| Wed 15 Oct 2008, 15:36 | | RDI - Rockwell Diamonds Incorporated - Consolidated Financial |
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RDI
RDI
RDI - Rockwell Diamonds Incorporated - Consolidated Financial
Statements Three And Six Months Ended August 31, 2008 And 2007
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
CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED AUGUST
31, 2008 AND 2007
(Expressed in Canadian Dollars)
(Unaudited)
These financial statements have not been reviewed by the Company`s
auditors.
Consolidated Balance
Sheets
(Expressed in Canadian
Dollars)
August 31 2008 February 29 2008
(unaudited)
ASSETS
Current assets
Cash and equivalents $10,110,840 $19,623,847
Amounts receivable 729,133 631,446
Restricted cash 3,258,450 13,335,124
Trade receivable from a 1,301,032
related party (note 10) 593,434
Diamond inventory and 5,313,053
supplies (note 4) 3,465,853
Prepaids and deposits 1,044,776 946,858
21,757,284
38,596,562
Property, plant and 75,415,984 64,831,636
equipment (note 5)
Mineral property interests 37,386,417 25,247,937
(note 6)
Other assets and deposits 2,826,498 3,200,112
Reclamation deposits (note 1,903,271 1,816,877
8)
$139,289,454 $133,693,124
LIABILITIES AND
SHAREHOLDERS` EQUITY
Current liabilities
Accounts payable and 5,587,218 $4,420,212
accrued liabilities
Amounts owing pursuant to 3,878,016
acquisition (Note 6(a)) 294,402
Amounts due to related 56,657
parties (note 10) 49,604
Income taxes 1,273,521 890,332
Current portion of capital 6,573,436
lease obligations (note 7) 6,847,751
17,368,848 12,502,301
Long-term liabilities
Capital lease obligations 5,833,697 7,955,548
(note 7)
Future income taxes 14,426,959 12,430,100
Reclamation obligation 3,167,790 1,755,820
(note 8)
23,428,446 22,141,468
Non-controlling interest 5,513,309
11,934,548
Shareholders` equity
Share capital (note 9) 119,952,533 112,095,390
Warrants (note 9(c)) 1,693,197 1,693,197
Contributed surplus 3,390,983 2,332,882
Deficit (32,057,862) (29,006,662)
92,978,851 87,114,807
Nature and continuance of
operations (note 1)
Subsequent events (note
11)
Contingencies and
commitments (note 12)
$139,289,454 $133,693,124
The accompanying notes are an integral part of these consolidated
financial statements.
Approved by the Board of Directors
/s/ Dr. John Bristow /s/ Dominique de la Roche
Dr. John Bristow Dominique de la Roche
Director, Chief Executive Officer Director, Chief Financial Officer
ROCKWELL DIAMONDS INC.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited - Expressed in Canadian Dollars)
Three months ended August 31
2008 2007
Revenue
Rough diamonds sales (note $9,912,702 $14,021,974
10(a))
Contract diamond sales 4,356 179,975
Other sales 250,799 20,515
10,167,857 14,222,464
Cost of sales
Cost of rough diamonds sales (7,650,605)
(5,656,083)
Cost of contract diamond sales - (152,979)
Amortization and depletion (2,672,728) (1,975,013)
Operating profit (loss) (155,476) 6,438,389
Expenses
Accretion of reclamation 98,779 58,543
obligation (note 8)
Exploration (32,976) 303,644
Foreign exchange loss (gain) 831,009
(641,267)
Interest on capital leases 440,378 471,195
Convertible note accretion and 162,790 85,774
interest expense
Legal, accounting and audit 639,568 65,762
Office and administration 867,755 699,896
Shareholder communications 119,330 69,792
Stock-based compensation - 134,619 6,462
exploration (note 9(b))
Stock-based compensation - 237,883 25,611
administration (note 9(b))
Travel and conferences 107,806 125,804
Transfer agent 34,646 6,893
3,641,587 1,278,109
Other items
Write-off of amounts receivable - -
Loss (gain) on disposal of 283,785 (25,277)
equipment
Interest income (742,169) (485,753)
Write-down of mineral property - -
interests
(458,384) (511,030)
Loss (profit) before income 3,338,679 (5,671,310)
taxes
Income tax (recovery) expense (110,367) 26,894
Future income tax (recovery) (592,800) 1,741,627
expense
Loss (profit) before non- 2,635,512 (3,902,789)
controlling interest
Non-controlling interest (589,003) 3,471,580
Loss (profit) for the period 2,046,509 (431,209)
before discontinued operations
The accompanying notes are an 203,338 -
integral part of these
consolidated financial
statements.Loss from
discontinued operations (Note
6(d))
Loss (profit) for the period 2,249,847 (431,209)
Other comprehensive (income) - -
loss
Total Comprehensive (Income) $2,249,847 $(431,209)
Loss
Reconciliation to Headline loss
per share
Foreign exchange loss (gain) $831,009 $(641,267)
Loss (gain) on disposal of $283,785 $(25,277)
equipment
Headline loss 1,135,053 235,335
Basic and diluted loss per $0.01 $(0.00)
common share
Headline Earnings per Share $0.00 $0.00
Weighted average number of 238,041,569 187,131,953
common shares outstanding
Six months ended August 31
2008 2007
Revenue
Rough diamonds sales (note $17,007,623 $21,702,746
10(a))
Contract diamond sales 160,576 179,975
Other sales 330,590 24,576
17,498,789 21,907,297
Cost of sales
Cost of rough diamonds sales (12,259,173) (12,756,614)
Cost of contract diamond - (152,979)
sales
Amortization and depletion (5,246,960)
(3,654,569)
Operating profit (loss) (7,344) 5,343,135
Expenses
Accretion of reclamation obligation 167,402 114,014
(note 8)
Exploration 271,182 466,167
Foreign exchange loss (gain) 624,887 (3,497,377)
Interest on capital leases 903,195 904,239
Convertible note accretion and 248,831 696,105
interest expense
Legal, accounting and audit 776,895 468,164
Office and administration 1,839,810 2,351,880
Shareholder communications 198,975 125,522
Stock-based compensation - 337,243 10,472
exploration(note 9(b))
Stock-based compensation - 720,858 29,179
administration (note 9(b))
Travel and conferences 319,709 411,026
Transfer agent 44,697 63,322
6,453,684 2,142,713
Other items
Write-off of amounts receivable - 224,942
Loss (gain) on disposal of 304,753 57,143
equipment
Interest income (2,123,452) (708,035)
Write-down of mineral property - 15,648
interests
(1,818,699) (410,302)
Loss (profit) before income 4,642,329 (3,610,724)
taxes
Income tax (recovery) expense 157,629 26,894
Future income tax (recovery) (1,274,808) 1,096,191
expense
Loss (profit) before non- 3,525,150 (2,487,639)
controlling interest
Non-controlling interest (677,288) 3,977,875
Loss (profit) for the period 2,847,862 1,490,236
before discontinued operations
Loss from discontinued 203,338 -
operations (Note 6(d))
Loss (profit) for the period 3,051,200 1,490,236
Other comprehensive (income) - -
loss
Total Comprehensive (Income) 3,051,200 $1,490,236
Loss
Reconciliation to Headline loss
per share
Foreign exchange loss (gain) $624,887 $(3,497,377)
Loss (gain) on disposal of $304,753 $57,143
equipment
Headline loss 2,121,559 4,930,470
Basic and diluted loss per $0.01 $0.01
common share
Headline Earnings per Share $0.01 $0.03
Weighted average number of 237,963,291 143,372,763
common shares outstanding
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Shareholders` Equity
(Expressed in Canadian Dollars)
Six months ended August 31
2008
(unaudited)
Share capital Number of
shares
Balance at beginning of the period 223,755,854 $112,095,390
Share purchase options exercised at - -
$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 January 2008, - -
net of issue costs at $0.60 per share
Commission consideration for - -
private placement at $0.60 per share
Warrants exercised at $0.60 per - -
share
Consideration for acquisition of - -
property net of issue cost at $0.78
per share (note 6)
Consideration for additional 14,285,715 7,857,143
interest net of issue cost at $0.55
per share (note 6(b))
Consideration for property finders - -
fees at $0.78 per share
Fair value of stock options - -
allocated to shares issued on exercise
Balance at end of the period 238,041,569 $119,952,533
Warrants
Broker warrants issued as 1,693,197
consideration for private placement
$1,693,197
Contributed surplus
Balance at beginning of the period 2,332,882
Stock-based compensation (note 1,058,101
10(b))
Fair value of stock options -
allocated to shares issued on exercise
Balance at end of the period $3,390,983
Deficit
Balance at beginning of the period (29,006,662)
Loss for the period (3,051,200)
Balance at end of the period $(32,057,862)
TOTAL SHAREHOLDERS` EQUITY $92,978,851
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 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 January 2008, net 24,101,526 13,860,916
of issue costs at $0.60 per share
Commission consideration for 500,000 300,000
private placement at $0.60 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 6)
Consideration for additional - -
interest net of issue cost at $0.55
per share (note 6(b))
Consideration for property finders 1,676,529 1,307,693
fees at $0.78 per share
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
Contributed 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
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
(Unaudited - Expressed in Canadian Dollars)
Three months ended August 31
Cash provided by (applied to): 2008 2007
Operating activities
Profit (Loss) for the period $(2,249,847) $431,209
Items not affecting cash
Accretion of reclamation 98,779 58,543
obligation
Amortization and depletion 1,794,224 1,198,863
Amortization of capital lease 878,504 776,150
equipment
Write-off of amounts receivable - -
Write-down of mineral property (895,590) -
interests
Non cash convertible note - -
accretion and interest expense
Stock-based compensation 372,502 32,073
(note 10(b))
Unrealized foreign exchange gain 1,553,769 (1,050,503)
Loss (profit) on disposal of 283,785 (25,277)
equipment
Loss on sale of discontinued - -
operations
Future income tax (recovery) (592,800) 1,741,627
expense
Provision for site reclamation - (21,209)
Non-controlling interest (589,004) 3,471,580
Changes in non-cash working
capital items
Accounts receivable 430,708 1,292,828
Amounts due to and from related (233,875) (1,955,508)
parties
Inventory 743,635 (2,839,111)
Prepaids and deposits 2,198,419 1,147,334
Accounts payable and accrued 1,874,246 68,796
liabilities
Income taxes 66,125 (270,051)
Cash provided by (used in) 5,733,580 4,057,344
operating activities
Investing activities
Acquisition of Saxendrift Mine - -
(Pty) Limited, net of cash
acquired (Note 6(a))
Proceeds on sale of shares in 2,537,066 -
subsidiary
Restricted cash (316,583) 101,464
Mineral property acquisitions - (1,500,602)
Purchase of equipment (7,871,929) (4,422,740)
Proceeds received on disposal of 76,943 382,903
equipment
Other assets and deposits (290,912) (2,282,593)
Reclamation deposits (43,791) (680,821)
Reclamation obligation - -
Cash provided by (used in) (5,909,206) (8,402,389)
investing activities
Financing activities
Principal repayments under capital (2,189,963) (1,854,825)
lease obligations
Addition of capital lease 14,213 -
obligations
Common shares and warrants issued - 194,360
for cash, net of issue costs
Amounts received (paid) to related (25,570) 1,131,580
parties
Amounts paid pursuant to property (94,174) (6,660,406)
acquisition
Repayment of credit facility - -
Credit facility - -
Repayment of loans payable to - -
related parties
Loans payable to related parties - -
Cash provided by (used in)
financing activities (2,295,494) (7,189,291)
Increase (decrease) in cash and (2,471,120) (11,534,336)
equivalents during the period
Cash and equivalents, beginning of 12,581,960 32,626,376
period
Cash and equivalents, end of $10,110,840 $21,092,040
period
Cash and equivalents is comprised $10,110,840 $21,092,040
of:
Cash and equivalents $12,295,460 $21,092,040
Cash equivalent (Bank overdraft) $(2,184,620) $-
Interest paid during the period $162,790 $85,774
Interest received $742,169 $485,753
Income taxes paid during the $(66,125) $270,051
period
Supplemental disclosure of non-
cash investing and financing
activities:
Issuance of warrants - $- $-
consideration for private
placement
Issuance of common shares - $- $-
consideration for private
placement
Issuance of commons shares as $- $-
consideration for additional
interest
Fair value of stock options $- $9,090
allocated to shares issued upon
exercise
Equipment acquired under capital $14,214 $1,136,242
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 three and six months ended August 31, 2008 and 2007
(Unaudited - 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, acquiring and exploring natural resource properties. The
Company`s principal mineral property interests are located in South
Africa.
Operating results for the three and six months ended August 31, 2008
are not necessarily indicative of the results that may be expected for
the full year ending February 28, 2009.
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.
These interim financial statements do not include all the disclosures
required for annual financial statements under generally accepted
accounting principles. However, these interim financial statements
follow the same accounting policies and methods of application as the
Company`s most recent audited annual financial statements except for
the changes described in note 3 below. These interim consolidated
financial statements should be read in conjunction with the Company`s
nine months ending February 29, 2008 audited annual consolidated
financial statements which are filed on www.sedar.com. Certain
comparative information has been reclassified to conform to the
presentation adopted in the current period.
3. CHANGES IN ACCOUNTING POLICIES
(a) Newly Adopted Accounting Policies
(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
externally imposed capital requirements and, if it has not complied,
the consequences of such non-compliance.
The Company`s objective when managing capital is to safeguard the
Company`s ability to continue as a going concern, so that it can
continue to explore and develop its projects for the benefit of its
shareholders and other stakeholders. The Company considers the
components of shareholders` equity, as well as its cash and
equivalents, as capital. The Company manages the capital structure and
makes adjustments to it in the light of changes in economic conditions
and the risk characteristics of the underlying assets. The Company may
issue new shares through private placements in order to maintain or
adjust the capital structure.
In order to facilitate the management of its capital requirements, the
Company prepares annual expenditure budgets that are updated as
necessary depending on various factors, including successful capital
deployment and general industry conditions. The Company`s cash
resources at August 31, 2008 are sufficient for its present needs,
specifically to continue administrative and exploration operations at
current levels through the end of February 28, 2009.
There were no changes to the Company`s approach to capital management
during the six months ended August 31, 2008. The Company is not
subject to externally imposed capital requirements as at August 31,
2008
(ii) Financial Instruments - Disclosure (Section 3862) and
Presentation (Section 3863)
These standards replace CICA 3861, Financial Instruments - Disclosure
and Presentation. They increase the disclosures previously 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.
The carrying value of the Company`s cash and equivalents, amounts
receivable, restricted cash, trade receivable from a related party,
reclamation deposits accounts payable and accrued liabilities, due
to/from related parties and capital lease obligations approximate
their fair values.
Financial Instrument Risk Exposure and Risk Management
The Company is exposed in varying degrees to a variety of financial
instrument related risk, including credit risk, liquidity risk,
foreign exchange risk, interest risk and commodity price risk.
Credit Risk
Credit risk is the risk of potential loss to the Company if a
counterparty to a financial instrument fails to meet its contractual
obligations. The Company`s credit risk is primarily attributable to
its liquid financial assets including cash and equivalents, accounts
receivable and trade receivable from a related party. The Company
limits exposure to credit risk on liquid financial assets through
maintaining its cash and equivalents with high-credit quality
financial institutions. The carrying value of the Company`s cash and
cash equivalents, accounts receivable and trade receivable from a
related party represent the maximum exposure to credit risk. The
Company does not have financial assets that are invested in asset
backed commercial paper.
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 ensures that
there is sufficient capital in order to meet short term business
requirements, after taking into account cash flows from operations and
the Company`s holdings of cash and cash equivalents. The Company
believes that these sources will be sufficient to cover the likely
requirements for the foreseeable future. The Company`s cash and
equivalents are invested in business accounts which are available on
demand for the Company`s programs, and which are not invested in any
asset backed deposits/investments.
The Company operates in South Africa. Like other foreign entities
operating there, the Company is subject to currency exchange controls
administered by the South African Reserve Bank, that country`s central
bank. A significant portion of the Company`s funding structure for
its South African operations consists of advancing loans to its South
Africa incorporated subsidiaries and it is possible the Company may
not be able to acceptably repatriate such funds once those
subsidiaries are able to repay the loans or repatriate other funds
such as operating profits should any develop. The repatriation of cash
held in South Africa is permitted upon the approval of the South
African Reserve Bank. Cash balances in South Africa are the Rand
balances disclosed below.
The following are the contractual maturities of financial liabilities:
August 31, Carrying Contract 2009 2010 2011
2008 amount ual cash
flow
Accounts $5,587,218 $5,587,2 $5,587,218 $ - $ -
payable and 18
accrued
liabilities
Amounts due 56,657 56,657 56,657 - -
to related
parties
Capital 12,407,133 13,958,8 7,792,405 5,293,489 873,004
lease 98
obligations
Foreign Exchange Risk
In the normal course of business, the Company enters into transactions
for the purchase of supplies and services denominated in South African
Rand ("ZAR"). In addition, the Company has cash and certain
liabilities denominated in South African Rand. As a result, the
Company is subject to foreign exchange risk from fluctuations in
foreign exchange rates. The Company has not entered into any
derivative or other financial instruments to mitigate this foreign
exchange risk.
The exposure of the Company`s cash and equivalents, amounts receivable
and amounts due from related parties to foreign exchange risk is as
follows:
Currency August 31, 2008 February 29, 2008
South African Rand $11,434,719 $16,362,773
Other 29,940 1,127,790
Total Financial Assets $11,464,659 $17,490,563
The exposure of the Company`s accounts payable and accrued
liabilities, amounts due to related parties and capital lease
obligations to foreign exchange risk is as follows:
Currency August 31, 2008 February 29, 2008
South African Rand $17,375,257 $18,909,003
Total Financial $17,375,257 $18,909,003
Liabilities
Sensitivity analysis:
A 10 percent change of the Canadian dollar against the ZAR at August
31, 2008 would have changed net loss by $221,382. This analysis
assumes that all other variables, in particular interest rates, remain
constant.
Sensitivity analysis:
A 10 percent change of the prime rate for the period August 31, 2008
would have changed net loss by $90,320. This analysis assumes that all
other variables, in particular foreign exchange rates, remain
constant.
(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 the Company`s 2009 fiscal year. The Company`s
assessment and disclosure of its ability to continue as a going
concern is disclosed in Note 1.
(iv) Inventories (Section 3031)
This standard replaces the existing Section 3030 with the same title
and will harmonize accounting for inventories under Canadian GAAP with
International Financial Reporting Standards ("IFRS"). This standard
requires that inventories be measured at the lower of cost and net
realizable value, and includes guidance on the determination of cost,
including the allocation of overheads and other costs. The standard
also requires that similar inventories within a consolidated group be
measured using the same method. It also requires the reversal of
previous write-downs to net realizable value when there is a
subsequent increase in the value of inventories. This new section is
effective for the Company`s 2009 fiscal year. Upon adoption of this
standard, the Company concluded that there were no material
differences between the new standard and the Company`s current
accounting policy for its diamond and supplies inventory.
(b) Accounting Policies Not Yet Adopted
(i) 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 International Financial
Reporting Standards ("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
Canadian 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 March 1, 2011 will require the
restatement for comparative purposes of amounts reported by the
Company for the year ended February 28, 2011. While the Company has
begun assessing the impact of adoption of IFRS for 2011, the financial
reporting impact of the transition to IFRS cannot be reasonably
estimated at this time.
4. DIAMOND INVENTORY AND SUPPLIES
As at As at
August 31, 2008 February 29, 2008
Rough diamond inventory $830,780
$2,041,222
Work in progress 775,758 433,074
Mine supplies 2,047,669 1,990,699
Fuel, oil and grease 448,404 211,300
Total inventory and supplies $5,313,053 $3,465,853
5. PROPERTY, PLANT AND EQUIPMENT
As at August 31, 2008
Cost Accumulated Net book
amortization value
Land $6,970,440 $- $6,970,440
Processing plant and 46,248,344 3,352,204 42,896,140
equipment
Processing plant and 28,436,963 5,023,419 23,413,544
equipment under capital lease
Office equipment 854,631 101,771 752,860
Vehicles and light equipment 1,650,353 375,387 1,274,966
Vehicles and light equipment 154,324 46,290 108,034
under capital lease
$84,315,055 $8,899,071 $75,415,984
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
6. MINERAL PROPERTY INTERESTS
As at As at
Acquisition Costs August 31, 2008 February 29,
2008
Durnpike Investments (Pty)
Limited
Balance, beginning of period $5,247,936 $24,121,854
Acquisition costs 55,747 1,822,138
Adjustment to mineral property (178,661) -
cost
Financial, legal, advisory, and - 4,216
other fees
Site closure and reclamation - 230,622
obligation recognized
Future income tax liability (118,993) 419,050
Change in Future Income Tax rate (132,447) -
Depletion of mineral properties (661,651) (1,349,944)
during the period
Durnpike Investments (Pty) 24,211,931 25,247,936
Limited, end of period
Ricardo Property - 1
Saxendrift Mine (Pty) Ltd
Balance, beginning of period $- $-
Acquisition costs 9,822,979 -
Adjustment to mineral property
costs 649,288
Financial, legal, advisory, and 76,772 -
other fees
Future income tax liability 2,932,235 -
Depletion of mineral properties (306,788) -
during the year
Saxendrift Mine (Pty) Ltd, end of 13,174,486 -
period
Balance, end of period $37,386,417 $25,247,937
In April 2008, the Company completed the acquisition of Saxendrift
Mine (Pty) Ltd a South African private company with an alluvial
diamond property in the Middle Orange river area. The cash
consideration paid of $15,256,809 comprised of $9,899,763 for mineral
rights, $6,245,700 for property, plant and equipment, $130,800 for
inventory, $786 for other assets and a reclamation obligation of
$1,020,240.
(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 between Douglas and Prieska
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.
On April 11, 2008 the Company completed the MORO acquisition. The
substantive conditions to the Transaction have been fulfilled and the
Company completed the MORO acquisition. 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.
The results of the Saxendrift operations have been included in the
consolidated financial statements since April 11, 2008, the date of
acquisition. The following table summarizes the total purchase
consideration of the Saxendrift assets:
Amount (ZAR) Amount
($)
Cash advanced to fund Rockwell`s 93,312,269 12,205,245
acquisition of 100% of Saxendrift
Cash committed to fund 23,330,000 3,051,564
Total purchase consideration 116,642,269 15,256,809
The total acquisition price has been allocated to the net assets
acquired and liabilities assumed of Saxendrift as follows:
Amount Amount
(ZAR) ($)
Inventory 1,000,000 130,800
Plant and equipment 47,750,000 6,245,700
Other assets 6,009 786
Mineral property interests 75,686,260 9,899,763
Reclamation obligation (7,800,000) (1,020,240)
116,642,269 15,256,809
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, April 11, 2008.
As at August 31, 2008, the Company had the following payment
commitments relating to the acquisition of Saxendrift remaining: (a)
Payment of ZAR27.5 million ($3.8 million) in cash to Trans Hex subject
to the anticipated grant of Ministerial Consent to the cession of each
of the Outstanding Mining Rights to the Company and registration of
cession of such rights in its name.
(b) Assumption of 74% ownership of HC Van Wyk Diamonds Ltd ("HCVW`)
and Klipdam Mining Company Limited ("Klipdam")
Effective March 1, 2008, the Company increased its ownership of HCVW
and Klipdam by 34% resulting to an 85% interest by issuing 14,285,715
common shares of the Company pursuant to the June 2006 Durnpike
Definitive Agreement thereby reducing the non-controlling interest to
15%. Subsequent to that, effective June 1, 2008 the BEE group
increased its shareholding from 15% to 26% by subscribing for an
additional 11% shares in HCVW and Klipdam, thereby reducing the
Company`s interest to 74%.
(c) Galputs Minerale Project
As provided for in the June 2006 Durnpike Definitive Agreement, the
Company executed an agreement in relation to the acquisition of
control of the mineral rights relating to the Galputs Minerale Project
("Galputs"). In order for the Company to fully control the Galputs
minerals rights, the South African Department of Minerals and Energy
("DME") had to give its final written approval to transfer of the
shares of Galputs from Virgilia Investments Inc. to the Company on or
before May 31, 2008. Since no written approval had been received from
the DME by May 31, 2008, the provisions of the agreement shall not be
enforced and as a result all parties have been restored to a position
prior to entering the agreement.
(d) Disposal of discontinued operations - Minera Ricardo
During the period ended August 31, 2008, the Company sold its 100%
interest in certain mineral exploration and exploitation concessions
in the Calama Mining District in Chile known as the Ricardo Property
through the sale of all its shares in Minera Ricardo Resources Inc.
S.A. ("Minera Ricardo") to Hunter Dickinson Acquisitions Inc., a
company with certain directors and officers in common, for a nominal
price of $1, resulting in a loss of $203,338. Accordingly, the
results of operations of Minera Ricardo have been segregated and
presented separately as discontinued operations in the consolidated
financial statements. The results of discontinued operations,
including the loss on the sale of assets, were as follows:
Period ended
August 31, 2008
Revenue $-
Loss from operations until July 14, 2008 (135.528)
Loss on disposal (67,810)
Income tax effect
-
Loss from sale of discontinued operations $(203,338)
7. 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
August 31, 2008 February 29, 2008
ELB Finance $- $105,418
Stannic 1,646,284 2,093,869
Wesbank 319,236
197,069
Nedbank 568,764 1,842,519
Komatfin 9,995,016 10,442,257
$12,407,133 $14,803,299
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
August 31, 2008
2009 $7,792,405
2010 5,293,489
2011 873,004
Total minimum lease payments 13,958,898
Less interest portion (1,551,765)
Present value of capital 12,407,133
lease obligations
Current portion (6,573,436)
Non-current portion $5,833,697
8. RECLAMATION OBLIGATION
The continuity of the provision for site closure and reclamation
costs related to the Holpan, Wouterspan, Klipdam owned by the
Durnpike Investments subsidiary and Saxendrift mines, are as
follows:
As at As at February 29,
August 31, 2008 2008
Durnpike Investments (Pty)
Limited
Balance, beginning of period $1,755,820 $1,361,557
Changes during the period:
Site closure and reclamation 230,622
obligation recognized
Foreign exchange on reclamation 165,832 (300,675)
Accretion expense 114,538 464,316
Durnpike Investments (Pty) $2,036,190 $1,755,820
Limited, end of period
Saxendrift Mines (Pty) Limited
Balance, beginning of period $- $-
Changes during the period:
Site closure and reclamation 1,020,240 -
obligation recognized
Foreign exchange on reclamation 58,496 -
Accretion expense 52,864 -
Saxendrift Mines (Pty) Limited, $1,131,600 $-
end of period
Balance, end of period $3,167,790 $1,755,820
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 respectively. The estimated
reclamation costs for Saxendrift is $1,131,600 which is the amount
that had been established by an independent consultant during the
acquisition process. As no gravel mining has taken place yet it has
not been necessary to adjust this amount. 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 $3,167,790.
The accretion of $167,402 (2008 - $464,316) 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 August 31, 2008, the
Company had cash reclamation deposits totaling $1,903,271 (2008 - $
1,816,877) comprised of $1,743,883 (2008 - $ 1,657,489) for the
Holpan and Wouterspan mines and $159,388 (2008 - $159,388) for the
Klipdam mine. These deposits are invested in interest bearing money
market linked investments at rates ranging from 9.5% to 11%.
9. 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.
(b) 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 optionees
employment, except in the case of retirement or death.
The continuity of share purchase options for the six months ended
August 31, 2008 is as follows:
Expiry Exercise February Expired/ August 31
date 29 2008 2008
price Granted Exercised cancelled
March 28, $ 0.50 150,000 - - 150,000 -
2008
July 10, $ 0.68 300,000 - - - 300,000
2010
September $ 0.62 5,903,000 - - 5,903,000
24, 2012 -
November $ 0.63 1,109,000 - - 2,500 1,106,500
14, 2012
June 20, $ 0.45 - 1,150,000 - 1,150,000
2011 -
7,462,000 1,150,000 - 152,500 8,459,500
$ 0.62 $ 0.60
As at August 31, 2008, 2,823,166 of the options outstanding with a
weighted average exercise price of $0.60 per share have 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:
Three months ended Six months ended
August 31 August 31
2008 2007 2008 2007
Exploration and $ $ 6,462 $ 337,243 $
engineering 134,619 10,472
Operations and 237,883 25,611 720,858 29,179
administration
Total compensation cost $ $ $1,058,101 $
expensed to operations, 372,502 32,073 39,651
with the offset credited
to contributed surplus
The weighted-average assumptions used to estimate the fair value of
options granted are as follows:
Three months Six months ended
ended August 31 August 31
2008 2007 2008 2007
Risk free interest rate 4% 4% 4% 4%
Weighted average 4.8 2.0 4.8 2.0
expected life years years years years
Weighted average 114% 88% 114% 88%
expected volatility
Expected dividends nil nil nil nil
c) Share purchase warrants
The continuity of share purchase warrants (each warrant exercisable
into one common share) for the period ended August 31, 2008 is:
Expiry date November May 09, 2009 May 09, 2009
22, 2008 (ii) (iii)
(i)
Exercise price $0.80 $0.70 $0.70
Balance, February 29, 2008 39,600,000 116,007,154 5,772,000
Issued - - -
Exercised - - -
Expired - - -
Balance, May 31, 2008 39,600,000 116,007,154 5,772,000
(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.
(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%.
10. RELATED PARTY BALANCES AND TRANSACTIONS
Balances payable As at As at
August 31, 2008 February
29,2008
Banzi Trading (h) $3,819 $-
Jakes Tyres (i) 48,699 49,604
CEC Engineering (c) 4,139 -
$56,657 $49,604
Balances receivable
Hunter Dickinson Services $246,166 $78,504
Inc.(a)
Flawless Diamonds Trading House 980,558 477,298
(g)
Banzi Trade 26 (Pty) Ltd (h) 38,336 33,744
Diacor CC (k) 35,972 3,888
$1,301,032 $593,434
Three months ended
August 31 Six months ended
August 31
Transactions 2008 2007 2008 2007
Services
rendered and
expenses
reimbursed:
Hunter Dickinson $ 131,362 $ 220,869 $ 380,708 $ 533,023
Services Inc.
(a)
Euro-American - 8,148 - 14,000
Capital
Corporation(b)
CEC Engineering 14,289 15,275 14,289 29,723
(c)
Jeffrey B - 27,063 - 68,958
Traders CC(d)
Seven Bridges 37,128 13,189 67,992 33,605
Trading (e)
Cashmere Trading 9,483 121,339 19,295 164,696
(f)
Banzi Trade 26 4,927 4,152 12,573 256,094
(Pty) Ltd (h)
Jakes Tyres (i) 148,644 135,872 348,037 403,233
AA Van Wyk (j) - 152,979 - 326,956
Diacor CC (k) 32,696 - 36,314 -
Sales rendered
to:
Flawless $9,912,702 $14,201,949 $17,007,623 $21,882,721
Diamonds Trading
House (g)
(a) Hunter Dickinson Services Inc. ("HDSI") is a private company
equally owned by several public companies, one of which is Rockwell,
and has certain directors in common with the Company. HDSI 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
June 1, 2008. 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 provided management
services to the Company at market rates for those services, until
February 29, 2008
(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) 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.
(e) 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.
(f) Cashmere Trading is a private company owned by Hennie Van Wyk, an
officer of the Company, which provides helicopter services at market
rates.
(g) 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.
(h) Banzi Trade 26 (Pty) Ltd ("Banzi") is 49% owned by HC van Wyk
Diamonds Ltd and 51% 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.
(i) Jakes Tyres is a private company with certain directors and
officers in common with the Company that provides consumable materials
at market rates.
(j) AA Van Wyk is a private company owned by a party related to the
directors and officers of the Company, which provided contract mining
services at market rates until February 29, 2008.
(k) Diacor CC is a private company with certain directors and
officers in common with the Company that purchases consumable
materials at market rates.
11. SUBSEQUENT EVENTS
(a) Outstanding Niewejaarskraal mining rights
On April 11th, 2008 all the conditions precedent to the
Saxendrift acquisition had been met, however the Niewejaarskraal
new mining order rights were still outstanding and are subject
to the approval of the South African Department of Minerals and
Energy.
12. CONTINGENCIES AND COMMITMENTS
(a) In connection with the property described in the Company`s
audited annual consolidated financial statements for the nine months
ending February 29, 2008, one of the 50% shareholders of Midamines
has, subsequent to the conclusion of the Midamines Agreement denied
the validity of that agreement. The other 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 the
dispute.
The Company will obtain formal legal advice from counsel and
evaluate its available remedies. Although the outcome is not
currently determinable the project is not a material
operation of the Company. During the third quarter of fiscal
2008 the Company paid consideration of $600,000 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 August 31, 2008 the Company has paid the final
consideration to Folmink Delwery CC.
As at August 31, 2008, the Company had the following payment
commitments relating to the acquisition of Saxendrift remaining: (a)
Payment of ZAR27.5 million ($3.8 million) in cash to Trans Hex subject
to the anticipated grant of Ministerial Consent to the cession of each
of the Outstanding Mining Rights to the Company and registration of
cession of such rights in its name.
THREE AND SIX MONTHS ENDED AUGUST 31, 2008
MANAGEMENT`S DISCUSSION AND ANALYSIS
TABLE OF CONTENTS
1.1 DATE
1.2 OVERVIEW
1.3 SELECTED ANNUAL INFORMATION
1.4 SUMMARY OF QUARTERLY RESULTS
1.5 RESULTS OF OPERATIONS
1.6 LIQUIDITY
1.7 CAPITAL RESOURCES
1.8 OFF-BALANCE SHEET ARRANGEMENTS
1.9 TRANSACTIONS WITH RELATED PARTIES
1.10THIRD QUARTER
1.11PROPOSED TRANSACTIONS
1.12CRITICAL ACCOUNTING ESTIMATES
1.13CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
1.14FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
1.15OTHER MD&A REQUIREMENTS
1.15.1 ADDITIONAL DISCLOSURE FOR VENTURE ISSUERS WITHOUT
SIGNIFICANT REVENUE
1.15.2 DISCLOSURE OF OUTSTANDING SHARE DATA
1.1 DATE
THIS MANAGEMENT DISCUSSION AND ANALYSIS ("MD&A") SHOULD BE READ IN
CONJUNCTION WITH THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF
ROCKWELL DIAMONDS INC. ("ROCKWELL", OR THE "COMPANY") FOR THE THREE
MONTHS AND SIX MONTHS ENDED AUGUST 31, 2008 AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED FEBRUARY
29, 2008, PREPARED IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES, AND PUBLICLY AVAILABLE ON SEDAR AT
WWW.SEDAR.COM.
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.
THIS MD&A IS PREPARED AS OF OCTOBER 10TH, 2008. ALL DOLLAR FIGURES
STATED HEREIN ARE EXPRESSED IN CANADIAN DOLLARS, UNLESS OTHERWISE
SPECIFIED.
THIS DISCUSSION INCLUDES CERTAIN STATEMENTS THAT MAY BE DEEMED
"FORWARD-LOOKING STATEMENTS". ALL STATEMENTS IN THIS DISCUSSION,
OTHER THAN STATEMENTS OF HISTORICAL FACTS, THAT ADDRESS FUTURE
PRODUCTION, RESERVE POTENTIAL, EXPLORATION DRILLING, EXPLOITATION
ACTIVITIES AND EVENTS OR DEVELOPMENTS THAT THE COMPANY EXPECTS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THE
EXPECTATIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER MATERIALLY
FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-
LOOKING STATEMENTS INCLUDE MARKET PRICES, EXPLOITATION AND EXPLORATION
SUCCESSES, CONTINUED AVAILABILITY OF CAPITAL AND FINANCING AND GENERAL
ECONOMIC, MARKET OR BUSINESS CONDITIONS. INVESTORS ARE CAUTIONED THAT
ANY SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND THAT
ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS
CAUTIONARY NOTE TO INVESTORS CONCERNING ESTIMATES OF INDICATED
RESOURCES
THIS SECTION USES THE TERM "INDICATED RESOURCES". THE COMPANY ADVISES
INVESTORS THAT WHILE THIS TERM IS RECOGNIZED AND REQUIRED BY CANADIAN
REGULATIONS, THE U.S. SECURITIES AND EXCHANGE COMMISSION DOES NOT
RECOGNIZE IT. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ANY PART OR
ALL OF MINERAL DEPOSITS IN THIS CATEGORY WILL EVER BE CONVERTED INTO
RESERVES.
CAUTIONARY NOTE TO INVESTORS CONCERNING ESTIMATES OF INFERRED
RESOURCES
THIS SECTION USES THE TERM "INFERRED RESOURCES". THE COMPANY ADVISES
INVESTORS THAT WHILE THIS TERM IS RECOGNIZED AND REQUIRED BY CANADIAN
REGULATIONS, THE U.S. SECURITIES AND EXCHANGE COMMISSION DOES NOT
RECOGNIZE IT. "INFERRED RESOURCES" HAVE A GREAT AMOUNT OF UNCERTAINTY
AS TO THEIR EXISTENCE, AND AS TO THEIR ECONOMIC AND LEGAL FEASIBILITY.
IT CANNOT BE ASSUMED THAT ALL OR ANY PART OF A MINERAL RESOURCE WILL
EVER BE UPGRADED TO A HIGHER CATEGORY. UNDER CANADIAN RULES,
ESTIMATES OF INFERRED MINERAL RESOURCES MAY NOT FORM THE BASIS OF
ECONOMIC STUDIES, EXCEPT IN RARE CASES. INVESTORS ARE CAUTIONED NOT
TO ASSUME THAT ANY PART OR ALL OF AN INFERRED RESOURCE EXISTS, OR IS
ECONOMICALLY OR LEGALLY MINEABLE.
1.2 Overview
Rockwell Diamonds Inc. ("Rockwell" or the "Company") is engaged in the
business of alluvial diamond production. The Company is focused on
acquiring additional operating diamond properties or projects that
have near-term potential for alluvial diamond production.
1.2.1 Summary
In the first half of fiscal 2009, the Company operated four alluvial
diamond mines. During the period, the Company increased its interest
in the Holpan/Klipdam and Wouterspan properties to 74%, with the
remaining 26% being held by a Black Economic Empowerment ("BEE")
consortium.
As a result of work stoppages, production fell by approximately 55%
for the month of August.
An industrial action at the Wouterspan mine during the quarter
resulted in operations being shutdown during late July and the month
of August. Following negotiations between the Company and the National
Union of Mineworkers, a disciplinary procedure and hearing initiated
against employees at Wouterspan was settled.
Wage negotiations for all South African operations were implemented in
June 2008. These negotiations reached a deadlock in mid August and
were followed by work stoppages at the Company`s other operations.
During the industrial action and work stoppages, Rockwell was able to
maintain day time shift production through the efforts of its mine
management and supervisor teams supported by non-unionized employees
at its Wouterspan, Klipdam and Saxendrift operations.
Full operations resumed on September 3, 2008.
The Saxendrift mine was acquired in April 2008 by Rockwell through a
transaction with the TransHex Group (see the MORO Agreement below).
The Company completed re-commissioning of the plant and recovery unit
at Saxendrift during the first quarter, and began production.
Rockwell also initiated fabrication and construction of a new high-
volume Wet-Rotary Pan Plant, which continues to be on budget and on
schedule for start-up in early November 2008.
In the three month period ended August 31, 2008:
- 4,266.25 carats were produced at the Holpan/Klipdam, Wouterspan
and Saxendrift operations
- 5,024.34 carats were sold at an average price of US$1,951.41 per
carat
- Revenues from sales were $9.9 million, inclusive of revenue
received from contract diamond sales of $4,356.
- Cost of sales and amortization totalled $10.3 million, resulting
in an operating loss of $155,476 for the period.
- Net general and administrative expenses amounted to $3.2 million,
offset by a net tax recovery of $703,167, and the loss on the sale of
a discontinued operation of $203,338 resulted in a net loss of $2.2
million or $0.01 per share.
In the six months ending August 31, 2008:
- 10,576.83 carats were produced from operations at Holpan/Klipdam,
Wouterspan and Saxendrift.
- 9,879.61 carats were sold at an average price of US$1,709.31 per
carat.
- Revenues from sales of $17.4 million, inclusive of revenue
received from contract diamond sales of $160,576.
- Cost of sales and amortization totalled $17.5 million, resulting
in an operating loss of $7,344 for the period.
- Net general and administrative expenses amounted to $4.6 million,
offset by a net tax recovery of $1.1 million, and the loss on the sale
of a discontinued operation of $203,338 resulted in a net loss of $3
million or $0.01 per share.
Diamonds in inventory at August 31, 2008 totalled 1,640.53 carats.
In August 2008, the Company acquired some 12,254 hectares in
additional prospecting permits in the North Cape Province, a number of
which are adjacent to the Wouterspan and Saxendrift operations.
On September 9, 2008, Pala Investments Holdings Limited ("Pala") made
an unsolicited offer to acquire all of the outstanding shares of
Rockwell for $0.36 per share ("the Offer") After careful
consideration, including consultation with its independent financial
and legal advisors and recommendation from a special committee,
Rockwell`s Board concluded that the Offer significantly undervalues
Rockwell and is not in the best interests of its shareholders.
Management recommended to shareholders to reject the Offer. A
Directors` circular was mailed to shareholders on September 22, 2008.
Full scale pre-commissioning trials of the new final recovery facility
at the Saxendrift operation began three weeks ahead of schedule in
September 2008. The facility incorporates seven, flow-sort X-ray
recovery machines, a state of the art optical sort machine, hands-off
diamond recovery units with built-in secure storage capability and
security monitoring. The flow sort X-ray recovery units are configured
to process and recover diamonds in the size fraction +2 mm to 32 mm at
a high level of throughput and efficiency, and will recover diamonds
of up to about 210 carats in size. In addition, an optical sort
machine has been integrated that will also allow recovery of
considerably larger stones up to about 500 carats in size.
1.2.2 Financings
In fiscal year ended May 31, 2007, the Company completed two
significant equity financings. During the nine month period ended
February 29, 2008, the Company completed a brokered private placement
financing. There were no financings completed during six months ended
August 31, 2008.
$21 million private placement financing
In November 2006, Rockwell completed a private placement of $21
million, consisting of 42 million units at $0.50 per unit (the
"Offering"). Each unit consists of one common share ("Share") in the
capital of the Company and one Share purchase warrant. Each warrant
entitles the holder to buy one common share in the capital of the
Company at the exercise price of $0.60 during the first year from
completion of the financing, or at an exercise price of $0.80 during
the second year or at an exercise price of $1.00 during the third
year. The third year term of the warrants is conditional upon Rockwell
achieving Tier 1 status on the TSX Venture Exchange within the first
two years. The Company listed on the TSX in fiscal 2008. A portion of
the securities is subject to additional US resale restrictions in the
United States. The Company paid cash commissions of $1,215,770.
Financing to raise up to $60 million
In May 2007, the Company completed a private placement and issued
116,007,154 million equity units at a price of $0.52 per unit for
aggregate proceeds of up to $60 million, comprised of approximately
$50 million to be issued to investors under the brokered offering and
$10 million to be issued in a non-brokered offering. Each unit
consists of one common share and one share purchase warrant
exercisable at $0.70 for a 24 month period from completion. Units
issued under the brokered offering were being offered by a syndicate
of agents. Closing of the offering occurred on May 9, 2007.
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.
The net proceeds from the offerings will be used to fund Rockwell`s
acquisition of the MORO from Trans Hex, expand production capacity at
its Wouterspan operation across the river from the MORO, implement
improvements at its other operations, and for general corporate
purposes.
$14.5 million private placement financing, January 2008
In January 2008, the Company completed a brokered private placement,
which had been announced on November 28, 2007, and issued a total of
24,101,526 Common Shares at a price of $0.60 per share for total
proceeds of $14,460,916. 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 were
subject to a hold period that expired on March 31, 2008.
Proceeds from the financing will be used to fund Rockwell`s diamond
operations and new project evaluation and development.
1.2.3 Agreements
Durnpike Agreement
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 ("DRC"). These
four properties include the Holpan/Klipdam Property in South Africa,
Wouterspan Property in South Africa, Kwango River Project in the DRC
and Galputs Minerale Project in South Africa.
Subsequently and 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 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 increased its shareholding in HCVW to a 51% controlling
interest by (a) subscribing for additional shares in HCVW for the
amount of ZAR 1 million ($160,000) and (b) introducing a ZAR 24
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 ZAR 60 million
($9 million), payable in Common Shares. The Exchange Agreement became
effective upon Rockwell completing its listing of the Company`s Common
Shares on the JSE Limited ("JSE") stock exchange. In March 2008, the
Company issued Common Shares to the Van Wyk Trust and increased its
ownership by 34% to a total of 85% 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 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 JSE and hence
completed its JSE listing condition. Consequently, the Company issued
7,848,663 Common Shares as settlement of its commitment and also
1,676,529 Common Shares as finder fees relating to the Durnpike
acquisition.
- The Company spend C$283,691 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 the deadline of
February 29, 2008 was not met, the Company negotiated 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 of 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 15(a) to the
audited financial statements for the nine months ending February
29, 2008). During the third quarter of 2008 the Company paid
consideration of $600,000 to Midamines in order to increase the
size of the concession (Permit 331).
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. For the Galputs deal
to be fulfilled the condition precedent was that the South African
Department of Minerals and Energy had to give its written approval to
transfer the shares from the vendor to the purchaser by no later than
May 31, 2008. Due to the fact that no written approval had been
obtained on or before May 31, 2008, the provisions of the agreement
shall not be of any force and all parties have been restored to a
position as if the agreement had not been entered into.
During the year ended May 31, 2007, a BEE group purchased 15% of the
VWDG from the Van Wyk Trust for an amount of ZAR22.5 million ($3.4
million). The BEE company is African Vanguard Resources (Pty) Ltd.,
the holding company of Richtrau No 136 (Pty) Ltd. During the six
months ended August 31, 2008 the BEE group increased its shareholding
from 15% to 26% by subscribing for an additional 11% shares in the
VWDG. This additional 11% were at a subscription price of ZAR 17.5
million and the BEE group will also inject ZAR 10.5 million in working
capital into the VWDG.
Makoenskloof property acquisition
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, approximately 20 km from the town of Douglas, South
Africa, and 40 km upstream from the Wouterspan diamond operation. 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 ZAR 5.4 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 ZAR 21.3 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 ZAR 19 million ($2.7
million) and is committed to pay the remaining consideration in
monthly payments of ZAR 500,000 ($63,000). The monthly payments shall
incur interest calculated at the prime rate of the Standard Bank of
South Africa.
The Makoenskloof property is currently on care and maintenance.
Middle Orange River Operations ("MORO") Agreement
In March 2007, Rockwell and Trans Hex, through its wholly owned
subsidiary Trans Hex Operations (Pty) Ltd ("THO"), announced that the
companies had entered into an agreement whereby Rockwell`s wholly
owned South African subsidiary, Rockwell Resources RSA (Pty) Ltd
("Rockwell RSA"), would acquire two open pit alluvial diamond mines
(Saxendrift and Niewejaarskraal) currently on care and maintenance,
and three alluvial diamond exploration projects (Kwartelspan, Zwemkuil-
Mooidraai, and Remhooget-Holsloot) referred to collectively as the
Middle Orange River Operations from Trans Hex ("the Transaction").
Pursuant to the terms of the Transaction, Trans Hex will transfer all
its relevant mineral rights and associated assets into a new special
purpose vehicle ("Saxendrift Mine Pty (Ltd)") which Rockwell acquired
via Rockwell RSA.
The MORO include:
- the rights to prospect and explore for and/or mine precious
stones and/or other minerals and/or metals held directly or indirectly
by THO in the Saxendrift area (described above);
- substantial indicated and inferred mineral resources (see Table
in section 1.2.5 below);
- the material plant, machinery, equipment and other movable assets
owned and/or used by THO - These operating assets were independently
valued by Manhattan Mining Equipment (Pty) Limited in April 2005 at
ZAR 53.3 million ($8.0 million);
- the employees of THO in terms of Section 197 of South Africa`s
Labour Relations Act of 1995; and
- a rehabilitation liability which will be taken over by Rockwell
on the basis that the tailings and other heaps of unprocessed diamond
bearing middlings gravel and Rooikoppie gravels will be reprocessed by
Rockwell to recover contained diamonds. The plan is to process the
material and simultaneously rehabilitate these areas.
The Company has paid cash consideration to Trans Hex of ZAR 93.3
million ($12.2 million) and assumed potential liabilities for staff
layoffs of ZAR 5 million ($0.6 million) and rehabilitation bonds of
ZAR 7.8 million ($1 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 Saxendrift Mine Pty (Ltd) to
be acquired by the Rockwell RSA.
The Transaction was completed in April 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 was obtained.
Cession of the Niewejaarskraal mining right is still awaited from the
DME, and the Remhoogte prospecting right is in the process of being
renewed. Until these rights have been awarded, funds of ZAR 26.8
million allocated for their purchase will be retained in an interest-
bearing Trust account. Once the DME has issued the necessary cession
and renewal documents, these rights will also be transferred to
Rockwell RSA via the Saxendrift Mine Pty (Ltd) and the funds in Trust
released to Trans Hex.
Farhom Property
On July 30, 2007, H.C. Van Wyk Diamonds acquired 100% of the shares
and shareholder loans of Farhom Mining & Construction (Pty) Ltd for
ZAR 10 million ($1.5 million). This company holds the mineral rights
over the Farhom farm property. This transaction was concluded in terms
of an option granted to HCVW on February 24, 2005 and later amended on
July 10, 2007.
1.2.4 Production Properties
Production and Sales - Quarter Comparison
The following is a comparison of the current quarter (ending August
31, 2008) with the quarter ending August 31, 2007.
PRODUCTION
Operation 3 months ending August 31, 3 months ending August 31,
2008 2007
Volume Carats Average Volume Carats Average
(cubic grade (cubic grade
meters) (carats meters) (carats
per 100 per 100
cubic cubic
meters) meters)
Holpan 150,285 774.01 0.52 275,758 2,446.07 0.89
Klipdam 210,759 1,622.13 0.77 259,527 2,528.02 0.97
Wouterspan 120,829 708.12 0.59 354,492 2,594.59 0.73
Makoenskloof - - - 63,199 237.30 0.38
Saxendrift 84,883 1,161.99 1.37 - - -
Total 566,756 4,266.25 0.75 952,976 7,805.98 0.82
SALES, REVENUE AND INVENTORY
Operation 3 months ending August 31, 2008
Sales Value of Average value Inventory
(carats) Sales (US$) (US$ per (carats)
carat)
Holpan 1,015.39 842,285 829.52 267.65
Klipdam 1,898.91 5,294,781 2,788.33 679.31
Wouterspan 1,093.56 1,700,432 1,554.95 272.88
Makoenskloof - - - 0.38
Saxendrift 1,016.48 1,967,072 1,935.18 420.94
Total 5,024.34 9,804,570 1,951.41 1,640.78
SALES, REVENUE AND INVENTORY
Operation 3 months ending August 31, 2007
Sales Value of Average value Inventory
(carats) Sales (US$) (US$ per (carats)
carat)
Holpan 1,469.20 3,149,370 2,143.59 1,382.65
Klipdam 1,758.87 5,218,220 2,966.80 1,171.70
Wouterspan 1,752.56 4,879,342 2,784.12 991.56
Makoenskloof - - - 237.3
Saxendrift - - - -
Total 4,980.63 13,246,932 2,659.69 3,783.21
Production and Sales -Six Month Comparison
The following is a comparison of the first six months of fiscal 2009
(ending August 31, 2008) with the six months ending August 31, 2007.
PRODUCTION
Operation 6 months ending August 31, 6 months ending August 31,
2008 2007
Volume Carats Average Volume Carats Average
(cubic grade (cubic grade
meters) (carats meters) (carats
per 100 per 100
cubic cubic
meters) meters)
Holpan 356,751 2,579.36 0.72 671,933 4,651.83 0.70
Klipdam 429,429 4,232.01 0.99 456,468 3,996.34 0.88
Wouterspan 363,069 2,328.42 0.64 639,288 4,216.18 0.66
Makoenskloof - - - 63,199 237.3 0.38
Saxendrift 89,484 1,437.04 1.58 - - -
Total 1,238,733 10,576.83 0.85 1,830,888 13,101.65 0.65
SALES, REVENUE AND INVENTORY
Operation 6 months ending August 31, 2008
Sales Value of Average value Inventory
(carats) Sales (US$) (US$ per (carats)
carat)
Holpan 2,589.96 3,471,620 1,340.41 267.65
Klipdam 3,912.71 7,744,322 1,979.27 679.31
Wouterspan 2,360.46 3,704,334 1,569.33 272.88
Makoenskloof - - - -
Saxendrift 1,016.48 1,967,072 1,935.18 420.94
Total 9,879.61 16,887,348 1,709.31 1,640.78
SALES, REVENUE AND INVENTORY
Operation 6 months ending August 31, 2007
Sales Value of Average value Inventory
(carats) Sales (US$) (US$ per (carats)
carat)
Holpan 3,647.06 5,064,324 1,388.60 1,382.65
Klipdam 3,089.40 6,261,066 2,026.63 1,171.70
Wouterspan 3,466.98 7,024,589 2,026.14 991.56
Makoenskloof - - - 237.3
Saxendrift - - - -
Total 10,203.44 18,349,979 1,544.12 3,783.21
Holpan/Klipdam
The Holpan/Klipdam Property is located 45 km from Kimberley, South
Africa. It consists of the contiguous Holpan 161 farm and Klipdam
157 farm, covering an area of 3,836 hectares. The production from
Holpan and Klipdam is accounted for separately because they are
separate operating entities.
Quarter ending August 31, 2008
Production at Holpan in the quarter was 774.01 carats from 150,285
cubic meters (300,570 tonnes) of gravels processed, compared with
2,446.07 carats from 275,758 cubic meters (551,516 tonnes) of gravels
processed in the quarter ending August 31, 2007.
Sales from Holpan were 1,015.39 carats at an average value of
US$829.52 per carat, a decrease in carats and in value from the
1,469.20 carats at an average value per carat of US$2,143.59 sold in
the quarter ending August 31, 2007.
Production at Klipdam was 1,622.13 carats from 210,759 cubic meters
(421,518 tonnes) of gravels, compared to 2,528.02 carats from 259,527
cubic meters (519,054 tonnes) of gravels produced in the quarter
ending August 31, 2007.
Sales from Klipdam were 1,898.91 carats at an average value of
US$2,788.33 per carat, an increase in carats and slight decrease in
value compared to 1,758.87 carats at an average value per carat of
US$2,966.80 in the quarter ending August 31, 2007.
Six months ending August 31, 2008
Production at Holpan over the six months was 2,579.36 carats from
356,751 cubic meters (713,502 tonnes) of gravels processed, compared
with 4,651.83 carats from 671,933 cubic meters (1,343,866 tonnes) of
gravels processed in the six months ending August 31, 2007.
Sales from Holpan were 2,589.96 carats at an average value of
US$1,340.41 per carat, a decrease in carat sales and value per carat
sold from 3,647.06 carats at an average value of US$1,388.60 per carat
in the quarter ending August 31, 2007.
The inventory at Holpan is 267.65 carats.
In the first half of the 2009 fiscal year, production at Klipdam was
4,232.01 carats from 429,429 cubic meters (858,858 tonnes) of gravels,
compared to 3,996.34 carats from 456,468 cubic meters (912,926 tonnes)
of gravels produced in the quarter ending August 31, 2007.
Sales from Klipdam were 3,912.71 carats at an average value of
US$1,554.95 per carat, an increase in carats sold but a decrease in
value per carat sold from 3,089.40 carats at an average value of
US$2,026.63 per carat in the quarter ending August 31, 2007.
There is an inventory of 679.21 carats for Klipdam.
Wouterspan
The Wouterspan Property is located near Douglas, South Africa. It
comprises portions, totalling 969.4 hectares, of the Lanyon Vale 376
farm. Operations are taking place on two portions of the property
called the Farhom and Okapi farms, exploiting the Rooikoppie and
Primary gravel units.
Quarter ending August 31, 2008
During the quarter, the property produced 708.12 carats from 120,829
cubic meters (241,658 tonnes) of gravels, a decrease from 2,594.59
carats produced and 354,492 cubic meters (708,984 tonnes) of gravels
processed in the quarter ended August 31, 2007.
Sales from Wouterspan were 1,093.56 carats at an average price of
US$1,554.96 per carat, compared to 1,752.56 carats sold at an average
value per carat of US$2,784.12 in the quarter ending August 31, 2007.
Six months ending August 31, 2008
During the first half of the fiscal 2009 year, the property produced
2,328.42 carats from 363,069 cubic meters (726,138 tonnes) of gravels,
a decrease from 4,216.18 carats produced and 639,288 cubic meters
(1,278,576 tonnes) of gravels processed in the six months ending
August 31, 2007.
Sales from Wouterspan were 2,360.46 carats at an average price of
US$1,569.33 per carat, a decrease in carats and value per carat sold
from 3,466.98 carats at an average value of US$2,026.14 per carat in
the six months ending August 31, 2007.
The inventory at Wouterspan is 273.08 carats.
Saxendrift Property
The Saxendrift property is located on the south bank of the Middle
Orange River and adjacent to the Wouterspan diamond operation. The
Company acquired and re-commissioned the property in the first quarter
of fiscal 2009.
Quarter ending August 31, 2008
During the quarter, the property produced 1,161.99 carats from 84,883
cubic meters (169,766 tonnes) of gravels.
In the second quarter, 1,016.48 carats were sold at an average price
of US$1,935 per carat.
Six months ending August 31, 2008
During the six month period, 1,437.04 carats were recovered from
89,484 cubic meters (178,968 tonnes) of gravels during re-
commissioning. Of this, 144.35 carats of bantoms were recovered from
2,325 cubic meters (4,650 tonnes) of gravels in the processing plant
and the remaining carats were recovered from gravel production.
There were no sales from Saxendrift in the first quarter as the
Company was focused on re-commissioning the Saxendrift site. In the
second quarter, 1,016.48 carats were sold at an average price of
US$1,935 per carat.
Production Costs
The average operating cost during the quarter was US$5.62 per tonne
(excluding Saxendrift, which is currently in a ramp-up phase, it is
US$4.65), an increase from US$2.96 per tonne in the quarter ending
August 31, 2007.
The average operating cost over six months was US$4.77 per tonne
(excluding Saxendrift, which is currently in a ramp-up phase, it is
US$4.16), an increase from US$3.48 per tonne in the six months ending
August 31, 2007.
1.2.5 Exploration and Development Properties
Middle Orange River Operations
In addition to the Saxendrift mine (see production above) and the past
producing Niewejaarskraal mine, the MORO properties include
Kwartelspan, Vieglandsput, Zwemkuil-Mooidraai and Remhoogte-Holsloot
prospecting projects, totaling approximately 14,950 hectares.
The Niewejaarskraal Mine was operated from 2002-2006 by Trans Hex. It
has been on care and maintenance since late 2006. Once the final
permitting has been acquired for Niewejaarskraal, Rockwell`s Project
Team will be tasked with the re-start at this mining site.
Trans Hex also conducted exploration and evaluation work on several
large alluvial gravel terraces on the Kwartelspan property, located to
the north-east of Saxendrift, and on the Vieglandsput, Zwemkuil-
Mooidraai and Remhoogte-Holsloot properties, located to the south-west
of Niewejaarskraal. The exploration work included reverse circulation
drilling, trenching and bulk sampling.
Rockwell has a current plan for exploration activities at Kwartelspan
and Saxendrift. It will assess and implement plans for the other
properties once
Kwango River Project, DRC
The Kwango River Project comprises approximately 109 square km within
Exploitation Permit Number 331 ("PPE331") held by Midamines, a DRC
company. Durnpike has an option agreement with Midamines ("Midamines
Agreement") to manage and carry out exploration and mining on a
portion of PPE331, as contractor for and on behalf of Midamines, and
is entitled to an 80% share of the net revenue from the sale of any
diamonds produced from the contract area. PPE 331, issued in December
2003, is valid until January 2017 (and is renewable for a second
term) and allows the holder to conduct exploration, develop and
exploit the deposit as well as market the diamonds produced from the
deposit according to local government requirements and the Kimberley
process.
The Project encompasses over 75 km of river frontage and also extends
across elevated, palaeo-river terraces. Alluvial diamond deposits
occur as gravel assemblages within the modern Kwango River, underlying
its banks and in the adjacent terraces, which are being mined by small
scale operations.
In 2007, the Company advanced the logistical activities for its
planned exploration and bulk sampling initiative with Midamines,
established a working base in Kinshasa and conducted geophysical and
other investigations on site. No work was done in fiscal 2008.
One of the 50% shareholders of Midamines has, subsequent to the
conclusion of the Midamines Agreement denied the validity of that
agreement. The other 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 the
dispute.
The Company will obtain formal legal advice from counsel and evaluate
its available remedies. Although the outcome is not currently
determinable the project is not a material operation of the Company.
During the third quarter of fiscal 2008 the Company paid consideration
of $600,000 to Midamines in order to increase the size of the
concession
Ricardo Property, Chile
The Company held a 100% interest in the Ricardo Property, a copper
prospect located within the Calama Mining District, Chile that it
acquired in 1998. Exploration was carried out by two companies who
optioned the property in 2000 and 2004. Since that time, Rockwell has
sought partners to continue exploration or to divest of the property.
In July 2008, the Ricardo property was acquired by Hunter Dickinson
Acquisitions Inc., a company with certain directors and officers in
common.
1.2.6 Market Trends
The Diamond Market Update
In the quarter ending August 31, 2008, normal seasonal adjustments
related to the activities of buying and trading rough diamonds as well
as the effects of world stock markets caused an adjustment in world
diamond prices.
The first half year of 2008 experienced major price increase in both
polished and rough diamonds. This increase as well as the general
shortage of rough diamonds, in particular, better quality, larger
polished diamonds, fuelled a large amount of speculation between the
traders in the diamond industry. This speculation, artificially,
caused even higher prices for better quality diamonds. The downfall in
world economic situation saw a correction in diamond prices overall
and, particularly, an end to the speculation between traders.
De Beers raised prices in July by an average of 5% and up to 15% on
larger goods. This increase brought De Beers` total price increases up
to 16% so far in 2008. Diamond Trading Company (DeBeer`s selling
organization) prices are up over 70% since 2000.
At the end of August, the Diamond Cutting and Trading centers
throughout the world were watching and waiting before any major
activity will occur. The Hong Kong Jewelry and Watch Fair during mid
September will be closely monitored to determine the level of activity
for the next few months in the industry. All indications are that
large stone interest will continue; However, economic issues will
introduce a level of caution, particularly by US consumers, and less
so in the remainder of the world.
Rockwell expects the prices to remain firm for the remainder of 2008.
Rockwell has continued its sales via sealed bid tender basis as well
adding a few special diamonds (single, large, high value stones) that
will be cut and polished by Steinmetz Diamond Group on behalf of the
Steinmetz Diamond Group/Rockwell Diamonds Inc. joint venture. The
polished results of such `specials` are promising and are expected to
provide good returns over the next few quarters.
Rockwell`s marketing of its diamonds will continue in the same fashion
as the past but will further investigate the options to diversify its
beneficiation program for selected rough diamonds from Rockwell`s
production that prove viable based on the skills and the costs of
polishing within South Africa.
Background
Diamond clarity is rated using the following scale:
GIA diamond clarity grading scale
Category Flawles Internall Very Very Slightl Include
s y Very Slightl y d
Flawless Slightl y Include
y Include d
Include d
d
Grade FL IF VVS VVS VS1 VS2 SI SI I I I
1 2 1 2 1 2 3
- Diamonds with clarity of VS2 or better have experienced the
greatest increase in prices increases.
- Diamonds with a grade of less than VS2 have achieved relatively
smaller increases in price.
There has been price increases for the full range of coloured
diamonds, but the major price increases are for those in the D-K
colour range and, predominantly, for the D to F colours. The greatest
price increase was for D-coloured stones; however, an overall
percentage for the increase in price is hard to determine because of
the scarcity and extreme demand for these stone. Similar increases
have been experienced for fancy coloured diamonds, i.e. pink, blue or
yellow stones. All coloured and rare D-colour diamonds are regarded as
investment pieces, comparable to art from a known artist.
1.3 Selected Annual Information
The consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles, and are
expressed in Canadian dollars except common shares outstanding.
Nine months Years ended
ended
Balance Sheets February 29, May 31, 2007 May 31,
2008 2006
Current assets $38,596,562 $56,142,572 $256,456
Mineral properties 25,247,937 24,121,855 1
Other assets 69,848,625 49,341,956 32,190
Total assets 133,693,124 129,606,383 288,647
Current liabilities 12,502,301 29,399,774 1,146,070
Other liabilities 34,076,016 28,613,767 -
Shareholders` equity 87,114,807 71,592,842 (857,423)
(deficiency)
Total liabilities and $133,693,124 $129,606,383 $288,647
shareholders` equity
Nine months Years ended
ended
Statement of February 29, May 31, 2007 May 31,
Operations 2008 2006
Revenue $36,149,308 $10,103,328 $-
Mine site operating (22,730,271) (8,974,742) -
costs
Amortization and (6,533,941) (2,074,415) -
depletion
Operating profit 6,885,096 (945,829) -
(loss)
Expenses
Accretion of 464,316 55,471 -
reclamation obligation
Exploration 604,169 1,371,351 307,390
Foreign exchange loss (751,318) (3,580,364) (46,881)
(gain)
Legal, accounting and 790,725 691,759 175,782
audit
Office and 2,697,077 2,993,453 489,015
administration
Property - - 399,006
Investigations
Shareholder 198,985 200,574 32,130
communications
Stock-based 1,826,317 79,623 83,516
compensation
Travel and conference 654,705 666,194 132,645
Transfer agent filings 544,232 176,530 20,843
Subtotal 7,029,208 2,654,591 1,593,446
Gain on sale of - - (56,585)
marketable
securities
Loss on disposal of 402,411 94,621 -
equipment
Interest income (1,118,396) (372,149) (2,172)
Interest on capital 1,289,385 433,125 -
leases
Convertible note 270,976 2,466,839 -
accretion and
interest expense
Loss on early - 137,957 -
extinguishment
convertible
promissory notes
Write-off of amounts 18,360 224,942 -
receivable
Write-down of - 1 19,128
marketable
securities
Write-down of - - 46,856
mineral property
interests
1,600,673
862,736 2,985,336
Loss before income 1,006,848 6,585,756 1,600,673
taxes
Income tax expense 179,290 - -
Future income tax 2,261,110 (635,773) -
(recovery) expense
Loss before non- 3,447,248 5,949,983 1,600,673
controlling interest
Non-controlling 5,955,779 415,159 -
interest
Loss for the year $9,403,027 $6,365,142 $1,600,673
ended
Basic and diluted $(0.05) $(0.11) $(0.07)
loss per common
share
Weighted average 196,428,551 55,418,242 23,640,123
number of common
shares outstanding
1.3 Summary of Quarterly Results
Expressed in thousands of Canadian dollars, except per-share amounts.
Minor differences are due to rounding.
Aug 31 2008 May 31 2008 Feb 29 2008
Current assets $21,757 $27,190 $38,597
Mineral properties 37,386 36,592 25,248
Other assets 80,146 74,621 69,848
Total assets 139,289 138,403 133,693
Current liabilities 17,369 15,353 12,502
Other liabilities 28,942 28,194 34,076
Shareholders` equity 92,979 94,856 87,115
(deficiency)
Total liabilities and 139,289 138,403 133,693
shareholders` equity
Working capital (deficit) 4,388 11,837 26,905
Revenue 10,168 7,331 9,802
Mine site operating costs -7,651 -4,609 -7,350
Amortization -2,673 -2,574 -2,418
Operating profit (loss) -155 148 34
Expenses
Accretion of reclamation 99 69 378
obligation
Exploration -33 304 174
Foreign exchange 831 -206 16
Legal, accounting and audit 640 137 472
Office and administration 868 972 1,147
Shareholder communications 119 80 65
Stock-based compensation 373 686 1,177
Travel and conference 108 212 382
Transfer agent filings 35 10 439
Subtotal 3,038 2,263 4,250
Gain on investments - - -
Write-off of amounts - - 18
receivable
Loss (gain) on disposal of 284 21 424
equipment
Interest income -742 -1,381 -447
Interest on capital leases 440 463 391
Accretion and interest 163 86 84
expense
Loss on early retirement of - - -
convertible note
Profit (loss) before income -3,339 -1,304 -4,687
taxes
Future income tax recovery 703 414 698
(expense)
Profit (loss) before non- -2,636 -890 -5,385
controlling interest
Non-controlling interest 589 88 -3,322
Profit (loss) for the $ 2,047) $ (801) $(8,707)
period
Loss from discontinued -203 - -
operation
Net Income (Loss) $(2,250) $ (801) $(8,707)
Basic and diluted profit $ (0.01) $(0.003) $ (0.04)
(loss) per share
Weighted average number of 238,042 237,731 223,891
common shares outstanding
(thousands)
Nov 30 2007 Aug 31 2007 May 31 2007
Current assets $36,823 $46,861 $ 56,143
Mineral properties 24,928 25,589 24,122
Other assets 66,544 55,997 49,342
Total assets 128,295 128,447 129,606
Current liabilities 17,173 23,899 29,400
Other liabilities 30,395 32,297 28,613
Shareholders` equity 80,727 72,251 71,593
(deficiency)
Total liabilities and 128,295 128,447 129,606
shareholders` equity
Working capital (deficit) 19,650 22,962 26,743
Revenue 12,125 14,222 7,684
Mine site operating costs -9,571 -5,809 -7,100
Amortization -2,141 -1,975 -1,680
Operating profit (loss) 413 6,438 -1,096
Expenses
Accretion of reclamation 28 59 55
obligation
Exploration 127 304 162
Foreign exchange -126 -641 -2,856
Legal, accounting and audit 253 66 403
Office and administration 850 700 1,651
Shareholder communications 64 69 57
Stock-based compensation 617 32 8
Travel and conference 147 126 285
Transfer agent filings 98 7 56
Subtotal 2,058 721 -179
Gain on investments - - 16
Write-off of amounts - - 225
receivable
Loss (gain) on disposal of 3 -25 82
equipment
Interest income -186 -486 -222
Interest on capital leases 427 471 433
Accretion and interest 102 86 610
expense
Loss on early retirement of - - -
convertible note
Profit (loss) before income -1,991 5,671 -2,061
taxes
Future income tax recovery 26 -1,768 646
(expense)
Profit (loss) before non- -1,965 3,903 -1,415
controlling interest
Non-controlling interest 837 -3,472 -506
Profit (loss) for the $(1,128) $ 431 $(1,921)
period
Loss from discontinued - - -
operation
Net Income (Loss) $ (1,128) $ 431 $(1,921)
Basic and diluted profit $ 0.00 $ 0.00 $ (0.03)
(loss) per share
Weighted average number of 187,817 187,132 99,614
common shares outstanding
(thousands)
Feb 28 Nov 30 2006
2007
Current assets $ 25,751 $ 23,063
Mineral properties 18,788 -
Other assets 36,884 42
Total assets 81,423 23,105
Current liabilities 43,261 6,149
Other liabilities 21,966 -
Shareholders` equity 16,196 16,956
(deficiency)
Total liabilities and 81,423 23,105
shareholders` equity
Working capital (deficit) -17,510 16,914
Revenue 2,419 -
Mine site operating costs -1,874 -
Amortization -395 -
Operating profit (loss) 150 -
Expenses
Accretion of reclamation - -
obligation
Exploration 508 526
Foreign exchange -336 -394
Legal, accounting and audit -252 326
Office and administration 621 409
Shareholder communications 53 51
Stock-based compensation 16 18
Travel and conference 120 125
Transfer agent filings 23 52
Subtotal 754 1,113
Gain on investments -16 -
Write-off of amounts - -
receivable
Loss (gain) on disposal of 12 -
equipment
Interest income -97 -51
Interest on capital leases - -
Accretion and interest 356 1,156
expense
Loss on early retirement of - 138
convertible note
Profit (loss) before income -859 -2,356
taxes
Future income tax recovery -10 -
(expense)
Profit (loss) before non- -868 -2,356
controlling interest
Non-controlling interest 91 -
Profit (loss) for the $(777) $(2,356)
period
Loss from discontinued - -
operation
Net Income (Loss) $(777) $(2,356)
Basic and diluted profit $ ( 0.01) $ (0.08)
(loss) per share
Weighted average number of 68,307 30,322
common shares outstanding
(thousands)
1.5 Results of Operations
The Company had a loss of $3,051,200 for the six month period ended
August 31, 2008 compared to a net loss of $1,490,236 for the
comparable period in the prior year. The increase in net losses
during the period is mainly due to the foreign exchange loss of
$624,887 incurred during the six month period ending August 31, 2008
compared to the foreign exchange gain of $3,497,377 recorded during
the six month period ending August 31, 2007.
During the six months ended August 31, 2008, the Company realized
rough diamond sales of $17,007,623 compared to $21,702,746 for the
comparable period in the prior year, this decrease is as a result of
industrial action at the mines during July and August 2008 during
which time production fell by approximately 55%. Mine site operating
costs for the six months ended August 31, 2008 amounted to $12,259,173
(six months ended August 31, 2007 - $12,909,593), which excludes
amortization and depletion charges of $5,246,960 (six months ended
August 31, 2007 - $3,654,569).
Exploration expenses (excluding stock-based compensation) decreased to
$271,182 for the six months ended August 31, 2008 compared to $466,167
for the same period in the prior year. This decrease is due to less
engineering activities and property assessment fees performed during
the six month period ended August 31, 2008 on South African diamond
properties and the Kwango River Project in the DRC.
A foreign exchange loss of $624,887 was recorded for the six months
ended August 31, 2008 compared to a foreign exchange gain of
$3,497,377 for the same period in the previous year due to a higher
amount of South African denominated liabilities and the strengthening
of the Canadian dollar.
Administrative costs for the six months ended August 31, 2008
decreased to $1,839,810 in comparison to $2,351,880 incurred in for
the same period in the prior year, primarily due to centralized
administration and salary expenses which are in line with those in the
market. Travel and conference expenses amounted to $319,709 for the
six months ended August 31, 2008 compared to $411,026 for the same
period in the previous year. Legal, accounting and audit expenses for
the six months ended August 31, 2008 amounted to $776,895 compared to
$468,164 incurred for the same period in the prior year. This increase
was primarily due to increased legal services in the current period.
Stock-based compensation increased to $1,058,101 for the six months
ending August 31, 2008 in comparison to $39,651 for the same period in
the previous year due to an increase in the number of options granted
during fiscal 2008.
Interest expenses decreased to $248,831 for the six months ended
August 31, 2008, compared to $696,105 for the six months ended August
31, 2007, mainly due to the accretion and interest charges relating to
the issuance of the convertible promissory notes incurred during the
period ended August 31, 2007.
1.6 Liquidity
Historically, the Company`s sole source of funding has been the
issuance of equity securities for cash, primarily through private
placements to sophisticated investors and institutions. The Company
has issued common share capital in each of the past few years,
pursuant to private placement financings and the exercise of warrants
and options. The Company`s access to exploration financing, when the
financing is not transaction specific, is always uncertain. There can
be no assurance of continued access to significant equity funding.
At August 31, 2008, the Company had a working capital of $4,388,435
compared to working capital of $26,094,261 at February 29, 2008.
Effective March 1, 2008, the Company increased its ownership of VWDG
and Klipdam by 34% resulting to an 85% interest by issuing 14,285,715
common shares of the Company pursuant to the June 2006 Durnpike
Definitive Agreement. During the period ended August 31, 2008 the BEE
group increased its shareholding from 15% to 26% by subscribing for an
additional 11% shares in the VWDG. This additional 11% were at a
subscription price of ZAR 17.5 million and the BEE group will also
inject ZAR 10.5 million in working capital into the VWDG.
The Company has the following payment commitments: (a) minimum lease
payments of ZAR89 million ($12.4 million) in installments up to the
year 2011 to various financial institutions for plant and equipment
(c) Remaining acquisition payment of ZAR27.5 million ($3.8 million) to
Trans Hex following the acquisition of Saxendrift Mine (Pty) Ltd.
subject to the anticipated grant of Ministerial Consent to the cession
of each of the Outstanding Mining Rights to the Company and
registration of cession of such rights in its name.
Other than described above the Company has no "Purchase Obligations"
defined as any agreement to purchase goods or services that is
enforceable and legally binding on the Company that specifies all
significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction.
1.7 Capital Resources
As described in 1.2.2 Financings, the Company did not complete any
debt financings during the period, however the Company has sufficient
funds available to meet its capital expenditure requirements.
In January 2008, the Company completed a $14.5 million private
placement which will be used to fund Rockwell`s diamond operations and
new project evaluation and development (described in item 1.2.2
Financings).
As at August 31, 2008, the Company has the following capital
expenditure commitments:
a) Pursuant to the Definitive Agreement, the Company is required to
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. In addition, 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 Kwango River Discussion at 1.2.5 Exploration and
Development Properties - Kwango River Project);
Pursuant to the Exchange Agreement (described in item 1.2.2
Financings).the Company issued Common Shares to the Van Wyk Trust and
increased its ownership by 34 % to a total of 85% of the VWDG assets.
During the six months ending August 31, 2008, the BEE group increased
its shareholding from 15% to 26% by subscribing for an additional 11%
shares in the VWDG at a subscription price of ZAR17.5 million and are
to inject ZAR10.5 million in working capital into the VWDG before the
end of December 1, 2008.
Other than already described, the Company had no commitments for
capital expenditures and no lines of credit or other sources of
financing which have been arranged but as yet unused as at August 31,
2008.
1.8 Off-Balance Sheet Arrangements
None.
1.9 Transactions with Related Parties
Balances payable As at As at
August 31, 2008 February 29, 2008
Banzi Trading (h) $3,819 $-
Jakes Tyres (i) 48,699 49,604
CEC Engineering (C) 4,139 -
$56,657 $49,604
Balances receivable
Hunter Dickinson $246,166 $78,504
Services
Inc. (a)
Flawless Diamonds 980,558 477,298
Trading
House (g)
Banzi Trading (h) 38,336 33,744
Diacor CC (k) 35,972 3,888
$1,301,032 $593,434
Three months ended
August 31 Six months ended
August 31
Transactions 2008 2007 2008 2007
Services rendered
and expenses
reimbursed:
Hunter Dickinson $ 131,362 $ 220,869 $ 380,708 $ 533,023
Services Inc. (a)
Euro-American - 8,148 - 14,000
Capital
Corporation (b)
CEC Engineering 14,289 15,275 14,289 29,723
(c)
Jeffrey B Traders - 27,063 - 68,958
CC(d)
Seven Bridges 37,128 13,189 67,992 33,605
Trading(e)
Cashmere Trading 9,483 121,339 19,295 164,696
(f)
Banzi Trade 26 4,927 4,152 12,573 256,094
(Pty)Ltd (h)
Jakes Tyres (i) 148,644 135,872 348,037 403,233
AA Van Wyk (j) - 152,979 - 326,956
Diacor CC (k) 32,696 - 36,314 -
Sales rendered to:
Flawless Diamonds $9,912,702 $14,201,949 $ 7,007,623 $1,882,721
Trading House (g)
a) Hunter Dickinson Services Inc. ("HDSI") is a private company
equally owned by several public companies, one of which is Rockwell,
and has certain directors in common with the Company. HDSI 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
June 1, 2008. 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 provided management
services to the Company at market rates for those services, until
February 29, 2008.
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) 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.
e) 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.
f) Cashmere Trading is a private company owned by Hennie Van Wyk, an
officer of the Company, which provides helicopter services at market
rates.
g) 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.
h) Banzi Trade 26 (Pty) Ltd ("Banzi") is 50% owned by HC Van Wyk
Diamonds Ltd, 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.
i) Jakes Tyres is a private company with certain directors and
officers in common with the Company that provides consumable materials
at market rates.
j) AA Van Wyk is a private company owned by a party related to the
directors and officers of the Company, which provided contract mining
services at market rates until February 29, 2008.
k) Diacor CC is a private company with certain directors and
officers in common with the Company that purchases consumable
materials at market rates.
1.10 Fourth Quarter
Not applicable
1.11 Proposed Transactions
Please refer to the discussion of the proposed transaction in Section
1.2.3 Acquisitions.
1.12 Critical Accounting Estimates
The Company`s accounting policies are presented in note 3 of the
consolidated financial statements for the nine month period ended
February 29, 2008, which have been publicly filed on SEDAR at
www.sedar.com and as presented in changes in accounting policies item
1.13 The preparation of consolidated financial statements in
accordance with generally accepted accounting principles requires
management to select accounting policies and make estimates. Such
estimates may have a significant impact on the financial statements.
These estimates include:
- mineral resources and reserves,
- the carrying values of property, plant and equipment,
- restoration costs following completion of the mining activities,
and
- the valuation of stock-based compensation expense.
Actual amounts could differ from the estimates used and, accordingly,
affect the results of operation.
Mineral resources and reserves, and the carrying values of property,
plant and equipment
Mineral resources and reserves are estimated by professional
geologists and engineers in accordance with recognized industry,
professional and regulatory standards. These estimates require inputs
such as future metals prices, future operating costs, and various
technical geological, engineering, and construction parameters.
Changes in any of these inputs could cause a significant change in the
estimated resources and reserves which, in turn, could have a material
effect on the carrying value of property, plant and equipment.
Site restoration costs
Upon the completion of any mining activities, the Company will
ordinarily be required to undertake environmental reclamation
activities in accordance with local and/or industry standards. The
estimated costs of these reclamation activities are dependent on
labour costs, the environmental impacts of the Company`s operations,
the effectiveness of the chosen reclamation techniques, and applicable
government environmental standards. Changes in any of these factors
could cause a significant change in the reclamation expense charged in
a period.
Stock-based compensation expense
From time to time, the Company may grant share purchase options to
employees, directors, and service providers. The Company uses the
Black-Scholes option pricing model to estimate a value for these
options. This model, and other models which are used to value
options, require inputs such as expected volatility, expected life to
exercise, and interest rates. Changes in any of these inputs could
cause a significant change in the stock-based compensation expense
charged in a period.
1.13 Changes in Accounting Policies including Initial Adoption
(a) The following accounting policies were adopted during the 3
months ended May 31, 2008:
(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 externally imposed capital requirements
and, if it has not complied, the consequences of such non-
compliance.
(ii) Financial Instruments - Disclosure (Section 3862) and
Presentation (Section 3863)
These standards replace CICA 3861, Financial Instruments -
Disclosure and Presentation. They increase the disclosures
previously 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.
(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 the Company`s 2009 fiscal year.
The Company`s assessment and disclosure of its ability to
continue as a going concern is disclosed in Note 1 of the interim
consolidated financial statements for the period ended May 31,
2008.
(iv) Inventories (Section 3031)
This standard replaces the existing Section 3030 with the same
title and will harmonize accounting for inventories under
Canadian GAAP with International Financial Reporting Standards
("IFRS"). This standard requires that inventories be measured at
the lower of cost and net realizable value, and includes guidance
on the determination of cost, including the allocation of
overheads and other costs. The standard also requires that
similar inventories within a consolidated group be measured using
the same method. It also requires the reversal of previous write-
downs to net realizable value when there is a subsequent increase
in the value of inventories. This new section is effective for
the Company`s 2009 fiscal year. Upon adoption of this standard,
the Company concluded that there were no material differences
between the new standard and the Company`s current accounting
policy for its diamond and supplies inventory.
(b) Accounting Policies Not Yet Adopted
(i) 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 International Financial Reporting Standards ("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 Canadian 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 March 1, 2011 will require the restatement for comparative
purposes of amounts reported by the Company for the year ended
February 28, 2011. While the Company has begun assessing the
impact of adoption of IFRS for 2011, the financial reporting
impact of the transition to IFRS cannot be reasonably estimated
at this time.
1.14 Financial Instruments and Other Instruments
The carrying value of the Company`s cash and equivalents,
amounts receivable, restricted cash, trade receivable from a
related party, reclamation deposits accounts payable and accrued
liabilities, due to/from related parties and capital lease
obligations approximate their fair values.
Financial Instrument Risk Exposure and Risk Management
The Company is exposed in varying degrees to a variety of
financial instrument related risk, including credit risk,
liquidity risk, foreign exchange risk, interest risk and
commodity price risk.
Credit Risk
Credit risk is the risk of potential loss to the Company if a
counterparty to a financial instrument fails to meet its
contractual obligations. The Company`s credit risk is primarily
attributable to its liquid financial assets including cash and
equivalents, accounts receivable and trade receivable from a
related party. The Company limits exposure to credit risk on
liquid financial assets through maintaining its cash and
equivalents with high-credit quality financial institutions. The
carrying value of the Company`s cash and cash equivalents,
accounts receivable and trade receivable from a related party
represent the maximum exposure to credit risk. The Company does
not have financial assets that are invested in asset backed
commercial paper.
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
ensures that there is sufficient capital in order to meet short
term business requirements, after taking into account cash flows
from operations and the Company`s holdings of cash and cash
equivalents. The Company believes that these sources will be
sufficient to cover the likely requirements for the foreseeable
future. The Company`s cash and equivalents are invested in
business accounts which are available on demand for the Company`s
programs, and which are not invested in any asset backed
deposits/investments.
The Company operates in South Africa. Like other foreign entities
operating there, the Company is subject to currency exchange
controls administered by the South African Reserve Bank, that
country`s central bank. A significant portion of the Company`s
funding structure for its South African operations consists of
advancing loans to its South Africa incorporated subsidiaries and
it is possible the Company may not be able to acceptably
repatriate such funds once those subsidiaries are able to repay
the loans or repatriate other funds such as operating profits
should any develop. The repatriation of cash held in South Africa
is permitted upon the approval of the South African Reserve Bank.
Cash balances in South Africa are the Rand balances disclosed
below.
Foreign Exchange Risk
In the normal course of business, the Company enters into
transactions for the purchase of supplies and services
denominated in South African Rand ("ZAR"). In addition, the
Company has cash and certain liabilities denominated in South
African Rand. As a result, the Company is subject to foreign
exchange risk from fluctuations in foreign exchange rates. The
Company has not entered into any derivative or other financial
instruments to mitigate this foreign exchange risk.
1.15 Other MD&A Requirements
Additional information relating to the Company is available on SEDAR
at www.sedar.com.
1.15.1 Additional Disclosure for Venture Issuers without
Significant Revenue
Not applicable. The Company is not a venture issuer.
1.15.2 Disclosure of Outstanding Share Data
The following details the share capital structure as at October 10th,
2008, which is the date of this MD&A. These figures may be subject to
minor accounting adjustments prior to presentation in future
consolidated financial statements.
Expiry date Exercise Number Number
price
Common shares 238,041,569
Share purchase
options
July 10, $ 0.68 300,000
2010
September $ 0.62 5,903,000
24, 2012
November $ 0.63 1,106,500
14, 2012
June 20, $ 0.45 1,150,000 8,459,500
2011
Warrants November $0.80 39,600,000
22, 2008
May 9, 2009 $0.70 121,779,154 161,379,154
1.15.3 Internal Controls over Financial Reporting Procedures
The Company`s management is responsible for establishing and
maintaining adequate internal control over financial reporting. Any
system of internal control over financial reporting, no matter how
well designed, has inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
There have been no significant changes in internal controls over
financial reporting during the quarter ended August 31, 2008 that
could have materially affected or are reasonably likely to materially
affect the Company`s internal control over financial reporting.
1.15.4 Disclosure Controls and Procedures
The Company has disclosure controls and procedures in place to provide
reasonable assurance that any information required to be disclosed by
the Company under securities legislation is recorded, processed,
summarized and reported within the applicable time periods and to
ensure that required information is gathered and communicated to the
Company`s management so that decisions can be made about timely
disclosure of that information.
There have been no significant changes in the Company`s disclosure
controls during the quarter ended August 31, 2008 that could
significantly affect disclosure controls subsequent to the date the
Company carried out its last evaluation.
Canada
15 October 2008
Sponsor
Sasfin Capital
(A division of Sasfin Bank Limited)
Date: 15/10/2008 15:36:15 Produced by the JSE SENS Department.
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