Capital Resources
The Company has no operations that generate cash flow and its long-term financial success is dependant on management’s ability to discover economically viable diamond deposits. The diamond exploration process can take many years and is subject to factors that are beyond the Company’s control. Many factors influence the Company’s ability to raise funds, including the health of the resource market, the climate for diamond exploration investment, the Company’s track record and the experience and caliber of its management.
Several factors will influence the Company’s cash requirements in the near future. These factors include: a decision to proceed with further development of the Renard Project in Quebec, results from the Summer 2008 exploration programs and the Company’s exploration and development plans for 2009. The Company’s actual funding requirements may vary from those planned due to a number of factors, including the progress of exploration activity.
The Company has historically financed its exploration programs through the issuance of equity capital, while at the same time trying to reduce shareholder dilution by securing joint venture partners where appropriate and more recently, by the monetization of non-core assets. Recent malaise in the Canadian equity capital markets could make securing additional financing difficult in the short-term. The Company’s management intends to continue to seek out the best opportunities to maximize shareholder value by furthering exploration programs on its most promising projects and by generating new discoveries. However, failure to secure additional financing at reasonable terms may significantly impact the Company’s ability to continue as a going concern.
Subsequent to the April 30, 2008 year-end, the Company reduced the size of its observing laboratory, incurring closure costs of approximately $500,000. The Company retains its ability to process exploration samples through its Dense Media Separation (DMS) plants and though the X-Ray Sorter located in North Vancouver. This change allows the Company to continue to focus its financial resources on the Company’s exploration and development programs.
The Company’s audited consolidated financial statements for the years ended April 30, 2008 and 2007 have been prepared in accordance with Canadian GAAP and on the basis of accounting principles applicable to a going concern, which assumes that the Company will be able to continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. There are conditions and events at the present time that cast substantial doubt on the validity of this assumption, as discussed below.
In order to finance the Company’s exploration programs and to cover administrative and overhead expenses, the Company historically has raised money through equity sales and from the exercise of convertible securities. To finance the acquisition of the common shares of Ashton in 2006, the Company arranged for a $32.5 million bridge facility from a Canadian chartered bank that was repaid in full in March 2007 by using existing cash resources and proceeds from the $20.0 million in convertible debentures issued. Costs associated with the bridge facility and the convertible debentures are being amortized over the term of the loan and, once amortized, then capitalized to resource property costs, as per the Company’s accounting policy for resource properties.
The convertible debentures mature March 16, 2009 and interest is payable under the debentures quarterly at 12% per annum. The Company issued two series of debentures, $10,000,000 in Series A Debentures that provide the Company may repay principal on the maturity date in cash or common shares of Stornoway (”Shares”) at the Company’s election and $10,000,000 in Series B Debentures that provide that the Company must repay principal on the maturity date in cash or Shares at the holder’s election. Interest payments may be paid in cash or in Shares, at the Company’s election. If interest is paid in Shares, the Shares will be issued at a price of 95% of the five day volume weighted average price of the Shares ending three trading days before the payment date.
In July 2008, the Company announced a $22.0 million private placement with the holders of the convertible debentures, Agnico Eagle Mines Ltd. (“Agnico Eagle”) and Lorito Holdings Ltd. (“Lorito”). Agnico Eagle and Lorito presently hold, equally between them, convertible debentures in the aggregate principal amount of $20.0 million, which mature March 16, 2009. Under the terms of the proposed private placement, the Company will issue 24,444,444 common shares at a price of $0.90 per common share. Proceeds from the private placement will be used to repay the $20.0 million principal and to make a $2.0 million early redemption payment to the holders. The private placement is subject to the completion of subscription agreements and receipt of stock exchange and regulatory acceptances and approvals, including compliance with related party requirements as Agnico Eagle is a related party of the Company. Upon the completion of this financing, Stornoway will be debt free and its issued and outstanding share capital will be 226,170,452. Agnico Eagle currently holds approximately 13.6% of Stornoway’s issued and outstanding common shares. As a result of the private placement, Agnico Eagle’s holdings will increase to approximately 17.6%.
At July 16, 2008 the Company had 12,088,784 stock options outstanding which, if exercised, would increase the Company’s available cash by approximately $16.8 million. In addition, the Company has 7,379,500 warrants outstanding, the majority of which are exercisable until April 2009 that, if exercised, would increase the Company’s available cash by approximately $11.0 million. The weighted average exercise price of the warrants outstanding is $1.49.