| Mon 18 Aug 2008, 8:30 | | BCD - BRC Diamondcore Ltd - Management`s discussion and analysis of financial |
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BCD
BCD
BCD - BRC Diamondcore Ltd - Management`s discussion and analysis of financial
condition and results of operations for the three and six month periods ended
June 30, 2008
BRC DIAMONDCORE LTD.
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
MANAGEMENT`S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2008
The following Management`s Discussion and Analysis of Financial Condition and
Results of Operations (the "MD&A") has been prepared by management and provides
a review of the activities, results of operations and financial condition of
BRC DiamondCore Ltd. (formerly BRC Diamond Corporation) (the "Company" or "BRC
DiamondCore") based upon Canadian generally accepted accounting principles.
This MD&A should be read in conjunction with the unaudited interim consolidated
financial statements as at and for the three and six month periods ended June
30, 2008, as well as the notes thereto, the audited consolidated annual
financial statements as at and for the financial year of the Company ended
December 31, 2007 ("fiscal 2007") and the notes thereto, and the annual MD&A
for fiscal 2007. All amounts are expressed in Canadian dollars unless otherwise
stated. This MD&A is dated as of August 14, 2008. Additional information
relating to the Company is available on SEDAR at www.sedar.com
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements, other
than statements of historical fact, that address activities, events or
developments that the Company believes, expects or anticipates will or may
occur in the future (including, without limitation, statements relating to
future diamond prices, future diamond sales, future production, exploration
results, potential mineralization and future plans and objectives of the
Company) are forward-looking statements. These forward-looking statements
reflect the current expectations or beliefs of the Company based on information
currently available to the Company. Forward-looking statements are subject to a
number of risks and uncertainties that may cause the actual results of the
Company to differ materially from those discussed in the forward- looking
statements, and even if such actual results are realized or substantially
realized, there can be no assurance that they will have the expected
consequences to, or effects on the Company. Factors that could cause actual
results or events to differ materially from current expectations include, among
other things, the possibility that future exploration results will not be
consistent with the Company`s expectations, changes in equity markets, changes
in diamond markets, foreign currency fluctuations, political developments in
the Democratic Republic of the Congo (the "DRC") or South Africa, changes to
regulations affecting the Company`s activities, uncertainties relating to the
availability and costs of financing needed in the future, delays in obtaining
or failure to obtain required project approvals, the uncertainties involved in
interpreting geological data and the other risks involved in the diamond
exploration business. Any forward-looking statement speaks only as of the date
on which it is made and, except as may be required by applicable securities
laws, the Company disclaims any intent or obligation to update any
forward-looking statement, whether as a result of new information, future
events or results or otherwise. Although the Company believes that the
assumptions inherent in the forward-looking statements are reasonable,
forward-looking statements are not guarantees of future performance and
accordingly undue reliance should not be put on such statements due to the
inherent uncertainty therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition, exploration and development of
diamond properties in known diamond producing areas in the Northern Cape of
South Africa and in the DRC.
The Company`s shares commenced trading on the Toronto Stock Exchange on
February 11, 2008 following the acquisition by the Company of Diamond Core
Resources Limited, a South African based diamond exploration and development
company. In connection with the said acquisition, the Company `s shares were
also listed on the JSE Limited in Johannesburg, South Africa. Prior to February
11, 2008, the Company`s shares traded on the TSX Venture Exchange.
Highlights of the second quarter
South Africa
General
Bulk sampling/trial mining continued at the Paardeberg East and Silverstreams
projects during the second quarter ended June 30, 2008.
The company conducted its second, third and fourth tender sales of diamonds
during the second quarter ended June 30, 2008. Highlights of the tender sales
included the following (reference is made to the Company`s press releases dated
April 24, June 3 and July 17, 2008).
Silverstreams
Total weight Stones Average Size US$/ Carat Total value
(Carats) (Number) (Carats) (US$)
2nd Tender 327.76 200 1.64 1,476.84 484,049
3rd Tender 307.74 102 3.02 6,065.91 1,866,723
4th Tender 400.77 184 2.18 1,219.34 488,675
Total 1,036.27 486 2.13 2,740.06 2,839,447.11
Paardeberg East
Total weight Stones Average Size
(Carats) (Number) (Carats)
Date Site
2nd Tender PK1 985.50 3, 993 0.25
PK5 337.76 975 0.35
3rd Tender PK5 1, 601.45 4, 302 0.37
4th Tender PK1 50.66 261 0.19
PK2 56.08 145 0.39
PK5 818.08 2, 613 0.31
Total 3, 849.53 12,289 0.31
US$/ Carat Total value
(US$)
Date Site
2nd Tender PK1 155.33 153,078
PK5 334.42 112,955
3rd Tender PK5 390.90 625,999
4th Tender PK1 160.70 8, 141
PK2 110.00 6, 195
PK5 203.00 165,830
Total 278.53 1,072,197.72
Highlights - 2nd Tender
The Silverstreams `special stones` (+10.8 carats) totalled 25.06 carats
(approximately 8% by weight) and achieved a value of US$234,777 (approximately
48% by value).
- 10.22ct stone sold for US$ 12,509 per carat
- 3.94ct stone sold for US$ 5,644 per carat
- 14.84ct stone sold for US$ 7,211 per carat
Paardeberg East
PK 1:-
5.05ct stone sold for US$ 3,865 per carat
PK 5:-
9.97ct stone sold for US$ 5,531 per carat
3.12ct stone sold for US$ 1,804 per carat
Highlights - 3rd Tender
Using the prices achieved for the Silverstreams product on the open tender, the
Silverstreams run of mine production for the tender was valued at US$6,065.89
per carat. Of note, the 77.34 carat stone equals 25.1% of the weight and 48.5%
of the value of the parcel. This stone sold for US$11,698 per carat.
Other special stones (+10.8 cts) included:
- 13.65 carat - D Colour dodecahedron, which sold for US$37,962 per carat.
- 11.96 carat -- Fancy Yellow dodecahedron, which sold for US$11,202 per carat.
- 16.56 carat -- Off White octahedron/dodecahedron, which sold for US$7,059 per
carat.
The quality of diamonds produced from the PK5 samples was excellent, as
indicated by the high average value achieved of US$390.90 per carat. Besides a
18.36 carat stone, three other high value stones greater than 5 carats were
sold:
- 9.11 carat -- White irregular dodecahedron, which sold for US$11,618 per
carat.
- 7.15 -- Light Yellow dodecahedron, which sold for US$3,349 per carat.
- 5.34 carat -- White dodecahedron, which sold for US$2,505 per carat.
Highlights - 4th Tender
Silverstreams: "special stones" (+10.8 carats in size) totalled 40.16 carats
(comprising 10% by weight) and achieved a total value of US$153,737 (comprising
31.5% by value). These special stones comprised:
- a 14.56 carat white octahedron/dodecahedron, which sold for US$2,615 per
carat;
- a 14.00 carat white irregular dodecahedron, which sold for US$7,202 per
carat; and
- a 11.58 carat white irregular dodecahedron, which sold for US$1,277 per carat.
Other high value stones from Silverstreams were:
- a 9.81 carat white irregular dodecahedron, which sold for US$7,621 per carat;
- a 6.45 carat white octahedron, which sold for US$4,341 per carat; and
- a 3.69 carat white irregular dodecahedron, which sold for US$3,332 per carat.
Paardeberg East: the PK5 kimberlite body size frequency distribution plotted
for samples in this tender was similar to the last samples, indicating the
continuous nature of the ore body; the quality of diamonds produced from the
PK5 samples continues to be of high gem content, as indicated by the high
average value achieved, including:
- a 9.27 carat off-white dodecahedron, which sold for US$2,301 per carat;
- a 4.18 carat top white dodecahedron, which sold for US$3,398 per carat; and
- a 2.52 carat top white dodecahedron, which sold for US$2,729 per carat.
In total during the three months ended June 30, 2008 the Company recovered a
total of 4,885.78 carats which sold for a total value of US$ 3,911,644.
Both the Paardeberg East and Silverstreams bulk sampling plants have been
configured for exploration purposes but can be utilized in a production
capacity should a decision be taken to do so. Both sampling plants have been
equipped with weight meters in order to make accurate measurements of tonnages
treated. Both plants have been configured to optimize recoveries from the
unique size frequency curves of each deposit.
The services of an independent diamond consultant, Ramon Ferraris of
QTS-Kristal Dynamical of Kimberley, South Africa were retained to audit the
bulk sampling plants, bulk sampling process and diamond analysis on the
Paardeberg East and Silverstreams sites. The tenders were overseen by Mr.
Ferraris and an additional independent diamond consultant to the Company, Mr.
Maurice Barker.
Silverstream Bulk Sampling Alluvial Project
The Silverstream project continued its bulk sampling program and a total to
date surveyed volume of 1,112,156 tonnes was mined of which a total volume of
688,525 tonnes was processed through the metallurgical plant.
The Company is in the process of increasing its metallurgical processing plant
capacity by 50 %. Construction of the upgrading on the plant has already
commenced and is expected to be completed month-end September 2008. The plant
will then comprise a Taurus rotary screen 670tph front end, six 16ft rotary
pans, a 50tph re-concentrating Dense Medium Separation plant(DMS), a primary
Flow Sort X- Ray machine recovery unit, an attritioner, a secondary Bateman GB
1000 automated grease belts recovery unit and a "hands off" sort house.
The Exploration team has continued with advanced exploration on the ore deposit
and is working towards an updated resource statement for the project. Once the
updated recourse statement is completed a decision will be made whether to take
the project to the next step into a full mining phase.
Paardeberg East Bulk Sampling Kimberlite Project
The Paardeberg East project is the most advanced of the Company`s kimberlite
exploration projects. The project comprises a Mining License over various
portions of the farm Paardeberg East 153 located approximately 35km west of
Kimberley in the Northern Cape Province of South Africa.
A number of known kimberlites have been identified on the property, some of
which have been the subject of several phases of intermittent exploration and
exploitation from the early 1900`s up until 2003. Within the project area are
eight potential targets, namely proved kimberlites (PK) PK1, PK2, PK3, PK4 and
PK5. PK2, PK3 and PK5 (the old Rooipan Mine) and prospective anomalies (PA)
PA6, PA7 and PA8. Kimberlites PK1, PK2 and PK3 are known to be diamondiferous,
but very little is known about anomalies PA6, PA7 and PA8.
The kimberlite with the greatest prospect is currently represented by the PK1
kimberlite and to a lesser extent the PK3 kimberlite. All five known
kimberlites bodies (PK1, PK2, PK3, PK4 and PK5) were worked at one time or
another, as there are signs of adits, shafts and pits on, or in the vicinity of
all five.
The diamond analysis of the product from various sampling positions on the
2.2ha PK1 kimberlite pipe representing distinct kimberlite facies, as well as
the ongoing sampling operations at PK2, PK3 and PK5, was undertaken by
independent consultants on an ongoing basis since the second quarter of 2008.
The Company conducted 22 samples over the PK1 kimberlitic ore body.
A Pit Whittle was conducted by an independent consultant Riaan Herman under the
supervision of the company Hatch. An optical practical open pit design with a
final financial model is now being conducted by Johan Schoeman a mining
engineer from Hatch. The final result is expected by the end of August 2008.
The diamond analysis data, independent diamond valuations and prices received
on the open tenders conducted by the Company were used to underpin the economic
metrics for the Pit Whittle study on the PK1 kimberlite pipe at Paardeberg
East.
A total of nine samples, comprising 39,494 tonnes, were conducted over the PK5
kimberlite ore body with encouraging results. The cumulative number of stones
versus lower critical size plot of the average 2 carat diamonds of the
Paardeberg East deposits suggests that the prospects for recovering the
complete fraction of larger diamonds during bulk sampling process is good.
The exploration team is continuing with further exploration and geophysics on
the ore body and surrounding PK5 area.
The Paardeberg East metallurgical sampling plant comprises a front end, with
primary crushing (to - 55mm), a 50tph Bateman Dense Media Separation plant
(DMS), secondary re-crush (to -18mm) and tertiary re-crush (to-13mm) circuits
and has a 37tph ROM capacity. DMS feed is screened at 25 mm. The final recovery
consists of two Flow-Sort X-ray machines, an attritioner, two Bateman GB 800
grease belts and a "hands-off" sort house.
Democratic Republic of Congo
SOUTHERN DRC
Kwango Project
The 5 ton per hour DMS plant and recovery unit which the Company constructed
for bulk sampling the alluvial deposits on the Kwango River is currently being
commissioned at the Company`s Paardberg Kimberlite mine near Kimberley, South
Africa. Commissioning of the plant should be completed by September 2008, after
which time the plant will be shipped to the DRC.
Further drilling and pitting activities were temporarily suspended during the
2nd quarter on the Kwango. During this time the Tembo Camp was used as a base
to complete a stream sediment sampling program on newly acquired permits on the
Wamba River, adjacent to the Kwango. In all, 30 samples were collected and
concentrated at the Company`s jig station at the Tembo Camp. In addition, 271
samples from the Businga Project were also concentrated during this period.
Geological activities in conjunction with the University of Cape Town and
focused on developing a geological model for the Kwango were initiated in April
2008. This first field mapping session is expected to be concluded in August
2008.
Tshikapa Project
a) Candore Project
Two holes were drilled on a magnetic anomaly south of the Karuru camp (a total
of 122 meters drilled). Both holes terminated in sand or sandstone. The
magnetic response for both targets was attributed to near surface concentration
of magnetic heavy minerals (i.e. principally magnetite).
b) Acacia (Tshikapa)
Xcalibur Geophysics completed a follow-up airborne magnetic survey over 28
magnetic anomalies identified from previous regional geophysics. 1 kilometer by
1.6 km blocks were flown at 50m line spacing in order to improve target
resolution for future follow-up drill testing.
BRC DiamondCore also carried out follow-up sampling on two grain anomalies
identified during previous reconnaissance sampling campaigns; a total of 47
samples were collected, which will be concentrated and sent to MSA Laboratories
for analysis.
Furthermore, BRC DiamondCore received visual grain identification results from
MSA Laboratories for 8 follow-up samples collected in previous campaigns. The
follow-up samples collected over the TE3 003 magnetic anomaly yielded 8 garnets
and 60 ilmenites.
c) Kwango Mines (Tshikapa)
Xcalibur Geophysics completed four follow-up airborne magnetic blocks on the
Kwango Mines permit. Each block was flown at 50m line spacing and covers an
area of 1km x 1.6km. During the 2nd quarter two drillholes were completed on
the Kwango Mines permit, totaling 179m of drilling. The first hole was
terminated after encountering amphibolitic gneiss basement at 29m while the
second hole reached amphobilitc gneiss at 63m. Both magnetic anomalies were
attributed to elevated magnetic susceptibility values in the gneiss. As of June
30, 2008, drilling on the 3rd hole is ongoing at 87m depth and is still in
sedimentary cover.
Illunga Project
The Environmental Rehabilitation Report (PAR) was accepted by the Ministry of
Mines so that the planned drilling program can commence during the 3rd quarter.
King`s Mine Project
Xcalibur Geophysics completed a 1,012 line kilometers airborne magnetic survey
at 200m line spacing covering approximately 176 square kilometers.
The Company also received visual results from MSA Laboratories from
reconnaissance samples taken on this ground yielding spinel/ilmenite grains as
well as occasional garnets.
Group ABBA/Vangu Phambu Project
Xcalibur Geophysics completed a 4,780 line kilometers airborne magnetic survey
at 200m line spacing covering approximately 871 square kilometers. In addition
to this, the Company collected 29 reconnaissance stream samples which were sent
to the Tshikapa base camp jig station for concentration.
Lubao Project
MSA laboratories delivered surface texture and mineral chemistry results for
follow-up samples which were generally negative.
NORTHERN DRC
Zongo Project (Equateur)
No work was conducted in the 2nd quarter.
Businga Project (Equateur)
271 samples obtained in the 1st quarter were dispatched to Rio Tinto
laboratories in Australia.
Northern DRC - Provincial
Bafwasende (Bomili/Coexco/Caspian) Project
Preparations are currently underway to start with the regional stream sampling
program over these licences with the Company`s partners Rio Tinto. The field
program is scheduled to start in September 2008.
QUALIFIED PERSON AND TECHNICAL REPORTS
Dr. Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National instrument 43-101, has reviewed and approved
the technical information in this MD&A.
Additional information with respect to the Company`s DRC projects is contained
in the technical report prepared by Venmyn Rand (Pty) Limited, dated July 31,
2007 and titled "National Instrument 43-101 Technical Report on the Kwango,
Lubao and Tshikapa Projects of BRC Diamond Corporation in the Democratic
Republic of Congo".
Additional information with respect to the Company`s South African projects is
contained in the technical report prepared by Venmyn Rand (Pty) Limited, dated
July 31, 2007 and titled "National Instrument 43- 101 Technical Report Prepared
on the Mineral Assets of Diamond Core Resources Limited in the Northern Cape
and Free State Provinces, South Africa".
Copies of these reports can be obtained from SEDAR at www.sedar.com.
TRANSACTION WITH DIAMOND CORE RESOURCES LIMITED
In July 2007, the Company and Diamond Core Resources Limited ("Diamond Core")
announced that they had entered into an agreement to merge the two companies by
way of a court-sanctioned scheme of arrangement ("the scheme") under South
African corporate law, pursuant to which the Company would acquire all of the
outstanding shares of Diamond Core in exchange for the issuance of BRC
DiamondCore common shares. Under the scheme, each Diamond Core shareholder was
entitled to receive one BRC DiamondCore share for every 24.5 Diamond Core
ordinary shares held. On January 14, 2008, Diamond Core shareholder approval
was obtained, and court approval was obtained on January 22, 2008. On February
11, 2008, the Company acquired all of the outstanding Diamond Core shares and,
as the consideration for this acquisition, issued BRC DiamondCore shares to the
Diamond Core shareholders in the agreed ratio, resulting in the issuance by the
Company of a total of 12,089,678 common shares. In connection with this
acquisition, the Company changed its name from BRC Diamond Corporation to BRC
DiamondCore Ltd. and its shares were listed on the Toronto Stock Exchange and
the JSE Limited in Johannesburg, South Africa.
In July 2005, Diamond Core acquired all of the outstanding shares of Samadi
Resources SA (Pty) Ltd ("Samadi"). As consideration for this acquisition,
Diamond Core issued ordinary shares to Samadi`s shareholders. The terms of the
acquisition agreement (the "Samadi Agreement") entered into by Diamond Core
with the Samadi shareholders with respect to this acquisition provide for the
potential issuance of additional Diamond Core ordinary shares should certain
operating profits be reached from certain of the projects acquired by Diamond
Core pursuant to the acquisition.
In anticipation of the implementation of the scheme, the Company and Diamond
Core entered into an agreement (the "Samadi Amending Agreement") with the said
Samadi shareholders pursuant to which the Samadi shareholders would, if the
relevant profit thresholds are met, be entitled to receive BRC DiamondCore
common shares in substitution for the Diamond Core ordinary shares, with the
number of BRC DiamondCore shares issuable to such shareholders adjusted to
reflect the exchange ratio applicable under the terms of the scheme.
Accordingly, the number of BRC DiamondCore shares issuable to the said Samadi
shareholders under the Samadi Amending Agreement, in the same circumstances as
contemplated in the Samadi Agreement, is a maximum of 1,434,502 BRC DiamondCore
shares.
Also in connection with the acquisition by the Company of all of the
outstanding shares of Diamond Core (the "Diamond Core Acquisition"), 15,133,190
stock options that had been issued to employees of Diamond Core pursuant to The
Diamond Core Resources Share Trust Deed to acquire 15,133,190 ordinary shares
in Diamond Core (the "Old Options") have been substituted with new stock
options of BRC DiamondCore (the "Replacement Options"), so as to allow all
holders of Old Options to acquire the number of BRC DiamondCore common shares
that is calculated by dividing the number of ordinary shares of Diamond Core
that would otherwise have been issuable upon the exercise of the Old Options by
24.5, rounded up to the nearest whole number of BRC DiamondCore shares, with
the exercise price of such Replacement Options being adjusted to the number
that is equal to the exercise price of the Old Options (denominated in South
African rand) multiplied by 24.5. A total of 617,710 Replacement Options were
issued by the Company.
Allocation of purchase price
Based on BRC DiamondCore`s average closing price of $7.40 per share, calculated
with reference to the share price around July 5, 2007, BRC DiamondCore issued
12,089,678 common shares valued at $89,464,000 to Diamond Core shareholders
holding 296,218,483 Diamond Core ordinary shares outstanding on the same date.
The acquisition has been accounted for using the purchase method of accounting
with BRC DiamondCore being identified as the acquirer and Diamond Core as the
acquiree. In accordance with the purchase method of accounting, assets and
liabilities acquired from Diamond Core are measured at their individual fair
values on the date of the acquisition and the difference between these fair
values of net assets acquired and the purchase price is recorded in the
consolidated balance sheet as unallocated purchase price.
The allocation of the purchase price to the assets and liabilities acquired as
presented in this MD&A is preliminary and subject to change. The Company has
not yet finalised the fair value of all identifiable assets and liabilities
acquired, or the amount of the purchase price that may be allocated to
goodwill, or the complete impact of applying purchase accounting on the
Company`s consolidated statement of operations. Therefore, after reflecting the
purchase adjustments identified to date, the excess of the purchase
consideration over the adjusted book values of Diamond Core`s assets and
liabilities has been presented as "unallocated purchase price". The Company has
commenced the process whereby the fair value of all identifiable assets and
liabilities acquired as well as any goodwill and future income taxes arising
from the acquisition will be determined. On completion of valuation, any
adjustment to the carrying amounts of mineral properties, or the recording of
any finite life intangible assets on acquisition, will impact, if applicable,
the measurement of amortization recorded in the consolidated statement of
operations of the Company for the period after the date of acquisition.
$` 000
Issuance of 12,089,678 BRC DiamondCore common shares 89,464
Issuance of Replacement Options 2,477
Transaction costs 2,200
Purchase price 94,141
The preliminary allocation of the purchase price to the net assets acquired is
as follows :
Cash 2,308
Trade and other receivables 1,313
Inventories 1,196
Mineral rights 14,188
Property, plant and equipment 17,129
Deferred exploration costs 5,713
Trade and other payables (3,472)
Taxation (127)
Asset retirement obligation (537)
Future taxation (3,534)
Non-controlling interest 15
Net assets acquired 34,192
Unallocated purchase price 59,949
Fair value of net assets acquired $94,141
The purchase consideration and transaction costs of $94,141,000 exceeded the
carrying value of the net assets acquired by $59,949,000 which has been
recorded as unallocated purchase price.
RESULTS OF OPERATIONS
For the six month period ended June 30, 2008, the Company reported a net loss
of $4,631,000 or $0.2 per share, compared to a net loss of $704,000 or $0.05
per share, reported for the six month period ended June 30, 2007. The Company
reported a net loss of $1,193,000 or $0.05 per share for the three months ended
June 30, 2008, compared to a net loss of $521,000 or $0.04 per share, reported
for the three month period ended June 30, 2007. The increase in the net loss
for the second quarter of 2008 as compared to the first quarter of 2007 is due
to the increased exploration activity of the Company and the inclusion of
Diamond Core results of operations post the Diamond Core Acquisition. The most
significant item affecting the results of operations is the unrealized foreign
exchange loss recorded in the amount of $2,873,000.
Operating results for the Diamond Core group of companies have been excluded
prior to the Company acquiring control. Pending the final determination of the
fair value of all identifiable assets and liabilities acquired, the results of
the Diamond Core operations have been included with effect from February 11,
2008.
Net revenue of $4,369,000 for the six months ended June 30, 2008 achieved from
the sale of diamonds recovered from the bulk sampling operations in South
Africa has been applied to reduce the overall deferred costs incurred at the
operations as the projects in question are still in the development stage.
The carrying value of diamond inventory at June 30, 2008, amounting to $167,000
has similarly been applied to reduce the deferred exploration costs.
Significant changes in expenses incurred during the three and six months ended
June 30, 2008 when compared to the three and six months ended June 30, 2007,
are described below:
General and administrative expenses
General and administrative expenses increased to $669,000 and $813,000 for the
respective three and six months periods ended June 30, 2008, from $87,000 and
$116,000 for the corresponding periods in 2007. The main components of general
and administrative expenses for the six month period ended June 30, 2008
consisted of the following significant components: security expenses ($83,000),
travel expenses ($111,000), audit expenses ($178,000), marketing expenses
($139,000) and rental ($144,000). General and administrative expenses for the
six month period ended June 30, 2007 consisted mainly of shareholder
information and promotion expenses ($12,000), travel expenses ($44,000),
salaries ($39,000), government and filing fees ($15,000), office supplies and
expenses ($5,000) and bank charges ($1,000).
Employee stock-based compensation
Stock-based compensation expense of $nil and $nil was recorded for the
respective three and six month periods ended June 30, 2008
(June 30, 2007 - $nil and $nil). An amount of $nil and $243,000
representing the fair value of stock options issued during 2007 to employees of
the Company`s subsidiary in the DRC was capitalized as deferred exploration
expenditures during the three and six month periods ended June 30, 2008
(compared to $325,000 for the three and six month periods ended June 30, 2007).
Foreign exchange loss
An unrealized foreign exchange loss of $79,000 and $2,873,000 was recorded for
the respective three and six month periods ended June 30, 2008, compared to a
foreign exchange loss of $173,000 and $187,000 for the respective three and six
month periods ended June 30, 2007, due to the inclusion of higher South African
denominated assets and liabilities and fluctuations in the value of the United
States dollar and South African Rand relative to the Canadian dollar.
Regulatory expenses
Regulatory expenses of $60,000 and $250,000 for the respective three and six
month periods ended June 30, 2008 compared to $nil and $nil for the respective
three and six month periods ended June 30, 2007, arose as a result of the
Company listing on the Toronto Stock Exchange pursuant to the Diamond Core
Acquisition (see "Transaction with Diamond Core Resources Limited" above).
Salaries
Salaries of $300,000 and $515,000 for the respective three and six month
periods ended June 30, 2008 compared to $nil and $nil for the respective three
and six month periods ended June 30, 2007, arose mainly due to the inclusion of
the South African operations and represents the amount not capitalized as
deferred exploration expenditure.
Professional fees
Professional fees were over accrued for previously. The reversal of the accrual
resulted in a credit of $53,000 in the 2nd quarter of 2008.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the second quarter of 2008. This financial information has been prepared in
accordance with Canadian generally accepted accounting principles. The
Company`s reporting and measurement currency is the Canadian dollar.
2008 2008 2007 2007
2nd quarter 1st quarter 4th quarter 3rd quarter
Net loss
($`000) $ 1,193 $ 3, 438 $ 16 $ 1, 114
Net loss per
share (basic
and diluted) $ 0. 05 $ 0. 17 $ 0. 01 $ 0. 08
2007 2007 2006 2006
2nd quarter 1st quarter 4th quarter 3rd quarter
Net loss ($`000) $ 521 $ 183 $ 702 $ 266
Net loss per
share (basic
and diluted) $ 0. 04 $ 0. 01 $ 0. 06 $ 0. 02
During the second quarter of 2008, the Company`s net loss decreased to
$1,193,000 compared to a net loss of $3,438,000 reported for the first quarter
of 2008, due mainly to a decrease in unrealised foreign exchange losses created
on the revaluation of the South African balance sheet to Canadian dollars (June
30, 2008 - $79,000; March 30, 2008 - $2,794,000). During the first quarter of
2008, the Company`s net loss increased to $3,438,000 compared to a net loss of
$16,000 in the last quarter of 2007, due mainly to the inclusion of the Diamond
Core operating results and the unrealized foreign exchange loss recorded.
Certain professional and consulting fees incurred in relation to the Diamond
Core Acquisition (see "Transaction with Diamond Core Resources Limited" above)
were reclassified to deferred transaction costs during the fourth quarter of
2007, as such transaction was considered more likely than not to be completed.
The Company`s net loss during the third quarter of 2007 increased to $1,114,000
compared to a net loss of $521,000 incurred in the second quarter of 2007,
mostly due to increased professional and consulting fees incurred in relation
to the Diamond Core Acquisition. During the second quarter of 2007, the
Company`s net loss increased to $521,000 compared to a net loss of $183,000
reported for the first quarter of 2007. The Company`s net loss in the second
quarter of 2007 was significantly impacted by the increase in professional fees
related to the Diamond Core Acquisition and by a foreign exchange loss of
$173,000. The net loss recorded during the first quarter of 2007 decreased
significantly to $183,000 from $702,000 recorded during the previous quarter.
The net loss incurred during the fourth quarter of 2006 was most significantly
impacted by the write down of deferred exploration costs of $414,000 related to
the Company`s Fenton Township properties, as well as by the recognition of
stock option compensation expense, representing the fair value of stock options
issued to consultants ($76,000) and to employees, directors and officers of the
Company ($110,000). The Company recorded a net loss of $266,000 for the third
quarter of 2006 which did not significantly vary from the net loss recorded
during the previous quarter.
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2008, the Company had cash of $ 1,618,000 and a working capital
deficit of $ 8,176,000 compared to cash of $932,000 and a working capital
deficit of $4,287,000 as at December 31, 2007.
The Company does not currently generate revenues other than as a result of its
bulk sampling activities. Net revenue generated from the bulk sampling
activities, amounting to $4,369,000 during the first six months of 2008, is
adequate to support but not grow the South African operations. Similar to other
foreign entities operating in South Africa, the Company is subject to currency
exchange controls administered by the country`s central bank. An ability to
repatriate funds or operating profits, should any develop, may be adversely
affected by such exchange controls, and consequently the ability to adequately
finance the exploration in the DRC.
Historically, the Company has relied primarily on equity financings to fund its
activities through private placement financings and the exercise of warrants
and options. Although the Company has been successful in completing equity
financings in the past, there is no assurance that the Company will secure the
necessary financings in the future.
During the three months ended June 30, 2008, the Company did not complete any
equity financings. In July 2008, the Company completed a private placement
involving the issue and sale of 350,000 common shares of the Company at a price
of $1.50 per share for total proceeds of $525,000. The proceeds will be used
for the exploration of the Company`s diamond properties and for general
corporate purposes.
During the fourth quarter of 2007, the Company obtained a $3,000,000 credit
line (the "Loan Facility") from a Canadian financial institution, of which
$3,000,000 was utilized as at December 31, 2007. During the first quarter of
2008, the Loan Facility was increased from $3,000,000 to $6,000,000. As at June
30, 2008 the balance of the Loan Facility was $6,014,000 including accrued
interest of $141,000.
The Loan Facility is guaranteed by Banro Corporation, a significant shareholder
of the Company. The Company has agreed with Banro Corporation to pay all
amounts outstanding under the Loan Facility and to terminate the Loan Facility
by July 28, 2008. The Loan Facility was used to fund the Company`s exploration
activities until the second quarter of 2008. The Company will need to raise
additional capital in 2008 to fund its exploration programs for 2008 and to
repay the Loan Facility. As at August 14, 2008, the Loan Facility is still in
place.
Contractual obligations entered into by the Company as at the end of June 30,
2008 amount to $747,000 compared to $nil for the period ended June 30, 2007 and
are summarized in the table below:
Total Less than 1 year 1 - 3 years
Contractual
obligations $`000 $`000 $`000
Operating leases $ 191 $ 125 $ 66
Purchase obligations 556 556 -
$ 747 $ 681 $ 66
The Company is in the process of exercising an option agreement to secure an
equity interest in prospective ground currently held under option. The Company
expects to pay US$350,000 as an option exercise fee.
DEFERRED EXPLORATION EXPENDITURES
The following table provides a breakdown of the Company`s deferred exploration
expenditures per country and project for the six months ended June 30, 2008 and
June 30, 2007:
DRC
Tshikapa
Kwango Lubao (Acacia)
Project Project Project
June 30, 2008 $`000 $`000 $`000
Balance 12/31/2007 $ 7,749 $ 2,708 $ 1,687
Administrative and office support 6 562 187
Depreciation - - -
Drilling 3 3 60
Field camp expenses 37 36 34
Geochemistry - - -
Geology - contract geologists 13 18 29
Geophysics - - 202
Permits 43 59 122
Professional fees - - -
Remote sensing - - -
Stock based compensation - - -
Transport and helicopter 3 6 64
Subtotal 2008 105 684 698
Balance 06/30/2008 7,854 3,392 2,385
Tshikapa
(Candore) Other
Project Projects Total
June 30, 2008 $`000 $`000 $`000
Balance 12/31/2007 $ 1,494 $ 547 $ 14,185
Administrative and office support 232 139 1, 126
Depreciation - 108 108
Drilling 3 3 72
Field camp expenses 110 331 548
Geochemistry - - -
Geology - contract geologists - 113 173
Geophysics - 24 226
Permits 181 59 464
Professional fees 4 19 23
Remote sensing - - -
Stock based compensation - 243 243
Transport and helicopter 44 507 624
Subtotal 2008 574 1, 546 3, 607
Balance 06/30/2008 2,068 2,093 17,792
Other projects consist of the following projects: Tshikapa (Kwango Mines),
King`s Mine, Zongo, Businga, Bornili, Ilunga and Kwango (Acacia).
Kwango Lubao Tshikapa
Project Project Project
June 30, 2007 $`000 $`000 $`000
Balance 12/31/2006 $ 4, 548 $ 1, 793 $ 370
Administrative and office support 369 129 148
Depreciation 38 12 -
Drilling - 2 2
Field camp expenses 125 12 39
Geochemistry 8 7 76
Geology - contract geologists 31 192 8
Geophysics 50 39 208
Permits 351 55 76
Professional fees - - 6
Remote sensing 2 - 2
Transport and helicopter 281 11 92
Subtotal - 2007 1, 255 459 657
Balance 06/30/2007 $ 5, 803 $ 2, 252 $ 1, 027
Candore
Project Total
June 30, 2007 $`000 $`000
Balance 12/31/2006 $ 729 $ 7, 440
Administrative and office support 107 753
Depreciation - 50
Drilling 2 6
Field camp expenses - 176
Geochemistry 25 116
Geology - contract geologists - 231
Geophysics 13 310
Permits 54 536
Professional fees - 6
Remote sensing - 4
Transport and helicopter - 384
Subtotal - 2007 201 2, 572
Balance 06/30/2007 $ 930 $ 10, 012
South Africa
Paardeberg
Silverstreams East Total
June 30, 2008 $`000 $`000 $`000
Balance 12/31/2007 $ - $ - $ -
Admininstrative and office support 534 397 931
Depreciation 659 376 1, 035
Drilling - - -
Field camp expenses 1, 348 346 1, 694
Foreign exchange loss - unrealized 2 2 4
Geochemistry - - -
Geology - contract geologists 31 30 61
Geophysics - - -
Professional fees 6 8 14
Rehabilitation 316 206 522
Safety and security 231 205 436
Surveying 11 8 19
Subtotal - 2008 3, 138 1, 578 4, 716
Net proceeds on diamond sales and
diamond inventory (3, 129) (1,240) (4, 369)
Balance 06/30/2008 $ 9 $ 338 $ 347
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at August 14, 2008, the Company had outstanding 26,091,310
common shares and stock options to purchase an aggregate of 2,144,110 common
shares of the Company.
In addition, as part of the Diamond Core Acquisition, the Company agreed to
issue a maximum of 1,434,502 common shares to former shareholders of Samadi
Resources SA (Pty) Limited (a subsidiary of the Company which was acquired as
part of the Diamond Core Acquisition) if certain profitability thresholds are
met in relation to certain of Diamond Core`s projects (see "Transaction with
Diamond Core Resources Limited").
RELATED PARTY TRANSACTIONS
As at As at
June 30, 2008 December 31, 2007
Balances payable/(receivable) $`000 $`000
Macleod Dixon LLP $ 583 $ 269
Banro Corporation (11) 29
Banro Congo Mining sprl 4 4
$ 576 $ 302
For the six month period ended
June 30, 2008 June 30, 2007
Services rendered and expenses reimbursed $`000 $`000
Macleod Dixon LLP (a) $ 189 $ 207
Banro Corporation (b) (11) 47
Banro Congo Mining s prl(c) - -
SFW Village (d) 50 -
AT Kondrat (e) 42 33
DK Madilo (f) 20 16
$ 290 $ 303
a) During the six month period ended June 30, 2008 legal fees of $189,000 (June
30, 2007 - $207,000) incurred in connection with general corporate matters
as well as the Diamond Core Acquisition were billed by a law firm of which
one partner is a director and officer of the Company.
b) Banro Corporation ("Banro") owns 3,744,032 common shares representing a
14.55% (December 31, 2007 - 27.43%) equity stake in the Company. It is
engaged in the acquisition and exploration of gold properties in the DRC.
During the six month period ended June 30, 2008 the Company incurred $4,000
in rental expenses on behalf of Banro Corporation.
c) A subsidiary of Banro that incurred expenditure on behalf of the Company
previously.
d) Consulting fees in respect of services to the Company. Mr Village is a
director of the Company and has been an officer of the Company since
February 2008.
e) Salaries paid to Mr Kondrat who is a non-executive director of the Company
and was an officer of the Company until February 2008.
f) Salaries paid to Mr Madilo who is an officer of the Company and was a
director of the Company until February 2008.
All amounts due to related parties are unsecured, non-interest bearing and due
on demand. These transactions are in the normal course of operations and are
measured at the exchange value.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates used in the preparation of the consolidated
financial statements include the Company`s estimate of the recoverable value of
its mineral properties and related deferred exploration expenditures as well as
the value of stock-based compensation. Both of these estimates involve
considerable judgment and are, or could be, affected by significant factors
that are out of theCompany`s control.
The Company`s recoverability of the recorded value of its mineral properties
and associated deferred exploration expenses is based on market conditions for
minerals, underlying mineral resources associated with the properties and
future costs that may be required for ultimate realization through mining
operations or by sale. The Company is in an industry that is dependent on a
number of factors including environmental, legal, and political risks, the
existence of economically recoverable reserves, the ability of the Company and
its subsidiaries to obtain necessary financing to complete the development and
future profitable production or the proceeds of disposition thereof.
The Company uses the Black-Scholes option pricing model to determine the fair
value of stock options granted. This model requires the Company to make
reasonable assumptions in order to derive parameters such as the expected
volatility of the Company`s shares, the expected life of the option and
interest rates, all of which are based on historical information. Future
behaviors of these parameters are beyond the Company`s control, and thus, may
be significantly different from the Company`s estimates.
The values of all stock options granted were estimated, using the Black-Scholes
option-pricing model, based on the following factors:
- risk-free interest rate: 4.11% to 4.53% (2007 - 4.11 to 4.53%; 2006 - 4.38%;
2005 - 2.91% to 3.30%)
- expected volatility: 62% (2007 - 62%; 2006 - 63.8% ; 2005 - 117.97% to
129.39%)
- expected life: 5 years (2007 - 5 years; 2006 - 5 years ; 2005 - 2 to 5 years)
- expected dividends: $nil (2007 - $nil; 2006 - $nil ; 2005 - $nil)
Property, plant and equipment are depreciated over their useful lives taking
into account the residual values, where appropriate. The actual lives of the
assets and residual values are assessed annually and may depend on a number of
factors. In reassessing asset lives, factors such as technological innovation
and maintenance programs are taken into account. Residual value assessments
consider issues such as future market conditions, the remaining life of the
asset and projected disposal values.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
Effective January 1, 2008, the Company adopted the following sections of the
Handbook of the Canadian Institute of Chartered Accountants ("CICA"):
CICA Handbook Section 1400, as amended, changed the guidance related to
management`s responsibility to assess the ability of the entity to continue as
a going concern. Management is required to make an assessment of the entity`s
ability to continue as a going concern and should take into account all
information about the future, which is at least but not limited to 12 months
from the balance sheet date.
Disclosure is required of material uncertainties related to events or
conditions that cast significant doubt upon the entity`s ability to continue as
a going concern. The adoption of this standard had no impact on the Company`s
presentation of its financial position or consolidated results of operations as
at June 30, 2008 and for the six month period then ended.
CICA Handbook Section 3031, Inventories, replaces corresponding Section 3030
and established new standards for the measurement and disclosure of
inventories. This new section requires inventories to be measured at the lower
of cost and net realizable value, provides guidance on the determination of
cost and requires the reversal of prior period write-downs when the net
realizable value of impaired inventory subsequently recovers. The adoption of
this section did not have any impact on the Company`s consolidated financial
statements.
CICA Handbook Section 3862, Financial Instruments - Disclosures, and Handbook
Section 3863, Financial Instruments - Presentation, enhance existing disclosure
requirements and place greater emphasis on disclosures related to recognized
and unrecognized financial instruments and how those risks are managed.
Comparative information about the nature and extent of risks arising from
financial instruments is not required in the year Section 3862 is adopted. The
adoption of these standards did not have any impact on the classification and
measurement of the Company`s financial statements. The new disclosures pursuant
to these new Handbook Sections are included in Note 14 to the unaudited interim
consolidated financial statements for the three and six months ended June 30,
2008.
CICA Handbook Section 1535, Capital Disclosures, establishes disclosure
requirements about an entity`s capital objectives, policies and process for
managing capital as well as compliance with any externally imposed capital
requirements. The impact of adopting this standard is disclosed in Note 12 to
the unaudited interim consolidated financial statements for the three and six
months ended June 30, 2008.
CICA Handbook Section 3110, Asset Retirement Obligations, requires the
recognition of any statutory, contractual or other legal obligation related to
the retirement of tangible long-lived assets where 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. Changes resulting from revisions to
the timing or the amount of the original estimate of undiscounted cash flows
are recognized as an increase or decrease in the carrying amount of the
liability, and the related asset retirement cost is capitalized as part of the
carrying value of the related long-lived asset.
These new standards have been adopted on a prospective basis with no
restatement to prior period financial statements.
FUTURE ACCOUNTING STANDARDS
Goodwill and Intangibles
In February 2008, the CICA issued accounting standard Section 3064, Goodwill
and intangible assets, replacing Section 3062 Goodwill and intangible assets
and Section 3450, Research and development costs. Section 3064 establishes
standards for the recognition, measurement, presentation and disclosure of
goodwill subsequent to its initial recognition and of intangible assets by
profit-oriented enterprises. Standards concerning goodwill are unchanged from
the standards included in the previous Section 3062. Section 3064 will be
applicable to financial statements relating to fiscal years beginning on or
after October 1, 2008.
The Company is currently evaluating and has not yet determined the impact of
the adoption of this standard, if any, on its consolidated financial
statements.
International Financial Reporting Standards ("IFRS")
In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed that
Canadian GAAP for publicly accountable enterprises will be converged with IFRS
effective in calendar year 2011, with early adoption allowed starting in
calendar year 2009. The conversion to IFRS will be required, for the Company,
for interim and annual financial statements beginning on January 1, 2011. IFRS
uses a conceptual framework similar to Canadian GAAP, but there are significant
differences in recognition, measurement and disclosures. In the period leading
up to the conversion, the AcSB will continue to issue accounting standards that
are converged with IFRS such as IAS 2, Inventories, and IAS 38, Intangible
assets, thus mitigating the impact of adopting IFRS at the mandatory transition
date.
The Company is currently evaluating the impact of the adoption of IFRS on its
consolidated financial statements, and may consider the early adoption thereof,
particularly as Diamond Core had successfully adopted IFRS prior to the
acquisition thereof by the Company.
Determining whether a contract is routinely denominated in a single currency -
EIC 169
In January 2008 the CICA issued Section 3855 - Financial Instruments -
Recognition and Measurement, paragraph 3855.37, requires an embedded derivative
to be separated from the host contract and accounted for as a derivative if the
economic characteristics and risks of the embedded derivative are not closely
related to the economic characteristics and risks of the host contract. An
exception is made in paragraph 3855.A34(d) for an embedded foreign currency
derivative in a host contract that is not a financial instrument (such as a
contract for the purchase or sale of a non-financial item where the price is
denominated in a foreign currency) where the embedded derivative is not
leveraged, does not contain an option feature, and requires payments
denominated in "the currency in which the price of the related good or service
that is acquired or delivered is routinely denominated in commercial
transactions around the world (such as the US dollar for crude oil
transactions)." EIC 169 supplements Section 3855 and provides guidance on how
to define or apply the term "routinely denominated in commercial transactions
around the world". The EIC is in effect for interim filing as of March 31,
2008. The adoption of this EIC did not have any impact on the Company`s
consolidated financial statements.
CAPITAL MANAGEMENT
The Company`s main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of capital
at acceptable risk while providing an appropriate return to its shareholders;
- to maintain a strong capital base so as to maintain investor, creditor and
market confidence and to sustain future development of the business;
- to safeguard the Company`s ability to obtain financing should the need arise;
and
- to maintain financial flexibility in order to have access to capital in the
event of future acquisitions.
The Company manages its capital structure and makes adjustments to it in
accordance with the objectives stated above, as well as responds to changes in
economic conditions and the risk characteristics of the underlying assets.
There were no changes to the Company`s approach to capital management during
the six months ended June 30, 2008.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a) Fair value of financial instruments
The Company has classified financial instruments as follows:
June 30, 2008 December 31, 2007
Financial assets $`000 $`000
Held-for-trading, measured at fair value
Cash $ 1, 618 $ 932
Loans and receivables , measured at
amortized cost
Accounts receivable 1, 312 403
Financial liabilities
Other liabilities, measured at
amortized cost
Accounts payable and accrued liabilities $ 5, 506 $ 2, 599
b) Allowance account for credit losses
June 30, 2008 December 31, 2007
$`000 $`000
Accounts receivable $ 314 $ -
Allowance for doubt ful accounts - -
Other 998 403
$ 1, 312 $ 403
c) Fair value of financial instruments
The balance sheet carrying amounts for cash and cash equivalents, accounts
receivable and other receivables, accounts payable and accrued liabilities
approximate fair value due to their short-term nature. Due to the use of
subjective judgments and uncertainties in the determination of fair values
these values should not be interpreted as being realizable in an immediate
settlement of the financial instruments.
d) Risk management policies and hedging activities
The Company is sensitive to changes in commodity prices, foreign exchange
and interest rates. The Company`s board of directors has overall
responsibility for the establishment and oversight of the Company`s risk
management framework. Although the Company has the ability to address its
price- related exposures through the use of options, futures and forward
contracts, it does not generally enter into such arrangements. Similarly,
derivative financial instruments are not used to reduce these financial
risks.
Credit risk
Financial instruments which are potentially subject to credit risk for the
Company consist primarily of cash and cash equivalents. Cash and cash
equivalents are maintained with several financial institutions of reputable
credit and may be redeemed upon demand. It is therefore the Company`s
opinion that such credit risk is subject to normal industry risks and is
considered minimal.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due.
The Company`s approach to managing liquidity is to ensure that it will have
sufficient liquidity to meet its liabilities when due. To the extent the
Company does not believe it has sufficient liquidity to meet these obligations,
management will consider securing additional funding through equity or debt
transactions.
The Company manages its liquidity risk by continuously monitoring forecast and
cash flow from operations.
Financial liabilities consist of accounts payable and accrued liabilities.
Trade payables and accrued liabilities are paid in the normal course of
business except under certain exceptions no later than the second month.
Currency risk
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Monetary assets and liabilities denominated in foreign
currencies are translated from US Dollars and South African Rands into Canadian
dollars. Unfavourable changes in the applicable exchange rate may result in a
decrease or increase in foreign exchange gains or losses. The Company does not
use derivative instruments to reduce its exposure to foreign currency risk.
For the six months ended June 30 2008, everything else being equal, a 5%
increase or decrease in the exchange rate between the Canadian dollar, the
South African Rand and the US dollar would have resulted in a respective
$1,150,000 decrease and $1,339,000 increase in the Company`s net loss.
Interest rate risk
Interest rate risk is the potential impact on the Company`s earnings due to
changes in bank lending rates and short term deposit rates.
The Company`s exposure to interest rate risk is as follows:
Cash and cash equivalents Variable interest rate
Accounts receivable Non-interest bearing
Accounts payable and accrued liabilities Non-interest bearing
Short term debt Variable interest rate
The majority of the Company`s cash is held in South African Rands and is
invested in short term deposits.
The Company believes that the interest rates prevailing in Canada should not
significantly increase in 2008 and estimates that its interest rate risk
exposure will diminish in future quarters.
Market risk
Market risk is the risk that the value of a financial instrument might be
adversely affected by a change in commodity prices, interest rates or currency
exchange rates. The Company manages the market risk associated with commodity
prices by establishing and monitoring parameters that limit the types and
degree of market risk that may be undertaken.
Title risk
Title to mineral properties and mining rights involves certain inherent risks
due to the difficulties of determining the validity of certain claims as well
as the potential for problems arising from the frequently ambiguous
conveyancing history characteristic of many mining properties. Although the
Company has investigated title to all of its mineral properties for which it
holds concessions or other mineral leases or licenses, the Company cannot give
any assurance that title to such properties will not be challenged or impugned
and cannot be certain that it will have valid title to its mining properties.
The Company relies on title opinions by legal counsel who base such opinions on
the laws of countries in which the Company operates.
SUBSEQUENT EVENT
Diamond Sales
The Company realized US$ 993,000 from the sale of diamonds through the Company`s
fifth tender sale, realizing a price of US$1,035 per carat.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not, by
its nature, all inclusive.
All of the Company`s projects are located in the DRC and South Africa. The
assets and operations of the Company are therefore subject to various
political, economic and other uncertainties, including, among other things, the
risks of war and civil unrest, hostage taking, military repression, labor
unrest, illegal mining, expropriation, nationalization, renegotiation or
nullification of existing licenses, permits, approvals and contracts, taxation
policies, foreign exchange and repatriation restrictions, changing political
conditions, international monetary fluctuations, currency controls and foreign
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. Changes, if any, in mining
or investment policies or shifts in political attitude in either the DRC or
South Africa may adversely affect the Company`s operations or profitability.
Operations may be affected in varying degrees by government regulations with
respect to, but not limited to, restrictions on production, price controls,
export controls, currency remittance, income taxes, foreign investment,
maintenance of claims, environmental legislation, land use, land claims of
local people, water use and mine safety. Failure to comply strictly with
applicable laws, regulations and local practices relating to mineral rights
could result in loss, reduction or expropriation of entitlements. In addition,
in the event of a dispute arising from operations in the DRC or South Africa,
the Company may be subject to the exclusive jurisdiction of foreign courts or
may not be successful in subjecting foreign persons to the jurisdiction of
courts in Canada. The Company also may be hindered or prevented from enforcing
its rights with respect to a governmental instrumentality because of the
doctrine of sovereign immunity. It is not possible for the Company to
accurately predict such developments or changes in laws or policy or to what
extent any such developments or changes may have a material adverse effect on
the Company`s operations.
The DRC is a developing nation emerging from a period of civil war and
conflict. Physical and institutional infrastructure throughout the DRC is in a
debilitated condition. The DRC is in transition from a largely state controlled
economy to one based on free market principles, and from a non-democratic
political system with a centralized ethnic power base, to one based on more
democratic principles. There can be no assurance that these changes will be
effected or that the achievement of these objectives will not have material
adverse consequences for the Company and its operations. The DRC continues to
experience instability in parts of the country due to certain militia and
criminal elements. While the government and United Nations forces are working
to support the extension of central government authority throughout the
country, there can be no assurance that such efforts will be successful.
South Africa has recently experienced significant power shortages and it is
expected that these shortages will continue for several years. These power
shortages could disrupt the Company`s South African operations and have a
material adverse effect on the Company.
The only sources of future funds for further exploration programs which are
presently available to the Company (other than diamond sales as a result of the
Company`s bulk sampling activities) are the sale of equity capital, or the
offering by the Company of an interest in its properties to be earned by
another party carrying out further exploration. There is no assurance that such
sources of financing will be available on acceptable terms, if at all. In the
event that commercial quantities of minerals are found on the Company`s
properties, the Company does not have the financial resources at this time to
bring a mine into production.
All of the Company`s properties are in the exploration stage only and none of
the properties contain a known body of commercial ore. The Company currently
operates at a loss and does not generate any revenue from operations (other
than the said diamond sales). The exploration and development of mineral
deposits involve significant financial risks over a significant period of time
which even a combination of careful evaluation, experience and knowledge may
not eliminate. Few properties which are explored are ultimately developed into
producing mines. Major expenditures may be required to establish reserves by
drilling and to construct mining and processing facilities at a site. It is
impossible to ensure that the Company`s exploration programs will result in a
profitable commercial mining operation.
Diamond Core has concluded a number of transactions with Black Economic
Empowerment ("BEE") partners in support of the South African government`s
policy of the empowerment of previously disadvantaged individuals and
communities, through the minerals and mining industry. Additional BEE
transactions are contemplated. As a result of the transactions concluded to
date, a BEE entity holds a 50% equity interest in a number of the Company`s
South African projects. The approval of the BEE entity is required with respect
to certain key business decisions in relation to the relevant project. Disputes
between the Company and a BEE entity could therefore interfere with the
Company`s ability to conduct one or more of its projects in South Africa, which
could have a material adverse effect on the Company.
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Unfavorable changes in the applicable exchange rate may
result in a decrease or increase in foreign exchange gains or losses. The
Company does not use derivative instruments to reduce its exposure to foreign
currency risk.
The Company`s exploration and, if such exploration is successful, development
of its properties is subject to all of the hazards and risks normally incident
to mineral exploration and development, any of which could result in damage to
life or property, environmental damage and possible legal liability for any or
all damage.
The natural resource industry is intensely competitive in all of its phases,
and the Company competes with many companies possessing greater financial
resources and technical facilities than itself.
Johannesburg
18 August 2008
Sponsor
River Group
Date: 18/08/2008 08:30:01 Produced by the JSE SENS Department.
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