ENTREE GOLD INC, 40-F filed on 3/30/2012
Annual Report (foreign private issuer)
Document and Entity Information†(USD $)
12 Months Ended
Dec. 31, 2011
Feb. 17, 2012
Document And Entity Information
Entity Registrant Name
ENTREE GOLD INC†
Entity Central Index Key
0001271554†
Document Type
40-F†
Document Period End Date
Dec. 31, 2011†
Amendment Flag
false†
Current Fiscal Year End Date
--12-31†
Is Entity a Well-known Seasoned Issuer?
No†
Is Entity a Voluntary Filer?
No†
Is Entity's Reporting Status Current?
Yes†
Entity Filer Category
Smaller Reporting Company†
Entity Public Float
$†154,895,029†
Entity Common Stock, Shares Outstanding
128,377,243†
Document Fiscal Period Focus
FY†
Document Fiscal Year Focus
2011†
Balance Sheets†(USD $)
Dec. 31, 2011
Dec. 31, 2010
ASSETS
Cash and cash equivalents (note 4)
$†14,512,198†
$†21,296,169†
Short-term investments (note 4)
4,916,421†
0†
Receivables
424,522†
309,079†
Prepaid expenses
955,121†
1,140,253†
Total current assets
20,808,262†
22,745,501†
Long term investments (note 5)
0†
5,564,502†
Equipment (note 6)
754,846†
766,309†
Mineral property interests (note 7)
52,678,763†
51,977,982†
Other assets
249,489†
185,287†
Equity investment - joint venture (notes 5 and 7)
98,450†
119,517†
Total assets
74,589,810†
81,359,098†
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities
1,804,126†
1,477,300†
Loans payable to Oyu Tolgoi LLC (note 11)
4,327,878†
1,783,692†
Deferred income tax liabilities (note 11)
9,392,614†
14,374,498†
Total liabilities
15,524,618†
17,635,490†
Stockholders' equity
Common stock, no par value, unlimited number authorized, (note 9) 127,016,788 (December 31, 2010 - 114,354,925) issued and outstanding
165,574,192†
149,791,943†
Additional paid-in capital
17,420,307†
16,871,401†
Accumulated other comprehensive income (note 13)
1,901,351†
5,750,714†
Accumulated deficit during the exploration stage
(125,830,658)
(108,690,450)
Total stockholders' equity
59,065,192†
63,723,608†
Total liabilities and stockholders' equity
$†74,589,810†
$†81,359,098†
Balance Sheets (Parenthetical)†(USD $)
Dec. 31, 2011
Dec. 31, 2010
Balance Sheets Parenthetical
Common stock, par value
$†0†
$†0†
Common stock, Unlimited authorized shares
  †
  †
Common stock, issued shares
127,016,788†
114,354,925†
Common stock, outstanding shares
127,016,788†
114,354,925†
Statements of Operations†(USD $)
12 Months Ended 197 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2011
EXPENSES
Exploration (note 7)
$†17,679,174†
$†12,226,563†
$†84,755,323†
General and administration
5,766,102†
7,846,393†
48,111,023†
Depreciation
196,221†
203,086†
1,276,413†
Gain on sale of mineral property interests (note 7)
(1,574,523)
0†
(1,574,523)
Impairment of mineral property interests (note 7)
531,005†
0†
531,005†
Foreign exchange loss (gain)
491,504†
(403,230)
269,498†
Loss from operations
(23,089,483)
(19,872,812)
(133,368,739)
Gain on sale of investments (note 5)
3,326,275†
0†
3,326,275†
Interest income
190,391†
243,433†
5,087,860†
Loss from equity investee (note 5)
(2,397,085)
(985,441)
(3,918,629)
Fair value adjustment of asset backed commercial paper (note 5)
0†
0†
(2,332,531)
Loss from operations before income taxes
(21,969,902)
(20,614,820)
(131,205,764)
Current income tax expense
(152,190)
0†
(152,190)
Deferred income tax recovery
4,981,884†
545,412†
5,527,296†
Net loss
(17,140,208)
(20,069,408)
(125,830,658)
Comprehensive loss:
Net loss
(17,140,208)
(20,069,408)
(125,830,658)
Unrealized gain (loss) on available for sale securities (note 13)
(2,747,997)
2,184,516†
0†
Foreign currency translation adjustment (note 13)
(1,101,366)
3,483,645†
1,901,351†
Comprehensive loss
$†(20,989,571)
$†(14,401,247)
$†(123,929,307)
Basic and diluted net loss per share
$†(0.15)
$†(0.19)
Weighted average number of common shares outstanding
115,978,815†
105,814,724†
Shareholders Equity†(USD $)
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income
Accumulated Deficit During the Exploration Stage
Total
Beginning Balance - Amount at Jul. 18, 1995
$†0†
$†0†
$†0†
$†0†
$†0†
Beginning Balance - Shares at Jul. 18, 1995
0†
Private Placements, Shares
4,200,000†
Private Placements, Amount
60,852†
60,852†
Acquisition of mineral property interests, Shares
3,200,000†
Acquisition of mineral property interests, Amount
147,520†
147,520†
Foreign currency translation adjustment
(756)
(756)
Net loss
(175,714)
(175,714)
Ending Balance, Amount at Apr. 30, 1996
208,372†
  †
(756)
(175,714)
31,902†
Ending Balance, Shares at Apr. 30, 1996
7,400,000†
Private Placements, Shares
3,880,000†
Private Placements, Amount
274,718†
274,718†
Foreign currency translation adjustment
(8,568)
(8,568)
Net loss
(56,250)
(56,250)
Ending Balance, Amount at Apr. 30, 1997
483,090†
  †
(9,324)
(231,964)
241,802†
Ending Balance, Shares at Apr. 30, 1997
11,280,000†
Foreign currency translation adjustment
(5,216)
  †
(5,216)
Net loss
(33,381)
(33,381)
Ending Balance, Amount at Apr. 30, 1998
483,090†
  †
(14,540)
(265,345)
203,205†
Ending Balance, Shares at Apr. 30, 1998
11,280,000†
Foreign currency translation adjustment
(3,425)
  †
(3,425)
Net loss
(40,341)
(40,341)
Ending Balance, Amount at Apr. 30, 1999
483,090†
  †
(17,965)
(305,686)
159,439†
Beginning Balance - Shares at Apr. 30, 1999
11,280,000†
Exercise of stock options, Shares
1,128,000†
Exercise of stock options, Value
113,922†
  †
  †
  †
113,922†
Escrow shares compensation
  †
41,593†
  †
  †
41,593†
Foreign currency translation adjustment
(896)
  †
(896)
Net loss
(154,218)
(154,218)
Ending Balance, Amount at Apr. 30, 2000
597,012†
41,593†
(18,861)
(459,904)
159,840†
Ending Balance, Shares at Apr. 30, 2000
12,408,000†
Foreign currency translation adjustment
(5,627)
  †
(5,627)
Net loss
(18,399)
(18,399)
Ending Balance, Amount at Apr. 30, 2001
597,012†
41,593†
(24,488)
(478,303)
135,814†
Ending Balance, Shares at Apr. 30, 2001
12,408,000†
Foreign currency translation adjustment
(2,561)
  †
(2,561)
Net loss
(22,490)
(22,490)
Ending Balance, Amount at Apr. 30, 2002
597,012†
41,593†
(27,049)
(500,793)
110,763†
Beginning Balance - Shares at Apr. 30, 2002
12,408,000†
Private Placements, Shares
7,500,000†
Private Placements, Amount
1,351,055†
  †
  †
  †
1,351,055†
Exercise of warrants, Shares
12,500†
Exercise of warrants, Value
3,288†
  †
  †
  †
3,288†
Agentís finder fee, Shares
310,000†
Agentís finder fee, Value
39,178†
  †
  †
  †
39,178†
Acquisition of mineral propery interests, Shares
100,000†
Acquisition of mineral property interests, Value
35,827†
  †
  †
  †
35,827†
Debt settlement, Shares
135,416†
Debt settlement, Amount
45,839†
5,252†
  †
  †
51,091†
Agentís warrants
16,877†
  †
  †
16,877†
Escrow shares compensation
  †
40,205†
  †
  †
40,205†
Stock-based compensation
16,660†
  †
  †
16,660†
Share issue costs
(211,207)
  †
  †
  †
(211,207)
Foreign currency translation adjustment
73,080†
  †
73,080†
Net loss
(1,073,320)
(1,073,320)
Ending Balance, Amount at Apr. 30, 2003
1,860,992†
120,587†
46,031†
(1,574,113)
453,497†
Ending Balance, Shares at Apr. 30, 2003
20,465,916†
Private Placements, Shares
16,352,942†
Private Placements, Amount
10,891,160†
  †
  †
  †
10,891,160†
Exercise of stock options, Shares
35,000†
Exercise of stock options, Value
18,730†
(4,026)
  †
  †
14,704†
Exercise of warrants, Shares
3,730,372†
Exercise of warrants, Value
1,316,664†
(6,443)
  †
  †
1,310,221†
Agentís finder fee, Shares
100,000†
Agentís finder fee, Value
64,192†
8,384†
  †
  †
72,576†
Acquisition of mineral propery interests, Shares
5,000,000†
Acquisition of mineral property interests, Value
3,806,000†
  †
  †
  †
3,806,000†
Agentís warrants
  †
370,741†
  †
  †
370,741†
Escrow shares compensation
  †
1,949,878†
  †
  †
1,949,878†
Stock-based compensation
  †
414,847†
  †
  †
414,847†
Share issue costs
(1,302,715)
  †
  †
  †
(1,302,715)
Foreign currency translation adjustment
1,950†
  †
1,950†
Net loss
(12,505,759)
(12,505,759)
Ending Balance, Amount at Dec. 31, 2003
16,655,023†
2,853,968†
47,981†
(14,079,872)
5,477,100†
Ending Balance, Shares at Dec. 31, 2003
45,684,230†
Private Placements, Shares
4,600,000†
Private Placements, Amount
3,846,521†
  †
  †
  †
3,846,521†
Exercise of stock options, Shares
50,000†
Exercise of stock options, Value
26,180†
(8,238)
  †
  †
17,942†
Exercise of warrants, Shares
533,836†
Exercise of warrants, Value
186,208†
(13,197)
  †
  †
173,011†
Warrants issued for cancellation of price guarantee
  †
129,266†
  †
  †
129,266†
Escrow shares compensation
  †
405,739†
  †
  †
405,739†
Stock-based compensation
  †
1,530,712†
  †
  †
1,530,712†
Share issue costs
(21,026)
  †
  †
  †
(21,026)
Foreign currency translation adjustment
132,501†
  †
132,501†
Net loss
  †
(5,528,114)
(5,528,114)
Ending Balance, Amount at Dec. 31, 2004
20,692,906†
4,898,250†
180,482†
(19,607,986)
6,163,652†
Ending Balance, Shares at Dec. 31, 2004
50,868,066†
Private Placements, Shares
7,542,410†
Private Placements, Amount
13,538,097†
  †
  †
  †
13,538,097†
Exercise of stock options, Shares
772,000†
Exercise of stock options, Value
1,238,581†
(532,908)
  †
  †
705,673†
Exercise of warrants, Shares
10,456,450†
Exercise of warrants, Value
10,475,291†
  †
  †
  †
10,475,291†
Escrow shares compensation
  †
(435,583)
  †
  †
(435,583)
Stock-based compensation
  †
5,074,100†
  †
  †
5,074,100†
Share issue costs
(521,798)
  †
  †
  †
(521,798)
Foreign currency translation adjustment
1,099,954†
  †
1,099,954†
Net loss
  †
(13,691,767)
(13,691,767)
Ending Balance, Amount at Dec. 31, 2005
45,423,077†
9,003,859†
1,280,436†
(33,299,753)
22,407,619†
Ending Balance, Shares at Dec. 31, 2005
69,638,926†
Membership paid in stock, Shares
4,167†
Membership paid in stock, Amount
8,870†
  †
  †
  †
8,870†
Exercise of stock options, Shares
1,215,000†
Exercise of stock options, Value
1,862,345†
(753,628)
  †
  †
1,108,717†
Stock-based compensation
  †
1,031,683†
  †
  †
1,031,683†
Foreign currency translation adjustment
252,317†
  †
252,317†
Net loss
  †
(9,655,341)
(9,655,341)
Ending Balance, Amount at Dec. 31, 2006
47,294,292†
9,281,914†
1,532,753†
(42,955,094)
15,153,865†
Ending Balance, Shares at Dec. 31, 2006
70,858,093†
Private Placements, Shares
14,428,640†
Private Placements, Amount
43,826,994†
  †
  †
  †
43,826,994†
Exercise of stock options, Shares
728,700†
Exercise of stock options, Value
926,364†
(322,880)
  †
  †
603,484†
Exercise of warrants, Shares
7,542,408†
Exercise of warrants, Value
20,392,043†
  †
  †
  †
20,392,043†
Acquisition of mineral propery interests, Shares
15,000†
Acquisition of mineral property interests, Value
33,976†
  †
  †
  †
33,976†
Stock-based compensation
  †
1,732,839†
  †
  †
1,732,839†
Share issue costs
(1,981,360)
  †
  †
  †
(1,981,360)
Foreign currency translation adjustment
3,539,535†
  †
3,539,535†
Net loss
  †
(11,833,416)
(11,833,416)
Ending Balance, Amount at Dec. 31, 2007
110,492,309†
10,691,873†
5,072,288†
(54,788,510)
71,467,960†
Ending Balance, Shares at Dec. 31, 2007
93,572,841†
Exercise of stock options, Shares
958,057†
Exercise of stock options, Value
1,447,926†
(591,456)
  †
  †
856,470†
Acquisition of mineral propery interests, Shares
30,000†
Acquisition of mineral property interests, Value
60,941†
  †
  †
  †
60,941†
Stock-based compensation
  †
3,672,358†
  †
  †
3,672,358†
Share issue costs
(7,186)
  †
  †
  †
(7,186)
Foreign currency translation adjustment
(12,483,218)
  †
(12,483,218)
Net loss
  †
(16,730,278)
(16,730,278)
Ending Balance, Amount at Dec. 31, 2008
111,993,990†
13,772,775†
(7,410,930)
(71,518,788)
46,837,047†
Ending Balance, Shares at Dec. 31, 2008
94,560,898†
Exercise of stock options, Shares
2,355,948†
Exercise of stock options, Value
4,330,539†
(2,050,489)
  †
  †
2,280,050†
Acquisition of mineral propery interests, Shares
142,500†
Acquisition of mineral property interests, Value
275,122†
  †
  †
  †
275,122†
Stock-based compensation
  †
4,183,677†
  †
  †
4,183,677†
Foreign currency translation adjustment
6,930,002†
  †
6,930,002†
Unrealized gain on available for sale securities
563,481†
  †
563,481†
Net loss
  †
(17,102,254)
(17,102,254)
Ending Balance, Amount at Dec. 31, 2009
116,599,651†
15,905,963†
82,553†
(88,621,042)
43,967,125†
Ending Balance, Shares at Dec. 31, 2009
97,059,346†
Exercise of stock options, Shares
2,122,278†
Exercise of stock options, Value
4,632,135†
(1,932,407)
  †
  †
2,699,728†
Acquisition of mineral propery interests, Shares
152,500†
Acquisition of mineral property interests, Value
382,283†
  †
  †
  †
382,283†
Acquistion of PacMag, Shares
15,020,801†
Acquistion of PacMag, Amount
28,325,101†
  †
  †
  †
28,325,101†
Escrow shares compensation
0†
0†
Stock-based compensation
  †
2,897,845†
  †
  †
2,897,845†
Share issue costs
(147,228)
(147,228)
Foreign currency translation adjustment
3,483,645†
  †
3,483,645†
Unrealized gain on available for sale securities
2,184,516†
  †
2,184,516†
Net loss
(20,069,408)
(20,069,408)
Ending Balance, Amount at Dec. 31, 2010
149,791,943†
16,871,401†
5,750,714†
(108,690,450)
63,723,608†
Ending Balance, Shares at Dec. 31, 2010
114,354,925†
Marketed offering, Shares
11,482,216†
Marketed offering, Amount
14,075,483†
14,075,483†
Exercise of stock options, Shares
427,147†
Exercise of stock options, Value
1,050,721†
(442,255)
  †
  †
608,466†
Escrow shares compensation
0†
0†
Stock-based compensation
991,161†
991,161†
Share issue costs
(1,065,065)
(1,065,065)
Acquisition of mineral property interests, Shares
752,500†
Acquisition of mineral property interests, Amount
1,721,110†
1,721,110†
Foreign currency translation adjustment
(1,101,366)
  †
(1,101,366)
Unrealized gain on available for sale securities
(2,747,997)
  †
(2,747,997)
Net loss
(17,140,208)
(17,140,208)
Ending Balance, Amount at Dec. 31, 2011
$†165,574,192†
$†17,420,307†
$†1,901,351†
$†(125,830,658)
$†59,065,192†
Ending Balance, Shares at Dec. 31, 2011
127,016,788†
Statements of Cash Flows†(USD $)
12 Months Ended 197 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
$†(17,140,208)
$†(20,069,408)
$†(125,830,658)
Items not affecting cash:
Depreciation
196,221†
203,086†
1,276,413†
Stock-based compensation
991,161†
2,897,845†
21,545,882†
Fair value adjustment of asset backed commercial paper
0†
0†
2,332,531†
Escrow shares compensation
0†
0†
2,001,832†
Mineral property interest paid in stock and warrants
0†
0†
4,052,698†
Loss from equity investee
2,397,085†
985,441†
3,918,629†
Deferred income tax recovery
(4,981,884)
(545,412)
(5,527,296)
Gain on sale of mineral property interest
(1,574,523)
0†
(1,574,523)
Impairment of mineral property interests
531,005†
0†
531,005†
Gain on sale of investments
(3,326,275)
0†
(3,326,275)
Other items not affecting cash
40,145†
24,604†
260,741†
Changes in assets and liabilities:
Receivables
(126,216)
(108,634)
(394,247)
Receivables - Oyu Tolgoi LLC
0†
705,988†
64,194†
Prepaid expenses
165,271†
(276,413)
(850,561)
Accounts payable and accrued liabilities
438,197†
212,772†
1,512,494†
Net cash used in operating activities
(22,390,021)
(15,970,131)
(100,007,141)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock
14,683,949†
2,699,728†
129,375,411†
Share issue costs
(1,065,065)
(147,228)
(4,758,213)
Loan payable to Oyu Tolgoi LLC
0†
0†
376,230†
Net cash provided by financing activities
13,618,884†
2,552,500†
124,993,428†
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired on acquisition of PacMag Metals Limited
0†
837,263†
837,263†
Mineral property interest
(777,517)
(178,874)
(994,610)
Mineral Property Interest - Bond Payments
(62,127)
(79,493)
(211,188)
Joint venture - Oyu Tolgoi LLC
0†
0†
(366,595)
Short term investments
(5,076,271)
0†
(5,076,271)
Purchase of asset backed commercial paper
0†
0†
(4,031,122)
Acquisition of PacMag Metals Limited
0†
(7,388,397)
(7,465,495)
Acquisition of equipment
(223,176)
(180,458)
(2,087,719)
Proceeds from sale of mineral property interest
1,491,391†
0†
1,491,391†
Proceeds from sale of investments
5,734,895†
0†
5,734,895†
Net cash provided by (used in) investing activities
1,087,195†
(6,989,959)
(12,169,451)
Effect of foreign currency translation on cash and cash equivalents
899,971†
1,343,323†
1,695,362†
Change in cash and cash equivalents during the period
(6,783,971)
(19,064,267)
14,512,198†
Cash and cash equivalents, beginning of period
21,296,169†
40,360,436†
0†
Cash and cash equivalents, end of period
14,512,198†
21,296,169†
14,512,198†
Cash paid for interest during the period
0†
0†
0†
Cash paid for income taxes during the period
$†0†
$†0†
$†0†
NATURE OF OPERATIONS
NATURE OF OPERATIONS

 

Entrée Gold Inc. was incorporated under the laws of the Province of British Columbia on July 19, 1995 and continued under the laws of the Yukon Territory on January 22, 2003. On May 27, 2005, Entrée Gold Inc. changed its governing jurisdiction from the Yukon Territory to British Columbia by continuing into British Columbia under the Business Corporation Act (British Columbia).  The principal business activity of Entrée Gold Inc., together with its subsidiaries (collectively referred to as “the Company”), is the exploration of mineral property interests. To date, the Company has not generated significant revenues from its operations and is considered to be in the exploration stage.

 

All amounts are expressed in United States dollars, except for certain amounts denoted in Canadian dollars ("C$"), and Australian dollars ("A$").

 

These consolidated financial statements have been prepared on the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.  The Company currently earns no operating revenues.  Continued operations of the Company are dependent upon the Company’s ability to secure additional equity capital or receive other financial support, and in the longer term to generate profits from business operations. Management believes that the Company has sufficient working capital to maintain its operations for the next fiscal year.

SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

These consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") in the United States of America and include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.

 

Use of estimates

 

The preparation of consolidated financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  The Company regularly evaluates estimates and assumptions related to deferred income tax asset valuations, asset impairment, stock-based compensation, valuation of asset-backed commercial paper and loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.

 

Cash and cash equivalents

 

Cash and cash equivalents includes cash in banks, money market funds, and certificates of term deposits with maturities of less than three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in value.  The Company had $14,512,198 in cash and cash equivalents at December 31, 2011.

 

Short-term investments

 

Short-term investments consist of money market instruments with maturities of three months or more at date of purchase. The Company had $4,916,421 in short-term investments as at December 31, 2011.

 

Long-term investments

 

Long-term investments in companies in which the Company has voting interests of 20% to 50% or where the Company has the ability to exercise significant influence, are accounted for using the equity method. Under this method, the Company’s share of the investees’ earnings and losses is included in operations and its investments therein are adjusted by a like amount. Dividends received are credited to the long-term investment accounts.

 

Other long-term investments are classified as "available-for-sale" investments and unrealized gains and losses on these investments are recorded in accumulated other comprehensive income as a separate component of stockholders’ equity, unless the declines in market value are judged to be other than temporary, in which case the losses are recognized in income in the period. Gains and losses from the sale of these investments are included in income in the period.

 

Equipment

 

Equipment, consisting of office, computer, field equipment and buildings, is recorded at cost less accumulated depreciation.  Depreciation is recorded on a declining balance basis at rates ranging from 20% to 30% per annum.

 

Mineral property interests

 

Costs of exploration and costs of carrying and retaining unproven properties are expensed as incurred. The Company considers mineral rights to be tangible assets and accordingly, the Company capitalizes certain costs related to the acquisition of mineral rights.

 

Asset retirement obligation

 

The Company records the fair value of the liability for closure and removal costs associated with the legal obligations upon retirement or removal of any tangible long-lived assets where the initial recognition of any liability will be capitalized as part of the asset cost and depreciated over its estimated useful life.  To date, the Company has not incurred any asset retirement obligations.

 

Impairment of long-lived assets

 

Long-lived assets are continually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the discounted carrying amount of the assets exceeds the fair value of the assets.

 

Stock-based compensation

 

The Company applies the fair value method of accounting for all stock option awards, whereby the Company recognizes a compensation expense for all stock options awarded to employees, officers and consultants based on the fair value of the options on the date of grant, which is determined using the Black Scholes option pricing model. The options are expensed over the vesting period of the options.

 

Financial instruments

 

The Company measures the fair value of financial assets and liabilities based on GAAP guidance which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

 

Under GAAP, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is also established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable.

Level 3 – Inputs that are unobservable (for example cash flow modelling inputs based on assumptions).

 

Income taxes

 

The Company follows the asset and liability method of accounting for income taxes whereby deferred income taxes are recognized for the deferred income tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective income tax bases (temporary differences). Deferred income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is included in income in the period in which the change occurs. The amount of deferred income tax assets recognized is limited to the amount that is more likely than not to be realized.

 

Foreign currency translation

 

The functional currency of the Company is the Canadian dollar.  Accordingly, monetary assets and liabilities denominated in a foreign currency are translated at the exchange rate in effect at the balance sheet date while non-monetary assets and liabilities denominated in a foreign currency are translated at historical rates.  Revenue and expense items denominated in a foreign currency are translated at exchange rates prevailing when such items are recognized in the statement of operations.  Exchange gains or losses arising on translation of foreign currency items are included in the statement of operations.

 

The Company follows the current rate method of translation with respect to its presentation of these consolidated financial statements in the reporting currency, which is the United States dollar.  Accordingly, assets and liabilities are translated into United States dollars at the period-end exchange rates while revenue and expenses are translated at the prevailing exchange rates during the period.  Related exchange gains and losses are included in a separate component of stockholders’ equity as accumulated other comprehensive income.

 

Net loss per share

 

Basic net loss per share is computed by dividing the net loss for the period attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period.  Diluted net loss per share takes into consideration shares of common stock outstanding (computed under basic loss per share) and potentially dilutive shares of common stock.  Diluted net loss per share is not presented separately from basic net loss per share as the conversion of outstanding stock options and warrants into common shares would be anti-dilutive.  At December 31, 2011, the total number of potentially dilutive shares of common stock excluded from basic net loss per share was 9,135,500 (December 31, 2010 - 9,292,800).

 

Comparative figures

 

Certain comparative figures have been reclassified to conform with the current year’s presentation.

 

Recent accounting pronouncements

 

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  ASU 2011-12 defers the effective date pertaining to reclassification adjustments out of accumulated other comprehensive income (AOCI) in ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income.  ASU 2011-12 is effective for interim and annual reporting periods beginning after December 15, 2011. The Company does not expect its adoption to have a material impact on the Company’s financial reporting and disclosures.

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, amending ASC 220.  ASU 2011-05 eliminates the current option under U.S. GAAP to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity.  Entities are required to present components of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 also requires entities to present reclassification adjustments out of AOCI in the statements where the components of net income and the components of OCI are presented.  Consequently, this requirement is deferred by ASU 2011-12 and will be reconsidered by the FASB at a future date.  ASU 2011-05 is effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently presenting all components of comprehensive income in a single continuous statement of comprehensive income and accordingly, the Company does not expect its adoption to have a material impact on the Company’s financial reporting and disclosures.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, amending ASC 820.  ASU 2011-04 results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs.  Accordingly, the amendments clarify the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact of ASU 2011-04, but does not expect its adoption to have a material impact on the Company’s financial reporting and disclosures.

ACQUISITIONS
ACQUISITIONS

The Company acquired all of the outstanding shares of PacMag Metals Limited (now PacMag Metals Pty Ltd) ("PacMag") on June 30, 2010, pursuant to a Scheme Implementation Deed dated November 28, 2009 and amended by a Deed of Variation dated April 12, 2010 with PacMag, by way of schemes of arrangement (the "Schemes") under the laws of Australia. The acquisition has been accounted for as an acquisition of the net assets of PacMag, rather than a business combination, as the net assets acquired did not represent a separate business transaction. For accounting purposes, the Company acquired control of PacMag on June 30, 2010 and these consolidated financial statements include the results of PacMag from June 30, 2010. All outstanding options to purchase PacMag shares were cancelled pursuant to the Schemes.

As consideration to former shareholders and option holders of PacMag, the Company issued 15,020,801 common shares valued at $28,325,101, paid $6,160,391 and incurred transaction costs of $1,282,789 for total consideration of $35,768,281.

The Company allocated the consideration to assets acquired and liabilities assumed as follows:

Cash  $837,263 
Receivables and deposits   174,440 
Investments   895,273 
Mineral property interests   47,979,966 
Equipment   1,488 
Accounts payables and accrued liabilities   (128,689)
Deferred income tax liability   (13,991,460)
   $35,768,281 

For the purposes of these consolidated financial statements, the purchase consideration has been allocated to the fair value of assets acquired and liabilities assumed, based on management’s best estimates and taking into account all available information at the time of acquisition as well as applicable information at the time these consolidated financial statements were prepared 

       

 

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash, cash equivalents and short-term investments consist of the following:

 

  December 31, 2011 December 31, 2010
Cash at bank and in hand $10,579,061 $21,296,169
Cash equivalent investments 3,933,137 -
Short-term investments 4,916,421 -
  $19,428,619 $21,296,169

 

LONG-TERM INVESTMENTS
LONG-TERM INVESTMENTS

 

Long-term investments are summarized as follows:

 

     
  December 31, 2011 December 31, 2010
Asset Backed Commercial Paper $ - $2,638,185
Australian Listed Equity - 2,926,317
  $ - $5,564,502

  

Asset Backed Commercial Paper

 

 In September 2011, the Company sold its asset backed notes (“AB Notes”) with a face value of C$4,007,068, and an expected maturity date of December 20, 2016, for gross cash proceeds of $2,560,687, net of taxes. The Company had designated the notes as available for sale and the notes were recorded at fair value using a discounted cash flow approach (December 31, 2010 – C$2,623,998).  The Company recorded a gain on sale of investments of $1,178,254 for the year ended December 31, 2011.

 

Australia Listed Equity Securities

 

In April 2011, the Company sold its Australian listed securities for gross cash proceeds of $3,174,208, net of taxes.  The Company recorded a gain on sale of investments of $2,148,021 for the year ended December 31, 2011.

 

Equity Method Investment

 

The Company has a 20% interest in a joint venture with Oyu Tolgoi LLC (“OTLLC”), a company owned 66% by Ivanhoe Mines Ltd. and 34% by the Government of Mongolia (Note 7).  At December 31, 2011, the Company’s investment in the joint venture was $98,450 (December 31, 2010 - $119,517). The Company’s share of the loss of the joint venture is $2,397,085 for the year ended December 31, 2011 (December 31, 2010 - $985,441) including accrued interest expense of $151,952 for the year ended December 31, 2011 (December 31, 2010 - $44,103).

EQUIPMENT
EQUIPMENT

 

    December 31, 2011 December 31, 2010
  Cost Accumulated Depreciation Net Book Value Cost Accumulated Depreciation Net Book Value
             
Office equipment $125,486 $83,346 $42,140 $128,546 $77,718 $50,828
Computer equipment 577,249 322,882 254,367 582,103 317,101 265,002
Field equipment 568,984 246,363 322,621 542,662 255,423 287,239
Buildings 422,468 286,750 135,718 444,041 280,801 163,240
  $1,694,187 $939,341 $754,846 $1,697,352 $931,043 $766,309

MINERAL PROPERTY INTERESTS
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 property interests.  The Company has investigated title to its mineral property interests and, to the best of its knowledge, title to the mineral property interests is in good standing.

 

Material Properties

 

The Company’s two principal assets are its interest in the Lookout Hill copper-gold property in Mongolia, and the Ann Mason copper-molybdenum project in Nevada.

 

Lookout Hill, Mongolia

 

The Lookout Hill property in the South Gobi region of Mongolia is comprised of two mining licences, Shivee Tolgoi and Javhlant, granted by the Mineral Resources Authority of Mongolia in October 2009.  

Title to the two licences is held by the Company.

 

In October 2004, the Company entered into an arm’s-length Equity Participation and Earn-In Agreement (the "Earn-In Agreement") with Ivanhoe Mines Ltd. ("Ivanhoe Mines").  Under the Earn-In Agreement, Ivanhoe Mines agreed to purchase equity securities of the Company, and was granted the right to earn an interest in what is now the eastern portion of the Shivee Tolgoi mining licence and all of the Javhlant mining licence (together the "Joint Venture Property").  Most of Ivanhoe Mines’ rights and obligations under the Earn-In Agreement were subsequently assigned by Ivanhoe Mines to what was then its wholly-owned subsidiary, OTLLC.  The Government of Mongolia subsequently acquired a 34% interest in OTLLC from Ivanhoe Mines.

 

On June 30, 2008, OTLLC gave notice that it had completed its earn-in obligations by expending a total of $35 million on exploration of the Joint Venture Property.  OTLLC earned an 80% interest in all minerals extracted below a sub-surface depth of 560 metres from the Joint Venture Property and a 70% interest in all minerals extracted from surface to a depth of 560 metres from the Joint Venture Property.  In accordance with the Earn-In Agreement, the Company and OTLLC formed a joint venture (the "Entrée-OTLLC Joint Venture") on terms annexed to the Earn-In Agreement.

 

The portion of the Shivee Tolgoi mining licence outside of the Joint Venture Property ("Shivee West") is 100% owned by the Company, but is subject to a first right of refusal by OTLLC.

 

The Shivee Tolgoi and Javhlant mining licences were each issued for a 30 year term and have rights of renewal for two further 20 year terms.

 

As of December 31, 2011, the Entrée-OTLLC Joint Venture had expended approximately $20.5 million to advance the Joint Venture Property. Under the terms of the Entrée-OTLLC Joint Venture, OTLLC contributed on behalf of the Company its required participation amount charging interest at prime plus 2% (Note 8).

 

Ann Mason, Nevada, United States

 

The Ann Mason Project is defined by a series of both unpatented lode claims on public land administered by the Bureau of Land Management, and patented lode claims.  The Company assembled this package of claims through a combination of staking and a series of transactions undertaken since August 2009, including the acquisition of PacMag.  The project area includes the Ann Mason copper-molybdenum porphyry deposit, the Blue Hill oxide target, and several early-stage copper porphyry targets including the Blackjack, Roulette and Minnesota targets.

 

On August 26, 2010, the Company acquired 51% of Honey Badger Exploration Inc.’s ("Honey Badger") interest in unpatented lode claims formerly known as the Blackjack property after incurring expenditures of $900,000 on the property, issuing 37,500 common shares and reimbursing Honey Badger for up to $206,250 of expenditures previously incurred on the property.  On July 27, 2011, the Company acquired Honey Badger’s remaining 49% interest in the Blackjack property, by issuing 550,000 common shares and paying $650,000 to Honey Badger.  Certain of the claims are subject to an underlying mining lease and option to purchase agreement with two individuals.  The underlying agreement provides for an option to purchase the claims for $500,000, a 3% net smelter returns ("NSR") royalty (which may be brought down to a 1% NSR royalty for $2 million) and annual advance minimum royalty payments of $27,500 which commenced in June 2011 and will continue until the commencement of sustained commercial production.  The advance payments will be credited against future net smelter returns royalty payments.

 

In September 2009, the Company entered into an agreement with Bronco Creek Exploration Inc. ("Bronco Creek"), a wholly-owned subsidiary of Eurasian Minerals Inc. (together, "Eurasian Minerals"), whereby the Company may acquire an 80% interest in unpatented lode claims formerly known as the Roulette property.  In order to acquire its interest, the Company must: (a) incur expenditures of $1,000,000, make cash payments of $140,000 and issue 85,000 common shares of the Company within three years; (b) make aggregate advance royalty payments totalling $375,000 between the fifth and tenth anniversaries of the agreement; and (c) deliver a bankable feasibility study before the tenth anniversary of the agreement.  In accordance with the agreement, the Company has completed required exploration expenditures of $600,000, issued 85,000 shares and made payments totalling $140,000.

 

Other Properties

 

During the financial year ended December 31, 2011, the Company also had interests in non-material properties in Mongolia, Australia, United States, and Peru.  Non-material properties include the following:

 

Togoot

 

In November 2011, the Company sold the Togoot license for $1,365,475, net of taxes and recorded a gain on sale of mineral property interests of $1,474,640.  OTLLC did not exercise its right of first refusal with respect to the sale.

 

Australia Properties

 

The Company has a number of mineral property interests in Australia which it acquired in conjunction with the PacMag acquisition, including the Blue Rose joint venture and the Mystique farm-out.  The Company holds a 51% interest in the Blue Rose copper-iron-gold-molybdenum joint venture property, with Giralia Resources Pty Ltd., now a subsidiary of Atlas Iron Limited (ASX:AGO) ("Atlas"), retaining the remaining 49% interest.  The Company has a farm-out agreement with Black Fire Gold Pty Ltd, a wholly-owned subsidiary of Black Fire Minerals Limited (ASX:BFE – "Black Fire"), pursuant to which Black Fire can earn a 60% interest in the property by expending $1 million by September 2012 and a 75% interest by expending $2.5 million by September 2014.  Black Fire can earn an additional 10% interest by sole funding a pre-feasibility study on the property.

 

 

     
  December 31, 2011 December 31, 2010
     
USA    
Ann Mason $50,973,368 $50,211,120
Empirical 532,550 268,701
Other 199,754 458,798
Bisbee - 68,796
Total USA 51,705,672 51,007,415
     
AUSTRALIA    
Blue Rose JV 558,927 557,464
Mystique 414,164 413,103
Total Australia 973,091 970,567
     
Total all locations $52,678,763 $51,977,982

 

The Company recorded an impairment of mineral property interests of $531,005 on certain of its non-material mineral property interests during the year ended December 31, 2011(December 31, 2010 - $Nil).  The Company recorded a gain on sale of mineral property interests of $1,574,523, including $1,474,640 on the Togoot property during the year ended December 31, 2011 (December 31, 2010 - $Nil).

 

Exploration costs expensed are summarized as follows:

 

     
  Year Ended 
December 31, 2011
Year Ended
December 31, 2010
     
US $14,088,428 $3,973,528
Mongolia 3,255,588 6,945,394
Other 335,158 1,307,641
     
Total all locations $17,679,174 $12,226,563

LOANS PAYABLE
LOANS PAYABLE

 

Under the terms of the Entrée-OTLLC Joint Venture (Note 7), OTLLC will contribute funds to approved joint venture programs and budgets on the Company’s behalf. Interest on each loan advance shall accrue at an annual rate equal to OTLLC’s actual cost of capital or the prime rate of the Royal Bank of Canada, plus two percent (2%) per annum, whichever is less, as at the date of the advance. The loans will be repayable by the Company monthly from ninety percent (90%) of the Company’s share of available cash flow from the Entrée-OTLLC Joint Venture. In the absence of available cash flow, the loans will not be repayable. The loans are not expected to be repaid within one year. 

 

COMMON STOCK
COMMON STOCK

 

Share issuances

 

In July 1995, the Company completed a private placement consisting of 4,200,000 common shares issued at a price of C$0.02 per share for gross proceeds of $60,852.

 

In July 1995, the Company issued 3,200,000 shares at a value of $147,520 for the acquisition of a mineral property interest in Costa Rica.  This mineral property was abandoned in 2001.

 

In January 1997, the Company completed a private placement consisting of 1,680,000 common shares issued at a price of C$0.06 per share for gross proceeds of $77,553.

 

In April 1997, the Company completed a private placement consisting of 2,200,000 common shares issued at a price of C$0.12 per share for gross proceeds of $197,165.

 

In February 2000, the Company issued 1,128,000 common shares for cash proceeds of $113,922 on the exercise of stock options.

 

In September 2002, the Company completed a brokered private placement consisting of 4,000,000 units issued at a price of C$0.20 per unit for gross proceeds of $505,520.  Each unit consisted of one common share and one-half non-transferable share purchase warrant.  Each whole share purchase warrant entitled the holder to acquire one additional common share at a price of C$0.40 per share for a period of one year.  As part of this private placement, the Company issued 310,000 units as a finder's fee to the agent.  Each agent's unit consisted of one common share and one-half non-transferable share purchase warrant whereby each whole share purchase warrant entitled the agent to acquire one additional common share at a price of C$0.40 per share for a period of one year. Related share issue costs of $112,338 were comprised of cash costs totalling $72,556 and the fair value of 310,000 units estimated at $39,782, of which $39,178 was assigned to the common shares and $604 was assigned to the warrants.

 

In January 2003, the Company completed a combination brokered and non-brokered private placement consisting of 2,500,000 units issued at a price of C$0.35 per unit for gross proceeds of $569,975.  Each unit consisted of one common share and one-half non-transferable share purchase warrant.  Each whole share purchase warrant entitled the holder to acquire one additional common share at a price of C$0.40 per share for a period of one year.  As part of this private placement, the Company issued 329,723 agent's warrants whereby each warrant entitled the agent to acquire one additional common share at a price of C$0.40 per share for a period of one year. Related share issue costs of $94,461 were comprised of cash costs totalling $78,188 and the fair value of the agents warrants estimated at $16,273.

 

In January 2003, the Company issued 100,000 common shares at a value of $35,827 as a finder's fee towards the acquisition of mineral property interests.

 

In February 2003, the Company issued 12,500 common shares for proceeds of $3,288 on the exercise of warrants.

 

In March 2003, the Company issued 135,416 common shares at a value of $45,839 and 67,708 non-transferable share purchase warrants with a value of $5,252 to settle accounts payable totalling $45,839 resulting in a loss on settlement of $5,252.  Each share purchase warrant entitled the holder to acquire one additional common share at a price of C$0.60 per share for a period of one year.

 

In April 2003, the Company completed a non-brokered private placement consisting of 1,000,000 units issued at a price of C$0.40 per unit for proceeds of $275,560.  Each unit consisted of one common share and one non-transferable share purchase warrant.  Each share purchase warrant entitled the holder to acquire one additional common share at a price of C$0.50 per share for the first year and at C$0.60 per share for the second year.   The Company incurred costs of $4,408 with respect to this private placement.

 

In August 2003, the Company completed a non-brokered private placement consisting of 2,000,000 common shares issued at a price of C$0.20 per share for gross proceeds of $288,360.  Related share issue costs of $15,270 were charged as a reduction to the gross proceeds raised on the non-brokered private placement.

 

In October 2003, the Company completed a short-form offering and issued 2,352,942 units at a price of C$0.85 per unit for gross proceeds of $1,510,400.  Each unit consisted of one common share and one-half of one non-transferable share purchase warrant.  Each whole share purchase warrant allowed the holder to purchase one additional common share at an exercise price of C$1.06 on or before October 22, 2005.  The agent for the offering was paid a cash commission of 8.5% of the gross proceeds received, or $128,384, in respect of units sold and received agent's warrants to acquire common shares equal to 10% of the number of units sold, or 235,294 warrants.  The agent's warrants allowed the agent to purchase one additional common share at an exercise price of C$0.95 per share on or before October 22, 2004. The agent was also issued 100,000 units as a corporate finance fee.  Each agent's unit consisted of one common share and one-half of one non-transferable share purchase warrant.  Each whole share purchase warrant allowed the agent to purchase one additional common share at an exercise price of C$0.95 on or before October 22, 2004.  Related share issue costs of $296,296 were comprised of cash costs totalling $164,004 and the fair value of 100,000 agents units estimated at $72,576 and the fair value of 235,294 agent's warrants estimated at $59,716.  The fair value of the agent's units of $72,576 consisted of $64,192 assigned to the common shares and $8,384 assigned to the warrants.

 

In October 2003, the Company completed a brokered private placement consisting of 12,000,000 units at a price of C$1.00 per unit for gross proceeds of $9,092,400.  Each unit consisted of one common share and one-half of one non-transferable share purchase warrant.  Each whole share purchase warrant allowed the holder to purchase one additional common share at an exercise price of C$1.35 on or before October 31, 2005.  The agent for the offering was paid a cash commission of 6.5% of the gross proceeds received in respect of units sold by the agent up to 11,500,000 units, or $566,381, and received 920,000 agent's warrants.  The agent's warrants allowed the agent to purchase one additional common share at an exercise price of C$1.35 per share on or before April 30, 2005.  Related share issue costs of $991,149 were comprised of cash costs totalling $680,124 and the fair value of the agents warrants estimated at $311,025.

 

In November 2003, the Company issued 5,000,000 shares at a value of $3,806,000 pursuant to the Lookout Hill mineral property purchase agreement.

 

During the eight month period ended December 31, 2003 the Company issued 3,730,372 common shares for cash proceeds of $1,310,221 on the exercise of warrants.  The warrants exercised had a corresponding fair value of $6,443 when issued which has been transferred from additional paid-in capital to common stock on the exercise of the warrants.

 

During the eight month period ended December 31, 2003, the Company issued 35,000 common shares for cash proceeds of $14,704 on the exercise of stock options.  The fair value recorded when the options were granted of $4,026 has been transferred from additional paid-in capital to common stock on the exercise of the options.

 

In November 2004, the Company completed a non-brokered private placement consisting of 4,600,000 units at a price of C$1.00 per unit for gross proceeds of $3,846,521.  Each unit consisted of one common share and one non-transferable share purchase warrant.  Each share purchase warrant entitles the holder to purchase one additional common share at a price of C$1.10 on or before November 9, 2006.  Pursuant to an agreement with the Company, the placee, being Ivanhoe Mines, had a pre-emptive right to such percentage of any future offering of securities by the Company to enable it to preserve its pro-rata ownership interest in the Company after its acquisition of these 4,600,000 units.  The pre-emptive right terminated in June 2008.  Related share issue costs were comprised of cash costs totalling $21,026.

 

During the year ended December 31, 2004, the Company issued 533,836 common shares for cash proceeds of $173,011 on the exercise of warrants.  Certain of the warrants exercised had a corresponding fair value of $13,197 when issued which has been transferred from additional paid-in capital to common stock on the exercise of the warrants.

 

In June 2005, the Company completed a non-brokered private placement consisting of 5,665,730 units at a price of C$2.20 per unit for gross proceeds of $10,170,207. Each unit consisted of one common share, one non-transferable share purchase A warrant and one non-transferable share purchase B warrant. Two A warrants entitle the holder to purchase one common share of the Company at a price of C$2.75 for a period of 2 years. Two B warrants entitle the holder to purchase one common share of the Company at a price of C$3.00 for a period of two years. Pursuant to an agreement with the Company, the placee, Kennecott Canada Exploration Inc. (now Rio Tinto Exploration Canada Inc. (“Rio Tinto”)) (indirect wholly-owned subsidiary of Rio Tinto plc) has the right to acquire additional securities and participate in future financings by the Company so as to maintain its proportional equity in the Company. Related share issue costs were comprised of cash costs totalling $521,798.

 

In July 2005, the Company completed a non-brokered private placement consisting of 1,876,680 units at a price of C$2.20 per unit for gross proceeds of $3,367,890. Each unit consisted of one common share, one non-transferable share purchase A warrant and one non-transferable share purchase B warrant. Two A warrants entitle the holder to purchase one common share of the Company at a price of C$2.75 for a period of 2 years. Two B warrants entitle the holder to purchase one common share of the Company at a price of C$3.00 for a period of two years.

 

During the year ended December 31, 2005, the Company issued 10,456,450 common shares for cash proceeds of $10,475,291 on the exercise of warrants.

 

During the year ended December 31, 2005, the Company issued 772,000 common shares for cash proceeds of $705,673 on the exercise of stock options. The fair value recorded when the options were granted of $532,908 has been transferred from additional paid–in capital to common stock on the exercise of the options.

 

The year ended December 31, 2006, the Company issued 1,215,000 common shares for cash proceeds of $1,108,717 on the exercise of stock options. The fair value recorded when the options were granted of $753,628 has been transferred from additional paid–in capital to common stock on the exercise of the options.

 

In June 2007, the Company issued 7,542,408 common shares for cash proceeds of $20,392,043 on the exercise of warrants.

 

In August 2007, the Company issued 15,000 shares at a value of $33,976 to Empirical Discovery, LLC (“Empirical”) pursuant to a mineral property option agreement.

 

In November 2007, the Company completed a brokered private placement consisting of 10,000,000 common shares at price of C$3.00 per share for gross proceeds of C$30,000,000.  Ivanhoe Mines and Rio Tinto elected to exercise their respective rights to participate in the private placement.  Ivanhoe Mines acquired 2,128,356 shares at C$3.00 for gross proceeds of C$6,464,881.  Rio Tinto acquired 2,300,284 shares at C$3.00 for proceeds of C$6,987,113. Related share issuance costs were cash costs totalling $1,981,360.

 

During the year ended December 31, 2007, the Company issued 728,700 common shares for cash proceeds of $603,684 on the exercise of stock options. The fair value recorded when the options were granted of $322,880 has been transferred from additional paid–in capital to common stock on the exercise of the options.

 

In February 2008, the Company issued 10,000 shares at a fair value of $20,066 to Empirical pursuant to the January 2008 Bisbee mineral property option agreement.

 

In August 2008, the Company issued 20,000 shares at a fair value of $40,875 to Empirical pursuant to the July 2007 mineral property option agreement.

During the year ended December 31, 2008, the Company issued 958,057 common shares for cash proceeds of $856,470 on the exercise of stock options. The fair value recorded when the options were granted of $591,456 has been transferred from additional paid–in capital to common stock on the exercise of the options. Included in the issued shares were 144,169 common shares issued pursuant to the cashless exercise of 296,112 options with an exercise price of C$1.00, with the remaining 151,943 options treated as cancelled.

 

In February 2009, the Company issued 20,000 shares at a fair value of $22,515 to Empirical pursuant to the January 2008 Bisbee mineral property option agreement.

 

In August 2009, the Company issued 35,000 shares at a fair value of $45,545 to Empirical pursuant to the July 2007 mineral property option agreement and 37,500 shares at a fair value of $84,511 to Honey Badger  pursuant to the August 2009 mineral property option agreement.

 

In November 2009, the Company issued 50,000 shares at a fair value of $122,551 to Bronco Creek pursuant to the September 2009 mineral property option agreement.

 

During the year ended December 31, 2009, the Company issued 2,355,948 common shares for cash proceeds of $2,280,050 on the exercise of stock options. The fair value recorded when the options were granted of $2,050,489 has been transferred from additional paid–in capital to common stock on the exercise of the options. Included in the issued shares were 415,448 common shares issued pursuant to the cashless exercise of 705,000 options with an exercise price of C$1.15, with the remaining 289,552 options treated as cancelled.

  

In February 2010, the Company issued 30,000 shares at a fair value of $82,391 to Empirical pursuant to a January 2008 mineral property option agreement covering the Company’s Bisbee, Arizona property.

 

In June 2010, the Company issued 15,020,801 shares at a fair value of $28,325,101 pursuant to the acquisition of PacMag (Note 3) and incurred $147,228 of share issue costs.

 

In August 2010, the Company issued 80,000 shares at a fair value of $185,863 to Empirical pursuant to a June 2007 mineral property option agreement covering the Lordsburg and Oak Grove properties in New Mexico.

 

In October 2010, the Company issued 20,000 shares at a fair value of $53,797 to Peter Drobeck pursuant to a Confidentiality and Finder’s Fee Agreement as a finder’s fee in connection with a September 2010 conditional property option agreement between the Company’s wholly-owned Peruvian subsidiary Exploraciones Apolo Resources S.A.C. and a private Peruvian company.

 

In October 2010, the Company issued 22,500 shares at a fair value of $60,233 to Bronco Creek pursuant to a mineral property agreement.

 

During the year ended December 31, 2010, the Company issued 2,122,278 common shares for cash proceeds of $2,699,728 on the exercise of stock options. The fair value recorded when the options were granted of $1,932,407 has been transferred from additional paid–in capital to common stock on the exercise of the options. Included in the issued shares were 430,078 common shares issued pursuant to the cashless exercise of 100,000 options with an exercise price of C$1.32, 1,535,300 options with an exercise price of C$1.75, and 7,500 options with an exercise price of C$2.60, with the remaining 1,212,722 options treated as cancelled.

 

In February 2011, the Company issued 40,000 shares at a fair value of $122,189 to Empirical pursuant to a January 2008 mineral property option agreement covering the Company’s Bisbee, Arizona property.

 

In July 2011, the Company issued 550,000 shares at a fair value of $1,271,371 to acquire Honey Badger’s remaining 49% interest in the Blackjack property.

 

In August 2011, the Company issued 150,000 shares at a fair value of $304,793 to Empirical pursuant to a June 2007 mineral property option agreement.

 

In October 2011, the Company issued 12,500 shares at a fair value of $19,753 to Bronco Creek pursuant to the September 2009 mineral property option agreement.

 

In November 2011, the Company completed a marketed offering and issued 10,000,000 shares at a price of C$1.25 per share.  Rio Tinto elected to exercise its pre-emptive rights and purchased an additional 1,482,216 shares at a price of C$1.25 per share.  The total gross proceeds from the offering were $14,075,483.  Related share issuance costs were $1,065,065.

 

During the year ended December 31, 2011, the Company issued 427,147 common shares for cash proceeds of $608,466 on the exercise of stock options. The fair value recorded when the options were granted of $442,255 has been transferred from additional paid–in capital to common stock on the exercise of the options.  Included in the issued shares were 87,847 common shares issued pursuant to the cashless exercise of 245,000 options with an exercise price of C$1.32, with the remaining 157,153 options treated as cancelled.

 

The Company has adopted a stock option plan (the "Plan") to grant options to directors, officers, employees and consultants.  Under the Plan, as amended in May 2011, the Company may grant options to acquire up to 10% of the issued and outstanding shares of the Company.  Options granted can have a term of up to ten

years and an exercise price typically not less than the Company's closing stock price on the last trading day before the date of grant. Vesting is determined at the discretion of the Board of Directors.

 

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted. For employees, the compensation expense is amortized on a straight-line basis over the requisite service period which approximates the vesting period.  Compensation expense for stock options granted to non-employees is recognized over the contract services period or, if none exists, from the date of grant until the options vest. Compensation associated with unvested options granted to non-employees is re-measured on each balance sheet date using the Black-Scholes option pricing model.

 

The Company uses historical data to estimate option exercise, forfeiture and employee termination within the valuation model. The expected term of the options approximates the full term of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company has not paid and does not anticipate paying dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. Companies are required to utilize an estimated forfeiture rate when calculating the expense for the reporting period. Based on the best estimate, management applied the estimated forfeiture rate of Nil in determining the expense recorded in the accompanying Statements of Operations.

 

Stock option transactions are summarized as follows:

     
  Number of Options Weighted Average Exercise Price 
(C$)
Balance at December 31, 2009 10,907,800 1.86
   Granted 1,737,500 2.77
   Exercised (2,122,278) 1.66
   Cancelled (1,212,722) 1.74
   Expired (10,000) 1.75
   Forfeited (7,500) 1.65
Balance at December 31, 2010 9,292,800 2.09
   Granted 575,000 2.77
   Exercised (427,147) 1.66
   Cancelled (157,153) 1.32
   Forfeited (148,000) 2.31
Balance at December 31, 2011 9,135,500 2.16

 

There were 575,000 stock options granted during the year ended December 31, 2011 with a weighted average exercise price of C$2.77 and a weighted average fair value of C$1.64 (December 31, 2010 – C$1.75).  The number of stock options exercisable at December 31, 2011 was 8,873,000.

 

At December 31, 2011, the following stock options were outstanding:

 

             

Number of

Options

Exercise

Price

(C$)

Aggregate

Intrinsic Value

 (C$)

Expiry Date

Number of

Options

Exercisable

Aggregate

 Intrinsic Value

(C$)

             
                50,000         1.77                        -   January 22, 2012                 50,000                         -
              200,000         2.16                        -   April 5, 2012               200,000                         -
              500,000         2.06                        -   May 16, 2012               500,000                         -
              457,500         2.30                        -   May 31, 2012               457,500                         -
           1,349,500         2.00                        -   April 3, 2013            1,349,500                         -
                12,500         1.55                        -   May 21, 2013                 12,500                         -
                87,500         2.02                        -   July 17, 2013                 87,500                         -
           1,092,000         1.55                        -   September 17, 2013            1,092,000                         -
                  5,000         1.55                        -   October 10, 2013                   5,000                         -
           1,414,000         1.32                        -   February 12, 2014            1,414,000                         -
           1,677,500         2.60                        -   December 29, 2014            1,677,500                         -
              300,000         2.34                        -   September 22, 2015               300,000                         -
           1,415,000         2.86                        -   November 22, 2015            1,415,000                         -
              200,000         3.47                        -   January 4, 2016               150,000                         -
              125,000         2.94                        -   March 8, 2016               100,000                         -
              150,000         2.05                        -   July 7, 2016                 37,500                         -
              100,000         2.23                        -   July 15, 2016                 25,000                         -
           9,135,500    $                    -                8,873,000  $                     -

 

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of C$1.25 per share as of December 31, 2011, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options vested and exercisable as of December 31, 2011 was Nil. The total intrinsic value of options exercised during the year ended December 31, 2011 was $437,770 (December 31, 2010 - $3,103,315).

 

Subsequent to December 31, 2011, the Company granted 1,732,000 stock options with an exercise price of C$1.25 and 50,000 stock options with an exercise price of C$1.27.  50,000 stock options with an exercise price of C$1.77 expired and 2,500 stock options with an exercise price of C$2.86 were forfeited.

 

Stock-based compensation

 

575,000 stock options were granted during the year ended December 31, 2011. The fair value of stock options granted during the year ended December 31, 2011 was $944,319 (December 31, 2010 - $3,007,946).  312,500 options were fully vested in 2011 and the remaining 262,500 will fully vest in 2012.  Stock-based compensation recognized during the year ended December 31, 2011 was $991,161 (December 31, 2010 - $2,897,845) which has been recorded in the consolidated statements of operations as follows with corresponding additional paid-in capital recorded in stockholders' equity:

 

                 
   

Year Ended 

 December 31, 

2011

Year Ended

December 31, 

2010

Cumulative to

December 31, 

2011

Exploration    $          146,343      $          425,791      $      3,807,401
General and administration                844,818               2,472,054            17,738,481
     $          991,161      $       2,897,845      $    21,545,882
                 

 

The following weighted-average assumptions were used for the Black-Scholes valuation of stock options granted:

 

           
           
    December 31, 2011   December 31, 2010  
           
Risk-free interest rate     2.06 %   1.84 %
Expected life of options (years)     4.2     5.0  
Annualized volatility     74 %   78 %
Dividend rate     0.00 %   0.00 %
               

SEGMENT INFORMATION
SEGMENT INFORMATION

 

The Company operates in one business segment being the exploration of mineral property interests.

 

Geographic information is as follows:

   December 31, 2011  December 31, 2010
           
Identifiable assets          
  USA  $52,424,129   $51,790,144 
  Canada   18,345,690    23,603,838 
  Australia   1,993,279    4,778,311 
  Mongolia   1,781,099    1,027,622 
  Other   45,613    159,183 
   $74,589,810   $81,359,098 

 

 

INCOME TAXES
INCOME TAXES

 

A reconciliation of income taxes at statutory rates with the reported taxes is as follows:

 

     
  Year Ended
December 31,
2011
Year Ended
December 31,
2010
     
Loss for the year $(21,969,902) $(20,614,820)
Statutory rate 26.5% 28.5%
Expected income tax recovery (5,822,024) (5,875,224)
Permanent differences (22,083) (60,761)
Difference in foreign tax rates (1,029,337) (18,021)
Change in valuation allowance 2,014,763 5,289,044
Change in enacted tax rates (123,203) 119,550
Withholding taxes 152,190 -
Total income tax expense (recovery) $(4,829,694) $(545,412)
     
Current income tax expense 152,190 -
Deferred income tax expense (recovery) (4,981,884) (545,412)
Total income taxes $(4,829,694) $(545,412)

  

The significant components of the Company’s deferred income tax assets and liabilities are as follows:

 

     
  Year Ended
December 31,
2011
Year Ended
December 31,
2010
     
Deferred income tax assets:    
Non-capital loss carry forward $16,310,423 $8,743,555
Investments - 173,823
Resource expenditures 6,717,013 8,042,421
Equipment 76,811 99,668
Share issue and legal costs 318,999 253,337
Other 255,619 12,976
  23,678,865 17,325,780
Valuation allowance (18,009,043) (15,994,280)
Net deferred income tax assets $5,669,822 $1,331,500
     
Deferred income tax liabilities:    
Investments $- $(786,088)
Mineral property interests (15,062,436) (14,919,910)
Net deferred income tax liabilities $(15,062,436) $(15,705,998)
     
Net deferred income tax liabilities $(9,392,614) $(14,374,498)

 

The Company has available for deduction against future taxable income non-capital losses of approximately $25,340,000 (2010: $19,260,000) in Canada, $680,000 (2010: $719,000) in China, $8,570,000 (2010: $2,350,000) in Mongolia, $22,000,000 (2010: $4,600,000) in the United States of America, $400,000 (2010: $3,100,000) in Australia and $240,000 (2010: $110,000) in Peru.  These losses, if not utilized, will expire through 2030.  Subject to certain restrictions, the Company also has foreign resource expenditures available to reduce taxable income in future years.  Deferred income tax benefits which may arise as a result of these losses, resource expenditures, investments, accounts receivable, equipment, share issue and legal costs have been offset in these financial statements by a valuation allowance.

 

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. As of December 31, 2011, there was no accrued interest or accrued penalties.

 

The Company files income tax returns in Canada and several foreign jurisdictions. The Company’s Canadian income tax returns from 2004 to 2011 are open. For other foreign jurisdictions, including Mongolia and the U.S., all years remain open.

FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash and cash equivalents, short-term investments, receivables, deposits, long-term investments, accounts payable and accrued liabilities and loans payable. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, except as noted below.

 

The Company is exposed to currency risk by incurring certain expenditures in currencies other than the Canadian dollar. The Company does not use derivative instruments to reduce this currency risk.

 

Fair value measurement is based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value which are:

 

Level 1 — Quoted prices that are available in active markets for identical assets or liabilities.

 

Level 2 — Quoted prices in active markets for similar assets that are observable.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

At December 31, 2011, the Company had Level 1 financial instruments, consisting of cash, cash equivalents and short-term investments, with a fair value of $19,428,619.

ACCUMULATED OTHER COMPREHENSIVE INCOME (OCI)
ACCUMULATED OTHER COMPREHENSIVE INCOME (OCI)

 

     
  Year Ended
December 31,
2011
Year Ended
December 31,
2010
     
Accumulated OCI, beginning of year:    
Currency translation adjustment $3,002,717 $(480,928
Available for sale securities 2,747,997 563,481
  $5,750,714 $82,553
     
Other comprehensive income (loss) for the year:    
Currency translation adjustments $(1,101,366) $3,483,645
Unrealized gain on available for sale investments 715,428 2,184,516
Release of OCI on available for sale investments (3,463,425) -
Other comprehensive income (loss) for the year: $(3,849,363) $5,668,161
     
Accumulated OCI, end of year:    
Currency translation adjustment $1,901,351 $3,002,717
Available for sale securities - 2,747,997
  $1,901,351 $5,750,714

SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS

The significant non-cash transactions for the year ended December 31, 2011 consisted of the following items: 

·         issuance of 752,500 common shares (December 31, 2010 – 152,500) in payment of mineral property acquisitions valued at $1,721,110 (December 31, 2010 - $382,283) which have been capitalized as mineral property interests. 

·         funding by OTLLC of the Company’s investment requirements for the Entrée-OTLLC Joint Venture of $2,397,085. 

 

COMMITMENTS
COMMITMENTS

 

The Company is committed to make lease payments for the rental of office space as follows:

 
 

2012                     $    286,412

2013                           187,579

2014                           201,594

2015                           205,409

2016                           208,135

2017                             86,723

$ 1,175,852

 

The Company incurred lease expense of $382,878 (December 31, 2010 – $322,062) for the year ended December 31, 2011.

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

 

Subsequent to December 31, 2011:

 

On December 30, 2011, the underwriters for the Company’s November 2011 marketed offering exercised their over allotment option pursuant to which, on January 4, 2012, the Company issued 1,150,000 common shares at a price of C$1.25 per share.  Rio Tinto elected to exercise its pre-emptive rights and purchased an additional 170,455 shares at a price of C$1.25 per share.  The total gross proceeds from the over allotment were $1,628,583.

 

In addition, the Company granted 1,732,000 stock options with an exercise price of C$1.25 and 50,000 stock options with an exercise price of C$1.27.  50,000 stock options with an exercise price of C$1.77 expired and 2,500 stock options with an exercise price of C$2.86 were forfeited.

 

Through a combination of staking and purchase agreements, the Company acquired or entered into agreements to acquire a total of 72 unpatented and patented lode claims within or contiguous to the boundaries of its Ann Mason project, Nevada, for aggregate costs of $3,618,853 and 40,000 common shares.

 

The Company entered into an agreement with Vanguard Exploration Ltd. ("Vanguard") pursuant to which Vanguard agreed to purchase the Company’s interest in the Northling farm-out in Australia for A$100,000. The transaction closed on March 12, 2012.