| Mon 17 Nov 2008, 10:35 | | BCD - BRC DiamondCore - Management`s Discussion And Analysis Of Financial |
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BCD
BCD
BCD - BRC DiamondCore - Management`s Discussion And Analysis Of Financial
Condition And Results Of Operations For The Three And Nine Month Periods
Ended September 30, 2008
BRC DIAMONDCORE LTD.
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
MANAGEMENT`S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2008
The following Management`s Discussion and Analysis of Financial Condition and
Results of Operations (the "MD&A") has been prepared by management and
provides a review of the activities, results of operations and financial
condition of BRC DiamondCore Ltd. (formerly BRC Diamond Corporation) (the
"Company" or "BRC DiamondCore") based upon Canadian generally accepted
accounting principles. This MD&A should be read in conjunction with the
unaudited interim consolidated financial statements as at and for the three
and nine month periods ended September 30, 2008, as well as the notes
thereto, the audited consolidated annual financial statements as at and for
the financial year of the Company ended December 31, 2007 ("fiscal 2007") and
the notes thereto, and the annual MD&A for fiscal 2007. All amounts are
expressed in Canadian dollars unless otherwise stated. This MD&A is dated as
of November 14, 2008. Additional information relating to the Company is
available on SEDAR at www.sedar.com
FORWARD LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements,
other than statements of historical fact, that address activities, events or
developments that the Company believes, expects or anticipates will or may
occur in the future (including, without limitation, statements relating to
future diamond prices, future diamond sales, future production, exploration
results, potential mineralization and future plans and objectives of the
Company) are forward-looking statements. These forward-looking statements
reflect the current expectations or beliefs of the Company based on
information currently available to the Company. Forward-looking statements
are subject to a number of risks and uncertainties that may cause the actual
results of the Company to differ materially from those discussed in the
forward-looking statements, and even if such actual results are realized or
substantially realized, there can be no assurance that they will have the
expected consequences to, or effects on the Company. Factors that could
cause actual results or events to differ materially from current expectations
include, among other things, uncertainties relating to the availability and
costs of financing needed in the future, the possibility that future
exploration results will not be consistent with the Company`s expectations,
changes in equity markets, changes in diamond markets, foreign currency
fluctuations, political developments in the Democratic Republic of the Congo
(the "DRC") or South Africa, changes to regulations affecting the Company`s
activities, delays in obtaining or failure to obtain required project
approvals, the uncertainties involved in interpreting geological data and the
other risks involved in the diamond exploration business. Any forward-
looking statement speaks only as of the date on which it is made and, except
as may be required by applicable securities laws, the Company disclaims any
intent or obligation to update any forward-looking statement, whether as a
result of new information, future events or results or otherwise. Although
the Company believes that the assumptions inherent in the forward-looking
statements are reasonable, forward-looking statements are not guarantees of
future performance and accordingly undue reliance should not be put on such
statements due to the inherent uncertainty therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition, exploration and development of
diamond properties in known diamond producing areas in the Northern Cape of
South Africa and in the DRC.
The Company`s shares commenced trading on the Toronto Stock Exchange on
February 11, 2008 following the acquisition by the Company of Diamond Core
Resources Limited, a South African based diamond exploration and development
company. In connection with the said acquisition, the Company`s shares were
also listed on the JSE Limited in Johannesburg, South Africa. Prior to
February 11, 2008, the Company`s shares traded on the TSX Venture Exchange.
Highlights of the Third Quarter
South Africa
Strategic review.
In a response to the weakening global economic conditions that have adversely
affected both diamond prices and the Company`s access to both debt and equity
finance the Company is currently undertaking a strategic review of each of
its South African operations.
General
Bulk sampling/trial mining was completed on PK1 and PK 5 at the Paardeberg
East kimberlite project.
Bulk sampling continued at the Silverstreams alluvial project and the
metallurgical plant upgrade started in August 2008.
Bulk sampling commenced on August 1, 2008 at the De Kalk alluvial project.
The Company conducted its fifth, sixth and seventh tender sales of diamonds
during the three months ended September 30, 2008. Highlights of these tender
sales included the following:
Silverstreams
Total Stones Average US$/Carat Total Value
weight Size
(Carats) (Number) (Carats) (US$)
Tender 5 282.91 152 1.86 $2,614.77 $739,738.00
Tender 6 424.66 187 2.27 $2,090.11 $887,587.00
Tender 7 307.34 116 2.65 $1,285.08 $394,958.99
Total 1,014.91 455 2.23 $1,992.57 $2,022,283.99
De Kalk
Total Stones Average US$/Carat Total Value
weight Size
(Carats) (Number) (Carats) (US$)
Tender 5 0 0 0 0 0
Tender 6 19.49 12 1.62 $5077.68 $98,964.00
Tender 7 27.14 18 1.51 $418.04 $11,345.69
Total 46.63 30 1.55 $2,365.64 $110,309.69
Paarderberg
East
Total Stones Average US$/Carat Total Value
weight Size
(Carats) (Number) (Carats) (US$)
Tender 5 PK 1 44.98 195 0.23 $92.73 $4,171.00
East
PK 2 28.66 133 0.22 $187.06 $5,361.00
PK 5 602.91 1,847 0.33 $403.52 $243,285.00
Tender 6 PK 5 906.98 2,659 0.34 $418.07 $379,185.00
Tender 7 PK 5 189.38 534 0.35 $218.70 $41,418.65
Tailings 170.41 1,019 0.17 $80.57 $13,730.00
Total 1,943.33 6,387 0.30 $353.59 $687,150.65
In total, during the three months ended September 30, 2008 the Company
recovered a total of 3,004.87 carats which sold for a total value of US$
2,819,744,33.
Both the Paardeberg East and Silverstreams bulk sampling plants have been
configured for exploration purposes but can be utilized in a production
capacity should a decision be taken to do so. Both sampling plants have been
equipped with weightometers in order to make accurate measurements of
tonnages treated. Both plants have been configured to optimize recoveries
from the unique size frequency curves of each deposit. At De Kalk the bulk
sampling is at a much smaller scale and is done by a contracted operator.
The services of a diamond consultant, Ramon Ferraris of QTS-Kristal Dynamical
of Kimberley, South Africa, were retained to audit the bulk sampling plants,
bulk sampling process and diamond analysis on the Paardeberg East,
Silverstreams and De Kalk sites. The tenders were overseen by Mr. Ferraris
and an additional diamond consultant to the Company, Mr. Maurice Barker.
Silverstreams Bulk Sampling Alluvial Project
The Silverstreams project continued its bulk sampling program and, for the
three and nine month periods ended, a surveyed volume of 346,634 and
1,458,790 tonnes, respectively, were mined, of which a total volume of
221,641 and 910,166 tonnes, respectively, were processed through the
metallurgical plant.
The Company completed the metallurgical plant upgrade successfully on
September 16, 2008. The upgrade increased plant capacity by 50%. The plant
now comprises a Taurus rotary screen 670tph front end, six 16ft rotary pans,
a 50tph re-concentrating Dense Medium Separation plant, a primary Flow Sort X-
Ray machine recovery unit, an attritioner, a secondary Bateman GB 1000
automated grease belts recovery unit and a "hands off" sort house.
The Company also added an 85 tonne Hitachi Excavator to its earthmoving fleet
to compensate for the plant production increase and is in the process of
procuring another dozer to assist the fleet of earthmoving machines to match
the production demand from the metallurgical plant. Asset finance was
obtained to finance the purchase of the excavator.
The exploration team has continued with advanced exploration on the project.
Venmyn Rand (Pty) Limited is preparing an updated mineral resource estimate
for Silverstreams which is expected to be completed in the first quarter of
2009.
De Kalk Bulk Sampling Alluvial Project
Bulk sampling commenced at the De Kalk project on August 1, 2008. The plant
consists of front-end with a Warrior 1800 in pit screen, two 16 ft rotary
pans, a final recovery with two Flow sort X-ray machines and a sort house.
A total of 39,342 tonnes was mined of which 28,102 tonnes was processed
through the metallurgical plant.
Sandrift Alluvial Prospecting Project
In June 2008 the Company commenced a percussion drilling program on the
project. A total of 200 holes were drilled. Due to the thick sand on top of
the gravel, it was decided to stop drilling with the Company drill rig and to
source a crawler drill rig. The drilling program is expected to commence
again in the first quarter of 2009.
Paardeberg East Bulk Sampling Kimberlite Project
The Paardeberg East project is the most advanced of the Company`s kimberlite
exploration projects. The project comprises a Mining License over various
portions of the farm Paardeberg East 153 located approximately 35km west of
Kimberley in the Northern Cape Province of South Africa.
A number of known kimberlites have been identified on the property, some of
which have been the subject of several phases of intermittent exploration and
exploitation from the early 1900`s up until 2003. Within the project area are
eight potential targets, namely proved kimberlites (PK) PK1, PK2, PK3, PK4
and PK5 and prospective anomalies (PA) PA6, PA7 and PA8. Kimberlites PK1,
PK2, PK3 and PK5 are known to be diamondiferous, but very little is known
about anomalies PA6, PA7 and PA8.
The kimberlite with the greatest prospect is currently represented by the PK1
kimberlite and to a lesser extent the PK3 kimberlite. All five known
kimberlites bodies (PK1, PK2, PK3, PK4 and PK5) were worked at one time or
another, as there are signs of adits, shafts and pits on, or in the vicinity
of all five.
The diamond analysis of the product from various sampling positions on the
2.2ha PK1 kimberlite pipe representing distinct kimberlite facies, as well as
the ongoing sampling operations at PK2, PK3 and PK5, was undertaken by
independent consultants on an ongoing basis since the second quarter of 2008.
During the three and nine month periods ended September 30, 2008, the Company
conducted, respectively, 5 and 27 bulk samples (23 on PK1 east and 4 on PK1
west) over the PK1 kimberlitic ore body.
A Whittle pit study was conducted on PK1 by an independent consultant under
the supervision of the company, Hatch. An optical practical open pit design
with a final financial model was conducted by Hatch. Management is currently
reviewing this work and wishes to supplement the PK1 ore body with other
known kimberlites. The Company also hopes to have access to exploration data
on the Paardeberg farm that was done previously. Management will then be able
to prepare an appropriate resource model. The diamond analysis data,
independent diamond valuations and prices received on the open tenders
conducted by the Company were used to underpin the economic metrics for the
Whittle pit study on the PK1 kimberlite pipe.
During the three and nine month periods ended September 30,2008 a total of
nine and thirteen samples, respectively, comprising 39,454 and 75,948 treated
tonnes, respectively, were conducted over the PK5 kimberlite ore body with
encouraging results. The cumulative number of stones versus lower critical
size plot of the average 2 carat diamonds of the Paardeberg East deposits
suggests that the prospects for recovering the complete fraction of larger
diamonds during the bulk sampling process is good.
Bulk sampling on PK1 and PK5 was completed and the exploration team is
continuing with further exploration and geophysics on the PK5 ore body and
the remainder of the Paardeberg East area.
The Paardeberg East metallurgical sampling plant comprises a front end, with
primary crushing (to -55mm), a 50tph Bateman Dense Media Separation plant
(DMS), secondary re-crush (to -18mm) and tertiary re-crush (to-13mm) circuits
and has a 37tph ROM capacity. DMS feed is screened at 25 mm. The final
recovery consists of two Flow-Sort X-ray machines, an attritioner, two
Bateman GB 800 grease belts and a "hands-off" sort house.
Democratic Republic of the Congo ("DRC")
SOUTHERN DRC
Kwango Project
The Kwango plant has been commissioned in South Africa and is ready for
shipment to the DRC. However, a first stage evaluation of the terraces and
flats based on data collected to date and on size frequency analysis of
several parcels of diamonds from local artisanal operators along the Kwango
River, albeit at a low level of confidence, has indicated that more detailed
grade and diamond value information is required prior to committing the 5 tph
DMS unit to the project. Several bulk samples are now being planned for
processing using jigs in order to establish the grades with a higher level of
confidence.
The development of a geological model for the Kwango is progressing well and
the first five month field program was completed in September.
The Company is presently engaged with the Acacia company to exercise its
option over the Kwango and Tshikapa licences.
Tshikapa Project
a) Candore project
Most of the drilling was completed on the Candore ground. Except for one
target in the north-east part of the project area, which remains to be
drilled, the remaining ground has been sterilised with regard to primary
diamond deposits and Candore has been advised that the Company has no
further interest in these licences. No kimberlites were found.
b) Ilunga project
During the quarter, two holes were drilled into the magnetic target on
the southern part of the licence area to a cumulative depth of 82
metres. In both cases highly magnetic grano-diorite was intersected.
There are no further targets on the licence area and therefore Ilunga
has been informed that the Company has no further interest in the ground
and that the option contract has been cancelled.
c) Acacia Tshikapa project
A total of four holes were drilled on the Acacia ground during the
quarter totally 367 metres. Three magnetic anomalies were successfully
resolved in magnetic breccia units - possibly diamictites, at between 30
and 50 metres depth. A fourth target was drilled in the same area and
intersected granite-gneiss at 33 metres.
d) Kwango Mines project
The one Kwango Mines licence in the Tshikapa area in which the Company
has an interest has so far produced abundant kimberlitic minerals,
including diamonds, and several promising magnetic targets. Two holes
were drilled during the quarter: one intersected granite at 119 metres
and the other anomaly was not resolved and will have to be re-drilled.
Several other targets await drilling.
e) King`s Mine project
Interpretation of the most recent geophysical surveys over the three
licences under option with King`s Mine has indicated that two of the
licences are of no further interest and have been removed from the
option contract. The remaining property has some interesting geophysical
targets which will be drilled in due course.
Lubao Project
Geological interpretation of both field and laboratory data has revealed that
further work in this area is unlikely to produce a diamond bearing kimberlite
of economic interest. Although alluvial diamonds have been found along the
Lomani River near Lubao these have most likely been derived from the
kimberlites discovered in 2007 by De Beers on the Bugeco properties
approximately 50 kilometers upstream. It has also been suggested that the
Lubao properties are not underlain by Achaean Craton. It has therefore been
decided to relinquish all the ground associated with the Lubao project in
order to focus the Company`s resources in more promising areas.
Laboratory results from the reconnaissance sampling program for the Vangu
Phambu project have not yet been received.
The interpretation of the most recently acquired geophysical data over large
parts of the Tshikapa project is ongoing.
NORTHERN DRC
All the projects in the northern DRC are part of the Rio Tinto joint venture
in which Rio Tinto has the right to earn in project equity over the various
stages of the exploration program.
a) Zongo project (Equateur)
Results from the stream samples collected over the Zongo project
situated along the Ubangui River were all negative and the licences
associated with this project have been relinquished.
b) Businga project (Equateur)
Stream sampling over most of the licence areas associated with the
Businga ground has been completed and all laboratory results have been
received from the Rio Tinto laboratory. Several interesting anomalies
have been indentified over several licence areas. The licences that
reported negative results have been relinquished.
c) Bomili project
An exploration base was set up at Bafwasende and with the onset of the
`dry` season the reconnaissance sampling program over the Coexco ground
started in the middle of September. During the quarter, 54 samples were
collected covering some 1,620 km2. Many alluvial diamond occurrences
have been noted.
LICENCE HOLDING
In order to focus the exploration program on the most promising areas, many
licences were relinquished with a high degree of confidence and at the same
time applications have been lodged for more interesting ground and option
agreements were signed with two more companies: Group Abba and Caspian Oil &
Gas.
a) Relinquishments.
During the quarter the following 43 prospecting licences were
relinquished: Acacia (2), BCE (8), BRC DiamondCore (10), Candore (9),
CCE (11), Ilunga (1), King`s Mine (2).
b) Additional ground.
Option agreements were signed with Group Abba and Caspian Oil & Gas for
one and two licences respectively in the Tshikapa area bringing the
total licences to which the Company has access to 115. The said
agreement with Caspian Oil & Gas is in addition to the agreement signed
with the same company in the first quarter of this year for nine
licences in northern DRC.
c) Current prospecting licences.
The following licences are currently held by the Company (through its
DRC subsidiary) or are covered by option agreements entered into by the
Company with the licence holders: Acacia (14), BCE (23), BCM (1), BRC
DiamondCore (10), Candore (5), Caspian Oil & Gas (11), CCE (1), Coexco
(44), Group Abba (1), King`s Mine (1), Kwango Mines (3) and Vangu Phambu
(1). These licences represent a total surface area of 26,349 km?.
QUALIFIED PERSON AND TECHNICAL REPORTS
Dr. Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National Instrument 43-101, has reviewed and approved
the technical information in this MD&A.
Additional information with respect to the Company`s DRC projects is
contained in the technical report prepared by Venmyn Rand (Pty) Limited,
dated July 31, 2007 and titled "National Instrument 43-101 Technical Report
on the Kwango, Lubao and Tshikapa Projects of BRC Diamond Corporation in the
Democratic Republic of Congo".
Additional information with respect to the Company`s South African projects
is contained in the technical report prepared by Venmyn Rand (Pty) Limited,
dated July 31, 2007 and titled "National Instrument 43-101 Technical Report
Prepared on the Mineral Assets of Diamond Core Resources Limited in the
Northern Cape and Free State Provinces, South Africa".
Copies of these reports can be obtained from SEDAR at www.sedar.com.
TRANSACTION WITH DIAMOND CORE RESOURCES LIMITED
In July 2007, the Company and Diamond Core Resources Limited ("Diamond Core")
announced that they had entered into an agreement to merge the two companies
by way of a court-sanctioned scheme of arrangement ("the scheme") under South
African corporate law, pursuant to which the Company would acquire all of the
outstanding shares of Diamond Core in exchange for the issuance of BRC
DiamondCore common shares. Under the scheme, each Diamond Core shareholder
was entitled to receive one BRC DiamondCore share for every 24.5 Diamond Core
ordinary shares held. On January 14, 2008, Diamond Core shareholder approval
was obtained, and court approval was obtained on January 22, 2008. On
February 11, 2008, the Company acquired all of the outstanding Diamond Core
shares and, as the consideration for this acquisition, issued BRC DiamondCore
shares to the Diamond Core shareholders in the agreed ratio, resulting in the
issuance by the Company of a total of 12,089,678 common shares. In connection
with this acquisition, the Company changed its name from BRC Diamond
Corporation to BRC DiamondCore Ltd. and its shares were listed on the Toronto
Stock Exchange and the JSE Limited in Johannesburg, South Africa.
In July 2005, Diamond Core acquired all of the outstanding shares of Samadi
Resources SA (Pty) Ltd ("Samadi"). As consideration for this acquisition,
Diamond Core issued ordinary shares to Samadi`s shareholders. The terms of
the acquisition agreement (the "Samadi Agreement") entered into by Diamond
Core with the Samadi shareholders with respect to this acquisition provide
for the potential issuance of additional Diamond Core ordinary shares should
certain operating profits be reached from certain of the projects acquired by
Diamond Core pursuant to the acquisition.
In anticipation of the implementation of the scheme, the Company and Diamond
Core entered into an agreement (the "Samadi Amending Agreement") with the
said Samadi shareholders pursuant to which the Samadi shareholders would, if
the relevant profit thresholds are met, be entitled to receive BRC
DiamondCore common shares in substitution for the Diamond Core ordinary
shares, with the number of BRC DiamondCore shares issuable to such
shareholders adjusted to reflect the exchange ratio applicable under the
terms of the scheme. Accordingly, the number of BRC DiamondCore shares
issuable to the said Samadi shareholders under the Samadi Amending Agreement,
in the same circumstances as contemplated in the Samadi Agreement, is a
maximum of 1,434,502 BRC DiamondCore shares.
Also in connection with the acquisition by the Company of all of the
outstanding shares of Diamond Core (the "Diamond Core Acquisition"),
15,133,190 stock options that had been issued to employees of Diamond Core
pursuant to The Diamond Core Resources Share Trust Deed to acquire 15,133,190
ordinary shares in Diamond Core (the "Old Options") have been substituted
with new stock options of BRC DiamondCore (the "Replacement Options"), so as
to allow all holders of Old Options to acquire the number of BRC DiamondCore
common shares that is calculated by dividing the number of ordinary shares of
Diamond Core that would otherwise have been issuable upon the exercise of the
Old Options by 24.5, rounded up to the nearest whole number of BRC
DiamondCore shares, with the exercise price of such Replacement Options being
adjusted to the number that is equal to the exercise price of the Old Options
(denominated in South African rand) multiplied by 24.5. A total of 617,710
Replacement Options were issued by the Company.
Allocation of purchase price
Based on BRC DiamondCore`s average closing price of $7.40 per share,
calculated with reference to the share price around July 5, 2007, BRC
DiamondCore issued 12,089,678 common shares valued at $89,464,000 to Diamond
Core shareholders holding 296,218,483 Diamond Core ordinary shares
outstanding on the same date.
The acquisition has been accounted for using the purchase method of
accounting with BRC DiamondCore being identified as the acquirer and Diamond
Core as the acquiree. In accordance with the purchase method of accounting,
assets and liabilities acquired from Diamond Core are measured at their
individual fair values on the date of the acquisition and the difference
between these fair values of net assets acquired and the purchase price is
recorded in the consolidated balance sheet as unallocated purchase price.
The allocation of the purchase price to the assets and liabilities acquired
as presented in this MD&A is preliminary and subject to change. The Company
has not yet finalised the fair value of all identifiable assets and
liabilities acquired, or the amount of the purchase price that may be
allocated to goodwill, or the complete impact of applying purchase accounting
on the Company`s consolidated statement of operations. Therefore, after
reflecting the purchase adjustments identified to date, the excess of the
purchase consideration over the adjusted book values of Diamond Core`s assets
and liabilities has been presented as "unallocated purchase price". The
Company has commenced the process whereby the fair value of all identifiable
assets and liabilities acquired as well as any goodwill and future income
taxes arising from the acquisition will be determined. On completion of
valuation, any adjustment to the carrying amounts of mineral properties, or
the recording of any finite life intangible assets on acquisition, will
impact, if applicable, the measurement of amortization recorded in the
consolidated statement of operations of the Company for the period after the
date of acquisition.
$`000
Issuance of 12,089,678 BRC DiamondCore
common shares 89,464
Issuance of Replacement Options 2,477
Transaction costs 2,200
Purchase price 94,141
The preliminary allocation of the purchase price to the net assets acquired
is as follows:
Cash 2,308
Trade and other receivables 1,313
Inventories 1,196
Mineral rights 14,188
Property, plant and equipment 17,129
Deferred exploration costs 5,713
Trade and other payables (3,472)
Taxation (127)
Asset retirement obligation (537)
Future taxation (3,534)
Non-controlling interest 15
Net assets acquired 34,192
Unallocated purchase price 59,949
Fair value of net assets acquired $94,141
The purchase consideration and transaction costs of $94,141,000 exceeded the
carrying value of the net assets acquired by $59,949,000 which has been
recorded as unallocated purchase price.
RESULTS OF OPERATIONS
For the three and nine month periods ended September 30, 2008, the Company
reported a net loss, of, respectively, $7,497,811 (or $0.31 per share) and
$12,130,444 (or $0.50 per share), compared to a net loss of, respectively,
$1,113,593 (or $0.08 per share) and $1,817,357 (or $0.14 per share),
reported for the three and nine month periods ended September 30, 2007. The
increase in the net loss for the third quarter of 2008 as compared to the
third quarter of 2007 is due to the increased exploration activity of the
Company and the inclusion of Diamond Core results of operations post the
Diamond Core acquisition, as well as the write off of certain mineral
properties in the DRC. The most significant items affecting the results of
operations are the write off of certain mineral properties in the DRC of
$5,312,000 and the unrealized foreign exchange loss recorded in the amount of
$2,499,752. Operating results for the Diamond Core group of companies have
been excluded prior to the Company acquiring control. Pending the final
determination of the fair value of all identifiable assets and liabilities
acquired, the results of the Diamond Core operations have been included with
effect from February 11, 2008.
Net revenue of $2,108,980 and $6,477,980 for the three and nine months ended
September 30, 2008 achieved from the sale of diamonds recovered from the bulk
sampling operations in South Africa has been applied to reduce the overall
deferred costs incurred at the operations as the projects in question are
still in the development stage. The carrying value of diamond inventory at
September 30, 2008, amounting to $97,750 has similarly been applied to reduce
the deferred exploration costs.
Significant changes in expenses incurred during the three and nine months
ended September 30, 2008 when compared to the three and nine months ended
September 30, 2007, are described below:
General and administrative expenses
General and administrative expenses increased to $992,000 and $1,350,000 for
the respective three and nine months periods ended September 30, 2008, from
$126,565 and $241,997 for the corresponding periods in 2007. The main reason
for this increase was the business combination with Diamond Core Resources
Ltd that occurred in February 2008. The main components of general and
administrative expenses for the nine month period ended September 30, 2008
consisted of the following: security expenses ($63,963), travel expenses
($433,318), audit expenses ($191,908), marketing expenses ($248,902) and
rental ($363,018). General and administrative expenses for the nine month
period ended September 30, 2007 consisted mainly of shareholder information
and promotion expenses ($75,591), travel expenses ($43,849), salaries
($97,060), government and filing fees ($15,408), office supplies and expenses
($9,627) and bank charges ($463).
Employee stock-based compensation
Stock-based compensation expense of $1,237,000 and $1,593,000 was recorded
for the respective three and nine month periods ended September 30, 2008
(September 30, 2007- $nil and $nil). An amount of $nil and $243,000
representing the fair value of stock options issued during 2007 to employees
of the Company`s subsidiary in the DRC was capitalized as deferred
exploration expenditures during the three and nine month periods ended
September 30, 2008 (compared to $nil and $665,375 for the three and nine
month periods ended September 30, 2007).
Foreign exchange loss
An unrealized foreign exchange (profit)/loss of ($369,189) and $2,499,782 was
recorded for the respective three and nine month periods ended September 30,
2008, compared to a foreign exchange loss of $39,488 and $226,770 for the
respective three and nine month periods ended September 30, 2007, due to the
inclusion of higher South African denominated assets and liabilities and
fluctuations in the value of the United States dollar and South African rand
relative to the Canadian dollar. The South African rand devalued relative to
both the US and Canadian dollars.
Regulatory expenses
Regulatory expenses of $30,000 and $280,000 for the respective three and nine
month periods ended September 30, 2008 compared to $nil and $nil for the
respective three and nine month periods ended September 30, 2007, arose as a
result of the Company listing on the Toronto Stock Exchange pursuant to the
Diamond Core Acquisition (see "Transaction with Diamond Core Resources
Limited" above).
Salaries
Salaries of $133,000 and $648,000 for the respective three and nine month
periods ended September 30, 2008 compared to $nil and $nil for the respective
three and nine month periods ended September 30, 2007, arose mainly due to
the inclusion of the South African operations and represents the amount not
capitalized as deferred exploration expenditure.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning
with the third quarter of 2008. This financial information has been prepared
in accordance with Canadian generally accepted accounting principles. The
Company`s reporting and measurement currency is the Canadian dollar.
2008 2008 2008 2007
3rd quarter 2nd quarter 1st quarter 4th quarter
$ $ $ $
7,498 1,193 3,438 16
$ $ $ $
0.31 0.05 0.17 0.01
2007 2007 2007 2006
3rd quarter 2nd quarter 1st quarter 4th quarter
$ $ $ $
1,114 521 183 702
During the third quarter of 2008, the Company`s net loss increased to
$7,499,000 compared to a net loss of $1,193,000 reported during the second
quarter of 2008. This increase is due mainly to the impairment of $5,312,000
on certain properties in the DRC that have been relinquished, the accounting
for stock based compensation and a reversal from unrealised foreign exchange
profits to losses on the conversion of the South African balance sheet from a
relatively weaker rand to the Canadian dollar.
During the second quarter of 2008, the Company`s net loss decreased to
$1,193,000 compared to a net loss of $3,438,000 reported for the first
quarter of 2008, due mainly to a decrease in unrealised foreign exchange
losses created on the revaluation of the South African balance sheet to
Canadian dollars (June 30, 2008 - $79,000; March 30, 2008 - $2,794,000).
During the first quarter of 2008, the Company`s net loss increased to
$3,438,000 compared to a net loss of $16,000 in the last quarter of 2007, due
mainly to the inclusion of the Diamond Core operating results and the
unrealized foreign exchange loss recorded. Certain professional and
consulting fees incurred in relation to the Diamond Core Acquisition (see
"Transaction with Diamond Core Resources Limited" above) were reclassified to
deferred transaction costs during the fourth quarter of 2007, as such
transaction was considered more likely than not to be completed. The
Company`s net loss during the third quarter of 2007 increased to $1,114,000
compared to a net loss of $521,000 incurred in the second quarter of 2007,
mostly due to increased professional and consulting fees incurred in relation
to the Diamond Core Acquisition. During the second quarter of 2007, the
Company`s net loss increased to $521,000 compared to a net loss of $183,000
reported for the first quarter of 2007. The Company`s net loss in the second
quarter of 2007 was significantly impacted by the increase in professional
fees related to the Diamond Core Acquisition and by a foreign exchange loss
of $173,000. The net loss recorded during the first quarter of 2007
decreased significantly to $183,000 from $702,000 recorded during the
previous quarter. The net loss incurred during the fourth quarter of 2006
was most significantly impacted by the write down of deferred exploration
costs of $414,000 related to the Company`s Fenton Township properties, as
well as by the recognition of stock option compensation expense, representing
the fair value of stock options issued to consultants ($76,000) and to
employees, directors and officers of the Company ($110,000).
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2008, the Company had cash of $1,217,669 and a working
capital deficit of $9,260,000 compared to cash of $932,000 and a working
capital deficit of $4,287,000 as at December 31, 2007.
The Company does not currently generate revenues other than as a result of
its bulk sampling activities. Net revenue generated from the bulk sampling
activities, amounting to $6,477,980 during the first nine months of 2008, is
adequate to support but not grow the South African operations. Similar to
other foreign entities operating in South Africa, the Company is subject to
currency exchange controls administered by the country`s central bank. An
ability to repatriate funds or operating profits, should any develop, may be
adversely affected by such exchange controls, and consequently the ability to
adequately finance the exploration in the DRC.
Historically, the Company has relied primarily on equity financings to fund
its activities through private placement financings and the exercise of
warrants and options. Although the Company has been successful in completing
equity financings in the past, there is no assurance that the Company will
secure the necessary financings in the future.
During the three months ended September 30, 2008, the Company completed a
private placement involving the issue and sale of 350,000 common shares of
the Company at a price of $1.50 per share for total proceeds of $525,000.
The proceeds will be used for the exploration of the Company`s diamond
properties and for general corporate purposes.
During the fourth quarter of 2007, the Company obtained a $3,000,000 credit
line (the "Loan Facility") from a Canadian financial institution, of which
$3,000,000 was utilized as at December 31, 2007. During the first quarter of
2008, the Loan Facility was increased from $3,000,000 to $6,000,000. As at
September 30, 2008, the balance of the Loan Facility was $6,092,486 including
accrued interest of $242,486.
The Loan Facility is guaranteed by Banro Corporation, a significant
shareholder of the Company. The Company has undertaken to release Banro from
its guarantee as soon as possible. The Loan Facility was used to fund the
Company`s exploration activities until the second quarter of 2008. The
Company will need to obtain additional finance in 2008 to fund its
exploration programs for the remainder of 2008 and to repay the Loan
Facility. As at November 14, 2008, the Loan Facility guaranteed by Banro is
still in place.
Contractual obligations entered into by the Company as at the end of
September 30, 2008 amount to $491,721 compared to $nil for the period ended
September 30, 2007 and are summarized in the table below:
Total Less than 1 year 1 - 3 years
Contractual obligations $ $ $
Operating leases $ 158,654 $ 114,478 $ 44,176
Purchase obligations 333,066 333,066 -
$ 491,720 $ 447,544 $ 44,176
The Company is in the process of exercising an option agreement to secure an
equity interest in prospective ground in the DRC currently held under option.
The Company expects to pay approximately US$350,000 as an option exercise fee
and is negotiating a separate financing for this.
DEFERRED EXPLORATION EXPENDITURES
The following table provides a breakdown of the Company`s deferred
exploration expenditures per country and project for the nine months ended
September 30, 2008:
DRC
Kwango Lubao Tshikapa Other Total
Project Project Tshikapa (Candore) Projects
(Acacia) Project
Project
September 30, 2008 $`000 $`000 $`000 $`000 $`000 $`000
Balance 12/31/2007 7,749 2,708 1,687 1,494 547 14,185
Administrative and 352 167 184 160 530 1,393
office support
Depreciation - - - - 165 165
Drilling 3 3 64 3 3 76
Field camp expenses 61 39 144 137 536 917
Geochemistry - - - - - -
Geology - contract 13 18 29 - 113 173
geologists
Geophysics - - 206 - 24 230
Permits 43 59 122 181 45 450
Professional fees 39 - 6 4 85 134
Remote sensing - - - - - -
Stock based - - - - 243 243
compensation
Transport and 16 9 73 45 528 671
helicopter
Write off - (2,916) - (1,965) (431) (5,312)
Subtotal - 2008 527 (2,621) 828 (1,435) 1,841 (860)
Balance 09/30/2008 8,276 - 2,515 - 2,388 13,325
Other projects consist of the following projects: Tshikapa (Kwango Mines),
King`s Mine, Zongo, Businga, Bornili, Ilunga and Kwango (Acacia).
South Africa
De Total
Silverstreams Paardeberg Kalk
East
September 30, 2008 $`000 $`000 $`000 $`000
Balance 12/31/2007 $ - $ - $ - $ -
Admininstrative and office 1,178 947 49 2,174
support
Depreciation 1,006 593 11 1,610
Drilling - - - -
Field camp expenses 2,057 655 257 2,969
Foreign exchange loss - - - - -
unrealized
Geochemistry - - - -
Geology - contract geologists 29 30 3 62
Geophysics - 11 2 13
Professional fees 14 61 2 77
Rehabilitation 739 219 14 972
Safety and security 340 372 51 763
Surveying 18 14 3 35
Subtotal - 2008 5,381 2,902 392 8,675
Net proceeds on diamond sales (4,607) (1,778) (93)
and diamond inventory (6,478)
Balance 09/30/2008 $74 $1,124 $299 $2,197
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number
of common shares. As at November 14, 2008, the Company had outstanding
26,091,310 common shares and stock options to purchase an aggregate of
4,564,110 common shares of the Company.
In addition, as part of the Diamond Core Acquisition, the Company agreed to
issue a maximum of 1,434,502 common shares to former shareholders of Samadi
Resources SA (Pty) Limited (a subsidiary of the Company which was acquired as
part of the Diamond Core Acquisition) if certain profitability thresholds are
met in relation to certain of Diamond Core`s projects (see "Transaction with
Diamond Core Resources Limited").
RELATED PARTY TRANSACTIONS
As at As at
September 30,2008 December 31, 2007
Balance payable $000 $000
Macleod Dixon LLP $ 669 $ 269
Banro Corporation - 29
Banro Congo Mining sprl - 4
Scallan Project
Facilitation (Pty) Ltd 24 -
$ 693 $ 302
For the three month period For the nine month period
ended ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2008 2007 2008 2007
Transactions $000 $000 $000 $000
Macleod
Dixon LLP (a) $ 83 $ 188 $ 272 $ 395
Banro
Corporation (b) - - (11) 47
SFW Village (c) 25 25 75 42
AT Kondrat (d) 25 25 75 75
DK Madilo (e) 12 12 36 36
Scallan Project
Facilitation
(Pty) Ltd (f) $ 203 $ 250 $ 505 $ 595
During the three and nine month periods ended September 30, 2008 legal fees
and related costs of $83 and $272 (September 30, 2007 - $188 and $395)
incurred in connection with general corporate matters as well as the Diamond
Core acquisition (see note 4) were billed by a law firm of which one partner
is a director and officer of the Company.
Banro Corporation ("Banro") owns 3,744,032 common shares representing a
14.35% (December 31, 2007 - 27.43%) equity stake in the Company. It is
engaged in the acquisition and exploration of gold properties in the DRC.
During the three and nine month periods ended September 30, 2008 the Company
incurred $11 in rental expenses on behalf of Banro Corporation (September 30,
2007 - $nil and $47).
Consulting fees in respect of services to the Company. Mr Village is a
director of the Company and has been an officer of the Company since February
2008.
Salaries paid to Mr Kondrat who is a non-executive director of the Company
and was an officer of the Company until February 2008.
Salaries paid to Mr Madilo who is an officer of the Company and was a
director of the Company until February 2008.
Consulting fees paid in respect of services to the Company. Mr Scallan is an
officer and a director of the Company and is the sole shareholder of Scallan
Project Facilitation (Pty) Limited.
All amounts due to related parties are unsecured, non-interest bearing and
due on demand. These transactions are in the normal course of operations and
are measured at the exchange value.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates used in the preparation of the consolidated
financial statements include the Company`s estimate of the recoverable value
of its mineral properties and related deferred exploration expenditures as
well as the value of stock-based compensation. Both of these estimates
involve considerable judgment and are, or could be, affected by significant
factors that are out of the Company`s control.
The Company`s recoverability of the recorded value of its mineral properties
and associated deferred exploration expenses is based on market conditions
for minerals, underlying mineral resources associated with the properties and
future costs that may be required for ultimate realization through mining
operations or by sale. The Company is in an industry that is dependent on a
number of factors including environmental, legal, and political risks, the
existence of economically recoverable reserves, the ability of the Company
and its subsidiaries to obtain necessary financing to complete the
development and future profitable production or the proceeds of disposition
thereof. If current economic conditions continue for an extended period into
the future it is possible that a future write down in good will and carrying
value could occur.
The Company uses the Black-Scholes option pricing model to determine the fair
value of stock options granted. This model requires the Company to make
reasonable assumptions in order to derive parameters such as the expected
volatility of the Company`s shares, the expected life of the option and
interest rates, all of which are based on historical information. Future
behaviors of these parameters are beyond the Company`s control, and thus, may
be significantly different from the Company`s estimates.
The values of all stock options granted were estimated, using the Black-
Scholes option-pricing model, based on the following factors:
- risk-free interest rate: 3.02% to 4.53% (2007 - 4.11 to 4.53%; 2006 -
4.38%; 2005 - 2.91% to 3.30%)
- expected volatility: 72 to 62% (2007 - 62%; 2006 - 63.8% ; 2005 -
117.97% to 129.39%)
- expected life: 5 years (2007 - 5 years; 2006 - 5 years ; 2005 - 2 to 5
years)
- expected dividends: $nil (2007 - $nil; 2006 - $nil ; 2005 - $nil)
Property, plant and equipment are depreciated over their useful lives taking
into account the residual values, where appropriate. The actual lives of the
assets and residual values are assessed annually and may depend on a number
of factors. In reassessing asset lives, factors such as technological
innovation and maintenance programs are taken into account. Residual value
assessments consider issues such as future market conditions, the remaining
life of the asset and projected disposal values.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
Effective January 1, 2008, the Company adopted the following sections of the
Handbook of the Canadian Institute of Chartered Accountants ("CICA"):
CICA Handbook Section 1400, as amended, changed the guidance related to
management`s responsibility to assess the ability of the entity to continue
as a going concern. Management is required to make an assessment of the
entity`s ability to continue as a going concern and should take into account
all information about the future, which is at least but not limited to 12
months from the balance sheet date. Disclosure is required of material
uncertainties related to events or conditions that cast significant doubt
upon the entity`s ability to continue as a going concern. The adoption of
this standard had no impact on the Company`s presentation of its financial
position or consolidated results of operations as at September 30, 2008 and
for the nine month period then ended.
CICA Handbook Section 3031, Inventories, replaces corresponding Section 3030
and established new standards for the measurement and disclosure of
inventories. This new section requires inventories to be measured at the
lower of cost and net realizable value, provides guidance on the
determination of cost and requires the reversal of prior period write-downs
when the net realizable value of impaired inventory subsequently recovers.
The adoption of this section did not have any impact on the Company`s
consolidated financial statements.
CICA Handbook Section 3862, Financial Instruments - Disclosures, and Handbook
Section 3863, Financial Instruments - Presentation, enhance existing
disclosure requirements and place greater emphasis on disclosures related to
recognized and unrecognized financial instruments and how those risks are
managed. Comparative information about the nature and extent of risks arising
from financial instruments is not required in the year Section 3862 is
adopted. The adoption of these standards did not have any impact on the
classification and measurement of the Company`s financial statements. The new
disclosures pursuant to these new Handbook Sections are included in Note 14
to the unaudited interim consolidated financial statements for the three and
nine months ended September 30, 2008.
CICA Handbook Section 1535, Capital Disclosures, establishes disclosure
requirements about an entity`s capital objectives, policies and process for
managing capital as well as compliance with any externally imposed capital
requirements. The impact of adopting this standard is disclosed in Note 12 to
the unaudited interim consolidated financial statements for the three and
nine months ended September 30, 2008.
CICA Handbook Section 3110, Asset Retirement Obligations, requires the
recognition of any statutory, contractual or other legal obligation related
to the retirement of tangible long-lived assets where such obligations are
incurred, if a reasonable estimate of fair value can be made. These
obligations are measured initially at fair value and the resulting costs are
capitalized to the carrying value of the related asset. In subsequent
periods, the liability is adjusted for the accretion of the discount and any
changes in the amount or timing of the underlying future cash flows. Changes
resulting from revisions to the timing or the amount of the original estimate
of undiscounted cash flows are recognized as an increase or decrease in the
carrying amount of the liability, and the related asset retirement cost is
capitalized as part of the carrying value of the related long-lived asset.
These new standards have been adopted on a prospective basis with no
restatement to prior period financial statements.
FUTURE ACCOUNTING STANDARDS
Goodwill and Intangibles
In February 2008, the CICA issued accounting standard Section 3064, Goodwill
and intangible assets, replacing Section 3062 Goodwill and intangible assets
and Section 3450, Research and development costs. Section 3064 establishes
standards for the recognition, measurement, presentation and disclosure of
goodwill subsequent to its initial recognition and of intangible assets by
profit-oriented enterprises. Standards concerning goodwill are unchanged from
the standards included in the previous Section 3062. Section 3064 will be
applicable to financial statements relating to fiscal years beginning on or
after October 1, 2008.
The Company is currently evaluating and has not yet determined the impact of
the adoption of this standard, if any, on its consolidated financial
statements.
International Financial Reporting Standards ("IFRS")
In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed that
Canadian GAAP for publicly accountable enterprises will be converged with
IFRS effective in calendar year 2011, with early adoption allowed starting in
calendar year 2009. The conversion to IFRS will be required, for the Company,
for interim and annual financial statements beginning on January 1, 2011.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are
significant differences in recognition, measurement and disclosures. In the
period leading up to the conversion, the AcSB will continue to issue
accounting standards that are converged with IFRS such as IAS 2, Inventories,
and IAS 38, Intangible assets, thus mitigating the impact of adopting IFRS at
the mandatory transition date.
The Company is currently evaluating the impact of the adoption of IFRS on its
consolidated financial statements, and may consider the early adoption
thereof, particularly as Diamond Core had successfully adopted IFRS prior to
the acquisition thereof by the Company.
Determining whether a contract is routinely denominated in a single currency
- EIC 169
In January 2008 the CICA issued Section 3855 - Financial Instruments -
Recognition and Measurement, paragraph 3855.37, requires an embedded
derivative to be separated from the host contract and accounted for as a
derivative if the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics and risks
of the host contract. An exception is made in paragraph 3855.A34(d) for an
embedded foreign currency derivative in a host contract that is not a
financial instrument (such as a contract for the purchase or sale of a non-
financial item where the price is denominated in a foreign currency) where
the embedded derivative is not leveraged, does not contain an option feature,
and requires payments denominated in "the currency in which the price of the
related good or service that is acquired or delivered is routinely
denominated in commercial transactions around the world (such as the US
dollar for crude oil transactions)." EIC 169 supplements Section 3855 and
provides guidance on how to define or apply the term "routinely denominated
in commercial transactions around the world". The EIC is in effect for
interim filing as of March 31, 2008. The adoption of this EIC did not have
any impact on the Company`s consolidated financial statements.
CAPITAL MANAGEMENT
The Company`s main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of
capital at acceptable risk while providing an appropriate return to its
shareholders;
- to maintain a strong capital base so as to maintain investor, creditor
and market confidence and to sustain future development of the business;
- to safeguard the Company`s ability to obtain financing should the need
arise; and
- to maintain financial flexibility in order to have access to capital in
the event of future acquisitions.
The Company manages its capital structure and makes adjustments to it in
accordance with the objectives stated above, as well as responds to changes
in economic conditions and the risk characteristics of the underlying assets.
There were no changes to the Company`s approach to capital management during
the nine months ended September 30, 2008.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a) Fair value of financial instruments
The Company has classified financial instruments as follows:
September 30, 2008 December 31, 2007
Financial Assets $000 $000
Held-for-trading, measured at
Fair value
Cash $ 1,218 $ 932
Loans and receivables, measured
at amortized cost
Accounts receivable 1,219 403
Financial liabilities
Other liabilities, measured
at cost
Accounts payable and accrued $ 5,962 $ 2,599
liabilities
(b) Allowance account for credit losses
September 30, 2008 December 31, 2007
$000 $000
Accountable receivable $ 413 $ -
Allowance for doubtful
Accounts - -
Other 806 403
$ 1,219 $ 403
c) Fair value of financial instruments
The balance sheet carrying amounts for cash and cash equivalents, accounts
receivable and other receivables, accounts payable and accrued liabilities
approximate fair value due to their short-term nature. Due to the use of
subjective judgments and uncertainties in the determination of fair values
these values should not be interpreted as being realizable in an immediate
settlement of the financial instruments.
d) Risk management policies and hedging activities
The Company is sensitive to changes in commodity prices, foreign exchange and
interest rates. The Company`s board of directors has overall responsibility
for the establishment and oversight of the Company`s risk management
framework. Although the Company has the ability to address its price-related
exposures through the use of options, futures and forward contracts, it does
not generally enter into such arrangements. Similarly, derivative financial
instruments are not used to reduce these financial risks.
Credit risk
Financial instruments which are potentially subject to credit risk for the
Company consist primarily of cash and cash equivalents. Cash and cash
equivalents are maintained with several financial institutions of reputable
credit and may be redeemed upon demand. It is therefore the Company`s
opinion that such credit risk is subject to normal industry risks and is
considered minimal.
Liquidity risk
Liquidity risk arises from the Company`s financial obligations and in the
management of its assets, liabilities and optimal capital structure. The
Company manages this risk by regularly evaluating its liquid financial
resources to fund its current and long term obligations and to meet its
capital commitments in a cost effective manner.
The main factors that affect liquidity include realized sales prices,
production levels, cash, production costs, working capital requirements,
future capital expenditure requirements, scheduled repayments of long term
debt obligations, credit capacity and expected future debt and equity capital
market conditions.
The Company`s liquidity requirements are met through a variety of sources,
including: cash and cash equivalents on hand, cash generated from operations,
existing credit facilities, leases and debt and equity capital markets.
Weakening global economic conditions have led to a significant weakness in
diamond prices. In general, credit market conditions have increased the cost
and difficulty of obtaining capital and limited the availability of funds. As
economic conditions stabilize, management expects to be in a similar position
as it has been previously in terms of its ability to access its traditional
sources of liquidity.
Given the Company`s financial position, available credit facilities and cash
flow requirements, the Company currently expects a need to access debt and
equity capital markets for financing over the next 12 months. However because
of the duration of general economic uncertainty and its detrimental effect on
credit and capital markets is unknown, it is difficult to determine the long
term impact on the Company.
In light of current market conditions, the Company has initiated a series of
measures to bring its spending in line with projected cash flows from its
operations and available project specific facilities in order to preserve its
balance sheet and maintain its liquidity position.
Management currently believes that based on its financial position and
liquidity profile at September 30, 2008 the Company will be able to satisfy
its current and long term obligations.
Currency risk
The Company is exposed to currency risk as its principal business is
conducted in foreign currencies. Monetary assets and liabilities denominated
in foreign currencies are translated from US Dollars and South African rand
into Canadian dollars. Unfavourable changes in the applicable exchange rate
may result in a decrease or increase in foreign exchange gains or losses.
The Company does not use derivative instruments to reduce its exposure to
foreign currency risk.
For the nine months ended September 30, 2008, everything else being equal, a
5% increase or decrease in the exchange rate between the Canadian dollar, the
South African rand and the US dollar would have resulted in a respective
$1,708,745 decrease or increase in the Company`s net loss.
Interest rate risk
Interest rate risk is the potential impact on the Company`s earnings due to
changes in bank lending rates and short term deposit rates.
The Company`s exposure to interest rate risk is as follows:
Cash and cash equivalents Variable interest rate
Accounts receivable Non-interest bearing
Accounts payable and accrued liabilities Non-interest bearing
Short term debt Variable interest rate
The majority of the Company`s cash is held in South African rands and is
invested in short term deposits.
The Company believes that the interest rates prevailing in Canada should not
significantly increase in 2008 and estimates that its interest rate risk
exposure will diminish in future quarters.
Market risk
Market risk is the risk that the value of a financial instrument might be
adversely affected by a change in commodity prices, interest rates or
currency exchange rates. The Company manages the market risk associated with
commodity prices by establishing and monitoring parameters that limit the
types and degree of market risk that may be undertaken.
Title risk
Title to mineral properties and mining rights involves certain inherent risks
due to the difficulties of determining the validity of certain claims as well
as the potential for problems arising from the frequently ambiguous
conveyancing history characteristic of many mining properties. Although the
Company has investigated title to all of its mineral properties for which it
holds concessions or other mineral leases or licenses, the Company cannot
give any assurance that title to such properties will not be challenged or
impugned and cannot be certain that it will have valid title to its mining
properties. The Company relies on title opinions by legal counsel who base
such opinions on the laws of countries in which the Company operates.
SUBSEQUENT EVENT
Diamond Sales
The Company realized US $670,454 from the sale of diamonds through the
Company`s eighth tender sale, realizing a price of US $1,004.26 per carat.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not,
by its nature, all inclusive.
The only sources of future funds for further exploration programs which are
presently available to the Company (other than diamond sales as a result of
the Company`s bulk sampling activities) are the sale of equity capital, or
the offering by the Company of an interest in its properties to be earned by
another party carrying out further exploration. There is no assurance that
such sources of financing will be available on acceptable terms, if at all.
In the event that commercial quantities of minerals are found on the
Company`s properties, the Company does not have the financial resources at
this time to bring a mine into production.
The current financial climate is characterized by volatile and uncertain
times. The uncertainty of forward looking statements is thus greater in the
current period than previous periods. What is known is that the diamond
prices have reduced significantly as a result of the economic downturn
compounded by the normal end of year softening of prices. This will adversely
affect the Company`s cash flow particularly if the depressed prices continue
for a protracted period.
The Company has limited bank borrowings but it is aware that the credit
crunch has limited the availability of traditional sources of project finance
from banks.
All of the Company`s projects are located in the DRC and South Africa. The
assets and operations of the Company are therefore subject to various
political, economic and other uncertainties, including, among other things,
the risks of war and civil unrest, hostage taking, military repression, labor
unrest, illegal mining, expropriation, nationalization, renegotiation or
nullification of existing licenses, permits, approvals and contracts,
taxation policies, foreign exchange and repatriation restrictions, changing
political conditions, international monetary fluctuations, currency controls
and foreign governmental regulations that favor or require the awarding of
contracts to local contractors or require foreign contractors to employ
citizens of, or purchase supplies from, a particular jurisdiction. Changes,
if any, in mining or investment policies or shifts in political attitude in
either the DRC or South Africa may adversely affect the Company`s operations
or profitability. Operations may be affected in varying degrees by
government regulations with respect to, but not limited to, restrictions on
production, price controls, export controls, currency remittance, income
taxes, foreign investment, maintenance of claims, environmental legislation,
land use, land claims of local people, water use and mine safety. Failure to
comply strictly with applicable laws, regulations and local practices
relating to mineral rights could result in loss, reduction or expropriation
of entitlements. In addition, in the event of a dispute arising from
operations in the DRC or South Africa, the Company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of courts in Canada. The
Company also may be hindered or prevented from enforcing its rights with
respect to a governmental instrumentality because of the doctrine of
sovereign immunity. It is not possible for the Company to accurately predict
such developments or changes in laws or policy or to what extent any such
developments or changes may have a material adverse effect on the Company`s
operations.
The DRC is a developing nation emerging from a period of civil war and
conflict. Physical and institutional infrastructure throughout the DRC is in
a debilitated condition. The DRC is in transition from a largely state
controlled economy to one based on free market principles, and from a non-
democratic political system with a centralized ethnic power base, to one
based on more democratic principles. There can be no assurance that these
changes will be effected or that the achievement of these objectives will not
have material adverse consequences for the Company and its operations. The
DRC continues to experience violence and significant instability in parts of
the country due to certain militia and criminal elements. The recent events
of violence have been a very considerable distance from the areas of interest
to the Company. While the government and United Nations forces are working
to support the extension of central government authority throughout the
country, there can be no assurance that such efforts will be successful.
South Africa has recently experienced significant power shortages and it is
expected that these shortages will continue for several years. These power
shortages could disrupt the Company`s South African operations and have a
material adverse effect on the Company.
All of the Company`s properties are in the exploration stage only and none of
the properties contain a known body of commercial ore. The Company currently
operates at a loss and does not generate any revenue from operations (other
than the said diamond sales). The exploration and development of mineral
deposits involve significant financial risks over a significant period of
time which even a combination of careful evaluation, experience and knowledge
may not eliminate. Few properties which are explored are ultimately
developed into producing mines. Major expenditures may be required to
establish reserves by drilling and to construct mining and processing
facilities at a site. It is impossible to ensure that the Company`s
exploration programs will result in a profitable commercial mining operation.
Diamond Core has concluded a number of transactions with Black Economic
Empowerment ("BEE") partners in support of the South African government`s
policy of the empowerment of previously disadvantaged individuals and
communities, through the minerals and mining industry. Additional BEE
transactions are contemplated. As a result of the transactions concluded to
date, a BEE entity holds different equity interests ranging from 15% to 50%
interests in a number of the Company`s South African projects. The approval
of the BEE entity is required with respect to certain key business decisions
in relation to the relevant project. Disputes between the Company and a BEE
entity could therefore interfere with the Company`s ability to conduct one or
more of its projects in South Africa, which could have a material adverse
effect on the Company.
The Company is exposed to currency risk as its principal business is
conducted in foreign currencies. Unfavorable changes in the applicable
exchange rate may result in a decrease or increase in foreign exchange gains
or losses. The Company does not use derivative instruments to reduce its
exposure to foreign currency risk.
The Company`s exploration and, if such exploration is successful, development
of its properties is subject to all of the hazards and risks normally
incident to mineral exploration and development, any of which could result in
damage to life or property, environmental damage and possible legal liability
for any or all damage.
The natural resource industry is intensely competitive in all of its phases,
and the Company competes with many companies possessing greater financial
resources and technical facilities than itself.
17 November 2008
Johannesburg
Sponsor
River Group
Date: 17/11/2008 10:35:01 Produced by the JSE SENS Department.
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