CGA Mining Limited - Management's Discussion and Analysis

PERTH, Western Australia, Oct. 31, 2012 /CNW/ -

Management's Discussion and Analysis

The Management's Discussion and Analysis ("MD&A") provides an analysis to enable readers to assess material changes in financial condition and results of operations for the 3 month period ended 30 September, 2012. This MD&A, prepared as of 31 October, 2012 is intended to complement and supplement our Annual Financial Statements. It should be read in conjunction with the MD&A for the period ended 30 June, 2012, our Interim Financial Statements for the period ended 30 September, 2012 and our Annual Information Form ("AIF") for 30 June, 2012, copies of which are available on SEDAR. Our financial statements and this MD&A are intended to provide investors with a reasonable basis for assessing our results of operation and our financial performance.

Our Interim Financial Statements are prepared in accordance with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards ("IFRS"). All dollar amounts contained in this MD&A are expressed in US dollars, unless otherwise specified.

Where we say "we", "us", "our", the "Company" "Group" or "CGA", we mean CGA Mining Limited and/or one or more of all of its subsidiaries, as it may apply.

First Quarter Highlights

Mining Operations Results
(In thousands of dollars, except amounts per ounce, per tonne and per share)

Masbate Operations

The financial and operating results set out above for the Masbate Gold Project are based on a notional consolidation of the results of Filminera Resource Corporations ("FRC") and Philippine Gold Processing and Refining Corp. ("PGPRC") and as such, do not necessarily match with the Group's consolidated financial statements, as FRC is classified as an associate of the Group for accounting purposes and therefore does not form part of the consolidated results of the Group. The specific purpose analysis set out above is to illustrate the operating results of the Masbate Gold Project.

Total tonnes milled for the 3 months to September 2012 was 1.70M tonnes, with 47,646oz of gold produced.  Revenue from metal sales for the 3 month period was $58.035M, with 40,848oz of gold sold at an average gold sales price of $1,404/oz.  Adjusted cash costs per tonne milled was $23/t for the 3 month period ended September 2012, with cash operating costs for the quarter of $837/oz.

Production for the September quarter was closely in line with the previous quarter, with a small decrease of 6% in ounces produced from the June 2012 quarter, due to a slightly lower grade and volume milled for the quarter.  Revenue from metal sales for the September quarter decreased by $7.880M or 12% from the previous quarter to $58.035M, partially due to the 6% decrease in gold production and partially due to the timing of sales, with gold inventory on hand increasing by 7,200oz/$5.899M from June 2012. The average gold price achieved for the September quarter was $1,404/oz as compared to $1,377/oz for the June quarter, with a decreased proportion of sales at spot offset by the higher average spot price of $1,695/oz achieved in the September quarter compared to $1,602/oz achieved in the June quarter. Mill throughput for the quarter was 1.70M tonnes (June 2012 quarter: 1.73M tonnes) for total production of a 47,646 ounces (June 2012 quarter: 50,817 ounces) of gold.

Adjusted cash costs per tonne milled were relatively steady at $23.41/t for the September 2012 quarter, as compared to $22.76/t for the June 2012 quarter, adjusted for waste deferral and ore stockpile valuation changes. Cash operating costs per ounce increased by 7% to US$837/oz (US$783/oz in the June quarter) predominantly due to accounting for the waste deferral in the September 2012 quarter.

Future Outlook

As previously announced, the Company announced it has entered into a definitive Merger Implementation Agreement ("Merger Agreement") to merge B2Gold Corp. ("B2Gold") and the Company at an agreed exchange ratio of 0.74 B2Gold common shares for each CGA share held, which represents a purchase price of approximately C$3.18 per CGA share (based on the closing share prices on 17 September 2012, being just prior to announcement).  The proposed merger has received strong endorsement from both sets of shareholders and the wider investment community. During the December quarter, the Company will be focused on implementing the merger which will be done by way of a Scheme of Arrangement under the Australian Corporations Act 2001 ("Scheme").  Upon completion of the Scheme, existing B2Gold shareholders and CGA shareholders will own approximately 62% and 38%, respectively, of the issued common shares of the combined company.  There are a number of conditions precedent such as shareholder approval by both CGA and B2Gold shareholders and it is subject to traditional terms and conditions for transactions of this nature. B2 Gold intend to continue to operate the Masbate Gold Project, hence we would expect that the financial operating result to continue in line with current forecasts of CGA. As set out in the Merger Agreement, all of the Perth based employees of CGA will be terminated upon completion of the merger.

The Lycopodium Optimisation Study to consider a number of alternative development options, which will better utilise the existing infrastructure (and accordingly may provide significant capital expenditure reductions compared to the alternative which makes the current front end redundant) is progressing well.  Following the announced merger plans with B2Gold, discussions on the further direction/options of the study will be undertaken with B2Gold prior to the finalisation of the report.

Exploration activities planned for the 2012 - 2013 year include resource definition drilling within the mine site area, exploration drilling within EP-10 and MPSA 219 (Vicar), geophysical surveys (EP-10), and follow up geochemical sampling and detail mapping (EP-10 and MPSA 219).

As part of the planned activities for the 2012-2013 year, the December quarter will include continuation of resource definition drilling within the mine site area at Colorado, Panique - Dabu, and Main Vein North, within EP10 at Blue Quartz and Old Lady and within MPSA 219-2005-V (Vicar) at Pajo Hill. Exploration drilling is planned within EP10 at Young Lady - Water West and Bart -Ag, and within MPSA 219-2005-V (Vicar) at Montana NW and on Pajo Hill where parallel structures to the west of the main structure will be tested. Total drilling planned for the December quarter is 19,125m RC and 8,850m of diamond core.

A geochemical soil sampling orientation program will be carried out during the December 2012 quarter. The aim of this program is to collect soil samples at several depths, along known gold mineralization, to pick up on the geochemical signature. After an investigation of the weathering profile, the plan is for approximately 1,000 to 1,500 soil samples to be collected across known, intact, gold vein systems at Pajo Hill, Young Lady, Water West, Bart-Ag and Luy-A. Soil test lines will cross over the mineralized system and continue across the hanging wall of the down-dip extension of the veins. An extra 100 metres of soil line will be added on either side of the soil lines to get the barren background readings. This study will determine the best sampling and assay techniques for the area and will be used to design soil sampling programs to follow up the results obtained from the regional stream and rock sampling program completed last quarter.

Consolidated Balance Sheet Extracts
(In thousands of dollars)

Total assets of the Company increased during the quarter, mainly attributable to an increase in inventory of $4.124M and an increase in investments in associates of $4.978M, offset by a decrease in cash by $2.501M.  Cash and cash equivalents have decreased from the prior quarter with a reduction in gold sales during the period contributing to the lower cash reserves at the end of the current quarter.  Gold sales were impacted by a delay in exports during the current period,.  The delay in exports resulted in an increase in gold inventory on hand at the end of the period, which has contributed to the increase in inventory of $4.124M.    Total liabilities for the group decreased by $4.839M, largely due to principal repayments of $4.292M on the BNP finance facility during the current quarter, bringing the outstanding principal balance owing to $22.914M at 30 September, 2012.

The VAT receivable reflects recoverable VAT paid in the Philippines, which represents an estimate of proceeds expected to be refunded or offset against other future tax payments.

Consolidated Profit and Loss
(In thousands of dollars)

For the three month period ended 30 September 30, 2012, the Company earned $58.684M in revenue as compared with $17.048M in the three month period ended 30 September, 2011, an increase of $41.636M or 244%. The results for the September 2011 quarter were impacted by the SAG Mill incident, and reflect the limited operating capacity of the plant during that period.

Cost of sales for the three month period ended 30 September, 2012 was $44.984M as compared to $23.541M for the three month period ended 30 September, 2011, an increase of $21.443M or 91%. The increase in cost of sales is due to the increased operations in the current quarter as compared to the prior comparative quarter when production was reduced as a result of the breakdown of the SAG Mill.

Gross profit for the three months to 30 September, 2012 was $13.700M as compared to a gross loss of $6.492M for the prior year period, an increase of $20.192M or 311%.  As discussed above, gold production for the first half of the prior financial year was impacted by the breakdown of the SAG Mill.

A gain of $0.091M on the movement in fair value of financial derivatives was recognised during the three months period ended 30 September, 2012 as compared to a loss of $0.471M in the three months period ended 30 September, 2011.  The 2011 gain related largely to the movement in the fair value of the Company's fuel hedges, which expired in April 2012.

Other expenses of $1.702M were incurred during the three month period ended 30 September, 2012 as compared to $2.061M incurred during the three month period ended September 30, 2011, a decrease of $0.359M or 17%. The decrease is due largely to reduced consultancy fees & travel costs incurred during the three months to 30 September, 2012 compared to the 30 September, 2011 quarter.

The Company recorded a net profit of $9.638M for the three month period ended 30 September, 2012 as compared to a net loss of $11.935M in the 30 September, 2011 period, an increase of $21.573M, which is attributable to the increased mining operations subsequent to the re-commencement of full operations resulting from the repair of the SAG Mill. The results for the prior year comparative quarter were adversely impacted by the failure in July 2011 of the SAG Mill at the Company's operation at the Masbate Gold Project.

Reconciliation of Masbate cashflows from operations to Consolidated cashflows from operations
(In thousands of dollars)

Liquidity and Capital Resources 

As at 30 September, 2012, the Company had cash and cash equivalents of $77.620M as compared to $79.671M at 30 June, 2012, and $83.2M at 30 September, 2011. Cash and liquid assets of the Company were $182.594M at 30 September, 2012 (30 June, 2012: $151.394M). The increase in cash and liquid assets from the prior quarter is primarily due to an increase in the market value of the Company's listed investments, predominantly SAU, by $17.835M and the market value of bullion on hand by $14.689M.  The increase in market value of bullion on hand is due to the increase in ounces on hand at 30 September, 2012 due to production and timing of sales, together with the impact of the increase in the gold spot price from $1,599/oz at 30 June, 2012 to $1,776/oz at 30 September, 2012. The Company's forecast working capital needs can likely be met through cash on hand and short and long-term borrowings, subject to current forecast operating parameters being met.

During the quarter, 50,000 outstanding options due to expire on 30 September, 2012 and 40,000 options due to expire on 17 November, 2013 were exercised for total gross proceeds of A$91,000.  150,000  unexercised options expired and 250,000 unexercised out of the money options issued to employees now resigned were cancelled, per the terms of the Employee Option Scheme.

During the current quarter, the Company has repaid $4.3M in principal and $0.3M in interest on the financing facility with BNP Paribas, reducing the balance owing at 30 September, 2012 to $22.9M.   The repayments on this facility can likely be met through cash on hand, subject to current forecast operating parameters being met

During the 2010 financial year the Company completed a private placement, issuing 39.1M ordinary shares at C$2.20 per share in February 2010, raising a total of C$111.020M. The net proceeds from this issue were used, amongst other things, to repay the $25M promissory notes and $10M loan facility from Meridian and Casten and were used to increase exploration activity at the Masbate Gold Project.

The Company manages liquidity risk through cash reserves, credit facilities and equity capital raising to meet the operating requirements of the business, investing excess funds in highly liquid short term cash deposits. The Company's liquidity needs can likely be met through cash on hand and short and long-term borrowings, subject to current forecast operating parameters being met. Future cashflow forecasts are subject to a number of risks including commodity price movements and inflationary risks surrounding mining and processing costs.  These risks have been accounted for in the forecasts, by adopting a conservative commodity price, as well as allowing for estimated inflationary effects in its cashflow forecasts.

The Company currently has in place an active program of financial forecasting and budgeting both at a corporate and project level to manage both the application of funds and planning for future financial needs to ensure that any shortfall in revenue funds is adequately covered by cash reserves or planned new sources being either debt or equity based on the then most cost effective weighted average cost of capital.

Credit Risk represents the loss that would be recognised if counterparties failed to perform as contracted. The Group's maximum exposures to credit risk at the reporting date in relation to each class of financial asset is the carrying amounts of those assets as indicated in the Balance Sheet.

Subsequent Events

Subsequent to 30 September, 2012, there has not been any matter or circumstance that has significantly affected, or may significantly affect, the Company's operations, results or state of affairs in future financial years.

Information on Outstanding Shares

As at 31 October, 2012 the Company had 337,865,726 common shares outstanding and 5,831,250 unlisted options on issue.  Each option is exercisable into one common share in the capital of the Company.

Quarterly Information

Selected Quarterly Information
($US in thousands, except for per share information)
(unaudited, in accordance with IFRS)

Fluctuations in the quarterly net loss or profit amounts over the two year period ended 30 September, 2012 are predominantly due to the following factors:

• the recognition of fair value mark to mark movements of the Company's derivative instruments which do not qualify for hedge account, or the ineffective portion of those that do;
• a notional gain of $2.929M arising from the deconsolidation of Ratel Gold from the Group in the September 2011 quarter;
• decreased gold production during the first half of the 2012 financial year, resulting from the breakdown of the SAG Mill in July 2011, which has resulted in lower gold sales and higher costs per ounce due to the fixed cost component of operations.  Repairs to the SAG Mill were completed during the December 2011 quarter with full production re-commencing in January 2012;
• the recognition of an impairment loss of $6.9M in the June 2012 quarter to write down the investment in St. Augustine Gold & Copper Limited to its market value as at 30 June, 2012. The investment is carried at historical cost, hence any future increases to its value are not recorded in the profit and loss;
• the recognition of expenses of $6.2M in the June 2012 quarter related to repairs to the SAG Mill.  An insurance claim has been lodged to compensate for costs incurred to repair the SAG Mill, however the Company has not yet received indemnity under its insurance policy, hence all costs have been fully expensed.  Any insurance proceeds subsequently received will be disclosed as income in the period received.

Quarterly Results
Three Months Ended 30 September, 2012 Compared to the Three Months Ended 30 June, 2012 and the Three Months Ended 30 September, 2011

The Company's result for the three months ended 30 September, 2012 was a net profit of $9.638M or 2.85 cents per share (undiluted) as compared to a net loss of $1.142M or 0.34 cents per share (undiluted) for the June 2012 quarter and a net loss of $11.935M or 3.58 cents per share (undiluted) for the September 2011 quarter.  The overall result for the June 2012 comparative quarter were impacted by the expensing of $6.2M related to repairs costs for the SAG mill as the Company has not yet received indemnity under its insurance claim on this matter, as well as an impairment expense of $6.9M to write the Company investment in SAU down to its market value at 30 June, 2012. The investment in SAU is carried at historical cost, and as such any subsequent increases to its market value are not recorded on the balance sheet or profit and loss statement.   Before allowing for the non-recurring SAG Mill expenses and impairment of investments, the net profit for the June 2012 quarter was $11.441M or 3.39 cents per share.  The September 2011 comparative period results were adversely impacted by the failure in July 2011 of the SAG Mill at the Masbate Gold Project operations, which resulted in significantly decreased production during that quarter.

Revenue from metal sales for the current quarter was $57.847M as compared to $65.666M for the June 2012 quarter, a decrease of $7.819M or 12%, and $17.049M for the September 2011 quarter, an increase of $40.798M or 239%.  The decrease in revenue from the June 2012 quarter is due largely to the timing of sales, with gold inventory on hand at 30 September, 2012 increasing by 7,200oz from the previous quarter, along with a decrease in production from the June 2012 quarter (47,646oz for September 2012 compared to 50,817oz for June 2012). These factors were partially offset by a strengthening gold price during the September 2012 quarter, with the average realised gold sales price increasing from $1,377/oz in June 2012 to $1,404/oz in September 2012 (inclusive of hedged sales).  Revenue from metals sales for the September 2011 prior year quarter was $17.049M (a decrease of $40.798M or 239% from the current quarter) and reflects the limited production capacity of the plant during that period due to the SAG mill incident.  Cost of sales for the current quarter was $44.984M as compared to $48.486M in the previous quarter (including depreciation, amortisation and tax expenses), a decrease of $3.502M or 7%. The decrease in cost of sales from the previous quarter was predominantly due to less ore purchased in the current quarter, due to decreased throughput and production levels in the current quarter. The September 2011 results reflect the limited processing capacity during that period due to the SAG mill incident.  The cost of sales includes a mark-up charged to PGPRC by FRC on the ore sales which totalled $1.451M for the September 2012 quarter, (June 2012 qtr: $1.475M and Sep 2011 qtr: $0.354M), as FRC is an associate of the group and is therefore not consolidated for accounting purposes.

As previously mentioned, the Mkushi Copper Project and Segilola Projects that were previously operated by the Company were spun out and the interests are now held by the Ratel Group, a 19.1% associate of the Company. The market value of the investment in Ratel Group Limited ("Ratel Group") at 30 September, 2012 was $3.649M ($2.241M June 2012).  The Company has taken up its proportional share of their loss for the period, along with its other associates being SAU, Masminero Resources ("Masminero"), Aroroy Resources ("Aroroy") and FRC. The total loss from associates taken up by the Company during the current period is $0.440M ($1.570M: June 2012 quarter and $0.949M: September 2011 quarter).

Revenues

The Company earned $58.684M in revenue for the September 2012 quarter as compared to $66.524M in revenue for the prior quarter and $17.049M in revenue for the September 2011 quarter. The decrease in revenues by $7.840M or 12% from the prior quarter is a result of an decrease in gold ounces sold of 6,239oz or 13% for the September 2012 quarter, together with the increase of bullion on hand of 7,200oz or 86% at the end of the September 2012 quarter from the June 2012 quarter, however the decrease in revenue resulting from lower gold sales was slightly offset by an increase in the average gold sales price of $1,404/oz for the September 2012 quarter compared with $1,377/oz for the June 2012 quarter, an increase of $27/oz or 2%. The average gold sales price for the September 2011 quarter was $960/oz.  The lower gold production in the September 2012 quarter resulted in decreased levels of gold sales at spot prices.  In the September 2012 quarter, 26,234oz gold was sold at an average unhedged gold sales price of $1,696/oz compared to 32,630oz of gold sold at an average unhedged sales price of $1,602/oz in the June 2012 quarter and 2,133oz of gold sold at an average unhedged sales price of $1,752/oz in the September 2011 quarter.  Gold production for the September 2012 quarter of 47,646oz was 6% lower than the June 2012 quarter production of 50,817oz due to the lower throughput in the September 2012 quarter.  Gold production of 47,646oz for the September 2012 quarter was 219% higher than the gold production of 14,935oz for the September 2011 quarter as a result in the increased throughput capacity resulting from the commissioning of the supplementary crusher in September 2011, together with the 6.5Mtpa plant upgrade completed in December 2011 and re-commencement of full production in January 2012 following completion of repairs to the SAG Mill.

In addition, as a result of the acquisition of the Masbate Gold Project in late March 2007, the Company has recognised a receivable from its associate, FRC. The acquisition accounting for the business combination through which the Masbate Gold Project was acquired requires the accretion of the interest on the discounted receivable to be recognised as revenue during each period. As FRC is an associate, it is required to be equity accounted by the group, with the Company recognizing its ownership portion of the FRC loss in the Company's accounts. As the notional interest accretion gain is recognised as income in the consolidated group and recognised as an expense in Filminera's accounts, the amounts are largely offset. The notional interest accretion recognised for the 3 months ended September 30, 2012 was $0.806M (June 2012: $0.728M and September 2011 $0.728M).

Cost of Sales

Cost of sales for the September 2012 quarter was $44.984M as compared to $48.486M for the June 2012 quarter and $23.541M for the September 2011 quarter. Cost of sales decreased from the June 2012 quarter predominantly as a result of the decrease in ore purchases of $1.972M or 11% in the September 2012 quarter together with a decrease in depreciation and amortisation of $0.585M or 10%, a result of the decreased throughput and production in the current quarter. The prior year quarter result reflects the limited processing capacity of the plant due to the SAG Mill failure.

Cash operating costs for the project (based on a combination of the results of FRC and PGPRC before depreciation, amortisation and taxes) were $837/oz as compared to $784/oz in the June 2012 quarter, with the increase attributable to the reduced feed grade to the mill, together with an increase in mining and processing costs.  Consumables and supplies expense was $15.015M for the September 2012 quarter as compared to $14.741M for the June 2012 quarter, an increase of $0.274M or 2%.  The cost of cyanide has continued to increase, and additional cyanide was also required in the current quarter.  Additional reagents were also introduced in the current period, which have not been used in prior quarters.  Total project cash operating costs for the current quarter decreased by $2.702M or 7%. Insurance premium costs relating to the premium funding have decreased to $1.523M in the September 2012 quarter from $2.400M in the June 2012 quarter, a reduction of $0.873M or 36%.  Depreciation and amortisation of $5.571M was incurred in the September 2012 quarter, compared to $6.155M in the June 2012 quarter, a decrease of $0.585M or 10%.  The reduction in depreciation is due to the adoption in the current period of the new resources model which has an extended life of mine compared to the previous resource model.  The increase in the life of mine effectively reduces the depreciation rate applied, compared to the depreciation rate applied in previous years based on the earlier resource model.  The revised depreciation rates will be applied on an ongoing basis.

Production costs disclosed in the annual financial statements also include costs which are not included in the cash cost calculation, such as depreciation, amortisation, refining and treatment charges and tax expenses, along with the cost mark up on purchases of ore from its associate, FRC, of $1.451M for September 2012 quarter ($1.475M June 2012 quarter and $0.354M September 2011 quarter).

Other Expenses

Net other expenses (after cost of sales) for the September 2012 quarter were $4.062M as compared to $16.953M for the June 2012 quarter and $5.442M in the prior year comparative quarter, a decrease of $1.380M or 25%.  The variance of $12.891M or 76% from the June 2012 quarter relates largely to additional SAG Mill repairs & maintenance costs of $3.351M, $6.870M impairment of investments and a provision for taxes of $1.027M that were expensed In the June 2012 quarter, together with a decrease in share of loss of associates of $1.130M incurred in the September 2012 quarter.

Specific Items Contributing to Changes

Impairment of investments
An impairment of investments of $6.870M was recognised in the June 2012 quarter (September 2012 quarter: nil) for the mark to market of the investment in St. Augustine Gold & Copper Limited.   This is a non-cash non-recurring expense.

Finance costs
The Company incurred finance costs of $1.017M during the period compared to the $1.137M incurred during the June 2012 quarter, a decrease of $0.120M or 10%, and $0.781M in the September 2011 quarter, an increase of $0.236M or 30%.  These comprise predominantly interest expenses of $0.863M for September 2012 ($0.946M for June 2012 and $0.730M for September 2011) on borrowings on the $80.3M project finance facility with BNP Paribas and finance lease obligations, together with $0.153M for amortisation of capitalised borrowing costs for June 2012 ($0.155M for June 2012, $0.051M for September 2011).

Share of loss of associates
In the September 2012 quarter, the Company has recognised a loss of $0.440M in from its share of its associates losses, including its interests in FRC, Ratel Group, SAU, Aroroy Resources, Inc. and Masminero Resources Corporation, a decrease of $1.129M or 720% from the previous quarter loss of $1.569M.  In the September 2011 quarter, the Company recognised a loss of $0.949M, which related to FRC, Ratel Gold (now SAU), Ratel Group, Aroroy and Masminero.  The variance from the June 2012 quarter is mainly due to the decreased share of loss from FRC in the September 2012 quarter.

SAG Mill expenses
All expenses in relation to the SAG Mill repair were fully expensed in the 2012 financial year, with $5.713M expensed in the June 2012 quarter (September 2012 quarter: nil).  Additionally, other operating income that was recognised in the December 2011 quarter for insurance compensation of $2.363M relating to the insurance claim lodged for repairs to the SAG Mill was reclassified as part of the SAG Mill expenses in the June 2012 quarter.

Administration and other costs
In the current quarter the Company incurred costs of $2.697M as compared to $1.208M for the previous quarter, an increase of $1.489M or 123% and $3.241M in September 2011, a decrease of $0.544M or 17%.  The variance from the previous quarter is predominantly due to repairs & maintenance costs of $2.863M relating to the repair of the SAG Mill incurred during the December 2011 quarter being reclassified to a separate line item in the June 2012 quarter, therefore reducing administration & other costs in the June 2012 quarter, partially offset by the recognition of documentary stamp taxes of $1.027M in the June 2012 quarter.  The variance from the September 2011 quarter is predominantly due to the recognition of a notional value of $0.460M relating to employee share option expenses in the September 2011 quarter, which has not been incurred in later periods.

Movement in fair value of derivative financial instruments
A gain of $0.091M was recognised in the profit and loss statement in September 2012 for the movement in the fair value of the Company's hedges, being a gain of $0.091M on interest rate swap contracts.  A gain of $0.045M was recognised for the 30 June, 2012 quarter, being a gain of $0.119M on interest rate swap contracts and a gain related to the movement in the value of ineffective gold forward hedges at 30 June, 2012 of $0.343M, offset by losses on its HFO & diesel fuel swap contracts of $0.417M.  The HFO & diesel fuel swap contracts expired in April 2012.  In the September 2011 quarter, a loss of $0.471M was recognised. The movements relate to the fair value of the Company's hedged instruments, and as such are determined by the prevailing market values at each balance date.

Summary of gold forward sales contracts

Summary of interest rate swap contract

Summary of HFO fuel and diesel swap contracts

HFO fuel and diesel swap contracts expired 30 April, 2012

Commitments and Contingencies 

Other Commitments

The Company is party to a mining services contract between Leighton Contractors (Philippines) Limited and FRC which has been determined to contain a finance lease. The contract for mining services previously had a 6 month termination period (3 months at 31 December, 2011), however the term of the contract ended at 31 March, 2012, and the mining services contract is now on a month by month term and can be terminated at any time without the requirement to pay an extended termination notice period.  Under the Ore Purchase Agreement, PGPRC is contracted to purchasing ore from FRC at cost plus a profit margin. The Company is also party to a contract for the operation of the power station at the Masbate Gold Project. The contract has a 3 month termination notice period. Laboratory services agreements relate to a 3 month termination notice period on the laboratory services contract.

Background and Review of Operations

CGA is incorporated and domiciled in Australia.  The Company has been listed on the Australian Stock Exchange ("ASX") since April 1991 and on the Toronto Stock Exchange ("TSX") since February 2005.

During the 2007 year, the Company entered into agreements to acquire interests in the Masbate Gold Project in the Philippines, the Mkushi Copper Project in Zambia, and the Segilola Gold Project in Nigeria.

The Company executed a joint venture agreement on 30 May, 2007 between Seringa Mining Limited ("SML"), a then wholly owned subsidiary of the Company, African Eagle Resources plc ("AFE") and Katanga Resources Limited ("Katanga"), a wholly owned subsidiary of AFE whereby CGA acquired a 51% interest in the Mkushi Copper Project in Zambia, with AFE retaining a 49% interest.

On 27 May, 2007, the Company through its then wholly owned subsidiary, Segilola Gold Limited ("SGL"), entered into a joint venture agreement ("the JV Agreement") with Tropical Mines Limited ("TML"), to earn a 51% interest in the Segilola Gold Project in Nigeria, considered to be the most advanced gold exploration project in the country.  TML is a Nigerian company owned in joint venture by local investors and the Government.

On 31 January, 2007, the Company entered into a Sale and Purchase Agreement ("SPA") for the acquisition of 100% of Thistle Mining Inc.'s interest in the Masbate Gold Project located in the Republic of the Philippines. The agreed purchase consideration was $51M, and the transaction was completed on 19 March, 2007 through an issue of 40,985,538 shares and cash payments of $25M.

During the 2009 year, the Company's focus was the development and commissioning of the Masbate Gold Project with the construction of the processing plant completed in the 2009 March quarter and the power plant in the 2009 June quarter. The Masbate Gold Project achieved its first gold pour on 12 May, 2009. Prior to commencement of commercial production, most costs were capitalised as development costs.

On 30 October, 2009 the Company completed a private placement of 14,705,000 ordinary shares in the capital of the Company at C$1.70 per share for a total capital raising of C$24,998,500.  The net proceeds, after costs of the issue, in combination with existing cash reserves, were utilised to fund further enhancements in the plant and exploration activities at the Masbate Gold Mine.

A further private placement was completed on 5 February, 2010 on a bought deal basis, of 39.1M ordinary shares in the capital of the Company at C$2.20 per share for total gross proceeds of C$86M. The net proceeds from the sale of the shares were used to repay indebtedness, including the early repayment of the loan facility with Meridian and Casten, the $25M Senior Promissory Notes, to increase exploration activity at the Masbate Gold Project and for general corporate purposes.

In 2010, the Company entered into a strategic alliance with Sierra Mining Limited ("Sierra"), which holds prospective gold exploration interests in the Philippines. Projects include the property immediately adjacent to Medusa Mining Limited's (TSX:MLL) rich Co-0 gold mine (December 2010 quarter - average grade 13.09g/t and cash costs of $185/oz) and other properties to the south of the King-king gold and copper deposit. This will leverage CGA's exploration expenditure and further capitalise on the success to date in the Philippines.  In November 2010, the Company purchased a further 4M shares in Sierra, increasing its holding to 19.7M shares or approximately 8.5%.

In 2010, the Company incorporated a new entity, Ratel Gold Limited, now called St. Augustine Gold and Copper Limited which acquired the Company's African assets. During the 2010 year, the Company announced a proposed spin-off of Ratel from the Company, with Ratel undertaking an initial public offering of common shares (the "Offering") in Ratel. The Offering closed successfully on 6 August, 2010, with Ratel issuing 70M common shares at a price of C$0.20 per common share, for aggregate gross proceeds of C$14M.  The Offering, along with a subsequent issue of 2.5M shares by Ratel, diluted the Company's holding in Ratel to 19.4%. Accordingly the African assets, being the Segilola Gold Project and the Mkushi Copper Project, are no longer controlled by the Company or consolidated into its financial statements.

In October 2010, the Company entered into a strategic alliance with Ratel  (now called SAU) in connection with Ratel's agreement to acquire the interests held by Russell Mining & Minerals, Inc. and their subsidiaries (the "RMMI Group"), in the 20.7M equivalent gold ounce King-king Copper-Gold Project in the Philippines ('the King-king Interests"). As part of the acquisition, the Company agreed to provide a loan facility to the RMMI Group to fund the initial settlement payments to Benguet Corporation ("Benguet") and debt holders of Benguet, together with working capital, which was fully secured against the King-king Interests. The total amount loaned was $14,489,202, which was fully repaid to the Company on 7 January, 2011, along with interest of $336,705. The acquisition was conditional on the successful completion of a C$25M capital raising at C$0.30 ('the Ratel Placement") per share and securing all necessary shareholder and TSX approval for the acquisition, share issue to the RMMI Group and the Ratel Placement. The Company subscribed for a total of 50M additional shares in the Ratel Placement, increasing its interest in Ratel Gold Limited (now called SAU) to its current interest of 20.7%. The Ratel Placement along with the acquisition of the King-king interests was successfully closed on 7 January, 2011.

With the closure of the Ratel Placement, Ratel (now called SAU) completed a spin-off of its existing African assets, by way of an entitlement issue back to shareholders of shares in Ratel Group Limited, a TSX-listed company trading under the symbol "RTG". Under the terms of the reorganization, the Company was issued a further 9,722,222 Ratel Group shares. The Company also participated in a capital raising of Ratel Group, taking up 19M shares at C$0.10 each. As a result the Company now holds a 19.1% interest in Ratel Group.

In June 2011, the Company successfully achieved Project Completion for the project finance facility for the Masbate Gold Project.  Having now satisfied Project Completion, the following additional benefits apply to the facility:

• the margin has reduced from LIBOR plus 3.65% to LIBOR plus 3.15%;
• any guarantees from CGA have been released and the project is non-recourse to CGA;
• the Project is able to flow all excess funds (above and beyond the Debt Service Reserve Account) to any other entity within the CGA group, with any payment out of the security structure to be applied as to 25% to a further prepayment of the principal outstanding under the facility, subject to the satisfaction of normal financial ratios.

Operations at the Masbate Gold Project progressed well through the 2010-11 year. Mill throughput continued to improve with a ninth consecutive quarterly record set in the June 2011 quarter along with the commissioning of a fourth mining fleet to support further throughput improvements including the 6.5Mtpa plant upgrade which was completed during the December 2011 quarter.

On 10 July, 2011, cracks were detected in the SAG mill at the Masbate Gold Project. The SAG mill was shut down to be repaired, although interim production was re-established on 21 July, 2011 with a reconfiguration of the grinding circuit and ore being fed directly into the ball mills. Repairs to the SAG mill were completed on 25 December, 2011 with recommissioning occurring over the ensuing days.  Initially production was set at 300-350tph to bed the mill in and make final mechanical checks. Production rates were subsequently lifted to 700tph with all mechanical checks showing that the circuit had settled in and was running smoothly and back at full operating capacity. Following the repairs to the SAG mill, throughput was 1,728,751 tonnes for the June 2012 quarter, compared to 866,140 tonnes for the December 2011 quarter - a 100% increase in throughput from the December quarter when the repairs were completed. The milling circuit is performing consistently at levels at or above 6.5Mtpa. All repairs were conducted under the supervision of mill specialists, Metso Minerals, who have repaired similar issues on this type of mill on a number of previous occasions.  All repair work was subjected to extensive Non Destructive Testing which showed that 100% of the weld was within specification.  Further engineering work in the form of the addition of gussets which "knit" the rotating element to the mill heads were also implemented to ensure improved structural integrity to the mill shell.  The purchase of a new rotating element is also in the process giving extra security against any chance of another prolonged shutdown.

Following the successful recommissioning of the SAG mill in December 2011, production has remained strong with throughput rates in excess of 6.5mtpa (annualised) in each subsequent quarter since recommissioning. Production continues to improve with a record 100,019 ounces produced in the 6 month period January to June 2012, and the project pouring its 500,000^th ounce of gold in August 2012, and a total 47,646 ounces produced in the September 2012 quarter.

The Lycopodium Optimisation Study to determine the options for upgrading plant capacity via stepped increases in capital expenditure is currently being finalised, with capital and operating estimates under final consultant review. The Company is reviewing the various options available with B2 before making any further commitments

The Company has continued with its aggressive drilling program to realise the significant exploration potential of the Masbate Gold Project. During the 2012 year, the Company announced an increase in total measured mineral resources  to 0.16M ounces and indicated mineral resources to 4.97M ounces (including stockpiles of 0.13M ounces) increasing total contained gold to 5.13M ounces, and inferred resources of 2.83M ounces, as reported in the last release of a NI 43-101 compliant resource. After allowing for the ounces depleted from mining since we commenced production, this represents an increase of 1.06M measured and indicated ounces of contained gold from the previous NI 43-101 compliant resource or 23.3%.] The full details of the announcement can be found on sedar.com. The updated mineral resource estimates are based on drilling completed to the end of June 2011, which represents only the addition of approximately 42,000 metres (US$4M) of new drilling or a discovery cost of approximately $3.77/ounce. During the 2012 year, the aggressive exploration program continued, with a total spend in the order of $14.4M including drilling on new near mine targets, more regional exploration programmes, reserve definition, inferred resource ounce conversion and sterilisation programs. Given the success of the project to date, the Company is well positioned to capitalise on further exploration success with the mining fleet already expanded, the initial scoping study of a 10mtpa expansion completed and the optimisation study to determine the options for upgrading plant capacity via stepped increases in capital expenditure nearing completion.

Results from recent drilling at "near mine" targets have resulted in some excellent intercepts. Programs targeting immediately north and south of the Main Vein Pit have intercepted broad widths of high grade mineralisation.

During the September 2012 quarter, drilling was split between resource infill and step out work within the mining area on both Filminera Resources and Vicar Mining leases; drilling along strike into the EP10 exploration lease and initial drilling of six holes into a series of geophysical targets at the Baleno gold-copper porphyry prospect. Drilling totalled 5,834.9m of reverse circulation, 12,138.4m of diamond core and 3,448.3m of RC / core tail. The best results for the quarter were returned from Libra East where infill drilling has extended the mineralisation below the planned pit floor. HMBNW and Main Vein North Split and Blue Quartz North holes also returned encouraging results. The contract regional mapping and sampling crew completed the mapping program within the Vicar Mining Properties near Pajo Hill and demobilised during the quarter.  Their mapping has indicated an extension to the Grandview structure within the Vicar Mining lease, west of the Pajo Hill Prospect. At the Baleno gold-copper porphyry prospect, drilling was completed during the quarter. Further ground work is anticipated including soil geochemical sampling program in the near future.

During the quarter, 50,000 outstanding options due to expire on 30 September, 2012 and 40,000 options due to expire on 17 November, 2013 were exercised for total gross proceeds of A$91,000.  150,000  unexercised options expired and 250,000 unexercised out of the money options issued to employees now resigned were cancelled, per the terms of the Employee Option Scheme.

During the current quarter, 40,000 A$1.15 options issued in November 2008, together with 50,000 A$0.90 options issued in September 2007, were exercised raising a total of A$91,000.

On 4 September, 2012, the Company entered into a loan facility agreement with Ratel Group Limited ("Borrower") to provide a funding facility of up to $2.5M to Ratel Group Limited.  The term is for 24 months at an interest rate of 9% per annum.

On 19 September, 2012, the Company announced it had entered into a definitive Merger Implementation Agreement to merge B2Gold and the Company at an agreed exchange ratio of 0.74 B2Gold common shares for each CGA share held, which represents a purchase price of approximately C$3.18 per CGA share (based on the closing share prices on 17 September, 2012, being just prior to announcement).  The proposed merger has received strong endorsement from both shareholders and the wider investment community. It will be implemented by way of a Scheme of Arrangement under the Australian Corporations Act 2001 ("Scheme").  Upon completion of the Scheme, existing B2Gold shareholders and CGA shareholders will own approximately 62% and 38%, respectively, of the issued common shares of the combined company.  There are a number of conditions precedent such as shareholder approval by both CGA and B2Gold shareholders and it is subject to traditional terms and conditions for transactions of this nature.

A Scheme Booklet setting out the terms of the Scheme and an Independent Expert's Report will be circulated to all CGA shareholders in connection with a meeting of CGA shareholders expected to take place later in the year.  The Scheme requires approval by 75% of the number of votes cast, and 50% of the number of CGA shareholders present and voting, at the meeting of CGA shareholders. If the Scheme is implemented, CGA will become a subsidiary of B2Gold and cease to be a reporting issuer in Canada and will de-list from the ASX and TSX.

The business of the Company and its shares should be considered speculative given the volatility in world stock markets (particularly with respect to mining and exploration companies) and the uncertain nature of mining and exploration activities generally.  Amongst other things, some of the key risk factors faced by CGA include:

• foreign exchange movements;
• movements in commodity prices (in particular the gold price and costs of production);
• access to new capital (both debt and equity) and meeting liquidity requirements;
• meeting forecast operating parameters, including grade, operating costs,  throughput and reliability of mechanical components;
• the uncertain nature of exploration and development activities;
• commissioning risks in new development projects including the use of second hand equipment;
• satisfying banking requirements and covenants;
• increases in capital expenditures necessary to advance the Company's projects;
• the ability to profitably exploit new development projects;
• political, security and sovereign risks of the Philippines;
• permitting, local community  and small scale miners support;
• environmental obligations; and
• weather conditions.

For further information on these and other risks inherent in the Company's business, we direct readers to Appendix A of this MD&A and the Company's Annual Information Form for the most recently completed financial year lodged on SEDAR at sedar.com.

Disclosure Controls and Procedures

In accordance with Multilateral Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings, an evaluation of the effectiveness of the Company's disclosure controls and procedures ("DC&P") and its internal control over financial reporting ("ICFR") was conducted. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that DC&P and ICFR were effective as of the three-month period ended 30 September, 2012, and that, as a result, ICFR design provides reasonable assurance that material information relating to the Company, is made known to them by others within those entities, particularly during the period in which the annual filings are being prepared, and the information that the Company must present in its annual documents, its interim documents or in other documents it files or submits under securities regulations is recorded, processed, condensed and presented within the times frames prescribed by this legislation. Furthermore, ICFR design provides reasonable assurance that the Company's financial information is reliable and that its financial statements have been prepared, for the purpose of publishing financial information, in accordance with the Company's GAAP.  Lastly, no changes to the ICFR that have had or are likely to have a significant effect on this control mechanism were identified by management during the accounting period commencing on 1 July, 2012 and ending on 30 September, 2012.

Critical Accounting Estimates

The significant accounting policies including the critical accounting estimates and assumptions used by CGA are disclosed in Note 2 to the annual financial statements for the year ended 30 June, 2012. Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  Management reviews its estimates on a regular basis. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates.  The critical accounting estimates and assumptions used in the preparation of the 30 June, 2012 annual financial statements have been applied consistently from the previous financial year.  The critical accounting estimates and assumptions used are as follows:

(i)     Significant accounting judgments 

• Mineral reserve estimates

(ii)     Significant accounting estimates and assumptions

• Share based payment transactions
• Impairment of intangibles
• Carrying value of exploration and evaluation
• Deferred tax assets and liabilities
• Impairment of plant and equipment
• Estimating costs of environment rehabilitation
• Loan to associate
• Finance leases
• Derivative financial instruments

Further details regarding the critical accounting estimates and assumptions can be found in the 30 June, 2012 annual financial statements. There have been no changes to the critical accounting estimates of the Group over the past two years.

Transactions between the group and its related parties

During the quarter ended 30 September, 2012, the Company entered into transactions with related parties in the wholly-owned group:

• loans were advanced and repayments received on short term inter-company accounts; and
• loans were received from controlled entities on short term inter-company accounts.

During the quarter ended 30 September, 2012 the Company entered into loan advances totalling $4.456M on short term intercompany accounts with its 40% associate, Filminera.

These transactions were undertaken on commercial terms and conditions except that:

• there is no fixed repayment of loans between the related parties; and
• no interest is payable on the loans at present.

During the financial year, the Company entered into the following transactions with related parties:

• Ore was purchased from its 40% associate Filminera, pursuant to an Ore Sales and Purchases Agreement, which requires the Company to purchase ore mined from the associate's facility on a cost plus basis.  In the current quarter, $19.588M of ore was purchased from Filminera.
  
  
• On 4 September, 2012 the Company entered a Loan Facility Agreement with Ratel Group Limited for the sum of $2.5M.  The facility is for a term of 24 months and the drawn portion of the facility incurs interest at a rate 9% p.a.  As at 30 September, 2012 $0.824M had been drawn down on the loan.

Additional Information and Continuous Disclosure

This MD&A has been prepared as of 31 October, 2012. Additional information on the Company is available through regular filings of press releases, financial statements and its Annual Information Form on SEDAR (sedar.com). You may also find these documents and other information about CGA on our website at www.cgamining.com.

Forward-Looking Statements

This MD&A contains forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding expectations of the Company as to the market price of gold, strategic plans, future commercial production, production targets, timetables, mining operating expenses, capital expenditures, and mineral reserve and resource estimates. Forward-looking statements involve known and unknown risks and uncertainties and accordingly, actual results and future events could differ materially from those anticipated in such statements. Factors that could cause future results or events to differ materially from current expectations expressed or implied by the forward-looking statements include, but are not limited to, fluctuations in the market price of precious metals, mining industry risks, uncertainty as to calculation of mineral reserves and resources, risks related to hedging strategies, risks of delays in construction, requirements of additional financing, increase in tax or royalty rates or adoption of new interpretations related thereto and other risks described in this MD&A and in the Company's other documents filed from time to time with Canadian securities regulatory authorities. Although the Company is of the opinion that these forward-looking statements are based on reasonable assumptions, those assumptions may prove to be incorrect. Accordingly, readers should not place undue reliance on forward-looking statements. Readers can find further information with respect to risks in the Annual Information Form of the Company and other filings of the Company with Canadian securities regulatory authorities available at sedar.com. The Company disclaims any obligation to update or revise these forward-looking statements, except as required by applicable law.

RISK FACTORS

APPENDIX A

RISKS AND UNCERTAINTIES  

As a mining company, the Company faces the financial, operational, political and environmental risks inherent to the nature of its activities. These risks may affect the Company's profitability and level of operating cash flow.  The Company also faces risks stemming from other factors, such as fluctuations in gold prices, oil prices, interest rates, exchange rates, tax or royalty rates or the adoption of new interpretation relating thereto and financial market conditions in general. As a result, the securities of the Company must be considered speculative, and in evaluating the securities of the Company, the following factors, amongst other things, should be considered.

Fluctuation in Gold Prices

The profitability of CGA's operations will be significantly affected by changes in the market price of gold. Gold production from mining operations and the willingness of third parties, such as central banks, to sell or lease gold affects the gold supply. Demand for gold can be influenced by economic conditions, gold's attractiveness as an investment vehicle and the strength of the US dollar and local investment currencies. Other factors include the level of interest rates, exchange rates, inflation and political stability. The aggregate effect of these factors is impossible to predict with accuracy.  Gold prices are also affected by worldwide production levels.  In addition, the price of gold has on occasion been subject to very rapid short-term changes because of speculative activities.  Fluctuations in gold prices may adversely affect CGA's financial performance and results of operations.

Uncertainty of Reserve and Resource Estimates

The figures for reserves and resources presented are estimates based on limited information acquired through drilling and other sampling methods.  No assurance can be given that the anticipated tonnages and grades will be achieved or that the indicated level of recovery will be realized.  The ore grade actually recovered may differ from the estimated grades of the reserves and resources.  Such figures have been determined based upon assumed gold prices and operating costs.  Future production could differ dramatically from reserve estimates for, among others, the following reasons:

• mineralization or formations could be different from those predicted by drilling, sampling and similar examinations;
  
  
• increases in operating mining costs and processing costs could adversely affect reserves;
  
  
• the grade of the reserves may vary significantly from time to time and there is no assurance that any particular level of gold may be recovered from the reserves; and
  
  
• declines in the market price of gold may render the mining of some or all of the reserves uneconomic.

Any of these factors may require CGA to reduce its reserves estimates or increase its costs. Short-term factors, such as the need for the additional development of a deposit or the processing of new different grades, may impair CGA's profitability.  Should the market price of gold fall, CGA could be required to materially write down its investment in mining properties or delay or discontinue production or the development of any new projects.

Production

No assurance can be given that the intended or expected production schedules or the estimated direct operating cash costs will be achieved in respect of the operating gold mine in which CGA has an interest.  Many factors may cause delays or cost increases, including, without limitation, labour issues, disruptions in power, transportation or supplies, and mechanical failure.  The revenues of CGA from the operating gold mine will depend on the extent to which expected operating costs in respect thereof are achieved.  In addition, short-term operating factors, such as the need for the orderly development of ore bodies or the processing of new or different ore grades, may cause a mining operation to be unprofitable in any particular period.

Depletion of the Company's Mineral Reserves

CGA must continually replace mining reserves depleted by production to maintain production levels over the long term.  This is done by expanding known mineral reserves or by locating or acquiring new mineral deposits. There is, however, a risk that depletion of reserves will not be offset by future discoveries of mineral reserves.  Exploration for minerals is highly speculative in nature and involves many risks.  Many projects are unsuccessful and there are no assurances that current or future exploration programs will be successful.  Further, significant costs are incurred to establish mineral reserves, open new pits and construct mining and processing facilities.  Development projects have no operating history upon which to base estimates of future cash flow and are subject to the successful completion of feasibility studies, obtaining necessary government permits, obtaining title or other land rights and the availability of financing.  In addition, assuming discovery of an economic mine or pit, depending on the type of mining operation involved, many years may elapse before commercial operations commence.  Accordingly, there can be no assurances that CGA's current programs will result in any new commercial mining operations or yield new reserves to replace and/or expand current reserves.

Uncertainty Relating to Inferred Mineral Resources

Inferred mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty which may attach to inferred mineral resources, there is no assurance that Inferred mineral resources will be upgraded to mineral resources with sufficient geological continuity to constitute proven and probable mineral reserves as a result of continued exploration.

Fluctuation in Oil Prices

Because CGA uses diesel and heavy fuel oil to power its mining equipment and power stations to supply its mining operations, CGA's operating results and financial results may be adversely affected by rising petroleum prices. A portion of the costs until April 2012 were the subject of fuel hedges.

Exchange Rate Fluctuations

The operations of CGA in the Philippines are subject to currency fluctuations and such fluctuations may materially affect the financial position and results of CGA. Gold is currently sold in US dollars and although the majority of the costs of CGA are also in US dollars, certain costs are incurred in other currencies. The appreciation of non-US dollar currencies against the US dollar can increase the cost of exploration and production in US dollar terms, which could materially and adversely affect CGA's profitability, results of operations and financial condition.

Access to Capital Markets

To fund its growth, CGA is often dependent on securing the necessary capital through loans or permanent capital.  The availability of this capital is subject to general economic conditions and lender and investor interest in CGA's projects.

Nature of Mineral Exploration and Mining

CGA's profitability is significantly affected by CGA's exploration and development programs.  The exploration and development of mineral deposits involves significant financial risks over a significant period of time, which even a combination of careful evaluation, experience and knowledge may not eliminate. While the discovery of a gold-bearing structure may result in substantial rewards, few properties explored are ultimately developed into mines.  Major expenses may be required to establish and replace reserves by drilling, and to construct mining and processing facilities at a site. It is impossible to ensure that the current or proposed exploration programs on CGA's exploration properties will result in profitable commercial mining operations.

CGA's operations are, and will continue to be, subject to all of the hazards and risks normally associated with the exploration, development and production of gold, any of which could result in damage to life or property, environmental damage and possible legal liability for any or all damage.  CGA's activities may be subject to prolonged disruptions due to weather conditions depending on the location of operations in which CGA has interests. Hazards, such as unusual or unexpected formations, rock bursts, pressures, cave-ins, flooding or other conditions may be encountered in the drilling and removal of material. While CGA may obtain insurance against certain risks in such amounts as it considers adequate, the nature of these risks are such that liabilities could exceed policy limits or could be excluded from coverage.  There are also risks against which CGA cannot insure or against which it may elect not to insure. The potential costs which may be associated with any liabilities not covered by insurance or in excess of insurance coverage or compliance with applicable laws and regulations may cause substantial delays and require significant capital outlays, adversely affecting CGA's earnings and competitive position in the future and, potentially, its financial position and results of operations.

Whether a gold deposit will be commercially viable depends on a number of factors, some of which are the particular attributes of the deposit, such as its size and grade, proximity to infrastructure, financing costs and governmental regulations, including regulations relating to prices, taxes, royalties, infrastructure, land use, importing and exporting of gold, revenue repatriation and environmental protection. The effects of these factors cannot be accurately predicted, but the combination of these factors may result in CGA not receiving an adequate return on invested capital.

Licences and Permits

CGA requires licences and permits from various governmental authorities. CGA believes that it holds all necessary licences and permits under applicable laws and regulations in respect of its properties and that it is presently complying in all material respects with the terms of such licences and permits. Such licences and permits, however, are subject to change in various circumstances and regularly expire and need to be renewed. There can be no guarantee that CGA will be able to obtain or maintain all necessary licences and permits that may be required to explore and develop its properties, commence construction or operation of mining facilities and properties under exploration or development or to maintain continued operations that economically justify the cost.

Competition

The mineral exploration and mining business is competitive in all of its phases. CGA competes with numerous other companies and individuals, including competitors with greater financial, technical and other resources than CGA, in the search for and the acquisition of attractive mineral properties and, increasingly, human resources. There is no assurance that CGA will continue to be able to compete successfully with its competitors in acquiring properties or prospects and in attracting and retaining human resources.

Cash Cost of Gold Production

CGA's cash operating cost to produce an ounce of gold is dependent on a number of factors, including the grade of reserves, recovery and plant throughput.  In the future, the actual performance of CGA may differ from the estimated performance. As these factors are beyond CGA's control, there can be no assurance that CGA's cash operating cost will continue at historical levels or perform as forecast.

Title Matters

While CGA has no reason to believe that the existence and extent of any mining property in which it has a participating interest is in doubt, title to mining properties is subject to potential claims by third parties.  The failure to comply with all applicable laws and regulations, including failure to pay taxes and carry out and file assessment work, may invalidate title to portions of the properties where the mineral rights are held by CGA.

Outside Contractor Risk

The mining and exploration activities are conducted by outside contractors. As a result, CGA's operations at these sites will be subject to a number of risks, some of which will be outside CGA's control, including:

• negotiating agreements with contractors on acceptable terms;
• the inability to replace a contractor and its operating equipment in the event that either party terminates the agreement;
• reduced control over such aspects of operations that are the responsibility of the contractor;
• failure of a contractor to perform under its agreement with CGA;
• interruption of operations in the event that a contractor ceases its business due to insolvency or other unforeseen events;
• failure of a contractor to comply with applicable legal and regulatory requirements, to the extent that it is responsible for such compliance; and
• problems of a contractor with managing its workforce, labour unrest or other employment issues.

In addition, CGA may incur liability to third parties as a result of the actions of a contractor.  The occurrence of one or more of these risks could have a material adverse effect on CGA's business, results of operations and financial condition.

Safety and Other Hazards

The mining industry is characterised by significant safety risks.  To minimize these risks, the Company has established an Occupational Health Safety & Environment Management Plan ("OHS&E").  The Company provides OHS&E training and awareness programs to its employees and contractors to continuously improve work practices and the work environment.  However there are no guarantees that this will prevent safety issues, accidents or other hazards.

Political Risks

CGA currently holds interests in gold projects in the Philippines, which may be considered to have high political and sovereign risk. The Company also has its head office operations located in Australia. Any material adverse changes in government policies or legislation of Australia, Nigeria, the Republic of Zambia (given the investment in Ratel Group) or the Philippines or any other country that the Company has economic interests in that affect mineral exploration activities, may affect the viability and profitability of the Company.

While the government in the Philippines has historically supported the development of its natural resources by foreign companies, there is no assurance that the government will not in the future adopt different policies or interpretations respecting foreign ownership of mineral resources, royalties rates, taxation, rates of exchange, environmental protection, labour relations, repatriation of income or return of capital or the obligations of CGA under its respective mining codes. The possibility that the government may adopt substantially different policies or interpretations, which might extend to the expropriation of assets, may have a material adverse effect on CGA. Political risk also includes the possibility of civil disturbances and political instability.

Environmental Risks and Hazards

All phases of CGA's operations are subject to environmental regulation. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors and employees. Environmental hazards which are unknown to CGA at present and which have been caused by previous or existing owners or operations of the properties may exist on CGA's properties. Failure to comply with applicable environmental laws and regulations may result in enforcement actions thereunder and may include corrective measures that require capital expenditures or remedial actions. There is no assurance that future changes in environmental laws and regulations and permits governing operations and activities of mining companies, if any, will not materially adversely affect CGA's operations or result in substantial costs and liabilities to CGA in the future.

Production at CGA's mine involves the use of sodium cyanide which is a toxic material. Should sodium cyanide leak or otherwise be discharged from the containment system, CGA may become subject to liability for clean up work that may not be insured.  While all steps have been taken to prevent discharges of pollutants into ground water and the environment, CGA may become subject to liability for hazards that it may not be insured against.

Hedging Risk 

The Company is exposed to movements in the gold price, other commodities and interest rates. As part of the risk management policy of the Company and in compliance with the conditions required by the Company's financiers, a variety of financial instruments (such as gold forward sales contracts and gold put options) are used from time to time to reduce exposure to unpredictable fluctuations in the project life revenue streams. Within this context, the hedging programs undertaken are structured with the objective of retaining as much upside to the gold price as possible, but in any event, by limiting hedging commitments to no more than 50% of the group gold reserves. The Company has also entered into a number of other derivative instruments including interest rate swaps and fuel hedging contracts.  In the event that the Company cannot deliver into these contracts due to insufficient gold production at the Masbate Gold Project, an early repayment of the loans, the Company could be exposed to material mark to market adjustments which could cause material liquidity requirements which may not be able to be funded from the cashflow from operations.

Small Scale Miners

Small scale miners have been operating in Aroroy, Masbate since the time Atlas Consolidated Mining and Development Corporation ("Atlas") operated in the area. While their processing operations are not on FRC's property, there has been evidence of contamination from tailing and effluent discharges within the Company's boundary. Although FRC is not liable for their contamination, the Company has been diligent in attempting to limit the activities of these miners and informing the public about the risk of contamination. In line with attempts to limit and control their activities the Company, in coordination with local and National government, is endeavouring to enter into agreements with small scale miners. The agreements will form local cooperatives to legally work on some areas of the Company's mineral tenements outside of its operations that are not suitable for large scale mining.  There is also a natural conflict in objectives between small scale miners and the Company and FRC, as the small scale miners have no legal rights to mine and are keen to access as much ore as possible.  In contrast, the Company and FRC have a stated position of allowing some level of activity; however, they require it to be contained to nominated areas only.  Accordingly, there are risks that conflict can arise which could materially adversely affect the operations of CGA and/or FRC.

Dependence on Key Management Personnel and Executives

The Company will be dependent upon the continued support and involvement of a number of key management personnel. The loss of the services of one or more of such personnel could have a material adverse effect on the Company. The Company's ability to manage its exploration and development activities and, hence, its success, will depend in large part on the efforts of these individuals. The Company faces intense competition for qualified personnel and there can be no assurances that the Company will be able to attract and retain personnel.

Land Holdings

In general, FRC has valid title to or preferential rights to use and possess the parcels of land needed for its mining operations at the Masbate Gold Project. The following are outstanding issues:

(i)     titles to three parcels of land are being judicially confirmed by applying for registration under the Land Registration Act; and

(ii)     three claimants have filed an action contesting the title of FRC to three parcels of land.

While FRC anticipates that these land issues will be resolved, no assurance can be given that the matters will be resolved in FRC's favour in a timely manner, or at all.

Community Relations

At the Masbate Gold Project, community support is critical to the continued successful operation of the project, including equitable and sensible co-operation with local small scale mining activities. The Philippines operates on a relatively decentralised system and accordingly, all constituents potentially have an impact on the operations of the project and may have interests that conflict with those of the project, which may have a material adverse effect on the project and the Company.

Banking Covenants

Construction of the Masbate Gold Project has in part been financed by project finance from commercial banks which have representations, financial commitments, banking ratios and other covenants which must be satisfied at all times. Given the risks to operating cashflow as described above, the Company is exposed to potential events of default which could make all amounts due and payable immediately or expose CGA to working capital needs which may not be able to be funded by proceeds from operations. Such exposures can also cause cross-defaults on other debt facilities, making those also due and payable immediately, and which may not be able to be funded from cash reserves.

Concentration of Share Ownership

Majority or significant shareholders may be able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, and such parties may not act in the best interests of the Company.

Thistle, PGO Loan and Inter-Company Loans

Some of the Philippine Gold Limited ("PGO") (which was acquired from Thistle) loans and inter-company loans have been in place for a number of years. In 2005 and 2006, PGO, FRC and PGPRC undertook a restructuring of the inter-company loans on the advice of tax consultants. Some inter-company loans were converted into interest-bearing loans, and a portion of the inter-company loans were converted into "additional paid-in capital".

There is a risk that the past and current structure of the inter-company loans may have adverse tax consequences.

Regulations in the Philippines

The Philippines Constitution provides that all natural resources are owned by the State which may enter into a co-production, joint venture or production sharing agreement with citizens of the Philippines or corporations or associations whose capital is at least 60% owned by Philippine citizens.

Commonwealth Act # 108, as amended (the "Anti-Dummy Act"), provides penalties for, amongst others: (a) Filipinos who permit aliens to use them as nominees or dummies so that the aliens could enjoy privileges otherwise reserved for Filipinos or Filipino corporations, and (b) aliens or foreigners who profit from the adoption of these dummy relationships. It also penalises the act of falsely simulating the existence of minimum stock or capital as owned by citizens of the Philippines or any other country in cases in which a constitutional or legal provision requires that, before a corporation or association may exercise or enjoy a right, franchise or privilege, not less than a certain percentage of its capital must be owned by such citizens.

The Anti-Dummy Act likewise prohibits aliens from intervening in the management, operation, administration or control of nationalised business or enterprises, whether as officers, employees or labourers, with or without remuneration, except that aliens may take part in technical aspects only, provided (a) no Filipino can do such technical work, and (b) it is with express authority from the Secretary of Justice. The Anti-Dummy Act also allows the election of aliens as members of the boards of directors or governing bodies of corporations or associations engaged in partially nationalised activities in proportion to their allowable participation or share in the capital of such entities. Although CGA believes its structure complies with all Philippine regulations, there is a risk that, given the limited precedents to date in the country, it could be changed or challenged.

Non completion of the merger with B2 Gold
If the Scheme is not implemented, CGA will remain an independent company and will continue to mine, explore and advance the Masbate Project. Should this occur, the Directors expect that the CGA Share price will trade below its current trading levels in the near term (although it is difficult to predict the CGA Share price movement with any certainty).