Canadian Zinc Corporation

 

 

(Exact Name of Registrant as Specified in its Charter)

 

British Columbia, Canada	1400	N/A
(Province or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code)	(I.R.S. Employer Identification No.)

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

The following table sets forth our selected financial data of the Company. This selected financial data is derived from the Company’s audited financial statements and notes thereto as at December 31, 2014, 2013, 2012, 2011 and 2010. The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, which differs in certain respects from U.S. GAAP. The selected financial data provided below is not necessarily indicative of the future results of operations or financial performance of the Company. The Company has not paid any dividends on its common shares and it does not expect to pay dividends in the foreseeable future. The selected financial data set forth below should be read in conjunction with “Item 5 – Operating and Financial Review and Prospects,” and the financial statements and the notes thereto and other financial information which appear elsewhere in this Annual Report.

 

Selected Financial Data

(CDN$ in thousands, except share and per share data)

	Year ended December 31,
		2014				2013				2012				2011				2010
Amounts in accordance with IFRS:
Net income (loss)		$	(12,434	)		$	(6,911	)		$	(19,870	)		$	(33,362	)		$	18,494
Basic and diluted income (loss) per share			(0.06	)			(0.04	)			(0.13	)			(0.26	)			0.15
Total assets			21,899				19,272				21,948				28,686				53,408
Net assets			17,045				15,685				17,812				25,764				51,235
Share capital			104,028				91,823				87,250				77,052				70,314
Reserves			14,270				12,681				12,470				10,750				9,597
Dividends declared (per share)		$	0.00			$	0.00			$	0.00			$	0.00			$	0.00
Weighted average number of common shares outstanding – basic			192,465,968				166,539,368				157,936,692				130,816,879				122,561,368
Weighted average number of common shares outstanding – diluted			192,465,968				166,539,368				157,936,692				130,816,879				124,724,308
Number of common shares outstanding			218,047,709				172,828,575				164,031,781				143,109,112				130,448,492

In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian dollars (“CDN”).

 

 

 

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Since June 1, 1970, the Government of Canada has permitted a floating exchange rate to determine the value of the Canadian dollar against the U.S. dollar. The high and low exchange rates, the average rates (average of the exchange rates on the last day of each month during the period), and the end of the period rates for Canadian dollars, expressed in U.S. dollars, from January 1, 2010 to December 31, 2014 were as follows:

 

		U.S. DOLLARS PER $1.00 (CDN)
		Years ended December 31
		2014				2013				2012				2011				2010
High			0.9422				1.0164				1.0299				1.0583				1.0054
Low			0.8589				0.9348				0.9599				0.9430				0.9278
Average			0.9027				0.9670				1.0008				1.0151				0.9671
End of Period			0.8620				0.9402				1.0051				0.9833				1.0054

The high and low exchange rates for Canadian dollars, expressed in U.S. dollars for each of the most recent six months were as follows:

 

		U.S. DOLLARS PER $1.00 (CDN)
		Monthly
		October ‘14				November ‘14				December ‘14				January ‘15				February ‘15				March ‘15
High			0.8980				0.8900				0.8815				0.8527				0.8063				0.8039
Low			0.8858				0.8751				0.8589				0.7863				0.7915				0.7811

 

The exchange rate on April 27, 2015 was 0.8261.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

The following is a discussion of those distinctive or special characteristics of the Company’s operations and industry which may have a material impact on, or constitute risk factors in respect of, the Company’s future financial performance.

 

Permitting, Environmental and Other Regulatory Requirements

 

The Company’s operations are subject to permitting, environmental and other regulatory requirements which the Company may not be able to comply with.

 

The operations of Canadian Zinc require licences and permits from various governmental and regulatory authorities. Canadian Zinc holds all necessary licences and permits under applicable laws and regulations for the operation of the Prairie Creek Mine. Canadian Zinc believes that it is presently complying in all material respects with the terms of its current licences and permits. However, such licences and permits are subject to change in various circumstances. There can be no guarantee Canadian Zinc will be able to maintain all necessary licences and permits as are required to explore and develop its properties, including the Prairie Creek Property, commence construction or operation of mining facilities or properties under exploration or development.

 

The Prairie Creek Project is located in an environmentally sensitive and remote area in the Mackenzie Mountains of the Northwest Territories, within the watershed of the South Nahanni River. The South Nahanni River is considered to be of global significance, is highly valued as a wilderness recreation river and is a designated World Heritage Site. The South Nahanni River flows through the Nahanni National Park Reserve.

 

 

 

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The Prairie Creek Property is encircled by the Nahanni National Park Reserve; however, an area of approximately 300 square kilometres immediately surrounding the Prairie Creek Mine is specifically excluded from the Park. In 2009 new legislation entitled “An Act to Amend the Canada National Parks Act to enlarge Nahanni National Park Reserve of Canada” was enacted, which also authorized the Minister of Environment to enter into leases, licences of occupation or easements over Nahanni Park lands for the purposes of a mining access road leading to the Prairie Creek Mine area, including the sites of storage and other facilities connected with that road. The Company has obtained permits from the Parks Canada Agency for the purposes of accessing the Prairie Creek Mine area. There can be no guarantee Canadian Zinc will be able to maintain all necessary permits on acceptable terms.

 

Canadian Zinc’s activities are subject to extensive federal, provincial, territorial and local laws and regulations governing environmental protection and employee health and safety. Canadian Zinc is required to obtain governmental permits and provide bonding requirements under federal and territorial water and mine regulations. All phases of Canadian Zinc’s operations are subject to environmental regulation. These regulations mandate, among other things, the maintenance of water and air quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner, which will require stricter standards and enforcement, increased fines and penalties for non-compliance, and more stringent environmental assessments of proposed projects. United Nations proposals for a global treaty on mercury, intended to result in reduced global emissions of mercury, may place restrictions on the production, use and international movement of mercury and mercury-containing wastes which may, if adopted, result in restrictions on shipment of concentrates or other mineral products containing by-product or trace mercury. There is no assurance that future changes in environmental laws or regulations, if any, will not adversely affect Canadian Zinc’s operations.

 

Environmental laws and regulations are complex and have tended to become more stringent over time. These laws are continuously evolving. Any changes in such laws, or in the environmental conditions at the Prairie Creek Property, could have a material adverse effect on Canadian Zinc’s financial condition, liquidity or results of operations. Canadian Zinc is not able to determine the impact of any future changes in environmental laws and regulations on its future financial position due to the uncertainty surrounding the ultimate form such changes may take. The Company does not currently consider that expenditures required to maintain ongoing environmental monitoring obligations at the Prairie Creek Property are material to the results and financial condition of the Company. However, these costs could become material in the future and would be reported in the Company’s public filings at that time.

 

Although Canadian Zinc makes provision for reclamation costs, it cannot be assured that such provision is adequate to discharge its obligations for these costs. As environmental protection laws and administrative policies change, Canadian Zinc will revise the estimate of its total obligations and may be obliged to make further provisions or provide further security for mine reclamation costs. The ultimate amount of reclamation to be incurred for existing and past mining interests is uncertain.

 

Existing and possible future environmental legislation, regulations and actions could cause additional expense, capital expenditures, restrictions and delays in the activities of the Company, the extent of which cannot be predicted. The Company must obtain various regulatory approvals, permits and licences relating to the Prairie Creek Property and there is no assurance that such approvals will be obtained. No assurance can be given that new rules and regulations will not be enacted or made, or that existing rules and regulations will not be applied, in a manner which could limit or curtail production or development.

 

Regulatory approvals and permits are currently, and will in the future be, required in connection with Canadian Zinc’s operations. To the extent such approvals are required and not obtained; Canadian Zinc may be curtailed or prohibited from proceeding with planned exploration or development of its mineral properties or from continuing its mining operations.

 

Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

 

 

 

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Failure to comply with applicable environmental and health and safety laws can result in injunctions, damages, suspension or revocation of permits and imposition of penalties. There can be no assurance that Canadian Zinc has been or will be at all times in complete compliance with all such laws, regulations and permits, or that the costs of complying with current and future environmental and health and safety laws and permits will not materially adversely affect Canadian Zinc’s business, results of operations or financial condition. Environmental hazards may exist on the properties, including the Prairie Creek Property, on which Canadian Zinc holds interests which are unknown to Canadian Zinc at present and which have been caused by previous owners or operators of the properties.

 

Amendments to current laws, regulations and permits governing operations and activities of mining and exploration companies, or more stringent implementation thereof, could have a material adverse impact on Canadian Zinc and cause increases in exploration expenses, capital expenditures or production costs or require abandonment or delays in the development of mining properties.

 

The Prairie Creek Project has, on numerous occasions, experienced significant delays in obtaining permits and licences necessary for the conduct of its operations. If at any time permits essential to operations are not obtained, or not obtained in a timely manner, or are cancelled or revoked, there is a risk that the Company may not be able to operate a mine at the Prairie Creek Property.

 

Political and Legislative

 

Canadian Zinc’s operations are exposed to various levels of political, legislative and other risks and uncertainties.

 

Canadian Zinc conducts its operations in Canada and specifically in the Northwest Territories and the province of Newfoundland and Labrador. The Mackenzie Valley in the Northwest Territories of Canada is in an area which is claimed by the Dehcho First Nations as their traditional territory. The Dehcho have not settled their land claim with the Federal Government of Canada. The Dehcho and the Federal Government both claim legal title to this territory and legal title to the land remains in dispute. The Company’s operations are potentially subject to a number of political, legislative and other risks. Canadian Zinc is not able to determine the impact of political, legislative or other risks on its business or its future financial position.

 

Canadian Zinc’s operations are exposed to various levels of political, legislative and other risks and uncertainties. These risks and uncertainties include, but are not limited to, cancellation, renegotiation or nullification of existing leases, claims, permits and contracts; expropriation or nationalization of property; changes in laws or regulations; changes in taxation laws or policies; royalty and tax increases or claims by governmental, Aboriginal or other entities; retroactive tax or royalty claims and changing political conditions; government mandated social expenditures; governmental regulations or policies that favour or require the awarding of contracts to local or Aboriginal contractors or require contractors to employ residents of, or purchase supplies from, a particular jurisdiction or area; or that require that an operating project have a local joint venture partner, which may require to be subsidized; and other risks arising out of sovereignty or land claims over the area in which Canadian Zinc’s operations are conducted.

 

The mineral exploration, mine development, and proposed mining, processing activities of Canadian Zinc, and the anticipated production, transportation and sale of mineral concentrates are subject to extensive federal, territorial, international and local laws, regulations and treaties, including various laws governing prospecting, development, production, transportation taxes, labour standards and occupational health, mine safety, toxic substances including mercury, land use, water use and other matters. Such laws and regulations are subject to change and can become more stringent and costly over time. No assurance can be given that new laws, rules and regulations will not be enacted or that existing laws, rules and regulations will not be applied in a manner which could limit or curtail exploration, development, mining, processing, production and sale of concentrates. Amendments to current laws and regulations governing operations and activities of exploration and mining, or more stringent implementation thereof, could have a substantial adverse impact on Canadian Zinc.

 

 

 

 

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There was a major change to the legislative and regulatory framework and regulations in the Mackenzie Valley between 1998 and 2000. There can be no assurance that these laws and regulations will not change in the future in a manner that could have an adverse effect on the Company’s activities and/or its financial condition. In 2007, the Federal Government announced the Northern Regulatory Improvement Initiative to improve the current regulatory regime in the north of Canada and in May 2010 announced an Action Plan to improve northern regulatory regimes, which anticipate changes to the current legislative framework and regulatory processes. In 2013, the Federal Government introduced Bill C-15 The Northwest Territories Devolution Act which includes proposed amendments to the Mackenzie Valley Resource Management Act, which amendments may impose additional regulations, obligations or restrictions on mining operations in the Mackenzie Valley.

 

In relation to Northwest Territories specifically, a number of policy and social issues exist which increase Canadian Zinc’s political and legislative risk. The Government of Canada is facing legal and political issues, such as land claims and social issues, all of which may impact future operations. This political climate increases the risk of the Government making changes in the future to its position on issues such as mining rights and land tenure, which in turn may adversely affect Canadian Zinc’s operations. Future government actions cannot be predicted, but may impact the operation and regulation of the Prairie Creek Mine. Changes, if any, in Government policies, or shifts in local political attitude in the Northwest Territories may adversely affect Canadian Zinc’s operations or business.

 

On April 1, 2014 Bill C-15 -The Northwest Territories Devolution Act came into law providing for the devolution of lands and resource management in the NWT from the Government of Canada to the Government of the Northwest Territories (“GNWT”). Devolution in the NWT represents the transfer of decision-making and administration for land and resource management from the Government of Canada to the Government of the Northwest Territories. The territorial government is now responsible for the management of onshore lands and the issuance of rights and interests with respect to onshore minerals and oil and gas. Devolution also gives the GNWT the power to collect and share in resource revenues generated in the territory.

 

Canadian Zinc’s exploration, development and production activities may be substantially affected by factors beyond Canadian Zinc’s control, any of which could materially adversely affect Canadian Zinc’s financial position or results of operations. The occurrence of these various factors and uncertainties cannot be accurately predicted. The Company is not able to determine the impact of these risks on its business.

 

Financing and Going Concern

 

Additional financing will be needed for the Company’s business operations and there are no assurances that the Company will be able to obtain the necessary funding under acceptable terms and there is uncertainty regarding the Company’s ability to continue as a going concern.

 

The successful development of the Company’s properties will depend upon the Company’s ability to obtain financing through private placement financing, public financing, the joint venturing of projects, bank financing or other means. There is no assurance that the Company will be successful in obtaining the required financing.

 

Securities of junior and small-cap companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include macroeconomic developments in North America and global and market perceptions of the attractiveness of particular industries. The share price of Canadian Zinc is likely to be significantly affected by short-term changes in metal prices. Other factors unrelated to Canadian Zinc’s performance that may have an effect on the price of its shares include the following: the extent of analytical coverage available to investors concerning Canadian Zinc’s business may be limited if investment banks with research capabilities do not follow the Company’s securities; lessening in trading volume and general market interest in the Company’s securities may affect an investor’s ability to trade significant numbers of common shares; the size of Company’s public float may limit the ability of some institutions to invest in the Company’s securities; and a substantial decline in the price of the common shares that persists for a significant period of time could cause the Company’s securities to be delisted from an exchange, further reducing market liquidity.

 

As a result of any of these factors, the market price of the Company’s shares at any given point in time may not accurately reflect Canadian Zinc’s long-term value. Securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. Canadian Zinc may in the future be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert management’s attention and resources.

 

 

 

 

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Canadian Zinc does not currently generate any cash flow from its operations and will need to generate additional financial resources in order to fund its planned exploration and development programs and its corporate administration costs. There is a risk that additional financing will not be available to the Company on a timely basis or on acceptable terms. There are no assurances that the Company will continue to be able to obtain additional financial resources and/or achieve positive cash flows or profitability. Canadian Zinc has not achieved profitable operations, has an accumulated deficit since inception and expects to incur further losses in the development of its business. If the Company is unable to obtain adequate additional financing, the Company may be required to curtail operations and its exploration and development activities. Failure to continue as a going concern would require that the Company’s assets and liabilities be restated on a liquidation basis which would differ significantly from the going concern basis.

 

The development and exploration of Canadian Zinc’s Prairie Creek Property will require substantial additional financing. The SNC Preliminary Feasibility Study of 2012 estimated that, depending on final design and operating permit conditions, the additional capital required to install the planned new facilities and to bring the Prairie Creek Mine into production will aggregate $160 million plus a contingency of $33 million for a total of $193 million. Working capital upon commencement of production is estimated to be $34 million plus a contingency of $7 million for a total of $41 million.

 

The Company is in the process of updating the estimate of capital costs to bring the Prairie Creek Mine into production and a revised estimate will be included in the updated feasibility study to be completed alter in the year. The PFS included an estimate of $12.8 million in respect of security deposits or financial assurance required to secure reclamation obligations arising under various surface leases, permits and licences. The new Water Licences and Land Use Permits issued in 2013 together provide for the posting, in stages, of a total of approximately $20.4 million in respect of security deposits or financial assurance required to secure reclamation obligations and expected decommissioning liabilities. The Company is currently finalizing the design and cost estimates of a potential all season road for inclusion into the capital cost schedule of the Prairie Creek Project. Incorporation of an all season road for future operations would require significant additional capital cost which were not considered in the 2012 Preliminary Feasibility Study.

 

Failure to obtain sufficient financing or to post the financial assurance or security when required will result in delaying or indefinite postponement of exploration, development or production on Canadian Zinc’s property or even a loss of property interest. There can be no assurance that additional capital or other types of financing will be available when needed or that, if available, the terms of such financing will be favourable to Canadian Zinc.

 

Metal Prices and Marketability of Minerals

 

The Company may be adversely affected by fluctuations in metal prices.

 

The market price of metals and minerals is volatile and cannot be controlled. Metal prices have fluctuated widely, particularly in recent years. If the price of metals and minerals should drop significantly, the economic prospects for the Prairie Creek Project could be significantly reduced or rendered uneconomic. There is no assurance that, a profitable market may exist for the sale of products, including concentrates from the Prairie Creek Project. Factors beyond the control of the Company may affect the marketability of minerals or concentrates produced. The marketability of minerals is affected by numerous other factors beyond the control of the Company, including quality issues, impurities, government regulations, royalties, allowable production and regulations regarding the importing and exporting of minerals, the effect of which cannot be accurately predicted.

 

Factors tending to affect the price of metals include:

• The relative strength of the U.S. dollar against other currencies;
• Government monetary and fiscal policies;
• Expectations of the future rate of global monetary inflation and interest rates;
• General economic conditions and the perception of risk in capital markets;
• Political conditions including the threat of terrorism or war;
• Speculative trading;

 

 

 

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• Investment and industrial demand; and
• Global production and inventory stocks.

The effects of these factors, individually or in aggregate, on the prices of zinc, lead and/or silver is impossible to predict with accuracy. Fluctuations in metal prices may adversely affect Canadian Zinc’s financial performance and results of operations. Further, if the market price of zinc, lead and/or silver falls or remains depressed, Canadian Zinc may experience losses or asset write-downs and may curtail or suspend some or all of its exploration, development and mining activities.

 

Furthermore, sustained low metal prices can halt or delay the development of new and existing projects; reduce funds available for mineral exploration and may result in the recording of a write-down of mining interests due to the determination that future cash flows would not be expected to recover the carrying value.

 

Metal prices fluctuate widely and are affected by numerous factors beyond Canadian Zinc’s control such as the sale or purchase of such commodities by various central banks and financial institutions, interest rates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, global and regional supply and demand, and the political and economic conditions of major mineral and metal producing countries throughout the world.

 

Future production, if any, from Canadian Zinc’s mining properties is dependent on mineral prices that are adequate to make these properties economic. The prices of metals have fluctuated widely in recent years, and future or continued serious price declines could cause continued development of and commercial production from Canadian Zinc’s properties to be impracticable. Depending on the price of metal, cash flow from mining operations may not be sufficient and Canadian Zinc may never commence commercial production and may lose its interest in, or may be forced to sell, its properties. The SNC Preliminary Feasibility Study on the Prairie Creek Project, completed in 2012, assumed levels of treatment charges, penalties and payabilities for all concentrates used in the economic analysis and were derived from a market study conducted by an independent third-party, however, no smelters or concentrate buyers have directly offered or confirmed the assumed treatment charges, penalties or payabilities. There can be no assurance that the assumed terms will be available to the Company.

 

In addition to adversely affecting Canadian Zinc’s reserve or resource estimates and its financial condition, declining commodity prices can impact operations by requiring a reassessment of the feasibility of a particular project. The need to conduct such a reassessment may cause substantial delays or may interrupt operations until the reassessment can be completed.

 

Currency fluctuations may affect the costs that Canadian Zinc incurs at its operations. Zinc, lead and silver are sold throughout the world based principally on the U.S. dollar price, but operating expenses are incurred in currencies other than the U.S. dollar. Appreciation of the Canadian dollar against the U.S. dollar increases the cost of production in U.S. dollar terms at mines located in Canada.

 

Exploration and Evaluation

 

Mineral exploration involves a high degree of risk.

 

The business of exploring for minerals and mining involves a high degree of risk. There is no assurance the Company’s mineral exploration activities will be successful. Few properties that are explored are ultimately developed into producing mines. In exploring and developing its mineral deposits the Company is subjected to an array of complex economic factors and technical considerations. Unusual or unexpected formations, formation pressures, power outages, labour disruptions, flooding, explosions, cave-ins, landslides, environmental hazards, and the inability to obtain suitable or adequate machinery, equipment or labour are other risks involved in the conduct of exploration and development programs. Such risks could materially adversely affect the business or the financial performance of the Company.

 

There is no certainty that the expenditures made by Canadian Zinc towards the search and evaluation of mineral deposits will result in discoveries of commercial quantities of ore. The exploration for and development of mineral deposits involves significant risks which even a combination of careful evaluation, experience and knowledge may not eliminate. Major expenses may be required to locate and establish mineral reserves, to develop metallurgical processes and to construct mining and processing facilities at a particular site. It is impossible to ensure that the exploration or development programs planned by Canadian Zinc will result in a profitable commercial mining operation. Whether a mineral deposit will be commercially viable depends on a number of factors, some of which are: the particular attributes of the deposit, such as size, grade and proximity to infrastructure; metal prices which are highly cyclical; and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in Canadian Zinc not receiving an adequate return on invested capital.

 

 

 

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A specific risk associated with the Prairie Creek Property is its remote location. Mining, processing, development and exploration activities depend, to one degree or another, on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important factors, which affect capital and operating costs. Unusual or infrequent weather phenomena, government or other interference in the maintenance or provision of such infrastructure could adversely affect Canadian Zinc’s operations, financial condition and results of operations.

 

Mining operations generally involve a high degree of risk. Canadian Zinc’s mining operations will be subject to all the hazards and risks normally encountered in the development and production of minerals, including unusual and unexpected geologic formations, seismic activity, rock bursts, cave-ins, flooding and other conditions involved in the drilling and removal of material, any of which could result in damage to, or destruction of, mines and other producing facilities, damage to life or property, environmental damage and possible legal liability. Mining and milling operations are subject to hazards such as equipment failure or failure of retaining dams around tailings disposal areas, which may result in environmental pollution and consequent liability.

 

Uncertainty in the Estimation of Mineral Reserves and Mineral Resources

 

There is uncertainty in the estimation of mineral reserves and mineral resources.

 

The figures for Mineral Reserves and Mineral Resources contained in this document are estimates only and no assurance can be given that the anticipated tonnages and grades will be achieved, that the indicated level of recovery will be realized or that Mineral Reserves and Mineral Resources can be mined or processed profitably. There are numerous uncertainties inherent in estimating Mineral Reserves and Mineral Resources, including many factors beyond Canadian Zinc’s control. Such estimation is a subjective process, and the accuracy of any reserve and resource estimate is a function of the quantity and quality of available data and of the assumptions made and judgments used in engineering and geological interpretation. In addition, there can be no assurance that mineral or metal recoveries in small scale laboratory tests will be duplicated in larger scale tests under on-site conditions or during production.

 

Inferred mineral resources 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 measured and indicated mineral resources as a result of continued exploration.

 

Fluctuation in metal prices, results of drilling, metallurgical testing and production and the evaluation of mine plans subsequent to the date of any estimate may require revision of any such resource or reserve estimate. The volume and grade of resources mined and processed and recovery rates may not be the same as currently anticipated. Any material reductions in estimates of Mineral Reserves or Mineral Resources, or of Canadian Zinc’s ability to extract these Mineral Reserves or Mineral Resources, could have a material adverse effect on Canadian Zinc’s results of operations and financial condition.

 

Mineral reserve and mineral resource estimates are imprecise and depend partly on statistical inferences drawn from drilling and other data which may prove to be unreliable. Future production could differ dramatically from reserve or resource estimates for many reasons including the following:

• Mineralization or formations could be different from those predicted by drilling, sampling and similar examinations;
• Declines in the market price of metals may render the mining of some or all of Canadian Zinc’s Mineral Reserves or Mineral Resources uneconomic;
• Increases in operating mining costs and processing costs could adversely affect reserves or resources; and

 

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• The grade of reserves or resources may vary significantly from time to time and there can be no assurance that any particular level of metal may be recovered from the reserves or resources.

Any of these factors may require Canadian Zinc to reduce its Mineral Reserve or Mineral Resources estimates.

 

Insurance and Uninsured Risks

 

The Company is not insured to cover all potential risks.

 

Canadian Zinc’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, ground or slope failures, cave-ins, changes in the regulatory environment and natural phenomena such as inclement weather conditions, floods and earthquakes. Such occurrences could result in damage to mineral properties or production facilities, personal injury or death, environmental damage to Canadian Zinc’s properties or the properties of others, delays in mining, monetary losses and possible legal liability.

 

Although Canadian Zinc maintains insurance to protect against certain risks in such amounts as it considers reasonable, its insurance will not cover all the potential risks associated with the Company’s mining operations. Canadian Zinc may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards as a result of exploration and production is not generally available to Canadian Zinc or to other companies in the mining industry on acceptable terms. In particular, the Company is not insured for environmental liability or earthquake damage.

 

Canadian Zinc might also become subject to liability for pollution or other hazards which may not be insured against, or which Canadian Zinc may elect not to insure against, because of premium costs or other reasons. Losses from these events may cause Canadian Zinc to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.

 

Title Matters

 

Title to the Company’s mineral properties may be challenged or defective. Aboriginal groups may raise title disputes in relation to land claims and any impairment or defect in title could have a negative impact on the Company.

 

Mining leases and surface leases issued to the Company by the Federal Government have been surveyed but other parties may dispute the Company’s title to its mining properties. The mining claims in which the Company has an interest have not been surveyed and, accordingly, the precise location of the boundaries of the claims and ownership of mineral rights on specific tracts of land comprising the claims may be in doubt. These claims have not been converted to lease, and are, accordingly, subject to regular compliance with assessment work requirements. Failure to comply strictly with applicable laws, regulations and local practices relating to mineral right applications and tenure, could result in loss, reduction or expropriation of entitlements.

 

While the Company has investigated its title to all its mining leases, surface leases and mining claims and, to the best of its knowledge, title to all properties is in good standing, this should not be construed as a guarantee of title and title may be affected by undetected defects. The validity and ownership of mining property holdings can be uncertain and may be contested. There are currently a number of pending Aboriginal or Native title or Treaty or traditional land ownership claims relating to Northwest Territories. The Company’s properties at Prairie Creek are subject to Aboriginal or Native land claims. Title insurance generally is not available, and Canadian Zinc’s ability to ensure that it has obtained secure title to individual mineral properties or mining concessions may be severely constrained. Canadian Zinc’s mineral properties may be subject to prior unregistered liens, agreements, transfers or claims, including Native land claims, and title may be affected by, among other things, undetected defects. No assurances can be given that there are no title defects affecting such properties.

 

 

 

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Executives and Conflicts of Interest

 

The Company is dependent on certain key executives and the loss of these executives may adversely affect our business and results of operations.

 

Canadian Zinc is dependent on the services of key executives, including the President & Chief Executive Officer and the Vice President of Exploration & Chief Operating Officer of the Company, and a small number of other skilled and experienced executives and personnel. Due to the relatively small size of the Company, the loss of these persons or Canadian Zinc’s inability to attract and retain additional highly skilled or experienced employees may adversely affect its business and future operations.

 

Certain officers and directors of the Company may be in a position of conflicts of interest.

 

Certain of the directors and officers of the Company also serve as directors and/or officers of, or have significant shareholdings in, other companies involved in natural resource exploration and development and consequently there exists the possibility for such directors and officers to be in a position of conflict. Any decision made by any of such directors and officers involving Canadian Zinc will be made in accordance with their duties and obligations to deal fairly and in good faith with a view to the best interests of the Company and its shareholders. In addition, each of the directors is required to declare and refrain from voting on any matter in which such directors may have a conflict of interest in accordance with the procedures set forth in the Business Corporations Act (British Columbia) and other applicable laws.

 

To the extent that such other companies may participate in ventures in which Canadian Zinc may participate, the directors of Canadian Zinc may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. In the event that such a conflict of interest arises at a meeting of the Company’s directors, a director who has such a conflict will abstain from voting for the approval of such participation or such terms.

 

From time to time several companies may collectively participate in the acquisition, exploration and development of natural resource properties thereby allowing for their participation in larger programs, permitting involvement in a greater number of programs and reducing financial exposure in respect of any one program. It may also occur that a particular company will assign all or a portion of its interest in a particular program to another of these companies due to the financial position of the company making the assignment. Under the laws of the Province of British Columbia, the directors of the Company are required to act honestly, in good faith and in the best interests of the Company. In determining whether or not Canadian Zinc will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider the degree of risk to which the Company may be exposed and its financial position at that time.

 

Acquisitions

 

From time to time Canadian Zinc undertakes evaluations of opportunities to acquire additional mining assets and businesses. Any resultant acquisitions, such as those discussed in this Annual Report, may be significant in size, may change the scale of Canadian Zinc’s business, and may expose Canadian Zinc to new geographic, political, operating financial and geological risks. Canadian Zinc’s success in its acquisition activities depends on its ability to identify suitable acquisition candidates, to acquire them on acceptable terms, and integrate their operations successfully with those of Canadian Zinc. Any acquisition would be accompanied by risks, such as a significant decline in metal prices; the ore body proving to be below expectations; the difficulty of assimilating the operation and personnel; the potential disruption of Canadian Zinc’s ongoing business; the inability of management to maximize the financial and strategic position of Canadian Zinc through the successful integration of acquired assets and businesses; the maintenance of uniform standards, control, procedures and policies; the impairment of relationships with employees, customers and contractors as a result of any integration of new management personnel; and the potential unknown liabilities associated with acquired assets and business. In addition Canadian Zinc may need additional capital to finance an acquisition. Debt financing related to any acquisition will expose Canadian Zinc to the risk of leverage, while equity financing may cause existing shareholders to suffer dilution. There can be no assurance that Canadian Zinc would be successful in overcoming these risks or any other problems encountered in connection with such acquisitions.

 

 

 

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Competition

 

The resource industry is very competitive.

 

The mining industry is competitive in all of its phases. There is aggressive competition within the mining industry for the discovery and acquisition of properties considered to have commercial potential. Canadian Zinc faces strong competition from other mining companies in connection with the acquisition of properties, mineral claims, leases and other mineral interests as well as for the recruitment and retention of qualified employees and other personnel. Many of these companies have greater financial resources, operational experience and technical capabilities than Canadian Zinc. As a result of this competition, Canadian Zinc may be unable to maintain or acquire attractive mining properties on terms it considers acceptable or at all. Consequently, Canadian Zinc’s operations and financial condition could be materially adversely affected.

 

Requirements of the Sarbanes-Oxley Act and Similar Canadian Regulations

 

The Company is subject to the requirements of the Sarbanes-Oxley Act and similar Canadian regulations and there are no assurances that the Company will be able to continue to comply with these heightened regulatory requirements.

 

Since 2007, the Company has documented and tested its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), which requires an annual assessment by management of the effectiveness of the Company’s internal control over financial reporting and an attestation by the Company’s independent auditors addressing internal controls over financial reporting.

 

Due to its size, its limited staff resources and financial constraints, the Company is exposed to certain potential deficiencies in its internal controls over financial reporting. If the Company is unable to maintain the adequacy of its internal control over financial reporting, as such standards are modified, supplemented, or amended from time to time; the Company may not be able to ensure that it can conclude on an ongoing basis that it has effective internal controls over financial reporting in accordance with Section 404 of SOX. The Company’s inability to satisfy the requirements of Section 404 of SOX on an ongoing, timely basis could result in the loss of investor confidence in the reliability of its consolidated financial statements, which in turn could harm the Company’s business and negatively impact the trading price of its common shares. In addition, any inability to implement required new or improved controls, or difficulties encountered in their implementation, could impact the Company’s operating results or cause it to be unable to meet its reporting obligations. Future acquisitions (if any) may provide the Company with challenges in implementing the required processes, procedures and controls in the acquired operations. Acquired companies may not have disclosure controls and procedures or internal control over financial reporting that are as thorough or effective as those required by securities laws currently applicable to the Company.

 

No evaluation can provide complete assurance that the Company’s internal control over financial reporting will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be reported. The effectiveness of the Company’s controls and procedures could also be limited by simple errors or faulty judgments. In addition, as the Company continues to develop, the challenges involved in implementing appropriate internal controls over financial reporting will increase and will require that the Company continue to enhance its internal controls over financial reporting. Although the Company will be required to devote substantial time and will incur substantial costs, as necessary, in an effort to ensure ongoing compliance, the Company cannot be certain that it will be successful in continuing to comply with Section 404 of SOX.

 

Vatukoula Gold Mines plc

 

The Company has an investment in Vatukoula Gold Mines plc, which operates the Vatukoula Gold Mine in Fiji. Fiji has experienced political unrest and there may, at times, be challenges to foreign owned companies in Fiji. VGM expenditures are made in Fijian dollars and revenues are in U.S. dollars. The parent company in the VGM group is based in the United Kingdom. The impact of foreign exchange fluctuations may have a material impact on the results of operations of VGM. As VGM is operating a working gold mine, it is exposed to risk from changes in commodity prices (notably gold) and also the price of oil on the world markets. Adverse changes in these prices could have a material impact on the operations of VGM and therefore the fair value or price of VGM shares.

 

 

 

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History of Losses and No Assurance of Profitable Operations

 

The Company has a history of losses and no assurance of profitable operations.

 

The Company has incurred losses since inception of $101,253,000 through December 31, 2014, which includes $72,597,000 of exploration and development expenditures on the Prairie Creek property and central Newfoundland properties which have been expensed in accordance with the Company’s accounting policies. There can be no assurance that the Company will be able to operate profitably during future periods. If the Company is unable to operate profitably during future periods, and is not successful in obtaining additional financing, the Company could be forced to cease its exploration and evaluation programs and mine development activities as a result of insufficient cash resources.

 

Shareholder Dilution

 

The exercise of outstanding options and warrants would lead to dilution of current shareholders.

 

As of December 31, 2014, there were 218,047,709 common shares outstanding. As of December 31, 2014, the Company had 5,693,800 share purchase options and 17,295,960 warrants outstanding allowing the holders to purchase 22,989,760 common shares. Directors and officers of the Company hold 3,900,000 of these share purchase options, contractors and employees of the Company hold 1,793,800 share purchase options and third-party entities hold 17,295,960 share purchase warrants.

 

As of March 31, 2015, there were 218,047,709 common shares outstanding and the Company had 5,693,800 share purchase options and 16,908,360 warrants outstanding allowing the holders to purchase 22,602,160 common shares. The exercise of all of the existing share purchase options and warrants would result in percentage ownership dilution to the existing shareholders.

 

Potential Future Equity Financings

 

Additional financing may be needed for our business operations which may lead to dilution of the Company’s current shareholders.

 

The Company has used equity financing in order to meet its needs for capital and may engage in equity financings during future periods. Subsequent issuances of equity securities or securities convertible into or exchangeable or exercisable for equity securities would result in further percentage ownership dilution to existing shareholders and could depress the price of the Company’s shares.

 

Enforcement of Foreign Judgments

 

The Company is a foreign corporation and all of the Company’s directors and officers are outside of the United States, which may make enforcement of civil liabilities difficult.

 

Canadian Zinc is organized under the law of, and headquartered in, British Columbia, Canada, and none of its directors and officers are citizens or residents of the United States. In addition, all of its assets are located outside the United States. As a result, it may be difficult or impossible for an investor to (i) enforce in courts outside the United States judgments against the Company and its directors and officers obtained in United States courts based upon the civil liability provisions of United States federal securities law or (ii) bring in courts outside the United States an original action against the Company and/or its directors and officers to enforce liabilities based upon such United States securities laws.

 

Foreign Private Issuer Status

 

As a foreign private issuer, the Company’s shareholders may have less complete and timely data.

 

 

 

 

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The Company is a “foreign private issuer” as defined in Rule 3b-4 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). Equity securities of the Company are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the Exchange Act pursuant to Rule 3a12-3 of the Exchange Act. Therefore, the Company is not required to file a Schedule 14A proxy statement in relation to the annual meeting of shareholders. The submission of proxy and annual meeting of shareholder information on Form 6-K may result in shareholders having less complete and timely information in connection with shareholder actions. The exemption from Section 16 rules regarding reports of beneficial ownership and purchases and sales of common shares by insiders and restrictions on insider trading in the Company’s securities may result in shareholders having less data and there being fewer restrictions on insiders’ activities in the Company’s securities.

 

U.S. Tax Matters

 

The Company’s Passive Foreign Investment Company status has possible adverse tax consequences for U.S. investors.

 

Because the Company is an exploration stage company and its only material revenues consist of passive investment income on its cash investments, U.S. holders of common shares should be aware that the Company believes it was classified as a passive foreign investment company (“PFIC”) during the tax year ended December 31, 2014, and based on current business plans and financial expectations, the Company anticipates that it may be a PFIC for the current tax year and may be a PFIC in future tax years. If the Company is a PFIC for any year during a U.S. shareholder’s holding period of the common shares, then such U.S. shareholder generally will be required to treat any gain realized upon a disposition of common shares, or any “excess distribution” received on its common shares, as ordinary income, and to pay an interest charge on a portion of such gain or distribution, unless the shareholder makes a timely and effective "qualified electing fund" election (“QEF Election”) or a "mark-to-market" election with respect to the common shares. A U.S. shareholder who makes a QEF Election generally must report on a current basis its share of the Company's net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. shareholders should be aware that there can be no assurance that the Company will satisfy the record keeping requirements that apply to a qualified electing fund, or that the Company will supply U.S. shareholders with information that such U.S. shareholders require to report under the QEF Election rules, in the event that the Company is a PFIC and a U.S. shareholder wishes to make a QEF Election. Thus, U.S. shareholders may not be able to make a QEF Election with respect to their common shares. A U.S. shareholder who makes a mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the common shares over the taxpayer’s adjusted tax basis therein. This paragraph is qualified in its entirety by the discussion below under the heading “Certain United States Federal Income Tax Consequences.” Each U.S. shareholder should consult its own tax advisors regarding the PFIC rules and the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares.

 

Penny Stock Rules

 

The Company’s securities may be subject to penny stock regulations.

 

The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade the Company’s securities.

 

 

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

The Company was incorporated in British Columbia, Canada, on December 16, 1965 under the former Companies Act of British Columbia. The Company changed its name to “San Andreas Resources Corporation” on August 29, 1991 and to “Canadian Zinc Corporation” on May 25, 1999. The Company currently exists under the Business Corporations Act (British Columbia). On June 16, 2004, the Company’s shareholders adopted new Articles to bring the Company’s Charter documents up to date and into conformity with the then new Business Corporations Act (British Columbia).

 

The Company's head office, which is also its registered and records office, is located at Suite 1710, 650 West Georgia Street, Vancouver, British Columbia, Canada V6B 4N9.

 

The Company’s shareholders passed a resolution to amend the Company’s authorized share capital from 50,000,000 common shares with no par value to 100,000,000 common shares with no par value on May 24, 2002 and from 100,000,000 common shares with no par value to 200,000,000 common shares with no par value on December 30, 2003. On June 16, 2004, shareholders passed a resolution to change the authorized share capital to an unlimited number of common shares with no par value.

 

General Development of the Business

 

Canadian Zinc is a public company listed on the Toronto Stock Exchange under the symbol “CZN” and traded on the OTCQB under the symbol “CZICF” and is engaged in the business of exploration and, when warranted, development of natural resource properties.

 

The Company’s principal focus is the development of the Prairie Creek property (the “Prairie Creek Property”, “Prairie Creek Project” or “Prairie Creek Mine”) in the Northwest Territories, Canada and the exploration of base metal properties in Newfoundland and Labrador, Canada.

 

The Prairie Creek Property contains a zinc/lead/silver mineral resource located approximately 500 kilometres west of Yellowknife in the Northwest Territories, Canada. The Prairie Creek Mine already has extensive infrastructure in place including five kilometres of underground workings on three levels, a 1,000 tonne per day mill, a fleet of heavy duty and light duty surface vehicles, three surface exploration diamond drills, camp accommodation, maintenance and water treatment facilities and a 1,000 long gravel metre airstrip. The Company has obtained all the significant regulatory permits and social licences required to complete construction and development at the mine site and the access road to allow commencement of mining and milling at Prairie Creek.

 

Canadian Zinc’s primary objective is to bring the Prairie Creek Mine into production at the earliest opportunity and in pursuit of that objective to complete ongoing optimization, planning and engineering for incorporation into feasibility studies to support and secure the necessary financing to rehabilitate, upgrade and modernize the Mine, including the processing plant and other site infrastructure.

 

Canadian Zinc also owns an extensive land package in central Newfoundland, Canada, with known lead/zinc deposits and extensive exploration potential, which includes the South Tally Pond project, which hosts the Lemarchant deposit, the Tulks South project, which hosts the Boomerang and Domino deposits, and the Long Lake project.

 

 

 

 

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The Company’s exploration strategy in Newfoundland is to continue to build on its existing polymetallic resource base with the aim of developing either a stand-alone mine, similar to the past-producing mine at Buchans or the Duck Pond mine, or a number of smaller deposits that could be developed simultaneously and processed in a central milling facility.

 

Three Year History

 

Throughout the years 2012, 2013 and 2014, the Company’s principal focus has been its efforts to advance the Prairie Creek Project towards completion of development and subsequent production.

 

Preliminary Feasibility Study

 

In June 2012 a Preliminary Feasibility Study (“PFS” or “Preliminary Feasibility Study”) was prepared by SNC-Lavalin Inc. (“SNC” or “SNC-Lavalin”) of Vancouver and a corresponding technical report dated effective June 15, 2012 was filed on SEDAR on August 9, 2012. Such report was revised to incorporate post-tax results and was filed on SEDAR on July 23, 2014. The revised report (the “AMC Technical Report”) by AMC Mining Consultants (Canada) Ltd. is titled “Prairie Creek Property, Northwest Territories, Canada, Technical Report for Canadian Zinc Corporation”. The Qualified Persons responsible are J. M. Shannon, P. Geo., AMC Mining Consultants Ltd.; D. Nussipakynova, P. Geo., AMC Mining Consultants Ltd.; JB Hancock, P. Eng., Barrie Hancock & Associates Inc.; and F. Sveinson, P. Eng., SNC-Lavalin Inc.

 

The Preliminary Feasibility Study projected a mining rate of 1,400 tonnes per day, with mill throughput, following dense media separation, of 1,000 tonnes per day, to produce an average annual output of approximately 60,000 tonnes of zinc concentrates and 60,000 tonnes lead concentrates,which in total contain approximately 76 million pounds of zinc, 90 million pounds of lead and 2.2 million ounces of silver per year, for a projected mine life of 11 years.

 

The PFS included a number of recommendations for further work and studies to optimize the Prairie Creek Project, including detailed mine planning, construction engineering, transport efficiencies, reducing start-up time and addressing working capital requirements.

 

Optimization Studies

 

In order to address the recommendations of the PFS, and move the Prairie Creek Project towards full feasibility for financing, Canadian Zinc embarked on a series of optimization projects in late 2013, which continued throughout 2014 and into 2015. The main objectives have been to improve the project economics by increasing the mine life; defining, with feasibility level accuracy, the capital cost required to place the mine into production, refining the projected costs to operate the mine; and developing a transportation plan and marketing strategy for all of the Prairie Creek concentrate production.

 

New Resource Estimate

 

During 2014, the Company engaged AMC Mining Consultants (“AMC”) to undertake an underground optimization study of the mine with a view to reducing the initial cost of mine development, improving the mining methods, minimize mine operating costs and incorporate results of recent exploration drilling programs into an updated mineral resource estimate. AMC also undertook a number of underground mine studies, including a geotechnical assessment to determine the optimum mining methods for use in the design of the new mine plan. Underground ventilation and backfill studies were also completed.

 

A new mineral resource estimate, completed by AMC in March 2015 demonstrated an increase in overall resource tonnages in the Indicated and the Inferred categories. The new resource estimate is based on a newly constructed and revised and more detailed geological wireframe block model, developed over the past year, which defines and constrains the mineralized system for inclusion in the new mine plan. The new resource estimate also includes results from additional drilling and underground sampling not included in previous estimates.

 

 

 

 

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Exploration and Site Programs

 

The Company conducted surface exploration drill programs; site maintenance and facility upgrade programs during 2012 and 2013. In October 2014, the Company awarded an underground exploration and development program to Procon Mining and Tunneling Ltd. (“Procon”) and undertook the first stage of the program that included dewatering and re-installation of electrical and ventilation services to the 650 metre-long decline tunnel located at the end of the 870m underground level.

 

Permitting at Prairie Creek

 

On December 8, 2011, the Mackenzie Valley Environmental Impact Review Board (the “Review Board”) issued its Report of Environmental Assessment and Reasons for Decision (the “EA Report”) for the Company’s proposed Prairie Creek Mine in which it concluded that the proposed development of the Prairie Creek Mine is not likely to have any significant adverse impacts on the environment or to be a cause for significant public concern; that an environmental impact review of this proposed development is not necessary; and that the proposed Prairie Creek Mine project should proceed to the regulatory phase for approvals by the Water Board.

 

In January 2012, following the completion of the Environmental Assessment in December 2011, the Mackenzie Valley Land and Water Board (“MVLWB” or the “Water Board”) commenced the regulatory process for the issue of a Type “A” Water Licence and Land Use Permits for the operation of the Prairie Creek Mine.

 

In June 2013, the MVLWB issued Land Use Permit MV2008D0014 which permits Canadian Zinc to extract ore and waste rock from the Prairie Creek Mine, operate a flotation mill concentrator to produce zinc and lead concentrates, create a waste rock facility, and refurbish and develop site facilities in support of the mining operation, along with the eventual closure and reclamation of the mine site.

 

In September 2013, the Minister of Aboriginal Affairs and Northern Development Canada (“AANDC”), approved and signed the Type “A” Water Licence for the Prairie Creek Mine in the Northwest Territories, Canada. The Type “A” Water Licence, MV2008L2-002, was issued by the Water Board on September 24, 2013 and entitles Canadian Zinc to use water, dewater the underground mine for the purposes of mining and to dispose of waste for mining and milling.

 

In April 2014, Canadian Zinc made application to the MVLWB and Parks Canada for permits to construct, maintain and operate an all season road from the Mine to the Liard Highway. The MVLWB referred the applications to the Mackenzie Valley Environmental Impact Review Board (“MVRB”) in May 2014 for environmental assessment. In June 2014, the Company presented its Developer’s scoping document to local communities and organizations. In September 2014, the MVRB issued the final Terms of Reference and the Company submitted the Developer’s Assessment Report to the MVRB in April 2015.

 

Lead / Zinc Exploration in Newfoundland

PRAIRIE CREEK RESOURCE ESTIMATE: MARCH 2015
		TONNES				Zn (%)				Pb (%)				Ag (g/t)
MAIN QUARTZ VEIN (MQV)
MEASURED			1,279,000				13.2				11.6				211
INDICATED			2,850,000				10.2				12.8				193
TOTAL MQV MEASURED & INDICATED			4,129,000				11.2				12.4				199
TOTAL MQV INFERRED			6,132,000				12.6				10.4				195
STOCKWORK (STK)		TONNES				Zn (%)				Pb (%)				Ag (g/t)
MEASURED			0				0.0				0.0				0
INDICATED			1,400,000				7.1				4.0				63
TOTAL STK MEASURED & INDICATED			1,400,000				7.1				4.0				63
TOTAL STK INFERRED			790,000				4.7				4.0				61
STRATABOUND (SMS)		TONNES				Zn (%)				Pb (%)				Ag (g/t)
MEASURED			0				0.0				0.0				0
INDICATED			1,059,000				10.8				5.4				55
TOTAL SMS MEASURED & INDICATED			1,059,000				10.8				5.4				55
TOTAL SMS INFERRED			156,000				11.0				6.6				63

 

OVERALL RESOURCE ESTIMATE: MARCH 2015																		OVERALL RESOURCE ESTIMATE: JUNE 2012
TOTAL MQV+STK+SMS		TONNES				Zn (%)				Pb (%)				Ag (g/t)				TONNES				Zn (%)				Pb (%)				Ag (g/t)
MEASURED			1,279,000				13.2				11.6				211				1,700,000				12.1				9.7				155
INDICATED			5,309,000				9.5				9.0				131				3,731,000				10.2				10.5				162
MEASURED & INDICATED			6,588,000				10.2				9.5				147				5,431,000				10.8				10.2				160
INFERRED			7,078,000				11.7				9.6				177				6,239,000				14.5				11.5				229

 

Table 1 Mineral Resources at 31 May 2012

 

Classification		Tonnes (M)				Zn (%)				Pb (%)				Ag g/t				Cu (%)
Measured			1.700				12.1				9.7				155				0.28
Indicated			3.731				10.2				10.5				162				0.32
Measured + Indicated			5.431				10.8				10.2				160				0.31
Inferred			6.239				14.5				11.5				229				0.57

Table 2 Mineral Reserve Estimate for Prairie Creek Mine

 

Zone	Class		Tonnes (M)				Zn (%)				Pb (%)				Ag g/t
Main Quartz Vein	Proven			1.278				10.8				9.4				172
	Probable			3.140				8.7				10.5				165
	Proven and Probable			4.418				9.4				10.2				167
Stratabound	Probable			0.803				9.5				5.7				62
Total Mineral Reserves				5.222				9.4				9.5				151

Project Metrics

 

Table 3 Key Project Metrics

 

Parameter	Unit	Metric
Mine type	-	Underground
Total mined	Mt	5.2
Average grade milled
Zinc	%	9.4
Lead	%	9.5
Silver	g/t	151
Mining rate	tpd	1,350
Milling rate	tpd	1,000
Project life	years	11
Estimated recoveries
Zinc	%	75
Lead	%	88
Silver	%	92
Average annual metal production
Production of zinc concentrate	t	60,000
Production of lead concentrate	t	60,000
Zinc	M lbs	76
Lead	M lbs	90
Silver	M oz	2.2

Table 4 Capital Cost Estimates

Description		Total ($M)
Pre-Production Capital			192.87
Working Capital			41.15
Sustaining Capital			11.34
Total Capital Cost			235.36

Total Operating Cost		Year 1				Year 5				Year 1				Year 5
		($/t)				($/t)				($M/year)				($M/year)
Processing		$	37.25			$	37.17			$	7.93			$	18.57
Mining		$	81.22			$	72.10			$	17.29			$	36.03
G&A		$	10.59			$	10.83			$	2.26			$	5.41
Site Surface		$	30.72			$	23.67			$	6.54			$	11.83
Transportation		$	51.31			$	60.30			$	10.92			$	30.13
Total		$	211.10			$	204.07			$	44.94			$	101.97

Table 6 Economic Analysis

 

	Low Case	Base Case	High Case
Metal Price Scenario	90%	100%	110%
Average Annual EBITDA* $M	$47	$66	$84
Pre-Tax NPV (undiscounted) $M	$303	$493	$683
Pre-Tax NPV @ 8% discount $M	$140	$253	$366
Pre-Tax IRR	27.4%	40.4%	52.8%
Pre-Tax Payback Period (years)	3.8	3.0	2.5
Post-Tax NPV (undiscounted) $M	$198	$319	$446
Post-Tax NPV @ 8% discount $M	$83	$155	$232
Post-Tax IRR	21.5%	31.7%	42.2%
Post-Tax Payback Period	3.5 yrs	3.0 yrs	2.8 yrs

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

 

 

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. Operating Results

 

Financial Results for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

 

This review of the results of operations should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2014 and 2013 and other public disclosure documents of the Company.

 

For the year ended December 31, 2014, the Company reported a net loss and comprehensive loss of $12,434,000 compared to a net loss and comprehensive loss of $6,911,000 for the year ended December 31, 2013. Included in the loss for the year ended December 31, 2014, were exploration and evaluations costs of $9,996,000, compared to $6,089,000 for the previous year.

 

The net loss in the year ended December 31, 2014 included a loss of $878,000 on the Company’s marketable securities compared to a loss of $3,626,000 for the comparative year of 2013. The net loss in the previous year was reduced by a gain on the sale of a net smelter royalty in the amount of $5,439,000 with no comparable in the current year. Excluding the loss on marketable securities and the gain on the sale of a net smelter royalty, the Company recorded a loss of $11,556,000 for the year ended December 31, 2014 compared to a loss of $8,724,000 the previous year.

 

Exploration and Evaluation Costs

 

For the year ended December 31, 2014, the Company expensed $7,982,000 on its exploration and evaluation programs at Prairie Creek compared to $4,928,000 for the year ended December 31, 2013. The overall increase in expenditures for the Prairie Creek Project was due to the increased mine planning and feasibility studies costs of $3,301,000 in 2014 compared to $1,611,000 for the comparative year along with increased exploration costs of $1,163,000 in 2014 compared to $331,000 as the Company initiated an underground exploration program in the last quarter of 2014.

 

For the year ended December 31, 2014, the Company also expensed $2,014,000 on its exploration and evaluation properties in central Newfoundland compared to $1,161,000 for the comparative year as the Company completed a yearlong exploration program on its properties in central Newfoundland.

 

Details of the exploration and evaluation costs are shown in Note 13 to the audited consolidated financial statements for the year ended December 31, 2014.

 

Revenue and Investment Income

 

The Company does not generate any cash flows from operations. To date the Company has not earned any significant revenues other than interest and related investment income. Investment income for the year ended December 31, 2014 was $169,000 versus $106,000 for the comparative year. The increase is attributable to the overall increase in amounts available for investment during 2014.

 

Administrative Expenses

 

The Company recorded administrative expenses (excluding share-based compensation and depreciation) of $2,226,000 for the year ended December 31, 2014 which were lower than the $2,741,000 for the previous year as incentive bonuses were awarded in 2013 to certain employees and consultants based upon successful receipt of all necessary permits for the Prairie Creek Project.

 

Share-Based Compensation

 

Share-based compensation was $23,000 for the year ended December 31, 2014 versus $120,000 for the comparative year due to a lower amount of stock options vesting throughout the current year. The share-based compensation expense value was calculated using the Black-Scholes valuation method with assumptions as described in the audited consolidated financial statements of the Company.

 

 

 

 

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Other Income (Expenses)

 

The Company reported a loss on marketable securities of $878,000 for the year ended December 31, 2014 versus a loss of $3,626,000 for the year ended December 31, 2013. All the Company’s marketable securities have been designated as fair value through profit or loss by the Company.

 

The Company recorded a gain on the sale of a 1.2% net smelter royalty on the Prairie Creek Mine to Sandstorm Metals & Energy Ltd. for net proceeds of $10,271,000 in the second quarter of 2013. The Company’s policy is to recognize, in income, costs recovered on exploration and evaluation assets when amounts received or receivable are in excess of the carrying amount of the corresponding exploration and evaluation asset. Accordingly, the Company reduced the carrying value of the Prairie Creek Mine to $nil in the second quarter of 2013 and recognized a gain on the sale of mineral property interests of $5,439,000 on the consolidated statement of income (loss) with no comparable amount in 2014.

 

Excluding the loss on marketable securities and the gain on the sale of a net smelter returns royalty, the Company recorded a net loss of $11,556,000 during the year ended December 31, 2014 compared to a net loss of $8,724,000 during the comparative year.

 

Financial Results for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

 

This review of the results of operations should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2013 and 2012 and other public disclosure documents of the Company.

 

For the year ended December 31, 2013, the Company reported a net loss and comprehensive loss of $6,911,000 compared to a net loss and comprehensive loss of $19,870,000 for the year ended December 31, 2012. The net loss in the year ended December 31, 2013 included a loss of $3,626,000 on the Company’s marketable securities compared to loss of $8,804,000 for the comparative year of 2012. The net loss in the fiscal year ended December 31, 2013 was reduced as the Company recorded a gain on the sale of a net smelter royalty in the amount of $5,439,000 with no comparable in the previous year. Excluding the loss on the marketable securities and the gain on the sale of a net smelter royalty, the Company recorded a loss of $8,724,000 for the year ended December 31, 2013 compared to a similar loss of $11,066,000 the previous year.

 

Exploration and Evaluation Costs

 

For the year ended December 31, 2013, the Company expensed $4,928,000 on its exploration and evaluation programs at Prairie Creek compared to $9,037,000 for the year ended December 31, 2012. For the year ended December 31, 2013, the Company also expensed $1,161,000 on its exploration and evaluation programs at South Tally Pond compared to $88,000 for the comparative period. Details of the exploration and evaluation costs are shown in Note 13 to the audited consolidated financial statements for the years ended December 31, 2013 and 2012.

 

The overall decrease in expenditures at the Prairie Creek Mine site was due to two factors. Firstly, diamond drilling costs of $331,000 compared to $3,107,000 for the comparative year as the scope of the drill program was reduced in 2013. Secondly, feasibility studies and mine planning costs of $2,860,000 were incurred in 2012 as the Company completed a pre-feasibility study and were significantly higher than similar costs of $1,611,000 in 2013. During 2013, the Company continued engineering work, associated with the Prairie Creek Mine Site, with Tetra Tech, AMC and JDS and expects to continue this work in 2014. Also, costs associated with permitting activities decreased somewhat in the year ended December 31, 2013 to $1,342,000 (year ended December 31, 2012 - $1,522,000).

 

 

 

 

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Revenue and Investment Income

 

The Company does not generate any cash flows from operations. To date the Company has not earned any significant revenues other than interest and related investment income. Investment income for the year ended December 31, 2013 was $106,000 versus $164,000 for the comparative period. The decrease is attributable to the overall decrease in amounts available for investment during the year ended December 31, 2013 versus the comparative year.

 

Administrative Expenses

 

The Company recorded administrative expenses (excluding share-based compensation and depreciation) of $2,741,000 for the year ended December 31, 2013 compared to $2,231,000 for the previous year as incentive bonuses were awarded to certain employees and consultants based upon receipt of all necessary permits for the Prairie Creek Project in 2013.

 

Share-Based Compensation

 

Share-based compensation was $120,000 for the year ended December 31, 2013 versus $107,000 for the previous year due to a higher amount of stock options vesting throughout the year ended December 31, 2013. The share-based compensation expense value was calculated using the Black-Scholes valuation method with assumptions as described in the audited consolidated financial statements of the Company.

 

Other Income (Expenses)

 

The Company recorded a gain on the sale of a 1.2% net smelter royalty on the Prairie Creek Mine to Sandstorm Metals & Energy Ltd. for net proceeds of $10,271,000 in 2013. The Company’s policy is to recognize, in income, costs recovered on exploration and evaluation assets when amounts received or receivable are in excess of the carrying amount of the corresponding exploration and evaluation asset. Accordingly, the Company reduced the carrying value of the Prairie Creek Mine to $nil in 2013 and recognized a gain on the sale of mineral property interests of $5,439,000 on the consolidated statement of income (loss).

 

The Company reported a loss on marketable securities of $3,626,000 for the year ended December 31, 2013 versus a loss of $8,804,000 for the previous year. All the Company’s marketable securities have been designated as fair value through profit or loss by the Company. The total gain or loss recorded on marketable securities for the year ended December 31, 2013 is based upon the closing market bid price of the shares at December 31, 2013.

 

B. Liquidity and Capital Resources

 

At December 31, 2014, the Company had a positive working capital balance of $12,353,000 including cash and cash equivalents of $8,792,000, short term investments of $5,023,000 and marketable securities of $450,000 (for a total of $14,265,000). At December 31, 2013, the Company had cash and cash equivalents of $8,376,000, short term investments of $2,005,000, marketable securities of $1,328,000, and a positive working capital balance of $10,617,000.

 

Cash inflows from financing activities totaled $14,474,000 for year ended December 31, 2014 versus $3,701,000 for the comparative year, due to the Company’s financing activities in the third quarters of 2014 and 2013. The Company also received $357,000 for the issue of 1,513,134 common shares upon the exercise of stock options at exercise prices of $0.23 and $0.30 per common share during year ended December 31, 2014. During the comparable year, 200,000 common shares were issued upon the exercise of stock options at an exercise price of $0.23 per common share for total proceeds of $46,000.

 

The Company’s accounts payable and accrued and other liabilities at December 31, 2014 were $2,140,000 compared to $1,624,000 as at December 31, 2013.

 

Canadian Zinc does not generate any cash flows from operations and has no income other than investment income. The Company relies on financings to fund its working capital requirements and planned exploration, development and permitting activities. The Company expects its current working capital will be able to meet current commitments and allow 2015 programs to proceed as planned.

 

 

 

 

 

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Additional capital will be required in order to bring the Prairie Creek Mine into production in the future. The ability to raise additional financing may be impacted by conditions beyond the control of the Company, such as continued uncertainty in the capital markets and depressed commodity prices, or such financing may not be available on favourable terms. This is discussed in more detail in the “Risk Factors” section in this Annual Report.

 

The Preliminary Feasibility Study completed in June 2012 estimated that, depending on final design and operating permit conditions, the additional capital required to install the planned new facilities and to bring the Prairie Creek Mine into production will aggregate $160 million plus a contingency of $33 million for a total of $193 million. Working capital upon commencement of production was estimated in the PFS to be $34 million plus a contingency of $7 million for a total of $41 million.

 

The Company is in the process of updating the estimate of capital costs to bring the Prairie Creek Mine into production and a revised estimate will be included in the updated preliminary feasibility study to be completed later in the year. The 2012 Preliminary Feasibility Study included an estimate of $12.8 million in respect of security deposits or financial assurance required to secure reclamation obligations arising under various surface leases, permits and licences. The new water licences and land use permits issued in 2013 together provide for the posting, in stages, of a total of approximately $20.4 million in respect of security deposits or financial assurance required to secure reclamation obligations. The Company is currently finalizing the design and cost estimates of a potential all season road for inclusion into the capital cost schedule of the Prairie Creek Project. Incorporation of an all season road for future operations would require significant additional capital costs which were not considered in the 2012 Preliminary Feasibility Study.

 

Financing - Use of Proceeds

 

During 2014, the Company completed an equity financing, which closed July 31, 2014, by way of a short form Prospectus in Canada dated July 23, 2014, raising gross proceeds of $15.8 million. The following table details how the net proceeds of the financing have been used up to December 31, 2014 compared to the anticipated use of the net proceeds set out in the Prospectus, including additional net proceeds derived from the sale of additional flow-through shares upon the exercise, in part, by the Underwriters of their over-allotment option.

 

		Net Use of Proceeds
		Prospectus				Actual
Prairie Creek Mine Development Programs		$	8,000			$	1,671
Exploration Programs			5,751				3,190
General and Administrative			722				722
Total		$	14,473			$	5,583
	(Unaudited, thousands of Canadian dollars)

 

The allocation of the net proceeds of the financing may be adjusted within the stated categories of expenditures above depending on, among other things, timing of receipt of required government approvals, availability of equipment and services, and general political and market conditions. Further, while the Company intends to use the net proceeds as stated above, there may be circumstances that are not known at this time where a reallocation of the net proceeds may be advisable for business reasons that management believes are in the Company's best interest.

 

C. Research and Development, Patents and Licences, Etc.

 

The Company is a mineral exploration company and does not carry on any research and development activities.

 

 

 

 

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D. Trend Information

 

As the Company is an exploration company with no producing mining properties, information regarding trends in production, sales and inventory are not meaningful.

 

E. Off-balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table reflects the Company’s aggregate contractual commitments as of December 31, 2014:

 

(thousands of Canadian dollars)		Payment due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Operating Lease Obligation (1)			410				161				249				-				-
Decommissioning Liability (2)			3,142				-				-				-				3,142
Total Contractual Obligations			3,552				161				249				-				3,142

(1) Represents obligations under operating leases for office space and equipment.

(2) The decommissioning liability represents reclamation and closure costs for the Prairie Creek Property and have been estimated based on the Company’s understanding of its current obligations under its existing surface leases, land use permits and class “B” Water Licence for reclamation and closure of the Prairie Creek Mine site as it now exists with the current infrastructure and assuming a mine life of 11 years whereby such undiscounted costs are anticipated to be predominantly incurred at the end of the life of the Prairie Creek Mine.

The table above does not include the annual fees related to the Company’s mining leases, surface leases and mineral claims which total approximately $45,000 per annum and property taxes of approximately $30,000 per annum.

 

 

 

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

Name, Province or State and Country of Ordinary Residence and Position Held with the Company	Principal Occupation During Preceding Five Years	Date First Became Director of the Company (5)
Brian A. Atkins (2) (3) British Columbia, Canada Director	Chartered Accountant; Partner at KPMG LLP, Chartered Accountants, from 1978 to 2005; Director of BlueShore Financial; Member of Independent Review Committee of Inhance Investment Management Inc. until December 2009; Member of the Institute of Corporate Directors.	June 2008
John F. Kearney Ontario, Canada Chairman, President, Chief Executive Officer and Director	Chairman, President and Chief Executive Officer of Canadian Zinc Corporation since 2003; Chairman of Labrador Iron Mines Limited since May 2007; Chairman of Conquest Resources Limited since 2001; Chairman of Anglesey Mining plc since 1994; Director of Vatukoula Gold Mines plc July 2009 to August 2013.	November 2001
John A. MacPherson (2) (3) British Columbia, Canada Director	Private Businessman; Director of Vatukoula Gold Mines plc July 2009 to February 2014.	May 1999
Dave Nickerson (2) (3) (4) Northwest Territories, Canada Director	Professional Engineer, Mining consultant, Director, Tyhee Development Corp.; previously Chairman of Northwest Territories Water Board; Member of Parliament, Member of NWT Legislative Assembly; Government Minister.	March 2004
Alan B. Taylor (4) British Columbia, Canada Vice President, Exploration, Chief Operating Officer and Director	Vice President, Exploration of Canadian Zinc Corporation since 1999 and Chief Operating Officer of Canadian Zinc Corporation since March 2004.	March 2004
Trevor L. Cunningham British Columbia, Canada Chief Financial Officer, Vice President Finance and Corporate Secretary	Chief Financial Officer and Vice President Finance of Canadian Zinc Corporation since January 2011; Chartered Professional Accountant, Certified Management Accountant.	N/A

(1)	The information as to common shares beneficially owned, controlled or directed by the above-named directors as at the date hereof, not being within the knowledge of the Company, has been furnished by the respective directors individually.

(2)	Member of the Audit Committee.

(3)	Member of the Compensation Committee.

(4)	Member of Health and Safety Committee.

(5)	All Directors are elected annually to hold office until the Company’s next Annual Meeting of shareholders.

 

B. Compensation

 

Compensation Discussion and Analysis

 

Objectives of Executive Compensation

 

The Board has appointed a Compensation Committee which has responsibility for determining compensation for the directors and senior management. The Company does not have a formal compensation plan in place for its Named Executive Officers (defined below under the heading “Summary Compensation Table”). The general compensation philosophy of the Company for executive officers, including for the Chief Executive Officer (“CEO”), is to provide a level of compensation that is competitive within the North American marketplace and that will attract and retain individuals with the experience and qualifications necessary for the Company to be successful, and to provide longer-term incentive compensation, such as the grant of stock options, which aligns the interest of executives with those of shareholders and encourages senior management to have a direct and identifiable impact on the performance of the Company and to develop and implement a long-range strategy.

 

The Company is primarily engaged in the exploration, development and re-permitting of its Prairie Creek property located in the Northwest Territories, Canada. The Company is considered to be in the exploration and development stage, given that its Prairie Creek property is not in production and, to date, has not earned any significant revenues and does not generate revenues from operations. Accordingly, the Company is reliant upon funding from capital raising activities. Therefore, the use of traditional performance standards, such as corporate profitability, is not considered to be appropriate in the evaluation of corporate or executive performance, and the Board of Directors (the “Board”) has to consider the financial situation of the Company in a wider context and involving the ongoing status of the Prairie Creek project, when setting its executive compensation levels.

 

 

 

 

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Historically, the compensation of executive officers of the Company has been comprised primarily of cash compensation and the allocation of incentive stock options. In establishing levels of remuneration and in granting stock options, the Compensation Committee takes into consideration the executive's performance, level of expertise, responsibilities and length of service to the Company, as well as comparable levels of remuneration paid to executives of other companies of comparable size and development within the industry. Interested executives do not participate in reviews, discussions or decisions of the Compensation Committee or the Board regarding this remuneration. The Compensation Committee’s responsibilities and composition are described below under the heading “Corporate Governance Disclosure – Compensation Committee”.

 

Goals and objectives for the Company are typically set through discussions at Board meetings, and senior management will then work to achieve these goals and objectives. Follow-up on progress would typically take place at subsequent Board meetings. The Company did not set formal, person-specific, performance goals for the Named Executive Officers for 2014. Awarding additional compensation upon successful completion of corporate objectives is entirely at the discretion of the Compensation Committee. Given the size of the Company, this is considered appropriate to effectively manage the business and allow the Named Executive Officers to move the business forward.

 

While the Company does not actively benchmark its compensation programs for executive officers, and the individual components thereof, it does review compensation levels within the industry primarily through the use of third-party “Compensation Reports”, which are available through certain consulting firms. These reports typically include information for larger mining companies but do assist the Compensation Committee in determining approximately the salary levels and other benefits in place across the industry.

 

The Compensation Committee relies on the general knowledge and experience of its members, and recommendations from senior management, in reviewing appropriate levels of compensation for executive officers and the implementation of, or amendment to, any other aspects of compensation that the Compensation Committee may review from time to time. All Compensation Committee members have relevant general, but not direct, experience in executive compensation and compensation policies and practices in the junior mineral resources business gained through current and prior experience in business, the minerals industry and government. Neither the Company nor the Compensation Committee currently has nor at any time during 2013 had any contractual arrangement with any compensation consultant.

 

The Compensation Committee is responsible for considering the risks associated with the Company’s compensation policies and practices and has not identified any specific risks associated with the Company’s compensation policies and practices that are reasonably likely to have a material adverse effect.

 

Because of the current scale and scope of the Company’s operations, and the limited number of senior management and employees, and the oversight by the Board of all significant activities, including risk management, the Compensation Committee does not believe that the Company’s compensation policies and practices would encourage any executive officer to take inappropriate or excessive risk.

 

Base Salary

 

The Company provides executive officers with base salaries which represent their minimum compensation for services rendered during the fiscal year. Salary levels are based upon the executive’s experience, responsibilities, performance and time commitment. Base salaries are reviewed annually by the Compensation Committee, which reviewed the base salaries of the CEO and COO for 2014 and did not recommend any adjustments. The base salaries were considered to be appropriate for the level of experience and skills of each Named Executive Officer. The Compensation Committee reviewed the base salary of the CFO for 2014 and approved an increase based on expanded responsibility and comparable compensation levels in the mining industry.

 

 

 

 

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Stock Options

 

The grant of stock options to purchase common shares of the Company, pursuant to the Company’s stock option plan is an integral component of executive officer compensation packages. The Company's stock option plan is administered by the Board of Directors, with option grants being recommended by the Compensation Committee to the Board. The stock option plan is designed to give each option holder an interest in preserving and maximizing shareholder value in the longer term, to enable the Company to attract and retain individuals with experience and ability, and to reward individuals for current performance and expected future performance. Previous stock option grants are considered when reviewing executive officer compensation packages as a whole. No stock options were granted to officers or directors in 2014. A total of 1,100,000 stock options were exercised by officers and directors during 2014.

 

Restricted Share Units

 

In 2014, the Company adopted a Restricted Share Unit Plan (the “RSU Plan”) for the benefit of the Company’s employees, directors and consultants. The RSU Plan is intended to assist the Company in the recruitment and retention of highly qualified employees, directors and eligible consultants by providing a means to reward performance, to motivate participants under the RSU Plan to achieve important corporate and personal objectives and, through the proposed issuance by the Company of Common Shares under the RSU Plan, to better align the interests of participants with the long-term interests of Shareholders.

 

The Board uses Restricted Share Units (‘‘RSUs’’) issued under the RSU Plan as part of the Company’s overall executive compensation plan. Since the value of RSUs increase or decrease with the price of the Common Shares, RSUs reflect a philosophy of aligning the interests of executives with those of the Shareholders by tying executive compensation to share price performance. In addition, RSUs assist in the retention of qualified and experienced executives by rewarding those individuals who make a long term commitment.

 

The RSU Plan is administered by the Compensation Committee of the Board or such other Committee of the Board as may be designated by the Board (the “Committee”). Each RSU awarded conditionally entitles the participant to receive one Common Share (or the cash equivalent) upon attainment of the RSU vesting criteria. The maximum number of Common Shares which may be reserved, set aside and made available for issuance under the RSU Plan is a variable number equal to 3% of the issued and outstanding Common Shares of the Company as of the date of the grant on a non-diluted basis.

 

No award of RSUs was made in 2014.

 

Other Incentives

 

The Company does not have a formal annual incentive bonus plan in place. Any award of a bonus to executive officers is entirely at the discretion of the Board of Directors based upon recommendation by the Compensation Committee. In considering the payment of a discretionary bonus to executive officers, the Compensation Committee takes into account the individual performance and efforts of the executive during the year, the progress made by the Company in furthering its business plan and the overall economic climate. As discussed above, there are no specific individual performance targets set ahead of time when determining additional payments such as bonuses.

 

In 2013, the Compensation Committee considered that the progress with regard to the on-going development of the Prairie Creek Project, including the achievement of a major milestone in obtaining all necessary permits and licences to complete construction and development of the Prairie Creek Mine, were such that the payments of year-end bonuses to each of the CEO, COO and CFO were appropriate. Payment of such bonuses was split into two equal halves with the first half paid in 2013 and the second half in 2014.

 

No additional incentive bonuses were awarded in 2014.

 

The Company's health benefit plan is available to all full-time employees. The benefit plan is designed to protect the health of all employees and their dependents, and to provide coverage in the event of disability or death.

 

 

 

 

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Perquisites and personal benefits provided to executive officers reflect competitive practices and particular business needs. They are not considered a material component of the executive compensation program.

 

Summary Compensation Table

 

The following table sets out all annual and long term compensation for services in all capacities to the Company for the three most recently completed financial years ended on December 31, 2014, 2013 and 2012 in respect of each of the individuals comprised of each CEO and the CFO (who acted in such capacity for all or any portion of the most recently completed financial year), and each of the three most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, (other than the CEO and the CFO), as at December 31, 2014 whose total compensation was, individually, more than $150,000 for the financial year and any individual who would have satisfied these criteria but for the fact that individual was neither an executive officer of the Company, nor acting in a similar capacity, at the end of the most recently completed financial year (collectively, the "Named Executive Officer" or "NEOs").

 

Name And Principal Position	Year	Salary ($)	Share-based awards ($)	Option-based awards (1) ($)	Non-equity incentive plan compensation ($)		Pension value ($)	All other compensation (3) ($)	Total Compensation ($)
					Annual incentive plans (2)	Long-term incentive plans (2)
John F. Kearney Chairman, President, CEO and Director (4)	2014 2013 2012	159,181 159,181 158,921	Nil Nil Nil	Nil Nil Nil	96,792 96,792 Nil	Nil Nil Nil	Nil Nil Nil	Nil Nil Nil	255,973 255,973 158,921
Alan B. Taylor COO, Vice President, Exploration, Director (4)	2014 2013 2012	268,981 (5) 193,583 192,017	Nil Nil Nil	Nil Nil Nil	96,792 96,792 Nil	Nil Nil Nil	Nil Nil Nil	Nil Nil Nil	365,773 290,375 192,017
Trevor L. Cunningham CFO, Vice President, Finance	2014 2013 2012	175,000 142,800 142,567	Nil Nil Nil	Nil Nil 21,678	35,700 35,700 Nil	Nil Nil Nil	Nil Nil Nil	Nil Nil Nil	210,700 178,500 164,245
Michael Vande Guchte Vice President Exploration (Paragon) (6)	2014 2013 2012	175,000 175,000   47,153	Nil Nil Nil	Nil Nil 43,356	Nil Nil Nil	Nil Nil Nil	Nil Nil Nil	Nil Nil Nil	175,000 175,000   90,509

(1)

The value of option-based awards represents the grant date fair value of the stock options awarded. For fiscal 2012, the Company granted stock options on October 4, 2012, which were valued using the Black-Scholes valuation model with the following assumptions: (i) Dividend yield – 0%, (ii) Risk free interest rate – 1.2%, (iii) Expected option life – 2.6 years to 3.5 years and (iv) Expected volatility – 71.4% to 735.1%.

(2)

The Company does not have a formal bonus plan tied to set targets. Any bonus payments are entirely discretionary and are reviewed by the Compensation Committee as part of an overall review of performance for the year.

(3)

Perquisites have not been included, as they do not exceed 10% of total salary for the financial years presented.

(4)

John Kearney and Alan Taylor are directors of the Company but were not compensated for services in this capacity.

(5)

Includes $75,398 in vacation pay in respect of unused vacation days accrued in previous years.

(6)

Michael Vande Guchte joined the Company on September 24, 2012.

 

 

 

 

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Incentive plan awards

 

The following table shows all awards outstanding to each Named Executive Officer as at December 31, 2014.

 

	Option-based Awards				Share-based Awards
Name	Number of securities underlying unexercised options (#)	Option exercise price ($)	Option expiration date	Value of unexercised in-the-money options (1) ($)	Number of shares or units of shares that have not vested (#)	Market or payout value of share- based awards that have not vested ($)	Market or payout value of vested share-based awards not paid out or distributed ($)
John F. Kearney	1,300,000	0.45	May 12, 2015	Nil	Nil	Nil	Nil
Alan B. Taylor	1,000,000	0.45	May 12, 2015	Nil	Nil	Nil	Nil
Trevor L. Cunningham	300,000 100,000	0.71 0.46	January 27, 2016 October 3, 2017	Nil Nil	Nil	Nil	Nil
Michael Vande Guchte	23,800 200,000	0.81 0.46	July 4, 2016 October 3, 2017	Nil Nil	Nil	Nil	Nil

(1)

Calculated based on the difference between the market value of the shares underlying the options at the end of the most recently completed financial year, which was $0.21, and the exercise or base price of the option.

 

Incentive plan awards – value vested or earned during the year ended December 31, 2014

 

Name	Option-based awards – Value vested during the year (1) ($)	Share-based awards – Value vested during the year ($)	Non-equity incentive plan compensation – Value earned during the year (2) ($)
John F. Kearney	Nil	N/A	Nil
Alan B. Taylor	Nil	N/A	Nil
Trevor L. Cunningham	Nil	N/A	Nil
Michael Vande Guchte	Nil	N/A	Nil

(1)

The value of vested options represents the aggregate dollar value that would have been realized if any of the options granted had been exercised on the vesting dates. The dollar value is the difference between the market price of the underlying securities at exercise and the exercise price of the options on the vesting date.

(2)

The Company does not have a formal bonus plan tied to set targets. Any bonus payments are entirely discretionary and are reviewed by the Compensation Committee as part of an overall review of performance for the year.

 

Stock Option Plan

 

Under the 2012 Plan (described below), options to purchase common shares of the Company may be granted to employees, officers and directors of the Company or subsidiaries of the Company and other persons or companies engaged to provide ongoing management or consulting services for the Company or any entity controlled by the Company. In determining the number of common shares of the Company subject to each option granted under the 2012 Plan, consideration is given to the present and potential contribution by such person or company to the success of the Company and the appropriate number and percentage of options that should be awarded and held by each party granted options relative to the total number of shares issued and stock options granted.

 

At December 31, 2014, there were 5,693,800 stock options outstanding, representing approximately 2.61% of the Company's issued and outstanding common shares as of May 6, 2015, of which 4,460,000 were granted under the Company's 2004 stock option plan (the “2004 Plan”). At the Company's Annual General Meeting held on June 13, 2012, shareholders approved the adoption of a new stock option plan (the “2012 Plan“). The 2012 Plan is a fixed stock option plan pursuant to which options on up to 7,500,000 common shares may be issued to directors, officers, employees and service providers of the Company. No new stock options will be granted under the 2004 Plan, which is a 10% rolling stock option plan, but the 4,460,000 stock options currently outstanding under the 2004 Plan will remain outstanding and subject to the 2004 Plan. Stock options will only be granted under the 2012 Plan to the extent that the aggregate number of stock options outstanding, under the 2012 Plan and the 2004 Plan together, does not exceed 7,500,000.

 

 

 

 

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The purpose of the Company’s equity compensation plans is to attract and motivate directors, officers and employees of and service providers to the Company (collectively, the “Optionees”) and thereby advance the Company’s interests by affording such persons with an opportunity to acquire an equity interest in the Company through the stock options. The 2012 Plan authorizes the Board (or compensation committee) to grant stock options to the Optionees on the following terms:

 

·

Options may be granted to directors, officers and employees of the Company as well as persons or corporations engaged to provide services to the Company (or any entity controlled by the Company) and any individuals employed by such persons or corporations.

 

·

The maximum number of shares that may be reserved for issue under the 2012 Plan is 7,500,000 common shares, representing approximately 3.44% of the Company's issued and outstanding shares as of May 6, 2015. In addition, options shall only be granted under the 2012 Plan to the extent that the aggregate number of shares reserved for issue under the 2012 Plan and the 2004 Plan does not exceed 7,500,000 common shares.

 

·

The total number of shares issuable to all insiders of the Company at any time, under all security based compensation arrangements of the Company, cannot exceed 10% of the Company’s issued and outstanding shares.

 

·

The number of shares issued to insiders of the Company as a group, within any one year period, under all security based compensation arrangements of the Company, cannot exceed 10% of the Company’s issued and outstanding shares as at the end of such one year period.

 

·

The exercise price for stock options granted under the 2012 Plan must be not less than the closing market price on the day preceding the date of grant of the stock options.

 

·

Vesting of stock options will be at the discretion of the Board, or any committee authorized by the Board to administer the 2012 Plan.

 

·

The maximum term of stock options granted under the 2012 Plan will be ten years from the date of grant, subject to extension in the event of a management imposed black-out period.

 

·

Any outstanding stock options with an expiry date occurring during a management imposed black-out period or within five days thereafter will be automatically extended to a date that is ten trading days following the end of the black-out period.

 

·

If an Optionee ceases to be eligible to receive options under the 2012 Plan as a result of termination for cause, any outstanding options held by such Optionee on the date of such termination shall be cancelled as of that date.

 

·

If an Optionee ceases to be eligible to receive options under the 2012 Plan for reasons other than termination for cause (or death), any outstanding options held by such Optionee at such time shall remain exercisable for a period ending on the earlier of the expiry time of such stock option or three months after the Optionee ceases to be eligible to receive stock options. Notwithstanding the foregoing, the Board may, on a case by case basis, allow such stock options to remain in full force and effect until any time up to the original expiry time of such stock options, irrespective of whether such expiry time is more than three months after the Optionee ceases to be eligible to receive stock options.

 

·

Any outstanding stock options held by an Optionee at the time of his or her death shall remain exercisable by the person or persons to whom the rights of the Optionee's stock options are passed by the will of the Optionee or the laws of descent and distribution for a period ending on the earlier of the expiry date of such stock options or one year after the Optionee's death.

 

 

 

 

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·

The Board may from time to time, without shareholder approval and subject to applicable law and to the prior approval, if required, of the Toronto Stock Exchange (“TSX”) or any other regulatory body having authority over the Company or the 2012 Plan, suspend, terminate or discontinue the 2012 Plan at any time, or amend or revise the terms of the 2012 Plan or of any option granted under the 2012 Plan to:

 

(a)

make amendments of a clerical or typographical nature and to include clarifying provisions in the 2012 Plan;

(b)

implement features or requirements that are necessary or desirable under applicable tax and securities laws;

(c)

change vesting provisions;

(d)

change termination provisions for an insider provided that the expiry time does not extend beyond the original expiry time under the 2012 Plan;

(e)

change termination provisions for an Optionee who is not an insider beyond the original expiry time;

(f)

reduce the exercise price of a stock option for an Optionee who is not an insider; and

(g)

implement a cashless exercise feature, payable in cash or securities;

 

provided that no such amendment, revision, suspension, termination or discontinuance shall in any manner adversely affect any stock option previously granted to an Optionee under the 2012 Plan without the consent of that Optionee. Any other amendments to the 2012 Plan or stock options granted there under will be subject to the approval of the shareholders.

 

·

The 2012 Plan does not contain any provisions relating to the provision of financial assistance by the Company to Optionees to facilitate the purchase of common shares upon the exercise of stock options.

 

·

Stock options granted under the 2012 Plan are not assignable, but may be exercised by the personal representative of a deceased Optionee.

 

·

The 2012 Plan requires adjustments to the numbers of shares which may be acquired and the exercise price of stock options in the event the Company proceeds with certain changes or transactions in which the Company’s share capital is altered, some form of corporate reorganization or special distribution is completed, a merger, amalgamation, spinout transaction, plan of arrangement, takeover bid, compulsory acquisition or going private transaction is completed. In such case the provisions typically entitle the Optionee to acquire, at the same aggregate price, the shares, cash, securities or other property to which the Optionee would have been entitled had the Optionee held the shares issuable under the stock option before such transaction, with certain exceptions.

 

Restricted Share Unit Plan

 

The Board uses RSUs issued under the RSU Plan, as well as options issued under the Stock Option Plan, as part of the Company’s overall executive compensation plan. Since the value of RSUs increase or decrease with the price of the Common Shares, RSUs reflect a philosophy of aligning the interests of executives with those of the Shareholders by tying executive compensation to share price performance. In addition, RSUs assist in the retention of qualified and experienced executives by rewarding those individuals who make a long term commitment. The RSU Plan is a treasury based plan and Common Shares are reserved from treasury for issuance under the RSU Plan.

 

Employees, directors and eligible consultants of the Company and its designated subsidiaries are eligible to participate in the RSU Plan. RSUs awarded to participants are credited to them by means of an entry in a notional account in their favour on the books of the Company. Each RSU awarded conditionally entitles the participant to receive one Common Share (or the cash equivalent) upon attainment of the RSU vesting criteria. Additional conditions may be imposed to any particular RSU award. The maximum number of Common Shares which may be reserved, set aside and made available for issuance under the RSU Plan is a variable number equal to 3% of the issued and outstanding Common Shares of the Company as of the date of the grant on a non-diluted basis.

 

 

 

 

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The RSU Plan provides that the maximum number of Common Shares issuable to insiders (as that term is defined by the TSX) pursuant to the RSU Plan, together with any Common Shares issuable pursuant to any other security-based compensation arrangement of the Company, will not exceed 10% of the total number of outstanding Common Shares. In addition, the maximum number of Common Shares issued to insiders under the RSU Plan, together with any Common Shares issued to insiders pursuant to any other security-based compensation arrangement of the Company within any one year period, will not exceed 10% of the total number of outstanding Common Shares.

 

Deferred Share Unit Plan

 

The Deferred Share Unit Plan (the “DSU Plan”) is used for the benefit of the Company’s non-executive directors. The DSU Plan is intended to assist the Company in the recruitment and retention of qualified persons to serve on the Board and, through the proposed issuance by the Company of Common Shares under the DSU Plan, to promote better alignment of the interests of directors and the long-term interests of Shareholders.

 

The Board uses the Deferred Share Units (‘‘DSUs’’) issued under the DSU Plan, as well as options issued under the Stock Option Plan and RSUs issued under the RSU Plan, if any, as part of the Company’s overall director compensation plan. Since the value of DSUs increase or decrease with the price of the Common Shares, DSUs reflect a philosophy of aligning the interests of directors with those of the Shareholders by tying compensation to share price performance. The DSU Plan is a treasury-based plan and Common Shares are reserved from treasury for issuance under the DSU Plan.

 

The Board may award such number of DSUs to a non-executive director as the Board deems advisable to provide the director with appropriate equity-based compensation for the services he or she renders to the Company. A DSU is a unit credited to a Participant by way of a bookkeeping entry in the books of the Company, the value of which is equivalent to a Common Share. All DSUs paid with respect to such awards will be credited to the director by means of an entry in a notional account in their favour on the books of the Company (a “DSU Account”). The Board shall determine the date on which such DSUs may be granted and the date as of which such DSUs shall be credited to the director’s DSU Account. The Company and a director who receives such an award of DSUs shall enter into a DSU award agreement to evidence the award and the terms applicable thereto.

 

Additionally, the DSU Plan provides that non-executive directors may elect to receive up to 50% of their annual compensation amount (the “Annual Base Compensation”) in DSUs. All DSUs paid with respect to Annual Base Compensation will be credited to the director’s DSU Account when such Annual Base Compensation is payable. The director’s DSU Account will be credited with the number of DSUs calculated to the nearest thousandth of a DSU, determined by dividing the dollar amount of compensation payable in DSUs on the payment date by the Share Price of a Common Share at the time. Share Price is defined in the DSU Plan and means (if the Common Shares are listed and posted for trading on the TSX) the volume-weighted average price of a Common Share on the TSX over the five (5) consecutive trading days immediately preceding the date of grant or the redemption date, as the case may be. Fractional Common Shares will not be issued and any fractional entitlements will be rounded down to the nearest whole number.

 

Generally, a participant in the DSU Plan shall be entitled to redeem his or her DSUs during the period commencing on the business day immediately following the date upon which the non-executive director ceases to hold any position as a director of the Company and its subsidiaries and is no longer otherwise employed by the Company or its subsidiaries, including in the event of death of the participant (the “Termination Date”) and ending on the 90th day following the Termination Date. Redemptions under the DSU Plan may be in Common Shares issued from treasury subject to the Shareholder approval being sought at this Meeting, may be purchased by the Company on the open market for delivery to the director, may be settled in cash or any combination of the foregoing, at the discretion of the Company. The Committee may impose additional conditions to any particular DSU award.

 

DSUs may be granted in accordance with the DSU Plan, provided the aggregate number of DSUs outstanding pursuant to the DSU Plan from time to time does not exceed 2% of the issued and outstanding Common Shares from time to time. It is proposed that the maximum number of Common Shares which may be reserved, set aside and made available for issuance under the DSU Plan is a variable number equal to 2% of the issued and outstanding Common Shares of the Company as of the date of grant on a non-diluted basis.

 

 

 

 

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The DSU Plan provides that the maximum number of Common Shares issuable to insiders (as that term is defined by the TSX) pursuant to the DSU Plan, together with any Common Shares issuable pursuant to any other security- based compensation arrangement of the Company, will not exceed 10% of the total number of outstanding Common Shares. In addition, the maximum number of Common Shares issued to insiders under the DSU Plan, together with any Common Shares issued to insiders pursuant to any other security-based compensation arrangement of the Company within any one year period, will not exceed 10% of the total number of outstanding Common Shares.

 

Equity Compensation Plan Information

 

The following table sets out certain details as at December 31, 2014 with respect to compensation plans pursuant to which equity securities of the Company are authorized for issuance:

 

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	5,370,000	$0.45	2,130,000 (1)
Equity compensation plans not approved by security holders   (2)	323,800	$0.72	Nil
Total	5,693,800	$0.47	2,130,000

(1)

Subject to the restriction that stock options will only be granted under the 2012 Plan to the extent that the aggregate number of stocks options outstanding under the 2012 Plan and the 2004 Plan does not exceed 7,500,000.

(2)

Incentive stock options in the amount of 300,000 were granted outside of the Company’s stock option plan and in accordance with the policies of the TSX. Upon the Company’s acquisition of Paragon Minerals Corporation, incentive stock options were converted from options previously granted and 23,800 remain outstanding at December 31, 2014.

 

Pension Plan Benefits

 

The Company does not provide any form of group pension plan benefits to employees, officers or directors.

 

Termination and Change of Control Benefits

 

Except as otherwise disclosed herein, the Company has no compensatory plan or arrangement in respect of compensation received, or that may be received, by a Named Executive Officer in the Company's most recently completed or current financial year to compensate such NEO in the event of the termination of employment (whether voluntary, involuntary or constructive), resignation, retirement, a change of control of the Company or a change in responsibilities of the NEO following a change in control.

 

The Company entered into an Employment Agreement dated effective January 1, 2010 with Mr. Alan Taylor, Chief Operating Officer, for his continuing services as an officer of the Company (the “ Taylor Agreement ”). Certain provisions in the Taylor Agreement deal with events around termination of employment or resignation following a change of control of the Company, which is defined as the acquisition by any entity, directly or indirectly, of not less than fifty percent (50%) of the outstanding voting securities of the Company or the votes attached to those securities that are sufficient, if exercised, to elect a majority of the Board (a " Change of Control "). Should Mr. Taylor’s employment with the Company be terminated without cause, Mr. Taylor is entitled to receive an amount equal to his then current annual salary upon termination, and a further amount equal to 50% of the initial termination pay amount on the first anniversary of his termination. In the event of a Change of Control and subsequent termination by the Company without cause, or resignation of Mr. Taylor, within 12 months of the Change of Control, Mr. Taylor is entitled to receive, in addition to termination pay, a further amount equal to twenty-four months of his then current annual salary.

 

A summary of the potential payments to Mr. Taylor, assuming the applicable resignation or termination had occurred on December 31, 2014, is termination without cause - $290,374; termination without cause or resignation following a change of control - $677,540.

 

 

 

 

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The Company entered into an Employment Agreement effective January 17, 2011 with Mr. Trevor Cunningham, CFO, for his continuing services as an officer of the Company (the “ Cunningham Agreement ”). Certain provisions in the Cunningham Agreement deal with events around termination of employment and change in responsibilities amounting to constructive dismissal following a Change of Control. If Mr. Cunningham’s employment is terminated without cause on or after January 17, 2012 and prior to January 17, 2015, Mr. Cunningham is entitled to receive six months' termination pay at his then current annual salary. If his employment is terminated without cause on or after January 17, 2015, Mr. Cunningham is entitled to receive twelve months' termination pay at his then current annual salary. In the event of a Change of Control and subsequent termination or constructive dismissal within 12 months of the Change of Control, Mr. Cunningham is entitled to receive, in addition to termination pay, a further amount equal to six months' termination pay at his then current annual salary.

 

A summary of the potential payments to Mr. Cunningham, assuming the termination had occurred on December 31, 2014, is termination without cause - $87,500; termination without cause following a change of control - $175,000.

   

Director Compensation

 

The following table shows director compensation for each director, other than directors that are also Named Executive Officers, for the year ended December 31, 2014.

 

Name	Fees earned   ($)	Share-based awards   ($)	Option-based awards (1)   ($)	Non-equity incentive plan compensation   ($)	Pension value   ($)	All other compensation   ($)	Total   ($)
Brian A. Atkins	30,500	N/A	Nil	Nil	N/A	Nil	30,500
John A. MacPherson	27,500	N/A	Nil	Nil	N/A	Nil	27,500
Dave Nickerson	28,500	N/A	Nil	Nil	N/A	Nil	28,500

(1)

The value of option-based awards represents the grant date fair value of the stock options awarded.

 

The Company pays each director, other than directors that are also Named Executive Officers, an annual fee of $20,000, (payable quarterly and pro-rated for partial months served) plus $500 for each meeting or committee meeting attended. The Chair of the Audit Committee and Compensation Committee (providing the Chair is not also an executive officer of the Company) receives an additional $500 per meeting attended. An aggregate of $86,500 was paid to directors for their services as directors during 2014.

 

From time to time, directors may be retained to provide specific services to the Company, or sit on additional sub-committees of the Board, and will be compensated on a basis to be determined at the time.

 

 

 

 

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Share-based awards, option-based awards and non-equity incentive plan compensation

 

The following table shows all option-based and share-based awards outstanding to each director, other than those that are also Named Executive Officers, as at December 31, 2014.

 

	Option-based Awards				Share-based Awards
Name	Number of securities underlying unexercised options (#)	Option exercise price ($)	Option expiration date	Value of unexercised in-the-money options (1) ($)	Number of shares or units of shares that have not vested (#)	Market or payout value of share-based awards that have not vested ($)	Market or payout value of vested share-based awards not  paid out or distributed ($)
Brian A. Atkins	300,000	0.45	May 12, 2015	Nil	Nil	Nil	Nil
John A. MacPherson	500,000	0.45	May 12, 2015	Nil	Nil	Nil	Nil
Dave Nickerson	400,000	0.45	May 12, 2015	Nil	Nil	Nil	Nil

(1)

Calculated based on the difference between the market value of the shares underlying the options at the end of the most recently completed financial year, which was $0.21, and the exercise or base price of the option.

 

Incentive plan awards – value vested or earned during the year

 

The following table shows all incentive plan awards values vested or earned for each director, other than those that are Named Executive Officers, during the year ended December 31, 2014.

 

Name	Option-based awards – Value vested during the year (1) ($)	Share-based awards – Value vested during the year ($)	Non-equity incentive plan compensation – Value earned during the year ($)
Brian A. Atkins	Nil	N/A	Nil
John A. MacPherson	Nil	N/A	Nil
Dave Nickerson	Nil	N/A	Nil

(1)

The value of vested options represents the aggregate dollar value that would have been realized if any of the options granted had been exercised on the vesting dates. The dollar value is the difference between the market price of the underlying securities at exercise and the exercise price of the options on the vesting date.

 

The Company has no plans pursuant to which cash or non-cash compensation was paid or distributed to directors during the most recently completed financial year or is proposed to be paid or distributed in a subsequent year.

 

In 2014, the Company adopted a Deferred Share Unit Plan for the benefit of the Company’s, directors. The DSU Plan is intended to assist the Company in the recruitment and retention of qualified, directors by providing a means to compensate directors and through the proposed issuance by the Company of Common Shares under the DSU Plan, to better align the interests of directors with the long-term interests of Shareholders.

 

Directors are eligible to participate in the 2012 Plan and the DSU Plan. During the financial year ended December 31, 2014, no stock options or DSUs were granted to the directors of the Company.

 

C. Board Practices

 

Directors’ and Officers’ Liability Insurance

 

Section 21 of the Articles of the Company provides for mandatory indemnification of directors and former directors against all costs, charges and expenses in respect of any proceeding to which they are made a party by reason of being a director or officer of the Company, subject any limitations contained in the Articles and in the Business Corporations Act (British Columbia).

 

 

 

 

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The Company maintains insurance for the benefit of the Company’s directors and officers against liability incurred by them in their capacity as directors and officers. The policy provides coverage in respect of a maximum total liability of $5 million, subject to a deductible of $25,000 per event. The premium for 2014 was $22,000 and in 2015 is $22,000. The policy contains standard industry exclusions and no claims have been made to date.

 

Independence of Members of Board

 

The Board currently consists of five directors. Three of the directors, Brian Atkins, Dave Nickerson and John MacPherson, being a majority, are considered independent of management and of any significant shareholder and are considered competent to exercise independent judgment in carrying out their responsibilities as directors. None of these directors have any direct or indirect material relationship with the Company or have any relationship pursuant to which they may accept, directly or indirectly, any consulting, advisory or other compensatory fees, other than as remuneration for acting in his capacity as a member of the Board or a committee of the Board.

 

The Chairman of the Board, John F. Kearney, is not independent in that he is also President and Chief Executive Officer of the Company. Alan B. Taylor is not independent as he is the Vice-President Exploration and Chief Operating Officer of the Company.

 

The Chairman of each of the Audit Committee and the Compensation Committee is an independent director, who provides leadership to those committees, and the Chairman of the Board does not sit on either committee. Three of the five Board members of the Company are independent and this is considered sufficient at the current time to enable the Board to carry out its duties and responsibilities. The Company does not have an appointed lead director.

 

Management Supervision by the Board

 

The Chief Executive Officer and Chief Operating Officer report upon the operations of the Company directly to the Board on a regular basis. The independent directors are able to meet at any time they consider necessary without any members of management, including non-independent directors, being present. The Audit Committee is composed of independent directors who meet with the Company’s auditors, and without management in attendance if considered necessary or desirable. The independent directors have regular and full access to management and are able to meet at any time without the non-independent directors being present if considered necessary or desirable. The independent directors hold in camera discussions at every quarterly Audit Committee meeting to facilitate open and candid discussion amongst themselves.

 

Participation of Directors in Other Reporting Issuers

 

The participation of the Directors in other reporting issuers is described in the following table:

 

Name of Director	Name of Other Reporting Issuer
John F. Kearney	Anglesey Mining Plc Avnel Gold Mining Limited Conquest Resources Limited Labrador Iron Mines Holdings Limited Minco Plc. Xtierra Inc.
Dave Nickerson	Tyhee Gold Corp.

 

 

 

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Participation of Directors in Board Meetings

 

In the year ended December 31, 2014, nine Board meetings were held. In addition, there were four meetings of the Audit Committee, two of the Compensation Committee and one of the Health & Safety Committee. The attendance record of each director for the Board and applicable committee meetings held is as follows:

 

Name of Director	Board Meetings Attended	Committee Meetings Attended
Brian A. Atkins	9 of 9	6 of 6
John F. Kearney	9 of 9	N/A
John A. MacPherson	9 of 9	6 of 6
Dave Nickerson	9 of 9	7 of 7
Alan B. Taylor	9 of 9	1 of 1

 

Board Mandate

 

The Board does not have a written mandate. The mandate of the Board is to supervise the management of the business and affairs of the Company. As part of its overall stewardship, the Board assumes responsibility for strategic planning, identification of the principal risks associated with the Company’s business and ensuring appropriate management of these risks and making all senior officer appointments, including responsibility for evaluating performance, management development and succession planning.

 

Position Descriptions

 

The Board has not developed written position descriptions for the Chairman of the Board or the chairs of each of the Board Committees. The Board is of the view that the role and responsibilities of the Chairman of the Board and of the Chairs of the respective Committees are sufficiently specific that no separate written position descriptions are necessary or advisable.

 

The Company does not have a written employment contract, or a written position description, in place with its President and Chief Executive Officer. The Chief Executive Officer is responsible for the day to day operations of the Company and reports directly to the Board on a regular basis. The Board responds to, and if it considers appropriate, approves with such revisions as it may require, recommendations which have been brought forward by the Chief Executive Officer. In addition to those matters which by law must be approved by the Board, all significant activities and actions proposed to be taken by the Company including in particular capital budgets, financing, property acquisitions or dispositions, senior appointments and compensation are subject to approval by the Board.

 

Orientation and Continuing Education

 

The Company does not have a formal orientation or education program for directors. New Board members are provided with information respecting the functioning of the Board and its Committees. In addition, directors receive copies of Board materials, corporate policies and procedures, and other information regarding the business and operations of the Company. Board members are expected to keep themselves current with industry trends and developments and are encouraged to communicate with management and, where applicable, auditors and technical consultants of the Company, and visit the Company’s offices on a regular basis. Board members have access to legal counsel to the Company in the event of any questions or matters relating to the Board members’ corporate and director responsibilities and to keep themselves current with changes in legislation. Board members have full access to the Company’s records and general industry information and material of interest is circulated to directors on a regular basis.

 

Ethical Business Conduct

 

The Board assumes responsibility for the Company’s approach to corporate governance matters. The Board views good corporate governance and ethical business conduct as an integral and essential component to the supervision and management of the Company and to meet responsibilities to shareholders, employees and other stakeholders.

 

 

 

 

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The Board has adopted a written Code of Ethics for directors, officers and employees – a copy of this Code can be found on the Company’s website at www.canadianzinc.com. The Code is intended to define the ethical and regulatory standards applicable to all directors, officers and employees (including contractors) of the Company, and their family members, and provides guidance as to the following matters (being a summary and not an exhaustive list): honest and ethical conduct; avoidance of conflicts of interest, whether actual or potential; full, fair, accurate, timely and understandable disclosures; compliance with legislation and regulations; prompt internal disclosure of any violation of the Code; and accountability for any failure to respect the Code.

 

The Code is not considered a comprehensive guide to all the Company’s policies or to individuals’ responsibilities under applicable laws and regulations. The Code is intended to provide general parameters and expectations of the Company and is provided to all directors, officers, employees and key contractors when they commence their services with the Company.

 

The Board conducts periodic reviews of the Company’s corporate governance practices and procedures in the light of applicable rules and guidelines and the current status and stage of development of the Company.

 

Directors are expected to adhere to all corporate law requirements in respect of any transaction or agreement in which they may have a material interest. It is a requirement of applicable corporate law that directors who have an interest in a transaction or agreement with the Company promptly disclose that interest at any meeting of the Board at which the transaction or agreement will be discussed and abstain from discussions and voting in respect to same if the interest is material. Where appropriate, any director having a material conflict of interest will be expected to withdraw from the meeting and not participate in the meeting where such matter is being considered, so that the remaining directors may properly exercise independent judgment.

 

Nomination of Directors

 

The Board has not appointed an independent Nominating Committee. Nominations, if and when they arise, are generally the result of formal or informal discussions with members of the Board or recommendations by members of the Board. Nominations to the Board are determined, after appropriate review and investigation, by the Board of Directors as a whole.

 

Compensation Committee

 

The Board has appointed a Compensation Committee which has responsibility for determining compensation for the directors and senior management. In 2014, the Compensation Committee of the Board consisted of Brian Atkins, John MacPherson and Dave Nickerson (all considered independent directors). The Compensation Committee relies on the general knowledge and experience of its members, and recommendations from senior management, in reviewing appropriate levels of compensation for executive officers and the implementation of, or amendment to, any other aspects of compensation that the Compensation Committee may review from time to time. All Compensation Committee members have relevant general, but not direct, experience in executive compensation and compensation policies and practices in the junior mineral resources business gained through current and prior experience in business, the minerals industry and government.

 

Pursuant to its Charter, the Compensation Committee has, among others, the following responsibilities:

 

·

Review and make recommendations to the Board regarding the Company’s compensation plans, including with respect to incentive-compensation plans and equity-based plans, policies and programs.

 

·

Review the level and form of the directors’ compensation and recommend changes to the Board for consideration and approval.

 

·

Review and monitor the Company’s employee and management compensation and benefit plans and policies, provide oversight of any employee benefit plan, and review and approve the compensation of the Company’s executive officers.

 

 

 

 

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·

Annually review and approve corporate goals and objectives relevant to CEO compensation, evaluate the CEO’s performance in light of those goals and objectives and establish the individual elements of the CEO’s total compensation based on this evaluation.

 

·

Review and make recommendations to the Board with regard to grants and/or awards of restricted stock, stock options and other forms of equity-based compensation under the Company’s stock option, incentive-compensation and equity-based plans (as applicable).

 

·

Review and make recommendations for the Board, when and if appropriate, of employment agreements, severance agreements and change in control provisions / agreements for the CEO and other executive officers.

 

The Compensation Committee makes recommendations to the Board with respect to the compensation of the President and CEO. The Compensation Committee meets as requested by the Board or the CEO, or as considered desirable by the Compensation Committee. The Compensation Committee has the authority to retain independent advisors as it may deem necessary or appropriate to allow it to discharge its responsibilities.

 

Other Committees

 

In addition to the Audit Committee and the Compensation Committee, the Board also has a Health & Safety Committee comprised of Board members Alan Taylor and Dave Nickerson and also the Prairie Creek Site Managers. The function of the Health & Safety Committee is to review the Company’s Health & Safety Policies, practices and programs, to oversee and regularly evaluate the Company’s health and safety performance and to monitor and advise the Board on current and anticipated future best practices and regulatory issues relating to health and safety.

 

Assessment

 

The Board of Directors continuously reviews on an ongoing informal basis the effectiveness of the Board as a whole and the effectiveness, contribution and performance of the Board, its committees and individual directors. Each year, when it determines the number of directors to be elected at the annual meeting of shareholders, the Board considers its appropriate size and composition to properly administer the affairs of the Company and to effectively carry out the duties of the Board, given the Company’s current status and stage of development.

 

Audit Committee Charter

 

The Audit Committee has adopted a Charter, the text of which is set out below:

“Charter of the Audit Committee of the Board of Directors”

I.           MANDATE

 

The Audit Committee (the “ Committee ”) is appointed by the Board of Directors (the “ Board ”) of Canadian Zinc Corporation (the “ Corporation ”) to assist the Board in fulfilling its oversight responsibilities relating to financial accounting and reporting process and internal controls for the Corporation. The Committee’s mandate and responsibilities are to:

·

recommend to the Board the external auditors to be nominated and the compensation of such auditor;

·

oversee and monitor the work and performance of the Corporation's external auditors, including meeting with the external auditors and reviewing and recommending all renewals or replacements of the external auditors and their remuneration;

·

pre-approve all non-audit services to be provided to the Corporation by the external auditors;

·

review the financial statements and management's discussion and analysis (MD&A) and annual and interim financial results press releases of the Corporation;

·

oversees the integrity of internal controls and financial reporting procedures of the Corporation and ensure implementation of such controls and procedures;

·

provide oversight to any related party transactions entered into by the Corporation.

 

 

 

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II.           AUTHORITY OF THE AUDIT COMMITTEE

 

The Committee shall have the authority to:

 

·

engage independent counsel and other advisors as it determines necessary to carry out its duties;

·

set and pay the compensation for advisors employed by the Audit Committee; and

·

communicate directly with the external auditors.

 

III.           COMPOSITION AND MEETINGS

 

·

The Committee and its membership shall meet all applicable legal, regulatory and listing requirements, including those of all applicable securities regulatory authorities.

·

The Committee shall be composed of three directors as shall be designated by the Board from time to time. The members of the Committee shall appoint from among themselves a member who shall serve as Chair. A minimum of two members of the Committee present either in person or by telephone shall constitute a quorum.

 

The Committee members will be elected annually at the first meeting of the Board following the annual general meeting of shareholders.

 

·

Each member of the Committee shall be “independent” and shall be “financially literate” (as each such term is defined in Multilateral Instrument 52-110)

·

The Committee shall meet at least quarterly, as circumstances dictate or as may be required by applicable legal or listing requirements.

·

Any member of the Committee may participate in the meeting of the Committee by means of conference telephone or other communication equipment, and the member participating in a meeting pursuant to this paragraph shall be deemed, for purposes hereof, to be present in person at the meeting.

 

IV.           RESPONSIBILITIES

 

·

The Committee shall review the annual audited financial statements to satisfy itself that they are presented in accordance with applicable International Financial Reporting Standards and report thereon to the Board and recommend to the Board whether or not same should be approved, prior to their being filed with the appropriate regulatory authorities. The Committee shall also review the interim financial statements.

·

The Committee shall review any internal control reports prepared by management and the evaluation of such report by the external auditors, together with management’s response.

·

The Committee shall be satisfied that adequate procedures are in place for the review of the Corporation’s public disclosure of financial information extracted or derived from the Corporation’s financial statements, management’s discussion and analysis and annual and interim earnings press releases before the Corporation publicly discloses this information.

·

The Committee shall review management’s discussion and analysis relating to annual and interim financial statements and any other public disclosure documents, including interim earnings press releases, before the Corporation publicly discloses this information.

·

The Committee shall meet no less frequently than annually with the external auditors to review accounting practices, internal controls and such other matters as the Committee deems appropriate.

·

The Committee shall establish procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters; and the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters.

·

The Committee shall provide oversight to any related party transactions entered into by the Corporation.

·

In the event that the Corporation wishes to retain the services of the Corporation’s external auditors for tax compliance or tax advice or any non-audit services the Chief Financial Officer of the Corporation shall consult with the Audit Committee, who shall have the authority to approve or disapprove such non-audit services. The Audit Committee shall maintain a record of non-audit services approved by the Audit Committee for each fiscal year and provide a report to the Board on an annual basis.

·

The Committee shall review and approve the Corporation's hiring policies regarding partners, employees and former partners and employees of the present and former auditors of the Corporation.

 

 

 

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·

The Committee shall perform any other activities consistent with this Charter and governing law, as the Committee or the Board deems necessary or appropriate.

 

Composition of Audit Committee

 

The Audit Committee, as of the date of this Annual Report, is composed of Brian Atkins, Dave Nickerson and John MacPherson. The Company considers each member of the Audit Committee to be financially literate and independent for the purposes of National Instrument 52-110 (“NI 52-110”).

 

Relevant Education and Experience

 

The education and experience of each Audit Committee member that is relevant to the performance of his responsibilities as a member of the Audit Committee is set out below:

 

Brian A. Atkins, CA graduated from the University of British Columbia with a Bachelor of Commerce and obtained his Chartered Accountant designation from the British Columbia Institute of Chartered Accountants. Mr. Atkins joined KPMG LLP, Chartered Accountants, in 1969 and was admitted as a partner in 1978. As a KPMG partner, Mr. Atkins provided audit, accounting and advisory services to a number of public and private companies continually throughout the period until his retirement from KPMG in September 2005. Mr. Atkins is currently a director of BlueShore Financial, currently a member of the Institute of Corporate Directors and was until December 2009 a Member of the Independent Review Committee of Inhance Investment Management Inc. He has a thorough understanding of accounting standards used by the Company in preparing its annual and quarterly financial statements. He has a thorough understanding of internal controls over financial reporting.

 

Dave Nickerson B.Sc., M.Sc., Mr. Nickerson holds a Bachelors degree in Mining Engineering from the University of Birmingham and a Masters degree in Mineral Exploration from Laurentian University and has taken Post-Graduate Courses in Mineral Development and in Legislation Strategy at McGill University, Montreal. He is a Professional Engineer and a member of the Association of Professional Engineers, Geologists and Geophysicists of the Northwest Territories. He was elected as Member of Parliament for three terms 1979 to 1988, during part of which time he served as a member of the House Standing Committee on Public Accounts, and as a Member of the Legislative Assembly of the Northwest Territories 1975 to 1979. He served as the Chairman of the Northwest Territories Water Board from 1988 to 1994. He has served as a director of public companies for a period in excess of five years. He has an understanding of the accounting principles used by the Company to prepare its financial statements and has the ability to assess the general application of such accounting principles in connection with the accounting for estimates, accruals and reserves. He has experience evaluating financial statements with accounting issues comparable to the financial statements and issues that can reasonably be expected to be raised by the Company’s financial statements. He has an understanding of internal controls and procedures for financial reporting.

 

John MacPherson has served on the Boards of many public companies as chairman, president or director for over 40 years. Having worked in the investment industry he was licenced to sell securities which required him to understand and evaluate complex financial reports. He has an understanding of the accounting principles used by the Company to prepare its financial statements and has the ability to assess the general application of such accounting principles in connection with the accounting for estimates, accruals and reserves.

 

Audit Committee Oversight

 

Since the commencement of the Company’s most recently completed financial year (January 1, 2014) there has not been a recommendation of the Audit Committee to nominate or compensate an external auditor which was not adopted by the Board of Directors.

 

Pre-Approval Policies and Procedures

 

The Audit Committee has adopted procedures requiring Audit Committee review and approval in advance of all particular engagement for services provided by the Auditors. Consistent with applicable laws, the procedures permit limited amounts of services, other than audit services, to be approved by the Audit Committee provided the Audit Committee is informed of each particular service. All of the engagements and fees for fiscal 2014 and 2013 were approved by the Audit Committee. The Audit Committee reviews with the auditors whether non-audit services to be provided, if any, are compatible with maintaining the auditor’s independence.

 

 

 

 

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D. Employees

 

As of December 31, 2014, the Company had 23 employees. Ten employees are based in the Company’s corporate offices, two in Ontario, Canada and eight in British Columbia, Canada. Thirteen employees are based in Northwest Territories, Canada on field assignments. In addition, the Company utilizes the services of contractors to assist in certain tasks and projects. There has been no significant change in the number of employees over the last three years and the Company’s employees are not members of a labour union.

 

E. Share Ownership

 

The following table sets forth the shareholdings, to the best of Management’s knowledge, owned beneficially, directly or indirectly, by the Company’s directors and officers as of April 30, 2015. There were 218,047,709 common shares issued and outstanding as of April 30, 2015.

 

Name	Common Shares beneficially owned, controlled or directed, directly or indirectly	Percentage of Outstanding Common Shares (%)
Brian A. Atkins	200,000	0.09
John F. Kearney	3,500,909	1.61
John A. MacPherson	68,500	0.03
Dave Nickerson	130,000	0.06
Alan B. Taylor	124,000	0.06
Trevor L. Cunningham	15,000	0.01

See “Item 6.B. – Compensation” for table setting out the stock options currently outstanding to our directors and officers and for information regarding equity compensation plans .

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

 

To the best of the Company’s knowledge the following table sets forth information regarding the share ownership of the Company as of April 30, 2015 of shareholders that are beneficial owners of 5% or more of the Company’s outstanding common shares.

 

Name of Owner	Number of Common Shares	Percentage
Zhongrun International Mining Co. Ltd.	15,000,000	6.9%

To the best of the Company’s knowledge and other than as disclosed in this Annual Report, the Company is not directly or indirectly controlled or owned by any other corporation, foreign government or any other natural or legal person and it is not subject to any arrangements the operation of which may at a subsequent date result in a change in control of the Company.

 

The Company’s major shareholders as listed above do not have any different voting rights than those held by any other shareholder of the Company.

 

Outstanding Share Data

 

As at March 31, 2015, the Company has 218,047,709 common shares issued and outstanding. In addition, there are outstanding stock options and warrants for a further 5,693,800 and 16,908,360 common shares respectively.

 

As of March 31, 2015, there were 89 shareholders of record of the Company’s common shares in the United States, holding 1.14% of the outstanding common shares of the Company.

 

 

 

 

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B. Related Party Transactions

 

For the year ended December 31, 2014, the Company incurred rent expense in the amount of $24,000 with a corporation in which the Chairman of the Company is also a director, versus $24,000 for the comparative year. These transactions were within the normal course of business and have been recorded at amounts agreed to by the transacting parties. At December 31, 2014, $2,000 relating to amounts owing to related parties was included in accounts payable and accrued and other liabilities (December 31, 2013 - $2,000).

 

Other than as noted above, there were no material transactions in the fiscal year ended December 31, 2014, or proposed material transactions between the Company or any of its subsidiaries and:

 

(a)            enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Company;

(b)           associates;

(c)           individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company, and close members of any such individual's family;

(d)           key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of the Company, including directors and senior management of companies and close members of such individuals' families;

(e)           enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence including enterprises owned by directors or major shareholders of the Company and enterprises that have a member of key management in common with the Company, other than rent expense as set out in Note 18 to the Financial Statements for the year ended December 31, 2014.

 

C. Interests of Experts and Counsel

 

Not applicable.

ITEM 8. FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information

 

Consolidated Financial Statements

 

The consolidated financial statements of the Company and audit report of the Company’s independent auditor are filed as part of this Form 20-F under Item 18.

 

Legal or Arbitration Proceedings

 

The Company currently is not a party to any material legal or arbitration proceeding.

 

The Company is not aware of any material proceeding in which any director, member of senior management or affiliate of the Company is either a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

 

Dividend Policy

 

The Company has not paid any dividend or made any other distribution in respect of its outstanding common shares and management does not anticipate that the Company will pay dividends or make any other distribution in respect on its common shares in the foreseeable future.

 

 

 

 

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B. Significant Changes

 

There have been no significant changes in the affairs of the Company since the date of the audited annual consolidated financial statements of the Company as at and for the year ended December 31, 2014, other than as discussed in this Annual Report.

ITEM 9. THE OFFER AND LISTING

 

A. Offer and Listing Details

 

Nature of Trading Market.

 

The common shares of the Company trade on the TSX under the symbol “CZN”. The Company’s common shares also trade on the OTCQB in the United States under the symbol “CZICF”.

 

Trading on the TSX

 

The following table sets forth the high and low sale prices on the TSX for the common shares for the last five fiscal years ended December 31, 2014.

 

Year Ended	High CDN$	Low CDN$
December 31, 2014	0.54	0.18
December 31, 2013	0.73	0.37
December 31, 2012	0.78	0.35
December 31, 2011	1.34	0.52
December 31, 2010	0.78	0.31

The following table sets forth the high and low sale prices on the TSX for the common shares for each quarterly period in the two most recent fiscal years ended December 31, 2014 and the quarter ended March 31, 2015.

 

Quarter Ended	High CDN$	Low CDN$
March 31, 2015	0.24	0.19
December 31, 2014	0.25	0.18
September 30, 2014	0.39	0.27
June 30, 2014	0.42	0.29
March 31, 2014	0.54	0.41
December 31, 2013	0.55	0.39
September 30, 2013	0.70	0.46
June 30, 2013	0.51	0.37
March 31, 2013	0.73	0.41

The following table sets forth the high and low sales prices on the TSX for the common shares for each monthly period in the last six months.

 

Month Ended	High CDN$	Low CDN$
March 31, 2015	0.23	0.20
February 28, 2015	0.24	0.22
January 31, 2015	0.22	0.20
December 31, 2014	0.24	0.18
November 30, 2014	0.25	0.21
October 31, 2014	0.25	0.19

 

 

 

 

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Trading on the OTCQB

 

The following table sets forth the high and low sale prices on the OTCBB or OTCQB, as applicable, for the common shares of the Company for the last five fiscal years ended December 31, 2014.

 

Year Ended	High U.S.$	Low U.S.$
December 31, 2014	0.48	0.15
December 31, 2013	0.73	0.36
December 31, 2012	0.80	0.34
December 31, 2011	1.38	0.52
December 31, 2010	0.78	0.31

The following table sets forth the high and low sale prices on the OTCBB or OTCQB, as applicable, for the common shares of the Company for each quarterly period in the two most recent fiscal years ended December 31, 2014 and the quarter ended March 31, 2015.

 

Quarter Ended	High U.S.$	Low U.S.$
March 31, 2015	0.20	0.15
December 31, 2014	0.23	0.15
September 30, 2014	0.35	0.22
June 30, 2014	0.39	0.28
March 31, 2014	0.48	0.37
December 31, 2013	0.53	0.37
September 30, 2013	0.68	0.44
June 30, 2013	0.49	0.36
March 31, 2013	0.73	0.41

The following table sets forth the high and low sales prices on the OTCQB for the common shares of the Company for each monthly period in the last six months.

 

Month Ended	High U.S.$	Low U.S.$
March 31, 2015	0.19	0.16
February 28, 2015	0.20	0.17
January 31, 2015	0.19	0.16
December 31, 2014	0.21	0.15
November 30, 2014	0.22	0.19
October 31, 2014	0.23	0.18

B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

The Company's common shares trade on the TSX, under the trading symbol "CZN".

 

The Company's common shares are quoted in the United States on the OTCQB under the symbol “CZICF”.

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

 

 

 

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F. Expenses of the Issue

 

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Association

 

The Company was incorporated in British Columbia, Canada, on December 16, 1965, under the name “Pizza Patio Management Ltd.” The Company changed its name to “San Andreas Resources Corporation” on August 29, 1991 and to “Canadian Zinc Corporation” on May 25, 1999. On June 16, 2004, the Company’s shareholders adopted new Articles to bring its Charter documents up to date and into conformity with the new Business Corporations Act (British Columbia).

 

With respect to directors and officers, the Articles of the Company provide that a Director or officer who is a party to a material contract or proposed material contract with the Company shall disclose the nature and extent of his interest in accordance with the provisions of the Act and shall abstain from voting in respect thereof.

 

The Articles also provide that the Directors may from time to time borrow money on the credit of the Company; issue, reissue, sell or pledge debt obligations of the Company, whether secured or unsecured; give a guarantee on behalf of the Company; mortgage, hypothecate, pledge or otherwise create an interest in or charge on all or any property of the Company to secure payment of a debt or performance of any other obligation of the Company. Variation of these borrowing powers would require an amendment to the Articles of the Company which would, in turn, require the approval of the shareholders of the Company by way of a Special Resolution. A Special Resolution means a resolution cast by a majority of not less than three quarters of the votes cast by shareholders of the Company who, being entitled to do so, vote in person or by proxy at a general meeting of the Company of which notice as the Articles provide shall not be less than 21 days notice specifying the intention to propose the resolution as a special resolution, has been duly given (or, if every shareholder entitled to attend and vote at the meeting agrees, at a meeting of which less than 21 days notice has been given), or a resolution consented to in writing by every shareholder of the Company who would have been entitled to vote in person or by proxy at a general meeting of the Company, and a resolution so consented to is deemed to be a special resolution passed at a general meeting of the Company.

 

There is no requirement under the Articles of the Company or in the Act requiring retirement or non-retirement of directors under an age limit requirement, nor is there any minimum shareholding required for a director’s qualification. Holders of common shares of the Company are entitled to vote at meetings of shareholders, and a Special Resolution, as described above, is required to effect a change in the rights of shareholders. Holders of common shares are not entitled to pre-emptive rights. Holders of common shares are entitled, ratably, to the remaining property of the Company upon liquidation, dissolution or winding up of the Company, and such holders receive dividends if, as, and when, declared by the directors of the Company. There are no restrictions on the purchase or redemption of common shares by the Company while there is an arrearage in the payment of dividends or sinking fund installments. There is no liability on the part of any shareholder to further capital calls by the Company nor any provision discriminating against any existing or prospective holder of securities of the Company as a result of such shareholder owning a substantial number of shares. There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by the Act or by the constating document of the Company.

 

The Company is required to give its registered shareholders not less than 21 days notice of any general meeting of the Company unless all such shareholders consent to reduce or waive the period. In addition, the Company is obliged to give notice to companies and intermediaries who hold shares on behalf of the ultimate beneficial owners no fewer than 35 or more than 60 days prior to the date of the meeting. The Company then delivers, in bulk, proxy-related materials in amounts specified by the intermediaries. No shares of the Company owned by companies or intermediaries may be voted at a general meeting of the Company unless all proxy-related materials are delivered to the ultimate beneficial owners of such shares. Such ultimate beneficial owner must then deliver a proxy to the Company within the time limited by the Company for the deposit of proxies in order to vote the shares in respect of which such person is the beneficial owner.

 

 

 

 

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There is no provision in the Company's Articles that would have an effect of delaying, deferring or preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring involving the Company (or any of its subsidiaries).

 

Securities legislation in the Company’s home jurisdiction of British Columbia requires that shareholder ownership must be disclosed once a person owns beneficially or has control or direction over greater than 10% of the issued shares of the Company. This threshold is higher than the 5% threshold under U.S. Securities legislation at which shareholders must report their share ownership.

 

C. Material Contracts

 

Other than contracts entered into in the ordinary course of business and those disclosed elsewhere in this Annual Report, the Company has not entered into any material contracts within the past two years.

 

D. Exchange Controls

 

There are no governmental laws, decrees or regulations in Canada relating restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of the Company’s common shares other than withholding tax requirements. (E.g., Remittances of dividends to United States residents are subject to a 15% withholding tax (10% if the shareholder is a corporation owning at least 10% of the common shares of the Company) pursuant to Article X of the reciprocal treaty between Canada and the United States.)

 

Except as provided in the Investment Canada Act (“Investment Act”), there are no provisions under the laws of Canada, the Province of British Columbia or in the Articles of the Company restricting the right of foreigners to hold or vote the common shares of the Company. The Investment Act provides for a review in the case of an acquisition of control of a Canadian business by a non-Canadian (other than a “NAFTA investor” as defined in the Investment Act), as described below. The Investment Act generally prohibits implementation of a reviewable investment by an individual, government, corporation, partnership, trust or joint venture that is non-Canadian unless the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada.

 

In the case of the direct acquisition of control of a Canadian business, the threshold for review is $600 million in enterprise value for investments by:  (1) WTO investors that are not state-owned enterprises; and (2) non-WTO investors that are not state-owned enterprises where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, "controlled by a WTO investor".  A WTO investor is a member of the World Trade Organization, current members of which include the European Union, Australia, Japan, Mexico, and the United States.  The review threshold of $600 million applies starting in 2015 and increases in subsequent years in accordance with the provisions of the Investment Act.

 

In the case of an acquisition of control of a Canadian business by a non-Canadian, other than a WTO investor, where: (i) in the case of acquisition (for example, through a share purchase or asset purchase), the assets of the business are $5 million or more in value; or (ii) in the case of an indirect acquisition (for example, the acquisition of the foreign parent of the Canadian business) where the Canadian business has assets of $50 million or more in value or if the Canadian business represents more than 50% of the assets of the original group and the Canadian business has assets of $5 million or more in value. Review and approval are also required for the acquisition or establishment of a new business in areas concerning “Canada's cultural heritage or national identity” such as book publishing, film production and distribution, television and radio, production and distribution of music, and the oil and natural gas industry, regardless of the size of the investment.

 

The Investment Act would not apply to certain transactions in relation to common shares of the Company, including: an acquisition of common shares of the Company by any person made in the ordinary course of that person's business as a trader or dealer in securities; or an acquisition of control of the Company by an amalgamation, merger, consolidation or corporate reorganization following which the control of the Company, remains unchanged.

 

 

 

 

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In the context of the Company, in essence, three methods of acquiring control of a Canadian business are regulated by the Investment Act: (i) the acquisition of all or substantially all of the assets used in carrying on the Canadian business; (ii) the acquisition, directly or indirectly, of voting shares of a Canadian corporation carrying on the Canadian business; (iii) the acquisition of voting of an entity which controls, directly or indirectly, another entity carrying on a Canadian business. An acquisition of a majority of the voting interests of an entity, including a corporation, is deemed to be an acquisition of control under the Investment Act. An acquisition of less than one-third of the voting shares of a corporation is deemed not to be an acquisition of control. An acquisition of less than a majority, but one-third or more, of the voting shares of a corporation is presumed to be an acquisition of control unless it can be established that on the acquisition the corporation is not, in fact, controlled by the acquirer through the ownership of voting shares. For partnerships, trusts, joint ventures or other unincorporated entities, an acquisition of less than a majority of the voting interests is deemed not to be an acquisition of control.

 

In addition to the foregoing, the Investment Act requires that all other acquisitions of control of Canadian businesses by non-Canadians are subject to formal notification to the Canadian government. These provisions require a foreign investor to give notice in the required form, which notices are for information, as opposed to review, purposes.

 

E. Taxation

 

Certain Canadian Federal Income Tax Consequences

 

The following summarizes the principal Canadian federal income tax consequences applicable to the holding and disposition of common shares in the capital of the Company by a holder who, for purposes of the Income Tax Act (Canada) (the “Tax Act”) and the Canada United States Income Tax Convention, 1980, as amended (the “Canada-U.S. Tax Convention”), is resident in the United States, beneficially holds the common shares as capital property and does not use or hold the common shares in the course of carrying on a business in Canada (a “U.S. Holder”). The common shares will generally be considered to be capital property unless the U.S. Holder holds the common shares in the course of carrying on a business, or acquires the common shares in a transaction or transactions considered to be an adventure in the nature of trade.

 

This summary is based on the current provisions of the Tax Act, the regulations thereunder, all amendments thereto publicly proposed by the government of Canada, the published administrative practices of the Canada Revenue Agency and the current provisions of the Canada-U.S. Tax Convention. This summary does not otherwise take into account or anticipate any changes in law, whether by way of legislative, judicial or administrative action or interpretation, nor does it address any provincial, territorial or foreign (including without limitation, any United States) tax considerations.

 

This summary is of a general nature only and it is not intended to be, nor should it be construed to be, legal or tax advice to any particular U.S. Holder. Accordingly, U.S. Holders are urged to consult with their own tax advisors about the specific tax consequences of acquiring, holding and disposing of common shares.

 

Dividends:

 

A U.S. Holder will be liable to pay a Canadian withholding tax on every dividend that is or is deemed to be paid or credited to the U.S. Holder on the U.S. Holder’s common shares. The rate of withholding tax under the Tax Act is 25% of the gross amount of the dividend paid. However, the Canada-U.S. Tax Convention will reduce that withholding tax rate, provided the U.S. Holder is eligible for benefits under the Canada-U.S. Tax Convention. Where applicable, the general rate of withholding tax under the Canada-U.S. Tax Convention will be 15% of the gross amount of the dividend, but if the U.S. Holder is a company that owns at least 10% of the voting stock of the Company, the rate of withholding tax will be reduced to 5%. The Company will be required to withhold the applicable tax from the dividend payable to the U.S. Holder, and to remit that tax to the Receiver General for Canada on account of the U. S. Holder. Not all persons who are residents of the United States will qualify for benefits under the Canada-U.S. Tax Convention. U.S. Holders are advised to consult their own tax advisors in this regard.

 

 

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Where a holder disposes of common shares to the Company (unless the Company acquired the common shares in the open market in the manner in which shares would normally be purchased by any member of the public), this will result in a deemed dividend to the U.S. holder equal to the amount by which the consideration paid by the Company exceeds the paid-up capital of such stock. The amount of such dividend will be subject to withholding tax as described above.

 

Disposition of Common Shares and Capital Gains:

 

A U.S. Holder will generally not be subject to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a common share, unless the common share constitutes “taxable Canadian property” to the U.S. Holder for purposes of the Tax Act. Provided that the common shares are listed on a “designated stock exchange” for purposes of the Tax Act (which includes the TSX) at the time of disposition, the common shares will generally not constitute “taxable Canadian property” to a U.S. Holder unless, at any time during the 60-month period immediately preceding the disposition (i) the U.S. Holder, together with persons with whom the U.S. Holder does not deal at “arm’s length” for the purposes of the Tax Act, owned 25% or more of the issued shares of any class of shares of the Company and (ii) more than 50% of the fair market value of the common shares was derived directly or indirectly from one or a combination of real or immovable property situated in Canada, “Canadian resource properties” or “timber resource properties” (as such terms are defined in the Tax Act), or options or interests in respect of any such properties.

 

Provided the common shares are listed at the time of disposition on the TSX or other “recognized stock exchange” (which includes the TSX) for purposes of the Tax Act, a U.S. Holder who disposes of common shares will not be required to satisfy the obligations imposed under Section 116 of the Tax Act and, as such, the purchaser of such shares will not be required to withhold any amount on the purchase price paid and the US Holder will not have to apply to obtain a certificate of compliance related to the disposition of the common shares.

 

U.S. Holders whose common shares may constitute “taxable Canadian property” should consult their own tax advisors.

 

Certain United States Federal Income Tax Consequences:

 

The following is a general summary of certain material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership and disposition of common shares.

 

This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including, without limitation, specific tax consequences to a U.S. Holder under an applicable income tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. This summary does not address the U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences to U.S. Holders of the acquisition, ownership, and disposition of common shares. In addition, except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Each prospective U.S. Holder should consult its own tax advisors regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of common shares.

 

No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the conclusions described in this summary.

 

 

 

 

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Scope of this Summary

 

Authorities

 

This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS, the Canada United States Income Tax Convention, 1980, as amended (the “Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable, and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied retroactively. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation.

 

U.S. Holders

 

For purposes of this summary, the term "U.S. Holder" means a beneficial owner of common shares that is for U.S. federal income tax purposes:

 

·

an individual who is a citizen or resident of the United States;

·

a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia;

·

an estate whose income is subject to U.S. federal income taxation regardless of its source; or

·

a trust that (1) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

 

U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed

 

This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders that: (a) are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) are broker-dealers, dealers, or traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) have a “functional currency” other than the U.S. dollar; (e) own common shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (f) acquire common shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) hold common shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); or (h) own, have owned or will own (directly, indirectly, or by attribution) 10% or more of the total combined voting power of the outstanding shares of the Company. This summary also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are: (a) U.S. expatriates or former long-term residents of the U.S.; (b) persons that have been, are, or will be a resident or deemed to be a resident in Canada for purposes of the Income Tax Act (Canada) (the “Tax Act”); (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold common shares in connection with carrying on a business in Canada; (d) persons whose common shares constitute “taxable Canadian property” under the Tax Act; or (e) persons that have a permanent establishment in Canada for the purposes of the Canada-U.S. Tax Convention. U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders described immediately above, should consult their own tax advisors regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of common shares.

 

If an entity or arrangement that is classified as a partnership (or other “pass-through” entity) for U.S. federal income tax purposes holds common shares, the U.S. federal income tax consequences to such entity or arrangement and the partners (or other owners or participants) of such entity or arrangement generally will depend on the activities of the entity or arrangement and the status of such partners (or owners or participants). This summary does not address the tax consequences to any such partner (or owner or participants). Partners (or other owners or participants) of entities or arrangements that are classified as partnerships or as “pass-through” entities for U.S. federal income tax purposes should consult their own tax advisors regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership and disposition of common shares.

 

 

 

 

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Passive Foreign Investment Company Rules

 

PFIC Status of the Company

 

If the Company were to constitute a “passive foreign investment company” under the meaning of Section 1297 of the Code (a “PFIC”, as defined below) for any year during a U.S. Holder’s holding period, then certain potentially adverse rules may affect the U.S. federal income tax consequences to a U.S. Holder as a result of the acquisition, ownership and disposition of common shares. The Company believes that it was classified as a PFIC for the tax year ended December 31, 2014, and based on current business plans and financial expectations, the Company anticipates that it may be a PFIC for its current tax year and subsequent tax years. The determination of whether any corporation was, or will be, a PFIC for a tax year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether any corporation will be a PFIC for any tax year depends on the assets and income of such corporation over the course of each such tax year and, as a result, cannot be predicted with certainty as of the date of this document. Accordingly, there can be no assurance that the IRS will not challenge any determination made by the Company (or any subsidiary of the Company) concerning its PFIC status. Each U.S. Holder should consult its own tax advisors regarding the PFIC status of the Company and each subsidiary of the Company.

 

In any year in which the Company is classified as a PFIC, a U.S. Holder will be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. In addition to penalties, a failure to satisfy such reporting requirements may result in an extension of the time period during which the IRS can assess a tax. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file an IRS Form 8621.

 

The Company generally will be a PFIC if, for a tax year, (a) 75% or more of the gross income of the Company is passive income (the “PFIC income test”) or (b) 50% or more of the value of the Company’s assets either produce passive income or are held for the production of passive income, based on the quarterly average of the fair market value of such assets (the “PFIC asset test”). “Gross income” generally includes all sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and “passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.

 

For purposes of the PFIC income test and PFIC asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and PFIC asset test described above, and assuming certain other requirements are met, “passive income” does not include certain interest, dividends, rents, or royalties that are received or accrued by the Company from certain “related persons” (as defined in Section 954(d)(3) of the Code) also organized in Canada, to the extent such items are properly allocable to the income of such related person that is not passive income.

 

Under certain attribution rules, if the Company is a PFIC, U.S. Holders will generally be deemed to own their proportionate share of the Company’s direct or indirect equity interest in any company that is also a PFIC (a ‘‘Subsidiary PFIC’’), and will generally be subject to U.S. federal income tax on their proportionate share of (a) any “excess distributions,” as described below, on the stock of a Subsidiary PFIC and (b) a disposition or deemed disposition of the stock of a Subsidiary PFIC by the Company or another Subsidiary PFIC, both as if such U.S. Holders directly held the shares of such Subsidiary PFIC. In addition, U.S. Holders may be subject to U.S. federal income tax on any indirect gain realized on the stock of a Subsidiary PFIC on the sale or disposition of common shares. Accordingly, U.S. Holders should be aware that they could be subject to tax under the PFIC rules even if no distributions are received and no redemptions or other dispositions of common shares are made.

 

 

 

 

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Default PFIC Rules Under Section 1291 of the Code

 

If the Company is a PFIC for any tax year during which a U.S. Holder owns common shares, the U.S. federal income tax consequences to such U.S. Holder of the acquisition, ownership, and disposition of common shares will depend on whether and when such U.S. Holder makes an election to treat the Company and each Subsidiary PFIC, if any, as a “qualified electing fund” or “QEF” under Section 1295 of the Code (a “QEF Election”) or makes a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder.”

 

A Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code (described below) with respect to (a) any gain recognized on the sale or other taxable disposition of common shares and (b) any “excess distribution” received on the common shares. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. Holder’s holding period for the common shares, if shorter).

 

Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of common shares (including an indirect disposition of the stock of any Subsidiary PFIC), and any “excess distribution” received on common shares or with respect to the stock of a Subsidiary PFIC, must be ratably allocated to each day in a Non-Electing U.S. Holder’s holding period for the respective common shares. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income (and not eligible for certain preferred rates). The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax rate applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A Non-Electing U.S. Holder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible.

 

If the Company is a PFIC for any tax year during which a Non-Electing U.S. Holder holds common shares, the Company will continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless of whether the Company ceases to be a PFIC in one or more subsequent tax years. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above), but not loss, as if such common shares were sold on the last day of the last tax year for which the Company was a PFIC.

 

QEF Election

 

A U.S. Holder that makes a timely and effective QEF Election for the first tax year in which the holding period of its common shares begins generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to its common shares. A U.S. Holder that makes a timely and effective QEF Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) the net capital gain of the Company, which will be taxed as long-term capital gain to such U.S. Holder, and (b) the ordinary earnings of the Company, which will be taxed as ordinary income to such U.S. Holder. Generally, “net capital gain” is the excess of (a) net long-term capital gain over (b) net short-term capital loss, and “ordinary earnings” are the excess of (a) “earnings and profits” over (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each tax year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company. However, for any tax year in which the Company is a PFIC and has no net income or gain, U.S. Holders that have made a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S. Holder that made a QEF Election has an income inclusion, such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal interest,” which is not deductible.

 

A U.S. Holder that makes a timely and effective QEF Election with respect to the Company generally (a) may receive a tax-free distribution from the Company to the extent that such distribution represents “earnings and profits” of the Company that were previously included in income by the U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, a U.S. Holder that makes a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of common shares.

 

 

 

 

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The procedure for making a QEF Election, and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be treated as “timely” if such QEF Election is made for the first year in the U.S. Holder’s holding period for the common shares in which the Company was a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such year. If a U.S. Holder does not make a timely and effective QEF Election for the first year in the U.S. Holder’s holding period for the common shares, the U.S. Holder may still be able to make a timely and effective QEF Election in a subsequent year if such U.S. Holder meets certain requirements and makes a “purging” election to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above) as if such common shares were sold for their fair market value on the day the QEF Election is effective. If a U.S. Holder makes a QEF Election but does not make a “purging” election to recognize gain as discussed in the preceding sentence, then such U.S. Holder shall be subject to the QEF Election rules and shall continue to be subject to tax under the rules of Section 1291 discussed above with respect to its common shares. If a U.S. Holder owns PFIC stock indirectly through another PFIC, separate QEF Elections must be made for the PFIC in which the U.S. Holder is a direct shareholder and the Subsidiary PFIC for the QEF rules to apply to both PFICs.

 

A QEF Election will apply to the tax year for which such QEF Election is timely made and to all subsequent tax years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, the Company ceases to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those tax years in which the Company is not a PFIC. Accordingly, if the Company becomes a PFIC in another subsequent tax year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF rules described above during any subsequent tax year in which the Company qualifies as a PFIC.

 

U.S. Holders should be aware that there can be no assurances that the Company will satisfy the record keeping requirements that apply to a QEF, or that the Company will supply U.S. Holders with information that such U.S. Holders are required to report under the QEF rules, in the event that the Company is a PFIC. Thus, U.S. Holders may not be able to make a QEF Election with respect to their common shares. Each U.S. Holder should consult its own tax advisors regarding the availability of, and procedure for making, a QEF Election.

 

A U.S. Holder makes a QEF Election by attaching a completed IRS Form 8621, including a PFIC Annual Information Statement, to a timely filed United States federal income tax return. However, if the Company does not provide the required information with regard to the Company or any of its Subsidiary PFICs, U.S. Holders will not be able to make a QEF Election for such entity and will continue to be subject to the rules of Section 1291 of the Code discussed above that apply to Non-Electing U.S. Holders with respect to the taxation of gains and excess distributions.

 

Mark-to-Market Election

 

A U.S. Holder may make a Mark-to-Market Election only if the common shares are marketable stock. The common shares generally will be “marketable stock” if the common shares are regularly traded on (a) a national securities exchange that is registered with the Securities and Exchange Commission, (b) the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (c) a foreign securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such foreign exchange has trading volume, listing, financial disclosure, and surveillance requirements, and meets other requirements and the laws of the country in which such foreign exchange is located, together with the rules of such foreign exchange, ensure that such requirements are actually enforced and (ii) the rules of such foreign exchange effectively promote active trading of listed stocks. If such stock is traded on such a qualified exchange or other market, such stock generally will be “regularly traded” for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. Provided that the common shares are “regularly traded” as described in the preceding sentence, the common shares are expected to be marketable stock. However, each U.S. Holder should consult its own tax advisor in this regard.

 

 

 

 

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A U.S. Holder that makes a Mark-to-Market Election with respect to its common shares generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to such common shares. However, if a U.S. Holder does not make a Mark-to-Market Election beginning in the first tax year of such U.S. Holder’s holding period for the common shares for which the Company is a PFIC and such U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, the common shares.

 

A U.S. Holder that makes a Mark-to-Market Election will include in ordinary income, for each tax year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the common shares, as of the close of such tax year over (b) such U.S. Holder’s adjusted tax basis in such common shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the excess, if any, of (a) such U.S. Holder’s adjusted tax basis in the common shares, over (b) the fair market value of such common shares (but only to the extent of the net amount of previously included income as a result of the Mark-to-Market Election for prior tax years).

 

A U.S. Holder that makes a Mark-to-Market Election generally also will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in gross income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition of common shares, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary income or ordinary loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior tax years over (b) the amount allowed as a deduction because of such Mark-to-Market Election for prior tax years). Losses that exceed this limitation are subject to the rules generally applicable to losses provided in the Code and Treasury Regulations.

 

A U.S. Holder makes a Mark-to-Market Election by attaching a completed IRS Form 8621 to a timely filed United States federal income tax return. A Mark-to-Market Election applies to the tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless the common shares cease to be “marketable stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisors regarding the availability of, and procedure for making, a Mark-to-Market Election.

 

Although a U.S. Holder may be eligible to make a Mark-to-Market Election with respect to the common shares, no such election may be made with respect to the stock of any Subsidiary PFIC that a U.S. Holder is treated as owning, because such stock is not marketable. Hence, the Mark-to-Market Election will not be effective to avoid the application of the default rules of Section 1291 of the Code described above with respect to deemed dispositions of Subsidiary PFIC stock or excess distributions from a Subsidiary PFIC to its shareholder.

 

Other PFIC Rules

 

Under Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations that, subject to certain exceptions, would cause a U.S. Holder that had not made a timely QEF Election to recognize gain (but not loss) upon certain transfers of common shares that would otherwise be tax-deferred (e.g., gifts and exchanges pursuant to corporate reorganizations). However, the specific U.S. federal income tax consequences to a U.S. Holder may vary based on the manner in which common shares are transferred.

 

Certain additional adverse rules may apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For example, under Section 1298(b)(6) of the Code, a U.S. Holder that uses common shares as security for a loan will, except as may be provided in Treasury Regulations, be treated as having made a taxable disposition of such common shares.

 

Special rules also apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to such special rules, foreign taxes paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. The rules relating to distributions by a PFIC and their eligibility for the foreign tax credit are complicated, and a U.S. Holder should consult with its own tax advisors regarding the availability of the foreign tax credit with respect to distributions by a PFIC.

 

The PFIC rules are complex, and each U.S. Holder should consult its own tax advisors regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares.

 

 

 

 

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General Rules Applicable to the Ownership and Disposition of Common Shares

 

The following discussion describes the general rules applicable to the ownership and disposition of the common shares but is subject in its entirety to the special rules described above under the heading “Passive Foreign Investment Company Rules.”

 

Distributions on Common Shares

 

A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a common share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current and accumulated “earnings and profits” of the Company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates if the Company is a PFIC for the tax year of such distribution or the preceding tax year. To the extent that a distribution exceeds the current and accumulated “earnings and profits” of the Company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in the common shares and thereafter as gain from the sale or exchange of such common shares. (See “Sale or Other Taxable Disposition of Common Shares” below). However, the Company may not maintain the calculations of its earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder may have to assume that any distribution by the Company with respect to the common shares will constitute ordinary dividend income. Dividends received on common shares by corporate U.S. Holders generally will not be eligible for the “dividends received deduction.” Subject to applicable limitations and provided the Company is eligible for the benefits of the Canada-U.S. Tax Convention, dividends paid by the Company to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that the Company not be classified as a PFIC in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisors regarding the application of such rules.

 

Sale or Other Taxable Disposition of Common Shares

 

Upon the sale or other taxable disposition of common shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the U.S. dollar value of cash received plus the fair market value of any property received and such U.S. Holder's tax basis in such common shares sold or otherwise disposed of. A U.S. Holder’s tax basis in common shares generally will be such holder’s U.S. dollar cost for such common shares. Gain or loss recognized on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition, the common shares have been held for more than one year.

 

Preferential tax rates currently apply to long-term capital gain of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.

 

Additional Considerations

 

Additional Tax on Passive Income

 

Certain U.S. Holders that are individuals, estates or trusts (other than trusts that are exempt from tax) will be subject to a 3.8% tax on all or a portion of their “net investment income,” which includes dividends on the common shares and net gains from the disposition of the common shares. Further, excess distributions treated as dividends, gains treated as excess distributions under the PFIC rules discussed above, and mark-to-market inclusions and deductions are all included in the calculation of net investment income.

 

Treasury Regulations provide, subject to the election described in the following paragraph, that solely for purposes of this additional tax, that distributions of previously taxed income will be treated as dividends and included in net investment income subject to the additional 3.8% tax. Additionally, to determine the amount of any capital gain from the sale or other taxable disposition of common shares that will be subject to the additional tax on net investment income, a U.S. Holder who has made a QEF Election will be required to recalculate its basis in the common shares excluding QEF basis adjustments.

 

 

 

 

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 Alternatively, a U.S. Holder may make an election which will be effective with respect to all interests in controlled foreign corporations and QEFs held in that year or acquired in future years. Under this election, a U.S. Holder pays the additional 3.8% tax on QEF income inclusions and on gains calculated after giving effect to related tax basis adjustments. U.S. Holders that are individuals, estates or trusts should consult their own tax advisors regarding the applicability of this tax to any of their income or gains in respect of the common shares.

 

Receipt of Foreign Currency

 

The amount of any distribution paid to a U.S. Holder in foreign currency, or on the sale, exchange or other taxable disposition of common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). A U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who converts or otherwise disposes of the foreign currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method. Each U.S. Holder should consult its own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.

 

Foreign Tax Credit

 

Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income that is subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year.

 

Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” Generally, dividends paid by a foreign corporation should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S. Holder should be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty, and if an election is properly made under the Code. However, the amount of a distribution with respect to the common shares that is treated as a “dividend” may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately with respect to specific categories of income. The foreign tax credit rules are complex, and each U.S. Holder should consult its own U.S. tax advisors regarding the foreign tax credit rules.

 

Backup Withholding and Information Reporting

 

Under U.S. federal income tax law, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on individuals who are U.S. Holders that hold certain specified foreign financial assets in excess of certain thresholds. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U.S. Holders may be subject to these reporting requirements unless their common shares are held in an account at certain financial institutions. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should consult with their own tax advisors regarding the requirements of filing information returns, including the requirement to file an IRS Form 8938.

 

Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, common shares will generally be subject to information reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons generally are excluded from these information reporting and backup withholding rules. Backup withholding is not an additional tax. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner.

 

 

 

 

111

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The discussion of reporting requirements set forth above is not intended to constitute a complete description of all reporting requirements that may apply to a U.S. Holder. A failure to satisfy certain reporting requirements may result in an extension of the time period during which the IRS can assess a tax and, under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied reporting requirement. Each U.S. Holder should consult its own tax advisors regarding the information reporting and backup withholding rules.

 

THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSIDERATIONS APPLICABLE TO U.S. HOLDERS WITH RESPECT TO THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF COMMON SHARES. U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSIDERATIONS APPLICABLE TO THEM IN THEIR OWN PARTICULAR CIRCUMSTANCES

 

F. Dividends and Paying Agents

 

Not applicable.

 

G. Statements by Experts

 

Not applicable.

 

H. Documents on Display

 

For further information with respect to the Company, you are referred to the filings the Company has made with the SEC. Statements contained in this Annual Report concerning the contents of any contract, or any other document, are not necessarily complete. If a contract or document has been filed as an exhibit to any filing the Company has made with the SEC, you are referred to the copy of the contract or document that has been filed. Each statement in this Annual Report relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The Company is subject to certain of the informational requirements of the Securities Exchange Act of 1934 and, in accordance with the Exchange Act, files reports and other information with the SEC. The Company’s registration statements, including the exhibits and schedules thereto, and such reports and other information, can be inspected and copied at the following public reference facility maintained by the SEC:

 

100 F Street, N.W. Room 1580

Washington, DC  20549

 

Copies of these materials can also be obtained by mail at prescribed rates. You may also call the SEC at 1-800-SEC-0330. The SEC maintains a website that contains registration statements, reports and other information regarding registrants that file electronically with the SEC at http://www.sec.gov.

 

I. Subsidiary Information

 

See Item 4.C for information regarding the Company’s subsidiaries.

 

 

 

 

112

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Financial Instruments

 

Financial assets are initially recorded at fair value and designated upon inception into one of the following four categories: held-to-maturity, available-for-sale, loans and receivables or at fair value through profit or loss (“FVTPL”).

 

Financial assets classified as loans and receivables are measured at amortized cost less impairment. The Company has classified its other receivables as loans and receivables.

 

Financial assets classified as FVTPL are measured at fair value with unrealized gains and losses recognized through earnings. The Company has classified its cash and cash equivalents, short-term investments, marketable securities and other long-term assets as FVTPL. The Company designated its marketable securities as FVTPL upon initial recognition in accordance with an investment strategy that management uses to evaluate performance on a fair value basis.

 

Financial assets classified as held-to-maturity are measured at amortized cost. The Company has no financial assets classified as held-to-maturity.

 

Financial assets classified as available-for-sale are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss) except for losses in value that are considered other than temporary. The Company has no financial assets classified as available-for-sale.

 

Transaction costs associated with FVTPL financial assets are expensed as incurred, while transaction costs associated with all other financial assets are included in the initial carrying amount of the asset.

 

Financial liabilities are initially recorded at fair value and designated upon inception as FVTPL or classified as other financial liabilities.

 

Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. Subsequently, they are measured at amortized cost using the effective interest method. The Company has classified its accounts payable and accrued liabilities as other financial liabilities.

 

Financial liabilities classified as FVTPL include financial liabilities held-for-trading and financial liabilities designated upon initial recognition as FVTPL. Fair value changes on financial liabilities classified as FVTPL are recognized through the consolidated statement of comprehensive income or loss. The Company has no financial liabilities classified as FVTPL.

 

Categories of financial instruments

 

			December 31, 2014				December 31, 2013
Cash and cash equivalents	FVTPL		$	8,792			$	8,376
Short-term investments	FVTPL			5,023				2,005
Marketable securities	FVTPL			450				1,328
Other receivables	Loans and receivables			368				324
Other long-term assets	FVTPL			525				739
Accounts payable	Other financial liabilities			(1,303	)			(917	)
Accrued and other liabilities	Other financial liabilities			(837	)			(707	)

All financial instruments above, except marketable securities which is classified under the Level 3 fair value hierarchy; other financial liabilities; and loans and receivables, are classified under the Level 1 fair value hierarchy.

 

 

 

 

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Level 3 Fair Value: Marketable Securities

 

As set out in note 6 of the Company’s Audited Consolidated Financial Statements for the years ending December 31, 2014 and 2013, the Company holds 12,573,380 shares in VGM. As of June 30, 2014, VGM de-listed from the AIM. The investment is classified as at December 31, 2014 at a level 3 hierarchy (2013 - level 1 hierarchy) as a result of de-listing.

 

The valuation is based on comparable companies’ share price performance. A decrease or increase in the average share price of 5% would result in a decrease or increase in the value of VGM of $22,500.

 

Interest rate risk

 

Included in the loss for the year ended December 31, 2014, is investment income on the Company’s cash and cash equivalents and short-term investments. If interest rates had been 100 basis points (1%) lower or higher than net income or loss would have been approximately $112,000 higher or lower. The Company does not have any debt obligations which expose it to interest rate risk.

 

Foreign currency risk

 

The Company holds marketable securities denominated in U.K. pounds sterling. Based upon the marketable securities held at December 31, 2014, and assuming no changes in number of shares or stock price, for every $0.01 fluctuation in exchange rate between the Canadian dollar and U.K. pound sterling, the Company’s net income or loss would be $2,000 higher or lower.

 

Credit risk

 

The Company considers that the following financial assets are exposed to credit risk: cash and cash equivalents, short-term investments, marketable securities and other long-term assets. The total value of these items at December 31, 2014 is $14,790,000 (December 31, 2013 - $12,448,000). Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company does not currently generate any revenues from sales to customers nor does it hold derivative type instruments that would require a counterparty to fulfil a contractual obligation resulting in a credit risk. The Company has never held any asset-backed paper instruments. The Company seeks to place its cash and cash equivalents, short-term investments and restricted cash with reputable financial institutions. At December 31, 2014, the Company’s cash and cash equivalents, short-term investments and restricted cash were invested with three financial institutions.

 

Liquidity risk

 

Liquidity risk encompasses the risk that the Company cannot meet its financial obligations as they fall due. As at December 31, 2014, the Company had positive working capital of $12,353,000 (December 31, 2013 - $10,617,000). Given positive working capital, the Company believes it will be able to meet its current obligations. However, the Company will require significant additional funding in the future in order to complete the development of the Prairie Creek Mine site and bring the mine into production. Accordingly, there is a risk that the Company may not be able to secure adequate funding on reasonable terms, or at all, at that future date.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Not applicable.

 

 

 

 

114

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PART II

 

 

ITEM 13. DEFAULTS, DIVIDEND ARREARS AND DELINQUENCIES

 

There has not been a material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within thirty days, relating to indebtedness of the Company or any of its significant subsidiaries. There are no payments of dividends by the Company in arrears, nor has there been any other material delinquency relating to any class of preference shares of the Company.

 

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

A to D.

 

None.

 

E. Use of Proceeds

 

Not applicable.

 

 

ITEM 15. CONTROLS AND PROCEDURES

 

A. Disclosure Controls and Procedures

 

The Company’s disclosure controls and procedures are designed to provide reasonable assurance that material items requiring disclosure by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislations is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by the Company in its annual filing, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Based on current securities legislation in Canada and the United States, the CEO and the CFO of the Company have evaluated the design and effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of December 31, 2014, and have concluded that such disclosure controls and procedures were operating effectively at that date.

 

It should be noted that, while the Company’s CEO and CFO believe that the Company’s disclosure controls and procedures provide a reasonable level of assurance and that they are effective, they do not expect that the disclosure controls and procedures can prevent all errors or mistakes. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

B. Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for designing, establishing and maintaining a system of internal controls over financial reporting to provide reasonable assurance that the financial information prepared by the Company for external purposes is reliable and has been recorded, processed and reported in an accurate and timely manner in accordance with IFRS.

 

The Board is responsible for ensuring that management fulfills its responsibilities. The Audit Committee fulfills its role of ensuring the integrity of the reported information through its review of the interim and annual consolidated financial statements.

 

 

 

 

115

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There are inherent limitations in the effectiveness of internal controls over financial reporting, including the possibility that misstatements may not be prevented or detected. Accordingly, even effective internal controls over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation. Furthermore, the effectiveness of internal controls can change with circumstances. The Company has paid particular attention to segregation of duties matters surrounding its internal controls over financial reporting as the Company has only limited staff resources at the present time such that “ideal” segregation of duties is not feasible. This risk is dealt with by management identified compensating controls such as Board oversight or senior management review where appropriate. At the present time, the Company does not anticipate hiring additional accounting or administrative staff as this is not considered necessary or practical and accordingly, will continue to rely on review procedures to detect potential misstatements in reporting of material to the public.

 

The CEO and the CFO have evaluated the design and effectiveness of internal controls over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 Framework). Based on this evaluation, as at December 31, 2014, the Company believes that its internal controls over financial reporting were designed and operating effectively to provide reasonable, but not absolute, assurance that the objectives of the control system are met.

 

The Company’s management, including the CEO and CFO, believe that any internal controls over financial reporting, including those systems determined to be effective and no matter how well conceived and operated, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met with respect to consolidated financial statement preparation and presentation. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

 

The registered public accounting firm that audited the financial statements included in this Annual Report has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting.

 

C. Attestation Report of Registered Public Accounting Firm

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, has been audited by the Company’s independent registered public accounting firm, Ernst & Young LLP. Ernst & Young LLP has expressed an unqualified opinion on the Company’s internal control over financial reporting as of December 31, 2014, and their report is included with the Company’s consolidated financial statements. Ernst & Young LLP has also audited the Company’s consolidated financial statements for the year ended December 31, 2014, and has expressed an unqualified opinion thereon.

 

D. Changes in Internal Control Over Financial Reporting

 

Based upon their evaluation of the Company’s internal control over financial reporting, the Company’s CEO and CFO have concluded that, there were no significant changes in the Company’s internal control over financial reporting or in other factors during the company’s last fiscal year that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

116

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ITEM 16. [RESERVED]

 

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

 

The Board has determined that at least one member of the Company’s Audit Committee, Brian Atkins, an independent director of the Company pursuant to the criteria set out in the NYSE MKT Company Guide, possesses the educational and professional qualifications as well as the experience to qualify as an “Audit Committee Financial Expert” as defined in Item 16A of Form 20-F. In addition, the Company believes that the other members of the Audit Committee are capable of analyzing and evaluating the financial statements and understanding internal controls and procedures for financial reporting.

 

 

ITEM 16B. CODE OF ETHICS

 

The Company has adopted a Code of Business Conduct and Ethics that applies to all directors, senior officers and employees of the Company.

 

Shareholders may request a copy of the Code of Ethics by written request directed to Canadian Zinc Corporation, Suite 1710, 650 West Georgia Street, PO Box 11644, Vancouver, British Columbia, Canada V6B 4N9 or by reference to the Company’s website – www.canadianzinc.com .

 

There have been no waivers or amendments to the Code of Ethics during the year ended December 31, 2014.

 

 

ITEM 16C. PRINCIPAL ACCOUNTANT AND FEES AND SERVICES

 

The aggregate amounts billed by auditors for the two fiscal years ended December 31, 2014 and 2013 for audit fees, audit related fees, tax fees and all other fees are set forth below:

 

		Year Ended December 31, 2014 (4)				Year Ended December 31, 2013
Audit Fees (1)		$	140,000			$	130,000
Audit-Related Fees (2)			50,000				30,000
Tax Fees (3)			-				30,000
All Other Fees			-				58,000
Total		$	190,000			$	248,000

(1) “Audit Fees” represent fees for the audit of the annual consolidated financial statements, and review in connection with the statutory and regulatory filings.

(2) “Audit Related Fees” represent fees for assurance and related services that are related to the performance of the audit.

(3) “Tax Fees” represent fees for tax compliance, tax advice and planning.

(4) Fees for the year ended December 31, 2014, are based, in part, upon estimates received by Canadian Zinc as final invoices are yet to be rendered as of the date of this Annual Report.

 

 

ITEM 16D. EXEMPTIONS FROM THE LISTINGS STANDARDS FOR AUDIT COMMITTEES

 

Not applicable.

 

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

Not applicable.

 

 

 

 

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ITEM 16F. CHANGE IN REGISTRANTS’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

 

ITEM 16G. CORPORATE GOVERNANCE

 

Not applicable.

 

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.

PART III

 

 

ITEM 17. FINANCIAL STATEMENTS

 

Not applicable.

 

 

ITEM 18. FINANCIAL STATEMENTS

 

See Financial Statements and Exhibits listed in Item 19 hereof and filed as part of this Annual Report.

 

 

ITEM 19. EXHIBITS

 

Financial Statements

 

F-1           [Audit Report]

 

F-2           [Financial Statements]

 

 

 

 

118

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Exhibit Number	Description of Document
1.1	Notice of Articles (of Incorporation) (1)
1.2	Articles (Bylaws) (2)
4.1	Form of Option Commitment (Senior Officers) dated October 15, 2007 to acquire common shares under the Company’s Stock Option Plan. (3)
4.2	Form of Option Commitment (Directors and Senior Officers) dated March 27, 2009 to acquire common shares under the Company’s Stock Option Plan. (4)
4.3	Employment Agreement between the Company and Alan Taylor dated January 1, 2010. (5)
4.4	Employment Agreement between the Company and Trevor Cunningham dated January 17, 2011. (6)
4.5	2012 Fixed Stock Option Plan.
4.6	Deferred Share Unit Plan.
4.7	Restricted Share Unit Plan.
4.8	Warrant Indenture dated as July 31, 2014.
4.9	Base Metal and Precious Metal Net Smelter Returns Royalties Agreement dated May 31, 2013.
4.10	Arrangement Agreement among the Company, Messina Minerals Inc. and 0980829 B.C. Ltd. Dated as of October 21, 2013.
4.11	Underwriting Agreement dated July 15, 2014.
12.1	Certification of President pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
12.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
13.1	Certification of President Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to 906 of the Sarbanes-Oxley Act of 2002.

(1)

Previously filed as exhibit 1.A to the Company’s 20-F annual report filed on July 26, 2005.

(2)

Previously filed as exhibit 1.B to the Company’s 20-F annual report filed on July 26, 2005.

(3)

Previously filed as exhibit 4.5 to the Company’s 20-F annual report filed on April 11, 2008.

(4)

Previously filed as exhibit 4.6 to the Company’s 20-F annual report filed on May 27, 2009.

(5)

Previously filed as exhibit 4.7 to the Company’s 20-F annual report filed on May 13, 2010.

(6)

Previously filed as exhibit 4.8 to the Company’s 20-F annual report filed on May 2, 2011.

 

 

 

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Annual Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in thousands of Canadian dollars, unless otherwise stated)

 

 

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INDEPENDENT AUDITORS’ REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Canadian Zinc Corporation

We have audited the accompanying consolidated financial statements of Canadian Zinc Corporation, which comprise the consolidated statements of financial position as at December 31, 2014 and 2013, and the consolidated statements of comprehensive loss, cash flows and changes in shareholders’ equity for the years ended December 31, 2014, 2013 and 2012, and a summary of significant accounting policies and other explanatory information.

 

Management's responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Canadian Zinc Corporation as at December 31, 2014 and 2013, and its financial performance and its cash flows for the years ended December 31, 2014, 2013 and 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

Other matter

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Canadian Zinc Corporation's internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 31, 2015 expressed an unqualified opinion on Canadian Zinc Corporation’s internal control over financial reporting.

Vancouver, Canada	/s/ Ernst & Young LLP
March 31, 2015	Chartered Accountants

 

 

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Independent Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Canadian Zinc Corporation

We have audited Canadian Zinc Corporation’s [the “Company”] internal control over financial reporting as at December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) [the “COSO criteria”]. The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria .

We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position as at December 31, 2014 and 2013, and the consolidated statements of comprehensive loss, cash flows and changes in shareholders’ equity for the years ended December 31, 2014, 2013 and 2012 of the Company and our report dated March 31, 2015 expressed an unqualified opinion thereon.

Vancouver, Canada	/s/ Ernst & Young LLP
March 31, 2015	Chartered Accountants

 

 

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CANADIAN ZINC CORPORATION

Consolidated Statement of Financial Position

(Expressed in thousands of Canadian dollars, unless otherwise stated)

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Balance Sheet

		December 31, 2014				December 31, 2013
ASSETS
Current
Cash and cash equivalents (Note 4)		$	8,792			$	8,376
Short-term investments (Note 5)			5,023				2,005
Marketable securities (Note 6)			450				1,328
Other receivables and prepaid expenses			699				532
Total Current Assets			14,964				12,241
Other long-term assets (Note 7)			525				739
Property, plant and equipment (Note 8)			782				860
Exploration and evaluation assets (Note 9)			5,628				5,432
Total Assets		$	21,899			$	19,272
LIABILITIES
Current
Accounts payable		$	1,303			$	917
Accrued and other liabilities			837				707
Flow-through share premium (Note 11 and 14)			471				-
Total Current Liabilities			2,611				1,624
Decommissioning liability (Note 10)			2,243				1,963
Total Liabilities			4,854				3,587
SHAREHOLDERS' EQUITY
Share capital (Note 11)			104,028				91,823
Reserves (Note 12)			14,270				12,681
Deficit			(101,253	)			(88,819	)
Total Shareholders’ Equity			17,045				15,685
Total Liabilities and Shareholders’ Equity		$	21,899			$	19,272
Commitments (Note 20)

Approved by the Board of Directors:
	“John F. Kearney”		“Brian A. Atkins, CPA, CA”
	Director		Director

The accompanying notes are an integral part of these consolidated financial statements.

 

1

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CANADIAN ZINC CORPORATION

Consolidated Statement of Comprehensive Loss

(Expressed in thousands of Canadian dollars, except for share information)

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Income Statement

						Year ended December 31,
		2014				2013				2012
Income
Investment income		$	169			$	106			$	164
Expenses
Depreciation			8				8				16
Exploration and evaluation (Note 13)			9,996				6,089				9,125
Listing and regulatory			58				65				67
Management and directors			850				1,278				673
Office and general			604				569				586
Professional			298				374				329
Project evaluation			-				15				34
Shareholder and investor communications			416				440				542
Share-based compensation (Note 12 (a))			23				120				107
			12,253				8,958				11,479
Other income (expenses)
Loss on marketable securities (Note 6)			(878	)			(3,626	)			(8,804	)
Gain on sale of NSR (Note 9)			-				5,439				-
Finance costs (Note 10)			(60	)			(49	)			(46	)
Gain on changes to decommissioning liability (Note 10)			-				177				-
Tax deduction recovery (Note 14)			588				-				295
			(350	)			1,941				(8,555	)
Net loss for the year			(12,434	)			(6,911	)			(19,870	)
Other comprehensive income (loss)			-				-				-
Comprehensive loss for the year		$	(12,434	)		$	(6,911	)		$	(19,870	)
Net loss per share - basic and diluted		$	(0.06	)		$	(0.04	)		$	(0.13	)
Weighted average number of shares outstanding
Basic and diluted			192,465,968				166,539,368				157,936,692

The accompanying notes are an integral part of these consolidated financial statements.

 

2

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CANADIAN ZINC CORPORATION

Consolidated Statement of Cash Flows

(Expressed in thousands of Canadian dollars, unless otherwise stated)

---

Cash Flows

						Year ended December 31,
		2014				2013				2012
Operating Activities
Net loss for the year		$	(12,434	)		$	(6,911	)		$	(19,870	)
Adjustment for items not involving cash:
Accretion and depreciation			154				173				216
Loss on marketable securities (Note 6)			878				3,626				8,804
Share-based compensation			23				120				107
Gain on sale of NSR (Note 9)			-				(5,439	)			-
Gain on changes to decommissioning liability (Note 10)			-				(177	)			-
Tax deduction recovery (Note 14)			(588	)			-				(295	)
Change in non-cash working capital items:											-
Other receivables and prepaid expenses			24				(154	)			(233	)
Accounts payable and accrued liabilities			540				(128	)			743
			(11,403	)			(8,890	)			(10,528	)
Financing Activities
Capital stock issued			15,751				4,005				9,119
Issuance costs			(1,278	)			(304	)			(883	)
Proceeds on exercise of options or warrants			357				46				2
			14,830				3,747				8,238
Investing Activities
Short-term investments (Note 5)			(2,995	)			3,453				(51	)
Marketable securities (Note 6)			-				-				14
Property, plant and equipment (Note 8)			(16	)			(13	)			(183	)
Sale of NSR (Note 9)			-				10,271				-
Exploration and evaluation assets (Note 9)			-				(416	)			(411	)
Government grants (Note 15)			-				-				170
			(3,011	)			13,295				(461	)
Net change in cash and cash equivalents		$	416			$	8,152			$	(2,751	)
Cash and cash equivalents, beginning of year		$	8,376			$	224			$	2,975
Net change in cash and cash equivalents			416				8,152				(2,751	)
Cash and cash equivalents , end of year		$	8,792			$	8,376			$	224

The accompanying notes are an integral part of these consolidated financial statements.

 

3

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CANADIAN ZINC CORPORATION

Consolidated Statement of Changes in Shareholders’ Equity

(Expressed in thousands of Canadian dollars, except for share information)

---

Shareholders’ Equity

						Common shares
		Number				Amount				Reserves				Deficit				Total
Balance, December 31, 2011			143,109,112			$	77,052			$	10,750			$	(62,038	)		$	25,764
Issue of shares at $0.67 per share			13,610,000				9,119				-				-				9,119
Share issuance costs			-				(761	)			-				-				(761	)
Share purchase warrants			-				(1,560	)			1,560				-				-
Paragon Minerals Acquisition			7,299,019				3,394				-				-				3,394
Options and warrants converted upon Paragon acquisition			-				-				53				-				53
Exploration and evaluation asset acquisition (Note 11)			9,520				4				-				-				4
Exercise of warrants at $0.40 per share			4,130				2				-				-				2
Share-based compensation			-				-				107				-				107
Net loss for the year			-				-				-				(19,870	)			(19,870	)
Balance, December 31, 2012			164,031,781			$	87,250			$	12,470			$	(81,908	)		$	17,812
Issue of shares at $0.62 per share			6,460,000				4,005				-				-				4,005
Share issuance costs			-				(304	)			-				-				(304	)
Share purchase warrants			-				(92	)			92				-				-
Exercise of options at $0.23 per share			200,000				66				(20	)			-				46
Messina Minerals Acquisition (Note 3)			2,132,714				896				-				-				896
Options and warrants converted upon Messina acquisition			-				-				19				-				19
Exploration and evaluation asset acquisition (Note 11)			4,080				2				-				-				2
Share-based compensation			-				-				120				-				120
Net loss for the year			-				-				-				(6,911	)			(6,911	)
Balance, December 31, 2013			172,828,575				91,823				12,681				(88,819	)			15,685
Issue of shares at $0.35 per share			28,572,000				10,000				-				-				10,000
Issue of shares at $0.38 per share			15,134,000				4,692				-				-				4,692
Share issuance costs			-				(1,278	)			-				-				(1,278	)
Share purchase warrants			-				(1,723	)			1,723				-				-
Exercise of options between $0.23 and $0.30 per share			1,513,134				514				(157	)			-				357
Share-based compensation			-				-				23				-				23
Net loss for the year			-				-				-				(12,434	)			(12,434	)
Balance, December 31, 2014			218,047,709			$	104,028			$	14,270			$	(101,253	)		$	17,045

The accompanying notes are an integral part of these consolidated financial statements.

 

4

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

1. Nature of Operations and Going Concern

Canadian Zinc Corporation (the “Company” or “Canadian Zinc”) is incorporated under the laws of the Province of British Columbia, Canada, and its principal business activity is the exploration and development of natural resource properties. The address of the Company’s registered office is Suite 1710, 650 West Georgia Street, PO Box 11644, Vancouver, British Columbia, Canada, V6B 4N9. The Company currently exists under the Business Corporations Act (British Columbia) and its common shares are listed on the Toronto Stock Exchange (“TSX”) under the symbol “CZN” and on the OTCQB under the symbol “CZICF”.

The Company is primarily engaged in the exploration, development and permitting of its mineral properties. The Company is considered to be in the exploration and development stage given that its mineral properties are not yet in production and, to date, have not earned any significant revenues. The recoverability of amounts shown for exploration and evaluation assets is dependent on the existence of economically recoverable reserves, obtaining and maintaining the necessary permits to operate a mine, obtaining the financing to complete development and future profitable production.

These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes that the Company will realize its assets and discharge its liabilities in the normal course of business. Management has carried out an assessment of the going concern assumption and has concluded that the Company has sufficient cash and cash equivalents, short-term investments and marketable securities (as well as no debt obligations outside of normal course accounts payable and accrued liabilities) to continue operating for the ensuing twelve months. These consolidated financial statements do not give effect to any adjustment which would be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different than those reflected in the consolidated financial statements.

2. Significant Accounting Policies

(a)

Statement of Compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and were approved and authorized for issue by the Board of Directors on March 30, 2015.

(b)

Basis of Preparation and Consolidation

These consolidated financial statements have been prepared on a historical cost basis except for financial instruments classified as fair value through profit and loss which are stated at their fair value. These audited consolidated financial statements are presented in Canadian dollars and have been prepared on the basis of IFRS standards that are effective on December 31, 2014. The accounting policies chosen by the Company have been applied consistently to all periods presented.

These consolidated financial statements include the accounts of Canadian Zinc Corporation and its wholly-owned subsidiaries Paragon Minerals Corporation (“Paragon”) and Messina Minerals Inc. (“Messina”), collectively the group. Subsidiaries are consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealized gains and losses resulting from intra-group transactions and dividends are eliminated in full.

 

5

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

2. Significant Accounting Policies (continued)

(c)

Significant Accounting Judgments, Estimates and Assumptions

The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.

i.

Company acquisitions: Identifying a purchase transaction as being a business combination or an asset purchase requires judgment regarding whether the set of assets acquired and liabilities assumed constitutes a business based on the particular circumstances.

ii.

Exploration and evaluation: Significant judgment is required when determining whether facts and circumstances suggest that the carrying amount of exploration and evaluation assets may exceed its recoverable amount. Significant judgment must be exercised in determining when a project of the Company moves from the exploration and evaluation phase and into the development phase. The existence and extent of proven or probable mineral reserves; retention of regulatory permits and licences; the availability of development financing; current and future metal prices; and market sentiment are all factors considered by the Company. Accordingly, the Company having not secured development financing has deemed all projects to be in the exploration and evaluation phase.

The valuation of the gain of $5,439,000 on the sale of net smelter returns royalty is subject to several judgments and estimates, in particular the valuation of the option to repurchase the net smelter returns royalty. Taking into consideration current market conditions the Company has recorded a value of $nil to this repurchase option (see Note 9).

iii.

Decommissioning liability: Decommissioning liabilities are recognized in the period in which they arise and are stated at the best estimate of the present value of estimated future costs. These estimates require extensive judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations and remediation practices. Recording a provision for security deposits is subject to significant judgment as to the amount and timing of the required posting of security (see Note 10).

iv.

Marketable securities: The Company measures the fair value of marketable securities not listed on a public stock exchange as a level 3 input under the fair value hierarchy using unobservable inputs for the asset including, but not limited to, risk and the performance of gold commodities and similar gold producing companies. The fair value measurement objective is to value an exit price at the measurement date from the perspective of a market participant that holds the asset and involves significant judgment. There is no assurance that the fair value assigned will be realized at any future date.

v.

Share-based compensation: The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 12.

 

6

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

2. Significant Accounting Policies (continued)

(d)

Financial Assets

Financial assets are initially recorded at fair value and designated upon inception into one of the following four categories: held-to-maturity, available-for-sale, loans and receivables or at fair value through profit or loss (“FVTPL”).

Financial assets classified as loans and receivables are measured at amortized cost less impairment. The Company has classified its other receivables as loans and receivables.

Financial assets classified as FVTPL are measured at fair value with unrealized gains and losses recognized through earnings. The Company has classified its cash and cash equivalents, short-term investments, marketable securities, and other long-term assets as FVTPL. The Company designated its marketable securities as FVTPL upon initial recognition in accordance with an investment strategy that management uses to evaluate performance on a fair value basis.

Financial assets classified as held-to-maturity are measured at amortized cost. The Company has no financial assets classified as held-to-maturity.

Financial assets classified as available-for-sale are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss) except for losses in value that are considered other than temporary. The Company has no financial assets classified as available-for-sale.

Transaction costs associated with FVTPL financial assets are expensed as incurred, while transaction costs associated with all other financial assets are included in the initial carrying amount of the asset.

(e)

Impairment of Non-Financial Assets

The Company assesses at each date of the consolidated statement of financial position the carrying amounts of non-financial assets to determine whether there is an indication that those assets have suffered an impairment loss. If such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the assets belong.

Recoverable amount is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments for the time value of money and risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated statement of comprehensive income or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized.

 

7

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

2. Significant Accounting Policies (continued)

(f)

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and liquid investments which are readily convertible into cash with maturities of three months or less when purchased.

(g)

Short-term Investments

Short-term investments, which consist primarily of investments in Bankers Acceptances and Guaranteed Investment Certificates, are investments with maturities of more than three months and less than one year when purchased.

(h)

Marketable Securities

Marketable securities are recorded at their fair market value on the date of acquisition and are classified as FVTPL. The carrying value of the securities is adjusted at each subsequent reporting period to the then fair value (based upon the market bid price and the Bank of Canada quoted exchange rate if applicable) with the resulting unrealized gains or losses included in comprehensive income or loss for the period. Transaction costs relating to the purchase of marketable securities are expensed directly to comprehensive income or loss.

(i)

Foreign Currency Transactions

The Company’s reporting currency and the functional currency of all of its operations is the Canadian dollar as this is the principal currency of the economic environment in which the Company operates. Foreign currency transactions are translated at the rate in effect when the transactions occur. Monetary assets and liabilities denominated in a foreign currency (if any) are translated at the rate in effect at the reporting period date.

(j)

Property, Plant and Equipment (“PPE”)

PPE is stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided on a declining-balance basis, less the estimated residual value, at the following annual rates:

Mining equipment	30%
Office equipment	20%

Buildings and leasehold improvements are recorded at cost, net of accumulated depreciation. Depreciation on buildings and leasehold improvements are provided on a straight-line basis over the life of the asset.

Amortization of the Prairie Creek plant and mill will be based on the unit-of-production method based upon estimated proven and probable reserves.

(k)

Exploration and Evaluation Assets

Exploration and evaluation assets include acquired mineral use rights for mineral property held by the Company. The amount of consideration paid (in cash or share value) for mineral use rights is capitalized. The amounts shown for exploration and evaluation assets represent costs of acquisition incurred to date, less recoveries, and do not necessarily reflect present or future values. These costs will be amortized against revenue from future production or written off if the exploration and evaluation assets are abandoned or sold. Included in the cost of exploration and evaluation assets is the cost of the estimated decommissioning liability. The Company has classified exploration and evaluation assets as intangible in nature. Depletion of costs capitalized on projects put into commercial production will be recorded using the unit-of-production method based upon estimated proven and probable reserves. The Company recognizes, in income, costs recovered on exploration and evaluation assets when amounts received or receivable are in excess of the carrying amount of the corresponding asset.

Ownership in exploration and evaluation assets involves certain inherent risks, including geological, metal prices, operating costs, and permitting risks. Many of these risks are outside the Company’s control. The ultimate recoverability of the amounts capitalized for the exploration and evaluation assets is dependent upon the delineation of economically recoverable ore reserves, obtaining the necessary financing to complete their development, obtaining the necessary permits to operate a mine, and realizing profitable production or proceeds from the disposition thereof. Management’s estimates of recoverability of the Company’s investment in exploration and evaluation assets have been based on current and expected conditions. However, it is possible that changes could occur which could adversely affect management’s estimates and may result in future write downs of exploration and evaluation assets carrying values.

 

8

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

 

2. Significant Accounting Policies (continued)

(l)

Financial Liabilities

Financial liabilities are initially recorded at fair value and designated upon inception as FVTPL or classified as other financial liabilities.

Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. Subsequently, they are measured at amortized cost using the effective interest method. The Company has classified its accounts payable and accrued liabilities as other financial liabilities.

Financial liabilities classified as FVTPL include financial liabilities held-for-trading and financial liabilities designated upon initial recognition as FVTPL. Fair value changes on financial liabilities classified as FVTPL are recognized through the consolidated statement of comprehensive income or loss. The Company has no financial liabilities classified as FVTPL.

(m)

Decommissioning, Restoration and Similar Liabilities

The Company recognizes liabilities for statutory, contractual, constructive or legal obligations, including those associated with the reclamation of exploration and evaluation assets and PPE, when those obligations result from the acquisition, construction, development or normal operation of the assets. Initially, a provision for a decommissioning liability is recognized at its present value in the period in which it is incurred, which is generally when an environmental disturbance occurs or a constructive obligation is determined. Upon initial recognition of the liability, a corresponding amount is added to the carrying amount of the related asset and the cost is amortized as an expense over the economic life of the asset using the unit-of-production method. Following the initial recognition of a decommissioning liability, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the current market-based discount rate and the amount or timing of the underlying cash flows needed to settle the obligation. Changes to estimated future costs are recognized in the consolidated statement of financial position by either increasing or decreasing the decommissioning liability and the decommissioning asset.

(n)

Flow-Through Shares

Current Canadian tax legislation permits mining entities to issue flow-through shares to investors. Flow-through shares are securities issued to investors whereby the deductions for tax purposes related to exploration and evaluation expenditures may be claimed by investors instead of the entity. The issue of flow-through shares is in substance an issue of ordinary shares and the sale of tax deductions. At the time the Company issues flow-through shares, the sale of tax deductions is deferred and presented as other liabilities in the consolidated statement of financial position to recognize the obligation to incur and renounce eligible resource exploration and evaluation expenditures. The tax deduction is measured as the difference between the current market price of the Company’s common shares and the issue price of the flow-through share. Upon incurring and renouncing eligible resource exploration and evaluation expenditures, the Company recognizes the sale of tax deductions as a tax deduction recovery on the consolidated statement of comprehensive income or loss and reduces the liability for flow-through shares premium.

(o)

Investment Income

Investment income on cash and cash equivalents and short-term investments is recognized as it is earned.

(p)

Exploration and Evaluation Costs

Exploration and evaluation costs, other than those described in Note 2(k), are expensed as incurred until such time as mineral reserves are proven or probable; permits to operate the mineral resource property are received; and financing to complete development has been obtained. Following these three events and approval of the Board of Directors to commence mining development and operations, exploration and evaluation expenditures are capitalized as deferred development expenditures included within exploration and evaluation assets.

 

9

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

 

2. Significant Accounting Policies (continued)

(q)

Share-based Compensation

The Company follows the fair value method of accounting for the stock option awards granted to employees, directors and consultants. The fair value of stock options is determined by the Black-Scholes Option Pricing Model with assumptions for risk-free interest rates, dividend yields, volatility of the expected market price of the Company’s common shares and an expected life of the options. The number of stock option awards expected to vest are estimated using a forfeiture rate based on historical experience and future expectations. The fair value of direct awards of stock is determined by the quoted market price of the Company’s stock. Share-based compensation is amortized to earnings over the vesting period of the related option.

The Company uses graded or accelerated amortization which specifies that each vesting tranche must be accounted for as a separate arrangement with a unique fair value measurement. Each vesting tranche is subsequently amortized separately and in parallel from the grant date.

Option-pricing models require the use of highly subjective estimates and assumptions including the expected stock price volatility. Changes in the underlying assumptions can materially affect the fair value estimates and, therefore, existing models do not necessarily provide reliable measurement of the fair value of the Company’s stock options.

(r)

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are recognized in the period for temporary differences between the tax and accounting bases of assets and liabilities as well as for the potential benefit of income tax losses and other deductions carried forward to future years.

Deferred income tax assets and liabilities are measured using substantively enacted tax rates and laws expected to apply in the years in which temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in the year that includes the substantive enactment date. The value of deferred income tax assets is reviewed annually and adjusted, if necessary, to reflect the amount probable of being realized.

(s)

Earnings (Loss) Per Common Share

Earnings (loss) per share calculations are based on the net income (loss) attributable to common shareholders for the year divided by the weighted average number of common shares issued and outstanding during the year.

Diluted earnings per share calculations are based on the net income attributable to common shareholders for the year divided by the weighted average number of common shares outstanding during the year plus the effects of dilutive common share equivalents. This method requires that the dilutive effect of outstanding options and warrants issued be calculated using the treasury stock method. This method assumes that all common share equivalents have been exercised at the beginning of the year (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of common shares during the year. The incremental number of common shares that would be issued is included in the calculation of diluted earnings per share.

Diluted loss per share calculations are based on the net loss attributable to common shareholders for the year divided by the weighted average number of common shares issued and outstanding during the year. Stock options and share purchase warrants are not included in the computation of loss per share for the years ended December 31, 2014 and 2013 as such inclusion would be anti-dilutive.

(t)

Government Grants

Grants from the government are recognized at their fair value where there is a reasonable assurance that the Company has complied with all conditions necessary to receive the grants and collectability is reasonably assured. Government grants relating to costs are accrued as receivable and recognized in the consolidated statement of comprehensive income or loss as a reduction of the related expense. Government grants relating to property, plant and equipment are accrued as receivable and recognized in the consolidated statement of financial position as a reduction of the carrying value of the related asset.

 

10

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

2. Significant Accounting Policies (continued)

(u)

IFRS Standards Adopted

IFRIC 21	Levies
IFRS 1 (Amendment)	First-time Adoption of International Financial Reporting Standards
IFRS 10 (Amendment)	Consolidated Financial Statements
IFRS 12 (Amendment)	Disclosure of Interest in Other Entities
IFRS 13 (Amendment)	Fair Value Measurement
IAS 27 (Amendment)	Separate Financial Statements
IAS 32 (Amendment)	Offsetting Financial Assets and Financial Liabilities
IAS 36 (Amendment)	Recoverable Amount Disclosures for Non-Financial Assets
IAS 39 (Amendment)	Novation of Derivatives and Continuation of Hedge Accounting

The adoption of these standards, adopted effective January 1, 2014, did not have a material impact on the consolidated results and financial position of the Company.

(v)

IFRS Standards Issued But Not Yet Effective

IFRS 9	Financial Instruments (4)
IFRS 14	Regulatory Deferral Accounts (2)
IFRS 15	Revenue from Contracts with Customers (3)
IFRS 2 (Amendment)	Share-based Payment (1)
IFRS 3 (Amendment)	Business Combinations (1)
IFRS 5 (Amendment)	Non-current Assets Held for Sale and Discontinued Operations (2)
IFRS 7 (Amendment)	Financial Instruments: Disclosures (2)
IFRS 8 (Amendment)	Operating Segments (1)
IFRS 10 (Amendment)	Consolidated Financial Statements (2)
IFRS 11 (Amendment)	Joint Arrangements (2)
IFRS 12 (Amendment)	Disclosure of Interest in Other Entities (2)
IFRS 13 (Amendment)	Fair Value Measurement (1)
IAS 1 (Amendment)	Presentation of Financial Statements (2)
IAS 16 (Amendment)	Property, Plant and Equipment (1, 2)
IAS 19 (Amendment)	Employee Benefits (1, 2)
IAS 24 (Amendment)	Related Party Disclosures (1)
IAS 27 (Amendment)	Separate Financial Statements (2)
IAS 28 (Amendment)	Investments in Associates and Joint Ventures (2)
IAS 34 (Amendment)	Interim Financial Reporting (2)
IAS 38 (Amendment)	Intangible Assets (1, 2)
IAS 40 (Amendment)	Investment Property (1)
IAS 41 (Amendment)	Agriculture (2)

(1)

For annual periods beginning on or after July 1, 2014.

(2)

For annual periods beginning on or after January 1, 2016.

(3)

For annual periods beginning on or after January 1, 2017.

(4)

For annual periods beginning on or after January 1, 2018.

The Company anticipates that the application of these standards and amendments on their effective dates will not have a material impact on the consolidated results and financial position of the Company.

 

11

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

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3. Messina Minerals Inc. Acquisition

The Company undertook no significant acquisitions in the year ended December 31, 2014.

On December 20, 2013, the Company acquired the outstanding shares of Messina Minerals Inc. (“Messina”), a company which holds mineral interests in the Canadian province of Newfoundland and Labrador.

The acquisition has been accounted for as a purchase of assets and the assumption of liabilities by the Company. The transaction does not qualify as a business combination under IFRS 3, Business Combinations , as significant inputs and processes that constitute a business were not identified. Total consideration transferred was $1,372,000, which was comprised of the issuance of 2,132,714 common shares valued at $896,000 based on the closing market price of the Company’s shares on December 20, 2013 of $0.42 per share, conversion of options and warrants with a fair value of $19,000 (See Note 12), 3,000,000 Messina shares previously acquired and valued at $180,000 based on the closing market price of Messina shares on December 20, 2013 of $0.06 per share and transaction costs of $277,000. A value of $1,324,000 was allocated to exploration and evaluation assets for the mineral interests. (See Notes 8, 9, 11, and 12).

The purchase price for Messina was allocated to the assets acquired and the liabilities assumed based upon their relative fair value at the date of acquisition as follows:

Purchase price
Issued 2,132,714 Canadian Zinc common shares at $0.42 per share		$	896
Acquired 3,000,000 Messina shares at $0.06 per share			180
Options and warrants converted upon acquisition			19
Transaction costs			277
		$	1,372
Fair value of net assets acquired
Cash and cash equivalents		$	14
Other assets			70
Accounts payable and accrued liabilities			(36	)
Exploration and evaluation assets			1,324
		$	1,372

4. Cash and Cash Equivalents

The Company’s cash and cash equivalents at December 31, 2014 consisted of cash of $446,000 and cash equivalents of $8,346,000 (December 31, 2013 - cash of $334,000 and cash equivalents of $8,042,000).

5. Short-term Investments

Short-term investments, which consist primarily of investments in Bankers Acceptances and Guaranteed Investment Certificates, are investments with maturities of more than three months and less than one year when purchased. At December 31, 2014, short-term investments were valued at $5,023,000, earning income at a rate of 1.75% (December 31, 2013 - $2,005,000, earning income at a rate of 1.71%). The market value of these assets is based upon quoted market values and the recorded amounts at December 31, 2014 and December 31, 2013 equal the fair value for these investments.

 

12

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

6. Marketable Securities

		December 31, 2014												December 31, 2013
		# of Shares				Original Cost				Fair Value				# of Shares				Original Cost				Fair Value
Vatukoula Gold Mines plc			12,573,380			$	10,142			$	450				12,573,380			$	10,142			$	1,328
						$	10,142			$	450							$	10,142			$	1,328

7. Other Long-term Assets

As at December 31, 2014, other long-term assets consist of non-interest bearing reclamation security deposits of $525,000 (December 31, 2013 - $525,000) and restricted cash equivalents of $nil (December 31, 2013 - $214,000). The non-interest bearing reclamation security deposits are lodged with government agencies as security in support of certain reclamation obligations. The restricted cash equivalents was security for a letter of guarantee issued by a financial institution, to secure performance by the Company of certain obligations pursuant to an authorization to carry out road repairs adjacent to the Prairie Creek Mine Property granted by the Department of Fisheries and Oceans Canada.

8. Property, Plant and Equipment

		Land				Prairie Creek Plant & Mill				Mining Equipment				Office Equipment				Buildings and Leasehold Improvements				Total
Acquisition Cost
December 31, 2012		$	-			$	500			$	1,660			$	164			$	60			$	2,384
Additions			40				-				13				-				20				73
December 31, 2013			40				500				1,673				164				80				2,457
Additions			-				-				16				-				-				16
December 31, 2014			40			$	500			$	1,689			$	164			$	80			$	2,473
Accumulated Depreciation
December 31, 2012		$	-			$	-			$	1,280			$	133			$	60			$	1,473
Depreciation charge			-				-				116				8				-				124
December 31, 2013			-				-				1,396				141				60				1,597
Depreciation charge			-				-				86				6				2				94
December 31, 2014		$	-			$	-			$	1,482			$	147			$	62			$	1,691
Net Book Value
December 31, 2012		$	-			$	500			$	380			$	31			$	-			$	911
December 31, 2013			40				500				277				23				20				860
December 31, 2014			40				500				207				17				18				782

 

13

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

 

9. Exploration and Evaluation Assets

The Company holds a 100% interest in the Prairie Creek Mine property located in the Northwest Territories, Canada. It also holds, through the Company’s wholly-owned subsidiaries Paragon and Messina, a 100% interest in the South Tally Pond, Tulks South and Long Lake properties in Newfoundland and Labrador.

In May 2013, the Company sold a 1.2% net smelter returns royalty (“NSR”) on the Prairie Creek Mine for net proceeds of $10,271,000 to Sandstorm Metals & Energy Ltd. The Company’s policy is to recognize, in income, costs recovered on exploration and evaluation assets when amounts received or receivable are in excess of the carrying amount of the corresponding exploration and evaluation asset. Accordingly, the Company reduced the carrying value of the Prairie Creek Mine exploration and evaluation asset to $nil during the second quarter of 2013 and recognized a gain of $5,439,000 on the consolidated statement of income or loss. In addition, as part of the agreement, Sandstorm has granted Canadian Zinc the option, for a period of 30 months, to repurchase 100% of the NSR without premium or penalty for US$10 million, if Canadian Zinc enters into a metal stream agreement with Sandstorm under which Sandstorm will provide Canadian Zinc with an upfront deposit of not less than US$90 million to be used to finance part of the capital cost to develop the Prairie Creek Mine.

		December 31, 2014				December 31, 2013
Prairie Creek Mine		$	220			$	-
Messina properties			1,299				1,324
Paragon properties			4,109				4,108
		$	5,628			$	5,432

The Company has incurred historical exploration and evaluation costs of $69,334,000 on the Prairie Creek Mine asset and $3,263,000 on exploration properties in central Newfoundland (see Note 13) and has expensed these costs pursuant to its accounting policy.

10. Decommissioning Liability

Reclamation and closure costs for the Prairie Creek Property have been estimated based on the Company’s understanding of its current obligations under its existing surface leases, land use permits and class “B” Water Licence for reclamation and closure of the Prairie Creek Mine site as it now exists with the current infrastructure and assuming a mine life of 11 years. These reclamation and closure costs have been measured based on the net present value of the best estimate of future cash expenditures. These reclamation and closure costs are capitalized into exploration and evaluation assets and amortized over the life of the related asset (see Note 9). The accretion expense is included in finance costs in the consolidated statement of comprehensive income or loss.

The Company’s undiscounted decommissioning liability of the Prairie Creek site, as it currently exists, is $3,142,000 (December 31, 2013 - $2,961,000), being the estimated future net cash outflows of the reclamation and closure costs, including a 30% contingency and inflation of 2%, required to satisfy the obligations, settlement of which will occur subsequent to closure of the mine through to 2031. The discounted decommissioning liability is calculated using a risk free rate of 2.22% per annum (December 31, 2013 – 3.13%).

		December 31, 2014				December 31, 2013
Balance – beginning of year		$	1,963			$	2,148
Accretion expense			60				49
Change in estimates (1)			220				(234	)
Balance – end of year		$	2,243			$	1,963

(1) The change in estimates represents the increase (decrease) in net present value of the decommissioning liability and results in an offsetting addition (deduction) to the carrying value of the corresponding exploration and evaluation asset (see note 9) until the corresponding asset is reduced to nil, after which a decrease in the net present value is recognised as a gain in the income statement.

 

14

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

 

10. Decommissioning Liability (continued)

The Company currently holds a surface lease, issued by the Minister of Aboriginal Affairs and Northern Development Canada, which limits the use of the land for mine site care and maintenance purposes only and establishes the Company's current responsibility for abandonment and restoration in accordance with an abandonment and restoration plan attached as a schedule to the surface lease. The Company has applied to the Minister of Aboriginal Affairs and Northern Development Canada for a new lease for production to replace the existing care and maintenance surface lease.

In September 2013, the Company was issued with the Type “A” Water Licence MV2008L2-002 by the Mackenzie Valley Water Board (“MVLWB”). The Type “A” Water Licence is valid for a term of seven years and entitles Canadian Zinc to use water, dewater the underground mine for the purposes of mining and to dispose of waste for mining and milling. The Licence is subject to numerous conditions, including the requirement to post and maintain security, in stages, with the Minister of Aboriginal Affairs and Northern Development Canada totalling $13.07 million on a schedule of $3 million within ninety days of the effective date of the licence, $5 million prior to extracting waste rock from the underground mine and $5.07 million prior to commencing milling.

In June 2013, the MVLWB issued Land Use Permit MV2008D0014 which permits Canadian Zinc to extract ore and waste rock from the Prairie Creek Mine, operate a flotation mill concentrator to produce zinc and lead concentrates, create a waste rock facility, and refurbish and develop site facilities in support of the mining operation, along with the eventual closure and reclamation of the mine site. This permit which is valid for a term of five years, with an optional two year extension, is subject to numerous conditions including the requirement to deposit, in stages, with the Minister of Aboriginal Affairs and Northern Development Canada a total of $4 million on a schedule of $3 million within ninety days of the issue of the permit and $1 million prior to construction upgrades to the mill commencing.

In June and December 2013, the Company filed requests with the MVLWB for amendments to the timing schedules of the various security deposits to be provided to the Minister of Aboriginal Affairs and Northern Development Canada under the Type “A” Water Licence and the Land Use Permit. The Department of Aboriginal Affairs and Northern Development Canada has confirmed to the MVLWB that the Board’s assessment of the Company’s liability for the site and cost of closure and reclamation is not applicable until a new lease for production replaces the existing care and maintenance surface lease. The Company has provided responses to Information Requests and the MVLWB has circulated the application to interested parties for comment.

In August 2014, CZN submitted an amended development schedule for the Prairie Creek Mine to the MVLWB and this was followed up by an application to the MVLWB in October 2014 requesting that the Water Licence be held in abeyance until more certainty develops around the actual commencement of construction and the mine development schedule. This action would defer the schedule and dates in the licence for the submission of various plans until the activation of licence and the commencement of operations. The MVLWB is considering the Company’s request and has circulated this application to interested parties for comment.

The Company also holds various land use permits, water licences and construction permits from the MVLWB and Parks Canada with the requirement to post security for future reclamation in the total amount of $3.33 million, to be posted prior to construction of infrastructure or commencement of operations. The Company has previously posted reclamation security deposits in support of current reclamation obligations in the amount of $525,000 (see Note 7).

 

15

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

11. Share Capital

Authorized: Unlimited common shares with no par value (2013 – unlimited).

Issued and outstanding: 218,047,709 common shares (December 31, 2013 – 172,828,575).

(a)

During the year ended December 31, 2014

i.

On July 31, 2014, the Company completed a bought deal public offering of units and flow-through shares (the “Offering”) through a syndicate of underwriters led by Dundee Securities Ltd. and included Canaccord Genuity Corp. and Paradigm Capital Inc. (together, the ("Underwriters"). The Company issued 28,572,000 units (“Units”) at a price of $0.35 per Unit for gross proceeds of $10,000,000, and 15,134,000 common shares, which qualify as “flow-through” shares (the "FT Shares”) at a price of $0.38 per FT Share for gross proceeds of $5,751,000. Each Unit is comprised of one common share and one half of one common share purchase warrant (each full warrant, a “Warrant”). Each Warrant entitles the holder to purchase one common share at an exercise price of $0.50 on or before July 31, 2017.

In total, the gross proceeds of the Offering amount to $15,751,000. The Underwriters were paid a commission of 6% of the gross proceeds from the offering and received compensation warrants to acquire 2,622,360 non-flow-through shares at any time until July 31, 2016 at a price of $0.35 per share. Net proceeds from the issuance were $14,473,000 after issuance costs comprised of the agent’s commission of $945,000 and other issuance costs of $333,000. The Company also recognized non-cash costs for the fair value of the warrants granted of $1,723,000. The sale of tax deductions of $1,059,000, measured as the difference between the market price of the Company’s shares at the date of issue and the issue price of the flow-through shares, was deferred and was recorded as a current liability in the consolidated statement of financial position.

ii.

1,513,134 stock options were exercised at prices between $0.23 and $0.30 per common share for proceeds of $357,000.

(b)

During the year ended December 31, 2013

i.

On August 20, 2013, the Company issued by way of a bought deal private placement 6,460,000 flow-through shares on a brokered basis at $0.62 per share, for aggregate gross proceeds of $4,005,000. The agent to the private placement was paid a commission of 5% of the gross proceeds from the offering and received broker’s warrants to acquire 387,600 non-flow-through shares at any time until February 20, 2015 at a price of $0.63 per share. Net proceeds from the issuance were $3,701,000 after issuance costs comprised of the agent’s commission of $200,000 and other issuance costs of $104,000. The Company also recognized non-cash costs for the fair value of the broker’s warrants granted of $92,000.

ii.

200,000 stock options were exercised at a price of $0.23 per common share for proceeds of $46,000.

iii.

On September 16, 2013, the Company issued 4,080 common shares valued at $2,000 and $13,000 in cash pursuant to an agreement by Paragon Minerals Corporation to acquire an exploration property.

iv.

On December 20, 2013, the Company acquired Messina Minerals Inc. and issued 2,132,714 common shares valued at $896,000 based on the Company’s closing market price on December 31, 2013 of $0.42 per share in exchange for all outstanding Messina shares that the Company did not already own.

 

16

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

 

12. Reserves

(a)

Stock Options

At December 31, 2014, there were 5,693,800 incentive stock options outstanding. Each stock option is exercisable for one ordinary share of the Company. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither rights to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry.

At the Annual General Meeting held on June 13, 2012, shareholders approved the adoption of a new incentive stock option plan (the “2012 Plan“). The 2012 Plan is a fixed share stock option plan pursuant to which options on up to 7,500,000 common shares may be issued to directors, officers, employees and service providers of the Company. No new stock options will be granted under the 2004 Rolling Stock Option Plan (the “2004 Plan”), which is a 10% rolling stock option plan, but the 4,460,000 stock options currently outstanding under the 2004 Plan will remain outstanding and subject to that plan. Stock options will only be granted under the 2012 Stock Option Plan to the extent that the aggregate number of options outstanding under the 2012 Plan and the 2004 Plan does not exceed 7,500,000. Under the 2012 Plan, each option granted shall be for a term not exceeding five years from the date of grant and the vesting period is determined at the discretion of the Board. The option exercise price is set at the date of grant and cannot be less than the closing market price of the Company’s common shares on the TSX on the day of grant.

At the Annual General Meeting held on June 19, 2014, shareholders approved the adoption of a Restricted Share Unit Plan (the “RSU Plan”) and a Deferred Share Unit Plan (the “DSU Plan”). The RSU Plan and the DSU Plan provide for the issuance of shares to eligible employees, directors and consultants, subject to certain vesting and deferral provisions, to a maximum number, equal to 3% and 2% respectively, of the issued and outstanding Common Shares of the Company. As of December 31, 2014, the Company has not made any grants of Restricted Share Units or any grants of Deferred Share Units.

		December 31, 2014								December 31, 2013								December 31, 2012
		Number of Options				Weighted Average Exercise Price				Number of Options				Weighted Average Exercise Price				Number of Options				Weighted Average Exercise Price
Outstanding, beginning of year			7,247,734			$	0.42				7,605,533			$	0.46				6,410,000			$	0.41
Granted			-				-				-				-				960,000				0.46
Exercised			(1,513,134	)			0.24				(200,000	)			0.23				-				-
Converted			-				-				138,134				0.30				310,533				1.54
Expired			(40,800	)			1.14				(258,433	)			1.62				(75,000	)			0.94
Forfeited			-				-				(37,500	)			0.46				-				-
Outstanding, end of year			5,693,800			$	0.47				7,247,734			$	0.42				7,605,533			$	0.46

As at December 31, 2014, the Company has outstanding and exercisable stock options, with a weighted average remaining contractual life of 0.79 years, to purchase an aggregate 5,693,800 common shares as follows:

		Options Outstanding and Exercisable
Expiry Date		Number of Options				Weighted Average Exercise Price
May 12, 2015			4,460,000			$	0.45
January 27, 2016			300,000				0.71
July 4, 2016			23,800				0.81
October 3, 2017			910,000				0.46
			5,693,800			$	0.47

For the year ended December 31, 2014, the Company recorded share-based compensation charges for stock options granted to directors, officers and employees of $23,000 (2013 - $120,000 and 2012 - $107,000).

 

17

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

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12. Reserves (continued)

(b)

Warrants

As at December 31, 2014, the Company has outstanding exercisable warrants, with a weighted average remaining contractual life of 2.38 years, to purchase an aggregate 17,295,960 common shares, as follows:

		December 31, 2014								December 31, 2013								December 31, 2012
		Number of Warrants				Weighted Average Exercise Price				Number of Warrants				Weighted Average Exercise Price				Number of Warrants				Weighted Average Exercise Price
Outstanding, beginning of year			8,490,200			$	1.00				13,419,693			$	0.95				5,054,148			$	0.88
Issued			16,908,360				0.48				387,600				0.63				7,299,650				0.88
Converted			-				-				84,745				3.54				1,407,168				1.51
Exercised			-				-				-				-				(4,130	)			0.40
Expired			(8,102,600	)			1.01				(5,401,838	)			0.90				(337,143	)			0.70
Outstanding, end of year			17,295,960			$	0.48				8,490,200			$	1.00				13,419,693			$	0.95

		Warrants Outstanding and Exercisable
Expiry Date		Number of Warrants				Weighted Average Exercise Price
February 20, 2015			387,600			$	0.63
July 31, 2016			2,622,360				0.35
July 31, 2017			14,286,000				0.50
			17,295,960			$	0.48

The fair value of the warrants issued was determined using the Black-Scholes option pricing model, based on the following terms and assumptions:

Year of Grant	Year ended December 31, 2014	Year ended December 31, 2013 (2)
Dividend Yield	0%	0%
Risk free interest rate	1.08% to 1.41%	1.20%
Expected life	2.0 to 3.0 years	1.46 years
Expected volatility (1)	66.23% to 68.46%	67.8%
Weighted average grant date fair value	$0.10	$ 0.24
(1) Determined based on historical volatility of the Company’s share price. (2) Excludes warrants converted upon Messina acquisition.

 

18

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

12. Reserves (continued)

(c)

Summary

		Options				Warrants				Unexercised Options and Warrants				Normal Course Issuer Bid				Total
Balance , December 31, 2012		$	1,326			$	2,594			$	7,946			$	604			$	12,470
Share-based compensation			120				-				-				-				120
Stock options exercised			(20	)			-				-				-				(20	)
Stock options expired			(25	)			-				25				-				-
Broker warrants issued			-				92				-				-				92
Warrants expired			-				(1,104	)			1,104				-				-
Messina acquisition			19				-				-				-				19
Balance , December 31, 2013			1,420				1,582				9,075				604				12,681
Share-based compensation			23				-				-				-				23
Stock options exercised			(157	)			-				-				-				(157	)
Unit warrants issued			-				1,456				-				-				1,456
Broker warrants issued			-				267				-				-				267
Warrants expired			-				(1,491	)			1,491				-				-
Balance , December 31, 2014		$	1,286			$	1,814			$	10,566			$	604			$	14,270

 

19

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

13. Exploration and Evaluation Expenses

		Year ended December 31,
Prairie Creek Mine		2014				2013				2012
Camp operation and project development		$	1,881			$	1,528			$	1,394
Diamond drilling			1,163				331				3,107
Mine planning and feasibility studies			3,301				1,611				2,860
Permitting and environmental			1,551				1,342				1,522
			7,896				4,812				8,883
Depreciation – mining plant and equipment			86				116				154
Total exploration and evaluation expenses		$	7,982			$	4,928			$	9,037
Exploration and evaluation expenses (inception to date), beginning of year		$	61,352			$	56,424			$	47,387
Total exploration and evaluation expenses			7,982				4,928				9,037
Exploration and evaluation expenses (inception to date), end of year		$	69,334			$	61,352			$	56,424

		Year ended December 31,
Messina & Paragon Properties		2014				2013				2012
Camp operation and project development		$	802			$	163			$	54
Diamond drilling			1,195				984				34
Permitting and environmental			17				14				-
Total exploration and evaluation expenses		$	2,014			$	1,161			$	88
Exploration and evaluation expenses (inception to date), beginning of year		$	1,249			$	88			$	-
Total exploration and evaluation expenses			2,014				1,161				88
Exploration and evaluation expenses (inception to date), end of year		$	3,263			$	1,249			$	88

For the year ended December 31, 2014, employee wages and benefits of $1,339,000 were included in exploration and evaluation expenses (2013 - $1,344,000 and 2012 - $1,594,000).

 

20

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

14. Tax Deduction Recovery

During the year ended December 31, 2014, the Company recognized a tax deduction recovery of $588,000 (2013 - $nil and 2012 - $295,000) in respect of flow-through shares previously issued (see Note 11).

15. Government Grants

For the year ended December 31, 2014, the Company received government grants in the amount of $170,000 (2013 - $547,000 and 2012 - $451,000) and recorded a reduction to the related expense or as a reduction of the carrying value of the related asset. At December 31, 2014, $170,000 related to amounts owed was included in other receivables and prepaid expenses (December 31, 2013 - $106,000 and December 31, 2012 - $3,000).

16. Income Taxes

The Company’s current and deferred income tax expense for the year ended December 31, 2014, is $nil and $nil (2013 - $nil and $nil and 2012 - $nil and $nil). A reconciliation of the statutory tax rate to the effective rate for the Company is as follows:

		2014				2013				2012
Statutory tax rate			26.56	%			26.51	%			25.94	%
Income taxes/(recovery) computed at statutory rates		$	(3,303	)		$	(1,832	)		$	(5,152	)
Permanent differences			249				(34	)			42
Expired losses			236				60				-
Renunciation of resource expenditures			1,899				-				637
Flow-through share premium recovery			(156	)			-				-
Other			7				(14	)			(110	)
Loss on marketable securities subject to capital gains tax rate			(118	)			465				1,126
Income tax rate changes			20				(518	)			131
Tax benefits not yet recognized			1,166				1,873				3,326
			-				-				-

The approximate tax effect of each type of temporary difference that gives rise to the Company’s deferred income tax assets and liabilities are as follows:

		2014				2013				2012
Non-capital loss carry forwards		$	9,868			$	8,467			$	5,986
Plant and equipment			409				386				315
Resource interests			9,329				9,515				7,904
Other			994				843				920
Marketable securities			1,314				1,198				695
Net unrecognized deferred income tax asset		$	21,914			$	20,409			$	15,820

 

21

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

---

 

 

16. Income Taxes (continued)

At December 31, 2014, the Company has approximately $37,300,000 (2013 - $31,998,000 and 2012 - $23,202,000) of non-capital losses for tax purposes available to be carried forward at various dates until 2034 and applied against future income for tax purposes and approximately $35,422,000 (2013 - $40,425,000 and 2012 - $38,983,000) of unused cumulative Canadian exploration and development expenses for tax purposes available to be carried forward indefinitely and applied against future income for tax purposes. The non-capital losses expire as follows:

	Year	Total
	2015	$ 895
	2024	112
	2025	374
	2026	1,905
	2027	3,729
	2028	5,112
	2029	3,347
	2030	3,325
	2031	3,690
	2032	6,700
	2033	1,913
	2034	6,198
		$ 37,300

17. Capital Management

The Company manages its cash and cash equivalents, short-term investments, marketable securities, common shares, stock options and share purchase warrants as capital. As the Company is in the exploration and evaluation stage, its principal source of funds for its operations is from the issuance of common shares. The issuance of common shares requires approval of the Board of Directors. It is the Company’s objective to safeguard its ability to continue as a going concern, so that it can continue to explore its Canadian properties and develop its Prairie Creek project for the benefit of its shareholders.

18. Related Party Transactions

For the year ended December 31, 2014, the Company incurred rent expense in the amount of $24,000 (2013 - $24,000 and 2012 - $24,000) with a corporation in which the Chairman of the Company is also a director. These transactions were within the normal course of business and have been recorded at amounts agreed to by the transacting parties. At December 31, 2014, $2,000 relating to amounts owing to related parties was included in accounts payable and accrued and other liabilities (December 31, 2013 - $2,000 and December 31, 2012 - $4,000).

For the year ended December 31, 2014, the Company incurred short-term employee remuneration and benefits to officers and directors in the amount of $850,000 (2013 - $1,278,000 and 2012 - $673,000). For the year ended December 31, 2014, the Company incurred share-based compensation with officers and directors in the amount of $2,000 (2013 - $13,000 and 2012 - $41,000).

 

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

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19. Financial Instruments

(a)

Categories of financial instruments

			December 31, 2014				December 31, 2013
Cash and cash equivalents	FVTPL		$	8,792			$	8,376
Short-term investments	FVTPL			5,023				2,005
Marketable securities	FVTPL			450				1,328
Other receivables	Loans and receivables			368				324
Other long-term assets	FVTPL			525				739
Accounts payable	Other financial liabilities			(1,303	)			(917	)
Accrued and other liabilities	Other financial liabilities			(837	)			(707	)

All financial instruments above, except marketable securities which is classified under the Level 3 fair value hierarchy; other financial liabilities; and loans and receivables, are classified under the Level 1 fair value hierarchy.

Level 3 Fair Value: Marketable Securities

As set out in note 6, the Company holds 12,573,380 shares in Vatukoula Gold Mines plc. (“VGM”). As of June 30, 2014, VGM de-listed from the Alternative Investment Market (“AIM”). The investment is classified as at December 31, 2014 at a level 3 hierarchy (2013 - level 1 hierarchy) as a result of de-listing.

The valuation is based on comparable companies’ share price performance. A decrease or increase in the average share price of 5% would result in a decrease or increase in the value of VGM of $22,500.

(b)

Interest rate risk

Included in the loss for the year ended December 31, 2014, is investment income on the Company’s cash and cash equivalents and short-term investments. If interest rates had been 100 basis points (1%) lower or higher than net income or loss would have been approximately $112,000 higher or lower. The Company does not have any debt obligations which expose it to interest rate risk.

(c)

Foreign currency risk

The Company holds marketable securities denominated in U.K. pounds sterling. Based upon the marketable securities held at December 31, 2014, and assuming no changes in number of shares or stock price, for every $0.01 fluctuation in exchange rate between the Canadian dollar and U.K. pound sterling, the Company’s net income or loss would be $2,000 higher or lower.

(d)

Credit risk

The Company considers that the following financial assets are exposed to credit risk: cash and cash equivalents, short-term investments, marketable securities and other long-term assets. The total value of these items at December 31, 2014 is $14,790,000 (December 31, 2013 - $12,448,000). Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company does not currently generate any revenues from sales to customers nor does it hold derivative type instruments that would require a counterparty to fulfil a contractual obligation resulting in a credit risk. The Company has never held any asset-backed paper instruments. The Company seeks to place its cash and cash equivalents, short-term investments and restricted cash with reputable financial institutions. At December 31, 2014, the Company’s cash and cash equivalents, short-term investments and restricted cash were invested with three financial institutions.

(e)

Liquidity risk

Liquidity risk encompasses the risk that the Company cannot meet its financial obligations as they fall due. As at December 31, 2014, the Company had positive working capital of $12,353,000 (December 31, 2013 - $10,617,000). Given positive working capital, the Company believes it will be able to meet its current obligations. However, the Company will require significant additional funding in the future in order to complete the development of the Prairie Creek Mine site and bring the mine into production. Accordingly, there is a risk that the Company may not be able to secure adequate funding on reasonable terms, or at all, at that future date.

 

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CANADIAN ZINC CORPORATION

Notes to the Consolidated Financial Statements

December 31, 2014

(Tabular amounts expressed in thousands of Canadian dollars, except for shares, price per share and per share amounts)

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20. Commitments

The Company has entered into certain operating lease agreements for office space and equipment. These agreements require the Company to make the following lease payments:

Year ending December 31,		Total
2015		$ 161
2016		160
2017		89
2018		-
		$ 410

During the year ended December 31, 2014, the Company recognized lease expenses of $207,000 (2013 - $209,000 and 2012 - $181,000).

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SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing this Annual Report on Form 20-F and it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.

Dated at Vancouver, British Columbia, this 30 th day of April, 2015.

CANADIAN ZINC CORPORATION

“John F. Kearney”                                                                  

Per: (signed) John F. Kearney

Title: President, Chief Executive Officer & Director

 

 

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