| Thu 2 Apr 2009, 7:43 | | BCD - BRC DiamondCore - Management`s discussion and analysis of financial |
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BCD
BCD
BCD - BRC DiamondCore - Management`s discussion and analysis of financial
condition and results of operations for the year ended December 31, 2008
BRC DIAMONDCORE LIMITED
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
BRC DIAMONDCORE LTD.
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008
The following Management`s Discussion and Analysis of Financial Condition
and Results of Operations (the "MD&A") has been prepared by management and
provides a review of the activities, results of operations and financial
condition of BRC DiamondCore Ltd. (formerly BRC Diamond Corporation) (the
"Company" or "BRC DiamondCore") based upon Canadian generally accepted
accounting principles. This MD&A should be read in conjunction with the audited
consolidated financial statements as at and for the year ended December 31,
2008, as well as the notes thereto and the audited consolidated financial
statements as at and for the financial year of the Company ended December 31,
2007 ("fiscal 2007") and the notes thereto. All amounts are expressed in
Canadian dollars unless otherwise stated. For the financial year ended December
31, 2008, this MD&A includes operations in Canada and operations 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 are
included.
This MD&A is dated as of March 31, 2009. Additional information relating to
the Company, including the Company`s annual information form, is available on
SEDAR at www.sedar.com
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements,
other than statements of historical fact, that address activities, events or
developments that the Company believes, expects or anticipates will or may
occur in the future (including, without limitation, statements relating to
future diamond prices, future diamond sales, future production, exploration
results, potential mineralization and future plans and objectives of the
Company) are forward-looking statements. These forward-looking statements
reflect the current expectations or beliefs of the Company based on information
currently available to the Company. Forward-looking statements are subject
to a number of risks and uncertainties that may cause the actual results
of the Company to differ materially from those discussed in the forward-looking
statements, and even if such actual results are realized or substantially
realized, there can be no assurance that they will have the expected
consequences to, or effects on the Company. Factors that could cause actual
results or events to differ materially from current expectations include,
among other things, uncertainties relating to the availability and costs of
financing needed in the future, the possibility that future exploration
results will not be consistent with the Company`s expectations, changes in
equity markets, changes in diamond markets, foreign currency fluctuations,
political developments in the DRC or South Africa, changes to regulations
affecting the Company`s activities, delays in obtaining or failure to obtain
required project approvals, the uncertainties involved in interpreting
geological data and the other risks involved in the diamond exploration
business. Any forward-looking statement speaks only as of the date on
which it is made and, except as may be required by applicable securities laws,
the Company disclaims any intent or obligation to update any forward-looking
statement, whether as a result of new information, future events or results or
otherwise. Although the Company believes that the assumptions inherent in the
forward-looking statements are reasonable, forward-looking statements are not
guarantees of future performance and accordingly undue reliance should not be
put on such statements due to the inherent uncertainty therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition, exploration and development of
diamond properties in known diamond producing areas in the Northern Cape of
South Africa and in the DRC.
The Company`s shares commenced trading on the Toronto Stock Exchange on
February 11, 2008, following the acquisition by the Company of Diamond Core
Resources Limited ("Diamond Core"), a South African based diamond exploration
and development company listed on the JSE Limited ("JSE") in Johannesburg,
South Africa. Diamond Core is primarily engaged in diamond exploration and
trial mining in the middle Orange area of Northern Cape, South Africa. Prior
to the acquisition the Company`s shares had traded on the TSX Venture Exchange .
The Company also obtained a secondary listing on the JSE in connection with
the Diamond Core transaction. The purchase price of the acquisition was
$94.3 million paid through the issuance of shares to the shareholders of
Diamond Core.
For the year ended December 31, 2008, the Company reported a net loss of
$103,001,649 (a net loss of $1,832,891 in 2007). The net asset value of the
Company was $2,565,234 as at December 31,2008 (2007: $12,694,797).
The first cause of the loss for 2008 was the impairment of the entire goodwill
of $54,558,329 arising from the acquisition of Diamond Core and the impairment
of properties and capital assets. The goodwill arose at the time of purchase
from the difference between the purchase price paid of $94.3 million paid for
the outstanding shares in Diamond Core and the actual fair value of the assets
acquired in Diamond Core.
The second cause of the loss was the impairment of mineral properties and
capital assets due largely to the substantial decrease in diamond prices at
the time of valuation affecting the valuation of the mineral resources and
the current economic conditions decreasing the value of assets generally.
The Company`s accumulated deficit as at December 31, 2008 was $108,890,567
(2007 - $5,888,918). The Company has 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 resources, 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. It is also not possible to determine the timing
of completion of these initiatives required 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.
Highlights
South Africa
Strategic Review
In a response to the ongoing weakening global economic conditions that have
further adversely affected both diamond prices and the Company`s access to
both debt and equity finance the Company undertook a strategic review of each
of its South African operations. The average cost of production at each of the
Company`s bulk sampling operations, i.e. Paardeberg, Silverstreams and De Kalk,
exceeded the expected revenue from the proceeds of sale of recovered diamonds.
Consequently the Company suspended its bulk sampling operations in December
2008. The Company used the opportunity to maintain and implement appropriate
refurbishment of the recovery plants. The Company also used the opportunity
to develop its human capital by using the shutdown period to continue the
Company`s HIV/AIDS awareness and in-house training of personnel.
This strategy was implemented to conserve cash in the light of the then
prevailing economic conditions and to remain poised to resume an appropriate
level of activities if a diamond price recovery was to occur. As at December
31, 2008 no decision had been taken with regard to the general retrenchment of
staff (but see "Subsequent Events" with respect to events since December31,
2008. A contractor was used to undertake the bulk sampling at De Kalk but
this service was terminated on December 31, 2008.
General
Bulk sampling/trial mining was completed at the Paardeberg East kimberlite
project and during the month of October 2008 material from Mazal tailings
dump and P.K. 1 overburden stripping were hauled to the plant and processed.
In the fourth quarter, the Company decided to place Paardeberg East on care
and maintenance.
Bulk sampling continued at the Silverstreams alluvial project. The
metallurgical plant upgrade was completed and commissioned on 8 October 2008.
The project was put on care and maintenance later in the fourth quarter.
Bulk sampling continued at the De Kalk alluvial project but then later
in the fourth quarter the bulk sampling was suspended.
The Company offered its diamonds for sale by way of tender. During the year
ended December 31, 2008 the sales each quarter were:
Silverstreams
Total Stones Average US$/Carat Total Value
weight Size
(Carats) (Number) (Carats) (US$)
1st quarter 688.26 455 1.51 $ 1,446 $
995,150
2nd quarter 1,036.27 486 $ 2,740 $
2.13 2,839,447
3rd quarter 1,014.91 455 2.23 $ 1,993 $
2,022,284
4th quarter 542.96 299 1.80 $ 1,083 $
681,123
Total 3,282.4 1695 1.94 $ 1,991 $6,538,004
De Kalk
Total Stones Average US$/Carat Total Value
weight Size
(Carats) (Number) (Carats) (US$)
1st quarter 0 0 0 0 0
2nd quarter 0 0 0 0 0
3rd quarter 46.63 30 1.55 $2,365.64 $110,310
4th quarter 29.27 15 1.95 $1,766.69 $ 51,704
Total 75.90 45 1.04 $2,134.57 $162,014
Paarderberg
East
Total Stones Average US$/Carat Total Value
weight Size
(Carats) (Number) (Carats) (US$)
1st quarter 3,362.32 10,426 0.32 $ 200.00 $
672,824
2nd quarter 3,849.53 12,289 0.31 $ 278.53 $ 1,072,197
3rd quarter 1,943.33 6,387 0.30 $ 353.59 $
687,150
4th quarter 2,155 0.20 $ 30.85 $
470.24 14,733
Total 9,625.42 31,257 0.31 $ 254.21 $
2,446,904
During the year ended December 31, 2008, the Company in total sold
12,983.72 carats for a total value of US$ 9,146,923.
Both the Paardeberg East and Silverstreams bulk sampling plants have been
configured for exploration purposes but can be utilized in a production
capacity should a decision be taken to do so. Both sampling plants have been
equipped with weightometers in order to make accurate measurements of tonnages
treated. Both plants have been configured to optimize recoveries from the unique
size frequency curves of each deposit. At De Kalk the bulk sampling was at a
much smaller scale and was done by a contracted operator.
The services of a diamond consultant, Ramon Ferraris of QTS-Kristal Dynamical
of Kimberley, South Africa, were retained to audit the bulk sampling plants,
bulk sampling process and diamond analysis on the Paardeberg East, Silverstreams
and De Kalk sites. The tenders were overseen by Mr. Ferraris and an additional
diamond consultant to the Company, Mr. Maurice Barker.
Silverstreams Bulk Sampling Alluvial Project
The Company commissioned the metallurgical plant upgrade successfully on
October 8, 2008. The upgrade increased plant capacity by 50%. The plant now
comprises a Taurus rotary screen 670tph front end, six 16ft rotary pans, a
50tph re-concentrating Dense Medium Separation plant, a primary Flow Sort
X-Ray machine recovery unit, an attritioner, a secondary Bateman GB 1000
automated grease belts recovery unit and a "hands off" sort house.
A decision was taken by the Company to suspend bulk sampling in the fourth
quarter due to the unfavourable economic conditions.
De Kalk Bulk Sampling Alluvial Project
Bulk sampling commenced at the De Kalk project on August 1, 2008. The
plant consists of front-end with a Warrior 1800 in pit screen, two 16 ft
rotary pans, a final recovery with two Flow sort X-ray machines and a sort
house.
A total of 25,439 tonnes was mined of which 19,784 tonnes was processed
through the metallurgical plant.
Bulk sampling was also suspended in the fourth quarter of 2008 due to poor
economic conditions.
Sandrift Alluvial Prospecting Project
The Company did no further exploration in the fourth quarter of 2008.
Paardeberg East Bulk Sampling Kimberlite Project
The Paardeberg East project is the most advanced of the Company`s kimberlite
exploration projects. The project comprises a Mining License over various
portions of the farm Paardeberg East 153 located approximately 35km west of
Kimberley in the Northern Cape Province of South Africa.
A number of known kimberlites have been identified on the property, some of
which have been the subject of several phases of intermittent exploration and
exploitation from the early 1900`s up until 2003. Within the project area are
eight potential targets, namely proved kimberlites (PK) PK1, PK2, PK3, PK4 and
PK5 and prospective anomalies (PA) PA6, PA7 and PA8. Kimberlites PK1, PK2, PK3
and PK5 are known to be diamondiferous, but very little is known about anomalies
PA6, PA7 and PA8.
The kimberlite with the greatest prospect is currently represented by the
PK1 kimberlite and to a lesser extent the PK3 kimberlite. All five known
kimberlites bodies (PK1, PK2, PK3, PK4 and PK5) were worked at one time or
another, as there are signs of adits, shafts and pits on, or in the vicinity
of all five.
The diamond analysis of the product from various sampling positions on the
2.2ha PK1 kimberlite pipe representing distinct kimberlite facies, as well as
the ongoing sampling operations at PK2, PK3 and PK5, was undertaken by
independent consultants on an ongoing basis since the second quarter of 2008.
During the fourth quarter of 2008 the Company tested and sampled only the
PK 1 overburden and old tailing stockpiles.
The Paardeberg East metallurgical sampling plant comprises a front end, with
primary crushing (to -55mm), a 50tph Bateman Dense Media Separation plant
(DMS), secondary re-crush (to -18mm) and tertiary re-crush (to-13mm) circuits
and has a 37tph ROM capacity. DMS feed is screened at 25 mm. The final recovery
consists of two Flow-Sort X-ray machines, an attritioner, two Bateman GB 800
grease belts and a "hands-off" sort house.
A decision was taken by the Company to suspend bulk sampling operations in
the fourth quarter of 2008.
Democratic Republic of the Congo ("DRC")
General
The Company`s operations in the DRC consist of the exploration and evaluation
of mineral properties for diamonds. During the 2008 fiscal year the Company`s
DRC diamond exploration programmes focused on the Tshikapa area in southern DRC
and the Bafwasende project in northern DRC. Although some work was done along
the Kwango River and the Candore and Lubao projects in southern DRC and the
Zongo and Businga projects in northern DRC these areas have been downgraded in
terms of their prospectivity.
In summary during the fiscal year the follow data were collected:
1 Kimberlite exploration:
* 619 reconnaissance stream samples were collected covering 12,045kmSquared.
* 150 follow-up samples taken over various heavy mineral anomalies in the
Tshikapa area.
* 39 sample consignments were received from the laboratories.
* 4,272 line kilometres of regional airborne magnetic was flown (200m line
spacing) covering 743kmSquared.
* 1,205 line kilometres high-resolution follow-up helicopter borne magnetic
data (50m line spacing) over 34 blocks was completed.
* A reinterpretation of the geophysical data has earmarked 35 targets for
drilling.
* During the year 19 holes were drilled over 13 targets to a cumulative depth
of 1 390m.
2 Alluvial prospecting: 4 holes drilled to a cumulative depth of 65m; a
screen analysis of diamond parcels from several sites was conducted and a
preliminary economic assessment of the Kwango alluvial deposits was
completed.
No safety incidents or accidents have been reported during the 2008 financial
year.
Security of tenure
With all the data available from exploration activities of 2007 and 2008, the
Company 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 permits relinquished.
The present ground holding is summarized in the attached table. It should be
noted that over several licences the legal requirement to reduce the permit by
at least 50% after 4 years applies. So that even if a permit might be reduced in
surface area it is still recorded as a valid permit.
Company Relinquished 2008 Added 2008 Permits at Dec
2008
Number KmSquared Number KmSquared Number KmSquared
Permits Permits Permits
BRC 10 2,100 0 0 6 2,113
Acacia 5 1,515 0 0 11 1,815
BCE 15 5,508 0 0 16 5,344
BCM 0 0 0 0 1 351
Candore 8 1,798 0 0 5 816
Caspian 0 0 2 164 11 3,229
O &G
CCE 12 3 167 0 0 0 0
Coexco 0 0 44 6,904 44 6,904
Groupe 0 0 1 178 1 178
Abba
IEL 0 0 2 279 2 279
Ilunga 1 8.5 0 0 0 0
King`s 2 136 0 0 1 77
Mine
Kwango 2 528 0 0 3 590
Mines
Vangu 1 180 1 180 0 0
Phambu
Total 56 14,940.5 50 7,705 101 21,696
During the year some 56 permits were relinquished covering almost
15,000kmSquared.
The Company signed the following agreement in order to access other prospective
ground: Caspian Oil and Gas (2 permits), Groupe Abba (1 permit), IEL (2 permits)
and Vangu Phambu (1 permit) all in the Tshikapa project area. It should be noted
that the permit belonging to Vangu Phambu was covered within the year and since
no positive results were achieved it was dropped within the same year. The
ground holding was reduced from approximately 27,000kmSquared to 21,000kmSquared
at which it now stands. The total number of PR`s to which Company has access was
increased by 6 permits mainly related to access to the Coexco ground in the
northern DRC which consists of 44 small licences.
Project Kwango River
Reconnaissance stream sampling of the Kwango River basin project continued in
the Wamba drainage where several permits were covered with stream sediment
sampling. Although several samples returned interesting numbers of kimberlitic
minerals the surface textures of these grains suggest that these have been
sourced well outside the Company`s permit area. Results received for the
Kwango River also indicated that all kimberlitic minerals recovered so far
have more than likely travelled from primary sources more upstream than the
present project area and probably out of Angola.
The reconnaissance drilling and pitting program and the main follow up drill
holes and pits, to model the volume of the various gravel terraces in more
detail, has been completed. A size frequency analysis of several diamond
parcels, obtained from local operators working on many digging sites along the
Kwango River, was conducted. The total number of holes dug and drilled on the
Kwango project now stands at 1,248 and 266 respectively. This has provided a
gravel resource of approximately 12 million tonnes. However based on the
diamond size frequency data and the operating cost per tonne it is not an
economic resource, and the low diamond value per carat, the high stripping
ratio, the high operating cost per tonne in the DRC and logistical support
are particular of concern. The decision was subsequently taken to terminate
the project.
Project Tshikapa
The Tshikapa area has produced well over 100 million carats of diamonds and
results from the stream samples taken in the area indicate that abundant
kimberlitic indicators are present. It has further been established that
these are not abraded and hence are not far removed from their primary
source(s). In addition, the chemistry of these minerals suggests that they
have been derived from mineralized kimberlites.
Following a program of detailed stream sampling and airborne geophysics at
Tshikapa, the Company retained 2,400 kmSquared of the most prospective ground
with very encouraging geophysical and sampling targets.
The Company began drilling in June 2008 using a man portable core drill rig
capable of drilling down to 300 metres. Of the 12 holes drilled between June
and September, two holes intersected ironstone, three intersected late stage
granites and two went into grano-diorites. The final three holes intersected
breccia. Two additional option agreements were signed with Group Abba and
Investors Equity Ltd. respectively for four licences in favourable geological
terrain around Tshikapa and which contain very promising geophysical targets.
The Tshikapa project consists of the following components: Acacia, Candore,
Ilunga, Kwango Mines and Group Abba/King`s Mine/Caspian/IEL. The focus of the
program during the year was to locate accurate drill positions on the ground
through detailed geophysical surveys (airborne and on the ground) and drilling.
The whole geophysical dataset was re-interpreted by an independent Australian
based geophysical consultant - Diamond Geophysics. This has resulted in a
complete review of BRC`s targets in the Tshikapa area with an appropriate
interest rating for each target. Drilling started midway through the year
and 18 holes were drilled to a cumulative depth of 1,318 metres.
In addition the area was covered by regional Airborne Magnetics (150m or 200m
line spacing) and 5,432 line kilometres were flown covering 798kmSquared.
Finally, follow-up high-resolution helicopter borne magnetic surveys (50m line
spacing) were flown over selected anomalies to accurately define drill targets
and 33 blocks (each approximately 1.6kmSquared in size) were covered.
Acacia
Some 88 stream samples were collected covering areas in the Acacia permits
that had previously not been sampled while some very positive sample results
were received from the heavy mineral laboratory MSA. In addition, 28 follow-up
geophysical targets were flown (Detailed Airborne Surveys) using a line spacing
of 50m. Finally a total of 7 holes were drilled over the Acacia licences to
a cumulative depth of 678 metres. Three holes intersected volcanic breccias,
two ended up in red sandstones with slightly higher magnetic susceptibilities,
and one each is a granite and sedimentary breccia respectively.
Candore
Drilling of the most promising targets on the Candore ground and which have
been graded moderately interesting at best, have been completed and no
kimberlites were found. The option contract has therefore been terminated and
the ground has been returned to Candore for relinquishment.
Ilunga
Two holes were drilled on a very promising target in the Ilunga permit and
both returned grano-diorite. No further work has been scheduled and the option
agreement has therefore been cancelled.
Kwango Mines
Four geophysical follow up blocks were flown (DAF) on 50m line spacing.
These were used to position the four boreholes that were drilled on the Kwango
Mines permit with a cumulative depth of 453 mertes. One hole ended in a granite
`sill`, one in a sedimentary breccias, one in gneiss and one in a magnetic rich
sandstone. Based on the excess sedimentary cover of this permit and the
disappointing drilling results the Kwango Mines permits have been relinquished.
Group Abba, King`s Mine, Caspian and IEL
The Group Abba and King`s Mine permits were flown and 1,047 kmSquared was
covered by
a 200m line spacing airborne survey. In addition 21 stream samples were
collected over the Group Abba ground. This was married to the exploration data
that was collected by De Beers in 2006 and 2007 over the Caspian Oil and Gas
and Investors Equity Ltd permits. These four permits were acquired by BRC
through option agreements. Several high interest drill targets with respect of
sampling and geophysics were identified. Accurate GPS positions have been
acquired through detailed ground magnetic surveys and these will be drilled
as soon as the rig is available. Two of the three King`s Mine permits were
proven to be of no interest and have been relinquished.
Project Lubao
Geological interpretation of both field and laboratory data has revealed that
further work in this area is unlikely to produce a diamond bearing kimberlite
of economic interest. This is supported by recent geological modelling of the
area based on various geophysical and geological factors which indicates that
the Lubao properties are not underlain by Achaean Craton. Although alluvial
diamonds have been found along the Lomani River near Lubao these have most
likely been derived from the kimberlites discovered in 2006 by De Beers on the
Bugeco properties approximately 50 kilometres upstream. It has therefore been
decided to relinquish all the ground associated with the Lubao project in order
to focus the Company`s resources in more promising areas.
Project Businga
A start was made with the early stage reconnaissance program in the northern
DRC in 2007. Following on from the Zongo project the Businga ground was also
covered by reconnaissance stream samples (200 litres of screened material)
on a grid of 1 to between 20 to 30 kmSquared. This area has some historical
diamond workings which had been of interest. During the first quarter of the
year 271 stream samples had been collected covering 6 775 kmSquared of ground.
All samples
were concentrated in Kinshasa at the BRC treatment station and forwarded to
the Rio Tinto Laboratory in Perth Australia. Only sporadic grains of spinel
and several small but scattered diamonds were recovered and the prospectivity
of this ground was downgraded and relinquished.
Project Bafwasende
Following the wet season between March and September in northern DRC a start
was made with the green field project around Bafwasende in September. This
project covers ground belonging to Coexco, BCE and BRC. Again stream sampling
program was initiated sampling all drainage at a density of between 1 sample
every 20 to 30 kmSquared. Volumes of the samples were 200 litres of screened
(0.4 to 0.7mm) material.
In total 179 samples were collected covering some 3,500kmSquared and coverage
of the project area will be completed in the first quarter of 2009.
Wamba Project
Several licences were taken out in the Wamba drainage basin where diamonds
and kimberlitic minerals have been reported. Stream sampling has confirmed
confined kimberlite targets and once all the microprobe results have been
received a program of airborne geophysics over selected areas will be
initiated.
Northern DRC - Joint Venture Project with Rio Tinto
Northern DRC and the Central African Republic (the "CAR") are considered to
be one of the few remaining highly prospective regions in the world for
diamond exploration. The Company`s land package forms part of the joint
venture with Rio Tinto, as reported in the Company`s press release of June 12,
2008. Rio Tinto has the right to earn in project equity over the various stages
of the exploration programme through meeting the costs of that exploration.
Work in the form of regional stream sampling for heavy minerals started in
November 2007 and to date some 15,000 kmSquared have been covered. It is planned
to have the remaining 13,000 kmSquared completed by April 2009. Simultaneously,
applications for other prospecting licences have been made.
Stream sampling over most of the licence areas associated with the Businga
ground in Equateur Province, has been completed and all laboratory results
have been received from the Rio Tinto laboratory. Several interesting anomalies
have been indentified over several licence areas. The results identified several
diffused diamond/chromite anomalies that have been earmarked for further work.
The licences that reported negative results have been relinquished.
Results from the stream samples collected over the Zongo project situated
along the Ubangui River in Equateur were all negative and the licences
associated with this project have been relinquished.
An exploration base was set up at Bafwasende (the Bomili project) and with the
onset of the `dry` season the reconnaissance sampling program over the Coexco
ground started in the middle of September. During the quarter, 54 samples were
collected covering some 1,620 kmSquared. Many alluvial diamond occurrences have
been noted.
LICENCE HOLDING
In order to focus the exploration program on the most promising areas, many
licences were relinquished with a high degree of confidence and at the same
time applications have been lodged for more interesting ground and option
agreements were signed with three more companies: Group Abba and Caspian Oil &
Gas and Investors Equity Ltd.
a) Relinquishments.
During the year the following 53 prospecting licences were relinquished:
Acacia (5), BCE (15), BRC DiamondCore (10), Candore (8), CCE (12), Ilunga
(1), King`s Mine (2).
b) Additional ground.
Option agreements were signed with Group Abba and Caspian Oil & Gas and AEL
for one, two and two licences respectively in the Tshikapa area bringing
the total licences to which the Company has access to 101. The said
agreement with Caspian Oil & Gas is in addition to the agreement signed
with the same company in the first quarter of this year for nine licences
in northern DRC. An agreement was also signed with Coexco for 44 permits in
northern DRC.
c) Current prospecting licences.
The following licences are currently held by the Company (through its
DRC subsidiary) or are covered by option agreements entered into by the
Company with the licence holders: Acacia (11), BCE (16), BCM (1), BRC
DiamondCore (6), Candore (5), Caspian Oil & Gas (11), Coexco (44), Group
Abba (1), King`s Mine (1), Kwango Mines (3) and TEL (2). These licences
represent a total surface area of 26,349 kmSquared.
QUALIFIED PERSON AND TECHNICAL REPORTS
Dr. Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National Instrument 43-101, has reviewed and approved
the technical information in this MD&A.
Additional information with respect to the Company`s Tshikapa project
is contained in the technical report prepared by Dr. M de Wit and Fabrice
Matheys , dated March 31, 2009 and titled "National Instrument 43-101
Technical Report on the Tshikapa Project of BRC DiamondCore Ltd. in the
Democratic Republic of the Congo".
Additional information with respect to the Company`s South African projects
is contained in the technical report prepared by Venmyn Rand (Pty) Limited,
dated July 31, 2007 and titled "National Instrument 43-101 Technical Report
Prepared on the Mineral Assets of Diamond Core Resources Limited in the
Northern Cape and Free State Provinces, South Africa".
Copies of these reports can be obtained from SEDAR at www.sedar.com.
TRANSACTION WITH DIAMOND CORE RESOURCES LIMITED
In July 2007, the Company and Diamond Core Resources Limited
("Diamond Core") announced that they had entered into an agreement to merge the
two companies by way of a court-sanctioned scheme of arrangement ("the scheme")
under South African corporate law, pursuant to which the Company would acquire
all of the outstanding shares of Diamond Core in exchange for the issuance of
BRC DiamondCore common shares. Under the scheme, each Diamond Core shareholder
was entitled to receive one BRC DiamondCore share for every 24.5 Diamond Core
ordinary shares held. On January 14, 2008, Diamond Core shareholder approval
was obtained, and court approval was obtained on January 22, 2008. On February
11, 2008, the Company acquired all of the outstanding Diamond Core shares and,
as the consideration for this acquisition, issued BRC DiamondCore shares to the
Diamond Core shareholders in the agreed ratio, resulting in the issuance by the
Company of a total of 12,089,678 common shares. In connection with this
acquisition, the Company changed its name from BRC Diamond Corporation to BRC
DiamondCore Ltd. and its shares were listed on the Toronto Stock Exchange and
the JSE Limited in Johannesburg, South Africa.
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
provide for the potential issuance of additional Diamond Core ordinary shares
should certain operating profits be reached from certain of the projects
acquired by Diamond Core pursuant to the acquisition.
In anticipation of the implementation of the scheme, the Company and Diamond
Core entered into an agreement (the "Samadi Amending Agreement") with the
said Samadi shareholders pursuant to which the Samadi shareholders would,
if the relevant profit thresholds are met, be entitled to receive BRC
DiamondCore common shares in substitution for the Diamond Core ordinary
shares, with the number of BRC DiamondCore shares issuable to such shareholders
adjusted to reflect the exchange ratio applicable under the terms of the
scheme. Accordingly, the number of BRC DiamondCore shares issuable to the
said Samadi shareholders under the Samadi Amending Agreement, in the same
circumstances as contemplated in the Samadi Agreement, is a maximum of
1,434,502 BRC DiamondCore shares.
Also in connection with the acquisition by the Company of all of the
outstanding shares of Diamond Core (the "Diamond Core Acquisition"),
15,133,190 stock options that had been issued to employees of Diamond Core
pursuant to The Diamond Core Resources Share Trust Deed to acquire 15,133,190
ordinary shares in Diamond Core (the "Old Options") have been substituted with
new stock options of BRC DiamondCore (the "Replacement Options"), so as to
allow all holders of Old Options to acquire the number of BRC DiamondCore
common shares that is calculated by dividing the number of ordinary shares of
Diamond Core that would otherwise have been issuable upon the exercise of the
Old Options by 24.5, rounded up to the nearest whole number of BRC DiamondCore
shares, with the exercise price of such Replacement Options being adjusted to
the number that is equal to the exercise price of the Old Options (denominated
in South African rand) multiplied by 24.5. A total of 617,710 Replacement
Options were issued by the Company.
Allocation of purchase price
Based on BRC DiamondCore`s average closing price of $7.40 per share, calculated
with reference to the share price around July 5, 2007, BRC DiamondCore issued
12,089,678 common shares valued at $89,463,617 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 and assumed.
$`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.
SELECTED ANNUAL INFORMATION
The Company is in the diamond mining and exploration business and during the
year under review acquired a business that engaged in bulk sampling and trial
mining. Before the current year the Company had no expectation of revenues and
there is no expectation of revenues from production in the foreseeable future
with respect to the Company`s DRC projects. The revenue realized from sales of
diamonds produced from bulk sampling in the South African operations is used to
recover exploration expenditure.
The following financial data which has been prepared in accordance with Canadian
generally accepted accounting principles and is derived from the Company`s
audited consolidated financial statements for each of the three most recently
completed financial years. The Company`s reporting and measurement currency is
the Canadian dollar.
2008 2007 2006
Net loss $103,001,649 $1,832,891 $1,448,359
Net loss per share $4.20 $0.14 $0.12
Mineral properties and deferred $9,075,139 $14,188,659 $7,459,562
exploration expenditures
Total assets $19,112,324 $18,316,988 $8,097,741
The Company`s net loss for fiscal 2008 was significantly greater than that
recorded for 2007. This is due to the impairment of the goodwill arising from
the purchase of Diamond Core and the impairment of the Company`s mineral
properties and deferred exploration expenditures.
RESULTS OF OPERATIONS
For the year ended December 31, 2008, the Company reported a net loss, of
$103,001,649 (or $4.20 per share), compared to a net loss of $1,832,891 (or
$0.14 per share) incurred during the year ended December 31, 2007. The increase
in the net loss for the year 2008 as compared 2007 is due to the impairment of
goodwill arising from the acquisition of Diamond Core Resources Limited and the
impairment of mineral properties and capital assets.
An increase in exploration activity and the inclusion of Diamond Core results of
operations post the Diamond Core acquisition, also contributed to the loss. The
most significant items affecting the results of operations are the impairment of
certain mineral properties and exploration cost in the DRC and South Africa
totaling $36,608,543 and capital assets in South Africa of $6,796,346. Goodwill
that arose from the transaction with Diamond Core Resources Limited of
$54,558,329 was also impaired. Operating results for the Diamond Core group of
companies have been excluded prior to the Company acquiring control. The results
of the Diamond Core operations have been included with effect from February 11,
2008.
Net revenue of $8,475,174 (net of diamond inventory on hand of $35,461) for the
year ended December 31, 2008 earned from the sale of diamonds recovered from the
bulk sampling operations in South Africa has been applied to reduce the overall
deferred exploration costs incurred at the operations as the projects in
question are still in the development stage.
Significant changes in expenses incurred during the year ended December 31, 2008
when compared to the year ended December 31, 2007. As a result of the
acquisition of Diamond Core Resources in the first quarter of the year 2008, the
scope of activities of the Company were significantly different when compared to
2007. Comparisons between the two years will reflect this difference in scope
and will not be a meaningful measure of comparative activity, performance or
efficiency.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the fourth quarter of 2008. This financial information has been prepared in
accordance with Canadian generally accepted accounting principles. The Company`s
reporting and measurement currency is the Canadian dollar.
2008
2008 2008 2008
4th 3rd 2nd 1st
quarter quarter quarter quarter
Net loss ($`000) $ $ $ $
90,873 7,498 1,193 3,438
Net loss per share $ $ $ $
(basic and diluted) 3.70 0.31 0.05 0.17
2007 2007 2007
2007
4th 3rd 2nd 1st
quarter quarter quarter quarter
Net loss ($`000) $ $ $ $
16 1,114 521 183
Net loss per share $ $ $ $
(basic and diluted) 0.01 0.08 0.04 0.01
During the fourth quarter of 2008, the Company`s net loss increased to
$90,873,000 compared to a net loss of $16,000 reported during the fourth
quarter of 2007 this increase is due mainly to the impairment of goodwill,
mineral properties and capital assets.
During the third quarter of 2008, the Company`s net loss increased to
$7,499,000 compared to a net loss of $1,193,000 reported during the second
quarter of 2008. This increase was due mainly to the impairment of $5,312,000
on certain properties in the DRC that had been relinquished, the accounting
for stock based compensation and a reversal from unrealised foreign exchange
profits to losses on the conversion of the South African balance sheet from a
relatively weaker rand to the Canadian dollar.
During the second quarter of 2008, the Company`s net loss decreased to
$1,193,000 compared to a net loss of $3,438,000 reported for the first quarter
of 2008, due mainly to a decrease in unrealised foreign exchange losses created
on the revaluation of the South African balance sheet to Canadian dollars (June
30, 2008 - $79,000; March 30, 2008 - $2,794,000).
During the first quarter of 2008, the Company`s net loss increased to
$3,438,000 compared to a net loss of $15,533 in the last quarter of 2007,
due mainly to the inclusion of the Diamond Core operating results and the
unrealized foreign exchange loss recorded.
Certain professional and consulting fees incurred in relation to the
Diamond Core Acquisition (see "Transaction with Diamond Core Resources
Limited" above) were reclassified to deferred transaction costs during the
fourth quarter of 2007, as such transaction was considered more likely than not
to be completed. The Company`s net loss during the third quarter of 2007
increased to $1,113,593 compared to a net loss of $520,544 incurred in the
second quarter of 2007, mostly due to increased professional and consulting
fees incurred in relation to the Diamond Core Acquisition. During the second
quarter of 2007, the Company`s net loss increased to $520,544 compared to a
net loss of $183,220 reported for the first quarter of 2007. The Company`s
net loss in the second quarter of 2007 was significantly impacted by the
increase in professional fees related to the Diamond Core Acquisition and
by a foreign exchange loss of $176,000.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2008, the Company had cash of $198,085 and a working capital
deficit of $13,033,742 compared to cash of $931,845 and a working capital
deficit of $4,286,694 as at December 31, 2007.
The Company does not currently generate revenues other than potentially as a
result of its bulk sampling activities. Net revenue generated from the bulk
sampling activities, amounted to $8,475,174 and consists of diamond sales of
$8,510,635 during 2008 less inventory on hand of $35,461. This revenue through
the year had been adequate to support but not grow the South African operations
until the fourth quarter when the collapse of diamond prices meant that
operating costs exceeded expected revenues from the sale of diamonds recovered
from bulk sampling operations. This resulted in a suspension of the bulk
sampling operations as reported above.
Similar to other foreign entities operating in South Africa, the Company is
subject to currency exchange controls administered by the country`s central
bank. An ability to repatriate funds or operating profits, should any develop,
may be adversely affected by such exchange controls, and consequently the
ability to adequately finance the exploration in the DRC.
Historically, the Company has relied primarily on equity financings to fund its
activities through private placement financings and the exercise of warrants and
options. Although the Company has been successful in completing equity
financings in the past, there is no assurance that the Company will secure the
necessary financings in the future.
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
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 interest payments 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.
During the third quarter of 2008 the Company completed a private placement
involving the issue and sale of 350,000 common shares of the Company at a price
of $1.50 per share for total proceeds of $525,000. The proceeds were used for
the exploration of the Company`s diamond properties and for general corporate
purposes.
During the fourth quarter of 2007, the Company obtained a $3,000,000 credit line
(the "Loan Facility") from a Canadian financial institution, of which $3,000,000
was utilized as at December 31, 2007. During the first quarter of 2008, the
Loan Facility was increased from $3,000,000 to $6,000,000. As at December 31,
2008, the balance of the Loan Facility was $6,172,317 (December 31, 2007,
$3,022,899) including accrued interest of $307,872 (December 31, 2007, $22,899).
The Loan Facility is guaranteed by Banro Corporation, a significant shareholder
of the Company. The Company has undertaken to release Banro from its guarantee
as soon as possible. The Loan Facility was used to fund the Company`s
exploration activities until the second quarter of 2008. As at March 31, 2009,
the Loan Facility guaranteed by Banro is still in place.
Contractual obligations (not on balance sheet) entered into by the Company as at
the end of December 31, 2008 amount to $126,078 compared to $nil for the year
ended December 31, 2007 and are summarized in the table below:
Total Less than 1 - 3
1 year years
Contractual $ $ $
obligations
Operating leases $126,079 $104,416 $
21,661
$126,079 $104,416 $
21,661
The Company is in the process of exercising an option agreement to secure an
equity interest in prospective ground in the DRC currently held under option.
The Company expects to pay approximately US$350,000 as an option exercise fee.
DEFERRED EXPLORATION EXPENDITURES
The following table provides a breakdown of the Company`s deferred exploration
expenditures per country and project for the year ended December 31, 2008:
DRC
Kwango Lubao Tshikapa Other Total
Project Project Tshikapa (Candore) Projects
(Acacia) Project
Project
December 31, $`000 $`000 $`000 $`000 $`000 $`000
2008
Balance
12/31/2007 8,610 3,009 1,847 1,660 608 15,734
Administrative
and office 503 97 238 277 603 1,718
support
Depreciation
- - - - 259 259
Drilling
- 4 75 4 8 90
Field camp
expenses 275 56 292 186 588 1,397
Geochemistry
- - - - - -
Geology -
contract - - - - - -
geologists
Geophysics
28 - 240 - - 268
Permits
7 68 141 211 95 523
Professional
fees 153 21 58 4 226 462
Remote sensing
- - - - - -
Stock based
compensation - 294 - - 651 945
Transport and 534 12 181 878
helicopter 113 39
Foreign 342 - - - 22 364
exchange
profit
Write off
(10,452) (2,916) - (1,965) (1,454) (16,788)
Subtotal - (8,610) (2,682)
2008 1,157 (1,245) 1,179 (10,201)
Balance
12/31/2008 - 327 3,032 415 1,787 5,561
Other projects consist of the following projects: Tshikapa (Kwango Mines),
King`s Mine, Zongo, Businga, Bornili, Ilunga and Kwango (Acacia).
South Africa
De Total
Silverstreams Paardeberg Kalk
East
December 31, 2008 $`000 $`000 $`000 $`000
Balance at acquisition date $ $ $ $
346 3,046 - 3,392
Administrative and office
support 1,094 615 293 2,002
Depreciation
1,861 - 484 2,345
Field camp expenses
2,720 1,362 2,457 6,534
Foreign exchange loss - 323
unrealized 162 - 485
Geology - contract geologists
30 66 3 99
Geophysics
- 11 15 26
Insurance 77 24 11 112
Inventory losses - (21) - (21)
Permits 5 - - 5
Professional fees
18 21 12 51
Rehabilitation
1,072 475 122 1,669
Safety and security
479 488 804 1,771
Surveying
27 16 23 66
Transport 93 - 55 148
Net proceeds on diamond sales
and diamond inventory (5,394) (1,856) (1,260) (8,510)
Write off (3,019) (10,179)
(2,590) (4,570)
Balance 12/31/2008 $ $ $ $
- - - -
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at March 30, 2008, the Company had outstanding 26,091,310
common shares and stock options to purchase an aggregate of 4,153,225 common
shares of the Company.
In addition, as part of the Diamond Core Acquisition, the Company agreed to
issue a maximum of 1,434,502 common shares to former shareholders of Samadi
Resources SA (Pty) Limited (a subsidiary of the Company which was acquired as
part of the Diamond Core Acquisition) if certain profitability thresholds are
met in relation to certain of Diamond Core`s projects (see "Transaction with
Diamond Core Resources Limited").
RELATED PARTY TRANSACTIONS
As at As at
December 31, 2008 December 31, 2007
Balances payable $`000 $`000
Macleod Dixon LLP $ 745 $ 269
Banro Corporation - 0
Banro Congo Mining sarl - 0
Scallan Project Facilitation (Pty) Ltd 13 -
Sterling Portfolio Securities 11
$ 769 $ 269
For the year ended December 31,
2008 2007
$`000 $`000
Transactions
Macleod Dixon LLP (a) $ 300 $ 561
Banro Corporation (b) - 420
SFW Village (c) 100 80
AT Kondrat (d) 100 33
DK Madillo (e) 48 16
Scallan Project Facilitation (Pty) Ltd (f) 58 -
Sterling Portfolios 11
$ 617 $ 1,110
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 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.
NEW ACCOUNTING STANDARDS ADOPTED
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.
The financial statements have been prepared using Canadian generally accepted
accounting principles (Canadian GAAP) applicable to a going concern, which
contemplates the realization of assets and settlement of liabilities in the
normal course of business as they come due.
In considering the going-concern assertion, management has made significant
judgments and estimates with respect to the potentially adverse financial and
liquidity effects of the Company`s risks and uncertainties associated with the
current global economic conditions, current and future commodity prices, its
ability to access capital markets, its ability to meet its future financial
obligations, and the overall operation of its business segments. Management has
also assessed other items and risks arising in its businesses and made
reasonable judgments and estimates with respect thereto.
It is possible that the actual outcome of one or more of management`s plans
could be materially different or that one or more of management`s significant
judgments or estimates about the potential effects of the risks and
uncertainties could prove materially different which may affect BRC
DiamondCore`s ability to continue as a going concern.
The consolidated financial statements do not reflect adjustments that would be
necessary if the going-concern assumption were not appropriate. If the going-
concern basis were not appropriate for the consolidated financial statements,
then adjustments would be necessary to the carrying value of the assets and
liabilities, the reported revenue and expenses and the balance sheet
classifications used. These adjustments could be material.
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 its balance sheet under
IFRS 1, which could impact the balance sheet significantly if the impairment
imposed needs to be reassessed.
To transition to IFRS, the Company must apply "IFRS 1 - First Time Adoption of
IFRS" which set out the rules for first time adoption. In general, IFRS 1
requires an entity to comply with each IFRS effective at the reporting date for
the entity`s first IFRS financial statements. This requires that an entity apply
IFRS to its opening IFRS balance sheet as at January 1, 2010 (i.e.: the balance
sheet prepared at the beginning of the earliest comparative period presented in
the entity`s first IFRS financial statements).
Within IFRS 1 there are exemptions, some of which are mandatory and some of
which are elective. The exemptions provide relief for companies from certain
requirements in specified areas when the cost of complying with the requirements
is likely to exceed the resulting benefit to users of financial statements. IFRS
1 generally requires retrospective application of IFRSs on first-time adoptions,
but prohibits such application in some areas, particularly when retrospective
application would require judgments by management about past conditions after
the outcome of a particular transaction is already known.
On transition, management must apply the mandatory exemptions and make the
determination as to which elective exemptions will be made under IFRS 1.
Management has completed the high level analysis of the financial statement
areas and is currently reviewing the analysis to make determinations on what
elections will be taken. After these decisions are made, the impact on the
financial statements will be determinable.
Management continues to assess the impact that IFRS will have on the aspects of
the business including accounting policy, financial reporting, information
technology and communications perspective. Given that the Company is currently
in the development phase, accounting policy determinations that will be made
leading in the Company`s production phase, such as revenue recognition, deferred
stripping and diamond inventory costing to name a few examples, will be made
during or post transition to IFRS. Management is also currently reviewing
accounting systems and assessing the changes that will be required and the
strategies that will be employed. Communication and training strategies are also
being developed by management.
As Diamond Core currently prepares its local statutory financial statements
under IFRS, the Company will need to assess the impact for Canada and the DRC.
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.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates used in the preparation of the consolidated
financial statements include the Company`s estimate of the recoverable value of
its mineral properties and related deferred exploration expenditures, goodwill,
asset retirement obligations, taxes and stock-based compensation. All of these
estimates involve considerable judgment and are, or could be, affected by
significant factors that are out of the Company`s control.
The Company`s recoverability of the recorded value of its mineral properties and
associated deferred exploration expenses is based on market conditions for
minerals, underlying mineral resources associated with the properties and future
costs that may be required for ultimate realization through mining operations or
by sale. The Company is in an industry that is dependent on a number of factors
including environmental, legal, and political risks, the existence of
economically recoverable reserves, the ability of the Company and its
subsidiaries to obtain necessary financing to complete the development and
future profitable production or the proceeds of disposition thereof. If current
economic conditions continue for an extended period into the future it is
possible that a future write down in good will and carrying value could occur.
Management uses its best available information to identify the point at which a
development project is capitalized, assess reserves, future costs and benefits
and, where considered necessary, engages qualified third-party professionals to
assist in the process. Changing assumptions about future commodity prices,
exchange rates, production costs and revised information on reserves may change
management`s recoverable amounts and depletion and amortization.
The Company`s estimates of recoverability of its operating and development
properties are critical, because they could have a significant impact on the
balance sheet and statement of operations. The Company periodically reviews and
evaluates the recoverability of property, plant and equipment based on an
estimate of undiscounted future cash flows. In performing impairment tests,
management must make certain estimates: future cash flows, expected commodity
prices, inflation rate, future exchange rates, future operating, capital and
reclamation costs, and the amount and classification of resources. Future cash
flows are calculated using quoted benchmark prices in the futures market or
price forecasts consistent with reputable industry forecasts or contracted
prices where applicable. If any of these estimates change, future net cash
flows from the property, plant and equipment could be lower which would result
in impairment.
Goodwill Impairment
The Company had goodwill with a carrying value of $54.6 million; related to the
acquisition of Diamond Core.
The Company tests for impairment of goodwill on an annual basis and at any other
time if events occur or circumstances change that would indicate that it is more
likely than not that the fair value of the reporting unit has been reduced below
its carrying amount. Circumstances that could trigger an impairment test
include: a significant adverse change in the business climate or legal factors;
an adverse action or assessment by a regulator; unanticipated competition; the
loss of key personnel and adverse results of testing for recoverability of a
significant asset group within a reporting unit; and the recognition of a
goodwill impairment loss in the financial statements of a subsidiary that is a
component of a reporting unit.
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 price per 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. 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 net
earnings.
At December 31, 2008, the fair value of Diamond Core, based on discounted
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
$54.6 million.
Asset-Retirement Obligations
The Company`s operations and joint ventures are subject to environmental
regulations in the DRC and South Africa.
These future obligations are estimated by taking into consideration closure
plans, known environmental impacts, and internal and external studies which
estimate the activities and costs that will be carried out to meet the
retirement obligations. The asset-retirement cost estimates could change due to
amendments in laws and regulations in the countries in which the businesses
operate.
A number of assumptions and judgments are made by management in the
determination of these provisions. Amounts recorded for asset-retirement
obligations are based on estimates of retirement costs which may not be incurred
for several years or decades. Actual estimated decommissioning and reclamation
costs may differ from those projected as a result of an increase over time of
actual remediation costs, a change in the timing for utilization of reserves and
the potential for increasingly stringent environmental regulatory requirements.
Income Taxes
The Company estimates future income taxes based upon temporary differences
between the assets and liabilities that are reported in its consolidated
financial statements and their tax basis as determined under applicable tax
legislation. The Company records a valuation allowance against its future
income tax assets when it believes that it is not "more likely than not" that
such assets will be realized. The valuation of future tax assets and any
associated valuation allowance can be affected by many factors, including:
current and future economic conditions, net realizable sale prices, production
rates and production costs and can either be increased or decreased where, in
the view of Management, such change is warranted.
Foreign Currency Translation
The functional currency of the Company is Canadian dollars. BRC DiamondCore`s
businesses undertake transactions in currencies other than the Canadian dollar,
including US dollars and the South African rand. As part of its ongoing review
of critical accounting policies and estimates, the Company reviews the foreign
currency translation method of its foreign operations to determine if there are
significant changes to economic facts and circumstances that may indicate
whether or not the foreign operations are largely self-sufficient and the
economic exposure is more closely tied to their respective domestic currencies.
Any change in translation method resulting from this review will be accounted
for prospectively. The Company accounts for its South African operations as
self-sustaining and for the DRC as an integrated foreign operation.
The Company uses the Black-Scholes option pricing model to determine the fair
value of stock options granted. This model requires the Company to make
reasonable assumptions in order to derive parameters such as the expected
volatility of the Company`s shares, the expected life of the option and interest
rates, all of which are based on historical information. Future behaviors of
these parameters are beyond the Company`s control, and thus, may be
significantly different from the Company`s estimates.
The values of all stock options granted were estimated, using the Black-Scholes
option-pricing model, based on the following factors:
(i) risk-free interest rate: 3.075% (2007 - 4.11% - 4.53%)
(ii) expected volatility: 95% (2007 - 62% )
(iii) expected life: 5 years (2007 - 5 years)
(iv) expected dividends: $Nil (2007 - $Nil)
Property, plant and equipment are depreciated over their useful lives taking
into account the residual values, where appropriate. The actual lives of the
assets and residual values are assessed annually and may depend on a number of
factors. In reassessing asset lives, factors such as technological innovation
and maintenance programs are taken into account. Residual value assessments
consider issues such as future market conditions, the remaining life of the
asset and projected disposal values.
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.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not, by
its nature, all inclusive.
The only sources of future funds for further exploration programs which are
presently available to the Company (other than diamond sales as a result of the
Company`s bulk sampling activities) are the sale of equity capital, or the
offering by the Company of an interest in its properties to be earned by another
party carrying out further exploration. There is no assurance that such sources
of financing will be available on acceptable terms, if at all. In the event
that commercial quantities of minerals are found on the Company`s properties,
the Company does not have the financial resources at this time to bring a mine
into production.
The current financial climate is characterized by volatile and uncertain times.
The uncertainty of forward looking statements is therefore greater in the
current period than previous periods. Diamond prices have reduced significantly
as a result of the economic downturn compounded by the normal end of year
softening of prices. This will adversely affect the Company`s cash flow
particularly if the depressed prices continue for a protracted period.
The Company has limited bank borrowings but it is aware that the credit crunch
has limited the availability of traditional sources of project finance from
banks.
All of the Company`s projects are located in the DRC and South Africa.
The assets and operations of the Company are therefore subject to various
political, economic and other uncertainties, including, among other things,
the risks of war and civil unrest, hostage taking, military repression, labor
unrest, illegal mining, expropriation, nationalization, renegotiation or
nullification of existing licenses, permits, approvals and contracts, taxation
policies, foreign exchange and repatriation restrictions, changing political
conditions, international monetary fluctuations, currency controls and foreign
governmental regulations that favor or require the awarding of contracts to
local contractors or require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction. Changes, if any, in mining
or investment policies or shifts in political attitude in either the DRC or
South Africa may adversely affect the Company`s operations or profitability.
Operations may be affected in varying degrees by government regulations with
respect to, but not limited to, restrictions on production, price controls,
export controls, currency remittance, income taxes, foreign investment,
maintenance of claims, environmental legislation, land use, land claims of
local people, water use and mine safety. Failure to comply strictly with
applicable laws, regulations and local practices relating to mineral rights
could result in loss, reduction or expropriation of entitlements. In addition,
in the event of a dispute arising from operations in the DRC or South Africa,
the Company may be subject to the exclusive jurisdiction of foreign courts or
may not be successful in subjecting foreign persons to the jurisdiction of
courts in Canada. The Company also may be hindered or prevented from enforcing
its rights with respect to a governmental instrumentality because of the
doctrine of sovereign immunity. It is not possible for the Company to
accurately predict such developments or changes in laws or policy or to what
extent any such developments or changes may have a material adverse effect on
the Company`s operations.
The DRC is a developing nation emerging from a period of civil war and
conflict. Physical and institutional infrastructure throughout the DRC is
in a debilitated condition. The DRC is in transition from a largely state
controlled economy to one based on free market principles, and from a non-
democratic political system with a centralized ethnic power base, to one
based on more democratic principles. There can be no assurance that these
changes will be effected or that the achievement of these objectives will
not have material adverse consequences for the Company and its operations.
The DRC continues to experience violence and significant instability in parts
of the country due to certain militia and criminal elements. The recent events
of violence have been a very considerable distance from the areas of interest
to the Company. While the government and United Nations forces are working to
support the extension of central government authority throughout the country,
there can be no assurance that such efforts will be successful.
South Africa has recently experienced significant power shortages and it is
expected that these shortages may be repeated in the future although adequate
supply currently appears to be available. Future possible power shortages
could disrupt the Company`s South African operations and have a material
adverse effect on the Company.
All of the Company`s properties are in the exploration stage only and none
of the properties contain a known body of commercial ore. The Company currently
operates at a loss and does not generate any revenue from operations (other than
the said diamond sales). The exploration and development of mineral deposits
involve significant financial risks over a significant period of time which even
a combination of careful evaluation, experience and knowledge may not eliminate.
Few properties which are explored are ultimately developed into producing mines.
Major expenditures may be required to establish reserves by drilling and to
construct mining and processing facilities at a site. It is impossible to
ensure that the Company`s exploration programs will result in a profitable
commercial mining operation.
Diamond Core has concluded a number of transactions with Black Economic
Empowerment ("BEE") partners in support of the South African government`s
policy of the empowerment of previously disadvantaged individuals and
communities, through the minerals and mining industry. Additional BEE
transactions are contemplated. As a result of the transactions concluded to
date, a BEE entity holds different equity interests ranging from 15% to 50%
interests in a number of the Company`s South African projects. The approval
of the BEE entity is required with respect to certain key business decisions
in relation to the relevant project. Disputes between the Company and a BEE
entity could therefore interfere with the Company`s ability to conduct one or
more of its projects in South Africa, which could have a material adverse
effect on the Company.
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Unfavorable changes in the applicable exchange rate may
result in a decrease or increase in foreign exchange gains or losses. The
Company does not use derivative instruments to reduce its exposure to foreign
currency risk.
The Company`s exploration and, if such exploration is successful, development of
its properties is subject to all of the hazards and risks normally incident to
mineral exploration and development, any of which could result in damage to life
or property, environmental damage and possible legal liability for any or all
damage.
The natural resource industry is intensely competitive in all of its phases, and
the Company competes with many companies possessing greater financial resources
and technical facilities than itself.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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 accrued $ $
liabilities 7,542,084 2,599,292
Debt $ $
6,172,317 3,022,899
Lease $ $
499,484 -
b) Allowance account for credit losses
Year ended Year ended
December 31, December 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, the consolidated financial
statements have been prepared in accordance with Canadian GAAP applicable to a
going concern (see note 1 to the financial statements).
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.
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 in the Financial Statements.
The Company carries on business in the following geographic areas:
2008 Group $ Canada $ DRC $ South Africa
$
Net $ 103,055,588 $ 60,018,696 $ 14,189,252 $ 29,378,02
operating
loss
Finance (101,954) (33) - (101,920)
income
Finance 48,015 6,754 - 41,262
expense
Net loss 103,001,648 60,025,417 14,189,251 29,317,361
Assets and
liabilities
Segment 19,112,324 177,765 6,354,163 12,580,396
assets
Segment 16,547,090 10,005,270 538,851 6,402,259
liabilities
Other
Segment
information
Depreciation $104,205 $ - $- $104,205
2007 Group $ Canada$ DRC $
Net $1,809,992 $1,809,992 $ -
operating
loss
Finance - - -
income
Finance 22,899 22,899 -
expense
Income Tax - - -
expense
Net loss 1,832,891 1,832,891 -
Segment 14,188,659 - 14,188,659
assets
Segment 5,622,191 5,170,880 451,311
liabilities
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
Company will restructure itself by selling off non-core assets and seeks to
enter into a business combination with a partner with whom the South African
mining assets of the Company can be developed at an appropriate time and manner
when diamond prices have recovered sufficiently to restore profitable
operations.
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.
DISCLOSURE CONTROLS AND PROCEDURES
The Company`s President and Vice President, Finance have limited the scope of
their design of disclosure controls and procedures to exclude controls, policies
and procedures of Diamond Core.
Subject to the above scope limitation, disclosure controls and procedures are
designed to provide reasonable assurance that all relevant information is
gathered and reported to senior management, including the Company`s President
and Vice President, Finance, on a timely basis so that appropriate decisions can
be made regarding public disclosure. As at December 31, 2008, management of the
Company, with the participation of the President and Vice President, Finance,
evaluated the effectiveness of the Company`s disclosure controls and procedures
as required by Canadian securities laws. Based on that evaluation, the
President and Vice President, Finance have concluded that, as of December 31,
2008, the disclosure controls and procedures were effective. No material
weaknesses have been identified.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company`s President and Vice President, Finance have limited the scope of
their design of internal control over financial reporting to exclude controls,
policies and procedures of Diamond Core.
Subject to the above scope limitation, internal controls have been designed to
provide reasonable assurance regarding the reliability of the Company`s
financial reporting and the preparation of financial statements together with
the other financial information for external purposes in accordance with
Canadian GAAP. As at December 31, 2008, the Company`s President and Vice
President, Finance evaluated or caused to be evaluated under their supervision
the effectiveness of the Company`s internal control over financial reporting.
Based on that evaluation, the President and Vice President, Finance have
concluded that, as of December 31, 2008, the Company`s internal control over
financial reporting was effective. No material weaknesses have been identified.
The Company is required under Canadian securities laws to disclose herein any
change in the Company`s internal control over financial reporting that occurred
during the Company`s most recent interim period that has materially affected, or
is reasonably likely to materially affect, the Company`s internal control over
financial reporting. No changes were identified in the Company`s internal
control over financial reporting during the quarter ended December 31, 2008,
that have materially affected, or are reasonably likely to materially affect,
the Company`s internal control over financial reporting.
It should be noted that a control system, including the Company`s disclosure and
internal controls and procedures, no matter how well conceived can provide only
reasonable, but not absolute, assurance that the objective of the control system
will be met and it should not be expected that the disclosure and internal
controls and procedures will prevent all errors or fraud.
The summary financial results of Diamond Core which was acquired by the Company
in 2008 are presented below. The dominant feature of the acquired company is its
$29.4 million loss from time of acquisition at the beginning of February 2008 to
the year end at December 31, 2008.
2008
Net operating loss $ 29,378,020
Finance income (101,920)
Finance expense 41,261
Net loss 29,317,361
Assets 12,580,396
Liabilities 6,402,259
Depreciation $
104,205
Sponsor
Arcay Moela Sponsors (Proprietary) Limited
(Registration number 2006/033725/07)
Date: 02/04/2009 07:43:01 Produced by the JSE SENS Department.
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