| Wed 20 May 2009, 16:54 | | BCD - BRC Diamondcore Ltd - Interim Consolidated Financial Statements as at and |
|
BCD
BCD
BCD - BRC Diamondcore Ltd - Interim Consolidated Financial Statements as at and
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")
(formerly BRC Diamond Corporation)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 2009
(expressed in Canadian dollars)
(unaudited)
NOTICE TO READER
These interim consolidated financial statements of BRC DiamondCore Ltd. as at
and for the three month period ended March 31, 2009 have been prepared in
accordance with Canadian generally accepted accounting principles and are the
responsibility of the Company`s management.
These interim consolidated financial statements have not been audited or
reviewed by the Company`s auditors.
Page
Table of Contents 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations and Deficit 3
Consolidated Statements of Comprehensive Loss 4
Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial Statements 6
As at As at
March 31, December
2009 31,
$`000 2008
$`000
ASSETS
CURRENT
Cash $ 233 $198
Prepaid expenses and other assets 154 562
Inventory (Note 4) 122 122
509 882
NON CURRENT
Restricted cash (Note 2) 236 308
Mineral properties and deferred exploration 9,108 9,075
expenditures (Note 9)
Capital assets (Note 10) 7,198 8,847
16,542 18,230
$ 17,051 $19,112
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 8,253 $7,542
(Notes 5 and 7)
Other liabilities 224 201
Debt (Note 6) 6,228 6,172
14,705 13,915
NON-CURRENT
Asset retirement obligations (Note 8) 2,525
2,132
Long term lease (Note 7) 658
499
3,183 2,631
Going concern (Note 1)
Commitments, contingencies and guarantees
(Note 12)
SHAREHOLDERS` EQUITY
Capital stock (Note 11) 105,815 105,815
Contributed surplus (Notes 11(b) and (e)) 7,200 6,934
Black economic empowerment reserve 1,076 1,076
Deficit (110,373) (108,891)
Accumulated other comprehensive loss (Note (4,555) (2,370)
11(f))
(837) 2,565
$ 17,051 $19,112
The accompanying notes are an integral part of these financial statements.
BRC DiamondCore Ltd.
(formerly BRC Diamond Corporation)
Consolidated Statements of Operations and
Deficit (unaudited)
(expressed in Canadian dollars)
For the For the
three three
month month
period period
ended ended
March 31, March 31,
2009 2008
$`000 $`000
Expenses
Consulting fees $70 $
50
Depreciation 710 -
Professional fees 49 243
General and administrative 789 359
Stock-based compensation (Note 11(b)) 266 -
Profit on sale of assets (18) -
Foreign exchange gain realized - (14)
Foreign exchange gain/(loss) unrealized 2,794
(482)
Other income - (26)
Loss before the under noted items (1,384) (3,406)
Interest income 11 27
Interest expense (110) (59)
Loss before income tax (1,483) (3,438)
Income taxes -
-
Net loss for the period (1,483) (3,438)
Deficit - beginning of the period (108,890) (5,889)
Deficit - end of the period $(110,373) $
(9,327)
Basic and diluted loss expressed in dollars $(0.06) $
per share (Note 11(d)) (0.17)
Headline loss expressed in dollars per $(0.06) $
share (Note 11(d)) (0.21)
Weighted average number of common shares 26,091,31 20,308,000
outstanding 0
GOING CONCERN (Note 1)
The accompanying notes are an integral part of these financial statements.
BRC DiamondCore Ltd.
(formerly BRC Diamond Corporation)
Consolidated Statements of Comprehensive Loss (unaudited)
(expressed in Canadian dollars)
For the three month period ended
March 31, March 31,
2009 2008
$`000 $`000
Net loss $ (1,483) $ (3,438)
Unrealized foreign currency loss on (4,555) -
self sustaining-operation
Reversal of fair value adjustment upon - -
disposition of investment
Comprehensive loss $ (6,038) $ (3,438)
GOING CONCERN (Note 1)
The accompanying notes are an integral part of these financial statements.
BRC DiamondCore Ltd.
(formerlyBRC Diamond Corporation)
Consolidated Statements of Cash Flows
(unaudited)
(expressed in Canadian dollars)
For the three month
period ended
March 31, March
2009 31,
$`000 2008
$`000
Net (outflow) inflow of cash related to the
following activities
Operating
Net loss for the year $ (1,483) (3,686)
$
Items not affecting cash
Depreciation 710 -
Asset retirement obligation 393 -
Stock-based compensation and stock-based 266 -
consulting fees
Unrealized foreign exchange loss (482) 2,794
Profit on sale of fixed assets (18) -
Non-controlling interest - 1
(131) (891)
Net change in non-cash working capital
items
Unrealised foreign currency loss (2,185) -
relating to balance sheet
Prepaid expenses and other assets 407 315
Accounts payable and accrued liabilities 734 (932)
Inventory 1 185
(1,175) (1,323)
Investing
Cash balances acquired from Diamond - 2,308
Core
Mineral properties and deferred (33) (1,596)
exploration expenditures
Capital assets 956 (120)
923 592
Financing
Increase in short-term debt 214 2,000
214 2,000
Effect of currency on cash 73 -
Increase in cash during the period 35 1,269
Cash - Beginning of the period 198 932
Cash - End of the period $ $ 2,201
233
SUPPLEMENTARY INFORMATION
Interest received $ 11 $ 27
Interest paid $ 110 $ 59
GOING CONCERN (Note 1)
Depreciation of capital assets of $41,000 was capitalized to mineral properties
in the three month period ended March 31, 2009 (March 31, 2008: $512,000).
During the three month period ended March 31, 2008, the Company issued
approximately 12 million common shares for a non-cash consideration of
$89,463,617 to acquire Diamond Core Resources Limited (See Note 3).
The accompanying notes are an integral part of these financial statements.
1. PRINCIPAL BUSINESS ACTIVTIES AND CONTINUATION OF THE BUSINESS
The principal business of BRC DiamondCore Ltd. (the "Company" or "BRC
DiamondCore") is the acquisition, exploration and eventual development of
mineral properties.
These financial statements of the Company have been prepared in accordance
with Canadian generally accepted accounting principles applicable to a going
concern, which assumes that the Company will continue in operation for a
reasonable period of time and will be able to realize its assets and
discharge its liabilities in the normal course of operations. Due to the
current significant economic turmoil and global credit crisis that have
impacted the demand for many goods and commodities, particularly the
Company`s commodity of diamonds, the Company has incurred a significant net
loss of $1,482,545 in the current period (three month period ended March 31,
2008: a loss of $3,438,000)and also in recent past periods. The Company`s
accumulated deficit as at March 31, 2009 was $110,373,112 (December 31, 2008:
$108,890,567). 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 reserves, receive the necessary permitting, or arrange
appropriate financing, the carrying value of the Company`s assets could be
subject to further material adjustment. Furthermore, certain current market
conditions including declining diamond carat prices have cast significant
doubt upon the validity of this assumption.
The Company`s ability to continue operations in the normal course of business
is dependent on several factors, including its ability to secure additional
funding and achieve or sustain profitable operations. Management is exploring
all available options to secure additional funding including equity and debt
financing, sale of non-core assets or business units and strategic
partnerships. In addition, the recoverability of amounts shown for mineral
properties and long-lived assets is dependent upon the existence of
economically recoverable reserves, the ability of the Company to obtain
financing to complete the development of the properties where necessary and
upon future profitable production, or, alternatively, upon the Company`s
ability to recover its spent costs through a disposition of its interests,
all of which are uncertain in the current climate. It is not possible to
determine with any certainty the success and adequacy of these initiatives,
nor the timing of completion of these initiatives to enable the Company to
continue until such time as when diamond prices recover, and the Company is
able to earn positive operating cash flows.
In considering the going-concern assertion, management has made significant
judgments and estimates with respect to the potentially adverse financial and
liquidity effects of the Company`s risks and uncertainties associated with
the current global economic conditions, current and future commodity prices,
its ability to access capital markets, its ability to meet its future
financial obligations, and the overall operation of its business segments.
Management has also assessed other items and risks arising in its businesses
and made reasonable judgments and estimates with respect thereto.
It is possible that the actual outcome of one or more of management`s plans
could be materially different or that one or more of management`s significant
judgments or estimates about the potential effects of the risks and
uncertainties could prove materially different which may affect the Company`s
ability to continue as a going concern.
These financial statements do not include any additional adjustments to the
recoverability and classification of certain recorded asset amounts and
classification of certain liabilities that might be necessary if the Company
was unable to continue as a going concern. If the going-concern basis were
not appropriate for these financial statements, then adjustments would be
necessary to the carrying value of the assets and liabilities, the reported
revenue and expenses and the balance sheet classifications used. These
adjustments could be material.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
These financial statements represent the consolidated financial statements of
the Company, which includes its accounts and those of its subsidiaries, BRC
Diamond South Africa (Pty) Limited and BRC DiamondCore Congo SPRL, and the
entities acquired as part of the Diamond Core Resources (Pty) Limited
transaction (Note 3) namely, Diamond Core Resources, Dikeing Mining (Pty)
Ltd, Diamond Core Kimberlite Projects (Pty) Ltd, Diamond Core Alluvial
Projects (Pty) Ltd, Diamond Core Mining and Exploration (Pty) Ltd, Diamond
Core Technical Services (Pty) Ltd, Diamond Core Trading (Pty) Ltd, Samadi
Resources (Pty) Ltd, Samadi Gemsbok (Pty) Ltd, Samadi Exploration (Pty) Ltd,
Samadi Douglas (Pty) Ltd, Prieska Diamond Mining (Pty) Ltd, Sandstraat
Eksplorasie (Pty) Ltd and Sandrif (Pty) Ltd (collectively the "Subsidiaries")
all of which are controlled through ownership of majority voting interests.
All inter-company balances and charges have been eliminated.
Revenue
Revenue is recognized when diamonds are sold to third parties at the tender
house. As the Company is currently in the development stage, any revenues
earned reduce the carrying value of deferred exploration expenditures.
Use of estimates
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. In
addition to the going concern assumption, assets and liabilities which
require management to make significant estimates and assumptions in
determining carrying values include mineral properties, capital assets, asset
retirement obligations, future income taxes, goodwill and stock-based
compensation.
Comprehensive income, Financial instruments, Hedges and Equity
All financial instruments are required to be measured at fair value on
initial recognition, except for certain related party transactions. Due to
the short term nature of the Company`s financial assets and liabilities,
management believes that the book value approximates the fair value.
Measurement in subsequent periods depends on whether the financial instrument
has been classified as either loans and receivables, held-for-trading, held-
to-maturity, available-for-sale, or other liabilities. The classification
depends on the purpose for which the financial instruments were acquired,
their characteristics and/or management`s intent. Management determines the
classification of financial assets and financial liabilities at initial
recognition and, except in very limited circumstances, the classification is
not changed subsequent to initial recognition.
(i)Loans and receivables
Loans and receivables are initially recognized at fair value including direct
and incremental transaction costs and are subsequently measured at amortized
cost, using the effective interest method.
(ii)Held-for-trading
Financial assets and financial liabilities that are purchased and incurred
with the intention of generating income in the near term, are classified as
held-for-trading. Financial instruments included in this category are
initially recognized at fair value and transaction costs are taken directly
to earnings along with gains and losses arising from changes in fair value.
(iii)Other liabilities
Financial liabilities, including short-term debt and accounts payable and
accrued liabilities, are classified as "other liabilities". Other liabilities
are initially recognized at fair value and are subsequently measured at
amortized cost using the effective interest methodTransaction costs
Transaction costs with respect to instruments not classified as held-for-
trading are recognized as an adjustment to the cost of the underlying
instruments and are recognized and amortized using the effective interest
method.
(iV)Comprehensive income
Comprehensive income is composed of the Company`s net income and other
comprehensive income. Other comprehensive income includes any unrealized
gains and losses on available-for-sale securities, foreign currency
translation gains and losses on the net investment in self-sustaining foreign
operations and changes in the fair market value of derivative instruments
designated as cash flow hedges, all net of income taxes. The components of
comprehensive income are disclosed in the Consolidated Statements of
Comprehensive Loss.
(v)Derivatives and hedge accounting
Derivative instruments, including embedded derivatives, are recorded at fair
value unless exempted from derivative treatment as normal purchase and sale.
All changes in their fair value are recorded in income unless cash flow hedge
accounting is used, in which case changes in fair value are recorded in other
comprehensive income. The Company does not currently apply hedge accounting
or have derivative instruments.
The Company designated its financial instruments as follows:
Financial instrument Classification Measurement
Cash Held-for-trading Fair value
Other assets Loans and receivables Amortized
cost
Due from related parties Loans and receivables Amortized
cost
Accounts payable and accrued Other liabilities Amortized
liabilities, other cost
liabilities and debt
Lease Other liabilities Amortized
cost
Mining assets
Exploration costs
Exploration costs are recorded in the statement of operations and deficit until
such time as the Company has legal title to the mineral rights. Thereafter all
exploration and evaluation expenditures are capitalized until such time as the
mining property is capable of commercial production. It will then be subject to
impairment tests when facts and circumstances suggest that the carrying amount
of the assets may exceed their recoverable amount. The value of diamonds
recovered from exploration activities is offset against exploration costs.
Mine development costs
Mine development costs are capitalized. Capitalized mine development costs
include expenditure incurred to develop new mineral resources, to define further
mineral resources and to expand the capacity of the mine. Amortization is first
charged on new mining ventures from the date on which commercial production
commences. Mine development costs will be amortized over the expected useful
life of the mine. Day to day mining costs are expensed as incurred.
Land and mineral rights
Undeveloped properties and mineral rights, upon which the Company has not
performed sufficient exploration work to determine whether sufficient
mineralization exists, are carried at original cost.
Land is not depreciated.
Mineral rights are amortized over the expected life of the mine from the date on
which commercial production commences. Where there is little likelihood of a
mineral right being exploited, or the value of an exploitable mineral right has
diminished below cost, a write down is affected.
Non- producing mineral properties
Costs relating to the acquisition, exploration and development of non-producing
resource properties are capitalized until such time as either economically
recoverable reserves are established, the properties are sold or abandoned, or
the value of the particular property is impaired. The excess of these costs over
estimated recoveries is charged to operations. The ultimate recovery of these
costs depends on the discovery and development of economic reserves or the sale
of the mineral rights. The amounts shown for non-producing resource properties
do not necessarily reflect present or future values.
In addition, the Company`s exploration opportunities in the Democratic Republic
of the Congo (the "DRC") may be subject to sovereign risks, including political
and economic instability, government regulations relating to mining, military
repression, civil disorder, currency fluctuations and inflation, all or any of
which may impede the Company`s activities in this country or may result in the
impairment or loss of part or all of the Company`s interest in the properties.
The exploration and development opportunities in South Africa must also be
compliant with applicable laws regarding the participation of historically
disadvantaged South Africans in order to register and retain mineral rights.
Capital assets
Capital assets of the Company are recorded at cost. Depreciation of capital
assets is recorded on a straight line basis over the following periods:
Vehicles - four years
Furniture and office equipment - two to seven years
Computer equipment - three years
Leasehold improvements - five years
Processing plant - hours worked / volumes processed
Exploration and mining assets - two to 15 years
Earthmoving equipment - hours worked
The depreciation methods, useful lives and residual values, if not
insignificant, are reassessed annually.
Goodwill
Goodwill represents the excess of the price paid over the fair value attributed
to the net assets, including tangible and identifiable intangible assets upon
acquisition of a business. Goodwill resulting from the acquisition of a business
is not amortized but tested for impairment annually or more frequently if
changes in circumstances indicate a potential impairment. The impairment test
consists of a comparison of the fair value of the reporting unit to which
goodwill is assigned with its carrying amount. Any impairment in the carrying
amount of goodwill is charged to earnings. The Company has elected to perform
its annual impairment test as of December 31st of each fiscal year.
The impairment test for goodwill is a two-step process. Step one consists of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to the reporting unit. Measurement of the fair
value is based on one or more fair value measures including present value
techniques of estimated future cash flows and a market approach for resources
based on diamond carat estimates. In estimating the fair value of the reporting
unit, the Company is also required to make a number of estimates, including
estimates about future revenue, income taxes, net earnings, overhead costs,
capital expenditure, and the cost of capital. Given the variability of the
future-oriented financial information, a judgement balancing discount and growth
rates enables management to opine whether or not the goodwill balance has been
impaired. If the carrying amount of the reporting unit exceeds the fair value,
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in income. The Company impaired the entire
amount of goodwill that arose on the acquisition of Diamond Core in 2008 (Note
3).
Impairment of long-lived assets
The Company reviews and evaluates the carrying value of its exploration and
development properties for impairment when events or circumstances indicate that
the carrying amounts of related assets or groups of assets may not be
recoverable. If the total estimated future cash flows on an undiscounted basis
are less than the carrying amount of the asset, an impairment loss is measured
and assets are written down to fair value. Future cash flows are estimated based
on estimated future recoverable mine production, expected sales prices and
considering current and historical commodity prices, price trends and related
factors, production levels, cash costs of production and capital and reclamation
costs, and the sustainable exploitation of the indicated ore body.
Capitalized interest
Interest on borrowings related to the financing of major capital projects under
construction is capitalized during the construction phase as part of the cost of
the project.
Overburden removal costs
The costs of removing overburden material to access mineral reserve deposits,
referred to as "stripping costs", are accounted for as variable production costs
to be included in the cost of inventory produced, unless the overburden removal
activity can be shown to be a betterment of the mineral property, in which case
these costs are capitalized. Betterment occurs when the overburden removal
activity provides access to additional sources of mineral deposit reserves that
will be produced in future periods which would not have otherwise been
accessible in the absence of the stripping activity.
Asset retirement obligations
The estimated fair value of an asset-retirement obligation is recognized as a
liability in the period incurred. A corresponding amount is added to the
carrying amount of the associated asset when incurred and depreciated over the
asset`s estimated useful life. The liability is accreted over time through
charges to earnings to reflect changes in its present value. Actual expenditures
incurred are charged against the accumulated obligation. The asset-retirement
obligation is reviewed by management annually and revised for changes in future
estimated costs and regulatory requirements.
Stock options
The Company`s stock option plan is referred to in Note 11(b). Stock-based
compensation is recorded using the fair value method of accounting for stock
options granted to directors, officers and employees whereby the weighted
average fair value of options granted is recorded as compensation expense in the
consolidated financial statements. Compensation expense on stock options
granted is recognized and amortized over the vesting period, with the offset
being credited to contributed surplus, which will transfer to share capital if
the related options are converted. Compensation expense on stock options granted
to non-employees is recorded as an expense in the period at the earlier of the
completion of performance and the date the options are vested using the fair
value method. Any consideration paid for shares purchased under this plan is
credited to share capital.
Restricted cash
Restricted cash to the value of $235,504 is held by various financial
institutions as security for guarantees the Company has provided to the
Department of Minerals and Energy Affairs in South Africa for the rehabilitation
of land disturbed by mining and exploration and to Eskom, the South African
electricity utility, in respect of electricity payment deposits.
Corporate transaction costs
Corporate transaction costs incurred in connection with business combinations
are recognized as an asset when the transaction is specifically identified and
the completion of such transaction is considered to be more likely than not.
Upon completion of the transaction, corporate transaction costs are included in
the costs of the acquired business and allocated to the acquired net assets.
Such corporate transaction costs are expensed when the transaction is abandoned.
Income taxes
The Company follows the liability method of accounting for income taxes. Under
this method, future income taxes are recognized based on the expected future tax
consequences of differences between the carrying amount of balance sheet items
and their corresponding tax basis, using the substantively enacted income tax
rates for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce future income tax assets to
amounts expected to be realized.
Loss per share
Basic loss per share is computed by dividing net loss by the weighted average
number of shares outstanding during the reporting period. Due to reported
losses, diluted loss per share data is the same as basic loss per share as the
assumed exercise of stock options are anti-dilutive (Note 11(d)).
Foreign currency translation
These consolidated financial statements are presented in Canadian dollars. The
Company`s functional currency is the Canadian dollar.
Transactions of self-sustaining foreign operations are translated into Canadian
dollars using the current-rate method. Under this method, assets and liabilities
are translated at the rate of exchange in effect at the balance sheet date while
revenue and expense items (including depletion and amortization) are translated
at the average rates of exchange prevailing during the period. Exchange gains
and losses that result from the translation are deferred and disclosed as a
component of "accumulated other comprehensive income (loss)". The operations in
South Africa are considered self-sustaining and their functional currency is the
South African rand.
Transactions in foreign currencies of integrated foreign operations are
translated into Canadian dollars at rates of exchange at the time of such
transactions. Monetary assets and liabilities are translated at current rates of
exchange with the resulting gains or losses included in income. Non-monetary
items are translated at historical exchange rates. Revenue and expense items are
translated at the average rates of exchange, except depletion and amortization
which are translated at the rates of exchange applicable to the related assets.
Gains or losses resulting from these translation adjustments are included in
income. The activities in the DRC are considered integrated.
Transactions denominated in a foreign currency are translated into Canadian
dollars at the rate of exchange in effect at the time of such transactions.
Monetary assets and liabilities denominated in foreign currency are translated
at the rate of exchange at the balance sheet date. The resulting gains and
losses are included in income.
Variable interest entities (VIEs)
VIEs are consolidated by the Company when it is determined that it will, as the
primary beneficiary, absorb the majority of the VIEs expected losses or expected
residual returns. The Company currently does not have any interests in VIEs.
New Accounting Standards
(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 Company
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 (see Note 3) 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 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.
3. ACQUISTION OF DIAMOND CORE RESOURCES LIMITED
In July 2007, the Company and Diamond Core Resources Limited ("Diamond
Core"), a South African diamond exploration company listed on the JSE
Limited, announced that they had entered into an agreement to merge the two
companies by way of a court-sanctioned scheme of arrangement (the "scheme")
under South African corporate law, pursuant to which the Company would
acquire all of the outstanding shares of Diamond Core in exchange for the
issuance of BRC DiamondCore common shares. Under the scheme, each Diamond
Core shareholder was entitled to receive one BRC DiamondCore share for every
24.5 Diamond Core ordinary shares held. On January 14, 2008, Diamond Core
shareholder approval was obtained, and court approval was obtained on January
22, 2008. On February 11, 2008, the Company acquired all of the outstanding
Diamond Core shares and, as the consideration for this acquisition, issued
BRC DiamondCore shares to the Diamond Core shareholders in the agreed ratio,
resulting in the issuance by the Company of a total of 12,089,678 common
shares. In connection with this acquisition, the Company changed its name
from BRC Diamond Corporation to BRC DiamondCore Ltd. and its shares were
listed on the Toronto Stock Exchange and the JSE Limited in Johannesburg,
South Africa.
Previously in July 2005, Diamond Core acquired all of the outstanding shares
of Samadi Resources SA (Pty) Ltd ("Samadi"). As consideration for this
acquisition, Diamond Core issued ordinary shares to Samadi`s shareholders.
The terms of the acquisition agreement (the "Samadi Agreement") entered into
by Diamond Core
with the Samadi shareholders with respect to this acquisition provided for
the potential issuance of additional Diamond Core ordinary shares should
certain operating profits be reached from certain of the projects acquired by
Diamond Core pursuant to the acquisition.
In anticipation of the implementation of the scheme, the Company and Diamond
Core entered into an agreement (the "Samadi Amending Agreement") with the
said Samadi shareholders pursuant to which the Samadi shareholders would, if
the relevant profit thresholds are met, be entitled to receive BRC
DiamondCore common shares in substitution for the Diamond Core ordinary
shares, with the number of BRC DiamondCore shares issuable to such
shareholders adjusted to reflect the exchange ratio applicable under the
terms of the scheme. Accordingly, the number of BRC DiamondCore shares
issuable to the said Samadi shareholders under the Samadi Amending Agreement,
in the same circumstances as contemplated in the Samadi Agreement, is a
maximum of 1,434,502 BRC DiamondCore shares. Since the outcome and amount of
the contingency cannot be determined without reasonable doubt, no recognition
has been made for this in these financial statements.
Also in connection with the acquisition by the Company of all of the
outstanding shares of Diamond Core, 15,133,190 stock options that had been
issued to employees of Diamond Core pursuant to The Diamond Core Resources
Share Trust Deed to acquire 15,133,190 ordinary shares in Diamond Core (the
"Old Options") were substituted with new stock options of BRC DiamondCore
(the "Replacement Options"), so as to allow holders of Old Options to acquire
the number of BRC DiamondCore common shares that is calculated by dividing
the number of ordinary shares of Diamond Core that would otherwise have been
issuable upon the exercise of the Old Options by 24.5, rounded up to the
nearest whole number of BRC DiamondCore shares, with the exercise price of
such Replacement Options being adjusted to the number that is equal to the
exercise price of the Old Options (denominated in South African rand)
multiplied by 24.5. A total of 617,710 Replacement Options were issued by the
Company.
As at December 31, 2007, the Company had deferred transaction costs of
$2,200,165 in relation to the Diamond Core acquisition. An additional
$206,859 expenses was incurred in 2008 and are included in the purchase price
equation below.
Allocation of Purchase Price
Based on BRC DiamondCore`s average closing price of $7.40 per share,
calculated with reference to the share price around July 5, 2007 (date of
announcement), BRC DiamondCore issued 12,089,678 common shares valued at
$89,463,617 to Diamond Core shareholders holding 296,218,483 Diamond Core
ordinary shares outstanding on the same date.
The acquisition has been accounted for using the purchase method of
accounting with BRC DiamondCore being identified as the acquirer and Diamond
Core as the acquiree. In accordance with the purchase method of accounting,
assets and liabilities acquired from Diamond Core are measured at their
individual fair values on
the date of the acquisition and the difference between these fair values of
net assets acquired and the purchase price is recorded in the consolidated
balance sheet as goodwill.
The following table summarizes the components of the total purchase price and
net assets acquired. It reflects fair-value adjustments for identifiable
assets and liabilities acquired.
$`000
Issuance of 12,089,678 BRC DiamondCore common 89,464
shares
Issuance of Replacement Options 2,477
Transaction costs 2,407
Purchase price 94,348
The allocation of the purchase price to the net
assets acquired is as follows:
$`000
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.
4. INVENTORY
March 31, 2009 December 31,
$`000 2008
$`000
Consumables $ 122 $ 122
$ 122 $ 122
5. 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 2
Scallan Project Facilitation 13 13
(Pty) Ltd(f)
Sterling Portfolio Securities 81 11
Inc. (g)
$ 1001 $ 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
$ 1,001 $ 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 and officer 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.
6. DEBT
The Company has a loan facility established with a Canadian financial
institution which bears interest at prime rate plus 1% per annum. The effective
interest rate for the three month period ended March 31, 2009 was 4.00%
(December 31, 2008: 5.75%). At March 31, 2009, the balance of this short term
debt was $6,227,577 (December 31, 2008: $6,172,317), including accrued interest
of $363,133 (December 31, 2008: $307,872,). This loan facility has been
utilized to fund exploration activities in the DRC and all interest of $363,133
was capitalized to exploration cost. This loan facility, which is still in
place, is guaranteed by Banro Corporation ("Banro"), a significant shareholder
of the Company. The Company has undertaken to release Banro from this guarantee
as soon as possible. The Company is in breach of an agreement between Banro and
the Company to have repaid the loan to the institution by July 28, 2008. Banro
has not exercised its rights in terms of the Company`s undertaking to repay the
loan to the institution.
7. LEASE LIABILITIES
As at As at
March 31, 2009 December 31,
$`000 2008
$`000
Total lease liability $ $
662 649
Less: Current portion included (4)
in accounts payable and accrued (150)
liabilities
$ $
658 499
This liability is secured by a finance lease over vehicles with a carrying
amount of $57,619 and earthmoving equipment with a carrying amount of $437,907.
The leases are payable in monthly installments that varies and the final dates
of repayments are on October 1, 2013 and October 1, 2012. The applicable
interest rate is 15.86%, which varies with the South African prime rate, on the
South African rand denominated obligation. The monthly installments in dollar
terms will decrease with any lowering of the South African interest rates and
any weakening of the South African currency.
8. ASSET RETIREMENT OBLIGATIONS
The provision for the site closure and reclamation costs relate to the
Silverstreams, Paardeberg East and De Kalk projects in South Africa.
As at As at
March 31, 2009 December 31, 2008
$`000 $`000
Balance at beginning of period $ $
2,132 -
Changes during the period - 2,132
Reclamation obligation - -
recognized
Accretion expense - -
Foreign exchange revaluation 393 -
Balance at end of period $ $
2,525 2,132
The estimated amount of reclamation costs at March 31, 2009, is $728,649 for the
Paardeberg East project, $1,114,940 for the Silverstreams project and $18,635
for the De Kalk project. The estimated amount for the dismantling of the
processing plants at Paardeberg East is $295,282 and at Silverstreams is
$367,912.
The Company had cash reclamation deposits totaling $235,504 (December 31, 2008:
$235,504) as determined by the regulatory authorities in South Africa, as well
as cash guarantees with Eskom (provider of electricity in South Africa) totaling
$72,510. The deposits are invested in interest bearing money market linked
investments at rates ranging from 9.5% to 10%.
The above provision is for the future environmental obligations including the
rehabilitation of land disturbed by prospecting and mining operations and the
mine closure. The environmental rehabilitation obligation was calculated by
taking into account the Company`s environmental management plans and current
technology. The provision was increased based on an independent study performed.
The provision was calculated according to the Department of Minerals and Energy
(South Africa) guidelines and takes into account reductions through the
application of innovative rehabilitation methods.
In view of the uncertainties concerning environmental remediation, the ultimate
cost of asset retirement obligations could differ materially from the estimated
amounts provided. The estimate of the total liability for asset retirement
obligation costs is subject to change based on amendments to laws and
regulations and as new information concerning the Company`s operations becomes
available. Future changes, if any, to the estimated total liability as a result
of amended requirements, laws, regulations and operating assumptions may be
significant and would be recognised prospectively as a change in accounting
estimate, when applicable.
9. MINERAL PROPERTIES
In order to focus the exploration programme in the DRC on the most promising
areas, a number of exploration 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 in the DRC
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 exploration 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).
As at March 31, 2009, the Company`s South African subsidiaries held title to two
mining rights and 11 prospecting rights in the Northern Cape and Free State
Provinces of South Africa. The projects include Silverstreams and Paardeberg.
Silverstreams is one of the Company`s most advanced exploration projects located
on the northern bank of the Orange River in the Northern Cape province.
Paardeberg East contains a number of known kimberlite bodies. Other South
African alluvial opportunities include Uitdraai, De Kalk, the Sanddrift and
Muishoek projects along the existing or historical courses of the Orange River.
Sanddrift and Muishoek are immediately adjacent to the Silverstreams project,
with the Koa Valley project in proximity to the town of Pofadder in the Northern
Cape.
Since 2006, Diamond Core had entered into transactions with Black Economic
Empowerment ("BEE") partners in order to satisfy the requirements of the
transformed mining and minerals industry legislation of South Africa,
specifically in compliance with the Broad Based Socio-Economic Empowerment
Charter of the Mineral and Petroleum Resources Development Act (Act 28 of 2002;
MPRDA). Under the MPRDA, mining companies are obliged to, among other
requirements, have negotiated a BEE equity ownership agreement through which
historically disadvantaged South Africans (HDSAs) own 26% of the issued equity
in the operational assets by 2014. In the case of previously state held rights,
HDSA ownership of 51% is required before granting of the right to a private
company.
Through its subsidiaries, the Company has BEE transactions with Selang Resources
(Pty) Limited ("Selang") and previously had a BEE transaction with Sefalana
Mineral Resources (Pty) Limited ("Sefalana"). Selang acquired 50% of the issued
share capital of Samadi Gemsbok Resources (Pty) Limited (Uitdraai Portion 9),
Diamond Core Alluvial Projects (Pty) Limited (Muishoek project) and Sandrif
Exploration (Pty) Limited (option over Sanddrift project).
Sefalana was to acquire 50% of the issued ordinary share capital of each of the
subsidiaries of Samadi Resources (SA) (Pty) Limited (Samadi Resources;
Silverstreams, Koa River Valley, De Kalk and Uitdraai RE of Portion 1 projects)
other than Samadi Gemsbok Resources (Pty) Limited.
Sefalana subsequently failed to fulfill certain conditions precedent of the
agreements and was obliged to offer the said shares to Samadi Resources. Samadi
Resources then held the entire issued ordinary share capital of the
subsidiaries. Sefalana is disputing this. In 2008, Sefalana was replaced by
Leswika Resources (Pty) Limited ("Leswika"). Leswika holds 15% of the issued
share capital of the subsidiaries of Samadi Resources (Silverstreams, Koa River
Valley, De Kalk and Uitdraai RE of Portion 1 projects) other than Samadi Gemsbok
Resources (Pty) Limited. The agreement further allows Leswika to attain an
additional 11% of the shareholding at fair market value.
The Company will require a BEE partner for the Paardeberg East project prior to
the Company`s old order mining license over the project expiring in the second
quarter of 2009. Although the Company is not currently required to have
concluded any agreement with a BEE partner in relation to this project, it will
be required to do so at the time that it lodges this old order mining right for
conversion with the Department of Minerals and Energy, namely, by April 30,
2009. Such application would need to include a social and labour plan that is
compliant with the broad-based empowerment objectives of the MPRDA and the
Mining Charter (which sets the framework, targets and timetable for effecting
the participation of historically disadvantaged South Africans in the mining
industry).
The Company has incurred deferred exploration expenditures and mineral property
costs, in the DRC and in South Africa as at March 31, 2009 as follows:
Group
Cumulative Year ended Three month
from inception December 31, period ended
in 1990 to 2008 March 31,
March 31, 2009 2009
$`000 $`000 $`000
Mineral property costs
Canada $- $- $-
DRC 3 -
South Africa 3,512 3,512
3,515 3,512 -
Deferred exploration
expenditures
DRC 5,593 (8,625) 230
South Africa - - -
5,593 (8,625) 230
Total mineral properties $ 9,108 $ ( 5,113) 230
and deferred exploration
expenditures
DRC
Mineral properties in the DRC (which comprise the following projects: Tshikapa
(Candore), Tshikapa (Acacia), King`s Mines, BCM, Caspian Oil & Gas, Groupe Abba
and IEL).
Cumulative Year ended Three month
from December 31, period ended
inception in 2008 March 31,
1990 to 2009
March 31, $`000 $`000
2009
$`000
Mineral property costs
Claims and staking $ $ $
3 3 -
Total mineral property 3 3 -
costs
Deferred exploration
expenditures
Administrative and 4,590 1,719 (56)
office support
Depreciation 583 259 41
Drilling 486 90 -
Field camp expenses 3,019 1,397 197
Geochemistry 329 - -
Geology - contract 1,601 - -
geologists
Geophysics 2,370 268 -
Option fees 308 - -
Permits and surface 1,849 523 -
taxes
Professional fees 634 462 20
Remote sensing and 47 - -
surveying
Stock-based 1,989 945 -
compensation
Transport cost and 3,252 877 28
helicopter
Unrealised foreign 1,424 1,623 -
exchange difference
Write off (16,788) (16,788) -
Total deferred 5,593 (8,625) 230
exploration expenditures
Total mineral properties $ 5,596 (8,625) $230
and deferred exploration
expenditures
South Africa
Cumulative Year ended Three month
from inception December 31, period ended
in 1990 to 2008 March 31,
March 31, 2009 2009
$`000 $`000 $`000
Mineral property costs
Acquisition of Diamond $ $ -
Core 13,152 13,152
Write off (9,640) (9,640) -
Total mineral property 3,512 3,512 -
costs
Deferred exploration
expenditures
Acquisition of Diamond 6,505 6,505 -
Core
Administrative and 2,002 2,002 -
office support
Depreciation 2,345 2,345 -
Field camp expenses 6,538 6,538 -
Geology - contract 100 100 -
geologists
Geophysics 26 26 -
Insurance 112 112 -
Inventory losses (21) (21) -
Permits and surface 5 5 -
taxes
Professional fees 51 51 -
Rehabilitation 1,670 1,670 -
Security 1,771 1,771 -
Surveying 66 66 -
Transport cost 149 149 -
Unrealised foreign (2,666) (2,666) -
exchange difference
18,655 18,655 -
Net proceeds on diamond (8,475) (8,475) -
sales
Write off (10,179) (10,179) -
Total mineral properties $ $ -
and deferred exploration 3,512 3,512
expenditures
10. CAPITAL ASSETS
As at March 31,2009
Cost Accumulat Accumulated Net
ed Impairment Book
Depreciat $`000
ion
$`000
Value
$`00 $`000
0
Computer equipment $ 213 $124 $ 88
- $
Earthmoving equipment 4,979 1,290 662 3,027
Exploration and 467 226 35 206
mining assets
Furniture and Office 80 21 10 49
equipment
Land and buildings 443 47 - 396
Leasehold 227 226 - 1
improvements
Processing plant 10,875 1,600 6,078 3,197
Vehicles 645 409 1 235
$ 17,928 $3,944 $6,786 $7,198
As at December 31,2008
Cost Accumulat Impairment Net
ed Book
Depreciat $`000
ion
$`000
Value
$`00 $`000
0
Computer equipment $ 294 $103 $ - $ 191
Earthmoving equipment 5,753 1,398 645 3,711
Exploration and 458 196 35 227
mining assets
Furniture and Office 100 17 10 73
equipment
Land and buildings 539 43 - 496
Leasehold 227 226 - 1
improvements
Processing plant 11,180 1,248 6,105 3,827
Vehicles 711 390 1 320
$ 19,263 $3,619 $ 6,796 $8,847
During the three month period ended March 31, 2009, $41,000 of depreciation was
included in mineral properties and deferred exploration expenditures (see Note
9) (March 31, 2008: $nil).
11. CAPITAL STOCK
(a) Share capital
Number of Amounts
shares $`000
`000
Balance, December 31, 2007 13,652 $15,827
Shares issued for cash 350 525
Shares issued for the 12,089 89,464
acquisition of Diamond
Core
Balance, December 31, 2008 105,815
26,091
Balance, March 31, 2009 $105,815
26,091
On March 31, 2009, the authorized share capital of the Company is comprised
of an unlimited number of common shares.
On February 11, 2008, the Company acquired all of the outstanding shares of
Diamond Core on the basis of 1 BRC DiamondCore share for every 24.5 Diamond
Core shares resulting in the issuance by the Company of a total of 12,089,678
common shares. This acquisition was effected by way of a scheme of
arrangement under the laws of the Republic of South Africa. See Note 3.
In July 2008, the Company completed a non-brokered private placement of
350,000 common shares of the Company at a price of $1.50 per share resulting
in aggregate gross proceeds of $525,000.
(b) Stock option plan
The Company has a stock option plan under which non-transferable options to
purchase common shares of the Company may be granted by the Board of
Directors to any director, officer, employee or consultant of the Company or
any subsidiary of the Company. This stock option plan contains provisions
providing that the term of an option may not be longer than five years and
the exercise price of an option shall not be lower than the last closing
price of the Company`s shares on the Toronto Stock Exchange prior to the date
the stock option is granted. Unless the Board at any time makes a specific
determination otherwise, a stock option and all rights to purchase Company
shares pursuant thereto shall expire and terminate immediately upon the
optionee who holds such stock option ceasing to be at least one of a
director, officer or employee of or consultant to the Company or a subsidiary
of the Company, as the case may be. One-quarter (1/4) of the stock options
granted pursuant to the stock option plan vest immediately on their date of
grant and another one-quarter of such stock options vest on each of the 6-
month, 12-month and 18-month anniversaries of the grant date.
As at March 31, 2009, the Company had outstanding under the stock option plan
stock options to acquire 3,846,400 (December 31, 2008: 3,846,400) common
shares of the Company at a weighted-average price of $1.97 (December 31,
2008: $2.16) per share.
11. CAPITAL STOCK - continued
The following table summarizes information about stock options outstanding
and exercisable at March 31, 2009:
Date of Grant Number Options Options
outstanding at granted Exercised,
12/31/2008 during the Expired or
period Forfeited
04/14/04 210,000 - -
10/06/04 50,000 - -
03/04/05 16,400 - -
03/18/05 225,000 - -
04/29/05 225,000 - -
06/29/06 200,000 - -
04/09/07 300,000 - -
08/03/07 230,000 - -
08/28/08 2,390,000 - -
3,846,400 - -
Table continues:...
Number Options Exer-cise Fair Expiry Date
outstanding at Exercisable at price value
03/31/09 03/31/09 date of
grant
210,000 210,000 $ 1.50 $ 1.24 04/14/09
50,000 50,000 $ 2.00 $ 1.73 10/06/09
16,400 16,400 $ 2.10 $ 1.78 03/04/10
225,000 225,000 $ 2.50 $ 1.76 03/18/10
225,000 225,000 $ 2.50 $ 2.14 04/29/10
200,000 200,000 $ 3.75 $ 2.16 06/29/11
300,000 300,000 $ 5.50 $ 3.25 04/09/12
230,000 230,000 $ 8.00 $ 2.85 08/03/12
2,390,000 1,195,000 $ 1.05 $ 0.77 08/28/13
3,846,400 2,651,400
During the three month period ended March 31, 2009, the Company recognized in
the statement of operations as stock-based compensation expense $265,557
(March 31,2008: $nil) representing the fair value of stock options previously
granted to employees, directors and officers under the Company`s stock option
plan. These amounts were credited accordingly to contributed surplus in the
balance sheet.
The Black-Scholes option-pricing model was used to estimate the fair values
of all stock options granted based on the following factors:
(i) risk-free interest rate: 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)
(iv) expected dividends: 2008 - $nil (2007: nil)
(c) Replacement Options
In connection with the acquisition by the Company of all of the outstanding
shares of Diamond Core (see note 3), 15,133,190 stock options that had been
issued to employees of Diamond Core pursuant to The Diamond Core Resources
Share Trust Deed to acquire 15,133,190 ordinary shares in Diamond Core (the
"Old Options") were substituted with new stock options of BRC DiamondCore
(the "Replacement
Options"), so as to allow holders of Old Options to acquire the number of
BRC DiamondCore common shares that is calculated by dividing the number of
ordinary shares of Diamond Core that would otherwise have been issuable
upon the exercise of the Old Options by 24.5, rounded up to the nearest
whole number of BRC DiamondCore shares, with the exercise price of such
Replacement Options being adjusted to the number that is equal to the
exercise price of the Old Options (denominated in South African rand)
multiplied by 24.5. A total of 617,710 Replacement Options were issued by
the Company. At March 31, 2009, 349,510 of these options had been
cancelled.
(d) Loss per share
The loss per share figures for the three month periods ended March 31, 2009
and March 31, 2008 are calculated using the weighted average number of
shares outstanding during the respective accounting periods amounting to
26,091,310 and 20,308,000 common shares, respectively. The calculations of
basic and diluted loss per share amounts are identical. All common share
options were excluded from the calculation of diluted loss per share as
their effect would have been antidilutive.
Headline earnings per share
March 31, 2009
December 31, 2008
Basic loss $ (103,002)
(1,483)
Impairment of goodwill - 54,558
Impairment of Capital assets and - 43,405
Mineral assets
Headline loss (1,483) (5,038)
Weighted average number of common 24,546
share outstanding 26,091
$ (0.06) $ (0.21)
(e) Contributed Surplus
March 31, 2009 December 31,
$`000 2008
$`000
Balance, beginning of the $ 6,934 $ 2,757
period
Options granted 266 1,700
Balance, end of the $ 7,200 $ 6,934
period
(f) Accumulated other comprehensive income
March 31,
2009
December 31, 2008
Balance, beginning of the $ $ -
period (2,370)
Adjustment for cumulative
unrealized gain (loss) on
available-for-sale investment - -
on January 1, 2007
Realized gain on available-for- - -
sale investment
Unrealized foreign currency (2,185) (2,370)
profit/(loss) on self
sustaining foreign operation in
South Africa
Balance, end of the period $ (4,555) $ (2,370)
12. COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company is committed to the payment of certain surface fees and taxes in
the DRC. For 2009, these fees and taxes are estimated to be approximately
US$120,000 compared to US$520,000 incurred in 2008. The surface fees and
taxes are required to be paid annually under the DRC Mining Code in order to
keep exploration licences in good standing.
In addition, as at March 31, 2009, the Company had a bank guarantee of
US$4,373 (December 31, 2008: $4,373) with respect to expenses related to a
mitigation and rehabilitation plan required from holders of exploration
licences under the DRC Mining Code.
The Company is in the process of exercising an option agreement to secure an
equity interest in prospective ground currently held under option. The
Company expects to pay US$350,000 as an option exercise fee.
In 2006, Samadi Resources, a 100% subsidiary of Diamond Core, entered into a
transaction with Sefalana ("Sefalana transaction"). In terms of the
Sefalana transaction, Sefalana acquired 50% of the issued ordinary share
capital and loan accounts of the Samadi subsidiaries and was, pursuant to the
Sefalana preference share agreement and subject to the fulfilment of certain
conditions precedent, to subscribe for preference shares in the capital of
the Samadi subsidiaries. Certain of the conditions precedent were not
timeously fulfilled. Accordingly, Sefalana was in terms of the Sefalana
shareholders agreement deemed to have offered its ordinary shares in the
Samadi subsidiaries to Samadi Resources which was deemed to have accepted
such offer. Sefalana is disputing Samadi Resources` position.
Samadi Resources had made application in the High Court (South Gauteng
Provincial Division) for a declarator against Sefalana but this was refused
on March 27, 2009. The judgment did not interfere with the current
shareholder structure, has no effect on the Company financially and no effect
on its current mining order rights. The application was brought in order to
dispose of any uncertainty regarding the annulment of the BEE agreements
between Samadi Resources and Sefalana. Samadi Resources remains committed to
its current BEE shareholder Leswika, and will oppose any attempt by Sefalana
to rely on the Court`s refusal to issue a declarator in favour of Samadi
Resources. Samadi Resources has been advised by its legal representatives
that there are good grounds for an appeal and has consequently filed a notice
to appeal the judgment.
The Company has entered into surface use agreements in respect of prospecting
operations conducted. The terms of the surface use agreements typically
include a distinction between prospecting and mining activities and provide
for an appropriate notice period. The Company`s mining and exploration
activities are subject to various federal, provincial and state laws and
regulations governing the protection of the environment. These laws and
regulations are continually changing and generally becoming more restrictive.
The Company conducts its operations so as to protect public health and the
environment and believes its operations are materially in compliance with all
applicable laws and regulations. The Company has made, and expects to make in
the future, expenditures to comply with such laws and regulations.
In addition to the above matters, the Company and its subsidiaries are also
subject to routine legal proceedings and tax audits. The Company does not
believe that the outcome of any of these matters, individually or in
aggregate, would have a material adverse effect on its consolidated losses,
cash flow or financial position.
Labour disputes
The Company is in dispute with two of its previous directors. One of those
individuals applied for a summary judgment in the High Court; the application
was dismissed and the Company was granted leave to defend his claim. The
matter will now proceed in the High Court on an opposed basis. The other
individual has referred two disputes to the CCMA in Johannesburg and an
action to the High Court in that same jurisdiction. He elected to withdraw
an application for summary judgment.
There is a dispute with an engineering contractor over the design and
installation of the Paardeberg diamond recovery plant. Pleadings in the
matter have closed in relation to the contractor`s claim of $158,613 and the
Company`s counter claim of $368,363. A trial date has been set for May 19,
2010.
The Company believes that these claims are without merit and is vigorously
defending these actions.
The following contractual obligations exist at March 31, 2009:
Total < 1 year 1 - 3 years
Purchase $ 204,964 $ 204,964 $ nil
Obligations
Operating lease $ 93,632 $ 81,710 $ 11,922
commitments
13. 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.
14. 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 154 562
Financial liabilities
Other liabilities, measured at
amortised cost
Accounts payable and accrued $ $
liabilities 8,253 7,542
Debt $6,228 $6,172
Lease $ $
658 499
(b) Allowance account for credit losses
March December 31,
31,2009 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.
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, these consolidated financial
statements have been prepared in accordance with Canadian GAAP applicable to a
going concern (Note 1).
Currency risk
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Monetary assets and liabilities denominated in foreign
currencies are translated from US dollars and South African 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.
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - continued
Title risk
Title to mineral properties and mining rights involves certain inherent risks
due to the difficulties of determining the validity of certain claims as well as
the potential for problems arising from the frequently ambiguous conveyancing
history characteristic of many mining properties. Although the Company has
investigated title to all of its mineral properties for which it holds
concessions or other mineral leases or licenses, the Company cannot give any
assurance that title to such properties will not be challenged or impugned and
cannot be certain that it will have valid title to its mining properties. The
Company relies on title opinions by legal counsel who base such opinions on the
laws of countries in which the Company operates.
Country risk
The DRC is a developing country and as such, the Company`s exploration projects
in the DRC could be adversely effected by uncertain political or economic
environments, war, civil or other disturbances, and a changing fiscal regime and
by DRC`s underdeveloped industrial and economic infrastructure.
The Company`s operations in the DRC may be effected by economic pressures on the
DRC. Any changes to regulations or shifts in political attitudes are beyond the
control of the Company and may adversely affect its business. Operations may be
affected in varying degrees by such factors as DRC government regulations with
respect to currency conversion, production, price controls, export controls,
income taxes or reinvestment credits, expropriation of property, environmental
legislation, land use, water use and mine safety.
There can be no assurance that policies towards foreign investment and profit
repatriation will continue or that a change in economic conditions will not
result in a change in the policies of the DRC government or the imposition of
more stringent foreign investment restrictions. Such changes cannot be
accurately predicted.
15. SUBSEQUENT EVENTS
As a result of the continued depressed state of the diamond market with diamond
prices at a level such that operating costs exceeded expected revenue, the
Company placed all its South African operations on a care and maintenance basis.
It entered into consultations regarding retrenchment with the labour force.
Subsequent to March31, 2009 it concluded the retrenchment of all employees of
its South African operations. 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.
An urgent application was made by a former adviser to the Company, River Group
Corporate Finance ("RGCF"), for the liquidation of Diamond Core Resources (Pty)
Ltd ("DCR"). The judge did not consider the matter urgent and it was postponed
to June 19, 2009. The claim arose from an alleged debt for services allegedly
provided, and which was allegedly in default, before the acquisition of DCR by
the Company. DCR is in dispute with RGCF with regard to the services and intends
to sue it for damages in excess of the amount RGCF claims. The Company`s former
security company, whose services were discontinued for an alleged breach of
security, requested a combined application with RGCF, but this was also
postponed. The Company intends to sue its former security provider for the
alleged breach. Alternative security arrangements have subsequently been put in
place.
The Toronto Stock Exchange (the "TSX") is reviewing the eligibility for
continued listing on the TSX of the Company`s shares. The Company is making
submissions to the TSX in respect of this delisting review with a view to
achieving a positive outcome.
The Company recently issued a cautionary announcement, pursuant to the listing
requirements of the JSE Limited, advising that the Company is in negotiations
which, if the transaction is concluded, may have a material effect on the price
of the Company`s securities.
The Company submitted an application to the South African Department of Minerals
& Energy ("DME") for the conversion of its old order mining right at Paardeberg
East into a new order mining right prior to the deadline of April 30, 2009. The
application has been received and acknowledged by the DME and it is currently
being examined. The Company has been advised that there is a considerable delay
in processing applications but during this process the Company`s rights continue
as before. The BEE partner will be Leswika who is the Company`s BEE partner in
other projects.
Date: 20/05/2009 16:54:17 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.
