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WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the
Company") provides its results for the periods ended June 30, 2011, key
highlights, and activities to date. The Company has also had two significant
announcements since the end of the second quarter.
On May 31, 2011, WesternZagros made a significant oil discovery in the Jeribe
Formation at the Sarqala-1 exploration well that tested at rates up to 9,444
barrels per day of 40 degree API oil. The Company is now evaluating and sourcing
surface equipment and trucking facilities with the objective of producing oil by
the end of 2011 through an extended well testing program.
On August 2, 2011, WesternZagros announced it had finalized an agreement with
the Kurdistan Regional Government of Iraq ("KRG") and Talisman (Block K44) B.V.
("Talisman") to amend the original Production Sharing Contract ("Original PSC")
that governed the Company's exploration activities in the Kalar-Bawanoor Block
in Kurdistan. The agreement divides the contract area of the Original PSC into
two new contract areas named Garmian and Kurdamir, each of which is now governed
by a distinct PSC. WesternZagros will continue to operate the southern contract
area named Garmian Block that covers approximately 1,780 square kilometres and
is now governed by a new PSC ("Garmian PSC"). The Garmian Block contains the
Sarqala-1 oil discovery, the Mil Qasim-1 prospect, and the other numerous
prospects and plays that contributed to a large increase in prospective
resources reported by the Company on July 20, 2011. The northern contract area
is named Kurdamir Block. It covers some 340 square kilometres, contains the
Kurdamir-1 oil, gas and condensate discovery, and is now governed by an amended
version of the Original PSC ("Kurdamir PSC"). The Kurdamir Block is now operated
by Talisman. WesternZagros's production sharing terms, under both the Garmian
and Kurdamir PSCs, remain unchanged from the Original PSC.
On July 20, 2011, WesternZagros reported an increase of over 100 percent in the
combined mean estimate of gross unrisked prospective resources on the Company's
Kurdamir and Garmian exploration blocks ("PSC Lands"). The updated estimate is
approximately 2.2 billion barrels of oil or 3.6 billion barrels of oil
equivalent (when oil, gas and condensate prospective resources are included).
Previously these estimates were 1.1 billion barrels of oil or 1.8 billion
barrels of oil equivalent. This updated mean estimate has been independently
audited by Sproule International Limited ("Sproule") and incorporates the
multiple reservoirs in additional prospective areas of the Company's PSC Lands
which are all located on the Garmian Block. The audit included prospects with
Jeribe, Mio-Oligocene, Eocene and Shiranish reservoir sequences and two Upper
Fars plays. These prospects and plays are potential follow-on exploration
targets for future drilling consideration.
Commenting on the second quarter results and subsequent events, WesternZagros's
Chief Executive Officer Simon Hatfield said, "We are very pleased by the
achievements of the last few months, including our first oil discovery, a major
jump in our resource estimates, and most recently, the PSC amendments. Our
primary focus now is the aggressive pursuit of oil production from the Sarqala-1
well, with preparations underway for the extended well testing program, and
proving up our prospective resources via the Mil Qasim-1 and Kurdamir-2 wells.
We look forward to the test results of the Oligocene reservoir in Talisman's
adjacent Topkhana-1 well to assist in our drilling plans for Kurdamir-2."
To view the Figure 1 map, please visit the following link:
http://media3.marketwire.com/docs/812wzr_map.pdf
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 three and six month
periods ended June 30, 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 June 30, 2011, and the
audited consolidated financial statements for the year ended December 31, 2010
prepared under Canadian Generally Accepted Accounting Principles ("GAAP") and
the related notes. The effective date of this MD&A is August 11, 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 amended Production Sharing
Contract for the Kurdamir area ("Kurdamir PSC") and new Production Sharing
Contract for the Garmian area ("Garmian PSC"), anticipated capital and operating
budgets, 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, plans for and results of extended well tests
and 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, 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, and the timing of and costs reimbursed by
the third party participant interest assignment in the Garmian PSC. In addition,
budgets are based upon WesternZagros's 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 and testing
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. "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, February 22, 2011, and July 20, 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, and the significant positive and negative factors
relevant to the estimates.
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 holds two Production
Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the
Kurdistan Region of Iraq that are both on trend with, and adjacent to, a number
of prolific historic oil and gas discoveries. Each PSC governs a separate
contract area. The northern contract area (comprising some 340 square
kilometres) is governed by the Kurdamir PSC which is an amended version of the
original February 28, 2008 PSC that governed all of the Kalar-Bawanoor Block
(the "Original PSC") and is now called the Kurdamir Block. The southern contract
area (comprising some 1,780 square kilometres) is governed under the new Garmian
PSC and is named the Garmian Block. WesternZagros holds a 40 percent working
interest in both the Kurdamir and Garmian PSCs. The KRG holds a 20 percent
working interest in both PSCs. The remaining 40 percent working interest (the
third party participation interest or "TPPI") of the Kurdamir PSC is held by a
wholly-owned subsidiary of Talisman Energy Inc. ("Talisman"). The remaining 40
percent TPPI of the Garmian PSC is held by the KRG and it is to be assigned to a
third party participant.
Basis of Presentation
Reporting and Functional Currency
The Company has prepared its June 30, 2011 unaudited Condensed Consolidated
Interim Financial Statements in accordance with International Financial
Reporting Standards ("IFRS"). December 31, 2011 will mark the Company's first
annual reporting date under IFRS. Accordingly, the 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. The Company is not yet at the stage of having reserves
and production, hence revenue is currently comprised entirely of interest earned
on cash and cash equivalent balances and short-term investments. WesternZagros's
highlights and activities for the second quarter of 2011 and to August 11, 2011
include the following.
HSE&S
- Awareness and implementation of best practices with respect to health, safety,
environment and security ("HSE&S") continues to be a high priority commitment of
the Board of Directors, Executive Management, employees and contractors towards
all of the local residents and the staff and contractors involved in the
Company's operations.
- WesternZagros prides itself on the credible standards it has established as an
operational benchmark. The new contractor drilling the Mil Qasim-1 well has
demonstrated their commitment to the Company's high standards by their
acceptance and participation in our procedures and programs. This has the
positive safety result of no recordable injuries to date.
- WesternZagros has achieved a total of 289 days without any Lost Time Incidents
("LTIs") to August 11, 2011.
Operations
- The Company re-entered the Sarqala-1 well bore on March 29, 2011, and made a
significant oil discovery after drilling an approximate 100 metre long sidetrack
to a depth of 3,893 metres. Hydrocarbon 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 of the reservoir. No water was produced during this
flow. The Company then tested the well and achieved 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 limited by the
flow capacity of 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 although there
remains the potential to do so at a later date. On June 7, 2011 the Company
successfully completed the initial testing phase of this oil discovery.
- Preparations are currently underway for WesternZagros to drill the Mil Qasim-1
well, with an anticipated spud date in mid August 2011. The 2,000 HP Viking
Drilling Rig #10 is secured through a contract with Maritas Co., a subsidiary of
Viking Oilfield Services of the United States, to drill the Mil Qasim-1 well.
- Site construction of the Kurdamir-2 well is approximately 50 percent complete.
Kurdamir-2 is approximately two kilometres away from Kurdamir-1 and the well
will target the Oligocene, Eocene and Cretaceous reservoirs. WesternZagros and
Talisman have sourced the necessary long lead items, including casing and
wellhead equipment and are currently preparing the drilling plan for Kurdamir-2.
Exploration
- On July 20, 2011, Sproule International Limited ("Sproule") completed the
fourth in a series of independent audits of the Company's resource assessments
on the Kurdamir and Garmian blocks (the"PSC Lands"). The audit included
prospects identified on the Garmian Block with Jeribe, Mio-Oligocene, Shiranish
and Eocene reservoirs (Tilako, Zardi, Segrdan, Chwar, Alyan) and two Upper Fars
plays (Fault Trap Play, Bawanoor Saddle). The combined mean estimate of gross
unrisked prospective resources for these prospects is 1,099 million barrels of
oil, or 1,798 million barrels of oil equivalent when gas and condensate
prospective resources are included. This audit, together with the previous audit
results announced on December 16, 2010, January 17, 2011, and February 22, 2011,
respectively, increased the combined mean estimate of gross unrisked prospective
resources on the Company's PSC Lands to 2,192 million barrels of oil, or 3,570
million barrels of oil equivalent when gas and condensate are included.
- The Sarqala-1 Discovery Report was submitted to the KRG in the second quarter
of 2011 as per the PSC's requirements.
- WesternZagros continues to compile seismic data and information from wells
adjacent to its PSC Lands to integrate with its existing large technical
database and aid further in the definition and upgrade of its prospects and
leads inventory. Talisman's Topkhana-1 testing results from the Oligocene
reservoir are expected in the third quarter of 2011 and from the deeper Eocene
and Cretaceous reservoirs in the fourth quarter of 2011. The Topkhana well
results will impact the drilling plan for the Kurdamir-2 well and the potential
drilling order of the Qulijan and Baran prospects in the Garmian Block.
- The Company's exploration work included integrating field geology work into
the Company's understanding of the Oligocene and Jeribe Formation reservoirs and
detailed structural analyses of the Oligocene reservoir in the Kurdamir-1 well
and the Jeribe Formation of the Sarqala-1 well sidetrack. In the second quarter
of 2011 WesternZagros also completed a quantitative fluorescence study of drill
cuttings from the Kurdamir-1 well to better understand the presence of oil
versus gas in reservoirs to be drilled in the Kurdamir-2 well. Results indicate
the probable presence of an oil column in the Lower and Middle Shiranish
formations (Cretaceous), gas in the Upper Shiranish Formation, and oil in Eocene
aged reservoirs. The Kurdamir-2 well is operated by Talisman, with a spud date
currently expected by the end of 2011.
Financial
- As at June 30, 2011, WesternZagros had $46.7 million in working capital.
- For the six months ended June 30, 2011, WesternZagros's share of capital
expenditures, associated with its Original PSC activities and other capitalized
costs was $33.9 million (net of disposals and prior to the impact of changes in
non-cash investing capital). Year-to-date expenditures for 2011 included $29.7
million of drilling-related costs; $0.9 million of geological and geosciences
related work; $2.3 million of supervision and field office costs; and $1.0
million of other PSC-related expenditures. These expenditures reflect the
requirement that WesternZagros currently fund 100 percent of the Sarqala-1
sidetracking and testing costs as well as other activities on the Garmian Block.
Insurance
- WesternZagros has concluded its insurance claim for a total of $45 million
relating to the Kurdamir-1 well, the proceeds for which have all been received
at the date of this MD&A. The Company and its insurers have also agreed to terms
to renew its insurance policy for the drilling of the Kurdamir-2 well. These
terms include an increase in the net aggregate limit from $45 million to $75
million.
Corporate
- WesternZagros finalized an agreement with the KRG and Talisman to amend the
Original PSC that governed the Company's exploration activities in the
Kalar-Bawanoor Block in Kurdistan. The agreement divides the contract area of
the Original PSC into two contract areas named Garmian and Kurdamir and each is
now governed by a distinct PSC.
Political
- Further improvement in Iraq's political environment was seen in the resumption
of oil exports from the Kurdistan region in February 2011, and the subsequent
release of the first oil export payment to the KRG from the Federal Ministry of
Finance in May 2011. KRG's contractors confirmed receipt of their first
payments. DNO International ASA confirmed receipt of $103 million for their
February/March production from Tawke, and TTOPCO (Genel Enerji AS and Sinopec
Corp.) confirmed receipt of $92 million for their production from Taq Taq. These
payments are equal to approximately 50 percent of net revenue. Payment to KRG
contractors from revenues received from the Federal Government of Iraq provides
the opportunity for WesternZagros to potentially generate cash flow from an
extended well test at Sarqala.
- July 2011 witnessed new entrants to the region, including Afren plc,
PetroCeltic International plc, Repsol YPF, SA, and Hess Corp., purchasing
interests in license blocks in the Kurdistan Region of Iraq, providing further
endorsement of the international oil industry's confidence in Iraq's improving
political situation.
- In July 2011, the central government's Oil and Energy Committee held
parliamentary hearings to deliberate the proposed formation of a national oil
company, the draft oil and gas law and the status of contracts that have been
signed in the absence of a definitive legal framework. The hearings give new
momentum to a legislative process that had been stalled since a draft oil law
was tentatively approved in February 2007.
Corporate Social Responsibility
- WesternZagros aspires to be an industry leader with respect to corporate
social responsibility. The Company and its co-venturers continue to focus on
four key corporate social responsibility initiatives in the PSC Lands of
Kurdistan, namely, local employment, water supply, education and health care.
Activities included:
-- Drilling water wells in over 17 villages and repairing another eight wells
through July 2011. Sumps, pits and irrigation channels were dug in another 42
rural communities that do not have any other reliable sources of drinking water.
-- Completing repairs to six primary schools in the Garmian region.
-- Distributing over 2,000 school supply backpacks to school children in over 30
primary schools in the Garmian region.
-- Refurbishing of the Aziz Zadr Health Clinic.
-- Purchasing and distributing sports equipment to villages in the Garmian region.
-- Creating a new soccer pitch for the village of Hasira.
-- Together with an international NGO, contributing towards the purchase of a
youth mobile literacy bus.
General and Administrative Expenses
For the three and six months ended June 30, 2011, WesternZagros expensed $1.8
million and $3.6 million in general and administrative expenses ("G&A"),
respectively, as compared to $1.5 million and $3.2 million for the comparable
periods in 2010. G&A costs were higher in 2011 due to the relatively stronger
Canadian dollar in 2011, which impacts a large portion of the Company's G&A
expenditures, as well as increased personnel costs.
For the six months ended June 30, 2011, WesternZagros capitalized $2.1 million
of G&A (2010: $0.9 million). The amounts capitalized are directly related to the
supervision of the Company's exploration and evaluation activities. The increase
in 2011 reflects the requirement that WesternZagros fund 100 percent of the
Sarqala-1 sidetrack drilling and testing, as well as other activities on the
Garmian Block, prior to assignment of the TPPI by the KRG.
Depreciation, Depletion and Amortization (DD&A)
For the three and six months ended June 30, 2011, WesternZagros had $0.05
million and $0.1 million, respectively, of depreciation related to certain
administrative assets (2010: $0.1 and $0.3 million). 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 June
30, 2011, WesternZagros recorded $0.2 million in stock based compensation
expense (2010: $0.2 million) and $0.2 million as part of capitalized G&A (2010:
negligible), with a corresponding increase to contributed surplus. For the six
months ended June 30, 2011, WesternZagros recorded $0.4 million in stock-based
compensation expense (2010: $0.5 million), and $0.3 million as part of
capitalized G&A (2010: negligible).
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 June 30, 2011, WesternZagros held approximately 85 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's
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 June 30, 2011, WesternZagros recorded a foreign
exchange gain of $0.1 million relating to these conversions, compared to a $0.2
million foreign exchange loss for the quarter ended June 30, 2010. For the six
months ended June 30, 2011, WesternZagros recorded a foreign exchange loss of
$0.1 million, compared to a $0.2 million loss for the six months ended June 30,
2010.
Income Taxes
For the quarter ended June 30, 2011, WesternZagros had a net income tax recovery
of $0.4 million (2010: $0.1 million recovery), comprised of $0.5 million of
current income tax recovery (2010: $0.2 million recovery) and a $0.1 million
deferred income tax expense (2010: $0.1 million expense). For the six months
ended June 30, 2011, WesternZagros had a net income tax recovery of $0.9 million
(2010: $0.8 million) comprised entirely of current income tax recovery (2010:
$0.9 million current income tax recovery and $0.1 million deferred tax expense).
The current tax recovery relates to the expected recovery of taxes incurred in
2008 on realized foreign exchange gains and losses in WesternZagros's
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's revenue is comprised entirely of interest earned on cash and
cash equivalents and short-term investment balances. Interest of $0.03 million
was earned for the quarter ended June 30, 2011 compared to $0.02 million for the
quarter ended June 30, 2010. Interest of $0.05 million was earned for the six
months ended June 30, 2011, compared to $0.04 million for the six months ended
June 30, 2010.
Net Loss
For the quarter ended June 30, 2011, WesternZagros recorded a net loss of $1.4
million compared to $1.6 million for the quarter ended June 30, 2010. For the
six months ended June 30, 2011, WesternZagros recorded a net loss of $2.9
million (2010: $3.0 million loss). WesternZagros is an early stage exploration
enterprise and, apart from its working interest in the Kurdamir and Garmian PSCs
and cash and cash equivalents, the Company has no other significant assets. The
increase in G&A costs for the first six months of 2011 was offset by lower
depreciation and lower foreign exchange losses as compared to the same period of
2010.
Capital Expenditures
For the three months ended June 30, 2011, WesternZagros's share of capital
expenditures associated with its activities and other capitalized costs was
$18.4 million (prior to the impact of changes in non-cash investing capital).
Expenditures for the second quarter of 2011 included $16.6 million of
drilling-related costs; $0.6 million of geological and geosciences related work;
$0.7 million of supervision and field office costs; and $0.5 million of other
PSC related expenditures. These expenditures reflect the requirement that
WesternZagros currently fund 100 percent of the Sarqala-1 sidetracking and
testing costs as well as other activities on the Garmian Block.
By comparison, WesternZagros's share of exploration and evaluation expenditures
for the quarter ended June 30, 2010 associated with its activities was $16.0
million. Capital expenditures for the second quarter of 2010 included $14.8
million of drilling-related costs; $0.3 million of geological and
geosciences-related work; $0.7 million for related field office and supervision
costs in support of operations; and $0.2 million for other PSC-related costs.
For the six months ended June 30, 2011, WesternZagros's share of capital
expenditures associated with its activities and other capitalized costs was
$33.9 million (net of disposals and prior to the impact of changes in non-cash
investing capital). Expenditures included $29.7 million of drilled-related
costs; $0.9 million of geological and geosciences related work; $2.3 million of
supervision and field office costs; and $1.0 million of other PSC-related
expenditures. These expenditures reflect the requirement that WesternZagros
currently fund 100 percent of the Sarqala-1 sidetracking and testing costs as
well as other activities on the Garmian Block.
By comparison, WesternZagros's share of exploration and evaluation expenditures
for the six months ended June 30, 2010 associated with its activities was $29.1
million. Expenditures included $27.2 million of drilling-related costs; $0.4
million of geological and geosciences work; $1.3 million of supervision and
local office costs; and $0.2 million of other PSC-related activities.
WesternZagros capitalized $2.1 million of G&A expenses, including $0.3 million
of stock-based compensation, for the six months ended June 30, 2011, compared to
capitalizing $0.9 million of G&A expenses, including a negligible amount of
stock-based compensation, for the six months ended June 30, 2010.
Kurdamir and Garmian Production Sharing Contracts: Summary and Commitments
Under the terms of its Kurdamir and Garmian PSCs, WesternZagros has a 40 percent
working interest and the KRG has a 20 percent working interest which is carried
by WesternZagros. The remaining 40 percent TPPI in the Kurdamir PSC is held by a
wholly-owned subsidiary of Talisman and the remaining 40 percent TPPI in the
Garmian PSC is held by the KRG to be assigned to another third party
participant. WesternZagros, the KRG and Talisman for the Kurdamir PSC and
WesternZagros, the KRG, and the third party participant for the Garmian PSC, are
collectively the "Contractor Groups."
A summary of the material amendments to the Original PSC and remaining
commitments are set forth in Table 1.
Table 1. Material amendments to the Original PSC and WesternZagros's remaining
PSC commitments
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Original PSC Amended PSC New PSC
(Kalar-Bawanoor) (Kurdamir) (Garmian)
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First exploration December 31, 2010 June 30, 2012 December 31, 2011
sub-period
(expires)
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Exploration Third exploration Kurdamir-2 Mil Qasim-1
obligation well exploration well
(remaining)
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----------------------------------------------------------------------------
Second exploration Additional two Additional two Additional two
sub-period years years years
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Exploration Two exploration One appraisal One exploration
obligation wells well well
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other extensions Two one year Six month One year extension
extensions extension
----------------------------------------------------------------------------
Work commitments One appraisal One exploration
well well
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Economic terms 10% Royalty Oil, Unchanged Unchanged
remainder
available for Cost
Recovery and
Profit Oil
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PSC payments $ 5 Million Additional Additional
Signature Bonus Capacity Building Capacity Building
$40 Million Support Payment Support Payment
Capacity Building payable equal to payable equal to
Support Payment 3% of 3% of
$ 1.1 Million WesternZagros WesternZagros
annual payments Profit Oil. Profit Oil. Annual
Continuation of payments 50% of
previous annual previous payments.
payments.
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Operator WesternZagros Talisman WesternZagros
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Working interest WesternZagros 40% WesternZagros 40% WesternZagros 40%
Talisman 40% Talisman 40% Unassigned
KRG 20%(i) KRG 20%(i) TPPI 40%(ii)
KRG 20%(i)
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Contract area 2,120 km2 340 km2 1,780 km2
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(i) WesternZagros funds 20% of the KRG costs, ultimately to be recovered by
WesternZagros through the KRG's share of Cost Recovery Oil.
(ii) WesternZagros initially funds the 40% of the costs for the third party
participant until the TPPI is assigned by the KRG. The amounts funded
by WesternZagros for the TPPI will be repaid upon assignment of this
interest.
As at June 30, 2011, the Company estimates expenditures of approximately $70
million, prior to the costs of any testing, to meet its remaining commitments
for the first exploration sub-periods under the PSCs. This estimate includes the
Company's current 100 percent funding requirement for the remaining costs
associated with drilling the Mil Qasim-1 commitment well by December 31, 2011;
the Company's 60 percent funding requirement of costs for drilling the
Kurdamir-2 commitment well by June 30, 2012; the associated supervision and
local office support costs related to both drilling operations; and the
Company's annual funding requirements for certain technological, logistical,
recruitment and training support under its PSCs.
Kurdamir and Garmian Production Sharing Contracts: Commercial Terms
Under the Kurdamir and Garmian PSCs, 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 PSCs; 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
sharing 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 June 30, 2011, the Company had approximately $78 million relating to the
Kurdamir PSC and $116 million related to the Garmian PSC, both net to
WesternZagros of recoverable costs available that may ultimately be recovered
from future crude oil or natural gas sales in accordance with the PSCs.
Production
The Kurdamir and Garmian PSCs provide 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 Kurdamir and Garmian PSCs, WesternZagros maintains
the right to market its share of oil on the world market. There is an obligation
under the Kurdamir and Garmian PSCs to make oil production available to meet
regional market demand. The price of such oil is a market-based 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.
Other Commitments
The Company has entered into and terminated various exploration-related
contracts, including contracts for drilling equipment, services, tangibles and
consulting service contracts. The following table summarizes the estimated
commitments in relation to these exploration-related contracts relating to the
PSCs and other contractual obligations at June 30, 2011:
For the Years Ending December 31,
2011 2012 2013 2014 2015+ Total
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Exploration $ 4,462 $ 5,500 - - - $ 9,962
Office $ 326 $ 579 $ 599 $ 456 - $ 1,960
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$ 4,788 $ 6,079 $ 599 $ 456 - $ 11,922
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Consulting Service Contracts
In 2003 the Company entered into a consulting service contract 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. The contract has been terminated.
Further, in 2004 the Company entered into a consulting service contract 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. During the
second quarter of 2011 the contract was terminated.
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 June 30, 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 Kurdamir-1 well was plugged and cemented to approximately 2,500
metres, concluding well control operations.
WesternZagros has concluded its insurance claim for a total of $45 million, the
proceeds of which have all been received at the date of this MD&A. 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.
The Company began the first of these operations by re-entering the Sarqala-1
well bore testing the Jeribe reservoir at rates up to 9,444 barrels per day of
40 degree API oil. The Company is now evaluating and sourcing surface equipment
and trucking facilities with the goal of producing and selling oil by the end of
2011 through an extended well testing program. The objective is to further
evaluate the Jeribe reservoir while generating cash flow from operations. The
Company has submitted a request to the KRG's Ministry of Natural Resources for
approval to commence this extended testing program and will submit its full
appraisal work program and budget to the Ministry of Natural Resources later in
the third quarter of 2011.
Commencing in mid August 2011, WesternZagros plans to drill the remaining
Garmian Block 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 is being 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 hypothesis that the Kurdamir and Topkhana
structures may both be part of one large structure. Testing results expected in
the third quarter of 2011 from the Oligocene reservoir and in the fourth quarter
of 2011 from the deeper Eocene and Cretaceous reservoirs in Topkhana-1 will also
impact the drilling plan for the Kurdamir-2 well and the potential drilling
sequence of the nearby Qulijan and Baran prospects in the Garmian Block.
Site construction of the Kurdamir-2 well is approximately 50 percent complete.
Kurdamir-2 is approximately two kilometres away from Kurdamir-1 and the well
will target the Oligocene, Eocene and Cretaceous Formations. WesternZagros and
Talisman have sourced the necessary long lead items, including casing and
wellhead equipment and are currently preparing the drilling plan for Kurdamir-2.
With the objective of maximizing its options and flexibility to increase the
likelihood of success, WesternZagros's priorities for the remainder of 2011 are
as follows:
- Prepare for and implement an extended well test program for the Jeribe
Formation in Sarqala-1, including the trucking 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 Mil Qasim-1.
WesternZagros estimates its capital and operating budget for the remaining two
quarters of 2011, including the requirement for the Company to fund 100 percent
of the Sarqala-1 completed extended well testing and Mil Qasim-1, until the TPPI
is assigned, and to fund its share of the costs of the Kurdamir-2 well, to be
approximately $70 million. This includes approximately $60 million for drilling
and related costs with the remainder of the budget comprised of funds for
certain annual Kurdamir and Garmian 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's 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 $46.7 million in working capital and
no outstanding bank debt or other interest bearing indebtedness as at June 30,
2011.
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. WesternZagros will monitor the timing and likelihood of the third
party participant being assigned by the KRG in the Garmian PSC in determining
its future capital requirements, as WesternZagros will continue to fund 100
percent of the costs incurred on the Garmian Block until such a time as the TPPI
is assigned by the KRG. Upon assignment of the TPPI by the KRG WesternZagros
will be reimbursed for the costs that it has funded on the Garmian PSC and will
be able to utilize these funds for other exploration and appraisal activities.
During the remainder of 2011, WesternZagros will also focus its efforts on the
Sarqala extended well testing operations, including potential cash flow from the
sale of crude oil produced from these operations under the export terms agreed
to by the KRG and the Federal Government of Iraq during the first quarter of
2011. Cash flow from Sarqala-1 could then be used to fund or partially fund
future exploration and appraisal activities.
WesternZagros, in considering the proper timing to access further capital, will
assess the following factors:
- The required capital and timing associated with the extended well test being
planned for Sarqala-1;
- The expected timing for full exploration results from Mil Qasim-1 and any
preliminary results achieved while drilling;
- 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, the commencement of payments for oil
exported from the Kurdistan Region of Iraq, and general industry interest in the
Kurdistan Region, management has a reasonable expectation that any future
capital requirements can be met through either further equity issuances or cash
flow generated from extended well tests.
Outstanding Share Data
As at August 11, 2011, the total number of shares outstanding was 297,209,472
and 1,173,666 stock options forfeited by employees and contractors. The total
stock options outstanding were 18,415,767.
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:
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(US$ thousands, unless
otherwise specified) Three Month Periods Ended
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June 30 Mar 31 Dec 31 Sept 30
2011 2011 2010 2010
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Total Revenue 34 17 13 38
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Net Loss 1,416 1,480 2,003 819
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Net Loss Per Share (US$ Per Share)
(Basic and Fully Diluted) 0.005 0.006 0.010 0.004
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Capital Expenditures, net of
disposals 18,420 15,494 17,283 20,455
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Total Assets 272,650 271,720 240,290 233,770
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Total Non-Current Liabilities 864 816 649 665
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Dividend (US$ per Share) Nil Nil Nil Nil
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Three Month Periods Ended
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June 30 March 31 Dec 31 Sep 30
2010 2010 2009 2009
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Total Revenue 17 19 32 36
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Net Loss 1,646 1,333 1,035 2,712
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Net Loss Per Share (US$ Per Share)
(Basic and Fully Diluted) 0.008 0.006 0.005 0.013
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Capital Expenditures 15,962 13,153 11,250 11,456
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Total Assets 235,295 235,514 241,077 241,600
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Total Non-Current Liabilities 624 573 175 171
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Dividend (US$ per Share) Nil Nil Nil Nil
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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's 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's 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's 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 PSC activities,
timing and likelihood of The Garmian third party participant interest being
assigned, and the Company's need for additional financing in the future for any
acquisition, exploration, development and production of oil and gas reserves
beyond current funding levels. WesternZagros's 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's 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's
operations are conducted, as well as risks of loss due to civil strife, acts of
war, guerrilla activities and insurrections. WesternZagros's 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 at www.westernzagros.com or on SEDAR at www.sedar.com.
Adoption of International Financial Reporting Standards ("IFRS")
The Company has prepared its June 30, 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". The Company's first annual reporting date under IFRS will
be December 31, 2011. Accordingly, the 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
June 30, 2011 Condensed Consolidated Interim Financial Statements. Prior period
reconciliations between IFRS and previous GAAP are included within Note 23 to
the June 30, 2011 Condensed Consolidated Interim Financial Statements. In
summary, Note 23 includes the following reconciliations:
- Balance Sheets as at January 1, 2010, June 30, 2010 and December 31, 2010;
- Statements of Comprehensive Loss for the periods ended June 30, 2010 and
December 31, 2010; and
- Statements of Cash Flows for the periods ended June 30, 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's 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 June 30, 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 judgments 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, estimated forfeitures 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)
June 30, December 31, January 1,
Note 2011 2010 2010
(Note 23) (Note 23)
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 7 $ 50,668 $ 31,482 $ 76,708
Trade and other receivables 8 2,955 8,648 6,880
Insurance recoveries receivable 9 4,446 17,597 -
Deposits held in trust 11 - 420 -
Prepaid expenses 459 39 183
Income tax recoverable 12 1,804 887 1,738
----------------------------------------------------------------------------
Total current assets 60,332 59,073 85,509
Non-current assets
Deposits held in trust 11 - - 420
Property, plant and equipment 10 160 261 814
Exploration and evaluation
expenditures 9 211,992 180,770 154,097
Deferred tax assets 12 166 186 371
----------------------------------------------------------------------------
Total non-current assets 212,318 181,217 155,702
----------------------------------------------------------------------------
Total assets $272,650 $240,290 $241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Trade and other payables 13 $ 13,634 $ 21,525 $ 18,297
----------------------------------------------------------------------------
Total current liabilities 13,634 21,525 18,297
Non-current liabilities
Provision for decommissioning
obligations 14 706 509 432
Deferred tax liabilities 12 158 140 134
----------------------------------------------------------------------------
Total non-current liabilities 864 649 566
----------------------------------------------------------------------------
Total liabilities 14,498 22,174 18,863
----------------------------------------------------------------------------
Equity
Share capital 15 295,783 253,583 253,583
Contributed surplus 16 11,955 11,223 9,654
Deficit (49,586) (46,690) (40,889)
----------------------------------------------------------------------------
Total equity 258,152 218,116 222,348
----------------------------------------------------------------------------
Total equity and liabilities $272,650 $240,290 $241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent events, 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 August 11, 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)
Three months ended Six months ended
June 30, June 30,
Note 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenue
Other income $ 34 $ 17 $ 51 $ 36
Expenses
General and administrative
expenses 17, 18 1,847 1,483 3,643 3,246
Depreciation 51 132 101 311
Accretion 14 6 4 12 8
Foreign exchange (gain)loss (77) 193 71 245
----------------------------------------------------------------------------
Total expenses 1,827 1,812 3,827 3,810
----------------------------------------------------------------------------
Loss before taxation 1,793 1,795 3,776 3,774
Taxation
Current 12 (452) (207) (917) (904)
Deferred 12 75 58 37 109
----------------------------------------------------------------------------
Total taxation (recovery) (377) (149) (880) (795)
----------------------------------------------------------------------------
Total loss and comprehensive
loss for the period
attributable to the
shareholders $1,416 $1,646 $ 2,896 $2,979
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share
- basic and diluted 19 $0.005 $0.008 $0.011 $0.014
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 Contributed Accumulated Total
Note shares capital surplus deficit equity
----------------------------------------------------------------------------
Balance
January 1,
2010 23 207,464,320 $253,583 $ 9,654 $(40,889) $222,348
Share based
payments - - 442 - 442
Loss for the
period - - - (2,979) (2,979)
----------------------------------------------------------------------------
Balance June
30, 2010 23 207,464,320 253,583 10,096 (43,868) 219,811
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share based
payments - - 1,127 - 1,127
Loss for the
period - - - (2,822) (2,822)
----------------------------------------------------------------------------
Balance
December 31,
2010 23 207,464,320 253,583 11,223 (46,690) 218,116
----------------------------------------------------------------------------
Issuance of
common shares 89,665,352 44,227 - - 44,227
Options
exercised 16 9,200 7 (2) 5
Share
issuance
costs - (2,034) - - (2,034)
Share based
payments 16,17 - - 734 - 734
Loss for the
period - - - (2,896) (2,896)
----------------------------------------------------------------------------
Balance June
30, 2011 297,138,872 $295,783 $11,955 (49,586) $258,152
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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)
Three months ended Six months ended
June 30, June 30,
Note 2011 2010 2011 2010
----------------------------------------------------------------------------
Cash flow from operating
activities
Net loss before taxation $ (1,793) $ (1,795) $ (3,776) $ (3,774)
Adjustments for
Depreciation 51 132 101 311
Accretion 14 6 4 12 8
Share based payments 16,17 193 214 438 487
Income tax recovered (paid) - 598 - 598
Change in non-cash operating
working capital 21 (1,646) 48 (1,698) (259)
----------------------------------------------------------------------------
Net cash from (used in)
operating activities (3,189) (799) (4,923) (2,629)
----------------------------------------------------------------------------
Cash flow from investing
activities
Expenditures on exploration
and evaluation 21 (15,721) (15,895) (34,750) (35,690)
Disposals of assets - - 461 -
Insurance recoveries 9 4,695 5,380 16,200 5,380
----------------------------------------------------------------------------
Net cash from (used in)
investing activities (11,026) (10,515) (18,089) (30,310)
----------------------------------------------------------------------------
Cash flow from financing
activities
Issuance of common shares, net
of costs 15 - 42,193 -
Proceeds from options exercised 5 - 5 -
----------------------------------------------------------------------------
Net cash from (used in)
financing activities 20 - 42,198 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash
equivalents (14,195) (11,314) 19,186 (32,939)
----------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 64,863 55,083 31,482 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $50,668 $43,769 $50,668 $ 43,769
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim
financial statements.
Notes to the condensed consolidated interim financial statements
For the three and six months ended June 30, 2011 and 2010
(Tabular amounts in United States dollars thousands)
(Unaudited)
1. General information
WesternZagros Resources Ltd. (the "Company" or "WesternZagros") is 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.
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 holds two Production
Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the
Kurdistan Region of Iraq. Each PSC governs a separate contract area. The
northern contract area (comprising some 340 square kilometres) is governed by
the Kurdamir PSC which is an amended version of the original February 28, 2008
PSC that governed all of the Kalar-Bawanoor Block (the "Original PSC") and is
now called the Kurdamir Block. The southern contract area (comprising some 1,780
square kilometres) is governed under the new Garmian PSC and is named the
Garmian Block. WesternZagros holds a 40 percent working interest in both the
Kurdamir and Garmian PSCs. The KRG holds a 20 percent working interest in both
PSCs. The remaining 40 percent working interest (the third party participation
interest or "TPPI") of the Kurdamir PSC is held by a wholly-owned subsidiary of
Talisman Energy Inc. ("Talisman"). The remaining 40 percent TPPI of the Garmian
PSC is held by the KRG and it is to be assigned to a third party participant
(refer to Note 22 "Subsequent events, commitments and contingencies" for a
description of the PSCs).
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 as at and for the
three and six months ended June 30, 2011 were authorized for issuance in
accordance with a resolution of the Audit Committee of the Board of Directors on
August 11, 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. Prior to 2011, 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 June 30, 2011. During the three months ended June 30,
2011, the Company had expenditures of $3.2 million for operating activities and
$11.0 million for investing activities related to exploration and evaluation
assets, including changes in non-cash working capital. During the six months
ended June 30, 2011, the Company had expenditures of $4.9 million for operating
activities and $18.1 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; the potential assignment by
the KRG of the third party participant interest in the Garmian PSC and timing
thereof (see Note 22 "Subsequent events, commitment and contingencies" for a
description of the PSCs); the results and timing associated with potential
future production and sales; the political climate in Iraq and the general
effect 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 PSCs.
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 present the Company's
financial results of operations and financial position, prepared in accordance
with IFRS, as at and for the three and six months ended June 30, 2011. The
Company's transition date to IFRS is 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
judgment 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 Cyprus Exploration
Company
These subsidiaries are entities over which the Company has the power to govern
the financial and operating policies. The Company has 100 percent 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 PSCs
The jointly controlled assets under the PSCs offer joint ownership by the
Company and its co-venturers to the PSCs 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 PSCs (refer to Note 22 "Subsequent events, commitments and
contingencies" for a description of the PSCs).
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 through 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 contributed surplus 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 its role as operator in both PSCs, including
Talisman's 40 percent interest in the Kurdamir PSC and its share of related
expenditures and the potential reimbursement of costs incurred under the Garmian
PSC that may ultimately be due upon assignment by the KRG of the third party
participant in the Garmian PSC. Accordingly, the ability of the Company to
successfully carry out the exploration, appraisal and development of its PSC
contract areas may be impacted by the continued participation of the parties in
these activities and the potential assignment of the third party participant
interest in the Garmian PSC by the KRG and any corresponding reimbursement of
costs incurred under the Garmian PSC (refer to Note 22 "Subsequent events,
commitments and contingencies" for a description of the PSCs). As at June 30,
2011, the Company had a net receivable balance owing from Talisman of $2.8
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
"Subsequent events, 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:
June 30, December 31,
As at 2011 2010
----------------------------------------------------------------------------
Cash and cash equivalents $50,668 $ 31,482
Trade and other receivables 2,955 8,648
Insurance recoveries receivable 4,446 17,597
Deposits held in trust - 420
----------------------------------------------------------------------------
Total $58,069 $ 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 Garmian and Kurdamir PSCs (also refer to Note 22
"Subsequent events, 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 $13.6 million are all
current liabilities due in less than 1 year. Certain commitments of
approximately $8.3 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. This review includes assessing the likelihood and
timing of an assignment of the third party participant interest by the KRG under
the Garmian PSC and any corresponding reimbursement of costs under the Garmian
PSC (refer to Note 22 "Subsequent events, commitments and contingencies for a
description of the PSCs), as well as an assessment of any potential revenue to
be derived from crude oil sales during any extended well testing. Management has
a reasonable expectation that the Company can raise the additional capital
required in order to meet future expenditures. 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.
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 June
30, 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 six months ended June 30, 2011, West Texas Intermediate crude prices ranged
in value from $83 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's business
plan.
5. Critical accounting judgments, 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 judgment 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 the Garmian and Kurdamir Blocks. 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 judgments 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
The Company has only one significant asset related to its interest in the PSCs
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. Also
refer to Note 22 "Subsequent events, commitments and contingencies" for a
description of the PSCs.
7. Cash and cash equivalents
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Bank balances $ 3,825 $ 3,613 $ 6,609
Term deposits 46,843 27,869 70,099
----------------------------------------------------------------------------
Cash and cash equivalents $ 50,668 $ 31,482 $ 76,708
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Trade and other receivables
June 30, December 31, January 1,
Current 2011 2010 2010
----------------------------------------------------------------------------
Joint venture receivables $ 2,793 $ 7,675 $ 6,636
Other receivables 162 973 53
Loan receivable from related
party - - 191
----------------------------------------------------------------------------
Total trade and other
receivables $ 2,955 $ 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 a GST receivable as well as 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
June 30, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Costs $ 211,992 $ 180,770 $ 154,097
Accumulated impairment - - -
----------------------------------------------------------------------------
Net book value $ 211,992 $ 180,770 $ 154,097
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six months Twelve months
ended ended
June 30, December 31,
Period ended 2011 2010
----------------------------------------------------------------------------
Opening net book value $ 180,770 $ 154,097
Additions, net of insurance recoveries 31,683 26,673
Disposals (461) -
Impairment - -
----------------------------------------------------------------------------
Closing net book value $ 211,992 $ 180,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All exploration and evaluation expenditures pertain to the Kurdistan Region
Exploration Project with respect to the Company's PSCs and have been capitalized
in accordance with the Company's exploration and evaluation accounting policy.
Included in exploration and evaluation expenditures as at June 30, 2011 is $0.4
million related to provisions for decommissioning obligations (December 31,
2010: $0.2 million). For the six months ended June 30, 2011, the Company has
capitalized $2.1 million of general and administrative costs (June 30, 2010:
$0.9 million), including $0.3 million of share-based compensation costs (June
30, 2010: negligible amount) 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 June 30, 2011, the Company had received
insurance proceeds of $40.6 million related to approved interim claims. During
the second quarter of 2011 the Company and insurers reached an agreement to
settle the balance of the claim which brought the total amount credited for
insurance recoveries to approximately $45.0 million. Subsequent to June 30, 2011
the Company received the remaining $4.4 million of insurance proceeds to
conclude the claim. As at December 31, 2010, $42.0 million had been credited for
insurance recoveries.
As at June 30, 2011, the Company had approximately $194 million relating to the
Kurdamir and Garmian PSCs, net to WesternZagros, of recoverable costs available
that may ultimately be recovered from future crude oil or natural gas sales in
accordance with the PSCs (refer to Note 22 "Subsequent events, commitments and
contingencies for a description of the PSCs). Under each PSC, costs subject to
recovery include all costs and expenditures incurred for exploration,
development, production and decommissioning operations, as well as any other
costs and expenditures incurred directly or indirectly with these activities.
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.
June 30, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Costs $ 1,830 $ 1,830 $ 1,830
Accumulated impairment - - -
Accumulated depreciation (1,670) (1,569) (1,016)
----------------------------------------------------------------------------
Net book value $ 160 $ 261 $ 814
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six months Twelve months
ended ended
June 30, December 31,
Period ended 2011 2010
----------------------------------------------------------------------------
Opening net book value $ 261 $ 814
Additions - -
Impairment - -
Depreciation (101) (553)
----------------------------------------------------------------------------
Closing net book value $ 160 $ 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 first quarter of 2011
these funds held in trust were released back to the Company.
12.Income taxes
For the six months ended June 30 2011 2010
----------------------------------------------------------------------------
Current income tax recovery $ (917) $ (904)
Future income tax expense (recovery) 37 109
----------------------------------------------------------------------------
Income tax expense (recovery) $880 $ (795)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred income tax asset is comprised of:
Deferred income tax asset June 30, December 31, January 1,
as at 2011 2010 2010
----------------------------------------------------------------------------
Share issue costs $ 162 $ 204 $ 408
Temporary differences on
property, plant and equipment 4 (18) (37)
----------------------------------------------------------------------------
Total deferred income tax asset $ 166 $ 186 $ 371
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred income tax liability is comprised of:
Deferred income tax liability June 30, December 31, January 1,
as at 2011 2010 2010
----------------------------------------------------------------------------
Temporary differences on
property, plant and equipment $ 158 $ 140 $ 161
Non-capital loss carryforwards - - (27)
----------------------------------------------------------------------------
Total deferred income tax liability $ 158 $ 140 $ 134
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Trade and other payables
June 30, December 31, January 1,
Current 2011 2010 2010
----------------------------------------------------------------------------
Trade payables $ 2,103 $ 4,052 $ 6,705
Accruals 11,531 17,473 11,592
----------------------------------------------------------------------------
Total trade and other payables $13,634 $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 the 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 2011 relates to the
Company's current 100 percent working interest funding for the Sarqala-1
re-entry operation for which Talisman had elected not to participate (also refer
to Note 22 "Subsequent events, commitments and contingencies").
The following table presents the reconciliation of the Company's provision
for decommissioning liabilities:
Six months Twelve months
ended ended
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Balance, beginning of period $ 509 $ 432
Additional obligations incurred 173 -
Changes in estimates or timing of cash flows 12 61
Accretion 12 16
----------------------------------------------------------------------------
Balance, end of period $ 706 $ 509
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Share capital
As at June 30, 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
exercise
Number of 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 $1.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
average
Number of exercise
For the six months ended June 30, 2011 Options price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of period 20,354,900 $1.00
Granted 47,000 0.61
Exercised (9,200) 0.49
Forfeited and expired (807,667) 1.63
----------------------------------------------------------------------------
Outstanding, end of period 19,585,033 $0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at June 30, 2011 11,811,898 $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:
----------------------------------------------------------------------------
Six months Twelve months
ended ended
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Weighted average fair value of stock
options granted $0.42 $0.29
Average Risk Free Interest Rate 1.67% 1.62%
Expected Life 3 years 2 - 3 years
Average Expected Volatility 113% 120%
Dividend Per Share Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the six months ended June 30, 2011, the Company recognized $0.4
million (2010: $0.5 million) of stock based compensation as general and
administrative expense and capitalized $0.3 million (2010: negligible
amount).
17. General and administrative expenses, by nature
For the six months ended June 30 2011 2010
----------------------------------------------------------------------------
Staff expenses $ 3,040 $ 2,381
Share-based payments 438 487
Travel expenses 439 224
Professional fees 495 918
Office costs 547 605
Regulatory and corporate project
costs 246 240
Other administrative expenses 233 241
Less capitalized general and
administrative costs (1,795) (1,850)
----------------------------------------------------------------------------
Total administrative expenses $ 3,643 $ 3,246
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 six months ended June 30 2011 2010
----------------------------------------------------------------------------
Salaries and employee benefits $ 843 $ 650
Share-based compensation expense 404 331
----------------------------------------------------------------------------
Total $ 1,247 $ 981
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 19,585,033 (June 30, 2010 -
12,484,000) 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:
Three months ended Six months ended
June 30, June 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Loss for the period $ 1,416 $ 1,646 $ 2,896 $ 2,979
Weighted-average common shares
(000's) 297,130 207,464 263,444 207,464
----------------------------------------------------------------------------
Loss per share (basic and diluted) $ 0.005 $ 0.008 $ 0.011 $ 0.014
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 For the
three months six months
ended June 30, ended June 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Expenditures on exploration and
evaluation assets $(18,420) $(15,962) $(34,375) $(29,115)
Change in non-cash investing
working capital 2,699 67 (375) (6,575)
----------------------------------------------------------------------------
$(15,721) $(15,895) $(34,750) $(35,690)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in non-cash working capital is comprised of:
For the For the
three months six months
ended June 30, ended June 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Related to operating activities
Trade and other receivables $(1,716) $ 51 $ (1,278) $ (47)
Prepaid expenses 74 1 (420) (212)
Trade and other payables (4) (4) - -
----------------------------------------------------------------------------
$(1,646) $ 48 $ (1,698) $ (259)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Related to investing activities
Trade and other receivables $637 $ (1,230) 7,391 $ (3,137)
Trade and other payables 2,062 1,297 (7,766) (3,438)
----------------------------------------------------------------------------
$2,699 $ 67 (375) $ (6,575)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
22. Subsequent events, commitments and contingencies
A. PSC commitments and subsequent events
Subsequent to June 30, 2011 the Company finalized an agreement with the
Kurdistan Regional Government and Talisman to amend the original Production
Sharing Contract ("Original PSC") that governed the Company's exploration
activities in the Kalar-Bawanoor Block in Kurdistan. The agreement divides the
contract area of the Original PSC into two contract areas named Garmian and
Kurdamir (see chart below) and each will be operated under a distinct PSC.
WesternZagros will continue to operate the southern contract area named the
Garmian Block that covers approximately 1,780 square kilometres and is now
governed under the new Garmian PSC. The northern contract area is named the
Kurdamir Block. It covers some 340 square kilometres and is now governed under
an amended version of the Original PSC (the "Kurdamir PSC"). The northern area
is now operated by Talisman. WesternZagros's production sharing terms, under
both the Garmian and Kurdamir PSCs, remain unchanged from the Original PSC.
A summary of the material amendments to the Original PSC is as follows:
----------------------------------------------------------------------------
Original PSC Amended PSC New PSC
(Kalar-Bawanoor) (Kurdamir) (Garmian)
----------------------------------------------------------------------------
First Exploration December 31, 2010 June 30, 2012 December 31, 2011
Sub-Period
(expires)
----------------------------------------------------------------------------
Exploration Third Exploration Kurdamir-2 Mil Qasim-1
Obligation Well Exploration Well
(remaining)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Second Exploration Additional Two Additional Two Additional Two
Sub-Period Years Years Years
----------------------------------------------------------------------------
Exploration Two Exploration One Appraisal One Exploration
Obligation Wells Well Well
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Extensions Two One Year Six Month One Year Extension
Extensions Extension
----------------------------------------------------------------------------
Economic Terms 10% Royalty Oil, Unchanged Unchanged
remainder
available for Cost
Recovery and
Profit Oil
----------------------------------------------------------------------------
PSC Payments $ 5 Million Additional Additional
Signature Bonus Capacity Building Capacity Building
$40 Million Support Payment Support Payment
Capacity Building payable equal to payable equal to
Support Payment 3% of 3% of
$ 1.1 Million WesternZagros WesternZagros
Annual Payments Profit Oil. Profit Oil. Annual
Continuation of payments 50% of
previous annual previous payments.
payments.
----------------------------------------------------------------------------
Operator WesternZagros Talisman WesternZagros
----------------------------------------------------------------------------
Ownership WesternZagros 40% WesternZagros 40% WesternZagros 40%
Talisman 40% Talisman 40% Unassigned TPPI
KRG 20% (i) KRG 20% (i) 40%(ii)
KRG 20% (i)
----------------------------------------------------------------------------
Contract Area 2,120 km2 340 km2 1,780 km2
----------------------------------------------------------------------------
(i) WesternZagros funds 20% of the KRG costs. Ultimately to be recovered by
WesternZagros through KRG's share of Cost Recovery Oil.
(ii) WesternZagros initially funds the 40% of the costs for the third party
participant interest until it is assigned by the KRG. The amounts
funded by WesternZagros for the third party participant interest will
be repaid upon assignment of this interest.
As at June 30, 2011, the Company estimates expenditures of approximately $70
million, prior to the costs of any testing, to meet its remaining commitments
for the first exploration sub-periods under the PSCs. This estimate includes the
Company's current 100 percent funding requirement for the remaining costs
associated with drilling the Mil Qasim-1 commitment well by December 31, 2011;
the Company's 60 percent funding requirement of costs for drilling the
Kurdamir-2 commitment well by June 30, 2012; the associated supervision and
local office support costs related to both drilling operations; and the
Company's annual funding requirements for certain technological, logistical,
recruitment and training support under its PSCs.
B. Other commitments
The Company has entered into and terminated various exploration-related
contracts, including contracts for drilling equipment, services, tangibles and
consulting service contracts. The following table summarizes the estimated
commitments in relation to these exploration-related contracts relating to the
PSCs and other contractual obligations at June 30, 2011:
For the Years Ending December 31,
2011 2012 2013 2014 2015+ Total
----------------------------------------------------------------------------
Exploration $ 4,462 $ 5,500 - - - $ 9,962
Office $326 $579 $ 599 $ 456 - $ 1,960
----------------------------------------------------------------------------
$ 4,788 $ 6,079 $ 599 $ 456 - $ 11,922
----------------------------------------------------------------------------
----------------------------------------------------------------------------
C. Consulting service contracts
In 2003 the Corporation entered into a consulting service contract 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. The contract has been terminated.
Further, in 2004 the Company entered into a consulting service contract 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. During the
second quarter of 2011 the contract was terminated.
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
judgment 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 Garmian and
Kurdamir PSCs, 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 condensed consolidated interim financial statements present the Company's
financial results of operations and financial position, prepared in accordance
with IFRS, as at and for the three and six months ended June 30, 2011, 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
Notes GAAP to 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 - June 30, 2010 (United States dollars
thousands):
Effect of
Canadian transition
Notes GAAP to IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 43,769 $ - $ 43,769
Trade and other receivables 8,565 - 8,565
Insurance recoveries receivable a 14,307 (10,053) 4,254
Prepaid expenses 395 - 395
Income tax recoverable 2,044 - 2,044
Future income tax assets b 153 (153) -
----------------------------------------------------------------------------
Total current assets 69,233 (10,206) 59,027
Non-current assets
Property, plant and equipment c 166,353 (165,850) 503
Exploration and evaluation
expenditures c - 175,079 175,079
Deposits held in trust 420 - 420
Deferred income tax assets b - 266 266
----------------------------------------------------------------------------
Total non-current assets 166,773 9,495 176,268
----------------------------------------------------------------------------
Total assets $236,006 $ (711) $ 235,295
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $14,860 $ - $ 14,860
----------------------------------------------------------------------------
Total current liabilities 14,860 - 14,860
Non-current liabilities
Provision for decommissioning
obligations d 182 304 486
Deferred tax liabilities b 25 113 138
----------------------------------------------------------------------------
Total non-current liabilities 207 417 624
----------------------------------------------------------------------------
Total liabilities 15,067 417 15,484
----------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus e 9,809 287 10,096
Deficit f (42,453) (1,415) (43,868)
----------------------------------------------------------------------------
Total equity 220,939 (1,128) 219,811
----------------------------------------------------------------------------
Total equity and liabilities $236,006 $ (711) $ 235,295
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Upon transition to IFRS, an adjustment was required for the timing of
recognition related to the insurance recoveries receivable. Under IFRS
receivables could only be recognized to the extent that they were "virtually
certain" to be realized. Virtual certainty was defined as the point in time the
adjuster approved the interim claims, rather than Management's estimate of the
receivable as calculated under previous GAAP. The resulting adjustment as at
June 30, 2010 was a decrease in the insurance recoveries receivable of $10.1
million. Note that the total insurance recoveries for year ended December 31,
2010 were unchanged.
b. 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.
c. 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
six months ended June 30, 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 $165.9 million with an associated
increase in exploration and evaluation expenditures of $165.9million.
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 contract areas, have been expensed as part of General and
administrative costs for the six months ended June 30, 2010 after conversion to
IFRS. 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
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 six months ended June 30, 2010 resulted in a decrease in exploration
and evaluation expenditures of $0.6 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
six months ended June 30, 2010 resulted in an overall increase in the provision
for decommissioning obligations of $0.05 million. Accordingly, the net effect
was negligible for exploration and evaluation expenditures.
v. The corresponding impact of item (a) above related to the change in timing
for recognition of insurance recoveries credits resulted in an increase of $10.1
million for exploration and evaluation expenditures.
vi. The total net impact of items (i) through (v) was an increase in exploration
and evaluation assets of $175.1 million.
d. 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 six months ended June 30, 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.
e. 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 which were not estimated under previous GAAP. The net effect at
June 30, 2010 was an increase in contributed surplus of $0.3 million.
f. 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 of expensing certain Corporate projects that had been capitalized
under previous GAAP during the six months ended June 30, 2010 was an increase in
the accumulated deficit of $0.3 million.
iv. The total impact of items (i) through (iii) was an increase in the
accumulated deficit of $1.4 million as at June 30, 2010, including other minor
adjustments of $(0.1) million.
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
Notes GAAP to 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 contract areas, 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 $0.1 million. 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
six months ended June 30, 2010 (United States dollars thousands):
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Interest income $ 36 $ - $ 36
----------------------------------------------------------------------------
Expenses
General and administrative expenses a 2,994 252 3,246
Depreciation 311 - 311
Accretion on decommissioning
liabilities 7 1 8
Foreign exchange loss 245 - 245
----------------------------------------------------------------------------
Total expenses 3,557 253 3,810
----------------------------------------------------------------------------
Loss before taxation 3,521 253 3,774
Taxation
Current (904) - (904)
Deferred 109 - 109
----------------------------------------------------------------------------
Total taxation (recovery) (795) - (795)
----------------------------------------------------------------------------
Comprehensive loss for the period
attributable to shareholders $ 2,726 $ 253 $ 2,979
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to general and administrative expenses were mainly comprised of
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 contract areas, which have been expensed as part of general and
administrative costs for the six months ended June 30, 2010 after conversion to
IFRS. The net effect was an increase in general and administrative costs of $0.3
million.
Also note that the net adjustment for stock-based compensation expense as at
June 30, 2010 was not material.
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
Note GAAP to 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
Foreign exchange loss 62 - 62
----------------------------------------------------------------------------
Total expenses a 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 contract areas, 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 six months ended June 30, 2010 (United States dollars thousands):
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Cash flow from operating activities
Net loss prior to taxation a $ (2,726) $ (1,048) $ (3,774)
Adjustments for
Depreciation 311 - 311
Accretion on decommissioning
liabilities 7 1 8
Share based payments 495 (8) 487
Income tax recovered (paid) b - 598 598
Future income tax expense c 109 (109) -
Change in non-cash working capital d (565) 306 (259)
----------------------------------------------------------------------------
Net cash from (used in) operating
activities (2,369) (260) (2,629)
----------------------------------------------------------------------------
Cash flow from investing activities
Expenditure on exploration and
evaluation assets e - (35,690) (35,690)
Expenditure on property, plant, and
equipment f (29,375) 29,375 -
Insurance recoveries 5,380 - 5,380
Change in non-cash working capital e (6,575) 6,575 -
----------------------------------------------------------------------------
Net cash from (used in) investing
activities (30,570) 260 (30,310)
----------------------------------------------------------------------------
Cash flow from financing activities
None - - -
----------------------------------------------------------------------------
Net cash from (used in) financing
activities - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash equivalents (32,939) - (32,939)
----------------------------------------------------------------------------
Cash and cash equivalents, beginning
of period 76,708 - 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 43,769 - $ 43,769
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to net loss, which total to $(1.0 million), were as follows:
i. Presentation of net loss under IFRS is prior to taxation expense. The net
effect was an increased net loss prior to total taxation expense (current and
deferred) of $0.8 million.
ii. Increased general and administrative expense for corporate projects
previously capitalized under IFRS, the net effect was an increased net loss of
$0.3 million.
iii. Total net effect of items (i) through (ii) is an increased net loss of $1.0
million, including other minor adjustments that reduced the net loss by $0.1
million.
b. Increased $0.6 million due to presentation of actual taxes recovered under IFRS.
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. Adjustments to change in non-cash working capital were as follows:
i. 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 which results in an increase in the change in non-cash working
capital for operating activities of $0.9 million.
ii. In addition, actual taxes recovered are reflected separately, which results
in a $0.6 million decrease to the change in non-cash working capital for
operating activities.
iii. The net effect of items (i) and (ii) resulted in an increase in the net
change for non-cash working capital items of $0.3 million.
e. The net change in exploration and evaluation expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of $29.4
million.
ii. Decrease in expenditures of $0.3 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. net effect of items (i) through (iii) results in an increase in exploration
and evaluation expenditures of $35.7 million.
f. Expenditures for property, plant and equipment were reclassified as
exploration and evaluation expenditures, net effect was a decrease of $29.4
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
Note GAAP to 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. Decreased 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. Adjustments to change in non-cash working capital were as follows:
i. 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 which results in an increase in the change in non-cash working
capital for operating activities of $1.3 million.
ii. In addition, actual taxes recovered are reflected separately, which results
in a $2.2 million decrease to the change in non-cash working capital for
operating activities.
iii. The net effect of items (i) and (ii) resulted in a decrease in the net
change for 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 $0.3 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.
g. 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.
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