INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY (AMAK)
|12 Months Ended|
Dec. 31, 2012
|INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY ("AMAK") [Abstract]|
|INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY ("AMAK")||
NOTE 10 - INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY ("AMAK")
History of the Company's Investment through the year ended December 31, 2011
Until December 2008 the Company had a direct investment in the Al Masane mining project in Najran province of Saudi Arabia. AMAK was formed in late 2007 by the Company and seven Saudi investors, and was granted a commercial license from the Ministry of Commerce in January 2008. The Company formed AMAK with the Saudi investors because the Company recognized that the only way to obtain exploration permits from the Saudi government for the Al Masane and Wadi Qatan properties would be to form a joint venture with Saudi investors.
In December 2008 the Company contributed to AMAK (i) its interests in its Saudi mining properties and (ii) $3,750,000 of costs the Company incurred in connection with the formation of AMAK and the obtaining of necessary licenses for AMAK. AMAK treated such costs as a contribution from the Company. AMAK assumed from the Company the liability for the repayment of the $11 million loan from the Saudi Arabia Ministry of Finance and National Economy, and the Saudi Arabia Ministry of Finance and National Economy released the Company from liability for the loan. The Company received a 50% interest in AMAK. The seven Saudi investors contributed $60 million in cash to AMAK for a 50% interest. Under the by-laws of AMAK, the Company was entitled to appoint four of eight members of AMAK's board of directors and the Saudi investors were entitled to appoint the remaining four members of AMAK's board of directors. However, the by-laws provided that the chairman of AMAK's board, who is appointed by the Saudi investors, casts an extra vote in the event of a tie vote among the eight board members.
The Company accounted for its contribution of these assets to AMAK, net of the $11 million liability, as the contribution of non-monetary assets to a joint venture, and recorded the transfer based on the lower of the cost or market value of the transferred assets. The Company determined that cost was less than market value, with market value being based on the contribution of cash of $60 million by the other investors in AMAK in exchange for their 50% interest. In addition, the Company confirmed that market value was greater than cost based on the cash flow projections based on the proven reserves and market mineral prices. The Company's initial investment in AMAK was comprised of the following:
Initially, the Company accounted for its investment using the equity method of accounting under the presumption that since it owned more than 20% of AMAK, the Company would have the ability to exercise significant influence over the operating and financial policies of AMAK. Under the equity method of accounting the Company would normally have recognized a gain (and a corresponding increase in the carrying amount of its investment) of approximately $16.2 million upon the formation of AMAK for the difference between its $33 million basis in its investment in AMAK and its share of the $120 million in fair value of the net assets of AMAK recorded by AMAK at formation. However, the Company determined that gain recognition would not be appropriate in these circumstances due to the significant uncertainty regarding the success of AMAK, the realization of its assets and the Company's implied commitment to support operations.
AMAK's by-laws require that audited financial statements for each year ended December 31 be submitted to its stockholders by June 30 of the following year. As a result, the Company had expected to obtain the audited 2008 financial statements of AMAK by June 30, 2009, and in addition the Company expected to be able to secure the cooperation of AMAK and its auditors in converting those financial statements from generally accepted accounting principles in Saudi Arabia ("Saudi GAAP") to U.S. generally accepted accounting principles ("U.S. GAAP"). However, by August of 2009 no financial statements of AMAK for 2008 had been produced.
During an April 2009 meeting of the Board of Directors of AMAK, a Saudi shareholder and director questioned the validity of the agreements between the Company and several of the Saudi investors which had been relied upon by the Company as the operating document for AMAK since it was signed. The issues raised included: discrepancies between the terms of the original memorandum of understanding and the executed AMAK partnership agreement; an allegation that various signatures for one or more of the Saudi investors on the AMAK partnership agreement were not authorized; that the Saudi attorney that prepared the AMAK partnership agreement exceeded his authority; and whether the Company's capital contribution for its 50% interest in AMAK was fully paid or whether the Company was subject to a call for a $30 million cash contribution to AMAK's capital. The Company had relied upon the AMAK partnership agreement since December 2008.
To settle these disputes, in August 2009 AMAK's shareholders (the Company and the Saudi investors) agreed to amend the articles of association and by-laws for AMAK that provided that (i) the Company would convey nine percent or 4,050,000 shares of AMAK stock to the other AMAK shareholders pro rata, such that the Company's interest in AMAK was now 41%, (ii) the Company has fully and completely paid the subscription price for 18,450,000 shares of AMAK stock (or 41% of the issued and outstanding shares), (iii) neither AMAK nor the other AMAK shareholders may require the Company to make an additional capital contribution without the Company's written consent, (iv) the Company's right to retain seats on the AMAK Board equal in number to that of the Saudi Arabian shareholders would be limited to the three year period beginning August 25, 2009; (v) AMAK has assumed the $11 million promissory note to the Saudi Arabian Ministry of Finance and National Economy, and AMAK will indemnify and defend the Company against any and all claims related to that note, and (vi) for a three year period commencing August 25, 2009, the Company has the option to repurchase from the Saudi Arabian shareholders 4,050,000 shares of AMAK stock at a price equal to the then fair market value of said shares less ten percent.
In May 2010 we introduced a resolution at a meeting of the AMAK board of directors that would have required AMAK to produce the annual and quarterly financial statements prepared in accordance with U.S. GAAP or IFRS so that the Company could continue applying the equity method of accounting for its investment. The resolution was defeated as the result of the casting of the tie breaking vote described above.
As the result of the events described above the Company concluded beginning in August 2009 that it no longer had significant influence over the operating and financial policies of AMAK, and the Company changed to the cost method of accounting for its investment in AMAK. The Company recorded its cost method investment in AMAK at the carrying amount of its equity method investment on the date the method of accounting was changed.
As discussed in Note 15, in October 2010 the Company guaranteed certain of AMAK's bank debt.
Change in Accounting Principle from Cost to Equity Method in 4th Quarter 2012
During 2011 and 2012 the Company's participation in the financial and operating decisions of AMAK increased. An officer and director of the Company was appointed chairman of the Nomination, Reward and Compensation Committee of the Board of Directors of AMAK and an ex-officio member of the Executive Committee of the Board of Directors of AMAK. Another director of the Company was appointed chairman of the Audit Committee of the Board of Directors of AMAK. In addition, the Company directed the process of locating, interviewing and hiring AMAK's new chief operating officer and the selection of a third party agent to conduct the marketing of the concentrate to be produced by AMAK.
During the quarter ended December 31, 2012, the Company reintroduced the resolution at a meeting of the AMAK Board of Directors that would require AMAK to produce annual and quarterly financial statements prepared in accordance with U.S GAAP or IFRS. The resolution was approved on October 6, 2012. Subsequently, the Company and its representatives were given permission to gain access to AMAK's books and records to allow for the auditing of AMAK financial statements in accordance with the auditing standards of the PCAOB.
As a result of these developments in the quarter ended December 31, 2012, the Company concluded that it now had significant influence over the operating and financial policies of AMAK, and accordingly should account for its investment in AMAK using the equity method. The financial statements for prior periods have been retrospectively restated to apply the equity method of accounting for all prior periods (see Note 2).
The Company has received and attached to this Form 10-K/A as an attachment the financial statements prepared in accordance with generally accepted accounting principles in the United States as of December 31, 2012, 2011, and 2010, and for the years then ended. These financial statements have been prepared in the functional currency of AMAK which is the Saudi Riyal (SR). In June 1986 the SR was officially pegged to the U.S. Dollar (USD) at a fixed exchange rate of 1 USD to 3.75 SR.
The summarized results of operation and financial position for AMAK are as follows:
Results of Operations
The equity in the income or loss of AMAK reflected on the consolidated statement of operations for the years ended December 31, 2012, 2011, and 2010, is comprised of the following:
As discussed above, a gain of approximately $16.2 million for the difference between the Company's initial investment in AMAK and its share of AMAK's initial assets recorded at fair value was not recognized in 2008. This basis difference is being amortized over the life of AMAK's mine which is estimated to be twelve years beginning with its commencement of production in July 2012 as an adjustment to the Company's equity in AMAK's income or loss.
In July 2011 Arab Mining Company ("ARMICO") invested US $37.3 million in AMAK and acquired 5 million shares, representing a 10% interest in AMAK. ARMICO also acquired a seat on AMAK's board which is being held by Mr. Sultan Al-Shawli, Saudi Deputy Minister for Petroleum and Minerals. Mr. Al-Shawli's election increased the total number of board members to nine with the Company retaining four. This transaction changed our ownership percentage in AMAK to 37% and the ownership interest of the Saudi shareholders to 53%. As a result of the ARMICO transaction, the Company's share of the net assets of AMAK increased by approximately $8.9 million which the Company recognized as a gain (with a corresponding increase in its investment) in 2011 in accordance with ASC 323-10-40-1.
We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an adverse effect on the fair value of the investment. We consider recoverable ore reserves and the amount and timing of the cash flows to be generated by the production of those reserves, as well as, recent equity transactions within AMAK. No impairment charges were recorded in 2012, 2011, or 2010.
Working Capital Advances to AMAK
In May 2011 we advanced $50,000 on behalf of AMAK as a hiring fee for the general manager of AMAK. In June 2011 we advanced $750,000 to AMAK for interim funding. The $750,000 was repaid in August 2011. An additional $70,000 was paid on behalf of AMAK during the fourth quarter of 2011 for marketing advisory services which will be repaid to the Company. During 2012 the Company advanced an additional $2,041,000 for working capital purposes which is expected to be repaid by the end of the second quarter of 2013. The amounts due from AMAK at December 31, 2012, and 2011, were $2,162,000 and $120,000, respectively.
The entire disclosure for investments accounted for under the cost-method. The carrying amount of such investments may be adjusted, for example, distributions in excess of cost (return of capital) or for other-than-temporary impairments. The cost method and lower-of-cost or market, an adaptation of the cost method, is generally followed for most investments in noncontrolled corporations, in some corporate joint ventures, and to a lesser extent in unconsolidated subsidiaries in which the entity does not have the ability to exercise significant influence.
Reference 1: http://www.xbrl.org/2003/role/presentationRef