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Meridian Mining — Audit Report / Information 2021
Apr 15, 2022
47387_rns_2022-04-14_d5cb43de-b0e5-4726-9f68-c8c73ed686f6.pdf
Audit Report / Information
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MERIDIAN MINING
MERIDIAN MINING UK SOCIETAS
(formerly Meridian Mining S.E.)
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
FOR THE YEARS ENDED DECEMBER 31, 2021 AND DECEMBER 31, 2020
KPMG
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto, ON M5H 2S5
Canada
Tel 416-777-8500
Fax 416-777-8818
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Meridian Mining UK Societas
OPINION
We have audited the consolidated financial statements of Meridian Mining UK Societas (the Entity), which comprise:
- the consolidated statements of financial position as at December 31, 2021 and December 31, 2020
- the consolidated statements of loss and other comprehensive loss for the years ended December 31, 2021 and December 31, 2020
- the consolidated statements of changes in equity (deficit) for the years ended December 31, 2021 and December 31, 2020
- the consolidated statements of cash flows for the years ended December 31, 2021 and December 31, 2020
- and notes to the consolidated financial statements, including a summary of significant accounting policies
(Hereinafter referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2021 and December 31, 2020, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).
BASIS FOR OPINION
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the Audit of the Financial Statements" section of our auditors' report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
© 2022 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
KPMG
Meridian Mining UK Societas
April 14, 2022
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
MATERIAL UNCERTAINTY RELATED TO GOING CONCERN
We draw attention to Note 1 in the financial statements, which indicates that the Company incurred a loss of $37,582,080 during the year ended December 31, 2021 (2020 $7,532,260). The Company has working capital of $7,214,576 on December 31, 2021 (2020 $3,361,274). The Company's continuation as a going concern is dependent on obtaining additional financing.
As stated in Note 1 in the financial statements, these events or conditions, along with other matters as set forth in Note 1 in the financial statements, indicate that material uncertainties exist that cast significant doubt on the Entity's ability to continue as a going concern.
Our opinion is not modified in respect of this matter.
OTHER INFORMATION
Management is responsible for the other information. Other information comprises:
- the information included in Management's Discussion and Analysis filed with the relevant Canadian Securities Commissions.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management's Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors' report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors' report.
We have nothing to report in this regard.
RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
KPMG
Meridian Mining UK Societas
April 14, 2022
In preparing the financial statements, management is responsible for assessing the Entity's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity's financial reporting process.
AUDITORS' RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion.
Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
- Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
- The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
KPMG
Meridian Mining UK Societas
April 14, 2022
- Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Entity to cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
- Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
- Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors' report is Daniel Gordon Ricica.
Toronto, Canada
April 14, 2022
MERIDIAN MINING UK SOCIETAS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Expressed in United States dollars)
| As at December 31, 2021 | As at December 31, 2020 | |
|---|---|---|
| ASSETS | ||
| Current | ||
| Cash | $ 9,059,798 | $ 4,516,136 |
| Prepaid expenses and other assets (Note 4) | 321,755 | 183,108 |
| Inventory | - | 11,010 |
| 9,381,553 | 4,710,254 | |
| Property, plant and equipment (Note 5) | 748,063 | 220,701 |
| Exploration and evaluation assets (Note 6) | 6,057,012 | 6,008,048 |
| Total assets | $ 16,186,628 | $ 10,939,003 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
| Current | ||
| Accounts payable and accrued liabilities (Note 7) | $ 912,953 | $ 510,563 |
| Provisions (Note 9) | 410,218 | 422,950 |
| Taxes and fees payable (Note 8) | 843,806 | 415,467 |
| 2,166,977 | 1,348,980 | |
| Provisions (Note 9) | 98,860 | 157,418 |
| Taxes and fees payable (Note 8) | 95,652 | 1,177,192 |
| Warrant Liability (Note 11) | 17,540,791 | 5,031,394 |
| 19,902,280 | 7,714,984 | |
| Equity (Deficit) | ||
| Share capital (Note 11) | 1,814,863 | 1,184,781 |
| Share premium (Note 11) | 39,553,231 | 12,021,458 |
| Reserves (Note 11) | 68,908,478 | 66,427,924 |
| Deficit | (113,992,224) | (76,410,144) |
| Total equity (Deficit) | (3,715,652) | 3,224,019 |
| Total liabilities and equity | $ 16,186,628 | $ 10,939,003 |
Nature of business and going concern (Note 1)
Commitments and contingencies (Note 18)
Subsequent events (Note 19)
On behalf of the Board on April 14, 2022:
"Charles Riopel" Director "Adrian McArthur" Director
The accompanying notes are an integral part of these consolidated financial statements.
Page | 1
MERIDIAN MINING UK SOCIETAS
CONSOLIDATED STATEMENTS OF LOSS AND OTHER COMPREHENSIVE LOSS
(Expressed in United States dollars)
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Revenues | $ - | $ 241,019 |
| Cost of sales | - | (253,158) |
| - | (12,139) | |
| Operating expenses | ||
| Exploration and evaluation expenses (Note 13) | 3,533,194 | 443,703 |
| General and administration expenses (Note 14) | 1,943,763 | 1,218,999 |
| Professional fees | 534,026 | 592,370 |
| Share-based payments (Note 11) | 3,027,640 | 49,266 |
| Care and maintenance expenses (Note 9 (i)) | 345,970 | 393,377 |
| Gain on Sale of property, plant and equipment | (18,551) | (222,918) |
| Depreciation | 48,025 | 79,229 |
| Total operating expenses | (9,414,067) | (2,554,026) |
| Loss from operations | (9,414,067) | (2,566,165) |
| Finance items | ||
| Mark-to-market revaluation of warrants (Note 11) | (28,564,576) | (3,940,613) |
| Loss on extinguishment of debt | - | (244,636) |
| Gain on derivative liability | - | 351,270 |
| Finance income (expense) (Note 10) | 582,134 | (597,976) |
| Foreign exchange loss | (185,571) | (557,140) |
| Total finance expenses | (28,168,013) | (4,989,095) |
| Loss for the year before taxes | (37,582,080) | (7,555,260) |
| Income tax (expense) recovery (Note 15) | - | 23,000 |
| Loss for the year | (37,582,080) | (7,532,260) |
| Other comprehensive loss | ||
| Items that may be reclassified to loss | ||
| Foreign currency translation | (435,823) | (1,559,969) |
| Other comprehensive loss, net of taxes | $ (38,017,903) | $ (9,092,229) |
| Basic and diluted loss per common share | $ (0.30) | $ (0.09) |
| Weighted average number of basic and diluted shares outstanding | 126,057,471 | 103,788,425 |
The accompanying notes are an integral part of these consolidated financial statements.
MERIDIAN MINING UK SOCIETAS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES | ||
| Loss for the year | $ (37,582,080) | $ (7,532,260) |
| Items not affecting cash: | ||
| Accrued finance expense | - | 415,732 |
| Depreciation | 48,025 | 79,229 |
| Mark-to-market revaluation of warrants (Note 11) | 28,564,576 | 3,940,613 |
| Gain on sale of property, plant and equipment | (18,551) | (222,918) |
| Share-based payments (Note 11) | 3,027,640 | 49,266 |
| Loss on extinguishment of debt (Note 10) | - | 244,636 |
| Gain on derivative liability | - | (351,270) |
| Unrealized foreign exchange | 185,571 | 550,900 |
| Reversal of taxes and fees payables (Note 8 (ii)) | (688,065) | 329,772 |
| Changes in non-cash working capital items: | ||
| Accounts receivable | - | 717,860 |
| Prepaid expenses and other assets | (164,048) | (9,055) |
| Inventory | 10,249 | 205,591 |
| Accounts payable and accrued liabilities | 306,922 | (467,980) |
| Provisions | (33,115) | (147,504) |
| Taxes and fees payable (Note 8) | (150,855) | - |
| Net cash used in operating activities | (6,493,731) | (2,197,388) |
| CASH FLOWS FROM INVESTING ACTIVITIES | ||
| Acquisition of exploration and evaluation assets | (351,521) | (25,000) |
| Additions to property, plant and equipment | (608,699) | - |
| Proceeds from sale of property, plant and equipment | 18,551 | 277,632 |
| Net cash used in investing activities | (941,669) | 252,632 |
| CASH FLOWS FROM FINANCING ACTIVITIES | ||
| Proceeds from private placement financing, net of costs | 8,004,641 | 5,771,724 |
| Proceeds from the exercise of stock options | 9,933 | 36,574 |
| Proceeds from the exercise of warrants, agent’s compensation options and agent’s compensation options warrants | 3,980,839 | 5,501 |
| Net cash provided by financing activities | 11,995,413 | 5,813,799 |
| Effect of foreign exchange on cash | (16,351) | 116,771 |
| Net change in cash | 4,543,662 | 3,985,814 |
| Cash, beginning of the year | 4,516,136 | 530,322 |
| Cash, end of the year | $ 9,059,798 | $ 4,516,136 |
The accompanying notes are an integral part of these consolidated financial statements.
Page | 3
MERIDIAN MINING UK SOCIETAS
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(Expressed in United States dollars)
| Share Capital | Reserves | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Share Capital | Share Premium | Reserves | Share based payments | Warrant reserve | Other reserves | Accumulated other comprehensive loss | Deficit | Total Equity | |
| Balance, January 1, 2020 | 163,822,421 | 1,775,220 | 58,493,031 | 462,185 | 2,089,882 | 13,447 | – | (12,025,433) | (68,877,884) | (18,069,552) |
| Share-based payments | – | – | – | – | 49,266 | – | – | – | 49,266 | |
| Shares issued on private placement | 68,343,166 | 797,207 | 4,048,640 | – | – | – | – | – | 4,845,847 | |
| Share issuance costs | – | – | (316,682) | – | – | 146,002 | – | – | – | (170,680) |
| Exercise of stock options | 700,000 | 8,110 | 49,091 | – | (20,627) | – | – | – | – | 36,574 |
| Exercise of warrants | 65,000 | 787 | 10,490 | – | – | – | – | – | – | 11,277 |
| Debt settlement transactions, SGRFIV and TSG (Note 10 and 11) | 11,869,142 | 135,105 | 2,750,636 | – | – | – | 22,727,774 | – | – | 25,613,515 |
| Share surrender (Note 11) | (141,011,304) | (1,531,648) | (53,013,749) | – | – | – | 54,545,397 | – | – | – |
| Comprehensive loss for the period | – | – | – | – | – | – | – | (1,559,969) | (7,532,260) | (9,092,228) |
| Balance, December 31, 2020 | 103,788,425 | $1,184,781 | $12,021,457 | $462,185 | $2,118,521 | $159,449 | $77,273,171 | $(13,585,402) | $(76,410,144) | $3,224,019 |
| Share-based payments (Note 11) | – | – | – | – | 3,027,640 | – | – | – | – | 3,027,640 |
| Shares issued on private placement | 14,835,000 | 172,711 | 8,229,429 | – | – | – | – | – | – | 8,402,140 |
| Share issuance costs | – | – | (397,499) | – | – | – | – | – | – | (397,499) |
| Exercise of stock options | 137,287 | 1,565 | 16,505 | – | (8,137) | – | – | – | – | 9,933 |
| Exercise of warrants | 35,445,065 | 421,466 | 19,400,105 | – | – | – | – | – | – | 19,821,571 |
| Exercise of agent’s compensation options) | 2,904,680 | 34,340 | 283,234 | – | – | (103,127) | – | – | – | 214,447 |
| Comprehensive loss for the period | – | – | – | – | – | – | – | (435,823) | (37,582,080) | (38,017,903) |
| Balance, December 31, 2021 | 157,110,457 | 1,814,863 | 39,553,231 | 462,185 | 5,138,025 | 56,322 | 77,273,171 | (14,021,225) | (113,992,224) | (3,715,652) |
The accompanying notes are an integral part of these consolidated financial statements.
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
1. NATURE OF BUSINESS AND GOING CONCERN
Meridian Mining UK Societas, formerly Meridian Mining S.E., (the “Company” or “Meridian”) was formed in Amsterdam, Netherlands on December 16, 2013. Effective August 15, 2017, the Company transferred its official seat from the Netherlands to London, United Kingdom. Effective April 4, 2022, the Company’s shares are listed on the Toronto Stock Exchange (“TSX”) under the symbol MNO. The Company is currently engaged in the exploration, development of mineral deposits in Brazil, through its subsidiaries, Meridian Mineração Jaburi S.A. (“Jaburi”) and Rio Cabaçal Mineração Ltda (“Rio Cabaçal”). On December 31, 2020, the Company was converted under Articles AA1 and AAA1 of the EC Regulation on the European Public Limited-Liability company (Amended Etc.) (Eu Exit) Regulations 2018 to a United Kingdom Societas under the name of Meridian Mining UK Societas. The Company’s head office is located at 6th Floor, 65 Gresham Street, London, EC2V 7NQ, United Kingdom.
Going Concern
These consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business as they come due into the foreseeable future. The Company incurred a loss of $37,582,080 during the year ended December 31, 2021 (2020 $7,532,260). The Company has working capital of $7,214,576 on December 31, 2021 (2020 $3,361,274). During the year ended December 31, 2021, the Company raised gross proceeds of $8,402,140 (CAD 10,384,500) pursuant to a private placement (Note 11).
To continue as a going concern, the Company will need to secure new funding. The ability of the Company to arrange additional financing in the future will depend, in part, on the prevailing capital market conditions and exploration successes. There can be no assurance that these initiatives will be successful, or sufficient financing, will be available. These material uncertainties cast significant doubt as to the ability of the Company to meet its business plan and obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.
These financial statements do not include adjustments to the recoverability and classifications of recorded assets and liabilities and related expenses that might be necessary should the Company be unable to continue as a going concern. Such adjustments could be material.
2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance and basis of presentation
These consolidated financial statements, including comparatives, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
Basis of presentation
The consolidated financial statements have been prepared on a historical cost basis except for certain financial instruments classified as financial instruments at fair value through profit or loss, which are stated at fair value. The financial statements of the Company are presented in United States dollars, which is the functional currency of the Company. References to “$”, “US$”, “dollars”, or “USD” are to US dollars, references to “C$” or “CAD” are to Canadian dollars, and references to “R$” or “BRL” are to Brazilian Reals.
Principles of consolidation
The consolidated financial statements incorporate the assets and liabilities and revenues and expenses of the Company's subsidiaries. Subsidiaries are all entities controlled by the Company. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with an investee and has the ability to affect those returns through its power over the investee. Subsidiaries are included in the consolidated financial statements from the date control is obtained until the date control ceases. All intercompany balances, transactions, income, expenses, profits and losses, including unrealized gains and losses have been eliminated on consolidation.
These consolidated financial statements include the following 100% held entities as December 31, 2021 and December 31, 2020:
| Name of subsidiary: | Jurisdiction of Incorporation | Functional Currency |
|---|---|---|
| Ferrometals Management Services Canada Inc | Canada | USD |
| Meridian Mineração Jaburi S.A. | Brazil | BRL |
| Cancana Resources Corp (“Cancana”). | Canada | CAD |
| Rio Cabaçal Internacional Ltda¹ | Brazil | BRL |
| Rio Cabaçal Mineração Ltda² | Brazil | BRL |
¹Previously Cabaçal Internacional Ltda.
²Previously Cabaçal Mineração Ltda.
Accounting policies of subsidiaries are updated where necessary to ensure consistency with the policies adopted by the consolidated group. Acquisitions of subsidiaries under common control before and after the transaction are recorded at historical carrying value. Subsidiaries under common control are consolidated from the date of acquisition by the ultimate controlling entity.
Foreign currency translation
The functional currency of an entity is the currency of the primary economic environment in which the entity operates. The presentation currency of these consolidated financial statements is the United States dollar, which is also the functional currency of the Company.
Transactions in foreign currencies are translated to the functional currency of the entity at the exchange rate in existence at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated at the period end date exchange rates.
The results and financial position of entities in the group that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
- Assets and liabilities, including goodwill, for each statement of financial position presented are translated at the closing rate of the period reported;
- Income and expenses for each statement of loss and comprehensive loss presented are translated at average exchange rates for the period; and
- All resulting exchange differences are recognized in accumulated other comprehensive loss which is included in the reserves on the consolidated statement of financial position.
Page | 6
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
Revenue recognition
Revenue is recognized when a customer obtains control of the promised asset and the Company satisfies its performance obligation. Revenue is allocated to each performance obligation. The Company considers the terms of the contract in determining the transaction price. The transaction price is based upon the amount the Company expects to be entitled to in exchange for the transferring of promised goods. The Company earned revenue from customers related to the sale of manganese ore.
Control is achieved when a product is delivered to the customer, we have a present right to payment for the product, significant risks and rewards of ownership have transferred to the customer according to contract terms and there is no unfulfilled obligation that could affect the customer's acceptance of the product. In general, control over manganese ore from export sales is transferred to the customer and revenue is recognized when the material is assayed and loaded at the Brazilian port and for local sales, control over the manganese ore is transferred when the ore is loaded onto trucks at the stockpile warehouse.
Production costs
Production costs consists of costs of conversion including the costs of extraction, conversion, direct labor and production overheads included in the measurement of inventory sold during the period. Period costs, such as standby and re-commissioning costs, are not allocated to inventory but charged directly to operating expenses.
Financial instruments
Financial assets
The Company classifies its financial assets in the following categories: at fair value through profit and loss ("FVTPL"), at fair value through other comprehensive income (FVTOCI"), or at amortized cost. The determination of the classification of financial assets is made at initial recognition.
The Company's accounting policy for each of the categories is as follows:
Financial assets at FVTPL: Financial assets carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statement of (loss) income. Realized and unrealized gains and losses arising from changes in the fair value of financial assets held at FVTPL are included in the statement of (loss) income in the period.
Financial assets at FVTOCI: Financial assets carried at FVTOCI are recorded at fair value and transaction costs are expensed in the statement (loss) income. Realized and unrealized gains and losses arising from changes in fair value of the financial assets held at FVTOCI are included in other comprehensive (loss) income in the period.
Financial assets at amortized cost: A financial asset is measured at amortized cost if the objective of the business model is to hold the financial asset for the collection of contractual cash flows, and the asset's contractual cash flows are comprised solely of payments of principal and interest. They are classified as current assets or non-current assets based on their maturity date and are initially recognized at fair value and subsequently carried at amortized cost less any impairment.
Impairment of financial assets at amortized cost: The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost.
Page | 7
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
The following table shows the classification of the Company’s financial assets:
| Financial asset | Classification |
|---|---|
| Cash | Amortized cost |
Financial liabilities
The Company classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was incurred. The Company's accounting policy for each category is as follows:
Fair value through profit or loss - This category comprises derivatives or liabilities acquired or incurred principally for the purpose of selling or repurchasing in the near term. They are carried in the statement of financial position at fair value with changes in fair value recognized in the statement of loss and other comprehensive loss.
Amortized Cost - This category includes accounts payable and accrued liabilities, and loans payable, all of which are recognized at amortized cost using the effective interest method.
Transaction costs in respect of financial instruments at fair value through profit or loss or other comprehensive income are recognized in the statement of operations and comprehensive loss immediately, while transaction costs associated with all other financial instruments are included in the initial measurement of the financial instrument.
The following table shows the classification of the Company’s financial liabilities:
| Financial liability | Classification |
|---|---|
| Accounts payable and accrued liabilities | Amortized cost |
| Loans payable | Amortized cost |
| Warrant liability | FVTPL |
| Financial liability | FVTPL |
Exploration and evaluation assets
Pre-exploration costs are expensed as incurred. Costs directly related to the acquisition of exploration and evaluation assets are capitalized provided that the legal rights to explore the mineral properties are acquired or obtained. Exploration and evaluation expenditures are subsequently expensed as incurred. When the technical feasibility and commercial viability of a mineral resource have been demonstrated and a development decision by the board has been made, the capitalized costs of the related property are transferred to mining development costs and any subsequent expenditures are capitalized as mine development costs.
The amounts shown for mineral properties do not necessarily represent present or future values. Their recoverability is dependent upon the discovery of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete the development, and future profitable production or proceeds from the disposition thereof.
The carrying values of capitalized amounts are reviewed when indicators of impairment are present. If it is determined that capitalized exploration and evaluation costs are not recoverable, or the property is abandoned or management has determined an impairment in value, the property is written down to its recoverable amount.
Property, plant and equipment
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials, labor and other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and capitalized borrowing costs.
Page | 8
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
Property, plant and equipment is depreciated on a straight-line basis.
| Vehicles | 5 years |
|---|---|
| Machinery and Equipment | 10 years |
| Office furniture, communication and computer equipment | 10 years |
| Buildings | 10 years |
Depreciation commences when the asset is available for its intended use. The residual values and useful lives of the assets are reviewed, and adjusted if appropriate, at the end of each reporting period. Gains and losses on disposals are determined by comparing proceeds with carrying amounts.
Impairment of long-lived assets
At the end of each reporting period the Company’s assets are reviewed to determine whether there is any indication that the carrying values of the assets may not be recoverable. If such an indication of impairment exists, an impairment loss is calculated as the amount by which the carrying amount of the CGU exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs of disposal or value in use (the discounted present value of future cash flows). For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separate identifiable cash flows (cash generating units). Any prior impairment loss (excluding impairment losses related to goodwill) would be reversed in future periods if the conditions that gave rise to the original impairment no longer apply. The impairment reversal would be limited to the revised estimate of its recoverable amount, not to exceed the carrying amount that would have been determined net of depreciation had no impairment loss been recognized for the asset in prior years.
Provisions
Provisions for legal claims and constructive obligations are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.
Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognized as finance expense.
Environmental provisions
Mining, processing, development and exploration activities are subject to various laws and regulations governing the protection of the environment. An environmental provision is recognized in the period when a legal or constructive obligation originates. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessment of the time value of money and the risks specific to the liability where the impact of discounting is material. A corresponding increase to the carrying value of the related property is recorded and depreciated on the same basis as the related asset. The majority of the restoration and rehabilitation activities of the Company include the restoration and re-vegetation of extraction areas; as extraction sites are short-term in nature, these related costs are allocated to inventory in the period recognized. Where appropriate, the provision is accreted over time to its expected future settlement value.
Environmental provisions are reviewed at every reporting period. The liability is adjusted for changes in estimates in costs and timing of work to be performed. Changes in the discount rate and inflation rates are recognized each reporting period, with the changes recognized as additions to or reductions from the liability and a corresponding addition to or reduction from property, plant and equipment or profit and loss where the changes relate to closed mine sites. Changes in estimates of environmental provisions also include changes due to movement in the exchange rates. Any reduction to the asset may not exceed the carrying value of that asset.
Page | 9
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
Share-based payments
The Company accounts for stock options granted to directors, officers, employees and non-employees at fair value. The fair value of the options at the date of the grant is determined using the Black-Scholes option pricing model and share-based compensation is accrued and charged to operations, with an offsetting credit to share-based payment reserve, over the vesting periods using a graded vesting model. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest.
When the stock options are exercised, the applicable amounts of equity reserves are transferred to share capital.
Current and deferred income taxes
Income tax expense comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity. Current tax expense is the expected tax payable on taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.
Deferred tax is recorded for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Temporary differences are not provided for relating to goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable loss, nor differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the statement of financial position date.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered the deferred tax asset is not set up.
New accounting standards issued but not yet effective
The following are new pronouncements approved by the IASB. These new standards are not yet effective and have not been applied in preparing these financial statements, however, they may impact future periods:
IAS 16 Property, Plant and Equipment
On May 14, 2020, IASB issued amendments to IAS 16 Property, Plant and Equipment requiring proceeds from selling items before the related item of property, plant and equipment is available for use to be recognized in profit or loss, together with the costs of producing those items. The amendment is effective for annual periods beginning on or after January 1, 2022.
The Company assessed the impacts of the amendments to the IAS 16 Property, Plant and Equipment standard and concluded such will not give rise to changes to the Company’s consolidated financial statements.
IAS 12 Income Taxes
On May 7, 2021, IASB issued amendments to IAS 12 which require companies to recognize deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The amendments are effective for annual reporting periods beginning on or after 1 January 2023.
The impacts of the above amendments to IAS 12 on the Company’s consolidated financial statements have not yet been determined.
Page | 10
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The preparation of these consolidated financial statements requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its judgments and estimates in relation to assets, liabilities and expenses. Management uses historical experience and various other factors it believes to be reasonable under the given circumstances as the basis for its judgments and estimates. Actual outcomes may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Certain estimates and judgments, such as those related to the recoverability of property, plant and equipment, and exploration and evaluation assets, deferred tax assets and liabilities, depreciation and remaining useful life of assets, and disclosure of contingencies depend on subjective or complex judgments about matters that may be uncertain. Changes in those estimates could materially impact these consolidated financial statements.
Material sources of estimation uncertainty include:
Provisions and recognition of a liability for loss contingencies
Judgments are required to determine if a present obligation exists at the end of the reporting period by considering all available evidence, including the opinion of experts. The most significant provisions that require judgment to determine if a present obligation exists are contingent losses related to claims and asset retirement obligation. This includes an assessment of how to account for obligations based on the most recent closure plans and environmental regulations.
Income taxes
In assessing the probability of realizing income tax assets recognized, management makes estimates related to expectations of future taxable income, applicable tax opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified. Where applicable tax laws and regulations are either unclear or subject to ongoing varying interpretations, it is reasonably possible that changes in these estimates can occur that materially affect the amounts of income tax assets recognized. At the end of each reporting period, the Company reassesses unrecognized income tax assets.
The Company's operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with tax authorities in various jurisdictions and resolution of disputes arising from tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues based on its estimate of whether, and the extent to which, additional taxes will be due. The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If the estimate of tax liabilities proves to be greater than the ultimate assessment, a tax benefit would result.
Share based compensation and mark-to-market revaluation of warrants and embedded derivatives
The Company utilizes the Black-Scholes Option Pricing Model ("Black-Scholes") to estimate the fair value of stock options granted to directors, officers, employees, and consultants and for the mark-to-market revaluation of share purchase warrants. The use of Black-Scholes requires management to make various estimates and assumptions that impact the value assigned to the stock options including the forecast future volatility of the stock price, the risk-free interest rate, dividend yield and the expected life of the stock options.
Page | 11
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
The Company’s financial liability measured at fair value through profit and loss (“FVTPL”) requires estimates of valuation inputs including extended hold period discounts, risk-free interest rates and the probability of and the timing of future financing transactions.
Any changes in these assumptions could have a material impact on the share-based compensation calculation value and mark-to-market valuation changes of derivatives and financial liabilities measured at FVTPL. The most significant estimates relate to volatility, hold period discounts and the assessment of the probability of future financing targets being met. Expected future volatility can be difficult to estimate as the Company has had limited history and historical volatility is not necessarily indicative of future volatility.
Critical management judgments:
Recoverability of exploration and evaluation assets
The Company capitalizes the acquisition costs related to its exploration and evaluation assets. This policy requires management to make certain judgments about future events and circumstances. Any such judgments may change as new information becomes available. If, after having capitalized the costs, a judgment is made that recovery of the costs is unlikely, the relevant capitalized amount will be written off to profit and loss.
The recoverability of amounts shown for exploration and evaluation assets is dependent on the existence of economically recoverable reserves, the ability to obtain financing to complete the development of such reserves and meet obligations under various agreements, and the success of future operations or dispositions. If a project does not prove viable, all unrecoverable costs associated with the project net of any related existing impairment provisions are written down to its recoverable amount.
4. PREPAID EXPENSES AND OTHER ASSETS
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Current: | ||
| Tax credits | $ 17,748 | $ 19,329 |
| Tax recovery | 24,000 | 24,000 |
| Prepaid expenses and advances | 280,007 | 139,779 |
| Total | $ 321,755 | $ 183,108 |
The Company is required to pay certain taxes in Brazil that are based on purchases of consumables and property, plant and equipment. These taxes are recoverable from the Brazilian tax authorities through various methods, including as a cash refund or as a credit against current taxes payable.
Page | 12
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
- PROPERTY, PLANT AND EQUIPMENT
| Cost: | Land | Vehicles, machinery and equipment | Office furniture and other | Total |
|---|---|---|---|---|
| Balance, January 1, 2020 | $ 93,848 | $ 1,238,278 | $ 188,709 | $ 1,520,835 |
| Disposals | - | (600,345) | (68,038) | (668,383) |
| Currency adjustment | (21,182) | (269,233) | (41,431) | (331,846) |
| Balance, December 31, 2020 | 72,666 | 368,700 | 79,240 | 520,606 |
| Additions | - | 586,578 | 22,121 | 608,699 |
| Currency adjustment | (4,916) | (44,172) | (6,085) | (55,173) |
| Balance, December 31, 2021 | $ 67,750 | $ 911,106 | $ 95,276 | $ 1,074,132 |
| Accumulated depreciation: | Land | Vehicles, machinery and equipment | Office furniture and other | Total |
| --- | --- | --- | --- | --- |
| Balance, January 1, 2020 | - | $(934,821) | (130,949) | (1,065,770) |
| Additions | - | (45,706) | (12,634) | (58,340) |
| Disposals | - | 545,631 | 47,149 | 592,780 |
| Currency adjustment | - | 202,458 | 28,967 | 231,425 |
| Balance, December 31, 2020 | - | $(232,438) | (67,467) | (299,905) |
| Additions | - | (42,270) | (5,755) | (48,025) |
| Currency adjustment | - | 17,111 | 4,750 | 21,861 |
| Balance, December 31, 2021 | $ - | $(257,597) | $(68,472) | $(326,069) |
| Net book value: | Land | Vehicles, machinery and equipment | Office furniture and other | Total |
| --- | --- | --- | --- | --- |
| December 31, 2020 | $ 72,666 | $ 136,262 | $ 11,773 | $ 220,701 |
| December 31, 2021 | $ 67,750 | $ 653,509 | $ 26,804 | $ 748,063 |
- EXPLORATION AND EVALUATION ASSETS
Summary of exploration and evaluation assets:
| Balance as at January 1, 2020 | $ 7,700,032 |
|---|---|
| Additions | |
| Option payment – Cabaçal project | 25,000 |
| Foreign currency adjustment | (1,716,984) |
| Balance as at December 31, 2020 | 6,008,048 |
| Additions: | |
| Option payment – Cabaçal project | 275,000 |
| Option payment – Mirante da Serra project | 13,913 |
| Acquisition of new areas – Cabaçal project | 149,753 |
| Acquisition of new areas – Espigão project | 10,435 |
| Foreign currency adjustment | (400,137) |
| Balance as at December 31, 2021 | $ 6,057,012 |
Page | 13
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
Title to mineral property interests
Title to mineral property interests involves certain inherent risks due to the difficulties of determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of many mineral claims. Title to mineral properties is also subject to the laws and regulations in Brazil, which can be subject to change and may impact the Company's title to its mineral properties. Jaburi and Rio Cabaçal have investigated title to all of its mineral properties and, to the best of its knowledge, title to all of its interests are in good standing. However, this should not be construed as a guarantee of title. The concessions may be subject to prior claims, agreements or transfers and rights of ownership may be affected by undetected defects.
Espigão Project, Rondônia
In connection with the loan settlements described in Note 10, the Company issued a net smelter return royalty to SGRFIV, as follows:
- 3% on Espigão polymetallic;
- 3% Mirante da Serra manganese;
- 3% Ariquemes tin; and
- 100% of the royalty on each project can be bought back for $2,000,000 for each project or $6,000,000 for all 3 projects. The Company has determined that there is currently no value related to this buy-back feature.
During the year ended December 31, 2021, the Company acquired new areas adjacent to the Espigão Project through the Brazilian National Mining Agency’s (“ANM”, Agência Nacional de Mineração) auction process for a total of $10,435.
Mirante da Serra, Rondônia
On July 24, 2019 the Company entered into an option agreement to acquire a 100-per-cent interest in the Mirante da Serra manganese project, in Rondônia, Brazil. Following a sequential process related to project and administrative milestone achievements, the Company may at its election, acquire the project for a cumulative consideration of 1,140,000 Brazilian reals (approximately $204,500). The Company is required to make staged payments as follows:
- 40,000 Brazilian reals upon signing (paid);
- 75,000 Brazilian reals upon approval of the final report by the ANM and title transfer to Meridian (paid);
- 125,000 Brazilian reals on the Meridian board of directors' approval of a positive Economic Mining Plan (Plano de Aproveitamento Econômico (“PAE”));
- 150,000 Brazilian reals following the ANM approval of PAE;
- 250,000 Brazilian reals one-year anniversary of ANM approval; and
- 500,000 Brazilian reals upon grant and publication of a valid mining licence (Lavra).
The project is subject to a 0.5% NSR, which the Company may purchase back for one million Brazilian reals.
Cabaçal Project, Mato Grosso
On November 6, 2020 the Company entered into a definitive Purchase Agreement to acquire a 100% beneficial interest in the Cabaçal Copper-Gold Project (“Cabaçal”) in the state of Mato Grosso, Brazil, for a total consideration of $8,750,000 plus, at the option of the vendors, 4,500,000 Meridian shares or CAD 1,350,000, from two private Brazilian companies, Prometálica Mineração Ltda. and IMS Engenharia Mineral Ltda (the “Vendors”). During the year ended December 31, 2021, the Company changed the terms of the second payments and assigned the Purchase Agreement related to the Cabaçal project to its subsidiary Rio Cabaçal and, after the year end, changed the terms of the third payment (Note 19). The Company is required to make staged payments based on milestones achieved as follows:
- $25,000 payable within 5 days of the execution of the option agreement (paid);
- $275,000 payable by October 15, 2021, as the transfers of the mineral rights to Rio Cabaçal Mineração Ltda were filed with ANM (paid);
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
- $1,750,000 payable on August 1, 2023, unless accelerated upon completion of an equity financing for gross proceeds of at least $2,500,000, provided completion of successful drilling program and historical geophysics database validation (Note 19);
- 1,000,000 common shares in the capital of the Company or CAD 300,000, at the option of the Vendors, subject to completion of technical report on the estimate of the resource in accordance with National Instrument 43-101;
- $1,850,000 plus, at the option of the vendors, 1,500,000 common shares in the capital of the Company or CAD 450,000, within 9 months of the fourth payment and subject to the successful completion of the positive economic feasibility study;
- $2,250,000 payable plus, at the option of the vendors, 2,500,000 common shares in the capital of the Company or CAD 600,000, up to 30 days after the Installation License (“LI”) of the Cabaçal Project plant is issued by the competent authorities; and
- $2,600,000 payable within 45 days after the signature by the Company of the definitive financing contracts for the construction of the Cabaçal Project plant.
There is a historic 1.5% NSR associated with the Santa Helena project, which is part of Cabaçal. Cabaçal is located within the buffer zone of Brazil’s frontier (“Border Buffer Zone”). The Border Buffer Zone is a political protection zone and not an economic exclusion zone. The terms of the proposed Agreement gives the Company the option, under certain conditions, to return the mineral rights to the Vendors on a “as is” basis, without any obligation to making any outstanding payments and to complying with other obligations.
During the year ended December 31, 2021, the Company acquired new areas adjacent to the Cabaçal project through the ANM’s auction process for a total of $149,753.
- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Trade payables | $ 612,795 | $ 363,873 |
| Payroll liabilities | 146,130 | 52,398 |
| Other liabilities | 154,028 | 94,292 |
| Total | $ 912,953 | $ 510,563 |
- TAXES AND FEES PAYABLE
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Current: | ||
| Taxes and fees payable (i) | $ 73,711 | $ 79,059 |
| Withholding taxes and other taxes related to debt restructuring (ii) | 704,990 | 292,532 |
| Other | 65,105 | 43,876 |
| 843,806 | 415,467 | |
| Non-Current: | ||
| Taxes and fees payable (i) | 95,652 | 177,046 |
| Withholding taxes and other taxes related to debt restructuring (ii) | - | 1,000,146 |
| 95,652 | 1,177,192 | |
| Total | $ 939,458 | $ 1,592,659 |
(i) Restructuring of Brazilian taxes and fees liabilities
During the year ended December 31, 2020, the Company enrolled in an instalment payment program on certain unpaid taxes and fees related to the year ended December 31, 2019. Under the program the Company will pay the outstanding taxes and fees, plus accrued penalties and interests, in equal instalments over a period of 36 to 60 months.
Page | 15
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
The status of each instalment program can be summarized as follow:
a) Brazilian social security taxes. The total taxes payable of $131,544 will be repaid in equal monthly instalments over 38 months, adjusted for inflation.
b) Brazilian ANM fees. The total fees payable of $37,819 will be repaid in equal monthly instalments over 13 months, adjusted for inflation.
As a result, the Company classified as long-term liabilities the amount of $95,652.
(ii) Withholding taxes and other taxes related to debt facilities
Certain taxes totalling $704,990 (December 31, 2020 - $1,292,678), including $nil (December 31, 2020 - $1,000,146) as long-term liability, were accrued in connection with the debt restructuring transactions described in Note 10. During the year ended December 31, 2021, the Company partially reversed the withholding taxes related to the Consolidated Facility Agreement with SGRFIV and, as a result, $688,065 was included as Finance income in the Consolidated Statement of Loss.
- PROVISIONS
| Environmental provision (i) | Other provisions (ii) | Total | |
|---|---|---|---|
| Balance, January 1, 2020 | $ 536,446 | $ 375,282 | $ 911,728 |
| Spent during the period | (196,048) | - | (196,048) |
| Accretion | 10,341 | - | 10,341 |
| Additions (reversals) during the year | 99,046 | (60,842) | 38,204 |
| Foreign currency adjustment | (119,596) | (64,261) | (183,857) |
| Balance, December 31, 2020 | $ 330,189 | $ 250,179 | $ 580,368 |
| Spent during the period | (320,949) | (11,131) | (332,080) |
| Accretion | 9,169 | - | 9,169 |
| Additions (reversals) during the year | 270,922 | 18,874 | 289,796 |
| Foreign currency adjustment | (20,997) | (17,178) | (38,175) |
| Balance, December 31, 2021 | $ 268,334 | $ 240,744 | $ 509,078 |
| Represented by: | |||
| Long-term portion | $ 98,860 | $ - | $ 98,860 |
| Current portion | $ 169,474 | $ 240,744 | $ 410,218 |
(i) Environmental provision
Pursuant to Jaburi's operations in Brazil, the Company is required to rehabilitate its plant and colluvial mining sites, as well as remove all plant and equipment. A provision has been recognized for the requirements to rehabilitate these sites environmentally and decommission the plant and equipment. Environmental liabilities required to rehabilitate sites are considered short-term in nature and are included in care and maintenance expenses in the period recognized. Long-term environmental liabilities related to decommissioning the plants are recorded at the present value of the estimated costs, assuming risk-free discount rates of 7,92% (2020 - 5,87%) and are expected to be incurred up to the end of 2023.
(ii) Other provisions
Various legal and regulatory matters are outstanding from time to time due to the nature of the Company's operations. In the event that management's estimate of the future resolution of these matters changes, the Company will recognize the effects of the changes in its consolidated financial statements on the date such charges occur. As at December 31, 2021, the Company has recognized a provision of $240,744 (2020 - $250,179) representing management's best estimates of expenditures required to settle present obligations. The ultimate outcome or actual cost of settlement may vary materially from management estimates due to the inherent uncertainty regarding the Company's estimates.
Page | 16
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
10. LOANS PAYABLE
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Balance, beginning of year | $ - | $ 24,786,099 |
| Borrowings (b.(iv), b.(v)) | - | - |
| Interest expense | - | 473,189 |
| Debt settlement (a) | - | (25,259,288) |
| Balance, end of year | $ - | $ - |
| Represented by: | ||
| Current | $ - | $ - |
| Non-current | - | - |
| Total | $ - | $ - |
a. Standstill Agreement and Debt Settlements:
In March 2020, the Company signed amendment and stand-still agreements with Sentient Global Resources Fund IV L.P. ("SGRFIV") and The Sentient Group Limited ("TSG") extending the maturity date of all loans from March 31, 2020 to July 30, 2020 and reducing the interest rates to $0\%$ effective April 1, 2020.
Subsequent to entering into the amendment and stand-still agreements, the Company completed various restructuring transactions with SGRFIV and TSG resulting in the settlement of the amounts outstanding. Each of these restructuring transactions is considered to be a substantial modification of the previous debt agreement and therefore the prior carrying amounts have been settled and the consideration which was issued by the Company has been accounted for at fair value, with all transaction costs being expensed as incurred.
Debt settlement gains related to the restructuring transactions with SGRFIV have been recognized as a capital contribution in equity as SGRFIV owned in excess of $87\%$ of the Company's voting common shares at the time of the restructuring transactions and therefore was considered to be acting in the interests of a shareholder rather than a creditor. Debt settlement loss related to the restructuring transaction with TSG has been recognized in the consolidated statement of loss and other comprehensive loss as TSG was considered to be acting in the interests of a creditor. TSG was a third party when TSG entered into the restructuring transaction with the Company.
The following is a summary of the restructuring transactions at settlement dates:
| Carrying Value of Loan Extinguished | Form of consideration given | Valuation of consideration | Equity – Other reserves | Gain (loss) on Settlement | |
|---|---|---|---|---|---|
| SGRFIV: | |||||
| (i) | $ 10,861,715 | Consolidated facility agreement | $ 1,123,119 | $ 9,738,596 | $ - |
| (ii) | 10,500,000 | Common shares | 1,498,641 | 9,001,359 | - |
| (iii) | 3,166,027 | Net smelter royalties | - | 3,166,027 | - |
| 24,527,742 | 2,621,760 | 21,905,982 | - | ||
| TSG (iv) | 1,192,406 | Common shares | 1,437,043 | - | (244,636) |
Page | 17
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
(i) Consolidated Facility Agreement with SGRFIV
Effective on the closing of the July 15, 2020 private placement, the Company replaced debt of $10,343,397 in exchange for a non-interest bearing loan facility of CAD 14,674,177 maturing on March 31, 2022 (“Consolidated Facility”). Any outstanding balance of the loan facility at maturity will be converted into common shares of Meridian at a conversion rate of CAD 2.50 per common share. The Company can elect to settle the loan facility in cash at any time without premium and has the option to convert the loan to common shares at the same conversion rate prior to maturity if or when the Company meets a financing target of CAD 7,093,500 (this condition was met upon completion of the December 21, 2020 private placement (Note 11)). The Company had also agreed to assume SGRFIV’s future withholding tax obligation owing when the interest portion of the debt is ultimately settled with SGRFIV by Meridian. The Consolidated Facility Agreement is secured against certain inter-company loans between Meridian and its subsidiary Jaburi and all the shares of Jaburi.
The Consolidated Facility was determined to be a financial liability containing an embedded derivative asset related to the Company’s contingent share conversion option. The Company elected to measure the entire hybrid instrument at fair value through profit and loss. On initial recognition, the Consolidated Facility was recognized at fair value of $1,123,119. The difference between the carrying amount of the settled debt ($10,861,715) and the fair value of the loan facility was $9,738,596 and it was recognized as a capital contribution to other reserves. The withholding tax obligation related to the Consolidated Facility is $369,295 (December 31, 2020 – $1,000,146).
During the year ended December 31, 2020, the Company completed two non-brokered private placements with total proceeds of CAD 7,822,800. As result, the Consolidated Facility’s financing target of CAD 7,093,500 was met on the closing date of the December 21, 2020 financing (Note 11) resulting in the Company now having the option to settle the outstanding Consolidated Facility with a fixed number of common shares (5,869,670 common shares) at any time through to maturity. Upon effectiveness of the issuer conversion provision, the Company had a substantive right to settle the liability with their own shares and therefore the instrument was reclassified to equity. The fair value of the Consolidated Facility liability of $771,849 on December 21, 2020 was reclassified to other reserves as an equity instrument, resulting in no gain or loss on extinguishment.
The Company recorded a gain of $351,270 due to change in the fair value of the loan facility, measured at FVTPL, through to its reclassification to equity on December 21, 2020.
Subsequent to year end, the Company issued 5,869,670 common shares settling the Consolidated Facility as per the terms of the agreement and 509,795 common shares settling the withholding taxes. (Note 19).
(ii) Debt Conversion Agreement with SGRFIV
The Company issued 5,958,540 common shares on July 16, 2020 to SGRFIV to settle debt of $10,500,000. The transaction was accounted for as a debt extinguishment and the Company’s common shares were valued using the closing trading price of Meridian’s common shares on July 16, 2020, the date of debt extinguishment. The difference between the fair value of consideration and the carrying amount of the debt extinguished has been recognized as a capital contribution to other reserves, totalling $9,051,302.
(iii) Royalty Purchase and Debt Settlement Agreement and Net Smelter Royalty Agreement between Cancana and SGRFIV
Cancana issued to SGRFIV a 2% net smelter returns royalty (“Royalty”) to settle the debt of $3,166,027. The effective date of the extinguishment was June 2, 2020, the date Cancana received approval from TSX-V. The Company had also agreed to assume SGRFIV’s future withholding tax obligation owing when the interest portion of the obligation is paid to SGRFIV by Cancana. The fair value of the Royalty valued at inception was $nil and the difference from the carrying amount of the debt extinguished was recognized as a capital contribution to other reserves, totalling $3,166,027. As at December 31, 2020, the fair value royalty obligation was estimated to be $nil. The fair value of the estimated withholding tax payable is $221,725 (December 31, 2020 - $176,783).
Page | 18
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
In June 2020, the Company agreed to increase the Royalty from 2% to 3%. TSX-V approval for the increase was received on September 22, 2020.
The 3% net smelter returns royalty is over the following projects:
- 3% on Espigão polymetallic;
- 3% Mirante da Serra manganese;
- 3% Ariquemes tin; and
- 100% of the royalty on each project can be bought back for $2,000,000 for each project or $6,000,000 for all 3 projects. The Company has determined that there is currently no value related to this buy-back feature.
Certain conditions and restrictions apply to be followed by Jaburi and Cancana regarding the title maintenance and assignment of the projects contemplated in the Royalty Agreement.
(iv) Debt Conversion Agreement with TSG
The Company issued 5,910,602 common shares on July 16, 2020, at a conversion price of CAD 0.30 per common share, to The Sentient Group’s nominees to settle debt of $1,249,863. The Company had also agreed to assume TSG’s future withholding tax obligation owing when the interest portion of the obligation is paid to TSG by Meridian. The transaction was accounted for as a debt extinguishment, resulting in a loss on extinguishment of $244,636. The withholding tax payable is $71,821 (December 31, 2020 - $57,457).
11. SHAREHOLDERS’ EQUITY
Authorized Capital
As at December 31, 2021 the Company had authorized unlimited number of common shares with a par value of €0.01.($0.01)
Issued Capital
The Company has 157,110,457 (2020 – 103,788,425) issued and fully paid common shares.
Share capital
Share capital comprises the amount subscribed for at the par value.
Share premium
Share premium comprises the amount subscribed for share capital in excess of par value.
Shares issued
During the period ended December 31, 2021:
The Company issued 35,445,065 common shares for cash proceeds of $3,766,393 pursuant to the exercise of warrants.
The Company issued 2,904,680 common shares for cash proceeds of $214,447 pursuant to the exercise of agent’s compensation units and agent’s compensation options warrants; the Company reallocated $103,127 of warrant reserve to share capital and share premium in connection with the exercise of these agent’s compensation units.
The Company issued 137,287 common shares for cash proceeds of $9,933 pursuant to the exercise of stock options at the exercise price of CAD 0.07 and CAD 0.10 per common share.
Page | 19
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
The Company issued 14,835,000 common shares for cash proceeds of $8,402,140 pursuant to the Private Placement at the share price of CAD 0.70 per common share.
Private Placement
On October 19, 2021, the Company completed a brokered private placement of 14,835,000 common shares at a subscription price of CAD 0.70 per common share, for aggregate gross proceeds of $8,402,140 (CAD 10,384,500). The Company incurred other share issuance costs of $397,499 on this private placement.
During the year ended December 31, 2020:
On July 15, 2020, the Company completed a non-brokered private placement of 46,766,666 units at a price of CAD 0.075 per Unit, for gross proceeds of CAD 3,507,500 ($2,586,270). Each unit consists of one common share and one non-transferable common share purchase warrant. Each common share purchase warrant is exercisable at a price of CAD 0.11 for a period of 24 months, until July 15, 2022. The Company determined that the fair value of the warrants issued was CAD 657,330 ($484,685). The fair value was determined by using Black-Scholes to perform an iterative calculation to allocate the actual proceeds received between the common shares and the warrants. The assumptions in the Black-Scholes pricing model used to calculate the fair value of the warrants were: an expected life of 1 years; annualized volatility of 103.68%; a risk free interest rate of 0.27%; and zero expected dividend yield. The Company paid finders fees of CAD 118,732 ($87,548) and issued 1,962,060 agent's compensation option valued at CAD 147,155 ($108,523) as finder's fees in connection with this private placement. The value of the agent's compensation option was determined using the same unit price of the private placement. Each agent's compensation option entitles the holder to purchase a unit at a price of CAD 0.075 per unit expiring July 15, 2022. Each unit related to the compensation option has features consistent with the private placement. The Company incurred other share issuance costs of $34,962 on this private placement. Total transactions costs were $231,033 of which $187,736 were allocated to share premium and $43,297 were recognized through profit and loss.
On December 21, 2020, the Company completed a non-brokered private placement of 21,576,500 units at a price of CAD 0.20 per unit, for gross proceeds of CAD 4,315,300 ($3,356,134). Each unit consists of one common share and one-half of one transferable common share purchase warrant. Each whole share purchase warrant is exercisable at a price of CAD 0.30 for a period of 24 months, until December 21, 2022. The Company determined that the fair value of the warrants issued was CAD 786,742 ($611,872). The fair value was determined by using Black-Scholes to perform an iterative calculation to allocate the actual proceeds received between the common shares and the warrants. The assumptions in the Black-Scholes pricing model used to calculate the fair value of the warrants were: an expected life of 2 years; annualized volatility of 113.23%; a risk free interest rate of 0.23%; and zero expected dividend yield. The Company paid finders fees of CAD 84,205 ($65,489) and issued 240,950 agent's compensation options valued at CAD 48,190 ($37,479) as finder's fees in connection with this private placement. The value of the agent's compensation option was determined using the same unit price of the private placement. Each agent's compensation option entitles the holder to purchase a unit at a price of CAD 0.20 per unit expiring December 21, 2022. Each unit related to the compensation option has features consistent with the private placement. The Company incurred other share issuance costs of $54,729 on this private placement. Total transactions costs were $157,696 of which $128,946 were allocated to share premium and $28,750 were recognized through profit and loss.
Page | 20
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
Reserves - Stock options and warrants
Stock option and share purchase warrant transactions are summarized as follows:
| Warrants | Stock Options | |||||
|---|---|---|---|---|---|---|
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||
| Outstanding January 1, 2020 | - | CAD | - | 16,220,000 | CAD | 0.09 |
| Expired | - | - | (1,600,303) | 0.13 | ||
| Granted | 57,554,916 | 0.15 | 700,000 | 0.10 | ||
| Exercised | (65,000) | 0.11 | (700,000) | 0.07 | ||
| Amendment, reduction in shares issued and outstanding (1) | - | (7,545,031) | 0.09 | |||
| Outstanding December 31, 2020 | 57,489,916 | CAD | 0.15 | 7,074,666 | CAD | 0.09 |
| Expired | - | - | (30,000) | 0.45 | ||
| Granted | - | - | 7,794,717 | 0.82 | ||
| Exercised | (35,445,065) | 0.11 | (137,287) | 0.09 | ||
| Outstanding December 31, 2021 | 22,044,851 | CAD | 0.17 | 14,702,096 | CAD | 0.09 |
| Number currently exercisable | 22,044,851 | CAD | 0.17 | 14,702,096 | CAD | 0.48 |
(1) In July 2020, the Company finalized the transaction listed in the Treasury share cancellation section above, the private placement and debt restructuring transactions (Note 10) that reduced the Company's common shares issued and outstanding by 50.28%. In August, and in order to comply with the Company's stock option plan, the number of stock options issued were amended and updated to reflect this proportional reduction.
As at December 31, 2021 the following incentive stock options were outstanding:
| Number of Shares | Exercise Price (CAD) | Expiry Date | Remaining Contractual Life (years) | |
|---|---|---|---|---|
| Stock options | 397,732 | $ 0.44 | May 17, 2022 | 0.38 |
| 6,291,631 | 0.07 | October 22, 2024 | 2.81 | |
| 248,016 | 0.10 | June 2, 2025 | 3.42 | |
| 3,305,000 | 0.45 | February 26, 2026 | 4.16 | |
| 4,459,717 | 1,10 | October 27, 2026 | 4.83 | |
| Warrants | 15,628,101 | 0.11 | July 15, 2022 | 0.54 |
| 6,416,750 | 0.30 | December 21, 2022 | 0.97 | |
| Agent's compensation options | 226,710(1) | 0.075 | July 15, 2022 | 0.54 |
| 195,026(2) | 0.20 | December 21, 2022 | 0.97 | |
| Agent's compensation options warrants | 631,255(3) | 0.11 | 0.54 | |
| 42,450(3) | 0.30 | July 15, 2022 | 0.97 |
(1) Each agent's compensation units are exercisable into one unit at a price of CAD 0.075. Each unit comprises one common share and one share purchase warrant. Each share purchase warrant is exercisable into an additional common share at a price of CAD 0.11.
(2) Each agent's compensation units are exercisable into one unit at a price of CAD 0.20. Each unit comprises one common share and one-half share purchase warrant. Each share purchase warrant is exercisable into an additional common share at a price of CAD 0.30.
(3) These are underlying warrants issued upon exercise of the Agent's compensation options
Page | 21
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
The Company has a stock option plan under which it is authorized to grant options to directors, employees and consultants to acquire up to 10% of the issued and outstanding common shares. The exercise price of each option is based on the market price of the Company's shares for a period preceding the date of grant. The options can be granted for a maximum term of 10 years and vest as determined by the board of directors.
In June 2020, the Company granted 700,000 options that vested immediately to an officer. Total share-based payments recognized in the statement of operations for the year ended December 31, 2020 was $49,266 for incentive options granted and vested.
In February 2021, the Company granted 3,335,000 options that vested immediately to directors, officers, employees, advisors, and consultants of the Company. The stock options are exercisable for a term of five years at an exercise price of CAD 0.45 per common share under the term of the Company's stock option plan. Total share-based payments recognized in the statement of loss for the year ended December 31, 2021, was $600,824 for incentive options granted and vested.
In October 2021, the Company granted 4,459,717 options that vested immediately to directors, officers, employees, advisors, and consultants of the Company. The stock options are exercisable for a term of five years at an exercise price of CAD 1.10 per common share under the term of the Company's stock option plan. Total share-based payments recognized in the statement of operations for the year ended December 31, 2021, was $2,426,816 for incentive options granted and vested.
The following weighted average assumptions were used for the Black-Scholes option-pricing model valuation of stock options granted during the years ended on December 31, 2021 and December 31, 2020:
| Options granted in 2021 | Options granted in 2020 | |
|---|---|---|
| Risk-free interest rate | 1.19% | 0.39% |
| Expected life of options | 5 years | 5 years |
| Expected annualized volatility | 90.81% | 175.84% |
| Dividend yield | 0.0% | 0.0% |
| Forfeiture rate | 0.0% | 0.0% |
Warrants – Derivative Liability
The Company's detachable warrants related to the units issued in the July 15, 2020 and December 21, 2020 private placements have an exercise price denominated in foreign currency (Canadian dollars) and are classified and accounted for as a derivative liability at fair value with changes in fair value included in profit or loss.
On July 15, 2020, the Company issued 46,766,666 warrants and initially allocated $484,685 to the warrant derivative liability. On December 21, 2020, the Company issued 10,788,250 warrants and initially allocated $611,872 to the warrants derivative liability.
During the year ended December 31, 2021, there was a derivative loss of $28,564,576 (2020 - $3,940,613) from the mark-to-market measurement of the warrant derivative liability. The weighted average assumptions used in the Black-Scholes pricing model to calculate the fair value of the warrants, as at December 31, 2021, were: an expected life of 0.47 year; annualized volatility of 83.67%; a risk free interest rate of 0.95%; and zero expected dividend yield.
Page | 22
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
12. RELATED PARTIES
a) Key management compensation
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Salaries, consulting and directors’ fees | $ 777,743 | $ 549,472 |
| Share-based compensation | 1,858,577 | 49,266 |
b) Other related party transactions
As at December 31, 2021 the Company had the following balances due to/from entities related by way of common directors and/or management. These amounts, unless otherwise noted, were unsecured and non-interest bearing.
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Other liabilities - management and board fees | $ 59,450 | $ 94,292 |
13. EXPLORATION AND EVALUATION EXPENSES
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Assays | $ 295,994 | $ 20,632 |
| Consulting – geological | 212,882 | 95,125 |
| Consulting – geophysical | 136,551 | - |
| Consulting – Engineering | 106,414 | - |
| Drilling | 1,091,941 | - |
| Equipment and maintenance | 221,987 | 16,125 |
| Fees and licenses | 44,139 | 158,342 |
| Field expenditures and road construction | 370,455 | 8,020 |
| Vehicle expenses | 92,362 | - |
| Other | 93,688 | 9,877 |
| Payroll | 701,166 | 124,351 |
| Survey | 34,368 | - |
| Room and boarding | 131,247 | 11,231 |
| Total | $ 3,533,194 | $ 443,703 |
14. GENERAL AND ADMINISTRATION EXPENSES
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Consulting | $ 12,838 | $ 78,973 |
| Investor relations and shareholder communication | 456,836 | 97,907 |
| Insurance | 116,847 | 117,990 |
| Management and director fees (Note 12) | 591,142 | 439,806 |
| Office and miscellaneous | 133,080 | 75,136 |
| Payroll | 355,248 | 190,710 |
| Rent | 17,658 | 20,298 |
| Subscriptions and licenses | 34,414 | 23,392 |
| Telephone and information technology | 56,381 | 74,970 |
| Travel | 66,942 | 14,996 |
| Other taxes | - | 58,029 |
| Other | 102,377 | 26,792 |
| Total | $ 1,943,763 | $ 1,218,999 |
Page | 23
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
15. INCOME TAXES
A reconciliation of income taxes (recovery) at statutory rates with the reported taxes for the years ended December 31, 2021 and 2020 is as follows:
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Loss before income taxes | $ (37,582,080) | $ (7,555,259) |
| Statutory tax rate: | 19% | 19% |
| Expected income tax (recovery) | $ (7,140,595) | $ (1,435,000) |
| Foreign tax rate differential | (824,000) | (542,000) |
| Statutory permanent differences | 1,673,000 | (139,000) |
| Losses and deductible temporary differences not recognized | 6,291,595 | 2,093,000 |
| Income tax (recovery), net | $ - | $ (23,000) |
The significant components of deferred tax assets and liabilities as at year-end are as follows:
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Exploration and evaluation assets | $ (113,000) | $ (114,000) |
| Property, plant and equipment and other | - | - |
| Loss carryforwards | 113,000 | 114,000 |
| Net deferred tax assets (liabilities) | $ - | $ - |
The significant components of the Company's deductible temporary differences, and unused tax losses that have not been recognized on the statement of financial position are as follows:
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Temporary differences: | ||
| Environmental provision | $ 268,000 | $ 330,000 |
| Loss carry forwards | 60,466,000 | 30,654,000 |
| Provisions | 703,000 | 1,531,000 |
| Property, Plant & Equipment | 1,832,000 | 3,035,000 |
Loss carryforwards consist of Canadian tax losses of $3,103,000, which expire between 2036 and 2041, United Kingdom loss of $33,966,000 which have no expiry date and Brazilian tax losses of $23,397,000, which have no expiry date, however only 30% of the taxable income in one year can be applied against the loss carry-forwarded balance. The ability of the Company to access unrecognized tax losses and other deductions in Canada has been restricted as a result of the 2016 acquisition of control of Cancana. Tax attributes are subject to review, and potential adjustment, by tax authorities.
16. CAPITAL MANAGEMENT
The capital structure of the Company consists of shareholder's equity (deficiency) totaling ($3,715,652) (2020 - $3,224,019), share capital of $1,814,863 (2020 - $1,184,781), share premium of $39,553,231 (2020 - $12,021,458), reserves of $68,908,478 (2020 - ($66,427,924), and deficit of $113,992,224 (2020 - $76,410,144). The Company's objectives when managing capital are to: (i) preserve capital, (ii) obtain the best available net return, and (iii) maintain liquidity.
The Company manages the capital structure and makes adjustments to it in light of changes in economic condition and
Page | 24
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares, issue new debt, acquire or dispose of assets or adjust the amount of cash and investments.
The Company’s policy is to invest its excess cash in highly liquid, fully guaranteed, bank sponsored instruments. The Company is not subject to externally imposed capital requirements and does not have exposure to asset-backed commercial paper or similar products.
17. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Financial instruments
The Company is required to disclose the fair value of each class of financial assets and liabilities in the financial statements. Financial assets and liabilities are classified in the fair value hierarchy according to the lowest level of input that is significant to the fair value measurement. Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect placement within the fair value hierarchy levels.
The hierarchy is as follows:
- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
- Level 2: inputs other than quotes prices included in Level 1 that are observable for the asset or liability. either directly (i.e., as prices) or indirectly (i.e., derived from prices).
- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The carrying value of receivables and advances, accounts payable and accrued liabilities, and loan payable approximates fair value due to the short-term nature of the financial instruments. Cash is carried at its fair value using level 1 inputs. Warrants derivative liability and financial liability were measured at fair value based on Level 2 inputs.
Risk management
The Company is exposed to various financial instrument risks and assesses the impact and likelihood of this exposure. These risks include, credit risk, currency risk, interest rate risk and liquidity risk. Where material, these risks are reviewed and monitored by the Board of Directors.
Credit risk
Financial instruments that potentially subject the Company to credit risk consist of cash. The Company deposits cash with high credit quality financial institutions as determined by rating agencies.
Currency risk
The international nature of the Company’s operations results in foreign exchange risk. The Company’s operating costs are primarily in US dollars, Canadian dollars, Brazilian reals and Euro, while revenues are received in either US dollars or Brazilian reals. Hence, any fluctuation of the US dollar in relation to these currencies may affect the profitability of the Company and the value of the Company’s assets and liabilities.
Page | 25
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
The Company is exposed to foreign exchange risk through the following financial assets and liabilities denominated in currencies other than the function currency of the applicable company:
| As at December 31, 2021 | US dollar | Canadian dollar | Brazilian real | |
|---|---|---|---|---|
| Cash | $ | 22,785 | $ 8,830,498 | $ 206,515 |
| Prepaid expenses and other assets | 210,487 | 16,635 | 94,633 | |
| Total Assets | 233,272 | 8,847,133 | 301,148 | |
| Accounts payable and accrued liabilities | (348,103) | (14,510) | (550,341) | |
| Net Assets | $ | (114,831) | $ 8,832,623 | $ (249,193) |
| As at December 31, 2020 | US dollar | Canadian dollar | Brazilian real | |
| Cash | $ | 8,475 | $ 4,411,747 | $ 95,913 |
| Prepaid expenses and other assets | 108,857 | 18,515 | 31,736 | |
| Total Assets | 117,332 | 4,430,262 | 127,649 | |
| Accounts payable and accrued liabilities | (482,329) | (251,404) | (192,297) | |
| Net Assets | $ | (364,997) | $ 4,178,858 | $ (64,648) |
Based on the above net exposures as at December 31, 2021, a 10% appreciation in the US dollar against the Brazilian real would not result in a significant impact to the Company's earnings before taxes. A 10% appreciation in the Canadian dollar against the US dollar would result in an approximate $884,713 (December 31, 2020 - $435,564) decrease to the Company's earnings before income taxes. A 10% appreciation in the Brazilian real against the US dollar would not result in a significant impact to the Company's earnings before income taxes.
The Company does not use derivative instruments to reduce its exposure to foreign currency risk nor has it entered into foreign exchange contracts to hedge against gains or losses from foreign exchange.
Interest rate risk
The Company's financial assets exposed to interest rate risk consist of cash balances. None of the Company's debt is subject to floating interest rates. The Company does not believe its interest rate risk is significant.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its obligations associated with its financial liabilities that are settled by delivering cash or another financial assets.
The Company has historically relied upon capital contributions, related party debt financing and equity financings to maintain an adequate level of cash to satisfy its capital requirements and will continue to depend heavily upon equity financings. All of the Company's accounts payable and accrued liabilities are subject to normal trade terms. The Company is exposed to risk that it will encounter difficulty in satisfying liabilities on maturity.
There can be no assurance the Company will be able to obtain required financing in the future on acceptable terms. The Company will need additional capital in the future to finance ongoing exploration of its properties, such capital is expected to be derived from the completion of equity financings. The Company has limited financial resources, has minimal source of operating income and has no assurance that additional funding will be available to it for future exploration and development of its projects, although the Company has been successful in the past in financing its activities through the previously mentioned financing activities.
Page | 26
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
The ability of the Company to arrange additional financing in the future will depend, in part, on the prevailing capital market conditions as well as exploration success. In recent years, the securities markets have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continual fluctuations in price will not occur. Any quoted market for the common shares may be subject to market trends generally, notwithstanding any potential success of the Company in creating revenue, cash flows or earnings.
The Company cannot estimate the extent of COVID-19 pandemic outbreak, and its potential impact on the ability to obtain financing and maintain necessary liquidity.
As at December 31, 2021, the Company’s liabilities that have contractual maturities are as follows:
| December 31, | ||||
|---|---|---|---|---|
| 2021 | 1 Year | 2 Years | Total | |
| Accounts payable and accrued liabilities | $ 912,953 | $ - | $ - | $ 912,953 |
| Provisions | 410,218 | 98,860 | - | 509,078 |
| Taxes and fees payable | 843,806 | 95,652 | - | 939,458 |
| $ 2,166,977 | $ 194,512 | $ - | $ 2,361,489 |
18. COMMITMENTS AND CONTINGENCIES
A significant portion of the Company’s operations are located in Brazil. From time to time various legal, labour, environmental and tax matters are outstanding due to the nature of both current and historical operations. The Company has taken and continues to take all necessary and available steps to comply with relevant laws and regulations, however there is no assurance such steps will be successful.
Royalties
The Company pays royalties to landowners as well as the Brazilian government. Royalties to landowners are determined based on individual negotiated agreements, usually at a rate of 1.5% of net sales proceeds on the sale of manganese oxide material, while royalties of approximately 3% of sale proceeds on the sale of manganese oxide material are paid to the Brazilian government.
19. SUBSEQUENT EVENTS
a) Warrants and agent’s compensation options and warrants exercises
Subsequent the year ended December 31, 2021, the Company issued 2,937,473 common shares and received gross proceeds totaling $292,376 related to share purchase warrants, agent’s compensation options and agent’s compensation options warrants.
b) Joint Venture with Orosur Mining Inc
On January 13, 2022, the Company signed a Joint Venture Agreement (“JV Agreement”) with Orosur Mining Inc. (“Orosur”). The JV Agreement provides a mechanism for a staged earn-in by Orosur into the Ariquemes project mineral concessions currently held via Jaburi.
Page | 27
MERIDIAN MINING UK SOCIETAS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
The terms of the JV Agreement are:
- Orosur or any of its subsidiaries shall have the exclusive right to acquire a 51% interest in the Ariquemes Project by expending $1,000,000 on exploration within an initial 24-month period. Orosur may terminate the Agreement at any time with 60 days' notice during this Period by providing written notice to Meridian;
- Orosur or any of its subsidiaries will be the operator of the joint venture;
- Following the exercise of the first option, Orosur shall have the right to acquire an additional 24% interest in the Ariquemes Project (for an aggregate interest of 75%) by incurring an additional $2,000,000 in exploration expenditures; and
- After the second option period, funding of the JV Agreement would be on a pro rata basis. In the event that either party's interest is diluted to 10% or less, its interest shall be converted to a royalty of 1% of net smelter returns on all minerals thereafter produced. The royalty, which shall be subject to a purchase option of $1,000,000 for the other party, includes customary terms for royalties of this type.
c) Amendment of the Cabacal Purchase Agreement
On January 28, 2022, the Company secured an Amendment to the Cabacal Purchase Agreement rescheduling the payment of the 3rd Purchase Price Installment to August 1, 2023 unless accelerated upon completion of an equity financing for gross proceeds of at least $2,500,000.
d) Grant of stock options
On February 7, 2022, the Company granted 100,000 stock options to a consultant that vested immediately with an exercise price of CAD 1.10 per common share for a term of five years, until February 6, 2027.
On February 24, 2022, the Company granted 75,000 stock options to the Company's Corporate Secretary that vested immediately with an exercise price of CAD 1.10 per common share for a term of five years, until February 24, 2027.
e) Conversion of the Consolidated Facility Agreement with SGRFIV
On March 29, 2022, the Company issued 5,869,670 common shares at a conversion rate of CAD 2.50, settling the Consolidated Facility balance of CAD 14,674,177, as per the terms of the agreement. On April 5, 2022, the Company also issued 509,795 common shares to HM Revenue & Customs ("HMRC", United Kingdom tax authority) as payment of the withholding taxes obligation related to the agreement above.
Page | 28