| Wed 20 May 2009, 16:53 | | BCD - BRC DiamondCore - Management`s Discussion And Analysis Of Financial |
|
BCD
BCD
BCD - BRC DiamondCore - Management`s Discussion And Analysis Of Financial
Condition And Results Of Operations For The Three Month Period Ended March 31,
2009
BRC DIAMONDCORE LTD.
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2009
The following Management`s Discussion and Analysis of Financial Condition and
Results of Operations (the "MD&A") has been prepared by management and
provides a review of the activities, results of operations and financial
condition of BRC DiamondCore Ltd. (formerly BRC Diamond Corporation) (the
"Company" or "BRC DiamondCore") based upon Canadian generally accepted
accounting principles. This MD&A should be read in conjunction with the
unaudited interim consolidated financial statements as at, and for the three
month period ended, March 31, 2009, as well as the notes thereto, the audited
consolidated financial statements as at, and for the financial year of the
Company ended, December 31, 2008 ("fiscal 2008") and the notes thereto and the
annual MD&A for fiscal 2008. All amounts are expressed in Canadian dollars
unless otherwise stated.
This MD&A is dated as of May 15, 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 Democratic Republic of the Congo
(the "DRC") or South Africa, changes to regulations affecting the Company`s
activities, delays in obtaining or failure to obtain required project
approvals, the uncertainties involved in interpreting geological data and the
other risks involved in the diamond exploration business. Any forward-looking
statement speaks only as of the date on which it is made and, except as may be
required by applicable securities laws, the Company disclaims any intent or
obligation to update any forward-looking statement, whether as a result of new
information, future events or results or otherwise. Although the Company
believes that the assumptions inherent in the forward-looking statements are
reasonable, forward-looking statements are not guarantees of future
performance and accordingly undue reliance should not be put on such
statements due to the inherent uncertainty therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition, exploration and development of
diamond properties in known diamond producing areas in the Northern Cape of
South Africa and in the DRC.
The Company`s shares commenced trading on the Toronto Stock Exchange on
February 11, 2008, following the acquisition by the Company of Diamond Core
Resources Limited ("Diamond Core"), a South African based diamond exploration
and development company that had been listed on the JSE Limited ("JSE") in
Johannesburg, South Africa. Diamond Core was 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 three month period ended March 31, 2009, the Company reported a net
loss of $1,483,000 (compared to a net loss of $3,438,000 for the three month
period ended March 31, 2008).
The Company`s accumulated deficit as at March 31, 2009 was $110,373,112
(compared to $108,890,567 as at December 31, 2008). The Company had a working
capital deficit of $14,195,342 as at March 31, 2009 (December 31, 2008:
$13,033,742).
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 continuing low
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 selected business units, sale of non-core assets and
entering 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 sufficient 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 continued the strategic review of
each of its South African operations that it had begun at the end of 2008. The
average cost of production at each of the Company`s bulk sampling operations,
i.e. Paardeberg East, Silverstreams and De Kalk, exceeded the expected revenue
from the proceeds of sale of recovered diamonds. Consequently, during the
first quarter of 2009, the Company continued its suspension of its bulk
sampling operations that had started in December 2008. The Company`s bulk
sampling operations, i.e. Paardeberg East, Silverstreams and De Kalk, are
still under care and maintenance.
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. The Company
took the decision early in January 2009 to retrench all operational staff. The
negotiation process was started with the employees, workers unions and all
affected parties. The retrenchment process was concluded in conjunction with
facilitation by the Commission for Conciliation, Mediation and Arbitration
("CCMA") and the services of employees were terminated in April 2009. A total
of 187 employees were retrenched and a skeleton staff is now employed on a
rolling short term contract basis to attend to the administration of the
Company and to ensure protection and preservation of the Company`s assets.
Silverstreams Bulk Sampling Alluvial Project
The plant comprises a Taurus rotary screen 670tph front end, six 16ft rotary
pans, a 50tph re-concentrating Dense Medium Separation plant, a primary Flow
Sort X-Ray machine recovery unit, an attritioner, a secondary Bateman GB 1000
automated grease belts recovery unit and a "hands off" sort house.
The decision taken by the Company to suspend bulk sampling operations in the
fourth quarter of 2008 is still effective.
De Kalk Bulk Sampling Alluvial Project
The decision taken by the Company to suspend bulk sampling operations in the
fourth quarter of 2008 is still effective.
The contractor has removed all its equipment from site. The Company is keeping
security in attendance on the site as its final recovery plant with two Flow
Sort X-ray machines and a sort house is still on the site.
Sandrift Alluvial Prospecting Project
The Company has a prospecting licence on this alluvial gravel deposit. No
further exploration on this project was carried out in the first quarter of
2009.
Paardeberg East Bulk Sampling Kimberlite Project
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.
The decision taken by the Company to suspend bulk sampling operations in the
fourth quarter of 2008 is still effective.
Democratic Republic of the Congo ("DRC")
Tshikapa Project (12 licences)
With additional drilling on the Tshikapa project, the Company has been able to
focus on the most interesting areas. One hole was drilled on PR 1188 and was
terminated in sandstone with slightly elevated magnetic susceptibility
readings. Two more exploration licences were dropped and the Company now has
retained access to 12 exploration licences in the Tshikapa area through the
following companies: Acacia Tshikapa project (6 licences), King`s Mine (1
licence), Groupe ABBA (1 licence), Caspian Oil & Gas (2 licences) and
Investors Equity Ltd (2 licences)
The drilling program at Tshikapa was temporarily suspended during the three
month period ended March 31, 2009 whilst the Company restructured its
financial position. The camp at Tshikapa is under care and maintenance.
Northern DRC project (18 licences)
The projects in the northern DRC are part of the Rio Tinto Northern DRC joint
venture in which Rio Tinto has the right to earn in over the various stages of
the exploration program. Greenfields stream sampling work continued over the
Bomili project during the quarter and a total of 156 stream samples were
collected.
Most of the samples were collected over the Coexco exploration licences (107
samples) and these has now been completely covered by stream sediment
sampling. Other samples were collected from the Company (21 samples) and BCE
(28 samples) licences. All samples collected were taken on a spacing of one
sample to every 20 km2 to 25 kmSquared and this program covered well over
2,000 kmSquared of very difficult terrain.
The screened and hand gravitated samples were concentrated by mechanical jig
in Kinshasa and these concentrates have been submitted to the Rio Tinto
laboratory for analyses.
The geochemical samples were forwarded to Coexco for analysis for other
minerals.
Kwango Project
A financial model was run based on the diamond size frequency analysis that
was conducted on diamonds from over the main target areas in the Kwango. A
total of 2,734 stones (282.41 carats) were used in this study and the average
stone size varied from 0.118 to 0.074 carats per stone from the most upstream
licence to the most downstream licence. Optimistic values of US$100 per carat
were used in the model.
In addition the overburden thickness varied from seven to 12 metres over the
various terraces and the gravel thickness varied from 0.2 to 0.6 metres. Based
on the financial model, using various sensitivities, the resource was not
profitable even with the most optimistic mining costs. This was made worse by
the recent drop in global diamond prices. It has therefore been decided to
withdraw from the Kwango project and all remaining licences have been
relinquished.
Licence Holding
In order to focus the exploration program on the most promising areas, many
licences were relinquished with a high degree of confidence. No new
applications were lodged during the first quarter of 2009.
During the first quarter of 2009, the following exploration licences were
relinquished: Acacia (5), the Company (4), Candore (5), BCM (1), Caspian Oil
and Gas (9), Kwango Mines (3), Coexco (44). The Company will keep its focus
on the following licences which are held by the Company directly or by
partners through various option agreements: Acacia (6), BCE (16), the Company
(2), Caspian Oil & Gas (2), Group Abba (1), King`s Mine (1) and IEL (2).
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, 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 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 shares 89,464
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, for the year ended December 31, 2008, 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.
RESULTS OF OPERATIONS
For the three month period ended March 31, 2009, the Company reported a net
loss, of $1,483,000 (or $0.06 per share), compared to a net loss of $3,438,000
(or $0.17 per share) incurred during the three month period ended March 31,
2008. The reduced loss is due to the discontinuation of the Company`s bulk
sampling operations, placing all activities in South Africa on a care and
maintenance basis and the significant scaling back of the Company`s operations
in the DRC.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the first quarter of 2009. This financial information has been prepared in
accordance with Canadian generally accepted accounting principles. The
Company`s reporting and measurement currency is the Canadian dollar.
2009 2008
2008 2008
1st 4th 3rd 2nd
quarter quarter quarter quarter
Net loss ($`000) $1,483 $ $ $
90,873 7,498 1,193
Net loss per share $ $ $
(basic and diluted) $0.06 3.70 0.31 0.05
2007 2007
2008 2007
1st 4th 3rd 2nd
quarter quarter quarter quarter
Net loss ($`000) $ $ $ $
3,438 16 1,114 521
Net loss per share $ $ $ $
(basic and diluted) 0.17 0.01 0.08 0.04
During the first quarter of 2009, the Company`s net loss reduced to $1,483,000
compared to a net loss of $90,837,000 reported during the fourth quarter of
2008. This change is mainly as a result of the impairments which took place
at the end of 2008 and Company`s decision to place its operations on a care
and maintenance basis
During the fourth quarter of 2008, the Company`s net loss increased to
$90,873,000 compared to a net loss of $7,498,000 reported during the third
quarter of 2008. This increase is due mainly to the impairment of goodwill,
mineral properties and capital assets which took place at the end of 2008.
During the third quarter of 2008, the Company`s net loss increased to
$7,498,000 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.
LIQUIDITY AND CAPITAL RESOURCES
As at March 31, 2009, the Company had cash of $233,000 and a working capital
deficit of $14,195,342 compared to cash of $198,085 and a working capital
deficit of $13,033,742 as at December 31, 2008.
As a result of suspending its bulk sampling activities during the fourth
quarter of 2008, the Company does not currently generate operating revenues.
Suspension of bulk sampling occurred when the collapse of diamond prices meant
that operating costs exceeded expected revenues from the sale of diamonds
recovered.
Similarly to other foreign entities and all local companies operating in South
Africa, the Company is subject to currency exchange controls administered by
the country`s central bank. An ability to manage cash flows, 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 have and are being met through a variety
of sources, including: cash on hand, cash generated from operations, cash
generated from the sale of non core assets, existing credit facilities, trade
credit, leases, and debt and equity markets.
Weakening global economic conditions have led to a significant weakness in
commodity prices in recent times, 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 2009, the
Company will either have to access debt and equity markets for financing or
sell off non-core business units over the next twelve month period 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 continued a series of
measures, initiated in the last quarter of 2008, 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. The Company may also
sell non-core business units.
As at December 31, 2008, the consolidated financial statements were prepared
in accordance with Canadian GAAP applicable to a going concern. In the first
quarter of 2009, the Company has been able to contain costs and continue as a
going concern and if the measures detailed above are successfully implemented,
although this is subject to factors outside of the control of management, then
management believes that the Company will be able to satisfy its current and
long-term obligations.
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
March 31, 2009, the balance of the Loan Facility was $6,227,577. (December 31,
2008: $6,172,317) including accrued interest of $363,133 (December 31, 2008:
$307,872).
The Loan Facility is guaranteed by Banro Corporation, a significant
shareholder of the Company. The Loan Facility was used to fund the Company`s
exploration activities in the DRC. As at May 15, 2009, the Loan Facility
guaranteed by Banro is still in place. The Company has undertaken to release
Banro from its guarantee as soon as possible. The Company is in breach of an
agreement between Banro and the Company to have repaid the loan to the
institution by July 28, 2008. Banro has not exercised its rights in terms of
the Company`s undertaking to repay the loan to the institution.
Contractual obligations (not on the balance sheet) that have been entered into
by the Company as at March 31, 2009 are summarized in the table below:
Total Less than 1 - 3
1 year years
Contractual obligations $204,964 $204,964 $nil
Operating leases $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 three month period ended March
31, 2009:
DRC
Kwango Lubao Tshikapa Other
Project Project Tshikapa (Candore) Projects Total
(Acacia) Project
Project
March 31, 2009 $`000 $`000 $`000 $`000 $`000
$`000
Balance December
31,2008 0 327 3,032 415 1,787 5,561
Administrative and 21
office support - 54 6 (144) (62)
Depreciation
- - - - 41 41
Field camp expenses 10
- 58 - 128 196
Professional fees 3
- 5 - 11 20
Remote sensing
- - - - - -
Transport 8 - 16 28
4 -
Foreign exchange (13) (120) (16) (71) (221)
diff
Subtotal - first 43 (13) 1
three month period (10) (19) (2)
of 2009
Balance 3/31/2009
43 314 3,033 405 1,768 5,663
Other projects consist of the following projects: Tshikapa (Kwango Mines),
King`s Mine, Zongo, Businga, Bornili, Ilunga and Kwango (Acacia).
South Africa
Through placing the South African projects on a care and maintenance basis,
exploration has been suspended and the salaries and wages and other ongoing
costs were no longer capitalized as deferred exploration expenditure. These
costs were charged to the statement of operations and deficit for the three
month period ended March 31, 2009.
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at May15, 2009, the Company had outstanding 26,091,310
common shares and stock options to purchase an aggregate of 3,449,600 common
shares of the Company.
In addition, as part of the Diamond Core Acquisition, the Company had 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 were
met in relation to certain of Diamond Core`s projects (see "Transaction with
Diamond Core Resources Limited").
RELATED PARTY TRANSACTIONS
Balances payable March 31, 2009 December 31,
$`000 2008
$`000
Macleod Dixon LLP $ 799 $
745
SFW Village 71 -
AT Kondrat 25 -
DK Madilo 12 -
Scallan Project Facilitation 13 13
(Pty) Ltd(f)
Sterling Portfolio Securities 81 11
Inc. (g)
$ $
1,001 769
For the three For the three
month period month period
ended ended
Transactions March 31, 2009 March 31,
$`000 2008
$`000
Macleod Dixon LLP (a) $ 54 $ 159
Banro Corporation (b) - -
88
Banro Congo Mining sprl - 4
SFW Village (c) 25 25
AT Kondrat (d) 25 -
DK Madilo (e) 12 -
$ $
116 276
a) During the three month period ended March 31, 2009, legal fees and
related costs of $54,000 (March 31, 2008: $159,000) incurred in
connection with general corporate matters 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, 2008: 14.35%) equity stake in
the Company. It is engaged in the acquisition and exploration of
gold properties in the DRC. During the three month period ended
March 31, 2009, the Company incurred $nil in general and office
related expenses for contribution to these expenses (March 31, 2008
: $88,000).
c) Consulting fees in respect of services to the Company. Mr Village is
a director of the Company.
d) Consulting fees are paid to Mr. Kondrat who is a non-executive
director of the Company.
e) Consulting fees are paid to Mr. Madilo, who is an officer of the
Company.
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
a) Goodwill and intangible assets
Effective January 1, 2009, the Company adopted CICA Section 3064,
Goodwill and Intangible Assets, replacing Section 3062, Goodwill and
Other 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. The new standard provides guidance on the recognition,
measurement, presentation and disclosure of goodwill and intangible
assets subsequent to its initial recognition. The adoption of this new
standard did not have a significant impact on the financial statements.
b) Mining exploration costs
On March 27, 2009, the CICA issued EIC-174, Mining Exploration Costs, to
provide additional guidance for mining exploration enterprises on when an
impairment test is required. This new Abstract replaces EIC-126,
Accounting by Mining Enterprises for Exploration Costs. The Abstract
states that an enterprise that has initially capitalized exploration
costs has an obligation in the current and subsequent accounting periods
to test such costs for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable.
The accounting treatments provided in EIC-174 have been applied in the
preparation of these financial statements and did not have a significant
impact on the valuation of exploration assets.
c) Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities" which requires the
Corporation to consider its own credit risk as well as the credit risk of
its counterparty when determining the fair value of financial assets and
liabilities, including derivative instruments. The standard is effective
for the first quarter of 2009 and is required to be applied
retrospectively without restatement of prior periods. The adoption of
this standard did not have an impact on the valuation of financial assets
or liabilities.
FUTURE ACCOUNTING STANDARDS
a) 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 is 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 to 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.
b) 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.
Proven and probable reserve estimates are determined based on professional
evaluations provided by internal or external qualified persons. Reserve
estimates should not be interpreted as assurances of the life or of the
profitability of current or future operations. Estimates of the reserves may
change based on additional knowledge gained subsequent to the assessment date.
This may include additional data available from continuing exploration and
development, results from the reconciliation of actual production data against
the original reserve estimates, or the impact of economic factors such as
changes in the price of commodities or the cost of components of production.
The estimation of reserves is a subjective process, all of which are subject
to numerous uncertainties and various interpretations.
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 of proven and probable reserves. 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 at
December31, 2008, 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: 2008: 3.075% (2007: 4.11% to
4.53%);
(ii) expected volatility: 2008: 95% (2007: 62%);
(iii) expected life: 2008: 5 years (2007 : 5 years); and
(iv) expected dividends: 2008: $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 three month period ended March 31, 2009.
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 but will be able to do so if suitable joint
venture agreements are concluded.
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. 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. 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.
In 2008, South Africa experienced significant power shortages but it is not
expected that these shortages will be repeated in the immediate future and
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. 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:
March 31, December 31,
2009 2008
$`000 $`000
Financial assets
Held-for-trading, measured at fair
value
Cash $ $
233 198
Restricted Cash
236 308
Loans and receivables, measured at
amortised cost
Other assets 155 562
Financial liabilities
Other liabilities, measured at
amortised cost
Accounts payable and accrued $ $
liabilities 8,253 7,542
Debt 6,227 6,172
Lease
658 499
b) Allowance account for credit losses
March 31,2009 December 31,
2008
Accounts receivable $ $
- -
Allowance for doubtful accounts - -
Other -
-
$ $
- -
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, asset sales, 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, the Company expects a
need to access debt and equity markets for financing over the next twelve
month period or find alternative sources of finance. 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 March 31, 2009, the Company will be able to satisfy its
current and long-term obligations. As at March 31, 2009, 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 rand into Canadian
dollars. Unfavourable changes in the applicable exchange rate may result in a
decrease or increase in foreign exchange gains or losses. The Company does
not use derivative instruments to reduce its exposure to foreign currency
risk.
For the three month period ended March 31, 2009, 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
$73,746 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 affected 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 affected 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.
RETRENCHMENT OF EMPLOYEES
As a result of the continued depressed state of the diamond market, with
diamond prices at a level such that operating costs would have exceed expected
revenue, the Company placed all its South African operations on a care and
maintenance basis and retrenched all employees of its South African
operations. In terms of South African labour law related to retrenchments
there are a mandatory consultation period and a mandatory notice period. This
process resulted in the final date of employment of the South African
employees being April 11, 2009. A skeleton staff is now employed on a rolling
short term contract basis to attend to the administration of the Company and
to ensure protection and preservation of the Company`s assets.
In the DRC employees have also been retrenched and operations significantly
cut back. The Tshikapa camp is being maintained on a care and maintenance
basis. Altogether 21 employees have been retrenched out of a total staff
complement of 31. In addition two expat contracts have also been discontinued.
FUTURE STRATEGY
The Company intends to restructure itself 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.
It will continue with its existing strategy of selling off non-core assets and
may also sell non-core business units to ensure sufficient cash flow to
maintain liquidity. The Company sees its main strategy as the exploration for
and, if successful, the consequent development of kimberlite diamond
operations in the DRC, with these being supported by its remaining operations
in South Africa.
INTERNAL CONTROL OVER FINANCIAL REPORTING
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. During the quarter ended March 31, 2009 the
Company extended the principles of Internal Control - Integrated Framework
issued by The Committee of Sponsoring Organizations of the Treadway Commission
to the South African operations with appropriate adaptation to local
conditions.
The Company`s decision to retrench operational staff, including accounting
staff, in response to deteriorating global economic conditions may impede its
ability to maintain an adequate internal control environment, specifically as
it relates to lack of segregation of duties and inadequate system monitoring.
The Company`s management is responsible for establishing and maintaining
adequate internal control over financial reporting. However, until such time
as sufficient financial resources are available, the Company might not be able
to mitigate the above described risks and weaknesses.
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.
RENEWAL OF CAUTIONARY ANNOUNCEMENT
Further to the cautionary announcement issued pursuant to the JSE listing
requirements, on May 6, 2009, shareholders are advised that negotiations are
ongoing and that they should continue to exercise caution when dealing in
their securities until a further announcement in made.
Date: 20/05/2009 16:53:51 Produced by the JSE SENS Department.
The SENS service is an information dissemination service administered by the
JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or
implicitly, represent, warrant or in any way guarantee the truth, accuracy or
completeness of the information published on SENS. The JSE, their officers,
employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature,
howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
