| Tue 18 Aug 2009, 7:33 | | BCD - BRC DiamondCore - Management`s Discussion And Analysis Of Financial |
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BCD
BCD
BCD - BRC DiamondCore - Management`s Discussion And Analysis Of Financial
Condition And Results Of Operations For The Three And Six Month Periods Ended
June 30, 2009
BRC DIAMONDCORE LTD.
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2009
The following Management`s Discussion and Analysis of Financial Condition and
Results of Operations (the "MD&A") has been prepared by management and
provides a review of the activities, results of operations and financial
condition of BRC DiamondCore Ltd. (formerly BRC Diamond Corporation) (the
"Company" or "BRC") based upon Canadian generally accepted accounting
principles. This MD&A should be read in conjunction with the unaudited interim
consolidated financial statements as at and for the three and six month
periods ended June 30, 2009, as well as the notes thereto, the audited
consolidated annual financial statements as at and for the financial year of
the Company ended December 31, 2008 ("fiscal 2008") and the notes thereto, and
the annual MD&A for fiscal 2008. All amounts are expressed in Canadian dollars
unless otherwise stated. This MD&A is dated as of August 14, 2009. Additional
information relating to the Company, including the Company`s annual
information form, is available on SEDAR at www.sedar.com.
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements, other
than statements of historical fact, that address activities, events or
developments that the Company believes, expects or anticipates will or may
occur in the future (including, without limitation, statements relating to the
asset sale transaction with KIG Mining Plc, future diamond prices, future
diamond sales, future production, exploration results, potential
mineralization and future plans and objectives of the Company) are forward-
looking statements. These forward-looking statements reflect the current
expectations or beliefs of the Company based on information currently
available to the Company.
Forward-looking statements are subject to a number of risks and uncertainties
that may cause the actual results of the Company to differ materially from
those discussed in the forward-looking statements, and even if such actual
results are realized or substantially realized, there can be no assurance that
they will have the expected consequences to, or effects on the Company.
Factors that could cause actual results or events to differ materially from
current expectations include, among other things, the Company being
unsuccessful in its appeal of the liquidation order against its subsidiary,
Diamond Core Resources, failure to complete the asset sale transaction with
KIG Mining Plc, the possibility that future exploration results will not be
consistent with the Company`s expectations, changes in equity markets, changes
in diamond markets, foreign currency fluctuations, political developments in
the Democratic Republic of the Congo (the "DRC") or South Africa, changes to
regulations affecting the Company`s activities, uncertainties relating to the
availability and costs of financing needed in the future, delays in obtaining
or failure to obtain required project approvals, the uncertainties involved in
interpreting geological data and the other risks involved in the diamond
exploration business. Any forward-looking statement speaks only as of the date
on which it is made and, except as may be required by applicable securities
laws, the Company disclaims any intent or obligation to update any forward-
looking statement, whether as a result of new information, future events or
results or otherwise. Although the Company believes that the assumptions
inherent in the forward-looking statements are reasonable, forward-looking
statements are not guarantees of future performance and accordingly undue
reliance should not be put on such statements due to the inherent uncertainty
therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition, exploration and development of
diamond properties in known diamond producing areas in the Northern Cape of
South Africa and in the DRC.
The Company`s shares commenced trading on the Toronto Stock Exchange ("TSX")ry
11, 2008, following the acquisition by the Company of Diamond Core Resources
Limited ("Diamond Core"), a South African based diamond exploration and
development company that had been listed on the JSE Limited ("JSE") in
Johannesburg, South Africa. Diamond Core is primarily engaged in diamond
exploration and trial mining in the middle Orange area of Northern Cape, South
Africa. Prior to the acquisition the Company`s shares had traded on the TSX
Venture Exchange.
The Company also obtained a secondary listing on the JSE in connection with
the Diamond Core transaction. The purchase price of the acquisition was $94.3
million paid through the issue of shares to the shareholders of Diamond Core.
For the three and six month periods ended June 30, 2009, the Company reported
a net loss of $2,062,000 ($0.08 per share) and $3,544,000 ($0.14 per share)
respectively (compared to a net loss of $1,193,000 or $0.05 per share and
$4,631,000 or $0.20 per share for the three and six month periods ended June
30, 2008 respectively).
The Company`s accumulated deficit as at June 30, 2009 was $112,434,739
(compared to $108,890,567 as at December 31, 2008). The Company has a working
capital deficit of $14,992,785 as at June 30, 2009 and had a net decrease in
cash of $62,000 during the three month period ended June 30, 2009.
While the Company`s 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 that
the Company is unable to identify recoverable resources, receive the necessary
permitting, or arrange appropriate financing, the carrying value of the
Company`s assets could be subject to further material adjustment. This applies
particularly to the DRC. Furthermore, certain current market conditions
including continuing low diamond carat prices have cast significant doubt upon
the validity of this assumption.
The Company`s ability to continue operations in the normal course of business
is dependent on several factors, including its ability to secure additional
funding, and achieve or sustain profitable operations. Management is exploring
all available options to secure additional funding including equity and debt
financing, sale of selected business units, sale of non-core assets and
entering strategic partnerships. In addition, the recoverability of amounts
shown for mineral properties and long-lived assets is dependent upon the
existence of economically recoverable reserves, the ability of the Company to
obtain sufficient financing to complete the development of the properties
where necessary and upon future profitable production, or, alternatively, upon
the Company`s ability to recover its spent costs through a disposition of its
interests, all of which are uncertain in the current climate. It is not
possible to determine with any certainty the success and adequacy of these
initiatives. It is also not possible to determine the timing of completion of
these initiatives required to enable the Company to continue until such time
as diamond prices recover and the Company is able to earn positive operating
cash flows.
Highlights
South Africa
Strategic Review
The ongoing weak global economic conditions have continued to adversely affect
both diamond prices and the Company`s access to debt and equity finance.
Following the strategic review of each of its South African operations that it
had begun at the end of 2008, the Company took the decision to joint venture
or sell its South African operations. The Company has engaged in numerous
negotiations in fulfilment of this review, several of which are ongoing.
The services of all employees of the South African operations were terminated
in April 2009. A skeleton staff is now employed on a rolling short term
contract basis to attend to the administration of the Company and to ensure
protection and preservation of the Company`s assets. The Company`s bulk
sampling operations, i.e. Paardeberg East, Silverstreams and De Kalk, are
still under "care and maintenance".
Silverstreams Bulk Sampling Alluvial Project
The plant comprises a Taurus rotary screen 670tph front end, six 16ft rotary
pans, a 50tph re-concentrating Dense Medium Separation plant, a primary Flow
Sort X-Ray machine recovery unit, an attritioner, a secondary Bateman GB 1000
automated grease belts recovery unit and a "hands off" sort house.
The decision taken by the Company to suspend bulk sampling operations in the
fourth quarter of 2008 is still effective.
De Kalk Bulk Sampling Alluvial Project
The decision taken by the Company to suspend bulk sampling operations in the
fourth quarter of 2008 is still effective.
The contractor has removed all its equipment from site. The Company is keeping
security in attendance on the site as its final recovery plant with two Flow
Sort X-ray machines and a sort house is still on the site.
Sandrift Alluvial Prospecting Project
The Company has a prospecting licence on this alluvial gravel deposit. No
further exploration on this project was carried out during the first six
months of 2009.
Paardeberg East Bulk Sampling Kimberlite Project
The Paardeberg East metallurgical sampling plant comprises a front end, with
primary crushing (to -55mm), a 50tph Bateman Dense Media Separation plant
(DMS), secondary re-crush (to -18mm) and tertiary re-crush (to-13mm) circuits
and has a 37tph ROM capacity. DMS feed is screened at 25 mm. The final
recovery consists of two Flow-Sort X-ray machines, an attritioner, two Bateman
GB 800 grease belts and a "hands-off" sort house.
The decision taken by the Company to suspend bulk sampling operations in the
fourth quarter of 2008 is still effective.
Democratic Republic of the Congo ("DRC")
Tshikapa Project
The Company has distilled the Tshikapa project down from 35 to 12 exploration
permits after detailed geophysical surveys and sampling have provided
promising drill targets to proceed with the remaining 12. These permits are
covered by option agreements with Acacia sprl (6 permits), Caspian Oil & Gas
(2 permits), Kings Mine, Investors Equity (2 permits) and Groupe Abba.
Detailed sampling and 200m line spacing geophysical surveys have generated 24
targets, interpreted as kimberlite intrusions, and have been earmarked for the
next drilling phase. Two of these targets, on the Groupe Abba ground, have
been covered by detailed ground magnetic surveys on 50m line spacing and are
two clear circular magnetic anomalies. These have been modeled from the
geophysics as being cylindrical in shape probably associated with intrusions.
One is some 500m in diameter and between 5 to 9 ha in size and the other is
200m in diameter and 2 to 3 ha in size and they are interlinked with a dyke
feature.
Recent stream sampling around these targets has returned abundant coarse
grained kimberlite derived minerals suggesting that these are kimberlite
intrusions. The grains will be selected for detailed surface texture and
microprobe analysis to assess the diamond potential of the source of these
grains. This is scheduled for the third quarter of 2009.
Detailed geophysical surveys are planned over the other 22 anomalies. The
Company has also retained its drilling capabilities in Tshikapa. The Company`s
operations in Tshikapa remain under the care and maintenance programme that
was initiated in the first quarter of 2009.
Northern DRC Project
The projects in the northern DRC, consisting of 18 exploration licences, are
part of the Rio Tinto Mining and Exploration Ltd ("Rio Tinto") Northern DRC
joint venture, in which Rio Tinto has the right to earn in equity over the
various stages of the exploration programme.
Samples and concentrates from these projects have been submitted to the
laboratories of Rio Tinto for analysis. Work on these projects has been
temporality suspended as a cost saving measure pending the further analysis
and interpretation of the samples and the laboratory results.
The Company has maintained its excellent relationship with Rio Tinto whereby
Rio Tinto assists in the financing and exploration of properties to which the
Company holds the licence permits. The Company hopes to further this
relationship in the near future.
Kwango Project
Having identified that the project was not economically viable it was decided
to withdraw from the Kwango project and all remaining licences were
relinquished during the first quarter of 2009.
Licence Holding
During the first quarter of 2009 the following exploration licences in the DRC
were relinquished: Acacia (5), BRC (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), BRC (2),
Caspian Oil & Gas (2), Groupe Abba (1), King`s Mine (1) and IEL (2). No DRC
exploration licences were relinquished in the second quarter of 2009.
KIG Mining PLC Heads of Agreement
The Company has entered into a heads of agreement with KIG Mining Plc ("KIG")
for the sale of the Company`s South African alluvial assets for a sum of US
$10.7 million in cash and shares in KIG (reference is made to the Company`s
July 3, 2009 press release). The transaction is still subject to the
completion of a full agreement and the fulfilment of various regulatory
requirements. As well, the ability to complete this transaction may be
adversely affected by the outcome of the appeal of the liquidation order
against Diamond Core (see below).
Liquidation Proceedings
On July 3, 2009 Diamond Core (which is the holding company for all of the
Company`s South African assets) was the subject of a final liquidation order
by the Northern Cape High Court in South Africa. The application for the
liquidation was initiated by River Corporate Finance (Pty) Ltd, which was the
exclusive adviser to Diamond Core on the transaction with the Company. The
liquidation application was based on a claim in respect of the balance
allegedly owing on a success fee of US$1million. Diamond Core disputed the
claim based on performance and has sued River Corporate Finance for the return
of the R2 million of this fee already paid. Provisional liquidators have been
appointed but while the appeal is being processed the liquidators may only
secure the assets and no disposal or sale is possible without the approval of
the shareholders (i.e. the Company).
An application for leave to appeal the liquidation order has been lodged with
the Northern Cape High Court with a request that if leave is granted that the
appeal be heard in the Supreme Court of Appeal. The matter is expected to be
heard during the month of September 2009 on a date to be agreed. If leave is
not granted by the Northern Cape High Court then the Company intends to
petition the Supreme Court of Appeal directly.
In the event that the legal process is unsuccessful and the liquidation order
is confirmed then the appointed liquidators will establish who the creditors
are and the amount of their claims and sell off the assets of Diamond Core to
settle the creditors. The cost of a liquidation process is very high due to
the liquidators` administration costs during the process, the fees and
commissions due to the liquidators from the sale of assets and revenue
received, the auctioneer`s fees, etc. As well, due to the complicated
structure of the Company`s South African subsidiaries, each with different
creditors with competing claims, the process when it starts, in the event that
the appeal process fails, will likely be long and costly. Thus, if the
liquidation goes ahead, it is uncertain at this point whether any of the
Company`s South African assets would remain at the end of the liquidation
process.
However the Company`s South African legal counsel has advised that there are
good grounds for appeal and the Company remains hopeful of a positive outcome.
The basis for the appeal includes the agreement entered into with KIG that
will enable sufficient cash flow to become available to provide for the
settlement of the claim by River Corporate Finance (Pty) Limited, albeit under
protest.
QUALIFIED PERSON AND TECHNICAL REPORTS
Dr Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National Instrument 43-101, has reviewed and approved
the technical information in this MD&A.
Additional information with respect to the Company`s Tshikapa project is
contained in the technical report prepared by Dr Michiel de Wit and Fabrice
Matheys, dated March 31, 2009 and titled "National Instrument 43-101 Technical
Report on the Tshikapa Project of BRC DiamondCore Ltd. in the Democratic
Republic of the Congo".
Additional information with respect to the Company`s South African projects is
contained in the technical report prepared by Venmyn Rand (Pty) Limited, dated
July 31, 2007 and titled "National Instrument 43-101 Technical Report Prepared
on the Mineral Assets of Diamond Core Resources Limited in the Northern Cape
and Free State Provinces, South Africa".
Copies of these reports can be obtained from SEDAR at www.sedar.com.
TRANSACTION WITH DIAMOND CORE RESOURCES LIMITED
In July 2007, the Company and Diamond Core 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 issue of common shares of the Company. Under
the scheme, each Diamond Core shareholder was entitled to receive one share of
the Company 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 shares of the Company to the Diamond Core shareholders in
the agreed ratio, resulting in the issue by the Company of a total of
12,089,678 common shares. In connection with this acquisition, the Company
changed its name from BRC Diamond Corporation to BRC DiamondCore Ltd. and its
shares were listed on the Toronto Stock Exchange and the JSE Limited in
Johannesburg, South Africa.
Previously in July 2005, Diamond Core acquired all of the outstanding shares
of Samadi Resources SA (Pty) Ltd ("Samadi"). As consideration for this
acquisition, Diamond Core issued ordinary shares to Samadi`s shareholders. The
terms of the acquisition agreement (the "Samadi Agreement") entered into by
Diamond Core with the Samadi shareholders with respect to this acquisition
provide for the potential issue 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 common shares of
the Company in substitution for the Diamond Core ordinary shares, with the
number of shares of the Company issuable to such shareholders adjusted to
reflect the exchange ratio applicable under the terms of the scheme.
Accordingly, the number of Company 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 shares.
Also in connection with the acquisition by the Company of all of the
outstanding shares of Diamond Core, 15,133,190 stock options that had been
issued to employees of Diamond Core pursuant to The Diamond Core Resources
Share Trust Deed to acquire 15,133,190 ordinary shares in Diamond Core (the
"Old Options") were substituted with new stock options of the Company (the
"Replacement Options"), so as to allow all holders of Old Options to acquire
the number of common shares of the Company 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 shares of the Company, with the exercise price of such
Replacement Options being adjusted to the number that is equal to the exercise
price of the Old Options (denominated in South African rand) multiplied by
24.5. A total of 617,710 Replacement Options were issued by the Company.
Allocation of Purchase Price
Based on the Company`s average closing price of $7.40 per share, calculated
with reference to the share price around July 5, 2007, the Company 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 the Company being identified as the acquirer and Diamond Core as the
acquiree. In accordance with the purchase method of accounting, assets and
liabilities acquired from Diamond Core are measured at their individual fair
values on the date of the acquisition and the difference between these fair
values of net assets acquired and the purchase price is recorded in the
consolidated balance sheet as goodwill.
The following table summarizes the components of the total purchase price and
net assets acquired. It reflects fair-value adjustments for identifiable
assets and liabilities acquired and assumed.
$`000
Issue of 12,089,678 common shares of the Company 89,464
Issue of Replacement Options 2,477
Transaction costs 2,407
Purchase price 94,348
The allocation of the purchase price to the net
assets acquired is as follows:
Cash 2,270
Trade and other receivables 1,253
Inventories 192
Mineral rights 14,188
Property, plant and equipment 17,051
Deferred exploration costs 8,891
Trade and other payables (2,912)
Taxation (126)
Asset retirement obligation (1,017)
Net assets acquired 39,790
Goodwill 54,558
Fair value of net assets acquired $94,348
The consideration and transaction costs of $94,347,641 exceeded the carrying
value of the net assets acquired by $54,558,329 which was recorded as
goodwill.
At December 31, 2008, the fair value of the South African reporting unit,
based on undiscounted projected cash flows, was less than the carrying value.
As a result, the Company recognized an impairment of the full amount of the
Diamond Core goodwill of $54,558,329. The decrease in the fair value was
primarily due to the decline in price per carat and general economic
conditions.
RESULTS OF OPERATIONS
For the six month period ended June 30, 2009, the Company reported a net loss
of $3,544,172 or $0.14 per share, compared to a net loss of $4,631,000 or
$0.20 per share, reported for the six month period ended June 30, 2008.
For the three month period ended June 30, 2009, the Company reported a net
loss, of $2,062,000 (or $0.08 per share), compared to a net loss of $1,193,000
(or $0.05 per share) incurred during the three month period ended June 30,
2008.
The major component of the increased expenses and cause of the increased loss
of the quarter were salaries and the retrenchment costs associated with the
termination of the employment contracts. These costs are at an end and will
not be incurred in the future. Even though the Company has placed its
operations on a care and maintenance basis there are still significant costs
such as surface use rentals payable to the land owners, electricity, security,
fuel etc. Depreciation also continues even though the assets are not in use.
Costs incurred in South African rand increased due to the 17% increase in the
value of the rand against the Canadian dollar over the quarter.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the second quarter of 2009. This financial information has been prepared in
accordance with Canadian generally accepted accounting principles. The
Company`s reporting and measurement currency is the Canadian dollar.
2009 2009 2008 2008
2nd 1st 4th 3rd
quarter quarter quarter quarter
Net loss ($`000) $2,062 $1,483 $90,873 $7,498
Net loss per share $3.70 $0.31
(basic and diluted) $0.08 $0.06
2007
2008 2008 2007
2nd 1st 4th 3rd
quarter quarter quarter quarter
Net loss ($`000) $1,193 $3,438 $16 $1,114
Net loss per share $0.05 $0.17 $0.01 $0.08
(basic and diluted)
During the second quarter of 2009, the Company`s net loss was $2,062,000
compared to a net loss of $1,483,000 reported during the first quarter of
2009. The increased loss, reported in Canadian dollars, is partially as a
result of the 17% appreciation in the South African rand over the second
quarter. There were additional costs associated with retrenchment of
employees. The Company maintained its decision to place its South African bulk
sampling operations on a care and maintenance basis as a result of market
conditions. Similarly the DRC exploration activities remained on a care and
maintenance basis as a result of decreased funding for operations in the DRC.
During the first quarter of 2009, the Company`s net loss reduced to $1,483,000
compared to a net loss of $90,837,000 reported during the fourth quarter of
2008. This change was mainly as a result of the Company`s decision to place
its operations on a care and maintenance basis as a result of decreased
funding for operations in the DRC and the low diamond prices adversely
affecting the bulk sampling operations in South Africa, which was in effect
throughout the first quarter of 2009 but for only part of the fourth quarter
of 2008.
During the fourth quarter of 2008, the Company`s net loss increased to
$90,873,000 compared to a net loss of $7,498,000 reported during the third
quarter of 2008. This increase was due mainly to the impairment of goodwill,
mineral properties and capital assets.
During the third quarter of 2008, the Company`s net loss increased to
$7,498,000 compared to a net loss of $1,193,000 reported during the second
quarter of 2008. This increase was due mainly to the impairment of $5,312,000
on certain properties in the DRC that had been relinquished, the accounting
for stock based compensation and a reversal from unrealised foreign exchange
profits to losses on the conversion of the South African balance sheet from a
relatively weaker rand to the Canadian dollar.
During the second quarter of 2008, the Company`s net loss decreased to
$1,193,000 compared to a net loss of $3,438,000 reported for the first quarter
of 2008, due mainly to a decrease in unrealised foreign exchange losses
created on the revaluation of the South African balance sheet to Canadian
dollars (June 30, 2008 - $79,000; March 30, 2008 - $2,794,000).
During the first quarter of 2008, the Company`s net loss increased to
$3,438,000 compared to a net loss of $15,533 in the last quarter of 2007, due
mainly to the inclusion of the Diamond Core operating results and the
unrealized foreign exchange loss recorded.
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2009, the Company had cash of $171,000 and a working capital
deficit of $14,992,785 compared to cash of $198,000 and a working capital
deficit of $13,033,742 as at December 31, 2008.
As a result of the ongoing suspension of its bulk sampling activities in South
Africa which started during the fourth quarter of 2008, the Company does not
currently generate operating revenues. Suspension of bulk sampling occurred
when the collapse of diamond prices meant that operating costs exceeded
expected revenues from the sale of diamonds recovered.
Similar to other foreign entities and all local companies operating in South
Africa, the Company is subject to currency exchange controls administered by
the country`s central bank. An ability to manage cash flows, repatriate funds
or operating profits, should any develop, may be adversely affected by such
exchange controls, and consequently the ability to adequately finance the
exploration in the DRC out of funds generated by the South African operations.
Historically, the Company has relied primarily on equity financings to fund
its activities through private placement financings and the exercise of
warrants and options. Although the Company has been successful in completing
equity financings in the past, there is no assurance that the Company will
secure the necessary financings in the future.
The Company`s liquidity requirements have and are being met through a variety
of sources, including: cash on hand, cash generated from operations, cash
generated from the sale or renting of non-core assets, existing credit
facilities, trade credit, leases, and debt and equity markets.
Weakening global economic conditions have led to a significant weakness in
commodity prices in recent times, including diamond prices. In general, credit
market conditions have increased the cost of obtaining capital and limited the
availability of funds.
Given the Company`s financial position, available credit facilities and the
fact that there are scheduled interest payments on its debt in 2009, the
Company will either have to access debt and equity markets for financing or
sell off non-core business units over the next twelve month period. However,
because the duration of the general economic uncertainty and its detrimental
effect on credit and capital markets is unknown, it is difficult to determine
the long-term impact on the Company.
In light of current market conditions, the Company has continued a series of
measures, initiated in the last quarter of 2008, to bring its spending in line
with the projected cash flows from its operations and available project
specific facilities in order to preserve its balance sheet and maintain its
liquidity position, as well as selling non-core assets. It is now also
proposing to sell non-core business units and has reasonable prospects for
concluding such sales in the third quarter of 2009.
The Company`s consolidated financial statements have been prepared in
accordance with Canadian GAAP applicable to a going concern. In the first and
second quarters of 2009, the Company has been able to contain costs and if the
measures detailed above are successfully implemented, although this is subject
to factors outside of the control of management, then management currently
believes that the Company will be able to satisfy its current and long-term
obligations.
During the third quarter of 2008 the Company completed a private placement
involving the issue and sale of 350,000 common shares of the Company at a
price of $1.50 per share for total proceeds of $525,000. The proceeds were
used for the exploration of the Company`s diamond properties and for general
corporate purposes.
During the fourth quarter of 2007, the Company obtained a $3,000,000 credit
line (the "Loan Facility") from a Canadian financial institution, of which
$3,000,000 was utilized as at December 31, 2007. During the first quarter of
2008, the Loan Facility was increased from $3,000,000 to $6,000,000. As at
June 30, 2009, the balance of the Loan Facility was $6,280,133. (December 31,
2008: $6,172,317) including accrued interest of $420,727 (December 31, 2008:
$307,872).
The Loan Facility is guaranteed by Banro Corporation, a significant
shareholder of the Company. The Company has undertaken to release Banro from
its guarantee as soon as possible. The Loan Facility was used to fund the
Company`s exploration activities until the second quarter of 2008. As at
August 14, 2009, the Loan Facility guaranteed by Banro is still in place.
Contractual obligations (not on balance sheet) that have been entered into by
the Company as at June 30, 2009 amount to $310,591 (compared to $747,000 as at
June 30, 2008) and are summarized in the table below:
Total Less than 1 year 1 - 3 years
Contractual $237,394 $237,394 $nil
obligations
Operating leases $73,197 $63,365 $9,833
$310,591 $300,759 $9,833
The Company is in the process of exercising an option agreement to secure an
equity interest in prospective ground in the DRC currently held under option.
The Company expects to pay approximately US$350,000 as an option exercise fee.
DEFERRED EXPLORATION EXPENDITURES
The following table provides a breakdown of the Company`s deferred exploration
expenditures per country and project for the three and six month periods ended
June 30, 2009.
DRC
Three month period Kwango Lubao Tshikapa Other
Project Project Tshikapa (Candore) Projects Total
(Acacia) Project
Project
Ended June 30, 2009 $`000 $`000 $`000 $`000 $`000
$`000
Balance 3/31/2009 43 314 3,033 405 1,768 5,563
Administrative and - - 115 - 390 505
office support
Depreciation - - 58 - 1 59
Drilling - - 16 - - 16
Field camp expenses - - 22 - (15) 7
Permits & Surface - - - - 21 21
taxes
Professional fees - - 27 - 6 33
Profit on sale of - - (22) - (28) (50)
assets
Remote sensing - - - - - -
Share based - - 58 - 76 134
payments
Transport - - 4 - 5 9
Unrealised foreign - 51 477 62 279 869
exchange difference
Subtotal - second - 51 755 62 735 1,603
quarter period of
2009
Balance 6/30/2009 43 365 3,788 467 2,503 7,166
Six month period Kwango Lubao Tshikapa Other
Project Project Tshikapa (Candore) Projects Total
(Acacia) Project
Project
Ended June 30, 2009 $`000 $`000 $`000 $`000 $`000
$`000
Balance December - 327 3,032 415 1,787 5,561
31,2008
Administrative and 21 - 169 2 246 438
office support
Depreciation - - 60 1 42 103
Drilling - - 16 - - 16
Field camp expenses 10 - 80 1 113 204
Permits and surface - - - - 21 21
taxes
Professional fees 3 - 32 1 17 53
Profit on sale of - - (22) - (28) (50)
assets
Remote sensing - - - - -
Share based - - 58 - 76 134
payments
Transport 8 - 8 - 21 37
Unrealised foreign - 38 355 47 208 648
exchange difference
Subtotal - six 43 38 756 52 716 1,605
month period ended
June 30, 2009
Balance 6/30/2009
43 365 3,788 467 2,503 7,166
Other projects consist of the following projects: Tshikapa (Kwango Mines),
King`s Mine, Zongo, Businga, Bornili, Ilunga and Kwango (Acacia).
South Africa
No exploration expenses were capitalised for any of the South African projects
during the first six months of 2009. All South African exploration projects
are currently under care and maintenance.
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at August 14, 2009, the Company had outstanding 26,091,310
common shares and stock options to purchase an aggregate of 3,198,142 common
shares of the Company.
In addition, as part of the transaction with Diamond Core, the Company had
agreed to issue a maximum of 1,434,502 common shares to former shareholders of
Samadi Resources SA (Pty) Limited (a subsidiary of the Company which was
acquired as part of the Diamond Core transaction) if certain profitability
thresholds were met in relation to certain of Diamond Core`s projects (see
"Transaction with Diamond Core Resources Limited").
RELATED PARTY TRANSACTIONS
Balances Payable June 30, 2009 December 31, 2008
$`000 $`000
Macleod Dixon LLP 798 745
SFW Village 138 -
AT Kondrat 50 -
DK Madilo 24 -
Scallan Project 2 13
Facilitation (Pty)
Ltd (f)
Sterling Portfolio 101 11
Securities Inc. (g)
1,113 769
For the three For the six month
Transactions month period ended period ended
June June June June
30, 30, 30, 30,
2009 2008 2009 2008
$`000 $,000 $`000 $`000
Macleod Dixon LLP (a) 72 30 120 189
Banro Corporation (b) - (99) - (11)
SFW Village (c) 67 25 138 50
AT Kondrat (d) 25 21 50 42
DK Madilo (e) 12 10 24 20
Sterling Portfolio 20 - 90 -
Securities Inc.
196 $ (13) 422 290
a) During the three and six month periods ended June 30, 2009, legal fees
and related costs of $72,140 and $119,993 (June 30, 2008: $30,000 and $
189,000) 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 and six month periods ended June 30, 2009, the Company
incurred $nil and $nil in general and office related expenses for
contribution to these expenses (June 30, 2008 : $99,000 and $11,000).
c) Consulting fees in respect of services to the Company as well as a short
term advance 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 and 2009, Sterling Portfolio Securities Inc. advanced a short
term loan to the Company. The officer and director of Sterling Portfolio
Securities Inc. is a non-executive director of the Company.
All amounts due to related parties are included in the balance sheet in
accounts payable and accrued liabilities. These amounts are unsecured, non-
interest bearing and due on demand. These transactions are in the normal
course of operations and are measured at the exchange value.
NEW ACCOUNTING STANDARDS
a) Goodwill and Intangible Assets
Effective January 1, 2009, the Company adopted CICA Section 3064,
Goodwill and Intangible Assets, replacing Section 3062, Goodwill and
Other Intangible Assets, and Section 3450, Research and Development
Costs. Section 3064 establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to its
initial recognition and of intangible assets by profit-oriented
enterprises. The new standard provides guidance on the recognition,
measurement, presentation and disclosure of goodwill and intangible
assets subsequent to its initial recognition. The adoption of this new
standard did not have a significant impact on the Company`s financial
statements.
b) Mining Exploration Costs
In March 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 the Company`s 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 and will require the restatement, for comparative
purposes, of amounts reported by the Company for its fiscal year ended
December 31, 2010. IFRS uses a conceptual framework similar to Canadian
GAAP, but there are significant differences in recognition, measurement
and disclosures. While adoption of IFRS will not change the actual cash
flow movements of the Company, the adoption of IFRS will result in
changes to the reported financial position and results of operations of
the Company. 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 and has established the following:
- All of the Company`s South African subsidiaries are subject to IFRS.
Diamond Core had successfully adopted IFRS prior to the acquisition
thereof by the Company and is currently reporting its statutory
returns in South Africa in terms of IFRS. This will facilitate the
adoption of IFRS, since the Company`s reporting systems and
processes already take both Canadian GAAP and IFRS into
consideration and the staff involved in the financial reporting
process are knowledgeable on IFRS.
- The Company is in the process of identifying the key areas where
differences between Canadian GAAP and IFRS exist and the Company
reviews any new financial information on an ongoing basis to
identify further areas of differences that will need to be
addressed. I.e. 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 IFRS 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 South African local statutory
financial statements under IFRS, the Company will need to assess the
impact for Canada and the DRC.
During the first six months of 2009, the following steps have been
completed as part of the formal IFRS transition plan:
i. A formal project structure including project governance
ii. An estimate of required resources (combination of internal and
external)
iii. A detailed timeline for fiscal 2009 and 2010
iv. A proposed training program
v. A comprehensive analysis and review of all IFRS 1 elections
During the remainder of 2009, a comprehensive analysis of all GAAP and
IFRS differences will be addressed as well as an assessment of the impact
on data systems, internal controls over financial reporting and business
activities.
b) Business Combinations / Consolidated Financial Statements / Non-
Controlling Interests
In January 2009, the CICA adopted sections 1582, "Business Combinations",
1601, "Consolidated Financial Statements", and 1602, "Non-Controlling
Interests" which superseded current sections 1581, "Business
Combinations" and 1600 "Consolidated Financial Statements". These
Sections will be applied prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2011. Earlier adoption
is permitted. If an entity applies these Sections before January 1, 2011,
it will disclose that fact and apply each of the new sections
concurrently. These new sections were created to converge Canadian GAAP
with IFRS. The Company is currently evaluating the impact of the adoption
of these changes on its consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates used in the preparation of the Company`s
consolidated financial statements include the Company`s estimate of the
recoverable value of its mineral properties and related deferred exploration
expenditures, asset retirement obligations, taxes and stock-based
compensation. All of these estimates involve considerable judgment and are,
or could be, affected by significant factors that are out of the Company`s
control.
Mineral Properties and Deferred Exploration Expenses
The Company`s recoverability of the recorded value of its mineral properties
and associated deferred exploration expenses is based on market conditions for
minerals, underlying mineral resources associated with the properties and
future costs that may be required for ultimate realization through mining
operations or by sale. The Company is in an industry that is dependent on a
number of factors including environmental, legal, and political risks, the
existence of economically recoverable reserves, the ability of the Company and
its subsidiaries to obtain necessary financing to complete the development and
future profitable production or the proceeds of disposition thereof.
Management uses its best available information to identify the point at which
a development project is capitalized, assess resources, future costs and
benefits and, where considered necessary, engages qualified third-party
professionals to assist in the process. Changing assumptions about future
commodity prices, exchange rates, production costs and revised information on
resources may change management`s recoverable amounts and depletion and
amortization.
The Company`s estimates of recoverability of its operating and development
properties are critical, because they could have a significant impact on the
balance sheet and statement of operations. The Company periodically reviews
and evaluates the recoverability of property, plant and equipment based on an
estimate of undiscounted future cash flows. In performing impairment tests,
management must make certain estimates: future cash flows, expected commodity
prices, inflation rate, future exchange rates, future operating, capital and
reclamation costs, and the amount and classification of resources. Future cash
flows are calculated using quoted benchmark prices in the futures market or
price forecasts consistent with reputable industry forecasts or contracted
prices where applicable. If any of these estimates change, future net cash
flows from the property, plant and equipment could be lower which would result
in impairment.
Asset-Retirement Obligations
The Company`s operations and joint ventures are subject to environmental
regulations in the DRC and South Africa.
These future obligations are estimated by taking into consideration closure
plans, known environmental impacts, and internal and external studies which
estimate the activities and costs that will be carried out to meet the
retirement obligations. The asset-retirement cost estimates could change due
to amendments in laws and regulations in the countries in which the businesses
operate.
A number of assumptions and judgements are made by management in the
determination of these provisions. Amounts recorded for asset-retirement
obligations are based on estimates of retirement costs which may not be
incurred for several years or decades. Actual estimated decommissioning and
reclamation costs may differ from those projected as a result of an increase
over time of actual remediation costs, a change in the timing for utilization
of resources and the potential for increasingly stringent environmental
regulatory requirements.
Income Taxes
The Company estimates future income taxes based upon temporary differences
between the assets and liabilities that are reported in its consolidated
financial statements and their tax basis as determined under applicable tax
legislation. The Company records a valuation allowance against its future
income tax assets when it believes that it is not "more likely than not" that
such assets will be realized. The valuation of future tax assets and any
associated valuation allowance can be affected by many factors, including:
current and future economic conditions, net realizable sale prices, production
rates and production costs and can either be increased or decreased where, in
the view of management, such change is warranted.
Foreign Currency Translation
The functional currency of the Company is Canadian dollars. The Company`s
businesses undertake transactions in currencies other than the Canadian
dollar, including US dollars and the South African rand. As part of its
ongoing review of critical accounting policies and estimates, the Company
reviews the foreign currency translation method of its foreign operations to
determine if there are significant changes to economic facts and circumstances
that may indicate whether or not the foreign operations are largely self-
sufficient and the economic exposure is more closely tied to their respective
domestic currencies.
Any change in translation method resulting from this review will be accounted
for prospectively. The Company accounts for its South African operations as
self-sustaining and for the DRC as an integrated foreign operation.
Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to determine the fair
value of stock options granted. This model requires the Company to make
reasonable assumptions in order to derive parameters such as the expected
volatility of the Company`s shares, the expected life of the option and
interest rates, all of which are based on historical information. Future
behaviours of these parameters are beyond the Company`s control, and thus, may
be significantly different from the Company`s estimates.
The values of all stock options granted were estimated, using the Black-
Scholes option-pricing model, based on the following factors:
i. risk-free interest rate: 3.075%
ii. expected volatility: 95%
iii. expected life: 5 years
iv. expected dividends: $Nil
Property, plant and equipment are depreciated over their useful lives taking
into account the residual values, where appropriate. The actual lives of the
assets and residual values are assessed annually and may depend on a number of
factors. In reassessing asset lives, factors such as technological innovation
and maintenance programs are taken into account. Residual value assessments
consider issues such as future market conditions, the remaining life of the
asset and projected disposal values.
CAPITAL MANAGEMENT
The Company`s main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of
capital at acceptable risk while providing an appropriate return to its
shareholders;
- to maintain a strong capital base so as to maintain investor, creditor
and market confidence and to sustain future development of the business;
- to safeguard the Company`s ability to obtain financing should the need
arise; and
- to maintain financial flexibility in order to have access to capital in
the event of future acquisitions.
The Company manages its capital structure and makes adjustments to it in
accordance with the objectives stated above, as well as responds to changes in
economic conditions and the risk characteristics of the underlying assets.
There were no changes to the Company`s approach to capital management during
the six month period ended June 30, 2009.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not,
by its nature, all inclusive.
The only sources of future funds for further exploration programs which are
presently available to the Company (other than diamond sales as a result of
the Company`s bulk sampling activities but which have been currently
suspended) are the sale of equity capital, or the offering by the Company of
an interest in its properties to be earned by another party carrying out
further exploration. There is no assurance that such sources of financing
will be available on acceptable terms, if at all. In the event that
commercial quantities of minerals are found on the Company`s properties, the
Company does not have the financial resources at this time to bring a mine
into production but will be able to do so if suitable joint venture agreements
are concluded.
The current financial climate is characterized by volatile and uncertain
times. The uncertainty of forward looking statements is therefore greater in
the current period than previous periods. Diamond prices have reduced
significantly as a result of the economic downturn and any recovery could be
accompanied by volatility. This will adversely affect the Company`s cash flow
particularly if the depressed prices continue for a protracted period.
The Company has limited bank borrowings but it is aware that the credit crunch
has limited the availability of traditional sources of project finance from
banks.
All of the Company`s projects are located in the DRC and South Africa. The
assets and operations of the Company are therefore subject to various
political, economic and other uncertainties, including, among other things,
the risks of war and civil unrest, hostage taking, military repression, labour
unrest, illegal mining, expropriation, nationalization, renegotiation or
nullification of existing licenses, permits, approvals and contracts, taxation
policies, foreign exchange and repatriation restrictions, changing political
conditions, international monetary fluctuations, currency controls and foreign
governmental regulations that favour or require the awarding of contracts to
local contractors or require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction. Changes, if any, in mining
or investment policies or shifts in political attitude in either the DRC or
South Africa may adversely affect the Company`s operations or profitability.
Operations may be affected in varying degrees by government regulations with
respect to, but not limited to, restrictions on production, price controls,
export controls, currency remittance, income taxes, foreign investment,
maintenance of claims, environmental legislation, land use, land claims of
local people, water use and mine safety. Failure to comply strictly with
applicable laws, regulations and local practices relating to mineral rights
could result in loss, reduction or expropriation of entitlements. In
addition, in the event of a dispute arising from operations in the DRC or
South Africa, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in Canada. The Company also may be hindered or
prevented from enforcing its rights with respect to a governmental
instrumentality because of the doctrine of sovereign immunity. It is not
possible for the Company to accurately predict such developments or changes in
laws or policy or to what extent any such developments or changes may have a
material adverse effect on the Company`s operations.
The DRC is a developing nation emerging from a period of civil war and
conflict. Physical and institutional infrastructure throughout the DRC is in
a debilitated condition. The DRC is in transition from a largely state
controlled economy to one based on free market principles, and from a non-
democratic political system with a centralized ethnic power base, to one based
on more democratic principles. There can be no assurance that these changes
will be effected or that the achievement of these objectives will not have
material adverse consequences for the Company and its operations. The DRC
continues to experience violence and significant instability in parts of the
country due to certain militia and criminal elements.
The recent events of violence have been a very considerable distance from the
areas of interest to the Company. While the government and United Nations
forces are working to support the extension of central government authority
throughout the country, there can be no assurance that such efforts will be
successful.
South Africa has recently experienced significant power shortages. While it is
not expected that these shortages will be repeated in the immediate future and
adequate supply currently appears to be available, future possible power
shortages could disrupt the Company`s South African operations and have a
material adverse effect on the Company. All of the Company`s properties are in
the exploration stage only and none of the properties contain a known body of
commercial ore. The Company currently operates at a loss and does not
generate any revenue from operations (other than the said diamond sales). The
exploration and development of mineral deposits involve significant financial
risks over a significant period of time which evens a combination of careful
evaluation, experience and knowledge may not eliminate. Few properties which
are explored are ultimately developed into producing mines. Major
expenditures may be required to establish reserves by drilling and to
construct mining and processing facilities at a site. It is impossible to
ensure that the Company`s exploration programs will result in a profitable
commercial mining operation.
Diamond Core has concluded a number of transactions with Black Economic
Empowerment ("BEE") partners in support of the South African government`s
policy of the empowerment of previously disadvantaged individuals and
communities, through the minerals and mining industry. Additional BEE
transactions are contemplated. As a result of the transactions concluded to
date, a BEE entity holds different equity interests ranging from 15% to 50%
interests in a number of the Company`s South African projects. The approval
of the BEE entity is required with respect to certain key business decisions
in relation to the relevant project. Disputes between the Company and a BEE
entity could therefore interfere with the Company`s ability to conduct one or
more of its projects in South Africa, which could have a material adverse
effect on the Company.
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. 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.
The Company`s exploration and, if such exploration is successful, development
of its properties is subject to all of the hazards and risks normally incident
to mineral exploration and development, any of which could result in damage to
life or property, environmental damage and possible legal liability for any or
all damage.
The natural resource industry is intensely competitive in all of its phases,
and the Company competes with many companies possessing greater financial
resources and technical facilities than itself.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a. Fair value of financial instruments
The Company has classified financial instruments as follows:
June 30, 2009 December 31, 2008
$`000 $`000
Financial Assets
Held-for-trading, measured
at fair value
Cash 171 198
Restricted Cash 248 308
Loans and receivables
measured at amortised cost
Other assets 561 562
Financial Liabilities
Other liabilities, measured
at amortised cost
Accounts payable and
accrued liabilities 9,093 7,542
Debt 6,280 6,172
Lease 639 499
Allowance for credit losses is included in prepaid expenses and other
receivables.
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.
b. 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.
c. 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.
d. 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 in 2008, the
Company currently 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 June 30, 2009, the Company will be able to satisfy
its current and long-term obligations. As at June 30, 2009, the Company`s
consolidated financial statements have been prepared in accordance with
Canadian GAAP applicable to a going concern (see note 1 to the financial
statements).
e. Currency risk
The Company is exposed to currency risk as its principal business is
conducted in foreign currencies. Monetary assets and liabilities
denominated in foreign currencies are translated from US dollars and
South African Rands into Canadian dollars. Unfavourable changes in the
applicable exchange rate may result in a decrease or increase in foreign
exchange gains or losses. The Company does not use derivative
instruments to reduce its exposure to foreign currency risk.
For the three and six month periods ended June 30, 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 $91,574 and $145,318 decrease and increase in
the Company`s net loss.
f. 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.
g. 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.
h. 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.
i. Country risk
The DRC is a developing country and as such, the Company`s exploration
projects in the DRC could be adversely affected by uncertain political or
economic environments, war, civil or other disturbances, and a changing
fiscal regime and by DRC`s underdeveloped industrial and economic
infrastructure.
The Company`s operations in the DRC may be 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.
RETRENCHMENT OF EMPLOYEES
In response to the economic circumstances affecting the Company and the
decision to place operations on a care and maintenance basis, the Company
initiated a retrenchment process of all its employees of its South African
subsidiaries during the first quarter of 2009. In terms of South African
labour law related to retrenchments there is a mandatory consultation period
and a mandatory notice period. This process was concluded on April 11, 2009. A
skeleton staff is now employed on a rolling short term contract basis to
attend to the administration of the Company and to ensure protection and
preservation of the Company`s assets.
During the first quarter of 2009, employees in the DRC were also retrenched
and operations cut back. The lease for the corporate office was cancelled and
office space made available in the Company`s management flat. The lease for
the Company`s executive flat has been cancelled. The Tshikapa camp is being
maintained on a care and maintenance basis. Altogether 21 employees have been
retrenched out of a total staff complement of 31, in addition two expatriate
contracts have also been discontinued. The present complement has been reduced
to 10.
SEFALANA LITIGATION
In 2006, Samadi, a 100% subsidiary of Diamond Core, entered into a transaction
with Sefalana Mineral Resources (Pty) Limited ("Sefalana") ("Sefalana
transaction"). In terms of the Sefalana transaction, Sefalana acquired 50%
of the issued ordinary share capital and loan accounts of certain of the
Samadi subsidiaries (see note 9 of the Company`s financial statements) 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 such 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, which was deemed to have accepted such offer.
Sefalana is disputing Samadi`s position.
Samadi had made application in the High Court (South Gauteng Provincial
Division) for a declarator against Sefalana but this was refused in March
2009. The judgment did not interfere with the current shareholder structure,
had no effect on the Company financially and no effect on its current mining
order rights. The application was brought in order to dispose of any
uncertainty regarding the annulment of the BEE agreements between Samadi and
Sefalana. Samadi remains committed to its current BEE shareholder Leswika
Resources (Pty) Ltd and will oppose any attempt by Sefalana to rely on the
Court`s refusal to issue a declarator in favour of Samadi. Samadi has been
advised by its legal representatives that there are good grounds for an appeal
and has consequently filed a notice to appeal the judgment.
TSX DELISTING REVIEW
Arising from the state of the Company`s financial position and the substantial
decline in the market capitalisation of the Company`s shares, the Toronto
Stock Exchange ("TSX") is reviewing the eligibility for the continued listing
on the TSX of the Company`s shares. The TSX has indicated that this delisting
review will take into account the outcome of the various matters affecting the
Company that have been reported elsewhere in this MD&A. In the event that the
TSX decides to delist the Company`s shares, the Company understands that a
reasonable amount of time will be given to the Company to make alternative
listing arrangements.
FUTURE STRATEGY
The Company sees its main strategy as the exploration for and, if successful,
the consequent development of a kimberlite diamond mining operation in the
DRC, with this being supported by any remaining interests in South Africa. It
is actively developing its existing relationships to extend it joint venture
arrangements.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company is required under Canadian securities laws to disclose herein any
change in the Company`s internal control over financial reporting that
occurred during the Company`s most recent interim period that has materially
affected, or is reasonably likely to materially affect, the Company`s internal
control over financial reporting.
The Company`s decision to retrench operational staff, including accounting
staff, in response to deteriorating global economic conditions (which was
completed during the second quarter of 2009) may impede its ability to
maintain an adequate internal control environment, specifically as it relates
to lack of segregation of duties and inadequate system monitoring. The
Company`s management is responsible for establishing and maintaining adequate
internal control over financial reporting. However, until such time as
sufficient financial resources are available, the Company might not be able to
mitigate the above described risks and weaknesses.
During the quarter ended March 31, 2009 the Company extended the principles of
Internal Control - Intergrated Framework issued by The Committee of Sponsoring
Organizations of the Treadway Commission to the South African operations with
appropriate adaptation to local conditions.
It should be noted that a control system, including the Company`s disclosure
and internal controls and procedures, no matter how well conceived can provide
only reasonable, but not absolute, assurance that the objective of the control
system will be met and it should not be expected that the disclosure and
internal controls and procedures will prevent all errors or fraud.
JOHANNESBURG
17 AUGUST 2009
SPONSORS
ARCAY MOELA SPONSORS (PROPRIETARY) LIMITED
Date: 18/08/2009 07:33:01 Produced by the JSE SENS Department.
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