| Thu 13 Nov 2008, 17:03 | | EPS - Eastern Platinum - Management`s Discussion And Analysis Of Financial |
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EPS
EPS
EPS - Eastern Platinum - Management`s Discussion And Analysis Of Financial
Conditions And Results Of Operations For The Three And Nine Months Ended
September 30, 2008
EASTERN PLATINUM LIMITED
(Incorporated in Canada)
(Canadian Registration number BC0722783)
(South African Registration number 2007/006318/10)
Share Code TSX: ELR ISIN: CA2768551038
Share Code AIM: ELR ISIN: CA2768551038
Share Code JSE: EPS ISIN: CA2768551038
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008
The following Management`s Discussion and Analysis ("MD&A") is intended to
assist the reader to assess material changes in financial condition and results
of operations of Eastern Platinum Limited ("Eastplats" or the "Company") as at
September 30, 2008 and for the three and nine months then ended in comparison
to the same periods in 2007. This MD&A should be read in conjunction with the
unaudited consolidated financial statements for the three and nine months ended
September 30, 2008 and supporting notes that have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP"). The Company
reports certain non-GAAP measures such as EBITDA and cash costs per ounce which
are explained in Section 1.2 of this MD&A.
All monetary amounts are in U.S. dollars unless otherwise specified. The
effective date of this MD&A is November 13, 2008. Additional information
relating to the Company is available on SEDAR at www.sedar.com.
Overview
Eastplats is an expanding platinum group metals ("PGM") producer engaged in the
mining and development of PGMs with properties located in various provinces in
South Africa. All of the Company`s properties are situated on the western and
eastern limbs of the Bushveld Complex ("BC"), the geological environment that
supports over 75% of the world`s PGM supply.
The Company`s primary operating asset is an 85% direct and indirect interest in
Barplats Investments Limited ("Barplats"), whose main assets are the PGM
producing Crocodile River Mine ("CRM") located on the western limb of the BC
and the non-producing Kennedy`s Vale Project located on the eastern limb of the
BC. The Company also has a 75.5% direct and indirect interest in Mareesburg
Platinum JV ("Mareesburg") and a 93.4% direct and indirect interest in Spitzkop
PGM Project ("Spitzkop"), both located on the eastern limb of the BC.
Highlights for the quarter ended September 30, 2008 ("Q3 2008")
Eastplats recorded a net loss of $10,561,000 ($0.02 loss per share) compared to
a net loss of $1,390,000 ($0.00 loss per share) in the third quarter of 2007
("Q3 2007"). The Company`s net loss increased over Q3 2007 primarily due to a
significant decline in the price of PGMs during Q3 2008 which resulted in
negative provisional price ad justments.
* Production at the Crocodile River Mine ("CRM") increased by 5% to 30,758
PGM ounces, from 29,417 PGM ounces in Q3 2007.
* Negative provisional sales price adjustments of $29,416,000 were recorded
in the quarter, causing revenues from CRM to decrease by 70% to $9,291,000
compared to $31,452,000 in Q3 2007. (See Table 4 for reconciliation of
revenue and provisional price adjustments.)
* The average realized basket price per PGM ounce was $1,193, an increase of
10% compared to $1,088 in Q3 2007, but a decrease of 28% compared to $1,657
in the second quarter of 2008.
* EBITDA was negative $11,338,000 compared to $11,036,000 in Q3 2007.
* Operating cash costs were $672 per ounce, an increase of 5% compared to
$637 per ounce in Q3 2007, but a decrease of 3% compared to $696 per ounce
in the second quarter of 2008.
* Operating cash costs net of by-product credits was $521 per ounce, as the
chrome recovery circuit became fully integrated at the end of the last
quarter.
* Recovery rates improved to 78%, compared to 72% in Q3 2007, following
planned improvements to the concentrator circuit at the Crocodile River
Mine.
* Average grade was 3.99 grams per tonne (5PGE+Au) compared to 4.10 grams per
tonne (5PGE+Au) in Q3 2007.
* Stoping units for the quarter increased by 12% to 39,652 square meters,
compared to 35,262 square meters in Q3 2007.
* Total underground development increased by 15% to 5,599 meters during the
quarter (4,868 meters in Q3 2007).
* The average mining rate decreased by 1% to 106,487 tonnes per month during
Q3 2008 from 107,926 tonnes per month in Q3 2007.
* At September 30, 2008, the Company had a cash position (including cash,
cash equivalents and short term investments) of $172,060,000 (December 31,
2007 - $189,856,000).
Contents of the MD&A
1. Results of operations for the three and nine months ended September 30, 2008
1.1. Mining operations at the Crocodile River Mine ("CRM")
1.2. CRM non-GAAP measures
1.3. Development projects - CRM
1.4. Development projects - Spitzkop and Kennedy`s Vale
1.5. Development projects - Mareesburg
1.6. Corporate and other expenses
2. Liquidity and Capital Resources
2.1. Outlook
2.2. Share capital
2.3. Contractual Obligations and Commitments
3. Related party transactions
4. Adoption of new accounting standards and accounting pronouncements
5. Internal control over financial reporting
6. Cautionary statement on forward-looking information
1. Results of Operations for the three and nine months ended September 30, 2008
The following table sets forth selected consolidated financial information for
the three and nine months ended September 30, 2008 and 2007:
Table 1
Consolidated statements of operations
(Unaudited, expressed in thousands of U.S. dollars, except share and per share
amounts)
Three months ended Sept 30,
2008 2007
Revenue $ 9,291 $ 31,452
Cost of operations
Production costs (20,629) (20,416)
Depletion and depreciation (4,716) (3,972)
Mine operating earnings
(loss) (16,054) 7,064
Expenses
General and administrative (5,585) (3,480)
Stock-based compensation (278) (54)
Operating income (loss) (21,917) 3,530
Other income (expense)
Interest income 1,975 2,188
Interest expense (659) (779)
Foreign exchange gain (loss) (28) (5,344)
Income (loss) before income
taxes
and non-controlling
interests (20,629) (405)
Future income tax (expense)
recovery 6,363 (376)
Non-controlling interests 3,705 (609)
Net income (loss) for the
period (10,561) (1,390)
Basic and diluted income
(loss) per share $ (0.02) $ (0.00)
Weighted average common
shares outstanding
Basic 680,245,010 667,834,880
Fully diluted 680,245,010 667,834,880
Consolidated balance sheets September 30, December 31,
2008 2007
Total assets $ 969,058 $ 1,063,076
Total long-term liabilities $ 139,682 $ 155,632
Nine months ended Sept 30,
2008 2007
Revenue $ 115,842 $ 85,108
Cost of operations
Production costs (61,437) (58,032)
Depletion and depreciation (13,528) (6,365)
Mine operating earnings (loss) 40,877 20,711
Expenses
General and administrative (15,227) (12,267)
Stock-based compensation (1,845) (14,278)
Operating income (loss) 23,805 (5,834)
Other income (expense)
Interest income 6,285 3,769
Interest expense (2,821) (4,180)
Foreign exchange gain (loss) 1,100 (8,224)
Income (loss) before income taxes
and non-controlling interests 28,369 (14,469)
Future income tax (expense)
recovery (7,417) 914
Non-controlling interests 1,154 (2,467)
Net income (loss) for the period 22,106 (16,022)
Basic and diluted income (loss)
per share $ 0.03 $ (0.03)
Weighted average common shares
outstanding
Basic 675,978,818 598,287,756
Fully diluted 705,249,374 598,287,756
Consolidated balance sheets
Total assets
Total long-term liabilities
The table below sets forth selected results of operations for the Company`s
eight most recently completed quarters (in thousands of U.S. dollars, except
per share amounts). All financial data previously reported in Canadian dollars
have been converted to U.S. dollars.
Table 2
2008
Sept 30 June 30 March 31
Revenues $ 9,291 $ 50,143 $ 56,408
Cost of operations (25,345) (25,508) (24,112)
Mine operating earnings (loss) (16,054) 24,635 32,296
Expenses (G&A and stock-based
compensation) (5,863) (5,649) (5,560)
Operating income (loss) (21,917) 18,986 26,736
Net income (loss) $ (10,561) $ 12,705 $ 19,962
Income (loss) per share - basic $ (0.02) $ 0.02 $ 0.03
Income (loss) per share -
diluted $ (0.02) $ 0.02 $ 0.03
Average foreign exchange rates
South African Rand to US dollar 0.1285 0.1287 0.1328
Canadian dollar to US dollar 0.9603 0.9901 0.9955
Period end foreign exchange
rates
South African Rand to US dollar 0.1197 0.1280 0.1229
Canadian dollar to US dollar 0.9397 0.9807 0.9742
2007
Dec 31 Sept 30 June 30 March 31
Revenues $ 34,126 $ 31,452 $ 22,324 $ 31,332
Cost of operations (26,095) (24,388) (17,528) (22,481)
Mine operating
earnings (loss) 8,031 7,064 4,796 8,851
Expenses (G&A and
stock-based
compensation) (18,022) (3,534) (6,691) (16,320)
Operating income (loss) (9,991) 3,530 (1,895) (7,469)
Net income (loss) $ (10,814) $ (1,390) $ (4,693) $ (9,939)
Income (loss) per
share - basic $ (0.02) $ - $ (0.01) $ (0.02)
Income (loss) per
share - diluted $ (0.02) $ - $ (0.01) $ (0.02)
Average foreign
exchange rates
South African Rand to
US dollar 0.1478 0.1409 0.1410 0.1381
Canadian dollar to US
dollar 1.0189 0.9572 0.9102 0.8536
Period end foreign
exchange rates
South African Rand to
US dollar 0.1453 0.1454 0.1416 0.1368
Canadian dollar to US
dollar 1.0088 1.0052 0.9386 0.8661
2006
Dec 31
Revenues $ 25,062
Cost of operations (19,842)
Mine operating earnings (loss) 5,219
Expenses (G&A and stock-based compensation) (4,020)
Operating income (loss) 1,199
Net income (loss) $ 6,550
Income (loss) per share - basic $ 0.01
Income (loss) per share - diluted $ 0.01
Average foreign exchange rates
South African Rand to US dollar 0.1369
Canadian dollar to US dollar 0.8784
Period end foreign exchange rates
South African Rand to US dollar 0.1418
Canadian dollar to US dollar 0.8581
1.1 Mining operations at Crocodile River Mine ("CRM")
The following is a summary of CRM`s operations for the quarters ended September
30, 2008, June 30, 2008, March 31, 2008, and the four quarters in 2007:
Table 3
Crocodile River Mine operations
Three months ended
September 30, June 30, March 31, Dec 31,
2008 2008 2008 2007
Key financial
statistics
(amounts stated in
thousands of
U.S. dollars, except
per ounce data)
Revenue $ 9,291 $ 50,143 $ 56,408 34,126
Cost of operations
Production costs (20,629) (21,058) (19,750) (20,947)
Depletion and
depreciation (4,716) (4,450) (4,362) (5,148)
Mine operating
earnings (loss) (16,054) 24,635 32,296 8,031
EBITDA (1) $ (11,338) $ 29,085 $ 36,658 $ 13,179
Sales - PGM ounces 30,758 30,311 27,825 26,632
Average realized
price per ounce (2) $ 1,193 $ 1,657 $ 1,621 $ 1,305
Average basket price $ 1,438 $ 1,969 $ 1,927 $ 1,551
Cash costs per ounce
of PGM (1) $ 672 $ 696 $ 698 $ 774
Key production
statistics
Run of mine tonnes 319,462 305,134 279,036 335,263
Total tonnes
processed 317,602 337,471 349,497 383,159
Stoping units
(square meters) 39,652 44,277 38,349 37,374
Development meters 5,599 5,575 4,409 4,759
On-reef development
meters 3,556 3,230 2,343 2,814
Recovery 78% 73% 78% 72%
Metal in concentrate
sold (ounces)
Platinum (Pt) 15,393 15,333 13,684 13,264
Palladium (Pd) 6,973 6,777 6,201 6,013
Rhodium (Rh) 2,581 2,543 2,335 2,182
Gold (Au) 123 132 121 154
Iridium (Ir) 1,083 994 1,078 955
Ruthenium (Ru) 4,605 4,532 4,405 4,064
Total PGM ounces 30,758 30,311 27,825 26,632
Sept 30, June 30, March 31,
2007 2007 2007
Key financial statistics
(amounts stated in thousands of
U.S. dollars, except per ounce
data)
Revenue $ 31,452 $ 22,324 $ 31,332
Cost of operations
Production costs (20,416) (17,291) (19,763)
Depletion and depreciation (3,972) (237) (2,718)
Mine operating earnings (loss) 7,064 4,796 8,851
EBITDA (1) $ 11,036 $ 5,033 $ 11,569
Sales - PGM ounces 29,417 25,111 26,807
Average realized price per
ounce (2) $ 1,088 $ 1,113 $ 1,130
Average basket price $ 1,293 $ 1,322 $ 1,343
Cash costs per ounce of PGM (1) $ 637 $ 702 $ 704
Key production statistics
Run of mine tonnes 323,777 244,275 211,830
Total tonnes processed 399,022 369,453 415,112
Stoping units (square meters) 35,262 35,315 26,441
Development meters 4,868 4,807 3,687
On-reef development meters 2,570 1,767 2,391
Recovery 72% 69% 73%
Metal in concentrate sold
(ounces)
Platinum (Pt) 14,630 12,829 14,303
Palladium (Pd) 6,727 5,605 5,842
Rhodium (Rh) 2,418 2,002 1,782
Gold (Au) 166 137 715
Iridium (Ir) 1,056 885 787
Ruthenium (Ru) 4,420 3,654 3,378
Total PGM ounces 29,417 25,111 26,807
(1) These are non-GAAP measures as described in Section 1.2
(2) Average realized price is the average basket price, net of associated
smelter costs, under the Company`s primary off-take agreement.
Quarter ended September 30, 2008 compared to the quarter ended June 30, 2008
("Q2 2008")
The Company settles its PGM sales three to five months following the physical
delivery of the concentrates. Because of the sharp decline in PGM prices in Q3
2008, concentrate deliveries made prior to Q3 2008 were settled at much lower
prices than those in effect on the dates of the deliveries. As a result,
negative provisional price adjustments of $29,416,000 were recorded during the
quarter. These adjustments also take into account all Q3 2008 deliveries which
do not settle until the fourth quarter of 2008. These deliveries have been
recorded at the net basket prices as at September 30, 2008. The following table
shows a reconciliation of revenue and provisional price adjustments.
Table 4
Crocodile River Mine
Effect of provisional price adjustments on revenues
(stated in thousands of U.S. dollars)
Three months ended Nine months ended
Sept 30, 2008 Sept 30, 2008
Revenue before provisional price
adjustments $ 38,707 $ 146,925
Provisional price adjusments
Negative adjustments to revenue
upon settlement (17,069) (18,225)
of prior periods` sales
Mark-to-market adjustment on
current (12,347) (12,858)
period`s sales
Revenue as reported in the income
statement $ 9,291 $ 115,842
PGM ounces sold were up by 2% in Q3 2008 compared to Q2 2008 as a result of
increased recovery rates (78% in Q3 2008 compared to 73% in Q2 2008), and a 5%
increase in the rate of underground mining (319,462 run of mine tonnes in Q3
2008 compared to 305,134 tonnes in Q2 2008), offset slightly by lower grades
than those achieved in the previous quarter (3.99 g/tonne in Q3 2008 compared
to 4.03 g/tonne in Q2 2008). Total tonnage processed decreased by 6% as a
result of a planned reduction in the treatment of low grade tailings as the
current tailings area was depleted. Planning is in progress to more effectively
treat tailings from the existing dam.
Total development for the quarter was 5,599 meters, comparable to the 5,575
meters achieved in Q2 2008, and on-reef development increased by 10% to 3,556
meters from 3,230 meters in Q2 2008. The Company has experienced a continued
improvement in mining operations as a result of increasing the level of on-reef
development which has allowed an improvement in mining flexibility that is
required to maintain the planned production build-up at the mine. On-reef
development is expensed for accounting purposes.
As expected, recovery rates increased from 73% in Q2 2008 to 78% in Q3 2008 as
the concentrator achieved steady state operating conditions subsequent to its
upgrades during Q2 2008.
Operating cash costs, a non-GAAP measure, decreased 3% to $672 per ounce in Q3
2008 compared to $696 per ounce in Q2 2008 as total cash operating costs
decreased by about 2% and ounces produced increased by about 2% compared to Q2
2008. Total cash operating costs decreased primarily as a result of cost
savings achieved with operating efficiencies compared to Q2 2008. A
reconciliation of production costs, as reported in the income statement, to
cash operating costs, is shown under Section 1.2 below under CRM non-GAAP
measures.
During the quarter, the chrome recovery circuit at CRM produced commercial
quantities of chrome as a by-product of PGM production. A total of 65,536
tonnes of chrome was produced in Q3 2008, of which 44,079 tonnes were sold for
total proceeds of $4,640,000. Operating cash costs dropped to $521 per ounce
net of by-product credits. Operating cash costs net of by-product credits is
also a non-GAAP measure. The chrome recovery circuit also significantly reduced
chrome penalties in the PGM concentrate from $1,719,000 in Q3 2007 to $669,000
in Q3 2008.
In Q3 2008, CRM suffered eight lost time injuries (compared to five lost time
injuries in Q2 2008) resulting in a Lost Time Injury Frequency Rate ("LTIFR")
of 3.02 (1.85 in Q3 2007). The Company`s twelve month rolling LTIFR of 3.15 to
September 30, 2008 compares favorably with other platinum producers in South
Africa.
Quarter ended September 30, 2008 compared to quarter ended September 30, 2007
For the quarter ended September 30, 2008, PGM sales were 30,758 ounces compared
with 29,417 ounces for the quarter ended September 30, 2007. This 5% increase
is attributable to improved recovery rates (78% in Q3 2008 compared to 72% in
Q3 2007), increased development work (5,599 development meters in Q3 2008
compared to 4,868 meters in Q3 2007), and increased on-reef development (3,556
meters in Q3 2008 compared to 2,570 meters in Q3 2007). Offsetting this was a
20% decrease in tonnes processed (317,602 tonnes in Q3 2008 compared to 399,022
in Q3 2007) as a result of the planned reduction of the treatment of low grade
tailings, and a decrease in grades (3.99 grams per tonne in Q3 2008 compared to
4.10 grams per tonne in Q3 2007).
Operating cash costs increased to $672 per ounce for the quarter ended
September 30, 2008 compared to $637 per ounce for the same quarter in 2007. A
38% increase in on-reef development, which is expensed for accounting purposes,
and a general 10% to 12% inflationary cost increase lead to the increase in
cash costs per ounce. This is offset by a 9% drop in the value of the Rand
against the U.S dollar and a 5% increase in the number of ounces produced in Q3
2008 compared to Q3 2007.
The average mining rate in Q3 2008 decreased to 106,487 tonnes per month from
107,926 tonnes per month in Q3 2007 as a result of reduced tonnage generated
from old underground areas which have been largely depleted, with grades also
decreasing to an average of 3.99 g/t (5PGE+Au) during Q3 2008 from
4.10 g/t (5PGE+Au) during Q3 2007. "5PGE+Au" is defined as platinum, palladium,
rhodium, iridium, ruthenium and gold.
Nine months ended September 30, 2008 ("9M 2008") compared to nine months ended
September 30, 2007 ("9M 2007")
In 9M 2008, the Company sold 88,894 PGM ounces, an increase of 9% compared to
9M 2007, primarily as a result of higher volumes mined in 2008 (903,632 tonnes
mined in 9M 2008 compared to 779,882 tonnes mined in 9M 2007), improved
recovery rates (76% in 9M 2008 compared to 71% in 9M 2007), and an increase in
on-reef development (9,129 meters in 9M 2008 compared to 6,728 meters in 9M
2007).
The realized price per ounce improved from $1,110 in 9M 2007 to $1,485 in 9M
2008 as a result of a strong increase in PGM prices between late 2007 and July
2008.
Operating cash costs of $688 per ounce were achieved in 9M 2008, compared to
$681 per ounce in 9M 2007. The cash cost per ounce of these two periods were
similar as higher total cash operating costs in 2008 were offset by an increase
in the number of ounces produced in 2008. Total cash operating costs were
higher in 9M 2008 due to increased wages, and inflationary cost increases for
consumables, particularly steel, fuel related expenditures, and mine operating
supplies.
1.2 CRM non-GAAP measures
In this MD&A, the Company has reported its share of earnings before interest,
depletion, depreciation, amortization and tax ("EBITDA") at CRM. This is a
liquidity non-GAAP measure which the Company believes is used by certain
investors to determine the Company`s ability to generate cash flows for
investing and other activities. The Company also reports cash operating costs
per ounce of PGM produced, another non-GAAP measure which is a common
performance measure used in the precious metals industry. These non-GAAP
measures do not have any standardized meaning prescribed under Canadian GAAP,
and therefore they may not be comparable to similar measures employed by other
companies.
The following table provides a reconciliation of EBITDA and cash operating
costs per ounce of PGM sold to the financial statements:
Table 5
Crocodile River Mine non-GAAP measures
(Expressed in thousands of U.S. dollars, except ounce and per ounce data)
Three months ended
September 30, June 30, March 31,
2008 2008 2008
Mine operating earnings (loss) $ (16,054) $ 24,635 $ 32,296
Depletion and depreciation 4,716 4,450 4,362
EBITDA (1) (11,338) 29,085 36,658
Production costs as reported 20,629 21,058 19,750
Less overhead and miscellaneous
(costs) credits (2) 40 38 (323)
Cash operating costs 20,669 21,096 19,427
Less by-product credits - chrome
revenues (4,640) - -
Cash operating costs net of
by-product credits 16,029 21,096 19,427
Ounces sold 30,758 30,311 27,825
Cash cost per ounce sold $ 672 $ 696 $ 698
Cash cost per ounce sold net of
by-product credits $ 521 N/A N/A
December 31, September 30,
2007 2007
Mine operating earnings (loss) $ 8,031 $ 7,064
Depletion and depreciation 5,148 3,972
EBITDA (1) 13,179 11,036
Production costs as reported 20,947 20,416
Less overhead and miscellaneous (costs)
credits (2) (322) (1,677)
Cash operating costs 20,625 18,739
Less by-product credits - chrome revenues - -
Cash operating costs net of by-product
credits 20,625 18,739
Ounces sold 26,632 29,417
Cash cost per ounce sold $ 774 $ 637
Cash cost per ounce sold net of by-product
credits N/A N/A
(1) EBITDA includes negative sales price adjustments, chrome revenues and
chrome penalties, but does not include non- operating general and
administrative expenses at CRM.
(2) Overhead costs include costs such as safety, housing, technical services
and planning, net of residual revenues or adjustments.
During the quarter, the Company recorded a negative EBITDA of $11,338,000 as a
result of negative provisional price adjustments of $29,416,000 arising from
the settlement of PGM concentrate sales three to five months following their
delivery dates and from the significant drop in PGM prices since June 30, 2008.
Without the effect of negative price adjustments, EBITDA would have been
$18,078,000.
Q3 2008 was the first full quarter that CRM`s chrome recovery circuit was in
full operation. As a result, chrome penalties present in PGM concentrates have
been significantly reduced and commercial quantities of chrome were produced
and sold as a by-product of PGM production. Cash cost per PGM ounce in Q3 2008
was $521 net of by-product credits.
1.3 Development projects - CRM
During the quarter ended September 30, 2008, the Company focused on development
projects at CRM, which include the Zandfontein, Kareespruit and Crocette
sections.
During the quarter, the existing vertical shaft was re-equipped and refurbished
to allow more efficient mining and development operations to take place at
deeper levels. Hoisting of mine workers commenced through the vertical shaft
during the quarter. The shaft should be fully operational and hoisting ore by
December 2008.
At the Crocette section, underground development intersected the ore body in
September 2008. However, following the recent significant downturn in the
platinum group metals prices and the global economy, the development of the
Crocette section will be put on care and maintenance while the Company focuses
on increasing production from existing mining areas.
Delineation and evaluation drilling for the quarter was focused on completing
the resource upgrade drilling at Crocette, as well as deeper drilling in
Zandfontein and Kareespruit project areas. As at September 30, 2008, 37 out of
51 planned boreholes were completed. All drilling is on target for completion
by the fourth quarter of 2008 with assay results to follow thereafter. Planning
for the 2009 exploration programme is under review, and, given the downturn in
the PGM market, the programme is expected either to be postponed or to focus on
areas that will allow the Company to maximize production from operating
sections.
The geological model has been updated with drilling up to the end of the second
quarter and the revised resource estimation is expected to be released in the
first half of 2009.
The mining right for the Zandfontein extension and three new order prospecting
rights were granted in August 2008. Preparation of the mining rights
application for the Kareespruit area has commenced, and is expected to be
submitted in 2009.
1.4 Development projects - Spitzkop and Kennedy`s Vale
During the quarter ended September 30, 2008, the Company continued work on the
bulk sampling programme at Spitzkop. The box-cuts for both the Merensky Reef
and UG2 have been completed and blasting of the declines is in progress. By the
end of the quarter, 140 meters of decline development had taken place. Due to
the current market environment, the continuation of the Merensky declines will
be put on hold and under care and maintenance. Engineering design of the mine
and Kennedy`s Vale concentrator is being finalized with an updated cost
estimate and schedule for the project expected to be completed in the first
quarter of 2009. The Company submitted a full Environmental and Impact
Assessment to the Department of Minerals and Energy ("DME") during the quarter.
Discussion and interaction with the DME on the Social and Labour Plan has been
ongoing.
1.5 Development projects - Mareesburg
At Mareesburg, work is continuing on updating the feasibility study and on
obtaining a new order mining right from the DME. The feasibility study is
expected to be available by the first quarter of 2009.
1.6 Corporate and other expenses
General and administrative expenses ("G&A") are costs associated with the
Company`s corporate head office in Vancouver and the Johannesburg and CRM
administrative offices. Such costs include legal and accounting, regulatory,
executive management fees, investor relations, travel and consulting fees. G&A
for Q3 2008 is 60% higher than G&A for Q3 2007 with balances of $5,585,000 and
$3,480,000 respectively. This increase was mainly due to an increase in
outsourced services and insurance in South Africa. For the nine months ended
September 30 2007 and 2008, G&A increased from $12,267,000 to $15,227,000. This
increase was mainly due to the hiring of senior personnel in Vancouver and in
Johannesburg in late 2007 to oversee the Company`s expansion projects and
operations combined with the increase in outsourced services and insurance
costs in South Africa.
During the nine months ended September 30, 2008, the Company`s board of
directors granted 1,500,000 stock options to employees and a new director. All
of these options were granted in March 2008. Stock based compensation for the
nine months ended September 30, 2008 was $1,845,000. The Company had a 10%
rolling stock option plan which expired on March 31, 2008. At the Company`s
annual general meeting on June 4, 2008, shareholders approved a new stock
option plan which allows for the grant of options to purchase up to a maximum
of 75,000,000 common shares of the Company.
Interest income recorded during the quarter ended September 30, 2008 was
$1,975,000 compared with $2,188,000 in the same period in 2007. Interest income
during the nine months ended September 30, 2008 was $6,285,000 compared with
$3,769,000 in the same period in 2007. The increase in interest income was the
result of the Company`s higher average cash balances during the six months
ended June 30, 2008 as compared with the same periods in 2007. The Company
raised Cdn$200 million from a financing completed in May 2007.
Interest expense is comprised primarily of interest incurred on equipment
financing in South Africa and interest on debt related to Gubevu Consortium
Holdings (Pty) Ltd. Interest expense in the quarter ended September 30, 2008
was $659,000 compared with $779,000 in the same period in 2007. Similarly,
interest expense for the nine months ended September 30, 2008 was $2,821,000
compared with $4,180,000 in the same period in 2007. The higher interest
expense balances in 2007 were the result of an accounting adjustment made to
the financial statements for the year ended June 30, 2007. The Company changed
its year-end to December 31 after the June 30, 2007 fiscal year-end.
During the three months ended September 30, 2008 the Company recorded an income
tax recovery of $6,363,000. During the nine months ended September 30, 2008,
the Company recorded an income tax expense of $7,417,000. Both of these
expenses are based on net income generated at CRM during the period. Loss carry
forwards and other tax assets were utilized such that no cash taxes were
payable. The consolidated balance sheet reflects a total net future income tax
liability of $130,474,000 which arose primarily as a result of the step-up to
fair value of the net assets acquired on business acquisitions during the years
ended June 30, 2006 and June 30, 2007.
2. Liquidity and Capital Resources
At September 30, 2008, the Company had working capital of $152,553,000
(December 31, 2007 - $196,681,000) and cash and cash equivalents and short-term
investments of $172,060,000 (December 31, 2007 - $189,856,000) in highly
liquid, fully guaranteed, bank sponsored instruments. The Company is not
exposed to financial instruments involving the US residential property markets
or mortgages.
The Company had no long-term debt at September 30, 2008, other than asset
retirement obligations relating primarily to its Crocodile River Mine, and
capital lease obligations relating to mining vehicles with lease terms of five
years with options to purchase for a nominal amount at the conclusion of the
lease. See Contractual Obligations under Section 2.3 below.
2.1 Outlook
The significant decline in the prices of platinum group metals (PGMs) during
the last four months has had a negative impact on the Company`s profitability.
More recently, the strengthening of the U.S. dollar relative to the South
African Rand has partially offset this negative impact. With the current global
financial crisis leading to a possible economic downturn, the Company
anticipates that PGM prices will remain depressed and the Rand-U.S. dollar
exchange rate will remain volatile in the near term. Based on current PGM
prices, the current value of the U.S. dollar, and planned production levels at
CRM, the Company expects to continue to generate positive cash flows, albeit at
significantly lower levels than earlier in 2008.
In light of the current market environment, the Company`s near-term goal is to
preserve its cash balances to the greatest extent possible, by minimizing
operating costs and by curtailing capital expenditures. In that regard, the
Company is currently reviewing its operations at CRM with a view to optimizing
efficiencies and reducing costs wherever possible without compromising safety,
health or environmental standards. The Company is also reassessing the project
economics and the previously planned capital budget for the Crocette section at
CRM and for the Spitzkop and Mareesburg projects on the Eastern Limb, with a
view to determining an optimal development schedule given the Company`s current
cash balances, its ability to generate sufficient cash flows, and its ability
to obtain additional funding in the current market environment. Additional
funding may include external debt financing, joint venture or other third party
participation in one or more of the projects, or the public or private sales of
equity or debt securities of the Company.
If current market conditions persist for an extended time and PGM prices remain
at present levels or lower, then the cash flows from CRM and current cash
balances will be insufficient to advance any or all of the Company`s
development projects to commercial production. This, along with tightening
credit markets that may result in higher financing costs, could negatively
affect the Company`s ability to obtain equity financing, external debt
financing or third party participation. There can be no assurance that
additional funding will be available to the Company or, if available, that this
funding will be on acceptable terms. If adequate funds are not available, the
Company may be required to delay or reduce the scope of any or all of its
development projects.
The Company has assessed the carrying values of its mineral properties as a
result of the market downturn. In the last few months, share prices of mining
companies have declined significantly, resulting in the Company`s market
capitalization falling below its book value as at September 30, 2008. Based on
current and expected PGM prices and cost structures, management has determined
that the values of the Company`s mineral properties have not been impaired at
this time. However, should current market conditions and commodity prices
worsen and/or persist for a prolonged period of time, an impairment of mineral
properties may be required.
2.2 Share Capital
During the three months ended September 30, 2008, the Company did not grant any
stock options. During the same period, 250,000 options were exercised at a
weighted average exercise price of Cdn$1.70. These options were exercised
without cash payment under the "Share Appreciation Rights" clause in the Stock
Option Plan.
During the nine months ended September 30, 2008, the Company granted 1,500,000
stock options with an exercise price of Cdn$3.38 and expiry dates of February
20, 2018 to March 27, 2018. Stock based compensation expense during this period
was $1,845,000. During the same period, 570,000 options were exercised at a
weighted average exercise price of $1.60 for proceeds of $466,000. 260,000 of
these options were exercised without cash payment under the "Share Appreciation
Rights" clause in the Stock Option Plan. 10,824,077 warrants were exercised at
a weighted average exercise price of Cdn$1.97 per common share for proceeds of
$Cdn21,367,000.
On April 25, 2008, the Company`s warrants that trade on the Toronto Stock
Exchange under the symbol "ELR.WT" expired. A total of 1,937,977 warrants
expired unexercised.
As at November 13, 2008, the Company had:
* 680,526,454 common shares outstanding;
* 46,785,000 stock options outstanding, which are exercisable at prices
ranging from Cdn$0.56 to Cdn$3.38 most of which expire between 2011 and
2018; and
* 58,485,996 share purchase warrants outstanding, which are exercisable at
Cdn$1.80 per share and expire on March 28, 2009. These warrants are traded
on the Toronto Stock Exchange under the symbol "ELR.WT.A".
2.3 Contractual Obligations and Commitments
The Company`s major contractual obligations and commitments at September 30,
2008 were as follows:
Table 6
(in thousands of U.S.
dollars) Less than More than
Total 1 year 1-5 years 5 years
Asset retirement
obligations $ 11,031 $ - $ - $ 11,031
Capital expenditure
contracted at September
30, 2008 but not recognized
on the balance sheet 48,144 48,144 - -
Capital lease obligations 5,927 1,227 4,700 -
Obligations related to
Gubevu acquisition 3,545 3,545 - -
$ 68,647 $52,916 $ 4,700 $ 11,031
Pursuant to the Company`s acquisition of a 42.39% interest in Gubevu Consortium
Holdings (Pty) Ltd. ("Gubevu") during the year ended June 30, 2007, the
Company entered into an agreement to pay an unrelated third party certain
amounts that existed in the underlying Gubevu agreements as an obligation of
Gubevu. As at June 30, 2007, the total payable was R55.4 million of which half
was paid in June 2008. The remaining amount, which is due in June 2009, has
been recorded at a discounted value of $3,051,000 (27.7 million Rand) and has
been included in current loans in the financial statements.
3. Related Party Transactions
A number of the Company`s executive officers are engaged under contract with
those officers` personal services companies. During the three and nine months
ended September 30, 2008 the Company paid $395,000 and $1,261,000 respectively
for management fees, consulting fees and reimbursements of expenses to private
companies controlled by officers and directors of the Company, compared to
$211,000 and $1,013,000 respectively during the same three and nine month
periods in 2007. The increase over the prior comparative period is mostly due
to the hiring of two executive officers in November 2007.
All related party transactions were recorded at the amounts agreed upon between
the parties. Any balances payable are payable on demand without interest.
4. Adoption of New Accounting Standards and Accounting Pronouncements
Effective January 1, 2008, the Company adopted four new accounting standards
that were issued by the Canadian Institute of Chartered Accountants. These
accounting policy changes were adopted on a prospective basis with no
restatement of prior period financial statements.
CICA Handbook Sections 3862 "Financial Instruments - Disclosures" and Section
3863 "Financial Instruments - Presentation" replace Section 3861 "Financial
Instruments - Disclosure and Presentation". The new standards carry forward the
presentation requirements for financial instruments and enhance the disclosure
requirements by placing increased emphasis on disclosures about the nature and
extent of risks arising from financial instruments and how the entity manages
those risks.
CICA Handbook Section 1535 requires the company to disclose (a) its objectives,
policies and processes for managing capital; (b) quantitative data about what
the entity regards as capital; (c) whether the entity has complied with any
capital requirements; and (d) if it has not complied, the consequences of such
non-compliance.
CICA Handbook Section 3031 replaced the existing inventories standard. The new
standard requires inventory to be valued on a first-in, first-out or weighted
average basis, which is consistent with the Company`s current treatment.
The Company`s South African subsidiaries prepare their financial statements in
accordance with International Financial Reporting Standards ("IFRS") and its
interpretations adopted by the International Accounting Standards Board. The
subsidiaries` statements are adjusted to Canadian GAAP for the consolidated
financial statements. In February 2008, the CICA announced that Canadian
generally accepted accounting principles (GAAP) for publicly accountable
enterprises will be replaced by International Financial Reporting Standards
(IFRS) for fiscal years beginning on or after January 1, 2011.
Companies will be required to provide IFRS comparative information for the
previous fiscal year. Accordingly the conversion from Canadian GAAP to IFRS
will be applicable to the Company`s reporting for the first quarter of 2011 for
which the current and comparative information will be prepared under IFRS. The
Company expects the transition to IFRS to impact accounting, financial
reporting, and IT systems and processes. The Company is currently assessing the
impact of the transition to IFRS. Training and additional resources have been
engaged to ensure the timely conversion to IFRS.
5. Internal Control over Financial Reporting
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
the Company are responsible for the design of internal control over financial
reporting within the Company in order to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with Canadian GAAP. Management
has evaluated the design of the Company`s internal control and procedures over
financial reporting as of the end of the period covered by these annual
filings, and believes the design to be sufficient to provide such reasonable
assurance.
The CEO and CFO have also evaluated the effectiveness of the Company`s
disclosure controls and procedures as of the quarter ended September 30, 2008
and have concluded that the Company`s disclosure controls and procedures
provide reasonable assurance that material information relating to the Company,
including its consolidated subsidiaries, was made known to them and reported as
required, particularly during the period in which these annual filings were
being prepared.
Management of the Company, including the CEO and CFO, do not expect that the
Company`s disclosure controls and procedures will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
reasonable but not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to the associated costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected.
During the quarter ended September 30, 2008, the Company engaged a major
accounting firm to act as the Company`s internal auditors in South Africa.
Other than described above, there were no changes in the Company`s internal
control over financial reporting during the quarter ended September 30, 2008
that have materially affected, or are reasonably likely to affect, the
Company`s internal control over financial reporting.
6. Cautionary Statement on Forward-Looking Information
This MD&A, which contains certain forward-looking statements, are intended to
provide readers with a reasonable basis for assessing the financial performance
of the Company. All statements, other than statements of historical fact, are
forward-looking statements. The words "believe", "expect", "anticipate",
"contemplate", "target", "plan", "intends", "continue", "budget", "estimate",
"may", "will", "schedule" and similar expressions identify forward looking
statements. Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies. Known and unknown factors could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, fluctuations in the
currency markets such as Canadian dollar, South African Rand and U.S. dollar,
fluctuations in the prices of PGM and other commodities, changes in government
legislation, taxation, controls, regulations and political or economic
developments in Canada, the United States, South Africa, or Barbados or other
countries in which the Company carries or may carry on business in the future,
risks associated with mining or development activities, the speculative nature
of exploration and development, including the risk of obtaining necessary
licenses and permits, and quantities or grades of reserves. Many of these
uncertainties and contingencies can affect the Company`s actual results and
could cause actual results to differ materially from those expressed or implied
in any forward-looking statements made by, or on behalf of, the Company.
Readers are cautioned that forward-looking statements are not guarantees of
future performance. There can be no assurance that such statements will prove
to be accurate and actual results and future events could differ materially
from those acknowledged in such statements. Specific reference is made to the
Company`s most recent Annual Information Form on file with Canadian provincial
securities regulatory authorities for a discussion of some of the factors
underlying forward-looking statements.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future
events or otherwise, except to the extent required by applicable laws.
November 13, 2008
Ian Rozier
For further information contact:
Investor Relations
Website: www.eastplats.com
Email: info@eastplats.com
Tel: 1-(604)-685-6851, Fax: 1-(604)-685-6493
NOMAD: JSE Sponsor:
Canaccord Adams Limited, London PSG Capital (Pty) Limited,
Email: Ryan.Gaffney@canaccordadams.com South Africa
Tel: +44 20 7050 6500 Email:anjem@psgcapital.com
Tel: +27 21 887 9602
Date: 13/11/2008 17:03:45 Produced by the JSE SENS Department.
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