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EPS - Eastern Platinum Limited - Management`s Discussion and Analysis of
Financial Conditions and Results of Operations for the Three Months Ended
March 31, 2009
EASTERN PLATINUM LIMITED
(Incorporated in Canada)
(Canadian Registration number BC0722783)
(South African Registration number 2007/006318/10)
Share Code TSX: ELR ISIN: CA2768551038
Share Code AIM: ELR ISIN: CA2768551038
Share Code JSE: EPS ISIN: CA2768551038
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009
The following Management`s Discussion and Analysis ("MD&A") is intended to
assist the reader to assess material changes in financial condition and results
of operations of Eastern Platinum Limited ("Eastplats" or the "Company") as at
March 31, 2009 and for the three months then ended in comparison to the same
period in 2008.
In February 2009, the applicable provincial securities commissions granted the
Company exemptive relief to adopt International Financial Reporting Standards
("IFRS") with an adoption date of January 1, 2009 and a transition date of
January 1, 2008.
This MD&A should be read in conjunction with the condensed consolidated
financial statements for the three months ended March 31, 2009 and supporting
notes. These condensed financial statements have been prepared using accounting
policies consistent with IFRS and in accordance with International Accounting
Standard 34 ("IAS 34") - Interim Financial Reporting. A reconciliation of the
previously disclosed comparative periods` financial statements prepared in
accordance with Canadian generally accepted accounting principles to IFRS is
set out in Note 15 to these condensed financial statements.
In this MD&A, the Company also reports certain non-IFRS measures such as EBITDA
and cash costs per ounce which are explained in Section 3.2 of this MD&A.
All monetary amounts are in U.S. dollars unless otherwise specified. The
effective date of this MD&A is May 13, 2009. Additional information relating to
the Company is available on SEDAR at www.sedar.com.
Contents of the MD&A
1. Overview
2. Highlights for the quarter ended March 31, 2009
3. Results of operations for the quarter ended March 31, 2009
3.1. Mining operations at the Crocodile River Mine ("CRM")
3.2. CRM non-IFRS measures
3.3. Development projects
3.3.1. CRM
3.3.2. Spitzkop and Kennedy`s Vale
3.3.3. Mareesburg
3.4. Corporate and other expenses
4. Liquidity and Capital Resources
4.1. Outlook
4.2. Share capital
4.3. Contractual Obligations and Commitments
5. Related party transactions
6. Adoption of accounting standards and accounting pronouncements under IFRS
6.1 Significant differences between IFRS and Canadian GAAP in the Company`s
financial statements
7. Internal control over financial reporting
8. Cautionary statement on forward-looking information
1. Overview
Eastplats is a platinum group metals ("PGM") producer engaged in the mining and
development of PGM deposits with properties located in South Africa. All of the
Company`s properties are situated on the western and eastern limbs of the
Bushveld Complex ("BC"), the geological environment that supports over 75% of
the world`s PGM supply.
The Company`s primary operating asset is an 87.5% direct and indirect interest
in Barplats Investments Limited ("Barplats"), whose main assets are the PGM
producing Crocodile River Mine ("CRM") located on the western limb of the BC
and the non-producing Kennedy`s Vale Project located on the eastern limb of the
BC. The Company also has a 75.5% direct and indirect interest in Mareesburg
Platinum Project ("Mareesburg") and a 93.4% direct and indirect interest in
Spitzkop PGM Project ("Spitzkop"), both located on the eastern limb of the BC.
2. Highlights for the quarter ended March 31, 2009 ("Q1 2009")
- Eastplats recorded a net profit attributable to equity shareholders of the
Company of $3,164,000 ($0.00 per share) compared to $19,476,000 ($0.03 per
share) in the first quarter of 2008 ("Q1 2008").
- Production at the Crocodile River Mine ("CRM") increased by 18% to 32,969
PGM ounces, from 27,825 PGM ounces in Q1 2008.
- The average delivered basket price per PGM ounce was $590, a decrease of
64% compared to $1,621 in Q1 2008, but an increase of 7% compared to $550 in the
fourth quarter of 2008.
- EBITDA was $7,018,000 compared to $36,045,000 in Q1 2008 and negative
$18,180,000 in the fourth quarter of 2008.
- Operating cash costs were $536 per ounce, an improvement of 23% over the
$698 per ounce in Q1 2008, and an improvement of 15% over the $628 per ounce in
the fourth quarter of 2008.
- Operating cash costs net of by-product credits was $388 per ounce.
- Average recovery rates for the quarter improved to 80%, compared to 78% in
Q1 2008.
- Run-of-mine ore processed increased by 24% to 318,394 tonnes in Q1 2009
from 257,748 tonnes in Q1 2008.
- At March 31, 2009, the Company had a cash position (including cash, cash
equivalents and short term investments) of $21,966,000 (December 31, 2008 -
$61,063,000).
3. Results of Operations for the quarter ended March 31, 2009
The following table sets forth selected consolidated financial information for
the three months ended March 31, 2009 and 2008:
Condensed consolidated income statements
(Expressed in thousands of U.S. dollars,
except per share amounts) Three months ended March 31,
2009 2008
Revenue $ 24,903 $ 55,795
Cost of operations
Production costs 17,885 19,750
Depletion and depreciation 3,517 4,394
Mine operating earnings 3,501 31,651
Expenses
General and administrative 1,636 4,333
Share-based payment 132 1,349
Operating profit 1,733 25,969
Other income (expense)
Interest income 494 2,807
Finance costs (452) (8)
Foreign exchange (loss) gain (75) 1,057
Profit before income taxes 1,700 29,825
Deferred income tax recovery (expense) 680 (8,247)
Net profit for the period $ 2,380 $ 21,578
Attributable to
Non-controlling interest $ (784) $ 2,102
Equity shareholders of the Company $ 3,164 $19,476
Earnings per share
Basic $ 0.00 $ 0.03
Diluted $ 0.00 $ 0.03
Weighted average number of common share
outstanding
Basic 680,526,454 669,872,192
Diluted 683,394,510 718,406,612
Condensed consolidated statements of March 31, December 31,
financial position 2009 2008
Total assets $ 562,877 $ 596,570
Total long-term liabilities $ 45,892 $ 47,685
The table below sets forth selected results of operations for the Company`s
eight most recently completed quarters (in thousands of U.S. dollars, except
per share amounts). The quarters of 2007 have been presented in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP").
All financial data previously reported in Canadian dollars have been converted
to U.S. dollars.
Selected quarterly data 2009 2008
(under IFRS unless otherwise noted) March 31 Dec 31
Revenues $ 24,903 $ 355
Cost of operations (21,402) (19,580)
Mine operating earnings (loss) 3,501 (19,225)
Expenses (G&A and share-based payment) (1,768) (6,602)
Impairment of property, plant and equipment - (313,603)
Operating profit (loss) 1,733 (339,430)
Net profit (loss) attributable to equity
shareholders of the Company $ 3,164 $ (231,582)
Earnings (loss) per share - basic $ 0.00 $ (0.34)
Earnings (loss) per share - diluted $ 0.00 $ (0.34)
Average foreign exchange rates
South African Rand to US dollar 0.1006 0.1008
Canadian dollar to US dollar 0.8038 0.8252
Period end foreign exchange rates
South African Rand to US dollar 0.1048 0.1076
Canadian dollar to US dollar 0.7928 0.8210
2008
Sept 30 June 30 March 31
Revenues $ 9,214 $ 49,317 $ 55,795
Cost of operations (25,360) (25,539) (24,144)
Mine operating earnings (loss) (16,146) 23,778 31,651
Expenses (G&A and share-based payment) (5,787) (5,995) (5,682)
Impairment of property, plant and
equipment - - -
Operating profit (loss) (21,933) 17,783 25,969
Net profit (loss) attributable to equity
shareholders of the Company $ (9,490) $ 12,215 $ 19,476
Earnings (loss) per share - basic $ (0.01) $ 0.02 $ 0.03
Earnings (loss) per share - diluted $ (0.01) $ 0.02 $ 0.03
Average foreign exchange rates
South African Rand to US dollar 0.1285 0.1287 0.1328
Canadian dollar to US dollar 0.9603 0.9901 0.9955
Period end foreign exchange rates
South African Rand to US dollar 0.1197 0.1280 0.1229
Canadian dollar to US dollar 0.9397 0.9807 0.9742
2007
Dec 31 Sept 30 June 30
Under Canadian GAAP
Revenues $ 34,126 $ 31,452 $ 22,324
Cost of operations (26,095) (24,388) (17,528)
Mine operating earnings (loss) 8,031 7,064 4,796
Expenses (G&A and share-based payment) (18,022) (3,534) (6,691)
Impairment of property, plant and
equipment - - -
Operating profit (loss) (9,991) 3,530 (1,895)
Net profit (loss) attributable to
equity
shareholders of the Company $ (10,814) $(1,390) $ (4,693)
Earnings (loss) per share - basic $ (0.02) $ - $ (0.01)
Earnings (loss) per share - diluted $ (0.02) $ - $ (0.01)
Average foreign exchange rates
South African Rand to US dollar 0.1478 0.1409 0.1410
Canadian dollar to US dollar 1.0189 0.9572 0.9102
Period end foreign exchange rates
South African Rand to US dollar 0.1453 0.1454 0.1416
Canadian dollar to US dollar 1.0088 1.0052 0.9386
3.1 Mining operations at Crocodile River Mine ("CRM")
The following is a summary of CRM`s operations for each of the quarters of 2009
and 2008:
Crocodile River Mine operations
Three months ended
March 31, December 31, September 30,
2009 2008 2008
Key financial statistics
(dollar amounts stated in U.S.
dollars)
Sales - PGM ounces 32,969 29,015 30,758
Average delivered price per
ounce (2) $590 $550 $1,193
Average basket price $676 $655 $1,438
Cash costs per ounce of PGM (1) $536 $628 $672
Cash costs per ounce of PGM,
net of chrome by-product
credits (1) $388 $578 $521
Key production statistics
Total tonnes processed 318,394 298,514 317,602
Run-of-mine ("ROM") rock
tonnes processed 318,394 298,514 305,490
Tailings tonnes processed - - 12,112
Third party ore processed - - -
Development meters 4,573 4,604 5,599
On-reef development meters 2,745 2,922 3,556
Concentrator recovery from ROM
ore 80% 76% 78%
Chrome produced 77,554 69,937 64,744
Metal in concentrate sold
(ounces)
Platinum (Pt) 16,499 14,466 15,393
Palladium (Pd) 7,399 6,690 6,973
Rhodium (Rh) 2,812 2,451 2,581
Gold (Au) 135 121 123
Iridium (Ir) 1,144 979 1,083
Ruthenium (Ru) 4,980 4,308 4,605
Total PGM ounces 32,969 29,015 30,758
Three months ended
June 30, March 31,
2008 2008
Key financial statistics
(dollar amounts stated in U.S. dollars)
Sales - PGM ounces 30,311 27,825
Average delivered price per ounce (2) $1,657 $1,621
Average basket price $1,969 $1,927
Cash costs per ounce of PGM (1) $696 $698
Cash costs per ounce of PGM,
net of chrome by-product credits (1) $696 $698
Key production statistics
Total tonnes processed 337,471 349,497
Run-of-mine ("ROM") rock tonnes processed 313,767 257,748
Tailings tonnes processed 23,704 88,948
Third party ore processed - 2,801
Development meters 5,575 4,409
On-reef development meters 3,230 2,343
Concentrator recovery from ROM ore 73% 78%
Chrome produced 37,515 22,489
Metal in concentrate sold (ounces)
Platinum (Pt) 15,333 13,684
Palladium (Pd) 6,777 6,201
Rhodium (Rh) 2,543 2,335
Gold (Au) 132 121
Iridium (Ir) 9 94 1,078
Ruthenium (Ru) 4,532 4,405
Total PGM ounces 30,311 27,825
(1) These are non-IFRS measures as described in Section 3.2
(2) Average delivered price is the average basket price at the time of delivery
of PGM concentrates, net of associated smelter costs, under the Company`s
primary off-take agreement.
Quarter ended March 31, 2009 compared to the quarter ended March 31, 2008 ("Q1
2008")
The Company recorded revenue of $24,903,000 in Q1 2009. This amount represents
revenues recorded when PGM concentrates are physically delivered to the buyer,
less adjustments made when final prices for these concentrates are settled. The
Company settles its PGM sales three to five months following the physical
delivery of the concentrates which are provisionally priced on the date of
delivery. PGM prices declined sharply from August through December 2008
resulting in significant negative adjustments to the provisional prices for the
second half of 2008 when these provisional prices were marked to market at
December 31, 2008.
Since December 31, 2008, PGM prices have stabilized and risen by approximately
15%. The Company recorded an average delivered basket price of $590 per PGM
ounce in Q1 2009, compared to $550 in Q4 2008 and $1,621 in Q1 2008. The
delivered price per ounce refers to the PGM prices in effect at the time the
PGM concentrates are delivered. As a result of the rise in prices, the Company
recorded a positive provisional price adjustment of $2,058,000 for the quarter.
The following table shows a reconciliation of revenue and provisional price
adjustments.
Crocodile River Mine
Effect of provisional price adjustments on revenues
(stated in thousands of U.S. dollars)
Three months ended Three months ended
March 31, 2009 March 31, 2008
Revenue before provisional price
adjustments $ 22,845 $ 46,506
Provisional price adjusments
Adjustments to revenue upon
settlement 433 2,646
of prior periods` sales
Mark-to-market adjustment on
sales not yet
settled at end of period 1,625 6,643
Revenue as reported in the income
statement $ 24,903 $ 55,795
PGM ounces sold were up by 18% in Q1 2009 compared to Q1 2008 as a result of a
24% increase in ore tonnes mined (318,394 tonnes in Q1 2009 compared to 257,748
tonnes in Q1 2008) and increased recovery rates (80% in Q1 2009 compared to 78%
in Q1 2008). Grades have remained constant at 4.0 g/tonne since the beginning
of 2008. Total tonnage processed decreased by 9% compared to Q1 2008 because
there were 88,948 tonnes of tailings processed in Q1 2008 and none in 2009.
Planning is in progress to recommence the treatment of tailings from the
existing dam.
Total development for the quarter was 4,573 metres, comparable to the 4,409
metres achieved in Q1 2008, and on-reef development increased by 17% to 2,745
metres from 2,343 metres in Q1 2008. The Company has experienced a continued
improvement in mining operations as a result of increasing the level of on-reef
development which has allowed for an improvement in mining flexibility and has
facilitated the planned production build-up at the mine. On-reef development is
expensed for accounting purposes.
Recovery rates increased from 78% in Q1 2008 to 80% in Q1 2009 as the
concentrator achieved steady state operating conditions subsequent to the
upgrades made during Q2 2008.
Operating cash costs, a non-IFRS measure, decreased 23% to $536 per ounce in Q1
2009 compared to $698 per ounce in Q1 2008. Total cash operating costs in Rand
were up by 18% compared to Q1 2008. The increase in Rand operating cash costs
was due to a general 10% rate of inflation on labour and consumables,
particularly steel, fuel-related expenditures and mine supplies, and increased
costs associated with higher mining volumes and production throughout 2008.
This was largely offset by a 30% rise in the value of the U.S. dollar relative
to the Rand between Q1 2008 and Q1 2009. A reconciliation of production costs,
as reported in the income statement, to cash operating costs, is shown under
Section 3.2 below under CRM non-IFRS measures.
The chrome recovery circuit at CRM was fully integrated at the end of the
second quarter of 2008. As a result, penalties for excess chrome present in PGM
concentrates have been significantly reduced and commercial quantities of
chrome were produced and sold as a by-product of PGM production. In July 2008,
the Company commenced reporting cash costs net of chrome by-product credits,
also a non-IFRS measure. A total of 77,554 tonnes of chrome was produced in Q1
2009 and a total of 84,207 tonnes were sold for proceeds of $4,895,000.
Operating cash costs net of by-product credits dropped to $388 per ounce.
Chrome penalties in the PGM concentrate also dropped significantly, from
$2,602,000 in Q1 2008 to $314,000 in Q1 2009.
In Q1 2009, CRM suffered five lost time injuries (same as in Q1 2008) resulting
in a Lost Time Injury Frequency Rate ("LTIFR") of 1.83 (2.57 in Q1 2008). The
Company`s twelve month rolling LTIFR of 2.52 to March 31, 2009 compares
favorably with other platinum producers in South Africa.
3.2 CRM non-IFRS measures
The following table provides a reconciliation of EBITDA and cash operating
costs per PGM ounce to mine operating earnings and production costs,
respectively:
Crocodile River Mine non-IFRS measures
(Expressed in thousands of U.S. dollars, except ounce and per ounce data)
Three months ended
March 31, March 31,
2009 2008
Mine operating earnings $ 3,501 $ 31,651
Depletion and depreciation 3,517 4,394
EBITDA (1) 7,018 36,045
Production costs as reported 17,885 19,750
Adjustments for miscellaneous costs (2) (214) (323)
Cash operating costs 17,671 19,427
Less by-product credits - chrome revenues and
adjustments (4,895) -
Cash operating costs net of by-product credits 12,776 19,427
Ounces sold 32,969 27,825
Cash cost per ounce sold $ 536 $ 698
$ 388 $ 698
Cash cost per ounce sold net of by-product credits
(1) EBITDA includes provisional price adjustments, chrome revenues, chrome
penalties, and foreign exchange adjustments to sales.
(2) Miscellaneous costs include costs such as housing, technical services and
planning.
The Company is of the opinion that conventional measures of performance
prepared in accordance with IFRS do not fully demonstrate the ability of its
operations to generate cash flow. Therefore, the Company has included certain
non-IFRS measures in this MD&A to supplement its financial statements which are
prepared in accordance with IFRS. These non-IFRS measures do not have any
standardized meaning prescribed under IFRS, and therefore they may not be
comparable to similar measures employed by other companies.
In this MD&A, the Company has reported its share of earnings before interest,
depletion, depreciation, amortization and tax ("EBITDA") at CRM. This is a
liquidity non-IFRS measure which the Company believes is used by certain
investors to determine the Company`s ability to generate cash flows for
investing and other activities. The Company also reports cash operating costs
per ounce of PGM produced, another non-IFRS measure which is a common
performance measure used in the precious metals industry.
3.3 Development projects
3.3.1 CRM
In Q1 2009, the Company spent approximately $10.3 million at CRM, primarily on
surface works at the vertical shaft at Zandfontein, including conveyor belts
for the transport of ore hoisted up the vertical shaft and construction of
change houses and other associated infrastructure. The shaft hoisting capacity
will be 120,000 tonnes of ore per month plus associated waste, and the shaft,
along with the decline development, will allow access into the deeper parts of
the ore body.
Due to the recent significant downturn in the platinum group metals prices and
the global economy, the development of the Crocette and Kareespruit sections at
CRM was put on care and maintenance while the Company focused on increasing
production from existing mining areas.
3.3.2 Spitzkop/Kennedy`s Vale
The Company spent $0.4 million on the Spitzkop/Kennedy`s Vale project during Q1
2009, primarily for payment of previously committed equipment purchases.
Spitzkop is planned as a decline mining operation that will access high-grade
PGM resources in the UG2 reef at shallow depth without the requirement for high
capital cost shaft infrastructure. Spitzkop is situated updip of, and adjacent
to, the Kennedy`s Vale project. Kennedy`s Vale and the deeper sections of both
properties could utilize the existing twin vertical shafts. This infrastructure
would provide a significant reduction in capital costs for the development of
the deeper sections of both properties.
During 2008, work on the basic engineering for trial mining was completed and
long lead items such as mills and mining equipment were purchased or ordered.
The box-cuts for both the Merensky Reef and UG2 declines were completed. Due to
the current market environment, development of the declines was suspended at a
depth of about 180 metres. Equipment purchased will be stored and continuation
of the declines will be suspended until PGM prices improve.
A draft report on accessing the vertical shafts at Kennedy`s Vale to conduct
trial mining has been received and is being reviewed.
3.3.3 Mareesburg
A new order mining right application was submitted in December 2007 which
supports the Company`s intention to commence mining when PGM prices improve. An
updated feasibility study for the Mareesburg open pit is expected to be
completed in 2009.
3.4 Corporate and other expenses
General and administrative expenses ("G&A") are costs associated with the
Company`s corporate head office in Vancouver and the Johannesburg
administrative office. Such costs include legal and accounting, regulatory,
executive management fees, investor relations, travel and consulting fees.
Given the current downturn in the economy and the curtailment and postponement
of some of the Company`s projects, the trend was for G&A expenses to decrease
beginning in Q4 2008 and continuing into 2009, as the Company implemented cash
preservation measures in late 2008. G&A decreased by 62% to $1,636,000 in Q1
2009 from $4,333,000 in Q1 2008. The decrease in G&A was due to termination of
two senior executive officers at the end of Q1 2008, a reduction in certain
senior level staff in Johannesburg in late 2008, and a general reduction in
corporate travel and investor relations activities. In addition, $976,000 of
the decrease was due to a drop in both the Canadian dollar and the Rand
relative to the US dollar, as G&A costs were paid in Canadian dollars and in
Rand.
During Q1 2009, the Company`s board of directors approved the grant of 80,000
stock options to employees of the Company. Share-based payment expense for the
quarter was $132,000. In Q1 2008, 1,500,000 stock options were granted and the
share-based payment expense was $1,349,000.
Interest income recorded during the quarter ended March 31, 2009 was $494,000
compared with $2,807,000 in the same period in 2008. The decrease in interest
income was due to lower average cash balances and lower interest rates in 2009
compared to the same period in 2008.
During the three months ended March 31, 2009 the Company recorded an income tax
recovery of $680,000, despite recording consolidated net profit. The recoveries
were based on net losses generated at CRM during the period as well as to an
expected reduction of future tax rates in South Africa, from 29% to 28%. The
consolidated statement of financial position reflects total deferred tax
liabilities of $37,095,000 which arose primarily as a result of the step-up to
fair value of the net assets acquired on the Barplats and Gubevu business
acquisitions during the years ended June 30, 2006, June 30, 2007, and December
31, 2008.
4. Liquidity and Capital Resources
At March 31, 2009, the Company had working capital of $28,951,000 (December 31,
2008 - $35,328,000) and cash and cash equivalents and short-term investments of
$21,966,000 (December 31, 2008 - $61,063,000) in highly liquid, fully
guaranteed, bank sponsored instruments.
The Company had no long-term debt at March 31, 2009, other than a provision for
environmental rehabilitation relating primarily to its Crocodile River Mine,
and capital lease obligations relating to mining vehicles with lease terms of
five years with options to purchase for a nominal amount at the conclusion of
the lease. See Contractual Obligations under Section 4.3 below.
4.1 Outlook
The unprecedented sharp decline in the prices of platinum group metals (PGMs)
during the last five months of 2008 had a negative impact on the Company`s
profitability and on the future of the Company`s development projects, most of
which were put on care and maintenance until a sustained recovery of PGM prices
takes place. PGM prices have recovered since the beginning of 2009, but the
realized basket prices that the Company is receiving is still more than 50%
below those recorded in July 2008. With the current global economic
uncertainty, the Company anticipates that PGM prices will remain depressed and
the Rand-U.S. dollar exchange rate will remain volatile in the near term. Based
on current PGM prices, the current value of the U.S. dollar, and planned
production levels at CRM, the Company expects to resume generating positive
cash flows by the middle of 2009, albeit at significantly lower levels than
earlier in 2008.
In light of the current market environment, the Company`s near-term goal is to
continue to preserve its cash balances to the greatest extent possible, by
minimizing operating costs and by curtailing capital expenditures. In that
regard, in December 2008, the Company reviewed its operations at CRM with a
view to optimizing efficiencies and reducing costs wherever possible without
compromising safety, health or environmental standards. The Company also
reassessed the project economics and the previously planned capital budget for
the Crocette section at CRM and for the Spitzkop and Mareesburg projects on the
Eastern Limb, with a view to determining an appropriate development schedule
given the Company`s current cash balances, its ability to generate sufficient
cash flows, and its ability to obtain additional funding in the current market
environment. Additional funding may be required and may include external debt
financing, joint venture or other third party participation in one or more of
the projects, or the public or private sales of equity or debt securities of
the Company.
If current market conditions persist for an extended time and PGM prices remain
at present levels or lower, then the cash flows from CRM and current cash
balances will be insufficient to advance any or all of the Company`s
development projects to commercial production. This, along with the current
tight credit markets that may result in higher financing costs, could
negatively affect the Company`s ability to obtain equity financing, external
debt financing or third party participation. There can be no assurance that
additional funding will be available to the Company or, if available, that this
funding will be on acceptable terms. If adequate funds are not available, the
Company may be required to further delay or reduce the scope of any or all of
its development projects.
The Company has assessed the carrying values of its mineral properties as a
result of the market downturn. In the last few months, declining PGM prices and
negative market sentiment have lead to the Company`s market capitalization
dropping below its book value as at December 31, 2008 and as at March 31, 2009.
Based on current and expected PGM prices and cost structures, management has
determined that the values of the Company`s mineral properties have not been
impaired, with the exception of the Kennedy`s Vale Project, which was impaired
by $313,603,000 as determined under IFRS. This impairment has been recorded in
the year ended December 31, 2008. Should current market conditions and
commodity prices worsen for a prolonged period of time, an impairment of the
Company`s other mineral properties may be required.
4.2 Share Capital
During the three months ended March 31, 2009, the Company granted 80,000 stock
options with an exercise price of Cdn$0.32 and expiry date of February 11,
2014, giving rise to share-based payment expense of $6,000 for the quarter. The
total share-based payment expense for the period was $132,000, which takes into
account the vesting of options. In Q1 2009, 3,350,000 options were forfeited at
a weighted average exercise price of Cdn$1.96.
On March 28, 2009, the Company`s warrants that traded on the Toronto Stock
Exchange under the symbol "ELR.WT.A" expired. A total of 58,485,996 warrants
expired unexercised.
As at May 13, 2009, the Company had:
- 680,526,421 common shares outstanding; and
- 61,176,000 stock options outstanding, which are exercisable at prices
ranging from Cdn$0.32 to Cdn$3.38 most of which expire between 2011 and 2018.
4.3 Contractual Obligations and Commitments
The Company`s major contractual obligations and commitments at March 31, 2009
were as follows:
(in thousands of U.S.
dollars) Less than More than
Total 1 year 1-5 years 5 years
Provision for
environmental
rehabilitation $ 12,651 $ - $ - $ 12,651
Capital expenditure
contracted at
March 31, 2009 but
not recognized on the
statement of financial
position 12,822 12,822 -
Capital lease obligations 4,464 1,020 3,444 -
Obligations related to
Gubevu acquisition 2,905 2,905 - -
$ 32,842 $16,747 $ 3,444 $ 12,651
Pursuant to the Company`s acquisition of a 42.39% interest in Gubevu Consortium
Holdings (Pty) Ltd. ("Gubevu") during the year ended June 30, 2007, the Company
entered into an agreement to pay an unrelated third party certain amounts that
existed in the underlying Gubevu agreements as an obligation of Gubevu. As at
June 30, 2007, the total payable was R55.4 million of which half was paid in
June 2008. The remaining amount, which is due in June 2009, has been recorded
at a discounted value of $2,870,000 (27.7 million Rand) and has been included
in current loans in the financial statements.
5. Related Party Transactions
A number of the Company`s executive officers are engaged under contract with
those officers` personal services companies. During the three months ended
March 31, 2009 the Company paid $266,000 for management and consulting fees and
$nil for reimbursements of expenses to private companies controlled by officers
and directors of the Company, compared to $358,000 and $90,000 respectively
during the same period in 2008. Management fees, which are paid in Canadian
dollars, were lower during Q1 2009 compared to Q1 2008 due to the resignation
of a senior officer in Q1 2008 and due to a weaker Canadian dollar in Q1 2009.
All related party transactions were recorded at the amounts agreed upon between
the parties. Any balances payable are payable on demand without interest.
6. Adoption of Accounting Standards and Pronouncements under IFRS
In 2008, the Company`s management assessed the impact of an early adoption to
IFRS and concluded that early adoption would be beneficial to shareholders. An
application for early adoption was submitted to the British Columbia and
Ontario Securities Commissions (the "Commissions") in November 2008.
In February 2009, the Commissions granted the Company exemptive relief to adopt
International Financial Reporting Standards ("IFRS") with an adoption date of
January 1, 2009 and a transition date of January 1, 2008. The Company`s first
financial statements prepared under IFRS are the interim financial statements
for the three months ended March 31, 2009, which includes full disclosure of
its new IFRS policies in Note 3 to these financial statements. These financial
statements also include reconciliations of the previously disclosed comparative
periods financial statements prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") to IFRS is set out in Note 15.
6.1 Significant differences between IFRS and Canadian GAAP in the Company`s
financial statements
During the year ended December 31, 2008, the Company recorded an impairment of
its Kennedy`s Vale ("KV") Project of $313,603,000 under IFRS, as the discounted
cash flows of the KV Project were below its carrying value. The amount of the
impairment was the difference between the discounted cash flows and the
carrying value. Deferred tax liabilities associated with the KV Project were
also written off as a result. The effect of the impairment was a decrease in
property, plant and equipment of $274,354,000, from $783,039,000 under Canadian
GAAP, to $508,685,000 under IFRS. An impairment was not required under Canadian
GAAP, as the undiscounted cash flows of the KV Project were higher than its
carrying value. Since the valuation of the KV Project was based on a production
start date of 2020, discounted and undiscounted cash flows varied
significantly, creating a difference in the impairment determination under IFRS
and under Canadian GAAP.
Tests for impairment are based on certain assumptions on metal prices,
production rates, project start-up dates, operating costs, capital costs, and
discount rates. Should any of these assumptions change and cause an adverse
effect on the valuation of a project, additional impairment charges may be
required.
At January 1, 2008, the Company elected to eliminate its currency translation
adjustment balance in the statement of financial position, as allowed for
first-time IFRS adopters. The effect of this elimination was a decrease in the
deficit of $21,747,000, from $68,132,000 under Canadian GAAP to $46,385,000
under IFRS.
7. Internal Control over Financial Reporting
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
the Company, together with the Company`s management, are responsible for the
information disclosed in this MD&A and in the Company`s other external
disclosure documents. For the three months ended March 31, 2009 and March 31,
2008, the CEO and the CFO have designed, or caused to be designed under their
supervision, the Company`s disclosure controls and procedures ("DCP") to
provide reasonable assurance that material information relating to the Company
and its consolidated subsidiaries has been disclosed in accordance with
regulatory requirements and good business practices and that the Company`s DCP
will enable the Company to meet its ongoing disclosure requirements.
The CEO and CFO have evaluated the effectiveness of the Company`s disclosure
controls and procedures and have concluded that the design and operation of the
Company`s DCP were effective as of March 31, 2009 and that the Company has the
appropriate DCP to ensure that information used internally by management and
disclosed externally is, in all material respects, complete and reliable.
The CEO and the CFO are also responsible for the design of the internal
controls over financial reporting ("ICFR") within the Company in order to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with International Financial Reporting Standards ("IFRS"). During 2008, the
Company engaged an international accounting firm to act as the Company`s
internal auditors for its South African operations. Under the supervision, and
with the participation, of the CEO and the CFO, management conducted an
evaluation of the effectiveness of the Company`s ICFR based on the framework in
the Internal Control - Integrated Framework developed by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, the CEO and the CFO concluded that the design and
operation of the Company`s ICFR were effective as at March 31, 2009.
The scope of the Company`s design of DCP and ICFR excluded Gubevu Consortium
Holdings (Pty) Ltd., a subsidiary which is accounted for as a special purpose
entity under IFRS (previously a variable interest entity under Canadian
generally accepted accounting principles).
During the design and evaluation of the Company`s ICFR, management identified
certain non-material deficiencies, a number of which have been addressed or are
in the process of being addressed in order to enhance the Company`s processes
and controls. The Company employs entity level and compensating controls to
mitigate any deficiencies that may exist in its process controls. Management
intends to continue to further enhance the Company`s ICFR.
The Company`s management, including its CEO and CFO, believe that any DCP and
ICFR, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
they cannot provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been prevented or detected. These
inherent limitations include the realities that judgments in decision making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by unauthorized override
to the future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Accordingly, because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and not be detected.
There have been no changes in the Company`s ICFR during the quarter ended March
31, 2009 that have materially affected, or are reasonably likely to materially
affect, the Company`s ICFR.
8. Cautionary Statement on Forward-Looking Information
This MD&A, which contains certain forward-looking statements, are intended to
provide readers with a reasonable basis for assessing the financial performance
of the Company. All statements, other than statements of historical fact, are
forward-looking statements. The words "believe", "expect", "anticipate",
"contemplate", "target", "plan", "intends", "continue", "budget", "estimate",
"may", "will", "schedule" and similar expressions identify forward looking
statements. Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies. Known and unknown factors could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, fluctuations in the
currency markets such as Canadian dollar, South African Rand and U.S. dollar,
fluctuations in the prices of PGM and other commodities, changes in government
legislation, taxation, controls, regulations and political or economic
developments in Canada, the United States, South Africa, or Barbados or other
countries in which the Company carries or may carry on business in the future,
risks associated with mining or development activities, the speculative nature
of exploration and development, including the risk of obtaining necessary
licenses and permits, and quantities or grades of reserves. Many of these
uncertainties and contingencies can affect the Company`s actual results and
could cause actual results to differ materially from those expressed or implied
in any forward-looking statements made by, or on behalf of, the Company.
Readers are cautioned that forward-looking statements are not guarantees of
future performance. There can be no assurance that such statements will prove
to be accurate and actual results and future events could differ materially
from those acknowledged in such statements. Specific reference is made to the
Company`s most recent Annual Information Form on file with Canadian provincial
securities regulatory authorities for a discussion of some of the factors
underlying forward-looking statements.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future
events or otherwise, except to the extent required by applicable laws.
May 13, 2009
Ian Rozier
Date: 13/05/2009 16:34:34 Produced by the JSE SENS Department.
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