| Tue 31 Mar 2009, 15:43 | | 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 Year Ended December 31, 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
EASTERN PLATINUM LIMITED
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 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
December 31, 2008 and for the year then ended in comparison to the same period
in 2007. The comparative period used in this MD&A is the twelve-month period
ended December 31, 2007 even though the Company`s fiscal year ended December
31, 2007 was a six-month period. Effective July 1, 2007, the Company changed
its fiscal year end from June 30 to December 31.
This MD&A should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2008 and supporting notes that have
been prepared in accordance with Canadian gene rally 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 March 31, 2009. Additional information relating
to the Company is available on SEDAR at www.sedar.com.
Contents of the MD&A
1. Overview
2. Highlights
2.1. Highlights for the quarter ended December 31, 2008
2.2. Highlights for the year ended December 31, 2008
3. Results of operations for the quarter and year ended December 31, 2008
3.1. Mining operations at the Crocodile River Mine ("CRM")
3.2. CRM non-GAAP measures
3.3. Development projects
3.3.1. CRM
3.3.2. Spitzkop and Kennedy`s Vale
3.3.3. Mareesburg
3.4. Corporate and other expenses
4. Liquidity and Capital Resources
4.1. Outlook
4.2. Share capital
4.3. Contractual Obligations and Commitments
5. Related party transactions
6. Critical accounting policies and estimates
6.1. Property, plant and equipment
6.2. Revenue recognition
6.3. Stock-based compensation
6.4. Asset retirement obligations
7. New accounting standards and accounting pronouncements under Canadian GAAP
8. Adoption of International Financial Reporting Standards ("IFRS")
8. 1 IFRS conversion plan
8. 2 Initial adoption of IFRS
8. 3 Impact of IFRS
9 . Risk factors
9.1. Risks associated with the mining industry
9.2. Risks associated with the current global economic uncertainty
9.3. Risks associated with foreign currencies
9.4. Risks associated with metals prices
9.5. Risks associated with foreign operations
9.6. Risks associated with granting of exploration, mining and other
licences
10. Internal control over financial reporting
11. Cautionary statement on forward-looking information
1. Overview
Eastplats is a 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 87.5% 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.
2. Highlights
2.1 Highlights for the quarter ended December 31, 2008 ("Q4 2008")
* Eastplats recorded a net loss of $5,742,000 ($0.01 loss per share)
compared to a net loss of $10,814,000 ($0.02 loss per share) in the
fourth quarter of 2007 ("Q4 2007").
* Production at the Crocodile River Mine ("CRM") increased by 9% to
29,015 PGM ounces, from 26,632 PGM ounces in Q4 2007.
* Negative provisional sales price adjustments of $16,698,000 were
recorded in the quarter, causing revenue from CRM to decrease to
$356,000 compared to reported revenue of $34,126,000 in Q4 2007. (See
Table 4 for reconciliation of revenue and provisional price
adjustments.)
* The average delivered basket price per PGM ounce was $550, a decrease
of 58% compared to $1,305 in Q4 2007, and a decrease of 54% compared
to $1,193 in the third quarter of 2008.
* EBITDA was negative $18,168,000 compared to $13,179,000 in Q4 2007.
* Operating cash costs were $628 per ounce, an improvement of 19% over the
$774 per ounce in Q4 2007, and an improvement of 7% over the $672 per
ounce in the third quarter of 2008.
* Operating cash costs net of by-product credits was $578 per ounce, as
the chrome recovery circuit became fully integrated in June 2008.
* Average recovery rates for the quarter improved to 76%, compared to 72%
in Q4 2007.
* Hard rock ore processed increased by 8% to 298,514 tonnes in Q4 2008 from
275,972 tonnes in Q4 2007.
* The Company acquired an additional direct and indirect 2.47% interest in
Barplats Investments Limited, the subsidiary that holds CRM and
Kennedy`s Vale.
* At December 31, 2008, the Company had a cash position (including cash,
cash equivalents and short term investments) of $61,063,000 (December
31, 2007 - $189,856,000).
2.2 Highlights for the year ended December 31, 2008
* Eastplats recorded net earnings of $16,364,000 ($0.02 per share)
compared to a net loss of $26,836,000 ($0.04 loss per share) for the
year ended December 31, 2007.
* Production at the Crocodile River Mine ("CRM") increased by 9% to
117,909 PGM ounces, from 107,967 PGM ounces in 2007.
* Total provisional sales price adjustments were negative $25,162,000 for
the year. (See Table 4 for reconciliation of revenue and provisional
price adjustments.)
* The average delivered basket price per PGM ounce was $1,204, an increase
of 4% compared to $1,158 in 2007.
* EBITDA was $36,237,000 compared to $40,343,000 in 2007.
* Operating cash costs were $674 per ounce, an improvement of 4% over the
$699 per ounce in 2007. Operating cash costs net of by-product credits
were $622 per ounce in 2008.
* Average recovery rates for the year improved to 76%, compared to 72% in
2007, following planned improvements to the concentrator circuit at the
Crocodile River Mine.
* Hard rock ore processed increased by 15% to 1,175,519 tonnes in 2008
from 1,025,293 tonnes in 2007.
* The Company achieved an average grade for 2008 of 4.01 grams per tonne,
up from 3.96 grams per tonne in 2007.
* During the year, the Company spent $143 million on capital expenditures
primarily at Crocodile River and at Spitzkop.
3. Results of Operations for the quarter and year ended December 31, 2008
The following table sets forth selected consolidated financial information for
the three months and years ended December 31, 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 December 31,
2 008 2007
Revenue $ 356 $ 34, 126
Cost of operations
Production costs (18,524) (20,947)
Depletion and depreciation (1,071) (5,148)
Mine operating earnings (loss) (19,239) 8,031
Expenses
General and administrative (4,184) (7,825)
Stock-based compensation (2,445) (10,197)
Operating loss (25,868) (9,991)
Other income (expense)
Interest income 796 2,736
Interest expense (730) (1,231)
Foreign exchange loss (3,255) (260)
Loss before income taxes
and non-controlling interests (29,057) (8,746)
Future income tax (expense)
recovery 21, 040 (1,263)
Non-controlling interests 2, 275 (805)
Net income (loss) for the period (5,742) (10,814)
Basic and diluted income (loss)
per share $ (0.01) $ (0.02)
Weighted average common shares
outstanding
Basic 680,505,530 668,475,351
Fully diluted 680,505,530 668,475,351
December 31, December 31,
Consolidated balance sheets
2008 2007
Total assets $ 872, 227 $ 1,063,076
Total long-term liabilities $ 123, 341 $ 155,632
Twelve months ended Dec 31,
2008 2007
Revenue $ 116,198 $ 119, 234
Cost of operations
Production costs (79,961) (78,979)
Depletion and depreciation (14,599) (11,513)
Mine operating earnings (loss) 21,638 28,742
Expenses
General and administrative (19,411) (20,092)
Stock-based compensation (4,290) (24,475)
Operating loss (2,063) (15,825)
Other income (expense)
Interest income 7,081 6,505
Interest expense (3,551) (5,411)
Foreign exchange loss (2,155) (8,484)
Loss before income taxes
and non-controlling interests (688) (23,215)
Future income tax (expense) recovery 13,623 (349)
Non-controlling interests 3,429 (3,272)
Net income (loss) for the period 16,364 (26,836)
Basic and diluted income (loss) per
share $ 0. 02 $ (0.04)
Weighted average common shares
outstanding
Basic 677,116,680 616,027,477
Fully diluted 687,581,138 616,027,477
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
Selected quarterly data
2008
Dec 31 Sept 30
Revenues $ 356 $ 9,291
Cost of operations (19,595) (25,345)
Mine operating earnings (loss) (19,239) (16,054)
Expenses (G&A and stock-based compensation) (6,629) (5,863)
Operating income (loss) (25,868) (21,917)
Net income (loss) $ (5,742) $ (10,561)
Income (loss) per share - basic $ (0.01) $ (0.02)
Income (loss) per share - diluted $ (0.01) $ (0.02)
Average foreign exchange rates
South African Rand to US dollar 0.1008 0.1285
Canadian dollar to US dollar 0.8252 0.9603
Period end foreign exchange rates
South African Rand to US dollar 0.1076 0.1197
Canadian dollar to US dollar 0.8210 0.9397
2008
June 30 March 31
Revenues $ 50,143 $ 56,408
Cost of operations (25,508) (24,112)
Mine operating earnings (loss) 24,635 32,296
Expenses (G&A and stock-based compensation) (5,649) (5,560)
Operating income (loss) 18,986 26,736
Net income (loss) $ 12,705 $ 19,962
Income (loss) per share - basic $ 0.02 $ 0.03
Income (loss) per share - diluted $ 0.02 $ 0.03
Average foreign exchange rates
South African Rand to US dollar 0.1287 0.1328
Canadian dollar to US dollar 0.9901 0.9955
Period end foreign exchange rates
South African Rand to US dollar 0.1280 0.1229
Canadian dollar to US dollar 0.9807 0.9742
2007
Dec 31 Sept 30
Revenues $ 34,126 $31,452
Cost of operations (26,095) (24,388)
Mine operating earnings (loss) 8,031 7,064
Expenses (G&A and stock-based compensation) (18,022) (3,534)
Operating income (loss) (9,991) 3,530
Net income (loss) $ (10,814) $ (1,390)
Income (loss) per share - basic $ (0.02) $ -
Income (loss) per share - diluted $ (0.02) $ -
Average foreign exchange rates
South African Rand to US dollar 0.1478 0.1409
Canadian dollar to US dollar 1.0189 0.9572
Period end foreign exchange rates
South African Rand to US dollar 0.1453 0.1454
Canadian dollar to US dollar 1.0088 1.0052
2007
June 30 March 31
Revenues $ 22,324 $ 31,332
Cost of operations (17,528) (22,481)
Mine operating earnings (loss) 4,796 8,851
Expenses (G&A and stock-based compensation) (6,691) (16,320)
Operating income (loss) (1,895) (7,469)
Net income (loss) $ (4,693) $ (9,939)
Income (loss) per share - basic $ (0.01) $ (0.02)
Income (loss) per share - diluted $ (0.01) $ (0.02)
Average foreign exchange rates
South African Rand to US dollar 0.1410 0.1381
Canadian dollar to US dollar 0.9102 0.8536
Period end foreign exchange rates
South African Rand to US dollar 0.1416 0.1368
Canadian dollar to US dollar 0.9386 0.8661
3.1 Mining operations at Crocodile River Mine ("CRM")
The following is a summary of CRM`s operations for each of the quarters of 2008
and 2007:
Table 3
Crocodile River Mine operations
Three months ended
December 31, September 30,
2008 2008
Key financial statistics
(amounts stated in thousands of
U.S. dollars, except per ounce data)
Revenue $ 356 $ 9,291
Cost of operations
Production costs (18,524) (20,629)
Depletion and depreciation 1,998 (4,716)
Mine operating earnings (loss) (16,170) (16,054)
EBITDA (1) $ (18,168) $ (11,338)
Sales - PGM ounces 29,015 30,758
Average realized price per ounce (2) $ 550 $ 1,193
Average basket price $ 655 $ 1,438
Cash costs per ounce of PGM (1) $ 628 $ 672
Key production statistics
Total tonnes processed 298,514 317,602
Hard rock tonnes processed 298,514 305,490
Tailings tonnes processed - 12,112
Third party ore processed - -
Development meters 4,604 5,599
On-reef development meters 2,922 3,556
Hard rock recovery at concentrator 76% 78%
Metal in concentrate sold (ounces)
Platinum (Pt) 14,466 15,393
Palladium (Pd) 6,690 6,973
Rhodium (Rh) 2,451 2,581
Gold (Au) 121 123
Iridium (Ir) 979 1,083
Ruthenium (Ru) 4,308 4,605
Total PGM ounces 29,015 30,758
June 30, March 31,
2008 2008
Key financial statistics
(amounts stated in thousands of
U.S. dollars, except per ounce data)
Revenue $ 50,143 $ 56,408
Cost of operations
Production costs (21,058) (19,750)
Depletion and depreciation (4,450) (4,362)
Mine operating earnings (loss) 24,635 32,296
EBITDA (1) $ 29,085 $ 36,658
Sales - PGM ounces 30,311 27,825
Average realized price per ounce (2) $ 1,657 $ 1,621
Average basket price $ 1,969 $ 1,927
Cash costs per ounce of PGM (1) $ 696 $ 698
Key production statistics
Total tonnes processed 337,471 349,497
Hard rock tonnes processed 313,767 257,748
Tailings tonnes processed 23,704 88,948
Third party ore processed - 2,801
Development meters 5,575 4,409
On-reef development meters 3,230 2,343
Hard rock recovery at concentrator 73% 78%
Metal in concentrate sold (ounces)
Platinum (Pt) 15,333 13,684
Palladium (Pd) 6,777 6,201
Rhodium (Rh) 2,543 2,335
Gold (Au) 132 121
Iridium (Ir) 994 1,078
Ruthenium (Ru) 4,532 4,405
Total PGM ounces 30,311 27,825
Dec 31, Sept 30,
2007 2007
Key financial statistics
(amounts stated in thousands of
U.S. dollars, except per ounce data)
Revenue $ 34,126 $ 31,452
Cost of operations
Production costs (20,947) (20,416)
Depletion and depreciation (5,148) (3,972)
Mine operating earnings (loss) 8,031 7,064
EBITDA (1) $ 13,179 $ 11,036
Sales - PGM ounces 26,632 29,417
Average realized price per ounce (2) $ 1,305 $ 1,088
Average basket price $ 1,551 $ 1,293
Cash costs per ounce of PGM (1) $ 774 $ 637
Key production statistics
Total tonnes processed 383,159 399,022
Hard rock tonnes processed 275,972 277,348
Tailings tonnes processed 88,380 59,228
Third party ore processed 18,807 62,446
Development meters 4,759 4,868
On-reef development meters 2,814 2,570
Hard rock recovery at concentrator 72% 72%
Metal in concentrate sold (ounces)
Platinum (Pt) 13,264 14,630
Palladium (Pd) 6,013 6,727
Rhodium (Rh) 2,182 2,418
Gold (Au) 154 166
Iridium (Ir) 955 1,056
Ruthenium (Ru) 4,064 4,420
Total PGM ounces 26,632 29,417
June 30, March 31,
2007 2007
Key financial statistics
(amounts stated in thousands of
U.S. dollars, except per ounce data)
Revenue $ 22,324 $ 31,332
Cost of operations
Production costs (17,291) (19,763)
Depletion and depreciation (237) (2,718)
Mine operating earnings (loss) 4,796 8,851
EBITDA (1) $ 5,033 $ 11,569
Sales - PGM ounces 25,111 26,807
Average realized price per ounce (2) $ 1,113 $ 1,130
Average basket price $ 1,322 $ 1,343
Cash costs per ounce of PGM (1) $ 702 $ 704
Key production statistics
Total tonnes processed 369,453 415,112
Hard rock tonnes processed 258,927 213,046
Tailings tonnes processed 26,357 -
Third party ore processed 84,169 202,066
Development meters 4,807 3,687
On-reef development meters 1,767 2,391
Hard rock recovery at concentrator 69% 73%
Metal in concentrate sold (ounces)
Platinum (Pt) 12,829 14,303
Palladium (Pd) 5,605 5,842
Rhodium (Rh) 2,002 1,782
Gold (Au) 137 715
Iridium (Ir) 885 787
Ruthenium (Ru) 3,654 3,378
Total PGM ounces 25,111 26,807
(1) These are non-GAAP measures as described in Section 3.2
(2) Average delivered price is the average basket price at the time of delivery
of PGM concentrates, net of associated smelter costs, under the Company`s
primary off-take agreement.
Quarter ended December 31, 2008 compared to the quarter ended December 31, 2007
("Q4 2007")
The Company recorded revenue of $356,000 in Q4 2008. This amount represents
revenues recorded when PGM concentrates are physically delivered to the buyer,
less adjustments made when final prices for these concentrates are settled. 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 Q4
2008, concentrate deliveries made prior to Q4 2008 were settled in Q4 2008 at
much lower prices than those in effect on the dates of the deliveries. Certain
Q3 2008 and all Q4 2008 deliveries which do not settle until 2009 have also
been marked-to-market and recorded at the net basket prices for delivered PGM
concentrates in December 2008. As a result, negative provisional price
adjustments totalling $16,698,000 were recorded during the quarter against
revenue of $17,054,000 prior to these adjustments.
The delivered price per ounce was $550 in Q4 2008 compared to $1,305 in Q4 2007
as a result of a sharp decline in PGM prices commencing in August 2008. The
delivered price per ounce refers to the PGM prices in effect at the time the
PGM concentrates are delivered.
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 Year ended
December 31, 2008 December 31, 2008
Revenue before provisional price
adjustments $ 17,054 $ 141,360
Provisional price adjusments
Adjustments to revenue upon
settlement (9,515) 6,315
of prior periods` sales
Adjustments to revenue for PGM
concentrate - (24,294)
sold and settled in the current
period
Mark-to-market adjustment on sales
not yet (7,183) (7,183)
settled at end of period
Revenue as reported in the income
statement $ 356 $ 116,198
PGM ounces sold were up by 9% in Q4 2008 compared to Q4 2007 as a result of
increased recovery rates (76% in Q4 2008 compared to 72% in Q4 2007), an 8%
increase in hard rock tonnes mined (298,514 tonnes in Q4 2008 compared to
275,972 tonnes in Q4 2007), and a slight increase in grades (3.98 g/tonne in Q4
2008 compared to 3.87 g/tonne in Q4 2007). Mill run time also improved from 83%
in Q4 2007 to 87% in Q4 2008. Total tonnage processed decreased by 22% 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 4,604 metres, comparable to the 4,759
metres achieved in Q4 2007, and on-reef development increased by 4% to 2,922
metres from 2,814 metres in Q4 2007. The Company has experienced a continued
improvement in mining operations as a result of increasing the level of on-reef
development which has successfully enabled an improvement in mining flexibility
necessary to maintain the planned production build-up at the mine. On-reef
development is expensed for accounting purposes.
As expected, recovery rates increased from 72% in Q4 2007 to 76% in Q4 2008 as
the concentrator achieved steady state operating conditions subsequent to its
upgrades during Q2 2008.
Operating cash costs, a non-GAAP measure, decreased 19% to $628 per ounce in Q4
2008 compared to $774 per ounce in Q4 2007 even as total cash operating costs
in Rand were up by 29% compared to Q4 2007. The increase in Rand operating cash
costs was due to a general 10% rate of inflation on labour and consumables,
particularly steel, fuel-related expenditures and mine supplies, and increased
costs associated with higher mining volumes and production throughout 2008.
This was largely offset by a 46% rise in the value of the U.S. dollar relative
to the Rand between Q4 2007 and Q4 2008. A reconciliation of production costs,
as reported in the income statement, to cash operating costs, is shown under
Section 3.2 below under CRM non-GAAP measures.
Since the end of the second quarter of 2008, the chrome recovery circuit at CRM
has produced commercial quantities of chrome as a by-product of PGM production.
A total of 69,900 tonnes of chrome was produced in Q4 2008, of which 13,000
tonnes were sold for total proceeds of $1,187,000. Operating cash costs dropped
to $578 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 $2,146,000
in Q4 2007 to $344,000 in Q4 2008.
In Q4 2008, CRM suffered six lost time injuries (an improvement from eight lost
time injuries in Q3 2008) resulting in a Lost Time Injury Frequency Rate
("LTIFR") of 1.94 (3.07 in Q4 2007). The Company`s twelve month rolling LTIFR
of 2.35 to December 31, 2008 compares favorably with other platinum producers
in South Africa.
In December 2008, the Company increased its direct shareholding in Barplats to
74.99% and at the same time increased its ownership in Gubevu to 49.9%, in each
case by way of equity investments. The total net cost to the Company to effect
these ownership increases was US$38,589,000.
Concurrent with these transactions, the majority interest in Gubevu, previously
held by a consortium headed by Dr. Penuell Maduna, was acquired by Usiba
Resources (Pty) Ltd. ("Usiba"), a South African company controlled by Mr.
Zwelakhe Sisulu. Mr. Sisulu is a former Chairman of New Africa Investments
Limited and a prominent businessman involved in South Africa`s media, telecoms,
agri- business, and manufacturing, as well as in the minerals sector through
his shareholding in Savannah Resources, which has an approximate 20%
shareholding in Aquarius Platinum Limited. Mr. Sisulu also controls
Afriminerals, the Company`s BEE partner in the Spitzkop PGM project.
Year ended December 31, 2008 compared to year ended December 31, 2007
In 2008, the Company produced 117,909 PGM ounces, an increase of 9% compared
to 2007, primarily as a result of improved recovery rates (76% in 2008
compared to 72% in 2007), a 15% increase in hard rock tonnes processed
(1,175,519 tonnes in 2008 compared to 1,025,293 tonnes in 2007), a 26%
increase in on-reef development metres (12,051 metres in 2008 compared to
9,542 metres in 2007) and slightly higher grades (4.01 g/t in 2008 compared to
3.96 g/t in 2007). This is partially offset by lower tailings tonnes processed
in 2008 and the elimination of third party ore purchases in late 2007. Ounces
produced from third party ore in 2007 totalled 10,470 ounces. Excluding ounces
from third party ore, the Company`s production from its own ore increased by
21% over 2007.
The average delivered prices per ounce were $1,204 in 2008 and $1,158 in 2007.
Operating cash costs of $674 per ounce were achieved in 2008, compared to $699
per ounce in 2007.
Total cash operating costs in Rand were up by 36% compared to 2007. The
increase in Rand operating cash costs was due to a general 10% rate of
inflation, and increased costs associated with higher mining volumes and
production throughout 2008. A 17% rise in the value of the U.S. dollar relative
to the Rand between 2007 and 2008, as well as a 21% increase in PGM ounces
produced from CRM ore in 2008, both combined to offset the increase in total
Rand operating cash costs. A reconciliation of production costs, as reported in
the income statement, to cash operating costs, is shown under Section 3.2 below
under CRM non-GAAP measures.
3.2 CRM non-GAAP measures
The Company believes that conventional measures of performance prepared in
accordance with Canadian GAAP do not fully illustrate the ability of its
operations to generate cash flow. Therefore, the Company has included certain
non-GAAP measures in this MD&A to supplement its financial statements which are
prepared in accordance with Canadian GAAP. 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.
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.
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
December 31, December 31,
2008 2007
Mine operating earnings (loss) $ (19,239) $ 8,031
Depletion and depreciation 1,071 5,148
EBITDA (1) (18,168) 13,179
Production costs as reported 18,524 20,947
Less overhead and miscellaneous costs (2) (303) (322)
Cash operating costs 18,221 20,625
Less by-product credits - chrome revenues
and adjustments (1,450) -
Cash operating costs net of by-product
credits 16,77 120,625
Ounces sold 29,015 26,632
Cash cost per ounce sold $ 628 774
Cash cost per ounce sold net of
by-product credits $ 578 774
Year ended
December 31, December 31,
2008 2007
Mine operating earnings (loss) 21,638 28,742
Depletion and depreciation 14,599 11,601
EBITDA (1) 36,237 40,343
Production costs as reported 79,96 179,280
Less overhead and miscellaneous costs (2) (547) (3,415)
Cash operating costs 79,414 75,865
Less by-product credits - chrome revenues and
adjustments (6,090) -
Cash operating costs net of by-product credits 73,324 75,865
Ounces sold 117,909 107,967
Cash cost per ounce sold 674 699
Cash cost per ounce sold net of by-product
credits $ 622 699
(1) EBITDA includes provisional 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 $18,168,000 as a
result of negative provisional price adjustments of $16,698,000 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
negative $1,470,000.
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 Q4 2008
was $578 net of chrome by-product credits.
3.3 Development projects
3.3.1 CRM
In 2008, the Company spent approximately$131 million primarily on ongoing
underground development at the Zandfontein section of CRM, the completion of
the vertical shaft and the chrome recovery plant, development work at the
Crocette and Kareespruit sections of CRM and a surface exploration drilling
programme across all CRM properties which commenced in July 2007 and was
completed in December 2008.
Vertical Shaft
At the Zandfontein section of the CRM, equipping of the vertical shaft was
completed during 2008. The headgear, which previously stood over one of the two
1,000-metre deep shafts at Kennedy`s Vale, was successfully repositioned over
the Zandfontein shaft and all supporting infrastructure was installed. This
work was carried out without any serious incidents.
The shaft has been used successfully for hoisting men and material, and in
December 2008, hoisting of waste rock began. The shaft hoisting capacity will
be 120,000 tonnes per month, and the shaft, along with the concurrent decline
development, will allow access into the lower parts of the ore body
approximately 6 months earlier than would have otherwise been possible.
Chrome Recovery Plant
The concentrator produces a UG2 flotation concentrate which is sent, under a
long term contract, to a third party for smelting and refining. PGM smelters
typically charge penalties for concentrate which contains in excess of a
specified percentage of chromite. The chrome recovery plant at CRM, which
became fully integrated in June 2008 and is operating successfully, has
provided three main benefits - a reduction in chrome penalties for concentrate
sales, additional revenue from the sale of chromite and an increase in capacity
in the secondary milling and flotation circuits resulting from the early
removal of chromite in the concentration process. PGM losses to the chrome
concentrate have been minimal.
Crocette
In March 2008, initial mine development commenced in the Crocette section at
CRM, which would provide incremental production without the requirement for
significant capital expenditure as the reefs can be accessed from surface and
the ore treated at the nearby CRM concentrator. 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 was put on care and
maintenance while the Company focused on increasing production from existing
mining areas. At full production, the Crocette section is expected to produce
up to 40,000 tonnes of ore per month enabling CRM to mine a total of 200,000
tonnes per month.
Drilling Programs
Delineation and evaluation drilling for the year was focused on completing the
resource upgrade drilling at Crocette and the UG2 orebody has been confirmed to
a depth of over 200 metres by exploration drilling which included 88 holes
drilled over 17,385 metres with 79 UG2 intersections.
At Kareespruit, the previously announced drilling programme has progressed and
between July 2007 and December 2008, 38,346 metres were drilled with 89 UG2
reef intersections. The Company is awaiting final assay results for this
drilling programme. In Q4 2008, the pre-feasibility study on Kareespruit was
suspended due to depressed PGM prices.
3.3.2 Spitzkop/Kennedy`s Vale
The Company spent $50 million on the Spitzkop/Kennedy`s Vale project during
2008.
Spitzkop is planned as a decline mining operation that will access high-grade
PGM resources in the UG2 reef at shallow depth without the requirement for high
capital cost shaft infrastructure. Spitzkop is situated updip of, and adjacent
to, the Kennedy`s Vale project. Kennedy`s Vale and the deeper sections of both
properties could utilize the existing twin vertical shafts. This infrastructure
would provide a significant reduction in capital costs for the development of
the deeper sections of both properties.
During 2008, work on the basic engineering for trial mining was completed and
long lead items such as mills and mining equipment were purchased or ordered.
The box-cuts for both the Merensky Reef and UG2 declines were completed. Due to
the current market environment, development of the declines was suspended at a
depth of about 180 metres. Equipment purchased will be stored and continuation
of the declines will be temporarily suspended until PGM prices improve.
A draft report on accessing the vertical shafts at Kennedy`s Vale to conduct
trial mining has been received and is being reviewed.
3.3.3 Mareesburg
A new order mining right application was submitted in December 2007 which
supports the Company`s intention to commence mining when PGM prices improve. An
updated feasibility study for the Mareesburg open pit is expected to be
completed in 2009.
3.4 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
decreased by 47% to $4,184,000 in Q4 2008 from $7,825,000 in Q4 2007. The
decrease was primarily due to termination payments of $2,726,000 made to former
executives and an officer of the Company as well as costs incurred in the
delisting of Barplats shares from the Johannesburg Stock Exchange. For the
years ended December 31, 2007 and 2008, G&A decreased from $20,092,000 to
$19,411,000. Without the effect of the termination payments and the delisting
of the Barplats shares, the Company experienced a slight increase in G&A
compared to 2007, 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. Given the current downturn in the economy and the
curtailment and postponement of some of the Company`s projects, the trend was
for G&A expenses to decrease beginning in Q4 2008 and continuing into 2009.
During the year ended December 31, 2008, the Company`s board of directors
granted 19,856,000 stock options to employees, officers and directors.
18,356,000 of these options were granted in December 2008. Stock based
compensation for the three months and for the year ended December 31, 2008 was
$2,445,000 and $4,290,000, respectively. 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 December 31, 2008 was
$796,000 compared with $2,736,000 in the same period in 2007. The decrease in
interest income was due to lower average cash balances and lower interest rates
in the three months ended December 31, 2008 compared to the same period in
2007. Interest income during the year ended December 31, 2008 was $7,081,000
compared with $6,505,000 in 2007. The increase in interest income was the
result of the Company`s higher average cash balances during the twelve months
ended December 31, 2008 as compared with the same period in 2007. The Company
raised Cdn$200 million from a financing completed in May 2007.
Interest expense is comprised primarily of interest on advances from PGM sales,
interest on equipment financing in South Africa, and interest on debt related
to Gubevu Consortium Holdings (Pty) Ltd. Interest expense in the quarter ended
December 31, 2008 was $730,000 compared with $1,231,000 in the same period in
2007. Interest expense for the year ended December 31, 2008 was $3,551,000
compared with $5,411,000 in 2007. The higher interest expense balances in 2007
were the result of higher interest rates in 2007, and higher debt and equipment
lease balances in 2007.
During the three months ended December 31, 2008 the Company recorded an income
tax recovery of $21,040,000. During the year ended December 31, 2008, the
Company recorded an income tax recovery of $13,623,000. The recoveries were
based on net losses generated at CRM during the period as well as to an
expected reduction of future tax rates in South Africa, from 29% to 28%. The
consolidated balance sheet reflects a total net future income tax liability of
$117,234,000 which arose primarily as a result of the step-up to fair value of
the net assets acquired on the Barplats and Gubevu business acquisitions during
the years ended June 30, 2006, June 30, 2007, and December 31, 2008.
4. Liquidity and Capital Resources
At December 31, 2008, the Company had working capital of $35,328,000 (December
31, 2007 - $196,681,000) and cash and cash equivalents and short-term
investments of $61,063,000 (December 31, 2007 - $189,856,000) in highly liquid,
fully guaranteed, bank sponsored instruments.
The Company had no long-term debt at December 31, 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 4.3 below.
4.1 Outlook
The significant decline in the prices of platinum group metals (PGMs) during
the last four months of 2008 has had a negative impact on the Company`s
profitability. In Q4 2008, the strengthening of the U.S.
dollar relative to the South African Rand partially offset this negative
impact. With the current global economic uncertainty, 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, and after the effects of negative price adjustments as discussed in
Section 3.1, the Company expects to resume generating positive cash flows in
the first half of 2009, 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 appropriate 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 further 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, declining PGM prices as
a result of the global economic uncertainty, and negative market sentiment have
lead to the Company`s market capitalization dropping below its book value as at
December 31, 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. See Section 6.1 for
a further discussion on the Company`s impairment evaluations.
4.2 Share Capital
During the three months ended December 31, 2008, the Company granted 18,356,000
stock options with an exercise price of Cdn$0.32 and expiry date of December
18, 2013, giving rise to stock based compensation expense of $2,445,000 for the
quarter. During the same period, 275,000 options were exercised at a weighted
average exercise price of Cdn$0.56.
During the year ended December 31, 2008, the Company granted 19,856,000 stock
options with an average exercise price of Cdn$0.55 and expiry dates of December
18, 2013 to March 27, 2018. Stock based compensation expense during the year
was $4,290,000. During the same period, 845,000 options were exercised at a
weighted average exercise price of Cdn$1.26 for proceeds of Cdn$619,800.
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 Cdn$21,367,000.
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.
On March 28, 2009, the Company`s warrants that trade on the Toronto Stock
Exchange under the symbol "ELR.WT.A" expired. A total of 58,485,996 warrants
expired unexercised.
As at March 31, 2009, the Company had:
* 680,526,454 common shares outstanding; and
* 61,476,000 stock options outstanding, which are exercisable at prices
ranging from Cdn$0.32 to Cdn$3.38 most of which expire between 2011 and
2018.
4.3 Contractual Obligations and Commitments
The Company`s major contractual obligations and commitments at December 31,
2008 were as follows:
Table 6
(in thousands of U.S. dollars) Less than
Total 1 year
Asset retirement obligations $ 11,197 $ -
Capital expenditure contracted at December 31,
2008 but not recognized on the balance sheet 23,174 22,725
Capital lease obligations 4,746 1,102
Obligations related to Gubevu acquisition 2,983 2,983
$ 42,100 $26,810
(in thousands of U.S. dollars) More than
1-5 years 5 years
Asset retirement obligations $ - $ 11,197
Capital expenditure contracted at December 31,
2008 but not recognized on the balance sheet 449 -
Capital lease obligations 3,644 -
Obligations related to Gubevu acquisition - -
$ 4,093 $ 11,197
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 $2,843,000 (27.7 million Rand) and has been included
in current loans in the financial statements.
5. Related Party Transactions
A number of the Company`s executive officers are engaged under contract with
those officers` personal services companies. During the three months and year
ended December 31, 2008 the Company paid $378,000 and $1,549,000 respectively
for management fees, consulting fees and reimbursements of expenses to private
companies controlled by officers and directors of the Company, compared to
$3,149,000 and $3,805,000 respectively during the same three and twelve month
periods in 2007. The decrease compared to the prior period is mostly due to the
termination payment of $2,252,000 payable to an officer of the Company in 2007.
All related party transactions were recorded at the amounts agreed upon between
the parties. Any balances payable are payable on demand without interest.
6. Critical Accounting Policies and Estimates
The preparation of financial statements requires management to establish
accounting policies, estimates and assumptions that affect the timing and
reported amounts of assets, liabilities, revenues and expenses.
These estimates are based upon historical experience and on various other
assumptions that management believes to be reasonable under the circumstances,
and require judgement on matters which are inherently uncertain. A summary of
the Company`s significant accounting policies is set forth in Note 2 of the
consolidated financial statements for the year ended December 31, 2008.
Management reviews its estimates and assumptions on an ongoing basis using the
most current information available and considers the following to be key
accounting policies and estimates:
6.1 Property, plant and equipment
Property, plant and equipment are the most significant assets of the Company
and represent capitalized expenditures related to the development of mining
properties and related plant and equipment and the value assigned to
exploration potential on acquisition. Property, plant and equipment are
recorded at cost less accumulated depreciation and depletion. Maintenance,
repairs and renewals are charged to operations. Capitalized costs are
depreciated and depleted using either the unit-of-production method over the
estimated economic life of the mine which they relate to, or using the
straight-line method over their estimated useful lives.
All direct costs related to the acquisition, exploration and development of
mineral properties are capitalized until the properties to which they relate
are placed into production, sold, abandoned or management has determined there
to be an impairment. If economically recoverable ore reserves are developed,
capitalized costs of the related property are reclassified as mining assets and
amortized using the units-of-production method following commencement of
production.
The amounts shown for mineral properties do not necessarily represent present
or future values. Their recoverability is dependent upon the discovery of
economically recoverable reserves, the ability of the Company to obtain the
necessary financing to complete the development, and future profitable
production or proceeds from the disposition thereof.
The Company reviews and evaluates its mining interests for impairment at least
annually or when events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. Under Canadian GAAP, these evaluations
consist of comparing each asset`s carrying value with the estimated
undiscounted future net cash flows. An impairment is considered to exist if the
total estimated future undiscounted cash flows are less than the carrying
amount of the assets. However, the resulting impairment loss is measured and
recorded based on discounted estimates of future cash flows. Future cash flows
are estimated based on expected future production, commodity prices, operating
costs and capital costs. Other estimates incorporated in the impairment
evaluations include processing and mining costs, mining tonnage, ore grades and
recoveries, which are all subject to uncertainty.
Based on impairment analyses, it was determined that none of the Company`s
mineral properties were impaired as of December 31, 2008. The PGM prices used
in these analyses were based on the average future PGM price estimates of a
number of independent industry and financial analysts. If price and other
assumptions prove to be inaccurate, or if PGM prices remain at or below values
which existed as at December 31, 2008 for a prolonged period, then material
asset impairment charges may be required in the future.
6.2 Revenue recognition
Revenue, based upon prevailing metal prices, is recorded in the financial
statements when title to the PGMs transfers to the customer. The estimated
revenue is recorded based on metal prices and exchange rates on the date of
shipment and is adjusted at each balance sheet date to the metal prices on
those dates.
The actual amounts will be reflected in revenue upon final settlement, which
are three and five months after the date of shipment. These adjustments reflect
changes in metal prices and changes in qualities arising from final assay
calculations. Prices of PGMs have declined significantly since August 2008,
resulting in the Company recording negative price adjustments of $16,698,000
during the fourth quarter of 2008.
6.3 Stock-based compensation
The Company applies the fair-value method of accounting in accordance with the
recommendations of CICA Handbook Section ("CICA 3870"), "Stock-based
Compensation and Other Stock-based Payments". Under this method, stock-based
compensation expense is calculated using the Black-Scholes option pricing model
with a corresponding credit to contributed surplus, on a straight-line basis
over the vesting period. If and when the stock options are ultimately
exercised, the applicable amounts of contributed surplus are transferred to
share capital. During the year ended December 31, 2008, the Company`s
assumptions for the calculation included a risk-free interest rate of 1.54%,
expected life of the options of 3 years, no dividends, and an annualized
volatility of the Company`s shares of 74%. The resulting weighted average
option valuation was Cdn.$0.23 per share for a total stock-based compensation
expense of $4,290,000in 2008 (2007 - $10,251,000).
6.4 Asset retirement obligations
The Company recognizes liabilities for statutory, contractual or legal
obligations associated with the retirement of property, plant and equipment,
when those obligations result from the acquisition, construction, development
or normal operation of the assets. Initially, the fair value of the liability
for an asset retirement obligation is recognized in the period incurred. The
net present value is added to the carrying amount of the associated asset and
amortized over the asset`s useful life. The liability is accreted over time
through periodic charges to operations and it is reduced by actual costs of
reclamation.
The Company`s estimates of reclamation costs are based on the Company`s
interpretation of current regulatory requirements and these estimates could
change as a result of changes in regulatory requirements and assumptions
regarding the amount and timing of the future expenditures. A change in
estimated discount rates is reviewed annually or as new information becomes
available. Expenditures relating to ongoing environmental programs are charged
against operations as incurred or capitalized and amortized depending on their
relationship to future earnings. At December 31, 2008, the expected present
value of future rehabilitation costs at the Crocodile River Mine was
approximately $2.8 million using a discount rate of 13%. The undiscounted value
was approximately $11.2 million. The Company has not recorded any future
rehabilitation costs for its Spitzkop, Mareesburg and Kennedy`s Vale projects
as these costs are currently determined to be immaterial.
7. Adoption of New Accounting Standards and Pronouncements under Canadian GAAP
Effective January 1, 2008, the Company adopted four new accounting standards
that were issued by the Canadian Institute of Chartered Accountants:
* 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.
8. Adoption of International Financial Reporting Standards
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 would be replaced by IFRS for fiscal years beginning on or after
January 1, 2011. Companies wishing to adopt earlier than 2011 may do so by
application to their applicable securities commission.
In 2008, the Company`s management assessed the impact of an early adoption to
IFRS and concluded that early adoption would be beneficial to shareholders. An
application for early adoption was submitted to the British Columbia and
Ontario Securities Commissions (the "Commissions") in November 2008.
In February 2009, the Commissions granted the Company exemptive relief to adopt
International Financial Reporting Standards ("IFRS") with an adoption date of
January 1, 2009 and a transition date of January 1, 2008. The Company`s first
financial statements prepared under IFRS will be the interim financial
statements for the three months ended March 31, 2009, which will include full
disclosure of all new IFRS policies.
8.1 IFRS conversion plan
In 2008, the Company designed a comprehensive IFRS conversion plan which
addressed changes in accounting policies, restatement of comparative periods,
organization, internal controls and any required changes to business
processes. To facilitate this process and ensure the full impact of the
conversion was understood and managed reasonably, the Company hired a Manager
of Financial Reporting to be responsible for the IFRS conversion project. In
addition, the Company`s Canadian accounting staff attended training courses on
the adoption and implementation of IFRS. The Company`s South African
accounting staff is familiar with IFRS due to the local adoption of IFRS in
2005. Through in-depth training and preparation of reconciliations of
historical Canadian GAAP financial statements to IFRS, the Company believes
that its finance department has obtained a thorough understanding of IFRS.
In Q4 2008, the Company reviewed its existing accounting system along with its
internal and disclosure control processes and concluded that they would not
need significant modification as a result of the Company`s conversion to IFRS.
The following discussion sets forth the process for the initial adoption of
IFRS and its impact, to the extent known, on the Company`s consolidated balance
sheet as at January 1, 2008 and December 31, 2008, and the Company`s
consolidated statement of operations for the year ended December 31, 2008.
The Company has presented reconciliations of the significant, identified
Canadian GAAP to IFRS differences below. These reconciliations are unaudited.
8.2 Initial adoption of International Financial Reporting Standards
IFRS 1 "First-time Adoption of International Financial Reporting Standards"
sets forth guidance for the initial adoption of IFRS. Under IFRS 1 the
standards are applied retrospectively at the transitional balance sheet date
with all adjustment to assets and liabilities taken to retained earnings unless
certain exemptions are applied. The Company has applied the following
exemptions to its opening balance sheet dated January 1, 2008:
(i) Business Combinations
IFRS 1 indicates that a first-time adopter may elect not to apply IFRS
3 Business Combinations retrospectively to business combinations that
occurred before the date of transition to IFRS. The Company will take
advantage of this election and will apply IFRS 3 to business
combinations that occurred on or after January 1, 2008.
(ii) Cumulative translation differences
IFRS 1 allows a first-time adopter to not comply with the requirements
of IAS 21 The Effects of Changes in Foreign Exchange Rates for
cumulative translation differences that existed at the date of
transition to IFRS. The Company has chosen to apply this election and
will eliminate the cumulative translation difference and adjust
retained earnings by the same amount at the date of transition to IFRS.
If, subsequent to adoption, a foreign operation is disposed of, the
translation differences that arose before the date of transition to
IFRS shall not affect the gain or loss on disposal.
(iii) Share-based payment transactions
IFRS 1 encourages, but does not require, first-time adopters to apply
IFRS 2 Share-based Payment to equity instruments that were granted on or
before November 7, 2002, or equity instruments that were granted
subsequent to November 7, 2002 and vested before the later of the date
of transition to IFRS and January 1, 2005. The Company has elected not
to apply IFRS 2 to awards that vested prior to January 1, 2008.
(iv) IAS 27 - Consolidated and Separate Financial Statements
In accordance with IFRS 1, if a company elects to apply IFRS 3 Business
Combinations retrospectively, IAS 27 Consolidated and Separate Financial
Statements must also be applied retrospectively. As the Company elected
to apply IFRS 3 prospectively, the Company has also elected to apply IAS
27 prospectively.
IFRS 1 also outlines specific guidelines that a first-time adopter must adhere
to under certain circumstances. The Company will be applying the following
guidelines to its opening balance sheet dated January 1, 2008:
(v) Assets and liabilities of subsidiaries, associates and joint ventures
In accordance with IFRS 1, if a parent company adopts IFRS subsequent to
its subsidiary, associate or joint venture adopting IFRS, the assets and
the liabilities of the subsidiary, associate or joint venture are to be
included in the consolidated financial statements at the same carrying
amounts as in the financial statements of the subsidiary, associate or
joint venture. The Company will apply this guideline.
(vi) Estimates
In accordance with IFRS 1, an entity`s estimates under IFRS at the date
of transition to IFRS must be consistent with estimates made for the
same date under previous GAAP, unless there is objective evidence that
those estimates were in error. The Company`s IFRS estimates as of
January 1, 2008 are consistent with its Canadian GAAP estimates for the
same date unless evidence was obtained that indicated that the estimates
were in error.
The January 1, 2008 Canadian GAAP balance sheet has been reconciled to IFRS.
This reconciliation has not been audited.
(Stated in millions of U.S. dollars)
January 1 ,2008
Canadian Effect of
transition to IFRS
Note GAAP IFRS
Assets
Current assets
Cash and cash
equivalents $ 19 $ - $ 19
Short-term
investments 171 - 171
Trade receivables 33 - 33
Inventories 7 - 7
230 - 230
Property, plant
and equipment (v) 813 2 815
Refining contract 18 - 18
Investments 1 - 1
Deferred tax
asset (b) - 2 2
$ 1,062 $ 4 $ 1,066
Liabilities
Accounts payable
and
accrued
liabilities (v) 23 - 23
Current loans 4 - 4
27 - 27
Provision for
environmental
rehabilitation (v) 3 3 6
Capital leases 9 - 9
Deferred tax
liability (b) 150 2 152
189 5 194
Shareholders`
equity
Issued capital 868 - 868
Equity reserve 27 - 27
Accumulated
other
comprehensive
income (ii) 23 (23) -
Accumulated loss (v) (68) 22 (46)
Minority
shareholder`s
interest 23 - 23
(22) (1) (23)
873 (1) 872
$ 1,062 $ 4 $ 1,066
8.3 Impact of IFRS
IFRS employs a conceptual framework that is similar to Canadian GAAP. However,
significant differences exist in certain matters of recognition, measurement
and disclosure. While adoption of IFRS will not change the Company`s actual
cash flows, it will result in changes to the Company`s reported financial
position and results of operations. In order to allow the users of the
financial statements to better understand these changes, the Company`s Canadian
GAAP income statement and balance sheet for the year ended December 31, 2008
have been reconciled to IFRS, with the resulting differences explained. The
reconciliations have been presented in the same manner as the Canadian GAAP
financial statements for the convenience of readers. The reconciliations
presented herein are unaudited and do not show the presentation and disclosure
required under IFRS.
(Stated in millions of U.S. dollars)
Year ended December 31, 2008
Canadian Effect of
Note GAAP Transition IFRS
to IFRS
Revenue $ 116 $ - $ 116
Cost of operations
Production costs 80 - 80
Depletion and depreciation 15 - 15
95 - 95
Mine operating earnings 21 - 21
Expenses
General and administrative 19 - 19
Stock-based compensation 4 - 4
23 - 23
Operating loss (2) - (2)
Other income (expense)
Interest income 7 - 7
Interest expense (4) - (4)
Impairment loss (a) - (314) (314)
Foreign exchange loss (2) - (2)
Loss before income taxes (1) (314) (315)
and non-controlling interests
Future income tax recovery (b) 14 87 101
Non-controlling interests 3 - 3
Net earnings (loss) for the
period $ 16 $ (227) $ (211)
(a) Impairment
Canadian GAAP
* To determine if an asset is impaired, the asset`s carrying value is
compared to the undiscounted cash flows.
IFRS
* To determine if an asset is impaired, the asset`s carrying value is
compared to the discounted cash flows.
The Company completed an impairment review of its assets at January 1, 2008 and
concluded that the assets were not impaired in accordance with IFRS. At
December 31, 2008, the Kennedy`s Vale mineral property was not impaired using
undiscounted cash flows in accordance with Canadian GAAP, but was impaired in
accordance with IFRS using discounted cash flows.
An impairment of $314 million and an income tax recovery of $87 million has
been recorded relating to the Kennedy`s Vale impairment.
(Stated in millions of U.S. dollars)
December 31, 2008
Canadian Effect of
Note transition to IFRS
GAAP IFRS
Assets
Current assets
Cash and cash
equivalents $ 26 $ - $ 26
Short-term investments 35 - 35
Trade receivables 10 - 10
Inventories 4 - 4
Deferred tax asset 1 - 1
76 - 76
Property, plant and
equipment (a) (c) 783 (275) 508
Refining contract 12 - 12
Investments 1 - 1
$ 872 $ (275) $ 597
Liabilities
Current liabilities
Accounts payable and
accrued liabilities 37 - 37
Current portion of
capital
leases 1 - 1
Current loans 3 - 3
41 - 41
Provision for
environmental
rehabilitation (c) 3 3 6
Capital leases 3 - 3
Deferred tax liability 117 (77) 40
164 (74) 90
Shareholders` equity
Issued capital 890 - 890
Equity reserve 31 - 31
Accumulated other
comprehensive
income (loss) (ii) (d) (173) 4 (169)
Accumulated loss (e) (52) (205) (257)
Minority shareholder`s
interest 12 - 12
(213) (201) (414)
708 (201) 507
$ 872 $ (275) $ 597
(b) Deferred tax asset/liability
Canadian GAAP
* The sum of all subsidiaries` current future income tax assets and
liabilities is equal to the net current future income tax
asset/liability. The same is true for the consolidated non- current
future income tax asset/liability.
IFRS
* If one subsidiary has a current future income tax asset and
another subsidiary has a current future income tax liability,
they cannot be combined on the consolidated financial
statements to result in a net asset or net liability. Both the
current future income tax asset and the current future income
tax liability must be disclosed as separate line items on the
consolidated financial statements. The same is true for the
consolidated non-current future income tax asset/liabilities.
(c) Provision for environmental rehabilitation
Canadian GAAP - The calculation of asset retirement obligation ("ARO")
uses credit-adjusted discount rates and contractors` costs. When ARO is
revalued, any difference between the current and previous ARO is
recorded against the asset.
IFRS - The calculation of the provision for environmental
rehabilitation uses risk-adjusted discount rates and owners` costs, or
risk-free discount rates with provisions for contingent costs.
When the provision for environmental rehabilitation is revalued, any
difference between the current and previous provision is allocated
between the environmental asset and the expense.
(d) Accumulated other comprehensive income or loss
The Company`s net assets have a different value in accordance with IFRS
than in accordance with Canadian GAAP. This affects the Company`s
cumulative translation difference which affect accumulated other
comprehensive income or loss.
(e) Accumulated profit or loss
As discussed above, the transition to IFRS resulted in adjustments to
net income and retained earnings. These adjustments resulted in a
corresponding adjustment to accumulated profit or loss.
9. Risk Factors
The business of exploring for minerals and the mining and processing of those
minerals involve a high degree of risk. These activities involve significant
risks which careful evaluation, experience and knowledge may not, in some
cases, eliminate. These risks include risks associated with the mining
industry, the fina ncial markets, metals prices and foreign operations.
9.1 Risks associated with the mining industry
The commercial viability of any mineral deposit depends on many factors, not
all of which are within the control of management. Some of the factors that
will affect the financial viability of a mineral deposit include its size,
grade and proximity to infrastructure. In addition, government regulation,
taxes, royalties, land tenure, land use, environmental protection and
reclamation and closure obligations could have a profound impact on the
economic viability of a mineral deposit.
The mining operations and the exploration and development programmes of the
Company may be disrupted by a variety of risks and hazards which are beyond the
control of the Company, including, but not limited to, geological, geotechnical
and seismic factors, fires, power outages, labour disruptions, flooding,
explosions, cave-ins, land-slides, availability of suitable or adequate
machinery and labour, industrial and mechanical accidents, environmental
hazards (including discharge of metals, pollutants or hazardous chemicals), and
political and social instability.
It is not always possible to obtain insurance against all risks described above
and the Company may decide not to insure against certain risks as a result of
high premiums or for other commercial reasons.
The Company does not maintain insurance against political or environmental
risks, but may be required to do so in the future. Should any uninsured
liabilities arise, they could result in increased costs, reductions in
profitability, and a decline in the value of the Company`s securities.
The Company is not able to determine the impact of potential changes in
environmental laws and regulations on its financial position due to the
uncertainty surrounding the form such changes may take.
As mining regulators continue to update and clarify their requirements for
closure plans and environmental protection laws and administrative policies are
changed, additional reclamation obligations and further security for mine
reclamation costs may be required. It is not known whether such changes would
have a material effect on the operations of the Company.
9.2 Risks associated with the current global economic uncertainty
Since August 2008, there has been a negative trend towards metals prices and
shares of mining companies as a result of the global economic uncertainty,
declining confidence in financial markets, failures of financial institutions
and concerns over the availability of credit. These factors may impact the
ability of the Company to obtain equity or debt financing in the future and, if
obtained, on terms that are favourable to the Company. If market volatility and
uncertainty continue or worsen, the Company`s operations could be adversely
impacted and the value of the Company`s common shares could continue to be
adversely affected, making accessibility to public financing even more
difficult.
9.3 Risks associated with foreign currencies
The Company currently uses the South African Rand and the Canadian dollar as
its functional currencies, and the U.S. dollar as its reporting currency.
Operations at the Company`s Crocodile River Mine ("CRM") are predominately
conducted in Rand, with costs paid in Rand and revenues received in Rand, even
though PGM prices are based in U.S. dollars. The Company does not hedge or sell
forward any of its PGM production and is therefore exposed to exchange rate
fluctuations. A deterioration of the U.S.
dollar against the Rand could have an adverse effect on the earnings of CRM.
Fluctuations in the exchange rate between the Canadian dollar and the Rand may
also have a significant impact on the Company`s results of operations and
financial condition.
9.4 Risks associated with metals prices
Metals prices, particularly platinum prices, have a direct impact on the
Company`s earnings and the commercial viability of the Company`s other mineral
properties. Platinum is both a precious metal and an industrial metal. The most
important industrial application of platinum is in automobiles as a catalytic
converter. The current fundamentals of the platinum market are volatile -
demand has decreased as a result of the slowdown in the auto sector in North
America and Europe, and supplies are limited, as mining companies reduce
exploration and development to preserve cash. Platinum prices experienced
significant volatility in the last 18 months, and if the current imbalance
between supply and demand continues, price volatility can be expected to
continue. Some of the other key factors that may influence platinum prices are
policies in the most important producing countries, namely South Africa and the
Russian Federation, the amount of stockpiled platinum, economic conditions in
the main consuming countries, international economic and political trends,
fluctuations in the U.S. dollar and other currencies, interest rates, and
inflation.
Prices for platinum and most of the other PGMs increased to all-time highs in
early 2008, and as a result, the Company achieved record margins for its PGM
sales during the first two quarters of the year. There is no assurance that PGM
prices will return to these levels in the future.
The marketability of metals is also affected by numerous other factors beyond
the control of the Company, including but not limited to government regulations
relating to price, royalties, allowable production and importing and exporting
of minerals, the effect of which cannot accurately be predicted. A decline in
the market price of PGMs mined by the Company may render ore reserves
containing relatively low grades of mineralization uneconomic and may in
certain circumstances lead to a restatement of reserves.
9.5 Risks associated with foreign operations
The Company`s investments in South Africa carry certain risks associated with
different political and economic environments. South Africa has recently
undergone major constitutional changes to effect majority rule, and mineral
title. Accordingly, all laws may be considered relatively new, resulting in
risks such as possible misinterpretation of new laws, unilateral modification
of mining or exploration rights, operating restrictions, increased taxes,
environmental regulation, mine safety and other risks arising out of a new
sovereignty over mining, any or all of which could have an adverse impact upon
the Company.
The Company`s operations may also be affected in varying degrees by political
and economic instability, terrorism, crime, extreme fluctuations in currency
exchange rates, and inflation.
The Government of South Africa has promulgated the Mineral and Petroleum
Resources Royalty Act, 2008. This act allows for a revenue based royalty on
South African mining companies with an effective date of March 1, 2009. The
royalty rate for unrefined minerals is based on a formula that references EBIT
margins and is estimated to be approximately 2.55% of gross mining revenues.
The effective date of the royalty has however been delayed to March 1, 2010.
This delay was enacted in response to the impact of the global economic fallout
on mining companies. The royalty is expected to have a negative impact on CRM`s
earnings in 2010.
9.6 Risks associated with the granting of exploration, mining and other licences
The Government of South Africa exercises control over such matters as
exploration and mining licensing, permitting, exporting and taxation, which may
adversely impact on the Company`s ability to carry out exploration, development
and mining activities. Failure to comply strictly with applicable laws,
regulations and local practices relating to mineral right applications and
tenure, could result in loss, reduction or expropriation of entitlements, or
the imposition of additional local or foreign parties as joint venture partners
with carried or other interests.
The Company`s exploration and mining activities are dependent upon the grant of
appropriate licences, concessions, leases, permits and regulatory consents
which may be granted for a defined period of time, or may not be granted, or
may be withdrawn or made subject to limitations. There can be no assurance that
such authorizations will be renewed following expiry or granted (as the case
may be) or as to the terms of such grants or renewals. There is also no
assurance that the issue of a reconnaissance, prospecting or exploration
licence will ensure the subsequent issue of a mining licence. All `old order`
mineral rights in South Africa are subject to conversion into `new order`
mineral rights. New order prospecting rights for both the Spitzkop and the
Mareesburg PGM Projects have been issued by the Department of Minerals and
Energy ("DME"). CRM has been awarded three additional new order mining rights
and now holds a total of 5 new order mining rights. Both the Kennedy`s Vale
Project and CRM have had new order prospecting rights granted on certain farms
(currently holds 21 in total). Two new order prospecting right applications has
been lodged for CRM. These applications are still pending approval. Application
for new order mining rights for the Mareesburg and Spitskop projects have been
made in the appropriate manner and such applications are currently being
processed by the DME. The Company and its independent South African legal
counsel are not aware of any reasons why the new order mining rights will not
be issued by the DME.
10. Internal Control over Financial Reporting
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
the Company, together with the Company`s management, are responsible for the
information disclosed in this MD&A and in the Company`s other external
disclosure documents. For the years ended December 31, 2008 and 2007, the CEO
and the CFO have designed, or caused to be designed under their supervision,
the Company`s disclosure controls and procedures ("DCP") to provide reasonable
assurance that material information relating to the Company and its
consolidated subsidiaries has been disclosed in accordance with regulatory
requirements and good business practices and that the Company`s DCP will enable
the Company to meet its ongoing disclosure requirements.
The CEO and CFO have evaluated the effectiveness of the Company`s disclosure
controls and procedures as of the year ended December 31, 2008 and have
concluded that the design and operation of the Company`s DCP were effective as
of December 31, 2008 and that the Company has the appropriate DCP to ensure
that information used internally by management and disclosed externally is, in
all material respects, complete and reliable.
The CEO and the CFO are also responsible for the design of the internal
controls over financial reporting ("ICFR") 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. During 2008, the Company engaged an international
accounting firm to act as the Company`s internal auditors for its South African
operations. Under the supervision, and with the participation, of the CEO and
the CFO, management conducted an evaluation of the effectiveness of the
Company`s ICFR based on the framework in the Internal Control - Integrated
Framework developed by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on that evaluation, the CEO and the CFO
concluded that the design and operation of the Company`s ICFR were effective as
at December 31, 2008.
The scope of the Company`s design of DCP and ICFR excluded Gubevu Consortium
Holdings (Pty) Ltd., a subsidiary which is accounted for as a variable interest
entity.
During the design and evaluation of the Company`s ICFR, management identified
certain non-material deficiencies, a number of which have been addressed or
are in the process of being addressed in order to enhance the Company`s
processes and controls. The Company employs entity level and compensating
controls to mitigate any deficiencies that may exist in its process controls.
Management intends to continue to further enhance the Company`s ICFR.
The Company`s management, including its CEO and CFO, believe that any DCP and
ICFR, no matter how well conceived and operated, can provide only reasonable,
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 their costs. Because of the inherent limitations in all control systems,
they cannot provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been prevented or detected. These
inherent limitations include the realities that judgments in decision making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by unauthorized override
to the future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Accordingly, because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and not be detected.
There have been no changes in the Company`s ICFR during the quarter ended
December 31, 2008 that have materially affected, or are reasonably likely to
materially affect, the Company`s ICFR.
11. 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.
March 31, 2009
Ian Rozier
Date: 31/03/2009 15:43:48 Produced by the JSE SENS Department.
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