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EPS - Eastern Platinum Limited - Management`s Discussion And Analysis Of
Financial Conditions And Results Of Operations For The Three And Nine Months
Ended September 30, 2009
EASTERN PLATINUM LIMITED
(Incorporated in Canada)
(Canadian Registration number BC0722783)
(South African Registration number 2007/006318/10)
Share Code TSX: ELR & ISIN: CA2768551038
Share Code AIM: ELR & ISIN: CA2768551038
Share Code JSE: EPS & ISIN: CA2768551038
EASTERN PLATINUM LIMITED
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009
The following Management`s Discussion and Analysis ("MD&A") is intended to
assist the reader to assess material changes in financial condition and results
of operations of Eastern Platinum Limited ("Eastplats" or the "Company") as at
September 30, 2009 and for the three and nine months then ended in comparison
to the same period in 2008.
In February 2009, the applicable provincial securities commissions granted the
Company exemptive relief to adopt International Financial Reporting Standards
("IFRS") with an adoption date of January 1, 2009 and a transition date of
January 1, 2008.
This MD&A should be read in conjunction with the condensed consolidated interim
financial statements for the three and nine months ended September 30, 2009 and
supporting notes. These condensed consolidated interim financial statements
have been prepared using accounting policies consistent with IFRS and in
accordance with International Accounting Standard 34 ("IAS 34") - Interim
Financial Reporting. A reconciliation of the previously disclosed comparative
periods` financial statements prepared in accordance with Canadian generally
accepted accounting principles to IFRS is set out in Note 15 to these condensed
consolidated interim financial statements.
In this MD&A, the Company also reports certain non-IFRS measures such as EBITDA
and cash costs per ounce which are explained in Section 3.2 of this MD&A.
All monetary amounts are in U.S. dollars unless otherwise specified. The
effective date of this MD&A is November 12, 2009. Additional information
relating to the Company is available on SEDAR at www.sedar.com.
Contents of the MD&A
1. Overview
2. Highlights for the quarter ended September 30, 2009
3. Results of operations for the three and nine months ended September 30, 2009
3.1. Mining operations at the Crocodile River Mine ("CRM")
3.2. CRM non-IFRS measures
3.3. Development projects
3.3.1. CRM
3.3.2. Spitzkop and Kennedy`s Vale
3.3.3. Mareesburg
3.4. Corporate and other expenses
4. Liquidity and Capital Resources
4.1. Outlook
4.2. Impairment
4.3. Share capital
4.4. Contractual Obligations and Commitments
5. Related party transactions
6. Adoption of accounting standards and accounting pronouncements under IFRS
6.1 Significant differences between IFRS and Canadian GAAP in the Company`s
financial statements
6.2 Accounting standards issued but not yet effective
7. Internal control over financial reporting
8. Cautionary statement on forward-looking information
1. Overview
Eastplats is a platinum group metals ("PGM") producer engaged in the mining and
development of PGM deposits with properties located in South Africa. All of the
Company`s properties are situated on the western and eastern limbs of the
Bushveld Complex ("BC"), the geological environment that supports over 75% of
the world`s PGM mine production.
The Company`s primary operating asset is an 87.5% direct and indirect interest
in Barplats Investments Limited ("Barplats"), whose main assets are the PGM
producing Crocodile River Mine ("CRM") located on the western limb of the BC
and the non-producing Kennedy`s Vale Project located on the eastern limb of the
BC. The Company also has a 75.5% direct and indirect interest in Mareesburg
Platinum Project ("Mareesburg") and a 93.4% direct and indirect interest in
Spitzkop PGM Project ("Spitzkop"), both located on the eastern limb of the BC.
2. Highlights for the quarter ended September 30, 2009 ("Q3 2009")
* CRM reached two million fatality-free shifts in September.
* The Company`s Lost Time Injury Frequency Rate (LTIFR) was 1.69 this quarter
compared to 3.02 in the third quarter of 2008 ("Q3 2008").
* Eastplats recorded a net profit attributable to equity shareholders of the
Company of $1,839,000 ($0.00 per share) compared to a net loss attributable
to equity shareholders of $10,829,000 ($0.02 loss per share) in Q3 2008.
* Production at CRM was 29,986 PGM ounces compared to 30,758 PGM ounces in
Q3 2008, despite the industrial action by contract mining company`s
workers in July.
* EBITDA was $4,971,000 compared to negative EBITDA of $11,405,000 in Q3 2008.
* The average delivered basket price per PGM ounce was $765, a decrease of
36% compared to $1,193 in Q3 2008.
* Operating cash costs net of by-product credits were $583 per ounce, a 12%
increase from $521 per ounce achieved in Q3 2008 as a result of the
industrial action in July. Operating cash costs were $758 per ounce, an
increase of 13% compared to the $672 per ounce in Q3 2008.
* Rand operating cash costs net of by-product credits were R4,548 per
ounce, an increase of 12% compared to R4,055 per ounce in Q3 2008. Rand
operating cash costs were R5,915 per ounce, an increase of 13% compared
to R5,233 per ounce in Q3 2008.
* Head grade increased to 4.1 grams per tonne in Q3 2009 from 4.0 grams
per tonne in Q3 2008, and average concentrator recovery remained
unchanged at 78%.
* Development meters decreased by 49% to 2,882 meters and on-reef
development decreased by 56% to 1,562 meters compared to Q3 2008,
partly due to the industrial action in July, and partly due to the
planned reduction in reserve development that was initiated in November
2008.
* Stoping units decreased by 9% to 36,263 square meters and run-of-mine
rock ore decreased by 23% to 244,959 tonnes compared to the same
quarter in 2008 as a result of the industrial action in July.
* Run-of-mine ore processed decreased by 8% to 280,777 tonnes in Q3 2009
from 305,490 tonnes in Q3 2008.
* At September 30, 2009, the Company had a cash position (including cash,
cash equivalents and short term investments) of $22,906,000 (December
31, 2008 - $61,063,000).
The table below sets forth selected results of operations for the Company`s
eight most recently completed quarters (in thousands of U.S. dollars, except
per share amounts). The quarters of 2007 have been presented in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP").
All financial data previously reported in Canadian dollars have been converted
to U.S. dollars.
Table 1
Selected quarterly data 2009 2009 2009
(under IFRS unless otherwise noted) Sept 30 June 30 March 31
Revenues $ 27,365 $ 24,838 $ 24,903
Cost of operations (26,702) (22,595) (21,402)
Mine operating earnings (loss) 663 2,243 3,501
Expenses (G&A and share-based payment) (2,445) (3,374) (1,768)
Impairment of property, plant and
equipment - - -
Operating (loss) profit (1,782) (1,131) 1,733
Net profit (loss) attributable to equity
shareholders of the Company $ 1,839 $ 317 $ 3,164
Earnings (loss) per share-basic $ 0.00 $ 0.00 $ 0.00
Earnings (loss) per share - diluted $ 0.00 $ 0.00 $ 0.00
Average foreign exchange rates
South African Rand per US dollar 7.80 8.44 9.94
US dollar per Canadian dollar 0.9114 0.8578 0.8038
Period end foreign exchange rates
South African Rand per US dollar 7.53 7.75 9.54
US dollar per Canadian dollar 0.9340 0.8598 0.7928
Selected quarterly data 2008
(under IFRS unless
otherwise noted) Dec 31 Sept 30 June 30 March 31
Under IFRS
Revenues $ 345 $ 9,224 $ 49,317 $ 55,795
Cost of operations (19,569) (25,372) (25,538) (24,144)
Mine operating
earnings (loss) (19,224) (16,148) 23,779 31,651
Expenses (G&A and
share-based payment) (6,599) (5,996) (5,789) (5,682)
Impairment of
property, plant and
equipment (313,603) - - -
Operating (loss) profit (339,426) (22,144) 17,990 25,969
Net profit (loss)
attributable to equity
shareholders of the
Company $ (230,176) $ (10,829) $ 12,148 $ 19,476
Earnings (loss) per
share-basic $ (0.34) $ (0.02) $ 0.02 $ 0.03
Earnings (loss) per
share - diluted $ (0.34) $ (0.02) $ 0.02 $ 0.03
Average foreign
exchange rates
South African Rand per
US dollar 9.92 7.78 7.77 7.53
US dollar per Canadian
dollar 0.8252 0.9603 0.9901 0.9955
Period end foreign
exchange rates
South African Rand per
US dollar 9.29 8.35 7.81 8.14
US dollar per Canadian
dollar 0.8210 0.9397 0.9807 0.9742
Selected quarterly data 2007
(under IFRS unless otherwise noted) Dec 31
Under
Canadian
GAAP
Revenues $ 34,126
Cost of operations (26,095)
Mine operating earnings (loss) 8,031
Expenses (G&A and share-based payment) (18,022)
Impairment of property, plant and equipment -
Operating (loss) profit (9,991)
Net profit (loss) attributable to equity
shareholders of the Company $ (10,814)
Earnings (loss) per share-basic $ (0.02)
Earnings (loss) per share - diluted $ (0.02)
Average foreign exchange rates
South African Rand per US dollar 6.76
US dollar per Canadian dollar 1.0189
Period end foreign exchange rates
South African Rand per US dollar 6.88
US dollar per Canadian dollar 1.0088
3. Results of Operations for the three and nine months ended September 30, 2009
The following table sets forth selected consolidated financial information for
the three and nine months ended September 30, 2009 and 2008:
Table 2
Condensed consolidated interim income statements
(Expressed in thousands of U.S. dollars,
except per share amounts) Three months ended September 30,
2009 2008
Revenue
Cost of operations $ 27,365 $ 9,224
Production costs 22,394 20,629
Depletion and depreciation 4,308 4,743
Mine operating earnings (loss) 663 (16,148)
Expenses
General and administrative 2,336 5,585
Share-based payments 109 411
Operating (loss) profit (1,782) (22,144)
Other income (expense)
Interest income 448 2,297
Finance costs (332) (701)
Foreign exchange (loss) gain 652 (28)
(Loss) profit before income taxes (1,014) (20,576)
Deferred income tax recovery (expense) 1,645 6,363
Net profit (loss) for the period $ 631 $ (14,213)
Attributable to
Non-controlling interest $ (1,208) $ (3,384)
Equity shareholders of the Company $ 1,839 $ (10,829)
Earnings per share
Basic $ 0.00 $ (0.02)
Diluted $ 0.00 $ (0.02)
Weighted average number of common share outstanding
Basic 680,558 680,245
Diluted 687,018 680,245
Nine months ended September 30,
2009 2008
Revenue
Cost of operations $ 77,106 $ 114,336
Production costs 58,588 61,437
Depletion and depreciation 12,111 13,617
Mine operating earnings (loss) 6,407 39,282
Expenses
General and administrative 7,143 15,227
Share-based payments 444 2,240
Operating (loss) profit (1,180) 21,815
Other income (expense)
Interest income 1,437 7,981
Finance costs (1,159) (2,957)
Foreign exchange (loss) gain (795) 1,100
(Loss) profit before income taxes (1,697) 27,939
Deferred income tax recovery (expense) 3,934 (7,417)
Net profit (loss) for the period $ 2,237 $ 20,522
Attributable to
Non-controlling interest $ (3,083) $ (273)
Equity shareholders of the Company $ 5,320 $ 20,795
Earnings per share
Basic $ 0.01 $ 0.03
Diluted $ 0.01 $ 0.03
Weighted average number of common share outstanding
Basic 680,541 675,979
Diluted 686,112 705,249
Condensed consolidated statements of September 30, December 31,
financial position 2009 2008
Total assets $ 695,191 $ 596,570
Total long-term liabilities $ 54,425 $ 47,685
3.1 Mining operations at Crocodile River Mine ("CRM")
The following is a summary of CRM`s operations for each of the quarters of 2009
and 2008:
Table 3
Crocodile River Mine operations
September June 30, March 31,
30, 2009 2009 2009
Key financial statistics
(dollar amounts stated in U.S. dollars)
Sales - P GM ounces 29,986 33,383 32,969
Average delivered price per ounce (2) $765 $679 $590
Average basket price $878 $779 $676
Cash costs per ounce of PGM (1) $758 $554 $536
Cash costs per ounce of PGM,
net of chrome by-product credits (1) $583 $494 $388
Rand cash costs per ounce of PGM (1) R 5,915 R 4,673 R 5,326
Rand cash costs per ounce of PGM,
net of chrome by-product credits (1) R 4,548 R 4,169 R 3,857
Key production statistics
Total tonnes processed 471,743 440,288 318,394
Run-of-mine ("ROM") rock tonnes
processed 280,777 304,354 318,394
Tailings tonnes processed 190,966 135,934 -
Third party ore processed - - -
Development meters 2,882 4,326 4,573
On-reef development meters 1,562 2,860 2,745
Stoping units (square meters) 36,263 51,342 45,098
Concentrator recovery from ROM ore 78% 80% 80%
Chrome produced (tonnes) 83,930 82,760 77,554
Metal in concentrate sold (ounces)
Platinum (Pt) 15,080 16,721 16,499
Palladium (Pd) 6,613 7,406 7,399
Rhodium (Rh) 2,499 2,868 2,812
Gold (Au) 115 141 135
Iridium (Ir) 1,095 1,179 1,144
Ruthenium (Ru) 4,584 5,068 4,980
Total PGM ounces 29,986 33,383 32,969
Three months ended
December 31, September 30, June 30, March 31,
2008 2008 2008 2008
Key financial
statistics
(dollar amounts
stated in U.S.
dollars)
Sales - P GM
ounces 29,015 30,758 30,311 27,825
Average delivered
price per ounce
(2) $550 $1,193 $1,657 $1,621
Average basket
price $655 $1,438 $1,969 $1,927
Cash costs per
ounce of PGM (1) $628 $672 $696 $698
Cash costs per
ounce of PGM,
net of chrome
by-product
credits (1) $578 $521 $696 $698
Rand cash costs
per ounce of PGM
(1) R 6,231 R 5,233 R 5,411 R 5,258
Rand cash costs
per ounce of PGM,
net of chrome
by-product
credits (1) R 5,734 R 4,055 R 5,410 R 5,256
Key production
statistics
Total tonnes
processed 298,514 317,602 337,471 349,497
Run-of-mine
("ROM") rock
tonnes processed 298,514 305,490 313,767 257,748
Tailings tonnes
processed - 12,112 23,704 88,948
Third party ore
processed - - - 2,801
Development meters 4,604 5,599 5,575 4,409
On-reef
development
meters 2,922 3,556 3,230 2,343
Stoping units
(square meters) 46,459 39,652 44,277 38,686
Concentrator
recovery from ROM
ore 76% 78% 73% 78%
Chrome produced
(tonnes) 69,937 64,744 37,515 22,489
Metal in
concentrate sold
(ounces)
Platinum (Pt) 14,466 15,393 15,333 13,684
Palladium (Pd) 6,690 6,973 6,777 6,201
Rhodium (Rh) 2,451 2,581 2,543 2,335
Gold (Au) 121 123 132 121
Iridium (Ir) 979 1,083 994 1,078
Ruthenium (Ru) 4,308 4,605 4,532 4,405
Total PGM ounces 29,015 30,758 30,311 27,825
(1) These are non-IFRS measures as described in Section 3.2
(2) Average delivered price is the average basket price at the time of delivery
of PGM concentrates, net of associated smelter costs, under the Company`s
primary off-take agreement.
Quarter ended September 30, 2009 compared to the quarter ended September 30,
2008
The Company recorded revenue of $27,365,000 in Q3 2009. This amount represents
revenues recorded when PGM concentrates are physically delivered to the buyer,
plus/minus adjustments made when final prices for these concentrates are
settled. The Company settles its PGM sales three to five months following the
physical delivery of the concentrates which are provisionally priced on the
date of delivery.
After a period of sharp declines in late 2008, PGM prices in U.S. dollar terms
have risen steadily throughout 2009 from its lows in December 2008. The Company
recorded an average delivered basket price of $765 per PGM ounce in Q3 2009,
compared to $679 in Q2 2009 and $1,193 in Q3 2008. The delivered price per
ounce refers to the PGM prices in effect at the time the PGM concentrates are
delivered. As a result of the rise in prices, the Company recorded positive
provisional price adjustments of $1,579,000 and $6,490,000 for the three and
nine months ended September 30, 2009 respectively. In comparison, PGM prices
declined sharply from August through December 2008 resulting in significant
negative adjustments to the provisional prices in Q3 2008 when these were
marked to market at September 30, 2008.
The following table shows a reconciliation of revenue and provisional price
adjustments.
Table 4
Crocodile River Mine
Effect of provisional price adjustments on revenues
(stated in thousands of U.S. dollars)
Three months ended Three months ended
September 30, 2009 September 30, 2008
Revenue before provisional price
adjustments $ 25,786 $ 34,412
Provisional price adjusments
Adjustments to revenue upon
settlement 20 (4,749)
of prior periods` sales
Mark-to-market adjustment on
sales not yet
settled at end of period 1,559 (20,439)
Revenue as reported in the income
statement $ 27,365 $ 9,224
Nine months ended Nine months ended
September 30, 2009 September 30, 2008
Revenue before provisional price
adjustments $ 70,616 $ 129,702
Provisional price adjusments
Adjustments to revenue upon
settlement 4,931 5,073
of prior periods` sales
Mark-to-market adjustment on
sales not yet
settled at end of period 1,559 (20,439)
Revenue as reported in the income
statement $ 77,106 $ 114,336
In Q3 2009, CRM suffered five lost time injuries (compared to eight lost time
injuries in Q3 2008) resulting in a Lost Time Injury Frequency Rate ("LTIFR")
of 1.69 (3.02 in Q3 2008). The Company`s twelve month rolling LTIFR of 1.85 to
September 30, 2009 compares favorably with other platinum producers in South
Africa.
PGM ounces sold were down by 3% in Q3 2009 compared to Q3 2008 as a result of
decreased run-of- mine rock tonnes processed (280,777 tonnes in Q3 2009
compared to 305,490 tonnes in Q3 2008). The decrease in run-of-mine tonnes was
due to an illegal industrial action by personnel employed by two contract
mining companies which severely interrupted production at the mine in July and
August. By September, production levels had returned to those achieved in June
2009. The decrease in production was partially offset by an increase in grades
from 4.0 grams per tonne in Q3 2008 to 4.1 grams per tonne in Q3 2009. Total
tonnage processed increased by 49% compared to Q3 2008 primarily due to the Q3
2009 recommencement of tailings retreatment at CRM. There were 190,966 tonnes
of tailings processed in Q3 2009 versus 12,112 tonnes in Q3 2008.
Total development for the quarter was 2,882 metres, a 49% decrease compared to
5,599 metres achieved in Q3 2008, and on-reef development was 1,562 metres, a
56% decrease compared to 3,556 metres in Q3 2008, again as a result of the
industrial action. Since the industrial action, the Company`s focus has been to
return to production levels achieved in June 2009 in a safe, timely, and cost
efficient manner. Going forward, development is planned at Q2 levels in order
to ensure that the reserve immediately available for stoping can be maintained
at about eighteen months.
Recovery rates increased from 78% in Q3 2008 to 80% in Q2 2009 and then
decreased to 78% in Q3 2009 as a result of the industrial action causing
sub-optimal concentrator operation during times of low feed from underground.
Operating cash costs, a non-IFRS measure, increased by 13% from $672 per ounce
in Q3 2008 to $758 per ounce in Q3 2009 due to inefficiencies caused by the
disruption of the industrial action, a 10% wage increase effective July 1,
2009, and a 30% increase in electricity costs. Operating cash costs are
incurred primarily in Rand. The average U.S. dollar-Rand exchange rate, which
was R7.80:$1.00 in both Q3 2009 and Q3 2008, was not a factor in the comparison
of operating cash costs.
A reconciliation of production costs, as reported in the income statement, to
cash operating costs, is shown under Section 3.2 below under CRM non-IFRS
measures.
The chrome recovery circuit at CRM was fully operational at the end of the
second quarter of 2008. As a result, penalties for excess chrome present in PGM
concentrates have been significantly reduced and commercial quantities of
chrome have been produced and sold as a by-product of PGM production. In July
2008, the Company commenced reporting cash costs net of chrome by-product
credits, also a non- IFRS measure. In Q3 2009, 83,930 tonnes of chrome were
produced and 76,900 tonnes were sold for proceeds of $5,255,000, reducing
operating cash costs net of by-product credits to $583 per ounce.
Quarter ended September 30, 2009 compared to the quarter ended June 30, 2009
Underground mining activities and production were significantly interrupted
during the quarter as a result of the illegal industrial action in July.
Development meters, on-reef development meters, and stoping units decreased by
33%, 45% and 29% respectively compared to Q2 2009. However, the decrease in
run- of-mine ore processed was limited to 8% and the decrease in PGM ounces
sold was limited to 10% due to the processing of 35,000 tonnes of surface ore
stockpiles which had accumulated as at June 30, 2009.
The decrease in production ounces and production efficiencies led to a 37%
increase in operating cash costs per ounce from $554 per ounce in Q2 2009 to
$758 per ounce in Q3 2009. Other factors contributing to this increase was a
10% rise in wages effective July 1, 2009 and a 30% rise in electricity costs.
An 8% weakening of the U.S. dollar from R8.44:$1.00 in Q2 2009 to R7.80:$1.00
in Q3 2009 also contributed to the increase in operating cash costs, which are
incurred primarily in Rand.
Revenues were 10% higher compared to Q2 2009 as a result of a 13% rise in the
average delivered price per PGM ounce, which also contributed to positive
provisional price adjustments for the current quarter, and an increase in
chrome production and sales.
Nine months ended September 30, 2009 ("9M 2009") compared to the nine months
ended September 30, 2008 ("9M 2008")
In 9M 2009, the Company sold 96,338 PGM ounces, an increase of 8% compared to
9M 2008, primarily as a result of higher volumes mined in 2009 (1,230,425
tonnes processed in 9M 2009 compared to 1,004,570 tonnes processed in 9M 2008),
and improved recovery rates (79% in 9M 2009 compared to 76% in 9M 2008).
On-reef development decreased to 7,167 meters in 9M 2009 compared to 9,129
meters in 9M 2008.
The average delivered basket price per ounce decreased from $1,485 in 9M 2008
to $675 in 9M 2009 as PGM prices reached multi-year highs in March 2008 and
decreased between August 2008 and December 2008.
Operating cash costs of $611 per ounce were achieved in 9M 2009, compared to
$688 per ounce in 9M 2008, due to an 8% increase in the number of ounces
produced in 2009 compared to 2008 and a 12% rise in the value of the U.S.
dollar relative to the Rand between 2008 and 2009. However, total cash
operating costs in Rand were 8% higher in 9M 2009 compared to the same period
in 2008 due to increased labour costs and general inflation on other supplies
and services during this period.
3.2 CRM non-IFRS measures
The following table provides a reconciliation of EBITDA and cash operating
costs per PGM ounce to mine operating earnings and production costs,
respectively:
Table 5
Crocodile River Mine non-IFRS measures
(Expressed in thousands of U.S. dollars, except ounce and per ounce data)
Three months ended
September September
30, 2009 30, 2008
Mine operating earnings (loss) $ 663 $ (16,148)
Depletion and depreciation 4,308 $ 4,743
EB ITDA (1) 4,971 (11,405)
Production costs as reported 22,394 20,629
Adjustments for miscellaneous costs (2) 335 40
Cash opera ting costs 22,729 20,669
Less by-product credits - chrome revenues and
adjustments (5,255) (4,640)
Cash opera ting costs net of by-product credits 17,474 16,029
Ounces sold 29,986 30,758
Cash cost per ounce sold $ 758 $ 672
Cash cost per ounce sold net of by-product credits $ 583 $ 521
Nine months ended
September September
30, 2009 30, 2008
Mine opera ting earnings (loss) $ 6,407 $ 39,282
Depletion and depreciation 12,111 13,617
EB ITDA (1) 18,518 52,899
Production costs as reported 58,588 61,437
Adjustments for miscellaneous costs (2) 306 (245)
Cash opera ting costs 58,894 61,192
Less by-product credits - chrome revenues and
adjustments (12,144) (4,640)
Cash opera ting costs net of by-product credits 46,750 56,552
Ounces sold 96,338 88,894
Cash cost per ounce sold $ 611 $ 688
Cash cost per ounce sold net of by-product credits $ 485 $ 636
(1) EBITDA includes provisional price adjustments, chrome revenues, chrome
penalties, and foreign exchange adjustments to sales.
(2) Miscellaneous costs include costs such as housing, technical services and
planning.
The Company is of the opinion that conventional measures of performance
prepared in accordance with IFRS do not fully demonstrate the ability of its
operations to generate cash flow. Therefore, the Company has included certain
non-IFRS measures in this MD&A to supplement its financial statements which are
prepared in accordance with IFRS. These non-IFRS measures do not have any
standardized meaning prescribed under IFRS, and therefore they may not be
comparable to similar measures employed by other companies.
In this MD&A, the Company has reported its share of earnings before interest,
depletion, depreciation, amortization and tax ("EBITDA") at CRM. This is a
liquidity non-IFRS measure which the Company believes is used by certain
investors to determine the Company`s ability to generate cash flows for
investing and other activities. The Company also reports cash operating costs
per ounce of PGM produced, another non-IFRS measure which is a common
performance measure used in the precious metals industry.
3.3 Development projects
3.3.1 CRM
In Q3 2009, the Company spent approximately $3.9 million at CRM, primarily on
continuing underground mine development, concentrator instrumentation upgrades,
underground high tension electricity expansion and upgrades, and ongoing
surface and underground works at the Zandfontein vertical shaft, including
conveyor belts for the transport of ore hoisted up the vertical shaft and
construction of dams for underground water control. The shaft hoisting capacity
will be 100,000 tonnes of ore per month plus associated waste, and the shaft,
along with additional decline development, will allow access into the deeper
parts of the ore body.
Due to the recent downturn in the global economy and platinum group metals
prices, the development of the Crocette and Kareespruit sections at CRM has
been put on hold while the Company focused on increasing production from
existing mining areas.
3.3.2 Spitzkop/Kennedy`s Vale
Development of Spitzkop and Kennedy`s Vale has been on hold since December
2008. During Q3 2009 the only expenditures at Spitzkop/Kennedy`s Vale related
to care and maintenance costs.
Spitzkop is planned as a decline mining operation that will access high-grade
PGM resources in the UG2 reef at shallow depth without the requirement for high
capital cost shaft infrastructure. Spitzkop is situated up dip of, and adjacent
to, the Kennedy`s Vale project. Kennedy`s Vale and the deeper sections of both
properties could utilize the existing twin vertical shafts. This infrastructure
would provide a significant reduction in capital costs for the development of
the deeper sections of both properties.
During 2008, work on the basic engineering for trial mining was completed and
long lead items such as mills and mining equipment were purchased or ordered.
The box-cuts for both the Merensky Reef and UG2 declines were completed. Due to
the market environment, development of the declines was suspended after about
180 metres and equipment purchased is being stored for future use.
The new order mining right for Spitzkop was executed in October 2009.
3.3.3 Mareesburg
Further work on the Mareesburg project has been on hold since December 2008. A
new order mining right application was submitted in December 2007 which
supports the Company`s intention to commence mining when PGM prices improve.
An updated feasibility study for the Mareesburg open pit is expected to be
completed in 2009.
3.4 Corporate and other expenses
General and administrative expenses ("G&A") are costs associated with the
Company`s corporate head office in Vancouver and the Johannesburg
administrative office and costs associated with care and maintenance at
Spitzkop, Kennedy`s Vale and Mareesburg. Corporate office costs include legal
and accounting, regulatory, executive management fees, investor relations,
travel and consulting fees. Given the current downturn in the economy and the
curtailment and postponement of some of the Company`s projects, the Company has
made considerable efforts to reduce G&A expenses beginning in Q4 2008.
G&A decreased by 58% to $2,336,000 in Q3 2009 from $5,585,000 in Q3 2008.
Similarly, G&A decreased by 53% to $7,143,000 in 9M 2009 from $15,227,000 in 9M
2008. The decrease in G&A was due to a reduction in certain senior level staff
in Johannesburg in late 2008, and a general reduction in corporate travel and
investor relations activities.
Compared to the second quarter of 2009, G&A decreased from $3,171,000 to
$2,336,000 in Q3 2009 mainly due to the Q2 2009 settlement of two long-standing
legal proceedings which originated at CRM in 2004 and 2006 respectively. The
costs to settle these proceedings totaled $1,407,000.
Interest income recorded during the three and nine months ended September 30,
2009 was $448,000 and $1,437,000 respectively compared with $2,297,000 and
$7,981,000 in the same period in 2008. The decrease in interest income was due
to lower average cash balances and lower interest rates in 2009 compared to the
same period in 2008.
During the three and nine months ended September 30, 2009 the Company recorded
an income tax recovery of $1,645,000 and $3,934,000 respectively. The
recoveries were based on net losses generated at CRM during the period as well
as changes in the Company`s net assets that resulted in a deferred tax
recovery. The consolidated statement of financial position reflects total
deferred tax liabilities of $43,506,000 which arose primarily as a result of
the step-up to fair value of the net assets acquired on the Barplats and Gubevu
business acquisitions during the years ended June 30, 2006, June 30, 2007, and
December 31, 2008.
4. Liquidity and Capital Resources
At September 30, 2009, the Company had working capital of $30,271,000 (December
31, 2008 - $34,025,000) and cash and cash equivalents and short-term
investments of $22,906,000 (December 31, 2008 - $61,063,000) in highly liquid,
fully guaranteed, bank sponsored instruments.
The Company had no long-term debt at September 30, 2009, other than a provision
for environmental rehabilitation relating primarily to its Crocodile River
Mine, and capital lease obligations relating to mining vehicles with lease
terms of five years with options to purchase for a nominal amount at the
conclusion of the lease. See Contractual Obligations under Section 4.4 below.
4.1 Outlook
The sharp decline in the prices of platinum group metals (PGMs) during the last
five months of 2008 had a negative impact on the Company`s profitability and
the Company`s development projects which have been put on hold until a
sustained recovery of PGM prices takes place. PGM prices in U.S. dollar terms
have recovered since the beginning of 2009, but this has been negated by the
recent strength of the Rand against the U.S. dollar. As a result, the realized
basket prices that the Company is receiving have not improved significantly
since their lows of December 2008 and are still more than 50% below those
recorded in July 2008. In light of the current global economic uncertainty, the
Company anticipates that PGM prices will remain depressed and the Rand-U.S.
dollar exchange rate will remain volatile in the short term.
Furthermore, the illegal industrial action at CRM in July and the hiring and
training of new personnel resulted in lower production levels in the third
quarter. Despite the negative impact of this disruption, the Company
anticipates production to return to budgeted levels in the fourth quarter as
new mining crews complete their phase-in and training periods.
As a consequence of the global economic uncertainty and the industrial action
at CRM, the Company`s near-term goal has been, and continues to be, to preserve
its cash balances to the greatest extent possible, by finding ways to increase
production and minimize operating costs without compromising safety, health and
environmental standards, and by curtailing capital expenditures. This process
began in December 2008, and until the industrial action took place, the Company
was successful in achieving significant cost improvements over the first two
quarters of 2009. The Company will continue to manage costs as a priority and
expects the lower cost structure to be maintained, as long as there are no
further unanticipated disruptions in production.
The Company`s three primary development projects, at the Crocette section at
CRM and at Spitzkop and Mareesburg on the Eastern Limb, have remained on care
and maintenance since the end of 2008. The Company continually assesses their
status, with a view to determining an appropriate development schedule given
the market conditions, the Company`s current cash balances, its ability to
generate sufficient cash flows, and its ability to obtain additional funding in
the current market environment.
Additional funding may be required and may include external debt financing,
joint venture or other third party participation in one or more of the
projects, or the public or private sales of equity or debt securities of the
Company.
If current market conditions persist for an extended time and PGM prices remain
at present levels or lower, then the cash flows from CRM and current cash
balances will be insufficient to advance any or all of the Company`s
development projects to commercial production. This, along with the current
tight credit markets that may result in higher financing costs, could
negatively affect the Company`s ability to obtain equity financing, external
debt financing or third party participation. There can be no assurance that
additional funding will be available to the Company or, if available, that this
funding will be on acceptable terms. If adequate funds are not available, the
Company may be required to further delay or reduce the scope of any or all of
its development projects.
4.2 Impairment
The Company has assessed the carrying values of its mineral properties as a
result of the market downturn. Since late 2008, declining PGM prices and
negative market sentiment have led to the Company`s market capitalization
dropping below its book value as at December 31, 2008 and throughout 2009.
Based on the then-current and expected PGM prices and cost structures as at
December 31, 2008, management determined that the values of the Company`s
mineral properties have not been impaired as of December 31, 2008, with the
exception of the Kennedy`s Vale Project, which was impaired by $313,603,000 as
determined under IFRS. This impairment has been recorded in the year ended
December 31, 2008. Should market conditions and commodity prices deteriorate
for a prolonged period of time, an impairment of the Company`s other mineral
properties may be required.
4.3 Share Capital
During the three months ended September 30, 2009, the Company did not grant any
stock options. Share- based payment expense for the quarter was $109,000, which
takes into account the vesting of options.
During Q3 2009, 472,500 options were forfeited at a weighted average exercise
price of Cdn$1.35.
During the nine months ended September 30, 2009, the Company granted 480,000
stock options with a weighted average exercise price of Cdn$0.49 and expiry
dates of February 11, 2014 and June 30, 2014, giving rise to share-based
payment expense of $101,000 for the period. The total share-based payment
expense for the period was $444,000, which takes into account the vesting of
options. During the nine months ended September 30, 2009, 5,154,167 options
were forfeited at a weighted average exercise price of Cdn$2.02.
On March 28, 2009, the Company`s warrants that traded on the Toronto Stock
Exchange under the symbol "ELR.WT.A" expired. A total of 58,485,996 warrants
expired unexercised.
As at November 12, 2009, the Company had:
* 680,570,958 common shares outstanding; and
* 60,157,500 stock options outstanding, which are exercisable at prices
ranging from Cdn$0.32 to Cdn$3.38 and expire between 2011 and 2018.
4.4 Contractual Obligations and Commitments
The Company`s major contractual obligations and commitments at September 30,
2009 were as follows:
Table 6
(in thousands of U.S. dollars)
Total Less than 1 1-5 years More than 5
year years
Provision for
environmental
rehabilitation $ 16,031 $ - $ - $ 16,031
Capital expenditure
contracted at
September 30, 2009
but
not recognized on
the condensed
consolidated interim
statement of
financial position 4,122 4,122 - -
Capital lease
obligations 4,817 1,202 3,614 -
$ 24,970 $ 5,324 $ 3,614 $ 16,031
5. Related Party Transactions
A number of the Company`s executive officers are engaged under contract with
those officers` personal services companies. During the three and nine months
ended September 30, 2009 the Company paid $280,000 and $829,000 respectively
for management and consulting fees compared to $322,000 and $1,033,000
respectively during the same periods in 2008. During the three and nine months
ended September 30, 2009, the Company paid $26,000 and $45,000 respectively for
reimbursements of expenses to private companies controlled by officers and
directors of the Company, compared to $73,000 and $228,000 respectively during
the same period in 2008. Management fees were lower during the three and nine
months ended September 30, 2009 compared to the same periods in 2008 due to
cost-cutting measures and a lower Canadian dollar. Reimbursements of expenses
were lower during the three and nine months ended September 30, 2009 compared
to the same periods in 2008 due to less travel to South Africa.
All related party transactions were recorded at the amounts agreed upon between
the parties. Any balances payable are payable on demand without interest.
6. Adoption of Accounting Standards and Pronouncements under IFRS
In 2008, the Company`s management assessed the impact of an early adoption to
IFRS and concluded that early adoption would be beneficial to shareholders. An
application for early adoption was submitted to the British Columbia and
Ontario Securities Commissions (the "Commissions") in November 2008.
In February 2009, the Commissions granted the Company exemptive relief to adopt
International Financial Reporting Standards ("IFRS") with an adoption date of
January 1, 2009 and a transition date of January 1, 2008. The Company`s second
financial statements prepared under IFRS are the interim financial statements
for the three and nine months ended September 30, 2009, which includes full
disclosure of its new IFRS policies in Note 3 to these financial statements.
These financial statements also include reconciliations of the previously
disclosed comparative periods financial statements prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") to IFRS as set out
in Note 15.
6.1 Significant differences between IFRS and Canadian GAAP in the Company`s
financial statements
During the year ended December 31, 2008, the Company recorded an impairment of
its Kennedy`s Vale ("KV") Project of $313,603,000 under IFRS, as the discounted
cash flows of the KV Project were below its carrying value. The amount of the
impairment was the difference between the discounted cash flows and the
carrying value. Deferred tax liabilities associated with the KV Project were
also written off as a result. The effect of the impairment was a decrease in
property, plant and equipment of $274,354,000, from $783,039,000 under Canadian
GAAP, to $508,685,000 under IFRS. An impairment was not required under Canadian
GAAP, as the undiscounted cash flows of the KV Project were higher than its
carrying value. Since the valuation of the KV Project was based on a production
start date of 2020, discounted and undiscounted cash flows varied
significantly, creating a difference in the impairment determination under IFRS
and under Canadian GAAP.
Tests for impairment are based on certain assumptions on metal prices,
production rates, project start-up dates, operating costs, capital costs, and
discount rates. Should any of these assumptions change and cause an adverse
effect on the valuation of a project, additional impairment charges may be
required.
At January 1, 2008, the Company elected to eliminate its currency translation
adjustment balance in the statement of financial position, as allowed for
first-time IFRS adopters. The effect of this elimination was a decrease in the
deficit of $21,747,000, from $68,132,000 under Canadian GAAP to $46,385,000
under IFRS.
6.2 Accounting standards issued but not yet effective
(i) Effective for annual periods beginning on or after July 1, 2009
* IFRS 2 Share Based Payments (revised) - revision of scope
* IFRS 3 Business Combinations (revised) - revision of scope and amendments
to accounting for business combinations
* IAS 27 Consolidated and Separate Financial Statements (revised) -
amendments due to IFRS 3 Business Combinations revisions
* IAS 38 Intangible Assets (revised) - amendments due to IFRS 3 Business
Combinations revisions and measuring the fair value of an intangible asset
acquired in a business combination
(ii) Effective for annual periods beginning on or after January 1, 2010
* IFRS 8 Operating Segments (revised) - disclosure of information about
segment assets
The Company has not early adopted these revised standards and is currently
assessing the impact that these standards will have on the consolidated
financial statements.
7. Internal Control over Financial Reporting
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
the Company, together with the Company`s management, are responsible for the
information disclosed in this MD&A and in the Company`s other external
disclosure documents. For the quarters ended September 30, 2009 and September
30, 2008, the CEO and the CFO have designed, or caused to be designed under
their supervision, the Company`s disclosure controls and procedures ("DCP") to
provide reasonable assurance that material information relating to the Company
and its consolidated subsidiaries has been disclosed in accordance with
regulatory requirements and good business practices and that the Company`s DCP
will enable the Company to meet its ongoing disclosure requirements.
The CEO and CFO have evaluated the effectiveness of the Company`s disclosure
controls and procedures and have concluded that the design and operation of the
Company`s DCP were effective as of September 30, 2009 and that the Company has
the appropriate DCP to ensure that information used internally by management
and disclosed externally is, in all material respects, complete and reliable.
The CEO and the CFO are also responsible for the design of the internal
controls over financial reporting ("ICFR") within the Company in order to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with International Financial Reporting Standards ("IFRS"). During 2008, the
Company engaged an international accounting firm to act as the Company`s
internal auditors for its South African operations.
Under the supervision, and with the participation, of the CEO and the CFO,
management conducted an evaluation of the effectiveness of the Company`s ICFR
based on the framework in the Internal Control - Integrated Framework developed
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, the CEO and the CFO concluded that the design and
operation of the Company`s ICFR were effective as at September 30, 2009.
The scope of the Company`s design of DCP and ICFR excluded Gubevu Consortium
Holdings (Pty) Ltd., a subsidiary which is accounted for as a special purpose
entity under IFRS (previously a variable interest entity under Canadian
generally accepted accounting principles).
During the design and evaluation of the Company`s ICFR, management identified
certain non-material deficiencies, a number of which have been addressed or are
in the process of being addressed in order to enhance the Company`s processes
and controls. The Company employs entity level and compensating controls to
mitigate any deficiencies that may exist in its process controls. Management
intends to continue to further enhance the Company`s ICFR.
The Company`s management, including its CEO and CFO, believe that any DCP and
ICFR, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
they cannot provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been prevented or detected. These
inherent limitations include the realities that judgments in decision making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by unauthorized override
to the future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Accordingly, because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and not be detected.
There have been no changes in the Company`s ICFR during the quarter ended
September 30, 2009 that have materially affected, or are reasonably likely to
materially affect, the Company`s ICFR.
8. Cautionary Statement on Forward-Looking Information
This MD&A, which contains certain forward-looking statements, are intended to
provide readers with a reasonable basis for assessing the financial performance
of the Company. All statements, other than statements of historical fact, are
forward-looking statements. The words "believe", "expect", "anticipate",
"contemplate", "target", "plan", "intends", "continue", "budget", "estimate",
"may", "will", "schedule" and similar expressions identify forward looking
statements. Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies. Known and unknown factors could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, fluctuations in the
currency markets such as Canadian dollar, South African Rand and U.S. dollar,
fluctuations in the prices of PGM and other commodities, changes in government
legislation, taxation, controls, regulations and political or economic
developments in Canada, the United States, South Africa, or Barbados or other
countries in which the Company carries or may carry on business in the future,
risks associated with mining or development activities, the speculative nature
of exploration and development, including the risk of obtaining necessary
licenses and permits, and quantities or grades of reserves. Many of these
uncertainties and contingencies can affect the Company`s actual results and
could cause actual results to differ materially from those expressed or implied
in any forward-looking statements made by, or on behalf of, the Company.
Readers are cautioned that forward-looking statements are not guarantees of
future performance. There can be no assurance that such statements will prove
to be accurate and actual results and future events could differ materially
from those acknowledged in such statements. Specific reference is made to the
Company`s most recent Annual Information Form on file with Canadian provincial
securities regulatory authorities for a discussion of some of the factors
underlying forward-looking statements.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future
events or otherwise, except to the extent required by applicable laws.
November 12, 2009
Ian Rozier
Date: 12/11/2009 17:27:01 Produced by the JSE SENS Department.
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