CALGARY, ALBERTA--(Marketwire - June 29, 2011) -
NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR DISSEMINATION IN THE UNITED STATES
WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the Company") provides its results for the period ended March 31, 2011, key highlights, and activities to date.
On May 31, 2011, WesternZagros made an oil discovery in the Jeribe Formation at the Sarqala-1 exploration well. The Company tested the well at rates up to 9,444 barrels per day of 40 degree API oil. This rate was reached after flowing and stabilizing the well at progressively bigger choke sizes until reaching the limits of the surface equipment. The final rate was achieved on a 52/64 inch choke with a wellhead pressure of 2,475 psi. No water was produced during this initial testing program. No stimulation was applied to the well but there remains the potential to do so at a later date. Efforts will now be directed toward evaluating and sourcing surface equipment and trucking facilities by the end of 2011 to start producing and selling oil during an extended well testing program.
Subsequent to March 31, 2011, the Company concluded negotiations with the Ministry of Natural Resources of the Kurdistan Regional Government of Iraq ("KRG") and Talisman (Block K44) B.V. ("Talisman") to amend the Production Sharing Contract ("the "Original PSC") that governs the Company's exploration activities in the Kalar-Bawanoor Block in Kurdistan. Once approved, the amendments will divide the contract area of the Original PSC into two contract areas, each under a separate PSC. The northern contract area (comprising some 340 square kilometres) will remain under an amended version of the Original PSC (the "Kurdamir PSC") and will be called the Kurdamir Block. The southern contract area (comprising some 1,780 square kilometres) will be governed under a new Garmian PSC and will be known as the Garmian Block. The Company is awaiting formal approval of both the Kurdamir and Garmian PSC's from the Oil and Gas Council of the KRG and execution of the PSC's by the KRG. The PSC's will extend the time available to complete the remaining first exploration sub-period work obligations to drill Mil Qasim-1 by December 31, 2011, and will add an additional well commitment to drill Kurdamir-2 by June 30, 2012. WesternZagros' 40 percent ownership and other economic terms will remain unchanged in both the Kurdamir PSC and the Garmian PSC.
Commenting on the first quarter results and subsequent events, WesternZagros Chief Executive Officer Simon Hatfield said, "We are pleased with the negotiated amendments to the Original PSC to enable us to focus our efforts on our drilling operations over the next year. The Company is looking forward with great anticipation to evaluating the full potential of the Sarqala-1 oil discovery through an extended well testing program. We're proceeding with our target of discovering over one billion barrels of oil equivalent through drilling the next two wells at Mil Qasim-1 and Kurdamir-2."
Summary of Exploration Activities Completed and Exploration Opportunities Being Pursued
About Kurdamir
- WesternZagros began drilling the Kurdamir-1 well in May 2009, and announced a large Oligocene gas and condensate discovery in November 2009. The well reached a total depth of 4,077 metres in January 2010. Testing performed in December 2010 confirmed an oil column in the Oligocene reservoir at Kurdamir-1 beneath the gas cap. Technical analysis of the oil shows encountered in the well to date support oil potential in the Oligocene, Eocene and Cretaceous formations. Under the Kurdamir PSC, the Kurdamir-2 well will be required to be drilled by June 30, 2012 and it is expected to commence drilling in the fourth quarter of 2011.
About Sarqala
- WesternZagros began drilling the Sarqala-1 well in May 2008 and suspended the well in early 2009. In March 2011, the Company re-entered the well and drilled a 100 metre sidetrack through the Jeribe Formation. The Company confirmed an oil discovery in the Jeribe Formation after flowing light, 40 degree API oil. Currently the Company is evaluating and preparing for an extended well test at Sarqala-1 by the end of 2011 including sourcing the required surface and trucking facilities to start producing and selling oil.
About Mil Qasim
- Mil Qasim is a structure, the crest of which lies approximately three kilometres from the Sarqala-1 well. Target reservoirs are Upper Fars sandstones, which are anticipated to be oil bearing. The Mil Qasim-1 well must be drilled by December 31, 2011 and it is expected to commence drilling in July 2011.
About Qulijan and Baran
- Qulijan and Baran are attractive prospects located close to the Kurdamir-1 discovery well. Both Qulijan and Baran are anticline structures with upside potential related to the fault that separates them from Kurdamir in the Oligocene, Eocene and Cretaceous Formations.
Management's Discussion and Analysis
The following management's discussion and analysis ("MD&A") reviews WesternZagros Resources Ltd.'s ("WesternZagros" or the "Company") financial condition, activities and results of operations for the period ended March 31, 2011. It should be read in conjunction with the unaudited condensed consolidated interim financial statements prepared under International Financial Reporting Standards for the period ended March 31, 2011, and the audited consolidated financial statements for the year ended December 31, 2010 prepared under Canadian Generally Accepted Accounting Principles and the related notes. The effective date of this MD&A is June 29, 2011.
Forward-Looking Information
This discussion offers management's analysis of the financial and operating results of WesternZagros and contains certain forward-looking statements relating to, but not limited to, operational information, future drilling plans and testing programs and the timing associated therewith, future production and sales, estimated commitments under the Company's existing Production Sharing Contract (the "Original PSC"), an amended Production Sharing Contract ("Kurdamir PSC") and new Production Sharing Contract for the Garmian area ("Garmian PSC"), anticipated capital and operating budgets, anticipated insurance recoveries, anticipated working capital and estimated costs. Forward-looking information typically contains statements with words such as "anticipate", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Company cautions readers and prospective investors in the Company's securities to not place undue reliance on forward-looking information as, by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros. Readers are also cautioned that disclosed test rates may not be indicative of ultimate production levels.
Forward looking information is not based on historical facts but rather on management's current expectations and assumptions regarding, among other things, outcomes of future well operations, extended well tests, plans for and results of drilling activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), future economic conditions, future currency and exchange rates, continued political stability, timely receipt of any necessary government or regulatory approvals including those for the Kurdamir PSC and Garmian PSC, the Company's continued ability to employ qualified staff and to obtain equipment in a timely and cost efficient manner, the participation of the Company's co-venture partners in exploration activities, the timing of the third party participant assignment in the Garmian PSC, and the timely receipt of insurance proceeds. In addition, budgets are based upon WesternZagros' current exploration plans and anticipated costs, both of which are subject to change based on, among other things, the actual outcomes of well operations and the results of drilling activity, unexpected delays, availability of future financing and changes in market conditions. Although the Company believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in exploration; inherent uncertainties in interpreting geological data; changes in plans with respect to exploration or capital expenditures; interruptions in operations together with any associated insurance proceedings; denial of any portion of the insurance claims; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments, and risk associated with international activity.
In addition, statements relating to "resources" contained herein are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources described can be economically produced in the future. Terms related to resource classifications referred to herein are based on the definitions and guidelines in the Canadian Oil and Gas Evaluation Handbook which are as follows. "Contingent resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingent resources have an associated chance of development (economic, regulatory, market and facility, corporate commitment or political risks). The estimates referred to herein have not been risked for the chance of development. There is no certainty that the contingent resources will be developed and, if developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the contingent resources. "Prospective resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery (geological chance of success) and a chance of development (economic, regulatory, market, facility, corporate commitment or political risks). The chance of commerciality is the product of these two risk components. The estimates referred to herein have not been risked for either the chance of discovery or the chance of development.
There is no certainty that any portion of the prospective resources will be discovered. If a discovery is made, there is no certainty that it will be developed or, if it is developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the prospective resources. All resource estimates presented are gross volumes for the indicated reservoirs, without any adjustment for working interest or encumbrances. A barrel of oil equivalent (BOE) is determined by converting a volume of natural gas to barrels using the ratio of 6 million cubic feet (Mcf) to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The Company's material change reports filed on SEDAR at www.sedar.com and dated December 16, 2010, January 17, 2011 and February 22, 2011 contain additional detail on the information used in the resource assessments and include the risks and level of uncertainty associated with the recovery and development of the resources, the significant positive and negative factors relevant to the estimates and, in respect of contingent resources, the specific contingencies which prevent the classification of the resources as reserves.
Readers are cautioned that the foregoing list of important factors is not exhaustive. The forward-looking statements contained in this MD&A are made as of the date of this MD&A and, except as required by law, WesternZagros does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. See the Risk Factors section of this MD&A for a further description of these risks and uncertainties facing WesternZagros. Additional information relating to WesternZagros is also available on SEDAR at www.sedar.com, including the Company's Annual Information Form.
Overview
WesternZagros is a publicly-traded, Calgary-based, international oil and gas company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros currently holds the Original PSC with the Kurdistan Regional Government ("KRG") which covers a 2,120 square kilometre exploration block (the "Kalar-Bawanoor Block" or "PSC Lands") and it is on trend with, and adjacent to, a number of prolific historic oil and gas discoveries. WesternZagros holds a 40 percent working interest, the KRG holds a 20 percent working interest (the costs of which are carried by WesternZagros) and a wholly-owned subsidiary of Talisman Energy Inc. ("Talisman"), holds the remaining 40 percent working interest (collectively known as the "Contractor Group"). Subsequent to March 31, 2011, the Company concluded negotiations with the Ministry of Natural Resources of the KRG and Talisman to amend the Original PSC that governs the Company's exploration activities in the Kalar-Bawanoor Block. Once approved, the amendments will divide the contract area of the Original PSC into two contract areas, each now under a separate PSC. The Company is awaiting formal approval of both the Kurdamir and Garmian PSC's from the Oil and Gas Council of the KRG and execution of the PSC's by the KRG. (See "PSC Commitments" discussion in this MD&A for a summary of the material amendments to the Original PSC and remaining commitments.)
Basis of Presentation
Reporting and Functional Currency
The Company has prepared its March 31, 2011 unaudited Condensed Consolidated Interim Financial Statements in accordance with International Financial Reporting Standards ("IFRS"). These are the Company's first condensed consolidated interim financial statements prepared under IFRS. Accordingly, the transition date to IFRS was January 1, 2010, and comparative information for 2010, including that utilized in this MD&A, has been prepared in accordance with the Company's IFRS accounting policies. Please refer to "Adoption of IFRS" section of this MD&A for further descriptions of this impact.
The reporting and functional currency of the Company is the United States ("U.S.") dollar. All references herein to US$ or to $ are to United States dollars and references herein to Cdn$ are to Canadian dollars.
Highlights
WesternZagros is currently exploring for crude oil and natural gas in the Kurdistan Region of Iraq and the Company currently has no reserves or production. WesternZagros' revenue is comprised entirely of interest earned on cash and cash equivalent balances and short-term investments. WesternZagros' highlights and activities for the first quarter of 2011 to June 29, 2011 include the following.
HSE&S
- Awareness and implementation of best practices with respect to health, safety, environment and security continues to be a high priority commitment of the Board of Directors, Executive Management, employees and contractors to all of the local residents and to the staff and contractors involved in its operations. WesternZagros has achieved a total of 245 days without any Lost Time Incidents ("LTIs") to June 29, 2011.
Operations
- WesternZagros made an oil discovery in the Jeribe Formation at the Sarqala-1 exploration well. The Company re-entered the Sarqala-1 well bore on March 29, 2011, and completed an approximate 100 metre sidetrack to a depth of 3,893 metres. Drilling shows and log results indicated a potential gross pay interval of over 55 metres in this zone. The Jeribe Formation flowed light, 40 degree API oil at a stabilized rate of 6,000 barrels per day over the 24 hours of the initial flow period. This rate was achieved through a 36/64 inch choke at a flowing well head pressure of 3,900 psi and without any stimulation. No water was produced during this flow. The Company then tested the well at rates up to 9,444 barrels per day of 40 degree API oil. This rate was reached after flowing and stabilizing the well at progressively bigger choke sizes until reaching the limits of the surface equipment. The final rate was achieved on a 52/64 inch choke with a wellhead pressure of 2,475 psi. No water was produced during this initial testing program. No stimulation was applied to the well but there remains the potential to do so at a later date. On June 7, 2011 the Company successfully completed the initial testing of this oil discovery.
- WesternZagros has completed site construction and secured the 2,000 HP Viking Drilling Rig #10 through a contract with Maritas Co., a subsidiary of Viking International of the United States, to drill the Mil-Qasim-1 well. The anticipated spud date of the Mil Qasim-1 well is in July 2011.
- During the first quarter of 2011, WesternZagros and Talisman agreed on the drilling location for Kurdamir-2. Kurdamir-2 is approximately two kilometres away from Kurdamir-1 and the well will target the Oligocene, Eocene and Cretaceous Formations. WesternZagros and Talisman are currently preparing the drilling plan for Kurdamir-2, and have begun to source long lead time materials.
Exploration
- The exploration work performed during the three month period ended in March 31, 2011 refined the Company's understanding of the regional geology and petroleum geology on its PSC Lands, and reinforced management's view of the excellent prospects for significant oil discoveries on the Company's PSC Lands.
- The Company's exploration work included integration of field geology work into the Company's understanding of the Oligocene and Jeribe reservoirs and a detailed fracture analysis study of the Oligocene reservoir in the Kurdamir-1 well.
- WesternZagros also continues to compile seismic data and information from wells adjacent to its PSC Lands and to integrate the data, together with the reprocessed seismic data on its PSC Lands, into its seismic interpretations to further define and update its prospects and leads inventory.
- On January 17, 2011 Sproule International Limited ("Sproule") completed an independent audit of the Company's resource assessment of the following: the Tertiary Eocene and Cretaceous reservoir intervals of Kurdamir-1; and the Jeribe reservoir at Sarqala-1 and the Upper Fars reservoir at Mil Qasim-1. The combined mean estimate of gross unrisked prospective resources for these five prospects is 792 million barrels of oil or 1,083 million barrels of oil equivalent when gas and condensate are included.
- On February 22, 2011, Sproule completed a further independent audit of the Company's resource assessment that covered stacked reservoirs in three multiple prospect areas of the PSC Lands in the Kurdistan Region of Iraq. The audit covered the following: the Oligocene, Eocene and Cretaceous reservoir intervals at the Qulijan prospect; the Oligocene and Eocene reservoirs at the Baran prospect; and the Oligocene, Eocene and Cretaceous reservoirs at the Sarqala prospect. This audit, together with the previous audit results announced on December 16, 2010 and January 17, 2011, increased the combined mean estimate of gross unrisked prospective resources on the Company's PSC Lands to 1,092 million barrels of oil, or 1,771 million barrels of oil equivalent when gas and condensate are included.
Financial
- WesternZagros closed a private placement offering (the "Offering") of common shares of the Company on March 10, 2011. The Company sold, through a syndicate of agents, 89,665,352 shares at a price of Cdn. $0.48 per share for gross proceeds of Cdn. $43 million. The syndicate of agents was led by TD Securities Inc. and Scotia Capital Inc. and included Macquarie Capital Markets Canada Ltd., RBC Capital Markets and Stifel Nicolaus Canada Inc. The net proceeds from the Offering will be used by the Company for: the drilling of the Company's Sarqala-1 re-entry well and the Mil Qasim-1 exploration well; future exploration on the Company's oil and gas properties; working capital and for general corporate purposes. As at March 31, 2011, WesternZagros had $66.0 million in working capital.
- For the three months ended March 31, 2011, WesternZagros' share of capital expenditures, associated with its Original PSC activities and other capitalized costs was $15.5 million (net of disposals and prior to the impact of changes in non-cash investing capital). Expenditures for the first quarter of 2011 included $13.0 million of drilling-related costs; $0.3 million of geological and geosciences related work; $1.6 million of supervision and field office costs; and $0.6 million of other Original PSC-related expenditures. These Original PSC expenditures reflect the requirement that WesternZagros fund 100 percent of the Sarqala-1 sidetracking and testing as an exclusive operation.
Insurance
- WesternZagros has reached an agreement with its insurers to settle its insurance claim for a total of $45 million (of which $40.6 million has been received to date). The Company and its insurers have also agreed to terms to renew its insurance policy for the drilling of Kurdamir-2. These terms include an increase in the net aggregate limit from $45 million to $75 million.
Corporate
- Subsequent to March 31, 2011, the Company concluded negotiations with the Ministry of Natural Resources of the KRG and Talisman to amend the Original PSC that currently governs the Company's exploration activities in Kurdistan. Once approved, the amendments will divide the contract area of the Original PSC into two contract areas, each under a separate PSC. The northern contract area (comprising some 340 square kilometres) will remain under an amended version of the Original PSC (the "Kurdamir PSC") and will be called the Kurdamir Block. The southern contract area (comprising some 1,780 square kilometres) will be governed under a new Garmian PSC and will be known as the Garmian Block. The Company is awaiting formal approval of both the Kurdamir and Garmian PSC's from the Oil and Gas Council of the KRG and execution of the PSC's by the KRG.
- The PSC's will extend the time available to complete the first exploration sub-period work obligations and will add an additional commitment well. The drilling commitments will comprise a well (Mil Qasim-1) on the Garmian Block and a well (Kurdamir-2) on the Kurdamir Block. Under the Kurdamir PSC, the Kurdamir-2 well will be required to be drilled by June 30, 2012 to evaluate the Oligocene, Eocene and Cretaceous formations, with Talisman as operator. Under the Garmian PSC, WesternZagros will remain the operator of the Garmian Block, which contains the Sarqala-1 well and a number of attractive drill-ready prospects including Mil Qasim, Baran and Qulijan. WesternZagros will be committed to drill the Mil Qasim-1 exploration well on the Garmian Block by the end of 2011. WesternZagros' 40 percent ownership and other economic terms will remain unchanged in both the Kurdamir PSC and the Garmian PSC.
Political
- In late 2010 and early 2011, Prime Minister Maliki and Minister of Oil Luaibi, of the Federal Government of Iraq were both quoted as voicing their support for the Kurdistan Region's PSC's in their current form. Further to this, an agreement was reached to resume exports in February, 2011 from the Kurdistan Region including from both the Taq Taq field and the Tawke field with a goal to export 200,000 barrels per day by the end of 2011.
- In April 2011, the Prime Minister of the Kurdistan Regional Government ("KRG") presented the first KRG oil export statement to the Iraq federal Finance Ministry of over five million barrels delivered to the State Oil Marketing Organization ("SOMO"). Subsequently, the Iraqi Federal Ministry of Finance confirmed the release of the first oil export payment to the KRG to compensate the KRG's contractors for past costs. The amount released to the KRG was equal to approximately 50 percent of net revenues and several of the KRG's contractors involved in the production of the exported crude oil, (DNO International ASA, TTOPCO), have confirmed receipt of their portion of the net revenue. This is the first time that KRG contractors have been paid as a result of revenues received from the Federal Government of Iraq and provides the opportunity for the generation of cash flows from an extended well test at Sarqala.
Corporate Social Responsibility
- WesternZagros and its co-venturers continued to focus on three key corporate social responsibility initiatives in the Garmian region of Kurdistan - water supply, education and health care. Activities included:
-- Requested water resistivity studies in relation to Qulijan Sarhad village from the Garmian Water Directorate, with the view to examining potential for a water well project.
-- Reviewing the feasibility of a water project in Shakal.
-- Purchase of material for a school refurbishment project in Kawa Churma village.
-- Distribution of school supply backpacks to approximately 1,300 primary school children in Sarqala sub-district.
-- Refurbishment of Omer Mil Health Clinic, near Sarqala Village that services up to 1,000 people in the area.
-- Planning a comprehensive refurbishment to Aziz Zadr Health Clinic.
-- Purchase and distribution of sports equipment to villages in the Garmian region.
General and Administrative Expenses
For the quarter ended March 31, 2011, WesternZagros expensed $1.8 million in general and administrative expenses ("G&A"), compared to $1.8 million for the prior year, and capitalized $1.0 million of G&A compared to $0.6 million in 2010. The amounts capitalized are directly related to the supervision of the Company's exploration and evaluation activities. Total G&A costs were relatively consistent between the first quarter of 2011 and 2010, as the increase in US dollar costs incurred resulting from a stronger Canadian dollar in 2011, which impacts a large portion of the Company's G&A expenditures, was offset by lower legal and other consulting fees as compared to the same quarter in 2010.
Depreciation, Depletion and Amortization (DD&A)
For the quarter ended March 31, 2011, WesternZagros had $0.05 million depreciation related to certain administrative assets, compared to $0.2 million for the quarter ended March 31, 2010. No depletion of exploration and evaluation expenditures will be recognized until such time that the technical feasibility and commercial viability of reserves have been demonstrated and the development of those reserves has been sanctioned, in which case the assets would then be reclassified as development expenditures, tested for impairment, and depleted on a unit of production basis.
Share based payments
The Company recognized the expense associated with share based payments on a graded vesting basis for all stock options granted. For the quarter ended March 31, 2011, WesternZagros recorded $0.2 million in stock based compensation expense and $0.1 million as part of capitalized G&A, with a corresponding increase to contributed surplus. For the quarter ended March 31, 2010, WesternZagros recorded $0.3 million in stock-based compensation expense, and $0.1 million as part of capitalized G&A.
Foreign Exchange
WesternZagros adopted the U.S. dollar as its measurement and reporting currency since the majority of its expenditures are or will be directly or indirectly denominated in U.S. dollars and to facilitate a more direct comparison to other international crude oil and natural gas exploration and development companies. As at March 31, 2011, WesternZagros held approximately 80 percent of its cash and cash equivalents in U.S. dollar accounts and U.S. dollar overnight term deposits. The Company also has certain assets and liabilities in currencies other than the U.S. dollar (mainly Canadian dollars). For financial statement presentation purposes, WesternZagros converts other currencies to U.S. dollars at the end of each period resulting in foreign exchange gains and losses. Canadian dollar balances are held for the purpose of funding WesternZagros' Canadian dollar expenditures, which are mainly related to the costs associated with general and administrative costs for its head office and certain drilling-related services and tangible equipment procured from Canadian suppliers. For the quarter ended March 31, 2011, WesternZagros recorded a foreign exchange loss of $0.1 million relating to these conversions, compared to a $0.05 million foreign exchange loss for the quarter ended March 31, 2010.
Income Taxes
For the quarter ended March 31, 2011, WesternZagros had a net income tax recovery of $0.5 million (2010: $0.6 million recovery), comprised of $0.5 million of current income tax recovery (2010: $0.7 million recovery) and a negligible future income tax recovery (2010: $0.1 million expense). The current tax recovery relates to the expected recovery of taxes incurred in 2008 on realized foreign exchange gains and losses in WesternZagros' wholly-owned Canadian subsidiary through the utilization of share issuance costs as well as the associated G&A costs incurred by the subsidiary.
Revenue
WesternZagros' revenue is comprised entirely of interest earned on cash and cash equivalents and short-term investment balances. Interest of $0.02 million was earned for the quarter ended March 31, 2011 compared to $0.02 million for the quarter ended March 31, 2010. The change in first quarter revenue from year to year was essentially flat, but was limited in the first quarter of 2011 due to the relatively short time frame available for investing proceeds received from the private equity financing.
Net Loss
For the quarter ended March 31, 2011, WesternZagros recorded a net loss of $1.5 million compared to $1.3 million for the quarter ended March 31, 2010. WesternZagros is an early stage exploration enterprise and, apart from its working interest in the Original PSC and cash and cash equivalents, the Company has no other significant assets. The increased net loss in the first quarter of 2011 resulted mainly from reduced tax recoveries as compared to 2010.
Capital Expenditures
WesternZagros closed a private placement offering (the "Offering") of common shares of the Company on March 10, 2011. The Company sold, through a syndicate of agents, 89,665,352 shares at a price of Cdn$0.48 per share for gross proceeds of Cdn$43 million. The syndicate of agents was led by TD Securities Inc. and Scotia Capital Inc. and included Macquarie Capital Markets Canada Ltd., RBC Capital Markets and Stifel Nicolaus Canada Inc. The net proceeds from the Offering will be used by the Company for: the drilling of the Company's Sarqala-1 re-entry well and the Mil Qasim-1 exploration well; future exploration on the Company's oil and gas properties; working capital and for general corporate purposes. As at March 31, 2011, WesternZagros had $66.0 million in working capital.
For the three months ended March 31, 2011, WesternZagros' share of capital expenditures, associated with its Original PSC activities and other capitalized costs was $15.5 million (net of disposals and prior to the impact of changes in non-cash investing capital). Expenditures for the first quarter of 2011 included $13.0 million of drilling-related costs; $0.3 million of geological and geosciences related work; $1.6 million of supervision and field office costs; and $0.6 million of other Original PSC-related expenditures. These Original PSC expenditures reflect the requirement that WesternZagros funded the Sarqala-1 sidetracking and testing as an exclusive operation, which requires the Company to fund 100 percent.
By comparison, WesternZagros' share of exploration and evaluation expenditures for the quarter ended March 31, 2010 associated with its Original PSC activities was $13.2 million. Capital expenditures for the first quarter of 2010 included $12.4 million of drilling-related costs; $0.1 million of geological and geosciences-related work; $0.6 million for related field office and supervision costs in support of operations; and $0.1 for other Original PSC-related costs.
WesternZagros capitalized $1.0 million of G&A expenses, including $0.1 million of stock-based compensation, for the quarter ended March 31, 2011, compared to capitalizing $0.6 million of G&A expenses, including $0.1 million of stock-based compensation, for the quarter ended March 31, 2010.
Production Sharing Contract - Summary
Under the terms of its Original PSC, WesternZagros has a 40 percent working interest, the KRG holds a 20 percent working interest (the costs of which are carried by WesternZagros) and Talisman holds the remaining 40 percent working interest.
Subsequent to March 31, 2011, the Company concluded negotiations with the Ministry of Natural Resources of the KRG and Talisman to amend the Original PSC. Once approved, the amendments will divide the contract area of the Original PSC into two contract areas, each under a separate PSC. The northern contract area (comprising some 340 square kilometres) will remain under an amended version of the Original PSC (the "Kurdamir PSC") and will be called the Kurdamir Block. The southern contract area (comprising some 1,780 square kilometres) will be governed under a new Garmian PSC and will be known as the Garmian Block. The Company is awaiting formal approval of both the Kurdamir and Garmian PSC's from the Oil and Gas Council of the KRG and execution of the PSC's by the KRG. WesternZagros' 40 percent ownership and other economic terms will remain unchanged in both.
The Kurdamir PSC and Garmian PSC will extend the time period available to complete the first exploration sub-period work obligations and adds an additional well. The drilling commitments will comprise Mil Qasim-1 on the Garmian Block (to be drilled by December 31, 2011) and Kurdamir-2 on the Kurdamir Block (to be drilled by June 30, 2012). WesternZagros will remain the operator on the Garmian Block while Talisman will become operator of the Kurdamir Block. Also, Talisman's future participation in activities on the Original PSC Lands will be limited to the Kurdamir Block and it will not be a party of the Garmian PSC. Under the Garmian PSC, the KRG will have the ability to assign the remaining 40 percent interest in the Garmian Block to a new third party participant following the completion of Mil Qasim-1. As such, the Company will be required to initially, or entirely, fund 100 percent of the costs associated with Mil Qasim-1.
WesternZagros continues to work toward drilling the third exploration commitment well under the terms of the force majeure provision of the Original PSC in order to ensure that it meets the current requirements of the Original PSC in the event the Kurdamir and Garmian PSC's are not approved by the Oil and Gas Council of the KRG and subsequently executed by the KRG.
Production Sharing Contract - Commercial Terms
Under the Original PSC, the sharing of oil occurs as follows: of the total oil produced, operations oil is available to the Contract Group for use in carrying out its obligations under the Original PSC; the remaining oil is subject to a 10 percent royalty payable to the KRG (the residual is considered to be "net available oil"). The net available oil is determined on a development by development basis. Up to 45 percent of the net available oil is available for cost recovery with the remainder as "profit oil". Costs subject to cost recovery include all costs and expenditures incurred by the Contractor Group for exploration, development, production and decommissioning operations, as well as any other costs and expenditures incurred directly or indirectly with these activities. The portion of profit oil available to the Contractor Group is based on a sliding scale from 35 percent to 16 percent depending on a calculated R-Factor. The R-Factor is established by reference to the ratio of cumulative revenues over cumulative costs. When the ratio is below one, the Contractor Group is entitled to 35 percent of the profit oil. The percentage is then reduced on a linear sliding scale to a minimum of 16 percent at an R-Factor ratio of two or greater.
The production sharing terms for natural gas are the same as the oil production share terms except that the net available gas available for cost recovery is 55 percent and the profit sharing component is on a different scale. For natural gas, the portion of profit natural gas available for the Contractor Group is based on a sliding scale from 40 percent to 20 percent depending on a calculated R-factor. The R-Factor is established by reference to the ratio of the Contractor Group's cumulative revenue over cumulative costs. When the R-Factor is below one, the Contractor Group is entitled to 40 percent of the profit oil. The Contractor Group's percentage is then reduced on a linear scale to a minimum of 20 percent at a ratio of 2.75 or greater.
As at March 31, 2011, the Company had approximately $174 million relating to the Original PSC, net to WesternZagros of recoverable costs available that may ultimately be recovered from future crude oil or natural gas sales in accordance with the Original PSC.
Production
The Original PSC provides the Contractor Group with the exclusive right to develop and produce any commercial discoveries. The development period for producing a commercial discovery is an initial term of 20 years from the date of declaring a commercial discovery with a further automatic right to a five year extension. If commercial production is possible at the end of the last period then the Contractor Group shall be entitled to an extension of a further five years under the same terms as in the Original PSC if a request is made by the Contractor Group at least six months before the end of the first five year extension.
Pursuant to the terms of the Original PSC, WesternZagros maintains the right to market its share of oil on the world market. There is an obligation under the Original PSC to make oil production available to meet regional market demand. The price of such oil is a market-based oil price based on a basket of crudes. The price for natural gas is based on local commercial value and Iraq tariffs. Currently, no markets exist for natural gas within Iraq and there is no infrastructure for export.
Original PSC Commitments
The Original PSC contemplates two exploration sub-periods of three years and two years, respectively, with two possible one-year extensions. The first exploration sub-period ended December 31, 2010, subject to an extension under a force majeure claim described below. During such time the Contractor Group is required to complete a minimum of 1,150 kilometres of seismic surveying (which has been completed), to drill three exploration wells (two of which have been drilled,) and to commit a minimum of $75 million in the aggregate on these activities (which has been completed). The Original PSC also includes capacity building support payments (which concluded in April 2009) and annual funding for certain technological, logistical, recruitment and training support during the exploration sub-periods.
During the drilling of the Kurdamir-1 well, certain situations occurred which caused additional time to be spent on well control and repair operations under conditions of force majeure. Under the terms of the Original PSC, when a force majeure event occurs, the timing resulting from any such delay and the time necessary to repair any damage resulting from the delay is to be added to any time period provided under the Original PSC, including the first exploration sub-period. The period of force majeure started on January 22, 2010 and continued until October 14, 2010, a period of 265 days. The Corporation, on behalf of the Contractor Group, has notified the KRG of a force majeure event under the terms of the Original PSC and claimed a corresponding 265-day extension of the first exploration sub-period, i.e. until September 22, 2011.
At the end of the first exploration sub-period, WesternZagros and the other parties to the Original PSC may relinquish the entire contract area (other than any discovery or development areas), or continue further exploration operations by entering into the second exploration sub-period, or request a one-year extension for future exploration and appraisal activities prior to deciding to enter into the second exploration sub-period.
As at March 31, 2011, the Company estimates expenditures of approximately $35 million, prior to the costs of any testing, to meet its remaining commitments for the first exploration sub-period. This estimate includes 100 percent of the remaining costs associated with drilling the Mil Qasim-1 exploration commitment well by December 31, 2011, and providing associated supervision and local office support in support of drilling operations.
During the second exploration sub-period, the Contractor Group, or those parties that have elected to participate in further exploration, is required to complete a minimum of 575 kilometres of seismic surveying, drill at least two exploration wells and commit a minimum of $35 million to these activities. At the end of the second exploration sub-period, WesternZagros and the other parties to the Original PSC who have elected to participate in the second exploration sub-period, may relinquish the entire contract area (other than any discovery or development areas) or continue further exploration and appraisal operations into the extension periods subject to the following relinquishment requirements. At the end of the second exploration sub-period, and at the end of each subsequent extension period, the Original PSC requires WesternZagros, and other parties who have elected to participate, to relinquish 25 percent of the remaining undeveloped area within the PSC Lands or the entire contract area (other than any discovery or development areas).
Other Commitments
The Company has entered into various exploration-related contracts, including contracts for drilling equipment, services and tangibles. The following table summarizes the commitments the Company has under these exploration-related contracts related to the Original PSC and other contractual obligations at March 31, 2011:
For the Years Ending December 31,
2011 2012 2013 2014 2015+ Total
----------------------------------------------------------------------------
Exploration $ 2,272 $ - - - $ 2,272
Office $ 457 $ 223 $ 13 - - $ 693
----------------------------------------------------------------------------
$ 2,729 $ 223 $ 13 - - $ 2,965
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consulting Service Agreements
In 2003 the Corporation entered into a consulting service agreement that provided for a three percent right to participate indirectly in the future profits the Company may earn in respect to the Original PSC, in exchange for consulting services provided since that date. In the determination of profits under this agreement, the Company was entitled to deduct the consultant's proportionate share of all costs associated with acquiring the Original PSC and the exploration, appraisal, development and production expenditures incurred by the Company ("eligible costs"), together with interest on such percentage of eligible costs at LIBOR plus three percent. Subsequent to March 31, 2011, the Company reached agreement for the termination of this right contemporaneously with the execution of the Kurdamir and Garmian PSC's by the KRG.
Further, in 2004 the Company entered into a consulting service agreement that provided for a two percent right to participate indirectly in the future profits the Company may earn in respect to the Original PSC, in exchange for the provision of consulting services during the period 2004 to 2006. In determination of profits under this agreement, the Company was entitled to deduct one percent of all eligible costs, together with interest on such percentage of eligible costs at LIBOR plus ten percent. The consultant was required to fund the additional one percent of all eligible costs. Subsequent to March 31, 2011, the Company terminated this right.
Off Balance Sheet Arrangements
The Company does not presently utilize any off-balance sheet arrangements to enhance its liquidity and capital resource positions, or for any other purpose. During the period ended March 31, 2011, WesternZagros did not enter into any off-balance sheet transactions.
Insurance Claim Update
WesternZagros initiated a control of well insurance claim in the first quarter of 2010 in relation to certain events at Kurdamir-1 which commenced when the well was drilled into a high pressure formation in the Gulneri Seal. These operations continued after a subsequent additional high pressure zone was encountered in the Aaliji Seal and continued until October 14, 2010, when the open hole in the Kurdami-1 well was plugged and cemented to approximately 2,500 metres, concluding well control operations.
The control of well insurance policy covering these claims has a net aggregate limit to the Company of $45 million, with a $0.4 million deductible. Under the terms of the insurance policy, the Company submits claims for these costs as they are incurred and paid and these claims are then subject to the review and approval by the adjuster appointed by the insurers. WesternZagros submitted its initial claim in the first quarter of 2010 and received initial confirmation of coverage from the insurers during the second quarter of 2010.
WesternZagros has reached an agreement with its insurers to settle its insurance claim for a total of $45 million (of which $40.6 million has been received to date). The Company and its insurers have also agreed to terms to renew its insurance policy for the drilling of Kurdamir-2. These terms include an increase in the net aggregate limit from $45 million to $75 million.
Outlook for 2011
In 2011 and the first half of 2012, WesternZagros plans to focus on a program of drilling and testing to evaluate the highly prospective formations discovered through the Sarqala-1 and Kurdamir-1 wells. This program will test the approximately one billion barrels of oil equivalent of mean gross unrisked prospective resources that these formations are estimated to contain as of December 14, 2010 and January 14, 2011, as audited by Sproule International Limited.
On March 29, 2011, the Company began the first of these operations by re-entering the Sarqala-1 well bore and completed an approximate 100-metre sidetrack to 3,893 metres to evaluate and test the Jeribe Formation which is the primary reservoir target in the Sarqala-1 well. Drilling shows and log results indicated potential gross pay interval of over 55 metres in this zone. The Company tested the well at rates up to 9,444 barrels per day of 40 degree API oil. This rate was reached after flowing and stabilizing the well at progressively bigger choke sizes until reaching the limits of the surface equipment. The final rate was achieved on a 52/64 inch choke with a wellhead pressure of 2,475 psi. No water was produced during this initial testing program. No stimulation was applied to the well but there remains the potential to do so at a later date. Efforts will now be directed toward evaluating and sourcing surface equipment and trucking facilities by the end of 2011 to start producing and selling oil during an extended testing program with the objective of further evaluating the Jeribe reservoir and the generation of cash flow from operations.
Commencing in July 2011, WesternZagros plans to drill the remaining commitment well at Mil Qasim-1, located three kilometres from Sarqala-1. Mil Qasim-1 will target potential oil-bearing sandstones in the Upper Fars reservoir, which exhibited oil shows when penetrated in Sarqala-1. With a proposed total depth of 2,000 to 2,400 metres, Mil Qasim-1 will be a shallower well with less technical risk than either Sarqala-1 or Kurdamir-2.
Concurrent with the Company's drilling operations at Mil Qasim-1, Talisman is continuing to drill the Topkhana prospect on its adjacent Block 39, where operations commenced on January 31, 2011. Topkhana-1 will be drilled to evaluate and test the Oligocene, Eocene and Cretaceous reservoirs. Although WesternZagros has no working interest in Topkhana-1, results from the well could provide information confirming the potential of the Kurdamir and Topkhana structures being both part of one large structure. During the first quarter of 2011, WesternZagros and Talisman agreed on the drilling location for Kurdamir-2. The drilling location is approximately two kilometres away from Kurdamir-1 and will target the Oligocene, Eocene and Cretaceous Formations. WesternZagros and Talisman are currently preparing the drilling plan for Kurdamir-2, and have sourced long lead time materials.
With the objective of maximizing its options and flexibility to increase the likelihood of success, WesternZagros' priorities for 2011 are as follows:
- Prepare for and implement an extended well test program for the Jeribe Formation in Sarqala-1, including the trucking of and sale of crude oil.
- Drill Mil Qasim-1 to test the oil potential of the Upper Fars Formation;
- Begin drilling Kurdamir-2 to test the Oligocene, Eocene and Cretaceous formations; and
- Evaluate the commercial potential of and design an appraisal program for the natural gas, gas condensate and oil discovered at Kurdamir, and evaluate the commercial potential for any discoveries from the Mil Qasim-1.
WesternZagros estimates its capital and operating budget for the remaining three quarters of 2011, including the requirement for the Company to fund 100 percent of the Sarqala-1 re-entry and Mil Qasim-1 as an exclusive operation and to fund its share of the costs of Kurdamir-2 well, to be approximately $80 million. This includes approximately $70 million for drilling and related costs with the remainder of the budget comprised of funds for certain annual Original PSC payments, initial technical studies as part of the Kurdamir Discovery appraisal program, in-country operational support and corporate general and administrative costs.
Liquidity and Capital Resources
WesternZagros is currently exploring for crude oil and natural gas in the Kurdistan Region of Iraq and currently has no reserves, production or operational cash flows. WesternZagros' revenue is comprised entirely of interest earned on cash and cash equivalent balances and short-term investments. WesternZagros invests its cash and cash equivalents with major Canadian financial institutions with investment grade credit ratings and in Government of Canada instruments. This is in accordance with an Investment Policy approved by the Board of Directors. WesternZagros had no outstanding bank debt or other interest bearing indebtedness as at March 31, 2011.
On March 10, 2011, WesternZagros successfully completed a brokered private placement for gross proceeds of approximately Cdn$43 million (net proceeds of approximately Cdn$41 million after fees). The working capital and the proceeds of this private placement will be used to fund a portion of the future capital expenditures as described in the "Outlook" section, specifically both the drilling operations for the Sarqala-1 re-entry and Mil Qasim-1 which the Company anticipates funding 100 percent. At March 31, 2011, WesternZagros had $66.0 million in working capital.
WesternZagros may be required to access further funding in 2011, in particular as it relates to the drilling of Kurdamir-2, and ultimately to fund any appraisal programs and future development programs from successful exploration activities. During the remainder of 2011, WesternZagros will focus its efforts on the sale of crude oil and generation of cash flow from operations from the Sarqala extended well testing under the terms agreed to by the KRG and the Federal Government of Iraq. The generation of cash flow from these operations could then be used to fund or partially fund future exploration and appraisal activities.
In considering the proper timing to access further capital, the Company will assess the following factors:
- The required capital and timing associated with the extended well test being planned for Sarqala-1, including the potential cash flow generation from the potential trucked crude oil sales;
- Talisman's future participation in activities on the PSC Lands being limited to the Kurdamir prospect, with the expectation that the KRG would assign Talisman's prior 40 percent interest in the remaining PSC Lands to a new third party participant following completion of the third exploration commitment well, which would be located on those remaining PSC Lands. As such, this would require the Corporation to initially, or entirely fund 100 percent of the costs associated with the third commitment well;
- The exploration result of Mil Qasim-1;
- The ability to export oil and natural gas from the Kurdistan Region of Iraq in accordance with the economic terms under the PSC's likely following the promulgation of the new Federal Petroleum Law of Iraq; and
- The current conditions in the financial markets, including the potential for further market instability.
With the successful oil test at Sarqala-1 and the commencement of payments for oil exported from the Kurdistan Region of Iraq, management has a reasonable expectation that any future capital requirements can be met through either further equity raises or cash flow generated from extended well tests.
Outstanding Share Data
As at March 31, 2011 there were 297,129,672 shares issued and outstanding, including the 89,665,352 common shares issued during the first quarter of 2011 when WesternZagros completed a private placement of shares. The number of common shares reserved for issuance pursuant to options granted will not exceed 10 percent of the issued and outstanding common shares. As at December 31, 2010 there were 207,464,320 shares issued and outstanding. As at June 29, 2011, the total number of shares outstanding was 297,138,872.
As at December 31, 2010 there were 20,354,900 stock options issued and outstanding. For the quarter ended March 31, 2011, there were 27,000 stock options that were granted to employees and 605,400 forfeited by employees, bringing the total stock options outstanding as of March 31, 2011 to 19,776,500. Subsequent to March 31, 2011, there were 20,000 stock options granted to employees, 9,200 stock options exercised and 202,267 stock options forfeited by employees and contractors, bringing the total stock options outstanding as of June 29, 2011 to 19,585,033.
Supplemental Quarterly Information
The following table summarizes key financial information on a quarterly basis for the periods indicated, note that only the quarters for 2011 and 2010 are in accordance with accounting policies under IFRS, while the presented 2009 data is in accordance with previous GAAP:
----------------------------------------------------------------------------
(US$ thousands, unless otherwise
specified) Three Month Periods Ended
----------------------------------------------------------------------------
Mar 31 Dec 31 Sept 30 June 30
2011 2010 2010 2010
----------------------------------------------------------------------------
Revenue 17 13 38 17
----------------------------------------------------------------------------
Net Loss 1,480 2,003 819 1,646
----------------------------------------------------------------------------
Net Loss Per Share (US$ Per Share) 0.006 0.010 0.004 0.008
(Basic and Fully Diluted)
----------------------------------------------------------------------------
Capital Expenditures, net of disposals 15,494 17,283 20,455 15,962
----------------------------------------------------------------------------
Total Assets 271,720 240,290 233,770 235,295
----------------------------------------------------------------------------
Total Long-term Liabilities 816 649 665 624
----------------------------------------------------------------------------
Dividend (US$ per Share) Nil Nil Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Month Periods Ended
----------------------------------------------------------------------------
March 31 Dec 31 Sep 30 June 30
2010 2009 2009 2009
----------------------------------------------------------------------------
Revenue 19 32 36 35
----------------------------------------------------------------------------
Net Loss 1,333 1,035 2,712 1,404
----------------------------------------------------------------------------
Net Loss Per Share (US$ Per Share) 0.006 0.005 0.013 0.006
(Basic and Fully Diluted)
----------------------------------------------------------------------------
Capital Expenditures 13,153 11,250 11,456 14,796
----------------------------------------------------------------------------
Total Assets 235,514 241,077 241,600 241,171
----------------------------------------------------------------------------
Total Long-term Liabilities 573 175 171 197
----------------------------------------------------------------------------
Dividend (US$ per Share) Nil Nil Nil Nil
----------------------------------------------------------------------------
RISK FACTORS
The risks factors that could influence actual results have not changed since the 2010 Annual Report and Annual Information Form including the risk that WesternZagros' ability to access the equity or debt markets in the future may be affected by further drilling challenges and related increases to exploration well costs. Any financial market instability may impact WesternZagros' ability, and that of other exploration and development companies, to access equity or debt markets at all or with acceptable terms. The inability to access the equity or debt markets for sufficient capital, at acceptable terms and within required time frames, could have a material adverse effect on WesternZagros' financial condition, results of operations and prospects.
An investment in WesternZagros should be considered highly speculative due to the nature of its activities, the present stage of its development, the need for continued participation of the Company's co-venturers in the Original PSC activities and its need for additional financing in the future for any acquisition, exploration, development and production of oil and gas reserves beyond current funding levels. WesternZagros' risk factors include, but are not limited to, all the risks normally incidental to the exploration, development and operation of crude oil and natural gas properties and the drilling of crude oil and natural gas wells, including geological risk, encountering unexpected formations or pressures, potential environment damage, blow-outs, fires and spills, all of which could result in personal injuries, loss of life and damage to property of WesternZagros and others; premature declines of reservoirs; environment risks; delay or changes in plans with respect to exploration or development projects or capital expenditures; the ability to attract key personnel; the risk of commodity price and foreign exchange rate fluctuations.
All of WesternZagros' assets are located in the Kurdistan Region of Iraq. As such, WesternZagros is subject to political, economic, and other uncertainties, including, but not limited to, the uncertainty of negotiating with foreign governments, expropriation of property without fair compensation, adverse determinations or rulings by governmental authorities, changes in energy policies or the personnel administering them, nationalization, currency fluctuations and devaluations, disputes between various levels of authorities, arbitrating and enforcing claims against entities that may claim sovereignty, authorities claiming jurisdiction, potential implementation of exchange controls, royalty and government take increases and other risks arising out of foreign governmental sovereignty over the areas in which WesternZagros' operations are conducted, as well as risks of loss due to civil strife, acts of war, guerrilla activities and insurrections. WesternZagros' operations may be adversely affected by changes in government policies and legislation or social instability and other factors which are not within the control of WesternZagros including, among other things, adverse legislation in Iraq and/or the Kurdistan Region, a change in crude oil or natural gas pricing policy, the risks of war, terrorism, abduction, expropriation, nationalization, renegotiation or nullification of existing concessions and contracts, taxation policies, economic sanctions, the imposition of specific drilling obligations and the development and abandonment of fields.
For a complete list of risk factors please refer to Company's Annual Information Form, which is available atwww.westernzagros.com or on SEDAR at www.sedar.com.
Adoption of International Financial Reporting Standards ("IFRS")
The Company has prepared its March 31, 2011 condensed consolidated interim financial statements in accordance with IAS 34, "Interim Financial Reporting" and in accordance with IFRS 1, "First Time Adoption of International Financial Reporting Standards". These were the Company's first condensed consolidated interim financial statements prepared under IFRS. Accordingly, the transition date to IFRS was January 1, 2010 and comparative information for 2010 has been prepared in accordance with the Company's IFRS accounting policies. The adoption of IFRS has not had a material impact on the Company's operations, strategic decisions, cash flow, or overall capital expenditures.
The Company's IFRS accounting policies are provided in detail in Note 3 to the March 31, 2011 Condensed Consolidated Interim Financial Statements. Prior period reconciliations between IFRS and previous GAAP are included within Note 23 to the March 31, 2011 Condensed Consolidated Interim Financial Statements. In summary, Note 23 includes the following reconciliations:
- Balance Sheets as at January 1, 2010, March 31, 2010 and December 31, 2010;
- Statements of Comprehensive Loss for the periods ended March 31, 2010 and December 31, 2010; and
- Statements of Cash Flows for the periods ended March 31, 2010 and December 31, 2010.
Financial Statement Impacts Upon Conversion to IFRS
The following discussion explains the significant impacts on the financial statements upon conversion to IFRS.
Exploration and Evaluation Expenditures "(E&E")
WesternZagros previously utilized the full cost method under Canadian GAAP for accounting for its exploration activities in the Kurdistan Region of Iraq. Under the full cost method, all costs associated with the acquisition of, exploration for, and development of crude oil and natural gas, including asset retirement obligations, were capitalized and accumulated within cost centres on a country-by-country basis. Such costs included land acquisition, geological and geophysical activity, drilling and testing of productive and non-productive wells, carrying costs directly related to unproved properties, major development projects as well as insurance and administrative costs directly related to exploration and development activities. As WesternZagros was only operating in the Kurdistan Region of Iraq and had only one Original PSC in that region, it capitalized all costs associated with those exploration activities, including certain costs incurred prior to entering into the Original PSC.
IFRS 1 sets out the procedures that an entity must follow when adopting IFRS as the basis for preparing financial statements. IFRS 1 also provides entities with a number of optional exemptions upon conversion to IFRS, the most significant of which that WesternZagros utilized was the exemption that allows the December 31, 2009 full cost pool under previous GAAP which are related to costs where the technical feasibility and commercial viability have not yet been determined to be reclassified as exploration and evaluation assets under IFRS. This resulted in $154 million of costs being reclassified from property, plant and equipment ("PP&E") to E&E expenditures on a deemed costs basis as at January 1, 2010.
Upon conversion to IFRS, WesternZagros was also required to adopt IFRS 6, "Exploration for and Evaluation of Mineral Resources", which is the standard that deals with accounting for exploration and evaluation expenditures for extractive industries. Typical costs included in the E&E expenditures are acquisition of rights to explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling, activities in relation to evaluating the technical feasibility and commercial viability of extracting mineral resources, as well as insurance and certain general and administrative costs. Under IFRS 6, costs incurred prior to the legal rights to explore an area being obtained may no longer be capitalized within E&E expenditures. During 2010 the Company reclassified a further $27 million from PP&E to E&E expenditures. As at December 31, 2010 a total of $181 million in costs had been reclassified from PP&E under previous GAAP to E&E expenditures relating to the Company's Original PSC upon conversion to IFRS.
WesternZagros was also required to complete an impairment test of E&E expenditures as at January 1, 2010. There was no impairment of E&E assets upon transition to IFRS.
Share Based Payments
The Company previously valued stock option issuances based on each grant as a whole and expensed the valuation of each grant on a straight line basis over the expected lives of the options. Upon conversion to IFRS, the Company was required to adopt IFRS 2, "Share-Based Payment" which provides that the valuation and expensing of share-based payment be done on a graded vesting basis. This resulted in an accelerated expensing of share-based payments based on each individual vesting tranche of options under IFRS as compared to previous GAAP, less the impact of estimated forfeiture rates under IFRS that had not previously been estimated under GAAP. As at January 1, 2010 the adoption of IFRS 2 resulted in an increase in contributed surplus of approximately $0.9 million, with a corresponding increase in the accumulated deficit. As at December 31, 2010 the adoption of IFRS 2 resulted in a net minor overall decrease in contributed surplus as compared to previous GAAP as the timing of expense recognition was similar between IFRS and previous GAAP at that point in time.
Provision for Decommissioning Liabilities
The provisions for decommissioning obligations under IFRS are treated similarly to previous Canadian GAAP, which had previously been disclosed as asset retirement obligations ("ARO"). Upon conversion to IFRS, the Company was required to adopt IAS 37, "Provisions, Contingent Liabilities and Contingent Assets", which required that a risk-free discount rate, that was not credit risk adjusted, be applied to the present value calculation of estimated future abandonment costs. This resulted in a lower discount rate utilized in the present value calculation under IFRS as compared to previous GAAP. As a result of the lower discount rate under IFRS, the provision for decommissioning liabilities increased by $0.3 million under IFRS as at January 1, 2010 and remained at a $0.3 million increase as at December 31, 2010 when compared to GAAP.
Other IFRS 1 Exemptions Utilized
IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary exemptions from the general principal of retrospective treatment. Beyond the full-cost book value as deemed cost exemption utilized for E&E expenditures as discussed in the E&E section of this MD&A, the Company also utilized the allowed exemption relating to IFRS 3, "Business Combinations". Accordingly, IFRS 3 has not been applied to acquisitions that occurred prior to January 1, 2010.
CRITICAL ACCOUNTING ESTIMATES
WesternZagros' critical accounting estimates are defined as those estimates that have a significant impact on the portrayal of its financial position and operations and that require management to make judgments, assumptions and estimates in the application of IFRS. Judgments, assumptions and estimates are based on historical experience and other factors that management believes to be reasonable under current conditions. As events occur and additional information is obtained, these judgments, assumptions and estimates may be subject to change. WesternZagros believes the following are the critical accounting estimates used in the preparation of its consolidated financial statements, which can also be found in Note 5 to the March 31, 2011 Condensed Consolidated Interim Financial Statements.
Use of Estimates
The preparation of the condensed consolidated interim 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 as at the date of the condensed consolidated interim financial statements, and the reported amounts of revenues and expenses during the reporting period. Such estimates relate to unsettled transactions and events as of the date of the condensed consolidated interim financial statements. Accordingly, actual results may differ from these estimated amounts as future confirming events occur. Significant estimates used in the preparation of the condensed consolidated interim financial statements include, but are not limited to, recovery of asset carrying values, provision for decommissioning liabilities, incomes tax, and share-based payments.
Recoverability of asset carrying values
At each reporting date, the Company assesses its exploration and evaluation and property, plant and equipment expenditures for possible impairment if events or circumstances indicate the carrying values of the assets might not be recoverable. Relevant indicators include the following: the continued progression of Management's operational plans; new information obtained from wells that have been drilled or tested; changes or restrictions in access to drilling sites; changes in legal, regulatory, market, environmental, technological, or political factors that could impact ongoing operations; the ability of the Company to continue fulfilling ongoing commitments; and significant changes in the Company's market value.
If factors indicate that the Company may need to recognize impairment, the carrying value of the assets for each cash-generating-unit is compared to the greater of value-in-use or fair-value less costs to sell. It is anticipated that the value-in-use model, based on discounted estimated future net cash flows, would be more readily computed. Determination of the value-in-use amount and any resulting impairment involves the use of significant estimates and assumptions about future events and factors such as future commodity prices, the impact of inflation on operating expenses, discount rates, production profiles, the ability to produce and export crude oil and natural gas, the future capital costs needed to develop reserves, as well as the future marketability and availability of transportation for crude oil and natural gas that is produced.
At the reporting date, the Company is still in the exploration phase of operations on its PSC Lands. The Company has not recognized any impairment for exploration and evaluation expenditures nor for property, plant, and equipment.
Provision for decommissioning obligations
The Company recognizes both an asset and a provision for decommissioning obligations in the period in which they are incurred by estimating the fair value of the obligation. Provisions for environmental clean-up and remediation costs associated with the Company's drilling operations are based on current legal and constructive requirements, technology, price levels and expected plans for remediation. Actual costs and cash outflows and the timing of those cash outflows can differ from estimates because of changes in laws and regulations, public expectations, prices, discovery and analysis of site conditions, future performance of wells drilled, and changes in clean-up technology. Estimating the timing and amount of cash outflows required to settle these obligations are inherently difficult and are based on Management's current experience. A risk free rate has been used in the calculations. Any differences between actual and estimated decommissioning obligations would impact both the asset and the provision which then would impact future depletion on the asset as well as accretion on the provision.
Income tax
Tax regulations and legislation and the interpretations thereof in the jurisdictions that the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by Management based on all available information at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings.
Share-based payments
The estimates, assumptions, and judgements made in relation to the fair value of share-based payments and the associated expense recognition is subject to measurement uncertainty. The fair value of employee stock options is measured using a Black Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility, expected life of the instrument, expected dividends, and the risk-free interest rate.
Recent accounting pronouncements issued but not yet effective
The IASB has issued the following standards which are effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company is currently evaluating the impact, if any, of each of these new standards, which are briefly summarized as follows:
IAS 27 - Separate Financial Statements:
IAS 27 replaces the existing IAS 28, "Consolidated and Separate Financial Statements". IAS 27 contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. IAS 27 requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9, "Financial Instruments".
IAS 28 - Investments in Associates and Joint Ventures:
IAS 28 prescribes the accounting for investments in associates and sets out the application of the equity method when accounting for investments in associates and joint ventures.
IFRS 9 - Financial Instruments:
IFRS 9 is the first part of a new standard on classification and measurement of financial assets and liabilities that will replace IAS 39, "Financial Instruments: Recognition and Measurements".
For financial assets, IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is at fair value through profit and loss.
For financial liabilities, although the classification criteria for financial liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities may require different accounting for changes to the fair value of a financial liability as a result of changes to an entity's own credit risk.
IFRS 10 - Consolidated Financial Statements:
IFRS 10 establishes the principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces IAS 27 "Consolidated and Separate Financial Statements" and SIC-12 "Consolidation - Special Purpose Entities".
IFRS 11 - Joint Arrangements:
IFRS 11 establishes principles for financial reporting by parties to a joint arrangement, and requires entities to classify interests in joint arrangements as either a joint venture or a joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for joint operations the entity will recognize it share of the assets, liabilities, revenue and expenses of the joint operation. IFRS 11 replaces IAS 31 "Interests in Joint Ventures" and SIC-13 "Jointly Controlled Entities - Non-monetary Contributions by Venturers".
IFRS 12 - Disclosure of Interests in Other Entities:
IFRS 12 establishes disclosure requirements relating to an entity's interests in other entities such as joint arrangements, associates or unconsolidated structured entities, including special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosure requirements and also introduces significant additional disclosure requirements that address the nature and risk associated with interests in other entities.
IFRS 13 - Fair Value Measurements:
IFRS 13 defines fair value and sets out a single IFRS framework for measuring fair value and the required disclosures about fair value measurements for use across all IFRS standards. IFRS 13 is intended to eliminate the inconsistencies in fair value measurement and the disclosure requirements contained in various other IFRS standards that refer to fair value.
----------------------------------------------------------------------------
Condensed consolidated interim statements of financial position
(United States dollars thousands)
(Unaudited)
January 1,
March December 31, 2010
Note 31, 2011 2010 (Note 23) (Note 23)
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 7 $ 64,863 $ 31,482 $ 76,708
Trade and other
receivables 8 1,876 8,648 6,880
Insurance recoveries
receivable 9 9,092 17,597 -
Deposits held in trust 11 - 420 -
Prepaid expenses 534 39 183
Income tax recoverable 12 1,351 887 1,738
----------------------------------------------------------------------------
Total current assets 77,716 59,073 85,509
Non-current assets
Deposits held in trust 11 - - 420
Property, plant and
equipment 10 211 261 814
Exploration and evaluation
expenditures 9 193,560 180,770 154,097
Deferred tax assets 12 233 186 371
----------------------------------------------------------------------------
Total non-current assets 194,004 181,217 155,702
----------------------------------------------------------------------------
Total assets $ 271,720 $ 240,290 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Trade and other payables 13 $ 11,701 $ 21,525 $ 18,297
----------------------------------------------------------------------------
Total current liabilities 11,701 21,525 18,297
Non-current liabilities
Provision for
decommissioning
obligations 14 667 509 432
Deferred tax liabilities 12 149 140 134
----------------------------------------------------------------------------
Total non-current
liabilities 816 649 566
----------------------------------------------------------------------------
Total liabilities 12,517 22,174 18,863
----------------------------------------------------------------------------
Equity
Share capital 15 295,761 253,583 253,583
Contributed surplus 16 11,612 11,223 9,654
Deficit (48,170) (46,690) (40,889)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total equity 259,203 218,116 222,348
----------------------------------------------------------------------------
Total equity and
liabilities $ 271,720 $ 240,290 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and contingencies (Note 22)
The notes are an integral part of these condensed consolidated interim
financial statements.
These condensed consolidated interim financial statements were authorized
for issue by the Board of Directors on June 29, 2011. They are signed on the
Company's behalf by:
(Signed) "Fred J. Dyment" (Signed) "Randall Oliphant"
Director Director
Condensed consolidated interim statements of comprehensive loss
(United States dollars thousands, except per share amounts)
(Unaudited)
For the three months ended March 31 Note 2011 2010
----------------------------------------------------------------------------
Revenue
Other income 17 19
Expenses
General and administrative expenses 17, 18 1,796 1,763
Depreciation 50 179
Accretion on decommissioning liabilities 14 6 4
Foreign exchange loss 148 52
----------------------------------------------------------------------------
Total expenses 2,000 1,998
----------------------------------------------------------------------------
Loss before taxation 1,983 1,979
Taxation
Current 12 (465) (697)
Deferred 12 (38) 51
----------------------------------------------------------------------------
Total taxation (recovery) (503) (646)
----------------------------------------------------------------------------
Total loss and comprehensive loss for the
period attributable to the shareholders $ 1,480 $ 1,333
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share
- basic and diluted 19 $ 0.006 $ 0.006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim
financial statements.
Condensed consolidated interim statements of changes in equity
(United States dollars thousands)
(Unaudited)
Number of Share
Note shares capital
----------------------------------------------------------------------------
Balance January 1, 2010 23 207,464,320 $ 253,583
Share based payments - -
Loss for the period - -
----------------------------------------------------------------------------
Balance March 31, 2010 23 207,464,320 253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share based payments - -
Loss for the period - -
----------------------------------------------------------------------------
Balance December 31, 2010 23 207,464,320 253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Issue of common shares 89,665,352 44,227
Share issue costs - (2,049)
Share based payments 16 - -
Loss for the period - -
----------------------------------------------------------------------------
Balance March 31, 2011 297,129,672 $ 295,761
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed Accumulated Total
surplus deficit equity
----------------------------------------------------------------------------
Balance January 1, 2010 $ 9,654 $ (40,889) $ 222,348
Share based payments 357 - 357
Loss for the period - (1,333) (1,333)
----------------------------------------------------------------------------
Balance March 31, 2010 10,011 (42,222) 221,372
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share based payments 1,212 - 1,212
Loss for the period - (4,468) (4,468)
----------------------------------------------------------------------------
Balance December 31, 2010 11,223 (46,690) 218,116
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Issue of common shares - - 44,227
Share issue costs - - (2,049)
Share based payments 389 - 389
Loss for the period - (1,480) (1,480)
----------------------------------------------------------------------------
Balance March 31, 2011 $ 11,612 (48,170) $ 259,203
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim
financial statements.
Condensed consolidated interim statements of cash flows
(United States dollars thousands)
(Unaudited)
For the three months ended March 31 Note 2011 2010
----------------------------------------------------------------------------
Cash flow from operating activities
Net loss before taxation $ (1,983) $ (1,979)
Adjustments for
Depreciation 50 179
Accretion 14 6 4
Share based payments 16, 17 245 273
Income tax recovered (paid) - -
Change in non-cash operating working
capital 21 (52) (307)
----------------------------------------------------------------------------
Net cash from (used in) operating
activities (1,734) (1,830)
----------------------------------------------------------------------------
Cash flow from investing activities
Expenditure on exploration and evaluation
assets 21 (19,029) (19,795)
Disposals of exploration and evaluation
assets 461 -
Insurance recoveries 9 11,505 -
----------------------------------------------------------------------------
Net cash from (used in) investing
activities (7,063) (19,795)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flow from financing activities
Issuance of common shares, net of issuance
costs 42,178 -
----------------------------------------------------------------------------
Net cash from (used in) financing
activities 42,178 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash equivalents 33,381 (21,625)
----------------------------------------------------------------------------
Cash and cash equivalents, beginning of
period 31,482 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 64,863 $ 55 ,083
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim
financial statements.
Notes to the condensed consolidated interim financial statements
For the three months ended March 31, 2011
(Tabular amounts in United States dollars thousands)
(Unaudited)
1. General information
WesternZagros Resources Ltd. (the "Company" or "WesternZagros") and its subsidiaries are headquartered in Calgary, Canada. The Company is incorporated under the laws of the Province of Alberta, Canada. The registered address for the Company is Suite 600, 440 - 2nd Avenue S.W., Calgary, Alberta, T2P 5E9.
The Company is an international oil and gas company engaged in acquiring properties and exploring for, developing, and producing crude oil and natural gas in Iraq. The Company is in the exploration stage, and through its subsidiaries, the Company's operations are related to its interest in a Production Sharing Contract ("PSC") with the Kurdistan Regional Government ("KRG") in respect of a 2,120 square kilometre exploration block (the "Kalar-Bawanoor Block" or "PSC Lands") within the Kurdistan Region of Iraq. WesternZagros holds a 40 percent working interest, the KRG holds a 20 percent working interest (the costs of which are carried by WesternZagros) and a wholly-owned subsidiary of Talisman Energy Inc. ("Talisman") holds the remaining 40 percent working interest (collectively known as the "Contractor Group"). Subsequent to March 31, 2011, the Company concluded negotiations with the Ministry of Natural Resources of the KRG and Talisman to amend the PSC that governs the Company's exploration activities in the Kalar-Bawanoor Block (the "Original PSC"). Once approved, the amendments to the agreement will divide the contract area of the Original PSC into two contract areas, each under a separate PSC. The northern contract area (comprising approximately 340 square kilometers) will remain under an amended version of the Original PSC (the "Kurdamir PSC"), while the southern area (comprising approximately 1,780 square kilometers) will be governed under a new "Garmian PSC". The Company is awaiting formal approval of both the Kurdamir and Garmian PSC's from the Oil and Gas Council of the KRG and execution of the PSC's by the KRG. WesternZagros' 40 percent ownership and other economic terms will remain unchanged in both the Kurdamir PSC and the Garmian PSC (refer to Note 22 "Commitments and contingencies" for a description of the PSC's).
The Company has its listing on the TSX Venture Exchange under the symbol "WZR.V".
Authorization of financial statements
These condensed consolidated interim financial statements for the period ending March 31, 2011 were authorized for issuance in accordance with a resolution of the Audit Committee of the Board of Directors on June 29, 2011.
2. Basis of preparation
These condensed consolidated interim financial statements, including prior year comparative information, have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting, and International Financial Reporting Standard 1, First Time Adoption of IFRS, using accounting policies consistent with International Financial Reporting Standards("IFRS") as issued by the International Accounting Standards Board ("IASB"), and interpretations issued by the IFRS Interpretations Committee, that are published at the time of preparation and that are effective or available for early adoption on December 31, 2011, the Company's first annual reporting date under IFRS. These are the Company's first condensed consolidated interim financial statements prepared in accordance with IFRS. Previously the Company prepared its consolidated annual and consolidated interim financial statements in accordance with Canadian generally accepted accounting principles ("GAAP").
These condensed consolidated interim financial statements have been prepared on a going concern basis under the historical cost convention. These condensed consolidated interim financial statements should be read in conjunction with the Company's annual financial statements and the notes thereto in the Company's annual report for the year ended December 31, 2010, which were prepared in accordance with previous GAAP.
As is typical with exploration stage companies, the Company has incurred losses from operations and negative cash flows from operating activities, and has an accumulated deficit at March 31, 2011. During the three months ended March 31, 2011, the Company had expenditures of $1.7 million for operating activities and $7.1 million for investing activities related to exploration and evaluation assets, including changes in non-cash working capital. The Company will require additional funding over time to maintain ongoing exploration programs and property commitments, as well as for administration expenses. In general, the Company's ability to continue operations and exploration activities is dependent upon its ability to obtain additional funding over time. While the Company has been successful in obtaining its required funding in the past, there is no assurance that sufficient funds will be available to the Company in the future, or if available, available on favourable terms. Factors that could affect the availability of financing include the continued support of its shareholders; the results of exploration activities; obtaining formal approval by the Oil and Gas Council of the KRG and the execution by the KRG of the Kurdamir and Garmian PSC's and the potential assignment by the KRG of the Third Party Participant in the Garmian PSC and timing thereof (see Note 22 "Commitment and contingencies" for a description of the PSC's); the results and timing associated with potential future production and sales; the political climate in Iraq and the general affect it has on the oil and gas industry; and the overall state of the capital markets. This requirement for funding may occur during the fiscal year ending December 31, 2011 and is dependent on the level and timing of exploration activities pursued by the Company and the funding requirement of the Company under the relevant PSC's.
The Company realizes that the combination of circumstances and risks represent an uncertainty that may cast doubt upon the Company's ability to realize its assets and discharge its liabilities in the normal course of business. Nevertheless, after considering the uncertainties, Management has a reasonable expectation that the Company has adequate resources or can raise the additional resources required in order to continue to adopt the going concern basis of accounting in preparing the financial statements.
3. Significant accounting policies
The significant accounting policies used in the preparation of these condensed consolidated interim financial statements are described below.
A. Conversion to IFRS
The Canadian Accounting Standards Board ("AcSB") confirmed in February 2008 that IFRS would replace Canadian generally accepted accounting principles for publicly accountable enterprises for financial periods beginning on or after January 1, 2011.
These condensed consolidated interim financial statements for the period ended March 31, 2011 were the Company's first condensed consolidated interim financial statements prepared under IFRS, with a corresponding transition date of January 1, 2010. Consequently, the comparative figures for 2010 and the Company's consolidated statement of financial position as at January 1, 2010 have been restated from GAAP to comply with IFRS. The reconciliations between previously reported GAAP and IFRS are explained in Note 23 of these condensed consolidated interim financial statements.
B. Basis of measurement
These condensed consolidated interim financial statements have been prepared on a historical costs basis, and have been prepared using the accrual basis of accounting, except for certain cash flow information. The accounting policies, as described in further detail in this note, have been consistently applied to all periods presented in these condensed consolidated interim financial statements. They also have been applied in preparing an opening statement of financial position at January 1, 2010 for the purposes of transition to IFRS as required by IFRS 1, First Time Adoption of International Financial Reporting Standards.
These condensed consolidated interim financial statements, unless otherwise indicated, are expressed in United States dollars ("US"). The company has adopted the US dollar as its functional and reporting currency since most of its expenses are directly or indirectly denominated in US dollars. When revenues are realized, it is expected that US dollars would be received. All references herein to U.S. $ or to $ are to United States dollars and references herein to Cdn $ are to Canadian dollars. These condensed consolidated interim financial statements are rounded to the nearest thousand (U.S. $000) except where otherwise indicated.
The preparation of these condensed consolidated interim financial statements in conformity with IFRS requires the use of critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date, as well as the reported amounts of revenues and expenses during the reporting period. Such estimates relate to unsettled transactions and events at the reporting date. Accordingly, actual results may ultimately differ from the estimated amounts as future confirming events occur. Areas that involve a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the condensed consolidated interim financial statements are disclosed in Note 5.
C. Basis of consolidation
These condensed consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Nature of
Wholly-owned subsidiary Jurisdiction operations
----------------------------------------------------------------------------
WesternZagros Resources Inc. Canada Holding Company
Western Oil International Holdings Limited Cyprus Holding Company
WesternZagros Limited Exploration
Cyprus Company
These subsidiaries are entities over which the Company has the power to govern the financial and operating policies. The Company has 100% direct ownership of these entities. Accordingly, the subsidiaries are fully consolidated within the Company's condensed consolidated interim financial statements.
Inter-company transactions and balances, including unrealized income and expenses arising from inter-company transactions, are eliminated in full in preparing these condensed consolidated interim financial statements.
D. Jointly controlled assets under the Original PSC
The jointly controlled assets under the Original PSC offer joint ownership by the Company and its co-venturers to the Original PSC for assets contributed to the ongoing exploration project in the Kurdistan Region of Iraq. The Company recognizes its share of the jointly controlled assets and its share of the joint liabilities incurred under the Original PSC.
E. Foreign currency translation
These condensed consolidated interim consolidated financial statements are presented in U.S. dollars, which is the Company's functional and reporting currency.
Transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At the reporting date, monetary assets and liabilities that are denominated in foreign currencies are translated at the exchange rates prevailing at the date of the statement of financial position. Non-monetary items are measured at historical exchange rates.
F. Exploration and evaluation expenditures
Crude oil and natural gas exploration and evaluation expenditures are accounted for using a modified 'successful efforts' method of accounting. Accordingly, the Company accounts for its share of costs relating to the acquisition of, exploration for, and evaluation of crude oil and natural gas assets, including related provisions for decommissioning liabilities, as exploration and evaluation expenditures. Exploration and evaluation costs include, but are not limited to, license and land acquisition costs; topographical, geological, geochemical, and geophysical costs or studies; drilling and testing of exploratory and non-productive wells; costs related to evaluating the technical feasibility or commercial viability of extracting mineral reserves; carrying costs directly related to unproved properties; major development projects; and administrative costs directly related to exploration and evaluation activities.
The costs continue to be carried as exploration and evaluation expenditures until such time that the technical feasibility and commercial viability of the crude oil and natural gas hydrocarbons has been demonstrated and development of reserves has been sanctioned. At that point the exploration and evaluation expenditures are assessed for impairment and then transferred to development expenditures. As at the date of these financial statements the Company is an exploration stage company and has not yet incurred any development expenditures.
Accumulated exploration and evaluation expenditures are assessed for impairment if: a) sufficient data exists to determine technical feasibility and commercial viability; and b) facts or circumstances suggest the carrying amount exceeds the recoverable amount. Indicators of impairment are considered at least annually or whenever facts and circumstances indicate potential impairment. For the purposes of impairment testing, exploration and evaluation expenditures are allocated on a cash-generating unit ("CGU") basis. The Company has established that each PSC entered into will be identified as a separate CGU. An impairment loss is recognized for the amount by which the exploration and evaluation expenditure's carrying value exceeds it recoverable amount. The recoverable amount is the higher of the exploration and evaluation expenditure's fair value less costs to sell and their value in use. Impairment losses are recognized immediately in the statement of comprehensive income (loss). If facts and circumstances subsequently indicate that a reversal of a previous impairment loss is warranted, the carrying value is increased up to the recoverable amount, with the reversal limited to the original loss amount. As at the reporting date no impairment has been recognized.
No depreciation or amortization is charged against exploration and evaluation assets.
G. Property, plant and equipment ("PP&E")
Property, plant and equipment are stated at historical cost, less depreciation, and are depreciated on a straight-line basis over their estimated useful lives based on the following annual rates:
Furniture, fixtures and office equipment 20-33%
Computer hardware and software 33-50%
Whenever events or circumstances dictate, the Company compares the carrying value of other property, plant and equipment to estimated net recoverable amounts, based on estimated discounted future cash flows, to determine whether there is any indication of impairment.
H. Cash and cash equivalents
Cash and cash equivalents consist of cash in the bank, less outstanding cheques, and short-term deposits with original maturity dates of three months or less.
I. Financial instruments
Financial assets and liabilities are recognized on the Company's statement of financial position when the Company becomes party to the contractual provisions of the instrument. Financial assets are de-recognized when the contractual rights to the cash flows from the financial assets expire or when the contractual rights to those assets are transferred. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled, or expired.
Upon initial recognition, the Company classifies its financial instruments into one of the following categories based on the purpose for which the instruments were acquired:
Financial assets and liabilities at fair value through profit or loss - this category is comprised of derivatives, or assets acquired or incurred principally for the purpose of selling or repurchasing in the near term, except for those derivatives designated as hedges. They are carried in the statement of financial position at fair value with changes in fair value recognized in the comprehensive statement of income (loss) for the period. The Company has not classified any instruments in this category, and has not identified any material embedded derivatives in any of its financial instruments.
Available-for-sale financial assets - this category is comprised of non-derivative investments designated as available for sale and can include marketable securities and investments in debt and equity securities. Available-for-sale investments are recognized initially at fair value plus transaction costs and are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognized in other comprehensive income. Available-for-sale investments are classified as non-current, unless the investments mature within twelve months, or management expects to dispose of them within twelve months. The Company has not classified any instruments in this category.
Loans and receivables - this category is comprised of non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company's loans and receivables are comprised of cash and cash equivalents, trade and other receivables, insurance recoveries receivable, deposits held in trust and income tax recoverable and are included in current assets due to their short-term nature.
Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest rate method.
Financial liabilities at amortized cost - this category is comprised of financial liabilities measured at amortized cost using the effective interest rate method, which includes trade and other payables.
J. Impairment of financial instruments
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss as follows:
Financial assets carried at amortized cost - the impairment loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument's original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly though the use of an allowance account.
Available for sale financial assets - the impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the statement of loss. This amount represents the cumulative loss in accumulated other comprehensive income that is reclassified to net income.
Impairment losses on financial instruments carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Impairment losses on available-for-sale equity instruments are not reversed.
K. Provision for decommissioning obligations
Provision for decommissioning obligations are recognized when the Company has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. Provision is made for the present value of the future cost of abandonment of oil and gas wells and related facilities. The Company recognizes the initial spud date as the obligating event for each well location. The Company currently has no other facilities or infrastructure relating to petroleum operations that would require future abandonment activities. When the provision is first recognized a corresponding amount equivalent to the provision is also currently recognized as part of the cost of exploration and evaluation expenditures.
The amount recognized is the estimated cost of decommissioning activities based on internal engineering estimates prevailing at the reporting date, discounted to its present value utilizing a pre-tax risk-free interest rate. Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision, with a corresponding adjustment to exploration and evaluation expenditures, and are updated at each reporting date to reflect the current market assessments of the time value of money and the risks specific to the obligation.
The liability is increased each period due to the passage of time and the associated accretion is expensed to income in the period.
L. Taxation including deferred taxation
Tax expense represents current tax and deferred tax. Income tax is recognized in the statement of income or loss except to the extent that it relates to items directly in equity, in which case the related income tax impact is recognized in equity.
Current tax is based on the taxable profits for the period and any adjustment to tax payable or receivable in respect of previous years.
Deferred tax assets and liabilities are determined on a non-discounted basis, using the liability method, based on the differences between the carrying values in the condensed consolidated interim financial statements and the tax bases of assets and liabilities. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income tax assets and liabilities are presented as non-current.
Deferred taxes are calculated using tax rates that have been enacted or substantively enacted by the reporting date.
Taxes on income in interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.
M. Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity.
N. Share-based payments
The Company has established a Stock Option Plan for the issuance of options to directors, officers, employees and consultants to purchase Common Shares of the Company. The vesting period and expiry date for each option grant is set at the discretion of the Board of Directors. Each vesting tranche is considered a separate award with its own vesting period. The fair value of each tranche is measured at the grant date using the Black-Scholes option pricing model. Compensation costs are recognized over the vesting period for each particular tranche based on the number of awards expected to vest, with a corresponding increase to contributed surplus. Compensation costs directly related to exploration activities are capitalized, costs related to non-exploration activities are treated as general and administrative expenses. The number of option awards expected to vest is reviewed at least annually, with any impact being recognized immediately.
The cash proceeds received, net of any directly attributable transaction costs, together with the amount recorded to other reserves are credited to share capital when the options are exercised.
O. Revenue
The Company recognizes revenue on an accrual basis, which is related to the interest income earned on the Company's cash and cash equivalents balances.
P. Fair value
The fair value of instruments, trade and other receivables, and trade and other payables approximate their carrying amounts due to the short term maturity of the instruments.
Q. Loss per share
The Company presents the basic and diluted loss per share data for its common shares, calculated by dividing the loss attributable to the shareholders of the Company by the weighted-average number of common shares outstanding during the period. Diluted income per share is determined by adjusting the income attributable to the common shareholders and the average number of common shares outstanding for the period for the effects of all potential dilutive common shares. Note that by definition, for periods in which there is a loss attributable to the common shareholders, there can be no dilutive impact on the loss per share calculation.
R. Recent accounting pronouncements issued but not yet effective
The IASB has issued the following standards which are effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company is currently evaluating the impact, if any, of each of these new standards, which are briefly summarized as follows:
IAS 27 - Separate Financial Statements:
IAS 27 replaces the existing IAS 28, "Consolidated and Separate Financial Statements". IAS 27 contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. IAS 27 requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9, "Financial Instruments".
IAS 28 - Investments in Associates and Joint Ventures:
IAS 28 prescribes the accounting for investments in associates and sets out the application of the equity method when accounting for investments in associates and joint ventures.
IFRS 9 - Financial Instruments:
IFRS 9 is the first part of a new standard on classification and measurement of financial assets and liabilities that will replace IAS 39, "Financial Instruments: Recognition and Measurements".
For financial assets, IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is at fair value through profit and loss.
For financial liabilities, although the classification criteria for financial liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities may require different accounting for changes to the fair value of a financial liability as a result of changes to an entity's own credit risk.
IFRS 10 - Consolidated Financial Statements:
IFRS 10 establishes the principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces IAS 27 "Consolidated and Separate Financial Statements" and SIC-12 "Consolidation - Special Purpose Entities".
IFRS 11 - Joint Arrangements:
IFRS 11 establishes principles for financial reporting by parties to a joint arrangement, and requires entities to classify interests in joint arrangements as either a joint venture or a joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for joint operations the entity will recognize it share of the assets, liabilities, revenue and expenses of the joint operation. IFRS 11 replaces IAS 31 "Interests in Joint Ventures" and SIC-13 "Jointly Controlled Entities - Non-monetary Contributions by Venturers".
IFRS 12 - Disclosure of Interests in Other Entities:
IFRS 12 establishes disclosure requirements relating to an entity's interests in other entities such as joint arrangements, associates or unconsolidated structured entities, including special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosure requirements and also introduces significant additional disclosure requirements that address the nature and risk associated with interests in other entities.
IFRS 13 - Fair Value Measurements:
IFRS 13 defines fair value and sets out a single IFRS framework for measuring fair value and the required disclosures about fair value measurements for use across all IFRS standards. IFRS 13 is intended to eliminate the inconsistencies in fair value measurement and the disclosure requirements contained in various other IFRS standards that refer to fair value.
4. Financial risk management
The Company's financial instruments consist of cash and cash equivalents, trade and other receivables, insurance recoveries receivable, deposits held in trust, and trade and other payables. The main risks that could adversely affect the Company's financial instruments are credit risk, liquidity and funding risk, and market and interest rate risk.
Risk management is carried out by senior management, in particular, the Board of Directors. The risk management policies employed by the Company are discussed below:
Credit risk
Credit risk is the risk of loss associated with the counterparty's inability to fulfill its payment obligations. The Company is currently exposed to credit risk on its cash and cash equivalents to the extent these balances are invested with various institutions. The Board of Directors of the Company has approved an Investment Policy to dictate the various types of instruments and institutions that can be invested in and monitors these against this policy on a regular basis. Currently, the Company has entered into transactions for cash equivalents with major Canadian financial institutions with investment grade credit ratings.
The Company is also normally exposed to credit risk on trade and other receivables, mainly associated with Talisman's 40 percent interest in the Original PSC. Accordingly, the ability of the Company to successfully carry out the exploration, appraisal and development of its PSC Lands may be impacted by the continued participation of the parties in these activities. As at March 31, 2011, the Company had a net receivable balance owing from Talisman of $1.7 million for its share of expenditures under the terms of the Original PSC, including penalty provisions for any amounts in default (also refer to Note 22 "Commitments and contingencies").
With respect to the Company's financial assets, the maximum exposure to credit risk due to default of a counter party is equal to the carrying value of these instruments. The maximum exposure to credit risk as at the reporting date is as follows:
March 31, December 31,
As at 2011 2010
----------------------------------------------------------------------------
Cash and cash equivalents 64,863 31,482
Trade and other receivables $ 1,876 $ 8,648
Insurance recoveries receivable 9,092 17,597
Deposits held in trust - 420
----------------------------------------------------------------------------
Total $ 75,831 $ 58,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company does not expect any losses from non-performance by these counterparties, and has not recorded a provision against any of these amounts as it does not consider the balances to be impaired.
Liquidity and funding risk
Liquidity and funding risk is the risk that the Company may be unable to generate or obtain sufficient cash or its equivalent in a timely and cost-effective manner to meet its commitments as they become due. As the Company is engaged in acquiring properties and exploring for crude oil and natural gas and is in the exploration phase, it currently does not have a revenue source outside of interest on its cash and cash equivalent balances. The Company is therefore required to funds its share of all commitments from existing balances or access additional sources of funding from debt or equity markets.
The Company's capital structure consists of shareholder's equity and working capital. The Company will adjust its capital structure to manage its drilling program though the issuance of shares and adjustments to capital spending.
The Company's objectives when managing its capital structure are as follows:
i. Ensure adequate levels of available cash and cash equivalents to meet the Company's commitments under the Original PSC (also refer to Note 22 "Commitments and contingencies"); and
ii. To prudently fund expenditures related to the acquisition of properties, and for exploration, appraisal and development of crude oil and natural gas properties.
The Company funds its share of expenditures of all commitments from existing cash and cash equivalent balances received primarily from issuances of shareholder's equity. The Company has not entered into any debt financing arrangements as at the reporting date and is not subject to any externally imposed capital requirements. Trade and other payables of $12 million are all current liabilities due in less than 1 year. Certain commitments of approximately $3 million identified in Note 22 are also due within 1 year of the reporting date.
The Board of Directors regularly reviews the Company's cash and cash equivalents against the Company's expenditure commitments and assesses the need and timing for additional financing. However, the Company's results will impact its access to the capital necessary to meet these expenditure commitments. There can be no assurance that debt or equity financing will be available or sufficient to meet those commitments, or for other corporate purposes, or if debt or equity financing is available, that it will be on terms acceptable to the Company. The inability of the Company to access sufficient capital for its operations could have a material adverse impact on the Company's financial condition, results of operations and prospects. Management has a reasonable expectation that the Company can raise the additional capital required in order to meet future expenditures.
Market and interest rate risk
Market risk is the risk of loss that may arise from changes in market factors such as interest rates, foreign exchange rates and equity or commodity prices. The Company is exposed to interest rate risk to the extent that changes in market interest rates will impact interest earned on the Company's cash and cash equivalents. The Company is also exposed to foreign exchange risk, as the majority of costs are anticipated to be incurred in U.S. dollars while the funds it will have available to it may be in other currencies.
The Company's Investment Policy dictates the various types of instruments and institutions that can be invested in and monitors these against this policy on a regular basis. The Board of Directors has also approved a Foreign Exchange Policy to dictate the currencies held by the Company and the instruments that can be utilized by the Company to meet its day to day requirements. This Foreign Exchange Policy requires the Company to hold the majority of its cash and cash equivalents and short term investments in U.S. dollars and sets out the type and duration of instruments that can be used to meet the Company's day to day foreign exchange requirements. The Foreign Exchange Policy does allow the Company to hold other balances, mainly Canadian dollars, to meet its funding needs for general and administrative and other spending requirements in these currencies. Neither aforementioned policy permits the Company to enter into any economic hedging as it relates to interest or foreign exchange risks. As at March 31, 2011, had the U.S. dollar changed by one percent against the Canadian dollar, with all other variables held constant, the Company's foreign exchange gain (loss) would have been affected by approximately $0.1 million.
The marketability and price of crude oil and natural gas that may be acquired or discovered by the Company is, and will continue to be, affected by numerous factors beyond its control including the impact that the various levels of government may have on the ultimate price received for crude oil and natural gas sales. The Company's ability to market its crude oil and natural gas may depend on its ability to secure transportation. The Company may also be affected by deliverability uncertainties related to the proximity of its potential production to pipelines and processing facilities and operational problems affecting such pipelines and facilities as well as potential government regulation relating to price, the export of crude oil and natural gas and other aspects of the crude oil and natural gas business.
Both crude oil and natural gas prices are subject to wide fluctuation. During the last 15 months ended March 31, 2011, both crude oil and natural gas prices remained volatile with West Texas Intermediate ranging from $64 to $113 per barrel. WesternZagros originally negotiated the economic terms of the Original PSC in 2007 in a crude oil price environment of approximately $50 per barrel. Any significant and sustained decline in crude oil prices from that price may impact the feasibility of WesternZagros' business plan.
5. Critical accounting judgements, estimates and assumptions
The preparation of these condensed consolidated interim financial statements in conformity with IFRS requires the use of critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the reporting date, as well as the reported amounts of revenues and expenses during the reporting period. Such estimates relate to unsettled transactions and events as at the reporting date. Accordingly, actual results may ultimately differ from the estimated amounts as future confirming events occur. Areas that involve a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the condensed consolidated interim financial statements are disclosed below.
A. Recoverability of asset carrying values
At each reporting date, the Company assesses its exploration and evaluation and property, plant and equipment expenditures for possible impairment if events or circumstances indicate the carrying values of the assets might not be recoverable. Relevant indicators include the following: the continued progression of Management's operational plans; new information obtained from wells that have been drilled or tested; changes or restrictions in access to drilling sites; changes in legal, regulatory, market, environmental, technological, or political factors that could impact ongoing operations; the ability of the Company to continue fulfilling ongoing commitments; and significant changes in the Company's market value.
If factors indicate that the Company may need to recognize impairment, the carrying value of the assets for each cash-generating-unit is compared to the greater of value-in-use or fair-value less costs to sell. The determination of the value-in-use amount, which is based on discounted future cash flows, and any resulting impairment involves the use of significant estimates and assumptions about future events and factors such as future commodity prices, the impact of inflation on operating expenses, discount rates, production profiles, the ability to produce and export crude oil and natural gas, the future capital costs needed to develop reserves, as well as the future marketability and availability of transportation for crude oil and natural gas that is produced.
At the reporting date, the Company is still in the exploration phase of operations on its PSC Lands. The Company has not recognized any impairment for exploration and evaluation expenditures nor for property, plant, and equipment.
B. Provision for decommissioning obligations
The Company recognizes both an asset and a provision for decommissioning obligations in the period in which they are incurred by estimating the fair value of the obligation. The fair value calculations are based on a risk-free discount rate. Provisions for environmental clean-up and remediation costs associated with the Company's drilling operations are based on current legal and constructive requirements, technology, price levels and expected plans for remediation. Actual costs and cash outflows and the timing of those cash outflows can differ from estimates because of changes in laws and regulations, public expectations, prices, discovery and analysis of site conditions, future performance of wells drilled, and changes in clean-up technology. Estimating the timing and amount of cash outflows required to settle these obligations are inherently difficult and are based on Management's current experience. Any differences between actual and estimated decommissioning obligations would impact both the asset and the provision, which would then impact future depreciation of the asset as well as accretion on the provision.
C. Income tax
Tax regulations and legislation and the interpretations thereof in the jurisdictions that the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by Management based on all available information at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings.
D. Share-based payments
The estimates, assumptions, and judgements made in relation to the fair value of share-based payments and the associated expense recognition is subject to measurement uncertainty. The fair value of employee stock options is measured using a Black Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility, expected life of the instrument, expected dividends, and the risk-free interest rate.
6. Segment reporting
At the reporting date, the Company had only one significant asset related to its interest the Original PSC with the KRG in respect of an exploration project in the Kurdistan Region of Iraq. The Company is still in the exploration phase and has identified one segment for operational activities carried out in the country of Iraq.
7. Cash and cash equivalents
March 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Bank balances $ 3,752 $ 3,613 $ 6,609
Term deposits 61,111 27,869 70,099
----------------------------------------------------------------------------
Cash and cash equivalents $ 64,863 $ 31,482 $ 76,708
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Trade and other receivables
Current March 31, December 31, January 1,
2011 2010 2010
---------------------------------------------------------------------------
Joint venture receivables $ 1,724 $ 7,675 $ 6,636
Other receivables 152 973 53
Loan receivable from related party - - 191
---------------------------------------------------------------------------
Total trade and other receivables $ 1,876 $ 8,648 $ 6,880
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Joint venture receivables relate to amounts owing from Talisman for its working interest share of costs incurred in relation to the Original PSC agreement. Other receivables include balances owing from certain payables vendors that have yet to be realized. The loan receivable at January 1, 2010 was in respect of a loan to a senior officer, this loan was fully repaid in the third quarter of 2010.
At the reporting date, there were joint venture receivables of $0.2 million (December 31, 2010: $0.2 million) that were more than ninety days past due but were not considered impaired. The other classes within trade and other receivables do not contain any impaired assets.
9. Exploration and evaluation expenditures
March 31, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Costs $ 193,560 $ 180,770 $ 154,097
Accumulated impairment - - -
----------------------------------------------------------------------------
Net book value $ 193,560 $ 180,770 $ 154,097
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Twelve months
ended ended
March 31, December 31,
Period ended 2011 2010
----------------------------------------------------------------------------
Opening net book value $ 180,770 $ 154,097
Additions, net of insurance recoveries 13,251 26,673
Disposals (461) -
Impairment - -
----------------------------------------------------------------------------
Closing net book value $ 193,560 $ 180,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All exploration and evaluation expenditures pertain to the Kurdistan Region Exploration Project with respect to the Company's PSC and have been capitalized in accordance with the Company's exploration and evaluation accounting policy. Included in exploration and evaluation expenditures as at March 31, 2011 is $0.4 million related to provisions for decommissioning obligations (December 31, 2010: $0.2 million). For the three months ended March 31, 2011, the Company has capitalized $1.0 million of general and administrative costs (March 31, 2010: $0.6 million), including $0.1 million of share-based compensation costs (March 31, 2010: $0.1 million) directly related to exploration activities. All exploration and evaluation expenditures are excluded from depreciation.
The Company initiated an insurance claim during 2010 related to the cost of the well control and recovery operations at Kurdamir-1. The control of well insurance policy covering these claims has a net aggregate limit to the Company of $45 million, with a $0.4 million deductible. Under the terms of the insurance policy, the Company submits claims for these costs as they are incurred and paid and these claims are then subject to the review and approval of an adjuster appointed by the insurers. As at March 31, 2011, the Company had received insurance proceeds of $35.9 million related to approved interim claims. Subsequent to March 31, 2011, the insurers approved a further payment of $4.7 million, which was fully received as at the reporting date. Also subsequent to March 31, 2011, the Company and insurers reached an agreement to settle the balance of the claim which will bring the total amount credited for insurance recoveries to approximately $45.0 million. As at December 31, 2010, $42.0 million had been credited for insurance recoveries.
As at March 31, 2011, the Company had approximately $174 million, net to WesternZagros, of recoverable costs available that may ultimately be recovered from future crude oil or natural gas sales in accordance with the Original PSC.
10. Property plant and equipment
As at the reporting date, property, plant and equipment is comprised of office and computer equipment and leasehold improvements. As the Company is still in the exploration stage all oil and gas assets, including assets related to provisions for decommissioning obligations, are classified within exploration and evaluation assets.
March 31, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Costs $ 1,830 $ 1,830 $ 1,830
Accumulated impairment - - -
Accumulated depreciation (1,619) (1,569) (1,016)
----------------------------------------------------------------------------
Net book value $ 211 $ 261 $ 814
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Twelve months
ended ended
March 31, December 31,
Period ended 2011 2010
----------------------------------------------------------------------------
Opening net book value $ 261 $ 814
Additions - -
Impairment - -
Depreciation (50) (553)
----------------------------------------------------------------------------
Closing net book value $ 211 $ 261
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Deposits held in trust
The Company had deposited in trust for a supplier amounts to be utilized to fund certain expenditures for drilling operations. During the three months ended March 31, 2011, these funds held in trust were released back to the Company.
12. Income taxes
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Current income tax recovery $ (465) $ (697)
Future income tax expense (recovery) (38) 51
----------------------------------------------------------------------------
Income tax expense (recovery) $ (503) $ (646)
----------------------------------------------------------------------------
The deferred income tax asset is comprised of:
Deferred income tax asset as at March 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Share issue costs $ 244 $ 204 $ 408
Book value in excess of tax values (11) (18) (37)
----------------------------------------------------------------------------
Total deferred income tax asset $ 233 $ 186 $ 371
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred income tax liability is comprised of:
March 31, December 31, January 1,
Deferred income tax liability as at 2011 2010 2010
---------------------------------------------------------------------------
Book value in excess of tax values $ 149 $ 140 $ 161
Non-capital loss carryforwards - - (27)
---------------------------------------------------------------------------
Total deferred income tax liability $ 149 $ 140 $ 134
13. Trade and other payables
March 31, December 31, January 1,
Current 2011 2010 2010
---------------------------------------------------------------------------
Trade payables $ 1,405 $ 4,052 $ 6,705
Accruals 10,296 17,473 11,592
---------------------------------------------------------------------------
Total trade and other payables $ 11,701 $ 21,525 $ 18,297
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Trade payables are non-interest bearing and are normally settled on 30 to 60 day terms. Accruals relate mainly to exploration and evaluation expenditures incurred as at the reporting date.
14. Provision for decommissioning obligations
Decommissioning liabilities are recognized when the Company has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. Provisions are made for the present value of the future cost of abandonment of oil and gas wells and related facilities.
The amount recognized is the estimated cost of decommissioning activities based on internal engineering estimates prevailing at the reporting date, discounted to its present value utilizing a pre-tax risk-free interest rate. Changes in the estimated decommissioning costs or the estimated timing of decommissioning costs are dealt with prospectively by recording an adjustment to the provision, with a corresponding adjustment to exploration and evaluation assets, and are updated at each reporting date to reflect the current market assessments of the time value of money and the risks specific to the obligation.
These costs are expected to be incurred in the year 2035 in respect of well locations as at the reporting date. The Company's share of total undiscounted amount of estimated cash flow required to settle the obligation is $1.7 million. The Company has used the Bank of Canada long-term bond yield rate and an inflation rate of 4 percent to calculate the net present value of the future obligations. The additional obligation incurred in the first quarter of 2011 relates to the Company's current 100 percent working interest funding for the Sarqala-1 re-entry operation for which Talisman has elected not to participate (also refer to Note 22 "Commitments and contingencies").
The following table presents the reconciliation of the Company's provision for decommissioning liabilities:
Three months Twelve months
ended March 31, ended December
2011 31, 2010
----------------------------------------------------------------------------
Balance, beginning of period $ 509 $ 432
----------------------------------------------------------------------------
Additional obligations incurred 173 -
Changes in estimates or timing of cash
flows (21) 61
Accretion 6 16
----------------------------------------------------------------------------
Balance, end of period $ 667 $ 509
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Share capital
As at March 31, 2011, the Company is authorized to issue an unlimited number of common shares and preferred shares, issuable in series. The common shares are without nominal or par value.
16. Share based payments
Pursuant to the stock option plan, the Board of Directors may grant options to directors, officers, employees and other service providers. The aggregate number of shares that may be reserved for issuance pursuant to stock options may not exceed 10 per cent of the issued and outstanding common shares of the Company on a non-diluted basis as at the time of granting. Stock options expire not more than five years from the date of grant, or earlier if the individual ceases to be associated with the Company, and the option vesting period is determined at the discretion of the Board of Directors when granted. These options are equity settled share based payment transactions.
The following tables present the reconciliation of stock options granted:
Weighted average
Number of exercise price
For the year ended December 31, 2010 options ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of year 13,007,334 $ 1.50
Granted 9,764,900 0.49
Exercised - -
Forfeited and expired (2,417,334) 1.67
----------------------------------------------------------------------------
Outstanding , end of year 20,354,900 $ 1.00
----------------------------------------------------------------------------
Exercisable at December 31, 2010 12,143,965 $ 1.30
----------------------------------------------------------------------------
Weighted average
Number of exercise price
For the three months ended March 31, 2011 Options ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of period 20,354,900 $ 1.00
Granted 27,000 0.58
Exercised - -
Forfeited and expired (605,400) 1.97
----------------------------------------------------------------------------
Outstanding, end of period 19,776,500 $ 0.97
----------------------------------------------------------------------------
Exercisable at March 31, 2011 11,736,965 $ 1.26
----------------------------------------------------------------------------
The fair value of all options granted have been estimated at the grant date using the Black-Scholes option pricing model and are summarized in the following table:
----------------------------------------------------------------------------
Three months ended Twelve months ended
March 31, 2011 December 31, 2010
----------------------------------------------------------------------------
Weighted average fair value of stock
options granted $0.40 $0.29
Average Risk Free Interest Rate $1.74% 1.62%
Expected Life 3 years 2 - 3 years
Average Expected Volatility 116% 120%
Dividend Per Share Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the quarter ended March 31, 2011, the Company recognized $0.2 million (Q1 2010: $0.3 million) of stock based compensation as general and administrative expense and capitalized $0.1 million (Q1 2010: $0.1 million).
17. General and administrative expenses, by nature
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Staff expenses $ 1,484 $ 1,179
Share-based payments 245 273
Travel expenses 215 119
Professional fees 268 442
Office costs 267 284
Regulatory and corporate project costs 69 312
Other administrative expenses 124 83
Less capitalized general and administrative
costs (876) (929)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total administrative expenses $ 1,796 $ 1,763
----------------------------------------------------------------------------
Key management personnel have been identified as the Board of Directors and the Executive Management Team. Details of key management remuneration are shown in Note 18.
18. Related party transactions and balances
All wholly-owned subsidiaries as listed in Note 3(c) have been included in the consolidated accounts.
The remuneration of the ten key management personnel of the Company, which includes the Directors and Officers and other Executive Management personnel, is set out below in aggregate:
For the three months ended March 31
2011 2010
----------------------------------------------------------------------------
Salaries and employee benefits $ 339 $ 320
Share-based compensation expense 201 172
----------------------------------------------------------------------------
Total $ 540 $ 492
----------------------------------------------------------------------------
19. Loss per share, basic and diluted
The basic loss per share is calculated by dividing the loss attributable to shareholders of the Company by the weighted average number of common shares issued during the period. In computing diluted per share amounts, all of the Company's options at the reporting date totaling 19,776,500 (March 31, 2010 - 12,904,000) have been excluded as they are anti-dilutive. Accordingly no additional common shares were added to the basic weighted average shares outstanding to account for dilution.
The basic and diluted loss per share was calculated as follows:
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Loss for the period $ 1,480 $ 1,333
Weighted-average number of common shares 229,382,517 207,464,320
----------------------------------------------------------------------------
Loss per share (basic and diluted) $ 0.006 $ 0.006
20. Shareholder rights plan
On October 18, 2007, the Corporation adopted a shareholder rights plan (the "Plan"). Under the Plan, one right has been issued in respect of each currently issued common share and one right will be issued with each additional common share which is issued. The rights remain attached to the common shares and are not exercisable or separable unless one or more of certain specified events occur. If a person or group acting in concert acquires 20 per cent or more of the common shares of the Corporation, the rights will entitle the holders thereof (other than the acquiring person or group) to purchase common shares at a substantial discount from the then market price. The rights are not triggered by a "Permitted Bid" as defined in the Plan. The Plan will remain in effect until termination of the annual meeting of shareholders in 2013, unless extended by resolution of the shareholders at such meeting.
21. Supplemental cash flow information
Expenditures on exploration and evaluation assets are comprised of:
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Expenditures on exploration and evaluation assets $(15,955) $(13,153)
Change in non-cash investing working capital (3,074) (6,642)
----------------------------------------------------------------------------
$(19,029) $(19,795)
----------------------------------------------------------------------------
Changes in non-cash working capital is comprised of:
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Related to operating activities
Trade and other receivables $ 438 $ (98)
Prepaid expenses (494) (213)
Income tax recoverable - -
Trade and other payables 4 4
----------------------------------------------------------------------------
$ (52) $ (307)
----------------------------------------------------------------------------
Related to investing activities
Trade and other receivables $ 6,754 $ (1,907)
Trade and other payables (9,828) (4,735)
----------------------------------------------------------------------------
$ (3,074) $ (6,642)
----------------------------------------------------------------------------
22. Commitments and contingencies
A. Production sharing contract
Under the terms of its Original PSC, the Company has a 40 percent working interest and the KRG has a 20 percent working interest which is carried by the Company. The remaining 40 percent working interest is held by Talisman, which was allocated the interest by the KRG, as announced on June 23, 2008. The Company, the KRG and Talisman are collectively the "Contractor Group" under the Original PSC. WesternZagros is the operator of the PSC Lands until the end of the first exploration sub-period of the Original PSC, when a joint operating company may be established if so elected by the Contractor Group.
The Original PSC contemplates two exploration sub-periods of three years and two years, respectively, with two possible one-year extensions. The first exploration sub-period ended December 31, 2010, subject to an extension under a force majeure claim described below. During such time, the Contractor Group was required to complete a minimum of 1,150 kilometres of seismic surveying (which has been completed), to drill three exploration wells (two of which have been drilled), and to commit a minimum of $75 million in the aggregate on these activities (which has been completed). The Original PSC also includes capacity building support payments (which concluded in April 2009) and annual funding for certain technological, logistical, recruitment and training support during the exploration sub-periods.
During the drilling of the Kurdamir-1 well, certain situations occurred which caused additional time to be spent on well control and repair operations under conditions of force majeure. Under the terms of the Original PSC, when a force majeure event occurs, the time resulting from any such delay and the time necessary to repair any damage resulting from the delay is to be added to any time period provided under the Original PSC, including the first exploration sub-period. The period of force majeure started on January 22, 2010 and continued until October 14, 2010, a period of 265 days. The Company, on behalf of the Contractor Group, has notified the KRG of a force majeure event under the terms of the Original PSC and claimed a corresponding 265 day extension of the first exploration sub-period, i.e. until September 22, 2011.
Following the submission of the force majeure claim to the KRG, the KRG proposed certain contractual amendments in order to resolve the timing issues created by the force majeure event and other commercial concerns. Subsequent to March 31, 2011, negotiations among the Contractor Group were concluded with respect to these proposed amendments. See "Future PSC Operations".
At the end of the first exploration sub-period, the Company and the other parties to the Original PSC may relinquish the entire contract area (other than any discovery or development areas), or continue further exploration operations by entering into the second exploration sub-period, or request a one-year extension for further exploration and appraisal activities prior to deciding to enter into the second exploration sub-period.
To meet its remaining commitments for the first exploration sub-period as at March 31, 2011, the Company estimates expenditures of approximately $35 million, prior to the costs of any testing, to meet its remaining commitments for the first exploration sub-period related to the third exploration commitment well. This estimate assumes that the Company will be required to fund 100 percent of the remaining costs associated with drilling the Mil Qasim-1 exploration commitment well, and provide associated supervision and local office support in support of drilling operations. See "Future PSC Operations".
During the second exploration sub-period under the Original PSC Agreement, the Contractor Group, or those parties who elected to participate in further exploration, is required to complete a minimum of 575 kilometres of seismic surveying, drill at least two exploration wells and commit a minimum of $35 million to these activities. At the end of the second exploration sub-period, the Company and the other parties to the Original PSC who elected to participate in the second exploration sub-period, may relinquish the entire contract area (other than any discovery or development areas) or continue further exploration and appraisal operations into the extension periods subject to the following relinquishment requirements. At the end of the second exploration sub-period, and at the end of each subsequent extension period, the Original PSC requires the Company, and other parties who elected to participate, to relinquish 25 percent of the remaining undeveloped area within the PSC Lands or the entire contract area (other than any discovery or development areas).
Future PSC Operations
Subsequent to March 31, 2011, and as an alternative to the force majeure claim, the Company concluded negotiations with the Ministry of Natural Resources of the KRG and Talisman to amend the Original PSC that governs the Company's exploration activities in the Kalar-Bawanoor Block in the Kurdistan Region of Iraq. Once approved, the amendments will divide the contract area of the Original PSC into two contract areas, each under a separate PSC. The northern contract area (or "Kurdamir Block", which comprises approximately 340 square kilometers) will remain under an amended version of the Original PSC called the "Kurdamir PSC", while the southern contract area (or "Garmian Block", which comprises approximately 1,780 square kilometers) will be governed under a new "Garmian PSC". The Company is awaiting formal approval of both the Kurdamir and Garmian PSC's from the Oil and Gas Council of the KRG and execution of the PSC's by the KRG. WesternZagros' 40 percent ownership and other economic terms will remain unchanged in both the Kurdamir PSC and the Garmian PSC.
The Kurdamir PSC and Garmian PSC will extend the time period available to complete the first exploration sub-period work obligations and add an additional well. The drilling commitments will comprise Mil Qasim-1 on the Garmian Block (to be drilled by December 31, 2011) and Kurdamir-2 on the Kurdamir Block (to be drilled by June 30, 2012). WesternZagros will remain the operator on the Garmian Block while Talisman will become operator of the Kurdamir Block. Also, Talisman's future participation in activities on the Original PSC Lands will be limited to the Kurdamir Block and it will not be a party to the Garmian PSC. Under the Garmian PSC, the KRG will have the ability to assign the remaining 40 percent interest in the Garmian Block to a new third party participant following the completion of Mil Qasim-1. As such, the Company will be required to initially, or entirely, fund 100 percent of the costs associated with Mil Qasim-1.
WesternZagros continues to work toward drilling the third exploration commitment well under the terms of the force majeure provision of the Original PSC in order to ensure that it meets the current requirements of the Original PSC in the event the Kurdamir and Garmian PCS's are not approved by the Oil and Gas Council of the KRG and subsequently executed by the KRG.
B. Other commitments
The Company has entered into various exploration-related contracts, including contracts for drilling equipment, services and tangibles. The following table summarizes the commitments the Company has under these exploration-related contracts relating to the Original PSC and other contractual obligations at March 31, 2011:
For the Years Ending December 31,
2011 2012 2013 2014 2015+ Total
----------------------------------------------------------------------------
Exploration $ 2,272 - - - - $ 2,272
Office $ 457 $ 223 $13 - - $693
----------------------------------------------------------------------------
$ 2,729 $ 223 $13 - - $ 2,965
----------------------------------------------------------------------------
----------------------------------------------------------------------------
C. Consulting service agreements
In 2003 the Corporation entered into a consulting service agreement that provided for a three percent right to participate indirectly in the future profits the Company may earn in respect to the Original PSC, in exchange for consulting services provided since that date. In the determination of profits under this agreement, the Company was entitled to deduct the consultant's proportional share of all costs associated with acquiring the Original PSC and the exploration, appraisal, development and production expenditures incurred by the Company ("eligible costs"), together with interest on such percentage of eligible costs at LIBOR plus three percent. Subsequent to March 31, 2011, the Company reached agreement for the termination of this right upon execution of the Kurdamir and Garmian PSC's by the KRG.
Further, in 2004 the Company entered into a consulting service agreement that provided for a two percent right to participate indirectly in the future profits the Company may earn in respect to the Original PSC, in exchange for the provision of consulting services during the period 2004 to 2006. In determination of profits under this agreement, the Company was entitled to deduct one percent of all eligible costs, together with interest on such percentage of eligible costs at LIBOR plus ten percent. The consultant was required to fund the additional one percent of all eligible costs. Subsequent to March 31, 2011, the Company terminated this right.
D. Contingencies
i. Litigation
From time to time the Company may become involved in legal or administrative proceedings in the normal conduct of business. Amounts involved in such matters are not reasonably estimable due to uncertainty as to the final outcome. The Company's assessment of the likely outcome of these matters is based on its judgement of a number of factors, including precedents and facts specific to the matters. The Company does not believe these matters, individually or in aggregate will have a material adverse effect on its consolidated financial position or consolidated comprehensive loss.
ii. Regulatory
Oil and gas operations are subject to extensive controls and regulations imposed by various levels of government that may be amended from time to time. The Company's operations may require licenses and permits from various governmental authorities in the countries in which it operates. Under the Original PSC, the KRG is obligated to assist in obtaining all permits and licenses from any government agencies in the Kurdistan Region and from any other government administration in Iraq. There can be no assurance that the Company will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development of its projects.
The political and security situation in Iraq is unsettled and volatile. The Kurdistan Region is the only "Region" of Iraq that is constitutionally established pursuant to the Iraq Constitution, which expressly recognizes the Kurdistan Region. The political issues of federalism and the autonomy of the Regions of Iraq are matters about which there are major differences between the various political factions in Iraq. These differences could adversely impact the Company's interest in the Kurdistan Region including the ability to export any hydrocarbons as a result of our activities.
23. Explanation of transition to IFRS
These are the Company's first condensed consolidated interim financial statements that have been prepared in accordance with IFRS in respect of the Company's first annual reporting date under IFRS of December 31, 2011. Previously the Company prepared its consolidated annual and consolidated interim financial statements in accordance with Canadian generally accepted accounting principles. In accordance with IFRS 1, First Time Adoption of IFRS, certain disclosures relating to the transition to IFRS are given in this note. These disclosures are prepared under IFRS as set out in the basis of preparation in Note 2.
IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary exemptions from the general principal of retrospective restatement. The Company has utilized the following exemptions:
A. IFRS 3 Business combinations
This standard has not been applied to acquisitions that occurred before January 1, 2010, the Company's transition date.
B. Full-cost book value as deemed costs
In July 2009, the IASB published an amendment to IFRS 1, Additional Exemptions for First-Time Adopters, to allow a first time adopter that had previously utilized full-cost accounting for oil and gas activities under previous GAAP to elect to measure exploration and evaluation assets at the date of transition at the book value amount determined under the adopter's previous GAAP. The Company did follow a full cost approach under previous GAAP and has elected to utilize this exemption to measure exploration and evaluation expenditures on a deemed cost basis at the date of transition to IFRS.
C. Reconciliation of equity from Canadian GAAP to IFRS as at the date of IFRS transition - January 1, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Notes GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 76,708 $ - $ 76,708
Trade and other receivables 6,880 - 6,880
Prepaid expenses 183 - 183
Income tax recoverable 1,738 - 1,738
Future income tax assets a 231 (231) -
----------------------------------------------------------------------------
Total current assets 85,740 (231) 85,509
Non-current assets
Property, plant and equipment b 154,911 (154,097) 814
Exploration and evaluation
expenditures b - 154,097 154,097
Deposits held in trust 420 - 420
Deferred tax assets a 6 365 371
----------------------------------------------------------------------------
Total non-current assets 155,337 365 155,702
----------------------------------------------------------------------------
Total assets $ 241,077 $ 134 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 18,297 $ - $ 18,297
----------------------------------------------------------------------------
Total current liabilities 18,297 - 18,297
Non-current liabilities
Provision for decommissioning
obligations c 175 257 432
Deferred tax liabilities a - 134 134
----------------------------------------------------------------------------
Total non-current liabilities 175 391 566
----------------------------------------------------------------------------
Total liabilities 18,472 391 18,863
----------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus d 8,749 905 9,654
Deficit e (39,727) (1,162) (40,889)
----------------------------------------------------------------------------
Total equity 222,605 (257) 222,348
----------------------------------------------------------------------------
Total equity and liabilities $ 241,077 $ 134 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a) Reclassification of the current portion of future income tax assets recognized under previous GAAP to non-current assets in accordance with IAS 12, Income Taxes. Net effect was a decrease in current future income tax assets of $0.2 million. In addition, the presentation of net deferred tax assets and liabilities are based on a separate legal entity basis which resulted in a net increase of $0.4 million in deferred tax assets and an increase of $0.1 million in deferred tax liabilities. The net overall change to deferred taxes was NIL.
b) Reclassification of exploration and evaluation expenditures previously classified as property, plant and equipment under previous GAAP in accordance with IFRS 1, First Time Adoption of IFRS. The Company utilized the exemption under IFRS 1 that allows entities following a full-cost approach under previous GAAP to recognize exploration and evaluation assets on a deemed cost basis upon transition to IFRS. Net effect was a decrease in property, plant and equipment of $154.1 million with a corresponding increase in exploration and evaluation assets.
c) Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent Assets, the provision for decommissioning obligations (previously referred to as "asset retirement obligation") was increased due to a change in the discount rate utilized for the present value calculation of these obligations. Under previous GAAP a credit adjusted risk-free rate was utilized, but under IFRS a non-credit adjusted risk-free rate is utilized in the valuation of the discounted cash flows associated with estimated future abandonment costs. Net effect was an increase in the provision for decommissioning liabilities of $0.3 million, with a corresponding increase in the accumulated deficit.
d) Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to employees was recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. Upon transition to IFRS this resulted in an accelerated recognition of the expense associated with share-based payments, but was partially offset by a reduction in expense due to estimated forfeitures associated with unvested options not previously estimated under GAAP. Net effect was an increase in contributed surplus of $0.9 million, with a corresponding increase in the accumulated deficit.
e) The cumulative effect of these transition adjustments on the accumulated deficit as at the date of transition to IFRS is based on the combination of items (c) and (d). The net effect was an increase in the accumulated deficit of $1.2 million.
D. Reconciliation of equity from Canadian GAAP to IFRS as at the end of the prior year comparative interim period - March 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Notes GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $55,083 $ - $ 55,083
Trade and other receivables 8,886 - 8,886
Prepaid expenses 397 - 397
Income tax recoverable 2,436 - 2,436
Future income tax assets a 178 (178) -
----------------------------------------------------------------------------
Total current assets 66,980 (178) 66,802
Non-current assets
Property, plant and equipment b 168,570 (167,935) 635
Exploration and evaluation b
expenditures - 167,336 167,336
Deposits held in trust 420 - 420
Deferred income tax assets a 7 314 321
----------------------------------------------------------------------------
Total non-current assets 168,997 (285) 168,712
----------------------------------------------------------------------------
Total assets $ 235,977 $ (463) $ 235,514
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $13,569 $ - $ 13,569
----------------------------------------------------------------------------
Total current liabilities 13,569 - 13,569
Non-current liabilities
Provision for decommissioning
obligations c 178 259 437
Deferred tax liabilities a - 136 136
----------------------------------------------------------------------------
Total non-current liabilities 178 395 573
----------------------------------------------------------------------------
Total liabilities 13,747 395 14,142
----------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus d 9,380 631 10,011
Deficit e (40,733) (1,489) (42,222)
----------------------------------------------------------------------------
Total equity 222,230 (858) 221,372
----------------------------------------------------------------------------
Total equity and liabilities $ 235,977 $ (463) $ 235,514
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Reclassification of the current portion of future income tax assets recognized under previous GAAP to non-current assets in accordance with IAS 12, Income Taxes. Net effect is a decrease in current future income tax assets of $0.2 million. In addition, the presentation of net deferred tax assets and liabilities are based on a separate legal entity basis which resulted in a net increase of $0.3 million in deferred tax assets and an increase of $0.1 million in deferred tax liabilities. The net overall change to deferred taxes was NIL.
b. Adjustments to property, plant and equipment as well as exploration and evaluation expenditures were as follows:
i. Exploration and evaluation expenditures previously classified as property, plant and equipment under GAAP were reclassified in accordance with IFRS 1, First Time Adoption of IFRS. The Company utilized the IFRS 1 exemption allowing entities following a full-cost approach under previous GAAP to recognize exploration and evaluation assets on a deemed cost basis upon transition to IFRS. In addition, exploration and evaluation expenditures incurred during the three months ended March 31, 2010 were also reclassified in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources. The net effect was a decrease in property, plant and equipment of $167.9 million with an associated increase in exploration and evaluation expenditures of $167.9million.
ii. Certain corporate projects that were previously capitalized within the full cost pool as allowed under previous Canadian GAAP, but which were unrelated to the Company's PSC Lands, have been expensed as part of General and administrative costs for the three months ended March 31, 2010 after conversion to IFRS. The net effect was a decrease in exploration and evaluation expenditures of $0.2 million.
iii. Share-based payment amounts associated with employees that directly contribute to exploration and evaluation activities are recognized as part of exploration and evaluation expenditures. Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to those employees is recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. The net effect of the change in the timing of recognition of share-based payments associated with those employees that directly contributed to exploration and evaluation activities during the three months ended March 31, 2010 resulted in a decrease in exploration and evaluation expenditures of $0.4 million.
iv. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent Assets, the provision for decommissioning obligations (previously referred to as "asset retirement obligation") is prospectively adjusted each period for any changes in the estimated future decommissioning expenditures or the timing of estimated future decommissioning expenditures. Changes to estimates during the three months ended March 31, 2010 resulted in an overall increase in the provision for decommissioning obligations of $.1 million. The net effect was NIL for exploration and evaluation expenditures.
v. The total net impact of items (i) through (iv) was an increase in exploration and evaluation assets of $167.3 million.
c. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent Assets, the provision for decommissioning obligations (previously referred to as "asset retirement obligation") increased due to a change in the discount rate utilized for the present value calculation of these obligations upon conversion to IFRS. Under previous GAAP a credit adjusted risk-free rate was utilized, but under IFRS a non-credit adjusted risk-free rate is utilized in the valuation of the discounted cash flows associated with estimated future abandonment costs. In addition, during the three months ended March 31, 2010, the provision for decommissioning obligations was also adjusted prospectively each period for changes in the estimated future decommissioning expenditures or the timing of estimated future decommissioning expenditures. The total net effect of these changes was an increase in the provision for decommissioning obligations of $0.3 million.
d. Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to employees is recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. Upon transition to IFRS this resulted in an accelerated recognition of the expense associated with share-based payments, but was partially offset by a reduction in expense associated with estimated forfeitures associated with unvested options that had not been estimated under previous GAAP. The net effect at March 31, 2010 was an increase in contributed surplus of $0.6 million.
e. The cumulative change in the accumulated deficit is summarized as follows:
i. Impact of increased provision for decommissioning obligation at January 1, 2010 was an increase in accumulated deficit of $0.3 million.
ii. Impact of increased contributed surplus related to share based payments at January 1, 2010 was an increase in accumulated deficit of $0.9 million.
iii. Impact from expensed portion of share based payments during the three months ended March 31, 2010 was an increase in accumulated deficit of $0.1 million.
iv. Impact from increased accretion expense associated with decommissioning liabilities for the three months ended March 31, 2010 was NIL.
v. Impact of expensing certain Corporate projects that had been capitalized under previous GAAP during the period ended March 31, 2010 was an increase in the accumulated deficit of $0.2 million.
vi. The total impact of all of items (i) through (v) was an increase in the accumulated deficit of $1.5 million as at March 31, 2010.
E. Reconciliation of equity from Canadian GAAP to IFRS as at the end of the last reporting year under Canadian GAAP - December 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Notes GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 31,482 $ - $ 31,482
Trade and other receivables 8,648 - 8,648
Insurance recoveries receivable 17,597 - 17,597
Deposits held in trust 420 - 420
Prepaid expenses 39 - 39
Income tax recoverable 887 - 887
Future income tax assets a 102 (102) -
---------------------------------------------------------------------------
Total current assets 59,175 (102) 59,073
Non-current assets
Property, plant and equipment b 182,056 (181,795) 261
Exploration and evaluation
expenditures b - 180,770 180,770
Future income tax assets a - 186 186
---------------------------------------------------------------------------
Total non-current assets 182,056 (839) 181,217
---------------------------------------------------------------------------
Total assets $ 241,231 $ (941) $ 240,290
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 21,525 $ - $ 21,525
---------------------------------------------------------------------------
Total current liabilities 21,525 - 21,525
Non-current liabilities
Provision for decommissioning
obligations c 189 320 509
Deferred tax liabilities 56 84 140
---------------------------------------------------------------------------
Total non-current liabilities 245 404 649
---------------------------------------------------------------------------
Total liabilities 21,770 404 22,174
---------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus d 11,353 (130) 11,223
Deficit e (45,475) (1,215) (46,690)
---------------------------------------------------------------------------
Total equity 219,461 (1,345) 218,116
---------------------------------------------------------------------------
Total equity and liabilities $ 241,231 $ (941) $ 240,290
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Reclassification of the current portion of future income tax assets recognized under previous GAAP to non-current assets in accordance with IAS 12, Income Taxes. Net effect is a decrease in current future income tax assets of $0.1 million. In addition, the presentation of net deferred tax assets and liabilities are based on a separate legal entity basis which resulted in a net increase of $0.2 million in deferred tax assets and an increase of $0.1 million in deferred tax liabilities. The net overall change to deferred taxes was NIL.
b. Adjustments to property, plant, and equipment as well as exploration and evaluation expenditures were as follows:
i. Exploration and evaluation expenditures previously classified as property, plant and equipment under GAAP were reclassified in accordance with IFRS 1, First Time Adoption of IFRS. The Company utilized the IFRS 1 exemption allowing entities following a full-cost approach under previous GAAP to recognize exploration and evaluation assets on a deemed cost basis upon transition to IFRS. In addition, exploration and evaluation expenditures incurred during the year ended December 31, 2010 were also reclassified in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources. The net effect was a decrease in property, plant and equipment of $181.8 million and an associated increase in exploration and evaluation expenditures of $181.8 million.
ii. Certain corporate projects that were previously capitalized within the full cost pool as allowed under previous Canadian GAAP, but which were unrelated to the Company's PSC Lands, have been expensed as part of General and administrative costs for the year ended December 31, 2010. The net effect was a decrease in exploration and evaluation expenditures of $0.3 million.
iii. Share-based payment amounts associated with employees that directly contribute to exploration and evaluation activities are recognized as part of intangible exploration and evaluation expenditures. Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to those employees is recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. The net effect of the change in the timing of recognition of share-based payments associated with those employees that directly contributed to exploration and evaluation activities during the year ended December 31, 2010 resulted in a decrease in exploration and evaluation expenditures of $0.8 million.
iv. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent Assets, the provision for decommissioning obligations (previously referred to as "asset retirement obligation") is prospectively adjusted each period for changes in the estimated future decommissioning expenditures or the timing of estimated future decommissioning expenditures. Changes to estimates during the year ended December 31, 2010 resulted in an overall increase in the provision for decommissioning obligations of $61. The net effect was a corresponding increase in exploration and evaluation expenditures of $0.1 million.
v. The total net impact of items (i) through (iv) was an increase in exploration and evaluation assets of $180.8 million.
c. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent Assets, the provision for decommissioning obligations (previously referred to as "asset retirement obligation") increased due to a change in the discount rate utilized for the present value calculation of these obligations upon conversion to IFRS. Under previous GAAP a credit adjusted risk-free rate was utilized, but under IFRS a non-credit adjusted risk-free rate is utilized in the valuation of the discounted cash flows associated with estimated future abandonment costs. In addition, during the year ended December 31, 2010, the provision for decommissioning obligations was also adjusted prospectively each period for changes in the estimated future decommissioning expenditures or the timing of estimated future decommissioning expenditures. The total net effect of these changes was an increase in the provision for decommissioning obligations of $0.3 million.
d. Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to employees is recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. Upon transition to IFRS this resulted in an accelerated recognition of the expense associated with share-based payments in prior periods and resulted in less expense recognition during 2010. In addition, the expense associated with share based payments was slightly reduced due to estimated forfeitures associated with unvested options that had not been estimated under previous GAAP. The net effect at December 31, 2010 was a reduction in contributed surplus of $0.1 million.
e. The cumulative change in the accumulated deficit is summarized as follows:
i. Impact of increased provision for decommissioning obligation at January 1, 2010 was an increase in accumulated deficit of $0.3 million.
ii. Impact of increased contributed surplus related to share based payments at January 1, 2010 was an increase in accumulated deficit of $0.9 million.
iii. Impact from expensed portion of share based payments during the year ended December 31, 2010 was a decrease in accumulated deficit of $0.3 million.
iv. Impact from increased accretion expense associated with decommissioning liabilities for the year ended December 31, 2010 was NIL.
v. Impact of expensing certain Corporate projects that had been capitalized under previous GAAP during the year ended December 31, 2010 was an increase in the accumulated deficit of $0.3 million.
vi. The total impact of all of items (i) through (v) was an increase in the accumulated deficit of $1.2 million.
F. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the three months ended March 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Note GAAP IFRS IFRS
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Interest income $ 19 $ - $ 19
----------------------------------------------------------------------------
Expenses
General and administrative
expenses a 1,437 326 1,763
Depreciation 179 - 179
Accretion on decommissioning
liabilities 3 1 4
Finance cost 52 - 52
----------------------------------------------------------------------------
Total expenses 1,671 327 1,998
----------------------------------------------------------------------------
Loss before taxation 1,652 327 1,979
Taxation
Current (697) - (697)
Deferred 51 - 51
----------------------------------------------------------------------------
Total taxation (recovery) (646) - (646)
----------------------------------------------------------------------------
Comprehensive loss for the period
attributable to shareholders $ 1,006 $ 327 $ 1,333
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to general and administrative expenses were as follows:
i. Certain corporate projects that were previously capitalized within the full cost pool as allowed under previous Canadian GAAP, but which were unrelated to the Company's PSC Lands, have been expensed as part of general and administrative costs for the three months ended March 31, 2010 after conversion to IFRS. The net effect was an increase in general and administrative costs of $0.2 million.
ii. Share-based payment amounts associated with employees that do not directly contribute to exploration and evaluation activities are recognized as part of general and administrative expenses. Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to those employees is recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. The net effect of the change in the timing of recognition of share-based payments during the three months ended March 31, 2010 resulted in an increase in general and administrative expenses of $0.1 million.
iii. The total net impact of items (i) and (ii) was an increased net loss of $0.3 million, including a $1k adjustment relating to accretion.
G. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the year ended December 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Note GAAP IFRS IFRS
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Interest income $ 87 $ - $ 87
----------------------------------------------------------------------------
Expenses
General and administrative
expenses a 6,362 51 6,413
Depreciation 553 - 553
Accretion on decommissioning
liabilities 14 2 16
Finance cost 62 - 62
----------------------------------------------------------------------------
Total expenses 6,991 53 7,044
----------------------------------------------------------------------------
Loss before taxation 6,904 53 6,957
Taxation
Current (1,347) - (1,347)
Deferred 191 - 191
----------------------------------------------------------------------------
Total taxation (recovery) (1,156) - (1,156)
----------------------------------------------------------------------------
Comprehensive loss for the period
attributable to shareholders $ 5,748 $ 53 $ 5,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to general and administrative expenses were as follows:
i. Certain corporate projects that were previously capitalized within the full cost pool as allowed under previous Canadian GAAP, but which were unrelated to the Company's PSC Lands, have been expensed as part of general and administrative costs for the year ended December 31, 2010 after conversion to IFRS. The net effect was an increase in general and administrative costs of $0.3 million.
ii. Share-based payment amounts associated with employees that do not directly contribute to exploration and evaluation activities are recognized as part of general and administrative expenses. Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to those employees is recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. The net effect of the change in the timing of recognition of share-based payments associated with employee's activities during the year ended December 31, 2010 resulted in a decrease in general and administrative expenses of $0.3 million.
iii. The total net impact of items (i) and (ii) was an increased net loss of $0.1 million, including a $2k adjustment to accretion.
H. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for the three months ended March 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Note GAAP IFRS IFRS
----------------------------------------------------------------------------
Cash flow from operating
activities
Net loss prior to taxation a $ (1,006) $ (973) $ (1,979)
Adjustments for
Depreciation 179 - 179
Accretion on decommissioning
liabilities 3 1 4
Share based payments b 128 145 273
Income tax recovered (paid) - - -
Future income tax expense c 51 (51) -
Change in non-cash working capital d (1,004) 697 (307)
----------------------------------------------------------------------------
Net cash from (used in) operating
activities (1,649) (181) (1,830)
----------------------------------------------------------------------------
Cash flow from investing activities
Expenditure on exploration and
evaluation assets e - (19,795) (19,795)
Expenditure on property, plant, and
equipment f (13,334) 13,334 -
Change in non-cash working capital e (6,642) 6,642 -
----------------------------------------------------------------------------
Net cash from (used in) investing
activities (19,976) 181 (19,795)
----------------------------------------------------------------------------
Cash flow from financing activities
None - - -
----------------------------------------------------------------------------
Net cash from (used in) financing
activities - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash equivalents (21,625) - (21,625)
----------------------------------------------------------------------------
Cash and cash equivalents, beginning
of period 76,708 - 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 55,083 - $ 55,083
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to net loss, which total to $(0.9 million), were as follows:
i. Presentation of net loss under IFRS is prior to taxation. The net effect was an increased net loss prior to total taxation (current and deferred) of $0.6 million.
ii. Increased expense associated with share-based payments, net effect was an increased net loss of $0.1 million.
iii. Increased general and administrative expense for corporate projects previously capitalized under IFRS, the net effect was an increased net loss of $0.2 million.
iv. Total net effect of items (i) through (iii) is an increased net loss of $0.9 million.
b. Increased expense relating to timing of recognition of share based payment under IFRS 2, net effect an increase of $0.1 million.
c. Presentation of net loss under IFRS is prior to taxation, accordingly there is no adjustment for future income tax expense, net effect was a reduction of the adjusting item to zero.
d. Presentation of net loss under IFRS is prior to taxation, as a result the change in current income tax recovery is removed from the change in non-cash working capital. The net effect was a decrease in the net change from non-cash working capital items of $0.7 million.
e. The net change in exploration and evaluation expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of $13.3 million.
ii. Decrease in expenditures of $0.2 million for corporate projects previously capitalized under GAAP that were expensed as general and administrative expenses under IFRS.
iii. Combine changes in non-cash investing working capital with E&E expenditures for proper presentation under IFRS, which reduces the change in non-cash working capital to NIL.
iv. The net effect of items (i) through (iii) results in an increase in exploration and evaluation expenditures of $19.8 million.
f. Expenditures for property, plant and equipment were reclassified as exploration and evaluation expenditures, net effect was a decrease of $13.3 million.
I. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for the year ended December 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Note GAAP IFRS IFRS
----------------------------------------------------------------------------
Cash flow from operating
activities
Net loss prior to taxation a $ (5,748) $(1,209) $ (6,957)
Adjustments for
Depreciation 553 - 553
Accretion on decommissioning
liabilities 14 2 16
Share based payments b 1,568 (258) 1,310
Income tax recovered (paid) c - 2,198 2,198
Future income tax expense d 191 (191) -
Change in non-cash working
capital e 728 (851) (123)
----------------------------------------------------------------------------
Net cash from (used in)
operating activities (2,694) (309) (3,003)
----------------------------------------------------------------------------
Cash flow from investing
activities
Expenditure on exploration and
evaluation assets f - (66,626) (66,626)
Expenditure on property, plant,
and equipment g (67,162) 67,162 -
Insurance recoveries 24,403 - 24,403
Change in non-cash working
capital f 227 (227) -
----------------------------------------------------------------------------
Net cash from (used in)
investing activities (42,532) 309 (42,223)
----------------------------------------------------------------------------
Cash flow from financing
activities
None - - -
----------------------------------------------------------------------------
Net cash from (used in)
financing activities - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash
equivalents (45,226) - (45,226)
----------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 76,708 - 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 31,482 - $ 31,482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to net loss, which total to $(1.2 million), were as follows:
i. Presentation of net loss under IFRS is prior to total taxation (current and deferred). The net effect was an increased net loss prior to taxation of $1.2 million.
ii. Increased expense associated with share-based payments, net effect was a decreased net loss of $0.3 million.
iii. Increased general and administrative expense for corporate projects previously capitalized under IFRS, the net effect was an increased net loss of $0.3 million.
iv. Total net effect of items (i) through (iii) is an increased net loss of $1.2 million.
b. Decreased expense relating to timing of recognition of share based payment under IFRS 2, net effect a decrease of $0.3 million.
c. For proper presentation under, actual taxes recovered of $2.2 million are reflected directly in the cash flow statement.
d. Presentation of net loss under IFRS is prior to taxation, accordingly there is no adjustment for future income tax expense, net effect was a reduction of the adjusting item to zero.
e. Presentation of net loss under IFRS is prior to taxation, as a result the change in current income tax recovery is removed from the change in non-cash working capital. In addition actual taxes recovered are shown separately in the cash flow statement under IFRS. The net effect of both of these items was a decrease in the net change from non-cash working capital items of $0.9 million.
f. The net change in exploration and evaluation expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of $67.2 million.
ii. Decrease in expenditures of $.3 million for corporate projects previously capitalized under GAAP that were expensed as general and administrative expenses under IFRS.
iii. Combine changes in non-cash investing working capital with E&E expenditures for proper presentation under IFRS, which reduces the change in non-cash working capital to NIL.
iv. The net effect of items (i) through (iii) results in an increase in exploration and evaluation expenditures of $66.6 million.
Expenditures for property, plant and equipment were reclassified as exploration and evaluation expenditures, net effect was a decrease of $67.2 million.
About WesternZagros Resources Ltd.
WesternZagros is an international natural resources company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros, through its wholly-owned subsidiaries, holds a Production Sharing Contract with the Kurdistan Regional Government in the Kurdistan Region of Iraq.
WesternZagros' shares trade in Canada on the TSX Venture Exchange under the symbol "WZR".
This news release contains certain forward-looking information relating, but not limited, to operational information, future production plans and the timing associated therewith. Forward-looking information typically contains statements with words such as "anticipate", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Company cautions readers not to place undue reliance on forward-looking information as by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros. In addition, the forward-looking information is made as of the date hereof, and the Company assumes no obligation to update or revise such to reflect new events or circumstances, except as required by law. Readers are also cautioned that test rates may not be indicative of ultimate production levels.
Forward-looking information is not based on historical facts but rather on management's current expectations and assumptions regarding, among other things, plans for and results of drilling activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), continued political stability, timely receipt of any necessary government or regulatory approvals, and the timely receipt of any insurance proceeds due to the Company. Although the Company believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in exploration; inherent uncertainties in interpreting geological data; changes in plans with respect to exploration or capital expenditures; interruptions in operations together with any associated insurance proceedings; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. For further information on WesternZagros and the risks associated with its business, please see the Company's Annual Information Form dated April 11, 2011, which is available on SEDAR at www.sedar.com.
NEITHER THE TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE |
