EX-99.1 2 ex99_1.htm CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 2012 ex99_1.htm
EXHIBIT 99.1

 


 
Condensed Consolidated Interim Financial Statements
March 31, 2012
(Stated in United States Dollars)
(Unaudited)

 
 
Table of Contents
 
Condensed Consolidated Interim Statements of Financial Position
 
- 2 -
Condensed Consolidated Interim Statements of Comprehensive Income - 3 -
Condensed Consolidated Interim Statements of Cash Flows - 4 -
Condensed Consolidated Interim Statements of Changes in Shareholders’ Equit - 5 -
Notes to the Condensed Consolidated Interim Financial Statements
 
   
1. Nature of Business and Going Concern - 6 -
2. Basis of Preparation - 7 - 
3. Inventories - 8 - 
4. Mineral Properties, Plant and Equipment - 8 - 
5. Contingent Liability - 9 - 
6. Long Term Debt - 9 - 
7. Derivative Instruments - 10 - 
8. Share Purchase Warrants Issued with Canadian Dollar Exercise Prices - 12 - 
9. Project Financing  - 12 - 
10. Equipment Loans  - 12 - 
11. Provision for Site Reclamation and Closure  - 13 - 
12. Common Shares, Share Purchase Warrants and Stock Options  - 13 - 
13. Related Party Transactions  - 15 - 
14. Operating Segments - 16 - 
   

- 1 -
 

 
Mercator Minerals Ltd
Condensed Consolidated Statements of Financial
(Stated in Thousands of United States Dollars)
 
             
    March 31, 2012      December 31, 2011  
Assets             
     Current Assets
 
 
   
 
 
          Cash and cash equivalents
   $ 15,781      $ 25,324  
          Restricted cash (notes 5 and 6)
    17,612       17,566  
          Accounts receivable
    10,138       13,347  
          Inventories (note 3)
    24,690       18,888  
          Prepaid expenses
    1,397       1,843  
          Total Current Assets
    69,618       76,968  
                 
     Mineral properties, plant and equipment (note 4)
    532,189       532,448  
     Environmental/Land Reclamation bonds
    3,534       3,528  
Total Assets     $ 605,341      $ 612,944  
                 
Liabilities and Equity:                 
     Current Liabilities                 
          Accounts payable and accrued liabilities
   $ 47,034      $ 49,472  
          Long term debt (note 6)
    48,810       107,444  
          Derivative liabilities (note 7)
    20,946       11,410  
          Project financing (note 9)
    2,976       18,636  
          Equipment loans (note 10)
    1,678       4,136  
          Deferred revenue
    2,249       2,197  
          Total Current Liabilities
    123,693       193,295  
     Non-Current Liabilities                 
          Long-term debt (note 6)
    79,033       24,266  
          Derivative liabilities (note 7)
    46,217       28,601  
          Project financing (note 9)
    14,951        
          Equipment loans (note 10)
    1,760        
          Share purchase warrants (note 8)
    9,944       10,902  
          Provision for site reclamation and closure (note 11)
    9,812       10,802  
          Deferred revenue
    35,195       35,727  
          Deferred tax liability
    10,836       16,097  
          Total Liabilities
    331,441       319,690  
                 
     Equity                 
          Share capital
    395,091       395,025  
          Share-based payments reserve
    26,726       31,582  
          Accumulated other comprehensive income
    (26     (26 )
          Deficit      (147,891 )     (133,327
          Total Equity
    273,900       293,254  
Total Liabilities and Equity
   $ 605,341      $ 612,944  
Nature of business and going concern (note 1)
               
Commitments and contingencies (notes 5, 6, 7, 8, 9 and 10)
               
 
Approved by the Board of Directors:
 
   
(signed) John Bowles
(signed) Stephen Quin
 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
- 2 -
 

 
Mercator Minerals Ltd.
Condensed Consolidated Statements of Comprehensive Income
(Stated in Thousands of United States Dollars, except per share amounts)
 
    Three Months Ended  
 (Unaudited)    March 31, 2012      March 31, 2011  
Revenue             
Copper revenue
   $ 32,213      $ 39,116  
Molybdenum revenue
    32,018       15,691  
Silver revenue
    1,003       950  
Other revenue
    3       81  
      65,237       55,838  
                 
Cost of sales
               
Mining and processing
    38,375       32,444  
Freight, smelting & refining
    8,955       7,396  
      47,330       39,840  
Gross profit
    17,907       15,998  
                 
Administration
    7,267       6,346  
Exploration expenditures
    282       478  
      7,549       6,824  
Operating profit
    10,358       9,174  
                 
Other income (expense)
         
Finance expense
    (2,654 )     (2,383 )
Finance income
    36       27  
Realized loss on derivative liabilities (note 7)
    (6.791 )     (11,326 )
Unrealized loss on derivative instruments (note 7)
    (27,152 )     (7,451 )
Unrealized gain on share purchase warrants (note 8)
    (958 )     5,794  
Foreign exchange loss
    (533 )     (36 )
Loss before income taxes
    (25,778 )     (6,201 )
Income taxes expense (recovery)
         
Current      (25 )      
Future      (5,261 )      
      (5,286 )      
Net loss for the period
    (20,492 )     (6,201 )
                 
Other comprehensive income
         
Unrealized gain on marketable securities
          34  
Total comprehensive loss for the period
    (20,492 )     (6,167 )
                 
Net loss per share (note 12):
         
  Basic     $ (0.08 )    $ (0.03 )
  Diluted     $ (0.08 )    $ (0.03 )

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
- 3 -
 

 
Mercator Minerals Ltd.
Condensed Consolidated Statements of Cash Flow
(Stated in Thousands of United States Dollars)
(Unaudited)   Three Months Ended  
Cash provided by    March 31, 2012      March 31, 2011  
Operating Activities            
Operating activities
           
Net loss for the period
   $ (20,492 )    $ (6,201 )
Adjustments for:
               
       Unrealized loss on derivative liabilities
    27,152       7,451  
       Unrealized gain on share purchase warrants
    (958 )     (5,794 )
       Amortization and depreciation
    5,065       2,958  
       Deferred revenue recognized during the period
    (480 )     (562 )
       Accretion of financing costs
    494       488  
       Accretion of provision for site reclamation and closure
    81       80  
       Share-based compensation
    1,102       1,706  
       Accretion of net proceeds interest liability
          98  
       Foreign exchange loss on long term debt
    436        
       Foreign exchange gain on restricted cash
    (46 )      
       Deferred tax liability
    (5,261 )      
       Finance expense, net of accretion
    2,079       2,383  
       Finance income
    (36 )     (27 )
       Unrealized foreign exchange loss
             
                 
Changes in non-cash operating working capital balances:
               
       Accounts receivable
    3,209       (2,709 )
       Inventories
    (5,802 )     937  
       Prepaid expenses
    479       1,539  
       Deposits
    (33 )      
       Accounts payable and accrued liabilities
    (2,438 )     8,075  
Finance expense paid
    (2,079 )     (1,919 )
Finance income received
    36       27  
Net cash from operations
    2,508       8,530  
Financing activities
               
Long term debt repayment
    (4,761 )     (4,762 )
Proceeds from share purchase warrants exercised
          2,056  
Proceeds from stock options exercised
    36       1,125  
Proceeds from project financing
          520  
Project financing payments
    (744 )      
Equipment loan payments
    (698 )     (259 )
Net cash used in financing activities
    (6,167 )     (1,320 )
Investing activities
               
Acquisition of property, plant and equipment
    (5,878 )     (19,500 )
Payment of net proceeds interest liability
          (558 )
Environmental land and reclamation bonds
    (6     (8 )
Net cash used in investing activities
    (5,884 )     (20,066 )
                 
Decrease in cash and cash equivalents
    (9,543 )     (12,856 )
Cash and cash equivalents, beginning of period
    25,324       36,156  
Cash and cash equivalents, end of period
   $ 15,781      $ 23,300  

 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
- 4 -
 

 
 
Mercator Minerals Ltd.
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Stated in Thousands of United States Dollars)

(Unaudited)
 
Number of
Common Shares
   
Share Capital
   
Share-based
payments reserve
   
Accumulated Other
Comprehensive
Income
   
Deficit
   
Total Equity
 
Balance at December 31, 2010
    197,621,466       235,062       27,767       384     $ (225,280 )   $ 37,933  
Net income
                            (6,201 )     (6,201 )
Other comprehensive income
                      34             34  
Share based payments expense
                1,706                   1,706  
Issue of shares on exercise of stock options
    1,466,496       1,125                         1,125  
Reclassification of grant date fair value on exercise of stock options
          2,559       (2,559 )                  
Issue of shares on exercise of share purchase warrants
    1,611,847       2,056                         2,056  
Reclassification of fair value on exercise of broker share purchase warrants
          430       (430 )                  
Reclassification of fair value of warrants exercised
          4,753                         4,753  
Balance at March 31, 2011
    200,699,809       245,985       26,484       418     $ (231,481 )   $ 41,406  
                                                 
Balance at December 31, 2011
    259,014,300       395,025       31,582       (26 )   $ (133,327 )   $ 293,254  
Net loss
                            (20,492 )     (20,492 )
Share based payments expense
                1,102                   1,102  
Reclassification of fair value of options expired after vesting
                (5,928 )           5,928        
Issue of shares on exercise of stock options
    22,819       66       (30 )                 36  
Balance at March 31, 2012
    259,037,119       395,091       26,726       (26 )   $ (147,891 )   $ 273,900  

 
 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
- 5 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)


1.
Nature of Business and Going Concern
 
Mercator Minerals Ltd. is a natural resource company engaged in the mining, development and exploration of its mineral properties in the United States of America and Mexico. The Company’s principal assets are its 100% owned Mineral Park mine (“Mineral Park Mine”), a producing copper/molybdenum mine located near Kingman, Arizona, its 100% owned El Pilar (“El Pilar”) copper exploration and development project located in Northern Mexico and its 100% owned El Creston molybdenum exploration and development project (“El Creston project”) located in Northern Mexico.

The Company was incorporated in the Province of British Columbia under the name “Sultana Resources Corporation” by registration of its Memorandum and Articles on March 5, 1984. The Company changed its name to “Silver Eagle Resources Ltd.” on May 31, 1988. On April 16, 1997, the Company was continued under the Yukon Business Corporations Act and became a Yukon corporation. On March 12, 2001, the Company changed its name to "Mercator Minerals Ltd." and consolidated its outstanding share capital on the basis of one (new) for five (old) shares. Effective April 7, 2005, the Company continued under the Business Corporations Act (British Columbia) with an authorized capital of an unlimited number of shares without par value and became a British Columbia corporation. The Company’s securities are listed for trading on the Toronto Stock Exchange. The head office of the Company is located at Suite 1050, 625 Howe Street, Vancouver, B.C. Canada, V6C 2T6.

The Company had a net loss of $20.5 million for the three months ended March 31, 2012 (March 31, 2011 – net loss of $6.2 million), and as at March 31, 2012, had an accumulated deficit of $147.9 million (December 31, 2011- $133.3 million) and working capital deficiency of $54.1 million (December 31, 2011 - working capital deficiency of $116.3 million).

In finalizing the December 31, 2011 annual consolidated financial statements, the Company determined that it had breached certain of its covenants under each of its Credit Facilities (note 6), Project Financing (note 9) and Equipment Loans (note 10) as at December 31, 2011. Therefore, the working capital deficiency at December 31, 2011 included $88.4 million (Credit Facilities), $15.7 million (Project Financing), and $2.1 million (Equipment Loans) for the otherwise non-current portions of these debt arrangements that were required to be classified with current liabilities as at December 31, 2011. The Company subsequently obtained waivers from the lending institutions under its Credit Facilities and Project Financing and as of March 31, 2012, is no longer in breach of these debt arrangements.  As at March 31, 2012 the scheduled payments of greater than one year, including $82.2 million (Credit Facility), $15.0 million (Project Financing), and $1.8 million (Equipment Loans), have been classified as long-term liabilities. The Pre-construction credit facility of $25.7 million has a maturity date of January 3, 2013 and has been classified within current liabilities as at March 31, 2012.

The working capital deficiency at December 31, 2011 includes certain overdue accounts payable totalling $20.6 million. At March 31, 2012, the overdue accounts payable totalled $21.2 million. During 2011, the Company experienced a delay in completion of the Phase 2 expansion at Mineral Park Mine and incurred costs in excess of the planned capital project costs. This resulted in a delay in achieving the expected incremental increase in sales and resulted in an increase in overdue accounts payable. Management has had discussions with certain vendors and has verbally agreed to suitable payment arrangements with respect to the overdue amounts. Management anticipates the incremental increase in sales revenue from the Phase 2 expansion to generate sufficient cash flow to become current with all vendors by the third quarter of 2012.  There can be no assurances the Company will be able to meet its planned operating results or that the Company’s vendors will not demand repayment of the overdue amounts.

This unaudited condensed consolidated interim 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 for the foreseeable future.  However, the uncertainty with respect to the Company’s ability to meet its operating objectives and settle the Company’s liabilities including the overdue accounts payable casts substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and realize on its investments in its mineral properties and mining assets, as well as meet its liabilities including the overdue vendor accounts, will be dependent upon the future profitable production or proceeds from the disposition of the mineral resources.  There can be no assurances the Company will be able to meet its planned business objectives and continue as a going concern. If the going concern assumption were not appropriate for these financial statements then adjustments would be necessary to the carrying value of assets and liabilities, the reported revenue and expenses and the statement of financial position classifications used.

 
- 6 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)


The Company’s activities have been financed to date through the sale and issuance of shares and other securities by way of private placements, commercial financing arrangements, and cash flow from operations at the Mineral Park Mine.

Management anticipates that the Company would need to raise additional financing through equity or debt financings if it is to advance its capital development programs related to its El Pilar and El Creston mineral properties; however there is no assurance that the Company will be able to obtain adequate funding on favourable terms.
 
2.
Basis of Preparation
 
a)
Basis of Presentation
 
The unaudited condensed consolidated financial statements (“consolidated financial statements”) were prepared in accordance with International Accounting Standards ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by International Financial Reporting Standards for complete financial statements for year-end reporting purposes. The consolidated financial statements have been prepared on a basis consistent with the significant accounting policies disclosed in its audited consolidated annual financial statements for the period ended December 31, 2011 and therefore should be read in conjunction with the most recent annual financial statements, which includes information necessary or useful to understand the Company’s business and financial statement presentation.

The consolidated financial statements were approved by the board of directors and authorised for issue on May 10, 2012.
 
b)
 Basis of Measurement

The consolidated financial statements have been prepared on the historical cost basis except for derivatives and certain other financial assets and liabilities that are measured at, fair value.  In addition, these consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information.
 
c)
Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries Mercator Mineral Park Holdings Ltd., Mineral Park Inc., Mercator Minerals (Barbados) Ltd Mercator Minerals USA, Bluefish Energy Corporation (established August 17, 2010), Stingray Copper Inc., Minera Stingray S.A. de C.V. and Recursos Stingray de Cobre, S.A. de C.V and Creston Moly Corp. (subsequent to June 22, 2011- the acquisition date). Inter-company balances and transactions are eliminated upon consolidation.

Control exists where the parent entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are included in the consolidated financial report from the date control commences until the date control ceases.

The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are discussed in note 3(b) in the Company’s annual consolidated financial statement for the year ended December 31, 2011. There have been no changes to significant estimates during the period ended March 31, 2012 with the exception of derivative instruments disclosed in note 7 and the provision for site reclamation and closure disclosed in note 11.
 
 
- 7 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)


3.
Inventories
 
 
March 31,
2012
December 31,
2011
Ore on leach dump
5,332
5,358
In-process inventory
687
480
Concentrate inventory
4,682
1,069
Cathode inventory
278
152
Supplies
13,567
11,463
Coarse ore inventory
144
366
Total
$             24,690
$               18,888

The amount of inventory recognized as an expense for the three months ended March 31, 2012 and March 31, 2011 includes production costs, amortization, depletion, and share-based payments directly attributable to the inventory production process.

No inventories were pledged as security for liabilities for any period presented.

Ore on leach dump inventory includes $2.4 million (December 31, 2011 - $2.5 million) that will not be recoverable within the subsequent twelve months.
 
4.
Mineral Properties, Plant and Equipment
 
   
Mill and
SX-EW
   
Mineral
Properties
   
Power
Generator
   
Mining
Equipment -
large
   
Mining
Equipment -
small
   
Building, Improvements
& Office
Equipment
   
Land
   
Site
reclamation
and
disclosure
   
Construction
in Progress
   
Total
 
Cost
                                                           
Balance at December 31, 2011
  $ 310,346     $ 176,477     $ 40,317     $ 18,565     $ 12,314     $ 670     $ 4,152     $ 7,665     $     $ 570,506  
Additions
    1,323       3,535       67       227       151             16             650       5,969  
Disposals
                      (200 )     (100 )                             (300 )
Adjustment to site reclamation & closure provision
                                        0       (1,072 )           (1,072 )
Balance at March 31,2012
  $ 311,669     $ 180,012     $ 40,384     $ 18,592     $ 12,365     $ 670     $ 4,168     $ 6,593     $ 650     $ 575,103  
                                                                                 
Accumulated depreciation
                                                                               
Balance at December 31, 2011
  $ (25,542 )   $ (549 )   $ (1,008 )   $ (5,882 )   $ (4,862 )   $ (33 )   $     $ (182 )   $     $ (38,058 )
Depreciation charge
    (3,168 )     (11 )     (782 )     (581 )     (353 )     (3 )     (83 )     (83 )           (5,064 )
Disposals
                      108       100                               208  
Balance at March 31,2012
  $ (28,710 )   $ (560 )   $ (1,790 )   $ (6,355 )   $ (5,115 )   $ (36 )   $ (83 )   $ (265 )   $     $ (42,914 )
                                                                                 
Net book value
                                                                               
As at December 31, 2011
    284,804       175,928       39,309       12,683       7,452       637       4,152       7,483             532,448  
As at March 31, 2012
    282,959       179,452       38,594       12,237       7,250       634       4,085       6,328       650       532,189  

 
- 8 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)


5.
Contingent Liability
 
Prior to the acquisition of Creston, in May 2007 Creston agreed to pay a Finders’ Fee to an arm’s length third party (the “Fee”). The TSX-V approved the payment of $1.5 million as the Fee, which, at the option of the Finder, could be paid in any combination of cash or shares.  The TSX-V determined that a price of $0.70 per share was to be used in determining the number of shares to be issued as payment of the Fee or a portion of the Fee. The Finder claimed that $0.15 per share should have been used as the basis for determining the Fee. The Finder entered into arbitration proceedings seeking payment of the Fee in cash at an equivalent price of $0.15 per share.  The arbitrator found in favour of the Finder, awarded the Finder CDN$4.1 million plus costs and Creston recorded the additional amount of CDN$2.6 million awarded in the arbitration as an accrued liability.  CDN$1.5 million was forwarded to the Finder and Creston deposited the unpaid balance of the arbitration award (CDN$2.6 million) plus interest into trust.
 
As at March 31, 2012 and December 31, 2011, CDN$2.6 million is included in the Company’s Restricted Cash and accounts payable and accrued liabilities. On May 14, 2010, the British Columbia Court of Appeal unanimously reversed the decision of the lower court and granted Creston leave to appeal the decision in the Supreme Court of B.C. On May 6, 2011 Creston’s appeal of the arbitrator’s award was dismissed with costs and the successor company, Mercator Minerals Ltd, has appealed to the British Columbia Supreme Court, which has not yet released its decision.
 
6.
Long Term Debt
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
Pre-construction credit facility ("PCF")
    24,774       24,266  
Credit facility ("CF")
    103,069       107,444  
      127,843       131,710  
                 
Current portion - PCF
    (24,774 )      
Current portion - CF
    (24,036 )     (107,444 )
Non current long term debt
    79,033       24,266  

Pre-Construction Credit Facility (“PCF”)
The Company has classified the $24.8 million balance with current liabilities as at March 31, 2012, as the PCF is due in January 2013.

Credit Facilities
The interest rate as of March 31, 2012 was based on the 1-month London Interbank Offered Rate (“LIBOR”) rate and was approximately 4.74%.

The Credit Agreement also contains provisions that require the Company to apply cash flow available for cash sweep, as defined, to reduce the Credit Facilities. The percentage of excess cash subject to prepayment was reduced from 50% to 25% as a result of meeting the performance test requirement under the Credit Facilities on November 14, 2011.  The cash sweep provision was limited to prepayment aggregating of $30.0 million, and has subsequently been amended to $40.0 million. The Lenders have deferred the December 31, 2011 quarterly cash sweep payment due on April 6, 2012 of $4.7 million until May 22, 2012. The Company estimates the March 31, 2012 quarterly cash sweep payment to be $0.3 million due on May 22, 2012. The Company has accordingly classified the total cash sweeps due of $5.0 million within current liabilities as at March 31, 2012.
 
The Credit Facilities contain covenants, including restrictions on new indebtedness, new liens, and disposition of assets, acquisitions, investments and distributions, among others. Financial covenants include a loan life coverage ratio and a minimum debt service coverage ratio as well as a minimum reserve tails based on life-of-mine mineral reserves. In finalizing the consolidated financial statements, as at December 31, 2011, the Company determined that it was in breach of the Credit Facility covenants related to new indebtedness, and investments breach and the loan life coverage ratio. During
 
- 9 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)


2011, the subsidiary of the Company which holds the Credit Facilities provided an intercompany loan, and entered into an intercompany finance lease with another subsidiary of the Company resulting in additional intercompany indebtedness and investments which were in breach of certain covenants. The required minimum loan life coverage ratio is 1.25 to 1.00. As at December 31, 2011, the loan life coverage ratio was 1.23 to 1.00 resulting in the loan life coverage ratio breach. Due to these breaches at December 31, 2011 the Company was required to classify the total amount of the Credit Facilities as a current liability as at December 31, 2011.
 
The Company subsequently obtained the waivers from the lending institutions under its Credit Facilities as at March 31, 2012 and is no longer in breach of this debt arrangement as at March 31, 2012. In addition, the Company has obtained an amendment to the covenants regarding the commodity price assumptions in the loan life coverage ratio. As at March 31, 2012, $82.2 million of payments scheduled greater than one year have been classified as long-term liabilities.
 
The Company is required to maintain a minimum cash balance in a restricted bank account of $10.0 million up to June 29, 2011 and $15.0 million thereafter until the Credit Facilities are repaid.
 
The minimum principal payments and cash sweeps due for each of the four succeeding years are estimated as follows:
 
Year
Description
 
Amount
2012
Principal
$
14,286
2012
Cash Sweeps
 
4,988
2013
Principal
 
19,048
2014
Principal
 
49,048
2015
Principal
 
18,820
    $
106,190
 
7.
Derivative Instruments
 
Derivative financial instruments are classified as held for trading and are recorded on the statement of financial position at fair value. Changes in fair value of derivative financial instruments are recorded in operations unless the instruments are classified as cash flow hedges. As at March 31, 2012 and December 31, 2011, the Company did not designate any of its instruments as hedges for accounting purposes.

   
March 31,
   
December 31,
 
   
2012
   
2011
 
Derivative Instruments-copper futures
   $ 65,932      $ 38,760  
Derivative Instruments-interest swaps
    1,231       1,251  
      67,163       40,011  
Current
    (20,946 )     (11,410 )
Non Current
   $ 46,217      $ 28,601  

- 10 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)


Realized losses on derivative instruments consist of:
   
For the three months ended March 31,
 
   
2012
   
2011
 
Realized loss-copper futures
  $ 6,389     $ 11,066  
Realized loss-interest swaps
    402       260  
    $ 6,791     $ 11,326  
 
(a)
Copper Forward Contracts

In connection with the closing of the Credit Facilities (Note 6), the Company entered into forward sales of copper totalling 146.9 million pounds of copper over a six year term at an average net price to the Company of $3.01 per pound ($2.96 per pound on remaining notional quantities as of March 31, 2012), net of all costs. The quantities forward sold and the net weighted average prices to be received outstanding at March 31, 2012 are set out as follows:

Year
Copper pounds
 
Annual price
2012
18,862,729
3.05
2013
24,630,015
 
2.98
2014
22,725,223
 
2.93
2015
20,688,154
 
2.89
2016
3,836,039
 
2.88
 
90,742,160
2.96

The copper forward contracts had outstanding notional amounts of 90.7 million pounds of copper as at March 31, 2012 (December 31, 2011 – 99.6 million pounds).  At March 31, 2012, the Company has recorded a derivative liability of $65.9 million related to these copper forward contracts, of which $20.3 million relates to derivative contracts maturing in less than one year, and $45.6 million relates to derivative contracts with a maturity date greater than one year.  The fair value of these forward contracts will fluctuate until their respective maturities in response to fluctuation in market prices of copper, interest rates and the Company’s own credit risk. Actual results can differ from estimates made by management and may have a material impact on the Company’s financial statements.

During the three months ended March 31, 2012, the Company recorded a realized loss of $6.4 million (three months ended March 31, 2011 – $11.1 million) on the copper forward contracts that were closed out and settled for cash.
 
(b)
Interest Rate Swaps

The Credit Facilities bear interest at LIBOR plus a spread.  The Company has entered into interest rate swap contracts to exchange the LIBOR portion of the interest payments for a fixed rate of 2.38% on 50% of the non-revolving credit facility of $76.2 million (December 31, 2011 - $80.9 million) for the period from May 28, 2010 to March 31, 2016.

These interest rate swaps had outstanding notional amounts of $38.1 million as at March 31, 2012 (December 31, 2011 - $40.5 million).  The notional amount decreases over the period as payments are made.  At March 31, 2012, the Company had recorded a liability with a fair value of $1.2 million related to these interest rate swaps, of which $0.6 million relates to derivative contracts maturing in less than one year, and $0.6 million relates to derivative contracts with a maturity date greater than one year.  In the estimation of fair value of interest rate swaps, management used the following assumptions: risk free rate of 0.83%, credit risk adjustment rate of 7.17%. The fair value of these interest rate swap contracts will fluctuate until their respective maturities. In response to prevailing market conditions and the Company’s own credit risk, actual rates can differ from management estimates.
 
 
- 11 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)


During the three months ended March 31, 2012, the Company recorded a realized loss of $0.4 million (three months ended March 31, 2011 – $0.3 million) on the interest rate swaps that were closed out and settled for cash.

The fair values of the Company’s derivative financial instruments as disclosed above are determined, in part, based on quoted market prices received from counterparties and adjusted for Company specific factors, notably credit risk.
 
8.
Share Purchase Warrants Issued with Canadian Dollar Exercise Prices
 
The exercise price of the share purchase warrants is fixed in Canadian dollars and the functional currency of the Company is the US dollar, therefore the warrants are considered a derivative, as a variable amount of cash in the Company’s functional currency will be received on exercise.  At March 31, 2012 the fair value of share purchase warrants issued and outstanding with Canadian dollar exercise prices was $9.9 million (December 31, 2011 - $10.9 million). The share purchase warrants are re-measured at fair value at each statement of financial position date with the change in fair value recorded in earnings during the period of change. The change in fair value for the three months ended March 31, 2012 was a gain of $1.0 million (three months ended March 31, 2011 – gain of $5.8 million. The fair value of share purchase warrants is reclassified to equity upon exercise.
 
9.
Project Financing

   
March 31,
   
December 31,
 
   
2012
   
2011
 
             
Gross project financing
   $ 17,927      $ 18,636  
Current portion
    (2,976 )     (18,636 )
Non current portion
   $ 14,951      $  

During 2011 a subsidiary of the Company provided intercompany loans to another subsidiary of the Company which holds the Project Financing. In finalizing the December 31, 2011 consolidated financial statements, the Company determined that these intercompany loans were a breach of certain covenants under the Project Financing related to allowable indebtedness as at December 31, 2011. Due to the breach of covenants, as at December 31, 2011, the Company was required to classify amounts due under the loan agreements as current liabilities. The Company has subsequently obtained waivers from the lending institution under its Projecting Financing. As of March 31, 2012 the Company is no longer in breach of this debt arrangement and $15.0 million of payments scheduled greater than one year have been classified as long term liabilities.
 
10.
Equipment Loans
 
   
March 31,
   
December 31,
 
   
2012
 
2011
 
Equipment loans
   $ 3,438      $ 4,136  
Current portion
    (1,678 )     (4,136 )
Long term portion
   $ 1,760      $  

Due to the breach of covenants related to the Credit Facilities (note 6), certain cross default covenants in the equipment loan agreements were breached as at December 31, 2011. Therefore, the entire amount owing on the Equipment Loans were classified within current liabilities as at December 31, 2011.  As at March 31, 2012, the Company is no longer in breach of covenants related to the Credit Facilities and $1.8 million of equipment loan payments scheduled greater than one year have been classified as long-term liabilities. All agreements are collateralized by the respective mining equipment.
 
 
- 12 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)


11.
  Provision for Site Reclamation and Closure
 
The Company’s provision for site reclamation and closure relating to the Mineral Park Mine was assumed as part of the acquisition of the facility in 2003. The Company estimates its provision for site reclamation and closure based on its current legal obligations to reclaim, decommission, and restore its Mineral Park Mine site. The present value of future site closure and restoration obligations was determined using the expected inflation rate of 4% (2010 – 4%) and a discount rate of 3.35% (December 31, 2011 – 2.9%).  The change in discount rate at March 31, 2012 to 3.35% resulted in a decrease in the net present value of the site reclamation and closure liability of $1.1 million with a corresponding decrease in the related asset.  Excluding the effects of future inflation, and before discounting, the Company estimates that approximately $8.1 million will be payable in 23 to 48 years (2011 – 23 to 48 years).  As at March 31, 2012, the net present value of the discounted cash flows required to settle the obligation was $9.8 million (December 31, 2011 - $10.8 million).

The provision for site reclamation and closure requires management to make significant estimates and assumptions.  Actual results could materially differ from these estimates.

The continuity of the provision for site reclamation and closure is as follows:

Balance, December 31, 2011
 $   10,802  
Change in discount rate
    (1,071 )
Accretion expense
    81  
Balance, March 31, 2012
  9,812  

On May 1, 2012, Mineral Park Inc. received a notice from the Bureau of Land Management (BLM) requesting an interim financial guarantee of $1.0 million for reclamation of BLM administered lands within the Mineral Park Mine operation. The Company has included the estimated cost of this reclamation in its provision for site reclamation and closure. The Company is investigating the options of appeal, timing, and type of financial guarantee that are available.
 
 
12.
Common Shares, Share Purchase Warrants and Stock Options
 
Common shares
At March 31, 2012, the Company had unlimited authorized common shares without par value and 259,037,119 common shares issued and outstanding (December 31, 2011 – 259,014,300).  Refer to the consolidated statements of changes in equity for movement in share capital. The holders of common shares are entitled to one vote per share at meetings of the Company.
 
i.
Warrants

The following table summarizes the number of fully exercisable warrant transactions as at March 31, 2012:

   
Number
   
Weighted Average Exercise Price ($Cdn)
 
Balance December 31, 2011
    24,411,801      $ 2.15  
Warrants expired
    (5,994,550 )     4.00  
Balance March 31, 2012
    18,417,251      $ 1.54  

- 13 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)



The following is a summary of common share purchase warrants outstanding and exercisable as at March 31, 2012:
 

Number of warrants
Exercise price
in $ Cdn

Expiry date
Publically
Traded
14,154,662
1.00
January 29, 2012
Yes
21,5625
2.80
July 14, 2012
No
1,18,9821
5.47
May 15, 2012
No
2,857,143
2.50
December 2, 2014
No
18,417,251
     

Fair value is determined on publically traded warrants from quoted market prices. All other warrants are valued using the Black-Scholes option-pricing model.
 
ii.
Share Purchase Options

The following table summarizes for the periods presented the number of share option transactions and the weighted average exercise prices thereof:
 
   
Number of
Options
   
Weighted Average
Exercise Price
($CDN)
 
Outstanding at December 31, 2011
    14,221,819      $ 2.76  
Granted (a)
    700,000       1.51  
Exercised (b)
    (22,819 )     1.48  
Expired
    (2,763,761 )     3.15  
Canceled/Forfeited (b)
    (6,750 )     6.79  
Outstanding at March 31, 2012
    12,128,489       2.60  
Exerciseable at March 31, 2012
    8,983,491      $ 2.70  
 
(a)  
The weighted average fair value of options granted during the three months ended March 31, 2012 was $0.78 (CDN$0.77) (March 31, 2011 – $2.61 (CDN$2.60)) based on the Black-Scholes option pricing model using weighted average assumptions, as described below.
 
(b)  
During the three months ended March 31, 2012, a total of 22,819 (2011 – 578,100) shares were issued to directors, officers and employees on the exercise of options for cash consideration and nil (2011 – 888,356) shares were issued to directors, officers and employees on exercise by way of a cashless share option exercise. In conjunction with the exercise of the options using the cashless option provision, nil options were cancelled (2011 – 678,271).

A summary of the share options exercisable and outstanding at March 31, 2012 was as follows:
 

 
Exercise price
range (CAD$)
 
Number of Options
Outstanding
Weighted average
remaining life of
options (years)
 
Number of Options
Exercisable
Weighted average
remaining life of
options (years)
  0.83 - 1.93
3,500,044
2.56
2,800,044
2.06
  1.94 - 2.32
2,648,939
2.33
2,498,939
2.27
  2.33 - 2.53
2,765,550
3.79
1,240,553
3.50
  2.54 - 3.21
1,541,087
3.90
771,086
3.53
3.22 - 10.44
1,672,869
2.24
1,672,869
2.24
 
12,128,489
2.92
8,983,491
2.48

- 14 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)




 
Weighted average assumptions used in calculating fair value of options granted during the period using Black-Scholes model were as follows:
 
 
Three Months Ending March 31
 
2012
2011
Risk-free interest rate
0.98%
1/62%
Expected Dividend yield
nil
nil
Expected volatility
69.34%
100%
Weighted average expected life of the options (months)
25
35

For the three months ended March 31, 2012, the compensation expense for share options totalled $1.1 million (2011 - $1.7 million), which was included in the Statements of Comprehensive Income (Loss) and credited to share-based payments reserve.
 
 
iii.
Earnings per Share
 
    For the three months ended March 31, 2012     
For the three months ended March 31, 2011
 
               
Per share
               
Per share
 
   
Net earnings
   
Shares
   
Amount
   
Net earnings
   
Shares
   
Amount
 
Shares outstanding at Jan 1
          259,014,300                   197,621,466        
Issue of shares on exercise of stock options
          22,819                   1,466,496        
Issue of shares on exercise of share purchase warrants
                            1,611,847        
Basic net earnings per share
   $ (20,492 )     259,037,119      $ (0.08 )    $ (6,201 )     200,699,809      $ (0.03 )

For the three months ended March 31, 2012, 8,983,491 outstanding stock options were excluded from the calculation of diluted earnings per share (2011 –8,367,600) as their exercise would be antidilutive.
 
13.
Related Party Transactions
 
Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Company and other related parties are disclosed below.

The Company entered into the following transactions with related parties not disclosed elsewhere in these consolidated financial statements:

a.
Included in accounts payable as at March 31, 2012 was nil (December 31, 2011 - $2.6 million) due to a former director and officer in connection with his retirement and resignation from the Company.

b.
Legal fees - the Company paid or accrued nil (2011 – $26,000) for legal services rendered during the period by a law firm of which a director of the Company is a partner.

These transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Related parties include directors and officers and companies with common management and directorships.


- 15 -
 

 
Mercator Minerals Ltd.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2012 and 2011
 (Tabular amounts expressed in thousands of United States Dollars, unless otherwise noted)



14.
Operating Segments
 
The Company has determined it operates in two geographic segments. Operation of mineral properties and extraction of copper and molybdenum occurs in the United States of America and exploration and development of mineral properties occurs principally in Mexico. All revenue, inventory and long-term assets in 2012 and 2011 were related to the reporting segment in the United States except for the Company’s El Pilar and El Creston long-term exploration assets, which are located in the reporting segment in Mexico.

All revenue is attributable to external customers in the United States.


 
- 16 -