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BCD
BCD - BRC Diamondcore Limited - Abridged Audited Results For The Year Ended 31
December 2008
BRC DIAMONDCORE LIMITED
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
ABRIDGED AUDITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008
Presented below are the consolidated audited financial statements for BRC
DiamondCore Limited for the year ended 31 December 2008. The annual financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles and are the responsibility of the company`s management.
Please note that the financial statements are presented in Canadian Dollars.
The accompanying notes are an integral part of these consolidated annual
financial statements.
CONSOLIDATED BALANCE SHEET
Note 2008 2007
(CAD) (CAD)
ASSETS
CURRENT
Cash 198,085 931,845
Prepaid expenses and 562,144 402,652
other assets
Inventory 4 121,987 -
882,216 1,334,497
NON CURRENT
Restricted cash 2 308,014 -
Deferred transaction 3 - 2,200,165
costs
Mineral properties and 9 9,075,139 14,188,659
deferred exploration
expenditures
Capital assets 10 8,846,955 593,667
18,230,108 16,982,491
19,112,324 18,316,988
LIABILITIES
CURRENT
Accounts payable and 5, 7 7,542,084 2,599,292
accrued liabilities
Other liabilities 201,557 -
Debt 6 6,172,317 3,022,899
13,915,958 5,622,191
NON-CURRENT
Asset retirement 8 -
obligations 2,131,648
Long term lease 7 -
499,484
2,631,132 -
Going concern 1
Commitments, 13
contingencies and
guarantees
SHAREHOLDERS` EQUITY
Capital stock 11 105,815,141 15,826,524
Contributed surplus 11 (b) 6,934,641 2,757,191
and
(e)
Black economic 1,076,123
empowerment reserve
Deficit (108,890,56 (5,888,918)
7)
Accumulated other 11 (f) (2,370,104) -
comprehensive loss
2,565,234 12,694,797
19,112,324 18,316,988
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Note 2008 2007
Expenses
Consulting fees (1,857,651) (692,776)
Depreciation (104,205) -
Professional fees (958,144) (384,375)
Management fees - (49,333)
General and (2,195,488) (445,267)
administrative
Stock-based 11 (b) (1,687,323) -
compensation
Foreign exchange gain 15,705
realized
Foreign exchange 1,694,736 (206,483)
gain/(loss) unrealized
Loss before the under (5,092,370) (1,778,234)
noted items
Interest income 101,954 -
Interest expense (48,015) (22,899)
Impairment of mineral 9 and (43,404,889 (16,297)
properties and capital 10 )
assets
Impairment of goodwill 3 (54,558,329 -
)
Loss on sale of - (15,461)
investment
Loss for the year before (103,001,64 (1,832,891)
income tax 9)
Income taxes - -
Net loss (103,001,64 (1,832,891)
9)
Deficit - beginning of (5,888,918) (4,056,027)
the year
Deficit - end of the (108,890,56 (5,888,918)
year 7)
Basic and diluted loss 11 (d) (4.20)
per share (0.14)
Weighted average number 24,546,305
of common shares 13,243,967
outstanding
CONSOLIDATED STATEMETNS OF COMPREHENSIVE LOSS
2008 2007
Net loss (103,001,649) (1,832,891)
Unrealized foreign currency loss (2,370,104) -
on self sustaining-operation
Reversal of fair value adjustment - 13,950
upon disposition of investment
Comprehensive loss (105,371,753) (1,818,941)
GOING CONCERN (NOTE 1)
CONSOLIDATED STATEMETNS OF CASH FLOWS
2008 2007
Net (outflow) inflow of cash
related to the following
activities
Operating
Net loss for the year (103,001,649) (1,832,891)
Items not affecting cash
Depreciation 104,205 -
Impairment of mineral properties, 43,404,889
deferred exploration expenditure 16,297
and capital assets
Stock-based compensation and 1,687,323
stock-based consulting fees 219,900
Loss on sale of investment -
15,461
Impairment of goodwill 54,558,329 -
(3,246,903) (1,581,233)
Net change in non-cash working
capital items
Prepaid expenses and 970,145 (400,865)
other assets
Accounts payable and accrued 2,140,028 2,323,005
liabilities
Due from related parties - 9,676
Accrued interest payable - 22,899
Inventory 58,506 -
(78,224) 373,482
Investing
Cash balances acquired from 1,836,315 -
Diamond Core
Proceeds from sale of - 76,532
investment
Deferred charges - (2,200,165)
Mineral properties and (5,018,241) (5,564,310)
deferred exploration expenditures
Capital assets (1,148,028) (569,887)
(4,329,954) (8,257,830)
Financing
Issuance of common shares 525,000 5,443,100
and warrants
Increase in short-term debt 3,149,418 3,000,000
8,443,100
3,674,418
(Decrease)/Increase in cash (733,760) 558,752
during the year
Cash - Beginning of the year 931,845 373,093
Cash - End of the year 198,085 931,845
SUPPLEMENTARY INFORMATION
Interest paid 48,015 -
Income taxes paid 128,493 -
GOING CONCERN (Note 1)
Depreciation of capital assets of $2,604,300 was capitalized to mineral
properties in 2008 (2007 - $137,850).
During the year ended December 31, 2008, the Company issued approximately 12
million common shares for a non-cash consideration of $89,463,617 to acquire
Diamond Core Resources Limited (See Note 3).
The accompanying notes are an integral part of these financial statements.
1. PRINCIPAL BUSINESS ACTIVTIES AND CONTINUATION OF THE BUSINESS
The principal business of BRC DiamondCore Ltd. is the acquisition,
exploration and eventual development of mineral properties. In connection
with the acquisition of Diamond Core Resources Limited ("Diamond Core")
as described in Note 3, the name of the Company was changed from BRC
Diamond Corporation to BRC DiamondCore Ltd. ("BRC DiamondCore" or the
"Company"). For the financial year ended December 31, 2008, the balance
sheet and statement of operations include operations of Canada and
subsidiaries in the Democratic Republic of the Congo ("DRC") and South
Africa, whereas for the year ended December 31, 2007 only operations from
Canada and the DRC were included in the balance sheet and statement of
operations (Note 16).
These financial statements of BRC DiamondCore have been prepared in
accordance with Canadian generally accepted accounting principles
applicable to a going concern, which assumes that the Company will
continue in operation for a reasonable period of time and will be able to
realize its assets and discharge its liabilities in the normal course of
operations. Due to the current significant economic turmoil and global
credit crisis that have impacted the demand for many goods and
commodities, particularly the Company`s commodity of diamonds, the
Company has incurred a significant net loss of $103,001,649 in the
current year (2007 - $1,832,891). The Company`s accumulated deficit as at
December 31, 2008 was $108,890,567 (2007 - 5,888,918). The Company had a
working capital deficit of $13,033,742 as at December 31, 2008 and had a
net decrease in cash of $733,760 and used net cash in operating
activities of $78,224 during the year. While the financial statements
have been prepared on the basis of accounting principles applicable to a
going concern, adverse conditions may cast substantial doubt upon the
validity of this assumption. In the event the Company is unable to
identify recoverable reserves, receive the necessary permitting, or
arrange appropriate financing, the carrying value of the Company`s assets
could be subject to further material adjustment. Furthermore, certain
current market conditions including declining diamond carat prices have
cast significant doubt upon the validity of this assumption.
The Company`s ability to continue operations in the normal course of
business is dependent on several factors, including its ability to secure
additional funding and achieve or sustain profitable operations.
Management is exploring all available options to secure additional
funding including equity and debt financing, sale of non-core assets and
strategic partnerships. In addition, the recoverability of amounts shown
for mineral properties and long-lived assets is dependent upon the
existence of economically recoverable reserves, the ability of the
Company to obtain financing to complete the development of the properties
where necessary and upon future profitable production, or, alternatively,
upon the Company`s ability to recover its spent costs through a
disposition of its interests, all of which are uncertain in the current
climate. It is not possible to determine with any certainty the success
and adequacy of these initiatives, nor the timing of completion of these
initiatives to enable the Company to continue until such time as when
diamond prices recover, and the Company is able to earn positive
operating cash flows.
These financial statements do not include any additional adjustments to
the recoverability and classification of certain recorded asset amounts
and classification of certain liabilities that might be necessary if the
Company was unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
These financial statements represent the consolidated financial
statements of the Company, which includes its accounts and those of its
subsidiaries, BRC Diamond South Africa (Pty) Limited and BRC DiamondCore
Congo SPRL, and the entities acquired during the Diamond Core Resources
(Pty) Limited transaction (Note 3) namely, Diamond Core Resources,
Dikeing Mining (Pty) Ltd, Diamond Core Kimberlite Projects (Pty) Ltd,
Diamond Core Alluvial Projects (Pty) Ltd, Diamond Core Mining and
Exploration (Pty) Ltd, Diamond Core Technical Services (Pty) Ltd, Diamond
Core Trading (Pty) Ltd, Samadi Resources (Pty) Ltd, Samadi Gemsbok (Pty)
Ltd, Samadi Exploration (Pty) Ltd, Samadi Douglas (Pty) Ltd, Prieska
Diamond Mining (Pty) Ltd, Sandstraat Eksplorasie (Pty) Ltd and Sandrif
(Pty) Ltd (collectively the "Subsidiaries") all of which are controlled
through ownership of majority voting interests. All inter-company
balances and charges have been eliminated.
Revenue
Revenue is recognized when diamonds are sold to third parties at the
tender house. As the Company is currently in the development stage, any
revenues earned reduce the carrying value of deferred exploration
expenditures.
Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles ("GAAP") requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. In addition to the going concern assumption,
assets and liabilities which require management to make significant
estimates and assumptions in determining carrying values include mineral
properties, capital assets, asset retirement obligations, future income
taxes, goodwill and stock-based compensation.
Comprehensive income, Financial instruments, Hedges and Equity
All financial instruments are required to be measured at fair value on
initial recognition, except for certain related party transactions. Due
to the short term nature of the Company`s financial assets and
liabilities, management believes that the book value approximates the
fair value. Measurement in subsequent periods depends on whether the
financial instrument has been classified as either loans and receivables,
held-for-trading, held-to-maturity, available-for-sale, or other
liabilities. The classification depends on the purpose for which the
financial instruments were acquired, their characteristics and/or
management`s intent. Management determines the classification of
financial assets and financial liabilities at initial recognition and,
except in very limited circumstances, the classification is not changed
subsequent to initial recognition.
(i) Loans and receivables
Loans and receivables are initially recognized at fair value
including direct and incremental transaction costs and are
subsequently measured at amortized cost, using the effective
interest method.
(ii) Held-for-trading
Financial assets and financial liabilities that are purchased and
incurred with the intention of generating income in the near term,
are classified as held-for-trading. Financial instruments included
in this category are initially recognized at fair value and
transaction costs are taken directly to earnings along with gains
and losses arising from changes in fair value.
(iii) Other liabilities
Financial liabilities, including short-term debt and accounts
payable and accrued liabilities, are classified as "other
liabilities". Other liabilities are initially recognized at
fair value and are subsequently measured at amortized cost
using the effective interest method.
(iv) Transaction costs
Transaction costs with respect to instruments not classified as held-
for-trading are recognized as an adjustment to the cost of
the underlying instruments and are recognized and amortized using
the effective interest method.
(v) Comprehensive income
Comprehensive income is composed of the Company`s net income and
other comprehensive income. Other comprehensive income includes any
unrealized gains and losses on available-for-sale securities,
foreign currency translation gains and losses on the net investment
in self-sustaining foreign operations and changes in the fair market
value of derivative instruments designated as cash flow hedges, all
net of income taxes. The components of comprehensive income are
disclosed in the Consolidated Statements of Comprehensive Loss.
(vi) Derivatives and hedge accounting
Derivative instruments, including embedded derivatives, are recorded
at fair value unless exempted from derivative treatment as normal
purchase and sale. All changes in their fair value are recorded in
income unless cash flow hedge accounting is used, in which case
changes in fair value are recorded in other comprehensive income.
The Company does not currently apply hedge accounting or have
derivative instruments.
The Company designated its financial instruments as follows:
Financial instrument Classification Measurement
Cash Held-for-trading Fair value
Other assets Loans and receivables Amortized
cost
Due from related parties Loans and receivables Amortized
cost
Accounts payable and accrued Other liabilities Amortized
liabilities, other cost
liabilities and debt
Lease Other liabilities Amortized
cost
Mining assets
Exploration costs
Exploration costs are recorded in the statement of operations and deficit
until such time as the Company has legal title to the mineral rights.
Thereafter all exploration and evaluation expenditures are capitalized until
such time as the mining property is capable of commercial production. It will
then be subject to impairment tests when facts and circumstances suggest that
the carrying amount of the assets may exceed their recoverable amount. The
value of diamonds recovered from exploration activities is offset against
exploration costs.
Mine development costs
Mine development costs are capitalized. Capitalized mine development costs
include expenditure incurred to develop new mineral resources, to define
further mineral resources and to expand the capacity of the mine. Amortization
is first charged on new mining ventures from the date on which commercial
production commences. Mine development costs will be amortized over the
expected useful life of the mine. Day to day mining costs are expensed as
incurred.
Land and mineral rights
Undeveloped properties and mineral rights, upon which the Company has not
performed sufficient exploration work to determine whether sufficient
mineralization exists, are carried at original cost.
Land is not depreciated.
Mineral rights are amortized over the expected life of the mine from the date
on which commercial production commences. Where there is little likelihood of
a mineral right being exploited, or the value of an exploitable mineral right
has diminished below cost, a write down is effected.
Non- producing mineral properties
Costs relating to the acquisition, exploration and development of non-
producing resource properties are capitalized until such time as either
economically recoverable reserves are established, the properties are sold or
abandoned, or the value of the particular property is impaired. The excess of
these costs over estimated recoveries is charged to operations. The ultimate
recovery of these costs depends on the discovery and development of economic
reserves or the sale of the mineral rights. The amounts shown for non-
producing resource properties do not necessarily reflect present or future
values.
In addition, the Company`s exploration opportunities in the Democratic
Republic of the Congo (the "DRC") may be subject to sovereign risks, including
political and economic instability, government regulations relating to mining,
military repression, civil disorder, currency fluctuations and inflation, all
or any of which may impede the Company`s activities in this country or may
result in the impairment or loss of part or all of the Company`s interest in
the properties.
The exploration and development opportunities in South Africa must also be
compliant with applicable laws regarding the participation of historically
disadvantaged South Africans in order to register and retain mineral rights.
Capital assets
Capital assets of the Company are recorded at cost. Depreciation of capital
assets is recorded on a straight line basis over the following periods:
Vehicles - four years
Furniture and office equipment - two to seven years
Computer equipment - three years
Leasehold improvements - five years
Processing plant - hours worked / volumes processed
Exploration and mining assets - two to 15 years
Earthmoving equipment - hours worked
The depreciation methods, useful lives and residual values, if not
insignificant, are reassessed annually.
Goodwill
Goodwill represents the excess of the price paid over the fair value
attributed to the net assets, including tangible and identifiable intangible
assets upon acquisition of a business. Goodwill resulting from the acquisition
of a business is not amortized but tested for impairment annually or more
frequently if changes in circumstances indicate a potential impairment. The
impairment test consists of a comparison of the fair value of the reporting
unit to which goodwill is assigned with its carrying amount. Any impairment in
the carrying amount of goodwill is charged to earnings. The Company has
elected to perform its annual impairment test as of December 31st of each
fiscal year.
The impairment test for goodwill is a two-step process. Step one consists of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to the reporting unit. Measurement of the
fair value is based on one or more fair value measures including present value
techniques of estimated future cash flows and a market approach for resources
based on diamond carat estimates. In estimating the fair value of the
reporting unit, the Company is also required to make a number of estimates,
including estimates about future revenue, income taxes, net earnings, overhead
costs, capital expenditure, and the cost of capital. Given the variability of
the future-oriented financial information, a judgement balancing discount and
growth rates enables management to opine whether or not the goodwill balance
has been impaired. If the carrying amount of the reporting unit exceeds the
fair value, step two requires the fair value of the reporting unit to be
allocated to the underlying assets and liabilities of that reporting unit,
resulting in an implied fair value of goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss equal to the excess is recorded in income. The Company has
impaired the entire amount of goodwill that arose on the acquisition of
Diamond Core (Note 3).
Impairment of long-lived assets
The Company reviews and evaluates the carrying value of its exploration and
development properties for impairment when events or circumstances indicate
that the carrying amounts of related assets or groups of assets may not be
recoverable. If the total estimated future cash flows on an undiscounted basis
are less than the carrying amount of the asset, an impairment loss is measured
and assets are written down to fair value. Future cash flows are estimated
based on estimated future recoverable mine production, expected sales prices
and considering current and historical commodity prices, price trends and
related factors, production levels, cash costs of production and capital and
reclamation costs, and the sustainable exploitation of the indicated ore body.
Capitalized interest
Interest on borrowings related to the financing of major capital projects
under construction is capitalized during the construction phase as part of the
cost of the project.
Overburden removal costs
The costs of removing overburden material to access mineral reserve deposits,
referred to as "stripping costs" are accounted for as variable production
costs to be included in the cost of inventory produced, unless the overburden
removal activity can be shown to be a betterment of the mineral property, in
which case these costs are capitalized. Betterment occurs when the overburden
removal activity provides access to additional sources of mineral deposit
reserves that will be produced in future periods which would not have
otherwise been accessible in the absence of the stripping activity.
Asset retirement obligations
The estimated fair value of an asset-retirement obligation is recognized as a
liability in the period incurred. A corresponding amount is added to the
carrying amount of the associated asset when incurred and depreciated over the
asset`s estimated useful life. The liability is accreted over time through
charges to earnings to reflect changes in its present value. Actual
expenditures incurred are charged against the accumulated obligation. The
asset-retirement obligation is reviewed by management annually and revised for
changes in future estimated costs and regulatory requirements.
Stock options
The Company`s stock option plan is referred to in Note 11(b). Stock-based
compensation is recorded using the fair value method of accounting for stock
options granted to directors, officers and employees whereby the weighted
average fair value of options granted is recorded as compensation expense in
the consolidated financial statements. Compensation expense on stock options
granted is recognized and amortized over the vesting period, with the offset
being credited to contributed surplus, which will transfer to share capital if
the related options are converted. Compensation expense on stock options
granted to non-employees is recorded as an expense in the period at the
earlier of the completion of performance and the date the options are vested
using the fair value method. Any consideration paid for shares purchased under
this plan is credited to share capital.
Restricted cash
Restricted cash to the value of $308,014 is held by various financial
institutions as security for guarantees the Company has provided to the
Department of Minerals and Energy Affairs for the rehabilitation of land
disturbed by mining and exploration and to Eskom, the South African
electricity utility, in respect of electricity payment deposits.
Corporate transaction costs
Corporate transaction costs incurred in connection with business combinations
are recognized as an asset when the transaction is specifically identified and
the completion of such transaction is considered to be more likely than not.
Upon completion of the transaction, corporate transaction costs are included
in the costs of the acquired business and allocated to the acquired net
assets. Such corporate transaction costs are expensed when the transaction is
abandoned.
Income taxes
The Company follows the liability method of accounting for income taxes.
Under this method, future income taxes are recognized based on the expected
future tax consequences of differences between the carrying amount of balance
sheet items and their corresponding tax basis, using the substantively enacted
income tax rates for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce future
income tax assets to amounts expected to be realized.
Loss per share
Basic loss per share is computed by dividing net loss by the weighted average
number of shares outstanding during the reporting period. Due to reported
losses, diluted loss per share data is the same as basic loss per share as the
assumed exercise of stock options and warrants are anti-dilutive (Note 11(d)).
Foreign currency translation
These consolidated financial statements are presented in Canadian dollars. The
Company`s functional currency is the Canadian dollar.
Transactions of self-sustaining foreign operations are translated into
Canadian dollars using the current-rate method. Under this method, assets and
liabilities are translated at the rate of exchange in effect at the balance
sheet date while revenue and expense items (including depletion and
amortization) are translated at the average rates of exchange prevailing
during the year. Exchange gains and losses that result from the translation
are deferred and disclosed as a component of "accumulated other comprehensive
income (loss)". The operations in South Africa are considered self-sustaining
and their functional currency is the South African rand.
Transactions in foreign currencies of integrated foreign operations are
translated into Canadian dollars at rates of exchange at the time of such
transactions. Monetary assets and liabilities are translated at current rates
of exchange with the resulting gains or losses included in income. Non-
monetary items are translated at historical exchange rates. Revenue and
expense items are translated at the average rates of exchange, except
depletion and amortization which are translated at the rates of exchange
applicable to the related assets. Gains or losses resulting from these
translation adjustments are included in income. The activities in the DRC are
considered integrated.
Transactions denominated in a foreign currency are translated into Canadian
dollars at the rate of exchange in effect at the time of such transactions.
Monetary assets and liabilities denominated in foreign currency are translated
at the rate of exchange at the balance sheet date. The resulting gains and
losses are included in income.
Variable interest entities (VIEs)
VIEs are consolidated by the Company when it is determined that it will, as
the primary beneficiary, absorb the majority of the VIEs expected losses or
expected residual returns. The Company currently does not have any interests
in VIEs.
New accounting standards
On January 1, 2008, the Company adopted the following CICA accounting
standards which were effective for fiscal years beginning on or after October
1, 2007 and January 1, 2008. Adoption of these standards is on a prospective
basis without retroactive restatement of prior periods.
a) General Standards of Financial Statement Presentation
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 December 31, 2008 and for the year then ended.
b) Inventories
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.
c) Financial Instruments - Disclosure and Financial Instruments - Presentation
CICA Handbook Section 3862, Financial Instruments - Disclosures, and Handbook
Section 3863, Financial Instruments - Presentation, enhance existing
disclosure requirements and require entities to provide disclosures in their
financial statements that enable users to evaluate the significance of
financial instruments on the entity`s financial position and performance as
well as the nature and the risks arising from financial instruments and non-
financial derivatives. 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 disclosure, classification and measurement of the Company`s financial
statements, because the Company is not currently exposed to risk arising from
financial instruments.
The new disclosures pursuant to these new Handbook Sections are included in
Note 15 to the consolidated financial statements.
d) Capital Disclosures
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 new disclosures pursuant to this new Handbook Section are included in Note
14 to the consolidated financial statements.
The following accounting pronouncements have not yet been adopted:
a) 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.
b) 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. Diamond Core had successfully adopted IFRS
prior to the acquisition thereof by the Company and currently reporting its
statutory returns in South Africa in terms of IFRS. This will facilitate the
adoption of IFRS. The adoption of IFRS will make it possible for the Company
to re-assess the fair values of assets and liabilities on their balance sheet
under IFRS 1, which could impact the balance sheet significantly if the
impairment imposed needs to be reassessed.
c) 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 filings as of
March 31, 2008.
d) Business Combinations/Consolidated Financial Statements/Non-Controlling
Interests
In January 2009, the CICA adopted sections 1582, "Business Combinations",
1601, "Consolidated Financial Statements", and 1602, "Non-Controlling
Interests" which superseded current sections 1581, "Business Combinations" and
1600 "Consolidated Financial Statements". These Sections will be applied
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
January 1, 2011. Earlier adoption is permitted. If an entity applies these
Sections before January 1, 2011, it will disclose that fact and apply each of
the new sections concurrently. These new sections were created to converge
Canadian GAAP with IFRS. The Company is currently evaluating the impact of the
adoption of these changes on its consolidated financial statements.
3. ACQUISTION OF DIAMOND CORE RESOURCES LIMITED
In July 2007, the Company and Diamond Core, a South African diamond
exploration company listed on the JSE Limited, 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.
Previously 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
provided 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. Since the outcome and amount of the contingency cannot be
determined without reasonable doubt, no recognition has been made for this in
these financial statements.
Also in connection with the acquisition by the Company of all of the
outstanding shares of Diamond Core, 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") were substituted with new stock options of BRC DiamondCore (the
"Replacement Options"), so as to allow 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.
As at December 31, 2007, the Company had deferred transaction costs of
$2,200,165 in relation to the Diamond Core acquisition. An additional $206,859
expenses was incurred in 2008 and are included in the purchase price equation
for the year ended December 31, 2008.
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 (date of
announcement), BRC DiamondCore issued 12,089,678 common shares valued at
$89,463,617 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 goodwill.
The allocation of the purchase price to the assets and liabilities acquired as
presented in these consolidated financial statements was finalized in the
fourth quarter of 2008. The revisions to the results previously reported are
not material. Venmyn Rand (Proprietary) Limited ("Venmyn") performed the fair
values of certain mineral properties based upon the exchange rates, inflation
levels, diamond prices, expected resource levels, mine life and extraction
costs prevailing at that date.
The following table summarizes the components of the total purchase price and
net assets acquired. It reflects fair-value adjustments for identifiable
assets and liabilities acquired.
$`000
Issuance of 12,089,678 BRC DiamondCore common 89,464
shares
Issuance of Replacement Options 2,477
Transaction costs 2,407
Purchase price 94,348
The allocation of the purchase price to the net
assets acquired is as follows:
Cash 2,270
Trade and other receivables 1,253
Inventories 192
Mineral rights 14,188
Property, plant and equipment 17,051
Deferred exploration costs 8,891
Trade and other payables (2,912)
Taxation (126)
Asset retirement obligation (1,017)
Net assets acquired 39,790
Goodwill 54,558
Fair value of net assets acquired $94,348
The consideration and transaction costs of $94,347,641 exceeded the carrying
value of the net assets acquired by $54,558,329 which has been recorded as
goodwill.
At December 31, 2008, the fair value of the South African reporting unit,
based on undiscounted projected cash flows, was less than the carrying value.
As a result, the Company recognized an impairment of the full amount of the
Diamond Core goodwill of $54,558,329. The decrease in the fair value was
primarily due to the decline in price per carat and general economic
conditions.
4.INVENTORY
As at As at
December 31, 2008 December 31,
2007
Consumables $ $
121,987 -
$ $
121,987 -
5. RELATED PARTY TRANSACTIONS
As at As at
Balances payable December 31, 2008 December 31, 2007
Macleod Dixon LLP $ $
744,641 269,232
Scallan Project 13,200 29,000
Facilitation (Pty) Ltd
Sterling Portfolio 11,000 -
Securities (g)
$ $
768,841 289,232
For the year For the year
ended ended
Transactions December 31, December 31, 2007
2008
Macleod Dixon LLP (a) $ $
299,954 560,794
Banro Corporation (b) - 419,849
SFW Village (c) 99,996 79,997
AT Kondrat (d) 99,999 33,333
DK Madilo (e) 48,000 16,000
Scallan Project 58,091 -
Facilitation (Pty) Ltd
(f)
Sterling Portfolio 11,000 -
Securities Inc.(g)
$ $ 1,109,973
617,040
a) During the year ended December 31, 2008, legal fees and related costs of
$299,954 (December 31, 2007 - $665,753) incurred in connection with general
corporate matters as well as the Diamond Core acquisition (see Note 3) were
billed by a law firm of which one partner is a director and officer of the
Company.
b) Banro Corporation ("Banro") owns 3,744,032 common shares representing a
14.35% (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
year ended December 31, 2008, the Company incurred $11,000 in office rental
expenses for contribution to expenses for office rental (December 31, 2007 -
$419,849).
c) 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.
d) Consulting fees are paid to Mr. Kondrat who is a non-executive director of
the Company.
e) Consulting fees paid to Mr. Madilo, who is currently an officer of the
Company and was a director of the Company until February 2008.
f) Consulting fees in respect of services to the Company prior to Mr. Scallan
entering into an employment contract with the Company. Mr. Scallan is now an
officer and a director of the Company and is the sole shareholder of Scallan
Project Facilitation (Pty) Ltd.
g) During 2008, Sterling Portfolio Securities Inc. advanced a short term loan
to the Company. The officer and director of Sterling Portfolio Securities Inc.
is a non-executive director of the Company.
All amounts due to related parties are included in the balance sheet in
accounts payable and accrued liabilities. These amounts 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.
6. DEBT
The Company has a loan facility established with a Canadian financial
institution which bears interest at prime rate plus 1% per annum. The
effective interest rate for the twelve months ended December 31, 2008 was
5.75% (December 31, 2007 - 7.25%). At December 31, 2008, the balance of this
short term debt was $6,172,317 (December 31, 2007 - $3,022,899), including
accrued interest of $307,872 (December 31, 2007 - $22,899). This loan facility
has been utilized to fund exploration activities in the DRC and all interest
of $307,872 was capitalized to exploration cost. This loan facility, which is
still in place, is guaranteed by Banro Corporation ("Banro"), a significant
shareholder of the Company. The Company has undertaken to release Banro from
this guarantee as soon as possible. The Company is in breach of an agreement
between Banro and the Company to have repaid the loan to the institution by
July 28, 2008. Banro has not exercised its rights in terms of the Company`s
undertaking to repay the loan to the institution.
7. LEASE LIABILITIES
As at As at
December 31, December 31,
2008 2007
Total lease liability $ $
649,396 -
Less: Current portion (149,912)
included in accounts payable -
and accrued liabilities
$ $
499,484 -
This liability is secured by a finance lease over vehicles with a carrying
amount of $61,035 and earthmoving equipment with a carrying amount of
$466,377. The lease is payable in monthly installments that varies and the
final date of repayment is on October 1, 2013 and October 1, 2012. The
applicable interest rate is 15.86%, which varies with the South African prime
rate, on the South African rand denominated obligation. The monthly
installments in dollar terms will decrease with any lowering of the South
African interest rates and any weakening of the South African currency.
Payments
2009 $
149,912
2010
135,298
2011
142,303
2012
209,887
2013 11,996
$
649,396
8. ASSET RETIREMENT OBLIGATIONS
The provision for the site closure and reclamation costs relate to the
Silverstreams, Paardeberg East and De Kalk projects in South Africa.
As at As at
December 31, December 31,
2008 2007
Balance at beginning $ $
of period - -
Changes during the 2,131,648 -
period
Reclamation - -
obligation
recognized
Accretion expense - -
Foreign exchange - -
revaluation
Balance at end of $ $
period 2,131,648 -
The estimated amount of reclamation costs at December 31, 2008, is $615,036
for the Paardeberg East project, $941,096 for the Silverstreams project and
$15,729 for the De Kalk project. The estimated amount for the dismantling of
the processing plants are at Paardeberg East is $249,241 and at Silverstreams
is $310,546.
The Company had cash reclamation deposits totaling $235,504 (December 31, 2007
- $nil) as determined by the regulatory authorities in South Africa, as well
as cash guarantees with Eskom (provider of electricity in South Africa)
totaling $72,510. The deposits are invested in interest bearing money market
linked investments at rates ranging from 10.5% to 11%.
The above provision is for the future environmental obligations including the
rehabilitation of land disturbed by prospecting and mining operations and the
mine closure. The environmental rehabilitation obligation was calculated by
taking into account the Company`s environmental management plans and current
technology. The provision was increased based on an independent study
performed. The provision was calculated according to the Department of
Mineral and Energy guidelines and takes into account reductions through the
application of innovative rehabilitation methods.
In view of the uncertainties concerning environmental remediation, the
ultimate cost of asset retirement obligations could differ materially from the
estimated amounts provided. The estimate of the total liability for asset
retirement obligation costs is subject to change based on amendments to laws
and regulations and as new information concerning the Company`s operations
becomes available. Future changes, if any, to the estimated total liability as
a result of amended requirements, laws, regulations and operating assumptions
may be significant and would be recognised prospectively as a change in
accounting estimate, when applicable.
9. MINERAL PROPERTIES
With all the data available from the DRC exploration activities of 2007 and
2008, BRC was able to adjust its permit portfolio in order to focus on the
most prospective areas. For that reason, two projects in Northern DRC, Zongo
and Businga, and four projects in the southern DRC, Ilunga, Vangu Phambu,
Lubao and most of Candore, were closed and the exploration permits
relinquished.
As at December 31, 2008, the Company`s South African subsidiaries held title
to two mining rights and 11 prospecting rights in the Northern Cape and Free
State Provinces of South Africa. The projects include Silverstreams and
Paardeberg. Silverstreams is one of the Company`s most advanced exploration
projects located on the northern bank of the Orange River in the Northern Cape
province. Paardeberg East contains a number of known kimberlite bodies. Other
South African alluvial opportunities include Uitdraai, De Kalk, the Sanddrift
and Muishoek projects along the existing or historical courses of the Orange
River. Sanddrift and Muishoek are immediately adjacent to the Silverstreams
project, with the Koa Valley project in proximity to the town of Pofadder in
the Northern Cape.
Since 2006, Diamond Core had entered into transactions with Black Economic
Empowerment ("BEE") partners in order to satisfy the requirements of the
transformed mining and minerals industry legislation of South Africa,
specifically in compliance with the Broad Based Socio-Economic Empowerment
Charter of the Mineral and Petroleum Resources Development Act (Act 28 of
2002; MPRDA). Under the MPRDA, mining companies are obliged to, among other
requirements, have negotiated a BEE equity ownership agreement through which
historically disadvantaged South Africans (HDSAs) own 26% of the issued equity
in the operational assets by 2014. In the case of previously state held
rights, HDSA ownership of 51% is required before granting of the right to a
private company.
Through its subsidiaries, the Company has BEE transactions with Selang
Resources (Pty) Limited ("Selang") and previously had a BEE transaction with
Sefalana Mineral Resources (Pty) Limited ("Sefalana"). Selang acquired 50% of
the issued share capital of Samadi Gemsbok Resources (Pty) Limited (Uitdraai
Portion 9), Diamond Core Alluvial Projects (Pty) Limited (Muishoek project)
and Sandrif Exploration (Pty) Limited (option over Sanddrift project).
Sefalana was to acquire 50% of the issued ordinary share capital of each of
the subsidiaries of Samadi Resources (SA) (Pty) Limited (Samadi Resources;
Silverstreams, Koa River Valley, De Kalk and Uitdraai RE of Portion 1
projects) other than Samadi Gemsbok Resources (Pty) Limited.
Sefalana subsequently failed to fulfill certain conditions precedent of the
agreements and was obliged to offer the said shares to Samadi Resources.
Samadi Resources then held the entire issued ordinary share capital of the
subsidiaries. Sefalana is disputing this. Diamond Core has entered into
correspondence to relieve Sefalana as Samadi Resources` BEE partner. In 2008,
Sefalana was replaced by Leswika Resources (Pty) Limited ("Leswika"). Leswika
holds 15% of the issued share capital of the subsidiaries of Samadi Resources
(Silverstreams, Koa River Valley, De Kalk and Uitdraai RE of Portion 1
projects) other than Samadi Gemsbok Resources (Pty) Limited. The agreement
further allows Leswika to attain an additional 11% of the shareholding at fair
market value.
The Company will require a BEE partner for the Paardeberg East project prior
to the Company`s old order mining license over the project expiring in the
second quarter of 2009. Although the Company is not currently required to have
concluded any agreement with a BEE partner in relation to this project, it
will be required to do so at the time that it lodges this old order mining
right for conversion with the Department of Minerals and Energy, namely, by
April 30, 2009. Such application would need to include a social and labour
plan that is compliant with the broad-based empowerment objectives of the
MPRDA and the Mining Charter (which sets the framework, targets and timetable
for effecting the participation of historically disadvantaged South Africans
in the mining industry).
The Company has incurred deferred exploration expenditures and mineral
property costs, (net of write offs of $36,608,544 and net proceeds on diamond
sales of $8,510,635 and diamond inventory on hand of $35,461) in the DRC and
in South Africa as at December 31, 2008 as follows:
Group
Cumulative Year ended Year ended
from December December
inception 31, 2007 31, 2008
in 1990 to
December
31, 2008
Mineral property costs
Canada $ - $(16,297) $ -
DRC 2,713 - -
South Africa 3,511,886 - 3,511,886
3,514,599 (16,297) 3,511,886
Deferred exploration
expenditures
DRC 5,560,540 6,745,394 (8,625,241)
South Africa - - -
5,560,540 6,745,394 (8,625,241)
Total mineral properties $ $6,729,097 $(5,113,355
and deferred exploration 9,075,139 )
expenditures
Fenton/Menary project (Canada)
Cumulative Year ended Year ended
from December December
inception 31, 2008 31, 2007
in 1990 to
December
31, 2008
Mineral property costs
Claims and staking $66,306 $ $
-
Write-off (66,306) - (16,297)
Total mineral property - - (16,297)
costs
Deferred exploration
expenditures
Field camp expenses 88,828 - -
Surveying 60,515 - -
Geochemistry 5,554 - -
Geology - contract 47,378 - -
geologists
Drilling 232,356 - -
Professional fees 10,525 - -
Write-off (445,156) - -
Total deferred - - -
exploration expenditures
Total mineral properties $- $- $(16,297)
and deferred exploration
expenditures
DRC
Mineral properties in the DRC (which comprise the following projects: Lubao,
Kwango River, Tshikapa (Kwango Mines), Tshikapa (Candore), Tshikapa (Acacia),
Zongo, Businga, Bomili, Ilunga, King`s mines, BCM, Caspian and Coexo).
Cumulative Year ended Year ended
from December December
inception 31, 2007 31, 2008
in 1990 to
December
31, 2008
Mineral property costs
Claims and staking $2,713 $ - $ -
Total mineral property 2,713 - -
costs
Deferred exploration
expenditures
Administrative and 4,546,009 1,777,610 1,718,882
office support
Depreciation 541,629 137,850 259,011
Drilling 486,357 179,348 90,365
Field camp expenses 2,822,468 419,120 1,396,864
Geochemistry 329,145 230,306 -
Geology - contract 1,600,765 398,779 -
geologists
Geophysics 2,369,677 688,025 267,775
Option fees 308,443 120,769 -
Permits and surface 1,848,667 586,245 522,905
taxes
Professional fees 613,934 33,089 461,605
Remote sensing and 46,729 28,129 -
surveying
Stock-based 1,988,637 1,043,233 945,404
compensation
Transport cost and 3,223,874 1,102,891 877,742
helicopter
Unrealised foreign 1,622,685 - 1,622,685
exchange difference
Write off (16,788,479 - (16,788,479
) )
Total deferred 5,560,540 6,745,394 (8,625,241)
exploration expenditures
Total mineral properties $5,563,253 $6,745,394 $(8,625,241
and deferred exploration )
expenditures
South Africa
Cumulative Year ended Year ended
from December December
inception in 31, 2007 31, 2008
1990 to
December 31,
2008
Mineral property costs
Acquisition of Diamond $13,152,475 $- $13,152,475
Core
Write off (9,640,589) - (9,640,589)
Total mineral property 3,511,886 - 3,511,886
costs
Deferred exploration
expenditures
Acquisition of 6,505,442 - 6,505,442
Diamond Core
Administrative and 2,002,163 - 2,002,163
office support
Depreciation 2,345,289 - 2,345,289
Field camp expenses 6,537,896 - 6,537,896
Geology - contract 99,592 - 99,592
geologists
Geophysics 26,285 - 26,285
Insurance 112,379 - 112,379
Inventory losses (20,508) - (20,508)
Permits and surface 5,262 - 5,262
taxes
Professional fees 51,159 - 51,159
Rehabilitation 1,669,526 - 1,669,526
Security 1,771,455 - 1,771,455
Surveying 66,383 - 66,383
Transport cost 148,666 - 148,666
Unrealised foreign (2,666,340) - (2,666,340)
exchange difference
18,654,649 - 18,654,649
Net proceeds on diamond (8,475,174) - (8,475,174)
sales
Write off (10,179,475) - (10,179,475
)
Total mineral properties $3,511,886 $- $3,511,886
and deferred exploration
expenditures
The Company recognized asset impairments totalling $36,608,543 consisting of
impairments to mineral properties ($9,640,589) and deferred exploration costs
($26,967,954) where the carrying value of certain assets exceeded their
estimated fair value.
10. CAPITAL ASSETS
As at December 31,2008
Cost Accumulat Impairment Net
ed Book
Depreciat
ion
Value
Computer $ 293,707 102,546 $ - $ 191,16
equipment 1
Earthmoving 5,753,329 1,397,764 644,712 3,710,
equipment 853
Exploration and 457,912 195,604 35,378 226,93
mining assets 0
Furniture and 100,052 16,935 9,715 73,402
Office equipment
Land and 539,260 42,761 - 496,49
buildings 9
Leasehold 226,592 225,639 - 953
improvements
Processing plant 11,180,482 1,247,745 6,105,476 3,827,
261
Vehicles 711,451 390,490 1,065 319,89
6
$ 19,262,785 $ $ 8,846,
3,619,484 6,796,346 955
As at December 31, 2007
Accumula Net
Cost ted Book
Deprecia Value
tion
Computer equipment $ - $ - $ -
Earthmoving equipment - - -
Exploration and mining assets 318,08 82,616 235,46
0 4
Furniture and Office equipment 19,439 15,495 3,944
Land and buildings - - -
Leasehold improvements 225,12 225,121 -
1
Processing plant - - -
Vehicles 538,53 184,279 354,25
8 9
$ 1,101, $ 507,511 $ 593,66
178 7
During 2008, $2,604,300 of depreciation was included in mineral properties and
deferred exploration expenditures (see Note 9) (2007 - $137,850).
The Company recognized asset impairments totalling $6,796,346 related to
capital assets where the carrying value of certain assets exceeded their
estimated fair value.
11. CAPITAL STOCK
a)Share capital
Number of Amounts
shares
Balance, December 31, 2006 12,424,032 $ 10,212,954
Shares issued for cash 1,000,000 4,970,541
Exercise of warrants 114,000 510,720
Exercise of options 113,600 132,309
Balance, December 31, 2007 15,826,524
13,651,632
Shares issued for the 12,089,678 89,463,617
acquisition of Diamond Core
Shares issued for cash 350,000 525,000
Balance, December 31, 2008 $ 105,815,141
26,091,310
On December 31, 2008, the authorized share capital of the Company is
comprised of an unlimited number of common shares.
On February 11, 2008, BRC DiamondCore acquired all of the outstanding
shares of Diamond Core on the basis of 1 BRC DiamondCore share for every
24.5 Diamond Core shares resulting in the issuance by the Company of a
total of 12,089,678 common shares. This acquisition was effected by way
of a scheme of arrangement under the laws of the Republic of South
Africa. See note 3.
In July 2008, the Company completed a non-brokered private placement of
350,000 common shares of the Company at a price of $1.50 per share
resulting in aggregate gross proceeds of $525,000.
b)Stock option plan
The Company has a stock option plan under which non-transferable options
to purchase common shares of the Company may be granted by the Board of
Directors to any director, officer, employee or consultant of the Company
or any subsidiary of the Company. This stock option plan contains
provisions providing that the term of an option may not be longer than
five years and the exercise price of an option shall not be lower than
the last closing price of the Company`s shares on the TSX prior to the
date the stock option is granted. Unless the Board at any time makes a
specific determination otherwise, a stock option and all rights to
purchase Company shares pursuant thereto shall expire and terminate
immediately upon the optionee who holds such stock option ceasing to be
at least one of a director, officer or employee of or consultant to the
Company or a subsidiary of the Company, as the case may be. One-quarter
(1/4) of the stock options granted pursuant to the stock option plan vest
immediately on their date of grant and another one-quarter of such stock
options vest on each of the 6-month, 12-month and 18-month anniversaries
of the grant date.
As at December 31, 2008, the Company had outstanding under the stock
option plan stock options to acquire 3,876,400 (December 31, 2007
-1,526,400) common shares of the Company at a weighted-average price of
$2.16 (December 31, 2007 - $3.54) per share.
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2008:
Date Number Option Option Number Option Exer Fair Expir
of outsta s s outsta s cise valu y
Grant nding grante Exerci nding Exerci pric e Date
at d sed, at sable e date
12/31/ during Expire 12/31/ at of
2007 the d or 08 12/31/ gran
year Forfei 08 t
ted
11/19/ 70,000 - - $ $ 11/19
03 70,000 - 0.50 0.42 /08
04/14/ 210,00 - - 210,00 210,00 $ $ 04/14
04 0 0 0 1.50 1.24 /09
10/06/ 50,000 - - 50,000 50,000 $ $ 10/06
04 2.00 1.73 /09
03/04/ 16,400 - - 16,400 16,400 $ $ 03/04
05 2.10 1.78 /10
03/18/ 225,00 - - 225,00 225,00 $ $ 03/18
05 0 0 0 2.50 1.76 /10
04/29/ 225,00 - - 225,00 225,00 $ $ 04/29
05 0 0 0 2.50 2.14 /10
06/29/ 200,00 - - 200,00 200,00 $ $ 06/29
06 0 0 0 3.75 2.16 /11
04/09/ 300,00 - - 300,00 300,00 $ $ 04/09
07 0 0 0 5.50 3.25 /12
08/03/ 230,00 - - 230,00 172,50 $ $ 08/03
07 0 0 0 8.00 2.85 /12
08/28/ - 2,420, - 2,420, 605,00 $ 08/28
08 000 000 0 $ 0.77 /13
1.05
3,876,
1,526, 2,420, 70,000 400 2,003,
400 000 900
During 2008, the Company recognized in the statement of operations as stock-
based compensation expense $611,200 (2007 - $nil) representing the fair value
of stock options previously granted to employees, directors and officers under
the Company`s stock option plan. An amount of $1,073,250 related to stock
options were issued to employees and officers of the Company and $16,000
related to stock options issued to a consultant of the Company`s subsidiary in
the DRC was capitalized as deferred exploration expenditures. These amounts
were credited accordingly to contributed surplus in the balance sheet.
The Black-Scholes option-pricing model was used to estimate the fair values of
all stock options granted based on the following factors:
(i) risk-free interest rate: 3.075% (2007 - 4.11% to 4.53%)
(ii) expected volatility: 95% (2007 - 62%)
(iii) expected life: 5 years (2007 - 5 years)
(iv) expected dividends: $Nil (2007 - $Nil)
c) Replacement Options
In connection with the acquisition by the Company of all of the outstanding
shares of Diamond Core (see note 3), 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") were substituted with new stock options of BRC DiamondCore (the
"Replacement Options"), so as to allow 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. At December 31, 2008, 340,885 of these options had been cancelled.
d) Loss per share
The loss per share figures for 2008 and 2007 are calculated using the weighted
average number of shares outstanding during the respective accounting periods
amounting to 24,546,305 and 13,243,967 common shares, respectively. The
calculations of basic and diluted loss per share amounts are identical. All
common share options and warrants were excluded from the calculation of
diluted loss per share as their effect would have been antidilutive.
e) Contributed Surplus
Year ended Year ended
December 31, December 31,
2008 2007
Balance, beginning of the $ $
year 2,757,191 1,552,807
Options granted 1,700,450 1,263,134
Acquisition of Diamond 2,477,000 -
Core grant
Options forfeited - (58,750)
Balance, end of the year $ $
6,934,641 2,757,191
f) Accumulated other comprehensive income
Year ended Year ended
December 31,
2008
December 31,
2007
Balance, beginning of $ $
the year - -
Adjustment for (13,950)
cumulative unrealized
gain (loss) on available- -
for-sale investment on
January 1, 2007
Realized gain on - 13,950
available-for-sale
investment
Unrealized foreign (2,370,104) -
currency loss on self
sustaining foreign
operation in South
Africa
Balance, end of the year $ (2,370,104) $
12. INCOME TAXES
The Company uses the asset and liability method to determine future income
taxes. Under this method, future tax assets and liabilities are determined
based on temporary differences between the carrying amount and the tax bases
of assets and liabilities, and measured using the tax rates substantively
enacted at the balance sheet date.
The provision for income taxes is at an effective tax rate which differs from
the basic corporate tax rate for the following reasons:
Year ended December 31, 2008 2007
Combined basic Canadian federal
and
Provincial income tax 33.5% 36.12%
rates
Recovery of income taxes
Based on above rates $
(662,040)
Increase resulting from: $
Foreign rate differential 2,291,000
Difference in future tax (34,505,5 202,035
rates 52)
Stock-options expense 565,253 79,428
Write off of goodwill 18,277,04 -
0
Other Non Deductible 398,156 -
expenses
Impairment of assets 12,489,13 -
8
Unrecognized benefit of 484,965 380,577
losses
$ - $
-
The following information summarizes the principal temporary differences,
unused tax losses, and related future tax effect:
2008 2007
Future tax assets
Non-capital losses $ $
10,792,789 1,178,785
Rehabilitation provision 596,861
Mineral properties 7,051,793 148,324
Net capital losses 100,263 100,263
Other expenses and 159,201 125,882
financing costs
Capital assets 1,968,262 32,642
Gross future tax asset 20,669,169 1,585,896
Future tax liability-investment - -
Net future tax asset before 20,669,169 1,585,896
valuation allowance
Valuation allowance (1,585,89
(20,669,169) 6)
Net future tax asset $ $
- -
The Company has not recognized the benefit of these losses in the financial
statements. The Company concluded that the criteria of more likely than not
that the benefits of the future income tax assets would be realized prior to
their expiration had not been met.
As at December 31, 2008, the Company has available non-capital losses of
approximately $33,294,028 that may be carried forward to apply against future
South African taxable income for tax purposes, which will not expire. The
Company also has available at December 31, 2008, Canadian non-capital losses
of approximately $5,071,000 If not utilized, these losses will expire as
follows:
2009 $
193,000
2010
397,000
2011 355,000
2015 615,000
2026 480,000
2027 1,818,000
2028 1,213,000
$
5,071,000
13. COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company is committed to the payment of the surface fees and taxes referred
to in Note 8. For 2009, these fees and taxes are estimated to be
approximately US$120,000 compared to US$520,000 incurred in 2008. The surface
fees and taxes are required to be paid annually under the DRC Mining Code in
order to keep PRs in good standing.
In addition, as at December 31, 2008, the Company had a bank guarantee of
US$4,373 (2007 - $4,698) with respect to expenses related to a mitigation and
rehabilitation plan required from holders of PRs under the DRC Mining Code.
The Company is in the process of exercising an option agreement to secure an
equity interest in prospective ground currently held under option. The Company
expects to pay US$350,000 as an option exercise fee.
In 2006, Samadi Resources, a 100% subsidiary of Diamond Core, entered into a
transaction with Sefalana ("Sefalana transaction"). In terms of the Sefalana
transaction, Sefalana acquired 50% of the issued ordinary share capital and
loan accounts of the Samadi subsidiaries and was, pursuant to the Sefalana
preference share agreement and subject to the fulfilment of certain conditions
precedent, to subscribe for preference shares in the capital of the Samadi
subsidiaries. Certain of the conditions precedent were not timeously
fulfilled. Accordingly, Sefalana was in terms of the Sefalana shareholders
agreement deemed to have offered its ordinary shares in the Samadi
subsidiaries to Samadi Resources which was deemed to have accepted such offer.
As such, Samadi Resources currently holds the entire issued ordinary share
capital of the Samadi subsidiaries. Sefalana is disputing Samadi Resources`
position. The Company has entered into correspondence with the Department of
Minerals and Energy regarding the exit of Sefalana as Samadi Resources` BEE
partner.
The Company has entered into surface use agreements in respect of prospecting
operations conducted. The terms of the surface use agreements typically
include a distinction between prospecting and mining activities and provide
for an appropriate notice period. The Company`s mining and exploration
activities are subject to various federal, provincial and state laws and
regulations governing the protection of the environment. These laws and
regulations are continually changing and generally becoming more restrictive.
The Company conducts its operations so as to protect public health and the
environment and believes its operations are materially in compliance with all
applicable laws and regulations. The Company has made, and expects to make in
the future, expenditures to comply with such laws and regulations.
In addition to the above matters, the Company and its subsidiaries are also
subject to routine legal proceedings and tax audits. The Company does not
believe that the outcome of any of these matters, individually or in
aggregate, would have a material adverse effect on its consolidated losses,
cash flow or financial position.
Labour disputes
At year end the Company was in dispute with two of its previous directors. One
of those individuals applied for a summary judgment in the High Court; the
application was dismissed and the Company was granted leave to defend his
claim. The matter will now proceed in the High Court on an opposed basis.
The other individual has referred two disputes to the CCMA in Johannesburg and
an action to the High Court in that same jurisdiction. He elected to withdraw
an application for summary judgment.
There is a dispute with an engineering contractor, over the design and
installation of the Paardeberg diamond recovery plant. Pleadings in the matter
have closed in relation to the contractor`s claim of $158,613 and the
Company`s counter claim of $368,363. A trial date has been set for May19,
2010.
The company believes that these claims are without merit and are vigorously
defending these actions.
The following contractual obligations exist at December 31, 2008:
Total < 1 year 1 - 3 years
Operating lease $126,077 $104,416 $21,661
commitments
14. 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 year ended December 31, 2008.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
a. Fair value of financial instruments
The Company has classified financial instruments as follows:
Year ended Year ended
December 31, December 31,
2008 2007
Financial assets
Held-for-trading, measured
at fair value
Cash $198,085 $931,845
Restricted Cash 308,014 -
Loans and receivables,
measured at amortised cost
Other assets 562,144 402,652
Financial liabilities
Other liabilities,
measured at amortised cost
Accounts payable and $7,542,084 $2,599,292
accrued liabilities
Debt $6,172,317 $3,022,899
Lease $499,484 $-
b. Allowance account for credit losses
Year ended Year ended
December December 31,
31,2008 2007
Accounts receivable $ - $ -
Allowance for doubtful - -
accounts
Other - 403
$ - $403
Allowance for credit losses is included in prepaid expenses and other
receivables.
c. Fair value of financial instruments
The balance sheet carrying amounts for cash, restricted cash and other assets,
accounts payable, debt and other 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. Cash is 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, the Company`s 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 on hand, cash generated from operations, existing credit
facilities, leases, and debt and equity markets.
Weakening global economic conditions have led to a significant weakness in
exchange traded commodity prices in recent months, including diamond prices.
In general, credit market conditions have increased the cost of obtaining
capital and limited the availability of funds.
Given the Company`s financial position, available credit facilities and the
fact that there are scheduled maturities on its debt in 2008, the Company
currently expects a need to access debt and equity markets for financing over
the next twelve months. However, because the duration of the 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 the projected cash flows from its
operations and available project specific facilities in order to preserve its
balance sheet and maintain its liquidity position, as well as selling non-core
assets.
Management currently believes that based on its financial position and
liquidity profile at December 31, 2008, the Company will be able to satisfy
its current and long-term obligations. As at December 31, 2008, these
consolidated financial statements have been prepared in accordance with
Canadian GAAP applicable to a going concern (Note 1).
Currency risk
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Monetary assets and liabilities denominated in foreign
currencies are translated from US dollars and South African rands into
Canadian dollars. Unfavourable changes in the applicable exchange rate may
result in a decrease or increase in foreign exchange gains or losses. The
Company does not use derivative instruments to reduce its exposure to foreign
currency risk.
For the year ended December 31, 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
$2,273,915 decrease and 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 Variable interest rate
Other assets Non-interest bearing
Accounts payable and accrued liabilities Non-interest bearing/variable
interest rate
Short term debt Variable interest rate
The Company believes that the interest rates prevailing in Canada should not
significantly increase in 2009 and estimates that its interest rate risk
exposure will diminish in future years.
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.
Country risk
The DRC is a developing country and as such, the Company`s exploration
projects in the DRC could be adversely effected by uncertain political or
economic environments, war, civil or other disturbances, and a changing fiscal
regime and by DRC`s underdeveloped industrial and economic infrastructure.
The Company`s operations in the DRC may be effected by economic pressures on
the DRC. Any changes to regulations or shifts in political attitudes are
beyond the control of the Company and may adversely affect its business.
Operations may be affected in varying degrees by such factors as DRC
government regulations with respect to currency conversion, production, price
controls, export controls, income taxes or reinvestment credits, expropriation
of property, environmental legislation, land use, water use and mine safety.
There can be no assurance that policies towards foreign investment and profit
repatriation will continue or that a change in economic conditions will not
result in a change in the policies of the DRC government or the imposition of
more stringent foreign investment restrictions. Such changes cannot be
accurately predicted.
15. SEGMENTED INFORMATION
The Company`s reportable segments have been determined at the level where
decisions are made on the allocation of resources and capital, and where
internal financial statements are available, which is essentially the
different geographic regions. The South African segment comprises the
exploration, development, mining, processing and marketing of its diamonds in
South Africa. The DRC segment represents the Company`s exploration activities
in the DRC. The Corporate segment comprises its general corporate activities.
As the South African operations are in the development stage, all the direct
costs incurred for projects that initialised bulk sampling activities are
capitalized, and revenue earned from the sale of diamonds reduce the deferred
capitalized costs. For the DRC, its exploration costs are capitalized.
Canadian corporate costs are expensed to the statement of operations and
deficit. Further discrete segment information is provided in Note 9.
The Company carries on business in the following geographic areas:
2008 Group Canada DRC South
Africa
Net operating $103,055,5 $60,018,69 $13,658,87 $29,378,02
loss 88 6 2 0
Finance income (101,954) (34) - (101,920)
Finance expense 48,015 6,754 - 41,261
Net loss 103,001,64 60,025,416 13,658,872 29,317,361
9
Segment assets 19,112,324 177,765 6,354,163 12,580,396
Segment 16,547,090 10,005,270 538,851 6,402,259
liabilities
Depreciation $104,205 $- $- $104,205
2007 Group Canada DRC
Net operating $1,809,992 $1,809,992 $-
loss
Finance income - - -
Finance expense 22,899 22,899 -
Income Tax - - -
expense
Net loss 1,832,891 1,832,891 -
Segment assets 18,316,988 3,455,447 14,861,541
Segment 5,622,191 5,170,880 451,311
liabilities
Depreciation $- $- $-
16. SUBSEQUENT EVENTS
As a result of the continued depressed state of the diamond market with
diamond prices at a level such that operating costs would exceed expected
revenue, the Company has placed all its South African operations on a care and
maintenance basis. It has consequently retrenched all employees of its South
African operations. This process is expected to be concluded by April 11,
2009.
The application by the Company`s subsidiary, Samadi Resources (SA) (Pty) Ltd,
in the High Court (South Gauteng Provincial Division) for a declarator against
its former BEE partner Sefalana Mineral Resources (Pty) Ltd. was refused on
March 27, 2009. The judgment did not interfere with the current shareholder
structure, has no effect on the Company financially and no effect on its
current mining order rights. The application was brought in order to dispose
of any uncertainty regarding the annulment of the BEE agreements between
Samadi and Sefalana. Samadi remains committed to its current BEE shareholder
Leswika Resources (Pty) Ltd and will oppose any attempt by Sefalana to rely on
the Court`s refusal to issue a declarator in favour of Samadi. Samadi has been
advised by its legal representatives that there are good grounds for an appeal
and will shortly file a notice appealing the judgment.
1 April 2009
Auditors
Deloitte & Touche LLP
Sponsors
Arcay Moela Sponsors (Proprietary) Limited
Date: 02/04/2009 07:05:05 Produced by the JSE SENS Department.
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