Surface
Property Ownership
Anglo
Gold purchased surface property ownership, consisting of 466 Hectares in
Altar,
Sonora, on January 27, 1998. The ownership was conveyed to our subsidiary,
Oro
de Altar S.A. de C.V., in 2002. MSR, one of our wholly-owned Mexican affiliates,
has a lease on the property for the purpose of mining the Chanate gold
deposit.
The purchase transaction was recorded as public deed 19,591 granted by
Mr. Jose
Maria Morera Gonzalez, Notary Public 102 of the Federal District, registered
at
the Public Registry of Property of Caborca, Sonora, under number 36026,
book
one, volume 169 of the real estate registry section on May 7, 1998.
General
Information and Location
The
El
Chanate Project is located in the State of Sonora, Mexico, 37 kilometers
northeast of the town of Caborca. It is accessible by paved and all weather
dirt
roads typically traveled by pickup trucks and similar vehicles. Driving
time
from Caborca is approximately 40 minutes. Access from Caborca to the village
of
16 de September is over well maintained National highways. Beyond the 16
de
September village, routes to the property are currently over well traveled
gravel and sandy desert roads suitable for lightweight vehicles. We acquired
rights for a service road to allow immediate access for mine construction
activities. This service road access was acquired from the village of 16
de
September, and construction of this road is now complete. In addition to
this
service road, we had negotiated long term access that does not pass through
the
village of 16 de September. However, an issue arose with regard to whether
the
land owner from whom we negotiated this right had adequate title to this
land.
We continue to rely on the existing access through the village of 16 de
September.
The
project is situated on the Sonora desert in a hot and windy climate, generally
devoid of vegetation with the exception of cactus. The terrain is generally
flat
with immense, shallow basins, scattered rock outcropping and low rocky
hills and
ridges. The desert floor is covered by shallow, fine sediment, gravel and
caliche. The main body of the known surface gold covers and irregularly
shaped
area of approximately 1,800 feet long by 900 feet wide. Several satellite
mineral anomalies exist on surfaces which have not been thoroughly explored.
Assays on chip samples taken from trenches at these locations by us indicate
the presence of gold mineralization.
The
general El Chanate mine area has been mined for gold since the early
19th
century.
A number of old underground workings exist characterized by narrow shafts,
to a
depth of several tens of feet and connecting drifts and cross cuts. No
information exists regarding the amount of gold taken out; however, indications
are that mining was conducted on a small scale.
Geology
The
project area is underlain by sedimentary rocks of the Late Jurassic - Early
Cretaceous Bisbee Group, and the Late Cretaceous Chanate Group, which locally
are overlain by andesites of the Cretaceous El Charro volcanic complex.
The
sedimentary strata are locally intruded by andesitic sills and dikes, a
microporphyritic latite and by a diorite stock. The sedimentary strata
are
comprised of mudstone, siltstone, sandstone, conglomerate, shale and limestone.
Within the drilled resource area, a predecessor exploration company
differentiated two units on the basis of their position relative to the
Chanate
fault. The upper member is an undifferentiated sequence of sandstone,
conglomerate and lesser mudstone that lies above the Chanate fault and
it is
assigned to the Escalante Formation of the Middle Cretaceous Chanate Group.
The
lower member is comprised of mudstone with mixed in sandstone lenses and
thin
limestone interbreds; it lies below the Chanate fault and is assigned to
the
Arroyo Sasabe Formation of the Lower Cretaceous Bisbee Group. The Arroyo
Sasabe
formation overlies the Morita Formation of the Bisbee Group. Both the Escalante
and Arroyo Sasabe formations are significantly mineralized proximal to
the
Chanate fault, while the Morita Formation is barren.
The
main
structural feature of the project area is the Chanate fault, a 7 km long
(minimum) northwest-striking, variably southwest-dipping structure that
has been
interpreted to be a thrust fault. The Chanate fault is overturned
(north-dipping) at surface, and is marked by brittle deformation and shearing
which has created a pronounced fracture foliation and fissility in the
host
rocks. In drill holes the fault is often marked the presence of an andesite
dike. Reports prepared by a predecessor exploration company describe the
fault
as consisting of a series of thrust ramps and flats; however, geologic
cross
sections which we have reviewed but did not prepare may negate this
interpretation.
Alteration/Mineralization
A
predecessor exploration company has defined a 600 meter long, 300 meter
wide,
120 meter thick zone of alteration that is centered about the Chanate fault.
The
strata within this zone have been silicified and pyritized to varying degrees.
In surface outcrop the mineralized zone is distinguished by its bleached
appearance relative to unmineralized rock. The mineralized zone contains
only
single digit ppm (parts per million) levels of gold. Dense swarms of veinlets
form thick, mineralized lenses, within a larger area of sub-economic but
anomalous gold concentrations. Drill hole data indicates that the mineralized
lenses are sub-horizontal to gently southwest-dipping and are grossly parallel
to the Chanate fault. The fault zone itself is also weakly mineralized,
although
strata in the near hanging wall and footwall are appreciably mineralized.
Work
to Date
The
El
Chanate property has been the site of small scale mining of high grade
quartz
veins (La Cuchilla mine) during the last century. Modern exploration includes
work by Phelps Dodge in the 1980’s as part of a copper exploration program.
Kennecott conducted geologic mapping and geochemical sampling in 1991 and
dropped the property. A Mexican subsidiary of AngloGold explored the property
intermittently between 1992 and 1997, and has conducted extensive surface
geologic mapping, geochemical sampling, geophysical studies and drilling,
including 11,000 meters of trenching, over 14 line-kilometers of induced
polarization geophysical surveys, 61 line-kilometers of VLF-magnetometer
geophysical surveys, 87 line-kilometers of enzyme leach geochemical surveys
and
34,000 meters of R.C. drilling in 190 holes and 1080 meters of diamond
drilling
in 9 holes. That company also commissioned various consultant studies concerning
petrography, fluid inclusions, air photo interpretation and structural
analyses,
and conducted some metallurgical test work.
In
April
and May 2002, to confirm previous results obtained by third parties and
to
provide specifically located metallurgical test samples, we drilled six
diamond
core holes totaling 1,508 feet into the main mineralized zone at El Chanate.
Management believes that the diamond drill results generally confirmed
the
previous results and,
in
June 2002 and January 2003, we drilled an additional 45 reverse circulation
holes totaling 9,410 feet. This reverse circulation drill program confirmed
previous results and also expanded certain mineralized areas. In May 2004,
three
core holes were drilled for a total of 2,155 feet. The total number of
holes is
now 256. Of these, 235 are reverse circulation drill holes and 21 are diamond
drill holes. Detailed check assays were obtained both for core samples
and for
reverse drill samples that initially assayed greater than 0.3 grams/tonne.
Chemex Labs, Vancouver, Canada, preformed both the initial and the check
assays,
and the check assays supported the initial assay results.
In
August
2002, we retained SRK Consulting (a global engineering company) Denver,
Colorado, to conduct a scoping engineering study for the El Chanate Project.
This study was completed in October 2002 and concluded that the El Chanate
Project deserved additional work and that the property contained important
gold
mineralization. The base case for this study assumed a gold price of
$320.
Following
SRK’s positive conclusion, in February 2003, we retained M3 Engineering of
Tucson, Arizona to begin work on a feasibility study. M3 completed the
study in
August 2003. Based on 253 drill holes and more than 22,000 gold assays,
this
study (the “2003 Study”) provided details for an open pit gold mine. The 2003
Study indicated that at a gold price of $325, the initial open pit project
contains proven and probable reserves of 358,000 ounces of gold contained
within
13.5 million metric tonnes of ore with an average grade of 0.827 grams/tonne.
It
estimated that the mine could recover approximately 48,000 - 50,000 ounces
of
gold per year or 248,854 ounces over a five year mine life.
In
October 2005, M3 completed an update of the 2003 Study (The “2005 Study”). The
2005 Study includes the following changes from the 2003 Study:
· |
an
increase in the mine life from five to six
years,
|
· |
an
increase in the base gold price from $325/oz to
$375/oz,
|
· |
use
of a mining contractor,
|
· |
revised
mining, processing and support
costs,
|
· |
stockpiling
of low grade material for possible processing in year six,
if justified by
gold prices at that time,
|
· |
a
reduced size for the waste rock dump and revised design of reclamation
waste dump slopes,
|
· |
a
revised process of equipment selection
and
|
· |
evaluation
of the newly acquired water well for processing the
ore.
|
In
view
of a significant rise in the gold price, in June 2006, we commissioned
SRK
Consulting, Denver, Colorado, to prepare an updated Canadian Securities
Administration National Instrument 43-101 compliant technical report on
our El
Chanate Project. SRK completed this technical report in August 2006 (the
“2006
Update”). The 2006 Update provided the following updated information from the
2005 Study:
·
|
an
18% increase in the proven mineral reserve
tonnage,
|
· |
a
59% increase in the probable mineral reserve
tonnage
|
· |
an
increase in mine life from six to seven
years,
|
· |
an
increase in the base gold price from $375/oz to $450/oz
and
|
· |
Stockpiling
of low grade material for possible processing in year seven,
if justified
by gold prices at that time.
|
Pursuant
to the 2005 Study, as updated by the 2006 Update using a $450 per ounce
gold
price, our estimated mine life is now seven years as opposed to five years
and
the ore reserve is 490,000 ounces of gold present in the ground (up 122,000
ounces or 33%). Of this, we anticipate recovering approximately 332,000
ounces
of gold (up 74,000 ounces or 29%) over a seven year life of the mine. The
targeted cash cost (which includes mining, processing and on-property general
and administrative expenses) per the 2005 Study is $259 per ounce (up $29
per
ounce). The 2005 Study contains the same mining rate as the 2003 Study
of 7,500
metric tonnes per day of ore. It should be noted that, during the preliminary
engineering phase of the project it was decided to design the crushing
screening
and ore stacking system with the capability of processing 10,000 tonnes
per day
of ore. This will make allowances for any possible increase in production
and
for operational flexibility. It was found that the major components in
the
feasibility study would be capable of handling the increase in tonnage.
Design
changes were made where necessary to accommodate the increased tonnage. The 2005
Study takes into consideration a more modern crushing system than the one
contemplated in the 2003 Study. The crushing system referred to in the
2005
Study is a new system, that, we believe will be faster to install and provide
more efficient processing capabilities than the used equipment referred
to in
the 2003 Study. In March 2006, we made a $250,000 down payment to a US
Supplier
to acquire a portion of a new crushing system. In October 2006, we paid
an
additional $230,000 towards this equipment and we now have purchase orders
for
all of the new crushing system. Please see “Current
Status of El Chanate”
for
updated information as of March 2007.
In
addition, the 2005 Study assumes a contractor will mine the ore and haul
it to
the crushers. In the 2003 Study, we planned to perform these functions.
As
discussed below, we have retained a mining contractor.
The
2005
Study assumes a mining production rate of 2.6 million tonnes of ore per
year or
7,500 tonnes per day. The processing plant will operate 365 days per year.
The
processing plan for this open pit heap leach gold project calls for crushing
the
ore to 100% minus 3/8 inch. Carbon columns will be used to recover the
gold.
The
following Summary is extracted from the 2005 Study, as updated by the 2006
Update. Please note that the reserves as stated are an estimate of what
can be
economically and legally recovered from the mine and, as such, incorporate
losses for dilution and mining recovery. The 489,952 ounces of contained
gold
represents ounces of gold contained in ore in the ground, and therefore
does not
reflect losses in the recovery process. Total gold produced is estimated
to be
331,560 ounces, or approximately 68% of the contained gold. The gold recovery
rate is expected to average approximately 68% for the entire ore body.
Individual portions of the ore body may experience varying recovery rates
ranging from about 73% to 48%. Oxidized and sandstone ore types may have
recoveries of about 73%; fault zone ore type recoveries may be about 64%;
and
siltstone ore types recoveries may be about 48%.
El
Chanate Project
Production
Summary
|
|
Metric
|
|
U.S.
|
|
Materials
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
Proven
|
|
11.7
Million Tonnes
|
|
@
0.811 g/t*
|
|
12.9
Million Tons
|
|
@
0.024 opt*
|
|
Probable
|
|
8.2
Million Tonnes
|
|
@
0.705 g/t*
|
|
9.0
Million Tons
|
|
@
0.021 opt*
|
|
Total
Reserves
|
|
19.9
Million Tonnes
|
|
@
0.767 g/t*
|
|
21.9
Million Tons
|
|
@
0.022 opt*
|
|
Other
Mineralized Materials
|
|
0
Million Tonnes
|
|
|
|
0
Million Tons
|
|
|
|
Waste
|
|
19.9
Million Tonnes
|
|
|
|
21.9
Million Tons
|
|
|
|
Total
|
|
39.7
Million Tonnes
|
|
|
|
43.8
Million tons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contained
Gold
|
|
15.24
Million grams
|
|
|
|
489,952
Oz
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
|
|
|
|
|
|
|
Ore
Crushed
|
|
2.6
Million Tonnes /Year
|
|
|
|
2.87
Million Tons/Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Days/Year
|
|
365
Days per year
|
|
|
|
365
Days per year
|
|
|
|
Gold
Plant Average Recovery
|
|
|
|
|
|
|
|
|
|
Average
Annual Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
· |
“g/t”
means grams per metric tonne, “Mt/d means metric tonnes per day and “opt”
means ounces per ton.
|
· |
The
reserve estimates are based on a recovered gold cutoff grade
of 0.20 grams
per metric tonne as described below.
|
In
the
mineral resource block model developed, with blocks 10m (meters) x 10m
x 5m
high, Measured and Indicated resources (corresponding to Proven and Probable
reserves respectively when within the pit design) were classified in accordance
with the following scheme:
· |
Blocks
with 4 or more drill holes within a search radius of 40m x 40m
x 25m and
inside suitable geological zones were classified as Measured
(corresponding to Proven);
|
· |
Blocks
with 3 or more holes within a search radius of 75m x 75m x 50m
and inside
suitable geological zones were classified as Indicated (corresponding
to
Probable);
|
· |
Blocks
with 1 or 2 holes within a search radius of 75m x 75m x 50m and
inside
suitable geological zones were classified as Inferred (and which
was
classed as waste material in the mining reserves
estimate);
|
· |
Blocks
outside the above search radii or outside suitable geological
zones were
not assigned a classification.
|
The
proven and probable reserve estimates are based on a recovered gold internal
cutoff grade of 0.20 grams/tonne. (A constant recovered gold cutoff grade
was
used for reserves calculation as the head gold grade cutoff varies with
the
different ore types due to their variable gold recoveries.) The internal
(in-pit) cutoff grade was used for reserves reporting.
Cutoff
Grade
Calculation |
|
Internal
Cutoff Grade |
|
Break
Even Cutoff
Grade |
Basic
Parameters
Gold
Price
Gold
Recovery
Operating
Costs per Tonne of Ore
Royalty
(4%)
Smelting
& Refining
Mining
*
Processing
Heap
Leach Pad Development
G&A
Total
Internal
Cutoff Grade
Head
Grade Cutoff (67.7% recov.)
Recovered
Gold Grade Cutoff
|
|
US$450/oz
67.7%
$
per Tonne of Ore
0.115
0.015
0.070
1.680
0.185
0.810
2.875
Grams
per Tonne
0.29
0.20
|
|
US$450/oz
67.7%
$
per Tonne of Ore
0.164
0.021
1.250
1.680
0.185
0.810
4.110
Grams
per Tonne
0.41
0.28
|
*
The
calculation of an internal cutoff grade does not include the basic mining
costs
(which are considered to be sunk costs for material within the designed
pit).
The $0.07 per tonne cost included is the incremental (added) cost of hauling
ore
over hauling waste, and which is included in the calculation.
Pursuant
to the 2005 Study, as updated by the 2006 Update, based on the current
reserve
calculations, the mine life is estimated to be approximately seven years, and
at
least another year will likely be required to perform required reclamation.
The
2005 Study forecasts initial capital costs of $17.9 million, which includes
$1.7
million of working capital. Annual production is planned at approximately
44,000
to 48,000 ounces per year at an average operating cash cost of $259 per
ounce.
We believe that cash costs may decrease as the production rate increases.
Total
costs (which include cash costs as well as off-property costs such as property
taxes, royalties, refining, transportation and insurance costs and exclude
financing costs) will vary depending upon the price of gold (due to the
nature
of underlying payment obligations to the original owner of the property).
Total
costs are estimated in the 2005 Study to be $339 per ounce at a gold price
of
$417 per ounce (the three year average gold price as of the date of the
study).
We will be working on measures to attempt to reduce costs going forward.
Ore
reserves and production rates are based on a gold price of $375 per ounce,
which
is the Base Case in the 2005 Study. During 2005, the spot price for gold
on the
London Exchange has fluctuated between $411.10 and $537.50 per ounce. Between
January 1, 2006 and October 24, 2006, the spot price for gold on the London
Exchange has fluctuated between $524.75 and $725.00 per ounce.
Management
believes that the capital costs to establish a surface, heap leach mining
operation at El Chanate will be between $17.5 and $18.5 million. For more
information on the capital costs and our funding activities, please see
“Part
II, Item 6, Management's Discussion and Analysis of Financial Condition
and
Results of Operations; Liquidity and Capital Resources; Plan of
Operations.”
Management
believes the El Chanate Project will benefit substantially from rising
gold
prices, which as of October 24, 2006 was around $575 per ounce. Mineralized
material previously below operating cut-off gold grades could possibly
become
economic if future engineering studies support lowering the cutoff grade
due to
gold prices substantially above the $450 per ounce used in the 2006 Update
to
define the proven and probable reserves mentioned above. We are currently
looking at processing techniques that may be capable of supporting higher
production rates that may be justified due to rising gold prices. However,
the
new crushing system will likely have to be modified to handle the additional
tonnage required for expanding our production. The crushing system for
which we
received purchase orders, with certain modifications, is expected to have
a
capacity beyond the 7,500 metric tons per day that are initially planned.
In
February 2005, Metcon Research Inc. of Tucson, Arizona completed gold recovery
studies on existing samples at fine grind sizes of 100 mesh, 150 mesh and
200
mesh. These studies were undertaken to determine whether extraction by
fine
grinding is economical given the increased price of gold. Generally, fine
grinding, while more expensive, will achieve higher gold recoveries than
the
heap leach method recommended in the feasibility study. Metcon found that
increasing amounts of gold were recovered at finer grind sizes. However
in May
2004, M3, who conducted the feasibility study, reported that at El Chanate,
heap
leaching remains the most economical and optimal method of extracting gold
at
current prices.
In
May
2004, three core holes were drilled at El Chanate to define gold grades,
to
obtain metallurgical samples from siltstone hosted ores, and to evaluate
previous deep drilling results by Anglo Gold in the Los Dos Virgens Zone.
Two of
the core holes tested and confirmed the presence of gold in the deep Los
Dos
Virgens Zone that lies below the level of the planned open pit. This zone
was
previously identified by Anglo Gold’s reverse circulation drilling and, with
increasing gold prices, we are analyzing with core drilling the conditions
that
might allow an enlarged open pit to include ores from the Los Dos Virgens
zone.
The third core hole was drilled in the main high grade part of the deposit
to
obtain ore samples for metallurgical column testing from siltstone host
rocks.
The
latest metallurgical column test studies were completed in February 2005
at
Metcon’s laboratory in Tucson Arizona to determine the optimal conditions at El
Chanate for recovering gold from within siltstone host rocks using heap
leach
technology. The siltstone drill core samples were tested at crush sizes
of 100
percent -3/8 inch and 100 percent -1/4 inch, and these column tests showed
recovery rates of 42% and 46% respectively. With rising gold prices, management
believes the ore reserves may increase beyond the level currently published
in
the 2006 Update. Although we are optimistic about the results, there can
be no
assurance that improved gold recoveries alone will result in an increase
in
reserves.
In
January 2004, we received permits from the Mexican Department of Environmental
Affairs and Natural Resources necessary to begin construction of the El
Chanate
Project. The permits were extended in June 2005. Pursuant to the extensions,
once we file a notice that work has commenced, we have one year to prepare
the
site and construct the mine and seven years to mine and process ores from
the
site. We filed the notice on June 1, 2006. These permits also cover the
operation of a heap-leach gold recovery system. Please see “Current
Status of El Chanate”
for
updated information as of March 2007.
In
2005,
we acquired 15 year rights of way for the current access road, and we acquired
the right to purchase 81 hectares of land near the main highway. We have
use of
the land; however, our actual purchase of the land is conditioned upon
the Ejido
(local cooperative) privatizing the land, before the acquisition is finalized.
We subsequently purchased an extension of our rights-of-way from 15 to
30 years.
We have completed an access road on this land that will provide access
for water
and power lines. In addition to this road, we acquired a water concession,
and
our water well is located within a large regional aquifer. The 2005 feasibility
study indicates our average life of mine water requirements, for ore processing
only, will be about 94.6 million gallons per year (11.4 liters per second).
The
amount of water we are currently permitted to pump for our operations is
approximately 71.3 million gallons per year (8.6 liters per second). Our
currently permitted water rights may not be adequate for all of our total
project needs over the entire course of our anticipated mining operations.
We
are looking into ways to rectify this issue. Please see “Current
Status of El Chanate”
for
updated information as of March 2007.
In
December 2005, MSR entered into a Mining Contract with a Mexican mining
contractor, Sinergia Obras Civiles y Mineras, S.A. de C.V. (“Contractor”) The
Mining Contract becomes effective if and when MSR sends the Contractor
a formal
Notice of Award. Pursuant to the Mining Contract, the contractor had the
right
to terminate the contract or modify its initial mining rates if it did
not
receive the formal Notice by June 1, 2006. MSR would not be obligated to
proceed
with the Mining Contract if those modified rates are unacceptable to it.
In
August 2006, the Mining Contract was amended to extend MSR’s right to deliver
the Notice to November 1, 2006 and, provided that the Notice specifies a
date of commencement of the Work (as defined in the contract) not later
than
February 1, 2007, the mining rates set forth in the Mining Contract will
still apply; subject to adjustment for the rate of inflation between
September 23, 2005 and the date of commencement of the Work. As
consideration for these changes, we paid the Contractor $200,000 of the
requisite advance payment discussed below. On November 1, 2006, MSR delivered
the Notice of Award specifying January 25, 2007 as the date of commencement
of
Work. Please see “Current
Status of El Chanate”
for
updated information as of March 2007.
Pursuant
to the Mining Contract, the Contractor, using its own equipment, will generally
perform all of the mining work (other than crushing) at the El Chanate
Project
for the life of the mine. Subsequent to delivery of the Notice to Proceed
and
prior to the commencement of any work by the Contractor, MSR must pay the
Contractor a mobilization payment of $70,000, and must also make an advance
payment of $520,000 to the Contractor (all of which has already been advanced).
The advance payments are recoverable by MSR out of 100% of subsequent payments
due to the Contractor under the Mining Contract. Pursuant to the Mining
Contract, upon termination, the Contractor would be obligated to repay
any
portion of the advance payment that had not yet been recouped. The Contractor’s
mining rates are subject to escalation on an annual basis. This escalation
is
tied to the percentage escalation in the Contractor’s costs for various parts
for its equipment, interest rates and labor. One of the principals of the
Contractor is one of the former principals of Grupo Minero FG S.A. de C.V.
(“FG”). FG was our former joint venture partner.
In
June
2006, MSR retained the contracting services of a Mexican subsidiary of
M3
Engineering & Technology Corporation (“M3M”) to provide EPCM (engineering
procurement construction management) services. M3M will supervise the
construction and integration of the various components necessary to commence
production at the El Chanate Project. The contracted services shall not
exceed
$1,200,000 and the contract is based on the EPCM services to be provided
by M3M.
As of October 24, 2006, approximately $346,000 has been billed pursuant
to the
contract.
In
March
2006, we paid $250,000 as a down payment for a portion of a new crushing
system
capable of producing 7,500 metric tons per day of ore. The total cost for
all of
the crushing equipment (inclusive of site preparation and installation)
will be
approximately $4,000,000. In October 2006, we paid an additional $230,000
towards this equipment and we now have purchase orders for all of the new
crushing system. As of the date of this report, we have issued purchase
orders
for all of the crushing equipment. We also retained Golder Associates,
- a
geotechnical engineering firm, for the detailed engineering of the leach
pads
and ponds. The engineering was completed in August 2006 and construction
of the
leach pads began in September 2006. Please see “Current
Status of El Chanate”
for
updated information as of March 2007.
Current
Status of El Chanate
We
have
made significant progress in the construction and commissioning of our
mine at
El Chanate. As of March 13, 2007, engineering and procurement is complete,
we
have obtained all permits required to commence mining operations, the majority
of equipment has been delivered and installed and the infrastructure support
buildings have been constructed. The current status of the relevant areas
is as
follows:
Electrical
power is supplied from the National grid by CFE (Commission Federal de
Electricidad) in Caborca at 34.5 kilo volt-amps and is converted to 480
volts at
seven transformer stations throughout the site. The transmission lines
and
transformers have been installed and commissioned and approved for use
by CFE.
An emergency generator has been installed adjacent to the solution ponds
to
circulate the leach pad solution in the event of power interruptions. An
additional substation is being built by the local power company 20 kilometers
from the mine in the town of Altar. It will have the capability to increase
power to the mine later this year should additional power be required in
the
event of additional consumption requirements for increased production or
seasonal fluctuations.
Process
water is supplied from a well owned by MSR, one of our Mexican subsidiaries.
The
well’s casing has been inspected and equipped with a new pump and electrical
hardware. The well is located nine kilometers from the mine and can supply
water
in sufficient quantity to support the mine through a new eight inch diameter
steel pipeline. While there are issues about the adequacy of water supply
over
the entire life of the project, based on the anticipated water consumption
for
at least the first few years of operation, we believe that we have an allocation
to meet our requirements. The capability of acquiring additional water
through
third party allocation purchase is available, as is the conservation of
water
through good operational practice. If we need to obtain additional rights,
but
are unable to procure them our planned operations may be adversely affected.
See
“Our
currently permitted water rights may not be adequate for all of our total
project needs over the entire course of our anticipated mining operations.
If we
need to obtain additional rights, but are unable to procure them our planned
operations may be adversely affected”
in
“Part I, Item 1, Description of Business; Risk Factors.”
The
mine
access road is nine kilometers long and is capable of supporting all anticipated
traffic. The road connects with a main asphalt road (Route 2) that is maintained
by the state highways department. There are two arroyos that cross the
mine
access road, both of which have concrete crossings to prevent erosion of
the
road at these locations, giving year round access to the site. The internal
access roads have been constructed for the life of the mine.
The
mine
is supported by a number of infrastructure buildings all of which have
been or
are being constructed. The completed buildings in use are an explosive
and
detonator store, a 5,000 sq. ft warehouse, the mine office and the security
guardhouse and first aid centre. Buildings due for completion by the end
of
March 2007 are, the laboratory, lime storage building and a cyanide and
carbon
storage building. The refinery building is anticipated to be completed
by mid
April 2007.
The
crushing and screening plant consists of three stage crushing and closed
circuit
screening. All of the equipment is new and has a design capacity of 1,000
tons
per hour (tph) for the primary crushing circuit and 400 tph for the balance
of
the crushing circuit. A 20,000 ton buffer stockpile separates the primary
crusher from the rest of the circuit allowing the crushing circuits to
operate
independently of each other. The crushed ore is stacked on the leach pad
by a
series of conveyors and a radial stacker. The equipment is new and has
been
commissioned and is currently stacking ore for over liner production and
leaching. Ore is placed on a leach pad that is (HDPE) plastic lined to
contain
the gold bearing solution and transport it via lined launders (plastic
lined
earth trenches) to ponds which are double plastic lined. The initial leach
pad
will consist of four panels, three of which will be lined at this time
(the
ultimate leach pad will consist of ten panels). These four panels will
allow for
the stacking of approximately one year of crushed ore. The launder and
ponds
have been constructed for the mine life. The first two panels are complete
and
the remainder of the launder and pond construction is scheduled for completion
during March 2007. We anticipate that we will begin to apply cyanide solution
to
the ore by the end of April 2007. We anticipate that gold Dore (bars of
semi-purified gold) production will begin between 45 to 75 days thereafter.
The
initial supply of ore to the crushing plant and leach pad is being loaded
and
delivered by a group of local truckers. Sinergia, the mining contractor,
is in
the process of mobilizing the mining fleet to commence mining on March
25, 2007.
The Sinergia mining fleet is not new, however it has been refurbished at
Sinergia’s repair facility and at the Caterpillar dealer in Hermosillo. This
process has been monitored by us and third party specialists and we believe
the
equipment will be suitable for mining when required. Sinergia is constructing
staff accommodation within an existing Ejido village adjacent to the mine
site.
On site power, water, and fuel supply has been made available for Sinergia’s use
as prescribed in the mining contract.
The
gold
in the cyanide/gold solution (pregnant solution) will be recovered using
activated carbon held in tanks. The activated carbon will be transferred
on a
daily basis to a processing plant (ADR Plant) that, with the use of chemicals,
will extract the gold from the pregnant solution. The gold from the solution
will be deposited by an electrowinning (electrolysis) process and then
dried,
mixed with fluxes (substances that reduce the melting point of the material
and
remove impurities in the metal) and smelted in a furnace to produce gold
Dore.
The solution that has been stripped of gold will gravitate to the barren
solution pond. Cyanide will be added to this and the solution will be pumped
to
freshly stacked ore. The ADR Plant is not new. It has been refurbished;
all of
the pumps, valves, piping, instruments and electrical components have been
replaced. The pumps and piping associated with the solution ponds are also
new.
We anticipate that the ADR Plant will be operational and ready for use
by mid
April 2007.
We
have
filled all key positions in finance, human resources, operations and mine
support (other than a General Manager), and the majority of the remainder
of the
staff is also in place. Our Chief Operating Officer is acting as our General
Manager until a replacement can be found. We are actively searching for
a
replacement and we do not believe that it will be a problem finding a suitable
candidate. We forecast a total staffing complement of between 70 and 80
people.
The mine has three towns in close proximity where the staff live. With
this
local infrastructure, the staff will be bussed to site, eliminating the
need for
an on site camp. Certain duties such as security and staff transport will
be
contracted. In the town of Caborca we own a house and rent an office. While
we
have constructed and are using an on-site office, we will retain an “in town”
office for the project life.
We
have
entered into a supply agreement for cyanide and have ordered consumable
supplies
such as explosives and carbon. Wear parts and critical spare parts have
also
been delivered to the mine. A fully equipped laboratory has been constructed
at
the mine with the capability of monitoring the mine operation and conducting
metallurgical test work. We anticipate that the laboratory will be fully
functional during April 2007.
During
the construction and commissioning process, we have been assisted by a
number of
suppliers and consultants to ensure that the transition into full production
becomes a seamless event. Given the location of the mine, there are many
local
services available to support the operation. Where we feel it is prudent
to
retain critical items such as pond and water well pumps, we have done so
and we
have constructed storage facilities to store in excess of three months
supply of
reagents should we foresee supply shortages looming.
To
support the mine we have purchased a number of vehicles and support equipment
that were used during construction. The equipment consists of a 35 ton
crane, a
water truck, an ambulance, a D4 dozer, a front end loader and a forklift/tool
handler. We also have purchased a number of additional equipment such as
lighting plants, welders and small tools.
Our
acquisition and ownership of the El Chanate Project
In
June
2001, we purchased 100% of the issued and outstanding stock of Minera Chanate,
S.A. de C.V. from AngloGold North America Inc. and AngloGold (Jerritt Canyon)
Corp. Minera Chanate’s assets at the time of the closing of the purchase
consisted of 106 exploitation and exploration concessions in the States
of
Sonora, Chihuahua and Guerrero, Mexico. By June of 2002, after property
reviews
and to minimize tax payments, the 106 had been reduced to 12 concessions.
To
cover certain non-critical gaps between concessions, three new concessions
were
located, and the number of concessions is now 16. These concessions are
contiguous, totaling approximately 3,544 hectares (8,756 acres or 13.7
square
miles). We sometimes refer to these concessions as the El Chanate concessions.
Although there are 16 concessions, we only plan to mine two of these concessions
at the present time. We sometimes refer to the planned operations on these
two
concessions as the El Chanate Project We also own outright 466 hectares
(1,151
acres or 1.8 square miles) of surface rights at El Chanate and no third
party
ownership or leases exist on this fee land or the El Chanate concessions.
In the
future, assuming adequate funding is available, we plan on conducting
exploration activities on some of the other concessions.
Pursuant
to the terms of the agreement with Anglo Gold, in December 2001, we made
a
$50,000 payment to AngloGold. AngloGold will be entitled to receive the
remainder of the purchase price by way of an ongoing percentage of net
smelter
returns of between 2% and 4% plus a 10% net profits interest (until the
total
net profits interest payment received by AngloGold equals $1,000,000).
AngloGold's right to a payment of a percentage of net smelter returns and
the
net profits interest will terminate at such point as they aggregate $18,018,355.
In accordance with the agreement, the foregoing payments are not to be
construed
as royalty payments. Should the Mexican government or other jurisdiction
determine that such payments are royalties, we could be subjected to and
would
be responsible for any withholding taxes assessed on such payments.
Under
the
terms of the agreement, we have granted AngloGold the right to designate
one of
its wholly-owned Mexican subsidiaries to receive a one-time option to purchase
51% of Minera Chanate (or such entity that owns the El Chanate concessions
at
the time of option exercise). That option is exercisable over a 180 day
period
commencing at such time as we notify AngloGold that we have made a good
faith
determination that we have gold-bearing ore deposits on any one of the
identified groups of El Chanate concessions, when aggregated with any ore
that
we have mined, produced and sold from such concessions, of in excess of
2,000,000 troy ounces of contained gold. The exercise price would equal
twice
our project costs on the properties during the period commencing on December
15,
2000 and ending on the date of such notice. Based on current information
available to us, we do not believe a deposit of the size that would trigger
these back-in rights is likely to be identified at El Chanate.
In
February 2002, MSR, one of our wholly-owned Mexican affiliates, now the
leasee
of the El Chanate concessions, as discussed below, entered into a joint
venture
agreement with Grupo Minero FG S.A. de C.V. to explore, evaluate and develop
the
El Chanate concessions. Grupo Minero FG S.A. de C.V., referred to as FG,
is a
private Mexican company that owns and operates the La Colorada open-pit gold
mine outside of Hermosillo in Sonora, Mexico.
Effective
March 31, 2004, the joint venture agreement with FG was terminated. In
consideration of FG’s contributions to the venture of $457,455, we issued to FG
2,000,000 restricted shares of our Common Stock valued at $800,000 and
MSR
issued to FG a participation certificate entitling FG to receive five percent
of
the MSR’s annual dividends, when declared. The participation certificate also
gives FG the right to participate, but not to vote, in the meetings of
MSR’s
Board of Managers, Technical Committee and Partners. In September 2006,
we
repurchased the participation certificate from FG for $500,000 with FG
retaining
a 1% net profits interest in MSR, payable only after a total $20 million
in net
profits has been generated from operations at El Chanate. MSR also received
a
right of first refusal to carry out the works and render construction services
required to effectuate the El Chanate Project. This right of first refusal
is
not applicable where a funding source for the project determines that others
should render such works or services.
FG
has
assigned or otherwise transferred to MSR all permits, licenses, consents
and
authorizations (collectively, “authorizations”) for which FG had obtained in its
name in connection with the development of the El Chanate Project to the
extent
that the authorizations are assignable. To the extent that the authorizations
are not assignable or otherwise transferable, FG has given its consent
for the
authorizations to be cancelled so that they can be re-issued or re-granted
in
MSR’s name. The foregoing has been completed.
During
March 2002, prior to the sale of Minera Chanate and pursuant to the FG
joint
venture agreement, Minera Chanate, in a series of transactions, sold all
of its
surface land and mining claims to Oro de Altar S. de R. L. de C.V. ("Oro"),
another of our wholly-owned subsidiaries. Oro, in turn, leased the foregoing
land and mining claims to Minera Santa Rita.
PART
III
Item
13. Exhibits.
Exhibits
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3.1
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|
Certificate
of Incorporation of Company.(1)
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3.2
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Amendments
to Certificate of Incorporation of
Company.(1)(5)
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3.3
|
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Certificate
of Merger (Delaware) (which amends our Certificate of
Incorporation)(16)
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3.4
|
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Amended
and Restated By-Laws of Company(17)
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4.1 |
Specimen certificate representing our Common
Stock.(9) |
|
4.2
|
Form
of Warrant for Common Stock of the Company issued in February
2005 private
placement.(8)
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4.3
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Form
of Warrant for Common Stock of the Company issued to Standard
Bank.(10)
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4.4
|
Form
of Warrant for Common Stock of the Company issued in February
and March
2006 private placement.(14)
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4.5
|
Rights
Agreement, dated as of August 15, 2006, between the Company and
American
Stock Transfer & Trust Company. The Right Agreement includes the Form
of Certificate of Designation of the Series B Common Stock and
the Form of
Right Certificate. (17)
|
|
10.2 |
Stock Purchase Option Agreement from AngloGold
(2) |
|
10.3 |
Letter of Intent with International Northair
Mines Ltd.
(2) |
|
10.4
|
March
30, 2002 Minera Chanate Stock Purchase and Sale and Security
Agreement
(Sale by us and Holding of all of the stock of Minera Chanate)
(In
Spanish).(3)
|
|
10.5
|
English
summary of March 30, 2002 Minera Chanate Stock Purchase and Sale
and
Security Agreement.(3)
|
|
10.6 |
Agreement between Santa Rita and Grupo Minero
FG.(4) |
|
10.7 |
Amendment to Agreement between Santa Rita and
Grupo
Minero FG.(6) |
|
10.8 |
Termination Agreement between Santa Rita and
Grupo Minero
FG.(7) |
|
10.9 |
English summary of El Charro agreement.
(11) |
|
10.10 |
Plan and agreement of merger (reincorporation).
(12) |
|
10.11 |
Contract between MSR and Sinergia Obras Civiles
y
Mineras, S.A. de C.V.(13) |
|
10.12
|
Amendment
to Contract between MSR and Sinergia Obras Civiles y Mineras,
S.A. de
C.V.
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|
10.13
|
September
2006 Chipman Amended Engagement Agreement.
|
|
10.14
|
Employment
Agreement with John Brownlie. (18)
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10.15
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June
1, 2006 EPCM agreement between MSR and a Mexican subsidiary of
M3
Engineering & Technology Corporation
(18)
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10.16
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Credit
Agreement dated August 15, 2006 among MSR and Oro, as the borrowers,
the
Company, as the guarantor, and Standard Bank PLC, as the lender
and the
offshore account holder. (17)
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|
10.17
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Employment
Agreement with Gifford A. Dieterle.
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10.18
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Employment
Agreement with Roger A. Newell.
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10.19
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Employment
Agreement with Jack V. Everett.
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10.20
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Employment
Agreement with Jeffrey W. Pritchard.
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21 |
Subsidiaries of the Registrant.
(9) |
|
31.1
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Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from
the
Company's Chief Executive Officer.
|
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31.2
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Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from
the
Company's Chief Financial Officer.
|
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32.1
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from
the
Company's Chief Executive Officer.
|
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32.2
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from
the
Company's Chief Financial Officer.
|
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(1) |
Previously
filed as an exhibit to the Company's Registration Statement on
Form S-18
(SEC File No. 2-86160-NY) filed on or about November 10, 1983,
and
incorporated herein by this
reference.
|
|
(2) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for
the quarter ended January 31, 2001 filed with the Commission
on or about
March 16, 2001, and incorporated herein by this
reference.
|
|
(3) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for
the quarter ended April 30, 2002 filed with the Commission on
or about
June 20, 2002, and incorporated herein by this
reference.
|
|
(4) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for
the quarter ended January 31, 2002 filed with the Commission
on or about
March 25, 2002, and incorporated herein by this
reference.
|
|
(5) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K
filed with
the Commission on or about April 11, 2003, and incorporated herein
by this
reference.
|
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(6) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K
filed with
the Commission on or about January 22, 2004, and incorporated
herein by
this reference.
|
|
(7) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K
filed with
the Commission on or about April 12, 2004, and incorporated herein
by this
reference.
|
|
(8) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K
filed with
the Commission on or about February 10, 2005, and incorporated
herein by
this reference.
|
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(9) |
Previously
filed as an exhibit to the Company's Registration Statement on
Form SB-2
(SEC file no. 333-123216) filed with the Commission on or about
March 9,
2005, and incorporated herein by this
reference.
|
|
(10) |
Previously
filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (SEC file no. 333-123216) filed with the
Commission
on or about June 27, 2005, and incorporated herein by this
reference.
|
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(11)
|
Previously
filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for
the quarter ended April 30, 2005 filed with the Commission on
or about
June 20, 2005, and incorporated herein by this
reference.
|
|
(12) |
Previously
filed as Appendix B to the Company's Definitive 14A Proxy Statement
filed
with the Commission on or about October 7, 2005, and incorporated
herein
by this reference.
|
|
(13) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for
the quarter ended October 31, 2005 filed with the Commission
on or about
December 15, 2005, and incorporated herein by this
reference.
|
|
(14) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K
filed with
the Commission on or about February 16, 2006, and incorporated
herein by
this reference.
|
|
(15) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for
the quarter ended January 31, 2006 filed with the Commission
on or about
March 22, 2006, and incorporated herein by this
reference.
|
|
(16) |
Previously
filed as an exhibit to the Company's Registration Statement on
Form SB-2
(SEC file no. 333-129939) filed with the Commission on or about
November
23, 2005, and incorporated herein by this
reference.
|
|
(17) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K
filed with
the Commission on or about August 16, 2006, and incorporated
herein by
this reference.
|
|
(18) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for
the quarter ended April 30, 2006 filed with the Commission on
or about
June 19, 2006, and incorporated herein by this
reference.
|
Statements
contained in this Form 10-KSB as to the contents of any agreement or other
document referred to are not complete, and where such agreement or other
document is an exhibit to this Report or is included in any forms indicated
above, each such statement is deemed to be qualified and amplified in all
respects by such provisions.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to its Form 10-KSB
annual
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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|
CAPITAL
GOLD
CORPORATION |
|
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|
Dated:
March 16, 2007 |
By: |
/s/Gifford
A. Dieterle |
|
Gifford
A. Dieterle,
President |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this amendment
to
Form 10-KSB annual report has been signed below by the following persons
on
behalf of the registrant and in the capacities and on the dates
indicated.
SIGNATURES
|
|
TITLE
|
|
DATE
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|
|
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|
|
/s/
Gifford
A. Dieterle |
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President,
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March
16, 2007
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Gifford
A. Dieterle
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Treasurer,
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and
Chairman
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|
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of
the Board of Directors
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/s/
Christopher
M. Chipman |
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Principal
Financial
|
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Christopher
M. Chipman
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and
Accounting Officer
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March
16, 2007
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/s/
John
Brownlie |
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Director
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March
17, 2007
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John
Brownlie
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/s/
Jack
V. Everett |
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Director
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March
15, 2007
|
Jack
V. Everett
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Director
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March
__, 2007
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Robert
N. Roningen
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/s/
Roger
A. Newell |
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Director
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March
15, 2007
|
Roger
A. Newell
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|
/s/
Jeffrey
W. Pritchard |
|
Director
|
|
March
15, 2007
|
Jeffrey
W. Pritchard
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/s/
Ian
A. Shaw |
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Director
|
|
March
17, 2007
|
Ian
A. Shaw
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|
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/s/
John
Postle |
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Director
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|
March
16, 2007
|
John
Postle
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Director
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March
__, 2007
|
Mark
T. Nesbitt |
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