| Tue 17 Nov 2009, 17:10 | | BCD - BRC Diamondcore Ltd - Interim consolidated financial statements |
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BCD
BCD
BCD - BRC Diamondcore Ltd - Interim consolidated financial statements
As at and for the three and nine month periods ended September 30, 2009
BRC DIAMONDCORE LTD
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
(formerly BRC Diamond Corporation)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009
(expressed in Canadian dollars)
(unaudited)
NOTICE TO READER
These interim consolidated financial statements of BRC DiamondCore Ltd. as at
and for the three and nine month periods ended September 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
September December
30, 31,
2009 2008
$`000 $`000
ASSETS
CURRENT
Cash 32 198
Prepaid expenses and other assets 326 562
Inventory (Note 4) - 122
357 882
NON CURRENT
Restricted cash (Note 2) - 308
Mineral properties and deferred exploration 6,735 9,075
expenditures (Note 9)
Capital assets (Note 10) 190 8,847
6,925 18,230
7,282 19,112
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 4,881 7,542
(Notes 5 and 7)
Other liabilities - 201
Debt (Note 6) 6,338 6,172
11,219 13,915
NON-CURRENT
Asset retirement obligations (Note 8) -
2,132
Long term lease (Note 7) -
499
- 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)) 7,562 6,934
Black economic empowerment reserve - 1,076
Deficit (117,314) (108,891)
Accumulated other comprehensive loss (Note - (2,370)
11(f))
3,937 2,565
7,282 19,112
The accompanying notes are an integral part of these financial statements.
BRC DiamondCore Ltd.
(formerly BRC Diamond Corporation)
Consolidated Statements of Operations and Deficit (unaudited)
(expressed in Canadian dollars)
For the three month For the nine month
period ended period ended
September September September September
30, 30, 30, 30,
Continuing operations 2009 2008 2009 2008
$`000 $`000 $`000 $`000
Expenses
Consulting fees 27 153 103 316
Depreciation 42 41 42 130
Doubtful debts 903 - 903 -
Professional fees (69) 93 51 93
General and administrative 156 1,125 2 1,998
Stock-based compensation 177 1,237 388 1,593
(Note 11(b))
(Profit)/Loss on sale of (9) - (9) _
assets
Regulatory expenses - 30 - 280
Foreign exchange 683 (369) 46 2,499
(gain)/loss unrealised
(1,909) (2,310) (1,526) (6,909)
Other income 278 176 238 261
Loss before the under (1,631) (2,134) (1,288) (6,648)
noted items
Impairment of mineral - (5,312) - (5,312)
properties
Interest income - 28 - 60
Interest expense (105) (80) (40) (229)
Loss before discontinued (1,736) (7,498) (1,337) (12,130)
operations
Loss from discontinued (3,143) - (7,086) -
operations (Note 3)
Net loss for the period (4,879) (7,498) (8,423) (12,130)
Deficit - beginning of the (112,435) (10,520) (108,891) (5,889)
period
Deficit - end of the (117,314) (18,018) (117,314) (18,018)
period
Basic and diluted loss
expressed in dollars per 0.19 0.3 0.32 0.50
share (Note 11 (d))
Weighted average number of
common shares outstanding 26,091,310 24,042,000 26,091,310 24,042,000
GOING CONCERN (Note 1)
The accompanying notes are an integral part of these financial statements.
BRC DiamondCore Ltd.
(formerly BRC Diamond Corporation)
Consolidated Statements of Comprehensive Loss (Income) (unaudited)
(expressed in Canadian dollars)
Expenses
For the three month For the nine month
period ended period ended
September September September September
30, 30, 30, 30,
2009 2008 2009 2008
$`000 $`000 $`000 $`000
Net loss 4,879 7,498 8,423 12,130
Unrealized foreign - - - -
currency (gain)/loss on
self sustaining
operation
Comprehensive loss/ 4,879 7,498 8,423 12,130
(income)
For the 9 For the 9 For the 3 For the 3
month month month month
period period period period
ended ended ended ended
September September September September
30, 30, 30, 30,
2009 2008 2009 2008
$`000 $`000 $`000 $`000
Headline earnings per
share calculation
Basic loss -8 423 -7 498 -4 879 -12 129
Loss from discontinued 3 944 - - -
operations
Loss from sale of 3 143 - 3 143 -
subsidiary
Headline loss -1 337 -7 498 -1 736 -12 129
Weighted average number
of common shares
outstanding 26 091 310 24 042 000 26 091 24 042
310 000
Headline loss per share -0.05 -0.31 -0.07 -0.50
GOING CONCERN (Note 1)
The accompanying notes are an integral part of these financial statements.
BRC DiamondCore Ltd.
(formerly BRC Diamond Corporation)
Consolidated Statements of Cash Flow (unaudited)
(expressed in Canadian dollars)
Net (outflow) inflow of cash For the three For the nine month
related to the following month period ended period ended
activities
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2009 2008 2009 2008
$`000 $`000 $`000 $`000
Operating
Net loss for the period (4,879) (7,498) (8,423) (12,130)
Items not effecting cash
Depreciation 42 41 42 130
Asset retirement obligation - 513 - 1,048
Other provisions - 21 - 120
Stock based compensation and 177 1,237 388 1,593
stock based consulting fees
Unrealized foreign exchange 683 (369) 46 2,499
loss (gain)
BEE Reserve (1,076) - (1,076) -
Loss on disinvestment of 3,143 - 3,143 -
subsidiary
(Profit)/Loss on sale of fixed (9) - (9) -
assets
Write-off mineral properties - 5,312 - 5,312
Non Cash items from - - 1,901 -
discontinued operations
(2,603) (742) (4,035) (1,427)
Net change in non-cash working
capital items
Unrealised foreign currency 2,202 - 2,370 -
gain relating to balance sheet
Tax paid - (6) - (126)
Prepaid expenses and other 164 105 165 567
assets
Accounts payable and accrued (374) 380 1,939 51
liabilities
Inventory - 61 - 751
(611) (202) 439 (184)
Investing
Cash balances (57) - (57) 2,308
acquired/disinvested from
Diamond Core
Mineral properties and deferred 434 (1,412) (1,088) (5,960)
exploration expenditures
Capital assets 31 609 369 528
408 (803) (776) (3,124)
BRC DiamondCore Ltd.
(formerly BRC Diamond Corporation)
Consolidated Statements of Cash Flow (unaudited) (continued)
(expressed in Canadian dollars)
Net (outflow) inflow of
cash related to the For the three month For the nine month
following activities period ended period
ended
September September September September
30, 30, 30, 30,
2009 2008 2009 2008
$`000 $`000 $`000 $`000
Financing
Issue of common shares
and warrants, net of - 525 -
expenses 525
Due to related parties - 1 - (1)
(Decrease)/Increase in (64) 79 172 3,070
short term debt
Increase/(decrease) in
cash and cash (139) (400) (166) 286
equivalents during the
period
Cash and cash
equivalents - beginning 171 1,618 198 932
of the period
Cash and cash
equivalents - end of the 32 1,218 32 1.218
period
GOING CONCERN (Note 1)
The accompanying notes are an integral part of these financial statements.
BRC DiamondCore Ltd.
(formerly BRC Diamond Corporation)
Notes to the Consolidated Financial Statements (unaudited)
September 30, 2009 (expressed in Canadian dollars)
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 $4,879,249 and $8,423,420 during
the three and nine month periods ended September 30, 2009 (losses of $7,498,000
and $12,129,000 during the same respective periods in 2008) and also in recent
past periods. The Company`s accumulated deficit as at September 30, 2009 was
$117,313,987 (December 31, 2008: $108,890,567). The Company had a working
capital deficit of $10,861,224 as at September 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 low diamond carat prices have cast significant doubt upon
the validity of this assumption.
The Company`s ability to continue operations in the normal course of business is
dependent on several factors, including its ability to secure additional funding
and achieve or sustain profitable operations. Management is exploring all
available options to secure additional funding including equity and debt
financing, sale of 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.
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, prior to
the third quarter, the Company`s financial statements also included 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
all of which were 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, 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.
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.
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.
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.
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.
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).
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 or to related Loans and receivables Amortized
parties cost
Accounts payable and accrued Other liabilities Amortized
liabilities, other cost
liabilities and debt
Lease Other liabilities Amortized
cost
Mining assets
Exploration costs
Exploration costs are recorded in the statement of operations and deficit until
such time as the Company has legal title to the mineral rights. Thereafter all
exploration and evaluation expenditures are capitalized until such time as the
mining property is capable of commercial production. It will then be subject to
impairment tests when facts and circumstances suggest that the carrying amount
of the assets may exceed their recoverable amount. The value of diamonds
recovered from exploration activities is offset against exploration costs.
Mine development costs
Mine development costs are capitalized. Capitalized mine development costs
include expenditure incurred to develop new mineral resources, to define further
mineral resources and to expand the capacity of the mine. Amortization is first
charged on new mining ventures from the date on which commercial production
commences. Mine development costs will be amortized over the expected useful
life of the mine. Day to day mining costs are expensed as incurred.
Land and mineral rights
Undeveloped properties and mineral rights, upon which the Company has not
performed sufficient exploration work to determine whether sufficient
mineralization exists, are carried at original cost.
Land is not depreciated.
Mineral rights are amortized over the expected life of the mine from the date
on which commercial production commences. Where there is little likelihood of a
mineral right being exploited, or the value of an exploitable mineral right has
diminished below cost, a write down is affected.
Non- producing mineral properties
Costs relating to the acquisition, exploration and development of non-producing
resource properties are capitalized until such time as either economically
recoverable reserves are established, the properties are sold or abandoned, or
the value of the particular property is impaired. The excess of these costs
over estimated recoveries is charged to operations. The ultimate recovery of
these costs depends on the discovery and development of economic reserves or
the sale of the mineral rights. The amounts shown for non-producing resource
properties do not necessarily reflect present or future values.
In addition, the Company`s exploration opportunities in the Democratic Republic
of the Congo (the "DRC") may be subject to sovereign risks, including political
and economic instability, government regulations relating to mining, military
repression, civil disorder, currency fluctuations and inflation, all or any of
which may impede the Company`s activities in this country or may result in the
impairment or loss of part or all of the Company`s interest in the properties.
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 Resources (Pty)
Ltd 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.
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
No restricted cash is currently held. In the previous reporting period prior to
the disposition of Diamond Core Resources (Pty) Ltd, restricted cash was held
by various financial institutions as security for guarantees the Company had
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.
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)". Prior to the
disposition of Diamond Core Resources (Pty) Ltd (Note 3), the operations in
South Africa were considered self-sustaining and their functional currency was
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
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.
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.
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
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. Its former South African subsidiary, Diamond
Core Resources (Pty) Ltd, had successfully adopted IFRS prior to the
acquisition thereof by the Company (see Note 3) and previously reported its
statutory returns in South Africa in terms of IFRS. This has provided experience
in the use of IFRS
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.
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.
Financial Instruments - Disclosures
In June 2009, the CICA amended Section 3862, "Financial Instruments -
Disclosures", to include additional disclosure requirements about fair value
measurement for financial instruments and liquidity risk disclosures. These
amendments require a three level hierarchy that reflects the significance of
the inputs used in making the fair value measurements. Fair value of assets
and liabilities included in Level 1 are determined by reference to quoted
prices in active markets for identical assets and liabilities. Assets and
liabilities in Level 2 include valuations using inputs other than the quoted
prices for which all significant inputs are based on observable market data,
either directly or indirectly. Level 3 valuations are based on inputs that are
not based on observable market data. The amendments to Section 3862 apply to
annual financial statements for fiscal years ending after September 30, 2009.
Earlier adoption is permitted. The Company is currently evaluating the impact
of the adoption of these changes on its consolidated financial statements.
DISCONTINUED OPERATIONS -DIAMOND CORE RESOURCES
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 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.
On July 3, 2009 Diamond Core (which was the holding company for all of the
Company`s South African projects) was the subject of a final liquidation order
by the Northern Cape High Court in South Africa. The application for the
liquidation was initiated by River Corporate Finance (Pty) Ltd, which had been
the exclusive adviser to Diamond Core on the transaction with the Company. The
liquidation application was based on a claim in respect of the balance allegedly
owing on a success fee of US$1million. Diamond Core disputed the claim based
on performance and counter claimed to River Corporate Finance for the return
of the R2 million of this fee already paid.
An application for leave to appeal the liquidation order was 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. Final liquidators have been appointed
but while the appeal is being processed the liquidators may only secure the
assets and no disposal or sale of the assets is possible without the approval
of the shareholder of Diamond Core.
Effective September 30, 2009, the Company sold all of its shares in Diamond
Core for nominal consideration plus, if the offer of compromise referred to in
the next sentence is approved by the court, for value of US$500,000. The terms
of the sale contemplate that the purchaser enter into an offer of compromise
with the creditors of Diamond Core. The previously announced heads of agreement
with KIG Mining Plc has been cancelled.
Having regard to the sale by the Company of 100% of the shares in Diamond Core,
the financial accounts of Diamond Core including all its subsidiaries are no
longer consolidated with the Company.
The Company`s fixed assets located in South African now only consist of a
portable recovery plant, constructed in three containers that had been built
for one of the Company`s operations in the DRC (the Kwango River alluvial
project that the Company subsequently relinquished). The Company advanced funds
of $335,000 to Diamond Core Technical Services (Pty) Ltd to custom build this
processing plant for operations in the DRC. The liquidation order and subsequent
proceedings prevented the finalisation of shipping the processing plant to the
DRC. The advance is included under prepaid expenses and other assets on the
balance sheet with a provision for doubtful debts of the same amount against it.
The Company will continue to claim its ownership of the plant in forthcoming
liquidation proceedings.
Discontinued Operations For the three For the nine
month period month
ended Sept. 30, period ended
2009 Sept. 30,
2009
$`000 $`000
Revenue - -
Expenses - 3,943
Loss from discontinued operations - 3,943
Net asset value of subsidiary sold 3,143 3,143
Net loss from discontinued operations 3,143 7,086
Assets and liabilities part of disposal
group
Cash 306 306
Prepaid expenses and other assets 71 71
Inventory 139 139
Mineral properties and deferred 3,562 3,562
exploration costs
Capital assets 6,460 6,460
Asset retirement obligation (2,421) (2,421)
Accounts payable and accrued liabilities (4,974) (4,974)
3,143 3,143
The loss from discontinued operations is not final and dependent on the outcome
of the possible offer of compromise referred to above.
INVENTORY
September 30, December 31,
2009 2008
$`000 $`000
Consumables - 122
- 122
RELATED PARTY TRANSACTIONS
Balances Payable September 30, December 31,
2009 2008
$`000 $`000
Macleod Dixon LLP (a) 852 745
Banro Corporation (b) 6,344 -
SFW Village (c) 212 -
AT Kondrat (d) 75 -
DK Madilo (e) 36 -
Scallan Project Facilitation - 13
(Pty) Ltd (f)
Sterling Portfolio Securities 117 11
Inc. (g)
7,636 769
For the three month For the nine month
Transactions period ended period ended
September September September September
30, 30, 30, 2009 30,
2009 2008 $`000 2008
$`000 $,000 $`000
Macleod Dixon LLP 74 83 194 272
(a)
Banro Corporation 6,344 - 6,344 (11)
(b)
SFW Village (c) 67 25 163 75
AT Kondrat (d) 25 25 75 75
DK Madilo (e) 12 12 36 36
Scallan Project - 58 - 58
Facilitation (Pty)
Ltd (f)
Sterling Portfolio 16 - 16 -
Securities Inc.
(g)
6,538 203 6,828 505
During the three and nine month periods ended September 30, 2009, legal fees
and related costs of $74,346 and $194,990 (September 30, 2008: $83,000 and
$272,000 ) 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.
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
nine month periods ended September 30, 2009, Banro made an advance to the
Company of $6,349,991 and $6,349,991 of which $6,337,991 was utilised to settle
the loan facility with a Canadian financial institution (Note 6) (September 30,
2008: $11,000 and $11,000 ).
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.
Consulting fees are paid to Mr. Kondrat who is a non-executive director of the
Company.
Consulting fees are paid to Mr. Madilo, who is an officer of the Company.
Consulting fees in respect of services to the Company prior to Mr. Scallan
entering into an employment contract. Mr Scallan is now an officer and a
director of the Company and was the sole shareholder of Scallan Project
Facilitation (Pty) Ltd.
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 or debt. Other than the loan from Banro, which
is secured by a general security agreement and which bears interest at a rate
of prime plus 1%, 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.
DEBT
The Company had a loan facility established with a Canadian financial
institution which bore interest at prime rate plus 1% per annum. The effective
interest rate for the nine month period ended September 30, 2009 was 2.68%
(December 31, 2008: 5.75%). At September 30, 2009, the balance of this short
term debt was $nil (December 31, 2008: $6,172,317. This loan facility had been
utilized to fund exploration activities in the DRC and all interest of $420,727
was capitalized to exploration cost. This loan facility to the financial
institution was paid in full by a matching loan from Banro Corporation
("Banro"), a significant shareholder of the Company. The loan from Banro is
being settled as part of a debt for equity swap (see Note 15).
LEASE LIABILITIES
As at As at
September 30, December 31,
2009 2008
$`000 $`000
Total lease liability - 649
Less: Current portion included - (150)
in accounts payable and accrued
liabilities
- 499
ASSET RETIREMENT OBLIGATIONS
The provision for the site closure and reclamation costs as at December 31,
2008 related to the Silverstreams, Paardeberg East and De Kalk projects in
South Africa which are no longer owned by the Company (see Note 3).
As at As at
September 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 - -
Loss of investment (2,132) -
Balance at end of period - 2,132
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 nine 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 and third quarters of 2009.
Effective September 30, 2009, the Company sold its entire shareholding in
Diamond Core Resources (Pty) Ltd which held the Company`s South African diamond
projects (see Note 3).
The Company has incurred deferred exploration expenditures and mineral property
costs, in the DRC and in South Africa as at September 30, 2009 as follows:
Group
Cumulative Year ended Nine month
from inception December 31, period ended
in 1990 to 2008 September 30,
September 30, 2009
2009 $`000 $`000
$`000
Mineral property costs
Canada - - -
DRC 2 - (1)
South Africa - 3,512 (3,563)
2 3,512 (3,564)
Deferred exploration
expenditures
DRC 6,733 (8,625) 1,172
South Africa - - -
6,733 (8,625) 1,172
Total mineral properties
and deferred exploration 6,735 ( 5,113) (2,392)
expenditures
DRC
Nine month
Cumulative Year ended period ended
from December 31, September
inception in 2008 30, 2009
1990 to
September $`000 $`000
30, 2009
$`000
Mineral property costs
Claims and staking 2 - (1)
Total mineral property costs 2 - (1)
Deferred exploration
expenditures
Administrative and office 4,984 1,719 438
support
Depreciation 645 259 103
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 taxes 1,870 523 21
Professional fees 667 462 53
Profit on sale of assets (50) - (50)
Remote sensing and 47 - -
surveying
Stock-based compensation 2,123 945 134
Transport cost and 3,261 877 37
helicopter
Unrealised foreign 1,837 1,623 215
exchange difference
Write off (16,788) (16,788) -
Total deferred exploration 6,733 (8,625) 1,172
expenditures
Total mineral properties and
deferred exploration 6,735 (8,625) 1,171
expenditures
South Africa
Cumulative Year ended Nine month
from inception December 31, period ended
in 1990 to 2008 September
September 30, 30, 2009
2009 $`000 $`000
$`000
Mineral property costs
Acquisition of Diamond 14,188 13,152 -
Core
Unrealised foreign (985) - -
exchange difference
Disinvestment (3,563) - (3,563)
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 2,002 2,002 -
office support
Depreciation 2,345 2,345 -
Field camp expenses 6,538 6,538 -
Geology - contract 100 100 -
geologists
Geophysics 26 26 -
Insurance 112 112 -
Inventory losses (21) (21) -
Permits and surface 5 5 -
taxes
Professional fees 51 51 -
Rehabilitation 1,670 1,670 -
Security 1,771 1,771 -
Surveying 66 66 -
Transport cost 149 149 -
Unrealised foreign (2,666) (2,666) -
exchange difference
18,654 18,654 -
Net proceeds on diamond (8,475) (8,475) -
sales
Write off (10,179) (10,179) -
Total mineral properties
and deferred exploration - 512 -
expenditures
CAPITAL ASSETS
As at September 30, 2009
Accumulated Accumulated Net book
Cost Depreciation Impairment Value
$`000 $`000 $`000 $`000
Computer equipment 30 18 - 12
Exploration and mining 359 188 - 171
assets
Furniture and Office 21 14 - 7
equipment
Leasehold improvements 225 225 - -
Vehicles 239 239 - -
874 684 - 190
As at December 31, 2009
Accumulated Accumulated Net book
Cost Depreciation Impairment Value
$`000 $`000 $`000 $`000
Computer equipment 294 103 - 191
Earthmoving equipment 5,753 1,398 645 3,711
Exploration and mining 458 196 35 227
assets
Furniture and Office 100 17 10 73
equipment
Land and buildings 539 43 - 496
Leasehold improvements 227 226 - 1
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 nine month periods ended September 30, 2009, $nil and
$103,000, respectively, of depreciation was included in mineral properties
and deferred exploration expenditures (see Note 9) (September 30, 2008:
$32,000 and $1,775,000).
CAPITAL STOCK
Share capital
Number of Amounts
shares $`000
`000
Balance, December 31, 2007 13,652 15,827
Shares issued for cash 350 525
Shares issued for the 12,089 89,464
acquisition of Diamond
Core
Balance, December 31, 2008 26,091 105,815
Balance, September 30, 2009 26,091 105,815
On September 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.
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 September 30, 2009, the Company had outstanding under the stock option
plan stock options to acquire 2,991,400 (December 31, 2008: 3,846,400) common
shares of the Company at a weighted-average price of $ 2.13 (December 31, 2008:
$2.16) per share.
The following table summarizes information about stock options outstanding and
exercisable at September 30, 2009:
Date Number Option Option Number Option Exer Fair Expir
of outsta s s outsta s cise valu y
Grant nding grante Exerci nding Exerci pric e Date
at d sed, at sable e date
12/31/ during Expire 09/30/ at of
2008 the d or 09 09/30/ gran
period Forfei 09 t
ted
04/14/ 210,00 - 210,00 - - $ $ 04/14
04 0 0 1.50 1.24 /09
10/06/ 50,000 - - 50,000 50,000 $ $ 10/06
04 2.00 1.73 /09
03/04/ 16,400 - - 16,400 16,400 $ $ 03/04
05 2.10 1.78 /10
03/18/ 225,00 - - 225,00 225,00 $ $ 03/18
05 0 0 0 2.50 1.76 /10
04/29/ 225,00 - - 225,00 225,00 $ $ 04/29
05 0 0 0 2.50 2.14 /10
06/29/ 200,00 - - 200,00 200,00 $ $ 06/29
06 0 0 0 3.75 2.16 /11
04/09/ 300,00 - - 300,00 300,00 $ $ 04/09
07 0 0 0 5.50 3.25 /12
08/03/ 230,00 - 50,000 180,00 180,00 $ $ 08/03
07 0 0 0 8.00 2.85 /12
08/28/ 2,365, - 570,00 1,795, 1,346, $ 08/28
08 000 0 000 250 $ 0.77 /13
1.05
- 830,00 2,991, 2,542,
3,821, 0 400 650
400
During the three and nine month periods ended September 30, 2009, the Company
recognized in the statement of operations as stock-based compensation expense
$177,120 and $388,320 for continued operations ($105,293 included in
discontinued operations), respectively, (September 30,2008: $1,237,000 and
$1,593,000) representing the fair value of stock options previously granted to
employees, directors and officers under the Company`s stock option plan. During
the three and nine month periods ended September 30, 2009, the Company
capitalized an amount of $nil and $134,012 as stock option expenses to deferred
exploration costs (Note 9). These amounts were credited accordingly to the
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
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 September
30, 2009, 460,968 of these options had been cancelled.
Loss per share
The loss per share figures for the three and nine month periods ended September
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, (September 30, 2008: 24,042,000 and 24,042,000
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.
Contributed Surplus
September 30, December 31,
2009 2008
$`000 $`000
Balance, beginning of the 6,934 2,757
period
Options granted 628 1,700
Balance, end of the 7,562 6,934
period
Accumulated other comprehensive income
September 30,
2009
December 31,
2008
Balance, beginning of the (2,370) -
period
Disinvestment 2,370
Unrealized foreign currency
profit/(loss) on self - (2,370)
sustaining foreign operation in
South Africa
Balance, end of the period - (2,370)
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 September 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 although the counter party
has stated it wishes to modify the option agreement. The Company is hopeful of
reaching an acceptable settlement.
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.
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 nine month period ended September 30, 2009.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair value of financial instruments
The Company has classified financial instruments as follows:
September 30, December 31,
2009 2008
$`000 $`000
Financial assets
Held-for-trading, measured at
fair value
Cash 32 198
Restricted Cash - 308
Loans and receivables, measured
at amortised cost
Other assets 326 562
Financial liabilities
Other liabilities, measured at
amortised cost
Accounts payable and accrued 4,881 7,542
liabilities
Debt 6,338 6,172
Lease - 499
Allowance account for credit losses
September December 31,
30,2009 2008
Accounts receivable 903 -
Allowance for doubtful accounts (903) -
Other 326 -
326 -
The allowance for doubtful accounts resulted from the previously accounted for
intercompany receivables from the Diamond Core group, which group has been
disposed of by the Company (Note 3).
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.
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, 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 led to a significant weakness in exchange
traded commodity prices, 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
Management currently believes that based on its financial position and
liquidity profile at September 30, 2009, the Company will be able to satisfy
its current and long-term obligations. As at September 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 nine month periods ended September 30, 2009, everything else
being equal, a 5% increase or decrease in the exchange rate between the
Canadian dollar and the US dollar would have resulted in a respective $6,245
and $151,563 decrease and increase in the Company`s net loss. The currency
risk of the Company has declined with the disposition of the South African
operations (Note 3).
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 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 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.
SUBSEQUENT EVENTS
In November 2009 the Company announced that it has entered into agreements
with certain of its creditors pursuant to which such creditors have agreed to
accept common shares of the Company, to be issued from treasury by the Company
at a price of $0.20 per share, in satisfaction of indebtedness owed to them by
the Company (the "Debt Settlements"). The total number of common shares to be
issued by the Company to the creditors under the Debt Settlements is 43,317,330
shares (the "Debt Shares"), and the total amount of Company debt to be settled
by such share issuances is $8,663,466.
The Company also announced in November 2009 that it proposes to carry out a
non-brokered private placement of up to 20,000,000 units of the Company (the
"Units") at a price of $0.05 per Unit for proceeds to the Company of up to
$1,000,000. Each Unit is to be comprised of one common share of the Company
and one warrant of the Company, with each such warrant entitling the holder to
purchase one common share of the Company at a price of $0.066 for a period of
four years. The Company intends to use the proceeds from this financing (the
"Financing") for working capital and general corporate purposes. The financing
may be entirely subscribed for by directors.
Closing of the Debt Settlements and the Financing is expected to occur shortly.
One of the creditors involved in the Debt Settlements is Banro Corporation
("Banro"), which currently holds 3,744,032 (or 14.35%) of the outstanding
common shares of the Company. 31,689,955 of the Debt Shares are to be issued
to Banro pursuant to its debt settlement agreement, such that upon closing
Banro will own 35,433,987 common shares of the Company.
In November 2009 the Company announced that it has signed a Letter of Intent
with Rio Tinto Mining and Exploration Limited ("Rio Tinto"), whereby Rio Tinto
will fund the exploration of certain parts (the "JV Property") of the Company`s
Tshikapa kimberlite project in the DRC. The JV Property does not include the
ground covered by the ACACIA sprl exploration permits. The Letter of Intent
proposes that Rio Tinto will have the right, under a staged earn-in arrangement,
to earn a 75% interest in a joint venture company (the "JVCo") which would hold
the ownership interests in the JV Property, with the Company retaining a 25%
interest in the JVCo. The above proposed earn-in arrangement is subject to
various conditions, including completion of due diligence and negotiation and
execution of a definitive agreement between the parties. A drilling program on
the JV Property is expected to commence in November 2009.
Johannesburg
17 November 2009
Sponsor
Arcay Moela Sponsors (Proprietary) Limited
Date: 17/11/2009 17:10:01 Produced by the JSE SENS Department.
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