| Tue 17 Nov 2009, 17:11 | | BCD - BRC Diamondcore Ltd - Management`s Discussion And Analysis Of Financial |
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BCD
BCD
BCD - BRC Diamondcore Ltd - Management`s Discussion And Analysis Of Financial
Condition And Results Of Operations 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")
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009
The following Management`s Discussion and Analysis of Financial Condition and
Results of Operations (the "MD&A") has been prepared by management and
provides a review of the activities, results of operations and financial
condition of BRC DiamondCore Ltd. (formerly BRC Diamond Corporation) (the
"Company" or "BRC") based upon Canadian generally accepted accounting
principles. This MD&A should be read in conjunction with the unaudited interim
consolidated financial statements as at and for the three and nine month
periods ended September 30, 2009, as well as the notes thereto, the audited
consolidated annual financial statements as at and for the financial year of
the Company ended December 31, 2008 ("fiscal 2008") and the notes thereto, and
the annual MD&A for fiscal 2008. All amounts are expressed in Canadian dollars
unless otherwise stated. This MD&A is dated as of November 16, 2009.
Additional information relating to the Company, including the Company`s annual
information form, is available on SEDAR at www.sedar.com
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements, other
than statements of historical fact, that address activities, events or
developments that the Company believes, expects or anticipates will or may
occur in the future (including, without limitation, statements relating to the
Letter of Intent with Rio Tinto Mining and Exploration Limited, exploration
results, potential mineralization and future plans and objectives of the
Company) are forward-looking statements. These forward-looking statements
reflect the current expectations or beliefs of the Company based on
information currently available to the Company. Forward-looking statements are
subject to a number of risks and uncertainties that may cause the actual
results of the Company to differ materially from those discussed in the
forward-looking statements, and even if such actual results are realized or
substantially realized, there can be no assurance that they will have the
expected consequences to, or effects on the Company. Factors that could cause
actual results or events to differ materially from current expectations
include, among other things, the possibility that future exploration results
will not be consistent with the Company`s expectations, changes in equity
markets, changes in diamond markets, foreign currency fluctuations, political
developments in the Democratic Republic of the Congo (the "DRC"), changes to
regulations affecting the Company`s activities, uncertainties relating to the
availability and costs of financing needed in the future, delays in obtaining
or failure to obtain required project approvals, the uncertainties involved in
interpreting geological data and the other risks involved in the diamond
exploration business. Any forward-looking statement speaks only as of the date
on which it is made and, except as may be required by applicable securities
laws, the Company disclaims any intent or obligation to update any forward-
looking statement, whether as a result of new information, future events or
results or otherwise. Although the Company believes that the assumptions
inherent in the forward-looking statements are reasonable, forward-looking
statements are not guarantees of future performance and accordingly undue
reliance should not be put on such statements due to the inherent uncertainty
therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition and exploration of diamond
properties in the DRC.
For the three and nine month periods ended September 30, 2009, the Company
reported a net loss of $4,879,249 ($0.19 per share) and $8,423,420 ($0.32 per
share) respectively (compared to a net loss of $7,497,811 (or $0.31 per share)
and $12,130,444 (or $0.50 per share), for the three and nine month periods
ended September 30, 2008 respectively).
The Company`s accumulated deficit as at September 30, 2009 was $117,313,987
(compared to $108,890,567 as at December 31, 2008). The Company has a working
capital deficit of $10,861,224 as at September 30, 2009 and had a net decrease
in cash of $139,948 during the three month period ended September 30, 2009.
While the Company`s financial statements have been prepared on the basis of
accounting principles applicable to a going concern, adverse conditions may
cast substantial doubt upon the validity of this assumption. In the event the
Company is unable to identify recoverable resources, receive the necessary
permitting, or arrange appropriate financing, the carrying value of the
Company`s assets could be subject to further material adjustment. Furthermore,
certain current market conditions including continuing low diamond carat
prices have cast significant doubt upon the validity of this assumption.
The Company`s ability to continue operations in the normal course of business
is dependent on several factors, including its ability to secure additional
funding, and achieve or sustain profitable operations. Management is exploring
all available options to secure additional funding including equity and debt
financing, debt for equity swaps, sale of non-core assets and entering
strategic partnerships. In addition, the recoverability of amounts shown for
mineral properties and long-lived assets is dependent upon the existence of
economically recoverable reserves, the ability of the Company to obtain
sufficient financing to complete the development of the properties where
necessary and upon future profitable production, or, alternatively, upon the
Company`s ability to recover its spent costs through a disposition of its
interests, all of which are uncertain in the current climate. It is not
possible to determine with any certainty the success and adequacy of these
initiatives. It is also not possible to determine the timing of completion of
these initiatives required to enable the Company to continue until such time
as when diamond prices recover and the Company is able to earn positive
operating cash flows.
General
South Africa
On July 3, 2009 Diamond Core Resources (Pty) Ltd ("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 enters 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 alluvial project
which the Company subsequently relinquished).
See Note 3 to the Company`s September 30, 2009 financial statements for
additional information regarding the assets and liabilities disposed of
pursuant to the disposal of Diamond Core.
Democratic Republic of the Congo ("DRC")
The Company has 12 exploration permits remaining in the Tshikapa kimberlite
project. Detailed geophysical surveys and stream sediment sampling have
provided promising drill targets within these remaining permits which are
covered by option agreements with Acacia sprl (6x), Caspian Oil & Gas (2x),
Kings Mine, Investors Equity (2x) and Group Abba. Acacia has indicated that
it wants to modify the option agreement with the Company (see the Company`s
October 15, 2009 press release).
Detailed sampling and 200m line spacing geophysical surveys have generated 24
targets, interpreted as kimberlite intrusions, and these have been earmarked
for the next drilling phase. BRC had retained its drilling capabilities in
Tshikapa where the drill and its support equipment have been mothballed.
Preparations to prepare the drill for the proposed drilling program over some
of these targets are underway and it is hoped to commence drilling in
November. Surface texture analyses of the grains of certain of the targets
suggest that a significant number of these of these are moderately abraded
with many of the garnets displaying sub-kelyphitic surfaces. Several of the
garnets show diagenetic alteration (DAF) features. Since the garnets are
highly susceptible to diagenesis in this tropical environment it is not
surprising that DAF features are seen. The presence of sub-kelyphitic surfaces
on moderately abraded grains therefore suggest that these have been derived
from a proximal source. These grains have now been submitted for microprobe
analysis to assess the diamond potential of the area.
The grains obtained from the sediment stream sampling program from the King`s
Mine permit have now been submitted for surface texture work after which these
will also be submitted for major element analyses.
The remaining exploration equipment which had been used in the Company`s
Kwango project arrived from Tembo in Kinshasa during the quarter and has been
stored in the Kinshasa Depot.
The Company`s Tshikapa project is situated in the highly prospective
"Kimberlite Emplacement Corridor" extending northeastward from the Kimberlite
fields of the Lunda Norte Province in Angola. The area has produced well over
100 million carats of diamonds; the results from stream samples taken in the
area indicate the presence of promising kimberlitic indicators. Additional
information with respect to the Tshikapa project is contained in a technical
report dated March 31, 2009 and entitled "National Instrument 43-101 Technical
Report on the Tshikapa Project of BRC DiamondCore Ltd. in the Democratic
Republic of Congo". A copy of this report can be obtained from SEDAR at
www.sedar.com.
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 project. 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.
Northern DRC Projects
The Company`s projects in the northern DRC, consisting of 18 exploration
permits, are part of the Rio Tinto Northern DRC joint venture, in which Rio
Tinto has the right to earn in equity over the various stages of the
exploration programme.
Samples and concentrates from these projects have been submitted to the
laboratories of Rio Tinto for analysis. Work on these projects has been
temporality suspended as a cost saving measure pending the further analysis
and interpretation of the samples and the laboratory results.
The Company has maintained its excellent relationship with Rio Tinto whereby
Rio Tinto assists in the financing and exploration of properties to which the
Company holds or controls the exploration permits. The Company has earned
other income through receiving monetary consideration from Rio Tinto in
exchange for granting Rio Tinto exclusivity in the right to pursue joint
venture agreements. The Company hopes to further this relationship in the near
future.
Kwango Project
Having identified that the project was not economically viable it was decided
to withdraw from the Kwango project and all remaining licences were
relinquished during the first quarter of 2009.
Permit Holding
During the first quarter of 2009 the following exploration permits in the DRC
were relinquished: Acacia (5), BRC (4), Candore (5), BCM (1), Caspian Oil and
Gas (9), Kwango Mines (3), Coexco (44). The Company will keep its focus on
the following exploration permits which are held by the Company directly or by
partners through various option agreements: Acacia (6), BCE (16), BRC (2),
Caspian Oil & Gas (2), Groupe Abba (1), King`s Mine (1) and IEL (2). No DRC
exploration permits were relinquished in the second and third quarters of
2009.
QUALIFIED PERSON
Dr Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National Instrument 43-101, has reviewed and approved
the technical information in this MD&A.
RESULTS OF OPERATIONS
For the nine month period ended September 30, 2009, the Company reported a net
loss of $8,423,000 or $0.32 per share, compared to a net loss of $12,130,444
(or $0.50 per share), per share, reported for the nine month period ended
September 30, 2008.
For the three month period ended September 30, 2009, the Company reported a
net loss of $4,879,249 (or $0.19 per share), compared to a net loss of
$7,497,811 (or $0.31 per share) incurred during the three month period ended
September 30, 2008.
The items which impacted on the changes in the Company`s financial results in
2009 as compared to 2008, include the following:
- the Company`s operations in both South Africa and the DRC were on a care
and maintenance basis for most of 2009 resulting in lower activity levels
for the Company in 2009;
- the disposition of the Company`s South African operations in the third
quarter of 2009 resulted in such operations no longer being consolidated
in the Company`s financial statements (but also resulted in a significant
loss from discontinued operations);
- the Company had a significant impairment of mineral properties in the
third quarter of 2008;
- stock-based compensation decreased significantly in 2009 as compared to
2008; and
- foreign exchange gains/losses were significantly different in 2009 as
compared to 2008.
See also "Summary of Quarterly Results" below for additional discussion
regarding the changes in financial results.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the third quarter of 2009. This financial information has been prepared in
accordance with Canadian generally accepted accounting principles. The
Company`s reporting and measurement currency is the Canadian dollar:
2009 2009 2009 2008
3rd quarter 2nd quarter 1st quarter 4th quarter
Net loss in $`000 $4,879 $2,062 $1,483 $ 90,873
Net loss per share $0.19 $0.08 $0.06 $ 3.70
(basic and diluted)
2008 2008 2008 2007
3rd quarter 2nd quarter 1st quarter 4th quarter
Net loss in $`000 $ 7,498 $ 1,193 $ 3,438 $ 16
Net loss per share
(basic and diluted) $ 0.31 $ 0.05 $ 0.17 $ 0.01
In the third quarter of 2009 the loss of $4,879,248 can be analysed into a
loss of $3,143,096 attributable to discontinued operations and $1,736,152
attributable to continued operations. The loss per share is $0.12 for
discontinued operations and $0.07 for continued operations.
During the third quarter of 2009, the Company`s net loss was $4,879,249
compared to a net loss of $2,062,000 reported during the second quarter of
2009. The main components of the loss in the third quarter are the loss on the
sale of Diamond Core of $3,143,000 and the provision for doubtful debts of
$903,000 relating to the Company`s former South African operations. Previously
these debts were offset in the consolidation. During the second quarter of
2009, the Company`s net loss was $2,062,000 compared to a net loss of
$1,483,000 reported during the first quarter of 2009. The increased loss,
reported in Canadian dollars, is partially as a result of the 17% appreciation
in the South African rand over the second quarter. There were additional costs
associated with retrenchment of employees. During the second quarter, the
Company maintained its decision to place its South African bulk sampling
operations on a care and maintenance basis as a result of market conditions.
Similarly the DRC exploration activities remained on a care and maintenance
basis as a result of decreased funding for operations in the DRC.
During the first quarter of 2009, the Company`s net loss reduced to $1,483,000
compared to a net loss of $90,837,000 reported during the fourth quarter of
2008. This change was mainly as a result of the Company`s decision to place
its operations on a care and maintenance basis as a result of decreased
funding for operations in the DRC and the low diamond prices adversely
affecting the bulk sampling operations in South Africa, which was in effect
throughout the first quarter of 2009 but for only part of the fourth quarter
of 2008.
During the fourth quarter of 2008, the Company`s net loss increased to
$90,873,000 compared to a net loss of $7,498,000 reported during the third
quarter of 2008. This increase was due mainly to the impairment of goodwill,
mineral properties and capital assets.
During the third quarter of 2008, the Company`s net loss increased to
$7,498,000 compared to a net loss of $1,193,000 reported during the second
quarter of 2008. This increase was due mainly to the impairment of $5,312,000
on certain properties in the DRC that had been relinquished, the accounting
for stock based compensation and a reversal from unrealised foreign exchange
profits to losses on the conversion of the South African balance sheet from a
relatively weaker rand to the Canadian dollar.
During the second quarter of 2008, the Company`s net loss decreased to
$1,193,000 compared to a net loss of $3,438,000 reported for the first quarter
of 2008, due mainly to a decrease in unrealised foreign exchange losses
created on the revaluation of the South African balance sheet to Canadian
dollars (June 30, 2008 - $79,000; March 30, 2008 - $2,794,000).
During the first quarter of 2008, the Company`s net loss increased to
$3,438,000 compared to a net loss of $15,533 in the last quarter of 2007, due
mainly to the inclusion of the Diamond Core operating results and the
unrealized foreign exchange loss recorded.
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2009, the Company had cash of $32,000 and a working
capital deficit of $10,861,224 compared to cash of $198,000 and a working
capital deficit of $13,033,742 as at December 31, 2008.
As a result of the disposal of its bulk sampling activities in South Africa,
the Company does not currently generate operating revenues. The Company`s
source of revenue has been the sale of exclusivity rights to future potential
joint venture agreements with Rio Tinto.
Historically, the Company has relied primarily on equity financings to fund
its activities through private placement financings and the exercise of
warrants and options. Although the Company has been successful in completing
equity financings in the past, there is no assurance that the Company will
secure the necessary financings in the future.
The Company`s liquidity requirements have and are being met through a variety
of sources, including: cash on hand, cash generated from the sale or renting
of non-core assets, existing credit facilities, trade credit, leases, and the
sale of exclusivity rights to joint venture agreements.
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.
The Company`s consolidated financial statements have been prepared in
accordance with Canadian GAAP applicable to a going concern. In the first,
second and third quarters of 2009, the Company has been able to contain costs
and if the measures detailed above are successfully implemented, although this
is subject to factors outside of the control of management, then management
currently believes that the Company will be able to satisfy its current and
long-term obligations.
During the third quarter of 2008 the Company completed a private placement
involving the issue and sale of 350,000 common shares of the Company at a
price of $1.50 per share for total proceeds of $525,000. The proceeds were
used for the exploration of the Company`s diamond properties and for general
corporate purposes.
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 interest of
$420,727 was capitalized to exploration cost. This loan facility to the
financial institution, which had been guaranteed by Banro Corporation
("Banro"), a significant shareholder of the Company, was paid in full by a
matching loan from Banro. This loan from Banro is being settled as part of the
Debt Settlements (see the discussion above).
DEFERRED EXPLORATION EXPENDITURES
The following table provides a breakdown of the Company`s deferred exploration
expenditures for the three and nine month periods ended September 30, 2009.
DRC
Three month Kwango Lubao Tshikapa Other
period Project Project Tshikapa (Candore) Projects Total
(Acacia) Project
Project
Ended $`000 $`000 $`000 $`000 $`000 $`000
September
30, 2009
Balance 43 365 3,788 467 2,503 7,166
6/30/2009
Admini- - - - - - -
strative
and office
support
Depreciatio - - - - - -
n
Drilling - - - - - -
Field camp - - - - - -
expenses
Permits & - - - - - -
Surface
taxes
Professiona - - - - - -
l fees
Profit on - - - - - -
sale of
assets
Remote - - - - - -
sensing
Share based - - - - - -
payments
Transport - - - - - -
Unrealised (3) (22) (229) (28) (151) (433)
foreign
exchange
difference
Subtotal - (3) (22) (229) (28) (151) (433)
third
quarter of
2009
Balance 40 343 3,559 439 2,352 6,733
9/30/2009
Nine month Kwango Lubao Tshikapa Other
period Project Project Tshikapa (Candore) Projects Total
(Acacia) Project
Project
Ended $`000 $`000 $`000 $`000 $`000 $`000
September 30,
2009
Balance - 327 3,032 415 1,787 5,561
December
31,2008
Administrative 21 - 169 2 246 438
and office
support
Depreciation - - 60 1 42 103
Drilling - - 16 - - 16
Field camp 10 - 80 1 113 204
expenses
Permits and - - - - 21 21
surface taxes
Professional 3 - 32 1 17 53
fees
Profit on sale - - (22) - (28) (50)
of assets
Remote sensing - - - - - -
Share based - - 58 - 76 134
payments
Transport 8 - 8 - 21 37
Unrealised (3) 16 126 19 57 215
foreign
exchange
difference
Subtotal - 39 16 527 24 565 1,172
nine month
period ended
September 30,
2009
Balance 40 343 3,559 439 2,352 6,733
9/30/2009
Other projects consist of the following projects: Tshikapa (Kwango Mines),
King`s Mine, Zongo, Businga, Bornili, Ilunga and Kwango (Acacia).
South Africa
The Company disposed of all its South African projects in the third quarter.
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at November 16, 2009, the Company had outstanding
26,091,310 common shares and stock options to purchase an aggregate of
3,098,142 common shares of the Company.
RELATED PARTY TRANSACTIONS
Balances Payable September 30, 2009 December 31, 2008
$`000 $`000
Macleod Dixon LLP (a) $ 852 $ 745
Banro Corp. (b) 6,344
SFW Village (c) 212 -
AT Kondrat (d) 75 -
DK Madilo (e) 36 -
Scallan Project - 13
Facilitation (Pty) Ltd(f)
Sterling Portfolio 117 11
Securities 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, 30,
2009 2008 2009 2008
$`000 $,000 $`000 $`000
Macleod Dixon 74 $ 83 $ 194 $ 272
LLP (a)
Banro Corp. 6,344 - 6,344 (11)
(b)
SFW Village 67 25 163 75
(c)
AT Kondrat (d) 25 25 75 75
DK Madilo (e) 12 12 36 36
Scallan - 58 - 58
Project
Facilitation
Sterling 16 - 16 -
Portfolio
Securities
Inc. (g)
6,538 $ 203 $ 6,828 $ 505
a) During the three and nine month periods ended September 30, 2009, legal
fees and related costs of $74,000 and $194,000 (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.
b) Banro Corporation ("Banro") owns 3,744,032 common shares representing a
14.35% (December 31, 2008: 14.35%) equity stake in the Company. It is
engaged in the development and exploration of gold properties in the DRC.
During the three and nine month periods ended September 30, 2009, the
Company obtained a loan from Banro of $6,337,991 which was exclusively
used to settle a loan with a financial institution. The balance was
applied to general and office related expenses (September 30, 2008 :
$11,000 and $11,000).
c) Consulting fees in respect of services to the Company as well as a short
term advance to the Company. Mr. Village is a director and officer of the
Company.
d) Consulting fees are paid to Mr. Kondrat who is a non-executive director
of the Company.
e) Consulting fees are paid to Mr. Madilo, who is an officer of the Company.
f) Consulting fees in respect of services to the Company prior to Mr.
Scallan entering into an employment contract. Mr. Scallan is now an
officer and a director of the Company and is the sole shareholder of
Scallan Project Facilitation (Pty) Ltd.
g) During 2008 and 2009, Sterling Portfolio Securities Inc. advanced a short
term loan to the Company. The officer and director of Sterling Portfolio
Securities Inc. is a non-executive director of the Company.
All amounts due to related parties are included in the balance sheet in
accounts payable and accrued liabilities or debts. 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.
NEW ACCOUNTING STANDARDS
a) Goodwill and Intangible Assets
Effective January 1, 2009, the Company adopted CICA Section 3064,
Goodwill and Intangible Assets, replacing Section 3062, Goodwill and
Other Intangible Assets, and Section 3450, Research and Development
Costs. Section 3064 establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to its
initial recognition and of intangible assets by profit-oriented
enterprises. The new standard provides guidance on the recognition,
measurement, presentation and disclosure of goodwill and intangible
assets subsequent to its initial recognition. The adoption of this new
standard did not have a significant impact on the Company`s financial
statements.
b) Mining Exploration Costs
In March 2009, the CICA issued EIC-174, Mining Exploration Costs, to
provide additional guidance for mining exploration enterprises on when an
impairment test is required. This new Abstract replaces EIC-126,
Accounting by Mining Enterprises for Exploration Costs. The Abstract
states that an enterprise that has initially capitalized exploration
costs has an obligation in the current and subsequent accounting periods
to test such costs for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable.
The accounting treatments provided in EIC-174 have been applied in the
preparation of the Company`s financial statements and did not have an
significant impact on the valuation of exploration assets.
c) Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities" which requires the Company
to consider its own credit risk as well as the credit risk of its
counterparty when determining the fair value of financial assets and
liabilities, including derivative instruments. The standard is effective
for the first quarter of 2009 and is required to be applied
retrospectively without restatement of prior periods. The adoption of
this standard did not have an impact on the valuation of financial assets
or liabilities.
FUTURE ACCOUNTING STANDARDS
a) International Financial Reporting Standards ("IFRS")
In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed
that Canadian GAAP for publicly accountable enterprises will be converged
with IFRS effective in calendar year 2011, with early adoption allowed
starting in calendar year 2009. The conversion to IFRS will be required,
for the Company, for interim and annual financial statements beginning on
January 1, 2011 and will require the restatement, for comparative
purposes, of amounts reported by the Company for its fiscal year ended
December 31, 2010. IFRS uses a conceptual framework similar to Canadian
GAAP, but there are significant differences in recognition, measurement
and disclosures. While adoption of IFRS will not change the actual cash
flow movements of the Company, the adoption of IFRS will result in
changes to the reported financial position and results of operations of
the Company. In the period leading up to the conversion, the AcSB will
continue to issue accounting standards that are converged with IFRS such
as IAS 2, Inventories, and IAS 38, Intangible assets, thus mitigating the
impact of adopting IFRS at the mandatory transition date.
The Company is currently evaluating the impact of the adoption of IFRS on
its consolidated financial statements and has established the following:
- All of the Company`s former South African subsidiaries were subject
to IFRS. Diamond Core had successfully adopted IFRS prior to the
acquisition thereof by the Company and was reporting its statutory
returns in South Africa in terms of IFRS. This will facilitate the
adoption of IFRS, since the Company`s staff involved in the
financial reporting process are knowledgeable on IFRS.
- The Company is in the process of identifying the key areas where
differences between Canadian GAAP and IFRS exist and the Company
reviews any new financial information on an ongoing basis to
identify further areas of differences that will need to be
addressed.
- To transition to IFRS, the Company must apply "IFRS 1 - First Time
Adoption of IFRS" which set out the rules for first time adoption.
In general, IFRS 1 requires an entity to comply with each IFRS
effective at the reporting date for the entity`s first IFRS
financial statements. This requires that an entity apply IFRS to its
opening IFRS balance sheet as at January 1, 2010 (i.e.: the balance
sheet prepared at the beginning of the earliest comparative period
presented in the entity`s first IFRS financial statements).
- Within IFRS 1 there are exemptions, some of which are mandatory and
some of which are elective. The exemptions provide relief for
companies from certain requirements in specified areas when the cost
of complying with the requirements is likely to exceed the resulting
benefit to users of financial statements. IFRS 1 generally requires
retrospective application of IFRS on first-time adoptions, but
prohibits such application in some areas, particularly when
retrospective application would require judgments by management
about past conditions after the outcome of a particular transaction
is already known.
- On transition, management must apply the mandatory exemptions and
make the determination as to which elective exemptions will be made
under IFRS 1. Management has completed the high level analysis of
the financial statement areas and is currently reviewing the
analysis to make determinations on what elections will be taken.
After these decisions are made, the impact on the financial
statements will be determinable.
- Management continues to assess the impact that IFRS will have on the
aspects of the business including accounting policy, financial
reporting, information technology and communications perspective.
Given that the Company is currently in the exploration phase,
accounting policy determinations that will be made leading in the
Company`s development phase, such as revenue recognition from joint
venture agreements as an example, 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.
During the first nine months of 2009, the following steps have been undertaken
as part of the formal IFRS transition plan:
- A formal project structure including project governance;
- An estimate of required resources (combination of internal and external);
- A detailed timeline for fiscal 2009 and 2010;
- A proposed training program; and
- A comprehensive analysis and review of all IFRS 1 elections.
During the remainder of 2009, a comprehensive analysis of all GAAP and IFRS
differences will be addressed as well as an assessment of the impact on data
systems, internal controls over financial reporting and business activities.
b) Business Combinations/Consolidated Financial Statements / Non-Controlling
Interests
In January 2009, the CICA adopted sections 1582, "Business Combinations",
1601, "Consolidated Financial Statements", and 1602, "Non-Controlling
Interests" which superseded current sections 1581, "Business
Combinations" and 1600 "Consolidated Financial Statements". These
Sections will be applied prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2011. Earlier adoption
is permitted. If an entity applies these Sections before January 1, 2011,
it will disclose that fact and apply each of the new sections
concurrently. These new sections were created to converge Canadian GAAP
with IFRS. The Company is currently evaluating the impact of the adoption
of these changes on its consolidated financial statements.
c) 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.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates used in the preparation of the Company`s
consolidated financial statements include the Company`s estimate of the
recoverable value of its mineral properties and related deferred exploration
expenditures, foreign currency translation and stock-based compensation. All
of these estimates involve considerable judgment and are, or could be,
affected by significant factors that are out of the Company`s control.
Mineral Properties and Deferred Exploration Expenses
The Company`s recoverability of the recorded value of its mineral properties
and associated deferred exploration expenses is based on market conditions for
minerals, any underlying mineral resources associated with the properties and
future costs that may be required for ultimate realization through mining
operations or by sale. The Company is in an industry that is dependent on a
number of factors including environmental, legal, and political risks, the
existence of economically recoverable reserves, the ability of the Company to
obtain necessary financing to complete the development and future profitable
production or the proceeds of disposition thereof.
Management uses its best available information to identify the point at which
a development project is capitalized, assess resources, future costs and
benefits and, where considered necessary, engages qualified third-party
professionals to assist in the process. Changing assumptions about future
commodity prices, exchange rates, production costs and revised information on
any resources may change management`s recoverable amounts and depletion and
amortization.
Foreign Currency Translation
The functional currency of the Company is Canadian dollars. The Company`s
businesses undertake transactions in currencies other than the Canadian
dollar, including US dollars and the South African rand. As part of its
ongoing review of critical accounting policies and estimates, the Company
reviews the foreign currency translation method of its foreign operations to
determine if there are significant changes to economic facts and circumstances
that may indicate whether or not the foreign operations are largely self-
sufficient and the economic exposure is more closely tied to their respective
domestic currencies. Any change in translation method resulting from this
review will be accounted for prospectively. The Company had accounted for its
South African operations as self-sustaining and accounts for the DRC
operations as an integrated foreign operation.
Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to determine the fair
value of stock options granted. This model requires the Company to make
reasonable assumptions in order to derive parameters such as the expected
volatility of the Company`s shares, the expected life of the option and
interest rates, all of which are based on historical information. Future
behaviours of these parameters are beyond the Company`s control, and thus, may
be significantly different from the Company`s estimates.
The values of all stock options granted were estimated, using the Black-
Scholes option-pricing model, based on the following factors:
(i) risk-free interest rate: 3.075%
(ii) expected volatility: 95%
(iii) expected life: 5 years
(iv) expected dividends: $Nil
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.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not,
by its nature, all inclusive.
The only sources of future funds for further exploration programs which are
presently available to the Company are the sale of equity capital, or the
offering by the Company of an interest in its properties to be earned by
another party carrying out further exploration. There is no assurance that
such sources of financing will be available on acceptable terms, if at all.
In the event that commercial quantities of minerals are found on the Company`s
properties, the Company does not have the financial resources at this time to
bring a mine into production.
The current financial climate is characterized by volatile and uncertain
times. The uncertainty of forward looking statements is therefore greater in
the current period than previous periods. Diamond prices have reduced
significantly as a result of the economic downturn and any recovery could be
accompanied by volatility.
The Company is aware that the credit crisis has limited the availability of
traditional sources of project finance from banks.
All of the Company`s projects are located in the DRC. The assets and
operations of the Company are therefore subject to various political, economic
and other uncertainties, including, among other things, the risks of war and
civil unrest, hostage taking, military repression, labor unrest, illegal
mining, expropriation, nationalization, renegotiation or nullification of
existing licenses, permits, approvals and contracts, taxation policies,
foreign exchange and repatriation restrictions, changing political conditions,
international monetary fluctuations, currency controls and foreign
governmental regulations that favour or require the awarding of contracts to
local contractors or require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction. Changes, if any, in mining
or investment policies or shifts in political attitude may adversely affect
the Company`s operations or profitability. Operations may be affected in
varying degrees by government regulations with respect to, but not limited to,
restrictions on production, price controls, export controls, currency
remittance, income taxes, foreign investment, maintenance of claims,
environmental legislation, land use, land claims of local people, water use
and mine safety. Failure to comply strictly with applicable laws, regulations
and local practices relating to mineral rights could result in loss, reduction
or expropriation of entitlements. In addition, in the event of a dispute
arising from operations in the DRC, the Company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of courts in Canada. The
Company also may be hindered or prevented from enforcing its rights with
respect to a governmental instrumentality because of the doctrine of sovereign
immunity. It is not possible for the Company to accurately predict such
developments or changes in laws or policy or to what extent any such
developments or changes may have a material adverse effect on the Company`s
operations.
The DRC is a developing nation emerging from a period of civil war and
conflict. Physical and institutional infrastructure throughout the DRC is in
a debilitated condition. The DRC is in transition from a largely state
controlled economy to one based on free market principles, and from a non-
democratic political system with a centralized ethnic power base, to one based
on more democratic principles. There can be no assurance that these changes
will be effected or that the achievement of these objectives will not have
material adverse consequences for the Company and its operations. The DRC
continues to experience violence and significant instability in parts of the
country due to certain militia and criminal elements. The recent events of
violence have been a very considerable distance from the areas of interest to
the Company. While the government and United Nations forces are working to
support the extension of central government authority throughout the country,
there can be no assurance that such efforts will be successful.
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Unfavorable changes in the applicable exchange rate
may result in a decrease or increase in foreign exchange gains or losses. The
Company does not use derivative instruments to reduce its exposure to foreign
currency risk.
The Company`s exploration and, if such exploration is successful, development
of its properties is subject to all of the hazards and risks normally incident
to mineral exploration and development, any of which could result in damage to
life or property, environmental damage and possible legal liability for any or
all damage.
The natural resource industry is intensely competitive in all of its phases,
and the Company competes with many companies possessing greater financial
resources and technical facilities than itself.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a. Fair value of financial instruments
The Company has classified financial instruments as follows:
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
liabilities 4,881 7,542
Debt 6,338 6,172
Lease - 499
Allowance for credit losses is included in prepaid expenses and other
receivables.
The balance sheet carrying amounts for cash, restricted cash and other
assets, accounts payable, debt and other liabilities approximate fair
value due to their short-term nature. Due to the use of subjective
judgments and uncertainties in the determination of fair values these
values should not be interpreted as being realizable in an immediate
settlement of the financial instruments.
b. Risk management policies and hedging activities
The Company is sensitive to changes in commodity prices, foreign exchange
and interest rates. The Company`s board of directors has overall
responsibility for the establishment and oversight of the Company`s risk
management framework. Although the Company has the ability to address its
price-related exposures through the use of options, futures and forward
contracts, it does not generally enter into such arrangements. Similarly,
derivative financial instruments are not used to reduce these financial
risks.
c. Credit risk
Financial instruments which are potentially subject to credit risk for
the Company consist primarily of cash. Cash is maintained with several
financial institutions of reputable credit and may be redeemed upon
demand. It is therefore the Company`s opinion that such credit risk is
subject to normal industry risks and is considered minimal.
d. Liquidity risk
Liquidity risk arises from the Company`s financial obligations and in the
management of its assets, liabilities and optimal capital structure. The
Company manages this risk by regularly evaluating its liquid financial
resources to fund its current and long term obligations and to meet its
capital commitments in a cost effective manner. The main factors that
affect liquidity include 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 sale of option
agreements, 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 and available credit facilities,
the Company currently expects a need to access debt and equity markets
for financing over the next twelve month period. However, because the
duration of the general economic uncertainty and its detrimental effect
on credit and capital markets is unknown, it is difficult to determine
the long-term impact on the Company. As reported above under "Liquidity
and Capital Resources" the Company has succeeded in negotiating a debt
for equity conversion with certain of its creditors.
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,
the Company`s consolidated financial statements have been prepared in
accordance with Canadian GAAP applicable to a going concern (see note 1
to the September 30, 2009 financial statements).
e. Currency risk
The Company is exposed to currency risk as its principal business is
conducted in foreign currencies. Monetary assets and liabilities
denominated in foreign currencies are translated from US dollars and
previously 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.
f. Interest rate risk
Interest rate risk is the potential impact on the Company`s earnings due
to changes in bank lending rates and short term deposit rates.
The Company`s exposure to interest rate risk is as follows:
Cash : Variable interest rate
Other assets : Non-interest bearing
Accounts payable and accrued liabilities : Non-interest bearing/variable
interest rate
Short term debt : Variable interest rate
The Company believes that the interest rates prevailing in Canada should
not significantly increase in 2009 and estimates that its interest rate
risk exposure will diminish in future years.
g. Market risk
Market risk is the risk that the value of a financial instrument might be
adversely affected by a change in commodity prices, interest rates or
currency exchange rates. The Company manages the market risk associated
with commodity prices by establishing and monitoring parameters that
limit the types and degree of market risk that may be undertaken.
h. Title risk
Title to mineral properties 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.
i. Country risk
The DRC is a developing country and as such, the Company`s exploration
projects in the DRC could be adversely affected by uncertain political or
economic environments, war, civil or other disturbances, and a changing
fiscal regime and by DRC`s underdeveloped industrial and economic
infrastructure.
The Company`s operations in the DRC may be effected by economic pressures
on the DRC. Any changes to regulations or shifts in political attitudes
are beyond the control of the Company and may adversely affect its
business. Operations may be affected in varying degrees by such factors
as DRC government regulations with respect to currency conversion,
production, price controls, export controls, income taxes or reinvestment
credits, expropriation of property, environmental legislation, land use,
water use and mine safety.
There can be no assurance that policies towards foreign investment and
profit repatriation will continue or that a change in economic conditions
will not result in a change in the policies of the DRC government or the
imposition of more stringent foreign investment restrictions. Such
changes cannot be accurately predicted.
RETRENCHMENT OF EMPLOYEES
During the first quarter of 2009, employees in the DRC were retrenched and
operations cut back. The lease for the corporate office was cancelled and
office space made available in the Company`s management flat. The lease for
the Company`s executive flat has been cancelled. The Tshikapa camp is being
maintained on a care and maintenance basis. Altogether 21 employees were
retrenched out of a total staff complement of 31. In addition two expatriate
contracts were also discontinued. The present complement has been reduced to
10
TSX DELISTING REVIEW
Arising from the state of the Company`s financial position and the substantial
decline in the market capitalisation of the Company`s shares, the Toronto
Stock Exchange ("TSX") is reviewing the eligibility for the continued listing
on the TSX of the Company`s shares. A final decision is expected to be made by
the TSX towards the end of November 2009. In the event that the TSX decides to
delist the Company`s shares, the Company understands that a reasonable amount
of time will be given to the Company to make alternative listing arrangements.
FUTURE STRATEGY
The Company sees its main strategy as the exploration for and, if successful,
the consequent development of a kimberlite diamond mining operation in the
DRC. It is actively developing its existing relationships to extend it joint
venture arrangements.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company is required under Canadian securities laws to disclose herein any
change in the Company`s internal control over financial reporting that
occurred during the Company`s most recent interim period that has materially
affected, or is reasonably likely to materially affect, the Company`s internal
control over financial reporting.
The Company`s decision to retrench operational staff, including accounting
staff, in response to deteriorating global economic conditions (which was
completed during the second quarter of 2009) may impede its ability to
maintain an adequate internal control environment, specifically as it relates
to lack of segregation of duties and inadequate system monitoring. The
Company`s management is responsible for establishing and maintaining adequate
internal control over financial reporting. However, until such time as
sufficient financial resources are available, the Company might not be able to
mitigate the above described risks and weaknesses.
It should be noted that a control system, including the Company`s disclosure
and internal controls and procedures, no matter how well conceived can provide
only reasonable, but not absolute, assurance that the objective of the control
system will be met and it should not be expected that the disclosure and
internal controls and procedures will prevent all errors or fraud.
JOHANNESBURG
17 NOVEMBER 2009
Date: 17/11/2009 17:11:01 Produced by the JSE SENS Department.
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