| GOLDEN STAR RESOURCES LTD ITEM 1A RISK FACTORS RISK FACTORS You should consider the following discussion of risks in addition to the other information contained in or included by reference in this Form 10-K In addition to historical information, the information in this form 10-K contains "e forward-looking "e statements about our future business and performance |
| Our actual operating results and financial performance may be very different from what we expect as of the date of this Form 10-K The risks below address material factors that may affect our future operating results and financial performance |
| FINANCIAL RISKS A substantial or prolonged decline in gold prices would have a material adverse effect on us |
| The price of our common shares, our financial results and our exploration, development and mining activities have previously been, and would in the future be, significantly adversely affected by a substantial or prolonged decline in the price of gold |
| The price of gold is volatile and is affected by numerous factors beyond our control such as the sale or purchase of gold by various central banks and financial institutions, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, global and regional demand, and the political and economic conditions of major gold-producing countries throughout the world |
| Any drop in the price of gold adversely impacts our revenues, profits and cash flows |
| In particular, a sustained low gold price could: 21 o cause suspension of our mining operations at Bogoso/Prestea and Wassa if such operations become uneconomic at the then-prevailing gold price, thus further reducing revenues; o cause us to be unable to fulfill our obligations under agreements with our partners or under our permits and licenses which could cause us to lose our interests in, or be forced to sell, some of our properties; o cause us to be unable to fulfill our debt payment obligations; o halt or delay the development of new projects; o reduce funds available for exploration, with the result that depleted reserves are not replaced; and o reduce or eliminate the benefit of enhanced growth opportunities anticipated from the St |
| Jude acquisition |
| Furthermore, the need to reassess the feasibility of any of our projects because of declining gold prices could cause substantial delays or might interrupt operations until the reassessment can be completed |
| Mineral reserve calculations and life-of-mine plans using significantly lower gold prices could result in reduced estimates of mineral reserves and non-reserve mineral resources and in material write-downs of our investment in mining properties and increased amortization, reclamation and closure charges |
| We may incur substantial losses in the future that could make financing our operations and business strategy more difficult |
| We had a net loss of dlra13dtta5 million during the year ended December 31, 2005 and annual earnings of dlra2dtta6 million, dlra22dtta0 million and dlra4dtta9 million in 2004, 2003 and 2002, respectively |
| Numerous factors, including declining gold prices, lower than expected ore grades or higher than expected operating costs (including increased commodity prices), and impairment write-offs of mine property and/or exploration property costs, could cause us to be unprofitable in the future |
| The acquisition of St |
| Jude, which has no operating properties, may result in increased future losses |
| Any future operating losses could make financing our operations and our business strategy, including pursuit of the growth opportunities anticipated as a result of our acquisition of St |
| Jude, or raising additional capital, difficult or impossible and could materially and adversely affect our operating results and financial condition |
| Our obligations could strain our financial position and impede our business strategy |
| We had total consolidated debt and liabilities as of December 31, 2005 of dlra165dtta7 million, including dlra7dtta6 million payable to banks, dlra15dtta8 million in equipment financing loans, dlra47dtta7 million in senior convertible notes maturing on April 15, 2009, dlra26dtta1 million of current trade payables, accrued current and other liabilities, dlra45dtta1 million of future taxes, dlra12dtta0 million of derivative liabilities and an dlra11dtta4 million accrual for environmental rehabilitation liabilities |
| We expect that our indebtedness and other liabilities will increase as a result of our corporate development activities |
| These liabilities could have important consequences, including the following: o increasing our vulnerability to general adverse economic and industry conditions; o limiting our ability to obtain additional financing to fund future working capital, capital expenditures, operating and exploration costs and other general corporate requirements; o requiring us to dedicate a significant portion of our cash flow from operations to make debt service payments, which would reduce our ability to fund working capital, capital expenditures, operating and exploration costs and other general corporate requirements; o limiting our flexibility in planning for, or reacting to, changes in our business and the industry; and o placing us at a disadvantage when compared to our competitors that have less relative to their market capitalization |
| Our estimates of mineral reserves could be inaccurate, which could cause production and costs to differ from estimates |
| Our estimates of non-reserves mineral resources could also be inaccurate |
| There are numerous uncertainties inherent in estimating proven and probable mineral reserves and non-reserve measured, indicated and inferred mineral resources, including many factors beyond our control |
| The accuracy of estimates of mineral reserves and non-reserves is a function of the quantity and quality 22 of available data and of the assumptions made and judgments used in engineering and geological interpretation, which could prove to be unreliable |
| These estimates of mineral reserves and non-reserves may not be accurate, and mineral reserves and non-reserves may not be able to be mined or processed profitably |
| Fluctuation in gold prices, results of drilling, metallurgical testing and production, and the evaluation of mine plans subsequent to the date of any estimate could require revision of the estimates |
| The volume and grade of mineral reserves mined and processed and recovery rates might not be the same as currently anticipated |
| Any material reductions in estimates of our mineral reserves and non-reserves, or of our ability to extract these mineral reserves and non-reserves, could have a material adverse effect on our results of operations and financial condition |
| We currently have only two major sources of operational cash flows, which will likely be insufficient by themselves to fund our continuing exploration and development activities |
| While we have received significant infusions of cash from sales of equity and debt, our only current significant internal sources of funds are operational cash flows from Bogoso/Prestea and Wassa |
| The newly constructed Wassa processing plant and open pit mine were completed and placed in service on April 1, 2005, and we currently process through the plant a mixture of ore from the open pit and materials from the prior ownerapstas heap leach pads |
| Production at Wassa was 69cmam070 ounces during the last nine months of 2005 and is expected to average approximately 120cmam000 to 130cmam000 ounces per year after 2005 |
| However, Wassaapstas production goal may not be achieved |
| The anticipated continuing exploration and development of our properties will require significant expenditures over the next several years, which we expect to increase with the acquisition of St |
| We expect that these expenditures will exceed free cash flows generated by Bogoso/Prestea and Wassa during 2006 and possibly in later years and therefore we expect in the future to require additional external debt or equity financing |
| Lower gold prices during the five years prior to 2002 adversely affected our ability to obtain financing, and recurring lower gold prices could have similar effects in the future |
| If we are unable to obtain additional financing on acceptable terms, we might need to delay or indefinitely postpone further exploration and development of our properties, and as a result, we could lose our interest in, or could be forced to sell, some of our properties |
| Implementation of a gold hedging program might be unsuccessful and incur losses |
| EURO Ressources SA, our 53prca owned subsidiary, has entered into a cash-settled forward gold price agreement with its lender designed to reduce in part the impact of gold price fluctuations on expected future Rosebel royalty revenues it receives from Cambior Inc, as required by its loan agreement |
| While there is a risk of loss if the derivative positions were to be liquidated early and during a period of unfavorable gold prices, loan covenants prohibit liquidation of the position prior to the end of the loan repayment |
| Also, while the derivatives EURO has entered into are economically effective, accounting for the derivatives on a mark-to-market basis could show large swings in any period as any unrealized, non-cash losses/gains are recognized through the statement of operations |
| We have purchased and may continue to purchase put options ( "e puts "e ) and sell call options ( "e calls "e ) from time to time during the construction phase of the new processing plant at Bogoso in Ghana |
| Puts give us the right but not the obligation to sell gold in the future at a fixed price |
| Calls are contractual commitments which require us to sell gold at a fixed price on specified future dates |
| If the spot market gold price exceeds the call option price on the specified sale date we would receive the call price rather than the higher spot market price for the gold ounces covered by the call option |
| Our call options are set at dlra525 per ounce |
| There will be no cost to us unless the spot market price of gold exceeds this level on the call options &apos specified sales dates |
| Of our 2006 production, approximately 17prca is subject to calls at dlra525 per ounce, and approximately 50prca is protected by puts at a floor price of dlra406 per ounce |
| We continue to review whether or not, in light of the potential for gold prices to fall, it would be appropriate to establish a more general hedging program |
| To date, we have decided not to implement a more general hedging program on gold production from our own properties |
| We are subject to fluctuations in currency exchange rates, which could materially adversely affect our financial position |
| Our revenues are in United States dollars, and we maintain most of our working capital in United States dollars or United States dollar-denominated securities |
| We typically convert our United States funds to foreign currencies as payment obligations become due |
| Accordingly, we are subject to fluctuations in the rates of currency exchange between the United States dollar and these foreign 23 currencies, and these fluctuations could materially affect our financial position and results of operations |
| A significant portion of the operating costs at Bogoso/Prestea and Wassa is based on the Ghanaian currency, the Cedi |
| We are required to convert into Cedis only 20prca of the foreign exchange proceeds that we receive from selling gold, but the Government of Ghana could require us to convert a higher percentage of gold sales proceeds into Cedis in the future |
| In addition, we currently have future obligations that are payable in South African Rand and Euros, and receivables collectible in Euros |
| We obtain construction and other services and materials and supplies from providers in South Africa and other countries |
| The costs of goods and services could increase due to changes in the value of the United States dollar or the Cedi, Euros, the South African Rand or other currencies, such as the recent cost increase due to the decrease in the value of the United States dollar relative to other currencies |
| Consequently, operation and development of our properties might be more costly than we anticipate |
| We have purchased, and expect to continue to purchase South African Rand and Euro forward contracts to hedge the expected purchase of capital assets in South Africa and Europe in connection with the Bogoso sulfide expansion project |
| We may engage in additional currency hedges in the future in connection with other projects |
| Implementation of a currency hedging program may not adequately protect us from the effects of fluctuation in currency exchange rates |
| Risks inherent in acquisitions that we might undertake could adversely affect our current business and financial condition and our growth |
| We plan to continue to pursue the acquisition of producing, development and advanced stage exploration properties and companies, and we have recently completed the acquisition and joint venture of exploration and development properties in Ghana and Sierra Leone and the acquisition of St |
| Jude on December 21, 2005 |
| The search for attractive acquisition opportunities and the completion of suitable transactions are time consuming and expensive, divert management attention from our existing business and may be unsuccessful |
| Our success in our acquisition activities depends on our ability to complete acquisitions on acceptable terms and integrate the acquired operations successfully with those of Golden Star |
| Any acquisition would be accompanied by risks |
| For example, there may be a significant change in commodity prices after we have committed to complete a transaction and established the purchase price or exchange ratio, a material ore body may prove to be below expectations or the acquired business or assets may have unknown liabilities which may be significant |
| We may lose the services of our key employees or the key employees of any business we acquire or have difficulty integrating operations and personnel |
| The integration of an acquired business or assets may disrupt our ongoing business and our relationships with employees, suppliers and contractors |
| Any one or more of these factors or other risks could cause us not to realize the anticipated benefits of an acquisition of properties or companies, and could have a material adverse effect on our current business and financial condition and on our ability to grow |
| We are subject to litigation risks All industries, including the mining industry, are subject to legal claims, with and without merit |
| We are involved in various routine legal proceedings, which include labor matters such as unfair termination claims, supplier matters and property issues incidental to our business |
| Due to the inherent uncertainty of the litigation process, the resolution of any particular legal proceeding could have a material effect on our financial position and results of operations |
| OPERATIONAL RISKS The technology, capital costs and cost of production of refractory mineral reserves and non-reserves at Bogoso/Prestea remain subject to a number of uncertainties, including funding uncertainties |
| Based upon the completion of our Bogoso sulfide project feasibility studies in 2001 and 2005, the refractory material at Bogoso/Prestea has been included in our proven and probable mineral reserves, which are prepared in accordance with NI 43-101 of the Canadian securities regulators |
| While the sulfide project feasibility study indicated that refractory mineral reserves can be profitably mined and processed at current gold prices, the capital cost to construct a new bio-oxidation or BIOX(R) plant at Bogoso to process refractory ore, together with related mining equipment and facilities, is significant, and is forecast to be dlra125 million, of which approximately dlra36 million had been spent on the project through December 31, 2005 |
| While the processing technology envisioned in the feasibility study has been successfully utilized at other mines, and despite our testing, engineering and analysis, the technology may not perform successfully at commercial production levels on the Bogoso/Prestea refractory sulfide ores, in which case our production estimates may not be achieved |
| 24 The integration of Golden Star and St |
| We have only recently begun the process of integrating the operations of Golden Star and St |
| The acquisition of St |
| Jude was proposed with the expectation that its successful completion would over time result in enhanced growth opportunities and the synergies resulting from the combination of increased earnings and reduced costs |
| These anticipated benefits depend in part on whether the operations of Golden Star and St |
| Jude can be integrated in an efficient and effective manner and whether the St |
| Jude Properties can be developed |
| If these do not occur, the benefits we receive from the acquisition will be significantly less than anticipated |
| Most operational and certain staffing decisions with respect to the combined company have not yet been made |
| These decisions and the integration of the two companies will present challenges to management, including the integration of systems and personnel of the two companies, and special risks, including possible unanticipated liabilities and costs |
| We are subject to a number of operational hazards that can delay production or result in liability to us |
| Our activities are subject to a number of risks and hazards including: o environmental hazards; o discharge of pollutants or hazardous chemicals; o industrial accidents; o labor disputes and shortages; o supply and shipping problems and delays; o shortage of equipment and contractor availability; o difficulty in applying technology such as bio-oxidation processing; o unusual or unexpected geological or operating conditions; o slope failures; o cave-ins of underground workings; o failure of pit walls or dams; o fire; o marine and transit damage and/or loss; o changes in the regulatory environment; and o natural phenomena such as inclement weather conditions, floods and earthquakes |
| These or other occurrences could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, delays in mining, delayed production, monetary losses and possible legal liability |
| We could incur liabilities as a result of pollution and other casualties |
| Satisfying such liabilities could be very costly and could have a material adverse effect on our financial position and results of operations |
| Our mining operations are subject to numerous environmental laws, regulations and permitting requirements that can delay production and adversely affect operating and development costs |
| Compliance with existing regulations governing the discharge of materials into the environment, or otherwise relating to environmental protection, in the jurisdictions where we have projects may have a material adverse effect on our exploration activities, results of operations and competitive position |
| New or expanded regulations, if adopted, could affect the exploration or development of our projects or otherwise have a material adverse effect on our operations |
| 25 A significant portion of our Dunkwa property and portions of our Wassa property, as well as some of our exploration properties in Ghana, are located within forest reserve areas |
| Although Dunkwa and Wassa have been identified by the Government of Ghana as eligible for mining permits subject to normal procedures and a site inspection, permits for projects in forest reserve areas may not be issued in a timely fashion, or at all, and such permits may contain special requirements with which it is burdensome or expensive to comply |
| Mining and processing gold from the south end of the Prestea property, the new tailings dam at Bogoso and other activities will require mining and other permits from the Government of Ghana |
| These permits may not be issued on a timely basis or at all, and such permits, when issued, may be subject to requirements or conditions with which it is burdensome or expensive to comply |
| Such permitting issues could adversely affect our projected production commencement dates, production amounts and costs |
| Due to an increased level of non-governmental organization activity targeting the mining industry in Ghana, the potential for the Government of Ghana to delay the issuance of permits or impose new requirements or conditions upon mining operations in Ghana may be increased |
| Any changes in the Government of Ghanaapstas policies may be costly to comply with and may delay mining operations |
| The exact nature of other environmental control problems, if any, which we may encounter in the future cannot be predicted, primarily because of the changing character of environmental requirements that may be enacted within various jurisdictions |
| To the extent that we are subject to any such changes, they may have a material adverse effect on our operations |
| As a result of the foregoing risks, project expenditures, production quantities and rates and cash operating costs, among other things, could be materially and adversely affected and could differ materially from anticipated expenditures, production quantities and rates, and costs |
| In addition, estimated production dates could be delayed materially |
| Any such events could materially and adversely affect our business, financial condition, results of operations and cash flows |
| The development and operation of our mining projects involve numerous uncertainties that could affect the feasibility or profitability of such projects |
| Mine development projects, including our recent development at Wassa and expansion at Bogoso/Prestea, and the potential development of any of the St |
| Jude Properties if reserves are established, typically require a number of years and significant expenditures during the development phase before production is possible |
| Development projects are subject to the completion of successful feasibility studies and environmental assessments, issuance of necessary governmental permits and receipt of adequate financing |
| The economic feasibility of development projects is based on many factors such as: o estimation of mineral reserves and mineral resources; o anticipated metallurgical recovery rates; o environmental considerations and permitting; o future gold prices; and o anticipated capital and operating costs |
| Our mine development projects could have limited relevant operating history upon which to base estimates of future operating costs and capital requirements |
| Estimates of proven and probable mineral reserves and operating costs determined in feasibility studies are based on geologic and engineering analyses and might not prove to be accurate |
| The management of mine development projects and start up of new operations are complex, and we do not have a history of simultaneously managing an ongoing operation, the start-up of a new operation and a significant development project |
| Completion of development and the commencement of production may be subject to delays, as occurred at Wassa |
| Any of the following events, among others, could affect the profitability or economic feasibility of a project: o unanticipated changes in grade and tonnage of ore to be mined and processed; o unanticipated adverse geotechnical conditions; 26 o incorrect data on which engineering assumptions are made; o costs of constructing and operating a mine in a specific environment; o availability and cost of processing and refining facilities; o availability of economic sources of power; o adequacy of water supply; o adequate access to the site including competing land uses (such as agriculture and illegal mining); o unanticipated transportation costs and shipping incidents and losses; o significant increases in the cost of diesel fuel, cyanide or other major components of operating costs; o government regulations (including regulations relating to prices, royalties, duties, taxes, permitting, restrictions on production, quotas on exportation of minerals, as well as the costs of protection of the environment and agricultural lands); o fluctuations in gold prices; and o accidents, labor actions and force majeure events |
| Adverse effects on the operations or further development of a project could also adversely affect our business, financial condition, results of operations and cash flow |
| Because of these uncertainties, and others identified in these "e Risk Factors, "e our production estimates at Bogoso/Prestea and Wassa may not be achieved |
| We need to continually discover, develop or acquire additional mineral reserves for gold production and a failure to do so would adversely affect our business and financial position in the future |
| Because mines have limited lives based on proven and probable mineral reserves, we must continually replace and expand our mineral reserves as our mines produce gold |
| At current average production rates, we estimate that Bogoso/Prestea has about ten years of mine life and Wassa has about five years of mine life, but our estimates might not be correct and the mine life would be shortened if we expand production |
| Our ability to maintain or increase our annual production of gold will be dependent in significant part on our ability to bring new mines into production and to expand or extend the life of existing mines |
| Gold exploration is highly speculative, involves substantial expenditures, and is frequently non-productive |
| Gold exploration, including the exploration of the Prestea Underground and the St |
| Jude Properties and other projects, involves a high degree of risk and exploration projects are frequently unsuccessful |
| To the extent that we continue to be involved in gold exploration, the long-term success of our operations will be related to the cost and success of our exploration programs |
| We cannot assure you that our gold exploration efforts will be successful |
| The success of gold exploration is determined in part on the following factors: o the identification of potential gold mineralization based on superficial analysis; o availability of prospective land; o availability of government-granted exploration and exploitation permits; o the quality of our management and our geological and technical expertise; and o the capital available for exploration and development |
| Substantial expenditures are required to determine if a project has economically mineable mineralization |
| It could take several years to establish proven and probable mineral reserves and to develop and construct mining and processing facilities |
| As a result of these uncertainties, we cannot assure you that current and future exploration programs will result in the discovery of mineral reserves, the expansion of our existing mineral reserves and the development of mines |
| 27 We face competition from other mining companies in connection with the acquisition of properties |
| We face strong competition from other mining companies in connection with the acquisition of properties producing, or capable of producing, precious metals |
| Many of these companies have greater financial resources, operational experience and technical capabilities |
| As a result of this competition, we might be unable to maintain or acquire attractive mining properties on terms we consider acceptable or at all |
| Consequently, our revenues, operations and financial condition could be materially adversely affected |
| We seek to confirm the validity of our rights to title to, or contract rights with respect to, each mineral property in which we have a material interest |
| However, we cannot guarantee that title to our properties will not be challenged |
| Title insurance generally is not available, and our ability to ensure that we have obtained a secure claim to individual mineral properties or mining concessions could be severely constrained |
| We generally do not conduct surveys of our properties until they have reached the development stage, and therefore, the precise area and location of such properties could be in doubt |
| Accordingly, our mineral properties could be subject to prior unregistered agreements, transfers or claims, and title could be affected by, among other things, undetected defects |
| In addition, we might be unable to operate our properties as permitted or to enforce our rights with respect to our properties |
| We depend on the services of key executives |
| We are dependent on the services of key executives including our President and Chief Executive Officer and a small number of highly skilled and experienced executives and personnel |
| Due to the relatively small size of our management team, the loss of these persons or our inability to attract and retain additional highly skilled employees could adversely affect the exploration and development of our properties, which could have a material adverse effect on our business and future operations |
| We have obtained key person insurance only with respect to our President and Chief Executive Officer |
| The period of weak gold prices prior to 2002 resulted in depletion of the number of trained and experienced professionals and managers in our industry |
| Higher gold prices have resulted in an increased demand for these people, and it could therefore be more difficult to attract or retain such experienced professionals and managers without significantly increasing the cost to us |
| Our insurance coverage could be insufficient |
| Our business is subject to a number of risks and hazards generally, including: o adverse environmental conditions; o industrial accidents; o labor disputes; o unusual or unexpected geological conditions; o ground or slope failures; o cave-ins; o changes in the regulatory environment; o marine transit and shipping damage and/or losses; o natural phenomena such as inclement weather conditions, floods and earthquakes; and o political risks including expropriation and civil war |
| Such occurrences could result in: o damage to mineral properties or production facilities; 28 o personal injury or death; o loss of legitimate title to properties; o environmental damage to our properties or the properties of others; o delays in mining, processing and development; o monetary losses; and o possible legal liability |
| Although we maintain insurance in amounts that we believe to be reasonable, our insurance might not cover all the potential risks associated with our business |
| We might also be unable to maintain insurance to cover these risks at economically feasible premiums |
| Insurance coverage might not continue to be available or might 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 us or to other companies in the mining industry on acceptable terms |
| We might also become subject to liability for pollution or other hazards which we cannot insure against or which we might elect not to insure against because of premium costs or other reasons |
| Losses from these events might cause us to incur significant costs that could have a material adverse effect upon our financial performance and results of operations |
| In addition, as of the completion of the Arrangement with St |
| Jude and its properties at economically feasible premiums or at all |
| GOVERNMENTAL AND REGULATORY RISKS As a holding company, limitations on the ability of our operating subsidiaries to make distributions to us could adversely affect the funding of our operations |
| We are a holding company that conducts operations through foreign (principally African) subsidiaries and joint ventures, and substantially all of our assets consist of equity in these entities |
| Accordingly, any limitation on the transfer of cash or other assets between the parent corporation and these entities, or among these entities, could restrict our ability to fund our operations efficiently, or to repay our convertible notes or other debt |
| Any such limitations, or the perception that such limitations might exist now or in the future, could have an adverse impact on available credit and our valuation and stock price |
| We are subject to changes in the regulatory environment where we operate which may increase our costs of compliance |
| Our mining operations and exploration activities are subject to extensive regulation governing various matters, including: o licensing; o production; o taxes; o disposal of process water or waste rock; o toxic substances; o development and permitting; o exports; o imports; o labor standards; o occupational health and safety; 29 o mine safety; and o environmental protections; Compliance with these regulations increases the costs of the following: o planning; o designing; o drilling; o operating; o developing; o constructing; and o closure and reclamation |
| We believe that we are in substantial compliance with current laws and regulations in Ghana and elsewhere |
| However, these laws and regulations are subject to frequent change and reinterpretation |
| Due to the substantial increase in mining development in Ghana in recent years, the Government of Ghana has been reviewing the adequacy of reclamation bonds and guarantees throughout the country and in some cases has requested higher levels of bonding than previously had been required |
| Our bonds may be increased |
| Amendments to current laws and regulations governing operations and activities of mining companies or more stringent implementation or interpretation of these laws and regulations could have a material adverse impact on us, cause a reduction in levels of production and delay or prevent the development or expansion of our properties in Ghana |
| Government regulations limit the proceeds from gold sales that could be withdrawn from Ghana |
| Changes in regulations that increase these restrictions could have a material adverse impact on us, as Bogoso/Prestea and Wassa are currently our only sources of internally generated operating cash flows |
| The Government of Ghana has the right to increase its ownership and control of certain subsidiaries |
| The Government of Ghana is entitled to a 10prca carried interest in gold properties in Ghana |
| The carried interest comes into existence at the time the government issues a mining license |
| As such, the Government of Ghana currently has a 10prca carried interest in our subsidiaries that own the Bogoso Prestea mine, the Wassa mine and a 19prca carried interest in the Prestea Underground property in Ghana |
| The Government of Ghana also has: (a) the right under the current mining law to acquire up to an additional 20prca equity interest in each of these subsidiaries for a price to be determined by agreement or arbitration (although this right does not exist in the new Minerals and Mining Bill which is expected to receive Presidential assent in 2006); (b) the right to acquire a special share or "e golden share "e in such subsidiaries at any time for no consideration or such consideration as the Government of Ghana and such subsidiaries might agree; and (c) a pre-emptive right to purchase all gold and other minerals produced by such subsidiaries |
| The Government of Ghana may seek to exercise one or more of these rights, which could reduce our equity interest |
| A reduction in our equity interest could reduce our income or cash flows from Bogoso/Prestea or Wassa, reducing amounts available to us for reinvestment and adversely affecting our ability to take certain actions |
| We are subject to risks relating to exploration, development and operations in foreign countries |
| Certain laws, regulations and statutory provisions in certain countries in which we have mineral rights could, as they are currently written, have a material negative impact on our ability to develop or operate a commercial mine |
| For countries where we have exploration or development stage projects, we intend to negotiate mineral agreements with the governments of these countries and seek variances or otherwise be exempted from the provisions of these laws, regulations and/or statutory provisions |
| We cannot assure you, however, that we will be successful in obtaining mineral agreements or variances or exemptions on commercially acceptable terms |
| In addition, our assets and operations are affected by various political and economic uncertainties, including: o the risks of war, civil unrest, coups or other violent or unexpected changes in government; 30 o political instability and violence; o expropriation and nationalization; o renegotiation or nullification of existing concessions, licenses, permits, and contracts; o illegal mining; o changes in taxation policies; o restrictions on foreign exchange and repatriation; and o changing political conditions, currency controls, and governmental regulations that favor or require the awarding of contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction |
| Illegal mining occurs on our properties, is difficult to control, can disrupt our business and can expose us to liability |
| We continue to experience significant illegal mining activity on our Bogoso/Prestea property involving illegal miners numbering in the thousands |
| Most of this activity is close to our Plant-North pit and planned Bogoso North and Beta Boundary pit areas and includes areas where we have established reserves |
| It is difficult to quantify the exact impact of this activity on our reserves and non-reserve mineral resources |
| The impact of this illegal mining, to the extent known at this time, on our currently reported Mineral Reserves and Non-Reserve Mineral Resources, has been reflected in our year-end 2005 reserve figures |
| While we are proactively working with local, regional and national governmental authorities to obtain protection of our property rights on a timelier basis, any action on the part of such authorities may not occur, may not fully address our problems or may be delayed |
| In addition to the impact on our mineral reserve and non reserve mineral resources, the presence of illegal miners could lead to project delays and disputes and delays regarding the development or operation of commercial gold deposits |
| The work performed by the illegal miners could cause environmental damage or other damage to our properties, or personal injury or death for which we could potentially be held responsible |
| Illegal miners work on other of our properties from time to time, including on the Paul Isnard property in French Guiana, and they may in the future increase their presence and have increased negative impacts such as those described above on such other properties |
| Our activities are subject to complex laws, regulations and accounting standards that can adversely affect operating and development costs, the timing of operations, the ability to operate and financial results |
| Our business, mining operations and exploration and development activities are subject to extensive Canadian, United States, Ghanaian and other foreign, federal, state, provincial, territorial and local laws and regulations governing exploration, development, production, exports, taxes, labor standards, waste disposal, protection of the environment, reclamation, historic and cultural resource preservation, mine safety and occupational health, toxic substances, reporting and other matters, as well as accounting standards |
| Compliance with these laws, regulations and standards or the imposition of new such requirements could adversely affect operating and development costs, the timing of operations, the ability to operate and financial results |
| We have identified a material weakness in our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act; failure in the future to achieve and maintain effective internal controls could have a material adverse effect on our business and share price |
| We are required to annually test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditor addressing these assessments |
| In connection with managementapstas assessments for the year ended December 31, 2005, management identified a material weakness in our internal control over financial reporting related to not maintaining appropriate documentation to support the use of hedge accounting in our subsidiary, EURO Ressources SA We determined that Golden Star did not have the necessary controls in place to properly identify the lack of documentation, which was necessary to properly evaluate the derivative instruments to determine if hedge accounting was appropriate |
| As a result of this, management has concluded that, for the year ended December 31, 2005, Golden Star did not maintain effective control over financial reporting |
| As a result, our independent registered public accounting firm has issued an adverse opinion on our internal control over financial reporting as of December 31, 2005 |
| 31 The treatment of the EURO derivative contracts has been properly reflected in this Annual Report on Form 10-K, and we plan to restate our consolidated financial statements for the quarters ended March 31, June 30 and September 30, 2005 to reflect such change in accounting treatment |
| We have taken steps to remediate the material weakness discussed above; however failure in the future to achieve and maintain an effective internal control environment could have a material adverse effect on our business and share price |
| MARKET RISKS The market price of our common shares could experience volatility and could decline significantly |
| Securities of 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 globally and market perceptions of the attractiveness of particular industries |
| Our share price is also likely to be significantly affected by short-term changes in gold prices or in our financial condition or results of operations as reflected in our quarterly earnings reports |
| Other factors unrelated to our performance that could have an effect on the price of our common shares include the following: o the extent of analytical coverage available to investors concerning our business could be limited if investment banks with research capabilities do not continue to follow our securities; o the trading volume and general market interest in our securities could affect an investorapstas ability to trade significant numbers of common shares; o the size of the public float in our common shares may limit the ability of some institutions to invest in our securities; and o a substantial decline in our stock price that persists for a significant period of time could cause our securities to be delisted from the AMEX and the TSX, further reducing market liquidity |
| As a result of any of these factors, the market price of our common shares at any given point in time might not accurately reflect our long-term value |
| Securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities |
| We could in the future be the target of similar litigation |
| Securities litigation could result in substantial costs and damages and divert managementapstas attention and resources |
| Investors could have difficulty or be unable to enforce certain civil liabilities on us, certain of our directors and our experts |
| Golden Star is a Canadian corporation |
| Substantially all of our assets are located outside of Canada and the United States, and our head office is located in the United States |
| It might not be possible for investors to collect judgments obtained in Canadian courts predicated on the civil liability provisions of Canadian or US securities legislation |
| It could also be difficult for you to effect service of process in connection with any action brought in the United States upon our directors and experts |
| Execution by United States courts of any judgment obtained against us or, any of the directors, executive officers or experts named in this report in the United States courts would be limited to our assets or the assets of such persons or corporations, as the case might be, in the United States |
| The enforceability in Canada of United States judgments or liabilities in original actions in Canadian courts predicated solely upon the civil liability provisions of the federal securities laws of the United States is doubtful |
| There may be certain tax risks associated with investments in Golden Star |
| Potential investors that are United States taxpayers should consider that we could be considered to be a "e passive foreign investment company "e ( "e PFIC "e ) for US federal income tax purposes |
| Although we believe that we currently are not a PFIC and do not expect to become a PFIC in the future, the tests for determining PFIC status are dependent upon a number of factors, some of which are beyond our control, and we can not assure you that we would not become a PFIC in the future |
| If we were deemed to be a PFIC, then a United States taxpayer who disposes of common shares at a gain, or who received a so-called "e excess distribution "e on the common shares, generally would be required to treat such gain or excess distribution as ordinary income and pay an interest charge on a portion of the gain or distribution |
| 32 The existence of outstanding rights to purchase or acquire common shares could impair our ability to raise capital |
| As of March 27, 2006 approximately 18dtta6 million common shares are issuable on exercise of warrants, options or other rights to purchase common shares (including options and warrants issued in exchange for St |
| Jude options and warrants) at prices ranging from Cdndlra0dtta29 to Cdndlra9dtta07 |
| In addition, 11dtta1 million common shares are currently issuable upon conversion of our senior convertible notes issued in April 2005 |
| During the life of the warrants, options, notes and other rights, the holders are given an opportunity to profit from a rise in the market price of common shares, with a resulting dilution in the interest of the other shareholders |
| Our ability to obtain additional financing during the period such rights are outstanding could be adversely affected, and the existence of the rights could have an adverse effect on the price of our common shares |
| The holders of the warrants, options, notes and other rights can be expected to exercise or convert them at a time when we would, in all likelihood, be able to obtain any needed capital by a new offering of securities on terms more favorable than those provided by the outstanding rights |