendments are effective for annual periods beginning on or after January 1, 2016 and are to be applied prospectively. These amendments are not anticipated to impact the Company’s financial statements as revenue-based depreciation or amortization methods are not used. In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers. The standard replaces IAS 11, Construction Contracts; IAS 18, Revenue; IFRIC 13, Customer Loyalty Programmes; IFRIC 15, Agreements for the Construction of Real Estate; IFRIC 18, Transfer of Assets from Customers; and SIC 31, Revenue – Barter Transactions Involving Advertising Services. This standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue; at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much, and when revenue is recognized. This standard is effective for annual periods beginning on or after January 1, 2018, and permits early adoption. The Company is currently evaluating the impact of this standard on the financial statements. In July 2014, the IASB issued the complete IFRS 9, Financial Instruments (“IFRS 9(2014)”, or “IFRS 9”), which will replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 provides a new model for the classification and measurement of financial instruments. The IASB has determined the revised effective date for IFRS 9 will be for annual periods beginning on or after January 1, 2018. The Company will evaluate the impact of the change to the financial statements based on the characteristics of financial instruments outstanding at the time of adoption. 4.

Critical accounting estimates and judgements

Many of the amounts included in the Balance Sheet require management to make estimates and judgements. Accounting estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised. Critical accounting estimates The following is a list of the accounting estimates that the Company believes are critical, due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liabilities, revenue or expense being reported. Actual results may differ from these estimates. -

The Company makes estimates of the quantities of proven and probable reserves of the Kemess Project. The estimation of quantities of reserves and resources is complex, requiring significant subjective assumptions that arise from the evaluation of geological, geophysical, engineering and economic data for a given ore body. This data could change over time as a result of numerous factors, including new information gained from exploration and development activities and a reassessment of the viability of production under different economic conditions. Reserve estimates are used to calculate the recoverable amount of the Kemess assets.

-

The Company makes estimates of the life of mineral properties to which its royalty assets relate. When life of mine models from the operator are not available, the Company uses publically available statements of reserves and resources and other information gathered from historical experience to develop a best estimate of ounces to be produced and delivered under the contract. These estimates impact the amount of depletion expense recognized during the period.

-

The Company makes estimates of future cash flows in order to calculate the recoverable amount of royalty assets for the purpose of impairment testing and for determining the purchase price allocation of businesses acquired. These future cash flows require estimates of future metal prices, future production and life of mine, as referenced above.

-

The Company makes estimates of the likelihood of whether or not all or some portion of each deferred income tax assets will be realized, which is impacted by interpretation of tax laws and regulations, historic and future expected levels of taxable income, timing of reversals of taxable temporary timing differences, and tax planning initiatives. 11 

 

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) Levels of future taxable income are affected by, among other things, market gold prices, production costs, quantities of proven and probable gold reserves, interest rates, and foreign currency exchange rates. -

The Company makes estimates of the timing and amount of expenditures required to settle the Company’s reclamation provision. The principal factors that can cause expected future expenditures to change are: the construction of new processing facilities; changes in the quantities of material in reserves and a corresponding change in the life of mine plan; changing ore characteristics that ultimately impact the environment; changes in water quality that impact the extent of water treatment required; and changes in laws and regulations governing the protection of the environment. In general, as the end of the mine life nears, the reliability of expected cash flows increases, but earlier in the mine life, the estimation of a reclamation provision is inherently more subjective.

Critical accounting judgments The following are critical judgments that management has made in the process of applying accounting policies that may have a significant impact on the amounts recognized in the financial statements. -

The Company makes judgments about whether or not indicators of impairment exist at each reporting period. For all assets, this determination impacts whether or not a detailed impairment assessment is performed. These judgements did not impact cash generating units that contain goodwill at December 31, 2015, as these are required to be tested for impairment regardless of whether or not an indicator exists.

-

The functional currency of the Company and its subsidiary is the currency of the primary economic environment in which the entity operates. Determination of functional currency may involve certain judgements to determine the primary economic environment.

-

The assessment of whether an acquisition meets the definition of a business, or whether assets are acquired is an area of key judgment. If deemed to be a business combination, applying the acquisition method to business combinations requires each identifiable asset and liability to be measured at its acquisition-date fair value. The excess, if any, of the fair value of consideration over the fair value of the net identifiable assets acquired is recognized as goodwill. The determination of the acquisition-date fair values often requires management to make assumptions and estimates about future events. The assumptions and estimates with respect to determining the fair value of royalty, stream or working interests generally requires a high degree of judgment, and include estimates of mineral reserves and resources acquired, future metal prices, discount rates and reserve/resource conversion. Changes in any of the assumptions or estimates used in determining the fair value of acquired assets and liabilities could impact the amounts assigned to assets and liabilities.

5.

Acquisition of Mineral Streams

On September 8, 2015, the Company announced the acquisition of Mineral Streams, a private company owning a 0.25% net smelter royalty (“NSR”) on the Williams mine at Barrick Gold Corporation’s (“Barrick”) Hemlo complex, a 0.5% NSR on Wesdome Gold Mine Ltd’s Eagle River mine, and a 1.5% NSR on Barrick’s David Bell property, which also forms part of the Hemlo complex. The transaction closed on September 18, 2015 and the Company acquired all of the outstanding common shares of Mineral Streams by issuing 4,753,951 common shares and making a cash payment of $2,590 (CAD $3,425). Total transaction costs were expensed under General and Administrative expense and amounted to approximately $75 in the year ended December 31, 2015. The Company determined that the acquisition of Mineral Streams was a business combination in accordance with the definition in IFRS 3, Business combinations, and as such has accounted for it in accordance with this standard. The following table summarizes the fair value of the total consideration transferred to former Mineral Streams shareholders and the fair value of identified assets acquired and liabilities assumed. The Company used a market approach using discounted cash flows to estimate the fair value of the royalty assets acquired, and as a result the fair value measurement is classified within level 3 of the fair value hierarchy. Expected future cash flows were based on estimates of future production and commodity prices. Purchase Price Common shares issued Cash

$ $

2,495 2,590 5,085 12 

 

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) Net Assets Acquired Cash Receivables Royalty assets Goodwill Current income taxes payable Deferred income tax liability

$

$

622 178 4,858 640 (18) (1,195) 5,085

The goodwill represents the potential of the underlying assets to continue to extend their operating mine life beyond proven and probable reserves and the requirement to record a deferred tax liability for the difference between the assigned values and the tax basis of the assets acquired. Goodwill is not deductible for tax purposes. The Company’s results include $225 in revenues and $49 in net earnings from Mineral Streams for the period from September 18, 2015 to December 31, 2015. Pro forma revenues and net loss of the combined Company were $4,926 and $3,395, respectively, for the year ended December 31, 2015. These pro forma results include the revenue and net earnings of the Company, combined with the revenue and net earnings of Mineral Streams over the same periods, as if the acquisition date was January 1, 2015. 6.

Receivables December 31 December 31 2015 2014

Royalty receivables HST receivable Other

$

$

1,558 1,337 93

$

2,988

$

97 162 259

During January 2016, the Company collected the HST receivable of $1,337. 7.

Property, plant and equipment & mining interests Plant and equipment

Exploration and evaluation

Total

Cost At December 31, 2013

$

Additions Disposals At December 31, 2014

$

176 (1,140) $

Additions Disposals Carrying value adjustment recorded in equity (Note 2) At December 31, 2015

27,535

26,571

17,319

$

8,662 $

62 (28) (9,286) $

70,836

79,498

8,838 (1,140) $

12,405 (27,884) $

64,019

98,371

106,069 12,467 (28) (37,170)

$

81,338

 

13   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) 8.

Royalty Assets Young-Davidson

Fosterville

Hemlo

Eagle River

Other

Total

Cost At December 31, 2013

$

Additions At December 31, 2014

-

$

$

Additions Acquisition of Mineral Streams (Note 5) Disposals At December 31, 2015

-

-

$

$

-

-

$

$

-

-

$

$

-

37,000

8,621

-

-

-

-

2,994 -

1,864 -

37,000

8,621

2,994

1,864

34,004

$

$

34,004

34,004 -

$

589

34,004 46,210

(34,004)

4,858 (34,004)

589

51,068

Accumulated depletion At December 31, 2013

$

Depletion At December 31, 2014

-

$

$

Depletion Disposals At December 31, 2015

-

-

$

-

$

-

$

-

$

-

$

-

-

$

-

$

(13,288)

-

$

(13,288)

(13,288)

$

(13,288)

(665) -

(1,412) -

(77) -

(46) -

13,288

(2,200) 13,288

(665)

(1,412)

(77)

(46)

-

(2,200)

Carrying value At December 31, 2014

$

-

$

-

$

-

$

-

$

20,716

$

20,716

At December 31, 2015

$

36,335

$

7,209

$

2,917

$

1,818

$

589

$

48,868

Included within other royalties at December 31, 2014 was the retained interest royalty held by Alamos that had resulted from the sale of the Fosterville and Stawell mines to Crocodile Gold in 2012. On January 14, 2015, following receipt of regulatory approval, Alamos and Crocodile Gold Corporation terminated the retained interest royalty. As consideration for the termination of the retained interest royalty, Alamos received cash proceeds of $16,725 upon closing and was granted a net smelter return royalty of 2% from the Fosterville mine and 1% from the Stawell mine. Upon termination, a gain of $5,261 was recognized (Note 14). The net smelter return royalties were distributed to the Company on July 2, 2015, as previously discussed in Note 2. 9.

Impairment

Non-financial assets and CGUs are tested for impairment when events or changes in circumstances suggest that the carrying amount may not be fully recoverable. CGUs containing goodwill are tested for impairment each year at December 31. An impairment loss is recognized when the carrying amount exceeds the recoverable amount. The Company determined that each individual royalty meets the definition of a CGU. The fair value of each CGU has been estimated based on its fair value less costs of disposal (“FVLCD” or “recoverable amount”) which has been determined to be greater than its value in use (“VIU”). FVLCD has been determined to be greater than VIU as additional value can be attributed to resource conversion and exploration potential under the FVLCD method. As at December 31, 2015, impairment tests were conducted for the Hemlo and Eagle River CGUs, as both CGUs contain goodwill. There were no indicators of impairment identified for the Company’s CGUs which do not contain goodwill. The recoverable amount of these CGUs was determined to be in excess of their carrying values. The recoverable amount of each CGU was determined by calculating the net present value (“NPV”) of the estimated future cash flows using life-of-mine models estimated by the Company based on publically available information. Other than the production estimates contained in the life-of-mine models, the key assumptions in the determination of the recoverable amount were gold prices and discount rate. Gold price assumptions were determined by referencing consensus price estimates obtained from a sample of analysts. The future cash flows were discounted using a discount rate which reflects specific market risk factors associated with each property. 14   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) The key assumptions used in the impairment testing are summarized in the table below: Gold price per ounce

$

2016 1,150

Discount rate

$

2017 1,200

$

2018 1,250

Long-term $ 1,250

5%

The recoverable amount of the Hemlo and Eagle River CGUs are $3,837 and $2,391, respectively. In order for the recoverable amount to approximate the carrying value of each CGU, the Company’s gold price assumption would need to be reduced by 10% or the discount rate be increased from 5% to 7%. 10.

Reclamation provisions

The Company’s reclamation provisions consist of reclamation and rehabilitation costs required for the Company’s Kemess property. Significant reclamation activities include land rehabilitation, demolition and decontamination of mine facilities, monitoring and other costs. The present value of the provision is currently estimated at $12,932 (December 31, 2014 $15,585). The undiscounted value of the reclamation provision at December 31, 2015 is $13,940 (December 31, 2014 $16,161). The Company estimates the costs to conduct significant reclamation activities based on the most recent experience and cost data available. These expected expenditures are then risk-adjusted by considering the time remaining until reclamation activities commence, recent industry experience in the region, and other relevant factors. This current cost estimate is then inflated to the estimated date of settlement using the Bank of Canada target rate of 2% (December 31, 2014 – 2%), and then discounted to present value based on a risk-free interest rate of 1.12% (December 31, 2014 – 1.34%). Changes to reclamation provisions during the year were as follows:

Reclamation provision, beginning of period Obligations incurred and revisions to estimates Impact of foreign exchange Accretion expense Reclamation expenditures Reclamation provision, end of period Less: current portion

December 31 December 31 2015 2014 $ 15,160 $ 16,617 203 362 (2,415) (1,355) 178 297 (194) (336) 12,932 15,585 (321) (425) $ 12,611 $ 15,160

The $203 adjustment to the reclamation provision was recognized within Care & Maintenance expense in the Statement of Comprehensive Income. Included in Restricted cash on the Balance Sheet is $13,695 (December 31, 2014 - $16,007) held on deposit relating to reclamation expenditures to be incurred at Kemess South.  

15   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) 11.

Income taxes

The following table reconciles the expected income tax recovery at the combined Federal and Provincial statutory income tax rate to the amounts recognized in the Statements of Operations for the years ended December 31, 2015 and 2014: Year Ended

Loss before income taxes Income tax rate

December 31 December 31 2015 2014 $ (729) $ (19,883) 26.34% 26.15%

Expected income tax recovery based on above rates Impact of British Columbia Mineral Tax Effect of taxes in foreign jurisdictions Permanent differences, including stock-based compensation Change in unrecognized temporary differences Impact of foreign exchange Provision for income taxes

(192) 445 1,204 111 (2,034) 3,017 $

2,551

(5,199) 40 2,506 2,202 $

(451)

The following reflects the deferred income tax liability at December 31, 2015 and December 31, 2014: December 31 December 31 2015 2014 Accounting value of property, plant and equipment & mining interests in excess of tax value Accounting value of royalty assets in excess of tax value Accounting value of supplies inventories in excess of tax value Other taxable temporary differences Non-capital losses carried forward Deferred income tax liability

$

22,593 11,154 135 (4,684) (941)

$

19,963 163 (1,371) (8,526)

$

28,257

$

10,229

The change in the income tax liability is explained as follows: December 31 Balance, beginning of year Acquisition of Mineral Streams Deferred income tax recovery recognized in net loss Carrying value adjustment recorded in equity

$

Deferred income tax liability

$

2015 10,229 1,195 1,698 15,135 28,257

December 31 $

$

2014 10,680 (451) 10,229

The Company has Canadian tax loss carryforwards of $3,571, which expire in 2035. The Company has recognized deferred tax assets relating to these loss carryforwards. The Company has unrecognized deferred income tax assets in respect of capital losses of $179 (December 31, 2014 - $nil).  

16   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) 12.

Share capital

The authorized share capital consists of an unlimited number of common shares. The Company’s shares have no par value. Issued and outstanding: December 31, 2015

Balance, beginning of period Issuance of common shares to Alamos Issuance of common shares through private placement (Note 12) Shares issued to complete acquisition of Mineral Streams (Note 5)

Number of common shares 118,120,000 8,000,000 4,753,951

$

Balance, end of period

130,873,951

$

Ascribed value 110,118 4,222 2,495 116,835

Private placement On September 15, 2015, the Company announced the closing of a private placement with Alamos. Under the terms of the agreement, the Company issued 8,000,000 common shares at a price of CAD $0.70 per share for total proceeds of $4,222 (CAD $5,600). Stock options (in Canadian dollars) The Company has a long-term incentive plan under which share-based compensation, including stock options, deferred share units, performance share units, and restricted share units may be granted to directors, officers, employees, and consultants of the Company. The maximum number of common shares that may be reserved and set aside for issuance under the plan is 10% of the common shares outstanding at the time of granting the award (on a non-diluted basis). Stock options are generally exercisable for a maximum period of seven years from the grant date, and vest in equal installments over three years or as determined by the Company’s Board of Directors. The fair value of the options granted during the year ended December 31, 2015 were calculated using the Black-Scholes option-pricing model with the following weighted average assumptions: December 31 2015 Dividend yield Expected volatility Risk free interest rate Expected life Exercise price Share price Grant date fair value

$ $ $

0% 102% 0.73% 4.46 0.51 0.51 0.36

17   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) Expected volatility was determined based on the volatility of comparable companies over a period equal to the expected life of the option. December 31, 2015 Weighted Options average price $ 5,167,500 $ 0.51 (2,100,000) $ 0.50 3,067,500 $ 0.51

Outstanding, beginning of period Granted Forfeited Outstanding, end of period Options exercisable, end of period

-

$

-

Deferred share unit plan The Company awards Deferred Share Units (“DSUs”) as an alternative form of compensation for members of the Company’s Board of Directors. Each unit entitles the participant to receive one common share of the Company from treasury upon redemption. DSUs are measured on the grant date using the volume weighed average closing share price of the last five days prior to that date. A total of 1,181,029 DSUs were granted during the year ended December 31, 2015 with a grant date fair value of $735. No units have vested and, therefore, no units were redeemed during the year. At December 31, 2015, 1,181,029 DSUs were outstanding. Performance share unit plan The Company awards Performance Share Units (“PSUs”) as an alternative form of compensation for officers of the Company. Each unit entitles the participant to receive a cash payment equal to the market price of one share as of the PSU vesting date, one share, or any combination of cash and shares equal to the market price of one share, as determined by the Company’s Board of Directors, as of the PSU vesting date, assuming certain performance conditions are met. PSUs are measured using the volume weighted average closing share price of the last five days prior to granting of the units. A total of 2,400,000 PSUs, to be settled in shares, were granted during the year ended December 31, 2015 with a grant date fair value of $1,838. No units have vested and, therefore, no units were redeemed during the year. During the year ended December 31, 2015, 600,000 units were forfeited. At December 31, 2015, 1,800,000 PSUs were outstanding. Owner’s net investment Alamos’ investment in the operations of the business is presented as owner’s net investment in the financial statements. Owner’s net investment represents accumulated net earnings of the operations and accumulated net distributions from and to Alamos. On July 2, 2015, owner’s net investment was assigned to shareholders’ equity accounts on a continuityof-interests basis based on carrying values. 13.

Loss from operations

The following employee benefits expenses are included in general and administrative and care and maintenance expenses: Year Ended December 31 December 31 2015 2014 Salaries and Benefits Share-based compensation

$

2,072 423

$

2,533 -

$

2,495

$

2,533

 

18   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) 14.

Other income / (loss) Year ended December 31 December 31 2015 2014

Interest income Gain on termination of retained interest royalty Inventory adjustment Loss on disposal of property, plant and equipment Other

15.

$

168 5,261 (367) 315

$

171 (429) 253

$

5,377

$

(5)

Loss per share

Basic loss per share is calculated based on the weighted average number of common shares and common share equivalents outstanding during the year ended December 31, 2015 of 121,829,920. For the year ended December 31, 2015, net loss and basic weighted average shares outstanding are equal to diluted loss and diluted weighted average shares outstanding, as the impact of all potential common shares was anti-dilutive. The following items were excluded from the computation of diluted weighted average shares outstanding for the years ended December 31, 2015 because their effect would have been anti-dilutive: Year Ended December 31 2015 3,067,500 1,800,000 1,181,029

Stock options Performance share units Deferred share units

16.

Supplemental cash flow information Year ended

Non-cash adjustments to reconcile net loss to operating cash flows: Amortization and depletion Income tax expense / (recovery) Interest income Unrealized foreign exchange (gain) / loss Share-based compensation, net of forfeitures Gain on termination of retained interest royalty Loss on disposal of prooperty, plant and equipment Other non-cash items

Change in non-cash operating working capital: Receivables Current income tax receivable Prepaids and deposits Inventories Trade payables and accrued liabilities

December 31 December 31 2015 2014 $

2,200 1,698 (168) (352) 423 (5,261) (62)

$

13,288 (451) (171) 970 429 671

$

(1,522)

$

14,736

$

(2,777) 395 (345) 293 1,970 (464)

$

5 15,431 (18) (27) 117 15,508

$

$

  19   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) 17.

Related party disclosures

Related party transactions during the year ended December 31, 2015 included the compensation of the Company’s key management personnel. The Company’s key management personnel include the Company’s executives and members of the Board of Directors. The compensation of key management personnel was as follows:

Salaries and benefits Share-based compensation

Year ended December 31 2015 $ 535 375 $

910

As described in Note 2, on July 2, 2015 the Company received a distribution from AuRico Gold Inc. which, at that time, was a related party. AuRico Gold Inc. combined into a new entity, Alamos Gold Inc., which is not a related party to the Company. 18.

Financial instruments and risk management

The fair value of all of the company’s financial assets and liabilities, including cash, receivables and trade payables and accruals approximate their carrying amount. The Company’s cash balance is classified as level 1 within the fair value hierarchy and their fair values are based on quoted prices (unadjusted) in active markets for identical assets or liabilities. The Company has no financial assets or liabilities classified as level 2 or 3 within the fair value hierarchy. The fair value of royalty assets for the purposes of impairment testing is determined primarily using a market approach using observable cash flows and as a result is classified within level 3 of the fair value hierarchy. For more details on the assumptions used in these measurements, refer to Note 9. Risks In the normal course of operations, the Company is exposed to credit risk, liquidity risk, commodity price risk, and foreign currency exchange rate risk. The Company has developed a risk management process to identify, analyze and assess these and other risks. At December 31, 2015 and 2014, the Company had not entered into any derivative instruments to mitigate these risks. Commodity price risk The Company’s royalty revenues are significantly impacted by changes in the market price of gold. Gold prices fluctuate on a daily basis and are affected by numerous factors beyond the Company’s control. The supply and demand for gold, interest rates, the rate of inflation, investment decisions by large holders of gold, including governmental reserves, and the stability of exchange rates can all cause significant fluctuations in gold prices. Such external economic factors are in turn influenced by changes in international investment patterns, monetary systems, and political developments. Foreign currency exchange rate risk The majority of the Company’s royalty revenues are denominated in US dollars. The Company is exposed to currency fluctuations relative to the US dollar on expenditures that are denominated in Canadian dollars. These potential currency fluctuations could have a significant impact on the profitability of the Company. The Company is also exposed to the impact of currency fluctuations on its monetary assets and liabilities. At December 31, 2015 and 2014, the Company’s balance sheet exposure to foreign currency exchange rate risk in Canadian dollars was as follows:

20   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars)

Cash Receivables Current tax receivable Prepaids Restricted cash Trade payables and accrued liabilities Obligation to incur exploration expenditures Deferred income tax liability Net balance sheet exposure

$

$

2015 11,585 4,135 266 18,955 (3,406) (2,352) (39,110) (9,927)

$

$

2014 1,984 374 1,310 18,570 (925) (11,867) 9,446

A 10% strengthening of the Canadian Dollar against the US dollar at December 31, 2015 would have increased net losses by $717 (December 31, 2014 – reduced net losses by $814), assuming that other variables remain constant. Credit risk Credit risk relates to receivables and other contracts, and arises from the possibility that any counterparty to an instrument fails to perform. For cash and cash equivalents, restricted cash, and receivables, the Company’s credit risk is limited to the carrying amount on the balance sheet. The Company manages credit risk by transacting with highly rated counterparties. Exposure on receivables is limited as the Company collects royalties from a small number of companies, of which the historical level of default is minimal. Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The company manages this risk through regular monitoring of its cash flow requirements to support ongoing operations and expansionary plans. The Company ensures that there is sufficient cash on hand to meet its business requirements over the next 12 month period, taking into account estimated cash flows from royalty assets. In the event the Company obtains the permits and necessary approvals to proceed with the development of the Kemess Underground project, it will require substantial additional capital resources. There can be no assurance that funding will be available to the Company in the future on acceptable terms. 19.

Capital Management

The primary objective of managing the Company’s capital is to ensure that there is sufficient available capital to support the long-term growth strategy of the Company in a way that optimizes the cost of capital and shareholder returns, and ensures that the Company remains in a sound financial position. The Company considers the items included in shareholders’ equity as capital, which at December 31, 2015 totalled $115,601 (December 31, 2014 - $124,745). The Company’s access to capital may be adversely affected as a result of a downturn in capital market conditions generally, or related matters specific to the Company. The Company may also look to access borrowings to take advantage of accretive opportunities to grow the business, as they arise. There were no changes to the Company’s approach to capital management during the year ended December 31, 2015.  

21   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) 20.

Segment reporting

The Company’s reportable segments are consistent with the Company’s operating segments and consist of the Royalties and Kemess segments. In determining the Company’s segment structure, the Company considered the basis on which management, including the chief operating decision maker, reviews the financial and operating performance of the Company. The following are the operating results by reportable segment: Year ended December 31, 2015 Kemess Corporate Total

Royalties Revenue

$

General and administrative Care and maintenance Amortization and depletion

Income / (loss) from operations

4,306

$

(2,200) (2,200) $

2,106

$

General and administrative Care and maintenance Amortization and depletion

Loss from operations

2,463

$

(5,573) (5,573) $

(5,573)

-

$

(2,651) (2,651) $

(2,651)

4,306 (2,651) (5,573) (2,200) (10,424)

$

(6,118)

Year ended December 31, 2014 Kemess Corporate Total

Royalties Revenue

-

$

(13,288) (13,288)

-

$

(6,325) (6,325)

-

$

(1,428) (1,428)

2,463 (1,428) (6,325) (13,288) (21,041)

$

(10,825)

$

(6,325)

$

(1,428)

$

(18,578)

Total assets at December 31, 2015

$

Royalties 51,159

$

Kemess 101,313

$

Corporate 8,731

$

Total 161,203

Total assets at December 31, 2014

$

20,716

$

127,595

$

$

151,402

The following are total assets by reportable segment:

3,091

Total royalty revenues by geographical region are as follows: Year ended December 31 December 31 2015 2014 Canada Australia

$

1,585 2,721

$

2,463

$

4,306

$

2,463

 

22   

NOTES TO THE FINANCIAL STATEMENTS (in thousands of United States dollars) Total non-current assets, excluding long-term financial assets, by geographical region, are as follows: December 31 December 31 2015 2014 Canada Australia

$

122,690 8,156

$

106,069 20,716

$

130,846

$

126,785

Goodwill recognized in the Royalties reportable segment totalled $640 at December 31, 2015. Of this amount, $397 relates to the Hemlo CGU and $243 relates to the Eagle River CGU. 21.

Events after the reporting period

On January 15, 2016, the Company reported the results of the vote regarding the shareholders’ rights plan held at the special meeting of shareholders. The shareholders’ rights plan, originally adopted by the Company’s Board of Directors in August 2015, was confirmed by simple majority.

23