| Wed 28 May 2008, 13:57 | | RDI - Rockwell - Audited Consolidated Financial Statements Years Ended May |
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RDI
RDI
RDI - Rockwell - Audited Consolidated Financial Statements Years Ended May
31, 2007 And 2006, And Nine Months Ended February 29, 2008
ROCKWELL DIAMONDS INCORPORATED
(A company incorporated in accordance with the laws of British Columbia,
Canada)
(Incorporation number BCO354545)
(Formerly Rockwell Ventures Inc.)
(South African registration number: 2007/031582/10)
Share code on the JSE Limited: RDI ISIN: CA77434W1032
Share code on the TSXV: RDI CUSIP Number: 77434W103
Share code on the OTCBB: RDIAF
("Rockwell
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006, AND NINE MONTHS ENDED FEBRUARY 29, 2008
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian Dollars)
February 29 May 31
2008 2007
Audited Audited
$ $
ASSETS
Current assets
Cash 19,623,847 32,626,376
Amounts receivable 631,446 1,724,418
Restricted cash (note 15(a)) 13,335,124 15,642,120
Trade receivable from a related party 593,434 839,253
(note 11)
Diamond inventory and supplies (note 5) 3,465,853 2,604,684
Prepaids and deposits 946,858 2,705,721
38,596,562 56,142,572
Property, plant and equipment (note 6) 64,831,636 44,790,441
Mineral property interests (note 7) 25,247,937 24,121,855
Other assets and deposits 3,200,112 3,513,449
Reclamation deposits (note 9) 1,816,877 1,038,066
133,693,124 129,606,383
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 4,420,212 $ 4,460,922
Amounts owing pursuant to acquisition 294,402 13,842,809
(note 7)
Due to related parties (note 11) 49,604 1,609,301
Income taxes 890,332 1,677,787
Current portion of capital lease 6,847,751 7,808,955
obligations (note 8)
12,502,301 29,399,774
Long-term liabilities
Capital lease obligations (note 8) 7,955,548 9,294,581
Future income taxes (note 12) 12,430,100 11,978,860
Reclamation obligation (note 9) 1,755,820 1,361,557
22,141,468 22,634,998
Non-controlling interest (note 7) 11,934,548 5,978,769
Shareholders` equity
Share capital (note 10) 112,095,390 88,903,530
Warrants (note 10(c)) 1,693,197 1,693,197
Contributed surplus 2,332,882 599,749
Deficit (29,006,662) (19,603,634)
87,114,807 71,592,842
Nature and continuance of operations
(note 1)
Subsequent events (note 15)
Contingencies and commitments ( notes 7
and 14)
133,693,124 129,606,383
The accompanying notes are an integral part of these
consolidated financial statements.
Approved by the Board of Directors
Dr. John Bristow
Chief Executive Officer
Dominique de la Roche
Director
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Expressed in Canadian Dollars)
Nine months Year Year
ended ended ended
February 29 May 31 May 31 2006
2008 2007 Audited
Audited Audited $
$ $
Revenue
Rough diamonds sales (note 35,863,214 8,117,647 -
11(h))
Contract diamond sales (note 174,892 1,967,889 -
11(h))
Other sales 111,202 17,792 -
36,149,308 10,103,328 -
Cost of sales
Cost of rough diamonds sales (22,581,613) (7,206,389) -
Cost of contract diamond (148,658) (1,768,353) -
sales
Amortization and depletion (6,533,941) (2,074,415) -
Operating profit 6,885,096 (945,829) -
Expenses
Accretion of reclamation 464,316 55,471 -
obligation (note 9)
Exploration 604,169 1,371,351 307,390
Foreign exchange gain (751,315) (3,580,364) (46,881)
Interest on capital leases 1,289,385 433,125 -
Interest expense 270,976 103,031 -
Legal, accounting and audit 790,725 691,759 175,782
Office and administration 2,697,077 2,993,453 489,014
Property investigations - - 399,006
Shareholder communications 198,985 200,574 32,129
Stock-based compensation - 514,892 41,372 36,415
exploration (note 10(b))
Stock-based compensation - 1,311,423 38,251 47,101
administration (note 10(b))
Travel and conferences 654,705 666,194 132,647
Transfer agent 544,232 176,530 20,843
8,589,570 3,190,747 1,593,446
Other items
Gain on sale of marketable - - (56,585)
securities
Write-off of amounts 18,360 224,942 -
receivable
Loss on disposal of 402,411 94,621 -
equipment
Interest income (1,118,396) (372,149) (2,172)
Convertible note accretion - 2,363,808 -
expense
Loss on early extinguishment - 137,957 -
of convertible promissory
notes
Write-down of mineral - - 46,856
property interests
Write-down of marketable - 1 19,128
securities
(697,625) 2,449,180 7,227
Loss before income taxes 1,006,849 6,585,756 1,600,673
Income tax expense (note 12) 179,290 - -
Future income tax (recovery) 2,261,110 (635,773) -
expense (note 12)
Loss before non-controlling 3,447,249 5,949,983 1,600,673
interest
Non-controlling interest 5,955,779 415,159 -
Loss for the period 9,403,028 6,365,142 1,600,673
Other comprehensive loss - - -
Total Comprehensive Loss $ 9,403,028 $ 6,365,142 $ 1,600,673
Reconciliation to Headline
earnings per share
Foreign exchange gain (751,315) (3,580,364) 307,390
Loss on disposal of 402,411 94,621 -
equipment
Headline earnings 9,751,932 9,850,885 1,293,283
Basic and diluted loss per $ 0.05 $ 0.11 $ 0.07
common share
Headline loss per share $ 0.05 $ 0.18 $ 0.07
Weighted average number of 196,428,551 55,418,242 23,640,123
common shares outstanding
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS` EQUITY
(Expressed in Canadian Dollars)
Nine
months
ended February
29 2008
Audited
Share capital Number of
shares
Balance at beginning of the period 186,976,219 $ 88,903,530
Share purchase options exercised at - -
$0.32 per share
Share purchase options exercised at 107,917 43,167
$0.40 per share
Share purchase options exercised at 145,000 60,900
$0.42 per share
Private placement November 2006, - 4,160
net of issue costs at $0.47 per
share
Private placement May 2007, net of - -
issue costs at $0.47 per share
Private placement January 2008, net 24,101,526 13,860,916
of issue costs at $0.60 per share
Interest consideration for - -
convertible promissory at $0.60 per
share notes
Interest consideration for credit - -
facility at $0.61 per share
Interest consideration for loan at - -
$0.55 per share
Commission consideration for - -
private placement at $0.52 per
share
Commission consideration for 500,000 300,000
private placement at $0.60 per
share
Warrants exercised at $0.40 per - -
share
Warrants exercised at $0.60 per 2,400,000 1,440,000
share
Consideration for acquisition of 7,848,663 6,081,842
property net of issue cost at $0.78
per share (note 7)
Consideration for property finders 1,676,529 1,307,693
fees at $0.78 per share (note 7)
Fair value of stock options - 93,182
allocated to shares issued on
exercise
Balance at end of the period 223,755,854 $ 112,095,390
Warrants
Broker warrants issued as 1,693,197
consideration for private placement
$ 1,693,197
Contibuted surplus
Balance at beginning of the period 599,749
Stock-based compensation (note 1,826,315
10(b))
Fair value of stock options (93,182)
allocated to shares issued on
exercise
Balance at end of the period 2,332,882
Deficit
Balance at beginning of the period (19,603,634)
Loss for the period (9,403,028)
Balance at end of the period (29,006,662)
TOTAL SHAREHOLDERS` EQUITY 87,114,807
Year ended
May 31
2007
Audited
$
Share capital Number of
shares
Balance at beginning of the period 23,694,776 11,857,649
Share purchase options exercised at - -
$0.32 per share
Share purchase options exercised at 9,167 3,734
$0.40 per share
Share purchase options exercised at - -
$0.42 per share
Private placement November 2006, 42,000,000 19,784,230
net of issue costs at $0.47 per
share
Private placement May 2007, net of 116,007,154 54,184,270
issue costs at $0.47 per share
Private placement January 2008, net - -
of issue costs at $0.60 per share
Interest consideration for 1,734,127 1,045,000
convertible promissory at $0.60 per
share notes
Interest consideration for credit 1,939,562 1,182,869
facility at $0.61 per share
Interest consideration for loan at 497,993 273,896
$0.55 per share
Commission consideration for 1,093,440 568,588
private placement at $0.52 per
share
Commission consideration for - -
private placement at $0.60 per
share
Warrants exercised at $0.40 per - -
share
Warrants exercised at $0.60 per - -
share
Consideration for acquisition of - -
property net of issue cost at $0.78
per share (note 7)
Consideration for property finders - -
fees at $0.78 per share (note 7)
Fair value of stock options - 3,294
allocated to shares issued on
exercise
Balance at end of the period 186,976,219 88,903,530
Warrants
Broker warrants issued as 1,693,197
consideration for private placement
1,693,197
Contibuted surplus
Balance at beginning of the period 523,420
Stock-based compensation (note 79,623
10(b))
Fair value of stock options (3,294)
allocated to shares issued on
exercise
Balance at end of the period 599,749
Deficit
Balance at beginning of the period (13,238,492)
Loss for the period (6,365,142)
Balance at end of the period (19,603,634)
TOTAL SHAREHOLDERS` EQUITY 71,592,842
Year ended
May 31
2006
Audited
$
Share capital Number of
shares
Balance at beginning of the period 23,613,943 $ 11,815,792
Share purchase options exercised at 27,500 8,800
$0.32 per share
Share purchase options exercised at 3,333 1,333
$0.40 per share
Share purchase options exercised at - -
$0.42 per share
Private placement November 2006, - -
net of issue costs at $0.47 per
share
Private placement May 2007, net of - -
issue costs at $0.47 per share
Private placement January 2008, net - -
of issue costs at $0.60 per share
Interest consideration for - -
convertible promissory at $0.60 per
share notes
Interest consideration for credit - -
facility at $0.61 per share
Interest consideration for loan at - -
$0.55 per share
Commission consideration for - -
private placement at $0.52 per
share
Commission consideration for - -
private placement at $0.60 per
share
Warrants exercised at $0.40 per 50,000 20,000
share
Warrants exercised at $0.60 per - -
share
Consideration for acquisition of - -
property net of issue cost at $0.78
per share (note 7)
Consideration for property finders - -
fees at $0.78 per share (note 7)
Fair value of stock options - 11,724
allocated to shares issued on
exercise
Balance at end of the period 23,694,776 $ 11,857,649
Warrants
Broker warrants issued as -
consideration for private placement
Contibuted surplus
Balance at beginning of the period 451,628
Stock-based compensation (note 83,516
10(b))
Fair value of stock options (11,724)
allocated to shares issued on
exercise
Balance at end of the period 523,420
Deficit
Balance at beginning of the period (11,637,819)
Loss for the period (1,600,673)
Balance at end of the period (13,238,492)
TOTAL SHAREHOLDERS` EQUITY (857,423)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Canadian Dollars)
Cash provided by (applied Nine months Year ended Year ended
to): ended May 31 May 31
February 29 2007 2006
2008 Audited Audited
Audited $ $
$
Operating activities
Loss for the period (9,403,028) (6,365,142) (1,600,673)
Items not affecting cash
Accretion of reclamation 464,316 55,471 -
obligation
Amortization and depletion 4,460,323 1,196,682 -
Amortization of capital 2,073,618 877,733 -
lease equipment
Gain on sale of marketable - - (56,585)
securities
Write-off of amounts 18,360 224,942 -
receivable
Write-down of marketable - 1 19,128
securities
Write-down of mineral - - 46,856
property interests
Loss on early extinguishment - 137,957 -
of convertible promissory
note
Non cash convertible note - 2,363,808 -
accretion and interest
expense
Stock-based compensation 1,826,315 79,623 83,516
(note 10(b))
Unrealized foreign exchange (2,967,105) (3,320,085) -
gain
Loss on disposal of 402,411 94,621 -
equipment
Future income tax (recovery) 2,261,110 (635,773) -
expense (note 12)
Provision for site 230,622 (474,024) -
reclamation
Non-controlling interest 5,955,779 415,159 -
Changes in non-cash working
capital items
Accounts receivable 1,074,612 (920,522) (23,244)
Amounts due to and from 245,819 6,074,609 -
related parties
Inventory (861,169) (508,110) -
Prepaids and deposits 1,758,863 (2,672,073) -
Accounts payable and accrued (40,710) (3,485,300) 137,624
liabilities
Income taxes (787,455) (872,950) -
Cash provided by (used in) 6,712,681 (7,733,373) (1,393,378)
operating activities
Investing activities
Acquisition of Durnpike - (8,293,413) -
Investments (Pty) Limited,
net of cash acquired (note 7
(a))
Overdraft assumed on - (1,201,297) -
acquisition of Durnpike
Investments, net
Restricted cash (note 15(a)) - (15,642,120) -
Proceeds received on sale of - - 146,970
marketable securities
Mineral property 600,661 (527,328) -
acquisitions
Purchase of equipment (21,603,785) (6,453,942) -
Proceeds received on 1,034,620 263,010 -
disposal of equipment
Other assets and deposits 313,337 (3,481,259) -
Reclamation deposits (778,811) (63,760) -
Cash provided by (used in) (20,433,978) (35,400,109) 146,970
investing activities
Financing activities
Principal repayments under (5,964,113) (2,678,965) -
capital lease obligations
Common shares and warrants 15,709,143 76,234,018 30,133
issued for cash, net of
issue costs
Amounts received (paid) to (1,559,697) (872,735) 1,055,629
related parties
Amounts paid pursuant to (7,466,565) 2,885,509 -
property acquisition
Repayment of credit facility - (11,000,000) -
Credit facility - 11,000,000 -
Repayment of convertible - (9,500,000) -
promissory notes
Issuance of convertible - 9,500,000 -
promissory notes
Repayment of loans payable - (12,474,500) -
to related parties
Loans payable to related - 12,474,500 -
parties
Cash provided by financing 718,768 75,567,827 1,085,762
activities
Increase (decrease) in cash (13,002,529) 32,434,345 (160,646)
during the period
Cash, beginning of period 32,626,376 192,031 352,677
Cash, end of period $ 19,623,847 $ 32,626,376 $ 192,031
Interest paid during the $ - $ 103,031 $ -
period
Interest received $ 1,118,396 $ 372,149 $ -
Income taxes paid during the $ 787,455 $ 872,950 $ -
period
Supplemental disclosure of
non-cash investing and
financing activities:
Issuance of warrants - $ - $ 1,693,197 $ -
consideration for private
placement
Issuance of common shares - $ 300,000 $ 568,588 $ -
consideration for private
placement
Issuance of common shares - $ - $ 1,045,000 $ -
interest on convertible
promissory notes
Issuance of common shares - $ - $ 1,456,764 $ -
interest on credit facility
Issuance of commons shares $ 6,081,842 $ - $ -
as consideration for
acquisition of property
(note 7)
Issuance of common shares as $ 1,307,693 $ - $ -
consideration for property
finders fees (note 7)
Fair value of stock options $ 93,182 $ 3,295 $ 11,724
allocated to shares issued
upon exercise
Equipment acquired under $ 6,408,382 $ 7,316,459 $ -
capital lease (note 6)
The accompanying notes are an integral part of these consolidated
financial statements.
ROCKWELL DIAMONDS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2007 and 2006 and the nine months ended February
29, 2008
(Expressed in Canadian Dollars unless otherwise stated)
1. NATURE AND CONTINUANCE OF OPERATIONS
Rockwell Diamonds Inc. (the "Company") is incorporated under the British
Columbia Business Corporations Act (formerly the Company Act of British
Columbia), and is engaged in the business of diamond production, and the
acquiring and exploring natural resource properties. The Company`s principal
mineral property interests are located in South Africa.
These consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. In December 2007, the
Company`s Board of Directors approved a resolution to change the Company`s
year end from May 31, 2008 to February 29, 2008.
During the year, the Company listed with the Toronto Stock Exchange ("TSX")
and also had a listing on the Johannesburg Stock Exchange ("JSE").
The Company has estimated that it will have adequate funds from existing
working capital to meet its corporate, operational, development,
administrative and property obligations for the coming year. The Company will
periodically need to obtain additional financing, and while it has been
successful in the past, there can be no assurance that it will be able to do
so in the future.
The recoverability of the amounts shown for the Company`s mineral property
interests, property, plant and equipment and inventory is dependent upon the
existence of economically recoverable mineral resources and future profitable
production or proceeds from the disposition of the mine. The Company`s
continuing operations are also dependent upon the discovery and existence of
economically recoverable mineral reserves, the ability of the Company to
obtain the necessary financing to complete the exploration and development of
its mineral property interests, and upon future profitable production or
proceeds from the disposition of its mineral property interests.
These consolidated financial statements do not include adjustments to amounts
and classifications of assets and liabilities that might be necessary should
the Company be unable to continue operations.
2. Basis of presentation and principles of consolidation
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles. These consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated upon consolidation. Certain comparative information has been
reclassified to conform to the presentation adopted in the current period.
3. Significant accounting policies
(a) Cash and equivalents
Cash and equivalents consist of cash and highly liquid investments,
having maturity dates of three months or less from the date of purchase, that
are readily convertible to known amounts of cash and which are subject to an
insignificant risk of change in value. At February 29, 2008, of the
$19,623,847 (May 31, 2007 - $32,626,376) cash and equivalents held by the
Company, $15,698,068 (ZAR 124,095,041) were held in South African Rand
("ZAR"), $35,772 ($16,553,541) were held in Chilean Pesos and $9,974
($10,036) in US Dollars.
(b) Revenue recognition
Revenue from rough diamond sales is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the Company`s price to the
customer is fixed or determinable and collection of the resulting receivable
is reasonably assured.
(c) Trade accounts receivables
Trade accounts receivables are recorded at the invoiced amount less an
estimate made for doubtful accounts based on a review of all outstanding
amounts on a quarterly basis. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.
(e) Inventory
Rough diamond inventory is recorded at the lower of production cost and net
realizable value. Production costs include the cost of consumable materials,
direct labour, mine-site overhead expenses and amortization.
Supplies inventory is valued at the lower of average cost and replacement
cost.
Plant and equipment
Plant and equipment are stated at cost less accumulated amortization. Assets
are amortized on a straight-line method over the estimated useful lives of
the related assets, which are as follows:
Processing plant and equipment 4 - 10 years
Office equipment 6 years
Vehicles and light equipment 5 years
Repairs and maintenance expenditures are charged to operations as incurred.
Significant improvements and major replacements which extend the useful life
of the asset are capitalized as incurred.
(f) Reclamation and security deposits
Reclamation and security deposits are recorded at cost.
(g) Mineral property interests
The acquisition costs of mineral properties are capitalized until the
property is placed into production, sold, or abandoned, or when management
has determined that there has been an impairment in value. Such acquisition
costs are amortized over the estimated life of the property, based on the
unit of production method, or written off to operations if the property is
abandoned, allowed to lapse, or if there is little prospect of further work
being carried out by the Company.
Mineral property acquisition costs include the cash consideration and the
fair market value of common shares, based on the trading price of the shares,
on the date of issue or as otherwise provided under the agreed terms for the
mineral property interest.
Exploration costs and option payments are expensed in the period incurred.
Administrative expenditures are expensed in the period incurred.
The amount presented for mineral property interests represents costs incurred
to date and accumulated acquisition costs, less write-downs, and does not
necessarily reflect present or future values.
(h) Financial instruments
The Company`s financial instruments consist of cash, restricted cash, amounts
receivable, trade receivables from a related party, reclamation deposit,
accounts payable and accrued liabilities, capital lease obligations, amounts
owing pursuant to acquisition and balances payable to related parties. It is
management`s opinion the Company is not exposed to significant interest,
currency or credit risk arising from these financial instruments. The fair
values of these financial instruments approximate their carrying values,
unless otherwise noted.
(i) Site closure and reclamation obligations
The Company accounts for site closure and reclamation costs in accordance
with Canadian Institute of Chartered Accountants ("CICA") Handbook Section
3110, "Asset Retirement Obligations" (HB 3110). HB 3110 requires the
recognition of any statutory, contractual or other legal obligation related
to the retirement of tangible long-lived assets when such obligations are
incurred, if a reasonable estimate of fair value can be made.
These obligations are measured initially at fair value and the resulting
costs are capitalized to the carrying value of the related asset. In
subsequent periods, the liability is adjusted for the accretion of the
discount and any changes in the amount or timing of the underlying future
cash flows. The asset retirement cost is amortized to operations over the
life of the asset. Changes resulting from revisions to the timing or the
amount of the original estimate of undiscounted cash flows are recognized as
an increase or a decrease in the carrying amount of the liability, and the
related asset retirement cost is capitalized as part of the carrying amount
of the related long-lived asset.
(j) Impairment of long-lived assets
Long-lived assets, including mineral properties, plant and equipment, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of would be separately presented in the balance
sheet and reported at the lower of the carrying amount and the fair value
less costs to sell, and are no longer amortized.
(k) Foreign currency translation
All of the Company`s foreign operations are considered integrated.
Monetary assets and liabilities of the Company and its integrated foreign
operations are translated into Canadian dollars at exchange rates in effect
at the balance sheet date. Non-monetary assets and liabilities are
translated at historical exchange rates unless such items are carried at
market, in which case they are translated at the exchange rates in effect on
the balance sheet date. Revenues, cost of sales and expenses, except
amortization, are translated at the average exchange rates for the period.
Amortization is translated at the same exchange rate as the assets to which
it relates. Gains or losses on translation are recorded in the statement of
operations.
(l) Share capital
Common shares issued for mineral property interests are recorded at their
fair market value based upon the trading price of the shares on the Toronto
Stock Exchange ("TSX") on the date of issue or as otherwise provided under
the terms of the agreement to issue the shares. Share issue costs are
deducted from share capital.
(m) Stock-based compensation
The Company has a share option plan which is described in note 10(b). The
Company records all stock-based payments granted using the fair value method.
Under the fair value method, stock-based payments are measured at the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable, and are charged to
operations over the vesting period, with an offsetting amount to contributed
surplus. Consideration received on the exercise of stock options is recorded
as share capital and the related contributed surplus is transferred to share
capital.
(n) Income taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, future income tax assets and liabilities are
computed based on differences between the carrying amount of assets and
liabilities on the balance sheet and their corresponding tax values,
generally using the enacted or substantively enacted income tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Future tax assets are recognized to the extent that they are considered more
likely than not to be realized. The valuation of future income tax assets is
adjusted, if necessary, by the use of a valuation allowance to reflect the
estimated realizable amount.
(o) Loss per share
Basic income (loss) per share is calculated by dividing the loss for the
period by the weighted average number of common shares outstanding during the
period.
Diluted income (loss) per share is calculated using the treasury stock
method. Under the treasury stock method, the weighted average number of
common shares outstanding used for the calculation of diluted income (loss)
per share assumes that the proceeds receivable upon exercise of dilutive
share purchase options and warrants are used to repurchase common shares at
the average market price during the period.
Diluted loss per share has not been presented separately as the effect of
outstanding options and warrants would be anti-dilutive.
(p) Use of estimates
The preparation of consolidated financial statements in conformity with
Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as at the
balance sheet date, and the reported amounts of revenues and expenses during
the reporting period. Significant areas requiring the use of management
estimates relate to the impairment of mineral property interests,
determination of reclamation obligations and the assumptions used in
determining stock-based compensation expense. Actual results could differ
from those estimates.
4. CHANGES IN ACCOUNTING POLICIES
(a) Newly Adopted Accounting Policies
Effective June 1, 2007, the Company adopted the following new accounting
standards issued by the Canadian Institute of Chartered Accountants ("CICA")
relating to financial instruments. These new standards have been adopted on a
prospective basis with no restatement to prior period financial statements.
(i) Section 3855 - Financial Instruments - Recognition and Measurement
This standard sets out criteria for the recognition and measurement of
financial instruments for fiscal years beginning on or after October 1, 2006.
This standard requires all financial instruments within its scope, including
derivatives, to be included on a Company`s balance sheet and measured either
at fair value or, in certain circumstances when fair value may not be
considered most relevant, at cost or amortized cost. Changes in fair value
are to be recognized in the statements of operations and comprehensive
income, depending on the classification of the related instruments.
All financial assets and liabilities are recognized when the entity becomes a
party to the contract creating the item. As such, any of the Company`s
outstanding financial assets and liabilities at the effective date of
adoption are recognized and measured in accordance with the new requirements
as if these requirements had always been in effect. Any changes to the fair
values of assets and liabilities prior to June 1, 2007 are recognized by
adjusting opening deficit or opening accumulated other comprehensive income.
All financial instruments are classified into one of the following
categories: held for trading, held-to-maturity and available-for-sale
financial assets. Initial and subsequent measurement and recognition of
changes in the value of financial instruments depends on their initial
classification:
- Held-to-maturity investments, loans and receivables, and other financial
liabilities are initially measured at fair value and subsequently measured at
amortized cost. Amortization of premiums or discounts and losses due to
impairment are included in current period net earnings.
- Available-for-sale financial assets are measured at fair value. Changes
in fair value are included in other comprehensive income until the gain or
loss is recognized in income.
- Held for trading financial instruments are measured at fair value. All
gains and losses are included in net earnings in the period in which they
arise.
- All derivative financial instruments are measured at fair value, even
when they are part of a hedging relationship. Changes in fair value are
included in net earnings in the period in which they arise, except for hedge
transactions which qualify for hedge accounting treatment in which case gains
and closes are recognized in other comprehensive income.
On adoption of the standards on June 1, 2007, the Company`s outstanding
financial assets and liabilities were recognized and measured in accordance
with the new requirements as if these requirements had always been in effect.
However, no adjustments to opening deficit or opening accumulated other
comprehensive income were required.
In accordance with this new standard, the Company has classified its
financial instruments as follows:
- Cash and restricted cash are classified as held for trading financial;
instruments and are measured at fair value due to their short term nature and
availability for prompt liquidation.
- Amounts receivables and trades receivable from a related party are
classified as loans and receivables and are measured initially at fair value
and subsequently measured at amortized cost.
- Accounts payable and accrued liabilities, amounts owing pursuant to
acquisition and balances payable to related parties are classified as other
financial liabilities and are measured initially at fair value and
subsequently measured at amortized cost.
- Reclamation deposits invested in interest bearing money market linked
investments are classified as available-for-sale securities and are carried
at fair market value, with the unrealized gain or loss recorded in
shareholders` equity as a component of other comprehensive income. During the
period there were no unrealized gains or losses relating the reclamation
deposits as the carrying amounts approximate the fair value. Previously,
reclamation deposits were carried at cost, less provision for other than a
temporary decline in value.
(ii) Section 3865 - Hedges.
This new standard specifies the circumstances under which hedge accounting is
permissible and how hedge accounting may be performed. The Company currently
does not have any financial instruments which qualify for hedge accounting.
(iii) Section 1530 - Comprehensive Income.
Comprehensive income is the change in the Company`s shareholder equity that
results from transactions and other events from other than the Company`s
shareholders and includes items that would not normally be included in net
earnings, such as unrealized gains or losses on available-for-sale
investments. This standard requires certain gains and losses that would
otherwise be recorded as part of net earnings to be presented in other
"comprehensive income" until it is considered appropriate to recognize into
net earnings. This standard requires the presentation of comprehensive
income, and its components in a separate financial statement that is
displayed with the same prominence as the other financial statements.
Accumulated other comprehensive income is presented as a new category in
shareholders` equity. As at February 29, 2008, the Company had no
accumulated other comprehensive income and for the period, comprehensive
income (loss) equals net loss.
(iv) Section 1506 - Accounting Changes
This standard establishes criteria for changing accounting policies, together
with the accounting treatment and disclosure of changes in accounting
policies, changes in accounting estimates and correction of errors. As a
result, changes in accounting policies are only permitted when required by a
primary source of generally accepted accounting principles or when the change
will result in more reliable and more relevant information.
(b) Accounting Policies Not Yet Adopted
(i) Section 1535 - Capital Disclosures
This standard requires disclosure of an entity`s objectives, policies and
processes for managing capital, quantitative data about what the entity
regards as capital and whether the entity has complied with any capital
requirements and, if it has not complied, the consequences of such non-
compliance. This standard is effective for the Company for interim and annual
periods relating to fiscal years beginning on or after January 1, 2008, The
Company is currently evaluating the effects of adopting this standard.
(ii) Financial Instruments - Disclosure (Section 3862) and Presentation
(Section 3863)
These standards replace CICA 3861, Financial Instruments - Disclosure and
Presentation. They increase the disclosures currently required, which will
enable users to evaluate the significance of financial instruments for an
entity`s financial position and performance, including disclosures about fair
value. In addition, disclosure is required of qualitative and quantitative
information about exposure to risks arising from financial instruments,
including specified minimum disclosures about credit risk, liquidity risk and
market risk. The quantitative disclosures must provide information about the
extent to which the entity is exposed to risk, based on information provided
internally to the entity`s key management personnel. This standard is
effective for the Company for interim and annual periods beginning on or
after January 1, 2008. The Company expects that its disclosures will be
expanded to incorporate the additional requirements.
(iii) Amendments to Section 1400 - Going Concern
CICA 1400, General Standards of Financial Statement Presentation, was amended
to include requirements to assess and disclose an entity`s ability to
continue as a going concern. The new requirements are effective for interim
and annual financial statements relating to fiscal years beginning on or
after January 1, 2008. The Company is currently evaluating the impact of this
new standard.
(iv) International Financial Reporting Standards ("IFRS")
In 2006, the Canadian Accounting Standards Board ("AcSB") published a new
strategic plan that will significantly affect financial reporting
requirements for Canadian companies. The AcSB strategic plan outlines the
convergence of Canadian GAAP with IFRS over an expected five year
transitional period. In February 2008, the AcSB announced that 2011 is the
changeover date for publicly-listed companies to use IFRS, replacing Canada`s
own GAAP. The date is for interim and annual financial statements relating
to fiscal years beginning on or after January 1, 2011. The transition date
of January 1, 2011 will require the restatement for comparative purposes of
amounts reported by the Company for the year ended December 31, 2010. While
the Company has begun assessing the adoption of IFRS for 2011, the financial
reporting impact of the transition to IFRS cannot be reasonably estimated at
this time.
5. DIAMOND INVENTORY AND SUPPLIES
As at As at
February May 31,
29, 2008 2007
Rough diamond inventory $ 830,780 $ 644,459
Work in progress 433,074 -
Mine supplies 1,990,699 1,741,412
Fuel, oil and grease 211,300 218,813
Total inventory and $ 3,465,853 $ 2,604,684
supplies
6. PROPERTY, PLANT AND EQUIPMENT
As at February 29, 2008
Cost Accumulated Net book
amortization value
Land $ 3,936,092 $ - $ 3,936,092
Processing plant and 35,421,362 1,474,746 33,946,616
equipment
Processing plant and 27,850,217 2,961,508 24,888,709
equipment under capital
lease
Office equipment 815,209 8,476 806,733
Vehicles and light 1,389,566 259,538 1,130,028
equipment
Vehicles and light 154,323 30,865 123,458
equipment under capital
lease
$69,566,769 $ 4,735,133 $64,831,636
As at May 31, 2007
Cost Accumulated Net book
amortization value
Land $ 3,086,948 $ - $ 3,086,948
Processing plant and 17,044,142 609,026 16,435,116
equipment
Processing plant and 24,686,561 870,018 23,816,543
equipment under capital
lease
Office equipment 299,072 20,515 278,557
Vehicles and light 1,065,396 43,199 1,022,197
equipment
Vehicles and light 158,795 7,715 151,080
equipment under capital
lease
$46,340,914 $ 1,550,473 $44,790,441
7. MINERAL PROPERTY INTERESTS
Nine months Year ended
ended
Acquisition Costs February 29, 2008 May 31, 2007
Durnpike Investments (Pty)
Limited
Balance, beginning of period $ 24,121,854 $ -
Acquisition costs 1,822,138 18,696,487
Financial, legal, 4,216 527,328
advisory, and other fees
Site closure and 230,622 -
reclamation obligation
recognized
Future income tax 419,050 5,421,981
liability
Depletion of mineral (1,349,944) (523,942)
properties during the period
Durnpike Investments (Pty) 25,247,936 24,121,854
Limited, end of period
Ricardo Property 1 1
Balance, end of period $ 25,247,937 $ 24,121,855
Title to mining properties involves certain inherent risks due to the
difficulties in determining the validity of certain claims as well as the
potential for problems arising from the often complicated conveyancing
history characteristic of many mining properties. The Company does not have
title insurance but has investigated title to its Ricardo mineral property
and, to the best of its knowledge and belief, title to its property is in
good standing.
(a) Acquisition of Durnpike Investments (Pty) Limited
On June 30, 2006, the Company entered into an Agreement-in-Principle to
acquire interests and/or rights in four alluvial diamond properties in South
Africa and the Democratic Republic of Congo. These four properties include
the Holpan/Klipdam Property in South Africa, Wouterspan Property in South
Africa, Kwango River Project in the Democratic Republic of Congo and Galputs
Minerale Project in South Africa.
Subsequently, pursuant to the terms of the Definitive Agreement, the Company
acquired all of the shares and loans in Durnpike, a private South African
company, from eight vendors (the "Vendors") for consideration set forth
below, payable in common shares of the Company ("Common Shares") related to
the closing price of the Common Shares on the TSX Venture Exchange on the
specified dates described below. Durnpike holds an interest in respect of
and/or rights in the four alluvial diamond properties.
The Holpan/Klipdam Property and the Wouterspan Property were indirectly owned
by the H.C. Van Wyk Diamante Trust ("Van Wyk Trust"), a business trust
registered in South Africa. The Van Wyk Trust held 99% of HC Van Wyk Diamonds
Ltd ("HCVW"), a private South African company, and 99% of Klipdam Mining
Company Limited ("Klipdam"), a private South African company. The remaining
1% of HCVW and Klipdam was owned by nominees of the Van Wyk Trust. HCVW and
Klipdam, and were collectively referred to as The Van Wyk Diamond Group of
companies ("VWDG").
On July 7, 2006, Durnpike completed the acquisition of an initial 49% of the
issued and outstanding shares of HCVW and 51% of the issued and outstanding
shares of Klipdam (the "Acquisition Interest") for South African Rand ("ZAR")
50 million ($7.8 million) and agreed to pay an additional ZAR30 million ($4.5
million) to the Van Wyk Trust on July 7, 2007.
To facilitate Durnpike`s payment of ZAR50 million to the Van Wyk Trust on
July 7, 2006, the Company advanced a non-interest bearing loan to Durnpike of
ZAR50 million (Cdn$7.8 million). This loan is secured by a pledge of
Durnpike`s Acquisition Interest. The payment of ZAR30 million was made to the
Van Wyk Trust in June 2007.
Durnpike had the option to increase its shareholding in HCVW to a 51%
controlling interest by (a) subscribing for additional shares in HCVW for the
amount of ZAR1 million ($160,000) and (b) introducing a ZAR24 million ($3.9
million) working capital loan into VWDG. These conditions were met in January
2007.
The Company also entered into an Exchange Agreement with the Van Wyk Trust to
acquire the remaining shareholding of VWDG for ZAR60 million ($7.6 million),
payable in Common Shares. The Exchange Agreement became effective upon
Rockwell completing its listing of the Company`s Common Shares on the JSE. In
March 2008, subsequent to the nine months ending February 29, 2008, pursuant
to the Exchange Agreement the Company issued Common Shares to the Van Wyk
Trust and increased its ownership by 23% to a total of 74% of the VWDG
assets.
Pursuant to the Definitive Agreement, the Company:
- acquired from the Vendors all of their shares and loans in Durnpike for
consideration of ZAR 39.8 million ($6.1 million), payable in common shares of
the Company on the earlier of (i) the date of the JSE listing; and (ii)
within approximately 12 months from signature of the Definitive Agreement. By
virtue of such acquisition, the Company acquired Durnpike`s interests in the
four alluvial diamond properties in South Africa and the Democratic Republic
of Congo ("DRC"). The ZAR consideration does not include payment in respect
of the Kwango River Project, which payment stands to be made by the Company
only when (and if) the feasibility study referred to below has been completed
and approved by the board of directors of the Company.
On November 30, 2007, the Company began trading on the Johannesburg Stock
Exchange and hence completed its JSE listing condition. Consequently, the
Company issued 7,848,663 Common Shares as settlement of its commitment of ZAR
39.8 million ($6.1 million) and also 1,676,529 Common Shares as finder fees
relating to the Durnpike acquisition.
- will spend US$7 million on a feasibility study on the Kwango River
Project by August 31, 2007. This deadline may be extended to February 29,
2008 at no cost and be further extended to December 31, 2008 by payment of
US$1 million in Common Shares. As it seems highly unlikely that the deadline
of February 29, 2008 will be met, the Company is currently negotiating an
extension to such deadline. If the Company wishes to retain the Kwango River
Project following completion of the feasibility study, the Company must (i)
pay to the Vendors an amount equal to 60% of the net present value of the
Kwango River Project Valuation (as determined in terms of the feasibility
study and subject to a minimum acquisition cost of US$13 million and a
maximum acquisition cost of US$26 million), which payment shall be effected
by the issuance of Common Shares and (ii) commit to incur an additional
amount of up to US$6 million in expenditures for development of the Kwango
River Project within 16 months from the date of completion of the feasibility
study. If the Company does not wish to retain the Kwango River Project
following completion of the feasibility study, the Definitive Agreement
provides for Durnpike being divested of such project on certain terms, with
the Company nevertheless retaining 100% of the shares in Durnpike (and
therefore the indirect interests in the Holpan/Klipdam, Wouterspan and
Galputs properties). In such event, the full and final purchase consideration
for Durnpike will be limited to the ZAR Consideration.
Durnpike`s interest in the Kwango River Project is constituted by an
agreement ("Midamines Agreement") with Midamines SPRL ("Midamines"), the
holder of the exploration permit on the Kwango River Project, to act as
contractor on behalf of Midamines to manage and carry out exploration and
mining. Durnpike will be entitled to an 80% share of the net revenue from the
sale of any diamonds produced from the contract area.
Under the Midamines Agreement, Durnpike agreed to certain minimum royalty
payments being made to Midamines. These royalties take the form of a series
or recurring annual minimum royalty payments of US$1,200,000 per annum
(commencing on December 31, 2007). (As to the enforceability of this
commitment in light of developments pertaining to the Midamines Agreement,
see note 14 (a)). During the third quarter of fiscal 2008 the Company paid
consideration of $600k to Midamines in order to increase the size of the
concession.
All of the Common Shares issued to the Vendors pursuant to the acquisition,
other than the Common Shares issued to extend the feasibility study deadline,
will be held in escrow for at least nine months from the date of issuance,
provided that a limited portion of those escrowed Common Shares may be
released to enable the Vendors to meet certain specified obligations.
On January 31, 2007, all the conditions precedent to implementation of the
Acquisition as per the Definitive Agreement were fulfilled. The Company also
received the necessary regulatory approvals in Canada and South Africa. As
provided for in the Definitive Agreement, the Company executed an agreement
in relation to the acquisition of control of the mineral rights relating to
the Galputs Minerale Project. To date the Company is still awaiting the
Department of Minerals and Energy`s ("DME") final approval relating to the
transfer of the shares of Galputs Minerale Project from Virgilia Investments
Inc. to the Company.
During the year ended May 31, 2007, a black economic empowerment ("BEE")
group purchased 15% of the VWDG from the Van Wyk Trust for an amount of ZAR
22.5 million (Cdn$3.4 million). Subsequent to the nine months ending February
29, 2008, the BEE group is in the process of increasing its shareholding from
15% to 26% by subscribing for an additional 11% shares in the VWDG. This
additional 11% will be at a subscription price of ZAR17.5 million and the BEE
group will also inject ZAR10.5 million working capital into the VWDG. The BEE
company is African Vanguard Resources (Pty) Ltd., the holding company of
Richtrau No 136 (Pty) Ltd
The results of acquired operations have been included in the consolidated
financial statements since January 31, 2007, the date of acquisition. The
following table summarizes the total purchase consideration of the acquired
assets:
Amount Amount
(ZAR) ($)
Cash advanced to fund 51,005,000 8,293,413
Durnpike`s acquisition of
51% of VWDG
Cash committed to fund 30,000,000 4,878,000
Durnpike`s acquisition of
51% of VWDG
Common shares issuable(1) 43,000,000 6,991,800
Total purchase consideration 124,005,000 20,163,213
(1) The Company has issued consideration in common shares amounting to
ZAR39.8 million and the remaining ZAR3.2 million consideration will be
issuable upon receiving the DME`s final approval of the Galputs Minerale
Project transfer of shares.
The total acquisition price has been allocated to the net assets acquired and
liabilities as follows:
Amount Amount
(ZAR) ($)
Cash 593,238 96,460
Receivable and current 48,658,813 7,911,923
assets
Inventory 12,894,060 2,096,574
Plant and equipment 202,510,108 32,928,144
Other assets 5,992,042 974,306
Mineral property interests 148,330,065 24,118,469
Bank overdraft (7,981,287) (1,297,757)
Accounts payable and (72,773,215) (11,832,925)
accrued liabilities
Capital lease obligations (84,854,165) (13,797,287)
Reclamation obligation (10,947,787) (1,780,110)
Future income taxes (84,200,330) (13,690,974)
Non controlling interests (34,216,542) (5,563,610)
124,005,000 20,163,213
The allocation of purchase price is based on management`s estimates of the
fair value of the assets acquired and liabilities assumed at the date of
acquisition, January 31, 2007.
(b) Acquisition of Makoenskloof property
In conjunction with the acquisition of Durnpike, HCVW had an option agreement
to acquire the Makoenskloof alluvial diamond project. The Makoenskloof
property is located on the north bank of the Middle Orange River ("MOR"). As
a result of the acquisition of HCVW by Durnpike, and concurrent acquisition
of Durnpike by Rockwell, the Company assumed the option to purchase the
Makoenskloof property.
In November 2006, HCVW exercised its option to purchase the property and the
company that held the mineral rights of the Makoenskloof property. HCVW paid
ZAR5.4 million ($880,000) in January 2007 for the property and mining
permits. Pursuant to this option exercise, HCVW also entered into a sub-
contracting agreement with Folmink Delwery CC to perform bulk sampling
commencing in March 2007. In April 2007 HCVW entered into an agreement to
purchase ZAR21.3 million (approximately $3 million) in plant and equipment
from the sub-contractor and to terminate the sub-contracting arrangement. The
Company has paid a total consideration of ZAR19 million ($2.7 million) and is
committed to pay the remaining consideration in monthly payments of
ZAR500,000 ($63,000). The monthly payments shall incur interest calculated at
the prime rate of the Standard Bank of South Africa.
In December 2007, Makoenskloof property was placed on care and maintenance in
order for management to evaluate the results of the bulk sampling activities
which had taken place up until the end of November 2007.
(c) Ricardo Property, Chile
The Company holds a 100% interest in certain mineral exploration and
exploitation concessions in the Calama Mining District in Chile. The Company
continues to maintain the Ricardo Property in good standing.
(d) Farhom Property, South Africa
On July 30, 2007 H.C. Van Wyk Diamonds acquired 100% of the shares and
shareholder loans of Farhom Mining & Construction (Pty) Ltd. for ZAR10
million ($1.5 million). This company holds the mineral rights over the
Farhom farm property. This transaction was concluded in terms of an option
granted to HCVW on February 24, 2005 and later amended on July 10, 2007.
8. CAPITAL LEASE OBLIGATIONS
Included in property, plant and equipment are mining equipment that the
Company acquired pursuant to three to four year capital lease agreements.
The Company`s capital lease obligations are with the following financial
institutions:
As at As at
February 29, 2008 May 31, 2007
Liebherr Finance $ - $ 131,572
ELB Finance 105,418 175,180
Stannic 2,093,869 3,452,954
Wesbank 319,236 557,153
Nedbank 1,842,519 4,383,372
Komatfin 10,442,257 8,403,305
$ 14,803,299 $ 17,103,536
Capital lease obligations as detailed above are secured over plant and
equipment and are repayable in monthly installments. Interest is charged at
rates linked to the prevailing prime rate of the relative financial
institution mentioned above.
Future minimum lease payments are as follows:
As at
February 29, 2008
2009 $ 8,385,013
2010 6,087,834
2011 2,389,611
Total minimum lease 16,862,458
payments
Less interest portion (2,059,159)
Present value of capital 14,803,299
lease obligations
Current portion (6,847,751)
Non-current portion $ 7,955,548
9. RECLAMATION OBLIGATION
The continuity of the provision for site closure and reclamation costs
related to the Holpan, Wouterspan and the Klipdam mines are as follows:
As at As at
February 29, 2008 May 31, 2007
Balance, beginning of period $ 1,361,557 $ -
Changes during the period:
Site closure and reclamation 230,622 1,306,086
obligation recognized
Foreign exchange on (300,675) -
reclamation
Accretion expense 464,316 55,471
Site closure and reclamation $ 1,755,820 $ 1,361,557
obligations, February 29, 2008
The estimated amount of the reclamation costs, adjusted for estimated
inflation at 9% per year, is $732,688 for the Klipdam mine in the year 2011,
$1.3 million for the Holpan mine in the year 2013 and $3.8 million for the
Wouterspan mine in the year 2027 and is expected to be spent over periods of
approximately three years beginning in 2011, 2013 and 2027. The credit-
adjusted risk free rate at which the estimated future cash flows have been
discounted is 13%, to arrive at a net present value of $1,755,820. The
accretion of $464,316 (2007 - $55,471) is charged to the statement of
operations. During the period the Company revised the site closure and
reclamation obligation.
As required by regulatory authorities, at February 29, 2008, the Company had
cash reclamation deposits totaling $1,816,877 (2007 - $ 1,038,066) comprised
of $1,657,489 (2007 - $ 878,678) for the Holpan and Wouterspan mines and
$159,388 (2007 - $159,388) for the Klipdam mine. These deposits are invested
in interest bearing money market linked investments at rates ranging from 8%
to 9.5%.
10. SHARE CAPITAL
(a) Authorized share capital
The Company`s authorized share capital consists of an unlimited number of
common shares, without par value, and an unlimited number of preferred shares
without par value, of which none have been issued.
Share purchase options
The Company has a share purchase option compensation plan approved by the
shareholders that allows the Company to grant options for up to 10% of the
issued and outstanding shares of the Company at any one time, typically
vesting over two years, to its directors, employees, officers, and
consultants. The exercise price of each option is set by the Board of
Directors at the time of grant and cannot be less than the market price (less
permissible discounts) on the Toronto Stock Exchange. Options have a maximum
term of five years and typically terminate 30 days following the termination
of the optionee`s employment, except in the case of retirement or death.
The continuity of share purchase options for the nine months ended
February 29, 2008 is as follows:
Exercise May 31 Expired/ February
Expiry price 2007 Granted Exercised cancelled 29 2008
date
September $ 0.40 107,917 - 107,917 - -
28, 2007
February $ 0.42 190,000 - 145,000 45,000 -
29, 2008
March 28, $ 0.50 150,000 - - - 150,000
2008
July 10, $ 0.68 - 300,000 - - 300,000
2010
September $ 0.62 - 5,905,500 - 2,500 5,903,000
24, 2012
November $ 0.63 - 1,114,500 - 5,500 1,109,000
14, 2012
447,917 7,320,000 252,917 53,000 7,462,000
Weighted average $ 0.44 $0.62 $0.41 $0.45 $0.62
exercise price
Weighted average fair value of options $0.62
granted during the period
As at February 29, 2008, 250,000 of the options outstanding with a weighted
average exercise price of $0.57 per share had vested with grantees.
The continuity of share purchase options for the year ended May 31, 2007 is
as follows:
Exercise May 31 Expired/ May 31
Expiry date price 2006 Granted Exercised cancelled 2007
September $ 0.40 115,417 - 5,833 1,667 107,917
28, 2007
February $ 0.42 210,000 - 3,334 16,666 190,000
29, 2008
March 28, $ 0.50 150,000 - - - 150,000
2008
475,417 - 9,167 18,333 447,917
Weighted average $0.44 $ - $ 0.41 $ 0.42 $ 0.44
exercise price
Weighted average fair value of options $ Nil
granted during the year
As at May 31, 2007, 327,917 of the options outstanding with a weighted
average exercise price of $0.40 per share had vested with grantees.
The continuity of share purchase options for the year ended May 31, 2006 is
as follows:
Exercis May 31 Expired/ May 31
Expiry date e 2005 Granted Exercised cancelled 2006
price
May 19, $ 0.32 27,500 - 27,500 - -
2006
September $ 0.40 - 126,250 3,333 7,500 115,417
28, 2007
February $ 0.42 - 210,000 - - 210,000
29, 2008
March 28, $ 0.50 - 150,000 - - 150,000
2008
27,500 486,250 30,833 7,500 475,417
Weighted average $ 0.32 $ 0.44 $0.33 $0.40 $0.44
exercise price
Weighted average fair value of options $0.50
granted during the year
As at May 31, 2006, 38,750 of the options outstanding with a weighted average
exercise price of $0.40 per share had vested with grantees.
Using a Black-Scholes option pricing model with the assumptions noted below,
the fair values of stock options granted have been reflected in the statement
of operations as follows:
Nine Months Year ended Year ended
ended February May 31 May 31
29 2007 2006
2008
Exploration and $ 514,892 $ 41,372 $ 36,415
engineering
Operations and 1,311,425 38,251 47,101
administration
Total compensation cost
expensed to operations, $ 1,826,317 $ 79,623 $ 83,516
with the offset
credited to contributed
surplus
The weighted-average assumptions used to estimate the fair value of options
granted are as follows:
2008 2007 2006
Risk free 4% 4% 4%
interest rate
Expected life 4.8 2 2
years years years
Expected 111% 97% 124%
volatility
Expected nil nil nil
dividends
(c) Share purchase warrants
The continuity of share purchase warrants (each warrant exercisable into one
common share) for the period ended February 29, 2008 is:
Expiry date November 22, May 09, 2009 (ii) May 09,
2008 (i) 2009 (iii)
Exercise price $0.80 $0.70 $0.70
Balance, May 31, 2007 42,000,000 116,007,154 5,772,000
Issued - - -
Exercised 2,400,000 - -
Expired - - -
Balance, February 29, 39,600,000 116,007,154 5,772,000
2008
(i) The share purchase warrants are exercisable over three years with the
option to exercise at $0.60 expiring on November 22, 2007, the option to
exercise at $0.80 expiring on November 22, 2008 and the option to exercise at
$1.00 expiring on November 22, 2009.
(ii) In May 2007, Rockwell completed a $60 million private placement
financing of 116,007,154 million equity Units at $0.52 each with each Unit
consisting of one common share and one share purchase warrant exercisable
over two years at $0.70. All securities are subject to a four month hold
period in Canada which expired on September 10, 2007.
(iii) In May 2007, the Company issued 5,772,000 broker warrants
exercisable over two years at $0.70 expiring on May 9, 2009. Using a Black-
Scholes option pricing model, the fair value of the 5,772,000 broker warrants
granted in the amount of $1,693,197 have been reflected in the consolidated
balance sheet. The weighted-average assumptions used to estimate the fair
value of warrants granted were an expected volatility of 97%, expected
dividends of nil, expected life of 2 years and risk free rate of 4%.
The continuity of share purchase warrants (each warrant exercisable into one
common share) for the year ended May 31, 2007 is:
Expiry date November 22, May 09, 2009 May 09, 2009
2007 (i)
Exercise $0.60 $0.70 $0.70
price (note
10(d and e))
Balance, May - - -
31, 2006
Issued 42,000,000 116,007,154 5,772,000
(note 10(d
and e))
Exercised - - -
Expired - - -
Balance, May 42,000,000 116,007,154 5,772,000
31, 2007
(i) The share purchase warrants are exercisable over three years with the
option to exercise at $0.60 expiring on November 22, 2007, the option to
exercise at $0.80 expiring on November 22, 2008 and the option to exercise at
$1.00 expiring on November 22, 2009.
The continuity of share purchase warrants (each warrant exercisable into
one common share) for the year ended May 31, 2006 is:
Exercise May 31 May 31
Expiry date price 2005 Issued Exercised Expired 2006
December 31, $ 0.40 8,975,000 - 50,000 8,925,000 -
2005
Weighted average $ 0.40 $ - $ 0.40 $ - $ -
exercise price
(d) Private placement, November 2006
In November 2006, Rockwell completed a $21 million private placement of 42
million units at $0.50 per unit, with each unit consisting of one common
share and one share purchase warrant exercisable over three years at $0.60 in
the first year, $0.80 in the second year and $1.00 in the third year. The
third year term of the warrants is subject to the Company achieving Tier 1
status on the TSX Venture Exchange within the first two years. All securities
are subject to a four month holding period in Canada expiring on March 23,
2007, and a portion will be subject to additional US resale restrictions in
the United States. The Company paid cash commissions of $1,215,770.
(e) Private placement, May 2007
In May 2007, Rockwell completed a $60 million financing of 116,007,154
million equity Units at $0.52 each with each Unit consisting of one common
share and one share purchase warrant exercisable over two years at $0.70. All
securities are subject to a four month hold period in Canada expiring
September 10, 2007. In addition, the securities have not been, and will not
be, registered under the United States Securities Act of 1933, as amended,
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The Company paid cash
commissions of $3,877,665, issued 1,093,440 common shares fair valued at
$568,588 as compensation to agents as well as 5,772,000 broker warrants fair
valued at $1,693,197 to the agents, bringing the total issued common shares
to 117,100,594 and total commissions to $6,139,450.
(f) Private Placement, January 2008
In January 2008 the Company completed a brokered private placement of
24,101,526 Common Shares at a price of $0.60 per share for total proceeds of
$13,860,916, net of issue costs. The Company issued 500,000 Common Shares
and paid a cash fee of $300,000 as finder`s fees relating to the private
placement. All shares issued pursuant to the private placement are subject
to a hold period expiring on March 31, 2008.
Proceeds from the financing will be used to fund Rockwell`s diamond
operations and new project evaluation and development.
11. RELATED PARTY BALANCES AND TRANSACTIONS
Balances payable As at As at
February 29, May 31,
2008 2007
Hunter Dickinson Inc. (a) $ - $ 37,571
Euro-American Capital - 2,879
Corporation (b)
CEC Engineering (c) - 5,558
Durnpike shareholder - 1,503,566
loans (i)
Banzi Trading (k) - 2,191
Jakes Tyres (i) 49,604 10,993
Cashmere Trading (g) - 46,543
$ 49,604 $ 1,609,301
Balances receivable
Hunter Dickinson Inc. (a) $ 78,504 $ -
Flawless Diamonds Trading 477,298 781,928
House (h)
Banzi Trading (k) 33,744 -
Diacor CC (n) 3,888 -
AA Van Wyk (m) - 57,325
$ 593,434 $ 839,253
Nine Months Year ended May 31
ended
February 29
Transactions 2008 2007 2006
Services rendered
and expenses
reimbursed:
Hunter Dickinson $ 863,861 $ 1,988,027 $ 578,134
Inc. (a)
Euro-American 14,393 18,765 18,630
Capital Corporation
(b)
CEC Engineering 39,766 187,225 -
(c)
John Bristow - 115,320 -
(d)
Jeffrey B 52,740 141,318 -
Traders CC (e)
Seven Bridges 57,952 55,534 -
Trading (f)
Plateau - - 124,737
Resources
(Proprietary)
Limited (j)
Cashmere 353,736 43,357 -
Trading (g)
Banzi Trade 26 47,575 251,942 -
(Pty) Ltd (k)
Jakes Tyres (l) 1,141,454 267,361 -
AA Van Wyk (m) 148,658 173,977 -
Diacor CC (n) 3,888 - -
Sales rendered to:
Flawless $ 36,038,106 $ 10,085,536 $ -
Diamonds Trading
House (h)
(a) Hunter Dickinson Inc. ("HDI") is a private company equally owned by
several public companies, one of which is Rockwell, and has certain directors
in common with the Company. HDI provides geological, technical, corporate
development, administrative and management services to, and incurs third
party costs on behalf of, the Company on a full cost recovery basis pursuant
to an agreement dated January 1, 2001. There are no specific terms of
repayment.
(b) Euro-American Capital Corporation is a private company controlled by
Rene Carrier, a director of the Company, which provides management services
to the Company at market rates for those services.
(c) CEC Engineering Ltd. is a private company owned by David Copeland,
Chairman and a director of the Company, which provides engineering and
project management services at market rates.
(d) John Bristow, President, Chief Executive Officer and a director of the
Company, provided engineering consulting services at market rates to the
Company.
(e) Jeffrey B Traders CC is a private company controlled by Jeffrey Brenner,
a former director and employee of the Company, which provides management and
marketing services to the Company at market rates.
(f) Seven Bridges Trading is a wholly owned subsidiary of Randgold
Resources, a public company where Mark Bristow, a director of the Company,
serves in an executive capacity. Seven Bridges Trading provides
administrative and management services at market rates to the Company`s South
African subsidiaries.
(g) Cashmere Trading is a private company owned by Hennie Van Wyk, an
officer of the Company, which provides helicopter services at market rates.
(h) Flawless Diamonds Trading House ("Flawless") is a private company where
certain directors, former directors and officers of the Company, namely,
Messr. Brenner, Bristow and Van Wyk, are shareholders of. Flawless is a
registered diamond broker and purchases diamonds from the Company at market
prices.
(i) Pursuant to the Company` agreement to acquire all of the shares and
loans in Durnpike Investments (Pty) Limited from eight individuals (the
"Vendors"), of which three individuals from the Vendors were subsequently
appointed to the Company`s Board of Directors (Messr. Brenner, M.Bristow,
J.Bristow).
(j) Plateau Resources (Proprietary) Limited ("Plateau") is a wholly-owned
subsidiary of Anooraq Resources Corporation, a Canadian company which has
certain directors in common with the Company. Plateau shares certain
premises and other facilities with the Company pursuant to a cost-sharing
arrangement with no profit element involved.
(k) Banzi Trade 26 (Pty) Ltd ("Banzi") is 50% owned by Hennie Van Wyk Family
Trust, 30% by Ronnie Visagie, a member of the van Wyk family and 20% by
Bokomoso Trust. Banzi is a private company focused on providing self
sustaining programs to local communities. During the period, Banzi provided
the Company with buildings materials at market rates.
(l) Jakes Tyres is a private company with certain directors and officers in
common with the Company that provides consumable materials at market rates.
(m) AA Van Wyk is a private company owned by a party related to the
directors and officers of the Company, which provides contract mining
services at market rates.
(n) Diacor CC is a private company with certain directors and officers in
common with the Company that purchases consumable materials at market rates.
12. INCOME TAXES
Income tax expense (recovery differs from the amount which would result from
applying the statutory Canadian income tax rates in 2008 of 33.55% (2007 -
34.1%, 2006 - 36.6%). A reconciliation of income taxes calculated at
applicable statutory rates is as follows:
Nine months Years ended May 31
ended February
2008 2007 2006
Loss before income $ (1,006,849) $ (6,585,756) $ (1,600,673)
taxes
Expected income tax $ (338,000) $ (2,324,000) $ (555,000)
recovery
Difference in foreign 298,000 101,000 7,000
tax rates
Permanent differences 1,200,000 309,000 375,000
Change in tax rate 440,000 - (35,000)
Change in valuation (477,000) 1,409,433 208,000
allowance
Other non-deductible 1,317,400 (131,206) -
items
Net income tax $ 2,440,400 $ (635,773) $ -
expense (recovery)
As at February 29, 2008 and May 31, 2007, the estimated tax effect of the
significant components within the Company`s future tax assets and liabilities
were as follows:
As at February As at May 31
29
2008 2007 2006
Future income tax
asset (liability)
Resource allowances $ 1,938,000 $ 2,133,000 $ 1,155,000
Loss carry forwards 3,559,000 3,824,000 2,136,000
Other 1,460,000 1,835,000 150,000
Total 6,957,000 7,792,000 3,441,000
Less: valuation (6,957,000) (7,434,860) (3,441,000)
allowance
- 357,140 -
Mineral properties (3,937,000) (5,005,000) -
Equipment (8,493,100) (7,331,000) -
Net future tax asset $ (12,430,100) $ $ -
(liability) (11,978,860)
At February 29, 2008, the Company had available for deduction against future
taxable income non-capital losses of approximately $12,587,000 (2007 -
$10,711,00; 2006 - $3,290,000). These losses, if not utilized, will expire
in various years ranging from 2008 to 2027. Subject to certain restrictions,
the Company also had Canadian resource expenditures of approximately
$5,635,000 (2007 - $5,635,000; 2006 - $5,635,000), which are available to
reduce taxable income in future years.
13. SEGMENTED INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operation decision maker, or decision-making group, in deciding how
to allocate resources and in assessing performance. All of the Company`s
operations are within the mineral exploration and diamond mining sector. The
Company`s resource properties are located in South Africa, Democratic
Republic of Congo, Canada and in Chile.
For the nine Canada Chile South Africa Total
months ended
February 29,
2008
Revenue $ - $ - $ 36,149,308 $ 36,149,308
Loss for the (3,393,226) (92,767) (5,917,035) (9,403,028)
year
Total assets 4,002,546 70,133. 129,620,445 133,693,124
Mineral - 1 25,247,936 25,247,937
property
interests
Property, - - 64,831,636 64,831,636
plant and
equipment
For the year Canada Chile South Africa Total
ended
May 31, 2007
Revenue $ - $ - $ 10,103,328 $ 10,103,328
Loss for the (5,342,557) (191,800) (830,785) (6,365,142)
year
Total assets 38,281,401 62,857. 91,262,125 129,606,383
Mineral - 1 24,121,854 24,121,855
property
interests
Property, - - 44,790,441 44,790,441
plant and
equipment
For the year Canada Chile South Total
ended Africa
May 31,
2006
Loss for the $ (1,340,385) $ (260,288) $ - $ (1,600,673)
year
Total assets 228,560 60,087. - 288,647
Mineral - 1 - 1
property
interests
Property, - - - -
plant and
equipment
14. CONTINGENCIES AND COMMITMENTS
(a) One of the 50% shareholders of Midamines has, subsequent to the
conclusion of the Midamines Agreement (see note 7(a)) in accordance with a
mandate granted by such shareholder, denied the validity of the Midamines
Agreement. The remaining 50% shareholder disputes this view and remains
committed to the Midamines Agreement. Due to this dispute, Midamines has not
afforded Durnpike access to the site, and assistance as regards its proposed
operations on the site, in the manner contemplated in the Midamines
Agreement. This failure has significantly delayed the Company`s proposed
operations on the site, and it is consequently the Company`s position that
the required royalty payments have become suspended for the duration of
Midamines internal dispute.
The Company remains committed to the Kwango River Project and is hopeful that
the ongoing dispute between the shareholders of Midamines will be resolved.
The Company will obtain formal legal advice from both Belgian and DRC legal
counsel as soon as possible as the Midamines Agreement is governed by Belgian
law and the obligations under the Midamines Agreement are to be implemented,
where required, in accordance with the laws of the DRC. Concurrently, the
Company will also monitor the resolution of the internal dispute between the
Midamines shareholders. If the issue of minimum royalty payments is not
settled on or before December 31, 2008, the Company will seek formal legal
advice and may consider formally terminating the Midamines Agreement. During
the third quarter of 2008 the Company paid consideration of $600k to
Midamines in order to increase the size of the concession.
(b) In April 2007 the Company, entered into an agreement in relation to its
Makoenskloof property to purchase plant and equipment in the amount of
ZAR21.3 million (approximately $3.2 million) from Folmink Delwery CC. As at
February 29, 2008 the Company is committed to pay the remaining consideration
of ZAR2.3 million ($294,402) in the following manner:
- The balance shall be paid in monthly payments of ZAR500,000 ($63,000).
The monthly payments shall incur interest calculated at the prime rate of the
Standard Bank of South Africa.
15. SUBSEQUENT EVENTS
(a) Acquisition of Saxendrift Mine (Pty) Ltd.
On March 6, 2007, the Company and Trans Hex Group Limited ("Trans Hex")
entered into a conditional agreement whereby the Company`s wholly owned South
African subsidiary, Rockwell Resources RSA (Pty) Ltd. ("Rockwell RSA"), would
acquire two open pit alluvial diamond mines and three alluvial diamond
exploration projects from Trans Hex ("the Transaction"). Trans Hex, through
its wholly-owned subsidiary, Trans Hex Operations (Pty) Ltd. ("THO"), is the
owner of two open pit alluvial diamond mines, namely Saxendrift and
Niewejaarskraal, and three alluvial diamond exploration projects, namely
Kwartelspan, Zwemkuil-Mooidraai and Remhoogte-Holsloot, which are located
along the southern bank of the Middle Orange River in the Northern Cape
Province of South Africa ("Northern Cape") and which are collectively
referred to as the Middle Orange River Operations and Projects (or "MORO").
The MORO includes:
- the rights to prospect, explore and/or mine precious stones and/or other
minerals and/or metals held directly or indirectly by THO in the Saxendrift
area of the Northern Cape;
- a series of large remnant alluvial diamond terraces;
- the material plant, machinery, equipment and other movable assets owned
and/or used by THO;
- certain employees of THO; and
- a rehabilitation liability which will be taken over by the Company.
The Company has paid cash consideration to Trans Hex of ZAR100.4 million
($14.8 million) and will assume potential liabilities for staff layoffs of
ZAR4.7 million (capped at ZAR5 million ($0.8 million)) and rehabilitation
bonds (capped at ZAR4.25 million ($0.6 million)). An independent consultant
has been appointed to determine the value of the rehabilitation bonds. All
payments and liabilities are expected to total $16.2 million, subject to
certain final adjustments. Trans Hex will transfer all its relevant mineral
rights and associated assets into a new special purpose entity ("Saxendrift
Mine Pty (Ltd)"), to be acquired by Rockwell RSA. The implementation of the
Transaction is subject to fulfillment of certain conditions precedent
including:
- The unconditional approval of South Africa`s Competition Commission;
which has already taken place;
- All requisite consents by South Africa`s Minister of Minerals and Energy
to the cession and transfer of the underlying mining and prospecting rights
pertaining to the MORO to the Saxendrift Mine Pty (Ltd) and the acquisition
by the Company of the shares in Saxendrift Mine Pty (Ltd);
- Satisfactory provision by the Company of certain financial undertakings
to THO;
- Approval by the TSX Exchange;
- Completion by the Company of a mineral title due diligence
investigation; and
- The audited balance sheet of Saxendrift Mine Pty (Ltd) as at the
effective date.
Fulfillment of some of the conditions precedent may be waived, or the date
specified for their fulfillment extended, in certain limited circumstances.
The MORO will be placed in care and maintenance with effect from date of
signature of the relevant transaction agreements pending fulfillment of the
conditions precedent.
In January 2007, the Company entered into a credit facility with the Canadian
Imperial Bank of Commerce ("CIBC") for a standby letter of credit of $16.5
million for the acquisition of Saxendrift Mine. The Company secured this
facility by providing sufficient funds on deposit equal to the amount of the
outstanding letter of credit, being $15.6 million as of May 31, 2007. The
facility was not utilized and expired on July 31, 2007.
On July 31, 2007 the funds, previously utilized to secure the facility, were
transferred to an account held in trust for the Company for acquisition of
the Saxendrift Mine.
Subsequent to the nine months ended February 29, 2008 the Company completed
the MORO acquisition. The substantive conditions to the Transaction have
been fulfilled and the Transaction was completed on April 11, 2008.
Registration of transfer to Saxendrift Mine Pty (Ltd) of the Saxendrift
mining right, as well as prospecting rights in respect of the Kwartelspan,
Zwemkuil-Mooidraai and part of the Remhoogte-Holsloot projects has already
been obtained. Cession of the Niewejaarskraal mining right is still awaited
at this time from the DME, and the Remhoogte prospecting right is in the
process of being renewed.
(b) Shares issued and share options granted subsequent to February 29, 2008.
Subsequent to February 29, 2008, the Company issued 14,285,715 common shares
at $0.55 per share and 152,500 share options were cancelled or expired. No
additional share options have been granted subsequent to year end.
(c) Assumption of 74% ownership of HCVW and Klipdam
Effective March 1, 2008, the Company took ownership of 74% of HCVW and
Klipdam from 51% to 74% as per the agreement announced in June 2006.
(d) Acquisition of an additional 11% by the BEE Group
Subsequent to the nine months ending February 29, 2008, the BEE group is in
the process of increasing its shareholding from 15% to 26% by subscribing for
an additional 11% of the shares in the VWDG at a subscription price of
ZAR17.5 million and injecting ZAR10.5 million working capital into the VWDG.
Johannesburg
28 May 2008
Sponsor
Sasfin Capital (A division of Sasfin Bank Limited)
Date: 28/05/2008 13:56:56 Produced by the JSE SENS Department.
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