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EPS
EPS
EPS - Eastern Platinum Limited - Management`s discussion and analysis of
financial conditions and results of operations for the three and six months
ended June 30, 2009
EASTERN PLATINUM LIMITED
(Incorporated in Canada)
(Canadian Registration number BC0722783)
(South African Registration number 2007/006318/10)
Share Code TSX: ELR ISIN: CA 2768551038
Share Code AIM: ELR ISIN: CA 2768551038
Share Code JSE: EPS ISIN: CA 2768551038
EASTERN PLATINUM LIMITED
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009
The following Management`s Discussion and Analysis ("MD&A") is intended to
assist the reader to assess material changes in financial condition and results
of operations of Eastern Platinum Limited ("Eastplats" or the "Company") as at
June 30, 2009 and for the three and six months then ended in comparison to the
same period in 2008.
In February 2009, the applicable provincial securities commissions granted the
Company exemptive relief to adopt International Financial Reporting Standards
("IFRS") with an adoption date of January 1, 2009 and a transition date of
January 1, 2008.
This MD&A should be read in conjunction with the condensed consolidated interim
financial statements for the three and six months ended June 30, 2009 and
supporting notes. These condensed consolidated interim financial statements
have been prepared using accounting policies consistent with IFRS and in
accordance with International Accounting Standard 34 ("IAS 34") - Interim
Financial Reporting. A reconciliation of the previously disclosed comparative
periods` financial statements prepared in accordance with Canadian generally
accepted accounting principles to IFRS is setout in Note 15 to these condensed
consolidated interim financial statements.
In this MD&A, the Company also reports certain non-IFRS measures such as EBITDA
and cash costs per ounce which are explained in Section 3.2 of this MD&A.
All monetary amounts are in U.S. dollars unless otherwise specified. The
effective date of this MD&A is August 13, 2009. Additional information relating
to the Company is available on SEDAR at www.sedar.com.
Contents of the MD&A
1. Overview
2. Highlights for the quarter ended June 30, 2009
3. Results of operations for the three and six months ended June 30, 2009
3.1. Mining operations at the Crocodile River Mine ("CRM")
3.2. CRM non-IFRS measures
3.3. Development projects
3.3.1. CRM
3.3.2. Spitzkop and Kennedy`s Vale
3.3.3. Mareesburg
3.4. Corporate and other expenses
4. Liquidity and Capital Resources
4.1. Outlook
4.2. Impairment
4.3. Share capital
4.4. Contractual Obligations and Commitments
5. Related party transactions
6. Adoption of accounting standards and accounting pronouncements under IFRS
6.1 Significant differences between IFRS and Canadian GAAP in the Company`s
financial statements
6.2 Accounting standards issued but not yet effective
7. Internal control over financial reporting
8. Cautionary statementon forward-looking information
1. Overview
Eastplats is a platinum group metals ("PGM") producer engaged in the mining and
development of PGM deposits with properties located in South Africa. All of the
Company`s properties are situated on the western and eastern limbs of the
Bushveld Complex ("BC"), the geological environment that supports over 75% of
the world`s PGM mine production.
The Company`s primary operating asset is an 87.5% direct and indirect interest
in Barplats Investments Limited ("Barplats"), whose main assets are the PGM
producing Crocodile River Mine ("CRM") located on the western limb of the BC
and the non-producing Kennedy`s Vale Project located on the eastern limb of the
BC. The Company also has a 75.5% direct and indirect interest in Mareesburg
Platinum Project ("Mareesburg") and a 93.4% direct and indirect interest in
Spitzkop PGM Project ("Spitzkop"), both located on the eastern limb of the BC.
2. Highlights for the quarter ended June 30, 2009 ("Q2 2009")
Eastplats recorded a net profit attributable to equity shareholders of the
Company of $317,000 ($0.00 per share) compared to a net profit attributable
to equity shareholders of $12,148,000 ($0.02 per share) in the second
quarter of 2008 ("Q2 2008").
Production at the Crocodile River Mine ("CRM") increased by 10% to 33,383
PGM ounces, from 30,311 PGM ounces in Q2 2008.
The average delivered basket price per PGM ounce was $679, a decrease of
59% compared to $1,657 in Q2 2008, but an increase of 15% compared to $590
in the first quarter of 2009.
EBITDA was $6,529,000 compared to $28,259,000 in Q2 2008 and $7,018,000 in
the first quarter of 2009.
Operating cash costs were $554 per ounce, a decrease of 20% compared to the
$696 per ounce achieved in Q2 2008, but an increase of 3% compared to the
$536 per ounce achieved in the first quarter of 2009.
Operating cash costs netof by-product credits were $494 per ounce, a 29%
decrease from $696 per ounce achieved in Q2 2008.
Rand operating cash costs per ounce have decreased by 25% since the fourth
quarter of 2008 reflecting the success of the Company`s operating cost
cutting measures which had been implemented since December 2008. Rand
operating cash costs per ounce decreased from R6,231 per ounce in the
fourth quarter of 2008 to R5,326 per ounce in the first quarter of 2009,
and to R4,673 per ounce in Q2 2009.
Chrome penalties decreased by 76% percent from $2,631,000 in Q2 2008 to
$621,000 this quarter.
Average recovery rates for the quarter improved to 80%, compared to 73% in
Q2 2008.
Head grade increased to 4.2 grams per tonne this quarter compared to the
4.0 g/t that had been consistently achieved in the previous five quarters.
Stoping units increased by 16% and run-of-mine tonnes hoisted increased by
12% compared to the same quarter in 2008.
Run-of-mine ore processed decreased by 3% to 304,354 tonnes in Q2 2009 from
313,767 tonnes in Q2 2008.
The Company`s Lost Time Injury Frequency Rate (LTIFR) was 1.94 this quarter
compared to 1.85 in Q2 2008. The mine`s safety record continues to compare
favourably with other platinum producers in South Africa.
At June 30, 2009, the Company had a cash position (including cash, cash
equivalents and short term investments) of $21,910,000 (December 31, 2008 -
$61,063,000).
3. Results of Operations for the three and six months ended June 30, 2009
The following table sets forth selected consolidated financial information for
the three and six months ended June 30, 2009 and 2008:
Table 1
Condensed consolidated interim income statements
(Expressed in thousands of U.S. dollars,
except per share amounts) Three months ended June 30,
2009 2008
Revenue $ 24,838 $ 49,317
Cost of operations
Production costs 18,309 21,058
Depletion and depreciation 4,286 4,480
Mine operating earnings 2,243 23,779
Expenses
General and administrative 3,171 5,309
Share-based payments 203 480
Operating (loss) profit (1,131) 17,990
Other income (expense)
Interest income 495 2,877
Finance costs (375) (2,248)
Foreign exchange (loss) gain (1,372) 71
(Loss) profit before income taxes (2,383) 18,690
Deferred income tax recovery (expense) 1,609 (5,533)
Net (loss) profit for the period $ (774) $ 13,157
Attributable to
Non-cont rolling interest $ (1,091) $ 1,009
Equity shareholders of the Company $ 317 $ 12,148
Earnings per share
Basic $ 0.00 $ 0.02
Diluted $ 0.00 $ 0.02
Weighted average number of common share
outstanding
Basic 680,538 677,772
Diluted 687,181 713,615
Condensed consolidated statements of June 30, December 31,
financial position 2009 2008
Total assets $ 669,087 $ 596,570
Total long-term liabilities $ 54,388 $ 47,685
Six months ended June 30,
2009 2008
Revenue $ 49,741 $ 105,112
Cost of operations
Production costs 36,194 40,808
Depletion and depreciation 7,803 8,874
Mine operating earnings 5,744 55,430
Expenses
General and administrative 4,807 9,642
Share-based payments 335 1,829
Operating (loss) profit 602 43,959
Other income (expense)
Interest income 989 5,684
Finance costs (827) (2,256)
Foreign exchange (loss) gain (1,447) 1,128
(Loss) profit before income taxes (683) 48,515
Deferred income tax recovery (expense) 2,289 (13,780)
Net (loss) profit for the period $ 1,606 $ 34,735
Attributable to
Non-cont rolling interest $ (1,875) $ 3,111
Equity shareholders of the Company $ 3,481 $ 31,624
Earnings per share
Basic $ 0.01 $ 0.05
Diluted $ 0.01 $ 0.04
Weighted average number of common share
outstanding
Basic 680,532 673,822
Diluted 685,597 716,095
Condensed consolidated statements of
financial position
Total assets
Total long-term liabilities
The table below sets forth selected results of operations for the Company`s
eight most recently completed quarters (in thousands of U.S. dollars, except
per share amounts). The quarters of 2007 have been presented in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP").
All financial data previously reported in Canadian dollars have been converted
to U.S. dollars.
Table 2
Selected quarterly data 2009 2009
(under IFRS unless otherwise noted) June 30 March 31
Revenues $ 24,838 $ 24,903
Cost of operations (22,595) (21,402)
Mine operating earnings (loss) 2,243 3,501
Expenses (G&A and share- based payment) (3,374) (1,768)
Impairment of property, plant and equipment - -
Operating (loss) profit (1,131) 1,733
Net (loss) profit attributable to equity
shareholders of the Company $ 317 $ 3,164
Earnings (loss) per share - basic $ 0.00 $ 0.00
Earnings (loss) per share - diluted $ 0.00 $ 0.00
Average foreign exchange rates
South African Rand to US dollar 0.1185 0.1006
Canadian dollar to US dollar 0.8578 0.8038
Period end foreign exchange rates
South African Rand to US dollar 0.1291 0.1048
Canadian dollar to US dollar 0.8598 0.7928
Selected quarterly data 2008
(under IFRS unless otherwise noted) Dec 31 Sept 30
Revenues $ 355 $ 9,214
Cost of operations (19,580) (25,360)
Mine operating earnings (loss) (19,225) (16,146)
Expenses (G&A and share- based payment) (6,602) (5,787)
Impairment of property, plant and equipment (313,603) -
Operating (loss) profit (339,430) (21,933)
Net (loss) profit attributable to equity
shareholders of the Company $ (231,582) $ (9,490)
Earnings (loss) per share - basic $ (0.34) $ (0.01)
Earnings (loss) per share - diluted $ (0.34) $ (0.01)
Average foreign exchange rates
South African Rand to US dollar 0.1008 0.1285
Canadian dollar to US dollar 0.8252 0.9603
Period end foreign exchange rates
South African Rand to US dollar 0.1076 0.1197
Canadian dollar to US dollar 0.8210 0.9397
Selected quarterly data 2008
(under IFRS unless otherwise noted) June 30 March 31
Revenues $ 49,317 $ 55,795
Cost of operations (25,539) (24,144)
Mine operating earnings (loss) 23,778 31,651
Expenses (G&A and share- based payment) (5,995) (5,682)
Impairment of property, plant and equipment - -
Operating (loss) profit 17,783 25,969
Net (loss) profit attributable to equity
shareholders of the Company $ 12,148 $ 19,476
Earnings (loss) per share - basic $ 0.02 $ 0.03
Earnings (loss) per share - diluted $ 0.02 $ 0.03
Average foreign exchange rates
South African Rand to US dollar 0.1287 0.1328
Canadian dollar to US dollar 0.9901 0.9955
Period end foreign exchange rates
South African Rand to US dollar 0.1280 0.1229
Canadian dollar to US dollar 0.9807 0.9742
Selected quarterly data 2007
(under IFRS unless otherwise noted) Dec 31 Sept 30
Under Canadian GAAP
Revenues $ 34,126 $ 31,452
Cost of operations (26,095) (24,388)
Mine operating earnings (loss) 8,031 7,064
Expenses (G&A and share- based payment) (18,022) (3,534)
Impairment of property, plant and equipment - -
Operating (loss) profit (9,991) 3,530
Net (loss) profit attributable to equity
shareholders of the Company $ (10,814) $ (1,390)
Earnings (loss) per share - basic $ (0.02) $ 0.00
Earnings (loss) per share - diluted $ (0.02) $ 0.00
Average foreign exchange rates
South African Rand to US dollar 0.1478 0.1409
Canadian dollar to US dollar 1.0189 0.9572
Period end foreign exchange rates
South African Rand to US dollar 0.1453 0.1454
Canadian dollar to US dollar 1.0088 1.0052
3.1 Mining operations at Crocodile River Mine ("CRM")
The following is a summary of CRM`s operations for each of the quarters of 2009
and 2008:
Table 3
Crocodile River Mine operations
Three months ended
June 30, March 31, December 31,
2009 2009 2008
Key financial statistics
(dollar amounts stated in U.S.
dollars)
Sales - PGM ounces 33,383 32,969 29,015
Average de livered price per ounce
(2) $679 $590 $550
Average basket price $779 $676 $655
Cash costs per ounce of PGM (1) $554 $536 $628
Cash costs per ounce of PGM,
net of chrome by-product credits (1) $494 $388 $578
Rand cash costs per ounce of PGM (1) R 4,673 R 5,326 R 6,231
Key production statistics
Total tonnes processed 440,288 318,394 298,514
Run-of-mine ("ROM") rock tonnes
processed 304,354 318,394 298,514
Tailings tonnes processed 135,934 - -
Third party ore processed - - -
Development meters 4,326 4,573 4,604
On-reef development meters 2,860 2,745 2,922
Stoping units (square meters) 51,342 45,098 46,459
Concentrator recovery from ROM ore 80% 80% 76%
Chrome produce d (tonnes) 82,760 77,554 69,937
Metal in concentrate sold (ounces)
Platinum (Pt) 16,721 16,499 14,466
Palladium (Pd) 7,406 7,399 6,690
Rhodium (Rh) 2,868 2,812 2,451
Gold (Au) 141 135 121
Iridium (Ir) 1,179 1,144 979
Ruthenium (Ru) 5,068 4,980 4,308
Total PGM ounces 33,383 32,969 29,015
September 30, June 30, March 31,
2008 2008 2008
Key financial statistics
(dollar amounts stated in U.S.
dollars)
Sales - PGM ounces 30,758 30,311 27,825
Average de livered price per ounce
(2) $1,193 $1,657 $1,621
Average basket price $1,438 $1,969 $1,927
Cash costs per ounce of PGM (1) $672 $696 $698
Cash costs per ounce of PGM,
net of chrome by-product credits (1) $521 $696 $698
Rand cash costs per ounce of PGM
(1) R 5,233 R 5,411 R 5,258
Key production statistics
Total tonnes processed 317,602 337,471 349,497
Run-of-mine ("ROM") rock tonnes
processed 305,490 313,767 257,748
Tailings tonnes processed 12,112 23,704 88,948
Third party ore processed - - 2,801
Development meters 5,599 5,575 4,409
On-reef development meters 3,556 3,230 2,343
Stoping units (square meters) 39,652 44,277 38,686
Concentrator recovery from ROM ore 78% 73% 78%
Chrome produce d (tonnes) 64,744 37,515 22,489
Metal in concentrate sold (ounces)
Platinum (Pt) 15,393 15,333 13,684
Palladium (Pd) 6,973 6,777 6,201
Rhodium (Rh) 2,581 2,543 2,335
Gold (Au) 123 132 121
Iridium (Ir) 1,083 994 1,078
Ruthenium (Ru) 4,605 4,532 4,405
Total PGM ounces 30,758 30,311 27,825
(1) These are non-IFRS measures as described in Section 3.2
(2) Average delivered price is the average basket price at the time of delivery
of PGM concentrates, net of associated smelter costs, under the Company`s
primary off-take agreement.
Quarter ended June 30, 2009 compared to the quarter ended June 30, 2008 ("Q2
2008")
The Company recorded revenue of $24,838,000 in Q2 2009. This amount represents
revenues recorded when PGM concentrates are physically delivered to the buyer,
less adjustments made when final prices for these concentrates are settled. The
Company settles its PGM sales three to five months following the physical
delivery of the concentrates which are provisionally priced on the date of
delivery. PGM prices declined sharply from August through December 2008
resulting in significant negative adjustments to the provisional prices for the
second half of 2008 when these provisional prices were marked to market at
December 31, 2008.
Between December 31, 2008 and March 31, 2009, PGM prices in U.S. dollar terms
stabilized and rose by approximately 15% compared to the lows experienced in
early December 2008. Since March 31, 2009, PGM prices have continued to
strengthen and have risen by a further 15%. The Company recorded an average
delivered basket price of $679 per PGM ounce in Q2 2009, compared to $590 in
Q1 2009 and $1,657 in Q2 2008. The delivered price per ounce refers to the PGM
prices in effect at the time the PGM concentrates are delivered. As a result of
the rise in prices, the Company recorded positive provisional price
adjustments of $2,853,000 and $4,911,000 for the three and six months ended
June 30, 2009 respectively.
The following table shows a reconciliation of revenue and provisional price
adjustments.
Table 4
Crocodile River Mine
Effect of provisional price adjustments on revenues
(stated in thousands of U.S. dollars)
Three months ended Three months ended
June 30, 2009 June 30, 2008
Revenue before provisional price
adjustments $ 21,985 $ 48,784
Provisional price adjusments
Adjustments to revenue upon
settlement 1,060 (452)
of prior periods` sales
Mark-to-market adjustment on sales
not yet
settled at end of period 1,793 985
Revenue as reported in the income
statement $ 24,838 $ 49,317
Six months ended Six months ended
June 30, 2009 June 30, 2008
Revenue before provisional price
adjustments $ 44,830 $ 95,290
Provisional price adjusments
Adjustments to revenue upon
settlement 1,493 2,194
of prior periods` sales
Mark-to-market adjustment on sales
not yet
settled at end of period 3,418 7,628
Revenue as reported in the income
statement $ 49,741 $ 105,112
PGM ounces sold were up by 10% in Q2 2009 compared to Q2 2008 as a result of
increased recovery rates (80% in Q2 2009 compared to 73% in Q2 2008) and
increased grades (4.2 g/tonne in Q2 2009 compared to 4.0 g/tonne in Q2 2008).
This was offset by a 3% decrease in ore tonnes processed (304,354 tonnes in Q2
2009 compared to 313,767 in Q2 2008), which, combined with a 16% increase in
the stoping units and a 12% increase in the tonnes of run-of-mine rock hoisted,
resulted in an increase in the amount of surface ore stockpiles at June 30,
2009. Total tonnage processed increased by 30% compared to Q2 2008 primarily
due to the Q2 2009 recommencement of tailings retreatment at CRM. There were
135,934 tonnes of tailings processed in Q2 2009 (yielding 695 PGM ounces)
versus 23,704 tonnes in Q2 2008.
Total development for the quarter was 4,326 metres, a 22% decrease compared to
5,575 metres achieved in Q2 2008, and on-reef development was 2,860 metres, an
11% decrease compared to 3,230 metres in Q2 2008. Since Q4 2008, the Company
has focused on reducing development to a level that maintains mining
flexibility while providing for the mine production build-up and minimizing
cash outflows. On- reef development is expensed for accounting purposes.
Recovery rates increased from 73% in Q2 2008 to 80% in Q1 2009 and remained at
80% throughout Q2 2009 as the concentrator achieved steady state operating
conditions subsequent to the upgrades made during Q2 2008.
Operating cash costs, a non-IFRS measure, improved from $696 per ounce in Q2
2008 to $554 per ounce in Q2 2009 partly due to a 10% increase in the number of
ounces produced in Q2 2009 compared to Q2 2008 and partly due to a 9% rise in
the value of the U.S. dollar relative to the Rand between Q2 2008 and Q2 2009
as the Company incurs these costs entirely in Rand.
In spite of a general annual inflation rate of 8%, Rand operating cash costs
per ounce have improved by 25% since the fourth quarter of 2008 reflecting the
success of the Company`s operating cost cutting measures which have been
implemented since December 2008. Rand operating cash costs per ounce have
decreased from R 6,231 per ounce in the fourth quarter of 2008 to R 5,326 per
ounce in the first quarter of 2009 to R 4,673 per ounce in Q2 2009. In
comparison with Q2 2008, Rand cash operating costs have improved 14%. A
reconciliation of production costs, as reported in the income statement, to
cash operating costs, is shown under Section 3.2 below under CRM non-IFRS
measures.
The chrome recovery circuit at CRM was fully operational at the end of the
second quarter of 2008. As a result, penalties for excess chrome present in PGM
concentrates have been significantly reduced and commercial quantities of
chrome were produced and sold as a by-product of PGM production. In July 2008,
the Company commenced reporting cash costs net of chrome by-product credits,
also a non-IFRS measure. In Q2 2009, 82,760 tonnes of chrome were produced and
78,685 tonnes were sold for proceeds of $1,995,000. Operating cash costs net of
by-product credits increased to $494 per ounce. Chrome penalties in the PGM
concentrate dropped significantly, from $2,631,000 in Q2 2008 to $621,000 in Q2
2009.
In Q2 2009, CRM suffered seven lost time injuries (compared to five lost time
injuries Q2 2008) resulting in a Lost Time Injury Frequency Rate ("LTIFR") of
1.94 (1.85 in Q2 2008). The Company`s twelve month rolling LTIFR of 2.5 to June
30, 2009 compares favorably with other platinum producers in South Africa.
Six months ended June 30, 2009 ("6M 2009") compared to the six months ended
June 30, 2008 ("6M 2008")
In 6M 2009, the Company sold 66,352 PGM ounces, an increase of 14% compared to
6M 2008, primarily as a result of higher volumes mined in 2009 (622,748 tonnes
processed in 6M 2009 compared to 571,515 tonnes processed in 6M 2008), improved
recovery rates (80% in 6M 2009 compared to 76% in 6M 2008), and a slight
increase in on-reef development (5,605 meters in 6M 2009 compared to 5,573
meters in 6M 2008).
The realized price per ounce decreased from $1,642 in 6M 2008 to $635 in 6M
2009 due to significant decrease in PGM prices between July 2008 and November
2008.
Operating cash costs of $545 per ounce were achieved in 6M 2009, compared to
$697 per ounce in 6M 2008, due to a 14% increase in the number of ounces
produced in 2009 compared to 2008 and a 19% rise in the value of the U.S.
dollar relative to the Rand between 2008 and 2009. Total cash operating costs
in Rand were 7% higher in 6M 2009 compared to the same period in 2008 due to
increased labour costs of 10% and general inflation on other supplies and
services of 8% during this period.
3.2 CRM non-IFRS measures
The following table provides a reconciliation of EBITDA and cash operating
costs per PGM ounce to mine operating earnings and production costs,
respectively:
Table 5
Crocodile River Mine non-IFRS measures
(Expressed in thousands of U.S. dollars, except ounce and per ounce data)
Three months ended
June 30, June 30,
2009 2008
Mine operating earnings $ 2,243 $ 23,779
Depletion and depreciation 4,286 4,480
EB ITDA (1) 6,529 28,259
Production costs as reported 18,309 21,058
Adjustments for miscellaneous costs (2) 185 38
Cash operating costs 18,494 21,096
Less by-product credits - chrome
revenues and adjustments (1,994) -
Cash operating costs net of by-product
credits 16,500 21,096
Ounces sold 33,383 30,311
Cash cost per ounce sold $ 554 $ 696
Cash cost per ounce sold net of
by-product credits $ 494 $ 696
Six months ended
June 30, June 30,
2009 2008
Mine operating earnings $ 5,744 $ 55,430
Depletion and depreciation 7,803 8,874
EB ITDA (1) 13,547 64,304
Production costs as reported 36,194 40,808
Adjustments for miscellaneous costs (2) (29) (285)
Cash operating costs 36,165 40,523
Less by-product credits - chrome revenues
and adjustments (6,889) -
Cash operating costs net of by-product
credits 29,276 40,523
Ounces sold 66,352 58,136
Cash cost per ounce sold $ 545 $ 697
Cash cost per ounce sold net of by-product
credits $ 441 $ 697
(1) EBITDA includes provisional price adjustments, chrome revenues, chrome
penalties, and foreign exchange adjustments to sales.
(2) Miscellaneous costs include costs such as housing, technical services and
planning.
The Company is of the opinion that conventional measures of performance
prepared in accordance with IFRS do not fully demonstrate the ability of its
operations to generate cash flow. Therefore, the Company has included certain
non-IFRS measures in this MD&A to supplement its financial statements which are
prepared in accordance with IFRS. These non-IFRS measures do not have any
standardized meaning prescribed under IFRS, and therefore they may not be
comparable to similar measures employed by other companies.
In this MD&A, the Company has reported its share of earnings before interest,
depletion, depreciation, amortization and tax ("EBITDA") at CRM. This is a
liquidity non-IFRS measure which the Company believes is used by certain
investors to determine the Company`s ability to generate cash flows for
investing and other activities. The Company also reports cash operating costs
per ounce of PGM produced, another non-IFRS measure which is a common
performance measure used in the precious metals industry.
3.3 Development projects
3.3.1 CRM
In Q2 2009, the Company spent approximately $5.0 million at CRM, primarily on
continuing underground mine development, repairs to the mill gearbox and motor
in the concentrator, and ongoing surface works at the vertical shaft at
Zandfontein, including conveyor belts for the transport of ore hoisted up the
vertical shaft and construction of change houses and other associated
infrastructure. The shaft hoisting capacity will be 120,000 tonnes of ore per
month plus associated waste, and the shaft, along with the decline development,
will allow access into the deeper parts of the ore body.
Due to the recent significant downturn in the global economy and platinum group
metals prices, the development of the Crocette and Kareespruit sections at CRM
has been put on hold while the Company focused on increasing production from
existing mining areas.
3.3.2 Spitzkop/Kennedy`s Vale
Development of Spitzkop and Kennedy`s Vale has been put on hold since December
2008. During Q2 2009, the Company spent $3.3 million on the Spitzkop/Kennedy`s
Vale project, primarily on mill refurbishment and flotation cells, which were
long-lead items ordered in late 2008. The Company does not expect any further
expenditures at Spitzkop/Kennedy`s Vale other than care and maintenance costs.
Spitzkop is planned as a decline mining operation that will access high-grade
PGM resources in the UG2 reef at shallow depth without the requirement for high
capital cost shaft infrastructure. Spitzkop is situated up dip of, and adjacent
to, the Kennedy`s Vale project. Kennedy`s Vale and the deeper sections of both
properties could utilize the existing twin vertical shafts. This infrastructure
would provide a significant reduction in capital costs for the development of
the deeper sections of both properties.
During 2008, work on the basic engineering for trial mining was completed and
long lead items such as mills and mining equipment were purchased or ordered.
The box-cuts for both the Merensky Reef and UG2 declines were completed. Due to
the current market environment, development of the declines was suspended after
about 180 metres. Equipment purchased will be stored and continuation of the
declines will be suspended until PGM prices improve.
A draft report on accessing the vertical shafts at Kennedy`s Vale to conduct
trial mining has been received and is being reviewed.
3.3.3 Mareesburg
Further work on the Mareesburg project has been put on hold since December 2008.
A new order mining right application was submitted in December 2007 which
supports the Company`s intention to commence mining when PGM prices improve. An
updated feasibility study for the Mareesburg open pit is expected to be
completed in 2009.
3.4 Corporate and other expenses
General and administrative expenses ("G&A") are costs associated with the
Company`s corporate head office in Vancouver and the Johannesburg
administrative office. Such costs include legal and accounting, regulatory,
executive management fees, investor relations, travel and consulting fees.
Given the current downturn in the economy and the curtailment and
postponement of some of the Company`s projects, the trend was for G&A expenses
to decrease beginning in Q4 2008 and continuing into 2009, as the Company
implemented cash preservation measures in late 2008. G&A decreased by 40% to
$3,171,000 in Q2 2009 from $5,309,000 in Q2 2008. Similarly, G&A decreased by
50% to $4,807,000 in 6M 2009 from $9,642,000 in 6M 2008. The decrease in G&A
was due to a reduction in certain senior level staff in Johannesburg in late
2008, and a general reduction in corporate travel and investor relations
activities. In addition, $329,000 of the quarterly decrease was due to a drop
in both the Canadian dollar and the Rand relative to the US dollar, as G&A
costs were paid in Canadian dollars and in Rand.
Compared to the first quarter of 2009, G&A increased from $1,636,000 to
$3,171,000 in Q2 2009 due to the Q2 2009 settlement of two long-standing legal
proceedings which originated at CRM in 2004 and 2006 respectively. The costs to
settle these proceedings totaled $1,407,000.
Interest income recorded during the three and six months ended June 30, 2009
was $495,000 and $989,000 respectively compared with $2,877,000 and $5,684,000
in the same period in 2008. The decrease in interest income was due to lower
average cash balances and lower interest rates in 2009 compared to the same
period in 2008.
During the three and six months ended June 30, 2009 the Company recorded an
income tax recovery of $1,609,000 and $2,289,000 respectively, despite
recording a minor loss in Q2 2009 and a profit in 6M 2009. The recoveries were
based on net losses generated at CRM during the period as well as changes in
the Company`s net assets that resulted in a deferred tax recovery. The
consolidated statement of financial position reflects total deferred tax
liabilities of $43,955,000 which arose primarily as a result of the step- up
to fair value of the net assets acquired on the Barplats and Gubevu business
acquisitions during the years ended June 30, 2006, June 30, 2007, and December
31, 2008.
4. Liquidity and Capital Resources
At June 30, 2009, the Company had working capital of $29,402,000 (December 31,
2008 - $34,025,000) and cash and cash equivalents and short-term investments of
$21,910,000 (December 31, 2008 - $61,063,000) in highly liquid, fully
guaranteed, bank sponsored instruments.
The Company had no long-term debt at June 30, 2009, other than a provision for
environmental rehabilitation relating primarily to its Crocodile River Mine,
and capital lease obligations relating to mining vehicles with lease terms of
five years with options to purchase for a nominal amount at the conclusion of
the lease. See Contractual Obligations under Section 4.4 below.
4.1 Outlook
The unprecedented sharp decline in the prices of platinum group metals (PGMs)
during the last five months of 2008 had a negative impact on the Company`s
profitability and the Company`s development projects which have been put on hold
until a sustained recovery of PGM prices takes place. PGM prices in U.S. dollar
terms have recovered since the beginning of 2009, but this has been negated by
the recent strength of the Rand against the U.S. dollar. As a result, the
realized basket prices that the Company is receiving has not improved
significantly since their lows of December 2008 and are still more than 50%
below those recorded in July 2008. In light of the current global economic
uncertainty, the Company anticipates that PGM prices will remain depressed and
the Rand-U.S. dollar exchange rate will remain volatile in the short term.
As a consequence, the Company`s near-term goal has been, and continues to be,
to preserve its cash balances to the greatest extent possible, by increasing
production and minimizing operating costs without compromising safety, health
and environmental standards, and by curtailing capital expenditures. This
process began in December 2008, and the Company has successfully achieved cost
improvements over the last two consecutive quarters. The Company will continue
to manage costs as a priority and expects the lower cost structure to be
maintained, as long as there are no disruptions to the production side.
On July 12, 2009, the Company announced that its subsidiary Barplats Mines Ltd.
had served notice to immediately terminate the services of the contract mining
companies whose employees were involved in an illegal sit-in at the Crocodile
River Mine a few days earlier. As a result of this termination, the Company
anticipates that production in the third quarter will be negatively impacted,
but expects production to return to budgeted levels in the fourth quarter as
new mining crews complete their phase-in and training periods.
The Company`s three primary development projects, at the Crocette section at
CRM and at Spitzkop and Mareesburg on the Eastern Limb, have remained on care
and maintenance since the end of 2008. The Company continually assesses the
possibility of their restart-up, with a view to determining an appropriate
development schedule given the Company`s current cash balances, its ability to
generate sufficient cash flows, and its ability to obtain additional funding in
the current market environment.
Additional funding may be required and may include external debt financing,
joint venture or other third party participation in one or more of the
projects, or the public or private sales of equity or debt securities of the
Company.
If current market conditions persist for an extended time and PGM prices remain
at present levels or lower, then the cash flows from CRM and current cash
balances will be insufficient to advance any or all of the Company`s
development projects to commercial production. This, along with the current
tight credit markets that may result in higher financing costs, could
negatively affect the Company`s ability to obtain equity financing, external
debt financing or third party participation. There can be no assurance that
additional funding will be available to the Company or, if available, that this
funding will be on acceptable terms. If adequate funds are not available, the
Company may be required to further delay or reduce the scope of any or all of
its development projects.
4.2 Impairment
The Company has assessed the carrying values of its mineral properties as a
result of the market downturn. Since late 2008, declining PGM prices and
negative market sentiment have led to the Company`s market capitalization
dropping below its book value as at December 31, 2008 and throughout 2009.
Based on the then-current and expected PGM prices and cost structures as at
December 31, 2008, management determined that the values of the Company`s
mineral properties have not been impaired as of December 31, 2008, with the
exception of the Kennedy`s Vale Project, which was impaired by $313,603,000 as
determined under IFRS. This impairment has been recorded in the year ended
December 31, 2008. Should current market conditions and commodity prices worsen
for a prolonged period of time, an impairment of the Company`s other mineral
properties may be required.
4.3 Share Capital
During the three months ended June 30, 2009, the Company granted 400,000 stock
options with an exercise price of Cdn$0.52 and expiry date of June 30, 2014,
giving rise to share-based payment expense of $93,000 for the quarter. The
total share-based payment expense for the quarter was $203,000, which takes
into account the vesting of options. During Q2 2009, 1,331,667 options were
forfeited at a weighted average exercise price of Cdn$2.43.
During the six months ended June 30, 2008, the Company granted 480,000 stock
options with a weighted average exercise price of Cdn$0.49 and expiry dates of
February 11, 2014 and June 30, 2014, giving rise to share-based payment expense
of $99,000 for the period. The total share-based payment expense for the period
was $335,000, which takes into account the vesting of options. During the six
months ended June 30, 2009, 4,681,667 options were forfeited at a weighted
average exercise price of Cdn$2.09.
On March 28, 2009, the Company`s warrants that traded on the Toronto Stock
Exchange under the symbol "ELR.WT.A" expired. A total of 58,485,996 warrants
expired unexercised.
As at August 13, 2009, the Company had:
680,557,369 common shares outstanding; and
60,295,000 stock options outstanding, which are exercisable at prices
ranging from Cdn$0.32 to Cdn$3.38 most of which expire between 2011 and
2018.
4.4 Contractual Obligations and Commitments
The Company`s major contractual obligations and commitments at June 30, 2009
were as follows:
Table 6
(in thousands of U.S. dollars)
Less than 1
Total year
Provision for environmental rehabilitation $ 15,588 $ -
Capital expenditure contracted at June 30, 2009 but
not
recognized on the condensed consolidated interim
statement of financial position 4,236 4,236
Capital lease obligations 5,313 1,184
$ 25,137 $ 5,420
More than 5
1-5 years years
Provision for environmental rehabilitation $ - $ 15,588
Capital expenditure contracted at June 30,
2009 but not
recognized on the condensed consolidated
interim
statement of financial position - -
Capital lease obligations 4,129 -
$ 4,129 $ 15,588
5. Related Party Transactions
A number of the Company`s executive officers are engaged under contract with
those officers` personal services companies. During the three and six months
ended June 30, 2009 the Company paid $283,000 and $549,000 respectively for
management and consulting fees compared to $336,000 and $711,000 respectively
during the same periods in 2008. During the three and six months ended June 30,
2009 the Company paid $19,000 and $19,000 respectively for reimbursements of
expenses to private companies controlled by officers and directors of the
Company, compared to $82,000 and $155,000 respectively during the same period
in 2008. Management fees, which are paid in Canadian dollars, were lower during
the three and six months ended June 30, 2009 compared to the same period in
2008 due to a weaker Canadian dollar in 2009. Reimbursements of expenses were
lower during the three and six months ended June 30, 2009 compared to the same
period in 2008 due to less travel to South Africa.
All related party transactions were recorded at the amounts agreed upon between
the parties. Any balances payable are payable on demand without interest.
6. Adoption of Accounting Standards and Pronouncements under IFRS
In 2008, the Company`s management assessed the impact of an early adoption to
IFRS and concluded that early adoption would be beneficial to shareholders. An
application for early adoption was submitted to the British Columbia and
Ontario Securities Commissions (the "Commissions") in November 2008.
In February 2009, the Commissions granted the Company exemptive relief to adopt
International Financial Reporting Standards ("IFRS") with an adoption date of
January 1, 2009 and a transition date of January 1, 2008. The Company`s second
financial statements prepared under IFRS are the interim financial statements
for the three and six months ended June 30, 2009, which includes full
disclosure of its new IFRS policies in Note 3 to these financial statements.
These financial statements also include reconciliations of the previously
disclosed comparative periods financial statements prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") to IFRS is set out in
Note 15.
6.1 Significant differences between IFRS and Canadian GAAP in the Company`s
financial statements
During the year ended December 31, 2008, the Company recorded an impairment of
its Kennedy`s Vale ("KV") Project of $313,603,000 under IFRS, as the discounted
cash flows of the KV Project were below its carrying value. The amount of the
impairment was the difference between the discounted cash flows and the
carrying value. Deferred tax liabilities associated with the KV Project were
also written off as a result. The effect of the impairment was a decrease in
property, plant and equipment of $274,354,000, from $783,039,000 under Canadian
GAAP, to $508,685,000 under IFRS. An impairment was not required under Canadian
GAAP, as the undiscounted cash flows of the KV Project were higher than its
carrying value. Since the valuation of the KV Project was based on a production
start date of 2020, discounted and undiscounted cash flows varied
significantly, creating a difference in the impairment determination under IFRS
and under Canadian GAAP.
Tests for impairment are based on certain assumptions on metal prices,
production rates, project start-up dates, operating costs, capital costs, and
discount rates. Should any of these assumptions change and cause an adverse
effect on the valuation of a project, additional impairment charges may be
required.
At January 1, 2008, the Company elected to eliminate its currency translation
adjustment balance in the statement of financial position, as allowed for
first-time IFRS adopters. The effect of this elimination was a decrease in the
deficit of $21,747,000, from $68,132,000 under Canadian GAAP to $46,385,000
under IFRS.
6.2 Accounting standards issued but not yet effective
(i) Effective for annual periods beginning on or after July 1, 2009
IFRS 2 Share Based Payments (revised) - revision of scope
IFRS 3 Business Combinations (revised) - revision of scope and amendments
to accounting for business combinations
IAS 27 Consolidated and Separate Financial Statements (revised) -
amendments due to IFRS 3 Business Combinations revisions
IAS 38 Intangible Assets (revised) - amendments due to IFRS 3 Business
Combinations revisions and measuring the fair value of an intangible asset
acquired in a business combination
(ii) Effective for annual periods beginning on or after January 1, 2010
IFRS 8 Operating Segments (revised) - disclosure of information about
segment assets
The Company has not early adopted these revised standards and is currently
assessing the impact that these standards will have on the consolidated
financial statements.
7. Internal Control over Financial Reporting
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
the Company, together with the Company`s management, are responsible for the
information disclosed in this MD&A and in the Company`s other external
disclosure documents. For the quarter ended June 30, 2009 and June 30, 2008,
the CEO and the CFO have designed, or caused to be designed under their
supervision, the Company`s disclosure controls and procedures ("DCP") to
provide reasonable assurance that material information relating to the Company
and its consolidated subsidiaries has been disclosed in accordance with
regulatory requirements and good business practices and that the Company`s DCP
will enable the Company to meet its ongoing disclosure requirements.
The CEO and CFO have evaluated the effectiveness of the Company`s disclosure
controls and procedures and have concluded that the design and operation of the
Company`s DCP were effective as of June 30, 2009 and that the Company has the
appropriate DCP to ensure that information used internally by management and
disclosed externally is, in all material respects, complete and reliable.
The CEO and the CFO are also responsible for the design of the internal
controls over financial reporting ("ICFR") within the Company in order to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with International Financial Reporting Standards ("IFRS"). During 2008, the
Company engaged an international accounting firm to act as the Company`s
internal auditors for its South African operations.
Under the supervision, and with the participation, of the CEO and the CFO,
management conducted an evaluation of the effectiveness of the Company`s ICFR
based on the framework in the Internal Control - Integrated Framework developed
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, the CEO and the CFO concluded that the design and
operation of the Company`s ICFR were effective as at June 30, 2009.
The scope of the Company`s design of DCP and ICFR excluded Gubevu Consortium
Holdings (Pty) Ltd., a subsidiary which is accounted for as a special purpose
entity under IFRS (previously a variable interest entity under Canadian
generally accepted accounting principles).
During the design and evaluation of the Company`s ICFR, management identified
certain non-material deficiencies, a number of which have been addressed or are
in the process of being addressed in order to enhance the Company`s processes
and controls. The Company employs entity level and compensating controls to
mitigate any deficiencies that may exist in its process controls. Management
intends to continue to further enhance the Company`s ICFR.
The Company`s management, including its CEO and CFO, believe that any DCP and
ICFR, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
they cannot provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been prevented or detected. These
inherent limitations include the realities that judgments in decision making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by unauthorized override
to the future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Accordingly, because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and not be detected.
There have been no changes in the Company`s ICFR during the quarter ended June
30, 2009 that have materially affected, or are reasonably likely to materially
affect, the Company`s ICFR.
8. Cautionary Statement on Forward-Looking Information
This MD&A, which contains certain forward-looking statements, are intended to
provide readers with a reasonable basis for assessing the financial performance
of the Company. All statements, other than statements of historical fact, are
forward-looking statements. The words "believe", "expect", "anticipate",
"contemplate", "target", "plan", "intends", "continue", "budget", "estimate",
"may", "will", "schedule" and similar expressions identify forward looking
statements. Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies. Known and unknown factors could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, fluctuations in the
currency markets such as Canadian dollar, South African Rand and U.S. dollar,
fluctuations in the prices of PGM and other commodities, changes in government
legislation, taxation, controls, regulations and political or economic
developments in Canada, the United States, South Africa, or Barbados or other
countries in which the Company carries or may carry on business in the future,
risks associated with mining or development activities, the speculative nature
of exploration and development, including the risk of obtaining necessary
licenses and permits, and quantities or grades of reserves. Many of these
uncertainties and contingencies can affect the Company`s actual results and
could cause actual results to differ materially from those expressed or implied
in any forward-looking statements made by, or on behalf of, the Company.
Readers are cautioned that forward-looking statements are not guarantees of
future performance. There can be no assurance that such statements will prove
to be accurate and actual results and future events could differ materially
from those acknowledged in such statements. Specific reference is made to the
Company`s most recent Annual Information Form on file with Canadian provincial
securities regulatory authorities for a discussion of some of the factors
underlying forward-looking statements.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise, except to the extent required by applicable laws.
August 13, 2009
Ian Rozier
Date: 13/08/2009 17:17:01 Produced by the JSE SENS Department.
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