CANDENTE COPPER CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
YEARS ENDED DECEMBER 31, 2011 and 2010 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
INTRODUCTION
The following Management’s Discussion and Analysis (“MD&A”) of Candente Copper Corp. (“Candente Copper”) and its subsidiary companies (collectively, the “Company”) is prepared as of March 28, 2012 and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the years ended December 31, 2011 (“fiscal 2011”) and December 31, 2010 (“fiscal 2010”),
As of January 1, 2011, the Company’s financial statements are reported under International Financial Reporting Standards (“IFRS”). The effects of the Company’s conversion from Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) to IFRS have been identified in Note 11 of the Company’s March 31, 2011 unaudited interim condensed consolidated financial statements and Note 15 of the Company’s December 31, 2011 audited consolidated financial statements and in this MD&A.
The Company’s reporting currency is the United States dollar and all figures in this MD&A are in United States dollars unless otherwise indicated.
Some of the statements in this MD&A are forward-looking statements that are subject to risk factors set out in the cautionary note contained herein.
Candente Copper’s common shares are listed on both the Toronto and Lima Stock Exchanges under the trading symbol “DNT”.
Additional information on the Company can be found in the Company’s Annual Information Form (“AIF”), filed with the Canadian regulators and available on SEDAR at www.sedar.com.
DESCRIPTION OF BUSINESS
Candente Copper is a Vancouver, Canada based mineral exploration company engaged in the acquisition, exploration and development of mineral right interests. The Company is currently focused on the exploration and development of its Cañariaco Norte copper project (the “Cañariaco Norte Copper Project”), the Cañariaco Sur, Quebrada Verde and Jehuamarca prospects (collectively with the Cañariaco Norte Copper Project, the “Cañariaco Property” or the “Cañariaco Project”) located in Northern Peru.
CORPORATE DEVELOPMENTS
In 2009, Candente Copper made the strategic decision to complete a plan of arrangement that included the transfer of the Company’s interests in various precious metals mineral right interests to a newly incorporated company, Candente Gold Corp. (“Candente Gold”) in exchange for consideration that included shares in Candente Gold. The mineral right interests transferred to Candente Gold were those where the precious metal component was considered dominant or essential to making the project economic based on then current metal prices and the Company’s geological knowledge of the mineral right interests at the time of the transfer. On April 30, 2009 and on December 17, 2009 respectively, the Company completed the transfer of its interests in the El Oro property and its Peruvian silver- gold mineral right interests to Candente Gold. Candente Gold’s shares started trading on the Toronto Stock Exchange (“TSX”) on January 4, 2010. The Company currently holds a 9% interest in Candente Gold.
The arrangement allowed the Company to dedicate its resources to copper and base metals exploration and development, specifically the Cañariaco Norte copper project. In 2010, management completed a financing for gross proceeds of $6,060,695 and awarded AMEC Americas Limited (“AMEC”) with the contract to complete a comprehensive pre-feasibility study on Cañariaco Norte. In November 2010, the Company announced a significant increase in the mineral resource estimate for Cañariaco Norte and in December 2010, filed a technical report prepared by AMEC to support the increase in the mineral resource estimate.
In 2011, the Company announced the receipt from AMEC of a positive pre-feasibility study progress report for Cañariaco Norte entitled “Cañariaco Project, Lambayeque Department, Peru, NI 43-101 Technical Report on Pre- feasibility Study Progress Report” (the “January 2011 Pre-Feasibility Study Progress Report”) . Details of the January 2011 Pre-Feasibility Study Progress Report are contained in the Company’s Annual Information Form for the year ended December 31, 2011, under “Mineral Projects – Cañariaco Project”.
Page2 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
On February 17, 2011 Candente Copper closed a bought-deal financing (the “Bought Deal Offering”). The Bought Deal Offering was closed with a syndicate of underwriters led by Dundee Securities Ltd. and Scotia Capital Inc. as lead underwriters, and including Raymond James Ltd., Wellington West Capital Markets Inc. and Stonecap Securities Inc. (collectively, the “Underwriters”) for total gross proceeds of $27,136,722 (Cdn$26,969,800), inclusive of the proceeds from the full exercise of the over-allotment option granted to the Underwriters. Candente Copper issued an aggregate of 13,156,000 Common Shares at a purchase price of Cdn$2.05 per Common Share. In addition to the Bought Deal Offering, the Company completed a non-brokered private placement (the “Non-Brokered Offering”) issuing 1,563,415 Common Shares at a price of Cdn$2.05 per Common Share for gross proceeds of $3,246,228 (Cdn$3,205,001).
On May 17, 2011, the Company announced the approval of a proposal to undertake a spin-out transaction that would reorganize the business and capital structure of the Company into two separate public companies in order to allow the Company to focus on the development of Cañariaco by way of plan of Arrangement under the Business Corporation Act (British Columbia) (the “2011 Arrangement”). Pursuant to the 2011 Arrangement, on June 2, 2011, Candente Copper incorporated a new subsidiary, Cobriza Metals Corp. (“Cobriza”), to which it transferred 100% of its indirect interest in all of its Peruvian exploration mineral right interests other than the Cañariaco and Jehuamarca claims, which cover the Cañariaco Norte Deposit as well as the Cañariaco Sur and Quebrada Verde prospects. In addition to the transfer of the mineral right interests, Candente Copper subscribed for common shares of Cobriza (“Cobriza Shares”) to provide Cobriza with approximately $6 million in working capital. Of the Cobriza Shares received, the Company retained a position of approximately 15% in Cobriza and distributed the remaining Cobriza Shares to its shareholders on a pro-rata basis of one Cobriza Share for every 5 Common Shares held, by way of a reduction of the capital of the Company.
At the Company’s annual general and special meeting held on August 23, 2011, the Company’s shareholders approved, among other things, the 2011 Arrangement. The 2011 Arrangement was approved by the Supreme Court of British Columbia on August 25, 2011.
On October 6, 2011 the 2011 Arrangement was completed and the Cobriza Shares were conditionally approved for listing in the TSX.
On October 12, 2011 the Cobriza Shares began trading on the TSX under the symbol “CZA”.
On November 24, 2011 the Company announced a reassessment of the Cañariaco Norte Copper Project economics using the new MMR and SMT tax rates. The after-tax NPV, IRR and payback period for the project being $912 million, 17.2% and 4.4 years respectively, at a long term copper price of $2.25 per pound and a discount rate of 8%.
The Company also announced an increase in processing rate to 100,000 to 110,000 tonnes per day, the selection of a new tailings containment area significantly closer to the proposed process plant, the selection of a southern mine access route that follows the current access road route, and progress in acquiring drilling permits that should result in drilling commencing in the first quarter of 2012.
The Company posted a loss in the year of $7,785,268. The most significant expenses were a loss on transfer of mineral right interests of $3,401,190 and a share-based payment of $2,151,874 (both of these expenses being non- cash expenses).
In 2011, the Company also posted other comprehensive loss of $6,479,973, comprised of an unrealized loss on available-for-sale financial assets of $4,764,689 and a cumulative translation allowance of $1,715,284.
Comprehensive loss for the year ended December 31, 2011 was $14,265,241. Loss per share was $0.07.
Page3 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
PROJECTS UPDATE
Cañariaco
The Cañariaco property (the “Property”) is a 19,200 hectare advanced stage porphyry copper exploration and development project located in Northern Peru. The Company’s main focus is to progress development of the Cañariaco Norte project through completion of a Feasibility Study and to conduct an exploratory search for additional mineable mineral deposits within the Cañariaco property.
The Company acquired the Property through a government auction process in 2001, and since acquisition has met all regulatory requirements to maintain the Property in good standing. The Company has a 100% interest in the mineral rights of the Property and is in discussions with the local community regarding securing an agreement for long term surface rights access.
The Cañariaco porphyry system lies within a belt of porphyry copper deposits, which follow a northwesterly trend 350 km from Cajamarca to the Ecuadorian border. The known porphyry deposits within this belt comprise two types: porphyry copper-molybdenum and porphyry copper-gold deposits. Cañariaco Norte is a porphyry copper-gold deposit.
Property work completed to date has defined one copper-gold porphyry deposit at Cañariaco Norte, one copper-gold porphyry system at Cañariaco Sur, and one copper-gold porphyry target at Quebrada Verde. Mineralization at Cañariaco Norte is copper-gold-and silver and is associated with a composite, multiphase porphyry stock and breccias with a well-developed fine to medium grained quartz-sulphide stockwork. Copper mineralization at Cañariaco Norte occurs mainly as primary hypogene chalcopyrite, chalcocite and minor bornite, covellite, and lesser enargite and tennantite. Mineralization identified to date at Cañariaco Sur is copper-gold-and silver in intrusive rocks and breccias similar to those which host the bulk of the copper mineralization at the Cañariaco Norte deposit. Quebrada Verde has surface geology, geochemistry and geophysics that are similar to Cañariaco Sur and therefore strongly indicative of an underlying copper-gold-silver porphyry system.
The Company started diamond drilling at Cañariaco Norte in 2004 and continued through 2008. By October 31, 2008, the Company had completed 71,162.70 metres of diamond drilling in 244 holes. Total meterage drilled by all companies to date (since 1973) is 74,072.31 metres. Since the inception of drilling and other exploration activities, the Company has applied Quality Assurance and Quality Control protocols. The sampling, analysis, and security/chain of custody procedures are all conducted to industry standards, overseen by qualified professionals and conducted by registered professional consultants and certified laboratories.
In May 2007, the Company commissioned a feasibility study and an Environmental Impact Assessment at Cañariaco Norte. In May 2008 an updated resource estimate was completed on Cañariaco Norte by SRK Consultants Canada (“SRK”).
Due to the severe downturn in the world economy in late 2008 through 2009, work on the feasibility study and the Environmental and Social Impact Assessment (“ESIA”) for Cañariaco Norte was suspended. An updated, NI 43-101 compliant Preliminary Economic Assessment (“PEA”) was completed by SRK in December 2008 based on the updated resource estimate issued in September 2008 (“2008 PEA”). The 2008 PEA demonstrated that the project had very positive economics at a copper price of $2.00per pound and robust economics at a copper price of $2.50/lb.
The ESIA was resumed in February 2010 by AMEC Peru S.A. (“AMEC-Peru”) In April 2010, AMEC Americas Ltd (“AMEC”) started a pre-feasibility level study (“PFS”) and SGS Lakefield of Santiago, Chile resumed feasibility level metallurgical test-work.
Following re-modeling and re-classifying of the Mineral Resource, AMEC issued an updated, significantly larger Resource Estimate on November 1, 2010 (report filed on December 17, 2010), which renders the 2008 resource estimate by SRK as historical. At the base case 0.30% copper cut-off grade, Cañariaco Norte’s 2010 Measured and Indicated tonnage increased by 21% and the Measured and Indicated contained copper increased by 16% from the Mineral Resource Estimate released in September 2008. x Measured and Indicated: 752.4 million tonnes (“Mt”) grading 0.45% copper containing 7.53 billion pounds of copper (0.52% copper equivalent*; 0.49% copper equivalent with metal recoveries applied**).
Page4 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted) x Inferred: 157.7 Mt grading 0.41% copper containing 1.43 billion pounds of copper (0.47% copper equivalent*; 0.44% copper equivalent with metal recoveries applied**).
To show sensitivity of the estimate to cut-off grade, a 0.20% copper cut-off grade was also modeled. Using this cut- off grade, Cañariaco Norte’s Measured and Indicated tonnage increased by 22% and contained copper increased by 18% from the 2008 Mineral Resource Estimate. x Measured and Indicated: 1.003 billion tonnes grading 0.40% copper containing 8.94 billion pounds of copper (0.46% copper equivalent*; 0.44% copper equivalent with gold and silver recoveries applied**). x Inferred: 293.3 million tonnes grading 0.33% copper containing 2.16 billion pounds of copper (0.38% copper equivalent*; 0.36% copper equivalent with gold and silver recoveries applied **).
*Copper equivalent grade including gold and silver values and based on 100% metal recoveries. Copper grade equivalent calculation. Cu Eq% =Cu % + ((Au grade g/t x Au price)+(Ag grade g/t x Ag price))/(22.0462 x Cu price x 31.1035 g/t)
**Copper equivalent grade including gold and silver, metal recoveries (gold 55%; silver 50%) and smelter returns (copper 96.5%: gold 93%; silver 90%) applied. Copper grade equivalent calculation: Cu Eq% =Cu % + ((Au grade g/t x Au price x Au recovery % x Au smelter return%)+(Ag grade g/t x Ag price x Ag recovery% x Ag smelter return%))/(22.0462 x Cu price x 31.10135 g/t x Cu recovery% x Cu smelter return%)
Pre-Feasibility Study Progress Report:
On January 18, 2011, AMEC reported key results from a Pre-Feasibility Study Progress Report (“PFSPR”) filed on March 4, 2011. The mine plan is based on Measured and Indicated mineral resources only, with Inferred mineral resources considered as waste. The metallurgical test work, process development and economic analyses have been completed to a pre-feasibility level; however, additional geotechnical drilling and rock quality assessment is required to complete the open pit slope design to a level consistent with generally accepted pre-feasibility requirements and therefore, this report does not meet the criteria of a Pre-Feasibility Study and is considered to be a PEA under NI 43- 101. Additional geotechnical drilling and investigations are planned for 2012 as part of the Feasibility Study.
The PFSPR proposes a large scale mining and processing operation utilizing proven industry technology to produce copper concentrate, including open pit mining utilizing trucks and shovels. Processing would utilize primary crushing, semi-autogenous and ball mill grinding followed by rougher and cleaner flotation for copper recovery and concentrate production. A concentrate partial-roasting process designed by Outotec Oyj (“Outotec”) of Finland has been incorporated to reduce arsenic levels in the final concentrate to below penalty levels. Copper concentrate will be transported by truck to a load-out port on the Peruvian coast to be loaded onto vessels for trans-ocean shipment to offshore smelters for refining.
Principal Outcomes from the January 2011 PFSPR: x After-tax Net Present Value (“NPV”) of $1,063.4 million for base case with long-term metal prices of $2.25 per pound copper, $1,015 per ounce gold, $15.85 per ounce silver, and 8% discount rate* x After-tax Internal Rate of Return (“IRR”) of 18.8% for base case with $2.25 per pound copper, $1,015 per ounce gold, and $15.85 per ounce silver* x Payback of preproduction capital in 2.9 years (on a pre-tax basis) and 4.1 years (on an after-tax basis)* x Cash operating cost of $0.99 per pound of copper including all on-site and offsite costs, toll treatment and refinery (“TCRC”) charges, net of by-product credits x Average metal production of 262 million pounds (119,000 tonnes) copper per year, 37,000 ounces of gold per year, and 850,000 ounces of silver per year.
Page5 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted) x Average production of 295 million pounds (139,000 tonnes) copper per year for the first three years of production x Pre-production capital cost of $1.437 billion based on leased mining equipment and including contingency of 20% x All-in capital cost of $1.565 billion based on leased mining equipment and including working capital, life-of-mine sustaining capital, and closure costs x Processing rate of 95,000 tonnes per day using conventional crush/grind and flotation technology x Waste to ore strip ratio of 0.98 to 1 x Average life-of-mine metal recoveries of 89.7% for copper, 55% for gold and 50% for silver x Concentrate grades average approximately 30% copper, three grams per tonne gold and 73 grams per tonne silver x 22 year mine life, with potential for extension by mining additional resources identified below proposed pit x Cañariaco Norte is located at a moderate elevation with pit centroid and process plant at approximately 3,000 metres above sea level; x Connection to Peruvian national power grid; distance of approximately 57 kilometres x New access road to major paved highway; distance of approximately 42 kilometres x Significant potential for discovery of additional resources.
* Note – The financial analysis above including NPV, IRR and project payback period are as calculated by AMEC according to the Peru Mineral taxation schedule in place at January 2011.
The results of the January 2011 PFSPR enabled the Company to complete a financing of $30,562,950 in February 2011. Use of proceeds will include completion of a Definitive Feasibility Study on Cañariaco Norte and significant exploration drilling on the Cañariaco Sur and Quebrada Verde targets on the Cañariaco Norte Project.
In April 2011, immediately following the publication of the PFSPR, the Company commenced a Feasibility Study ("FS") on the Cañariaco Norte copper project, under the direction of AMEC and Knight Piésold Ltd. (“KP”).
The Feasibility Study is being based on the scope of development presented in the PFSPR, although several aspects are being subjected to additional investigation and optimization, including production rate, geotechnical investigation, metallurgical test work, and concentrate off-take. The level of engineering and economic analysis are being completed to a significantly higher accuracy level than the PFSPR, with the objective of finalizing the scope of project development, and completing capital and operating costs estimates to an accuracy of plus or minus 15%.
In September 2011, a new mineral tax schedule was enacted by the Government of Peru whereby taxation on mineral production was increased. Based on an initial assessment of the new tax rates on the Cañariaco Norte financial analysis, the after tax NPV and IRR will be reduced slightly, and the project payback period extended slightly. The new tax rates do not change the conclusions presented in the January 2010 PFSPR and the economics of the Cañariaco Norte project remain robust.
In November 2011, these new tax rates were applied to the March 2011 PFSPR financial model. In order to complete a direct assessment of the new tax rates, all other aspects of the financial assessment including metal prices were held. Under the new tax rates, the after tax NPV, IRR and payback period for the Cañariaco Norte project are $912 million, 17.2% and 4.4 years respectively, at a long term copper price of $2.25 per pound and a discount rate of 8%.
Page6 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
The after tax NPV, IRR and payback period reported in March 2011 in the PFSPR were $1.063 billion, 18.8% and 4.2 years respectively.
Also in November 2011, as part of the Feasibility Study program, AMEC completed an analysis of the potential benefit of increased daily throughput. Based on this study, a larger SAG mill and larger ball mills will be incorporated into the Cañariaco Norte process plant, which is expected to achieve a processing rate in the range of 100,000 to 110,000 tonnes per day, which is an increase from the 95,000 tonne per day rate projected in the PFSPR.
As part of this production rate increase, KP selected a new, larger tailings containment area significantly closer to the proposed process plant than the tailings facility presented in the PFPSR.
In addition, AMEC completed a review of the potential mine access routes which indicates that development of a southern route that follows the current access road route would provide several key benefits including shorter haul distance to the Port at Eten and lower life of mine cost. In addition, the power line may be constructed along this road route thereby simplifying the logistics of power line construction.
In 2012, significant drilling is planned for Cañariaco Norte as part of the FS, including geotechnical, metallurgical and geological drilling for Feasibility Study design of the open pit and ancillary facilities, as well as a small amount of infill drilling for the resource. Exploration drilling is also planned on the Cañariaco Sur copper-gold porphyry system and the Quebrada Verde copper-gold porphyry target.
The Environmental and Social Impact Assessment, under the direction of AMEC-Peru also continues in 2012 with fieldwork and office based data assessment.
Joanne Freeze, P.Geo., Director and CEO and Sean Waller, P. Eng., Director and President are the Qualified Persons responsible for the review of the technical information contained under the Cañariaco Property.
SELECTED ANNUAL FINANCIAL INFORMATION
Years Ended December 31, 2011 2010 2009 (IFRS) (IFRS) (Canadian GAAP)
Total revenue $ - $ - $ - Net loss (7,785,268) 93,529 (1,348,379) Basic and diluted loss per share (0.07) - (0.02)
As at December 31, 2011 2010 2009 (IFRS) (IFRS) (Canadian GAAP)
Working capital $ 19,043,338 $ 2,143,395 $ 435,036 Mineral right interests 41,301,933 41,782,236 37,307,164 Total assets 63,256,954 50,420,217 46,892,353
RESULTS OF OPERATIONS
During the year ended December 31, 2011 the Company posted a net loss of $7,785,268, compared to net income of $93,539 in the year ended December 31, 2010. The Company is in the exploration stage, with no significant sources of revenue.
Page7 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
The increase of $7,878,807 in net losses in 2011 is explained mostly by a variance of $4,840,837 in loss or gain on transfer of mineral right interests, by a variance of $1,610,000 in fair value adjustments of investments and by an increase of $1,153,154 in share-based payment, in connection with incentive options vesting in 2011.
The most significant expenses recorded by the Company in 2011 were a loss on transfer of mineral right interests of $3,401,190 (a non-cash expense; 2010: gain of $1,439,647), share-based payment of $2,151,874 (also a non-cash expense; 2010: $998,720), a fair value loss on adjustment of investments of $910,000 (2010: gain of $700,000) and management fees, office salaries and benefits of $844,042 (2010: $317,063).
The loss of $3,401,190 on transfer of mineral right interests in 2011 resulted from the difference between the fair value of the Cobriza shares received as consideration and the carrying cost of the mineral right interests transferred to Cobriza as part of the Cobriza spin-off. The gain of $1,439,647 on transfer of mineral right interests in 2010 resulted from the fair value adjustments to the Candente Gold shares, then trading on the TSX, prior to the return on capital that completed the Candente Gold spin-off.
The gains or losses on fair value adjustments of investments were recorded in connection with changes to the fair value of Candente Gold warrants held by the Company, calculated using the Black-Scholes model at each statement of financial position date.
The increase in management fees, office salaries and benefits was associated with higher staff levels in 2011 and management performance bonuses paid or accrued in 2011.
The net loss posted by the Company in 2011 adjusted to exclude non-cash expenses (depreciation, share-based payment expense, loss on transfer of mineral right interests, fair value adjustments of investment and impairment of mineral right interests) was $1,180,932 (2010: $1,014,324).
The Company posted other comprehensive loss of $6,479,973 in 2011 (2010: other comprehensive income of $4,144,081), of which $4,764,689 was an unrealized loss resulting from fair value adjustments to investments designated as “available for sale” financial instruments (2010: unrealized gain of $3,684,029) and ($1,715,284) was derived from cumulative translation allowance (2010: $460,052).
SUMMARY OF QUARTERLY FINANCIAL RESULTS
QE Dec. 31, 2011 QE Sep. 30, 2011 QE June 30, 2011 QE March 31, 2011
Revenue $ - $ - $ - $ - Loss for the period (5,455,461) (23,224) (1,223,744) (1,082,839) Basic and diluted loss per share (0.05) - (0.01) (0.01)
QE Dec. 31, 2010 QE Sept. 30, 2010 QE June 30, 2010 QE March 31, 2010
Revenue $ - $ - $ - $ - Profit (loss) for the period (222,799) (867,718) 7,382 1,176,674 Basic and diluted loss per share - (0.01) - 0.01
Page8 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
LIQUIDITY AND CAPITAL RESOURCES
The following table provides a summary of key liquidity and cash flow indicators for the years ended December 31, 2011 and 2010:
Year Ended December 31, Year Ended December 2011 31, 2010 Cash provided by (used in) Operating activities $ (1,163,198) $ (1,368,028) Investing activities (10,098,389) (4,815,233) Financing activities 30,124,892 6,680,959 Effect of exchange rate changes on cash (1,754,116) 200,810 Increase in cash and cash equivalents during the year 18,863,305 497,698 Cash and cash equivalents – beginning 1,690,908 992,400 Cash and cash equivalents – ending 18,800,097 1,690,908
Working capital 19,043,338 2,143,395
At December 31, 2011, the Company had cash and cash equivalents of $18,800,097 and working capital of $19,043,338, compared to cash of $1,690,908 and working capital of $2,143,395 at December 31, 2010.
The Company is in the exploration stage and has relied on the issuance of share capital to fund acquisitions, exploration activities and general and administrative expenses.
Operating Activities
Cash used in operations in 2011, including the changes in non-cash working capital items, was $1,163,198 (2010: cash used in operations of $1,368,028).
Financing Activities
On February 17, 2011, the Company completed a financing by way of a bought deal private placement (the “Bought Deal Offering”) with a syndicate of underwriters (the “Underwriters”) for total gross proceeds of $27,316,722 (Cdn$26,969,800) inclusive of the proceeds from the full exercise of the over-allotment option granted to the Underwriters. The Company issued an aggregate of 13,156,000 common shares in the capital of the Company (the “Shares”) at a purchase price of Cdn$2.05 per Share. In consideration for their services with respect to the closing of the Bought Deal Offering, the Underwriters received a cash commission equal to 5% of the gross proceeds of the sale of Shares in the Bought Deal Offering.
In addition to the Bought Deal Offering, the Company completed a non-brokered private placement issuing 1,563,415 Shares at a price per Share of Cdn$2.05 for gross proceeds of $3,246,228 (Cdn$3,205,001) (the “Non-Brokered Offering”). In consideration for their services with respect to the closing of the Non-Brokered Offering, agents received a cash commission equal to 5% of the gross proceeds of the sale of Shares in the Non-Brokered Offering. The securities issued under the offerings were subject to a four month hold period in Canada.
Total issue costs on the Bought Deal Offering and the Non-Brokered Offering, inclusive of cash commissions, were $1,725,725.
On March 9, 2010, the Company completed a private placement (the “Offering”) of 12,938,011 units (“Units”) and 4,856,185 special warrants (“Special Warrants”), for gross proceeds of $6,060,695 (Cdn$6,227,969).
The Units and Special Warrants were sold for a price of Cdn$0.35 each. Each Unit consisted of one common share in the capital of the Company (“Share”) and one half of one share purchase warrant (“Warrant”). Each whole Warrant is exercisable for the 3 year period from the date of closing to purchase one Share at a price of Cdn$0.50 per Share.
Page9 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
The Warrants issued were valued by the Company at $1,325,501 and the Warrants attached to the Special Warrants were valued by the Company at $497,517.
The $1,654,015 (Cdn$1,699,665) in gross proceeds from the sale of the Special Warrants was deposited into and held in escrow pending shareholder approval, which was obtained at the Company’s annual general meeting held on May 13, 2010. On May 14, 2010 each Special Warrant was automatically converted into one Unit at no additional cost to the holder, and the net proceeds of $1,586,411 were released to the Company from escrow.
In connection with the Offering, the Company paid a 6% cash commission of $412,047 and issued 661,876 broker/finder warrants (“Broker Warrants”) and 242,602 special broker/finder warrants (“Special Broker Warrants”) on all of the brokered portions of the offering and on part of the non-brokered portion of the offering. Each Broker Warrant is exercisable for a period of 36 months from closing to purchase one share at a price of Cdn$0.45 per share. Each of the Special Broker Warrants was automatically converted into one Broker Warrant on May 14, 2010. The Broker Warrants and Special Broker Warrants were valued by the Company at $192,524.
In the year ended December 31, 2011, the Company received cash proceeds of $970,232 and $317,435 from the exercise of stock purchase warrants and stock purchase options, respectively.
In the year ended December 31, 2010, the Company received cash proceeds of $683,167 and $407,141 from the exercise of stock purchase warrants and stock purchase options, respectively.
Page10 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
Investing Activities
The mineral property additions summarized in the following table represent costs incurred, not necessarily cash spent, on mineral interests in the periods indicated:
Cañariaco Other Peruvian Total Balance, January 1, 2010 32,618,757 4,688,407 37,307,164 Expenditures: Assays 192,099 8,903 201,002 Camp, field supplies & travel 91,961 12,603 104,564 Equipment maintenance & rental 107,313 6,553 113,866 Engineering studies 2,332,057 - 2,332,057 Field support and personnel 484,201 44,016 528,217 Administration 258,440 6,492 264,932 Geological & geophysical 250,387 49,547 299,934
OTHER ITEMS: 38,370 118,362 156,732 Acquisition cost and payments Value added tax 202,713 26,521 229,234 Impairment of unproven mineral interests - (11,404) (11,404) Exchange differences 252,548 3,390 255,938
Balance, December 31, 2010 36,828,846 4,953,390 41,782,236
Cañariaco Other Peruvian Total Balance, January 1, 2011 36,828,846 4,953,390 41,782,236 Expenditures Assays 6,000 - 6,000 Camp, field supplies & travel 165,705 - 165,705 Equipment maintenance & rental 185,201 - 185,201 Engineering studies 2,070,920 - 2,070,920 Field support & personnel 1,098,903 - 1,098,903 Administration 159,884 65,868 225,752 Geological and geophysical 433,981 - 433,981
OTHER ITEMS: Acquisition cost and payments 91,000 - 91,000 Value added tax 358,105 - 358,105 Impairment of unproven mineral interest (85,817) (33,944) (119,761) Transfer of mineral rights 7,308 (4,985,314) (4,978,006) Exchange differences (18,103) - (18,103)
Balance, December 31, 2011 41,301,933 - 41,301,933
The Company spent cash resources of $4,015,646 and $4,622,271 for expenditures and acquisitions on mineral interests in the years ended December 31, 2011 and 2010, respectively.
In 2011, the Company invested cash of $5,707,200 (Cdn$6,000,000) in the capital of Cobriza (2010: $nil).
The Company also made payments of $17,438 for the purchase of equipment (2010: $8,017), received $44,289 from the sale of equipment in 2010 and paid $358,105 for VAT in Peru (2010: $229,234). The VAT in Peru is not currently refundable to the Company, but can be used in the future to offset amounts due to the Peruvian taxation authorities by the Company resulting from VAT charged to clients on future sales.
Page11 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
The aggregate of investment activities in 2011 totaled $10,098,389 (2010: $4,815,233).
INVESTMENTS
At January 4, 2010, the Company held 21,750,000 shares of Candente Gold Corp. (“Candente Gold”). On January 4, 2010, Candente Gold became an issuer listed on the TSX, completing the spin-out of Candente Gold. Candente Copper returned a total of 16,213,627 shares to Candente Copper’s shareholders, as a return of capital with a value of $7,030,553, resulting in a gain of $1,439,647, and retained 5,536,373 shares of Candente Gold, which represents 9% of Candente Gold’s outstanding shares, and 1,625,000 warrants with an exercise price of Cdn$0.60 per share until January 4, 2012. Subsequent adjustments to fair value of these shares, required at each statement of financial position date, are recorded in accumulated other comprehensive income, as the Company’s investment in Candente Gold is designated as “available for sale” for accounting purposes. The changes in the fair value of the warrants, required at each statement of financial position date, are recognized in operations and are calculated using the Black- Scholes pricing model. At December 31, 2011, Candente Gold’s closing share price was Cdn$0.235 and the fair value of the Company’s investment in Candente Gold was $1,275,547 (December 31, 2010 - $5,590,619: January 1, 2010: $7,500,000). The warrants expired unexercised.
As of October 6, 2011, the Company held 27,500,000 shares of Cobriza Metals Corp. (“Cobriza”). Candente Copper returned a total of 23,686,697 shares to Candente Copper’s shareholders, as a return of capital with a value of $6,308,620, and retained 3,813,303 shares of Cobriza, which represents 14% of Cobriza’s outstanding shares. As a result of this transaction, Candente Copper transferred its interest in other Peruvian mineral right interests, invested $5,707,200 (Cdn$6,000,000) and recognized a loss of $3,401,190. On October 12, 2011, Cobriza became an issuer listed on the TSX, completing the spin-out of Cobriza. Subsequent adjustments to fair value of these shares, required at each statement of financial position date, are recorded in accumulated other comprehensive income, as the Company’s investment in Cobriza is designated as “available for sale” for accounting purposes. At December 31, 2011, Cobriza’s closing share price was Cdn$0.155 and the fair value of the Company’s investment in Cobriza was $579,477 (December 31, 2010 and January 1, 2010: $nil).
The Company also holds 42,000 common shares of Orex Minerals Inc. (“Orex”), an issuer listed on the TSX Venture Exchange. Adjustments to fair value of these shares, required at each statement of financial position date, are recorded in accumulated other comprehensive income, as the Company’s investment in Orex is designated as “available for sale” for accounting purposes. At December 31, 2011, Orex’s closing share price was Cdn$0.56 and the fair value of the Company’s investment in Orex was $23,059 (December 31, 2010 - $36,533; January 1, 2010: $34,029).
The Company recorded other comprehensive loss of $4,764,689 (2010: other comprehensive income of $3,684,029) for the changes in the fair value of these investments.
SUMMARY OF OBLIGATIONS
The Company has entered into various lease agreements with unrelated corporations, for the lease of office and other premises in Canada and Peru. The Company’s share of rent commitments for the remaining term of the contracts (spanning from 2012 to 2015) is approximately $447,104.
The Company is committed to contributions of Cdn$100,000 in January 1, 2012 (paid) and Cdn$100,000 in January 1, 2013 to non-profit organization to fund various health care and educations projects in Peru.
TRANSACTIONS WITH RELATED PARTIES
During 2011, a total of $235,028 (2010: $178,941) for geological consulting services rendered was paid or accrued to corporations controlled by various directors and officers and to an individual former director of the Company. These amounts are included as a component of deferred exploration costs.
During 2011, $192,198 (2010: $199,225) was paid as salaries to various officers of the Company and $358,919 (2010: $98,130) was paid or accrued to corporations controlled by an officer and two directors and officers of the
Page12 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
Company for management services rendered and management performance bonuses. These amounts are included in general and administrative expenses.
During 2011, $90,180 (2010: $nil) was accrued to directors and former directors of the Company for services rendered. These amounts are included in general and administrative expenses.
Included in accounts receivable at December 31, 2011 is $994(December 31, 2010: $5,520) owed to the Company by a director and officer for expense advances. Included in accounts payable and accrued liabilities at December 31, 2011 is $167,219 (December 31, 2010: $71,539) owed by the Company to certain officers and directors of the Company for services rendered and reimbursement of expenses. The above transactions have been recorded at the exchange amounts agreed to by the related parties. Amounts due to related parties are considered by the Company to be accounts payable and are unsecured and non-interest bearing.
At December 31, 2011, two directors and officers and three officers of the Company acted as a director and officer and as officers of Candente Gold. During the years ended December 31, 2011 and 2010, the Company and Candente Gold shared certain office and administrative expenses and the Company made certain payments on behalf of Candente Gold. As of December 31, 2011, a total of $83,096 was due from Candente Gold to the Company for reimbursement of expenses (December 31, 2010: $112,716) and $nil was due to Candente Gold for its share of proceeds from option exercises (December 31, 2010: $7,367).
At December 31, 2011, two directors and officers and four officers of the Company acted as directors and officers and as officers of Cobriza. During the year ended December 31, 2011 the Company and Cobriza shared certain office and administrative expenses and the Company made certain payments on behalf of Cobriza. As of December 31, 2011, a total of $55,209 was due from Cobriza to the Company for reimbursement of expenses (December 31, 2010: $nil).
FOURTH QUARTER
In the quarter ended December 31, 2011 (“Q4-2011”) the Company posted a loss of $4,545,161 or $0.04 per share. The main expenses during the quarter were a loss on transfer of mineral right interests of $3,401,190, followed by management fees, office salaries and benefits of $430,178 and share-based payment of $369,789.
A summary of general and administrative expenses incurred on a quarterly basis in 2011 is presented below:
Q1-2011 Q2-2011 Q3-2011 Q4-2011 Total 2011 Depreciation 4,875 4,965 4,701 6,970 21,511 Audit and tax advisory fees 30,991 8,779 45,570 16,252 101,592 Bank charges and interest 2,473 2,211 1,720 1,573 7,977 Consulting - 3,269 13,742 623 17,634 Corporate development 12,169 12,395 12,490 12,291 49,345 Legal 21,877 123,236 115,389 257 260,759 Management fees, office salaries and benefits 119,008 138,167 156,689 430,178 844,042 Office, rent and miscellaneous 49,604 45,883 54,778 65,002 215,267 Travel and accommodations 82,343 20,960 55,850 61,495 220,648 Regulatory and filing fees 60,299 7,877 34,181 27,066 129,423 Shareholder communications 37,458 17,567 104,562 26,768 186,355 Share-based payment 419,096 922,634 440,355 369,789 2,151,874 Interest and other income (46,630) (121,045) (170,815) 25,535 (312,955) Loss on transfer of mineral right interests - - - 3,401,190 3,401,190 Fair value adjustments of investments - - - 910,000 910,000 Impairment of mineral right interests - - - 119,761 119,761 (Gain) loss on foreign exchange 289,276 36,846 (845,988) (19,289) (539,155) Net loss (1,082,839) (1,223,744) (23,224) (5,455,461) (7,785,268)
Page13 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
CRITICAL ACCOUNTING ESTIMATES
The Company’s significant accounting policies are summarized in Note 3 of its Audited Consolidated Financial Statements for the year ended December 31, 2011. The preparation of consolidate financial statements in accordance with IFRS requires management to select accounting policies and make estimates and judgements that may have a significant impact on the consolidated financial statements. The Company regularly reviews its estimates; however, actual amounts could differ from the estimates used and, accordingly, materially affect the results of operations.
Examples of significant estimates include:
x Fair value assumptions used in the Candente Gold and Cobriza spin-offs; x Carrying values of mineral right interests; x Carrying values of equipment and depreciation rates for equipment; x Valuation of deferred income taxes and allowances; x Assumptions used to assess impairment of mineral right interests and equipment; x Valuation of investment adjustments going through profit or loss; x Valuation of share-based payment.
Examples of significant judgements, apart from those involving estimates, include:
x The accounting policies for mineral right interests and equipment; x Determination that the Candente Gold and Cobriza investments are not subject to significant influence and its classification as available-for-sale investments; x Classification of financial instruments; x Determination of functional currency.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”) IMPLEMENTATION PLAN
Effective January 1, 2011, Canadian publicly traded entities were required to prepare their financial statements in accordance with IFRS. Due to the requirement to present comparative financial information, the effective transition date was January 1, 2010. The three months dated March 31, 2011 were the Company’s first reporting period under IFRS.
The Company has completed its IFRS conversion project.
Under IFRS 1, First Time Adoption of International Financial Reporting Standards, the IFRS are applied retrospectively at the transition date with all adjustments to assets and liabilities as stated under Canadian GAAP taken to deficit unless certain exemptions are applied.
The Company elected to take the following IFRS 1 optional exemptions:
• Not to restate business combinations which occurred prior to the transition date and the accounting thereof.
• Reclassify the cumulative translation difference reserve for all foreign operations to zero at the date of transition to IFRS.
• Share-based payments – IFRS 2 Share-based payments encourages application of its provisions to equity instruments granted on or before November 7, 2002, but permits the application only to equity instruments granted after November 7, 2002 that had not vested by the transition date. The Company has chosen to apply the exemption under IFRS 1 and applied IFRS 2 for all outstanding equity instruments granted after November 7, 2002 that had not vested by the transition date.
The following paragraphs explain the significant differences between Canadian GAAP and the current IFRS accounting policies applied by the Company. These differences result in the adjustments presented in the tables listed in the following pages.
Page14 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
Note 1 Under Canadian GAAP, the properties transferred from the Company to Candente Gold were transferred at their carrying value. Under IFRS, the transfer of properties was accounted for at fair value. The impact of this difference as of January 1, 2010 was a net increase of $1,838,831 in available for sale financial assets and a reduction in deficit in the same amount.
Note 2 The transfer of properties disclosed in the preceding paragraph had an effect in the base value of the investment which was subsequently distributed to the Company’s shareholders in January 2010. As a result, in the year ended December 31, 2010, the distribution to shareholders was recognized at fair value at the date of the distribution and was $2,810,411 higher under IFRS and there was a gain of $1,439,647 recognized during the year.
Note 3 Under Canadian GAAP, the Company and all of its subsidiaries had a U.S. dollar measurement currency. Under IFRS, the functional currency of the parent company is the Canadian dollar as this is the currency in which it primarily generates and expends cash. The Company’s presentation currency remains the U.S. dollar. The period end exchange rate is applied to all entities where the functional currency is different from the presentation currency, resulting in an adjustment on transition to IFRS and a cumulative translation adjustment on each statement of financial position date. The impact of this IFRS adjustment as of January 1, 2010 was an increase in equipment of $11,520, an increase of $1,203,504 in unproven mineral interests and a reduction in deficit of $1,215,024. As of December 31, 2010, the impact of this adjustment was an increase of $12,541 in equipment, an increase of $1,455,482 in unproven mineral interests, a reduction in deficit of $1,007,881 and an increase to cumulative translation allowance of $460,052.
Note 4 Under Canadian GAAP, the Company recorded share-based payments on a straight-line basis over the vesting period. Under IFRS, the Company calculates the fair value for share-based payments for each tranche within an award over the vesting period of the corresponding tranche. There was no impact from this adjustment on January 1, 2010 due to an IFRS 1 exemption taken by the Company. During the year ended December 31, 2010, there was an increase of $101,345 to stock-based compensation expense and contributed surplus from this adjustment.
Note 5 The January 1, 2010 and the December 31, 2010 statement of financial position have been adjusted to reflect an increase in investments relating to the fair value of the Candente Gold warrants held by the Company at each of these dates. The fair value was determined using the Black-Scholes model. The change in fair value for the year ended December 31, 2010 of $700,000 is the reflected in the loss for the year. There is no difference in accounting for the fair value of the warrants in accordance with Canadian GAAP and IFRS.
Page15 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
Reconciliation of statements of financial position
The reconciliation between Canadian GAAP and IFRS statements of financial position at January 1, 2010 and December 31, 2010 is provided below.
As at January 1, 2010 Canadian Canadian GAAP Transition GAAP Note Adjustments Amended impact Note IFRS $ $ $ $ $ Assets Current assets Cash and cash equivalents 992,400 - 992,400 - 992,400 Trade and other receivables 303,170 - 303,170 - 303,170 Prepaid expenses and deposits 66,098 - 66,098 - 66,098 Other current assets 326,422 - 326,422 - 326,422 1,688,090 - 1,688,090 - 1,688,090
Non-current assets Investments 5,695,198 5 210,000 5,905,198 1,838,831 1 7,744,029 Equipment 351,550 - 351,550 11,520 3 363,070 Unproven mineral right interests 36,103,660 - 36,103,660 1,203,504 3 37,307,164 42,150,408 210,000 42,360,408 3,053,855 45,414,263 43,838,498 210,000 44,048,498 3,053,855 47,102,353
Liabilities Current liabilities Trade and other payables 1,253,054 - 1,253,054 - 1,253,054 1,253,054 - 1,253,054 - 1,253,054
Equity Share capital 52,103,487 - 52,103,487 - 52,103,487 Other equity reserves 8,194,464 - 8,194,464 - 8,194,464 Deficit (17,692,861) 5 210,000 (17,482,861) 3,053,855 1, 3 (14,429,006) Accumulated other comprehensive loss (19,646) - (19,646) - (19,646) 42,585,444 210,000 42,795,444 3,053,855 45,849,299 43,838,498 210,000 44,048,498 3,053,855 47,102,353
Page16 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
As at December 31, 2010 Canadian Canadian GAAP Transition GAAP Note Adjustments Amended impact Note IFRS $ $ $ $ $ Assets Current assets Cash and cash equivalents 1,690,908 - 1,690,908 - 1,690,908 Trade and other receivables 480,479 - 480,479 - 480,479 Prepaid expenses and deposits 140,639 - 140,639 - 140,639 Other current assets 425,542 - 425,542 - 425,542 Total current assets 2,737,568 - 2,737,568 - 2,737,568
Non-current assets Investments 5,627,152 5 910,000 6,537,152 - 6,537,152 Equipment 260,810 - 260,810 12,451 3 273,261 Unproven mineral right interests 40,326,754 - 40,326,754 1,455,482 3 41,782,236 Total non-current assets 46,214,716 910,000 47,124,716 1,467,933 48,592,649 Total assets 48,952,284 910,000 49,862,284 1,467,933 51,330,217
Liabilities Current liabilities Trade and other payables 594,173 - 594,173 - 594,173 Total liabilities 594,173 - 594,173 - 594,173
Equity Share capital 53,094,880 - 53,094,880 (2,810,411) 2 50,284,469 Other equity reserves 10,561,262 - 10,561,262 101,345 4 10,662,607 Deficit (19,430,481) 5 910,000 (18,520,481) 4,185,014 2,3,4 (14,335,467) Accumulated other comprehensive income (loss) 4,132,450 - 4,132,450 (8,015) 3 4,124,435 Total equity 48,358,111 910,000 49,268,111 1,467,933 50,736,044 Total liabilities and equity 48,952,284 910,000 49,862,284 1,467,933 51,330,217
Page17 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
Reconciliation of total comprehensive income
The reconciliation between Canadian GAAP and IFRS total comprehensive income for the year ended December 31, 2010 is provided below.
For the year ended December 31, 2010 Canadian Canadian GAAP Transition GAAP Note Adjustments Amended impact Note IFRS $ $ $ $ $
Depreciation 21,660 - 21,660 - 21,660 Audit and tax advisory fees 83,665 - 83,665 - 83,665 Bank charges and interest 10,325 - 10,325 - 10,325 Consulting 2,936 - 2,936 - 2,936 Corporate development 45,611 - 45,611 - 45,611 Legal 45,909 - 45,909 - 45,909 Management fees, of fice salaries and benefits 317,063 - 317,063 - 317,063 Office, rent and miscellaneous 175,909 - 175,909 - 175,909 Travel and accomodations 86,011 - 86,011 - 86,011 Regulatory and filing fees 88,249 - 88,249 - 88,249 Shareholder communications 68,813 - 68,813 - 68,813 Share-based payment 897,375 - 897,375 101,345 4 998,720 Interest and other income (117,670) - (117,670) - (117,670) Gain on transfer of mineral right interests and spin-off of Candente Gold - - - (1,439,647) (1,439,647) Fair value adjustments on investments - 5 (700,000) (700,000) - (700,000) Impairment of mineral right interests 11,404 - 11,404 - 11,404 Loss on foreign exhange 360 - 360 207,143 3 207,503 Net loss (1,737,620) 700,000 (1,037,620) 1,131,159 93,539
Other comprehensive income (loss) Unrealized gain on available-f or-sale financial assets 4,152,096 - 4,152,096 (468,067) 3,684,029 Cumulative translation adjustment - - - 460,052 3 460,052 4,152,096 - 4,152,096 (8,015) 4,144,081 Comprehensive income for the period 2,414,476 700,000 3,114,476 1,123,144 4,237,620
Statement of cash flows
The IFRS transition adjustments noted above did not have an impact on cash and cash equivalents. There was no change to investing and financing cash flow sub-totals.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance that material information is gathered and reported to senior management as is appropriate to permit timely decisions regarding public disclosure.
During the year ended December 31, 2009, the Company engaged legal counsel to formalize its disclosure controls and procedures. Based on those recommendations, a corporate disclosure policy was presented to the Company's board and formally adopted on March 25, 2009. The disclosure policy includes the setting up of a Disclosure Policy Committee that consists of the Company's CEO, President and Corporate Secretary.
The disclosure policy and committee have been in place since the adoption date. Management is reasonably confident that material information relating to the Company, including its consolidated subsidiaries, is being made known to senior management in a timely manner, and that the Company's disclosure controls and procedures are effective not only with respect to the Company's annual filing requirements but on an ongoing basis.
Page18 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
INTERNAL CONTROLS OVER FINANCIAL REPORTING (“ICFR”)
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect the additions to and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS and the Company’s receipts and expenditures are made only in accordance with authorization of management and the Company’s directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the annual or interim financial statements.
Any system of internal controls over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
An evaluation of the design effectiveness of the Company’s internal controls over financial reporting was conducted as of December 31, 2011 by the Company’s management, including the President and CEO and CFO. Based on this evaluation, management has concluded that the design of the Company’s internal controls over financial reporting was effective.
There were no changes in the Company’s internal control over financial reporting during the year ended December 31, 2011 that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.
RISKS AND UNCERTAINTIES
The Company is subject to a number of significant risks due to the nature and the present stage of its business and the effect of worldwide economic conditions. Exploration of mineral right interests involves a high degree of financial risk. While discovery of an ore body may result in substantial rewards, few exploration mineral right interests are ultimately developed into producing mines. Major expenditures may be required to establish reserves by drilling, constructing mining and process facilities, developing metallurgical processes and extracting base and precious- metals from ore. It is impossible to ensure that the current exploration programs of the Company will result in profitable commercial mining operations.
Risk factors that should be taken into account in assessing the Company’s activities and any investment in the Company include, but are not limited to, those listed below. Any one or more of these risk factors could have a material impact on the financial condition of the Company. This information, by its nature, is not all-inclusive and risk factors that have not been listed could have a material impact on the future financial condition of the Company.
Economic conditions may prevent the Company from obtaining the capital required to continue operations
The Company’s ability to continue operations is contingent on its ability to obtain additional financing. Equity market conditions, funding environments and the price of the Company’s common shares may make it dilutive and difficult to raise funds by the sale of the Company’s shares. An investment in the shares of a junior resource company is considered to be a high-risk investment. While the Company currently has the necessary cash resources to fund operations and exploration work at its mineral right interests for a period of at least one year, there is no assurance that financing will be available to the Company in future periods. . Limited Operating History
The Company has limited operating history. The Company is exploring its mineral right interests for base metals. The Company currently does not generate any revenues from production. Its success will depend largely upon its ability to locate commercially productive mineral reserves. As a result of these factors, it is difficult to evaluate the Company’s prospects, and its future success is more uncertain than if it had a longer history of operations.
Page19 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
History of Losses
The Company has incurred net losses every year since inception, and as of December 31, 2011 had a deficit of $22,120,735. The Company anticipates significant expenditures for its mineral exploration programs. Since most exploration projects do not result in the discovery of commercially productive mineral reserves and are ultimately expensed in full, the Company expects to report net losses at least into the foreseeable future.
The long-term profitability of the Company’s operations will be in part directly related to the success of its exploration programs, which are affected by numerous factors including the cost of such programs, the amount of mineral reserves discovered and fluctuations in the price of any minerals produced.
No History of Dividends
Since incorporation, the Company has not paid any cash or other dividends on its common stock and does not expect to pay such dividends in the foreseeable future, as all available funds will be invested primarily to finance its mineral exploration programs. The Company will need to achieve profitability prior to any dividends being declared.
Dilution
The Company does not generate any revenues from production and does not have sufficient financial resources to undertake by itself all of its planned exploration programs. The Company has limited financial resources and has financed its operations primarily through the sale of securities such as common shares. The Company will need to continue its reliance on the sale of such securities for future financing, resulting in dilution to the Company’s existing shareholders. The amount of additional funds required will depend largely on the success of the Company’s exploration programs.
Further exploration programs will depend on the Company’s ability to obtain additional financing which may not be available under favorable terms, if at all. If adequate financing is not available, the Company may not be able to commence or continue with its exploration programs or to meet minimum expenditure requirements to prevent the full or partial loss of its mineral right interests. Also, failure to meet the Company’s share of costs incurred under joint venture arrangements to which it may be a party may result in a reduction of its interests in mineral right interests. Furthermore, if other parties to such agreements do not meet their share of such costs, the Company may be unable to finance the cost required to complete the recommended programs.
No Known Mineral Reserves
All of the Company’s mineral right interests are in the exploration stage and are without known mineral reserves. Although the Company may discover mineral reserves through its exploration programs, commercial production may not be warranted due to insufficient quantities. Development of any of the Company’s properties will only follow upon obtaining satisfactory exploration results. However, few mineral right interests that are explored are ultimately developed into producing mines.
In the event a commercially productive mineral reserve is discovered, substantial expenditures are required to develop mineral reserves for production through drilling, development of metallurgical processes for extraction and to develop the mining and processing facilities and infrastructure at the production site. The marketability of any minerals discovered may be affected by numerous factors which are beyond the Company’s control and which cannot be predicted, such as market fluctuations, the proximity and capacity of milling facilities, mineral markets and processing equipment, and such other factors as government regulations, including regulations relating to royalties, allowable production, importing and exporting of minerals, and environmental protection. Depending on the price of minerals produced, the Company may determine that it is impractical to commence or continue commercial production.
Title to Mineral Right interests
The Company believes it has diligently investigated title to all of its mineral right interests and, to the best of its knowledge, title to all right interests are in good standing. However, the right interests may be subject to prior unregistered agreements or transfers, which may affect the validity of the Company’s ownership of such right interests.
Page20 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
Although the Company has exercised the usual due diligence with respect to title to right interests in which it has a material interest, title to such right interests may be challenged or impugned in the future. The boundaries of the Company’s mineral right interests have not been surveyed and, therefore, the precise location and area of these mining right interests may be in doubt. The Company makes a search of mining records in accordance with mining industry practices to confirm that it has acquired satisfactory title to its right interests but does not obtain title insurance with respect to such right interests. The possibility exists that title to one or more of its right interests, particularly title to undeveloped right interests, might be defective because of errors or omissions in the chain of title, including defects in conveyances and defects in locating or maintaining such claims. Should any defect in title be discovered by or disclosed to the Company, all reasonable steps would be taken to perfect title to the particular claims in question. The Company is not aware of any material defect in the title to its mineral right interests.
A claim on any of the Company’s mineral right interests, especially if commercially productive mineral reserves have been located, could adversely affect the Company’s long-term profitability as it may preclude entirely the economic development of a mineral property. Also, such a claim would affect the Company’s current operations due to the high costs of defending against such claims and its impact on senior management's time.
Key Personnel
The Company is dependent on a relatively small number of key personnel, the loss of any of whom could have an adverse effect on the operations of the Company. The Company’s success is dependent to a great degree on its ability to attract and retain qualified management personnel. The loss of such key personnel, through incapacity or otherwise, would require the Company to seek and retain other qualified personnel and could compromise the pace and success of its exploration activities. The Company does not maintain key person insurance in the event of a loss of any such key personnel. Also, certain management personnel of the Company are officers and/or directors of other publicly-traded companies and will only devote part of their time to the Company.
Additionally, the Company has relied on and is expected to continue relying upon consultants and others for exploration expertise. In the event a commercial ore deposit is discovered on any of the Company’s right interests, the Company will likely require the expertise of such consultants and others for the development and operation of a producing mine.
Competition
The resource industry is intensively competitive in all of its phases, and the Company competes with many companies possessing much greater financial and technical research resources. Competition is particularly intense with respect to the acquisition of desirable undeveloped base-metal and precious-metal right interests. The principal competitive factors in the acquisition of such undeveloped right interests include the staff and data necessary to identify, investigate and purchase such right interests, and the financial resources necessary to acquire and develop such right interests. Competition could adversely affect the Company’s ability to acquire suitable prospects for exploration in the future.
Industry Operating Hazards and Risks
Mineral exploration involves many risks, including location of commercially productive mineral reserves, which may not occur even with a combination of experience, knowledge and careful evaluation. The operations in which the Company has a direct or indirect interest will be subject to all the hazards and risks normally incidental to resource companies, any of which could result in work stoppages and damage to persons or property or the environment and possible legal liability for any and all damage. Fires, power outages, labour disruptions, flooding, explosions, cave- ins, landslides and the inability to obtain suitable or adequate machinery, equipment or labour are some of the industry operating risks involved in the operation of mines and the conduct of exploration programs. Other risks include injury or loss of life, severe damage to or destruction of property, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The occurrence of any of these operating risks and hazards may have an adverse effect on the Company’s financial condition and operations.
Although the Company will, when appropriate, secure liability insurance in an amount which it considers adequate, the nature of these risks is such that liabilities might exceed policy limits, the liability and hazards might not be insurable, or the Company might elect not to insure itself against such liabilities due to high premium costs or other reasons, in which event the Company could incur significant costs that may have a material adverse effect upon its financial condition and operations.
Page21 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
Government Regulations and Political Climate
Mineral exploration on the Company’s right interests are affected to varying degrees by: (i) government regulations relating to such matters as environmental protection, health, safety and labour; (ii) mining law reform; (iii) tax laws (iv) restrictions on production, price controls, and tax increases; (v) maintenance of claims; (vi) tenure; and (vii) expropriation of property through nationalization, requisition or confiscation. Any mineral exploration activities conducted by the Company, including commencement of production, require permits from governmental authorities and such operations are and will be governed by laws and regulations governing prospecting, mining, production, exports, taxes, labour standards, occupation health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters.
Companies engaged in the operation of mines and related facilities generally experience increased costs, and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. All permits required for the conduct of mining operations, including the construction of mining facilities, may not be obtainable by the Company on reasonable terms which would have an adverse effect on any mining project the Company might undertake. Additionally, failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
To the best of the Company’s knowledge, the Company is and will be operating in compliance with all applicable regulations. However, amendments to current governmental laws and regulations affecting mining companies, or the more stringent application thereof, or shifts in political conditions or attitudes could adversely affect the Company’s operations including the potential to curtail or cease exploration programs or to preclude entirely the economic viability of a mineral property. The extent of any future changes to governmental laws and regulations cannot be predicted or quantified, but it should be assumed that such laws and regulations will become more stringent in the future. Generally, new laws and regulations will result in increased compliance costs, including costs for obtaining permits, delays or fines resulting from loss of permits or failure to comply with the new requirements.
Environmental Liability
Although the Company is not aware of any claims for damages related to any impact that its operations have had on the environment, it may become subject to such claims in the future. An environmental claim could adversely affect the Company’s business due to the high costs of defending against such claims and its impact on senior management's time.
The Company conducts exploration activities in Peru. Such activities are subject to various laws, rules and regulations governing the protection of the environment. All phases of the Company’s operations are subject to environmental regulation in the jurisdictions in which it operates. Environmental legislation is evolving in a manner which requires stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed right interests and a heightened degree of responsibility for companies and their officers, directors and employees.
Although the Company is committed to ensure compliance with all environmental regulations currently applicable, environmental hazards may exist on the Company’s mineral right interests, which hazards are not known to the Company at present, that have been caused by previous or existing owners or operators.
Also, environmental regulations may change in the future which could adversely affect the Company’s operations including the potential to curtail or cease exploration programs or to preclude entirely the economic development of a mineral property. The extent of any future changes to environmental regulations cannot be predicted or quantified, but it should be assumed that such regulations will become more stringent in the future. Generally, new regulations will result in increased compliance costs, including costs for obtaining permits, delays or fines resulting from loss of permits or failure to comply with the new regulations.
Page22 CANDENTE COPPER CORP. Management’s Discussion and Analysis Years ended December 31, 2011 and 2010 (Expressed in U.S. Dollars, Unless Otherwise Noted)
Fluctuations in Metal Prices
Although the Company does not hold any known mineral reserves, its future revenues, if any, are expected to be in large part derived from the future mining and sale of base metals or interests related thereto. The prices of these commodities have fluctuated widely, particularly in recent years, and are affected by numerous factors beyond the Company’s control including international economic and political conditions, expectations of inflation, international currency exchange rates, interest rates, global or regional consumptive patterns, speculative activities, levels of supply and demand, increased production due to new mine developments and improved mining and production methods, availability and costs of metal substitutes, metal stock levels maintained by producers and others and inventory carrying costs. The effect of these factors on the price of base and precious metals, and therefore the economic viability of the Company’s operations, cannot be accurately predicted.
Depending on the price obtained for any minerals produced, the Company may determine that it is impractical to commence or continue commercial production.
OTHER MD&A REQUIREMENTS
As of March 28, 2012, Candente Copper has outstanding 118,706,864 common shares, 8,794,500 warrants (at prices ranging from Cdn$0.45 to Cdn$0.50 per share) and 6,292,698 exercisable options (at prices ranging from Cdn$0.33 to Cdn$2.15 per share).
Additional information, including the company’s most recent Annual Information Form, is available on SEDAR at www.sedar.com.
CAUTIONARY STATEMENT ON FORWARD LOOKING INFORMATION
This Report contains “forward looking statements”. These forward looking statements include, but are not limited to, statements regarding the Company’s strategic plans, property search and evaluation plans, estimated levels of expenditures, acquisition targets and commitments. Forward-looking statements express, as at the date of this Report, The Company’s plans, estimates, forecasts, projections, or beliefs as to future events or results and the Company does not intend, and does not assume any obligation, to update these forward-looking statements. In certain cases, forward-looking statements can be identified by the use of words such as “plans”, “expects”, or does not expect”, is expected”, “budget”, “schedule” , “estimates”, “intends”, “anticipates”, or “does not anticipate”, “believes”, or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might”, or “will be taken, “occur”, or “be achieved”. We caution that forward-looking statements involve a number of risks and uncertainties, and there can be no assurance that such statements will prove to be accurate. Therefore, actual results and future events may differ materially from those anticipated in such statements. Factors that could cause results or events to differ materially from current expectations expressed or implied by the forward – looking statements include, but are not limited to the success of the Company’s acquisition criteria, the success in completing further financing and closing on any target acquisitions, currency fluctuations, the ability of the Company to conduct its business in Peru, risks inherent with the mining industry, unexpected regulatory changes, delays in the completion of critical activities and other risks inherent to the Company’s activities and other risks more fully described in Candente Copper’s Annual Information Form filed with the Securities Commissions of the provinces of Alberta, British Columbia and Ontario which is available on SEDAR at www.sedar.com
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