| Tue 18 Aug 2009, 7:34 | | BCD - BRC DiamondCore - Interim Consolidated Financial Statements As At And |
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BCD
BCD
BCD - BRC DiamondCore - Interim Consolidated Financial Statements As At And
For The Three And Six Month Periods Ended June 30, 2009
BRC DIAMONDCORE LTD.
(formerly BRC Diamond Corporation)
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE THREE AND SIX
MONTH PERIODS ENDED JUNE 30, 2009
(expressed in Canadian dollars)
(unaudited)
These interim consolidated financial statements of BRC DiamondCore Ltd. as at
and for the three and six month periods ended June 30, 2009 have been prepared
in accordance with Canadian generally accepted accounting principles and are
the responsibility of the Company`s management.
These interim consolidated financial statements have not been audited or
reviewed by the Company`s auditors.
As at As at
June 30, December
2009 31,
Consolidated Balance Sheets (unaudited) $`000 2008
$`000
ASSETS
CURRENT
Cash 171 198
Prepaid expenses and other assets 561 562
Inventory (Note 4) 141 122
873 882
NON CURRENT
Restricted cash (Note 2) 248 308
Mineral properties and deferred exploration 10,731 9,075
expenditures (Note 9)
Capital assets (Note 10) 6,714 8,847
17,693 18,230
18,566 19,112
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 9,351 7,542
(Notes 5 and 7)
Other liabilities 235 201
Debt (Note 6) 6,280 6,172
15,866 13,915
NON-CURRENT
Asset retirement obligations (Note 8) 2,421 2,132
Long term lease (Note 7) 639 499
3,061 2,631
Going concern (Note 1)
Commitments, contingencies and guarantees
(Note 12)
SHAREHOLDERS` EQUITY
Capital stock (Note 11) 105,815 105,815
Contributed surplus (Notes 11(b) and (e)) 7,385 6,934
Black economic empowerment reserve 1,076 1,076
Deficit (112,435) (108,891)
Accumulated other comprehensive loss (Note (2,202) (2,370)
11(f))
(360) 2,565
18,566 19,112
The accompanying notes are an integral part of these financial statements.
Consolidated Statements For the three month For the six month
of Operation and period ended period ended
Deficit (unaudited)
(expressed in Canadian
Dollars)
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
$`000 $`000 $`000 $`000
Expenses
Consulting fees 329 113 398 163
Depreciation 930 - 1,640 -
Professional fees 147 (53) 196 -
General and 765 910 1,554 1,243
administrative
Stock-based 51 - 316 -
compensation (Note
11(b))
Loss on sale of 71 - 53 -
assets
Foreign exchange - (1) - (15)
gain realized
Regulatory expenses 1 60 1 250
Foreign exchange (155) 79 (637) 2,873
(gain)/loss unrealized
Loss before the under (2,139) (1,108) (3,522) (4,514)
noted items
Interest income 77 5 19 32
Interest expense - (90) (41) (149)
Loss before income tax (2,062) (1,193) (3,544) (4,631)
Income taxes - - - -
Net loss for the period (2,062) (1,193) (3,544) (4,631)
Deficit - beginning of (110,373) (9,327) (108,891) (5,889)
the period
Deficit - end of the (112,435) (10,520)
period (112,435) (10,520)
Basic and diluted loss 0.08 0.05
expressed in dollars 0.14 0.20
per share (Note 11(d))
Headline loss expressed 0.08 0.05
in dollars per share 0.14 0.20
(Note 11(d))
Weighted average number 26,091,31 25,741,310
of common shares 0 26,091,31 23,040,000
outstanding 0
GOING CONCERN (Note 1)
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of
Comprehensive Loss (Income) For the three month For the six month
(unaudited) period ended period ended
(expressed in Canadian dollars)
June 30, June June June
30, 30, 30,
2009 2008 2009 2008
$`000 $`000 $`000 $`000
Net loss 2,061 1,193 3,544 4,631
Unrealized foreign currency
(gain)/loss on self sustaining (2,353) - (168) -
operation
Comprehensive loss/ (income) (292) 1,193 3,376 4,631
GOING CONCERN (Note 1)
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Cash Flow (unaudited)
(expressed in Canadian dollars)
Net (outflow) inflow of cash For the three month For the six month
related to the following period ended period ended
activities
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
$`000 $`000 $`000 $`000
Operating
Net loss for the period (2,061) (1,193) (3,544) (4,631)
Items not effecting cash
Depreciation 1,032 89 1,743 89
Asset retirement obligation (104) 490 290 490
Other provisions - 99 - 99
Stock based compensation and
stock based consulting fees 185 108 450 356
Unrealized foreign exchange - 227 - (3,084)
loss
Profit on sale of fixed 71 - 53 -
assets
Net change in non-cash (877) (180) 1,008 (6,681)
working capital items
Unrealised foreign currency
gain relating to balance 2,353 - 168 -
sheet
Tax paid - (127) - (147)
Prepaid expenses and other (405) (26) 2 515
assets
Accounts payable and accrued 1,109 553 1,842 (949)
liabilities
Inventory (20) 511 (19) 890
2,160 731 984 (6,372)
Investing
Cash balances acquired from - - - 2,308
Diamond Core
Mineral properties and
deferred exploration (1,624) 147 (1,656) 148
expenditures
Capital assets (618) (3,768) 338 2,927
(2,242) (3,621) (1,318) 5,383
Financing
Increase in short term debt 34 2,307 248 1,675
34 2,307 248 1,675
Increase/(decrease) in cash during (62) (583) (27) 686
the period
Effect of currency on cash (13) - 60 -
Cash - beginning of the period 233 2,201 198 932
Cash - end of the period 171 1,618 171 1,618
Consolidated Statement of Cash Flow (unaudited)
(expressed in Canadian dollars)
Net (outflow) inflow of cash For the three month For the six month
related to the following period ended period ended
activities
June 30, June 30, June June
30, 30,
2009 2008 2009 2008
$`000 $`000 $`000 $`000
SUPPLEMENTARY INFORMATION
Interest received 8 5 19 32
Interest paid - 90 - 149
GOING CONCERN (Note 1)
Depreciation of capital assets of $61,454 and $102,454 was capitalized to
mineral properties in the respective three month and six month periods ended
June 30, 2009 (June 30, 2008: $631,000 and $ 1,143,000).
During the six month period ended June 30, 2008, the Company issued
approximately 12 million common shares for a non-cash consideration of
$89,463,617 to acquire Diamond Core Resources Limited (See Note 3).
The accompanying notes are an integral part of these financial statements.
Notes to the Consolidated Financial Statements (unaudited)
June 30, 2009 (expressed in Canadian Dollars)
1. PRINCIPAL BUSINESS ACTIVTIES AND CONTINUATION OF THE BUSINESS
The principal business of BRC DiamondCore Ltd. (the "Company") is the
acquisition, exploration and eventual development of mineral properties.
These financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles
applicable to a going concern, which assumes that the Company will
continue in operation for a reasonable period of time and will be able to
realize its assets and discharge its liabilities in the normal course of
operations. Due to the current significant economic turmoil and global
credit crisis that have impacted the demand for many goods and
commodities, particularly the Company`s commodity of diamonds, the
Company has incurred a significant net loss of $2,061,000 and $3,544,172
during the three and six month periods ended June 30, 2009 (losses of $
1,193,000 and $4,631,000 during the same respective periods in 2008) and
also in recent past periods. The Company`s accumulated deficit as at June
30, 2009 was $112,434,739 (December 31, 2008: $108,890,567). The Company
had a working capital deficit of $14,992,785 as at June 30, 2009
(December 31, 2008: $13,033,000). While the financial statements have
been prepared on the basis of accounting principles applicable to a going
concern, adverse conditions may cast substantial doubt upon the validity
of this assumption. In the event the Company is unable to identify
recoverable reserves, receive the necessary permitting, or arrange
appropriate financing, the carrying value of the Company`s assets could
be subject to further material adjustment. Furthermore, certain current
market conditions including declining diamond carat prices have cast
significant doubt upon the validity of this assumption.
The Company`s ability to continue operations in the normal course of
business is dependent on several factors, including its ability to secure
additional funding and achieve or sustain profitable operations.
Management is exploring all available options to secure additional
funding including equity and debt financing, sale of non-core assets or
business units and strategic partnerships. In addition, the
recoverability of amounts shown for mineral properties and long-lived
assets is dependent upon the existence of economically recoverable
reserves, the ability of the Company to obtain financing to complete the
development of the properties where necessary and upon future profitable
production, or, alternatively, upon the Company`s ability to recover its
spent costs through a disposition of its interests, all of which are
uncertain in the current climate. It is not possible to determine with
any certainty the success and adequacy of these initiatives, nor the
timing of completion of these initiatives to enable the Company to
continue until such time as when diamond prices recover, and the Company
is able to earn positive operating cash flows.
In considering the going-concern assertion, management has made
significant judgments and estimates with respect to the potentially
adverse financial and liquidity effects of the Company`s risks and
uncertainties associated with the current global economic conditions,
current and future commodity prices, its ability to access capital
markets, its ability to meet its future financial obligations, and the
overall operation of its business segments. Management has also assessed
other items and risks arising in its businesses and made reasonable
judgments and estimates with respect thereto.
It is possible that the actual outcome of one or more of management`s
plans could be materially different or that one or more of management`s
significant judgments or estimates about the potential effects of the
risks and uncertainties could prove materially different which may affect
the Company`s ability to continue as a going concern.
These financial statements do not include any additional adjustments to
the recoverability and classification of certain recorded asset amounts
and classification of certain liabilities that might be necessary if the
Company was unable to continue as a going concern. If the going-concern
basis were not appropriate for these financial statements, then
adjustments would be necessary to the carrying value of the assets and
liabilities, the reported revenue and expenses and the balance sheet
classifications used. These adjustments could be material.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
These financial statements represent the consolidated financial
statements of the Company, which includes its accounts and those of its
subsidiaries, BRC Diamond South Africa (Pty) Limited and BRC DiamondCore
Congo SPRL, and the entities acquired as part of the Diamond Core
Resources (Pty) Limited transaction (Note 3) namely, Diamond Core
Resources, Dikeing Mining (Pty) Ltd, Diamond Core Kimberlite Projects
(Pty) Ltd, Diamond Core Alluvial Projects (Pty) Ltd, Diamond Core Mining
and Exploration (Pty) Ltd, Diamond Core Technical Services (Pty) Ltd,
Diamond Core Trading (Pty) Ltd, Samadi Resources (Pty) Ltd, Samadi
Gemsbok (Pty) Ltd, Samadi Exploration (Pty) Ltd, Samadi Douglas (Pty)
Ltd, Prieska Diamond Mining (Pty) Ltd, Sandstraat Eksplorasie (Pty) Ltd
and Sandrif (Pty) Ltd (collectively the "Subsidiaries") all of which are
controlled through ownership of majority voting interests. All inter-
company balances and charges have been eliminated.
Revenue
Revenue is recognized when diamonds are sold to third parties at the
tender house. As the Company is currently in the development stage, any
revenues earned reduce the carrying value of deferred exploration
expenditures.
Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles ("GAAP") requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. In addition to the going concern assumption,
assets and liabilities which require management to make significant
estimates and assumptions in determining carrying values include mineral
properties, capital assets, asset retirement obligations, future income
taxes, goodwill and stock-based compensation.
Comprehensive income, Financial instruments, Hedges and Equity
All financial instruments are required to be measured at fair value on
initial recognition, except for certain related party transactions. Due
to the short term nature of the Company`s financial assets and
liabilities, management believes that the book value approximates the
fair value. Measurement in subsequent periods depends on whether the
financial instrument has been classified as either loans and receivables,
held-for-trading, held-to-maturity, available-for-sale, or other
liabilities. The classification depends on the purpose for which the
financial instruments were acquired, their characteristics and/or
management`s intent. Management determines the classification of
financial assets and financial liabilities at initial recognition and,
except in very limited circumstances, the classification is not changed
subsequent to initial recognition.
i. Loans and receivables
Loans and receivables are initially recognized at fair value
including direct and incremental transaction costs and are
subsequently measured at amortized cost, using the effective
interest method.
ii. Held-for-trading
Financial assets and financial liabilities that are purchased and
incurred with the intention of generating income in the near term,
are classified as held-for-trading. Financial instruments included
in this category are initially recognized at fair value and
transaction costs are taken directly to earnings along with gains
and losses arising from changes in fair value.
iii. Other liabilities
Financial liabilities, including short-term debt and accounts
payable and accrued liabilities, are classified as "other
liabilities". Other liabilities are initially recognized at fair
value and are subsequently measured at amortized cost using the
effective interest methods.
iv. Transaction costs
Transaction costs with respect to instruments not classified as held-
for-trading are recognized as an adjustment to the cost of the
underlying instruments and are recognized and amortized using the
effective interest method.
v. Comprehensive income
Comprehensive income is composed of the Company`s net income and
other comprehensive income. Other comprehensive income includes any
unrealized gains and losses on available-for-sale securities,
foreign currency translation gains and losses on the net investment
in self-sustaining foreign operations and changes in the fair market
value of derivative instruments designated as cash flow hedges, all
net of income taxes. The components of comprehensive income are
disclosed in the Consolidated Statements of Comprehensive Loss
(Income).
vi Derivatives and hedge accounting
Derivative instruments, including embedded derivatives, are recorded
at fair value unless exempted from derivative treatment as normal
purchase and sale. All changes in their fair value are recorded in
income unless cash flow hedge accounting is used, in which case
changes in fair value are recorded in other comprehensive income.
The Company does not currently apply hedge accounting or have
derivative instruments.
The Company designated its financial instruments as follows:
Financial instrument Classification Measurement
Cash Held-for-trading Fair value
Other assets Loans and receivables Amortized cost
Due from related parties Loans and receivables Amortized cost
Accounts payable and accrued Other liabilities Amortized cost
liabilities, other
liabilities and debt
Lease Other liabilities Amortized cost
Mining assets
Exploration costs
Exploration costs are recorded in the statement of operations and deficit
until such time as the Company has legal title to the mineral rights.
Thereafter all exploration and evaluation expenditures are capitalized
until such time as the mining property is capable of commercial
production. It will then be subject to impairment tests when facts and
circumstances suggest that the carrying amount of the assets may exceed
their recoverable amount. The value of diamonds recovered from
exploration activities is offset against exploration costs.
Mine development costs
Mine development costs are capitalized. Capitalized mine development
costs include expenditure incurred to develop new mineral resources, to
define further mineral resources and to expand the capacity of the mine.
Amortization is first charged on new mining ventures from the date on
which commercial production commences. Mine development costs will be
amortized over the expected useful life of the mine. Day to day mining
costs are expensed as incurred.
Land and mineral rights
Undeveloped properties and mineral rights, upon which the Company has not
performed sufficient exploration work to determine whether sufficient
mineralization exists, are carried at original cost.
Land is not depreciated.
Mineral rights are amortized over the expected life of the mine from the
date on which commercial production commences. Where there is little
likelihood of a mineral right being exploited, or the value of an
exploitable mineral right has diminished below cost, a write down is
effected.
Non- producing mineral properties
Costs relating to the acquisition, exploration and development of non-
producing resource properties are capitalized until such time as either
economically recoverable reserves are established, the properties are
sold or abandoned, or the value of the particular property is impaired.
The excess of these costs over estimated recoveries is charged to
operations. The ultimate recovery of these costs depends on the
discovery and development of economic reserves or the sale of the mineral
rights. The amounts shown for non-producing resource properties do not
necessarily reflect present or future values.
In addition, the Company`s exploration opportunities in the Democratic
Republic of the Congo (the "DRC") may be subject to sovereign risks,
including political and economic instability, government regulations
relating to mining, military repression, civil disorder, currency
fluctuations and inflation, all or any of which may impede the Company`s
activities in this country or may result in the impairment or loss of
part or all of the Company`s interest in the properties.
The exploration and development opportunities in South Africa must also
be compliant with applicable laws regarding the participation of
historically disadvantaged South Africans in order to register and retain
mineral rights.
Capital assets
Capital assets of the Company are recorded at cost. Depreciation of
capital assets is recorded on a straight line basis over the following
periods:
Vehicles - four years
Furniture and office equipment - two to seven years
Computer equipment - three years
Leasehold improvements - five years
Processing plant - hours worked / volumes processed
Exploration and mining assets - two to 15 years
Earthmoving equipment - hours worked
The depreciation methods, useful lives and residual values, if not
insignificant, are reassessed annually.
Goodwill
Goodwill represents the excess of the price paid over the fair value
attributed to the net assets, including tangible and identifiable
intangible assets upon acquisition of a business. Goodwill resulting from
the acquisition of a business is not amortized but tested for impairment
annually or more frequently if changes in circumstances indicate a
potential impairment. The impairment test consists of a comparison of the
fair value of the reporting unit to which goodwill is assigned with its
carrying amount. Any impairment in the carrying amount of goodwill is
charged to earnings. The Company has elected to perform its annual
impairment test as of December 31st of each fiscal year.
The impairment test for goodwill is a two-step process. Step one consists
of a comparison of the fair value of a reporting unit with its carrying
amount, including the goodwill allocated to the reporting unit.
Measurement of the fair value is based on one or more fair value measures
including present value techniques of estimated future cash flows and a
market approach for resources based on diamond carat estimates. In
estimating the fair value of the reporting unit, the Company is also
required to make a number of estimates, including estimates about future
revenue, income taxes, net earnings, overhead costs, capital expenditure,
and the cost of capital. Given the variability of the future-oriented
financial information, a judgement balancing discount and growth rates
enables management to opine whether or not the goodwill balance has been
impaired. If the carrying amount of the reporting unit exceeds the fair
value, step two requires the fair value of the reporting unit to be
allocated to the underlying assets and liabilities of that reporting
unit, resulting in an implied fair value of goodwill. If the carrying
amount of the reporting unit goodwill exceeds the implied fair value of
that goodwill, an impairment loss equal to the excess is recorded in
income. The Company impaired the entire amount of goodwill that arose on
the acquisition of Diamond Core in 2008 (Note 3).
Impairment of long-lived assets
The Company reviews and evaluates the carrying value of its exploration
and development properties for impairment when events or circumstances
indicate that the carrying amounts of related assets or groups of assets
may not be recoverable. If the total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the asset, an
impairment loss is measured and assets are written down to fair value.
Future cash flows are estimated based on estimated future recoverable
mine production, expected sales prices and considering current and
historical commodity prices, price trends and related factors, production
levels, cash costs of production and capital and reclamation costs, and
the sustainable exploitation of the indicated ore body.
Capitalized interest
Interest on borrowings related to the financing of major capital projects
under construction is capitalized during the construction phase as part
of the cost of the project.
Overburden removal costs
The costs of removing overburden material to access mineral reserve
deposits, referred to as "stripping costs", are accounted for as variable
production costs to be included in the cost of inventory produced, unless
the overburden removal activity can be shown to be a betterment of the
mineral property, in which case these costs are capitalized. Betterment
occurs when the overburden removal activity provides access to additional
sources of mineral deposit reserves that will be produced in future
periods which would not have otherwise been accessible in the absence of
the stripping activity.
Asset retirement obligations
The estimated fair value of an asset-retirement obligation is recognized
as a liability in the period incurred. A corresponding amount is added to
the carrying amount of the associated asset when incurred and depreciated
over the asset`s estimated useful life. The liability is accreted over
time through charges to earnings to reflect changes in its present value.
Actual expenditures incurred are charged against the accumulated
obligation. The asset-retirement obligation is reviewed by management
annually and revised for changes in future estimated costs and regulatory
requirements.
Stock options
The Company`s stock option plan is referred to in Note 11(b). Stock-
based compensation is recorded using the fair value method of accounting
for stock options granted to directors, officers and employees whereby
the weighted average fair value of options granted is recorded as
compensation expense in the consolidated financial statements.
Compensation expense on stock options granted is recognized and amortized
over the vesting period, with the offset being credited to contributed
surplus, which will transfer to share capital if the related options are
converted. Compensation expense on stock options granted to non-employees
is recorded as an expense in the period at the earlier of the completion
of performance and the date the options are vested using the fair value
method. Any consideration paid for shares purchased under this plan is
credited to share capital.
Restricted cash
Restricted cash to the value of $248,293 is held by various financial
institutions as security for guarantees the Company has provided to the
Department of Minerals and Energy Affairs in South Africa for the
rehabilitation of land disturbed by mining and exploration and to Eskom,
the South African electricity utility, in respect of electricity payment
deposits.
Corporate transaction costs
Corporate transaction costs incurred in connection with business
combinations are recognized as an asset when the transaction is
specifically identified and the completion of such transaction is
considered to be more likely than not. Upon completion of the
transaction, corporate transaction costs are included in the costs of the
acquired business and allocated to the acquired net assets. Such
corporate transaction costs are expensed when the transaction is
abandoned.
Income taxes
The Company follows the liability method of accounting for income taxes.
Under this method, future income taxes are recognized based on the
expected future tax consequences of differences between the carrying
amount of balance sheet items and their corresponding tax basis, using
the substantively enacted income tax rates for the year in which the
differences are expected to reverse. Valuation allowances are
established when necessary to reduce future income tax assets to amounts
expected to be realized.
Loss per share
Basic loss per share is computed by dividing net loss by the weighted
average number of shares outstanding during the reporting period. Due to
reported losses, diluted loss per share data is the same as basic loss
per share as the assumed exercise of stock options are anti-dilutive
(Note 11(d)).
Foreign currency translation
These consolidated financial statements are presented in Canadian
dollars. The Company`s functional currency is the Canadian dollar.
Transactions of self-sustaining foreign operations are translated into
Canadian dollars using the current-rate method. Under this method, assets
and liabilities are translated at the rate of exchange in effect at the
balance sheet date while revenue and expense items (including depletion
and amortization) are translated at the average rates of exchange
prevailing during the period. Exchange gains and losses that result from
the translation are deferred and disclosed as a component of "accumulated
other comprehensive loss (income)". The operations in South Africa are
considered self-sustaining and their functional currency is the South
African rand.
Transactions in foreign currencies of integrated foreign operations are
translated into Canadian dollars at rates of exchange at the time of such
transactions. Monetary assets and liabilities are translated at current
rates of exchange with the resulting gains or losses included in income.
Non-monetary items are translated at historical exchange rates. Revenue
and expense items are translated at the average rates of exchange, except
depletion and amortization which are translated at the rates of exchange
applicable to the related assets. Gains or losses resulting from these
translation adjustments are included in income. The activities in the DRC
are considered integrated.
Transactions denominated in a foreign currency are translated into
Canadian dollars at the rate of exchange in effect at the time of such
transactions. Monetary assets and liabilities denominated in foreign
currency are translated at the rate of exchange at the balance sheet
date. The resulting gains and losses are included in income.
Variable interest entities (VIEs)
VIEs are consolidated by the Company when it is determined that it will,
as the primary beneficiary, absorb the majority of the VIEs expected
losses or expected residual returns. The Company currently does not have
any interests in VIEs.
New Accounting Standards
a. Goodwill and Intangible Assets
Effective January 1, 2009, the Company adopted CICA Section 3064,
Goodwill and Intangible Assets, replacing Section 3062, Goodwill and
Other Intangible Assets, and Section 3450, Research and Development
Costs. Section 3064 establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented
enterprises. The adoption of this new standard did not have a
significant impact on the 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 these financial
statements and did not have a significant impact on the valuation of
exploration assets.
c. Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair
Value of Financial Assets and Financial Liabilities" which requires
the Company to consider its own credit risk as well as the credit
risk of its counterparty when determining the fair value of
financial assets and liabilities, including derivative instruments.
The standard is effective for the first quarter of 2009 and is
required to be applied retrospectively without restatement of prior
periods. The adoption of this standard did not have an impact on the
valuation of financial assets or liabilities.
Future Accounting Standards
a. International Financial Reporting Standards ("IFRS")
In February 2008, the CICA Accounting Standards Board ("AcSB")
confirmed that Canadian GAAP for publicly accountable enterprises
will be converged with IFRS effective in calendar year 2011, with
early adoption allowed starting in calendar year 2009. The
conversion to IFRS will be required, for the Company, for interim
and annual financial statements beginning on January 1, 2011. IFRS
uses a conceptual framework similar to Canadian GAAP, but there are
significant differences in recognition, measurement and disclosures.
In the period leading up to the conversion, the AcSB will continue
to issue accounting standards that are converged with IFRS such as
IAS 2, Inventories, and IAS 38, Intangible Assets, thus mitigating
the impact of adopting IFRS at the mandatory transition date.
The Company is currently evaluating the impact of the adoption of
IFRS on its consolidated financial statements. Diamond Core had
successfully adopted IFRS prior to the acquisition thereof by the
Company (see Note 3) and is currently reporting its statutory
returns in South Africa in terms of IFRS. This will facilitate the
adoption of IFRS. The adoption of IFRS will make it possible for the
Company to re-assess the fair values of assets and liabilities on
its balance sheet under IFRS 1, which could impact the balance sheet
significantly if the impairment imposed needs to be reassessed.
To transition to IFRS, the Company must apply "IFRS 1 - First Time
Adoption of IFRS" which set out the rules for first time adoption.
In general, IFRS 1 requires an entity to comply with each IFRS
effective at the reporting date for the entity`s first IFRS
financial statements. This requires that an entity apply IFRS to its
opening IFRS balance sheet as at January 1, 2010 (i.e. the balance
sheet prepared at the beginning of the earliest comparative period
presented in the entity`s first IFRS financial statements).
Within IFRS 1 there are exemptions, some of which are mandatory and
some of which are elective. The exemptions provide relief for
companies from certain requirements in specified areas when the cost
of complying with the requirements is likely to exceed the resulting
benefit to users of financial statements. IFRS 1 generally requires
retrospective application of IFRSs on first-time adoptions, but
prohibits such application in some areas, particularly when
retrospective application would require judgments by management
about past conditions after the outcome of a particular transaction
is already known.
On transition, management must apply the mandatory exemptions and
make the determination as to which elective exemptions will be made
under IFRS 1. Management has completed the high level analysis of
the financial statement areas and is currently reviewing the
analysis to make determinations on what elections will be taken.
After these decisions are made, the impact on the financial
statements will be determinable.
Management continues to assess the impact that IFRS will have on the
aspects of the business including accounting policy, financial
reporting, information technology and communications perspective.
Given that the Company is currently in the development phase,
accounting policy determinations that will be made leading in the
Company`s production phase, such as revenue recognition, deferred
stripping and diamond inventory costing to name a few examples, will
be made during or post transition to IFRS. Management is also
currently reviewing accounting systems and assessing the changes
that will be required and the strategies that will be employed.
Communication and training strategies are also being developed by
management.
As Diamond Core currently prepares its local statutory financial
statements under IFRS, the Company will need to assess the impact
for Canada and the DRC.
b. Business Combinations/Consolidated Financial Statements/Non-
Controlling Interests
In January 2009, the CICA adopted sections 1582, "Business
Combinations", 1601, "Consolidated Financial Statements", and 1602,
"Non-Controlling Interests" which superseded current sections 1581,
"Business Combinations" and 1600 "Consolidated Financial
Statements". These sections will be applied prospectively to
business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or
after January 1, 2011. Earlier adoption is permitted. If an entity
applies these Sections before January 1, 2011, it will disclose that
fact and apply each of the new sections concurrently. These new
sections were created to converge Canadian GAAP with IFRS. The
Company is currently evaluating the impact of the adoption of these
changes on its consolidated financial statements.
3. ACQUISTION OF DIAMOND CORE RESOURCES LIMITED
In July 2007, the Company and Diamond Core Resources Limited (which has
changed its name to Diamond Core Resources (Proprietary) Limited)
("Diamond Core"), a South African diamond exploration company listed on
the JSE Limited, announced that they had entered into an agreement to
merge the two companies by way of a court-sanctioned scheme of
arrangement (the "scheme") under South African corporate law, pursuant to
which the Company would acquire all of the outstanding shares of Diamond
Core in exchange for the issuance of 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
issuance by the Company of a total of 12,089,678 common shares. In
connection with this acquisition, the Company changed its name from BRC
Diamond Corporation to BRC DiamondCore Ltd. and its shares were listed on
the Toronto Stock Exchange and the JSE Limited in Johannesburg, South
Africa.
Previously in July 2005, Diamond Core acquired all of the outstanding
shares of Samadi Resources SA (Pty) Ltd ("Samadi"). As consideration for
this acquisition, Diamond Core issued ordinary shares to Samadi`s
shareholders. The terms of the acquisition agreement (the "Samadi
Agreement") entered into by Diamond Core with the Samadi shareholders
with respect to this acquisition provided for the potential issuance of
additional Diamond Core ordinary shares should certain operating profits
be reached from certain of the projects acquired by Diamond Core pursuant
to the acquisition.
In anticipation of the implementation of the scheme, the Company and
Diamond Core entered into an agreement (the "Samadi Amending Agreement")
with the said Samadi shareholders pursuant to which the Samadi
shareholders would, if the relevant profit thresholds are met, be
entitled to receive 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
shares of the Company 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. Since the outcome
and amount of the contingency cannot be determined without reasonable
doubt, no recognition has been made for this in these financial
statements.
Also in connection with the acquisition by the Company of all of the
outstanding shares of Diamond Core, 15,133,190 stock options that had
been issued to employees of Diamond Core pursuant to The Diamond Core
Resources Share Trust Deed to acquire 15,133,190 ordinary shares in
Diamond Core (the "Old Options") were substituted with new stock options
of the Company (the "Replacement Options"), so as to allow 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.
As at December 31, 2007, the Company had deferred transaction costs of
$2,200,165 in relation to the Diamond Core acquisition. An additional
$206,859 in expenses were incurred in 2008 and are included in the
purchase price equation below.
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 (date of
announcement), 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.
$`000
Issuance of 12,089,678 common shares of the Company 89,464
Issuance of Replacement Options 2,477
Transaction costs 2,407
Purchase price 94,348
The allocation of the purchase price to the net
assets acquired is as follows:
$`000
Cash 2,270
Trade and other receivables 1,253
Inventories 192
Mineral rights 14,188
Property, plant and equipment 17,051
Deferred exploration costs 8,891
Trade and other payables (2,912)
Taxation (126)
Asset retirement obligation (1,017)
Net assets acquired 39,790
Goodwill 54,558
Fair value of net assets acquired $94,348
The consideration and transaction costs of $94,347,641 exceeded the
carrying value of the net assets acquired by $54,558,329 which 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, for the year ended December 31, 2008 the Company
recognized an impairment of the full amount of the Diamond Core goodwill
of $54,558,329. The decrease in the fair value was primarily due to the
decline in price per carat and general economic conditions.
4. INVENTORY
June 30, 2009 December 31, 2008
$`000 $`000
Consumables 141 122
141 122
5. RELATED PARTY TRANSACTIONS
Balances Payable June 30, 2009 December 31,
$`000 2008
$`000
Macleod Dixon LLP 798 745
SFW Village 138 -
AT Kondrat 50 -
DK Madilo 24 -
Scallan Project Facilitation 2 13
(Pty) Ltd (f)
Sterling Portfolio Securities 101 11
Inc. (g)
1,113 769
For the three For the six month
Transactions month period period ended
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 net 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 an
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 was 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.
6. DEBT
The Company has a loan facility established with a Canadian financial
institution which bears interest at prime rate plus 1% per annum. The
effective interest rate for the six month period ended June 30, 2009 was
2.00% (December 31, 2008: 5.75%). At June 30, 2009, the balance of this
short term debt was $6,280,133 (December 31, 2008: $6,172,317),
including accrued interest of $420,727 (December 31, 2008: $307,872).
This loan facility has been utilized to fund exploration activities in
the DRC and all interest of $420,727 was capitalized to exploration cost.
This loan facility, which is still in place, is guaranteed by Banro
Corporation ("Banro"), a significant shareholder of the Company. The
Company has undertaken to release Banro from this guarantee as soon as
possible. The Company is in breach of an agreement between Banro and the
Company to have repaid the loan to the institution by July 28, 2008.
Banro has not exercised its rights in terms of the Company`s undertaking
to repay the loan to the institution.
7. LEASE LIABILITIES
As at As at
June 30, 2009 December 31,
$`000 2008
$`000
Total lease liability 740 649
Less: Current portion included (101) (150)
in accounts payable and accrued
liabilities
639 499
This liability is secured by a finance lease over vehicles with a
carrying amount of $62,125 and earthmoving equipment with a carrying
amount of $469,092. The leases are payable in monthly installments that
varies and the final dates of repayment are on October 1, 2013 and
October 1, 2012. The applicable interest rate is 15.86%, which varies
with the South African prime rate, on the South African rand denominated
obligation. The monthly installments in dollar terms will decrease with
any lowering of the South African interest rates and any weakening of the
South African currency.
8. ASSET RETIREMENT OBLIGATIONS
The provision for the site closure and reclamation costs relate to the
Silverstreams, Paardeberg East and De Kalk projects in South Africa.
As at As at
June 30, 2009 December 31, 2008
$`000 $`000
Balance at beginning of 2,132 -
period
Changes during the period - 2,132
Reclamation obligation - -
recognized
Accretion expense - -
Foreign exchange 289 -
revaluation
Balance at end of period 2,421 2,132
The estimated amount of reclamation costs at June 30, 2009, is $698,625
for the Paardeberg East project, $1,068,999 for the Silverstreams project
and $17,867 for the De Kalk project. The estimated amount for the
dismantling of the processing plants at Paardeberg East is $283,115 and
at Silverstreams is $352,752.
The Company had cash reclamation deposits totaling $248,293 (December 31,
2008: $235,504) as determined by the regulatory authorities in South
Africa, as well as cash guarantees with Eskom (provider of electricity in
South Africa) totaling $72,510. The deposits are invested in interest
bearing money market linked investments at rates ranging from 9.5% to
10%.
The above provision is for the future environmental obligations including
the rehabilitation of land disturbed by prospecting and mining operations
and the mine closure. The environmental rehabilitation obligation was
calculated by taking into account the Company`s environmental management
plans and current technology. The provision was increased based on an
independent study performed. The provision was calculated according to
the Department of Minerals and Energy (South Africa) guidelines and takes
into account reductions through the application of innovative
rehabilitation methods.
In view of the uncertainties concerning environmental remediation, the
ultimate cost of asset retirement obligations could differ materially
from the estimated amounts provided. The estimate of the total liability
for asset retirement obligation costs is subject to change based on
amendments to laws and regulations and as new information concerning the
Company`s operations becomes available. Future changes, if any, to the
estimated total liability as a result of amended requirements, laws,
regulations and operating assumptions may be significant and would be
recognised prospectively as a change in accounting estimate, when
applicable.
9. MINERAL PROPERTIES
In order to focus the exploration programme in the DRC on the most
promising areas, a number of exploration licences were relinquished
during the first quarter of 2009 with a high degree of confidence. No new
applications were lodged during the first six months of 2009.
During the first quarter of 2009 the following exploration licences in
the DRC were relinquished: Acacia (5), the Company (4), Candore (5), BCM
(1), Caspian Oil and Gas (9), Kwango Mines (3), Coexco (44). The Company
will keep its focus on the following exploration licences which are held
by the Company directly or by partners through various option agreements:
Acacia (6), BCE (16), the Company (2), Caspian Oil & Gas (2), Groupe Abba
(1), King`s Mine (1) and IEL (2). No DRC exploration licences were
relinquished in the second quarter of 2009.
As at June 30, 2009, the Company`s South African subsidiaries held title
to two mining rights and nine prospecting rights in the Northern Cape and
Free State Provinces of South Africa. The projects include Silverstreams
and Paardeberg. Silverstreams is one of the Company`s most advanced
exploration projects located on the northern bank of the Orange River in
the Northern Cape Province. Paardeberg East contains a number of known
kimberlite bodies. Other South African alluvial opportunities include
Uitdraai, De Kalk, the Sanddrift and Muishoek projects along the existing
or historical courses of the Orange River. Sanddrift and Muishoek are
immediately adjacent to the Silverstreams project.
Since 2006, Diamond Core had entered into transactions with Black
Economic Empowerment ("BEE") partners in order to satisfy the
requirements of the transformed mining and minerals industry legislation
of South Africa, specifically in compliance with the Broad Based Socio-
Economic Empowerment Charter of the Mineral and Petroleum Resources
Development Act (Act 28 of 2002; MPRDA). Under the MPRDA, mining
companies are obliged to, among other requirements, have negotiated a BEE
equity ownership agreement through which historically disadvantaged South
Africans (HDSAs) own 26% of the issued equity in the operational assets
by 2014. In the case of previously state held rights, HDSA ownership of
51% is required before granting of the right to a private company.
Through its subsidiaries, the Company has BEE transactions with Selang
Resources (Pty) Limited ("Selang") and previously had a BEE transaction
with Sefalana Mineral Resources (Pty) Limited ("Sefalana"). Selang
acquired 50% of the issued share capital of Samadi Gemsbok Resources
(Pty) Limited (Uitdraai Portion 9), Diamond Core Alluvial Projects (Pty)
Limited (Muishoek project) and Sandrif Exploration (Pty) Limited (option
over Sanddrift project).
Sefalana was to acquire 50% of the issued ordinary share capital of each
of the subsidiaries of Samadi Resources (SA) (Pty) Limited (Samadi
Resources; Silverstreams, De Kalk and Uitdraai RE of Portion 1 projects)
other than Samadi Gemsbok Resources (Pty) Limited (the "Samadi
Subsidiaries"). Sefalana subsequently failed to fulfill certain
conditions precedent of the agreements and was obliged to offer the said
shares to Samadi Resources. Samadi Resources then held the entire issued
ordinary share capital of the Samadi Subsidiaries. Sefalana is disputing
this. In 2008, Sefalana was replaced by Leswika Resources (Pty) Limited
("Leswika"). Leswika holds 15% of the issued share capital of the Samadi
Subsidiaries. The agreement further allows Leswika to attain an
additional 11% of the shareholding at fair market value.
Prior to the Company`s old order mining license over the Paardeberg East
project expiring in the second quarter of 2009, the Company applied for
the conversion of the old order right to a new order right. The Company
has agreed with its existing BEE partner on certain of its other
projects, namely Leswika, to be its BEE partner in relation to the
Paardeberg East project. The application also included a social and
labour plan that is compliant with the broad-based empowerment objectives
of the MPRDA and the Mining Charter (which sets the framework, targets
and timetable for effecting the participation of historically
disadvantaged South Africans in the mining industry).
The Company has incurred deferred exploration expenditures and mineral
property costs, in the DRC and in South Africa as at June 30, 2009 as
follows:
Group
Cumulative Year ended Six month
from inception December 31, period ended
in 1990 to 2008 June 30, 2009
June 30, 2009 $`000
$`000 $`000
Mineral property costs
Canada - - -
DRC 3 - -
South Africa 3,562 3,512 -
3,565 3,512 -
Deferred exploration
expenditures
DRC 7,166 (8,625) 1,605
South Africa - - -
7,166 (8,625) 1,605
Total mineral
properties and 10,731 (5,113) 1,605
deferred exploration
expenditures
DRC
Cumulative Year ended Six month
from December 31, period ended
inception in 2008 June 30,
1990 to June 2009
30, 2009 $`000
$`000 $`000
Mineral property costs
Claims and staking 3 - -
Total mineral property 3 - -
costs
Deferred exploration
expenditures
Administrative and 4,983 1,719 437
office support
Depreciation 644 259 102
Drilling 502 90 16
Field camp expenses 3,026 1,397 204
Geochemistry 329 - -
Geology - contract 1,601 - -
geologists
Geophysics 2,370 268 -
Option fees 308 - -
Permits and surface 1,870 523 21
taxes
Professional fees 666 462 52
Profit on sale of (50) - (50)
assets
Remote sensing and 47 - -
surveying
Stock-based 2,123 945 134
compensation
Transport cost and 3,261 877 37
helicopter
Unrealised foreign 2,270 1,623 651
exchange difference
Write off (16,788) (16,788) -
Total deferred 7,166 (8,625) 1,605
exploration expenditures
Total mineral properties
and deferred exploration 7,169 (8,625) 1,605
expenditures
South Africa
Cumulative Year ended Six month
from inception December 31, period ended
in 1990 to 2008 June 30,
June 30, 2009 2009
$`000 $`000 $`000
Mineral property costs
Acquisition of Diamond 13,152 13,203 -
Core
Write off (9,640) (9,640) -
Total mineral property 3,512 3,563 -
costs
Deferred exploration
expenditures
Acquisition of Diamond 6,505 6,505 -
Core
Administrative and office 2,002 2,002 -
support
Depreciation 2,345 2,345 -
Field camp expenses 6,538 6,538 -
Geology - contract 100 100 -
geologists
Geophysics 26 26 -
Insurance 112 112 -
Inventory losses (21) (21) -
Permits and surface taxes 5 5 -
Professional fees 51 51 -
Rehabilitation 1,670 1,670 -
Security 1,771 1,771 -
Surveying 66 66 -
Transport cost 149 149 -
Unrealised foreign (2,666) (2,666) -
exchange difference
18,655 18,655 -
Net proceeds on diamond (8,475) (8,475) -
sales
Write off (10,179) (10,179) -
Total mineral properties
and deferred exploration 3,512 3,563 -
expenditures
CAPITAL ASSETS
As at June 30, 2009
Cost Accumulat Accumulat Net
ed ed Book
Depreciat Impairmen Value
ion t $`000
$`000 $`000
$`000
Computer equipment 326 162 164
Earthmoving equipment 4,705 1,523 761 2,421
Exploration and mining 393 230 43 120
assets
Furniture and Office 114 28 11 75
equipment
Land and buildings 354 67 - 287
Leasehold improvements 225 225 - -
Processing plant 12,665 2,238 6,935 3,491
Vehicles 409 253 - 156
19,192 4,727 7,751 6,714
As at December 31, 2008
Cost Accumulat Net
ed Impairmen Book
Depreciat t Value
ion $`000 $`000
$`000
$`000
Computer equipment 294 103 - 191
Earthmoving equipment 5,753 1,398 645 3,711
Exploration and 458 196 35 227
mining assets
Furniture and Office 100 17 10 73
equipment
Land and buildings 539 43 - 496
Leasehold 227 226 - 1
improvements
Processing plant 11,180 1,248 6,105 3,827
Vehicles 711 390 1 320
19,263 3,619 6,796 8,847
During the three and six month periods ended June 30, 2009, $61,454 and
$102,454, respectively, of depreciation was included in mineral
properties and deferred exploration expenditures (see Note 9) (June 30,
2008: $ 631,000 and $1,143,000).
10. CAPITAL STOCK
a. Share capital
Number of Amounts
shares $`000
`000
Balance, December 31, 2007 13,652 $15,827
Shares issued for cash 350 525
Shares issued for the
acquisition of Diamond 12,089 89,464
Core
Balance, December 31, 2008 26,091 105,815
Balance, June 30, 2009 26,091 $105,815
On June 30, 2009, the authorized share capital of the Company is
comprised of an unlimited number of common shares.
On February 11, 2008, the Company acquired all of the outstanding shares
of Diamond Core on the basis of 1 share of the Company for every 24.5
Diamond Core shares resulting in the issuance by the Company of a total
of 12,089,678 common shares. This acquisition was effected by way of a
scheme of arrangement under the laws of the Republic of South Africa. See
Note 3.
In July 2008, the Company completed a non-brokered private placement of
350,000 common shares of the Company at a price of $1.50 per share
resulting in aggregate gross proceeds of $525,000.
b. Stock option plan
The Company has a stock option plan under which non-transferable options
to purchase common shares of the Company may be granted by the Board of
Directors to any director, officer, employee or consultant of the Company
or any subsidiary of the Company. This stock option plan contains
provisions providing that the term of an option may not be longer than
five years and the exercise price of an option shall not be lower than
the last closing price of the Company`s shares on the Toronto Stock
Exchange prior to the date the stock option is granted. Unless the Board
at any time makes a specific determination otherwise, a stock option and
all rights to purchase Company shares pursuant thereto shall expire and
terminate immediately upon the optionee who holds such stock option
ceasing to be at least one of a director, officer or employee of or
consultant to the Company or a subsidiary of the Company, as the case may
be. One-quarter (1/4) of the stock options granted pursuant to the stock
option plan vest immediately on their date of grant and another one-
quarter of such stock options vest on each of the 6-month, 12-month and
18-month anniversaries of the grant date.
As at June 30, 2009, the Company had outstanding under the stock option
plan stock options to acquire 3,041,400 (December 31, 2008: 3,846,400)
common shares of the Company at a weighted-average price of $ 2.10
(December 31, 2008: $2.16) per share.
The following table summarizes information about stock options
outstanding and exercisable at June 30, 2009:
Date Number Option Option Number Fair
of outsta s s outsta Option valu
Grant nding Grante Exerci nding s Exe e Expir
at d sed, at Exerci rci date y
12/31/ During Expire 06/30/ sable se of Date
2008 the d or 09 at pri gran
period Forfei 06/30/ ce t
ted 09
04/14 210,00 - 210,00 - - $1.2 04/14
/04 0 0 $1. 4 /09
50
10/06 50,000 - - 50,000 50,000 $1.7 10/06
/04 $2. 3 /09
00
03/04 16,400 - - 16,400 16,400 $1.7 03/04
/05 $2. 8 /10
10
03/18 225,00 - - 225,00 225,00 $1.7 03/18
/05 0 0 0 $2. 6 /10
50
04/29 225,00 - - 225,00 225,00 $2.1 04/29
/05 0 0 0 $2. 4 /10
50
06/29 200,00 - - 200,00 200,00 $2.1 06/29
/06 0 0 0 $3. 6 /11
75
04/09 300,00 - - 300,00 300,00 $5. $3.2 04/09
/07 0 0 0 50 5 /12
08/03 230,00 - 50,000 180,00 180,00 $ $2.8 08/03
/07 0 0 0 8.0 5 /12
0
08/28 2,365, - 520,00 1,845, 922,50 $0.7 08/28
/08 000 0 000 0 $1. 7 /13
05
3,821, - 780,00 3,041, 2,118,
400 0 400 900
During the three and six month periods ended June 30, 2009, the Company
recognized in the statement of operations as stock-based compensation
expense $265,557 and $ 450,610, respectively, (June 30,2008: $nil and
$nil) representing the fair value of stock options previously granted to
employees, directors and officers under the Company`s stock option plan.
These amounts were credited accordingly to contributed surplus in the
balance sheet. The stock compensation expense excludes any cost
attributable to employees after the date of retrenchment.
The Black-Scholes option-pricing model was used to estimate the fair
values of all stock options granted based on the following factors:
(i) risk-free interest rate: 2009: 3.075%
(ii) expected volatility: 2009: 95%
(iii) expected life: 2009: 5 years
(iv) expected dividends: 2009 - $Nil
c. Replacement Options
In connection with the acquisition by the Company of all of the
outstanding shares of Diamond Core (see note 3), 15,133,190 stock options
that had been issued to employees of Diamond Core pursuant to The Diamond
Core Resources Share Trust Deed to acquire 15,133,190 ordinary shares in
Diamond Core (the "Old Options") were substituted with new stock options
of the Company (the "Replacement Options"), so as to allow 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. At June 30,
2009, 349,510 of these options had been cancelled.
d. Loss per share
The loss per share figures for the three and six month periods ended June
30, 2009 are calculated using the weighted average number of shares
outstanding during the respective accounting periods amounting to
26,091,310 and 26,091,310 common shares, respectively, (June 30, 2008:
25,741,000 and 23,040,000 respectively). The calculations of basic and
diluted loss per share amounts are identical. All common share options
were excluded from the calculation of diluted loss per share as their
effect would have been antidilutive.
Headline earnings per share
June 30, June 30, 2008
2009 $`000
$`000
Basic loss (3,544) (4,631)
Headline loss (3,544) (4,631)
Weighted average number of shares 26,091 23,040
(0.14) (0.20)
e. Contributed Surplus
June 30, 2009 December 31,
$`000 2008
$`000
Balance, beginning of the 6,934 2,757
period
Options granted 451 1,700
Balance, end of the 7,385 6,934
period
f. Accumulated other comprehensive income
December 31,
June 30, 2009 2008
$`000 $`000
Balance, beginning of the (2,370) -
period
Unrealized foreign currency 168 (2,370)
profit/(loss) on self
sustaining foreign operation in
South Africa
Balance, end of the period (2,202) (2,370)
11. COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company is committed to the payment of certain surface fees and taxes
in the DRC. For 2009, these fees and taxes are estimated to be
approximately US$120,000 compared to US$520,000 incurred in 2008. The
surface fees and taxes are required to be paid annually under the DRC
Mining Code in order to keep exploration licences in good standing.
In addition, as at June 30, 2009, the Company had a bank guarantee of
US$4,373 (December 31, 2008: $4,373) with respect to expenses related to
a mitigation and rehabilitation plan required from holders of exploration
licences under the DRC Mining Code.
The Company is in the process of exercising an option agreement to secure
an equity interest in prospective ground currently held under option. The
Company expects to pay US$350,000 as an option exercise fee.
In 2006, Samadi Resources, a 100% subsidiary of Diamond Core, entered
into a transaction with Sefalana ("Sefalana transaction") (see note 9).
In terms of the Sefalana transaction, Sefalana acquired 50% of the issued
ordinary share capital and loan accounts of the Samadi Subsidiaries and
was, pursuant to the Sefalana preference share agreement and subject to
the fulfilment of certain conditions precedent, to subscribe for
preference shares in the capital of the Samadi Subsidiaries. Certain of
the conditions precedent were not timeously fulfilled. Accordingly,
Sefalana was in terms of the Sefalana shareholders agreement deemed to
have offered its ordinary shares in the Samadi Subsidiaries to Samadi
Resources which was deemed to have accepted such offer. Sefalana is
disputing Samadi Resources` position.
Samadi Resources had made application in the High Court (South Gauteng
Provincial Division) for a declarator against Sefalana but this was
refused on March 27, 2009. The judgment did not interfere with the
current shareholder structure, has no effect on the Company financially
and no effect on its current mining order rights. The application was
brought in order to dispose of any uncertainty regarding the annulment of
the BEE agreements between Samadi Resources and Sefalana. Samadi
Resources remains committed to its current BEE shareholder Leswika
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 Resources.
Samadi Resources has been advised by its legal representatives that there
are good grounds for an appeal and has consequently filed a notice to
appeal the judgment.
The Company has entered into surface use agreements in respect of
prospecting operations conducted. The terms of the surface use
agreements typically include a distinction between prospecting and mining
activities and provide for an appropriate notice period. The Company`s
mining and exploration activities are subject to various federal,
provincial and state laws and regulations governing the protection of the
environment. These laws and regulations are continually changing and
generally becoming more restrictive. The Company conducts its operations
so as to protect public health and the environment and believes its
operations are materially in compliance with all applicable laws and
regulations. The Company has made, and expects to make in the future,
expenditures to comply with such laws and regulations.
In addition to the above matters, the Company and its subsidiaries are
also subject to routine legal proceedings and tax audits. The Company
does not believe that the outcome of any of these matters, individually
or in aggregate, would have a material adverse effect on its consolidated
losses, cash flow or financial position.
The Company is in dispute with two of its previous directors. One of
those individuals applied for a summary judgment in the High Court; the
application was dismissed and the Company was granted leave to defend his
claim. The matter will now proceed in the High Court on an opposed
basis. The other individual has referred two disputes to the CCMA in
Johannesburg and an action to the High Court in that same jurisdiction.
He elected to withdraw an application for summary judgment.
There is a dispute with an engineering contractor over the design and
installation of the Paardeberg diamond recovery plant. Pleadings in the
matter have closed in relation to the contractor`s claim of $158,613 and
the Company`s counter claim of $368,363. A trial date has been set for
May 19, 2010.
The Company believes that these claims are without merit and is
vigorously defending these actions.
The following contractual obligations exist at June 30, 2009:
$ Total < 1 year 1 - 3 years
Purchase 237,394 237,394 nil
Obligations
Operating lease 73,394 63,365 9,833
commitments
13. CAPITAL MANAGEMENT
The Company`s main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of
capital at acceptable risk while providing an appropriate return to its
shareholders;
- to maintain a strong capital base so as to maintain investor, creditor
and market confidence and to sustain future development of the business;
- to safeguard the Company`s ability to obtain financing should the need
arise; and
- to maintain financial flexibility in order to have access to capital in
the event of future acquisitions.
The Company manages its capital structure and makes adjustments to it in
accordance with the objectives stated above, as well as responds to
changes in economic conditions and the risk characteristics of the
underlying assets.
There were no changes to the Company`s approach to capital management
during the six month period ended June 30, 2009.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a. Fair value of financial instruments
The Company has classified financial instruments as follows:
June 30, 2009 December 31,
$`000 2008
$`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 9,351 7,542
liabilities
Debt 6,280 6,172
Lease 639 499
b. Allowance account for credit losses
$ June 30,2009 December 31,
2008
Accounts receivable - -
Allowance for doubtful accounts - -
Other - -
- -
c. Fair value of financial instruments
The balance sheet carrying amounts for cash, restricted cash and other
assets, accounts payable, debt and other liabilities approximate fair
value due to their short-term nature. Due to the use of subjective
judgments and uncertainties in the determination of fair values these
values should not be interpreted as being realizable in an immediate
settlement of the financial instruments.
d. Risk management policies and hedging activities
The Company is sensitive to changes in commodity prices, foreign exchange
and interest rates. The Company`s board of directors has overall
responsibility for the establishment and oversight of the Company`s risk
management framework. Although the Company has the ability to address its
price-related exposures through the use of options, futures and forward
contracts, it does not generally enter into such arrangements. Similarly,
derivative financial instruments are not used to reduce these financial
risks.
Credit risk
Financial instruments which are potentially subject to credit risk for the
Company consist primarily of cash. Cash is maintained with several financial
institutions of reputable credit and may be redeemed upon demand. It is
therefore the Company`s opinion that such credit risk is subject to normal
industry risks and is considered minimal.
Liquidity risk
Liquidity risk arises from the Company`s financial obligations and in the
management of its assets, liabilities and optimal capital structure. The
Company manages this risk by regularly evaluating its liquid financial
resources to fund its current and long term obligations and to meet its
capital commitments in a cost effective manner. The main factors that affect
liquidity include realized sales prices, production levels, cash production
costs, working capital requirements, future capital expenditure requirements,
scheduled repayments of long-term debt obligations, the Company`s credit
capacity and expected future debt and equity capital market conditions.
The Company`s liquidity requirements are met through a variety of sources,
including: cash on hand, cash generated from operations, asset sales, existing
credit facilities, leases, and debt and equity markets.
Weakening global economic conditions have led to a significant weakness in
exchange traded commodity prices in recent months, including diamond prices.
In general, credit market conditions have increased the cost of obtaining
capital and limited the availability of funds.
Given the Company`s financial position, available credit facilities and the
fact that there are scheduled maturities on its debt the Company expects a
need to access debt and equity markets for financing over the next twelve
month period. 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, these consolidated
financial statements have been prepared in accordance with Canadian GAAP
applicable to a going concern (Note 1).
Currency risk
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Monetary assets and liabilities denominated in foreign
currencies are translated from US dollars and South African rand into Canadian
dollars. Unfavourable changes in the applicable exchange rate may result in a
decrease or increase in foreign exchange gains or losses. The Company does
not use derivative instruments to reduce its exposure to foreign currency
risk.
For the three 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.
Interest rate risk
Interest rate risk is the potential impact on the Company`s earnings due to
changes in bank lending rates and short term deposit rates.
The Company`s exposure to interest rate risk is as follows:
Cash Variable interest rate
Other assets Non-interest bearing
Accounts payable and accrued liabilities Non-interest bearing/variable
interest rate
Short term debt Variable interest rate
The Company believes that the interest rates prevailing in Canada should
not significantly increase in 2009 and estimates that its interest rate
risk exposure will diminish in future years.
Market risk
Market risk is the risk that the value of a financial instrument might be
adversely affected by a change in commodity prices, interest rates or
currency exchange rates. The Company manages the market risk associated
with commodity prices by establishing and monitoring parameters that
limit the types and degree of market risk that may be undertaken.
Title risk
Title to mineral properties and mining rights involves certain inherent
risks due to the difficulties of determining the validity of certain
claims as well as the potential for problems arising from the frequently
ambiguous conveyancing history characteristic of many mining properties.
Although the Company has investigated title to all of its mineral
properties for which it holds concessions or other mineral leases or
licenses, the Company cannot give any assurance that title to such
properties will not be challenged or impugned and cannot be certain that
it will have valid title to its mining properties. The Company relies on
title opinions by legal counsel who base such opinions on the laws of
countries in which the Company operates.
Country risk
The DRC is a developing country and as such, the Company`s exploration
projects in the DRC could be adversely affected by uncertain political or
economic environments, war, civil or other disturbances, and a changing
fiscal regime and by DRC`s underdeveloped industrial and economic
infrastructure.
The Company`s operations in the DRC may be effected by economic pressures
on the DRC. Any changes to regulations or shifts in political attitudes
are beyond the control of the Company and may adversely affect its
business. Operations may be affected in varying degrees by such factors
as DRC government regulations with respect to currency conversion,
production, price controls, export controls, income taxes or reinvestment
credits, expropriation of property, environmental legislation, land use,
water use and mine safety.
There can be no assurance that policies towards foreign investment and
profit repatriation will continue or that a change in economic conditions
will not result in a change in the policies of the DRC government or the
imposition of more stringent foreign investment restrictions. Such
changes cannot be accurately predicted.
15. SUBSEQUENT EVENTS
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 fulfillment 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).
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 of Diamond Core was initiated by River Corporate
Finance (Pty) Ltd, which was the exclusive adviser to Diamond Core on the
transaction with the Company (see Note 3). 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 assets in South Africa 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, albeit under
protest.
JOHANNESBURG
17 August 2009
SPONSOR
Arcay Moela Sponsors (Proprietary) Limited
Date: 18/08/2009 07:34:01 Produced by the JSE SENS Department.
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